Delivering today,
investing for the future
Rolls-Royce Group plc
Annual report 2009
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© Rolls-Royce plc 2010
Rolls-Royce Group plc
Registered office:
65 Buckingham Gate
London
SW1E 6AT
T +44(0)20 7222 9020
www.rolls-royce.com
Company number 4706930
Order book – firm and announced (£bn)
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Contents
Financial highlights
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Order book – firm and announced (£bn)
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Cautionary statement regarding forward-looking statements
This Annual report has been prepared for the members of the Company only. The Company, its directors, employees or agents do not accept
or assume responsibility to any other person in connection with this document and any such responsibility or liability is expressly disclaimed.
This Annual report contains certain forward-looking statements. These forward-looking statements can be identified by the fact that they do
not relate only to historical or current facts. In particular, all statements that express forecasts, expectations and projections with respect to future
matters, including trends in results of operations, margins, growth rates, overall market trends, the impact of interest or exchange rates, the
availability of financing to the Group, anticipated cost savings or synergies and the completion of the Group’s strategic transactions, are
forward-looking statements. By their nature, these statements and forecasts involve risk and uncertainty because they relate to events and
depend on circumstances that may or may not occur in the future. There are a number of factors that could cause actual results or developments
%
to differ materially from those expressed or implied by these forward-looking statements and forecasts. The forward-looking statements reflect
2
the knowledge and information available at the date of preparation of this Annual report, and will not be updated during the year. Nothing in
this Annual report should be construed as a profit forecast.
.
7
1
Return on capital employed (%)
06 07
08 09
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Note: The reconciliation of underlying revenues and results is provided in notes 2 and 5 on pages 104 and 111 of the consolidated financial statements.
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00 01 02 03 04 05 06 07 08 09
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Business review
01 Introduction
02 Chairman’s statement
04 Chief Executive’s review
08 Global activity
10 Our strategy
18 Market outlook
19 Key performance indicators
24 Principal risks and uncertainties
27 Review of operations
28 Civil aerospace
30 Defence aerospace
32 Marine
34 Energy
36 Engineering and technology
38 Operations
40 Services
42 Corporate responsibility
58 Finance Director’s review
Corporate governance
66 Introduction
66 Board of directors
72 Board committees
74 Internal control and risk management
75 Shareholders and share capital
77 Other statutory information
78 Annual report and financial statements
80 Directors’ remuneration report
Financial statements
Contents listed on page 91
Directors’ report
The Directors present the Annual report for the year
ended December 31, 2009 which includes the business
review, corporate governance and audited financial
statements for the year. References to ’Rolls-Royce’, the
‘Group’, the ’Company’, ‘we’, or ‘our’ are to Rolls-Royce
Group plc and/or its subsidiaries, or any of them as the
context may require. Pages 01 to 90, inclusive, of this
Annual report comprise a Directors’ report that has been
drawn up and presented in accordance with English
company law and the liabilities of the Directors in
connection with that report shall be subject to the
limitations and restrictions provided by such law.
Rolls-Royce Group plc is incorporated as a public limited
company and is registered in England under the UK
Companies Act 1985 with the registered number
4706930. Rolls-Royce Group plc’s registered office is
65 Buckingham Gate, London, SW1E 6AT.
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Photography credits: Airbus Industrie, BAE Systems plc, The Boeing
Company, United States Department of Defense, Gulfstream Aerospace
Corporation, Lockheed Martin Corporation, Marcus Ginns, The Ministry
of Defence, Peak Photographic.
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This document is printed on Revive 50:50 Silk which has been
independently certified according to the rules of the Forestry
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recycled fibre bleached in an Elementally Chlorine Free (ECF) process.
The manufacturing mill is accredited with the ISO 14001 Environmental
Standard. This document has been printed using vegetable based inks
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and is recyclable.
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Printed by St Ives Westerham Press Ltd. ISO 14001:2004,
FSC certified and CarbonNeutral®.
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Business review
Introduction
Introduction
We have followed a consistent strategy for
20 years and our investment in technology,
together with our strong order book, positions
us well for future growth.
Civil aerospace
Marine
Powering more than 30 civil aircraft types from
small executive jets to the largest airliners.
A world-class range of capabilities in ship
design and in the supply and support of
power and propulsion systems.
£47.0bn
Order book
£4,481m
Underlying revenue
£3.5bn
Order book
£2,589m
Underlying revenue
Defence aerospace
Energy
An engine portfolio that covers all major
sectors including transport, combat, trainers,
helicopters, tactical and unmanned aircraft.
An established and leading position in power
for onshore and offshore oil and gas
applications, together with a growing
presence in power generation.
£6.5bn
Order book
£2,010m
Underlying revenue
£1.3bn
Order book
£1,028m
Underlying revenue
Rolls-Royce Group plc
Annual report 2009
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Business review
Chairman’s statement
Chairman’s statement
“ Our balance sheet remains strong
and the long-term nature of our
business gives us exceptional
visibility of revenues for many
years to come.”
At the end of an extremely challenging year for the world
economy, I am pleased to report that Rolls-Royce has delivered
another solid performance in 2009. This demonstrates both the
resilience and the long-term nature of our business. Underlying
profit before tax has increased by four per cent and despite intense
competition, our order book has grown from £55.5 billion in 2008
to £58.3 billion in 2009.
We are proposing a final payment to shareholders of nine pence
per share, bringing the full year payment to 15.00 pence. This is an
increase of five per cent, and reflects the Board’s continued
confidence in the Group’s business.
In the past year, the degree of uncertainty facing global markets
has somewhat diminished. Sharp declines in output have been
arrested and growth is returning to most of the world’s major
economies, albeit at considerably reduced levels. Overall the
economic environment remains tough. Therefore we shall
continue to focus on operational efficiency, while maintaining
our commitment to research and development and to investment
which supports our growing order book.
Our strategy of developing our business in new markets and
geographies and increasing the revenues we earn through long-term
service contracts, positions us well to take advantage of commercial
opportunities as they arise and to deliver sustained growth. The power
systems and services we sell employ complex technologies and demand
advanced engineering skills, which together create high barriers
to entry. Our balance sheet remains strong and the long-term nature
of our business gives us exceptional visibility of revenues for many
years to come.
Simon Robertson, Chairman
Full year payment to shareholders
14.30p
2008
15.00p
2009
Rolls-Royce Group plc
Annual report 2009
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example of this is our sponsorship of the Rolls-Royce Science Prize for
schools which attracts greater interest every year. In 2009, 1,500 schools
took part, with 2,000 schools expected to participate in 2010. Last year’s
top award of £20,000 went to Kells Lane Primary School, Gateshead,
England for a really innovative wind turbine project.
Rolls-Royce supports a wide range of charitable causes, with much of
that support directed towards educational programmes which promote
engineering and scientific learning.
I would like to thank the management and all our employees for the
commitment and the flexibility they have shown in the past challenging
12 months. I would also like to record my gratitude to my fellow
directors for their continued hard work and support. There have been
no changes to the Board during the past year, but I would like to take
this opportunity to thank Charles Blundell for his contribution to
Rolls-Royce and his services to the Board where he served as Company
Secretary from 1995 to 2007. He retired this year from the position of
Director of Public Affairs.
2010 will present significant challenges for Rolls-Royce. However the
resilience of the Group’s performance reflected in this report, the
fundamental strength of its business model and the proven capabilities
of the management team, give me confidence that Rolls-Royce will
continue to find opportunities in the marketplace and deliver
sustainable growth for the benefit of all our stakeholders.
Simon Robertson
Chairman
February 10, 2010
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Business review
Chairman’s statement – continued
It is particularly important in periods of economic uncertainty that a
company’s core values are defended and strengthened. Our
commitment to acting with integrity is at the heart of the way we
operate. In 2008, Rolls-Royce established an ethics committee, which
reports to the Board. In 2009, we published a new Global Code of
Business Ethics and distributed this, with face-to-face training, to all our
employees worldwide. The Global Code establishes industry-leading
standards and is supported by a rigorous process for reporting and
monitoring to ensure compliance.
The Board is committed to improving the environmental performance
of our products across all our business sectors. We have always
recognised that technology and innovation are critical to achieving
such improvements. As a consequence we commit two-thirds of our
research and development expenditure to developing solutions to
these challenges. Substantial progress has been made over many years.
Our products are significantly more fuel efficient than they were a
decade ago. We continue to look for further advances through the
Environmentally Friendly Engine and other research programmes.
In our marine business, we have extended our range of engines that
run on liquefied natural gas, offering far better emission performance
than conventional diesel powered engines. We also actively explore
the opportunities presented by civil nuclear and other sustainable
energy technologies.
Rolls-Royce is a long-term business operating in global markets and
we have benefited again in the past year from the wise counsel of
our International Advisory Board (IAB), which was established in 2006
to advise on emerging political, business and economic trends
(membership of the IAB is shown on page 69). The IAB provides
high-level strategic input to the Board and management. Its members
bring a deep understanding of global issues affecting Rolls-Royce and
of the markets and countries we operate in.
The life-blood of Rolls-Royce is its people. It is their pride in what
Rolls-Royce has achieved and, even more important, their vision of what
can be achieved in the future, that will secure our continued success.
As I travel around the world, I am constantly impressed by the calibre of
the men and women I encounter at every level of the Group. From our
apprentices and recent graduates to the most experienced and
knowledgeable of our engineers and scientists, it is their ideas, their
insight and their motivation which give Rolls-Royce its competitive edge.
The Board is committed to investing in the development of future
generations who will, in time, ensure the success of the Company.
I am very proud of our employees. We remain committed to developing
their skills through a range of world-class training programmes, as well
as by encouraging a wider interest in science and engineering. A good
Rolls-Royce Group plc
Annual report 2009
04
Business review
Chief Executive’s review
Chief Executive’s review
“ Our resilience, coupled with the
inherent strength of our business
model, will enable us to manage
short-term uncertainties and
deliver future growth.”
In 2009, Rolls-Royce has delivered solid results despite the severity
of the economic downturn, a performance which has again
demonstrated the benefits of pursuing a consistent strategy over
a long period. This approach has created a broadly-based business
with deep customer knowledge, outstanding technology and
world-class people.
Our financial results demonstrate the resilience of our business. The
Group’s order book increased to a record £58.3 billion, with underlying
revenue growing 11 per cent to £10.1 billion and underlying profit
before tax improving four per cent to £915 million.
The Group has a strong financial position with average cash balances
increasing by £260 million to £635 million. The triennial valuation of the
Group’s largest pension scheme has just been completed and confirms
that 2010’s cash funding will be maintained at a level similar to that in
2009. This demonstrates the benefits of the early action taken to amend
the terms of the scheme and to adopt an investment strategy that
reduces volatility.
The economic environment remains challenging and it seems
likely that world growth will be slower in the years ahead than it has
been in the past decade. In these circumstances, we will benefit
from our ability to access the world’s faster growing markets where
there continues to be demand for investment in transport
and infrastructure.
We will maintain our focus on cost reduction and improving our
operational efficiency. At the same time we will continue to invest
in technology, in our product and service portfolio, in the capital
assets required to deliver growth, in our international footprint and
in our people.
Sir John Rose, Chief Executive
Delivering
today,
investing
for the future
Group order book
£55.5bn
2008
£58.3bn
2009
Rolls-Royce Group plc
Annual report 2009
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05
A long-term business
It is important to recognise that ours is a long-term business. Typically,
our product and service lifecycles span 40-50 years and we invest in
technology programmes that look five, ten, 20 years and more into
the future.
We are becoming less dependent on our traditional markets of Europe and
North America. These geographies, which accounted for around 70 per cent
of our revenues in 1999, represent around 66 per cent of our revenues now
and that trend is set to continue, as more than half our current order book
comes from Asia, South America and the Middle East.
A good example of this is the Avon engine. In its latest version –
modified to produce significant improvements in power and efficiency
– it is meeting the demands of customers in the oil and gas sector.
Yet the Avon first entered the industrial gas turbine market 40 years ago.
That engine in turn was derived from the original aero version, which
powered a Canberra aeroplane on the first non-stop, non-refuelling,
jet flight across the Atlantic in 1951.
Examples like this show why it is so important to set our Group’s
progress into a broad context. This review will chart our progress over
the past ten years, during which we more than doubled our revenues
and our underlying profits. This has provided us with a platform from
which we are confident we can grow our revenues by at least as much
again in the decade ahead.
A very different company
We are now a very different company than we were ten years ago. This can
be measured in terms of our scale and geography, in terms of the range of
things we do and in terms of operational efficiency. All this has made us a
more resilient business and has established a far broader foundation from
which to build revenues in the future. A few facts and figures comparing
the Rolls-Royce of 1999 with today’s Group illustrate the point.
Today, at any one time around 200,000 people are flying in aircraft
powered by Rolls-Royce engines. Our ability to keep those aircraft in the
sky is a powerful illustration of the ‘mission critical’ nature of what we do.
At peak times that figure can double, which means that the equivalent
of the population of Bristol is being kept aloft by Rolls-Royce engines.
That is considerably more than double the number of people we were
flying a decade ago.
We have become much more than a civil aerospace company. The
revenues from our marine, defence aerospace and energy businesses
have grown from £2.1 billion in 1999 to £5.6 billion in 2009. In 2009,
revenues from outside our civil aerospace business accounted for more
than half of Group revenues.
Underlying earnings per ordinary share
36.70p
2008
39.67p
2009
Around half our revenues come from services today compared to
40 per cent a decade ago. This represents an annual compound
growth in services of ten per cent.
Throughout this period we have maintained our focus on costs and
improving operational efficiency. Every year for the past ten years,
revenue per employee has increased, showing a 16 per cent
improvement in the year to £271,000 in 2009. We are now selling more
than twice as much as we were ten years ago, with 2,000 fewer people.
Taken together, the pipeline of orders we have already signed,
our increased market share, the growth and scale of our services
business and our focus on costs, underpin our confidence that we
will double our annual revenues in the decade ahead by organic
growth alone.
Our shareholders have benefited from our success to date with
payments increasing from 7.25 pence in 1999 to 15.00 pence in 2009.
A consistent strategy
The disciplined application of a consistent strategy over many years has
delivered a strong, resilient company, which is well positioned for the
long-term growth we expect.
Our strategy has five elements and 2009 saw us make progress against
each of these.
1. Addressing four global markets
Rolls-Royce has become a truly global Group, providing ‘mission
critical’ power and propulsion systems to a wide range of customers
in over 120 countries. The scale of the progress that has been made is
illustrated by the fact that the size of our order book in Asia and the
Middle East today is around double the Group’s entire order book in 1999.
During 2009 we won new customers in Asia, Africa, Europe, the Middle
East and North and South America.
Our global reach, coupled with the fact that very few companies offer
the highly sophisticated range of products and services that we do,
positions us well to take advantage of opportunities in early recovering
and emerging economies.
Rolls-Royce Group plc
Annual report 2009
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Chief Executive’s review – continued
2. Investing in technology, infrastructure and capability
We have managed our balance sheet cautiously and for the long term
so that we can continue to invest in manufacturing capability and
technology. These investments are targeted specifically to support
anticipated growth and meet our customers’ future needs.
Technology is a critical differentiator in our four markets, all of which
demand increased fuel efficiency, reduced environmental impact and
higher levels of reliability and durability. We have invested £7 billion in
R&D over the past ten years to maintain our technological advantage,
with a particular emphasis on collaborative research involving a network
of universities around the world.
This focus continued in 2009, as we championed the development
of a network of Advanced Manufacturing Research Centres – four in
the UK and one each in the US and Singapore – bringing business
and academia together to undertake research relevant to industry.
In 2009, the Group announced a £300 million investment in four new
factories in the UK: a casting facility for single crystal turbine blades;
an advanced disc facility; a wide-chord fan blade facility for defence
engines and; a civil nuclear facility to assemble and test components.
This represents the latest phase in a programme of capital replacement
which has seen Rolls-Royce invest £1.8 billion in UK infrastructure over
the past decade, creating world-class manufacturing facilities in multiple
locations and providing skilled jobs in state-of-the-art environments.
To address our global market opportunities, in 2009 we began work on a
manufacturing and assembly facility at Crosspointe in the United States.
We also confirmed a large engine assembly plant and announced a new
wide-chord fan blade factory in Seletar, Singapore, our first outside the
UK. This will bring the total investment in the Seletar campus to around
£300 million by the time it is completed in 2012.
We now manufacture in 20 countries and have service centres in over 50.
3. Developing a competitive portfolio of products and services
We invest continually in developing proprietary technology which
will meet our customers’ present and future needs. We currently
have 39 ‘live’ major engineering programmes, compared to 25 a
decade ago.
2009 was a remarkable year in which we celebrated the first flight of six
of our customers’ aircraft: the Boeing 787; Gulfstream G650; Airbus
A400M; Embraer Legacy 650, the BAE Systems Mantis UAV and the
AgustaWestland Lynx Wildcat helicopter. Early in 2010, the short take-off
and vertical landing (STOVL) version of the F-35 Joint Strike Fighter
deployed the unique Rolls-Royce LiftSystem® for the first time.
These are unprecedented achievements, with more entirely new aircraft
taking to the skies in a period of three months than in the previous five
years. The capability to meet these requirements is the direct
consequence of a decade of investment and innovation.
In the marine market in 2009, we saw the US Navy’s Littoral Combat Ship
go on active duty, the first sailing of the Royal Navy’s Astute class
submarine and the commissioning of the Royal Navy’s first Type 45
Destroyer, HMS Daring.
All these aircraft and vessels are powered by Rolls-Royce and will enter
active service in the next two to three years. The lives of each of these
programmes is expected to span 40 years or more, giving us exceptional
clarity of future original equipment and service revenues.
4. Growing market share and our installed product base
We have successfully grown our market share in each of our businesses,
generating revenues today and establishing a platform for future growth.
Our share of the civil aerospace market has expanded from 27 per cent
in 1999 to 34 per cent today and our future order book will ensure that
our market share continues to grow, driven by the strong position
Rolls-Royce has established on the new generation of wide-bodied
aircraft. On the new Boeing 787 and the Airbus A350 XWB families,
Rolls-Royce has achieved a market share of 64 per cent.
In the defence aerospace sector we are the world’s number two and
Europe’s number one producer of aero engines, with an extensive
engine portfolio for all key sectors of the market.
Revenues in our marine business have more than doubled since 2005.
We now design, supply and support power and propulsion systems for
naval and commercial applications, with over 30,000 vessels worldwide
using our equipment.
In 2009, our energy business recorded its highest ever underlying
revenue and profit. We serve energy customers in over 120 countries.
Our position in providing power for the oil and gas sector remains strong
and the industrial Trent engine continues to establish its presence in the
power generation market.
5. Adding value for customers through product-related services
We have unrivalled knowledge of the complex technologies within our
products and a deep understanding of our customers’ needs. We have
used these to develop services that improve our customers’ operations.
Our aerospace operations centres are a good illustration of this
capability. In dedicated facilities serving airline, corporate and defence
Rolls-Royce Group plc
Annual report 2009
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07
customers, these Rolls-Royce centres collect real-time data from our
engines as they are operating around the world, 24 hours a day, 365 days
a year. By analysing, sharing and acting upon this information we can
optimise the performance of our engines in service. The centres are a
focal point for service delivery, assessing the condition of the fleet and
directing logistics and field maintenance.
We have transferred service best practice across all our businesses so that
each now offers a through-life service capability. We continue to strengthen
our global services network and in the past year opened, or expanded,
marine services facilities in Niteroi in Brazil, Galveston and Seattle in the US
and Newfoundland in Canada. We opened an On-Wing Care facility for
corporate and regional aircraft in Indianapolis, in the US, and continue to
invest in our civil aerospace overhaul bases in Hong Kong and Singapore.
Our people
To execute this strategy effectively and on a worldwide basis, the skills,
diversity and dedication of our people are key. The global nature of
our customers and our operations means that our people have to be
capable of teamwork across geographies. They need to be flexible and
open minded, to have world-class capabilities and shared values. Of the
38,500 people we employ, 45 per cent are now based outside the UK.
Today we run a civil aerospace business from the UK with emerging
capabilities in Germany and the US. The Presidents of both our defence
and energy businesses are based in North America. The US is our biggest
defence market and in our energy business, gas turbines are produced
in Canada and packaged in the US. We have transferred our marine
headquarters to Singapore, reflecting the significance of the Asia region
for shipbuilding.
Effective communication that enables the organisation to work well across
time zones and borders is crucial. We invest time and effort in
communication, using a combination of modern technology and
traditional formats to help us to stay connected. In 2009, we shared our
strategy storyboard with every employee. The programme was conducted
in groups of around ten with a presenter and a record keeper. This
amounts to more than 4,000 presentations over 6,000 hours, with a record
of the conversation kept to make sure that we benefit from local insights.
While we have continued to invest, economic conditions have forced us
to take some difficult decisions as well. We have had to reduce our staff
in parts of the business where demand has been weak, leading to a net
reduction in headcount across the Group of around 500 people in the
past year.
Taking these difficult decisions early, investing where the business case
is strong and continually looking for ways to improve, have enabled us
to respond to the difficult economic environment. Our employees
have again demonstrated their capability and commitment and
I would like to thank them for playing an integral part in our Group’s
continuing success.
Prospects
I have described how Rolls-Royce has transformed itself in the past ten
years and how, in doing so, it has established a platform for the doubling
of revenues in the decade ahead.
In 1999, Rolls-Royce had an order book of £13.2 billion. Today our order
book stands at £58.3 billion, with a record number of major global
programmes balanced across our four business sectors. These include the
Trent XWB, which is not due to enter service until 2013, yet has already
achieved more than 1,000 orders – a powerful demonstration of the
confidence our customers have in our ability to deliver.
The market share we have gained, the investments in new products we
have made and the balance of the business we have achieved, affords
us access to a global market for products and services we assess to be
worth more than US$2 trillion over the next 20 years, made up of
US$1,400 billion for civil aerospace, US$450 billion for defence aerospace,
US$320 billion for marine and US$120 billion for energy.
In the short term, the Group expects the trading environment to remain
difficult, with the implications of delayed airframe programmes and
launch costs adding to demand and operational uncertainty. The
Group expects underlying revenues and profits in the current year to
be broadly similar to those achieved in 2009. We anticipate a modest
cash outflow in 2010 with average cash balances remaining above
£500 million.
In 2009, Rolls-Royce recruited more than 250 new apprentices and 334
graduates, more than ever before, young men and women of over 30
nationalities who have the potential to become leaders of the future.
Our resilience, coupled with the inherent strengths of our business
model will enable us to manage these short-term difficulties and deliver
future growth.
We are able to attract exceptional people because of the range of
world-class skills we require to deliver high value-added manufacturing
and services. These range from expertise in marketing and law, through to
specialist engineering and logistics, all of which need to be practised
internationally and at the highest level.
Sir John Rose
Chief Executive
February 10, 2010
Rolls-Royce Group plc
Annual report 2009
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Business review
Global activity
Reliable power is ‘mission critical’
for our customers
The power systems we deliver are critical
to the operations of our customers.
On land, at sea and in the air we deploy
the world’s most advanced technologies
for those who depend upon us.
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Civil aerospace
Airlines and their customers rely
on Rolls-Royce. We recognise
the responsibility that is placed
on us to produce the most
reliable engines with the
highest engineering integrity.
1,000,000
Aircraft powered by Rolls-Royce
fly one million miles every hour,
keeping society and the global
economy on the move.
67,000
Airlines look to us to deliver safe,
reliable power on behalf of their
customers – to ensure this, we
monitor 67,000 hours of engine
data every day, in real time.
650
650 airline, freight and lease
customers are Rolls-Royce
powered and they fly the
equivalent of six million flights
around the world each year.
15
Rolls-Royce is powering 15
different aircraft types in
Afghanistan, supporting
combat, transport, medical
evacuation, tactical and
surveillance operations.
Defence aerospace
Pilots of 160 armed forces need
to know that they can depend
on the power from Rolls-Royce
engines instantly, whenever
they call for it. Our engines
are employed in all the key
sectors of this market.
103
Rolls-Royce products provide
the defence power systems for
103 countries.
85
Rolls-Royce powers 85 per cent
of the UK MoD’s aircraft in
frontline operations. The UK
military on average performs
over 2,000 search and rescue
missions annually, many are
powered by Rolls-Royce.
Rolls-Royce Group plc
Annual report 2009
Business review
Global activity – continued
Rolls-Royce is a global company
producing ‘mission critical’ power
solutions for customers in aerospace,
marine and energy markets.
3,000
40
Our design of specialist vessels
can secure an offshore platform
at depths of up to 3,000 metres
with pinpoint accuracy –
helping access the world’s deep
water oil and gas reserves.
The Littoral Combat Ship,
USS Freedom, is one of the
fastest warships afloat.
Powered by two Rolls-Royce
MT30 gas turbines it has a top
speed of well over 40 knots.
The latest Rolls-Royce nuclear
plant, that powers the Royal
Navy’s Astute class submarines,
can circumnavigate the globe
without surfacing and will never
need to be refuelled in its life.
500
60
Over 500 of our gas turbines are
operating in hostile weather
environments, offshore of 25
countries, delivering the critical
power needed on oil and gas
platforms.
Over 60 major pipelines in
26 countries depend on
Rolls-Royce gas turbines to
transport oil and gas – essential
arteries in the world’s energy
network.
16
Our new Trent 60 gas turbine
has been sold to 16 countries
and the fleet can generate
enough power for three million
homes.
Marine
There are 30,000 commercial and
naval vessels operating with
Rolls-Royce equipment, ensuring
that sea trade of all types keeps on
the move and that coasts, national
and international waters are safe
for all. Rolls-Royce has a wider
range of marine products than
any other single supplier.
Energy
Society’s energy demands continue
to grow. We are providing essential
power for the oil and gas industries
to meet these needs and
increasingly our clean and efficient
gas turbines are providing local
electricity. Rolls-Royce is also at the
forefront of low carbon and
renewable energy products.
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Annual report 2009
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Business review
Our strategy
Our consistent strategy
Our consistent strategy is based
on five key elements
Underpinned by
core characteristics
Address four global markets
We are a leading producer of mission critical,
integrated, power systems for the civil and
defence aerospace, marine and energy markets.
Closeness to our customers
We recognise that our customers determine
our strategy and organisation.
Domain knowledge
A deep understanding of our customers
and the way in which our products and
services are used.
Across four key markets
Civil aerospace
Broadest engine range in the world
£4,481m
Underlying revenue 2009
Defence aerospace
Europe’s biggest engine maker
Invest in technology, infrastructure
and capability
Over the past five years, we have invested
£4 billion in R&D. We invest substantially in
employee development and invest around
£300 million a year in capital projects.
Develop a competitive portfolio of
products and services
We have 39 major engineering programmes
and we are involved in many of the future
projects in the markets we serve. These key
projects will define the power systems market
for many years.
Grow market share and installed
product base
Across the Group, the installed base of engines
in service is expected to generate attractive
returns over many decades.
Add value for our customers through the
provision of product-related services
We seek to add value for our customers with
aftermarket services that will enhance the
performance and reliability of our products.
Expanding product portfolio
Integrated systems
Integrating our products into systems that
deliver increased value for our customers.
£2,010m
Underlying revenue 2009
Technological superiority
Gaining competitive advantage through
continuous investment in technology.
Marine
World-leading systems provider
and integrator
Operational excellence
Working constantly to meet and exceed
customer expectations.
£2,589m
Underlying revenue 2009
Organisational capability
Attracting and retaining the best
people globally.
Energy
World leader in oil and gas and a growing
power generation presence
Brand
Recognised globally, our brand embodies
qualities that create a common focus for
all our people worldwide.
£1,028m
Underlying revenue 2009
Astute class submarine
Airbus A400M airborne
STOVL F-35 milestone
The Royal Navy’s latest class of nuclear submarine went to sea in
2009, powered by a new Rolls-Royce designed long-life core.
Rolls-Royce is a major partner in the engine consortium
powering the new airlifter, which flew for the first time in 2009.
The F-35B Lightning engaged its Rolls-Royce designed
STOVL propulsion LiftSystem™, in flight, for the first time.
Rolls-Royce Group plc
Annual report 2009
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Our strategy – continued
An increasing contribution from
services
The increasing contribution from services
We have grown our service revenues ten
per cent compound over the past ten years.
Services now account for around 50 per cent
of total underlying revenue.
Underlying services revenue 2009
£4,927m
A commitment to R&D creating
Underlying services revenue (£m)
high barriers to entry
0
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4
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A strong record of investment in research
5,000
and development
We invest in world-class, cost-effective
4,000
technology in order to develop products
that add value for our customers, improve
3,000
efficiency and reduce environmental impact.
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Investment in research and
1,000
development during 2009
Delivering a 20-year track
record of continued growth
6000
Organic growth
Our broad product range and expanding
service provision have delivered growth
globally.
4000
5000
3000
Partnerships
We increasingly develop products with risk
and revenue sharing partners and through
strategic long-term relationships.
1000
2000
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£864m
02
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Acquisition
Major acquisitions such as Allison and Vickers
have enabled growth in key sectors.
0
Underlying services revenue (£m)
Gross research and development expenditure (£m)
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1
0
6
3
6
6
1,000
800
600
400
200
0
00
01
02
03
04
05
06
07
08
09
00
01
02
03
04
05
06
Gross research and development expenditure (£m)
4
0
6
6
3
6
0
9
5
9
1
6
1
0
6
3
6
6
7
4
7
4
2
8
5
8
8
m
4
6
8
£
1000
800
600
400
5,000
4,000
3,000
2,000
1,000
0
1,000
800
600
Gulfstream G650 jet airborne
400
Powered by the new BR725 engine, this new long-range
business jet took to the air for the first time on schedule
during 2009.
200
0
00
01
02
03
04
05
06
07
08
09
Rolls-Royce Group plc
Annual report 2009
Littoral Combat Ship completes sea trials
Lockheed Martin’s USS Freedom, powered by Rolls-Royce MT30
marine gas turbines, completed its sea trials.
200
0
12000
10000
8000
6000
4000
2000
0
1000
6000
800
5000
Our growth during the
past 20 years has been
achieved organically and
through partnerships
and acquisitions.
4000
600
3000
2000
400
1000
0
200
0
12000
10000
1000
8000
800
6000
4000
600
2000
400
0
200
0
Boeing 787 airborne
Trent 1000 engines powered the new Boeing 787
Dreamliner on a successful first flight at the end of 2009.
12000
10000
8000
6000
4000
2000
0
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6000
5000
4000
3000
2000
1000
0
1000
800
600
400
200
0
12000
10000
8000
6000
4000
2000
0
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Business review
Our strategy – continued
Our strategy in action
Delivering
today, investing
for the future
Rolls-Royce is growing globally and at
the same time meeting the challenges
of managing the business today. Our
consistent strategy has ensured that
the Group is resilient in the current
economic climate and is still able to
plan and invest for future growth.
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Rolls-Royce Group plc
Annual report 2009
Business review
Our strategy – continued
Addressing
our four global
markets
Serving a global customer base
We are a leading integrated power systems company, operating in civil and
defence aerospace, marine and energy markets. We serve customers in over 120
countries and forecast a 20-year market opportunity of US$2 trillion.
Our gas turbine products are shipped to
customers all over the world, by land, sea
and air.
US$1,400bn
Civil aerospace market opportunity
US$450bn
Defence aerospace market opportunity
US$320bn
Marine market opportunity
US$120bn
Energy market opportunity
Rolls-Royce Group plc
Annual report 2009
13
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Business review
Our strategy – continued
Our strategy in action
Investing in
technology,
infrastructure
and capability
Future capacity
Rolls-Royce is investing in capital projects all over the world as the Group increases
its operational capacity. We are growing as a result of our increased market share
and substantial order book.
During 2009, building work began on the new
US facility in Crosspointe, Virginia, where we will
make discs for gas turbines.
£2.7 billion
The Group has invested £2.7 billion in
capital projects over the past ten years.
Rolls-Royce Group plc
Rolls-Royce Group plc
Annual report 2009
Annual report 2009
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Business review
Business review
Our strategy – continued
Our strategy in action
Developing a
competitive portfolio
of products and
services
Powering the F-35 Lightning
Rolls-Royce is a partner with General Electric in producing the F136 main propulsion
engine for the F-35 and, in addition, Rolls-Royce has designed the LiftSystem which
is employed in the F-35B, or STOVL, version of the aircraft. This is just one of the
many major new programmes on which the Group is engaged.
The Rolls-Royce designed LiftFan™ is used in the
F-35B as part of the overall LiftSystem. The F-35B
LiftSystem was engaged in flight for the first time
in early 2010.
39
39 major programmes in development.
Rolls-Royce Group plc
Rolls-Royce Group plc
Annual report 2009
Annual report 2009
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Business review
Our strategy – continued
Our strategy in action
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Growing our
market share
and installed
product base
World-leading offshore support and power
Rolls-Royce is a major partner of oil and gas companies all over the world, not
just providing industrial gas turbines as power systems for the platforms but also
providing the designs for, and much of the equipment on board, the specialist
vessels that support the platforms.
The Group’s UT-Design of offshore vessels is a
world leader, incorporating significant amounts
of Rolls-Royce technology and equipment.
2,000
2,000 marine customers.
Energy customers in 120 countries.
Rolls-Royce Group plc
Annual report 2009
Business review
Our strategy – continued
Our strategy in action
Adding value for
our customers
through product-
related services
Data management for predictive maintenance
As the original equipment manufacturer, we have access to data on the Rolls-Royce
fleet of gas turbines. We gather, analyse and act upon this data to ensure that we
can maximise the value of the gas turbines in service with our customers.
We have expanded the capability of our operations
centres. These centres manage data and help plan
and drive the services offered by the businesses.
90
Ninety per cent of Trent fleet under
TotalCare management.
Rolls-Royce Group plc
Annual report 2009
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Business review
Market outlook
Market outlook
The Group operates in four long-term global
markets – civil and defence aerospace, marine
and energy. These markets create a total
opportunity worth in excess of US$2 trillion
over the next 20 years and:
• have very high barriers to entry;
• offer the opportunity for organic growth;
• feature extraordinarily long programme lives, usually measured
in decades;
• can only be addressed through significant investments in technology,
infrastructure and capability; and
• create a significant opportunity for extended customer relationships,
with revenues from aftermarket services similar in size to original
equipment revenues.
The size of these markets is generally related to world Gross Domestic
Product (GDP) growth, or in the case of the defence markets, global
security and the scale of defence budgets.
Civil aerospace
The Group publishes a 20-year global market outlook, which covers
passenger and cargo jets, corporate and regional aircraft. We predict that
over the next 20 years 141,000 engines, worth over US$800 billion, will
be required for more than 65,000 commercial aircraft and business jets.
The forecast predicts faster growth rates for long-haul markets and those
markets to, from and within Asia. These markets will continue to benefit
from more liberal air service agreements, which boost demand. Factors
affecting demand include GDP growth, aircraft productivity, operating
costs, environmental issues and the number of aircraft retirements. While
the market can be temporarily disrupted by external events, such as war,
acts of terrorism, or economic downturns, it has, in the past, always
returned to its long-term growth trend. In addition to the demand for
engines, the Group forecasts a market opportunity worth US$600 billion
for the provision of product-related aftermarket services.
Defence aerospace
The Group forecasts that demand for military engines will be worth
US$170 billion over the next 20 years. The largest single market is
expected to be the US, followed by Europe and the Far East. Within Asia,
demand will be dominated by Japan, South Korea and India. Trends are
driven by the scale of defence budgets and geopolitical developments
around the world.
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As in the Group’s other business sectors, programme lives are long and
there is a significant opportunity to support equipment with aftermarket
services estimated at US$280 billion over the same period. Customers’
budget constraints and their need to increase the value they derive from
their assets have accelerated the move in this direction.
Marine
The Group forecasts a demand for marine power and propulsion
systems valued at more than US$200 billion over the next 20 years.
Demand will be greatest in the commercial sector, where the shipping
of raw materials, finished goods and people, in addition to oil and gas
exploration and production activity, play crucial roles in the world
economy. These activities require large fleets of specialised and
increasingly sophisticated ships, which have to be continually
renewed and supported to remain operationally efficient.
Merchant and offshore markets are rarely at the same stage of the
business cycle, which helps to reduce overall volatility. Whilst naval
markets are driven by different considerations, customers are similarly
seeking to get more from their budgets, leading to increasing demand
for integrated systems and through-life support arrangements. As in
the Group’s other markets, marine aftermarket services are expected
to generate significant opportunities, with demand forecasted at
US$120 billion over the next 20 years.
Energy
The International Energy Agency has forecast that over the next 20 years,
the worldwide demand for oil will grow by more than 20 per cent, for
gas by 35 per cent and for power generation by more than 60 per cent.
To satisfy this demand, there will be a growing requirement for aero
derivative gas turbines.
The Group’s 20-year forecast values the total aero-derivative gas turbine
sales in the oil and gas and power generation sectors at more than
US$70 billion. Over this period, demand for associated aftermarket
services is expected to be around US$50 billion.
While the oil and gas market is large and growing, demand for
aero-derivative gas turbines in the power generation segment is
twice that of oil and gas.
Note: A long-term conversion rate has been used where necessary in order to present all
figures in US$.
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Annual report 2009
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Business review
Key performance indicators
Key performance indicators
The Board uses a range of financial and
non-financial indicators to monitor Group
and segmental performance in line with the
strategy described on pages 10-11. These
indicators are chosen to monitor both current
performance and the success of investments
that will sustain and enhance future
performance. Key performance indicators
are included in the appropriate sections of
the business review and are as follows:
Key performance indicators
• Underlying revenue
• Underlying profit before financing
• Cash flow
• Return on capital employed
• Net research and development
charge
• Gross research and development
expenditure
• Net research and development
expenditure as a proportion of
underlying revenue
• Capital expenditure
• Order book
• Training and development
• Employee engagement
• Underlying revenue per
employee
• Product cost index
• Engine deliveries
• Installed thrust – civil aerospace
• Percentage of civil fleet
under management
• Underlying services revenue
• Emissions
Underlying revenue
Monitoring of revenues provides a measure of business growth.
Underlying revenues are used in order to eliminate the effect of the
decision not to adopt hedge accounting and to provide a clearer
year-on-year measure. The Group measures foreign currency sales at
the actual exchange rate achieved as a result of settling foreign
exchange contracts from forward cover.
Underlying profit before financing
Underlying profit before financing is presented on a basis that shows
the economic substance of the Group’s hedging strategies in respect
of the transactional exchange rate and commodity price movements.
In particular: (a) revenues and costs denominated in US dollars and euros
are presented on the basis of the exchange rates achieved during the year;
(b) similar adjustments are made in respect of commodity derivatives; and
(c) consequential adjustments are made to reflect the impact of exchange
rates on trading assets and liabilities and long-term contracts on a
consistent basis. The derivation of underlying profit before financing is
shown in note 2 on page 104 of the consolidated financial statements.
Rolls-Royce Group plc
Annual report 2009
£m
6,458
£m
7,353
7,817
9,147
10,108
6,458
7,353
7,817
9,147
10,108
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£m
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05
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552
£m
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05
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06
06
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748
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06
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(183)
570
(183)
09
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750
1,000
500
750
250
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450
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500
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600
450
300
150
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15
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500
400
500
300
400
200
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20
Business review
Key performance indicators – continued
Cash flow
In a business requiring significant investment, the Board monitors
cash flow to ensure that profitability is converted into cash
generation, both for future investment and as a reward for
shareholders. The Group measures cash flow as the movement in
net funds/debt during the year, after taking into account the value
of derivatives held to hedge the value of balances denominated in
foreign currencies. The figure in 2007 includes a £500 million special
contribution to the Group’s UK pensions schemes, as part of the
restructuring of its pension schemes.
Return on capital employed
Return on capital employed is calculated as the after-tax underlying
profit, divided by the average net assets during the year, adjusted for
net cash, net post-retirement deficit and goodwill previously written
off. It represents a measure of the return the Group is making on
its investments.
Net research and development charge
Investment in research and development underpins all the elements
of the Group’s strategy. Programme expenditure is monitored in
conjunction with a gated review process on each programme and
progress is reviewed at key milestones.
Gross research and development expenditure
The Group’s research and development activities comprise both
self-funded and customer funded programmes. Gross expenditure
measures total research and development activity and is an indicator
of the effectiveness of the actions taken to enhance the Group’s
intellectual property.
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Rolls-Royce Group plc
Annual report 2009
Business review
Key performance indicators – continued
21
%
5.2
%
5.2
%
5.2
05
05
£m
05
232
£m
232
£m
232
05
05
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05
24.4
£bn
24.4
£bn
24.4
05
5.4
5.4
5.4
06
06
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5.8
5.8
07
07
5.4
5.4
5.4
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304
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4.7
4.7
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45.9
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08
58.3
09
07
05
08
06
Employee engagement
38,500 employees in 2009
Regular surveys are undertaken to identify and address
emerging issues. A full employee engagement survey is run
every two years with smaller pulse-check surveys in between.
Training and employee engagement surveys are discussed
further in the corporate responsibility section of this review.
06
08
09
09
05
07
.
%
7
4
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7
4
%
7
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.
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350
300
250
350
200
300
150
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100
200
50
350
150
0
300
100
250
50
200
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100
50
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60
50
40
60
30
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20
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60
30
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20
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0
20
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Net research and development expenditure as a proportion
of underlying revenue
Research and development is measured as the self-funded
expenditure before both amounts capitalised in the year and
amortisation of previously capitalised balances. The Group expects
to spend approximately five per cent of revenues on research and
development although this proportion will fluctuate annually
depending on the stage of development of current programmes.
This measure reflects the need to generate current returns as well
as to invest for the future.
Capital expenditure
To deliver on its commitments to customers, the Group invests
significant amounts in its infrastructure. All investments are subject
to rigorous review to ensure that they are consistent with forecast
activity and will provide value for money. Annual capital expenditure
is measured as the cost of property, plant and equipment acquired
during the period.
Order book
The order book provides an indicator of future business. It is measured
at constant exchange rates and list prices and includes both firm and
announced orders. In civil aerospace, it is common for a customer to
take options for future orders in addition to firm orders placed. Such
options are excluded from the order book. In defence aerospace,
long-term programmes are often ordered for only one year at a time.
In such circumstances, even though there may be no alternative
engine choice available to the customer, only the contracted business
is included in the order book. Only the first seven years’ revenue of
long-term aftermarket contracts is included.
Training and development
£24 million investment in 2009
Training is a core element of the Group’s investment in its
capability and is measured as the expenditure on the training
and development of employees, customers and suppliers.
Effectiveness is ensured by using a range of external and
internal sources and by gathering user feedback.
m
4
2
£
Rolls-Royce Group plc
Annual report 2009
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Business review
Key performance indicators – continued
Underlying revenue per employee
A measure of personnel productivity, this indicator measures
underlying revenue generated per employee on a three-year rolling
basis. The basis of calculation has been amended to avoid short-term
distortions caused by fluctuations in exchange rates.
Product cost index
Unit costs are a key determinant of the Group’s ability to deliver
its commitments on a profitable basis. The Group monitors the
year-on-year change in the average unit product cost of its gas
turbine operations and seeks over time to improve productivity in
all owned facilities and those of its suppliers.
Engine deliveries
The Group’s installed engine base represents an opportunity to
generate future aftermarket business. This is measured as the number
of Group products delivered during the year within each business
except for marine, as its products do not lend themselves to this
measure due to their diversity.
Installed thrust – civil aerospace
Installed thrust is the indicator of the amount of product in use by
our customers and therefore the scale of opportunity this presents
for our services business.
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Rolls-Royce Group plc
Annual report 2009
£000
169
£000
169
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182
194
182
194
169
182
194
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05
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Business review
Key performance indicators – continued
Percentage of civil fleet under management
Long-term contracts are an important way of generating value for
customers. The percentage of fleet under management gives a
measure of the proportion of the installed base where the future
aftermarket arrangements are agreed under long-term contracts.
The corresponding indicators for the other segments are shown
in the respective sections of the business review of operations.
Underlying services revenue
Underlying services revenue shows the amount of business during
the year that has been generated from the installed engine base.
This is measured as the revenue derived from spare parts, overhaul
services and long-term service arrangements.
Emissions
Much of the research and development expenditure is focused on
reducing emissions of the Group’s products. The Group measures both
the emissions of its products and the emissions of its manufacturing
operations. These measures are described in detail in the environment
report, ‘Powering a better world’, which is available on the Group’s
website at www.rolls-royce.com/cr/reports.
Rolls-Royce Group plc
Annual report 2009
s
b
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m
s
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7
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m
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7
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%
9
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24
Business review
Principal risks and uncertainties
Principal risks and uncertainties
The Group continues to be exposed to a
number of risks and has an established,
structured approach to identifying, assessing
and managing these.
Business environment risks
Cyclical downturn – global recession
The Group’s largest market, civil aerospace, is cyclical by nature,
although services activity and revenue, which now represents
59 per cent of annual revenue, have historically been less volatile
in economic slowdowns and are considered more predictable and
robust than the sales of engines for new aircraft.
The willingness of passengers to travel by air is influenced by a
range of factors, including economic conditions, as well as health
and security issues. Any prolonged reduction in air travel would
impact airlines’ revenues and cash flows and potentially reduce
their need for new engines, spare parts or aftermarket
support services.
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The risk committee has accountability for the system of risk
management and reports regularly to the Board on the key risks facing
the business and the mitigating actions taken in order to manage them.
The Group’s consistent strategy and long-term programmes require that
key sources of risk are identified and are kept under continuous review.
The strategy of growing revenues in other sectors with steady and
substantial long-term growth, will help offset this risk. Access to global
markets with greater diversification by sector, customer and geography
and an improved balance between original equipment and services
revenue, are expected to help mitigate the effects of the slowing global
economy in any one sector.
Risk profile
Over the past year the risk profile of the Group, in common with many
other large companies, has changed to reflect the underlying global
economic uncertainties. The Group continues to experience the
negative effects of the recent economic downturn through a decline
in the civil aviation sector, shipbuilding and other capital-intensive
industries, which are prime markets for its products and services.
Tight control of the underlying cost base, the cost of managing
operations and the unit cost of products, is essential to protect
margins and maintain profitability. Even as the economy begins
to recover, there will be continued pressure to reduce costs and
improve the use of resources. The Group is focusing on identifying
the principal drivers of unit costs and identifying actions to achieve
sustainable cost reductions.
In the absence of a sustained and general return to growth, uncertainty
remains across financial and industrial markets. This is reflected in the
Group’s risk profile.
The risks described below are among those that may have an impact
on the Group’s performance. This is notwithstanding other risks and
uncertainties that are currently unknown to the Group, or which the
Group does not presently consider to be material. The principal risks
reflect the global nature of the business and the competitive and
challenging business environment in which it operates. Risks, including
those to the Group’s reputation, are considered under four broad
headings:
• Business environment risks
• Strategic risks
• Financial risks
• Operational risks
Environmental impact of products and operations
The Group recognises that its products and business operations have
an impact on the environment, particularly in relation to climate
change. Rolls-Royce is determined to be part of the solution to these
environmental challenges and continues to make significant investment
in innovative solutions for the aviation, marine and energy markets.
The challenge is being addressed through the enhancement of
current product ranges and affordable research and development
into low carbon technologies such as nuclear power, fuel cells and
tidal energy. The Group continues to work closely with its customers,
industry partners and other stakeholders to implement these
development opportunities.
A robust governance structure headed by the Environment Council
directs and monitors improvements in the environmental performance
of the Group’s products, and the Environmental Advisory Board reviews
and makes recommendations on the environmental aspects of the
Group’s products and business operations.
Rolls-Royce Group plc
Annual report 2009
Business review
Principal risks and uncertainties – continued
25
Strategic risks
Competitive pressures
The markets in which Rolls-Royce operates are highly competitive and
this competitiveness is increasing as a result of the global economic
uncertainties. The majority of product programmes are long term in
nature and access to key customer platforms is critical to the success of
the business. This requires sustained investment in technology, capability
and infrastructure by the Group, all creating high barriers to entry.
However, these factors alone do not protect the Group from competition
such as pricing and technical advances made by competitors.
The Group has developed a balanced business portfolio and continues
to maintain a steady focus on improvement in operational performance,
for example through the modernisation of its facilities and an increased
focus on managing the costs of operations and products. Sustained
investment in technology acquisition and robust protection of
intellectual property, together with the establishment of long-term
customer relationships, allow the Group to differentiate its products and
services and protect margins in the face of competitive pressures.
Export controls
Rolls-Royce designs and supplies a number of products and services for
the defence market. Many countries in which the Group conducts its
business have legislation controlling the export of specified goods and
technology intended or adaptable for military application. The Group is
committed to complying with the requirements of national
governments in all jurisdictions when exporting goods, parts,
technologies or information, although globalisation of the Group’s
operations brings with it complexities of concurrent but differing
national export control legislation. Non-compliance with export controls
is recognised as a principal risk to both programme performance and
the Group’s reputation.
The exports committee, chaired by the Chief Operating Officer, directs
the Group’s strategy and policy on exports. Export control managers are
embedded throughout the business and export controls awareness
training is provided to employees. The Group will continue to implement
any necessary changes to ensure that it maintains the capability to
monitor and comply with requirements.
Financial risks
Principal risks are:
• movements in foreign currency exchange rates;
• interest rates;
• commodity prices;
• counterparty credit risk; and
• regulatory developments.
A description of these risks and details of the Group’s risk mitigation
actions in this area are provided in the Finance Director’s review.
Operational risks
Performance of supply chain
The Group’s products and services are delivered through the effective
operation of its facilities and key capabilities, including its supply
chain. The Group’s success in strengthening its market position and
its presence on a number of high profile civil and defence aerospace
programmes places increased demands on the performance of the
supply chain. The Group manufactures approximately 30 per cent by
value of its gas turbine products, the remainder being provided
through external suppliers, including risk and revenue sharing partners.
Meeting delivery commitments on schedule, cost and quality are
critical to the achievement of business goals. Investment in developing
world-class manufacturing processes is continuing in Asia, North
America and Europe.
Global supply chains are complex with multiple inter-relationships across
a wide network of organisations. While the Group’s strategy is to improve
integration and simplify the internal and external elements of its supply
chain by building long-term strategic links with fewer, stronger suppliers,
it remains at risk of disruption from financial or physical causes such as
bankruptcy, natural disaster, armed conflict or pandemic. A significant
disruption in any of these elements could adversely affect the Group’s
ability to deliver its operational commitments and would have the
potential to affect financial returns.
The planning for, and management of, any such interruption is
addressed through the Group’s business continuity management
process, which is well established and focused on critical facilities,
activities, processes, skills and suppliers. The Group’s crisis management
plan and framework were significantly revised and exercised in 2009. In
addition to the Group’s comprehensive programme of business
interruption insurance, significant investment is being undertaken to
establish, where possible, dual sourcing of key components or processes.
Increased focus is also being applied to understanding and addressing
sources of risk arising in the external supply chain, particularly those
associated with financial instability. Procedures are in place to monitor,
assess and respond to such risks.
Rolls-Royce Group plc
Annual report 2009
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26
Business review
Principal risks and uncertainties – continued
IT security
The continuing globalisation of the business and advances in technology
have resulted in more data being transmitted internationally, posing an
increased security risk. There is also the possibility of unintentional loss of
controlled data by authorised users. In either case, adverse impacts upon
operational effectiveness, the value of intellectual property, legislative
compliance or the reputation of the Group might arise. The active sharing
of information through industry and government forums, commitment of
additional specialist resources and the continual upgrading of security
equipment and software mitigate these risks.
Ethics
The Group recognises the benefit that is derived from conducting
business in an ethical and socially responsible manner. This approach
extends from the sourcing of raw materials and components to the
manufacture and delivery of products and services in all of its global
locations and markets. It applies to the provision of a safe and healthy
place of work and investment in technologies to reduce the
environmental impact of the Group’s products and operations.
Shortcomings in any of these areas could damage the Group’s
reputation, expose it to financial penalties and disrupt its business.
The Group is committed to maintaining high ethical standards. A Global
Code of Business Ethics, available in 16 languages, has been issued to all
employees supported by a training and engagement programme to
improve awareness of the Group’s values. A programme of technical
training for specialist roles is underway. The Group’s ethical standards
are also communicated to the Group’s first-tier supply base through a
supplier code of conduct. Concerns regarding potentially unethical
behaviours can be reported in confidence via dedicated global
telephone and internet channels. All such reports are followed up
and are monitored by the ethics committee.
Programme risk
The Group manages complex product programmes with demanding
technical requirements against stringent, and sometimes fluctuating,
customer schedules. This requires co-ordination of the engineering
function, manufacturing operations, the external supply chain and other
partners. Failure to achieve programme goals would have significant
financial and reputational implications for the Group. These implications
include the risk of impairment of the carrying value of the Group’s
intangible assets and the impact of potential litigation. Impairment is
discussed further in the Finance Director’s review on page 58.
The Group seeks continuous improvement of all its processes and
employs project management controls to ensure that both technical
and business objectives are achieved. All major programmes are subject
to Board approval and are reviewed regularly by the Board with a
particular focus on the nature and potential impact of emerging risks
and the effective mitigation of previously identified threats.
Rolls-Royce Group plc
Annual report 2009
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Business review
Review of operations
Review of operations
Overview
Rolls-Royce is a technology leader with a global customer base.
We are developing our presence across the world to meet
increasing demand for the advanced products and services that
we take to market.
As well as introducing new technologies we also place emphasis
on continuously developing the through-life performance of our
products for the benefit of customers.
New facilities
We are expanding our operations
facilities around the world.
Building
our global
operations
27
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28
Business review
Review of operations – continued
Civil aerospace
“ A strong portfolio of products
and services combined with
a global customer base has
provided strength during
uncertain times.”
Mark King President – Civil Aerospace
£4,481m
Underlying revenue
US$1,400bn
Market opportunity over 20 years
Trent engine
The Trent family of large aero engines continues to command a strong market
position on the new generation of wide-bodied aircraft.
The civil aerospace business powers over
30 types of commercial aircraft and has a
strong position in all sectors of the market:
wide-body, narrow-body and corporate
and regional aircraft. Over 13,000 engines
are currently in service with 650 airlines,
freight operators and lessors and 4,000
corporate operators.
Despite a decline in air traffic, the market is beginning to recover, albeit
slowly. 2010 traffic will see a return to growth but from suppressed
levels. We remain cautious but optimistic of seeing the historic traffic
growth level of approximately five per cent per annum achieved over
a 20-year period.
The economic situation also saw the retirement across the industry
of some 500 aircraft, notably older models. The Rolls-Royce powered
fleet is, by contrast, relatively young and more fuel efficient. The better
performance and increased aftermarket potential in this younger fleet
underlined the value of our balanced services and products business
model. The corporate and regional aircraft market has been sensitive
in the downturn but the twin-aisle, large airliner market, has been
more robust.
Order intake was reduced due to the poor market conditions but
there were some significant orders, notably from AirAsia X, Air China
and United Airlines. New orders also included first-time customers for
the Trent family: Turkish Airlines; Ethiopian Airlines and, the US lessor
Aviation Capital Group. Trent engines continue to win business
across the range of wide-body aircraft and now hold a 50 per cent
market share.
The first flight of the Boeing 787 in December 2009, powered by
Rolls-Royce Trent 1000 engines, was a significant and important
milestone for this programme. The majority of the Boeing 787 flight
test and certification programme planned to be completed in 2010
will use Trent 1000 engines.
The Trent family philosophy continues to demonstrate significant
advantages with the introduction of new technology for established
engines. Upgrades for the Trent 700 have enhanced its performance and
Rolls-Royce Group plc
Annual report 2009
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Business review
Review of operations – continued
fuel efficiency and a similar package is planned for the Trent 900.
Technology being developed for new engines such as the Trent 1000
and Trent XWB will continue to provide operational, performance and
environmental advantages across our product range. Orders for the
Trent 700 and the Trent XWB now exceed 1,000 engines for each
programme. For the Trent XWB this marks a significant demonstration
of customer confidence as the programme is still three years away from
entry into service.
In the narrow-body market the V2500 engine, produced by International
Aero Engines (IAE) in which Rolls-Royce is a major partner, continues to
win orders. IAE delivered 347 engines in 2009. IAE also gained significant
contract awards from Air China, Qatar Airlines and Dubai Aerospace.
There are now more than 4,000 V2500 engines flying with 190
customers worldwide.
In the corporate and regional market, the latest addition to the Group’s
corporate engine family is the BR725 engine. It flew for the first time on
the Gulfstream G650 ultra-long-range business jet in November 2009,
and remains on schedule for entry into service in 2012. In September
2009, the first flight of an Embraer Legacy 650, powered by the new
AE 3007A2 engine, took place. The AE 3007A2 will deliver significant
performance and reliability improvements over previous engine marks.
It is currently undergoing flight testing ahead of certification and entry
into service in the second half of 2010.
The majority of orders in the civil aerospace business are now contracted
under TotalCare® or CorporateCare® long-term support contracts. These
overarching service contracts provide an important and sustainable
revenue stream for the business. They also allow our customers to plan
their business more effectively both financially and in the use of engine
assets. Services revenue has been affected by the current economic
environment with fewer flying hours and airlines deferring non-essential
maintenance. As more engines enter service in line with order
commitments we expect to see flying hours increase. The TotalCare
service structure has been particularly robust and the model we have in
place is designed to be responsive to this change and match the market
and customer demand. Hours flown under TotalCare agreements
continue to grow.
50
Trent engines now hold a
50 per cent market share in
wide-bodied aircraft.
Rolls-Royce Group plc
Annual report 2009
Corporate jets
Rolls-Royce holds a strong position in this market sector, where there were
notable programme achievements in 2009.
Highlights
• Record year for Trent delivery with 224 engines shipped
• Trent 700 and Trent XWB each exceeded orders for 1,000 engines
• Trent 1000 powered the Boeing 787 Dreamliner first flight
• BR725 powered the Gulfstream G650 long range business jet
first flight
Key financial data
2005
2006
2007
2008
2009
Underlying revenue £m
Underlying profit before
financing £m
Net assets £m
3,406
+11%
454
+118%
1,617
3,907
+15%
519
+14%
2,165
4,038
+3%
564
+9%
2,468
4,502
+11%
566
0%
330
4,481
0%
493
-13%
2,694
Other key performance indicators
Order book £bn
Engine deliveries
Underlying services
revenues £m
Underlying services
revenues %
Percentage of fleet under
management
2005
2006
2007
2008
2009
19.0
+17%
881
20.0
+5%
856
35.9
+80%
43.5
+21%
851
987
47.0
+8%
844
2,016
2,310
2,554
2,726
2,626
59
45
59
48
63
55
61
57
59
59
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Business review
Review of operations – continued
Defence aerospace
Rolls-Royce is a global provider of defence
aero-engine products and services, with
18,000 engines in service for 160 customers
in 103 countries. Our engines power aircraft
in all key defence market sectors: transport;
combat; reconnaissance; training; helicopters
and unmanned aerial vehicles.
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“ Public spending is under
pressure but we have
strong positions in new and
established programmes.”
Dan Korte President – Defence Aerospace
£2,010m
Underlying revenue
US$450bn
Market opportunity over 20 years
We also received the second contract, worth US$171 million, for the
production of the LiftSystem for the short take-off and vertical landing
(STOVL) or ‘B’ version of the F-35 Joint Strike Fighter. This programme
reached a significant milestone in early 2010, when the Rolls-Royce
designed LiftSystem was engaged successfully in flight for the first time.
Tranche three of the Eurofighter Typhoon aircraft was ordered, which
provided Rolls-Royce with a 37 per cent production share of 241 Eurojet
engines. The EJ200’s reliability and support effectiveness was highlighted
during the year, with a Royal Air Force engine reaching 1,200 flying hours
with no requirement for unscheduled maintenance.
At the end of the year the Airbus A400M airlifter, powered by the TP400
turboprop engine, flew for the first time. Rolls-Royce is a major partner
in the European consortium producing the TP400. There is continuing
uncertainty about the A400M programme. However, the TP400 engine
has made good progress, with engine flight testing to date being
encouraging. We believe that our estimated costs to completion
adequately consider the remaining testing and delivery phases.
There were four additional successful Rolls-Royce powered first flights
during 2009 in the defence sector: the AgustaWestland Lynx AH Mk.9A;
the AgustaWestland AW159 Wildcat; and the AgustaWestland T129
Attack Helicopter, all powered by the CTS800 engine. The BAE Systems
Mantis UAV powered by the Model 250 engine, also flew and
demonstrated our capability to design and deliver an integrated
power system.
Eurofighter Typhoon
As a major partner in the Eurojet engine consortium, Rolls-Royce benefited from
the latest tranche of Eurofighter aircraft being ordered.
The downturn in the global economy has put pressure on public
spending in our key markets in Europe and the US. However, our
position on new and established programmes continues to provide
growth opportunities in these markets. In addition, we are well
positioned to secure growth from emerging economies in Asia, the
Middle East and South America.
During 2009, key orders were secured in both the combat and transport
sectors and we saw new programmes emerge in the helicopter and
unmanned aerial vehicles (UAVs) sectors.
The US Government approved 2010 funding for development of
the F136 engine for the F-35 Joint Strike Fighter. This engine, being
developed jointly by Rolls-Royce and General Electric, is designed
to power all variants of the F-35 aircraft.
Conversion work began on the first Airbus A330 aircraft for the
Future Strategic Tanker Aircraft programme. The A330M multi-role
tanker is powered by the Trent 700 engine and is expected to enter
service in 2012.
Rolls-Royce Group plc
Annual report 2009
Business review
Review of operations – continued
Service business under long-term contract programmes, such as
MissionCare™, continues to be attractive to defence customers. The US
Department of Defense awarded us a US$90 million contract to support
the engines for the US Navy’s T-45 trainer aircraft. We agreed a US$200
million production contract and a US$500 million service contract,
through to 2014, with the US Marine Corps to provide support for the
AE 1107C Liberty engine in the Bell-Boeing V-22 Osprey vertical lift aircraft.
An £865 million contract to service the EJ200 engines for the UK
Eurofighter Typhoon fleet through to 2019 was also secured. Rolls-Royce is
a major partner in the Eurojet consortium which produces the EJ200.
Over £1 billion worth of orders for services were signed in 2009,
presenting significant opportunities for Rolls-Royce to leverage its
innovative service solutions.
The defence sector has continued to invest successfully in new
technology as demonstrated by the Phase 2 award of the US Air Force
ADVENT technology programme. Phase 2 will include the integration of a
variety of advanced technologies, component testing and culminates with
the development of a new technology demonstrator engine. The
demonstrator is designed to reduce fuel consumption significantly,
enabling extended mission ranges and loiter times. This advanced engine
is targeted for future US military aerospace platforms. In the UK, we signed
a jointly funded research and technology contract for ENTAPS (Engine
Technologies for Aircraft Persistence and Survivability) with the
UK Ministry of Defence.
BAE Systems Mantis
AW159 Wildcat
The AW159 Wildcat programme will
deliver a fleet of 62 new light
helicopters for the Army and Royal
Navy from 2014 and 2015, respectively.
Mantis is an unmanned advanced
technology demonstrator powered
by Rolls-Royce.
90
US$90 million contract to support
the engines for the US Navy’s T-45
trainer aircraft.
Rolls-Royce Group plc
Annual report 2009
Market strength
We signed a US$500 million contract to support the engines for the V-22 Osprey,
in service with the US Marine Corps.
Highlights
• £325 million contract secured for EJ200 engine production
• US$200 million production contract for AE 1107C V-22 engines
• F136 engine development funded for 2010
• US$184 million worth of US Army helicopter contracts secured for
the Model 250 fleet
• £865 million contract secured for long-term EJ200 engine support
• US$500 million MissionCare contract signed for AE 1107C fleet
Key financial data
2005
2006
2007
2008
2009
Underlying revenue £m
Underlying profit before
financing £m
Net assets £m
1,420
+3%
180
+1%
55
1,601
+13%
193
+7%
20
1,673
+4%
199
+3%
(172)
1,686
+1%
223
+12%
(197)
2,010
+19%
253
+13%
(345)
Other key performance indicators
Order book £bn
Engine deliveries
Underlying services
revenues £m
Underlying services
revenues %
Percentage of fleet under
management
2005
2006
2007
2008
2009
3.3
0%
565
3.2
-3%
514
4.4
+38%
495
5.5
+25%
517
6.5
+18%
662
787
853
877
947
1,046
55
8
53
11
52
11
56
12
52
16
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Marine
“ Our business has grown
significantly during the past year
and we are seeing the increasing
importance of support services
in our revenue mix.”
John Paterson President – Marine
£2,589m
Underlying revenue
US$320bn
Market opportunity over 20 years
The marine business has enjoyed another year of strong growth, despite
macroeconomic challenges and a slowdown in orders. Although the
demand for original equipment has reduced, service opportunities have
increased as a result of the large number of ships introduced to the
market in recent years. As a systems integrator, Rolls-Royce has an
advantage in being able to provide a wide range of services for the
sophisticated vessels that utilise our systems.
Since 2005, our revenues have more than doubled and increased by
17 per cent on 2008, driven primarily by the continued growth in our
offshore business. Marine profit increased 44 per cent in 2009 as a result
of strong revenue growth, the increasing importance of support services
and improved operational performance.
The offshore sector has been central to our continued strong
performance, based on the success of our specialist UT-Design and
integrated systems capability. 2009 saw the launch of the Rolls-Royce
designed Far Samson, the world’s most powerful offshore vessel, and
the introduction of an innovative wave-piercing design that improves
stability and crew safety while minimising environmental impact.
During 2009, we acquired a 33 per cent holding in ODIM ASA, a leading
provider of specialist marine handling systems. This investment increases
our already strong presence in the offshore oil and gas sector.
Our naval business had a good year, with significant activity in the
UK, the US, France, India and Korea. We began delivering power and
propulsion equipment for the UK’s new, Queen Elizabeth class, aircraft
carriers. Stabilisers have already been delivered for the first carrier and
our MT30 gas turbine has successfully completed trials. MT30 gas
turbines installed in the US Navy Littoral Combat Ship, USS Freedom,
also completed sea trials during the year.
Rolls-Royce has a world-class range of
capabilities and expertise in the design,
supply and support of power and propulsion
systems for offshore oil and gas, merchant
and naval vessels. Our marine business has
more than 2,000 customers and equipment
installed on over 30,000 vessels worldwide,
including those of 70 navies.
Far Samson
This is the world’s most powerful offshore vessel, designed primarily for
laying pipelines and cables.
33
We acquired a 33 per cent holding
in ODIM ASA, a leading provider of
specialist marine handling systems.
Rolls-Royce Group plc
Annual report 2009
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As our installed base of equipment continues to grow, we are actively
expanding our support capacity and capability to realise the significant
opportunity that this represents. Six marine service centres across North
America, South America, Europe and the Middle East were opened in
2009. Marine customers seek to have their ships serviced close to where
they primarily operate and we are continuing to develop our extensive,
global network to meet customer requirements.
A significant and growing proportion of our customers, manufacturing
capability and supply chain are based in the Asia region. As a result, and
recognising the importance of being closer to where more of our
activity is located, we established the global headquarters of our marine
business in Singapore.
We continue to invest in technology that can address the need for more
efficient and environmentally sustainable power and propulsion systems.
This is primarily through the reduction of exhaust gas emissions and
improvements in ship design. Our Bergen gas engines already surpass
International Maritime Organization limits for NOx emissions, while
research in propulsor/hull interactions deliver improvements in fuel
consumption, stability and general performance, as demonstrated by our
Promas integrated rudder/propeller system.
Rolls-Royce and Royal Caribbean Cruises have settled the lawsuit
regarding the Mermaid podded-propulsion system, which experienced
technical issues that have now been resolved. By working together,
Rolls-Royce and Royal Caribbean have been successful in improving the
reliability of the design.
As anticipated, there were some order cancellations in 2009 as
customers reviewed their requirements given the economic downturn.
However, our strong market-leading position in the offshore sector and
demand for high-specification vessels in support of oil and gas
exploration, provide good visibility of revenues in 2010.
Marine services
Six new marine service centres were
opened during the course of last year
as we seek to build a global network
for our customers.
Rolls-Royce Group plc
Annual report 2009
Littoral Combat Ship
The Littoral Combat Ship, USS Freedom, is powered by two MT30 gas turbines.
Highlights
• Continued strong growth despite challenging market environment
• Far Samson, the world’s most powerful offshore vessel,
entered service
• Service capabilities expanded across North America, South America,
Europe and Middle East
• Queen Elizabeth class aircraft carrier equipment deliveries commenced
Key financial data
2005
2006
2007
2008
2009
Underlying revenue £m
Underlying profit before
financing £m
Net assets £m
1,097
+14%
89
+14%
674
1,299
+18%
101
+13%
619
1,548
+19%
113
+12%
563
2,204
+42%
183
+62%
488
2,589
+17%
263
+44%
641
Other key performance indicators
Order book £bn
Underlying services
revenues £m
Underlying services
revenues %
Percentage of fleet under
management
2005
2006
2007
2008
2009
1.7
+21%
2.4
+41%
4.7
+96%
5.2
+11%
3.5
-33%
435
487
545
712
785
40
3
37
3
35
33
32
35
30
26
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Energy
The energy business is a world-leading
supplier of power systems for onshore and
offshore oil and gas applications and has a
growing presence in the electric power
generation sector. It has supplied products to
customers in over 120 countries.
“ Our order book was maintained
and market confidence in oil and
gas has begun to return.”
John Cheffins Acting President – Energy
£1,028m
Underlying revenue
US$120bn
Market opportunity over 20 years
Energy had a strong performance in 2009, with revenues up by
36 per cent to over £1 billion for the first time and profits growing
by £26 million.
Industrial RB211 gas turbine
Used in gas compression, oil pumping and electrical generation
applications, the RB211 is a highly reliable and robust unit.
The number of orders secured by the business reduced by 16 per cent
compared to the previous year. Despite the challenging market
conditions, the size of the order book was broadly maintained in 2009.
The year also saw high original equipment volume deliveries. The
modest profit increase in the year was achieved as a result of the
continued growth in demand for aftermarket products and services.
In the main, oil and gas customers took a long-term view from the
outset of the global recession and continued to invest, albeit at a
reduced level. Market confidence has begun to return as a result of the
strengthening in oil prices, with both offshore and pipeline customers
now persisting with previous expansion plans.
Pipeline bid activity continued in the year, with a total of 24 gas
turbine units ordered, comprising 11 units for Kazakhstan, nine for China
and four for India. In other oil and gas markets, orders for five gas turbine
units were received for installation offshore of Azerbaijan and Malaysia.
The power generation market remained depressed due to the high cost
and restricted availability of finance, coupled with reduced demand for
electricity. However, market interest in the Trent 60 continued to grow
and contracted projects proceeded as planned. Sales growth continued
to advance on the back of high order levels in recent years and the
increasing aftermarket business. In the power generation market,
successful commercial operation of the Trent 60 began in the US, Israel,
Germany, China and Australia. Orders for 15 Trent 60 packages were
secured in 2009.
Rolls-Royce Group plc
Annual report 2009
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Business review
Review of operations – continued
Demand for aftermarket products and services grew strongly with
another record year resulting in revenues of £470 million, an increase of
27 per cent. The growth of the installed fleet has resulted in an increase
in demand for services and product upgrades which incorporate the
latest gas turbine technology. Operators are benefiting from the
additional power and efficiency that these upgrades provide. Units
under long-term service agreements increased to approximately 300
units from 250 units the previous year.
The energy business strategy to consolidate its gas turbine packaging
operations into the Mount Vernon, Ohio, US facility progressed with the
latest site improvements becoming fully operational in the middle of
2009. While the energy business currently centres its product portfolio
on the gas turbine, the skills and technical knowledge within the Group
allow the business to identify and explore new growth opportunities in
the energy market.
During 2009, good progress was made on the establishment of the new
Rolls-Royce civil nuclear business unit. The business announced plans
to build a new factory in the UK to assemble and test systems and
components for nuclear power stations. This facility will have strong links
with the UK Government-funded Nuclear Advanced Manufacturing
Research Centre, in which Rolls-Royce is a lead partner. The Rolls-Royce
position in the nuclear market was further strengthened with the
signing of a memorandum of understanding in 2009 with EDF Energy
to support the UK facility.
Rolls-Royce is already a global leader in the supply of digital
instrumentation and control systems for nuclear power plants, with
products installed in over 184 nuclear reactors worldwide.
Investment in fuel cell development technology continued, although
at a reduced cost to the Group as planned. Other energy research
included tidal power, where preparations for sea trials got underway
during the year, following the Group taking full ownership of Tidal
Generation Limited.
15
Orders for 15 Trent 60 packages were
secured in 2009.
Rolls-Royce Group plc
Annual report 2009
Pipeline power
A total of 24 gas turbine units were ordered during the year for pipelines
around the world.
Highlights
• Order book maintained despite difficult market conditions
• Revenues increased to over £1 billion for the first time
• Service business growth of 27 per cent to £470 million sales
• Civil nuclear business memorandum of understanding with
EDF Energy
Key financial data
2005
2006
2007
2008
2009
Underlying revenue £m
535
-1%
546
+2%
558
+2%
755
+35%
1,028
+36%
Underlying profit before
financing £m
1
+114%
(18)
-1900%
5
+128%
(2)
24
-140% +1300%
Net assets £m
390
387
370
392
533
Other key performance indicators
Order book £bn
Engine deliveries
Underlying service
revenues £m
Underlying service
revenues %
Percentage of fleet under
management
2005
2006
2007
2008
2009
0.4
0%
61
0.5
+25%
44
0.9
+80%
32
1.3
+44%
64
1.3
0%
73
219
251
289
370
470
41
5
46
6
52
7
49
9
46
10
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Engineering and technology
In 2009, Rolls-Royce invested a total of
£864 million in research and development,
of which £471 million was funded from
Group resources.
“ An ongoing commitment to
research and development is
fundamental to the Group’s
future success.”
Colin Smith Director –
Engineering and Technology
£864m
Investment
440
Patent applications
The Group believes that its ongoing commitment to research and
development is fundamental to its future success, providing
technologies and intellectual property that allow us to compete on a
global basis in highly competitive markets.
technology for the next generation of civil gas turbine engines. We
also continue to invest in several other large-scale demonstrator
programmes to reduce carbon emissions, which focus both on future
gas turbine technology and advanced manufacturing.
During 2009, we created a new advanced research centre in Singapore
to develop manufacturing, electrical systems and high-power
computing capabilities. Our new Mechanical Test Operations Centre in
Dahlewitz, Germany, neared completion during the year. This centre will
provide mechanical testing capability for all areas of the Group.
We completed wind tunnel testing of our open rotor aero-engine
concept. This concept uses large unducted fan blades to secure a
significant reduction in fuel burn when compared with modern
turbofans. Our results demonstrated efficient performance and
low-noise characteristics in line with our expectations.
Next generation technology
The Group has a global network of University Technology Centres undertaking
advanced research in specialist subject areas.
Building on the success of our membership of the Advanced
Manufacturing Research Centre, we have increased our focus on
advanced manufacturing. In the UK, we announced our partnership in
the new National Composites Centre, the Advanced Fabrication
Research Centre, the Advanced Nuclear Research Centre and became
the inaugural industrial partner in the Manufacturing Technology Centre.
Additionally, we became a partner of the US Commonwealth of Virginia
in two new centres studying advanced aerospace propulsion systems
and advanced manufacturing.
We continue to invest in our worldwide network of 27 Rolls-Royce
University Technology Centres, which undertake advanced research
for the Group across a range of specialist subject areas such as
materials, noise, vibration and combustion. During the year we
filed 440 patent applications.
Improving the environmental performance of our products and
operations continues to be a key driver for research and development in
Rolls-Royce. We have completed the first build of the Environmentally
Friendly Engine and the second build of our mid-size technology
demonstrator engine. These will begin testing in early 2010, delivering
Rolls-Royce Group plc
Annual report 2009
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Turbine blade
The design, use of materials and the manufacturing processes that go towards
the production of our high-pressure turbine blades exemplify the Group’s
engineering capability.
Highlights
• Award of the second phase of the ADVENT programme
• First flight of the Trent 1000-powered Boeing 787
• First flight of the BR725-powered Gulfstream G650
• First flight of the TP400-powered Airbus A400M
• First in-flight engagement of the F-35 LiftSystem
• Initial trials of the first Astute class submarine
Key performance indicators
2005
2006
2007
2008
2009
Gross research and
development expenditure £m
Net research and
development expenditure £m
Net research and
development charge £m
Net research and development
expenditure % of
underlying revenue
663
747
824
885
864
339
395
454
490
471
282
370
381
403
379
5.2
5.4
5.8
5.4
4.7
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Our work for the US Air Force on the Adaptive Versatile Engine
Technology (ADVENT) programme has led to us being awarded the
second phase of funding, which will include the incorporation of
Phase 1 technologies in a demonstrator engine. ADVENT focuses on the
variable cycle and geometry to meet demanding US defence
requirements for the next generation of military engines.
We achieved notable engineering successes in each of our key
business sectors.
In the civil aerospace business, the Trent 1000 successfully completed its
Extended Twin Operations (ETOPS) testing and, at the end of the year,
powered the Boeing 787 on its first flight. The BR725 engine was
certified and delivered on time and powered the new Gulfstream G650
corporate jet on its maiden flight. The AE 3007A2 engine for the Embraer
Legacy 650 completed the majority of its certification testing and started
flight testing.
Our marine business has designed a radical wave-piercing hull concept
for applications in the offshore marine market. For the second year
running Rolls-Royce won the coveted ‘Ship of the year award’, this time
for the ‘Far Samson’ – the most powerful offshore vessel ever built. The
Littoral Combat Ship, USS Freedom, completed US Navy acceptance
trials in preparation for entering service. The first Type 45 Destroyer,
HMS Daring, has entered service with the Royal Navy powered by the
WR-21 and work on her sister ships is progressing well. The first Astute
class nuclear-powered attack submarine with the Rolls-Royce designed,
full-life, PWR2 power system has sailed for initial trials.
In defence aerospace, the Airbus A400M powered by the Europrop
TP400 turboprop engine made a successful first flight in 2009 and the
BAE Systems Mantis unmanned aerial vehicle, powered by Rolls-Royce,
also operated flawlessly during its flight trials. In the F-35 Joint Strike
Fighter programme, the first development F136 engine was delivered
one month ahead of schedule. The Rolls-Royce LiftSystem, for the short
take-off and vertical landing variant, completed ground testing and
aircraft taxi trials ahead of its first engagement in-flight, which was
achieved early in 2010.
In energy, the latest industrial Trent combustion system entered service
during the year and the design of the high efficiency RB211-H63 has
progressed significantly. We continue our work on low carbon energy
solutions. During 2009, we began installation of a 500kW tidal power
generator in the waters off the coast of Scotland and the Group
continues to invest in engineering capability to support its move into
the civil nuclear energy market.
Rolls-Royce Group plc
Annual report 2009
38
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Review of operations – continued
Operations
2009 proved to be a challenging year but
also one of notable achievement for our
operations. We improved our revenue per
employee significantly from £211,000 in
2008 to £233,000 in 2009.
“ Our focus continues to be on
operational excellence, strong
partnerships and technological
superiority.”
Mike Terrett Chief Operating Officer
£291m
Capital expenditure
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The Group managed the disruptive effects of the recession and changes
to programmes, we reduced our inventory levels and, although gas
turbine product costs increased slightly, these were held at a level of
three per cent above those of 2008.
Our operational activity in 2009 centred around two prime objectives:
managing our own activities and those of the supply chain in a weak
global economic climate, while at the same time continuing with our
programme of investment for the future.
The Group’s operations and its supply chain faced the challenges of
uncertain market conditions, depressed financing markets and volatility
in major programmes such as the Boeing 787 Dreamliner, Airbus A380
airliner and the A400M military airlifter.
Weaker demand in the corporate and regional jet market and for civil
engine overhauls and spare parts in the large engine market, reduced
levels of activity and impacted on productivity and unit costs.
Our marine business had a record year, placing additional demand on
operations. Although certain product areas saw a slowdown in
production, we also introduced an unprecedented number of new
products in this sector. Nevertheless, the supply chain coped well by
using our production planning and management tools and we were
able to successfully match capacity to demand.
Across the Group we sought to ensure that we maintained the correct
balance of employees to meet current and anticipated demand. This did
involve some difficult decisions and, regrettably, some redundancies.
Our employees remain understanding, loyal and co-operative, working
with us to help mitigate the effects wherever possible and I would like to
thank them for their support.
Rolls-Royce Group plc
Annual report 2009
New facilities
The Group is investing substantially in new facilities in the UK, US and Asia.
Our process excellence and improvement journeys continued
throughout 2009. Our joint venture engine overhaul facilities, Hong
Kong Aero Engine Services Limited (HAESL) and Singapore Aero Engine
Services Limited (SAESL), were the latest to benefit from the rollout of
the enterprise resource planning and SAP process systems.
Around 500 engineers based at our engineering support services
business in India, also became connected to our design network,
Product Life-cycle Management, and are now able to work concurrently
on design models with colleagues around the world.
Business review
Review of operations – continued
Continuing with our investment plan is important, as the Group must
increase its operational capability in order to deliver the inevitable
growth over the next decade that we will experience. This growth is
as a result of the Group’s improved market position and current order
book commitments.
We announced further new investments in facilities in 2009 and
work commenced on facilities that had already been announced.
Construction of our new US-based disc manufacturing centre in
Crosspointe, Virginia, began during the year.
Our plans progressed on the building of the new assembly and test
facility for Trent engines at the Seletar Aerospace Park, Singapore. We
also announced that we will build an additional wide-chord fan blade
facility on an adjacent site at Seletar, bringing the total investment on
the site to £300 million and creating 500 jobs over the next few years.
A further £300 million of significant capital investment in the UK was also
announced, creating or securing 800 jobs. The Group is to build a new
single crystal turbine blade facility at a location yet to be determined
and in Sunderland we are to build a new discs facility. We are also
extending our wide-chord fan blade facility at Barnoldswick to support
our defence business. These gas turbine facilities are addressing the
planned increase in the manufacturing of components that the Group
sees as necessary over the next five years and they will help provide
improved productivity benefits on our current product range.
Singapore
We opened an extension to our joint venture repair and overhaul business in
Singapore. Plans for our wholly-owned new facilities there also progressed.
Highlights
• Recession and delays to major programmes managed successfully
• Announced investment in Singapore facilities now at £300 million
• £300 million investment in UK facilities announced in 2009
• Building of new US facility commenced
• Global integration of people and systems continues
In addition, we announced in 2009 our intention to create a new facility
in the UK to support our emerging civil nuclear business.
Key performance indicators
2005
2006
2007
2008
2009
Capital expenditure £m
232
303
304
283
291
Product cost index –
year-on-year
(increase)/decrease %
Underlying revenue
per employee £000 1
–
(5)
(7)
(4)
(3)
169
182
194
211
233
1 Calculated on a three-year rolling basis
Despite the planned increases in our own capability, the proportion of
parts that the Group buys, including through our partnerships, will also
continue to increase as we move towards having fewer, larger and more
capable suppliers to support our global operations.
The increasing globalisation of our own operations and of our supply
chain will, over time, bring together world-class capabilities while also
helping to reduce the Group’s US dollar exposure.
Our focus continues to be on operational excellence, strong partnerships
and technological superiority, as we manage the current economic
situation alongside continuing with our investments to provide the
increased operational capacity we require for future growth.
While we expect 2010 to be no less volatile, it is pleasing to reflect on
a year of strong progress. Our operations have proven to be robust
and adaptable, giving us confidence in our ability to cope well with
challenges and changes as we move ahead.
Rolls-Royce Group plc
Annual report 2009
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Business review
Review of operations – continued
Services
“ We work closely with customers
to align service packages to
their operational needs.”
Tony Wood President – Services
£4,927m
Underlying revenue
US$1,050bn
Market opportunity over 20 years
MissionCare in defence
Defence continued to develop its MissionCare service worldwide and service
provision on military bases.
Services activities provide around one half of
the Group’s revenues, having increased ten
per cent compound over the past ten years.
As the original equipment manufacturer,
Rolls-Royce is best placed to provide ‘mission
critical’ support, long-term product care and
well planned maintenance on behalf of
customers in each of the markets we serve.
The Group’s service business capabilities include field services, the sale
of spare parts, equipment overhaul services, component repair, data
management, field support, equipment leasing and inventory
management. These are typically sold as packages such as our TotalCare
suite. We work closely with customers to align these service packages to
their operational needs, helping to maximise the efficient operation of
the equipment on their behalf.
In civil aerospace, over 65 per cent of the total large-engine fleet and
nearly 90 per cent of the in-service Trent fleet is now managed under
TotalCare. We also have over 900 corporate and business jet aircraft
enrolled in CorporateCare, the equivalent offering for this market sector.
This year, significant TotalCare contracts were signed with airlines in Asia,
the Middle East and the US.
Defence continued to develop its MissionCare provision worldwide and
its service presence on military bases. A number of long-term engine
service agreements were signed with customers of the C-130J airlifter
worldwide and contracts were signed with the UK Ministry of Defence in
support of frontline fighter aircraft engines. The US Department of
Defense also signed major agreements for support of Rolls-Royce
engines in service.
Energy secured 12 long-term service agreements which, together
with the additional 35 new gas turbine units that will become
operational during 2010, will take the number of gas turbines
under long-term service agreement to over 300. In support of
the Rolls-Royce fleet in China, a 22-year maintenance, repair and
overhaul agreement was signed with PetroChina for the West to
East Gas Pipeline Project. New service operations serving energy
customers were opened in Angola, India, Israel, Kazakhstan
and Qatar.
Rolls-Royce Group plc
Annual report 2009
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In the marine market our investment in capability and capacity
continued to deliver benefits, with ten per cent services revenue growth
in 2009. Marine customers require their service centres to be close to
their operational base and therefore the expansion of our network to
serve their needs continued. Six new centres were opened during the
year in North America, South America, Europe and the Middle East. We
have also developed underwater intervention capability, enabling
Rolls-Royce to complete major propulsion overhauls without the need
for time-consuming dry dockings.
The Group invested over £10 million this year in developing and
restructuring our gas turbine repair and overhaul network, which will
deliver significant improvements in performance and customer
satisfaction. We also upgraded our service processes and continued to
make progress in standardising our IT systems for global services.
Our SAESL joint venture celebrated its 1,000th Trent engine overhaul and a
£25 million facility extension was opened. A similar investment in our
HAESL joint venture is planned to open in 2010. N3, our Germany-based
repair and overhaul joint venture with Lufthansa marked its 100th Trent
engine overhaul this year and is now fully capable for Trent 500 and 700
overhaul, with Trent 900 capability development underway. 2009 also saw
the celebration of 50 years of repair and overhaul operations in Brazil.
During 2009, we opened our sixth On-Wing Care facility in Indianapolis,
US and our field service capability supported over 4,000 aero engines
globally. Good progress has been made in applying this capability across
all sectors. Our focus on asset optimisation was further reinforced by the
Optimized Systems and Solutions Inc. (OSyS) business, created in 2009.
OSyS has further expanded our in-service diagnostic and predictive
capabilities and signed contracts this year with Qatar Airways and
easyJet for its fuel management system, enabling them both to realise
substantial fuel savings. OSyS also expanded the health monitoring
services and capabilities already applied successfully to aircraft engines
and energy systems.
We expanded component repair coverage and capability across all
sectors and delivered savings to Rolls-Royce of £120 million during 2009.
Our International Engine Component Overhaul Limited (IECO) joint
venture in Singapore completed its 11th year of operation and the repair
of its one millionth component. Both SAESL and IECO were recognised
with several prestigious awards, highlighting their contribution to the
Asia Pacific region, process innovation, new technology introduction and
service delivery.
Rolls-Royce Group plc
Annual report 2009
Predictive capabilities
Our operations centres specialise in acquiring and analysing data on the
Rolls-Royce engine fleet in operation.
Highlights
• Service revenues increased by four per cent to £4.9 billion
• 65 per cent of the civil large engine fleet now under
TotalCare support
• OSyS expands service diagnostic and predictive capabilities
• Major defence contracts secured for Typhoon and C-130J
airlifter engines
• New marine service centres opened around the world
• Over 300 long-term service contracts now signed by energy
Key performance indicators
2005
2006
2007
2008
2009
Underlying services
revenue £m
Underlying services as
percentage of Group revenue
3,457
3,901
4,265
4,755
4,927
54
53
55
52
49
90
90 per cent of the in-service Trent
fleet is now managed under
TotalCare.
TotalCare agreement
As the original equipment
manufacturer, Rolls-Royce is best
placed to offer long-term support.
41
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Business review
Corporate responsibility
Corporate responsibility
The business case for corporate responsibility
Corporate responsibility is a fundamental part
of the Group’s business strategy. It is not
conducted as a separate and self-contained
activity, but is integral to the business.
Corporate
responsibility is
an integral part
of our business
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Promoting science and engineering
Rolls-Royce supports the UK Cub
Scout Scientist badge – encouraging
interest in science.
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We see corporate responsibility as making a key contribution to the
success of Rolls-Royce. We believe that conducting business in an
ethical and responsible manner creates competitive advantage by
enabling us to:
• attract and retain the best people;
• build goodwill and maintain successful working relationships with
customers, suppliers and governments; and
• support the global communities in which our employees live
and work.
The Group’s values of reliability, integrity and innovation are embedded
in our Global Code of Business Ethics. This provides a framework for our
stakeholder relationships worldwide, the strength of which helps to
shape the Group’s reputation.
External recognition
Rolls-Royce is ranked in a number of external indices which
benchmark corporate responsibility performance, see below:
Business in the Community Corporate Responsibility Index (BitC)
The BitC Index assesses the extent to which corporate strategy is
integrated into business practice throughout an organisation. It
provides a benchmark for companies to evaluate their management
practices in key areas of corporate responsibility and performance
in a range of environmental and social impact areas. In this year’s
BitC Index, Rolls-Royce retained its Gold status with an overall score
of 93 per cent.
With around 38,500 employees in more than 50 countries, our strongest
contribution to society is the wealth generated by the thousands of
highly skilled jobs we provide worldwide.
9 10
Governance
Each area of corporate responsibility has its own governance process or
managing committee. These include:
• the ethics committee, consisting exclusively of independent
non-executive directors;
• the health, safety and environment committee, chaired by the
Chief Executive;
• the Environment Council, chaired by the Director – Engineering and
Technology;
• the Environmental Advisory Board, chaired by a senior academic
from the Massachusetts Institute of Technology;
• the Global Council, chaired by the Director – Human Resources;
• the Global Diversity and Inclusion Steering Group, chaired by the
Chief Operating Officer; and
• the Group community investment and sponsorship committee,
chaired by the Chief Executive.
Individual subject matter expertise is reviewed by the Corporate
Responsibility Steering Group, which reports to the Board. This group
comprises the Director – Human Resources, Director – Public Affairs,
Director of Risk and the General Counsel and Company Secretary.
In addition, the corporate responsibility risk register uses the Group
risk process to identify the potential risks and opportunities, as well
as mitigation plans to address these risks. Additional information can
be found in the Principal risks and uncertainties section on pages
24 to 26.
Dow Jones Sustainability World and European Indexes (DJSI)
Rolls-Royce has retained its position in the DJSI for the eighth
consecutive year, thereby achieving international recognition of being
amongst the best-in-class for addressing a range of sustainability
issues. Our overall score of 80 per cent represented an improvement
of one per cent on last year and we once again achieved first position
in the Aerospace and Defence sector. The Group scored 100 per cent
for environmental reporting, product impact and operational
eco-efficiency and the best sector score for both climate strategy
(91 per cent) and occupational health and safety (95 per cent).
Carbon Disclosure Project (CDP)
The CDP is an independent not-for-profit organisation holding the
largest database of primary corporate climate change information in
the world. Thousands of organisations from across the world’s major
economies measure and disclose their greenhouse gas emissions
and climate change strategies through CDP.
For the second consecutive year, Rolls-Royce has been included
within CDP’s FTSE 350 Carbon Disclosure Leadership Index, in which
the quality and depth of a company’s response to the annual CDP
questionnaire is scored.
Rolls-Royce has a long history of being a responsible business. We are
committed to building on our track record and our obligation to
behave responsibly.
Rolls-Royce Group plc
Annual report 2009
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Business review
Corporate responsibility – continued
Our approach
Our approach to corporate responsibility is
concentrated on four areas of activity:
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Rolls-Royce Group plc
Annual report 2009
Business ethics
Rolls-Royce has a long history of conducting business
responsibly and ethically. Our commitment to act with integrity
is at the heart of the way we operate and we regard ethical
behaviour as key to maintaining and strengthening our
reputation for being trusted to deliver excellence.
Health, safety and the environment (HS&E)
With its heritage of technological and engineering excellence,
Rolls-Royce is well placed to help society address the problems
of climate change and energy security. We also believe that good
HS&E performance in our operations is synonymous with good
business. Our objective is to achieve world-class performance at
every site and to be widely recognised for the excellence of our
HS&E performance.
Employees
We aim to attract and retain the best people and create an
inclusive working environment in which creativity, capability and
motivation flourish. By continually improving levels of employee
performance, we deliver on our commitments.
Society
Rolls-Royce has a firm, long-standing commitment to the
communities in which we operate. Sustained investment in
communities makes a positive difference and delivers tangible
benefits to our business. Corporate responsibility is also a key
enabler in delivering our global supply chain strategy.
Business review
Corporate responsibility – continued
45
Business ethics
Rolls-Royce has a long history of conducting
business responsibly and ethically. Our
commitment to act with integrity is at the heart
of the way we operate and we regard ethical
behaviour as key to maintaining and
strengthening our reputation.
4,600
The ethics training programme
included leadership workshops for
4,600 managers around the world.
Rolls-Royce Group plc
Annual report 2009
In 2009, the Group completed a
programme of face-to-face training in
ethics for employees.
30
We have over 30 confidential
reporting lines worldwide.
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Business review
Corporate responsibility – continued
facility includes telephone lines and an external website. Rolls-Royce
employees can call any one of over 30 telephone numbers in countries
across the world to report any concerns they may have with regard to
business conduct. Calls are made in total confidence, being handled
independently by the partnership LRN – EthicsPoint. Reports are
investigated by the business ethics and compliance team with support
from the businesses, security, legal counsel and human resources as
required. An ethics report steering group meets quarterly to review
cases, identify trends and manage the associated ethical and
reputational risks. The ethics committee monitors cases reported, the
management of cases and the results for high risk investigations
undertaken.
Global Code of Business Ethics
In 2009, Rolls-Royce published an updated version of its Global Code of Business
Ethics and issued a personal copy to every employee.
16
Our Global Code of Business Ethics
is available in 16 languages.
Confidential reporting
Independently operated and
confidential ethics reporting lines
are available for employees to raise
issues or concerns regarding
business conduct.
The Board strongly believes that the Group’s business should be
conducted in a way that reflects the highest ethical standards. The ethics
committee was established in 2008 to oversee the implementation of
the Group’s global ethics strategy and the management of ethical and
reputational risk. The committee consists exclusively of independent
non-executive directors and met four times in 2009. Further details of
the committee and its principal terms of reference can be found on
page 73 .
In 2009, as a demonstration of the Group’s commitment to setting
industry-leading standards of ethical business conduct, Rolls-Royce
signed the statement of adherence to the Aerospace and Defence
Industries Association of Europe Common Industry Standards.
Global Code of Business Ethics
In 2009, Rolls-Royce published an updated version of its Global Code of
Business Ethics (the Global Code) and issued a personal copy to every
employee. The revised Global Code sets out the principles for employees
to follow when conducting business and provides practical guidance
to help identify, resolve and report any ethical issues or dilemmas they
may face. It sets standards of ethical behaviour for working together,
conducting business with customers, suppliers and joint ventures,
running our company, health safety and the environment, and working
within our communities. Principles and guidance for managers and
employees are provided in key areas such as diversity, discrimination
and harassment, bribery and corruption, conflicts of interest and safe
working. The Global Code encourages employees to ask for help and
assures them that concerns can be raised without fear of reprisal. It is
available in 16 languages and can be viewed on the Group’s website
at www.rolls-royce.com/cr/ethics.
Training and awareness programme
In 2009, the Group completed a programme of face-to-face training for
all employees to strengthen awareness of the Group’s values and embed
the Global Code. The training programme included facilitated half-day
leadership workshops for almost 4,600 managers across the Group. The aim
of these workshops was to set the tone at the top, make managers aware
of the content of the Global Code and equip them with the necessary tools
to deal with ethics-related issues appropriately. Employee briefings were
subsequently delivered by these managers to their teams using supporting
materials including briefing guides, Global Code wall charts and a corporate
values and ethics video. A tailored ethics e-learning course will be available
in 2010 to reinforce the face-to-face training provided in 2009.
Confidential reporting line
An independently operated and confidential ethics reporting facility is
available worldwide so employees can raise issues or concerns regarding
business conduct independently of the normal management chain. This
Rolls-Royce Group plc
Annual report 2009
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47
Health, safety and the environment
(HS&E)
Rolls-Royce is well placed to help society address the problems
of climate change and energy security.
We also believe that good HS&E performance in our operations
is synonymous with good business. Our objective is to achieve
world-class performance at every site.
Policy and management
arrangements
The Group’s arrangements for HS&E
governance and management systems
implementation are detailed in our
published booklet.
Future product developments
As part of the European Commission
Clean Sky Joint Technology Initiative
we are leading research on low
fuel-burn geared open rotors.
50
We are targeting a 50 per cent
reduction in Total Reportable
Injuries by 2012.
Strong HS&E culture
An underlying theme of our strategy
is to continue to develop a strong
HS&E culture.
Rolls-Royce Group plc
Annual report 2009
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Business review
Corporate responsibility – continued
HS&E management
We believe that all cases of work-related ill-health, injuries and
environmental incidents are avoidable. Our vision is to have world-class
levels of performance on every site and be recognised for the excellence
of our HS&E performance. The Group’s arrangements for HS&E
governance and management systems implementation are detailed
in our Policy & Management Arrangements booklet available on
www.rolls-royce.com/cr. Performance improvement is delivered through
the implementation of a focused strategy, the core elements of which
cover: leadership, commitment and involvement; full implementation
of the company HS&E management system and related standards; and
implementation of best practice and reducing risks through the removal
or minimisation of hazards in the workplace.
An underlying theme of our strategy is to continue to develop a strong
HS&E culture. A team of HS&E professionals supports line management
at the corporate, business and site levels. During 2009, we have made
further progress to strengthen the capabilities of the HS&E function.
All the Group’s businesses have third-party certification to the
environmental management system standard ISO 14001. During 2009,
we consolidated all of our third-party certification and surveillance
activities into one provider – Bureau Veritas Certification. This is aimed
at increasing the efficiency and effectiveness of the global programme.
This also supports our drive to provide consistent standards across the
Group and to focus our efforts on key issues. In this way we will derive
greater benefit from the certification process.
The Group has recently committed to a programme of third-party
certification to OHSAS 18001, the standard for Occupational Health
and Safety management systems, across all businesses by 2012. This
will provide independent assessment across all of the elements of our
HS&E management system. Both the ISO 14001 and the OHSAS 18001
international standards are supported within the Group by a
comprehensive range of Rolls-Royce standards and guidelines.
We operate three sites in the UK which together manufacture, test
and support nuclear reactor cores for the Royal Navy’s submarines.
The Nuclear Propulsion Assurance Committee regularly monitors the
performance of both the submarines and recently formed civil nuclear
businesses and seeks evidence that the highest standards of HS&E are
maintained and that fit-for-purpose processes are followed.
The Group’s contribution to developing best practice through third-
party collaboration continues. We are taking a leading industry role
in Registration, Evaluation, Authorisation and restriction of Chemicals
(REACH), the latest EU chemicals regulation and continue to work
with other companies, trade bodies, sectors and regulators on
implementation. During 2009, efforts have again focused on raising
awareness within our supply chain, such that appropriate arrangements
for compliance and business continuity are introduced well ahead of
deadlines. We continue to support the development of international
standards within aviation, for the phased declaration of substances
supplied to us to facilitate future REACH compliance and, where
required, industry-wide substitution programmes. We also continue
to consult widely with the European Chemicals Agency (ECHA) on
pertinent matters relating to implementation and compliance within
our sectors.
We continue to participate in and meet our ongoing commitments
under various climate change agreements such as the EU Emissions
Trading Scheme and the US Chicago Climate Exchange greenhouse
gas emissions trading scheme. The Group is also preparing for the latest
carbon emissions reduction regulations in the UK under the Carbon
Reduction Commitment Energy Efficiency Scheme. Such measures,
alongside the underpinning science, are fully considered when setting
Group greenhouse gas reduction targets.
Operational performance
Shaped by our HS&E strategy, we continue to implement prioritised
work programmes across all our sites to meet the challenging objectives
and targets that have been set. In the past year, we have made excellent
progress against these targets. There were no fatalities in the Group
during 2009 and no prosecutions against the Group for HS&E offences.
Comprehensive improvement programmes, with an enhanced level of
support from the Corporate HS&E team, were initiated at the poorer
performing sites during 2009. A significant improvement in performance
has been achieved at these target sites.
During 2009, we introduced a web-based, global reporting system,
which now provides the facility to collect and review HS&E performance
in our operations on a monthly basis. This provides improved tracking of
performance at site, business and Group levels. Our latest progress
report is available on the Group’s website at www.rolls-royce.com/cr/
reports. Our data collection and reporting is subject to independent
assurance and recommendations for improvement by Deloitte LLP.
Web-based reporting system
Our new system allows us
to collect and review HS&E
data globally.
Rolls-Royce Group plc
Annual report 2009
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Our 2007-2009 objectives and targets were to:
Protect health
Reduce the incident rate of occupational diseases and other
work-related ill health by ten per cent by the end of 2009
Prevent injury
Achieve a 15 per cent reduction in the lost-time injury rate
(over one day) by the end of 2009
Reduce environmental impact
Achieve a ten per cent reduction in energy consumed (normalised
by financial revenues) by the end of 2009
Achieve a ten per cent reduction in solid waste (normalised by
financial revenues) by the end of 2009
Achieve a 58 per cent recycle rate of solid waste by the end of 2009
Detailed results will be published during 2010 on the Group’s
website at www.rolls-royce.com/cr/reports
A new set of objectives and targets for the period 2010-2012
have been agreed and are set out below:
Protect health
Reduce the Group incident rate of occupational diseases and other
work related ill-health by ten per cent by end 2012
Prevent injury
Reduce Company Total Reportable Injury (TRI) rate by 50 per cent
by end 2012
Reduce environmental impact
Five per cent reduction in company facility greenhouse gas
emissions by end 2012 (absolute)
Ten per cent reduction in total Group greenhouse gas emissions by
end 2012 (normalised by financial revenues)
Ten per cent reduction in total Group production waste (solid and
liquid) by end 2012 (normalised by financial revenues)
70 per cent Group recycle rate of solid waste by end 2012
Rolls-Royce Group plc
Annual report 2009
Greenhouse gas targets
Reducing environmental impact
An absolute reduction target for
company facility greenhouse gas
emissions of five per cent has been set
for the period 2010-2012.
A new target has been set of increasing
the company recycle rate for solid
waste to 70 per cent by the end of
2012.
Product environmental performance
Rolls-Royce is both committed and well placed to find solutions to the
substantial challenges posed by climate change. The Group believes that
technology must be applied on an industrial scale, through companies
such as Rolls-Royce with global reach, to achieve significant reductions
in emissions.
The Group closely monitors developments in the underpinning science
to help steer the significant research and development programmes
undertaken across all product ranges. Such knowledge, supplemented
by independent expert advice from the Group’s Environmental Advisory
Board made up of distinguished academics who are leading authorities
in their respective fields, is also vital to the overall business strategy and
design process.
In civil aerospace, we have used our technological expertise to reduce
significantly the fuel consumption of our products and consequently
carbon dioxide emissions, since the first jet aircraft entered service. For
example, the Trent 1000 engine is 25 per cent more efficient than the
first RB211 engine. The Trent 900 and 1000 engines, for the Airbus A380
and Boeing 787 respectively, and in future the Trent XWB for the Airbus
A350 XWB, help us demonstrate progress towards meeting our Advisory
Council for Aeronautics Research in Europe (ACARE) goal
of a 15-20 per cent reduction in engine fuel burn by 2020 compared to
2000 levels. The Group also continues to drive for reductions in noise
and improvements in air quality.
We are taking a leading role in research, including the Environmentally
Friendly Engine (EFE), a combined UK Government, industry and
university programme, as part of our continuing drive to improve the
environmental performance of our aero engines. As part of the European
Commission Clean Sky Joint Technology Initiative, we are leading a
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Environmental performance is fundamental across all of our businesses.
For example, in the marine sector, our market leading Azipull thrusters
use 16 per cent less energy than conventional thrusters, resulting in
lower emissions. We are also extending our range of marine
reciprocating engines capable of running on liquefied natural gas (LNG),
which compared with diesel fuel in conventional engines, provide
significantly lower CO2, NOx and SOx emissions.
The Group continues to explore opportunities in low emission and
alternative energy products and is working in partnership with the UK
Energy Technologies Institute. As part of this work programme, a
prototype tidal device has been developed and will be tested at the
European Marine Energy Centre, in Orkney, Scotland.
Nuclear power is expected to represent an important component of
future low-carbon electricity generation. Rolls-Royce has substantial
capabilities in this area gained through supplying power systems for the
UK nuclear-powered submarine fleet over many decades and, in
response to the formidable challenge posed by climate change, has
formed a civil nuclear business unit.
A new factory is planned to manufacture, assemble and test
components for new civil nuclear power stations. These include pressure
vessels, heat exchangers and other large and complex reactor parts,
manufactured to exacting nuclear standards. The facility will have strong
links with the Nuclear Advanced Manufacturing Research Centre,
announced by the UK Government in July 2009, in which Rolls-Royce
will be the leading industrial partner.
Improving product efficiency
Azipull thruster
The Trent 1000 engine is
25 per cent more efficient than
the first RB211 engine.
Market leading Azipull thrusters use
16 per cent less energy than
conventional marine thrusters.
€400 million engine research programme, where our efforts are focused
on demonstrators for low-weight advanced turbofans and ultra-low fuel
burn geared open rotors. Rolls-Royce is also leading other joint
Government/industry programmes, including:
• Strategic Investment in Low-carbon Engine Technology (SILOET);
• Strategic Affordable Manufacturing in the UK through Leading
Environmental Technologies (SAMULET); and
• Environmental Lightweight Fan (ELF).
Rolls-Royce is an active member of the UK Sustainable Aviation Council,
which comprises manufacturers, airlines, airports and air navigation
service providers and is an industry body committed to building a
sustainable future for aviation. Its second progress report, published
in 2009, includes an emissions reduction ‘Roadmap’ detailing that
significant abatement is feasible in the UK by 2050.
Fuel saving1 (%)
n
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%
00
-05
-10
-15
Trent 895
Trent 500
Trent 900
Trent 1000
Trent XWB
ACARE
engine
goal
-20 1995
2000
2005
2010
2015
2020
1 SFC: fuel consumption normalised for engine power
ACARE: Advisory Council for Aeronautics Research in Europe
The aviation sector is closely examining the potential of bio-fuels to offer
a sustainable lower-carbon alternative to kerosene. Rolls-Royce has
supported a number of flight trials, whilst remaining conscious of the
wider sustainability issues. Our position is that, to be acceptable,
candidate alternative fuels must:
• be technically suitable;
• be deployable on a scale sufficient to displace a significant quantity
of kerosene use;
• avoid harmful impacts on food availability and cost, water demand
and ecosystems; and
• offer an overall lifecycle carbon footprint significantly lower
than kerosene.
Rolls-Royce Group plc
Annual report 2009
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51
Employees
We aim to attract and retain the best people and create
an inclusive working environment in which creativity,
capability and motivation flourish. By continually
improving levels of employee performance, we deliver
on our commitments.
Attracting new employees
Rolls-Royce aims to attract and
retain the best people by having
an inclusive working environment.
5
2009 was the fifth year that the
Global Council had met. Its aim
is to improve consultation and
employee engagement.
42A total of 42 employee delegates
and a selection of senior
management attend council
meetings.
Global council
Delegates at the council can hear
the discussions translated into their
own languages.
Rolls-Royce Group plc
Annual report 2009
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Engagement survey
As a result of the survey, feedback
improvements are being
implemented. A pulse check of
employee perceptions will be
undertaken in early 2010.
Since 2008, we have conducted an annual strategy storyboard, an
interactive Group-wide briefing on corporate direction and
performance. The storyboard is delivered globally through small
face-to-face briefings and ensures all our employees have a good
understanding of the Group’s key objectives and the contribution each
individual can make towards meeting them.
Our Employee Engagement Survey was redesigned at the end of 2008
to give clearer and more comprehensive feedback and was incorporated
into a two-year rolling global engagement programme. The first
improved global employee survey was conducted in January 2009 with
a participation rate of 80 per cent, a marked increase from the 46 per
cent participation in 2006. The new reporting format has allowed us to
develop improvement activities that are being implemented across each
business and function. A pulse-check survey to gauge employees’
perceptions of progress will be undertaken in early 2010.
Rolls-Royce provides competitive pay and benefits in all its locations
and actively encourages share ownership by offering ShareSave plans
to all employees. Our employees have currently committed around
£106 million to these plans. In the UK, statutory arrangements enable
employees to receive part of their annual bonus in shares and to make
monthly share purchases from their salary.
Encouraging diversity
The Group is committed to developing a diverse workforce and equal
opportunities for all. This includes encouraging more women and
people from minority backgrounds to pursue engineering careers.
Our global governance framework for diversity includes a senior
executive Global Diversity Steering Group that provides leadership
and shapes strategic direction.
During 2009, we recruited MBA students from 11 nations, graduates for
our worldwide graduate programme from 34 nations, and apprentices in
the UK and Germany from five nations.
In Asia, we continue to make good progress in attracting the highest
quality leadership talent. Several key management roles have provided
the opportunity to recruit new senior management locally. As the need
for early career high potential talent strengthens in the region, we have
also engaged with several universities to encourage students to apply
for our graduate recruitment and development programmes.
Launched in 2006, our UK Women’s Network focuses on personal and
professional skills development as well as providing support through
networking and mentoring frameworks. Participation continues to grow
and, during 2009, we supported the launch of a Women’s Network in
Indianapolis, North America, and we are currently supporting the launch
of a network in Germany.
80
80 per cent of employees
completed the engagement survey.
Engaging employees
At the end of 2009, Rolls-Royce employed 38,500 permanent staff in
over 50 countries. The long lifecycle of the Group’s products makes it
imperative that we have a skilled workforce that is committed to
delivering excellence to customers over the long term. To achieve this
and help improve performance, we aim to create an inclusive working
environment that attracts and retains the best people, enhances their
flexibility, capability and motivation and encourages them to be
involved in the ongoing success of the Group.
In 2005, we formed a Global Council to improve our consultation and
employee engagement. The full council meets twice a year and involves
42 employee delegates and a selection of senior management
representatives from each business and function. Employee delegates
are elected to represent both employees that are members of unions
and those who are not. An executive committee of eight elected
delegates meets senior management an additional four times
throughout the year to ensure regular dialogue and timely consultation
between council meetings.
In 2009, our global election process saw 30 per cent of Global Council
delegates take up the responsibility for the first time. Due to the
changing shape of our global workforce and the need for delegates to
have effective communication and interaction during and in between
Global Council meetings, we ran cultural awareness training for all
delegates in 2009.
Rolls-Royce Group plc
Annual report 2009
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53
34
During 2009, we recruited MBA
students from 11 nations, graduates
from 34 nations and apprentices
from five nations.
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Trainees
During 2009, we recruited 199
graduates and 254 apprentices and
technicians worldwide onto Rolls-Royce
programmes.
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Our policy is to provide, wherever possible, employment training and
development opportunities for disabled people. We are committed to
supporting employees who become disabled during employment and
to helping disabled employees make the best possible use of their skills
and potential.
Learning and development
In December 2008, we launched MyLearning, a global system providing
access for all employees to both instructor-led and online learning.
Through this web-based system, employees are now able to view the
training available, book onto a course, undertake online learning and
review their training history. By the end of December 2009, employees
from 44 countries had accessed the system, with over 11,000 employees
undertaking more than 65,000 hours of online training.
We have begun to roll out a programme of competency definitions
that will align generic jobs to behavioural and technical competencies.
These competencies will allow all our employees to assess their skills
and knowledge against those required to carry out their job successfully.
Through MyLearning, employees can run a self-assessment and are
then offered training to ensure that they develop the skills needed to
meet the required competency levels.
During 2009 our learning and development team provided 9,000
days of leadership training and delivered learning and development
programmes that supported capability development for individuals
and the business. We continue to use trained facilitators to deliver global
training programmes such as business ethics and our annual strategy
storyboard to all employees.
About 1,000 employees have benefited from financial support and time
off work to attend further education programmes at local colleges and
universities and we provided £1.7 million to finance this type of learning.
Overall, we invested £24 million in the education, training and
professional development of employees during the year.
Resourcing and deployment
We continue to focus on the recruitment, development, and
deployment of leadership and professional capability across all of
our functions globally. Leadership succession and individual career
development is managed through development meetings held on a
regular basis with senior leadership teams throughout the Group.
Discussions in these forums are directly linked to the development
of resourcing plans which identify the need for specialist, managerial,
MBA, graduate and apprentice employees. Development meetings
operate at four different levels in the organisation, ensuring a balanced
Rolls-Royce Group plc
Annual report 2009
54
Business review
Corporate responsibility – continued
Occupational health
The primary objective of the Group’s
occupational health strategy remains a
culture of prevention rather than cure.
45
45 per cent of respondents made
beneficial lifestyle changes.
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focus on the development and advancement of employees including,
high potential employees, technical specialists and senior executives.
This ultimately enables effective deployment of people throughout
the business.
During 2009, we recruited 199 graduates onto Rolls-Royce graduate
programmes and 254 apprentices and technicians worldwide and an
additional 256 students were employed on short-term training projects
in the UK and North America. We remain in the upper quartile of
The Times’ Top 100 Graduate Employers survey and are ranked in
first position for engineering companies.
Health and wellbeing
The Group is committed to promoting best practice in occupational
health and provides professional expertise through highly regarded
service providers. The primary objective of the Group’s occupational
health strategy remains a culture of prevention rather than cure.
The strategy maintains four key areas of focus:
• screening and surveillance;
• rehabilitation;
• health promotion; and
• education.
We continue to demonstrate good progress against our screening and
surveillance targets. These are detailed in the Responsible Operations
report, published in April 2007 and subsequent updates available on
the Group’s website at www.rolls-royce.com/cr/reports.
The ‘Know your body metrics’ health promotion campaign designed to
complement the ‘Owners Handbook’ on wellbeing rolled out in 2007
and 2008 has been continued in 2009 following popular demand.
The programme is designed to raise awareness and understanding
of cardiovascular risk factors.
An anonymous online questionnaire found that the ‘Owners Handbook’
and the ‘Know your body metrics’ booklet were rated as ‘good to
excellent’ by more than 80 per cent of respondents. Some 45 per cent
said they had made beneficial lifestyle changes as a result of the
information.
A pilot programme in one of our business units took place with the
Sainsbury Centre for Mental Health based on the successful Australian
programme entitled ‘beyondblue’. Further training and awareness are
planned to help managers identify depression in the workplace.
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Annual report 2009
Business review
Corporate responsibility – continued
55
Society
Rolls-Royce has a firm, long-standing commitment
to the communities in which we operate around
the world.
Sustained investment in communities makes a positive
difference and delivers tangible benefits to our business.
Corporate responsibility is also a key enabler in
delivering our global supply chain strategy.
Investing in science
6.7
The Group donated £6.7 million in
2009 for good causes.
120,000
Each year the Rolls-Royce Science
Prize awards £120,000 to schools
to help them develop science
teaching methods.
Rolls-Royce Science Prize
Our flagship education programme, the
Rolls-Royce Science Prize, recognises
excellent and innovative science teaching
in the UK.
Rolls-Royce Group plc
Annual report 2009
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Business review
Corporate Responsibility – continued
Good supplier relationships
The Group sets and manages rigorous performance standards for suppliers
through its quality system, Supplier Advanced Business Relationships.
4,000
In 2009, 4,000 tonnes of high-value
metals were returned to our own
supply chain for re-use.
Society
The Group continues to foster productive supplier relationships which:
• deliver mutual business benefits;
• minimise the environmental impact of business operations;
• encourage the highest standards of ethical behaviour; and
• promote human rights.
We also set and manage rigorous performance standards for suppliers
through our quality system, Supplier Advanced Business Relationships
(SABRe). This includes a supplier code of conduct, which is
complemented by the Group’s purchasing code of conduct to ensure
suppliers and employees work to the same standards.
We are an active member of the UK MoD/Industry Sustainable
Procurement working group, and look to proactively engage suppliers
in this topic. In 2010, we aim to address the integration of Sustainable
Procurement into our sourcing decision process.
Over the last few years Rolls-Royce has voluntarily and publicly
declared our carbon emissions by having our data analysed by the
Carbon Disclosure Project (CDP). As part of our membership of the
CDP we were able to extend this analysis into our external supply
chain by inviting some of our suppliers from around the world to
declare their carbon emissions. Due to the success of this analysis,
we plan to extend this pilot programme in 2010.
We are committed to working with suppliers to eliminate waste. Success
in recycling metals within our manufacturing facilities has been
extended to support suppliers in recycling their waste metals. In 2009,
we further extended our remit on metal recycling by engaging with
selected customers to ensure that their time-expired engine parts enter
the recycling process. In addition, in 2009 over 4,000 tonnes of high-
value metals were returned from Rolls-Royce factories directly back to
our own supply chain for re-use.
Local sourcing policies reflect government regulations, such as in the US
where particular rules towards working with small and disadvantaged
businesses apply.
Community investment
The Group has a long-standing commitment to support its local
communities. Community investment is an intrinsic part of the way we
do business, supporting the Group’s strategy and future success,
particularly in the areas of:
• recruitment and retention of employees, especially by investing in the
science skills we need;
• employee engagement, by encouraging a sense of loyalty, pride and
motivation in our organisation;
• development of professional and personal skills such as teamwork,
leadership, adaptability and ethical behaviour; and
• reputation, by building proactive and mutually beneficial relationships
in the communities in which we operate.
During 2009, we conducted our sixth global survey of community
and sponsorship contributions, including cash, employee time and
gifts in kind, using the London Benchmarking Group model.
The Group’s total contributions across all these areas amounted to
approximately £6.7 million.
Donations and sponsorship
The Group’s charitable donations policy is to ‘directly support causes
primarily relating to educational, engineering and scientific objectives, as
well as social objectives connected with the Group’s business and place
in the wider community’.
The Group’s charitable donations amounted to £2.3 million, of which
£1.5 million were made in the UK. These included support for
Community Foundations, Emmaus for homeless people, and the main
armed service benevolent funds. Rolls-Royce made charitable donations
of US$800,000 in North America, €135,000 in Germany and £200,000 in
other regions. These donations included support for the work of United
Way in North America and for the victims of natural disasters in Vietnam,
India, Indonesia and Brazil.
Rolls-Royce Group plc
Annual report 2009
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A further £2.1 million was contributed in sponsorships and educational
programmes, including the Smithsonian National Air and Space
Museum in North America, the Brandenburg Summer Festival in
Germany and sponsorship of The Big Bang fair for young scientists and
engineers in the UK.
The Group has a stated policy of working closely with governments and
institutions to highlight the many career opportunities that science and
engineering can offer.
Our flagship education programme, the Rolls-Royce Science Prize,
recognises excellent and innovative science teaching in the UK. This
year’s winner, Kells Lane Primary School in Gateshead, England, received
a total of £20,000 for its project, in which teachers developed a wind
tunnel to test pupil-designed wind turbines. In all, £120,000 was
awarded, with the help of the UK Science Learning Centre network, to 59
schools to improve science teaching and learning. As part of the Science
Prize, the Group sponsors Project ENTHUSE which provides free
professional development courses to teachers in the UK through the
National Science Learning Centre.
Employee time
Employee time contributed during 2009 is estimated at a value of at
least £1.5 million, with more than 5,000 employees participating in
activities such as community projects and team-building activities with
societal benefits.
Over 200 employees in the UK, North America and Germany took part
in 20 projects during the year as part of their personal development.
These projects are recognised at the Group’s Global Learning and
Development Awards.
Employee giving
In addition to the Group’s own contributions, Rolls-Royce finances the
administration of a Payroll Giving Scheme for UK employees, enabling
them to make tax-free donations to their chosen charities. In the UK
during 2009, employees gave almost £430,000 to more than 350
charitable causes of their choice. The scheme is recognised as Gold
Award standard by the UK Government’s Payroll Giving Quality Mark,
with approximately 14 per cent of UK employees participating in the
scheme. In North America, employees have contributed over
US$550,000 directly from payroll to good causes through the United Way
scheme, a percentage of which is matched by the Group.
In-kind support
The Group also supports community and educational organisations with
in-kind donations, including places on Group training courses and the
loan of engines and components.
Rolls-Royce Group plc
Annual report 2009
5,000
Almost 5,000 employees
participated in community projects.
Employee giving
Employees contributed over US$550,000 through the United Way scheme.
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Business review
Finance Director’s review
Finance Director’s review
“ In 2009, the Group delivered
increases in revenue and profit.
The order book also remained
resilient in difficult market
conditions.”
Andrew Shilston, Finance Director
The Group delivered another year of strong progress in the face of
significant challenges in 2009. The global recession, together with
industry specific issues, provided substantial challenges, including the
continued delay of a number of major new aerospace programmes.
However, a resilient financial performance provides clear evidence
of the strength of the business and its ability to adjust quickly in a
volatile environment.
Our businesses are being affected by the same economic factors as
many of our peers and competitors. However, the Group’s breadth
both by sector and geographical mix, the age of our installed fleet of
products, the strong positions we hold on current and future major
programmes, together with the Group’s services revenues, provide us
with significant advantages and have helped deliver a resilient overall
result for the year.
The financial performance in 2009 met the expectations of the Board
and the guidance provided at the start of the year, delivering an
11 per cent increase in underlying Group revenues with underlying
profit before taxes up four per cent to £915 million.
As anticipated there was a cash outflow in the year of £183 million.
This was as a consequence of the global economic downturn and
programme delays impacting the working capital cycle which was
exacerbated by year-end revaluation effects.
The published results were heavily influenced by the significant
movements in foreign exchange rates in 2009, especially the GBP/USD
and the GBP/EUR which are explained on page 59.
The Group has maintained a strong financial position throughout the
year and continues to hold strong credit ratings from both Standard &
Poor’s (A-, Stable) and Moody’s (A3, Stable). At the year end, the Group
held gross cash balances of £3.0 billion with £1.7 billion of outstanding
debt commitments – a net cash position of £1.3 billion with the average
net cash having also increased to £635 million over 2009. The
redemptions on the Group’s existing bond financing, at around
£1.7 billion, are well spread with around US$187 million due in the
second half of 2010 and a €750 million Eurobond due in 2011 as shown
in the chart below. The Group had a further £450 million in term funding
available to it that was undrawn at the year end. The Group has
essentially completed the refinancing of the 2011 Eurobond via the
successful £500 million GBP bond issued in the first half of 2009, the
proceeds of which are now held on term deposit and will be available to
settle the 2011 bond when it falls due. There are no other material
maturities until 2013.
Maturity profile of outstanding Group debt commitments
108
501
0
133
201
48
201
0
0
500
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
600
500
400
300
200
100
0
Rolls-Royce Group plc
Annual report 2009
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59
The changes made to the Group’s UK pension schemes over the last few
years have enabled the deficit to remain stable and modest and the
schemes ended the year with a net deficit of £380 million on an
accounting basis, as detailed in note 18 of the financial statements on
page 131. The triennial actuarial valuation of the Rolls-Royce Pension
Fund, representing 64 per cent of future liabilities, was completed in the
year producing a pleasing result with no material changes in the scale of
the deficit or future funding levels. The stability in ongoing funding is a
direct result of changes made to the Group’s pension schemes to reduce
the volatility of the deficit, and to provide stability and visibility of cash
funding requirements over the next three years.
Foreign exchange effects on published results
The pace and extent of currency movements have continued to have a
significant effect on the Group’s financial reporting in 2009, with the
GBP/USD and GBP/EUR rates having the biggest impact. These
movements have influenced both the reported income statement and
the cash flow and closing net cash position (as set out in the cash flow
statement and note 2 in the financial statements) in the following ways:
1. Income statement – the most important impact was the end of year
mark to market of outstanding financial instruments (foreign exchange
contracts, interest rate, commodity and jet fuel swaps). The principal
adjustments related to the GBP/USD hedge book.
The principal movements in 2009 were as follows:
GBP–USD
GBP–EUR
Oil–Spot Brent
Open
Close
£1–$1.438
£1–$1.615
£1–€1.034
£1–€1.126
$49/bbl
$77/bbl
The impact of this mark to market is included in net financing in the
income statement and caused a net £1,835 million benefit, contributing
to a published profit before tax of £2,957 million. These adjustments are
non-cash, accounting adjustments required under IAS 39 Financial
Instruments: Recognition and Measurement. As a result, reported earnings
do not reflect the economic substance of derivatives that have been
settled in the financial year, but do include the unrealised gains and
losses on derivatives that will only affect cash flows when they are
settled at some point in the future to match trading cash flows.
Underlying earnings are presented on a basis that shows the economic
substance of the Group’s hedging strategies in respect of transactional
exchange rates and commodity price movements. Further details and
information are included within the section on key performance
indicators on page 19 and in notes 2 and 5 of the financial statements.
Underlying profit before finance costs of £915 million benefited from
£71 million of foreign exchange benefits compared to 2008. The
achieved rate on selling US dollar income, around one and a half cents
better in 2009 than 2008, contributed £16 million of transactional
benefits. In addition, the improvement in the average GBP-USD and
GBP-EUR exchange rates, 29 and 14 cents respectively, contributed
translation benefits totalling £55 million to underlying profit before tax
in the year.
The achieved rate on selling net US dollar income is expected to
improve by six to nine cents in 2010 compared to 2009, as the Group
is able to benefit from forward contracts at better rates. Revaluation
effects, which are measured at a point in time, do not, therefore,
represent additional currency headwinds or benefits.
2. Cash flow and balance sheet – the Group maintains a number of
currency cash balances which vary throughout the financial year. Given
the significant movements in foreign exchange rates in 2009, a number
of these cash balances were reduced by the effects of retranslation at
the year end, causing a reduction of £141 million in the 2009 cash flow
and hence the closing balance sheet cash position.
Summary
The Group’s revenues increased by 15 per cent in 2009 to £10,414 million
with 86 per cent of revenues from customers outside the UK. Underlying
revenues grew 11 per cent in 2009 with double-digit increases in defence
aerospace, marine and energy and stable revenues in civil aerospace.
• Underlying revenues in the civil aerospace division were stable at
£4,481 million (2008 £4,502 million) with a four per cent decline in
service revenues being offset by a four per cent improvement in
revenues from original equipment. Original equipment revenues were
supported by a record year for the Trent family, with 224 engines
delivered, helping to offset a 39 per cent reduction in deliveries for the
corporate and regional sector. Overall 844 engines were delivered in
the year, including 347 V2500 engines, and 273 engines for various
corporate and regional applications. Revenues from services were held
back by reduced discretionary spares and service activity as customers
reduced overhaul activity given lower utilisation patterns on a number
of large aircraft types.
• Underlying defence aerospace revenues grew by 19 per cent
supported by strong growth in deliveries for the military transport
sector. New equipment revenues grew 30 per cent and services
revenues increased by ten per cent over 2008.
• The marine business continued to grow strongly in the year with
underlying revenues increasing 17 per cent from 2008 to £2,589
million. Overall new equipment revenues increased by 21 per cent to
£1,804 million with services revenues increasing ten per cent to £785
million supported by the expansion of the marine services network as
six facilities were opened or expanded in the year.
Rolls-Royce Group plc
Annual report 2009
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• The energy business made strong progress in the year with underlying
revenues up 36 per cent to £1,028 million, supported by good growth
in both original equipment and services activities.
Overall underlying services revenues increased by four per cent in 2009
to £4,927 million and accounted for 49 per cent of Group revenues
for the year.
Underlying profit margins before financing costs reduced slightly from
10.0 per cent in 2008 to 9.7 per cent in 2009. The reduction in margin
reflected an increased mix of original equipment and increased unit
costs. Underlying financing costs increased by £29 million to £68 million
(2008 £39 million) including an increase in the net interest charge of
£33 million as a consequence of the additional £500 million bond issue
in April 2009, and finance costs associated with financial risk and
revenue sharing partnerships.
Restructuring charges in 2009 totalled £55 million (2008 £82 million) as
the Group continued its focus on operational improvements, including
the reduction in the number of people working in support functions.
These costs are included within operating costs.
A final payment to shareholders of nine pence per share, in the form of
C Shares, is proposed, making a total of 15.00 pence per share, a five per
cent increase over the 2008 total.
Order book
The order book at December 31, 2009, at constant exchange rates, has
remained resilient at £58.3 billion (2008 £55.5 billion). This included firm
business that had been announced but for which contracts had not yet
been signed of £6.8 billion (2008 £6.1 billion).
In civil aerospace, it is common for a customer to take options for future
orders in addition to firm orders placed. Such options are excluded from
the order book.
In defence aerospace, long-term programmes are often ordered for only
one year at a time. In such circumstances, even though there may be no
alternative engine choice available to the customer, only the contracted
business is included in the order book.
Aftermarket services agreements, including TotalCare packages,
represented 28 per cent of the order book, having increased by £2 billion
in the year. These are long-term contracts where only the first seven
years’ revenue is included in the order book.
Aftermarket services
The Group continues to be successful in developing its aftermarket
services activities. These grew by four per cent on an underlying basis
in 2009 and accounted for 49 per cent of the Group revenues.
In particular, TotalCare packages in the civil aerospace sector now cover
59 per cent, by value, of the installed fleet. TotalCare packages cover
long-term management of the maintenance and associated logistics for
our engines and systems, monitoring the equipment in service to deliver
the system availability our customers require with predictable costs. The
pricing of such contracts reflects their long-term nature. Revenues and
costs are recognised based on the stage of completion of the contract,
generally measured by reference to flying hours. The overall net position
of assets and liabilities on the balance sheet for TotalCare packages was
an asset of £970 million (2008 £848 million).
Cash
There was a cash outflow in the year of £183 million (2008 £570 million
inflow) partly the consequence of revaluing year end non-GBP cash
balances of £141 million (2008 £439 million inflow) but also reflecting
£94 million of investments in acquisitions and joint ventures and
associates during the period.
Working capital increased by £78 million during the year with increased
financial working capital offsetting inventory which reduced by
£119 million. Reduced inventory levels was a significant achievement
given the volatility caused by the economic downturn, ongoing delays
of major new programmes and the growth in the non-civil aerospace
segments during 2009.
Cash investments of £597 million (2008 £675 million) in property, plant
and equipment and intangible assets, payments to shareholders of
£250 million (2008 £200 million) and tax payments of £119 million
(2008 £117 million) represented the major cash outflows in the period.
Despite a modest cash outflow in 2009, the average net cash was
£635 million (2008 £375 million). The net cash balance at the year end
was £1,275 million (2008 £1,458 million).
Taxation
The overall tax charge on the profit before tax was £740 million (2008
£547 million credit), a rate of 25.0 per cent (2008 28.9 per cent).
The tax charge on underlying profit was £187 million (2008 £217 million)
a rate of 20.4 per cent (2008 24.7 per cent).
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Annual report 2009
Business review
Finance Director’s review – continued
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The overall tax charge was reduced by £26 million in respect of the
expected benefit of the UK research and development tax credit. In
addition, £35 million of prior years’ tax provisions were released in the
year. This was partly following settlement of a number of outstanding
tax issues and partly as a result of a change in UK tax law generally
exempting foreign dividends from UK taxation. These items also reduced
the underlying tax charge by the same amounts. The underlying tax rate
is expected to increase in 2010 to around 24 per cent.
The operation of most tax systems, including the availability of specific
tax deductions, means that there is often a delay between the Group
tax charge and the related tax payments, to the benefit of cash flow.
The Group operates internationally and is subject to tax in many
differing jurisdictions. As a consequence, the Group is routinely subject
to tax audits and examinations which, by their nature, can take a
considerable period to conclude. Provision is made for known issues
based on management’s interpretation of country specific legislation
and the likely outcome of negotiation or litigation. The Group believes
that it has a duty to shareholders to seek to minimise its tax burden but
to do so in a manner which is consistent with its commercial objectives
and meets its legal obligations and ethical standards. While every effort
is made to maximise the tax efficiency of its business transactions, the
Group does not use artificial structures in its tax planning. The Group has
regard for the intention of the legislation concerned rather than just the
wording itself. The Group is committed to building open relationships
with tax authorities and to following a policy of full disclosure in order
to effect the timely settlement of its tax affairs and to remove
uncertainty in its business transactions. Where appropriate, the Group
enters into consultation with tax authorities to help shape proposed
legislation and future tax policy.
Transactions between Rolls-Royce subsidiaries and associates in different
jurisdictions are conducted on an arms-length basis and priced as if the
transactions were between unrelated entities, in compliance with the
OECD Model Tax Convention and the laws of the relevant jurisdictions.
Before entering into a transaction the Group makes every effort to
determine the tax effect of that transaction with as much certainty as
possible. To the extent that advance rulings and clearances are available
from tax authorities in areas of uncertainty, the Group will seek to obtain
them and adhere to their terms.
Pensions
The charges for pensions are calculated in accordance with the
requirements of IAS 19 Employee Benefits. During 2007, the Group’s
principal UK defined benefit schemes adopted a lower risk investment
strategy in which the interest rate and inflation risks were largely hedged
and the exposure to equities reduced to around 20 per cent of scheme
assets. As reported last year, the primary objective of the revised
investment strategy was to reduce the volatility of the pension schemes
to enable greater stability in the funding requirements. The March 31,
2009 valuation of our largest pension fund has demonstrated the
success of these measures. After increasing the allowance for life
expectancy, the deficit has fallen slightly compared to the previous
valuation in 2006. This means that the deficit reduction contributions
which have been in place since 2003 will continue at their current level
but are now projected to end slightly earlier than previously envisaged.
Further information and details of the pensions’ charge and the defined
benefit schemes’ assets and liabilities are shown in note 18 to the
financial statements. The net deficit, after taking account of deferred
tax, was £590 million (2008 £399 million restated). Changes in this net
position are affected by the assumptions made in valuing the liabilities
and the market performance of the assets.
Investments
The Group continues to subject all investments to rigorous examination
of risks and future cash flows to ensure that they create shareholder
value. All major investments require Board approval.
The Group has a portfolio of projects at different stages of their
lifecycles. Discounted cash flow analysis of the remaining life of projects
is performed on a regular basis. Sales of engines in production are
assessed against criteria in the original development programme to
ensure that overall value is enhanced.
Gross research and development (R&D) investment amounted to £864
million (2008 £885 million). Net research and development charged to
the income statement was £379 million (2008 £403 million). The level
of self-funded investment in research and development is expected to
remain at approximately four to five per cent of Group revenues in the
future. The impact of this investment on the income statement will
reflect the mix and maturity of individual development programmes
and will result in a modest increase in the level of net research and
development charged within the income statement in 2010.
The continued development and replacement of operational facilities
contributed to the total expenditure in property, plant and equipment
of £291 million (2008 £283 million). Investment in 2010 is anticipated to
be slightly increased compared to the 2009 level as the investments in
new facilities in the US and Singapore commence.
Investment in training was £24 million (2008 £30 million).
Rolls-Royce Group plc
Annual report 2009
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Intangible assets
The Group carried forward £2,472 million (2008 £2,286 million) of
intangible assets. This comprised purchased goodwill of £984 million,
engine certification costs and participation fees of £454 million,
development expenditure of £546 million, recoverable engine costs
of £290 million and other intangible assets of £198 million. Expenditure
on intangible assets is expected to increase modestly in 2010.
The carrying values of the intangible assets are assessed for impairment
against the present value of forecast cash flows generated by the
intangible asset. The principal risks remain reductions in assumed market
share, programme timings, increases in unit cost assumptions and
adverse movements in discount rates. There have been no impairments
in 2009. Further details are given in note 8.
Partnerships
The development of effective partnerships continues to be a key feature
of the Group’s long-term strategy. Major partnerships are of two types:
joint ventures and risk and revenue sharing partnerships.
Joint ventures
Joint ventures are an integral part of our business. They are involved in
engineering, manufacturing, repair and overhaul, and financial services.
They are also common business structures for companies participating
in international, collaborative defence projects. They share risk and
investment, bring expertise and access to markets and provide external
objectivity. Some of our joint ventures have become substantial
businesses. A major proportion of the debt of the joint ventures is
secured on the assets of the respective companies and is non-recourse
to the Group.
Risk and revenue sharing partnerships (RRSPs)
RRSPs have enabled the Group to build a broad portfolio of engines,
thereby reducing the exposure of the business to individual product
risk. The primary financial benefit is a reduction of the burden of R&D
expenditure on new programmes.
The related R&D expenditure is expensed through the income statement
and the initial programme receipts from partners, which reimburse the
Group for past R&D expenditure, are also recorded in the income
statement, as other operating income.
RRSP agreements are a standard form of co-operation in the civil
aero-engine industry. They bring benefits to the engine manufacturer
and the partner. Specifically, for the engine manufacturer they bring
some or all of the following benefits: additional financial and
engineering resource; sharing of risk; and initial programme
contribution. As appropriate, the partner also supplies components and
as consideration for these components, receives a share of the long-term
revenues generated by the engine programme in proportion to its
purchased programme share.
The sharing of risk is fundamental to RRSP agreements. Partners share
financial investment in the programme, typically through:
• market risk as they receive their return from future sales;
• currency risk as their returns are denominated in US dollars;
• sales financing obligations;
• warranty costs; and
• where they are manufacturing or development partners, technical
and cost risk.
Partners that do not undertake development work or supply
components are referred to as financial RRSPs and are accounted for as
financial instruments as described in the accounting policies on page 97.
In 2009, the Group received other operating income of £89 million (2008
£79 million).
Payments to RRSPs are recorded within cost of sales and increase as the
related programme sales increase. These payments amounted to £231
million (2008 £268 million).
The classification of financial RRSPs as financial instruments has resulted
in a liability of £363 million (2008 £455 million) being recorded in the
balance sheet and an associated underlying financing cost of £25 million
(2008 £26 million) recorded in the income statement.
In the past, the Group has also received government launch investment
in respect of certain programmes. The treatment of this investment is
similar to non-financial RRSPs.
Risk management
The Board has an established, structured approach to risk management.
The risk committee (see page 73) has accountability for the system of
risk management and reporting the key risks and associated mitigating
actions. The Director of Risk reports to the Finance Director. The Group’s
policy is to preserve the resources upon which its continuing reputation,
viability and profitability are built, to enable the corporate objectives to
be achieved through the operation of the Rolls-Royce business
processes. Risks are formally identified and recorded in a corporate risk
register and its subsidiary registers within the businesses, which are
reviewed and updated on a regular basis, with risk mitigation plans
identified for key risks.
Rolls-Royce Group plc
Annual report 2009
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Financial risk
The Group uses various financial instruments in order to manage the
exposures that arise from its business operations as a result of movements
in financial markets. All treasury activities are focused on the management
and hedging of risk. It is the Group’s policy not to trade financial
instruments or to engage in speculative financial transactions. There
have been no significant changes in the Group’s policies in the last year.
with a short-term credit rating of ‘A-1’ from Standard & Poor’s or better
and ‘P-1’ from Moody’s. Counterparty diversification is achieved with
suitable risk-adjusted concentration limits. Investment decisions are
refined through a system of monitoring real-time equity and credit-
default swap (CDS) price movements of potential investment
counterparties which are compared to other relevant benchmark
indices and then risk-weighted accordingly.
The principal economic and market risks continue to be movements in
foreign currency exchange rates, interest rates and commodity prices.
The Board regularly reviews the Group’s exposures and financial risk
management and a specialist committee also considers these in detail.
All such exposures are managed by the Group Treasury function, which
reports to the Finance Director and which operates within written
policies approved by the Board and within the internal control
framework described on page 74.
The Group’s borrowing facilities increased during 2009 following
the successful placement of a £500 million ten-year bond. As at
December 31, 2009 the Group had total committed borrowing facilities
of £2.15 billion (2008 £1.65 billion). Debt maturities in 2010 and 2011 are
£108 million and £501 million respectively. The proceeds of the recent
£500 million bond issue are anticipated to be used to pay down the
£501 million of debt maturities in 2011. The maturity profile of the
borrowing facilities is staggered to ensure that refinancing levels are
manageable in the context of the business and market conditions.
Counterparty credit risk
The Group has an established policy for managing counterparty credit
risk. A common framework exists to measure, report and control
exposures to counterparties across the Group using value-at-risk and
fair-value techniques. The Group assigns an internal credit rating to each
counterparty, which is assessed with reference to publicly available
credit information, such as that provided by Moody’s, Standard & Poor’s,
and other recognised market sources, and is reviewed regularly.
Financial instruments are only transacted with counterparties that have a
publicly assigned long-term credit rating from Standard & Poor’s of ‘A-’ or
better and from Moody’s of ‘A3’ or better.
Funding and liquidity
The Group finances its operations through a mixture of shareholders’
funds, bank borrowings, bonds, notes and finance leases. The Group
borrows in the major global markets in a range of currencies and
employs derivatives where appropriate to generate the desired currency
and interest rate profile.
The Group’s objective is to hold financial investments and maintain
undrawn committed facilities at a level sufficient to ensure that the
Group has available funds to meet its medium-term capital and funding
obligations and to meet any unforeseen obligations and opportunities.
The Group holds cash and short-term investments which, together with
the undrawn committed facilities, enable it to manage its liquidity risk.
Short-term investments are generally held as bank deposits or in ‘AAA’
rated money market funds. The Group operates a conservative
investment policy which limits investments to high quality instruments
There are no rating triggers contained in any of the Group’s facilities that
could require the Group to accelerate or repay any facility for a given
movement in the Group’s credit rating.
The Group’s £250 million bank revolving credit facility contains a rating
price grid, which determines the borrowing margin for a given credit
rating. The Group’s current borrowing margin would be 20 basis points
(bp) over sterling LIBOR if drawn. The borrowing margin on this facility
increases by approximately 5bp per one notch rating downgrade, up
to a maximum borrowing margin of 55bp. The facility was not drawn
during 2009.
There are no rating price grids contained in the Group’s other
borrowing facilities.
The Group continues to have access to all the major global debt markets.
Credit rating
The Group subscribes to both Moody’s Investors Service and Standard &
Poor’s for its official publicised credit ratings. As at December 31, 2009
the Group’s assigned long-term credit ratings were:
Rating agency
Moody’s
Standard & Poor’s
Rating
A3
A-
Outlook
Stable
Stable
Category
Investment grade
Investment grade
As a long-term business, the Group attaches significant importance to
maintaining an investment grade credit rating, which it views as
necessary for the business to operate effectively.
Rolls-Royce Group plc
Annual report 2009
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The Group’s objective is to maintain an ‘A’ category investment grade
credit rating from both agencies.
view of long-term exchange rates. Forward cover is in the form of
standard foreign exchange contracts and instruments on which the
exchange rates achieved are dependent on future interest rates.
Currency risk
The Group is exposed to movements in exchange rates for both foreign
currency transactions and the translation of net assets and income
statements of foreign subsidiaries.
The Group regards its interests in overseas subsidiary companies as
long-term investments and manages its translational exposures
through the currency matching of assets and liabilities where applicable.
The matching is reviewed regularly, with appropriate risk mitigation
performed where material mismatches arise.
The Group has exposure to a number of foreign currencies. The most
significant transactional currency exposures are USD to GBP and
USD to EUR.
The Group manages its exposure to movements in exchange rates at
two levels:
i) Revenues and costs are currency matched where it is economic to do so.
The Group actively seeks to source suppliers with the relevant currency
cost base to avoid the risk or to flow down the risk to those suppliers that
are capable of managing it. Currency risk is also a prime consideration
when deciding where to locate new facilities. US dollar income converted
into sterling represented 23 per cent of Group revenues in 2009
(2008 26 per cent). US dollar income converted into euros represented
two per cent of Group revenues in 2009 (2008 four per cent).
ii) Residual currency exposure is hedged via the financial markets.
The Group operates a hedging policy using a variety of financial
instruments with the objective of minimising the impact of
fluctuations in exchange rates on future transactions and cash flows.
Market exchange rates
USD per GBP
– Year-end spot rate
– Average spot rate
EUR per GBP
– Year-end spot rate
– Average spot rate
2008
2009
1.438
1.854
1.034
1.258
1.615
1.566
1.126
1.123
The permitted range of the amount of cover taken is determined by
the written policies set by the Board, based on known and forecast
income levels.
The forward cover is managed within the parameters of these policies
in order to achieve the Group’s objectives, having regard to the Group’s
The Group may also write currency options against a portion of the
unhedged dollar income at a rate which is consistent with the Group’s
long-term target rate. At the end of 2009 the Group had US$18.8 billion
of forward cover (2008 US$17.1 billion).
The consequence of this policy has been to maintain relatively stable
long-term foreign exchange rates. Note 16 to the financial statements
includes the impact of revaluing forward currency contracts at market
values on December 31, 2009, showing a negative value of £144 million
(2008 negative value of £2,181 million) which will fluctuate with
exchange rates over time. The Group has entered into these forward
contracts as part of the hedging policy, described above, in order to
mitigate the impact of volatile exchange rates.
Interest rate risk
The Group uses fixed rate bonds and floating rate debt as funding
sources. The Group’s policy is to maintain a proportion of its debt at fixed
rates of interest having regard to the prevailing interest rate outlook. To
implement this policy the Group may utilise a combination of interest-
rate swaps, forward-rate agreements and interest-rate caps to manage
the exposure.
Commodity risk
The Group has an ongoing exposure to the price of jet fuel and base
metals arising from business operations. The Group’s objective is to
minimise the impact of price fluctuations. The exposure is hedged,
on a similar basis to that adopted for currency risks, in accordance with
parameters contained in written policies set by the Board.
Sales financing
In connection with the sale of its products, the Group will, on some
occasions, provide financing support for its customers. This may involve
the Group guaranteeing financing for customers, providing asset-value
guarantees (AVGs) on aircraft for a proportion of their expected future
value, or entering into leasing transactions.
The Group manages and monitors its sales finance related exposures to
customers and products within written policies approved by the Board
and within the internal framework described in the corporate
governance section. The contingent liabilities represent the maximum
discounted aggregate gross and net exposure that the Group has in
respect of delivered aircraft, regardless of the point in time at which such
exposures may arise.
Rolls-Royce Group plc
Annual report 2009
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The Group uses Ascend Worldwide Limited as an independent appraiser
to value its security portfolio at both the half year and year end. Ascend
provides specific values (both current and forecast future values) for
each asset in the security portfolio. These values are then used to assess
the Group’s net exposure.
The permitted levels of gross and net exposure are limited in aggregate,
by counterparty, by product type and by calendar year. The Group’s
gross exposures were divided approximately 55:45 between AVGs and
credit guarantees in 2009 (2008 55:45). They are spread over many years
and relate to a number of customers and a broad product portfolio.
The Board regularly reviews the Group’s sales finance related exposures
and risk management activities. Each financing commitment is subject
to a credit and asset review process and prior approval in accordance
with Board delegations of authority.
The Group operates a sophisticated risk-pricing model to assess risk
and exposure.
Costs and exposures associated with providing financing support are
incorporated in any decision to secure new business.
The Group seeks to minimise the level of exposure from sales finance
commitments by:
• the use of third-party non-recourse debt where appropriate;
• the transfer, sale, or reinsurance of risks; and
• ensuring the proportionate flow down of risk and exposure to
relevant RRSPs.
Each of the above forms an active part of the Group’s exposure
management process.
Where exposures arise, the strategy has been, and continues to be, to
assume where possible liquid forms of financing commitment that may
be sold or transferred to third parties when the opportunity arises.
Note 22 to the financial statements describes the Group’s contingent
liabilities. There were no material changes to the Group’s gross and net
contingent liabilities during 2009.
Accounting standards
The consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards (IFRS),
as adopted by the EU. In 2009, the changes that have had the most
significant effect on the Group’s financial statements are:
• Amendments to IAS 1 Presentation of Financial Statements: this relates
to presentation only and there is no impact on the reported results.
The amendments require (i) a statement of comprehensive income in
place of the statement of recognised income and expense; (ii) a
balance sheet at the beginning of the comparative period when there
has been a change in accounting policy; and (iii) the statement of
changes in equity to be presented as a primary statement.
• IFRIC 14 IAS 19 The Limit of a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction: this interpretation applies where
regulatory funding requirements for pension schemes will result in an
unrecognisable surplus arising in the future. It has been adopted with
effect from January 1, 2008. An additional liability of £491 million was
recognised at that date. Further details are shown in note 18.
• IFRS 8 Operating Segments: this standard amends the requirements for
disclosure of segmental performance and does not have any effect on
the Group’s overall reported results. Note 2 is presented in accordance
with the new requirements. The key change is that the basis for
reporting the segmental results is the same as that used internally,
which is equivalent to the underlying results, reported as additional
information in prior years.
A summary of other less significant changes and those which have not
been adopted in 2009, is included within the accounting policies in
note 1 to the financial statements.
Regulatory developments
In response to the financial crisis, governments and regulators around the
world are considering various regulatory reforms to the financial markets
with the aim of improving transparency and reducing systemic risk. While
the proposed reforms are predominantly directed at financial institutions,
some of them may have implications for non-financial institutions.
In particular, proposals by both US and European regulators to reform
the Over-the-Counter (OTC) derivatives market could have implications
for the Group in terms of future funding requirements and increased
cash flow volatility, if parties to future OTC derivative transactions are
required to post collateral to reduce counterparty risk.
Share price
During the year the Company’s share price increased by 44 per cent
from 335.5p to 483.5p, compared to a 16 per cent increase in the FTSE
aerospace and defence sector and a 22 per cent increase in the
FTSE 100. The Company’s shares ranged in price from 258.50p in March
to 500.0p in December.
The number of ordinary shares in issue at the end of the year was 1,854
million, an increase of 12 million relating to the exercise of share options.
The average number of ordinary shares in issue was 1,845 million (2008
1,820 million).
Andrew Shilston
Finance Director
February 10, 2010
Rolls-Royce Group plc
Annual report 2009
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66
Corporate governance
Board of directors
Corporate governance
Peter Byrom BSc, FCA
Non-executive director
A member of the remuneration, ethics and nominations committees
Peter Byrom was appointed to the Board in 1997. He is Chairman of
Domino Printing Sciences plc and a non-executive director of AMEC plc.
He is a Fellow of the Royal Aeronautical Society. He was a director of
NM Rothschild & Sons Limited from1977 to 1996. Age 65.
Iain Conn
Non-executive director, Senior Independent Director
A member of the audit and nominations committees
Iain Conn was appointed to the Board in 2005. He is an executive
director of BP p.l.c. having held a range of executive positions within
the BP Group worldwide. He is Chairman of the Advisory Board of
The Imperial College Business School. Age 47.
Professor Peter Gregson
Non-executive director
A member of the remuneration and nominations committees
Peter Gregson was appointed to the Board in 2007. He is President and
Vice-Chancellor of Queen’s University Belfast and serves on the Northern
Ireland Economic Development Forum, the Council of CBI Northern
Ireland and the Steering Group of the US-Ireland Research and
Development Partnership. He is a Fellow of the Royal Academy of
Engineering, a Member of the Royal Irish Academy, and Deputy
Lieutenant of Belfast. He was formerly Professor of Aerospace Materials
and Deputy Vice-Chancellor of the University of Southampton and has
served on the Councils of the Royal Academy of Engineering and the
Central Laboratory of the Research Councils. Age 52.
James Guyette BSc
President and Chief Executive Officer of Rolls-Royce North America Inc.
Jim Guyette was appointed to the Board in 1998 having joined
Rolls-Royce in 1997. He is a director of the PrivateBank and Trust
Company of Chicago, Illinois and of priceline.com Inc. Until 1995
he was Executive Vice President, Marketing and Planning of United
Airlines. Age 64.
Dr John McAdam
Non-executive director
A member of the remuneration and nominations committees
John McAdam was appointed to the Board in 2008. He is Chairman
of United Utilities Group PLC and of Rentokil Initial plc, the Senior
Independent Director of J Sainsbury plc and a non-executive director
of Sara Lee Corporation. He was the Chief Executive of ICI plc until ICI’s
acquisition by Akzo Nobel. Age 61.
Introduction
Rolls-Royce attaches the highest priority to corporate governance, the
system by which the Company is directed, managed and controlled in
the interests of all its stakeholders. The strength of the Company’s
corporate values, its reputation and its ability to achieve its objectives
are influenced by the effectiveness of the Company’s approach towards
corporate governance.
The Company is subject to the Combined Code on Corporate
Governance published in June 2008 by the Financial Reporting Council
(the Combined Code). A printed copy of the code can be obtained free
of charge from FRC publications, telephone: +44 (0)20 8247 1264, email:
customer.services@cch.co.uk and online at: www.frcpublications.com.
The Board confirms that throughout 2009, the Company complied
with the Combined Code. This report, which includes the Directors’
remuneration report on pages 80 to 90, explains how the Company
discharges its corporate governance responsibilities.
Board of directors
Simon Robertson
Non-executive Chairman
Chairman of the nominations committee
Simon Robertson was appointed to the Board in 2004. He is the founder
member of Simon Robertson Associates LLP and a non-executive
director of HSBC Holdings plc, Berry Bros & Rudd Limited, and The
Economist Newspaper Limited. He is a director of The Royal Opera
House Covent Garden Limited and a Trustee of The Eden Project and
the Royal Opera House Endowment Fund. He is the former President
of Goldman Sachs Europe Limited. Age 68.
Sir John Rose
Chief Executive
A member of the nominations committee
Sir John Rose was appointed to the Board in 1992, having joined
Rolls-Royce in 1984. He has been Chief Executive since 1996.
He is a Trustee of The Eden Project. Age 57.
Helen Alexander CBE
Non-executive director
Chairman of the remuneration committee and a member of the ethics
and nominations committees
Helen Alexander CBE was appointed to the Board in 2007. She is
President of the CBI and Chairman of the Port of London Authority
and of Incisive Media. She is a non-executive director and chair of the
remuneration committee at Centrica plc and senior adviser to Bain
Capital. She was CEO of the Economist Group from 1997 to 2008. Helen
is also senior trustee of the Tate Gallery and a trustee of the World Wide
Web Foundation. Age 53.
Rolls-Royce Group plc
Annual report 2009
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Mike Terrett
Chief Operating Officer
Mike Terrett was appointed to the Board in 2007, having joined
Rolls-Royce in 1978. He has held a variety of senior positions in the
development of new aero-engine programmes, including Managing
Director of Airlines and President and Chief Executive Officer of
International Aero Engines (IAE), based in the United States. Prior to
his appointment as Chief Operating Officer he was President – Civil
Aerospace. He is a Member of the Institute of Mechanical Engineers
and a Fellow of the Royal Aeronautical Society. Age 53.
Tim Rayner
General Counsel and Company Secretary
Tim Rayner joined Rolls-Royce in 2007 having previously been General
Counsel and Company Secretary at United Utilities PLC. Age 49.
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Corporate governance
Board of directors – continued
John Neill CBE
Non-executive director
A member of the audit and nominations committees
John Neill was appointed to the Board in 2008. He is the Chief Executive
of the Unipart Group of Companies. He is a member of the Council and
Board of Business in the Community and is a non-executive director of
Charter International plc. He is Vice President of the Society of Motor
Manufacturers and Traders, BEN, the automotive industry charity and
The Institute of the Motor Industry. Age 62.
John Rishton
Non-executive director
Chairman of the audit committee and a member of the ethics and
nominations committees
John Rishton was appointed to the Board in 2007. He is Chief Executive
Officer of Royal Ahold. He began his career in 1979 at Ford Motor
Company and held a variety of positions both in the UK and in Europe.
In 1994 he joined British Airways Plc where he was Chief Financial Officer
from 2001 to 2005. He is a former non-executive director of Allied
Domecq. Age 51.
Andrew Shilston MA, ACA, MCT
Finance Director
Andrew Shilston was appointed to the Board in 2003 having joined
Rolls-Royce in 2002. He was a non-executive director of Cairn Energy PLC
until May 2008 and he was Finance Director of Enterprise Oil plc from
1993 until 2002. Age 54.
Colin Smith BSc Hons, FREng, FRAeS, FIMechE
Director – Engineering and Technology
Colin Smith was appointed to the Board in 2005 having joined
Rolls-Royce in 1974. He has held a variety of key positions within
Engineering, including Director – Research and Technology and Director
of Engineering and Technology – Civil Aerospace. He is a Fellow of the
Royal Academy of Engineering, the Royal Aeronautical Society and the
Institution of Mechanical Engineers. Age 54.
Ian Strachan
Non-executive director
Chairman of the ethics committee and a member of the audit and
nominations committees
Ian Strachan was appointed to the Board in 2003. He is a non-executive
director of Xstrata plc, Transocean Inc and Caithness Petroleum Limited.
He is the former Chief Executive of BTR plc, former Deputy Chief
Executive (1991 to 1995) and Chief Financial Officer (1987 to 1991) of
Rio Tinto plc, former non-executive Chairman of Instinet Group Inc and
former non-executive director of Johnson Matthey plc, Commercial
Union and Reuters Group plc. Age 66.
Rolls-Royce Group plc
Annual report 2009
68
Corporate governance
The Group Executive
The Group Executive
The Group Executive is responsible for the management of the Group
within the strategy determined by the Board. Sir John Rose, Chief
Executive, chairs meetings of the Group Executive and its other
members are:
Tom Brown
John Cheffins
Miles Cowdry
James Guyette
Dr Michael Haidinger
Lawrie Haynes
Mark King
Dan Korte
Alain Michaelis
Peter Morgan
Dr Mike Orris
John Paterson
Tim Rayner
Andrew Shilston
Colin Smith
Mike Terrett
Tony Wood
Director – Human Resources
Acting President – Energy
Director – Global Corporate Development
President and Chief Executive Officer of
Rolls-Royce North America Inc.
President – Rolls-Royce Deutschland
Ltd & Co KG
President – Nuclear
President – Civil Aerospace
President – Defence Aerospace
President – Gas Turbine Supply Chain
& Deputy Chief Operating Officer
Director – Corporate Affairs
Chief Procurement Officer
President – Marine
General Counsel and Company Secretary
Finance Director
Director – Engineering and Technology
Chief Operating Officer
President – Gas Turbine Services
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Rolls-Royce Group plc
Annual report 2009
Corporate governance
International Advisory Board
International Advisory Board
The International Advisory Board (IAB) was formed in 2006. It advises
the Group on emerging political, business and economic trends.
Membership of the IAB is as follows:
Lord Powell of Bayswater
Chairman of IAB, former Foreign Affairs and Defence Adviser to Prime
Ministers Margaret Thatcher and John Major
Taizo Nishimuro
Chairman of Tokyo Stock Exchange Group, Inc. and former Chairman of
Toshiba Corporation
Bernard Duc, CBE
Senior Partner HMI Ltd (Hong Kong), Chairman of the Rolls-Royce South
East Asia Advisory Board, former Deputy Chairman of the Rolls-Royce
European Advisory Board
Sir Rod Eddington
Chairman, J.P. Morgan – Australia & New Zealand and former
Chief Executive, British Airways Plc
Dr Fan Gang
Professor at China’s Academy of Social Sciences and Director of National
Economic Research Institute
Carla Hills
Chair and CEO, Hills & Company, International Consultants, former US
Trade Representative, former Secretary of Housing and Urban
Development, former Assistant Attorney General
General Sir Mike Jackson
Former Chief of the General Staff, UK Ministry of Defence
Lubna Olayan
CEO and Deputy Chairperson of the Olayan Financing Company
Eduardo Serra
President and founder of Eduardo Serra y Asociados (ESYA), former
Spanish Defence Minister, former President of the Royal Board of Trustees
of the Prado Museum
Rair Simonyan
Chairman, Morgan Stanley, Russia, former first VP of Russian state oil
company, Rosneft
Ratan Tata
Chairman of Tata Sons Limited
Matthias Wissmann
President of the German Association of the Automotive Industry (VDA),
Vice-Chairman of the Federation of German Industries (BDI) and Senior
International Counsel at WilmerHale, Former Federal Minister of Research
and Technology and of Transports of Germany
Mustafa Koç
Chairman of Koç Holding, A.Ş.
Lee Hsien Yang
Chairman, Fraser and Neave Limited
Ernesto Zedillo
Former President of Mexico, Director, Yale Center for the Study
of Globalization
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Annual report 2009
70
Corporate governance
Composition of the Board
Composition of the Board
Simon Robertson chairs the Board of directors and Sir John Rose is the
Chief Executive. The division of responsibilities between them is set
down in writing and agreed by the Board. Iain Conn is the Company’s
Senior Independent Director. There are currently 14 directors on the
Board comprising the non-executive Chairman, the Chief Executive,
four other executive directors and eight non-executive directors.
The quality and broad experience of the directors, the balance of the
Board’s composition and the dynamics of the Board as a group, ensure
the Board’s effectiveness and also prevents any individual or small group
dominating the Board’s decision making. Each executive director
receives a service contract on appointment (see page 83 for further
information) and each non-executive director receives a letter setting
out the conditions of his or her appointment.
Non-executive directors are appointed for an initial term of three years,
which may be extended with the agreement of the Board, although
reappointment is not automatic. Executive directors are employees who
have executive responsibilities in addition to their duties as directors.
Non-executive directors are not employees and do not participate in the
daily business management of the Group. There were no Board changes
during the year.
Under the Company’s Articles of Association, one-third of the directors
are subject to re-election every year, with each director also being
subject to re-election at intervals of not more than three years. Any
director appointed during the year is separately required to retire and
seek election by the shareholders at the next Annual General Meeting
(AGM). The Board also requires any non-executive director who has
served on the Board for more than nine years to be subject to annual
re-election at the AGM.
The directors retiring under the annual re-election provisions contained
in the Articles of Association are Professor Peter Gregson, Dr John
McAdam, Helen Alexander CBE and Andrew Shilston. They all offer
themselves for re-election.
Peter Byrom, having served more than nine years on the Board, is subject
to annual re-election by shareholders. No other non-executive director
has served for more than nine years on the Board. In recommending
Peter Byrom for re-election, the Board took account of the desirability
of retaining a director with long experience on the Board. The Board
believes strongly that, in a long-term, complex and technologically
advanced business, it is essential that non-executive directors have
the opportunity to acquire, over a number of years, the experience
and knowledge of the business and the sectors within which the
Group operates.
The Articles of Association also provide that no person may be
appointed to the office of chairman (in an executive capacity) or to the
office of chief executive, managing director or joint managing director
of the Company, unless he or she is a British citizen. No person may be
appointed to the office of director of the Company if, immediately
following such appointment, the number of directors of the Company
who are not British citizens would exceed one half of the total number
of directors of the Company for the time being.
Subject to the provisions of relevant statutes, the Company’s
Memorandum and Articles of Association and any directions given
by special resolution, the directors may exercise all the powers of
the Company.
Independence of the non-executive directors
The Board applies a rigorous process in order to satisfy itself that its
non-executive directors remain independent. The Combined Code does
not regard the Chairman as being independent in view of his unique
role in corporate governance. However, on his appointment as Chairman
on January 1, 2005, Simon Robertson met the criteria for independence
contained in the Combined Code. His other significant commitments are
described on page 66.
The Board reviews the independence of the non-executive directors
every year, based on the criteria in the Combined Code. This review was
undertaken in 2009 and the Board concluded that all the non-executive
directors (other than the Chairman) were independent in character
and judgement. The Board determined that Peter Byrom remains
independent in character and judgement notwithstanding that he
has served on the Board for more than nine years, that there are no
relationships or circumstances which are likely to affect his independent
judgement and that he is in no way dependent on the remuneration he
receives from the Company.
Role of the Board
The Board is responsible to all the Company’s stakeholders for its
conduct and for the performance of the Company. The day-to-day
running of the Company is delegated by the Board to the executive
team under the leadership of Sir John Rose, the Chief Executive. The
Board retains responsibility for the approval of certain matters which
affect the shape and risk profile of the Company, as well as items such as
the annual budget and performance targets, the financial statements,
payments to shareholders, major capital investments and any substantial
change to balance sheet management policy. This division of
responsibilities between the Board and the executive team is set out in
detail in a schedule approved annually by the Board, which also defines
those decisions which can only be taken by the Board itself.
Rolls-Royce Group plc
Annual report 2009
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In the autumn of 2009, the JCA Group conducted a Board review which
took the form of a facilitated self-evaluation by the Board. The review
included confidential, unattributable, one-on-one interviews with each
Board member and the Company Secretary which covered corporate
governance, board effectiveness, strategy development, risk
management and Board and Committee organisation, composition,
operation and dynamics. The Board members unanimously agreed that
the Board was working as an effective whole. The review highlighted the
crucial importance of strategic execution and the need to remain
vigilant to future business challenges. In addition, Board members
welcomed the introduction of closer co-ordination between the audit,
ethics and remuneration committees.
Conflicts of interest
Directors have a duty to avoid a situation in which they have, or can
have, a direct or indirect interest which conflicts, or possibly may conflict,
with the interests of the Company unless that situational conflict has
been authorised by the Board. The Board has reviewed and authorised
all directors’ situational conflicts and has agreed that while directors are
required to keep confidential all Company information, they shall not be
required to share with the Company confidential information received
by them from a third party which is the subject of the situational conflict.
The authorisation of situational conflicts is reviewed annually.
Indemnity
The Company has entered into separate Deeds of Indemnity in favour of
its directors. The deeds provide substantially the same protection as that
already provided to directors under the indemnity in Article 170 of the
Company’s Articles of Association. The Company has also arranged
appropriate insurance cover for any legal action taken against its
directors and officers.
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Corporate governance
Composition of the Board – continued
The Board has approved the following statement summarising its
core responsibilities:
Primary goal
The primary goal of the Board is to ensure that the Company’s strategy
creates value for the long-term investor within an acceptable risk profile.
The Board’s tasks
In line with its primary goal, the Board’s principal tasks are to:
• ensure the development of the Company’s strategy and keep it
under rigorous review;
• monitor the implementation of the strategy, ensuring that the
necessary financial and human resources are in place to deliver it
and that effective controls exist to manage risk;
• safeguard the values of the Company, including its brand and
corporate reputation and the safety of its products;
• oversee the quality and performance of management and ensure
through effective succession planning and remuneration policies
that it is maintained at world-class standards; and
• maintain an effective corporate governance framework that aspires
to deliver long-term value to shareholders.
Directors’ induction, training and information
Newly appointed directors participate in a structured induction
programme and receive a comprehensive data pack providing detailed
information on the Group. An existing executive director acts as a mentor
to each newly appointed non-executive director, giving guidance and
advice as required. As part of their briefing, non-executive directors visit
key sites and meet a cross-section of managers and employees to gain a
better understanding of the Group and its operations. Ongoing training is
available for all the directors, including presentations by the executive
team on particular aspects of the business. There is a procedure for
directors to take independent professional advice at the Company’s
expense. This is in addition to the access every director has to the General
Counsel and Company Secretary.
Board effectiveness
The Chairman and the non-executive directors meet at least once a year
without the executive directors present, in order to review the operation
of the Board. The Chairman has an annual meeting with each non-
executive director to review his or her contribution to the Board. The
Senior Independent Director chairs an annual meeting of the executive
and non-executive directors (excluding the Chairman) to review the
performance of the Chairman, the outcome of which is reported back
to him. Each year, the Chairman reviews the performance of the Chief
Executive as part of the annual salary review process overseen by the
remuneration committee. The Chief Executive reviews the performance
of the other executive directors in the same way.
Rolls-Royce Group plc
Annual report 2009
72
Corporate governance
Board committees
Board committees
The Board is assisted by its committees. Details of their membership and principal terms of reference are set out below. Their full terms of reference are
available on the Group’s website at www.rolls-royce.com.
Attendance at meetings of the Board and its principal committees in 2009
Held
Board
Attended
Held
Audit
Attended
Held
Nominations
Attended
Remuneration
Attended
Held
Helen Alexander CBE
Peter Byrom
Iain Conn
Professor Peter Gregson
James Guyette
Dr John McAdam
John Neill CBE
John Rishton
Simon Robertson
Sir John Rose
Andrew Shilston
Colin Smith
Ian Strachan
Mike Terrett
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8
8
8
8
8
8
8
8
8
8
8
8
8
7
7
6
7
8
8
7
8
8
8
8
8
7
8
5
5
5
5
5
4
5
4
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
0
1
1
1
0
6
6
6
6
6
6
5
6
Held
4
4
4
4
Ethics
Attended
4
3
4
4
Remuneration committee
The committee has responsibility for making recommendations to the Board on the Group’s policy regarding executive remuneration. The committee
determines, on the Board’s behalf, the specific remuneration packages of the Chairman, the executive directors and a number of senior executives.
The committee met six times during the year. The committee’s membership and principal terms of reference are set out in the Directors’ remuneration
report on page 80.
Nominations committee
In 2009, Simon Robertson chaired the nominations committee. Its other members were Helen Alexander CBE, Peter Byrom, Iain Conn, Professor Peter
Gregson, Dr John McAdam, John Neill CBE, John Rishton, Sir John Rose and Ian Strachan. The committee met once during the year.
The committee makes recommendations to the Board on the appointment of executive and non-executive directors and on the membership of
Board committees. It is assisted in the former task by external recruitment consultants. It reviews succession planning generally and also reviews
specific appointments to the Board and to other senior positions within the Group. The committee also oversees the annual review of Board
effectiveness.
In carrying out these tasks, the committee gives careful consideration to the balance of skills required on the Board, including the need to reflect
diversity, international experience and strong managerial and business skills. Before recommending the appointment of a non-executive director
to the Board, the committee satisfies itself that the candidate will have sufficient time available to discharge his or her responsibilities effectively.
Audit committee
The audit committee consists exclusively of independent, non-executive directors. During 2009, John Rishton, who has recent and relevant financial
experience, chaired the committee. In 2009, its other members were Iain Conn, John Neill CBE and Ian Strachan. The committee met five times during
the year. The Director of Risk, Head of Business Assurance and a representative of the external auditors normally attend the meetings. Additionally, the
Head of Business Assurance has direct access to the committee. The Chairman of the Board, the Chief Executive, the Finance Director and any other
Board member or senior executive may attend the meetings as necessary, at the invitation of the audit committee chairman.
Rolls-Royce Group plc
Annual report 2009
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Board committees – continued
The committee has responsibility for recommending the financial
statements to the Board and for reviewing the Group’s financial
reporting and accounting policies, including major announcements
made to a regulatory information service. It is also responsible for
the relationship with the external auditors and for assessing the role
and effectiveness of the internal audit function, which in Rolls-Royce
is termed business assurance. In addition, the committee reviews
the Group’s procedures for detecting, monitoring and managing
the risk of fraud.
The committee has responsibility for recommending to the Board the
appointment of the external auditors and for reviewing the nature,
scope and results of the annual external audit. It also approves the
audit fee and, on an annual basis, assesses the effectiveness and
independence of the external auditors. A resolution to reappoint the
auditors, KPMG Audit Plc, and to authorise the directors to determine
the auditors’ remuneration, will be proposed at the 2010 AGM. The
committee keeps under review the Group’s internal controls and systems
for assessing and mitigating financial and non-financial risk. It also
reviews and approves the business assurance work programme and
ensures that this function is adequately resourced and co-ordinated with
the work of the external auditors. Twice a year the committee receives
a written report on the reviews conducted throughout the Group by
business assurance and reports from senior executives on the key
business risks and risk systems in selected sectors.
In order to safeguard auditor independence and objectivity, the
following policy is applied in relation to services provided by the
auditors:
Audit related services – the auditors undertake these services as it is work
that they must, or are best suited to, perform. It includes formalities
relating to borrowings, shareholder and other circulars, risk management
services, various regulatory reports and work in respect of acquisitions
and disposals;
Tax, accounting and mergers and acquisitions – the auditors are used for
this work where they are best suited to undertake it. All other significant
consulting work in these areas is put out to tender; and
All other advisory services/consulting – the auditors are generally
prohibited from providing these services.
Throughout the year the committee monitors the cost of non-audit
work undertaken by the auditors and is, therefore, in a position to take
action if at any time it believes that there is a risk of the auditors’
independence being undermined through the award of this work.
Ethics committee
The ethics committee consists exclusively of independent non-executive
directors. Ian Strachan chairs the committee and its other members
during 2009 were Helen Alexander CBE, Peter Byrom and John Rishton.
The committee met four times during the year. The Director of Risk,
who has executive responsibility for ethics, attends the meetings.
The Chairman of the Board, the Chief Executive and other executives of
the Company may be invited to attend meetings of the committee.
The committee is responsible for reviewing compliance with the Group’s
Global Code of Business Ethics (the Global Code) and will, if appropriate,
make recommendations to the Board for changes to the Global Code.
The Global Code sets out the principles to be followed by employees
when conducting business.
The committee reviews recommendations on ethical matters made by
external regulatory authorities or other bodies and is responsible for
making recommendations to the Board about whether these should
be applied to the Company and, if so, to what extent. It also has
responsibility for monitoring reports on issues raised through the
Group’s confidential reporting line and for reviewing the results of
subsequent investigations.
The committee ensures that ethical policies and practice are subject to
an appropriate level of internal audit and, where necessary, will appoint
auditors to conduct an independent external review.
Risk committee
The Board has a risk committee, chaired by the Chief Executive, with
specific accountability for the system of risk management and for
reporting key risks and their associated mitigating actions to the Board.
In 2009, its other members were James Guyette, Andrew Shilston, Colin
Smith and Mike Terrett. The risk committee met twice in 2009 and
reports annually to the Board on the policy, process and operation of
the risk management system and the principal risks facing the Group,
identified through the risk management system.
Rolls-Royce believes that the proactive management of risks is a
fundamental part of achieving its business objectives. This responsibility
flows from the top of the organisation.
Rolls-Royce Group plc
Annual report 2009
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Corporate governance
Internal control and risk management
Internal control and risk management
The Board – system of internal control and its effectiveness
The Board is responsible for the Group’s system of internal control and
for maintaining and reviewing its effectiveness from both a financial and
an operational perspective. The system of internal control is designed to
manage, rather than eliminate, the risk of failure to achieve business
objectives and to provide reasonable but not absolute assurance against
material misstatement or loss. The Group’s approach to internal control is
based on the underlying principle of line management’s accountability
for control.
The Board has reviewed the risk management process and confirms that
ongoing processes and systems ensure that Rolls-Royce continues to be
compliant with the Turnbull guidance as contained in ‘Internal Control:
Guidance for Directors on the Combined Code’.
In reviewing the effectiveness of the system of internal control, the
Board has taken account of the results of the work carried out to audit
and review the activities of the Group.
Financial reporting
The Group has a comprehensive budgeting system with an annual
budget approved by the Board. Revised forecasts for the year are
reported at least quarterly. Actual results, at both a business and Group
level, are reported monthly against budget and variances reviewed.
Financial managers are required to acknowledge in writing that their
routine financial reporting is based on reliable data and that their results
are properly stated in accordance with Group requirements. In addition,
for annual reporting, business presidents and finance directors are
required to acknowledge that their business has complied with the
Group Finance Manual.
The audit committee – reviewing internal controls
The audit committee keeps under review the Group’s internal controls
and systems for assessing and mitigating financial and non-financial risk.
In addition, the committee reviews the Group’s procedures for detecting,
monitoring and managing the risk of fraud.
The committee reviews and approves the business assurance work
programmes and ensures that this function is adequately resourced and
co-ordinated with the work of the external auditors. Twice a year, the
committee receives a report on the reviews conducted throughout the
Group by business assurance and a report from senior executives on the
key risks and risk systems in selected customer facing businesses and
key functions.
The business assurance function, working closely with external auditors,
undertakes a programme of financial and operational audits or reviews
agreed by the audit committee and covering all Group activities. The
programme includes independent reviews of the systems of internal
control, selected on the basis of risks material to the Group. The findings
and status of corrective actions taken to address these are reported to
the audit committee.
The risk committee – implementation of the Board’s policies
The risk committee has accountability for the system of risk
management and for reporting the principal risks and associated
mitigating actions, including those risks potentially affecting the Group’s
reputation. It has responsibility for implementing the Board’s policies on
risk and internal control and reviews the results of the risk management
process, which operates at all levels in the Group. The risk committee has
developed a risk policy which states that risk management is a part of
every manager’s responsibility and that risk management is to be
embedded within the day-to-day management activity. The committee
reports annually to the Board on the policy, process and operation of the
risk management system and the principal risks facing the Group,
identified through the risk management system.
Specific committees have accountability for reviewing certain categories
of risk. The financial risk committee reviews credit, market or liquidity
risks. The ethics committee reviews those risks with a significant ethical
dimension, often identified as threats to reputation.
Risk management process – how risks are managed throughout
the Group
Risks are defined as threats to the achievement of business objectives or
to the continuing reputation of the Group. As part of the business cycle
each part of the Group is required formally to identify and document key
risks together with appropriate mitigating activities.
The risk management process
Assessment
Planning
Identification
Risk
register
Treatment
Review, control
and communicate
Rolls-Royce Group plc
Annual report 2009
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Shareholders and share capital
The risk escalation structure
Group
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Work package
The process provides methods for escalation and delegation to the
appropriate levels within the organisation and ensures that actions are
owned, defined, resourced and effective.
Risks may arise from a variety of internal and external sources. They
may be associated with regulations, customer requirements, economic
conditions or competitor actions. They could result from the capability
of the processes used to execute the business or from external causes,
such as war, terrorist activity or pandemics.
Management has continued to perform comprehensive risk reviews for
all major programmes, including business change plans. Independent
gated reviews are conducted where key risks and mitigating actions
are identified and reported to management for incorporation into
programme plans. The risk management process places significant
emphasis on learning from and sharing prior experience.
Risks are documented in a framework of risk registers and are subject to
regular review by management. The top-level corporate risk register is
updated and reviewed by the risk committee twice per year and the
Board also considers these risks in the context of the Group’s business
strategy. This ongoing process has been in place during 2009, up to
and including the date of approval of the Annual report.
Implementation of the process
Development, implementation and maintenance of the standard global
process are the responsibility of a dedicated enterprise risk management
team. This team is part of the Department of Risk, which reports to the
Finance Director. The team has created a comprehensive framework for
the assessment of risk management process maturity that enables
focused improvement actions and drives consistent application of the
risk management process throughout the Group.
An integrated range of tools and training underpins the risk process.
Implementation of an enterprise-wide software application enables
the recording, analysis, communication and management of risks
across the Group.
A global network of risk champions, mentors and facilitators drive the
application of the standard process in their parts of the business and
help to develop, embed and share best practice throughout the Group.
The risk management process is subject to continuous improvement.
In 2009, training has been enhanced and a comprehensive curriculum
of risk, reputation and ethics training has been developed for delivery
at all levels of the organisation.
Shareholders and share capital
Share capital and voting rights
At December 31, 2009, the Company’s authorised share capital was
£3,500,050,000.60 and comprised: 2,499,999,998 ordinary shares of 20p;
2,000,000,000,000 C Shares of 0.1p; one Special Share of £1; and 50,000
preference shares of £1.
On December 31, 2009, there were 1,854,087,040 ordinary shares,
12,577,437,184 C Shares and one Special Share in issue. The ordinary
shares are listed on the London Stock Exchange.
Payments to shareholders
At the AGM on April 28, 2010 the directors will recommend an issue
of 90 C Shares with a total nominal value of nine pence for each ordinary
share. Together with the interim issue on January 4, 2010 of 60 C Shares
for each ordinary share with a total nominal value of six pence, this is
the equivalent of a total annual payment to ordinary shareholders of
15 pence for each ordinary share.
Communication with shareholders
The Company attaches importance to the effectiveness of its
communications with shareholders. It publishes an Annual report which
is available on the Group’s website. There are also separate reports
covering the environment and community relations. The Company
maintains a regular dialogue with institutional shareholders and the
financial community. This includes presentations of the preliminary and
interim results, regular meetings with major shareholders, participation
in stockbrokers’ seminars and site visits.
Each year the Company holds an investors’ seminar in order to improve
the financial community’s understanding of the Group and to introduce
investors to a broader range of management. All shareholders can gain
access to these and other presentations, as well as to the Annual report
and other information about the Group, on the Group’s website at
www.rolls-royce.com.
Rolls-Royce Group plc
Annual report 2009
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Corporate governance
Shareholders and share capital – continued
Holders of ordinary shares may attend the Company’s AGM at which the
Company highlights key business developments during the year and at
which shareholders have an opportunity to ask questions. The chairmen of
the audit, nominations, remuneration and ethics committees are available to
answer any questions from shareholders on the work of their committees.
The Company confirms that it sends the AGM notice and relevant
documentation to all shareholders at least 20 working days before the
date of the AGM. For those shareholders who have elected to receive
communications electronically, notice is given by email of the availability
of documents on the Group’s website. Responsibility for maintaining
regular communications with shareholders rests with the executive
management team led by the Chief Executive. However, the Board is
informed on a regular basis of key shareholder issues, including share
price performance, the composition of the shareholder register and
market expectations. Independent research is commissioned annually
into institutional shareholder perceptions of the Group. The Chairman,
the Senior Independent Director and the non-executive directors make
themselves available to meet with shareholders as required.
Share class rights
The rights and obligations attaching to the different classes of shares are
set out in the Company’s Articles of Association.
Ordinary shares
Holders of ordinary shares are entitled to receive the Company’s Annual
report. They are also entitled to attend and speak at general meetings of
the Company, to appoint one or more proxies or, if they are corporations,
corporate representatives, and to exercise voting rights. They have the
right to ask questions at the AGM relating to the business of the meeting
and for these to be answered, unless such answer would interfere
unduly with the business of the meeting, involve the disclosure of
confidential information, if the answer has already been published on
the Company’s website or if it is not in the interests of the Company or
the good order of the meeting that the question be answered. Holders
of ordinary shares may receive a bonus issue of C Shares or a dividend
and on liquidation may share in the assets of the Company.
Holders of not less than five per cent of the issued ordinary share capital
of the Company may requisition a general meeting of the Company.
Members who represent at least five per cent of the total voting rights
of all the members who have a right to vote at the meeting or at least
100 members who can vote and hold shares paid up on average, per
member, as to at least £100, can require the Company to include a
matter (other than a proposed resolution) at an AGM unless it is
defamatory, frivolous or vexatious. Alternatively, such members may
require the Company to circulate a statement of not more than 1,000
words with respect to a matter referred to in a proposed resolution or
other business to be dealt with at a general meeting. The members do
not have to meet the costs of circulating the statement provided
sufficient requests are received before the end of the financial year
preceding the meeting.
C Shares
Since January 2009, the Company has issued non-cumulative
redeemable preference shares (C Shares) as an alternative to paying
a cash dividend. Shareholders can choose to:
• redeem all C Shares for cash;
• redeem all C Shares for cash and reinvest the proceeds in additional
ordinary shares using the C Share Reinvestment Plan operated by
Computershare Investor Services PLC (the Registrar); or
• keep the C Shares.
Any C Shares retained attract a dividend of 75 per cent of LIBOR on the
0.1p nominal value of each share, paid on a twice-yearly basis, and have
limited voting rights. The Company has the option to compulsorily
redeem the C Shares, at any time, if the aggregate number of C Shares in
issue is less than ten per cent of the aggregate number of all C Shares
issued, or on the acquisition or capital restructuring of the Company.
On a return of capital on a winding-up, the holders of C Shares shall be
entitled, in priority to any payment to the holders of ordinary shares, to
the repayment of the nominal capital paid-up or credited as paid-up on
the C Shares held by them, together with a sum equal to the
outstanding preferential dividend which will have been accrued but
not been paid until the date of return of capital.
The holders of C Shares are entitled to attend, speak and vote at a
General meeting only if a resolution to wind up the Company is to be
considered, in which case they may vote only on such resolution.
Special Share
Certain rights attach to the special rights non-voting share (Special
Share) issued to HM Government (Special Shareholder). Subject to the
provisions of the Companies Act 2006, the Treasury Solicitor may redeem
the Special Share at par at any time. The Special Share confers no rights
to dividends but in the event of a winding-up it shall be repaid at its
nominal value in priority to any other shares.
Certain Articles (in particular those relating to the foreign shareholding
limit, disposals and the nationality of directors) that relate to the rights
attached to the Special Share may only be altered with the consent of
the Special Shareholder. The Special Shareholder is not entitled to vote
at any general meeting or any other meeting of any class of
shareholders.
Preference shares
The 50,000 preference shares were issued pursuant to the Company’s
incorporation and were subsequently redeemed. They cannot be reissued.
Rolls-Royce Group plc
Annual report 2009
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Other statutory information
B Shares
Up to July 2008, the Company had issued B Shares as an alternative
to paying a cash dividend. All remaining B Shares were redeemed on
September 22, 2008 and cancelled. The Company has no intention of
issuing further B Shares.
Restrictions on transfer of shares and limitations on holdings
There are no restrictions on transfer or limitations on the holding of the
ordinary shares or C Shares other than under the Articles of Association
(as described below), under restrictions imposed by law or regulation
(for example, insider trading laws) or pursuant to the Company’s share
dealing code. The Articles of Association provide that the Company should
be and remain under United Kingdom control. As such, an individual
foreign shareholding limit is set at 15 per cent of the aggregate votes
attaching to the share capital of all classes (taken as a whole) and capable
of being cast on a poll and to all other shares that the directors determine
are to be included in the calculation of such holding.
Shareholder agreements and consent requirements
There are no known arrangements under which financial rights carried by
any of the shares in the Company are held by a person other than the holder
of the shares and no known agreements between the holders of shares with
restrictions on the transfer of shares or exercise of voting rights.
No disposal may be made to a non-Group member which, alone or
when aggregated with the same or a connected transaction, constitutes
a disposal of the whole or a material part of either the nuclear business
or the assets of the Group as a whole, without consent of the Special
Shareholder.
Authority to issue shares
At the AGM in 2009, authority was given to the directors to allot new
ordinary shares up to a nominal value of £124,899,130, equivalent to
one-third of the issued share capital of the Company as at February 11,
2009. Such authority is valid until the AGM in 2010 or 18 months from April
30, 2009, whichever is the earlier. A further special resolution was passed
to effect a disapplication of pre-emption rights for a maximum of five per
cent of the issued share capital of the Company as at February 11, 2009.
The directors propose to renew these authorities at the AGM in 2010.
At the AGM in 2009, authority was given to the directors to allot new
C Shares up to a nominal value of £350 million as an alternative to a cash
dividend. Such authority is valid until the AGM in 2010 or 18 months
from April 30, 2009 whichever is the earlier. The directors propose to
renew this authority at the AGM in 2010.
Authority to purchase own shares
At the AGM in 2009, the Company was authorised by shareholders to
purchase up to 185,137,887 of its own ordinary shares representing
ten per cent of its issued ordinary share capital as at February 11, 2009.
The Company did not make use of this authority during 2009.
The authority for the Company to purchase its own shares expires at the
conclusion of the AGM in 2010 and a resolution to renew it will be
proposed at that meeting.
Voting rights
Deadlines for exercising voting rights
Electronic and paper proxy appointment and voting instructions must
be received by the Company’s Registrars not less than 48 hours before a
general meeting.
Voting rights for employee share plan shares
Shares are held in various employee benefit trusts for the purpose of
satisfying awards made under the various employee share plans. For
shares held in a nominee capacity or if plan/trust rules provide the
participant with the right to vote in respect of specifically allocated
shares, the trustee votes in line with the participants’ instructions. For
shares that are not held absolutely on behalf of specific individuals, the
general policy of the trustees, in accordance with investor protection
guidelines, is to abstain from voting in respect of those shares.
Major shareholdings
At February 10, 2010, the following companies had notified an interest in
the issued ordinary share capital of the Company in accordance with the
Financial Services Authority’s Disclosure and Transparency Rules:
Company
AXA S.A.
BlackRock Inc.
Invesco Limited
Legal & General Group plc
Other statutory information
Date notified
January 11, 2010
December 3, 2009
February 4, 2008
October 14, 2009
% of issued
ordinary
share capital
4.90
5.34
6.91
3.96
Political donations
In line with its established policy, the Group made no political donations
pursuant to the authority granted at the 2009 AGM.
Although the Company does not make, and does not intend to make,
donations to political parties, within the normal meaning of that
expression, the definition of political donations under the Companies
Act 2006 is very broad and includes expenses legitimately incurred as
part of the process of talking to members of parliament and opinion
formers to ensure that the issues and concerns of the Group are
considered and addressed. These activities are not intended to support
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Annual report 2009
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Corporate governance
Annual report and financial statements
any political party and the Group’s policy is not to make any donations
for political purposes in the normally accepted sense.
A resolution will therefore be proposed at the 2010 AGM seeking
shareholder approval for the directors to be given authority to make
donations and incur expenditure which might otherwise be caught by
the terms of the Companies Act 2006. The authority sought will be
limited to a maximum amount of £25,000 per Group company but so as
not to exceed £50,000 for the entire Group in aggregate.
During the year, one of our US subsidiaries made a contribution towards
the running expenses of a political action committee (PAC) organised by
its employees in an amount of US$24,636 (2008: US$23,700). PACs are a
common feature of the US political system and are governed by the
Federal Election Campaign Act. The Rolls-Royce PAC is independent of
the Company and independent of any political party. Its funds are
contributed voluntarily by employees and the Company cannot affect
how they are applied. Such contributions do not require authorisation
by shareholders under the Companies Act 2006 and therefore do not
count towards the £25,000 and £50,000 limits for political donations and
expenditure for which shareholder approval will be sought at the AGM.
Change of control
Contracts and joint venture agreements
There are a number of contracts and joint venture agreements which
would allow the counterparties to terminate or alter those arrangements
in the event of a change of control of the Company. These arrangements
are commercially confidential and their disclosure could be seriously
prejudicial to the Company.
Borrowings and other financial instruments
The Group has a number of borrowing facilities provided by various
lenders. These facilities generally include provisions which may
require any outstanding borrowings to be repaid or the alteration or
termination of the facility upon the occurrence of a change of control
of the Company. At December 31, 2009 these facilities were less than
50 per cent drawn.
The Group has entered into a series of financial instruments to hedge its
currency, interest rate and commodity exposures. These contracts provide
for termination or alteration in the event that a change of control of the
Company materially weakens the creditworthiness of the Group.
Employee share plans
In the event of a change of control of the Company, the effect on the
employee share plans would be as follows:
• Executive Share Option Plan – All options granted have vested and are
exercisable. Consequently, no early vesting is currently possible. This
Plan has now expired and no further options can be granted;
• Performance Share Plan – Awards would vest pro-rata to service in the
performance period, subject to remuneration committee judgement
of Company performance;
• Annual Performance Related Award deferred shares – The shares
would be released from trust immediately;
• ShareSave – Options would become exercisable immediately.
The new company might offer an equivalent option in exchange
for cancellation of the existing option; and
• Share Incentive Plan – Consideration received as shares would be held
within the Plan, if possible, otherwise the consideration would be
treated as a disposal from the Plan.
Essential commercial relationships
Supply chain
Certain suppliers to the Group contribute key components or services,
the loss of which could cause disruption to the Group’s deliveries.
However, none are so vital that their loss would affect the viability of
the business as a whole. When dealing with suppliers, the Group is
guided by the Supply Chain Relationships in Aerospace (SCRIA) initiative.
It seeks the best possible terms from suppliers and when entering into
binding purchasing contracts, gives consideration to quality, delivery,
price and the terms of payment. In the event of disputes, efforts are
made to resolve them quickly. As the Company is a holding company
and does not itself trade, it owed no amounts to trade creditors at
December 31, 2009 and therefore the number of creditor days required
to be shown in this report to comply with the provisions of the
Companies Act 2006 is nil.
Customers
The increasingly global nature of the business, balanced across the civil
aerospace, defence aerospace, marine and energy businesses, ensures
that the Group is not overly dependent on any individual customer.
Annual report and the financial statements
Statement of directors’ responsibilities in respect of the
Annual report and the financial statements
The directors are responsible for preparing the Annual report and the
Group and parent company financial statements in accordance with
applicable law and regulations.
Company law requires the directors to prepare Group and parent
company financial statements for each financial year. Under that law
they are required to prepare the Group financial statements in
accordance with IFRS as adopted by the EU and applicable law and
have elected to prepare the parent company financial statements in
accordance with UK Accounting Standards and applicable law (UK
Generally Accepted Accounting Practice).
Rolls-Royce Group plc
Annual report 2009
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Annual report and financial statements – continued
79
Under company law the directors must not approve the financial
statements unless they are satisfied that they give a true and fair view
of the state of affairs of the Group and parent company and of their
profit or loss for that period. In preparing each of the Group and parent
company financial statements, the directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• for the Group financial statements, state whether they have been
prepared in accordance with IFRSs as adopted by the EU;
• for the parent company financial statements, state whether applicable
UK Accounting Standards have been followed, subject to any material
departures disclosed and explained in the parent company financial
statements; and
• prepare the financial statements on the going concern basis unless it
is inappropriate to presume that the Group and the parent company
will continue in business.
The directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the parent company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the parent company and enable them to ensure
that its financial statements comply with the Companies Act 2006. They
have general responsibility for taking such steps as are reasonably open
to them to safeguard the assets of the Group and to prevent and detect
fraud and other irregularities.
Under applicable law and regulations, the directors are also responsible
for preparing a Directors’ report, Directors’ remuneration report and
Corporate governance statement that complies with that law and
those regulations.
The directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Group’s website.
Legislation in the UK governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
Going concern
The Group’s business activities, together with the factors likely to affect
its future development, performance and position are set out on pages
1 to 41 of the business review. The financial position of the Group, its
cash flows, liquidity position, borrowing facilities and financial risks
are described in pages 58 to 65 of the business review. In addition,
notes 1, 13, 14 and 16 of the consolidated financial statements include
the Group’s objectives, policies and processes for financial risk
management, details of its cash and cash equivalents, indebtedness and
borrowing facilities and its financial instruments, hedging activities and
its exposure to counterparty credit risk, liquidity risk, currency risk,
interest rate risk and commodity pricing risk.
As described on page 63, the Group meets its funding requirements
through a mixture of shareholders’ funds, bank borrowings, bonds, notes
and finance leases. The chart on page 58 shows the maturity profile of
the Group’s outstanding debt facilities; a total of £108 million is due to
expire in 2010. The Group has a further £450 million of term funding
available that is currently undrawn.
The Group’s forecasts and projections, taking into account reasonably
possible changes in trading performance, show that the Group has
sufficient financial resources. As a consequence the directors have a
reasonable expectation that the Company and the Group are well
placed to manage their business risks and to continue in operational
existence for the foreseeable future, despite the current uncertain global
economic outlook. Accordingly, the directors continue to adopt the
going concern basis in preparing the consolidated financial statements.
Disclosure of information to auditors
Each of the persons who is a director at the date of approval of this
report confirms that:
i) so far as the director is aware, there is no relevant information of which
the Company’s auditors are unaware;
ii) the director has taken all steps that he or she ought to have taken as a
director in order to make himself or herself aware of any relevant audit
information and to establish that the Company’s auditors are aware of
that information.
This confirmation is given and should be interpreted in accordance
with the provisions of Section 418 of the Companies Act 2006.
Responsibility statement
Each of the persons who is a director at the date of approval of this
report confirms that to the best of his or her knowledge:
i) each of the Group and parent company financial statements, prepared
in accordance with IFRS and UK Accounting Standards respectively,
gives a true and fair view of the assets, liabilities, financial position and
profit or loss of the issuer and the undertakings included in the
consolidation taken as a whole; and
ii) the Directors’ report on pages 1 to 79, incorporating by reference the
Directors’ remuneration report on pages 80 to 90, includes a fair review
of the development and performance of the business and the position
of the Company and the undertakings included in the consolidation
taken as a whole, together with a description of the principal risks and
uncertainties that they face.
By order of the Board
Tim Rayner
General Counsel and Company Secretary
February 10, 2010
Rolls-Royce Group plc
Annual report 2009
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80
Corporate governance
Directors’ remuneration report – Information not subject to audit
Directors’ remuneration report
This report to shareholders:
• explains the policy under which the executive directors, the Chairman
and the non-executive directors are remunerated; and
• gives details of the remuneration, fees and share interests of
the directors.
The committee received advice on remuneration matters from Deloitte
LLP and the Group’s lawyers, Freshfields Bruckhaus Deringer LLP.
During 2009, Deloitte LLP also advised the Group on tax, assurance,
pensions and corporate finance and Deloitte MCS Limited provided
consulting services.
It provides the information required by the Large and Medium-sized
Companies and Groups (Accounts and Reports) Regulations 2008 (the
Regulations) and describes how the Company applies the principles
of the Combined Code in relation to executive directors’ remuneration.
The Company confirms that it complies with the requirements of the
Combined Code.
The report was approved by the remuneration committee (the
committee) on February 9, 2010 and was signed on the Board’s behalf
by Helen Alexander CBE as the Chairman of the committee. A resolution
will be put to shareholders at the AGM on April 28, 2010 inviting them
to approve this report.
The remuneration committee
The committee has responsibility for making recommendations to the
Board on the Group’s policy regarding executive remuneration. The
committee determines, on the Board’s behalf, the specific remuneration
packages of the Chairman, the executive directors and a number of
senior executives. A copy of the committee’s terms of reference is
available on the Group’s website at www.rolls-royce.com.
The committee consists exclusively of independent, non-executive
directors. During 2009, it was chaired by Helen Alexander CBE.
Its other members were Peter Byrom, Professor Peter Gregson and
Dr John McAdam.
In 2009, Simon Robertson, Chairman, Sir John Rose, Chief Executive, the
Director – Human Resources and the General Counsel and Company
Secretary, attended meetings by invitation of the committee but were
not present during any discussion of their own emoluments. The
committee met on six occasions in 2009 and details of members’
attendance are set out in the table on page 72.
Advice to the remuneration committee
The committee may call for information and advice from advisers inside
and outside the Group. In 2009, Sir John Rose made recommendations
to the committee relating to the performance of his direct reports and
Simon Robertson made recommendations to the committee relating
to the performance of Sir John Rose. Internal support to the committee
was provided primarily by the Director – Human Resources, advised by
Deloitte LLP. Additional advice was provided by senior employees from
human resources and finance.
Remuneration policy
The policy framework
The Group operates in a highly competitive, international market.
Its business is complex, technologically advanced and has long-time
horizons. The Group is committed to achieving sustained improvements
in performance and this depends crucially on the individual
contributions made by the executive team and by employees at all
levels. The Board therefore believes that an effective remuneration
strategy plays an essential part in the future success of the Group.
Accordingly the Board has adopted, on the recommendation of the
committee, a remuneration policy reflecting the following broad
principles which it will continue to apply in 2010:
• the remuneration of executive directors and other senior executives
should reflect their responsibilities and contain incentives to
deliver the Group’s performance objectives; it must also be
capable of attracting and retaining the individuals necessary for
business success;
• total remuneration should be based on Group and individual
performance, both in the short and long term; and
• the system of remuneration should establish a close identity of interest
between senior executives and shareholders through measures such as
encouraging the senior executives to acquire shares in the Company.
When determining remuneration, the committee takes into account
pay and employment conditions elsewhere in the Group.
The committee regularly reviews both the competitiveness of the
Group’s remuneration structure and its effectiveness in incentivising
executives to enhance value for shareholders over the longer term. It
considers that a successful remuneration policy needs to be sufficiently
flexible to take account of future changes in the Group’s business
environment and in remuneration practice.
The main components of remuneration
The main components of remuneration comprise base salary, benefits,
annual incentive arrangements, long-term share-based incentives and
pension and life assurance benefits.
Rolls-Royce Group plc
Annual report 2009
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Corporate governance
Directors’ remuneration report – continued (Information not subject to audit)
81
APRA performance measures
The APRA performance measures set by the committee are based on
the Group’s annual operating plans. For 2009, the measures for executive
directors included underlying profit, cash flow and individual
contribution assessed with reference to the achievement of personal
objectives and overall personal performance. These measures will
remain unchanged for 2010. The committee is mindful of corporate,
environmental, social and governance risks when setting personal
objectives. Forty per cent of any APRA bonus depends on personal
performance.
In 2009, a high proportion of the annual remuneration for executive
directors was based on performance. For the Chief Executive, his
162 per cent maximum bonus opportunity meant that 62 per cent of
his combined basic pay and bonus opportunity was directly related to
annual financial and personal performance. In 2009, the level of
achievement against the financial measures was sufficient to generate
up to 45 per cent of the maximum bonus for individual participants
subject to the achievement of their personal objectives.
Deferred APRA
In 2009, the percentage of APRA delivered in the form of a deferred
award in the Company’s shares increased from 33 per cent to 40 per
cent. A participant who is granted a deferred share award under APRA
must normally continue to remain an employee of the Group for two
years from the date of the award in order to retain the shares, although
shares will be released early in certain circumstances including
retirement or redundancy.
The value of any deferred share awards is derived from the annual bonus
criteria and is therefore dependent on personal and business financial
performance. The release of deferred share awards is not dependent on
the achievement of any further performance conditions. This
arrangement provides a strong link between performance and
remuneration, promotes a culture of share ownership amongst the
Group’s senior management and encourages decisions in the long-term
interest of shareholders. The deferred share element operated for 2009
will result in share awards as described in the directors’ emoluments
table on page 85. Details of deferred shares held under the plan are
shown in the table on page 89.
Other annual incentives
The same targets as set for APRA are used for the Managers’ Bonus
Scheme and the All-Employee Bonus Scheme. The Managers’ Bonus
Scheme typically enables managers worldwide to receive a bonus of
up to ten per cent of pay and the All-Employee Bonus Scheme up to
two weeks’ pay, based on corporate and business performance. Those
participating in the Managers’ Bonus Scheme or APRA are excluded
from the All-Employee Bonus Scheme.
Base salaries
In determining the relative importance of these elements of
remuneration, the committee believes that base salaries should be set at
levels required to recruit and retain high quality senior executives and
with reference to the levels in the relevant marketplace for companies
of similar size, internationality and complexity. The committee has
commissioned salary benchmarks from Deloitte LLP. The benchmarks
have been prepared using their company size and complexity
methodology which is based on these factors.
All salary increases must be justified on the basis of performance and
are not automatic. Other benefits are generally at the median of market
practice. In 2009, there were no increases in base salaries for executive
directors. With effect from March 1, 2010 the median increase in
executive directors salaries will be two per cent. This is broadly in line
with salary increases of other employees in the Group.
Benefits
Executive directors and senior executives are entitled to a company car
or car allowance, private medical insurance and financial counselling.
James Guyette is entitled to a housing allowance and the costs of
additional housing are met for Mike Terrett.
Annual incentives
Executive directors and selected senior executives participate in the
Annual Performance Related Award plan (APRA). For UK participants,
APRA awards do not form part of pensionable earnings.
Target and maximum APRA bonus opportunity
Under APRA as operated in 2009, executive directors were eligible for
awards in accordance with the table below:
Target bonus
Maximum
(as a % of bonus (as a %
of salary)1,2
salary)1
James Guyette
Sir John Rose
Andrew Shilston
Colin Smith
Mike Terrett
75
81
75
75
75
125
135
125
125
125
1 The target bonuses are 60 per cent of the maximum bonus figure in the table.
2 It is possible for a bonus award to be increased by a further 20 per cent to reflect exceptional
personal performance. Therefore the overall maximum is 162 per cent for Sir John Rose and
150 per cent for the other executive directors.
Rolls-Royce Group plc
Annual report 2009
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Corporate governance
Directors’ remuneration report – continued (Information not subject to audit)
Rolls-Royce Group plc Performance Share Plan
The Rolls-Royce Group plc Performance Share Plan (PSP) is designed to
reward and incentivise selected senior executives who can influence the
long-term performance of the Group.
Under the rules of the PSP, selected executives are granted conditional
share awards entitling them to a number of shares determined by
reference to corporate performance over a three-year performance
period. The measures of corporate performance are Cash Flow Per Share
(CPS), Earnings Per Ordinary Share (EPS) and Total Shareholder Return
(TSR). These measures are considered particularly important in
generating shareholder value and are explained in more detail below.
There is no retesting of the performance criteria and no automatic
vesting in the event of a takeover. In the three-year period to December
31, 2009 the Company’s financial and TSR performance generated 116.25
per cent of the number of shares awarded under the rules of the plan.
Performance measures
No shares will be released from the PSP unless the growth in the
Company’s underlying EPS exceeds the UK retail price index by three per
cent per year over the performance period.
The number of shares released (if any) will be determined in accordance
with CPS targets, which will not be adjusted for inflation. CPS is
calculated as cash flow after interest, taxation and capital expenditure,
but before cost of business acquisitions or proceeds of disposals and
payments to shareholders, divided by the weighted average number of
shares in issue. Intermediate levels of performance attract pro rata
releases. The Company’s TSR over the performance period will be
compared with the TSR of the companies constituting the FTSE 100
index on the date of grant. This comparison will be carried out by an
independent agency.
If the Company’s TSR is above the median of the FTSE 100 index, the
number of shares due to be released to an executive will be increased by
between 25 per cent and 50 per cent. This increase is on a straight-line
basis between the median and upper-quartile TSR performance in the
performance period.
Shareholders have authorised the committee to set CPS performance
targets for future grants provided that, in the committee’s reasonable
judgement, the targets are no less challenging in the light of the Group’s
business circumstances and its internal forecasts than the targets for the
initial grant in 2004 as approved by shareholders.
The following CPS targets will apply to the grants to be made in 2010.
Aggregate CPS
over three-year performance period
Percentage of
maximum award released
40p
62p
30
100
The committee believes that these CPS targets are challenging and that
the performance necessary to achieve awards towards the upper end of
the range is stretching. They should not, therefore, be interpreted as
providing guidance on the Group’s performance over the relevant period.
PSP award levels
The size of awards under the PSP is set taking into account competitive
levels within the marketplace for UK companies of a similar size and
complexity to the Group. In 2009, Sir John Rose received a conditional
award of shares with a market value at the time of grant of 120 per cent
of his annual salary. For other executive directors the grant was 100 per
cent. As described above, the number of shares released is increased if
the Company’s TSR is between the median and upper-quartile of the
FTSE 100 index.
For 2010, the size of awards under the PSP will be unchanged and will
therefore be as follows:
James Guyette
Sir John Rose
Andrew Shilston
Colin Smith
Mike Terrett
PSP award
(as a percentage
of salary)
PSP award
overall maximum
(as a percentage
of salary)
100
120
100
100
100
150
180
150
150
150
Share retention policy
The committee believes it is important that the interests of the
executive directors should be closely aligned with those of shareholders.
The deferred APRA award and the PSP provide considerable alignment.
However, participants in the PSP are also required to retain at least one
half of the number of after tax shares released from the PSP, until the
value of their shareholding reaches 200 per cent of salary for the
Chief Executive and 150 per cent for other executive directors. When
this level is reached, it must be retained until retirement or departure
from the Company.
Rolls-Royce Group plc
Annual report 2009
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Corporate governance
Directors’ remuneration report – continued (Information not subject to audit)
83
The following table summarises the terms of the executive directors’
service contracts:
Date of
contract
Unexpired Notice period Notice period
individual
Company
term
James Guyette
Sir John Rose
29 September 1997
30 days1
4 December 1992 12 months 12 months2
Indefinite
30 days
6 months
Andrew Shilston
5 November 2002 12 months 12 months
6 months
Colin Smith
Mike Terrett
1 July 2005 12 months 12 months
6 months
1 September 2007 12 months 12 months
6 months
1 James Guyette has a contract with Rolls-Royce North America Inc, drawn up under the laws of the
Commonwealth of Virginia, US. It provides that, on termination without cause, he is entitled to 12
months’ severance pay without mitigation and appropriate relocation costs.
2 In the event of the service contract being terminated by the Company, other than in accordance
with the contract’s terms, Sir John Rose is entitled to receive a liquidated sum of 12 months’ salary
and benefits. Performance related payments are not covered under this arrangement, although an
annual bonus may be paid if he is in post at the end of the performance year.
External directorships of executive directors
During the year, James Guyette served as a director of The PrivateBank
and Trust Company of Chicago, Illinois and of priceline.com Inc., and
retained the relevant fees from serving on the boards of these
companies, as shown in the table below:
External directorship fees
James Guyette1,2
Payment
received £000
70
1 James Guyette was paid in US dollars translated at £1 = $1.566.
2 In addition to an annual fee, James Guyette received 2,516 Restricted Stock Units (RSUs) in
PrivateBank. During 2009, a total of 2,059 RSUs vested. Also during 2009, 500 shares of restricted
stock vested at US$67.09 per share, 500 shares of restricted stock vested at US$82.96 per share and
215 shares of RSUs vested at US$82.37 in priceline.com. He was granted 1,330 shares of restricted
stock at US$82.65 per share and exercised the following stock options in priceline.com: 3,333 at an
option price of US$18.36 per share achieving a market price of US$201.76 per share; 8,000 at an
option price of US$22.59 per share achieving a market price of US$200.53 per share and 8,000 at
an option price of US$22.59 per share achieving a market price of US$199.16 per share.
Non-executive directors
The Chairman and the non-executive directors have letters of
appointment rather than service contracts. No compensation is payable
to the Chairman or to any non-executive director if the appointment is
terminated early.
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Executive share option plan
No options have been granted under the executive share option plan
since the introduction of the PSP. The Rolls-Royce 1999 Executive Share
Option Plan has now expired and no further options can be granted.
All-employee share plans
The committee believes that share-based plans make a significant
contribution to the close involvement and interest of all employees in
the Group’s performance. Executive directors are eligible to participate
in the Group’s all-employee share plans on the same terms as other
employees. There are three main elements to these arrangements:
i) the ShareSave Plan – a savings-related share option plan available to
all employees. In the UK, this plan operates within UK tax legislation
(including a requirement to finance the exercise of the option using
the proceeds of a monthly savings contract) but the key principles
are applied globally. The exercise of the option is not subject to the
achievement of a performance target;
ii) the ‘Free Share’ element of the Share Incentive Plan (SIP) under which
UK employees receive shares as part of the Company component of
any bonus paid for 2009. The SIP attracts tax benefits for UK
employees; and
iii) the ‘Partnership Share’ element of the SIP under which UK employees
may make regular purchases of shares from pre-tax income.
Service contracts
The committee’s policy is that executive directors appointed to the
Board are offered notice periods of 12 months. The committee
recognises that in the case of appointments to the Board from outside
the Group, it may be necessary to offer a longer initial notice period,
which would subsequently reduce to 12 months after that initial period.
The committee has a defined policy on compensation and mitigation
to be applied in the event of a UK director’s contract being prematurely
terminated. In these circumstances, steps are taken to ensure that poor
performance is not rewarded. When calculating termination payments,
the committee takes into account a range of factors including the
director’s obligation to mitigate his or her own loss.
Rolls-Royce Group plc
Annual report 2009
84
Corporate governance
Directors’ remuneration report – continued (Information not subject to audit)
Non-executive directors’ fees
The Board takes account of independent market surveys in determining
the fees payable to the Chairman and the non-executive directors.
The Chairman receives a fee of £370,000 per annum. The other
non-executive directors receive a basic fee of £55,000 per annum and
an additional fee for carrying out specific duties as follows:
Senior Independent Director
Chairman of audit committee
Chairman of remuneration committee
Chairman of ethics committee
£10,000
£15,000
£12,000
£12,000
The total fees paid to the Chairman and non-executive directors for the
year ended December 31, 2009 are shown in the emoluments table on
page 85.
Total shareholder return over five years
Rolls-Royce
FTSE100
250
200
150
100
50
0
2004
2005
2006
2007
2008
2009
Following a review of the fees payable to non-executive directors there
will be no increases in their fees for 2010.
Aggregate directors’ remuneration
The total amounts for directors’ remuneration were as follows:
250
200
150
100
50
0
Emoluments
Gains on exercise of share options
Value of shares vested under long-term
incentive awards
Money purchase pension contributions
2009
£000
5,237
51 9
1,586
524
7,398
2008
£000
5,022
3,458
558
9,047
The Chairman and the non-executive directors are not eligible to
participate in any of the Group’s share schemes, incentive arrangements
or pension schemes. A facility is in place which enables non-executive
directors to use some or all of their fees, after the appropriate statutory
deductions, to make market purchases of shares in the Company on a
monthly basis.
Performance graph
The Company’s TSR performance over the previous five years compared
to a broad equity market index is shown in the graph opposite. The
FTSE 100 index has been chosen as the comparator index because it
contains a broad range of other leading UK listed companies.
This graph shows the growth in value of a hypothetical £100 holding in
Rolls-Royce Group plc ordinary shares over five years, relative to the
FTSE 100 index. The values of the hypothetical £100 holdings at the end
of the five-year period were £227.60 and £135.40 respectively.
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Rolls-Royce Group plc
Annual report 2009
Corporate governance
Directors’ remuneration report – continued (Information subject to audit)
85
Directors’ emoluments
The individual directors’ emoluments paid during the year are as follows:
Annual Performance Related Award plan (APRA)
James Guyette5
Sir John Rose
Andrew Shilston
Colin Smith
Mike Terrett
Helen Alexander CBE
Peter Byrom
Iain Conn
Professor Peter Gregson
Dr John McAdam
John Neill CBE
John Rishton
Simon Robertson
Ian Strachan
Former directors who did not serve
during the 2009 financial year
Basic salaries
£000
491
850
550
386
500
–
–
–
–
–
–
–
–
–
–
2,777
Total
fees
£000
–
–
–
–
–
67
55
65
55
55
55
70
370
67
–
859
Cash
bonus
£000
132
240
135
101
125
Deferred
shares1
£000
88
160
90
67
84
Total
APRA
£000
220
400
225
168
209
Pension
payments2
£000
–
–
–
97
104
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2009
Aggregate
emoluments
excluding
Taxable
pensions
benefits3 contributions4
£000
£000
2008
Aggregate
emoluments
excluding
pensions
contributions4
£000
53
20
12
8
85
–
–
–
–
–
–
–
–
–
–
764
1,270
787
659
898
67
55
65
55
55
55 7
70
370
67
–
623
1,253
768
641
924
63
55
65
55
48
70
367
59
24
5,022
733
489
1,222
201
178
5,237
1 Shares forming part of the bonus under APRA have been valued at the date of award. An investment is expected to be made by March 31, 2010 when the trustee will acquire the required number of shares
at the prevailing market price.
2 Colin Smith received a cash allowance in lieu of future pension accrual. Mike Terrett also received a cash allowance until he started to receive his pension from November 1, 2009.
3 Taxable benefits include the following: company car or car allowance, private medical insurance and financial counselling. In the case of James Guyette, the figure in the above table includes a housing
allowance and appropriate club membership fees. In the case of Mike Terrett, the figure in the above table includes housing costs paid on his behalf and the tax charge on that benefit paid by the Company.
4 Details of the directors’ pensions are set out on page 86.
5 James Guyette was paid in US dollars translated at £1 = $1.566.
Payments made to former directors of the Company
John Cheffins retired from the Board on September 30, 2007. Following his retirement, he has continued to be retained by the Company to
give support and advice on the strategy and implementation of Rolls-Royce Fuel Cell Systems Limited, supply chain management and the
assembly and test facilities. He was paid £25,800 and benefits totalling £1,428 up to March 25, 2009. He was appointed on March 25, 2009 as
Acting President – Energy for approximately three days per week. He was paid £231,860 for the period March 25, 2009 to December 31, 2009
(paid in Canadian dollars translated at £1 = CAD$1.782).
Dr Mike Howse retired from the Board on June 30, 2005. Following his retirement, he has continued to be retained by the Company for his expertise
in engineering and was paid £27,720.
Sir Robin Nicholson retired as a non-executive director on May 4, 2005. He was retained by Rolls-Royce Fuel Cell Systems Limited for his management
and technical expertise and to provide advice on business related matters and was paid total fees of £22,500.
Rolls-Royce Group plc
Annual report 2009
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86
Corporate governance
Directors’ remuneration report – continued (Information subject to audit)
Pensions
The Group’s UK pension schemes are funded, registered schemes and were approved under the regime applying until April 6, 2006. They are defined
benefit pension schemes providing, at retirement, a pension of up to two-thirds of final remuneration, subject to HM Revenue & Customs limits.
Andrew Shilston is a member of the Group’s UK pension scheme. Sir John Rose opted out of future pension accrual with effect from February 1, 2008
and started to receive his pension immediately – see note 6 below.
Colin Smith has opted out of future pension accrual with effect from April 1, 2006. He receives a cash allowance in lieu of future pension accrual – see
note 8 below. Mike Terrett opted out of future pension accrual with effect from April 1, 2006 and started to receive his pension from November 1, 2009
– see note 9 below. He received a cash allowance in lieu of further pension accrual until drawing his pension on November 2, 2009. Since starting to
receive their pensions, neither Sir John Rose nor Mike Terrett accrue any further pension benefit or allowance in lieu of pension benefit from their
ongoing employment with the Group.
Details of the pension benefits, which accrued over the year in the Group’s registered UK defined benefit pension schemes1, are given below.
Sir John Rose 6
Andrew Shilston 7
Colin Smith 8
Mike Terrett 8,9
Increase/decrease in
accrued pension
year ended
Dec 31, 20092
£000pa
Total accrued
pension entitlement
at the year ended
Dec 31, 20093
£000pa
Transfer value
of accrued
pension as at
Dec 31, 20094
£000
Transfer value as at
Dec 31, 2008 of
accrued pension
at that date4
£000
Increase/decrease in
transfer value over 2009
net of the member’s
own contributions5
£000
1
3
17
-11
-21
2
5
-23
450
15
258
239
8,542
354
3,837
5,188
10,632
-2,090
-395
307
3,847
5,230
202
-10
-42
40
4
-651
James Guyette participates in pension plans sponsored by Rolls-Royce North America Inc.
Details of the retirement benefits, which accrued over the year in the defined benefit plans sponsored by Rolls-Royce North America Inc., are
given below:
James Guyette 12,13
Increase in accrued
retirement lump
sum during
the year ended
Dec 31, 2009 2
£000pa
85
59
Total accrued
retirement lump sum
at the year ended
Dec 31, 200910
£000pa
Transfer value
of accrued
retirement
lump sum as at
Dec 31, 2009 11
£000
Transfer value
as at Dec 31, 2008
of accrued
retirement lump
sum at that date 11
£000
Increase in
transfer value over
2009 net of
the member’s own
contributions5
£000
717
717
633
435
409
1 Members of the schemes have the option to pay Additional Voluntary Contributions. Neither the contributions nor the resulting benefits are included in the above table.
2 The figures on the right of this column show the increase/decrease in pension/retirement lump sum during the year ended December 31, 2009 but in this case excluding the effect of inflation.
3 The pension entitlement shown is that which would be paid annually on retirement, based on service to the end of the year, or to April 1, 2006 for members with enhanced protection from ‘A’ day.
4 The transfer values stated represent liabilities of the Rolls-Royce sponsored pension schemes and are not sums paid to the individuals. The transfer values of the accrued pensions as at December 31, 2009
have been calculated on a basis adopted by the Trustees on October 6, 2008 following receipt of actuarial advice.
5 The figures on the right of this column show the transfer value of the increase/decrease in pension/retirement lump sum during the year ended December 31, 2009 excluding the effect of inflation, and net
of the member’s own contributions.
6 Sir John Rose started to receive his pension from February 1, 2008. The transfer value as at December 31, 2008 was calculated using market gilt yields on that date and included cash taken on retirement
whereas the transfer value as at December 31, 2009 is the value of benefits in payment calculated using gilt yields applicable on that date.
7 The Group operates the Rolls-Royce Supplementary Retirement Scheme (the Scheme). The purpose of the Scheme is to fund pension provision above the pensionable earnings cap which was imposed on
approved pension schemes by the 1989 Finance Act. Membership of the Scheme is restricted to executive directors and to a limited number of senior executives. Andrew Shilston is a member of this
Scheme. He joined the Group after the introduction of the earnings cap and his terms and conditions on joining included a commitment to provide pension and life cover based on total salary. Employer
contributions to the Scheme during 2009 have been added to the increase in transfer value over 2009 for the registered defined benefit plans, and are therefore included in the figures shown in the right
hand column of the first table.
8 Colin Smith receives a cash allowance in lieu of future pension accrual. Mike Terrett also received a cash allowance until he started to receive his pension from November 1, 2009. Had they elected to continue
to accrue pension the estimated cost of that accrual would be higher than the cash allowance to be paid in lieu.
9 Mike Terrett started to receive his pension from November 1, 2009. The total accrued pension entitlement at December 31, 2009 is after allowance for early payment of pension and taking a part of his
pension as lump sum. The transfer value is the value of benefits in payment as at December 31, 2009 increased by cash taken on retirement.
10 The lump sum entitlement shown is that which would be paid on immediate retirement based on service to the end of the year.
11 The transfer values have been calculated on the basis of actuarial advice.
12 Benefits are translated at £1 = US$1.615.
13 James Guyette is a member of two defined benefit plans in the US, one qualified and one non-qualified. He accrues a retirement lump sum benefit in both of these plans. The aggregate value of the
retirement lump sums accrued in these two plans, and the transfer values of these benefits, are shown in the second table. In addition, James Guyette is a member of two 401(K) Savings Plans in the US, one
qualified and one non-qualified, to which both he and his employer, Rolls-Royce North America Inc., contribute. James Guyette is also a member of an unfunded non-qualified deferred compensation plan in
the US, to which his employer makes notional contributions. Employer contributions to these three plans during 2009 have been added to the increase in transfer value over 2009 for the defined benefit
plans and are therefore included in the figures shown in the right hand column of the second table.
Rolls-Royce Group plc
Annual report 2009
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Corporate governance
Directors’ remuneration report – continued (Information subject to audit)
87
Directors’ share interests
The directors who held office at December 31, 2009 and their connected persons had the following interests in the ordinary shares and C Shares1 of
the Company in respect of which transactions are notifiable to the Company under DTR 3.1.2R of the Disclosure Rules and Transparency Rules as
shown in the following table:
James Guyette
Sir John Rose2
Andrew Shilston
Colin Smith
Mike Terrett
Helen Alexander CBE
Peter Byrom
Iain Conn
Professor Peter Gregson
Dr John McAdam
John Neill CBE
John Rishton
Simon Robertson
Ian Strachan
January 1,
2009
350,881
Ordinary shares
Changes in December 31,
2009
2009
72,311
423,192
1,086,318
130,836
1,217,154
363,737
103,765
372,817
1,021
203,959
11,741
1,219
–
–
3,397
38,225
11,500
79,163
49,529
71,174
22
7,993
3,638
1,292
619
22,521
3,310
1,485
–
442,900
153,294
433,991
1,043
211,952
15,379
2,511
619
22,521
6,707
39,710
11,500
January 1,
2009
C Shares
Changes in December 31,
2009
2009
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
13,899
13,899
–
–
–
–
–
–
–
–
1 Non-cumulative redeemable preference shares of 0.1p each.
2 Sir John Rose had a non-beneficial interest in 45,191 (2008: 45,191) ordinary shares.
Directors’ interests in the Company’s share plans are shown separately on pages: 88 (Share Incentive Plan); 89 (share options and Annual Performance
Related Award plan); and page 90 (Performance Share Plan). No director had any other interests, beneficial or otherwise, in the share capital of the
Company or any of its subsidiaries as at December 31, 2009.
Changes in the interests of the directors between December 31, 2009 and February 10, 2010 are listed below and in the notes to the table on page 88
Share Incentive Plan:
• On January 4, 2010, Helen Alexander CBE was allotted 62,850 C Shares and Dr John McAdam was allotted 31,320 C Shares.
• On January 8, 2010, the following directors purchased ordinary shares under the C Share Reinvestment Plan: Andrew Shilston 5,364;
Colin Smith 1,233; Mike Terrett 5,256; Peter Byrom 2,566; Iain Conn 181; Professor Peter Gregson 28; John Rishton 76 and Simon Robertson 507.
• The following directors purchased ordinary shares under arrangements made for non-executive directors to purchase shares on a monthly basis
using a percentage of their after tax fees: On January 7, 2010: Iain Conn 196; Professor Peter Gregson 77; Dr John McAdam 47; John Neill CBE 196 and
John Rishton 196 and on February 8, 2010: Iain Conn 204; Professor Peter Gregson 80; Dr John McAdam 49; John Neill CBE 204 and John Rishton 204.
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Rolls-Royce Group plc
Annual report 2009
88
Corporate governance
Directors’ remuneration report – continued (Information subject to audit)
‘Partnership Shares’ held in trust under the Share Incentive Plan1
Sir John Rose2,3
Andrew Shilston2,3
Colin Smith2,3
Mike Terrett2,3
‘Free Shares’ held in trust under the Share Incentive Plan1
Sir John Rose4
Andrew Shilston4
Colin Smith4
Mike Terrett4
‘Unrestricted Shares’ held under the Share Incentive Plan1
Sir John Rose3,5
Andrew Shilston3,5
Colin Smith3,5
Mike Terrett3,5
January 1,
2009
2,339
2,341
2,339
2,342
January 1,
2009
2,687
4,670
3,103
1,436
January 1,
2009
5,678
2,235
1,583
1,473
Ordinary shares
Changes in December 31,
2009
2009
January 1,
2009
C Shares
Changes in December 31,
2009
2009
(330)
(330)
(330)
(334)
2,009
2,011
2,009
2,008
–
–
–
–
–
239,096
232,566
232,363
–
239,096
232,566
232,363
Ordinary shares
Changes in December 31,
2009
2009
January 1,
2009
C Shares
Changes in December 31,
2009
2009
(1,434)
(527)
909
(1,436)
1,253
4,143
4,012
–
–
–
–
–
–
540,454
521,722
–
–
540,454
521,722
–
Ordinary shares
Changes in December 31,
2009
2009
January 1,
2009
C Shares
Changes in December 31,
2009
2009
2,166
2,169
732
2,172
7,844
4,404
2,315
3,645
–
–
–
–
–
64,779
337,345
527,595
–
64,779
337,345
527,595
1 Under the Share Incentive Plan (SIP), ‘Free Shares’ and ‘Partnership Shares’ held in trust for more than five years are classified as ‘Unrestricted’ and are no longer subject to income tax or national insurance
contributions on withdrawal. ‘Unrestricted Shares’ can be held in Trust under the SIP for as long as the participant remains an employee of the Company.
2 On January 4, 2010, C Shares were allotted under the ‘Partnership Shares’ element of the SIP to Sir John Rose 123,780; Andrew Shilston 123,780; Colin Smith 123,780 and Mike Terrett 123,780. Sir John Rose
elected to redeem the C Shares he was allotted.
3 Sir John Rose, Andrew Shilston, Colin Smith and Mike Terrett purchased 25 ordinary shares each on January 7, 2010 and 26 ordinary shares each on February 8, 2010 under the HM Revenue & Customs
approved Share Incentive Plan. On January 7, 2010 and February 7, 2010 the ordinary shares held as Partnership Shares by Sir John Rose 54 and 52; Andrew Shilston 55 and 51; Colin Smith 54 and 52 and
Mike Terrett 53 and 52 were classified as Unrestricted Shares.
4 On January 4, 2010, C Shares were allotted under the ‘Free Shares’ element of the SIP to Sir John Rose 75,180; Andrew Shilston 248,580 and Colin Smith 240,720. Sir John Rose elected to redeem the C Shares
he was allotted.
5 On January 4, 2010, C Shares were allotted under the ‘Unrestricted Shares’ element of the SIP to Sir John Rose 464,340; Andrew Shilston 258,000; Colin Smith 132,600 and Mike Terrett 212,340. Sir John Rose
and Andrew Shilston elected to redeem the C Shares they were allotted.
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Rolls-Royce Group plc
Annual report 2009
Corporate governance
Directors’ remuneration report – continued (Information subject to audit)
89
Share options
The directors held the following options under the Rolls-Royce 1999 Executive Share Option Plan, all of which have vested and are capable of exercise
unless otherwise indicated and under the Rolls-Royce International ShareSave Plan.
All employees were eligible for options under the International ShareSave plan. The 2001 (seven-year) plan and the 2005 (three-year) plan matured on
February 1, 2009.
James Guyette
Colin Smith
Mike Terrett
January 1,
2009
Granted in
2009
Lapsed in
2009
Exercised in December 31,
2009
2009
Exercise
price
1,397
683
2,080
15,444
2,396
1,233
19,073
180,556
6,900
187,456
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
6,900
6,900
1,397
–
1,397
15,444
2,396
–
17,840
–
–
–
–
683
683
–
–
1,233
1,233
180,556
–
180,556
298p1
416p1
416p2
194p3
108p1
298p1
298p2
216p4
141p1
216p2
Market price
at date
exercised
321.25p
–
–
485.00p
332.00p
–
–
–
–
–
Aggregate
gains 2009
£000
Aggregate
gains 2008
£000
–
–
–
45
6
–
51
–
–
–
–
–
–
–
–
–
9
–
–
–
Exercisable
dates
–
2011
2009-2010
2009
2011
2009-2011
2009
1 ShareSave plans.
2 Weighted average exercise price of December 31, 2009 balance.
3 Granted under the Rolls-Royce 1999 Executive Share Option Plan. The only performance criteria was that the growth in EPS must exceed UK RPI over a rolling three-year period.
4 Granted in 2001 under the Rolls-Royce 1999 Executive Share Option Plan with additional performance and personal shareholding requirements. Vesting of these Supplementary options was subject to
attainment of significant personal shareholding targets and the requirement that the growth in EPS exceeds an average of six per cent year on year as well as exceeding the UK RPI by three per cent per year
over a rolling three-year period. The increases are measured from the year 2000 or the base year of the rolling three-year period, whichever is the more stringent. All options were granted at the market value
on the date of issue and no discount was applied. No options were varied during the year and no consideration was paid for the grant of options. The market price of the Company’s ordinary shares ranged
between 258.50p and 500.00p during 2009. The closing price on December 31, 2009 was 483.50p.
Long-term incentive awards
The directors as at December 31, 2009 had the following deferred share awards arising out of the operation of the Annual Performance Related
Award1 plan:
James Guyette
Sir John Rose
Andrew Shilston
Colin Smith
Mike Terrett
January 1,
2009
Vested
during 2009
Granted December 31,
2009
during 2009
31,657
76,862
43,550
28,432
30,471
18,852
42,091
23,237
16,387
15,583
26,125
44,019
24,211
17,336
22,441
38,930
78,790
44,524
29,381
37,329
1 Under the Annual Performance Related Award plan (APRA), shares vest after two years. Shares went into trust in 2007, 2008 and 2009 at prices of 447.60p, 501.62p and 289.65p respectively. At December 31, 2009,
the amounts stated in the emoluments table representing the 2009 APRA deferred shares had not yet been applied by the Trustee to purchase shares. An investment is expected to be made by March 31, 2010
when the trustee will acquire the required number of shares at the prevailing market price. The market value per share which vested under APRA during 2009 was 281.80p
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Rolls-Royce Group plc
Annual report 2009
90
Corporate governance
Directors’ remuneration report – continued (Information subject to audit)
Conditional awards, granted under the Rolls-Royce Group plc Performance Share Plan (PSP) to executive directors, are set out below. The number of
shares released will be dependent upon the achievement of the EPS and CPS targets over the three-year performance period. In respect of awards
made up to and including 2008, the number of shares released will be increased by 25 per cent if the Company’s TSR exceeds the median for the
FTSE 100 index over the three-year performance period. From the 2009 grant, if the Company’s TSR is above the median of the FTSE 100 index, the
number of shares due to be released to an executive will be increased by between 25 per cent and 50 per cent. This increase is on a straight-line basis
between the median and upper-quartile TSR performance in the performance period.
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Sir John Rose
Andrew Shilston
Colin Smith
Mike Terrett
January 1,
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72,670
60,669
70,672
–
204,011
177,240
175,649
212,888
–
565,777
82,930
81,438
100,183
–
264,551
54,085
59,881
70,356
–
184,322
60,638
61,693
91,075
–
213,406
Granted
during
2009
–
–
–
207,845
207,845
–
–
–
391,675
391,675
–
–
–
211,198
211,198
–
–
–
148,319
148,319
–
–
–
191,998
191,998
Total vested
TSR uplift
at vesting1
during December 31,
20092
2009
Performance period
Date of grant
Market price
at date of grant
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
72,670
–
Jan 1, 2006 to Dec 31, 2008
March 1, 2006
–
–
–
72,670
60,669
70,672
207,845
339,186
Jan 1, 2007 to Dec 31, 2009
March 1, 2007
Jan 1, 2008 to Dec 31, 2010
March 3, 2008
Jan 1, 2009 to Dec 31, 2011 March 10, 2009
177,240
–
Jan 1, 2006 to Dec 31, 2008
March 1, 2006
–
–
–
177,240
175,649
212,888
391,675
780,212
Jan 1, 2007 to Dec 31, 2009
March 1, 2007
Jan 1, 2008 to Dec 31, 2010
March 3, 2008
Jan 1, 2009 to Dec 31, 2011 March 10, 2009
82,930
–
Jan 1, 2006 to Dec 31, 2008
March 1, 2006
–
–
–
82,930
81,438
100,183
211,198
392,819
Jan 1, 2007 to Dec 31, 2009
March 1, 2007
Jan 1, 2008 to Dec 31, 2010
March 3, 2008
Jan 1, 2009 to Dec 31, 2011 March 10, 2009
54,085
–
Jan 1, 2006 to Dec 31, 2008
March 1, 2006
–
–
–
54,085
59,881
70,356
148,319
278,556
Jan 1, 2007 to Dec 31, 2009
March 1, 2007
Jan 1, 2008 to Dec 31, 2010
March 3, 2008
Jan 1, 2009 to Dec 31, 2011 March 10, 2009
60,638
–
Jan 1, 2006 to Dec 31, 2008
March 1, 2006
–
–
–
60,638
61,693
91,075
191,998
344,766
Jan 1, 2007 to Dec 31, 2009
March 1, 2007
Jan 1, 2008 to Dec 31, 2010
March 3, 2008
Jan 1, 2009 to Dec 31, 2011 March 10, 2009
443.75p
501.00p
439.20p
260.42p
443.75p
501.00p
439.20p
260.42p
443.75p
501.00p
439.20p
260.42p
443.75p
501.00p
439.20p
260.42p
443.75p
501.00p
439.20p
260.42p
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1 There was no increase in the shares vesting as the TSR did not exceed the median of the FTSE 100 index during the three-year performance period to December 31, 2008.
2 The market value per share, which vested under the PSP during 2009, was 281.80p.
Approval of the Directors’ remuneration report
The Directors’ remuneration report above was approved by the Board of directors on February 10, 2010 and signed on its behalf by
Helen Alexander CBE
Chairman of the remuneration committee
Rolls-Royce Group plc
Annual report 2009
Consolidated financial statements
Financial statements
Consolidated financial statements
92
92
93
94
96
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated balance sheet
Consolidated cash flow statement
Consolidated statement of changes in equity
97 Notes to the consolidated financial statements
1 Accounting policies
Segmental analysis
97
104 2
108 3 Net financing
Taxation
108 4
Earnings per ordinary share
5
111
6
111
Employee information
7 Auditors’ remuneration
112
Intangible assets
8
113
Property, plant and equipment
115
9
Investments
116 10
117
Inventory
11
118 12 Trade and other receivables
118 13 Cash and cash equivalents
119
119
120 16 Financial instruments
130 17 Provisions
131 18 Post-retirement benefits
135 19 Share capital
136 20 Share-based payments
139 21 Operating and finance leases
140 22 Contingent liabilities
141 23 Related party transactions
142 24 Acquisitions and disposals
14 Borrowings
15 Trade and other payables
Company financial statements
143 Company balance sheet
143 Reconciliation of movements in shareholders’ funds
144 Notes to the Company financial statements
Investments – subsidiary undertakings
Financial liabilities
Share capital
144 1 Accounting policies
144 2
144 3
145 4
145 5 Movements in capital and reserves
145 6 Contingent liabilities
145 7 Other information
Other matters
146 Principal subsidiary undertakings
147 Principal joint ventures and associates
149
150 Group five-year review
151 Shareholder information
Independent auditors’ report
Rolls-Royce Group plc
Annual report 2009
91
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Consolidated financial statements – continued
Consolidated income statement
For the year ended December 31, 2009
Revenue
Cost of sales
Gross profit
Other operating income
Commercial and administrative costs
Research and development costs
Share of profit of joint ventures and associates
Operating profit
(Loss)/profit on sale or termination of businesses
Profit before financing
Financing income
Financing costs
Net financing
Profit/(loss) before taxation1
Taxation
Profit/(loss) for the year
Attributable to:
Equity holders of the parent
Minority interests
Profit/(loss) for the year
Earnings per ordinary share:
Basic
Diluted
Payments to shareholders in respect of the year
Pence per share
Total (£m)
1 Underlying profit before taxation
2009
£m
10,414
(8,303)
2,111
89
(740)
(379)
93
1,174
(2) 7
1,172
2,276
(491)
1,785
2,957
(740)
2,217
2,221
(4)
2,217
Restated*
2008
£m
9,082
(7,278)
1,804
79
(699)
(403)
74
855
862
432
(3,186)
(2,754)
(1,892)
547
(1,345)
(1,340)
(5)
(1,345)
120.38p
119.09p
(73.63p)
(73.63p)
15.00p
278
14.30p
263
915
880
Notes
2
10
24
2
3
3
4
5
5
16
16
2
* During the year, the Group has reviewed the allocation of costs. As a result, costs of £33m classified as cost of sales in 2008 have been reclassified as commercial and administrative costs.
Consolidated statement of comprehensive income
For the year ended December 31, 2009
Profit/(loss) for the year
Other comprehensive income
Foreign exchange translation differences on foreign operations
Net actuarial (losses)/gains
Movement in unrecognised post-retirement surplus
Movement in post-retirement minimum funding liability
Transfers from transition hedging reserve
Net movements on cash flow hedging reserve in respect of joint ventures and associates
Related tax movements
Total comprehensive income/(expense) for the year
Attributable to:
Equity holders of the parent
Minority interests
Total comprehensive income/(expense) for the year
* 2008 figures have been restated to reflect the adoption of IFRIC 14 with effect from January 1, 2008 – see note 18.
Rolls-Royce Group plc
Annual report 2009
Notes
18
18
18
10
4
2009
£m
2,217
(158)
(1,148)
707
40
(27)
22
141
1,794
1,799
(5)
1,794
Restated*
2008
£m
(1,345)
603
944
(928)
66
(80)
(41)
(4)
(785)
(782)
(3)
(785)
i
w
e
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s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
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t
n
e
m
e
t
a
t
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a
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a
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i
Consolidated financial statements – continued
Consolidated balance sheet
At December 31, 2009
ASSETS
Non-current assets
Intangible assets
Property, plant and equipment
Investments – joint ventures and associates
Other investments
Other financial assets
Deferred tax assets
Post-retirement scheme surpluses
Current assets
Inventory
Trade and other receivables
Taxation recoverable
Other financial assets
Short-term investments
Cash and cash equivalents
Assets held for sale
Total assets
LIABILITIES
Current liabilities
Borrowings
Other financial liabilities
Trade and other payables
Current tax liabilities
Provisions
Non-current liabilities
Borrowings
Other financial liabilities
Trade and other payables
Non-current tax liabilities
Deferred tax liabilities
Provisions
Post-retirement scheme deficits
Total liabilities
Net assets
EQUITY
Capital and reserves
Called-up share capital
Share premium account
Capital redemption reserves
Hedging reserves
Other reserves
Retained earnings
Equity attributable to equity holders of the parent
Minority interests
Total equity
Notes
December 31,
2008
£m
2009
£m
Restated*
January 1,
2008
£m
8
9
10
10
16
4
18
11
12
16
2
13
9
14
16
15
17
14
16
15
4
17
18
19
2,472
2,009
437
58
637
360
75
6,048
2,432
3,877
12
80
2,962
9,374
15,422
(126)
(181)
(5,628)
(167)
(210)
(6,312)
(1,787)
(868)
(1,145)
–
(366)
(232)
(930)
(5,328)
(11,640)
3,782
371
98
191
(19)
506
2,635
3,782
–
3,782
2,286
1,995
345
53
366
804
453
6,302
2,600
3,929
9
24
1
2,471
12
9,046
15,348
(23)
(316)
(5,735)
(184)
(181)
(6,439)
(1,325)
(2,525)
(1,318)
(1)
(307)
(188)
(1,020)
(6,684)
(13,123)
2,225
369
82
204
(22)
663
920
2,216
9
2,225
1,761
1,813
284
57
343
132
210
4,600
2,203
2,585
7
171
40
1,897
7
6,910
11,510
(34)
(33)
(4,326)
(188)
(121)
(4,702)
(1,030)
(355)
(965)
–
(258)
(180)
(824)
(3,612)
(8,314)
3,196
364
67
191
77
62
2,423
3,184
12
3,196
* 2008 figures have been restated to reflect the adoption of IFRIC 14 with effect from January 1, 2008 (see note 18) and the adoption of Amendments to IAS 1 Presentation of Financial Statements relating to the
classification of derivative financial instruments as current or non-current (see note 16).
The financial statements on pages 92 to 142 were approved by the Board on February 10, 2010 and signed on its behalf by:
Simon Robertson Chairman
Andrew Shilston Finance Director
Rolls-Royce Group plc
Annual report 2009
93
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94
Consolidated financial statements – continued
Consolidated cash flow statement
For the year ended December 31, 2009
Reconciliation of cash flows from operating activities
Profit/(loss) before taxation
Share of profit of joint ventures and associates
Loss/(profit) on sale or termination of businesses
Profit on sale of property, plant and equipment
Net financing
Taxation paid
Amortisation of intangible assets
Depreciation and impairment of property, plant and equipment
Increase in provisions
Decrease/(increase) in inventories
Increase in trade and other receivables
(Decrease)/increase in trade and other payables
(Increase)/decrease in other financial assets and liabilities
Additional cash funding of post-retirement schemes
Share-based payments charge
Transfers of hedge reserves to income statement
Dividends received from joint ventures and associates
Net cash inflow from operating activities
Cash flows from investing activities
Additions of unlisted investments
Disposals of unlisted investments
Additions of intangible assets
Disposals of intangible assets
Purchases of property, plant and equipment
Disposals of property, plant and equipment
Acquisitions of businesses
Disposals of businesses
Investments in joint ventures and associates
Disposals of joint ventures and associates
Net cash outflow from investing activities
Cash flows from financing activities
Current borrowings
– repayment of loans
Non-current borrowings – repayment of loans
– increase in loans
Capital element of finance lease payments
Net cash inflow/(outflow) from increase/(decrease) in borrowings
Interest received
Interest paid
Interest element of finance lease payments
(Increase)/decrease in government securities and corporate bonds
Issue of ordinary shares
Purchase of ordinary shares
Other transactions in ordinary shares
Redemption of B/C Shares
Net cash inflow/(outflow) from financing activities
Increase in cash and cash equivalents
Cash and cash equivalents at January 1
Foreign exchange
Cash and cash equivalents at December 31
Rolls-Royce Group plc
Annual report 2009
Notes
2009
£m
2008
£m
10
24 2
3
8
9
20
16
10
2
24
24 3
2,957
(93)
(40)
(1,785)
(119)
121
194
81
119
(14)
(183)
(303)
(159)
31
(27)
77
859
(2)
– 6
(339)
–
(258)
82
(7)
6
(87)
–
(606)
(10)
–
693 –
(3)
680
24
(66)
(1)
(1)
18
(17)
(3)
(250)
384
(1,892)
(74)
(7)
(11)
2,754
(117)
107
208
39
(208)
(1,072)
1,242
144
(117)
40
(80)
59
1,015
(1)
(389)
(286)
68
(47)
(32)
30
(645)
(1)
(22)
(4)
(27)
52
(53)
(1)
39
17
(44)
(4)
(200)
(221)
637
2,462
(141)
2,958
149
1,872
441
2,462
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c
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a
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Consolidated financial statements – continued
Consolidated cash flow statement (continued)
For the year ended December 31, 2009
Reconciliation of movements in cash and cash equivalents to movements in net funds
Increase in cash and cash equivalents
Net cash (inflow)/outflow from (increase)/decrease in borrowings
Cash outflow/(inflow) from increase/(decrease) in government securities and corporate bonds
Change in net funds resulting from cash flows
Net funds (excluding cash and cash equivalents) of businesses acquired
Exchange adjustments
Fair value adjustments
Movement in net funds
Net funds at January 1 excluding the fair value of swaps
Net funds at December 31 excluding the fair value of swaps
Fair value of swaps hedging fixed rate borrowings
Net funds at December 31
The movement in net funds (defined by the Group as including the items shown below) is as follows:
1
2009
£m
637
(680)
(42)
–
(141)
110
(73)
1,124
1,051
224
1,275
2008
£m
149
27
(39)
137
(6)
439
(319)
251
873
1,124
334
1,458
cations
£m
–
–
–
–
–
(121)
121
–
–
At
Reclassifi- December 31,
2009
£m
1,240
(4)
1,722
2,958
2
(122)
(1,786)
(1)
1,051
224
1,275
–
Cash at bank and in hand
Overdrafts
Short-term deposits
Cash and cash equivalents
Investments
Other current borrowings
Non-current borrowings
Finance leases
Fair value of swaps hedging fixed rate borrowings
At
January 1,
2009
£m
940
(9)
1,531
2,462
1
(11)
(1,324)
(4)
1,124
334
1,458
Funds
flow
£m
358
5
274
637
1
10
(693)
3
(42)
Exchange
adjustments
£m
(58)
–
(83)
(141)
–
–
–
–
(141)
(42)
(141)
Fair value
adjustments
£m
–
–
–
–
–
–
110
–
110
(110)
–
Rolls-Royce Group plc
Annual report 2009
95
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Consolidated financial statements – continued
Consolidated statement of changes in equity
For the year ended December 31, 2009
Attributable to equity holders of the parent
Share
capital
£m
364
–
364
–
Share
premium
£m
67
–
67
–
Capital
redemption
reserves
£m
191
–
191
–
Hedging
reserves1
£m
77
–
77
–
Other
reserves2
£m
62
–
62
–
Retained
earnings3
£m
2,776
(353)
2,423
(1,340)
Notes
At January 1, 2008
Adoption of IFRIC 14 (note 18)
At January 1, 2008 restated
Loss for the year
Foreign exchange translation differences
on foreign operations
Net actuarial gains
Movement in unrecognised
post-retirement surplus
Movement in post-retirement minimum
funding liability
Transfers from transition hedging reserve
Transfers to cash flow hedging reserve
Related tax movements – deferred tax
Total comprehensive income for the year
Arising on issues of ordinary shares
Issue of B Shares
Redemption of B Shares
Conversion of B Shares into ordinary shares
Ordinary shares purchased
Share-based payments adjustments4
Related tax movements – deferred tax
Other changes in equity in the year
At January 1, 2009
Profit for the year
Foreign exchange translation differences
on foreign operations
Net actuarial losses
Movement in unrecognised post-retirement surplus
Movement in post-retirement minimum
funding liability
Transfers from transition hedging reserve
Transfers to cash flow hedging reserve
Related tax movements – deferred tax
Total comprehensive income for the year
Arising on issues of ordinary shares
Issue of C Shares
Redemption of C Shares
Ordinary shares purchased
Share-based payments adjustment4
Transactions with minority interests
Related tax movements – deferred tax
Other changes in equity in the year
At December 31, 2009
19
16
16
16
4
19
16
16
4
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i
Total
£m
3,537
(353)
3,184
(1,340)
601
944
601
–
–
944
–
(928)
(928)
–
–
–
–
601
–
–
–
–
–
–
–
–
663
–
(157)
–
–
–
–
–
–
(157)
–
–
–
–
–
–
–
–
506
66
–
–
(26)
(1,284)
–
–
(200)
–
(44)
36
(11)
(219)
920
2,221
–
(1,148)
707
40
–
–
133
1,953
–
1
(251)
(17)
28
–
1
(238)
2,635
66
(80)
(41)
(4)
(782)
17
(237)
–
53
(44)
36
(11)
(186)
2,216
2,221
(157)
(1,148)
707
40
(27)
22
141
1,799
18
(263)
–
(17)
28
–
1
(233)
3,782
Minority
interests
£m
12
–
12
(5)
2
–
–
–
–
–
–
(3)
–
–
–
–
–
–
–
–
9
(4)
(1)
–
–
–
–
–
–
(5)
–
–
–
–
–
(4)
–
(4)
–
Total
equity
£m
3,549
(353)
3,196
(1,345)
603
944
(928)
66
(80)
(41)
(4)
(785)
17
(237)
–
53
(44)
36
(11)
(186)
2,225
2,217
(158)
(1,148)
707
40
(27)
22
141
1,794
18
(263)
–
(17)
28
(4)
1
(237)
3,782
–
–
–
–
–
–
–
–
2
–
–
3
–
–
–
5
369
–
–
–
–
–
–
–
–
–
2
–
–
–
–
–
–
2
371
–
–
–
–
–
–
–
–
15
–
–
–
–
–
–
15
82
–
–
–
–
–
–
–
–
–
16
–
–
–
–
–
–
16
98
–
–
–
–
–
–
–
–
–
(237)
200
50
–
–
–
13
204
–
–
–
–
–
–
–
–
–
–
(264)
251
–
–
–
–
(13)
191
–
–
–
–
(80)
(41)
22
(99)
–
–
–
–
–
–
–
–
(22)
–
–
–
–
–
(27)
22
8
3
–
–
–
–
–
–
–
–
(19)
1 See accounting policies note 1 – hedge accounting. Hedging reserves include £nil (2008 £19m) in respect of the transition hedging reserve and £(19)m (2008 £(41)m) in respect of the cash flow hedging
reserve.
2 Other reserves include a merger reserve of £3m (2008 £3m) and a translation reserve of £503m (2008 £660m).
3 At December 31, 2009, the Group held 7,156,497 ordinary shares with a net book value of £25m (2008 8,017,635 ordinary shares with a net book value of £34m). These are included in retained earnings.
During the year, 6,766,884 ordinary shares with a net book value of £25m (2008 8,782,658 shares with a net book value of £37m) vested in share-based payment plans.
4 The share-based payment adjustment is the net of the credit to equity in respect of the share-based payment charge to the income statement and the actual cost of shares vesting, excluding those vesting
from own shares.
Rolls-Royce Group plc
Annual report 2009
Notes to the consolidated financial statements
Notes to the consolidated financial statements
1 Accounting policies
The Company
Rolls-Royce Group plc (the ‘Company’) is a company domiciled in the United Kingdom. The consolidated financial statements of the Company for the
year ended December 31, 2009 comprise the Company and its subsidiaries (together referred to as the ‘Group’) and the Group’s interest in jointly
controlled and associated entities. The financial statements were authorised for issue by the directors on February 10, 2010.
Basis of preparation and statement of compliance
In accordance with European Union (EU) regulations, these financial statements have been prepared in accordance with International Financial
Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), as adopted for use in the EU effective at December 31,
2009 (Adopted IFRS). The Company has elected to prepare its parent company accounts under UK Generally Accepted Accounting Practices (GAAP).
The financial statements have been prepared on the historical cost basis except where Adopted IFRS requires the revaluation of financial instruments
to fair value and certain other assets and liabilities on an alternative basis – most significantly post-retirement scheme liabilities are valued on the
basis required by IAS 19 Employee Benefits.
The Group’s significant accounting policies are set out below. These accounting policies have been applied consistently to all periods presented in
these consolidated financial statements and by all Group entities.
The preparation of financial statements in conformity with Adopted IFRS requires the use of certain critical accounting estimates and judgements.
The directors consider the potential key areas of judgements required to be made in applying the Group’s accounting policies to be:
• A large proportion of the Group’s activities relate to long-term aftermarket contracts. The determination of appropriate accounting policies for
recognising revenue and costs in respect of these contracts requires judgement, in particular (i) whether an aftermarket contract is linked, for
accounting purposes, to the related sale of original equipment and (ii) the appropriate measure of stage of completion of the contract.
• Where the Group participates in the financing of original equipment, judgement is required to determine whether revenue should be recognised
or whether the transaction results in the consolidation of a special purpose financing entity.
• As set out in note 8, the Group has significant intangible assets. The decision as to when to commence capitalisation of development costs and
whether sales of original equipment give rise to recognisable recoverable engine costs is a key judgement.
• As set out in note 22, the Group has contingent liabilities in respect of financing support provided to customers. Judgement is required to assess
the likelihood of these crystallising, in order to assess whether a provision should be recognised.
Key sources of estimation uncertainty in applying the Group’s accounting policies are described on page 102.
Basis of consolidation
The Group financial statements include the financial statements of the Company and all of its subsidiary undertakings made up to December 31,
together with the Group’s share of the results of joint ventures and associates up to December 31.
A subsidiary is an entity controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial
and operating policies of the entity so as to derive benefits from its activities.
A joint venture is an entity in which the Group holds a long-term interest and which is jointly controlled by the Group and one or more other
venturers under a contractual arrangement. An associate is an entity, being neither a subsidiary nor a joint venture, in which the Group holds a
long-term interest and where the Group has a significant influence. The results of joint ventures and associates are accounted for using the equity
method of accounting.
Any subsidiary undertakings, joint ventures or associates sold or acquired during the year are included up to, or from, the dates of change of control.
All intra-group transactions, balances, income and expenses are eliminated on consolidation. Adjustments are made to eliminate the profit or loss
arising on transactions with joint ventures and associates to the extent of the Group’s interest in the entity.
Rolls-Royce Group plc
Annual report 2009
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Notes to the consolidated financial statements – continued
1 Accounting policies (continued)
Significant accounting policies
Revenue recognition
Revenues comprise sales to outside customers after discounts, excluding value added tax.
Sales of products are recognised when the significant risks and rewards of ownership of the goods are transferred to the customer, the sales price
agreed and the receipt of payment can be assured. On occasion, the Group may participate in the financing of engines in conjunction with airframe
manufacturers, most commonly by the provision of guarantees as described in note 22. In such circumstances, the contingent obligations arising
under these arrangements are taken into account in assessing whether significant risks and rewards of ownership have been transferred to the
customer. Where it is judged that sufficient risks and rewards are not transferred, the transaction is treated as a leasing transaction, resulting in an
operating lease between the Group and the customer. No deliveries of engines were treated as operating leases during 2009. Depending on the
specific circumstances, where applicable, the financing arrangements may result in the consolidation of the entity established to facilitate the
financing. Such special purpose entities will be consolidated as required by Adopted IFRS. No such entities were consolidated at December 31, 2009.
Sales of services are recognised by reference to the stage of completion based on services performed to date. The assessment of the stage of
completion is dependent on the nature of the contract, but will generally be based on: costs incurred to the extent these relate to services performed
up to the reporting date; achievement of contractual milestones where appropriate; or flying hours or equivalent for long-term aftermarket
arrangements.
Linked sales of products and services are treated as a single contract where these components have been negotiated as a single commercial package
and are so closely interrelated that they do not operate independently of each other and are considered to form a single project with an overall profit
margin. Revenue is recognised on the same basis as for other sales of products and services as described above.
Provided that the outcome of construction contracts can be assessed with reasonable certainty, the revenues and costs on such contracts are
recognised based on stage of completion and the overall contract profitability.
Full provision is made for any estimated losses to completion of contracts having regard to the overall substance of the arrangements.
Progress payments received, when greater than recorded revenue, are deducted from the value of work in progress except to the extent that
payments on account exceed the value of work in progress on any contract where the excess is included in trade and other payables. The amount by
which recorded revenue of long-term contracts is in excess of payments on account is classified as amounts recoverable on contracts and is
separately disclosed within trade and other receivables.
Risk and revenue sharing partnerships (RRSPs)
From time to time, the Group enters into arrangements with partners who, in return for a share in future programme revenues or profits, make cash
payments that are not refundable (except under certain remote circumstances). Cash sums received, which reimburse the Group for past expenditure,
are credited to other operating income. The arrangements also require partners to undertake development work and/or supply components for use
in the programme at their own expense. No accounting entries are recorded where partners undertake such development work or where
programme components are supplied by partners because no obligation arises unless and until programme sales are made; instead, payments to
partners for their share in the programme are charged to cost of sales as programme revenues arise.
The Group has arrangements with partners who do not undertake development work or supply parts. Such arrangements are considered to be
financial instruments as defined by IAS 32 Financial Instruments: Presentation and are accounted for using the amortised cost method.
Government investment
Where a government or similar body has previously invested in a development programme, the Group treats payments to that body as royalty
payments, which are matched to related sales.
Government grants
Government grants are recognised in the income statement so as to match them with the related expenses that they are intended to compensate.
Where grants are received in advance of the related expenses, they are included in the balance sheet as deferred income. Non-monetary grants are
recognised at fair value.
Interest
Interest receivable/payable is credited/charged to the income statement using the effective interest method. Where borrowing costs are attributable
to the acquisition, construction or production of a qualifying asset, such costs are capitalised as part of the specific asset.
Rolls-Royce Group plc
Annual report 2009
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Notes to the consolidated financial statements – continued
1 Accounting policies (continued)
Taxation
The tax charge on the profit or loss for the year comprises current and deferred tax. Current tax is the expected tax payable for the year, using tax rates
enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of the assets
and liabilities for financial reporting purposes and the amounts used for taxation purposes.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, joint ventures and associates, except
where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the
foreseeable future. Deferred tax is not recognised on taxable temporary differences arising on the initial recognition of goodwill or for temporary
differences arising from the initial recognition of assets and liabilities in a transaction that is not a business combination and that affects neither
accounting nor taxable profit.
Deferred tax is calculated using the enacted or substantively enacted rates that are expected to apply when the asset or liability is settled. Deferred
tax is charged or credited in the income statement or other comprehensive income (OCI) as appropriate, except when it relates to items credited or
charged directly to equity in which case the deferred tax is also dealt with in equity.
Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the assets can be utilised.
Foreign currency translation
Transactions in overseas currencies are translated into local currency at the exchange rates ruling on the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies are translated into local currency at the rate ruling at the year-end. Exchange differences arising on
foreign exchange transactions and the retranslation of assets and liabilities into sterling at the rate ruling at the year-end are taken into account in
determining profit before taxation.
The trading results of overseas undertakings are translated at the average exchange rates for the year. The assets and liabilities of overseas
undertakings, including goodwill and fair value adjustments arising on acquisition, are translated at the exchange rates ruling at the year end.
Exchange adjustments arising from the retranslation of the opening net investments, and from the translation of the profits or losses at average rates,
are taken to OCI.
Financial instruments
IAS 39 Financial Instruments: Recognition and Measurement requires the classification of financial instruments into separate categories for which the
accounting requirements are different. The Group has classified its financial instruments as follows:
• Fixed deposits, principally comprising funds held with banks and other financial institutions, and trade receivables are classified as loans and
receivables.
• Investments (other than fixed deposits and interests in joint ventures and associates) and short-term deposits (other than fixed deposits) are
classified as available for sale.
• Borrowings, trade payables, financial RRSPs and C Shares are classified as other liabilities.
• Derivatives, comprising foreign exchange contracts, interest rate swaps and commodity swaps, are classified as held for trading.
Financial instruments are recognised at the contract date and initially measured at fair value. Their subsequent measurement depends on their classification:
• Loans and receivables and other liabilities are held at amortised cost and not revalued (except for changes in exchange rates which are included in
the income statement) unless they are included in a fair value hedge accounting relationship. Where such a relationship exists, the instruments are
revalued in respect of the risk being hedged. If instruments held at amortised cost are hedged, generally by interest rate swaps, and the hedges are
effective, the carrying values are adjusted for changes in fair value, which are included in the income statement.
• Available for sale assets are held at fair value. Changes in fair value arising from changes in exchange rates are included in the income statement. All
other changes in fair value are recognised in OCI. On disposal, the accumulated changes in value recorded in OCI are included in the gain or loss
recorded in the income statement.
• Held for trading instruments are held at fair value. Changes in fair value are included in the income statement unless the instrument is included in a
cash flow hedge. If the instruments are included in a cash flow hedging relationship, which is effective, changes in value are recognised in OCI.
When the hedged forecast transaction occurs, amounts previously recognised in OCI are recognised in the income statement.
Financial instruments are derecognised on expiry or when all contractual rights and obligations are transferred.
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Notes to the consolidated financial statements – continued
1 Accounting policies (continued)
Hedge accounting
The Group does not apply hedge accounting in respect of forward foreign exchange contracts held to manage the cash flow exposures of forecast
transactions denominated in foreign currencies.
The Group does not apply hedge accounting in respect of commodity swaps held to manage the cash flow exposures of forecast transactions in
those commodities.
The Group applies hedge accounting in respect of transactions entered into to manage the fair value and cash flow exposures of its borrowings.
Forward foreign exchange contracts are held to manage the fair value exposures of borrowings denominated in foreign currencies and are
designated as fair value hedges. Interest rate swaps are held to manage the interest rate exposures and are designated as fair value or cash flow
hedges of fixed and floating rate borrowings respectively. In 2009 and 2008, cash flow hedging was undertaken only by joint ventures.
Changes in the fair values of derivatives designated as fair value hedges and changes in fair value of the related hedged item are recognised directly
in the income statement.
Changes in the fair values of derivatives that are designated as cash flow hedges and are effective are recognised in OCI. Any ineffectiveness in the
hedging relationships is included in the income statement. The amounts deferred in OCI are recognised in the income statement to match the
recognition of the hedged item.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, exercised, or no longer qualifies for hedge accounting.
At that time, for cash flow hedges and if the forecast transaction remains probable, any cumulative gain or loss on the hedging instrument recognised
in OCI is retained in equity until the forecast transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss
previously recognised in OCI is transferred to the income statement.
The portion of a gain or loss on an instrument used to hedge a net investment in a foreign operation that is determined to be an effective hedge is
recognised in OCI. The ineffective portion is recognised immediately in the income statement.
Until December 31, 2004, and as allowed by IFRS 1 First-time Adoption of International Financial Reporting Standards, the Group applied hedge
accounting for forecast foreign exchange transactions and commodity exposures in accordance with UK GAAP. On January 1, 2005, the fair values of
derivatives used for hedging these exposures were included in the transition hedging reserve. This reserve is released to the income statement based
on the designation of the hedges on January 1, 2005.
Purchased goodwill
Goodwill represents the excess of the fair value of the purchase consideration for shares in subsidiary undertakings, joint ventures and associates over
the fair value to the Group of the net of the identifiable assets acquired and the liabilities assumed.
i) To December 31, 1997: Goodwill was written off to reserves in the year of acquisition.
ii) From January 1, 1998: Goodwill was recognised within intangible assets in the year in which it arose and amortised on a straight line basis over its
useful economic life, up to a maximum of 20 years.
iii) From January 1, 2004, in accordance with IFRS 3 Business Combinations, goodwill is recognised as per (ii) above but is no longer amortised.
Certification costs and participation fees
Costs incurred in respect of meeting regulatory certification requirements for new civil aero-engine/aircraft combinations and payments made to
airframe manufacturers for this, and participation fees, are carried forward in intangible assets to the extent that they can be recovered out of future
sales and are charged to the income statement over the programme life, up to a maximum of 15 years from the entry into service of the product.
Research and development
In accordance with IAS 38 Intangible Assets, expenditure incurred on research and development, excluding known recoverable amounts on contracts,
and contributions to shared engineering programmes, is distinguished as relating either to a research phase or to a development phase.
All research phase expenditure is charged to the income statement. For development expenditure, this is capitalised as an internally generated
intangible asset only if it meets strict criteria, relating in particular to technical feasibility and generation of future economic benefits.
Expenditure that cannot be classified into these two categories is treated as being incurred in the research phase. The Group considers that, due to
the complex nature of new equipment programmes, it is not possible to distinguish reliably between research and development activities until
relatively late in the programme.
Expenditure capitalised is amortised over its useful economic life, up to a maximum of 15 years from the entry into service of the product.
Rolls-Royce Group plc
Annual report 2009
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101
1 Accounting policies (continued)
Recoverable engine costs
On occasion, the Group may sell original equipment to customers at a price below its cost, on the basis that this deficit will be recovered from future
aftermarket sales to the original customer. Where the Group has a contractual right to supply aftermarket parts to the customer and its intellectual
rights, warranty arrangements and statutory airworthiness requirements provide reasonable control over this supply, these arrangements are
considered to meet the definition of an intangible asset. Such intangible assets are recognised to the extent of the deficit and amortised on a
straight-line basis over the expected period of utilisation by the original customer.
Software
The cost of acquiring software that is not specific to an item of property, plant and equipment is classified as an intangible asset and amortised over
its useful economic life, up to a maximum of five years.
Property, plant and equipment
Property, plant and equipment assets are stated at cost less accumulated depreciation and any provision for impairments in value.
Depreciation is provided on a straight-line basis to write off the cost, less the estimated residual value, of property, plant and equipment over their
estimated useful lives. No depreciation is provided on assets in the course of construction. Estimated useful lives are as follows:
i) Land and buildings, as advised by the Group’s professional advisors:
a) Freehold buildings – five to 45 years (average 23 years).
b) Leasehold buildings – lower of advisor’s estimates or period of lease.
c) No depreciation is provided on freehold land.
ii) Plant and equipment – five to 25 years (average 14 years).
iii) Aircraft and engines – five to 20 years (average 16 years).
Leases
i) As lessee
Assets financed by leasing agreements that give rights approximating to ownership (finance leases) are capitalised at their fair value and
depreciation is provided on the basis of the Group depreciation policy. The capital elements of future obligations under finance leases are
included as liabilities in the balance sheet and the current year’s interest element, having been allocated to accounting periods to give a constant
periodic rate of charge on the outstanding liability, is charged to the income statement. The annual payments under all other lease arrangements,
known as operating leases, are charged to the income statement on a straight-line basis.
ii) As lessor
Amounts receivable under finance leases are included within receivables and represent the total amount outstanding under the lease
agreements, less unearned income. Finance lease income, having been allocated to accounting periods to give a constant periodic rate of return
on the net investment, is included in revenue. Rentals receivable under operating leases are included in revenue on a straight-line basis.
Impairment of non-current assets
Impairment of non-current assets is considered in accordance with IAS 36 Impairment of Assets. Where the asset does not generate cash flows that are
independent of other assets, impairment is considered for the cash-generating unit to which the asset belongs.
Goodwill and intangible assets not yet available for use are tested for impairment annually. Other non-current assets are assessed for any indications
of impairment annually. If any indication of impairment is identified, an impairment test is performed to estimate the recoverable amount.
Recoverable amount is the higher of value in use or fair value less costs to sell if this is readily available. The value in use is the present value of future
cash flows using a pre-tax discount rate that reflects the time value of money and the risk specific to the asset.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be below the carrying value, the carrying value is reduced to the
recoverable amount and the impairment loss recognised as an expense.
Inventory
Inventory and work in progress are valued at the lower of cost and net realisable value on a first-in, first-out basis. Cost comprises direct materials and,
where applicable, direct labour costs and those overheads, including depreciation of property, plant and equipment, that have been incurred in
bringing the inventories to their present location and condition. Net realisable value represents the estimated selling prices less all estimated costs of
completion and costs to be incurred in marketing, selling and distribution.
Rolls-Royce Group plc
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Notes to the consolidated financial statements – continued
1 Accounting policies (continued)
Cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand and short-term deposits with a maturity of three months or less on inception. The Group
considers overdrafts (repayable on demand) to be an integral part of its cash management activities and these are included in cash and cash
equivalents for the purposes of the cash flow statement.
Provisions
Provisions are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to
settle that obligation. Provisions are measured at the directors’ best estimate of the expenditure required to settle the obligation at the balance sheet
date, and are discounted to present value where the effect is material.
Post-retirement benefits
Pensions and similar benefits (principally healthcare) are accounted for under IAS 19 Employee Benefits. For defined benefit plans, obligations are
measured at discounted present value whilst plan assets are recorded at fair value. The service and financing costs of such plans are recognised
separately in the income statement; current service costs are spread systematically over the lives of employees and financing costs are recognised in
the periods in which they arise. Actuarial gains and losses are recognised immediately in OCI.
Surpluses in schemes are recognised as assets only if they represent economic benefits available to the Group in the future. A liability is recognised to
the extent that the minimum funding requirements in respect of past service will give rise to an unrecognisable surplus. Movements in unrecognised
surpluses and minimum funding liabilities are recognised in OCI.
Payments to defined contribution schemes are charged as an expense as they fall due.
Share-based payments
The Group provides share-based payment arrangements to certain employees. These are principally equity-settled arrangements and are measured
at fair value (excluding the effect of non-market based vesting conditions) at the date of grant. The fair value is expensed on a straight-line basis over
the vesting period. The amount recognised as an expense is adjusted to reflect the actual number of shares or options that will vest, except where
additional shares vest as a result of the TSR performance condition in the Performance Share Plan.
Cash-settled share options (grants in the International ShareSave plan) are measured at fair value at the balance sheet date. The Group recognises a
liability at the balance sheet date based on these fair values, taking into account the estimated number of options that will actually vest and the
relative completion of the vesting period. Changes in the value of this liability are recognised in the income statement for the year.
The fair values of the share-based payment arrangements are measured as follows:
i) ShareSave plans – using the binomial pricing model;
ii) Performance Share Plan – using a pricing model adjusted to reflect non-entitlement to dividends (or equivalent) and the TSR market-based
performance condition;
iii) Annual Performance Related Award plan deferred shares and free shares under the Share Incentive Plan – share price on the date of the award.
See note 20 for a further description of the share-based payment plans.
Contingent liabilities
In connection with the sale of its products, the Group will, on occasion, provide financing support for its customers. These arrangements fall into two
categories; credit-based guarantees and asset value guarantees. In accordance with the requirements of IAS 39 Financial Instruments: Recognition and
Measurement and IFRS 4 Insurance Contracts, credit-based guarantees are treated as insurance contracts. The Group considers asset value guarantees
to be non-financial liabilities and accordingly these are also treated as insurance contracts. Provision is made as described above.
The Group’s contingent liabilities relating to financing arrangements are spread over many years and relate to a number of customers and a broad
product portfolio, and are reported on a discounted basis.
Key sources of estimation uncertainty
In applying the above 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, that have a significant risk of causing material adjustment to
the carrying amounts of assets and liabilities within the next financial year are set out on page 103. The estimation of the relevant assets and liabilities
involves the combination of a number of assumptions. Where appropriate and practicable, sensitivities are disclosed in the relevant notes.
Rolls-Royce Group plc
Annual report 2009
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Notes to the consolidated financial statements – continued
103
1 Accounting policies (continued)
Current economic environment
The current economic environment could impact a number of estimates necessary to prepare the financial statements, in particular, the recoverable
amount of assets and contingent liabilities. The Group has taken these factors into account in assessing the estimates set out below. These matters are
discussed in more detail in the Finance Director’s review.
Forecasts and discount rates
The carrying value of a number of items on the balance sheet are dependent on the estimates of future cash flows arising from the Group’s operations:
• The assessment whether there are any indications of impairment of development, participation, certification and recoverable engine costs
recognised as intangible assets are dependent on forecasts of cash flows generated by the relevant assets. (Carrying values at December 31, 2009
£1,290m; December 31, 2008 £1,072m.)
• The financial liabilities arising from financial risk and revenue sharing partnerships are valued at each reporting date using the amortised cost
method. (Carrying values at December 31, 2009 £363m; December 31, 2008 £455m.) This involves calculating the present value of the forecast cash
flows of the arrangement using the internal rate of return at the inception of the arrangement as the discount rate.
• The realisation of the deferred tax assets (carrying value at December 31, 2009 £360m; December 31, 2008 £804m restated) recognised is
dependent on the generation of sufficient future taxable profits. The Group recognises deferred tax assets where it is more likely than not that the
benefit will be realised.
Assessment of long-term contractual arrangements
The Group has long-term contracts that fall into different accounting periods. In assessing the allocation of revenues and costs to individual
accounting periods, and the consequential assets and liabilities, the Group estimates the total revenues and costs forecast to arise in respect of the
contract and the stage of completion based on an appropriate measure of performance as described under revenue recognition above.
Post-retirement benefits
The Group’s defined benefit pension schemes and similar arrangements are assessed annually in accordance with IAS 19. The accounting valuation,
which was based on assumptions determined with independent actuarial advice, resulted in a net deficit of £855m before deferred taxation being
recognised on the balance sheet at December 31, 2009 (December 31, 2008 £567m restated). The size of the net deficit is sensitive to the market
value of the assets held by the schemes and to actuarial assumptions, which include price inflation, pension and salary increases, the discount rate
used in assessing actuarial liabilities, mortality and other demographic assumptions and the levels of contributions. Further details are included in
note 18.
Provisions
As described in the accounting policy above, the Group measures provisions (carrying value at December 31, 2009 £442m; December 31, 2008
£369m) at the directors’ best estimate of the expenditure required to settle the obligation at the balance sheet date. These estimates take account of
information available and different possible outcomes.
Taxation
The tax payable on profits is determined based on tax laws and regulations that apply in each of the numerous jurisdictions in which the Group
operates. Where the precise impact of these laws and regulations is unclear then reasonable estimates may be used to determine the tax charge
included in the financial statements. If the tax eventually payable or reclaimable differs from the amounts originally estimated then the difference will
be charged or credited in the financial statements for the year in which it is determined.
Revisions to Adopted IFRS in 2009
The following revisions have been adopted in the Group’s financial statements in 2009:
• Amendments to IAS 1 Presentation of Financial Statements – these amendments revise requirements for the presentation of the financial statements
and do not affect the Group’s overall reported results.
• Improvements to IFRSs (2008) – the amendments to IAS 1 clarify the classification of derivative financial instruments as current or non-current.
Previously the Group has classified all derivative financial instruments within the IAS 39 category ‘held for trading’ as current. As a result of these
amendments, they have now been classified according to their maturity dates. The impact is shown in note 16.
• Amendments to IFRS 2 Share-based Payments: Vesting Conditions and Cancellations – these amendments concern certain aspects of the valuation of
share-based payments and the impact of a cancellation by a grantee. These amendments have not had a significant impact on the charges
recognised to date for share-based payments.
• Amendments to IFRS 7 Financial Instruments: Disclosure – these amendments require additional disclosure of the basis of fair value measurements
and liquidity risks. Note 16 reflects these additional disclosure requirements.
• IFRS 8 Operating Segments – this standard amends the requirements for disclosure of segmental performance and does not have any effect on the
Group’s overall reported results. Note 2 reflects the new requirements.
Rolls-Royce Group plc
Annual report 2009
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Notes to the consolidated financial statements – continued
1 Accounting policies (continued)
• Amendment to IAS 23 Borrowing Costs – the amendment generally eliminates the option to expense borrowing costs attributable to the
acquisition, construction or production of a qualifying asset as incurred, and instead requires the capitalisation of eligible borrowing costs as part of
the cost of the specific asset. There is no significant impact, as the Group generally funds qualifying assets from gross cash resources and
consequently does not have significant eligible borrowing costs.
• IFRIC 12 Service Concession Arrangements – this interpretation is applicable to the Group’s investments in the joint ventures operating the Future
Strategic Tanker Aircraft contract with the UK Ministry of Defence. This contract commenced in 2008 and the adoption of IFRIC 12 does not have
any material transitional impact.
• IFRIC 14 IAS 19 The Limit of a Defined Benefit Asset, Minimum Funding Requirements and their Interaction – this interpretation applies where regulatory
funding requirements will result in an unrecognisable surplus arising in the future. It has been adopted with effect from January 1, 2008. The impact
of the adoption of this interpretation is set out in note 18.
Revisions to IFRS not applicable in 2009
Standards and interpretations issued by the IASB are only applicable if endorsed by the EU. The following revisions to IFRS will be applicable in future
periods, subject to endorsement where applicable:
• Revised IFRS 3 Business Combinations and amendments to IAS 27 Consolidated and Separate Financial Statements are applicable for 2010. These
standards will affect the future accounting for acquisitions and transactions with non-controlling interests. There will be no retrospective impact.
• IFRIC 18 Transfers of Assets from Customers is applicable for 2010. This interpretation confirms the Group’s existing policies for the recognition of assets
received from customers and will not have a significant impact.
• Amendments to IFRS 2 Group Cash-settled Share-based Payment Transactions are applicable from 2010. If endorsed, these amendments will apply to
the International ShareSave Scheme, but the impact is not anticipated to be significant.
• IFRS 9 Financial Instruments is applicable from 2013. If endorsed, this standard will simplify the classification of financial assets for measurement
purposes, but is not anticipated to have a significant impact on the financial statements.
The Group does not consider that any other standards, amendments or interpretations issued by the IASB, but not yet applicable, will have a
significant impact on the financial statements.
2 Segmental analysis
The analysis by business segment is presented in accordance with the basis set out in IFRS 8 Operating segments, on the basis of those segments
whose operating results are regularly reviewed by the Board (the Chief Operating Decision Maker as defined by IFRS 8), as follows:
– development, manufacture, marketing and sales of commercial aero engines and aftermarket services.
Civil aerospace
Defence aerospace – development, manufacture, marketing and sales of military aero engines and aftermarket services.
Marine
Energy
– development, manufacture, marketing and sales of marine propulsion systems and aftermarket services.
– development, manufacture, marketing and sales of power systems for the oil and gas industry and electrical power
generation and aftermarket services.
Engineering and Technology, Operations and Services discussed in the business review, operate on a Group-wide basis across all the above segments.
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 exclude
the release of the foreign exchange transition hedging reserve and reflect the achieved exchange rates arising on settled derivative contracts. There is
no inter-segment trading and hence all revenues are from external customers.
Underlying profit before financing – Where transactions are denominated in a currency other than the functional currency of the Group undertaking,
this excludes the release of the foreign exchange transition hedging reserve and reflects the transactions at the achieved exchange rates on settled
derivative contracts.
Rolls-Royce Group plc
Annual report 2009
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105
2 Segmental analysis (continued)
Underlying profit before taxation – in addition to those adjustments in underlying profit before financing:
• includes amounts realised from settled derivative contracts and revaluation of relevant assets and liabilities to exchange rates forecast to be
achieved from future settlement of derivative contracts; and
• excludes unrealised amounts arising from revaluations required by IAS 39 Financial Instruments: Recognition and Measurement, changes in value
of financial RRSP contracts arising from changes in forecast payments and the net impact of financing costs related to post-retirement
scheme benefits.
This analysis also includes a reconciliation of the underlying results to those reported in the consolidated income statement. The analysis for 2008 has
been restated on a consistent basis.
Year ended December 31, 2009
Underlying revenue from sale of original equipment
Underlying revenue from services
Total underlying revenue
Underlying operating profit excluding share of profit of joint ventures and associates
Share of profit of joint ventures and associates
Profit/(loss) on sale of businesses
Underlying profit before financing and taxation
Segment assets
Investments in joint ventures and associates
Segment liabilities
Net assets/(liabilities)
Investment in intangible assets, property plant and equipment, joint ventures and associates
Depreciation and amortisation
Year ended December 31, 2008
Underlying revenue from sale of original equipment
Underlying revenue from services
Total underlying revenue
Underlying operating profit excluding share of profit of joint ventures
Share of profit of joint ventures
Profit/(loss) on sale of businesses
Underlying profit/(loss) before financing and taxation
Segment assets
Investments in joint ventures
Segment liabilities
Net assets/(liabilities)
Investment in intangible assets, property, plant and equipment and joint ventures
Depreciation and amortisation
Civil
aerospace
£m
1,855
2,626
4,481
409
82
2
493
Defence
aerospace
£m
964
1,046
2,010
247
6
–
253
7,341
271
(4,918)
2,694
522
209
1,776
2,726
4,502
503
55
8
566
7,223
320
(7,213)
330
520
212
1,166
62
(1,573)
(345)
56
34
739
947
1,686
215
8
–
223
1,044
(7)
(1,234)
(197)
84
42
Marine
£m
1,804
785
2,589
263
–
–
263
2,302
77
(1,738)
641
122
46
1,492
712
2,204
185
(2)
–
183
2,334
5
(1,851)
488
68
32
Total
reportable
segments
£m
5,181
4,927
10,108
942
93
(2)
1,033
11,807
437
(8,721)
3,523
720
315
4,392
4,755
9,147
893
70
7
970
11,408
345
(10,740)
1,013
707
315
Energy
£m
558
470
1,028
23
5
(4)
24
998
27
(492)
533
20
26
385
370
755
(10)
9
(1)
(2)
807
27
(442)
392
35
29
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Annual report 2009
106
Notes to the consolidated financial statements – continued
2 Segmental analysis (continued)
Reconciliation to reported results
Year ended December 31, 2009
Revenue from sale of original equipment
Revenue from services
Total revenue
Operating profit excluding share of profit of joint ventures and associates
Share of profit of joint ventures and associates
Loss on sale of businesses
Profit before financing and taxation
Net financing
Profit before taxation
Taxation
Profit/(loss) for the year
Year ended December 31, 2008
Revenue from sale of original equipment
Revenue from services
Total revenue
Operating profit excluding share of profit of joint ventures
Share of profit of joint ventures
Profit on sale of businesses
Profit before financing and taxation
Net financing
Profit/(loss) before taxation
Taxation
Profit/(loss) for the year
1 Central corporate costs
Underlying adjustments
Underlying performance
Release of transition hedging reserve
Recognise revenue at exchange rate on date of transaction
Realised losses/(gains) on settled derivative contracts1
Net unrealised fair value changes to derivative contracts2
Effect of currency on contract accounting
Revaluation of trading assets and liabilities
Financial RRSPs – foreign exchange differences and
changes in forecast payments
Net post-retirement scheme financing
Related tax effect
Total underlying adjustments
Reported per consolidated income statement
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Total
reportable
segments
£m
5,181
4,927
10,108
942
93
(2)
1,033
Underlying
central items
£m
–
–
–
(50)1
–
–
(50)
(68)
(118)
(187)
(305)
Total
underlying
£m
5,181
4,927
10,108
892
93
(2)
983
(68)
915
(187)
728
Underlying
adjustments
£m
128
178
306
189
–
–
189
1,853
2,042
(553)
1,489
4,392
4,755
9,147
893
70
7
970
–
–
–
(51)1
–
–
(51)
(39)
(90)
(217)
(307)
4,392
4,755
9,147
842
70
7
919
(39)
880
(217)
663
(15)
(50)
(65)
(61)
4
–
(57)
(2,715)
(2,772)
764
(2,008)
Revenue
£m
10,108
27
279
–
–
–
–
Profit before
financing
£m
983
27
–
274
14
(126)
–
–
–
–
306
10,414
–
–
–
189
1,172
Net
financing
£m
(68)
–
–
60
1,835
–
(17)
72
(97)
–
1,853
1,785
2009
Taxation
£m
(187)
–
–
–
–
–
–
–
–
(553)
(553)
(740)
Revenue
£m
9,147
80
(145)
–
–
–
–
Profit before
financing
£m
919
80
–
(185)
4
44
–
–
–
–
(65)
9,082
–
–
–
(57)
862
Net
financing
£m
(39)
–
–
(107)
(2,479)
–
14
(121)
(22)
–
(2,715)
(2,754)
Group
£m
5,309
5,105
10,414
1,081
93
(2)
1,172
1,785
2,957
(740)
2,217
4,377
4,705
9,082
781
74
7
862
(2,754)
(1,892)
547
(1,345)
2008
Taxation
£m
(217)
–
–
–
–
–
–
–
–
764
764
547
1 Realised (gains)/losses on settled derivative contracts included in profit before tax:
– includes £15m of realised losses (2008 £nil) deferred from prior years;
– excludes £6m of gains (2008 losses of £24m) realised in the year on derivative contracts settled in respect of trading cash flows that occurred after the year-end;
– excludes £14m of losses (2008 £nil) realised in respect of derivatives held in net investment hedges.
2 The adjustment for unrealised fair value changes included in profit before financing includes the reversal of £5m of unrealised gains (2008 £4m) in respect of derivative contracts held by joint ventures and
£9m (2008 £nil) of unrealised losses for which the related trading contracts have been cancelled and consequently the fair value loss has been recognised immediately in underlying profit.
Rolls-Royce Group plc
Annual report 2009
Notes to the consolidated financial statements – continued
107
2 Segmental analysis (continued)
The reconciliation of underlying earnings per ordinary share is shown in note 5.
Reportable segment assets
Investments in joint ventures and associates
Eliminations
Cash and cash equivalents and short-term investments
Fair value of swaps hedging fixed rate borrowings
Income tax assets
Post-retirement scheme surpluses
Total assets
Reportable segment liabilities
Eliminations
Borrowings
Fair value of swaps hedging fixed rate borrowings
Income tax liabilities
Post-retirement scheme deficits
Total liabilities
Net assets
* See note 18
Geographical segments
The Group’s revenue by destination is shown below:
United Kingdom
Rest of Europe
USA
Canada
Asia
Africa
Australasia
Other
2009
£m
11,807
437
(457)
2,964
224
372
75
15,422
December 31,
2008
£m
11,408
345
(477)
2,472
334
813
453
15,348
(8,721)
457
(1,913)
(533)
(930)
(11,640)
3,782
(10,740)
477
(1,348)
–
(492)
(1,020)
(13,123)
2,225
–
2009
£m
1,458
2,273
2,895
275
2,856
144
230
283
10,414
Restated*
January 1,
2008
£m
9,359
284
(461)
1,937
42
139
210
11,510
(6,414)
461
(1,064)
(27)
(446)
(824)
(8,314)
3,196
2008
£m
1,462
1,890
2,214
299
2,439
143
255
380
9,082
The carrying amounts of the Group’s non-current assets, excluding financial instruments, deferred tax assets and post-employment benefit surpluses,
by the geographical area in which the assets are located, are as follows:
United Kingdom
North America
Nordic countries
Germany
Other
Rolls-Royce Group plc
Annual report 2009
2009
£m
2,764
467
824
574
289
4,918
2008
£m
2,586
463
745
539
293
4,626
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a
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r
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e
t
a
r
o
p
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108
Notes to the consolidated financial statements – continued
3 Net financing
Financing income
Interest receivable
Fair value gains on foreign currency contracts2
Financial RRSPs – foreign exchange differences and changes in forecast payments
Fair value gains on commodity derivatives2
Expected return on post-retirement scheme assets
Net foreign exchange gains
Other financing income
Financing costs
Interest payable
Fair value losses on foreign currency contracts2
Financial RRSPs – foreign exchange differences and changes in forecast payments
Financial charge relating to financial RRSPs
Fair value losses on commodity derivatives2
Interest on post-retirement scheme liabilities
Net foreign exchange losses
Other financing charges
Net financing
Analysed as:
Net interest payable
Net post-retirement scheme financing
Net other financing
Net financing
1 See note 2
2 Net gain/(loss) on items held for trading
4 Taxation
Current tax
Current tax charge for the year
Less double tax relief
Adjustments in respect of prior years
Deferred tax
Deferred tax charge/(credit) for the year
Adjustments in respect of prior years
Recognised in the income statement
Rolls-Royce Group plc
Annual report 2009
2009
2008
Per
consolidated
income
statement
£m
Note
Per
consolidated
income
statement
£m
Underlying
financing1
£m
Underlying
financing1
£m
16
16
16
18
16
16
16
16
18
21
1,783
72
52
305
43
–
2,276
(64)
–
–
(25)
–
(402)
–
–
(491)
1,785
(43)
(97)
1,925
1,785
21
–
–
–
–
–
–
21
(64)
–
–
(25)
–
–
–
–
(89)
(68)
(43)
–
(25)
(68)
59
–
–
–
373
–
–
432
(69)
(2,383)
(121)
(26)
(96)
(395)
(91)
(5)
(3,186)
(2,754)
(10)
(22)
(2,722)
(2,754)
1,835
–
(2,479)
2009
£m
26 7
(29)
(3) –
(4)
(7)
628
(12) 2
616
609
UK
2008
£m
(7)
(9)
(9)
(574)
4
(572)
(581)
2009
£m
129
– –
129
(23)
106
21
25
131
Overseas
2008
£m
88
88
14
102
(50)
(18)
(68)
34
2009
£m
155
(29)
126
(27) 5
99
649
(8)
641
740
59
–
–
–
–
–
–
59
(69)
–
–
(26)
–
–
–
(3)
(98)
(39)
(10)
–
(29)
(39)
–
Total
2008
£m
95
(7)
88
93
(624)
(16)
(640)
(547)
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o
p
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C
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e
m
e
t
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a
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F
i
Notes to the consolidated financial statements – continued
109
4 Taxation (continued)
Other tax (charges)/credits
Deferred tax
net actuarial losses/(gains)
movement in unrecognised surplus on post-retirement schemes
movement in minimum funding liability
release of hedge reserve
share-based payment plans
Total in respect of the year
* See note 18
Tax reconciliation
Profit/(loss) before taxation
Less share of profits of joint ventures and associates (note 10)
Profit/(loss) before taxation excluding joint ventures and associates
Nominal tax charge/(credit) at UK corporation tax rate 28.0% (2008 28.5%)
UK R&D credit
Rate differences
Other permanent differences
Benefit to deferred tax from previously unrecognised tax losses and temporary differences
Tax losses in year not recognised in deferred tax
Adjustments in respect of prior years
Analysis of taxation charge:
Underlying items (note 2)
Non-underlying items
Deferred taxation assets and liabilities
At January 1
Amount (charged)/credited to income statement
Amount credited/(charged) to other comprehensive income
Amount credited/(charged) to equity
On acquisition of business
Exchange movements
At December 31
Analysed as:
Deferred tax assets
Deferred tax liabilities
* See note 18
Rolls-Royce Group plc
Annual report 2009
OCI
Restated*
2008
£m
(267)
260
(19)
22
1
(4) 1
2009
£m
342
(198)
(11)
8
– –
141
1
–
2009
£m
– –
– –
– –
– –
2009
£m
2,957
(93)
2,864
802
(26)
7
5
(21)
8
(35)
740
187
553
740
2009
£m
497
(641)
141
(4)
(6)
December 31,
2008
£m
804
(307)
497
2009
£m
360
(366)
(6)
Equity
2008
£m
(11)
(11)
2008
£m
(1,892)
(74)
(1,966)
(560)
(25)
16
15
(3)
21
(11)
(547)
217
(764)
(547)
Restated*
2008
£m
(126)
640
(4)
(11)
(5)
3
497
Restated*
January 1,
2008
£m
132
(258)
(126)
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110
Notes to the consolidated financial statements – continued
4 Taxation (continued)
The analysis of the deferred tax position is as follows:
Intangible assets
Property, plant and equipment
Other temporary differences
Amounts recoverable on contracts
Pensions and other post-retirement scheme benefits
Foreign exchange and commodity financial assets and liabilities
Losses
Advance corporation tax
At
January 1,
2009
£m
(200)
(146)
(31)
(195)
168
655
182
64
497
Recognised
in income
statement
£m
(53)
(17)
2
(48)
(17)
(609)
101
–
(641)
Recognised
in OCI
£m
–
–
–
–
133
8
–
–
141
Recognised
in equity
£m
–
–
(2)
–
–
–
3
–
1
At
On
acquisition movements
£m
3
3
9
–
(19)
–
–
–
(4)
At
Exchange December 31
2009
£m
(250)
(160)
(22)
(243)
265
54
286
64
(6)
£m
–
–
–
–
–
–
–
–
–
Intangible assets
Property, plant and equipment
Other temporary differences
Amounts recoverable on contracts
Pensions and other post-retirement
scheme benefits
Foreign exchange and commodity financial
assets and liabilities
Losses
Advance corporation tax
reported
£m
(140)
(143)
62
(145)
35
(121)
124
64
(264)
December 31, Adoption of
IFRIC 14,
as previously recognised in
2007
At
January 1,
OCI 2008 restated
£m
£m
(140)
–
(143)
–
62
–
(145)
–
Recognised
in income
statement
£m
(50)
3
(40)
(50)
Recognised
in OCI
£m
–
–
–
–
Recognised
in equity
£m
–
–
(20)
–
On
At
Exchange December 31,
acquisition movements 2008 restated
£m
(200)
(146)
(31)
(195)
£m
(6)
(6)
(33)
–
£m
(4)
–
–
–
138
–
–
–
138
173
(26)
(26)
(121)
124
64
(126)
754
49
–
640
22
–
–
(4)
–
–
9
–
(11)
(1)
–
–
–
(5)
Advance corporation tax
Losses and other unrecognised deferred tax assets
Deferred tax not recognised on unused tax losses and other items on the basis that future economic benefit is uncertain
Unprovided temporary differences relating to investments in subsidiaries and joint ventures are now £nil (2008 £946m). This is as a result of a recent
change in UK legislation, intended to exempt the great majority of overseas dividends from UK tax. The 2008 comparative reflected undistributed
profits of the relevant entities which, if paid up by way of dividend, would have given rise to taxable income in the UK. No deferred tax was provided in
respect of the resultant temporary differences because the timing of any reversals (by way of dividend flow) could be controlled and it was considered
unlikely that dividends would be paid if they resulted in additional UK taxable income.
Rolls-Royce Group plc
Annual report 2009
48
–
–
–
3
2009
£m
118
59
177
168
655
182
64
497
2008
£m
118
67
185
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a
n
r
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v
o
g
e
t
a
r
o
p
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C
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Notes to the consolidated financial statements – continued
111
5 Earnings per ordinary share
Basic earnings per ordinary share (EPS) are calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of
ordinary shares in issue during the year, excluding ordinary shares held under trust, which have been treated as if they had been cancelled.
Diluted EPS are calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of ordinary shares in issue
during the year as above, adjusted by the bonus element of share options.
Profit/(loss) (£m)
Weighted average number of shares (millions)
EPS (pence)
Potentially
dilutive share
options
–
20
(1.29)
Basic
2,221
1,845
120.38
1 As the basic EPS is negative, in accordance with IAS 33 Earnings per Share, share options are not considered dilutive.
The reconciliation between underlying EPS and basic EPS is as follows:
Underlying EPS/Underlying profit attributable to equity holders of the parent
Total underlying adjustments to profit before tax (note 2)
Related tax effects
EPS/Profit attributable to equity holders of the parent
Diluted underlying EPS
2009
Diluted
2,221
1,865
119.09
Pence
39.67
110.68
(29.97)
120.38
39.25
Potentially
dilutive share
options1
–
–
–
Basic
(1,340)
1,820
(73.63)
2009
£m
732
2,042
(553)
2,221
Pence
36.70
(152.31)
41.98
(73.63)
36.70
2008
Diluted
(1,340)
1,820
(73.63)
2008
£m
668
(2,772)
764
(1,340)
6 Employee information
Average monthly number of Group employees during the year
United Kingdom
Overseas
Civil aerospace
Defence aerospace
Marine
Energy
Group employment costs1
Wages and salaries
Social security costs
Share-based payments (note 20)
Pensions and other post-retirement scheme benefits (note 18)
1 Remuneration of key management personnel is shown in note 23.
Rolls-Royce Group plc
Annual report 2009
2009
Number
2008
Number
21,300
17,200
38,500
21,800
5,600
8,600
2,500
38,500
22,500
16,500
39,000
22,700
5,700
8,100
2,500
39,000
£m
£m
1,725
194
31
263
2,213
1,649
180
40
218
2,087
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112
Notes to the consolidated financial statements – continued
7 Auditors’ remuneration
Fees payable to the Company’s auditors and its associates were as follows:
Fees payable to the Company’s auditors for the audit of the Company’s annual financial statements1
Fees payable to the Company’s auditors and its associates for the audit of the Company’s subsidiaries pursuant to legislation
Total fees payable for audit services
Fees payable to the Company’s auditors and its associates for other services:
Other services pursuant to legislation
Other services relating to taxation
Fees payable in respect of the Group’s pension schemes:
Audit
Other services relating to taxation
2009
£m
0.1
4.1
4.2
0.6
0.4
5.2
0.2
0.1 –
2008
£m
0.1
3.6
3.7
0.5
0.4
4.6
0.2
1 The level of fees payable to the Company’s auditors for the audit of the Company’s annual financial statements reflects the fact that limited incremental work is required in respect of the audit of these
financial statements. Rolls-Royce plc, a subsidiary of the Company, is also required to prepare consolidated financial statements and the fees payable to the Company’s auditors for the audit of those
financial statements, including the audit of the sub-consolidation, is included in the audit of the Company’s subsidiaries pursuant to legislation.
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Rolls-Royce Group plc
Annual report 2009
Notes to the consolidated financial statements – continued
113
8 Intangible assets
Cost:
At January 1, 2008
Exchange adjustments
Additions
On acquisitions of businesses
On disposals of businesses
Disposals
At January 1, 2009
Exchange adjustments
Additions
On acquisitions of businesses
Disposals
At December 31, 2009
Accumulated amortisation and impairment:
At January 1, 2008
Exchange adjustments
Provided during the year 1
Disposals
At January 1, 2009
Exchange adjustments
Provided during the year1
Disposals
At December 31, 2009
Net book value at December 31, 2009
Net book value at December 31, 2008
Net book value at January 1, 2008
Certification
costs and
Goodwill
£m
participation Development
expenditure
£m
fees
£m
Recoverable
engine
costs
£m
Software
and other
£m
801
173
–
41
(2)
–
1,013
(28)
–
6
–
991
–
–
5
–
5
–
2
–
7
984
1,008
801
504
9
55
–
–
–
568
(3)
66
–
–
631
150
3
12
–
165
(1)
13
–
177
454
403
354
514
5
113
–
–
–
632
(2)
121
–
–
751
150
–
26
–
176
–
29
–
205
546
456
364
366
–
97
–
–
–
463
–
123
–
–
586
204
–
46
–
250
–
46
–
296
290
213
162
109
7
128
11
–
(1)
254
(2)
32
–
(11)
273
29
2
18
(1)
48
(1)
31
(3)
75
198
206
80
Total
£m
2,294
194
393
52
(2)
(1)
2,930
(35)
342
6
(11)
3,232
533
5
107
(1)
644
(2)
121
(3)
760
2,472
2,286
1,761
1 Charged to cost of sales except development costs, which are charged to research and development costs
Goodwill
In accordance with the requirements of IAS 36 Impairment of Assets, goodwill is allocated to the Group’s cash-generating units, or groups of
cash-generating units, that are expected to benefit from the synergies of the business combination that gave rise to the goodwill as follows:
Cash-generating unit (CGU) or group of CGUs
Rolls-Royce Deutschland Ltd & Co KG
Commercial marine – arising from the acquisitions of Vinters plc and Scandinavian Electric Holdings AS
Other
Operating
segment
Civil aerospace
Marine
Various
2009
£m
244
645
95
984
2008
£m
266
641
101
1,008
Rolls-Royce Group plc
Annual report 2009
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Notes to the consolidated financial statements – continued
8 Intangible assets (continued)
Goodwill (continued)
Goodwill has been tested for impairment during 2009 on the following basis:
• The carrying value of goodwill has been assessed by reference to values in use. These have been estimated using cash flows from the most recent
forecasts prepared by management, which are consistent with past experience and external sources of information on market conditions. Given the
long term and established nature of many of the Group’s products (product lives are often measured in decades), these typically forecast the next
ten years. Growth rates for the period not covered by the forecasts are based on a range of growth rates that reflect the products, industries and
countries in which the relevant CGU or group of CGUs operate.
• The key assumptions on which the cash flow projections for the most recent forecast are based are discount rates, growth rates and the impact of
foreign exchange rates on the relationship between selling prices and costs.
• The pre-tax cash flow projections have been discounted at 12.75 per cent (2008 12.75 per cent), based on the Group’s weighted average cost
of capital.
The principal value in use assumptions for goodwill balances considered to be individually significant are:
• Rolls-Royce Deutschland Ltd & Co KG – volume of engine deliveries, flying hours of installed fleet and cost escalation, these are based on current and
known future programmes, estimates of customers’ fleet requirements and long term economic forecasts. For the purposes of the impairment test
only, cash flows beyond the ten-year forecasts are assumed to grow at 2.5 per cent (2008 2.5 per cent). The directors do not consider that any
reasonably possible change in the key assumptions would cause the value in use of the goodwill to fall below its carrying value. For example, the
overall level of business would need to reduce by more that 30 per cent to cause an impairment of this balance.
• Vinters plc – volume of equipment deliveries, capture of aftermarket and cost escalation, these are based on current and known future programmes,
estimates of customers’ fleet requirements and long term economic forecasts. For the purposes of the impairment test only, cash flows beyond the
ten-year forecasts are assumed to grow at four per cent. The directors do not consider that any reasonably possible change in the key assumptions
would cause the value in use of the goodwill to fall below its carrying value. For example, it would require a doubling of the discount rate to cause
an impairment of this balance.
Other intangible assets
Certification costs and participation fees, development costs and recoverable engine costs have been reviewed for impairment in accordance with the
requirements of IAS 36 Impairment of Assets. Where an impairment test was considered necessary, it has been performed on the following basis:
• The carrying values have been assessed by reference to value in use. These have been estimated using cash flows from the most recent forecasts
prepared by management, which are consistent with past experience and external sources of information on market conditions over the lives of the
respective programmes.
• The key assumptions underlying cash flow projections are assumed market share, programme timings, unit cost assumptions, discount rates, and
foreign exchange rates.
• The pre-tax cash flow projections have been discounted at 11 per cent, 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 Group’s control (discount rate, exchange rate and airframe delays), could result in impairment in future years.
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Rolls-Royce Group plc
Annual report 2009
Notes to the consolidated financial statements – continued
115
9 Property, plant and equipment
Cost:
At January 1, 2008
Exchange adjustments
Additions
On acquisitions of businesses
On disposals of businesses
Reclassifications
Transferred to assets held for sale
Disposals/write-offs
At January 1, 2009
Exchange adjustments
Additions
Reclassifications
Transferred to assets held for sale
Disposals/write-offs
At December 31, 2009
Accumulated depreciation and impairment:
At January 1, 2008
Exchange adjustments
Provided during the year1
On disposals of businesses
Transferred to assets held for sale
Disposals/write-offs
At January 1, 2009
Exchange adjustments
Provided during the year1
Impairment
Transferred to assets held for sale
Disposals/write-offs
At December 31, 2009
Net book value at December 31, 2009
Net book value at December 31, 2008
Net book value at January 1, 2008
Land and
buildings
£m
Plant and
equipment
£m
Aircraft and
engines
£m
In course of
construction
£m
699
70
18
18
–
17
(32)
(3)
787
(17)
22
30
(12)
(4)
806
180
18
44
–
(22)
(2)
218
(2)
25
4
(12)
(2)
231
575
569
519
2,110
180
104
–
(13)
69
(3)
(97)
2,350
(43)
94
78
–
(92)
2,387
1,146
106
155
(11)
(3)
(85)
1,308
(25)
156
1
–
(82)
1,358
1,029
1,042
964
174
6
28
–
–
–
–
(37)
171
(2)
20
5
–
(31)
163
20
3
9
–
–
–
32
(1)
8
–
–
(5)
34
129
139
154
176
22
133
–
–
(86)
–
–
245
(8)
155
(113)
–
(3)
276
–
–
–
–
–
–
–
–
–
–
–
–
–
276
245
176
Total
£m
3,159
278
283
18
(13)
–
(35)
(137)
3,553
(70)
291
–
(12)
(130)
3,632
1,346
127
208
(11)
(25)
(87)
1,558
(28)
189
5
(12)
(89)
1,623
2,009
1,995
1,813
1 Depreciation provided during the year is charged to the income statement or included in the cost of inventory as appropriate.
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Rolls-Royce Group plc
Annual report 2009
116
Notes to the consolidated financial statements – continued
9 Property, plant and equipment (continued)
Property, plant and equipment includes:
Net book value of finance leased assets:
Land and buildings
Plant and equipment
Aircraft and engines
Assets held for use in operating leases:
Cost
Depreciation
Net book value
Non-depreciable land
Land and buildings at net book value comprise:
Freehold
Long leasehold
Short leasehold
Capital expenditure commitments – contracted but not provided for
Cost of fully depreciated assets
2009
£m
2008
£m
9 9
6 9
– –
133
(31)
102
98
559
10
6
575
146
473
141
(28)
113
113
533
12
24
569
122
475
10 Investments
At January 1, 2008
Exchange adjustments
Additions
Taxation paid by the Group
Share of retained profit
Transferred to ‘Assets held for sale’
Disposals
Transfer to cash flow hedging reserve3
At January 1, 2009
Exchange adjustments
Additions
Taxation paid by the Group
Impairment
Share of retained profit
Transfer to other investments
Disposals
Transfer from cash flow hedging reserve3
At December 31, 2009
Joint ventures
Associates1
Equity
accounted
Other2
Shares at
cost
£m
124
14
30
–
(8)
–
(13)
–
147
(7)
15
–
(1)
–
(5)
(1)
–
148
Share of post
acquisition
reserves
£m
146
71
–
3
25
(2)
(9)
(41)
193
(28)
–
2
–
18
2
1
22
210
Loans
£m
14
–
1
–
(2)
–
(8)
–
5
–
1
–
–
–
(1)
–
–
5
Shares at
cost
£m
–
–
–
–
–
–
–
–
–
4
71
–
–
–
–
–
–
75
Share of post
acquisition
reserves
£m
–
–
–
–
–
–
–
–
–
–
–
–
–
(1)
–
–
–
(1)
Total
£m
284
85
31
3
15
(2)
(30)
(41)
345
(35)
16
2
(1)
18
(4)
–
22
363
Total
£m
–
–
–
–
–
–
–
–
–
4
71
–
–
(1)
–
–
–
74
Total
£m
284
85
31
3
15
(2)
(30)
(41)
345
(31)
87
2
(1)
17
(4)
–
22
437
Unlisted
£m
57
1
1
–
–
–
(6)
–
53
–
2
–
(1)
–
4
–
–
58
1 During the year, the Group acquired 33 per cent of ODIM ASA, listed on the Oslo Stock Exchange. The market value of the shares at December 31, 2009 was £50m. The value of the investment has been
assessed on a value in use basis and is not considered to be impaired.
2 These primarily comprise floating rate convertible loan stock.
3 Certain of the Group’s joint ventures hold interest rate and inflation swaps for which cash flow hedge accounting has been adopted.
Rolls-Royce Group plc
Annual report 2009
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Notes to the consolidated financial statements – continued
117
10 Investments (continued)
Investments in joint ventures and associates are represented by:
Share of aggregate assets:
Non-current assets4
Current assets
Share of aggregate liabilities5:
Current liabilities
Non-current liabilities
4 Non-current assets include goodwill of
5 Liabilities include borrowings of
5
Share of income
Share of net financing
Share of taxation
Share of profit recognised in the income statement
Dividends received
Share of retained profit
Joint ventures
2008
£m
2009
£m
2009
£m
Associates
2008
£m
1,143
812
1,041
940
(709)
(883)
363
(816)
132
(26)
(12)
94
(77)
17
(841)
(795)
345
10
(655)
104 –
(16)
(14) –
74
(59) –
15
69 –
38 –
(20) –
(13) –
74 –
46 –
(5) –
–
(1) –
–
(1) –
–
(1) –
2009
£m
1,212
850
(729)
(896)
437
51
(821)
132
(27)
(12)
93
(77)
16
Total
2008
£m
1,041
940
(841)
(795)
345
10
(655)
104
(16)
(14)
74
(59)
15
The tax charge on joint venture profits represents an effective tax rate of 11 per cent (2008 16 per cent), a decrease of five per cent. This results from a
change in profit mix between joint ventures taxed at different effective rates.
The principal joint ventures and associates are listed on pages 147 to 148.
2009
£m
358
820
61
1,163
30
2,432
138
83
5
2008
£m
328
1,008
34
1,192
38
2,600
144
81
15
11 Inventory
Raw materials
Work in progress
Long-term contracts work in progress
Finished goods
Payments on account
Inventories stated at net realisable value
Amount of inventory write-down
Reversal of inventory write-down
Rolls-Royce Group plc
Annual report 2009
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118
Notes to the consolidated financial statements – continued
12 Trade and other receivables
Trade receivables
Amounts recoverable on contracts1
Amounts owed by joint ventures and associates
Other receivables
Prepayments and accrued income
Analysed as:
Financial instruments (note 16):
Trade receivables and similar items
Other non-derivative financial assets
Non-financial instruments
Trade and other receivables expected to be recovered in more than one year:
Trade receivables
Amounts recoverable on contracts
Amounts owed by joint ventures and associates
Other receivables
Prepayments and accrued income
2009
£m
1,285
1,524
502
401
165
3,877
1,837
382
1,658
3,877
1,178
14
35
30
1,266
9
2008
£m
1,421
1,448
451
404
205
3,929
1,939
369
1,621
3,929
24
1,222
28
59
38
1,371
1 The balance at December 31, 2009 includes a valuation allowance of £43m, being the directors’ best estimate of the loss that will occur from the Group’s contract with EPI Europrop International GmbH to
participate in the development of the TP400 engine for the A400M military transport aircraft.
13 Cash and cash equivalents
Cash at bank and in hand
Short-term deposits
Overdrafts (note 14)
Cash and cash equivalents per cash flow statement (page 94 )
Cash held as collateral against third party obligations
2009
£m
1,240
1,722
2,962
(4)
2,958
2008
£m
940
1,531
2,471
(9)
2,462
77
85
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Rolls-Royce Group plc
Annual report 2009
Notes to the consolidated financial statements – continued
119
14 Borrowings
Unsecured
Overdrafts
Bank loans
73/8% Notes 2016 £200m
5.84% Notes 2010 US$187m1
6.38% Notes 2013 US$230m1
6.55% Notes 2015 US$83m1
41/2% Notes 2011 €750m2
6.75% Notes 2019 £500m
Secured
Obligations under finance leases3: (note 21)
2009
£m
Current
2008
£m
2009
£m
Non-current
2008
£m
9
11
–
– –
204 5
200
–
155
57
677
493 –
4
200
136
178
67
738
Total
2008
£m
16
200
136
178
67
738
2009
£m
9
206
200
120
155
57
677
493 –
1
23
1
1,787
1
1,325
4
1,913
1,348
4
2
– –
120
– –
– –
– –
– –
– 3
126
1 These notes are the subject of interest rate swap agreements under which the Group has undertaken to pay floating rates of interest, and currency swaps which form a fair value hedge.
2 These notes are the subject of swap agreements under which counterparties have undertaken to pay amounts at fixed rates of interest and exchange in consideration for amounts payable at variable rates of
interest and at fixed exchange rates.
3 Obligations under finance leases are secured by related leased assets.
15 Trade and other payables
Payments received on account1
Trade payables
Amounts owed to joint ventures and associates
Other taxation and social security
Other payables
Accruals and deferred income
2009
£m
1,550
863
276
71
1,086
1,782
5,628
Current
2008
£m
1,635
1,042 –
372 2
55 –
1,170
1,461
5,735
2009
£m
544
–
9
–
71
528
1,145
Non-current
2008
£m
549
206
554
1,318
1 Includes payments received from joint ventures
200
209
259
107
Analysed as:
Financial instruments: (note 16)
Trade payables and similar items
Other non-derivative financial liabilities
Non-financial instruments
2009
£m
2,142
381
4,250
6,773
2008
£m
2,264
430
4,359
7,053
Included within trade and other payables are government grants of £31m (2008 £25m). During 2009, £2m of government grants were released to
the income statement.
Rolls-Royce Group plc
Annual report 2009
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120
Notes to the consolidated financial statements – continued
16 Financial instruments
This note should be read in conjunction with the Finance Director’s review on pages 58 to 65.
Carrying values and fair values of financial instruments
Valuation
basis
Held for
trading
£m
Loans and
receivables
£m
Available
for sale
£m
Notes
At December 31, 2009
Unlisted non-current asset investments
Trade receivables and similar items
Other non-derivative financial assets
Derivative financial assets
Short-term investments
Cash at bank and in hand
Short-term deposits
Borrowings
Derivative financial liabilities
Financial RRSPs
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
At December 31, 2008
Unlisted non-current asset investments
Trade receivables and similar items
Other non-derivative financial assets
Derivative financial assets
Short-term investments
Cash at bank and in hand
Short-term deposits
Borrowings
Derivative financial liabilities
Financial RRSPs
Trade payables and similar items
Other non-derivative financial liabilities
10
12
12
13
13
14
15
15
10
12
12
13
13
14
15
15
A
B
B
C
B
B
B
D
C
D
B
C
B
A
B
B
C
B
B
B
D
C
D
B
B
–
–
–
717
–
–
–
–
–
–
–
–
–
717
–
–
–
390
–
–
–
–
–
–
–
–
390
58
1,837
382
–
–
–
1,722
–
–
–
–
–
–
3,999
53
1,939
369
–
–
–
1,531
–
–
–
–
–
3,892
–
–
–
–
2
–
–
–
–
–
–
–
–
2
–
–
–
–
1
–
–
–
–
–
–
–
1
Assets
Cash
£m
–
–
–
–
–
1,240
–
–
–
–
–
–
–
1,240
–
–
–
–
–
940
–
–
–
–
–
–
940
Held for
trading
£m
–
–
–
–
–
–
–
–
(673)
–
–
–
–
(673)
–
–
–
–
–
–
–
–
(2,386)
–
–
–
(2,386)
Liabilities
Total
Other
£m
–
–
–
–
–
–
–
(1,913)
–
(363)
(13)
(2,142)
(381)
(4,812)
–
–
–
–
–
–
–
(1,348)
–
(455)
(2,264)
(430)
(4,497)
£m
58
1,837
382
717
2
1,240
1,722
(1,913)
(673)
(363)
(13)
(2,142)
(381)
473
53
1,939
369
390
1
940
1,531
(1,348)
(2,386)
(455)
(2,264)
(430)
(1,660)
Fair values equate to book values for both 2009 and 2008, with the following exceptions:
Borrowings
Financial RRSPs
Book value
£m
(1,913)
(363)
2009
Fair value
£m
(2,012)
(390)
Book value
£m
(1,348)
(455)
2008
Fair value
£m
(1,314)
(487)
The fair value of a financial instrument is the price at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties
in an arms-length transaction. Fair values have been determined with reference to available market information at the balance sheet date, using the
methodologies described below.
A These primarily comprise floating rate convertible loan stock. The conversion conditions are such that fair value approximates to the book value.
B Fair values are assumed to approximate to cost either due to the short-term maturity of the instruments or because the interest rate of the investments is reset after periods not exceeding six months.
C Fair values of derivative financial assets and liabilities are estimated by discounting expected future contractual cash flows using prevailing interest rate curves. Amounts denominated in foreign currencies
are valued at the exchange rate prevailing at the balance sheet date. These financial instruments are included on the balance sheet at fair value, derived from observable market prices (Level 2 as defined by
IFRS 7 Financial Instruments: Disclosures).
D Borrowing and financial RRSPs are carried at amortised cost. Fair values are estimated by discounting expected future contractual cash flows using prevailing interest rate curves. Amounts denominated
in foreign currencies are valued at the exchange rate prevailing at the balance sheet date. For financial RRSPs, the contractual cash flows are based on future trading activity, which is estimated based on
latest forecasts.
Rolls-Royce Group plc
Annual report 2009
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Notes to the consolidated financial statements – continued
121
16 Financial instruments (continued)
Carrying values of other financial assets and liabilities
Further to the amendments to IAS 1 in the Improvements to IFRS (2008), derivative contracts are now classified as current or non-current based on
their maturity dates. Previously all ‘held for trading’ items were deemed to be current. The effect is that: (i) financial assets comprising foreign exchange
contracts (2008 £112m and 2007 £433m), commodity contracts (2007 £39m) and interest rate contracts (2008 £278m and 2007 £42m), previously
reported as current assets; and (ii) financial liabilities comprising foreign exchange contracts (2008 £2,293m and 2007 £54m), commodity contracts
(2008 £89m) and interest rate contracts (2008 £4m and 2007 £3m) previously reported as current liabilities, are presented as current or non-current as
set out below.
At December 31, 2009
Non-current assets
Current assets
Current liabilities
Non-current liabilities
At December 31, 2008
Non-current assets
Current assets
Current liabilities
Non-current liabilities
At December 31, 2007
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Foreign
exchange
contracts
£m
Commodity
contracts
£m
Interest rate
contracts
£m
Total
derivatives
£m
Financial
RRSPs
£m
B/C Shares
£m
429
72
(56)
(589)
(144)
88
24
(214)
(2,079)
(2,181)
286
147
(4)
(50)
379
11
4
(12)
(14)
(11)
–
–
(36)
(53)
(89)
15
24
–
–
39
197
4
–
(2)
199
278
–
(2)
(2)
274
42
–
(1)
(2)
39
637
80
(68)
(605)
44
366
24
(252)
(2,134)
(1,996)
343
171
(5)
(52)
457
–
–
(100)
(263)
(363)
–
–
(64)
(391)
(455)
–
–
(12)
(303)
(315)
–
–
(13)
–
(13)
–
–
–
–
–
–
–
(16)
–
(16)
Total
£m
637
80
(181)
(868)
(332)
366
24
(316)
(2,525)
(2,451)
343
171
(33)
(355)
126
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o
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a
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a
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Rolls-Royce Group plc
Annual report 2009
122
Notes to the consolidated financial statements – continued
16 Financial instruments (continued)
Foreign exchange and commodity financial instruments
The Group uses various financial instruments to manage its exposure to movements in foreign exchange rates. The Group uses commodity swaps to
manage its exposure to movements in the price of commodities (jet fuel and base metals). From January 1, 2005, the Group has not included foreign
exchange or commodity financial instruments in any cash flow hedging relationships for accounting purposes. To hedge the currency risk associated
with a borrowing denominated in US dollars, the Group has currency derivatives designated as part of fair value hedges.
Movements in the fair values of foreign exchange and commodity instruments were as follows:
At January 1, 2008
Fair value gains to fair value hedges1,2
Fair value losses to other derivative contracts1
Fair value of contracts settled
Fair value of derivative contracts assumed on formation of joint venture
At January 1, 2009
Fair value losses to fair value hedges1,2
Fair value losses to net investment hedges
Fair value gains to other derivative contracts1
Fair value of contracts settled
At December 31, 2009
1 Included in financing
2 Profit on related hedged items £33m (2008 £83m loss).
Foreign
exchange
instruments
£m
379
83
(2,383)
(236)
(24)
(2,181)
(33)
(14)
1,783
301
(144)
Commodity
instruments
£m
39
–
(96)
(32)
–
(89)
–
–
52
26
(11)
Interest rate financial instruments
The Group uses interest rate swaps, forward rate agreements and interest rate caps to manage its exposure to movements in interest rates. Where the
effectiveness of the hedge relationship in a cash flow hedge is demonstrated, changes in the fair value that are deemed effective are included in the
hedging reserve and released to match actual payments on the hedged item. During 2008 and 2009, the Group did not have any cash flow hedges,
other than in joint ventures, which are not included in this analysis.
Movements in the fair values of interest rate financial instruments were as follows:
At January 1, 2008
Fair value changes1,2
At January 1, 2009
Fair value changes1,2
At December 31, 2009
1 Included in financing
2 Profit on related hedged items £77m (2008 £236m loss).
Included in
fair value
hedging
relationships
£m
42
236
278
(77)
201
Other
interest rate
financial
instruments
£m
(3)
(1)
(4)
2
(2)
Total
£m
39
235
274
(75)
199
Financial risk and revenue sharing partnerships (RRSPs)
The Group has financial liabilities arising from financial RRSPs. These financial liabilities are valued at each reporting date using the amortised cost
method. This involves calculating the present value of the forecast cash flows of the arrangements using the internal rate of return at the inception of
the arrangements as the discount rate.
Rolls-Royce Group plc
Annual report 2009
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Notes to the consolidated financial statements – continued
123
16 Financial instruments (continued)
Movements in the amortised cost values of financial RRSPs were as follows:
At January 1
Cash paid to partners
Additions
Exchange adjustments direct to reserves
Financing charge1
Excluded from underlying profit:
Exchange adjustments1
Restructuring of financial RRSP agreements and changes in forecast payments1
At December 31
1 Included in financing, excluding £1m of finance charge capitalised in intangible assets.
2009
£m
(455)
55
(15)
6
(26)
45
27
(363)
2008
£m
(315)
53
(40)
(6)
(26)
(118)
(3)
(455)
Risk management policies and hedging activities
The principal financial risks to which the Group is exposed are: foreign currency exchange rate risk; liquidity risk; credit risk; interest rate risk; and
commodity price risk. The Board has approved policies for the management of these risks.
Foreign currency exchange rate risk – The Group has significant cash flows (most significantly US dollars, followed by the euro) denominated in
currencies other than the functional currency of the relevant trading entity. To manage its exposures to changes in values of future foreign currency
cash flows, so as to maintain relatively stable long-term foreign exchange rates on settled transactions, the Group enters into derivative forward
foreign currency transactions. For accounting purposes, these derivative contracts are not designated as hedging instruments.
The Group also has exposures to the fair values of non-derivative financial instruments denominated in foreign currencies. To manage the risk of
changes in these fair values, the Group enters into derivative forward foreign exchange contracts, which are designated as fair value hedges for
accounting purposes.
The Group regards its interests in overseas subsidiary companies as long-term investments. The Group aims to match its translational exposures
by matching the currencies of assets and liabilities. Where appropriate, foreign currency financial liabilities may be designated as hedges of the
net investment.
Liquidity risk – The Group’s policy is to hold financial investments and maintain undrawn committed facilities at a level sufficient to ensure that the
Group has available funds to meet its medium-term capital and funding obligations and to meet any unforeseen obligations and opportunities. The
Group holds cash and short-term investments, which together with the undrawn committed facilities, enable the Group to manage its liquidity risk.
The profile of the maturity of the Group’s committed facilities is shown in the Finance Director’s review.
Credit risk – The Group is exposed to credit risk to the extent of non-payment by either its customers or the counterparties of its financial instruments.
The effective monitoring and controlling of credit risk is a key component of the Group’s risk management activities. The Group has credit policies
covering both trading and financial exposures. Credit risks arising from treasury activities are managed by a central treasury function in accordance
with the Group credit policy. The objective of the policy is to diversify and minimise the Group’s exposure to credit risk from its treasury activities by
ensuring the Group transacts strictly with single A or higher rated financial institutions based on pre-established limits per financial institution. At the
balance sheet date, there were no significant concentrations of credit risk to individual customers or counterparties. The maximum exposure to credit
risk at the balance sheet date is represented by the carrying value of each financial asset, including derivative financial instruments.
Interest rate risk – The Group’s interest rate risk is primarily in relation to its fixed rate borrowings (fair value risk), floating rate borrowings, cash and cash
equivalents (cash flow risk). Interest rate derivatives are used to manage the overall interest rate profile within the Group policy, which is to maintain a
higher proportion of net debt at floating rates of interest as a natural hedge to the net cash position. These are designated as either fair value or cash
flow hedges as appropriate.
Commodity risk – The Group has exposures to the price of jet fuel and base metals arising from business operations. To minimise its cash flow
exposures to changes in commodity prices, the Group enters into derivative commodity transactions. For accounting purposes, these derivative
contracts are not designated as hedging instruments.
Other price risk – The Group’s cash equivalent balances represent investments in money market instruments, with a term of up to three months.
The Group does not consider that these are subject to significant price risk.
Rolls-Royce Group plc
Annual report 2009
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124
Notes to the consolidated financial statements – continued
16 Financial instruments (continued)
Derivative financial instruments
The nominal amounts, analysed by year of expected maturity, and fair values of derivative financial instruments are as follows:
At December 31, 2009
Foreign exchange contracts:
Fair value hedges
Non-hedge accounted
Interest rate contracts:
Fair value hedges
Non-hedge accounted
Commodity contracts:
Non-hedge accounted
At December 31, 2008
Foreign exchange contracts:
Fair value hedges
Non-hedge accounted
Interest rate contracts:
Fair value hedges
Non-hedge accounted
Commodity contracts:
Non-hedge accounted
Nominal
amount
£m
Within
one year
£m
Between
one and
two years
£m
Between
two and
five years
£m
After
five years
£m
Assets
£m
Liabilities
£m
Expected maturity
Fair value
280
14,203
809
35
169
15,496
280
13,342
848
65
271
14,806
106
3,544
116
20
62
3,848
–
3,726
–
25
106
3,857
–
3,184
500
–
59
3,743
106
3,106
130
22
73
3,437
128
6,573
142
–
48
6,891
128
6,408
660
–
92
7,288
46
902
51
15
–
1,014
46
102
58
18
–
224
23
478
201
–
15
717
56
56
278
–
–
390
–
(645)
–
(2)
(26)
(673)
–
(2,293)
–
(4)
(89)
(2,386)
As described above, all derivative financial instruments are entered into for risk management purposes, although these may not be designated into
hedging relationships for accounting purposes.
Derivative financial instruments related to foreign exchange risks are denominated in the following currencies:
Sterling
£m
US dollar
£m
Currencies purchased forward
Total
£m
Other
£m
Euro
£m
At December 31, 2009
Currencies sold forward:
Sterling
US dollar
Euro
Other
At December 31, 2008
Currencies sold forward:
Sterling
US dollar
Euro
Other
Other derivative financial instruments are denominated in the following currencies:
Sterling
US dollar
Euro
Rolls-Royce Group plc
Annual report 2009
–
11,508
–
54
–
10,096
–
2
280
–
–
116
280
–
–
44
–
1,094
–
129
–
1,189
–
166
77
810
371
44
43
1,097
614
91
2009
£m
15
498
500
357
13,412
371
343
323
12,382
614
303
2008
£m
18
666
500
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c
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n
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o
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e
t
a
r
o
p
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Notes to the consolidated financial statements – continued
125
16 Financial instruments (continued)
Non-derivative financial instruments
Non-derivative financial instruments are denominated in the following currencies:
At December 31, 2009
Assets
Unlisted non-current investments
Trade receivables and similar items
Other non-derivative financial assets
Short-term investments
Cash at bank and in hand
Short-term deposits
Liabilities
Borrowings
Financial RRSPs
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
At December 31, 2008
Assets
Unlisted non-current investments
Trade receivables and similar items
Other non-derivative financial assets
Short-term investments
Cash at bank and in hand
Short-term deposits
Liabilities
Borrowings
Financial RRSPs
Trade payables and similar items
Other non-derivative financial liabilities
Sterling
£m
US dollar
£m
49
242
130
–
490
1,517
2,428
(893)
–
(13)
(886)
(187)
(1,979)
449
46
249
91
–
99
479
964
(203)
–
(763)
(144)
(1,110)
(146)
–
1,175
54
–
366
1
1,596
(332)
(303)
–
(811)
(86)
(1,532)
64
1
1,228
110
–
552
287
2,178
(385)
(406)
(979)
(151)
(1,921)
257
Euro
£m
4
225
40
–
129
192
590
(683)
(60)
–
(221)
(23)
(987)
(397)
4
211
85
–
129
744
1,173
(746)
(49)
(250)
(58)
(1,103)
70
Other
£m
Total
£m
5
195
158
2
255
12
627
(5)
–
–
(224)
(85)
(314)
313
2
251
83
1
160
21
518
(14)
–
(272)
(77)
(363)
155
58
1,837
382
2
1,240
1,722
5,241
(1,913)
(363)
(13)
(2,142)
(381)
(4,812)
429
53
1,939
369
1
940
1,531
4,833
(1,348)
(455)
(2,264)
(430)
(4,497)
336
Currency exposures
The Group’s actual currency exposures after taking account of derivative foreign currency contracts, which are not designated as hedging instruments
for accounting purposes are as follows:
Functional currency of Group operation
At December 31, 2009
Sterling
US dollar
Other
At December 31, 2008
Sterling
US dollar
Other
Rolls-Royce Group plc
Annual report 2009
Sterling
£m
US dollar
£m
Euro
£m
Other
£m
Total
£m
–
9
–
–
6
–
2
–
4
11
–
–
–
(6)
(1)
(4)
–
(2)
(2)
4
4
1
8
5
–
7
7
8
14
3
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t
a
r
o
p
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126
Notes to the consolidated financial statements – continued
16 Financial instruments (continued)
Ageing beyond contractual due date
The ageing beyond contractual due date of the Group’s financial assets is:
At December 31, 2009
Unlisted non-current asset investments
Trade receivables and similar items
Other non-derivative financial assets
Derivative financial assets
Short-term investments
Cash at bank and in hand
Short-term deposits
At December 31, 2008
Unlisted non-current asset investments
Trade receivables and similar items
Other non-derivative financial assets
Derivative financial assets
Short-term investments
Cash at bank and in hand
Short-term deposits
Contractual maturity analysis
At December 31, 2009
Borrowings
Derivative financial liabilities
Financial RRSPs
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
At December 31, 2008
Borrowings
Derivative financial liabilities
Financial RRSPs
Trade payables and similar items
Other non-derivative financial liabilities
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t
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Rolls-Royce Group plc
Annual report 2009
Up to three
months
overdue
£m
Between
three months
and one year
overdue
£m
More than
one year
overdue
£m
–
237
14
–
–
–
–
251
–
322
9
–
–
–
–
331
–
67
3
–
–
–
–
70
–
93
4
–
–
–
–
97
–
24
2
–
–
–
–
26
–
8
2
–
–
–
–
10
Within
terms
£m
58
1,509
363
717
2
1,240
1,722
5,611
53
1,516
354
390
1
940
1,531
4,785
Total
£m
58
1,837
382
717
2
1,240
1,722
5,958
53
1,939
369
390
1
940
1,531
5,223
Within
one year
£m
Between
one and
two years
£m
Between
two and
five years
£m
After
five years
£m
Discounting
£m
Carrying
value
£m
Gross values
(112)
(66)
(118)
(13)
(2,139)
(377)
(2,825)
(92)
(252)
(56)
(2,255)
(408)
(3,063)
(903)
(55)
(45)
–
(2)
(2)
(1,007)
(202)
(225)
(177)
(5)
(21)
(630)
(366)
(424)
(109)
–
(1)
(1)
(901)
(1,005)
(817)
(127)
(4)
(1)
(1,954)
(1,183)
(113)
(179)
–
–
(1)
(1,476)
(313)
(963)
(198)
–
–
(1,474)
651
(15)
88
–
–
–
724
264
(129)
103
–
–
238
(1,913)
(673)
(363)
(13)
(2,142)
(381)
(5,485)
(1,348)
(2,386)
(455)
(2,264)
(430)
(6,883)
Notes to the consolidated financial statements – continued
127
16 Financial instruments (continued)
Interest rate risk
In respect of income earning financial assets and interest bearing financial liabilities, the following table indicates their effective interest rates and the
periods in which they reprice. The value shown is the carrying amount.
Short-term investments1
Cash at bank and in hand2
Short-term deposits3
Unsecured bank loans
€2.5m floating rate loan
€5m floating rate loan
Overdrafts4
75m Indian Rupee Fixed Rate Loan
Effect of interest rate swaps
£200m floating rate
Unsecured bond issues
7 3/8% Notes 2016 £200m
5.84% Notes 2010 US$187m
Effect of interest rate swaps
6.38% Notes 2013 US$230m
Effect of interest rate swaps
6.55% Notes 2015 US$83m
Effect of interest rate swaps
4 1/2% Notes 2011 €750m
Effect of interest rate swaps
6.75% Notes 2019 £500m
Other secured
Obligations under finance leases
Effective
interest rate
%
8.6744% 2
EURIBOR + 1.2
EURIBOR + 0.5
9.8167%
6.1814% –
Total
£m
1,240
1,722
(1)
(4)
(4)
(1)
GBP LIBOR + 0.267
(200)
7.3750%
5.8400%
USD LIBOR + 1.159 –
6.3800%
USD LIBOR + 1.26 –
6.5500%
USD LIBOR + 1.24 –
4.5000%
GBP LIBOR + 0.911 –
(200)
(120)
(155)
(57)
(677)
6.7500%
(493)
6 months
or less
£m
2
1,240
1,722
6-12 months
£m
–
–
–
2009
Period in which interest rate reprices
More than
5 years
£m
–
–
–
2-5 years
£m
–
–
–
1-2 years
£m
–
–
–
(1)
(4)
(4)
(1)
15
(200)
–
–
(120)
–
(155)
–
(57)
–
(677)
–
–
–
–
–
–
–
–
(120)
120
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(677)
677
–
–
–
–
–
–
–
–
–
–
–
–
(155)
155
–
–
–
–
–
–
–
–
–
–
–
(15)
–
(200)
–
–
–
–
(57)
57
–
–
(493)
(1)
(709)
5.0000%
(1)
1,051
–
1,760
1 Interest on the short-term investments are at fixed rates.
2 Cash at bank and in hand comprises bank balances and demand deposits and earns interest at rates based on daily bank deposit rates.
3 Short-term deposits are deposits placed on money markets for periods up to three months and earn interest at the respective short-term deposit rates.
4 Overdrafts bear interest at rates linked to applicable LIBOR rates that fluctuate in accordance with local practice.
Rolls-Royce Group plc
Annual report 2009
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Notes to the consolidated financial statements – continued
16 Financial instruments (continued)
Short-term investments1
Cash at bank and in hand2
Short-term deposits3
Unsecured bank loans
€2.5m floating rate loan
€5m floating rate loan
Overdrafts4
55m Indian Rupee Fixed Rate Loan
79.4m Norwegian Kroner Floating Rate Loan
Effect of interest rate swaps
Unsecured bond issues
73/8% Notes 2016 £200m
5.84% Notes 2010 US$187m
Effect of interest rate swaps
6.38% Notes 2013 US$230m
Effect of interest rate swaps
6.55% Notes 2015 US$83m
Effect of interest rate swaps
41/2% Notes 2011 €750m
Effect of interest rate swaps
Other secured
Obligations under finance leases
Effective
interest rate
%
9.6769%
EURIBOR + 1.2
EURIBOR + 0.5
13.5455%
NIBOR + 1.1
3.3521%
7.3750%
5.8400%
USD LIBOR + 1.159
6.3800%
USD LIBOR + 1.26
6.5500%
USD LIBOR + 1.24
4.5000%
GBP LIBOR + 0.911
Total
£m
1
940
1,531
(2)
(5)
(9)
(1)
(8)
–
(200)
(136)
–
(178)
–
(67)
–
(738)
–
6 months
or less
£m
1
940
1,531
6-12 months
£m
–
–
–
2008
Period in which interest rate reprices
More than
5 years
£m
–
–
–
2-5 years
£m
–
–
–
1-2 years
£m
–
–
–
(2)
(5)
(9)
–
(8)
40
–
–
(136)
–
(178)
–
(67)
–
(738)
–
–
–
(1)
–
–
–
–
–
–
–
–
–
–
–
–
(1)
–
–
–
–
–
(22)
–
(136)
136
–
–
–
–
–
–
–
(22)
–
–
–
–
–
–
–
–
–
(178)
178
–
–
(738)
738
–
–
–
–
–
–
–
(18)
(200)
–
–
–
–
(67)
67
–
–
(1)
(219)
5.5226%
(4)
1,124
(3)
1,366
1 Interest on the short-term investments are at fixed rates.
2 Cash at bank and in hand comprises bank balances and demand deposits and earns interest at rates based on daily bank deposit rates.
3 Short-term deposits are deposits placed on money markets for periods up to three months and earn interest at the respective short-term deposit rates.
4 Overdrafts bear interest at rates linked to applicable LIBOR rates that fluctuate in accordance with local practice.
Some of the Group’s borrowings are subject to the Group meeting certain obligations, including customary financial covenants. If the Group fails to
meet its obligations these arrangements give rights to the lenders, upon agreement, to accelerate repayment of the facilities. There are no rating
triggers contained in any of the Group’s facilities that could require the Group to accelerate or repay any facility for a given movement in the Group’s
credit rating.
In addition, the Group has undrawn committed borrowing facilities available as follows:
Expiring after two years
2009
£m
450
2008
£m
650
Rolls-Royce Group plc
Annual report 2009
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Notes to the consolidated financial statements – continued
129
16 Financial instruments (continued)
Sensitivity analysis
The Group is exposed to a number of foreign currencies. The most significant transactional currency exposures are US dollar with sterling and US dollar
with euro.
At December 31, 2009 if sterling had weakened ten per cent against the US dollar with all other variables held constant, profit after tax for the year
and equity would have been £864m lower (2008 £890m). If sterling had strengthened ten per cent against the US dollar with all other variables held
constant, profit after tax for the year and equity would have been £707m higher (2008 £728m). There would have been no change to the underlying
results that exclude unrealised gains and losses on foreign exchange derivatives.
At December 31, 2009 if the euro had weakened ten per cent against the US dollar with all other variables held constant, profit after tax and equity
for the year would have been £88m lower (2008 £102m). If the euro had strengthened ten per cent against the US dollar with all other variables held
constant, profit after tax for the year and equity would have been £72m higher (2008 £84m). There would have been no change to the underlying
results that exclude unrealised gains and losses on foreign exchange derivatives.
At December 31, 2009 if the price of commodities had been ten per cent lower, with all other variables remaining constant, profit after tax for the year
and equity would have been £11m lower (2008 £13m). If the price of commodities had been ten per cent higher, with all other variables remaining
constant, profit after tax and equity would have been £11m higher (2008 £13m), arising mainly as the result of higher fair value gains on derivatives.
There would have been no change to the underlying results that exclude unrealised gains and losses on commodity derivatives.
At December 31, 2009 the Group had no material sensitivity to changes in interest rates on that date. The main interest rate sensitivity for the Group
arises as a result of the gross up of net cash and this is mitigated as described under the interest rate risk management policies on page 64.
B Shares and C Shares and payments to shareholders
The Company issues non-cumulative redeemable preference shares (C Shares) as an alternative to paying a cash dividend. C Shares in respect of a year
are issued in the following year. Shareholders are able to redeem any number of their C Shares for cash. Any C Shares retained attract a dividend of
75 per cent of LIBOR on the 0.1p nominal value of each share, paid on a twice-yearly basis, and have limited voting rights. The Company has the option
to compulsorily redeem the C Shares, at any time, if the aggregate number of C Shares in issue is less than ten per cent of the aggregate number of
C Shares issued, or on the acquisition or capital restructuring of the Company.
From July 2004 to July 2008, the Company issued non-cumulative redeemable convertible preference shares (B Shares). The only significant difference
was that B Shares, unlike C Shares, also carried the right to convert directly into ordinary shares. In September 2008, the Company exercised its option
to compulsorily redeem all B Shares then in issue. The Company does not intend to issue B Shares in the future.
Movements in the B/C Shares during the year were as follows:
Authorised
At January 1, and December 31
Issued and fully paid
At January 1
Issued
Converted into ordinary shares
Redeemed
At December 31
C Shares
of 0.1p each
Millions
2009
C Shares
Nominal
value
£m
B Shares
of 0.1p each
Millions
2008
B Shares
Nominal
value
£m
2,000,000
2,000
1,000,000
1,000
–
263,776
–
(251,199)
12,577
–
264
–
(251)
13
15,859
236,740
(52,524)
(200,075)
–
16
237
(53)
(200)
–
Payments to shareholders in respect of the year represent the value of C Shares to be issued in respect of the results for the year. Issues of C Shares
were declared as follows:
Interim
Final
Rolls-Royce Group plc
Annual report 2009
Pence
per share
6.00
9.00
15.00
2009
£m
111
167
278
Pence
per share
5.72
8.58
14.30
2008
£m
105
158
263
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130
Notes to the consolidated financial statements – continued
17 Provisions
Warranty and guarantees
Contract loss
Restructuring
Customer financing
Insurance
Other
Analysed as:
Current liabilities
Non-current liabilities
At
December 31,
2008
£m
182
38
16
73
38
22
369
Exchange
adjustments
£m
(4)
(1)
–
(2)
–
(1)
(8)
Unused
amounts
reversed
£m
(8)
–
(6)
–
–
–
(14)
Charged to
income
statement
£m
87
39
8
14
7
17
172
At
December 31,
2009
£m
224
58
8
71
45
36
442
Utilised
£m
(33)
(18)
(10)
(14)
–
(2)
(77)
2009
£m
210
232
442
2008
£m
181
188
369
Provisions for warranties and guarantees primarily relate to products sold and generally cover a period of up to three years.
Provisions for contract loss and restructuring are generally expected to be utilised within two years.
Customer financing provisions cover guarantees provided for asset value and/or financing. These guarantees are considered to be insurance contracts
in nature and provision is made in accordance with IFRS 4 Insurance Contracts and IAS 37 Provisions, Contingent Liabilities and Contingent Assets. These
guarantees, the risks arising and the process used to assess the extent of the risk are described under the heading ‘Sales financing’ in the Finance
Director’s review on page 64. The related contingent liabilities arising from these guarantees and the sensitivity to movements in the value of the
underlying security are discussed in note 22. It is estimated that the provision will be utilised as follows:
Potential claims with specific claim dates:
In one year or less
In more than one year but less than five years
In more than five years
Potential claims that may arise at any time up to the date of expiry of the guarantee:
Up to one year
Up to five years
Thereafter
2009
£m
2008
£m
3
20 6
21
19
4 4
4
71
–
27
31
5
73
The Group’s captive insurance company retains a portion of the exposures it insures on behalf of the remainder of the Group. Significant delays occur
in the notification and settlement of claims and judgement is involved in assessing outstanding liabilities, the ultimate cost and timing of which
cannot be known with certainty at the balance sheet date. The insurance provisions are based on information currently available, however it is
inherent in the nature of the business that ultimate liabilities may vary. Provisions for outstanding claims are established to cover the outstanding
expected liability as well as claims incurred but not yet reported.
Other provisions comprise a number of liabilities with varying expected utilisation rates.
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Rolls-Royce Group plc
Annual report 2009
Notes to the consolidated financial statements – continued
131
18 Post-retirement benefits
The Group operates a number of defined benefit and defined contribution schemes.
For the UK defined benefit schemes, the assets are held in separate trustee administered funds and employees are entitled to retirement benefits
based on either their final or career average salaries and length of service.
Overseas defined benefit schemes are a mixture of funded and unfunded plans. Additionally in the US, and to a lesser extent in some other countries,
the Group’s employment practices include the provision of healthcare and life insurance benefits for retired employees. These schemes are unfunded.
The valuations of the defined benefit schemes are based on the most recent funding valuations, updated by the scheme actuaries to December 31,
2009. The most recent funding valuations of the main UK schemes were:
Scheme
Rolls-Royce Pension Fund (RRPF)
Rolls-Royce Group Pension Scheme
Vickers Group Pension Scheme
Valuation date
March 31, 2009
April 5, 2007
March 31, 2007
Restatement
IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction has been adopted in 2009. The interpretation
requires that, where statutory funding requirements will result in an unrecognisable surplus arising in the future, a liability should be recognised. The
rules of the RRPF are such that future contributions set out in the scheme’s Recovery Plan will give rise to an unrecognisable surplus. In accordance
with the transition rules of the interpretation, it has been applied from January 1, 2008, and the 2008 figures have been restated accordingly. The
impact of adopting IFRIC 14 is as follows:
Net
post-retirement
liability
£m
(123)
(491)
(614)
(142)
(425)
(567)
66
UK
schemes
£m
Overseas
schemes
£m
94
2
–
96
8
104
(285)
355
70
174
29
4
–
33
29
62
(20)
47
27
89
Deferred tax (note 4)
Liabilities
£m
(345)
87
(258)
(307)
–
(307)
(87)
Retained
earnings
£m
2,776
(353)
2,423
1,226
(306)
920
Total
£m
(264)
138
(126)
378
119
497
(19)
UK
schemes
£m
Overseas
schemes
£m
127
5
8
140
6
146
(352)
358
6
152
27
3
–
30
20
50
(21)
37
16
66
2008
Total
£m
154
8
8
170
26
196
(373)
395
22
218
Assets
£m
81
51
132
685
119
804
68
2009
Total
£m
123
6
–
129
37
166
(305)
402
97
263
At January 1, 2008, as previously reported
Adoption of IFRIC 14
At January 1, 2008, restated
At December 31, 2008, as previously reported
Adoption of IFRIC 14
At December 31, 2008, restated
Movements in 2008 recognised in other comprehensive income
Amounts recognised in the income statement
Defined benefit schemes:
Current service cost
Past service cost
Ex-gratia payment paid directly by the Group
Defined contribution schemes
Operating cost
Financing (income)/costs in respect of defined benefit schemes:
Expected return on assets
Interest on liabilities
Total income statement charge
Rolls-Royce Group plc
Annual report 2009
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132
Notes to the consolidated financial statements – continued
18 Post-retirement benefits (continued)
The operating cost is charged as follows:
Cost of sales
Commercial and administrative costs
Research and development
9
Defined benefit
2008
£m
124
33 7
13 3
170
2009
£m
94
26
129
Defined contribution
2008
2009
£m
£m
19
27
5
2
37
26
2009
£m
121
33
12
166
Total
2008
£m
143
38
15
196
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The Group operates a PaySave scheme in the UK. This is a salary sacrifice scheme under which employees elect to stop making employee
contributions and the Group makes additional contributions in return for a reduction in gross contractual pay. As a result, there is a decrease in wages
and salaries and a corresponding increase in pension costs of £36m (2008 £38m) in the year.
Amounts recognised in other comprehensive income
Actuarial gain on scheme assets
Experience gains on scheme liabilities
Movement in unrecognised surplus
Movement in minimum funding liability
Defined benefit schemes
Assumptions
The principal actuarial assumptions used at the balance sheet date were as follows:
Rate of increase in salaries
Rate of increase of pensions in payment
Discount rate
Expected rate of return on scheme assets
Inflation assumption
1 Benefits accruing after April 5, 2005 are assumed to increase in payment at a rate of 1.9 per cent.
2009
£m
(270)
(878)
707
40
(401)
2008
£m
178
766
(928)
66
82
UK
schemes
%
4.7
3.3
5.7
5.4
3.6
2009
Overseas
schemes
%
4.0
2.2
5.9
7.4
2.6
UK
schemes
%
4.5
2.9
6.4
4.1
3.0
2008
Overseas
schemes
%
3.9
0.5
6.1
6.9
2.6
The discount rates are determined by reference to the market yields on AA rated corporate bonds. For the main UK schemes, the rate is determined by
using the profile of forecast benefit payments to derive a weighted average discount rate from the yield curve. For less significant UK schemes and
overseas schemes, the rate is determined as the market yield at the average duration of the forecast benefit payments. The discount rates above are
the weighted average of those for each scheme, based on the value of their respective liabilities.
The overall expected rate of return is calculated by weighting the individual returns expected from each asset class (see page 134) in accordance with
the actual asset balance in the schemes’ investment portfolios.
The mortality assumptions adopted for the UK pension schemes are derived from the actuarial tables (PA92, other than RRPF which has adopted the
SAPS tables in its 2009 valuation), with 80 per cent of long cohort, published by the Institute of Actuaries, projected forward and, where appropriate,
adjusted to take account of the relevant scheme’s actual experience. The resulting range of life expectancies in the principal UK schemes are as follows:
Life expectancy from age 65
Current pensioner
Future pensioner
19.6 years to 23.5 years
20.7 years to 24.2 years
Rolls-Royce Group plc
Annual report 2009
Notes to the consolidated financial statements – continued
133
18 Post-retirement benefits (continued)
The future costs of healthcare benefits are based on an assumed healthcare costs trend rate of eight per cent grading down to five per cent over
six years.
Other demographic assumptions have been set on advice from the relevant actuary, having regard to the latest trends in scheme experience and
other relevant data. The assumptions are reviewed and updated as necessary as part of the periodic actuarial valuation of the schemes.
Assumptions in respect of overseas schemes are also set in accordance with advice from local actuaries.
Amounts recognised in the balance sheet
Present value of funded obligations
Fair value of scheme assets
Present value of unfunded obligations
Unrecognised surplus1
Minimum funding liability2
Net asset/(liability) recognised in the balance sheet
Analysed as:
Post-retirement scheme surpluses
Post-retirement scheme deficits
UK
schemes
£m
(6,714)
7,048
334
–
(329)
(385)
(380)
Overseas
schemes
£m
(406)
354
(52)
(417)
(6)
–
(475)
2009
Total
£m
(7,120)
7,402
282
(417)
(335)
(385)
(855)
December 31, 2008
January 1, 2008
UK
schemes
£m
(5,719)
7,163
1,444
–
(1,036)
(425)
(17)
Overseas
schemes
£m
(390)
283
(107)
(437)
(6)
–
(550)
Total
£m
(6,109)
7,446
1,337
(437)
(1,042)
(425)
(567)
UK
schemes
£m
(6,335)
6,626
291
–
(110)
(491)
(310)
Overseas
schemes
£m
(293)
277
(16)
(284)
(4)
–
(304)
Total
£m
(6,628)
6,903
275
(284)
(114)
(491)
(614)
75
(455)
(380)
–
(475)
(475)
75
(930)
(855)
453
(470)
(17)
–
(550)
(550)
453
(1,020)
(567)
210
(520)
(310)
–
(304)
(304)
210
(824)
(614)
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 are such that future contributions in respect of past service that will result in a future unrecognisable surplus.
Changes in present value of defined benefit obligations
UK
schemes
£m
(5,719)
–
(94)
(2)
(355)
(3)
324
(865)
–
(6,714)
(6,714)
–
Overseas
schemes
£m
(827)
67
(29)
(4)
(47)
(3)
33
(13)
–
(823)
(406)
(417)
2009
Total
£m
(6,546)
67
(123)
(6)
(402)
(6)
357
(878)
–
(7,537)
(7,120)
(417)
UK
schemes
£m
(6,335)
–
(127)
(5)
(358)
(4)
331
776
3
(5,719)
(5,719)
–
Overseas
schemes
£m
(577)
(196)
(27)
(3)
(37)
(2)
25
(10)
–
(827)
(390)
(437)
2008
Total
£m
(6,912)
(196)
(154)
(8)
(395)
(6)
356
766
3
(6,546)
(6,109)
(437)
At January 1
Exchange adjustments
Current service cost
Past service cost
Finance cost
Contributions by employees
Net benefits paid out
Actuarial (losses)/gains
Transfers
At December 31
Funded schemes
Unfunded schemes
Rolls-Royce Group plc
Annual report 2009
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134
Notes to the consolidated financial statements – continued
18 Post-retirement benefits (continued)
Changes in fair value of scheme assets
At January 1
Exchange adjustments
Expected return on assets
Contributions by employer
Contributions by employees
Benefits paid out
Actuarial (losses)/gains
At December 31
Actual return on scheme assets
UK
schemes
£m
7,163
–
285
232
3
(324)
(311)
7,048
Overseas
schemes
£m
283
(16)
20
56
3
(33)
41
354
2009
Total
£m
7,446
(16)
305
288
6
(357)
(270)
7,402
35
The fair value of the scheme assets in the schemes and the expected rates of return at December 31, were as follows:
UK schemes:
LDI portfolios1
Equities
Sovereign debt
Corporate bonds
Other
Overseas schemes:
Equities
Corporate bonds
Other
Expected
rate of
return
%
5.0
7.8
4.5
5.5
4.6
5.4
9.3
4.7
6.5
7.4
UK
schemes
£m
6,626
–
352
248
4
(331)
264
7,163
2009
Market
value
£m
5,736
1,107
18
8
179
7,048
194
136
24
354
Overseas
schemes
£m
277
63
21
31
2
(25)
(86)
283
Expected
rate of
return
%
3.5
7.2
3.9
5.5
1.9
4.1
9.0
4.9
5.9
6.9
2008
Total
£m
6,903
63
373
279
6
(356)
178
7,446
551
2008
Market
value
£m
5,833
1,141
110
110
(31)
7,163
134
130
19
283
1 A portfolio of gilt and swap contracts, backed by LIBOR generating assets, that is designed to hedge the majority of the interest rate and inflation risks associated with the schemes’ obligations.
The scheme assets do not include any of the Group’s own financial instruments, nor any property occupied by, or other assets used by, the Group.
The expected rate of return for LDI portfolios is determined by the implicit yield on the portfolio at the balance sheet date.
The expected rates of return on other individual categories of scheme assets are determined by reference to gilt yields. In the UK, equities and
corporate bonds are assumed to generate returns that exceed the return from gilts by 3.25 per cent and 1.0 per cent per annum respectively.
The expected rates of return above are the weighted average of the rates for each scheme.
Future contributions
The Group expects to contribute approximately £270m to its defined benefit schemes in 2010.
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Rolls-Royce Group plc
Annual report 2009
Notes to the consolidated financial statements – continued
135
18 Post-retirement benefits (continued)
Sensitivities
The revised investment strategies are designed to hedge the risks from interest rates and inflation on an economic basis. A reduction of 0.25 per cent
in the discount rate would increase the obligations of the principal UK defined benefit schemes by approximately £243m. An equivalent movement
in interest rates would increase the fair value of the assets by approximately £290m. The difference arises largely due to differences in the methods
used to value the obligations for accounting and economic purposes. On an economic basis the correlation is in excess of 80 per cent. The principal
remaining risks relate to the assumptions for mortality and increases in salaries. If the age ratings in respect of the principal UK defined benefit
schemes were increased by one year, the scheme liabilities would increase by £137m. If the rate of increase in salaries were 0.5 per cent higher,
scheme liabilities would increase by £117m.
The defined benefit obligation relating to post-retirement medical benefits would increase by £47m if the healthcare trend rate increases by one per
cent, and reduce by £38m if it decreases by one per cent. The pension expense relating to post-retirement medical benefits, comprising service cost
and interest cost, would increase by £5m if the healthcare trend increases by one per cent, and reduce by £4m if it decreases by one per cent.
History of defined benefit schemes
The history of the schemes for the current and prior years is as follows:
Balance sheet
Present value of defined benefit obligation
Fair value of scheme assets
Unrecognised surplus
Minimum funding liability
Deficit
Experience gains/losses
Actuarial (losses)/gains on scheme assets
Experience (losses)/gains on scheme liabilities
Movement in unrecognised surplus
Recognition of minimum funding liability on January 1, 2008
Movement in minimum funding liability
Total amount recognised in OCI
Cumulative amounts recognised in OCI since January 1, 2004
19 Share capital
Authorised
At January 1, 2008 and December 31, 2009
Issued and fully paid
At January 1, 2008
Exercise of share options
B Share conversion into ordinary shares
At January 1, 2009
Exercise of share options
At December 31, 2009
2009
£m
2008
£m
2007
£m
2006
£m
(7,537)
7,402
(335)
(385)
(855)
(270)
(878)
707
40
(401)
(98)
(6,546)
7,446
(1,042)
(425)
(567)
178
766
(928)
(491)
66
(409)
303
(6,912)
6,903
(114)
–
(123)
161
350
(112)
–
–
399
712
(6,899)
5,906
(2)
–
(995)
132
470
–
–
–
602
313
2005
£m
(7,220)
5,563
(2)
–
(1,659)
588
(868)
(2)
–
–
(282)
(289)
–
Non-equity
Special
Share
of £1
Preference
shares of
£1 each
Nominal
value
£m
Ordinary
shares
of 20p each
Millions
Equity
Nominal
value
£m
1
1
–
–
1
–
1
50,000
–
–
–
–
–
–
–
–
–
–
–
–
–
2,500
1,820
12
12
1,844
10
1,854
500
364
2
3
369
2
371
The rights attaching to each class of share are set out in the Directors’ report on page 76.
In accordance with IAS 32 Financial Instruments: Presentation, the Company’s non-cumulative redeemable preference shares (C Shares) are classified as
financial liabilities. Accordingly, movements in C Shares are included in note 16.
Rolls-Royce Group plc
Annual report 2009
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Notes to the consolidated financial statements – continued
20 Share-based payments
Share-based payment plans in operation during the year
The Group had the following share-based payment plans in operation during the year:
Performance Share Plan (PSP)
This plan involves the award of shares to participants subject to performance conditions. Vesting of the performance shares is based on the
achievement of both non-market based conditions (EPS and cash flow per share) and a market based performance condition (TSR).
ShareSave share option plan
Based on a three- or five-year monthly savings contract, eligible employees are granted share options with an exercise price of up to 20 per cent
below the share price when the contract is entered into. Vesting of the options is not subject to the achievement of a performance target. In the UK,
the plan is HM Revenue & Customs approved. Overseas, employees in 33 countries participate in ShareSave plans through arrangements which
provide broadly comparable benefits to the UK plan. From 2007 onwards, the overseas schemes are cash-settled schemes.
Executive Share Option Plan (ESOP)
This plan involved the grant of market value share options to participants. It expired in 2009 and no further grants may be made. Remaining options
under the plan are subject to a non-market based performance condition (growth in EPS) and have a maximum contractual life of ten years.
Annual Performance Related Award (APRA) plan deferred shares
Deferred shares are awarded as part of the APRA plan. One third of the value of any annual bonus is delivered in the form of a deferred share award.
The release of deferred share awards is not dependent on the achievement of any further performance conditions other than that participants remain
employed by the Group for two years from the date of the award in order to retain the full number of shares. During the two-year deferral period,
participants are entitled to receive dividends, or equivalent, on the deferred shares. For deferred share awards made from 2010 onwards, 40 per cent of
the value of any annual bonus will be delivered in the form of a deferred share award.
Share Incentive Plan (SIP)
This is the ‘Free Share’ element of the UK Share Incentive Plan. Eligible UK employees may receive shares as part of the Company component of any
bonus paid. There are no conditions attached to the shares.
Further information regarding the operation of the plans can be found on pages 81 to 83 of the Directors’ remuneration report.
During the year the Group recognised a total expense of £31m (2008 £40m), of which £1.0m (2008 £0.4m) related to cash-settled arrangements.
At December 31, 2009, the Group had a liability of £1.5m (2008 £0.6m) relating to cash-settled arrangements.
The movements in awards under the Group’s various share plans are shown in the tables below.
PSP
Outstanding at January 1
Awarded during the year
Forfeited during the year
Additional entitlements arising from TSR performance
Vested during the year
Outstanding at December 31
ShareSave
Outstanding at January 1
Granted during the year
Forfeited during the year
Exercised during the year
Outstanding at December 31
Exercisable at December 31
Rolls-Royce Group plc
Annual report 2009
2009
Millions
13.2
10.1
(0.7)
Number of shares
2008
Millions
14.0
5.1
(0.7)
1.3
(6.5)
13.2
(4.2)
18.4
–
Number of
share
2009
Weighted
average
options exercise price
Pence
Millions
303p
29.7
387p
11.9
352p
(2.3)
192p
(11.9)
384p
27.4
–
–
Number of
share
options
Millions
43.3
–
(1.7)
(11.9)
29.7
1.6
2008
Weighted
average
exercise price
Pence
260p
–
333p
144p
303p
141p
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Notes to the consolidated financial statements – continued
137
20 Share-based payments (continued)
ESOP
Outstanding at January 1
Forfeited during the year
Exercised during the year
Outstanding at December 31
Exercisable at December 31
Deferred shares under APRA
Outstanding at January 1
Awarded during the year
Forfeited during the year
Additional shares accrued from conversion/reinvestment of B/C Shares
Vested during the year
Outstanding at December 31
Free Shares under SIP
Awarded during the year
Number of
share
2009
Weighted
average
options exercise price
Pence
Millions
177p
2.1
209p
(0.2)
213p
(0.7)
154p
1.2
154p
1.2
Number of
share
options
Millions
2.3
–
(0.2)
2.1
2.1
2008
Weighted
average
exercise price
Pence
175p
–
156p
177p
177p
Number of shares
2008
Millions
3.4
1.5
(0.1)
0.1
(2.1)
2.8
2009
Millions
2.8
2.3
(0.1)
0.1
(1.7)
3.4
Number of shares
2008
Millions
1.2
2009
Millions
1.2
Options were exercised on a regular basis during the year. The average share price during the year was 386p (2008 382p).
Fair values
The weighted average fair values per share for PSP awards, ShareSave grants, APRA deferred share awards, and SIP Free Share awards included in the
expense for the year were as follows:
PSP awards – 25% TSR uplift
PSP awards – 50% TSR uplift
ShareSave – 3 year grants
ShareSave – 5 year grants
APRA deferred share awards
SIP Free Share awards
2009
253p
282p
144p
167p
290p
330p
2008
458p
n/a
–
–
440p
439p
2007
557p
n/a
230p
264p
502p
499p
2006
494p
n/a
–
–
448p
462p
2005
282p
n/a
131p
154p
260p
257p
Details of the assumptions used in the calculation of these fair values are set out below. Expected volatility is based on the historical volatility of the
Company’s share price over the seven years prior to the grant or award date. Until 2007, expected dividends were based on the Company’s payments
to shareholders over the five years prior to the grant or award date. From 2008, expected dividends are based on the Company’s payments to
shareholders in respect of the previous year.
PSP awards
The fair value of shares awarded under the PSP are calculated using the market value of shares at the time of the award adjusted to take into account
non-entitlement to dividends (or equivalent) during the vesting period and the TSR performance condition. The PSP fair values were calculated using
the following assumptions:
Weighted average share price
Expected dividends
Volatility
Correlation
Expected life
Risk free interest rate
Rolls-Royce Group plc
Annual report 2009
2009
260p
14.70p
32%
35%
3 years
1.9%
2008
430p
13.00p
29%
29%
3 years
4.1%
2007
501p
8.30p
29%
26%
3 years
5.2%
2006
444p
7.92p
32%
19%
3 years
4.3%
2005
262p
7.81p
34%
19%
3 years
4.9%
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138
Notes to the consolidated financial statements – continued
20 Share-based payments (continued)
As explained on page 82 of the Directors’ remuneration report, the PSP has a TSR market-based performance condition, such that the Company’s TSR
over the performance period will be compared with the TSR of the companies constituting the FTSE 100 index on the date of grant. If the Company’s
TSR exceeds the median TSR of the FTSE 100, the number of shares that vest will be increased by 25 per cent. For conditional awards made from 2009
onwards, a further stretch was incorporated for certain senior executives, such that if TSR performance exceeds the upper quartile of the FTSE 100
index, awards are increased by 50 per cent, with straight-line vesting between median and upper quartile performance. The fair values of the awards
of shares under the PSP have been adjusted to take into account this market-based performance condition using a pricing model based on
expectations about volatility and the correlation of share price returns in the group of FTSE 100 companies and which incorporates into the valuation
the interdependency between share-price performance and TSR vesting. This adjustment increases the fair value of the award relative to the share-
price at the date of grant.
ShareSave awards
The fair value of options granted under the ShareSave plan are calculated using a binomial pricing model with the following assumptions:
Weighted average share price
Exercise price
Volatility
Expected dividends
Expected life1 – 3 year ShareSave
– 5 year ShareSave
Risk free interest rate
2007
553p
416p
37%
8.80p
2009
462p
387p
36%
14.30p
2003
173p
142p
43%
7.61p
3.3-3.8 years 3.3-3.8 years 3.3-3.8 years 3.2-3.7 years
5.3-5.8 years 5.3-5.8 years 5.3-5.8 years 5.2-5.7 years
4.6%
2005
351p
298p
40%
7.86p
2.4%
5.0%
4.4%
1 The binomial pricing model assumes that participants will exercise their options at the beginning of the six month window if the share price is greater than the exercise price. Otherwise it assumes that
options are held until the expiration of their contractual term. This results in an expected life that falls somewhere between the start and end of the exercise window.
Deferred shares under APRA and Free Shares under SIP
The fair value of shares awarded under these plans is calculated as the share price on the date of the award.
Share options outstanding
At December 31, 2009, the following ordinary shares were subject to options:
Executive Share Option Plan
ShareSave plans
Date of
grant
2000
2001
2001
2002
2003
2005
2007
2009
Number
61,638
500,440
8,161
157,061
513,061
4,576,045
10,949,312
11,905,178
Exercise
price
194p
216p
218p
188p
77p
298p
416p
387p
Exercisable
dates
2010
2010-2011
2010-2012
2010-2012
2010-2013
2010/2011
2011/2013
2013/2015
Under the terms of the Rolls-Royce 1999 Executive Share Option Plan, options granted to 42 directors and senior executives were outstanding at
December 31, 2009.
Rolls-Royce Group plc
Annual report 2009
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Notes to the consolidated financial statements – continued
139
21 Operating and finance leases
Operating leases
Leases as lessee
Rentals paid
– hire of plant and machinery
– hire of other assets
Non-cancellable operating lease rentals are payable as follows:
Within one year
Between one and five years
After five years
Leases as lessor
Rentals received – credited within revenue from aftermarket services
Non-cancellable operating lease rentals are receivable as follows:
Within one year
Between one and five years
After five years
2009
£m
68
24
82
182
123
387
2009
£m
22
5 6
11
5 3
21
2008
£m
64
25
104
163
205
472
2008
£m
26
13
22
The Group acts as lessee and lessor for both land and buildings and gas turbine engines, and acts as lessee for some plant and equipment.
• Sublease payments of £18m (2008 £15m) and sublease receipts of £11m (2008 £11m) were recognised in the income statement in the year.
• Purchase options exist on aero engines, land and buildings and plant and equipment with the period to the purchase option date varying between
one to five years.
• Renewal options exist on aero engines, land and buildings and plant and equipment with the period to the renewal option varying between one to
21 years at terms to be negotiated upon renewal.
• Escalation clauses exist on some leases and are linked to LIBOR.
• The total future minimum sublease payments expected to be made is £14m (2008 £88m) and sublease receipts expected to be received is £4m
(2008 £6m).
Finance leases
Finance lease liabilities are payable as follows:
Within one year
Between one and five years
After five years
Payments
£m
–
1
–
1
Interest
£m
–
–
–
–
2009
Principal
£m
–
1
–
1
Payments
£m
4
–
1
5
Interest
£m
1
–
–
1
2008
Principal
£m
3
–
1
4
There were no contingent rents recognised as an expense in the year (2008 £nil). The future minimum sublease receipts expected under non-
cancellable subleases is £4m (2008 £6m).
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Rolls-Royce Group plc
Annual report 2009
140
Notes to the consolidated financial statements – continued
22 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 relating to financing arrangements are spread over many years and relate to a number of customers and a broad product portfolio.
Contingent liabilities are disclosed on a discounted basis. As the directors consider the likelihood of these contingent liabilities crystallising to be
remote, this amount does not represent a value that is expected to crystallise. However, the amounts are discounted at the Group’s borrowing rate to
reflect better the time span over which these exposures could arise. The contingent liabilities are denominated in US dollars. As the Group does not
adopt cash flow hedge accounting for forecast foreign exchange transactions, this amount is reported, together with the sterling equivalent at the
reporting date spot rate.
The discounted values of contingent liabilities relating to delivered aircraft and other arrangements where financing is in place, less insurance
arrangements and relevant provisions, were:
Gross contingent liabilities
Contingent liabilities net of relevant security1
Contingent liabilities net of relevant security reduced by 20 per cent2
1 Security includes unrestricted cash collateral
£m
704
134
233
77
2009
$m
1,137
217
376
124
£m
775
155
246
85
2008
$m
1,086
222
354
123
2 Although sensitivity calculations are complex, the reduction of relevant security by 20 per cent illustrates the sensitivity of the contingent liability to changes in this assumption.
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.
Contingent liabilities exist in respect of guarantees provided by the Group in the ordinary course of business for product delivery, performance and
reliability. The Group has, in the normal course of business, entered into arrangements in respect of export finance, performance bonds, countertrade
obligations and minor miscellaneous items. Various Group undertakings are parties to legal actions and claims which arise in the ordinary course of
business, some of which are for substantial amounts. These include claims, which are yet to be substantiated, received by EPI Europrop International
GmbH (EPI) in which the Group is a partner, which is developing the TP400 engine for the Airbus A400M aircraft. As a consequence of the insolvency
of an insurer as previously reported, the Group is no longer fully insured against known and potential claims from employees who worked for certain
of the Group’s UK-based businesses for a period prior to the acquisition of those businesses by the Group. While the outcome of some of these matters
cannot precisely be foreseen, the directors do not expect any of these arrangements, legal actions or claims, after allowing for provisions already made,
to result in significant loss to the Group.
There is continuing uncertainty about the A400M programme. Airbus is currently in negotiation with its customers to determine the future of the
programme. The timing and outcome of these negotiations, and their possible impact on EPI and the Group, is uncertain. In the event that the
programme were cancelled, at December 31, 2009, the Group’s balance sheet included net assets of £17m in relation to the programme, which would
require impairment.
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Rolls-Royce Group plc
Annual report 2009
Notes to the consolidated financial statements – continued
141
23 Related party transactions
Sales of goods and services to joint ventures and associates
Purchases of goods and services from joint ventures and associates
Operating lease payments to joint ventures and associates
Guarantees of joint ventures’ and associates’ borrowings
Dividends received from joint ventures and associates
RRSP receipts from joint ventures and associates
Interest received from joint ventures and associates
Other income received from joint ventures and associates
2009
£m
2,136
(1,900)
(45)
15
77
7
– 2
52
2008
£m
1,555
(1,482)
(36)
13
59
19
102
The aggregated balances with joint ventures are shown in notes 12 and 15. Transactions with Group pension schemes are shown in note 18.
In the course of normal operations, related party transactions entered into by the Group have been contracted on an arms-length basis.
Key management personnel are deemed to be the directors and the members of the Group Executive as set out on pages 66 to 69. Remuneration for
key management personnel is shown below:
Salaries and short-term benefits
Post-retirement schemes
Share-based payments
2009
£m
11 9
2 2
4 6
17
2008
£m
17
More detailed information regarding the directors’ remuneration, shareholdings, pension entitlements, share options and other long-term incentive
plans is shown in the Directors’ remuneration report on pages 80 to 90.
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Rolls-Royce Group plc
Annual report 2009
142
Notes to the consolidated financial statements – continued
24 Acquisitions and disposals
During the year, the Group acquired 58 per cent of the shares of Tidal Generation Limited (previously a joint venture with a Group interest of
42 per cent) and 49 per cent of shares in Europea Microfusioni Aerospaziali S.p.A. (previously a subsidiary with a Group interest of 51 per cent) as
summarised below:
Trade and other receivables
Cash at bank and in hand
Trade and other payables
Net assets acquired
Goodwill arising
Acquisition cost
Less cash in acquired businesses
Cash outflow per cash flow statement
There were no significant fair value adjustments in respect of the net assets acquired.
During the year, the Group disposed of its interests in a number of small businesses, as summarised below:
Trade and other receivables
Assets held for resale
Net assets
Profit on sale or termination of businesses
Disposal proceeds
Receipt of proceeds deferred at December 31, 2008
Cash inflow per cash flow statement
Total
£m
2
3
(1)
4
6
10
(3)
7
Total
£m
2
2
4
(2)
2
1
3
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Rolls-Royce Group plc
Annual report 2009
Company financial statements
143
Company balance sheet
At December 31, 2009
Fixed assets
Investments in shares in subsidiary undertakings at cost
Current assets
Amounts owed by subsidiary undertakings due within one year
Cash at bank
Creditors – amounts falling due within one year
Financial liabilities
Amounts owed to subsidiary undertakings due within one year
Net current assets
Total assets less current liabilities
Net assets
Capital and reserves
Called-up share capital
Share premium account
Merger reserve
Capital redemption reserves
Other reserve
Own shares reserve
Profit and loss account
Equity shareholders’ funds
2
Notes
2009
£m
2008
£m
2
2,261
2,230
2
3
4
5
5 –
5
5
5
5
–
2
(13)
(71)
(84) –
(82)
2,179
2,179
371
98
968
108
(27)
661
2,179
165
167
–
–
167
2,397
2,397
369
82
214
767
77
(35)
923
2,397
The financial statements on pages 143 to 145 were approved by the Board on February 10, 2010 and signed on its behalf by:
Simon Robertson Chairman
Andrew Shilston Finance Director
Reconciliation of movements in shareholders’ funds
For the year ended December 31, 2009
At January 1
Profit/(loss) for the year
Arising on issue of ordinary shares
Issues of B/C Shares
Conversion of B Shares into ordinary shares
Ordinary shares purchased
Share-based payment adjustments
At December 31
Rolls-Royce Group plc
Annual report 2009
Annual report 2009
2009
£m
2,397
–
18
(263)
–
(17)
44
2,179
2008
£m
2,607
(1)
17
(237)
53
(71)
29
2,397
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Notes to the Company financial statements
Notes to the Company financial statements
1 Accounting policies
Basis of accounting
The financial statements have been prepared in accordance with applicable UK Accounting Standards on the historical cost basis.
As permitted by section 408 of the Companies Act 2006, a separate profit and loss account for the Company has not been included in these financial
statements. As permitted by the audit fee disclosure regulations, disclosure of non-audit fee information is not included in respect of the Company. As
permitted by FRS 1 Cash flow statements, no cash flow statement for the Company has been included. As permitted by FRS 8 Related party transactions,
no related party disclosures for the Company have been included.
Investments in subsidiary undertakings
Investments in subsidiary undertakings are reported at cost less any amounts written off.
Share-based payments
As described in the Directors’ remuneration report on pages 80 to 90, the Company grants awards of its own shares to employees of its subsidiary
undertakings, (see note 20 of the consolidated financial statements). The costs of share-based payments in respect of these awards are accounted for,
by the Company, as an additional investment in its subsidiary undertakings. The costs are determined in accordance with FRS 20 Share-based payment.
Any payments made by the subsidiary undertakings in respect of these arrangements are treated as a return of this investment.
Own shares for settlement of share-based payment plans
Where the Company acquires its own shares for the purpose of satisfying share-based payment plans, the cost in excess of any exercise price payable
by the plan participants is written off to the profit and loss reserve.
Current assets
Amounts are recognised at the lower of cost and net realisable value.
Financial instruments
In accordance with FRS 25 Financial instruments: Presentation, the Company’s C Shares are classified as financial liabilities and held at amortised cost
from the date of issue until redeemed.
Taxation
Provision for taxation is made at the current rate and, in accordance with FRS 19 Deferred tax, for deferred taxation at the projected rate on timing
differences that have originated, but not reversed at the balance sheet date.
2 Investments – subsidiary undertakings
Cost:
At January 1, 2009
Cost of share-based payments in respect of employees of subsidiary undertakings less receipts from subsidiaries in respect of those payments
At December 31, 2009
£m
2,230
31
2,261
3 Financial liabilities
C Shares
Movements in the C Shares during the year were as follows:
Authorised
At January 1, and December 31, 2009
Issued and fully paid
At January 1, 2009
Shares issued
Shares redeemed
At December 31, 2009
Rights attaching to C Shares are described in the Directors’ report on page 76.
Rolls-Royce Group plc
Annual report 2009
C Shares
of 0.1p
Millions
Nominal
value
£m
2,000,000
2,000
–
263,776
(251,199)
12,577
–
264
(251)
13
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Notes to the Company financial statements – continued
145
4 Share capital
Authorised
At January 1, 2008 and December 31, 2009
Issued and fully paid
At January 1, 2008
Exercise of share options
B Share conversion into ordinary shares
At January 1, 2009
Exercise of share options
At December 31, 2009
Non-equity
Special
Share
of £1
Preference
shares of
£1 each
Nominal
value
£m
1
1
–
–
1
–
1
50,000
–
–
–
–
–
–
–
–
–
–
–
–
–
Ordinary
shares of
20p each
Millions
2,500
1,820
12
12
1,844
10
1,854
Equity
Nominal
value
£m
500
364
2
3
369
2
371
The rights attaching to each class of share are set out in the Directors’ report on page 76.
In accordance with FRS 25 Financial instruments: Presentation, the Company’s non-cumulative redeemable preference shares (C Shares) are classified as
financial liabilities. Accordingly, movements in C Shares are included in note 3.
5 Movements in capital and reserves
At January 1, 2009
Result for the year
Arising on issue of ordinary shares
Issue of C Shares
Redemption of C Shares
Own shares purchased
Own shares vesting in share-based payment plans
Share-based payment adjustments
At December 31, 2009
Share
capital
£m
369
–
2
–
–
–
–
–
371
Share
premium
£m
82
–
16
–
–
–
–
–
98
Merger
reserve
£m
214
–
–
(214)
–
–
–
–
–
Capital
redemption
reserves
£m
767
–
–
(50)
251
–
–
–
968
Non-distributable reserves
Other
reserve1
£m
77
–
–
–
–
–
–
31
108
Own shares
reserve2
£m
(35)
–
–
–
–
(17)
25
–
(27)
Profit
and loss
account
£m
923
–
–
1
(251)
–
(25)
13
661
Total
£m
2,397
–
18
(263)
–
(17)
–
44
2,179
1 The ‘Other reserve’ represents the value of share-based payments in respect of employees of subsidiary undertakings for which payment has not been received.
2 At December 31, 2009, the Company held 7,156,197 shares (2008 8,017,635) with a net book value of £27m (2008 £35m).
6 Contingent liabilities
Where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within its group, the Company
considers these to be insurance arrangements, and accounts for them as such. In this respect, the Company treats the guarantee contract as a
contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee.
At December 31, 2009 these guarantees amounted to £1,876m (2008 £1,273m).
7 Other information
Emoluments of directors
The remuneration of the directors of the Company is shown in the Directors’ remuneration report on pages 80 to 90.
Employees
The Company had no employees in 2009 and 2008.
Share-based payments
Shares in the Company have been granted to employees of the Group as part of share-based payment plans and are charged in the
employing company.
Rolls-Royce Group plc
Annual report 2009
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Other matters
Principal subsidiary undertakings
At December 31, 2009
Incorporated within the UK – held by Rolls-Royce Group plc
Rolls-Royce plc
Principal trading company
Incorporated within the UK – indirectly held
Optimized Systems and Solutions Limited
Rolls-Royce Fuel Cell Systems Limited
Rolls-Royce International Limited
Rolls-Royce Leasing Limited
Rolls-Royce Marine Electrical Systems Limited
Rolls-Royce Marine Power Operations Limited
Rolls-Royce Power Development Limited
Rolls-Royce Power Engineering plc
Rolls-Royce Total Care Services Limited
Tidal Generation Limited
Equipment health management and advanced data management services
Development of fuel cell systems
International support and commercial information services
Engine leasing
Marine electrical systems
Nuclear submarine propulsion systems
Generation of electricity from independent power projects
Energy and marine systems
Aero engine aftermarket support services
Development of tidal generation systems
The above companies operate principally in the UK and the effective Group interest is 100 per cent, other than Rolls-Royce Fuel Cell Systems Limited in
which it is 80 per cent.
Incorporated overseas – indirectly held
Brazil
Canada
China
Finland
France
France
Germany
Guernsey
India
India
Italy
Norway
Norway
Singapore
Sweden
US
US
US
US
US
US
US
US
US
US
Rolls-Royce Brasil Limitada
Rolls-Royce Canada Limited
Rolls-Royce Marine (Shanghai) Limited
Rolls-Royce OY AB
Rolls-Royce Civil Nuclear SAS
Rolls-Royce Technical Support SARL
Rolls-Royce Deutschland Ltd & Co KG
Nightingale Insurance Limited
Rolls-Royce India Private Limited
Rolls-Royce Operations (India) Private Limited
Europea Microfusioni Aerospaziali S.p.A.
Rolls-Royce Marine AS
Scandinavian Electric Holding AS
Rolls-Royce Singapore Pte Limited
Rolls-Royce AB
Data Systems & Solutions LLC
Optimized Systems and Solutions Inc.
Rolls-Royce Commercial Marine Inc.
Rolls-Royce Corporation
Rolls-Royce Crosspointe LLC
Rolls-Royce Energy Systems Inc.
Rolls-Royce Engine Services – Oakland Inc.
Rolls-Royce Defense Services Inc.
Rolls-Royce Naval Marine Inc.
Seaworthy Systems Inc.
Aero engine repair and overhaul
Industrial gas turbines and aero engine sales, service and overhaul
Manufacture and supply of marine equipment
Manufacture of marine winches and propeller systems
Instrumentation and control systems and lifecycle management for
nuclear power plants
Aero engine project support
Aero engine design, development and manufacture
Insurance services
Diesel engine project management and customer support
Engineering support services
Manufacture of gas turbine engine castings
Design and manufacture of ship equipment
Marine electrical systems
Energy and marine aftermarket support services
Manufacture of marine propeller systems
Instrumentation and control systems and lifecycle management for
nuclear power plants
Equipment health management and advanced data
management services
Marine aftermarket support services
Design, development and manufacture of gas turbine engines
Manufacturing facility for aero engine parts
Energy turbine generator packages
Aero engine repair and overhaul
Aero engine repair and overhaul
Design and manufacture of marine equipment
Marine support services
The above companies operate principally in the country of their incorporation.
The effective Group interest is 100 per cent.
A list of all subsidiary undertakings will be included in the Company’s annual return to Companies House.
Rolls-Royce Group plc
Annual report 2009
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Other matters
147
Principal joint ventures and associates
At December 31, 2009
Joint ventures
Incorporated within the UK – indirectly held
Airtanker Holdings Limited
Strategic tanker aircraft PFI project
Airtanker Services Limited
Provision of aftermarket services for strategic tanker aircraft
Alpha Partners Leasing Limited
Aero engine leasing
Composite Technology & Applications Limited
Development of aero engine fan blades
Genistics Holdings Limited
Trailer-mounted field mobile generator sets
Rolls-Royce Goodrich Engine Control Systems Limited
Development and manufacture of aero engine controls
Rolls-Royce Snecma Limited (UK & France)
Aero engine collaboration
Rolls-Royce Turbomeca Limited (UK & France)
Aero engine collaboration
Rolls Wood Group (Repair and Overhauls) Limited
Industrial gas turbine repair and overhaul
TRT Limited
Aero engine turbine blade repair services
Turbine Surface Technologies Limited
Aero engine turbine surface coatings
Turbo-Union Limited (UK, Germany & Italy)
RB199 engine collaboration
Rolls-Royce Group plc
Annual report 2009
Class
% of
class held
% of total
equity held
Ordinary
20
Ordinary
A Ordinary
B Ordinary
A Ordinary
B Ordinary
A Ordinary
B Ordinary
Ordinary
A Shares
B Shares
A Shares
B Shares
A Ordinary
B Ordinary
A Ordinary
B Ordinary
A Ordinary
B Ordinary
Ordinary
A Shares
22
100
– }
– }
– }
100
100
50
–
–
100
100 }
100 }
– }
100 }
100 }
37.5 }
40
–
–
20
22
50
51
50
50
50
50
50
49.5
50
40
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Other matters
Principal joint ventures and associates (continued)
At December 31, 2009
Joint ventures
Incorporated overseas – indirectly held
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China
Germany
Germany
Germany
Germany
Hong Kong
Israel
Malaysia
Singapore
Singapore
Spain
Switzerland
US
US
US
US
US
Xian XR Aero Components Co Limited
Manufacturing facility for aero engine parts
EPI Europrop International GmbH (effective interest 35.5%)
A400M engine collaboration
EUROJET Turbo GmbH (UK, Germany, Italy & Spain) (effective interest 39%)
EJ200 engine collaboration
MTU, Turbomeca, Rolls-Royce GmbH (UK, France & Germany)
MTR390 engine collaboration
N3 Engine Overhaul Services Verwaltungsgesellschaft mbh
Aero engine repair and overhaul
Hong Kong Aero Engine Services Limited
Aero engine repair and overhaul
Techjet Aerofoils Limited
Manufacture of compressor aerofoils for gas turbines
Advanced Gas Turbine Solutions Sdn Bhd
Industrial gas turbine aftermarket services
International Engine Component Overhaul Pte Limited
Aero engine repair and overhaul
Singapore Aero Engine Services Private Limited (effective interest 39%)
Aero engine repair and overhaul
Industria de Turbo Propulsores SA
Aero engine component manufacture and maintenance
IAE International Aero Engines AG (UK, Germany, Japan & US)
V2500 engine collaboration
Alpha Leasing (US) LLC, Alpha Leasing (US) (No.2) LLC,
Alpha Leasing (US) (No.4) LLC, Alpha Leasing (US) (No.5) LLC,
Rolls-Royce & Partners Finance (US) LLC, Rolls-Royce & Partners Finance (US) (No.2) LLC
Aero engine leasing
Exostar LLC
Business to business internet exchange
GE Rolls-Royce Fighter Engine Team LLC
F136 development engine for the Joint Strike Fighter (JSF) Programme
Texas Aero Engine Services, LLC
Aero engine repair and overhaul
Williams-Rolls Inc. (UK & US)
Small aero engine collaboration
Class
% of
class held
% of total
equity held
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
A Ordinary
B Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
A Shares
B Shares
C Shares
D Shares
Partnerships
Partnership
Partnership
Partnership
Common
49
28
33
33.3
50
45
50
50 }
49
50
30
46.9
100
–
–
– }
50
17.6
40
50
15
49
28
33
33.3
50
45
50
49
50
30
46.9
32.5
–
–
–
–
15
Unincorporated overseas – held by subsidiary undertaking
US
Light Helicopter Turbine Engine Company (LHTEC)
Rolls-Royce Corporation has a 50 per cent interest in this unincorporated
partnership which was formed to develop and market jointly the T800 engine
Associate
Incorporated overseas – held by subsidiary undertaking
Norway
ODIM ASA
Provider of specialist marine handling systems
Ordinary
33
33
The countries of principal operations are stated in brackets after the name of the company, if not the country of incorporation.
Rolls-Royce Group plc
Annual report 2009
Other matters
149
Independent auditors’ report
to the members of Rolls-Royce Group plc
We have audited the financial statements of Rolls-Royce Group plc for the year ended December 31, 2009 set out on pages 92 to 148. The financial
reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting
Standards (IFRSs) as adopted by the EU. The financial reporting framework that has been applied in the preparation of the parent company financial
statements is applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice).
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work
has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ 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 and the
Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
As explained more fully in the Directors’ responsibilities statement set out on page 78, the directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with
applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s
(APB’s) Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/scope/UKP.
Opinion on financial statements
In our opinion:
• the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at December 31, 2009 and of the
Group’s profit for the year then ended;
• the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU;
• the parent company financial statements have been properly prepared in accordance with UK Generally Accepted Accounting Practice;
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006; and, as regards the Group financial
statements, Article 4 of the IAS Regulation.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
• the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006; and
• the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial
statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches
not visited by us; or
• the parent company financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting
records and returns; or
• certain disclosures of directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review:
• the directors’ statement, set out on page 79, in relation to going concern; and
• the part of the Corporate governance statement on page 66 relating to the Company’s compliance with the nine provisions of the June 2008
Combined Code specified for our review.
A J Sykes (Senior Statutory Auditor)
for and on behalf of KPMG Audit Plc, Statutory Auditor
Chartered Accountants
8 Salisbury Square
London
EC4Y 8BB
February 10, 2010
Rolls-Royce Group plc
Annual report 2009
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150
Other matters
Group five-year review
For the years ended December 31
Income statement
Revenue
Profit before net research and development and share of joint ventures and associates
Research and development (net) 1
Share of profit of joint ventures and associates
Profit before financing
Net financing
Profit/(loss) before taxation 2
Taxation
Profit/(loss) for the year
Attributable to:
Equity holders of the parent
Minority interests
Profit/(loss) for the year
1 Research and development (gross)
2 Underlying profit before taxation
Earnings per ordinary share:
Underlying
Basic
2009
£m
10,414
1,458
(379)
93
1,172
1,785
2,957
(740)
2,217
2,221
(4)
2,217
(864)
915
2008
£m
9,082
1,191
(403)
74
862
(2,754)
(1,892)
547
(1,345)
(1,340)
(5)
(1,345)
(885)
880
2007
£m
7,435
827
(381)
66
512
221
733
(133)
600
606
(6)
600
(824)
800
2006
£m
7,156
1,016
(370)
47
693
698
1,391
(397)
994
998
(4)
994
(747)
705
2005
£m
6,603
1,113
(282)
46
877
(400)
477
(130)
347
350
(3)
347
(663)
593
39.67p
120.38p
36.70p
(73.63p)
34.06p
33.67p
29.81p
57.32p
24.48p
20.11p
Payments to shareholders per ordinary share
15.00p
14.30p
13.00p
9.59p
8.72p
Balance Sheet
Assets
Liabilities
Called-up share capital
Reserves
Equity attributable to equity holders of the parent
Minority interests
Cash flow
Cash inflow from operating activities
Cash outflow from investing activities
Cash inflow/(outflow) from financing activities
Increase/(decrease) in cash and cash equivalents
–
2009
£m
15,422
(11,640)
3,782
371
3,411
3,782
3,782
2009
£m
859
(606)
384
637
2008
£m
15,348
(13,123)
2,225
369
1,847
2,216
9
2,225
2008
£m
1,015
(645)
(221)
149
2007
£m
11,459
(7,910)
3,549
364
2,815
3,179
12
3,191
2007
£m
705
(572)
(473)
(340)
2006
£m
10,798
(8,073)
2,725
356
2,362
2,718
7
2,725
2006
£m
1,072
(469)
(122)
481
2005
£m
9,627
(8,122)
1,505
352
1,147
1,499
6
1,505
2005
£m
1,060
(289)
(443)
328
Net funds
1,275
1,458
888
826
335
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Rolls-Royce Group plc
Annual report 2009
Other matters
151
Shareholder information
to the members of Rolls-Royce Group plc
Financial calendar 2010-2011
Ex entitlement to C Shares
Record date for entitlement to C Shares
Annual General Meeting, Queen Elizabeth II Conference Centre, London
Deadline for receipt of C Share elections
Record date for dividend payable on C Shares
Allotment of C Shares
Payment of C Share redemption monies
Purchase of ordinary shares for CRIP participants
Announcement of interim results
Ex entitlement to C Shares
Record date for entitlement to C Shares
Deadline for receipt of C Share elections
2010 Financial year end
Allotment of C Shares
Payment of C Share redemption monies
Purchase of ordinary shares for CRIP participants
Preliminary announcement – 2010 full year results
2010 Annual report published
Registrar
Our Registrar is Computershare Investor Services PLC. When making
contact with the Registrar please quote your Shareholder Reference
Number (SRN). This is a 10-digit number, which usually starts with the
letter ‘C’ and which can be found on the right hand side of your share
certificate. You can speak to a member of the Registrar’s Rolls-Royce
team by calling +44 (0)870 703 0162 between 8.30am and 5.30pm
Monday to Friday or you can write to them at Computershare Investor
Services PLC, The Pavilions, Bridgwater Road, Bristol, BS13 8AE.
Information available on the internet
You can access copies of the Annual report, Company announcements
and much more at www.rolls-royce.com.
You can also visit our Registrar’s website at www.investorcentre.co.uk to:
• view your account balance, values and history;
• view your payment history;
• update a record of your bank details;
• register to receive electronic shareholder communications;
• download forms;
• deal in Rolls-Royce shares online;
• vote online for forthcoming general meetings;
• view your holdings in all companies registered with Computershare
and create a portfolio; and
• track the market value of your portfolio.
Share dealing service
Our Registrar offers both internet and telephone dealing services. You
can deal over the telephone or on the internet from 8.00am to 4.30pm
Monday to Friday excluding Bank holidays. Real-time trading is available
on the internet during market hours and there is no need to open a
trading account in order to deal. The fee for the service is 0.5 per cent of
the value of each sale or purchase of shares subject to a minimum fee of
£15. The maximum value of shares you can trade using the internet is
£25,000 for purchases and £50,000 for sales. Please note that the internet
dealing service is only available to existing shareholders at
www-uk.computershare.com/investor/sharedealing.asp.
Rolls-Royce Group plc
Annual report 2009
April 21, 2010
April 23, 2010
11.00am April 28, 2010
5.00pm June 4, 2010
June 4, 2010
July 1, 2010
July 2, 2010
By July 13, 2010
July 29, 2010
October 27, 2010
October 29, 2010
5.00pm December 3, 2010
December 31, 2010
January 4, 2011
January 5, 2011
By January 13, 2011
February, 2011
March, 2011
The fee for the Telephone Share Dealing Service is one per cent of the
value of the transaction subject to a minimum fee of £25. If you would
like to use this service please call +44 (0)870 703 0084. Stamp duty of
0.5 per cent is also payable on all purchases.
Share price
You can obtain the current market price of the Company’s shares on our
website at www.rolls-royce.com or from Teletext, Ceefax or similar
services or on the London Stock Exchange website at
www.londonstockexchange.com.
American Depositary Receipts Programme (ADR)
Rolls-Royce ordinary shares are traded in the US in the form of a
sponsored ADR facility with The Bank of New York Mellon as the
depositary. Each ADR represents five ordinary shares.
For further information about the US ADR programme, please contact
your broker or write to:
BNY Mellon
Shareholder Services
PO Box 358516
Pittsburgh PA 15252-8516
Phone: +1 888 269 2377 or +1 888 BNY ADRS (toll free within the US)
Phone outside the US: +1 201 680 6825
Email: shrrelations@bnymellon.com
Website: www.adrbnymellon.com
Unsolicited mail
The Company is legally obliged to supply the names and addresses of its
members to certain organisations on request. Because of this, you may
receive mail you have not asked for. If you want to limit the amount of
personally addressed unsolicited mail you receive, and you have a UK
registered address, please write to the Mailing Preference Service (MPS),
DMA House, 70 Margaret Street, London, W1W 8SS or register by
telephoning +44 (0)845 703 4599 or online at www.mpsonline.org.uk.
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152
Other matters
Shareholder information (continued)
to the members of Rolls-Royce Group plc
ShareGift
The Orr Mackintosh Foundation operates a charity donation scheme for shareholders with small numbers of shares which may be uneconomic to sell.
Details of the scheme are available from ShareGift at www.sharegift.org or you can write to Orr Mackintosh Foundation, 17 Carlton House Terrace,
London SW1Y 5AH (telephone +44 (0)20 7930 3737).
Warning to shareholders
We are aware that some shareholders have received unsolicited phone calls or correspondence concerning investment matters. These are typically
from overseas based ‘brokers’ who target UK shareholders, offering to sell them what often turn out to be worthless or high risk shares in US or UK
investments. Such operations are commonly known as ‘boiler rooms’. These ‘brokers’ can be very persistent and extremely persuasive and a 2006
survey by the Financial Services Authority (FSA) has reported that the average amount lost by each investor is around £20,000.
Shareholders are advised to be very wary of any unsolicited advice, offers to buy shares at a discount or offers of free company reports. If you receive
any unsolicited investment advice:
• Make sure you get the correct name of the person and organisation.
• Check that they are properly authorised by the FSA before getting involved by visiting www.fsa.gov.uk/pages/register.
• Report the matter to the FSA. For UK callers telephone 0300 500 5000 and for overseas callers telephone +44 20 7066 1000 or visit
www.moneymadeclear.fsa.gov.uk.
• If the calls persist, hang up.
If you deal with an unauthorised firm, you will not be eligible to receive payment under the Financial Services Compensation Scheme.
Dividends paid on C Shares held
C Share calculation period
July 1, 2009 – December 31, 2009
January 1, 2009 – June 30, 2009
Dividend rate (%)
1.055
1.110
Record date for
C Share dividend
November 20, 2009
June 5, 2009
Payment date
January 4, 2010
July 1, 2009
Previous C Share Issues
Issue date
January 4, 2010
July 2, 2009
January 2, 2009
No of C Shares
issued per
ordinary share
Record date for
entitlement
to C Shares
60.0 October 30, 2009 December 4, 2009
85.8
June 5, 2009
57.2 October 31, 2008 December 5, 2008
April 24, 2009
Latest date for
receipt of election
forms by Registrar of trading (p)*
486.250
366.500
343.125
issues per Ordinary
shares
(%)
98.78
97.71
98.36
ordinary
share (p)**
6.00
8.58
5.72
C Shares
(%)
1.22
2.29
1.64
Date of
redemption
of C Shares
January 5, 2010
July 2, 2009
January 5, 2009
CRIP purchase CRIP purchase
price (p)
491.970
367.628
362.240
date
January 8, 2010
July 3, 2009
January 6, 2009
CGT apportionment
Apportionment values
Value of
C Share
Price of
ordinary
shares on
first day
Details of previous B Share issues can be found in the investors section on the Group’s website at www.rolls-royce.com.
Analysis of ordinary shareholders at December 31, 2009
Type of holder:
Individuals
Institutional and other investors
Total
Size of holding:
1 – 150
151 – 500
501 – 10,000
10,001 – 100,000
100,001 – 1,000,000
1,000,001 and over
Total
Rolls-Royce Group plc
Rolls-Royce Group plc
Annual report 2009
Annual report 2009
Number of
shareholders
226,717
5,776
232,493
% of total
shareholders
97.52
2.48
100.00
Number of
shares
130,632,130
1,723,454,910
1,854,087,040
69,016
121,350
40,068
1,430
438
191
232,493
29.69
52.20
17.23
0.61
0.19
0.08
100.00
7,043,918
31,407,665
67,226,364
37,527,196
155,217,055
1,555,664,842
1,854,087,040
% of total
shares
7.05
92.95
100.00
0.38
1.69
3.63
2.02
8.37
83.91
100.00
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Cautionary statement regarding forward-looking statements
This Annual report has been prepared for the members of the Company only. The Company, its directors, employees or agents do not accept
or assume responsibility to any other person in connection with this document and any such responsibility or liability is expressly disclaimed.
This Annual report contains certain forward-looking statements. These forward-looking statements can be identified by the fact that they do
not relate only to historical or current facts. In particular, all statements that express forecasts, expectations and projections with respect to future
matters, including trends in results of operations, margins, growth rates, overall market trends, the impact of interest or exchange rates, the
availability of financing to the Group, anticipated cost savings or synergies and the completion of the Group’s strategic transactions, are
forward-looking statements. By their nature, these statements and forecasts involve risk and uncertainty because they relate to events and
depend on circumstances that may or may not occur in the future. There are a number of factors that could cause actual results or developments
%
to differ materially from those expressed or implied by these forward-looking statements and forecasts. The forward-looking statements reflect
2
the knowledge and information available at the date of preparation of this Annual report, and will not be updated during the year. Nothing in
this Annual report should be construed as a profit forecast.
.
7
1
Return on capital employed (%)
06 07
08 09
03 04
01 02
5
4
1
0
6
1
2
7
1
1
7
1
2
1
1
8
1
1
5
8
2
7
7
7
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05
15
20
15
20
5
0
0
.
.
.
.
.
.
.
.
.
Note: The reconciliation of underlying revenues and results is provided in notes 2 and 5 on pages 104 and 111 of the consolidated financial statements.
10
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5
0
00 01 02 03 04 05 06 07 08 09
5
0
Business review
01 Introduction
02 Chairman’s statement
04 Chief Executive’s review
08 Global activity
10 Our strategy
18 Market outlook
19 Key performance indicators
24 Principal risks and uncertainties
27 Review of operations
28 Civil aerospace
30 Defence aerospace
32 Marine
34 Energy
36 Engineering and technology
38 Operations
40 Services
42 Corporate responsibility
58 Finance Director’s review
Corporate governance
66 Introduction
66 Board of directors
72 Board committees
74 Internal control and risk management
75 Shareholders and share capital
77 Other statutory information
78 Annual report and financial statements
80 Directors’ remuneration report
Financial statements
Contents listed on page 91
Directors’ report
The Directors present the Annual report for the year
ended December 31, 2009 which includes the business
review, corporate governance and audited financial
statements for the year. References to ’Rolls-Royce’, the
‘Group’, the ’Company’, ‘we’, or ‘our’ are to Rolls-Royce
Group plc and/or its subsidiaries, or any of them as the
context may require. Pages 01 to 90, inclusive, of this
Annual report comprise a Directors’ report that has been
drawn up and presented in accordance with English
company law and the liabilities of the Directors in
connection with that report shall be subject to the
limitations and restrictions provided by such law.
Rolls-Royce Group plc is incorporated as a public limited
company and is registered in England under the UK
Companies Act 1985 with the registered number
4706930. Rolls-Royce Group plc’s registered office is
65 Buckingham Gate, London, SW1E 6AT.
70
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Photography credits: Airbus Industrie, BAE Systems plc, The Boeing
Company, United States Department of Defense, Gulfstream Aerospace
Corporation, Lockheed Martin Corporation, Marcus Ginns, The Ministry
of Defence, Peak Photographic.
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This document is printed on Revive 50:50 Silk which has been
independently certified according to the rules of the Forestry
0
Stewardship Council (FSC). Revive 50:50 Silk contains 50 per cent
recycled fibre bleached in an Elementally Chlorine Free (ECF) process.
The manufacturing mill is accredited with the ISO 14001 Environmental
Standard. This document has been printed using vegetable based inks
5
and is recyclable.
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Printed by St Ives Westerham Press Ltd. ISO 14001:2004,
FSC certified and CarbonNeutral®.
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Delivering today,
investing for the future
Rolls-Royce Group plc
Annual report 2009
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© Rolls-Royce plc 2010
Rolls-Royce Group plc
Registered office:
65 Buckingham Gate
London
SW1E 6AT
T +44(0)20 7222 9020
www.rolls-royce.com
Company number 4706930