Rolls-Royce Reports Loss on Bribery Charges, Weak Pound -- 2nd Update
February 14 2017 - 4:46AM
Dow Jones News
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, 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's long-range planes, reported a GBP83 million
profit the year before. 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 country's
vote to leave the European Union. It included a GBP671 million
one-time charge for bribery settlements with U.S., British and
Brazilian authorities after the company admitted to illegal
business practices spanning decades.
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.
Shares slumped 2.57% to GBP7.21.
Chief Executive Warren East said 2017 "remains a challenging
year."
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. The
figure doesn't include a GBP293 million payment on its bribery
fine. Mr. East said cash-flow should top GBP1 billion by the end of
the decade.
Rolls-Royce, no longer affiliated with the luxury car maker,
began the year warning that 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 problems include weakness in its
business to provide engine for regional and business jets where
Rolls-Royce has lost ground to rivals.
Chief Financial Officer David Smith said many of the earnings
difficulties, including weakness in demand for business jet engines
and services, would remain this year.
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. Mr. East has
promised annual savings starting at the end of this year of around
GBP200 million.
He said the company would also work to define a long-term
vision. The broad portfolio would remain unchanged, though some
businesses could be repositioned or be sold. He promised an update
this year.
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. Under the new accounting standard Rolls-Royce wouldn't
have made an operating profit, Mr. Smith said.
Rolls-Royce a year ago announced its first dividend cut since
1992 to maintain balance sheet health amid falling profit. 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.
Write to Robert Wall at robert.wall@wsj.com
(END) Dow Jones Newswires
February 14, 2017 04:31 ET (09:31 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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