7th Feb 2008 07:00
7 February 2008 ROLLS-ROYCE GROUP plc PRELIMINARY RESULTS 2007
Group Highlights
- Order book increased by 76 per cent to a record ‚£45.9bn (2006
‚£26.1bn), with the Asia and Middle East order book more than doubling to ‚£20bn
in 2007.
- Group sales increased to ‚£7,435m (‚£7,156m). Sales on an
underlying basis* increased by six per cent to ‚£7,817m.
- Services sales increased by nine per cent to ‚£4,265m on an
underlying basis.
- Profit before financing was ‚£512m (2006 ‚£693m).
- Underlying profit before taxation* increased 13 per cent to ‚£800m
(2006 ‚£705m).
- Net cash inflow, before a special contribution of ‚£500m into the
UK pension schemes, was ‚£562m (2006 ‚£491m).
- Average net cash of ‚£350m (2006 ‚£150m), after reflecting the
‚£500m pension scheme contribution.
- Shareholder payments for 2007 will in aggregate be 35 per cent
higher than in 2006.
- Final payment to shareholders increased by 51 per cent to 8.96p
per share (2006 5.92p per share), making a full year total of 13.00p per share
(2006 9.59p per share).* see note 2
Sir John Rose, Chief Executive, said:
"We have delivered a strong set of results in challenging conditions.
"The breadth of our product and service portfolio, our access to expanding global markets and our focus on productivity and efficiency give us confidence that Rolls-Royce will continue to deliver profitable growth."
Group Overview
Summary
Rolls-Royce made strong progress in 2007, delivering underlyingsales and profit growth across all its businesses and good cash flow despitethe continuing challenges of a weak US dollar and increased unit costs. Theconsistent strategy pursued by the Group over many years, has created abusiness which is delivering increasing predictability of future revenues as aresult of the breadth of the portfolio, the access to growing global marketsand the strength of the aftermarket.
Our access to growing international markets resulted in a strong order intake across all our businesses. By the end of the year, the order book had increased by 76 per cent to a record ‚£45.9bn.
Sales increased by four per cent to ‚£7,435m. Underlying sales grew by six per cent relative to 2006 after allowing for the benefit of our hedge policy.
Underlying profit before tax increased by 13 per cent to ‚£800m (2006 ‚£705m), reflecting increased trading profits across all our businesses. This was achieved despite a further 8 cent deterioration in the achieved US dollar rate, at a cost of ‚£92m in 2007, and increased unit costs.
The published profit before tax reduced to ‚£733m from ‚£1,391m in2006. The increase in operating profits is more than offset by reducedbenefits from the unrealised fair value of derivative contracts, lower benefitfrom foreign exchange hedge reserve release and the recognition of pastservice costs for UK pension schemes, all of which are excluded from thecalculation of underlying performance. This is explained further in note 2 onpage 17.
Basic earnings per share were 33.67p (2006 57.32p) with underlying earnings per share increasing by 14 per cent to 34.06p (2006 29.81p).
We manage our exposure to the US dollar by long term hedging. We finished the year with a hedge book of around $9.4bn, representing approximately 2.6 years' cover at an average rate of 1.83 dollars to the pound. This cover gives us the time and opportunity to take mitigating action against further deteriorations in the achieved US dollar rate, through improving productivity and `dollarising' our cost base.
Increasing material costs, disruption due to facility moves andcost escalation in the external supply chain all contributed to an increase ofseven per cent in our unit costs. In 2008 we anticipate that the result of ouractions will reduce the rise in unit costs to between two and four per cent.The Group has completed the restructuring of its UK defined benefitpension schemes. A ‚£500m contribution into the UK schemes contributed to asignificant reduction in the IAS 19 net deficit, which at the year-end hadfallen to ‚£123m. After making this payment and after increased investment inR&D, capital and IT, we generated a positive cash flow of ‚£62m. Thiscontributed to an improved average cash balance of ‚£350m (2006 ‚£150m), furtherstrengthening the balance sheet.
In February 2007, we announced that we would be carrying out a financial review, the outcome of which is described in more detail below. Following the review, the Board has concluded that payments to shareholders should be rebased, resulting in an increase in payments for 2007 of 35 per cent with a full year payment of 13.00p per share.
The breadth of our order book
A good illustration of the strength of our strategy is theincreasing breadth of our order book which is now well balanced between theAmericas, Europe and Asia Pacific. The order book for Asia and the Middle Eastalone finished the year at the same level as the total value of our order bookjust four years ago. Almost 50 per cent of our order book is from outside thetraditional markets of Europe and North America. In 2007 new orders weresecured in a number of countries in which we had previously had little or nopresence.
Investing in products and services
We have continued to invest in new products and services, with thebreadth of our portfolio protecting us from delays or setbacks on particularprogrammes. We launched three major engine programmes in 2007; for DassaultAviation's new, super mid size Falcon business jet, for the Airbus A350XWB andfor the Robinson R66 helicopter. These new programmes are targeting a share ofan addressable market opportunity estimated to be worth $200bn over the next20 years. Our presence on a wide range of programmes reduces our exposure tounforeseen developments on any one programme.Our aftermarket continued to expand, with underlying servicerevenues increasing by nine per cent to ‚£4,265m (2006 ‚£3,901m). An increasingnumber of our customers are committing to long term service arrangements suchas Mission Ready Management Solutions‚® and TotalCare‚®. To meet the demand, theservice network was augmented with the opening of a new repair and overhaulfacility in Germany with joint venture partner Lufthansa Technik AG. We alsoadded an Operations Room in Dahlewitz, Germany, to support our global fleet
oftwo-shaft engines.Investing in technologyWe have continued to invest in technology. In 2007, investment inresearch and development totalled ‚£824m (2006 ‚£747m), of which we fundedaround 55 per cent and we expect the ongoing level of R&D cash spend by thebusiness to continue at around five per cent of sales. A key milestone in 2007and a reflection of the increasingly international nature of our researchactivity was the decision by the United States Air Force to select Rolls-Roycefor ADVENT (Adaptive Versatile Engine Technology) and HEETE (Highly EfficientEmbedded Turbine Engine), two major new programmes which will deliver the nextgeneration of technologies for advanced propulsion systems.
In the course of the year, we further extended our research capability by opening two new University Technology Centres at Bristol University and Karlsruhe in Germany and entering into a technology partnership with Birmingham University to develop casting technologies.
Increasing productivity and efficiency
We are simplifying our organisation, improving productivity andefficiency and developing an organisation that reflects the truly globalnature of our business. The programme to renew our UK factories was completedin 2007, and in November we announced plans to open two new aero engineassembly facilities in Singapore and Virginia. Simplification andrationalisation of our international supply chain continued, with resultingperformance improvements. As part of our drive to improve efficiency, weannounced earlier this year proposals to reduce by 2,300 the number of peopleemployed in our support activities. Over the last twelve months, we havecreated 2,500 jobs in the operational areas of the business and maintained ourrecruitment of apprentices and graduates. We will continue to access the keyskills we need in line with the development of the business.
Strategic financial review
In 2007, the Group's revised pension fund strategy was successfullyimplemented with the ‚£500m special contribution into the UK pension schemes,together with a commitment to increase contributions in the future. Thepension funds' investment strategy was also changed to shift asset allocationaway from equities and to reduce the exposure to inflation and interest ratechanges.
In February 2007, the Group committed to undertake a review of its financial strategy focusing on the manner and scale of payments to shareholders and taking into account the restructuring of the UK pension schemes, the importance of retaining a strong balance sheet and the investment needs of the Group. The review has coincided with changes in global capital markets and the increasing risk of global growth slowing.
We continue to believe that a strong balance sheet will remainessential for a long-term business such as ours. The Group has to competeagainst large competitors on programmes where returns are measured overdecades and where the Group's competitive advantage depends on its ability tomake substantial investments and long-term commitments to customers, notalways at a time of our choosing. Financial flexibility in periods ofuncertainty is desirable especially as there may be opportunities to developthe business further. Following the review, the Board has concluded that theoverall strength of the business and its future prospects support asignificant increase in the payment to shareholders.
It is therefore intended to increase cash returns to shareholders by increasing the annual shareholder payment by 35% over the 2006 level. Subject to the Group's future financial position and growth in earnings we would expect payments to shareholders to increase progressively.
In addition the Company will, for payments relating to 2008onwards, remove the current option to convert the payments into ordinaryshares, as explained further on page 11. The existing B Share scheme will bereplaced by a C share scheme, which is tax efficient for the Company, underwhich shareholders may choose to retain C shares or redeem them for cash. As aconsequence, the ongoing cash cost of shareholder payments is expected toincrease in future years.
Prospects
The Group operates in a competitive and challenging environment.Our strong focus on productivity and efficiency, our broad product and serviceportfolio and our access to growing global markets give us confidence that in2008 the business will continue to deliver profitable growth and positive cashflow.Enquiries:Mark AlflattDirector of Financial CommunicationsNicky Louth-DaviesDirector 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 are available at www.newscast.co.uk
Visit www.thenewsmarket.com/rolls-royce to download broadcast-standard video or order a Beta SP tape of Rolls-Royce products, services and facilities.
REVIEW OF 2007 BY BUSINESS SECTOR[1]
Civil Aerospace
Order book: ‚£35.9bn (2006: ‚£20.0bn)
Engine deliveries: 851 (2006: 856)
Underlying sales: ‚£4,038m (2006: ‚£3,907m)
Underlying aftermarket services sales: ‚£2,554m (2006: ‚£2,310m)
Underlying profit before financing: ‚£564m (2006: ‚£519m)
The Civil Aerospace business portfolio continues to expand, covering a broad range of aircraft across all sectors from corporate and regional to the largest wide-body aircraft.
Highlights of the Year
- The Trent 1000 for the Boeing B787 was certified on schedule in August. - 11 customers selected the Trent XWB for a total of more than 600 engines. - Dassault selected the RB282 to power its next generation business jet. - The Trent 900 entered service on the Airbus A380 with Singapore Airlines. - Orders were received for almost 1,200 Trent engines across the six variants. - 194 new customers signed up to CorporateCareĢ service agreements.
The Civil business achieved a record year-end order book of ‚£35.9bn after securing new orders worth more than ‚£20bn. The current order book of more than 2,000 Trent engines provides assurance of revenues for many years to come.
Almost 1,200 Trent engines were ordered in 2007 across all six Trent variants as we continued to broaden the customer base with 25 new customers from 20 countries. International Aero Engines also secured orders for more than 660 engines, valued at ‚£3bn, maintaining a strong market position on the Airbus A320 family of aircraft.
The first Airbus A380, powered by the Trent 900, entered service with launch customer, Singapore Airlines, in October. The expansion of the Civil portfolio continued with the launch of two new programmes, the Trent XWB for the A350XWB and the RB282, for the Dassault Falcon.
Civil engine deliveries, at 851, were similar to 2006, with lower Trent deliveries offset by increased deliveries to the corporate and regional sectors. As a result of this mix change, underlying revenues from original equipment deliveries contracted by seven per cent in the year.
Civil fleet flying hours rose by five per cent compared with 2006,supported by an increased installed fleet and continued high levels ofutilisation. Underlying services revenues increased by 11 per cent to ‚£2.6bn,representing 63 per cent of civil aerospace revenues. More than 55 per cent ofour modern jet engine fleet is now covered by TotalCareƒ¢ or CorporateCareƒ¢service agreements.Defence Aerospace
Order book: ‚£4.4bn (2006:‚£3.2bn)
Engine deliveries: 495 (2006: 514)
Underlying sales: ‚£1,673m (2006: ‚£1,601m)
Underlying aftermarket services sales: ‚£877m (2006: ‚£853m)
Underlying profit before financing: ‚£199m (2006: ‚£193m)
The Defence Aerospace business provides engines and support across all the major sectors of the defence market. With over 20,000 engines in service worldwide it has the broadest customer base of any of its peers.
Highlights of the year
- The AE2100 was selected for the US military Joint Cargo Aircraft, the C- 27J. - Good progress on development programme milestones for the F136 and 2008 funding confirmed. - The EJ200 engine and support contract for the Royal Saudi Air Force Eurofighter programme was finalised. - The Group was selected by the US Air Force to participate in two research programmes totalling $315m. - New service contracts were secured totalling more than $500m.
2007 was another year of good progress for all Defence Aerospace's sectors.
It was an important year for the business' combat programmes. The contract to supply EJ200 engines and in service support for the Royal Saudi Air Force fleet of Eurofighter jets was concluded, contributing almost ‚£1 billion to the order book.
The collaborative F136 engine, for the F-35 Lightning II (Joint Strike Fighter), was awarded full 2008 funding of $480m by the US Department of Defense (DoD), and performed strongly on both testing and milestone delivery. The LiftSystem for the STOVL variant, F-35B, was installed on the test aircraft with its first flight scheduled for the first half of 2008.
Rolls-Royce was selected to participate in two US Air Force technology programmes, ADVENT and HEETE, worth $315m in total. Our selection reinforces the strong position the Group's technological expertise has established with the US DoD. In addition, the RR300 engine for the new R66 Robinson helicopter programme was launched during the year.
The collaborative TP400-D6 engine programme for the A400M, thoughchallenging, made significant progress with the delivery of the engine for theflying test bed programme. Incremental development costs of ‚£40m associatedwith the programme have been provided for in the year.
For the defence business as a whole the benefits of improved trading and a number of one-offs, both positive and negative, contributed to an overall improvement in underlying profits.
New service contracts totalling more than $500m were signed during the year. These included agreements with the US DoD for the AE2100 and the US Navy for the Adour.
Marine
Order book: ‚£4.7bn (2006: ‚£2.4bn)
Underlying sales: ‚£1,548m (2006: ‚£1,299m)
Underlying aftermarket services sales: ‚£545m (2006: ‚£487m)
Underlying profit before financing: ‚£113m (2006: ‚£101m)
Rolls-Royce is a world leader in the provision of marine propulsion systems, offering a unique set of products and services for the naval and commercial sectors. Marine services support power systems installed on more than 20,000 vessels, including those with 70 navies.
Highlights of the year
- The business won its largest contract for offshore vessels to date, worth ‚£155m. - MT30 generator sets were selected by the US Navy to power the DDG 1000. - A ‚£1bn service contract was signed with the UK Ministry of Defence (MoD) to support the power plants of the UK's nuclear submarine fleet. - The global service network was expanded with the addition of a number of new service centres.
There was sustained order activity across the commercial and offshore sectors including Marine's largest offshore order to date worth ‚£155m, for service vessels to be operated by OSM Schiffahrt.
During the year, Rolls-Royce was selected to power the US Navy's most advanced surface combatant ship, the DDG-1000 Zumwalt Class destroyer. Four MT30 gas turbine generator sets will provide power for two of these new vessels.
China and South East Asia account for the major part of the world's merchant shipbuilding market. New business in China included record orders for over 700 ship sets of steering gear and 300 ship sets of deck equipment, confirming our position as market leader in the merchant sector.
A 10-year support contract was signed with the UK Ministry of Defence for the nuclear power plant systems for the current fleet of 13 Swiftsure, Trafalgar and Vanguard class submarines and the new Astute class submarines when they enter service.
Rolls-Royce has taken steps to consolidate its nuclear capability in order to assess the opportunities open to the Group in the global civil nuclear market.
Underlying sales increased in all parts of the Marine business withthe main drivers of growth coming from offshore and sales of our Bergen dieselproducts. Underlying profits grew during the year despite slightly lowertrading margins, due mainly to an increasing original equipment mix and someprogramme provisions. Increasing volumes and mix benefits will contribute togood margin growth in 2008 leading to an acceleration in underlying profitgrowth.
Underlying service revenues grew strongly by 12 per cent over 2006 and the service capability of the business was further extended with the acquisition of Seaworthy Systems Inc and the establishment of a number of new support centres in Singapore, Rio de Janeiro, Rotterdam and the US.
Energy
Order book: ‚£0.9bn (2006: ‚£0.5bn)
Engine deliveries: 32 (2006: 44)
Underlying sales: ‚£558m (2006: ‚£546m)
Underlying aftermarket services sales : ‚£289m (2006: ‚£251m)
Underlying profit before financing: ‚£5m (2006: loss ‚£18m)
The Energy business supplies a wide range of gas turbine packages and reciprocating engines to the worldwide oil & gas and power generation markets, with equipment operating in more than 120 countries.
Highlights of the year
- The business won its largest single contract to date, for the maintenance of RB211 gas turbines for BP. - Record order intake for the Industrial Trent. - The Avon 200 upgrade was received well, with orders for 19 upgrades in the first year. - Services revenues continued to grow strongly, representing more than 50 per cent of sales.The oil & gas and power generation markets have remained robust in 2007.Overall the Energy business won a record amount of new business in the year,increasing the order book to more than ‚£850m by the year end. Orders includeda ‚£120m TotalCare‚® service agreement with BP for the maintenance of 28industrial RB211 gas turbines in Azerbaijan, our largest ever order in the oil& gas sector.
The Industrial Trent continued to gain market position, winning record orders for 11 units from Europe, Chile, Australia including five units from the US. This progress supports our confidence in the outlook for the power generation sector of the market.
The Avon 200, an upgrade programme delivering increased fuel efficiency and output, proved successful in its first year with orders for 19 unit upgrades.
Our focus on service delivery has contributed to order intakedoubling over the last three years. Dedicated service centres in Brazil, theUK and Azerbaijan bring our key skills and knowledge closer to our customersand strengthen our competitive position.Underlying revenues were broadly flat with a reduction in originalequipment revenues balanced by increased aftermarket revenues. Strongunderlying revenue growth is expected in 2008 as new business is delivered.Underlying Services revenues increased by 15 per cent, primarily in the oil &gas sector, and underlying service revenues accounted for 52 per cent of totalsales of the Energy business.Underlying profits improved significantly in the year largely dueto the net benefit of ‚£18m of fee income, principally relating to increasedtechnology fees, and improved trading. These factors more than offsetincreases of ‚£10m, for restructuring costs, and an additional ‚£3m investmentin the fuel cells development programme.
FINANCIAL REVIEW - 2007 PERFORMANCE
The firm and announced order book, at constant exchange rates, was ‚£45.9bn (2006 ‚£26.1bn). Aftermarket services included in the order book totalled ‚£13.1bn (2006 ‚£9.9bn).
Sales increased by four per cent, compared with 2006, at ‚£7,435m (2006 ‚£7,156m). Sales on an underlying basis grew by six per cent. Payments to industrial Risk and Revenue Sharing Partners (RRSPs), charged in cost of sales, amounted to ‚£199m (2006 ‚£162m).
Gross research and development investment was ‚£824m (2006 ‚£747m). Net research and development investment charged to the income statement was ‚£381m (2006
‚£370m) after net capitalisation of ‚£73m (2006 ‚£25m) on development programmesin 2007. Receipts from RRSPs in respect of new programme developments, shownas other operating income, were ‚£50m (2006 ‚£57m).
Restructuring costs of ‚£52m (2006 ‚£47m) were charged within cost of sales.
The taxation charge was ‚£133m (2006 ‚£397m). The taxation charge on anunderlying basis was ‚£193m, representing 24 per cent of underlying profitbefore tax. (2006 ‚£190m, representing 27 per cent of underlying profit beforetax). The underlying rate is affected by the geographical mix of profits,changes in legislation and the benefit of research and development taxcredits. The 2008 underlying tax rate is anticipated to increase to around 26per cent.
Underlying profit before tax was ‚£800m (2006 ‚£705m). Underlying earnings per share increased by 14 per cent, to 34.06p (2006 29.81p) (see note 4).
Investment in intangibles was ‚£296m (2006 ‚£225m) and included ‚£37m (2006 ‚£64m)on recoverable engine costs, ‚£91m (2006 ‚£41m) for capitalised developmentcosts and a further ‚£129m (2006 ‚£91m) on certification costs and participationfees.
The continued expansion and replacement of operational facilities and investment in plant and equipment led to total investment in tangible assets in the year of ‚£304m (2006 ‚£303m).
Working capital reduced by ‚£291m during the year reflecting financial working capital, lower by ‚£650m, more than offsetting increased inventory of ‚£359m. Inventory increased in the year to support growth across all businesses and to minimise disruption during the transition to new operational facilities.
The cash inflow during the year was ‚£562m (2006 ‚£491m) before the specialcontribution of ‚£500m into the UK defined benefit pension schemes. Continuedgrowth in underlying profits and good cash conversion was supported by furtherincreases in customer deposits and progress payments in the year, increasingby ‚£332m, and a benefit of ‚£41m from year-end currency revaluations. Totalcash investments of ‚£598m in plant and equipment and intangible assets andpayments to shareholders of ‚£97m represented the major cash outflows in theperiod. Tax payments increased in the year to ‚£71m (2006 ‚£25m).As a consequence average net cash was ‚£350m (2006 ‚£150m). The net cash balanceat the year-end was ‚£888m (2006 ‚£826m). The Group's cash inflow in 2008 isexpected to be lower than 2007 due to the impact of increased taxes, higherongoing pension charges and increased payments to shareholders.Provisions were ‚£301m (2006 ‚£335m). Provisions carried forward in respect ofpotential customer financing exposure amounted to ‚£44m at the year-end (2006‚£98m).
The overall net position of assets and liabilities on the balance sheet for TotalCare packages was an asset of ‚£550m (2006 ‚£393m), 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 2007 (see note 9).
Net post-retirement benefit deficits, on an IAS 19 basis, were ‚£123m (2006‚£995m) after accounting for the ‚£500m special contribution in the year. Aftertaking account of deferred taxation, net post-retirement benefit deficits were‚£88m (2006 ‚£681m) (see note 10).The proposed final payment to shareholders is equivalent to 8.96 pence perordinary share (2006 final payment 5.92p), making a total payment for the yearof 13.00 pence (2006 9.59p). The final payment is payable on July 1, 2008 toshareholders on the register on March 7, 2008. The final day of trading withentitlement to B shares is March 4, 2008.The Directors propose that the 2007 final payment to shareholderswill be made by way of a further issue of B shares using the existing B shareprocess. It is then intended to create a new class of shares to be called Cshares, which will be redeemable for cash, and the Directors intend thatpayments thereafter will be made by the issue of C shares, commencing with the2008 interim payment to shareholders.The principal difference between B shares and C shares is that theC shares will not carry an option to convert into ordinary shares. The Companyplans to arrange with its Registrar for a scheme to enable shareholders toreinvest their payments in a market purchase of ordinary shares. For thoseshareholders who retain their C shares, a C share dividend at a rate of 75% ofthe London Inter Bank Offered Rate will be payable half yearly in arrears.Full details of this proposal, and a resolution seeking shareholder approval,will be included in the Notice convening the 2008 Annual General Meeting.
At the proposed full year level, the cash cost of the shareholder payment would be approximately ‚£237m compared to around ‚£90m to ‚£100m based on recent experience of the B Share scheme and take up of the scrip option.
Consolidated income statementFor the year ended December 31, 2007 Restated * 2007 2006 Notes ‚£m ‚£mRevenue 3 7,435 7,156Cost of sales (6,003) (5,566)Gross profit 1,432 1,590
Other operating income 50 57Commercial and administrative costs (653) (632)Research and development costs (381) (370)Share of profit of joint ventures 66 47Operating profit 514 692(Loss)/profit on sale or termination of businesses
(2) 1Profit before financing 3 512 693 Financing income 5 718 1,196Financing costs 5 (497) (498)Net financing 1 221 698Profit before taxation 2 2/3 733 1,391 Taxation - UK 3 (47) (299)Taxation - Overseas 3 (86) (98) Profit for the year 600 994 Attributable to:Equity holders of the parent 606 998Minority interests (6) (4)Profit for the year 600 994 Earnings per ordinary share 4Basic 4 33.67p 57.32pDiluted 4 32.97p 55.14p Payments to shareholders (237) (172) 1 Net interest payable 5 (6) (18)
2 Underlying profit before taxation 2/3 800 705
3 The taxation charge is reduced by a credit of ‚£35m as a result of the reduction in the corporation tax rates in
the UK and Germany - see note 4.
4 Underlying earnings per share are shown in note 4.
* During the year the Group has reviewed the classification of costs. As a result, costs of ‚£39m classified as
commercial and administrative costs in 2006 have been reclassified as cost of sales.Consolidated balance sheetAt December 31, 2007 Restated * 2007 2006 Notes ‚£m ‚£mASSETSNon-current assetsIntangible assets 6 1,761 1,460Property, plant and equipment 1,813 1,706Investments - joint ventures
284 240Other investments 57 51Deferred tax assets 81 141
Post-retirement scheme surpluses 10
210 22 4,206 3,620Current assetsInventory 2,203 1,845Trade and other receivables 2,585 2,465Taxation recoverable 7 5Other financial assets 514 644Short-term investments 40 34Cash and cash equivalents 1,897 2,185Assets held for sale 7 - 7,253 7,178Total assets 11,459 10,798 LIABILITIESCurrent liabilitiesBorrowings (34) (400)Other financial liabilities (85) (37)Trade and other payables (4,326) (3,688)Current tax liabilities (188) (191)Provisions (121) (146) (4,754) (4,462)Non-current liabilitiesBorrowings (1,030) (990)Other financial liabilities (303) (336)Trade and other payables (965) (827)Deferred tax liabilities (345) (252)Provisions (180) (189)
Post-retirement scheme deficits 10
(333) (1,017) (3,156) (3,611)Total liabilities (7,910) (8,073) Net assets 3,549 2,725 EQUITYCapital and reserves
Called-up share capital 364 356Share premium account 67 43Capital redemption reserves 191 197Transition hedging reserve
77 177Other reserves 62 (55)Retained earnings 2,776 2,000
Equity attributable to equity holders of the parent 8
3,537 2,718Minority interests 12 7Total equity 3,549 2,725
* Progress payments received against other inventory in the prior year
(‚£398m) have been included within trade and other payables. Post-retirement
schemes surpluses (‚£22m), netted against post-retirement scheme deficits in
the prior year have been separately disclosed.
Consolidated cash flow statementFor the year ended December 31, 2007 Restated * 2007 2006 ‚£m ‚£m
Reconciliation of cash flows from operating activities Profit before taxation
733 1,391Share of profit of joint ventures (66) (47)Loss/(profit) on sale or termination of businesses 2 (1)Loss/(profit) on sale of property, plant and equipment 1 (9)Net interest payable 6 18Net post-retirement scheme financing
(30) (3)Net other financing (197) (713)Taxation paid (71) (25)
Amortisation of intangible assets 63 60Depreciation of property, plant and equipment
170 161Decrease in provisions (42) (36)Increase in inventories (359) (226)
Increase in trade and other receivables (128) (397)Increase in trade and other payables 778 879Decrease in other financial assets and liabilities 357 250Additional cash funding of post-retirement schemes (441) (21)Share-based payments charge 36 36Transfers of hedge reserves to income statement (149) (289)Dividends received from joint ventures 42 44Net cash inflow from operating activities
705 1,072
Cash flows from investing activitiesAdditions of unlisted investments (5) -Additions to intangible assets (294) (219)Disposals of intangible assets - 7Purchases of property, plant and equipment (304) (298)Disposals of property, plant and equipment
47 55Acquisition of businesses (6) (5)Disposals of businesses 3 1Investments in joint ventures (13) (11)Disposals of joint ventures - 1
Net cash outflow from investing activities
(572) (469)
Cash flows from financing activitiesBorrowings due within one year - repayment of loans (350) (53)Capital element of finance lease payments (5) (8)Net cash outflow from decrease in borrowings
(355) (61)Interest received 95 84Interest paid (93) (96)
Interest element of finance lease payments (3) (2)(Increase)/decrease in government securities and corporate bonds
(6) 3Issue of ordinary shares 29 9Purchase of own shares (77) (44)
Other transactions in own shares 34 78Redemption of B Shares (97) (93)Net cash outflow from financing activities
(473) (122)
(Decrease)/increase in cash and cash equivalents (340) 481Cash and cash equivalents at January 1 2,171 1,745Foreign exchange 41 (60)Net cash of businesses acquired - 5Cash and cash equivalents at December 31
1,872 2,171
* Increase in inventories and increase in trade and other payables in
the prior year have been restated from (‚£136m) and ‚£789m respectively to
reflect progress payments received from other inventory being included within
trade and other payables. 2007 2006 ‚£m ‚£m
Reconciliation of increase in cash and cash equivalents to
movements in net funds(Decrease)/increase in cash and cash equivalents (340) 481
Cash outflow/(inflow) from increase/(decrease) in government securities and corporate bonds
6 (3)Net cash outflow from decrease in borrowings 355 61Change in net funds resulting from cash flows 21 539Net funds of businesses acquired
- 1Exchange adjustments 41 (49)Fair value adjustments (18) 77Movement in net funds 44 568
Net funds at January 1 excluding the fair value of swaps 829 261Net funds at December 31 excluding fair value of swaps 873 829Fair value of swaps hedging fixed rate borrowings
15 (3)Net funds at December 31 888 826
The movement in net funds (defined by the Group as including the items shown below) is as follows:
At January
Exchange Fair value Reclassi- At December
1, 2007 Cash flow
adjustments adjustments fications 31, 2007
‚£m ‚£m ‚£m ‚£m ‚£m ‚£mCash at bank and in hand 757 465 43 - - 1,265Overdrafts (14) (11) - - - (25)Short-term deposits 1,428 (794) (2) - - 632Cash and cash equivalents 2,171 (340) 41 - - 1,872Investments 34 6 - - - 40
Other borrowings due within one year (379) 350
- 27 (2) (4)Borrowings due after one year (983) - - (45) 2 (1,026)Finance leases (14) 5 - - - (9) 829 21 41 (18) - 873
Fair value of swaps hedging fixed rate borrowings (3) -
- 18 - 15 826 21 41 - - 888
Consolidated statement of recognised income and expense For the year ended December 31, 2007
2007 2006 ‚£m ‚£m
Foreign exchange translation differences from foreign operations 117 (75)Net actuarial gains 399 602Transfers from transition hedging reserve (149) (289)Related tax movements (86) (91)Change in rates of corporation tax (see note 4) (9) -Net income recognised directly in equity 272 147Profit for the year 600 994Total recognised income and expense for the year
872 1,141 Attributable to:Equity holders of the parent 878 1,145Minority interests (6) (4)
Total recognised income and expense for the year
872 1,1411. Basis of preparationThese 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, 2007 or 2006. Statutoryaccounts for 2006 have been delivered to the registrar of companies, and thosefor 2007 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 section237(2) or (3) of the Companies Act 1985.
2. Underlying performance
The Group seeks to present a measure of underlying performance that excludes items considered to be non-underlying in nature.
Underlying sales exclude the release of the foreign exchange transition hedging reserve and reflect the achieved US dollar exchange rate arising on settled derivative contracts.
Underlying profit before financing includes amounts realised from settled derivative contracts - these primarily relate to the Civil aerospace business - and excludes the past-service post-retirement cost that occurred in 2007.
In addition, underlying profit before tax excludes the unrealised amounts arising from revaluations required by IAS 32 and IAS 39 and the net impact of financing costs related to post-retirement schemes.
Underlying profit adjustments:
2007 2006 Profit Profit before Profit before Profit financing before tax financing before tax ‚£m ‚£m ‚£m ‚£mAs reported 512 733 693 1,391
Release of transition hedging reserve (149) (149) (289) (289)Realised gains on settled derivative contracts 415 420 343 370Net unrealised fair value changes to derivative contracts - (251) - (730)Effect of currency on contract accounting (76) (76) 1 1Revaluation of trading assets and liabilities - 10 - 4
Financial RRSPs - foreign exchange differences and changes in forecast payments
- 13 - (39)Net post-retirement scheme financing - (30) - (3)Post-retirement schemes - past service costs * 130
130 - -Total underlying adjustments 320 67 55 (686) Underlying 832 800 748 705* As part of its ongoing discussions with the Trustees of its UK pensionschemes, the Group agreed to reflect changes in HM Revenue & Customs practiceand increase the size of the lump sum payment retirees are able to receive bycommuting part of the pension. Like many other employers, the Group has alsoincreased the amount of the lump sum payment for the pension commuted.Updating the commutation arrangements to reflect these factors increases thepost-retirement liability by ‚£100m.
The Group has also agreed a 2% discretionary increase applicable to pensions that do not benefit from any guaranteed increase, which increases the liability by ‚£30m.
3. Analysis by business segment
2007 2006 ‚£m ‚£mRevenueCivil aerospace 3,718 3,775Defence aerospace 1,636 1,569Marine 1,542 1,300Energy 539 512 7,435 7,156 2007 2006 Underlying Underlying Underlying Underlying adjustments results adjustments results ‚£m ‚£m ‚£m ‚£m ‚£m ‚£mProfit before financingCivil aerospace 308 256 564 479 40 519Defence aerospace 170 29 199 186 7 193Marine 91 22 113 103 (2) 101Energy (8) 13 5 (28) 10 (18)Central items (49) - (49) (47) - (47) 512 320 832 693 55 748Net financing 221 (253) (32) 698 (741) (43)Profit before taxation 733 67 800 1,391 (686) 705Taxation (133) (60) (193) (397) 207 (190)Profit for the year 600 7 607 994 (479) 515Minority interests 6 - 6 4 - 4Profit attributable to equity holders of the 606 7 613 998 (479) 519parent 2007 2006 ‚£m ‚£mNet assets/(liabilities)Civil aerospace 2,468 2,165Defence aerospace (172) 20Marine 563 619Energy 370 387Net tax liabilities (445) (297)
Net unallocated post-retirement scheme deficits
(123) (995)Net funds 888 826 3,549 2,725 2007 2006 Group employees at year endCivil aerospace 23,200 22,300Defence aerospace 5,700 5,500Marine 8,000 7,600Energy 2,600 2,600 39,500 38,000
4. Earnings per ordinary share (EPS)
Basic EPS is calculated by dividing the profit attributable to ordinaryshareholders of ‚£606m (2006 ‚£998m) by 1,800 million (2006 1,741 million)ordinary shares, being the average number of ordinary shares in issue duringthe year, excluding own shares held under trust, which have been treated as ifthey had been cancelled.
Underlying EPS has been calculated as follows:
2007 2006 Pence ‚£m Pence ‚£mEPS / Profit attributable to equity holders of the parent 33.67 606 57.32 998Release of transition hedging reserve (8.28) (149) (16.60) (289)Realised gains on settled derivative contracts 23.33 420 21.25 370Net unrealised fair value changes to derivative contracts (13.94) (251) (41.93) (730)Effect of currency on contract accounting (4.22) (76) 0.06 1Revaluation of trading assets and liabilities 0.56 10 0.23 4
Financial RRSPs - foreign exchange differences and changes in forecast payments
0.72 13 (2.24) (39)Net post-retirement scheme financing (1.67) (30) (0.17) (3)Post-retirement schemes - past service costs (see note 2) 7.22 130 - -Related tax effect (1.39) (25) 11.89 207Change in rates of corporation tax * (1.94) (35) - -
Underlying EPS / Underlying profit attributable to equity holders of the parent
34.06
613 29.81 519
* During 2007, changes in the rates of UK and German corporation tax were substantively enacted. The above adjustment represents the reduction in deferred tax liabilities reflected in the income statement as a result of these changes. Where deferred tax has previously been charged or credited to the statement of recognised income and expense or directly to equity, the related deferred tax adjustments have been included in those statements respectively.
Diluted EPS of 32.97 pence per share (2006 55.14 pence) is calculated by dividing the profit attributable to ordinary shareholders of ‚£606m (2006 ‚£998m) by 1,838million (2006 1,810 million) ordinary shares, being 1,800 million (2006 1,741 million) as above, adjusted by the bonus element of existing share options of 38 million (2006 69 million).
5. Net financing 2007 2006 Underlying Underlying financing financing ‚£m ‚£m ‚£m ‚£mFinancing incomeInterest receivable 83 83 82 82Fair value gains on foreign currency contracts 215 - 696 -
Financial RRSPs - foreign exchange differences and changes in forecast payments
- - 39 -Fair value gains on commodity derivatives 36 - 34 -Expected return on post-retirement scheme assets 384 - 343 -Other financing income - - 2 2 718 83 1,196 84Financing costsInterest payable
(89) (89) (100) (100) Financial RRSPs - foreign exchange differences and changes in forecast payments
(13) - - -Financial charge relating to financial RRSPs (26) (26) (27) (27)Interest on post-retirement scheme liabilities (354) - (340) -Net foreign exchange gain losses (15) - (31) - (497) (115) (498) (127)Net financing 221 (32) 698 (43) Analysed as:Net interest payable (6) (6) (18) (18)Net post-retirement scheme financing 30 - 3 -Net other financing 197 (26) 713 (25)Net financing 221 (32) 698 (43)6. Intangible assets Certification costs and Software participation Development Recoverable and Goodwill fees expenditure engine costs other Total ‚£m ‚£m ‚£m ‚£m ‚£m ‚£mCost:At January 1, 2007 735 374 422 329 70 1,930Exchange adjustments 59 1 - - - 60Additions - 129 91 37 39 296On acquisition of business 7 - 1 - 1 9Disposals - - - - (1) (1)At December 31, 2007 801 504 514 366 109 2,294 Accumulated amortisation and impairment:At January 1, 2007 - 143 132 176 19 470Provided during the year(charged to cost of sales) - 7 18 28 10 63At December 31, 2007 - 150
150 204 29 533
Net book value at December 31, 2007 801 354 364 162 80 1,761Net book value at December 31, 2006 735 231
290 153 51 1,460
7. Other financial assets and liabilities
The carrying values of other financial assets and liabilities are as follows: 2007 2006 Assets Liabilities Net amount Assets Liabilities Net amount ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m
Foreign exchange contracts 433 (54) 379 578 (24) 554Commodity contracts 39 - 39 39 - 39 472 (54) 418 617 (24) 593Financial RRSPs - (315) (315) - (324) (324)Interest rate contracts 42 (3)
39 27 (12) 15B Shares - (16) (16) - (13) (13) 514 (388) 126 644 (373) 271
Foreign exchange and commodity financial instruments
Movements in the fair value of foreign exchange and commodity contracts are asfollows: 2007 2006 Foreign exchange Commodity Total Total ‚£m ‚£m ‚£m ‚£mAt January 1 554 39 593 259Fair value changes to fair value hedges (6) - (6) (26)Fair value changes to derivative contracts 215 36 251 730Fair value relating to contracts settled (384) (36) (420) (370)At December 31 379 39 418 593
Financial risk and revenue sharing partnerships (RRSPs)
Movements in the recognised value of RRSPs are as follows:
2007 2006 ‚£m ‚£mAt January 1 (324) (423)Cash paid to partners 55 87
Exchange adjustments direct to reserves (7) -Financing charge * (26) (27)Excluded from underlying profit *Exchange adjustments 7 42Restructuring of financial RRSP agreements and changes in forecast payments (20) (3)At December 31 (315) (324)
* Total amounts included within finance in the income statement are ‚£39m charge (2006 ‚£12m credit).
8. Share capital and reserves
2007 2006 ‚£m ‚£mEquity attributable to equity holders of the parentAt January 1 2,718 1,499
Total recognised income and expense attributable to equity holders of the parent
878 1,145Arising on issue of ordinary shares 29 14Issue of B shares (172) (154)Conversion of B shares into ordinary shares 71 55Own shares purchased (78) (47)Own shares vesting in share-based payment plans 93 143Share-based payments adjustment (22) (13)Related tax movements - current tax 43 18- deferred tax (18) 58Change in corporation tax rates (see note 4)
(5) -At December 31 3,537 2,718
9. 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 contingentliabilities related to financing arrangements are spread over many years andrelate to a number of customers and a broad product portfolio.The Group reports contingent liabilities on a discounted basis. As thedirectors consider the likelihood of these contingent liabilitiescrystallising to be remote, this amount does not represent a present value.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 will be reported, together with the sterlingequivalent at the reporting date spot rate.The discounted value of the total gross contingent liabilities relating todelivered aircraft and other arrangements where financing is in place, lessinsurance arrangements and relevant provisions, at December 31, 2007 amountedto $1,227m, ‚£616m, (2006 $1,109m, ‚£566m). Taking into account the netrealisable value of the relevant security, the discounted value of the netcontingent liabilities amounted to $279m, ‚£140m, (2006 $243m, ‚£124m).Sensitivity calculations are complex, but for example, if the value of therelevant security were reduced by 20 per cent, a net contingent liability witha discounted value of approximately $434m, ‚£218m, (2006 $361m, ‚£184m) wouldresult. There are also net contingent liabilities in respect of undeliveredaircraft, but it is not considered practicable to estimate these as deliveriescan be many years in the future, and the relevant financing will only be putin place at the appropriate time.
10. Pensions and other post-retirement benefits
As previously announced, during 2007 the Group has reached agreement with themembers and trustees of its three main UK defined benefit pension schemes onthe closure of the schemes to new employees and a change of investmentstrategy to reduce the volatility of funding levels by achieving progressivelya better match between assets and liabilities.As a result of these agreements, special contributions totalling ‚£500m havebeen paid to the schemes during 2007 and the implementation of revised lowerrisk investment strategies is largely complete across all three schemes.
After taking account of deferred tax, the net post-retirement benefits position was a deficit of ‚£88m (2006 ‚£681m).
Movements in the net post-retirement position recognised in the balance sheetare as follows: UK schemes Overseas schemes Total ‚£m ‚£m ‚£mAt January 1, 2007 (665) (330) (995)Exchange adjustments - (6) (6)Current service cost (100) (25) (125)Past service cost (131) (2) (133)
Interest on post-retirement scheme liabilities (323) (31) (354)Expected return on post-retirement scheme assets
367 17 384Contributions by employer 677 30 707Net actuarial gains 466 45 511
Movement on unrecognised surplus *
(110) (2) (112)At December 31, 2007 181 (304) (123) Analysed as:
Post-retirement scheme surpluses - included in non-current assets 210 - 210Post-retirement scheme deficits - included in non-current liabilities (29) (304) (333) 181 (304) (123)* Where a surplus has arisen on a scheme, in accordance with IAS 19, thesurplus is recognised as an asset only if it represents an unconditionaleconomic benefit available to the Group in the future. Any surplus in excessof this benefit is not recognised in the balance sheet. Surpluses have arisenon the UK schemes in 2007, largely as a result of differences between theactuarial and IAS 19 valuation assumptions.
11. Share-based payments
In accordance with IFRS 2, a charge of ‚£36m (2006 ‚£36m) relating to the fairvalue of share-based payment plans granted since November 7, 2002 is includedin the income statement.
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[1] Commentaries relate to underlying sales and profits unless specifically noted
ROLLS-ROYCE GROUP PLCRelated Shares:
Rolls-Royce