Final Results

9 February 2006 ROLLS-ROYCE GROUP plc PRELIMINARY RESULTS 2005 Group Highlights * Record order book, at £22.9bn (2004 £18.9bn). * Sales increased to £6,603m. Sales on an underlying* basis increased by nine per cent. * Services revenues** increased by 12 per cent on an underlying* basis. * Profit before financing costs increased to £877m. * Underlying profit before financing costs*** increased to £679m, up 40 per cent on a like-for-like basis. * Underlying profit before taxation*** increased to £584m, up 49 per cent on a like-for-like basis. * Cash inflow of £552m (2004 £251m) * Average net debt reduced to £260m (2004 £632m). * Final payment to shareholders increased by 7.5 per cent to 5.38p per share, making a full year total of 8.72p per share. Note: All results are reported under International Financial Reporting Standards (IFRS) (see note 1). 2004 results, as permitted by IFRS 1, are not restated in respect of IAS 32/39, financial instruments. A full analysis of the impact of adopting IFRS is available at http://ir.rolls-royce.com/rr/investors/ifrs/seminar/ * see note 4. ** including 100 per cent of repair and overhaul joint ventures. *** see notes 1, 4. Sir John Rose, Chief Executive, said: "We have established positions in four global market sectors where the barriers to entry are high. Growth in our sales and order book and our consistent focus on improved efficiency underpin our expectation of further growth in profits and positive cash flow in 2006." Group Overview Rolls-Royce continued to make good financial progress in 2005, with a strong increase in profitability and cash flow. The Group's performance has been built on a consistent strategy, supported by investment in market access, technology and capability. Growth has been achieved organically through the introduction of new products, the expansion of its comprehensive aftermarket services capability and strong partnerships, as well as the successful development of past acquisitions. This has resulted in continued strong order intake and sales growth. The focus on cost reduction and increased efficiency enabled the group to mitigate the headwinds caused by commodity price inflation and an adverse trend in the achieved US dollar exchange rate. Group sales were £6,603m, an underlying increase of nine per cent, reflecting organic growth in each of the Group's market sectors. Underlying profit before tax, on a like-for-like basis, increased by 49 per cent and a cash inflow of £552 million was generated, resulting in positive net cash of £335 million on the balance sheet at the year-end. Average net debt was reduced by 59 per cent, to £260 million. Underlying earnings per share rose 55 per cent to 24.14p (2004 15.56p) and basic earnings per share rose 29 per cent to 20.11p (2004 15.56p). A final payment to shareholders has been proposed of 5.38p per share, making a total payment for the year of 8.72p per share, a 6.6 per cent increase compared to the payment in 2004. New orders in 2005 reached a record level of £11.3 billion, and brought the year-end firm order book to a record £22.9 billion, an increase of 21 per cent over 2004. Over the past 10 years, the order book has grown by 14 per cent per annum compound. Good progress was made across all four of the Group's markets. Rolls-Royce is increasingly international. During 2005 the Group incorporated a new subsidiary in Bangalore, in order to expand engineering capacity over a range of new programmes; established a joint venture in Singapore, to develop a commercially viable power system based on solid oxide fuel cell technology; opened a new marine factory in Shanghai, from which the Group's £300 million turnover merchant business will be managed; and established new sources of supply in markets such as China, Indonesia, Malaysia, Singapore and Taiwan. The Group had three key priorities during the year: * Focused investment in technology and products The Group's structured approach to technology acquisition ensures that it has `on the shelf' technologies ready to incorporate into the latest generation of products whilst acquiring the technologies required for future products. As the Group continues to address new market opportunities in each of its business sectors, the level of self-funded investment in research and development is expected to remain at approximately five per cent of Group sales. The impact of this investment on the income statement will reflect the mix and maturity of individual development programmes and will result in a significantly lower level of capitalisation of costs in 2006. During the year the Group launched a number of new programmes, notably the Trent 1700 for the A350 and the Avon 200, an upgrade of the existing Avon engine that has been so successful in the energy sector. * Operational efficiency and unit cost reduction The Group continued to make progress with its drive for greater efficiency, offsetting the impact of commodity price inflation with cost reduction activities, including increased productivity, low-cost sourcing and supply chain management. The significantly higher workload challenged the ability of the supply chain and this remains an area for attention. The impact of higher inventories, carried to facilitate the factory modernisation programme, was more than offset by tight management of financial working capital. Importantly, more efficient working practices were implemented as a pre-condition for new factory investment. * Continued development of aftermarket services Aftermarket services revenues, including 100 per cent of repair and overhaul joint ventures, increased by 12 per cent in 2005 and have grown at 11 per cent per annum compound over the last ten years. Services sales now represent 54 per cent of Group sales. This follows the successful broadening of the Group's product range, an increasing number of engines in service, and investment in a comprehensive range of aftermarket services capabilities. Increasingly, the Group is taking responsibility for the maintenance of its engines and systems under long-term service agreements, resulting in a much closer alignment with the customers' interests and a better application of the Group's skills and assets. During 2005, a number of innovative services agreements were announced in each of the Group's business sectors. Prospects Rolls-Royce is addressing four long-term growth markets. The aggregate demand for engines and services over the next 20 years is estimated to be worth approximately two trillion dollars. The Group's consistent investment in technology and new products and services enables it to respond to new market developments, creating the opportunity for organic growth in each sector. The growing number of Rolls-Royce engines in service and their long service lives are expected to generate attractive returns over decades. As the business model develops and the revenues from aftermarket services continue to grow, the Group expects to achieve positive cash flow while maintaining its level of investment in technology and product. The Group considers it is prudent to continue to strengthen its balance sheet because of the long-term nature of its programmes and the significant investments and obligations they entail. The Group also recognises the importance of dividends to shareholders and is proposing a further increase in the payment to shareholders in 2005, representing an increase of 6.6 per cent compared to the payment made in 2004. The deficit on the Group's pension schemes, after taking account of deferred taxation, was £1,154m (2004 £1,002m). The Group introduced significant changes, in 2003, to reduce the pension scheme deficit and will review further actions in the light of the actuarial review of the main scheme, which is due this year, and the changing regulatory environment. The Group has continued to pursue its strategy of hedging future net dollar revenues and at the end of 2005 had approximately $10.5 billion of forward cover at an average exchange rate of 1.67 dollars to the pound (2004 $9 billion at 1.60). The Group is using this hedge book in conjunction with cost reduction initiatives and further `dollarisation' of the cost base to manage future foreign exchange risk. The achieved exchange rate in 2005 deteriorated by four cents relative to 2004. Continued progress is expected in 2006, underpinned by the strong order book, growing services revenues and increasing efficiency. As a result, the Group expects increased profits and a positive cash flow in 2006. Enquiries: Peter Barnes-Wallis Director of Financial Communications Duncan Campbell-Smith 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 2005 BY BUSINESS SECTOR Civil Aerospace Sales: £3,510m (2004 £3,040m) Underlying profit before financing costs: £454m (2004 £194m) Rolls-Royce has established a strong market position in civil aerospace through its portfolio of competitive aero-engines, powering a broad range of aircraft from corporate jets to the largest airliners. Highlights of the Year * Orders for 246 Trent engines, worth approximately $3 billion were announced. * The Airbus A380, powered by the Trent 900 engine, made a successful maiden flight and made good progress through its comprehensive flight test programme. * Agreement was reached with Airbus for Rolls-Royce to supply the Trent 1700 to power the new A350 airliner. * The 1,000th BR710 engine was delivered to Gulfstream to power its G550 long-range business jet. * International Aero Engines (IAE) achieved a record order intake of approximately 600 engines worth over $1.5bn to Rolls-Royce. The Group made good progress with the development of its product range. The Trent 900 engine powered the Airbus A380 on its maiden flight and has now accumulated more than 4,000 hours of flying experience. The first Trent 1000 engine build, for the Boeing 787, was commenced on schedule in November and the Trent 1700 became the sixth member of the Trent engine family, following its selection by Airbus to power the A350. The Trent family celebrated the tenth anniversary of its entry into service and passed the milestone of 15 million flying hours during the year. The Group's three year moving average share of civil engine orders fell to 23 per cent, largely as a result of the high proportion of Boeing 737 aircraft, for which the Group does not offer an engine, which were ordered during the year. IAE, in which Rolls-Royce is a major shareholder, took an increasing share of the strong single aisle market, with a record order intake of approximately 600 engines worth over $1.5bn to Rolls-Royce. Civil engine deliveries increased by seven per cent, to 881, reflecting strong growth in V2500 deliveries and continuing recovery in the corporate jet market, partially offset by a decline in regional airline engine deliveries. While the decline in regional deliveries is expected to continue, the Group expects total civil engine deliveries to grow in 2006, as the Trent 900 enters service, V2500 deliveries increase and the corporate sector remains strong. The Rolls-Royce civil fleet flying hours increased by 11 per cent compared to 2004, as a result of a combination of world traffic growth and increased fleet size. The installed base of civil jet engines grew to 11,500. This provides a significant aftermarket services opportunity, which the Group is addressing with innovative long-term service arrangements for its customers. TotalCare® contracts worth more than $13 billion have now been signed, covering 80 per cent of new customers since 2001. The Group achieved record growth for its CorporateCare® programme, signing 90 contracts in 2005. Services sales increased by 10 per cent, to £2.0bn, representing 59 per cent of civil aerospace sales. Defence Aerospace Sales: £1,413m (2004 £1,374m) Underlying profit before financing costs: £180m (2004 £179m) The Group's defence business is broadly based, with a strong portfolio of products and services covering the key defence aerospace market sectors. This enables the Group to make good progress in spite of the volatility that may be experienced on individual programmes, as exemplified by the uncertainties surrounding the alternate engine for the Joint Strike Fighter following the recent US Quadrennial Defense Review. Highlights of the year * Good progress was made with the Group's development work for the Joint Strike Fighter programme. * AirTanker was awarded preferred bidder status for the UK's Future Strategic Tanker Aircraft programme. * The first series of tests was completed for the TP400 engine for the Airbus A400M military transport aircraft. * Mission Ready Management Solutions services contracts were signed with the UK Ministry of Defence (MoD) and the US Department of Defense (DoD), covering combat, transport and trainer aircraft engines. * A new Operations Centre was opened in Bristol as part of the growing in-service support business for military engines. The Group made good progress with its development work for the Joint Strike Fighter (JSF) programme and accumulated more than 3,000 hours of STOVL (short take off vertical landing) testing. In December, an agreement was signed by the Governments of the Kingdom of Saudi Arabia and the UK, under which the Royal Saudi Air Force will acquire Eurofighter Typhoon aircraft, powered by the EJ200 engine. In the transport sector, Rolls-Royce is a member of the European consortium that successfully completed the first series of tests for the TP400 turboprop engine being developed for the A400M military transport aircraft. The DoD approved full production for the V-22 Osprey aircraft, powered by Rolls-Royce AE1107C-Liberty engines, and placed equipment and services orders relating to the engine worth more than $64 million. Rolls-Royce is a 20 per cent shareholder in the AirTanker consortium, which was awarded preferred bidder status for the Future Strategic Tanker Aircraft programme by the UK MoD. Australia selected the Rolls-Royce Turbomeca RTM 322 engine to power its NH90 helicopter fleet and the first RTM 322 to be assembled under license by KHI, in Japan, was delivered to the Japan Defense Agency and the Japan Maritime Self Defense Force. The provision of services contributed 55 per cent of the Group's defence sales. New services contracts announced during the year included: a £185 million service contract for the RB199 engines which power the MoD's fleet of Tornado aircraft; a renewal of the contract for the support of the F405 (Adour) engine in the US Navy's T-45 training aircraft worth $63 million; a £57 million contract to support the EJ200 engines that power the UK's Typhoon fleet; and a £40 million contract to support the UK's fleet of AE2100 engines that power the C-130J. A new Operations Centre was opened in Bristol as part of the growing in-service support business for military engines. Marine Sales: £1,097m (2004 £963m) Underlying profit before financing costs: £89m (2004 £78m) The Rolls-Royce marine business is a global leader in marine propulsion, engineering and hydrodynamic expertise, with a broad product range and full systems integration capability Highlights of the year * A £137 million service and support contract was secured for ships in service with the Royal Navy and the French, Belgian and Royal Netherlands navies. * The first MT 30 marine gas turbine was delivered to power land-based test runs of the US Navy's DD(X) destroyer. * Lockheed Martin installed two MT 30 marine gas turbines on the first prototype Littoral Combat Ship for the US Navy. * A Rolls-Royce University Technology Centre (UTC) was established in Norway to conduct research programmes in the marine sector. * A new marine facility in Shanghai was opened. The recovery of the offshore oil and gas support market continued and Rolls-Royce secured a good share of the available business. The 500th order was placed for a Rolls-Royce UT-Design vessel, one of the most successful designs in the history of commercial shipping. UT-Design ships are sold as complete systems and are fitted with a range of Rolls-Royce equipment. The Group is developing rim driven tunnel thruster technology, which is likely to have a major impact on marine propulsion in the future. The first thrusters are to be fitted to an offshore support vessel but the technology will also be suitable for merchant and cruise ships. Asia's shipbuilding accounts for nearly 80 per cent of all global, commercial ship construction. During 2005 Rolls-Royce expanded its presence in Asia, opening a new factory in Shanghai, which, together with its existing factory in Korea, creates a north-east Asian production hub. In the naval market sector, Rolls-Royce achieved a major development milestone when the MT30 gas turbine was awarded American Bureau of Shipping (ABS) certification. In February 2005, the first MT30 marine gas turbine generator set was delivered to the US Navy to power land-based test runs for the DD(X) destroyer. Lockheed Martin installed two MT30 gas turbines on the first prototype Littoral Combat Ship for the US navy. These gas turbines are the largest ever installed on a Navy ship. The Group is working with the US Navy as prime contractor on the advanced electric ship demonstrator project that will be the proving ground for the Rolls-Royce AWJ-21 water jet, the next generation of naval water jet. In 2005, 40 per cent of marine sales were derived from services and support activities. The Group announced a £137 million long-term service and support contract for Olympus and Tyne engines that power 27 ships in service with the Royal Navy and the French, Belgian and Royal Netherlands navies. Energy Sales: £505m (2004 £489m) Underlying profit before financing costs: £4m (2004 £14m) The Rolls-Royce energy business supplies a wide range of gas turbine packages to the worldwide oil & gas and power generation markets, with more than 4,000 industrial gas turbines sold and over 140 million hours of operating experience. Highlights of the year * The first 12 industrial RB211-based compression packages were installed and commissioned for the West-East Pipeline Project in China, four months ahead of schedule. * Six industrial Trent-based compression packages were delivered to Qatar for the Middle East Dolphin project. * Sharjah Electricity and Water Authority chose two Trent 60 power generation sets for the latest phase of the Wasit power plant expansion and the first Trent 60 for Asia was ordered by a major electric power producer in Yinchuan, China. * Ten RB211 industrial gas turbine power generation units were ordered to provide electrical power for Floating Production, Storage and Offloading (FPSO) vessels operated by Total, off the coast of Nigeria and by Petrobras, offshore Brazil. * The 500th industrial RB211 was shipped from the Rolls-Royce assembly and test facility in Montreal. * A joint venture was established with a Singaporean consortium to continue development work on solid-oxide fuel cell technology. The financial results for 2005 reflect a strong performance by the oil & gas business, offset by the slow recovery of the power generation market and continued investment in new product technologies. In oil & gas, the business continued to strengthen its presence in emerging markets, including orders worth over $120 million for projects in West Africa, over $100 million from customers in Asia, and over $70 million for gas turbine packages for Brazil. The international power generation market has shown signs of recovery and the Group won important new orders for the industrial Trent in the United Arab Emirates and China. In 2005, the Group continued to invest in its fuel cell technology. Rolls-Royce and the Singaporean consortium, EnerTek Singapore Pte Ltd, will between them invest a further US$100 million in the project. In addition, Rolls-Royce Fuel Cell Systems Limited (RRFCS) opened a new facility that will pilot the production of ceramic components for use in fuel cell systems. RRFCS is developing solid oxide fuel cell systems for megawatt-scale, stationary power generation applications with the goal of introducing a competitive product this decade. In the services sector the Group achieved a record order intake in 2005. Strong growth in long-term service agreements was maintained, with a further £93 million of business secured during the year. Services revenues contributed 38 per cent of energy sector sales. Financial Services Sales: £78m (2004 £81m) Underlying loss before financing costs: £(3)m (2004 £(7)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 281 engines, of which 98 per cent by value were on lease to 35 customers. Pembroke Group, the Group's joint venture aircraft leasing business, owned a portfolio of 19 aircraft. These are all on lease to 12 customers. A charge of £13 million was incorporated in the 2005 results to reflect the current market valuation of Pembroke's aircraft assets.Rolls-Royce Power Ventures, the Group's power project developer, has 11 power generation projects underway. The business is being restructured and proceeds of £49 million were raised from asset sales. FINANCIAL REVIEW The firm order book, at constant exchange rates, was £22.9bn (2004 £18.9bn). In addition, a further £1.5bn had been announced (2004 £2.4 bn). Aftermarket services represented 38 per cent of the firm order book (2004 39 per cent). Sales increased by 11 per cent, compared with 2004, at £6,603m (2004 £5,947m). Sales on an underlying basis grew by nine per cent. Gross profit was £1,679m (2004 £1,203m). Payments to Risk and Revenue Sharing Partners (RRSPs), charged in cost of sales, amounted to £146m(2004 £142m on a like-for-like basis). Underlying profit before tax was £584m (2004 £364m). Underlying earnings per share increased by 55 per cent, to 24.14p (2004 15.56p). Gross research and development investment was £663m (2004 £601m). Net research and development investment charged to the income statement was £282m (2004 £288m). Receipts from RRSPs in respect of new programme developments, shown as other operating income, were £60m (2004 £73m). Restructuring costs of £48m (2004 £37m) were charged within operating costs. The taxation charge was £130m (2004 £100m). The taxation charge on an underlying basis was £167m, representing 29 per cent of underlying profit before tax. (2004 £100m, representing 28 per cent of underlying profit before tax). Cash inflow during the year was £552m (2004 £251m), benefiting from stronger operational cash flow plus £180m increase from customer advances across the Group. Average net debt was £260m (2004 £632m). The net cash balance at the year-end was £335m (2004 net debt £217m). The impact of long-term contract accounting for TotalCare packages was a £20m increase in debtors (2004 £13m reduction) and an £42m increase in creditors (2004 £21m increase). The overall net position of assets and liabilities on the balance sheet for TotalCare packages was an asset of £367m (2004 £389m). Provisions were £361m (2004 £393m). Provisions carried forward in respect of potential customer financing exposure amounted to £90m at the year-end (2004 £92m). There were no material changes to the Group's gross and net contingent liabilities in 2005 (see note 11). The pension scheme deficit, after taking account of deferred taxation, was £1,154m (2004 £1,002m), having incorporated current mortality assumptions for the Group's UK schemes (see note 12). The next actuarial valuation of the Group's main pension scheme will be in 2006. 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 shareholders. The proposed final payment to shareholders is equivalent to 5.38 pence per ordinary share (2004 final payment 5.00p), making a total payment for the year of 8.72 pence (2004 8.18p). The final payment is payable on 3 July 2006 to shareholders on the register on 10 March 2006. The final day of trading with entitlement to B shares (equivalent to the ex-dividend date) is 8 March 2006. Consolidated Income Statement For the year ended December 31, 2005 2005 2004 £m £m Revenue 6,603 5,947 Cost of sales (4,924) (4,744) Gross profit 1,679 1,203 Other operating income 60 73 Commercial and administrative costs (624) (599) Research and development costs (282) (288) Share of profit of joint ventures 46 19 Group operating profit 879 408 (Loss)/Profit on sale of businesses (2) 9 Profit before financing costs 877 417 Financial income 442 372 Financial expenses (842) (425) Net financing costs* (note 5) (400) (53) Profit before taxation ** 477 364 Taxation - UK (61) (10) Taxation - Overseas (69) (90) Profit for the period 347 264 Attributable to: Equity holders of the parent 350 263 Minority interest (3) 1 Profit for the period 347 264 Payments to shareholders (154) (140) Earnings per ordinary share Basic 20.11p 15.56p Diluted 19.31p 15.05p * Net interest payable (39) (52) ** Underlying profit before taxation (note 3) 584 364 Note: All results are reported under International Financial Reporting Standards (IFRS). 2004 results, as permitted by IFRS 1, are not restated in respect of IAS 32/39, financial instruments. A full analysis of the impact of adopting IFRS is available at http://ir.rolls-royce.com/rr/investors/ifrs/ seminars Consolidated Balance Sheet at December 31, 2005 2005 2004 £m £m ASSETS Non-current assets Intangible assets (note 6) 1,281 1,227 Property, plant and equipment 1,683 1,672 Investments in joint ventures 247 211 Other investments 52 57 Deferred tax assets 439 318 3,702 3,485 Current assets Inventory 1,309 1,090 Trade and other receivables 2,047 2,049 Taxation recoverable 3 2 Other financial assets 464 - Short-term investments 37 36 Cash and cash equivalents 1,757 1,452 5,617 4,629 Total assets 9,319 8,114 LIABILITIES Current liabilities Borrowings (75) (207) Other financial liabilities (234) - Trade and other payables (2,689) (2,395) Current tax liabilities (171) (176) Provisions (138) (173) (3,307) (2,951) Non-current liabilities Borrowings (1,458) (1,430) Other financial liabilities (339) - Other payables (650) (543) Deferred tax liabilities (178) (115) Provisions (223) (220) Post retirement benefit obligations (1,659) (1,409) (4,507) (3,717) Total liabilities (7,814) (6,668) Net assets 1,505 1,446 EQUITY Capital and Reserves Called up share capital 352 346 Share premium account 30 4 Other reserves 605 39 Retained earnings 512 1,053 Equity attributable to equity holders of the 1,499 1,442 parent Minority interest 6 4 Total equity 1,505 1,446 Consolidated Cash Flow Statement Year to Year to 31 December 31 December 2005 2004 £m £m Cash flows from operating activities Profit for the period 477 364 Depreciation and amortisation 254 299 Decrease in provisions (31) (9) Decrease in working capital 247 33 Decrease in fair value of financial assets and 283 - liabilities Other non cash movements (145) (8) Taxation paid (60) (84) Dividends received from joint ventures 35 15 Net cash inflow from operating activities 1,060 610 Cash flows from investing activities Disposals of unlisted investments 5 - Additions to intangible assets (116) (142) Purchases of property, plant and equipment (235) (175) Disposals of property, plant and equipment 69 66 Disposals of businesses 1 16 Investments in joint ventures (13) (2) Net cash outflow from investing activities (289) (237) Cash flows from financing activities (Decrease)/increase in borrowings (207) 348 Capital element of finance lease payments (11) (52) Net cash (outflow)/inflow from (decrease)/increase (218) 296 in borrowings (Increase)/decrease in government securities and (1) 3 corporate bonds Net interest paid (49) (52) Payments to shareholders and issue of shares (26) (56) Settlement of financial liabilities to purchase own (149) (2) shares Net cash (outflow)/inflow from financing activities (443) 189 Net increase in cash and cash equivalents 328 562 Cash and cash equivalents at January 1 1,439 909 Exchange and other non-cash adjustments 46 (32) Adjustment on implementation of IAS 32 and IAS 39 (68) - Cash and cash equivalents at period end 1,745 1,439 Reconciliation of increase in cash and cash equivalents to movement in net funds Increase in cash and cash equivalents 328 562 Cashflow from decrease/(increase) in government 1 (3) securities and corporate bonds Net cash outflow/(inflow) from decrease/(increase) 218 (296) in borrowings Change in net funds resulting from cash flows 547 263 Exchange and other non-cash adjustments 5 (12) Fair value adjustments 47 - Movement in net funds 599 251 Net debt at January 1 (149) (400) Adjustment on implementation of IAS 32 and IAS 39 (189) - 261 (149) Fair value of swaps hedging fixed rate borrowings 74 - Net funds/(debt) at period end 335 (149) Consolidated Statement of Recognised Income and Expense For the year ended December 31, 2005 2005 2004 £m £m Foreign exchange adjustments 49 (38) Actuarial losses (282) (7) Deferred taxation on actuarial losses 84 2 Transfers from hedging reserve (324) - Transfers from cash flow hedging reserve 3 - Other adjustments - 2 Net expense recognised directly in equity (470) (41) Profit for the period 347 264 Total recognised income and expense for the (123) 223 period Attributable to: Equity holders of the parent (120) 222 Minority interest (3) 1 Total recognised income and expense for the (123) 223 period Total recognised income and expense for the (123) 223 period Adjustments relating to adoption of IAS 32 and 151 - IAS 39 from January 1, 2005 28 223 Summary of movements in equity For the year ended December 31, 2005 2005 2004 £m £m At January 1 (as previously reported under UK 1,446 2,143 GAAP) Adjustments on adoption of IFRS from January - (927) 1, 2004 At January 1 1,446 1,216 Recognised income and expense for the period (123) 223 Adjustments relating to adoption of IAS 32 and 151 - IAS 39 from January 1, 2005 Scrip dividend adjustments - 20 Net movement of B Shares (54) (27) New ordinary share capital issued (net of 30 4 expenses) Relating to own shares 2 (2) Share-based payment adjustment 48 12 Disposal of shares in subsidiary to a minority 5 - interest At December 31 1,505 1,446 Attributable to: Equity holders of the parent 1,499 1,442 Minority interest 6 4 Total equity 1,505 1,446 Notes 1. Basis of preparation The attached financial statements are the Group's first financial statements following the adoption of International Financial Reporting Standards (IFRS). These financial statements have been prepared in accordance with IFRS adopted for use in the EU ("adopted IFRS") in accordance with EU law (IAS Regulation EC 1606/2002). As allowed by IFRS 1 `First-time adoption of IFRS', the Group adopted IAS 32 `Financial instruments: disclosure and presentation' and IAS 39 `Financial instruments: recognition and measurement', prospectively from January 1, 2005. Therefore, until December 31, 2004, the Group continued to hedge account for forecast foreign exchange transactions and commodity exposures in accordance with UK GAAP, and hence the comparative financial statements exclude the impact of these standards. The Group has determined that its existing hedging strategy is in the best interests of the business and its shareholders. It is not, therefore, altering its hedging activities in order to achieve a particular accounting presentation under IFRS. In applying IAS 32 and IAS 39, the Group has chosen not to seek to hedge account its future foreign exchange and commodity transactions. On transition to IAS 32 and IAS 39, the Group was required to calculate the fair value of its foreign exchange and commodity contracts and record these in a hedging reserve. The balance on this reserve will be released to the income statement based on the expected maturities of the contracts at the transition date. On 14 April 2005, the Group published an analysis of the impact of adopting IFRS from January 1, 2004 - News Release available from the company's web site at www.rolls-royce.com. This included income statement, balance sheet and cashflow reconciliations, as well as details of the accounting policies applied in restating its financial statements for the year ended December 31, 2004 and as at January 1, 2005. Some small adjustments have been made to these statements to reflect reclassifications more accurately. The financial information set out above does not constitute the company's statutory accounts for the years ended December 31, 2005 or 2004. Statutory accounts for 2004, which were prepared under UK GAAP, have been delivered to the registrar of companies, and those for 2005, prepared under accounting standards adopted by the EU, will be delivered in due course. The auditors have reported on those accounts; their reports were (i) unqualified, (ii) did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their reports and (iii) did not contain statements under section 237(2) or (3) of the Companies Act 1985 2. Analysis by business segment 2005 2004 £m £m Revenue Civil aerospace 3,510 3,040 Defence 1,413 1,374 Marine 1,097 963 Energy 505 489 Financial services 78 81 6,603 5,947 Profit before financing costs Civil aerospace 659 194 Defence 177 179 Marine 87 78 Energy 2 14 Financial services (3) (7) Central costs (45) (41) 877 417 Underlying profit before financing costs* Civil aerospace 454 194 Defence 180 179 Marine 89 78 Energy 4 14 Financial services (3) (7) Central costs (45) (41) 679 417 *excluding unrealised gains on fair value adjustments (see note 3) Net assets/liabilities Civil aerospace 1,278 1,343 Defence (59) 51 Marine 592 565 Energy 314 324 Financial services 199 314 Unallocated pension liabilities (1,154) (1,002) Net cash/(debt) 335 (149) Net assets 1,505 1,446 3. Earnings per ordinary share and underlying profit reconciliation The Group seeks to present a measure of underlying performance which excludes items considered to be non-operating in nature. Underlying profit excludes the unrealised amounts arising from revaluations required by IAS 32 and IAS 39, and includes the realised amounts arising from settled hedging transactions. The calculation of underlying profit, and underlying earnings per share is shown below. For the year to 31 December 2004, IAS 32 and 39 have not been applied, and consequently no adjustment is required. Basic earnings per ordinary share are calculated by dividing the profit attributable to ordinary shareholders of £350m (2004 £263m) by 1,740 million (2004 1,690 million) ordinary shares, being the average number of ordinary shares in issue during the period, excluding own shares held under trust which have been treated as if they had been cancelled. Year to 31 December 2005 £m £m £m Pence Profit before financing costs 877 Profit before taxation 477 Profit attributable to equity holders of 350 20.11 the parent Adjust for: Release of hedge reserves (note 9) (452) (452) (452) (25.97) Unrealised fair value changes to - 345 345 derivative 19.83 contracts (note 7) Revaluation of trading assets and - (78) (78) (4.49) liabilities Exchange differences and adjustments - (30) (30) relating (1.72) to Risk and Revenue Sharing Partnerships (note 8) Realised gains on settled derivative 328 396 396 22.76 contracts (note 7) Foreign exchange derivative gains carried (74) (74) (74) (4.25) forward in contract accounting (note 7) Related tax effect - - (37) (2.13) Underlying profit before financing costs 679 Underlying profit before taxation 584 Underlying profit for the period 420 attributable to equity holders of the parent Underlying earnings per share 24.14 Diluted earnings per ordinary share, are calculated by dividing the profit attributable to ordinary shareholders of £350m (2004 £263m) by 1,813 million (2004 1,747 million) ordinary shares, being 1,740 million (2004 1,690 million) as above, adjusted by the bonus element of existing share options of 73 million (2004 57 million). In 2004, as the Group did not retrospectively adopt IAS 32 and IAS 39, there were no adjustments to headline earnings, and therefore headline and underlying earnings were identical at 15.56p. 4. Derivation of underlying and "like-for-like" results Year on Year 2005 2004 Changes (%) £m £m Sales: Sales 6,603 Adjustment for FX (principally civil aerospace) (145) Underlying Sales 6,458 5,947 9% Group services sales: Sales 3,542 Adjustment for FX (principally civil aerospace) (85) Underlying services sales 3,457 3,231 7% Adjustment to reflect 100% of repair and 405 228 overhaul JVs Underlying service sales (including 100% repair 3,862 3,459 12% and overhaul JVs) Profit before finance costs: Underlying profit before finance costs (See 679 417 note 3) 2004 treatment of financial RRSP net charges 69 Like-for-like profit before finance costs 679 486 40% Profit before tax: Underlying profit before tax 584 364 2004 treatment of financial RRSP net charges 69 Equivalent notional finance charge (41) Like-for-like profit before tax 584 392 49% 5. Net financing costs 2005 2004 £m £m Interest receivable 65 58 Gains on commodity derivatives 54 - Expected return on pension scheme assets 312 314 Net foreign exchange gains 11 - Financial income 442 372 Interest payable (104) (110) Fair value losses on foreign currency (399) - contracts Finance charge relating to financial risk (13) - and revenue sharing partnerships (Note 8) Interest on pension scheme liabilities (321) (315) Other financing charges (5) - Financial expenses (842) (425) Net financing costs (400) (53) Analysed as: Net interest payable (39) (52) Net other financing expenses (361) (1) Net financing costs (400) (53) 6. Intangible assets Goodwill Certification Development Recoverable Total and costs engine Participation costs fees £m £m £m £m £m Cost: At January 1, 2005 759 274 311 229 1,573 Exchange (8) - - - (8) adjustments Additions at cost 10 70 36 116 At December 31, 751 284 381 265 1,681 2005 Accumulated depreciation: At January 1, 2005 - 129 103 114 346 Provided during the - 9 13 32 54 year At December 31, - 138 116 146 400 2005 Net book value at 751 146 265 119 1,281 December 31, 2005 Net book value at 759 145 208 115 1,227 December 31, 2004 7. Foreign exchange and commodity financial assets Movements in the fair value of foreign exchange and commodity contracts are as follows: Foreign Commodity Total exchange £m £m £m On adoption of IAS 32 and IAS 39 on January 986 9 995 1, 2005 Fair value changes to derivative contracts (399) 54 (345) Fair value changes to fair value hedges 5 - 5 Fair value relating to contracts utilised* (364) (32) (396) Fair value at period end 228 31 259 * fair value of utilised contracts carried 74 - 74 forward in contract accounting balances 8. Financial Risk and Revenue Sharing Partnerships (RRSPs) Movements in the recognised value of RRSPs are as follows: £m £m On adoption of IAS 32 and IAS 39 on January 1, 2005 (468) Net cash flows to partners 58 Financing charge (43) Excluded from underlying profit: -Exchange adjustments (56) -Restructuring of RRSP agreement and forecast 86 adjustments Adjustment to underlying profit (see note 3) 30 Net Finance charge within the Income Statement (13) (13) Fair value at December 31, 2005 (423) 9. Foreign exchange and commodity hedge reserve movements Movements in the foreign exchange and commodity hedge reserves excluding deferred taxation are as follows: Foreign Commodity Total exchange £m £m £m On adoption of IAS 32 and IAS 39 on January 996 9 1,005 1, 2005* Transferred to income statement** (458) (4) (462) At December 31, 2005 538 5 543 * Deferred tax on opening balance (299) (3) (302) ** Deferred tax on amount transferred 137 - 137 Including £10m in respect of derivatives settled prior to transition to IFRS, the overall adjustment to underlying profit is £452m (see note 3) 10. Group employees at period end 2005 2004 Number Number Civil aerospace 21,000 20,100 Defence 5,200 5,100 Marine 7,200 7,100 Energy 2,700 3,000 Financial services 100 100 36,200 35,400 11. 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. Under UK GAAP, contingent liabilities were reported: (a) at the full potential exposure regardless of the point in time at which such exposures may arise; and (b) in sterling taking account of forward exchange contracts held. Following the adoption of IFRS, the Group has reviewed this policy and has concluded that it is more appropriate to report contingent liabilities on a discounted basis. As directors consider the likelihood of these contingent liabilities crystallising to be remote, this amount does not represent a present value. However, the amounts will be discounted at the Group's borrowing rate to reflect the time span over which these exposures could arise. In addition, following the decision to cease hedge accounting from January 1, 2005, it is no longer appropriate to take account of forward exchange contracts. As the contingent liabilities are denominated in US dollars, this amount will be reported, together with the sterling equivalent at the reporting date spot rate. Applying this revised policy the discounted value of the total gross contingent liabilities relating to financing arrangements on all delivered aircraft less insurance arrangements and relevant provisions amounted to $1,097m (£638m, 2004 $1,143m, £595m). Taking into account the net realisable value of the relevant security, the discounted value of the net contingent liabilities in respect of financing arrangements on all delivered aircraft amounted to $259m (£150m, 2004 $294m, £153m). Sensitivity calculations are complex, but for example, if the value of the relevant security was reduced by 20%, a net contingent liability with a discounted value of approximately $363m (£211m, 2004 $403m, £210m) would result. There are also net contingent liabilities in respect of undelivered aircraft, but it is not considered practicable to estimate these as deliveries can be many years in the future, and the relevant financing will only be put in place at the appropriate time. 12. Pensions and other post-retirement benefits The net pension scheme deficit, after taking account of deferred taxation, was £1,154m (2004 £1,002m). The gross pension scheme deficit, before deferred tax, has increased to £1,659m (2004 £1,409m) having incorporated current mortality assumptions for the Group's UK pension schemes. A charge of £132m (2004 £103m) for pensions and other post-retirement benefits is included in the income statement. 13. Share-based payments In accordance with IFRS 2 a charge of £26m (2004:£19m) relating to the fair value of share-based schemes granted since November 7, 2002 is included in the income statement.

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