Aerospace giant, Rolls-Royce swung to a £4bn loss in 2020, as the cost of Covid turbulence became clear. Rolls-Royce plunged to a loss of £4bn compared to a £306m profit in 2019 as the pandemic stopped airlines flying.
The firm’s underlying revenue also sunk to £11.7bn from £15.5bn the previous year.
Summary of 2020 financial performance and financial impact of COVID-19
The financial performance in 2020 was significantly affected by the COVID-19 pandemic. The global spread of the virus from March resulted in a sudden deterioration of some of its end markets.
A positive albeit reduced contribution from Power Systems and growth in Defence was important to the Group’s overall performance, partly offsetting the severe impact to Civil Aerospace business.
- FCF of £(4.2)bn, reflecting deterioration in underlying performance as a result of the impact of COVID-19 on Civil Aerospace in particular, and a deterioration in working capital which included a £(1.1)bn impact from the cessation of invoice discounting.
- Actions to reduce non-critical spend and payroll delivered more than £1bn of savings in a year compared to pre-COVID plans partly mitigating the impact of lower flying hour receipts.
- Reported movement in net funds of £(2.9)bn was helped by £2.0bn inflow from the rights issue.
- Underlying revenue of £11.8bn reflected lower activity and included a £(1.1)bn revenue impact from Civil Aerospace LTSA contract accounting catch-ups.
- Underlying operating loss of £(2.0)bn included £(1.3)bn of one-off charges largely due to COVID-19 comprising charges for LTSA catch-ups, contracts that have become loss-making in the year and customer provisions.
- Underlying loss before tax of £(4.0)bn included a £(1.7)bn underlying finance charge related to the FX hedge book reduction, due to lower USD receipts in 2020 and forecast future years.
- Reported operating loss of £(2.1)bn included £(1.3)bn net exceptional charges, largely as a result of COVID-19, including £(1.4)bn from impairments and write-offs, £(489)m from restructuring, and a £620m exceptional provision release on the Trent 1000 programme.
- A full reconciliation of reported results to underlying results is presented on page 6.
Financial and liquidity position at year-end
- Liquidity of £9.0bn at year-end comprised £3.5bn cash and £5.5bn undrawn credit facilities.
- A total of £7.3bn additional liquidity was secured during 2020, including £2.0bn rights issue and £5.3bn new credit through bonds, bank loan facilities and commercial paper.
- Net debt of £(1.5)bn excluding leases (£(3.6)bn including leases).
- Under the terms of recent loan agreements, we are restricted from making or declaring payments to our shareholders until after 31 December 2022. Regardless of these restrictions, the Board recognises that it would be inappropriate to make payments at this time due to the Group’s financial position.
Warren East, Chief Executive said:
“2020 was an unprecedented year and I would like to thank everyone at Rolls-Royce for their hard work, dedication and sacrifice to help secure the Group’s future. The impact of the COVID-19 pandemic on the Group was felt most acutely by our Civil Aerospace business.
In response, we took immediate actions to address our cost base, launching the largest restructuring in our recent history, consolidating our global manufacturing footprint and delivering significant cost reduction measures.
We have taken decisive actions to enhance our financial resilience and permanently improve our operational efficiency, resulting in a regrettable, but unfortunately very necessary, reduction in the size of our workforce.
With the support of our stakeholders, we successfully secured additional liquidity with a rights issue, bond issuance and further credit facilities put in place during the year. We have made a good start on our programme of disposals and will continue with this in 2021.
We continue to invest in developing market-leading technology and low carbon opportunities in all our end markets, to create value for our stakeholders and ensure we are well-positioned to take advantage of the transition to a lower-carbon economy and growing demand for more sustainable power solutions.”
Outlook and financial guidance
In this challenging environment, near-term financial forecasting is more difficult and the potential range of outcomes wider. Our expectations and targets are based on the pace of delivery of our fundamental restructuring programme and our current view of the shape and timing of the recovery.
- We expect Group FCF in the region of £(2.0)bn in 2021, based on EFH at around 55% of 2019 levels, with the outflow weighted towards the first half before the Group turns cash flow positive at some point during the second half of the year.
- Group FCF of at least £750m (excluding disposals) is achievable when EFH exceed 80%, on average, of 2019 levels for a 12-month period. We aim to reach this as early as 2022, underpinned by our cost reductions and management actions, however, the exact timing is dependent on the pace of air travel recovery.
- Medium-term, we aim to return to a net cash position and an investment-grade credit position driven by free cash generation and our planned £2.0bn disposal programme.
The near-term outlook remains uncertain and highly sensitive to the developments of the COVID-19 virus and the related measures taken by governments around the world.