Last checked at 26 Jul 2012 07:00
26 July, 2012 ROLLS-ROYCE HOLDINGS PLC HALF-YEAR 2012 RESULTSGroup Highlights
- Order book of £60.1bn, up four per cent.
- Underlying revenue of £5.8bn, up five per cent.
- Underlying profit before tax of £637m, up seven per cent.
- First half payment to shareholders of 7.6 pence per share, up ten per cent.
- Completion of sale of share holding in International Aero Engines AG (IAE).
- Full year Group guidance confirmed.
H1 12 H1 11 +/-Order book £60.1bn £57.6bn* +4%Underlying revenue** £5.76bn £5.46bn +5%
Underlying profit before tax** £637m £595m
+7%
Underlying earnings per share 26.54p 23.89p
+11%
Half-year payment to shareholders 7.6p 6.9p
+10%
Reported revenue £5.72bn £5.36bn
+7%
Reported profit before financing £1,280m £716m
+79% Net cash £869m £223m†Average net cash £(590)m £780m
* Restated 2011 year-end data excluding IAE order book of £4.6bn ** See Note 2 on p.19 for explanation †Full year 2011 data.
John Rishton, Chief Executive, said:
"Rolls-Royce has delivered solid growth in underlying revenue and underlying profit in the first half of the year.
"We continue to invest to support future growth, including our new production facility in Singapore, a new turbine blade casting plant in the UK, a new stator facility in the USA and a new assembly plant for our Energy business in Brazil.
"For the full year, we continue to expect good growth in underlying profit with cash flow around breakeven, excluding the positive impact of the Tognum acquisition and the sale of our equity stake in IAE."
Group Overview
In the first half of the year, underlying revenue increased by five per cent and underlying profit by seven per cent. We continue to invest in technology, infrastructure and people. These investments will enable us to meet our customer commitments and improve efficiency.
This programme of investment continued in the first half:
- We opened our new state-of-the-art facilities in Singapore, where we will manufacture wide-chord fan blades and assemble large civil engines for the first time outside the UK. We will be producing engines later in 2012 and will be at full production capability by the end of 2013.
- We are building a new casting facility at Rotherham in the UK that will have capacity to produce 100,000 turbine blades a year.
- A new advanced manufacturing facility at Indianapolis will produce compressor banded stators for our Civil Aerospace business.
- At Santa Cruz in Brazil work has started on a new assembly plant for our Energy business.
- We began building a new nuclear reactor core factory at Derby in the UK as part of a £1bn contract with the Ministry of Defence to support the UK's nuclear powered submarine fleet.
- Construction has begun on a new Heathrow Services Centre. This will expand the scale and capability of the services operations for our growing Civil Aerospace customer base at London Heathrow.
- We announced an expansion programme of our global network of Authorised Maintenance Centres (AMCs) for our Defence Aerospace customers. These AMCs will enhance our capacity to provide repair and overhaul services for the installed base of T56 engines that power military transport aircraft such as the C-130 Hercules and the P3 Orion.
- We announced our intention to acquire Aero Engine Controls ("AEC"), a jointventure with Goodrich Corporation. The transaction will give us full ownershipof a critical capability that enhances jet engine performance.
The status of two major transactions is as follows:
1. Sale of IAE Share Holding
The sale to Pratt & Whitney of our 32.5% share holding in IAEcompleted for a consideration of US$1.5 billion, subject to working capitaladjustments. We remain an essential supplier to IAE and will benefit from arevenue stream from the current installed fleet of V2500-powered aircraft forthe next 15 years. Rolls-Royce remains committed to the mid-size aircraftmarket, to IAE and to its customers and will continue to be responsible forthe manufacture of high-pressure compressors, fan blades and discs as well asthe provision of engineering support and final assembly of 50 per cent ofV2500 engines.
Our long and successful partnership with Pratt & Whitney will continue through a new venture to be established, subject to regulatory approval, to develop engines for the next generation of mid-size aircraft. The other IAE partners, Japanese Aero Engines Corporation (JAEC) and MTU Aero Engines GmbH (MTU), have also agreed to join this new venture.
2. Acquisition of Tognum AG
Engine Holding GmbH, our 50:50 joint venture with Daimler, owns over 99% of shares in Tognum. The German legal process to acquire the remaining shares is now expected to be completed in the first half of 2013. The Group will therefore equity account Tognum for 2012 and fully consolidate it upon completion.
Group Trading Summary Order Book- The order book increased four per cent to £60.1bn, adjusted forthe IAE disposal. Order intake of £9.1bn comprised new orders of £6.0bn inCivil Aerospace, £0.6bn in Defence Aerospace, £2.2bn in Marine and £0.3bn inEnergy.Income Statement
- Underlying revenue, up five per cent to £5.76bn, included five per cent growth in underlying OE revenue (£2.72bn) and six per cent growth in underlying services revenue (£3.04bn).
- Underlying OE revenue growth included increased deliveries ofTrent, V2500 and corporate engines in Civil Aerospace (up 26 per cent) and ofmilitary transport and civil helicopter engines in Defence Aerospace (up 11per cent). Growth was offset by the reduction in Marine (down 11 per cent) andEnergy (down 43 per cent).
- Underlying services revenue increased six per cent. Services grew ten per cent in Civil Aerospace, in line with growth in the installed base, and ten per cent in Defence Aerospace, excluding the £60m one-off SDSR settlement in 2011. Energy also saw good growth. Marine was down six per cent reflecting deferrals of maintenance activity by customers and lower spares spend.
- Underlying profit before tax increased seven per cent to £637m,reflecting revenue growth, revenue mix, unit cost reduction and thecontribution of Tognum. These benefits were partially offset in CivilAerospace by higher R&D charges and lower entry fees associated with major newprogrammes, and in Defence Aerospace by the non recurrence of the £60m SDSRsettlement. Underlying earnings per share (UEPS) improved 11 per cent comparedwith H1 2011.Balance Sheet- The balance sheet remains strong with net cash at period end of£869m, up from £223m at the end of 2011. Average net cash reduced since thefirst half of 2011, primarily due to the acquisition of Tognum in the secondhalf of 2011. The £953m consideration for the sale of the IAE share holdinghad no effect on average net cash in the first half but will have an impact inthe second half of the year.
- In April, Standard & Poor's Ratings Services raised its long- and short-term corporate credit ratings for the Group to 'A/A-1' from 'A-/A-2'.
- The Group continued to have good liquidity with £3.15bn of cash and committed facilities. Debt maturities remain well spread through to 2019.
- Pension liabilities increased by £173m on an accounting basis due to a reduction in the discount rate. On an economic basis however, funding requirements remain stable following the series of measures taken in recent years to achieve greater certainty for our major UK schemes.
Cash Flow
- A cash inflow of £646m during the period included £953m from thedisposal of IAE and £167m for the contribution of Bergen to Engine Holding.Excluding acquisitions, disposals and foreign exchange, the outflow of £447mreflects the continued investment programme in future growth and the increasein net working capital required ahead of OE volume growth, predominantly inCivil Aerospace.
Group Prospects
Confirming full year 2012 Group guidance for growth in underlying revenue and underlying profit:
For the full year 2012, the Group continues to expect good growth in underlying revenue and underlying profit, with cash flow around breakeven as we continue to invest for future growth.
This guidance includes the performance of Bergen, but excludes the impact of the Tognum acquisition and the IAE transaction, for which further information is given below.
In Civil Aerospace, we anticipate good growth in underlying revenueand strong growth in underlying profit. In Defence Aerospace we expect modestgrowth in underlying revenue and profit. In Marine we expect a modest increasein underlying revenue, with underlying profit broadly flat. And in Energy wenow expect underlying revenue to be broadly flat with some improvement inunderlying profit.
The implications of the Tognum acquisition on 2012 performance:
The Group cannot provide financial guidance on Tognum while it is still listed.
Tognum will report its second quarter results on 7 August 2012.
The implications of the IAE transaction on 2012 performance:
The Group expects the revised trading arrangements with IAE toproduce a benefit of around £70m to Civil Aerospace's underlying profit in2012.Enquiries:Investors: Media:Simon Goodson Josh RosenstockDirector - Investor Relations Director of External CommunicationsRolls-Royce plc Rolls-Royce plcTel: +44 (0)20 7227 9237 Tel: +44 (0)20 7227 9163simon.goodson@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 fromwww.rolls-royce.com/investors.This Half-Year Results Announcement contains forward-lookingstatements. Any statements that express forecasts, expectations andprojections are not guarantees of future performance and will not be updated.By their nature, these statements involve risk and uncertainty, and a numberof factors could cause material differences to the actual results ordevelopments. This report is intended to provide information to shareholders,is not designed to be relied upon by any other party, or for any other purposeand the Company and its directors accept no liability to any other personother than under English law.Business Segment Reviews[1]Civil Aerospace H1 12 H1 11 ChangeOrder book (£bn) 49.4 47.3* +4%Engine deliveries 533 462 +15%Underlying revenue (£m) 3,034 2,604 +17%Underlying OE revenue (£m) 1,314 1,047 +26%
Underlying services revenue (£m) 1,720 1,557
+10%
Underlying profit before financing (£m) 310 250
+24%
* Restated 2011 year-end data excluding IAE order book of £4.6bn
Financial
- New orders of £6.0bn (£6.5bn in H1 2011) resulted in a four percent increase in the order book. We continue to grow our wide-body marketshare with Trent engines making up around 70 per cent of our order book ofalmost 3,300 engines. We remain committed to the mid-size market both as asupplier to IAE and via our planned new joint venture with the IAE partners todevelop the next generation of engines for this market segment. Our continuedsuccess in the corporate market is being driven by primarily by the success ofour BR700 series of engines for large cabin Gulfstream and Bombardieraircraft. Significant orders in the period included:
- Trent 700 engines and TotalCare support for a total of 44 Airbus A330s for China Eastern, Synergy, Garuda Indonesia, Air Pacific and Etihad.
- Trent 1000 engines and TotalCare support for five Boeing 787s for Avianca and Air New Zealand.
- Trent XWB engines and TotalCare support for six A350s for Cathay Pacific.
- Revenue increased by 17 per cent. There was a 26 per cent growthin OE revenue, primarily reflecting higher deliveries of Trent and corporateengines. Services revenue grew by ten per cent consistent with growth in theinstalled base of thrust.
- Profit increased by 24 per cent due to increased OE volume, better OE mix, services growth and unit cost improvements. This growth was tempered by a higher R&D charge to higher spend and lower capitalisation related to major new programme activity, and lower entry fees related to the Trent XWB.
Portfolio- The Trent XWB engine took to the skies for the first time,powering an Airbus A380 test aircraft, and completed over 70 hours and over 20flights. The Trent XWB is the world's most efficient large jet engine and isthe fastest-selling Trent engine ever, with orders for more than 1,100 enginesalready received.
- Trent 1000 engines have now powered more than 4,500 flights on ten Boeing 787s with Japanese airline ANA.
Defence Aerospace H1 12 H1 11 ChangeOrder book (£bn) 5.5 6.0* -8%Engine deliveries 393 330 +19%Underlying revenue (£m) 1,134 1,088 +4%
Underlying OE revenue (£m) 559 504
+11%
Underlying services revenue (£m) 575 584
-2%
Underlying profit before financing (£m) 196 219
-11% * 2011 year-end dataFinancial- An eight per cent reduction in the order book to £5.5bn reflectsthe budgetary pressures of our major customers in Europe and North America.Net order intake was £0.6bn and includes cancellations of £0.4bn, the majorityof which reflects the cancellation of the C27J aircraft contract by the USDepartment of Defense ("DoD"). The business continues to benefit from thebreadth and diversity of our portfolio and our access to developing economies.Significant orders in the period included:
- Over US$870m worth of contracts with the US DoD for OE and services for military transport engines for the US Air Force, US Marine Corps and US Navy.
- A US$315m contract from Pratt & Whitney for 17 LiftSystem sets for the F-35B STOVL variant of the Lightning II Joint Strike Fighter.
- A £100m contract extension to maintain the engines for the UK MoD's fleet of C-130 military transport and VC10 tanker fleets of aircraft.
- A contract with the Royal Australian Air Force to help improve the fuel efficiency of its fleet of C-130 military transport aircraft.
- Revenue increased by four per cent, reflecting an 11 per centincrease in OE revenue. OE revenue benefited from a 19 per cent increase inengine deliveries, with more military transport and combat engines andsignificantly more civil helicopter engines delivered during the period.Services revenue fell by two per cent, however adjusted for the non-recurrenceof the £60m SDSR benefit in H1 2011, services revenue increased by ten percent. This increase highlights how our large installed base will continue toprovide services opportunities as customers seek to optimise the efficiency oftheir aircraft.
- Profit was down 11 per cent, primarily due to the non-recurrence of the £60m SDSR benefit in 2011. Adjusted for the non-recurrence of this benefit, profit increased by 23 per cent due to increased OE volumes and mix, growth in services and unit cost improvements.
Portfolio
- The F-35B made its maiden training mission and also its 500th short take-off during the first half. The DoD lifted the probationary status for the F-35B STOVL variant of the JSF, safeguarding the future of the LiftSystem.
- We continue to work with our partners on the TP400 engine towards the 2013 entry into service of the A400M military transport aircraft.
- We continued to invest in the ADVENT development programme for the next generation of heavy combat aircraft for the United States Air Force, and are bidding for inclusion in the AETD development programme.
Marine H1 12 H1 11 ChangeOrder book (£bn) 3.9 2.7* +44%Underlying revenue (£m) 1,070 1,171 -9%
Underlying OE revenue (£m) 622 695
-11%
Underlying services revenue (£m) 448 476
-6%
Underlying profit before financing (£m) 147 157
-6%
* 2011 year-end data
N.B. H1 2011 restated to take into account the transfer of Bergen to Engine Holding on January 2nd as per Note 2 on p.19
Financial
- A 44 per cent increase in the order book to £3.9bn includes£2.2bn of new orders compared with £1.0bn in H1 2011. Most of this increase isdue to the £1bn order by the UK MoD to deliver reactor cores for its fleet ofnuclear-powered submarines. Offshore orders were encouraging and reflected theincreasing bid activity in the Oil & Gas sector in areas such as Brazil,partially offset by weak order flow in the Merchant sector. The Naval businessremains stable. Significant orders in the period included:
- A contract with the US Navy to supply power and propulsion systems for the two latest vessels in the Littoral Combat Ship (LCS) programme.
- A contract with the Republic of Korea's Navy to supply the MT30 gas turbine to power a new FFX frigate. This is the first order for the MT30 in Asia.
- Over £100m of contracts to design and equip 13 Offshore Supply Vessels (OSVs) for Norway's Farstad Shipping, Korea's Hyundai and Brazil's Navega§£o S£o Miguel.
- Revenue fell by nine per cent reflecting lower OE volumes anddeferrals by customers of services activity. Services revenue was alsoaffected by lower customer spend as a result of reduced workscopes. This waspartially offset by a better capture of the available market from the recentinvestment in the global network of services centres.
- Profit reduced by six per cent due to lower OE and services volumes, competitive pricing pressures and some adverse foreign exchange movement, partially offset by cost reduction.
Portfolio
- The reactor core contract with the UK MoD includes the regeneration of our manufacturing facility in Derby. The phased re-build will provide a leading-edge manufacturing facility with the highest standards of safety to support the future programme needs of the UK MoD.
- The OSVs we design and equip support complex and demanding subseaprojects, including construction and servicing of oil and gas wells on the seabed up to 3,000 metres beneath sea level. We are well positioned to takeadvantage of growth in this market as an increasing proportion of the world'soil supply comes from beneath deep seas.- Tognum will add complementary high-speed diesel and otherproducts and scale to our existing portfolio and systems integrationcapabilities.Energy H1 12 H1 11 ChangeOrder book (£bn) 1.3 1.4* -7%Underlying revenue (£m) 445 541 -18%Underlying OE revenue (£m) 179 312 -43%
Underlying services revenue (£m) 266 229
+16%
Underlying loss before financing (£m) (5) (7)
+29%
* 2011 year-end data
N.B. H1 2011 restated to take into account the transfer of Bergen to Engine Holding on January 2nd as per Note 2 on p.19
Financial
- A seven per cent reduction in the order book included an orderintake of £0.3bn (£0.4bn in H1 2011). In the Oil & Gas market, high oil pricescontinue to sustain bid activity around the world, albeit with pricingpressures and order deferrals by some customers. The traditional powergeneration market remains suppressed and industrial demand has not yet fullyrecovered to pre-2008 levels, with few new projects being tendered in thedeveloped world. However we continue to see opportunities in the developingeconomies. We continue to invest for future growth in Civil Nuclear.Significant orders in the period included:
- A Power Generation contract to supply two industrial Trent 60 WLE gas turbines to power LUKOIL's plant in Russia.
- A Power Generation contract to supply a Trent 60 WLE gas turbine for the El Alto plant in the Kenko Zone that will power over 100,000 homes in and around La Paz, Bolivia.
- An Oil & Gas contract to supply an RB211 to operate PTT's Ethane Separation Plant in Thailand.
- Revenue fell by 18 per cent due to a significant reduction in OErevenue and adverse revenue mix in Oil & Gas and in Power Generation. The OEreduction was partially offset by a 16 per cent increase in services revenue.Services revenue, particularly in Oil & Gas, benefited from a betterpenetration of the aftermarket services market for the installed base acrossall markets.
- The reduced loss in H1 is due to the increased aftermarket volume partly offset by higher R&D spend, lower OE volumes and also increased investment in Civil Nuclear.
Portfolio
- An agreement was signed with Areva to collaborate further on civil nuclear new build projects for which we will manufacture complex components and provide engineering and technical services.
- LG has invested $45m to acquire a 51% share holding in Rolls-Royce Fuel Systems (US) Inc. that will enable the business to further the research, development, testing and commercialisation of solid oxide fuel cell technology.
- Ground has been broken for a new purpose-built gas turbine package, assembly and test facility in Santa Cruz in the state of Rio de Janeiro. The facility is expected to start production from the first quarter of 2013, including equipment for Petrobras for the Lula (Tupi) and Guar¡ oilfields.
- As in our Marine business, Tognum will add complementary products and scale to our existing portfolio and systems integration capabilities.
Additional Financial Information
Income statement
Underlying income statement extracts - £ million
H1 12 H1 11 ChangeRevenue 5,757 5,463 +5%Civil Aerospace 3,034 2,604 +17%Defence Aerospace 1,134 1,088 +4%Marine 1,070 1,171 -9%Energy 445 541 -18%Engine Holding 142 172 -17%Intra-segment (68) (113)
Profit before financing costs and taxation
668 619 +8%Civil Aerospace 310 250 +24%Defence Aerospace 196 219 -11%Marine 147 157 -6%Energy (5) (7) +29%Engine Holding 52 25 +108%Intra-segment (6) -Central costs (26) (25) -4%Net financing costs (31) (24) -29%Profit before taxation 637 595 +7%Taxation (140) (153) +8%Profit for the period 491 442 +11%EPS 26.54p 23.89p +11%Payment to shareholders 7.6p 6.9p +10%Other itemsOther operating income 17 52 -67%Gross R&D investment 428 431 +1%
Net R&D charged to the income statement
285 210 -36%
- Engine Holding, our 50:50 joint venture with Daimler, owns 100 per cent of Bergen and over 99 per cent of Tognum. Engine Holding's revenue and H1 2011 profit includes only the contribution of Bergen (100%). Engine Holding's H1 2012 profit of £52m includes 100 per cent of Bergen's profit of £17m and our share of Tognum's post tax contribution of £35m on an equity accounting basis. Further details are provided in Note 2 on p. 19.
- Underlying profit before financing costs and taxation is discussed in the relevant business sections.
- Underlying financing costs increased by £7m, largely reflecting an increased interest charge, consistent with the lower average cash balances following the Tognum investment in H2 2011.
- Underlying taxation of £140m, represents an underlying tax rate of 22.0 per cent, lower than the 25.6 per cent in 2011, primarily due to the impact of equity accounting Tognum (on a post tax basis) which dilutes the overall Group underlying rate.
- Underlying EPS increased by 11% to 26.54 pence, marginally lower than the increase in underlying profit for the period.
- Payment to shareholders is made in the form of C Shares which is explained on p. 26. An interim payment to shareholders of 7.6 pence per share will be made, a ten per cent increase to 2011.
- Other operating income relates to programme receipts from RRSPs, which reimburse past R&D costs. These receipts decreased by 67 per cent in 2012 due to the phasing of major programmes.
- Net R&D charged to the income statement increased by 36 per cent to £285m. This reflects a combination of increased investment, compounded by lower capitalisation and higher amortisation due to the phasing of new programmes.
- Foreign exchange rate movements influence the reported incomestatement, the cash flow and closing net cash balance. The average and spotrates for the principal trading currencies of the Group are shown in the tablebelow: 2012 2011USD per GBP Opening spot rate 1.55 1.57 Closing spot rate 1.57 1.61 Average spot rate 1.58 1.62 EUR per GBP Opening spot rate 1.20 1.17 Closing spot rate 1.24 1.11 Average spot rate 1.22 1.15
- The adjustments between the underlying income statement and the reported income statement are set out in Note 2 to the condensed financial statements on p.19.
Balance sheet
Summary balance sheet - £ million
HY 12 FY 11Intangible assets 2,865 2,882Property, plant and equipment 2,394 2,338
Net post-retirement scheme deficits
(570) (397)Net working capital (796) (1,098)Net funds 869 223Provisions (457) (502)
Net financial assets and liabilities (646) (718)Investment in joint ventures and associates 1,833 1,680Assets held for sale 5 178Other net assets and liabilities
(16) (67)Net assets 5,481 4,519Other itemsUSD hedge book $24,100 $22,000Net TotalCare assets 1,124 956
Gross customer finance contingent liabilities 602 612Net customer finance contingent liabilities 76 124- Intangible assets relate to goodwill, certification costs,participation fees, development expenditure, recoverable engine costs,software and other costs that represent long-term assets of the Group. Inaggregate, these assets remained broadly unchanged at £2.9bn with increasedsoftware costs being offset by amortisation of previously capitaliseddevelopment costs. The carrying values of the intangible assets are assessedfor impairment against the present value of forecast cash flows generated bythe intangible asset. The principal risks remain: reductions in assumed marketshare; programme timings; increases in unit cost assumptions; and adversemovements in discount rates. There have been no impairments in 2012. Furtherdetails are given in Note 7 of the condensed financial statements on p.22.
- Property, plant and equipment increased by two per cent to £2.4bn due to the ongoing development and refreshment of facilities and tooling, as the Group prepares for increased production volumes.
- Net post-retirement scheme deficits increased by 44 per cent,primarily due to a reduction in the discount rates used to value theliabilities for accounting purposes. Over 80 per cent of the assets are heldin liability-driven investment portfolios that are designed to match changesto the liabilities on a funding basis.- Net funds increased to £869m largely due to the $1.5bnconsideration received following the sale of the Group's 32.5 per centshareholding in IAE. This was partly offset by the impact of increased capitalexpenditure and an increase in working capital. As a result of the Tognuminvestment in the second half of 2011, average net funds decreased from £780mto £(590)m (£755m excluding Tognum). The Group continues to have access togood liquidity with £0.9bn undrawn committed facilities and bond proceeds of£1.4bn, providing total liquidity of £3.2bn when net funds of £0.9bn are takeninto consideration.
- Investment - joint ventures and associates increased by £153m to £1.8bn, the increase principally reflects the contribution of Bergen Engines AS (£167m) to Engine Holding.
- Assets held for sale were derecognised following the completion of the IAE restructuring.
- Provisions largely relate to warranties and guarantees provided to secure the sale of OE and services. Provisions in total reduced modestly to £457m following utilisation in the period of previously charged provisions.
- Net financial assets and liabilities relate to financial RRSPsand the fair value of foreign exchange, commodity and interest rate contracts,set out in detail in Note 8 to the condensed financial statements on p.23. Thechange largely reflects the impact of the change in the GBP/USD exchange rateon the valuation of foreign exchange contracts.
- The USD hedge book of US$24.1bn represents over five years of net exposure and has an average book rate of £1 to US$1.59. Current forward market exchange rates are similar to current average book rates.
- Net TotalCare assets relate to long-term service agreement contracts in the Civil Aerospace business, including the flagship services product TotalCare. These assets represent the timing difference between the recognition of income and costs in the income statement and cash receipts and payments.
- Customer financing facilitates the sale of OE and services byproviding financing support from to certain customers. Where such support isprovided by the Group, it is generally to customers of the civil aerospacebusiness and takes the form of various types of credit and asset valueguarantees. The contingent liabilities represent the maximum aggregatediscounted gross and net exposure in respect of delivered aircraft, regardlessof the point in time at which such exposures may arise. During the first halfof 2012, the Group's gross exposure remained relatively stable. The netexposure reduced to £76m (December 31, 2011 £124m) primarily as a result ofthe IAE restructuring.Condensed consolidated income statementFor the half-year ended June 30, 2012 Half-year to June 30, 2012 Half-year Year to to June December Excluding IAE IAE 30, 2011 31, 2011 restructuring restructuring Total Notes £m £m £m £m £mRevenue 2 5,720 - 5,720 5,364 11,124Cost of sales (4,465) - (4,465) (4,077) (8,676)Gross profit 1,255 - 1,255 1,287 2,448Other operating income 17 - 17 51 69
Commercial and administrative costs (474) - (474) (472) (984)Research and development costs (285) - (285) (210) (463)Share of results of joint ventures 67 -
67 60and associates 116Operating profit 580 - 580 716 1,186
Profit on restructuring/disposal of businesses - 700 700 - 3Profit before financing and taxation 580 700
1,280 716 1,189 Financing income 3 278 - 278 671 456Financing costs 3 (250) - (250) (250) (540)Net financing 28 - 28 421 (84) Profit before taxation 1 608 700 1,308 1,137 1,105Taxation 5 (141) 37 (104) (295) (257)Profit for the period 467 737 1,204 842 848 Attributable to:Ordinary shareholders 461 737 1,198 842 850Non-controlling interests 6 - 6 - (2)Profit for the period 467 737 1,204 842 848 Earnings per ordinary share 4attributable to shareholdersBasic 24.92p 39.84p 64.76p 45.51p 45.95pDiluted 63.83p 44.93p 45.33pUnderlying earnings per ordinaryshare are shown in note 4. Payments to ordinary shareholders in 6respect of the periodPence per share 7.6p 6.9p 17.5pTotal 142 129 328
1 Underlying profit before taxation 2 637 - 637 595 1,157
Condensed consolidated statement of comprehensive income
For the half-year ended June 30, 2012
Half-year Half-year Year to to June to June December 30, 2012 30, 2011 31, 2011 £m £m £m
Profit for the period 1,204 842 848Other comprehensive income (OCI)Foreign exchange translation differences on foreign operations (102) 76 (102)Movements in post-retirement schemes (216) (81) 123Amount credited to cash flow hedging reserve (1) 30 -Share of OCI of joint ventures and associates 14 5 (10)Related tax movements 74 17 (54)Total comprehensive income for the period
973 889 805 Attributable to:Ordinary shareholders 968 889 808
Non-controlling interests 5 - (3)Total comprehensive income for the period 973 889 805
Condensed consolidated balance sheet
At June 30, 2012 June June December 30, 2012 30, 2011 31, 2011 Notes £m £m £mASSETSNon-current assetsIntangible assets 7 2,865 3,027 2,882Property, plant and equipment 2,394 2,205 2,338Investments - joint ventures and associates 1,833
469 1,680Investments - other 10 11 10Other financial assets 8 302 485 327Deferred tax assets 464 309 368
Post-retirement scheme surpluses 9 337
249 503 8,205 6,755 8,108Current assetsInventories 2,742 2,612 2,561Trade and other receivables 4,015 4,070 4,009Taxation recoverable 15 5 20Other financial assets 8 73 187 91Short-term investments 12 3 11Cash and cash equivalents 2,160 2,526 1,310Assets held for sale 5 9 313 9,022 9,412 8,315Total assets 17,227 16,167 16,423 LIABILITIESCurrent liabilitiesBorrowings (4) - (20)Other financial liabilities 8 (110) (56) (111)Trade and other payables (6,732) (6,116) (6,236)Current tax liabilities (177) (173) (138)
Provisions for liabilities and charges (253) (306) (276)Liabilities associated with assets held for sale -
- (135) (7,276) (6,651) (6,916)Non-current liabilitiesBorrowings (1,407) (1,140) (1,184)Other financial liabilities 8 (803) (742) (919)Trade and other payables (659) (1,248) (1,314)Deferred tax liabilities (490) (483) (445)
Provisions for liabilities and charges (204) (219) (226)Post-retirement scheme deficits 9 (907)
(930) (900) (4,470) (4,762) (4,988)Total liabilities (11,746) (11,413) (11,904) Net assets 5,481 4,754 4,519 EQUITYAttributable to ordinary shareholdersCalled-up share capital 374 374 374Share premium account - - -Capital redemption reserve 172 - 173Cash flow hedging reserve (58) (11) (52)Other reserves 350 606 433Retained earnings 4,589 3,781 3,590 5,427 4,750 4,518Non-controlling interests 54 4 1Total equity 5,481 4,754 4,519Condensed consolidated cash flow statement
For the half-year ended June 30, 2012
* Restated Half-year to Half-year to Year to June 30, 2012 June 30, 2011 December 31, Notes £m £m 2011 £m
Reconciliation of cash flows from operating activities Profit before taxation
1,308 1,137 1,105Share of results of joint ventures and associates (67) (60) (116)Profit on restructuring/disposal of businesses (700) - (3)Profit on disposal of property, plant and equipment
(9) (10) (8)Net financing 3 (28) (421) 84Taxation paid (69) (95) (208)
Amortisation of intangible assets 115 73 169Depreciation of property, plant and equipment
122 111 241Decrease in provisions (38) (36) (28)Increase in inventories (200) (152) (140)
Increase in trade and other receivables (248) (90) (62)(Decrease)/increase in trade and other payables (69) 150 416Movement in other financial assets and liabilities 7 52 68
Net defined benefit post-retirement cost/(credit) recognised in profit before financing
9 75 (107) (43)Cash funding of defined benefit post-retirement schemes 9 (143) (146) (304)Share-based payments 27 20 59Dividends received from joint ventures and associates 65 31 76Net cash inflow from operating activities 148 457 1,306 Cash flows from investing activitiesDisposals of unlisted investments - - 1Additions of intangible assets (126) (152) (363)Disposals of intangible assets - 1 6Purchases of property, plant and equipment (237) (209) (412)Government grants received 8 22 38Disposals of property, plant and equipment 26 22 31Acquisitions of businesses
(2) - (19)Restructuring of IAE 953 - -Disposals of businesses - 2 7
Investments in joint ventures and associates (16) (37) (1,329)Transfer of subsidiary to associate (1) - -Repayment of/(increase in) loan to Engine Holding GmbH 167 - (167)Net cash inflow/(outflow) from investing activities 772 (351) (2,207) Cash flows from financing activitiesRepayment of loans - (567) (567)Proceeds from increase in loans 221 - -Net cash flow from increase/(decrease) in borrowings
221 (567) (567)Interest received 7 9 19Interest paid (40) (39) (50)
(Increase)/decrease in short-term investments (1) 325 316Issue of ordinary shares (net of expenses) - 1 (1)Purchase of ordinary shares (94) (57) (57)Other transactions in ordinary shares - 21 -Redemption of C Shares (124) (141) (315)Net cash outflow from financing activities (31) (448) (655) Net increase/(decrease) in cash and cash equivalents 889 (342) (1,556)Cash and cash equivalents at January 1 1,291 2,851 2,851Exchange gains on cash and cash equivalents (23) 17 (4)Cash and cash equivalents at period end 2,157 2,526 1,291
* Restated to show government grants, previously included in trade and other payables, separately.
Half-year Half-year Year to to June 30, to June 30, December 2012 £m 2011 £m 31, 2011 £m
Reconciliation of movements in cash and cash equivalents to movements in net funds Net increase/(decrease) in cash and cash equivalents
889 (342) (1,556)Net cash flow from (increase)/decrease in borrowings (221) 567 567Net cash flow from increase/(decrease) in short-term investments 1 (325) (316)Change in net funds resulting from cash flows 669 (100) (1,305)Exchange (losses)/gains on net funds
(23) 18 (5)Fair value adjustments (2) 136 92Movement in net funds 644 54 (1,218)
Net funds at January 1 excluding the fair value of swaps 117 1,335 1,335Net funds at period end excluding the fair value of swaps 761 1,389 117Fair value of swaps hedging fixed rate borrowings 108 62 106Net funds at period end 869 1,451 223
The movement in net funds (defined by the Group as including the items shown below) is as follows:
At January Funds
Exchange Fair value At June
1, 2012 £m flow £m differences £m adjustments £m 30, 2012 £mCash at bank and in hand 1,285 (634) (19) - 632Money market funds 11 458 - - 469Short-term deposits 14 1,049 (4) - 1,059Overdrafts (19) 16 - - (3)Cash and cash equivalents 1,291 889 (23) - 2,157Investments 11 1 - - 12Other current borrowings (1) - - - (1)Non-current borrowings (1,183) (221) - (2) (1,406)Finance leases (1) - - - (1)
Net funds excluding the fair value of swaps 117 669 (23) (2) 761Fair value of swaps hedging fixed rate borrowings 106 2 108Net funds 223 669 (23) - 869
Condensed consolidated statement of changes in equity For the half-year ended June 30, 2012
Non-controlling Total Attributable to ordinary shareholders interests equity Cash Capital flow Share Share redemption hedging Other Retained capital premium reserve reserve reserves earnings Total £m £m £m £m £m £m £m £m £mAt January 1, 2011 374 133 209 (37) 527 2,769 3,975 4 3,979Total comprehensive income forthe period - - - 26 79 784 889 - 889Arising on issues of ordinaryshares - 1 - - - - 1 - 1Issue of C Shares - (120) - - - 2 (118) - (118)Redemption of C Shares - - 143 - - (143) - - -Ordinary shares purchased - - - - - (57) (57) - (57)Share-based payments - direct toequity - - - - - 56 56 - 56Effect of scheme of arrangement1 2,434 (14) (352) - - (2,068) - - -Effect of capital reduction1 (2,434) - - - - 2,434 - - -Related tax movements - - - - - 4 4 - 4Other changes in equity in theperiod - (133) (209) - - 228 (114) - (114)At June 30, 2011 374 - - (11) 606 3,781 4,750 4 4,754Total comprehensive income forthe period - - - (41) (173) 133 (81) (3) (84)Issue of C Shares - - - - - (178) (178) - (178)Redemption of C Shares - - 174 - - (174) - - -Share-based payments - direct toequity - - - - - 21 21 - 21
Effect of scheme of arrangement - - (1) - - (1) (2)
- (2)Related tax movements - - - - - 8 8 - 8Other changes in equity in theperiod - - 173 - - (324) (151) - (151)At December 31, 2011 374 - 173 (52) 433 3,590 4,518 1 4,519Total comprehensive income forthe period - - - (6) (83) 1,057 968 5 973Issue of C Shares - - (129) - - 2 (127) - (127)Redemption of C Shares - - 128 - - (128) - - -Ordinary shares purchased - - - - - (94) (94) - (94)Share-based payments - direct toequity - - - - - 35 35 - 35Transactions withnon-controlling interests2 - - - - - 115 115 48 163Related tax movements - - - - - 12 12 - 12Other changes in equity in theperiod - - (1) - - (58) (59) 48 (11)At June 30, 2012 374 - 172 (58) 350 4,589 5,427 54 5,4811 On May 23, 2011, under a scheme of arrangement betweenRolls-Royce Group plc, the former holding company of the Group, and itsshareholders under Part 26 of the Companies Act 2006, and as sanctioned by theHigh Court, all the issued ordinary shares in that company were cancelled andthe same number of new ordinary shares were issued to Rolls-Royce Holdings plcin consideration for the allotment to shareholders of one ordinary share inRolls-Royce Holdings plc for each ordinary share in Rolls-Royce Group plc heldon 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.
2 On January 2, 2012, the Group contributed its interest in BergenEngines AS to Engine Holding GmbH, a company jointly held by Rolls-Royce andDaimler AG. Under the terms of agreement with Daimler, Rolls-Royce hasretained certain rights such that Bergen Engines continues to be classified asa subsidiary and consolidated.
1 Basis of preparation and accounting policies
Reporting entity
Rolls-Royce Holdings plc is a company domiciled in the UK. Thesecondensed consolidated half-year financial statements of the Company as at andfor the six months ended June 30, 2012 comprise the Company and itssubsidiaries (together referred to as the "Group") and the Group's interestsin joint ventures and associates.
The consolidated financial statements of the Group as at and for the year ended December 31, 2011 (2011 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 havebeen prepared in accordance with IAS 34 Interim Financial Reporting as adoptedby the European Union. They do not include all of the information required forfull annual statements, and should be read in conjunction with the 2011 Annualreport.The comparative figures for the financial year December 31, 2011are not the Group's statutory accounts for that financial year. Those accountshave been reported on by the Group's auditors and delivered to the registrarof companies. The report of the auditors was (i) unqualified, (ii) did notinclude a reference to any matters to which the auditors drew attention by wayof emphasis without qualifying their report, and (iii) did not contain astatement 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 25, 2012.
Significant accounting policies
The accounting policies applied by the Group in these condensedconsolidated half-year financial statements are the same as those that appliedto the consolidated financial statements of the Group for the year endedDecember 31, 2011 (International Financial Reporting Standards issued by theInternational Accounting Standards Board, as adopted for use in the EUeffective at December 31, 2011).
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, 2011.
2 Analysis by business segment
The analysis by business segment is presented in accordance withIFRS 8 Operating segments, on the basis of those segments whose operatingresults are regularly reviewed by the Board. Following the transfer of BergenEngines AS to Engine Holding GmbH on January 2, 2012, the comparative figuresfor 2011 have been restated to put them on a consistent basis.
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.
Underlying profit before financing - Where transactions aredenominated in a currency other than the functional currency of the Groupundertaking, this reflects the transactions at the achieved exchange rates onsettled derivative contracts. The revaluation effects of acquisitionaccounting are excluded and, in 2012, the profit arising on the restructuringof IAE is also excluded. In 2011, the effects of one-off past-service creditson post-retirement schemes were excluded.
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 byIAS 39 Financial Instruments: Recognition and Measurement, changes in value offinancial RRSP contracts arising from changes in forecast payments and the netimpact 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, 2012 Half-year
to June 30, 2011 Year to December 31, 2011
Original Original Original equipment Aftermarket Total equipment
Aftermarket Total equipment Aftermarket Total
£m £m £m £m £m £m £m £m £mUnderlying revenuesCivil aerospace 1,314 1,720 3,034 1,047 1,557 2,604 2,232 3,340 5,572Defence aerospace 559 575 1,134 504 584 1,088 1,102 1,133 2,235Marine 622 448 1,070 695 476 1,171 1,322 949 2,271Energy 179 266 445 312 229 541 527 556 1,083Engine Holding 66 76 142 88 84 172 185 146 331
Eliminate intra-segment revenue (17) (51) (68) (55)
(58) (113) (110) (105) (215) 2,723 3,034 5,757 2,591 2,872 5,463 5,258 6,019 11,277 Half-year Year to Half-year to to June 30, December June 30, 2012 2011 31, 2011 £m £m £mUnderlying profit before financingCivil aerospace 310 250 499Defence aerospace 196 219 376Marine 147 157 287Energy (5) (7) 16Engine Holding 52 25 80
Eliminate intra-segment profit (6) - -Reportable segments 694 644 1,258Underlying central items (26) (25) (52)Underlying profit before financing and taxation 668 619 1,206Underlying net financing (31) (24) (49)Underlying profit before taxation 637 595 1,157Underlying taxation (140) (153) (261)Underlying profit for the period
497 442 896 Total assets Total liabilities Net assets/(liabilities) June 30, June 30, Dec. 31, June 30,
June 30, Dec. 31, June 30, June 30, Dec.31
2012 2011 2011 2012 2011 2011 2012 2011 2011 £m £m £m £m £m £m £m £m £mCivil aerospace 8,585 8,821 8,621 (5,701) (5,506) (5,982) 2,884 3,315 2,639Defence aerospace 1,360 1,440 1,311 (1,773) (1,784) (1,831) (413) (344) (520)Marine 2,167 2,410 2,031 (1,458) (1,730) (1,440) 709 680 591Energy 1,295 1,125 1,234 (528) (569) (546) 767 556 688Engine Holding 1,543 229 1,654 (120) (110) (164) 1,423 119 1,490Reportable segments 14,950 14,025 14,851 (9,580) (9,699) (9,963) 5,370 4,326 4,888Eliminations (819) (1,012) (746) 819 1,012 746 - - -Net funds 2,280 2,591 1,427 (1,411) (1,140) (1,204) 869 1,451 223
Tax assets/(liabilities) 479 314 388 (667) (656) (583) (188) (342) (195)Post-retirement schemesurpluses/(deficits) 337 249 503 (907) (930) (900) (570) (681) (397) 17,227 16,167 16,423 (11,746) (11,413) (11,904) 5,481 4,754 4,519Group employees at period end
June 30, December June 30, 2012 2011 31, 2011Civil aerospace 21,100 19,400 20,000Defence aerospace 7,800 7,900 8,000Marine 8,800 8,700 8,800Energy 3,600 3,400 3,600Engine Holding 1,000 900 900 42,300 40,300 41,300
Underlying revenue adjustments
Half-year to Half-year Year to June 30, to June 30, December 31, 2012 2011 2011 £m £m £mUnderlying revenue 5,757 5,463 11,277Recognise revenue at exchange rate on date of (37) (99)transaction (153)Revenue per consolidated income statement 5,720 5,364 11,124Underlying profitadjustments Half-year to June 30, 2012 Half-year to June 30, 2011 Year to December 31, 2011 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 £mUnderlying performance 668 (31) (140) 619 (24) (153) 1,206 (49) (261)Realised (gains)/losses onsettled derivativecontracts1 (26) 26 - (71) 2 - (116) 24 -Net unrealised fair valuechanges to derivativecontracts2 (6) 66 - 6 456 - (5) (49) -Effect of currency oncontract accounting (14) - - 10 - - 4 - -Revaluation of tradingassets and liabilities - (4) - - (10) - - - -Financial RRSPs - exchangedifferences and changes inforecast payments - 2 - - 5 - - 2 -Effect of acquisitionaccounting (42) - - - - - (64) - -Post-retirement schemepast-service costs3,4 - - - 152 - - 164 - -Net post-retirement schemefinancing - (31) - - (8) - - (12) -Related tax effect - - (1) - - (142) - - 4IAE restructuring (note 12) 700 - 37 - - - - - -Total underlyingadjustments 612 59 36 97 445 (142) (17) (35) 4Reported per consolidatedincome statement 1,280 28 (104) 716 421 (295) 1,189 (84) (257)1 The adjustments for realised (gains)/losses on settled derivativecontracts include adjustments to reflect the (gains)/losses in the same periodas the related trading cash flows. It excludes amounts settled in respect ofthe IAE restructuring (£6m loss).2 The adjustments for unrealised fair value changes to derivativecontracts include those in respect of in equity accounted joint ventures andexclude those for which the related trading contracts have been cancelled whenthe 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 were amended, resulting in a gain in the 2011 income statement of £130m, which has been excluded from underlying profit.
4 During 2011, the Group agreed revised post-retirement healthcarearrangements on certain of its overseas schemes. This resulted in a net gainin the income statement of £34m (2011 half year £22m) which was excluded fromunderlying profit.3 Net financing Half-year to June 30, Half-year to June 30, 2012 2011 Year to December 31, 2011 Per Per Per consolidated consolidated consolidated income Underlying income Underlying income Underlying statement financing statement financing statement financing £m £m £m £m £m £mFinancing incomeInterest receivable 5 5 10 10 20 20Fair value gains on foreign currencycontracts 79 - 452 - - -Financial RRSPs - foreign exchangedifferences and changes in forecastpayments 2 - 5 - 2 -Fair value gains on commodityderivatives - - 4 - - -Expected return on post-retirementscheme assets 170 - 200 - 410 -Net foreign exchange gains 22 - - - 24 - 278 5 671 10 456 20Financing costsInterest payable (25) (25) (24) (24) (51) (51)Fair value losses on foreign currencycontracts - - - - (21) -Financial charge relating to financialRRSPs (5) (5) (5) (5) (11) (11)Fair value losses on commodityderivatives (13) - - - (28) -Interest on post-retirement schemeliabilities (201) - (208) - (422) -Net foreign exchange losses - -
(8) - - -Other financing charges (6) (6) (5) (5) (7) (7) (250) (36) (250) (34) (540) (69) Net financing 28 (31) 421 (24) (84) (49) Analysed as:Net interest payable (20) (20) (14) (14) (31) (31)
Net post-retirement scheme financing (31) -
(8) - (12) -Net other financing 79 (11) 443 (10) (41) (18)Net financing 28 (31) 421 (24) (84) (49)
4 Earnings per ordinary share (EPS)
Basic EPS are calculated by dividing the profit attributable toordinary shareholders by the weighted average number of ordinary shares inissue during the period, excluding ordinary shares held under trust, whichhave been treated as if they had been cancelled. Diluted EPS are calculated byadjusting the weighted average number of ordinary shares in issue during theperiod for the bonus element of share options. Half-year to June 30, 2012 Half-year to June 30, 2011 Year to December 31, 2011 Potentially Potentially Potentially dilutive dilutive dilutive share share share Basic options Diluted Basic options Diluted Basic options Diluted
Profit/(loss) (£m) 1,198 - 1,198 842 - 842 850 - 850Weighted average shares(millions) 1,850 27 1,877 1,850 24 1,874 1,850 25 1,875EPS (pence) 64.76 (0.93) 63.83 45.51 (0.58) 44.93 45.95 (0.62) 45.33
The reconciliation between underlying EPS and basic EPS is as follows:
Half-year to June 30, Year to December 31, Half-year to June 30, 2012 2011 2011 Pence £m Pence £m Pence £mUnderlying EPS / Underlying profit attributable toordinary shareholders 26.54 491 23.89 442 48.54 898Total underlying adjustments to profit before tax(note 2) 36.27 671 29.30 542 (2.81) (52)Related tax effects 1.95 36 (7.68) (142) 0.22 4EPS / Profit attributable to ordinary shareholders 64.76 1,198 45.51 842 45.95 850Excluding IAE restructuring 24.92 461
45.51 842 45.95 850IAE restructuring 39.84 737 - - - -Diluted underlying EPS 26.16 23.59 47.89 5 TaxationThe effective tax rate for the half year is 8.0% (2011: half year25.9%, full year 23.3%). Excluding the impact of the IAE restructuring, theeffective tax rate for the half year is 23.2%. Pursuant to the SubstantialShareholdings Exemption, the majority of the upfront proceeds received on theIAE restructuring are not subject to tax, which has the effect of reducing theeffective tax rate. The tax credit of £37m relating to the IAE restructuringarises as a consequence of the derecognition of various assets and liabilitieson completion of the transaction.The UK corporation tax rate reduced from 26% to 24% on April 1,2012 and the effective tax rate takes this into account. The impact of thereduction to 25% was reflected in the 2011 closing deferred tax balances asthe rate change was substantively enacted prior to the year end. As thefurther reduction to 24% was substantively enacted on March 26, 2012, theclosing deferred tax assets and liabilities have been remeasured. The proposedfuture reductions in the rate to 22% will be reflected when the relevantlegislation is substantively enacted. The impact of the reduction in the rateon the effective tax rate for the full year is not expected to be significant.
6 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 June 30, 2012 Year to December 31, 2011 Pence per Pence per share £m share £m
Interim (issued in January) 7.6 142 6.9 129Final (issued in July) 10.6 199 7.6 142 17.5 328 7 Intangible assets Certification costs and Development Recoverable Software Goodwill participation expenditure engine costs and £m fees £m £m £m other £m Total £mCost:At January 1, 2012 1,106 720 954 464 490 3,734Exchange differences (18) (2) (3) - (1) (24)Additions - 16 14 30 41 101On acquisition of business 2 - - - - 2Disposals/write-offs - (6) (6) - - (12)At June 30, 2012 1,090 728 959 494 530 3,801 Accumulated amortisation:At January 1, 2012 7 197 268 231 149 852Exchange differences - - - - - -Charge for the period - 17 25 27 27 96Disposals/write-offs - (6) (6) - - (12)At June 30, 2012 7 208 287 258 176 936 Net book value at:June 30, 2012 1,083 520 672 236 354 2,865December 31, 2011 1,099 523 686 233 341 2,882Certification costs and participation fees, development expenditureand recoverable engine costs have been reviewed for impairment in accordancewith the requirements of IAS 36 Impairment of Assets. Where an impairment testwas considered necessary, it has been performed on the following basis:- The carrying values have been assessed by reference to value in use. Thesehave been estimated using cash flows from the most recent forecasts preparedby management, which are consistent with past experience and external sourcesof information on market conditions over the lives of the respectiveprogrammes.
- 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% (2011 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.
8 Other financial assets and liabilities
Half-year to June 30, 2012 Half-year to
June 30, 2011 Year to December 31, 2011
Assets Liabilities Net Assets Liabilities Net Assets Liabilities Net £m £m £m £m £m £m £m £m £mForeign exchange contracts 279 (647) (368) 598 (531) 67 321 (768) (447)Commodity contracts 7 (32) (25) 29 (7) 22 14 (26) (12)Interest rate contracts 89 (3) 86 45 (4) 41 83 (2) 81Derivative financial 375 672 418 (796) (378)instruments (682) (307) (542) 130Financial RRSPs - (224) (224) - (256) (256) - (230) (230)C Shares - (7) (7) - - - - (4) (4) 375 (913) (538) 672 (798) (126) 418 (1,030) (612)Current 73 (110) 187 (56) 91 (111)Non-current 302 (803) 485 (742) 327 (919) 375 (913) 672 (798) 418 (1,030)
Derivative financial instruments Half-year Year to to June December Half-year to June 30, 2012 30, 2011 31, 2011 Foreign Interest exchange Commodity rate Total Total Total £m £m £m £m £m £mAt January 1 (447) (12) 81 (378) (140) (140)Movements in fair value hedges (1) - 4 3 41 85Movements in cash flow hedges (3) - - (3) 29 (1)Movements in other derivative contracts 79 (13)
1 67 457 (48)Contracts settled 4 - - 4 (257) (274)At period end (368) (25) 86 (307) 130 (378)
Financial risk and revenue sharing partnerships (RRSPs)
Half-year Year to Half-year to to June December June 30, 30, 2011 31, 2011 2012 £m £m £mAt January 1 (230) (266) (266)Cash paid to partners 6 13 46Exchange adjustments included in OCI 3 (3) (1)Financing charge 1 (5) (5) (11)Excluded from underlying profit: 1Exchange adjustments 1 5 1Changes in forecast payments 1 - 1At period end (224) (256) (230)
1 Included in net financing.
9 Pensions and other post-retirement benefits
The net post-retirement scheme deficit as at June 30, 2012 is calculated on a year to date basis, using the latest valuation as at December 31, 2011, updated to June 30, 2012 for the principal schemes.
Movements in the net post-retirement position recognised in the balance sheet were as follows:
Overseas UK schemes schemes Total £m £m £mAt January 1, 2012 252 (649) (397)Exchange adjustments - 6 6Current service cost (61) (18) (79)
Past service (cost)/credit (1) 5 4Interest on post-retirement scheme liabilities (177) (24) (201)Expected return on post-retirement scheme assets
156 14 170Contributions by employer 123 20 143Actuarial losses (542) (34) (576)
Movement in unrecognised surplus 1 329 - 329Movement on minimum funding liability 2
31 - 31At June 30, 2012 110 (680) (570) Analysed as:
Post-retirement scheme surpluses - included in non-current assets 329 8 337Post-retirement scheme deficits - included in non-current liabilities (219) (688) (907) 110 (680) (570)
1 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.
2 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.
10 Contingent liabilities and contingent assets
In connection with the sale of its products the Group will, on someoccasions, provide financing support for its customers. The Group's contingentliabilities related to financing arrangements are spread over many years andrelate to a number of customers and a broad product portfolio.
The discounted values of contingent liabilities relating to delivered aircraft and other arrangements where financing is in place, less insurance and indemnity arrangements and relevant provisions were:
June 30, 2012 December 31, 2011
£m $m £m $mGross contingent liabilities 602 944 612 951Contingent liabilities net of relevant security 76 119 124 192Contingent liabilities net of relevant security reduced by 20% 1
145 228 201 312
1 Although sensitivity calculations are complex, the reduction of the relevant security by 20% illustrates the sensitivity of the contingent liability to changes in this assumption.
The reduction in net contingent liabilities since December 31, 2011 is primarily a result of the IAE restructuring.
Contingent liabilities exist in respect of guarantees provided bythe Group in the ordinary course of business for product delivery, performanceand reliability. The Group has, in the normal course of business, entered intoarrangements in respect of export finance, performance bonds, countertradeobligations and minor miscellaneous items. Various Group undertakings areparties to legal actions and claims which arise in the ordinary course ofbusiness, some of which are for substantial amounts. While the outcome of someof these matters cannot precisely be foreseen, the directors do not expect anyof these arrangements, legal actions or claims, after allowing for provisionsalready made, to result in significant loss to the Group.
11 Related party transactions
Transactions with related parties are shown on page 118 of theAnnual report 2011. Significant transactions in the current financial periodare as follows: Half-year to Half-year Year to June 30, to June December 2012 30, 2011 31, 2011 £m £m £m
Sales of goods and services to joint ventures and associates 1,976 1,280 2,864Purchases of goods and services from joint ventures and associates (1,410) (1,044) (2,380)
12 Restructuring of IAE
On June 29, 2012, the Group and Pratt & Whitney completed therestructuring of their participation in IAE, which produces the V2500 enginefor the Airbus A320 family of aircraft. As a result of the restructuring,Rolls-Royce sold its equity, programme share and related goodwill in IAE toPratt & Whitney for US$1.5 billion, giving rise to a profit before tax of £700million.
As Rolls-Royce continues to be responsible for the manufacture of high-pressure compressors, fan blades as well as the provision of engine support and final assembly of 50 per cent of V2500 engines, the transaction is not considered to give rise to a discontinued operation.
Principal risks and uncertainties
Whilst the Group has a consistent strategy and long performance cycles, it continues to be exposed to a number of risks and has an established, structured approach to identifying, assessing and managing those risks.
The principal risks facing the Group for the remaining six months of the financial year are unchanged from those reported on page 34 and 35 of the Annual report 2011, and are summarised below:
- Significant external events affecting demand; - Failure to
grow capable resource globally;
- Failure to minimise the environmental impact of the - Product performance not meeting expectations; Group's products and operations;
- Disruption of supply chain;- Reduction in government spending; - Downgrade in credit rating;- Failure of counterparties; - Failure to conduct business in an ethical and socially- Fluctuations in foreign currency exchange rates; responsible
manner;
- Regulatory changes relating to financial derivatives; - Failure to manage multiple complex product programmes
effectively;
- The Group's products, services and pricing do not remain competitive;
- Breach of IT
security;
- Non-compliance with applicable legislation and - Failure to execute the programme to modernise the ITregulations;
infrastructure; and
- Loss or unintended disclosure of Intellectual Property.Going concernAfter making enquiries, the directors have a reasonable expectationthat the Group has adequate resources to continue in operational existence forthe foreseeable future. For this reason they continue to adopt the goingconcern basis in preparing the consolidated financial statements. Thefinancial risk management objectives and policies of the Group and itsexposure to price, credit, liquidity and cash flow risks are considered in theFinance Director's review on pages 14 to 17 and in Additional financialinformation on pages 36 and 37 of the Annual report 2011.
Payments to shareholders
The Company makes payments to shareholders by allotting non-cumulative redeemable preference shares of 0.1 pence each (C Shares). Shareholders can opt to redeem the C Shares for a cash payment, or reinvest the cash proceeds by purchasing additional ordinary shares via the C Share Reinvestment Plan (CRIP), which is operated by our Registrar, Computershare Investor Services PLC. On January 2, 2013, 76 C Shares, with a total nominal value of 7.6 pence, will be allotted for each ordinary share to those shareholders on the register on October 26, 2012. The final day of trading with entitlement to C Shares is October 23, 2012. Shareholders wishing to redeem their C Shares, or participate in the CRIP, must lodge instructions with our Registrar to arrive no later than 5.00 pm on December 3, 2012. The payment of C Shares redemption monies will be made on January 4, 2013.
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:
(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being anindication of important events that have occurred during the first six monthsof the financial year and their impact on the condensed consolidated half-yearfinancial statements; and a description of the principal risks anduncertainties for the remaining six months of the year; and(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related partytransactions that have taken place in the first six months of the currentfinancial year and that have materially affected the financial position orperformance of the entity during that period; and any changes in the relatedparty transactions described in the last Annual report that could do so.
The directors of Rolls-Royce Holdings plc at February 8, 2012 are listed in its Annual report 2011 on pages 38 and 39. Since that date, the following changes have taken place:
- Sir Peter Gregson retired as a non-executive director at the conclusion of the Annual General Meeting held on May 4, 2012; and
- Jasmin Staiblin was appointed as a non-executive director on May 21, 2012.
By order of the Board
John Rishton Mark MorrisChief Executive Finance DirectorJuly 25, 2012 July 25, 2012
Independent review report to Rolls-Royce Holdings plc
Introduction
We have been engaged by the company to review the condensed set offinancial statements in the half-yearly financial report for the six monthsended June 30, 2012 which comprises the condensed consolidated incomestatement, the condensed consolidated statement of comprehensive income, thecondensed consolidated balance sheet, the condensed consolidated cash flowstatement, the condensed consolidated statement of changes in equity and therelated explanatory notes. We have read the other information contained in thehalf-yearly financial report and considered whether it contains any apparentmisstatements or material inconsistencies with the information in thecondensed set of financial statements.This report is made solely to the company in accordance with theterms of our engagement to assist the company in meeting the requirements ofthe Disclosure and Transparency Rules ("the DTR") of the UK's FinancialServices Authority ("the UK FSA"). Our review has been undertaken so that wemight state to the company those matters we are required to state to it inthis 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 forour 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 thegroup are prepared in accordance with IFRSs as adopted by the EU. Thecondensed set of financial statements included in this half-yearly financialreport has been prepared in accordance with IAS 34 Interim Financial Reportingas 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 Standardon Review Engagements (UK and Ireland) 2410 Review of Interim FinancialInformation Performed by the Independent Auditor of the Entity issued by theAuditing Practices Board for use in the UK. A review of interim financialinformation consists of making enquiries, primarily of persons responsible forfinancial and accounting matters, and applying analytical and other reviewprocedures. A review is substantially less in scope than an audit conducted inaccordance with International Standards on Auditing (UK and Ireland) andconsequently does not enable us to obtain assurance that we would become awareof 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, 2012 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 25, 2012
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