Final Results
10 February 2005
ROLLS-ROYCE GROUP plc PRELIMINARY RESULTS 2004
Continuing Progress
Group Highlights
* 21per cent gain in underlying* pre-tax profits to £345m (2003: £285m):
profit before tax £306m (2003 : £180m)
* 41per cent reduction in average net debt to £560m (2003: £950m)
* 9 per cent rise in year-end firm order book to record £18.9bn (2003: £
17.4bn)
* 14 per cent rise in service revenues to £3.2bn, or 55 per cent of sales
(2003: 50 per cent)
* before exceptional and non-trading items (see note 2)
Sir John Rose, Chief Executive, said:
"Our results confirm the benefits of a consistent strategy and strong business
model. During 2004 this has resulted in strengthened market positions and
growth in services revenues, with higher volumes, improved mix and strong
operational performance enabling the Group to increase profit and reduce
average net debt.
"We enter 2005 with a record order book, strong positions on a new generation
of programmes and a growing services business. These factors, supported by our
investment in operational efficiency, underpin our expectation of continued
growth in profits and reduction of average net debt."
Group Overview
Group sales in 2004 rose 5 per cent to £5,939m (2003: £5,645m), in large part
reflecting the growth of service revenues and a better than expected cyclical
recovery of the civil aerospace market.
The Group gross margin rose to 19.0 per cent (2003: 17.4 per cent), benefiting
from continuing improvements in operational efficiency and a 5 per cent
reduction in product unit costs.
Underlying profits before taxation rose 21 per cent to £345m (2003: £285m).
After exceptional and non-trading items, notably goodwill amortisation, pre-tax
profits on ordinary activities were £306m (2003: £180m).
Underlying earnings per share rose 19 per cent to 14.50p (2003: 12.20p) and
basic earnings per share rose 71 per cent to 12.07p (2003: 7.04p). A payment to
shareholders has been proposed of 5.00p per share (2003: 5.00p), making a total
payment for the year of 8.18p per share (2003: 8.18p).
The Group generated a cash inflow of £243m (2003: £272m), resulting in a
reduction in year-end net debt to £80m (2003: £323m). Average net debt for the
year fell to £560m (2003: £950m), its lowest level since 1998.
The net deficit on the Group's three main UK pension funds, as defined under
FRS17 and after taking account of deferred taxation, declined to £805m (2003: £
855m).
New orders in 2004 reached a record level of £8.7bn (2003: £8.1bn), and brought
the year-end firm order book to a record £18.9bn (2003: £17.4bn). The order
book has now grown in each of the past 10 years, at a 12 per cent compound
annual growth rate. Good progress was made across all four of the Group's
target markets:
* in civil aerospace, the Trent 1000 engine was adopted by Boeing for its new
787 Dreamliner programme, and was selected for the purchase of 50 aircraft
by ANA, ensuring that Rolls-Royce will provide the launch engines for this
programme;
* in defence aerospace, the European governments participating in the
Eurofighter Typhoon confirmed Tranche 2 of the programme, resulting in an
EJ200 order worth more than £750m for the Group;
* in the marine sector, the MT30 version of the Trent engine was selected for
the Lockheed Martin version of the US Navy's Littoral Combat Ship,
complementing our earlier success with the demonstrator programme for the
DD(X) US destroyer;
* in the energy sector, important contracts were won in China for the
West-East pipeline and in the Middle East for the Dolphin project, which is
the first oil and gas application for the industrial version of the Trent
engine.
These, and other successes during the year, ensured that Rolls-Royce continued
to enhance its strong market position in each of its four chosen sectors. In
civil aerospace, we won 40 per cent of all new orders placed - our best ever
performance. In the oil and gas sector, the success of the industrial Trent
enhanced our position in the market for aero-derived engines.
The Group continued to build on the significant service opportunities that are
created each time an engine is sold. Revenue from services (including 100 per
cent repair and overhaul joint ventures) grew by 12 per cent to £3.8bn (2003: £
3.4bn), resulting in a compound annual growth rate for this business over the
past five years of 12 per cent. Revenue from services accounted for 55 per cent
of Group sales (2003: 50 per cent) and orders for future services accounted for
£7.3bn or 39 per cent of the year-end firm order book (2003: £6.6bn or 38 per
cent).
Further significant investments were made in new technology and the
establishment of an international network of technology-oriented relationships:
more than 50 per cent of our spending on technology programmes is now directed
outside the UK. A Technology Agreement was signed in December, for example,
with a number of research institutions in Singapore. Reflecting the importance
of innovation at the core of our business, Rolls-Royce last year approved 250
applications for new patents, a record total for the group in any one year.
The Group continued to overhaul and expand its manufacturing capabilities and
infrastructure. A new £85m production facility for compression systems was
opened at Inchinnan in Scotland.
Prospects
The four sectors of the power systems market on which Rolls-Royce is focused -
civil aerospace, defence aerospace, marine and energy - all enjoy strong demand
trends stretching well into the future. The aggregate demand for engines and
services across all four sectors over the next 20 years is estimated to be
worth approximately $2 trillion.
Rolls-Royce is well placed to benefit from this demand, having invested heavily
in new product. Taking advantage of the common technological base underpinning
all four sectors, the Group has directed its investment into the development of
a robust portfolio of products that can be adapted and applied to respond to
new market opportunities. Thus, the investment in the Trent family of engines
provided the technical foundation for us to bid successfully last year on the
new Boeing 787 and has also formed the basis for new products in other sectors,
such as the MT30 in marine and the industrial Trent in the energy sector.
The potential in services is also encouraging. The growing number of
Rolls-Royce engines in service and their long service lives promise to ensure
attractive returns over many years. This aspect of the Group's business is
evolving rapidly with a significant level of investment being made in support
capabilities such as engine repair and overhaul facilities, engine leasing and
predictive data management. A steady rise in the number of long-term service
agreements with our major customers is expected to create substantial value
both for them and for Rolls-Royce.
Across its four sectors, Rolls-Royce has now established a strong position
within programmes that will shape the power systems market for many years to
come:
* in civil aerospace, conditions remain difficult for some airlines but
Rolls-Royce has a broad spread of products and customers. The Trent engine
family has secured a 50 per cent share of the engine market serving
wide-bodied aircraft. In addition to the Boeing 787, Trent engines will
power the launch of the Airbus A380. The Trent 900 was certified on time
and the first A380 was rolled out in January 2005. We also offer a
competitive range of engines for the regional airlines and corporate
aircraft sectors;
* in defence aerospace, our strong position on a broad range of mature and
new programmes enables us to mitigate the impact of volatility on
individual programmes and provides a stable outlook;
* in the marine sector, our naval business is well positioned on a number of
important new programmes and orders in the offshore market recovered
strongly in the second half of 2004;
* in the energy sector, our oil and gas business has a strong order book and
the industrial Trent is well placed to secure a growing share of the power
generation market. Earlier this year we established a joint venture with a
consortium of companies in Asia as a further step in the process of
bringing to market our solid-oxide fuel cell technology.
The Group is exposed to exchange-rate movements on foreign currencies,
particularly the US dollar which continued to weaken relative to sterling
throughout 2004. We have, however, continued to pursue our strategy of hedging
future net dollar revenues and at the end of 2004 had approximately $9 billion
of forward cover.
Our strong order book, the long-term services revenue stream and our focus on
operational performance underpin the Group's expectations of continued growth
in profits and reduction of average net debt in 2005. We continue to target a
10 per cent return on sales over the medium term, across all our businesses, as
the business model develops and our operational efficiency continues to
improve.
Enquiries:
Peter Barnes-Wallis Duncan Campbell-Smith
Director of Financial Communications Director of Corporate Communications
Tel: 0207 222 9020
www.rolls-royce.com
REVIEW OF 2004 BY BUSINESS SECTOR
Civil Aerospace
Sales: £3,040m (2003: £2,694m)
Underlying profit before interest: £170m (2003: £131m)
Highlights of the Year
* The Trent 1000 engine was selected by Boeing for its new 787 Dreamliner
aircraft and was then chosen by the first two airlines that purchased the
aircraft. ANA will be the first to put the aircraft into service.
* The Trent 900 engine for the Airbus A380 achieved its Airworthiness
Certificate on schedule in October, paving the way for its first flight
early in 2005.
* Malaysian Airlines became the fifth A380 customer to select the Trent 900
engine
* China Eastern ordered Trent 700 engines to power 20 A330 aircraft.
* International Aero Engines, the joint venture one-third owned by
Rolls-Royce, delivered the 2,500th V2500 and ended the year with 950
engines in its firm order book and a further 1,100 option orders.
The breadth of our product range now allows us to provide engines for more than
30 different aircraft types for international airlines, regional airlines and
corporate operators.
We strengthened our presence in the civil aero-engine industry during 2004,
through a combination of strong positions on the new aircraft under development
and a growing market share, including a market-leading position on modern
wide-bodied aircraft. Overall, we won 40 per cent of the civil orders announced
during the year, a record level for the Group.
Engine deliveries were higher than originally anticipated, at 824, reflecting a
recovery from the trough year in 2003, when we delivered 746 engines. We expect
some continued growth in engine deliveries in 2005.
The Rolls-Royce civil fleet flying hours increased by 15 per cent compared to
2003, as a result of a combination of world traffic growth recovery and
increased fleet size. The Trent 500 engine passed the one million flying hours
mark in December.
In 2004 the corporate jet market showed signs of recovery, which we expect to
continue in 2005. The regional market, for 50-seat aircraft, is expected to
remain depressed.
Our success in the modern wide-body sector, where we have a 50 per cent market
share, has been further reinforced through our launch position on the Boeing
787. This aircraft addresses a growing sector of the civil market, which we
anticipate will require almost $100bn of new engines over the next 20 years.
We secured significant new risk and revenue sharing partnerships on the Trent
1000 engine. In Japan, MHI joined KHI, our long-term partner on the Trent, and
these two companies will together have a 15 per cent share of the Trent 1000
programme.
We made further headway with our strategy of offering innovative long-term
services to our customers, through the TotalCare and CorporateCare programmes:
new contracts worth £1.0bn were signed during the year, extending their
coverage to 38 per cent of the fleet. The 500th customer of Aeromanager, the
e-business portal which allows users access to a broad range of aero engine
aftermarket services, was signed up recently. In addition, we enhanced our
service-support infrastructure with our 24/7 Operations Room in Derby, which
went live in March 2004. It provides an integrated decision-support system,
co-ordinating data from aircraft, engine and overhaul shops and providing
round-the-clock logistics support and access to expert engineering knowledge.
Services sales increased by 25 per cent, to £1.8bn, representing 59 per cent of
civil aerospace sales.
In January 2005, Boeing announced the closure of its 717 line, an aircraft
powered exclusively by our BR715 engine. This programme had been subject to
speculation for some time and we had already taken a prudent approach to our
modest financial exposure within our 2004 results.
Defence Aerospace
Sales: £1,374m (2003: £1,398m)
Underlying profit before interest: £155m (2003: £147m)
Highlights of the year
* Confirmation of Tranche 2 of the Eurofighter Typhoon, worth more than £750
million to Rolls-Royce.
* Joint Strike Fighter programme milestones achieved - successful testing of
the F136 engine and operation of the Rolls-Royce LiftSystem®.
* Successful conclusion of the preliminary design review of the TP400-D6
engine for the A400M transport aircraft.
* Selection by Oman of the RTM322 engine to power 20 NH90 helicopters.
* Maiden flight of the BR710-powered Nimrod MRA4 reconnaissance aircraft.
* Over 1,100 military engines and 1,800 military engine modules now covered
by Mission Ready Management Solutions (MRMS) long-term services contracts.
Our defence business is broadly based, with a strong portfolio of products and
services covering the key defence aerospace market sectors, from combat and
trainer to transport, tactical aircraft and helicopters.
In 2004, we continued to expand our services offerings and our customer base,
while increasing the fleet of installed engines.
In the combat market, the order for Tranche 2 of the Eurofighter Typhoon
aircraft will mean new EJ200 engine sales worth more than £750 million to
Rolls-Royce. Work on Tranche 2 engines will start in 2005.
The F136 engine, in which Rolls-Royce is a 40 per cent partner, for the F-35
Joint Strike Fighter (JSF), successfully performed its first engine test. The
Rolls-Royce LiftSystem®, which provides vertical lift for the JSF, continued to
beat programme requirements.
A further ten Pegasus engines were ordered by the Spanish and Italian navies to
support their Harrier AV-8B aircraft.
The transport market, in which Rolls-Royce is the global leader, was another
area of strength in 2004, particularly in the United States. T56 turboprop
business remained strong in this engine's 51st year of production and the
improved Series IV engine secured the Advanced Hawkeye development programme
for the next generation of that aircraft. The AE 1107C-Liberty engine continued
to perform well in Operational Assessment testing of the V-22 Osprey. In the
summer, the US Air Force took possession of its first AE 2100-powered C-130J
aircraft.
In Europe, the preliminary design review of the TP400-D6 engine for the A400M
transport aircraft was successfully concluded, followed by on-schedule initial
testing of the first engine hardware.
In the helicopter market, the selection by Oman of the latest increased power
version of the RTM322 engine, for 20 helicopters, increased the number of
customers who have selected this engine for the NH90 to nine out of ten. The
first production NH90 made its maiden flight in May, powered by the RTM322.
The Federal Aviation Administration certified the LHTECH T800 engine for the
SuperLynx 300 helicopter and the first SuperLynx 300 aircraft were formally
handed over, to customers in Thailand and Oman. First deliveries of the
MTR390-powered Tiger took place in the second half of the year. The company
also received a large order for Model 250 engines when the US Border Patrol
selected the Bell 430 helicopter.
In the tactical aircraft market, four BR710 engines powered the Nimrod MRA4
reconnaissance aircraft for its maiden flight and five Rolls-Royce engines -
four AE 2100s and one T800 - powered the Japanese US1A-Kai flying boat on its
first flight.
The AE 3007 continues to demonstrate superb performance in the Global Hawk,
which has now exceeded 4,000 flying hours. The AE 3007 also powers the ERJ-145
which has been selected for the Aerial Common Sensor programme.
The provision of services contributed 56 per cent of the Group's defence sales
and we continued successfully to service existing contracts and win new ones.
Over 1,100 military engines and 1,800 military engine modules are now covered
by Mission Ready Management Solutions (MRMS) long-term services contracts.
Marine
Sales: £963m (£1,003m)
Underlying profit before interest: £67m (2003: £78m)
Highlights of the year
* Lockheed Martin selected MT30 gas turbines and Kamewa waterjets for the
first prototype ship in the US Navy's Littoral Combat Ship programme (LCS).
* Orders worth £166 million were taken for design and propulsion equipment
packages in the offshore sector in the last six months of 2004.
* Rolls-Royce was selected to supply nine gas turbine generator sets for the
Republic of Korea Navy's KDX III destroyer programme.
* The UK Ministry of Defence, acting on behalf of the UK, France and Norway,
selected Rolls-Royce to provide the NATO Submarine Rescue System.
* The Group penetrated new markets with offshore-derived technology,
including coastal protection vessels for Norway and France and pollution
control variants for India.
It has been a year of steady progress for the marine business with growth in
naval markets and a recovering commercial sector.
In the naval market sector, our MT30 gas turbine was selected for the first
prototype in the US Navy's Littoral Combat Ship (LCS) programme. This new
coastal defence vessel will also be powered by Rolls-Royce Kamewa waterjets.
The MT30, which is the world's most powerful marine gas turbine, earned full
naval and commercial certification.
The MT30 programme reflects a core Rolls-Royce philosophy, which is to invest
in a basic technology once and then reap the rewards across our different
market sectors. The engine has 80 per cent commonality with the Trent 800 aero
engine, developed for the Boeing 777.
The first MT30 to be delivered was handed over to Northrop Grumman in early
2004 as part of the land-based demonstrator for the US Navy's DD(X) destroyer
programme. Rolls-Royce is therefore well positioned on both DD(X) and LCS when
they move into full production.
Our submarine propulsion business accounted for 54 per cent of our naval sales.
During the year Rolls-Royce was awarded the NATO Submarine Rescue System
contract by the UK Ministry of Defence, acting on behalf of the UK, France and
Norway.
In 2004, our commercial business supplied the largest waterjets ever made for
the Japanese Techno-Superliner ferry, which will begin operations this year on
16-hour voyages between Tokyo and Ogasawara-Gunso. The waterjets will help
propel the 140m long, aluminium ferries at a service speed of 38 knots.
The offshore market recovered strongly in the second half of 2004, when we
announced firm orders worth £166 million to supply design and equipment
packages for service and support vessels in the offshore oil and gas industry.
Demonstrating our ability to supply complete systems, we are designing and will
help equip 26 new support vessels, based on our UT-Design.
Our ability to take offshore technology into new markets is enhancing our sales
opportunities. We entered the coastguard sector by supplying coastal protection
vessel design and equipment packages to France and Norway and pollution control
variants to India, all based on the UT-Design.
Much of the world's shipbuilding now takes place in Asia and our structures
reflect this regional shift. We gained orders from the Republic of Korea Navy
for nine AG9140RF gas turbine generator sets, which will be supplied to the
Republic's KDX III destroyer programme in partnership with Samsung. We are also
providing propellers and associated equipment and services for the same ships
in conjunction with Doosan Heavy Industries.
In 2004, marine made 41 per cent of its sales from services. This market is
growing as more navies acquire gas turbine technology.
Energy
Sales: £489m (2003: £508m)
Underlying profit before interest: £14m (2003: £23m)
Highlights of the year
* Second consecutive year of record order intake.
* Industrial Trent launched into the oil and gas market.
* New cost-effective package design completed for the industrial Trent.
* RB211 confirmed as market leader for oil and gas applications in its size
range.
* Geographic footprint of installed-product base continued to expand in the
oil and gas market.
* Record year for long-term service-agreement contracts.
In 2004 we continued to develop a solid foundation for sustained profitability
and robust growth.
In oil and gas, the RB211 was the clear market leader for aero-derived
industrial gas turbines in its size range. We also launched the industrial
Trent gas turbine into the oil and gas market with orders for six industrial
Trent gas compression packages for the Dolphin Energy Limited gas pipeline in
the Middle East. The Trent is the first aero-derived gas turbine in its class
to be selected for a major gas compression application. In addition, we
commenced shipments and achieved successful start-up of the first RB211-driven
compressor packages for the West-East pipeline in China, and we remain on
schedule for delivery of all 20 packages ordered for this important project.
In customer service, we continued to respond to the growing customer trend for
long-term service agreements. 2004 was a record year with over $160 million
booked in new contracts. We received the 2004 "Great Operator" award from BP
plc, having improved significantly the product performance on their Bruce
platform in the North Sea.
As we predicted, the world power generation market remained sluggish in 2004.
We continued to use this period to restructure our power generation business
and enhance new product development to take advantage of the expected market
recovery. Both Dry Low Emissions (DLE) and Wet Low Emissions (WLE) versions of
the industrial Trent are now available for sale, and are accumulating thousands
of operating hours each month.
We completed a new cost-competitive Trent package that provides our customers
with a world-class design for installation and maintainability. This new
package is applicable to both power generation and oil and gas units, and is
being embodied in the Trent units provided for the Dolphin Energy Limited gas
pipeline.
Our expansion of the geographic footprint of our installed base in the oil and
gas sector continued. We received orders for eight RB211 packages for the third
and final phase of the BP Azeri project for offshore Azerbaijan in the Caspian
Sea. With this success, we have received orders for 28 RB211 packages from BP
over the past three years.
Our goal of entering the offshore Kazakhstan market was realised with orders
for four RB211 generating sets that will be installed on a barge to provide
power to adjacent offshore facilities. Five additional RB211 packages were
ordered for offshore West Africa, making nearly 20 packages ordered for
offshore service there in recent years. Brazil remains a key market area and we
received orders for seven additional offshore RB211 packages in 2004 from
Petrobras, who have now ordered a total of 19 units for their offshore service
operations.
We are developing facilities to support operations in the Caspian, Brazil and
China, and are considering further opportunities in West Africa and other
regions of the world.
In 2004, we increased investment in our fuel cell technology. Earlier this year
we established a joint venture with a consortium of companies in Asia as a
further step in the process of bringing to market our solid-oxide fuel cell
technology. The Asian group has bought a 25 per cent share in Rolls-Royce Fuel
Cell Systems and will contribute both financial and technical resources to this
development programme.
Financial Services
Sales: £73m (2003: £42m)
Underlying profit before interest: £9m (2003: £(4)m)
The Financial Services businesses comprise engine leasing, aircraft leasing and
power project development.
Rolls-Royce and Partners Finance, the Group's joint venture engine leasing
business, owned a portfolio of 273 engines, of which 99 per cent by value were
on lease to 39 customers.
Pembroke Group, the Group's joint venture aircraft leasing business, owned a
portfolio of 28 aircraft. These are all on lease to 13 customers.
Rolls-Royce Power Ventures, the Group's power project developer, has 14 power
generation projects underway. The business is being restructured, reflecting
the general weakness in power generation markets. Net charges of £5 million
were taken.
FINANCIAL REVIEW
The firm order book, at constant exchange rates, was £18.9bn (2003: £17.4bn).
In addition, a further £2.4bn had been announced (2003: £1.3bn). Aftermarket
services represented 39 per cent of the firm order book (2003: 38 per cent).
Sales increased by five per cent, compared with 2003, at £5,939m (2003: £
5,645m). The translation impact of the weaker US dollar reduced sales by
approximately £200m.
Gross profit, before exceptional items, was £1,127m (2003: £980m). Gross margin
increased to 19.0 per cent in 2004 from 17.4 per cent in 2003. Payments to Risk
and Revenue Sharing Partners (RRSPs), charged in cost of sales, amounted to £
240m (2003: £179m).
Underlying profit before tax was £345m (2003: £285m). Underlying earnings per
share increased by 19 per cent, to 14.50p (2003: 12.20p).
Gross research and development investment was £601m (2003: £619m). Net research
and development investment was £282m (2003: £281m). Receipts from RRSPs in
respect of new programme developments, shown as other operating income, were £
73m (2003: £153m).
Restructuring costs of £37m (2003: £10m) were charged within operating costs.
The taxation charge was £101m (2003: £64m). After adjusting for exceptional and
non-trading items, the tax charge on an underlying basis was £99m, representing
29 per cent of underlying profit before tax. (2003: £84m, also representing 29
per cent of underlying profit before tax).
Cash inflow during the year was £243m (2003: £272m). Average net debt was £560m
(2003: £950m). Net debt at the year-end was £80m (2003: £323m).
Net working capital was £381m (2003: £383m); inventory increased by £119m
(2003: £196m reduction); debtors reduced by £196m (2003: increased by £193m);
and creditors reduced by £75m (2003: increased by £8m). The impact of long-term
contract accounting for TotalCare Packages was a £13m reduction in debtors
(2003: £115m increase) and a £52m increase in creditors (2003: £45m). The net
asset on the balance sheet at the year-end, in respect of TotalCare packages,
was £389m (2003: £454m).
Provisions were £787m, (2003: £795m). Provisions carried forward in respect of
potential customer financing exposure amounted to £116m at the year-end (2003:
£92m).
There were no material changes to the Group's gross and net contingent
liabilities in 2004 (see note 4).
Under the FRS17 definition, after taking account of deferred taxation, the net
deficit on the Group's three main UK pension schemes amounted to £805m (2003: £
855m)
(see note 5).
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 same
amount of cash that would have been received with a cash dividend, or converted
into the same number of ordinary shares in the Group that would have been
received under the scrip dividend alternative. The issue of `B' shares will
result in significant tax benefits for the Group, by accelerating the recovery
of Advanced Corporation Tax, which will in turn benefit all our shareholders.
The proposed final payment to shareholders is equivalent to 5.00 pence per
ordinary share (2003: final payment 5.00p), making a total payment for the year
of 8.18 pence (2003: 8.18p). The final payment is payable on 4 July 2005 to
shareholders on the register on 11 March 2005. The final day of trading with
entitlement to B shares (equivalent to the ex-dividend date) is 9 March 2005.
* * * * *
An interview on the results with Rolls-Royce Chief Executive, Sir John Rose, is
available on video, audio and text on www.Rolls-Royce.com and www.cantos.com.
Photographs of directors and products are available at www.newscast.co.uk
Group profit and loss account
for the year ended December 31, 2004
2004 2003
Notes £m £m
Turnover: Group and share of joint 6,229 6,038
ventures
Sales to joint ventures 965 936
Less share of joint ventures' turnover (1,255) (1,329)
Group turnover 1 5,939 5,645
Cost of sales (4,812) (4,714)
Gross profit 1,127 931
Other operating income 73 153
Commercial, marketing and product (302) (292)
support costs
General and administrative costs (296) (288)
Research and development (net)* (282) (281)
Group operating profit 320 223
Share of operating profit of joint 49 52
ventures
Profit on sale or termination of 9 6
businesses
Loss on sale of fixed assets (2) (11)
Profit on ordinary activities before 1 376 270
interest
Net interest payable - Group (48) (66)
- joint ventures (22) (24)
Profit on ordinary activities before 306 180
taxation
Taxation (101) (64)
Profit on ordinary activities after 205 116
taxation
Equity minority interests in subsidiary (1) -
undertakings
Profit attributable to ordinary 204 116
shareholders
Payment to shareholders 6 (140) (137)
Earnings per ordinary share: 2
Underlying** 14.50p 12.20p
Basic 12.07p 7.04p
Diluted 11.64p 6.94p
*Research and development (gross) (601) (619)
**Underlying profit and earnings are
defined in note 2
Group balance sheet
at December 31, 2004
Restated*
2004 2003
£m £m
Fixed assets
Intangible assets 911 863
Tangible assets 1,626 1,750
Investments - subsidiary undertakings - -
- joint ventures 199 202
share of gross assets 1,137 1,113
share of gross liabilities (943) (916)
goodwill 5 5
- other 57 63
2,793 2,878
Current assets
Stocks 1,081 962
Debtors - amounts falling due within one year 1,357 1,497
- amounts falling due after one year 1,053 1,109
Short-term deposits and investments 730 174
Cash at bank and in hand 758 794
4,979 4,536
Creditors - amounts falling due within one year
Borrowings (204) (94)
Other creditors (2,570) (2,759)
Net current assets 2,205 1,683
Total assets less current liabilities 4,998 4,561
Creditors - amounts falling due after one year
Borrowings (1,364) (1,197)
Other creditors (540) (426)
Provisions for liabilities and charges (787) (795)
2,307 2,143
Capital and reserves
Called-up share capital 346 333
Share premium account 4 1
Revaluation reserve 89 96
Merger reserve 3 3
Capital redemption reserve 74 -
Profit and loss account 1,787 1,707
Shareholders' funds 1 2,303 2,140
Equity minority interests in subsidiary 4 3
undertakings
2,307 2,143
1.Equity shareholders' funds £2,298m (2003 £2,140m). Non-equity shareholders'
funds £5m (2003 -)
* see note 8
Group cash flow statement
for the year ended December 31, 2004
Restated*
Notes 2004 2003
£m £m
Net cash inflow from operating activities A 640 673
Dividends received from joint ventures 15 11
Returns on investments and servicing of finance B (48) (56)
Taxation paid (84) (43)
Capital expenditure and financial investment C (219) (198)
Acquisitions and disposals D 14 (16)
Equity dividends paid (33) (88)
Cash inflow before use of liquid resources and 285 283
financing
Management of liquid resources E (558) (90)
Financing F 274 (17)
Increase in cash 1 176
Reconciliation of net cash flow to movement in
net funds
Increase in cash 1 176
Cash outflow from increase in liquid resources 558 90
Cash (inflow)/outflow from (increase)/decrease in (299) 20
borrowings
Change in net funds resulting from cash flows 260 286
Borrowings of businesses disposed - 33
Finance lease additions - (10)
Amortisation of zero-coupon bonds (4) (4)
Exchange adjustments (13) (33)
Movement in net funds 243 272
Net debt at January 1 (323) (595)
Net debt at December 31 (80) (323)
* see note 8
Reconciliation of operating profit to operating cash 2004 Restated*
flows
£m 2003
£m
Operating profit 320 223
Amortisation of intangible assets 62 63
Depreciation of tangible fixed assets 223 223
Increase in provisions for liabilities and charges 7 3
(Increase)/decrease in stocks (121) 191
Decrease/(increase) in debtors 180 (188)
(Decrease)/increase in creditors (31) 158
A Net cash inflow from operating activities 640 673
Returns on investments and servicing of finance
Interest received 58 28
Interest paid (103) (79)
Interest element of finance lease payments (3) (5)
B Net cash outflow for returns on investments and (48) (56)
servicing of finance
Capital expenditure and financial investment
Disposals of unlisted investments - 5
Additions of intangible assets (110) (37)
Purchases of tangible fixed assets (175) (182)
Disposals of tangible fixed assets 66 16
C Net cash outflow for capital expenditure and (219) (198)
financial investment
Acquisitions and disposals
Acquisitions of businesses - (9)
Disposals of businesses 16 1
Investments in joint ventures (2) (8)
D Net cash inflow/(outflow) for acquisitions and 14 (16)
disposals
Management of liquid resources
Increase in short-term deposits (561) (91)
Decrease in government securities and corporate bonds 3 1
E Net cash outflow from management of liquid resources (558) (90)
Financing
Borrowings due within one year - repayment of loans (57) (245)
- increase in loans - 2
Borrowings due after one year - repayment of loans (92) (58)
- increase in loans 500 296
Capital element of finance lease payments (52) (15)
Net cash inflow/(outflow) from increase/(decrease) in 299 (20)
borrowings
Issue of ordinary shares 4 1
Net (Purchase)/Disposal of own shares (2) 2
Redemption of B Shares (27) -
F Net cash inflow/(outflow) from financing 274 (17)
*see note 8
Group statement of total recognised gains and losses
for the year ended December 31, 2004
Restated*
2004 2003
£m £m
Profit attributable to the shareholders of Rolls-Royce 204 116
Group plc
Exchange adjustments on foreign currency net (38) (3)
investments
Total recognised gains for the year 166 113
Group historical cost profits and losses
for the year ended December 31, 2004
Restated*
2004 2003
£m £m
Profit on ordinary activities before taxation 306 180
Difference between the historical cost depreciation 7 4
charge and the actual depreciation charge for the year
calculated on the revalued amount
Historical cost profit on ordinary activities before 313 184
taxation
Historical cost transfer to reserves 211 67
Reconciliations of movements in Group shareholders' funds
for the year ended December 31, 2004
Restated*
2004 2003
£m £m
At January 1 (as previously reported) 2,141 2,035
Prior year adjustment* (1) (3)
At January 1 (restated) 2,140 2,032
Total recognised gains for the year 166 113
Ordinary dividends (net of scrip dividend adjustments) (7) (8)
New ordinary share capital issued (net of expenses) 4 1
Goodwill transferred to the profit and loss account in 2 -
respect of disposal of businesses
Relating to own shares (2) 2
At December 31 2,303 2,140
*see note 8
Notes
1. Segmental analysis
Restated*
2004 2003
£m £m
Group turnover
Analysis by business:
Civil aerospace 3,040 2,694
Defence 1,374 1,398
Marine 963 1,003
Energy 489 508
Financial services 73 42
5,939 5,645
Profit before interest
Analysis by business:
Civil aerospace 165 82
Defence 155 132
Marine 40 39
Energy 8 23
Financial services 8 (6)
376 270
Underlying profit before
interest*
Analysis by business:
Civil aerospace 170 131
Defence 155 147
Marine 67 78
Energy 14 23
Financial services 9 (4)
415 375
*before exceptional and non-trading items
Net assets**
Analysis by business:
Civil aerospace 1,142 1,099
Defence 47 69
Marine 567 577
Energy 387 346
Financial services 244 375
2,387 2,466
**Net assets exclude net debt of £80m (2003 £323m)
The segmental analysis of non-trading items is: Civil aerospace £5m, Marine £
27m, Energy £6m and Financial services £1m.
* See note 8. In addition, the segmental analysis has been restated for the
transfer of the diesels business from Energy to Marine
2. Earnings per ordinary share
Basic earnings per ordinary share are calculated by dividing the profit
attributable to ordinary shareholders of £204 million (2003 £116m) by 1,690
million (2003 1,647 million) ordinary shares, being the weighted average number
of ordinary shares in issue during the year, excluding own shares held under
trust which have been treated as if they have been cancelled.
Underlying profit before taxation and earnings per ordinary share have been
calculated as follows:
Year to 31 December 2004
£m £m Pence
Profit before taxation 306
Profit attributable to ordinary shareholders 204 12.07
Exclude:
Net profit on sale of businesses (9) (9) (0.53)
Loss on sale of fixed assets* 1 1 0.06
Amortisation of goodwill 47 47 2.78
Related tax effect - 2 0.12
Underlying profit before taxation 345
Underlying profit attributable to 245
shareholders
Underlying earnings per share 14.50
Year to 31 December 2003
£m £m Pence
Profit before taxation 180
Profit attributable to ordinary shareholders 116 7.04
Exclude:
Exceptional rationalisation costs 54 54 3.27
Net profit on sale of businesses (6) (6) (0.36)
Loss on sale of fixed assets* 9 9 0.55
Amortisation of goodwill 48 48 2.91
Related tax effect - (20) (1.21)
Underlying profit before taxation 285
Underlying profit attributable to 201
shareholders
Underlying earnings per share 12.20
*Excluding lease engines and aircraft sold by financial services companies.
Diluted earnings per ordinary share are calculated by dividing the profit
attributable to ordinary shareholders of £204m (2003 £116m) by 1,752 million
(2003 1,671 million) ordinary shares, being 1,690 million (2003 1,647 million)
as above adjusted by the bonus element of existing share options of 62 million
(2003 24 million).
3. Group employees at the period end
Restated*
31 December 31 December
2004 2003
Number Number
Civil Aerospace 20,100 19,800
Defence 5,100 4,900
Marine 7,100 7,300
Energy 3,000 3,100
Financial services 100 100
35,400 35,200
* Note: The diesels business was transferred from Energy to Marine at the end
of 2003, resulting in the transfer of 900 employees.
4. Sales financing contingent liabilities
In connection with the sale of its products the Group will on some occasions
provide financing support for its customers. The Group's contingent liabilities
related to financing arrangements are spread over many years and relate to a
number of customers and a broad product portfolio. The contingent liabilities
represent the maximum gross and net exposure the Group has in respect of
delivered aircraft, regardless of the point in time at which such exposures may
arise. Exposures are not reduced to a net present value.
At December 31 2004, the total gross liabilities in respect of financing
arrangements on all delivered aircraft, less amounts insured and related
provisions, amounted to £999m (2003 £1,090m), of which £12m (2003 £39m) related
to sales financing support provided to joint ventures. Taking into account the
estimated net realisable value of the relevant security, the net contingent
liabilities in respect of these financing arrangements amounted to £189m (2003
£184m). If the value of the relevant security was reduced by 20per cent, a net
contingent liability of approximately £277m (2003 £262m) would result.
Provisions of £116m (2003 £92m) are carried forward in respect of customer
financing exposures
5. Post retirement benefits
The Accounting Standards Board has deferred the full implementation of FRS 17,
pending the introduction of International Accounting Standards. For 2004
accounts certain memorandum disclosures are required, including the value of
pension scheme assets and liabilities. At December 31 2004, after taking
account of deferred taxation the net deficit on the Group's three UK pension
schemes amounted to £805 million (2003 £855m).
6. B Shares
The Company issues B Shares to shareholders in place of a dividend. These can
be redeemed for cash or converted into ordinary shares in the Company and are
not classed as a dividend. Therefore, no accrual is made for this in the
financial statements.
7. International Financial Reporting Standards
All European Union listed companies are required to adopt International
Financial Reporting Standards (IFRS) for their financial statements from 2005,
which will include comparative information for 2004. An initial evaluation of
the impact of IFRS was provided in the 2003 annual report. The Group has
continued its preparatory work, to enable it to report under IFRS for the first
time when it announces its interim 2005 results. Prior to this, it is the
Group's intention to restate the 2004 results on an IFRS basis, to allow the
impact to be interpreted and adequately understood.
8. Preliminary results
The Group has adopted UITF 38 `Accounting for ESOP Trusts', under which own
shares have been reclassified as a deduction from shareholders' funds. The
comparatives for 2003 have been restated to reflect this.
The financial information above does not constitute the Group's statutory
accounts for the year ended December 31, 2004 or 2003. Statutory accounts for
2003 have been delivered to the Registrar of Companies, whereas those for 2004
will be delivered following the annual general meeting. The auditors have
reported on those accounts; their reports were unqualified and did not contain
a statement under section 237(2) or (3) of the Companies Act 1985.
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