Final Results
4 March 2003
ROLLS-ROYCE plc PRELIMINARY RESULTS 2002
Delivering in line with guidance
'Against a background of challenging market conditions we have delivered profit
and cash flow in line with the guidance provided on October 19 2001. With the
help of our workforce we have successfully implemented the restructuring
programme announced at that time and have achieved a strong operational
performance with significant improvements in working capital management.
'This performance, together with our record year-end order book and growing
aftermarket revenues, confirms our business model and our ability to manage
uncertainty and deliver shareholder value.
'We are consulting with our employees with the objective of limiting the
financial impact of the current pension fund deficit within the guidance we
provided last August. Subject to the continuing uncertainty caused by the
situation over Iraq, we are reiterating our guidance for profit growth in 2003,
with positive cash flow.'
Sir John Rose, Chief Executive, Rolls-Royce plc
Highlights are:
Profit and cash in line with guidance
* Underlying profit before tax £255 million*
* Average net debt £1,090 million
* Year-end net debt £595 million
* Dividend maintained
Record year-end order book
* Order intake of £8.7 billion
* Record year-end order book of £16.2 billion
Strong aftermarket services
* Aftermarket services at £2.5 billion represent 44 per cent of total
revenues
* Long-term service agreements worth £2bn announced
*before exceptional and non-trading items (see note 3)
Overview
Results for the year ended December 31 2002 were in line with the guidance
provided in October 2001, reflecting the balanced nature of the company's
business and the swift action taken to mitigate the downturn in the civil
aerospace market. Underlying profit before tax was £255 million, a fall of 46
per cent, which resulted primarily from the predicted difficult conditions in
the civil aerospace market.
Aftermarket service revenues in 2002 were in line with the company's
expectations and, at £2.5 billion (2001 £2.4 billion), accounted for 44 per
cent of total revenues. Aftermarket sales, including joint venture businesses,
exceeded £3 billion.
Encouragingly, order intake at £8.7 billion remained strong during 2002. The
firm order book was £16.2 billion (2001 £14.4 billion) at the year-end, with a
further £0.9 billion business announced. Aftermarket service revenues accounted
for 33 per cent of the order book, including long term service agreements,
which accounted for 21 per cent.
Net debt was £595 million, reflecting a cash outflow of £94 million after
expenditure of £167 million on restructuring and after purchasing six aircraft
for £133 million in connection with sales financing activities. Average net
debt was £1,090 million (2001 £990 million).
Business model
Rolls-Royce invests in technology and capability that can be exploited in each
of its four global markets to create a competitive range of products and
services. The broad business portfolio has reduced the company's dependence on
any one sector and has helped mitigate the impact of the current decline in the
civil aerospace market.
The success of the company's products is demonstrated by the gains in market
share over recent years. Rolls-Royce now has an installed base of 54,000 gas
turbine engines in service across all its businesses. The investments in
product, capability and knowledge-based infrastructure to gain this market
position have created high barriers to entry. Successful implementation of the
company's service strategy has enabled it to increase its aftermarket revenues
by 60 per cent (including joint ventures) over the last five years.
Most of the engines in service will have operational lives of 25 years or more,
generating an assured aftermarket demand for the provision of spare parts and
services. The installed base of engines, therefore, represents an annuity for
the business and provides visibility as to future activity levels.
Rolls-Royce is now a global business; 52 per cent of research and technology is
conducted outside the UK; 63 per cent of purchases are international; and 40
per cent of manpower is based outside the UK, representing 40 nationalities in
48 countries.
Improving operational performance
Since October 2001, the business has been resized to balance load and capacity.
Despite the major changes in load and mix and the consequent rescheduling,
significant improvements have been achieved in delivery performance,
manufacturing lead-time, working capital management and operating cost. The
successful implementation of SAP in 2001 has provided a very effective tool for
managing changes in demand.
As a result of improvement initiatives manufacturing inventory was reduced by
19 per cent and average lead time was reduced. Working capital was effectively
controlled in 2002, reducing as a proportion of sales from 10.5 per cent to 6.8
per cent. A supply chain restructuring initiative has been launched and pilots
have been successfully completed, confirming that further inventory reduction
is achievable.
The company has implemented the restructuring programme announced in 2001
without industrial disruption. The company achieved a net headcount reduction
of 4,900 during 2002 with a further 900 employees due to leave in the early
part of 2003 as part of this programme. The company is on target to achieve
annual cost savings of £250 million from this programme. The headcount is
expected to be reduced to around 35,000 by the year-end, with further
restructuring charges of approximately £50 million in 2003.
During this difficult period, the company's employees have continued to
demonstrate strong teamwork, commitment and innovation.
Prospects
The company's business strategy and market position have enabled it to manage
the uncertainties of the short term and secure long term growth which will
deliver shareholder value. Over the next decade the emphasis of investment will
change. The company will continue to focus expenditure on technology
acquisition and in support of new product development and in-service
improvements. However, the pace of new product development will slow,
particularly in civil aerospace where fewer new aircraft are now being
developed. While continuing to develop new products that deliver value, the
emphasis will be on unit cost reduction, development of derivatives,
improvement of in-service operation and the creation of capabilities which
increase the scope and value of the company's service activities.
Rolls-Royce is in a sound financial position. At the year-end, gearing stood at
29 per cent and total committed borrowing facilities amounted to £2.6 billion,
following successful refinancing of approximately £1.0 billion during the year.
After repaying maturing borrowings, and assuming they are not renewed, total
committed facilities at the end of 2003 will be approximately £2.5 billion and
total facilities at the end of 2004 will be approximately £1.9 billion. Net
debt peaked at £1,390m in 2002. The company's foreign exchange hedging policy
minimises the impact of fluctuations in exchange rates. Total US dollar cover
currently amounts to five years' net US dollar income. The company's risk
management systems proved to be robust and a prudent approach has been taken in
the area of provisions and charges.
Since October 2001, two additional factors have increasingly influenced the
company's assumptions about future performance: firstly, the uncertainties
associated with the situation over Iraq and, secondly, the impact of depressed
financial markets and actuarial assumptions on the funding requirements for the
company's pension funds. All reasonable actions are being taken to mitigate the
impact of both.
The company's priority for 2003 is to manage these uncertainties, building on
its effective response to the events of September 11 2001 and continuing its
rationalisation activities with particular focus on quality, unit cost
reduction and supply chain restructuring.
At December 31 2002, after taking account of deferred taxation, the FRS 17
deficit in the Rolls-Royce UK pension funds was approximately £1.1 billion. The
next formal actuarial review of the major fund is due to commence on March 31
2003 and is expected to be completed before the year-end. This scheme was
closed to new entrants in January 1999. While the company intends to continue
to provide a defined benefit scheme, it has commenced consultations with
employees over a number of mitigating actions in connection with the provision
of pension benefits. The objective of these actions is to contain the
additional funding costs within the guidance provided last August (See note 6).
Subject to the continuing uncertainty caused by the situation over Iraq, the
company is reiterating its guidance for profit growth in 2003, with positive
cash flow.
Enquiries
Peter Barnes-Wallis Colin Duncan
Director of Financial Communications Director of Corporate Communications
Tel: 0207 222 9020
www.rolls-royce.com
An interview about the results with Rolls-Royce Chief Executive, Sir John Rose,
is available in video, audio and text on www.Rolls-Royce.com and www.cantos.com
.
Downloadable photographs of directors and products are available at
www.newscast.co.uk
Sector review
Civil aerospace: Sales £2,739m; underlying profit before interest £150m
In civil aerospace Rolls-Royce has established itself as the clear number two
aero engine manufacturer, having won 30 per cent of the global engine market
over the past three years. In 2002, the continuing level of order activity
among the customer base was encouraging, although the depressed performance of
the airline sector continues to impact sentiment and orders.
The company delivered 856 engines (2001, 1,362 engines) to 56 airlines and 93
corporate customers. Whilst engine deliveries were down by 37 per cent against
2001, the installed base of civil jet engines in service grew to 9,900.
Aftermarket sales were in line with the company's forecasts, at £1,250m, with
long term contracts worth £2bn signed with 50 customers. Despite the two per
cent drop in overall flying hours, the Rolls-Royce fleet flying hours increased
by seven per cent. This reflects the recent deliveries and the 8.2 year average
age of the in-service fleet.
Charges and provisions of £73 million were taken within underlying profit in
respect of customer financing exposures. In addition, the company utilised £50
million of existing
customer financing provisions, carrying forward customer financing provisions
of
£64 million at the year-end.
At the end of 2002, there were 2,000 parked aircraft, of which 19 per cent were
Rolls-Royce powered. The company expects approximately half of these
Rolls-Royce powered aircraft will return to service.
The Trent family continues to be successful in the high-thrust segment with
nearly 1,600 engines ordered by a total of 39 customers. New Trent customers
included Kenya Airways for the Trent 800 on its Boeing 777s and Middle East
Airlines who chose Trent 700s for its new A330 fleet.
The Trent 500 made its maiden development flight on the ultra-long-distance
A340-500 before entering commercial service on the higher-capacity A340-600
with Virgin Atlantic in August.
In the corporate sector, the 1,000th Tay engine was delivered for the 500th
Gulfstream GIV.
The focus on aftermarket services activity continued. The recently announced
joint venture with Lufthansa will further expand the Trent repair and overhaul
network. This followed the company's success in winning orders for the Trent
500, 700 and 900 to power Lufthansa's new fleet of wide-bodied aircraft.
Defence: Sales £1,376m; underlying profit before interest £183m
Rolls-Royce further consolidated its position as the number two defence aero
engine manufacturer through its strong positions on many of the world's new
programmes, covering sectors from combat and trainer aircraft to transport,
unmanned aerial surveillance, maritime patrol and helicopters. It is a key
partner in two of the world's largest combat programmes, the Joint Strike
Fighter (JSF) and the Eurofighter.
Rolls-Royce has unique experience of vertical take-off technology and is
responsible for the short take-off and vertical landing (STOVL) capability for
JSF. In 2002, this programme took a major step forward when the UK Ministry of
Defence announced it would take up to 150 STOVL F-35 JSF aircraft. The company
expects production revenue of approximately $3 billion from a successful UK/US
JSF STOVL production programme.
Rolls-Royce is also a 40 per cent partner in the alternate main propulsion
engine, the F136. The JSF design embodies world-leading new technologies,
including some of those originally developed for the Trent civil aero engine.
This programme will keep Rolls-Royce at the forefront of advanced propulsion
development and maintain its leadership in this market. Development work during
the year met all goals.
Rolls-Royce is also a major partner in the European collaboration which is
responsible for the EJ200 engine for Eurofighter. The first production
Eurofighter Typhoon aircraft flew in 2002 powered by production EJ200 engines.
The company expects engine deliveries to grow over the next few years.
Rolls-Royce produces one of the broadest helicopter engine ranges available in
the world, with more than 18,000 turboshaft engines in service and 160 million
flying hours accumulated for both military and civil applications. Milestones
in the helicopter market in 2002 included delivery of the first production
MTR390s to Eurocopter and the completion of the initial two flights of the
first Fire Scout unmanned helicopter, powered by the Model 250.
The Defence business has a total of 34,000 aero engines in service,
representing a significant aftermarket opportunity. The company continues its
focus on the provision of services, building upon capabilities developed in
other sectors. A number of Mission Ready Management Solutions (MRMS) contracts
were signed in 2002, including a Gnome agreement with the UK Ministry of
Defence and an AE 2100D Fleet Hour Agreement with the U.S. Marine Corps in
support of its growing KC-130J fleet. The US Navy announced its selection of
Rolls-Royce as the provider of full contractor logistic support and engine
maintenance for its F405 (Adour) engines fitted to its T-45 aircraft.
Vickers Defence Systems, the company's armoured vehicles business, was sold to
Alvis during 2002. This business contributed approximately £70 million to sales
and
£50 million to profit in the year, reflecting the release of provisions
following the successful completion of the Challenger 2 contract.
Marine: Sales £984m; underlying profit before interest £82m
The Marine business continued to deliver steady growth in a competitive, global
marketplace. A world-leading position in cruise, fast vessel, naval and
offshore oil and gas markets has been achieved by exploiting the core strengths
of the business. These include a highly skilled workforce, world-class
technological expertise and a comprehensive range of products and capabilities.
The offshore oil and gas sector held up well in 2002. Orders for the UT700
series of offshore support vessels reached 400. The ability to both design and
equip these ships with Rolls-Royce power, propulsion and motion control
equipment offers customers a unique systems capability.
The MT30 gas turbine, which has 80 per cent commonality by parts count with the
successful Trent 800 aero engine, is the first marine engine Rolls-Royce has
developed for applications across both commercial and naval markets. The MT30
has accumulated 200 hours of successful testing, building upon more than 4
million hours of Trent 800 flying experience. The engine is already attracting
strong interest from potential customers. The engine was recently chosen by the
US Navy for the Engineering Development Model of its DD(X) destroyer programme.
It is also nominated for the UK Carrier programme and generating interest in
the commercial marine sector.
The submarine propulsion business performed strongly. New long-term support and
service contracts have been developed with the MoD using experience gained in
providing Total Care Packages in the civil aerospace business.
Energy: Sales £639m; underlying loss before interest £(41)m
The company expects its Energy business to return to profitability in 2003.
2002 was another strong year for the oil and gas business. Offshore
applications dominated the year's order intake with RB211, Avon and 501 power
and compression packages sold to traditional markets such as Europe, North
America and Asia-Pacific. The global installed base increased with sales to
frontier oil and gas areas such as the Caspian Sea, West Africa and offshore
Newfoundland.
As expected, 2002 was a slow year for independent power generation. The
industry is weathering the aftermath of the September 11 tragedy, followed by
the collapse of several major energy provider companies. The business was
restructured to reduce the cost and lead times of its products and to position
it for the anticipated market recovery.
Development of the Trent 60 WLE (Wet Low Emissions) product was completed and
good progress was achieved on the retrofit programme for the new Trent 50 DLE
(Dry Low Emissions) industrial gas turbine, with the first unit now in service.
The Trent is the most powerful and efficient aeroderivative gas turbine product
available in the world and will play a significant role in the future growth of
the power generation business.
The company is continuing to develop its advanced solid oxide fuel cell
technology, complemented by its gas turbine technology, systems integration
skills and routes to market.
The focus on Long-term Service Agreements was increased, to enable customers to
achieve improved system availability. Technologies such as remote monitoring
and diagnostics help ensure the success of these contracts. In 2002, revenues
from such agreements increased by 52 per cent.
Financial Services: Sales £50m; underlying loss before interest £(12)m
The financial services businesses made a reduced contribution, following asset
impairment adjustments in the aircraft leasing and power ventures businesses.
Rolls-Royce and Partners Finance, the company's joint venture engine leasing
business, owns a portfolio of 257 engines with 32 customers. The proportion of
engines on lease remains high, at 98 per cent, by value.
Pembroke Group, the company's joint venture aircraft leasing business, owns 58
aircraft on lease to 17 customers in 14 countries. 94 per cent, by value, of
the owned aircraft fleet is on lease. Impairment adjustments of £12m were made
in respect of the company's fleet of 29 Fokker aircraft.
Rolls-Royce Power Ventures, the company's power project developer, has 12 power
generation projects in operation and six in construction or commissioning. The
business is being restructured, reflecting the general weakness in power
generation markets. The current weakness in electricity prices was reflected in
impairment adjustments of £30m which were made against the company's portfolio
of industrial Trent power projects.
Financial review
The firm order book was £16.2bn (2001 £14.4bn). In addition, a further £0.9bn
had been announced (2001 £2.3bn). Aftermarket services represented 33 per cent
of the order book.
Sales reduced by nine per cent to £5,788m (2001 £6,328m).
Underlying profit before tax was £255m (2001 £475m). Underlying earnings per
share reduced by 45 per cent, to 11.1p. These figures reflect the expected
reduction in the contribution from civil aerospace.
Gross research and development investment was £590m (2001 £636m). Net research
and development investment was £297m (2001 £358m).
Receipts from risk and revenue sharing partners (RRSPs), shown under other
operating income, were £158m (2001 £239m). Payments to RRSPs, charged in cost
of sales, amounted to £139m (2001 £113m).
Rationalisation costs of £105m were charged against the provision established
in 2001 and £75m was charged against profit and excluded from underlying
earnings.
The taxation charge was £52m (2001 £86m), reflecting losses in certain overseas
businesses and a £6 million benefit from the UK government's new research and
development tax credit. After adjusting for exceptional and non-trading items,
the tax charge on an underlying basis was £76m, representing 30 per cent of
underlying profit before tax. (2001 £154m, representing 32 per cent of
underlying profit before tax).
Cash outflow was £94m (2001 £189m inflow), after rationalisation expenditure of
£167m (2001 £86m) and capital expenditure of £381m (2001 £179m), which included
£133m in connection with the purchase of aircraft. Average net debt was £1,090m
(2001 £990m). Net debt at the year-end was £595m (2001 £501m).
Group interest was covered 4.1 times, based upon underlying earnings before
interest and tax, excluding joint ventures.
Net working capital reduced from £664m to £394m; inventory reduced by £64m;
debtors reduced by £37m, the impact of the lower level of activity offsetting a
£153m increase in amounts recoverable on contracts, relating to Total Care
Packages; and creditors increased by £169m, reflecting a £95m increase in
payments received on account and a £37m increase in creditor balances
associated with long term contracts. The net impact of Total Care Packages on
the balance sheet was £116m.
Provisions fell from £882m to £772m, largely reflecting the utilisation of £
105m of the restructuring provision.
The Group's gross contingent liability, net of insurance and provisions, was £
1,093m (2001 £857m) and the net contingent liability was £186m (2001 £206m)
(see note 5). The gross and net liabilities are spread over 24 customers, 317
aircraft and over 20 years. Approximately 60 per cent of the gross contingent
liability comprises asset value guarantees (AVGs), none of which can
crystallise in 2003. For indicative purposes, if all possible AVGs crystallised
in the next five years, the gross exposure assuming none of the underlying
aircraft security had any value, would amount to less than £70m. The balance of
the gross contingent liability relates to credit based financing, which is
spread over a broad portfolio of aircraft and customers. The company regards
the likelihood that these liabilities will crystallise as remote.
The recommended final dividend is 5.00 pence per share, making a full year
dividend of 8.18 pence per share. The dividend is payable on July 7 2003 to
shareholders on the register on April 25 2003. The ex-dividend date is April 23
2003.
Proposed arrangements for the creation of a new holding company
Rolls-Royce plc is proposing a change to its corporate structure by creating a
new holding company. At flotation in 1987, the Group's business was primarily
focused on the aerospace sector. Since then, whilst remaining a focused power
systems company, the Group has developed its operations, particularly following
a series of acquisitions, so that it now operates globally in a number of
complementary sectors. As the Group's corporate structure has remained largely
unchanged since flotation, there is, increasingly, a divergence between the
existing corporate structure and the operational and reporting structure
commonly put in place for the management of an international business.
The proposed non-trading, holding company structure with operating subsidiaries
underneath will provide flexibility for the Group to align its corporate
structure more closely with that of its operational divisions and management
reporting lines. In addition, the new structure will place the Group in a
better position to address operational, accounting or legal issues that may
arise in the future.
Approval will be sought for these proposals at the time of the Group's Annual
General Meeting on May 29 2003.
Enquiries
Peter Barnes-Wallis Colin Duncan
Director of Financial Communications Director of Corporate Communications
Tel: 0207 222 9020
www.rolls-royce.com
Group profit and loss account
for the year ended December 31 2002
Continuing Exceptional Total Total
operations items** 2002
before 2001
exceptional
items
Notes £m £m £m £m
Turnover: Group and share of 6,072 - 6,072 6,680
joint ventures
Sales to joint ventures 948 - 948 871
Less share of joint ventures' (1,232) - (1,232) (1,223)
turnover
Group turnover 1 5,788 - 5,788 6,328
Cost of sales (4,846) (69) (4,915) (5,406)
Gross profit 942 (69) 873 922
Other operating income 158 - 158 239
Commercial, marketing and (285) (2) (287) (288)
product support costs
General and administrative costs (275) (4) (279) (281)
Research and development (net)* (297) - (297) (358)
Group operating profit 243 (75) 168 234
Share of operating profit of 66 - 66 82
joint ventures
Loss on sale or termination of (22) - (22) (11)
businesses
Profit on sale of fixed assets - - - 6
Profit on ordinary activities 1 287 (75) 212 311
before interest
Net interest payable - Group (72) - (72) (77)
- joint ventures (35) - (35) (42)
Profit on ordinary activities 180 (75) 105 192
before taxation
Taxation (73) 21 (52) (86)
Profit on ordinary activities 107 (54) 53 106
after taxation
Equity minority interests in - -
subsidiary undertakings
Profit attributable to ordinary 53 106
shareholders
Dividends (133) (132)
Transferred from reserves (80) (26)
*Research and development (590) (636)
(gross)
Earnings per ordinary share: 3
Underlying 11.10p 20.20p
Basic 3.29p 6.67p
Diluted basic 3.26p 6.56p
** see note 2
Underlying profit and earnings are defined in note 3
Group balance sheet
at December 31 2002
2002 2001
£m £m
Fixed assets
Intangible assets 868 823
Tangible assets 1,876 1,732
Investments - subsidiary undertakings - -
- joint ventures 195 204
share of gross assets 1,160 1,341
share of gross liabilities (971) (1,144)
goodwill 6 7
- other 71 30
3,010 2,789
Current assets
Stocks 1,158 1,222
Debtors - amounts falling due within one year 1,487 1,640
- amounts falling due after one year 926 810
Short-term deposits and investments 84 301
Cash at bank and in hand 634 578
4,289 4,551
Creditors - amounts falling due within one year
Borrowings (275) (276)
Other creditors (2,727) (2,720)
Net current assets 1,287 1,555
Total assets less current liabilities 4,297 4,344
Creditors - amounts falling due after one year
Borrowings (1,038) (1,104)
Other creditors (450) (288)
Provisions for liabilities and charges (772) (882)
2,037 2,070
Capital and reserves
Called up share capital 323 320
Share premium account 634 636
Revaluation reserve 100 103
Other reserves 195 189
Profit and loss account 783 820
Equity shareholders' funds 2,035 2,068
Equity minority interests in subsidiary 2 2
undertakings
2,037 2,070
Group cash flow statement
for the year ended December 31 2002
Notes 2002 2001
£m £m
Net cash inflow from operating activities A 611 418
Dividends received from joint ventures 12 15
Returns on investments and servicing of finance B (84) (54)
Taxation paid (41) (24)
Capital expenditure and financial investment C (381) (179)
Acquisitions and disposals D (20) 79
Equity dividends paid (109) (84)
Cash (outflow)/inflow before use of liquid (12) 171
resources and
financing
Management of liquid resources E 217 (162)
Financing F (81) 111
Increase in cash 124 120
Reconciliation of net cash flow to movement in
net funds
Increase in cash 124 120
Cash (inflow)/outflow from (decrease)/increase in (217) 162
liquid resources
Cash outflow/(inflow) from decrease/(increase) in 82 (95)
borrowings
Change in net funds resulting from cash flows (11) 187
Borrowings of businesses acquired (52) -
Finance lease additions (32) -
Amortisation of zero-coupon bonds (5) (3)
Exchange adjustments 6 5
Movement in net funds (94) 189
Net debt at January 1 (501) (690)
Net debt at December 31 (595) (501)
Reconciliation of operating profit to operating cash 2002 2001
flows
£m £m
Operating profit 168 234
Amortisation of intangible assets 74 57
Depreciation of tangible fixed assets 236 198
(Decrease)/increase in provisions for liabilities and (125) 180
charges
Decrease/(increase) in stocks 19 (52)
Decrease/(increase) in debtors 27 (386)
Increase in creditors 212 187
A Net cash inflow from operating activities 611 418
Returns on investments and servicing of finance
Interest received 23 25
Interest paid (101) (73)
Interest element of finance lease payments (6) (6)
B Net cash outflow for returns on investments and (84) (54)
servicing of finance
Capital expenditure and financial investment
Additions to unlisted investments (44) (1)
Addition to intangible assets (50) (25)
Purchases of tangible fixed assets (314) (211)
Disposals of tangible fixed assets 27 56
Other investments - 2
C Net cash outflow for capital expenditure and (381) (179)
financial investment
Acquisitions and disposals
Acquisitions of businesses (28) (1)
Disposals of businesses 14 102
Investments in joint ventures (6) (24)
Loan repayments from joint ventures - 2
D Net cash (outflow)/inflow for acquisitions and (20) 79
disposals
Management of liquid resources
Decrease/(increase) in short-term deposits 218 (159)
Increase in government securities and corporate bonds (1) (3)
E Net cash inflow/(outflow) from management of liquid 217 (162)
resources
Financing
Borrowings due within one year - repayment of loans (201) (46)
- increase in loans 46 85
Borrowings due after one year - repayment of loans (48) (2)
- increase in loans 151 69
Capital element of finance lease payments (30) (11)
Net cash (outflow)/inflow from (decrease)/increase in (82) 95
borrowings
Issue of ordinary shares 1 16
F Net cash (outflow)/inflow from financing (81) 111
Group statement of total recognised gains and losses
for the year ended December 31 2002
2002 2001
£m £m
Profit attributable to the shareholders of Rolls-Royce 53 106
plc
Exchange adjustments on foreign currency net 15 (11)
investments
Total recognised gains for the year 68 95
Group historical cost profits and losses
for the year ended December 31, 2002
2002 2001
£m £m
Profit on ordinary activities before taxation 105 192
Difference between the historical cost depreciation 3 5
charge and the actual depreciation charge for the year
calculated on the revalued amount
Historical cost profit on ordinary activities before 108 197
taxation
Historical cost transfer to reserves (77) (21)
Reconciliations of movements in Group shareholders' funds
for the year ended December 31 2002
2002 2001
£m £m
At January 1 2,068 2,040
Total recognised gains for the year 68 95
Ordinary dividends (net of scrip dividend adjustments) (110) (90)
New ordinary share capital issued (net of expenses) 1 16
Goodwill transferred to the profit and loss account in 8 7
respect of disposal of businesses
At December 31 2,035 2,068
Notes
1. Segmental analysis
2002 2001
£m £m
Group turnover
Analysis by businesses:
Civil aerospace 2,739 3,443
Defence 1,376 1,400
Marine 984 827
Energy 639 608
Financial services 50 50
5,788 6,328
Profit before interest
Analysis by businesses:
Civil aerospace 87 198
Defence 161 132
Marine 54 37
Energy (70) (118)
Financial services (20) 62
212 311
Underlying profit before interest
*
Analysis by businesses:
Civil aerospace 150 347
Defence 183 175
Marine 82 73
Energy (41) (64)
Financial services (12) 63
362 594
*before exceptional and
non-trading items
Net assets**
Analysis by businesses:
Civil aerospace 1,219 1,124
Defence 25 179
Marine 550 513
Energy 348 381
Financial services 490 374
2,632 2,571
**Net assets exclude net debt of £595m
(2001 £501m)
The segmental analysis of exceptional items and non-trading items is: Civil
aerospace £63m, Defence £22m, Marine £28m, Energy £29m and Financial services £
8m.
2. Exceptional items
Rationalisation costs relate to termination of employment, site decommissioning
and relocation, and related disruption to operations, including accelerated
depreciation of plant and machinery. At December 31 2002 £52m was included in
provisions.
3. Earnings per ordinary share
Basic earnings per ordinary share are calculated by dividing the profit
attributable to ordinary shareholders of £53m (2001 £106m) by 1,612m (2001
1,589m) ordinary shares, being the average number of ordinary shares in issue
during the year, excluding own shares held under trust which have been treated
as if they have been cancelled.
Underlying profit before taxation and earnings per ordinary share have been
calculated as follows:
Year to December 31 2002
£m £m Pence
Profit before taxation 105
Profit attributable to ordinary shareholders 53 3.29
Exclude:
Exceptional - rationalisation 75 75 4.65
Net loss on sale of businesses 22 22 1.36
Loss on sale of fixed assets* 1 1 0.06
Amortisation of goodwill 52 52 3.23
Related tax effect - (24) (1.49)
Underlying profit before taxation 255
Underlying profit attributable to 179
shareholders
Underlying earnings per share 11.10
Year to December 31 2001
£m £m Pence
Profit before taxation 192
Profit attributable to ordinary shareholders 106 6.67
Exclude:
Exceptional - rationalisation 230 230 14.47
Net loss on sale of businesses 11 11 0.69
Profit on sale of fixed assets* (3) (3) (0.19)
Amortisation of goodwill 45 45 2.83
Related tax effect - (68) (4.27)
Underlying profit before taxation 475
Underlying profit attributable to 321
shareholders
Underlying earnings per share 20.20
*Excluding lease engines and aircraft sold by financial services companies.
Diluted basic earnings per ordinary share are calculated by dividing the profit
attributable to ordinary shareholders of £53m (2001 £106m) by 1,624 million
(2001 1,616 million) ordinary shares, being 1,612 million (2001 1,589 million)
as above adjusted by the bonus element of existing share options of 12 million
(2001 27 million).
4. Group employees at the period end
December 31 December 31
2002 2001
Number Number
Civil aerospace 21,100 23,900
Defence 5,100 6,700
Marine 6,500 6,500
Energy 4,500 4,900
Financial services 100 200
37,300 42,200
5. Sales financing contingent liabilities
In connection with the sale of its products, the Group will on some occasions
provide financing support for its customers. The Group's contingent liabilities
related to financing arrangements are spread over many years and relate to a
number of customers and a broad product portfolio. The contingent liabilities
represent the maximum gross and net exposure the Group has in respect of
delivered aircraft, regardless of the point in time at which such exposures may
arise. Exposures are not reduced to a net present value.
At December 31 2002, the total gross liabilities in respect of financing
arrangements on all
delivered aircraft, less amounts insured and related provisions, amounted to £
1,093m (2001 £857m), of which £35m (2001 £78m) relates to sales financing
support provided to joint ventures. Taking into account the estimated net
realisable value of the relevant security, the net contingent liabilities in
respect of these financing arrangements amounted to £186m (2001 £206m). If the
value of the relevant security was reduced by 20%, a net contingent liability
of approximately £251m (2001 £283m) would result. Provisions of £64m (2001 £
82m) are carried forward in respect of customer financing exposures.
6. Post-retirement benefits
The Accounting Standards Board has deferred the full implementation of FRS 17,
pending the introduction of International Accounting Standards. For 2002
accounts certain memorandum disclosures are required, including the value of
pension scheme assets and liabilities. At December 31 2002, after taking
account of deferred taxation the net deficit on the Group's three UK pension
schemes amounted to £1,117million (2001 £284m).
The Group's funding requirements for its schemes are derived from tri-annual
independent actuarial valuations, the next of which is due to commence in March
2003 for the principal Rolls-Royce Pension Fund. While the company intends to
continue to provide a defined benefit scheme, it has commenced consultations
with employees over a number of other mitigating actions in connection with the
provision of pension benefits. The objective of these actions is to contain the
additional funding costs within the guidance provided last August.
The other two Rolls-Royce pension funds are, together, less than a third of the
size of the principal fund. The Vickers Group Pension Scheme and the
Rolls-Royce Group Pension Scheme are due for actuarial review in March 2004 and
April 2004 respectively. At the date of their most recent three-yearly
actuarial valuations these funds were in surplus.
7. Preliminary results
The financial information above does not constitute the Group's statutory
accounts for the year ended December 31, 2002 or 2001. Statutory accounts for
2001 have been delivered to the Registrar of Companies, whereas those for 2002
will be delivered following the Annual General Meeting. The auditors have
reported on those accounts; their reports were unqualified and did not contain
a statement under section 237(2) or (3) of the Companies Act 1985.
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