Rolls-Royce Reports Loss on Bribery Charges, Weak Pound -- Update

By Robert Wall

LONDON-- Rolls-Royce Holdings PLC on Tuesday said it swung to a full-year GBP4.03 billion ($5.05 billion) net loss and suffered a sharp decline in operating profit stung by a settlement over corruption charges, the fall in the British pound and setbacks on high-profile aircraft engine programs.

Rolls-Royce, best known for making aircraft engines for Boeing Co. and Airbus SE long-range planes, reported a GBP83 million profit the year prior. The loss in the latest year reflected a large, noncash accounting hit from the revaluation of U.S. currency hedges after the British pound slumped in the wake of the Brexit vote. It included a GBP671 million a one-time charge for bribery settlements with U.S., British and Brazilian authorities.

The company's closely watched underlying pretax profit, that strips out one-time items and currency fluctuations, fell for a third year to GBP813 million from GBP1.43 billion a year earlier, ahead of expectations. Underlying sales fell 2% to GBP13.4 billion.

Earnings this year will only be modestly better, Rolls-Royce said. Underlying free cash flow, which was GBP100 million last year, should be similarly weak in 2017, the company said.

Rolls-Royce a year ago announced its first dividend cut since 1992 to maintain balance sheet health amid falling profits. The company said it would pay a 7.1 pence final dividend or 11.7 pence for the full-year compared with 16.4 pence for 2015.

Rolls-Royce, no longer affiliated with the luxury car maker, began the year warning earnings would sag. Profit on its engines for Airbus A330 planes would retreat amid weaker demand and with the plane maker introducing an upgraded model with newer Rolls-Royce engines. Costs on its Trent 1000 engines used to power Boeing Dreamliners have also risen with turbine components degrading too quickly. Other headwinds include weakness in its business to provide engine for regional and business jets where Rolls-Royce has lost ground to rivals.

Rolls-Royce has embarked on companywide restructuring and overhauled management to boost returns. About 600 manager positions are being eliminated along with around 2,600 job losses in the aerospace unit that generates most Rolls-Royce sales. About 1,800 jobs are being eliminated in the ship-engine unit. Chief Executive Warren East has promised annual savings starting at the end of this year of up to GBP200 million.

"We have delivered major changes to our management and processes and, while we have made good progress in our cost cutting and efficiency programs, more needs to be done to ensure we drive sustainable margin improvements within the business," Mr. East said.

Rolls-Royce faces another difficult year. The company will have to pay about GBP293 million this year under its bribery settlement. Rolls-Royce admitted to illegal business practices over decades in several markets including to win defense contracts and commercial aircraft engine business.

The company also is bracing for the introduction of new accounting standards that will depress near-term profit. Rolls-Royce typically sells aircraft engines at a loss and makes up the money later on servicing them. Rolls-Royce masks the early losses by booking some of the assured services revenue early. Under new accounting rules those losses will need to be reflected immediately and services revenue can't be booked until the work takes place.

Write to Robert Wall at robert.wall@wsj.com

(END) Dow Jones Newswires

February 14, 2017 03:27 ET (08:27 GMT)

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