Final Results
9 February 2006
ROLLS-ROYCE GROUP plc PRELIMINARY RESULTS 2005
Group Highlights
* Record order book, at £22.9bn (2004 £18.9bn).
* Sales increased to £6,603m. Sales on an underlying* basis increased by nine
per cent.
* Services revenues** increased by 12 per cent on an underlying* basis.
* Profit before financing costs increased to £877m.
* Underlying profit before financing costs*** increased to £679m, up 40 per
cent on a like-for-like basis.
* Underlying profit before taxation*** increased to £584m, up 49 per cent on
a like-for-like basis.
* Cash inflow of £552m (2004 £251m)
* Average net debt reduced to £260m (2004 £632m).
* Final payment to shareholders increased by 7.5 per cent to 5.38p per share,
making a full year total of 8.72p per share.
Note: All results are reported under International Financial Reporting
Standards (IFRS) (see note 1).
2004 results, as permitted by IFRS 1, are not restated in respect of IAS 32/39,
financial instruments.
A full analysis of the impact of adopting IFRS is available at
http://ir.rolls-royce.com/rr/investors/ifrs/seminar/
* see note 4.
** including 100 per cent of repair and overhaul joint ventures.
*** see notes 1, 4.
Sir John Rose, Chief Executive, said:
"We have established positions in four global market sectors where the barriers
to entry are high. Growth in our sales and order book and our consistent focus
on improved efficiency underpin our expectation of further growth in profits
and positive cash flow in 2006."
Group Overview
Rolls-Royce continued to make good financial progress in 2005, with a strong
increase in profitability and cash flow.
The Group's performance has been built on a consistent strategy, supported by
investment in market access, technology and capability. Growth has been
achieved organically through the introduction of new products, the expansion of
its comprehensive aftermarket services capability and strong partnerships, as
well as the successful development of past acquisitions. This has resulted in
continued strong order intake and sales growth.
The focus on cost reduction and increased efficiency enabled the group to
mitigate the headwinds caused by commodity price inflation and an adverse trend
in the achieved US dollar exchange rate.
Group sales were £6,603m, an underlying increase of nine per cent, reflecting
organic growth in each of the Group's market sectors.
Underlying profit before tax, on a like-for-like basis, increased by 49 per
cent and a cash inflow of £552 million was generated, resulting in positive net
cash of £335 million on the balance sheet at the year-end. Average net debt was
reduced by 59 per cent, to £260 million.
Underlying earnings per share rose 55 per cent to 24.14p (2004 15.56p) and
basic earnings per share rose 29 per cent to 20.11p (2004 15.56p). A final
payment to shareholders has been proposed of 5.38p per share, making a total
payment for the year of 8.72p per share, a 6.6 per cent increase compared to
the payment in 2004.
New orders in 2005 reached a record level of £11.3 billion, and brought the
year-end firm order book to a record £22.9 billion, an increase of 21 per cent
over 2004. Over the past 10 years, the order book has grown by 14 per cent per
annum compound. Good progress was made across all four of the Group's markets.
Rolls-Royce is increasingly international. During 2005 the Group incorporated a
new subsidiary in Bangalore, in order to expand engineering capacity over a
range of new programmes; established a joint venture in Singapore, to develop a
commercially viable power system based on solid oxide fuel cell technology;
opened a new marine factory in Shanghai, from which the Group's £300 million
turnover merchant business will be managed; and established new sources of
supply in markets such as China, Indonesia, Malaysia, Singapore and Taiwan.
The Group had three key priorities during the year:
* Focused investment in technology and products
The Group's structured approach to technology acquisition ensures that it has
`on the shelf' technologies ready to incorporate into the latest generation of
products whilst acquiring the technologies required for future products. As the
Group continues to address new market opportunities in each of its business
sectors, the level of self-funded investment in research and development is
expected to remain at approximately five per cent of Group sales. The impact of
this investment on the income statement will reflect the mix and maturity of
individual development programmes and will result in a significantly lower
level of capitalisation of costs in 2006. During the year the Group launched a
number of new programmes, notably the Trent 1700 for the A350 and the Avon 200,
an upgrade of the existing Avon engine that has been so successful in the
energy sector.
* Operational efficiency and unit cost reduction
The Group continued to make progress with its drive for greater efficiency,
offsetting the impact of commodity price inflation with cost reduction
activities, including increased productivity, low-cost sourcing and supply
chain management. The significantly higher workload challenged the ability of
the supply chain and this remains an area for attention. The impact of higher
inventories, carried to facilitate the factory modernisation programme, was
more than offset by tight management of financial working capital. Importantly,
more efficient working practices were implemented as a pre-condition for new
factory investment.
* Continued development of aftermarket services
Aftermarket services revenues, including 100 per cent of repair and overhaul
joint ventures, increased by 12 per cent in 2005 and have grown at 11 per cent
per annum compound over the last ten years. Services sales now represent 54 per
cent of Group sales. This follows the successful broadening of the Group's
product range, an increasing number of engines in service, and investment in a
comprehensive range of aftermarket services capabilities. Increasingly, the
Group is taking responsibility for the maintenance of its engines and systems
under long-term service agreements, resulting in a much closer alignment with
the customers' interests and a better application of the Group's skills and
assets. During 2005, a number of innovative services agreements were announced
in each of the Group's business sectors.
Prospects
Rolls-Royce is addressing four long-term growth markets. The aggregate demand
for engines and services over the next 20 years is estimated to be worth
approximately two trillion dollars. The Group's consistent investment in
technology and new products and services enables it to respond to new market
developments, creating the opportunity for organic growth in each sector.
The growing number of Rolls-Royce engines in service and their long service
lives are expected to generate attractive returns over decades. As the business
model develops and the revenues from aftermarket services continue to grow, the
Group expects to achieve positive cash flow while maintaining its level of
investment in technology and product.
The Group considers it is prudent to continue to strengthen its balance sheet
because of the long-term nature of its programmes and the significant
investments and obligations they entail. The Group also recognises the
importance of dividends to shareholders and is proposing a further increase in
the payment to shareholders in 2005, representing an increase of 6.6 per cent
compared to the payment made in 2004.
The deficit on the Group's pension schemes, after taking account of deferred
taxation, was £1,154m (2004 £1,002m). The Group introduced significant changes,
in 2003, to reduce the pension scheme deficit and will review further actions
in the light of the actuarial review of the main scheme, which is due this
year, and the changing regulatory environment.
The Group has continued to pursue its strategy of hedging future net dollar
revenues and at the end of 2005 had approximately $10.5 billion of forward
cover at an average exchange rate of 1.67 dollars to the pound (2004 $9 billion
at 1.60).
The Group is using this hedge book in conjunction with cost reduction
initiatives and further `dollarisation' of the cost base to manage future
foreign exchange risk. The achieved exchange rate in 2005 deteriorated by four
cents relative to 2004.
Continued progress is expected in 2006, underpinned by the strong order book,
growing services revenues and increasing efficiency. As a result, the Group
expects increased profits and a positive cash flow in 2006.
Enquiries:
Peter Barnes-Wallis
Director of Financial Communications
Duncan Campbell-Smith
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 are available at www.newscast.co.uk
Visit www.thenewsmarket.com/rolls-royce to download broadcast-standard video or
order a Beta SP tape of Rolls-Royce products, services and facilities.
REVIEW OF 2005 BY BUSINESS SECTOR
Civil Aerospace
Sales: £3,510m (2004 £3,040m)
Underlying profit before financing costs: £454m (2004 £194m)
Rolls-Royce has established a strong market position in civil aerospace through
its portfolio of competitive aero-engines, powering a broad range of aircraft
from corporate jets to the largest airliners.
Highlights of the Year
* Orders for 246 Trent engines, worth approximately $3 billion were
announced.
* The Airbus A380, powered by the Trent 900 engine, made a successful maiden
flight and made good progress through its comprehensive flight test
programme.
* Agreement was reached with Airbus for Rolls-Royce to supply the Trent 1700
to power the new A350 airliner.
* The 1,000th BR710 engine was delivered to Gulfstream to power its G550
long-range business jet.
* International Aero Engines (IAE) achieved a record order intake of
approximately 600 engines worth over $1.5bn to Rolls-Royce.
The Group made good progress with the development of its product range. The
Trent 900 engine powered the Airbus A380 on its maiden flight and has now
accumulated more than 4,000 hours of flying experience. The first Trent 1000
engine build, for the Boeing 787, was commenced on schedule in November and the
Trent 1700 became the sixth member of the Trent engine family, following its
selection by Airbus to power the A350. The Trent family celebrated the tenth
anniversary of its entry into service and passed the milestone of 15 million
flying hours during the year.
The Group's three year moving average share of civil engine orders fell to 23
per cent, largely as a result of the high proportion of Boeing 737 aircraft,
for which the Group does not offer an engine, which were ordered during the
year.
IAE, in which Rolls-Royce is a major shareholder, took an increasing share of
the strong single aisle market, with a record order intake of approximately 600
engines worth over $1.5bn to Rolls-Royce.
Civil engine deliveries increased by seven per cent, to 881, reflecting strong
growth in V2500 deliveries and continuing recovery in the corporate jet market,
partially offset by a decline in regional airline engine deliveries. While the
decline in regional deliveries is expected to continue, the Group expects total
civil engine deliveries to grow in 2006, as the Trent 900 enters service, V2500
deliveries increase and the corporate sector remains strong.
The Rolls-Royce civil fleet flying hours increased by 11 per cent compared to
2004, as a result of a combination of world traffic growth and increased fleet
size.
The installed base of civil jet engines grew to 11,500. This provides a
significant aftermarket services opportunity, which the Group is addressing
with innovative long-term service arrangements for its customers. TotalCare®
contracts worth more than $13 billion have now been signed, covering 80 per
cent of new customers since 2001. The Group achieved record growth for its
CorporateCare® programme, signing 90 contracts in 2005.
Services sales increased by 10 per cent, to £2.0bn, representing 59 per cent of
civil aerospace sales.
Defence Aerospace
Sales: £1,413m (2004 £1,374m)
Underlying profit before financing costs: £180m (2004 £179m)
The Group's defence business is broadly based, with a strong portfolio of
products and services covering the key defence aerospace market sectors. This
enables the Group to make good progress in spite of the volatility that may be
experienced on individual programmes, as exemplified by the uncertainties
surrounding the alternate engine for the Joint Strike Fighter following the
recent US Quadrennial Defense Review.
Highlights of the year
* Good progress was made with the Group's development work for the Joint
Strike Fighter programme.
* AirTanker was awarded preferred bidder status for the UK's Future Strategic
Tanker Aircraft programme.
* The first series of tests was completed for the TP400 engine for the Airbus
A400M military transport aircraft.
* Mission Ready Management Solutions services contracts were signed with the
UK Ministry of Defence (MoD) and the US Department of Defense (DoD),
covering combat, transport and trainer aircraft engines.
* A new Operations Centre was opened in Bristol as part of the growing
in-service support business for military engines.
The Group made good progress with its development work for the Joint Strike
Fighter (JSF) programme and accumulated more than 3,000 hours of STOVL (short
take off vertical landing) testing.
In December, an agreement was signed by the Governments of the Kingdom of Saudi
Arabia and the UK, under which the Royal Saudi Air Force will acquire
Eurofighter Typhoon aircraft, powered by the EJ200 engine.
In the transport sector, Rolls-Royce is a member of the European consortium
that successfully completed the first series of tests for the TP400 turboprop
engine being developed for the A400M military transport aircraft. The DoD
approved full production for the V-22 Osprey aircraft, powered by Rolls-Royce
AE1107C-Liberty engines, and placed equipment and services orders relating to
the engine worth more than $64 million.
Rolls-Royce is a 20 per cent shareholder in the AirTanker consortium, which was
awarded preferred bidder status for the Future Strategic Tanker Aircraft
programme by the UK MoD.
Australia selected the Rolls-Royce Turbomeca RTM 322 engine to power its NH90
helicopter fleet and the first RTM 322 to be assembled under license by KHI, in
Japan, was delivered to the Japan Defense Agency and the Japan Maritime Self
Defense Force.
The provision of services contributed 55 per cent of the Group's defence sales.
New services contracts announced during the year included: a £185 million
service contract for the RB199 engines which power the MoD's fleet of Tornado
aircraft; a renewal of the contract for the support of the F405 (Adour) engine
in the US Navy's T-45 training aircraft worth $63 million; a £57 million
contract to support the EJ200 engines that power the UK's Typhoon fleet; and a
£40 million contract to support the UK's fleet of AE2100 engines that power the
C-130J. A new Operations Centre was opened in Bristol as part of the growing
in-service support business for military engines.
Marine
Sales: £1,097m (2004 £963m)
Underlying profit before financing costs: £89m (2004 £78m)
The Rolls-Royce marine business is a global leader in marine propulsion,
engineering and hydrodynamic expertise, with a broad product range and full
systems integration capability
Highlights of the year
* A £137 million service and support contract was secured for ships in
service with the Royal Navy and the French, Belgian and Royal Netherlands
navies.
* The first MT 30 marine gas turbine was delivered to power land-based test
runs of the US Navy's DD(X) destroyer.
* Lockheed Martin installed two MT 30 marine gas turbines on the first
prototype Littoral Combat Ship for the US Navy.
* A Rolls-Royce University Technology Centre (UTC) was established in Norway
to conduct research programmes in the marine sector.
* A new marine facility in Shanghai was opened.
The recovery of the offshore oil and gas support market continued and
Rolls-Royce secured a good share of the available business. The 500th order was
placed for a Rolls-Royce UT-Design vessel, one of the most successful designs
in the history of commercial shipping. UT-Design ships are sold as complete
systems and are fitted with a range of Rolls-Royce equipment.
The Group is developing rim driven tunnel thruster technology, which is likely
to have a major impact on marine propulsion in the future. The first thrusters
are to be fitted to an offshore support vessel but the technology will also be
suitable for merchant and cruise ships.
Asia's shipbuilding accounts for nearly 80 per cent of all global, commercial
ship construction. During 2005 Rolls-Royce expanded its presence in Asia,
opening a new factory in Shanghai, which, together with its existing factory in
Korea, creates a north-east Asian production hub.
In the naval market sector, Rolls-Royce achieved a major development milestone
when the MT30 gas turbine was awarded American Bureau of Shipping (ABS)
certification. In February 2005, the first MT30 marine gas turbine generator
set was delivered to the US Navy to power land-based test runs for the DD(X)
destroyer.
Lockheed Martin installed two MT30 gas turbines on the first prototype Littoral
Combat Ship for the US navy. These gas turbines are the largest ever installed
on a Navy ship.
The Group is working with the US Navy as prime contractor on the advanced
electric ship demonstrator project that will be the proving ground for the
Rolls-Royce AWJ-21 water jet, the next generation of naval water jet.
In 2005, 40 per cent of marine sales were derived from services and support
activities. The Group announced a £137 million long-term service and support
contract for Olympus and Tyne engines that power 27 ships in service with the
Royal Navy and the French, Belgian and Royal Netherlands navies.
Energy
Sales: £505m (2004 £489m)
Underlying profit before financing costs: £4m (2004 £14m)
The Rolls-Royce energy business supplies a wide range of gas turbine packages
to the worldwide oil & gas and power generation markets, with more than 4,000
industrial gas turbines sold and over 140 million hours of operating
experience.
Highlights of the year
* The first 12 industrial RB211-based compression packages were installed and
commissioned for the West-East Pipeline Project in China, four months ahead
of schedule.
* Six industrial Trent-based compression packages were delivered to Qatar for
the Middle East Dolphin project.
* Sharjah Electricity and Water Authority chose two Trent 60 power generation
sets for the latest phase of the Wasit power plant expansion and the first
Trent 60 for Asia was ordered by a major electric power producer in
Yinchuan, China.
* Ten RB211 industrial gas turbine power generation units were ordered to
provide electrical power for Floating Production, Storage and Offloading
(FPSO) vessels operated by Total, off the coast of Nigeria and by
Petrobras, offshore Brazil.
* The 500th industrial RB211 was shipped from the Rolls-Royce assembly and
test facility in Montreal.
* A joint venture was established with a Singaporean consortium to continue
development work on solid-oxide fuel cell technology.
The financial results for 2005 reflect a strong performance by the oil & gas
business, offset by the slow recovery of the power generation market and
continued investment in new product technologies.
In oil & gas, the business continued to strengthen its presence in emerging
markets, including orders worth over $120 million for projects in West Africa,
over $100 million from customers in Asia, and over $70 million for gas turbine
packages for Brazil.
The international power generation market has shown signs of recovery and the
Group won important new orders for the industrial Trent in the United Arab
Emirates and China.
In 2005, the Group continued to invest in its fuel cell technology. Rolls-Royce
and the Singaporean consortium, EnerTek Singapore Pte Ltd, will between them
invest a further US$100 million in the project. In addition, Rolls-Royce Fuel
Cell Systems Limited (RRFCS) opened a new facility that will pilot the
production of ceramic components for use in fuel cell systems. RRFCS is
developing solid oxide fuel cell systems for megawatt-scale, stationary power
generation applications with the goal of introducing a competitive product this
decade.
In the services sector the Group achieved a record order intake in 2005. Strong
growth in long-term service agreements was maintained, with a further £93
million of business secured during the year. Services revenues contributed 38
per cent of energy sector sales.
Financial Services
Sales: £78m (2004 £81m)
Underlying loss before financing costs: £(3)m (2004 £(7)m)
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 281 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 19 aircraft. These are all on lease to 12 customers. A charge of
£13 million was incorporated in the 2005 results to reflect the current market
valuation of Pembroke's aircraft assets.Rolls-Royce Power Ventures, the Group's
power project developer, has 11 power generation projects underway.
The business is being restructured and proceeds of £49 million were raised from
asset sales.
FINANCIAL REVIEW
The firm order book, at constant exchange rates, was £22.9bn (2004 £18.9bn). In
addition, a further £1.5bn had been announced (2004 £2.4 bn). Aftermarket
services represented 38 per cent of the firm order book (2004 39 per cent).
Sales increased by 11 per cent, compared with 2004, at £6,603m (2004 £5,947m).
Sales on an underlying basis grew by nine per cent.
Gross profit was £1,679m (2004 £1,203m). Payments to Risk and Revenue Sharing
Partners (RRSPs), charged in cost of sales, amounted to £146m(2004 £142m on a
like-for-like basis).
Underlying profit before tax was £584m (2004 £364m). Underlying earnings per
share increased by 55 per cent, to 24.14p (2004 15.56p).
Gross research and development investment was £663m (2004 £601m). Net research
and development investment charged to the income statement was £282m
(2004 £288m). Receipts from RRSPs in respect of new programme developments,
shown as other operating income, were £60m (2004 £73m).
Restructuring costs of £48m (2004 £37m) were charged within operating costs.
The taxation charge was £130m (2004 £100m). The taxation charge on an
underlying basis was £167m, representing 29 per cent of underlying profit
before tax. (2004 £100m, representing 28 per cent of underlying profit before
tax).
Cash inflow during the year was £552m (2004 £251m), benefiting from stronger
operational cash flow plus £180m increase from customer advances across the
Group. Average net debt was £260m (2004 £632m). The net cash balance at the
year-end was £335m (2004 net debt £217m).
The impact of long-term contract accounting for TotalCare packages was a £20m
increase in debtors (2004 £13m reduction) and an £42m increase in creditors
(2004 £21m increase). The overall net position of assets and liabilities on the
balance sheet for TotalCare packages was an asset of £367m (2004 £389m).
Provisions were £361m (2004 £393m). Provisions carried forward in respect of
potential customer financing exposure amounted to £90m at the year-end
(2004 £92m).
There were no material changes to the Group's gross and net contingent
liabilities in 2005 (see note 11).
The pension scheme deficit, after taking account of deferred taxation, was
£1,154m (2004 £1,002m), having incorporated current mortality assumptions for
the Group's UK schemes (see note 12). The next actuarial valuation of the
Group's main pension scheme will be in 2006.
The Group is continuing to make payments to shareholders in the form of `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 issue of `B' shares will
result in significant tax benefits for the Group, by accelerating the recovery
of Advanced Corporation Tax, which will in turn benefit all shareholders.
The proposed final payment to shareholders is equivalent to 5.38 pence per
ordinary share (2004 final payment 5.00p), making a total payment for the year
of 8.72 pence (2004 8.18p). The final payment is payable on 3 July 2006 to
shareholders on the register on 10 March 2006. The final day of trading with
entitlement to B shares (equivalent to the ex-dividend date) is 8 March 2006.
Consolidated Income Statement
For the year ended December 31, 2005
2005 2004
£m £m
Revenue 6,603 5,947
Cost of sales (4,924) (4,744)
Gross profit 1,679 1,203
Other operating income 60 73
Commercial and administrative costs (624) (599)
Research and development costs (282) (288)
Share of profit of joint ventures 46 19
Group operating profit 879 408
(Loss)/Profit on sale of businesses (2) 9
Profit before financing costs 877 417
Financial income 442 372
Financial expenses (842) (425)
Net financing costs* (note 5) (400) (53)
Profit before taxation ** 477 364
Taxation - UK (61) (10)
Taxation - Overseas (69) (90)
Profit for the period 347 264
Attributable to:
Equity holders of the parent 350 263
Minority interest (3) 1
Profit for the period 347 264
Payments to shareholders (154) (140)
Earnings per ordinary share
Basic 20.11p 15.56p
Diluted 19.31p 15.05p
* Net interest payable (39) (52)
** Underlying profit before taxation (note 3) 584 364
Note: All results are reported under International Financial Reporting
Standards (IFRS). 2004 results, as permitted by IFRS 1, are not restated in
respect of IAS 32/39, financial instruments. A full analysis of the impact
of adopting IFRS is available at http://ir.rolls-royce.com/rr/investors/ifrs/
seminars
Consolidated Balance Sheet
at December 31, 2005
2005 2004
£m £m
ASSETS
Non-current assets
Intangible assets (note 6) 1,281 1,227
Property, plant and equipment 1,683 1,672
Investments in joint ventures 247 211
Other investments 52 57
Deferred tax assets 439 318
3,702 3,485
Current assets
Inventory 1,309 1,090
Trade and other receivables 2,047 2,049
Taxation recoverable 3 2
Other financial assets 464 -
Short-term investments 37 36
Cash and cash equivalents 1,757 1,452
5,617 4,629
Total assets 9,319 8,114
LIABILITIES
Current liabilities
Borrowings (75) (207)
Other financial liabilities (234) -
Trade and other payables (2,689) (2,395)
Current tax liabilities (171) (176)
Provisions (138) (173)
(3,307) (2,951)
Non-current liabilities
Borrowings (1,458) (1,430)
Other financial liabilities (339) -
Other payables (650) (543)
Deferred tax liabilities (178) (115)
Provisions (223) (220)
Post retirement benefit obligations (1,659) (1,409)
(4,507) (3,717)
Total liabilities (7,814) (6,668)
Net assets 1,505 1,446
EQUITY
Capital and Reserves
Called up share capital 352 346
Share premium account 30 4
Other reserves 605 39
Retained earnings 512 1,053
Equity attributable to equity holders of the 1,499 1,442
parent
Minority interest 6 4
Total equity 1,505 1,446
Consolidated Cash Flow Statement
Year to Year to
31 December 31 December
2005 2004
£m £m
Cash flows from operating activities
Profit for the period 477 364
Depreciation and amortisation 254 299
Decrease in provisions (31) (9)
Decrease in working capital 247 33
Decrease in fair value of financial assets and 283 -
liabilities
Other non cash movements (145) (8)
Taxation paid (60) (84)
Dividends received from joint ventures 35 15
Net cash inflow from operating activities 1,060 610
Cash flows from investing activities
Disposals of unlisted investments 5 -
Additions to intangible assets (116) (142)
Purchases of property, plant and equipment (235) (175)
Disposals of property, plant and equipment 69 66
Disposals of businesses 1 16
Investments in joint ventures (13) (2)
Net cash outflow from investing activities (289) (237)
Cash flows from financing activities
(Decrease)/increase in borrowings (207) 348
Capital element of finance lease payments (11) (52)
Net cash (outflow)/inflow from (decrease)/increase (218) 296
in borrowings
(Increase)/decrease in government securities and (1) 3
corporate bonds
Net interest paid (49) (52)
Payments to shareholders and issue of shares (26) (56)
Settlement of financial liabilities to purchase own (149) (2)
shares
Net cash (outflow)/inflow from financing activities (443) 189
Net increase in cash and cash equivalents 328 562
Cash and cash equivalents at January 1 1,439 909
Exchange and other non-cash adjustments 46 (32)
Adjustment on implementation of IAS 32 and IAS 39 (68) -
Cash and cash equivalents at period end 1,745 1,439
Reconciliation of increase in cash and cash
equivalents to movement in net funds
Increase in cash and cash equivalents 328 562
Cashflow from decrease/(increase) in government 1 (3)
securities and corporate bonds
Net cash outflow/(inflow) from decrease/(increase) 218 (296)
in borrowings
Change in net funds resulting from cash flows 547 263
Exchange and other non-cash adjustments 5 (12)
Fair value adjustments 47 -
Movement in net funds 599 251
Net debt at January 1 (149) (400)
Adjustment on implementation of IAS 32 and IAS 39 (189) -
261 (149)
Fair value of swaps hedging fixed rate borrowings 74 -
Net funds/(debt) at period end 335 (149)
Consolidated Statement of Recognised Income and Expense
For the year ended December 31, 2005
2005 2004
£m £m
Foreign exchange adjustments 49 (38)
Actuarial losses (282) (7)
Deferred taxation on actuarial losses 84 2
Transfers from hedging reserve (324) -
Transfers from cash flow hedging reserve 3 -
Other adjustments - 2
Net expense recognised directly in equity (470) (41)
Profit for the period 347 264
Total recognised income and expense for the (123) 223
period
Attributable to:
Equity holders of the parent (120) 222
Minority interest (3) 1
Total recognised income and expense for the (123) 223
period
Total recognised income and expense for the (123) 223
period
Adjustments relating to adoption of IAS 32 and 151 -
IAS 39 from January 1, 2005
28 223
Summary of movements in equity
For the year ended December 31, 2005
2005 2004
£m £m
At January 1 (as previously reported under UK 1,446 2,143
GAAP)
Adjustments on adoption of IFRS from January - (927)
1, 2004
At January 1 1,446 1,216
Recognised income and expense for the period (123) 223
Adjustments relating to adoption of IAS 32 and 151 -
IAS 39
from January 1, 2005
Scrip dividend adjustments - 20
Net movement of B Shares (54) (27)
New ordinary share capital issued (net of 30 4
expenses)
Relating to own shares 2 (2)
Share-based payment adjustment 48 12
Disposal of shares in subsidiary to a minority 5 -
interest
At December 31 1,505 1,446
Attributable to:
Equity holders of the parent 1,499 1,442
Minority interest 6 4
Total equity 1,505 1,446
Notes
1. Basis of preparation
The attached financial statements are the Group's first financial statements
following the adoption of International Financial Reporting Standards (IFRS).
These financial statements have been prepared in accordance with IFRS adopted
for use in the EU ("adopted IFRS") in accordance with EU law (IAS Regulation EC
1606/2002).
As allowed by IFRS 1 `First-time adoption of IFRS', the Group adopted IAS 32
`Financial instruments: disclosure and presentation' and IAS 39 `Financial
instruments: recognition and measurement', prospectively from January 1, 2005.
Therefore, until December 31, 2004, the Group continued to hedge account for
forecast foreign exchange transactions and commodity exposures in accordance
with UK GAAP, and hence the comparative financial statements exclude the impact
of these standards.
The Group has determined that its existing hedging strategy is in the best
interests of the business and its shareholders. It is not, therefore, altering
its hedging activities in order to achieve a particular accounting presentation
under IFRS. In applying IAS 32 and IAS 39, the Group has chosen not to seek to
hedge account its future foreign exchange and commodity transactions. On
transition to IAS 32 and IAS 39, the Group was required to calculate the fair
value of its foreign exchange and commodity contracts and record these in a
hedging reserve. The balance on this reserve will be released to the income
statement based on the expected maturities of the contracts at the transition
date.
On 14 April 2005, the Group published an analysis of the impact of adopting
IFRS from January 1, 2004 - News Release available from the company's web site
at www.rolls-royce.com. This included income statement, balance sheet and
cashflow reconciliations, as well as details of the accounting policies applied
in restating its financial statements for the year ended December 31, 2004 and
as at January 1, 2005. Some small adjustments have been made to these
statements to reflect reclassifications more accurately.
The financial information set out above does not constitute the company's
statutory accounts for the years ended December 31, 2005 or 2004. Statutory
accounts for 2004, which were prepared under UK GAAP, have been delivered to
the registrar of companies, and those for 2005, prepared under accounting
standards adopted by the EU, will be delivered in due course. The auditors have
reported on those accounts; their reports were (i) unqualified, (ii) did not
include references to any matters to which the auditors drew attention by way
of emphasis without qualifying their reports and (iii) did not contain
statements under section 237(2) or (3) of the Companies Act 1985
2. Analysis by business segment
2005 2004
£m £m
Revenue
Civil aerospace 3,510 3,040
Defence 1,413 1,374
Marine 1,097 963
Energy 505 489
Financial services 78 81
6,603 5,947
Profit before financing costs
Civil aerospace 659 194
Defence 177 179
Marine 87 78
Energy 2 14
Financial services (3) (7)
Central costs (45) (41)
877 417
Underlying profit before financing costs*
Civil aerospace 454 194
Defence 180 179
Marine 89 78
Energy 4 14
Financial services (3) (7)
Central costs (45) (41)
679 417
*excluding unrealised gains on fair value adjustments
(see note 3)
Net assets/liabilities
Civil aerospace 1,278 1,343
Defence (59) 51
Marine 592 565
Energy 314 324
Financial services 199 314
Unallocated pension liabilities (1,154) (1,002)
Net cash/(debt) 335 (149)
Net assets 1,505 1,446
3. Earnings per ordinary share and underlying profit reconciliation
The Group seeks to present a measure of underlying performance which excludes
items considered to be non-operating in nature. Underlying profit excludes the
unrealised amounts arising from revaluations required by IAS 32 and IAS 39, and
includes the realised amounts arising from settled hedging transactions. The
calculation of underlying profit, and underlying earnings per share is shown
below. For the year to 31 December 2004, IAS 32 and 39 have not been applied,
and consequently no adjustment is required.
Basic earnings per ordinary share are calculated by dividing the profit
attributable to ordinary shareholders of £350m (2004 £263m) by 1,740 million
(2004 1,690 million) ordinary shares, being the average number of ordinary
shares in issue during the period, excluding own shares held under trust which
have been treated as if they had been cancelled.
Year to 31 December 2005
£m £m £m Pence
Profit before financing costs 877
Profit before taxation 477
Profit attributable to equity holders of 350 20.11
the parent
Adjust for:
Release of hedge reserves (note 9) (452) (452) (452) (25.97)
Unrealised fair value changes to - 345 345
derivative 19.83
contracts (note 7)
Revaluation of trading assets and - (78) (78) (4.49)
liabilities
Exchange differences and adjustments - (30) (30)
relating (1.72)
to Risk and Revenue Sharing Partnerships
(note 8)
Realised gains on settled derivative 328 396 396 22.76
contracts (note 7)
Foreign exchange derivative gains carried (74) (74) (74) (4.25)
forward in
contract accounting (note 7)
Related tax effect - - (37) (2.13)
Underlying profit before financing costs 679
Underlying profit before taxation 584
Underlying profit for the period 420
attributable to equity holders of the
parent
Underlying earnings per share 24.14
Diluted earnings per ordinary share, are calculated by dividing the profit
attributable to ordinary shareholders of £350m (2004 £263m) by 1,813 million
(2004 1,747 million) ordinary shares, being 1,740 million (2004 1,690 million)
as above, adjusted by the bonus element of existing share options of 73 million
(2004 57 million).
In 2004, as the Group did not retrospectively adopt IAS 32 and IAS 39, there
were no adjustments to headline earnings, and therefore headline and underlying
earnings were identical at 15.56p.
4. Derivation of underlying and "like-for-like" results
Year on
Year
2005 2004 Changes
(%)
£m £m
Sales:
Sales 6,603
Adjustment for FX (principally civil aerospace) (145)
Underlying Sales 6,458 5,947 9%
Group services sales:
Sales 3,542
Adjustment for FX (principally civil aerospace) (85)
Underlying services sales 3,457 3,231 7%
Adjustment to reflect 100% of repair and 405 228
overhaul JVs
Underlying service sales (including 100% repair 3,862 3,459 12%
and overhaul JVs)
Profit before finance costs:
Underlying profit before finance costs (See 679 417
note 3)
2004 treatment of financial RRSP net charges 69
Like-for-like profit before finance costs 679 486 40%
Profit before tax:
Underlying profit before tax 584 364
2004 treatment of financial RRSP net charges 69
Equivalent notional finance charge (41)
Like-for-like profit before tax 584 392 49%
5. Net financing costs
2005 2004
£m £m
Interest receivable 65 58
Gains on commodity derivatives 54 -
Expected return on pension scheme assets 312 314
Net foreign exchange gains 11 -
Financial income 442 372
Interest payable (104) (110)
Fair value losses on foreign currency (399) -
contracts
Finance charge relating to financial risk (13) -
and revenue sharing partnerships (Note 8)
Interest on pension scheme liabilities (321) (315)
Other financing charges (5) -
Financial expenses (842) (425)
Net financing costs (400) (53)
Analysed as:
Net interest payable (39) (52)
Net other financing expenses (361) (1)
Net financing costs (400) (53)
6. Intangible assets
Goodwill Certification Development Recoverable Total
and costs engine
Participation costs
fees
£m £m £m £m £m
Cost:
At January 1, 2005 759 274 311 229 1,573
Exchange (8) - - - (8)
adjustments
Additions at cost 10 70 36 116
At December 31, 751 284 381 265 1,681
2005
Accumulated
depreciation:
At January 1, 2005 - 129 103 114 346
Provided during the - 9 13 32 54
year
At December 31, - 138 116 146 400
2005
Net book value at 751 146 265 119 1,281
December 31, 2005
Net book value at 759 145 208 115 1,227
December 31, 2004
7. Foreign exchange and commodity financial assets
Movements in the fair value of foreign exchange and commodity contracts are as
follows:
Foreign Commodity Total
exchange
£m £m £m
On adoption of IAS 32 and IAS 39 on January 986 9 995
1, 2005
Fair value changes to derivative contracts (399) 54 (345)
Fair value changes to fair value hedges 5 - 5
Fair value relating to contracts utilised* (364) (32) (396)
Fair value at period end 228 31 259
* fair value of utilised contracts carried 74 - 74
forward in
contract accounting balances
8. Financial Risk and Revenue Sharing Partnerships (RRSPs)
Movements in the recognised value of RRSPs are as follows:
£m £m
On adoption of IAS 32 and IAS 39 on January 1, 2005 (468)
Net cash flows to partners 58
Financing charge (43)
Excluded from underlying profit:
-Exchange adjustments (56)
-Restructuring of RRSP agreement and forecast 86
adjustments
Adjustment to underlying profit (see note 3) 30
Net Finance charge within the Income Statement (13) (13)
Fair value at December 31, 2005 (423)
9. Foreign exchange and commodity hedge reserve movements
Movements in the foreign exchange and commodity hedge reserves excluding
deferred taxation are as follows:
Foreign Commodity Total
exchange
£m £m £m
On adoption of IAS 32 and IAS 39 on January 996 9 1,005
1, 2005*
Transferred to income statement** (458) (4) (462)
At December 31, 2005 538 5 543
* Deferred tax on opening balance (299) (3) (302)
** Deferred tax on amount transferred 137 - 137
Including £10m in respect of derivatives
settled prior to transition to IFRS, the
overall adjustment to underlying profit is
£452m (see note 3)
10. Group employees at period end
2005 2004
Number Number
Civil aerospace 21,000 20,100
Defence 5,200 5,100
Marine 7,200 7,100
Energy 2,700 3,000
Financial services 100 100
36,200 35,400
11. 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.
Under UK GAAP, contingent liabilities were reported: (a) at the full potential
exposure regardless of the point in time at which such exposures may arise; and
(b) in sterling taking account of forward exchange contracts held. Following
the adoption of IFRS, the Group has reviewed this policy and has concluded that
it is more appropriate to report contingent liabilities on a discounted basis.
As directors consider the likelihood of these contingent liabilities
crystallising to be remote, this amount does not represent a present value.
However, the amounts will be discounted at the Group's borrowing rate to
reflect the time span over which these exposures could arise. In addition,
following the decision to cease hedge accounting from January 1, 2005, it is no
longer appropriate to take account of forward exchange contracts. As the
contingent liabilities are denominated in US dollars, this amount will be
reported, together with the sterling equivalent at the reporting date spot
rate.
Applying this revised policy the discounted value of the total gross contingent
liabilities relating to financing arrangements on all delivered aircraft less
insurance arrangements and relevant provisions amounted to $1,097m (£638m, 2004
$1,143m, £595m). Taking into account the net realisable value of the relevant
security, the discounted value of the net contingent liabilities in respect of
financing arrangements on all delivered aircraft amounted to $259m (£150m, 2004
$294m, £153m). Sensitivity calculations are complex, but for example, if the
value of the relevant security was reduced by 20%, a net contingent liability
with a discounted value of approximately $363m (£211m, 2004 $403m, £210m) would
result. There are also net contingent liabilities in respect of undelivered
aircraft, but it is not considered practicable to estimate these as deliveries
can be many years in the future, and the relevant financing will only be put in
place at the appropriate time.
12. Pensions and other post-retirement benefits
The net pension scheme deficit, after taking account of deferred taxation, was
£1,154m (2004 £1,002m). The gross pension scheme deficit, before deferred tax,
has increased to £1,659m (2004 £1,409m) having incorporated current mortality
assumptions for the Group's UK pension schemes. A charge of £132m (2004 £103m)
for pensions and other post-retirement benefits is included in the income
statement.
13. Share-based payments
In accordance with IFRS 2 a charge of £26m (2004:£19m) relating to the fair
value of share-based schemes granted since November 7, 2002 is included in the
income statement.
Latest directors dealings
- 8 hours ago Origin Enterprises (CDI)
- 8 hours ago Origin Enterprises (CDI)
- 9 hours ago SSP Group
- 10 hours ago Latham (James)
- 10 hours ago LSL Property Services