Interim Results
Rolls-Royce PLC
22 August 2002
22 August 2002
ROLLS-ROYCE plc INTERIM RESULTS 2002
Results in line with guidance
'We have today announced results for the first half of 2002 in line with earlier
guidance. We have a balanced business portfolio, strong market positions as
evidenced by our record order intake, a growing aftermarket and a lower cost
base.
'The business has continued to perform as predicted. Average net debt was
similar to the level of the first half last year, our liquidity position has
been substantially improved and we anticipate the average net debt for the full
year to be lower than that given in our earlier guidance.
'We have made excellent progress with our restructuring programme, which we
accelerated as a result of the events of 11 September 2001. I thank our
employees and unions for their support during this difficult task.'
Sir Ralph Robins, Chairman Rolls-Royce plc.
Highlights are:
• Profit and cash on course
• Underlying profit before tax £104 million*
• Average net debt in line with guidance
• Dividend maintained
• Record order book
• Record order intake of £5.2 billion
• Record order book of £16.7 billion
• Strong aftermarket services
• Aftermarket services represent 41 per cent of total revenues
• Long term service agreements represent 20 per cent of the order book
*before exceptional and non-trading items (see note 3)
Overview
Results for the half year ended 30 June 2002 were in line with the guidance
provided in October 2001 and repeated in March 2002. Underlying profit before
tax was £104 million, reflecting the expected reduction in civil aerospace
business following the events of 11 September 2001.
Net debt at the half-year end was £770 million, compared to £748 million at the
same point last year. Average net debt for the first half was £990 million
(2001 £940 million). The company now expects average net debt for 2002 to be
modestly better than that given in its earlier guidance.
The company successfully refinanced maturing borrowing facilities in the first
half, with a five-year revolving credit facility of £750 million, which was
oversubscribed. Total committed borrowing facilities now stand at £2.4 billion.
The operational performance of our businesses has been consistent with the
market outlook first published by the company in October 2001 and positions the
company for profit growth in 2003 compared to 2002. However, the final outcome
in 2003 will be influenced by any increase that might be required in pension
fund contributions.
A robust business model
Rolls-Royce operates in four growth markets. Its robust business model is
applied across all its business sectors. The company invests in technology and
capability that can be exploited in each of these sectors to create a
competitive range of products.
The success of these products is demonstrated by the company's rapid and
substantial gains in market share over recent years. As a result, engine
deliveries have grown to the point where Rolls-Royce now has an installed base
of 53,000 gas turbines in service across all its businesses. The necessary
investments in product, capability and infrastructure to gain this market
position create high barriers to entry.
Most of the engines in service will have operational lives of 25 years or more,
generating an assured aftermarket demand for the provision of spare parts and
services. The company's strategy is to maximise aftermarket revenues through the
development of a comprehensive services capability.
The installed base of engines, therefore, represents an annuity for the business
and provides visibility as to future activity levels. Aftermarket service
revenues accounted for 41 per cent of sales in the half year.
Further visibility is provided through the forward order book, which has now
reached a record level of £16.7 billion, having grown by £2.6 billion in the
first half of the year. A further £1.9 billion of orders have been announced but
not yet signed. Aftermarket service revenues accounted for 29 per cent of the
order book, including long term service agreements, which accounted for 20 per
cent.
The company continued to make good progress in reducing costs and rationalising
the business. At the end of the first half, the workforce was 39,000 people, a
reduction of 3,200 since the start of the year and 4,500 since the
rationalisation programme was announced in October 2001. In addition nearly
1,000 contract workers have left the company. The company is on target to
achieve annual cost savings of £250 million.
The sale of Vickers Defence Systems to Alvis was announced in August and will be
reflected in the year end results. Rolls-Royce acquired Vickers in 1999 to
create a world-leading marine business. This has been achieved by the
successful integration of the marine activities and the disposal of the non-core
businesses.
Pensions
The next formal actuarial review of the principal Rolls-Royce pension fund is
due in March 2003. This scheme was closed to new entrants in January 1999.
Subject to market levels and actuarial assumptions applying at 30 June 2002
remaining unchanged, the consequent additional charge to the profit and loss
account in 2003 could be around £35 million in relation to this fund (see note
7).
Enquiries
Peter Barnes-Wallis Colin Duncan
Director of Financial Communications Director of Corporate Communications
Tel: 0207 222 9020
www.rolls-royce.com
An interview about the results with Rolls-Royce Chief Executive, John Rose, is
available in video, audio and text on www.Rolls-Royce.com and www.cantos.com.
Sector review
Civil aerospace: Sales £1,314m; underlying profit before interest £55m
Rolls-Royce is now the world number two engine manufacturer for civil airlines
and the world number one for corporate aircraft. The company powers 38 of the
world's top 50 airlines and has a 32 per cent market share in the corporate
sector where its fleet has been growing at 12 per cent per annum. Overall
civil market share has tripled to 32 per cent since the 1980s.
In the first half of 2002, the civil aerospace market was, as anticipated,
impacted by the events of 11 September 2001. The company now expects to deliver
approximately 870 new civil engines in 2002, a reduction of 36 per cent compared
to 2001. However, the installed base of civil engines is continuing to grow,
with 9,500 jet engines now in service, with an average age of eight and a half
years.
Total Care Agreements representing more than £1 billion revenues were signed in
the first half. Such agreements, which incorporate long term service contracts,
cover more than 30 per cent of Rolls-Royce civil engines in service.
Aftermarket service revenues in 2002 are expected to be at the same level as in
2001 and to grow in 2003. Over the past decade aftermarket service revenues
have more than doubled and repair and overhaul tripled.
An order intake of £3.6 billion was achieved, from 24 customers in 15 countries,
including announcements by Lufthansa, South African Airways, Iberia, Middle East
Airlines and Cathay Pacific.
Since the end of the first half, a number of airlines in the US have made
statements regarding their response to the difficult civil aviation market.
Events of this nature were taken into account in the guidance provided by the
company for 2002.
Defence: Sales £659m; underlying profit before interest £85m
Rolls-Royce is the world number two in the defence aerospace sector and has a
growing services opportunity with a 26 per cent share of military installed
engines in 160 armed forces world-wide. With a leading position in Europe and a
share of over 25 per cent of the US Department of Defense planned aircraft
engine purchases, Rolls-Royce is participating in a wide range of programmes,
including Eurofighter, Joint Strike Fighter, transport, trainer, unmanned air
vehicles (UAVs), unmanned combat air vehicles (UCAVs) and helicopter programmes.
Defence profits increased during the half year, reflecting a higher contribution
from Vickers Defence Systems as the Challenger 2 contract was completed and a
small improvement in aerospace activities.
Defence aerospace programmes developed in line with expectations. The first
production standard EJ 200 engines assembled by Rolls-Royce powered the first UK
production Eurofighter on its maiden flight.
The company made good progress with its participation in the F-35 Joint Strike
Fighter (JSF) programme. The Dutch, Norwegian and Italian Governments signed
agreements to participate in the programme, joining the US, UK, Canada and
Denmark. Australia also indicated its selection of up to 100 JSF aircraft for
the Royal Australian Air Force's fighter requirement.
Marine: Sales £461m; underlying profit before interest £35m
With over 2,300 commercial and naval customers world-wide and equipment
installed on more than 20,000 vessels, Rolls-Royce is now a world leader in
marine propulsion systems. Following the successful integration of the Vickers
businesses, the company supplies a comprehensive range of marine propulsion
products and fully integrated systems and services.
Sales and profit in the first half increased by approximately 20 per cent and 13
per cent respectively, with growth being achieved particularly in the commercial
offshore supply and service market. In this sector, the market remained strong
and the company maintained its high market share.
Technology derived from commercial marine applications is being applied in the
naval sector. This enabled the company to win a contract to provide propeller
shaftlines for the Type 45 destroyer, increasing the company's role in this
ship's propulsion system.
The MT30, a 36 MW marine gas turbine, currently under development, is the latest
example of Rolls-Royce's strategy of exploiting its core gas turbine expertise
across a range of markets. The engine has 80 per cent commonality with the
Trent 800 aero engine and will be available from 2004.
Energy: Sales £298m; underlying loss before interest £(30)m
The company's developing energy business has now delivered over 5,000 units for
energy applications in 120 countries. With an installed base of 45,000 MW and a
strong position in the oil and gas sector, the company continues to introduce
new products and services.
Sales in the first half grew by 10 per cent, reflecting the continuing strength
of the oil and gas compression sector. The company secured orders for 16
industrial gas turbines, bringing its order book in the energy sector to £342
million.
The underlying loss before interest is accounted for by the company's continuing
investment in the industrial Trent and an additional charge of £10m which was
necessary to complete rectification work on the Allen 5000 diesel engine. The
loss before interest is expected to be significantly lower in the second half of
the year.
The programme to develop the industrial Trent remains on course. The
engineering programme to introduce a wet low emissions variant has been
completed and testing of the dry low emissions production standard has
commenced.
While the power generation sector offers long term growth, the market is
currently depressed. The company has taken immediate action to reduce its cost
base in this sector.
Financial Services: Sales £24m; underlying profit before interest £14m
The financial services businesses made a reduced contribution, largely as a
result of the phasing of costs in certain power project developments. A
stronger contribution is expected in the second half of the year.
Rolls-Royce and Partners Finance, the company's joint venture engine leasing
business, owns a portfolio of 17 engine types with 35 customers in 23 countries.
The proportion of engines on lease remains high, at 97 per cent.
Pembroke Group, the company's joint venture aircraft leasing business, has 17
aircraft types on lease to 37 customers in 22 countries. 98 per cent of the
owned aircraft fleet is on lease.
Rolls-Royce Power Ventures, the company's power project developer, has 13 power
generation projects in operation and seven in construction or commissioning. It
is intended that the company's investment in these projects will be sold down,
releasing cash in the future. The business was restructured during the first
half, reflecting the general weakness in power generation markets.
Financial review
Sales reduced by nine per cent to £2,756m (2001 £3,042m).
Underlying profit before tax was £104m (2001 £190m). Underlying earnings per
share reduced by 44 per cent, to 4.6p. These figures reflect the anticipated
reduction in the contribution from civil aerospace.
The firm order book was £16.7bn (2001 £14.6bn). In addition, a further £1.9bn
had been announced (2001 £1.9bn). Aftermarket services represented 29 per cent
of the order book.
Gross research and development investment was £277m (2001 £270m). Net research
and development investment was £138m (2001 £167m).
Receipts from risk and revenue sharing partners (RRSPs), shown under other
operating income, were £79m (2001 £122m). Payments to RRSPs, charged in cost
of sales, amounted to £52m (2001 £62m).
Rationalisation costs of £114m were incurred. These comprised £70m charged
against the provision established in 2001 and £44m charged against profit and
excluded from underlying earnings.
The taxation charge was £17m (2001 £52m), reflecting lower UK taxable profits
after restructuring and the benefit of research and development tax credits.
After adjusting for exceptional and non-trading items, the tax charge on an
underlying basis was £30m, representing 29 per cent of underlying profit before
tax. (2001 £61m, representing 32 per cent of underlying profit before tax). The
cash impact of the tax charge reduced, largely as a result of timing
differences.
Net capital expenditure was £67m (2001 £47m).
Cash outflow in the first half was £269m (2001 £58m), including rationalisation
expenditure of £109m (2001 £24m). Average net debt in the first half increased
by five per cent to £990m. Net debt on 30 June 2002 was £770m (2001 £748m).
Net working capital increased by £35m. Inventory reduced by £91m; debtors
increased by £6m, including a £90m increase in amounts recoverable on contracts,
relating to Total Care Packages; and creditors reduced by £120m.
Provisions were increased to £839m, compared to £791m at the interim stage in
2001. The increase included higher restructuring provisions and increased
customer financing provisions, which stood at £103m at the half year, 2002.
The interim dividend is 3.18 pence per share. The dividend is payable on 6
January 2003 to shareholders on the register on 18 October 2002. The
ex-dividend date is 16 October 2002.
Enquiries
Peter Barnes-Wallis Colin Duncan
Director of Financial Communications Director of Corporate Communications
Tel: 0207 222 9020
www.rolls-royce.com
Group Profit and Loss Account
For the half year to 30 June 2002
Half Year Half Year Year to
to to 31 December
30 June 2002 30 June 2001 2001
£m £m £m
Turnover: Group and share of joint ventures 3,004 3,150 6,680
Sales to joint ventures 343 383 871
Less share of joint ventures' turnover (591) (491) (1,223)
Group turnover (note 1) 2,756 3,042 6,328
Cost of sales and other operating income and costs* (2,564) (2,719) (5,736)
Research and development (net)** (138) (167) (358)
Group operating profit 54 156 234
Share of operating profit of joint ventures 36 33 82
Total operating profit 90 189 316
Operating profit before exceptional item 134 219 546
Exceptional item (note 2) (44) (30) (230)
Loss on sale of businesses (3) (2) (11)
Profit on sale of fixed assets 1 6 6
Profit on ordinary activities before interest (note 1) 88 193 311
Net interest payable Group (37) (35) (77)
joint ventures (18) (21) (42)
Profit on ordinary activities before taxation *** 33 137 192
Taxation (17) (52) (86)
Profit on ordinary activities after taxation and 16 85 106
attributable to ordinary shareholders
Dividends - interim 3.18p (2001 interim 3.18p final (52) (50) (132)
5.00p)
Transferred (from)/to reserves (36) 35 (26)
* includes Other Operating Income 79 122 239
** Research and development (gross) (277) (270) (636)
*** Underlying profit before taxation (note 3) 104 190 475
Earnings per ordinary share (note 3)
Underlying 4.60p 8.16p 20.20p
Basic 0.99p 5.38p 6.67p
Diluted basic 0.98p 5.35p 6.56p
Group Statement of Total Recognised Gains and Losses
Profit attributable to ordinary shareholders 16 85 106
Exchange adjustments on foreign currency net investments
60 19 (11)
Total recognised gains for the period 76 104 95
Summary Group Balance Sheet
Half Year Half Year Year to
to to 31 December
30 June 2002 30 June 2001 2001
£m £m £m
Fixed assets
Intangible 861 835 823
Tangible 1,684 1,732 1,732
Investments - joint ventures 221 193 204
- share of gross assets 1,327 1,263 1,341
- share of gross liabilities (1,113) (1,070) (1,144)
- goodwill 7 - 7
- other 52 29 30
2,818 2,789 2,789
Current assets
Stocks 1,203 1,294 1,222
Debtors 2,448 2,442 2,450
Short term deposits and investments 180 175 301
Cash at bank and in hand 400 471 578
4,231 4,382 4,551
Creditors
Amounts falling due within one year - Borrowings (331) (265) (276)
- Other Creditors (2,484) (2,647) (2,720)
Amounts falling due after one year - Borrowings (1,019) (1,129) (1,104)
- Other Creditors (259) (216) (288)
Provisions for liabilities and charges (839) (791) (882)
Net assets 2,117 2,123 2,070
Capital and Reserves
Equity shareholders' funds 2,114 2,122 2,068
Equity minority interests in subsidiary undertakings 3 1 2
2,117 2,123 2,070
Reconciliation of Movements in Shareholders' Funds
£m £m £m
At 1 January 2,068 2,040 2,040
Total recognised gains for the period 76 104 95
Ordinary dividends (net of scrip dividend adjustments) (35) (35) (90)
New ordinary share capital issued (net of expenses) 1 13 16
Goodwill transferred to the profit and loss account in
respect of disposals of businesses 4 - 7
At period end 2,114 2,122 2,068
Summary Group Cash Flow Statement
Half Year Half Year Year to
to to 31 December
30 June 2002 30 June 2001 2001
£m £m £m
Net cash (outflow)/inflow from operating activities (107) 15 418
Dividends received from joint ventures - 4 15
Returns on investments and servicing of finance (60) (31) (54)
Taxation paid (8) (24) (24)
Capital expenditure and financial investment (67) (47) (179)
Acquisitions and disposals (5) 48 79
Equity dividends paid (34) (31) (84)
Cash (outflow)/inflow before use of liquid resources and
financing (281) (66) 171
Management of liquid resources 121 (31) (162)
Financing (share capital and borrowings) (42) 122 111
(Decrease)/increase in cash (202) 25 120
Reconciliation of net cash flow to movement in net
funds
(Decrease)/increase in cash (202) 25 120
Cash (inflow)/outflow from (decrease)/increase in liquid (121) 31 162
resources
Cash outflow/(inflow) from decrease/(increase) in 43 (109) (95)
borrowings
Change in net funds resulting from cash flows (280) (53) 187
Amortisation of zero-coupon bonds (1) (1) (3)
Exchange adjustments 12 (4) 5
Movement in net funds (269) (58) 189
Net funds at 1 January (501) (690) (690)
Net debt at period end (770) (748) (501)
Reconciliation of operating profit to operating cash
flows
Operating profit 54 156 234
Amortisation of intangible assets 30 29 57
Depreciation of tangible fixed assets 96 90 198
(Decrease)/increase in provisions for liabilities and (58) 55 180
charges
(Increase) in working capital/creditors due after more
than one year (229) (315) (251)
Net cash (outflow)/inflow from operating activities (107) 15 418
Notes
Half Year Half Year Year to
to to 31 December
30 June 2002 30 June 2001 2001
£m £m £m
1. Analysis by business segment
Group turnover
Civil Aerospace 1,314 1,717 3,443
Defence 659 639 1,400
Marine 461 384 827
Energy 298 272 608
Financial services 24 30 50
2,756 3,042 6,328
Underlying profit before interest*
Civil Aerospace 55 163 347
Defence 85 70 175
Marine 35 31 73
Energy (30) (48) (64)
Financial services 14 30 63
159 246 594
*before exceptional and non-trading items
Profit before interest
Civil Aerospace 20 151 198
Defence 76 69 132
Marine 20 14 37
Energy (40) (70) (118)
Financial services 12 29 62
88 193 311
Net assets/liabilities - excluding net debt
Civil Aerospace 1,370 1,226 1,124
Defence 159 298 179
Marine 555 569 513
Energy 392 373 381
Financial services 411 405 374
Net assets 2,887 2,871 2,571
2. Exceptional items
This relates to exceptional rationalisation costs.
3. Earnings per ordinary share
Basic earnings per ordinary share are calculated by dividing the profit
attributable to ordinary shareholders of £16 million (2001 half year
£85m, full year £106m) by 1,610 million (2001 half year,1,580 million,
full year 1,589 million) ordinary shares, being the average number of
ordinary shares in issue during the period, excluding own shares held
under trust which have been treated as if they had been cancelled.
Underlying earnings per ordinary share have been calculated as follows.
Half Year to 30 June 2002
£m £m Pence
Profit before taxation 33
Profit attributable to ordinary shareholders 16 0.99
Exclude:
Net loss on sale of businesses 3 3 0.19
Loss on sale of fixed assets * 1 1 0.06
Amortisation of goodwill 23 23 1.43
Exceptional rationalisation 44 44 2.73
Related tax effect (13) (0.80)
Underlying profit before taxation 104
Underlying profit attributable to shareholders 74
Underlying earnings per share 4.60
* excluding lease engines and aircraft sold by financial services companies
Half Year to 30 June 2001
£m £m Pence
Profit before taxation 137
Profit attributable to ordinary shareholders 85 5.38
Exclude:
Net loss on sale of businesses 2 2 0.13
Profit on sale of fixed assets * (2) (2) (0.13)
Amortisation of goodwill 23 23 1.45
Exceptional rationalisation 30 30 1.90
Related tax effect (9) (0.57)
Underlying profit before taxation 190
Underlying profit attributable to shareholders 129
Underlying earnings per share 8.16
* excluding lease engines and aircraft sold by financial services companies
Year to 31 December 2001
£m £m Pence
Profit before taxation 192
Profit attributable to ordinary shareholders 106 6.67
Exclude:
Net loss on sale of businesses 11 11 0.69
Profit on sale of fixed assets * (3) (3) (0.19)
Amortisation of goodwill 45 45 2.83
Exceptional rationalisation 230 230 14.47
Related tax effect - (68) (4.27)
Underlying profit before taxation 475
Underlying profit attributable to shareholders 321
Underlying earnings per share 20.20
* excluding lease engines and aircraft sold by financial services companies
Diluted earnings per ordinary share, are calculated by dividing the profit
attributable to ordinary shareholders of £16m (2001 half year £85m, full year
£106m) by 1,632 million (2001 half year 1,589 million, full year 1,616 million)
ordinary shares, being 1,610 million (2001 half year 1,580 million, full year
1,589 million) as above adjusted by the bonus element of existing
share options of 22 million (2001 half year 9 million, full year 27 million).
4. Group employees at the period end
30 June 30 June 31 Dec
2002 2001 2001
Number Number Number
Civil Aerospace 21,400 24,300 23,900
Defence 6,100 7,200 6,700
Marine systems 6,400 6,500 6,500
Energy 4,900 5,100 4,900
Financial services 200 100 200
39,000 43,200 42,200
5. Post balance sheet event
On 2nd August 2002, the sale of the Vickers Defence Systems business to Alvis
was announced. This is conditional upon Alvis shareholder approval, and
clearance from certain regulatory and competition authorities. There will not
be a material impact on the Group.
6. Sales financing contingent liabilities
In connection with the sale of its products the Group will on some occasions
provide financing support for its customers. The Group's contingent liabilities
related to financing arrangements are spread over many years and relate to a
number of customers and a broad product portfolio. The contingent liabilities
represent the exposure the Group has in respect of delivered aircraft,
regardless of the point in time at which such exposures may arise. Exposures
are not reduced to a net present value.
During the first half of 2002 there were no material changes to the maximum
gross and net contingent liabilities.
7. Pensions
The Accounting Standards Board has proposed to defer full implementation of FRS
17, pending the introduction of International Accounting Standards. For 2002
accounts certain memorandum disclosures are required, including the value of
pension scheme assets and liabilities under the new rules laid down by FRS 17.
Whilst this is not a requirement for the half-year results, the following
indicative data is provided for the benefit of shareholders.
Rolls-Royce has three UK pension schemes. At 30 June 2002, after taking account
of deferred taxation the deficit in the principal Rolls-Royce Pension Fund had
increased to approximately £700 million. There is no impact on funding
requirements or profit and loss account for 2002. The Group's funding
requirements for its schemes are derived from tri-annual independent actuarial
valuations, the next of which is due in March 2003 for the principal Rolls-Royce
Pension Fund. Subject to market levels and actuarial assumptions applying at 30
June 2002 remaining unchanged, the consequent additional charge to the profit
and loss account (under SSAP24) in 2003 could be around £35 million for this
scheme.
The other two Rolls-Royce pension funds are, together, less than a third of
the size of the principal fund. The Vickers Group Pension Scheme and the
Rolls-Royce Group Pension Scheme are due for actuarial review in March 2004 and
April 2004 respectively. At the date of their most recent three-yearly
actuarial valuations these funds were in surplus.
8. Preparation of interim financial statements
The results for each half-year are unaudited. The comparative figures for the
year to 31 December 2001 have been abridged from the Group's financial
statements for that year, which have been delivered to the Registrar of
Companies. The auditors have reported on those financial statements; their
report was unqualified and did not contain a statement under s237(2) or (3) of
the Companies Act 1985.
The interim financial statements for the six months ended 30 June 2002 were
approved by the Board on 21 August 2002.
This information is provided by RNS
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