Interim Results

31 July 2003 ROLLS-ROYCE GROUP plc INTERIM RESULTS 2003 Steady progress "Our aftermarket revenues have continued to grow and currently account for half of Group sales. Our civil flying hours increased year on year despite the depressed civil market. "We are benefiting from the investments made in new products and markets over the past decade and the growth in our installed engine base following gains in market share. "The Group has made good progress with its cost reduction programmes and has responded effectively to the impact of recent events, including the Iraq war and SARS. We are demonstrating the value of our consistent strategy and broader portfolio." Sir John Rose, Chief Executive Rolls-Royce Group plc Profit and cash flow consistent with guidance * Underlying profit before tax Â£115 million* (h1 2002: Â£104m) * Headline profit before tax Â£59 million (h1 2002: Â£33m) * Average net debt Â£895 million (h1 2002: Â£990m) * Half year-end net debt Â£675 million (h1 2002: Â£770m) * Dividend maintained Aftermarket services revenues increased by 9 per cent * Â£1.3bn, 50 per cent of Group sales (h1 2002: Â£1.2bn) Record order book * Â£4.0bn order intake (h1 2002: Â£5.2bn) * Firm and announced backlog Â£19.0bn (h1 2002: Â£18.6bn) * Aftermarket services Â£6.5bn (h1 2002: Â£5.4bn) Balanced business portfolio * Civil - aftermarket growing * Defence - progress on key programmes * Marine - steady profit growth * Energy - return to profit *before exceptional and non-trading items (see note 3) Overview Results for the half-year ended June 30 2003 were consistent with previous guidance and reflected both the balanced nature of the company's business and the restructuring actions taken to mitigate the downturn in civil aerospace. Underlying profit before tax was Â£115 million, an increase of 11 per cent, and underlying earnings per share were 4.97 pence (h1 2002: 4.60p). Basic earnings per share were 2.09 pence (h1 2002: 0.99p) Net debt was Â£675 million (h1 2002: Â£770m), reflecting a cash outflow of Â£80 million (h1 2002: Â£269m) during the first half. Average net debt for the period was Â£895 million (h1 2002: Â£990 million). Group aftermarket services revenues grew by nine per cent and, at Â£1.3 billion, accounted for 50 per cent of total revenues. Aftermarket revenues have grown by 10 per cent per annum compound over the last five years. Engine flying hours for the Rolls-Royce fleet of civil engines to the end of May increased by six per cent compared to the same period in 2002. Engine deliveries across the Group were 14 per cent lower than in the first half of 2002. This reflected the phasing of deliveries in the defence sector and delivery deferrals in the civil sector, particularly for corporate and regional aircraft. Engine deliveries for the full year are expected to be at a similar level to those in 2002 with higher defence deliveries offsetting a 10 per cent decline in civil deliveries. The order book remained strong, at a record level of Â£17.6 billion (h1 2002: Â£ 16.7 billion), following an order intake of Â£4.0 billion (h1 2002: Â£5.2bn). A further Â£1.4 billion worth of business was announced (h1 2002: Â£1.9 billion), resulting in a firm and announced order backlog of Â£19.0 billion (h1 2002: Â£ 18.6 billion). Aftermarket services accounted for 34 per cent of the firm and announced order backlog (h1 2002: 29 per cent). The company has made good progress with its cost reduction programmes, including facilities rationalisation, supply chain restructuring and lead-time reduction. Headcount was 36,200, a net reduction of 1,100 during the first half. The headcount is expected to be reduced to around 35,000 by the year-end, in line with previous guidance. During this difficult period, the company's employees have continued to demonstrate strong teamwork and commitment. A robust business model Over the last five years, aftermarket services revenues have grown by 10 per cent per annum compound. The company expects further growth as the installed base of 54,000 engines continues to expand and mature. The Rolls-Royce business model is entering a new phase as the requirement for new engine development reduces and aftermarket revenues continue to increase. With its broad range of new engines, the company has been successful in increasing its market share and capturing the aftermarket services opportunity this creates. During the first six months of 2003, half the company's sales came from the aftermarket, supported by four original equipment businesses - civil, defence, marine and energy - each of which has established market positions. The company's competitive advantage in the provision of aftermarket services is based on its unique knowledge of its products' attributes and performance. The investments made in the global repair and overhaul network and in enhanced services have enabled the company to offer tailored, long-term support packages to its customers. More than 400 long-term aftermarket service agreements have been secured, representing 24 per cent of the order book. This will continue to support aftermarket sales growth. Outlook The company's defence, marine and energy businesses, which represent 54 per cent of Group sales, are performing in line with expectations. The after-effects of the Iraq war, coupled with the impact of SARS, have impacted the civil aerospace business, causing some deferrals of original equipment deliveries. However, year to date Rolls-Royce civil engine flying hours have increased compared to the same period in 2002, confirming that the company's aftermarket can continue to grow even in a depressed cycle for original equipment. On March 4 the company provided financial guidance for 2003. This guidance was subject to the uncertainty over Iraq and the outcome of consultations with employees, aimed at limiting the financial impact of the company's pension fund deficit. Based on trading performance across all its businesses over the first half of the year and its current view of market conditions, the company is reiterating this guidance for profit growth with positive cash flow. Enquiries Peter Barnes-Wallis Colin Duncan Director of Financial Communications Director of Corporate Communications Tel: 0207 222 9020 www.rolls-royce.com An interview on the results with Rolls-Royce Chief Executive, Sir John Rose, is available on video, audio and text on www.Rolls-Royce.com and www.cantos.com. Photographs of directors and products are available at www.newscast.co.uk Sector review Civil aerospace: Sales Â£1,198m; underlying profit before interest Â£46m Civil aerospace aftermarket revenues grew by 15 per cent. The company's forward view based on long-term contracts and repair and overhaul bookings continues to support its expectation that aftermarket revenues for 2003 will be higher than in 2002. Aftermarket revenues represented 57 per cent of civil aerospace sales in the first half. The Rolls-Royce fleet flying hours increased by six per cent to the end of May compared to the same period last year, continuing a trend of outperforming the industry. Since January 2001, Rolls-Royce engine flying hours have increased by 40 per cent relative to the industry. The company is now planning for engine deliveries in 2003 to be about 10 per cent lower than in 2002, primarily due to further reductions in regional and corporate aircraft deliveries. Good progress was made across the product portfolio, with a 33 per cent share of engine orders in the first half. In particular, new orders were announced for 182 Trent engines, the highest number in any first half since the programme was launched. The installed base of civil jet engines has increased by more than 50 per cent over the last five years and stood at 10,200 at the end of the first half. Its increasing maturity was demonstrated by the RB211-535, which passed 30 million flying hours, including 10 million take offs and landings, and by the delivery of the 1000th BR700 series engine. The company's global repair and overhaul network was enhanced by a joint venture with Lufthansa Technik AG, specialising in repair and overhaul of three types of Trent engine. Defence: Sales Â£642m; underlying profit before interest Â£60m Rolls-Royce further strengthened its position as the number two defence aero engine manufacturer adding to its strong presence on the world's new programmes. The company continued to develop its aftermarket services, which represented 51 per cent of defence sales. During the first half, additional orders were announced for Mission Ready Management Solutions (MRMS), which brought the total of MRMS business booked so far to more than $500 million. As a member of the Europrop International consortium, the company will develop the engines for the new European transport aircraft, the A400M. T he value to Rolls-Royce amounts to more than $500 million. Also in the transport sector, the company was awarded new contracts, worth more than $350 million, for AE 1107C-Liberty engines for the Bell Boeing V-22 for the US Marine Corps. A six-year agreement was concluded with Lockheed Martin covering 248 AE 2100 D engines for C-130J aircraft for the US Department of Defense. Good progress on the F-35 Joint Strike Fighter included production of the first Rolls-Royce LiftFanâ„¢ blisk (bladed disk) for the System Development and Demonstration phase of the programme. The Japanese Defense Agency selected the RTM322 engine for its fleet of EH101 helicopters, maintaining the engine's position as the leading powerplant for modern, medium-sized helicopters. Bahrain signed a contract for six Hawk Advanced Jet Training aircraft, to be powered by the Adour Mk 951 engine , which is currently completing flight certification trials for South Africa. Marine: Sales Â£456m; underlying profit before interest Â£37m The Marine business continues to develop its world leading position in commercial and naval markets. Aftermarket services represented 30 per cent of marine sales in the first half. Submarine support work, in particular, is providing significant opportunities for growth in services. The company entered the US Navy large gas turbine market with the selection of the MT30 gas turbine for the land based demonstrator for the US Navy's DD(X) destroyer programme. The company's Kamewa waterjets were also successful in the US, being selected for the X-craft, an experimental high-speed aluminium catamaran. The advanced WR-21 marine gas turbine, already selected for the Royal Navy's Type 45 frigates, was successfully demonstrated in Japan at the KHI test facility. The company is also supplying the world's most powerful waterjets for a Japanese passenger and cargo-carrying ferry. Following a long period of growth, sales in the offshore support vessel market have begun to level off. However, the company's order book for the delivery of ship designs and equipment remains robust at 45 vessels, worth more than Â£200 million. As well as designing the ships, Rolls-Royce provides a full range of equipment including engines, propulsion systems, rudders, steering gear, deck machinery and automation and monitoring systems. Energy: Sales Â£276m; underlying profit before interest Â£10m A strong worldwide oil and gas exploration and production market, coupled with reduced costs, enabled the company's energy business to return to profitability in the first half of 2003. Aftermarket services represented 42 per cent of sales. The energy business is pursuing a strategy for aftermarket growth, particularly in Long-Term Service Agreements and Engineered Solutions. Significant investments in facilities, resources and information technology capabilities are being made to support this growth. The oil and gas business continued to strengthen its position in emerging markets. Orders exceeding $155 million have been received to date for the Azeri oil and gas project being developed in the Caspian Sea, and new orders were received for equipment to be installed offshore west Africa. For onshore applications, compression and power generation units were ordered for installation in Thailand. Rolls-Royce pipeline compressors were chosen for use on the Interconnector, the major gas pipeline linking the UK and mainland Europe. The industrial Trent 60 Wet Low Emissions launch unit is operating at the Derby cogeneration facility. The retrofit programme for the Dry Low Emissions industrial Trent 50 is progressing with all but one of the facilities scheduled for completion this year. The final site is scheduled for completion in the first quarter, 2004. Financial Services: Sales Â£27m; underlying profit before interest Â£7m The Financial Services businesses comprise engine leasing, aircraft leasing and power project development. The reduced contribution at the half-year was largely attributable to Pembroke, the aircraft leasing joint venture, as a result of the disposal of its subsidiary, AFT, which owned Fokker aircraft. Rolls-Royce and Partners Finance, the company's engine leasing joint venture, owned 256 engines, of which 98 per cent by value were on lease to 33 customers. Following the disposal of its AFT subsidiary, Pembroke Group owned 30 aircraft, of which 96 per cent by value were on lease, Rolls-Royce Power Ventures is the company's power project developer. It has a portfolio of 12 projects in operation and a further five in construction or commissioning. First half highlights included the commencement of commercial operations at its Energobaltic joint venture in Poland. Financial review The firm order book was Â£17.6bn (h1 2002: Â£16.7bn). In addition, a further Â£ 1.4bn had been announced (h1 2002: Â£1.9bn). Aftermarket services represented 34 per cent of the firm and announced order book (h1 2002: 29 per cent). Sales reduced by six per cent to Â£2,599m (h1 2002: Â£2,756m). Underlying profit before tax was Â£115m (h1 2002: Â£104m). Underlying earnings per share increased by eight per cent, to 4.97p. Gross research and development investment was Â£304m (h1 2002: Â£277m). Net research and development investment was Â£145m (h1 2002: Â£138m). Receipts from risk and revenue sharing partners (RRSPs), shown as other operating income, were Â£74m (h1 2002: Â£79m). Payments to RRSPs, charged in cost of sales, amounted to Â£53m (h1 2002: Â£52m). As the company has previously indicated, the market success of engine programmes developed with RRSPs will result in payments to partners exceeding the level of receipts from partners for new programmes for the first time in 2003. Rationalisation costs of Â£15m (h1 2002: Â£70m) were charged against the provision established in previous years and Â£29m (h1 2002: Â£44m) was charged against profit and excluded from underlying earnings. The taxation charge was Â£25m (h1 2002: Â£17m). After adjusting for exceptional and non-trading items, the tax charge on an underlying basis was Â£34m, representing 30 per cent of underlying profit before tax. (h1 2002: Â£30m, representing 29 per cent of underlying profit before tax). Cash outflow during the first half was Â£80m (h1 2002: Â£269m), after rationalisation expenditure of Â£35m (h1 2002: Â£109m). Average net debt was Â£ 895m (h1 2002: Â£990m). Net debt at the half year was Â£675m (h1 2002: Â£770m). Net working capital was Â£523m (h1 2002: Â£908m), an increase of Â£129m (h1 2002: Â£244m) in the first half; inventory increased by Â£85m (h1 2002: decrease Â£19m); debtors reduced by Â£79m (h1 2002: Â£2m); and creditors reduced by Â£123m (h1 2002: Â£265). The impact of long-term contract accounting for TotalCare Packages was a Â£52m increase in debtors (h1 2002: Â£91m) and a Â£19m increase in creditors (h1 2002: Â£19m). Provisions were Â£782m, (h1 2002: Â£839m), largely reflecting utilisation of the rationalisation provision. There were no material changes to the Group's gross and net contingent liabilities during the first half of 2003. The company is consulting employees with a view to limiting the financial impact of the company's pension fund deficit. The results of these consultations will be incorporated in the full actuarial review of the Rolls-Royce Pension Fund, which is now underway and is due for completion by the year-end. The company expects any additional funding requirements will be contained within existing guidance. The interim dividend is 3.18 pence per share (2002 3.18p). The dividend is payable on January 5 2004 to shareholders on the register on October 17 2003. The ex-dividend date is October 15 2003. 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 2003 Half Year Half Year Year to to to 31 December 30 June 2003 30 June 2002 2002 Â£m Â£m Â£m Turnover: Group and share of joint ventures 2,665 3,004 6,072 Sales to joint ventures 487 343 948 Less share of joint ventures' turnover (553) (591) (1,232) _________________________________________________________________________________________ Group turnover (note 1) 2,599 2,756 5,788 Cost of sales and other operating income and (2,371) (2,564) (5,323) costs* Research and development (net)** (145) (138) (297) _________________________________________________________________________________________ Group operating profit 83 54 168 Share of operating profit of joint ventures 23 36 66 _________________________________________________________________________________________ Total operating profit 106 90 234 Operating profit before exceptional item 135 134 309 Exceptional item (note 2) (29) (44) (75) Loss on sale of businesses (2) (3) (22) Profit on sale of fixed assets - 1 - _________________________________________________________________________________________ Profit on ordinary activities before interest 104 88 212 (note 1) Net interest payable - Group (33) (37) (72) - joint ventures (12) (18) (35) _________________________________________________________________________________________ Profit on ordinary activities before taxation * 59 33 105 ** Taxation (25) (17) (52) _________________________________________________________________________________________ Profit on ordinary activities after taxation 34 16 53 and attributable to ordinary shareholders Dividends - interim 3.18p (2002 interim 3.18p (53) (52) (133) final 5.00p) _________________________________________________________________________________________ Transferred from reserves (19) (36) (80) _________________________________________________________________________________________ * includes Other Operating Income 74 79 158 ** Research and development (gross) (304) (277) (590) *** Underlying profit before taxation (note 3) 115 104 255 Earnings per ordinary share (note 3) Underlying 4.97p 4.60p 11.10p Basic 2.09p 0.99p 3.29p Diluted basic 2.08p 0.98p 3.26p Group Statement of Total Recognised Gains and Losses _________________________________________________________________________________________ Profit attributable to ordinary shareholders 34 16 53 Exchange adjustments on foreign currency net investments 18 60 15 _________________________________________________________________________________________ Total recognised gains for the period 52 76 68 _________________________________________________________________________________________ Summary Group Balance Sheet Half Year Half Year Year to to to 31 December 30 June 2003 30 June 2002 2002 Â£m Â£m Â£m Fixed assets Intangible 870 861 868 Tangible 1,848 1,684 1,876 Investments - joint ventures 202 221 195 ______________________________________________ ____________ ____________ ____________ share of gross assets 1,123 1,327 1,160 share of gross liabilities (927) (1,113) (971) goodwill 6 7 6 ______________________________________________ ____________ ____________ ____________ - other 65 52 71 _________________________________________________________________________________________ 2,985 2,818 3,010 Current assets Stocks 1,243 1,203 1,158 Debtors 2,334 2,448 2,413 Short term deposits and investments 216 180 84 Cash at bank and in hand 454 400 634 _________________________________________________________________________________________ 4,247 4,231 4,289 Creditors Amounts falling due within one year - (365) (331) (275) Borrowings - Other Creditors (2,590) (2,484) (2,727) Amounts falling due after one year - Borrowings (980) (1,019) (1,038) - Other Creditors (464) (259) (450) Provisions for liabilities and charges (782) (839) (772) _________________________________________________________________________________________ Net assets 2,051 2,117 2,037 _________________________________________________________________________________________ Capital and Reserves Equity shareholders' funds 2,049 2,114 2,035 Equity minority interests in subsidiary 2 3 2 undertakings _________________________________________________________________________________________ 2,051 2,117 2,037 _________________________________________________________________________________________ Reconciliation of Movements in Shareholders' Funds Â£m Â£m Â£m At 1 January 2,035 2,068 2,068 Total recognised gains for the period 52 76 68 Ordinary dividends (net of scrip dividend (38) (35) (110) adjustments) New ordinary share capital issued (net of - 1 1 expenses) Goodwill transferred to the profit and loss account in respect of disposals of businesses - 4 8 _________________________________________________________________________________________ At period end 2,049 2,114 2,035 _________________________________________________________________________________________ Summary Group Cash Flow Statement Half Year Half Year Year to to to 31 December 30 June 2003 30 June 2002 2002 Â£m Â£m Â£m Net cash inflow/(outflow) from operating 140 (107) 611 activities Dividends received from joint ventures 4 - 12 Returns on investments and servicing of finance (42) (60) (84) Taxation paid (22) (8) (41) Capital expenditure and financial investment (92) (67) (381) Acquisitions and disposals - (5) (20) Equity dividends paid (36) (34) (109) _________________________________________________________________________________________ Cash outflow before use of liquid resources and (48) (281) (12) financing Management of liquid resources (133) 121 217 Financing (54) (42) (81) _________________________________________________________________________________________ (Decrease)/increase in cash (235) (202) 124 _________________________________________________________________________________________ Reconciliation of net cash flow to movement in net funds (Decrease)/increase in cash (235) (202) 124 Cash outflow/(inflow) from increase/(decrease) in liquid resources 133 (121) (217) Cash outflow from decrease in borrowings 54 43 82 _________________________________________________________________________________________ Change in net funds resulting from cash flows (48) (280) (11) Borrowings of businesses acquired - - (52) Finance lease additions (9) - (32) Amortisation of zero-coupon bonds (2) (1) (5) Exchange adjustments (21) 12 6 _________________________________________________________________________________________ Movement in net funds (80) (269) (94) Net debt at 1 January (595) (501) (501) _________________________________________________________________________________________ Net debt at period end (675) (770) (595) _________________________________________________________________________________________ Reconciliation of operating profit to operating cash flows Operating profit 83 54 168 Amortisation of intangible assets 28 30 74 Depreciation of tangible fixed assets 96 96 236 Increase/(decrease) in provisions for liabilities and charges 10 (58) (125) (Increase)/decrease in working capital/ creditors due after more than one year (77) (229) 258 _________________________________________________________________________________________ Net cash inflow/(outflow) from operating 140 (107) 611 activities _________________________________________________________________________________________ Notes Half Year Half Year Year to to to 31 December 30 June 2003 30 June 2002 2002 Â£m Â£m Â£m 1. Analysis by business segment Group turnover Civil aerospace 1,198 1,314 2,739 Defence* 642 659 1,376 Marine 456 461 984 Energy 276 298 639 Financial services 27 24 50 _________________________________________________________________________________________ 2,599 2,756 5,788 _________________________________________________________________________________________ * includes Vickers Defence Systems - 44 70 Profit before interest Civil aerospace 20 20 87 Defence* 53 76 161 Marine 20 20 54 Energy 6 (40) (70) Financial services 5 12 (20) _________________________________________________________________________________________ 104 88 212 _________________________________________________________________________________________ * includes Vickers Defence Systems - 27 50 Underlying profit before interest** Civil aerospace 46 55 150 Defence 60 85 183 Marine 37 35 82 Energy 10 (30) (41) Financial services 7 14 (12) _________________________________________________________________________________________ 160 159 362 _________________________________________________________________________________________ **before exceptional and non-trading items Net assets/liabilities - excluding net debt Civil aerospace 1,295 1,370 1,219 Defence (4) 159 25 Marine 584 555 550 Energy 401 392 348 Financial services 450 411 490 _________________________________________________________________________________________ Net assets*** 2,726 2,887 2,632 _________________________________________________________________________________________ *** Net assets excludes net debt of Â£675m (2002 half year Â£770m, 2002 full year Â£595m) 2. Exceptional items This relates to exceptional rationalisation costs, largely comprising the continuation of previously announced severance programmes. 3. Earnings per ordinary share Basic earnings per ordinary share are calculated by dividing the profit attributable to ordinary shareholders of Â£34 million (2002 half year Â£16m, full year Â£53m) by 1,629 million (2002 half year, 1,610 million, full year 1,612 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 2003 Â£m Â£m Pence Profit before taxation 59 Profit attributable to ordinary shareholders 34 2.09 Exclude: Exceptional rationalisation 29 29 1.78 Net loss on sale of 2 2 0.12 businesses Amortisation of goodwill 25 25 1.53 Related tax effect (9) (0.55) ________________________________________________________________________________________ Underlying profit before taxation 115 Underlying profit attributable to 81 shareholders Underlying earnings per share 4.97 Half Year to 30 June 2002 Â£m Â£m Pence Profit before taxation 33 Profit attributable to ordinary shareholders 16 0.99 Exclude: Exceptional rationalisation 44 44 2.73 Net loss on sale of 3 3 0.19 businesses Loss on sale of fixed 1 1 0.06 assets * Amortisation of goodwill 23 23 1.43 Related tax effect (13) (0.80) ________________________________________________________________________________________ Underlying profit before taxation 104 Underlying profit attributable to 74 shareholders Underlying earnings per share 4.60 * excluding lease engines and aircraft sold by financial services companies Year to 31 December 2002 Â£m Â£m Pence Profit before taxation 105 Profit attributable to ordinary shareholders 53 3.29 Exclude: Exceptional rationalisation 75 75 4.65 Net loss on sale of 22 22 1.36 businesses Loss on sale of fixed assets 1 1 0.06 * Amortisation of goodwill 52 52 3.23 Related tax effect - (24) (1.49) ________________________________________________________________________________________ Underlying profit before taxation 255 Underlying profit attributable to 179 shareholders Underlying earnings per share 11.10 * 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 Â£34m (2002 half year Â£16m, full year Â£ 53m) by 1,636 million (2002 half year 1,632 million, full year 1,624 million) ordinary shares, being 1,629 million (2002 half year 1,610 million, full year 1,612 million) as above adjusted by the bonus element of existing share options of 7 million (2002 half year 22 million, full year 12 million). 4. Group employees at the period end 30 June 30 June 31 Dec 2003 2002 2002 Number Number Number Civil Aerospace 20,300 21,400 21,100 Defence 5,100 6,100 5,100 Marine systems 6,400 6,400 6,500 Energy 4,300 4,900 4,500 Financial services 100 200 100 _________________________________________________________________________________________ 36,200 39,000 37,300 5. 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 2003 there were no material changes to the maximum gross and net contingent liabilities. 6. Pensions The Accounting Standards Board has deferred the full implementation of FRS 17, pending the introduction of International Accounting Standards. The Group's funding requirements for its schemes are derived from tri-annual independent actuarial valuations. For the principal Rolls-Royce Pension Fund, the March 2003 actuarial valuation is in progress. The Group is currently undertaking consultations with employees over a number of mitigating actions in connection with the provision of pension benefits. The objective of these actions is to contain the additional funding costs within the guidance previously provided. 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. Whilst at the date of their most recent three-yearly actuarial valuations these funds were in surplus, the company has also commenced consultations to limit the potential growth of liabilities in the larger of these two schemes. 7. Preparation of interim financial statements The results for each half-year are unaudited. The comparative figures for the year to 31 December 2002 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. During the period Rolls-Royce Group plc was introduced as the new holding company of the Rolls-Royce Group by way of a Scheme of Arrangement under section 425 of the Companies Act 1985. This has been accounted for as a capital reorganisation and merger accounting principles have been applied, as if the company had always been the holding company of the Group. The interim financial statements for the six months ended 30 June 2003 were approved by the Board on 30 July 2003.

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