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
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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) LiftSystemâ„¢. 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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