Rolls-Royce

Recent actions by Rolls-Royce suggest that it is moving forward in its effort to materially reposition the company and return it to long-term profitability.   Several factors had drastically impacted demand for Rolls-Royce products and services, causing a substantial decline in company revenues. The pandemic placed a major drag on performance. Returning the company to sustained market success will take years to achieve.

Rolls-Royce's continues to face a difficult task in turning the company around. It had been quite unprofitable until recently. Because its business model tends to focus on segments of the aerospace market that are expected to grow slowly, the company’s path to full recovery will be drawn out.

In response to the dramatic downturn, the company’s management launched an aggressive restructuring and cost cutting plan.

It has taken a series of steps to improve the company’s liquidity. It raised additional debt and used a share rights offering to sell additional stock. Long-term debt was £7.5 billion at the end of 2021, up from less than £4 billion for 2018. This represents nearly twice as much long-term debt in just three years.

In addition, the company sought to dispose of assets to raise at least £2 billion by early 2022 in order to rebuild its balance sheet and return to investment grade credit rating. Much of the goal was potentially realized when in September 2021, Rolls-Royce agreed to sell its ITP Aero business unit to Bain Capital Private Equity for £1.7 billion ($2 billion).

Management purposely cut the size of the company to adjust to a projected deep decline in airliner demand due to the Covid-19 pandemic. By year-end 2021, over 9,000 positions were cut from continuing operations and reported that it had achieved its goal of eliminating £1.3 billion of run-rate savings.

Total revenue for all of 2021 was £10.9 billion, down 4% from £11.4 billion in 2020. Prior to the onset of the pandemic in 2019, total revenue stood at £15.5 billion. Since the company is looking to complete the sale of its ITP Aero, that unit is not included in the 2021 figures. ITP Aero’s sales were dramatically impacted by the drastic decline in air travel. At one point this unit’s annual revenues were close to a £1 billion. In 2021, they were below £400 million.

Rolls-Royce’s operating profit was only £414 million, equating to an operating margin of 3.8% in 2021. This was up sharply from 2020 operating loss of £2 billion or an operating margin of -17.6%. Much of the 2020 loss was due to the inability to shed operation costs fast enough to deal with the sharp drop in revenues.

Profit/loss before taxation was even more dramatic in its final 2020 amount, as it closed that year at a staggering loss of almost £4 billion, before rebounding in 2021 to a relatively miniscule £36 million. Much of the 2020 loss was due to one time costs incurred as management took aggressive actions aimed at restructuring company operations.

The individual business units accounted for 2021 revenues and respective shares as follows: Civil Aerospace £4.536 billion (41%), Defence £3.368 billion (31%), and Power Systems £2.749 billion (25%).

Operating Profits/Losses for each of the three major units were: Civil Aerospace with a loss of £172 million, Defence a profit of £457 million and Power Systems a profit of £242 million.

Civil Aerospace’s revenues in 2021 were divided as follows: large engines, 72%; business aviation, 21%; regional, 4%; and V2500, 3%. The business unit derived 36% of its revenue from original equipment (versus 45% in 2020), and 64% from services.