Rolls-Royce Swings to Profit
British aircraft engine maker Rolls-Royce Holdings PLC Tuesday swung to a first-half net profit amid signs a turnaround plan is helping bolster results.
Rolls-Royce net profit for the six months through June rose to 1.6 billion ($2.1 billion) from a GBP1.8 billion loss. Last year's figure was depressed by a revaluation of currency hedges because of the sharp fall of the British currency after the Brexit vote.
The company's closely watched underlying pretax profit rose to GBP287 million from GBP104 million, driven by its civil-aircraft-engine activities and better-than-expected performance at its power-systems unit. Sales in the first six months of this year rose 12% to GBP7.6 billion.
Rolls-Royce, which makes engines for Boeing Co. and Airbus SE long-range jets, had signaled it would make most of its profit in the second half. It repeated that forecast Tuesday.
The company, however, continues to be hit by multiple headwinds. Its core aircraft-engine business is ramping up production of new, less profitable models, with output of more lucrative ones falling. Demand for marine engines powering ships involved in the oil and gas industry have also sagged, denting profit.
The production rampup in which Rolls-Royce plans to about double output of large commercial airplane engines by the end of the decade is also weighing on cash flow. The company had GBP339 million in cash outflow at the end of June, slightly better than expected, and stuck to guidance of around GBP100 million in free cash generation this year.
Chief Executive Warren East has embarked on a prolonged turnaround plan, slashing jobs in a bid to boost profitability that lags that of rivals such as General Electric Co. Mr. East called the half-year performance "encouraging" and ahead of expectations.
Rolls-Royce also has to grapple with the introduction of new accounting rules that come into force soon. They will mainly affect book-keeping on Rolls-Royce's commercial engine activities. Those engines are often sold at a loss with profit generated through long-term service arrangements.
Under the so-called IFRS 15 standard, Rolls-Royce will no longer be able to book some of the service revenue early. That will depress near-term sales during a period Rolls-Royce is boosting production. Future sales, when many of these engines come in for overhaul, should be higher. Free cash flow is unaffected.
Rolls-Royce said under the new rules it last year would have reported a GBP4.8 billion loss, or GBP800 million worse than the year prior. Sales would have come in GBP1.7 billion lower at GBP13.3 billion.
Write to Robert Wall at Robert.Wall@wsj.com
(END) Dow Jones Newswires
August 01, 2017 03:16 ET (07:16 GMT)