Half-yearly Report
24 July 2008
ROLLS-ROYCE GROUP plc INTERIM RESULTS 2008
Group Highlights
- Order book increased by 17 per cent to £53.5 billion (2007: year end
£45.9 billion).
- Group sales increased to £4,049 million. Sales on an underlying basis*
increased by 12 per cent to £4,211 million.
- Services revenues increased by 12 per cent to £2,242 million on an underlying
basis*, representing 53 per cent of Group sales.
- Underlying profit before taxation* increased to £410 million, up eight per
cent.
- Profit before taxation of £389 million (2007: first half £377 million).
- Average net cash of £265 million (2007: first half £373 million).
- Cash outflow of £44 million (2007: first half cash inflow of £61 million
before special £132 million injection to the UK pension schemes).
- Interim payment to shareholders of 5.72 pence per share.
*see note 3
Sir John Rose, Chief Executive, said:
"We have delivered a strong set of first half results.
"Over the last decade, Rolls-Royce has pursued a consistent strategy which has
created a global power systems company with a broad and diverse portfolio of
products and services.
" The youth, scale and geographical diversity of our Civil Aerospace installed
base, along with our broad portfolio, will help mitigate the consequences of
uncertain conditions in the airline industry. Our other businesses are
increasingly material and are performing well.
"We are confident that we will continue to deliver profitable growth and
positive cash flow for the full year."
Group Overview
Rolls-Royce made strong progress in the first half of 2008, again increasing
both underlying profit and earnings per share.
The Group's order book grew by £7.6 billion to £53.5 billion, further extending
the visibility of future revenues. The profile of the order book continues to
become more international, with the growing Asian and Middle East markets now
accounting for over 40 per cent of the total.
Sales in the period increased by 12 per cent on an underlying basis to
£4,211 million and underlying aftermarket sales also increased by 12 per cent.
Underlying profit before tax increased by eight per cent to £410 million. This
increase in profitability was achieved after the impact of a further five cent
deterioration in the US dollar achieved exchange rate, increases in energy and
commodity costs and a £36 million increase in restructuring charges. The
increased charge for restructuring was mainly due to the programme, announced
in January, to reduce the number of people working on support functions by
2,300 people. In addition, a one-off charge of £16 million was taken in the
civil business.
At the end of the first half, the hedge book stood at $9.1 billion with an
average exchange rate of 1.87 US dollars to the pound, a deterioration of four
cents from the start of 2008. For 2008 as a whole, the Group continues to
forecast a deterioration in the achieved rate of between six and eight cents
relative to 2007, at an incremental cost to the Group of around £100 million
over the full year.
The consistent strategy pursued by the Group over many years has created a
broadly based power systems company. The breadth, diversity and materiality of
the Group's portfolio of businesses and products, access to global markets, a
growing installed base, the expansion of the Group's aftermarket services
business and the strength of the balance sheet all place Rolls-Royce in a good
position to deal with the challenges of the current economic environment.
Activity in the Group's Civil Aerospace business has continued to increase
strongly in the first half despite the impact of global economic pressures and
rising fuel prices on the civil aviation industry. Underlying service revenues
increased by ten per cent to £1,322 million in the first half and the order
book by 17 per cent to £42.1 billion.
Demand for widebody aircraft remained strong and Rolls-Royce now has a 50 per
cent share of this sector. Programmes in the business jet market continued to
sell well, with 191 deliveries in the first half, an increase of four per cent.
The successful launch of the Rolls-Royce powered Gulfstream G650 extends the
Group's footprint in this sector and has attracted a positive market response.
The civil aviation industry will not be immune from the effects of high oil
prices, the economic downturn and constraints on financing. However, the impact
on the Civil Aerospace business should be mitigated by a number of factors:
Â- The widebody and corporate sectors, which together account for more than 75
per cent of Civil Aerospace original equipment revenues, continue to be
resilient. The delays to the Airbus A380 and Boeing 787 programmes have
reduced planned capacity in the widebody sector by around 300 aircraft over the
next three years and caused firmer demand for existing widebody products.
Â- The relative youth and fuel efficiency of the Rolls-Royce installed base,
which has an average age of eight years, make it less likely that Rolls-Royce
powered aircraft will be grounded than older and less efficient aircraft. The
majority of announced retirements to date have been narrowbody aircraft or
aircraft over 20 years old. In the narrowbody sector the Rolls-Royce effective
share is less than ten per cent of the current generation market and less than
ten per cent of the Rolls-Royce narrowbody fleet is more than 20 years old.
-Â The scale and diversity of the Rolls-Royce installed base, with the number of
Rolls-Royce engines having grown by 75 per cent over the last ten years and
with a further 462 engines delivered in the first half of 2008, will continue to
support growth in aftermarket revenues.
The Marine business is benefiting from high levels of activity in the oil and
gas sector and has enjoyed a very strong first half with its order book rising
by 17 per cent. The oil industry is increasingly investing in deep water,
offshore exploration and development, as well as in compression and
transportation systems, which generate demand for high specification, bespoke
vessels and equipment. This activity is opening up new opportunities for
Marine in the supply of offshore ship designs and equipment.
Defence Aerospace continued to benefit from strong US demand, which now
accounts for around 45 per cent of its revenues. The business maintained its
lead in the military transport sector where the AE series of engines has made
strong progress. The programme uses a common core and production facilities
across a wide range of applications for the transport sector, including the
C-130J, the C-27J, V-22 Osprey TiltRotor and the Global Hawk UAV. These
applications will drive significant growth in engine deliveries in the second
half of 2008 and beyond, with the C-130J and the V-22 alone expected to
generate deliveries of around 160 engines a year over the next few years.
Energy is also benefiting from increased worldwide demand in the oil and gas
production sector, driven by higher oil prices and, in the land-based power
generation market, by the need for increased peaking capacity. This is opening
up new opportunities for the business in the supply of gas turbines and
compressors for land-based and underwater pipelines, as well as for power
generation on rigs and Floating Production, Storage and Offloading vessels.
The balance sheet is robust, with the Group enjoying a strong cash position and
credit rating. This enables the Group to take on long-term commitments, pursue
investment opportunities as they arise and deal with any short-term
consequences of the current economic environment. Changes to the Group's
defined benefit pension schemes in 2007, including a £500 million cash
injection and a reallocation of investments, have significantly reduced
volatility in funding requirements.
The Group saw a cash outflow in the first half of £44 million (2007: cash
inflow £61 million before special £132 million injection to the UK pension
schemes), due to a range of factors including restructuring costs and increased
inventory. However, the Group continues to expect a positive cash flow over
the full year. Average net cash fell by £108 million to £265 million over
the period, primarily reflecting the timing of the cash injection into the
pension fund late in 2007.
Underlying earnings per share increased by nine per cent to 17.15p per share
(2007: first half 15.72p per share). Basic earnings per share were 16.22p
(2007: first half 17.12p).
An interim payment to shareholders has been declared of 5.72p per share (2007:
first half: 4.04p). For the 2007 full year, the payment increased by 35 per
cent compared with 2006. This interim payment is expected to be around 40 per
cent of the full year payment for 2008.
Developments
Rolls-Royce is well placed to continue to develop its business and is investing
in new programmes. In March, it launched the BR725, the exclusive engine for
Gulfstream's new G650 corporate jet which is targeting an engine market worth
around $14 billion. Also in March, the Group announced that the RR300
helicopter engine, for Robinson Helicopter's R66, had been awarded its Federal
Aviation Authority (FAA) Type and Production Certificate, becoming the first
engine to roll off the Group's new small engine assembly line at Indianapolis.
These two engine programmes demonstrate how the Group has continued to broaden
its product portfolio.
Since the launch in July 2006 of the Airbus A350 XWB, for which the Trent XWB
is currently the sole engine, firm orders have been placed to date for more
than 700 engines. The engine addresses a sector of the market estimated to be
worth $186 billion over the next 20 years.
There have also been significant developments in Marine and Energy. The Group
has continued to develop its marine capability and earlier this month announced
its intention to acquire Scandinavian Electric Holdings, a supplier of system
packages for diesel electric propulsion systems. Rolls-Royce is also
particularly well positioned to respond to the increasing interest in the
environmental impact of shipping. It is developing further versions of its
successful Bergen gas engine to respond to the impact of increasingly stringent
environmental restrictions.
The Group is also seeking to broaden its Energy portfolio to address new
opportunities in civil nuclear and distributed power. In July, it announced
the reshaping of its nuclear business to apply Rolls-Royce's existing
capabilities to the expanding civil nuclear market, which is estimated to be
worth up to £50 billion a year in 15 years time. In March, the Group took a
23.5 per cent equity stake in TGL, a privately owned company developing a free
stream tidal power generation capability.
More generally, the Group has maintained its commitment to research and
development (R&D). R&D investment funded by the Group in the first half was
£222 million, or 5.3 per cent of underlying Group sales. Around two thirds of
this investment is devoted to improving the environmental performance of the
Group's products.
The Group has continued to expand its global footprint and strengthen its
operational performance. In Singapore, the ground-breaking ceremony took place
for the new engine assembly and test facility for large commercial aero
engines, which the Group announced in 2007. Also in development is
Crosspointe, a new advanced manufacturing, assembly and test facility in the
Commonwealth of Virginia in the US.
Good progress has been made with the programme announced in January to reduce
by 2,300 the number of people working in support areas. To date around 1,900
employees have left Rolls-Royce. The Group anticipates that the programme will
be complete by the end of 2008 and that it will be self-financing in the year.
Meanwhile, Rolls-Royce has continued to recruit in operational areas as well as
maintaining its apprentice and graduate programmes.
Prospects
Over the last decade, Rolls-Royce has pursued a consistent strategy which has
created a global power systems company with a broad and diverse portfolio of
products and services.
We are confident that we will continue to deliver profitable growth and
positive cash flow for the full year.
For visual material
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
Please visit the Rolls-Royce Media Room for images and The Newsmarket for
broadcast-standard video. If you are a first-time user of The Newsmarket, we
encourage you to take a moment to register. If you have any questions about
using The Newsmarket, please email Journalist Help.
For further information:
Investor relations:
Mark Alflatt
Director of Financial Communications
Rolls-Royce plc
Tel: +44 (0)20 7227 9241
Email: mark.alflatt@rolls-royce.com
Media relations:
Nicky Louth-Davies
Director of Corporate Communications
Rolls-Royce plc
Tel: +44 (0)20 7227 9232
Email: nicky.louth-davies@rolls-royce.com
REVIEW OF FIRST HALF 2008 BY BUSINESS SECTOR
Civil Aerospace
Order book: £42.1bn (2007: year end £35.9bn)
Engine deliveries: 462 (2007: 421)
Underlying sales: £2,102m (2007: £2,011m)
Underlying aftermarket service sales: £1,322m (2007: £1,205m)
Underlying profit before financing: £272m (2007: £261m)
The Civil Aerospace business has made good progress in the first half, with
over £8 billion of new orders.
Underlying sales rose to £2,102 million, driven by growth in the corporate
sector, increased deliveries of the V2500 for the Airbus A320 family and a ten
per cent increase in aftermarket revenues. These trends are expected to
continue for the full year. Trent deliveries for widebody aircraft were
slightly lower in the first half but are expected to increase strongly in the
second half.
Underlying profit increased by four per cent in the period, reflecting
increasing volumes and a higher aftermarket mix. This was achieved despite
higher unit costs, a five cent deterioration in the US dollar exchange rate and
restructuring costs. In addition there was an increase in customer provisions
of £16 million against a specific customer, relating to regional aircraft.
The business extended its product portfolio with the launch of the BR725,
selected as the exclusive powerplant for Gulfstream's new flagship corporate
jet, the G650. Rolls-Royce continues to be the leading engine supplier in the
corporate sector, with a 34 per cent market share.
The Trent engine family secured orders worth £4.5 billion for a further 360
engines. The most mature Trent, the Trent 700, consolidated its lead position
on the Airbus A330, on which it has a 53 per cent market share, and won orders
for up to 194 engines. At the end of June the order book included a total of
more than 2,300 Trent engines across six programmes. The global nature of the
customer base was again evident, with orders from customers in Asia, Latin
America and the Middle East, as well as the US and Europe.
In June, the Group established a joint venture company with GKN Aerospace to
carry out research and development on the use of composite materials in future
aero engine fan blades.
The Group's services activity continues to develop and is increasingly valued
by civil aviation customers. Over half of Rolls-Royce's modern jet engine
fleet is now covered by TotalCare® or CorporateCare® service agreements, a
level that is expected to increase given that around 70 per cent of recent
widebody orders incorporate these arrangements.
In July, the Group further extended its services provision, announcing a new
joint venture company with its partner Mubadala Development Company, offering
on-wing care for the rapidly expanding Middle East aviation market.
Defence Aerospace
Order book: £4.9bn (2007: year end £4.4bn)
Engine deliveries: 198 (2007: 168)
Underlying sales: £769m (2007: £808m)
Underlying aftermarket service sales: £441m (2007: £422m)
Underlying profit before financing: £104m (2007: £106m)
The Defence business continued to strengthen its market position in the first
half, winning contracts worth £1.2 billion. The business's broad portfolio
already comprises around 20,000 in-service engines and the fleet is expected to
grow given the Group's strong position on a number of key programmes in the
transport and combat sectors.
Overall underlying sales declined slightly in the first half due to the timing
and mix of deliveries on new production engines, while aftermarket sales
increased by five per cent. Both original equipment and aftermarket sales will
improve in the second half.
Underlying profits were stable, despite an increased restructuring charge and
adverse phasing of research and development spend.
The Group maintained its lead position on military transport aircraft. As part
of the AirTanker consortium, it won a 27 year engine and support contract to
supply the Trent 700 engine to the UK Ministry of Defence, worth over £700
million. The AE 2100 programme continued to make strong progress. AE 2100
orders this year have included a $135 million contract for the Canadian Air
Force for the C-130J and an exclusive nine year agreement, worth around $915
million, with Alenia Aeronautica for C-27J propulsion systems.
A number of major development programme milestones were reached during the
period, demonstrating the breadth of the defence portfolio. The F-35 Lightning
II (Joint Strike Fighter) achieved first flight, fitted with the Rolls-Royce
LiftSystemâ, while the aircraft's collaborative F136 engine successfully
completed its critical design review. On the Airbus A400M programme, Europrop
International, in which Rolls-Royce has a 25 per cent share, delivered four
TP400-D6 flight test engines to power the first A400M. The RR300 helicopter
engine achieved its Federal Aviation Authority (FAA) Type and Production
Certificate in March.
Marine
Order book: £5.5bn (2007: year end £4.7bn)
Underlying sales: £1,016m (2007: £700m)
Underlying aftermarket service sales: £326m (2007: £257m)
Underlying profit before financing: £87m (2007: £58m)
Rolls-Royce is a world leader in the provision of marine propulsion systems,
offering a unique set of products and services for the naval and commercial
sectors. Through its services business, it also supports propulsion systems
installed on more than 20,000 vessels, including those in service with 70
navies worldwide.
The business continued to benefit from increased demand in the merchant and
offshore sectors and achieved record sales in the first half. Underlying
profits increased significantly, supported by strong volume growth in both
original equipment and support services. Marine is now the Group's second
largest business in revenue terms.
Increasing oil prices are supporting significant investment in the offshore oil
and gas sector, driving demand for the Group's vessel designs and power systems
equipment. Order activity continues to be robust, with new orders totalling £
1.6 billion in the first half supporting a further increase in the order book
to £5.5 billion.
Two landmark orders were received from China: a £58 million contract with China
Oilfield Services Ltd to provide design and equipment systems for two offshore
support vessels and a £13 million contract with BGP Marine China to design and
equip an advanced seismic research vessel. The ships will support oil and gas
exploration and production and are the Group's first such contracts in the
Chinese market.
Also in China, the Group's integrated propulsion and manoeuvring system,
Promas, is being installed on four merchant cargo ships under construction.
In the naval market, Marine passed a significant milestone with the successful
'light-off' of the two MT30 gas turbines installed on the US Navy's first
Littoral Combat Ship. These Trent-derived engines are the most powerful marine
gas turbines available worldwide.
The business also signed a memorandum of understanding with the Vietnam
Shipbuilding Industry Group (Vinashin) in Hanoi to support the development of
Vietnam's fast-growing marine industry.
Services capabilities were expanded with the opening of a new facility in
Mumbai to support the Group's growing installed base of marine equipment. This
development is part of an expansion of the Marine services capability that
includes construction of new Service Centres in Galveston and Rio de Janeiro
and the upgrading of the Rotterdam Service Centre.
Energy
Order book: £1.0bn (2007: year end £0.9bn)
Engine deliveries: 18 (2007: 9)
Underlying sales: £324m (2007: £227m)
Underlying aftermarket service sales: £153m (2007: £117m)
Underlying loss before financing: £(8)m (2007: loss £(1)m)
The Energy business supplies a broad range of aero-derived gas turbine packages
to the worldwide oil and gas and power generation markets. With over 160
million hours of operating experience, the business has supplied over 4,000
packages to customers in around 80 countries.
Strong order intake in both the oil and gas and power generation sectors
contributed to a 10 per cent increase in the order book in the first half,
with new orders being won for 13 industrial Trent units in a broad
range of locations, including Australia, Europe, Russia and South East Asia.
Sales increased by 43 per cent, driven by significantly increased original
equipment and aftermarket sales across both the oil and gas and power
generation sectors.
At Dolphin Energy in Qatar, the world's first industrial Trent mechanical drive
gas turbines achieved full plant gas export capacity.
The Group continued to progress its programme to develop a commercially
competitive fuel cell system. A 100 hour concept demonstration test of a fully
integrated system is planned for the second half as part of the programme to
prove the unit.
Steps have also been taken to exploit the Group's nuclear capability, derived
from its 50 year involvement in the UK Royal Navy's nuclear submarine
programme. In July, Rolls-Royce announced that it was establishing a new unit
to take advantage of the emerging opportunities in civil nuclear in the UK and
in other countries.
Strong volume growth contributed to an improved trading performance in the
first half. Increased charges for restructuring and the expected increase in
the Group's investment in fuel cells and lower levels of technology fees in the
first half of 2008 all contributed to the result in the period. Continued
strong volume growth in both original equipment and aftermarket is expected to
deliver a modest profit in the second half of 2008.
Financial review
The firm and announced order book, at constant exchange rates, was £53.5bn
(2007: year end £45.9bn). Aftermarket services represented 26 per cent of the
order book (2007: year end 28 per cent).
Sales increased by 13 per cent to £4,049m (2007: £3,591m). Sales on an
underlying basis grew by 12 per cent. Payments to industrial Risk and Revenue
Sharing Partners (RRSPs), charged in cost of sales, amounted to £107m
(2007: £95m).
The published profit before tax increased to £389m from £377m. Underlying
profit before tax was £410m (2007: £380m). Underlying earnings per share
increased by nine per cent, to 17.15p (2007: 15.72p) (see note 6).
Gross research and development investment increased seven per cent to £399m
(2007: £373m). Net research and development investment charged to the income
statement in the first half was £177m (2007: £195m) after net capitalisation of
£45m (2007: £9m) on development programmes. The second half charge for R&D is
expected to be around £40m higher than in the first half, the bulk of the
increase being in Civil. Receipts from RRSPs in respect of new programme
developments, shown as other operating income, were £13m (2007: £40m).
Investment in intangibles was £127m (2007: £60m) and, in addition to
capitalised R&D of £57m, included £32m (2007: £24m) on recoverable engine costs
and a further £25m (2007: £9m) on certification costs and participation fees.
Restructuring costs of £60m (2007: £24m) were charged within operating costs
including costs associated with optimising the Group's support functions.
The taxation charge was £97m (2007: £74m). The taxation charge on an
underlying basis was £101m, representing 25 per cent of underlying profit
before tax (2007: £102m, representing 27 per cent of underlying profit before
tax). The effective underlying tax rate is impacted by a number of factors
including the geographical mix of profits, changes in legislation and the
benefit of research and development tax credits.
There was a cash outflow in the period of £44m (2007: inflow £61m before £132m
special injection to the UK pension schemes). Key features were an increase in
overall working capital of £334m from 2007 year end, including increased trade
and other receivables of £490m, an inventory increase of £250m, mitigated by a
£406m increase in trade and other payables (including customer deposits). The
net cash balance at the half year was £844m (2007: year end £888m).
Average net cash was £265m (2007: £373m), the reduction in the half-year
largely accounted for by the phasing of a £500m investment in the Group's UK
pension schemes that occurred largely at the end of 2007.
Provisions were £324m (2007: year end £301m). Provisions carried forward in
respect of potential customer financing exposure amounted to £57m at the period
end (2007: year end £44m).
There were no material changes to the Group's gross and net contingent
liabilities in the first half. Contingent liabilities include commitments made
to civil aerospace customers in the form of asset value guarantees (AVGs) and
credit guarantees. At the end of June 2008, the gross level of commitments on
delivered aircraft was $1,198m (£602m), including $666m for AVG's and $532m for
credit guarantees. The net exposure after reflecting the level of security was
$241m (£121m).
Related party transactions were broadly in line with 2007 (see note 14).
Pre-tax post-retirement benefit obligations were £123m (2007: year end £123m)
(see note 10). After taking account of deferred taxation, post-retirement
benefit obligations were £86m (2007: year end £88m).
The proposed interim payment to shareholders is equivalent to 5.72 pence per
Ordinary Share (2007: interim payment 4.04 pence). This payment will be the
first to be paid in C Shares rather than B Shares, the only material difference
being that C Shares will not carry the right to convert directly into Ordinary
Shares (see note 7 below). The interim payment is payable on January 5, 2009
to shareholders on the register on October 31, 2008. The ex entitlement date
for C Shares is October 29, 2008.
As the Company will no longer be issuing B Shares, the directors have decided
to exercise the Company's right to redeem compulsorily all remaining B Shares
in issue at their nominal value of 0.1 pence per share on 22 September 2008.
Payment of these redemption monies will be made to shareholders on 29 September
2008 together with a final B Share dividend accrued on B Shares from 1 July up
until 22 September.
Condensed consolidated income statement
For the half-year ended June 30, 2008
Half-year to Half-year to Year to
June 30, 2008 June 30, 2007 December 31, 2007
Notes £m £m £m
Revenue 2 4,049 3,591 7,435
Cost of sales (3,231) (2,943) (6,003)
Gross profit 818 648 1,432
Other operating income 13 40 50
Commercial and (366) (318) (653)
administrative costs
Research and development (177) (195) (381)
costs
Share of profit of joint 33 26 66
ventures
Operating profit 321 201 514
Profit/(loss) on sale or 1 (1) (2)
termination of businesses
Profit before financing 2 322 200 512
Financing income 4 359 416 718
Financing costs 4 (292) (239) (497)
Net financing 67 177 221
Profit before taxation 1 2,3 389 377 733
Taxation 5,6 (97) (74) (133)
Profit for the period 292 303 600
Attributable to:
Equity holders of the 294 306 606
parent
Minority interests (2) (3) (6)
Profit for the period 292 303 600
Earnings per ordinary share 2
Basic 6 16.22p 17.12p 33.67p
Diluted 6 15.97p 16.74p 32.97p
Payments to shareholders in 7 (105) (73) (237)
respect of the period
1 Underlying profit before 3 410 380 800
taxation
2 Underlying earnings per share are shown in note 6.
Condensed consolidated balance sheet
At June 30, 2008
June Restated* December 31,
30, June 2007
2008 30, 2007
Notes £m £m £m
ASSETS
Non-current assets
Intangible assets 8 1,885 1,492 1,761
Property, plant and equipment 1,792 1,725 1,813
Investments - joint ventures 298 258 284
Other investments 57 51 57
Deferred tax assets 91 82 81
Post-retirement scheme surpluses 10 221 94 210
4,344 3,702 4,206
Current assets
Inventory 2,453 2,081 2,203
Trade and other receivables 3,069 2,535 2,585
Taxation recoverable 7 3 7
Other financial assets 9 498 603 514
Short-term investments 1 35 40
Cash and cash equivalents 1,844 1,811 1,897
Assets held for sale 24 - 7
7,896 7,068 7,253
Total assets 12,240 10,770 11,459
LIABILITIES
Current liabilities
Borrowings (13) (38) (34)
Other financial liabilities 9 (159) (30) (85)
Trade and other payables (4,647) (3,826) (4,326)
Current tax liabilities (198) (189) (188)
Provisions (163) (115) (121)
(5,180) (4,198) (4,754)
Non-current liabilities
Borrowings (1,040) (1,003) (1,030)
Other financial liabilities 9 (320) (336) (303)
Trade and other payables (1,026) (873) (965)
Deferred tax liabilities (404) (384) (345)
Provisions (161) (185) (180)
Post-retirement scheme deficits 10 (344) (503) (333)
(3,295) (3,284) (3,156)
Total liabilities (8,475) (7,482) (7,910)
Net assets 3,765 3,288 3,549
EQUITY
Capital and reserves
Called-up share capital 364 361 364
Share premium account 67 66 67
Capital redemption reserves 185 198 191
Transition hedging reserve 29 138 77
Other reserves 171 (59) 62
Retained earnings 2,939 2,579 2,776
Equity attributable to equity holders 11 3,755 3,283 3,537
of the parent
Minority interests 10 5 12
Total equity 3,765 3,288 3,549
* Progress payments received against other inventory in the 2007 half-year
comparative (£396m) have been included within trade and other payables.
Condensed consolidated cash flow statement
For the half-year ended June 30, 2008
Half-year Restated* Year to
to June Half-year to December 31,
30, 2008 June 30, 2007 2007
Notes £m £m £m
Reconciliation of cash flows from
operating activities
Profit before taxation 389 377 733
Share of profit of joint ventures (33) (26) (66)
(Profit)/loss on sale or (1) 1 2
termination of businesses
(Profit)/loss on sale of (13) 2 1
property, plant and equipment
Net interest payable 4 5 6 6
Net post-retirement scheme 4 13 (15) (30)
financing
Net other financing 4 (85) (168) (197)
Taxation paid (32) (23) (71)
Amortisation of intangible assets 8 56 30 63
Depreciation of property, plant 92 82 170
and equipment
Increase/(decrease) in provisions 16 (35) (42)
Increase in inventories (250) (236) (359)
Increase in trade and other (490) (97) (128)
receivables
Increase in trade and other 406 233 778
payables
Decrease in other financial 223 156 357
assets and liabilities
Additional cash funding of (58) (40) (441)
post-retirement schemes
Share-based payments charge 17 17 36
Transfers of hedge reserves to (66) (63) (149)
income statement
Dividends received from joint 22 16 42
ventures
Net cash inflow from operating 211 217 705
activities
Cash flows from investing
activities
Additions of unlisted investments (1) - (5)
Disposals of unlisted investments 1 - -
Additions to intangible assets (122) (58) (294)
Purchases of property, plant and (105) (121) (304)
equipment
Disposals of property, plant and 42 - 47
equipment
Acquisition of businesses (8) (1) (6)
Disposals of businesses - 2 3
Investments in joint ventures (9) (10) (13)
Disposals of joint ventures 13 - -
Net cash outflow from investing (189) (188) (572)
activities
Cash flows from financing
activities
Borrowings due within one year - (3) (346) (350)
repayment of loans
Borrowings due after one year - (25) 35 -
(repayment)/increase in loans
Capital element of finance lease (2) (1) (5)
payments
Net cash outflow from decrease in (30) (312) (355)
borrowings
Interest received 43 70 95
Interest paid (55) (78) (93)
Interest element of finance lease - (3) (3)
payments
Decrease/(increase) in government 39 (1) (6)
securities and corporate bonds
Issue of ordinary shares - 28 29
Purchase of own shares (44) (78) (77)
Other transactions in own shares - 27 34
Redemption of B Shares (58) (56) (97)
Net cash outflow from financing (105) (403) (473)
activities
Decrease in cash and cash (83) (374) (340)
equivalents
Cash and cash equivalents at 1,872 2,171 2,171
January 1
Foreign exchange 48 (11) 41
Cash and cash equivalents at 1,837 1,786 1,872
period end
* Increase in inventories and increase in trade and other payables in the 2007
half-year comparative have been restated from (£238m) and £235m respectively to
reflect progress payments received from other inventory being included within
trade and other payables. The movement of £2m in each also reflects the
corresponding restatement of both inventory and trade and other payables in the
December 31, 2006 comparatives.
Half-year to Half-year to Year to
June 30, June 30, December 31,
2008 2007 2007
£m £m £m
Reconciliation of movement in cash and
cash equivalents to movements in net funds
Decrease in cash and cash (83) (374) (340)
equivalents
Cash (inflow)/outflow from (decrease)/
increase in government securities and
corporate bonds (39) 1 6
Net cash outflow from decrease in 30 312 355
borrowings
Change in net funds resulting (92) (61) 21
from cash flows
Exchange adjustments 48 (10) 41
Fair value adjustments (37) 47 (18)
Movement in net funds (81) (24) 44
Net funds at January 1 excluding 873 829 829
the fair value of swaps
Net funds at period end excluding 792 805 873
the fair value of swaps
Fair value of swaps hedging fixed 52 (50) 15
rate borrowings
Net funds at period end 844 755 888
The movement in net funds (defined by the Group as including the items shown
below) is as follows:
At Funds Non Exchange Fair At June
January flow cash adjustments value 30, 2008
1, 2008 flow
£m £m £m £m £m £m
Cash at bank and in hand 1,265 (315) - 44 - 994
Overdrafts (25) 18 - - - (7)
Short-term deposits 632 214 - 4 - 850
Cash and cash equivalents 1,872 (83) - 48 - 1,837
Investments 40 (39) - - - 1
Other borrowings due within (4) 3 (1) - - (2)
one year
Borrowings due after one (1,026) 25 1 - (37) (1,037)
year
Finance leases (9) 2 - - - (7)
873 (92) - 48 (37) 792
Fair value of swaps hedging
fixed rate borrowings 15 37 52
888 (92) - 48 - 844
Condensed consolidated statement of recognised income and expense
For the half-year ended June 30, 2008
Half-year Half-year Year to
to June to June December 31,
30, 2008 30, 2007 2007
£m £m £m
Foreign exchange translation differences 109 (4) 117
from foreign operations
Net actuarial gains - 525 511
Movement in unrecognised pension surplus (43) - (112)
(see note 10)
Transfers from transition hedging (66) (63) (149)
reserve
Related tax movements 30 (132) (86)
Change in rates of corporation tax - (9) (9)
Net income recognised directly in 30 317 272
equity
Profit for the period 292 303 600
Total recognised income and expense for 322 620 872
the period
Attributable to:
Equity holders of the parent 324 623 878
Minority interests (2) (3) (6)
Total recognised income and expense for 322 620 872
the period
1 Basis of preparation and accounting policies
Reporting entity
Rolls-Royce Group plc is a company domiciled in the UK. These condensed
consolidated half-year financial statements of the Company as at and for the
six months ended June 30, 2008 comprise the Company and its subsidiaries
(together referred to as the "Group") and the Group's interests in jointly
controlled entities. They have been prepared on the basis of the recognition
and measurement requirements of IFRS applied to the financial statements at
December 31, 2007 and those standards that have been endorsed and will be
applied at December 31, 2008.
The consolidated financial statements of the Group as at and for the year ended
December 31, 2007 (2007 Annual report) are available on the Group's website at
www.rolls-royce.com or upon request from the Company Secretary, Rolls-Royce
Group plc, 65 Buckingham Gate, London SW1E 6AT.
Statement of compliance
These condensed consolidated half-year financial statements have been prepared
in accordance with IAS 34 Interim Financial Reporting as adopted by the
European Union. They do not include all of the information required for full
annual statements, and should be read in conjunction with the 2007 Annual
report.
The comparative figures for the financial year December 31, 2007 are not the
Company's statutory accounts for that financial year. Those accounts have been
reported on by the Company's auditors and delivered to the Registrar of
Companies. The report of the auditors was (i) unqualified, (ii) did not include
a reference to any matters to which the auditors drew attention by way of
emphasis without qualifying their report, and (iii) did not contain a statement
under section 237(2) of the Companies Act 1985.
The condensed consolidated half-year financial statements were approved by the
Board of directors on July 23, 2008.
Significant accounting policies
The accounting policies applied by the Group in these condensed consolidated
half-year financial statements are the same as those that applied to the
consolidated financial statements of the Group for the year ended December 31,
2007.
Key sources of estimation uncertainty
In applying the accounting policies, management has made appropriate estimates
in many areas, and the actual outcome may differ from those calculated. The key
sources of estimation uncertainty at the balance sheet date were the same as
those that applied to the consolidated financial statements of the Group for
the year ended December 31, 2007.
2 Analysis by business segment
Half-year to June Half-year to June Year to December
30, 2008 30, 2007 31, 2007
2008
£m £m £m
Revenue
Civil aerospace 1,970 1,880 3,718
Defence aerospace 758 796 1,636
Marine 1,009 698 1,542
Energy 312 217 539
4,049 3,591 7,435
Half-year to June 30, Half-year to June 30, Year to December 31,
2008 2007 2007
Underlying Underlying Underlying Underlying Underlying Underlying
adjustments results adjustments results adjustments results
£m £m £m £m £m £m £m £m £m
Profit
before
financing
Civil 186 86 272 112 149 261 308 256 564
aerospace
Defence 106 (2) 104 84 22 106 170 29 199
aerospace
Marine 75 12 87 40 18 58 91 22 113
Energy (17) 9 (8) (10) 9 (1) (8) 13 5
Central (28) - (28) (26) - (26) (49) - (49)
items
322 105 427 200 198 398 512 320 832
Net 67 (84) (17) 177 (195) (18) 221 (253) (32)
financing
Profit
before 389 21 410 377 3 380 733 67 800
taxation
Taxation (97) (4) (101) (74) (28) (102) (133) (60) (193)
Profit for 292 17 309 303 (25) 278 600 7 607
the period
Minority 2 - 2 3 - 3 6 - 6
interests
Profit
attributable
to equity
holders of
the parent 294 17 311 306 (25) 281 606 7 613
June June December
30, 2008 30, 2007 31, 2007
£m £m £m
Net assets/(liabilities)
Civil aerospace 2,785 2,497 2,468
Defence aerospace (170) (49) (172)
Marine 605 616 563
Energy 328 366 370
Net tax liabilities (504) (488) (445)
Net unallocated post-retirement scheme deficits (123) (409) (123)
Net funds 844 755 888
Net assets 3,765 3,288 3,549
June June December
30, 2008 30, 2007 31, 2007
Number Number Number
Group employees at period end
Civil aerospace 22,300 22,700 23,200
Defence aerospace 5,700 5,600 5,700
Marine 8,000 7,700 8,000
Energy 2,500 2,500 2,600
38,500 38,500 39,500
3 Underlying performance
Underlying performance is presented to show the economic substance of the
Group's hedging strategies in respect of transactional exchange rate and
commodity price movements.
Underlying sales exclude the release of the foreign exchange transition hedging
reserve and reflect the achieved exchange rates arising on settled derivative
contracts.
Underlying profit before financing includes amounts realised from settled
derivative contracts (primarily relating to civil aerospace) and for 2007
excluded the £130m of past-service post-retirement costs.
In addition, underlying profit before taxation excludes the unrealised amounts
arising from revaluations required by IAS 32 Financial Instruments:
Presentation and IAS 39 Financial Instruments: Recognition and Measurement and
the net impact of financing costs related to post-retirement scheme benefits.
Underlying profit adjustments:
Half-year to Half-year to Year to
June 30, 2008 June 30, 2007 December 31,
2007
Profit Profit Profit Profit Profit Profit
before before before before before before
financing tax financing tax financing tax
£m £m £m £m £m £m
Profit per consolidated
income statement 322 389 200 377 512 733
Release of transition (66) (66) (63) (63) (149) (149)
hedging reserve
Realised gains on settled 191 235 161 171 415 420
derivative contracts
Net unrealised fair value
changes to derivative
contracts - (135) - (162) - (251)
Effect of currency on (30) (30) (76) (76)
contract accounting (20) (20)
Revaluation of trading - 2 - (16) - 10
assets and liabilities
Financial RRSPs - foreign
exchange differences and
changes in forecast payments - (8) - (12) - 13
Net post-retirement scheme - 13 - (15) - (30)
financing
Post-retirement schemes - - - 130 130 130 130
past service costs 1
Total underlying adjustments 105 21 198 3 320 67
Underlying profit 427 410 398 380 832 800
1 During 2007, the Group, as part of its ongoing discussions with the
Trustees of its UK pension schemes, agreed to reflect changes in HM Revenue &
Customs practice and increase the size of the lump sum payment retirees are
able to receive by commuting part of the pension. Like many other employers,
the Group also increased the amount of the lump sum payment for the pension
commuted. Updating the commutation arrangements to reflect these factors
increased the post-retirement liability by £100m.
The Group also agreed a 2% discretionary increase applicable to pensions that
do not benefit from any guaranteed increase, which increased the liability by £
30m.
4 Net financing
Half-year Half-year
to to Year to
June 30, June 30, December
2008 2007 31, 2007
Underlying Underlying Underlying
net net net
financing financing financing
£m £m £m £m £m £m
Financing income
Interest receivable 31 31 44 44 83 83
Fair value gains on foreign currency contracts 75 - 137 - 215 -
Financial RRSPs - foreign exchange differences
and changes in forecast payments 8 - 12 - - -
Fair value gains on commodity derivatives 60 - 25 - 36 -
Expected return on post-retirement scheme
assets 185 - 191 - 384 -
Net foreign exchange gains - - 6 - - -
Other financing income - - 1 1 - -
359 31 416 45 718 83
Financing costs
Interest payable (36) (36) (50) (50) (89) (89)
Financial RRSPs - foreign exchange differences
and changes in forecast payments - - - - (13) -
Financial charge relating to financial RRSPs (12) (12) (13) (13) (26) (26)
Interest on post-retirement scheme liabilities (198) - (176) - (354) -
Net foreign exchange losses (46) - - - (15) -
(292) (48) (239) (63) (497) (115)
Net financing 67 (17) 177 (18) 221 (32)
Analysed as:
Net interest payable (5) (5) (6) (6) (6) (6)
Net post-retirement scheme financing (13) - 15 - 30 -
Net other financing 85 (12) 168 (12) 197 (26)
Net financing 67 (17) 177 (18) 221 (32)
5 Taxation
The effective tax rate for the half-year is 24.9% (2007 half-year 19.6%, full
year 18.1%). The effective rate for 2007 full year was lower, mainly because
of the impact of the reduction in UK and German corporation tax rates enacted
during 2007. The effective underlying tax rates are discussed on page 10.
6 Earnings per ordinary share (EPS)
Basic EPS is calculated by dividing the profit attributable to ordinary
shareholders of £294m (2007 half-year £306m, full year £606m) by 1,813m (2007
half-year 1,787m, full year 1,800m) 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.
Underlying EPS has been calculated as follows:
Half-year to Half-year to Year to
June 30, June 30, December 31,
2008 2007 2007
Pence £m Pence £m Pence £m
EPS / Profit attributable to equity
holders of the parent 16.22 294 17.12 306 33.67 606
Release of transition hedging
reserve (3.64) (66) (3.52) (63) (8.28) (149)
Realised gains on settled
derivative contracts 12.96 235 9.57 171 23.33 420
Net unrealised fair value changes
to derivative contracts (7.45) (135) (9.06) (162) (13.94) (251)
Effect of currency on contract
accounting (1.10) (20) (1.68) (30) (4.22) (76)
Revaluation of trading assets and
liabilities 0.11 2 (0.90) (16) 0.56 10
Financial RRSPs - foreign exchange
differences
and changes in forecast payments (0.44) (8) (0.67) (12) 0.72 13
Net post-retirement scheme
financing 0.71 13 (0.84) (15) (1.67) (30)
Post-retirement schemes - past
service costs - - 7.27 130 7.22 130
Related tax effect (0.22) (4) (0.28) (5) (1.39) (25)
Change in rates of corporation tax 1 - - (1.29) (23) (1.94) (35)
Underlying EPS / Underlying profit
attributable to
equity holders of the parent 17.15 311 15.72 281 34.06 613
1 During 2007, changes in the rates of UK and German corporation tax were
enacted. The above adjustments represent the reduction in deferred tax
liabilities reflected in the income statement as a result of these changes.
Where deferred tax had previously been charged or credited to the statement of
recognised income and expense or directly to equity, the related deferred tax
adjustments have been included in those statements respectively.
Diluted EPS is calculated by dividing the profit attributable to ordinary
shareholders of £294m (2007 half-year £306m, full year £606m) by 1,841m (2007
half-year 1,828m, full year 1,838m) ordinary shares, being 1,813m (2007
half-year 1,787m, full year 1,800m) as above, adjusted by the bonus element of
existing share options of 28m (2007 half-year 41m, full year 38m).
7 Payments to shareholders in respect of the period
Payments to shareholders in respect of the period represent the value of B
Shares or C Shares to be issued in respect of the results for the period.
Issues of B Shares and C Shares were declared as follows:
Half-year to Year to
June 30, 2008 December 31, 2007
Pence per Pence per
share £m share £m
Interim 5.72 105 4.04 73
Final 8.96 164
13.00 237
The Company has previously identified the importance and relevance of making
payments to Shareholders in a form that does not generate additional surplus
shadow ACT. This will accelerate the recovery of the Group's surplus ACT, and
improve future cash flow, to the benefit of all Shareholders. Accordingly, all
payments made to shareholders since June 2004 have been made in the form of B
Shares rather than cash dividends.
As a result of the Company's strategic financial review the directors concluded
that the increase in the Company's issued share capital, which occurs when
Shareholders choose to convert B Shares to Ordinary Shares, is inconsistent
with its strategy to maintain a more efficient balance sheet and limit Earnings
Per Ordinary Share dilution. Therefore, from January 2009, payments to
shareholders will be made in the form of C Shares, the only significant
difference being that, unlike B Shares, C Shares will not carry the right to
convert directly into Ordinary Shares. Instead shareholders will have the right
to participate in the C Share Reinvestment Plan (CRIP) operated by our
Registrar, which will provide a low-cost method of reinvesting redemption
proceeds in Ordinary Shares.
8 Intangible assets
Goodwill Certification Development Recoverable Software Total
costs and expenditure engine and
participation costs other
fees
£m £m £m £m £m £m
Cost:
At January 1,
2008 801 504 514 366 109 2,294
Exchange
adjustments 53 2 - - - 55
Additions - 25 57 32 13 127
On
acquisition
of business - - - - 2 2
Disposals - - - - (3) (3)
At June 30,
2008 854 531 571 398 121 2,475
Accumulated
amortisation
and
impairment:
At January 1,
2008 - 150 150 204 29 533
Exchange
adjustments - 1 - - - 1
Provided
during the
period - 6 12 30 8 56
At June 30,
2008 - 157 162 234 37 590
Net book
value at June
30, 2008 854 374 409 164 84 1,885
Net book
value at
December 31,
2007 801 354 364 162 80 1,761
9 Other financial assets and liabilities
The carrying values of other financial assets and liabilities were as follows:
June 30, 2008 June 30, 2007 December 31, 2007
Net Net Net
Assets Liabilities amount Assets Liabilities amount Assets Liabilities amount
£m £m £m £m £m £m £m £m £m
Foreign
exchange
contracts 348 (103) 245 557 (23) 534 433 (54) 379
Commodity
contracts 74 - 74 46 - 46 39 - 39
422 (103) 319 603 (23) 580 472 (54) 418
Interest
rate
contracts 76 (1) 75 - (25) (25) 42 (3) 39
Financial
RRSPs - (353) (353) - (306) (306) - (315) (315)
B Shares - (22) (22) - (12) (12) - (16) (16)
498 (479) 19 603 (366) 237 514 (388) 126
Foreign exchange and commodity financial instruments
Movements in the fair values of foreign exchange and commodity contracts were
as follows:
Half-year Year to
Half-year to to June December
June 30, 2008 30, 2007 31, 2007
Foreign
exchange Commodity Total Total Total
£m £m £m £m £m
At January 1 379 39 418 593 593
Fair value changes to fair
value hedges 1 - 1 (4) (6)
Fair value changes to
derivative contracts 75 60 135 162 251
Fair value of contracts
settled (210) (25) (235) (171) (420)
At period end 245 74 319 580 418
Financial risk and revenue sharing partnerships (RRSPs)
Movements in the recognised values of financial RRSPs were as follows:
Half-year Half-year Year to
to June to June December 31,
30, 2008 30, 2007 2007
£m £m £m
At January 1 (315) (324) (324)
Cash paid to partners 12 19 55
Addition (39) - -
Exchange adjustments direct to (7) - (7)
reserves
Financing charge 1 (12) (13) (26)
Excluded from underlying profit 1
Exchange adjustments 5 7 7
Changes in forecast payments 3 5 (20)
At period end (353) (306) (315)
1 Total charge included within finance in the income statement is £4m (2007
half-year £1m, full year £39m).
10 Pensions and other post-retirement benefits
Movements in the net post-retirement position recognised in the balance sheet
were as follows:
UK Overseas
schemes schemes Total
£m £m £m
At January 1, 2008 181 (304) (123)
Exchange adjustments - (2) (2)
Current service cost (65) (12) (77)
Past service cost - (5) (5)
Interest on post-retirement scheme liabilities (181) (17) (198)
Expected return on post-retirement scheme assets 176 9 185
Contributions by employer 128 12 140
Movement in unrecognised surplus 1 (43) - (43)
At June 30, 2008 2 196 (319) (123)
Analysed as:
Post-retirement scheme surpluses - included in
non-current assets 221 - 221
Post-retirement scheme deficits - included in
non-current liabilities (25) (319) (344)
196 (319) (123)
1 Where a surplus has arisen on a scheme, in accordance with IAS19, the
surplus is recognised as an asset only if it represents an unconditional
economic benefit available to the Group in the future. Any surplus in excess
of this benefit is not recognised in the balance sheet. The £43m movement in
the current period has arisen due to the funding commitments currently in
place.
2 The net post-retirement scheme deficit as at June 30, 2008 is calculated on
a year to date basis, using the latest valuation as at December 31, 2007. There
have been no significant fluctuations or one-time events during the six-month
period that would require adjustments to the actuarial assumptions made at
December 31, 2007.
11 Movements in capital and reserves
Movements in equity attributable to equity holders of the parent were as
follows:
Half-year Half-year Year to
to June to June December 31,
30, 2008 30, 2007 2007
£m £m £m
At beginning of the period 3,537 2,718 2,718
Total recognised income and expense
attributable to equity holders of the parent 324 623 878
Arising on issue of ordinary shares - 28 29
Issue of B shares (73) (65) (172)
Conversion of B shares into ordinary shares 9 10 71
Own shares purchased (44) (78) (78)
Own shares vesting in share-based payment
plans 35 85 93
Share-based payments adjustment (18) (41) (22)
Related tax movements - current tax - - 43
Related tax movements - deferred tax (15) 8 (18)
Change in rate of UK corporation tax -
deferred tax - (5) (5)
At period end 3,755 3,283 3,537
12 Share-based payments
In accordance with IFRS 2, a charge of £17m (2007 half-year £17m, full year £
36m), relating to the fair value of share-based schemes granted since November
7, 2002 is included in the income statement.
13 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.
During the first half of 2008, there were no material changes to the maximum
gross and net contingent liabilities.
14 Related party transactions
Transactions with related parties are shown on page 109 of the Annual report
2007. Significant transactions in the current financial period are as follows:
Half-year Year to
to June December
30, 2008 31, 2007
£m £m
Sale of goods and services to joint ventures 785 1,289
Purchases of goods and services from joint ventures (688) (1,100)
15 Acquisitions
During the period the Group acquired one small business for consideration of £
8m. There were no significant fair value adjustments in respect of the net
assets acquired.
Principal risks and uncertainties
As described on pages 22 and 23 of the Annual report 2007, the Group continues
to be exposed to a number of risks and has an established, structured approach
to identifying, assessing and managing those risks. The Group has a consistent
strategy and long performance cycles and consequently the risks faced by the
Group have not changed significantly over the first six months of 2008.
The principal risks reflect the global growth of the business, and the
competitive and challenging business environment in which it operates. Risks
are considered under four broad headings:
Business environment risks
- Environmental impact of products and operations
- External events which might affect demand for air travel or cause the
business to be disrupted
Strategic risks
- Aftermarket
- Competitive pressures
Financial risks
- Counterparty credit risk, funding, liquidity and credit rating
- Market risks - foreign currency, interest rate and commodity
- Sales financing
Operational risks
- Performance of supply chain
- IT security
- Ethics
- Programme risk
Specific risks and uncertainties are discussed on pages 2 to 11.
Statement of directors' responsibilities
The directors confirm, to the best of their knowledge, that this condensed set
of financial statements has been prepared in accordance with IAS 34 Interim
Financial Reporting, as adopted by the European Union and that the half-year
report includes a fair review of the information required by Rules 4.2.7 and
4.2.8 of the Disclosure and Transparency Rules of the United Kingdom Financial
Services Authority.
The directors of Rolls-Royce Group plc at February 6, 2008 are listed in the
Annual report 2007 on page 46. There have been the following changes to the
Board of directors since that report:
Dr John McAdam - appointed February 19, 2008
Carl Symon - resigned May 7, 2008
By order of the Board
Sir John Rose
Chief Executive
July 23, 2008
Andrew Shilston
Finance Director
July 23, 2008
Independent review report to Rolls-Royce Group plc
Introduction
We have been engaged by the Company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended June
30, 2008 which comprises the condensed consolidated income statement, the
condensed consolidated balance sheet, the condensed consolidated cash flow
statement, the consolidated statement of recognised income and expense and the
related explanatory notes. We have read the other information contained in the
half-yearly financial report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in the condensed
set of financial statements.
This report is made solely to the Company in accordance with the terms of our
engagement to assist the Company in meeting the requirements of the Disclosure
and Transparency Rules ("the DTR") of the UK's Financial Services Authority
("the UK FSA"). Our review has been undertaken so that we might state to the
Company those matters we are required to state to it in this report and for no
other purpose. To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the Company for our review work, for
this report, or for the conclusions we have reached.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been
approved by, the directors. The directors are responsible for preparing the
half-yearly financial report in accordance with the DTR of the UK FSA.
As disclosed in note 1, the annual financial statements of the Group are
prepared in accordance with IFRSs as adopted by the EU. The condensed set of
financial statements included in this half-yearly financial report has been
prepared in accordance with IAS 34 Interim Financial Reporting as adopted by
the EU.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed
set of financial statements in the half-yearly financial report based on our
review.
Scope of review
We conducted our review in accordance with International Standard on Review
Engagements (UK and Ireland) 2410 Review of Interim Financial Information
Performed by the Independent Auditor of the Entity issued by the Auditing
Practices Board for use in the UK. A review of interim financial information
consists of making enquiries, primarily of persons responsible for financial
and accounting matters, and applying analytical and other review procedures. A
review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK and Ireland) and consequently does
not enable us to obtain assurance that we would become aware of all significant
matters that might be identified in an audit. Accordingly, we do not express an
audit opinion.
Whilst the Company has previously produced a half-yearly report containing a
condensed set of financial statements, those financial statements have not
previously been subject to a review by an independent auditor. As a
consequence, the review procedures set out above have not been performed in
respect of the comparative period for the six months ended June 30, 2007.
Conclusion
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended June 30, 2008 is not prepared, in all
material respects, in accordance with IAS 34 as adopted by the EU and the DTR
of the UK FSA.
KPMG Audit Plc
Chartered Accountants, London
July 23, 2008
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