TeAmwork
And Technology
Rolls-Royce Group plc
Annual report 2010
R
o
l
l
s
-
R
o
y
c
e
G
r
o
u
p
p
l
c
A
n
n
u
a
l
r
e
p
o
r
t
2
0
1
0
© 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)
.
7
6
1
.
1
7
1
.
7
8
1
.
3
1
2
.
4
4
2
.
1
6
2
.
9
5
4
.
5
5
5
.
3
8
5
.
2
9
5
£bn
60
40
20
0
8
2
3
6
,
8
8
7
5
,
5
4
6
5
,
7
4
9
5
,
8
5
4
6
,
3
5
3
7
,
7
1
8
7
,
7
4
1
9
,
8
0
1
0
1
,
6
6
8
0
1
,
£m
12,000
8,000
4,000
0
01
02
03
04
05
06
07
08
09
10
01
02
03
04
05
06
07
08
09
10
PROFIT BEFORE FINANCING (£m)
UNDERLYING PROFIT BEFORE TAX (£m)
1
1
3
2
1
2
0
7
2
7
1
4
7
7
8
3
9
6
2
1
5
2
6
8
2
7
1
1
,
4
3
1
1
,
£m
1,200
800
400
0
£m
1,200
800
400
0
5
7
4
5
5
2
5
8
2
4
6
3
3
9
5
5
0
7
0
0
8
0
8
8
5
1
9
5
5
9
01
02
03
04
05
06
07
08
09
10
01
02
03
04
05
06
07
08
09
10
UNDERLYING EARNINGS PER ORDINARY SHARE (p)
PAYMENTS TO SHAREHOLDERS (p)
0
2
0
2
.
0
1
1
1
.
0
2
2
1
.
2
6
5
1
.
8
4
4
2
.
1
8
9
2
.
6
0
4
3
.
0
7
6
3
.
7
6
9
3
.
3
7
8
3
.
p
40
30
20
10
0
8
1
8
.
8
1
8
.
8
1
8
.
8
1
8
.
2
7
8
.
9
5
9
.
0
0
3
1
.
0
3
4
1
.
0
0
5
1
.
0
0
6
1
.
p
16
12
8
4
0
01
02
03
04
05
06
07
08
09
10
01
02
03
04
05
06
07
08
09
10
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)
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
£m
01
2
1
3
0
Rolls-Royce Group plc annual report 2010
1
2
1
0
2
7
6
5
8
4
1
1
1
0
0
5
600
400
200
0
11
12
13
14
15
16
17
18
19
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
Business review
ChIeF exeCutIVe’S
ReVIew
“ Rolls-Royce has maintained
progress. our financial
position was further
strengthened in 2010.”
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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,
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
06
Rolls-Royce Group plc annual report 2010
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
07
Rolls-Royce Group plc annual report 2010
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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)
6
3
6
0
9
5
9
1
6
1
0
6
3
6
6
7
4
7
4
2
8
5
8
8
4
6
8
3
2
9
£m
1,000
800
600
400
200
0
3
4
4
2
,
6
3
5
2
,
0
0
8
2
,
1
5
2
3
,
7
5
4
3
,
1
0
9
3
,
5
6
2
4
,
5
5
7
4
,
7
2
9
4
,
4
4
5
5
,
£m
6,000
4,500
3,000
1,500
0
01
02
03
04
05
06
07
08
09
10
01
02
03
04
05
06
07
08
09
10
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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)
6
3
6
0
9
5
9
1
6
1
0
6
3
6
6
7
4
7
4
2
8
5
8
8
4
6
8
3
2
9
£m
1,000
800
600
400
200
0
3
4
4
2
,
6
3
5
2
,
0
0
8
2
,
1
5
2
3
,
7
5
4
3
,
1
0
9
3
,
5
6
2
4
,
5
5
7
4
,
7
2
9
4
,
4
4
5
5
,
£m
6,000
4,500
3,000
1,500
0
01
02
03
04
05
06
07
08
09
10
01
02
03
04
05
06
07
08
09
10
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.
09
Rolls-Royce Group plc Annual report 2010
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
10
Rolls-Royce Group plc Annual report 2010
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
11
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
12
Rolls-Royce Group plc Annual report 2010
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
14
14
Rolls-Royce Group plc Annual report 2010
Rolls-Royce Group plc Annual report 2010
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
15
15
Rolls-Royce Group plc Annual report 2010
Rolls-Royce Group plc Annual report 2010
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
BUSINESS REVIEw
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
17
17
Rolls-Royce Group plc Annual report 2010
Rolls-Royce Group plc Annual report 2010
MAIN IMAGE
servicing of an
azimuth thruster.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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$50 billion. While the oil and gas
market is large and growing, demand for aero-derivative gas turbines
in the power generation segment is twice that of oil and gas.
20
Rolls-Royce Group plc Annual report 2010
Note: A long-term conversion rate has been used where necessary in
order to present all figures in US$.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
f
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
f
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
12,000
8,000
4,000
0
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
f
i
1,200
800
400
0
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
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
r
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
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
f
i
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
n
o
r
i
v
n
e
s
s
e
n
s
u
B
i
competitive
pressures
export controls
i
c
g
e
t
a
r
t
s
government
spending
global resource
capability
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
f
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
Rolls-Royce Group plc Annual report 2010
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.
i
f
n
a
n
c
a
l
i
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.
o
p
e
r
a
t
o
n
a
l
i
• 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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
f
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
“ 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%
23%
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
Rolls-Royce Group plc Annual report 2010
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
“ 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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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%
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
1
1
1
1
3
3
2
2
3
3
2
2
“ 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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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%
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
2
2
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
2
2
1
1
1
1
3
3
3
3
1
1
1
1
3
3
2
2
3
3
2
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%
12%
25%
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
“ 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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
36
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
38
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
Rolls-Royce Group plc Annual report 2010
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
40
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
Rolls-Royce Group plc Annual report 2010
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
42
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
Business review
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
r
u
b
l
e
u
f
r
o
2
O
C
%
0
-5
-10
-15
-20
Trent 500
Trent 900
Trent 1000
Trent XWB
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
2000
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
C
e
v
i
t
a
l
e
r
%
-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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
Business review
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
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
e
c
n
a
n
r
e
v
o
G
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)
l
s
e
e
y
o
p
m
e
0
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)
e
2
O
C
s
e
n
n
o
T
o
l
i
K
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
e
t
a
t
s
l
a
i
c
n
a
n
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
C
s
e
n
n
o
T
o
l
i
K
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
C
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
e
e
y
o
l
p
m
e
0
0
1
r
e
p
e
t
a
R
I
R
T
e
2
O
C
s
e
n
n
o
T
o
l
i
K
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
e
e
y
o
l
p
m
e
0
0
1
r
e
p
e
t
a
R
I
R
T
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
Business review
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
.
3
1
2
.
4
4
2
.
1
6
2
.
9
5
4
.
5
5
5
.
3
8
5
.
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
7
2
2
6
8
1
1
3
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
7
1
1
4
3
1
1
400
800
06
07
01
09
08
04
03
10
02
0
,
,
8
2
3
6
,
8
8
7
5
,
5
4
6
5
,
7
4
9
5
,
8
5
4
6
,
3
5
3
7
,
7
1
8
7
,
7
4
1
9
,
8
0
1
0
1
,
6
6
8
,
0
1
£m
12,000
8,000
4,000
0
01
02
03
04
05
06
07
08
09
10
UNDERLYING PROFIT BEFORE TAX (£m)
£m
1,200
800
400
0
5
7
4
5
5
2
5
8
2
4
6
3
3
9
5
5
0
7
0
0
8
0
8
8
5
1
9
5
5
9
01
02
03
04
05
06
07
08
09
10
.
.
.
.
.
.
p
2
6
5
1
0
2
2
1
8
4
4
2
0
1
1
1
1
8
9
2
0
2
0
2
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
6
0
4
3
0
7
6
3
3
7
8
3
7
6
9
3
10
07
09
04
01
06
02
03
.
.
.
.
PAYMENTS TO SHAREHOLDERS (p)
p
16
12
8
4
0
8
1
8
.
8
1
8
.
8
1
8
.
8
1
8
.
2
7
8
.
9
5
9
.
.
0
0
3
1
.
0
3
4
1
.
0
0
5
1
0
0
.
6
1
01
02
03
04
05
06
07
08
09
10
MATURITY PROFILE OF THE GROUP DEBT COMMITMENTS (£m)
7
6
5
1
2
3
1
1
0
2
8
4
1
0
2
1
1
0
0
5
£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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
Business review
• 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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
Business review
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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,
52
Rolls-Royce Group plc Annual report 2010
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
53
Rolls-Royce Group plc Annual report 2010
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
55
Rolls-Royce Group plc Annual report 2010
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
Rolls-Royce Group plc Annual report 2010
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
58
Rolls-Royce Group plc Annual report 2010
governance
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
59
Rolls-Royce Group plc Annual report 2010
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
60
Rolls-Royce Group plc Annual report 2010
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
61
Rolls-Royce Group plc Annual report 2010
governance
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
62
Rolls-Royce Group plc Annual report 2010
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
63
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
67
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.
68
Rolls-Royce Group plc Annual report 2010
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
governance
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
70
Rolls-Royce Group plc Annual report 2010
governance
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.
71
Rolls-Royce Group plc Annual report 2010
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
governance
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.
72
Rolls-Royce Group plc Annual report 2010
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
governance
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.
73
Rolls-Royce Group plc Annual report 2010
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
governance
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
74
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
–
–
–
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
governance
‘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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
75
Rolls-Royce Group plc Annual report 2010
governance
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
Rolls-Royce Group plc Annual report 2010
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
Rolls-Royce Group plc Annual report 2010
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
79
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
81
Rolls-Royce Group plc Annual report 2010
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
g
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
97
Rolls-Royce Group plc Annual report 2010
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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)
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
1 charged to cost of sales except development costs, which are charged to research and development costs.
104
Rolls-Royce Group plc Annual report 2010
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
105
Rolls-Royce Group plc Annual report 2010
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
Rolls-Royce Group plc Annual report 2010
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
112
Rolls-Royce Group plc Annual report 2010
Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
113
Rolls-Royce Group plc Annual report 2010
Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued
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.
114
Rolls-Royce Group plc Annual report 2010
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued
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
–
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
115
Rolls-Royce Group plc Annual report 2010
Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
116
Rolls-Royce Group plc Annual report 2010
Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
117
Rolls-Royce Group plc Annual report 2010
Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued
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
118
Rolls-Royce Group plc Annual report 2010
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued
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
119
Rolls-Royce Group plc Annual report 2010
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
Rolls-Royce Group plc Annual report 2010
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
121
Rolls-Royce Group plc Annual report 2010
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)
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued
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
Rolls-Royce Group plc Annual report 2010
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued
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.
124
Rolls-Royce Group plc Annual report 2010
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
Notes to the CoNsolidated FiNaNCial statemeNts – CoNtiNued
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
125
Rolls-Royce Group plc Annual report 2010
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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).
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
other matters
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
% 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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
138
Rolls-Royce Group plc Annual report 2010
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
Rolls-Royce Group plc Annual report 2010
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
other matters
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
other matters
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
142
Rolls-Royce Group plc Annual report 2010
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.
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
F
i
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
i
w
e
v
e
r
s
s
e
n
i
s
u
B
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
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.
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®.
TeAmwork
And Technology
Rolls-Royce Group plc
Annual report 2010
R
o
l
l
s
-
R
o
y
c
e
G
r
o
u
p
p
l
c
A
n
n
u
a
l
r
e
p
o
r
t
2
0
1
0
© 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