26th Jul 2007 07:00
26 July 2007 ROLLS-ROYCE GROUP plc INTERIM RESULTS 2007
Group Highlights
* Record order book, increased 34 per cent to ‚£35.1bn (2006: year end ‚£
26.1bn).
* Group sales increased to ‚£3,591m. Sales on an underlying* basis increased
by 10 per cent.
* Services revenues increased by nine per cent to ‚£2,001m on an underlying*
basis, representing 53 per cent of Group sales.
* Underlying profit before taxation** increased to ‚£380m, up 17 per cent.
* Profit before taxation of ‚£377m** (2006: ‚£870m). * Average net cash of ‚£373m (2006: first half ‚£83m).
* Cash inflow of ‚£61m, before the injection of ‚£132m into the Group's UK
pension schemes (2006: first half cash inflow of ‚£122m).
* Interim payment to shareholders increased by 10 per cent to 4.04p per share
*Underlying sales reflect the exclusion of the IAS 39 hedge reserve adjustmentsand the inclusion of the benefit of settled foreign exchange transactions, andis consistent with underlying profit presentation.**Adjustments for underlying profits are included in note 1. Underlying profitsreflect a level of performance that excludes items considered to benon-operating in nature (see notes 1 and 2). Profit before tax includes suchnon-operating items, principally those relating to unrealised revaluationeffects.
Sir John Rose, Chief Executive, said:
"The Group has made strong progress in the first half.
"We have a well balanced business with a broad portfolio of products and services and proven access to global markets. Continued investment in our product portfolio and value added services for our customers has made us a market leader and gives us the ability to grow organically.
"Despite the challenges of increasing raw material costs and the effects of aweakening US dollar, the Group is well placed to deliver growth in underlyingprofit and, before pension scheme injections, a positive cash flow in 2007."Group OverviewTradingRolls-Royce has continued to make strong progress in the first half of 2007,increasing underlying profit and, before a payment into the Group's UK pensionschemes, generating a positive cash flow.The Group's order book, which grew by ‚£9.0bn in the half to ‚£35.1bn, continuesto become more international and is well balanced between the Americas, Asiaand the Middle East and Europe. The first half of 2007 saw a further broadeningof the Group's global reach, with a range of new customers being secured ingrowing markets for Rolls-Royce, including South America and Russia.Sales in the period increased by 10 per cent on an underlying basis to ‚£3,746mwith organic growth across the business. Despite the effect of the weakeningdollar, underlying aftermarket sales increased by nine per cent in the firsthalf with growth coming from all segments.
Underlying profit before tax increased by 17 per cent to ‚£380m. This was despite the impact of a further seven cent deterioration in the US dollar achieved exchange rate, creating a ‚£40m headwind compared to the first half of 2006, and an increase in unit costs partly due to rising raw material costs.
At the end of the first half, the hedge book stood at $9.4bn with an averageexchange rate of 1.78 US dollars to the pound, a deterioration of four centsfrom the start of 2007. For the whole of 2007, the Group continues to expect adeterioration in the achieved rate of between seven and eight cents relative to2006.The Group continues to take action to offset unit and other cost increases andthe weakening US dollar, including increased dollar based sourcing,restructuring the supply chain and delivering productivity improvements frominvestment in new facilities.Average net cash improved by ‚£290m to ‚£373m after a ‚£132m injection into theGroup's UK pension schemes, the first phase in the Group's plan to put ‚£500minto these schemes. The Group expects to transfer the remaining ‚£368m beforethe end of 2007 as actions on risk management and asset allocation arecompleted. This will enable the Group to conclude the review of financialstrategy, the start of which was announced in February 2007.Underlying earnings per share increased by 15 per cent to 15.72p (2006: firsthalf 13.62p)[1]. Basic earnings per share were 17.12p (2006: first half 35.86p).An interim payment to shareholders has been declared of 4.04p per share (2006:first half 3.67p), an increase of 10 per cent.
[All 2006 Comparatives in this commentary relate to first half performance unless otherwise stated [1]Underlying profit before tax and earnings per share exclude unrealised revaluations - see notes 1 and 2]
Developments
Three new engine programmes were announced in the period:
* A new Rolls-Royce engine was selected by Dassault Aviation to power its
new, super mid-sized Falcon business jet;
* The Trent XWB was formally launched for the A350 XWB and has demonstrated
significant success in the market;
* The new RR300 engine was selected for the Robinson R66 helicopter
These three programmes target a share of an addressable market opportunity estimated to be worth $200bn over the next 20 years.
In addition, the US Navy selected the MT30 to power the DDG-1000, a new class of advanced combat vessel.
Research and development activities progressed as planned over the period withthe Group investing around five per cent of sales on a cash basis, a levelexpected to be maintained over the rest of the year. This investment enablesthe Group to develop a broad portfolio of programmes and service capabilitiesthat typically enjoy a lifetime of several decades.The Group's research programmes are increasingly aimed at improving theenvironmental performance of existing and future products. The EnvironmentallyFriendly Engine (EFE) programme entered its manufacturing phase in the firsthalf and will demonstrate and validate new technologies aimed at reducing aeroengine fuel burn and emissions. The Group also believes that with itsengineering and scientific background, it is well placed to exploit theincreased demand for clean and fuel efficient power sources.
Rolls-Royce opened two new University Technology Centres (UTCs) at Bristol and Manchester Universities. The Group now has 28 UTCs worldwide, which make an important contribution to the Group's research and technology acquisition programmes.
The Group also continued to expand its services capabilities. The constructionof a new Trent repair and overhaul facility, through a joint venture withLufthansa Technik, was completed in Germany and is now operational. The latestof the Group's Operations Rooms was opened in Dahlewitz to support two-shaftengines in service. The benefits of the Group's service capabilities were againdemonstrated by the increasing number of customers committing to long termTotalCare(TM) and Mission Ready Management Solutions contracts in the civil anddefence sectors respectively.The Group's factory modernisation programme in the UK is nearing completion.New facilities in Derby and Bristol will be operational by the end of 2007 andtogether with improved processes will strengthen productivity and reduce costs.The Group is also making good progress in identifying a site for a new assemblyand test facility, with proposals being considered from Singapore and a numberof US states.The Group operates in a competitive and challenging environment and in doingso, we benefit from a consistent strategy, a strong order book, long programmelife cycles and the revenue generated by the provision of value addedaftermarket services to the users of its products. Consequently we have goodvisibility of our future workload and market opportunity. The results in thefirst half of 2007 demonstrate the resilience of the Group and its businessmodel.
Prospects
The Group expects to deliver an increase in underlying profits for the 2007full year despite the headwinds of a weakening dollar and increasing unitcosts. This increase in underlying profits will contribute to a positive cashflow for the full year before the effects of the cash injections into the UKpension schemes are taken into account.
Enquiries:
Mark Alflatt
Director of Financial Communications
Caroline Harris
Director of Corporate Communications
Tel: 0207 222 9020
www.rolls-royce.com
An interview on the results with Rolls-Royce Chief Executive, Sir John Rose, is available on video, audio and text on www.rolls-royce.com and www.cantos.com
Photographs 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 FIRST HALF 2007 BY BUSINESS SECTOR [2]
Civil Aerospace
Order book: ‚£28.1bn (2006: year end ‚£20.0bn)Engine deliveries: 421 (2006: 412)Sales: ‚£2,011m (2006: ‚£1,790m)Aftermarket services sales: ‚£1,205m (2006: ‚£1,077m)Underlying profit before financing: ‚£261m (2006: ‚£243m)
The Group made strong progress in Civil Aerospace, securing significant new orders, expanding its product portfolio with the launch of two new programmes and taking forward existing production programmes.
Continued growth in the corporate and regional sector contributed to a two percent increase in engine units delivered, to 421, as Trent deliveries slowed,largely because no Trent 900s for the Airbus A380 were delivered in the firsthalf.Underlying profit increased by seven per cent, reflecting the continuing growthof aftermarket service sales and original equipment deliveries, after incurringa further deterioration in unit costs and the impact of a seven centdeterioration in the foreign exchange achieved rate.The selection by Dassault Aviation of a new engine based on the RB282technology programme to power its next generation, super mid sized business jetreinforced the Group's leadership in the business jet sector whilst broadeningits product portfolio. This new programme will create new opportunities in thissector and will establish a route to market for a major technology programme.The formal launch of the A350 XWB has opened up significant opportunities forthe Trent XWB, the sixth member of the Trent family. Engine orders for a totalof 172 firm aircraft were received up to the half-year.The first flight of the Trent 1000 on the Rolls-Royce flying test bed tookplace in June and marked a major milestone in the development of the launchengine for the Boeing 787. Certification is expected shortly with entry intoservice in 2008. The Group has now received orders for more than 500 enginesfrom 15 customers and leasing companies.The success of the Trent family was further reinforced when the 3,000th Trentwas ordered this year, with a total of 1,425 Trent units having been deliveredand installed over the programme's 12 year history. Although the Trent isimportant in terms of the Group's future growth, it today represents arelatively small proportion of the installed base, accounting for only 11 percent of the total civil installed fleet and around 18 per cent of annual civilflying hours and less than 20 per cent of Group sales.Civil fleet flying hours rose by seven per cent compared with the first half of2006, driven by the increased number of engines in service and global trafficgrowth.
More than 52 per cent of our modern jet engine fleet is covered by TotalCare or CorporateCare service agreements.
[2]Commentaries relate to underlying sales unless specifically noted
Defence Aerospace
Order book ‚£3.2bn (2006: year end ‚£3.2bn)Engine deliveries: 168 (2006: 218)Sales: ‚£808m (2006: ‚£761m)Aftermarket services sales: ‚£422m (2006: ‚£416m)Underlying profit before financing: ‚£106m (2006: ‚£95m)
Defence Aerospace continues to be an attractive and growing business. The Group's portfolio includes a wide range of defence engine programmes at all stages of the product life cycle, supported by a growing services business.
Continued strong growth in new engines and modules contributed to a six per cent increase in sales in the period and a 12 per cent improvement in underlying profits.
The Group's leadership in the provision of propulsion systems for militarytransport aircraft was further enhanced this year with the selection of the AE2100 for the C-27J Spartan for the US military Joint Cargo Aircraft programme,with an initial order of 78 aircraft worth $500m.
The UK Ministry of Defence announced the launch of the Future Strategic Tanker Aircraft programme, with the order for 14 converted A330 aircraft.
The collaborative F136 engine and LiftSystem for the Joint Strike Fighter programme made good progress as they successfully continued their development programmes.
The helicopter portfolio has been broadened further with the launch of theRR300 engine programme to support the Robinson R66. In addition, the AustralianDepartment of Defence selected the RTM322 for a further 34 NH90 helicoptersunderlining the popularity of this engine on the NH90 platform. More than 85per cent of NH90 customers have selected the RTM322.
Defence services capabilities were further developed with contracts totalling more than ‚£200m confirmed in the first half for UK and international customers.
Marine
Order book: ‚£3.1bn (2006: year end ‚£2.4bn)Sales: ‚£700m (2006: ‚£621m)Aftermarket services sales: ‚£257m (2006: ‚£234m)Underlying profit before financing: ‚£58m (2006: ‚£50m)
Rolls-Royce is a world leader in the provision of marine propulsion systems, offering a unique set of products and services for naval and commercial customers.
All of the Group's marine business segments, offshore, merchant, naval, and submarines, continued to perform well. The order book increased by 29% to ‚£3.1 billion following continued strong demand in the first half.
Sales in the first half were supported by strong demand for original equipment leading to an overall 13 per cent growth and a 16 per cent improvement in underlying profit.
The selection in March by the US Navy of the MT30 to power the advanced destroyer, DDG-1000, was a major strategic success, demonstrating the Group's ability to leverage core technologies across markets and platforms.
A 10-year contract worth ‚£1 billion has recently been agreed with the UK Ministry of Defence to support nuclear power plant systems for the Swiftsure, Trafalgar and Vanguard class submarines and the new Astute class submarines when they enter service.
The first Astute Class submarine, HMS Astute, was launched in June featuringthe Rolls-Royce long-life core, capable of providing power for the vessel'sentire service life of more than 25 years, without being refuelled. In additionRolls-Royce provided marine propulsors, switchgear and electrical systems,demonstrating the benefits of the broadest product portfolio in the sector.
A series of major new orders for the offshore UT Ship design was secured, including the largest ever single order of ‚£83 million from OSM Schiffahrt.
Energy
Order book: ‚£0.7bn (2006: year end ‚£0.5bn)Engine deliveries: 9 (2006: 17)Sales: ‚£227m (2006: ‚£232m)Aftermarket services: ‚£117m (2006: ‚£106m)Underlying loss before financing: ‚£(1)m (2006: ‚£(18)m)The Rolls-Royce energy business supplies a broad range of gas turbine packagesto the worldwide oil & gas and power generation markets, with more than 4,000industrial gas turbines sold and over 140 million hours of operatingexperience.
A further period of strong demand in both the oil & gas and power generation markets supported the growth in the order book to ‚£0.7bn.
The oil & gas market remains robust, with continued activity for both on-shoreand off-shore projects in Europe, Brazil, Australia and West Africa leading toorders for a total of 14 RB211 units.
Global power generation markets continued to improve. There remains strong interest in the industrial Trent and orders were received for two further units in Chile and the USA.
Phasing of unit deliveries, mostly for oil & gas, contributed to a reduction inoriginal equipment sales, partly offset by an improved aftermarket salesperformance. The trading pattern in the first half has developed as anticipatedwith oil & gas remaining strong and power generation trading activity showingsome improvement. The reduction in the trading loss for the period, compared to2006, is after the net benefit of ‚£13m fee income, principally relating toincreased technology licence fees.
The Group invested ‚£12m in its fuel cell development programme in the first half which will undergo a key test in 2007.
As in 2006, oil & gas trading is expected to improve in the second half and mitigate the increased full year investment in the fuel cell development programme with the additional licence fees contributing to a near breakeven performance for the full year.
FINANCIAL REVIEW
The firm and announced order book, at constant exchange rates, was ‚£35.1bn (2006: year end ‚£26.1bn). Aftermarket services represented 33 per cent of the order book (2006: year end 38 per cent).
Sales increased by six per cent to ‚£3,591m (2006: ‚£3,390m). Sales on anunderlying basis grew by ten per cent. Payments to industrial Risk and RevenueSharing Partners (RRSPs), charged in cost of sales, amounted to ‚£95m (2006: ‚£79m).
Underlying profit before tax was ‚£380m (2006: ‚£324m). Underlying earnings per share increased by 15 per cent, to 15.72p (2006: 13.62p) (see note 2).
Gross research and development investment increased eight per cent to ‚£373m(2006: ‚£346m). Net research and development investment charged to the incomestatement was ‚£195m (2006: ‚£177m) after net capitalisation of ‚£9m (2006: ‚£16m)on development programmes. Receipts from RRSPs in respect of new programmedevelopments, shown as other operating income, were ‚£40m (2006: ‚£38m).Investment in intangibles was ‚£60m (2006: ‚£97m) and included ‚£24m (2006: ‚£43m)on recoverable engine costs and a further ‚£9m (2006: ‚£23m) on certificationcosts and participation fees. Increases in intangibles are expected to be abovethe 2006 level, due to higher levels of participation fees on new programmes.
Restructuring costs of ‚£24m (2006: ‚£23m) were charged within operating costs.
The taxation charge was ‚£74m (2006: ‚£253m). The taxation charge on anunderlying basis was ‚£102m, representing 27 per cent of underlying profitbefore tax (2006: ‚£91m, representing 28 per cent of underlying profit beforetax). The effective rate is impacted by a number of drivers including thegeographical mix of profits, changes in legislation and the benefit of researchand development tax credits.There was a cash inflow in the period of ‚£61m (2006: inflow ‚£122m) before the ‚£132m pension scheme injection. Key features were: a net ‚£23m outflow topurchase the Group's shares to fund employee remuneration and share saveschemes (there was an equivalent ‚£25m inflow in the first half 2006) and anincrease of ‚£100m in working capital in the period, mostly relating toinventory. As a result, the net cash balance, after the pension scheme funding,at the half year was ‚£755m (2006: year end ‚£826m).
Average net cash was ‚£373m (2006: ‚£83m), an improvement of ‚£290m over the last year.
Provisions were ‚£300m (2006: year end ‚£335m). Provisions carried forward inrespect of potential customer financing exposure amounted to ‚£74m at the periodend having utilised ‚£30m of the opening provision (2006: year end ‚£98m).
There were no material changes to the Group's gross and net contingent liabilities in 2007 (see note 7).
Gross post-retirement benefit obligations were ‚£409m (2006: year end ‚£995m) (see note 8). After taking account of deferred taxation, post-retirement benefit obligations were ‚£276m (2006: year end ‚£681m).
The Group is continuing to make payments to shareholders in the form of `B'shares rather than a dividend. These shares can then be redeemed for the sameamount of cash that would have been received with a cash dividend, or convertedinto the same number of ordinary shares in the Group that would have beenreceived under the scrip dividend alternative. The issue of `B' shares willresult in significant tax benefits for the Group, by accelerating the recoveryof Advance Corporation Tax, which will in turn benefit all shareholders.The proposed interim payment to shareholders is equivalent to 4.04 pence perordinary share (2006: interim payment 3.67p). The interim payment is payable onJanuary 3, 2008 to shareholders on the register on October 12, 2007. The finalday of trading with entitlement to B shares is October 9, 2007.
Consolidated income statement
For the half year ended June 30, 2007
Half year Half year Year to to June to June December 30, 2007 30, 2006 31, 2006 Notes ‚£m ‚£m ‚£m Revenue 1 3,591 3,390 7,156 Cost of sales and other costs (3,261) (2,900) (6,198) Other operating income 40 38 57 Research and development costs (195) (177)
(370)
Share of profit of joint ventures 26 10
47 Operating profit 201 361 692
(Loss)/profit on sale of businesses (1) -
1 Profit before financing 200 361 693 Financing income 3 416 753 1,196 Financing costs 3 (239) (244) (498) Net financing * 177 509 698 Profit before taxation ** 377 870 1,391 Taxation - UK *** (28) (196) (299) Taxation - Overseas (46) (57) (98) Profit for the period 303 617 994 Attributable to: Equity holders of the parent 306 619 998 Minority interests (3) (2) (4) Profit for the period 303 617 994 Earnings per ordinary share Basic 2 17.12p 35.86p 57.32p Diluted 2 16.74p 34.41p 55.14p Payments to shareholders - (65) (172) * Net interest payable (6) (11) (18)
** Underlying profit before taxation 380 324
705
*** The UK taxation charge is reduced by a credit of ‚£23m as a result of the reduction in the UK corporation tax rate - see note 2.
Underlying earnings per share is shown in note 2
Consolidated balance sheetAt June 30, 2007 June June December 30, 2007 30, 2006 31, 2006 Notes ‚£m ‚£m ‚£m ASSETS Non-current assets Intangible assets 4 1,492 1,394 1,460 Property, plant and equipment 1,725 1,624
1,706
Investments - joint ventures 258 243
240 Other investments 51 51 51 Deferred tax assets 82 274 141
Post-retirement scheme surpluses 8 94 3
22 3,702 3,589 3,620 Current assets Inventory 1,685 1,423 1,447 Trade and other receivables 2,535 2,128 2,465 Taxation recoverable 3 3 5 Other financial assets 5 603 717 644 Short-term investments 35 36 34 Cash and cash equivalents 1,811 1,837 2,185 Assets held for sale - 22 - 6,672 6,166 6,780 Total assets 10,374 9,755 10,400 LIABILITIES Current liabilities Borrowings (38) (388) (400) Other financial liabilities 5 (30) (72) (37) Trade and other payables (3,430) (2,878) (3,290) Current tax liabilities (189) (186) (191) Provisions (115) (152) (146) (3,802) (3,676) (4,064) Non-current liabilities Borrowings (1,003) (1,052) (990) Other financial liabilities 5 (336) (353) (336) Trade and other payables (873) (606) (827) Deferred tax liabilities (384) (191) (252) Provisions (185) (201) (189) Post-retirement scheme deficits 8 (503) (1,628) (1,017) (3,284) (4,031) (3,611) Total liabilities (7,086) (7,707) (7,675) Net assets 3,288 2,048 2,725 EQUITY Capital and reserves Called-up share capital 361 354 356 Share premium account 66 30 43 Capital redemption reserves 198 263 197 Transition hedging reserve 138 280 177 Other reserves (59) 7 (55) Retained earnings 2,579 1,105 2,000 Equity attributable to equity holders of 6 3,283 2,039 2,718the parent Minority interests 5 9 7 Total equity 3,288 2,048 2,725
Consolidated cash flow statement
For the half year ended June 30, 2007
Half year Half year Year to to June to June December 30, 2007 30, 2006 31, 2006 Notes ‚£m ‚£m ‚£m
Reconciliation of cash flows from operating
activities Profit before taxation 377 870 1,391
Share of profit of joint ventures (26) (10)
(47)
Loss/(profit) on sale or termination of 1 -
(1)businesses
Loss/(profit) on sale of property, plant 2 (9)
(9)and equipment Net interest payable 3 6 11 18 Net post-retirement scheme financing 3 (15) (4) (3)income Net other financing income 3 (168) (516) (713) Taxation paid (23) (18) (25)
Amortisation of intangible assets 4 30 29
60
Depreciation of property, plant and 82 80
161equipment Decrease in provisions (35) (7) (36) Increase in inventories (238) (112) (136) Increase in trade and other receivables (97) (89)
(397)
Increase in trade and other payables 235 185
789
Decrease in other financial assets and 156 69
250liabilities
Post-retirement scheme adjustment (40) (14)
(21) Share-based payments charge 17 16 36 Transfers of hedge reserves to income (63) (141) (289)statement
Dividends received from joint ventures 16 11
44
Net cash inflow from operating 217 351 1,072activities
Cash flows from investing activities Additions to intangible assets (58) (97)
(219)
Disposals of intangible assets - -
7
Purchases of property, plant and (121) (109) (298)equipment
Disposals of property, plant and - 25
55equipment Acquisition of businesses (1) (5) (5) Disposals of businesses 1 - 1 Investments in joint ventures (10) (10) (11) Disposals of joint ventures 1 - 1 Net cash outflow from investing (188) (196) (469)activities
Cash flows from financing activities Borrowings due within one year - (346) (51)
(53)repayment of loans
Borrowings due after one year - increase 35 -
-in loans
Capital element of finance lease (1) (5)
(8)payments
Net cash outflow from decrease in (312) (56)
(61)borrowings Net interest paid (8) (15) (12)
Interest element of finance lease (3) (1)
(2)payments
(Increase)/decrease in government (1) 1
3
securities and corporate bonds
Issue of ordinary shares 28 - 9 Purchase of own shares (78) (44) (44)
Other transactions in own shares 27 69
78 Redemption of B Shares (56) (21) (93) Net cash outflow from financing (403) (67)
(122)
(Decrease)/increase in cash and cash (374) 88
481equivalents Cash and cash equivalents at January 1 2,171 1,745 1,745 Foreign exchange (11) (22) (60)
Net cash of businesses acquired - -
5
Cash and cash equivalents at period end 1,786 1,811 2,171 Half year Half year Year to to June to June December 30, 2007 30, 2006 31, 2006 ‚£m ‚£m ‚£m
Reconciliation of increase in cash and cash equivalents to movements in net funds (Decrease)/increase in cash and cash (374) 88
481equivalents
Cash outflow/(inflow) from increase/(decrease) 1 (1)
(3)
in government securities and corporate bonds Net cash outflow from decrease in borrowings 312 56
61
Change in net funds resulting from cash (61) 143
539flows
Net funds of businesses acquired - 1
1 Exchange adjustments (10) (22) (49) Fair value adjustments 47 50 77 Movement in net funds (24) 172 568 Net funds at January 1 829 261 261 805 433 829
Fair value of swaps hedging fixed rate (50) 24 (3)borrowings Net funds at period end 755 457 826 At January Cash flow Exchange Fair At June 1, 2007 adjustments value 30, 2007 Analysis of net funds ‚£m ‚£m ‚£m ‚£m ‚£m Cash at bank and in hand 757 (385) (4) - 368 Overdrafts (14) (11) - - (25) Short-term deposits 1,428 22 (7) - 1,443 Cash and cash equivalents 2,171 (374) (11) - 1,786 Investments 34 1 - - 35 Other borrowings due within (379) 346 - 27 (6)one year Borrowings due after one year (983) (35) 1 20 (997) Finance leases (14) 1 - - (13) 829 (61) (10) 47 805 Fair value of swaps hedging (3) (47) (50)fixed rate borrowings 826 (61) (10) - 755
Consolidated statement of recognised income and expense
For the half year ended June 30, 2007
Half year Half year Year to to June to June December 30, 2007 30, 2006 31, 2006 ‚£m ‚£m ‚£m Foreign exchange translation differences from (4) (13) (75)foreign operations Actuarial gains 525 - 602 Transfers from transition hedging (63) (141) (289)reserve Related tax movements (132) 42 (91)
Change in UK rate of corporation tax (9) -
-(see note 2)
Net income/(expense) recognised directly 317 (112)
147in equity Profit for the period 303 617 994 Total recognised income and expense for the 620 505 1,141period Attributable to: Equity holders of the parent 623 507 1,145 Minority interests (3) (2) (4) Total recognised income and expense for the 620 505
1,141
period
1 Analysis by business segment
Half year Half year Year to to June to June December 30, 2007 30, 2006 31, 2006 ‚£m ‚£m ‚£m Revenue - Statutory Civil aerospace 1,880 1,789 3,775 Defence aerospace 796 752 1,569 Marine 698 620 1,300 Energy 217 229 512 3,591 3,390 7,156The Group seeks to present a measure of underlying performance that excludesitems considered to be non-underlying in nature. Underlying profit excludes thenet impact of financing costs related to post-retirement schemes as well asunrealised amounts arising from revaluations required by IAS 32 and IAS 39, andincludes the realised amounts arising from settled derivative hedgingtransactions. Half year to June 30, Half year to June 30, Year to December 31, 2007 2006 2006 Underlying Underlying Underlying Underlying Underlying Underlying adjustments results adjustments results adjustments results ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Profit before financing Civil 112 149 261 265 (22) 243 479 40 519aerospace Defence 84 22 106 90 5 95 186 7 193aerospace Marine 40 18 58 50 - 50 103 (2) 101 Energy (10) 9 (1) (19) 1 (18) (28) 10 (18) Central costs (26) - (26) (25) - (25) (47) - (47) 200 198 398 361 (16) 345 693 55 748 Net financing 177 (195) (18) 509 (530) (21) 698 (741) (43) Profit before 377 3 380 870 (546) 324 1,391 (686) 705taxation Taxation (74) (28) (102) (253) 162 (91) (397) 207 (190) Profit for the 303 (25) 278 617 (384) 233 994 (479) 515period
Underlying profit adjustments:
Half year to Half year to Year to December June 30, 2007 June 30, 2006 31, 2006 Profit Profit Profit Profit Profit Profit before before before before before before financing tax financing tax financing tax ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Release of transition hedge (63) (63) (141) (141) (289) (289)reserve Realised gains on settled 161 171 121 138 343 370derivative contracts
Realised gains carried forward (45) (45) (7) (7) (27)
(27)in contract balances Net unrealised fair value - (162) - (509) - (730)
changes to derivative contracts
Unrealised gains recognised in 15 15 11 11 28
28contract balances
Revaluation of trading assets - (16) - (5) -
4and liabilities Financial RRSPs - foreign - (12) - (29) - (39)exchange differences and
changes in forecast payments
Net post-retirement scheme - (15) - (4) - (3)financing income
Post-retirement schemes - past 130 130 - - -
-service costs * 198 3 (16) (546) 55 (686)* 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. Updatingthe commutation arrangements to reflect these factors increases thepost-retirement liability by ‚£100 million.The Group has also agreed a 2% discretionary increase applicable to pensionsthat do not benefit from any guaranteed increase, which increases the liabilityby ‚£30 million.In the six months to June 30, 2007, the Group funded ‚£132 million in respect ofthe increase in liabilities (funding was based on the actuarial fundingvaluations, which differ in certain respects from the IAS 19 valuations usedfor accounting purposes). June June December 30, 2007 30, 2006 31, 2006 ‚£m ‚£m ‚£m Net assets/(liabilities) Civil aerospace 2,497 2,216 2,165 Defence aerospace (49) (30) 20 Marine 616 706 619 Energy 366 424 387 Net tax liabilities (488) (100) (297) Unallocated post-retirement obligations (409) (1,625) (995) Net funds 755 457 826 3,288 2,048 2,725 June June December 30, 2007 30, 2006 31, 2006
Group employees at period end
Civil aerospace 22,700 21,950 22,300 Defence aerospace 5,600 5,400 5,500 Marine 7,700 7,400 7,600 Energy 2,500 2,750 2,600 38,500 37,500 38,000
2 Earnings per ordinary share (EPS)
Basic EPS is calculated by dividing the profit attributable to ordinaryshareholders of ‚£306m (2006 half year ‚£619m, full year ‚£998m) by 1,787m (2006half year 1,726 million, full year 1,741m) ordinary shares, being the averagenumber of ordinary shares in issue during the period, excluding own shares heldunder trust, which have been treated as if they had been cancelled.
Underlying EPS has been calculated as follows:
Half year to Half year to Year to June 30, 2007 June 30, 2006 December 31, 2006 Pence ‚£m Pence ‚£m Pence ‚£m EPS / Profit attributable to equity 17.12 306 35.86 619 57.32 998holders of the parent
Release of transition hedge reserve (3.52) (63) (8.17) (141) (16.60) (289)
Realised gains on settled derivative 9.57 171 8.00 138 21.25 370contracts Realised gains carried forward in (2.52) (45) (0.41) (7) (1.55) (27)contract balances Net unrealised fair value changes to (9.06) (162) (29.49) (509) (41.93) (730)derivative contracts
Unrealised gains recognised in 0.84 15 0.64 11 1.61
28contract balances
Revaluation of trading assets and (0.90) (16) (0.29) (5) 0.23
4liabilities
Financial RRSPs - foreign exchange (0.67) (12) (1.68) (29) (2.24) (39)differences and changes in forecast payments
Net post-retirement scheme financing (0.84) (15) (0.23) (4) (0.17) (3)
Post-retirement schemes - past 7.27 130 - - -
-service costs (note 1) Related tax effect (0.28) (5) 9.39 162 11.89 207
Change in UK rate of corporation tax (1.29) (23) - - -
-*
Underlying EPS / Underlying profit 15.72 281 13.62 235 29.81 519attributable to equity holders of the parent * On June 26, 2007, the change in the UK corporation tax rate from 30% to 28%,announced in March 2007, became substantively enacted. The above adjustmentrepresents the reduction in deferred tax liabilities reflected in the incomestatement as a result of this change. Where deferred tax has previously beencharged or credited to the statement of recognised income and expense ordirectly to equity, the related deferred tax adjustments have been included inthose statements respectively.Diluted EPS is calculated by dividing the profit attributable to ordinaryshareholders of ‚£306m (2006 half year ‚£619m, full year ‚£998m) by 1,828m (2006half year 1,799m, full year 1,810m) ordinary shares, being 1,787m (2006 halfyear 1,726m, full year 1,741m) as above, adjusted by the bonus element ofexisting share options of 41m (2006 half year 73m, full year 69m).3 Net financing Half year to Half year to Year to June 30, 2007 June 30, 2006 December 31, 2006 Underlying Underlying Underlying net financing net financing net financing ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Financing income Interest receivable 44 44 38 38 82 82
Fair value gains on foreign currency 137 - 478 - 696
-contracts
Financial RRSPs - foreign exchange 12 - 29 - 39
-
differences and changes in forecast
payments Fair value gains on commodity 25 - 31 - 34 -derivatives
Expected return on post-retirement 191 - 173 - 343
-scheme assets Net foreign exchange gains 6 - - - - - Other financing income 1 1 4 4 2 2 416 45 753 42 1,196 84 Financing costs Interest payable (50) (50) (49) (49) (100) (100) Financial charge relating to (13) (13) (14) (14) (27) (27)financial RRSPs
Interest on post-retirement scheme (176) - (169) - (340)
-liabilities Net foreign exchange losses - - (12) - (31) - (239) (63) (244) (63) (498) (127) Net financing 177 (18) 509 (21) 698 (43) Net financing analysed as: Net interest payable (6) (6) (11) (11) (18) (18)
Net post-retirement scheme financing 15 - 4 - 3
- Net other financing 168 (12) 516 (10) 713 (25) Net financing 177 (18) 509 (21) 698 (43)4 Intangible assets Goodwill Certification Development Recoverable Other Total and expenditure engine participation costs fees ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Cost: At January 1, 2007 735 374 422 329 70 1,930 Exchange adjustments 2 - - - - 2 Additions - 9 17 24 10 60 On acquisition of business - - 1 - - 1 Disposals - - - - (1) (1) At June 30, 2007 737 383 440 353 79 1,992 Accumulated amortisation and impairment: At January 1, 2007 - 143 132 176 19 470 Provided during the year - 3 8 13 6 30(charged to cost of sales) At June 30, 2007 - 146 140 189 25 500 Net book value at June 30, 737 237 300 164 54 1,4922007 Net book value at December 735 231 290 153 51 1,46031, 2006
5 Other financial assets and liabilities
June 30, 2007 June 30, 2006
December 31, 2006
Assets Liabilities Net Assets Liabilities Net Assets Liabilities Net amount amount amount ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Foreign exchange 557 (23) 534 634 (65) 569 578 (24) 554contracts Commodity 46 - 46 49 - 49 39 - 39contracts 603 (23) 580 683 (65) 618 617 (24) 593 Financial RRSPs - (306) (306) - (350) (350) - (324) (324) Interest rate - (25) (25) 34 (3) 31 27 (12) 15contracts B Shares - (12) (12) - (7) (7) - (13) (13) 603 (366) 237 717 (425) 292 644 (373) 271
Foreign exchange and commodity financial instruments
Movements in the fair value of foreign exchange and commodity contracts are asfollows: Half year to June 30, 2007 Half year Year to to June December 30, 2006 31, 2006 Foreign Commodity Total Total Total exchange ‚£m ‚£m ‚£m ‚£m ‚£m At beginning of the period 554 39 593 259 259 Fair value changes to fair (4) - (4) (12) (26)value hedges Fair value changes to 137 25 162 509 730derivative contracts Fair value relating to (153) (18) (171) (138) (370)contracts settled At period end 534 46 580 618 593
Financial risk and revenue sharing partnerships (RRSPs)
Movements in the recognised value of RRSPs are as follows:
Half year Half year Year to to June to June December 30, 2007 30, 2006 31, 2006 ‚£m ‚£m ‚£m At beginning of the period (324) (423) (423) Cash paid to partners 19 58 87 Financing charge * (13) (14) (27)
Excluded from underlying profit *
Exchange adjustments 7 22 42
Restructuring of financial RRSP agreements and 5 7
(3)changes in forecast payments At period end (306) (350) (324)
* Total amounts included within finance in the income statement are ‚£1m charge (2006 half year ‚£15m credit, full year ‚£12m credit).
6 Share capital and reserves
Half year Half year Year to to June to June December 30, 2007 30, 2006 31, 2006
Equity attributable to equity holders of the ‚£m ‚£m
‚£mparent At beginning of the period 2,718 1,499
1,499
Total recognised income and expense attributable 623 507 1,145 to equity holders of the parent
Arising on issue of ordinary shares 28 -
14 Issue of B shares (65) (59) (154)
Conversion of B shares into ordinary shares 10 38
55
Other transactions in ordinary shares 7 83
96
Share-based payments adjustment (41) (29)
(13)
Related tax movements - current tax - -
18 - deferred tax 8 - 58
Change in UK rate of corporation tax (see note 2) (5) -
- At period end 3,283 2,039 2,718
7 Sales financing contingent liabilities
In connection with the sale of its products the Group will, on some occasions,provide financing support for its customers. The Group's contingent liabilitiesrelated to financing arrangements are spread over many years and relate to anumber of customers and a broad product portfolio.
During the first half of 2007 there were no material changes to the maximum gross and net contingent liabilities.
8 Pensions and other post-retirement benefits
On May 4, 2007, the Group announced that it had reached an understanding withemployee representatives and was making substantial progress with Trustees overthe future of UK pension arrangements as described in note 1.As a result of these changes and taking account of the significant changes tomarket conditions since December 31, 2006, the Group has updated the IAS 19valuation of its post-retirement scheme assets and liabilities as at June 30,2007. No update to the valuation was undertaken at June 30, 2006. The principalchange in assumptions is an increase in the UK discount rate to 5.8% (December31, 2006: 5.1%). The following table summarises the results of the June 30,2007 valuation.
Amounts recognised in the balance sheet:
UK Overseas Total schemes schemes ‚£m ‚£m ‚£m At January 1, 2007 (665) (330) (995) Exchange adjustments - 6 6 Current service cost (50) (13) (63) Past service cost (130) - (130) Interest on scheme liabilities (160) (16)
(176)
Expected return on scheme assets 182 9
191 Contributions by employer 220 13 233 Actuarial gains 483 42 525 At June 30, 2007 (120) (289) (409) Analysed as:
Post-retirement scheme surpluses - included in 92 2
94non-current assets Post-retirement scheme deficits - included in (212) (291) (503)non-current liabilities (120) (289) (409)9 Share-based paymentsIn accordance with IFRS 2, a charge of ‚£17m (2006 half year ‚£16m, full year ‚£36m), relating to the fair value of share-based schemes granted since November7, 2002, is included in the income statement.
10 Basis of preparation
Reporting entity
Rolls-Royce Group plc is a company domiciled in the UK. These consolidatedinterim financial statements of the Company as at and for the six months endedJune 30, 2007 comprise the Company and its subsidiaries (together referred toas the "Group") and the Group's interests in joint ventures. They have beenprepared on the basis of the recognition and measurement requirements of IFRSapplied to the financial statements at December 31, 2006 and those standardsthat have been endorsed and will be applied at December 31, 2007.
The consolidated financial statements of the Group as at and for the year ended December 31, 2006 are available upon request from the Company Secretary, Rolls-Royce Group plc, 65 Buckingham Gate, London SW1E 6AT.
Section 240 Statement
The results for each half-year are unaudited. The comparative figures for theyear to December 31, 2006 have been abridged from the Group's financialstatements for that year, which have been delivered to the Registrar ofCompanies. The auditors have reported on those financial statements; theirreport was unqualified and did not contain statements under section 237(2) or(3) of the Companies Act 1985.
ROLLS-ROYCE GROUP PLCRelated Shares:
Rolls-Royce