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FY2010 Annual Report · Richtech Robotics Inc. Class B Common Stock
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TeAmwork
And Technology

Rolls-Royce Group plc
Annual report 2010

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© Rolls-Royce plc 2011

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

Trusted to deliver excellence

 
 
 
 
 
 
 
BUSIneSS reVIew

01   Introduction and 

highlights

02  Chairman’s statement
04  Chief Executive’s review
08  Our consistent strategy
20  Market outlook
22   Key performance 

indicators

26   Principal risks and 
uncertainties

28  Review of operations
28  civil aerospace
30  defence aerospace
32  marine
34  energy
36   engineering and 
technology
38  operations
40  Services
42  Sustainability
48  Finance Director’s review

goVernAnce

56  Chairman’s introduction
56  Board of directors
58   The Group Executive 
58  The International  
Advisory Board

59  Governance structure
62  Audit committee report
63  Nominations committee 

report

63  Ethics committee report
64  Risk committee report
67  Directors’ remuneration 

report

78  Shareholders and  

share capital

80  Other statutory information
81  Material litigation
81   Annual report and  
financial statements

FInAncIAl STATemenTS

Contents listed on page 83

Directors’ report
The directors present the Annual 
report for the year ended december 
31, 2010 which includes the business 
review, governance report 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 82, 
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. 

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 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.

designed and produced by salterbaxter

Photography credits: Pages 10, 16, 21 littoral combat Ship,  
copyright lockheed martin corporation, page 31, eurofighter Typhoon, 
© 2011 eurofighter Typhoon.

This document is printed on revive 50:50 Silk which has been 
independently certified according to the rules of the Forestry 
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 
and is recyclable.

Printed by St Ives westerham Press ltd. ISo 14001:2004,
FSc certified and carbonneutral®.

Business review

our ability to design and develop high-technology products and  
then integrate these into sophisticated power systems for land,  
sea and air, provides us with access to global markets.

Working together we…

CReate woRld-ClaSS  
pRoduCtS aNd teChNology 
INtegRate Complex SyStemS 
delIVeR global SolutIoNS 

10

12

14

ORDER BOOK – FIRM AND ANNOUNCED (£bn)

UNDERLYING REVENUE (£m)

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PAYMENTS TO SHAREHOLDERS (p)

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Note: Reconciliation of underlying revenues and results is provided in notes 2 and 5 of the Consolidated Financial Statements.

MATURITY PROFILE OF THE GROUP DEBT COMMITMENTS (£m)

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Rolls-Royce Group plc annual report 2010
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Business review

ChaIRmaN’S
StatemeNt

“ this has been a testing year, 
both for the world economy 
and for Rolls-Royce. I am 
therefore delighted to report 
that Rolls-Royce has performed 
well in these challenging 
circumstances.”

the group conducts business on a global basis and has 
customers in 120 countries. It is this broad customer base, 
coupled with an extensive product and services portfolio, 
which underpins our success. we have continued to grow 
our order book in 2010 to £59.2 billion. underlying profits 
before tax increased by four per cent to £955 million.

we are proposing a final payment to shareholders of  
9.6 pence per share, bringing the full year payment to  
16 pence per share. this is an increase of 6.7 per cent  
and reflects the board’s continuing confidence in the 
group’s business.

International trade tensions, uneven growth, fiscal 
tightening and currency instability have combined to 
make the economic environment uncertain. In these 
circumstances it is important to have a balanced business 
portfolio. this annual report records that our three 
businesses outside civil aerospace – marine, defence 
aerospace and energy – have all grown underlying profits 
at double digit rates during 2010, adding to the resilience 
of the business.

we continue to benefit from the high barriers to entry 
which are a consequence of our long-term investments 
and the businesses in which we are involved. our 
high-technology products and services require 
sophisticated systems integration and are hard to replicate. 
we continuously explore new ways in which technologies 
developed in one part of our business can be applied in 
others, reinforcing this strong market position. 

as well as meeting the challenges of the marketplace  
in 2010, Rolls-Royce has had to manage the high  
profile failure of a trent 900 engine on a Qantas airbus 
a380. Rolls-Royce behaved as you would expect of a 
highly proficient engineering company. we identified the 
problem quickly, and applied ourselves to the swift return 
of the fleet to normal operation. I would like to thank our 

customers for their support, and recognise the 
tremendous efforts of Rolls-Royce management and staff 
in responding so professionally to this very regrettable 
incident. the safety of our products has always been, and 
always will be our first priority.

we are committed to conducting business to the highest 
standards, and to enriching the societies in which we live 
and work. as well as creating employment and generating 
wealth, we invest heavily and consistently in improving the 
environmental performance of our products. through our 
own research, and in collaboration with universities around 
the world, we are driving innovation and extending the 
boundaries of human knowledge. our training 
programmes raise levels of skills and capability and set new 
standards of engineering excellence. Rolls-Royce people 
around the world are directly involved in community 
projects and voluntary activities, contributing to the 
communities in which we operate.

this year we took further steps to embed our global Code 
of business ethics. Rolls-Royce is a responsible group and 
we are committed to ensuring that we conduct business 
appropriately and to the highest levels of integrity. In 
order to ensure that we achieve best practice, our 
procedures and training programmes are continually 
reviewed and involve all our employees. 

we have continued to invest in our own people through 
training and development programmes. these 
programmes operate worldwide, including from 
dedicated training facilities in the uK and uS. these 
facilities are used to run a range of programmes for  
our worldwide workforce and for our customers.

the board is committed to improving our environmental 
performance across all business sectors. Continuous 
investment in the gas turbine engine, the core product 
for Rolls-Royce, has progressively improved fuel efficiency 

02

Rolls-Royce Group plc annual report 2010

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Business review

and will continue to do so. the new trent xwb for 
example will be 16 per cent more fuel efficient than  
the first trent aero engine to enter service 15 years ago. 
this means less cost for our customers as well as lower 
emissions. the application of gas turbines and efficient 
diesel engines in the marine sector also offers the 
possibility of significant reductions in emissions at sea.  
as well as developing core technologies, the group is 
exploring other low carbon energy sources including  
civil nuclear power, fuel cell technology and tidal power. 

In 2011, we are proposing to introduce a new holding 
company for the group. this will enable us to continue 
our progressive shareholder payment policy and provide 
cash returns to shareholders in the most efficient manner 
through the issue and redemption of C Shares.

Rolls-Royce supports a wide range of charitable causes 
with particular emphasis on the armed forces benevolent 
funds and educational programmes involved with 
science and engineering.

this year’s Rolls-Royce Science prize was won by a team 
from teesdale School, County durham for their design 
project to enhance the lives of animals in their local zoo. 
they received their award of £20,000 from John Rose at 
an awards dinner attended by senior industry leaders, 
academics and government ministers. the Science prize 
attracts entrants from thousands of schools across the uK. 

I would like to thank all our management and employees 
very much for their loyalty and hard work during the past 
year. our results are a testament to the focus and 
commitment I see demonstrated in every part of the 
business and at all levels of the organisation. I am constantly 
impressed by the initiative shown by Rolls-Royce people  
in seizing opportunities and responding to the needs of  
our customers.

once again the group benefited from the wise counsel  
of the International advisory board (Iab) during 2010. this 
board, whose membership is set out later in this report, was 
established in 2006 to help provide a broad perspective on 
issues such as global political developments, business risks 
and opportunities and economic trends. the advice they 
give is extremely valuable to us as we develop our global 
footprint and become more international in our outlook 
and behaviour. I would like to thank the members of the Iab 
for their work during the year in providing such high-level 
strategic advice.

I would also like to thank my fellow directors for their 
superb support and hard work over the past year. 

there is of course one very important tribute to be paid by 
the board and everyone else in Rolls-Royce to our Chief 

03

Rolls-Royce Group plc annual report 2010

executive, John Rose, who has announced his decision to 
retire at the end of march this year. John has been Chief 
executive for 15 years, during which time he has done the 
most extraordinary job. he has transformed Rolls-Royce 
into a world-class company operating on a global stage. 
his strategic vision has led to the construction of a resilient 
business with a powerful portfolio of internationally 
competitive products and services. his leadership and 
tenacity have helped establish a platform from which we 
expect revenues to double in the decade ahead. we owe 
John a huge debt of gratitude for what he has done for the 
Company, not only as Chief executive, but during his career 
of 27 years with Rolls-Royce.

John has also been a driving force in public policy, 
championing the cause of high value-added 
manufacturing and services. he argued for the importance 
of rebalancing the uK economy long before it became 
fashionable to do so. I am sure he will continue to be a 
powerful advocate for the importance of science, 
technology and maths, and of the importance of technical 
education in a nation’s ability to generate wealth. 

John Rose will be succeeded as Chief executive by John 
Rishton, who is currently the Chief executive officer of the 
dutch based, global retail group Royal ahold. John Rishton 
has been a member of the Rolls-Royce board for four years. 
as well as knowing Rolls-Royce well, John has a deep 
understanding of the aviation industry gained as Chief 
Financial officer at british airways. he also has 
manufacturing experience gathered from a number of 
senior positions at Ford. I have come to know John Rishton 
well. he is an outstanding individual, with experience as  
the successful Chief executive of a global publicly listed 
company. he is an instinctive team player, and was the 
unanimous choice of the board. I am certain he will prove 
himself a distinguished Chief executive of Rolls-Royce when 
he takes up his new role at the end of march this year.

the technologies that Rolls-Royce deploys are at the 
frontiers of engineering. we continue to invest in  
the long-term growth of our group. we enjoy the 
long-term support of our large customer base and 
suppliers, and we will continue to broaden our portfolio 
organically or by acquisition in our core sectors. we 
intend to maintain a strong balance sheet and a single  
a credit rating which we believe provides the foundation 
for the long-term growth of our businesses.

a great company is built by first class, passionate and 
highly skilled people. we have these in Rolls-Royce and I 
believe that we will continue to improve our business 
and deliver excellent value for all our shareholders.

Sir Simon Robertson
Chairman
February 9, 2011

16.00p

Full year payment to 
shareholders

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Business review

ChIeF exeCutIVe’S
ReVIew

“ Rolls-Royce has maintained 
progress. our financial 
position was further 
strengthened in 2010.”

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this is my fifteenth and final Chief executive’s review, and 
so it is a particular pleasure to report that Rolls-Royce has 
delivered a strong performance in 2010 despite 
challenging economic conditions.

underlying revenue has grown seven per cent to  
£10.9 billion and underlying profit before tax has 
increased by four per cent to £955 million. our financial 
position has also continued to improve with average net 
cash balances reaching £960 million, an improvement  
of £325 million over the same period in 2009. this 
demonstrates once again the strength and resilience  
of the group and the progress that we have made in 
recent years. It is a measure of this progress that the civil, 
defence and marine businesses now each generate 
underlying profits of more than £300 million.

I was an early pessimist about the condition of the world 
economy and I expect to be a late optimist. the situation 
remains fragile, recovery has been asymmetric and the 
global financial system retains the capacity to surprise 
unpleasantly. however, our consistent investment in a 
broad portfolio of products and services and our strong 
customer relationships have given us access to a wide 
range of global markets.

this breadth has allowed Rolls-Royce to maintain 
progress through the downturn and the disruption to  
the world economy which began in 2007. Since then the 
business has grown its order book, revenues, profits and 
average net cash, and increased payments to 

shareholders while at the same time we have invested 
more than £4 billion in the business. total Shareholder 
Return (tSR) during this period has been 27 per cent, 
which compares to an average tSR of four per cent for 
the FtSe all Share index.

Investing for the long term
during 2010, we have continued our programme of 
investment, funding world-class facilities in all major 
geographies, providing capacity for future growth, 
contributing to improved productivity and delivering 
products with operational lives which may well extend  
to half a century. we remain confident in our ability to 
double revenues in the coming decade through organic 
growth alone. however, we also have the management 
and financial capability to accelerate growth through 
acquisition and partnership.

Strategy
our consistent strategy, applied over many years, has 
helped deliver a more broadly based, better balanced  
and more resilient portfolio. this strategy has five key 
elements:
•  address four global markets, civil aerospace, defence 

aerospace, marine and energy;
• 
invest in technology, infrastructure and capability;
•  develop a competitive portfolio of products and 

services;

•  grow market share and our installed product base; and
•  add value for customers through the provision of 

product-related services.

04

Rolls-Royce Group plc annual report 2010

 
 
Business review

we have high barriers to entry as a result of the 
technology required for the design, systems integration, 
manufacture and support of our products. In addition we 
work hard to transfer intellectual property, products and 
innovation across businesses to achieve competitive 
advantage in the markets which we serve. 

An increasingly global business
the business today is the consequence of decisions and 
investments made over many years. when I first joined 
the Company in 1984, Rolls-Royce had a narrow product 
range and its business was mainly uK focused with some 
presence in the uS. this position has changed 
fundamentally. we are now able to trade successfully on a 
global basis and are developing our presence around the 
world. this brings us closer to customers and allows us 
access to funding and skills. our customer insight and our 
ability to develop technologies and integrate them into 
complex power systems, give us access to markets where 
demand remains strong for the products and services 
that we provide. 

the decision to locate the head office of our marine 
business in Singapore will have a profound impact on our 
ability to develop a global view. we now manage about 
one third of our revenue from Singapore, a further third 
from North america and the balance from the united 
Kingdom and europe. this means that management 
teams, running businesses that in themselves are the size 
of FtSe 100 companies, will think about challenges and 
opportunities from a different perspective. this will be of 
huge benefit to the group as we respond to customer 
requirements and competition.

In 2010, rapid progress was made in the construction of 
our major new aerospace facilities at Crosspointe in the uS 
to manufacture discs and at Seletar in Singapore where we 
will assemble and test large civil engines and manufacture 
wide-chord fan blades. during the year, we also opened a 
new mechanical test complex at dahlewitz in germany to 
conduct testing for our businesses worldwide.

we continue to expand our marine services. we already 
have 34 facilities around the world and the network is 
growing fast, ensuring that our locations match our 
customers’ requirements. of course our supply chain  
has also become increasingly global with around  
8,000 suppliers in North and South america, europe  

05

Rolls-Royce Group plc annual report 2010

and asia. we continue to invest in improving our  
supply chain management, to integrate these suppliers 
into our worldwide operations and to improve our  
quality and capabilities.

£59.2bn

order book

38.73p

underlying earnings per 
ordinary share

Our business today
our business is conducted through four major  
customer focused businesses:

Civil aerospace
we have seen signs of recovery in the civil aerospace 
sector, although the strength of this recovery varies 
between regions. Nonetheless, we have continued to 
sign significant new orders, particularly with customers 
based in asia and the middle east. this includes two 
individual orders worth more than £1 billion from China 
and the middle east. In all, new orders amounted to  
£7.5 billion during 2010, demonstrating the continued 
confidence of our customers in our portfolio.

the two new members of the trent family continued their 
development programmes through 2010. the trent 1000 
is powering the boeing 787 on the aircraft’s flight test 
schedule. the engine for the airbus a350 xwb, which is 
due to enter service in 2013, ran for the first time in June. 
this promises to be the most successful member of the 
trent family with 1,150 engines already on order. across 
the portfolio, our order book requires us to more than 
double our output of trent engines by the middle of  
this decade.

an uncontained disc release occurred on a trent 900 
engine on board a Qantas operated airbus a380 in 
November 2010. this regrettable incident attracted 
widespread attention. uncontained disc failures happen 
with a frequency of about once a year on the world’s 
large civil aircraft fleet. however, this was the first time  
an event of this nature had occurred on a large civil 
Rolls-Royce engine since 1994. 

the safety of our products is our highest priority and each 
time a serious incident happens Rolls-Royce and the 
aviation industry learns lessons. these are embedded in 
the rigorous certification requirements, safety procedures 
and standards of regulation which make flying an 
extraordinarily safe form of transport. In line with this 
regime, Rolls-Royce worked closely with the regulators, 

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Business review

airbus and our customers to put in place an effective 
inspection programme, to identify root cause and  
to achieve a rapid return of the trent 900 fleet to  
normal operation.

Marine
the growth of our marine business over the past decade 
has been a major feature in the broadening of our 
portfolio. In that time revenues have grown by six times, 
and we now have equipment on board 30,000 vessels. 
this growth is a consequence of our focus on power 
systems integration for increasingly complex and  
efficient vessels.

Rolls-Royce has a strong position in the offshore support 
industry with production facilities in nine countries and a 
growing support network. the acquisition of odIm aSa 
during 2010, has added significantly to our systems 
capability and gives us greater access to the growing 
markets of seismic surveying and subsea deepwater 
installation. this will be particularly important as oil and 
gas exploration moves into ever deeper waters, for 
instance in brazil, where more complex and capable 
vessels are required. 

our naval business secured a breakthrough order from 
the uS Navy to power ten littoral Combat Ships with 
mt30 marine gas turbine engines. this represents the 
largest naval surface vessel contract the group has 
signed. In the uK, all six type 45 destroyers for the Royal 
Navy have now been launched, equipped with our 
highly-efficient wR-21 gas turbine power system.

In the merchant sector, our technology enables us  
to respond to the growing demand for improved 
environmental performance of marine engines. as just 
one example of this, in 2010 we signed a contract for  
the world’s largest gas-powered ferry which will operate 
in the environmentally sensitive coastal waters of  
Norway, fuelled by liquefied natural gas. this technology 
dramatically reduces Co2 emissions and virtually 
eliminates soot and sulphur emissions. 

Defence aerospace
our defence aerospace business is highly diversified with 
160 customers in more than 100 countries. despite the 
pressure on public spending in its traditional markets we 

continue to benefit from our investment in a broad 
product and services portfolio, all of which have global 
applications. In particular, we see growth opportunities  
in emerging economies in asia, the middle east and 
South america.

In the uK, the Strategic defence and Security Review  
has impacted a number of long-standing programmes, 
including the harrier jump jet, which was taken out of 
service during 2010. however, new products and our 
substantial service activities will both ensure the 
resilience of this part of the defence business and  
create opportunities.

New european collaborative ventures are progressing 
well and are expected to have a strong export market. In 
particular, the tp400 turboprop on the airbus a400m has 
now successfully completed 3,000 hours of flight testing. 
Rolls-Royce is also the leading supplier of engines for 
transport aircraft globally, powering large fleets such as 
the C-130, C-130J, Spartan C-27 and osprey V-22.

In the uS, the government approved 2010 funding for  
the development of the F136 engine for the Joint Strike 
Fighter. we believe this is an important programme not 
just for the aircraft but to ensure competition and value 
for taxpayers and customers. 

we are also involved in major research projects such as 
adoptive Versatile engine technology (adVeNt), which  
is designed to significantly reduce fuel consumption. 
these position us well for future military programmes.

energy and nuclear
our energy business has two main activities. these  
are supplying power to the oil and gas sector and the 
provision of power generation products and services.

Rolls-Royce has been a major supplier of power systems 
for rigs and platforms since the earliest days of offshore  
oil and gas production. our gas turbines and compressors 
operate in harsh conditions and remote locations on 
behalf of major oil companies. For example, our industrial 
Rb211, avon and trent units are now employed on 60 
major pipelines around the world. New discoveries and 
the associated distribution of their output are creating 
strong demand for our products and services.

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Business review

the power generation market continues to be restrained 
by weak demand for electricity in our traditional markets. 
however, we have secured significant new orders in 
emerging economies including India and Venezuela and 
we see good opportunities for long-term growth for both 
our gas turbine and reciprocating engine portfolio. It is 
clear that future developments in this sector are likely to 
be driven by the need for affordable, efficient, distributed 
multi-fuel systems. our gas turbine and reciprocating 
engine portfolio provides a good basis to address  
these markets.

In addition, over the past decade, the group has invested 
in new technologies such as tidal power and fuel cells. 
during 2010, we conducted a full scale test of a tidal 
power turbine, anchored on the sea bed off the coast of 
Scotland. this has generated 500kw at full power and has 
been successfully linked into the national grid. 

we continue to expand our activities in civil nuclear 
power generation. during 2010, we secured contracts to 
provide nuclear safety systems in France and in China and 
have developed supply relationships with reactor vendors 
and utilities both in the uK and globally. these areas of 
investment enable us to address the particular 
requirements of low or zero carbon power generation 
with solutions that build on our core capabilities.

Strength through teamwork
the successful development of our portfolio depends 
critically on world-class people and teamwork. the  
global nature of our business means that our people 
must work effectively across time zones, geographies  
and cultures. of the 38,900 men and women we employ, 
45 per cent are now based outside the uK. this makes 
communications and shared values critical. 

this year we built on the success of our annual strategy 
storyboard with a televised presentation to most of the 
senior managers in the group. the managers who 
attended this event have been responsible for presenting 
the storyboard to every employee of the group. this has 
enabled people at all levels and in every location in the 
organisation to understand our objectives and to feed 
back their own thoughts.

over the past five years the group has committed £150 
million to this area alone. our uK apprenticeship scheme 
has been awarded beacon Status by the office for 
Standards in education (ofsted) and we have schemes  
of similar quality globally.

we benefit from the diversity that our global presence 
brings, recognising that a clear understanding of 
developing customer requirements, world-class 
technology and exceptional teamwork are the keys  
to our future success.

Prospects
the long-term disciplined application of our strategy  
has created a broad portfolio of products, services and 
capabilities that ensures a wide range of options for 
future growth. the expected doubling of revenue over 
the next decade is underpinned by a record order book, 
which gives good visibility of the future, and a strong 
balance sheet which enables us to invest in the people, 
technology and capability that will enhance 
competitiveness. 

In the short term we expect demand in some markets  
to remain subdued. however, we have access to the faster 
growing global markets and our large installed base 
allows us to benefit from an increasing emphasis on  
the services we can provide to our customers.

last September, when I announced my intention to retire, 
I said there were three considerations that made me 
comfortable with my decision: I know Rolls-Royce is in a 
strong position with more choices than we have had in 
the past; we have a world-class team; and I am confident 
in the board’s appointment of John Rishton as my 
successor. he will be an outstanding Chief executive.

Rolls-Royce has been my working life for 27 years. 
wherever I have gone in the world, I have always been 
proud to be Chief executive of this Company. It has  
been an extraordinary privilege to work with so many 
outstanding people and to contribute to the 
development of a business that has been at the forefront 
of engineering and technology for over 100 years. I wish 
Rolls-Royce, its employees and its shareholders 
continued success.

we believe that effective recruitment and continuous 
training are critical to our success. this year, we recruited 
220 apprentices and over 300 graduates from 25 
countries. we devote significant resource to the 
continuous development and training of our people. 

Sir John Rose
Chief executive
February 9, 2011

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BUSINESS REVIEw

OUR cOnsIsTEnT sTRATEgy
OUR cOnsIsTEnT sTRATEgy Is  
BAsED On FIVE KEy ELEMEnTs

1

2

3

ADDRESS FOUR GLOBAL
MARkETS

INVEST IN TECHNOLOGY 
INFRASTRUCTURE AND CAPABILITY

DEVELOP A COMPETITIVE PORTFOLIO 
OF PRODUCTS AND SERVICES

We are a leading producer of mission 
critical, integrated, power systems for 
the civil and defence aerospace, marine 
and energy markets.

Over the past five years, we have 
invested £4.2 billion in R&D. We invest 
substantially in employee development 
and, in 2010, we invested £361 million  
in capital projects.

We have 40 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.

Civil aerospace
Broadest engine range in the world

£4,919m

Underlying revenue 2010

Defence aerospace
Europe’s biggest engine maker

£2,123m

Underlying revenue 2010

Marine
World-leading systems provider  
and integrator

£2,591m

Underlying revenue 2010

Energy
World leader in power for the oil and  
gas sector and a growing power  
generation presence

£1,233m

Underlying revenue 2010

UnDERPInnED By cORE 
cHARAcTERIsTIcs

08

Rolls-Royce Group plc Annual report 2010

A strong record of investment in research 
and development
We invest in world-class, cost-effective 
technology in order to develop products  
that add value for our customers, improve 
efficiency and reduce environmental impact.

Investment in research and  
development during 2010

£923m

GROSS RESEARCH AND DEVELOPMENT 
EXPENDITURE (£m)

In 2010, we continued to bring new 
advanced products to market, including  
our new wave-piercing design of offshore 
support vessel. This vessel improves 
efficiency of operation and safety at sea  
for the crew.

UNDERLYING SERVICES REVENUE (£m)

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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.

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BUSINESS REVIEw

4

5

GROw MARkET SHARE AND OUR 
INSTALLED PRODUCT BASE

Across our group, the installed base of 
products in service is expected to generate 
attractive returns over many decades.

ADD VALUE FOR CUSTOMERS 
THROUGH THE PROVISION OF 
PRODUCT-RELATED SERVICES

We seek to add value for our customers 
with aftermarket services that will 
maximise the performance and reliability 
of our products.

The increasing contribution from services
We have grown our service revenues ten  
per cent compound over the past ten years. 
services account for over 50 per cent of total 
underlying revenue.

The Trent 700 is the market leading engine 
on the Airbus A330. The engine secured 
Us$5 billion of business in the second half  
of 2010.

Underlying services revenue 2010

£5,544m

GROSS RESEARCH AND DEVELOPMENT 
EXPENDITURE (£m)

UNDERLYING SERVICES REVENUE (£m)

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DELIVERING A 20-YEAR TRACk 
RECORD OF CONTINUED GROwTH

Organic growth
Our broad product range and expanding 
service provision have delivered  
growth globally.

Partnerships
We increasingly develop products with 
risk and revenue sharing partners and 
through strategic long-term relationships.

Acquisition
Major acquisitions such as Allison, Vickers 
and ODIM have enabled growth in  
key sectors. 

Our growth during the 
past 20 years has been 
achieved largely 
organically but also 
through partnerships  
and acquisitions.

Integrated systems
Integrating our products into 
systems that deliver increased 
value for our customers.

Technological superiority
gaining competitive advantage 
through continual investment in 
technology.

Operational excellence
Working constantly to meet and 
exceed customer expectations.

Organisational capability
Attracting and retaining the best  
people globally.

Brand
Recognised globally, our brand 
embodies qualities that create  
a common focus for all our 
people worldwide.

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BUSINESS REVIEw

cREATIng WORLD-cLAss  
PRODUcTs AnD TEcHnOLOgy
OnE cOMPLEx cOMPOnEnT, 
35 LARgE AnD 34 sMALL AnD MEDIUM 
sUPPLIERs, 37 UnIVERsITIEs AnD REsEARcH 
cEnTREs, OnE InTEgRATED TEAM

A single crystal turbine blade is one 
small component in a gas turbine 
but it illustrates what makes a  
high-value business such as  
Rolls-Royce. The technology it 
encompasses and the teamwork it 
takes to design and manufacture  
it, make it very special.

In service
As the original 
manufacturer, Rolls-Royce 
together with partner 
companies, manages the 
equipment in service all 
over the world.

A blade like this can find itself in a gas turbine for 
powering an aircraft, a ship or an electrical generator.  
The marine MT30 and the industrial Trent are both  
80 per cent common to the aero Trent 800 gas turbine.

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BUSINESS REVIEw

Manufacturing
We use a ceramic cast in a 
vacuum furnace to ‘grow’ 
the structure of the blade 
from a single crystal of 
nickel alloy.

“Manufacturingproducts
ofthiscomplexityrequires
anin-depthscientific
understandingthatcan
onlybeachievedby
comprehensiveand
collaborativeresearch.”

    Hamid Mughal  

Executive Vice President – 
Manufacturing Engineering  
and Technology

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Research
Future technologies are 
developed via a global 
network of group-funded 
University Technology 
centres. Each is dedicated to 
a specific technical discipline.

Aerospace 
The Trent 800 powers the  
Boeing 777 aircraft. It is available  
in a thrust range from  
75–95,000lb thrust.

Marine 
The 36MW MT30 marine gas 
turbine has been selected for  
the Us navy Littoral combat ship 
and DDg-1000 destroyer 
programme, as well as the UK’s  
new aircraft carriers.

Energy
The Trent 60 industrial gas turbine 
is the most powerful aero-derived 
gas turbine in the world and is in 
use for both gas compression and 
power generation applications.

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Rolls-Royce Group plc Annual report 2010

 
 
 
 
BUSINESS REVIEw

InTEgRATIng PRODUcTs InTO  
cOMPLEx sysTEMs
OUR KnOWLEDgE OF HIgH-TEcHnOLOgy 
EngInEERIng ALLOWs Us TO InTEgRATE  
sOFTWARE AnD HARDWARE TO PROVIDE  
WHOLE sysTEM sOLUTIOns

Systems integration
Our UT Design of offshore vessel 
exemplifies the capability of  
Rolls-Royce. All the electrical 
automation, power, manoeuvring  
and propulsion systems are designed 
and built by Rolls-Royce. Together  
with the deck-handling equipment, 
these amount to 60 per cent of the 
vessel’s total value.

Expertise in hydrodynamics 
makes Rolls-Royce a leader 
in providing propulsion 
and manoeuvring systems.

Today, Rolls-Royce is a global leader in 
integrating power and propulsion systems.

Offshore 
Our UT Design of offshore vessel  
is the market leader.

Merchant
We see a growing market 
opportunity based on environment 
and safety.

Naval
We are a market leader in 
integrated power systems  
on surface naval vessels.

650

80-90%

Offshore vessels built

80-90 per cent of world trade is by sea

70

navies

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BUSINESS REVIEw

Platform power
We are an essential partner 
in the offshore oil and gas 
industry. Our ships provide 
offshore support and  
over 500 of our gas 
turbines are powering 
platforms worldwide.

13

Rolls-Royce Group plc Annual report 2010

  Dynamic Positioning
“Informationisrelayed
fromthepositioning
referencesystemstothe
ship’sbridge,thendatais
automaticallycalculated
fortheengines,thrusters
andpropellers.”

   Geir Olav Otterlei 
DP service Manager

Power systems
The power and 
propulsion systems 
must all work together 
to keep the vessel 
within two metres of 
its intended position, 
even in high seas.

  Market leader
“Rolls-Royceistheleading
companyinoffshoreship
design.Wehaveaunique
competencebasedon
decadesofdesign
experiencecombined
withcreativityand
scientificknowledge.”

   Svein Kleven 
chief Designer – Offshore

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BUSINESS REVIEw

DELIVERIng gLOBAL sOLUTIOns 
AEROSPACE

Our civil aerospace business provides the  
power for 30 different types of commercial 
aircraft and supports customers around the 
world. From helicopters and general aviation 
aircraft, to business jets and the world’s largest 
airliners, Rolls-Royce offers the industry’s 
broadest range of engines. In defence, we are  
a global aero-engine provider and the largest 
manufacturer in Europe.

EXPANDING CIVIL ENGINE CAPABILITY IN ASIA FOR MANUFACTURING, ASSEMBLY AND TESTING

“Constructionofthenew63,000m2Seletar
campusinSingaporeiswellunderway
andwillsoonberecognisedasaglobal
aerospacehub.ItincludesthefirstTrent
engineassemblyfacilityRolls-Roycehas
builtoutsidetheUK.Thesitewillbe
officiallyopenedinearly2012.”

  Tin Ho Operations Director 
  singapore

63,000 m2

seletar footprint

2012

seletar opens

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Rolls-Royce Group plc Annual report 2010
Rolls-Royce Group plc Annual report 2010

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BUSINESS REVIEw

“Wearedeterminedto
ensurethatwemeet
allourcommitments
toourgrowinglist
ofcustomers.“

   Chris Cholerton 
Trent xWB  
Programme Director

Next generation Trent
Almost 1,200 Trent XwB 
engines are on order to 
power the new Airbus 
A350 XwB airliner. This is 
the newest member of  
the Trent family and it ran  
for the first time, on 
schedule, in mid 2010.  
The Trent XwB will power 
all variants of the new 
A350 XwB aircraft family 
and it will have a thrust 
range from 75–93,000lbs. 
The fan for the new 
engine, at 118 inches in 
diameter, is the biggest 
ever produced by 
Rolls-Royce. when the 
cowling is fitted it is wider 
than the fuselage of a 
Boeing 737.  

The first flight of the 
engine will be in 2011  
and production engine 
delivery is due in early 
2013. As the latest 
member of the Trent 
family, the -XwB benefits 
from a strong heritage 
which is important as  
we look towards an 
aggressive development 
schedule and the high 
production volumes 
required. Some of the  
new technology features 
include: a composite  
rear fan case; an 
optimised IP compressor; 
a blisked high-pressure 
compressor and a 
two-stage intermediate 
pressure turbine.

MAIN IMAGE

A Rolls-Royce powered 
aircraft takes off and 
lands every 2.5 seconds.

NEW FOCUSED FACTORY FOR LIFTFAN™ ASSEMBLY 
IS OPENED

“OurFocusedFactorytosupporttheproductionand
assemblyofLiftFansforthenewJointStrikeFighter,
wasofficiallyopenedinJune2010.Thefactoryis
equippedwithstate-of-the-artassemblytechnology
andisanimportantpartoftheexpandingcapability
Rolls-RoycehasintheUS.”

  Anthony Woodard senior Manager for LiftFan Assembly

GROWING OUR LARGE ENGINE SERVICES 
CAPABILITY ACROSS ASIA

EUROPE’S PROGRAMME TO DEVELOP AN ALL NEW 
ENGINE AND MILITARY TRANSPORT AIRCRAFT

we are building a  
£26 million extension  
to our Hong kong Aero 
Engine Services facility and 
our Singapore Aero Engine 
Services base has increased 
its capacity to 250 large 
engines each year.

The TP400-D6 large 
turboprop for the Airbus 
A400M is being developed by 
EPI Europrop International, 
an international co-operation 
of Rolls-Royce, Snecma, MTU 
and ITP. Flight testing 
progressed well in 2010.

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Rolls-Royce Group plc Annual report 2010
Rolls-Royce Group plc Annual report 2010

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DELIVERIng gLOBAL sOLUTIOns 
MARINE

We have some 650 Rolls-Royce designed and 
equipped vessels operating in the offshore 
oil and gas sector. Our strengths in this 
sector have enabled us to broaden our reach 
into the merchant and coastal vessel market 
areas. We have a significant presence in the 
naval market powering 70 navies worldwide.

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US NAVY ORDER

16 Rolls-Royce Group plc Annual report 2010
16
Rolls-Royce Group plc Annual report 2010

The US Navy confirmed at the 
beginning of 2011 that an order 
was being placed for the design 
and construction of ten Littoral 
Combat Ships incorporating the 
Rolls-Royce MT30 gas turbine. 
This is a breakthrough order for 
the Group. The Lockheed Martin 
designed ship operates in the 
close coastal or ‘littoral’ waters.

2,500

Marine customers

30,000

Vessels with Rolls-Royce 
equipment worldwide

 
 
BUSINESS REVIEw

“ODIMhasbeenaleading
supplierofautomated
handlingsystemsfor
theseismicindustryfor
manyyearsandalsohas
expertiseinthe
subseaandoffshore
supplysectors.”

   Alf Gunnar Skogen  
Project Manager
   Deck Machinery seismic  
and subsea 

Growing capability
Our acquisition of 
ODIM ASA in 2010 
brought technology 
and complex handling 
systems enabling us to 
address better the subsea 
and seismic sectors 
in offshore. It is the 
technology that  
Rolls-Royce provides  
that will allow exploration 
and production of oil and 
gas to move into ever 
deeper waters.

Naval power
In the naval sector we 
have the world’s most 
powerful marine gas 

turbine, the MT30, and 
the most powerful and 
efficient waterjet in 
the world through our 
kamewa product range.

Marine servicing
A feature of the marine 
business which reflects 
that of aerospace, is the 
long life-cycle of the 
equipment in service. 
Ships can be in service 
for up to 40 years and 
the ability to provide 
comprehensive support 
for complex systems is 
critical for our customers 
and is a core strength of 
Rolls-Royce.

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Rolls-Royce Group plc Annual report 2010
Rolls-Royce Group plc Annual report 2010

MAIN IMAGE

servicing of an  
azimuth thruster.

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EXPANDING OUR PRESENCE IN THE MERCHANT 
VESSEL MARKET

“Weseegrowthincoastal
andshort-seashipping,
withfeedervesselsthat
takeparcelsofcargo
tosmallerports.Our
energyefficientand
moreenvironmentally
friendlytechnologies
willbeincreasingly
attractivehere.”

   Per Egil Vedlog  
chief Designer – Merchant

80-90%

World trade by sea

Us$140bn

Addressable market 
opportunity over  
20 years

WAVE-PIERCING VESSEL

In 2010, the first order for the new Rolls-Royce design of 
‘wave-piercing’ offshore vessel was secured from operator, 
Farstad Shipping. The new vessel is designed for efficiency, 
safety and comfort and has a visually striking bow shape 
which enables the ship to pierce waves in extreme  
weather conditions while maintaining a constant speed.

 
 
BUSINESS REVIEw

DELIVERIng gLOBAL sOLUTIOns 
ENERGY

We are a well-established supplier of power  
for the energy sector. Rolls-Royce is one of the 
leading providers of gas turbines for onshore 
and offshore applications.

The group has a growing position in the 
power generation industry where it offers  
aero-derived gas turbines, reciprocating 
engines and now, a civil nuclear capability.

TRENT 60 GAS TURBINES IN SERVICE IN MASSACHUSETTS, USA

The first two Trent 60 industrial 
gas turbines to be sold in the  
US are in operation at  
Braintree Electric Light 
Department’s, Thomas A  
watson Generating Station.

58MW

Power rating of the  
Trent 60 gas turbine

 120

Rolls-Royce has energy 
customers in 120 countries

18 Rolls-Royce Group plc Annual report 2010
18
Rolls-Royce Group plc Annual report 2010

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BUSINESS REVIEw

“Rolls-Roycehasa
significantnuclearskills
base,withalargeexisting
nuclearcertifiedsupply
chain,andsupportsa
numberofkeyphasesof
thenuclearprogramme.”

   Lawrie Haynes  
President – nuclear

Civil nuclear capability
The civil nuclear market  
is undergoing worldwide 
expansion. Increasingly, 
more countries are 
recognising the 
importance of nuclear in 
providing a secure energy 
supply and in addressing 
global climate change.

Rolls-Royce is able to 
bring proven expertise in 
integrated, long-term 
support solutions and 
services throughout the 
reactor life cycle. The 
Group currently provides 
safety-critical 

instrumentation and 
controls in Europe,  
USA and many other 
international markets, 
including all 58 operating 
nuclear power facilities  
in France.

Our nuclear capability 
covers safety, licensing 
and environmental 
activities; plant system 
and component design; 
manufacture and supply;
in-service support and 
plant-life extension.

19
19

Rolls-Royce Group plc Annual report 2010
Rolls-Royce Group plc Annual report 2010

MAIN IMAGE

Industrial Trent gas 
turbines in a 
Middle East gas 
compression plant.

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POWER BOOST FOR THE INDUSTRIAL RB211  
GAS TURBINE

The RB211 has a strong 
reputation in the industrial 
gas turbine market. Over 
650 have been sold to 100 
customers in 37 countries 
for oil and gas applications. 
Now the latest version of 
the engine has been 
introduced, the -H63, 
capable of at least 30 per 
cent more power and 
delivering better efficiency 
than earlier models.

650

sold

37

countries

 100

customers

DEVELOPING A GENERATOR TO CAPTURE ENERGY 
FROM THE TIDE

500kW

Tidal stream generator

Our first tidal stream generator was deployed offshore 
of the Orkney Islands and a major milestone was 
reached in the development programme when it 
generated 500kw at full power for the first time.

 
 
Business review

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 produces a 20-year global market outlook, which covers 
passenger and cargo jets, corporate and regional aircraft. We predict that, 
over the next 20 years 137,000 engines, worth over US$800 billion, will 
be required for more than 63,000 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$160 billion over the next 20 years. This outlook was moderated, 
slightly based on US and European budget pressures. 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. 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$270 
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 US$215 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$125 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 18 per cent, for 
gas by 44 per cent and for energy by more than 30 per cent. To satisfy 
this demand, there will be a growing requirement for aero-derivative  
gas turbines in various applications.

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. 

20

Rolls-Royce Group plc Annual report 2010

Note: A long-term conversion rate has been used where necessary in 
order to present all figures in US$.

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Business review

US$800bn

We predict that over the next 20 years 137,000 engines, 
worth over US$800 billion, will be required for more 
than 63,000 commercial aircraft and business jets.

US$600bn

The Group forecasts a market opportunity worth 
US$600 billion for the provision of product-related 
aftermarket services.

US$160bn

The Group forecasts that demand for military engines 
will be worth US$160 billion over the next 20 years.

US$270bn

We have an opportunity to support equipment with 
aftermarket services estimated at US$270 billion.

US$215bn

The Group forecasts a demand for marine power 
and propulsion systems valued at US$215 billion 
over the next 20 years.

US$125bn

Marine aftermarket services are expected to 
generate significant opportunities, with demand 
forecasted at US$125 billion over the next 20 years.

US$70bn

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.

US$50bn

Demand for associated aftermarket services is 
expected to be around US$50 billion.

21

Rolls-Royce Group plc Annual report 2010

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Business review

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 08-09. 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
Engine deliveries 
Installed thrust – civil aerospace
Percentage of civil fleet under 
management
Underlying services revenue
Emissions

underlying revenue    £10,866m

£m

7,353

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.

12,000

8,000

4,000

0

7,817

9,147

10,108

10,866

748

832

919

983

1,010

491

62

570

(183)

258

16.0

17.2

17.1

17.2

17.3

370

381

403

379

422

747

824

885

864

923

5.4

5.8

5.4

4.7

4.7

303

304

283

291

361

26.1

45.9

55.5

58.3

59.2

182

194

211

233

259

1,469

1,439

1,621

1,600

1,657

320

334

348

367

382

48

55

57

59

70

3,901

4,265

4,755

4,927

5,544

4,025

5,864

8,651

9,875

12,000

1,200

800

400

0

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

832

919

983

1,010

491

62

570

(183)

258

16.0

17.2

17.1

17.2

17.3

370

381

403

379

422

747

824

885

864

923

5.4

5.8

5.4

4.7

4.7

303

304

283

291

361

26.1

45.9

55.5

58.3

59.2

182

194

211

233

259

1,469

1,439

1,621

1,600

1,657

320

334

348

367

382

3,901

4,265

4,755

4,927

5,544

4,025

5,864

8,651

9,875

12,000

600

400

200

0

-200

600

400

200

0

-200

18

12

6

0

500

375

250

125

0

18

12

6

0

500

375

250

125

0

1,000

750

500

250

0

500

375

250

125

0

1,000

750

500

250

0

6

4

2

0

1,000

750

500

250

0

6

4

2

0

400

300

200

100

0

6

4

2

0

400

300

200

100

0

60

40

20

0

400

300

200

100

0

60

40

20

0

300

200

100

0

60

40

20

0

300

200

100

0

2,000

1,500

1,000

500

0

300

200

100

0

2,000

1,500

1,000

500

0

400

300

200

100

0

2,000

1,500

1,000

500

0

400

300

200

100

0

80

60

40

20

0

06

48

07

55

08

57

09

59

10

70

06

48

07

55

08

57

09

59

10

70

400

300

200

100

0

80

60

40

20

0

6,000

4,000

2,000

0

80

60

40

20

0

6,000

4,000

2,000

0

12,000

8,000

4,000

0

12,000

8,000

4,000

0

6,000

4,000

2,000

0

12,000

8,000

4,000

0

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

491

62

570

(183)

258

16.0

17.2

17.1

17.2

17.3

370

381

403

379

422

747

824

885

864

923

5.4

5.8

5.4

4.7

4.7

303

304

283

291

361

26.1

45.9

55.5

58.3

59.2

182

194

211

233

259

1,469

1,439

1,621

1,600

1,657

320

334

348

367

382

3,901

4,265

4,755

4,927

5,544

4,025

5,864

8,651

9,875

12,000

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

18

12

6

0

underlying profit Before financing    £1,010m
7,353
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 
06
consistent basis. The derivation of underlying profit before financing is 
shown in note 2 on page 96 of the consolidated financial statements. 

cash flow   £258m
748
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 pension 
schemes, as part of the restructuring of these pension schemes.
06

800

400

0

£m

600

400

200

0

-200

£m

748

1,200

10,866

10,108

1,010

7,817

9,147

919

983

832

07

08

09

10

07

08

09

10

22

Rolls-Royce Group plc Annual report 2010

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8,000

4,000

0

s
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800

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7,353

7,817

9,147

10,108

10,866

12,000

8,000

4,000

0

06

07

08

09

10

 
 
Business review

62

570

(183)

return on capital employed    17.3%
491
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.

258

7,353

7,817

9,147

10,108

10,866

748

832

919

983

1,010

600

400

200

0

-200

7,353

7,817

9,147

10,108

10,866

748

832

919

983

1,010

570

(183)

258

16.0

17.2

17.1

17.2

17.3

500

375

250

125

0

7,353

7,817

9,147

10,108

10,866

748

832

919

983

1,010

570

(183)

258

06

491

07

62

12,000

8,000

4,000

0

1,200

800

400

0

600

400

200

0

-200

18

12

6

0

06

491

07

62

12,000

8,000

4,000

0

1,200

800

400

0

600

400

200

0

-200

06

491

07

62

06

491

07

62

12,000

8,000

4,000

0

1,200

800

400

0

600

400

200

0

-200

18

12

6

0

500

375

250

125

0

1,200

800

400

0

600

400

200

0

-200

18

12

6

0

500

375

250

125

0

1,000

750

500

250

0

7,353

7,817

9,147

10,108

10,866

748

832

919

983

1,010

570

(183)

258

16.0

17.2

17.1

17.2

17.3

370

381

403

379

422

7,353

7,817

9,147

10,108

10,866

748

832

919

983

1,010

570

(183)

258

16.0

17.2

17.1

17.2

17.3

370

381

403

379

422

747

824

885

864

923

06

07

08

09

10

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

12,000

8,000

4,000

0

1,200

800

400

0

12,000

8,000

4,000

0

1,000

750

500

250

0

6

4

2

0

18

12

6

0

17.2

17.1

net research and development charge    £422m
16.0
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.

17.2

17.3

370

381

403

379

422

£m

500

375

250

125

0

381

403

gross research and development expenditure    £923m
370
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 actions taken to enhance the Group’s intellectual property.

379

422

824

885

864

923

£m

747

1,000

750

500

250

0

16.0

17.2

17.1

17.2

17.3

370

381

403

379

422

747

824

885

864

923

5.4

5.8

5.4

4.7

4.7

303

304

283

291

361

26.1

45.9

55.5

58.3

59.2

182

194

211

233

259

1,469

1,439

1,621

1,600

1,657

320

334

348

367

382

48

55

57

59

70

3,901

4,265

4,755

4,927

5,544

4,025

5,864

8,651

9,875

12,000

%

18

12

6

0

1,000

750

500

250

0

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a
n
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06

5.4

07

5.8

08

5.4

09

4.7

10

4.7

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

303

304

283

291

361

26.1

45.9

55.5

58.3

59.2

182

194

211

233

259

1,469

1,439

1,621

1,600

1,657

320

334

348

367

382

3,901

4,265

4,755

4,927

5,544

4,025

5,864

8,651

9,875

12,000

747

824

885

864

923

303

304

283

291

361

26.1

45.9

55.5

58.3

59.2

182

194

211

233

259

1,469

1,439

1,621

1,600

1,657

320

334

348

367

382

3,901

4,265

4,755

4,927

5,544

4,025

5,864

8,651

9,875

12,000

06

5.4

07

5.8

08

5.4

09

4.7

10

4.7

06

48

07

55

08

57

09

59

10

70

500

375

250

125

0

6

4

2

0

400

300

200

100

0

60

40

20

0

1,000

750

500

250

0

6

4

2

0

400

300

200

100

0

60

40

20

0

300

200

100

0

6

4

2

0

400

300

200

100

0

60

40

20

0

300

200

100

0

2,000

1,500

1,000

500

0

400

300

200

100

0

60

40

20

0

300

200

100

0

2,000

1,500

1,000

500

0

400

300

200

100

0

60

40

20

0

300

200

100

0

2,000

1,500

1,000

500

0

400

300

200

100

0

80

60

40

20

0

300

200

100

0

2,000

1,500

1,000

500

0

400

300

200

100

0

80

60

40

20

0

6,000

4,000

2,000

0

2,000

1,500

1,000

500

0

400

300

200

100

0

80

60

40

20

0

6,000

4,000

2,000

0

12,000

8,000

4,000

0

06

48

07

55

08

57

09

59

10

70

06

48

07

55

08

57

09

59

10

70

80

60

40

20

0

6,000

4,000

2,000

0

12,000

8,000

4,000

0

400

300

200

100

0

80

60

40

20

0

6,000

4,000

2,000

0

12,000

8,000

4,000

0

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

26.1

45.9

55.5

58.3

59.2

182

194

211

233

259

1,469

1,439

1,621

1,600

1,657

320

334

348

367

382

3,901

4,265

4,755

4,927

5,544

4,025

5,864

8,651

9,875

12,000

06

48

07

55

08

57

09

59

10

70

12,000

8,000

4,000

0

6,000

4,000

2,000

0

12,000

8,000

4,000

0

923

%

5.4

5.8

5.4

4.7

4.7

303

304

283

291

361

26.1

45.9

55.5

58.3

59.2

182

194

211

233

259

1,469

1,439

1,621

1,600

1,657

320

334

348

367

382

3,901

4,265

4,755

4,927

5,544

4,025

5,864

8,651

9,875

12,000

net research and development expenditure 
747
as a proportion of underlying revenue    4.7%

885

864

824

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.
06

08

07

09

10

4.7

4.7

5.4

capital expenditure    £361m
5.4
5.8
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.

06

07

08

09

10

303

304

283

291

361

s
t
n
e
m
e
t
a
t
s

l

a
i
c
n
a
n
f

i

6

4

2

0

£m

400

300

200

100

0

06

07

08

09

10

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

23

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

Rolls-Royce Group plc Annual report 2010

 
 
7,353

7,817

9,147

10,108

10,866

748

832

919

983

1,010

491

62

570

(183)

258

16.0

17.2

17.1

17.2

17.3

370

381

403

379

422

747

824

885

864

923

5.4

5.8

5.4

4.7

4.7

303

304

283

291

361

7,353

7,817

9,147

10,108

10,866

748

832

919

983

1,010

491

62

570

(183)

258

16.0

17.2

17.1

17.2

17.3

370

381

403

379

422

747

824

885

864

923

5.4

5.8

5.4

4.7

4.7

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

12,000

8,000

4,000

0

1,200

800

400

0

600

400

200

0

-200

1,200

800

400

0

600

400

200

0

-200

18

12

6

0

600

400

200

0

-200

18

12

6

0

500

375

250

125

0

18

12

6

0

500

375

250

125

0

1,000

750

500

250

0

500

375

250

125

0

1,000

750

500

250

0

6

4

2

0

1,000

750

500

250

0

6

4

2

0

400

300

200

100

0

6

4

2

0

400

300

200

100

0

60

40

20

0

12,000

8,000

4,000

0

1,200

800

400

0

12,000

8,000

4,000

0

7,353

7,817

9,147

10,108

10,866

748

832

919

983

1,010

491

62

570

(183)

258

16.0

17.2

17.1

17.2

17.3

370

381

403

379

422

747

824

885

864

923

5.4

5.8

5.4

4.7

4.7

303

304

283

291

361

26.1

45.9

55.5

58.3

59.2

300

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

l

a
i
c
n
a
n
f

i

0

400

300

200

100

0

i

w
e
v
e
r

s
s
e
n
i
s
u
B

e
c
n
a
n
r
e
v
o
g

60

40

20

0

s
t
n
e
m
e
t
a
t
s

100

200

10

09

08

07

304

361

283

291

order Book    £59.2bn
303
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 
06
is included in the order book. Only the first seven years’ revenue of 
long-term aftermarket contracts is included.

£bn

26.1

45.9

55.5

58.3

59.2

182

194

211

233

259

1,469

1,439

1,621

1,600

1,657

320

334

348

367

382

48

55

57

59

70

3,901

4,265

4,755

4,927

5,544

4,025

5,864

8,651

9,875

12,000

60

40

20

0

300

200

100

0

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

training and development    £33m

employee engagement    38,900

£33 million investment in 2010
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.

38,900 employees in 2010
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 sustainability section of this review.

45.9

55.5

underlying revenue per employee    £259,000
26.1
A measure of personnel productivity, this indicator measures 
underlying revenue generated per employee on a three-year  
rolling basis. 

58.3

59.2

£000

300

200

100

0

182

194

211

233

259

1,469

1,439

1,621

1,600

1,657

320

334

348

367

382

48

55

57

59

70

3,901

4,265

4,755

4,927

5,544

4,025

5,864

8,651

9,875

12,000

2,000

1,500

1,000

500

0

2,000

1,500

1,000

500

0

400

300

200

100

0

80

60

40

20

0

400

300

200

100

0

80

60

40

20

0

6,000

4,000

2,000

0

80

60

40

20

0

6,000

4,000

2,000

0

12,000

8,000

4,000

0

12,000

8,000

4,000

0

6,000

4,000

2,000

0

12,000

8,000

4,000

0

1,469

1,439

1,621

1,600

1,657

320

334

348

367

382

48

55

57

59

70

3,901

4,265

4,755

4,927

5,544

4,025

5,864

8,651

9,875

12,000

2,000

1,500

1,000

500

0

400

300

200

100

0

engine deliveries    1,657
182
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.

211

233

259

194

Note: Figures have been restated to include diesel engines.
06

08

07

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

24

Rolls-Royce Group plc Annual report 2010

Business review

 
 
06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

Business review

1,621

1,439

installed thrust – civil aerospace    382m lbs
1,469
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.

1,600

1,657

2,000

1,500

1,000

500

0

334

348

367

382

48

55

57

59

70

3,901

4,265

4,755

4,927

5,544

4,025

5,864

8,651

9,875

12,000

m lbs

320

400

300

200

100

0

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

334

percentage of civil fleet under management    70%
382
348
320
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. 

367

The corresponding indicators for the other segments are shown in 
the respective sections of the business review of operations.

400

300

200

100

0

48

55

57

59

70

%

80

60

40

20

0

i

w
e
v
e
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s
s
e
n
i
s
u
B

6,000

4,000

2,000

0

80

60

40

20

0

12,000

8,000

4,000

0

3,901

4,265

4,755

4,927

5,544

4,025

5,864

8,651

9,875

12,000

6,000

4,000

2,000

0

12,000

8,000

4,000

0

7,353

7,817

9,147

10,108

10,866

748

832

919

983

1,010

491

62

570

(183)

258

16.0

17.2

17.1

17.2

17.3

370

381

403

379

422

747

824

885

864

923

5.4

5.8

5.4

4.7

4.7

303

304

283

291

361

26.1

45.9

55.5

58.3

59.2

182

194

211

233

259

1,469

1,439

1,621

1,600

1,657

7,353

7,817

9,147

10,108

10,866

748

832

919

983

1,010

491

62

570

(183)

258

16.0

17.2

17.1

17.2

17.3

370

381

403

379

422

747

824

885

864

923

5.4

5.8

5.4

4.7

4.7

303

304

283

291

361

26.1

45.9

55.5

58.3

59.2

182

194

211

233

259

12,000

8,000

4,000

0

1,200

800

400

0

600

400

200

0

-200

1,200

800

400

0

600

400

200

0

-200

18

12

6

0

600

400

200

0

-200

18

12

6

0

500

375

250

125

0

18

12

6

0

500

375

250

125

0

1,000

750

500

250

0

500

375

250

125

0

1,000

750

500

250

0

6

4

2

0

1,000

750

500

250

0

6

4

2

0

400

300

200

100

0

6

4

2

0

400

300

200

100

0

60

40

20

0

400

300

200

100

0

60

40

20

0

300

200

100

0

60

40

20

0

300

200

100

0

2,000

1,500

1,000

500

0

300

200

100

0

2,000

1,500

1,000

500

0

400

300

200

100

0

12,000

8,000

4,000

0

1,200

800

400

0

12,000

8,000

4,000

0

7,353

7,817

9,147

10,108

10,866

748

832

919

983

1,010

491

62

570

(183)

258

16.0

17.2

17.1

17.2

17.3

370

381

403

379

422

747

824

885

864

923

5.4

5.8

5.4

4.7

4.7

303

304

283

291

361

26.1

45.9

55.5

58.3

59.2

182

194

211

233

259

1,469

1,439

1,621

1,600

1,657

320

334

348

367

382

£m

3,901

4,265

4,755

4,927

5,544

4,025

5,864

8,651

9,875

12,000

6,000

4,000

2,000

0

e
c
n
a
n
r
e
v
o
g

12,000

8,000

4,000

0

underlying services revenue    £5,544m
59
48
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.

80

60

40

20

0

70

57

55

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

06

07

08

09

10

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/sustainability.

25

Rolls-Royce Group plc Annual report 2010

s
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Business review

PrINCIPAl rISKS AND UNCErTAINTIES

The Group has established and implemented a sound risk management structure  
throughout the business, that supports programme execution, informs decision making  
and ultimately leads to better business performance.

risk

description

potential impact

mitigation

environmental 
impact of 
products and 
operations

legislative 
and regulatory 
pressures

significant 
external events

t
n
e
m
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i

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i

competitive 
pressures

export controls

i

c
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e
t
a
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t
s

government 
spending

global resource 
capability

i

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i

The Group recognises that its products and 
business operations have an impact on the 
environment, particularly in relation to climate 
change. Environmental performance is of great 
importance to customers and regulators;  
rolls-royce is determined to be part of the 
solution to these environmental challenges.

Failure to respond proactively to the 
escalating environmental challenge 
could result in a dilution of reputation, 
and ultimately loss of market share to 
competitors. Product life cycles may also 
be shortened, with a consequent impact 
on the business model.

•  Significant investment in innovative solutions and 

enhancements for the aviation, marine and energy markets.

•  research and development in low carbon technologies  

such as nuclear power, fuel cells and tidal energy.

•  Governance structure headed by the Environment Council 
oversees improvements in the environmental performance  
of the Group.

The Group operates in a highly regulated 
environment and aims to comply with all 
relevant statutes. Increasing requirements 
from domestic and international legislation 
continue to be experienced; examples include 
anti-bribery, authorisation of chemicals and 
substances, and financial regulations, specifically 
relating to ‘over-the-counter’ derivatives.

Events may occur, externally to the business, 
that could undermine the basis of its operational 
and financial forecasts. Such events might 
include terrorism, political change, global 
pandemic, natural disaster or continued and 
deeper economic retrenchment. 

The markets in which the Group operates 
are highly competitive and this competition 
is increasing as a result of global economic 
uncertainties. The majority of product 
programmes are long term in nature and access 
to key customer platforms, most importantly 
Airbus and Boeing, is critical to success. This 
requires sustained investment in technology, 
capability and infrastructure, all creating high 
barriers to entry. However, these factors alone 
do not protect the Group from competition, 
including pricing and technical advances made 
by competitors.

Non-compliance with applicable 
legislation and regulations would expose 
the Group to significant financial fines 
and penalties and may have a damaging 
effect on its reputation.

•  Establishment of a business-wide compliance structure, 
focusing on anti-bribery and corruption legislation.
•  Enhanced policies and training on Gifts and Hospitality  

and Commercial Intermediaries for all employees.
•  lobbying to inform and influence the content and 
implementation of new legislation and regulations.

Such events could lead to a prolonged 
reduction in demand for transportation, 
and hence for a proportion of the Group’s 
products and services. There may also 
be constraints on the Group’s ability 
to conduct its business operations, for 
example, in the case of disruption to 
business premises or mobility of personnel.

If the rolls-royce products, services and 
pricing do not remain competitive, this 
could result in the loss of market share, 
with attendant impact on long-term 
financial performance.

•  A balanced business portfolio and diversity of global 

operations mitigate the impact of events in any one market 
sector or geographic territory.

•  A responsive and regularly exercised team for the proactive 
management of external events ensures that disruptions to 
the business, and to customers’ operations, are minimised.

•  See also ‘IT security’ risk.

•  Establishment of long-term customer relationships allows the 
Group to differentiate its products and services and protect 
margins in the face of competitive pressures.

•  Steady focus on improvement in operational performance,  

for example through the modernisation of facilities.
•  Increased focus on managing the costs of operations  

and products. 

•  Sustained investment in technology acquisition, and robust 
protection of intellectual property (see also ‘IT security’ risk).

rolls-royce designs and supplies a number of 
products and services for the military. 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.

Non-compliance with export controls 
could impact both programme 
performance and the Group’s reputation. 
Our ability to conduct business in certain 
jurisdictions could be revoked if we are 
non-compliant.

•  Exports Committee, chaired by the Chief Operating Officer, 

directs strategy and policy on exports. 

•  Export control managers embedded throughout the business. 
•  Export controls awareness training.
•  Maintenance of the capability to monitor and comply  

with requirements.

The Group conducts activities as a result of 
government investments, whether through 
direct sales or support to technology and other 
programmes. Such spending could be expected 
to experience continued pressure during a time 
of global financial uncertainty and budgetary 
constraint in Europe and the US in particular.

The rolls-royce position at the forefront of 
technology and innovation, and its commitment 
to delivering significant volumes of business to 
its customers, demand that we maintain world-
class capabilities in all core resource groups, 
particularly management. Demographic trends, 
the UK immigration cap and limited supply of 
appropriately educated and skilled personnel 
in science, technology, engineering and 
mathematics subjects exacerbate this risk.

A decrease in governmental spending 
could have an adverse effect on the 
Group’s future performance. For example, 
asset usage and/or flying hours could 
reduce across military fleets impacting 
aftermarket revenues. reduction in 
technology investment programmes 
could delay product development and 
introduction.

Failure to grow the Group’s resource 
capability to the necessary levels whilst 
maintaining world-class quality, would 
adversely impact delivery of customer 
programmes, threaten our reputation 
and stifle opportunities for future 
innovation and growth.

•  Development of a diversified portfolio of products and  

services to various markets and regions.

•  Proactive lobbying for research and technology funding.
•  Focus on performance to achieve commitments under  

current contracts.

•  Significant investment in resourcing and capability 

infrastructure, notably in the transformation of the Human 
resources function. 

•  Comprehensive systems in place for the development of 
individuals’ competencies and the objective assessment  
of performance, linked to reward.

•  The Group lobbies on the implications of the UK immigration 

cap, whilst managing the situation under the interim 
arrangements announced in 2010.

26

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Business review

risk

description

potential impact

mitigation

counterparty 
credit risk

rolls-royce works with various counterparties 
including financial institutions, customers, 
joint venture partners and insurers. 
Counterparty failure is recognised as a 
principal risk driven mainly by the economic 
uncertainties and pressures in the current 
environment.

Cash and profit margins could be 
impacted in the short term, although  
the Group has built a strong balance 
sheet to protect itself from the impact  
of individual defaults. 

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. The Group is exposed to a number 
of foreign currencies; the most significant being 
USD to GBP and USD to EUr.

Fluctuations in exchange rates to which 
the Group is exposed could adversely 
affect operational results or the outcomes 
of financial transactions.

•  Established policy for managing counterparty credit risk.
•  Common framework to measure, report and control exposures 
to counterparties across the Group using value-at-risk and 
fair-value techniques. 

•  Internal credit rating assigned to each counterparty, assessed 
with reference to publicly available credit information and 
subject to regular review.

refer to the Finance Director’s review on page 48 for additional 
information.

•  Hedging policy, using a variety of financial instruments, to 
minimise the impact of fluctuations in exchange rates on  
future transactions and cash flows.

•  Translational exposures managed through the currency 
matching of assets and liabilities, where applicable. 
•  risks reviewed regularly, and appropriate risk mitigation 

performed where material mismatches arise.

refer to the Finance Director’s review on page 48 for additional 
information.

credit rating

As a long-term business, the Group attaches 
significant importance to maintaining a  
sound investment grade credit rating, which  
it views as necessary for the business to 
operate effectively.

Downgrading of the Group‘s credit rating 
would inhibit its ability to secure funding, 
hedge forward or provide vendor financing, 
reducing and impacting cash, profit,  
and reputation.

•  The Group has developed a strong financial risk profile  
and continues to improve the business risk profile. 

refer to the Finance Director’s review on page 48 for  
additional information.

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supply chain 
performance

ethics

programme 
portfolio

The Group’s products and services are delivered 
through the effective operation of its facilities 
and key capabilities, including its supply chain. 
Success in strengthening our market position 
and our presence on a number of high profile 
civil and defence aerospace programmes, 
together with a growing marine business, 
places increased demands on the performance 
of the supply chain.

There is an ongoing exposure to the price of 
base metals, arising from business operations.

The Group recognises the benefits 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 our 
products and operations.

The Group manages complex product 
programmes with demanding technical and 
volume 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.

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. 

product 
performance

The Group strives to deliver world-class 
products that are safe and reliable, focusing 
attention on product design, robust quality 
and processes, pre-service maturity and 
in-service management. Safety is the Group’s 
highest priority.

27

Rolls-Royce Group plc Annual report 2010

Significant supply chain disruption, 
and failure to deliver parts on time or 
to committed costs and quality, would 
undermine the assumptions within 
business cases, adversely impacting 
profit and cash. Consequent damage to 
reputation could also hinder our ability  
to win future business.

•  Investment in developing world-class manufacturing processes 

in Asia, North America and Europe. 

•  Well-established business continuity management process that 

focuses on critical facilities, activities, processes, skills and 
suppliers. Significant progress in dual sourcing in these areas.
•  Increased focus on understanding and addressing sources of 
risk arising in the external supply chain, particularly those 
associated with financial instability. 

•  Comprehensive programme of business interruption insurance.
•  Policies to hedge the price of selected base metals.

Shortcomings in the Group’s business 
conduct would result in significant 
financial penalties, disruption to our 
business and/or have a damaging effect 
on our reputation.

•  Ethics Committee established to oversee and maintain the 

highest ethical standards. 

•  Global Code of Business Ethics, in 18 languages, issued to  
all employees supported by a training and engagement 
programme to improve awareness of the Group’s values. 
•  Global telephone and intranet channels are available for 

employees to report in confidence any concerns regarding 
potentially unethical behaviours.

Failure to achieve programme goals would 
have significant financial and reputational 
implications for the Group, including 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 48.

A breach of IT security may result in 
controlled data or intellectual property 
being lost, corrupted or accessed by non-
authorised users. Adverse impacts upon 
operational effectiveness, compliance 
with legislation or the reputation of the 
Group might arise. 

Deteriorations in product safety could 
significantly affect the Group’s reputation. 
Shortfalls in performance at entry into 
service or through life could lead to 
penalties or additional costs in the 
aftermarket, and would degrade the 
business cases upon which revenues  
are forecast.

See also ‘Environmental impact of products and operations’ risk.

•  Continuous improvement of all processes and project 

management controls to ensure both technical and business 
objectives are achieved. 

•  All major programmes subject to approval and regular review 
by the Board, with particular focus on the nature and potential 
impact of emerging risks and the effective mitigation of 
previously identified threats.

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•  Continual upgrading of security equipment and software, and 
deployment of a multi-layered protection system that includes 
web gateway filtering, firewalls and intruder detection.

•  Additional specialist resources committed.
•  Active sharing of information through industry and  

government forums.

•  The Group operates, and will continue to operate, in a ‘safety 

first’ culture.

•  Ongoing actions and activities being driven to improve 

maturity at entry into service.

•  Continuing engineering focus on improvements to product 

reliability and service lives.

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Business review

CiVil AEROsPACE

The civil aerospace business powers over 30 types  
of commercial aircraft and has a strong position in  
all sectors of the market: widebody, narrowbody 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.  
A Rolls-Royce powered aircraft takes off or lands  
every 2.5 seconds.

Highlights
First run, on schedule, for Trent XWB
Trent 1000 accumulated more than 2,000 test flight hours 
Trent 700 continues to lead on Airbus A330
AE 3007A2 enters into service
V2500 record production level
92 per cent of Trent engines under TotalCare®

Key financial data

Underlying revenue £m

Underlying profit before
financing £m

Net assets £m

2006

3,907
+15%

519
+14%

2,165

2007

4,038
+3%

564
+9%

2,468

2008

4,502
+11%

566
0%

330

Other key performance indicators

2009

4,481
0%

493
-13%

2,694

2009

47.0
+8%
844

2010

4,919
+10%

392
-20%

2,727

2010

48.5
+3%
846

2006

20.0
+5%
856

2007

2008

35.9
+80%
851

43.5
+21%
987

2,310

2,554

2,726

2,626

3,027

59

48

63

55

61

57

59

59

62

70

Order book £bn

Engine deliveries
Underlying service  
revenues £m
Underlying service  
revenues %

Percentage of fleet under 
management 

28

Rolls-Royce Group plc Annual report 2010

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“ Economic prospects 
remain uncertain, 
although traffic 
growth is improving”

Mark King 
President – Civil aerospace

£4,919m

Underlying revenue 2010

£392m

Underlying profit 2010

1

Full Year 2010 – revenue

1

3

3

2

2

Full Year 2009 – revenue

1

1

3

3

2

2

1

1

1

1

3

3

3

3

Key

1 Combat 

2 Transport 

Key

3 UAV/Trainer 

1 Combat 

2 Transport 

3 UAV/Trainer 

Key

1 Combat 

2 Transport 

Key

3 UAV/Trainer 

1 Combat 

2 Transport 

3 UAV/Trainer 

2

2

2

2

41%

52%

7%

41%

52%

7%

37%

52%

11%

37%

52%

11%

Key

1 Widebody 

2 Narrowbody 
Key
3 Small engines 
1 Widebody 

2 Narrowbody 

3 Small engines 

Key

1 Widebody 

2 Narrowbody 
Key
3 Small engines 
1 Widebody 

2 Narrowbody 

3 Small engines 

62%

13%

25%
62%

13%

25%

63%

12%

25%
63%

12%

25%

1

1

1

1

3

3

3

3

2

2

Key

1 Naval 

2 Merchant 

Key

3 Offshore 

1 Naval 

2 Merchant 

3 Offshore 

2

Key

2

1 Naval 

2 Merchant 

Key

3 Offshore 

1 Naval 

2 Merchant 

3 Offshore 

3

3

3

3

30%

21%

49%

30%

21%

49%

28%

24%

48%

28%

24%

48%

1

1

1

1

2

2

2

2

Key

1 Civil Nuclear/Other 

9%

2 Oil and Gas 

55%

Key

3 PowerGen (inc Diesels)  36%

1 Civil Nuclear/Other 

9%

2 Oil and Gas 

55%

3 PowerGen (inc Diesels)  36%

Key

1 Civil Nuclear/Other 

8%

2 Oil and Gas 

Key

3 PowerGen  

1 Civil Nuclear/Other 

2 Oil and Gas 

3 PowerGen  

69%

23%

8%

69%

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Business review

TotalCare service agreements and Tunisair became a new member  
of the Trent family, ordering Trent 700s.

A Trent 900 engine suffered a significant failure on a Qantas Airbus A380. 
The cause of this failure, which was specific to the Trent 900 and related 
to a component in the turbine area, was quickly established and 
addressed. The A380 fleet has returned to normal operation.

Narrowbody
in the narrowbody market the V2500 engine, produced by international 
Aero Engines (iAE) in which Rolls-Royce is a major partner, delivered 371 
engines in 2010, its highest ever production level. iAE gained significant 
contract awards from sichuan Airlines, Vietnam Airlines, TAM Airlines, 
BOC Airlines and China southern. There are now more than 4,500 V2500 
engines flying with more than 190 customers worldwide. 

Corporate and regional
in the small- and medium-size engine market the BR725 remains on 
schedule for entry into service on the Gulfstream G650 in 2012,  
following an exemplary flight and engine test programme. The first 
Embraer legacy 650 large executive jet, powered by the new  
Rolls-Royce AE 3007A2 engine, was delivered to a Middle East  
customer in December.

Services
Revenues from TotalCare long-term support agreements remained 
resilient in 2010. The proportion of Trent engines in service with 
TotalCare reached more than 90 per cent, while time and materials 
activity showed some recovery in the second half of the year. Overall 
reliability of the Rolls-Royce engine fleet continued to improve with 
Trent engines achieving on average one million hours between in-flight 
shut downs, a rate 20 times better than that required by the regulators 
for approval of Extended Range Twin Operations.

Future
The business continues to plan for the future, with new two-shaft  
and three-shaft engines. The Advance2 and Advance3 technology 
programmes are being driven to support the potential for new engine 
requirements in the latter part of the decade. The business is also 
continuing its research into open rotor technology, which we believe 
could provide a step change in engine performance.

Construction work at the seletar large engine assembly complex in 
singapore is well advanced and is scheduled to open in 2012. Work at 
the new Crosspointe facility in Virginia, Us, is also proceeding to plan.

Trent XWB on test
Our new Mechanical Test Operations Centre in 
Germany is employed in the testing of the Trent XWB.

The airline industry has shown recovery in 2010, (after significant losses 
in 2008 and 2009) with above-average passenger and cargo traffic 
growth and a return to profit for many airlines. Business jet flights also 
increased, although not to the levels before the downturn. large cabin 
business aircraft deliveries, where Rolls-Royce has a strong position, have 
been more resilient, driven by demand in Asia and Europe, although the 
Us market remains weak. The small- and mid-size aircraft sectors, which 
are concentrated in the Us market, continued to be subdued.

Widebody 
We made good progress with the latest members of the Trent engine 
family, the Trent XWB and Trent 1000. The Trent XWB will power the 
Airbus A350 XWB and ran for the first time in June – fulfilling a schedule 
commitment we made four years ago. seven engines will run in 2011  
as part of a comprehensive test programme. 

The Trent 1000, which powers the Boeing 787 Dreamliner, has 
accumulated more than 2,000 hours of test flight time on four aircraft. 
The engine won several new orders in 2010, taking the total on order  
to nearly 550. The aircraft is now expected to enter service in the third 
quarter of 2011.

The business continues to work closely with both large aircraft 
manufacturers, Airbus and Boeing, to support these programmes.

Of the Trent engines already in service, the Trent 700 confirmed its 
market leading position on the Airbus A330. it has won more than  
90 per cent of orders announced in 2010 and more than 70 per cent in 
the past five years. Orders were particularly strong in the second half of 
2010, with Us$5 billion of business announced since the start of July.

Rolls-Royce continued to enjoy success in growth markets. in China,  
Air China, China Eastern and Cathay Pacific selected Trent XWB and  
Trent 700 engines. in south East Asia, Thai Airways and Garuda ordered  
Trent 700s, and in the Middle East, Emirates and Egyptair extended 

While economic prospects remain uncertain in many countries for 2011, 
traffic growth is improving and we expect to see it return to its historic 
average of five per cent per annum.

Oil prices have remained generally high, encouraging airlines to retire 
older aircraft during the economic downturn. The Rolls-Royce powered 
fleet is relatively young and as a result, more fuel efficient. We are 
benefiting from the upturn as hours flown under TotalCare agreements 
continue to grow. This underlines the value of our balanced services and 
products business model.

29

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Business review

DEFENCE AEROsPACE

Rolls-Royce is the world’s second largest 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 sectors: 
transport, combat, reconnaissance, training, 
helicopters and unmanned aerial vehicles.

Highlights
TP400 engine approaching 3,000 test flying hours
F-35B achieved first vertical landing 
Adour engine order worth £200 million from india
service business worth £1.5 billion secured

2009

2010

2,010
+19%

253
+13%

(345)

2,123
+6%

309
+22%

(523)

2008

1,686
+1%

223
+12%

(197)

Key

1 Widebody 
2008

2009

62%

2010

2 Narrowbody 
5.5
Key
3 Small engines 
+25%
1 Widebody 
517
2 Narrowbody 

6.5
+18%
662

13%

25%
62%

6.5
0%
710

13%

3 Small engines 
947

1,046

25%
1,103

2007

1,673
+4%

199
+3%

(172)

2007

4.4
+38%
495

877

52

11

1

1

1

1

Key financial data

Underlying revenue £m

Underlying profit before
financing £m

Net assets £m

2006

1,601
+13%

193
+7%

20

3

Other key performance indicators

Order book £bn

Engine deliveries
Underlying service  
revenues £m
Underlying service  
revenues %

Percentage of fleet under 
management 

2006

3.2
-3%
514

853

53

11

3

2

2

3

3

2

2

30

Rolls-Royce Group plc Annual report 2010

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“ We are well positioned  
to secure growth from 
emerging economies”

Dan Korte 
President – Defence aerospace

£2,123m

Underlying revenue 2010

£309m

Underlying profit 2010

1

3

Full Year 2010 – revenue

1

3

Key

1 Combat 

2 Transport 
Key
3 UAV/Trainer 
1 Combat 

2 Transport 

3 UAV/Trainer 

2

2

1

1

1

1

3

3

3

3

2

2

Key

1 Naval 

2 Merchant 

Key

3 Offshore 

1 Naval 

2 Merchant 

3 Offshore 

2

Key

2

1 Naval 

2 Merchant 

Key

3 Offshore 

1 Naval 

2 Merchant 

3 Offshore 

3

3

3

3

30%

21%

49%

30%

21%

49%

28%

24%

48%

28%

24%

48%

1

1

1

1

2

2

2

2

Key

1 Civil Nuclear/Other 

9%

2 Oil and Gas 

55%

Key

3 PowerGen (inc Diesels)  36%

1 Civil Nuclear/Other 

9%

2 Oil and Gas 

55%

3 PowerGen (inc Diesels)  36%

Key

1 Civil Nuclear/Other 

8%

2 Oil and Gas 

Key

3 PowerGen  

1 Civil Nuclear/Other 

2 Oil and Gas 

3 PowerGen  

69%

23%

8%

69%

23%

41%

52%

7%
41%

52%

7%

37%

52%

11%
37%

52%

11%

52

16

52

18

Full Year 2009 – revenue

1

1

3

3

56

12

Key

1 Widebody 

2 Narrowbody 
Key
3 Small engines 
1 Widebody 

2 Narrowbody 

3 Small engines 

63%

12%

25%
63%

12%

25%

Key

1 Combat 

2 Transport 
Key
3 UAV/Trainer 
1 Combat 

2 Transport 

3 UAV/Trainer 

2

2

 
 
Business review

in March 2010. it is now ready for initial service Release in advance of  
the first customer deliveries to the Us Marine Corps, scheduled for 2011.

The F136 engine programme for the F-35 Joint strike Fighter has 
continued to illustrate the benefits of its advanced design and 
technologies, which are uniquely tailored for the requirements of the 
aircraft. six production-standard F136 engines have been tested during 
2010 and the programme is making excellent progress on the path  
to first flight.

Trainers
in india, the Government placed an order for a second tranche of 
Adour-powered Hawk Advanced Jet Trainers, worth up to £200 million. 

Helicopters
in the helicopter market we were awarded a multi-million dollar contract 
by the Us Army to design and develop a dual-channel, full authority, 
digital engine control (FADEC) for the M250-powered OH-58 Kiowa 
Warrior helicopter. We also received the Us Army Kiowa Warrior supplier 
Excellence Award.

in addition, the lHTEC CTs800 engine, which powered three first flights 
in 2009, achieved the milestone of 50,000 in-service flying hours. 

Services
The success of our services business continued in 2010, attracting major 
contracts worth around £1.5 billion. Among these was an extension of 
the long-term support for the RB199 engines powering the UK’s Tornado 
fleet, and MissionCare™ contracts to provide availability-based engine 
support for V-22 Osprey transport aircraft and the C-130J in service with 
the Us. The Us Navy again renewed its support agreement for Adour 
F405 engines in the T-45 Goshawk trainer. The Canadian Air Force’s  
AE 2100 engines are now also part of the MissionCare fleet.

Future
We continue to make good progress on the Us Air Force Adaptive 
Versatile Engine Technology (ADVENT) demonstrator programme. it is 
designed to reduce fuel consumption significantly, enabling extended 
mission ranges and loiter times. in December, we completed the fan rig 
tests and work continues in preparation for the core and engine 
demonstrator phases of the programme.

Our Unmanned Air systems portfolio was further increased by the roll  
out of the BAE systems Taranis technology demonstrator powered by the 
Adour engine. We continue to invest in performance improvements of 
established fleets such as the Northrop Grumman Global Hawk which is 
powered by our AE 3007.

EJ200 engines power Typhoon aircraft for six air forces
Eurofighter aircraft are powered by twin EJ200 turbofans. Each 
delivers 13,500lb thrust dry, or 20,000lb when using reheat.

There continues to be pressure on defence spending in our key markets 
in Europe and the Us. However, our broad product portfolio and strong 
service and support position on many of the new and established 
defence aircraft programmes have continued to provide protection 
against the changes in defence spending by these important customers.

We still see growth opportunities in these markets and, in addition, we 
are well positioned to secure growth from emerging economies in Asia, 
the Middle East and south America.

Transport
Rolls-Royce consolidated its position as a world leader in the transport 
market as our AE 2100 engine for the lockheed Martin C-130J transport 
aircraft continued to register orders with existing customers, such as the 
Us Air Force, while the global fleet expanded with the indian Air Force 
taking delivery of its first aircraft.

The Airbus A400M military transport aircraft enjoyed a year of flight test 
success with its TP400 engines achieving more than 3,000 flying hours 
and completing the final bench test requirements, thereby clearing the 
path to certification. 

in 2011, we expect to begin flight testing with the Us Air Force for the 
certification of the T56 engine enhancement kit for the C-130. This will 
provide significant fuel savings, a substantial improvement to engine 
reliability and improved hot day/high-altitude performance over the 
existing engine fleet.

Combat
in the combat sector our twin contributions to the lockheed Martin  
F-35 programme continue to make significant progress in the test phase. 
The unique short take-off and vertical landing (sTOVl) Rolls-Royce 
liftsystem® powered the F-35B variant aircraft to its first vertical landing 

Despite the budget cuts in traditional geographical markets, the defence 
business has the opportunity to compete in a global market potentially 
worth around Us$430 billion over the next 20 years. Many of our 
customer requirements for the next ten years are already contracted  
and there are key export opportunities for programmes across all  
market sectors.

31

Rolls-Royce Group plc Annual report 2010

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Business review

MARiNE

Rolls-Royce has a world-leading range of capabilities 
in the marine market, encompassing the design, 
supply and support of power and propulsion 
systems. We are leaders in the integration of 
technologically complex, mission critical systems  
for offshore oil and gas, merchant and naval vessels.

Highlights
strong profit growth despite challenging market environment
ODiM acquired to extend deepwater oil and gas capabilities 
First order secured for revolutionary wave-piercing UT Design vessel
World’s largest gas-powered ferry commissioned –  
using Bergen engines
Us Navy order for ten MT30-powered littoral Combat ships
Global service capabilities extended

Key financial data

Underlying revenue £m

Underlying profit before
Key
financing £m
1 Widebody 

62%

3
2006

1,299
3
+18%

101

+13%

619

2 Narrowbody 
Net assets £m
Key
3 Small engines 
1 Widebody 

13%

25%
62%

Other key performance indicators

2006

2.4
+41%

487

37

3

3

2 Narrowbody 

3 Small engines 
Order book £bn

13%

25%

Underlying service  
revenues £m
Underlying service  
revenues %

Key

1 Widebody 

2 Narrowbody 
Key
3 Small engines 
1 Widebody 

2 Narrowbody 

3 Small engines 

63%

12%

25%
63%

12%

25%

32

Rolls-Royce Group plc Annual report 2010

1

1

1

1

2007

2008

2009

2010

1,548
+19%

113

+12%

563
2

2007
2
4.7
+96%

545

35

2,204
+42%

183
Key
+62%

1 Combat 

2,589
+17%

263

+44%

641

2 Transport 
488
Key
3 UAV/Trainer 
1 Combat 

2,591
+0%

332

+26%
41%

52%

815

7%
41%

2008
2 Transport 

2009

52%

2010

3 UAV/Trainer 
5.2
+11%

3.5
-33%

7%

3.0
-16%

712

32

785

872

30

34

Key

1 Combat 

2 Transport 
Key
3 UAV/Trainer 
1 Combat 

2 Transport 

3 UAV/Trainer 

2

2

37%

52%

11%
37%

52%

11%

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“ Our revenues have 
nearly tripled since 
2005 and proved to 
be resilient in 2010”

John Paterson  
President – Marine

£2,591m

Underlying revenue 2010

£332m

Underlying profit 2010

1

Full Year 2010 – revenue

1

3

3

2

2

Key

1 Naval 

2 Merchant 
Key
3 Offshore 
1 Naval 

2 Merchant 

3 Offshore 

Full Year 2009 – revenue

1

1

3

3

2

Key

2

1 Naval 

2 Merchant 
Key
3 Offshore 
1 Naval 

2 Merchant 

3 Offshore 

3

3

3

3

30%

21%

49%
30%

21%

49%

28%

24%

48%
28%

24%

48%

1

1

1

1

2

2

2

2

Key

Key

1 Civil Nuclear/Other 

9%

2 Oil and Gas 

55%

3 PowerGen (inc Diesels)  36%

1 Civil Nuclear/Other 

9%

2 Oil and Gas 

55%

3 PowerGen (inc Diesels)  36%

Key

1 Civil Nuclear/Other 

8%

2 Oil and Gas 

Key

3 PowerGen  

1 Civil Nuclear/Other 

2 Oil and Gas 

3 PowerGen  

69%

23%

8%

69%

23%

 
 
Business review

As the oil and gas industry continues to explore ever deeper waters,  
the capabilities that the business now has in these highly-skilled areas 
will mean that we continue to be a strong partner for our offshore 
exploration and production customers. 

Naval
Our naval business had a strong year, with significant activity in the  
UK, the Us and south Korea. in early 2011, we received an order from 
lockheed Martin for the provision of MT30s, the world’s most powerful 
gas turbine, together with Kamewa waterjets, to power a further ten  
Us Navy littoral Combat ships. This is the largest surface fleet order ever 
achieved by Rolls-Royce. We continued to deliver power and propulsion 
equipment for the UK’s new Queen Elizabeth class aircraft carriers.

Merchant
We invest in technology that addresses the need for more efficient 
marine 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 (iMO) limits for NOx emissions, and several orders for  
these cleaner engines were secured for specialist coastal vessels and 
ferries in 2010. 

We believe that our strong focus on environment and safety technology 
will be increasingly attractive to customers, resulting in new business 
opportunities in the merchant and specialist vessel sector. 

Services
Our services revenues grew by 11 per cent in 2010, now representing  
34 per cent of total marine revenue, and we have continued to develop 
both capacity and capability to realise the significant opportunity that 
our increasing installed base represents.

Our global pool of service engineers increased by 20 per cent during the 
year and we have further extended our service centre network with four 
facilities across Europe and Africa being expanded or opened.

We have enhanced our range of equipment upgrades and successfully 
introduced an innovative underwater repair service that reduces vessel 
downtime and increases our ability to support customers operating in 
remote locations. in addition, we are continuing to develop equipment 
health monitoring capabilities, leveraging proven expertise in other 
Group sectors. 

Future
Our strong profit performance in 2010 was a result of delivery of existing 
orders combined with continued growth in service related activity. 

Although new orders in equipment reduced in 2010, there was some 
recovery in the second half of the year. This, combined with anticipated 
further growth in services, provides us with good visibility of revenues  
in 2011.

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Carrier propeller
The first propeller for the Royal Navy’s Queen Elizabeth class aircraft 
carriers was produced by the marine business during 2010.

Rolls-Royce has more than 2,500 marine customers and has equipment 
installed on over 30,000 vessels worldwide, including those of 70 navies.

The marine business had another strong year, despite lingering 
macroeconomic uncertainty and a sluggish recovery in new 
shipbuilding activity. service opportunities continued to increase as a 
result both of the large number of vessels incorporating Rolls-Royce 
equipment entering the market in recent years, and our expanding 
services network. 

Revenues proved to be resilient in 2010 despite a slowdown in original 
equipment orders. Growth was driven by our aftermarket services and 
ongoing success in the offshore market. As a result, marine profit has 
increased by 26 per cent in 2010. 

Offshore
The design of offshore vessels and the high-technology equipment they 
employ, is central to our business today, and we continued our strong 
performance in this sector. This was largely based on the success of our 
specialist UT Design vessels and ability to integrate sophisticated 
systems into complex ships. The latter part of 2010 saw a slight rebound 
in orders for highly specialised offshore vessels, highlighted by the  
first order for the innovative UT 790 wave-piercing series. This new 
design improves stability and crew safety, while minimising 
environmental impact. 

During 2010, we completed the acquisition of ODiM. The advanced 
automated handling solutions ODiM brings to our marine business  
has further extended our capabilities in the range of vessels and 
equipment we supply to support oil and gas customers in areas such  
as seismic surveys, deepwater installation, well intervention and other 
subsea operations. 

33

Rolls-Royce Group plc Annual report 2010

 
 
Business review

ENERGY

The energy business supplies gas turbines, 
compressors and diesel power units to customers 
around the world. The business is a world leader in 
the supply of power for onshore and offshore oil  
and gas applications. Our developing civil nuclear 
capability has further strengthened our position  
in the power generation market.

Highlights
Eight industrial Trent units sold
Avon 200 upgrade now sold to over 80 customers
57 Bergen diesel engines sold for land-based power applications
20 nuclear instrumentation and control systems for China

Key financial data

Underlying revenue £m

Underlying profit before
financing £m

Net assets £m

2006

546
+2%

2007

558
+2%

1

(18)
-1900%

387

5
+128%
1

370

Other key performance indicators

Key

2008

2009

2010

755
+35%

1,028
+36%

(2)

24
-140% +1300%

533

392

Key

1,233
+20%

27
+13%

434

2008
1 Naval 

2009

30%

2010

2 Merchant 
1.3
Key
3 Offshore 
+44%
1 Naval 
106
2 Merchant 

1.3
0%
87

21%

1.2
-8%
95

49%
30%

21%

3 Offshore 
370

470

49%

542

49

9

46

10

44

10

2

2

2006

2007

3

3

0.5
+25%
87

251

46

6

0.9
+80%
78

289

52

7

1

1

2

Key

2

1 Naval 

2 Merchant 
Key
3 Offshore 
1 Naval 

2 Merchant 

3 Offshore 

28%

24%

48%
28%

24%

48%

3

3

41%

52%

7%
41%

52%

7%

1 Combat 

2 Transport 
Order book £bn
Key
3 UAV/Trainer 
1 Combat 
Engine deliveries
2 Transport 
Underlying service  
3 UAV/Trainer 
revenues £m
Underlying service  
revenues %

Percentage of fleet under 
management 

Key

1 Combat 

2 Transport 
Key
3 UAV/Trainer 
1 Combat 

2 Transport 

3 UAV/Trainer 

37%

52%

11%
37%

52%

11%

34

Rolls-Royce Group plc Annual report 2010

“ Energy delivered 
a strong performance  
in challenging market 
conditions”

Andrew Heath  
President – energy

£1,233m

Underlying revenue 2010

£27m

Underlying profit 2010

1

2

Full Year 2010 – revenue

1

2

3

3

Full Year 2009 – revenue

1

1

2

2

3

3

Key

1 Civil Nuclear/Other 

9%

2 Oil and Gas 
Key
3 PowerGen (inc Diesels)  36%
9%
1 Civil Nuclear/Other 

55%

2 Oil and Gas 

55%

3 PowerGen (inc Diesels)  36%

Key

1 Civil Nuclear/Other 

8%

2 Oil and Gas 
Key
3 PowerGen  
1 Civil Nuclear/Other 

2 Oil and Gas 

3 PowerGen  

69%

23%
8%

69%

23%

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2

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2

Key

1 Widebody 

2 Narrowbody 

Key

3 Small engines 

1 Widebody 

2 Narrowbody 

3 Small engines 

Key

1 Widebody 

2 Narrowbody 

Key

3 Small engines 

1 Widebody 

2 Narrowbody 

3 Small engines 

62%

13%

25%

62%

13%

25%

63%

12%

25%

63%

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Business review

Gas pipelines in China
28 RB211 gas turbine compressor systems have now been 
ordered by PetroChina for lines one and two of the West-East 
China Pipeline and for the third shaanxi-Beijing Gas Pipeline.

The energy business delivered a strong performance in 2010 with 
underlying revenue of £1.2 billion, an increase of 20 per cent over 2009, 
and profit growth of 13 per cent as the business delivered a strong 
second half recovery to offset the £26 million charge taken in the first 
half of the year related to the industrial Trent engine. During 2010, the 
land-based diesel power business was integrated into energy, increasing 
revenue by £140 million.

Oil prices continued to strengthen during the year and, as a result, bid 
activity increased in the oil and gas sector, although it is also the case 
that a number of potential projects were delayed. The traditional power 
generation market for the Trent continues to be depressed by the low 
demand for electricity in developed countries. However, the business 
has been successful in securing new unit orders for both the Trent gas 
turbine and Bergen reciprocating engines in countries where significant 
power shortfalls exist, with major orders received from Bangladesh, india, 
and Venezuela.

Orders for land-based diesel and gas engine power generation 
applications tripled in 2010 when compared to the preceding two years.

A packaging partnership for the industrial Trent was agreed with sTX  
in south Korea, further broadening territorial coverage.

Services
Demand for aftermarket products and services again grew strongly with 
another record year delivering revenue of £542 million, an increase of  
15 per cent over 2009. including the land-based diesel units there are 
now a total of 662 units, or 33 per cent of the fleet under long-term 
service agreements. Operators continue to benefit from product 

35

Rolls-Royce Group plc Annual report 2010

upgrades that incorporate the latest technology, including the Avon 200 
upgrade, which was introduced in 2006 and has now been delivered to 
more than 24 customers.

Developments
investment in low carbon technology products continued with the 
ongoing development of fuel cell technology. in tidal generation the 
500kW demonstration unit at the European Marine Energy Centre in the 
Orkney islands successfully achieved its technical milestones, generating 
in excess of 50MWh in the process and earning a Renewable Offset 
Credit under the UK Government’s tariff regime. Plans are now underway 
to build a 1MW unit that will provide the basis for a commercially 
available product.

Nuclear
During 2010, we continued to progress plans for a UK nuclear 
manufacturing base and announced the opening of two new  
nuclear-specific University Technology Centres (UTCs), located at 
imperial College london and the University of Manchester. Rolls-Royce  
is also a lead partner in the UK Government’s Nuclear Advanced 
Manufacturing Research Centre (NAMRC) facility, which is due to open  
in september 2011.

The business further extended its nuclear manufacturing skills base 
through the integration of Canada-based ODiM Numet, specialising  
in engineering, manufacturing and through-life support of nuclear  
island systems. 

in india, a Memorandum of Understanding was signed with larsen & 
Toubro ltd for a collaborative approach to address new nuclear build 
markets both in india and internationally. At the beginning of 2011, 
Rolls-Royce signed an agreement to collaborate with Nuclear Power 
Delivery UK consortium on its plans to deploy the Westinghouse nuclear 
reactor in the UK.

The nuclear instrumentation and control business performed well in 
2010, establishing a solid platform for global growth across Central  
and Eastern Europe, China and india. it is also delivering 20 safety 
instrumentation and control systems for eight new plants in China. 

Future
Traditionally a strong oil price has resulted in increased business for 
original equipment in the oil and gas sector. We would therefore expect 
the market to continue to strengthen for products and services if the oil 
price remains relatively high. in power generation we now have a broad 
range of systems to offer and this puts us in a position of strength to 
take advantage of any market upturn. We will also continue to explore 
opportunities in emerging economies.

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“ Research and 
development are 
fundamental to 
our future success”

Colin Smith 
Director – engineering and Technology

£923m

Gross research and 
development 2010

Turbine technology
High-pressure turbine blades for the Trent 1000 engine, 
which is now flight testing on the new Boeing 787 aircraft. 

Business review

ENGiNEERiNG AND TECHNOlOGY

in 2010, Rolls-Royce invested a total of £923 million  
in gross research and development, of which  
£506 million was funded from Group resources.

Research and development are fundamental to our 
future success, providing technologies and intellectual 
property that allow us to compete on a global basis in 
highly competitive markets. 

Highlights
successful rig demonstrator for the ADVENT programme
Certification of the RR300-powered Robinson helicopter 
First test of the Trent XWB 
The AE 3007A2-powered legacy 650 achieved entry into service 
liftsystem™ on the F35 lightning ii completed a flawless first hover
The tidal stream generator ran to full power (500kW) 

Key performance indicators

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

2006

2007

2008

2009

2010

747

395

370

824

454

381

885

490

403

864

471

379

923

506

422

5.4

5.8

5.4

4.7

4.7

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Rolls-Royce Group plc Annual report 2010

 
 
Business review

The Group’s engineering and technology activities are undertaken  
by close to 10,000 product, engineering and technology specialists 
covering more than 40 major programmes. The activity is global with 
main engineering centres located in the UK, Us, Germany, the Nordic 
countries, singapore and india.

Research
Our advanced research is supported through our worldwide network  
of 28 Rolls-Royce University Technology Centres, working across a range 
of specialist subject areas such as materials, noise, vibration and 
combustion. Two new centres for nuclear technology at imperial College 
london and at the University of Manchester were added during the year. 

During 2010, we strengthened our new Advanced Technology Centre 
(ATC) in singapore which is developing manufacturing and electrical 
systems and high-power computing capabilities. Work began on the 
new, dedicated home for the ATC as part of the seletar development.  
We opened our new Mechanical Test Operations Centre in Dahlewitz, 
Germany, during the year. This centre provides mechanical testing 
capability for all areas of the Group. Building on the success of our 
membership of the Advanced Manufacturing Research Centre (AMRC), 
we continue to increase our focus on advanced manufacturing. in the 
UK, we opened the Advanced Fabrication Research Centre at 
strathclyde, scotland, and the Nuclear Advanced Manufacturing 
Research Centre project was launched. We are also establishing the 
Commonwealth Centre for Advanced Manufacturing (CCAM) at the 
Crosspointe complex in the Commonwealth of Virginia, UsA.

in 2010, we established the Manufacturing Technology Centre (MTC) in 
Coventry, UK. MTC will be the largest in the network of AMRCs when it 
opens in 2011. Technology programmes in the areas of high integrity 
joining, intelligent automation, advanced fixturing and net shape 
powder manufacture have already been launched through MTC 
partnerships with founder members Rolls-Royce, Airbus and Aero  
Engine Controls.

Environmental performance
Further improving the environmental performance of our products and 
operations is a key driver for research and development in Rolls-Royce. 
We completed the first build of the Environmentally Friendly Engine,  
and the second build of our mid-size technology demonstrator engine, 
E3E, was tested successfully in Germany. The E3E, two-shaft core 
demonstrated, amongst other successes, critical operability throughout 
the flight envelope up to 38,000ft, for the novel lean-burn combustor. 

The European sTREAMliNE programme led by Rolls-Royce was launched 
in 2010. The project includes 22 partners in eight countries and focuses on 
demonstrating radical new marine propulsion concepts, aimed at 
delivering increases in efficiency of at least 15 per cent. We achieved 
notable engineering successes in each of our key business sectors in 2010.

37

Rolls-Royce Group plc Annual report 2010

Civil aerospace
in the civil aerospace business, the first Trent XWB engine went to test 
on schedule in June, running to 100,000lbs of thrust later in the year. 
Flight testing of the BR725 for the new Gulfstream G650 progressed well 
and has now achieved 1,000 hours. The Trent 1000 flight test programme 
for the Boeing 787 continued, although Boeing announced in early 2011 
that the entry into service for the aircraft would be further delayed until 
later in 2011. 

2010 also brought a number of challenges to the civil aerospace 
business. The eruption of a volcano in iceland in April 2010 resulted in 
significant disruption to the aviation industry. Our engineering team 
took a leading role and worked in a systematic way to assist the airlines 
and industry regulators on this issue. Towards the end of 2010, a  
Trent 900 suffered a high-profile failure on a Qantas Airbus A380, which 
initiated a significant and urgent response from the engineering team  
in order to return to normal operations.

Marine
in 2010, the marine business acquired ODiM and we have successfully 
integrated the engineers of this business into the Rolls-Royce engineering 
community. ODiM’s people have a wealth of skills and technological 
knowledge. We anticipate the acquisition will enhance our offshore 
capability significantly. Marine sold the first offshore vessel with a 
wave-piercing design (UT 754 WP) for delivery in 2012 and the Dynamic 
Positioning Release 3 (DP3) successfully passed concept design review.

Defence aerospace
in defence aerospace, the sTOVl variant of the lockheed Martin F-35 
lightning ii, equipped with the Rolls-Royce liftsystem®, successfully 
completed a flawless first hover and vertical landing in March 2010.  
The pace of the F136 engine development programme accelerated 
significantly during 2010 with six new test engines delivered during the 
year. Approximately 900 test hours were completed according to plan 
for the F136 programme in 2010. The programme also continued its 
successful history of meeting contractual milestones with the first sTOVl 
propulsion system delivered to test, on time. 

libertyWorks® in indianapolis continues to perform well on the ADVENT 
demonstrator programme; rig testing demonstrated fan performance  
as expected and with a favourable stability margin. Work continues  
in preparation for the core and engine demonstrator phases of  
the programme.

in 2010, Robinson Helicopter obtained FAA certification for the  
RR300-powered R66 helicopter and commenced customer deliveries.

Energy 
We continue to develop our business activities in the civil nuclear market 
and also continued with further investment in nuclear engineers and  
in infrastructure.

Our first tidal stream generator was deployed offshore of the Orkney 
islands. A major milestone was reached on November 10, 2010 when the 
turbine generated 500kW at full power for the first time at the test site. 
The turbine is now being operated unrestricted with several periods of 
fully automatic 24-hour operation and has achieved all requirements to 
gain a renewable obligation certificate.

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Business review

OPERATiONs

We continue to invest in operational capability to 
enable the long-term growth plans of the Group  
to be executed.

Our strong positions in growing markets, 
represented by a record order book, together with 
increasing services activity, place a demand on us 
to deliver world-class operational excellence from 
modern and efficient facilities. 

Highlights
seletar and Crosspointe facilities on schedule
simple and scalable processes being embedded globally
Expansion of repair and overhaul capability in Asia
Further investment in iT completed across the Group
supporting new advanced manufacturing centres

Key performance indicators

Capital expenditure £m

Underlying revenue per 
employee* £000

* Calculated on a three-year rolling basis

2006
303

2007
304

2008
283

2009
291

2010
361

182

194

211

233

259

“ We are focused 
on delivering today 
and building 
capability for tomorrow”

Mike Terrett  
Chief Operating Officer

£361m

Capital expenditure

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Rolls-Royce Group plc Annual report 2010

 
 
Business review

Investing for growth
2009 proved to be a year of firsts with an unprecedented number of 
new programmes reaching first flight or launch. in 2010, the work to 
support these programmes progressed well. in June 2010, the first  
Trent XWB engine ran for the first time, in line with the plans we set out 
four years ago. Flight test work progressed on the new Trent 1000 for  
the Boeing 787 and the TP400 for the Airbus A400M transport aircraft.  
in marine, we introduced a new wave-piercing design of offshore 
support vessel, and in energy we launched the upgraded industrial 
RB211, the –H63.

Our success at winning business in the wide-bodied aircraft market 
means we expect to more than double the number of Trent engines 
being delivered by the middle of this decade. To manage this change in 
volume, investment in new facilities, tooling and capability continued 
during 2010. Building work has progressed as planned on the 
Crosspointe facility in Virginia, Us, and at seletar Aerospace Park in 
singapore. With the external building work broadly complete, both  
are on target to be in operation by 2011 and 2012 respectively.

We opened the new Mechanical Test Operations Centre at Dahlewitz, 
Germany, and a new facility to support the F-35 liftFan™ assembly in 
indianapolis, Us. We also expanded the civil aerospace repair and 
overhaul joint venture, singapore Aero Engine services limited, 
increasing capacity to 250 large engines per year.

in the UK, the new disc manufacturing plant in sunderland is 
progressing to plan and, in addition, we are supporting the 
development of four advanced manufacturing research centres. Two 
similar centres are being developed outside the UK. All of these will  
help improve manufacturing performance across the supply chain. 
Additional manufacturing capacity, for the submarines and civil nuclear 
businesses, is being added to our existing facilities in Derby.

People and capability
We are committed to investing in, and developing, our people to equip 
them with the skills required to meet the challenges and opportunities 
we face as the business grows. Through our ethics, health and safety 
programmes, we are helping our people to make the right decisions and 
ensuring that the safety of our people and products are at the forefront 
of our minds and actions. in 2010, we continued to invest heavily in 
information and technology across the Group. investments in Product 
lifecycle Management (PlM), Computer Aided Process Planning (CAPP) 
and Manufacturing Execution systems (MEs) are key to providing the 
tools to enable effectiveness and efficiency.

Future
Our journey to create a global, best-in-class, and fully integrated 
operations function is well underway. While economic uncertainty 
seems likely to continue, our priorities remain to improve the 
effectiveness of our delivery and ensure we are well placed to  
meet the operational demands of the future. 

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Executing operations effectively
We are seeking to deliver world-class operational 
performance across the Group.

There has been significant uncertainty in the economic environment 
during the last two years and our supply chain has performed well 
throughout this volatile period, with an increasing emphasis on 
productivity, flexibility and execution. The 2010 results reflect this 
performance through a marginal reduction in inventory and progress  
in productivity, reflected by an improvement in revenue per employee.

Our global operational network is a highly integrated activity including 
our own facilities, partners and other external suppliers feeding the gas 
turbine applications in all four businesses. in addition, we are managing 
substantial global supply chains to support our growing range of marine 
and nuclear activities.

Delivering excellence
During 2010, we have continued to focus on operational excellence  
with our programme of investments to improve current productivity  
and support the inevitable growth embedded in the order book. 

We work in partnership with our external partners and suppliers to 
reduce waste, improve designs and introduce better manufacturing 
methods for new and existing products. Our achievements have helped 
offset inflationary pressures in 2010, however, there remains more to do. 
Creating simple, scalable processes and a culture of  ‘right first time’ are 
key to operational excellence and will help achieve cost reductions in 
every aspect of our operations. 

The ongoing drive to reduce inventory provided further benefits in 2010. 
We are establishing systematic changes that can transform working 
capital management and, in time, release cash.

39

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Business review

sERViCEs

Rolls-Royce provides power systems for applications 
that routinely operate in particularly harsh 
environments, often with years between intervention. 
service activities provide over one half of the Group’s 
revenues, having increased ten per cent compound 
over the past ten years. 

Highlights
service revenues increased by 13 per cent to £5.5 billion
76 per cent of the large civil engine fleet now under TotalCare®
Osys expands service diagnostic and predictive capabilities
Major contracts secured for Tornado, Typhoon and C-130J engines
Over 30 marine service centres in operation around the world
350 industrial gas turbines now covered by long-term service contracts

Key performance indicators

Underlying revenue £m

Underlying services as a  
percentage of Group revenue

2006
3,901

2007
4,265

2008
4,755

2009
4,927

2010
5,544

53%

55%

52%

49%

51%

“ We work closely 
with customers to align 
service packages”

Tony Wood 
President – services

£5,544m

Underlying services  
revenue 2010

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Rolls-Royce Group plc Annual report 2010

 
 
Business review

Energy 
We secured further long-term service agreements which, together with 
the additional 38 new gas turbine units that became operational during 
2010, mean the number of gas turbines under long-term service 
agreements is approaching 350. Additionally, a number of long-term 
service agreements were renewed, the most significant being with  
Total in the North sea supporting 14 gas turbine packages on two 
platforms for a period of ten years. We continue to develop the service 
infrastructure to support the growth of the Rolls-Royce fleet in China, 
india, Brazil, Malaysia and Russia, along with extending the global 
footprint of the business with expanding operations in West Africa  
and Central Asia.

2010 also saw the 20-year anniversary of the Rolls Wood Group repair 
and overhaul joint venture. The Rolls Wood joint venture continues to 
maintain its position as the major supplier of repair and overhaul services 
for Rolls-Royce industrial gas turbine engines. The scope of the joint 
venture was expanded in the year with the official opening of a facility in 
Malaysia in partnership with OTEC.

Marine
service opportunities have continued to increase in marine as a result  
of the large number of vessels with Rolls-Royce equipment installed, 
now totalling over 30,000 vessels worldwide. As this installed base of 
equipment continues to grow, we are actively expanding our support 
capacity and capability and now have over 30 dedicated marine service 
centres serving customers across North and south America, Africa, 
Europe, the Middle East, Asia and Oceania. Marine customers seek to 
have their ships serviced close to where they primarily operate, and  
we continued our expansion by adding around 200 service engineers 
globally. We continue to expand our service capabilities and in 2010  
we completed more than 50 successful underwater intervention repair 
services which enabled major propulsion overhauls to be completed 
without the need for time consuming dry docking.

Future
The Group invested over £26 million this year in developing and 
restructuring our wholly-owned gas turbine repair and overhaul 
network, which will deliver significant improvements in operational 
performance and customer satisfaction. 2010 also saw the celebration  
of ten years of Rolls-Royce ownership of the Oakland repair and  
overhaul facility in the Us.

Our component repair business continues to grow rapidly and delivered 
£150 million in benefit across all sectors in 2010. 

Asset optimisation service development has advanced strongly, led by 
the Optimized systems and solutions inc. (Osys) business. Osys has 
expanded our in-service diagnostic, risk management and predictive 
capabilities. Through Osys, we continue to advance the health 
monitoring services and capabilities already applied successfully to 
aircraft engines and energy systems with more than 8,900 assets  
being monitored.

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Global services
service opportunities have increased in the marine business 
as a result of the increased level of equipment in operation. 

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 capabilities include field maintenance and 
support services, the provision of replacement parts, equipment 
overhaul services, component repair, data management, equipment 
leasing and inventory management. These are typically packaged 
together and sold as long-term support agreements such as our 
TotalCare suite. We work closely with customers to align each service 
package to their operational needs, helping to maximise the availability 
and efficient operation of the equipment on their behalf.

Civil aerospace
We have 76 per cent of the large engine fleet and 92 per cent of the 
in-service Trent fleet now managed under TotalCare. We also have 900 
corporate and business jet aircraft enrolled in CorporateCare®, the 
equivalent offering for this market sector. in 2010, operational planning 
has been further enhanced across the Trent family of engines with the 
adoption of sophisticated proactive engine life management policies. 
These combine our technical knowledge with the service data on each 
individual engine to enable each customer to manage their whole fleet 
in a more predictable manner. 

Our network of On-Wing Care facilities supported over 3,500 events 
globally in 25 different countries.

Defence aerospace
We continued to develop MissionCare™ provision worldwide and service 
presence on military bases. A long-term service agreement was signed 
with lockheed Martin to support the Canadian Air Force fleet of C-130J 
military transport aircraft. New contracts were also signed with the UK 
Ministry of Defence to increase the scope of support for the frontline 
Tornado and Typhoon fighter aircraft operations. in 2010, Rolls-Royce 
completed 500,000 flight hours of MissionCare support for the Adour 
engines that power the Us Navy’s T-45 training aircraft.

41

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Business review

SuSTAInABILITy

Our business activities need to be seen in the 
broader context of sustainable development. A 
secure supply of affordable energy is a prerequisite 
for sustainable economic growth, which in turn 
provides the foundations for social development. 

Climate change and other environmental concerns 
mean that new forms of power and propulsion 
systems are required to address these issues. The 
environmental challenges posed are complex. 
Technology will play a critical role and innovation 
will be vital. Rolls-Royce has highly relevant skills 
that can be applied to these challenges.

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Rolls-Royce Group plc Annual report 2010

The products and services that we deliver are critical to 
the operations of our customers and we pay the highest 
attention to product responsibility, guided by our core 
values of reliability, integrity and innovation. We also 
recognise the social responsibilities that come from being 
a major employer, neighbour and partner as we conduct 
our business around the world. In this regard we follow 
our published Global Code of Business Ethics. Corporate 
responsibility is fully integrated into our business 
activities. We believe that conducting business in a 
responsible manner creates competitive advantage by 
enabling us to:
•  attract, retain and motivate the best people;
•  develop and maintain successful working relationships 

with customers, suppliers and governments; and
•  support the global communities in which our 

employees live and work.

External recognition and benchmarking 
Rolls-Royce is ranked in a number of external indices 
which benchmark our performance:

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. 
In 2010, Rolls-Royce retained its Gold status with an overall  
score of 91 per cent. We also scored 94.8 per cent in the 
Environmental Index component of the overall survey.

9 10

Dow Jones Sustainability World and European Indexes (DJSI)

Rolls-Royce has retained its position in the DJSI for the ninth 
consecutive year and, with an overall score of 79 per cent,  
was sector leader for the Aerospace and Defence sector.  
The Group scored 100 per cent for environmental reporting, 
product impact and operational eco-efficiency and  
occupational health and safety.

Carbon Disclosure Project (CDP)

For the third consecutive year Rolls-Royce has been included 
within CDP’s FTSE 350 Carbon Disclosure Leadership Index,  
in recognition of a ‘professional approach to corporate 
governance in respect of climate change disclosure practices’. 
Our score increased from 76 in 2009 to 79 in 2010. 

2009 
 
Business review

Ethics
We regard ethical behaviour as key to maintaining and 
strengthening our reputation and in support of our 
commitment to act with integrity, we continued the 
deployment of the global ethics programme launched in 
2009. This is underpinned by our Global Code of Business 
Ethics which is issued to all employees.

Compliance and assurance
The new uK Bribery Act, which is expected to come into 
force in May 2011, and whose scope extends beyond uK 
borders, has led us to prioritise the review of the policy 
areas linked to anti-bribery and corruption. Policies on 
gifts and hospitality and commercial intermediaries were 
reviewed and updated during the year and agreement 
was given for the establishment of a new compliance 
organisation. 

Training and awareness programme
The global ethics training programme in 2010 was 
incorporated into a global risk, reputation and ethics 
training curriculum. A tailored e-learning package on the 
Global Code of Business Ethics has been developed to 
reinforce the key ethics messages and allow employees 
to work through ethical dilemmas. This will be introduced 
in 2011.

Reporting line 
An independently operated and confidential ethics 
reporting facility is available worldwide. This allows 
employees to raise issues or concerns regarding  
business conduct independently of the normal 
management chain. 

Governance
The following senior corporate governance bodies are  
in addition to those described on pages 59 to 67:
•  The Group Community Investment and Sponsorship 

Committee, chaired by the Chief Executive;

•  The Global Diversity Steering Group, chaired by the 

Chief Operating Officer;

•  The Sustainability Steering Group, chaired by the 

Director – Engineering and Technology;

•  The Environment Council, chaired by the Director – 

Engineering and Technology; and

•  The Environmental Advisory Board, chaired by  

a senior academic from the Massachusetts Institute  
of Technology.

Our people
Rolls-Royce employs 38,900 people in more than 50 
countries. Our growing order book and the continuing 
innovation of the Group’s products makes it imperative 
that we have a skilled workforce that is committed to 
delivering excellence to customers. To achieve this, we 
seek to create an inclusive working environment that 

43

Rolls-Royce Group plc Annual report 2010

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. 

Our workforce is dispersed globally across our  
business sectors:

Business seGment

Headcount

Civil aerospace

Defence aerospace

Marine

Energy

TOTAL

19,500

6,900

9,000

3,500

38,900

resourcing
In 2010, over 1,250 experienced professionals were 
recruited to support the growth of the business and, of 
these, nearly 50 per cent were recruited outside of the  
uK. During 2010, our campus teams were active at more  
than 40 universities in the uK, Europe, Asia and the  
uS, and we recruited 222 graduates onto our  
graduate programmes from 73 universities and 25  
nations worldwide.

We were ranked 26th overall in The Times newspaper’s 
Top 100 uK Graduate Employers of 2010, achieving first 
position in the Engineering sector. In Singapore, we 
entered Singapore’s Top 100 Graduate employers in  
21st place. 

In 2010, we recruited 220 apprentices globally. Our 
apprenticeship programme in the uK was graded as 
‘Outstanding’  by Ofsted. 

Learning and career development
Rolls-Royce provides all employees with access to 
learning that helps them deliver high performance in 
their current and future jobs. We have made significant 
improvements to the quality of our performance 
development review activity and in 2011 we will continue 
to focus on developing the right performance culture.
The Global Code of Business Ethics, rolled out to 
managers in 2009, has been cascaded to all employees 
during 2010. A Global Gifts and Hospitality and 
Commercial Intermediaries policy compliance 
programme has been provided to all employees as a 
result of the new uK Bribery Act.

We provide over 2,400 learning solutions globally through 
our online learning system. The catalogue includes 
several hundred programmes covering health, safety  
and the environment, diversity, ethics and corporate and 
management responsibility. 

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By the end of 2010, employees from 55 countries had 
accessed the learning system with over 34,000 employees 
undertaking more than 94,000 days of learning. Of these, 
86,000 hours consisted of online learning. We have 
updated our global leadership development framework 
in 2010 and partnered with world-class providers to 
ensure that the Group has a strategically focused and 
consistent way of managing its people.

Product responsibility
Product safety is paramount and the highest standards 
are maintained by the application of a robust safety 
management system. Our role does not stop once the 
product has been delivered to the customer. Safety and 
reliability are our highest priorities and we continue to 
drive uncompromised levels through rigorous design 
processes and by providing expert through-life support.

Learning investment for 2010 was £33 million.

engaging employees
We continue to place great value on giving a voice to our 
workforce. Employee opinions are obtained via a two-year 
rolling engagement programme. Improvement activities 
are then embedded into local and corporate business 
planning activities. In 2010, the Group conducted  
its second global engagement survey. Seventy-four  
per cent of the workforce responded, representing a 
continuing high level of participation in such activities. 

Comprehensive feedback has been shared with teams 
across the Group. The general trend indicates an 
improvement in overall engagement levels compared  
to 2009 when the first global survey was undertaken. 

encouraging diversity 
The Group is committed to developing a diverse 
workforce and equal opportunities for all. Our global 
governance framework for diversity includes a senior 
executive Global Diversity Steering Group that provides 
leadership and shapes strategic direction. 

Rolls-Royce is both committed and well placed to find 
solutions to the substantial challenges posed by climate 
change. We receive independent expert advice from  
the Group’s Environmental Advisory Board, comprising 
distinguished academics who are leading authorities in 
their respective fields, vital to the overall business strategy 
and design process.

The Board believes that technology must be applied  
on an industrial scale, through companies such as 
Rolls-Royce with its global reach, to achieve significant 
reductions in emissions. In 2010, we invested £923 million 
in research and development, two-thirds of which was 
aimed at improving the environmental performance of 
our products.

The aviation industry has a strong track record of 
addressing its environmental impact, investing 
consistently in product technology over the past six 
decades. Aircraft today are 75 per cent quieter and use  
70 per cent less fuel on a passenger-kilometre basis than 
the earliest jet aircraft. Rolls-Royce is continuing to work  
on ways to further reduce the effect of aviation.

During 2010, we developed a number of awareness 
programmes to increase self awareness and promote 
cross-cultural working. The Group is launching a reverse 
mentoring programme in 2011, where our most senior 
executives will be reverse mentored by a colleague who 
is junior to them in the organisation. The aim is to give 
senior executives a different perspective from a colleague 
who can share diverse experiences and ideas. 

The Trent 900 and 1000 engines, for the Airbus A380 and 
Boeing 787 respectively, and in the 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 reduction in 
noise and improvements in air quality.

The Group supports a number of women’s networks that 
focus on personal and professional development as well 
as providing support through networking. 

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 helping 
disabled employees make the best use of their skills  
and potential. 

REDUCING CO2

Trent 895

n
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l

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%

0

-5

-10

-15

-20

Trent 500

Trent 900

Trent 1000

Trent XWB

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2005

2010

2015

2020

Trent family

ACARE Target

Reducing noise

74%

74 per cent of the  
workforce responded  
to the global survey

£33m

Learning investment for 2010

44

Rolls-Royce Group plc Annual report 2010

Trent 800 (Boeing 777)

Trent 500 (Airbus A340)

0

-2

-4

-6

-8

-10

-12

6

P

E

A

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-20

-40

-60

-80

B

d

Trent 900

(Airbus A380)

Trent 1000 

(Boeing 787)

Trent XWB 

(Airbus A350)

2000

2005

2010

2015

2020

Noise levels with advanced 

operational practices

Certified noise levels

Reducing NOx

0

Trent 895

Trent 500

Target 80%

NOx overall reduction:

• 60% from engine technology

• 20% from operational 

  efficiency improvements

Trent 900

Trent 1000

Trent XWB

2000

2005

2010

2015

2020

Trent family

ACARE Target

(Advisory Council for 

Aeronautics Research in Europe)

 
 
 
 
 
 
 
 
Business review

In the longer term, we continue to see open rotor 
technology as offering a potential step change in 
performance and we are currently targeting entry into 
service early in the next decade for this technology. Our 
civil engine product strategy for 2010–2025 means that 
we will have engines entering service that, on average, 
will reduce the fuel burn of aircraft replaced in that 
15-year period by at least 15 per cent.

There is widespread interest in the possibility that the 
aviation industry could replace, at least in part, traditional 
fuels with biofuel – a synthetic fuel made from biomass. 
Rolls-Royce actively supports, and plays a central part in, 
the rigorous scientific testing and evaluation of biofuels 
and we support demonstrations of biofuels where they 
directly contribute to developing fuel specification 
criteria, or to the improvement of scientific 
understanding. However, we have to make sure that 
biofuel achieves the same technical and commercial 
standards as traditional fuels, and that its production is 
sustainable (taking account of such factors as impact on 
biodiversity, water resources, livelihoods, ecosystems and 
life-cycle CO2 emissions).

Rolls-Royce, as a world leader in marine technology,  
is well placed to help address the requirement for 
significantly reduced emissions. Our latest generation 
Azipull thruster technology, which is up to 16 per cent 
more efficient than conventional marine thrusters, 
enables ships to use less energy and so reduce emissions. 
Our Bergen lean-burn reciprocating gas engine achieves 
up to a 90 per cent reduction in oxides of nitrogen, 
virtually zero emissions of sulphur and a 20 per cent 
improvement in CO2 emissions, compared with a 
conventional diesel engine.

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 is under test at the European 
Marine Energy Centre, in the Orkney Islands, Scotland. 

The need to drastically cut greenhouse gas emissions, 
combined with the increasing insecurity of oil supplies, is 
likely to lead to an expansion of nuclear power over the 
coming decades. With more than 50 years’ experience in 
designing and supporting pressurised water reactors, we 
are well placed to make a significant contribution to this 
nuclear renaissance. We have recently established a new 
civil nuclear business with the aim of serving this  
growing global power market. 

45

Rolls-Royce Group plc Annual report 2010

We are also leading the development of the nuclear 
Advanced Manufacturing Research Centre (nAMRC),  
as part of the uK’s Low Carbon Industrial Strategy.

Operational HS&E performance 
Rolls-Royce is committed to building and maintaining a 
high reliability organisation; one that delivers consistently 
high performance across all aspects of health, safety and 
environmental (HS&E) management. Our objective is to 
achieve world-class levels of performance throughout our 
business and to be widely recognised for the excellence 
of our performance.

During 2010, the Group conducted a programme  
of Process Safety audits on our main manufacturing 
plants and test facilities. The results are being used to 
further strengthen our approach to assurance over 
process safety.

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 our recently 
formed civil nuclear business 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 to ensure our continued access to 
materials necessary for the production and support of  
our products.

operational performance
In 2009, we declared a new set of global targets for  
our HS&E performance. Progress against these will be 
reported in an update to our last HS&E report ‘Powering  
a better world’ planned for April 2011. We made progress 
against two of our key targets: reducing the Group’s Total 
Reportable Injury (TRI) rate and greenhouse gas (GHG) 
emissions. Our data collection and reporting is subject to 
independent assurance by Deloitte LLP.

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 50%

We are targeting a 50 per cent 
reduction in Total Reportable 
Injuries by 2012

1 TRI cover fatalities, lost time 
injuries, restricted work cases and 
medical treatment cases.

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 10%

We have set a target to reduce 
our total GHG emissions by 
ten per cent by 2012

PROGRESS AGAINST TRI REDUCTION TARGET 2009–2012

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0.69 (0.61)

2 Energy/GHG data for 2010 has 
been forecast based on data 
collected during January to 
October 2010. For details of the 
methodology see our ‘Basis of 
Reporting’ available at  
www.rolls-royce.com
(0.37)
(0.49)

TRI
Following a reduction of 40 per cent in our TRI1 rate during 
2007–2009 we set a new target last year to reduce this by a further 
50 per cent by 2012 (based on 2009). We can now report that we 
have reduced our TRI from 0.73 per 100 employees in 2009 to 0.69 in 
2010. This represents a five per cent reduction which is slightly 
behind our interim target. We continue to develop global 
programmes focused on improving our performance.

PROGRESS AGAINST TRI REDUCTION TARGET 2009–2012

0.73 (0.73)

0.69 (0.61)

(0.49)

(0.37)

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0
1
r
e
p
e
t
a
R

I

R
T

0.8

0.6

0.4

0.2

0.0

09
Target reduction

10

11

12

GHG
At the end of our last three-year target cycle (2007–2009) we 
reported a 38 per cent reduction in energy use (normalised on 
turnover). In addition, there was an accumulated 36 per cent 
reduction in absolute GHG emissions in the past decade. During 
2010, we have achieved a further three per cent reduction in total 
Group GHG emissions (including product test and development) 
moving us towards our target of a ten per cent reduction 
(normalised) by 2012. In absolute terms, GHG emissions for our 
facilities (excluding product test and development) have remained  
at a similar level to 2009 compared with our five per cent reduction 
target by 2012.2 

PROGRESS AGAINST FACILITY GHG (ABSOLUTE) EMISSION
REDUCTION TARGET 2009–2012

446.6 (446.6)

447.1 (439.2)

(432)

(424.28)

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500

375

250

125

0

09

10

11

12

Target reduction

09

10
Target five per cent reduction

11

12

PROGRESS AGAINST FACILITY GHG (ABSOLUTE) EMISSION
REDUCTION TARGET 2009–2012

PROGRESS AGAINST TOTAL GHG (NORMALISED) EMISSION
REDUCTION TARGET 2009–2012

447.1 (439.2)

s
t
n
e
m
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t
a
t
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l

a
i
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a
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F

i

0.054 (0.054)

0.053 (0.052)

(0.051)

(0.049)

(432)

(424.28)

m
£
/
e
2
O
C
s
e
n
n
o
T
o

l
i

K

0.06

0.04

0.02

0.00

PROGRESS AGAINST TOTAL GHG (NORMALISED) EMISSION
REDUCTION TARGET 2009–2012

0.054 (0.054)

0.053 (0.052)

(0.051)

(0.049)

m
£
/
e
2
O
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o

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0.06

0.04

0.02

0.00

09

10

11

12

Target ten per cent reduction

GrouP GreenHouse Gas – GHG emissions For 2010 (ktco2e)

Scope 1 (direct)
Scope 2 (indirect)

Total GHG

2010

217.3
363.1

580.4

2009

210.4
356.2

566.6

500

447.1 (439.2)

446.6 (446.6)

We recognise the need to make cuts in global emissions 
PROGRESS AGAINST FACILITY GHG (ABSOLUTE) EMISSION
within our own operations. Individual reduction targets 
REDUCTION TARGET 2009–2012
and budgets have been agreed for our top 25 energy 
consuming sites to enable us to build on previous 
improvements in energy efficiency. We will continue to 
work on ways to reduce our reliance on fossil fuels. This 
includes using more sustainable energy sources, like 
renewable and other low carbon technologies/materials 
within our facilities where this is cost effective  
and practical. 

e
2
O
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s
e
n
n
o
T
o

375

250

125

(424.28)

(432)

0

K

l
i

11

12

09

10
Target five per cent reduction

Learning from incidents 
This year we have introduced a new process of notifying 
serious and high-potential incidents to senior management. 
High-potential incidents are now required to be reviewed  
at Chief Operating Officer level within the businesses and 
functions. This is intended to strengthen our learning from 
incidents and to prevent their reoccurrence.

Health and wellbeing
Rolls-Royce recognises the association between physical 
and mental health and the need for our employees to 
consider their personal wellbeing. A preventative 
occupational health strategy has been in place since  
PROGRESS AGAINST TOTAL GHG (NORMALISED) EMISSION
2005 and supports employee wellbeing and productivity 
REDUCTION TARGET 2009–2012
through a series of health promotion initiatives.

0.054 (0.054)

0.053 (0.052)

(0.051)

(0.049)

0.06

m
£
/
e
2
O
C
s
e
n
n
o
T
o

0.04

In 2010, 1,300 employees took part in the ‘Know your 
body metrics’ health promotion campaign in the uK 
representing six per cent of the covered population.

0.02

l
i

K

0.00

Our Group-wide HS&E targets for the period 2009–2012
10
are set out opposite.
Target ten per cent reduction

09

11

12

(The methodology used by the Group to collect and 
report HS&E performance data is set out in our ‘Basis of 
Reporting’ available at www.rolls-royce.com).

0.73 (0.73)

s

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y

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p

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0

0

1

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0.8

0.6

0.4

0.2

0.0

500

375

250

125

0

PROGRESS AGAINST TRI REDUCTION TARGET 2009–2012

0.73 (0.73)

0.69 (0.61)

(0.49)

(0.37)

446.6 (446.6)

s

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0

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0.8

0.6

0.4

0.2

0.0

09

10

11

12

Target reduction

09

10
Target five per cent reduction

11

12

09

10
Target ten per cent reduction

11

12

46

Rolls-Royce Group plc Annual report 2010

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Business review

our tarGets are:

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 the Group TRI rate by 50 per cent by end 2012

reduce environmentaL imPact
Five per cent reduction in Group facility GHG by  
end 2012 (absolute) (excluding product development 
and test)

Ten per cent reduction in total Group greenhouse gas 
emissions by end 2012 (normalised by financial 
revenues) (including product development and test)

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

note: A full update on our progress against these 
targets will be provided on www.rolls-royce.com/
sustainability in April 2011. Progress against our TRI 
and GHG targets is provided opposite.

Suppliers
In 2010, supplier engagement has seen Rolls-Royce 
leading Global and Regional Supplier Forums which 
focused on near-term and long-term business 
improvements. We also hosted Regional Supplier Groups, 
culminating in a Global Best Practice Sharing event aimed 
at promoting the application of lean techniques across 
the supply chain. 

Society
We aim to communicate effectively, protect or enhance 
local quality of life and be recognised as part of the local 
community. We also recognise that there are significant 
business benefits for our organisation through 
community investment. These benefits include 
recruitment and retention of staff, employee engagement 
and development of our reputation and brand. 

Community investment 
The Group has a long-standing commitment to 
supporting its local communities focusing on four key 
areas: education; environment; regeneration; and arts and 
culture. The Group’s total contribution in these areas was 
approximately £5.3 million in 2010, measured using the 
London Benchmarking Group model.

donations and sponsorship
The Group’s charitable donations amounted to  
£2.3 million, of which £1.15 million were made in the  
uK. Rolls-Royce made charitable donations of uS$970,000 
in the Americas, €535,000 in Europe and £80,000 in  
other regions. 

A further £1.1 million was contributed in sponsorships 
including the Smithsonian national Air and Space 
Museum in north America, the Brandenburg Summer 
Festival in Germany, and The Big Bang fair for young 
scientists and engineers in the uK.

Each year, the Rolls-Royce Science Prize awards £120,000 
in prize money to recognise excellent and innovative 
science teaching in the uK. This year’s winner, Teesdale 
School in Barnard Castle, England, received a total of 
£20,000 for their project in which pupils developed 
enrichment devices for primates in zoos.

employee time
Employee time contributed during 2010 is estimated  
at a value of over £1.5 million, with more than  
4,000 employees participating in activities with  
societal benefits.

Over 300 employees across the globe took part in 30 
community and education outreach projects as part of 
their personal development during the year. Our 
programme of community projects, run by graduate and 
apprentice trainees, was awarded a ‘Big Tick’ by Business 
in the Community in its Awards for Excellence in 2010 in 
the category of  ‘Building Stronger Communities’. 

employee giving
Rolls-Royce finances the administration of a Payroll Giving 
Scheme for uK employees, enabling them to make 
tax-free donations to their chosen charities. During 2010, 
employees gave almost £460,000 to more than 500 
charitable causes. In north America, employees donated 
uS$430,000 directly from payroll to good causes through 
the united Way and Centraide schemes, a percentage of 
which is matched by the Group.

47

Rolls-Royce Group plc Annual report 2010

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fInAnCE DIRECToR’S REvIEw

“ The Group delivered a 
particularly resilient 
performance in 2010  
with strong order flow 
delivering a record order  
book at the period end.”

ORDER BOOK – FIRM AND ANNOUNCED (£bn)

UNDERLYING REVENUE (£m)

.

7
6
1

.

1
7
1

.

7
8
1

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3
1
2

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5

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3
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5

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2
9
5

£bn

60

40

20

0

The results were affected by the movements in foreign 
05
exchange rates through 2010, especially the GBP/USD 
and the GBP/EUR which are explained below.

01

08

09

10

07

06

04

03

02

£m

7
1
4

2
1
5

3
9
6

7
7
8

0
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2

2
6
8

1
1
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2
1
2

1,200

PROFIT BEFORE FINANCING (£m)
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 £3.2 billion with £1.7 billion of 
outstanding debt commitments – a net cash position in 
excess of £1.5 billion with the average net cash position 
having improved by £325 million to £960 million in 2010.
05

2
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£m

12,000

8,000

4,000

0

01

02

03

04

05

06

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09

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UNDERLYING PROFIT BEFORE TAX (£m)

£m

1,200

800

400

0

5
7
4

5
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2

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2

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2
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The maturities of the Group’s existing bond facilities, at 
around £1.7 billion, are well spread with the €750 million 
UNDERLYING EARNINGS PER ORDINARY SHARE (p)
Eurobond due in the first half of 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 essentially completed the refinancing of the 
2011 Eurobond via the successful ten year £500 million 
GBP bond issued in the first half of 2009, the proceeds of 
which are currently held on term deposit and will be 
available to settle the 2011 bond when it falls due. There 
08
05
are no other material maturities until 2013.

40
30
20
10
0

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3

3
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.

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.

PAYMENTS TO SHAREHOLDERS (p)

p

16
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01

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06

07

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10

MATURITY PROFILE OF THE GROUP DEBT COMMITMENTS (£m)

7
6
5

1

2
3
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1
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2

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4

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£m

600

400

200

0

11

12

13

14

15

16

17

18

19

Foreign exchange effects on published results 
whilst continuing to influence the Group’s published 
results in 2010, currency movements were less distortive 
than in prior years given that average and spot rates for 

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The trading performance in 2010 met the expectations  
of the Board and the guidance provided throughout the 
year, delivering a seven per cent increase in Group 
underlying revenues with underlying profit before tax  
up four per cent to £955 million. There was a cash inflow 
of £258 million in the year delivering a year end net cash 
balance in excess of £1.5 billion.

These achievements came in a year that saw the broader 
environment remaining difficult and unpredictable with 
significant macro-economic, industry and Company-specific 
challenges throughout 2010. It was especially pleasing that 
further significant milestones on major new programmes, 
considerable investment in product development and 
continued expansion of the global facilities and supply chain 
were also delivered along with a resilient trading outturn. 
This performance continues to highlight the strength of the 
portfolio and the benefits of the long-term and disciplined 
application of the power systems strategy. 

All of our businesses have been affected by the economic 
factors that have been prevalent in the last few years and 
that have had an impact on our competitors. However, the 
Group has significant advantages in the diversity of  
its businesses, both by sector and geographical dispersal. 
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 
have all helped to deliver significant progress in the last 
three years. This is demonstrated by: growth in the order 
book of 29 per cent; increase in underlying revenues of 39 
per cent; and increase in underlying profit before tax of 19 
per cent; all of which supported a 23 per cent 
improvement in payments to shareholders over the same 
period. Throughout this time, the portfolio has continued 
to evolve with investments totalling more than £4 billion in 
product development, acquisitions, capacity and facilities. 
This establishes a strong platform for long-term growth in 
revenue and productivity and hence profitability.

48

Rolls-Royce Group plc Annual report 2010

 
 
Business review

the GBP/USD and GBP/EUR remained in a relatively 
narrow range throughout the year, as shown in the  
table below. 

Market exchange rates 

USD per GBP

– Year end spot rate

– Average spot rate 

EUR per GBP

– Year end spot rate

– Average spot rate

2009

2010

1.615

1.566

1.126

1.123

1.566

1.543

1.167

1.167

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:  

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 impact of this mark to market is included in net 
financing in the income statement and caused a net £432 
million loss, contributing to a published profit before tax of 
£702 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 22 and in notes 2 and 5 
of the financial statements. 

Cash flow and balance sheet 
The Group maintains a number of currency cash balances 
which vary throughout the financial year. These net cash 
balances were improved by the effects of retranslation, 
causing an improvement of £17 million in the 2010 cash 
flow and hence the closing balance sheet net cash position.

Summary 
The Group’s revenues increased by six per cent in 2010  
to £11,085 million with 86 per cent of revenues from 
customers outside the UK. Underlying revenues grew 
seven per cent in 2010, consisting of a three per cent 
improvement in original equipment revenues with 
services growing 13 per cent including double digit 
services growth in civil aerospace, marine and energy  
and a five per cent improvement in defence aerospace. 
Services activities represented 51 per cent of Group 
underlying revenues in 2010.

•  Underlying revenues in the civil aerospace segment 
grew ten per cent to £4,919 million (2009 £4,481 
million) with a 15 per cent improvement in service 
revenues and a two per cent improvement in 
revenues from original equipment. new engine 
deliveries were stable at 846 (2009 844 engines) and 
included a record 371 v2500 engines for the Airbus 
A320 family of aircraft, and a small recovery in engine 
deliveries for corporate and regional applications. 
Trent deliveries for widebody commercial aircraft 
totalled 185 engines including a record number, 139 
of Trent 700s, for the Airbus A330 aircraft. The overall 
total was held back by delayed entry into service and 
slower production ramp up in major new 
applications, the Boeing 787 and Airbus A380 
respectively. Services revenues grew strongly 
reflecting three key elements: the completion of a 
spares distribution and logistics arrangement with 
Aviall Inc, and the disposal of associated spares 
inventory which contributed around one third of the 
annual services growth; the effect of better GBP/USD 
achieved foreign exchange rates which represented 
around one third of the service improvement; and the 
ongoing utilisation and some limited recovery in 
discretionary service activity.

Underlying profit before tax of £955 million benefited 
from £74 million of foreign exchange benefits compared 
to 2009. The achieved rate on selling USD income was 
around nine cents better in 2010 than 2009 and is 
expected to improve by a similar level in 2011. In 2010, 
these better achieved rates contributed £72 million of 
transactional benefits. In addition, the improvement in 
the average GBP/USD of three cents contributed net 
translation benefits totalling £2 million to underlying 
profit before tax in the year. 

•  Underlying defence aerospace revenues grew by  
six per cent to £2,123 million (2009 £2,010 million) 
supported by strong growth in deliveries for the 
military transport sector. original equipment 
revenues grew six per cent and services revenues 
increased by five per cent over 2009. The portfolio 
proved to be resilient despite some modest effects 
from the completion of the Strategic Defence and 
Security Review (SDSR) in the UK and is expected to 
grow revenues at a similar overall rate in 2011.

49

Rolls-Royce Group plc Annual report 2010

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•  Underlying revenues in the marine business were 

stable in 2010 at £2,591 million (2009 £2,589 million) 
reflecting a five per cent decline from original 
equipment, as the subdued order cycle began to 
impact deliveries. This was offset by further services 
growth, with underlying revenues 11 per cent higher 
in the year benefiting from a growing installed base 
and new services centres commencing operation 
around the world.

•  The energy business made significant progress again 

in 2010 with a 20 per cent growth in underlying 
revenues to £1,233 million (2009 £1,028 million), and 
is now more than 60 per cent higher than 2008. 

Underlying profit margins before financing costs reduced 
slightly from 9.7 per cent in 2009 to 9.3 per cent in 2010. 
The reduction in margin reflected changes in revenue 
mix, higher levels of research and development charges, 
increasing costs associated with the launch phase of 
major new programmes. In addition, the performance 
reflected the net impact of a number of positive and 
negative one-off items in the year including the Aviall 
distribution agreement and costs associated with the 
Trent 900 failure on an Airbus A380 which offset 
improvements in operational performance and 
productivity and the benefits of better achieved foreign 
exchange rates in the year.

Underlying financing costs reduced by £13 million to  
£55 million (2009 £68 million), primarily a function of 
lower finance costs associated with financial risk and 
revenue sharing partnerships as one of the major 
arrangements came to an end in late 2009. 

Restructuring charges in 2010, totalled £46 million down 
£9 million from the prior year. These costs are included 
within operating costs.

A final payment to shareholders of 9.60 pence per share,  
in the form of C Shares, is proposed, making a total of 16.00 
pence per share, a 6.7 per cent increase over the 2009 total.

Order book
The order book at December 31, 2010, at constant 
exchange rates, has remained resilient at £59.2 billion 
(2009 £58.3 billion). This included firm business that had 
been announced but for which contracts had not yet 
been signed of £4.5 billion (2009 £6.8 billion).

Aftermarket services agreements, including TotalCare® 
packages, represented 31 per cent of the order book, 
having increased by more than 40 per cent in the last 
three years. These are long-term contracts where only the 
first seven years’ revenue is included in the order book.

50

Rolls-Royce Group plc Annual report 2010

Aftermarket services 
The Group continues to be successful in developing its 
aftermarket services activities. These grew by 13 per cent 
on an underlying basis in 2010, reflecting increasing 
installed base of products across all four markets, 
expansion of the global services network, especially  
in the marine sector, and some encouraging signs of 
improving trends in the discretionary service spend in 
some large civil engine programmes. Underlying services 
accounted for 51 per cent of the Group revenues in 2010. 

In particular, TotalCare packages in civil aerospace now 
cover 70 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  
£920 million (2009 £970 million). 

Cash
There was a cash inflow in the year of £258 million (2009 
£183 million outflow) and an improvement in average  
net cash balances to £960 million (2009 £635 million).  
A modest increase in underlying profits combined with  
a strong working capital performance offset more than 
£800 million in investment in product development, 
operational facilities and tooling and the acquisition  
of oDIM ASA in the year.

These total cash investments of £842 million (2009  
£688 million) in intangible assets, property, plant and 
equipment and acquisitions together with payments to 
shareholders of £266 million (2009 £250 million) and tax 
payments of £168 million (2009 £119 million) represented 
the major cash outflows in the year.

The net cash balance at the year end was £1,533 million 
(2009 £1,275 million). 

Taxation
The overall tax charge on the profit before tax was  
£159 million (2009 £740 million), a rate of 22.6 per cent 
(2009 25.0 per cent). 

The tax charge on underlying profit was £236 million 
(2009 £187 million) a rate of 24.7 per cent (2009  
20.4 per cent).

The overall tax charge was reduced by £29 million in 
respect of the expected benefit of the UK research and 

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development tax credit. The underlying tax rate is 
expected to be around 25 per cent in 2011.

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. 

is to reduce the volatility of the pension schemes to 
enable greater stability in the funding requirements.  
over the last two years our three major defined benefit 
pension schemes have increased the assumed life 
expectancy of members and pensioners but, even after 
allowing for these changes, the overall funding level 
across these schemes has improved. 

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 changes made to the Group’s UK pension schemes 
over the last few years have enabled the deficit to remain 
stable and modest. The charges for pensions are 
calculated in accordance with the requirements of IAS 19 
Employee Benefits. The Group’s principal UK defined benefit 
schemes employ a lower risk investment strategy in 
which the interest rate and inflation risks are largely 
hedged and the exposure to equities has reduced to less 
than 20 per cent of scheme assets. As reported last year, 
the primary objective of the revised investment strategy 

51

Rolls-Royce Group plc Annual report 2010

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 £593 
million (2009 £590 million). 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 life cycles. 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 £923 million (2009 £864 million). net R&D 
charged to the income statement was £422 million  
(2009 £379 million). The level of self-funded investment  
in R&D 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 an increase in the level of net R&D 
charged within the income statement in 2011. 

The continued development and replacement of 
operational facilities contributed to the total expenditure  
in property, plant and equipment of £361 million  
(2009 £291 million). Investment in 2011 is anticipated to  
increase compared to the 2010 level as the investments  
in new facilities in the US and Singapore continue. 

Investment in training was £33 million (2009 £24 million). 

Intangible assets 
The Group carried forward £2,884 million (2009 £2,472 
million) of intangible assets. This comprised purchased 
goodwill of £1,108 million, engine certification costs and 
participation fees of £496 million, development 
expenditure of £630 million, recoverable engine costs of 
£346 million and other intangible assets of £304 million. 

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Business review

Expenditure on intangible assets is expected to reduce 
modestly in 2011, largely as a result of the status of 
development programmes. Intangible assets of  
£211 million arose during the year as a result of the 
acquisition of oDIM ASA.

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 2010. further details are given in note 8 of 
the financial statements.

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, 

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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 90. 

In 2010, the Group received other operating income of 
£95 million (2009 £89 million).

Payments to RRSPs are recorded within cost of sales and 
increase as the related programme sales increase. These 
payments amounted to £198 million (2009 £231 million). 

The classification of financial RRSPs as financial instruments 
has resulted in a liability of £266 million (2009 £363 million) 
being recorded in the balance sheet and an associated 
underlying financing cost of £13 million (2009 £25 million) 
recorded in the income statement.

The Group also receives 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 64) 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. 
These are reviewed and updated on a regular basis, with 
risk mitigation plans identified for key risks. Principal risks 
and uncertainties are identified on pages 26 and 27 and 
certain financial risks are described on page 53.

 
 
Business review

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.

During the year, the Group reviewed and amended its 
credit and short-term cash investment policies to reflect 
the state of the credit market and to ensure the Group 
can continue to lay-off market risks associated with its 
business. As a result, the Group has revised the minimum 
publicly assigned long-term credit rating requirements  
for transacting financial instruments with a counterparty 
from Standard & Poor’s ‘A- ‘ to ‘BBB+’ (or the equivalent 
ratings from Moody’s and/or fitch) to reflect the general 
lower level of ratings within the banking sector.

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 19 per cent of Group revenues in 2010 
(2009 23 per cent). US dollar income converted into 
euros represented four per cent of Group revenues in 
2010 (2009 two 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.

Deposits and investments in other debt instruments 
continue to require a short-term rating from Standard & 
Poor’s of ‘A-1’ (or the equivalent ratings from Moody’s 
and/or fitch).

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 most significant 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 65.

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/GBP and USD/EUR.

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 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.

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 2010, the Group had US$20.9 billion of forward 
cover (2009 US$18.8 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, 2010, showing a negative value of  
£336 million (2009 negative value of £144 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 

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Business review

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. 

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 fitch, Moody’s, Standard & Poor’s, and other 
recognised market sources, and is reviewed regularly.

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 with a short-term 
credit rating of  ‘A-1’ from Standard & Poor’s or better (or 
the equivalent ratings from Moody’s and/or fitch). 
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 Group’s borrowing facilities decreased during 2010 
following the maturity of a US$187 million US private 
placement. As at December 31, 2010 the Group had total 

54

Rolls-Royce Group plc Annual report 2010

committed borrowing facilities of £2.10 billion (2009 
£2.15 billion). The proceeds of the £500 million GBP bond 
issue in 2009 are anticipated to be fully used to pay down 
the debt maturities occurring 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.

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 2010.

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, 2010, the Group’s assigned 
long-term credit ratings were: 

Rating agency

Rating

outlook

Category

Moody’s

Standard & Poor’s

A3

A-

Stable

Stable

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. 

The Group’s objective is to maintain an ‘A’ category 
investment grade credit rating from both agencies. 

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. 

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Business review

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 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.

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. At the year end, the gross level of 
commitments on delivered aircraft was US$991 million, 
comprising US$618 million for AvGs and US$373 million 
for credit guarantees.

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.

Accounting standards
The consolidated financial statements have been prepared 
in accordance with International financial Reporting 
Standards (IfRS), as adopted by the EU. In 2010, the 
changes that have had the most significant effect on the 
Group’s financial statements are the revisions to IfRS 3 
Business Combinations and amendments to IAS 27 
Consolidated and Separate Financial Statements. These 
amendments affect the accounting for acquisitions and 
transactions with non-controlling interests and have been 
applied to the acquisition of oDIM ASA (see note 24 to the 
financial statements). There is no retrospective impact. 

A summary of other less significant changes, and  
those which have not been adopted in 2010, 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 were required to clear such transactions via 
an exchange or central clearing and be required to post 
cash collateral to reduce counterparty risk.

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. 

Share price 
During the year, the Company’s share price increased by 
29 per cent from 483.5p to 623p, compared to an eight 
per cent increase in the fTSE aerospace and defence 
sector and a nine per cent increase in the fTSE 100. The 
Company’s shares ranged in price from 473.4p in January 
to 654.5p in november. 

Each of the above forms an active part of the Group’s 
exposure management process.

The number of ordinary shares in issue at the end of the 
year was 1,872 million, an increase of 18 million relating to 
the issue of shares for share option schemes.

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 2010.

The average number of ordinary shares in issue 
(excluding ordinary shares held under trust) was  
1,846 million (2009 1,845 million).

Andrew Shilston 
finance Director 
february 9, 2011

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Rolls-Royce Group plc Annual report 2010

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governance

GOvERNANCE

CONTENTS

56 Chairman’s introduction
56 Board of directors
58  The Group Executive 
58 The International Advisory Board
59 Governance structure
62 Audit committee report
63 Nominations committee report
63 Ethics committee report

CHAIRMAN’S INTRODUCTION

The UK Corporate Governance Code
The Board 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.

In May 2010, the Financial Reporting Council 
introduced changes to the Combined Code, 
which will now be known as the UK Corporate 
Governance Code, to help company boards 
become more effective and more accountable 
to their shareholders. Changes include a clearer 
statement of the board’s responsibilities 
relating to risk, a greater emphasis on the 
importance of getting the right mix of skills 
and experience on the board, and a 
recommendation that all directors of FTSE 350 
companies be re-elected annually.

The Board has carefully considered the 
changes made to the Combined Code and 
intends to comply fully.

64 Risk committee report
67 Directors’ remuneration report
78 Shareholders and share capital
80 Other statutory information
81 Material litigation
81  Annual report and financial 

statements

continue its progressive shareholder payment 
policy and the Company’s practice of providing 
cash returns to shareholders in the most 
efficient manner through the issue and 
redemption of C Shares. The restructuring 
proposals will create a new non-trading Group 
holding company (New Holdco) which will be 
incorporated under the laws of England and 
Wales and have a premium listing on the 
London Stock Exchange’s main market for 
listed securities. 

The new corporate structure will be 
implemented by means of a Scheme of 
Arrangement (Scheme) under Part 26 of the 
Companies Act 2006 followed by a reduction 
of capital of New Holdco. Under the terms of 
the Scheme, shareholders will exchange 
ordinary shares in Rolls-Royce Group plc for 
shares in New Holdco on a one-for-one basis. 
The Scheme will provide greater flexibility in 
the capital structure of the Group and provide 
distributable reserves to New Holdco. Approval 
will be sought from shareholders for these 
proposals at the time of the Group’s annual 
general meeting (AGM) on May 6, 2011 and  
the Scheme will also require the sanction of 
the High Court.

Proposed arrangements for the creation of 
a new holding company
The Company is proposing a change to its 
corporate structure in order to generate 
appropriate reserves which will allow it to 

Sir Simon Robertson
Chairman
February 9, 2011

In the year to December 31, 2010, the Company was subject to the Combined Code on Corporate 
Governance published in June 2008 by the FRC (the Combined Code). A printed copy of the code can be 
obtained free of charge from FRC Publications, 145 London Road, Kingston upon Thames, Surrey,  
KT2 6SR - telephone: +44 (0)20 8247 1264 and online at: www.frcpublications.com. From January 1, 2011, 
the Company is subject to the UK Corporate Governance Code which can similarly be obtained from the 
FRC website. The Board confirms that throughout 2010, the Company complied with the Combined Code. 
This report explains how the Company discharges its corporate governance responsibilities.

56

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BOARD OF DIRECTORS

Sir Simon Robertson
Non-executive Chairman
Chairman of the nominations 
committee
Sir Simon Robertson was appointed to 
the Board in 2004. He is the founder 
member of Simon Robertson 
Associates LLP and Deputy Chairman 
of HSBC Holdings plc. He is a non-
executive director of 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 of the Royal Opera 
House Endowment Fund. He is the 
former President of Goldman Sachs 
Europe Limited. He was knighted in 
the 2010 Queen’s Birthday Honours for 
services to business. Age 69.

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 and will retire 
from the Company at the end of 
March 2011. He is a Trustee of The  
Eden Project. Age 58.

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 September 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. She is also Chair of the Advisory 
Council of the Saïd Business School, 
Oxford; Deputy Chair of the governors 
of St Paul’s Girls’ School and a trustee 
of the World Wide Web Foundation.  
Age 53.

 
 
governance

Peter Byrom 
Non-executive director
A member of the ethics and 
nominations committees
Peter Byrom was appointed to the 
Board in 1997. He is Chairman of 
Domino Printing Sciences plc and 
is a Fellow of the Royal Aeronautical 
Society. He was a director of AMEC 
plc from 2005 to 2011 and of NM 
Rothschild & Sons Limited from 
1977 to 1996. Age 66.

Iain C 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 has been an 
executive director of BP p.l.c. since 
2004 and is Chief Executive of 
Refining and Marketing, having 
previously 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 48.

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 53.

57

Rolls-Royce Group plc Annual report 2010

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 and he is 
Chairman, National Air & Space 
Museum, Washington DC. Until 
1995 he was Executive vice 
President, Marketing and Planning 
of United Airlines. Age 65.

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 62.

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 63.

John Rishton
Non-executive director
John Rishton was appointed to 
the Board in 2007. He served as 
Chairman of the audit committee 
and a member of the ethics and 
nominations committees until 
September 30, 2010 when the 
Board announced that he had 
been appointed to succeed  
Sir John Rose as Chief Executive. 
He will take up that role on March 
31, 2011. John Rishton is currently 
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 52.

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 55.

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 55.

Ian Strachan
Non-executive director
Chairman of the ethics and audit 
committees and a member of the 
nominations committee
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 
and Chief Financial Officer 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 67.

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 54.

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 50.

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governance

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:

James Guyette  
President and Chief Executive 
Officer of Rolls-Royce North 
America Inc.

Michael Haidinger  
President – Rolls-Royce 
Deutschland Ltd & Co KG

Tom Brown  
Director – Human Resources

Miles Cowdry  
Director – Global Corporate 
Development

Lawrie Haynes  
President – Nuclear

Andrew Heath  
President – Energy

Mark King  
President – Civil Aerospace

Dan Korte  
President – Defence Aerospace

Alain Michaelis  
President – 
Gas Turbine Supply Chain  
Deputy Chief Operating Officer

Peter Morgan  
Director – Corporate Affairs

Tim Rayner  
General Counsel and Company 
Secretary

Andrew Shilston  
Finance Director

Colin Smith  
Director – Engineering and 
Technology

Mike Orris  
Chief Procurement Officer

Mike Terrett  
Chief Operating Officer

John Paterson  
President – Marine

Tony Wood  
President – Gas Turbine Services

THE 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 

Fernando Henrique Cardoso
Former President of Brazil and 
professor emeritus, University of 
São Paulo

Bernard Duc, CBE
Senior Partner HMI Ltd (Hong 
Kong), Chairman of the  
Rolls-Royce South East Asia 
Advisory Board

Sir Rod Eddington
Chairman – Australia & New 
Zealand, J.P. Morgan 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 

Mustafa Koç 
Chairman of Koç Holding, A.Ş.

Ratan Tata
Chairman of Tata Sons Ltd

Taizo Nishimuro
Chairman of Tokyo Stock 
Exchange Group, Inc. and former 
Chairman of Toshiba Corporation

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

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

Lee Hsien Yang
Chairman, Fraser and Neave 
Limited

Rair Simonyan
Chairman, Morgan Stanley, Russia, 
former first vP of Russian State oil 
company, Rosneft

Ernesto Zedillo
Former President of Mexico, 
Director, Yale Center for the Study 
of Globalization 

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GOvERNANCE STRUCTURE

Develops strategy – approves the financial plan – decides on allocations of capital – takes major business decisions –  
controls risk – monitors progress – ensures ethical standards. 
The primary goal which underpins all Board decisions is to create value for the long-term investor.

BOARD

Audit committee 
• recommends the financial 
statements to the Board 

• reviews accounting policies

• reviews major results 

announcements 

• maintains relationship with, 

and recommends, the 
appointment of the external 
auditors

• approves the internal audit 

work programme and 
reviews its work and the 
effectiveness of that 
function 

• reviews internal controls 

and risk systems

Nominations committee 
• recommends the 

appointment of executive 
and non-executive directors 
assisted by external 
recruitment consultants 

• recommends the 

membership of Board 
committees 

• reviews succession planning 

generally 

• reviews specific 

appointments to the Board 
and to other senior 
positions within the Group 

• oversees the annual review 

of Board effectiveness

Remuneration
committee 
• recommends executive 
remuneration policy to  
the Board

• determines the 

remuneration of the 
Chairman and the 
remuneration packages of 
the executive directors and 
a number of senior 
executives

Ethics committee 
• reviews recommendations 
on ethical matters made by 
external regulatory 
authorities or other bodies 

• develops the Global Code  

of Business Ethics and 
reviews the Group’s 
compliance with it 

• oversees the enforcement of 
ethical conduct – receives 
reports on issues raised 
through the ‘confidential 
reporting line’ and any 
subsequent investigation 

• reviews the effectiveness of 

the Group’s external reporting 
of ethics policy and practice

Risk committee 
• develops and implements 

the Group’s Risk 
Management strategy and 
policy 

• reviews reports on key risks 
compiled from risk profiles 
prepared by management 

• monitors the total level of 
risk within the Group as a 
whole and within each 
business unit 

• assesses the effectiveness of 
the systems established by 
management to identify, 
assess, manage and monitor 
financial and non-financial 
risks

Scheduled 
meetings 
eligible to 
attend 

Meetings 
attended 

8
8
8
8
8 
8
8
8 
8
8
8
8
8
8

8
8
8
6
5
7
8
7
8
8
8
8
7
8

Sir Simon Robertson, as Chairman of the Board of directors, is 
responsible for leadership of the Board and ensuring its effectiveness on 
all aspects of its role. 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. There were no changes to Board members 
during the year. However, on September 30, 2010 the Board announced 
Sir John Rose’s intention to retire as Chief Executive on March 31, 2011. 
John Rishton has been appointed to succeed Sir John. Accordingly,  
John Rishton stood down from the ethics, nominations and audit 
committees on September 30, 2010 as he is no longer considered by  
the Board to be independent.

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 prevent any individual or small group 

The Board
Board attendance 2010

Sir Simon Robertson (Chairman)
Helen Alexander CBE 
Peter Byrom 
Iain Conn 
Peter Gregson 
James Guyette 
John McAdam 
John Neill CBE 
John Rishton 
Sir John Rose 
Andrew Shilston 
Colin Smith 
Ian Strachan 
Mike Terrett 

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governance

dominating the Board’s decision making. Each executive director 
receives a service contract on appointment (see page 71 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. 

Under the Company’s Articles of Association, one-third of the directors 
are subject to re-election every year. However, in accordance with the 
UK Corporate Governance Code, a resolution will be put to the 2011 
AGM to amend the Articles of Association to require that all directors 
stand for re-election every year.

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. A resolution will be put 
to the 2011 AGM to allow either the Chairman or the Chief Executive to 
be either a EU or US citizen provided the other is a British citizen. This 
proposed change has been approved by the HM Government (Special 
Shareholder). The Board believe that in a global business, it is essential to 
have a wider pool of talent to draw upon for such key positions.

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 strategy and certain 
matters which affect the shape and risk profile of the Group, 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. 

The 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. In 2010, the schedule was amended to include an overriding 
requirement for any high-risk item to be referred to the Board 
irrespective of it falling within the delegated financial limit.

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The Board’s primary goal and tasks
The primary goal of the Board is to ensure that the Company’s strategy 
creates value within an acceptable risk profile for the long-term investor. 
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.

The work of the Board 2010
During the year, the Board received regular reports by executive 
directors on business and financial performance and engineering and 
technology and received presentations on business issues, health, safety 
and the environment, IT infrastructure and disaster recovery 
arrangements, corporate governance, corporate affairs and quality and 
process excellence. It received reports on the activities of its committees 
after each committee meeting. The Board reviewed strategy regularly 
and also held a day-long strategy meeting.

In addition, the Board also approved:
•  the Annual report for 2009 and the preliminary announcement  

and the 2010 half yearly results;

•  the budget for 2011;
•  the final payment to shareholders in respect of the year ended 

December 31, 2009 and the interim payment for the year ending 
December 31, 2010;

•  the acquisition by Rolls-Royce Marine AS of ODIM ASA;
•  revised banking arrangements and facilities for the Group;
•  the renewal of the terms of the Euro Medium Term Note Programme; 

and

•  the actions to be taken to comply with the new UK Corporate 

Governance Code.

Board committees
Details of the work of the Board’s formal committees can be found on 
pages 62 to 64 and on page 67. Terms of reference for each committee 
are available on the Group’s website at www.rolls-royce.com.

Executive committees
The executive governance structure evolved during the year. In 2010, 
three new committees were established which report to the Group 
Executive. The Executive Committee chaired by the Chief Executive and 
comprising the executive directors has nine scheduled meetings each 
year with other directors joining by invitation. It develops strategy, 
considers investment choices and provides leadership for the Group’s 

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governance

businesses. The Operations Executive chaired by the Chief Operating 
Officer provides operational leadership driving world-class levels of cost, 
quality and delivery. The Functional Executive, chaired by the Finance 
Director, drives functional maturity. In addition, as our businesses have 
grown and developed, the leadership structure has broadened, with 
each business now having a governance structure which replicates 
broadly that of the holding 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 consider the test of independence to be appropriate to the 
chairman of a company. However, Sir Simon Robertson did meet the 
Code’s independence criteria upon his appointment as Chairman on 
January 1, 2005. His other significant commitments are described on 
page 56.

The Board reviews the independence of the other non-executive 
directors every year, based on the criteria in the Combined Code. This 
review was undertaken in 2010 and the Board concluded that all the 
non-executive directors were independent in character and judgement, 
although following the announcement on September 30, 2010 of the 
appointment of John Rishton as successor to Sir John Rose as Chief 
Executive, John Rishton has been treated as non-independent and  
has retired from his roles as a member of the audit, ethics and 
nominations committees. 

The Board will again be asking shareholders to re-elect Peter Byrom as a 
director even though he has served as a director of the holding 
company (then Rolls-Royce plc) since January 1,1997. In so doing, the 
Board has taken full account of the Combined Code requirement to 
consider carefully a non-executive director’s independence where that 
director has served on the board for more than nine years from the date 
of his or her first election. The Board strongly remains of the view that 
Peter Byrom continues to be independent and there are no issues which 
are likely to affect his independent judgement and that he is in no way 
dependent on the remuneration he receives from the Company.

The Board believes that in a complex and technologically advanced 
company with a long business cycle from the development of an engine 
to its eventual retirement, it is highly desirable to retain at least one 
non-executive director with long-term experience.

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. In addition, every director 
has access to the General Counsel and Company Secretary.

Board evaluation
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. 

In 2009, the Board asked outside consultants to assist it with a review, 
which took the form of a facilitated self evaluation. In 2010, the Chairman 
led a review of the Board’s effectiveness without the assistance of 
outside consultants. This review consisted of confidential, unattributable, 
one-on-one discussions with each Board member and covered any 
subject Board members wanted to raise concerning the workings of the 
Board, including governance, effectiveness, strategy development, 
composition, operations and dynamics. The Board members 
unanimously agreed that the Board was working effectively. The review 
highlighted the importance of the evaluation of strategy; risks including 
engineering and technology risk; the continued focus on Board and 
executive succession planning; and the need to be aware of challenges 
to the business.

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. 

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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AUDIT COMMITTEE REPORT

Membership of the audit committee
Audit committee attendance 2010

Ian Strachan (chairman)
Iain Conn 
John Neill CBE 
John Rishton 1

Meetings 
eligible to 
attend 

Meetings 
attended

5 
5
5
3 

5
5
5
3 

1 John Rishton retired as a member of the audit committee on September 30, 2010 on the 

announcement of his appointment as the next Chief Executive.

The audit committee consists exclusively of independent, non-executive 
directors. Up to September 30, 2010, John Rishton and thereafter Ian 
Strachan, both of whom have recent and relevant financial experience, 
chaired the committee. In 2010, its other members were Iain Conn and 
John Neill CBE. The committee met five times during the year. The 
Director of Risk, Head of Business Assurance, a representative of the 
external auditors and the General Counsel and Company Secretary 
normally attend the meetings. Additionally, the Director of Risk and the 
Head of Business Assurance have 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.

Responsibilities
The committee has responsibility for recommending the financial 
statements to the Board and for reviewing the Group’s financial 
reporting and accounting policies, including formal announcements 
and trading statements relating to the Company’s financial performance. 
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 2011 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.

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The work of the committee in 2010
In February 2010, the committee reviewed salient features arising out  
of KPMG Audit Plc’s audit of the 2009 Annual report, reviewed the draft 
Annual report and after consideration of a paper on going concern 
agreed to recommend the 2009 Annual report to the Board. Following 
completion of the 2009 year end process, the meeting assessed the 
2009 audit process and the strategy for the 2010 audit and considered 
the performance of the auditors. The committee also considered and 
recommended to the Board the Company’s interim management 
statements and half-yearly report. 

During the year, the committee closely monitored and approved KPMG’s 
non-audit fees. It also reviewed expenses incurred by Board directors 
and members of the Group Executive. It received reports on the work of 
the business assurance team and a presentation by the Chief 
Information Officer on IT and the Process Delivery function and by the 
President – Defence Aerospace on risk management in the defence 
business. The committee also considered whistle blowing arrangements 
for the reporting of fraud. Throughout the year, the committee received 
technical updates of relevant changes in the governance environment 
and in accounting standards and other reporting matters.

Auditors’ independence
In order to safeguard auditors’ 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 monitored 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.

 
 
governance

NOMINATIONS COMMITTEE REPORT

Membership of the nominations committee
Nominations committee attendance 2010

Sir Simon Robertson (chairman)
Helen Alexander CBE 
Peter Byrom 
Iain Conn 
Peter Gregson 
John McAdam 
John Neill CBE 
John Rishton 1
Sir John Rose 
Ian Strachan 

Meetings 
eligible to 
attend 

Meetings 
attended

4 
4
4
4
4
4 
4
2
4
4

4 
4
4
4
3
4 
3
2
4 
4

1 John Rishton retired as a member of the nominations committee on September 30, 2010 on the 

announcement of his appointment as the next Chief Executive.

In 2010, Sir Simon Robertson chaired the nominations committee which 
comprises the Chairman, the Chief Executive and the independent 
non-executive directors and which is attended by the General Counsel 
and Company Secretary. 

Responsibilities
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.

ETHICS COMMITTEE REPORT

Membership of the ethics committee
Ethics committee attendance 2010

Ian Strachan (chairman)
Helen Alexander CBE 
Peter Byrom 
John Rishton 1

Meetings 
eligible to 
attend 

Meetings 
attended

3
3
3
2

3
3
3
2

1 John Rishton retired as a member of the ethics committee on September 30, 2010 on the 

announcement of his appointment as the next Chief Executive.

The ethics committee consists exclusively of independent non-executive 
directors and met three times in 2010. Ian Strachan chairs the committee 
and its other members during 2010 were Helen Alexander CBE and  

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Rolls-Royce Group plc Annual report 2010

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.

The work of the committee in 2010
During the year, the committee recommended to the Board the 
reappointment of Helen Alexander CBE, Peter Byrom, Iain Conn, Peter 
Gregson, John Rishton and Sir Simon Robertson subject to those 
directors being re-elected at the 2011 AGM. The committee also 
engaged Egon Zehnder International (EZI) to conduct an executive 
search for a suitable successor to Sir John Rose and, after consideration 
of several candidates, recommended to the Board that an existing 
non-executive director, John Rishton, be appointed, such appointment 
to take effect on Sir John’s retirement on March 31, 2011. The committee 
has subsequently engaged EZI to search for a suitable non-executive 
director with substantial and recent relevant financial experience to be 
considered for the role of audit committee chairman.

The committee reviewed the situational conflicts declared by each 
director. It considered the independence of each non-executive director 
and made recommendations to the Board. The committee also 
considered the future structure of the Board and received a report from 
the Director – Human Resources on progress made in the last three 
years to build strength in depth for the executive team.

Peter Byrom. John Rishton was also a member up to September 30, 
2010. The Director of Risk, who has executive responsibility for ethics, 
attends the meetings as does the General Counsel and Company 
Secretary. The Chairman of the Board, the Chief Executive and  
other executives of the Group may be invited to attend meetings  
of the committee.

Responsibilities
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.

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governance

The committee is responsible for reviewing compliance with the Group’s 
Global Code of Business Ethics (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 Group 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.

The work of the committee in 2010
During the year, the committee reviewed and enhanced relevant 
supporting policies and procedures that provide detailed guidance and 
support for the implementation of the Global Code. The committee also 
considered the impact of the new UK Bribery Act which is expected to 
come into force in May 2011. In response, the committee has thoroughly 
reviewed its policies in this area. In particular, policies on Gifts and 
Hospitality and Commercial Intermediaries were updated during the year 
with every relevant employee receiving training on the new arrangements 
and a new compliance organisation has been established.

RISK COMMITTEE REPORT

Membership of the risk committee
Risk committee attendance 2010

Sir John Rose (chairman)
James Guyette 
Andrew Shilston 
Colin Smith 
Mike Terrett 

Meetings 
eligible to 
attend 

Meetings 
attended

2
2
2
2
2

2
2
2
2
2

The risk committee, chaired by the Chief Executive, and comprising all of 
the executive directors, meets at least twice a year and is attended by 
the sector presidents, the Director of Risk and the General Counsel and 
Company Secretary. 

Responsibilities 
The Group has established and implemented a sound risk management 
structure throughout the business that supports programme execution, 
informs decision making and, ultimately, helps to deliver better  
business performance.

The risk committee has accountability for the system of risk 
management and reports annually to the Board on the policy, process 
and operation of the risk management system and the principal risks 
facing the Group, including the treatment plans in place to manage 
them. The risk committee 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 of the Group.

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.

The risk committee has developed a risk policy which states that risk 
management is a part of every manager’s responsibility and is to be 
embedded within the day-to-day activity.

The work of the committee in 2010
During the year, the committee agreed additions and retirements to the 
Group risk register and reviewed mitigation plans. The committee 
received reports on business continuity and crisis management and on 
the Anti-Bribery and Corruption programme. It also reviewed the tools 
and processes used for risk management and reviewed the Group’s 
insurance portfolio.

Risk profile
The Group’s risk profile has increased over the past five years which, in 
part, can be attributed to the increasing maturity of the processes to 
recognise and formally communicate risks.

The significant risks arising from economic downturn and financial 
market disruption in that period have been or are being addressed by 
comprehensive mitigation strategies and plans. The external business 
environment is challenging and whilst competitive pressures remain 
high there are some early signs of recovery across all sectors.

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64

Rolls-Royce Group plc Annual report 2010

 
 
governance

Had the Group remained so strongly dependent upon the civil 
aerospace business, then its exposure to the cyclical downturn in the 
economy affecting the global demand for air travel would have been 
much more severe. While it is still possible that there may be a ‘double 
dip’ recession, the Group has performed well to date in the recessionary 
environment. The benefits of a strong aftermarket business, a broad 
portfolio of products across all businesses and the growing influence of 
geographical diversification have all been factors in maintaining a strong 
financial performance. Continued development of the portfolio in areas 
such as marine, energy and civil nuclear will further mitigate the risk.

Low probability/high impact events that are beyond the range of 
normal expectations have attracted a substantial degree of focus in 
2010. The European sovereign debt crisis threatening the euro, the April 
eruption of the Eyjafjallajökull volcano in Iceland, which shut down 
Europe’s airspace for six days, and the oil spill in the Gulf of Mexico have 
together resulted in a much deeper consideration of the risks to 
organisational resilience.

The reliability of our products remains a significant exposure and recent 
events have highlighted the negative impact that any deficiencies could 
have on the Group’s reputation. Management attention is on the ‘safety 
first’ culture and there is continuing engineering focus on product 
reliability and service lives.

THE RISK MANAGEMENT PROCESS

Principal risks and uncertainties
The ‘Principal risks and uncertainties’, described in the table on pages 26 
and 27, 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; and
•  operational risks.

Assessment

Planning

Identification

Risk
register

Treatment

Risk management process
Rolls-Royce takes a proactive approach to the management of risk and 
recognises the risk management process as fundamental in achieving its 
business objectives. Throughout the Group, risks are identified, assessed 
and managed through an established structured approach. 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’.

THE RISK MANAGEMENT PROCESS

Assessment

Planning

Identification

Risk
register

Treatment

Review, control
and communicate

THE RISK ESCALATION STRUCTURE

Group R

I

S

Business unit/
Function

K

E

S

C

A

L

A

T

I

O

N

RISK ACTION FLOWDOWN

Programme/Department

A

N

D

M

O

N

I

T

O

R

I

N

G

Review, control
and communicate

Work package

65

Rolls-Royce Group plc Annual report 2010

THE RISK ESCALATION STRUCTURE

Group R

I

S

Business unit/

Function

K

E

S

C

A

L

A

T

I

O

N

RISK ACTION FLOWDOWN

Programme/Department

Work package

A

N

D

M

O

N

I

T

O

R

I

N

G

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A global network of risk champions, mentors and facilitators drives the 
application of the standard process in each part of the business and 
helps to develop, embed and share best practice throughout the Group.

The risk management process is subject to continuous improvement. 
Over the past year, training material has been enhanced for all risk roles 
to ensure consistency of risk management capability for all levels of the 
organisation. The global uptake of risk training has more than doubled in 
comparison to 2009.

As the Group broadens its portfolio and enters new territories through 
organic growth and acquisition, it places increased emphasis on the 
need to understand the geopolitical risks inherent in the business. 
Initiatives are underway to formalise, corroborate and respond to  
these risks.

governance

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 to identify and record key risks 
together with appropriate treatment activities. Risks are documented in 
a framework of risk registers and are regularly reviewed and updated by 
management. 

The process provides methods for escalation and aggregation at every 
level of the business; delegation to the appropriate levels within the 
organisation ensures that risk and treatment actions are owned, defined, 
resourced and effective. The top-level corporate risk register is an 
aggregation of lower-level risk registers from where risks are escalated to 
be reviewed by the Board. The Board also considers these risks in the 
context of the Group’s business strategy. 

This ongoing process has been in place during 2010, up to and including 
the date of approval of this Annual report contained within it.

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.

Continuous improvement of the risk management process
Development, implementation and maintenance of the standard global 
process is the responsibility of a dedicated Enterprise Risk Management 
team, part of the Risk function, led by the Director of Risk. 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 all levels of the Group.

An integrated range of tools and training supports the risk process. 
Implementation of an enterprise-wide risk database application enables 
the recording, analysis, communication and management of risks across 
the Group.

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66

Rolls-Royce Group plc Annual report 2010

 
 
governance

DIRECTORS’ REMUNERATION REPORT

On behalf of the Board, I am pleased to present the Directors’ 
remuneration report for 2010, for which the Company will be seeking 
approval from shareholders at the AGM on May 6, 2011.

The work of the committee during 2010
During the last year the committee:
•  determined the outcome of awards for the Annual Performance 

The report: 
•  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 remuneration 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, we remain committed to a remuneration policy which, 
whilst sufficiently flexible to take account of future changes in the 
Group’s business environment and in remuneration practice, will 
continue to reflect the following broad principles:
•  the remuneration of executive directors and other senior executives 
should reflect their responsibilities and contain incentives to deliver 
the Group’s performance objectives without encouraging excessive 
risk-taking;

•  remuneration must 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;

•  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. Therefore a significant proportion of senior executive 
remuneration will comprise long-term share-based incentives; and
•  when determining remuneration, the remuneration committee will 
take into account pay and employment conditions elsewhere in  
the Group.

The committee reviews regularly both the competitiveness of the 
Group’s remuneration structure and its effectiveness in incentivising 
executives to enhance value for shareholders over the longer term. 

Related Award Plan, All-Employee Bonus Scheme and Performance 
Share Plan for 2009 and set performance conditions for the 2010 
awards under those plans;

•  considered the effect of foreign exchange movements on incentive plans;
•  agreed terms for the engagement of a new Chief Executive;
•  reviewed salary levels and participation in incentive arrangements for 

executive directors and other senior executives;

•  reviewed the implications of changes to tax relief on UK pension 

arrangements;

•  reviewed the Directors’ remuneration report for the year ended 2009 

prior to its approval by the Board; and

•  considered the Group remuneration arrangements in light of the UK 

Corporate Governance Code.

The committee will review regularly the policy and principles outlined 
above to ensure that Group remuneration practice continues to be in 
the best interests of shareholders.

Helen Alexander CBE
Chairman of the remuneration committee

Introduction to the remuneration report
The report provides the information required by the Large and Medium-
sized Companies and Groups (Accounts and Reports) Regulations 2008 
and describes how the Company applied the principles of the Combined 
Code in relation to executive directors’ remuneration. The Company 
confirms that it complied with the requirements of the Code.

The report was approved by the committee on February 8, 2011.

The 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 remuneration of the 
Chairman and the remuneration packages of 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.

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Rolls-Royce Group plc Annual report 2010

 
 
governance

The committee consists exclusively of independent, non-executive 
directors. The members of the committee and their attendance at 
committee meetings during the year were:

Helen Alexander CBE (chairman)
Peter Byrom 1 
Peter Gregson 
John McAdam 

Meetings 
eligible to 
attend

Meetings 
attended

7
7
7
7

7
5
6
7

1 Peter Byrom retired as a member of the remuneration committee on February 8, 2011.

In 2010, Sir 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.

Advice to the committee
During 2010, the committee had access to advice from inside and 
outside the Group from:
•  the Chairman;
•  the Chief Executive;
•  the Finance Director;
•  the Director – Human Resources;
•  the General Counsel and Company Secretary;
•  the Director – Global Reward;
•  the Group finance department;
•  Deloitte LLP1;
•  Kepler Associates; and 
•  Freshfields Bruckhaus Deringer LLP, the Company’s lawyers.

1 During the year, Deloitte LLP advised the Group on tax, assurance, pensions and corporate finance 

and Deloitte MCS Limited provided consulting services.

The main components of remuneration
The main components of remuneration for all executives worldwide comprise base salary, annual incentive arrangements, long-term share-based 
incentives and benefits. Executives are also entitled to participate in all-employee share plans.

COMPONENT

SUMMARY

TIMEFRAME

MAIN FEATURES

Base salary

annual
perFormance
related award
plan (apra)

•  Set by the committee at levels required to recruit and 
retain high quality senior executives with reference to 
the marketplace for companies of similar size, 
internationality and complexity and taking account of 
pay elsewhere in the Group.

•  Set with reference to the median of market practice.

•  Annual incentive.
•  Measures set by the committee based on underlying 

profit, cash flow and individual objectives and 
performance.

•  Strong link between performance and remuneration.
•  Promotes share ownership and encourages decisions 

in the long-term interest of shareholders.

rolls-royce
group plc
perFormance
share plan
(psp)

•  Long-term share based incentive.
•  Conditional on corporate performance.
•  Measures based on Cash Flow Per Share (CPS), Total 

Shareholder Return (TSR) and an Earnings Per Ordinary 
Share underpin (EPS).

all-employee
share plans

•  ShareSave Plan – a savings-related share option plan 

• 

• 

available to all employees allowing purchase of shares 
at a discount to the share price at date of grant.
‘Free Share’ element of the Share Incentive Plan (SIP) 
where UK employees may receive shares as part of any  
bonus paid.
‘Partnership Share’ element of the SIP under which UK 
employees may make regular purchases of shares from 
pre-tax income.

Not 
applicable

•  Set annually on March 1. Performance is taken into account.

One year 
plus two year 
deferral

•  Bonus potential:

 -

 -

for on target performance, 75 per cent of salary for 
executive directors and 81 per cent for Chief Executive.
for maximum performance, 125 per cent of salary for 
executive directors and 135 per cent for Chief Executive.

•  Bonuses can be increased by up to 20 per cent  
to reflect exceptional personal performance.

•  Compulsory deferral of 40 per cent of bonus into shares.
•  Shares vest after two years, subject to continued 

employment.

Three years

•  Potential:

 -

 -

for maximum CPS performance, 100 per cent of salary for 
executive directors and 120 per cent for Chief Executive.
for maximum CPS and TSR performance, 150 per cent  
of salary for executive directors and 180 per cent for 
Chief Executive.

•  Shares vest after three years provided performance criteria 

are met.

Not 
applicable

•  ShareSave options may be exercised in three or five years 

from the date of grant.

•  Shares under the SIP vest after five years free from income 

tax and national insurance.

In addition to the above, pension and other benefits, which are competitive in local markets, are provided.

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Rolls-Royce Group plc Annual report 2010

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Base salaries
The committee has commissioned salary benchmarks from Deloitte LLP. 
The benchmarks have been prepared using their company size and 
complexity methodology.

All salary increases must be justified on the basis of performance and are 
not automatic. The committee is informed of pay and conditions 
elsewhere in the Group and these are taken into account in determining 
remuneration for the executive directors.

Annual incentives
Executive directors and selected senior executives participate in APRA. For 
UK participants, APRA awards do not form part of pensionable earnings. 

Target and maximum APRA bonus opportunity
The committee considers that there should be a continuing emphasis on 
those at risk elements of remuneration, such as annual and long-term 
incentives, which directly influence the performance of senior executives. 
For the Chief Executive, a 162 per cent maximum bonus opportunity 
means that 62 per cent of combined basic pay and bonus opportunity is 
directly related to annual financial and personal performance.

Deferred APRA
For executive directors and selected senior executives, 40 per cent of 
APRA is delivered in the form of a deferred share award in the Company’s 
shares. For other participants in APRA, 33 per cent is delivered in the 
form of deferred shares. The deferred share element operated for 2010 
will result in share awards as described in the directors’ emoluments 
table on page 72. Details of deferred shares held under the plan are 
shown in the table on page 76.

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 for the shares to vest, 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. 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.

Under APRA as operated in 2010, executive directors were eligible for 
awards in accordance with the table below:

APRA TIMELINE

James Guyette
Sir John Rose
Andrew Shilston
Colin Smith
Mike Terrett 

Target bonus 
(as a % of 
salary)1

Maximum 
bonus (as a 
% of salary)1,2

75
81
75
75
75

125
135
125
125
125

Start of performance
period

End of performance
period

Deferred share awards 
allocated and cash 
awards paid

End of two year
retention period

Deferred shares
released

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 was 162 per cent for the Chief Executive 
and 150 per cent for the other executive directors.

The committee has determined that the bonus in respect of 2011 will be 
operated on substantially similar terms to 2010. There will be no change 
to the maximum bonus opportunities for executive directors.

APRA performance measures
The APRA performance measures set by the committee are based on the 
Group’s annual operating plans. For 2010, 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. Forty per cent of any APRA 
bonus depends on personal performance. In 2010, the level of 
achievement against the financial measures was sufficient to generate 
up to 100 per cent of the maximum bonus for individual participants 
subject to the achievement of their personal objectives.

2011 bonus targets will also be determined with reference to profit,  
cash flow and personal performance. The committee is mindful of 
corporate, environmental, social and governance risks when setting 
personal objectives. 

69

Rolls-Royce Group plc Annual report 2010

1 Jan 11

1 Jan 12

1 Jan 13

1 Jan 14

Other annual incentives
The same financial targets, as set for APRA, are used for the Managers’ 
Bonus and the All-Employee Bonus Scheme (AEBS). The Managers’ Bonus 
typically enables managers worldwide to receive a bonus of up to ten per 
cent of pay and the AEBS up to two weeks’ pay, based on corporate and 
business performance. Participants in APRA or the Managers’ Bonus do not 
participate in the AEBS.

PSP
The PSP is designed to reward and incentivise selected senior executives 
who can influence the long-term performance of the Group. The size of 
awards under the PSP are set taking into account competitive levels within 
the marketplace for UK companies of a similar size and complexity to the 
Group. In 2010, Sir John Rose received a conditional award of shares with a 
market value at the time of grant of 110 per cent of his annual salary. For 
other executive directors and business heads the grant was 80 per cent, 
and 65 per cent for other members of the Group Executive.

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governance

Under the rules of the PSP, selected senior 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  
CPS, EPS and 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, 2010, the Company’s financial and TSR performance 
generated 125 per cent of the number of shares conditionally  
granted in 2008.

PSP TIMELINE

Start of performance
period

End of performance
period

After tax shares 
released subject 
to performance 
criteria

50% of after tax
shares continue
to be held under
retention policy 

1 Jan 11

1 Jan 12

1 Jan 13

1 Jan 14

Performance measures

challenging earnings hurdle at the start of each three-year performance 
period, but, given the uncertain outlook for inflation and the increased 
proportion of turnover destined for markets outside the UK, the hurdle 
will not necessarily be RPI plus three per cent per annum. The hurdle for 
the 2011 grant will require EPS to show real growth by exceeding a 
composite world inflation figure.

The following CPS targets will apply to the grants to be made in 2011:

Aggregate CPS  
over three-year performance period

Percentage of  
maximum award released

56p
83p

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 awards granted in 2011
For 2011, the size of awards under the PSP will be unchanged from 2010 
and will be as follows:

James Guyette
John Rishton1,2
Andrew Shilston
Colin Smith
Mike Terrett 

PSP award  
(as a % of salary)

PSP award overall 
maximum  
(as a % of salary)

100
120
100
100
100

150
180
150
150
150

vesting criteria

Purpose of the measure

Performance condition over three-year period

EPS growth 

Aggregate  
CPS 

TSR 
performance 
against  
FTSE 100 index

•  Underpin to 
ensure any 
payouts are 
supported by 
sound 
profitability. 
Incentivise 
generation of 
cash flow in line 
with Company’s 
strategy.

• 

• 

• 

If EPS growth exceeds the hurdle, the 
number of shares vesting will be 
determined in accordance with the 
CPS targets.
If EPS growth does not exceed the 
hurdle, zero vesting.

•  Below threshold cash flow target, 

zero vesting.

•  Threshold cash flow target, 30 per 

cent vesting.

•  vesting will increase on a straight-line 

basis between 30 per cent and  
100 per cent.

•  Align interests 

•  50th percentile (median) and below, 

with shareholders 
by rewarding out 
performance of 
FTSE 100 returns.

no additional vesting.

•  Above 50th percentile (median) 

vesting will be enhanced by 25 per 
cent. For executive directors and 
selected senior executives, a 
straight-line basis will operate from 
25 per cent to a maximum of a 50 per 
cent enhancement for upper quartile 
TSR performance.

The plan rules approved by shareholders in 2004 included a fixed EPS 
growth hurdle of RPI plus three per cent per annum. The rules permit the 
committee to make adjustments. Following consultation with major 
shareholders, the committee agreed that from the 2011 grant it will set a 

1 This is the same level as previously granted to Sir John Rose in 2010.
2

In addition, John Rishton will receive a special grant of shares intended to mirror the fair value of 
shares forfeited on resigning from his current employer as described on page 71.

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. Details of the executive directors’ share interests are set out on 
pages 74 to 76. The current executive directors have each complied with 
the minimum shareholding requirement.

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: 
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 

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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 may receive shares as part of the Company component 
of any bonus paid. 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.

The effect of the corporate restructuring on share plans
At the 2011 AGM, shareholder approval will be sought for a revised 
corporate structure involving the creation of a new holding company. The 
committee has considered the implications of the restructuring proposal 
for the Company’s share plans and concluded that the new holding 
company will not advantage or disadvantage participants in any way.

Participants will be able to exchange their rights over Rolls-Royce  
Group plc shares for rights of an equivalent value over shares in the new 
holding company, held on the same terms and conditions as the 
existing rights.

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. 

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 terminated 
prematurely. 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.

Retirement of Sir John Rose and terms of engagement for  
John Rishton as Chief Executive
No compensation payment will be made to Sir John Rose on his 
retirement from the Board on March 31, 2011. He will receive the 
deferred elements of his 2009 and 2010 bonuses. He will also retain an 
interest in the 2009 and 2010 PSP grants. To the extent the performance 
conditions are satisfied at the end of each three-year performance 
period (ie December 31, 2011 in relation to the 2009 grant and 
December 31, 2012 in relation to the 2010 grant) he will be entitled to 
shares, prorated to his service in that performance period. 

John Rishton will join Rolls-Royce on March 1, 2011 as an executive 
director and will be appointed as Chief Executive with effect from  
March 31, 2011 under similar terms and conditions as Sir John Rose. He 
will be entitled to a base salary of £875,000 and a maximum bonus 
entitlement of 135 per cent which may be increased by 20 per cent to 
reflect exceptional personal performance. He will also be eligible to 
receive an annual grant of performance shares under the PSP which 
would equate to a maximum of 120 per cent of base salary. The 
proportion of these shares released after a three-year performance 
period would depend on the extent to which profit, cash and TSR 
performance conditions are met. 

John Rishton will also receive pension and other benefits consistent with 
standard Rolls-Royce terms and conditions for senior executives. He will 
be entitled to 12 months’ notice of termination and required to give six 
months’ notice to the Company. The contract includes mitigation 
provisions in the event of early termination by the Company. In addition 
to his remuneration package he will, on joining the Company, receive a 
special grant of shares in Rolls-Royce intended to mirror the fair value 
and vesting profile of the incentives forfeited on resigning from his 
current employer. The fair value of these shares is currently assessed as 
£2.8 million, attributed 56 per cent to performance and 44 per cent to 
restricted shares. These proportions mirror his existing arrangements.

External directorships of executive directors
James Guyette was 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:

The following table summarises the terms of the executive directors’ 
service contracts:

External directorship fees

James Guyette
Sir John Rose
Andrew Shilston
Colin Smith
Mike Terrett

Date of contract

29 September 1997
4 December 1992
5 November 2002
1 July 2005
1 September 2007

Unexpired 
term

Notice period 
Company
30 days1
Indefinite
12 months 12 months2
12 months
12 months
12 months
12 months
12 months
12 months

Notice period 
individual

30 days
6 months
6 months
6 months
6 months

2

1 James Guyette has a contract with Rolls-Royce North America Inc., drawn up under the laws of the 
State of virginia, US. It provides that, on termination without cause, he is entitled to 12 months’ 
severance pay without mitigation and, in addition, appropriate relocation costs.
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.

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James Guyette1,2

Payment 
received £000

100

1 James Guyette was paid in US dollars translated at £1 = US$1.543.
2

In addition to an annual fee, James Guyette received 3,693 Restricted Stock Units (RSUs) at 
US$13.54 per share in PrivateBank. During 2010, 2,503 RSUs vested at US$19.98 per share. Also 
during 2010, 500 shares of restricted stock vested at US$204.20 per share and 1,048 shares of 
restricted stock vested at US$233.12 per share in priceline.com. He was granted 466 shares of 
restricted stock at US$235.82 per share.

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TSR return over five years
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 has been chosen as the comparator index because it contains 
a broad range of other leading UK listed companies.

The 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 £168.80 and £126.30 respectively.

Aggregate directors’ remuneration
The total amounts for directors’ remuneration were as follows:

180

160

140

120

100

80

60

Emoluments
Gains on exercise of share options
value of shares vested under long-term incentive awards
Money purchase pension contributions

Directors’ emoluments (audited)
The individual executive directors’ emoluments are analysed as follows: 

Rolls-Royce (rebased to 100)
FTSE 100 (rebased to 100)

2005

2006

2007

2008  

2009  

2010  

2010  
£000

7,902
713
3,379
539
12,533

2009  
£000

5,237
51
1,586
524
7,398

James Guyette5
Sir John Rose
Andrew Shilston
Colin Smith
Mike Terrett 

Annual Performance Related Award plan (APRA)

Basic salary 
£000

Cash bonus 
£000

506
864
559
419
508
2,856

336
843
438
290
398
2,305

Deferred 
shares1 
£000

224
562
292
194
265
1,537

Total  
APRA  
£000

560
1,405
730
484
663
3,842

2010 
Aggregate 
emoluments 
excluding 
pensions  
contributions4 
£000

2009 
Aggregate 
emoluments 
excluding 
pensions 
contributions4 
£000

Pension 
payments2 
£000

Taxable 
benefits3 
£000

–
–
–
105
–
105

54
30
19
19
99
221

1,120
2,299
1,308
1,027
1,270
7,024

764
1,270
787
659
898
4,378

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, 2011 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. 
3 Taxable benefits may include the following: a car or car allowance; private medical insurance and financial counselling. In the case of James Guyette, a housing allowance and appropriate club membership 
fees. In the case of Mike Terrett, the figure in the above table includes additional housing costs paid on his behalf and the tax charge on that benefit paid by the Company. Amounts charged during the year 
to UK income tax in respect of the use of chauffeur services provided for the years 2005 to 2010 for Sir John Rose were £46,216. Only the amount for 2010 of £7,210 is included in the taxable benefits column 
in the above table.

4 Details of the directors’ pensions are set out below and on page 73.
5 James Guyette was paid in US dollars translated at £1 = US$1.543.

Payments made to former directors of the Company (audited)
John Cheffins retired from the Board on September 30, 2007. He was 
appointed on March 25, 2009 as acting President – Energy on a 
part-time basis and retired from this role on June 21, 2010. John Cheffins 
has continued in his role as Chairman of Rolls-Royce Fuel Cell Systems 
Limited and provided non-executive advice to the energy business. He 
was paid £130,223 and benefits totalling £1,767 in 2010. (He was paid in 
Canadian dollars translated at £1 = CAD$1.589.)

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. He was paid £23,310 in 2010.

Pensions (audited)
The Group’s UK pension schemes are funded, registered schemes and 
were approved under the regime applying until April 5, 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.

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Andrew Shilston is a member of the Group’s UK pension scheme. He is also a member of the Rolls-Royce Supplementary Retirement Scheme 
(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. 
Employer contributions to the Scheme during 2010 have been added to the increase in transfer value over 2010 for the registered defined benefit 
plans, and are therefore included in the figures shown in the final two columns of the first table below.

Sir John Rose opted out of future pension accrual with effect from February 1, 2008 and started to receive his pension immediately. Mike Terrett opted 
out of future pension accrual with effect from April 1, 2006 and started to receive his pension from November 1, 2009. The transfer value for  
Mike Terrett as at December 31, 2009 was calculated using market gilt yields on that date and included cash taken on retirement whereas the transfer 
value as at December 31, 2010 is the value of benefits in payment calculated using gilt yields applicable on that date. 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. 

Colin Smith opted out of future pension accrual with effect from April 1, 2006. He receives a cash allowance in lieu of future pension accrual. Had he 
elected to continue to accrue pension the estimated cost of that accrual would be higher than the cash allowance to be paid in lieu. 

James Guyette participates in pension plans sponsored by Rolls-Royce North America Inc. He 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 below. 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. He 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 2010 have been added to the increase in transfer value over 2010 for the defined 
benefit plans, and are therefore included in the figures shown in the final two columns of the second table below.

The transfer values in the tables below have been calculated on the basis of actuarial advice.

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
Andrew Shilston
Colin Smith
Mike Terrett

Increase in 
accrued pension 
year ended  
Dec 31, 2010 
£000pa

Increase in 
accrued 
pension during 
the year ended 
Dec 31, 20102 
£000pa

Total accrued 
pension 
entitlement at 
the year ended 
Dec 31, 20103 
£000pa

Transfer value of 
accrued 
pension as at 
Dec 31, 20104 
£000

Transfer value as 
at Dec 31, 2009 
of accrued 
pension at that 
date4 
£000

Increase/
(decrease) in 
transfer value  
over 2010 net of 
the member’s  
own contributions 
£000

Transfer value of 
increase in 
accrued pension 
over 2010 net of 
the member’s 
own contributions 
£000

3
2
2
1

3
2
2
1

453
17
260
240

8,828
412
4,467
4,739

8,542
354
3,837
5,188

286
216
630
(449)

85
206
535
16

Increase in 
accrued 
retirement lump 
sum during the 
year ended  
Dec 31, 2010  
£000pa

Increase in 
accrued 
retirement lump 
sum during the 
year ended  
Dec 31, 20102 
£000pa

Total accrued 
retirement lump 
sum entitlement 
at the year 
ended  
Dec 31, 20106
£000pa

Transfer value of 
accrued 
retirement lump 
sum as at  
Dec 31, 2010  
£000

Transfer value as 
at Dec 31, 2009 
of accrued 
retirement lump 
sum at that date 
£000

Increase in 
transfer value  
over 2010 net of 
the member’s 
own contributions 
£000

Transfer value of 
increase in 
accrued 
retirement lump 
sum over 2010 
net of the 
member’s own 
contributions5 
£000

James Guyette7

93

64

833

833

740

461

432

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 This column shows the increase in accrued pension/retirement lump sum during the year ended December 31, 2010 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.  

For Sir John Rose and Mike Terrett, the pension shown is the annual pension in payment at December 31, 2010.

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 

and December 31, 2010 have been calculated on a basis adopted by the Trustee on October 6, 2008 following receipt of actuarial advice.

5 This column shows the transfer value of the increase in pension/retirement lump sum during the year ended December 31, 2010 excluding the effect of inflation, and net of the member’s own contributions.
6 The lump sum entitlement shown is that which would be paid on immediate retirement based on service to the end of the year.
7 Benefits are translated at £1 = US$1.566.

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Directors’ share interests (audited)
The directors who held office at December 31, 2010 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:

Helen Alexander CBE
Peter Byrom
Iain Conn
Peter Gregson
James Guyette
John McAdam
John Neill CBE
John Rishton
Sir Simon Robertson
Sir John Rose2
Andrew Shilston
Colin Smith
Ian Strachan
Mike Terrett

Ordinary shares

C Shares

January 1, 
2010

Changes in 
2010

December 31, 
2010

January 1, 
2010

Changes in 
2010

December 31, 
2010

1,043
211,952
15,379
2,511
423,192
619
22,521
6,707
39,710
1,217,154
442,900
153,294
11,500
433,991

28
6,065
2,539
896
(98,961)
505
2,093
2,289
1,162
(302,676)
82,527
21,885
–
(5,696)

1,071
218,017
17,918
3,407
324,231
1,124
24,614
8,996
40,872
914,478
525,427
175,179
11,500
428,295

–
–
–
–
–
13,899
–
–
–
–
–
–
–
–

–
–
–
–
–
102,870
350,100
–
–
–
–
–
–
–

–
–
–
–
–
116,769
350,100
–
–
–
–
–
–
–

1 Non-cumulative redeemable preference shares of 0.1p each. 
2 Sir John Rose had a non-beneficial interest in nil (2009 45,191) ordinary shares.

Directors’ interests in the Company’s share plans are shown separately on pages: 75 (SIP and share options) and 76 (APRA and PSP). 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, 2010. 

Changes in the interests of the executive directors and non-executive directors between December 31, 2010 and February 9, 2011 are listed below. 
The ordinary share purchases were made pursuant to either their participation in the C Share Reinvestment Plan (CRIP) and/or the SIP. C Shares were 
allotted under both the ‘Partnership’ and ‘Free’ share elements of the SIP.

James Guyette
Sir John Rose
Andrew Shilston
Colin Smith
Mike Terrett

Ordinary shares

January 7, 
2011

February 7, 
2011

3,116
19
5,070
1,703
4,137

–
19
20
19
19

C Shares

January 4, 
2011

–
–
253,132
253,068
37,003

The following non-executive directors purchased ordinary shares either under arrangements made for them to purchase shares on a monthly basis 
using a percentage of their after tax fees and/or pursuant to their participation in the CRIP.

Helen Alexander CBE
Peter Byrom
Iain Conn
Peter Gregson
John McAdam
John Neill CBE
John Rishton
Sir Simon Robertson

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Rolls-Royce Group plc Annual report 2010

Ordinary shares

January 7, 
2011

February 7, 
2011

C Shares

January 4, 
2011

–
2,097
319
90
36
150
233
392

–
–
153
60
37
153
153
–

68,544
–
–
–
66,880
–
–
–

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‘Partnership Shares’ held in trust under the SIP1

Sir John Rose2
Andrew Shilston2
Colin Smith2
Mike Terrett2

‘Free Shares’ held in trust under the SIP1

Sir John Rose
Andrew Shilston
Colin Smith

‘Unrestricted Shares’ held under the SIP1

Sir John Rose 
Andrew Shilston 
Colin Smith 
Mike Terrett

Ordinary shares

C Shares

January 1, 
2010

Net changes  
in 2010

December 31, 
2010

January 1, 
2010

Net changes  
in 2010

December 31, 
2010

2,009
2,011
2,009
2,008

(275)
(277)
(275)
(275)

1,734
1,734
1,734
1,733

–
239,096
232,566
232,363

–
143,614
149,967
149,878

Ordinary shares

–
382,710
382,533
382,241

C Shares

January 1, 
2010

Net changes  
in 2010

December 31, 
2010

January 1, 
2010

Net changes  
in 2010

December 31, 
2010

1,253
4,143
4,012

(1,253)
(762)
(631)

–
3,381
3,381

–
540,454
521,722

–
298,714
317,446

–
839,168
839,168

Ordinary shares

C Shares

January 1, 
2010

Net changes  
in 2010

December 31, 
2010

January 1, 
2010

Net changes  
in 2010

December 31, 
2010

7,844
4,404
2,315
3,645

1,794
1,794
1,662
541

9,638
6,198
3,977
4,186

–
64,779
337,345
527,595

–
25,812
(247,047)
(437,095)

–
90,591
90,298
90,500

1 Under the 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 9, 2011 and February 7, 2011 the ordinary shares held as Partnership Shares by Sir John Rose 31 and 29; Andrew Shilston 31 and 28; Colin Smith 31 and 29; and Mike Terrett 29 and 29 were 

classified as ‘Unrestricted Shares’.

Share options (audited)
Mike Terrett held an option under the Rolls-Royce 1999 Executive Share Option Plan (ESOP), which had vested and was capable of exercise. Colin 
Smith held an option under the Rolls-Royce Group plc ShareSave Scheme 1997 and James Guyette held an option under the Rolls-Royce Group plc 
International ShareSave Plan 2007 (ShareSave).

January 1, 
2010

Granted in 
2010

Lapsed in  
2010

Exercised 
in 2010

December 31,  
2010

Exercise  
price

James Guyette
Colin Smith
Mike Terrett

ShareSave
ShareSave
ESOP1

683
1,233
180,556

–
–
–

–
–
–

–
–
180,556

683
1,233
–

416p
298p
216p

Market 
price at 
date 
exercised

–
–
611p

Aggregate 
gains 2010 
£000

Aggregate 
gains 2010 
£000

Exercisable 
dates

–
–
713

–
51
–

2011
2011
–

1 Granted in 2001 under the ESOP with additional performance and personal shareholding requirements. vesting of the Supplementary option was subject to attainment of significant personal shareholding 
targets and the requirement that the growth in EPS exceeded 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 
were measured from the year 2000 or the base year of the rolling three-year period, whichever was the more stringent. The option was granted at the market value on the date of issue and no discount was 
applied. No option was varied during the year and no consideration was paid for the grant of the option. The market price of the Company’s ordinary shares ranged between 473.40p and 654.50p during 
2010. The closing price on December 31, 2010 was 623.00p. 

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Long-term incentive awards (audited)
The directors as at December 31, 2010 had the following share awards arising out of the operation of the APRA1 plan:

James Guyette
Sir John Rose
Andrew Shilston
Colin Smith
Mike Terrett 

January 1, 
2010

vested 
during 2010

Granted during 
2010

December 31, 
2010

38,930
78,790
44,524
29,381
37,329

(12,805)
(34,771)
(20,313)
(12,045)
(14,888)

16,272
29,785
16,798
12,480
15,555

42,397
73,804
41,009
29,816
37,996

1 Under APRA, shares vest after two years. Shares went into trust in 2008, 2009 and 2010 at prices of 440.03p, 289.65p and 537.20p respectively. At December 31, 2010, the amounts stated in the emoluments 

table representing the 2010 APRA deferred shares had not yet been applied by the Trustee to purchase shares. The market value per share which vested under APRA during 2010 was 558.00p. 

Conditional awards, granted under the 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 TSR exceeds the median for the FTSE 100 index over the three-year performance period. For 
the 2009 and 2010 grants, 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.

James Guyette

Sir John Rose

Andrew Shilston

Colin Smith

Mike Terrett 

January 1, 
2010

Granted 
during 2010

TSR uplift at 
vesting1

Total vested 
during 2010

December 31,  
2010

Performance period

Date of grant

Market price at 
date of grant

60,669
70,672
207,845
–
339,186

175,649
212,888
391,675
–
780,212

81,438
100,183
211,198
–
392,819

59,881
70,356
148,319
–
278,556

61,693
91,075
191,998
–
344,766

–
–
–
91,383
91,383

–
–
–
191,005
191,005

–
–
–
102,993
102,993

–
–
–
78,025
78,025

–
–
–
93,630
93,630

9,859
–
–
–
9,859

28,543
–
–
–
28,543

13,234
–
–
–
13,234

9,731
–
–
–
9,731

10,026
–
–
–
10,026

(70,528)
–
–
–
(70,528)

(204,192)
–
–
–
(204,192)

(94,672)
–
–
–
(94,672)

(69,612)
–
–
–
(69,612)

(71,719)
–
–
–
(71,719)

–
70,672
207,845
91,383
369,900

–
212,888
391,675
191,005
795,568

–
100,183
211,198
102,993
414,374

–
70,356
148,319
78,025
296,700

–
91,075
191,998
93,630
376,703

Jan 1, 2007 to Dec 31, 2009
Jan 1, 2008 to Dec 31, 2010
Jan 1, 2009 to Dec 31, 2011
Jan 1, 2010 to Dec 31, 2012

March 1, 2007
March 3, 2008
March 10, 2009
March 1, 2010

Jan 1, 2007 to Dec 31, 2009
Jan 1, 2008 to Dec 31, 2010
Jan 1, 2009 to Dec 31, 2011
Jan 1, 2010 to Dec 31, 2012

March 1, 2007
March 3, 2008
March 10, 2009
March 1, 2010

Jan 1, 2007 to Dec 31, 2009
Jan 1, 2008 to Dec 31, 2010
Jan 1, 2009 to Dec 31, 2011
Jan 1, 2010 to Dec 31, 2012

March 1, 2007
March 3, 2008
March 10, 2009
March 1, 2010

Jan 1, 2007 to Dec 31, 2009
Jan 1, 2008 to Dec 31, 2010
Jan 1, 2009 to Dec 31, 2011
Jan 1, 2010 to Dec 31, 2012

March 1, 2007
March 3, 2008
March 10, 2009
March 1, 2010

Jan 1, 2007 to Dec 31, 2009
Jan 1, 2008 to Dec 31, 2010
Jan 1, 2009 to Dec 31, 2011
Jan 1, 2010 to Dec 31, 2012

March 1, 2007
March 3, 2008
March 10, 2009
March 1, 2010

501.00p
439.20p
260.42p
544.70p

501.00p
439.20p
260.42p
544.70p

501.00p
439.20p
260.42p
544.70p

501.00p
439.20p
260.42p
544.70p

501.00p
439.20p
260.42p
544.70p

1 Under the rules of the PSP, the number of shares vesting in 2010 was increased by 25 per cent as the TSR exceeded the median of the FTSE 100 index during the three-year performance period to  

December 31, 2009. The market value per share, which vested under the PSP during 2010, was 558.00p.

76

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governance

Non-executive directors’ remuneration
Policy
The committee determines, on the Board’s behalf, the remuneration of 
the Chairman. The Board determines the remuneration of the other 
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.

Helen Alexander CBE
Peter Byrom
Iain Conn
Peter Gregson
John McAdam
John Neill CBE
John Rishton
Sir Simon Robertson
Ian Strachan

Appointment date

Sep 1, 2007
Jan 1, 1997
Jan 20, 2005
Mar 1, 2007
Feb 19, 2008
Nov 13, 2008
Mar 1, 2007
Jan 1, 2005
Sep 19, 2003

Current letter of 
appointment 
start date

Current letter of 
appointment 
end date

Sep 1, 2010
Jan 1, 2011
Jan 20, 2011
Mar 1, 2010
Feb 19, 2008
Nov 13, 2008
Mar 1, 2010
Jan 1, 2011
Sep 19, 2009

Aug 31, 2013
Dec 31, 2011
Jan 19, 2014
Mar 1, 2013
Feb 18, 2011
Nov 12, 2011
Feb 28, 2013
Dec 31, 2013
Sep 18, 2012

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 fees payable to the non-executive directors are reviewed 
periodically by the Board. The fees were increased with effect from 
February 1, 2011 as shown below:

Chairman
Other non-executive directors
Chairman of audit committee
Chairman of remuneration committee
Chairman of ethics committee
Senior Independent Director

From 
February 1, 2011 
£000

From 
February 1, 2010 
£000

370
60
20
15
15
12

370
55
15
12
12
10

77

Rolls-Royce Group plc Annual report 2010

Remuneration of non-executive directors

Helen Alexander CBE
Peter Byrom
Iain Conn
Peter Gregson
John McAdam
John Neill CBE
John Rishton
Sir Simon Robertson1
Ian Strachan

2010 
£000

67
55
65
55
55
55
69
386
71
878

2009  
£000

67
55
65
55
55
55
70
370
67
859

1 Amounts charged during the year to UK income tax in respect of the use of chauffeur services 
provided for the years 2005 to 2010 for Sir Simon Robertson were £72,788. Only the amount for 
2010 of £15,683 is included in the above table.

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.

The Directors’ remuneration report was approved by the Board of 
directors on February 9, 2011 and signed on its behalf by

Helen Alexander CBE
Chairman of the remuneration committee

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governance

SHAREHOLDERS AND SHARE CAPITAL

Share capital and voting rights
The Company no longer has an authorised share capital having adopted 
new articles of association on April 28, 2010. On December 31, 2010, 
there were 1,871,779,201 ordinary shares of 20p each, 23,379,971,475  
C Shares of 0.1p each and one Special Share of £1 in issue. The ordinary 
shares are listed on the London Stock Exchange.

Payments to shareholders
At the AGM on May 6, 2011 the directors will recommend an issue of 96 
C Shares with a total nominal value of 9.6 pence for each ordinary share. 
Together with the interim issue on January 4, 2011 of 64 C Shares for 
each ordinary share with a total nominal value of 6.4 pence, this is the 
equivalent of a total annual payment to ordinary shareholders of 16 
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.

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, ethics and risk 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.

78

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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 Group’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 a valid request is 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 (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 

 
 
governance

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.

authorities are valid until the AGM in 2011 and the directors propose to 
renew these authorities at that AGM. 

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 the 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.

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 2010, authority was given to the directors to allot new 
ordinary shares up to a nominal value of £123,607,451, equivalent to 
one-third of the issued share capital of the Company as at February 10, 
2010. In addition, a 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 10, 2010. These 

In line with revised guidance issued by the Association of British Insurers in 
November 2009, it is proposed to seek a further authority at the AGM in 
2011 to allot up to two-thirds of the total issued share capital, but only in 
the case of a rights issue. This is called the Second Section 551 amount. 
The Board believes that this additional authority will allow the Company to 
retain the maximum possible flexibility (consistent with evolving market 
practice) to respond to circumstances and opportunities as they arise.

At the AGM in 2010, 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 expires at the conclusion of the AGM in 
2011. The directors propose to renew this authority at the AGM in 2011.

Authority to purchase own shares
At the AGM in 2010, the Company was authorised by shareholders to 
purchase up to 185,411,177 of its own ordinary shares representing ten 
per cent of its issued ordinary share capital as at February 10, 2010. The 
Company did not make use of this authority during 2010. The authority 
for the Company to purchase its own shares expires at the conclusion of 
the AGM in 2011 or 15 months from April 28, 2010 whichever is the 
earlier. 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 Registrar 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 9, 2011, 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 

Date notified

January 11, 2010 
September 3, 2010 
February 4, 2008 
October 14, 2009 

% of issued 
ordinary share 
capital

4.90 
5.02 
6.91 
3.96 

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Rolls-Royce Group plc Annual report 2010

 
 
governance

OTHER STATUTORY INFORMATION

Political donations
In line with its established policy, the Group made no political donations 
pursuant to the authority granted at the 2010 AGM. Although the Group 
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 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 2011 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, the contribution made by a US subsidiary towards the 
running expenses of a political action committee (PAC) organised by its 
employees was US$ nil (2009: US$24,636). 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, 2010 these facilities were less than 40 per 
cent drawn.

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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, 
2010 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.

80

Rolls-Royce Group plc Annual report 2010

 
 
governance

MATERIAL LITIGATION

In 2010, Rolls-Royce commenced an action in the United States against 
United Technologies Corporation (UTC), the parent company of Pratt & 
Whitney, alleging that the GP7200 turbofan engine, UTC’s geared 
turbofan engine, and other UTC turbofan engines infringe Rolls-Royce 
swept fan blade patent. A trial is expected be held in June this year.  
UTC subsequently commenced proceedings against Rolls-Royce in the 
United States and in England alleging that Trent 900, Trent 1000 and 
Trent XWB engines infringe its patent. Judgements in UTC’s cases are 
expected to be handed down between 2012 and 2015. 

It is not possible to comment at this stage on the amount of any 
damages which might be awarded in favour of, or against, Rolls-Royce 
although an award of damages or the financial effect of other remedies 
could be material. Rolls-Royce is advised that it has a strong claim 
against UTC and strong defences in the proceedings brought by UTC.

ANNUAL REPORT AND FINANCIAL STATEMENTS

Statement of directors’ responsibilities in respect of the  
Annual report and 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).

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 and a summary of the principal risks 
affecting the business are shown on pages 26 and 27. The financial 
position of the Group, its cash flows, liquidity position, borrowing 
facilities and financial risks are described in pages 48 to 55 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 

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governance

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.

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 82 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 9, 2011

As described on page 54, the Group meets its funding requirements 
through a mixture of shareholders’ funds, bank borrowings, bonds, notes 
and finance leases. The chart on page 48 shows the maturity profile of 
the Group’s outstanding debt facilities; a total of £567 million is due to 
expire in 2011. 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 audit information of 

which the Company’s auditors are unaware; and

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.

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82

Rolls-Royce Group plc Annual report 2010

 
 
Consolidated FinanCial statements

FINANCIAL STATEMENTS

CONSOLIDATED FINANCIAL STATEMENTS

84 
84 
85 
86 
88 

CONSOLIDATED INCOME STATEMENT
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
CONSOLIDATED BALANCE SHEET
CONSOLIDATED CASH FLOW STATEMENT
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

COMPANY FINANCIAL STATEMENTS

134  COMPANY BALANCE SHEET
134  RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’ FUNDS

OTHER MATTERS

137  PRINCIPAL SUBSIDIARY UNDERTAKINGS
138  PRINCIPAL JOINT VENTURES
140 
141  GROUP FIVE-YEAR REVIEW
142  SHAREHOLDER INFORMATION

INDEPENDENT AUDITOR’S REPORT

83 Rolls-Royce Group plc Annual report 2010

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
89 
Accounting policies
1 
89 
Segmental analysis
96 
2 
Net financing
100  3 
Taxation
100  4 
Earnings per ordinary share
103  5 
Employee information
103  6 
Auditors’ remuneration
104  7 
Intangible assets
104  8 
Property, plant and equipment
106  9 
Investments
107  10 
Inventories
109  11 
109  12 
Trade and other receivables
109  13  Cash and cash equivalents
110  14  Borrowings
110  15 
111 
16 
121  17 
122  18  Post-retirement benefits
Share capital
126  19 
Share-based payments
126  20 
129  21  Operating and finance leases
130  22  Contingent liabilities and contingent assets
131  23  Related party transactions
132  24  Acquisitions and disposals

Trade and other payables
Financial instruments
Provisions for liabilities and charges

Accounting policies
Investments – subsidiary undertakings
Financial liabilities
Share capital

135  NOTES TO THE COMPANY FINANCIAL STATEMENTS
135  1 
135  2 
135  3 
136  4 
136  5  Movements in capital and reserves
Contingent liabilities
136  6 
Other information
136  7 

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Consolidated FinanCial statements – Continued

CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2010

Revenue 
Cost of sales 
Gross profit 
Other operating income 
Commercial and administrative costs 
Research and development costs 
Share of results of joint ventures and associates 
Operating profit 
Profit/(loss) on disposal of businesses 
Profit before financing and taxation

Financing income 
Financing costs 
Net financing 

Profit before taxation1 
Taxation 
Profit for the year 

Attributable to: 
Ordinary shareholders
Non-controlling interests 
Profit for the year 

Earnings per ordinary share attributable to shareholders: 
Basic 
Diluted 

Payments to ordinary shareholders in respect of the year 
Per share 
Total 

1 Underlying profit before taxation 

Notes
2

10 

24
2

3 
3 

4 

5 

16 

2 

2010 
£m
11,085 
(8,885)
2,200 
95 
(836)
(422)
93 
1,130 
4 
1,134 

453 
(885)
(432)

702 
(159)
543 

539 
4 
543 

2009 
£m
10,414
(8,303)
2,111 
89 
(740)
(379)
93 
1,174 
(2)
1,172 

2,276 
(491)
1,785 

2,957 
(740)
2,217 

2,221 
(4)
2,217 

29.20p
28.82p

120.38p 
119.09p 

16.0p 
299 

955

15.0p 
278 

915

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 2010

Profit for the year 
Other comprehensive income (OCI)

Foreign exchange translation differences on foreign operations 
Net actuarial gains/(losses) relating to post-employment schemes
Movement in unrecognised post-retirement surplus 
Movement in post-retirement minimum funding liability 
Transfers from transition hedging reserve 
Share of other comprehensive income of joint ventures and associates
Related tax movements 

Total comprehensive income for the year 

Attributable to: 
Ordinary shareholders
Non-controlling interests 
Total comprehensive income for the year 

84

Rolls-Royce Group plc Annual report 2010

Notes

18 
18 
18 

10 
4 

2010 
£m
543

22 
157 
(300)
49 
– 
(16)
29 
484 

480 
4 
484 

2009 
£m
2,217 

(156)
(1,148)
707 
40 
(27)
20 
141 
1,794 

1,799 
(5)
1,794

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Consolidated FinanCial statements – Continued

CONSOLIDATED BALANCE SHEET
AT DECEMBER 31, 2010 

ASSETS 
Non-current assets 
Intangible assets 
Property, plant and equipment 
Investments – joint ventures and associates 
Investments – other
Other financial assets 
Deferred tax assets 
Post-retirement scheme surpluses 

Current assets 
Inventories
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 for liabilities and charges

Non-current liabilities 
Borrowings 
Other financial liabilities 
Trade and other payables 
Deferred tax liabilities 
Provisions for liabilities and charges
Post-retirement scheme deficits 

Total liabilities 

Net assets 

EQUITY 
Equity attributable to ordinary shareholders 
Called-up share capital 
Share premium account 
Capital redemption reserves 
Hedging reserves 
Other reserves 
Retained earnings 

Non-controlling interests 
Total equity 

The financial statements on pages 84 to 133 were approved by the Board on February 9, 2011 and signed on its behalf by:

Sir Simon Robertson Chairman   

Andrew Shilston Finance Director

85

Rolls-Royce Group plc Annual report 2010

Notes

8 
9 
10 
10 
16 
4 
18 

11 
12 

16 

13 

14 
16 
15 

17 

14 
16 
15 
4 
17 
18 

19 

2010  
£m

2,884 
2,136 
393 
11 
371 
451 
164 
6,410 

2,429 
3,943 
6 
250 
328 
2,859 
9 
9,824 
16,234 

(717)
(105)
(5,910)
(170)
(276)
(7,178)

(1,135)
(945)
(1,271)
(438)
(268)
(1,020)
(5,077)
(12,255)

2009 
£m

2,472 
2,009 
437 
58 
637 
360 
75 
6,048 

2,432 
3,877 
12 
80 
2 
2,962 
9 
9,374 
15,422 

(126)
(181)
(5,628)
(167)
(210)
(6,312)

(1,787)
(868)
(1,145)
(366)
(232)
(930)
(5,328)
(11,640)

3,979 

3,782 

374 
133 
209 
(37)
527 
2,769 
3,975 
4 
3,979 

371 
98 
191 
(19)
506 
2,635 
3,782 
–
3,782 

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Consolidated FinanCial statements – Continued

CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2010

Reconciliation of cash flows from operating activities 
Profit before taxation 
Share of results of joint ventures and associates 
(Profit)/loss on disposal of businesses 
Profit on disposal of property, plant and equipment 
Net financing 
Taxation paid 
Amortisation of intangible assets 
Depreciation of property, plant and equipment 
Impairment of investments 
Increase in provisions 
Decrease in inventories 
Decrease/(increase) in trade and other receivables 
Increase/(decrease) in trade and other payables 
Increase in other financial assets and liabilities 
Additional cash funding of post-retirement schemes 
Share-based payments 
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 
Net cash outflow from investing activities 

Cash flows from financing activities 
Repayment of loans
Proceeds from increase in loans 
Capital element of finance lease payments 
Net cash flow from (decrease)/increase in borrowings 
Interest received 
Interest paid 
Interest element of finance lease payments 
Increase in short-term investments 
Issue of ordinary shares 
Purchase of ordinary shares 
Other transactions in ordinary shares 
Redemption of C Shares 
Net cash (outflow)/inflow from financing activities 

Net (decrease)/increase in cash and cash equivalents 
Cash and cash equivalents at January 1 
Exchange gains/(losses) on cash and cash equivalents 
Cash and cash equivalents at December 31 

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86

Rolls-Royce Group plc Annual report 2010

Notes 

10 
24

3 

8 
9 
10 

20 
16 
10 

24
24

2010 
£m

702 
(93)
(4)
(10)
432 
(168)
130 
237 
3 
99 
41 
39
286 
(299)
(135)
50 
– 
68 
1,378 

(1)
46 
(321)
– 
(354)
38 
(150)
2 
(19)
(759)

(108)
68 
– 
(40)
11 
(65)
– 
(326)
67 
(124)
– 
(266)
(743)

(124)
2,958 
17 
2,851 

2009 
£m

2,957 
(93)
2 
(40)
(1,785)
(119)
121 
194 
– 
81 
119 
(14)
(183)
(303)
(159)
31 
(27)
77 
859 

(2)
–
(339)
2 
(258)
82 
(7)
3 
(87)
(606)

(10)
693 
(3)
680 
24 
(66)
(1)
(1)
18 
(17)
(3)
(250)
384 

637 
2,462 
(141)
2,958 

 
 
Consolidated FinanCial statements – Continued

CONSOLIDATED CASH FLOW STATEMENT (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 2010

Reconciliation of movements in cash and cash equivalents to movements in net funds 
(Decrease)/increase in cash and cash equivalents 
Net cash flow from decrease/(increase) in borrowings 
Cash outflow from increase in short-term investments
Change in net funds resulting from cash flows 
Net funds (excluding cash and cash equivalents) of businesses acquired 
Exchange gains/(losses) on net funds 
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:

2010 
£m

(124)
40 
326 
242 
(1)
17
26 
284 
1,051 
1,335 
198 
1,533 

2009 
£m

637 
(680)
1 
(42)
–
(141)
110 
(73)
1,124 
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, 
2010  
£m
1,240
(4)
1,722
2,958
2
(122)
(1,786)
(1)
1,051
224
1,275

Funds  
flow  
£m
384 
(4)
(504)
(124)
326 
42 
(2)
– 
242 

242 

Net funds of 
businesses 
acquired  
£m

– 
– 
(1)
– 
(1)

(1)

Exchange 
differences  
£m
23 
– 
(6)
17 
– 
– 
– 
– 
17 

17 

Fair value 
adjustments  
£m
– 
– 
– 
– 
– 
59 
(33)
– 
26 
(26)
– 

Reclassi- 
fications 
£m
– 
– 
– 
– 
– 
(688)
688 
– 
– 

– 

At  
December 31,  
2010  
£m
1,647 
(8)
1,212 
2,851 
328 
(709)
(1,134)
(1)
1,335
198 
1,533 

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87

Rolls-Royce Group plc Annual report 2010

 
 
Consolidated FinanCial statements – Continued

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2010

At January 1, 2009
Profit for the year
Foreign exchange translation differences on 
foreign operations
Net actuarial losses on post-employment 
schemes
Movement in unrecognised post-retirement 
surplus
Movement in post-retirement  
minimum funding liability
Transfers from transition hedging reserve
Share of OCI of joint ventures and associates 4
Related tax movements
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 – direct to equity 5
Transactions with non-controlling interests 
Related tax movements – deferred tax 
Other changes in equity in the year 
At January 1, 2010
Profit for the year
Foreign exchange translation differences on  
foreign operations
Net actuarial gains on post-employment 
schemes
Movement in unrecognised post-retirement 
surplus
Movement in post-retirement  
minimum funding liability
Share of OCI of joint ventures and associates 4
Related tax movements
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 – direct to equity 5
Related tax movements – deferred tax 
Other changes in equity in the year 
At December 31, 2010

Notes

Share 
capital  
£m
369 
–

Share 
premium  
£m
82 
–

Capital 
redemption 
reserves  
£m
204 
–

Hedging 
reserves1
£m
(22)
–

Other 
reserves2
£m
663 
–

Retained 
earnings3
£m
920 
2,221 

Non-
controlling 
interests  
£m
9 
(4)

Total  
£m
2,216 
2,221 

Total  
equity 
£m
2,225 
2,217 

Attributable to ordinary shareholders 

18

18

18

10
4

19
16
16

4

18

18

18
10
4

19
16
16

4

–

–

–

–
–
–
–
–
2 
–
–
–
–
–
–
2 
371 
–

–

– 

– 

– 
– 
– 
– 
3 
– 
– 
– 
–
–
3 
374 

–

–

–

–
–
–
–
–
16 
–
–
–
–
–
–
16 
98 
–

– 

– 

– 

– 
– 
– 
– 
64 
(29)
– 
– 
–
–
35 
133 

–

–

–

–
–
–
–
–
–
(264)
251 
–
–
–
–
(13)
191 
–

– 

– 

– 

– 
– 
– 
– 
– 
(249)
267 
– 
–
–
18 
209 

–

–

–

–
(27)
22 
8 
3 
–
–
–
–
–
–
–
–
(19)
–

– 

– 

– 

– 
(18)
– 
(18)
– 
– 
– 
– 
–
–
–
(37)

(155)

–

(155)

(1)

(156)

–

–

–
–
(2)
–
(157)
–
–
–
–
–
–
–
–
506 
– 

22 

– 

– 

– 
1 
(2)
21 
– 
– 
– 
– 
–
–
–
527 

(1,148)

(1,148)

707 

707 

40 
–
–
133 
1,953 
–
1 
(251)
(17)
28 
–
1 
(238)
2,635 
539 

– 

157 

40 
(27)
20 
141 
1,799 
18 
(263)
–
(17)
28 
–
1 
(233)
3,782 
539 

22 

157 

(300)

(300)

49 
1 
31 
477 
– 
1 
(267)
(124)
42 
5 
(343)
2,769 

49 
(16)
29 
480 
67 
(277)
– 
(124)
42 
5 
(287)
3,975 

–

–

–
–
–
–
(5)
–
–
–
–
–
(4)
–
(4)
–
4 

– 

– 

– 

– 
– 
– 
4 
– 
– 
– 
– 
–
–
–
4 

(1,148)

707 

40 
(27)
20 
141 
1,794 
18 
(263)
–
(17)
28 
(4)
1 
(237)
3,782 
543 

22

157 

(300)

49 
(16)
29 
484 
67 
(277)
– 
(124)
42 
5 
(287)
3,979 

1 See accounting policies note 1 – hedge accounting. Hedging reserves include nil (2009 nil, 2008 £19m) in respect of the transition hedging reserve and £(37)m (2009 £(19)m, 2008 £(41)m) in respect of 

the cash flow hedging reserve.

2 Other reserves include a merger reserve of £3m (2009 £3m, 2008 £3m) and a translation reserve of £524m (2009 £503m, 2008 £660m).
3 At December 31, 2010, 28,320,962 ordinary shares with a net book value of £125m (2009 7,156,497, 2008 8,017,635 ordinary shares with net book values of £25m and £34m respectively) were held and 
included in retained earnings. During the year, 6,586,568 ordinary shares with a net book value of £24m (2009 6,766,884 shares with a net book value of £25m) vested in share-based payment plans. 
During the year, the Company acquired 27,751,333 ordinary shares through purchases on the London Stock Exchange.

4 Certain of the Group’s joint ventures and associates hold interest rate and inflation swaps for which cash flow hedge accounting has been adopted.
5 The share-based payments charge direct to equity 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.

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88

Rolls-Royce Group plc Annual report 2010

 
 
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, 2010 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 9, 2011.

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, 2010 
(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. 

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 94.

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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89

Rolls-Royce Group plc Annual report 2010

 
 
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.

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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 2010. 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, 2010.

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. 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.

90

Rolls-Royce Group plc Annual report 2010

 
 
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 and joint ventures, 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 statement of comprehensive income 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 equity. 

Financial instruments
iAs 39 Financial Instruments: Recognition and Measurement requires the classification of financial instruments into separate categories for which the 
accounting requirement is different. the group has classified its financial instruments as follows:

•  short-term investments are classified as available for sale, if designated upon initial recognition. 
•  short-term deposits (principally comprising funds held with banks and other financial institutions), trade receivables and short-term investments not 

designated as available for sale are classified as loans and receivables. 

•  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 taken to equity. on disposal, the accumulated changes in value recorded in equity 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 taken to equity. When 
the hedged forecast transaction occurs, amounts previously recorded in equity 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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91

Rolls-Royce Group plc Annual report 2010

 
 
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.

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 directly in equity. Any 
ineffectiveness in the hedging relationships is included in the income statement. the amounts deferred in equity 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 equity 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 equity 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 directly in equity. 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 was released to the income statement 
based on the designation of the hedges on January 1, 2005. the reserve was fully utilised in 2009.

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.

92

Rolls-Royce Group plc Annual report 2010

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Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

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 impairment 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 24 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 13 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 intangible assets and property, plant and equipment 
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.

Inventories
inventories 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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93

Rolls-Royce Group plc Annual report 2010

 
 
 
 
 
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 director’s 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 the statement of comprehensive income.

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 included in the statement of comprehensive income.

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 total shareholder Return (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 – 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 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 below. 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.

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94

Rolls-Royce Group plc Annual report 2010

 
 
Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

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, in particular:

•  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, 2010 £1,472m, December 31, 2009 £1,290m.)

•  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, 2010 £266m, December 31, 2009 £363m.) 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, 2010 £451m, December 31, 2009 £360m) 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 on page 90.

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 £856m before deferred taxation being 
recognised on the balance sheet at December 31, 2010 (December 31, 2009 £855m). 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, 2010 £544m, December 31, 2009 £442m) 
at the directors’ best estimate of the expenditure required to settle the obligation at the balance sheet date. these estimates are made, taking 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 2010
in 2010, the group has adopted Revised iFRs 3 Business Combinations (including Amendments to iFRs 3 in improvements to iFRs (2009) and 
amendments to iAs 27 Consolidated and Separate Financial Statements were applicable for 2010. the acquisition of oDim AsA (see note 24) has been 
accounted for in accordance with the requirements of Revised iFRs 3. there was no retrospective impact.

no other revisions to Adopted iFRs that became applicable in 2010 had a significant impact on the group’s financial statements.

Revisions to IFRS not applicable in 2010
standards and interpretations issued by the iAsB are only applicable if endorsed by the eu. if endorsed, iFRs 9 Financial Instruments will be 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.

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95

Rolls-Royce Group plc Annual report 2010

 
 
Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

2 segmentAl AnAlysis

the analysis by business segment is presented in accordance with iFRs 8 Operating segments, on the basis of those segments whose operating results 
are regularly reviewed by the Board (the chief operating Decision maker as defined by iFRs 8), as follows:

civil aerospace 
Defence aerospace
marine 
energy

– development, manufacture, marketing and sales of commercial aero engines and aftermarket services.
– development, manufacture, marketing and sales of military aero engines and aftermarket services.
– development, manufacture, marketing and sales of marine propulsion systems and aftermarket services.
–  development, manufacture, marketing and sales of power systems for the offshore 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 reflect the 
achieved exchange rates arising on settled derivative contracts and exclude the release of the foreign exchange transition hedging reserve. there is 
no inter-segment trading and hence all revenues are from external customers.

underlying profit before financing – Where transactions are denominated in a currency other than the functional currency of the group undertaking, 
this reflects the transactions at the achieved exchange rates on settled derivative contracts and excludes the release of the foreign exchange 
transition hedging reserve.

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.

•  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-employment  
scheme benefits.

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96

Rolls-Royce Group plc Annual report 2010

 
 
Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

2 segmentAl AnAlysis (continueD)

this analysis also includes a reconciliation of the underlying results to those reported in the consolidated income statement.

Year ended December 31, 2010 
underlying revenue from sale of original equipment
underlying revenue from aftermarket services
Total underlying revenue
underlying operating profit excluding share of results of joint ventures and associates
share of results of joint ventures and associates
profit on disposal of businesses
Underlying profit before financing and taxation

segment assets
investments in joint ventures and associates
segment liabilities
net assets
investment in intangible assets, property, plant and equipment and joint ventures and associates
Depreciation and amortisation

year ended December 31, 2009 
underlying revenue from sale of original equipment
underlying revenue from aftermarket services
total underlying revenue
underlying operating profit excluding share of results of joint ventures and associates
share of results of joint ventures and associates
profit/(loss) on disposal of businesses
underlying profit before financing and taxation

segment assets
investments in joint ventures and associates
segment liabilities
net assets
investment in intangible assets, property, plant and equipment and joint ventures and associates
Depreciation and amortisation

Civil 
aerospace 
£m
1,892 
3,027 
4,919 
315 
77 
–
392 

Defence 
aerospace 
£m
1,020 
1,103 
2,123 
300 
9 
–
309 

7,790 
372 
(5,435)
2,727 
568 
246 

1,855 
2,626 
4,481 
409 
82 
2 
493 

7,341 
271 
(4,918)
2,694 
522 
209 

1,359 
(15)
(1,867)
(523)
53 
35 

964 
1,046 
2,010 
247 
6 
–
253 

1,166 
62 
(1,573)
(345)
56 
34 

Marine 
£m
1,719 
872 
2,591 
330 
2 
–
332 

2,357 
6 
(1,548)
815 
65 
58 

1,804 
785 
2,589 
263 
–
–
263 

2,302 
77 
(1,738)
641 
122 
46 

Total 
reportable 
segments 
£m
5,322 
5,544 
10,866 
963 
93 
4 
1,060 

12,658 
393 
(9,598)
3,453 
702 
367 

5,181 
4,927 
10,108 
942 
93 
(2)
1,033 

11,807 
437 
(8,721)
3,523 
720 
315 

Energy 
£m
691 
542 
1,233 
18 
5 
4 
27 

1,152 
30 
(748)
434 
16 
28 

558 
470 
1,028 
23 
5 
(4)
24 

998 
27 
(492)
533 
20 
26 

As noted in the Finance Director’s review on page 50, 2010 profit before financing for civil aerospace includes a charge associated with the trent 900 failure on an  
Airbus A380. this has reduced profit before financing by £56m.

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97

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Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

2 segmentAl AnAlysis (continueD)

Reconciliation to reported results

Year ended December 31, 2010 
Revenue from sale of original equipment 
Revenue from aftermarket services 
Total revenue
operating profit excluding share of results of joint ventures and associates
share of results of joint ventures and associates
profit on disposal of businesses
Profit before financing and taxation
net financing
Profit before taxation
taxation
Profit for the year

year ended December 31, 2009 
Revenue from sale of original equipment
Revenue from aftermarket services
total revenue
operating profit excluding share of results of joint ventures and associates
share of results of joint ventures and associates
loss on disposal of businesses
profit before financing and taxation
net financing
profit before taxation
taxation
profit for the year

1 central corporate costs

Underlying adjustments

Total 
reportable 
segments 
£m
5,322 
5,544 
10,866 
963 
93 
4 
1,060 

5,181 
4,927 
10,108 
942 
93 
(2)
1,033 

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underlying performance 
Release of transition hedging reserve 
Recognise revenue at exchange rate on date of transaction 
Realised losses/(gains) on settled derivative contracts 1 
net unrealised fair value changes to derivative contracts 2
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 

Profit 
before 
financing 
£m
1,010 
– 
– 
180 
–
(56)
–

–
–
–
124 
1,134 

Net 
financing 
£m
(55)
– 
– 
(7)
(341)
–
8 

(6)
(31)
–
(377)
(432)

Revenue  
£m
10,866 
– 
219 
– 
–
–
–

–
–
–
219 
11,085 

2010 

Taxation 
£m
(236)
– 
– 
– 
–
–
–

–
–
77 
77 
(159)

profit  
before 
financing  
£m
983 
27 
–
274 
14 
(126)
–

–
–
–
189 
1,172 

Revenue 
£m
10,108 
27 
279 
–
–
–
–

–
–
–
306 
10,414 

1 Realised losses/(gains) on settled derivative contracts included in profit before tax:

– includes £2m of realised losses (2009 £15m) deferred from prior years;
– excludes £5m of losses (2009 gains of £6m) realised in the year on derivative contracts settled in respect of trading cash flows that occurred after the year end and £7m of losses (2009 nil) recognised in 
prior years in respect of cancelled contracts;
– excludes £10m of realised gains (2009 nil) in respect of derivatives held in fair value hedges and nil (2009 £14m realised losses) 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 nil (2009 £5m unrealised gains) in respect of derivative contracts held by joint venture 

companies and nil (2009 £9m unrealised losses) for which the related trading contracts have been cancelled and consequently the fair value loss has been recognised immediately in underlying profit.

the reconciliation of underlying earnings per ordinary share is shown in note 5.

98

Rolls-Royce Group plc Annual report 2010

Underlying 
central  
items  
£m
–
–
–
(50)1
–
–
(50)
(55)
(105)
(236)
(341)

Total 
underlying  
£m
5,322 
5,544 
10,866 
913 
93 
4 
1,010 
(55)
955 
(236)
719 

Underlying 
adjustments  
£m
112 
107 
219 
124 
–
–
124 
(377)
(253)
77 
(176)

–
–
–
(50)1
–
–
(50)
(68)
(118)
(187)
(305)

5,181 
4,927 
10,108 
892 
93 
(2)
983 
(68)
915 
(187)
728 

Group  
£m
5,434 
5,651 
11,085 
1,037 
93 
4 
1,134 
(432)
702 
(159)
543 

5,309 
5,105 
10,414 
1,081 
93 
(2)
1,172 
1,785 
2,957 
(740)
2,217 

2009 

taxation 
£m
(187)
–
–
–
–
–
–

–
–
(553)
(553)
(740)

128 
178 
306 
189 
–
–
189 
1,853 
2,042 
(553)
1,489 

net 
financing 
£m
(68)
–
–
60 
1,835 
–
(17)

72 
(97)
–
1,853 
1,785 

 
 
Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

2 segmentAl AnAlysis (continueD)

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
income tax liabilities
post-retirement scheme deficits
Total liabilities
Net assets

Geographical segments
the group’s revenue by destination is shown below:

united Kingdom 
norway 
germany 
spain 
Rest of europe 
usA 
canada 
china 
south Korea 
middle east and south east Asia 
Rest of Asia 
Africa 
Australasia 
other 

2010 
£m
12,658 
393 
(823)
3,187 
198 
457 
164 
16,234 
(9,598)
823 
(1,852)
(608)
(1,020)
(12,255)
3,979 

2010  
£m
1,594 
486 
413 
231 
1,251 
3,096 
299 
890 
355 
1,585 
228 
109 
153 
395 
11,085 

2009 
£m
11,807 
437 
(457)
2,964 
224 
372 
75 
15,422 
(8,721)
457 
(1,913)
(533)
(930)
(11,640)
3,782 

2009 
£m
1,458 
443 
488 
233 
1,109 
2,895 
275 
640 
301 
1,689 
226 
144 
230 
283 
10,414 

in 2010, revenue (included in all reportable segments) of £1,131m was received from a single customer.

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 

99

Rolls-Royce Group plc Annual report 2010

2010  
£m
2,925 
611 
908 
625 
344 
5,413 

2009 
£m
2,764 
467 
824 
574 
289 
4,918

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Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

3 net FinAncing

Financing income
interest receivable
Fair value gains on foreign currency contracts (note 16) 2
Financial RRsps – foreign exchange differences and changes in forecast payments (note 16)
Fair value gains on commodity derivatives (note 16) 2
expected return on post-retirement scheme assets (note 18)
net foreign exchange gains

Financing costs
interest payable
Fair value losses on foreign currency contracts (note 16) 2
Financial RRsps – foreign exchange differences and changes in forecast payments (note 16)
Financial charge relating to financial RRsps (note 16)
interest on post-retirement scheme liabilities (note 18)
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 (loss)/gain 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
(credit)/charge for the year
Adjustments in respect of prior years
credit arising from reduction in uK tax rate

Recognised in the income statement

100

Rolls-Royce Group plc Annual report 2010

2010 
£m

(2)
(2)
(4)
1 
(3)

(53)
–
(3)
(56)
(59)

UK
2009 
£m

26
(29)
(3)
(4)
(7)

628 
(12)
–
616 
609 

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Per  
consolidated 
income 
statement  
£m

2010

Underlying 
financing1
£m

per  
consolidated 
income  
statement  
£m

2009

Underlying 
financing1
£m

23 
–
–
29 
400 
1 
453 

(63)
(370)
(6)
(13)
(431)
(2)
(885)
(432)

(40)
(31)
(361)
(432)

(341)

2010 
£m

174 
–
174
2 
176

41
1 
–
42
218 

23
– 
–
–
–
–
23 

(63)
–
–
(13)
–
(2)
(78)
(55)

(40)
–
(15)
(55)

–

Overseas
2009 
£m

129
–
129 
(23)
106 

21 
4 
–
25 
131 

21 
1,783 
72 
52 
305 
43 
2,276 

(64)
–
–
(25)
(402)
–
(491)
1,785 

(43)
(97)
1,925 
1,785 

1,835 

2010 
£m

172
(2)
170
3 
173

(12)
1 
(3)
(14)
159

21 
–
–
–
–
–
21 

(64)
–
–
(25)
–
–
(89)
(68)

(43)
–
(25)
(68)

–

Total
2009 
£m

155
(29)
126 
(27)
99 

649 
(8)
–
641 
740 

 
 
Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

2010 
£m

(37)
81 
(13)
–
–
(2) 
29 

OCI 
2009 
£m

342 
(198)
(11)
8 
–
–
141 

4 tAxAtion (continueD)

Other tax credits/(charges)

Deferred tax 

net actuarial (losses)/gains on post-retirement schemes 
movement in unrecognised surplus on post-retirement schemes 
movement in minimum funding liability 
release of transition hedge reserve 
share-based payment plans 
net investment hedge 

Tax reconciliation

profit before taxation
less share of results of joint ventures and associates (note 10)
profit before taxation excluding joint ventures and associates

nominal tax charge at uK corporation tax rate 28.0% (2009 28.0%)
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
Reduction in closing deferred taxes resulting from decrease in uK tax rate

Analysis of taxation charge:
underlying items (note 2)
non-underlying items

Deferred taxation assets and liabilities

At January 1
Amount credited/(charged) to income statement 
Amount credited to other comprehensive income 
Amount credited to equity 
Acquisition of businesses 
exchange differences 
At December 31

Analysed as: 
Deferred tax assets 
Deferred tax liabilities 

101

Rolls-Royce Group plc Annual report 2010

2010 
£m

–
–
–
–
5
–
5 

2010 
£m
702 
(93)
609 

171 
(29)
16 
2 
(5)
3 
4 
(3)
159 

236 
(77)
159 

2010 
£m
(6)
14 
29 
5 
(32)
3 
13 

451 
(438)
13 

Equity 
2009 
£m

–
–
–
–
1
–
1 

2009 
£m
2,957 
(93)
2,864 

802 
(26)
7 
5 
(21)
8 
(35)
–
740 

187
553
740

2009 
£m
497 
(641)
141 
1 
–
(4)
(6)

360 
(366)
(6)

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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

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, 
2010  
£m
(250)
(160)
(22)
(243)
265
54
286
64
(6)

At  
January 1, 
2009  
£m 
(200)
(146)
(31)
(195)
168 
655 
182 
64 
497 

Recognised 
in income 
statement  
£m 
(19)
10 
(25)
14 
(39)
40 
33 
–
14 

Recognised 
in income 
statement  
£m 
(53)
(17)
2 
(48)
(17)
(609)
101 
–
(641)

Recognised 
in OCI  
£m
–
–
–
–
31 
–
(2)
–
29 

Recognised  
in oci  
£m
–
–
–
–
133 
8 
-
–
141 

Recognised 
in equity  
£m 
–
–
5 
–
–
–
–
–
5 

Acquisition 
of businesses 
£m 
(11)
–
(21)
–
–
–
–
–
(32)

Recognised  
in equity  
£m 
–
–
(2)
–
–
–
3 
–
1 

Acquisition  
of businesses  
£m 
–
–
–
–
–
–
–
–
–

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

Exchange 
differences 
£m 
(2)
–
(1)
–
6 
–
–
–
3 

exchange 
differences
£m 
3 
3 
9 
–
(19)
–
–
–
(4)

2010  
£m
118 
51 
169 

At  
December 31,  
2010  
£m 
(282)
(150)
(64)
(229)
263 
94 
317 
64 
13 

At  
December 31, 
2009  
£m 
(250)
(160)
(22)
(243)
265 
54 
286 
64 
(6)

2009
£m
118 
59 
177 

the emergency Budget on June 22, 2010 announced that the uK corporation tax rate will reduce from 28 per cent to 24 per cent over a period of four years from 2011. 
the first reduction in the rate from 28 per cent to 27 per cent was substantively enacted on July 21, 2010 and will be effective from April 1, 2011. As this rate change was 
substantively enacted prior to the year end, the closing deferred tax assets and liabilities have been restated. the resulting charges or credits have been recognised in the 
income statement except to the extent that they relate to items previously charged or credited to oci or equity.

Accordingly, in 2010, £3m has been credited to the income statement, £1m has been charged to oci and £1m has been charged directly to equity. had the further tax 
rate changes been substantively enacted before the balance sheet date, it would have had the effect of reducing the deferred tax asset and liability by £27m and  
£29m respectively.

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102

Rolls-Royce Group plc Annual report 2010

 
 
Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

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 adjusting the weighted average number of ordinary shares in issue during the year for the bonus element of share options.

Potentially 
dilutive share 
options 

24
(0.38)

Basic
539 
1,846 
29.20 

2010 

Diluted 
539
1,870
28.82

Pence 
38.73 
(13.70)
4.17 
29.20 
38.24

Basic
2,221 
1,845 
120.38 

2010 

£m 
715 
(253)
77 
539 

profit attributable to ordinary shareholders (£m) 
Weighted average number of ordinary shares (millions) 
eps (pence) 

the reconciliation between underlying eps and basic eps is as follows:

underlying eps/underlying profit attributable to ordinary shareholders 
total underlying adjustments to profit before tax (note 2) 
Related tax effects 
eps/profit attributable to ordinary shareholders 
Diluted underlying eps 

6 employee inFoRmAtion

Average number of employees
united Kingdom
overseas

civil aerospace
Defence aerospace
marine
energy

* Following a review of the allocation of employees in functions serving more than one segment, the 2009 figures have been restated.

Group employment costs 1
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. 

potentially  
dilutive share 
options 

20 
(1.29)

pence 
39.67 
110.68 
(29.97)
120.38 
39.25 

2010

21,000 
17,900 
38,900 
19,500 
6,900 
9,000 
3,500 
38,900 

2009 

Diluted 
2,221 
1,865 
119.09 

2009 

£m 
732 
2,042 
(553)
2,221 

Restated*
2009

21,300 
17,200 
38,500 
19,800 
7,100
8,300
3,300
38,500 

£m

£m

1,847
212
50
221
2,330

1,725 
194 
31 
263 
2,213

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103

Rolls-Royce Group plc Annual report 2010

 
 
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 statements 1
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

2010 
£m
0.1
4.3
4.4

0.5
0.5
5.4

0.2
0.1

2009 
£m
0.1 
4.1 
4.2

0.6
0.4 
5.2 

0.2
0.1 

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.

8 intAngiBle Assets

Cost:
At January 1, 2009
exchange differences
Additions
Acquisitions of businesses
Disposals
At January 1, 2010
exchange differences
Additions
Acquisitions of businesses
Disposals
At December 31, 2010

Accumulated amortisation:
At January 1, 2009
exchange differences
charge for the year 1
Disposals
At January 1, 2010
charge for the year 1
Disposals
At December 31, 2010

Net book value:
At December 31, 2010
At December 31, 2009 
At January 1, 2009

Certification 
costs and 
participation fees  
£m

Goodwill 
£m

Development 
expenditure  
£m

Recoverable 
engine costs  
£m

Software and 
other 
£m

1,013 
(28)
– 
6 
– 
991 
6 
–
118 
–
1,115 

5 
–
2 
–
7 
–
–
7 

1,108 
984 
1,008 

568 
(3)
66 
–
– 
631 
(2)
57 
–
–
686 

165 
(1)
13 
–
177 
13 
–
190 

496 
454 
403 

632 
(2)
121 
–
–
751 
–
111 
–
–
862 

176 
–
29 
–
205 
27 
–
232 

630 
546 
456 

463 
–
123 
–
–
586 
–
111 
–
–
697 

250 
–
46 
–
296 
55 
–
351 

346 
290 
213 

254 
(2)
32 
–
(11)
273 
(1) 
46 
96 
(1)
413 

48 
(1)
31 
(3)
75 
35 
(1)
109 

304 
198 
206 

Total  
£m

2,930 
(35)
342 
6 
(11)
3,232 
3 
325 
214 
(1)
3,773 

644 
(2)
121 
(3)
760 
130 
(1)
889 

2,884 
2,472 
2,286 

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1 charged to cost of sales except development costs, which are charged to research and development costs.

104

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Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

8 intAngiBle Assets (continueD)

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 
commercial marine – arising from the acquisition of oDim AsA 
other 

goodwill has been tested for impairment during 2010 on the following basis:

Primary 
reporting 
segment
civil aerospace 
marine 
marine 
Various 

2010 
£m
236 
657 
114 
101 
1,108 

2009 
£m
244 
645 
–
95 
984 

•  the carrying value of goodwill has 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. given the 
long-term and established nature of many of the group’s products (product lives are often measured in decades), these forecast the next ten years. 
growth rates for the period not covered by the forecasts are based on a range of growth rates (2.0–2.5 per cent) that reflect the products, industries 
and countries in which the relevant cgu or group of cgus operate.

•  the key assumptions for the impairment tests are the discount rate and, in the cash flow projections, the programme assumptions, the growth rates 

and the impact of foreign exchange rates on the relationship between selling prices and costs. impairment tests are performed using prevailing 
exchange rates.

•  the pre-tax cash flow projections have been discounted at 13 per cent (2009 13 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. the principal foreign exchange exposure 
is on translating us dollar income into euros. For the purposes of the impairment test only, cash flows beyond the ten-year forecasts are assumed to 
grow at 2.5 per cent (2009 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. the overall level of business would need to reduce by more than 45 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. the principal foreign exchange exposures are on translating income in 
a variety of non-functional currencies into norwegian Kroner. For the purposes of the impairment test only, cash flows beyond the ten-year forecasts 
are assumed to grow at two per cent (2009 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. the overall level of business would need to reduce by more than 80 per 
cent 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 (2009 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 company’s control (discount rate, exchange rate and airframe delays), could result in impairment in future years.

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105

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Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

9 pRopeRty, plAnt AnD equipment

Land and 
buildings  
£m

Plant and 
equipment  
£m

Aircraft and 
engines  
£m

In course of 
construction  
£m

Cost:
At January 1, 2009
exchange differences
Additions
Reclassifications
transferred to assets held for sale
Disposals/write-offs
At January 1, 2010
exchange differences
Additions
Acquisition of businesses
Reclassifications
Disposals/write-offs
At December 31, 2010

Accumulated depreciation:
At January 1, 2009
exchange differences
charge for the year 1
impairment
transferred to assets held for sale
Disposals/write-offs
At January 1, 2010
exchange differences
charge for the year 1
Disposals/write-offs
At December 31, 2010

Net book value:
At December 31, 2010
At December 31, 2009
At January 1, 2009

787 
(17)
22 
30 
(12)
(4)
806 
6 
11 
17 
41 
(4)
877 

218 
(2)
25 
4 
(12)
(2)
231 
4 
37 
(1)
271 

606 
575 
569 

2,350 
(43)
94 
78 
–
(92)
2,387 
16 
94 
7 
108 
(74)
2,538 

1,308 
(25)
156 
1 
–
(82)
1,358 
11 
190 
(62)
1,497 

1,041 
1,029 
1,042 

171 
(2)
20 
5 
–
(31)
163 
–
35 
–
5 
(14)
189 

32 
(1)
8 
–
–
(5)
34 
–
10 
(2)
42 

147 
129 
139 

245 
(8)
155 
(113)
–
(3)
276 
1 
221 
–
(154)
(2)
342 

–
–
–
–
–
–
–
–
–
–
–

342 
276 
245 

1 Depreciation charged during the year is charged to the income statement or included in the cost of inventory as appropriate.

Total 
£m

3,553 
(70)
291 
–
(12)
(130)
3,632 
23 
361 
24 
–
(94)
3,946 

1,558 
(28)
189 
5 
(12)
(89)
1,623 
15 
237 
(65)
1,810 

2,136 
2,009 
1,995 

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106

Rolls-Royce Group plc Annual report 2010

 
 
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

capital expenditure commitments
cost of fully depreciated assets

10 inVestments

At January 1, 2009
exchange differences
Additions
taxation paid by the group
impairment
share of retained profit
transferred to other investments
share of oci of joint ventures and associates
At January 1, 2010
exchange differences
Additions
taxation paid by the group
impairment
share of retained profit
transferred to subsidiary1
Disposals
share of oci of joint ventures and associates
At December 31, 2010

1 During the year, the group acquired the 67 per cent of the shares of oDim AsA that it did not already own – see note 24.

107

Rolls-Royce Group plc Annual report 2010

2010 
£m

8
5
–

159
(35)
124

215
584

2009 
£m

9 
6 
–

133 
(31)
102 

146 
473

Joint ventures 
£m
345 
(33)
16 
2 
(1)
18 
(4)
20
363 
4 
16 
3 
(1)
24 
–
–
(16)
393 

Associates 
£m
–
4 
71 
–
–
(1)
–
–
74 
2 
–
–
–
1 
(77)
–
–
–

Equity accounted

Total 
£m
345 
(29)
87 
2 
(1)
17 
(4)
20 
437 
6 
16 
3 
(1)
25 
(77)
–
(16)
393 

Other unlisted 
£m
53 
–
2 
–
(1)
–
4 
–
58 
–
1 
–
(2)
–
–
(46)
–
11 

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2010 
£m

1,405 
1,161 

(1,151)
(1,022)
393 

69 
38 

(20)
(13)
74 

(5)

(1,043)

Associates
2009 
£m
15
–
(1)
–
(1)
–
(1)

2010 
£m
2,940 
129 
(19)
(17)
93 
(68)
25 

Total
2009 
£m

1,212 
850 

(729)
(896)
437 

(821)

Total
2009 
£m
 2,570
132 
(27)
(12)
93 
(77)
16 

Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

10 inVestments (continueD)

the summarised aggregated financial information of the group’s share of equity accounted investments is as follows:

Joint ventures
2009 
£m

2010 
£m

2010 
£m

Associates
2009 
£m

Assets:

non-current assets 
current assets

liabilities: 2

current liabilities
non-current liabilities

2 liabilities include borrowings of:

Revenue
profit before financing and taxation
net financing
taxation
profit for the year recognised in the consolidated income statement
Dividends received
Retained profit

the principal joint ventures are listed on pages 138 to 139.

1,405 
1,161 

(1,151)
(1,022)
393 

(1,043)

1,143 
812 

(709)
(883)
363 

(816)

Joint ventures
2009 
£m
 2,555
132 
(26)
(12)
94 
(77)
17 

2010 
£m
2,914 
128 
(19)
(17)
92 
(68)
24 

–
–

–
–
–

–

2010 
£m
26 
1 
–
–
1 
–
1 

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108

Rolls-Royce Group plc Annual report 2010

 
 
Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

11 inVentoRies

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

12 tRADe AnD otheR ReceiVABles 

trade receivables
Amounts recoverable on contracts 1
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

2010  
£m
377 
943 
42 
1,024 
43 
2,429 

202 
135 
2 

2010  
£m
1,210 
1,580 
518 
449 
186 
3,943 

1,801 
419 
1,723 
3,943 

7 
1,176 
5 
56 
27 
1,271 

1 the balance at December 31, 2010 includes an allowance of £55m (2009 £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 86)

cash held as collateral against third party obligations (see note 22)

109

Rolls-Royce Group plc Annual report 2010

2010  
£m
1,647
1,212
2,859

(8)
2,851

68

2009  
£m
358 
820 
61 
1,163 
30 
2,432 

138 
83 
5

2009  
£m
1,285 
1,524 
502 
401 
165 
3,877 

1,837 
382 
1,658 
3,877 

9 
1,178 
14 
35 
30 
1,266 

2009  
£m
1,240 
1,722 
2,962 

(4)
2,958 

77 

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Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

14 BoRRoWings

Unsecured
overdrafts
Bank loans
7 3/8% notes 2016 £200m
5.84% notes 2010 us$187m 1
6.38% notes 2013 us$230m 1
6.55% notes 2015 us$83m 1
4 1/2% notes 2011 €750m 2
6.75% notes 2019 £500m 3
Secured
obligations under finance leases: (note 21)4

2010  
£m

8 
67 
–
–
–
–
642 
–

–
717 

Current 
2009  
£m

4 
2 
–
120 
–
–
–
–

–
126 

2010  
£m

–
206 
200 
–
162 
60 
–
506 

Non-current 
2009  
£m

–
204 
200 
–
155 
57 
677 
493 

2010  
£m

8 
273 
200 
–
162 
60 
642 
506 

1 
1,135 

1 
1,787 

1 
1,852 

Total 
2009  
£m

4 
206 
200 
120 
155 
57 
677 
493 

1 
1,913 

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 these notes are the subject of swap agreements under which counterparties have undertaken to pay amounts at fixed rates of interest in consideration for amounts payable at variable rates of interest .
4 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

1 includes payments received on account from joint ventures and associates

2010  
£m
1,560 
891 
267 
81 
1,294 
1,817 
5,910 

258 

Current 
2009 
£m 
1,550 
863 
276 
71 
1,086 
1,782 
5,628 

200 

2010  
£m
475 
–
7 
–
94 
695 
1,271 

243 

Non-current
2009  
£m
544 
–
2 
–
71 
528 
1,145 

259 

included within trade and other payables are government grants of £44m (2009 £31m). During the year, £2m (2009 £2m) of government grants were 
released to the income statement.

Analysed as:

Financial instruments (note 16):

trade payables and similar items
other non-derivative financial liabilities

non-financial instruments

110

Rolls-Royce Group plc Annual report 2010

2010 
£m

2,212 
521
4,448 
7,181 

2009 
£m

2,142 
381 
4,250 
6,773

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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 48 to 55.

carrying values and fair values of financial instruments

At December 31, 2010
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, 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

Basis for 
determining 
fair value

Held for 
trading 
£m

Loans and 
receivables 
£m

Available 
for sale 
£m

Notes

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 
B 
B 

A 
B 
B 
c 
B 
B 
B 
D 
c 
D 
B 
B 
B 

–
–
–
621 
–
–
–
–
–
–
–
–
–
621 

–
–
–
717 
–
–
–
–
–
–
–
–
–
717 

11 
1,801 
419 
–
328 
–
1,212 
–
–
–
–
–
–
3,771 

58 
1,837 
382 
–
–
–
1,722 
–
–
–
–
–
–
3,999 

–
–
–
–
–
–
–
–
–
–
–
–
–
–

–
–
–
–
2 
–
–
–
–
–
–
–
–
2 

Assets

Cash 
£m

–
–
–
–
–
1,647 
–
–
–
–
–
–
–
1,647 

–
–
–
–
–
1,240 
–
–
–
–
–
–
–
1,240 

Held for 
trading 
£m

Liabilities
Amortised 
cost 
£m

–
–
–
–
–
–
–
–
(761)
–
–
–
–
(761)

–
–
–
–
–
–
–
–
(673)
–
–
–
–
(673)

–
–
–
–
–
–
–
(1,852)
–
(266)
(23)
(2,212)
(521)
(4,874)

–
–
–
–
–
–
–
(1,913)
–
(363)
(13)
(2,142)
(381)
(4,812)

Total

£m

11 
1,801 
419 
621 
328 
1,647 
1,212 
(1,852)
(761)
(266)
(23)
(2,212)
(521)
404 

58 
1,837 
382 
717 
2 
1,240 
1,722 
(1,913)
(673)
(363)
(13)
(2,142)
(381)
473 

Fair values equate to book values for both 2010 and 2009, with the following exceptions:

Borrowings
Financial RRsps

Book value 
£m
(1,852)
(266)

2010
Fair value 
£m
(1,963)
(296)

Book value 
£m
(1,913)
(363)

2009
Fair value 
£m
(2,012)
(390)

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 arm’s-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.

111

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Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

16 FinAnciAl instRuments (continueD)

Carrying values of other financial assets and liabilities

At December 31, 2010 
non-current assets 
current assets 
current liabilities 
non-current liabilities 

At December 31, 2009 
non-current assets 
current assets 
current liabilities 
non-current liabilities 

Foreign 
exchange 
contracts  
£m

317 
98 
(38)
(713)
(336)

429 
72 
(56)
(589)
(144)

Commodity 
contracts  
£m

Interest rate 
contracts  
£m

Total 
derivatives  
£m

Financial 
RRSPs  
£m

C Shares  
£m

18 
10 
(5)
(2)
21 

11 
4 
(12)
(14)
(11)

36 
142 
–
(3)
175 

197 
4 
–
(2)
199 

371 
250 
(43)
(718)
(140)

637 
80 
(68)
(605)
44 

–
–
(39)
(227)
(266)

–
–
(100)
(263)
(363)

–
–
(23)
–
(23)

–
–
(13)
–
(13)

Total  
£m

371 
250 
(105)
(945)
(429)

637 
80 
(181)
(868)
(332)

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). the group does not include 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.

the fair values of foreign exchange and commodity instruments were as follows: 

At January 1, 2009
movements in fair value hedges 1,2
movements in net investment hedges 
movements in other derivative contracts 1
contracts settled 
At January 1, 2010
movements in fair value hedges 1,2
movements in other derivative contracts 
contracts settled 3
At December 31, 2010 

1

included in financing.

2 loss on related hedged items £7m (2009 £33m gain).
3

includes settlement of contracts held in fair value hedge relationships of £10m (2009 nil).

Foreign  
exchange 
instruments 
£m
(2,181)
(33)
(14)
1,783 
301 
(144)
7 
(370)
171 
(336)

Commodity 
instruments 
£m
(89)
–
–
52 
26 
(11)
–
29 
3 
21 

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16 FinAnciAl instRuments (continueD)

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.

the fair values of interest rate financial instruments were as follows: 

At January 1, 2009
movements in fair values 1,2
At January 1, 2010
movements in fair values 1,2
contracts settled
At December 31, 2010 

1

included in financing.

2 gain on related hedged items £21m (2009 £77m gain).

Included in fair 
value hedging 
relationships 
£m
278 
(77)
201 
(21)
(2)
178

Total  
£m
274 
(75)
199 
(22)
(2)
175

Other interest 
rate financial 
instruments  
£m
(4)
2 
(2)
(1)
–
(3)

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.

the amortised cost values of financial RRsps were as follows:

At January 1
cash paid to partners
Additions
exchange adjustments included in oci
Financing charge 1
excluded from underlying profit:

exchange adjustments 1
Restructuring of financial RRsp agreements and changes in forecast payments 1

At December 31

1

included in financing, excluding nil (2009 £1m) of finance charge capitalised in intangible assets.

2010 
£m
(363)
114 
–
2 
(13)

(6)
–
(266)

2009 
£m
(455)
55 
(15)
6 
(26)

45 
27 
(363)

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.

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16 FinAnciAl instRuments (continueD)

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 ‘BBB+’ 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.

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, 2010 
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, 2009 
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

175 
15,561 

1,200 
46 

138 
17,120 

280 
14,203 

809 
35 

169 
15,496 

–
3,806 

500 
–

60 
4,366 

106 
3,544 

116 
20 

62 
3,848 

–
3,285 

–
–

43 
3,328 

–
3,184 

500 
–

59 
3,743 

175 
7,427 

200 
46 

35 
7,883 

128 
6,573 

142 
–

48 
6,891 

–
1,043 

500 
–

–
1,543 

46 
902 

51 
15 

–
1,014 

20 
395 

178 
–

28 
621 

23 
478 

201 
–

15 
717 

–
(751)

–
(3)

(7)
(761)

–
(645)

–
(2)

(26)
(673)

As described above, all derivative financial instruments are entered into for risk management purposes, although these may not be designated as 
hedging relationships for accounting purposes.

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16 FinAnciAl instRuments (continueD)

Derivative financial instruments related to foreign exchange risks are denominated in the following currencies:

At December 31, 2010 
currencies sold forward:

sterling
us dollar
euro
other

At December 31, 2009 
currencies sold forward:

sterling
us dollar
euro
other

Sterling 
£m

US dollar 
£m

–
13,195 
–
76 

–
11,508 
–
54 

175 
–
–
35 

280 
–
–
116 

Euro 
£m

–
1,161 
–
106 

–
1,094 
–
129 

other derivative financial instruments are denominated in the following currencies:

sterling
us dollar
euro
other

Currencies purchased forward
Total 
£m

Other 
£m

35 
642 
285 
26 

77 
810 
371 
44 

2010  
£m
514 
337 
500 
33 

210 
14,998 
285 
243 

357 
13,412 
371 
343 

2009  
£m
15
498
500
–

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16 FinAnciAl instRuments (continueD)

Non-derivative financial instruments
non-derivative financial instruments are denominated in the following currencies:

Sterling  
£m

US dollar  
£m

1 
312 
155 
325 
446 
853 
2,092 

(972)
–
(23)
(1,040)
(211)
(2,246)
(154)

49 
242 
130 
–
490 
1,517 
2,428 

(893)
–
(13)
(886)
(187)
(1,979)
449 

–
1,120 
46 
–
614 
20 
1,800 

(222)
(208)
–
(705)
(166)
(1,301)
499 

–
1,175 
54 
–
366 
1 
1,596 

(332)
(303)
–
(811)
(86)
(1,532)
64 

Euro  
£m

4 
210 
40 
–
156 
317 
727 

(656)
(58)
–
(219)
(35)
(968)
(241)

4 
225 
40 
–
129 
192 
590 

(683)
(60)
–
(221)
(23)
(987)
(397)

Other  
£m

Total  
£m

6 
159 
178 
3 
431 
22 
799 

(2)
–
–
(248)
(109)
(359)
440 

5 
195 
158 
2 
255 
12 
627 

(5)
–
–
(224)
(85)
(314)
313 

11 
1,801 
419 
328 
1,647 
1,212 
5,418 

(1,852)
(266)
(23)
(2,212)
(521)
(4,874)
544 

58 
1,837 
382 
2 
1,240 
1,722 
5,241 

(1,913)
(363)
(13)
(2,142)
(381)
(4,812)
429 

At December 31, 2010
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, 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

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16 FinAnciAl instRuments (continueD)

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:

Sterling  
£m

US dollar  
£m

Euro  
£m

Other  
£m

Total  
£m

–
1 
–
1 

–
9 
–

3 
–
(1)
–

2 
–
4 

1 
(1)
–
1 

–
(6)
(1)

1 
16 
(1)
2 

(2)
4 
4 

Up to three 
months  
overdue  
£m

Between  
three months  
and one year 
overdue  
£m

More than  
one year  
overdue  
£m

Within terms  
£m

11 
1,505 
396 
621 
328 
1,647 
1,212 
5,720 

58 
1,509 
363 
717 
2 
1,240 
1,722 
5,611 

–
180 
19 
–
–
–
–
199 

–
237 
14 
–
–
–
–
251 

–
86 
1 
–
–
–
–
87 

–
67 
3 
–
–
–
–
70 

–
30 
3 
–
–
–
–
33 

–
24 
2 
–
–
–
–
26 

5 
16 
(2)
4 

–
7 
7 

Total  
£m

11 
1,801 
419 
621 
328 
1,647 
1,212 
6,039 

58 
1,837 
382 
717 
2 
1,240 
1,722 
5,958 

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Functional currency of Group operation
At December 31, 2010 
sterling
us dollar
euro
other
At December 31, 2009 
sterling
us dollar
other

Ageing beyond contractual due date
the ageing beyond contractual due date of the group’s financial assets is: 

At December 31, 2010 
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, 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

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16 FinAnciAl instRuments (continueD)

Contractual maturity analysis

At December 31, 2010 
Borrowings
Derivative financial liabilities
Financial RRsps
c shares
trade payables and similar items
other non-derivative financial liabilities

At December 31, 2009 
Borrowings
Derivative financial liabilities
Financial RRsps
c shares
trade payables and similar items
other non-derivative financial liabilities

Within  
one  
year 
 £m

(812)
(43)
(47)
(23)
(2,199)
(516)
(3,640)

(112)
(66)
(118)
(13)
(2,139)
(377)
(2,825)

Between  
one and  
two years 
£m

(68)
(110)
(39)
–
(7)
(3)
(227)

(903)
(55)
(45)
–
(2)
(2)
(1,007)

Between  
two and  
five years 
£m

(575)
(525)
(110)
–
(4)
(1)
(1,215)

(366)
(424)
(109)
–
(1)
(1)
(901)

Gross values

After  
five years 
£m

Discounting  
£m

(887)
(8)
(152)
–
(2)
(1)
(1,050)

(1,183)
(113)
(179)
–
–
(1)
(1,476)

490 
(75)
82 
–
–
–
497 

651 
(15)
88 
–
–
–
724 

Carrying  
value  
£m

(1,852)
(761)
(266)
(23)
(2,212)
(521)
(5,635)

(1,913)
(673)
(363)
(13)
(2,142)
(381)
(5,485)

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.

Effective  
interest rate 
%
1.1654%

gBp liBoR + 0.7
euRiBoR + 0.5

11.2467%
7.2237%
gBp liBoR + 0.267

7.3750%
6.3800%
usD liBoR + 1.26
6.5500%
usD liBoR + 1.24
4.5000%
gBp liBoR + 0.911
6.7500%
gBp liBoR + 2.98

Total 
£m
328 
1,647 
1,212 

(66)
(5)
(8)
(1)
(1)
(200)

(200)
(162)
–
(60)
–
(642)
–
(506)
–

(66)
(5)
(8)
(1)
12 
(200)

–
–
(162)
–
(60)
(642)
–
–
(506)

5.0000%

(1)
1,335 

–
1,548 

6 months  
or less 
£m
327 
1,647 
1,212 

6-12 months 
£m
1 
–
–

2010
Period in which interest rate reprices
More than  
5 years 
£m
–
–
–

2-5 years 
£m
–
–
–

1-2 years 
£m
–
–
–

–
–
–
–
–
–

–
–
–
–
–
–
–
–
–

–
1 

–
–
–
–
–
–

–
–
–
–
–
–
–
–
–

–
–

–
–
–
–
(13)
–

–
(162)
162 
(60)
60 
–
–
–
–

–
(13)

–
–
–
–
–
–

(200)
–
–
–
–
–
–
(506)
506 

(1)
(201)

short-term investments 1
cash at bank and in hand 2
short-term deposits 3
Unsecured bank loans
£66m floating rate loan
€5m floating rate loan
overdrafts 4
75m indian Rupee Fixed Rate loan
interest rate swaps
£200m floating rate loan
Unsecured bond issues
73/8% notes 2016 £200m
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
6.75% notes 2019 £500m
  effect of interest rate swaps
Other secured
obligations under finance leases

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16 FinAnciAl instRuments (continueD)

short-term investments 1
cash at bank and in hand 2
short-term deposits 3
Unsecured bank loans
€2.5m floating rate loan
€5m floating rate loan
overdrafts 4
75m indian Rupee Fixed Rate loan
interest rate swaps
£200m floating rate loan
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
6.75% notes 2019 £500m
Other secured
obligations under finance leases

effective  
interest rate 
%
8.6744%

euRiBoR + 1.2
euRiBoR + 0.5

9.8167%
6.1814%
gBp liBoR + 0.267

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
6.7500%

total 
£m
2 
1,240 
1,722 

(1)
(4)
(4)
(1)
–
(200)

(200)
(120)
–
(155)
–
(57)
–
(677)
–
(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.

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 in one to two years
expiring after two years

2010  
£m
250 
200 
450 

2009  
£m
– 
450 
450 

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Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

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, 2010 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 £989m lower (2009 £864m). 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 £809m higher (2009 £707m). there would have been no change to the underlying 
results that exclude unrealised gains and losses on foreign exchange derivatives.

At December 31, 2010 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 £82m lower (2009 £88m). 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 £66m higher (2009 £72m). there would have been no change to the underlying 
results that exclude unrealised gains and losses on foreign exchange derivatives.

At December 31, 2010 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 (2009 £11m), arising mainly as the result of lower fair value gains on derivative contracts. 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 
(2009 £11m), arising mainly as the result of higher fair value gains on derivative contracts. there would have been no change to the underlying results 
that exclude unrealised gains and losses on commodity derivatives.

At December 31, 2010 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 53.

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. in certain circumstances 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.

movements in the c shares during the year were as follows:

Issued and fully paid 
At January 1
issued to equity shareholders
Redeemed 
At December 31

2010
Nominal value  
£m 

13 
278
(267)
23

Millions

12,577 
278,115
(267,312)
23,380

2009
nominal value  
£m 

–
264 
(251)
13 

millions 

–
263,776 
(251,199)
12,577 

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. As noted on  
page 56, the company intends to introduce a new holding company in 2011 and the c shares in respect of the final payment for 2010 will be issued 
by the new holding company. issues of c shares were declared as follows:

Pence per  
share
6.4
9.6
16.0

2010

£m 
119
180
299

pence per  
share
6.0 
9.0 
15.0 

2009 

£m 
111 
167 
278

interim (issued in January)
Final (issued in July)

120

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Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

17 pRoVisions FoR liABilities AnD chARges

Warranty and guarantees 
contract loss 
Restructuring 
customer financing 
insurance 
other 

Analysed as:

current liabilities 
non-current liabilities 

At  
January 1,  
2010  
£m
224 
58 
8 
71 
45 
36 
442 

Exchange 
differences  
£m
3 
1 
–
–
–
1 
5 

Acquisitions/ 
disposals of 
businesses  
£m
2 
–
–
–
–
–
2 

Unused  
amounts  
reversed  
£m
(5)
(6)
(2)
–
–
(4)
(17)

Charged to  
income  
statement  
£m
107 
31 
14 
16 
14 
3 
185 

At  
December 31,  
2010 
£m 
298 
72 
14 
78 
55 
27 
544 

2009  
£m
210 
232 
442 

Utilised  
£m
(33)
(12)
(6)
(9)
(4)
(9)
(73)

2010  
£m
276 
268 
544 

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 54. 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

2010  
£m

8 
47 
6 

9 
5 
3 
78 

2009  
£m

3 
20 
21 

19 
4 
4 
71 

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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Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

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, 
2010. the most recent funding valuations of the main uK schemes were:

Scheme 
Rolls-Royce pension Fund
Rolls-Royce group pension scheme (provisional) 
Vickers group pension scheme (provisional) 

Amounts recognised in the income statement

Defined benefit schemes: 
current service cost 
past service cost 
curtailment

Defined contribution schemes 
operating cost 
Financing in respect of defined benefit schemes: 
expected return on assets 
interest on liabilities 

total income statement charge 

the operating cost is charged as follows: 

cost of sales 
commercial and administrative costs 
Research and development 

Valuation date 
march 31, 2009 
April 5, 2010 
march 31, 2010 

uK  
schemes  
£m

overseas  
schemes  
£m

UK 
schemes  
£m

Overseas  
schemes  
£m

118 
–
–
118 
11 
129 

(374)
375 
1 
130 

34 
1 
(6)
29 
32 
61 

(26)
56 
30 
91 

2010 

Total  
£m

152 
1 
(6)
147 
43 
190 

(400)
431 
31 
221 

94 
2 
–
96 
8 
104 

(285)
355 
70 
174 

Defined benefit 
2009 
£m 
94 
26 
9 
129 

2010  
£m
106
31
10
147

Defined contribution 
2009 
2010  
£m 
£m
27 
31
7 
9
3 
3
37 
43

29 
4 
–
33 
29 
62 

(20)
47 
27 
89 

2010  
£m
137
40
13
190

2009 

total  
£m

123 
6 
–
129 
37 
166 

(305)
402 
97 
263 

Total 
2009 
£m 
121 
33 
12 
166 

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 £35m (2009 £36m) in the year. 

Amounts recognised in other comprehensive income

Actuarial gain/(loss) on scheme assets 
experience losses on scheme liabilities 
movement in unrecognised surplus 
movement in minimum funding liability

122

Rolls-Royce Group plc Annual report 2010

2010  
£m
460
(303)
(300)
49 
(94)

2009  
£m
(270)
(878)
707 
40 
(401)

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18 post-RetiRement BeneFits (continueD)

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 1
Discount rate 
expected rate of return on scheme assets 
inflation assumption 

UK  
schemes  
%
4.7
3.0
5.5
5.0
3.6

2010 
Overseas  
schemes  
%
3.9
1.7
5.4
7.2
2.5

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

1 Benefits from uK schemes accruing after April 5, 2005 are assumed to increase in payment at a rate of 1.9 per cent.

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 assumptions have not been adjusted to reflect the uK government’s announcement in 2010 to change the basis for the indexation of 
occupational pension schemes from the Retail prices index to the consumer price index.

the overall expected rate of return is calculated by weighting the individual returns expected from each asset class (see below) 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 sAp actuarial tables, with 80 per cent of long cohort and an 
underpin of one per cent, published by the institute of Actuaries, projected forward and, where appropriate, adjusted to take account of the relevant 
scheme’s actual experience. the resulting life expectancies in the principal uK schemes are as follows:

Life expectancy from age 65
current pensioner
Future pensioner currently aged 45

22.4 years
24.2 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.

the future costs of healthcare benefits are based on an assumed healthcare costs trend rate of 8.4 per cent, grading down to 5.0 per cent over five years.

Amounts recognised in the balance sheet

present value of funded obligations 
Fair value of scheme assets 

present value of unfunded obligations 
unrecognised surplus 1
minimum funding liability 2
net liability recognised in the balance sheet 

Analysed as: 
post-retirement scheme surpluses 
post-retirement scheme deficits 

UK  
schemes  
£m
(7,039)
7,783 
744 
–
(628)
(336)
(220)

164 
(384)
(220)

Overseas 
schemes  
£m
(484)
434 
(50)
(579)
(7)
–
(636)

–
(636)
(636)

2010 

Total  
£m
(7,523)
8,217 
694 
(579)
(635)
(336)
(856)

164 
(1,020)
(856)

uK  
schemes  
£m
(6,714)
7,048 
334 
–
(329)
(385)
(380)

75 
(455)
(380)

overseas 
schemes  
£m
(406)
354 
(52)
(417)
(6)
–
(475)

–
(475)
(475)

2009 

total 
£m 
(7,120)
7,402 
282 
(417)
(335)
(385)
(855)

75 
(930)
(855)

1 Where a surplus has arisen on a scheme, in accordance with iAs 19 and iFRic 14, the surplus is recognised as an asset only if it represents an unconditional economic benefit available to the group in the 

future. Any surplus in excess of this benefit is not recognised in the balance sheet.

2 A minimum funding liability arises where the statutory funding requirements require future contributions in respect of past service that will result in a future unrecognisable surplus.

123

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18 post-RetiRement BeneFits (continueD)

Changes in present value of defined benefit obligations 

At January 1 
exchange differences 
current service cost 
past service cost 
Finance cost 
contributions by employees 
Benefits paid out 
Actuarial losses 
curtailment
At December 31 
Funded schemes 
unfunded schemes 

Changes in fair value of scheme assets

At January 1 
exchange differences 
expected return on assets 
contributions by employer 
contributions by employees 
Benefits paid out 
Actuarial gains/(losses) 
At December 31 
Actual return on scheme assets 

UK  
schemes  
£m
(6,714)
–
(118)
–
(375)
(3)
313 
(142)
–
(7,039)
(7,039)
–

UK  
schemes  
£m
7,048 
–
374 
227 
3 
(313)
444 
7,783 
818 

Overseas 
schemes  
£m
(823)
(27)
(34)
(1)
(56)
(2)
35 
(161)
6 
(1,063)
(484)
(579)

Overseas 
schemes  
£m
354 
16 
26 
55 
2 
(35)
16 
434 
42 

2010 

Total  
£m
(7,537)
(27)
(152)
(1)
(431)
(5)
348 
(303)
6 
(8,102)
(7,523)
(579)

2010 

Total  
£m
7,402 
16 
400 
282 
5 
(348)
460 
8,217 
860 

uK  
schemes  
£m
(5,719)
–
(94)
(2)
(355)
(3)
324 
(865)
–
(6,714)
(6,714)
–

uK  
schemes  
£m
7,163 
–
285 
232 
3 
(324)
(311)
7,048 
(26)

overseas 
schemes  
£m
(827)
67 
(29)
(4)
(47)
(3)
33 
(13)
–
(823)
(406)
(417)

overseas 
schemes  
£m
283 
(16)
20 
56 
3 
(33)
41 
354 
61 

the fair value of the scheme assets in the schemes and the expected rates of return at December 31, were as follows:
2010 

UK schemes: 
lDi portfolios 1
equities 
sovereign debt 
corporate bonds 
other 

Overseas schemes: 
equities 
corporate bonds 
other 

Expected  
rate of  
return  
%

4.5
7.5
4.2
5.2
4.2
5.0

9.3
4.5
6.9
7.2

Market  
value  
£m

6,383 
1,204 
23 
22 
151 
7,783 

237
170
27
434

expected  
rate of  
return  
%

5.0
7.8
4.5
5.5
4.6
5.4

9.3
4.7
6.5
7.4

2009 

total 
£m 
(6,546)
67 
(123)
(6)
(402)
(6)
357 
(878)
–
(7,537)
(7,120)
(417)

2009 

total 
£m 
7,446 
(16)
305 
288 
6 
(357)
(270)
7,402 
35 

2009 

market  
value  
£m 

5,736 
1,107 
18 
8 
179 
7,048 

194 
136 
24 
354 

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. 

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18 post-RetiRement BeneFits (continueD)

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 £300m to its defined benefit schemes in 2011.

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 £259m. An equivalent movement in 
interest rates would increase the fair value of the assets by approximately £343m. 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 90 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 £119m. if the rate of increase in salaries were 0.5 per cent higher, scheme 
liabilities would increase by £132m.

the defined benefit obligation relating to post-retirement medical benefits would increase by £72m if the healthcare trend rate increases by one per 
cent, and reduce by £58m 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 £7m if the healthcare trend increases by one per cent, and reduce by £5m 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 obligations 
Fair value of scheme assets 
unrecognised surpluses 
minimum funding liabilities 
Deficit 

Experience gains/(losses) 
Actuarial gain/(losses) on scheme assets 
experience (losses)/gains on scheme liabilities 
movement in unrecognised surpluses 
Recognition of minimum funding liability on January 1, 2008 
movement in minimum funding liabilities 
total amount recognised in oci
cumulative amounts recognised in oci since January 1, 2004 

2010  
£m

(8,102)
8,217 
(635)
(336)
(856)

460 
(303)
(300)
–
49 
(94)
(192)

2009  
£m

(7,537)
7,402 
(335)
(385)
(855)

(270)
(878)
707 
–
40 
(401)
(98)

2008  
£m

(6,546)
7,446 
(1,042)
(425)
(567)

178 
766 
(928)
(491)
66 
(409)
303 

2007  
£m

(6,912)
6,903 
(114)
–
(123)

161 
350 
(112)
–
–
399 
712 

2006  
£m

(6,899)
5,906 
(2)
–
(995)

132 
470 
–
–
–
602 
313

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Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

19 shARe cApitAl 

Issued and fully paid 
At January 1, 2009
proceeds from shares issued for share option schemes
At January 1, 2010
proceeds from shares issued for share option schemes
At December 31, 2010

the rights attaching to each class of share are set out on page 78 and 79.

Non-equity 

Nominal  
value  
£m

–
–
–
–
–

Ordinary  
shares  
of 20p each 
Millions

1,844 
10 
1,854 
18
1,872 

Special  
Share  
of £1

1 
–
1 
–
1 

Equity 

Nominal  
value  
£m 

369 
2 
371 
3
374 

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.

20 shARe-BAseD pAyments

Effect of share-based payment transactions on the Group’s results and financial position

total expense recognised for equity-settled share-based payment transactions
total expense recognised for cash-settled share-based payment transactions
share-based payment expense recognised in the consolidated income statement
liability for cash-settled share-based payment expense

Share-based payment plans in operation during the year

2010  
£m
47 
3 
50 
5 

2009  
£m
30 
1 
31 
2 

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 (total shareholder 
Return – tsR) over a three-year period.

ShareSave share option plan (ShareSave)
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 cash-settled sharesave plans through arrangements 
which provide broadly comparable benefits to the uK plan. 

Executive Share Option Plan (ESOP)
this plan involved the grant of market value share options to participants. it terminated 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
A proportion of the ApRA annual incentive scheme 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. 

Further information regarding the operation of the plans can be found on pages 68 to 70 of the Directors’ remuneration report.

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126

Rolls-Royce Group plc Annual report 2010

 
 
 
Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

20 shARe-BAseD pAyments (continueD)

Movements in the Group’s share-based payment plans during the year 

outstanding at January 1, 2009
granted
Additional shares accrued from reinvestment of c shares
Forfeited
exercised
outstanding at December 31, 2009
exercisable at December 31, 2009

Outstanding at January 1, 2010
granted
Additional entitlements arising from tsR performance
Additional shares accrued from reinvestment of c shares
Forfeited
exercised
Outstanding at December 31, 2010
Exercisable at December 31, 2010

ShareSave
Weighted 
average 
exercise price
Pence
303 
387 
– 
352 
192 
384 
– 

384 
–
–
–
395 
366 
384 
–

Number
Millions
29.7 
11.9 
– 
(2.3)
(11.9)
27.4 
– 

27.4 
–
–
–
(0.8)
(0.1)
26.5 
–

ESOP
Weighted 
average 
exercise price
Pence 
177 
– 
– 
209 
213 
154 
154 

154 
–
–
–
–
190 
125 
125 

Number
Millions
2.1 
– 
– 
(0.2)
(0.7)
1.2 
1.2 

1.2 
–
–
–
–
(0.5)
0.7 
0.7 

PSP

APRA

Number
Millions
13.2 
10.1 
– 
(0.7)
(4.2)
18.4 
– 

18.4 
5.5 
0.6
–
(0.4)
(4.6)
19.5 
–

Number
Millions 
2.8 
2.3 
0.1 
(0.1)
(1.7)
3.4 
– 

3.4 
1.1 
–
0.1 
(0.1)
(1.4)
3.1 
–

As share options are exercised throughout the year, the weighted average share price during the year of 579p (2009 386p) is representative of the 
weighted average share price at the date of exercise. the closing share price at December 31, 2010 was 623p, (2009 483.5p).

the average remaining contractual life of exercisable options is 1.7 years (2009 2.1 years).

Share options outstanding

exercise price (pence)
At December 31, 2010
0 – 99
100 – 199
200 – 299
300 – 399
400 – 499

At December 31, 2009 
0 – 99
100 – 199
200 – 299
300 – 399
400 – 499

ShareSave
Weighted 
average 
remaining 
contractual 
life
Years

ESOP
Weighted 
average 
remaining 
contractual 
life
Years

Number
Millions

–
–
0.1 
3.2 
1.3 
2.0 

– 
– 
1.1 
4.2 
2.3 
2.9 

0.4 
0.1 
0.2 
–
–
0.7 

0.5 
0.2 
0.5 
– 
– 
1.2 

2.2 
1.2 
0.3 
–
–
1.7 

3.2 
1.7 
1.2 
– 
– 
2.1 

Number
Millions

–
–
4.5 
11.6 
10.4 
26.5 

– 
– 
4.6 
11.9 
10.9 
27.4 

Total
Weighted 
average 
remaining 
contractual 
life
Years

2.2 
1.2 
0.1 
3.2 
1.3 
1.9 

3.2 
1.7 
1.1 
4.2 
2.3 
2.9 

Number
Millions

0.4 
0.1 
4.7 
11.6 
10.4 
27.2 

0.5 
0.2 
5.1 
11.9 
10.9 
28.6 

the range of exercise prices of options outstanding at December 31, 2010 was between 77p and 416p (2009 77p and 416p). For sharesave it was 
between 298p and 416p (2009 298p and 416p) and for esop it was between 77p and 218p (2009 77p and 218p).

under the terms of the Rolls-Royce 1999 executive share option plan, options granted to 30 directors and senior executives were outstanding at 
December 31, 2010.

127

Rolls-Royce Group plc Annual report 2010

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Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

20 shARe-BAseD pAyments (continueD)

Fair values of share-based payment plans
the weighted average fair value per share of equity-settled share-based payment plans granted during the year, estimated at the date of grant,  
are as follows:

psp – 25% tsR uplift
psp – 50% tsR uplift
sharesave – 3 year grant
sharesave – 5 year grant
ApRA

in estimating these fair values, the following assumptions were used:

Weighted average share price
exercise price
expected dividends
expected volatility
correlation
expected life – psp
expected life – 3 year sharesave
expected life – 5 year sharesave
Risk free interest rate

2010
586p 
654p 
n/a 
n/a 
537p 

PSP

2009
260p 
n/a 
14.7p 
32%
35%
3 years 
n/a 
n/a 
1.9%

2009
253p 
282p 
144p 
167p 
290p 

ShareSave

2009
462p 
387p 
14.3p 
36%
n/a 
n/a 
3.3 – 3.8 years
5.3 – 5.8 years
2.4%

2010
545p 
n/a 
14.6p 
33%
35%
3 years
n/a
n/a
1.9%

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. expected 
dividends are based on the company’s payments to shareholders in respect of the previous year.

PSP 
the fair value of shares awarded under the psp is calculated using a pricing model that takes account of the non-entitlement to dividends (or 
equivalent) during the vesting period and the market-based performance condition, based on expectations about volatility and the correlation of, 
share price returns in the group of Ftse 100 companies 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
the fair value of the options granted under the sharesave plan is calculated using a binomial pricing model that assumes 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.

APRA
the fair value of shares awarded under ApRA is calculated as the share price on the date of the award, excluding expected dividends.

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128

Rolls-Royce Group plc Annual report 2010

 
 
Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

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

2010 
£m
82 
20 

92 
265 
215 
572 

2010 
£m
29 

3 
10 
3 
16 

2009 
£m
68 
24 

82 
182 
123 
387 

2009 
£m
22 

5 
11 
5 
21 

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 £23m (2009 £18m) and sublease receipts of £11m (2009 £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 £18m (2009 £14m) and sublease receipts expected to be received is 

£3m (2009 £4m).

Finance leases
Finance lease liabilities are payable as follows:

Between one and five years

Payments 
£m
1 

Interest 
£m
–

2010
Principal 
£m
1 

payments 
£m
1 

interest 
£m
–

2009
principal 
£m
1 

there were no contingent rents recognised as an expense in the year or prior year and there are no minimum sublease receipts under non-cancellable 
subleases (2009 £4m).

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129

Rolls-Royce Group plc Annual report 2010

 
 
 
Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

22 contingent liABilities AnD contingent Assets

in connection with the sale of its products the group will, on some occasions, provide financing support for its customers. the group’s contingent 
liabilities 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 security 1
contingent liabilities net of relevant security reduced by 20% 2
1 security includes unrestricted cash collateral of:

£m
633 
121 
200 
68 

2010

$m
991 
190 
314 
106 

£m
704
134
233
77

2009

$m
1,137
217
376
124

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 be precisely 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.

in 2010, the launch nations reconfirmed their commitment to the A400m programme; however, the launch nations and Airbus remain in final 
negotiations to modify the existing agreement. epi and Airbus are simultaneously in negotiations to modify their agreement in support of the  
A400m. the timing and outcome of these negotiations, and their possible impact on epi and the group, therefore remain uncertain. in the event  
that the programme were cancelled, at December 31, 2010, the group’s balance sheet did not include any net assets that would require impairment 
(2009 £17m).

As noted on page 81 of the business review, Rolls-Royce has commenced an action in respect of its swept fan blade patent. subsequent proceedings 
have commenced against Rolls-Royce alleging patent infringement. it is not possible, at this stage, to estimate the amount of any damages which 
might be awarded in favour of, or against, Rolls-Royce.

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130

Rolls-Royce Group plc Annual report 2010

 
 
Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

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
other income received from joint ventures and associates

2010 
£m
2,681 
(2,163)
(58)
43 
68 
12 
79 

2009 
£m
2,136 
(1,900)
(45)
15 
77 
7 
52 

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 56 to 58. Remuneration 
for key management personnel is shown below:

salaries and short-term benefits 
post-retirement schemes 
share-based payments 

2010  
£m
13
2
8
23

2009  
£m
11 
2 
4 
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 67 to 77.

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131

Rolls-Royce Group plc Annual report 2010

 
 
Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

24 Acquisitions AnD DisposAls

on April 7, 2010, the group acquired 67 per cent of the issued share capital, of oDim AsA (oDim). together with the 33 per cent of the issued share 
capital already held, this gave Rolls-Royce control of 100 per cent of oDim. oDim is a norwegian marine technology company which develops and 
sells advanced automated handling systems for seismic and offshore vessels. oDim’s technology and unique subsea and deepwater capability 
complement the group’s existing activities. integrating oDim’s innovative technology and highly skilled people into the  
group will optimise the group’s offering and provide the global customer base with a wider range of products and services in this important  
market segment. 

Recognised amounts of identifiable assets acquired and liabilities assumed

intangible assets – software and other
property, plant and equipment
inventories
trade and other receivables
cash and cash equivalents
trade and other payables
current tax liabilities
Borrowings
Deferred tax liabilities
provisions
Total identifiable assets and liabilities
goodwill arising
Total consideration

Satisfied by:
cash consideration
existing 33 per cent shareholding

Net cash outflow arising on acquisition:
cash consideration
less: cash and cash equivalents acquired
cash outflow per cash flow statement

Identifiable intangible assets comprise:
technology, patents and licenses
customer relationships
other

ODIM  
£m
96 
24 
16 
57 
12 
(46)
(3)
(1)
(32)
(2)
121 
115
236

159
77
236

Other 
£m
– 
– 
– 
– 
– 
– 
– 
– 
– 
–
–
3 
3 

3 
–
3 

Total 
£m
96 
24 
16 
57 
12 
(46)
(3)
(1)
(32)
(2)
121 
118 
239 

162 
77 
239

162 
(12)
150 

45 
46 
5 
96 

the fair value of the group’s 33 per cent interest in oDim before the acquisition was £77m. the group recognised a gain of £3m as a result of 
remeasuring this interest, which is included in the share of results of joint ventures and associates in the consolidated income statement for the year 
ended December 31, 2010. 

the goodwill arising on the acquisition of oDim amounting to £115m (which is not tax-deductible) consists of anticipated synergies and the 
assembled workforce. the synergies principally arise from:
•  increases in revenue from the combination of the routes to market; and
•  cost savings from the combination of the supply chain and central functions.

the gross contractual value of trade and other receivables acquired is £58m. At the acquisition date, it is estimated that contractual cash flows of  
£1m will not be collected.

Acquisition related costs (included in commercial and administrative costs) in the consolidated income statement for the year ended  
December 31, 2010, amounted to £2m.

132

Rolls-Royce Group plc Annual report 2010

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Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued

24 Acquisitions AnD DisposAls (continueD)

the acquisition of the controlling interest in oDim contributed £205m of revenue and a £16m loss before tax (including amortisation of intangible 
assets arising on acquisition) to the group’s results for the period between the date of acquisition and December 31, 2010.

if the acquisition of oDim had been completed on January 1, 2010, the group’s revenues and profit before tax would have been £11,132m and £696m 
respectively.

During the year the group disposed of its interests in a number of small businesses, as summarised below:

inventories
provisions for liabilities and charges
net assets
profit on disposal of businesses
proceeds deferred at December 31, 2010
Disposal proceeds
Receipt of proceeds deferred at December 31, 2009
cash inflow per cash flow statement

133

Rolls-Royce Group plc Annual report 2010

Total 
£m
4
(4)
–
4
(4)
–
2
2

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company Financial statements

COMPANY BAlANCe SheeT
AT DeCeMBer 31, 2010 

Fixed assets 
Investments – subsidiary undertakings 
Current assets 
Amounts owed by subsidiary undertakings due within one year
Cash at bank

Creditors – amounts falling due within one year 
Financial liabilities
Bank loans
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
Capital redemption reserves
Other reserve
Own shares reserve
Profit and loss account
Total shareholders’ funds 

Notes

2010  
£m

2009  
£m

2

3

4
5
5
5
5
5

2,274

2,261 

250
1
251

(23)
(67)
–
(90)
161
2,435
2,435

374 
133 
986 
144 
(126)
924 
2,435 

–
2 
2 

(13)
-
(71)
(84)
(82)
2,179 
2,179 

371 
98 
968 
108 
(27)
661 
2,179 

The financial statements on pages 134 to 136 were approved by the Board on February 9, 2011 and signed on its behalf by:

Sir Simon Robertson Chairman   

Andrew Shilston Finance Director

reCONCIlIATION OF MOveMeNTS IN ShArehOlDerS’ FuNDS 
FOr The YeAr eNDeD DeCeMBer 31, 2010

At January 1 
Profit for the year 
Proceeds from shares issued for share option schemes
Issue of C Shares 
Ordinary shares purchased 
Share-based payments – direct to reserves 
At December 31 

134

Rolls-Royce Group plc Annual report 2010

2010  
£m
2,179 
549 
67 
(277)
(124)
41 
2,435 

2009  
£m
2,397 
–
18 
(263)
(17)
44 
2,179 

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notes to the company Financial statements

NOTeS TO The COMPANY FINANCIAl STATeMeNTS

1 ACCOuNTINg POlICIeS

Basis of accounting
The financial statements have been prepared in accordance with applicable uK Accounting Standards on the historical cost basis.

As permitted by section 408 of the Companies Act 2006, a separate profit and loss account for the Company has not been included in these financial 
statements. As permitted by the audit fee disclosure regulations, disclosure of non-audit fees 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 
disclosures, no related party disclosures in respect of transactions between the Company and its wholly owned subsidiaries 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 67 to 77, 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, 2010
Cost of share-based payments in respect of employees of subsidiary undertakings less receipts from subsidiaries in respect of those payments
At December 31, 2010 

3 FINANCIAl lIABIlITIeS 

C Shares
Movements in C Shares during the year were as follows: 

Issued and fully paid 
At January 1, 2010
Shares issued 
Shares redeemed 
At December 31, 2010

The rights attaching to C Shares are set out on page 78.

135

Rolls-Royce Group plc Annual report 2010

C Shares  
of 0.1p  
Millions 

12,577 
278,115 
(267,312)
23,380 

£m 

2,261 
13
2,274

Nominal  
value  
£m 

13 
278 
(267)
23 

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notes to the company Financial statements – continued

4 ShAre CAPITAl

Issued and fully paid 
At January 1, 2010
Proceeds from shares issued for share option schemes 
At December 31, 2010 

The rights attaching to each class of share are set out on page 78.

Non-equity 

Nominal  
value  
£m 

–
–
–

Ordinary  
shares of  
20p each  
Millions 

1,854 
18 
1,872 

Equity 

Nominal  
value  
£m 

371 
3 
374 

Special Share  
of £1

1 
–
1 

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, 2010
Profit for the year 
Proceeds from shares issued for share option schemes
Issue of C Shares4
redemption of C Shares 
Ordinary shares purchased 
Ordinary shares vesting in share-based payment plans 
Share-based payments – direct to reserves 
At December 31, 2010

Non-distributable reserves 

Share  
capital 
£m
371 
–
3 
–
–
–
–
–
374 

Share 
premium  
£m
98 
–
64 
(29)
–
–
–
–
133 

Capital 
redemption 
reserves1 
£m
968 
–
–
(249)
267 
–
–
–
986 

Other  
reserve2 
£m
108 
–
–
–
–
–
–
36 
144 

Own  
shares 
reserve3
£m
(27)
–
–
–
–
(124)
25 
–
(126)

Profit 
and loss  
account  
£m
661 
549 
–
1 
(267)
–
(25)
5 
924 

Total 
£m
2,179 
549 
67 
(277)
–
(124)
–
41 
2,435 

1 Capital redemption reserves comprised £986m (2009 £719m) of capital redemption reserve (arising on the redemption of B and C Shares) and nil (2009 £249m) of capital reserve (which arose on the 

conversion of B shares).

2 The ‘Other reserve’ represents the value of share-based payments in respect of employees of subsidiary undertakings for which payment has not been received.

3 At December 31, 2010, 28,320,962 shares (2009 7,156,197) with a net book value of £126m (2009 £27m) were held.

4 C Shares issued during the year were paid up out of the capital reserve and out of the share premium arising on the issue of ordinary shares.

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, 2010, these guarantees amounted to £1,809m (2009 £1,876m).

7 OTher INFOrMATION

Emoluments of directors
The remuneration of the directors of the Company is shown in the Directors’ remuneration report on pages 67 to 77.

Employees
The Company had no employees in 2010 and 2009.

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.

136

Rolls-Royce Group plc Annual report 2010

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PrINCIPAl SuBSIDIArY uNDerTAKINgS
AT DeCeMBer 31, 2010 

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

rolls-royce Brasil limitada 

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 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.

Industrial gas turbines and aero engine repair and overhaul, energy and 
marine aftermarket support services
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 life-cycle 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
Aero engine parts manufacturing and engine assembly, energy and 
marine aftermarket support services
Manufacture of marine propeller systems
Instrumentation and control systems and life-cycle 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.

137

Rolls-Royce Group plc Annual report 2010

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% of 
class held

20

22

100
–
100
–

}
}
100  }

–
50

–
100
–
100
100
–
–
100
–
100
40
37.5

}
}
}
}
}
}

% of total  
equity held
20

22

50

51

50

50

50

50

50

49.5

50

40

other matters

PrINCIPAl JOINT veNTureS
AT DeCeMBer 31, 2010 

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

Class
Ordinary

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

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other matters

PrINCIPAl JOINT veNTureS
AT DeCeMBer 31, 2010 

JOINT veNTureS

INCOrPOrATeD OverSeAS – INDIreCTlY helD

China

germany

germany

germany

germany

hong Kong

India

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
International Aerospace Manufacturing Private limited
Manufacture of compressor shrouds, compressor rings, turbine blades and 
nozzel guide vanes
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, Alpha leasing (uS) (No.6) llC, 
Alpha leasing (uS) (No.7) 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 
Texas Aero engine Services, llC
Aero engine repair and overhaul
Williams-rolls Inc. (uK & uS)
Small aero engine collaboration

Class

Ordinary

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

uNINCOrPOrATeD OverSeAS – helD BY SuBSIDIArY uNDerTAKINg
light helicopter Turbine engine Company (lhTeC)
uS
rolls-royce Corporation has a 50 per cent interest in this unincorporated 
partnership which was formed to develop and market jointly the T800 engine

The countries of principal operations are stated in brackets after the name of the company, if not the country of incorporation.

139

Rolls-Royce Group plc Annual report 2010

% of  
class held

% of total  
equity held

49

28

33

49

28

33

33.3

33.3

}

50

45

50

50
50

49

50

30

46.9
100
–
–
–

50

17.6

40

50

15

50

45

50

50

49

50

30

46.9

32.5

–

–

–

–

15

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other matters

INDePeNDeNT AuDITOr’S 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, 2010, set out on pages 84 to 139. 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 81, 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, and express an opinion on, 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, 2010 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 81 in relation to going concern;
•  the part of the corporate governance statement on page 56 relating to the Company’s compliance with the nine provisions of the June 2008 

Combined Code specified for our review; and

•  certain elements of the Directors’ remuneration report.

A J Sykes (Senior Statutory Auditor)
for and on behalf of KPMg Audit Plc, Statutory Auditor
Chartered Accountants
15 Canada Square
london
e14 5gl
February 9, 2011

140

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grOuP FIve-YeAr revIeW
FOr The YeArS eNDeD DeCeMBer 31

Income statement
Revenue
Profit before net research and development and share of results of joint ventures  
and associates
research and development (net) 1 
Share of results of joint ventures and associates
Profit before financing
Net financing
Profit/(loss) before taxation 2 
Taxation
Profit/(loss) for the year

Attributable to:
Ordinary shareholders
Non-controlling interests
Profit/(loss) for the year

1 research and development (gross)
2 underlying profit before taxation

Earnings per ordinary share:
underlying
Basic

2010 
£m
11,085 

2009 
£m
10,414 

1,463 
(422)
93 
1,134 
(432)
702 
(159)
543 

539 
4 
543 

(923)
955 

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 

38.73p 
29.20p 

39.67p 
120.38p 

36.70p 
(73.63p)

34.06p 
33.67p 

29.81p 
57.32p 

Payments to shareholders per ordinary share

16.0p

15.0p 

14.3p 

13.0p 

9.59p 

2010 
£m
16,234 
(12,255)
3,979 

2009 
£m
15,422 
(11,640)
3,782 

2008 
£m
15,348 
(13,123)
2,225 

374 
3,601 
3,975 
4 
3,979 

2010 
£m
1,378 
(759)
(743)
(124)

1,533 

371 
3,411 
3,782 
–
3,782 

2009 
£m
859 
(606)
384 
637 

1,275 

369 
1,847 
2,216 
9 
2,225 

2008 
£m
1,015 
(645)
(221)
149 

1,458 

2007 
£m
11,459 
(7,910)
3,549 

364 
2,815 
3,179 
12 
3,191 

2007 
£m
705 
(572)
(473)
(340)

888 

2006 
£m
10,798 
(8,073)
2,725 

356 
2,362 
2,718 
7 
2,725 

2006 
£m
1,072 
(469)
(122)
481 

826 

Balance Sheet
Assets
liabilities

Called-up share capital
reserves
equity attributable to ordinary shareholders
Non-controlling interests

Cash flow
Cash inflow from operating activities
Cash outflow from investing activities
Cash (outflow)/inflow from financing activities
(Decrease)/increase in cash and cash equivalents 

Net funds

141

Rolls-Royce Group plc Annual report 2010

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ShArehOlDer INFOrMATION

Financial calendar 2011–2012
ex entitlement to C Shares
record date for entitlement to C Shares
AgM, Queen elizabeth II Conference Centre, london
record date for dividend payable on C Shares
Deadline for receipt of C Share elections
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
2011 Financial year end
Allotment of C Shares
Payment of C Share redemption monies
Purchase of ordinary shares for CrIP participants
Preliminary announcement – 2011 full year results
2011 Annual report published

April 20, 2011
April 26, 2011
11.00am May 6, 2011
June 3, 2011
5.00pm June 6, 2011
July 1, 2011
July 5, 2011
By July 12, 2011
July 28, 2011
October 26, 2011
October 28, 2011
5.00pm December 5, 2011
December 31, 2011
January 3, 2012
January 5, 2012
By January 13, 2012
February, 2012
March, 2012

On February 10, 2011 the Company announced its intention to establish 
a new, non-trading, holding company, by way of a scheme of 
arrangement (Scheme). If shareholder approval is given at the 
Company’s AgM and subsequent Court meeting, the Scheme will come 
into effect on May 23, 2011 and new share certificates will be dispatched 
on May 31, 2011. The Company will continue to make payment to 
shareholders in the form of C Shares.

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.

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other matters

ShArehOlDer INFOrMATION (CONTINueD)

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  

0845 606 1234 and for overseas callers telephone +44 20 7066 1000 or 
visit www.moneymadeclear.fsa.gov.uk; and

•  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.

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Share dealing service
Our registrar offers both internet and telephone dealing services. You 
can deal over the telephone or 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.

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. Before 
selling your shares, via either internet or telephone dealing, you 
must ensure that you have a valid share certificate. If you are 
unsure as to the validity of your share certificate you should contact  
the registrar.

Share price
You can obtain the current market price of the Company’s shares on our 
website at www.rolls-royce.com or 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
under the provisions of the Companies Act 1985, the Company was 
legally obliged to supply the names and addresses of its members to 
certain organisations on request. This provision is no longer an 
obligation under the Companies Act 2006. however, as a result of the 
Companies Act 1985, 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.

143

Rolls-Royce Group plc Annual report 2010

 
 
other matters

ShArehOlDer INFOrMATION (CONTINueD)

Dividends paid on C Shares held

C Share calculation period
July 1, 2010 – December 31, 2010
January 1, 2010 – June 30, 2010 
July 1, 2009 – December 31, 2009
January 1, 2009 – June 30, 2009

Previous C Share issues

Dividend rate (%)
0.381
0.314
1.055
1.110

record date for C Share 
dividend
November 19, 2011
June 5, 2010
November 20, 2009
June 5, 2009

Payment date 
January 4, 2011
July 1, 2010
January 4, 2010
July 1, 2009

Apportionment values

CgT apportionment  

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a
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F

i

 record date for 
entitlement to  
C Shares

No of  
C Shares 
issued per 
latest date for  
ordinary 
receipt of election 
share 
forms by registrar
64.0 October 29, 2010 December 3, 2010
90.0
June 4, 2010
60.0 October 30, 2009 December 4, 2009
85.8
June 5, 2009
57.2 October 31, 2008 December 5, 2008

April 24, 2009

April 23, 2010

Price of 
ordinary 
shares on 
first day of 
trading (p) 
634.500
534.750
486.250
366.500
343.125

value of  
C Share 
issues per 
ordinary 
share (p) 
6.40
9.00
6.00
8.58
5.72

Ordinary 
shares 
(%) 
99.00
98.34
98.78
97.71
98.36

Issue date
January 4, 2011
July 1, 2010
January 4, 2010
July 2, 2009
January 2, 2009

Date of 
redemption of  

C Shares 
(%)

C Shares CrIP purchase date
1.00 January 5, 2011 January 7, 2011
1.66
July 2, 2010
1.22 January 5, 2010 January 8, 2010
2.29
July 3, 2009
1.64 January 5, 2009 January 6, 2009

July 2, 2010 

July 2, 2009

CrIP 
purchase 
price (p)
661.120
548.010
491.970
367.628
362.240

Analysis of ordinary shareholders at December 31, 2010

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

Number of 
shareholders
220,219
5,591
225,810

% of total 
shareholders
97.52
2.48
100.00

69,061
117,382
37,465
1,314
391
197
225,810

30.58
51.98
16.59
0.58
0.17
0.10
100.00

Number of 
shares
115,152,937
1,756,626,264
1,871,779,201

6,908,768
30,711,715
61,469,806
34,925,943
140,271,264
1,597,491,705
1,871,779,201

% of total shares
6.15
93.85
100.00

0.37
1.64
3.28
1.87
7.49
85.35
100.00

144

Rolls-Royce Group plc Annual report 2010

 
 
 
 
 
 
BUSIneSS reVIew

01   Introduction and 

highlights

02  Chairman’s statement
04  Chief Executive’s review
08  Our consistent strategy
20  Market outlook
22   Key performance 

indicators

26   Principal risks and 
uncertainties

28  Review of operations
28  civil aerospace
30  defence aerospace
32  marine
34  energy
36   engineering and 
technology
38  operations
40  Services
42  Sustainability
48  Finance Director’s review

goVernAnce

56  Chairman’s introduction
56  Board of directors
58   The Group Executive 
58  The International  
Advisory Board

59  Governance structure
62  Audit committee report
63  Nominations committee 

report

63  Ethics committee report
64  Risk committee report
67  Directors’ remuneration 

report

78  Shareholders and  

share capital

80  Other statutory information
81  Material litigation
81   Annual report and  
financial statements

FInAncIAl STATemenTS

Contents listed on page 83

Directors’ report
The directors present the Annual 
report for the year ended december 
31, 2010 which includes the business 
review, governance report 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 82, 
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. 

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 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.

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TeAmwork
And Technology

Rolls-Royce Group plc
Annual report 2010

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© Rolls-Royce plc 2011

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

Trusted to deliver excellence