TIDMRR.

RNS Number : 9831H

Rolls-Royce Holdings plc

06 August 2019

6 August 2019

ROLLS-ROYCE HOLDINGS PLC - 2019 Half Year Results

Full year guidance maintained

Warren East, Chief Executive commented: "We delivered further progress across the group in the first half in line with our full year expectations. We expect a significant improvement in cash in the second half as we unwind inventory built up to support customer deliveries and benefit from improved trading in both Power Systems and Civil Aerospace. In Civil Aerospace we delivered on key drivers of future cash flow with further improvement in average OE unit losses and continued aftermarket growth. Defence grew both revenue and profit and enjoyed substantial order intake. In Power Systems we also saw good revenue growth and order intake and entered the second half underpinned by a healthy backlog.

We have made good progress on resolving the Trent 1000 compressor issue, though regretfully, customer disruption remains. Progress on our restructuring programme is in line with the plan we outlined a year ago. We took significant strides in accelerating our electrification ambitions through the announced acquisition of Siemens' eAircraft business in our drive to create cleaner, more sustainable and scalable power for the future."

   --        Good revenue progress; underlying Core and Group +7%; Group reported revenue +5% 
   --        Core free cash outflow of GBP(391)m; to materially improve in H2 as inventory reduces 
   --        Delivery on services growth in Civil Aerospace +18% and Power Systems +7% 
   --        Large engine flying hour growth +8%; OE unit loss -13%; Trent 7000 production ramp-up 
   --        Progress on Trent 1000 in-service issues; Pack B & C aircraft on ground (AOG) below 25 
   --        Trent 1000 in-service costs increased by a total of GBP100m across the next three years 
   --        Restructuring on track; GBP134m run-rate cost savings; acceleration expected in H2 

-- On track for FY guidance for Core underlying operating profit and FCF of GBP700m +/- GBP100m

   --        Outlook: at least GBP1bn free cash flow in FY 2020; mid-term ambition > GBP1 CPS 
 
                                                     Underlying Group(1)                                          Underlying Core(1,2) 
           Six months to              H1 2019               H1                 Organic                H1                 H1                 Organic 
           30 June                                        2018(3)             Change(4)              2019              2018(3)              Change(4) 
-------------------------  ------------------  ------------------  --------------------  -----------------  ------------------  --------------------- 
           Revenue (GBPm)              7,353               7,040                 +7%                7,213               6,680                 +7% 
-------------------------  ------------------  ------------------  --------------------  -----------------  ------------------  --------------------- 
           Operating 
            profit (GBPm)               203                 141                 +32%                 203                 146                  +33% 
-------------------------  ------------------  ------------------  --------------------  -----------------  ------------------  --------------------- 
           Earnings per 
            share                     (1.6)p               2.5p                (4.6)p               (1.4)p              3.1p                 (4.6)p 
-------------------------  ------------------  ------------------  --------------------  -----------------  ------------------  --------------------- 
           Free cash 
            flow(5)                    (429)               (72)                (357)*               (391)                10                  (401)* 
-------------------------  ------------------  ------------------  --------------------  -----------------  ------------------  --------------------- 
             *Change in                                Reported Group 
             Free Cash 
                Flow 
           represents YoY 
              movement 
           Six months to              H1 2019               H1                 Change 
           30 June                                        2018(3) 
-------------------------  ------------------  ------------------  -------------------- 
           Revenue (GBPm)              7,883               7,487                 +5% 
-------------------------  ------------------  ------------------  -------------------- 
           Operating 
            profit/(loss) 
            (GBPm)                      83                 (747)                 830 
-------------------------  ------------------  ------------------  -------------------- 
           Earnings per 
            share                     (48.0)p             (51.6)p               3.6p 
-------------------------  ------------------  ------------------  -------------------- 
           Net cash* 
            (GBPm)                     508*                 298                  210 
-------------------------  ------------------  ------------------  -------------------- 
           Payment per 
            share                      4.6p                4.6p                  n/a 
-------------------------  ------------------  ------------------  -------------------- 
 
 

*Net cash excludes IFRS 16 lease liability of GBP2.4bn in 2019

For other notes to table see page 3

2019 Half Year Group Highlights(4)

Financial:

-- Group underlying revenue of GBP7,353m up 7%; reported revenue GBP7,883m up 5%. Underlying Civil Aerospace revenue up 11%, Power Systems up 6%, Defence up 2%; ITP Aero up 23%

-- Group underlying operating profit up GBP48m to GBP203m; significant improvement in Civil Aerospace to GBP(21)m loss, strong growth in Power Systems +20%, solid growth in Defence +2% and an 18% decline in ITP Aero. Reported operating profit of GBP83m up GBP830m largely driven by a reduction in exceptional charges to GBP128m (H1 2018: GBP733m)

-- Exceptional charges: Trent 900 of GBP59m following further assessment of impact of A380 production line closure, taking total exceptional costs to GBP245m; restructuring charges of GBP69m

-- Group net R&D spend of GBP518m in line with previous year. Continued investment in improving efficiency of existing products and developing future technologies; progress on electrical strategy including announced acquisition of Siemens' eAircraft business and programme to strengthen hybrid electric power and propulsion R&D activities in Germany; SMR development a step closer

-- Group free cash outflow returned to typical seasonality with an outflow of GBP(429)m (H1 2018: GBP(72)m) with planned inventory build in Civil Aerospace & Power Systems, which will unwind in H2; net cash balance improved to GBP508m, excluding lease liabilities (H1 2018: GBP298m)

   --        Portfolio simplification with disposal of Commercial Marine and Power Development 

Operational:

-- Civil Aerospace: 257 large engines delivered; further good progress in reducing average large engine OE unit losses, down by GBP0.2m to GBP1.3m; growth in large engine installed fleet of 7% year-on-year to 4,897 installed engines driving engine flying hour growth of 8%; material ramp up in Trent 7000 production

-- Power Systems: strong revenue growth of 6%; increasing penetration of services; GBP1.7bn order intake (book to bill 1.1x); full year outlook underpinned by strong order coverage of 80%

-- Defence: solid revenue and profit performance; strong book-to-bill ratio 1.5x gives confidence in outlook; F-35 LiftSystem driving higher OE sales; directed energy successfully demonstrated

-- ITP Aero good underlying revenue growth at 23% led by civil programmes; profit lower reflecting temporary OE mix headwind and lower spare parts sales which are expected to pick up in H2

Civil Aerospace in-service performance:

-- Trent XWB cumulative flying hours now over 4m, 562 engines in service achieving 99.9% dispatch reliability; OE deficit reduced by a third in the first half

-- Progress made on Trent 1000, increasing our MRO capacity to help minimise disruption and reducing AOGs, albeit pace of decline has been slightly below our original plans; in-service cost estimates increased by a total of GBP100m across the next three years

-- Trent 1000 TEN high pressure turbine (HPT) blade issue being managed through proactive inspections; new blade design and certification underway; costs expected to be within the bounds of normal risk we manage on our programmes in any given year

Market environment:

-- Air traffic growth is at the long-term trend level of 4-5%; stable widebody airframe build-rates expected short to medium term; A380 production ceasing 2021; widebody order backlog at 2,136 engines; supports good ongoing growth in our in-service fleet to underpin medium term plan

-- Increased focus on life-cycle solutions and further improving environmental performance puts Power Systems in a strong position to take advantage of OE demand. Global defence markets remain stable with a number of appealing mid-term growth opportunities

2019 Half Year Results: Financial Highlights

Percentage or absolute change figures in this document are on an organic basis(4) unless otherwise stated.

 
                                                               Underlying 
                                    Underlying      Organic    op. profit      Organic 
                                revenue (GBPm)    Change(4)        (GBPm)    Change(4) 
 Civil Aerospace                         4,018         +11%          (21)          +86 
----------------------------  ----------------  -----------  ------------  ----------- 
 Power Systems                           1,553          +6%            96         +20% 
----------------------------  ----------------  -----------  ------------  ----------- 
 Defence                                 1,494          +2%           173          +2% 
----------------------------  ----------------  -----------  ------------  ----------- 
 ITP Aero                                  457         +23%            32         -18% 
----------------------------  ----------------  -----------  ------------  ----------- 
 Corporate / eliminations                (309)            -          (77)            - 
----------------------------  ----------------  -----------  ------------  ----------- 
 Core(2) operating business              7,213          +7%           203         +33% 
----------------------------  ----------------  -----------  ------------  ----------- 
 Non-core(2) business                      140            -             -            - 
----------------------------  ----------------  -----------  ------------  ----------- 
 Total Group                             7,353          +7%           203         +32% 
----------------------------  ----------------  -----------  ------------  ----------- 
 

For notes to table see page 3

 
 
 Civil Aerospace metrics:                              Core:                    H1 2019    H1 2018 
                                H1 2019      H1 2018    GBPm 
----------------------------  ----------  ----------  ----------------------  ---------  --------- 
 Large engines deliveries         257         259      Gross R&D spend           677        663 
----------------------------  ----------  ----------  ----------------------  ---------  --------- 
 Average loss per widebody 
 OE (GBPm)                        1.3         1.5      Net R&D spend             511        518 
----------------------------  ----------  ----------  ----------------------  ---------  --------- 
 Large engine in-service 
  fleet                          4,897       4,567     R&D capitalised           220        239 
----------------------------  ----------  ----------  ----------------------  ---------  --------- 
 Large engine invoiced 
  flying hours                   7.5m        6.9m      Capex                     348        332 
----------------------------  ----------  ----------  ----------------------  ---------  --------- 
 Large engine LTSA major                               Hedge book $/GBP 
  refurbs                         141         137       average(6)               1.54       1.54 
----------------------------  ----------  ----------  ----------------------  ---------  --------- 
 Large engine LTSA check 
  & repair                        295         242      Hedge book (US$bn)(6)     $35        $37 
----------------------------  ----------  ----------  ----------------------  ---------  --------- 
 
 

2019 Outlook: Guidance maintained

Commenting on the full year outlook, Warren East added: "We remain on track to meet our full year guidance for underlying Core operating profit and Core free cash flow(7) of GBP700m +/- GBP100m. Our outlook remains positive, underpinned by continued progress on our key free cash flow drivers towards our ambition to exceed GBP1 of free cash flow per share in the mid-term, together with the steadily improving health of the Trent 1000 fleet.

After a decade of significant investment, we remain committed to delivering improved returns while continuing to invest in the innovation needed to realise our long-term aspiration to be the world's leading industrial technology company."

Notes to financial tables and commentary on pages 1-3:

(1) Underlying: for definition see Note 2 on page 29

(2) Core includes Civil Aerospace, Power Systems, Defence and ITP Aero. Non-core includes Commercial Marine sold on 1 April 2019, Rolls-Royce Power Development sold on 15 April 2019, L'Orange sold on 1 June 2018 and other smaller non-core businesses. The H1 2018 segmental analysis has been presented on a consistent basis with the new segmental structure and excludes L'Orange which was sold on 1 June 2018

(3) The financial information for the prior period has been restated to reflect changes to the provisional ITP Aero balances and other adjustments. See note 1 on page 27 for more details

(4) Organic change at constant translational currency ('constant currency') by applying FY 2018 average rates to H1 2019 and H1 2018 numbers excluding M&A. All commentary is provided on an organic basis unless otherwise stated

(5) Free cash flow is defined as operating cash after capital expenditure, pensions and taxes, before payments to shareholders, payments to investigating authorities and M&A. Excludes cash costs of 2018 restructuring plan. The derivation of free cash flow from the cash flow statement is shown on page 42

(6) Comparators for currency hedge book shown at FY 2018 position

(7) Free cash flow outlook includes in-service engine costs as outlined on page 14

This announcement has been determined to contain inside information.

Enquiries:

 
 Investors:                            Media: 
 Jennifer Ramsey    +44 20 7227 9087   Richard Wray   +44 20 7227 9163 
 

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 Half 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.

Results presentation

A presentation will be held at 09:00 (BST) today. Details of how to join the event online are provided below. Downloadable materials will be available on the Investor Relations section of the Rolls-Royce website from the start of the event.

Online webcast registration details:

To register for the live webcast, including Q&A participation, please visit the following link:

https://edge.media-server.com/mmc/p/vwgm75xu

Please use this same link to access the webcast replay which will be made available shortly after the event concludes.

Trading Summary

Core Trading Summary

The income statement table below and all commentary relate to the underlying performance of our core business and percentage or absolute change figures in this document are on an organic basis, unless otherwise stated.

Summary income statement

 
                                                               Organic(4) 
 GBPm                             2019 H1   2018 H1   Change       change 
-------------------------------  --------  --------  -------  ----------- 
 Underlying revenue                 7,213     6,680      +8%          +7% 
-------------------------------  --------  --------  -------  ----------- 
 Underlying OE revenue              3,350     3,201      +5%          +4% 
-------------------------------  --------  --------  -------  ----------- 
 Underlying services revenue        3,863     3,479     +11%         +10% 
-------------------------------  --------  --------  -------  ----------- 
 Underlying gross profit              995       897     +11%         +10% 
-------------------------------  --------  --------  -------  ----------- 
 Gross margin %                     13.8%     13.4%   +40bps       +30bps 
-------------------------------  --------  --------  -------  ----------- 
 Commercial and administration 
  costs                             (516)     (467)     +10%         +10% 
-------------------------------  --------  --------  -------  ----------- 
 Restructuring                        (9)      (12)     -25%         -25% 
-------------------------------  --------  --------  -------  ----------- 
 Research and development 
  charge                            (314)     (296)      +6%          +5% 
-------------------------------  --------  --------  -------  ----------- 
 Joint ventures and associates         47        24     +96%         +80% 
-------------------------------  --------  --------  -------  ----------- 
 Underlying operating profit          203       146     +39%         +33% 
-------------------------------  --------  --------  -------  ----------- 
 Underlying operating margin         2.8%      2.2%   +60bps       +60bps 
-------------------------------  --------  --------  -------  ----------- 
 Financing costs                    (109)      (65)     +68%         +68% 
-------------------------------  --------  --------  -------  ----------- 
 Underlying profit before 
  tax                                  94        81     +16%           6% 
-------------------------------  --------  --------  -------  ----------- 
 Tax                                (118)      (22)        -            - 
-------------------------------  --------  --------  -------  ----------- 
 Underlying effective tax 
  rate                             125.5%     27.2%        -            - 
-------------------------------  --------  --------  -------  ----------- 
 Underlying (loss)/profit            (24)        59     (83)         (85) 
-------------------------------  --------  --------  -------  ----------- 
 Underlying earnings per 
  share                             (1.4)       3.1    (4.5)        (4.6) 
-------------------------------  --------  --------  -------  ----------- 
 

For notes to table see page 3

Revenue up 7%

Revenue rose by 7% to 7,213 reflecting growth in both OE and services led by Civil Aerospace and Power Systems. Civil Aerospace delivered OE revenue growth of 3% led by improved widebody OE pricing and programme mix. Services revenue in Civil Aerospace rose 18% driven by increased shop visit volumes and higher spare parts sales. Power Systems achieved 6% OE revenue growth due to strength in power generation markets, notably for data centres, with this progress delivered despite the non-recurrence of the emissions driven pre-buy effect seen in construction & agriculture in 2018. Power Systems services revenue was up 7%, reflecting higher spare parts sales driven by growth of the installed engine base and increased LTSA penetration. Defence OE revenue was 4% higher driven by F-35 LiftSystem growth, AE2100 product mix and increased naval volumes. Defence service revenue grew 1% with increased LTSA activity in transport markets. ITP Aero revenue growth of 23% reflected volume growth largely across ITP Aero's civil markets.

Gross profit up 10%

Gross profit increased by 10% to GBP995m with gross margin improvement of 30bps. Civil Aerospace gross profit increased 54% reflecting a reduction in widebody OE average unit losses and an improved aftermarket performance, including non-recurrence of the materially negative contract accounting catch-ups which had impacted 2018. Power Systems delivered gross profit and margin improvement driven by volume growth and improvement in product mix. Defence gross profit increased by 1% with stable margins, underlying performance improvements in our US operations and higher transport volumes mitigating UK MoD pricing headwinds. ITP Aero gross profit fell by 4% reflecting lower levels of high margin aftermarket sales and a temporary headwind from mix changes in OE engines.

C&A costs up 10%

Adjusted underlying C&A costs rose 3%. This increase was driven by pay escalation together with higher sales related activity in Power Systems offsetting a modest benefit from restructuring programme headcount reductions. The majority of the restructuring benefits are within R&D and cost of sales. Including the non-recurrence of credits within C&A in H1 2018, C&A costs were 10% higher.

Self-funded R&D cash spend 2% lower; Income statement charge 5% higher

Gross R&D spend was up GBP13m. After funding from customers and other third parties, core self-funded cash spend reduced by GBP8m to GBP511m, benefitting from engineering headcount reductions despite ongoing significant R&D investment across most businesses. Investment in Civil Aerospace in new widebody and business aviation programmes was lower following the recent entry into service of several new engine programmes. Investment in new technology, including the suite of technologies that underpin Ultrafan in Civil Aerospace and Tempest in Defence, increased. Capitalisation was GBP18m lower although remained significant due to the current development stage of several Civil Aerospace programmes. The P&L charge overall was GBP16m higher reflecting the reduction in capitalisation.

Profit from joint ventures and associates

Where spare engines are sold to joint venture companies, the transaction is accounted for in full in the Group's gross profit. The consequential deferral of profit to reflect the Group's share of the joint venture is then eliminated and accounted for against the share of the joint ventures results. In 2019, fewer engines were sold, resulting in a lower deferral adjustment against the joint ventures. This was a key driver in the increase in profit from joint ventures and associates (H1 2019 GBP47m: H1 2018 GBP24m). Before this reduced elimination of profit, the share of results of joint ventures was broadly flat.

Operating profit up 33%

Operating profit saw a GBP49m improvement on prior year to GBP203m, reflecting 20% growth in Power Systems to GBP96m due to volume growth and improved product mix, and an GBP86m improvement in Civil Aerospace, reflecting a number of factors:

-- Further progress reducing average large engine OE unit losses down to GBP(1.3)m from GBP(1.5)m

   --    Increased sales of spare parts and higher LTSA shop visit volumes 
   --    Reduced level of net contract accounting adjustments to GBP1m (H1 2018 GBP(154)m) 

-- Offset to an extent by higher C&A costs and R&D charge and some under recovery of production costs

Financing costs

Financing costs increased from GBP(65)m in 2018 to GBP(109)m in 2019. Within financing costs, net interest payable of GBP(67)m increased by GBP36m in part due to the adoption of IFRS16. Other financing costs were GBP(42)m in 2019 (H1 2018: GBP(34)m). The increase reflects higher charges related to the unwind of discounting of provisions and other financing charges.

Taxation

Core underlying taxation was GBP118m (H1 2018: GBP22m), an underlying rate of 125.5% compared with 27.2% in 2018. The increased tax rate reflected the fact that we have not recognised any deferred tax in respect of H1 2019 UK losses. This movement was also due to the increased profits arising in higher tax jurisdictions such as the US and Germany.

Exceptional restructuring charge

An exceptional restructuring charge of GBP69m has been recognised in H1 2019 (H1 2018: GBP179m), of which GBP39m related to the cost of our Group-wide restructuring set out at June 2018 CMD. The total expected cash cost to implement our restructuring programme remains around GBP500m and should be completed by the end of 2020. The remainder of the exceptional charge taken in H1 2019 relates to restructuring programmes that were already in place at Power Systems and Defence, reflecting actions to remove costs and improve operational efficiency.

Positive progress has been made so far on our restructuring plan and to date we have achieved a gross headcount reduction of around 2,500 with a net reduction of around 1,600 since commencing the programme. Run rate savings achieved to date on the programme have now reached GBP134m with our target maintained to deliver around GBP400m run-rate savings by the end of 2020.

A380 closure costs updated

With our full year 2018 results we took a preliminary view of costs relating to Airbus' decision to close the A380 production line. We have now had the opportunity to update and finalise our impact assessment and as a result recorded an additional exceptional charge of GBP59m, bringing the total A380 related exceptional charge to GBP245m.

IFRS 16

IFRS 16 is effective for the year beginning 1 January 2019 and has required the total commitments of all leases to be recognised on the balance sheet. The impact of the standard is as follows:

-- 1 January 2019 Balance Sheet we recorded an additional lease liability of GBP2,248m and lease assets of GBP2,213m

-- In the Income Statement rental payments are now replaced with depreciation on the leased assets.

Underlying financing costs on lease liabilities increased from GBP2m in H1 2018 to GBP39m in H1 2019 due to the new liability

   --    There is no impact on free cash flow 

We estimate that the net impact of IFRS 16, Leases was to increase the underlying loss after tax by GBP38m in H1 2019.

Group Trading Summary

Group results include core and non-core businesses. Group underlying revenues rose 7% to GBP7,353m, primarily driven by growth at Civil Aerospace and Power Systems, offsetting a (29)% decline in non-core revenue. Group underlying operating profit improved by 32% to GBP203m as a result of improved gross profit and higher profit from joint ventures offsetting the increase in C&A costs and a higher R&D charge.

Group Funds Flow

Free cash flow

Group free cash outflow of GBP429m deteriorated from a GBP72m outflow in H1 2018, reflecting higher Trent 1000 in-service cash costs and non-recurrence of an unusually high level of aftermarket deposits in Civil Aerospace which benefitted H1 2018. We saw the usual seasonality of increased inventory levels in Civil Aerospace and Power Systems in the first half ahead of increased trading in the second half. Capital expenditure and R&D investments remained broadly stable. Given the one-off nature of the restructuring announced in 2018, the GBP66m cash costs relating to this restructuring programme are reported outside of group free cash flow.

 
 Summary funds flow statement (1) 
------------------------------------------------------------------------------  ------------------  ------- 
 GBPm                                                                            H1 2019   H1 2018   Change 
------------------------------------------------------------------------------  --------  --------  ------- 
 
 Underlying operating profit                                                         203       141       62 
------------------------------------------------------------------------------  --------  --------  ------- 
 Depreciation and amortisation                                                       511       315      196 
------------------------------------------------------------------------------  --------  --------  ------- 
 Lease payments (capital plus interest)                                            (184)         -    (184) 
------------------------------------------------------------------------------  --------  --------  ------- 
 Expenditure on intangible assets                                                  (274)     (327)       53 
------------------------------------------------------------------------------  --------  --------  ------- 
 Capital expenditure (Property, Plant and Equipment)                               (348)     (342)      (6) 
------------------------------------------------------------------------------  --------  --------  ------- 
 Change in inventory                                                               (433)     (461)       28 
------------------------------------------------------------------------------  --------  --------  ------- 
 Change in receivables/payables                                                      391       130      261 
------------------------------------------------------------------------------  --------  --------  ------- 
 Civil Aerospace net LTSA balance change                                             128       487    (359) 
------------------------------------------------------------------------------  --------  --------  ------- 
     Of which: underlying change                                                     120       295    (175) 
------------------------------------------------------------------------------  --------  --------  ------- 
     Of which: impact of contract catch-ups                                            8       192    (184) 
------------------------------------------------------------------------------  --------  --------  ------- 
 Movement on provisions                                                            (271)         1    (272) 
------------------------------------------------------------------------------  --------  --------  ------- 
 Net interest received and paid                                                     (45)      (36)      (9) 
------------------------------------------------------------------------------  --------  --------  ------- 
 Other                                                                               (8)        66     (74) 
------------------------------------------------------------------------------  --------  --------  ------- 
 Trading cash flow                                                                  330)      (26)    (304) 
------------------------------------------------------------------------------  --------  --------  ------- 
 Contributions to defined benefit pensions in excess of underlying PBT charge          1        31     (30) 
------------------------------------------------------------------------------  --------  --------  ------- 
 Taxation paid                                                                     (100)      (77)     (23) 
------------------------------------------------------------------------------  --------  --------  ------- 
 Group free cash flow                                                              (429)      (72)    (357) 
------------------------------------------------------------------------------  --------  --------  ------- 
 Of which: Disposed entities(2)                                                     (41)      (77)       36 
------------------------------------------------------------------------------  --------  --------  ------- 
 Group free cash flow (pre disposed entities)                                      (388)         5    (393) 
------------------------------------------------------------------------------  --------  --------  ------- 
     Of which: Non-core businesses(3)                                                  3       (5)        8 
------------------------------------------------------------------------------  --------  --------  ------- 
 Core free cash flow                                                               (391)        10    (401) 
------------------------------------------------------------------------------  --------  --------  ------- 
 Shareholder payments                                                               (85)      (85)        - 
------------------------------------------------------------------------------  --------  --------  ------- 
 Disposals and acquisitions                                                          458       584    (126) 
------------------------------------------------------------------------------  --------  --------  ------- 
 Exceptional group restructuring                                                    (66)         -     (66) 
------------------------------------------------------------------------------  --------  --------  ------- 
 Payment of financial penalties                                                    (102)         -    (102) 
------------------------------------------------------------------------------  --------  --------  ------- 
 Foreign exchange                                                                    (8)        30     (38) 
------------------------------------------------------------------------------  --------  --------  ------- 
 Other                                                                                11        13      (2) 
------------------------------------------------------------------------------  --------  --------  ------- 
 Change in net funds/(debt)                                                        (221)       470    (691) 
------------------------------------------------------------------------------  --------  --------  ------- 
 

(1) The derivation of the summary funds flow statement above from the reported cash flow statement is included on page 42

(2) Disposed entities include Commercial Marine and Power Development in 2019 and both of these plus L'Orange in 2018

(3) Non-core businesses include the former Energy businesses not sold to Siemens

Depreciation and amortisation

The GBP196m increase in depreciation and amortisation to GBP511m was due to the additional c.GBP200m of charge relating to right of use assets following the adoption of IFRS 16 from 1 January 2019.

Lease payments

Lease payments of GBP184m reflects the cash cost of leases in H1 2019. In H1 2018, prior to the adoption of IFRS 16, the equivalent lease payments were reflected within underlying operating profit.

Expenditure on intangible assets

Intangible asset additions were GBP274m in the period. This included GBP224m of R&D capitalisation (H1 2018: GBP241m) largely reflecting ongoing investment in Civil Aerospace engine programmes including the Trent 7000, Trent XWB and Pearl 15. Intangible additions also included GBP39m of capitalised IT systems and software applications, of which GBP10m related to the Group wide restructuring programme and are therefore excluded from free cash flow.

Capital expenditure on property, plant and equipment

Investment of GBP348m in H1 2019 was GBP6m higher than the prior year. This reflects our ongoing investment in capacity and capability, projects to modernise our facilities, together with spare engines to support our growing in-service fleet in Civil Aerospace.

Change in inventory

Inventory increased by GBP433m (H1 2018: GBP461m) in the first half reflecting seasonality and planned inventory build in Civil Aerospace and Power Systems, and will unwind in H2. The rise in inventory also included 14 Trent 7000 engines on the Airbus final assembly line which are expected to reduce in the second half as aircraft are delivered to customers.

Change in receivables/payables

Change in receivables/payables of GBP391m in H1 2019, reflecting:

-- Customer deposits and advance payments of c.GBP300m, largely driven by a number of recent successful contract wins in Defence at approximately GBP240m

-- Broadly neutral trade and other receivables as volume-related growth was offset by an improvement in the collection of overdue receipts

Movement in Civil Aerospace net LTSA balance

The net LTSA balance represents deferred revenue and is a core part of our business model where we receive payments from our customers in respect of our long-term service and overhaul agreements. In H1 2019 the balance increased by GBP128m. This movement included an GBP8m increase driven by negative contract catch-ups (H1 2018: GBP192m). The underlying change net of these items was GBP120m. This reflects engine flying receipts invoiced to customers in excess of underlying revenue traded in the income statement. The H1 2018 equivalent of GBP295m included higher levels of deposits received on conversion of existing customer fleets to TotalCare.

Movement on provisions

The movement in provisions of GBP(271)m in H1 2019 largely reflected utilisation of the Trent 1000 exceptional provision taken in 2018, (GBP219m), cash costs in onerous contracts (GBP20m) and higher utilisation on short-term warranties (GBP30m).

Pensions

Cash contributions were in line with the profit and loss charge in H1 2019. This was a GBP30m year on year movement, reflecting a non-recurrence of the 2018 benefit from changing to quarterly payments.

Taxation

The increase in cash tax in H1 2019 of GBP23m to GBP100m was largely due to a higher proportion of full year tax payments in Germany and the US being made in the first half.

Shareholder payments

Payments to shareholders of GBP85m in H1 2019 remains unchanged.

Acquisitions and disposals

In H1 2019 the disposals of Commercial Marine and Power Development were completed. The combined net proceeds were GBP458m. The GBP584m cash inflow in H1 2018 related to the disposal of the L'Orange business, previously within Power Systems.

Payment of financial penalties

Following the agreements reached with investigating authorities in January 2017, a payment schedule was agreed. No payments were due in 2018 and UK payments of GBP100m, GBP130m and GBP148m (plus interest) were due in 2019, 2020 and 2021, respectively. The GBP102m paid in H1 2019 reflects the agreed payment plus interest. Consistent with prior years this payment is reported outside of free cash flow.

Balance sheet

 
                                                                31 Dec 2018 
----------------------------------------------  ------------- 
Summary balance sheet 
 GBPm                                            30 June 2019 
----------------------------------------------  -------------  ------------ 
Intangible assets                                       5,437         5,295 
----------------------------------------------  -------------  ------------ 
Property, plant and equipment                           4,768         4,929 
----------------------------------------------  -------------  ------------ 
Right of use assets                                     2,104             - 
----------------------------------------------  -------------  ------------ 
Joint ventures and associates                             405           412 
----------------------------------------------  -------------  ------------ 
Contract assets and liabilities                       (7,546)       (7,073) 
----------------------------------------------  -------------  ------------ 
Working capital (1)                                     (705)       (1,255) 
----------------------------------------------  -------------  ------------ 
Provisions                                            (1,675)       (1,917) 
----------------------------------------------  -------------  ------------ 
Net funds (2)                                         (1,937)           611 
----------------------------------------------  -------------  ------------ 
Net financial assets and liabilities (2)              (4,468)       (4,117) 
----------------------------------------------  -------------  ------------ 
Net post-retirement scheme (deficit)/ surplus           (335)           641 
----------------------------------------------  -------------  ------------ 
Tax                                                     1,337         1,026 
----------------------------------------------  -------------  ------------ 
Held for sale                                               -           374 
----------------------------------------------  -------------  ------------ 
Other net assets and liabilities                           16            22 
----------------------------------------------  -------------  ------------ 
Net liabilities                                       (2,599)       (1,052) 
----------------------------------------------  -------------  ------------ 
Other items 
----------------------------------------------  -------------  ------------ 
US$ hedge book (US$bn)                                     35            37 
----------------------------------------------  -------------  ------------ 
Civil Aerospace LTSA asset                              1,217         1,097 
----------------------------------------------  -------------  ------------ 
Civil Aerospace LTSA liability                        (5,947)       (5,584) 
----------------------------------------------  -------------  ------------ 
Civil Aerospace net LTSA liability                    (4,730)       (4,487) 
----------------------------------------------  -------------  ------------ 
 

(1) Net working capital includes inventory, trade receivables and payables and similar assets and liabilities.

(2) Net funds includes GBP384m (2018: GBP293m) of the fair value of financial instruments which are held to hedge the fair value of borrowings.

Key drivers of balance sheet movements were:

Intangible assets: The net increase of GBP142m includes additions of GBP283m, primarily related to programme development in Civil Aerospace (GBP224m), together with further investment in software applications of GBP39m. Amortisation for the period was GBP(153)m.

Property, plant and equipment: Following the adoption of IFRS 16, Leases, finance leased assets, previously held in PPE, have been transferred to right of use assets. Capital additions of GBP270m related to investment in maintenance, repair and overhaul (MRO) capacity in Civil Aerospace and the ongoing modernisation of facilities including our Defence facility in Indianapolis. We also expanded our spare engine lease pool to support our growing in-service widebody engine fleet. These were offset by depreciation of GBP(229)m.

Right of use assets: IFRS 16 was adopted effective 1 January 2019 resulting in the recognition of leased assets with a value of GBP2.2bn after GBP200m of depreciation. See note 10 in the condensed consolidated half-year financial statements.

Investments in joint ventures and associates: There was no material change in our investment in joint ventures and associates year-on-year.

Contract assets and liabilities: This represents deferred revenue and is a core part of our business model where we receive payments from our customers in respect of our long-term service and overhaul agreements. In H1 2019 the balance increased by GBP(473)m, of which GBP(243)m related to the Civil Aerospace LTSA balance and the balance related to Defence. The movement in the Civil Aerospace LTSA balance of GBP(243)m included non-cash items including foreign exchange of GBP115m. This reflected engine flying receipts invoiced to customers in excess of underlying revenue traded in the income statement. The H1 2018 equivalent of GBP295m included higher levels of deposits, received on conversion of existing customer fleets to TotalCare. The movement in Defence of GBP(240)m related to customer deposits and advance payments as a result of a number of recent successful contract wins.

Working capital: Working capital reduced by GBP550m primarily driven by a financial penalty payment of GBP102m related to agreements reached with investigating authorities in January 2017, and a GBP165m reduction in relation to deferred consideration for the acquisition of ITP Aero offset by planned inventory build.

Provisions: Provisions decreased by GBP242m largely driven by the utilisation of the Trent 1000 disruption (GBP219m) and contract losses (GBP34m).

Net funds: Net funds have moved from a net cash position of GBP611m in FY 2018 to a net debt position of GBP(1,937)m. The change is primarily driven by the adoption of IFRS 16 Leases, increasing lease liabilities by GBP(2,216)m.

Net financial assets and liabilities: These items principally relate to the fair value of foreign exchange, commodity and interest rate contracts. There was a reduction of GBP(351)m, primarily relating to an adverse mark to market movement on the foreign exchange hedge book of GBP(763)m, offset by settled contracts of GBP281m. This was partially offset by the reclassification of GBP79m of financial RRSAs to borrowings.

Net post-retirement scheme deficits: Decreased by GBP(976)m. The reduction in the UK surplus was primarily driven by the agreement with Legal & General Assurance Society Limited, which resulted in a decrease of around GBP(600)m. This transaction is expected to be fully completed by 31 December 2019. There have also been changes in financial and demographic assumptions.

US$ hedge book: The US hedge book at period end was $35bn. It extends out to 2026 on a declining basis and remains sufficient to cover our medium term requirements.

Group Reported Results

The changes resulting from underlying trading are described on pages 5 to 20.

Consistent with past practice and IFRS, we provide both reported and underlying figures. As the Group does not generally hedge account for forecast transactions in accordance with IFRS 9 Financial Instruments, we believe underlying figures are more representative of the trading performance by excluding the impact of period-end mark-to-market adjustments. In particular, the USD:GBP hedge book has a significant impact on the reported results. In H1 2019, the USD:GBP rate fell from 1.28 to 1.27 while the EUR:GBP remained stable at 1.12. The adjustments between the underlying income statement and the reported income statement are set out in Note 2 to the condensed consolidated financial statements. This basis of presentation has been applied consistently.

 
   Reconciliation between underlying and reported results 
   GBPm                                Revenue      Profit before financing    Financing     Profit/(loss) before tax 
   Six months to 30 June              2019   2018         2019          2018   2019   2018        2019            2018 
   --------------------------------  -----  -----  -----------  ------------  -----  -----  ----------  -------------- 
   Underlying                        7,353  7,040          203           141  (110)   (68)          93              73 
   --------------------------------  -----  -----  -----------  ------------  -----  -----  ----------  -------------- 
1  Revenue and costs recognised at 
   exchange rate on date of            530    447           78           103      -      -         608             550 
   transaction 
   --------------------------------  -----  -----  -----------  ------------  -----  -----  ----------  -------------- 
2  Mark-to-market adjustments on         -      -            -             -  (861)  (786)       (861)           (786) 
   derivatives and related foreign 
   exchange adjustments 
   --------------------------------  -----  -----  -----------  ------------  -----  -----  ----------  -------------- 
3  Trent 1000 exceptional charge         -      -            -         (554)      -      -           -           (554) 
   --------------------------------  -----  -----  -----------  ------------  -----  -----  ----------  -------------- 
3  Trent 900 exceptional item            -      -         (59)             -      -      -        (59)               - 
   --------------------------------  -----  -----  -----------  ------------  -----  -----  ----------  -------------- 
4  Exceptional restructuring             -      -         (69)         (179)      -      -        (69)           (179) 
   --------------------------------  -----  -----  -----------  ------------  -----  -----  ----------  -------------- 
   Effects of acquisition 
5  accounting                            -      -         (71)          (96)      -      -        (71)            (96) 
   --------------------------------  -----  -----  -----------  ------------  -----  -----  ----------  -------------- 
6  Impairments of Commercial Marine      -      -            -         (160)      -      -                       (160) 
   --------------------------------  -----  -----  -----------  ------------  -----  -----  ----------  -------------- 
6  Disposal of Commercial Marine         -      -           84             -      -      -          84               - 
   --------------------------------  -----  -----  -----------  ------------  -----  -----  ----------  -------------- 
7  Disposal of Power Development         -      -           34             -      -      -          34               - 
   --------------------------------  -----  -----  -----------  ------------  -----  -----  ----------  -------------- 
8  Disposal of L'Orange                  -      -            -           358      -      -           -             358 
   --------------------------------  -----  -----  -----------  ------------  -----  -----  ----------  -------------- 
9  Hedge ineffectiveness                 -      -            -             -   (15)      -        (15)               - 
   --------------------------------  -----  -----  -----------  ------------  -----  -----  ----------  -------------- 
   Other                                 -      -            1           (2)    (6)      9         (5)               7 
   --------------------------------  -----  -----  -----------  ------------  -----  -----  ----------  -------------- 
   Reported                          7,883  7,487          201         (389)  (992)  (845)       (791)         (1,234) 
   --------------------------------  -----  -----  -----------  ------------  -----  -----  ----------  -------------- 
 

See Note 2 to the Condensed Consolidated Financial Statements for further details, page 29

The most significant items included in the reported income statement, but not in underlying are summarised below.

(1) The impact of measuring revenues at spot rates rather than achieved hedge rates increased revenues by GBP530m (H1 2018: GBP447m) and profit before financing by GBP78m (H1 2018: GBP103m).

(2) There was a mark to market loss on the Group's hedge book of GBP(763)m (H1 2018: GBP(854)m). This reflected the large hedge book held by the Group (e.g. USD $35bn); and the weakening of sterling, against the US dollar (1.28 to 1.27) in H1 2019. At each period end, our foreign exchange hedge book is included in the balance sheet at fair value ('mark to market') and the movement in the year included in reported financing costs.

Adjustments are also included to recognise the gain on derivatives settled during the period GBP281m (H1 2018: GBP240m) and the impact of valuation of assets and liabilities using the spot exchange rate rather than the exchange rate that is expected to be achieved by the use of the hedge book.

(3) As described on page 29, the exceptional items are excluded from the underlying results. This includes the exceptional items in respect of the Trent 1000 and 900 costs. These have been explained on page 32.

(4) Exceptional restructuring costs of GBP69m (H1 2018: GBP179m). These are costs associated with the substantial closure or exit of a site, facility or activity related to the significant transformation project that the business is currently undertaking. A number of the projects within the transformation programme are spread over several years. Of the 2019 costs, GBP39m (H1 2018: GBP132m) relates to the Group Restructure announced in June 2018.

(5) The effects of acquisition accounting GBP71m (H1 2018: GBP96m) principally relate to the amortisation of intangible assets arising on the acquisition of Power Systems in 2013 and ITP Aero in 2017.

(6) The Commercial Marine business was disclosed as held for sale from 30 June 2018. In our 2018 half year financial statements, we reported an impairment charge of GBP160m as a result of the decision to classify Commercial Marine as a business held for sale. The Group completed the sale to KONGSBERG on 1 April 2019 and recognised a profit of GBP84m. Further details can be found on page 41.

(7) On 15 April 2019, the Group sold its shareholding in Rolls-Royce Power Development Ltd and recognised a profit of GBP34m. Further details can be found on page 41.

(8) The disposal of L'Orange in June 2018 gave rise to a gain of GBP358m, net of disposal costs. Further details can be found on page 41.

(9) To hedge the Group's fixed rate borrowings, it has entered into several cross-currency interest rate swaps (CCIRS). The effect of these is to convert fixed foreign currency payments into GBP floating rate payments; these have been designated as fair value hedges under IFRS 9. As the CCIRS involves two currencies the fair value of these is impacted by cross-currency basis. Under IFRS 9 this is a source of ineffectiveness as it does not affect the fair value of the hedged item and the Group has chosen to take this ineffectiveness direct to its P&L. This is a headline only item as it does not relate to the underlying performance of the business and is not within management control. The GBP(15)m taken to headline profit before tax in 2019 is predominately driven by volatility in EUR GBP basis.

Tax affecting these adjustments resulted in a tax credit of GBP5m (H1 2018: GBP307m). The reduction in the tax impact is mainly due to the fact we have not recognised any deferred tax in respect of H1 2019 UK losses. In H1 2018, a credit of GBP42m was recognised in respect of changes in the Basque tax rates, applying to ITP Aero.

Civil Aerospace

Overview

Civil Aerospace delivered 257 large engines in H1 2019 and shipped a further 14 engines to airframers. We remain on track to deliver over 500 large engines for the Full Year. We have continued to make progress reducing large engine OE average unit losses, down by GBP0.2m year on year to GBP1.3m. Our widebody installed fleet increased further in the first half, driving 8% growth in widebody engine flying hours and a GBP0.1bn increase in aftermarket cash margin.

Financial overview

 
                                                                    Organic 
   GBPm                             H1 2019    H1 2018     Change    change 
-------------------------------  ----------  ---------  ---------  -------- 
 Engine deliveries                      369        365        +1%       +1% 
-------------------------------  ----------  ---------  ---------  -------- 
 Underlying revenue                   4,018      3,600       +12%      +11% 
-------------------------------  ----------  ---------  ---------  -------- 
 Underlying OE revenue                1,570      1,530        +3%       +3% 
-------------------------------  ----------  ---------  ---------  -------- 
 Underlying services 
  revenue                             2,448      2,070       +18%      +18% 
-------------------------------  ----------  ---------  ---------  -------- 
 Underlying gross profit                276        175       +58%      +54% 
-------------------------------  ----------  ---------  ---------  -------- 
 Gross margin %                        6.9%       4.9%    +200bps   +190bps 
-------------------------------  ----------  ---------  ---------  -------- 
 Commercial and administrative        (178)      (148)       +20%      +20% 
-------------------------------  ----------  ---------  ---------  -------- 
 Restructuring                          (7)        (9)       -22%      -22% 
-------------------------------  ----------  ---------  ---------  -------- 
 Research and development 
  cost                                (157)      (152)        +3%       +3% 
-------------------------------  ----------  ---------  ---------  -------- 
 Joint ventures and associates           45         22      +105%      +91% 
-------------------------------  ----------  ---------  ---------  -------- 
 Underlying operating 
  result                               (21)      (112)        +91       +86 
-------------------------------  ----------  ---------  ---------  -------- 
 Underlying operating 
  margin %                            -0.5%      -3.1%     +260ps   +240bps 
-------------------------------  ----------  ---------  ---------  -------- 
 

Underlying revenue

 
  GBPm                                                              Organic 
                              H1 2019          H1 2018     Change    change 
--------------------  ---------------  ---------------  ---------  -------- 
 Original Equipment             1,570            1,530        +3%       +3% 
--------------------  ---------------  ---------------  ---------  -------- 
 Large engine                   1,226            1,157        +6%       +6% 
--------------------  ---------------  ---------------  ---------  -------- 
 Business aviation                330              305        +8%       +9% 
--------------------  ---------------  ---------------  ---------  -------- 
 V2500                             14               68       -79%      -79% 
--------------------  ---------------  ---------------  ---------  -------- 
 Services                       2,448            2,070       +18%      +18% 
--------------------  ---------------  ---------------  ---------  -------- 
 Large engine                   1,595            1,328       +20%      +20% 
--------------------  ---------------  ---------------  ---------  -------- 
 Business aviation                261              201       +30%      +29% 
--------------------  ---------------  ---------------  ---------  -------- 
 Regional                         163              151        +8%       +5% 
--------------------  ---------------  ---------------  ---------  -------- 
 V2500                            429              390       +10%      +10% 
--------------------  ---------------  ---------------  ---------  -------- 
 

Underlying revenue

Underlying revenue increased 11%, reflecting modest growth in OE, up 3% to GBP1,570m and 18% growth in services to GBP2,448m. OE growth was led by large engines, up 6%, driven by improved widebody mix and pricing. Widebody engine sales volumes, which were broadly flat overall at 257, reflected strong growth in Trent 7000 engines.

Large engine service revenue increased 20% to GBP1,595m (H1 2018: GBP1,328m) reflecting growth in servicing volumes, with major LTSA shop visit quantities up 3% and check and repair visits up 22% led by Trent 1000 activity. Sales of spare parts and activity not covered by LTSAs also increased.

Business aviation OE sales were 9% higher driven by modest engine volume increases and an improved mix of higher value engines. The 29% growth in service revenue reflected a combination of increased servicing activity and a benefit to revenue from positive contract catch-ups. The 5% increase in regional aviation was driven by increased servicing of our Tay-powered fleet. V2500 OE revenue was down 79% due to end of life production on the Airbus A320ceo. The 10% increase in V2500 service revenue was driven by higher spare parts sales and increased servicing activity, with the payment from Pratt & Whitney International Aero Engines (PWIAE) relating to engine flying hours remaining stable.

Underlying operating result

The underlying operating loss of GBP(21)m improved GBP86m reflecting higher gross profit and increased profit from joint ventures but with C&A costs 20% higher.

Gross profit improved by GBP97m and gross margin by 190bps, driven by increased servicing activity and higher spare parts sales together with lower widebody OE losses, with the average unit loss down to GBP(1.3)m (H1 2018: GBP(1.5)m). Partially offsetting these effects was a lower LTSA underlying gross margin reflecting shop visit mix. The net negative impact of contract catch-ups to profits previously recognised over the life of long-term contracts to date was GBP1m, a material improvement over 2018 H1 (GBP(154)m negative) comprising the following:

-- Life cycle cost benefit of GBP58m primarily reflecting lower Business Aviation servicing costs

-- Technical costs of GBP3m reflecting reassessed costs of technical issues across various engine programmes

-- Operational costs of GBP(54)m reflecting the latest information around future aircraft utilisation patterns and the resultant effect on flying hour receipts and shop visit costs

 
  GBPm                                    H1 2019   H1 2018 
---------------------------------------  --------  -------- 
 Life-cycle costs                              58        19 
---------------------------------------  --------  -------- 
 Technical costs                              (3)      (71) 
---------------------------------------  --------  -------- 
 Operational changes                         (54)     (102) 
---------------------------------------  --------  -------- 
 Total contract accounting adjustments          1     (154) 
---------------------------------------  --------  -------- 
 

Self-funded R&D cash spend reduced by GBP17m to GBP354m reflecting lower investment in widebody and business aviation programmes and an increase in next generation technology demonstrator programmes. Net R&D capitalisation was GBP22m lower, driven by widebody and business aviation development programme maturity. Overall, the R&D charge increased to GBP157m from GBP152m in 2018.

Underlying C&A costs were 1% lower year on year. Including the impact of prior year credits C&A costs increased 20% to GBP178m. The increase in profit from joint ventures to GBP45m (2018 H1: GBP22m) reflected increased servicing activity in overhaul bases together with lower elimination of profit on spare engine sales to joint ventures, where volumes were lower.

In service performance highlights

Our in-service large engine fleet grew by 7% year on year to 4,897 engines with widebody engine flying hours increasing 8%, led by growth in the Trent 1000 and Trent XWB fleets. There are now over 280 XWB powered Airbus A350s in service with 27 airlines across the world, representing 11% of our in-service fleet. In service performance has remained very good with over 4 million engine flying hours accrued by the total fleet with a dispatch reliability of 99.9%. One of our Trent 700 engines which entered into service in 2008 completed more than 50,000 engine flying hours without requiring an overhaul, the equivalent of travelling around the world more than 1,000 times.

On the Trent 1000 we continue with our plans to resolve the customer disruption caused by the compressor issue. We have been installing the new certified blade designs in the overhaul of all Package C compressors since early this year. We have made progress, increasing our MRO capacity to help minimise disruption and reducing the number of aircraft on ground (AOG), albeit the pace with which this has fallen has been slightly below our original plans. As such, our estimate of costs has deteriorated, increasing by around GBP100m across the next three years.

The total cash impact on Civil Aerospace from the Trent 1000 package B and C in-service issues in H1 2019 was GBP219m (H1 2018: GBP107m). We expect the full year 2019 impact to now be around GBP450-500m, before declining by GBP50-100m in 2020 and stepping down materially thereafter. All technical changes are expected to be fully embodied into the Trent 1000 Package B/C fleets by 2022.

In April an issue was identified with the high pressure turbine (HPT) blades on the Trent 1000 TEN and an airworthiness directive was issued mandating an engine inspection regime. Inspections to date have shown HPT blade deterioration that is faster than the certified hard life limit in the engines of around a third of our Trent 1000 TEN customers. This has led us to work closely with these customers to minimise the disruption to them as engines are removed for HPT blade replacement. The projected number of AOG driven by this issue is much smaller than that caused by Trent 1000 Package B/C disruption. However, it may modestly impact the pace of our overall AOG recovery on the Trent 1000. The expected cost of dealing with this is within the bounds of the normal risk we manage on our programmes in any given year.

Operational and strategic review

In H1 2019 we delivered 257 engines and shipped a further 14 engines to airframer OEMs. We remain on track to deliver over 500 large engines for the Full Year. We have continued to make progress reducing large engine OE unit losses, down by GBP0.2m to GBP1.3m in H1 2019. A key contributor continues to be the Trent XWB-84 engines with around a third reduction in average OE loss in H1.

Passenger air traffic growth rates continue to support the long-term trend level of 4-5% per annum and this underpins our future engine flying hour growth. Following a period of high orders driven by new aircraft programme launches, the widebody order environment is returning to trend ahead of growth in the replacement cycle in the early 2020s. We expect both Airbus and Boeing widebody production rates to remain stable in the short to medium term, with A380 production ceasing in 2021 as announced at the start of the year. Our market share of the Boeing 787 programme remains approximately 35%. We anticipate a growing number of A330ceo transitions over the coming years and based on our proven experience and market confidence in the Trent 700 powered A330ceo, we are working with operators and leasing companies to manage this. Our widebody order backlog remains significant at 2,136 engines and we continue to expect good growth in our in-service fleet over the short and medium term.

There were 320 new widebody engine firm & announced orders in the first half including 62 Trent 1000s and 112 Trent XWBs, with 202 cancellations which included 84 from Emirates relating to the A380 announced earlier this year.

We continue to expand our global service network with a new independent Authorised Maintenance Centre (AMC) in Abu Dhabi operated by Sanad Aerotech to provide complete Trent 700 overhaul services. Construction of the world's largest indoor testbed at Derby also continues, with commissioning expected in 2020. The GBP90m facility provides a 7,500 sq. metres capacity, harnessing the latest digital technology to set conditions and obtain evidence from a range of tests.

In business aviation we delivered our first Pearl 15 production standard engines to Bombardier to be fitted to the Global 6500 aircraft in readiness to power it into service, expected later this year. This supports our strategy of regaining market share in this sector. We took further steps to strengthen our services infrastructure by expanding the global network of Authorised Service Centres of our large CorporateCare customer base and introduced CorporateCare Enhanced in business aviation as standard for all new CorporateCare customers going forward.

We continue to make progress in our strategy to champion electrification. In June we announced the acquisition of Siemen's eAircraft business, a move that will accelerate the delivery of our electrification strategy. The business, based in Germany and Hungary, employs around 180 specialist electrical designers and engineers who have been developing a range of all electric and hybrid electric propulsion solutions for the aerospace industry. The team is already known to us working on the E-Fan X demonstrator project which, when flying, will demonstrate hybrid electric propulsion at the scale required to power regional aircraft. This creates a re-entry point into an OE market in which Rolls-Royce does not presently participate.

Our UltraFan programme, which encapsulates a broad range of enabling technologies, made further progress in the first half as the final phase of Advanced Low Pressure System (ALPS) testing got underway. This was the first time all composite elements of ALPS, including fan blades, a fan case and annulus fillers were tested together on a donor engine. The system also demonstrates the digital element of the Rolls-Royce Intelligent Engine vision with each blade having a digital twin enabling a comparison of digital and empirical test results.

We are further enhancing our digital capability via a co-innovation agreement with Singapore Airlines to identify new opportunities to enhance flight efficiency, safety and aircraft availability through data-driven digital applications and services. Additionally, Qatar Airways and Rolls-Royce have started to use Virtual Reality to train engineers, a first for both companies.

Power Systems

Overview

Power Systems made good progress in the first half, with sales continuing to outgrow global GDP growth and gross margins improving due to a better product mix. We continued to advance our services strategy, with strong growth in LTSA sales a particular highlight. Order intake was good at GBP1.7bn, a book-to-bill of 1.1x and a healthy level of order cover underpins our full year guidance. While there was a significant build-up of inventory in the first half, this is to support growth in the second half. This will largely unwind by the full year.

Financial overview

 
                                                                    Organic 
   GBPm                             H1 2019    H1 2018     Change    change 
-------------------------------  ----------  ---------  ---------  -------- 
 Underlying revenue                   1,553      1,471        +6%       +6% 
-------------------------------  ----------  ---------  ---------  -------- 
 Underlying OE revenue                  994        945        +5%       +6% 
-------------------------------  ----------  ---------  ---------  -------- 
 Underlying services revenue            559        526        +6%       +7% 
-------------------------------  ----------  ---------  ---------  -------- 
 Underlying gross profit                389        354       +10%      +10% 
-------------------------------  ----------  ---------  ---------  -------- 
 Gross margin %                       25.0%      24.1%     +90bps    +90bps 
-------------------------------  ----------  ---------  ---------  -------- 
 Commercial and administrative        (198)      (188)        +5%       +6% 
-------------------------------  ----------  ---------  ---------  -------- 
 Research and development 
  cost                                 (94)       (86)        +9%      +10% 
-------------------------------  ----------  ---------  ---------  -------- 
 Joint ventures and associates          (1)          -          -         - 
-------------------------------  ----------  ---------  ---------  -------- 
 Underlying operating profit             96         80       +20%      +20% 
-------------------------------  ----------  ---------  ---------  -------- 
 Underlying operating margin 
  %                                    6.2%       5.4%     +80bps    +70bps 
-------------------------------  ----------  ---------  ---------  -------- 
 

Underlying revenue

Underlying revenue of GBP1,553m increased by 6%, with OE revenues up 6% driven by strong demand for mission critical power generation products, notably to serve the data centre market. This growth more than offset the anticipated reduction in demand from the construction & agriculture sectors, following the non-recurrence of the emissions led pre-buy effect seen in 2018.

Services revenues grew by 7% in the first half. We continue our focus to drive greater value from our large installed base, both through a more proactive approach to spare parts sales and a greater focus on long term service agreements (LTSAs). In the first half LTSA revenues increased by more than 25%, with LTSA sales accounting for 11% of total services in the period.

The expected H2 seasonal bias to revenues, together with specific inventory build to support our growth strategy in emerging markets saw inventory increase in the first half. This will unwind through the second half to support the expected step-up in revenues, supported by a high level of order coverage.

Underlying operating profit

Underlying operating profit rose by 20% to GBP96m, led by the higher revenue growth and favourable mix. Gross profit increased by 10% to GBP389m, with gross margins up 90bps to 25%, driven by improved product mix. C&A costs of GBP(198)m were 6% higher year on year reflecting increased sales related activity, pay escalation and the first time consolidation of certain overseas subsidiaries. The R&D charge increased by GBP9m, driven by our continuing investment in future engine types and our electrification and hybrid strategy.

Operational and strategic review

Most of our end markets remain resilient despite the somewhat weaker economic backdrop. In power generation demand for mission critical power for data centres, particularly in the US, remains robust and government policies continue to favour renewable technologies driving demand for our microgrid solutions. In marine we continue to see growth in ferries and tugs and there are signs of a slow recovery from the prolonged slump in offshore oil & gas markets. As expected, in industrial markets we've seen weakness in construction and flat agricultural markets, partially offset by the recovery in mining.

As anticipated, given the benefit in 2018 from the pre-buy effect in construction and agriculture markets ahead of EU emission changes, order intake fell year on year but remained strong at GBP1.7bn, a book to bill ratio of 1.1. Excluding the 2018 pre-buy impact, underlying order intake improved by 2%. Full year order coverage remains strong at around 80% supporting our confidence in the second half.

In power generation we enhanced our microgrid solutions offering through a global partnership with ABB, combining our integrated MTU diesel and gas genset systems and control solutions with ABB's modular microgrid and control capability. This enables us to offer an innovative, energy-efficient microgrid solution. Similarly, through developing a battery pack for microgrids we have expanded our portfolio of energy systems with a microgrid solution for mines, providing operators with a reliable and sustainable energy supply.

In marine we launched the fifth generation S4000 engine with both exhaust after treatment and a new gas version to comply with the most stringent emission regulations. We announced a collaboration with British luxury yacht manufacturer, Sunseeker, as launch customer for an MTU powered hybrid propulsion yacht. We also entered into collaboration with ZF Group to develop a new electronic monitoring system for ships to improve vessel availability, fuel consumption and emissions.

In industrial MTU engines were chosen by both Hyster for forklift trucks and Bell for articulated dump trucks in order to meet the Stage V European emissions standards. Continuing our successful partnership with Chinese railcar company CRRC and Sri Lanka Railways our Series 4000 MTU drive system was chosen as the power plant, bringing the total number of Sri Lanka Railways MTU powered CRRC railcars to 60. In rail we converted the Iarnród Eireann Irish Rail MOU for Hybrid Power Packs into a firm order for delivery from May 2020 and signed further letters of intent for hybrid rail solutions.

In nuclear we benefitted from our broad in-house capability agreeing to provide MTU diesel generators to provide back-up power to the new nuclear power station at Hinkley Point C alongside all instrumentation and controls and full systems integration.

Progress continues in China, where we are growing our revenue and market share as well as building engineering capabilities. Our joint venture, MTU Yuchai Power, has increased the volume of locally produced engines and is targeting a wider range of applications through our extensive sales and service network. In India, we are expanding our engineering centre in Pune. Our Indian joint venture, Force MTU Power Systems is building its first plant with production expected to start in 2020 to cater for both local and export sales.

We continue to invest in the development of new products to meet more stringent environmental restrictions and to offer life-cycle services, such as hybrid and electrical solutions. Longer term we expect the hybrid market to move away from the current domination by diesel hybrid solutions towards a more even split of diesel and gas hybrid solutions. While microgrids offer an opportunity for us to combine our current combustion engines with intelligent controls and sustainable new energy sources, we continue to evaluate options on how best to incorporate other base load technologies, such as hydrogen fuel cells.

Defence

Overview

Defence performed well in H1, delivering stable revenues and a strong order intake of GBP2.3bn, strong customer deposits and a book-to-bill of 1.5x. Operating profit margins were modestly up compared with H1 2018. Headwinds in combat and lower LTSA accounting benefits were offset by a strong transport aftermarket and the ongoing operational efficiency improvement delivered across the business in the first half.

Financial overview

 
                                                                    Organic 
   GBPm                             H1 2019    H1 2018     Change    change 
-------------------------------  ----------  ---------  ---------  -------- 
 Underlying revenue                   1,494      1,415        +6%       +2% 
-------------------------------  ----------  ---------  ---------  -------- 
 Underlying OE revenue                  653        608        +7%       +4% 
-------------------------------  ----------  ---------  ---------  -------- 
 Underlying services revenue            841        807        +4%       +1% 
-------------------------------  ----------  ---------  ---------  -------- 
 Underlying gross profit                295        281        +5%       +1% 
-------------------------------  ----------  ---------  ---------  -------- 
 Gross margin %                       19.7%      19.9%     -20bps    -10bps 
-------------------------------  ----------  ---------  ---------  -------- 
 Commercial and administrative         (76)       (76)          -       -3% 
-------------------------------  ----------  ---------  ---------  -------- 
 Restructuring                          (1)        (1)          -         - 
-------------------------------  ----------  ---------  ---------  -------- 
 Research and development 
  cost                                 (48)       (44)        +9%       +9% 
-------------------------------  ----------  ---------  ---------  -------- 
 Joint ventures and associates            3          2       +50%      +50% 
-------------------------------  ----------  ---------  ---------  -------- 
 Underlying operating 
  profit                                173        162        +7%       +2% 
-------------------------------  ----------  ---------  ---------  -------- 
 Underlying operating 
  margin %                            11.6%      11.4%     +20bps    -10bps 
-------------------------------  ----------  ---------  ---------  -------- 
 

Underlying revenue

Underlying revenue of GBP1,494m was 2% higher than the prior year. OE revenue, 4% higher year-on-year, was driven by F-35 LiftSystem growth, better AE2100 contract mix and increased volumes in naval marine, partly offset by lower Trent 700 volumes for the Multi-Role Tanker Transport (MRTT) aircraft. Service revenue was 1% higher, as Long Term Service Agreement (LTSA) revenues increased on key transport programmes including the AE series, partly offset by lower naval T&M sales in the first half.

Underlying operating profit

Underlying operating profit of GBP173m was GBP3m higher than prior year. Gross profit increased by 1% to GBP295m, with margins stable at 19.7%. Profits benefited from higher LTSA transport revenues, increased sales of T56 series 3.5 upgrade kits and better operational performance in our US facilities. Partially offsetting this were the expected headwinds from reduced combat profits in the UK, as our contract to support the RB199 ended and as we entered into a new EJ200 services contract which is at lower margins due to Sole Source Pricing Regulations (SSPR). Additionally, positive LTSA contract accounting catch-ups were significantly lower year-on-year at GBP4m (2018 H1: GBP28m).

We continue to increase our investment for future programmes, with R&D up by GBP4m. C&A costs were GBP2m lower reflecting progress on cost reduction.

Operational and strategic review

The outlook for our core defence markets is unchanged. In our largest addressable market, the United States, we expect geopolitical factors to continue to drive modest growth over the medium term, though annual defence budgets remain subject to fluctuations and delay. In the UK, we still see a stable environment. In export markets, regional threats are driving pockets of growth in Asia. We also see changes in how defence budgets are being spent; the push for greater value for money across the industry continues, with customers seeking to meet new technology challenges in unmanned aircraft, space, hypersonic and directed energy weapons without major spending increases.

Our strategy is built around three pillars: continuing to hold our share of OE and services for existing products; expanding our core product offering; and growing beyond our core into adjacencies.

So far this year we have made progress against each of these strategic objectives. We continue to leverage our existing installed base with the Series 3.5 upgrade kit for the popular T56 engine (powering the C-130 Hercules transport aircraft). This helped drive sales growth in the half year and secured its first export order from the Royal Thai Air Force. The Series 3.5 upgrade delivers around 25% greater reliability and a 10% fuel cost saving. We have continued to step up our investment in new products, making good progress on our early work as part of Team Tempest, where we aim to secure a lead role in developing a new power and propulsion system for the UK's future air combat capability. Aligned to this, the UK and Sweden recently signed a Memorandum of Understanding to work on a joint development and acquisition programme to meet both nations' future combat aircraft requirements.

As we look to expand our offerings, a key milestone was reached in May as Rolls-Royce LibertyWorks demonstrated an integrated power and thermal management system for a high-power defensive directed energy system. This system leverages our expertise in power to support a new product in a growing area of defence spend. Subsequently we have been announced as part of Team Dynetics which was awarded a $130m contract to build and test the US Army's High Energy Laser Tactical Vehicle Demonstrator programme, a 100-kilowatt class laser weapon system. We also announced an agreement with Bell Helicopter for the development of an optimised propulsion system for the V-280 Valor and V-247 advanced vertical lift platforms.

Finally, as we look to grow beyond our core into technology adjacencies, the UK MOD recently announced a GBP10m contract to develop hypersonic propulsion systems which will be undertaken by Rolls-Royce and its technology partners, BAE Systems and Reaction Engines.

Operationally, the Submarines business has now been fully integrated into Defence, and as part of the group-wide restructuring, plans are now in place to further simplify the business. In the US, our modernisation efforts are beginning to yield material efficiency benefits, which helped offset the profit challenges in combat in the first half. The major redevelopment of our Indianapolis operations is nearing completion with 60% of production moved to the new facilities with zero customer disruption, and the remainder set to move by 2020. Significantly, as part of our bid to re-engine the USAF B-52 fleet we announced Indianapolis as our proposed engine assembly and test site for the F-130 engine. The F-130 is based on the proven and best-selling Rolls-Royce BR725 business jet engine, and already powers E-11A and C-37 aircraft for the US Air Force.

Order intake remained strong in H1 at GBP2.3bn, with a 1.5 book-to-bill ratio and a closing order backlog of c.GBP7.5bn. Notable orders included the design and manufacture of power plants for four additional Dreadnought Submarines (GBP0.5bn); a multi-year India spare parts order for Adour engines and future spare parts for Spey naval engines with the UK MOD.

ITP Aero

Financial overview

 
                                                                    Organic 
   GBPm                             H1 2019    H1 2018     Change    change 
-------------------------------  ----------  ---------  ---------  -------- 
 Underlying revenue                     457        375       +22%      +23% 
-------------------------------  ----------  ---------  ---------  -------- 
 Underlying OE revenue                  400        290       +38%      +40% 
-------------------------------  ----------  ---------  ---------  -------- 
 Underlying services revenue             57        85*       -33%      -32% 
-------------------------------  ----------  ---------  ---------  -------- 
 Underlying gross profit                 80         85        -6%       -4% 
-------------------------------  ----------  ---------  ---------  -------- 
 Gross margin %                       17.5%      22.7%    -520bps   -490bps 
-------------------------------  ----------  ---------  ---------  -------- 
 Commercial and administration 
  costs                                (32)       (29)       +10%      +14% 
-------------------------------  ----------  ---------  ---------  -------- 
 Restructuring                          (1)        (2)       -50%      -50% 
-------------------------------  ----------  ---------  ---------  -------- 
 Research and development 
  costs                                (15)       (14)        +7%       +7% 
-------------------------------  ----------  ---------  ---------  -------- 
 Underlying operating profit             32         40       -20%      -18% 
-------------------------------  ----------  ---------  ---------  -------- 
 Underlying operating margin           7.0%      10.7%    -370bps   -350bps 
-------------------------------  ----------  ---------  ---------  -------- 
 

* Restated to show In Service Support Solutions (ISS) revenue as Services

Underlying revenue

Underlying revenue was GBP457m, an increase of 23% versus H1 2018. Growth was led by higher engine volumes on civil programmes, with continued ramp-up across civil aerospace programmes in ITP's portfolio, partially offset by a reduction in defence sales. Aftermarket revenue declined versus H1 2018 due to lower spare parts consumption, largely driven by phasing and is expected to increase in H2. Revenues remained stable in MRO and services.

Underlying operating profit

Operating profit of GBP32m was GBP7m down versus H1 2018 largely driven by gross margin reduction. This reflected the lower levels of high-margin aftermarket sales, a temporary headwind from mix change in OE engines, together with learner production costs to support the continued OE ramp-up. C&A costs and R&D were also modestly higher in the first half.

Operational and strategic review

Our presence on newly launched platforms that are currently ramping up provides a solid base for ongoing growth in our civil aerospace business, with good progress in single aisle and widebody platforms, as well as in business aviation.

We continue with our industrialisation efforts, including the expansion of our externals business, with a new factory now operational in Derio (Spain) as well as the extension of our facilities in Queretaro (Mexico). In parallel, actions are being taken to improve manufacturing efficiency, delivering progress in unit cost reduction, particularly across our civil engine programmes.

Significant milestones in the first half include the first Rolls-Royce UltraFan's intermediate pressure turbine aerodynamic tests carried out by ITP Aero together with the Aerospace Test Laboratory (CTA); the support of new production technologies with a first additive manufacturing cell installed in our Zamudio plant. In Defence and MRO, ITP Aero has been certified as the second company worldwide to service the MTR390-E engine from our Albacete plant.

Our exposure to growing civil aerospace platforms continues to support our mid-term growth ambitions for the business.

Condensed consolidated half-year financial statements

Condensed consolidated income statement

For the half-year ended 30 June 2019

 
                                                                              Half-year                     Restated * 
                                                                                                             Half-year 
                                                                             to 30 June                     to 30 June 
                                                                                   2019                           2018 
                                                                   Notes           GBPm                           GBPm 
--------------------------------------------------------   ---  ----------  -----------  ----------------------------- 
Revenue                                                              2            7,883                          7,487 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
Cost of sales (1)                                                               (6,882)                        (7,169) 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
Gross profit                                                         2            1,001                            318 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
Commercial and administrative costs (1)                              2            (614)                          (723) 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
Research and development costs                                       3            (349)                          (360) 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
Share of results of joint ventures and associates                                    45                             18 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
Operating profit/(loss)                                                              83                          (747) 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
Gain on the disposal of businesses                                  16              118                            358 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
Profit/(loss) before financing and taxation                                         201                          (389) 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
 
Financing income                                                     4               73                            106 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
Financing costs                                                      4          (1,065)                          (951) 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
Net financing                                                                     (992)                          (845) 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
 
Loss before taxation                                                              (791)                        (1,234) 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
Taxation                                                             5            (116)                            282 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
Loss for the period                                                               (907)                          (952) 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
 
Attributable to: 
--------------------------------------------------------   ---  ----------  -----------  ----------------------------- 
Ordinary shareholders                                                             (909)                          (954) 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
Non-controlling interests                                                             2                              2 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
Loss for the period                                                               (907)                          (952) 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
Other comprehensive (expense)/income                                              (708)                            334 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
Total comprehensive loss for the period                                         (1,615)                          (618) 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
 
 
Earnings per ordinary share attributable to ordinary 
 shareholders:                                                       6 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
Basic                                                                          (48.02)p                       (51.60)p 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
Diluted                                                                        (48.02)p                       (51.60)p 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
Underlying earnings per ordinary share are shown in note 
6. 
--------------------------------------------------------   ---  ----------  -----------  ----------------------------- 
 
 
Payments to ordinary shareholders in respect of the period           7 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
Pence per share                                                                    4.6p                           4.6p 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
Total                                                                                87                             86 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
Underlying profit before taxation                                    2               93                             73 
--------------------------------------------------------------  ----------  -----------  ----------------------------- 
 
 

* The financial information for the prior period has been restated to reflect changes to the provisional ITP Aero balances and other adjustments.

See note 1 for more details.

(1) Included within cost of sales and commercial and administrative costs for the prior period are exceptional charges relating to the Trent 1000 Civil Aerospace programme and restructuring costs. Included within cost of sales for the current period are exceptional charges relating to the Trent 900 Civil Aerospace programme and restructuring costs. Further details can be found in note 2.

Condensed consolidated statement of comprehensive income

For the half-year ended 30 June 2019

 
                                                                                                  Restated * 
                                                                                      Half-year    Half-year 
                                                                                     to 30 June   to 30 June 
                                                                                           2019         2018 
                                                                             Notes         GBPm         GBPm 
------------------------------------------------------------------------    ------  -----------  ----------- 
Loss for the period                                                                       (907)        (952) 
--------------------------------------------------------------------------  ------  -----------  ----------- 
Other comprehensive income (OCI) 
------------------------------------------------------------------------    ------  -----------  ----------- 
  Movements in post-retirement schemes                                        13          (943)          451 
--------------------------------------------------------------------------  ------  -----------  ----------- 
  Share of OCI of joint ventures and associates                                             (1)            - 
------------------------------------------------------------------------    ------  -----------  ----------- 
  Related tax movements                                                                     313        (154) 
--------------------------------------------------------------------------  ------  -----------  ----------- 
  Items that will not be reclassified to profit or loss                                   (631)          297 
--------------------------------------------------------------------------  ------  -----------  ----------- 
 
  Foreign exchange translation differences on foreign operations                             20           48 
--------------------------------------------------------------------------  ------  -----------  ----------- 
  Reclassification to income statement on disposal of Commercial Marine       16           (98)         (19) 
--------------------------------------------------------------------------  ------  -----------  ----------- 
   Cash flow hedge reserve movements                                                         10            - 
------------------------------------------------------------------------    ------  -----------  ----------- 
  Share of OCI of joint ventures and associates                                             (7)            8 
--------------------------------------------------------------------------  ------  -----------  ----------- 
  Related tax movements                                                                     (2)            - 
------------------------------------------------------------------------    ------  -----------  ----------- 
  Items that may be reclassified to profit or loss                                         (77)           37 
--------------------------------------------------------------------------  ------  -----------  ----------- 
 
Total other comprehensive (expense)/income                                                (708)          334 
--------------------------------------------------------------------------  ------  -----------  ----------- 
 
Total comprehensive expense for the period                                              (1,615)        (618) 
--------------------------------------------------------------------------  ------  -----------  ----------- 
 
Attributable to: 
------------------------------------------------------------------------    ------  -----------  ----------- 
Ordinary shareholders                                                                   (1,617)        (620) 
--------------------------------------------------------------------------  ------  -----------  ----------- 
Non-controlling interests                                                                     2            2 
--------------------------------------------------------------------------  ------  -----------  ----------- 
Total comprehensive expense for the period                                              (1,615)        (618) 
--------------------------------------------------------------------------  ------  -----------  ----------- 
 

* The financial information for the prior period has been restated to reflect changes to the provisional ITP Aero balances and other adjustments.

See note 1 for more details.

Condensed consolidated balance sheet

At 30 June 2019

 
                                                             30 June   31 December 
                                                                2019          2018 
                                                    Notes       GBPm          GBPm 
-------------------------------------------------  ------  ---------  ------------ 
 
ASSETS 
-------------------------------------------------  ------  ---------  ------------ 
Intangible assets                                     8        5,437         5,295 
-------------------------------------------------  ------  ---------  ------------ 
Property, plant and equipment                         9        4,768         4,929 
-------------------------------------------------  ------  ---------  ------------ 
Right-of-use assets (1)                              10        2,104             - 
-------------------------------------------------  ------  ---------  ------------ 
Investments - joint ventures and associates                      405           412 
-------------------------------------------------  ------  ---------  ------------ 
Investments - other                                               16            22 
-------------------------------------------------  ------  ---------  ------------ 
Other financial assets                               11          437           343 
-------------------------------------------------  ------  ---------  ------------ 
Deferred tax assets                                   5        2,149         2,092 
-------------------------------------------------  ------  ---------  ------------ 
Post-retirement scheme surpluses                     13        1,143         1,944 
-------------------------------------------------  ------  ---------  ------------ 
Non-current assets                                            16,459        15,037 
-------------------------------------------------  ------  ---------  ------------ 
Inventories                                                    4,711         4,287 
-------------------------------------------------  ------  ---------  ------------ 
Trade receivables and other assets                             4,764         4,690 
-------------------------------------------------  ------  ---------  ------------ 
Contract assets                                      12        2,217         2,057 
-------------------------------------------------  ------  ---------  ------------ 
Taxation recoverable                                              27            34 
-------------------------------------------------  ------  ---------  ------------ 
Other financial assets                               11           33            22 
-------------------------------------------------  ------  ---------  ------------ 
Short-term investments                                             -             6 
-------------------------------------------------  ------  ---------  ------------ 
Cash and cash equivalents                                      4,208         4,974 
-------------------------------------------------  ------  ---------  ------------ 
Current assets                                                15,960        16,070 
-------------------------------------------------  ------  ---------  ------------ 
Assets held for sale                                 16            -           750 
-------------------------------------------------  ------  ---------  ------------ 
TOTAL ASSETS                                                  32,419        31,857 
-------------------------------------------------  ------  ---------  ------------ 
 
LIABILITIES 
-------------------------------------------------  ------  ---------  ------------ 
Borrowings and lease liabilities                               (464)         (858) 
-------------------------------------------------  ------  ---------  ------------ 
Other financial liabilities                          11        (918)         (647) 
-------------------------------------------------  ------  ---------  ------------ 
Trade payables and other liabilities                         (8,216)       (8,292) 
-------------------------------------------------  ------  ---------  ------------ 
Contract liabilities                                 12      (4,248)       (3,794) 
-------------------------------------------------  ------  ---------  ------------ 
Current tax liabilities                                        (178)         (138) 
-------------------------------------------------  ------  ---------  ------------ 
Provisions for liabilities and charges                         (919)       (1,122) 
-------------------------------------------------  ------  ---------  ------------ 
Current liabilities                                         (14,943)      (14,851) 
-------------------------------------------------  ------  ---------  ------------ 
Borrowings and lease liabilities                             (6,065)       (3,804) 
-------------------------------------------------  ------  ---------  ------------ 
Other financial liabilities                          11      (3,636)       (3,542) 
-------------------------------------------------  ------  ---------  ------------ 
Trade payables and other liabilities                         (1,964)       (1,940) 
-------------------------------------------------  ------  ---------  ------------ 
Contract liabilities                                 12      (5,515)       (5,336) 
-------------------------------------------------  ------  ---------  ------------ 
Deferred tax liabilities                              5        (661)         (962) 
-------------------------------------------------  ------  ---------  ------------ 
Provisions for liabilities and charges                         (756)         (795) 
-------------------------------------------------  ------  ---------  ------------ 
Post-retirement scheme deficits                      13      (1,478)       (1,303) 
-------------------------------------------------  ------  ---------  ------------ 
Non-current liabilities                                     (20,075)      (17,682) 
-------------------------------------------------  ------  ---------  ------------ 
Liabilities associated with assets held for sale     16            -         (376) 
-------------------------------------------------  ------  ---------  ------------ 
TOTAL LIABILITIES                                           (35,018)      (32,909) 
-------------------------------------------------  ------  ---------  ------------ 
 
NET LIABILITIES                                              (2,599)       (1,052) 
-------------------------------------------------  ------  ---------  ------------ 
 
EQUITY 
-------------------------------------------------  ------  ---------  ------------ 
Called-up share capital                                          383           379 
-------------------------------------------------  ------  ---------  ------------ 
Share premium account                                            269           268 
-------------------------------------------------  ------  ---------  ------------ 
Capital redemption reserve                                       160           161 
-------------------------------------------------  ------  ---------  ------------ 
Cash flow hedging reserve                                      (105)         (106) 
-------------------------------------------------  ------  ---------  ------------ 
Merger reserve                                                   567           406 
-------------------------------------------------  ------  ---------  ------------ 
Translation reserve                                              731           809 
-------------------------------------------------  ------  ---------  ------------ 
Accumulated losses                                           (4,628)       (2,991) 
-------------------------------------------------  ------  ---------  ------------ 
Equity attributable to ordinary shareholders                 (2,623)       (1,074) 
-------------------------------------------------  ------  ---------  ------------ 
Non-controlling interests                                         24            22 
-------------------------------------------------  ------  ---------  ------------ 
TOTAL EQUITY                                                 (2,599)       (1,052) 
-------------------------------------------------  ------  ---------  ------------ 
 

(1) IFRS 16 Leases has been adopted from 1 January 2019 and under the transitional arrangements the Group has adopted IFRS 16 Leases on a modified retrospective basis. See note 1 and note 18 for more details.

Condensed consolidated cash flow statement

For the half-year ended 30 June 2019

 
                                                                                                            Restated * 
                                                                                              Half-year      Half-year 
                                                                                             to 30 June     to 30 June 
                                                                                                   2019           2018 
                                                                                    Notes          GBPm           GBPm 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
 
Reconciliation of cash flows from operating activities 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Operating profit/(loss)                                                                              83          (747) 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Loss on disposal of property, plant and equipment                                                     -           (11) 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Share of results of joint ventures and associates                                                  (45)           (18) 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Dividends received from joint ventures and associates                                                36             46 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Amortisation and impairment of intangible assets (1)                                  8             153            332 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Depreciation and impairment of property, plant and equipment                          9             229            239 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Depreciation and impairment of right-of-use assets                                   10             200              - 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
(Decrease)/increase in provisions                                                                 (172)            809 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Increase in inventories                                                                           (433)          (461) 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Increase in trade receivables and other assets                                                     (50)          (187) 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Increase in contract assets                                                          12           (160)          (127) 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Decrease in amounts payable for financial penalties from agreements with 
investigating bodies                                                                              (102)              - 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Increase in trade payables and other liabilities                                                    265            330 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Increase in contract liabilities                                                     12             633            664 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Cash flows on other financial assets and liabilities held for operating purposes                  (314)          (261) 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Net defined benefit post-retirement cost recognised in profit before financing       13             107            118 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Cash funding of defined benefit post-retirement schemes                              13           (106)           (87) 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Share-based payments                                                                                 20             22 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Other                                                                                               (1)              - 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Net cash inflow from operating activities before taxation                                           343            661 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Taxation paid                                                                                     (100)           (77) 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Net cash inflow from operating activities                                                           243            584 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
 
Cash flows from investing activities 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Additions of unlisted investments                                                                   (2)            (4) 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Disposals of unlisted investments                                                                     4              - 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Additions of intangible assets                                                        8           (283)          (327) 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Disposals of intangible assets                                                                        2              2 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Purchases of property, plant and equipment                                            9           (349)          (343) 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Government grants received                                                                            -              1 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Disposals of property, plant and equipment                                                            7             60 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Disposal of businesses (net of cash transferred)                                     16             458            584 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Investments in joint ventures and associates and other investment movements                         (2)              - 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Reclassification of joint operations to subsidiaries                                                  -              4 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Other                                                                                               (1)              - 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Net cash outflow from investing activities                                                        (166)           (23) 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
 
Cash flows from financing activities 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Repayment of loans                                                                   11           (585)            (5) 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Proceeds from increase in loans                                                                      46            969 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Capital element of lease payments (2018: Capital element of finance lease 
 payments)                                                                                        (140)            (8) 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Net cash flow from (decrease)/increase in borrowings and finance leases                           (679)            956 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Interest received                                                                                    19             11 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Interest paid                                                                                      (64)           (47) 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Interest element of lease payments (2018: Interest element of finance lease 
payments)                                                                                          (44)              - 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Decrease/(increase) in short-term investments                                                         6            (4) 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Issue of ordinary shares (net of expenses)                                                            1              - 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Purchase of ordinary shares                                                                        (15)              - 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Other transactions in ordinary shares                                                                21              - 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Redemption of C Shares                                                                             (85)           (85) 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Net cash (outflow)/inflow from financing activities                                               (840)            831 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
 
Change in cash and cash equivalents                                                               (763)          1,392 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Cash and cash equivalents at 1 January                                                            4,952          2,933 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Exchange (losses)/gains on cash and cash equivalents                                                (7)             33 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
Cash and cash equivalents at period end (2)                                                       4,182          4,358 
---------------------------------------------------------------------------------  ------  ------------  ------------- 
 

* The comparative financial information for the prior period has been represented to show cash flow movements for contract assets and contract liabilities.

See note 17 for more details.

(1) In 2018 a goodwill impairment of GBP160m in respect of Commercial Marine was included in this line

(2) The Group considers overdrafts (repayable on demand) to be an integral part of its cash management activities and these are included in cash and cash equivalents for the purposes of the cash flow statement.

(3) In deriving the consolidated cash flow statement, movements in balance sheet line items have been adjusted for non-cash items.

 
 
                                                                                        Half-year      Half-year 
                                                                                       to 30 June     to 30 June 
                                                                                             2019           2018 
                                                                                             GBPm           GBPm 
-----------------------------------------------------------------------------------  ------------  ------------- 
Reconciliation of movements in cash and cash equivalents to movements in net funds 
-----------------------------------------------------------------------------------  ------------  ------------- 
Change in cash and cash equivalents                                                         (763)          1,392 
-----------------------------------------------------------------------------------  ------------  ------------- 
Cash flow from decrease/(increase) in borrowings and leases                                   679          (956) 
-----------------------------------------------------------------------------------  ------------  ------------- 
Cash flow from (decrease)/increase in short-term investments                                  (6)              4 
-----------------------------------------------------------------------------------  ------------  ------------- 
Change in net funds resulting from cash flows                                                (90)            440 
-----------------------------------------------------------------------------------  ------------  ------------- 
New leases in the period                                                                     (87)              - 
-----------------------------------------------------------------------------------  ------------  ------------- 
Exchange (losses)/gains on net funds                                                         (29)             30 
-----------------------------------------------------------------------------------  ------------  ------------- 
Fair value adjustments                                                                      (106)              7 
-----------------------------------------------------------------------------------  ------------  ------------- 
Reclassifications                                                                            (79)              - 
-----------------------------------------------------------------------------------  ------------  ------------- 
Movement in net funds                                                                       (391)            477 
-----------------------------------------------------------------------------------  ------------  ------------- 
Net funds at 1 January excluding the fair value of swaps                                      318          (532) 
-----------------------------------------------------------------------------------  ------------  ------------- 
Adoption of IFRS 16 (see note 18)                                                         (2,248)              - 
-----------------------------------------------------------------------------------  ------------  ------------- 
Net funds at 1 January restated                                                           (1,930)          (532) 
-----------------------------------------------------------------------------------  ------------  ------------- 
Net funds at period end excluding the fair value of swaps                                 (2,321)           (55) 
-----------------------------------------------------------------------------------  ------------  ------------- 
Fair value of swaps hedging fixed rate borrowings                                             384            220 
-----------------------------------------------------------------------------------  ------------  ------------- 
Net funds at period end                                                                   (1,937)            165 
-----------------------------------------------------------------------------------  ------------  ------------- 
 

The movement in net funds (defined by the Group as including the items shown below) is as follows:

 
                       At 31                   At 1                                                                                           At 30 
                       December   Transition   January   Reclassification   Funds   Exchange      Fair value    Reclassifications              June 
                       2018       to IFRS 16   2019      (1)                flow    differences   adjustments   (2)                 Leases     2019 
                           GBPm         GBPm      GBPm               GBPm    GBPm          GBPm          GBPm                GBPm      GBPm      GBPm 
--------------------  ---------  -----------  --------  -----------------  ------  ------------  ------------  ------------------  --------  -------- 
Cash at bank and in 
 hand                     1,023            -     1,023                  -   (103)             4             -                   -         -       924 
--------------------  ---------  -----------  --------  -----------------  ------  ------------  ------------  ------------------  --------  -------- 
Money market funds        1,222            -     1,222                  -     228           (4)             -                   -         -     1,446 
--------------------  ---------  -----------  --------  -----------------  ------  ------------  ------------  ------------------  --------  -------- 
Short-term deposits       2,729            -     2,729                  -   (884)           (7)             -                   -         -     1,838 
--------------------  ---------  -----------  --------  -----------------  ------  ------------  ------------  ------------------  --------  -------- 
Cash and cash 
 equivalents 
 (per balance sheet)      4,974            -     4,974                  -   (759)           (7)             -                   -         -     4,208 
--------------------  ---------  -----------  --------  -----------------  ------  ------------  ------------  ------------------  --------  -------- 
Overdrafts                 (22)            -      (22)                  -     (4)             -             -                   -         -      (26) 
--------------------  ---------  -----------  --------  -----------------  ------  ------------  ------------  ------------------  --------  -------- 
Cash and cash 
 equivalents 
 (per cash flow 
 statement)               4,952            -     4,952                  -   (763)           (7)             -                   -         -     4,182 
--------------------  ---------  -----------  --------  -----------------  ------  ------------  ------------  ------------------  --------  -------- 
Short-term 
 investments                  6            -         6                  -     (6)             -             -                   -         -         - 
--------------------  ---------  -----------  --------  -----------------  ------  ------------  ------------  ------------------  --------  -------- 
Borrowings - Current      (802)            -     (802)               (14)     542           (1)             5                 192         -      (78) 
--------------------  ---------  -----------  --------  -----------------  ------  ------------  ------------  ------------------  --------  -------- 
Borrowings - 
 Non-current            (3,609)            -   (3,609)               (65)     (3)             -         (111)               (192)         -   (3,980) 
--------------------  ---------  -----------  --------  -----------------  ------  ------------  ------------  ------------------  --------  -------- 
Lease liabilities         (229)      (2,248)   (2,477)                  -     184          (21)             -                   -     (131)   (2,445) 
--------------------  ---------  -----------  --------  -----------------  ------  ------------  ------------  ------------------  --------  -------- 
Financial 
 liabilities            (4,640)      (2,248)   (6,888)               (79)     723          (22)         (106)                   -     (131)   (6,503) 
--------------------  ---------  -----------  --------  -----------------  ------  ------------  ------------  ------------------  --------  -------- 
Net funds/(debt) 
 excluding the fair 
 value of swaps             318      (2,248)   (1,930)               (79)    (46)          (29)         (106)                   -     (131)   (2,321) 
--------------------  ---------  -----------  --------  -----------------  ------  ------------  ------------  ------------------  --------  -------- 
Fair value of swaps 
 hedging fixed rate 
 borrowings                 293            -       293                  -       -             -            91                   -         -       384 
--------------------  ---------  -----------  --------  -----------------  ------  ------------  ------------  ------------------  --------  -------- 
Net funds/(debt)            611      (2,248)   (1,637)               (79)    (46)          (29)          (15)                   -     (131)   (1,937) 
--------------------  ---------  -----------  --------  -----------------  ------  ------------  ------------  ------------------  --------  -------- 
 
  Net cash 
  (excluding lease 
  liabilities)              840                    840                                                                                            508 
--------------------  ---------  -----------  --------  -----------------  ------  ------------  ------------  ------------------  --------  -------- 
 

(1) The Group has reclassified GBP79m as borrowings previously included in other financial liabilities. These borrowings mature between 2019 and 2029.

(2) Reclassifications relate principally to the Group exercising its 3-year extension option on a GBP200m bank loan, moving the maturity date from 2019 to 2022.

Condensed consolidated statement of changes in equity

For the half-year ended 30 June 2019

 
                                             Attributable to ordinary shareholders 
                                                     Cash 
                                        Capital      flow 
                    Share     Share     redemption   hedging   Merger     Translation   Accumulated            Non-controlling 
                    capital   premium   reserve      reserve   reserves   reserve       losses (1)    Total    interests (NCI)   Total equity 
                       GBPm      GBPm         GBPm      GBPm       GBPm          GBPm          GBPm     GBPm              GBPm           GBPm 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
At 1 January 2018       368       195          162     (112)          3           657         (358)      915                 3            918 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Loss for the 
 period                   -         -            -         -          -             -         (954)    (954)                 2          (952) 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Foreign exchange 
 translation 
 differences on 
 foreign 
 operations               -         -            -         -          -            48             -       48                 -             48 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Reclassified to 
 the income 
 statement on 
 disposal of 
 L'Orange                 -         -            -         -          -          (19)             -     (19)                 -           (19) 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Movement on 
 post-retirement 
 schemes                  -         -            -         -          -             -           451      451                 -            451 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Share of other 
 comprehensive 
 income of joint 
 ventures and 
 associates               -         -            -         9          -           (1)             -        8                 -              8 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Related tax 
 movements                -         -            -         -          -             -         (154)    (154)                 -          (154) 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Total 
 comprehensive 
 expense for the 
 period                   -         -            -         9          -            28         (657)    (620)                 2          (618) 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Shares issued in 
 respect of 
 acquisition of 
 ITP Aero (4)             6         -            -         -        240             -             -      246                 -            246 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Other issues of 
ordinary shares           -         -            -         -          -             -             -        -                 -              - 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Issue of C Shares 
 (2)                      -         -         (85)         -          -             -             -     (85)                 -           (85) 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Redemption of C 
 Shares                   -         -           85         -          -             -          (85)        -                 -              - 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Share-based 
 payments - 
 direct to equity 
 (3)                      -         -            -         -          -             -            22       22                 -             22 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Reclassification 
 of joint 
 operations to 
 subsidiaries             -         -            -         -          -             -             -        -                15             15 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Transactions with 
 non-controlling 
 interests                -         -            -         -          -             -             -        -               (1)            (1) 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Related tax 
 movements                -         -            -         -          -             -             4        4                 -              4 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Other changes in 
 equity in the 
 period                   6         -            -         -        240             -          (59)      187                14            201 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
At 30 June 2018         374       195          162     (103)        243           685       (1,074)      482                19            501 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
 
At 31 December 
 2018                   379       268          161     (106)        406           809       (2,991)  (1,074)                22        (1,052) 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Impact of 
 adopting IFRS 16 
 (net of tax)             -         -            -         -          -             -          (40)     (40)                 -           (40) 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
At 1 January 2019 
 including the 
 impact of IFRS 
 16                     379       268          161     (106)        406           809       (3,031)  (1,114)                22        (1,092) 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Loss for the 
 period                   -         -            -         -          -             -         (909)    (909)                 2          (907) 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Foreign exchange 
 translation 
 differences on 
 foreign 
 operations               -         -            -         -          -            20             -       20                 -             20 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Reclassification 
 to income 
 statement on 
 disposal of 
 Commercial 
 Marine                   -         -            -         -          -          (98)             -     (98)                 -           (98) 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Movement on 
 post-retirement 
 schemes                  -         -            -         -          -             -         (943)    (943)                 -          (943) 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Amount credited 
 to cash flow 
 hedge reserve            -         -            -        10          -             -             -       10                 -             10 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Share of other 
 comprehensive 
 income of joint 
 ventures and 
 associates               -         -            -       (7)          -             -           (1)      (8)                 -            (8) 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Related tax 
 movements                -         -            -       (2)          -             -           313      311                 -            311 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Total 
 comprehensive 
 expense for the 
 period                   -         -            -         1          -          (78)       (1,540)  (1,617)                 2        (1,615) 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Shares issued in 
 respect of 
 acquisition of 
 ITP Aero                 4         -            -         -        161             -             -      165                 -            165 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Other issues of 
 ordinary shares          -         1            -         -          -             -             -        1                 -              1 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Issue of C Shares 
 (2)                      -         -         (87)         -          -             -             1     (86)                 -           (86) 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Redemption of C 
 Shares                   -         -           86         -          -             -          (86)        -                 -              - 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Shares issued to                                                      - 
employee share 
trust                     -         -            -         -                        -             -        -                 -              - 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Ordinary shares 
 purchased                -         -            -         -          -             -          (15)     (15)                 -           (15) 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Share-based 
 payments - 
 direct to equity 
 (3)                      -         -            -         -          -             -            41       41                 -             41 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Transactions with                                                     - 
non-controlling 
interests                 -         -            -         -                        -             -        -                 -              - 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Related tax 
 movements                -         -            -         -          -             -             2        2                 -              2 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
Other changes in 
 equity in the 
 period                   4         1          (1)         -        161             -          (57)      108                 -            108 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
At 30 June 2019         383       269          160     (105)        567           731       (4,628)  (2,623)                24        (2,599) 
-----------------  --------  --------  -----------  --------  ---------  ------------  ------------  -------  ----------------  ------------- 
 
 

(1) At 30 June 2019, 6,869,303 ordinary shares with a net book value of GBP60m (30 June 2018: 6,347,623 ordinary shares with net book values of GBP51m) were held for the purpose of share-based payment plans and included in accumulated losses. During the period, 8,416,510 ordinary shares with a net book value of

GBP78m (30 June 2018: 153,281 ordinary shares with a net book value of GBP1m) vested in share-based payment plans. During the period, the Company acquired 73,849 (30 June 2018: 34,801) of its ordinary shares via reinvestment of dividends received on its own shares and purchased 1,673,043 (2018: nil) of its ordinary shares through purchases on the London Stock Exchange. During the period, the Company issued 17,983,068 new ordinary shares (30 June 2018: 28,956,521 new ordinary shares) relating to the 6(th) and 7(th) (30 June 2018: first three) instalments for the acquisition of ITP Aero.

(2) In Rolls-Royce Holdings plc's own Financial Statements, C Shares are issued from the merger reserve. This reserve was created by a scheme of arrangement in 2011. As this reserve is eliminated on consolidation, in the consolidated financial statements, the C Shares are shown as being issued from the capital redemption reserve.

(3) Share-based payments - direct to equity is the share-based payment charge for the period less the actual cost of vesting excluding those vesting from own shares and cash received on share-based schemes vesting.

(4) Share premium of GBP240m in respect of shares issued for the acquisition of ITP Aero has been reclassified from share premium to merger reserve for the period ended 30 June 2018. This is consistent with the presentation adopted at 31 December 2018.

Notes to the half-year financial statements

   1     Basis of preparation and accounting policies 

Notes to the accounts

Reporting entity

Rolls--Royce Holdings plc (the 'Company') is a public company incorporated under the Companies Act 2006 and domiciled in the UK. These condensed consolidated half-year financial statements of the Company as at and for the six months ended 30 June 2019 consist of the consolidation of the financial statements of the Company and its subsidiaries (together referred to as the "Group") and include the Group's interest in jointly controlled and associated entities.

The consolidated financial statements of the Group as at and for the year ended 31 December 2018 (Annual Report 2018) are available upon request from the Company Secretary, Rolls-----Royce Holdings plc, 62 Buckingham Gate, London SW1E 6AT.

The Board of directors approved the condensed consolidated half-year financial statements on 5 August 2019.

Statement of compliance

These condensed consolidated half-year financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union. They do not include all of the information required for full annual statements, and should be read in conjunction with the 2018 Annual Report.

The interim figures up to 30 June 2019 and 2018 are unaudited. The 2018 financial statements have been reported on by the Group's auditors and delivered to the registrar of companies. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

Significant accounting policies

Except for the adoption of IFRS 16 Leases and IFRIC 23 Uncertainty over Income Tax Treatment, the accounting policies applied by the Group in these condensed consolidated half-year financial statements are the same as those that were applied to the consolidated financial statements of the Group for the year ended 31 December 2018 (International Financial Reporting Standards issued by the International Accounting Standards Board (IASB), as adopted for use in the EU effective at 31 December 2018).

Comparative financial information

The comparative financial information for the prior period has been restated for ITP Aero to reflect changes to the provisional ITP Aero balances reflecting additional information obtained during 2018 about facts that existed at the date of acquisition. This adjustment has reduced cost of sales by GBP28 million and increased profit after taxation by GBP8 million.

As at 31 December 2018, the Group concluded that it was more appropriate for deferred profit on sales to joint ventures to be recognised within 'share of results on joint ventures and associates' instead of 'cost of sales'. A reclassification adjustment of GBP34 million between these line items has been made to the prior period's results. No profit or cash impact arose from this adjustment.

Further details of these adjustments are in the 2018 Annual Report.

IFRS 16 Leases

The Group adopted IFRS 16 Leases on 1 January 2019 using the modified retrospective approach. Under the specific transitional provisions in the standard, comparative information has not been restated though the reclassifications and the adjustments arising from the new leasing rules have been recognised in the opening balance sheet on 1 January 2019 (see note 18).

The Group leases various aero engines that are used to support customers' aircraft fleets; land and buildings used for production, administration or training purposes; and equipment. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease arrangements do not impose any covenants, but leased assets may not be used as security for borrowing purposes.

Until 31 December 2018, leases of aircraft and engines, plant and equipment and land and buildings were classified as either finance or operating leases. Payments made under operating leases were charged to profit or loss on a straight-line basis over the period of the lease. From 1 January 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between reducing the liability and a finance cost. The finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

On adoption of IFRS 16, the Group recognised additional lease liabilities in relation to leases which had previously been classified as 'operating leases' under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the Group's incremental borrowing rate as of 1 January 2019. The weighted average incremental borrowing rate applied by the Group to the lease liabilities on 1 January 2019 was 3.7%.

The associated right-of-use assets for certain high value property leases are measured on a retrospective basis as if the new rules had always been applied. Other right-of-use assets are measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet as at 31 December 2018. There was a single onerous lease contract where as a permitted practical expedient we have adjusted the right-of-use asset at the date of initial application by the amount of the provision on the balance sheet at 31 December 2018.

In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:

-- on initial application, IFRS 16 will only be applied to contracts that were previously classified as leases, the Group has elected not to reassess whether a contract is, or contains, a lease at the date of initial application. Instead, for contracts entered into before the transition date the Group has relied on its assessment made applying IAS 17 and IFRIC 4 Determining whether an Arrangement contains a Lease;

-- lease contracts with a duration of less than 12 months will continue to be expensed to the income statement on a straight-line basis over the lease term;

-- the lease term has been determined with the use of hindsight where the contract contains options to extend the lease; and

   --       reliance on previous assessments on whether or not leases are onerous. 

Accounting policy

Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:

   --       fixed payments less any lease incentive receivable; 
   --       variable lease payments that are based on an index or a rate; 
   --       amounts expected to be payable by the Group under residual value guarantees; 

-- the exercise price of a purchase option if the Group is reasonably certain to exercise that option; and

-- payments of penalties for terminating the lease, if the lease term reflects the Group exercising that option.

Where leases commence after the initial transition date the lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the Group's incremental borrowing rate is used, being the rate that the Group would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. Lease liabilities are revalued at each reporting date using the spot exchange rate.

Right-of-use assets are measured at cost comprising the following:

   --       the amount of the initial measurement of lease liability; 

-- any lease payments made at or before the commencement date less any lease incentives received;

   --       any initial direct costs; and 
   --       restoration costs. 

Each right-of-use asset is depreciated over the shorter of its useful life and the lease term on a straight-line basis unless the lease is expected to transfer ownership of the underlying asset to the Group in which case the asset is depreciated to the end of the useful life of the asset.

Payments associated with short-term leases are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less.

IFRIC 23 Uncertainty over Income Tax Treatment

The Group adopted IFRIC 23 Uncertainty over Income Tax Treatment on 1 January 2019. Adoption of this interpretation did not have a material impact on the Group's financial statements.

The Group does not consider that any other standards, amendments or interpretations issued by the IASB, but not yet applicable will have a significant impact on the condensed consolidated financial statements.

   2     Analysis by business segment 

The analysis by Divisions (business segment) is presented in accordance with IFRS 8 Operating segments, on the basis of those segments whose operating results are regularly reviewed by the Board (which acts as the Chief Operating Decision Maker as defined by IFRS 8). Our four divisions are set out below and referred to collectively as the core businesses.

Civil Aerospace development, manufacture, marketing and sales of commercial aero engines and aftermarket services.

Power Systems development, manufacture, marketing and sales of reciprocating engines, power systems and nuclear systems for civil power generation.

Defence development, manufacture, marketing and sales of military aero engines, naval engines, submarines and aftermarket services.

ITP Aero design, research and development, manufacture and casting, assembly and test of aeronautical engines and gas turbines.

Non-core businesses include the trading results of Commercial Marine until the date of disposal on 1 April 2019, the results of Rolls-Royce Power Development Limited until the date of disposal on 15 April 2019, the results of L'Orange until the date of disposal on 1 June 2018 and other smaller businesses including former Energy businesses not included in the disposal to Siemens in 2014 (Retained Energy).

Underlying results

We present the financial performance of our businesses in accordance with IFRS 8 and consistently with the basis on which performance is communicated to the Board each month. Underlying results are presented to reflect the economic impact of the Group's foreign exchange risk management activities. Trading transactions are valued at the exchange rates achieved on the derivative contracts settled to cover the net exposures.

Underlying performance excludes the following:

   --       the effect of acquisition accounting and business disposals; 
   --       the impairment of goodwill and other assets arising on acquisition; 
   --       exceptional items. 

We classify items as "exceptional" where the Directors believe that presentation of our results in this way is more relevant to an understanding of our financial performance, as exceptional items are identified by virtue of their size, nature or incidence.

In determining whether an event or transaction is exceptional, management considers quantitative as well as qualitative factors such as the frequency or predictability of occurrence. Examples of exceptional items include one-time costs and charges in respect of aerospace programmes, costs of restructuring programmes and one time past service charges and credits on our post-retirement schemes.

Exceptional items are not allocated to segments and may not be comparable to similarly titled measures used by other companies.

The tax effects of the adjustments above are excluded from the underlying tax charge. In addition, changes in tax rates or changes in the amount of recoverable advance corporation tax recognised are also excluded.

See page 32 for the reconciliation between Underlying performance and Reported performance.

The following analysis sets out the results of the core businesses on the basis described above and also includes a reconciliation of the underlying results to those reported in the condensed consolidated income statement.

 
                                                                                        Corporate and 
-                         Civil Aerospace  Power Systems  Defence  ITP Aero             inter-segment  Core businesses 
                                     GBPm           GBPm     GBPm      GBPm                      GBPm             GBPm 
------------------------  ---------------  -------------  -------  --------  ------------------------  --------------- 
For the half-year ended 
30 June 2019 
------------------------  ---------------  -------------  -------  --------  ------------------------  --------------- 
Underlying revenue from 
 sale of original 
 equipment                          1,570            994      653       400                     (267)            3,350 
------------------------  ---------------  -------------  -------  --------  ------------------------  --------------- 
Underlying revenue from 
 aftermarket services               2,448            559      841        57                      (42)            3,863 
------------------------  ---------------  -------------  -------  --------  ------------------------  --------------- 
Total underlying revenue            4,018          1,553    1,494       457                     (309)            7,213 
------------------------  ---------------  -------------  -------  --------  ------------------------  --------------- 
Gross profit                          276            389      295        80                      (45)              995 
------------------------  ---------------  -------------  -------  --------  ------------------------  --------------- 
Commercial and 
 administrative costs               (178)          (198)     (76)      (32)                      (32)            (516) 
------------------------  ---------------  -------------  -------  --------  ------------------------  --------------- 
Restructuring                         (7)              -      (1)       (1)                         -              (9) 
------------------------  ---------------  -------------  -------  --------  ------------------------  --------------- 
Research and development 
 costs                              (157)           (94)     (48)      (15)                         -            (314) 
------------------------  ---------------  -------------  -------  --------  ------------------------  --------------- 
Share of results of 
 joint ventures and 
 associates                            45            (1)        3         -                         -               47 
------------------------  ---------------  -------------  -------  --------  ------------------------  --------------- 
Underlying operating 
 profit/(loss)                       (21)             96      173        32                      (77)              203 
------------------------  ---------------  -------------  -------  --------  ------------------------  --------------- 
 
For the half-year ended 
30 June 2018 
------------------------  ---------------  -------------  -------  --------  ------------------------  --------------- 
Underlying revenue from 
 sale of original 
 equipment (1)                      1,530            945      608       290                     (172)            3,201 
------------------------  ---------------  -------------  -------  --------  ------------------------  --------------- 
Underlying revenue from 
 aftermarket services 
 (1)                                2,070            526      807        85                       (9)            3,479 
------------------------  ---------------  -------------  -------  --------  ------------------------  --------------- 
Total underlying revenue            3,600          1,471    1,415       375                     (181)            6,680 
------------------------  ---------------  -------------  -------  --------  ------------------------  --------------- 
Gross profit (2)                      175            354      281        85                         2              897 
------------------------  ---------------  -------------  -------  --------  ------------------------  --------------- 
Commercial and 
 administrative costs               (148)          (188)     (76)      (29)                      (26)            (467) 
------------------------  ---------------  -------------  -------  --------  ------------------------  --------------- 
Restructuring                         (9)              -      (1)       (2)                         -             (12) 
------------------------  ---------------  -------------  -------  --------  ------------------------  --------------- 
Research and development 
 costs                              (152)           (86)     (44)      (14)                         -            (296) 
------------------------  ---------------  -------------  -------  --------  ------------------------  --------------- 
Share of results of 
 joint ventures and 
 associates (2)                        22              -        2         -                         -               24 
------------------------  ---------------  -------------  -------  --------  ------------------------  --------------- 
Underlying operating 
 profit/(loss)                      (112)             80      162        40                      (24)              146 
------------------------  ---------------  -------------  -------  --------  ------------------------  --------------- 
 

(1) In the prior period, revenue of GBP46m within ITP Aero was reclassified from OE to aftermarket services to better reflect the underlying nature of the revenue.

(2) The financial information for the prior period has been restated to reflect changes to the provisional ITP Aero balances and other adjustments. See note 1 for more details.

 
Reconciliation to                                                                      Underlying 
reported results                                                                  adjustments and     Group results at 
                                       Non-core businesses                         adjustments to      actual exchange 
                      Core businesses                  (1)  Total underlying     foreign exchange                rates 
                                 GBPm                 GBPm              GBPm                 GBPm                 GBPm 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
For the half-year 
ended 30 June 2019 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Revenue from sale of 
 original equipment             3,350                   57             3,407                  267                3,674 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Revenue from 
 aftermarket 
 services                       3,863                   83             3,946                  263                4,209 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Total revenue                   7,213                  140             7,353                  530                7,883 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Gross profit                      995                   35             1,030                 (29)                1,001 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Commercial and 
 administrative 
 costs                          (516)                 (29)             (545)                 (69)                (614) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Restructuring                     (9)                    1               (8)                    8                    - 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Research and 
 development costs              (314)                  (7)             (321)                 (28)                (349) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Share of results of 
 joint ventures and 
 associates                        47                    -                47                  (2)                   45 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Operating profit                  203                    -               203                (120)                   83 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Gain on the disposal 
 of businesses                      -                    -                 -                  118                  118 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Profit before 
 financing and 
 taxation                         203                    -               203                  (2)                  201 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Net financing                   (109)                  (1)             (110)                (882)                (992) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Profit/(loss) before 
 taxation                          94                  (1)                93                (884)                (791) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Taxation (4)                    (118)                  (3)             (121)                    5                (116) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Profit/(loss) for 
 the period                      (24)                  (4)              (28)                (879)                (907) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Attributable to: 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Ordinary 
 shareholders                                                           (30)                (879)                (909) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Non-controlling 
 interests                                                                 2                    -                    2 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
 
 
For the half-year 
ended 30 June 2018 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Revenue from sale of 
 original equipment 
 (2)                            3,201                  177             3,378                  196                3,574 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Revenue from 
 aftermarket 
 services (2)                   3,479                  183             3,662                  251                3,913 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Total revenue                   6,680                  360             7,040                  447                7,487 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Gross profit (3)                  897                  109             1,006                (688)                  318 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Commercial and 
 administrative 
 costs                          (467)                 (92)             (559)                (164)                (723) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Restructuring                    (12)                    -              (12)                   12                    - 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Research and 
 development costs              (296)                 (22)             (318)                 (42)                (360) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Share of results of 
 joint ventures and 
 associates (3)                    24                    -                24                  (6)                   18 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Operating 
 profit/(loss)                    146                  (5)               141                (888)                (747) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Gain on the disposal 
 of L'Orange                        -                    -                 -                  358                  358 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Profit/(loss) before 
 financing and 
 taxation                         146                  (5)               141                (530)                (389) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Net financing                    (65)                  (3)              (68)                (777)                (845) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Profit/(loss) before 
 taxation                          81                  (8)                73              (1,307)              (1,234) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Taxation (4)                     (22)                  (3)              (25)                  307                  282 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Profit/(loss) for 
 the period                        59                 (11)                48              (1,000)                (952) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Attributable to: 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Ordinary 
 shareholders                                                             46              (1,000)                (954) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Non-controlling 
 interests                                                                 2                    -                    2 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
 

(1) Includes Commercial Marine sold on 1 April 2019, Rolls-Royce Power Development Limited sold on 15 April 2019, L'Orange sold on 1 June 2018 and other smaller non-core businesses including former Energy businesses not included in the disposal to Siemens in 2014 (Retained Energy) .

(2) In the prior period, revenue of GBP46m within ITP Aero was reclassified from OE to aftermarket services to better reflect the underlying nature of the revenue.

(3) The financial information for the prior period has been restated to reflect changes to the provisional ITP Aero balances and other adjustments. See note 1 for more details.

(4) Appropriate rates of tax have been applied to underlying adjustments made to profit/(loss) before taxation. In 2019 there is a credit of GBP5m (30 June 2018: GBP307m). The credit in 2019 is lower than the prior period mainly due to deferred tax not being recognised on UK losses arising in 2019.

Disaggregation of revenue from contracts with customers

 
Analysis by type and                                                            Corporate and 
basis of recognition  Civil Aerospace  Power Systems  Defence  ITP Aero         inter-segment  Core businesses 
                                 GBPm           GBPm     GBPm      GBPm                  GBPm             GBPm 
--------------------  ---------------  -------------  -------  --------  --------------------  --------------- 
For the half-year 
ended 30 June 2019 
--------------------  ---------------  -------------  -------  --------  --------------------  --------------- 
Original equipment 
 recognised at a 
 point in time                  1,570            939      253       400                 (267)            2,895 
--------------------  ---------------  -------------  -------  --------  --------------------  --------------- 
Original equipment 
 recognised over 
 time                               -             55      400         -                     -              455 
--------------------  ---------------  -------------  -------  --------  --------------------  --------------- 
Aftermarket services 
 recognised at a 
 point in time                    827            497      330        57                     6            1,717 
--------------------  ---------------  -------------  -------  --------  --------------------  --------------- 
Aftermarket services 
 recognised over 
 time                           1,576             62      511         -                  (48)            2,101 
--------------------  ---------------  -------------  -------  --------  --------------------  --------------- 
Total underlying 
 customer contract 
 revenue                        3,973          1,553    1,494       457                 (309)            7,168 
--------------------  ---------------  -------------  -------  --------  --------------------  --------------- 
Other underlying 
 revenue                           45              -        -         -                     -               45 
--------------------  ---------------  -------------  -------  --------  --------------------  --------------- 
Total underlying 
 revenue                        4,018          1,553    1,494       457                 (309)            7,213 
--------------------  ---------------  -------------  -------  --------  --------------------  --------------- 
 
For the half-year 
ended 30 June 2018 
====================  ===============  =============  =======  ========  ====================  =============== 
Original equipment 
 recognised at a 
 point in time                  1,530            905      281       290                 (172)            2,834 
--------------------  ---------------  -------------  -------  --------  --------------------  --------------- 
Original equipment 
 recognised over 
 time                               -             40      327         -                     -              367 
--------------------  ---------------  -------------  -------  --------  --------------------  --------------- 
Aftermarket services 
 recognised at a 
 point in time                    797            448      336        85                  (28)            1,638 
--------------------  ---------------  -------------  -------  --------  --------------------  --------------- 
Aftermarket services 
 recognised over 
 time                           1,257             78      471         -                    19            1,825 
--------------------  ---------------  -------------  -------  --------  --------------------  --------------- 
Total underlying 
 customer contract 
 revenue                        3,584          1,471    1,415       375                 (181)            6,664 
--------------------  ---------------  -------------  -------  --------  --------------------  --------------- 
Other underlying 
 revenue                           16              -        -         -                     -               16 
--------------------  ---------------  -------------  -------  --------  --------------------  --------------- 
Total underlying 
 revenue (2)                    3,600          1,471    1,415       375                 (181)            6,680 
--------------------  ---------------  -------------  -------  --------  --------------------  --------------- 
 
 
 
                                                                                      Underlying 
                                                                                 adjustments and 
                                          Non-core businesses        Total        adjustments to    At actual exchange 
                       Core businesses                    (1)   underlying      foreign exchange                 rates 
                                  GBPm                   GBPm         GBPm                  GBPm                  GBPm 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
For the half-year 
ended 30 June 2019 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Original equipment 
 recognised at a 
 point in time                   2,895                     22        2,917                   267                 3,184 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Original equipment 
 recognised over time              455                     35          490                     -                   490 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Aftermarket services 
 recognised at a 
 point in time                   1,717                     83        1,800                   149                 1,949 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Aftermarket services 
 recognised over time            2,101                      -        2,101                   114                 2,215 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Total customer 
 contract revenue                7,168                    140        7,308                   530                 7,838 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Other revenue                       45                      -           45                     -                    45 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Total revenue                    7,213                    140        7,353                   530                 7,883 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
 
For the half-year 
ended 30 June 2018 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Original equipment 
 recognised at a 
 point in time                   2,834                     36        2,870                   195                 3,065 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Original equipment 
 recognised over time              367                    141          508                     1                   509 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Aftermarket services 
 recognised at a 
 point in time                   1,638                    183        1,821                   113                 1,934 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Aftermarket services 
 recognised over time            1,825                      -        1,825                   138                 1,963 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Total customer 
 contract revenue                6,664                    360        7,024                   447                 7,471 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Other revenue                       16                      -           16                     -                    16 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Total revenue (2)                6,680                    360        7,040                   447                 7,487 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
 

(1) Includes Commercial Marine sold on 1 April 2019, Rolls-Royce Power Development Limited sold on 15 April 2019, L'Orange sold on 1 June 2018 and other smaller non-core businesses including former Energy businesses not included in the disposal to Siemens in 2014 (Retained Energy).

(2) In the prior period, revenue of GBP46m within ITP Aero was reclassified from OE to aftermarket services to better reflect the underlying nature of the revenue.

 
                                             Total assets              Total liabilities     Net assets/(liabilities) 
---------------------------------  --------------------------------  ---------------------  -------------------------- 
                                           30 June      31 December   30 June  31 December   30 June 
                                              2019             2018      2019         2018      2019  31 December 2018 
                                              GBPm             GBPm      GBPm         GBPm      GBPm              GBPm 
---------------------------------  ---------------  ---------------  --------  -----------  --------  ---------------- 
Civil Aerospace                             17,130           14,652  (22,005)     (21,310)   (4,875)           (6,658) 
---------------------------------  ---------------  ---------------  --------  -----------  --------  ---------------- 
Power Systems                                3,990            3,759   (1,588)      (1,668)     2,402             2,091 
---------------------------------  ---------------  ---------------  --------  -----------  --------  ---------------- 
Defence                                      2,531            2,628   (2,951)      (2,924)     (420)             (296) 
---------------------------------  ---------------  ---------------  --------  -----------  --------  ---------------- 
ITP Aero                                     2,254            2,210   (1,216)      (1,168)     1,038             1,042 
---------------------------------  ---------------  ---------------  --------  -----------  --------  ---------------- 
Inter-segment                              (1,450)          (1,621)     1,667        1,743       217               122 
---------------------------------  ---------------  ---------------  --------  -----------  --------  ---------------- 
Core businesses                             24,455           21,628  (26,093)     (25,327)   (1,638)           (3,699) 
---------------------------------  ---------------  ---------------  --------  -----------  --------  ---------------- 
Non-core businesses                             53              136      (79)        (141)      (26)               (5) 
---------------------------------  ---------------  ---------------  --------  -----------  --------  ---------------- 
Held for sale 
 assets/(liabilities)                            -              750         -        (376)         -               374 
---------------------------------  ---------------  ---------------  --------  -----------  --------  ---------------- 
Net funds                                    4,592            5,273   (6,529)      (4,662)   (1,937)               611 
---------------------------------  ---------------  ---------------  --------  -----------  --------  ---------------- 
Tax assets/(liabilities)                     2,176            2,126     (839)      (1,100)     1,337             1,026 
---------------------------------  ---------------  ---------------  --------  -----------  --------  ---------------- 
Post-retirement scheme 
 surpluses/(deficits)                        1,143            1,944   (1,478)      (1,303)     (335)               641 
---------------------------------  ---------------  ---------------  --------  -----------  --------  ---------------- 
                                            32,419           31,857  (35,018)     (32,909)   (2,599)           (1,052) 
---------------------------------  ---------------  ---------------  --------  -----------  --------  ---------------- 
 
 
Underlying profit                                                                       Restated * 
adjustments                       Half-year to 30 June 2019                      Half-year to 30 June 2018 
                        ---------------------------------------------  --------------------------------------------- 
                                         Profit before                                  Profit before 
                        Revenue              financing  Net financing  Revenue              financing  Net financing 
                           GBPm                   GBPm           GBPm     GBPm                   GBPm           GBPm 
----------------------  -------  ---------------------  -------------  -------  ---------------------  ------------- 
Underlying performance    7,353                    203          (110)    7,040                    141           (68) 
----------------------  -------  ---------------------  -------------  -------  ---------------------  ------------- 
Revenue recognised at 
 exchange rate on date 
 of transaction             530                      -              -      447                      -              - 
----------------------  -------  ---------------------  -------------  -------  ---------------------  ------------- 
Realised losses on 
 settled derivative 
 contracts (1) (see 
 note 11)                     -                    241             40        -                    207             33 
----------------------  -------  ---------------------  -------------  -------  ---------------------  ------------- 
Net unrealised fair 
 value changes to 
 derivative contracts 
 (2) (see note 11)            -                    (2)          (738)        -                      1          (815) 
----------------------  -------  ---------------------  -------------  -------  ---------------------  ------------- 
Effect of currency on 
 contract accounting          -                  (115)              -        -                   (30)              - 
----------------------  -------  ---------------------  -------------  -------  ---------------------  ------------- 
Effect of currency on 
 contract loss 
 provision                    -                   (24)              -        -                      -              - 
----------------------  -------  ---------------------  -------------  -------  ---------------------  ------------- 
Revaluation of trading 
 assets and 
 liabilities                  -                   (22)          (163)        -                   (75)            (4) 
----------------------  -------  ---------------------  -------------  -------  ---------------------  ------------- 
Net post-retirement 
 scheme financing             -                      -             10        -                      -             11 
----------------------  -------  ---------------------  -------------  -------  ---------------------  ------------- 
Financial RRSAs - 
 exchange differences 
 and changes in 
 forecast payments            -                      -              1        -                      -            (2) 
----------------------  -------  ---------------------  -------------  -------  ---------------------  ------------- 
Effect of acquisition 
 accounting                   -                   (71)              -        -                   (96)              - 
----------------------  -------  ---------------------  -------------  -------  ---------------------  ------------- 
Gain arising on the 
 disposal of L'Orange 
 (3)                          -                      -              -        -                    358              - 
----------------------  -------  ---------------------  -------------  -------  ---------------------  ------------- 
Commercial Marine - 
 Gain on disposal (3) 
 (2018: Impairment of 
 goodwill)                    -                     84              -        -                  (160)              - 
----------------------  -------  ---------------------  -------------  -------  ---------------------  ------------- 
Gain arising on the 
 disposal of RRPD (3)         -                     34              -        -                      -              - 
----------------------  -------  ---------------------  -------------  -------  ---------------------  ------------- 
Trent 1000 exceptional 
 charge (4)                   -                      -              -        -                  (554)              - 
----------------------  -------  ---------------------  -------------  -------  ---------------------  ------------- 
Trent 900 exceptional 
 charge (4)                   -                   (59)              -        -                      -              - 
----------------------  -------  ---------------------  -------------  -------  ---------------------  ------------- 
Hedge ineffectiveness         -                      -           (15)        -                      -              - 
----------------------  -------  ---------------------  -------------  -------  ---------------------  ------------- 
Exceptional 
 restructuring charge 
 (5)                          -                   (69)              -        -                  (179)              - 
----------------------  -------  ---------------------  -------------  -------  ---------------------  ------------- 
Other                         -                      1           (17)        -                    (2)              - 
----------------------  -------  ---------------------  -------------  -------  ---------------------  ------------- 
Total underlying 
 adjustments                530                    (2)          (882)      447                  (530)          (777) 
----------------------  -------  ---------------------  -------------  -------  ---------------------  ------------- 
Reported per 
 consolidated income 
 statement                7,883                    201          (992)    7,487                  (389)          (845) 
----------------------  -------  ---------------------  -------------  -------  ---------------------  ------------- 
 

* The financial information for the prior period has been restated to reflect changes to the provisional ITP Aero balances and other adjustments.

See note 1 for more details.

(1) The adjustments for realised losses on settled derivative contracts include adjustments to reflect the losses in the same period as the related trading cash flows.

(2) The adjustments for unrealised fair value changes to derivative contracts include those included in equity accounted joint ventures and exclude those for which the related trading contracts have been cancelled when the fair value changes are recognised immediately in underlying profit.

(3) Gain on the disposal of businesses. See note 16 for more details.

The table below summarises the exceptional items recorded in 2019 and 2018.

 
                                                            Half-year 
                                              Half-year    to 30 June 
                                        to 30 June 2019          2018 
                                                   GBPm          GBPm 
------------------------------------  -----------------  ------------ 
Programme exceptional items (4)                      59           554 
------------------------------------  -----------------  ------------ 
Related foreign exchange impact (4)                   3            95 
------------------------------------  -----------------  ------------ 
Restructuring charge (5)                             69           179 
------------------------------------  -----------------  ------------ 
                                                    131           828 
------------------------------------  -----------------  ------------ 
 

(4) Included within programme exceptional items is GBP59m (GBP62m at prevailing exchange rates) relating to the decision by Airbus to cease Airbus A380 deliveries in 2021. Included in the prior period is GBP554m (GBP649m at prevailing exchange rates) in respect of the abnormal wastage costs on the Trent 1000.

(5) The Group recorded an exceptional restructuring charge of GBP69m (30 June 2018: GBP179m). The costs include: GBP39m (30 June 2018: GBP132m) in respect of the Group-wide restructuring programme announced on 14 June 2018; costs relating to ongoing multi-year significant restructuring programmes at Power Systems and in respect of Defence, reflecting actions to remove cost and improve operational efficiency.

   3     Research and development costs 
 
                                                                                                             Half-year 
                                                                                               Half-year    to 30 June 
                                                                                         to 30 June 2019          2018 
                                                                                                    GBPm          GBPm 
-------------------------------------------------------------------------------------  -----------------  ------------ 
Expenditure in the period                                                                          (518)         (542) 
-------------------------------------------------------------------------------------  -----------------  ------------ 
Capitalised as intangible assets                                                                     224           241 
-------------------------------------------------------------------------------------  -----------------  ------------ 
Amortisation and impairment of capitalised costs                                                    (55)          (59) 
-------------------------------------------------------------------------------------  -----------------  ------------ 
Net cost recognised in the income statement                                                        (349)         (360) 
-------------------------------------------------------------------------------------  -----------------  ------------ 
Underlying adjustments relating to the effects of acquisition accounting and foreign 
 exchange                                                                                             28            42 
-------------------------------------------------------------------------------------  -----------------  ------------ 
Net underlying cost recognised in the income statement                                             (321)         (318) 
-------------------------------------------------------------------------------------  -----------------  ------------ 
 
   4      Net financing 
 
                                   Half-year to 30 June 2019                       Half-year to 30 June 2018 
                              Per consolidated    Underlying financing        Per consolidated    Underlying financing 
                              income statement                     (1)        income statement                     (1) 
                                          GBPm                    GBPm                    GBPm                    GBPm 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
 
Interest receivable                         19                      19                      11                      11 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Financial RRSAs - 
foreign exchange 
differences and 
changes in forecast 
payments                                     1                       -                       -                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net fair value gains 
 on commodity 
 contracts                                  25                       -                      39                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Financing on 
 post-retirement 
 scheme surpluses                           28                       -                      27                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net foreign exchange 
gains                                        -                       -                      29                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Financing income                            73                      19                     106                      11 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
 
Interest payable                          (97)                    (87)                    (48)                    (48) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net fair value losses 
 on foreign currency 
 contracts                               (763)                       -                   (854)                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Financial RRSAs - 
 foreign exchange 
 differences and 
 changes in forecast 
 payments                                    -                       -                     (2)                       - 
---------------------- 
Financial charge 
 relating to financial 
 RRSAs                                     (2)                     (2)                     (5)                     (5) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net fair value losses 
on commodity contracts                       -                       -                       -                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Financing on 
 post-retirement 
 scheme deficits                          (18)                       -                    (16)                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net foreign exchange 
losses                                   (123)                       -                       -                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Other financing 
 charges                                  (62)                    (40)                    (26)                    (26) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Financing costs                        (1,065)                   (129)                   (951)                    (79) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
 
Net financing                            (992)                   (110)                   (845)                    (68) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
 
Analysed as: 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net interest payable                      (78)                    (68)                    (37)                    (37) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net fair value losses 
 on derivative 
 contracts                               (738)                       -                   (815)                       - 
Net post-retirement 
 scheme financing                           10                       -                      11                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net other financing                      (186)                    (42)                     (4)                    (31) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net financing                            (992)                   (110)                   (845)                    (68) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
 

(1) See note 2 for definition of underlying results.

   5     Taxation 

The tax charge for the half year is GBP116m on a reported loss before taxation of GBP791m (30 June 2018: tax credit of GBP282m on a reported loss before taxation of GBP1,234m). The key driver of the tax charge in the period is the non-recognition of deferred tax on UK losses.

Deferred tax assets are recognised to the extent it is probable that future taxable profits will be available against which to recover the asset. This is based on management's assumptions relating to the amounts and timing of future taxable profits. The Board continually reassess the appropriateness of recognising deferred tax assets relating to losses which includes a consideration of the time period over which they are recovered. We have not recognised any deferred tax assets in respect of 2019 UK losses, including mark to market valuations of derivative instruments. The deferred tax assets at 30 June 2019 have been reassessed for recoverability in line with the approach set out in Note 5 of the 2018 Annual Report.

   6     Earnings per ordinary share 

Basic earnings per share (EPS) are calculated by dividing the profit /(loss) attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period, excluding ordinary shares held under trust, which have been treated as if they had been cancelled.

Diluted EPS are calculated by adjusting the weighted average number of ordinary shares in issue during the period for the bonus element of share options.

 
                                    Half-year to 30 June 2019                Restated * Half-year to 30 June 2018 
                                         Potentially dilutive                           Potentially dilutive 
                            Basic           share options (1)   Diluted     Basic              share options   Diluted 
Loss attributable to 
 ordinary shareholders 
 (GBPm)                       (909)                         -     (909)     (954)                          -     (954) 
Weighted average number 
 of ordinary shares 
 (millions)                   1,893                         -     1,893     1,849                          -     1,849 
EPS (pence)                (48.02)p                         -  (48.02)p  (51.60)p                          -  (51.60)p 
 

* The financial information for the prior period has been restated to reflect changes to the provisional ITP Aero balances and other adjustments.

See note 1 for more details.

   (1)   As there is a loss, the effect of potentially dilutive ordinary shares is anti-dilutive. 

The reconciliation between underlying EPS and basic EPS is as follows:

 
                                                               Half-year to 30 June 2019    Half-year to 30 June 2018 
                                                                        Pence        GBPm          Pence          GBPm 
Underlying EPS / Underlying (loss)/profit attributable to 
 ordinary shareholders re-presented                                    (1.58)        (30)           2.49            46 
Total underlying adjustments to loss before tax (note 2)              (46.70)       (884)        (70.69)       (1,307) 
Related tax effects                                                      0.26           5          16.60           307 
EPS / Loss attributable to ordinary shareholders                      (48.02)       (909)        (51.60)         (954) 
Diluted underlying EPS (1)                                             (1.58)                       2.48 
 
   (1)   As there is a loss, the effect of potentially dilutive ordinary shares is anti-dilutive. 
   7     Payments to shareholders in respect of the period 

Payments to shareholders in respect of the period represent the value of C Shares to be issued in respect of the results for the period. Issues of C Shares were declared as follows:

 
                                Half-year to 30 June 2019    Half-year to 30 June 2018 
                                        Pence per                    Pence per 
                                            share     GBPm               share     GBPm 
Interim (issued in January)                   4.6       87                 4.6       86 
 
   8     Intangible assets 
 
                                                              Development             Customer 
                       Goodwill  Certification costs          expenditure        relationships  Software  Other  Total 
                           GBPm                 GBPm                 GBPm                 GBPm      GBPm   GBPm   GBPm 
Cost: 
At 1 January 2019         1,087                  948                2,883                1,384       964    811  8,077 
Additions                     -                    7                  224                    -        39     13    283 
Disposals                     -                    -                    -                  (1)      (37)    (4)   (42) 
Reclassifications             -                    -                    -                    -        11    (2)      9 
Exchange differences          5                    1                    9                    5         2      1     23 
At 30 June 2019           1,092                  956                3,116                1,388       979    819  8,350 
 
Accumulated amortisation and 
impairment: 
At 1 January 2019            42                  373                1,111                  304       607    345  2,782 
Charge for the 
 period (1)                   -                    9                   55                   34        42     13    153 
Disposals                     -                    -                    -                  (1)      (35)    (4)   (40) 
Reclassifications             -                    -                    -                    -        11    (2)      9 
Exchange differences          -                    -                    4                    5         -      -      9 
At 30 June 2019              42                  382                1,170                  342       625    352  2,913 
 
Net book value at: 
30 June 2019              1,050                  574                1,946                1,046       354    467  5,437 
31 December 2018          1,045                  575                1,772                1,080       357    466  5,295 
 

(1) Charged to cost of sales except development costs, which are charged to research and development costs.

Intangible assets have been reviewed for impairment in accordance with the requirements of IAS 36 Impairment of Assets. Where an impairment test was considered necessary, it has been performed on the following basis:

-- The carrying values have been assessed by reference to value in use. These have been estimated using cash flows from the most recent forecasts prepared by management, which are consistent with past experience and external sources of information on market conditions over the lives of the respective programmes.

-- The key assumptions underlying cash flow projections are assumed market share, programme timings, unit cost assumptions, discount rates and foreign exchange rates.

-- The pre-tax cash flow projections have been discounted at 7-13% (31 December 2018: 7-13%), based on the Group's weighted average cost of capital adjusted for the risks subject to the asset.

-- No impairment is required on this basis. However, a combination of changes in assumptions and adverse movements in variables that are outside the Group's control (discount rate, exchange rate and airframer delays), could result in impairment in future periods.

   9     Property, plant and equipment 
 
                                                                                                   In course of 
                         Land and buildings  Plant and equipment  Aircraft and engines             construction  Total 
                                       GBPm                 GBPm                  GBPm                     GBPm   GBPm 
Cost: 
At 31 December 2018                   1,916                5,296                   967                      722  8,901 
Impact of adoption of 
 IFRS 16 (see note 18)                 (12)                 (11)                 (205)                     (29)  (257) 
At 1 January 2019                     1,904                5,285                   762                      693  8,644 
Additions                                10                   85                    30                      145    270 
Disposal of businesses                  (4)                (168)                     -                        -  (172) 
Disposals                               (6)                 (76)                   (1)                      (1)   (84) 
Reclassifications                        57                  153                    16                    (235)    (9) 
Exchange differences                      7                   17                     2                        2     28 
At 30 June 2019                       1,968                5,296                   809                      604  8,677 
 
Accumulated 
depreciation and 
impairment: 
At 31 December 2018                     579                3,142                   244                        7  3,972 
Impact of adoption of 
 IFRS 16 (see note 18)                  (7)                 (13)                  (40)                        -   (60) 
At 1 January 2019                       572                3,129                   204                        7  3,912 
Charge for the period                    29                  183                    17                        -    229 
Disposal of businesses                    -                (165)                     -                        -  (165) 
Disposals                              (14)                 (61)                     -                        -   (75) 
Reclassifications                         -                  (9)                     -                        -    (9) 
Exchange differences                      4                   11                     2                        -     17 
At 30 June 2019                         591                3,088                   223                        7  3,909 
 
Net book value at: 
30 June 2019                          1,377                2,208                   586                      597  4,768 
1 January 2019                        1,332                2,156                   558                      686  4,732 
31 December 2018                      1,337                2,154                   723                      715  4,929 
 
 
   10   Right-of-use assets 
 
                                              Land and buildings  Plant and equipment  Aircraft and engines  Total 
                                                            GBPm                 GBPm                  GBPm   GBPm 
Cost: 
At 31 December 2018                                            -                    -                     -      - 
Impact of adoption of IFRS 16 (see note 18)                  493                  107                 1,654  2,254 
Transferred to assets held for sale (1)                     (40)                  (1)                     -   (41) 
At 1 January 2019                                            453                  106                 1,654  2,213 
Additions/modification of leases                              22                    4                    61     87 
Disposals                                                    (1)                    -                   (3)    (4) 
Reclassifications                                              -                    -                     -      - 
Exchange differences                                           3                    -                     1      4 
At 30 June 2019                                              477                  110                 1,713  2,300 
 
Accumulated depreciation and impairment: 
At 31 December 2018                                            -                    -                     -      - 
Impact of adoption of IFRS 16 (see note 18)                    -                    -                     -      - 
At 1 January 2019                                              -                    -                     -      - 
Charge for the period                                         26                   15                   149    190 
Impairment                                                     -                    -                    10     10 
Disposals                                                    (1)                    -                   (3)    (4) 
At 30 June 2019                                               25                   15                   156    196 
 
Net book value at: 
30 June 2019                                                 452                   95                 1,557  2,104 
1 January 2019                                               453                  106                 1,654  2,213 
31 December 2018                                               -                    -                     -      - 
 

(1) Relates to the Commercial Marine business classified as a "held for sale" business at 31 December 2018. See note 16 for more details.

   11   Financial assets and liabilities 

Other financial assets and liabilities comprise:

 
                                       Derivatives 
                        Foreign 
                       exchange       Commodity   Interest rate                Financial 
                      contracts       contracts   contracts (1)    Total           RRSAs  Other  C Shares    Total 
                           GBPm            GBPm            GBPm     GBPm            GBPm   GBPm      GBPm     GBPm 
At 30 June 2019 
Non-current 
 assets                      22              10             388      420               -     17         -      437 
Current assets               13               8               -       21               -     12         -       33 
Current 
 liabilities              (805)             (8)               -    (813)            (34)   (41)      (30)    (918) 
Non-current 
 liabilities            (3,480)            (10)             (4)  (3,494)           (110)   (32)         -  (3,636) 
                        (4,250)               -             384  (3,866)           (144)   (44)      (30)  (4,084) 
At 31 December 
2018 
Non-current 
 assets                      47               4             292      343               -      -         -      343 
Current assets               16               2               4       22               -      -         -       22 
Current 
 liabilities              (523)            (15)               -    (538)            (52)   (28)      (29)    (647) 
Non-current 
 liabilities            (3,304)            (25)             (4)  (3,333)           (175)   (34)         -  (3,542) 
                        (3,764)            (34)             292  (3,506)           (227)   (62)      (29)  (3,824) 
 
 
   (1)   Includes the foreign exchange impact of cross-currency interest rate swaps. 
 
Derivative financial instruments                      Half-year to 30 June 2019               Year to 31 December 2018 
                                         Foreign exchange  Commodity  Interest rate    Total                     Total 
                                                     GBPm       GBPm           GBPm     GBPm                      GBPm 
At 1 January 2019                                 (3,764)       (34)            292  (3,506)                   (2,084) 
Movements in fair value hedges                          -          -             91       91                        66 
Movement in cash flow hedges                          (4)          9              1        6                      (24) 
Movements in other derivative contracts 
 (1)                                                (763)         25              -    (738)                   (2,144) 
Contracts settled                                     281          -              -      281                       680 
At period/year end                                (4,250)          -            384  (3,866)                   (3,506) 
 

(1) Included in financing.

 
Financial risk and 
revenue sharing 
arrangements (RRSAs) 
and other financial 
assets and liabilities                 Financial RRSAs                                      Other 
                          Half-year to 30 June     Year to 31 December    Half-year to 30 June     Year to 31 December 
                                          2019                    2018                    2019                    2018 
                                          GBPm                    GBPm                    GBPm                    GBPm 
At 1 January as 
 previously reported                     (227)                   (247)                    (62)                    (57) 
Reclassification to 
 borrowings (1)                             79                       -                       -                       - 
At 1 January restated                    (148)                   (247)                    (62)                    (57) 
Exchange adjustments 
 included in OCI                             2                     (3)                       -                     (1) 
Additions                                    -                     (3)                    (35)                    (25) 
Financing charge (2)                       (2)                     (8)                       -                     (1) 
Excluded from 
underlying profit: 
  Changes to forecast 
   payments                                  -                     (2)                       -                       - 
  Exchange adjustments                       1                       -                       -                       - 
Cash paid to partners                        9                      36                      24                      22 
Other                                      (6)                       -                       -                       - 
Reclassification from 
 trade receivables                           -                       -                      29                       - 
At period/year end                       (144)                   (227)                    (44)                    (62) 
 

(1) The Group has reclassified GBP79m as borrowings previously included in other financial liabilities. These borrowings mature between 2019 and 2029.

(2) Included in net financing.

Fair values of financial instruments equate to book values with the following exceptions:

 
                         Half-year to 30 June 2019    Year to 31 December 2018 
                          Book value    Fair value    Book value    Fair value 
                                GBPm          GBPm          GBPm          GBPm 
Borrowings - Level 1         (3,363)       (3,334)       (3,754)       (3,634) 
Borrowings - Level 2           (721)         (719)         (908)         (887) 
Financial RRSAs                (144)         (154)         (227)         (235) 
 

Fair values

The fair value of a financial instrument is the price at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arms-length transaction. Fair values have been determined with reference to available market information at the balance sheet date, using the methodologies described below.

-- Non-current investments - other comprise unconsolidated companies and are measured at fair value.

-- The fair values of held to collect trade receivables and similar items, trade payables and other similar items, other non-derivative financial assets and liabilities, short-term investments and cash and cash equivalents are assumed to approximate to cost either due to the short-term maturity of the instruments or because the interest rate of the investments is reset after periods not exceeding six months.

-- Fair values of derivative financial assets and liabilities and trade receivable held to collect or sell (30 June 2019: GBP456m;

31 December 2018: GBP146m) are estimated by discounting expected future contractual cash flows using prevailing interest rate curves or cost of borrowing, as appropriate. Amounts denominated in foreign currencies are valued at the exchange rate prevailing at the balance sheet date. These financial instruments and money-market funds are included on the balance sheet at fair value, derived from observable market prices (Level 2 as defined by IFRS 13 Fair Value Measurement).

-- Borrowings are carried at amortised cost. Amounts denominated in foreign currencies are valued at the exchange rate prevailing at the balance sheet date. The fair value of borrowings is estimated using quoted prices (Level 1 as defined by IFRS 13) or by discounting contractual future cash flows (Level 2 as defined by IFRS 13).

-- The fair values of RRSAs and other liabilities are estimated by discounting expected future cash flows. The contractual cash flows are based on future trading activity, which is estimated based on latest forecasts (Level 3 as defined by IFRS 13).

-- The fair value of lease liabilities are estimated by discounting future contractual cash flows using either the interest rate implicit in the lease or the Group's incremental cost of borrowing (Level 2 as defined by IFRS 13).

Borrowings

During the period, the Group repaid GBP500m 6.75% Notes and exercised an option to extend the maturity of a GBP200m bank borrowing to 2022.

   12   Contract assets and liabilities 
 
                                     Half-year to 
                                          30 June            Year to 
                                             2019   31 December 2018 
                                             GBPm               GBPm 
Contract assets 
Contract assets with operators              1,582              1,403 
Participation fee contract assets             635                654 
Total contract assets                       2,217              2,057 
 
Contract liabilities 
Current                                   (4,248)            (3,794) 
Non-current                               (5,515)            (5,336) 
Total contract liabilities                (9,763)            (9,130) 
 
   13   Pensions and other post-retirement and long term employee benefits 

The net post-retirement scheme deficit as at 30 June 2019 is calculated on a year to date basis, using the latest valuation as at 31 December 2018, updated to 30 June 2019 for the principal schemes.

Movements in the net post-retirement position recognised in the balance sheet were as follows:

 
                                                                        UK schemes  Overseas schemes    Total 
                                                                              GBPm              GBPm     GBPm 
At 1 January 2019 (1)                                                        1,926           (1,312)      614 
Exchange adjustments                                                             -              (11)     (11) 
Current service cost and administrative expenses                              (80)              (27)    (107) 
Financing recognised in the income statement                                    28              (18)       10 
Contributions by employer                                                       69                37      106 
Actuarial gains/(losses) recognised in OCI                                 (1,111)             (198)  (1,309) 
Returns on plan assets excluding financing recognised in OCI                   291                75      366 
Disposal of businesses (see note 16)                                             -                28       28 
Transferred from other payables                                                  -              (32)     (32) 
At 30 June 2019 (2)                                                          1,123           (1,458)    (335) 
 
Analysed as: 
Post-retirement scheme surpluses - included in non-current assets            1,123                20    1,143 
Post-retirement scheme deficits - included in non-current liabilities            -           (1,478)  (1,478) 
Post-retirement scheme deficits - liabilities held for sale                      -                 -        - 
                                                                             1,123           (1,458)    (335) 
 

(1) Includes GBP27m of post-retirement scheme liabilities which were included in 'liabilities associated with assets held for sale' at 31 December 2018.

(2) The surplus in the UK scheme is recognised as, on ultimate wind-up when there are no longer any remaining members, any surplus would be returned to the Group, which has the power to prevent the surplus being used for other purposes in advance of this event.

On the 5 June 2019, the Group entered into a partial buy-in with Legal and General Assurance Society Limited covering the benefits of 33,000 in-payment pensioners. As a result of the transaction, an asset re-measurement net loss of c. GBP600 million has been recognised within the line 'Actuarial gains/(losses) recognised in OCI'. The partial buy-in is expected to be converted to a buy-out by 31 December 2019, at which point pension assets and pension liabilities of c. GBP4bn are expected to be derecognised from the Group's balance sheet.

   14   Contingent liabilities 

In January 2017, after full cooperation, the Company concluded deferred prosecution agreements with the SFO and the US Department of Justice and a leniency agreement with the MPF, the Brazilian federal prosecutors. The Central Bureau of Investigation in India has opened a formal investigation naming Rolls-Royce plc, Rolls-Royce India Private Limited and others alleging bribery in relation to historical matters. The Company will respond appropriately. Action may be taken by other authorities against the Company or individuals. In addition, we could still be affected by actions from customers and customers' financiers. The Directors are not currently aware of any matters that are likely to lead to a material financial loss over and above the penalties imposed to date, but cannot anticipate all the possible actions that may be taken or their potential consequences.

In connection with the sale of its products the Group will, on some occasions, provide financing support for its customers, generally in respect of civil aircraft. The Group's commitments relating to these financing arrangements are spread over many years, relate to a number of customers and a broad product portfolio and are generally secured on the asset subject to the financing. These include commitments of US$2.5bn (2018: $2.3bn) (on a discounted basis) to provide facilities to enable customers to purchase aircraft (of which approximately US$228m could be called during 2019). These facilities may only be used if the customer is unable to obtain financing elsewhere and are priced at a premium to the market rate. Consequently the Directors do not consider that there is a significant exposure arising from the provision of these facilities.

Commitments on delivered aircraft in excess of the amounts provided are shown in the table below. These are reported on a discounted basis at the Group's borrowing rate to reflect better the time span over which these exposures could arise. These amounts do not represent values that are expected to crystallise. The commitments are denominated in US dollars. As the Group does not generally adopt cash flow hedge accounting for future foreign exchange transactions, this amount is reported together with the sterling equivalent at the reporting date spot rate. The values of aircraft providing security are based on advice from a specialist aircraft appraiser.

 
                                                          30 June 2019    31 December 2018 
                                                           GBPm      $m      GBPm        $m 
Gross commitments                                            69      88        93       119 
Value of security (1)                                       (9)    (12)      (24)      (30) 
Indemnities                                                (11)    (14)      (19)      (24) 
Net commitments                                              49      62        50        65 
Net commitments with security reduced by 20% (2)             49      62        60        77 
(1) Security includes unrestricted cash collateral of:        -       -         4         6 
 

(2) Although sensitivity calculations are complex, the reduction of the relevant security by 20% illustrates the sensitivity of the contingent liability to changes in this assumption.

Contingent liabilities exist in respect of guarantees provided by the Group in the ordinary course of business for product delivery, performance and reliability. The Group has, in the normal course of business, entered into arrangements in respect of export finance, performance bonds, countertrade obligations and minor miscellaneous items. Various Group undertakings are parties to legal actions and claims which arise in the ordinary course of business, some of which are for substantial amounts. As a consequence of the insolvency of an insurer as previously reported, the Group is no longer fully insured against known and potential claims from employees who worked for certain of the Group's UK-based businesses for a period prior to the acquisition of those businesses by the Group. While the outcome of some of these matters cannot precisely be foreseen, the directors do not expect any of these arrangements, legal actions or claims, after allowing for provisions already made, to result in significant loss to the Group.

   15   Related party transactions 

Transactions with related parties are shown on page 163 of the 2018 Annual Report. Significant transactions in the current financial period are as follows:

 
                                                                        Half-year    Half-year 
                                                                       to 30 June   to 30 June 
                                                                             2019         2018 
                                                                             GBPm         GBPm 
Sales of goods and services to joint ventures and associates                1,614        1,400 
Purchases of goods and services from joint ventures and associates        (2,152)      (1,556) 
 

Included in sales of goods and services to joint ventures and associates are sales of spare engines amounting to GBP91m

(30 June 2018: GBP185m).

Profit recognised in the period on such sales amounted to GBP40m (30 June 2018: GBP54m), including profit on current year sales and recognition of profit deferred on similar sales in previous years. On an underlying basis (at actual achieved rates on settled derivative transactions), the amounts were GBP33m (30 June 2018: GBP47m).

   16   Acquisitions and disposals 

Acquisition

On the 18 June 2019, the Group announced its intention to acquire the electric and hybrid-electric aerospace propulsion activities of Siemens. The transaction is expected to be completed by 31 December 2019, subject to certain conditions.

Disposals

On the 1 April 2019, the Group completed the sale of its Commercial Marine business to KONGSBERG for GBP569m. The business was disclosed as held for sale from 30 June 2018. In our 2018 half year financial statements, we reported an impairment charge of GBP160m as a result of the decision to classify Commercial Marine as a business held for sale. Upon the disposal of Commercial Marine on 1 April 2019, and in accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates we have recycled the cumulate currency translation reserve through the Income Statement in 2019. This has resulted in a cumulative currency translation gain of GBP98m. Under the Sale and Purchase Agreement, the cash consideration may be adjusted based upon finalisation of the net assets disposed of, expected to be concluded by 31 December 2019.

On the 15 April 2019, the Group sold its shareholding in Rolls-Royce Power Development Limited to Rockland Capital Partners for GBP29m. The principal activity of this company was to operate a fleet of six industrial Trent power stations in the UK.

 
                                            Total 
 
                                             GBPm 
Proceeds 
Cash consideration                            598 
Cash and cash equivalents disposed          (118) 
Net cash consideration                        480 
Disposal costs paid                          (22) 
Cash inflow per cash flow statement           458 
 
Assets and liabilities disposed 
Intangible assets                             236 
Property, plant and equipment                 146 
Right-of-use assets                            40 
Deferred tax assets                             7 
Inventory                                     210 
Trade receivables and other assets            213 
Current tax assets                              1 
Lease liabilities                            (39) 
Trade payables and other liabilities        (280) 
Deposits (payments received on account)      (74) 
Provisions for liabilities and charges       (28) 
Post-retirement scheme deficits              (28) 
Net assets disposed                           404 
 

The provisional gain of disposal of businesses (net of disposal costs) totalled GBP118m.

L'Orange disposal

On 1 June 2018, the Group sold its L'Orange business, part of Rolls-Royce Power Systems, to Woodward Inc. for EUR673m. Under the sale agreement, the cash consideration may be adjusted by up to +/-EUR44m, based on L'Orange aftermarket sales over the five-year period to 31 May 2023 and this will be reviewed at each reporting date over the adjustment period, based on actual sales. No significant change has been identified to the cash consideration at 30 June 2019. Profit on disposal of business (net of disposal costs) was GBP358m.

   17   Derivation of summary funds flow statement from reported cash flow statement 
 
                                                                                                  Restated * 
                                                                                Half-year to      Half-year to 
                                                                                 30 June 2019     30 June 2018 
                                                                                 GBPm     GBPm    GBPm     GBPm 
 Underlying operating profit (see note 2)                                                  203              141 
 Depreciation and impairment of property, plant and equipment                     229              172 
 Amortisation and impairment of intangible assets                                 153              239 
 Depreciation and impairment of right-of-use assets                               200                - 
 Acquisition accounting                                                          (71)             (96) 
 Depreciation and amortisation                                                             511              315 
 Lease payments (capital plus interest)                                                  (184)                - 
 Additions of intangible assets                                                          (274)            (327) 
 Purchases of property, plant and equipment                                              (348)            (342) 
 Increase in inventories                                                                 (433)            (461) 
 Movement in receivables/payables (1)                                             220              123 
 Movement in contract assets and liabilities                                      230               20 
 Realised derivatives in financing                                               (40)             (33) 
 Revaluation of trading assets (excluding exceptional items)                     (19)               20 
 Movement on receivables/payables/contract balances (excluding Civil LTSA)                 391              130 
 Underlying Civil Aerospace LTSA contract balances                                         128              487 
 Movement on provisions                                                                  (271)                1 
 Net interest received and paid                                                           (45)             (36) 
 Other                                                                                     (8)               66 
 Trading cash flow                                                                       (330)             (26) 
 Contributions to defined benefit schemes in excess of underlying PBT charge                 1               31 
 Tax                                                                                     (100)             (77) 
 Free cash flow                                                                          (429)             (72) 
 Shareholder payments                                                                     (85)             (85) 
 Disposal of Commercial Marine and RRPD 
  (2018: Disposal of L'Orange)                                                             458              584 
 Exceptional restructuring costs                                                          (66)                - 
 DPA payments                                                                            (102)                - 
 Other                                                                                      11               13 
 Foreign exchange                                                                          (8)               30 
 Change in net funds/(debt)                                                              (221)              470 
 

* The comparative financial information for the period ended 30 June 2018 has been restated to show cash flow movements for contract assets and contract liabilities. Cash flow movements were previous shown within the lines 'increase in trade and other receivables' and 'increase in trade and other payables'.

(1) We offer reduced payment terms for smaller suppliers, so that they are paid in 30 days. Our terms with other suppliers vary on the products and services being sourced, the competitive global markets we operate in and other commercial aspects of suppliers' relationships. We offer a Supply Chain Finance programme in partnership with banks to enable suppliers who are on our standard payment term to receive their payment sooner. The Supply Chain Finance programme is available to suppliers at their discretion and does not change our rights and obligations with suppliers nor the timing of our payment of suppliers.

The table below shows a reconciliation of free cash flow to the change in cash and cash equivalents presented in the condensed consolidated cash flow statement on page 24.

 
 
                                                     Half-year to 30 June 2019      Half-year to 30 June 2018 
                                                             GBPm          GBPm            GBPm           GBPm  Source 
Change in cash and cash equivalents                                       (763)                          1,392    A 
Returns to shareholders                                                      85                             85    A 
Net cash flow from changes in borrowings and lease 
 liabilities (2018: finance leases)                                         679                          (956)    A 
(Decrease)/Increase in short-term investments                               (6)                              4    A 
Disposal of Commercial Marine and RRPD (2018: 
 Disposal of L'Orange)                                      (458)                         (584)                   A 
Other acquisitions and disposals                                6                          (13)                   C 
Changes in group structure                                                (452)                          (597) 
Payments of financial penalties from agreements 
 with investigating bodies                                                  102                              -    A 
Exceptional restructuring expenditure                                        66                              -    C 
Capital element of lease repayments (1)                                   (140)                              -    A 
Free cash flow                                                            (429)                           (72) 
 

(1) As IFRS 16 has been adopted with effect from 1 January 2019, no adjustments have been made to present the comparative period on a consistent basis.

Sources:

   A    Cash flow statement 
   B    Note 2 - underlying profit adjustments 
   C    Cash flow statement adjusted for non-underlying items including exchange differences 
   18   Impact of adopting IFRS 16 Leases 

For leases previously classified as finance leases, the Group recognised the carrying amount of the lease asset and lease liability immediately before transition as the carrying amount of the right-of-use asset and the lease liability at the date of initial application. The measurement principles of IFRS 16 are only applied after that date.

The following table reconciles the operating lease obligations under the previous accounting standard, IAS 17 Leases, to the lease liability recorded under IFRS16 on transition:

 
 
                                                                                                  GBPm 
Operating lease commitments as reported at 31 December 2018                                      2,343 
Lease commitments at end of aero engines lease contracts previously reflected in provisions 
 and other liabilities                                                                             515 
Discounted using the incremental borrowing rate at the date of initial application               (749) 
Additional commitments recognised during final data review (1)                                     180 
Impact of adoption of IFRS 16                                                                    2,289 
Commitments relating to businesses disposed                                                       (41) 
At 1 January 2019                                                                                2,248 
Finance lease liabilities recognised as at 31 December 2018                                        229 
Lease liability recognised as at 1 January 2019                                                  2,477 
Of which are: 
    Current lease liabilities                                                                      322 
    Non-current lease liabilities                                                                2,155 
 

(1) These have been offset by an equivalent right of use change.

The recognised right-of-use assets relate to the following types of asset:

 
                             30 June 2019  1 January 2019 
                                     GBPm            GBPm 
Land and buildings                    452             453 
Plant and equipment                    95             106 
Aircraft and engines                1,557           1,654 
Total right-of-use assets           2,104           2,213 
 

The change in accounting policy affected the following items in the balance sheet on 1 January 2019:

Condensed consolidated balance sheet

 
                                                                                        Transferred       As at 
                                                   Previously reported  IFRS 16           to assets   1 January 
                                                      31 December 2018   impact   held for sale (1)        2019 
                                                                  GBPm     GBPm                GBPm        GBPm 
 
ASSETS 
Intangible assets                                                5,295        -                   -       5,295 
Property, plant and equipment (2)                                4,929    (197)                   -       4,732 
Right-of-use assets (3)                                              -    2,254                (41)       2,213 
Investments - joint ventures and associates                        412        -                   -         412 
Investments - other                                                 22        -                   -          22 
Other financial assets                                             343        -                   -         343 
Deferred tax assets (4)                                          2,092        2                   -       2,094 
Post-retirement scheme surpluses                                 1,944        -                   -       1,944 
Non-current assets                                              15,037    2,059                (41)      17,055 
Inventories                                                      4,287        -                   -       4,287 
Trade receivables and other assets                               4,690        -                   -       4,690 
Contract assets                                                  2,057        -                   -       2,057 
Taxation recoverable                                                34        -                   -          34 
Other financial assets                                              22        -                   -          22 
Short-term investments                                               6        -                   -           6 
Cash and cash equivalents                                        4,974        -                   -       4,974 
Current assets                                                  16,070        -                   -      16,070 
Assets held for sale                                               750        -                  41         791 
TOTAL ASSETS                                                    31,857    2,059                   -      33,916 
 
LIABILITIES 
Borrowings and lease liabilities                                 (858)    (295)                   7     (1,146) 
Other financial liabilities                                      (647)        -                   -       (647) 
Trade payables and other liabilities (5)                       (8,292)       49                   -     (8,243) 
Contract liabilities                                           (3,794)        -                   -     (3,794) 
Current tax liabilities                                          (138)        -                   -       (138) 
Provisions for liabilities and charges (6)                     (1,122)       30                   -     (1,092) 
Current liabilities                                           (14,851)    (216)                   7    (15,060) 
Borrowings and lease liabilities                               (3,804)  (1,994)                  34     (5,764) 
Other financial liabilities                                    (3,542)        -                   -     (3,542) 
Trade payables and other payables (5)                          (1,940)       60                   -     (1,880) 
Contract liabilities                                           (5,336)        -                   -     (5,336) 
Deferred tax liabilities (4)                                     (962)        6                   -       (956) 
Provisions for liabilities and charges (6)                       (795)       45                   -       (750) 
Post-retirement scheme deficits                                (1,303)        -                   -     (1,303) 
Non-current liabilities                                       (17,682)  (1,883)                  34    (19,531) 
Liabilities associated with assets held for sale                 (376)        -                (41)       (417) 
TOTAL LIABILITIES                                             (32,909)  (2,099)                   -    (35,008) 
 
NET LIABILITIES                                                (1,052)     (40)                   -     (1,092) 
 
EQUITY 
Called-up share capital                                            379        -                   -         379 
Share premium account                                              268        -                   -         268 
Capital redemption reserve                                         161        -                   -         161 
Cash flow hedging reserve                                        (106)        -                   -       (106) 
Merger reserve                                                     406        -                   -         406 
Translation reserve                                                809        -                   -         809 
Accumulated losses (7)                                         (2,991)     (40)                   -     (3,031) 
Equity attributable to ordinary shareholders                   (1,074)     (40)                   -     (1,114) 
Non-controlling interests                                           22        -                   -          22 
TOTAL EQUITY                                                   (1,052)     (40)                   -     (1,092) 
 

(1) Relates to the Commercial Marine business which was classified as "held for sale" at 31 December 2018. See note 16 for more details.

(2) Transfer of net book value of finance leased assets to right-of-use assets.

(3) Initial recognition of right-of-use assets accounted for under IFRS 16.

(4) Deferred tax on the difference between the right-of-use asset measured on a retrospective basis and the lease liability at transition date.

(5) Lease related creditors reclassified against the IFRS 16 right-of-use asset on transition.

(6) Provisions related to engine return conditions reclassified against IFRS 16 right-of-use asset.

(7) Post-tax difference between the right-of-use asset measured on a retrospective basis and the lease liability at transition date

Principal risks and uncertainties

Whilst the Group has a consistent strategy and long performance cycles, it continues to be exposed to a number of risks and has an established, structured approach to identifying, assessing and managing those risks.

The principal risks facing the Group for the remaining six months of the financial year are unchanged from those reported on pages 50 to 54 of the Annual Report 2018, as summarised below:

 
            Strategic transformation                               Safety 
             Failure to deliver our strategic                       Failure to meet the expectations 
             transformation, including changing                     of: 1) our customers to provide 
             our behaviours could result in:                        safe products which also minimise 
             missed opportunities; dissatisfied                     the impact on the environment during 
             customers; disengaged employees;                       their production or use; or 2) people 
             ineffective use of our scarce resources;               who work for or with us to provide 
             and increasing the likelihood of                       a safe and healthy place of work 
             other principal risks occurring.                       which minimises the impact on the 
             This could lead to a business that                     environment; would adversely affect 
             is overly dependent on a small number                  our reputation and long-term sustainability. 
             of products and customers; failure 
             to achieve our vision; non-delivery                    Talent and capability 
             of financial targets and not meeting                   Inability to identify, attract, 
             investor expectations.                                 retain and apply the critical capabilities 
             Competitive environment                                and skills needed in appropriate 
             The presence of competitors in the                     numbers to effectively organise, 
             majority of our markets means that                     deploy and incentivise our people 
             the Group is susceptible to significant                would threaten the delivery of our 
             price pressure for original equipment                  strategies, business plans and projects. 
             or services. Our main competitors 
             have access to significant government                  Market and financial shock 
             funding programmes as well as the                      The Group is exposed to a number 
             ability to invest heavily in technology                of market risks, some of which are 
             and industrial capability. Disruptive                  of a macro-economic nature (e.g. 
             technologies or new entrants with                      foreign currency, oil price, rates) 
             alternative business models could                      and some of which are more specific 
             also reduce our ability to sustainably                 to the Group (e.g. liquidity and 
             win future business, achieve operating                 credit risks, reduction in air travel 
             results and realise future growth                      or disruption to other customer 
             opportunities.                                         operations). Significant extraneous 
             Cyber threat                                           market events could also materially 
             An attempt to cause harm to the                        damage the Group's competitiveness 
             Group, its customers, suppliers                        and/or creditworthiness. 
             and partners through the unauthorised                  This would affect operational results 
             access, manipulation, corruption,                      or the outcomes of financial transactions. 
             or destruction of data, systems 
             or products through cyber space.                       Political risk 
             Major product programme delivery                       Geopolitical factors (including 
             Failure to deliver a major programme                   Brexit) that lead to an unfavourable 
             on time, within budget, to technical                   business climate and significant 
             specification or falling significantly                 tensions between major trading parties 
             short of customer expectations,                        or blocs which could impact the 
             or not delivering the planned business                 Group's operations. Examples include: 
             benefits, would have potentially                       changes in key political relationships; 
             significant adverse financial and                      explicit trade protectionism, differing 
             reputational consequences, including                   tax or regulatory regimes, potential 
             the risk of impairment of the carrying                 for conflict or broader political 
             value of the Group's intangible                        issues; and heightened political 
             assets and the impact of potential                     tensions. 
             litigation. 
             Business continuity                                    Compliance 
             The major disruption of the Group's                    Non-compliance by the Group with 
             operations, which results in our                       legislation, the terms of the deferred 
             failure to meet agreed customer                        prosecution agreements or other 
             commitments and damages our prospects                  regulatory requirements in the heavily 
             of winning future orders. Disruption                   regulated environment in which it 
             could be caused by a range of events,                  operates (e.g. export controls; 
             for example: extreme weather or                        use of controlled chemicals and 
             natural hazards (e.g. earthquakes,                     substances; anti-bribery and corruption; 
             floods); political events; financial                   environmental regulations; and tax 
             insolvency of a critical supplier;                     and customs legislation). This could 
             scarcity of materials; loss of data;                   affect our ability to conduct business 
             and fire or infectious disease.                        in certain jurisdictions and would 
             The consequences of these events                       expose the Group to potential: reputational 
             could have an adverse impact on                        damage; financial penalties; debarment 
             our people, our internal facilities                    from government contracts for a 
             or our external supply chain.                          period of time; and suspension of 
                                                                    export privileges (including export 
                                                                    credit financing), each of which 
                                                                    could have a material adverse effect. 
 

Going concern

After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future (which accounting standards require to be at least a year from the date of this report). There have been no significant changes to the basis described on page 55 of the Annual Report 2018. For this reason they continue to adopt the going concern basis in preparing the consolidated financial statements.

Payments to shareholders

The Company makes payments to shareholders by allotting non-cumulative redeemable preference shares of 0.1 pence each (C Shares). Shareholders can opt to redeem the C Shares for a cash payment, or reinvest the cash proceeds by purchasing additional ordinary shares via the C Share Reinvestment Plan (CRIP), which is operated by our Registrar, Computershare Investor Services PLC. On 3 January 2020, 46 C Shares, with a total nominal value of 4.6p, will be allotted for each ordinary share to those shareholders on the register on 25 October 2019. The final day of trading with entitlement to C Shares is 23 October 2019. Shareholders wishing to redeem their C Shares, or participate in the CRIP, must lodge instructions with our Registrar to arrive no later than 5.00 pm on 2 December 2019 (CREST holders must submit their election in CREST by 3pm GMT). The payment of C Shares redemption monies will be made on 6 January 2020 and the CRIP purchase will begin as soon as practicable after 6 January 2020.

Statement of directors' responsibilities

The directors confirm that, to the best of their knowledge:

-- the condensed consolidated half-year financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

   --    the interim management report includes a fair review of the information required by: 

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed consolidated half-year financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last Annual Report that could do so.

The directors of Rolls-Royce Holdings plc at 28 February 2019 are listed in its Annual Report 2018 on pages 59 to 61. There have been no changes since this date.

By order of the Board

Warren East Stephen Daintith

Chief Executive Chief Financial Officer

5 August 2019 5 August 2019

Independent review report to Rolls-Royce Holdings plc

Report on the Condensed consolidated half-year financial statements

Our conclusion

We have reviewed Rolls-Royce Holdings plc's Condensed consolidated half-year financial statements (the "interim financial statements") in the 2019 Half Year Results of Rolls-Royce Holdings plc for the six month period ended 30 June 2019. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

What we have reviewed

The interim financial statements comprise:

   --      the Condensed consolidated balance sheet as at 30 June 2019; 

-- the Condensed consolidated income statement and Condensed consolidated statement of comprehensive income for the six month period then ended;

   --      the Condensed consolidated cash flow statement for the six month period then ended; 

-- the Condensed consolidated statement of changes in equity for the six month period then ended; and

   --      the explanatory notes to the interim financial statements. 

The interim financial statements included in the 2019 Half Year Results have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

Responsibilities for the interim financial statements and the review

Our responsibilities and those of the directors

The 2019 Half Year Results, including the interim financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the 2019 Half Year Results in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

Our responsibility is to express a conclusion on the interim financial statements in the 2019 Half Year Results based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

What a review of interim financial statements involves

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

We have read the other information contained in the 2019 Half Year Results and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.

PricewaterhouseCoopers LLP

Chartered Accountants

London

5 August 2019

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

IR SSMSFMFUSEFA

(END) Dow Jones Newswires

August 06, 2019 02:01 ET (06:01 GMT)

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