Half-yearly Report

July 29 2010 ROLLS-ROYCE GROUP plc 2010 HALF-YEARLY RESULTS Group Highlights * Order book remains strong at £58.4bn (2009 year-end £58.3bn). * Group revenues increased to £5,421m (2009 first-half £5,142m). Revenues on an underlying basis* increased by seven per cent to £5,259m. Services revenues increased by eight per cent to £2,615m on an underlying basis. * Profit before financing was £594m (2009 first-half £593m). * Underlying profit before taxation** increased by four per cent to £465m (2009 first-half £445m). * Strong financial position - Average net cash for the period improved by £155m to £915m (2009 first-half £760m). - Robust balance sheet with net cash of £1,388m at the period-end (2009 year-end £1,275m) after a cash inflow in the period of £113m. * Interim payment to shareholders increased 6.7 per cent to 6.40 pence per share. ** see note 2 on page 20 Sir John Rose, Chief Executive, said: "Rolls-Royce delivered a robust performance despite the continuing uncertainty in the global economy. "We continue to make progress with our development programmes and new facility construction; these investments are designed to underpin the growth embedded in our order book and achieve productivity improvements. "We now expect underlying profit for the full-year to be modestly higher than 2009, mainly due to good cost control and a strong trading performance from our Marine business. We expect a modest cash inflow for the year and average net cash balances to remain at a similar level to the first-half. "We are increasing the first-half payment to shareholders by 6.7 per cent". Group Overview An increasingly resilient portfolio: The Group made progress in the first-half of 2010 despite the economic uncertainty, the disruption caused by volcanic eruptions in Iceland and the costs incurred as we invest for future growth. The order book at £58.4bn, underlying revenues of £5.3bn and underlying profit before tax of £465m all increased. The Group maintained its strong financial position with average net cash balances improving by £155m to £915m compared to the first six months of 2009. Flight test programmes in Civil and Defence aerospace including the Boeing 787, Airbus A400M and Gulfstream G650, all made good progress in the period. The engine for the Airbus A350 XWB, which is due to enter service in 2013, ran for the first time in June. Sea trials of the Astute class submarine and the Type 45 Destroyer, HMS Daring, continued and the Littoral Combat Ship entered active duty. In April, the Marine business completed the acquisition of ODIM ASA, acquiring the remaining 67 per cent of shares for a cost of £147m, bringing the total cash investment in ODIM ASA to £218m. ODIM ASA adds capability to our strong marine systems portfolio in target markets such as seismic towing, oceanographic survey and subsea and deep-water installation systems. Rolls-Royce continues to benefit from its global reach and ability to access the world's faster growing markets. Our success in winning new customers and orders, the breadth and mix of our product and service portfolio, and the financial performance of the Group, demonstrate the resilience of our business. Our confidence in the long-term growth prospects of the Group is reflected in the decision to increase the first-half payment to shareholders by 6.7 per cent to 6.40 pence per share. A consistent strategy for long-term growth: The long-term and disciplined application of our power systems strategy across the four segments has created a portfolio we believe can double revenues in the next decade. Our success at winning business in the widebody aircraft market means Rolls-Royce expects to more than double the current number of Trent engines being delivered by the middle of this decade. To enable this step change in volume, investments in new facilities, tooling and capability have been made in the first-half of 2010 and will continue as we increase operational capacity and improve productivity. Elsewhere in the business, the first-half saw the official opening of the new Mechanical Test and Operations Centre at Dahlewitz in Germany, and a new facility to support the Joint Strike Fighter LiftFan capability in Indianapolis, USA. Rolls-Royce also expanded the Civil aerospace repair and overhaul facility in Singapore (SAESL) increasing capacity to 250 large engines per year. Significant progress was made with the construction of new facilities at the Seletar Aerospace Park in Singapore and at Crosspointe in Virginia, USA. We continue to develop our UK footprint with additional nuclear manufacturing capacity being added at our facilities in Derby and a new disc manufacturing plant in Sunderland. In addition, we are giving significant support to the development of six advanced manufacturing research centres, four of which will be based in the UK, to improve manufacturing performance across the supply chain. Strong financial position: The Group benefits from a robust financial position which has been further strengthened in the first-half. Average net cash balances were £915m, an improvement of £155m over the same period in 2009, with period-end cash balances improving £113m to almost £1.4bn. The Group's debt maturities are well spread with the debt credit ratings assessed by all major rating agencies remaining strong with a stable outlook. There were no major changes in the position of the Group's UK pension funds over the first-half. Two smaller UK funds are currently undertaking triennial actuarial valuations, and whilst the results will not be available for several months, the Group does not expect any material changes in funding requirements as a result of these reviews. Despite challenging financing markets, financial and contingent support to customers remains modest. Trading Summary - 2010 first-half: Whilst order activity in many markets remains subdued, we secured orders worth £5.9bn in the first-half of 2010, increasing the Group's total order book to a record £58.4bn. Approximately £17.9bn of the order book relates to service contracts. A further £1.1bn of orders were announced at the Farnborough Airshow. Revenues increased by five per cent to £5.4bn. Underlying revenues improved by seven per cent, with good growth in service revenues from all businesses and an especially strong performance from original equipment sales in the Energy business. The Group maintained its foreign exchange hedging policy and increased the hedge book over the period to $20.8bn, with an average rate of $1.60. Better rates locked into the hedge book provide visibility of improving rates over the next few years. Underlying profits in the first-half benefited by £37m from improving exchange rates. This consisted of £28m from a seven cent improvement in the USD achieved rate, and a further £9m from translation benefits on overseas businesses, mainly in the Marine segment. For the full-year, USD achieved rates are expected to improve by between six and nine cents contributing between £50m and £75m to underlying profit, compared to 2009. Investment in research and development was £436m (2009 first-half £440m), of which the Group funded 55 per cent (£238m). The charge to the income statement reduced slightly, by £8m to £192m; primarily as a function of lower cash spend. For the full-year, the charge to the income statement is expected to increase by between £40m and £50m as more engineering time focuses on early stage programmes, such as the Trent XWB, where research and development spending is charged in the income statement as incurred. The Group has benefited from improved cost control and a strong trading performance in the Marine segment. This has helped mitigate the reduction in profitability in the Civil business, resulting in a modest growth in underlying Group profits. Underlying profit before tax, which excludes the non-cash impact of the hedge book and other financial instruments, increased by four per cent to £465m (2009 first-half £445m). This growth in profit reflected a six per cent increase in original equipment revenue, eight per cent growth in service revenue, reduced R&D charges, lower restructuring charges and improved foreign exchange rates. These more than offset headwinds due to weaker revenue mix and the non-recurrence of one-off benefits in 2009. The Group's reported loss before tax of £(475)m, compared with a first-half profit of £2,515m in 2009, includes the effects of the "mark-to-market" of its financial instruments, for which hedge accounting is not adopted. The impact of mark-to-market is included within net financing in the income statement (see note 3 on page 22). The underlying tax charge of £116m increased £31m from 2009 as the effective rate rose to 25 per cent for the period, from 19 per cent in the first-half of 2009. The 2009 effective rate benefited from a one-off £21m credit following the successful completion of overseas tax audits and changes in legislation. The full-year underlying tax rate is expected to remain at around 25 per cent. Underlying earnings per share reduced by five per cent to 18.72p (2009 first-half 19.64p), primarily reflecting higher effective tax rate in the first-half of 2010. Basic earnings per share were a loss of 18.07p (2009 first-half - earnings of 100.87p), reflecting the mark-to-market adjustments described above. The Group reported a good first-half cash performance. Net cash inflow was £113m for the period reflecting an increase in underlying profitability, improved working capital performance, the receipts of inventory disposals under the Aviall distribution services agreement and after the acquisition of ODIM ASA. Group prospects: Our power systems strategy has broadened and provided a better balance to our portfolio and has also created a strong financial foundation from which to support long-term growth. Group prospects are underpinned by access to growing markets, participation in a record number of major programmes and expanding aftermarket service activity. We expect these factors to support a doubling of revenues over the next ten years. We continue to invest in technology, product development and operational facilities to support this growth. In the short term, the Group expects the global economic environment to remain uncertain. The Group expects underlying revenues to grow by approaching ten per cent in 2010. This includes the benefit of ODIM ASA, which is expected to contribute approximately £200m to Group revenues in 2010. For the full-year, underlying profits are expected to be modestly higher than 2009, benefitting from a strong trading performance in the Marine segment and improving cost control. Average cash balances are expected to remain at similar levels to those achieved in the first-half of the year and there will be a modest cash inflow in 2010. Enquiries: Investor relations: Mark Alflatt Director of Financial Communications Rolls-Royce plc Tel: +44 (0)20 7227 9164 mark.alflatt@rolls-royce.com Media relations: Josh Rosenstock Head of Corporate Communications Rolls-Royce plc Tel: +44 (0)20 7227 9246 josh.rosenstock@rolls-royce.com www.rolls-royce.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 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*2 *1 Commentaries relate to underlying revenues and profits unless specifically noted *2 2009 order book data relates to 31 December 2009 Civil aerospace (First-half) 2010 2009 Order book (£bn) 47.3 47.0 Engine deliveries 416 424 Underlying revenues (£m) 2,294 2,280 Underlying OE revenues (£m) 858 943 Underlying services revenues (£m) 1,436 1,337 Underlying profit before financing (£m) 210 257 The Civil portfolio benefits from having a large, broad-based and relatively young fleet of engines, which helped to mitigate some of the consequences of the global downturn. The business continued to make progress in the first-half of 2010 with a number of major development and commercial milestones achieved. However, trading conditions remained subdued. This, combined with changes in revenue mix, held back the first-half trading result as expected. Major milestones achieved on flight test programmes included the Boeing 787, Gulfstream G650 and the Embraer Legacy 650. Development schedules remain on target for these programmes to enter service over the next two years, further expanding the Group's portfolio and market share and underpinning long-term growth. Following the first running of the Trent XWB, development testing will now progress to support its scheduled entry to service in 2013. Orders totalling £3.3bn were received during the first-half, including orders for 50 Trent and 190 V2500 engines, ensuring the order book remained resilient over the period. A further £1bn of orders were announced during the recent Farnborough Airshow. The order book includes more than 5,100 engines. This is equivalent to more than 35 per cent of today's installed fleet which was delivered over more than 25 years. The trading environment remained difficult throughout the first-half, reflecting the ongoing uncertainty in the global economy, specifically the airline industry. Overall deliveries of new engines remained broadly stable, but with a greater emphasis on engines for new aircraft types. The industrial and commercial costs associated with the early phases of these new programmes, combined with subdued aftermarket activity, were the main cause of weaker margins. A distribution services agreement with Aviall Services Inc. was completed in the first-half. This covers logistics, marketing and customer management on the RB211-524 engine powering the Boeing 747 and 767 aircraft. It will also support spares sales on this programme in 2010 and beyond. While the airline industry showed some improvement, the impact on services revenues remains modest. Continued capacity discipline by airlines, the impact of the volcanic ash disruption and subdued economic activity in Europe and the USA constrained services revenues growth, which improved by seven per cent in the first-half. Increased fee income from Risk and Revenue Sharing Partners (RRSPs) and favourable foreign exchange effects were more than offset by weaker original equipment mix in the period, and one-off benefits in 2009 which did not recur. This resulted in lower reported profits in the first-half. Civil aerospace outlook Air travel and air freight have shown signs of recovery but the extent of the improvement varies by region and future trends remain uncertain. The second half of 2010 will see further mix changes in original equipment revenues resulting from deliveries for new programmes with associated pressure on margins. Services revenues are expected to increase by around ten to twelve per cent in the full-year 2010, benefiting from improved foreign exchange achieved rates, an increasing installed fleet and the Aviall Services Inc. distribution agreement. R&D charges are expected to be £40m to £45m higher than 2009 because of increased activity associated with early phase programmes, such as the Trent XWB. Improved GBP~USD achieved rates will help mitigate some of these effects. As a result of these factors underlying profits are expected to be modestly lower in 2010 than in 2009. Defence aerospace (First-half) 2010 2009 Order book (£bn) 6.6 6.5 Engine deliveries 373 284 Underlying revenues (£m) 1,018 969 Underlying OE revenues (£m) 510 473 Underlying services revenues (£m) 508 496 Underlying profit before financing (£m) 158 136 The Defence aerospace portfolio is characterised by its large installed fleet of engines across a broad range of applications and geographies, supporting more than 160 customers in 103 countries. A significant number of new Rolls-Royce powered helicopter, transport and combat aircraft programmes continue to make good progress. Development and certification testing in the first-half included the A400M and the F-35 Lightning II Joint Strike Fighter (JSF) LiftSystem™. Good technical progress is also being made with the F136 engine for the JSF. The TP400 engine has achieved more than 1,500 engine flight test hours on the three aircraft involved in the flight test programme. While there remains continuing uncertainty about the A400M programme, we believe that the future cost of the remaining phases of this development programme have been appropriately provided for. Total orders in the period reached £1.2bn, of which £0.8bn related to service contracts, including the contract for the UK's Royal Air Force's fleet of RB199 powered Tornado aircraft. This strong performance supported a resilient order book which ended the period at £6.6bn. Engine deliveries for the transport sector including the C130-J and V-22 Osprey continue to grow, supporting a five per cent improvement in first-half revenues. Lower restructuring spend, lower R&D charges, improving operational performance and mix helped deliver particularly strong first-half margins and a 16 per cent improvement in underlying profits. Defence aerospace outlook The expansion of the portfolio, the strong positions in military transport and access to a global customer base leaves the defence portfolio well positioned to access growing markets. These factors provide resilience in an uncertain budgetary environment. The business is well positioned to deliver another good performance in 2010. Revenues are expected to grow by mid single digits and, although second half profits will be weaker than the first due to the phasing of costs, we expect strong full-year profit growth. Marine (First-half) 2010 2009 Order book (£bn) 3.2 3.5 Underlying revenues (£m) 1,357 1,227 Underlying OE revenues (£m) 928 851 Underlying services revenues (£m) 429 376 Underlying profit before financing (£m) 171 110 The Marine business provides complex integrated power systems for a range of applications in the offshore oil and gas, specialist vessel and naval markets. It has more than 2,000 customers with equipment installed on more than thirty thousand vessels worldwide. The Marine business performed particularly strongly in the first-half of 2010 delivering double-digit revenue growth and a 55 per cent improvement in profits despite a challenging trading environment. Cancellations of existing orders have slowed and there are early signs of a recovery in demand. While £1bn of new orders were booked in the period, these did not make up for the completion of existing orders and as a result the order book weakened to £3.2bn at the end of the first-half. The market for specialist vessels continues to offer good opportunities, and demand from 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. The completion of the ODIM ASA acquisition in April adds significantly to our capability. We acquired the remaining 67 per cent of the business in April, an investment of £147m in cash (£218m including the 2009 investment), bringing significant seismic, oceanographic and offshore deck handling capabilities. New programmes achieved a number of important milestones. These included the Littoral Combat Ship (LCS) entering active duty. We now expect the selection between the competing LCS designs, which will move forward to production, to be announced by the end of 2010. Sea trials for the nuclear powered Astute class submarine and the Type 45 Destroyer, HMS Daring, are progressing well. New service facilities around the world supported good aftermarket growth of 14 per cent in the period, a trend expected to continue through the remainder of the year. The combination of improving revenue mix, strong operational performance, more favourable contract pricing and the non-recurrence of a number of one-off charges in 2009 contributed to strong improvement in margins and profitability. Marine outlook Whilst there are some improving signs for future orders, the environment remains uncertain. However, visibility of the trading profile over the second half remains good. Overall, revenue for the full-year is expected to be modestly below 2009 reflecting weaker original equipment revenues, partly offset by the contribution from ODIM ASA. Full-year profits are expected to be well ahead of 2009 with second half profits slightly lower than those achieved in the first-half of 2010. Energy (First-half) 2010 2009 Order book (£bn) 1.3 1.3 Engine deliveries 28 27 Underlying revenues (£m) 590 447 Underlying OE revenues (£m) 348 236 Underlying services revenues (£m) 242 211 Underlying (loss)/profit before financing (£m) (19) 1 The Energy business is a world-leading provider of power systems for onshore and offshore oil and gas applications with a growing presence in the electric power generation sector. It supplies customers in more than 120 countries. We are building a portfolio of power systems including large gas turbines, diesel and gas reciprocating engines, renewables and civil nuclear power capability. Energy made solid progress in the period with strong revenue growth and improved operational performance. Against this, a £26m one-off charge relating to retrofit costs across the industrial Trent fleet of Dry Low Emissions (DLE) engines caused a loss for the period of £19m. Order intake of £0.4bn kept the order book stable at £1.3bn with orders for eight industrial Trent units received in the period. The oil and gas sector continued to move ahead with substantial investment plans, especially in Brazil, West Africa and Asia. It is too early to judge whether the Macondo well leak in the Gulf of Mexico will have implications for our business, but we have seen no significant changes in customer behaviour to date. We reported exceptional growth of 47 per cent in original equipment revenues and double-digit service revenue growth in the period. The Group continues to focus on improving operating performance. Investments in new assembly facilities and testbeds have helped support both improved execution and load growth. In low carbon technology programmes, the tidal power demonstrator project in the Pentland Firth, Scotland, is expected to commence trials within the next few months. Ongoing development of the fuel cell technology programme continued with investment at a lower level than in prior years. The Group made good progress in the civil nuclear area with the announcement of a memorandum of understanding with Larsen & Toubro in India focusing on light water reactors in India, and internationally. Energy outlook Further revenue growth in the second half of 2010, improving operational performance and reduced investment in new programmes will more than offset the £26m one-off charge, and we expect profits to grow strongly in 2010. Financial Review - 2010 First-half performance Foreign exchange: The pace and extent of currency movements had a material effect on the Group's reported financial performance in 2010, with the GBP exchange rates against the USD, EUR and the NOK having the largest effect. These movements have influenced the reported income statement, the cash flow and the 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 period were as follows: Dec 31 2009 June 30 2010 GBP ~ USD £1~$1.62 £1~$1.50 GBP ~ Euro £1~€1.13 £1~€1.22 GBP ~ NOK £1~NOK9.33 £1~NOK9.73 The average rates throughout the first-half-year were: H1 2009 H1 2010 GBP ~ USD £1~$1.49 £1~$1.52 GBP ~ Euro £1~€1.12 £1~€1.15 GBP ~ NOK £1~NOK9.96 £1~NOK9.21 The impact of the period-end mark-to-market on all of the outstanding financial instruments is the principal element included within net financing costs in the income statement of £1,069m (2009 £1,922m net financing income), contributing to a published loss before tax of £475m (compared to a profit before tax of £2,515m in the first-half of 2009). 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 tax of £465m benefited from £37m of foreign exchange benefits compared to 2009. The achieved rate on selling net USD income was around seven cents better in 2010 than the same period of 2009, contributing £28m of transactional benefits. In addition translation benefits, mainly from the Norwegian Krone, contributed £9m to underlying profit before tax in the first-half. 2. Balance sheet and cash flow - The Group maintains a number of currency cash balances which vary throughout the financial year. These were impacted by the movements in exchange rates during the period, causing a small improvement of £6m 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 £58.4bn (2009 year-end £58.3bn) after reflecting new order intake of £5.9bn in the period. Aftermarket services included in the order book totalled £17.9bn (2009 year-end £16.5bn). Revenues increased by five per cent compared with 2009 to £5,421m. Revenues on an underlying basis grew by seven per cent. Payments to industrial RRSPs, charged in cost of sales, amounted to £127m (2009 first-half £134m). Gross research and development investment was £436m (2009 first-half £440m). Net research and development investment, charged to the income statement, was £192m (2009 first-half £200m) after net capitalisation of £46m (2009 first-half £46m) on development programmes in the period. Receipts from RRSPs in respect of new programme developments, shown as other operating income, were £82m (2009 first-half £68m), as key partners joined major new programmes, primarily the Trent XWB. Restructuring costs of £24m (2009 first-half £37m) were charged, reflecting the ongoing improvement programmes designed to improve future operational performance. Underlying profit margins before financing fell by approximately 0.3 per cent to 9.4 per cent in the period, impacted specifically by strong growth in lower margin original equipment revenues and retrofit charges within the Energy business, partially offset by both transactional and translational foreign exchange benefits of £37m. Net financing costs were £1,069m (2009 first-half income £1,922m) including the effects of mark-to-market revaluations. Underlying finance costs were £29m (2009 first-half £33m), reflecting lower interest rates on cash deposits offset by reduced financing charges on financial RRSP arrangements. Underlying profit before tax was £465m (2009 first-half £445m). Underlying earnings per share reduced by five per cent, to 18.72p (2009 first-half 19.64p) (see note 5 on page 23), reflecting an increase in the effective rate of underlying tax compared to 2009. The income statement tax credit was £144m (2009 first-half charge £658m), reflecting the large mark-to-market loss caused by the revaluation of various financial instruments at the period-end. The taxation charge on an underlying basis was £116m (2009 £85m), representing 24.9 per cent of underlying profit before tax. The 2010 full-year underlying tax rate is expected to be around 25 per cent. Balance sheet: Investment in intangibles during the period was £181m (2009 first-half £167m) and included £69m (2009 first-half £75m) for recoverable engine costs, £60m (2009 first-half £61m) for capitalised development costs and a further £38m (2009 first-half £26m) for certification costs and participation fees. In addition a total of £211m of goodwill and other intangibles were recognised on the acquisition of ODIM ASA. The continued development and replacement of operational facilities contributed to a total investment in property, plant and equipment of £139m (2009 first-half £106m). Overall, 2010 investment in tangible and intangible assets, excluding those related to the ODIM acquisition, are expected to be slightly above the 2009 level of £633m. The overall net position of assets and liabilities for TotalCare packages on the balance sheet was an asset of £998m (2009 year-end £970m). The movements reflect new agreements, timing of overhauls and changes in foreign exchange rates. Provisions were £489m (2009 year-end £442m), including increased provisions against warranties and guarantees reflecting higher volumes. Provisions carried forward in respect of potential customer financing exposure were £83m (2009 year-end £71m). Cash flow: Overall working capital reduced by £279m in the period. The cash inflow in the period of £113m (2009 first-half outflow £428m) included a £6m benefit (2009 first-half £194m outflow) relating to the period-end revaluation of foreign currency cash balances. Excluding the effects of period-end revaluations, cash flow for the period was £341m higher than 2009. The improvement from 2009 primarily reflected a better performance on deposits and other financial working capital. Average net cash for the period was £915m (2009 first-half £760m). The net cash balance at the period-end was £1,388m (2009 first-half £1,030m). 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 2010, the gross level of commitments on delivered aircraft was $1,129m (£699m), comprising $641m for AVGs and $488m for credit guarantees. The net exposure after reflecting the level of security was $207m (£128m). 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 to shareholders is equivalent to 6.40 pence per ordinary share (2009 6.00 pence), a 6.7 per cent increase over the first-half of 2009. The interim payment is payable on January 5, 2011 to shareholders on the register on October 29, 2010. The final day of trading with entitlement to C Shares is October 26, 2010. Condensed consolidated income statement For the half-year-ended June 30, 2010 Half-year Half-year Year to to June to June December 30, 2010 30, 2009 31, 2009 Notes £m £m £m Revenue 2 5,421 5,142 10,414 Cost of sales (4,316) (4,054) (8,303) Gross profit 1,105 1,088 2,111 Other operating income 82 68 89 Commercial and administrative costs (433) (407) (740) Research and development costs (192) (200) (379) Share of profit of joint ventures and 32 47 93 associates Operating profit 594 596 1,174 Loss on sale or termination of - (3) (2) businesses Profit before financing 594 593 1,172 Financing income 3 221 2,170 2,276 Financing costs 3 (1,290) (248) (491) Net financing (1,069) 1,922 1,785 (Loss)/profit before taxation*1 (475) 2,515 2,957 Taxation 144 (658) (740) (Loss)/profit for the period (331) 1,857 2,217 Attributable to: Equity holders of the parent (334) 1,859 2,221 Non-controlling interests 3 (2) (4) (Loss)/profit for the period (331) 1,857 2,217 Earnings per ordinary share *2 Basic 5 (18.07p) 100.87p 120.38p Diluted 5 (18.07p) 99.95p 119.09p Payments to shareholders in respect of the period Per share 6 6.40p 6.00p 15.00p Total (£m) 6 119 111 278 *1 Underlying profit before taxation 2 465 445 915 *2 Underlying earnings per ordinary share are shown in note 5 Condensed consolidated statement of comprehensive income For the half-year-ended June 30, 2010 Half-year Half-year Year to to June to June December 30, 2010 30, 2009 31, 2009 £m £m £m (Loss)/profit for the period (331) 1,857 2,217 Other comprehensive income Foreign exchange translation differences from foreign operations (39) (288) (158) Net actuarial losses (63) - (1,148) Movement in unrecognised post-retirement (91) (24) 707 surplus Movement in post-retirement minimum 27 25 40 funding liability Transfers from transition hedging reserve - (27) (27) Net movements on cash flow hedging (22) 12 22 reserve in respect of joint ventures and associates Related tax movements 29 (1) 141 Total comprehensive income for the period (490) 1,554 1,794 Attributable to: Equity holders of the parent (493) 1,557 1,799 Non-controlling interests 3 (3) (5) Total comprehensive income for the period (490) 1,554 1,794 Condensed consolidated balance sheet At June 30, 2010 June June December 30, 2010 30, 2009 31, 2009 Notes £m £m £m ASSETS Non-current assets Intangible assets 7 2,737 2,286 2,472 Property, plant and equipment 2,058 1,916 2,009 Investments - joint ventures and 360 336 437 associates Other investments 10 55 58 Other financial assets 8 222 707 637 Deferred tax assets 627 170 360 Post-retirement scheme surpluses 9 83 455 75 6,097 5,925 6,048 Current assets Inventory 2,526 2,589 2,432 Trade and other receivables 4,162 3,802 3,877 Taxation recoverable 8 9 12 Other financial assets 8 196 69 80 Short-term investments 326 1 2 Cash and cash equivalents 2,808 2,716 2,962 Assets held for sale 9 9 9 10,035 9,195 9,374 Total assets 16,132 15,120 15,422 LIABILITIES Current liabilities Borrowings (820) (6) (126) Other financial liabilities 8 (188) (743) (181) Trade and other payables (6,343) (5,301) (5,628) Current tax liabilities (159) (153) (167) Provisions (230) (204) (210) (7,740) (6,407) (6,312) Non-current liabilities Borrowings (1,146) (1,879) (1,787) Other financial liabilities 8 (1,388) (424) (868) Trade and other payables (993) (1,306) (1,145) Non-current tax liabilities - (1) - Deferred tax liabilities (410) (309) (366) Provisions (259) (173) (232) Post-retirement scheme deficits 9 (1,053) (930) (930) (5,249) (5,022) (5,328) Total liabilities (12,989) (11,429) (11,640) Net assets 3,143 3,691 3,782 EQUITY Capital and reserves Called-up share capital 371 371 371 Share premium account 98 97 98 Capital redemption reserves 188 200 191 Hedging reserves (41) (29) (19) Other reserves 463 368 506 Retained earnings 2,061 2,677 2,635 Equity attributable to equity holders of 3,140 3,684 3,782 the parent Non-controlling interests 3 7 - Total equity 3,143 3,691 3,782 Condensed consolidated cash flow statement For the half-year-ended June 30, 2010 Half-year Half-year Year to to June to June December 30, 2010 30, 2009 31, 2009 Notes £m £m £m Reconciliation of cash flows from operating activities (Loss)/profit before taxation (475) 2,515 2,957 Share of profit of joint ventures and (32) (47) (93) associates Loss on sale or termination of - 3 2 businesses Loss/(profit) on sale of property, plant 1 (16) (40) and equipment Net financing 3 1,069 (1,922) (1,785) Taxation paid (69) (50) (119) Amortisation and impairment of 7 64 57 121 intangible assets Depreciation and impairment of property, 103 93 194 plant and equipment Impairment of unlisted investments 2 - - Increase in provisions 45 30 81 (Increase)/decrease in inventories (79) (123) 119 Increase in trade and other receivables (240) (97) (14) Increase/(decrease) in trade and other 598 (67) (183) payables Increase in other financial assets and (195) (184) (303) liabilities Additional cash funding of (53) (73) (159) post-retirement schemes Share-based payments charge 8 15 31 Transfers of hedging reserves to income - (27) (27) statement Dividends received from joint ventures 36 30 77 and associates Net cash inflow from operating 783 137 859 activities Cash flows from investing activities Additions of unlisted investments (1) (3) (2) Disposals of unlisted investments 46 - - Additions of intangible assets (181) (167) (339) Disposals of intangible assets - - 2 Purchases of property, plant and (175) (109) (258) equipment Disposals of property, plant and 10 29 82 equipment Acquisitions of businesses (147) - (7) Disposals of businesses - - 3 Investments in joint ventures and (14) (5) (87) associates Disposals of joint ventures and - 2 - associates Net cash outflow from investing (462) (253) (606) activities Cash flows from financing activities Current borrowings - repayment of loans - (10) (10) Current borrowings - increase in loans 56 - - Non-current borrowings - increase in - 692 693 loans Capital element of finance lease - (1) (3) payments Cash inflow from net increase in 56 681 680 borrowings Interest received 20 30 24 Interest paid (68) (48) (66) Interest element of finance lease - - (1) payments Increase in government securities and (324) - (1) corporate bonds Issue of ordinary shares - 17 18 Purchase of ordinary shares (58) (16) (17) Other transactions in ordinary shares - - (3) Redemption of C Shares (107) (101) (250) Net cash (outflow)/inflow from financing (481) 563 384 activities (Decrease)/increase in cash and cash (160) 447 637 equivalents Cash and cash equivalents at January 1 2,958 2,462 2,462 Foreign exchange 6 (195) (141) Cash and cash equivalents at period-end 2,804 2,714 2,958 Half-year Half-year Year to to June to June December 30, 2010 30, 2009 31, 2009 £m £m £m Reconciliation of movements in cash and cash equivalents to movements in net funds (Decrease)/increase in cash and cash (160) 447 637 equivalents Cash outflow from increase in government 324 - 1 securities and corporate bonds Cash inflow from net increase in borrowings (56) (681) (680) Change in net funds resulting from cash flows 108 (234) (42) Net funds (excluding cash and cash (1) - - equivalents) of businesses acquired Exchange adjustments 6 (194) (141) Fair value adjustments 4 136 110 Movement in net funds 117 (292) (73) Net funds at January 1 excluding the fair 1,051 1,124 1,124 value of swaps Net funds at period-end excluding the fair 1,168 832 1,051 value of swaps Fair value of swaps hedging fixed rate 220 198 224 borrowings Net funds at period-end 1,388 1,030 1,275 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 businesses cash Fair 30, 1, 2010 flow acquired flow Exchange value 2010 £m £m £m £m £m £m £m Cash at bank and in hand 1,240 (453) 3 - 22 - 812 Overdrafts (4) - - - - - (4) Short-term deposits 1,722 281 9 - (16) - 1,996 Cash and cash equivalents 2,958 (172) 12 - 6 - 2,804 Investments 2 324 - - - - 326 Other current borrowings (122) (56) - (688) - 50 (816) Non-current borrowings (1,786) - (1) 688 - (46) (1,145) Finance leases (1) - - - - - (1) 1,051 96 11 - 6 4 1,168 Fair value of swaps hedging fixed rate borrowings 224 (4) 220 1,275 96 11 - 6 - 1,388 Condensed consolidated statement of changes in equity For the half-year-ended June 30, 2010 Attributable to equity holders of the parent Capital Share Share redemption Hedging Other Retained Non-controlling Total capital premium reserves reserves reserves earnings Total interests equity £m £m £m £m £m £m £m £m £m At January 1, 2009 369 82 204 (22) 663 920 2,216 9 2,225 Profit for the period - - - - - 1,859 1,859 (2) 1,857 Foreign exchange translation differences on foreign operations - - - - (287) - (287) (1) (288) Movement in unrecognised post–retirement surplus - - - - - (24) (24) - (24) Movement in post-retirement minimum funding liability - - - - - 25 25 - 25 Transfers from transition hedging reserve - - - (27) - - (27) - (27) Transfers to cash flow hedging reserve - - - 12 - - 12 - 12 Related tax movements - deferred tax - - - 8 (8) (1) (1) - (1) 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) Share-based payments adjustment - - - - - 15 15 - 15 Transactions with non-controlling interests - - - - - - - 1 1 Other changes in equity in the period 2 15 (4) - - (102) (89) 1 (88) At June 30, 2009 371 97 200 (29) 368 2,677 3,684 7 3,691 Profit for the period - - - - - 362 362 (2) 360 Foreign exchange translation differences on foreign operations - - - - 130 - 130 - 130 Net actuarial losses - - - - - (1,148) (1,148) (1,148) Movement in unrecognised post–retirement surplus - - - - - 731 731 - 731 Movement in post-retirement minimum funding liability - - - - - 15 15 - 15 Transfers to cash flow hedging reserve - - - 10 - - 10 - 10 Related tax movements - deferred tax - - - - 8 134 142 - 142 Total comprehensive income - - - 10 138 94 242 (2) 240 Arising on issue of ordinary shares - 1 - - - - 1 - 1 Issue of C Shares - - (159) - - 1 (158) - (158) Redemption of C Shares - - 150 - - (150) - - - Ordinary shares purchased - - - - - (1) (1) - (1) Share-based payments adjustment - - - - - 13 13 - 13 Transactions with non-controlling interests - - - - - - - (5) (5) Related tax movements - deferred tax - - - - - 1 1 - 1 Other changes in equity in the period - 1 (9) - - (136) (144) (5) (149) At December 31, 2009 371 98 191 (19) 506 2,635 3,782 - 3,782 Loss for the period - - - - - (334) (334) 3 (331) Foreign exchange translation differences on foreign operations - - - - (39) - (39) - (39) Net actuarial losses - - - - - (63) (63) - (63) Movement in unrecognised post–retirement surplus - - - - - (91) (91) - (91) Movement in post-retirement minimum funding liability - - - - - 27 27 - 27 Transfers from cash flow hedging reserve - - - (22) - - (22) - (22) Related tax movements - deferred tax - - - - (4) 33 29 - 29 Total comprehensive income - - - (22) (43) (428) (493) 3 (490) Issue of C Shares - - (111) - - 1 (110) - (110) Redemption of C Shares - - 108 - - (108) - - - Ordinary shares purchased - - - - - (58) (58) - (58) Share-based payments adjustment - - - - - 16 16 - 16 Related tax movements - deferred tax - - - - - 3 3 - 3 Other changes in equity in the period - - (3) - - (146) (149) - (149) At June 30, 2010 371 98 188 (41) 463 2,061 3,140 3 3,143 Notes to the condensed consolidated financial statements+ 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, 2010 comprise the Company and its subsidiaries (together referred to as the "Group") and the Group's interests in joint ventures and associates. The consolidated financial statements of the Group as at and for the year-ended December 31, 2009 (2009 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 2009 Annual report. The comparative figures for the financial year December 31, 2009 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 498(2) or (3) of the Companies Act 2006. The Board of directors approved the condensed consolidated half-year financial statements on July 28, 2010. 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 31,2009 (International Financial Reporting Standards issued by the International Accounting Standards Board, as adopted for use in the EU effective at December 31, 2009), with the following exceptions: Revised IFRS 3 Business Combinations and amendments to IAS 27 Consolidated and Separate Financial Statements have been adopted. These standards affect the accounting for acquisitions and transactions with non-controlling interests, in particular, the acquisition of ODIM ASA. There is no retrospective impact. IFRIC 18 Transfers of Assets from Customers has been adopted. This interpretation confirms the Group's existing policies for the recognition of assets received from customers and there is no significant impact. Amendments to IFRS 2 Group Cash-settled Share-based Payment Transactions has been adopted. These amendments apply to the International ShareSave Scheme, but the impact is not significant. 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, 2009. 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 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 reflect the achieved exchange rates arising on settled derivative contracts and exclude the release of the foreign exchange transition hedging reserve, which was fully utilised in 2009. Underlying profit before financing - Where transactions are denominated in a currency other than the functional currency of the Group undertaking, this reflects the transactions at the achieved exchange rates on settled derivative contracts and excludes the release of the foreign exchange transition hedging reserve. 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; and * 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, 2010 Half-year to June 30, 2009 Year to December 31, 2009 Original Original Original equipment Aftermarket Total equipment Aftermarket Total equipment Aftermarket Total £m £m £m £m £m £m £m £m £m Underlying revenues Civil 858 1,436 2,294 943 1,337 2,280 1,855 2,626 4,481 aerospace Defence 510 508 1,018 473 496 969 964 1,046 2,010 aerospace Marine 928 429 1,357 851 376 1,227 1,804 785 2,589 Energy 348 242 590 236 211 447 558 470 1,028 2,644 2,615 5,259 2,503 2,420 4,923 5,181 4,927 10,108 Year to Half-year to Half-year to December 31, June 30, 2010 June 30, 2009 2009 £m £m £m Underlying profit before financing Civil aerospace 210 257 493 Defence aerospace 158 136 253 Marine 171 110 263 Energy (19) 1 24 Reportable segments 520 504 1,033 Underlying central (26) (26) (50) items Underlying profit 494 478 983 before financing Underlying net (29) (33) (68) financing Underlying profit 465 445 915 before taxation Underlying taxation (116) (85) (187) Underlying profit 349 360 728 for the period Net assets/(liabilities) Net assets/ Total assets Total liabilities (liabilities) June June June June 30, 30, December June 30, June 30, December 30, 30, December 2010 2009 31, 2009 2010 2009 31, 2009 2010 2009 31, 2009 Civil aerospace 7,665 7,835 7,612 (5,822) (5,164) (4,918) 1,843 2,671 2,694 Defence 1,343 aerospace 1,102 1,228 (1,675) (1,390) (1,573) (332) (288) (345) Marine 2,498 2,375 2,379 (1,763) (1,845) (1,738) 735 530 641 Energy 1,060 922 1,025 (647) (415) (492) 413 507 533 Reportable segments 12,566 12,234 12,244 (9,907) (8,814) (8,721) 2,659 3,420 3,523 Eliminations (506) (663) (457) 506 663 457 - - - Net funds 3,354 2,915 3,188 (1,966) (1,885) (1,913) 1,388 1,030 1,275 Tax assets/ (liabilities) 635 179 372 (569) (463) (533) 66 (284) (161) Post-retirement scheme surpluses/ (deficits) 83 455 75 (1,053) (930) (930) (970) (475) (855) 16,132 15,120 15,422 (12,989) (11,429) (11,640) 3,143 3,691 3,782 Group employees at period-end June June 30, 2010 30, 2009 December 31, 2009 Civil aerospace 21,100 21,700 21,500 Defence aerospace 5,500 5,500 5,500 Marine 9,400 8,600 8,700 Energy 2,900 2,500 2,600 38,900 38,300 38,300 Underlying revenue adjustments Half-year Year to to June Half-year to December 31, 30, 2010 June 30, 2009 2009 £m £m £m Underlying revenue 5,259 4,923 10,108 Exclude achieved rate of settled derivative contracts 162 192 279 Release of transition hedging reserve - 27 27 Revenue per consolidated income statement 5,421 5,142 10,414 Underlying profit adjustments Half-year to June 30, 2010 Half-year to June 30, 2009 Year to December 31, 2009 Profit Profit Profit before Net before Net before Net financing financing Taxation financing financing Taxation financing financing Taxation £m £m £m £m £m £m £m £m £m Underlying performance 494 (29) (116) 478 (33) (85) 983 (68) (187) Release of transition hedging reserve - - - 27 - - 27 - - Realised losses on settled derivative contracts* 121 5 - 182 66 - 274 60 - Net unrealised fair value changes to derivative contracts*2 (12) (1,018) - 10 1,939 - 14 1,835 - Effect of currency on contract accounting (9) - - (104) - - (126) - - Revaluation of trading assets and liabilities - 5 - - (8) - - (17) - Financial RRSPs - exchange differences and changes in forecast payments - (19) - - 8 - - 72 - Net post-retirement scheme financing - (13) - - (50) - - (97) - Related tax effect - - 260 - - (573) - - (553) Total underlying adjustments 100 (1,040) 260 115 1,955 (573) 189 1,853 (553) Reported per consolidated income statement 594 (1,069) 144 593 1,922 (658) 1,172 1,785 (740) *1 Realised losses on settled derivative contracts included in profit before tax: - includes £1m of realised losses (2009: half-year £10m, full-year £15m) deferred from prior periods; - excludes £7m of losses (2009: half-year nil, full-year gains of £6m) realised in the period on derivative contracts settled in respect of cash flows that will occur after the period-end; - excludes £6m of realised losses (2009: half and full-year nil) recognised in prior periods when the related trading contracts were cancelled; and - excludes nil (2009: half-year nil, full-year £14m) realised in respect of derivatives held in net investment hedges. *2 The adjustment for unrealised fair value changes included in profit before financing includes the reversal of £11m of unrealised losses (2009: half-year £1m unrealised losses, full-year £5m unrealised gains) in respect of derivative contracts held by joint ventures and £1m (2009: half-year £9m, full-year £9m) of unrealised losses for which the related trading contracts have been cancelled and consequently the fair value loss has been recognised immediately in underlying profit. 3 Net financing Half-year to June 30, Half-year to June 30, 2010 2009 Year to December 31, 2009 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 8 8 13 13 21 21 Fair value gains on foreign currency contracts - - 1,909 - 1,783 - Financial RRSPs - foreign exchange differences and changes in forecast payments - - 8 - 72 - Fair value gains on commodity derivatives - - 30 - 52 - Expected return on post-retirement scheme assets 201 - 152 - 305 - Net foreign exchange gains 10 - 58 - 43 - Other financing income 2 2 - - - - 221 10 2,170 13 2,276 21 Financing costs Interest payable (30) (30) (31) (31) (64) (64) Fair value losses on foreign currency contracts (1,017) - - - - - Financial RRSPs - foreign exchange differences and changes in forecast payments (19) - - - - - Financial charge relating to financial RRSPs (9) (9) (14) (14) (25) (25) Fair value losses on commodity derivatives (1) - - - - - Interest on post-retirement scheme liabilities (214) - (202) - (402) - Other financing charges - - (1) (1) - - (1,290) (39) (248) (46) (491) (89) Net financing (1,069) (29) 1,922 (33) 1,785 (68) Analysed as: Net interest payable (22) (22) (18) (18) (43) (43) Net post-retirement scheme financing (13) - (50) - (97) - Net other financing (1,034) (7) 1,990 (15) 1,925 (25) Net financing (1,069) (29) 1,922 (33) 1,785 (68) 4 Taxation The effective tax rate for the half-year is 30.3% (2009: half-year 26.2%, full-year 25%). In accordance with IAS 12 Income Taxes the effective rate does not take into account the impact in 2010 of the proposed reduction in the UK corporation tax rate from 28% to 27% as the legislation had not been substantively enacted by the balance sheet date. (Similarly, proposed future reductions in the rate to 24% will be reflected when the relevant legislation is substantively enacted.) The impact of the reduction in the rate on the underlying effective tax rate for the full-year is not expected to be significant. 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 of share options. Half-year to June 30, 2010 Half-year to June 30, 2009 Year to December 31, 2009 Potentially Potentially Potentially dilutive dilutive dilutive share share share Basic options*1 Diluted Basic options Diluted Basic options Diluted (Loss)/ (334) - (334) 1,859 - 1,859 2,221 - 2,221 profit (£m) Weighted average shares (millions) 1,848 - 1,848 1,843 17 1,860 1,845 20 1,865 EPS (18.07) - (18.07) 100.87 (0.92) 99.95 120.38 (1.29) 119.09 (pence) *1 As the basic EPS is negative, in accordance with IAS 33 Earnings per Share, share options are not considered dilutive. For diluted underlying EPS, the weighted average number of shares was 1,874m. The reconciliation between underlying EPS and basic EPS is as follows: Year to Half-year to December 31, Half-year to June 30, 2010 June 30, 2009 2009 Pence £m Pence £m Pence £m Underlying EPS / Underlying profit attributable to equity holders of the parent 18.72 346 19.64 362 39.67 732 Total underlying adjustments to (loss)/profit before tax (note 2) (50.86) (940) 112.32 2,070 110.68 2,042 Related tax effects 14.07 260 (31.09) (573) (29.97) (553) Basic EPS / (Loss)/profit attributable to equity holders of the parent (18.07) (334) 100.87 1,859 120.38 2,221 Diluted underlying EPS 18.46 19.46 39.25 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 June 30, 2010 Year to December 31, 2009 Pence per Pence per share £m share £m Interim 6.40 119 6.00 111 Final 9.00 167 6.40 119 15.00 278 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, 991 631 751 586 273 3,232 2010 Exchange (51) (5) - - (8) (64) adjustments Additions - 38 60 69 14 181 On acquisition 115 - - - 96 211 of businesses At June 30, 1,055 664 811 655 375 3,560 2010 Accumulated amortisation and impairment: At January 1, 7 177 205 296 75 760 2010 Exchange - (1) - - - (1) adjustments Provided during - 6 14 28 16 64 the period At June 30, 7 182 219 324 91 823 2010 Net book value 1,048 482 592 331 284 2,737 at June 30, 2010 Net book value 984 454 546 290 198 2,472 at January 1, 2010 8 Other financial assets and liabilities Half-year to June 30, Year to December 31, Half-year to June 30, 2010 2009 2009 Assets Liabilities Net Assets Liabilities Net Assets Liabilities Net £m £m £m £m £m £m £m £m £m Foreign 229 (1,232) (1,003) 596 (680) (84) 501 (645) (144) exchange contracts Commodity 14 (23) (9) - (42) (42) 15 (26) (11) contracts 243 (1,255) (1,012) 596 (722) (126) 516 (671) (155) Interest 175 (2) 173 180 (3) 177 201 (2) 199 rate contracts Financial - (303) (303) - (438) (438) - (363) (363) RRSPs C Shares - (16) (16) - (4) (4) - (13) (13) 418 (1,576) (1,158) 776 (1,167) (391) 717 (1,049) (332) Current 196 (188) 69 (743) 80 (181) Non-current 222 (1,388) 707 (424) 637 (868) 418 (1,576) 776 (1,167) 717 (1,049) Foreign exchange and commodity financial instruments Half-year Year to to June cember 31, Half-year to June 30, 2010 30, 2009 2009 Foreign exchange Commodity Total Total Total £m £m £m £m £m At January 1 (144) (11) (155) (2,270) (2,270) Fair value changes to 23 - 23 (39) (33) fair value hedges Fair value changes to - - - 6 (14) net investment hedges Fair value changes to (1,017) (1) (1,018) 1,939 1,835 other derivative contracts Fair value of contracts 135 3 138 238 327 settled At period-end (1,003) (9) (1,012) (126) (155) Financial risk and revenue sharing partnerships (financial RRSPs) Half-year Half-year Year to to June to June December 30, 2010 30, 2009 31, 2009 £m £m £m At January 1 (363) (455) (455) Cash paid to partners 82 17 55 Addition - (15) (15) Exchange adjustments direct to reserves 6 21 6 Financing charge*1 (9) (14) (26) Excluded from underlying profit:*1 Exchange adjustments (19) 12 45 Changes in forecast payments - (4) 27 At period-end (303) (438) (363) *1 Amounts included in net financing in the income statement. The financing charge for 2009 full-year excluded £1m (2009 half-year nil) of financing charge capitalised in intangible assets. 9 Pensions and other post-retirement benefits The net post-retirement scheme deficit as at June 30, 2010 is calculated on a year to date basis, using the latest valuation as at December 31, 2009, updated to June 30, 2010 for the principal schemes. This update does not take account of the proposal, announced by the UK government on July 8, 2010, to limit the rate of increases in pensions to the Consumer Prices Index rather than the Retail Price Index. The impact of this proposal will depend, inter alia, on the rules of the relevant schemes and the detailed legislation supporting the proposal, which will be assessed during the second half of 2010. In 2009, there were no significant fluctuations or one-time events during the first-half that required adjustment to the actuarial assumptions made at December 31, 2008 and the net post-retirement deficit was calculated on a year-to-date basis, using the valuation as at December 31, 2008. 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, 2010 (380) (475) (855) Exchange adjustments - (29) (29) Current service cost (58) (16) (74) Interest on post-retirement scheme liabilities (189) (25) (214) Expected return on post-retirement scheme 188 13 201 assets Contributions by employer 106 21 127 Actuarial gain/(losses)*1 54 (116) (62) Movement in unrecognised surplus*2 (91) - (91) Movement on minimum funding liability 27 - 27 At June 30, 2010 (343) (627) (970) Analysed as: Post-retirement scheme surpluses - included in 83 - 83 non-current assets Post-retirement scheme deficits - included in (426) (627) (1,053) non-current liabilities (343) (627) (970) *1 In addition to the above, an actuarial loss of £1m in respect of a joint venture has been recognised in other comprehensive income. *2 Where a surplus has arisen on a scheme, in accordance with IAS 19 Employee Benefits, the surplus is recognised as an asset only if it represents an economic benefit available to the Group in the future. Any surplus in excess of this benefit is not recognised in the balance sheet. 10 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 2010, 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. These include claims received, which are yet to be substantiated, by EPI Europrop International GmbH (EPI) in which the Group is a partner, which is developing the TP400 engine for the Airbus A400M aircraft. The Group has included in provisions the directors' best estimate of the expected loss on this programme. 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. During the first-half of 2010, Airbus agreed in principle with the Customer Nations to: increase the price of the contract; waive all liquidated damages related to current delays; provide additional funding in exchange for a participation in future export sales; and accelerate pre-delivery payments in the period of 2010 to 2014. Although the impact of this agreement on EPI is not yet certain, at June 30, 2010, the Group balance sheet had no net assets associated with the programme. 11 Related party transactions Transactions with related parties are shown on page 141 of the Annual report 2009. Significant transactions in the current financial period are as follows: Half-year Half-year Year to to June to June December 30, 2010 30, 2009 31, 2009 £m £m £m Sales of goods and services to joint 1,270 1,086 2,136 ventures and associates Purchases of goods and services from joint (1,079) (890) (1,900) ventures and associates 12 Acquisitions On April 7, 2010, the Group acquired 67 per cent of the issued share capital of ODIM ASA (ODIM). Together with the 33 per cent of the issued share capital already held, this gave the Group control of 100 per cent of ODIM. ODIM is a Norwegian marine technology company which develops and sells advanced automated handling systems for seismic and offshore vessels. ODIM's technology and unique subsea and deepwater capability complement the Group's existing activities. Integrating ODIM's innovative technology and highly skilled people into the Group will optimise the Group's offering and provide the global customer base with a wider range of products and services in this important market segment. Recognised amounts of identifiable assets acquired and liabilities assumed £m Intangible assets 96 Property, plant and equipment 24 Inventories 16 Trade and other receivables 57 Cash and cash equivalents 12 Trade and other payables (46) Current tax liabilities (3) Borrowings (1) Deferred tax liabilities (32) Provisions (2) Total identifiable assets and liabilities 121 Goodwill 115 Total consideration 236 Satisfied by: Cash 159 Existing 33 per cent shareholding 77 236 Net cash outflow arising on acquisition: Cash consideration 159 Less: cash and cash equivalents acquired (12) 147 Identifiable intangible assets comprise: Technology, patents and licenses 45 Customer relationships 46 Other 5 96 The fair value of the Group's 33 per cent interest in ODIM before the acquisition was £77m. The Group recognised a gain of £3m as a result of remeasuring this interest, which is included in the share of profits of joint ventures and associates in the consolidated income statement for the period-ended June 30, 2010. The goodwill of £115m (which is not tax-deductible) consists of anticipated synergies and the assembled workforce. The synergies principally arise from: * increases in revenue from the combination of the routes to market; and * cost savings from the combination of the supply chain and central functions. The gross contractual value of trade and other receivables acquired is £58m. At the acquisition date it is estimated that contractual cash flows of £1m will not be collected. Acquisition related costs (included in commercial and administrative costs) in the consolidated income statement for the period-ended June 30, 2010, amounted to £2m. ODIM contributed £101m revenue and £2m loss before tax (predominantly amortisation of intangible assets arising on acquisition) to the Group's results for the period between the date of acquisition and June 30, 2010. If the acquisition of ODIM had been completed on January 1, 2010, the Group's revenues and loss before tax would have been £5,469m and £480m respectively. Principal risks and uncertainties As described on pages 24 to 26 of the Annual report 2009, 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 2010. Rolls-Royce has filed a patent infringement complaint against United Technologies Corporation (UTC) in the Federal Court for the Eastern District of Virginia alleging infringement by UTC of Rolls-Royce's swept fan patent. 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 Strategic risks * Cyclical downturn - global recession * Competitive pressures * Environmental impact of products and operations * Export controls Financial risks Operational risks * Movements in foreign currency exchange rates * Performance of supply chain * Interest rates * IT security * Commodity prices * Ethics * Counterparty credit risk * Programme risk * Regulatory developments Going concern After making enquiries, the directors have a reasonable expectation that the Group 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 consolidated financial statements. The financial risk management objectives and policies of the Group and the exposure of the Group to price risk, credit risk, liquidity risk and cash flow risk are discussed in the Finance Directors' review of the Annual report 2009 on pages 58 to 65. 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 theDisclosure 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 10, 2010 are listed in the Annual report 2009 on page 66. There have been no changes to the directors since that report. By order of the Board Sir John Rose Chief Executive July 28, 2010 Andrew Shilston Finance Director July 28, 2010 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, 2010 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 June 30, 2010 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 July 28, 2010

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