Half-yearly Report

July 30 2009 ROLLS-ROYCE GROUP PLC 2009 HALF-YEAR RESULTS Group Highlights - Order book increased by £2bn to a record £57.5bn (2008 year-end £55.5bn). - Group revenues increased to £5,142m (2008 first-half £4,049m). Revenues on an underlying basis* increased by 17 per cent to £4,923m. - Services revenues increased by eight per cent to £2,420m on an underlying basis. - Profit before financing was £593m (2008 first-half £322m). - Underlying profit before taxation* increased by nine per cent to £445m (2008 first-half £410m). - Net cash outflow of £234m (2008 first-half net cash outflow of £92m) before the impact of a negative £194m (2008 first-half £48m benefit) foreign exchange revaluation. - Robust balance sheet with net cash of £1,030m at the half year (2008 year-end £1,458m). - Average net cash for the period of £760m (2008 first-half £265m). - Interim payment to shareholders of six pence per share, an increase of five per cent over 2008. * see note 2 Sir John Rose, Chief Executive, said: " The global trading environment remains very difficult and we believe the recovery is likely to be slow. "However, our growing order book, the breadth of the portfolio, our robust balance sheet and the early action we have taken on costs underpin our investment in the business. "Our performance in the first half has enabled us to confirm our guidance for the full year and to increase the interim payment to shareholders". Group Overview Resilient performance: Rolls-Royce made progress in the first half of 2009 with the order book, revenues and profits all increasing. This performance was achieved despite the challenging external environment and the impact of continuing delays on the Airbus A380 and Boeing 787 programmes. The Board remains realistic about the severity of current trading conditions which are in line with expectations at the start of 2009. The depth and duration of the recession is unclear and there is no evidence yet of any recovery. Rolls-Royce has proved to be resilient in the face of these adverse conditions. The breadth of the Group's business portfolio, the increasing importance of service activities, the improved market share and strong financial position all enable Rolls-Royce to manage the risks and uncertainties caused by current trading conditions. The Board is therefore able to confirm the guidance for 2009 it gave in February and increase the shareholder payment for the first-half to 6.00p per share, an increase of five per cent. The advantages of a broad product and service portfolio are well illustrated in the civil aerospace sector. Delays to the Airbus A380 and the Boeing 787 programmes have reduced planned capacity in the widebody sector by approximately 300 aircraft or 100,000 seats over the next two years relative to the industry's earlier assumptions. However, the delays have also had the effect of generating firmer demand for existing widebody products where Rolls-Royce enjoys a strong position. The Trent 700 on the A330 has, in particular, enjoyed strong demand, with orders for almost 100 engines taken in the first half. Almost 550 Trent 700s have been delivered over the last fifteen years and a further 486 were in the order book at the end of the first-half. The Marine business continues to benefit from high levels of activity in the oil and gas sector and enjoyed a good first half. Defence Aerospace benefits from a broad portfolio and strong positions on the major military transport aircraft programmes, while Energy is benefiting from the growing worldwide demand for oil and gas and power generation. Strengthening productivity and efficiency: Overall performance is helped by the early steps taken to improve productivity and operational efficiency and to reduce costs. This flexibility in the matching of capacity to demand results in a competitive organisation capable of responding to short-term challenges as well as delivering long-term growth. Strong financial position: The Group continues to enjoy a strong financial position. It finished the first-half with a net cash balance of more than £1bn and had an average cash position of £760m over the period. The successful issue of a 10-year, £500m sterling bond in April reflected the market's confidence in the Group's finances and effectively achieved an early refinancing of the Group's next scheduled debt maturity in 2011. Investing for growth: The Group's trading performance, the scale of its order book and its ability to manage short-term challenges allow it to invest to support growth and develop new options for the business. Rolls-Royce recently announced further significant investments in its operational capacity and capability. Four new facilities will be developed in the UK for discs, military fan blades, single crystal castings and civil nuclear components at a total cost of around £300m. A new civil wide chord fan blade facility will be constructed in Singapore to complement the existing capability at Barnoldswick in the UK. These investments illustrate the continuing development of the Group's global operational footprint. Over the last five years Rolls-Royce has invested £1.4bn in capital, including £800m to refresh its UK operational footprint. In 2007, the Group announced that it would be proceeding with major new engine assembly and test facilities at Seletar in Singapore and an advanced manufacturing facility at Crosspointe in the Commonwealth of Virginia in the US. The timing of these investments has been adjusted to reflect the delays in the major airframe programmes. Construction of Crosspointe is expected to commence later this year and Seletar in the first quarter of 2010. The Group's services activities increased revenues by eight per cent in the first half. Investment to support this growth is continuing with the expansion of the Group's joint venture repair and overhaul facilities in Singapore and Hong Kong which are scheduled for completion by 2010. Marine has opened new service centres in Galveston, Seattle, Genoa and Rio de Janeiro, with additional facilities planned in Canada, the UAE and West Africa in order to support rapid growth. The Group's ability to identify and pursue new options for global growth is further illustrated by two developments in the year. In July the Marine business broadened its involvement in the offshore oil and gas sector by taking a 33 per cent shareholding in ODIM ASA. Similarly, significant progress was made with the development of the Group's civil nuclear business when it was announced that Rolls-Royce would be building a new civil nuclear manufacturing facility and would be playing the leading role in the UK Government-supported Nuclear Advanced Manufacturing Research Centre. Trading Summary - 2009 First-Half The Group's strong market positions have enabled it to secure orders worth £7.9bn in the first-half, increasing the order book by four per cent to a record £57.5bn at the end of the first-half. Around 60 per cent of the order book will be delivered after 2011. The global economic recession, combined with several years of strong order book build-up, contributed to a slow-down in new orders over the period. Revenues increased by 27 per cent to £5,142m, a performance that was positively impacted by the weakness of the GBP against the USD and Euro. Underlying revenues improved by 17 per cent, with a 27 per cent growth in original equipment revenues (with all four businesses reporting a 20 per cent or higher increase) and an eight per cent increase in service revenues. The Group has continued to implement its long-running foreign exchange hedging policy, increasing the USD hedge book during the first-half to $21.1bn to provide more than five years of cover. The average rate of the outstanding foreign exchange contracts in the book was £1~$1.63 at the end of the first-half. The Group's achieved rate, the blended rate delivered from the operation of the hedging activity, improved by two cents in the first-half. It contributed a £12m transactional benefit to first-half profits. The achieved rate is expected to improve by around two to three cents in the full year compared to 2008. In addition, improved average USD, Euro and NOK exchange rates relative to the GBP provided £35m of translation benefits. Unit costs increased by around two per cent in the first-half reflecting the continuing effects of the volatility of operational load across the supply chain, programme delays and rising commodity costs. Unit cost performance over the balance of the year will largely depend on the Group's ability to manage load variations and any unforeseen events. The Group has continued to invest in the acquisition and development of technology. In the first half of 2009, investment in research and development totalled £440m (2008 first-half £399m), of which the Group funded around 56 per cent, representing five per cent of underlying revenues. Net investment in research and development is expected to be approximately 4.5 per cent of underlying revenues for the full year. The Group announced earlier this week its involvement in two UK Government-supported research and technology programmes directed at low carbon and advanced manufacturing technologies. The programmes have a total value of around £180m, with around half being funded by Rolls-Royce and its partners. Underlying profit before tax, which excludes the non-cash impact of the hedge book and other financial instruments, increased by nine per cent to £445m (2008 first-half £410m). Good profit growth for the period reflected a significant increase in original equipment and services revenues and foreign exchange benefits. It also took account of higher R&D, increased unit costs and the first-half phasing of fees received under the Trent XWB Risk and Revenue Sharing Partnerships (RRSPs). The Group's published profit before tax of £2,515m includes the effects of "marking to market" its financial instruments, for which hedge accounting is not adopted. This effectively reverses much of the revaluations reported in the second half of 2008. The impact of mark to market is included within net financing in the income statement (see note 3). The first-half underlying tax charge of £85m benefited from a one-off £21m credit following the successful completion of overseas tax audits. This resulted in a reduction in the first-half underlying tax rate to 19.1 per cent. The 2009 full year underlying tax rate is expected to be around 21 per cent. The Group reported a net cash outflow of £428m for the period, with £194m of this being caused by the revaluation of currency balances at the end of the period. The remaining outflow of £234m reflected a slow-down in order flow and associated customer deposits, increased inventory and significant investment in the business. Engine deliveries in the civil aerospace sector were achieved with little recourse to financing support from Rolls-Royce. The commitments the Group has made are insignificant in the context of the balance sheet and any additional requests for support are discretionary. Basic earnings per share were 100.87p (2008 first-half 16.22p), reflecting the mark to market adjustments above, with underlying earnings per share increasing by 15 per cent to 19.64p (2008 first-half 17.15p), partly reflecting an improved tax rate. Prospects Rolls-Royce continues to benefit from the breadth of its portfolio, the robust balance sheet and the early action it has taken on costs. The Group expects that its global markets will continue to be affected by reducing demand and the impact of financing constraints. However, underlying revenues will continue to grow and underlying profits for the year are expected to be broadly similar to those achieved in 2008. The Group continues to expect a modest cash outflow for the whole of 2009 and an increase in the average net cash balance for the full year compared with 2008. The Group is therefore reiterating its guidance for the full year. Enquiries Investor relations: Mark Alflatt Director of Financial Communication Rolls-Royce plc Tel: +44 (0)20 7227 9246 mark.alflatt@rolls-royce.com Media relations: Nicky Louth-Davies Director of Corporate Communications Rolls-Royce plc Tel: +44 (0)20 7227 9232 nicky.louth-davies@rolls-royce.com 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. For news desks requiring visual material, photographs are available at www.rolls-royce.com and news broadcasters requiring broadcast-standard video can visit www.thenewsmarket.com/rolls-royce. If you are a first-time user, please take a moment to register. In case you have any questions, please email journalisthelp@thenewsmarket.com. A copy of this half-yearly report in Portable Document Format (PDF) can be downloaded from the investors section of the website at www.Rolls-Royce.com. This Half Yearly Results Announcement contains certain forward-looking statements. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. In particular, all statements that express forecasts, expectations and projections with respect to future matters, including trends in results of operations, margins, growth rates, overall market trends, the impact of interest or exchange rates, the availability of financing to the Company, anticipated cost savings or synergies and the completion of the Company's strategic transactions, are forward-looking statements. By their nature, these statements and forecasts involve risk and uncertainty because they relate to events and depend on circumstances that may or may not occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts. The forward-looking statements reflect the knowledge and information available at the date of preparation of this Half Yearly Results Announcement, and will not be updated during the year. Nothing in this Half Yearly Results Announcement should be construed as a profit forecast. REVIEW BY BUSINESS SEGMENT*1 Civil Aerospace H1 2009 H1 2008 Engine deliveries 424 462 Underlying revenues (£m) 2,280 2,102 Underlying services revenues (£m) 1,337 1,322 Underlying profit before financing (£m) 257 272 The Civil Aerospace business' order book has continued to grow in the first-half from £43.5bn at the end of 2008 to £46.7bn at the half-year. While order activity for the first-half has been lower than in recent years, demand for the major programmes has been encouraging, with engine orders totalling £ 6.3bn for the A320, A330 and the A350 XWB. The business continues to manage the consequences of further delays in airframe programmes as well as weakening overall demand for aircraft capacity as a result of the deteriorating global economy. Total new engine deliveries in the first half of 424 included a record 103 Trent deliveries. Deliveries of smaller engines, however, were lower as predicted. An increasing proportion of deliveries were on TotalCare™ service contracts, which are an important driver of long-term service revenue growth. Service revenues generated from long-term contracts (TotalCare and CorporateCare™) continued to grow strongly, reflecting the increasing number of engines under contract. The increasing significance of Trent deliveries in the widebody sector saw installed thrust, and therefore the potential for future service revenues, rise by 9m lbs to 357m lbs across the fleet. These trends are largely offsetting the reduction in more discretionary Time and Materials (T&M) service activities, resulting from the reduced scope of repair and overhaul activity on some engines and increasing numbers of Rolls-Royce powered parked aircraft compared to 2008. Although the total number of additional parked aircraft has increased by 662 to around 2,500 over the last 18 months, the number of additional Rolls-Royce powered parked aircraft, at 148, has remained low, as older, less fuel-efficient aircraft continue to be parked ahead of the relatively young, fuel-efficient Rolls-Royce fleet. More than 80 per cent of total parked aircraft are narrowbody and regional jets with the parked widebody population being dominated by aircraft more than 20 years old such as the DC-10, Tristar and early generation B747 aircraft to which Rolls-Royce has limited exposure. The net result has been a strong increase of 21 per cent in revenues from new engine deliveries compared to the first half of 2008 and a one per cent increase in aftermarket revenues as the growing installed thrust on new aircraft offsets the effects of lower utilisation levels and parked aircraft. A number of important milestones were passed during the first-half. The certification of the BR725 engine for the Gulfstream G650 aircraft, due to enter service in 2012, was achieved ahead of schedule; the Trent 700EP entered service and a number of upgrade kits have now been sold within TotalCare; the Trent XWB "design freeze" was achieved on time and manufacture for early assembly in 2010 commenced; and the 4,000th V2500 was delivered. The changing revenue mix, increasing unit costs, higher R&D charges, partially offset by an improving foreign exchange environment and higher RRSP fee income, all contributed to lower reported margins and profits in the period. Outlook Global air travel and airfreight continue to be adversely impacted by the economic downturn. Airframe delays and customer financing issues add to the uncertainty surrounding future engine volumes. The Group continues to expect engine deliveries to fall in 2009, with stable services revenues. Underlying profits are expected to be lower in 2009 than in 2008. Defence Aerospace H1 2009 H1 2008 Engine deliveries 284 198 Underlying revenues (£m) 969 769 Underlying services revenues (£m) 496 441 Underlying profit before financing (£m) 136 104 The Defence Aerospace business has continued to make strong progress over the period with the order book roughly unchanged at £5.4bn. There were increased deliveries in the military transport sector supporting a 44 per cent increase in original equipment revenues. Services revenues increased by 12 per cent, reflecting the utilisation of a large installed fleet and foreign exchange translation benefits. In the military transport sector, a $222m engine contract for the V22-Osprey covering delivery and in-service support for 96 engines from 2010 was signed in the first-half, providing further evidence of the success of this programme. Significant orders were also secured for AE2100 engines and service provision for the C130-J; a $80m contract with the U.S. Air Force to provide spare engines and parts; a $106m MissionCare™ contract with U.S. Naval Air Systems Command (NAVAIR) to provide service support; and a $23m support services and spares contract with the U.S. Air Force. Both engine development programmes for the Joint Strike Fighter continued to make progress. The F136, a joint programme with GE for all F-35 variants, moved to engine test ahead of schedule and the LiftSystem® completed its first hover-pit testing. As in previous years, uncertainty surrounds future funding for the F136 contract and we await the conclusion of the legislative budgetary process later in 2009. Margins have been maintained with strong volume performance and translation benefits offsetting increased unit costs and higher development spend, leading to a 31 per cent increase in first-half underlying profits. Outlook Further strong growth in engine deliveries for the military transport and combat sectors is expected to support another year of profit growth in 2009. Marine H1 2009 H1 2008 Underlying revenues (£m) 1,227 1,016 Underlying services revenues (£m) 376 326 Underlying profit before financing (£m) 110 87 The Marine business performed well despite challenging trading conditions. The order book stands at £4.3bn reflecting new orders of £600m and modest cancellations of £250m. Activity in the offshore oil and gas sector remains encouraging, with continued deepwater developments in a number of major offshore locations including Brazil, West Africa and Russia. Major first-half developments included: - The expansion of Marine's service capability, with two new centres opening in the US, one each in Brazil and Italy and a further three underway in Canada, UAE and West Africa. A new customer training facility is also being developed in Norway. - The launch of the next generation UT deepwater anchor handling design for the offshore industry. - Entry into service of the world's most powerful offshore vessel, the Far Samson, designed and equipped by Rolls-Royce. - The further extension of Marine's presence in the offshore sector with a 33 per cent investment in ODIM ASA. The first-half saw strong growth in both original equipment revenues, which increased by 23 per cent, and service revenues, up by 15 per cent. Services growth reflected the increasing installed base of equipment and the expanding service network. Margins have been maintained despite some negative one-offs in the period. A combination of improving operational performance, lower input costs and more favourable contract pricing all contributed to a 26 per cent increase in underlying profits in the first-half. Outlook The order book remains strong despite a slow down in new order activity. Marine's market leading position in the offshore sector, demand for high specification vessels and the opportunity to continue to develop services, provide good visibility of future revenues and support continuing strong growth in margins and profitability for the full year. Energy H1 2009 H1 2008 Engine deliveries 27 18 Underlying revenues (£m) 447 324 Underlying services revenues (£m) 211 153 Underlying profit before/(loss) financing (£m) 1 (8) The global slowdown is impacting the oil and gas and power generation sectors in different ways causing a small reduction in the order book to £1.1bn. Multinational oil and gas companies continue to move ahead with substantial investment plans, albeit more cautiously than in previous years, while the progress of new power generation programmes has slowed due to a lack of affordable project finance and lower demand for electricity. Significant order growth in prior years and improved USD translation rates have helped Energy deliver strong first-half underlying revenue growth across original equipment and services, both of which grew by 38 per cent in the first-half. Oil and gas activity has remained particularly robust and a growing installed base and high utilisation rates are contributing to increased service revenues across the oil and gas and power generation markets. Operational performance is starting to benefit from the investment the Group has made in new US facilities, such as new flow lines and test beds. The tidal power generation demonstrator project is expected to start a 500kw demonstration in the Pentland Firth, Scotland later in the year. Development of the fuel cell technology programme is continuing but with investment at a lower level than in prior years. As a result of strong growth in revenues, improving operational performance and reduced investment in fuel cells, first-half profits increased by £9m. Outlook Continued growth in original equipment and strong aftermarket growth, especially in oil and gas activities, are expected to deliver improving profitability in the second half of 2009 leading to strong growth for the full year. *1 Commentaries relate to underlying revenues and profits unless specifically noted Financial Review - H1 2009 Performance Foreign exchange The pace and extent of currency movements have had a significant effect on the Group's financial reporting in the first half of 2009, with the GBP exchange rates against the USD and the Euro having the biggest impact. These movements have influenced both the reported income statement and the cash flow and closing net cash position (as set out in the cash flow statement) in the following ways: 1. Income statement - the most significant impact was the period end mark to market of outstanding financial instruments (foreign exchange contracts, interest rate, commodity and jet fuel swaps). The principal adjustments related to the GBP~USD hedge book. The principal spot rate movements in the first half of 2009 were as follows: Jan 1 2009 June 30 2009 GBP~USD £1~$1.438 £1~$1.647 GBP~Euro £1~€1.034 £1~€1.174 Oil - Spot Brent $49/bbl $69/bbl The average rates throughout the period were: H1 2009 H12008 FY 2008 GBP ~ USD £1~$1.493 £1~$1.974 £1~$1.854 GBP ~ Euro £1~€1.119 £1~€1.291 £1~€1.258 The impact of the period end mark to market on all of the outstanding financial instruments is included within net financing in the income statement and caused a net £1,909m gain (2008 first-half £75m gain), contributing to a published profit before tax of £2,515m (compared to £389m reported in the first half of 2008). These adjustments are non-cash, accounting adjustments required under IAS 39 and do not, therefore, reflect the underlying trading performance of the Group for the period. Underlying profit before finance costs of £478m benefited from a £47m foreign exchange benefit compared to the first half of 2008. The achieved rate on selling net USD income was two cents better in the period than in the first half of 2008, contributing £12m of the first-half underlying profit improvement, and is expected to be between two to three cents better for the full year compared to full year 2008. In addition, the significant improvement in the average GBP~USD and GBP~Euro exchange rates, 48 and 17 cents respectively, contributed translation benefits totalling £35m of the first-half underlying profit improvement. Translation benefits for the full year are expected to reduce from the £35m reported in the first-half given improved rates experienced in the second half of 2008. 2. Balance sheet and cash flow - The Group maintains a number of currency cash balances which vary throughout the financial year. Given the significant movements in foreign exchange rates in the period, a number of these cash balances were impacted by the weaker rates at the period end causing a reduction of £194m in the periodic cash flow and hence the closing balance sheet cash position. Income statement The firm and announced order book, at constant exchange rates, was £57.5bn (2008 year-end £55.5bn) after reflecting new order intake of £7.9bn in the period. Aftermarket services included in the order book totalled £16.2bn (2008 year-end £14.5bn). Revenues increased by 27 per cent, compared with 2008, to £5,142m. Revenues on an underlying basis grew by 17 per cent. Payments to industrial RRSPs, charged in cost of sales, amounted to £151m (2008 first-half £117m). Gross research and development investment was £440m (2008 first-half £399m). Net research and development investment, charged to the income statement was £200m (2008 first-half £177m) after net capitalisation of £46m (2008 first-half £45m) on development programmes in the period. Receipts from RRSPs in respect of new programme developments, shown as other operating income, were £68m (2008 first-half £13m), as key partners joined major new programmes, primarily the Trent XWB. Restructuring costs of £37m (2008 first-half £60m) were charged, reflecting the ongoing reduction in headcount. Underlying profit margins before financing fell by approximately 0.5 per cent to 9.7 per cent in the period, reflecting strong growth in lower margin original equipment and an increase in unit costs of around two per cent relative to 2008, partially offset by both transactional and translational foreign exchange benefits of £47m. Net financing income was £1,922m (2008 first-half £67m) including the effects of mark to market revaluations. Underlying finance costs increased to £33m (2008 first-half £17m) reflecting lower interest rates on cash deposits. The income statement tax charge of £658m (2008 first-half £97m), reflects the large mark to market gain caused by the revaluation of various financial instruments at the period end. The taxation charge on an underlying basis was £85m (2008 first-half £101m), representing 19.1 per cent of underlying profit before tax. The underlying rate benefited from the settlement of certain overseas tax audits and is affected by the geographical mix of profits, changes in legislation and the benefit of research and development tax credits. The 2009 full year underlying tax rate is expected to be around 21 per cent. Underlying profit before tax was £445m (2008 first-half £410m). Underlying earnings per share increased by 15 per cent, to 19.64p (2008 first-half 17.15p) (see note 5). Balance sheet and cash flow Investment in intangibles during the period was £167m (2008 first-half £122m) and included £75m (2008 first-half £32m) for recoverable engine costs, £61m (2008 first-half £57m) for capitalised development costs and a further £26m (2008 first-half £25m) for certification costs and participation fees. The continued development and replacement of operational facilities contributed to a total investment in property, plant and equipment of £109m (2008 first-half £105m). Overall investment in tangible and intangible assets for the full year 2009 is expected to be similar to 2008. The overall net position of assets and liabilities for TotalCare packages on the balance sheet was an asset of £903m (2008 year-end £848m) and the movements include new agreements, timing of overhauls and changes in foreign exchange rates. Provisions were £377m (2008 year-end £369m). Provisions carried forward in respect of potential customer financing exposure were unchanged at £73m. Working capital increased by £287m during the period, with increased inventory of £123m and other financial working capital increasing by £164m. Inventory increased in the period in support of growth and partly reflecting disruption caused by programme changes. Deposits from new orders were weak given reduced order flow in the period. Cash outflow in the period of £428m (2008 first-half £44m) included a £194m outflow (2008 first-half £48m benefit) relating to the period end revaluation of foreign currency cash balances given weaker USD and Euro exchange rates compared to the start of the period. Continued growth in underlying profits was offset by increased cash investments of £276m (2008 first-half £227m) in plant and equipment and intangible assets and payments to shareholders of £101m (2008 first-half £58m). Tax payments increased by £18m to £50m in the period. Average net cash for the period was £760m (2008 first-half £265m). The net cash balance at the period-end was £1,030m (2008 year-end £1,458m). The Group's full year cash flow is expected to be affected by higher pension contributions, reduced deposits and progress payments and increased payments to shareholders which largely reflect the removal of the conversion option in 2008. In addition, the Group may be asked to provide financial support on a case by case basis to some customers and suppliers. As a result, we continue to expect that there will be a cash outflow in 2009. However, the average net cash balance is expected to increase from the 2008 full-year average of £375m. There were no material changes to the Group's gross and net contingent liabilities in the period. 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 2009, the gross level of commitments on delivered aircraft was $1,153m (£699m), including $642m for AVGs and $511m for credit guarantees. The net exposure after reflecting the level of security was $237m (£144m). The declared interim payment to shareholders is equivalent to 6.00 pence per ordinary share (2008 interim payment 5.72p), a five per cent increase over the 2008 interim. The payment to shareholders will, as before, be made in the form of redeemable C Shares which shareholders may either choose to retain or redeem for a cash equivalent. The Registrar, on behalf of the Company, operates a C Share Reinvestment Plan (CRIP) and can, on behalf of shareholders, purchase ordinary shares from the market rather than delivering a cash payment. The interim payment is payable on January 5, 2010 to shareholders on the register on October 30, 2009. The final day of trading with entitlement to C Shares is October 27, 2009. Condensed consolidated income statement For the half-year ended June 30, 2009 Restated* Half-year Half-year Year to to June to June December 30, 2009 30, 2008 31, 2008 Notes £m £m £m Revenue 2 5,142 4,049 9,082 Cost of sales (4,054) (3,214) (7,278) Gross profit 1,088 835 1,804 Other operating income 68 13 79 Commercial and administrative costs (407) (383) (699) Research and development costs (200) (177) (403) Share of profit of joint ventures 47 33 74 Operating profit 596 321 855 (Loss)/profit on sale or termination of businesses (3) 1 7 Profit before financing 593 322 862 Financing income 3 2,170 359 432 Financing costs 3 (248) (292) (3,186) Net financing 1,922 67 (2,754) Profit/(loss) before taxation *1 2,515 389 (1,892) Taxation (658) (97) 547 Profit/(loss) for the period 1,857 292 (1,345) Attributable to: Equity holders of the parent 1,859 294 (1,340) Minority interests (2) (2) (5) Profit/(loss) for the period 1,857 292 (1,345) * During the period, the Group has reviewed the allocation of costs. As a result, costs of £17m (2008 full year £33m) classified as costs of sales in 2008 have been reclassified as commercial and administrative costs. Earnings per ordinary share *2 Basic 5 100.87p 16.22p (73.63p) Diluted 5 99.95p 15.97p (73.63p) Payments to shareholders in respect of the period Pence per share 6 6.00p 5.72p 14.30p Total (£m) 6 111 105 263 *1 Underlying profit before taxation 2 445 410 880 *2 Underlying earnings per share are shown in note 5. Condensed consolidated statement of comprehensive income For the half-year ended June 30, 2009 Restated * Half-year Half-year Year to to June to June December 30, 2009 30, 2008 31, 2008 £m £m £m Profit/(loss) for the period 1,857 292 (1,345) Other comprehensive income Foreign exchange translation differences from foreign operations (288) 109 603 Net actuarial gains - - 944 Movement in unrecognised post-retirement surplus (24) (43) (928) Movement in post-retirement minimum funding liability 25 24 66 Transfers from transition hedging reserve (27) (66) (80) Transfers to cash flow hedging reserve 12 - (41) Related tax movements (1) 23 (4) Total comprehensive income for the period 1,554 339 (785) Attributable to: Equity holders of the parent 1,557 341 (782) Minority interests (3) (2) (3) Total comprehensive income for the period 1,554 339 (785) * 2008 figures have been restated to reflect the adoption of IFRIC 14 with effect from January 1, 2008 - see note 10. Condensed consolidated balance sheet At June 30, 2009 Restated * June June December 30, 2009 30, 2008 31, 2008 Notes £m £m £m ASSETS Non-current assets Intangible assets 7 2,286 1,885 2,286 Property, plant and equipment 1,916 1,792 1,995 Investments - joint ventures 336 298 345 Other investments 55 57 53 Deferred tax assets 170 110 804 Post-retirement scheme surpluses 10 455 221 453 5,218 4,363 5,936 Current assets Inventory 2,589 2,453 2,600 Trade and other receivables 3,802 3,069 3,929 Taxation recoverable 9 7 9 Other financial assets 9 776 498 390 Short-term investments 1 1 1 Cash and cash equivalents 2,716 1,844 2,471 Assets held for sale 9 24 12 9,902 7,896 9,412 Total assets 15,120 12,259 15,348 LIABILITIES Current liabilities Borrowings (6) (13) (23) Other financial liabilities 9 (743) (159) (2,450) Trade and other payables (5,301) (4,647) (5,735) Current tax liabilities (153) (198) (184) Provisions (204) (163) (181) (6,407) (5,180) (8,573) Non-current liabilities Borrowings 8 (1,879) (1,040) (1,325) Other financial liabilities 9 (424) (320) (391) Trade and other payables (1,306) (1,026) (1,318) Non-current tax liabilities (1) - (1) Deferred tax liabilities (309) (292) (307) Provisions (173) (161) (188) Post-retirement scheme deficits 10 (930) (811) (1,020) (5,022) (3,650) (4,550) Total liabilities (11,429) (8,830) (13,123) Net assets 3,691 3,429 2,225 EQUITY Capital and reserves Called-up share capital 371 364 369 Share premium account 97 67 82 Capital redemption reserves 200 185 204 Hedging reserves (29) 29 (22) Other reserves 368 171 663 Retained earnings 2,677 2,603 920 Equity attributable to equity holders of the parent 3,684 3,419 2,216 Minority interests 7 10 9 Total equity 3,691 3,429 2,225 * 2008 figures have been restated to reflect the adoption of IFRIC 14 with effect from January 1, 2008 - see note 10. Condensed consolidated cash flow statement For the half-year ended June 30, 2009 Half-year Half-year Year to to June to June December 30, 2009 30, 2008 31, 2008 Notes £m £m £m Reconciliation of cash flows from operating activities Profit/(loss) before taxation 2,515 389 (1,892) Share of profit of joint ventures (47) (33) (74) Loss/(profit) on sale or termination of businesses 3 (1) (7) Profit on sale of property, plant and equipment (16) (13) (11) Net interest payable 3 18 5 10 Net post-retirement scheme financing 3 50 13 22 Net other financing 3 (1,990) (85) 2,722 Taxation paid (50) (32) (117) Amortisation of intangible assets 7 57 56 107 Depreciation of property, plant and equipment 93 92 208 Increase in provisions 30 16 39 Increase in inventories (123) (250) (208) Increase in trade and other receivables (97) (490) (1,072) (Decrease)/increase in trade and other payables (67) 406 1,242 (Increase)/decrease in other financial assets and liabilities (184) 223 144 Additional cash funding of post-retirement schemes (73) (58) (117) Share-based payments charge 15 17 40 Transfers of hedge reserves to income statement (27) (66) (80) Dividends received from joint ventures 30 22 59 Net cash inflow from operating activities 137 211 1,015 Cash flows from investing activities Additions of unlisted investments (3) (1) (1) Disposals of unlisted investments - 1 6 Additions of intangible assets (167) (122) (389) Purchases of property, plant and equipment (109) (105) (286) Disposals of property, plant and equipment 29 42 68 Acquisition of businesses (1) (8) (50) Disposals of businesses - - 6 Investments in joint ventures (5) (9) (32) Disposals of joint ventures 2 13 30 Net cash outflow from investing activities (254) (189) (648) Cash flows from financing activities Borrowings due within one year - repayment of loans (10) (3) (1) Borrowings due after one year - increase in loans/(repayment) 692 (25) (22) Capital element of finance lease payments (1) (2) (4) Net cash inflow/(outflow) from increase/ (decrease) in borrowings 681 (30) (27) Interest paid (48) (55) (53) Interest received 30 43 52 Interest element of finance lease payments - - (1) Decrease in government securities and corporate bonds - 39 39 Issue of ordinary shares 17 - 17 Purchase of own shares (16) (44) (44) Other transactions in own shares - - (4) Redemption of B/C Shares (101) (58) (200) Net cash inflow/(outflow) from financing activities 563 (105) (221) Increase/(decrease) in cash and cash equivalents 446 (83) 146 Cash and cash equivalents at January 1 2,462 1,872 1,872 Foreign exchange (195) 48 441 Net cash of businesses acquired/disposed 1 - 3 Cash and cash equivalents at period end 2,714 1,837 2,462 Half-year Half-year Year to to June to June December 30, 2009 30, 2008 31, 2008 £m £m £m Reconciliation of increase in cash and cash equivalents to movements in net funds Increase/(decrease) in cash and cash equivalents 446 (83) 146 Cash inflow from decrease in government securities and corporate bonds - (39) (39) Net cash (inflow)/outflow from (increase)/ decrease in borrowings (681) 30 27 Change in net funds resulting from cash flows (235) (92) 134 Net funds of businesses acquired/disposed 1 - (3) Exchange adjustments (194) 48 439 Fair value adjustments 136 (37) (319) Movement in net funds (292) (81) 251 Net funds at January 1 excluding the fair value of swaps 1,124 873 873 Net funds at period end excluding the fair value of swaps 832 792 1,124 Fair value of swaps hedging fixed rate borrowings 198 52 334 Net funds at period end 1,030 844 1,458 The movement in net funds (defined by the Group as including the items shown below) is as follows: At Net funds of Non At June January Funds business cash Fair 30, 1, 2009 flow acquired flow Exchange value 2009 £m £m £m £m £m £m £m Cash at bank and in hand 940 321 1 - (89) - 1,173 Overdrafts (9) 6 - - 1 - (2) Short-term deposits 1,531 119 - - (107) - 1,543 Cash and cash equivalents 2,462 446 1 - (195) - 2,714 Investments 1 - - - - - 1 Other borrowings due within one year (11) 10 - (1) - - (2) Borrowings due after one year (1,324) (692) - 1 1 136 (1,878) Finance leases (4) 1 - - - - (3) 1,124 (235) 1 - (194) 136 832 Fair value of swaps hedging fixed rate borrowings 334 (136) 198 1,458 (235) 1 - (194) - 1,030 Condensed consolidated statement of changes in equity For the half-year ended June 30, 2009 Attributable to equity holders of the parent Capital Share Share redemption Hedging Other Retained Minority Total capital premium reserves reserves reserves earnings Total interests equity £m £m £m £m £m £m £m £m £m At January 1, 2008 364 67 191 77 62 2,776 3,537 12 3,549 Adoption of IFRIC 14 (note 10) - - - - - (353) (353) - (353) At January 1, 2008 restated 364 67 191 77 62 2,423 3,184 12 3,196 Half-year to June 30, 2008 Total comprehensive income - - - (48) 109 280 341 (2) 339 Issue of B Shares - - (73) - - - (73) - (73) Redemption of B Shares - - 58 - - (58) - - - Conversion of B Shares into ordinary shares - - 9 - - - 9 - 9 Ordinary shares purchased - - - - - (44) (44) - (44) Ordinary shares vesting in share-based payment plans - - - - - 35 35 - 35 Share-based payment adjustment - - - - - (18) (18) - (18) Related tax movements - - - - - (15) (15) - (15) At June 30, 2008 364 67 185 29 171 2,603 3,419 10 3,429 Half-year to December 31, 2008 Total comprehensive income - - - (51) 492 (1,564) (1,123) (1) (1,124) Arising on issue of ordinary shares 2 15 - - - - 17 - 17 Issue of B Shares - - (164) - - - (164) - (164) Redemption of B Shares - - 142 - - (142) - - - Conversion of B Shares into ordinary shares 3 - 41 - - - 44 - 44 Ordinary shares vesting in share-based payment plans - - - - - 2 2 - 2 Share-based payment adjustment - - - - - 17 17 - 17 Related tax movements - - - - - 4 4 - 4 At December 31, 2008 369 82 204 (22) 663 920 2,216 9 2,225 Half-year to June 30, 2009 Total comprehensive income - - - (7) (295) 1,859 1,557 (3) 1,554 Arising on issue of ordinary shares 2 15 - - - - 17 - 17 Issue of C Shares - - (105) - - - (105) - (105) Redemption of C Shares - - 101 - - (101) - - - Ordinary shares purchased - - - - - (16) (16) - (16) Ordinary shares vesting in share-based payment plans - - - - - 22 22 - 22 Share-based payment adjustment - - - - - (7) (7) - (7) Transactions with minority interests - - - - - - - 1 1 Related tax movements - - - - - - - - - At June 30, 2009 371 97 200 (29) 368 2,677 3,684 7 3,691 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, 2009 comprise the Company and its subsidiaries (together referred to as the "Group") and the Group's interests in joint ventures. The consolidated financial statements of the Group as at and for the year ended December 31, 2008 (2008 Annual report) are available 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 2008 Annual report. The comparative figures for the financial year December 31, 2008 are not the Group's statutory accounts for that financial year. Those accounts have been reported on by the Group'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) or (3) of the Companies Act 1985. The Board of directors approved the condensed consolidated half-year financial statements on July 29, 2009. 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, 2008, with the following exceptions: - IFRS 8 Operating Segments has been adopted. Under IFRS 8, reportable segments are determined on the basis of those segments whose operating results are regularly reviewed by the Board. These operating results are prepared on a basis that excludes items considered to be non-underlying in nature. Note 2 of the condensed consolidated financial statements sets out the Group's reportable segments and sets out reconciliations between these and the results reported in the income statement and balance sheet. - IAS 23 Borrowing Costs (as revised) has been adopted. IAS 23 requires borrowing costs that are directly attributable to the acquisition, construction or production of certain assets to be capitalised as part of the cost of the asset. IAS 23 has been adopted prospectively from January 1, 2009. No borrowing costs were eligible for capitalisation during the six months ended June 30, 2009. - IFRIC 14 IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction has been adopted with effect from January 1, 2008. IFRIC 14 requires that, where the Group is committed to making future contributions to post-retirement schemes in respect of past service, and those contributions will result in an unrecognisable surplus, a liability for the future contributions should be recognised. 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, 2008. 2. Analysis by business segment The analysis by business segment is presented in accordance with the basis set out in IFRS 8 Operating segments. The analyses for 2008 have been restated on a consistent basis. The operating results are prepared on an underlying basis that excludes items considered to be non-underlying in nature. The principles adopted are: Underlying revenues - Where revenues are denominated in a currency other than the functional currency of the Group undertaking, these 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 - Where transactions are denominated in a currency other than the functional currency of the Group undertaking, this excludes the release of the foreign exchange transition hedging reserve and reflects the transactions at the achieved exchange rates on settled derivative contracts. Underlying profit before taxation - In addition to those adjustments in underlying profit before financing, this: - Includes amounts realised from settled derivative contracts and revaluation of relevant assets and liabilities to exchange rates forecast to be achieved from future settlement of derivative contracts. - Excludes unrealised amounts arising from revaluations required by IAS 39 Financial Instruments: Recognition and Measurement, changes in value of financial RRSP contracts arising from changes in forecast payments and the net impact of financing costs related to post-retirement scheme benefits. This analysis also includes a reconciliation of the underlying results to those reported in the consolidated income statement. Half-year to June 30, 2009 Half-year to June 30, 2008 Year to December 31, 2008 Original Original Original equipment Aftermarket Total equipment Aftermarket Total equipment Aftermarket Total £m £m £m £m £m £m £m £m £m Underlying revenues Civil aerospace 943 1,337 2,280 780 1,322 2,102 1,776 2,726 4,502 Defence aerospace 473 496 969 328 441 769 739 947 1,686 Marine 851 376 1,227 690 326 1,016 1,492 712 2,204 Energy 236 211 447 171 153 324 385 370 755 2,503 2,420 4,923 1,969 2,242 4,211 4,392 4,755 9,147 Half-year to Half-year to Year to June 30, 2009 June 30, 2008 December 31, 2008 £m £m £m Underlying profit before financing Civil aerospace 257 272 566 Defence aerospace 136 104 223 Marine 110 87 183 Energy 1 (8) (2) Reportable segments 504 455 970 Central items (26) (28) (51) 478 427 919 Underlying net financing (33) (17) (39) Underlying profit before taxation 445 410 880 Underlying taxation (85) (101) (217) Underlying profit for the period 360 309 663 Attributable to: Equity holders of the parent 362 311 668 Minority interests (2) (2) (5) Total comprehensive income for the period 360 309 663 Net assets/ Total assets Total liabilities (liabilities) Restated * Restated * Restated * June June December June June December June June December 30, 30, 31, 30, 30, 31, 30, 30, 31, 2009 2008 2008 2009 2008 2008 2009 2008 2008 Net assets/ (liabilities) Civil aerospace 7,835 6,593 7,543 (5,164) (3,808) (7,213) 2,671 2,785 330 Defence aerospace 1,102 959 1,037 (1,390) (1,129) (1,234) (288) (170) (197) Marine 2,375 2,067 2,339 (1,845) (1,462) (1,851) 530 605 488 Energy 922 729 834 (415) (401) (442) 507 328 392 Reportable segments 12,234 10,348 11,753 (8,814) (6,800) (10,740) 3,420 3,548 1,013 Eliminations (663) (324) (477) 663 324 477 - - - Net funds 2,915 1,897 2,806 (1,885) (1,053) (1,348) 1,030 844 1,458 Tax assets/ (liabilities) 179 117 813 (463) (490) (492) (284) (373) 321 Unallocated post-retirement scheme surpluses/ (deficits) 455 221 453 (930) (811) (1,020) (475) (590) (567) 15,120 12,259 15,348 (11,429) (8,830) (13,123) 3,691 3,429 2,225 * 2008 figures have been restated to reflect the adoption of IFRIC 14 with effect from January 1, 2008 - see note 10. Half-year Half-year Year to to June to June December 30, 2009 30, 2008 31, 2008 Group employees at period end Civil aerospace 21,700 22,300 22,600 Defence aerospace 5,500 5,700 5,700 Marine 8,600 8,000 8,300 Energy 2,500 2,500 2,300 38,300 38,500 38,900 Underlying revenue adjustments Half-year Half-year Year to to June to June December 30, 2009 30, 2008 31, 2008 £m £m £m Underlying revenue 4,923 4,211 9,147 Release of transition hedging reserve 27 66 80 Exclude achieved rate of settled derivative contracts 192 (228) (145) Revenue per consolidated income statement 5,142 4,049 9,082 Underlying profit adjustments Half-year to Half-year to Year to June 30, 2009 June 30, 2008 December 31, 2008 Profit Profit Profit Profit Profit Profit before before before before before before financing tax financing tax financing tax £m £m £m £m £m £m Reportable segments 504 455 970 Central items (26) (28) (51) Underlying profit 478 445 427 410 919 880 Release of transition hedging reserve 27 27 66 66 80 80 Realised gains on settled derivative contracts*1 182 248 (191) (235) (185) (292) Net unrealised fair value changes to derivative contracts*2 10 1,949 - 135 4 (2,475) Effect of currency on contract accounting (104) (104) 20 20 44 44 Revaluation of trading assets and liabilities - (8) - (2) - 14 Financial RRSPs - foreign exchange differences and changes in forecast payments - 8 - 8 - (121) Net post-retirement scheme financing - (50) - (13) - (22) Total underlying adjustments 115 2,070 (105) (21) (57) (2,772) Profit/(loss) per consolidated income statement 593 2,515 322 389 862 (1,892) *1 2008 excluded £24m of realised losses on derivative contracts settled in respect of trading cash flows that would occur after the year end. £10m of these realised losses have been recognised in the period to June 30, 2009. *2 Profit before financing includes £9m of unrealised losses for which the related trading contracts have been cancelled, and includes £1m of unrealised losses (2008: half year nil, full year £4m gain) in respect of derivative contracts held by joint venture undertakings. 3. Net financing Half-year to June 30, Half-year to June 30, Year to December 31, 2009 2008 2008 Per Per Per consolidated Underlying consolidated Underlying consolidated Underlying income net income net income net statement financing statement financing statement financing £m £m £m £m £m £m Financing income Interest receivable 13 13 31 31 59 59 Fair value gains on foreign currency contracts 1,909 - 75 - - - Financial RRSPs - foreign exchange differences and changes in forecast payments 8 - 8 - - - Fair value gains on commodity derivatives 30 - 60 - - - Expected return on post-retirement scheme assets 152 - 185 - 373 - Net foreign exchange gains 58 - - - - - 2,170 13 359 31 432 59 Financing costs Interest payable (31) (31) (36) (36) (69) (69) Fair value losses on foreign currency contracts - - - - (2,383) - Financial RRSPs - foreign exchange differences and changes in forecast payments - - - - (121) - Financial charge relating to financial RRSPs (14) (14) (12) (12) (26) (26) Fair value losses on commodity derivatives - - - - (96) - Interest on post-retirement scheme liabilities (202) - (198) - (395) - Net foreign exchange losses - - (46) - (91) - Other financing charges (1) (1) - - (5) (3) (248) (46) (292) (48) (3,186) (98) Net financing 1,922 (33) 67 (17) (2,754) (39) Analysed as: Net interest payable (18) (18) (5) (5) (10) (10) Net post-retirement scheme financing (50) - (13) - (22) - Net other financing 1,990 (15) 85 (12) (2,722) (29) Net financing 1,922 (33) 67 (17) (2,754) (39) 4. Taxation The effective tax rate for the half-year is 26.2% (2008 half-year 24.9%, full year 28.9%). The first half tax charge benefited from a one-off £21m credit following the successful completion of certain overseas tax audits. 5. Earnings per ordinary share (EPS) Basic EPS is calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period, excluding ordinary shares held under trust, which have been treated as if they had been cancelled. Diluted EPS is calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period as above, adjusted by the bonus element share options. Half-year to June 30, Half-year to June 30, Year to December 31, 2009 2008 2008 Potentially Potentially Potentially dilutive dilutive dilutive share share share Basic options Diluted Basic options Diluted Basic options*1 Diluted Profit/ (loss) (£m) 1,859 - 1,859 294 - 294 (1,340) - (1,340) Weighted average number of shares (millions) 1,843 17 1,860 1,813 28 1,841 1,820 - 1,820 EPS (pence) 100.87 (0.92) 99.95 16.22 (0.25) 15.97 (73.63) - (73.63) *1 As the basic EPS is negative, in accordance with IAS 33 Earnings per Share, share options are not considered dilutive. The reconciliation between underlying EPS and basic EPS is as follows: Half-year to Half-year to Year to June 30, 2009 June 30, 2008 December 31, 2008 Pence £m Pence £m Pence £m Underlying EPS / Underlying profit attributable to equity holders of the parent 19.64 362 17.15 311 36.70 668 Total underlying adjustments to profit before tax (note 2) 112.32 2,070 (1.15) (21) (152.31) (2,772) Related tax effects (31.09) (573) 0.22 4 41.98 764 Basic EPS / Profit attributable to equity holders of the parent 100.87 1,859 16.22 294 (73.63) (1,340) 6. Payments to shareholders in respect of the period Payments to shareholders in respect of the period represent the value of C Shares to be issued in respect of the results for the period. Issues of C Shares were declared as follows: Half-year to Year to June 30, 2009 December 31, 2008 Pence per Pence per share £m share £m Interim 6.00 111 5.72 105 Final 8.58 158 14.30 263 7. Intangible assets Certification costs and Recoverable Software participation Development engine and Goodwill fees expenditure costs other Total £m £m £m £m £m £m Cost: At January 1, 2009 1,013 568 632 463 254 2,930 Exchange adjustments (96) (6) (3) - (4) (109) Additions - 26 61 75 5 167 Disposals - - - - (4) (4) At June 30, 2009 917 588 690 538 251 2,984 Accumulated amortisation and impairment: At January 1, 2009 5 165 176 250 48 644 Exchange adjustments - (1) - - (1) (2) Provided during the period - 6 15 22 14 57 Disposals - - - - (1) (1) At June 30, 2009 5 170 191 272 60 698 Net book value at June 30, 2009 912 418 499 266 191 2,286 Net book value at December 31, 2008 1,008 403 456 213 206 2,286 8. Borrowings On February 5, 2009, the Group borrowed £200m from an existing facility. Interest is payable at 3 month LIBOR + 26.7bp and the loan matures in 2014. On April 30, 2009, the Group issued £500m 6.75% Notes maturing in 2019. There were no other significant changes in the Group's borrowings during the six months ended June 30, 2009. 9. Other financial assets and liabilities Half-year to June 30, Half-year to June 30, Year to December 31, 2009 2008 2008 Assets Liabilities Net Assets Liabilities Net Assets Liabilities Net £m £m £m £m £m £m £m £m £m Foreign exchange contracts 596 (680) (84) 348 (103) 245 112 (2,293) (2,181) Commodity contracts - (42) (42) 74 - 74 - (89) (89) 596 (722) (126) 422 (103) 319 112 (2,382) (2,270) Interest rate contracts 180 (3) 177 76 (1) 75 278 (4) 274 Financial RRSPs - (438) (438) - (353) (353) - (455) (455) B/C Shares - (4) (4) - (22) (22) - - - 776 (1,167) (391) 498 (479) 19 390 (2,841) (2,451) Foreign exchange and commodity financial instruments Half-year Year to to June December Half-year to June 30, 2009 30, 2008 31, 2008 Foreign exchange Commodity Total Total Total £m £m £m £m £m At January 1 (2,181) (89) (2,270) 418 418 Fair value changes to fair value hedges (39) - (39) 1 83 Fair value changes to net investment hedges 6 - 6 - - Fair value changes to other derivative contracts 1,909 30 1,939 135 (2,479) Fair value of contracts settled 221 17 238 (235) (268) Fair value of derivative contracts assumed on formation of joint venture - - - - (24) At period end (84) (42) (126) 319 (2,270) Financial risk and revenue sharing partnerships (financial RRSPs) Half-year Half-year Year to to June to June December 30, 2009 30, 2008 31, 2008 £m £m £m At January *1 (455) (315) (315) Cash paid to partners 17 12 53 Addition (15) (39) (40) Exchange adjustments direct to reserves 21 (7) (6) Financing charge *1 (14) (12) (26) Excluded from underlying profit: *1 Exchange adjustments 12 5 (118) Changes in forecast payments (4) 3 (3) At period end (438) (353) (455) *1 Total charge included within finance in the income statement is £6m (2008 half-year £4m, full year £147m). 10. Pensions and other post-retirement benefits The net post-retirement scheme surplus/deficit as at June 30, 2009 is calculated on a year to date basis, using the latest valuation as at December 31, 2008. 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, 2008. The adoption of IFRC 14 has resulted in the recognition of an additional provision for future minimum funding liabilities. This has increased the scheme deficits by £400m at June 30, 2009 (2008 half year £467m, full year £425m). Consequential deferred tax assets of £112m (2008 half year £131m, full year £119m) have also been recognised. 11. 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 relating 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 2009, there were no material changes to the maximum gross and net contingent liabilities. Contingent liabilities exist in respect of guarantees provided by the Group in the ordinary course of business for product delivery, performance and reliability. The Group has, in the normal course of business, entered into arrangements in respect of export finance, performance bonds, countertrade obligations and minor miscellaneous items. Various Group undertakings are parties to legal actions and claims which arise in the ordinary course of business, some of which are for substantial amounts. While the outcome of some of these matters cannot precisely be foreseen, the directors do not expect any of these arrangements, legal actions or claims, after allowing for provisions already made, to result in significant loss to the Group. 12. Related party transactions Transactions with related parties are shown on page 136 of the Annual report 2008. Significant transactions in the current financial period are as follows: Half-year Half-year Year to to June to June December 30, 2009 30, 2008 31, 2008 £m £m £m Sales of goods and services to joint ventures 1,086 785 1,555 Purchases of goods and services from joint ventures (890) (688) (1,482) 13. Events after the balance sheet date On June 29, 2009, the Group announced that it had agreed to purchase a 33 per cent holding in the ordinary shares of ODIM ASA for NOK700m, a leading provider of specialist marine handling systems to the offshore oil and gas industry. The agreement was conditional on the approval of the investment by the Norwegian competition authority. On July 23, 2009, the relevant approval was obtained and the purchase was completed. Principal risks and uncertainties As described on pages 21 to 24 of the Annual report 2008, 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 2009. 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 Financial risks - Cyclical downturn - global - Counterparty credit risk, funding liquidity recession and credit rating - External events or factors - Market risks - foreign exchange, interest affecting air travel rate and commodity - Environmental impact of products - Sales financing and operations Strategic risks Operational risks - Delivery of aftermarket - Performance of supply chain - Competitive pressures - IT security - Export controls - Ethics - Programme risk Going concern After making enquiries, the directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements. The financial risk management objectives and policies of the Company and the exposure of the Company to price risk, credit risk, liquidity risk and cash flow risk are discussed on pages 60 to 63 of the Annual report 2008. Statement of directors' responsibilities The directors confirm that to the best of their knowledge: - the condensed financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU; - the interim management report includes a fair review of the information required by: a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so. The directors of Rolls-Royce Group plc at February 11, 2009 are listed in the Annual report 2008 on page 65. There have been no changes to the directors since that report. By order of the Board Sir John Rose Andrew Shilston Chief Executive Finance Director July 29, 2009 July 29, 2009 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 30 June 2009 which comprises the condensed consolidated income statement, the condensed consolidated statement of comprehensive income, the condensed consolidated balance sheet, the condensed consolidated cash flow statement, the condensed consolidated statement of changes in equity 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. 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 30 June 2009 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FSA. AJ Sykes for and on behalf of KPMG Audit Plc Chartered Accountants, London 29 July 2009

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