12th Feb 2009 07:00
12 February 2009 ROLLS-ROYCE GROUP plc PRELIMINARY RESULTS 2008
Group Highlights
- Order book increased by £9.6bn or 21 per cent to a record £55.5bn (2007 £45.9bn), with strong growth in all businesses.
- Group sales increased to £9,082m (2007 £7,435m). Sales on an underlying basis* increased by 17 per cent to £9,147m.
- Services sales increased by 11 per cent to £4,755m on an underlying basis.
- Profit before financing was £862m (2007 £512m).
- Underlying profit before taxation* increased by ten per cent to £880m (2007 £800m).
- Net cash inflow was £570m (2007 £62m) with average net cash of £375m (2007 £350m).
- Robust balance sheet with net cash of £1,458m (2007 £888m) at the year end.
- Final payment to shareholders 8.58 pence per share, making 14.30p per share, an increase of 10 per cent for the full year.
* see note 3
Sir John Rose, Chief Executive, said:
"We have delivered a good set of results, with strong order intake, cash flow and underlying profit growth achieved in challenging conditions.
"2009 will be a very difficult year for the global economy. Our welldiversified portfolio, the scale of our installed base and the strength of ourbalance sheet give us confidence that Rolls-Royce will respond successfully tocurrent challenges and develop the business for the longer term."Our current view is that in 2009 underlying revenues will continue to grow,with underlying profits remaining broadly similar to those achieved in 2008. Average net cash is expected to increase despite a cash outflow in the year".
Short term resilience and long term growth
Rolls-Royce's performance in 2008 was characterised by strong order intake,
cash inflow and underlying profit growth. The current economic crisis will have an impact on the Group, its customers and suppliers, but it is too early to be precise about the scale and duration of these effects. The Board fully recognises the unprecedented nature of the challenges that lie ahead, but is confident that the Group is better positioned than in the past and that its financial and portfolio strengths will enable it, in the short term, to respond to current uncertainties and continue to develop the
business.
Over the next ten years, the longevity of the Group's programmes and its technological leadership, the scale of the order book and the increasing
importance of services suggest that Rolls-Royce has the capability to double its revenues through organic growth.
The Group is well placed to respond effectively to the current challenging external environment for a number of reasons:
- It is a global leader in growing markets with very high barriers to entry
and the assurance of long-term, worldwide demand for its power systems; - Its portfolio is broad and well balanced, in terms of the geographical spread of its markets, the balance between its businesses and the relationship between the aftermarket and original equipment;
- Rolls-Royce is rich in technology, understands its customers' requirements
and has the ability to apply its system integration skills to meet those
requirements. It is also well positioned to exploit its technological strengths in adjacent markets such as civil nuclear and develop its existing businesses through partnerships and acquisitions;
- The Group has continuously focussed on strengthening operational efficiency
and flexibility, with early action taken to restructure and reduce the
costs of support functions, improve the performance of the external supply
chain and reduce discretionary costs;
- The balance sheet is robust, with a positive cash balance, a strong credit
rating and no material refinancing until 2011. Early action has been taken
to reduce the volatility and funding requirements of the Group's pension
schemes. The currency headwind of the past four years has abated; and - The Group successfully responded to previous setbacks in the external
environment over the last decade. Its markets have been impacted by the
events of 9/11, the Gulf War and the SARS epidemic and by other negative
developments such as the weakening dollar, high oil and commodity prices
and delays in major aircraft programmes.
The Board is proposing a total shareholder payment for the year of 14.30p per share, a 10 per cent increase.
2008 Trading summaryGroup overview
Rolls-Royce delivered strong underlying revenues, cash flow and growth in underlying profits in 2008.
Despite some weakening demand towards the end of the year, the Group's globalpresence has enabled it to secure orders worth £21.5bn, increasing the orderbook by 21 per cent to a record £55.5bn. Sales increased by 22 per cent to £9,082m relative to 2007 and underlying salesgrew by 17 per cent, with a 24 per cent growth in original equipment and an 11per cent increase in services revenues. This growth was achieved despite delayson major airframe programmes that reduced civil engine deliveries from theoriginal programme assumptions.We have continued to invest in the acquisition and development of technology.In 2008 investment in research and development totalled £885m (2007 £824m), ofwhich the Group funded around 55 per cent, representing 5.4 per cent ofunderlying sales. We expect investment in research and development to accountfor a similar proportion of underlying sales in 2009.
Underlying profit before tax, which adjusts primarily for the non-cash impact of the hedge book, increased by ten per cent to £880m (2007 £800m). This reflected strong growth in original equipment and service revenues and was despite an eight cent deterioration in the achieved US dollar rate, which reduced profit by £104m (2007 £92m), and a four per cent increase in unit costs.
The Group's published loss before tax of £1,892m includes the effects ofmarking to market the Group's financial instruments, for which hedge accountingis not adopted. These consist mostly of the book of foreign exchange contractsoutstanding at 31 December 2008. The impact of the mark to market is includedwithin net financing in the income statement (see note 4). The net adjustmentscaused a net £2.8bn reduction in published profits. The majority of theseadjustments are non-cash, accounting adjustments required under IAS 39 forfinancial instruments that the Group holds to provide stability of futuretrading cash flows and do not reflect the underlying trading performance of theGroup in 2008.The balance sheet is robust, with Rolls-Royce enjoying a strong cash position,credit rating and no material refinancing until 2011. Net cash inflow in 2008was £570m after a £151m investment in joint ventures and acquisitions and thepositive effect of £439m of translation benefits. This resulted in a net cashbalance of £1,458m at the year-end.Changes to the UK pension schemes in 2007 have significantly reduced volatilityand will enable Rolls-Royce to plan future funding requirements more precisely.The Group made a special £500m injection into the UK pension funds in 2007 andchanged the investment strategy so that less priority was given to equityinvestments, thereby reducing the volatility inherent in the schemes' assetmix. On an accounting basis the funds overall are in surplus. Funding on moreconservative actuarial assumptions will be considerably less volatile infuture.
Basic earnings per share were (73.63)p (2007 33.67p), reflecting the mark to market adjustments above, with underlying earnings per share increasing by eight per cent to 36.70p (2007 34.06p).
Further details of the Group's trading performance are contained in the Financial Review.
Group and Business sector underlying trading results 2008
Civil Defence Marine Energy Group Aerospace AerospaceOrder Book 2008 £43.5bn £5.5bn £5.2bn £1.3bn £55.5bn 2007 £35.9bn £4.4bn £4.7bn £0.9bn £45.9bn % change 21% 25% 11% 44% 21% Revenue 2008 £4,502m £1,686m £2,204m £755m £9,147m 2007 £4,038m £1,673m £1,548m £558m £7,817m % change 11% 1% 42% 35% 17% Services Revenue 2008 £2,726m £947m £712m £370m £4,755m2007 £2,554m £877m £545m £289m £4,265m% change 7% 8% 31% 28% 11% UPBFCT Civil Defence Marine Energy Central Group Aerospace Aerospace 2008 £566m £223m £183m £(2)m £(51)m £919m 2007 £564m £199m £113m £5m £(49)m £832m % change 0% 12% 62% n/a 4% 10% Major developments in 2008
The Group continued to expand its capability in 2008, forming a new business unit to address the increased global demand for civil nuclear power and establishing strategic joint ventures with GKN plc, to develop composite materials for fan blades, and with Goodrich Corporation, to develop and manufacture engine controls.
Good progress has been made with strengthening the Group's operationalperformance and restructuring support functions. The programme to upgrade ourUK facilities is largely complete. The opening of the new large engine assemblyand test facility in Singapore and the advanced manufacturing, assembly andtest facility at Crosspointe in the US have been put back to reflect the timingof major new programmes.
In January 2008, Rolls-Royce announced a 2,300 reduction in the number of people working in support functions, a programme which was completed by the end of the year at no incremental cost. In November 2008, the Group announced a further proposed reduction of 1,500-2,000 jobs, reflecting a more cautious approach to the planning of factory load and delivery expectations for 2009.
Civil Aerospace made significant progress in 2008 despite increasinglychallenging conditions. New engine deliveries, at 987, were at their highestlevel since 2001, increasing the installed thrust of the fleet by some 21m lbs,net of retirements. Service revenues grew by seven per cent relative to 2007,accounting for 61 per cent of civil aerospace revenues.In the widebody sector, the Trent received orders for 408 engines, the secondhighest level of Trent orders on record. The Airbus A350 XWB continued toattract strong interest and the Trent XWB will power all 400 aircraft confirmedto date. In the narrowbody market, the V2500 made strong progress with a record 351engines delivered for the Airbus A320. In the corporate and regional sector,the 3000th AE3007 engine was delivered, while the BR725 for the new GulfstreamG650 corporate aircraft achieved first engine run on time.Defence Aerospace continued to strengthen its business in 2008. Significantcontracts awarded during the year included a $915m contract from AleniaAeronautica for the AE2100 engine on the C-27J military transporter, a £700mPFI contract from the UK Ministry of Defence for the Future Strategic TankerAircraft and a number of important service contracts worth more than £770m.Other highlights included the first flight of the F-35 STOVL (Short Take Offand Vertical Landing) version of the Joint Strike Fighter. The F136 engine,developed with GE for all F-35 variants, secured funding for 2009 and passedall test milestones.
Defence Aerospace's other major collaborative programme - the TP400 engine for the A400M military transport aircraft made progress in the year. It has completed more than 2,000 hours of ground testing and has successfully undertaken its first flights on the flying testbed.
Marine enjoyed very strong revenue growth in 2008 and is now the second largest Rolls-Royce business in revenue terms. Underlying service revenues grew significantly in the year, up 31 per cent from 2007.
The offshore sector was central to Marine's 2008 performance, based on the success of its specialist UT design and integrated systems capability.
Other highlights included the entry into service of the MT30, a derivative ofthe Trent 800, on the USS Freedom, the first vessel of the US Littoral CombatShip programme, and an order for four MT30s from the UK Ministry of Defence forits new aircraft carriers.
Energy won a record level of new business in 2008 with the industrial Trent securing orders and reservations for 37 units in the oil and gas and power generation sectors. Underlying revenues increased by 35 per cent, driven by strong demand in the oil and gas sector and increasing activity in power generation markets.
The Group's fuel cell testing programme continued. However, the decision wastaken to focus future activity on the development of the technology in order tomatch product readiness with market demand. As a result, annual investment inthe programme will reduce in 2009.
Further details on the performance of the businesses and the outlook for 2009 are contained in the Review by Business Sectors section below.
Looking beyond 2008
The current economic crisis is widely expected to be unprecedented in terms ofits severity, duration and global impact. It is inevitable that companies willbe affected to varying degrees, regardless of the business strategies theypursue or the markets they serve.Rolls-Royce will not be immune from this deterioration in the global economybut the Board believes that the Group will be resilient in these challengingconditions, and approaches the current uncertainty from a position of muchgreater strength than in previous recessions.Falling global growth rates, coupled with shortages of customer finance, areexpected to cause a softening in some of the Group's markets, in particular inthe narrowbody and corporate and regional sectors where there is alreadyevidence of reducing demand. Credit shortages may also create difficulties forsome of the Group's suppliers. However, the consistent strategy pursued by theGroup over many years has created a strong and broadly based business which iswell placed to deal with these challenges as they arise.
The Board believes the following factors will help the Group to mitigate the impact of the global economic slowdown:
- Rolls-Royce is a global leader, operating in growing markets with high barriers
to entry and the assurance of long-term demand for its power systems. It is
rich in technology, understands its customers' requirements and can apply its
system integration skills to meet those requirements.
- The Group has a broad spread of businesses addressing a wide range of
geographical markets and with revenues evenly balanced between the aftermarket
and original equipment. Service revenues have grown by 10 per cent compound
over the last ten years, accounting for 52 per cent of Group revenue in 2008.
All four businesses saw their service revenues grow significantly in 2008 and
are well placed to expand their aftermarket on the back of growth in original
equipment deliveries as they arise.
- The Group has considerable visibility of future revenues, due to the scale of
its order book, the longevity of its programmes and its aftermarket business.
- The Group is benefiting from recent exchange rate movements. The average
achieved rate in the hedge book is starting to reduce, improving from £~$1.87
in June 2008 to £~$1.72 at the end of the year, with increased hedging in the
second half of 2008 capturing improving forward rates and leading to a year end
hedge book of $17.1bn. The Group expects the achieved rate in 2009 to be
similar to that in 2008. As a consequence, the £104m foreign exchange headwind
experienced in 2008 is not expected to reoccur in 2009.
- Early action has been taken to reduce overheads and strengthen operational
performance. The headcount reduction achieved in 2008 will provide annual cost
savings of £100m. It is expected that the proposed headcount reduction for 2009
will be achieved at no net cost to the Group and will generate further annual
cost savings of a similar level from 2010 onwards. Recruitment is continuing
in selected growth areas of the business and also in support of the Group's
apprentice and graduate schemes.
- The Group has a robust balance sheet with a positive cash balance and a strong
credit rating. Changes to the Group's pension schemes in 2007 have
significantly reduced volatility and will provide greater visibility of future
funding requirements.ProspectsThe Group expects that in 2009 its global markets will be affected by reducingdemand and the impact of financing constraints. We will continue to manage theconsequences of airframe programme slippages.Cash generation will be affected by the reduction in new orders and associateddeposit intake and the impact on inventory of any delays or cancellations.There are also likely to be requests for customer and supplier financialsupport which will be considered by the Group on a case by case basis. In thecurrent environment it is expected that in 2009 despite a cash outflow, theaverage net cash balance of the Group will increase. The Group's current viewis that underlying revenues will continue to grow and underlying profits forthe year will be broadly similar to those achieved in 2008.Enquiries:Investor relations: Mark Alflatt Director of Financial Communications Rolls-Royce plc Tel: +44 (0)20 7227 9246 [email protected] Media relations:Nicky Louth-DaviesDirector of Corporate CommunicationsRolls-Royce plcTel: +44 (0)20 7227 [email protected]
www.rolls-royce.com
An interview on the results with Rolls-Royce Chief Executive, Sir John Rose, isavailable on video, audio and text on www.rolls-royce.com and www.cantos.com. For news desks requiring visual material, photographs are available at www.newscast.co.uk and news broadcasters requiring broadcast-standard video canvisit www.thenewsmarket.com/rolls-royce. If you are a first-time user, pleasetake a moment to register. In case you have any questions, please email [email protected] Annual Results Announcement contains certain forward-looking statements.These forward-looking statements can be identified by the fact that they do notrelate only to historical or current facts. In particular, all statements thatexpress forecasts, expectations and projections with respect to future matters,including trends in results of operations, margins, growth rates, overallmarket trends, the impact of interest or exchange rates, the availability offinancing to the Company, anticipated cost savings or synergies and thecompletion of the Company's strategic transactions, are forward-lookingstatements. By their nature, these statements and forecasts involve risk anduncertainty because they relate to events and depend on circumstances that mayor may not occur in the future. There are a number of factors that could causeactual results or developments to differ materially from those expressed orimplied by these forward-looking statements and forecasts. The forward-lookingstatements reflect the knowledge and information available at the date ofpreparation of this Annual Results Announcement, and will not be updated duringthe year. Nothing in this Annual Results Announcement should be construed as aprofit forecast.REVIEW BY BUSINESS SEGMENT Civil Aerospace 2008 2007Order book (£bn) 43.5 35.9Engine deliveries 987 851Underlying revenues (£m) 4,502 4,038
Underlying services revenues (£m) 2,726 2,554 Underlying profit before financing (£m) 566 564
The Civil Aerospace portfolio continues to expand, covering a broad range ofaircraft across all sectors from corporate and regional to the largest widebodyaircraft. New engine deliveries, at 987, were at their highest level since2001, increasing the installed thrust of the fleet by some 21m lbs, net ofretirements.In the widebody sector, the division secured its second highest level of Trentorders, for 408 Trent engines, supporting another strong increase in the orderbook. The Trent 1000 for the Boeing 787 completed further successful endurancetesting, equivalent to two years of service. The Trent 900 for the Airbus A380demonstrated excellent reliability during its first full year in service withSingapore Airlines (SIA) and engines are now installed on nine SIA and Qantasaircraft. The outlook for the Trent XWB, the sole engine on the AirbusA350 XWB, is positive; orders for engines for 400 aircraft are now confirmed,while risk and revenue sharing partnerships for 40 per cent of the programmewere agreed in 2008.In the narrow body market, the V2500 programme performed strongly, with ordersfor more than 600 engines and a record 351 engines delivered for the AirbusA320. The V2500 SelectOne upgrade entered service on time, offering reducedfuel burn and increased time on wing between overhauls, enhancing its leadingposition as the most environmentally friendly engine for this application.In the corporate and regional market, the 3000th AE3007 engine was delivered.Meanwhile the BR725, the sole engine for the new Gulfstream G650 corporateaircraft, achieved first engine run on time. The G650 has enjoyedunprecedented market interest, reinforcing the Group's leading position in thecorporate market.Services revenues grew by seven per cent relative to 2007, representing 61 percent of Civil Aerospace revenues. Around 80 per cent of in-service Trent andcorporate engines are now covered by TotalCare® and CorporateCare® contractsrespectively, reflecting the continued interest in these long-term servicearrangements.
Outlook
Global air travel and air freight is already being affected by the economic downturn. The scale of the future impact is unclear, with airframe delays and concerns about customer financing adding to the uncertainties surrounding engine volumes.
The Group expects engine deliveries to fall in 2009 with an increasing risk ofdeferrals and cancellations. Weaker volumes in the narrowbody and the corporateand regional sectors and stable Trent deliveries for widebody aircraft.
Growth in services revenues will be modest in 2009, held back by lower utilisation levels, the impact of parked aircraft and some softening of uncontracted "Time and Material" service revenues. As a consequence, underlying profits will be lower in 2009.
Defence Aerospace 2008 2007Order book (£bn) 5.5 4.4Engine deliveries 517 495Underlying revenues (£m) 1,686 1,673Underlying services revenues (£m) 947 877
Underlying profit before financing (£m) 223 199
The Defence Aerospace business provides engines and support across all themajor sectors of the defence market to 160 customers in 103 countries. Withover 18,000 engines in service worldwide on fixed-wing applications, it has thebroadest customer base of any of its peers.2008 was a year of significant progress for the business. Considerableopportunities exist in the global defence market, particularly in the transportand helicopter sectors where Defence Aerospace made strong progress in 2008. The business continues to develop innovative aftermarket support, with servicesnow generating over 56 per cent of revenues.A $915m agreement was signed with Alenia Aeronautica for the AE 2100 engine onthe C-27J, which reinforced the business' market leading position in themilitary transport market. Engine deliveries for transport aircraft includingthe C-130J and V22-Osprey, will support a strong increase in revenues in 2009.As part of the AirTanker consortium, the business secured a 27-year engine andsupport contract worth over £700m from the UK Ministry of Defence (MoD), forTrent 700 engines for the Future Strategic Tanker Aircraft programme.Good progress was made on both engine programmes for the Joint Strike Fighter. First flight of the F-35 STOVL (Short Take Off and Vertical Landing) version,fitted with the Rolls-Royce LiftSystem®, took place and the first LiftSystemproduction contract was secured at a value of $131m. The F136 engine, jointlydeveloped with GE for all F-35 variants, achieved funding for 2009 and passedall its test milestones prior to delivery of the first production standardengine in early 2009.
Defence Aerospace's other major collaborative programme - the TP400 engine for the A400M military transport aircraft made progress in the year. It has completed more than 2,000 hours of ground testing and has successfully undertaken its first flights on the flying testbed.
A number of major new service contracts totalling more than £770m were signedduring the year. These included agreements with the US Department of Defenseto support the T-45 for the US Navy Goshawk trainer and with the UK MoD, tosupport the Gnome for the Sea King helicopter and the Pegasus for the UKHarrier fleet.
Outlook
Further strong growth in engine deliveries for the military transport sector is expected to support another year of profit growth in 2009.
Marine 2008 2007Order book (£bn) 5.2 4.7Underlying revenues (£m) 2,204 1,548Underlying services revenues (£m) 712 545
Underlying profit before financing (£m) 183 113
Marine is now the second largest Rolls-Royce business in revenue terms. It isa world leader in the provision of integrated marine propulsion systems,offering a unique set of products and services for the naval and commercialsectors. It has an installed equipment base of over 30,000 vessels, creating amajor opportunity for services growth.The business made strong progress in 2008. The order book increased by 11 percent to £5.2bn, underpinned by substantial order flow for vessels and powerpropulsion for the offshore sector. The offshore oil and gas market remainedrobust, with revenues growing by 57 per cent to £901m in 2008, accounting for41 per cent of total revenues in the year.
Demand from the merchant sector for specialist vessels was also strong, with revenues accounting for 24 per cent of 2008 revenues. Total underlying revenues increased by
42 per cent to £2.2bn and an improved mix helped strengthen margins, supporting a very strong improvement in profitability.
The naval segment of Marine represented 28 per cent of 2008 revenues andcontinued to perform well. The MT30, a derivative of the Trent 800, enteredservice on the USS Freedom, the US Navy's first Littoral Combat Ship. Inaddition, a £96m order for four MT30s plus propulsion equipment was placed bythe UK MoD to power its two new aircraft carriers. 2008 also marked 50 yearsof the Group's relationship with the UK Government on the design, productionand support of nuclear plant for the Royal Navy's Submarine fleet.The division's capability in the design and supply of power electric systemswas further extended with the acquisition of Scandinavian Electric Holdings AS,enabling it to supply systems for offshore vessels.
Underlying services revenues grew strongly in the year, up 31 per cent from 2007. The investment in, and expansion of, the global services network continued throughout 2008, supporting long-term growth opportunities in the Marine services sector.
Outlook
There were some modest cancellations in 2008 but a record order book, market leading positions in the offshore sector and demand for high specification vessels provide good visibility of revenues in 2009 and support continuing strong growth in profitability over the year.
Energy 2008 2007Order book (£bn) 1.3 0.9Engine deliveries 64 32Underlying revenues (£m) 755 558
Underlying services revenues (£m) 370 289 Underlying profit before financing (£m) (2) 5
The Energy business supplies a wide range of gas turbine packages and compressors to the global oil and gas and power generation markets, with equipment operating in more than 120 countries. It continues to invest in product development for power generation including tidal power, fuel cells and civil nuclear.
The Energy business won record levels of new business in 2008, securing ordersand reservations for 37 new industrial Trent units in the oil and gas and powergeneration sectors, both of which remained robust. This supported a furtherstrong increase in the order book to £1.3bn, providing good visibility ofactivity in 2009.Underlying revenues in 2008 increased by 35 per cent. This was driven byincreasing demand for original equipment in the power generation sector anddemand in oil and gas for both new equipment and support services. The £7mreduction in underlying profits from 2007 was the result of increased spend onthe fuel cells development programme and a one-off benefit from technology feesin 2007 that was not repeated in 2008. In 2008 underlying services revenues grew by 28 per cent, representing 49 percent of divisional revenues. This growth was accounted for by strong oil andgas activity and an expanding footprint in power generation. By the end of theyear long-term support agreements extended to more than 200 packages suppliedby the business. The Group's fuel cell testing programme continued. However, the decision wastaken to focus future activity on the development of the technology rather thanproduction and manufacturing verification, in order to match product readinesswith market demand. As a result, annual investment in the programme is expectedto reduce in 2009.Outlook
In 2009, further growth in original equipment revenues, particularly in thepower generation sector, combined with increased services activity and lowerinvestment in fuel cells, is expected to deliver a modest level of profit forthe business.
Financial Review - 2008 Performance
Foreign exchange
The pace and extent of currency movements have had a significant effect on theGroup's financial reporting in 2008, with the Sterling exchange rates againstthe USD and the Euro having the biggest impact. These movements haveinfluenced both the reported income statement and the cash flow and closing netcash position (as set out in the cash flow statement) in the following ways:
1. Income statement- the most important impact was the end of year mark to
market of outstanding financial instruments (foreign exchange contracts, interest rate, commodity and jet fuel swaps). The principal adjustments related to the Sterling/USD hedge book. The principal movements in 2008 were as follows: Open Close GBP ~ USD £1~$1.991 £1~$1.438 GBP ~ Euro £1~€1.362 £1~€1.034 Oil - Spot Brent $93/bbl $49/bbl The impact of this mark to market is included within net financing in the
income statement and caused a net £2.5bn cost, contributing to a published loss
before tax of £1,892m. These adjustments are non-cash, accounting adjustments
required under IAS 39 and do not, therefore, reflect the underlying trading
performance of the Group in 2008.
The achieved rate on selling net USD income will be similar in 2009 to that in
2008 and will gradually improve thereafter as the Group is able to absorb the
lower value of Sterling in its hedge books into the achieved rate. The
revaluation costs, which are measured at a point in time, do not, therefore,
represent additional currency headwinds. The improving average rate in the
hedge book will lead to improving achieved rates over time.
2. Cash flow and balance sheet - The Group maintains a number of currency cash
balances which vary throughout the financial year. Given the significant
movements in foreign exchange rates in 2008, a number of these cash balances
were inflated by the effects of retranslation at the period end causing an
increase of £439m in the 2008 cash flow and hence the closing balance sheet
cash position.Income statement
The firm and announced order book, at constant exchange rates, was £55.5bn (2007 £45.9bn) with good growth from all businesses. Aftermarket services included in the order book totalled £14.5bn (2007 £13.1 bn).
Revenues increased by 22 per cent, compared with 2007, to £9,082m. Revenues onan underlying basis grew by 17 per cent. Payments to industrial risk andrevenue sharing partners (RRSPs), charged in cost of sales, amounted to £268m (2007 £199m). Gross research and development investment was £885m (2007 £824m). Net researchand development investment, charged to the income statement, was £403m (2007£381m) after net capitalisation of £87m (2007 £73m) on development programmesin 2008. Receipts from RRSPs in respect of new programme developments, shownas other operating income, were £79m (2007 £50m), as key partners joined majornew programmes.
Restructuring costs of £82m (2007 £52m) were charged, the increase reflecting additional costs incurred in the year relating to the Group's programme to reduce the number of people working in support functions.
Underlying profit before financing margins fell by approximately 0.6 per cent in the period, reflecting strong growth in lower margin original equipment, further increases in the foreign exchange headwind and an increase in unit costs of four per cent relative to 2007, partially offset by improved productivity and efficiency.
The income statement recognised a tax credit of £547m (2007 £133m charge),reflecting the large mark to market loss caused by the revaluation of variousfinancial instruments at the year end. The taxation charge on an underlyingbasis was £217m (2007 £193m), representing 24.7 per cent of underlying profitbefore tax. The underlying rate is affected by the geographical mix ofprofits, changes in legislation and the benefit of research and development taxcredits. The 2009 underlying tax rate is expected to increase to around 26 percent.
Underlying profit before tax was £880m (2007 £800m). Underlying earnings per share increased by eight per cent, to 36.70p (2007 34.06p) (see note 5).
Balance Sheet
Investment in intangibles during the year was £393m (2007 £296m) and included £97m (2007 £37m) for recoverable engine costs, £113m (2007 £91m) for capitaliseddevelopment costs, £93m (2007 nil) relating to investments in new joint venturearrangements and a further £55m (2007 £129m) for certification costs andparticipation fees. The continued development and replacement of operational facilities contributedto a total investment in property, plant and equipment of £283m (2007 £304m). Investment in 2009 is anticipated to be slightly reduced from the 2008 level asthe investments in the new facilities in the USA and Singapore are rephased toreflect the timing of major new airframe programmes.Working capital increased by £38m during the year with increased inventory of £208m offset by reduced financial working capital of £170m. Inventory increasedin the year to support growth across all businesses and to minimise disruptionduring the transition to new operational facilities. Some reductions indeposits are expected in 2009.Cash inflow during the year was £570m (2007 £562m, before the special injectionof £500m into the UK pension schemes). Continued growth in underlying profitsand good cash conversion were supported by increases in customer deposits andprogress payments of £400m and the benefit of £439m from year-end currencyrevaluations. Cash investments of £675m in plant and equipment and intangibleassets and payments to shareholders of £200m represented the major cashoutflows in the period. Tax payments increased in the year to £117m (2007
£71m). As a consequence average net cash was £375m (2007 £350m). The net cash balance at the year-end was £1,458m (2007 £888m).
The Group's cash flow in 2009 is expected to be affected by higher pensioncontributions, reduced deposits and progress payments and increased payments toshareholders. In addition, it is likely that the Group may be asked to providefinancial support to some customers and suppliers which will be considered on acase by case basis. As a result, it is expected that there will be a cashoutflow in 2009. However, the average net cash balance is anticipated toincrease in 2009.Provisions were £369m (2007 £301m). Provisions carried forward in respect ofpotential customer financing exposure amounted to £73m at the year-end (2007 £44m).
The overall net position of assets and liabilities on the balance sheet for TotalCare packages was an asset of £848m (2007 £550m), which includes new agreements, timing of overhauls and changes in foreign exchange rates.
There were no material changes to the Group's gross and net contingent liabilities in 2008 (see note 11).
On an accounting basis, the UK pension schemes were £1.4bn in surplus, causedprimarily by unusually high AA corporate bond rates applied to value theschemes' future liabilities. A total of £408m of the UK surplus has beenrecognised as an asset on the balance sheet which together with a £550m deficiton the international pension and healthcare schemes caused a netpost-retirement benefit deficit recognised on the balance sheet of £142m (2007£123m). After taking account of deferred taxation, net post-retirement benefitdeficits were £93m (2007 £88m) (see note 9).The proposed final payment to shareholders is equivalent to 8.58 pence perordinary share (2007 final payment 8.96p), making a total payment for the yearof 14.30 pence (2007 13.00p), a ten per cent increase for the full year. Thepayment to shareholders will, as before, be made in the form of redeemable Cshares which shareholders may either choose to retain or redeem for a cashequivalent. The Registrar, on behalf of the Group, operates a C ShareReinvestment Plan (CRIP) and can, on behalf of shareholders, purchase ordinaryshares from the market rather than delivering a cash payment.
The final payment is payable on 2 July 2009 to shareholders on the register on 24 April 2009. The final day of trading with entitlement to C shares is 21 April 2009.
Condensed consolidated financial statements
Consolidated income statementFor the year-ended December 31, 2008 2008 2007 Notes £m £mRevenue 2 9,082 7,435Cost of sales (7,311) (6,003)Gross profit 1,771 1,432Other operating income 79 50
Commercial and administrative costs (666)
(653)
Research and development costs (403)
(381)
Share of profit of joint ventures 74
66
Operating profit 855
514
Profit/(loss) on sale or termination of businesses 7
(2)Profit before financing 2 862 512 Financing income 4 432 718Financing costs 4 (3,186) (497)Net financing 4 (2,754) 221
(Loss)/profit before taxation *1 2 (1,892)
733 Taxation 547 (133) (Loss)/profit for the year (1,345) 600 Attributable to:
Equity holders of the parent (1,340)
606
Minority interests (5)
(6)
(Loss)/profit for the year (1,345)
600
Earnings per ordinary share *2
Basic 5 (73.63p) 33.67pDiluted 5 (73.63p) 32.97p
Payments to shareholders in respect of the year 6 (263)
(237)
*1 Underlying profit before taxation 3 880
800
*2 Underlying earnings per share are shown in note 5.
Consolidated balance sheetAt December 31, 2008 2008 2007 Notes £m £mASSETS Non-current assets Intangible assets 7 2,286 1,761Property, plant and equipment 1,995 1,813Investments - joint ventures 345 284Other investments 53 57Deferred tax assets 685 81
Post-retirement scheme surpluses 9 453
210 5,817 4,206Current assets Inventory 2,600 2,203Trade and other receivables 3,929 2,585Taxation recoverable 9 7Other financial assets 8 390 514Short-term investments 1 40Cash and cash equivalents 2,471 1,897Assets held for sale 12 7 9,412 7,253Total assets 15,229 11,459 LIABILITIES Current liabilities Borrowings (23) (34)Other financial liabilities 8 (2,450) (85)Trade and other payables (5,735) (4,326)Current tax liabilities (184) (188)Provisions (181) (121) (8,573) (4,754) Non-current liabilities Borrowings (1,325) (1,030)Other financial liabilities 8 (391) (303)Trade and other payables (1,318) (965)Non-current tax liabilities (1) -Deferred tax liabilities (307) (345)Provisions (188) (180)
Post-retirement scheme deficits 9 (595)
(333) (4,125) (3,156)Total liabilities (12,698) (7,910) Net assets 2,531 3,549 EQUITY Capital and reserves Called-up share capital 369 364Share premium account 82 67Capital redemption reserves 204 191Hedging reserves (22) 77Other reserves 663 62Retained earnings 1,226 2,776Equity attributable to equity holders of the parent 10 2,522 3,537Minority interests 9 12Total equity 2,531 3,549 Consolidated cash flow statementFor the year-ended December 31, 2008
2008 2007
Notes £m £mReconciliation of cash flows from operating activities (Loss)/profit before taxation (1,892) 733Share of profit of joint ventures (74) (66)(Profit)/loss on sale or termination of businesses (7) 2(Profit)/loss on sale of property, plant and equipment (11) 1Net interest payable 4 10 6Net post-retirement scheme financing 4
22 (30)Net other financing 4 2,722 (197)Taxation paid (117) (71)
Amortisation of intangible assets 7 107 63Depreciation of property, plant and equipment 208 170Increase/(decrease) in provisions 39 (42)Increase in inventories (208) (359)Increase in trade and other receivables (1,072) (128)Increase in trade and other payables 1,242 778Decrease in other financial assets and liabilities 144 357Additional cash funding of post-retirement schemes (117) (441)Share-based payments charge 40 36Transfers of hedge reserves to income statement (80) (149)Dividends received from joint ventures 59 42Net cash inflow from operating activities
1,015 705
Cash flows from investing activities Additions of unlisted investments (1) (5)Disposals of unlisted investments 6 -Additions to intangible assets
(389) (294)
Purchases of property, plant and equipment (286) (304)Disposals of property, plant and equipment
68 47Acquisitions of businesses (50) (6)Disposals of businesses 6 3Investments in joint ventures (32) (13)Disposals of joint ventures 30 -
Net cash outflow from investing activities
(648) (572)
Cash flows from financing activities Borrowings due within one year - repayment of loans (1) (350)Borrowings due after one year - repayment of loans (22) -Capital element of finance lease payments (4) (5)Net cash outflow from decrease in borrowings
(27) (355)Interest received 52 95Interest paid (53) (93)
Interest element of finance lease payments (1) (3)Decrease/(increase) in government securities and corporate bonds
39 (6)Issue of ordinary shares 17 29Purchase of ordinary shares (44) (77)
Other transactions in ordinary shares (4) 34Redemption of B Shares (200) (97)Net cash outflow from financing activities
(221) (473)
Increase/(decrease) in cash and cash equivalents 146 (340)Cash and cash equivalents at January 1 1,872 2,171Foreign exchange 441 41Net cash of businesses acquired/disposed 3 -Cash and cash equivalents at December 31
2,462 1,872 2008 2007 Notes £m £m
Reconciliation of movement in cash and cash equivalents to movements in net funds Increase/(decrease) in cash and cash equivalents 146 (340)Net cash outflow from decrease in borrowings 27 355Cash (inflow)/outflow from (decrease)/increase in government securities and corporate bonds (39) 6Change in net funds resulting from cash flows 134 21Net funds of businesses acquired/disposed
(3) -Exchange adjustments 439 41Fair value adjustments (319) (18)Movement in net funds 251 44
Net funds at January 1 excluding the fair value of swaps 873 829Net funds at December 31 excluding the fair value of swaps 1,124 873Fair value of swaps hedging fixed rate borrowings 334 15Net funds at December 31
1,458 888
The movement in net funds (defined by the Group as including the items shownbelow) is as follows: Net funds of At businesses Other At January Funds acquired/ Exchange Fair value non-cash December 1, 2008 flow disposed adjustments
adjustments changes 31, 2008
£m £m £m £m £m £m £mCash at bank and in hand 1,265 (550) 1 224 - - 940 Overdrafts (25) 18 - (2) - - (9)Short-term deposits 632 678 2 219 - - 1,531Cash and cash equivalents 1,872 146 3 441 - - 2,462Investments 40 (39) - - - - 1Other borrowings due within one year (4) 1 (6) - - (2) (11)Borrowings due after one year (1,026) 22 - (3) (319) 2 (1,324)Finance leases (9) 4 - 1 - - (4) 873 134 (3) 439 (319) - 1,124Fair value of swaps hedging fixed rate borrowings 15 - - - 319 - 334 888 134 (3) 439 - - 1,458
Consolidated statement of recognised income and expense For the year-ended December 31, 2008
2008 2007
£m £mForeign exchange translation differences from foreign operations 603 117Net actuarial gains 944 511Movements in unrecognised pension surpluses (928) (112)Transfers from transition hedging reserve (80) (149)Transfer to cash flow hedging reserve (41) -Related tax movements 15 (86)Change in rates of corporation tax - (9)Net income recognised directly in equity 513 272(Loss)/profit for the year (1,345) 600Total recognised income and expense for the year
(832) 872 Attributable to: Equity holders of the parent (829) 878Minority interests (3) (6)
Total recognised income and expense for the year
(832) 872
Notes to the condensed financial statements
1 Basis of preparation
These financial statements have been prepared in accordance with InternationalFinancial Reporting Standards (IFRS) adopted for use in the EU in accordancewith EU law (IAS Regulation EC 1606/2002).The financial information set out above does not constitute the Company'sstatutory accounts for the years ended December 31, 2008 or 2007. Statutoryaccounts for 2007 have been delivered to the registrar of companies, and thosefor 2008 will be delivered in due course. The auditors have reported on thoseaccounts; their reports were (i) unqualified, (ii) did not include referencesto any matters to which the auditors drew attention by way of emphasis withoutqualifying their reports and (iii) did not contain statements under section 237(2) or (3) of the Companies Act 1985.
The accounting policies used in these financial statements are the same as those set out in the 2007 Annual Report.
2 Analysis by business segment
2008 2007 £m £mRevenue Civil aerospace 4,437 3,718Defence aerospace 1,688 1,636Marine 2,200 1,542Energy 757 539 9,082 7,435 2008 2007 Underlying Underlying Underlying Underlying adjustments *1 results adjustments*1 results £m £m £m £m £m £mProfit before financing Civil aerospace 501 65 566 308 256 564Defence aerospace 232 (9) 223 170 29 199Marine 176 7 183 91 22 113Energy 4 (6) (2) (8) 13 5Central items (51) - (51) (49) - (49) 862 57 919 512 320 832Net financing (2,754) 2,715 (39) 221 (253) (32)(Loss)/profit before taxation (1,892) 2,772 880 733 67 800Taxation 547 (764) (217) (133) (60) (193)(Loss)/profit for the year (1,345) 2,008 663 600 7 607 *1. See note 3 2008 2007 £m £mNet assets/(liabilities) Civil aerospace 330 2,468Defence aerospace (197) (172)Marine 488 563Energy 392 370Net tax liabilities 202 (445)Net unallocated post-retirement scheme deficits (142) (123)Net funds 1,458 888Net assets 2,531 3,549 Number NumberEmployees at year-end Civil aerospace 22,600 23,200Defence aerospace 5,700 5,700Marine 8,300 8,000Energy 2,300 2,600 38,900 39,500 3 Underlying performance
The Group seeks to present a measure of underlying performance that excludes items considered to be non-underlying in nature. The principles adopted are:
Underlying revenues - Where revenues are denominated in a currency other thanthe functional currency of the group undertaking, these exclude the release ofthe foreign exchange transition hedging reserve and reflect the achievedexchange rates arising on settled derivative contracts.Underlying profit before financing - Where transactions are denominated in acurrency other than the functional currency of the group undertaking, thisexcludes the release of the foreign exchange transition hedging reserve andreflects the transactions at the achieved exchange rates on settled derivativecontracts. In 2007, it also excluded £130m of past service post-retirementcosts.
Underlying profit before taxation- In addition to those adjustments in underlying profit before financing:
- Includes amounts realised from settled derivative contracts and revaluation of
relevant assets and liabilities to exchange rates forecast to be achieved from
future settlement of derivative contracts.
- Excludes unrealised amounts arising from revaluations required by IAS 39
Financial Instruments: Recognition and Measurement, changes in value of
financial RRSP contracts arising from changes in forecast payments and the net
impact of financing costs related to post-retirement scheme benefits. 2008 2007 Profit Profit Profit Profit before before before before financing taxation financing taxation £m £m £m £m
Profit/(loss) per consolidated
income statement 862 (1,892) 512 733
Release of transition hedging
reserve (80) (80) (149) (149)Realised gains on settled derivative contracts *1 185 292 415 420Net unrealised fair value changes to derivative contracts *2 (4) 2,475 - (251)
Effect of currency on contract accounting (44) (44) (76)
(76)
Revaluation of trading assets
and liabilities - (14) - 10Financial RRSPs - foreign exchange differences and changes in forecast payments - 121 - 13Net post-retirement scheme financing - 22 - (30)
Post-retirement schemes - past service costs *3 - - 130
130
Total underlying adjustments 57 2,772 320
67 Underlying profit 919 880 832 800
*1 Excludes £24m of realised losses (2007 nil) on derivative contracts in respect of trading cash flows that will occur after the year-end.
*2 Includes £4m (2007 nil) in respect of derivative contracts held by joint venture companies (included in profit before financing).
*3 During 2007, the Group, as part of its ongoing discussions with the Trusteesof its UK pension schemes, agreed to reflect changes in HM Revenue & Customspractice and increase the size of the lump sum payment retirees are able toreceive by commuting part of the pension. Like many other employers, the Grouphas also increased the amount of the lump sum payment for the pension commuted.Updating the commutation arrangements to reflect these factors increased thepost-retirement liability by £100m. The Group also agreed a 2 per centdiscretionary increase applicable to pensions that do not benefit from anyguaranteed increase, which increased the liability by £30m.4 Net financing 2008 2007 Underlying net Underlying net financing financing £m £m £m £mFinancing income Interest receivable 59 59 83 83Fair value gains on foreign currency contracts - - 215 -Fair value gains on commodity derivatives - - 36 -Expected return on post-retirement scheme assets 373 - 384 - 432 59 718 83Financing costs Interest payable (69) (69) (89) (89)Fair value losses on foreign currency contracts (2,383) - - -Financial RRSPs - foreign exchange differences
and changes in forecast payments (121) - (13)
-Financial charge relating to financial RRSPs (26) (26) (26) (26)
Fair value losses on commodity
derivatives (96) - - -Interest on post-retirement scheme liabilities (395) - (354) -Net foreign exchange losses (91) - (15) -Other financing charges (5) (3) - - (3,186) (98) (497) (115)Net financing (2,754) (39) 221 (32) Analysed as: Net interest payable (10) (10) (6) (6)Net post-retirement scheme financing (22) - 30 -Net other financing (2,722) (29) 197 (26)Net financing (2,754) (39) 221 (32)5 Earnings per ordinary share (EPS)Basic EPS are calculated by dividing the profit attributable to ordinaryshareholders by the weighted average number of ordinary shares in issue duringthe year, excluding ordinary shares held under trust, which have been treatedas if they had been cancelled.
Diluted EPS are calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year as above, adjusted by the bonus element of share options.
2008 2007 Potentially Potentially dilutive share dilutive share Basic options Diluted Basic options Diluted (Loss)/profit (£m) (1,340) - (1,340) 606 - 606Weighted average number of shares (millions) 1,820 -*1 1,820 1,800 38 1,838EPS (pence) (73.63) - (73.63) 33.67 (0.70) 32.97
*1 As the basic EPS is negative, in accordance with IAS 33 Earnings per Share, share options are not considered dilutive.
Underlying EPS has been calculated as follows:
2008
2007
Pence £m Pence £mEPS / (Loss)/profit attributable to equity holders of the parent (73.63) (1,340) 33.67 606Release of transition hedge reserve (4.40) (80) (8.28) (149)Realised gains on settled derivative contracts 16.05 292 23.33 420Net unrealised fair value changes to derivative contracts 135.99 2,475 (13.94) (251)Effect of currency on contract accounting (2.42) (44) (4.22) (76)Revaluation of trading assets and liabilities (0.77) (14) 0.56 10Financial RRSPs - foreign exchange differences and changes in forecast payments 6.65 121 0.72 13Net post-retirement scheme financing 1.21 22 (1.67) (30)Post-retirement schemes - past service costs -
see note 3 - - 7.22 130Related tax effect (41.98) (764) (1.39) (25)Change in rates of corporation tax - - (1.94) (35)Underlying EPS / Underlying profit attributable to equity holders of the parent 36.70 668
34.06 613
6 Payments to shareholders in respect of the yearPayments to shareholders in respect of the year represent the value of B Sharesor C Shares to be issued in respect of the results for the year. Issues of BShares and C Shares were declared as follows: 2008 2007 C Shares B Shares Pence per share £m Pence per share £mInterim 5.72 105 4.04 73Final 8.58 158 8.96 164 14.30 263 13.00 237 7 Intangible assets Certification costs and Recoverable Software participation Development engine and Goodwill fees expenditure costs other Total £m £m £m £m £m £mCost: At January 1, 2008 801 504 514 366 109 2,294Exchange adjustments 173 9 5 - 7 194Additions - 55 113 97 128 393On acquisitions of businesses 41 - - - 11 52On disposals of businesses (2) - - - - (2)Disposals - - - - (1) (1)At December 31, 2008 1,013 568 632 463 254 2,930 Accumulated amortisation and impairment: At January 1, 2008 - 150 150 204 29 533Exchange adjustments - 3 - - 2 5Provided during the year 5 12 26 46 18 107Disposals - - - - (1) (1)At December 31, 2008 5 165 176 250 48 644 Net book value at December 31, 2008 1,008 403 456 213 206 2,286Net book value at December 31, 2007 801 354 364 162 80 1,761 8 Other financial assets and liabilitiesThe carrying values of other financial assets and liabilities were as follows: 2008 2007 Net Net Assets Liabilities amount Assets Liabilities amount £m £m £m £m £m £mForeign exchange contracts 112 (2,293) (2,181) 433 (54) 379Commodity contracts - (89) (89) 39 - 39 112 (2,382) (2,270) 472 (54) 418Interest rate contracts 278 (4) 274 42 (3) 39Financial RRSPs - (455) (455) - (315) (315)B Shares - - - - (16) (16) 390 (2,841) (2,451) 514 (388) 126
Foreign exchange and commodity financial instruments
Movements in the fair value of foreign exchange and commodity contracts were asfollows: 2008 2007 Foreign exchange Commodity Total Total At January 1 379 39 418 593
Fair value changes to derivative contracts (2,383) (96) (2,479) 251Fair value changes to fair value hedges 83 - 83 (6)Fair value relating to contracts settled (236) (32) (268) (420)Fair value of derivative contracts assumed
on formation of joint venture (24) - (24) -At December 31 (2,181) (89) (2,270) 418
Financial risk and revenue sharing partnerships (RRSPs)
Movements in the recognised values of financial RRSPs were as follows:
2008 2007 £m £mAt January 1 (315) (324)Cash paid to partners 53 55Addition (40) -Exchange adjustments direct to reserves (6) (7)Financing charge*1 (26) (26)Excluded from underlying profit*1 Exchange adjustments
(118) 7
Restructuring of financial RRSP agreements and
changes in forecast payments (3) (20)At December 31 (455) (315)
* 1 Total charge included within finance in the income statement is £147m (2007 £39m).
9 Pensions and other post-retirement benefits
Movements in the net post-retirement position recognised in the balance sheetwere as follows: UK Overseas schemes schemes Total £m £m £mAt January 1 181 (304) (123)Exchange adjustments - (133) (133)Current service cost (127) (27) (154)Past service cost (5) (3) (8)
Interest on post-retirement scheme liabilities (358) (37)
(395)
Expected return on post-retirement scheme assets 352 21
373Contributions by employer 248 31 279Transfers 3 - 3Actuarial gains/(losses) 1,040 (96) 944
Movement in unrecognised surplus*1 (926) (2)
(928)At December 31 408 (550) (142) Analysed as:
Post-retirement scheme surpluses - included in non-current assets 453 -
453
Post-retirement scheme deficits - included in
non-current liabilities (45) (550) (595) 408 (550) (142)
*1 Where a surplus has arisen on a scheme, in accordance with IAS 19, 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 Movements in capital and reserves
Movements in equity attributable to equity holders of the parent were asfollows: 2008 2007 £m £mAt January 1 3,537 2,718
Total recognised income and expense attributable to equity holders of the parent (829) 878Arising on issue of ordinary shares 17 29Issue of B shares (237) (172)Conversion of B shares into ordinary shares 53 71Ordinary shares purchased (44) (78)Ordinary shares vesting in share-based payment plans 37 93Share-based payments adjustment (1) (22)Related tax movements - current tax - 43Related tax movements - deferred tax (11) (18)Change in rate of UK corporation tax - deferred tax
- (5)At December 31 2,522 3,537 11 Sales financing contingent liabilitiesIn connection with the sale of its products the Group will, on some occasions,provide financing support for its customers. The Group's contingent liabilitiesrelated to financing arrangements are spread over many years and relate to anumber of customers and a broad product portfolio. The Group reports contingent liabilities on a discounted basis. As directorsconsider the likelihood of these contingent liabilities crystallising to beremote, this amount does not represent a value that is expected to crystallise.However, the amounts are discounted at the Group's borrowing rate to reflectthe time span over which these exposures could arise. The contingentliabilities are denominated in US dollars. As the Group does not adopt hedgeaccounting, this amount is reported, together with the sterling equivalent atthe reporting date spot rate.
The discounted value of the total gross contingent liabilities relating to delivered aircraft and other arrangements where financing is in place, less insurance arrangements and relevant provisions were:
2008 2007 £m US$m £m US$m Gross contingent liabilities 755 1,086 616 1,227Contingent liabilities net of relevant security *1 155 222 140 279Contingent liabilities net of
relevant security reduced by 20% *2 246 354 218 434
*1 Security includes unrestricted cash collateral of: 85 123 60
120
*2 Although sensitivity calculations are complex, the reduction of the relevant
security by 20% illustrates the sensitivity of the contingent liability to
changes in this assumption There are also net contingent liabilities in respect of undelivered aircraft,but it is not considered practicable to estimate these as deliveries can bemany years in the future, and the relevant financing will only be put in placeat the appropriate time.
12 Acquisitions and joint ventures
During the year the Group concluded a joint venture with Goodrich Corporationto develop and manufacture engine controls. As part of the transaction, theGroup paid $100m in cash and assumed a further £24m of foreign exchangecommitments. These amounts totalling £93m have been included in intangibleassets in the year (note 7). The Group also invested £31m in new joint venturecompanies, including £16m relating to the formation of this engine controlsjoint venture.The Group also acquired a number of small businesses for a total considerationof £50m. There were no significant fair value adjustments in respect of thenet assets acquired.
mapperRelated Shares:
Rolls-Royce