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Richtech Robotics Inc. Class B Common Stock

rr · NASDAQ Industrials
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Industry Industrial - Machinery
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FY2009 Annual Report · Richtech Robotics Inc. Class B Common Stock
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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

 
 
 
 
 
 
 
 
 
Order book – firm and announced (£bn)

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Contents

Financial highlights

00

01 02

03 04

05

06 07

08 09

Order book – firm and announced (£bn)

1200

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Underlying EBITDA (£m)
1000
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Profit before financing (£m)

03 04

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70
60
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40
30
20
10
0

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40

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20

10
1,400
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1,200
1,000
800
600
400
200
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Underlying earnings per ordinary share (p)
1200
8
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1000
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12000
800
2
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Underlying revenue (£m)
10000
600

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00 01 02 03 04 05 06 07 08 09

1000

2000
800

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03 04
Underlying profit before tax (£m)

01 02

05
600

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06 07

08 09

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3
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Payments to shareholders (p) 

03 04

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05

0

08 09

.

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Profit before financing (£m)

03 04

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06 07

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

2
1
1

8
1
1

5
4
1

0
6
1

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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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Designed and produced by salterbaxter

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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 
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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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02

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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Chief Executive’s review – continued

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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Business review

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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Business review

Chief Executive’s review – continued

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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10

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
0
2
2

,

3
4
4
2

,

6
3
5
2

,

0
0
8
2

,

1
5
2
3

,

7
5
4
3

,

1
0
9
3

,

5
6
2
4

,

5
5
7
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.

m
7
2
9
4
£

,

2,000

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

0

£864m

02

01

00

03

04

05

06

07

08

09

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)

5
8
8

m
4
6
8
£

4
2
8

7
4
7

6000

5000

4000

3000

2000

1000

0
07

08

09

0
0
2
2

,

3
4
4
2

,

6
3
5
2

,

0
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2

,

1
5
2
3

,

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5
4
3

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3

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5
6
2
4

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5
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6
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6

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1
6

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

11

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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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12

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

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14

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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16

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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18

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

 
 
 
19

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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

05

05

£m

679
£m

679

05

05
£m

552
£m

552

05

05

06

06

07

07

08

08

09

09

748

832

919

983

748

832

919

983

06

06

491

491

06

06

07

07

62

62

07

07

08

08

09

09

570

(183)

570

(183)

09

09

08

08

12,000

9,000

12,000
6,000
9,000
3,000

6,000
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3,000

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1,000

750

1,000
500

750
250
500
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250

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600

450

600
300

450
150

300
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150

(200)

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17.2

06

06

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370

07

07

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381

381

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09

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403

379

370

381

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06

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747

07

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08

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09

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09
864

885

864

747

824

885

864

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06

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07

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08

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09

09

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9,000

6,000

3,000

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1,000

750

500

250

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600

450

300

150

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(200)
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20
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500

400

500
300

400
200

300
100
500
200
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400
100
300
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200

100

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1,000
600

800
400

600
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800
200
600
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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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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

5.8

5.8

5.8

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07

5.4

5.4

5.4

08

08

06

303

07

304

08

283

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4.7

4.7

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09

09

291

303

304

283

291

303

304

283

291

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06

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09

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45.9

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58.3

26.1

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45.9

07

55.5

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
%
7
4
%
7
4

.

.

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6

5

4
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350
300
250
350
200
300
150
250
100
200
50
350
150
0
300
100
250
50
200
0
150
100
50
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60

50

40
60
30
50
20
40
10
60
30
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50
20
40
10
30
0
20

10

0

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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22

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

£000

182

194

182

194

169

182

194

05

05

%
05

0
%

0

%

0

05

05

06

06

06

5

5

5

06

06

07

07

07

7

7

7

07

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211

211

211

08

08

08

4

4

4

08

08

233

233

233

09

09

09

3

3

3

09

09

05
1,519

06
1,426

07
1,393

08
1,579

09
1,586

1,519

1,426

1,393

1,579

1,586

1,519

1,426

1,393

1,579

1,586

05

06

07

08

09

lbs million
05

305

05

06

320

06

07

334

07

08

348

08

09

367

09

05

06

07

08

09

48

55

57

59

%

45

£m

05

06

07

08

09

3,457

3,901

4,265

4,755

4,927

05

06

07

08

09

250

200

150
250

100
200

50
150
250
100
0
200
50
150
0
100

50

0

8

6
8
4
6
2
8
4
0
6
2

4
0

2

0

2,000

1,500
2,000
1,000
1,500
500
2,000
1,000
0
1,500
500

1,000
0

500
400
0
350
300
250
200
150
100
50
0

60

50

40

30

20

10

0

5,000

4,000

3,000

2,000

1,000

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,

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0
0
0
3
0
3
0
2
£
3
0
3
0
2
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3
3
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3
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3

%
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lbs million

305

lbs million

320

334

348

367

305

320

334

348

367

05

05

%

45
%

45

05

05

£m

3,457
£m

06

06

48

48

06

06

07

07

55

55

07

07

08

08

57

57

08

08

09

09

59

59

09

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3,901

4,265

4,755

4,927

3,457

3,901

4,265

4,755

4,927

05

05

06

06

07

07

08

08

09

09

400

350

300
250
400
200
350
150
300
100
250
50
200
0
150
100
50
0

60

50

40
60
30
50
20
40
10
30
0
20

10

0

5,000

4,000

5,000
3,000

4,000
2,000

1,000
3,000

0
2,000

1,000

0

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

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6
m
3
7
6
3

%
9
5
%
9
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£
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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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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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30

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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34

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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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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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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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Review of operations – continued

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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42

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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43

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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44

Business review

Corporate responsibility – continued

Our approach

Our approach to corporate responsibility is 
concentrated on four areas of activity:

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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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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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49

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 (%)

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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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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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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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Rolls-Royce Group plc

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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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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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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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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61

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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71

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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 

8 

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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Corporate governance

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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74

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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Corporate governance

Shareholders and share capital

The risk escalation structure

Group

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Risk action flowdown

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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76

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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Corporate governance

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 

Rolls-Royce Group plc

Annual report 2009

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78

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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Corporate governance

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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82

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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James Guyette 

Sir John Rose 

Andrew Shilston 

Colin Smith 

Mike Terrett  

January 1, 
2009 

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

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92

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)

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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

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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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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

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96

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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£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.

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98

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. 

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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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100

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

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Notes to the consolidated financial statements – continued

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.

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102

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

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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.

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104

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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Notes to the consolidated financial statements – continued

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 

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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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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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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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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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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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114

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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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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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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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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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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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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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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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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128

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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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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136

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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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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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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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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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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144

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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146

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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148

Other matters

Principal joint ventures and associates (continued)
At December 31, 2009

Joint ventures

Incorporated overseas – indirectly held

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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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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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Order book – firm and announced (£bn)

5

.

4

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7

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6

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Contents

Financial highlights

00

01 02

03 04

05

06 07

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Order book – firm and announced (£bn)

1200

5

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4
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6
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06 07

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1200
Underlying EBITDA (£m)
1000
3
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9
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600
1200
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03 04

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400

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Profit before financing (£m)

03 04

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06 07

0
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08 09

70
60
50
40
30
20
10
0

50

40

30

20

10
1,400
0
1,200
1,000
800
600
400
200
0

2
6
8

2
1
5

7
1
4

0
7
2

2
1
2

3
9
6

1
1
3

7
9
7
8
8
2
1400
Underlying earnings per ordinary share (p)
1200
8
8
1000
4
3
4
9
12000
800
2
1
Underlying revenue (£m)
10000
600

0
1
1
1

0
2
0
2

0
2
2
1

2
6
5
1

1
8
9
2

6
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0
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4
6
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8
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5
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7
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7

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,

3
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3
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8000

400
8
5
4
200
1400
6000
6
0
1200
4000

,

00 01 02 03 04 05 06 07 08 09

1000

2000
800

00
03 04
Underlying profit before tax (£m)

01 02

05
600

0
06 07

08 09

6
3
4

5
7
4

5
5
2

5
8
2

4
6
3

400
3
9
200
5

5
0
7

0
0
8

0
8
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00
Payments to shareholders (p) 

03 04

01 02

06 07

05

0

08 09

.

8
1
8

9
8
0
5
1
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9
8
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Profit before financing (£m)

2
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1
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2
6
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1200
7
1000
7
8
800

00

01 02

03 04

05
600

06 07

08 09

00

01 02

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400

200
12000
0
10000
05

06 07

8000

08 09

,

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00 01 02 03 04 05 06 07 08 09
Return on capital employed (%)

6000

4000

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2
1
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8
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2
7

.

7
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Payments to shareholders (p) 
20

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600

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0
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10
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5
800
600
0
400
200
0

20

15

10

5

0
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15

Underlying EBITDA (£m)

7
3
8

9
4
8

2
7
6

1
6
6

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3
3
9

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Order book – firm and announced (£bn)

.

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Underlying earnings per ordinary share (p)

06 07

08 09

03 04

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05

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8
3
9
Underlying revenue (£m)
1

0
2
0
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1
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2
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8
4
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2

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8
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Underlying EBITDA (£m)

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00

01 02

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05

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00

01 02

03 04

05

06 07

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p
7
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9
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1,400
1,200
1,000
50
800
600
40
400
30
200
12,000
0
20
10,000
10
8,000
0
6,000

00
Profit before financing (£m)

03 04

01 02

05

06 07

08 09

9
8
2

1
1
3

2
1
2

0
7
2

7
1
4

7
7
8

3
9
6

2
1
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2
6
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Underlying revenue (£m)

4
6
8
5

,

8
2
3
6

,

8
8
7
5

,

5
4
6
5

,

7
4
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,

8
5
4
6

,

3
5
3
7

,

7
1
8
7

,

7
4
1
9

,

00 01 02 03 04 05 06 07 08 09

Underlying profit before tax (£m)

6
3
4

5
7
4

5
5
2

5
8
2

4
6
3

3
9
5

5
0
7

0
0
8

0
8
8

00
Payments to shareholders (p) 

03 04

01 02

06 07

05

08 09

0
0
8

.

8
1
8

.

8
1
8

.

8
1
8

.

8
1
8

.

2
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8

.

9
5
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06 07

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 (%)

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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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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 
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