Final Results
12 February 2004
ROLLS-ROYCE GROUP plc PRELIMINARY RESULTS 2003
Strong progress
"I am pleased to report financial and operational performance in line with our
guidance, demonstrating the strength of our business model and ability to
respond to significant challenge. Action has been taken to reduce operating and
unit costs and to reduce working capital. Importantly, we resolved our pension
funding issue in line with the guidance we provided in 2002.
We have competed effectively in all our market sectors and the strong
international market positions we have established have enabled us to maintain
a substantial order book and continue to expand our service activities. In 2004
we expect increased profits and a further reduction in average net debt."
Sir John Rose, Chief Executive Rolls-Royce Group plc
Profit and cash flow consistent with guidance
* Underlying profit before tax £285 million* (2002: £255m)
* Underlying earnings per share 12.20 pence* (2002: 11.10p)
* Headline profit before tax £180 million (2002: £105m)
* Average net debt £950 million (2002: £1,090m)
* Year-end net debt £323 million (2002: £595m)
* Payment to shareholders 8.18p per share** (2002: 8.18p)
Growing aftermarket services
* 50 per cent of Group sales, at £2.8bn (2002: £2.5bn)
* Compound growth of 10 per cent per annum over the past five years
* Aftermarket services order book £6.6bn (2002: £5.7bn), including long-term
service agreements of £5.0bn (2002: £3.6bn)
Record year-end order book
* £8.1bn order intake (2002: £8.7bn)
* Firm and announced backlog £18.7bn (2002: £17.1bn)
* before exceptional and non-trading items (see note 3)
** see page 10
Overview
Results for the year ended 31 December 2003 reflect the benefit of a maturing
business portfolio and the effective restructuring actions taken to mitigate
the downturn in civil aerospace, which was exacerbated by the Iraq war and the
outbreak of the SARS virus during the first half of 2003.
A combination of operational performance and mix enabled us to increase profit
on reduced revenues. Underlying profit before tax increased by 12 per cent to
£285 million (2002: £255m) and underlying earnings per share were 12.20 pence
(2002: 11.10p). Basic earnings per share were 7.04 pence (2002: 3.29p).
Net debt was £323 million (2002: £595 million), reflecting a cash inflow of £
272 million (2002: £94m outflow). Average net debt for the year was £950
million (2002: £1,090 million).
There are two key components to this successful outcome: first, a strong
business model based on a consistent strategy of providing power systems for
four global markets with a common technology focused on the gas turbine and,
secondly, committed people throughout the Company who understand our
objectives, are focused on our customers and are prepared to support the
changes necessary to enable us to be competitive.
We have built a well-balanced business, with revenues evenly divided between
original equipment sales and high value-added aftermarket services.
This balance has reduced our exposure to a downturn in any particular sector.
As a result we have been able to mitigate the impact of the continuing
recession in civil aerospace, which saw a further 13 per cent fall in civil
engine deliveries in 2003. Civil engine deliveries have nearly halved from a
peak of 1,362 in 2001 and now represent approximately 20 per cent of our total
sales. Engine deliveries across the Group were eight per cent lower than in
2002, with the reduction in civil engine deliveries being partially offset by
an increase in military engine deliveries.
The Rolls-Royce civil fleet flying hours increased by eight per cent in 2003
compared to the level in 2002, including our highest ever monthly flying hours,
recorded in the summer. Since September 11 2001, the Rolls-Royce fleet flying
hours have increased by 16 per cent, whilst world flying, measured by Available
Seat Kilometres, has fallen by 5 per cent.
The successful implementation of our services strategy has resulted in 10 per
cent compound annual growth in aftermarket revenue over the past five years. In
2003 this revenue amounted to £2.8 billion, or 50 per cent of our sales. It
represents a reasonably predictable and growing source of revenue based on an
increasing number of long-term, contractual relationships with our customers.
Further visibility is provided by our order book which, despite the difficult
market conditions, grew to a record year end level of £17.4 billion (2002: £
16.2 billion), with a further £1.3 billion of business announced but not yet
under contract (2002: £0.9 billion).
We were able to reach agreement, in line with the guidance we provided in 2002,
regarding the funding of the Rolls-Royce Pension Fund. A combination of changes
to the benefit structure and a £35 million annual increase in contributions
from the Company will ensure that we can continue to offer an affordable and
attractive defined benefit pension scheme.
Over recent months the US dollar has weakened significantly relative to
sterling. The nature of our activities means that the Group has always had an
exposure to the dollar exchange rate. We have therefore pursued a consistent
strategy of hedging dollar revenues and this has operated successfully for more
than 15 years, including periods where the exchange rate has been above two
dollars to the pound. During this period we have maintained an achieved rate
within a range of 10 cents, while the spot rate has moved in a range of 63
cents. We currently have approximately $10 billion of forward cover at rates
that will enable us to achieve a stable rate over the next four years.
We have completed the major rationalisation programme announced in October
2001. At the year-end we employed 35,200 people, a net reduction of 2,100
during the year and a reduction of 8,300, or 19 per cent, since the programme
was announced. In addition there has been a reduction of 1,000 contract jobs.
Rationalisation expense over the past two years has amounted to £247 million.
It is encouraging that, in spite of this, and the additional debt of £133
million that we brought onto the balance sheet as a result of sales financing
obligations, we have generated a net cash inflow of £178 million over this
period, demonstrating our robust trading performance.
We will continue to focus on operational excellence, including rationalisation
of our facilities, improvement of manufacturing processes, supply chain
restructuring and lead-time reduction in order to increase productivity and
reduce product and operating costs. Costs associated with these activities will
be included within underlying earnings.
Pursuing a consistent strategy
We have pursued a consistent strategy of addressing four global markets with a
common technology focused on the gas turbine. As a result we have built a
well-balanced business, not only across the four markets but also between
aftermarket and original equipment sales.
We have become a truly international business with customers in more than 150
countries. We have facilities in 48 countries and 40 per cent of employees are
based outside the UK, representing 40 nationalities. More than 80 per cent of
sales are to destinations outside the UK and nearly 40 per cent of sales
originate outside the UK.
The Group's priorities are:
* Focused investment in technology. Advanced technology is at the heart of
our success. Following a decade of high investment in new product
development, the market requirement for new products is now slowing down.
Technology acquisition, as well as supporting new product development, will
increasingly focus on the development of derivative products, unit cost
reduction, improvement of in-service operation and extending the scope and
value of our service capabilities.
* Operational excellence. We continue to manage our operational and unit
costs effectively. Over the past two years, despite a 45 per cent reduction
in civil engine deliveries, we have maintained a healthy balance sheet and
produced a creditable operating performance. In 2003 we accelerated the
implementation of our improvement initiatives and continued to focus on
reducing both operating and product unit costs. We will benefit from the
lower cost base as workload recovers.
* Development of aftermarket services. The Group's installed base of 54,000
engines in service has created a substantial aftermarket opportunity. The
development of innovative, long-term service agreements, such as TotalCare
in the civil sector and Mission Ready Management Solutions in the military
sector, increases this opportunity. It expands the scope of services from
traditional support such as spare parts supply and repair and overhaul, to
enhanced services such as engine health monitoring and predictive
maintenance. Our unique knowledge of our products and proprietary
technology creates a competitive advantage in the provision of these
services and enables us to add significant value for our customers.
Prospects
We have created a strong, international Group with a balanced business
portfolio and we expect to increase profits in 2004, despite challenging
conditions in some of our markets. Over time, we believe that the Group is
capable of achieving a 10 per cent return on sales (as measured by underlying
EBIT), across all its businesses, as the business model matures and our
operational efficiency continues to improve.
In civil aerospace the long-term trends for growth in air travel remain
favourable. With our wide product range and innovative service offerings, we
are well placed to continue to secure a substantial share of this market. In
the short-term, the flying of the relatively young Rolls-Royce powered aircraft
fleet continues to grow and to generate increasing aftermarket revenues. Over
the next 20 years we foresee a total market opportunity for new engines worth
more than $500 billion, with a gradual recovery from the current depressed
market starting over the next two years.
Our defence aerospace business has established a strong position in the world
market, with a broad portfolio of programmes and a large customer base. In the
short-term, we expect the mix of programmes to provide a stable outlook. Over
the medium-term we will benefit from the continuing development of the
programme portfolio and the increasing services opportunity.
Our marine propulsion business is a world leader. Over recent years its growth
has been led by the commercial offshore support sector, which is now slowing
down. However, a re-equipment cycle in the naval sector, new opportunities in
the merchant sector and the expansion of our services activity in the
commercial marine market are expected to enable us to continue to develop this
business.
Our energy business returned to profit in 2003, following a programme of new
product investment and the costly technical problems associated with the
industrial Trent. The industrial Trent is now fully released for sale and we
expect to increase our market share in power generation as the market recovers
over the next few years. The oil and gas market remains strong and we are
securing a high share of the available business, including important new
contracts in the gas transmission area. Over recent years the business has
benefited from the receipt of technology fees, which we expect to reduce in
2004.
The Group is in a sound financial condition. In 2003 average net debt was
reduced by £140 million to £950 million. We expect to continue to reduce
average net debt. At the year-end, gearing stood at 15 per cent and the company
had £2.2 billion of total committed borrowing facilities, following two
successful refinancings amounting to £380m in the US and Asia and the
retirement of £780m of facilities.
For more than a decade Rolls-Royce has invested in building leading positions
in four global, growing markets. The exploitation of our core technology in
different sectors produces a valuable portfolio effect for the business as a
whole.
The long-term nature of our product programmes results in returns over many
years. The high value-added aftermarket services opportunity created each time
a gas turbine is sold provides the key to adding value for our customers and
maximising these returns. Our successful strategy to capture this opportunity,
coupled with the increasing efficiency of our operations, underpins our
confidence in the future.
Enquiries
Peter Barnes-Wallis Colin Duncan
Director of Financial Communications Director of Corporate Communications
Tel: 0207 222 9020
www.rolls-royce.com
An interview on the results with Rolls-Royce Chief Executive, Sir John Rose, is
available on video, audio and text on www.Rolls-Royce.com and www.cantos.com.
Photographs of directors and products are available at www.newscast.co.uk
Sector review
Civil aerospace: Sales £2,694m (£2,739m); underlying profit before interest £
131m (£150m)
Highlights
* The Trent 500 entered service on the ultra-long-range A340-500.
* Emirates ordered an additional 20 A340-500/600 aircraft. The Trent 500 is
the only engine offered on this new generation of A340 aircraft.
* The 200th customer signed up for aeromanager.com, our e-business portal for
engine services.
* The Trent 900 for the A380 made good progress with development testing.
* JetBlue ordered V2500 engines for up to 115 more A320s - the largest single
order in the history of the engine.
* In the Corporate and regional jet sectors, the 1,000th BR700 series engine
was delivered; we accumulated a million flying hours for the BR715 on the
Boeing 717; and the AE 3007 engine passed the ten million flying hours
mark.
We have established ourselves as the number two civil aero engine manufacturer,
having won approximately 30 per cent of the market over the past three years.
In 2003, we were encouraged by the continuing level of order activity. We
delivered 746 engines (2002: 856 engines) to 48 airlines and 63 corporate
customers.
The Rolls-Royce civil fleet flying hours increased by eight per cent in 2003
compared to the level in 2002, including our highest ever monthly flying hours,
recorded in the summer. Since September 11 2001, the Rolls-Royce fleet flying
hours have increased by 16 per cent, whilst world flying, measured by Available
Seat Kilometres, has fallen by 5 per cent.
Civil aftermarket revenues increased by 15 per cent compared to 2002 and
represented 53 per cent of civil aerospace sales.
The company expects engine deliveries in 2004 to be similar to the level
achieved in 2003, with a gradual recovery in delivery volumes commencing in
2005. As deliveries grow in respect of those programmes in which risk and
revenue sharing partners (RRSPs) have invested, the payments to partners will
increase. The impact on cost of sales will be partly mitigated by the
components which the RRSPs provide free of charge. From the Group's viewpoint,
the higher the RRSP payments, the more successful the programme and the higher
the incremental revenues which accrue to Rolls-Royce.
The installed base of civil jet engines has now grown to 10,450 and will
continue to grow. Each engine generates the equivalent of its list price in
spare parts sales over an average of 25 years in service. This amounts to an
embedded value of $28.5 billion over the next 25 years from engines currently
in service, assuming no growth from future engine sales. Additional revenues
will be generated from aftermarket services, such as engine leasing and repair
and overhaul, and from growth in the installed base as a result of future
engine deliveries.
We have an innovative strategy to maximise the aftermarket opportunity. By
developing and extending our repair and overhaul infrastructure, our coverage
of Rolls-Royce engine maintenance has tripled in 10 years to over 60 per cent.
This provides a base on which to apply our engine knowledge and advanced health
monitoring to offer integrated services under the TotalCare and CorporateCare
banners. These align customer and Rolls-Royce objectives and offer long-term
security of revenue.
Defence: Sales £1,398m (£1,376m); underlying profit before interest £147m (£
183m)
Highlights
* JSF projects meeting cost targets, on schedule and beating weight goal.
* Austria became first confirmed export customer for EJ200 engine.
* Landmark orders announced for Adour powered Hawk from the UK and India.
* Consolidated our position as transport market leader through participation
in the TP400 for the A400M.
* The AE 3007 for Global Hawk progressed to Low Rate Initial Production.
* Japan's JDA selected the RTM322 to power their new EH101 helicopters.
In defence, Rolls-Royce is number one in Europe and world number two in terms
of engines in service. We have the largest military engine customer base,
serving over 160 armed forces worldwide with 24,000 engines in current military
service. The defence aerospace business is also responsible for a further
11,000 helicopter engines in commercial service.
Defence is a solid and growing business which is profitable and cash generative
in all its phases. We have a sound order book with good forward visibility and
in 2003 we continued to strengthen our market position, winning significant
engine and service contracts.
We have a broad portfolio of product programmes, with strong positions in the
key market sectors - from combat and light attack to trainer, transport,
helicopters, maritime reconnaissance and aerial surveillance. Many of today's
programmes will still be active in 2020 and beyond. This broad portfolio, with
regular upgrade programmes, reduces our dependence on any single programme in
achieving our future profitability goals.
New engine deliveries accounted for 28 per cent of sales, while income from
research and development work to government customers reached 16 per cent of
sales.
The company continued to develop its aftermarket services, which represented 56
per cent of defence sales. A dditional orders were announced for the company's
long-term service agreements, Mission Ready Management Solutions (MRMS), which
brought the total of MRMS business booked so far to more than $500 million.
Marine: Sales £927m (£984m); underlying profit before interest £71m (£82m)
Highlights
* MT30 selected for US DD(X) demonstrator and UK's future carrier.
* WR-21 gas turbine deliveries for Type 45 destroyer programme on schedule
following successful factory acceptance tests.
* Queen Mary 2 now in service with Rolls-Royce equipment.
* Continued growth strategy in marine electrical systems with acquisition of
VT Controls.
* The Group's UT-Design orders for offshore service vessels now exceed 450
units.
Over the past decade we have built a world-leading marine propulsion business
with a broad product range, full systems integration capability and access to
the world's naval and commercial markets.
Sales have grown to almost £1billion since the acquisition of Vickers plc in
1999 and the subsequent integration of Vickers-Ulstein Marine Systems.
The business is balanced between naval and commercial markets with aftermarket
sales representing 35% of total sales. Rolls-Royce equipment is operated on
more than 15,000 commercial vessels, 800 offshore support vessels (450 of our
own design) and more than 2,000 warships.
As with our other businesses, a portfolio approach reduces volatility. The
support and services sector of the offshore oil and gas market has been the
main engine of growth over the last few years. This market is now slowing down,
but naval shipbuilding is increasing.
The fall in marine sales in 2003 was largely attributable to the slowdown in
the offshore market. This also impacted profit before interest, along with
additional costs incurred in respect of the introduction of new products into
service.
There is a continuous drive for more complex, higher technology propulsion
systems as pressure for lower cost of operation, greater reliability, better
manoeuvrability and safety places higher demands on the propulsion system and
its design. In some sectors this is leading to a growing demand for fully
integrated system provision and for electrical drives instead of mechanical
drives. We have responded to this market need by establishing a Marine
Electrical Systems division and we further extended our capability with the
acquisition of VT Controls in 2003.
Market developments are leading to an increased demand for gas turbine
propulsion, with its reliable, compact power and smooth, quiet operation.
As in all of our businesses, the longevity of our equipment creates a
substantial aftermarket opportunity. As systems become more sophisticated,
customers have a greater requirement for value added aftermarket services,
resulting in a growing demand for long-term service agreements. These provide
long and reliable engine life for the customer and an incremental revenue
opportunity for Rolls-Royce.
Energy: Sales £584m (£639m); underlying profit before interest £30m (loss £41m)
Highlights
* Return to profitability.
* Record order intake.
* New business won in emerging oil and gas markets such as China, Qatar,
offshore West Africa and offshore Brazil.
* Long-Term Service Agreement business growth.
* Released enhanced performance Dry Low Emissions (DLE) system for industrial
Trent gas turbine.
2003 marked a return to profit following a programme of new product development
and the costly technical problems associated with the industrial Trent.
Our energy business utilises gas turbine technology at the heart of its
products. Industrial versions of aero-engine cores serve both oil and gas and
power generation markets, using state-of-the-art manufacturing facilities and
processes while maintaining application flexibility to meet diverse market and
customer needs.
Global markets for Rolls-Royce energy products face a healthy future, with
demand for energy predicted to double in size by the year 2020.
The industrial Trent is now fully released for sale and was recently selected
for a $107 million contract from Dolphin Energy Limited. The contract is to
supply six mechanical drive industrial Trent Dry Low Emission (DLE) compression
packages for the $3.5 billion Dolphin Gas Project in the Middle East.
Aftermarket services represented 42 per cent of sales. Our Customer Service
business remains robust with long-term service contracts securing our position
as the service and maintenance provider throughout the product lifetime. We are
uniquely qualified to provide fleet asset management and deliver efficiency
improvements.
We have also expanded our capability in engineered product upgrades, enabling
us to apply today's patented technology to the installed fleet. These tailored
solutions create significant value for our customers while enhancing both our
customer relationships and product portfolio.
Financial Services: Sales £42m (£50m); underlying loss before interest £4m (£
12m)
The Financial Services businesses comprise engine leasing, aircraft leasing and
power project development.
Rolls-Royce and Partners Finance, the Group's joint venture engine leasing
business, owned a portfolio of 259 engines, of which 98 per cent by value were
on lease to 35 customers.
Pembroke Group, the Group's joint venture aircraft leasing business, owned a
portfolio of 28 aircraft, of which 96 per cent by value were on lease to 14
customers. The shareholders of Pembroke are discussing ways of realising value
from the company as markets improve.
Rolls-Royce Power Ventures, the Group's power project developer, has 13 power
generation projects in operation and 4 in construction or commissioning. The
business is being restructured, reflecting the general weakness in power
generation markets. Charges of £15 million were taken as the process of
realising capital from the assets commenced.
Financial review
The firm order book was £17.4bn (2002: £16.2bn). In addition, a further £1.3bn
had been announced (2002: £0.9bn). Aftermarket services represented 35% of the
firm and announced order book (2002: 33%).
Sales were relatively level, compared with 2002, at £5,645m (2002: £5,788m),
Gross profit, before exceptional items, was £980m (2002: £942m), an increase of
4%. Gross margin increased to 17.3% in 2003 from 16.3% in 2002. Payments to
RRSPs, charged in cost of sales, amounted to £179m (2002: £139m).
Underlying profit before tax was £285m (2002: £255m). Underlying earnings per
share increased by 10%, to 12.20p (2002: 11.10p).
Gross research and development investment was £619m (2002: £590m). Net research
and development investment was £281m (2002: £297m). Receipts from RRSPs in
respect of new programme developments, shown as other operating income, were £
153m (2002: £158m).
Rationalisation costs of £33m (2002: £105m) were charged against the provision
established in previous years and £54m (2002: £75m) was charged against profit
and excluded from underlying earnings.
The taxation charge was £64m (2002: £52m). After adjusting for exceptional and
non-trading items, the tax charge on an underlying basis was £84m, representing
29% of underlying profit before tax. (2002: £76m, representing 30% of
underlying profit before tax).
Cash inflow during the year was £272m (2002: £94m outflow). Average net debt
was £950m (2002: £1,090m). Net debt at the year-end was £323m (2002: £595m).
Net working capital was £383m (2002: £394m); inventory decreased by £196m
(2002: £64m); debtors increased by £193m (2002: decreased by £37m); and
creditors increased by £8m (2002: £169m). The impact of long-term contract
accounting for TotalCare Packages was a £115m increase in debtors (2002: £153m)
and a £45m increase in creditors (2002: £37m). The net asset on the balance
sheet at the year-end, in respect of TotalCare packages was £454m (2002: £
384m).
Provisions were £795m, (2002: £772m), largely reflecting increases in
provisions for deferred taxation and customer finance, partially offset by
utilisation of the rationalisation provision.
The Group's gross contingent liability, net of insurance and provisions, was £
1,090m (2002: £1,093m). These liabilities are spread over 25 customers, 374
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 2004. 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 approximately £70m. The
balance of the gross contingent liability relates to credit based financing,
which is spread over a broad portfolio of aircraft and customers. After taking
into account the estimated net realisable value of the relevant security, the
net contingent liability was £184m (2002: £186m). The company regards the
likelihood that these liabilities will crystallise as remote (see note 5).
The company has agreed alterations to the benefit structure of the Rolls-Royce
Pension Fund, which will enable additional funding in respect of the company's
pension fund deficit to be restricted to an additional £35m annual
contribution.
Under the FRS17 definition, after taking account of deferred taxation, the net
deficit on the Group's three main UK pension schemes amounted to £855m (2002: £
1,117m)
(see note 6).
The Group is proposing to change the arrangements for making payments to
shareholders. Under the new proposals, which will be put to shareholders at the
Annual General Meeting on 5 May 2004, shareholders will receive `B' shares
rather than a dividend. These shares can then be redeemed for the same amount
of cash that would have been received with a cash dividend, or converted into
the same number of ordinary shares in the Group, that would have been received
under the scrip dividend alternative.
The issuance of `B' shares in this way will result in significant tax benefits
for the Group, by accelerating the recovery of advanced corporation tax, which
will in turn benefit all our shareholders.
The proposed final payment to shareholders is equivalent to 5.00 pence per
ordinary share (2002: final dividend 5.00p), making a total payment for the
year of 8.18 pence (2002: 8.18p). The final payment is payable on 5 July 2004
to shareholders on the register on 12 March 2004. The final day of trading with
entitlement to B shares (equivalent to the ex-dividend date) is 10 March 2004.
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, 2003
Continuing Exceptional Total Total
operations items** 2003
before 2002
exceptional
items
Notes £m £m £m £m
Turnover: Group and share of 6,038 - 6,038 6,072
joint ventures
Sales to joint ventures 936 - 936 948
Less share of joint ventures' (1,329) - (1,329) (1,232)
turnover
Group turnover 1 5,645 - 5,645 5,788
Cost of sales (4,665) (49) (4,714) (4,915)
Gross profit 980 (49) 931 873
Other operating income 153 - 153 158
Commercial, marketing and (290) (2) (292) (287)
product support costs
General and administrative costs (285) (3) (288) (279)
Research and development (net)* (281) - (281) (297)
Group operating profit 277 (54) 223 168
Share of operating profit of 52 - 52 66
joint ventures
Profit/(loss) on sale or 6 - 6 (22)
termination of businesses
Loss on sale of fixed assets (11) - (11) -
Profit on ordinary activities 1 324 (54) 270 212
before interest
Net interest payable - Group (66) - (66) (72)
- joint ventures (24) - (24) (35)
Profit on ordinary activities 234 (54) 180 105
before taxation
Taxation (81) 17 (64) (52)
Profit on ordinary activities 153 (37) 116 53
after taxation
Equity minority interests in - -
subsidiary undertakings
Profit attributable to ordinary 116 53
shareholders
Payment to shareholders 8 (137) (133)
Earnings per ordinary share: 3
Underlying 12.20p 11.10p
Basic 7.04p 3.29p
Diluted basic 6.94p 3.26p
*Research and development (619) (590)
(gross)
**see note 2
Underlying profit and earnings are
defined in note 3
Note: Comparative data in the financial statements relates
to Rolls-Royce plc (see note 7)
Group balance sheet
at December 31, 2003
2003 2002
£m £m
Fixed assets
Intangible assets 863 868
Tangible assets 1,750 1,876
Investments - subsidiary undertakings - -
- joint ventures 202 195
share of gross assets 1,113 1,160
share of gross liabilities (916) (971)
goodwill 5 6
- other 64 71
2,879 3,010
Current assets
Stocks 962 1,158
Debtors - amounts falling due within one year 1,497 1,487
- amounts falling due after one year 1,109 926
Short-term deposits and investments 174 84
Cash at bank and in hand 794 634
4,536 4,289
Creditors - amounts falling due within one year
Borrowings (94) (275)
Other creditors (2,759) (2,727)
Net current assets 1,683 1,287
Total assets less current liabilities 4,562 4,297
Creditors - amounts falling due after one year
Borrowings (1,197) (1,038)
Other creditors (426) (450)
Provisions for liabilities and charges (795) (772)
2,144 2,037
Capital and reserves
Called up share capital 333 323
Share premium account 1 634
Revaluation reserve 96 100
Other reserves 3 195
Profit and loss account (see note 7) 1,708 783
Equity shareholders' funds 2,141 2,035
Equity minority interests in subsidiary 3 2
undertakings
2,144 2,037
Group cash flow statement
for the year ended December 31, 2003
Notes 2003 2002
£m £m
Net cash inflow from operating activities A 673 611
Dividends received from joint ventures 11 12
Returns on investments and servicing of finance B (56) (84)
Taxation paid (43) (41)
Capital expenditure and financial investment C (196) (381)
Acquisitions and disposals D (16) (20)
Equity dividends paid (88) (109)
Cash inflow/(outflow) before use of liquid 285 (12)
resources and
financing
Management of liquid resources E (90) 217
Financing F (19) (81)
Increase in cash 176 124
Reconciliation of net cash flow to movement in
net funds
Increase in cash 176 124
Cash outflow/(inflow) from increase/(decrease) in 90 (217)
liquid resources
Cash outflow from decrease in borrowings 20 82
Change in net funds resulting from cash flows 286 (11)
Borrowings of businesses disposed/(acquired) 33 (52)
Finance lease additions (10) (32)
Amortisation of zero-coupon bonds (4) (5)
Exchange adjustments (33) 6
Movement in net funds 272 (94)
Net debt at January 1 (595) (501)
Net debt at December 31 (323) (595)
2003 2002
£m £m
Reconciliation of operating profit to operating cash
flows
Operating profit 223 168
Amortisation of intangible assets 63 74
Depreciation of tangible fixed assets 223 236
Increase/(decrease) in provisions for liabilities and 3 (125)
charges
Decrease in stocks 191 19
(Increase)/decrease in debtors (188) 27
Increase in creditors 158 212
A Net cash inflow from operating activities 673 611
Returns on investments and servicing of finance
Interest received 28 23
Interest paid (79) (101)
Interest element of finance lease payments (5) (6)
B Net cash outflow for returns on investments and (56) (84)
servicing of finance
Capital expenditure and financial investment
Disposals/(additions) to unlisted investments 7 (44)
Additions to intangible assets (37) (50)
Purchases of tangible fixed assets (182) (314)
Disposals of tangible fixed assets 16 27
C Net cash outflow for capital expenditure and (196) (381)
financial investment
Acquisitions and disposals
Acquisitions of businesses (9) (28)
Disposals of businesses 1 14
Investments in joint ventures (8) (6)
D Net cash outflow for acquisitions and disposals (16) (20)
Management of liquid resources
(Increase)/decrease in short-term deposits (91) 218
Decrease/(increase) in government securities and 1 (1)
corporate bonds
E Net cash (outflow)/inflow from management of liquid (90) 217
resources
Financing
Borrowings due within one year - repayment of loans (245) (201)
- increase in loans 2 46
Borrowings due after one year - repayment of loans (58) (48)
- increase in loans 296 151
Capital element of finance lease payments (15) (30)
Net cash outflow from decrease in borrowings (20) (82)
Issue of ordinary shares 1 1
F Net cash outflow from financing (19) (81)
Group statement of total recognised gains and losses
for the year ended December 31, 2003
2003 2002
£m £m
Profit attributable to the shareholders of Rolls-Royce 116 53
Group plc 1
Exchange adjustments on foreign currency net (3) 15
investments
Total recognised gains for the year 113 68
1 2002 Rolls-Royce plc
Group historical cost profits and losses
for the year ended December 31, 2003
2003 2002
£m £m
Profit on ordinary activities before taxation 180 105
Difference between the historical cost depreciation 4 3
charge and the actual depreciation charge for the year
calculated on the revalued amount
Historical cost profit on ordinary activities before 184 108
taxation
Historical cost transfer to/(from) reserves 67 (77)
Reconciliations of movements in Group shareholders' funds
for the year ended December 31, 2003
2003 2002
£m £m
At January 1 2,035 2,068
Total recognised gains for the year 113 68
Ordinary dividends (net of scrip dividend adjustments) (8) (110)
New ordinary share capital issued (net of expenses) 1 1
Goodwill transferred to the profit and loss account in - 8
respect of disposal of businesses
At December 31 2,141 2,035
Notes
1. Segmental analysis
2003 2002
£m £m
Group turnover
Analysis by business:
Civil aerospace 2,694 2,739
Defence 1,398 1,376
Marine 927 984
Energy 584 639
Financial services 42 50
5,645 5,788
Profit before interest
Analysis by business:
Civil aerospace 82 87
Defence 132 161
Marine 32 54
Energy 30 (70)
Financial services (6) (20)
270 212
Underlying profit before interest
*
Analysis by business:
Civil aerospace 131 150
Defence 147 183
Marine 71 82
Energy 30 (41)
Financial services (4) (12)
375 362
*before exceptional and non trading items
Net assets**
Analysis by business:
Civil aerospace 1,100 1,219
Defence 69 25
Marine 547 550
Energy 376 348
Financial services 375 490
2,467 2,632
**Net assets exclude net debt of £323m (2002 £595m)
The segmental analysis of exceptional items and non-trading items is: Civil
aerospace £49m, Defence £15m, Marine £39m and Financial services £2m.
In 2004 the Group will revise the segmental analysis such that the Diesels
business, which is currently included in the Energy segment, will be included
in the Marine segment. This change will align the reporting with how the
business is to be managed. Under this basis the 2003 segmental analysis would
be as follows:
Turnover Underlying
profit before
interest
£m £m
Analysis by businesses:
Civil aerospace 2,694 131
Defence 1,398 147
Marine 1,003 78
Energy 508 23
Financial Services 42 (4)
5,645 375
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 2003 £22m 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 £116 million (2002 £53m) by 1,647
million (2002 1,612 million) 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 31 December 2003
£m £m Pence
Profit before taxation 180
Profit attributable to ordinary shareholders 116 7.04
Exclude:
Exceptional rationalisation costs 54 54 3.27
Net profit on sale of businesses (6) (6) (0.36)
Loss on sale of fixed assets* 9 9 0.55
Amortisation of goodwill 48 48 2.91
Related tax effect - (20) (1.21)
Underlying profit before taxation 285
Underlying profit attributable to 201
shareholders
Underlying earnings per share 12.20
Year to 31 December 2002
£m £m Pence
Profit before taxation 105
Profit attributable to ordinary shareholders 53 3.29
Exclude:
Exceptional rationalisation costs 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
*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 £116m (2002 £53m) by 1,671 million
(2002 1,624 million) ordinary shares, being 1,647 million (2002 1,612 million)
as above adjusted by the bonus element of existing share options of 24 million
(2002 12 million).
4. Group employees at the period end
31 December 31 December
2003 2002
Number Number
Civil Aerospace 19,800 21,100
Defence 4,900 5,100
Marine 6,400 6,500
Energy 4,000 4,500
Financial services 100 100
35,200 37,300
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 2003, the total gross liabilities in respect of financing
arrangements on all delivered aircraft, less amounts insured and related
provisions, amounted to £1,090m (2002 £1,093m), of which £39m (2002 £35m)
related 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 £
184m (2002 £186m). If the value of the relevant security was reduced by 20%, a
net contingent liability of approximately £262m (2002 £251m) would result.
Provisions of £92m (2002 £64m) 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 2003
accounts certain memorandum disclosures are required, including the value of
pension scheme assets and liabilities. At December 31 2003, after taking
account of deferred taxation the net deficit on the Group's three UK pension
schemes amounted to £855 million (2002 £1,117m). This incorporates the benefit
changes noted below.
The Group's funding requirements for its schemes are derived from triennial
independent actuarial valuations. In March 2003 the principal Rolls-Royce
Pension Fund was subject to an actuarial valuation. The cost of additional
funding was contained in line with the guidance previously provided with a
combination of changes in benefit structure and a £35million annual increase in
company contributions.
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. Group reorganisation
During the year Rolls-Royce Group plc was introduced as the new holding company
of the Rolls-Royce Group by way of a Scheme of Arrangement under section 425 of
the Companies Act 1985. This has been accounted for as a capital reorganisation
and merger accounting principles have been applied, as if the company had
always been the holding company of the Group.
8. B Shares
The Company is proposing to set up a `B Share' programme, under which
shareholders will receive `B Shares' in place of a dividend, which can be
redeemed for cash or converted into ordinary shares in the Company. This will
provide the Company with significant tax benefits. Conditional on approval by
shareholders, `B Shares' with a nominal value of 5.00 pence per ordinary share
will be issued instead of paying a final dividend. As this is not classed as a
dividend, no charge is recognised in the profit and loss accounts at the
year-end.
9. Preliminary results
The financial information above does not constitute the Group's statutory
accounts for the year ended December 31, 2003 or 2002. Statutory accounts for
2002 have been delivered to the Registrar of Companies, whereas those for 2003
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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