Half-yearly Report

July 28, 2011 ROLLS-ROYCE HOLDINGS PLC HALF-YEARLY 2011 RESULTS Group Highlights - £8.7bn of new orders: record order book of £61.4bn. - Underlying revenues up four per cent to £5.46bn. - Underlying profit before tax, up 28 per cent to £595m, benefiting from one-off trading items. - First half payment to shareholders up eight per cent to 6.9 pence per share. - Exclusive agreement to power the Airbus A350-1000. - Over 94 per cent of shares secured in the joint Public Tender Offer for Tognum AG. - Full year Group profit guidance for 2011 confirmed. H1 11 H1 10 +/- Order book £61.4bn £59.2bn* +4% Underlying revenues** £5.46bn £5.26bn +4% Underlying profit before tax** £595m £465m +28% Underlying earnings per share 23.89p 18.72p +28% Reported revenues £5.36bn £5.42bn -1% Reported profit before financing £716m £594m +21% Net cash £1.45bn £1.53bn* -5% Half-year payment to shareholders 6.90p 6.40p +8% * Full year 2010 data ** See note 2 on page 19 for explanation John Rishton, Chief Executive, said: "Since taking over from Sir John Rose in April, I have had the chance to travel extensively, meeting customers and seeing a broad range of Rolls-Royce's capabilities. It has confirmed my view that this is an outstanding company with a proven strategy and many choices about how and where it can grow in the future. "Performance in the first half of the year was strong with our order book and underlying profit showing solid growth, enabling an increased payment to shareholders. This demonstrates the resilience of our strategy that is based on a diverse portfolio and access to global markets. "Completion of the acquisition, with Daimler, of the German diesel engines group Tognum will give us further opportunities for profitable growth and add significantly to the breadth and balance of our portfolio. "For the full year, we continue to expect good growth in underlying profit and, excluding the effect of the Tognum investment, a modest cash inflow". Group Overview Rolls-Royce benefits from a consistent and long-term strategy which has given us a broad installed base of power systems and a record order book of £61.4bn. This order book and our strong market position reinforce our belief that the Group's revenues will double in the next decade through organic growth alone. Successful implementation, with Daimler, of our joint plans for Tognum AG (Tognum) will accelerate that growth. The knowledge that we will grow significantly in the coming years gives us the confidence to continue investing in our portfolio and operations. These investments will enable us to meet our customer commitments and improve operational effectiveness. In the previous three years we have invested over £4bn in technology and infrastructure. This programme of investment continued in the first half: - Our new disc manufacturing facility opened in Crosspointe, Virginia, USA. - Equipment testing started at our new manufacturing, research and training facilities in Singapore. - Building works continued, with our partners, at the advanced manufacturing research centres in Ansty, Sheffield and Bristol - these sites remain on track for second half openings. - New Marine services centres were opened in Rotterdam in the Netherlands, Gdynia in Poland and Walvis Bay in Namibia - more will open in the second half. - The first production BR725 engines for the Gulfstream G650 were manufactured in Germany. The first half was also notable for two important decisions to expand our portfolio: Joint Public Tender Offer for Tognum Our 50:50 joint venture with Daimler to acquire Tognum will combine the strengths of three world-class companies to create a leader in integrated solutions for industrial engines, systems and services. This is a global market, worth €30bn annually, that is seeing significant growth. With complementary product ranges, a strong technology portfolio and good aftermarket opportunities, we are confident that this joint venture will create opportunities and add scale to our Marine and Energy businesses. Launch of the higher thrust Trent XWB for the A350-1000 We have agreed with Airbus SAS to provide engines on an exclusive basis for the new extended-range A350-1000 aircraft. Our position across all A350 XWB variants is a testament to our technology, which is setting new standards of efficiency and performance. The Trent XWB has already become the fastest selling Trent engine with almost 1,200 firm engine orders from 36 customers included in the orderbook. Before it has even flown, the Trent XWB has secured a similar number of engine orders to the market-leading Trent 700 that has been in service since 1995. Group Trading Summary General - The difficulties faced by the global economy and by those governments with budgetary imbalances are well publicised. However, due to the diversity of our businesses, customers and programmes and the strength of our product line-up, demand for our products and services remains robust, particularly in developing markets. - The order book benefited from new first half orders of £8.7bn, up 60 per cent on H1 2010, comprising £6.5bn in Civil Aerospace, £0.8bn in Defence Aerospace, £1.0bn in Marine and £0.4bn in Energy. The order book provides good visibility of growth for many years to come. Income Statement - Underlying revenues, up four per cent to £5.46bn, included ten per cent growth in services revenues (£2.87bn), partially offset by a two per cent reduction in Original Equipment (OE) revenues (£2.59bn). OE performance included strong growth in Civil Aerospace (up 22 per cent) and improvement in the achieved USD exchange rate. This growth was more than offset by the anticipated reduction in Marine OE revenues (down 25 per cent). - Underlying services revenues continued to benefit from the increased size of the installed base and expansion of our services network. Defence Aerospace benefited from one-off contract termination settlements resulting from the Strategic Defence and Security Review (SDSR) of the UK Ministry of Defence (MoD). Marine services saw further double-digit growth. - Underlying profit before tax, up 28 per cent to £595m, was helped by the increased size of the installed base, better revenue mix, the improved achieved USD exchange rate and better productivity that broadly offset inflationary pressures as expected. As is normal, there were a number of one-off items in the period that are explained further in the business reviews, the most significant of which relates to a £60m benefit from the SDSR settlements. Underlying earnings per share (UEPS) improved 28 per cent compared with H1 2010. Balance Sheet - The balance sheet remains strong with net cash at period end of £1.45bn, down from £1.53bn at the end of 2010. Average net cash for the first half reduced by £135m to £780m from the same period in 2010 due to the phasing of acquisition spend in 2010 and foreign exchange. Debt maturities remain well spread through 2019 and the credit ratings agencies provide strong debt ratings for Rolls-Royce with stable or positive outlooks. - Pension liabilities remain stable with no significant change expected to the ongoing funding levels of the UK pension schemes in 2011 or 2012. - Customer financing commitments remain modest. Cash Flow - A modest cash outflow of £82m resulted from the continued investment programme in both tangible and intangible assets, an increase in net working capital, in part reflecting supply chain disruption around the tragic events in Japan, lower customer deposits, mainly in Marine and Energy, and the purchase of shares in Tognum AG. Group Prospects Confirming full year 2011 guidance for underlying revenues and underlying profit: For the full year, underlying revenues are expected to grow modestly in 2011 as we experience strong OE growth in Civil Aerospace and Defence Aerospace together with further growth in services activities from all businesses. This growth in revenues will be partially offset by a slowdown in OE revenues in the Marine business. Group underlying profit before tax for 2011 is expected to see good growth resulting from a strong trading performance in Civil Aerospace and the one-off settlements in Defence Aerospace. The Civil Aerospace performance includes a better revenue mix, an improved achieved USD exchange rate and a continued focus on cost control, more than offsetting higher than expected research and development (R&D) charges and the consequences of the Japanese earthquake. The Marine and Energy businesses are expected to deliver broadly similar profit performances to 2010. Excluding the implications of the Tognum acquisition and after a modest cash inflow for the full year, average net cash balances are expected to remain similar to those of the first half of 2011. The implications of the Tognum joint public tender offer on 2011 performance: As a joint venture, Tognum will be equity-accounted and therefore will have no impact on the Group's 2011 revenues. The associated net funding costs are expected to broadly offset any 2011 operating profit benefit. We do not therefore expect any significant impact on the Group's underlying profit before tax. The 2011 cash consideration for the Group of the Tognum acquisition is expected to be around £1.3bn. Enquiries: Investors: Media: Mark Alflatt Josh Rosenstock Director of Financial Communications Director of External Communications Rolls-Royce plc Rolls-Royce plc Tel: +44 (0)20 7227 9237 Tel: +44 (0)20 7227 9163 mark.alflatt@rolls-royce.com josh.rosenstock@rolls-royce.com Photographs and broadcast-standard video are available at www.rolls-royce.com. A PDF copy of this report can be downloaded from www.rolls-royce.com/investors. This Half-Yearly Results Announcement contains certain forward-looking statements. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. In particular, all statements that express forecasts, expectations and projections with respect to future matters, including trends in results of operations, margins, growth rates, overall market trends, the impact of interest or exchange rates, the availability of financing to the Group, anticipated cost savings or synergies and the completion of the Group's strategic transactions, are forward-looking statements. By their nature, these statements and forecasts involve risk and uncertainty because they relate to events and depend on circumstances that may or may not occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts. The forward-looking statements reflect the knowledge and information available at the date of preparation of this Half-Yearly Results Announcement, and will not be updated during the year. Nothing in this Half-Yearly Results Announcement should be construed as a profit forecast. Business Segment Reviews N.B. Commentaries in all business segment reviews relate to underlying revenues and underlying profits, unless specifically noted. Civil Aerospace H1 11 H1 10 +/- Order book (£bn) 51.3 48.5* +6% Engine deliveries 462 416 +11% Underlying revenues (£m) 2,604 2,294 +14% Underlying OE revenues (£m) 1,047 858 +22% Underlying services revenues (£m) 1,557 1,436 +8% Underlying profit before financing (£m) 250 210 +19% * Full year 2010 data Financial - New orders of £6.5bn (£2.9bn in H1 2010) contributed to a six per cent increase in the record order book. The order book contains almost 5,000 engines that will add, over time, around 250m lbs of installed thrust, or 65 per cent, to our current installed base. Significant orders in the period included: > Trent 700 engines and TotalCare support for 15 Airbus A330s by Singapore Airlines. > Trent 900 engines and TotalCare support for six Airbus A380s by Asiana Airlines. > Trent 1000 TotalCare support for nine Boeing 787s by Norwegian Airlines. > Trent XWB TotalCare support for 70 Airbus A350 XWBs by Emirates Airlines. - Revenues increased by 14 per cent. There was a 22 per cent growth in OE revenues, including significantly higher deliveries of wide-body and Corporate & Regional engines. Services revenues grew by eight per cent, partly helped by a better achieved USD exchange rate in the period. - Profit increased by 19 per cent due to increased revenues, a nine cent improvement in the achieved USD exchange rate and improved productivity. This growth was tempered by higher R&D charges, further launch costs and modest costs related to the Trent 900 event in 2010, as previously guided. Portfolio - The exclusive agreement with Airbus SAS to develop a higher thrust Trent XWB engine for the extended range A350-1000 aircraft will further broaden our portfolio and strengthen our wide-body market position. - The Trent 1000 will power the Boeing 787 Dreamliner that enters commercial service later this year. This marks the start of engine deliveries that will generate revenues for decades to come. The Trent 1000 sets new standards in efficiency, winning seven out of the last eight Boeing 787 engine competitions. Full Year Outlook - Strong growth is expected in OE revenues supported by double digit growth in engine deliveries in all sectors. Services revenues are expected to grow by mid single digits, supported by further growth in TotalCare revenues and a recovery in 'time and materials' services on large engines. - Profit is expected to increase by 20 to 25 per cent due to growth in services revenues, a better achieved USD exchange rate and improved productivity. The increase includes the anticipated increase in new programme launch costs, higher R&D charges and operational costs associated with events in Japan. Defence Aerospace H1 11 H1 10 +/- Order book (£bn) 6.2 6.5* -5% Engine deliveries 330 373 -12% Underlying revenues (£m) 1,088 1,018 +7% Underlying OE revenues (£m) 504 510 -1% Underlying services revenues (£m) 584 508 +15% Underlying profit before financing (£m) 219 158 +39% * Full year 2010 data Financial - A five per cent reduction in the order book to £6.2bn reflects budgetary pressures in Europe and North America. However, new orders of £0.8bn (£1.2bn in H1 2010) confirm that opportunities still exist, particularly in services, in our traditional markets as well as in the developing economies. Significant orders in the period included: > MissionCare™ support for the UK Royal Air Force and the US Air Force for C-130J transport aircraft. - Revenues increased by seven per cent. A one per cent reduction in OE revenues reflects the phasing of engine deliveries that will improve significantly in the second half. Strong growth in services revenues benefits from the SDSR contract settlements with the UK MoD. Given the scale, breadth and balance of the portfolio, the expected operational and financial impact of the SDSR has been modest, excluding contract settlements. - Profit benefited from the one-off SDSR settlements of £60m. Portfolio - The US Department of Defence has halted the F136 second engine programme for the F-35 Lightning II Joint Strike Fighter (JSF) with development around 80 per cent complete. We continue to consider options with our partner General Electric Co. - While the Short Take-Off and Vertical Landing (STOVL) variant of the JSF is on probation, the Liftsystem™ is performing well in testing. - The TP400 engine for the A400M aircraft completed engine certification. Flight testing continues. Full Year Outlook - Defence Aerospace remains well-positioned to service traditional and developing markets, supported by the expansion of the portfolio, a market-leading presence in military transport and access to a global customer base. - Revenues are expected to grow by mid single digits with strong growth in OE. Services revenues are expected to grow modestly, including the benefit of the SDSR settlements. - Profit is expected to be around £60m better than 2010, mainly due to one-off SDSR settlements. Marine H1 11 H1 10 +/- Order book (£bn) 2.9 3.0* -3% Underlying revenues (£m) 1,171 1,357 -14% Underlying OE revenues (£m) 695 928 -25% Underlying services revenues (£m) 476 429 +11% Underlying profit before financing (£m) 176 171 +3% * Full year 2010 data Financial - There was a three per cent reduction in the order book to £2.9bn due to the phasing of orders. New orders totalled £1.0bn (£1.0bn in H1 2010) with some market segments improving, a trend we expect to continue through 2011. Significant orders in the period included: > MT30 gas turbines and water jets for a ten-ship contract for the Lockheed Martin designed Littoral Combat Ship by the US Navy, our largest surface ship contract to date. > UT design and systems integration packages for the Oil & Gas sector for more than £100m by customers in Italy, Brazil, Norway, Singapore and China. > A £100m contract for the design and provision of equipment for six UT776 offshore supply vessels by the Blue Sea Group. - Revenues reduced by 14 per cent due to 25 per cent lower OE revenues, mainly in the Merchant and Offshore sectors. This was partially offset by an 11 per cent increase in services revenues. - Profit increased by three per cent, supported by better revenue mix and unit cost improvements. Portfolio - Our continued investment in the network of service centres included the opening of new facilities in Rotterdam, Gdynia and Walvis Bay, with more to open in the second half. We now have a dockside presence in 35 countries and see opportunities to add further centres in the future. - The PWR3 nuclear reactor was selected by the UK MoD as the propulsion choice for the next generation of nuclear powered submarines. - Tognum will add complementary products and scale to our existing portfolio and systems integration capabilities. Full Year Outlook - Demand for sophisticated offshore Oil & Gas exploration and production capabilities, and for cleaner, more efficient vessels is encouraging, with order flow expected to improve in the second half of 2011. - Revenues in 2011 are expected to be similar to 2010, reflecting weaker OE revenues despite a strong improvement in the second half. This will be partially offset by further double digit growth in services revenues. - Profit for the full year is expected to be broadly similar to that in 2010. Energy H1 11 H1 10 +/- Order book (£bn) 1.0 1.2* -17% Engine deliveries 38 28 +36% Underlying revenues (£m) 600 590 +2% Underlying OE revenues (£m) 345 348 -1% Underlying services revenues (£m) 255 242 +5% Underlying loss before financing (£m) (1) (19) * Full year 2010 data Financial - Despite an 11 per cent increase in new orders to £424m (£381m in H1 2010), the order book declined by 17 per cent reflecting mainly the phasing of orders to the second half. High oil prices are supporting progress in new projects around the world, creating future demand for our products and services. - The traditional power generation market remains suppressed and industrial demand has not yet fully recovered to pre-2008 levels, resulting in excess generating capacity in the developed world. However, this is being partially offset by greater interest from the developing economies. Significant orders in the period included: > Six RB211 compressor units for PetroChina's WEPP Line 2 East Project. > Nine Bergen diesel engines to Lukoil in Russia. > A 20-year contract to supply safety-critical nuclear services to CEZ in the Czech Republic. - Revenues were similar to 2010 with stable contributions from Power Generation and Oil & Gas. - The £18m improvement in performance, resulting in a loss of £1m for the half year, was due mainly to non-recurring industrial Trent retrofit charges in the first half of 2010. Portfolio - The newly announced facility in Brazil to assemble and test RB211 gas turbine packages for the Brazilian Oil & Gas market is expected to be operational in 2012. - The 500kW tidal power turbine has continued testing at the European Marine Environmental Centre. - Memoranda of Understanding with Westinghouse Electric Co, Areva and EDF SA have been developed further to collaborate in the provision of civil nuclear services. - Improved Power Generation activity in developing markets is creating new opportunities. Our involvement with Tognum will position us better to respond to these opportunities and establish a broader platform for growth. Full Year Outlook - Revenues are expected to be broadly similar to 2010 in both OE and services. - Profit is expected to be broadly similar to 2010, which is lower than previously expected. Additional Group Financial Data 1. Foreign Exchange Currency movements can have a material effect on the Group's reported financial performance that does not reflect the underlying trading performance of the Group for the period. In particular, the GBP exchange rates against the USD, EUR and the NOK influence the reported income statement, the cash flow and the closing net cash position (as set out in the cash flow statement). The principal spot rates during the first half were as follows: Spot Rates 30 June 31 Dec £1 ~ USD $1.61 $1.57 £1 ~ EUR €1.11 €1.17 £1 ~ NOK NOK8.61 NOK9.10 Average Spot Rates H1 2011 H1 2010 £1 ~ USD $1.62 $1.52 £1 ~ EUR €1.15 €1.15 £1 ~ NOK NOK9.01 NOK9.21 The movements affected the reported performance in two main ways: a. Income statement Foreign exchange and commodity derivatives are held to hedge future transactions. IAS 39 requires that these derivatives are reported at market value at the balance sheet date. The Group has chosen not to hedge account for these derivatives and consequently gains or losses arising from changes in market value are included in the reported income statement. The non-cash unrealised gain/loss arising in the period is excluded from underlying profit. The value of the derivative hedge book is recognised in underlying profit when the derivatives are actually settled (i.e. utilised by matching with cash flows in the period). The Group's financial instruments mainly comprise forward contracts for foreign exchange and swap contracts for interest rates, commodities and jet fuel. Due to the significant net USD income of the Group, the principal mark-to-market adjustments relate to the GBP~USD hedge book which, together with the value of the other instruments, is included within net financing income in the income statement of £421m (£1,069m expense in H1 2010), contributing to a reported profit before tax of £1,137m (H1 2010 loss of £475m). Excluding the mark-to-market adjustments, the underlying profit before tax of £ 595m included £23m of foreign exchange benefits compared with H1 2010. The achieved exchange rate on selling net USD income was around nine cents better in the first half than for the same period in 2010, contributing £36m of transactional benefits, partially offset by a £13m translational loss related to lower average USD rates. For the full year, the achieved USD exchange rate is expected to improve by around eight cents compared with 2010. b. Balance sheet and cash flow The Group maintains a number of currency cash balances which vary throughout the period. These were impacted by the movements in exchange rates during the period, causing a small improvement of £18m in the periodic cash flow and hence the closing balance sheet net cash position. 2. Key Group Financial Metrics Research & Development H1 11 H1 10 +/- Gross R&D investment £431m £436m -1% Net R&D investment £243m £238m +2% Net R&D charge £210m £192m +9% There was a £5m increase in net R&D investment funded by the Group in the first half. In addition, lower net capitalisation of the development programme spend contributed to the £18m increase in the net R&D charge. For the full year, the net R&D investment funded by the Group is expected to be modestly higher than 2010, but lower capitalisation and higher amortisation will cause the R&D charge to the income statement to increase by around £60m. Net Financing H1 11 H1 10 +/- Net financing income/ (costs) £421m (£1,069m) Underlying finance costs £24m £29m -17% Net financing income of £421m (£1,069m cost in H1 2010) reflects the effects of the mark-to-market revaluations of the Group's hedge book and other financial instruments. Underlying finance charges reduced by £5m in the period reflecting lower financial RRSP charges and lower funding costs as one of the Group's bonds, a Eurobond settled part way through the period. Underlying finance costs are expected to continue at a similar rate in the second half. Other Income Other operating income decreased to £52m (£74m in H1 2010) on an underlying basis due to the phasing of programme fees from risk and revenue sharing partners on major new programmes such as the Trent XWB. For the full year, other operating income is expected to be around £20m lower than 2010. Taxation & Earnings per Share (EPS) H1 11 H1 10 +/- Underlying EPS 23.89p 18.72p +28% Underlying taxation charge £153m £116m +32% The 28 per cent increase in the underlying EPS is consistent with the 28 per cent increase in the Group's underlying profit before tax. The underlying taxation charge represents an underlying tax rate of 25.6 per cent (24.9 per cent in H1 2010). The 2011 full year rate is expected to be similar to the half-year rate. Tangible & Intangible Investments H1 11 H1 10 +/- Investment in intangible assets £155m £181m -14% Investment in property plant and equipment £177m £139m +27% The investment in intangible assets is outlined more fully in Note 7 on page 22. The 27 per cent increase in investment in property, plant and equipment reflects the ongoing development and refreshment of facilities and tooling as the Group prepares for increased production volumes. For the full year investment in tangible and intangible assets is expected to be around £800m, in line with prior guidance. Other Assets & Liabilities 30 June 31 Dec +/- USD Hedge book $21.2bn $20.9bn +1% Net TotalCare assets £909m £920m -1% Net pensions liabilities* £681m £856m -20% Provisions for liabilities and charges £525m £544m -3% * See note 9 on page 24 The USD hedge book of $21.2bn represents more than five years of net exposure and has an average book rate of £1~$1.60. Current forward market exchange rates are similar to current average hedge book rates. Provisions remained stable in the first half. 30 June 31 Dec +/- Gross customer finance liabilities £597m £633m -6% Net customer finance liabilities £113m £121m -7% Gross and net customer finance liabilities are contingent liabilities related to the financing of delivered aircraft for Civil Aerospace customers. The principal difference in the value of the gross and net commitments relates to the underlying security value of the aircraft. Payments to Shareholders The Group provides its payments to shareholders as redeemable C Shares that may be retained or redeemed for a cash equivalent. The Registrar operates a C Share Reinvestment Plan (CRIP) for the Group and can, on behalf of shareholders, purchase ordinary shares in the market rather than delivering a payment in cash. The interim payment is payable on January 5, 2012 to shareholders on the register on October 28, 2011 and will be made in the form of non-cumulative redeemable preference shares of 0.1 pence each (C Shares). The final day of trading with entitlement to C Shares is October 25, 2011. Shareholders must lodge instructions with our Registrars, Computershare Investor Services PLC, to arrive no later than 5.00 p.m. on December 5, 2011 if they wish to redeem C Shares for cash or otherwise reinvest the proceeds of the redemption in further ordinary shares using the CRIP. Cash & Cash Flow Cash flow during period H1 11 H1 10 +/- Net cash inflow from operating activities £479m £783m -£304m Net cash (outflow) from investing activities (£373m) (£462m) +£89m Net cash (outflow) from financing activities (£448m) (£481m) +£33m Net (decrease) in cash and cash equivalents (£342m) (£160m) -£182m Other changes (1) £260m £273m -£13m Net increase/(decrease) in net cash (£82m) £113m -£195m (1) Includes changes in borrowings and investments, businesses acquired and foreign exchange. Net cash from operating activities was £304m lower than the first half of 2010 due mainly to working capital changes. The main items were the non-recurrence of the Aviall distribution and logistics deal completed in the first half of 2010 (£165m), the utilisation of deposits and the later phasing of new order deposits (£109m), primarily in Marine and Energy. Cash flows relating to investments in the period were £89m lower in the first half than the H1 2010. Investments in property, plant and equipment and intangibles were in total similar to the H1 2010. The main change relates to the non-recurrence of the 2010 investment in ODIM ASA (£147m). Opening/closing cash H1 11 H1 10 +/- Opening gross funds 1 January (2) £3,187m £2,964m +£223m Opening gross debt 1 January (3) (£1,654m) (£1,689m) +£35m Opening net cash 1 January £1,533m £1,275m +£258m Closing gross funds 30 June (2) £2,529m £3,134m -£605m Closing gross debt 30 June (3) (£1,078m) (£1,746m) +£668m Closing net cash 30 June £1,451m £1,388m +£63m Average net cash £780m £915m -£135m (2) Gross funds include cash, money-market funds, short-term deposits and investments. (3) Gross debt includes overdrafts, borrowings and finance leases. Condensed consolidated income statement For the half-year ended June 30, 2011 Half-year Half-year Year to to June to June December 30, 2011 30, 2010 31, 2010 Notes £m £m £m Revenue 2 5,364 5,421 11,085 Cost of sales (4,077) (4,316) (8,885) Gross profit 1,287 1,105 2,200 Other operating income 51 82 95 Commercial and administrative costs (472) (433) (836) Research and development costs (210) (192) (422) Share of results of joint ventures and 60 32 93 associates Operating profit 716 594 1,130 Profit on disposal of businesses - - 4 Profit before financing and taxation 716 594 1,134 Financing income 3 671 221 453 Financing costs 3 (250) (1,290) (885) Net financing 421 ( 1,069) (432) Profit/(loss) before taxation (1) 1,137 (475) 702 Taxation 5 (295) 144 (159) Profit/(loss) for the period 842 (331) 543 Attributable to: Ordinary shareholders 842 (334) 539 Non-controlling interests - 3 4 Profit/(loss) for the period 842 (331) 543 Earnings per ordinary share attributable 4 to shareholders Basic 45.51p (18.07p) 29.20p Diluted 44.93p (18.07p) 28.82p Underlying earnings per ordinary share are shown in note 4 Payments to ordinary shareholders in 6 respect of the period Pence per share 6.9p 6.4p 16.0p Total 129 119 299 (1) Underlying profit before taxation 2 595 465 955 Condensed consolidated statement of comprehensive income For the half-year ended June 30, 2011 Half-year Half-year Year to to June to June December 30, 2011 30, 2010 31, 2010 £m £m £m Profit/(loss) for the period 842 (331) 543 Other comprehensive income (OCI) Foreign exchange translation differences on foreign operations 76 (39) 22 Net actuarial gains/(losses) relating to post-retirement schemes 32 (63) 157 Movement in unrecognised post-retirement surplus (124) (91) (300) Movement in post-retirement minimum funding liability 11 27 49 Amount credited to cash flow hedging reserve 30 - - Share of OCI of joint ventures and associates 5 (22) (16) Related tax movements 17 29 29 Total comprehensive income for the period 889 (490) 484 Attributable to: Ordinary shareholders 889 (493) 480 Non-controlling interests - 3 4 Total comprehensive income for the period 889 (490) 484 Condensed consolidated balance sheet At June 30, 2011 June June December 30, 2011 30, 2010 31, 2010 Notes £m £m £m ASSETS Non-current assets Intangible assets 7 3,027 2,737 2,884 Property, plant and equipment 2,205 2,058 2,136 Investments - joint ventures and associates 469 360 393 Investments - other 11 10 11 Other financial assets 8 485 222 371 Deferred tax assets 309 627 451 Post-retirement scheme surpluses 9 249 83 164 6,755 6,097 6,410 Current assets Inventories 2,612 2,526 2,429 Trade and other receivables 4,070 4,162 3,943 Taxation recoverable 5 8 6 Other financial assets 8 187 196 250 Short-term investments 3 326 328 Cash and cash equivalents 2,526 2,808 2,859 Assets held for sale 9 9 9 9,412 10,035 9,824 Total assets 16,167 16,132 16,234 LIABILITIES Current liabilities Borrowings - (820) (717) Other financial liabilities 8 (56) (188) (105) Trade and other payables (6,116) (6,343) (5,910) Current tax liabilities (173) (159) (170) Provisions for liabilities and charges (306) (230) (276) (6,651) (7,740) (7,178) Non-current liabilities Borrowings (1,140) (1,146) (1,135) Other financial liabilities 8 (742) (1,388) (945) Trade and other payables (1,248) (993) (1,271) Deferred tax liabilities (483) (410) (438) Provisions for liabilities and charges (219) (259) (268) Post-retirement scheme deficits 9 (930) (1,053) (1,020) (4,762) (5,249) (5,077) Total liabilities (11,413) (12,989) (12,255) Net assets 4,754 3,143 3,979 EQUITY Equity attributable to ordinary shareholders Called-up share capital 374 371 374 Share premium account - 98 133 Capital redemption reserve - 188 209 Cash flow hedging reserve (11) (41) (37) Other reserves 606 463 527 Retained earnings 3,781 2,061 2,769 4,750 3,140 3,975 Non-controlling interests 4 3 4 Total equity 4,754 3,143 3,979 Condensed consolidated cash flow statement For the half-year ended June 30, 2011 Half-year Half-year Year to to June to June December 30, 2011 30, 2010 31, 2010 Notes £m £m £m Reconciliation of cash flows from operating activities Profit/(loss) before taxation 1,137 (475) 702 Share of results of joint ventures and associates (60) (32) (93) Profit on disposal of businesses - - (4) Profit)/loss on disposal of property, plant and equipment (10) 1 (10) Net financing 3 (421) 1,069 432 Taxation paid (95) (69) (168) Amortisation of intangible assets 7 73 64 130 Depreciation of property, plant and equipment 111 103 237 Impairment of investments - 2 3 (Decrease)/increase in provisions (36) 45 99 (Increase)/decrease in inventories (152) (79) 41 (Increase)/decrease in trade and other receivables (90) (240) 39 Increase in trade and other payables 172 598 286 Decrease/(increase) in other financial assets and liabilities 52 (195) (299) Net defined benefit post-retirement (credit)/cost recognised in profit before financing 2,9 (107) 74 147 Cash funding of defined benefit 9 post-retirement schemes (146) (127) (282) Share-based payments 20 8 50 Dividends received from joint ventures and associates 31 36 68 Net cash inflow from operating activities 479 783 1,378 Cash flows from investing activities Additions of unlisted investments - (1) (1) Disposals of unlisted investments - 46 46 Additions of intangible assets (152) (181) (321) Disposals of intangible assets 1 - - Purchases of property, plant and equipment (209) (175) (354) Disposals of property, plant and equipment 22 10 38 Acquisitions of businesses - (147) (150) Disposals of businesses 2 - 2 Investments in joint ventures and associates (37) (14) (19) Net cash outflow from investing activities (373) (462) (759) Cash flows from financing activities Repayment of loans (567) - (108) Proceeds from increase in loans - 56 68 Net cash flow from (decrease)/increase in borrowings (567) 56 (40) Interest received 9 8 23 Interest paid (39) (56) (77) Decrease/(increase) in short-term investments 325 (324) (326) Issue of ordinary shares 1 - 67 Purchase of ordinary shares (57) (58) (124) Other transactions in ordinary shares 21 - - Redemption of C Shares (141) (107) (266) Net cash outflow from financing activities (448) (481) (743) Net decrease in cash and cash equivalents (342) (160) (124) Cash and cash equivalents at January 1 2,851 2,958 2,958 Exchange gains on cash and cash equivalents 17 6 17 Cash and cash equivalents at period end 2,526 2,804 2,851 Half-year Half-year Year to to June to June December 30, 2011 30, 2010 31, 2010 £m £m £m Reconciliation of movements in cash and cash equivalents to movements in net funds Decrease in cash and cash equivalents (342) (160) (124) Net cash flow from (increase)/decrease in borrowings 567 (56) 40 Net cash flow from (decrease)/increase in short-term investments (325) 324 326 Change in net funds resulting from cash flows (100) 108 242 Net funds (excluding cash and cash equivalents) of businesses acquired - (1) (1) Exchange gains on net funds 18 6 17 Fair value adjustments 136 4 26 Movement in net funds 54 117 284 Net funds at January 1 excluding the fair 1,335 1,051 value of swaps 1,051 Net funds at period end excluding the fair 1,389 1,168 value of swaps 1,335 Fair value of swaps hedging fixed rate 62 220 borrowings 198 Net funds at period end 1,451 1,388 1,533 The movement in net funds (defined by the Group as including the items shown below) is as follows: At At June January Funds Exchange Fair value 30, 1, 2011 flow differences adjustments 2011 £m £m £m £m £m Cash at bank and in hand 1,302 3 (1) - 1,304 Money market funds 345 100 - - 445 Overdrafts (8) 8 - - - Short-term deposits 1,212 (453) 18 - 777 Cash and cash equivalents 2,851 (342) 17 - 2,526 Investments 328 (325) - - 3 Other current borrowings (709) 567 - 142 - Non-current borrowings (1,134) - 1 (6) (1,139) Finance leases (1) - - - (1) Net funds excluding the fair value of swaps 1,335 (100) 18 136 1,389 Fair value of swaps hedging fixed rate borrowings 198 (136) 62 Net funds 1,533 (100) 18 - 1,451 Condensed consolidated statement of changes in equity For the half-year ended June 30, 2011 Attributable to ordinary shareholders Cash Capital flow Share Share redemption hedging Other Retained Non-controlling Total capital premium reserve reserve reserves earnings Total interests equity £m £m £m £m £m £m £m £m £m At January 1, 2010 371 98 191 (19) 506 2,635 3,782 - 3,782 Loss for the period - - - - - (334) (334) 3 (331) Exchange translation differences on foreign operations - - - - (39) - (39) - (39) Net actuarial losses on post-retirement schemes - - - - - (63) (63) - (63) Movement in unrecognised post-retirement surplus - - - - - (91) (91) - (91) Movement in post-retirement minimum funding liability - - - - - 27 27 - 27 Share of OCI of joint ventures and associates - - - (22) - - (22) - (22) Related tax movements - - - - (4) 33 29 - 29 Total comprehensive income for the period - - - (22) (43) (428) (493) 3 (490) Issue of C Shares - - (111) - - 1 (110) - (110) Redemption of C Shares - - 108 - - (108) - - - Ordinary shares purchased - - - - - (58) (58) - (58) Share-based payments - direct to equity - - - - - 16 16 - 16 Related tax movements - - - - - 3 3 - 3 Other changes in equity in the period - - (3) - - (146) (149) - (149) At June 30, 2010 371 98 188 (41) 463 2,061 3,140 3 3,143 Profit for the period - - - - - 873 873 1 874 Exchange translation differences on foreign operations - - - - 61 - 61 - 61 Net actuarial gains on post-retirement schemes - - - - - 220 220 - 220 Movement in unrecognised post-retirement surplus - - - - - (209) (209) - (209) Movement in post-retirement minimum funding liability - - - - - 22 22 - 22 Share of OCI of joint ventures and associates - - - 4 1 1 6 - 6 Related tax movements - - - - 2 (2) - - - Total comprehensive income for the period - - - 4 64 905 973 1 974 Arising on issues of ordinary shares 3 64 - - - - 67 - 67 Issue of C Shares - (29) (138) - - - (167) - (167) Redemption of C Shares - - 159 - - (159) - - - Ordinary shares purchased - - - - - (66) (66) - (66) Share-based payments - direct to equity - - - - - 26 26 - 26 Related tax movements - - - - - 2 2 - 2 Other changes in equity in the period 3 35 21 - - (197) (138) - (138) At December 31, 2010 374 133 209 (37) 527 2,769 3,975 4 3,979 Profit for the period - - - - - 842 842 - 842 Exchange translation differences on foreign operations - - - - 76 - 76 - 76 Net actuarial gains on post-retirement schemes - - - - - 32 32 - 32 Movement in unrecognised post-retirement surplus - - - - - (124) (124) - (124) Movement in post-retirement minimum funding liability - - - - - 11 11 - 11 Amount credited to cash flow hedging reserve - - - 30 - - 30 - 30 Share of OCI of joint ventures - - - 4 - 1 5 - 5 Related tax movements - - - (8) 3 22 17 - 17 Total comprehensive income for the period - - - 26 79 784 889 - 889 Arising on issues of ordinary shares - 1 - - - - 1 - 1 Issue of C Shares - (120) - - - 2 (118) - (118) Redemption of C Shares - - 143 - - (143) - - - Ordinary shares purchased - - - - - (57) (57) - (57) Share-based payments - direct to equity - - - - - 56 56 - 56 Effect of scheme of arrangement (1) 2,434 (14) (352) - - (2,068) - - - Effect of capital reduction1 (2,434) - - - - 2,434 - - - Related tax movements - - - - - 4 4 - 4 Other changes in equity in the period - (133) (209) - - 228 (114) - (114) At June 30, 2011 374 - - (11) 606 3,781 4,750 4 4,754 (1) On May 23, 2011, under a scheme of arrangement between Rolls-Royce Group plc, the former holding company of the Group, and its shareholders under Part 26 of the Companies Act 2006, and as sanctioned by the High Court, all the issued ordinary shares in that company were cancelled and the same number of new ordinary shares were issued to Rolls-Royce Holdings plc in consideration for the allotment to shareholders of one ordinary share in Rolls-Royce Holdings plc for each ordinary share in Rolls-Royce Group plc held on the record date (May 20, 2011). On May 23, 2011, pursuant to the scheme of arrangement noted above, 1,872,188,709 ordinary shares of 150 pence were issued. As required by Section 612 of the Companies Act 2006, no share premium was recognised. On May 24, 2011, the share capital of Rolls-Royce Holdings plc was reduced by reducing the nominal value of the ordinary shares from 150 pence to 20 pence as sanctioned by the High Court. Basis of preparation and accounting policies Reporting entity Rolls-Royce Holdings plc was introduced as the new holding company of the Rolls-Royce Group on May 23, 2011 by way of a scheme of arrangement (Scheme) under Part 26 of the Companies Act 2006. Following the Scheme taking effect, the capital of Rolls-Royce Holdings plc was reduced to create distributable reserves. The scheme does not constitute a business combination under the requirements of IFRS 3 Business combinations. Accordingly, merger accounting principles have been applied, as if the Company had always been the holding company of the Group. Rolls-Royce Holdings plc is a company domiciled in the UK. These condensed consolidated half-year financial statements of the Company as at and for the six months ended June 30, 2011 comprise the Company and its subsidiaries (together referred to as the "Group") and the Group's interests in joint ventures and associates. The consolidated financial statements of Rolls-Royce Group plc as at and for the year ended December 31, 2010 (2010 Annual report) are available upon request from the Company Secretary, Rolls-Royce Holdings plc, 65 Buckingham Gate, London SW1E 6AT. Statement of compliance These condensed consolidated half-year financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union. They do not include all of the information required for full annual statements, and should be read in conjunction with the 2010 Annual report. The comparative figures for the financial year December 31, 2010 are not the Group's statutory accounts for that financial year. Those accounts have been reported on by the Group's auditors and delivered to the registrar of companies. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006. The Board of directors approved the condensed consolidated half-year financial statements on July 27, 2011. Significant accounting policies Except as explained below, the accounting policies applied by the Group in these condensed consolidated half-year financial statements are the same as those that applied to the consolidated financial statements of the Group for the year ended December 31, 2010 (International Financial Reporting Standards issued by the International Accounting Standards Board, as adopted for use in the EU effective at December 31, 2010). Although the Group does not generally apply cash flow hedge accounting in respect of forward foreign exchange contracts held to manage the cash flow exposures of forecast foreign exchange transactions, it has applied cash flow hedge accounting in respect of forward foreign exchange contracts held to manage the commitment to fund the acquisition of shares in Tognum AG - see note 12. Key sources of estimation uncertainty In applying the accounting policies, management has made appropriate estimates in many areas, and the actual outcome may differ from those calculated. The key sources of estimation uncertainty at the balance sheet date were the same as those that applied to the consolidated financial statements of the Group for the year ended December 31, 2010. Analysis by business segment The analysis by business segment is presented in accordance with IFRS 8 Operating segments, on the basis of those segments whose operating results are regularly reviewed by the Board. The operating results are prepared on an underlying basis that excludes items considered to be non-underlying in nature. The principles adopted are: Underlying revenues - Where revenues are denominated in a currency other than the functional currency of the Group undertaking, these reflect the achieved exchange rates arising on settled derivative contracts. There is no inter-segment trading and hence all revenues are from external customers. Underlying profit before financing - Where transactions are denominated in a currency other than the functional currency of the Group undertaking, this reflects the transactions at the achieved exchange rates on settled derivative contracts. Underlying profit before taxation - In addition to those adjustments in underlying profit before financing, this: - Includes amounts realised from settled derivative contracts and revaluation of relevant assets and liabilities to exchange rates forecast to be achieved from future settlement of derivative contracts; and - Excludes unrealised amounts arising from revaluations required by IAS 39 Financial Instruments: Recognition and Measurement, changes in value of financial RRSP contracts arising from changes in forecast payments and the net impact of financing costs related to post-retirement scheme benefits. This analysis also includes a reconciliation of the underlying results to those reported in the consolidated income statement. Half-year to June 30, 2011 Half-year to June 30, 2010 Year to December 31, 2010 Original Original Original equipment Aftermarket Total equipment Aftermarket Total equipment Aftermarket Total £m £m £m £m £m £m £m £m £m Underlying revenues Civil 1,047 1,557 2,604 858 1,436 2,294 1,892 3,027 4,919 Aerospace Defence 504 584 1,088 510 508 1,018 1,020 1,103 2,123 Aerospace Marine 695 476 1,171 928 429 1,357 1,719 872 2,591 Energy 345 255 600 348 242 590 691 542 1,233 2,591 2,872 5,463 2,644 2,615 5,259 5,322 5,544 10,866 Half-year Half-year Year to June to June to December 30, 2011 30, 2010 31, 2010 £m £m £m Underlying profit before financing Civil Aerospace 250 210 392 Defence Aerospace 219 158 309 Marine 176 171 332 Energy (1) (19) 27 Reportable segments 644 520 1,060 Underlying central items (25) (26) (50) Underlying profit before 619 494 1,010 financing and taxation Underlying net financing (24) (29) (55) Underlying profit before 595 465 955 taxation Underlying taxation (153) (116) (236) Underlying profit for the 442 349 719 period Net assets/(liabilities) Net assets/ Total assets Total liabilities (liabilities) June June December June June December June June December 30, 30, 31, 30, 30, 31, 30, 30, 31, 2011 2010 2010 2011 2010 2010 2011 2010 2010 £m £m £m £m £m £m £m £m £m Civil Aerospace 8,821 7,665 8,162 (5,506) (5,822) (5,435) 3,315 1,843 2,727 Defence Aerospace 1,440 1,343 1,344 (1,784) (1,675) (1,867) (344) (332) (523) Marine 2,586 2,498 2,363 (1,782) (1,763) (1,548) 804 735 815 Energy 1,178 1,060 1,182 (627) (647) (748) 551 413 434 Reportable segments 14,025 12,566 13,051 (9,699) (9,907) (9,598) 4,326 2,659 3,453 Eliminations (1,012) (506) (823) 1,012 506 823 - - - Net funds 2,591 3,354 3,385 (1,140) (1,966) (1,852) 1,451 1,388 1,533 Tax assets/ (liabilities) 314 635 457 (656) (569) (608) (342) 66 (151) Post-retirement scheme surpluses/ (deficits) 249 83 164 (930) (1,053) (1,020) (681) (970) (856) 16,167 16,132 16,234 (11,413) (12,989) (12,255) 4,754 3,143 3,979 Group employees at period end June June December 30, 2011 30, 2010 31, 2010 Civil Aerospace 20,100 19,200 19,600 Defence Aerospace 7,100 7,100 7,000 Marine 9,600 9,100 9,400 Energy 3,500 3,500 3,600 40,300 38,900 39,600 Underlying revenue adjustments Half-year Half-year Year to to June to June December 30, 2011 30, 2010 31, 2010 £m £m £m Underlying revenue 5,463 5,259 10,866 Recognise revenue at exchange rate on date of transaction (99) 162 219 Revenue per consolidated income statement 5,364 5,421 11,085 Underlying profit adjustments Half-year to June 30, 2011 Half-year to June 30, 2010 Year to December 31, 2010 Profit Profit Profit before Net before Net before Net financing financing Taxation financing financing Taxation financing financing Taxation £m £m £m £m £m £m £m £m £m Underlying performance 619 (24) (153) 494 (29) (116) 1,010 (55) (236) Realised (gains)/losses on settled derivative contracts (1) (71) 2 - 121 5 - 180 (7) - Net unrealised fair value changes to derivative contracts (2) 6 456 - (12) (1,018) - - (341) - Effect of currency on contract accounting 10 - - (9) - - (56) - - Revaluation of trading assets and liabilities - (10) - - 5 - - 8 - Financial RRSPs - exchange differences and changes in forecast payments - 5 - - (19) - - (6) - Post-retirement scheme past service costs (3), (4) 152 - - - - - - - - Net post-retirement scheme financing - (8) - - (13) - - (31) - Related tax effect - - (142) - - 260 - - 77 Total underlying adjustments 97 445 (142) 100 (1,040) 260 124 (377) 77 Reported per consolidated income statement 716 421 (295) 594 (1,069) 144 1,134 (432) (159) (1) The adjustment for realised (gains)/losses on settled derivative contracts include adjustments to reflect the (gains)/losses in the same period as the related trading cash flows. (2) The adjustment for unrealised fair value changes to derivative contracts include those included in equity accounted joint ventures and exclude those for which the related trading contracts have been cancelled when the fair value changes are recognised immediately in underlying profit. (3) In 2010, the UK Government announced changes to the basis of the statutory indexation for pension increases. As a result, the relevant arrangements have been amended, resulting in a gain in the income statement of £130m, which has been excluded from underlying profit. (4) The Group has agreed revised post-retirement healthcare arrangements on certain of its overseas schemes. This has resulted in a net gain in the income statement of £22m which has been excluded from underlying profit. Net financing Half-year to Half-year Year to June 30, 2011 June 30, 2010 December 31, 2010 Per Per Per consolidated consolidated consolidated income Underlying income Underlying income Underlying statement financing statement financing statement financing £m £m £m £m £m £m Financing income Interest receivable 10 10 8 8 23 23 Fair value gains on foreign currency contracts 452 - - - - - Financial RRSPs - foreign exchange differences and changes in forecast payments 5 - - - - - Fair value gains on commodity derivatives 4 - - - 29 - Expected return on post-retirement scheme assets 200 - 201 - 400 - Net foreign exchange gains - - 10 - 1 - Other financing income - - 2 2 - - 671 10 221 10 453 23 Financing costs Interest payable (24) (24) (30) (30) (63) (63) Fair value losses on foreign currency contracts - - (1,017) - (370) - Financial RRSPs - foreign exchange differences and changes in forecast payments - - (19) - (6) - Financial charge relating to financial RRSPs (5) (5) (9) (9) (13) (13) Fair value losses on commodity derivatives - - (1) - - - Interest on post-retirement scheme liabilities (208) - (214) - (431) - Net foreign exchange losses (8) - - - - - Other financing charges (5) (5) - - (2) (2) (250) (34) (1,290) (39) (885) (78) Net financing 421 (24) (1,069) (29) (432) (55) Analysed as: Net interest payable (14) (14) (22) (22) (40) (40) Net post-retirement scheme financing (8) - (13) - (31) - Net other financing 443 (10) (1,034) (7) (361) (15) Net financing 421 (24) (1,069) (29) (432) (55) Earnings per ordinary share (EPS) Basic EPS are calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period, excluding ordinary shares held under trust, which have been treated as if they had been cancelled. Diluted EPS are calculated by adjusting the weighted average number of ordinary shares in issue during the period for the bonus element of share options. Half-year to June 30,2011 Half-year to June 30, 2010 Year to December 31, 2010 Potentially Potentially Potentially dilutive dilutive dilutive share share share Basic options Diluted Basic options (1) Diluted Basic options Diluted Profit/ (loss)(£m) 842 - 842 (334) - (334) 539 - 539 Weighted average shares (millions) 1,850 24 1,874 1,848 - 1,848 1,846 24 1,870 EPS(pence) 45.51 (0.58) 44.93 (18.07) - (18.07) 29.20 (0.38) 28.82 (1) As the basic EPS was negative, in accordance with IAS 33 Earnings per Share, share options were not considered dilutive. For diluted underlying EPS, the diluted weighted average number of shares was 1,874m. The reconciliation between underlying EPS and basic EPS is as follows: Half-year to Half-year to Year to June 30, 2011 June 30, 2010 December 31, 2010 Pence £m Pence £m Pence £m Underlying EPS / Underlying profit attributable to ordinary shareholders 23.89 442 18.72 346 38.73 715 Total underlying adjustments to profit/(loss) before tax (note 2) 29.30 542 (50.86) (940) (13.70) (253) Related tax effects (7.68) (142) 14.07 260 4.17 77 EPS / Profit/(loss) attributable to ordinary shareholders 45.51 842 (18.07) (334) 29.20 539 Diluted underlying EPS 23.59 18.46 38.24 Taxation The effective tax rate for the half-year is 25.9% (2010: half-year 30.3%, full year 22.6%). The UK corporation tax rate reduced from 28% to 26% on April 1, 2011 and the effective tax rate takes this reduction into account. The impact of the reduction to 27% was reflected in the 2010 closing deferred tax balances as the rate change was substantially enacted prior to the year end. As the further reduction to 26% was substantially enacted on March 29, 2011, the closing deferred tax assets and liabilities have been remeasured. The proposed future reductions in the rate to 23% will be reflected when the relevant legislation is substantively enacted. The impact of the reduction in the rate on the effective tax rate for the full-year is not expected to be significant. Payments to shareholders in respect of the period Payments to shareholders in respect of the period represent the value of C Shares to be issued in respect of the results for the period. Issues of C Shares were declared as follows: Half-year to Year to June 30, 2011 December 31, 2010 Pence per Pence per share £m share £m Interim (issued in January) 6.9 129 6.4 119 Final (issued in July) 9.6 180 6.9 129 16.0 299 Intangible assets Certification costs and Recoverable Software participation Development engine and Goodwill fees expenditure costs other Total £m £m £m £m £m £m Cost: At January 1, 1,115 686 862 697 413 3,773 2011 Exchange 51 5 2 - 5 63 differences Additions - 10 52 63 30 155 Disposals - - - - (7) (7) At June 30, 1,166 701 916 760 441 3,984 2011 Accumulated amortisation: At January 1, 7 190 232 351 109 889 2011 Exchange - - - - 1 1 differences Charge for - 6 19 30 18 73 the period Disposals - - - - (6) (6) At June 30, 7 196 251 381 122 957 2011 Net book value at: June 30, 2011 1,159 505 665 379 319 3,027 December 31, 1,108 496 630 346 304 2,884 2010 Certification costs and participation fees, development expenditure and recoverable engine costs have been reviewed for impairment in accordance with the requirements of IAS 36 Impairment of Assets. Where an impairment test was considered necessary, it has been performed on the following basis: The carrying values have been assessed by reference to value in use. These have been estimated using cash flows from the most recent forecasts prepared by management, which are consistent with past experience and external sources of information on market conditions over the lives of the respective programmes. The key assumptions underlying cash flow projections are assumed market share, programme timings, unit cost assumptions, discount rates, and foreign exchange rates. The pre-tax cash flow projections have been discounted at 11% (2010 full year 11%), based on the Group's weighted average cost of capital. No impairment is required on this basis. However, a combination of changes in assumptions and adverse movements in variables that are outside the Company's control (discount rate, exchange rate and airframe delays), could result in impairment in future periods. Other financial assets and liabilities Half-year to Half-year to Year to June 30, 2011 June 30,2010 December 31,2010 Assets Liabilities Net Assets Liabilities Net Assets Liabilities Net £m £m £m £m £m £m £m £m £m Foreign 598 (531) 67 229 (1,232) (1,003) 415 (751) (336) exchange contracts Commodity 29 (7) 22 14 (23) (9) 28 (7) 21 contracts 627 (538) 89 243 (1,255) (1,012) 443 (758) (315) Interest 45 (4) 41 175 (2) 173 178 (3) 175 rate contracts Financial - (256) (256) - (303) (303) - (266) (266) RRSPs C Shares - - - - (16) (16) - (23) (23) 672 (798) (126) 418 (1,576) (1,158) 621 (1,050) (429) Current 187 (56) 196 (188) 250 (105) Non-current 485 (742) 222 (1,388) 371 (945) 672 (798) 418 (1,576) 621 (1,050) Foreign exchange and commodity financial instruments Half-year to Half-year to Year to June 30, 2011 June 30, 2010 December 31, 2010 Foreign exchange Commodity Total Total Total £m £m £m £m £m At January 1 (336) 21 (315) (155) (155) Movements in fair value (4) - (4) 23 7 hedges Movements in cash flow 30 - 30 - - hedges Movements in other 452 4 456 (1,018) (341) derivative contracts Contracts settled (75) (3) (78) 138 174 At period end 67 22 89 (1,012) (315) Financial risk and revenue sharing partnerships (RRSPs) Half-year Half-year Year to to June to June December 30, 2011 30, 2010 31, 2010 £m £m £m At January 1 (266) (363) (363) Cash paid to partners 13 82 114 Exchange adjustments included in OCI (3) 6 2 Financing charge (1) (5) (9) (13) Excluded from underlying profit: (1) Exchange adjustments 5 (19) (6) At period end (256) (303) (266) (1)Included in net financing. Pensions and other post-retirement benefits The net post-retirement scheme deficit as at June 30, 2011 is calculated on a year to date basis, using the latest valuation as at December 31, 2010, updated to June 30, 2011 for the principal schemes. Movements in the net post-retirement position recognised in the balance sheet were as follows: UK Overseas schemes schemes Total £m £m £m At January 1, 2011 (220) (636) (856) Exchange adjustments - 11 11 Current service cost (57) (17) (74) Negative past service cost (1) 129 54 183 Curtailment - (2) (2) Interest on post-retirement scheme liabilities (186) (22) (208) Expected return on post-retirement scheme assets 190 10 200 Contributions by employer 126 20 146 Actuarial gains/(losses) 38 (6) 32 Movement in unrecognised surplus (2) (124) - (124) Movement on minimum funding liability (3) 11 - 11 At June 30, 2011 (93) (588) (681) Analysed as: Post-retirement scheme surpluses - included in 249 - 249 non-current assets Post-retirement scheme deficits - included in (342) (588) (930) non-current liabilities (93) (588) (681) (1) See note 2. (2) Where a surplus has arisen on a scheme, in accordance with IAS 19 and IFRIC 14, the surplus is recognised as an asset only if it represents an unconditional economic benefit available to the Group in the future. Any surplus in excess of this benefit is not recognised in the balance sheet. (3) A minimum funding liability arises where the statutory funding requirements require future contributions in respect of past service that will result in a future unrecognisable surplus. Contingent liabilities and contingent assets 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. During the first half of 2011, there were no material changes to the maximum gross and net contingent liabilities. Contingent liabilities exist in respect of guarantees provided by the Group in the ordinary course of business for product delivery, performance and reliability. The Group has, in the normal course of business, entered into arrangements in respect of export finance, performance bonds, countertrade obligations and minor miscellaneous items. Various Group undertakings are parties to legal actions and claims which arise in the ordinary course of business, some of which are for substantial amounts. While the outcome of some of these matters cannot precisely be foreseen, the directors do not expect any of these arrangements, legal actions or claims, after allowing for provisions already made, to result in significant loss to the Group. During 2011, the Launch Nations and Airbus agreed to modify the agreement relating to the development of the Airbus A400M aircraft. EPI Europrop International GmbH (EPI) which is developing the TP400 engine for the A400M, and in which the Group is a partner, and Airbus have subsequently modified their agreement. As a result, the previously reported claims received by EPI have been withdrawn. During the period, Rolls-Royce and United Technologies Corporation (UTC), the parent company of Pratt & Whitney, have reached an amicable, confidential settlement agreement resulting in dismissal of all patent litigations between the parties. Related party transactions Transactions with related parties are shown on page 131 of the Annual report 2010. Significant transactions in the current financial period are as follows: Half-year Half-year Year to to June to June December 30, 2011 30, 2010 31, 2010 £m £m £m Sales of goods and services to joint 1,280 1,270 2,681 ventures and associates Purchases of goods and services from joint (1,044) (1,079) (2,163) ventures and associates Potential acquisition of business On April 6, 2011, Rolls-Royce and Daimler AG announced a voluntary public offer at €24 per share for the majority of Tognum AG through their 50:50 joint venture, Engine Holding GmbH. On May 16, 2011, the offer was increased to €26 per share. At the end of the offer period (June 20, 2011), Engine Holding GmbH had secured 94.17% of the shares of Tognum AG, including 1.52% acquired during the acceptance period. The offer is expected to complete in the third quarter subject to certain regulatory clearances. The Group's total commitment to finance this acquisition is €1.7bn, which will be financed from existing resources. Principal risks and uncertainties As described on pages 26 and 27 of the Annual report 2010, the Group continues to be exposed to a number of risks and has an established, structured approach to identifying, assessing and managing those risks. The Group has a consistent strategy and long performance cycles and consequently the risks faced by the Group have not changed significantly over the first six months of 2011. The principal risks reflect the global growth of the business, and the competitive and challenging business environment in which it operates. Risks are considered under four broad headings: Business environment risks Strategic risks - Environmental impact of products and operations - Competitive pressures - Legislative and regulatory pressures - Export controls - Significant external events - Government spending - Global resource capability Financial risks Operational risks - Counterparty credit risk - Supply chain performance - Currency risk - Ethics - Credit rating - Programme portfolio - IT security - Product performance Going concern After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the consolidated financial statements. The financial risk management objectives and policies of the Group and the exposure of the Group to financial risks are discussed in the Finance Director's review of the Annual report 2010 on pages 48 to 55. Statement of directors' responsibilities The directors confirm that to the best of their knowledge: - the condensed consolidated half-year financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU; - the interim management report includes a fair review of the information required by: > DTR 4.2.7R of theDisclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed consolidated half-year financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and > DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so. From the date of the scheme of arrangement, the directors of Rolls-Royce Holdings plc have been the same as Rolls-Royce Group plc. The directors of Rolls-Royce Group plc at February 9, 2011 are listed in its Annual report 2010 on pages 56 and 57. Since that date, Sir John Rose retired on March 31, 2011 and Lewis Booth was appointed on May 25, 2011. By order of the Board John Rishton Andrew Shilston Chief Executive Finance Director July 27, 2011 July 27, 2011 Independent review report to Rolls-Royce Holdings plc Introduction We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended June 30, 2011 which comprises the condensed consolidated income statement, the condensed consolidated statement of comprehensive income, the condensed consolidated balance sheet, the condensed consolidated cash flow statement, the condensed consolidated statement of changes in equity and the related explanatory notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Disclosure and Transparency Rules ("the DTR") of the UK's Financial Services Authority ("the UK FSA"). Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached. Directors' responsibilities The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FSA. As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the EU. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU. Our responsibility Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. Scope of review We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended June 30, 2011 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FSA. AJ Sykes for and on behalf of KPMG Audit Plc Chartered Accountants, London July 27, 2011

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