Interim Results
28 July 2005
ROLLS-ROYCE GROUP plc INTERIM RESULTS 2005
Group Highlights
• Record order book, at £21.9bn (2004: £18.1bn).
• Sales increased to £3,184m. Sales on an underlying* basis increased by 14 per
cent.
• Services revenues increased by 15 per cent on an underlying* basis and
represented 55 per cent of Group sales.
• Profit before financing costs increased to £401m.
• Underlying profit before financing costs** increased to £309m, up 44 per cent
on a like for like basis.
• Underlying profit before taxation** increased to £260m, up 54 per cent on a
like for like basis.
• Average net debt reduced to £377m (2004: £626m).
• Interim payment to shareholders increased by five per cent.
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/analyst/presentations/
* underlying sales and profit exclude unrealised gains on fair value and other
IAS 39 adjustments (see note 3 and 4)
** underlying profit on a like for like basis is adjusted due to the lack of
comparability caused by the different treatment of payments to financial Risk and
Revenue Sharing Partners resulting from the implementation of IAS32/39 on
1 January 2005 with no retrospective adjustment(see page 2 and note 4).
Sir John Rose, Chief Executive, said:
"We continue to make good progress, demonstrating the increasingly
international nature of the business and our broad portfolio of products and
services.
"The higher orders and sales reflect strong market positions and the continuing
growth of our services revenues. Our business mix and focus on improved
efficiency are contributing to higher levels of profit and cash generation. As
a result we have increased our payment to shareholders by five per cent.
"We remain on target to generate continued growth in profits and reduction of
average net debt in 2005."
Group Overview
The Group maintained a good level of order intake, resulting in a record order
book of £21.9bn at the half year (2004: £18.1bn). In addition, a further £1.1bn
had been announced (2004: £1.5bn) but not contracted. Orders for future
services accounted for £8.2bn or 37 per cent of the firm order book at the half
year (2004: £7.1bn or 39 per cent).
Group sales in the first half of 2005 rose to £3,184m. Sales on an underlying
basis (see note 4) increased by 14 per cent, reflecting the continuing growth
of services revenues and increased engine deliveries.
Revenue from services activities rose to £1.8bn. On an underlying basis (see
note 4), services revenues grew by 15 per cent and accounted for 55 per cent of
Group sales (2004: 55 per cent).
Profit before financing costs increased to £401m (2004: £175m) and underlying
profit before financing costs (which excludes unrealised losses and gains on
fair value adjustments) rose to £309m (see note 3). On a like for like basis,
underlying profit before financing costs increased by 44 per cent. If IAS 32/39
had been applied to the underlying profit before financing costs for 2004,
payments to financial risk and revenue sharing partners, amounting to £39m, all
relating to the civil aerospace segment, would have been excluded. This would
have resulted in an underlying profit before financing costs of £214m in 2004,
compared to £309m achieved in 2005.
After financing costs, including fair value adjustments arising from the mark
to market of financial instruments and monetary assets, pre-tax profit on
ordinary activities was £165m (2004: £149m). On an underlying basis, pre tax
profit was £260m (2004: £149m) and compared to 2004, on a like for like basis,
increased by 54 per cent (see note 4).
Underlying earnings per share rose to 10.87p (2004: 6.44p) and basic earnings
per share rose to 6.88p (2004: 6.44p). An interim payment to shareholders has
been proposed of 3.34p per share (2004: 3.18p), an increase of five per cent.
The Group generated a cash inflow of £175m in the first half (2004: £44m). Net
debt at the half year was £37m (2004: £363m). Average net debt for the first
half fell to £377m (2004: £626m).
The Group has continued to pursue its strategy of hedging future net dollar
revenues in order to provide protection against fluctuations in exchange rates.
Currently, forward cover amounts to approximately $9 billion, at an average
rate of 1.61 dollars to the pound. This substantial hedge book, combined with
new forward sales of dollars, cost reduction activities and further
`dollarisation' of the cost base are the methods that the Group will use to
enable it to manage future foreign exchange risk. The achieved exchange rate in
the first half of 2005 deteriorated by three cents relative to 2004.
The Group continues to invest in new technology. In the first half it signed an
agreement with a Singaporean consortium to invest jointly $100m in developing a
commercially viable power system based on fuel cell technology, building upon
research that began in Rolls-Royce in 1992. In addition, the Group expanded its
international network of technology-oriented relationships, establishing its
first University Technology Centre in Norway to conduct key research programmes
in the marine sector.
Rolls-Royce has made good progress with its investment programme aimed at
overhauling its manufacturing capabilities and infrastructure. New facilities
for compression systems, combustion systems, turbines, component services and
repair and overhaul are on schedule for completion by 2007. Consequently, the
Group expects to continue to reduce operating costs, although the rate of cost
reduction has slowed in 2005. The level of capital investment is expected to
increase in support of this improvement programme.
Outlook
The Group is continuing to invest in new products and technology to strengthen
further its presence in power systems markets in the civil and defence
aerospace, marine and energy sectors. It has established strong positions
within new programmes that will shape these markets for many years to come. The
aggregate demand for engines and services across all four sectors over the next
20 years is estimated to be worth approximately $2 trillion.
As the Group addresses new market opportunities to drive organic growth in each
of its business sectors, self-funded investment in research and development is
expected to continue at approximately five per cent of Group sales. Under IFRS,
the impact of this investment on the income statement will reflect the mix and
maturity of individual development programmes.
While this investment continues, the Group expects to see increasing returns
from the substantial investments already made in establishing strong market
positions. These returns arise over many years as a result of the long-term
nature of original equipment programmes and the substantial services
opportunity created each time an engine is delivered. The Group is well
positioned to capture a large proportion of this services opportunity, having
invested in comprehensive support capabilities such as engine repair and
overhaul facilities, spare engine leasing, predictive data management and
long-term services agreements.
The Group's strong order book, the long-term services revenue stream and the
focus on operational performance underpin its expectations of continued growth
in profits and reduction of average net debt in 2005.
Enquiries:
Peter Barnes-Wallis Duncan Campbell-Smith
Director of Financial Communications Director of Corporate Communications
Tel: 0207 222 9020
www.rolls-royce.com
REVIEW OF 2005 BY BUSINESS SECTOR
Civil Aerospace
Sales: £1,730m (2004: £1,453m)
Underlying profit before financing costs: £200m (2004: £83m)
The Group has developed a broad and competitive portfolio of engines for the
civil market, addressing more than 30 different aircraft types for
international airlines, regional airlines and corporate operators.
Civil aerospace sales increased by 19 per cent and profit increased as a result
of the continuing cyclic recovery in engine deliveries, strong growth in
aftermarket services revenues, phasing of receipts from risk and revenue
sharing partners (RRSPs) and, in 2005, the absence of charges relating to
payments to financial RRSPs resulting from the introduction of IFRS 32/39 (See
note 4).
The Group delivered 441 civil engines in the first half, compared to 384 in the
first half of 2004. The installed base of civil jet engines increased to 11,230
engines, with an average in service age of 8.8 years.
The Group continues to experience strong growth in flying hours, with total
flying hours at record levels, up 10 per cent compared to the same period in
2004. Civil aftermarket services sales grew by 18 per cent and represented 59
per cent of civil aerospace sales. In the future, it is likely that the rate of
growth of services revenues will moderate but continue at double-digit levels.
Defence Aerospace
Sales: £677m (2004: £638m)
Underlying profit before financing costs: £94m (2004: £82m)
The Group's defence business is broadly based, with a strong portfolio of
products and services covering the key defence aerospace market sectors, from
combat and trainer to transport, tactical aircraft and helicopters.
Defence aerospace sales increased by 6 per cent and profit benefited from a
good performance on long-term development programmes and a favourable business
mix in the first half. The Group delivered 207 military engines, compared to
192 in the first half of 2004.
The defence business continued to develop its services capability, attracting
praise from the US Navy for its innovative `Power by the Hour' MRMS support
for the F405 engine on the T-45 Goshawk trainer aircraft. Defence aftermarket
services sales grew by four per cent and represented 55 per cent of defence
aerospace sales.
Marine
Sales: £488m (2004 £443m)
Underlying profit before financing costs: £39m (2004: £35m)
The Group has developed a leading position in commercial and naval marine
propulsion markets with a broad product range, from vessel design and gas
turbine engines, to water jets and deck handling equipment, and full systems
integration capability.
Marine sales increased by 10 per cent, reflecting continuing recovery in the
offshore oil and gas support sector. Profit increased by 11 per cent, largely
reflecting the fact that the comparative profit for 2004 included a £10m charge
in respect of the WR-21 programme. The marine business is expected to benefit
from a stronger business mix in the second half of the year.
Marine aftermarket services sales grew by 15 per cent and represented 46 per
cent of marine sales.
Energy
Sales: £237m (2004: £186m)
Underlying profit/(loss) before financing costs: (£3m) (2004: £1m)
In energy markets, Rolls-Royce has supplied more than 2,500 gas turbines to
customers in nearly 120 countries and is investing in new products and
capabilities for the oil and gas industry and for distributed electricity
generation.
Energy sales increased by 27 per cent reflecting strong demand from the oil and
gas sector. Underlying profit declined, reflecting the higher proportion of
original equipment sales in the oil and gas business and the continuing
investment to develop the power generation business.
Financial Services
Sales: £52m (2004: £30m)
Underlying profit/(loss) before financing costs: £3m (2004: (£2m))
The Financial Services businesses comprise engine leasing, aircraft leasing and
power project development.
In 2005, Rolls-Royce and Partners Finance, the Group's joint venture engine
leasing business, owned a portfolio of 271 engines, of which 99 per cent by
value were on lease to 42 customers.
Pembroke Group, the Group's joint venture aircraft leasing business, owned a
portfolio of 22 aircraft. These are all on lease to 14 customers.
Rolls-Royce Power Ventures, the Group's power project developer, has 12 power
generation projects underway.
FINANCIAL REVIEW
The firm order book, at constant exchange rates, was £21.9bn (2004: £18.1bn).
In addition, a further £1.1bn had been announced (2004: £1.5bn). Aftermarket
services represented 37 per cent of the firm order book (2004: 39 per cent).
On an underlying basis, after adjusting for the impact of the Group's hedging
activities on achieved exchange rates, sales increased by 14 per cent (see note
4).
Within cost of sales, payments to non-financial Risk and Revenue Sharing
Partners (RRSPs) amounted to £73m (2004: £112m, including £39m payments to
financial partners) and restructuring costs were £27m (2004: £16m).
Gross research and development investment was £283m (2004: £291m). Net research
and development investment was £147m (2004: £129m), of which £36m was
capitalised (2004: nil). Amortisation of previously capitalised research and
development costs amounted to £6m (2004: £9m), resulting in a net charge to the
income statement of £117m (2004: £138m). Receipts from RRSPs in respect of new
programme developments, reported as other operating income, were £44m (2004: £
15m).
The taxation charge was £47m (2004: £41m). The tax charge on an underlying
basis was £73m, representing 28 per cent of underlying profit before tax.
(2004: £41m, also representing 28 per cent of underlying profit before tax).
Cash inflow during the first half was £175m (2004: £44m). Average net debt was
£377m (2004: £626m). Net debt at the period-end was £37m (2004: £363m).
The net asset on the balance sheet at the half-year, in respect of TotalCare
packages, was £397m, an increase of £8m in the first half.
Provisions were £367m, (2004: £395m). Provisions carried forward in respect of
potential customer financing exposure amounted to £93m at the half year (2004:
£87m).
There were no material changes to the Group's gross and net contingent
liabilities in the first half of 2005 (see note 12).
The Group is continuing the practice of making 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
shareholders would have 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 interim payment to shareholders is equivalent to 3.34 pence per
ordinary share (2004: 3.18p), an increase of five per cent. The interim payment
of B shares will be made on 3 January 2006 to shareholders on the register on
14 October 2005. The final day of trading with entitlement to B shares
(equivalent to the ex-dividend date) is 12 October 2005.
* * * * *
An interview on the results with Rolls-Royce Chief Executive, Sir John Rose, is
available on video, audio and text on www.rolls-royce.com and www.cantos.com.
Photographs of directors and products are available at www.newscast.co.uk
Visit www.thenewsmarket.com to download broadcast-standard video or order a
Beta SP tape of Rolls-Royce products, services and facilities.
Consolidated Income Statement
Half Year Half Year Year to
to to 31 December
30 June 2005 30 June 2004 2004
£m £m £m
Revenue 3,184 2,750 5,947
Cost of sales and other operating (2,691) (2,460) (5,270)
income and costs*
Research and development costs (117) (138) (288)
Share of profit of joint ventures 26 12 19
Group operating profit 402 164 408
Profit/(loss) on sale of businesses (1) 11 9
Profit on ordinary activities before 401 175 417
financing costs
Financial income 116 19 58
Financial expenses (352) (45) (111)
Net financing costs** (note 5) (236) (26) (53)
Profit on ordinary activities before 165 149 364
taxation ***
Taxation (47) (41) (100)
Profit for the period 118 108 264
Attributable to:
Equity holders of the parent 119 108 263
Minority interest (1) - 1
Profit for the period 118 108 264
Payments to shareholders (59) (54) (140)
Earnings per ordinary share (note 3)
Basic 6.88p 6.44p 15.56p
Diluted 6.64p 6.25p 15.05p
* Other operating income 44 15 73
** Net interest payable (21) (26) (52)
*** Underlying profit before 260 149 364
taxation (note 3)
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/analyst/presentations/
Consolidated Balance Sheet
30 June 30 June 31 December
2005 2004 2004
£m £m £m
ASSETS
Non-current assets
Intangible assets (note 6) 1,236 1,085 1,227
Property, plant and equipment 1,666 1,729 1,672
Investments in joint ventures 241 221 211
Other investments 55 59 57
Deferred tax assets 292 322 318
3,490 3,416 3,485
Current assets
Inventory 1,163 1,051 1,090
Trade and other receivables 1,923 2,045 2,049
Taxation recoverable 3 7 2
Other financial assets 786 - -
Short-term investments 41 37 36
Cash and cash equivalents 1,767 1,434 1,452
5,683 4,574 4,629
Total assets 9,173 7,990 8,114
LIABILITIES
Current liabilities
Borrowings (461) (154) (207)
Other financial liabilities (283) - -
Trade and other payables (2,275) (2,285) (2,395)
Current tax liabilities (209) (191) (176)
Provisions (160) (215) (173)
(3,388) (2,845) (2,951)
Non-current liabilities
Borrowings (1,468) (1,680) (1,430)
Other financial liabilities (457) - -
Other payables (554) (488) (543)
Deferred tax liabilities (119) (92) (115)
Provisions (207) (180) (220)
Pensions liability (1,422) (1,460) (1,409)
(4,227) (3,900) (3,717)
Total liabilities (7,615) (6,745) (6,668)
Net assets 1,558 1,245 1,446
EQUITY
Capital and Reserves
Called up share capital 347 420 346
Share premium account 29 3 4
Other reserves 645 (80) 39
Retained earnings 531 899 1,053
Equity attributable to equity holders 1,552 1,242 1,442
of the parent
Minority interest 6 3 4
Total equity and reserves 1,558 1,245 1,446
Consolidated Cash Flow Statement
Half Year Half Year Year to
to to 31 December
30 June 30 June 2004
2005 2004
£m £m £m
Cash flows from operating activities
Net profit before taxation 165 149 364
Depreciation and amortisation 126 124 299
(Decrease)/increase in provisions (26) 1 (8)
(Increase)/decrease in working capital (101) (52) 33
Decrease in fair value of financial 153 - -
assets and liabilities
Other non cash movements 30 (20) (9)
Taxation paid (13) (40) (84)
Dividends received from joint ventures 6 2 15
Net cash inflow from operating 340 164 610
activities
Cash flows from investing activities
Disposals of unlisted investments 2 - -
Additions to intangible assets (55) (13) (142)
Purchases of property, plant and (73) (60) (175)
equipment
Disposals of property, plant and 10 14 66
equipment
Disposals of businesses 2 13 16
Investments in joint ventures (4) 2 (2)
Net cash flow from investing (118) (44) (237)
activities
Cash flows from financing activities
(Decrease)/increase in borrowings (3) 423 348
Capital element of finance lease (8) (8) (52)
payments
Net cash (outflow)/inflow from (11) 415 296
(decrease)/increase in borrowings
(Increase)/decrease in government (5) 2 3
securities and corporate bonds
Net interest paid (40) (44) (52)
Payments to shareholders and issue of 6 (30) (56)
shares
Purchase of own shares (13) (2) (2)
Net cash (outflow)/inflow from (63) 341 189
financing activities
Net increase in cash and cash 159 461 562
equivalents
Cash and cash equivalents at January 1 1,391 909 909
Exchange and other non-cash 11 (18) (32)
adjustments
Adjustment on implementation of IAS 32 - - (48)
and IAS 39
Cash and cash equivalents at period 1,561 1,352 1,391
end
Reconciliation of increase in cash and
cash equivalents to movement in net
funds
Increase in cash and cash equivalents 159 461 562
Cash (inflow)/outflow from (decrease)/ 5 (2) (3)
increase in government securities and
corporate bonds
Net cash outflow/(inflow) from 11 (415) (296)
decrease/(increase) in borrowings
Change in net funds resulting from 175 44 263
cash flows
Exchange and other non-cash 5 (7) (12)
adjustments
Fair value adjustments on borrowings 37 - -
Movement in net funds 217 37 251
Net debt at January 1 (149) (400) (400)
Adjustment on implementation of IAS 32 (189) - -
and IAS 39
(121) (363) (149)
Fair value of interest rate swaps 84 - -
hedging fixed rate borrowings
Net debt at period end (37) (363) (149)
Consolidated Statement of Recognised Income and
Expense
Half Year Half Year Year to
to to 31
30 June 30 June December
2005 2004 2004
£m £m £m
Net profit for the period 119 108 263
Foreign exchange adjustments 16 (81) (38)
Actuarial losses (29) (29) (7)
Deferred taxation 9 9 2
Recognised income and expense for 115 7 220
the period
Consolidated Statement of Changes in Equity
Half Year Half Year Year to
to to 31 December
30 June 30 June 2004
2005 2004
£m £m £m
At January 1 (as previously reported 1,442 2,140 2,140
under UK GAAP)
Adjustments on adoption of IFRS from - (927) (927)
January 1, 2004 *
Adjustments relating to adoption of 151 - -
IAS 32 and IAS 39 from January 1,
2005*
At January 1 (restated) 1,593 1,213 1,213
Recognised income and expense for the 115 7 220
period
Scrip dividend adjustments - 20 20
Redemption of B Shares (19) - (27)
New ordinary share capital issued 28 3 4
(net of expenses)
Relating to own shares (11) (2) (2)
Share-based payment adjustment 3 3 12
Other adjustments - (2) 2
Transfers from cashflow hedging (169) - -
reserves (fx and commodity contracts
- note 10)**
Transfer from cashflow hedging 2 - -
reserve (interest rate swaps)
Relating to forward purchase 10 - -
contracts for own shares
At period end 1,552 1,242 1,442
* See appendix 1 for reconciliations showing adjustments required on
adoption of IFRS for half year and full
year 2004 accounts.
** Gross hedge reserve release of £239m, a further £2m on commodity swaps
reduced by £72m in deferred tax
Notes
1. Basis of preparation
The attached interim financial statements are the first interim financial
statements following the adoption of International Financial Reporting
Standards (IFRS). As the Group has not previously published a full set of
financial statements under IFRS, the content of these statements has been
expanded to include summarised reconciliations of net assets and equity from
previously reported amounts under UK GAAP for the six months ended June 30,
2004 and year ended December 31, 2004 - see Appendix 1.
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. Summary details of the impact of adopting these standards
as at January 1, 2005 are also included in Appendix 1.
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 14th 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 more accurately reflect reclassifications.
These financial statements have been prepared in accordance with accounting
policies the Group expects to follow at the year-end. EU law (IAS Regulation EC
1606/2002) requires that the next annual consolidated financial statements of
the company, for the year ending 31 December 2005, be prepared in accordance
with IFRS adopted for use in the EU ("adopted IFRS").
This interim financial information has been prepared on the basis of the
recognition and measurement requirements of IFRS in issue that either are
endorsed by the EU and effective (or available for early adoption) at 31
December 2005 or are expected to be endorsed and effective (or available for
early adoption) at 31 December 2005, the Group's first annual reporting date at
which it is required to use adopted IFRSs. Based on these IFRS, the directors
have made assumptions about the accounting policies expected to be applied,
when the first annual IFRS financial statements are prepared for the year
ending 31 December 2005.
In particular, the directors have assumed that the IASB's amendment to IAS 19
will be adopted by the EU in sufficient time that it will be available for use
in the annual IFRS financial statements for the year ending 31 December 2005.
In addition, the adopted IFRS that will be effective (or available for early
adoption) in the annual financial statements for the year ending 31 December
2005 are still subject to change and to additional interpretations and
therefore cannot be determined with certainty. Accordingly, the accounting
policies for that annual period will be determined finally only when the annual
financial statements are prepared for the year ending 31 December 2005.
Section 240 Statement
The comparative figures for the financial year ended 31 December 2004 and half
year ended 30 June 2004 are not the company's statutory accounts for that
financial year. Those accounts, which were prepared under UK Generally Accepted
Accounting Practices, have been reported on by the company's auditors and
delivered to the registrar of companies. The report of the auditors was
unqualified and did not contain statements under section 237(2) or (3) of the
Companies Act 1985. The interim financial statements for the six months ended
30 June 2005 were approved by the Board on 27 July 2005.
2. Analysis by business segment
Half Year Half Year Year to
to to 31
30 June 30 June December
2005 2004 2004
£m £m £m
Revenue
Civil aerospace 1,730 1,453 3,040
Defence 677 638 1,374
Marine 488 443 963
Energy 237 186 489
Financial services 52 30 81
3,184 2,750 5,947
Profit before financing costs
Civil aerospace 299 83 194
Defence 95 82 179
Marine 37 35 78
Energy (9) 1 14
Financial services 3 (2) (7)
Central costs (24) (24) (41)
401 175 417
Underlying profit before financing
costs*
Civil aerospace 200 83 194
Defence 94 82 179
Marine 39 35 78
Energy (3) 1 14
Financial services 3 (2) (7)
Central costs (24) (24) (41)
309 175 417
*excluding unrealised gains on fair
value adjustments (see note 3)
Net assets/liabilities
Civil aerospace 1,414 1,317 1,343
Defence (8) 54 51
Marine 566 551 565
Energy 324 303 324
Financial services 279 417 314
Unallocated pension liabilities (980) (1,034) (1,002)
Net debt (37) (363) (149)
Net assets 1,558 1,245 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 comparative periods, half year to 30 June 2004 and 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 £119m (2004 half year £108m, full year
£263m) by 1,729 million (2004 half year 1,677 million, full year 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.
Half Year to 30 June 2005
£m £m £m Pence
Profit before financing costs 401
Profit before taxation 165
Profit attributable to equity 119 6.88
holders of the parent
Exclude:
Release of hedge reserves (note 10) (236) (236) (236) (13.65)
Unrealised fair value changes to - 180 180 10.41
derivative
contracts (note 7)
Revaluation of trading assets and (67) (67) (3.88)
liabilities (note 9)
Exchange differences and forecast - 44 44 2.55
changes relating
to Risk and Revenue Sharing
Partnerships (note 8)
Include:
Realised gains on settled derivative 176 206 206 11.91
contracts (note 7)
Less fx derivative gains carried (32) (32) (32) (1.85)
forward in contract
accounting (note 7)
Related tax effect - - (26) (1.50)
Underlying profit before financing 309
costs
Underlying profit before taxation 260
Underlying profit for the period 188
attributable to equity holders of
the parent
Underlying earnings per share 10.87
Diluted earnings per ordinary share, are calculated by dividing the profit
attributable to ordinary shareholders of £119m (2004 half year £108m, full year
£263m) by 1,791 million (2004 half year 1,727 million, full year 1,747 million)
ordinary shares, being 1,729 million (2004 half year 1,677 million, full year
1,690 million) as above, adjusted by the bonus element of existing share
options of 62 million
(2004 half year 50 million, full year 57 million).
4. Derivation of underlying and "like-for-like" results
Half Year Half Year Year on
to to Year
30 June 30 June Changes(%)
2005 2004
£m £m
Sales:
Sales 3,184 2,750 16%
Adjustment to reflect FX impact (49) -
Underlying Sales* 3,135 2,750 14%
Group services sales:
Sales 1,763 1,505 17%
Adjustment to reflect FX impact (29) -
Underlying services sales* 1,734 1,505 15%
Profit before finance costs:
Underlying profit before finance 309 175 77%
costs (See note 3)
2004 treatment of financial RRSP - 39
payments within cost of sales
Like-for-like profit before finance 309 214 44%
costs
Profit before tax:
Underlying profit before tax 260 149 74%
2004 treatment of financial RRSP - 39
payments within cost of sales
Equivalent notional finance charge - (19)
Like-for-like profit before tax 260 169 54%
* Underlying sales reflects the 2005 turnover after removing the impact of the
IAS 39 hedge reserve adjustments and includes the benefit of settled foreign
exchange transactions. All of the £49m adjustment are within the civil
aerospace segment.
5. Net financing costs
Half Year Half Year Year to
to to 31 December
30 June 30 June 2004
2005 2004
£m £m £m
Interest receivable 29 19 58
Gains on commodity derivatives 50 - -
Net foreign exchange gains 37 - -
Financial income 116 19 58
Interest payable (50) (45) (110)
Fair value losses on foreign currency (230) - -
contracts
Finance charge relating to financial (63) - -
risk and revenue sharing partnerships
(Note 8)
Financing charge on post-retirement (5) - (1)
benefits
Other financing charges (4) - -
Financial expenses (352) (45) (111)
Net financing costs (236) (26) (53)
Analysed as:
Net interest payable (21) (26) (52)
Net other financing expenses (215) - (1)
Net financing costs (236) (26) (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 adjustments (19) - - - (19)
Additions at cost - 3 36 16 55
At June 30, 2005 740 277 347 245 1,609
Accumulated
depreciation:
At January 1, 2005 - 129 103 114 346
Exchange adjustments - - - - -
Provided during the - 4 6 17 27
year
At June 30, 2005 - 133 109 131 373
Net book value at 740 144 238 114 1,236
June 30, 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 986 9 995
January 1, 2005
Fair value changes to derivative (230) 50 (180)
contracts
Fair value relating to contracts (195) (11) (206)
utilised*
Fair value at period end 561 48 609
* fair value of utilised contracts 32 - 32
carried forward in
contract accounting balances
8. Financial Risk and Revenue Sharing Partnerships (RRSPs)
Movements in the recognised value of RRSPs are as follows:
£m
On adoption of IAS 32 and IAS 39 on (468)
January 1, 2005
Financing charge* (19)
Excluded from underlying profit:
-Exchange adjustments* (37)
-Change in forecasts* (7)
Cash paid to partners 37
Fair value at period end (494)
* Total amounts included within the finance charges within the income statement
£63m.
9. Revaluation of trading assets and liabilities
£m
Net foreign currency trading assets
and liabilities
valued:
On adoption of IAS 32 and IAS 39 on
January 1, 2005
- on the basis of forward exchange (10)
contracts held
- at the spot exchange rate at period (104)
end
Difference on January 1, 2005 (94)
At June 30, 2005
- on the basis of forward exchange 74
contracts held
- at the spot exchange rate at period 47
end
Difference at June 30, 2005 (27)
Movement excluded from underlying (67)
profit
10. 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 996 9 1,005
January 1, 2005*
Transferred to income statement** (239) (2) (241)
At June 30, 2005 757 7 764
* Deferred tax on opening balance (299) (3) (302)
** Deferred tax on amount 72 - 72
transferred
Includes £5m in respect of
derivatives settled prior
to transition to IFRS
11. Group employees at period end
30 June 30 June 31 December
2005 2004 2004
Number Number Number
Civil aerospace 20,300 19,800 20,100
Defence 5,000 5,100 5,100
Marine 7,200 7,100 7,100
Energy 2,800 2,900 3,000
Financial services 100 100 100
35,400 35,000 35,400
12. 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 UKGAAP, 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 better
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 at December 31, 2004, 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 $1,143m (£595m, previously reported £999m), of which $18m (£9m, previously
reported £12m) related to sales finance support to joint ventures. 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 $294m (£153m, previously reported £189m).
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 $384m (£200m, previously reported £277m)
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.
During the first half of 2005 there were no material changes to the maximum
gross and net contingent liabilities.
13. Pensions and other post-retirement benefits
During the first half of 2005 there have been no significant changes in the
pension scheme deficit. A charge of £61m (2004:£47m) for pensions and other
post-retirement benefits is included in the income statement.
14. Share-based payments
In accordance with IFRS 2 a charge of £7m (2004:£4m) relating to the fair value
of share-based schemes granted since November 7, 2002 is included in the income
statement.
ENDS
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