Rolls-Royce Holdings plc
Annual report 2011
Trusted to deliver excellence
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© Rolls-Royce plc 2012
Rolls-Royce Holdings plc
Registered office:
65 Buckingham Gate
London
SW1E 6AT
T +44 (0)20 7222 9020
www.rolls-royce.com
Company number 7524813
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Contents
Civil aerospace
Defence aerospace
p18
p20
Marine
Energy
p22
p24
Technology
Operations
p26
p28
Visit Rolls-Royce online
Below are some examples of the type of information
and services available:
The Group’s business
Governance
Sustainability
News/updates
People
Investors
Heritage
www.rolls-royce.com/investors
Business review
Introduction
1
2 Chairman’s statement
4 Chief Executive’s review
6 Our business model and strategy
8 Our business segments
9 Market opportunities
10 Key performance indicators
14 Finance Director’s review
18 Civil aerospace
20 Defence aerospace
22 Marine
24 Energy
26 Excellence in technology
28 Excellence in operations
30 Sustainability
34 Principal risks and uncertainties
36 Additional financial information
Governance
38 Board of directors
40
International Advisory Board
40 The Group Leadership Team
41 Chairman’s introduction
42 UK Corporate Governance Code
46 Audit committee report
48 Nominations committee report
50 Ethics committee report
51 Risk committee report
52
55 Directors’ remuneration report
66 Shareholders and share capital
68 Other statutory information
Remuneration committee report
Financial statements
Contents listed on page 71
Other matters
122 Subsidiaries, jointly controlled
entities and associates
125 Independent Auditor’s report
126 Group five-year review
127 Shareholder information
129 Glossary
Directors’ report
The Directors’ report which includes the
Business review is set out on pages 1 to 70.
Forward-looking statements
This Annual report contains forward-
looking statements. Any statements
that express forecasts, expectations and
projections are not guarantees of future
performance and will not be updated.
By their nature, these statements involve
risk and uncertainty, and a number of
factors could cause material differences
to the actual results or developments.
This report is intended to provide
information to shareholders, is not designed
to be relied upon by any other party, or for
any other purpose and the Company and
its directors accept no liability to any other
person other than under English law.
129
Glossary
Glossary
ABC
ABI
ACARE
ADR
ADVENT
AEBS
AFRL
AGM
ANA
APB
APRA
ASD
BDI
BIS
BitC
CAD
CDP
CEO
CGU
CO2
CPI
CPS
CRIP
DJSI
EASA
EFE
EPS
ESOP
EU
FSA
GBP
GDP
GHG
GLT
HR
HS&E
I&C
IAB
IAE
IAS
IASB
IFBEC
IFRIC
Anti-bribery and corruption
Association of British Insurers
Advisory Council for Aviation Research and
Innovation in Europe
American Depositary Receipts Programme
Adaptive Versatile Engine Technology
All-Employee Bonus Scheme
US Air Force Research Lab
Annual General Meeting
All Nippon Airways
Auditing Practices Board
Annual Performance Related Award plan
Aerospace and Defence Industries Association of Europe
Federation of German Industries
Department for Business, Innovation and Skills
Business in the Community Corporate Responsibility Index
Canadian dollar
Carbon Disclosure Project
Chief Executive Officer
Cash-generating unit
Carbon dioxide
Consumer Price Index
Cash flow per share
C Share Reinvestment Plan
Dow Jones Sustainability World and European Indexes
European Aviation Safety Agency
Environmentally Friendly Engine
Earnings per ordinary share
Executive Share Option Plan
European Union
Financial Services Authority
Great British pound or pound sterling
Gross domestic product
Greenhouse gas
Group Leadership Team
Human Resources
Health, Safety and Environment
Instrumentation and control
International Advisory Board
IAE International Aero Engines AG
International Accounting Standards
International Accounting Standards Board
International Forum on Business Ethical Conduct
International Financial Reporting Interpretations Committee
International Financial Reporting Standards
IFRS
Integrated Vehicle Energy Technology
INVENT
Integrated Power and Thermal Management System Development
IPTMSD
International Standards Organisation
ISO
Liability-driven investment
LDI
London Inter-bank Offered Rate
LIBOR
Limited Liability Partnership
LLP
Long-Term Service Agreement
LTSA
UK Ministry of Defence
MoD
Memorandum of Understanding
MoU
Megawatt hours
MWh
North Atlantic Treaty Organisation
NATO
Nitrogen oxides
NOx
Other comprehensive income
OCI
Original Equipment
OE
Organisation for Economic Cooperation and Development
OECD
Over-the-counter
OTC
Political Action Committee
PAC
Product Introduction and Lifecycle Management
PILM
Public Limited Company
PLC
Performance Share Plan
PSP
Pressurised Water Reactor
PWR
Research and Development
R&D
Research and Technology
R&T
RCF
Revolving credit facility
Registrar Computershare Investor Services PLC
Rolls-Royce North America
RRNA
Risk and Revenue Sharing Partnerships
RRSPs
Restricted stock units
RSUs
Systems, applications and products
SAP
Supply Chain Relationships in Aerospace
SCRIA
Strategic Defence and Security Review
SDSR
Share Incentive Plan
SIP
Sulphur oxides
SOx
Shareholder Reference Number
SRN
Science, technology, engineering and maths
STEM
Short Take-Off and Vertical Landing
STOVL
Total reportable injuries
TRI
TSR
Total Shareholder Return
UK GAAP UK Generally Accepted Accounting Practices
USD
VDA
United States dollar
Verband der Automobilindustrie (German Association of the
Automotive Industry)
Vice President
VP
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Introduction
Rolls-Royce is a global company providing power
solutions for customers in civil and defence
aerospace, marine and energy markets. We support
our customers through a worldwide network of
offices, manufacturing and service facilities in over
50 countries.
Our ability to design and develop high-technology
products and then integrate these into sophisticated
systems for use on land, sea and air, provides us with
access to global markets.
2010
2011
% change
Order book – firm and announced
£59.2bn
£62.2bn
Underlying revenue*
Profit before financing
Underlying profit before tax*
Underlying earnings per ordinary share*
Payments to shareholders
* See explanation in note 2 on page 84
£10,866m
£11,277m
£1,134m
£1,189m
£955m
38.73p
16.00p
£1,157m
48.54p
17.50p
+5%
+4%
+5%
+21%
+25%
+9%
Rolls-Royce Holdings plc Annual report 2011Business reviewBusiness review 3
Chairman’s statement
Rolls-Royce has a highly-skilled and
motivated team – proud of its heritage
and ambitious for its future.
Sir Simon Robertson
Chairman
February 8, 2012
is being made. One good example is the Boeing 787 Dreamliner that
entered service in September 2011. This extraordinary aeroplane is
designed to be 20 per cent more fuel efficient than the earlier generation
of aircraft it replaces, thanks largely to advances in aero-engine
technology. Our marine business has advanced hull designs, engines, and
integrated propulsion systems that are reducing emissions dramatically.
In our energy business we have continued to make good progress
developing the scope of our civil nuclear capabilities.
I would like to thank my fellow directors for their great support and hard
work in the past year. I would also like particularly to express my gratitude
to Andrew Shilston, who retired from the Board at the year end. Andrew
served Rolls-Royce as Finance Director for nine years and has done an
outstanding job. I wish him well in his future endeavours. My
congratulations go to Mark Morris, who succeeds Andrew and was
appointed to the Board in January 2012. Mark joined Rolls-Royce as a
graduate 25 years ago.
Sir John Rose, who had been with the Group for 27 years and was Chief
Executive for 15 years, retired at the end of March and was succeeded by
John Rishton. I have paid tribute to John Rose on a number of occasions
including in last year’s Annual report. Suffice it for me to say, we owe John
a huge amount for what he achieved. I am very pleased to report that
John Rishton has made a tremendous start as our new Chief Executive.
Sir Peter Gregson has expressed his wish to retire as a non-executive
director of Rolls-Royce at this year’s Annual General Meeting (AGM) and
therefore will not be seeking re-election. Peter has made a valuable
contribution during the past five years and I would like to thank him for his
commitment. I am delighted to welcome both Lewis Booth and Sir Frank
Chapman onto the Board as non-executive directors. Lewis Booth, who
chairs the audit committee, is Executive Vice President and Chief Financial
Officer of Ford Motor Company and one of the most senior leaders within
the auto industry. Sir Frank has been Chief Executive at BG Group for the
past 11 years. He brings an additional deep technical understanding and
knowledge of advanced engineering to the Board. He has agreed to chair
a new safety committee that will be formed in 2012.
We are fortunate to benefit from the advice of an International Advisory
Board (IAB), comprised of some of the world’s most distinguished business
and political leaders. The IAB, whose membership is detailed later, provides
invaluable strategic advice about the global markets in which we operate
under the able guidance of Lord Powell of Bayswater. I would like to thank
its members for their time and wisdom.
Through the disciplined application of a long-term strategy, Rolls-Royce has
doubled its revenues in the past decade and we are confident of doubling
them again in the coming ten years. Rolls-Royce has a strong balance sheet
and we intend to run our business so that we maintain a single ‘A’ credit
rating. In all parts of our business we see opportunities for profitable
growth, building on the firm foundations I have described above.
At the heart of our business lie our people. Our past, current and future
success rests entirely with them. I believe Rolls-Royce has a highly-skilled
and motivated team which is proud of its heritage and ambitious for
its future. The strength of our order book demonstrates the confidence
our customers have placed in us. We are focused on delivering these
commitments for the long-term good of the families and communities
who depend upon us and for the benefit of our customers and of
our shareholders.
Business reviewBusiness review
4
Chief Executive’s review
Delivering for customers and
investing in the business
Demand for our products and services in 2011
remained strong. Despite the global economic
turbulence of recent years, Rolls-Royce has
continued to grow.
In my first year as Chief Executive, I have spent much of my time visiting
Rolls-Royce sites around the world to meet employees, customers,
suppliers and investors to hear what they have to say about your company.
Without exception, the employees I have met are dedicated, professional
and committed to delivering our brand promise – ‘trusted to deliver
excellence’. Our customers are supportive and enthusiastic about our
technology and, of course, they want even better performance both from
our products and our team. Our suppliers are excited by the opportunity
for growth and understand our requirement for better quality, on time
delivery and lower cost. Investors express support for our strategy and
naturally share our desire for still better financial performance in the future.
At the 2011 AGM, I confirmed that we will continue to follow the strategy
that has been in place for many years, and can be summarised as:
1. addressing four global markets: civil aerospace, defence aerospace,
marine and energy;
2. investing in technology, capability and infrastructure;
3. developing a competitive portfolio of products and services;
4. focusing on growing market share and our installed product base; and
5. adding value for our customers through product-related services.
This strategy has stood the test of time and has proved itself in battle.
Since 2007, and despite the turbulence of recent years, Rolls-Royce has
grown underlying revenue by 44 per cent, underlying profits by 45 per
cent and payments to shareholders by 35 per cent. We have doubled our
revenues in the past decade and, through organic growth alone, we are
confident that we will do the same in the decade ahead.
While we continue to follow this strategy, in the coming years, I see three
main priorities:
1. Delivering the promises we have made
With a record order book of £62.2 billion, our customers have placed a
huge amount of trust in us and it is essential we meet our commitments.
This will require a very significant increase in capacity. To put this growth
into perspective, since we started building Trent engines 18 years ago we
have delivered just over 2,000 units. We will deliver the next 2,000 in just
five years which means more than doubling our current rate of production.
To achieve this we continue to invest in new facilities around the world.
These investments include our new plants at Crosspointe in Virginia, USA
where we are making discs for civil jet engines and Seletar, in Singapore,
where we will make wide-chord fan blades and assemble and test Trent
engines. We are also expanding and renewing our facilities in the UK where
we still invest half of our capital expenditure and more than half of our
research and development budget. As well as investing in our own
facilities, we are working hard with our suppliers and partners to make
sure our global supply chain can support our growth and keep pace
with demand.
2. Deciding where we invest for future growth
We can see opportunity in all areas of our business but we need to
concentrate our resources and decide which opportunities we are going
to pursue and which we are not.
3. Continuing to improve the financial performance of the business
Although we are subject to inflationary pressures and tough competition
we will benefit from the growth of the business, from investments that will
improve efficiency and from an increasing focus on cost performance and
cash conversion.
In support of our strategy, during 2011 we made three very important
decisions for the future.
The first was our acquisition of the German industrial engines group
Tognum, our biggest acquisition, that we made in a joint offer with
Daimler. It will bring together highly complementary product and
technology portfolios and creates significant new opportunities for our
marine and energy businesses.
Second, we signed an exclusive deal with Airbus to power the long-range
Airbus A350-1000 aircraft, for which we will develop an enhanced
Trent XWB engine.
Rolls-Royce Holdings plc Annual report 2011Business review 5
Chief Executive’s review
Our strategy has stood the test of time
and has proved itself in battle.
John Rishton
Chief Executive
February 8, 2012
Third, we agreed to sell our equity stake in International Aero Engines (IAE)
to Pratt & Whitney, at the same time announcing our intention to form a
new joint venture to develop engines for the next generation of mid-size
aircraft. This agreement builds on a long and successful partnership with
Pratt & Whitney, and charts a clear course for our future in this important
market segment.
In addition, we have continued to extend our portfolio and have advanced
a number of important programmes. These are described in greater detail
later in this Annual report, but it is encouraging to note progress in each of
our customer facing businesses.
In civil aerospace, we celebrated the first commercial flight of the Boeing
787 Dreamliner, operated by All Nippon Airways (ANA) and powered
by Trent 1000 engines. The Trent XWB engine programme for the
Airbus A350 XWB is progressing well with over 1,500 test hours completed.
Our BR725 engine, developed for Gulfstream’s new flagship executive
jet, the G650, is due to enter service later this year.
In defence, our LiftFan™ system for the Joint Strike Fighter has performed
well during intensive flight tests that included more than 70 short take-offs
and vertical landings on board the aircraft carrier USS Wasp. The TP400
engine for the Airbus A400M is on course to enter service in 2013, further
strengthening our position in the military transport market.
In our marine business, we have secured the first orders for our award-
winning Environship, a cargo vessel powered by liquid natural gas that
substantially increases fuel efficiency through a combination of innovative
hull design and power systems. In May 2011, the UK Government awarded
Rolls-Royce the contract to develop a new propulsion system for the next
generation of nuclear-powered submarines.
Our energy business signed its biggest ever single contract to supply
Petrobras, Brazil’s leading oil company, with 32 gas turbine generation
packages to support its offshore operations. Within our civil nuclear
business we have continued to expand our instrumentation and controls
business while strategic relationships with reactor vendors and utility
operators were further strengthened during 2011 through a number of
cooperation agreements.
In 2011, Rolls-Royce performed well in difficult market conditions. We have
a £62.2 billion order book, underlying revenue has grown to £11.3 billion
and underlying profit has increased 21 per cent to £1.2 billion. This success
is due to the extraordinary team of over 40,000 people that work for
Rolls-Royce. I thank all of them for their support and effort in 2011. Their
skills, the breadth of our portfolio, the strength of our order book and the
access we have to parts of the world where demand for our products and
services remain strong, make your company increasingly resilient.
Business reviewBusiness review
6
Our business model and strategy
Invest in leading
technologies and
skilled people
Provide services
that add value
Trusted
to deliver
excellence
Develop
world-class
products
Develop close
customer
relationships
globally
Manufacture
efficiently
Rolls-Royce is a global company providing power solutions for customers in
civil and defence aerospace, marine and energy markets. The Group has an
ongoing commitment to investing in research and development (R&D)
which provides the technologies and intellectual property that allow us to
compete on a global basis and creates high barriers for entry to our markets.
Two-thirds of our annual R&D funding is aimed at improving the
environmental performance of our products. We maximise our research
and development investment through our approach of ‘invest once use
many times’ in products across the four major segments. Our
manufacturing operations and supply bases are integrated and global.
Rolls-Royce Holdings plc Annual report 2011Business review 7
Our business model and strategy
A leading producer of mission-critical,
integrated power systems and services for
use in civil and defence aerospace, marine
and energy segments.
Address four
global markets
Revenue 2011 (£m)
1. £5,572m civil aerospace
2. £2,235m defence aerospace
3. £2,271m marine
4. £1,199m energy
1
4
3
2
We invest close to £1 billion annually in R&D
and during 2011 we invested £467 million in
capital projects to grow our global capability
and productivity.
Invest in
technology
infrastructure
and capability
Develop a
competitive
portfolio of
products
and services
We have 40 major engineering programmes
under management. We continue to introduce
major new products, including the Trent 1000
in 2011. Our key projects will help define the
power systems markets for many years ahead.
Across the Group the growing installed
product base and integrated systems will
generate attractive returns for many decades.
Over half our revenues come from services.
We seek to develop our customer relationships,
through long-term service contracts where we
can grow strong business collaboration.
Grow market
share and
our installed
product base
Add value
for customers
through the
provision of
product-related
services
Rolls-Royce Holdings plc Annual report 2011Business reviewBusiness review 8
Our business segments
(charts show business segment revenue as a percentage of total revenue)
Civil
aerospace
Defence
aerospace
Marine
Energy
OVERVIEW OF BUSINESS
Our civil aerospace business
provides the power for more than
30 types of commercial aircraft
and supports customers around
the world. We have a good
presence in narrowbody and a
strong position in widebody,
corporate and regional aircraft.
MAIN OPERATIONAL LOCATIONS
– Derby, UK
– Indianapolis, US
– Virginia, US
– Singapore
– Dahlewitz, Germany
49%
OVERVIEW OF BUSINESS
We are the world’s second largest
provider of defence aero-engine
products and services with 160
customers in over 100 countries.
MAIN OPERATIONAL LOCATIONS
– Bristol, UK
– Indianapolis, US
– Virginia, US
– Dahlewitz, Germany
OVERVIEW OF BUSINESS
Our marine business serves more
than 4,000 customers and has
equipment installed on over
30,000 vessels, including those of
70 navies.
OVERVIEW OF BUSINESS
We are a world leader in power for
the offshore and onshore oil and
gas industry. We supply gas
turbines and diesel engines for
power generation and are
developing a strong capability in
the civil nuclear power market.
MAIN OPERATIONAL LOCATIONS
– Singapore
– Bristol, Derby, UK
– Ulsteinvik, Ålesund,
Bergen, Norway
– Kristinehamn, Sweden
– Rauma, Finland
– Hamburg, Germany
– Shanghai, China
– Pusan, Korea
– Vung Tau City, Vietnam
– Walpole, US
MAIN OPERATIONAL LOCATIONS
– Mount Vernon, US
– Montreal, Canada
– Bergen, Norway
20%
20%
11%
Rolls-Royce Holdings plc Annual report 2011Business review 9
Market opportunities over the next 20 years
The Group’s forecast predicts faster growth rates for long-haul
markets and those markets to, from and within Asia. Factors affecting
demand include GDP growth, aircraft productivity, operating costs,
environmental issues and the number of aircraft retirements. We
forecast a demand for civil aero engines of US$800 billion over the
next 20 years and for services of US$600 billion over the same period.
US$800bn
Civil engine market
US$600bn
Civil services market
With traditional defence markets under budget pressures there may
be delays in new programmes but these will be offset by longer
term services on current programmes where we are well placed.
Demand for military engines over the next 20 years is estimated at
US$155 billion and for services and support equipment we estimate
a market of US$260 billion over the same period.
US$155bn
Defence engine market
US$260bn
Defence services market
The Group forecasts a demand for marine power and propulsion
systems valued at US$215 billion over the next 20 years. Marine
aftermarket services are expected to generate significant opportunities
with demand forecast at US$125 billion over the same period.
US$215bn
Marine equipment market
US$125bn
Marine services market
The Group’s 20-year forecast values the total aero-derivative gas
turbines sales in the oil and gas and power generation sectors at
more than US$70 billion. Over this period, demand for associated
services is expected to be around US$50 billion.
US$120bn
Energy engine and services market
Based on the International Energy Agency forecasts, the Group has
conservatively estimated that demand for mission-critical
equipment, systems and engineering services for the nuclear island
could reach US$390 billion over the next 20 years while demand for
associated reactor support services could amount to US$250 billion
over the same period.
US$640bn
Civil nuclear equipment
and services market
Rolls-Royce Holdings plc Annual report 2011Business reviewBusiness review 10
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.
+4%
UNDERLYING REVENUE
Monitoring of revenues provides
a measure of business growth.
Underlying revenue is 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.
+19%
UNDERLYING PROFIT BEFORE FINANCING
Underlying profit before financing
is presented on a basis that shows
the economic substance of the
Group’s hedging strategies in
respect of the transactional
exchange rate and commodity
price movements. In particular:
(a) revenues and costs
denominated in US dollars and
euros are presented on the basis of
the exchange rates achieved during
the year; (b) similar adjustments are
made in respect of commodity
derivatives; and (c) consequential
adjustments are made to reflect the
impact of exchange rates on
trading assets and liabilities and
long-term contracts on a consistent
basis. The derivation of underlying
profit before financing is shown in
note 2 on page 84 of the
consolidated financial statements.
CASH FLOW
-608%
The figure for 2011 includes
investment of £1,496 million
in Tognum.
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.
RETURN ON CAPITAL EMPLOYED
+0.5%
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.
£m
12,000
8,000
4,000
0
£m
1,200
800
400
0
£m
700
350
0
-350
-700
-1050
-1400
%
18
12
6
0
9,147
10,108
7,817
10,866
11,277
07
08
09
10
11
832
919
983
1,010
1,206
07
08
09
10
11
570
258
62
(183)
(1,310)
07
08
09
10
11
17.2
17.1
17.2
17.3
17.8
07
08
09
10
11
Rolls-Royce Holdings plc Annual report 2011Business review 11
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
Underlying revenue per employee
Engine deliveries
Installed thrust – civil aerospace
Percentage of civil fleet under management
Underlying services revenue
Emissions
NET RESEARCH AND DEVELOPMENT CHARGE
+10%
Investment in research and
development underpins all the
elements of the Group’s strategy.
Programme expenditure is
monitored in conjunction with
a gated review process on each
programme and progress is
reviewed at key milestones.
GROSS RESEARCH AND DEVELOPMENT EXPENDITURE
-2%
The Group’s R&D 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.
-2%
+29%
NET RESEARCH AND DEVELOPMENT EXPENDITURE AS
A PROPORTION OF UNDERLYING REVENUE
R&D is measured as the self-funded
expenditure both before 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 depending
CAPITAL EXPENDITURE
To deliver on its commitments to
customers, the Group invests
significant amounts in its
infrastructure. All proposed
investments are subject to rigorous
review to ensure that they are
consistent with forecast activity
and will provide value for money.
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.
Annual capital expenditure is
measured as the cost of property,
plant and equipment acquired
during the period.
£m
500
375
250
125
0
£m
1,000
750
500
250
0
%
6
4
2
0
£m
500
375
250
125
0
381
403
379
422
463
07
08
09
10
11
824
885
864
923
908
07
08
09
10
11
5.8
5.4
4.7
4.7
4.6
07
08
09
10
11
304
283
291
467
361
07
08
09
10
11
Rolls-Royce Holdings plc Annual report 2011Business reviewBusiness review 12
Key performance indicators
+5%
ORDER BOOK
The order book provides an
indicator of future business. It is
measured at constant exchange
rates and list prices and includes
both firm and announced orders.
In civil aerospace, it is common for a
customer to take options for future
orders in addition to firm orders
placed. Such options are excluded
from the order book. In defence
aerospace, long-term programmes
are often ordered for only one year
at a time. In such circumstances,
even though there may be no
alternative engine choice available
to the customer, only the
contracted business is included in
the order book. Only the first seven
years’ revenue of long-term
aftermarket contracts is included.
TRAINING AND DEVELOPMENT
+15%
Training and development 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 monitored by
using a range of external and
internal sources and by gathering
user feedback.
UNDERLYING REVENUE PER EMPLOYEE
+6%
A measure of personnel
productivity, this indicator
measures underlying revenue
generated per employee on a
three-year rolling basis.
+12%
ENGINE DELIVERIES
The Group’s installed engine base
represents an opportunity to
generate future aftermarket
business. This is measured as the
number of Group products
delivered during the year within
each business except for marine,
as its products do not lend
themselves to this measure due
to their diversity.
2,000
1,500
1,000
0
1,621
1,600
1,657
1,439
1,853
07
08
09
10
11
Rolls-Royce Holdings plc Annual report 2011Business review 13
Key performance indicators
INSTALLED THRUST – CIVIL AEROSPACE
+5%
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.
PERCENTAGE OF CIVIL FLEET UNDER MANAGEMENT
-3%
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 engine base where the
future aftermarket arrangements are
agreed under long-term contracts.
+9%
UNDERLYING SERVICES REVENUE
Underlying services revenue shows
the amount of business during the
year that has been generated from
the installed engine base. This is
measured as the revenue derived
from spare parts, overhaul services
and long-term service agreements.
m lbs
400
300
200
100
0
%
80
60
40
20
0
£m
6,000
4,000
2,000
0
334
348
367
382
400
07
08
09
10
11
55
57
59
70
68
07
08
09
10
11
4,755
4,927
4,265
6,019
5,544
07
08
09
10
11
EMISSIONS
Around two-thirds of our 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.
Rolls-Royce Holdings plc Annual report 2011Business reviewBusiness review 14
Finance Director’s review
A strong performance
Demand for our products and
services remains robust.
Mark Morris
Finance Director
Summary
Summary data – £ million
Order book
Underlying revenue*
Underlying profit before tax*
Underlying earnings per ordinary
share*
Full year payment to shareholders
Reported revenue
Reported profit before financing
Net funds
Average net funds
* See explanation in note 2 on page 84
2011
62,201
11,277
1,157
48.54p
17.5p
11,124
1,189
223
320
2010
59,153
10,866
955
38.73p
16.0p
11,085
1,134
1,533
960
Change
+5%
+4%
+21%
+25%
+9%
0%
+5%
The difficulties faced by the global economy, by the Eurozone and by
those governments with budgetary imbalances are well publicised.
However, demand for our products and services remains robust,
particularly in developing markets. This demand results from the breadth
and diversity of our businesses, customers and programmes, the
competitive strength of our products and the relative youth of our
installed base.
The visibility of significant growth in the next decade provided by the
record order book underpins our continued investment in technology,
operations and services. These investments safeguard our competitive
advantage, support delivery on our commitments to customers and
improve our operational effectiveness. The Group’s 2011 performance
was achieved after absorbing a ten per cent increase in net R&D expense
to £463 million and a 29 per cent increase in capital expenditure to
£467 million.
The Group’s joint venture with Daimler now owns over 99 per cent of
Tognum for which Rolls-Royce paid cash consideration of £1.5 billion in
2011. This joint venture investment made a £30 million net contribution
(after costs and financing) to underlying profit before tax but did not
impact the Group’s 2011 revenues. On January 2, 2012, the Group
contributed its Bergen Diesels business to the joint venture, resulting in a
cash benefit to the Group of €200 million.
The Group’s proposed sale of its 32.5 per cent shareholding in IAE is subject
to regulatory approval and did not impact 2011 financial performance.
Rolls-Royce will continue to play an active role as a first tier supplier to IAE of
high-pressure compressors and fan blades and remains responsible for the
final assembly of 50 per cent of the production engines. The announced
new joint venture with Pratt & Whitney to develop an engine to power the
next generation of mid-size aircraft is also subject to regulatory approval
and had no effect on 2011 financial performance.
Business review 15
Finance Director’s review
For more financial information go online:
www.rolls-royce.com/investors
Underlying figures are considered more representative of the trading
performance by excluding the impact of year end mark-to-market
adjustments of outstanding financial instruments on the reported
performance, principally relating to the GBP/USD hedge book. In
addition the net post-retirement financing is excluded and, in 2011,
adjustments have been made to exclude one-off past-service credits on
post-retirement schemes and the effect of acquisition accounting. The
adjustments between the underlying income statement and the
reported income statement are set out in more detail in note 2 of the
financial statements. This basis of presentation has been applied
consistently since the transition to IFRS in 2005.
Underlying income statement
Underlying income statement extracts – £ million
Revenue
civil aerospace
defence aerospace
marine
energy
Profit before financing costs and taxation
civil aerospace
defence aerospace
marine
energy
engine holding (Tognum JV)
central costs
Net financing costs
Profit before taxation
Taxation
Profit for the year
EPS
Payment to shareholders
Other items
Other operating income
Gross R&D investment
Net R&D charged to the income statement
2011
11,277
5,572
2,235
2,271
1,199
1,206
499
376
323
24
36
(52)
(49)
1,157
(261)
896
48.54p
17.5p
70
908
463
2010
10,866
4,919
2,123
2,591
1,233
1,010
392
309
332
27
–
(50)
(55)
955
(236)
719
38.73p
16.0p
87
923
422
Change
+4%
+13%
+5%
-12%
-3%
+19%
+27%
+22%
-3%
-11%
–
-4%
+11%
+21%
+11%
+25%
+25%
+9%
-20%
-2%
+10%
Underlying revenue increased four per cent to £11.3 billion. This includes
a nine per cent growth in services revenue to £6.0 billion that more than
offset a one per cent reduction in OE revenue to £5.3 billion. OE
performance included strong 18 per cent growth in civil aerospace offset
by a greater than anticipated reduction of 23 per cent in marine OE
revenue. Underlying services revenue continues to represent more than
half (53 per cent) of the Group’s underlying revenues. In 2011, growth in
underlying services revenue was due to a number of factors: the installed
base of products grew and the services network expanded; defence
aerospace benefited from one-off contract termination settlements
resulting from the Strategic Defence and Security Review (SDSR) of the
UK Ministry of Defence (MoD); and marine services saw further growth of
nine per cent.
Underlying profit before financing costs and taxation increased
21 per cent to £1.16 billion. This was due to a number of factors, a better
mix between OE and services, a significant improvement in productivity
resulting from the focus on cost, net foreign exchange (FX) benefits of
£54 million including an eight cent improvement in the achieved rate
on selling USD income, £30 million from Tognum net of the costs of
the acquisition and a number of one-off items, the most significant
which relates to a £60 million benefit from the SDSR settlements
referred to earlier.
Further discussion of trading is included in the business segment reports
on page 18 to 25.
Underlying financing costs reduced 11 per cent to £49 million, including
a small reduction in financial Risk & Revenue Sharing Partnerships (RRSPs)
costs and lower funding costs due to the settlement of the Group’s €750
million Eurobond during the year.
Underlying taxation was £261 million, an underlying tax rate of 22.6 per
cent compared with 24.7 per cent in 2010. This reduction reflects increased
profits from joint ventures (which are accounted for on a post-tax basis)
and some adjustments to prior year estimates.
Underlying EPS increased 25 per cent to 48.54 pence, in line with the
increase in the underlying profit after tax.
Payments to shareholders At the AGM on May 4, 2012, the directors
will recommend an issue of 106 C Shares with a total nominal value of
10.6 pence for each ordinary share. The final issue of C shares will be made
on July 2, 2012 to shareholders on the register on April 27, 2012 and the
final day of trading with entitlement to C Shares is April 24, 2012. Together
with the interim issue on January 3, 2012 of 69 C Shares for each ordinary
share with a total nominal value of 6.9 pence, this is the equivalent of a
total annual payment to ordinary shareholders of 17.5 pence for each
ordinary share.
The payment to shareholders will, as before, be made in the form of
redeemable C Shares which shareholders may either choose to retain or
redeem for a cash equivalent. The Registrar, on behalf of the Company,
operates a C Share Reinvestment Plan (CRIP) and can, on behalf of
shareholders, purchase ordinary shares from the market rather than
delivering a cash payment. Shareholders wishing to redeem their C Shares
or else redeem and participate in the CRIP must ensure that their
instructions are lodged with the Registrar, Computershare Investor
Services Plc, no later than 5pm on Friday June 1, 2012.
Other operating income relates to programme receipts from RRSPs,
which reimburse past R&D costs. These receipts decreased by 20 per cent
in 2011 due to the phasing of major programmes such as the Trent XWB.
Net R&D charged to the income statement increased by ten per cent
to £463 million. The Group recruited an additional 1,000 engineers to
develop the products of the future and to help improve the in-service
performance of the existing installed base of products. This investment
and the 29 per cent increase in capital expenditure to £467 million will
prepare our infrastructure and global supply chain for significant growth in
the next decade. The Group continues to expect net R&D investment to
remain within four to five per cent of Group underlying revenue.
Rolls-Royce Holdings plc Annual report 2011Business reviewBusiness review 16
Finance Director’s review
Balance sheet
Summary balance sheet – £ million
Intangible assets
Property, plant and equipment
Net post-retirement scheme deficits
Net working capital
Net funds
Provisions
Net financial assets and liabilities
Share of results of joint ventures and associates
Assets held for sale
Other net assets and liabilities
Net assets
Other items
USD hedge book (US$ million)
Net TotalCare assets
Gross customer finance contingent liabilities
Net customer finance contingent liabilities
2011
2,882
2,338
(397)
(1,098)
223
(502)
(718)
1,680
178
(67)
4,519
2010
2,884
2,136
(856)
(973)
1,533
(544)
(627)
393
9
24
3,979
22,000
956
612
124
20,900
920
633
121
Intangible assets relate to goodwill, certification costs, participation fees,
development expenditure, recoverable engine costs, software and other
costs that represent long-term assets of the Group. In aggregate, these
assets remained broadly unchanged at £2.9 billion: this was largely due to
increased development, certification and software costs being offset by
the reclassification of V2500 assets on the balance sheet as assets held for
sale. 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
2011. Further details are given in note 8 of the financial statements.
Property, plant and equipment increased by nine per cent to
£2.3 billion due to the ongoing development and refreshment of facilities
and tooling as the Group prepares for increased production volumes.
Net post-retirement scheme deficits decreased 54 per cent to
£397 million, including: (i) the impact of the change in pensions’ indexing
to CPI in the UK (£130 million); (ii) revised healthcare benefits in certain
overseas schemes (£74 million); and (iii) the reduction in discount rates
having a larger impact on the value of the assets than the obligations
(calculated on an IAS 19 basis).
Overall funding across the schemes has improved in recent years as the
Group has adopted a lower risk investment strategy that reduces volatility
going forward and enables the funding position to remain stable: interest
rate and inflation risks are largely hedged; exposure to equities has
reduced to around 20 per cent of scheme assets, this has been achieved
against the headwind of increasing life expectancy assumptions.
In 2011, the Group made further arrangements to reduce volatility and
enable future funding to be predicted with more certainty. A longevity
swap was transacted with a third party to eliminate the risk of increasing
life expectancy of pensioners in the largest UK defined benefit scheme.
No significant change is expected to the ongoing funding levels of the UK
pension schemes in 2012.
Net funds decreased by 85 per cent to £223 million largely due to the
£1.5 billion consideration paid during the year for the Group’s shared
investment in Tognum. As a result, average net funds fell by £640 million
to £320 million (£805 million excluding acquisitions).
Investment – joint ventures and associates increased in the year as a
result of the investment in Tognum.
Assets held for sale represent the assets and liabilities expected to be
derecognised of as a result of the anticipated restructuring of IAE.
Provisions largely relate to warranties and guarantees provided to secure
the sale of OE and services. These provisions reduced modestly during
the year.
Net financial assets and liabilities relate to financial RRSPs and the fair
value of foreign exchange, commodity and interest rate contracts, set out
in detail in note 17 to the financial statements. The change largely reflects
the impact of the change in the GBP/USD exchange rate on the valuation
of foreign exchange contracts.
The USD hedge book increased five per cent to US$22.0 billion. This
represents around four and a half years of net exposure and has an
average book rate of £1 to US$1.60. Current forward market exchange rates
are similar to current average book rates.
Net TotalCare® assets relate to long-term service agreement (LTSA)
contracts in the civil aerospace business, including the flagship services
product TotalCare. These assets represent the timing difference between
the recognition of income and costs in the income statement and cash
receipts and payments.
Customer financing facilitates the sale of original equipment (OE) and
services by providing financing support to certain customers. Where such
support is provided by the Group, it is generally to customers of the civil
aerospace business and takes the form of various types of credit and asset
value guarantees. These exposures produce contingent liabilities that are
outlined in note 23 to the financial statements. The contingent liabilities
represent the maximum aggregate discounted gross and net exposure in
respect of delivered aircraft, regardless of the point in time at which such
exposures may arise.
During 2011, the Group’s exposure remained stable with gross and net
exposures of £612 million and £124 million respectively. As has been
well-publicised, some banks that have been active in recent years in
providing funds for aircraft financing have chosen during 2011 to
substantially reduce their exposure in this market segment. Although this
may have some effect on the terms and pricing of new aircraft finance
transactions in the near future, the Group expects that other providers of
USD funding and ongoing support from the export credit agencies will
largely fill the gap left by these banks.
Rolls-Royce Holdings plc Annual report 2011Business review 17
Finance Director’s review
For more financial information go online:
www.rolls-royce.com/investors
Group 2012 guidance
Excluding the impact of the Tognum acquisition and the proposed IAE
transaction, in 2012 the Group expects to see good growth in underlying
revenue and underlying profit with a cash flow around breakeven as we
continue to invest for future growth.
In civil aerospace, we anticipate good growth in underlying revenue and
strong growth in underlying profit. In defence aerospace, we expect
modest growth in underlying revenue and profit. In marine, we expect a
modest increase in underlying revenue, with underlying profit broadly flat.
And in energy, we see growth in revenue and some improvement in profit.
Other relevant data
Foreign exchange: neutral.
Taxation: the underlying tax rate is expected to be around 24 per cent.
R&D: a modest increase in expenditure combined with lower net
capitalisation and higher amortisation due to the phasing of new
programmes.
Capital expenditure: a modest increase, including increased
investment in IT.
Pensions: no material changes expected to funding levels.
Intangible assets: modest increase compared with 2011 due to a modest
increase in recoverable engine costs partially offset by a decrease in
development costs due to the phasing of new programmes.
Property, plant and equipment: modest increase compared with 2011
as we continue to invest in capability and infrastructure.
Tognum
Tognum is expected to contribute in the first half to the Group’s share of
results of joint ventures and associates. Tognum’s results are expected to
be fully consolidated around the half year with Daimler’s 50 per cent share
of the result recorded as a non-controlling interest. For 2012, Tognum will
be reported separately. As Tognum remains a listed company and will
issue its preliminary results on March 8, 2012, the Group is not providing
guidance at this time.
IAE
The sale of the Group’s 32.5 per cent shareholding in IAE is expected to
receive regulatory approval during 2012, at which time the initial cash
consideration of US$1.5 billion will be received. For the first full year
following settlement, the impact of the sale on subsequent trading will
have a small negative effect on underlying revenue and a positive effect of
around £140 million on underlying profit. The impact on the order book
will be a reduction of around £4 billion.
Additional financial information can be found on pages 36 and 37.
Rolls-Royce Holdings plc Annual report 2011Business reviewBusiness review 18
Civil aerospace
Strong programme positions supported further robust order
flow in 2011. A 47 per cent increase in the order intake to £11.0
billion contributed to a record order book of £52 billion, up
seven per cent on 2010. The order book contains over 5,000
engines that will add, over time, around 250 million pounds of
installed thrust, or 65 per cent, to our current installed base of
400 million pounds of thrust.
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2011 saw a strong performance as revenue increased by 13 per cent. (OE) revenue grew 18 per cent, largely
as a result of significantly higher deliveries of widebody and corporate and regional engines. Services
revenue grew by ten per cent, reflecting the growth in TotalCare revenue during the year, some recovery
in time and materials revenue and some benefit from a better achieved USD exchange rate in the period.
Highlights
Trent 1000 enters service on Boeing 787
Trent XWB exclusive contract on longer range Airbus A350 XWB
I,000th Trent 700 delivered for Airbus A330
New joint venture announced to address engines for future mid-size aircraft
BR725 certification programme for the Gulfstream G650 on course
£5,572m
Underlying revenue 2011
£499m
Underlying profit 2011
Key financial data
Order book £bn
Engine deliveries
Underlying revenue £m
Underlying OE revenue £m
Underlying service revenue £m
Underlying profit before
financing £m
2007
35.9
+80%
851
4,038
+3%
1,484
2,554
564
+9%
2008
43.5
+21%
987
4,502
+11%
1,776
2,726
566
0%
2009
47.0
+8%
844
4,481
0%
1,855
2,626
493
-13%
2010
48.5
+3%
846
4,919
+10%
1,892
3,027
392
-20%
2011
51.9
+7%
962
5,572
+13%
2,232
3,340
499
+27%
Rolls-Royce Holdings plc Annual report 2011Business review 19
Civil aerospace
For more information on
civil aerospace go online:
www.rolls-royce.com/civil
The civil aerospace business is a major manufacturer of aero engines for all
sectors of the airliner and corporate jet market. Rolls-Royce powers more
than 30 types of commercial aircraft and over 13,000 engines are in service
with customers around the world.
Narrowbody
A new joint venture with Pratt & Whitney was announced in October 2011
to develop engines for future generation mid-size aircraft. This move
enhances the strong position of Rolls-Royce in the mid-size airliner market.
Rolls-Royce is also to sell its shareholding in IAE, manufacturer of the V2500
engine, to Pratt & Whitney. The relevant agreements remain subject to
various closing conditions including regulatory approvals. Rolls-Royce will
remain a key supplier, responsible for the engineering support and
manufacture of high-pressure compressors and the final assembly of 50
per cent of the V2500 engine. Orders for over 150 V2500-powered aircraft
were taken in 2011.
Corporate and regional
In March 2011, Rolls-Royce delivered the 2,000th BR710 engine from the
Dahlewitz plant in Germany where the engine was developed. The BR710
powers a number of Bombardier and Gulfstream business jets. The
certification programme for the Gulfstream G650 powered by Rolls-Royce
BR725 engines remains on course despite the tragic accident suffered by
one of the test aircraft in April 2011. Service entry is expected in mid-2012.
The development programme for the AE 3007C engine for the Cessna
Citation TEN is on plan and the first flight took place in December 2011.
Entry into service is planned by the end of 2013.
Services
Revenue and engine flying hours from TotalCare improved during 2011,
driven by the growth of aircraft in service and increased utilisation of
existing fleets.
In 2011, the airline industry continued a slow but steady recovery despite
continued economic uncertainty. Passenger traffic continued to show
above average growth but the cargo market slackened. Whilst the small
and mid-size business jet market remained flat, Rolls-Royce continued to
benefit from the resilience of the market for large-cabin business aircraft.
Widebody
2011 was an important year for the Trent family of engines. In September
2011, Rolls-Royce was proud to power the entry into service of the
Boeing 787 Dreamliner with launch customer ANA. During the year two
new customers placed orders for Trent 1000s to power their Dreamliners.
Development of the Trent XWB continued apace, with the test programme
yielding exceptional results in terms of fuel efficiency and reliability. The
Trent XWB for the Airbus A350 XWB, is the fastest ever selling member of
the Trent family of engines. Over 1,100 Trent XWBs have been ordered so
far, more than the total number of Trent 700s currently in service. Market
successes in 2011 included significant orders from Thai Airways
International and Air France. Entry into service is now expected in the first
half of 2014. In June 2011, Rolls-Royce announced an exclusive engine
provider agreement with Airbus for Rolls-Royce to produce a higher-thrust
version of the Trent XWB, enabling Airbus to offer increased range and
capacity for the A350-1000.
In October 2011, the 1,000th Trent 700 engine was delivered for the A330
programme. During the year, further orders were received for
approximately 150 Trent 700 engines from customers around the world
including major orders from Cathay Pacific, Saudi Arabian Airlines and
Singapore Airlines. There are three engine options for the A330 and the
Trent 700 won 75 per cent of the orders contested in 2011.
The Trent 900 continues to be the leading engine for the Airbus A380 in
terms of through-life fuel burn and emissions. The Trent 900 has been
selected by 11 of the 16 airlines that have so far made an engine choice.
China Southern is the latest customer to place Rolls-Royce powered A380s
into service. New order announcements in 2011 came from Asiana of Korea
and Skymark of Japan.
In November 2011, American Airlines entered Chapter 11 bankruptcy
protection. The Group has equipment in service and a joint venture repair
and overhaul business with the airline and remains in close contact with
the customer as the airline manages this process. There was no significant
impact on the financial results.
The Trent 1000 entered service last year with Japanese airline ANA, as the
launch engine for the new Boeing 787 Dreamliner.
Rolls-Royce Holdings plc Annual report 2011Business reviewBusiness review 20
Defence aerospace
A broad and diverse base of customers and products
underpinned a resilient performance in 2011. Demand
for our products and services, particularly in the military
transport sector, held up well. Revenue increased five per
cent as a result of an eight per cent increase in OE revenue
and a three per cent increase in services revenue.
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A seven per cent decline in the order book reflects the cautious budgetary environment in many nations.
However, new orders of £1.8 billion provides continued confidence that opportunities remain, both in
traditional and in developing markets.
Profit grew 22 per cent as a result of increased revenue, cost reduction and the £60 million benefit of
termination settlements as a result of the UK MoD’s SDSR.
Highlights
TP400 engine for A400M transporter is certified
F-35B LiftSystem™ achieves programme and test milestones
US Navy renews Adour F405 support contract
750th EJ200 engine delivered for the Eurofighter programme
£2,235m
Underlying revenue 2011
£376m
Underlying profit 2011
Key financial data
Order book £bn
Engine deliveries
Underlying revenue £m
Underlying OE revenue £m
Underlying service revenue £m
Underlying profit before
financing £m
2007
4.4
+38%
495
1,673
+4%
796
877
199
+3%
2008
5.5
+25%
517
1,686
+1%
739
947
223
+12%
2009
6.5
+18%
662
2,010
+19%
964
1,046
253
+13%
2010
6.5
0%
710
2,123
+6%
1,020
1,103
309
+22%
2011
6.0
-7%
814
2,235
+5%
1,102
1,133
376
+22%
Rolls-Royce Holdings plc Annual report 2011Business review 21
Defence aerospace
For more information on
defence aerospace go online:
www.rolls-royce.com/defence
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.
Unmanned vehicles
In the unmanned air systems sector we successfully completed a
US Air Force funded flight-test programme for the growth variant of the
AE 3007H engine for Global Hawk.
Transport
We are a world leader in the military transport market with over 6,700
engines in service.
Small engines
GippsAero of Australia selected the M250 turboprop engine to power its
new ten seat passenger aircraft, the GA10.
In the helicopter market, the Apache fleet of the UK Army Air Corps,
powered by the RTM322 engine, reached 200,000 flying hours.
Services
The success of our services business continued in 2011, with MissionCare™
contracts secured to provide availability-based engine support for the
C-130 fleets of the UK and US air forces. The US Navy again renewed its
US$100 million support agreement for Adour F405 engines in the
T-45 Goshawk trainer.
Rolls-Royce also earned praise for its support of the frontline operations of
the UK armed forces air campaign over Libya which involved eight
different types of Rolls-Royce powered aircraft.
The global fleet of AE 2100 engines, which powers both the Lockheed
Martin C-130J and the Alenia C-27J transport aircraft, continues to expand.
The Emirate of Qatar and the Indian Air Force both received their first
C-130Js in 2011. The global AE 2100 fleet also passed the three million flight
hour milestone during the year.
The TP400 engine for the Airbus A400M military transport aircraft received
civil certification from EASA in May 2011 and has amassed over 8,000 flying
hours as part of the flight-test programme. Delivery of the engines for the
first production aircraft are due to begin in early 2012, part of the initial
order of 180 aircraft.
Important milestones were achieved in the T56 upgrade programme for
legacy variants of the C-130 and P-3 Orion aircraft. This engine variant
provides significant fuel and operating cost savings.
Combat
In the combat sector the Rolls-Royce LiftSystem® for the short take-off and
vertical landing (STOVL) variant of Lockheed Martin’s F-35 Lightning II Joint
Strike Fighter achieved its ‘Initial Service Release’.
In October 2011, two F-35B aircraft accomplished 72 STOVLs on the USS
Wasp during a successful three-week testing period of sea trials. In the
same month, the first LiftFan™ to be assembled at our new dedicated
state-of-the-art factory in Indianapolis, USA, rolled off the production line.
In January 2012 , probationary status was lifted for the F-35B and the first
STOVL aircraft were delivered to the customer.
Funding for the development programme of the F136 engine, in which
Rolls-Royce is a 40 per cent partner, for the F-35 Joint Strike Fighter was
terminated by the US Department of Defense in February 2011, despite
strong continuing Congressional support.
During 2011, we delivered the 750th EJ200 engine on behalf of Eurojet for
the Eurofighter programme.
The Eurofighter Typhoon was deployed on combat operations for the first
time as part of the NATO operation in Libya, displaying outstanding levels
of performance and reliability. The Typhoon is a contender for the KF-X
programme in South Korea.
We continue to make good progress on the US Air Force Adaptive Versatile
Engine Technology (ADVENT) demonstrator programme. It is designed to
significantly reduce fuel consumption, enabling extended mission ranges
and loiter times for future generations of military aircraft.
We are a major partner in the TP400 engine for the new Airbus A400M
large military transport aircraft.
Rolls-Royce Holdings plc Annual report 2011Business reviewBusiness review 22
Marine
Despite the uncertain market and macro-economic conditions,
a resilient performance was achieved in 2011, as demand for our
products and services gradually returns. New order intake during
the year was strong, up 15 per cent to £2.1 billion, although the
order book decreased largely due to the slower than expected
conversion of OE bid activity to new orders.
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Revenue decreased 12 per cent, impacted mainly by slow second half OE revenue that resulted in OE revenue
for the full year down 23 per cent. This slower than expected recovery of OE revenue was partially offset by a
nine per cent increase in underlying service revenue. Our expanding network of service centres continues to
take advantage of the growth in recent years of the global fleet of vessels equipped with our products,
engines and propulsion systems.
£2,271m
Underlying revenue 2011
Profit declined by three per cent relative to a fall in revenue of 12 per cent, reflecting an improved revenue mix
and an increased focus on costs and operational performance.
Highlights
Significant increase in new orders and continued growth in offshore oil and gas sector
First contract secured for award-winning NVC 405 Environship liquid natural gas-powered cargo vessels
£323m
Underlying profit 2011
Service centres in Europe, Africa and Asia opened or expanded
Customer training and simulator centres opened in Norway and Singapore
Tognum acquisition largely completed
Key financial data
Order book £bn
Underlying revenue £m
Underlying OE revenue £m
Underlying service revenue £m
Underlying profit before
financing £m
2007
4.7
+96%
1,548
+19%
1,003
545
113
+12%
2008
5.2
+11%
2,204
+42%
1,492
712
183
+62%
2009
3.5
-33%
2,589
+17%
1,804
785
263
+44%
2010
3.0
-16%
2,591
+0%
1,719
872
332
+26%
2011
2.7
-8%
2,271
-12%
1,322
949
323
-3%
Rolls-Royce Holdings plc Annual report 2011Business review
23
For more information on
marine go online:
www.rolls-royce.com/marine
Rolls-Royce has a world-leading range of capabilities in the marine market,
encompassing vessel design, the integration of complex systems and the
supply and support of power and propulsion equipment. We are leaders in
mission-critical systems for offshore oil and gas, merchant and naval vessels.
Offshore
Marine performed strongly in the offshore oil and gas sector. This was
largely based on the proven success of our specialist UT vessel design
capabilities and our proficiency at integrating sophisticated systems into
complex ships.
As the industry continues to explore ever deeper waters, like those in the
South Atlantic off the coast of Brazil, we will continue to be a strong
partner for our customers for offshore oil and gas exploration, production,
service and support.
Merchant
We continue to invest in technology that addresses the need for more
efficient and environmentally sustainable power and propulsion systems.
Our successful design and systems integration approach was validated in
2011 through an order by NorLines for two award-winning NVC 405
Environship short sea cargo vessels. These vessels incorporate a wave-
piercing hull, a liquid natural gas engine and an integrated rudder and
propeller system, which, in combination, reduces fuel consumption and
cuts CO2 emissions by up to 40 per cent compared to conventional vessels.
Naval
Power and propulsion equipment was delivered for the UK’s Queen
Elizabeth class aircraft carriers. In early 2011, we received an order from
Lockheed Martin for the provision of MT30s, the world’s most powerful
Rolls-Royce Holdings plc Annual report 2011Business reviewBusiness review 24
Energy
Significant demand for our products and services in offshore oil
and gas applications drove a 57 per cent increase in the order
intake to £1.5 billion, as the order book increased 28 per cent.
Revenue declined by three per cent, largely due to the phasing of OE delivery in the power generation
business. Demand for aftermarket products and services continued to grow strongly, with an increase of
ten per cent over 2010.
Profit fell by 11 per cent to £24 million as a result of a change in revenue mix and the additional charges
incurred to develop the civil nuclear business and our options in tidal and fuel cells. This was despite the
benefit of the non-recurring industrial Trent retrofit charges incurred in 2010.
Highlights
50 RB211 gas turbine packages ordered for oil and gas applications
50 Bergen diesel engines ordered for land-based power applications
Service revenue up ten per cent, with 701 engines under long-term agreements
Achieved the prestigious ASME-N accreditation for UK nuclear manufacturing facilities
Completed acquisition of leading US Remote inspection services business, R. Brooks Associates
Signed a 14-year contract with EDF to supply I&C technologies for the world’s largest reactor
modernisation project
Key financial data
Order book £bn
Engine deliveries
Underlying revenue £m
Underlying OE revenue (£m)
Underlying service revenue £m
Underlying profit before
financing £m
2007
0.9
+80%
78
558
+2%
269
289
5
+128%
2008
1.3
+44%
106
755
+35%
385
370
(2)
-140%
2009
1.3
0%
87
1,028
+36%
558
470
24
+1300%
2010
1.2
-8%
95
1,233
+20%
691
542
27
+13%
2011
1.5
+28%
75
1,199
-3%
602
597
24
-11%
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£1,199m
Underlying revenue 2011
£24m
Underlying profit 2011
Rolls-Royce Holdings plc Annual report 2011Business review
25
Energy
For more information on
energy go online:
www.rolls-royce.com/energy
www.rolls-royce.com/nuclear
Our energy business supplies customers with gas turbines, compressors,
reciprocating engines, and related services to support the efficient
production of oil and gas, and power generation around the world. We are
establishing a strong position in the civil nuclear sector for the provision of
mission-critical equipment, systems and engineering services.
The balanced nature of our portfolio has enabled us to deliver solid
revenues of £1.2 billion, broadly in line with 2010. While the power
generation sector in mature economies remains suppressed, due to excess
generating capacity and low industrial demand, we continue to see
growth in developing countries. The demand for oil and gas remains high,
driven by a resilient oil price and global demand growth. In the second half
of the year we secured significant oil and gas orders, increasing market
share in the key Brazilian offshore market.
Oil and gas
In total, 50 RB211 packages were ordered during the year for oil and gas
applications, 38 of which were for offshore.
The high price of oil continues to drive capital investment in the sector,
particularly in deepwater exploration and production environments where
the Group has technologies and expertise that are applicable. The business
was awarded a new contract, valued at up to US$650 million to supply 32
RB211 gas turbine power generation packages and related services to
Petrobras to support its long-term production activities offshore Brazil. This
order increases the number of Rolls-Royce RB211-powered industrial gas
turbine units installed in Brazil over the past ten years to 62.
In February 2011, we announced plans for the construction of a new
purpose-built packaging, assembly and test facility in Rio de Janeiro, Brazil.
The facility, expected to become operational in the first quarter of 2013,
will strengthen our support of Petrobras’ exploration and production
activities in the rapid growth pre-salt deepwater oil fields offshore Brazil.
Tognum
As with the marine business, our energy business will benefit from the
acquisition of Tognum through our joint venture with Daimler. By
combining our medium-speed diesel and gas Bergen engines business
with Tognum’s high-speed reciprocating engines, we will create a world
leading reciprocating engines offering in the energy industry, significantly
enhancing our core product and systems portfolio and global network of
sales and service facilities. This will benefit customers across high-growth
applications, including offshore and shale gas fracturing, as well as primary,
standby and rental land-based power generation. In January 2012, the
ownership of Bergen Engines transferred from Rolls-Royce to Engine
Holding GmbH, the 50/50 joint venture company formed with Daimler.
Civil nuclear
Rolls-Royce made significant progress in developing its nuclear business in
2011, securing the prestigious ASME-N stamp accreditation at our UK
nuclear manufacturing facilities. Plans for a new UK civil manufacturing
facility progressed throughout 2011 and the business received outline
planning permission for a potential site in South Yorkshire.
Strategic relationships with reactor vendors and utility operators were
further strengthened. An important cooperation agreement was signed
with Areva in March 2011, to cover the manufacture of complex components
for the first European Pressurised Water Reactors (PWR) to be built in the UK.
Enhanced MoUs were also signed with Nuclear Power Delivery UK and
EDF, the world’s largest utility operator. Additionally, the business entered
into a landmark agreement with Rosatom, the Russian state-owned
nuclear company, for the development of global civil nuclear programmes.
As a key step in growing its reactor services business, Rolls-Royce
completed the acquisition of US-based R. Brooks Associates, a world leader
in remote visual inspection.
In addition, we expanded our role in China’s gas pipeline industry with
contracts to supply PetroChina, the largest oil and gas producer in China,
with six RB211 gas turbine compressor packages for Line 2 of the West-East
China Pipeline Project.
We signed a €250 million contract with EDF to supply instrumentation and
control (I&C) technologies to the world’s largest reactor upgrade
programme, being carried out in France. We also opened a dedicated I&C
service centre to enhance our operations for customers in China.
Power generation
The power generation sector remains suppressed in the developed world,
the traditional market for the Trent gas turbine, which resulted in three
new Trent unit orders.
Demand for Bergen reciprocating engines remains strong, reflected by an
order intake of 50 units, of which 30 are for Bangladesh to help address the
country’s power shortfalls, bringing total Bergen engines orders in
Bangladesh to 82.
Services
Demand for aftermarket products and services again grew strongly,
delivering revenue of £597 million, an increase of ten per cent over 2010.
Including the land-based reciprocating engines, there are now a total of
701 units, or 35 per cent of the engine fleet, under long-term service
agreements. In 2012, we will launch the RB211 Gzero, an aftermarket
upgrade product for the RB211-G gas generator that increases power by a
nominal ten per cent.
Six RB211 gas turbine sets provide 100MW for this floating production,
storage and offloading unit. (image © Total S.A.)
Rolls-Royce Holdings plc Annual report 2011Business reviewBusiness review 26
Excellence in technology
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Our research and development investment
represents both a commitment to
continuous improvement of our existing
portfolio and a long-term investment
in future technology.
In 2011, Rolls-Royce invested £908 million
in gross research and development, of
which £520 million was funded from
Group resources. Globally, 475 new patent
applications were approved for filing –
a record number for the Group.
Research and technology
The Group’s 12,400 engineers are an increasingly integrated global
resource, whose activities include research and technology, product
development and in-service support.
Our successful model of collaboration, through a network of 28 University
Technology Centres and seven advanced manufacturing research centres,
provides access to world-class research.
With the opening of three advanced manufacturing research centres in
the UK during 2011, a total of five are now operational. The next two are
due to be opened in the US in 2012 and Singapore in 2013. These centres
bring companies, industrial sectors and universities around the world
together, in a common endeavour to develop step-change improvements
across a portfolio of manufacturing technologies.
In addition, the Advanced Simulation Research Centre was opened in
Bristol, UK, in March 2011 and is now enabling Rolls-Royce and member
organisations to access the latest simulation technologies for product
development, reducing the need for costly physical testing and improving
product design efficiency.
Civil aerospace
The year was notable for the successful entry into service of our latest large
engine, the Trent 1000, as launch engine for the Boeing 787 Dreamliner.
The Trent 1000 completed 670 flights in service with launch customer ANA
by the year end.
Flight testing of the BR725-powered Gulfstream G650 recovered from the
tragic loss of a test aircraft in April to achieve Provisional Type Certification
from the Federal Aviation Authority in November 2011.
The Trent XWB development programme continued successfully, with
several key functional, maturity and certification tests completed at sites in
Rolls-Royce Holdings plc Annual report 2011Business review 27
Excellence in technology
475
Patent applications were
approved for filing – a record
number for the Group.
Gross research and development
£m
1,000
750
500
250
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824
885
864
923
908
07
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Major technology programmes
The Trent XWB is the latest member of the Trent family in
development and is designed to be the most efficient,
large aero gas turbine ever produced.
For more information on
excellence in technology go online:
www.rolls-royce.com/technology-innovation
four countries. The engine is the only option for the Airbus A350 airliner
family. The Trent XWB promises to be the most efficient, large aero gas
turbine ever produced.
Our ongoing work to improve the environmental performance of
our products continued with key technology demonstrators. The
Environmentally Friendly Engine (EFE) completed successful testing of an
advanced ‘lean burn’ combustor. Meanwhile, the latest E3E medium-size,
two-shaft demonstrator core completed testing at the University of
Stuttgart’s altitude facility during the year.
Defence aerospace
Our engineers in Indianapolis are working on key enabling technologies
for the US Air Force ADVENT contract. This work focuses on developing
and demonstrating variable cycle engine technologies aimed at
incorporation in future generation US military aircraft. The team
completed designs and procured test hardware in preparation for a core
engine test which will take place in 2012 and a full demonstrator engine
test in 2013.
In addition, during the year we won contracts for the US Air Force
Research Lab (AFRL) Integrated Vehicle Energy Technology (INVENT)
and Integrated Power and Thermal Management System Development
(IPTMSD) programmes. These both focus on development of electrical
and thermal management architectures to support the next generation
of military aircraft.
Marine
Engineers in our submarines business are engaged in detailed design of
the PWR3 reactor plant, which, in May 2011, was selected for the next
generation of Royal Navy submarines. This project now represents the
second largest technology programme in Rolls-Royce after the Trent XWB.
Rolls-Royce has been designing and supplying nuclear reactors for the
Royal Navy for over 50 years, with the PWR2 model currently the latest
version in service. At the Nor-Shipping Exhibition in Oslo, our Environship
concept, the NVC 405 Environship, won the ‘Next Generation Ship’ award,
and we launched a new ‘concept bridge’ for marine vessels.
In other marine programmes, we completed our first production Permanent
Magnet Tunnel Thruster, and the Rolls-Royce operated NATO Submarine
Rescue Service achieved full operational capability. A prototype carbon
fibre azimuthing thruster exceeded performance and noise expectations
during sea trials. Azimuthing thrusters rotate 360 degrees allowing them to
perform both the propulsion and steering duties for a vessel.
Energy
In civil nuclear, EDF selected Rolls-Royce to modernise the safety-critical
I&C systems of 20 French nuclear power plants. This contract, combined
with a 25-year services agreement, means we are committed to support
our SPINLINE™ technology with EDF until 2048.
Summary
Rolls-Royce has developed a reputation for engineering excellence and
has been at the forefront of innovation for over 100 years. We continue to
push technological barriers, create intellectual property on behalf of our
stakeholders and develop advanced power products across each of our
chosen markets.
Rolls-Royce Holdings plc Annual report 2011Business reviewBusiness review 28
Excellence in operations
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£274k
Underlying revenue per employee
£467m
Capital expenditure on new and
improved facilities
We continue to invest in operational capacity
to fulfil the commitments we have made to
our customers and to enable the long-term
growth and productivity of our business.
Focused on efficiency and delivery
We are focused on improving the efficiency of all our operational
activities while, at the same time, expanding capacity in order to deliver
our record order book.
In 2011, our capital investment on new and improved facilities was
£467 million. Over the last decade underlying revenue per employee
has more than doubled from £128k in 2001 to £274k in 2011.
Our Group is headquartered in the UK which remains our main
employment centre and a key operations and manufacturing base.
However, we are an increasingly global company. Early in 2012 we
celebrated the opening of our major new facilities at Seletar, in Singapore,
where we will manufacture wide-chord fan blades, and assemble and test
Trent aero engines – the first time we have undertaken these activities
outside the UK. This represents an important commitment to our growing
customer base in Asia, and is one of 14 new facilities that we have opened
over the past three years in locations including the UK, Germany, the US,
Norway, China and Brazil.
As well as extending our global footprint, we continue to expand our
product portfolio. 2011 saw the Trent 1000 engine enter service with ANA
and the production programme for this latest member of the Trent family
come on stream. In other major programmes we started production
deliveries of the LiftSystem for the Joint Strike Fighter and the marine gas
turbine, MT30 for the US Navy. The BR725 which powers the new
Gulfstream G650 is scheduled to enter service later this year.
In October 2011, we announced a new joint venture with Pratt & Whitney
to develop engines for the next generation of mid-sized aircraft. We also
decided to restructure our participation in IAE, the joint venture which
produces the V2500 engine for the A320 family of aircraft. We agreed to
sell our equity stake in IAE to Pratt & Whitney, while remaining an
important supplier of parts and engineering support for the engine
programme. We continue to assemble 50 per cent of V2500 engines.
At the same time we continue to aim to offset all inflationary pressures
through improved productivity and waste reduction programmes.
Rolls-Royce Holdings plc Annual report 2011Business review
29
Excellence in operations
For more information on
excellence in operations go online:
www.rolls-royce.com/suppliers
New manufacturing and
assembly facilities Singapore
We have developed two new plants, one for the assembly
and test of Trent engines and the other to manufacture our
high-technology wide-chord fan blades for aero engines.
Integrated global approach
As we expand around the world, our operations strategy demands an
integrated approach across activities, time zones and locations.
We continue to develop local capabilities to meet our customer
requirements where appropriate. Brazil is a good example of this. We
have had an aero repair and overhaul business there for over 50 years.
In 2009 we opened a service centre to support our growing marine
business and, in 2011, we announced plans for the construction of a new
US$100 million-plus gas turbine package, assembly and test facility for our
energy business. This is expected to become operational in the first
quarter of 2013.
These investments not only grow our global footprint but bring us closer
to our customers in Brazil, adding significantly to our capabilities in a key
growth market and enabling us to pursue further opportunities.
Supply partnerships and new programmes
Close collaboration with our suppliers is critical to our continued success.
Around 70 per cent of our manufacturing is conducted within our supply
chain. As we continually develop intellectual property in technology,
manufacturing, materials and processes we decide which elements
of our programmes we produce ourselves and those which will be
subcontracted to our suppliers. Our relationship is open, analytical and
collaborative. We estimate that our supply base is currently investing at
around twice the level of Rolls-Royce in order to accommodate growth
and deliver greater efficiency.
As well as working with suppliers, we partner with universities and
manufacturing research centres around the world to develop new
technologies and processes which are more effective, efficient and robust.
Rolls-Royce is a long-term business in which consistent investment
sustained over many years has delivered expanding global capability,
accompanied by steadily improving productivity and performance.
These factors coupled with a high focus on product integrity, enable
us to effectively address both our customers’ current needs and their
future requirements.
Rolls-Royce continues to manufacture parts and assemble engines for the
IAE V2500 programme.
Rolls-Royce Holdings plc Annual report 2011Business reviewBusiness review 30
Sustainability
We remain committed to working with all our
stakeholders to develop new approaches and
technologies that will help provide solutions to
sustainable economic growth.
We are striving to power a better world and
recognise that we have a key part to play. We
will continue to invest for the long term; we
have a strong track record of innovation, and
a long-standing commitment to research and
development. Our sustainability programmes
address: the environment; our people; and, the
communities in which we operate.
2011
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 2011,
Rolls-Royce retained its Gold status with an overall score of 91 per cent.
We also scored 94 per cent in the Environmental Index component of
the overall survey.
Dow Jones Sustainability World and European Indexes (DJSI)
Rolls-Royce has retained its position in the DJSI for the tenth
consecutive year, with an overall score of 78 per cent (aviation and
defence sector average 49 per cent).
Carbon Disclosure Project (CDP)
Rolls-Royce continues to be one of the leading companies in the CDP
Index. Although our disclosure score in 2011 was lower than the
previous year (75 vs 79 per cent in 2010) we remain committed to
improving and reporting the carbon footprint of our operations.
Environment
Our environment strategy focuses on three key areas:
1. maintain our drive to reduce the environmental impact of all our
business activities;
2. further reduce the environmental impact of our products; and
3. develop entirely new low emission and renewable energy products.
1. Maintain our drive to reduce the environmental impact of all our
business activities
Greenhouse gas emissions
We recognise the need to reduce the global greenhouse gas emissions
(GHG) within our operations. For the past two years individual reduction
targets and budgets have been agreed for our top 25 energy consuming
sites. This has resulted in a further five per cent reduction (normalised on
turnover) during 2011 in total GHG emissions (1) (including product test and
development). Emissions from our facilities (excluding product test and
development) have reduced by six per cent since 2009 compared with our
five per cent reduction target by 2012 (2). In absolute terms, total GHG
emissions have increased to 586.5 kt CO2e (scope 1 and 2).
(1) Following further validation in 2012, the Group GHG emissions for 2009 have been re-stated.
(2) Energy/GHG data for 2011 has been forecast based on data collected during January to October
2011. For details of the methodology see our ‘Basis of Reporting’ available at www.rolls-royce.com.
In 2011, we invested over £3.5 million in energy improvement projects
including the upgrade of lighting, boiler controls and metering.
Our new facility at Seletar received the Singapore government’s Building
Construction Authority (BCA) Green Mark (Platinum) award in construction,
for having a reduced environmental footprint.
Progress on certification
Rolls-Royce continues to maintain accredited third-party certification to
ISO 14001 for its environmental management systems, achieving full
global re-certification in 2011.
The ‘green roof’ of our manufacturing facility in Singapore gained a BCA
award for environmental construction.
Rolls-Royce Holdings plc Annual report 2011Business review
31
Sustainability
For more information on
sustainability go online:
www.rolls-royce.com/sustainability
Global supply chain
In 2011, we led Global and Regional Supplier Forums, which focused on
near-term and long-term 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.
2. Further reduce the environmental impact of our products
We believe that we can make a significant contribution to mitigating
emissions by providing increasingly efficient products worldwide. We
benefit from independent expert advice from an Environmental Advisory
Board made up of distinguished academics who are leading authorities in
their respective fields to inform business strategy and design process. In
2011, the Group renewed its commitment, now extended to 2050, in taking
a leading role in the goals set by the Advisory Council for Aviation Research
and Innovation in Europe (ACARE). These challenging goals include:
• reducing aircraft CO2 emissions by 75 per cent per passenger kilometre
• reducing noise by 65 per cent; and
• 90 per cent reduction in oxides of nitrogen (NOx) relative to the year 2000.
The environmental improvements already achieved by the Trent 900 and
1000 engines for the Airbus A380 and Boeing 787 respectively, and in
future the Trent XWB for the Airbus A350 XWB, will help us make progress
meeting our contribution towards the ACARE goals.
Chart shows target of 20% lower CO2
Trent 895
Trent family
ACARE target
0
-5
-10
-15
-20
Trent 500
Trent 900
Trent 1000
Trent XWB
2000
2005
2010
2015
2020
(Advisory Council for Aviation Research and Innovation in Europe)
In the marine segment, the Rolls-Royce Environship concept, received the
prestigious ‘Next Generation Ship’ award at the Nor-Shipping event held
in, Norway. The Rolls-Royce Bergen B-Series lean-burn gas engines, as used
in the Environship, emit around 20 per cent less CO2 than comparative
diesel engines. The use of gas fuelled engines means that NOx emissions
are reduced by about 90 per cent and SOx emissions are negligible. These
emissions already meet the International Maritime Organisation legislation
due to come into force in 2016.
3. Develop entirely new low emission and renewable energy products
The Group is investing in other renewable energy sources such as tidal
power, working in partnership with the UK Energy Technologies Institute.
In addition, we are working with customers and fuel companies to ensure
that future biofuels, which will be part of the solution for aviation towards
2050, meet our requirements, with the important caveats that they are
sustainable, do not compete with the growth of food crops and are used
in the most effective way to maximise the reduction in GHG emissions.
Nuclear generation delivers low carbon power. Rolls-Royce has extensive
knowledge of nuclear safety and I&C technology.
Nuclear power will represent an important component of future low-
carbon electricity generation. We have substantial experience in this area
gained through supplying power systems for the Royal Navy nuclear
submarine fleet for many decades. Our core capabilities in safety and I&C
will enable the Group to provide solutions in this area that will help
address the requirements for low or zero carbon power generation.
Our people
Our working environment
We seek to create an inclusive working environment that attracts and
retains the best people, enhances their flexibility, capability and
motivation, and encourages them to be involved in the ongoing success
of the Group.
The organisation is experiencing a period of significant change as we grow
and invest globally. We continue to place great value on giving a voice to
our workforce and engage with our employees in many ways throughout
the world to ensure they are kept informed of changes that may impact
them. For example, employee opinions are obtained via a two-year rolling
engagement programme and improvement activities are then embedded
into local and corporate business planning activities. In addition we have
established communication channels which provide updates on key
business changes and activities.
Rolls-Royce employs 40,400 people in more than 50 countries. Our
workforce is dispersed globally across our business segments as follows:
Business segments average number of employees 2011
Civil aerospace
Defence aerospace
Marine
Energy
Total
Employees
20,600
6,800
9,400
3,600
40,400
Rolls-Royce Holdings plc Annual report 2011Business reviewBusiness review 32
Sustainability
Ethics
The Global Code of Business Ethics (Global Code) supports the Group’s
approach to business conduct and defines its ethical principles and
behaviours. Internal and external assessments of the Global Code during
2011 confirmed that it represents best-in-class standards.
During the year, the Group completed a review of its anti-bribery and
corruption related policies and procedures. This review considered
applicable law, including the UK Bribery Act, which came into force on
July 1, 2011. We also put in place a compliance organisation, led by a Chief
Compliance Officer. We issued a number of new and updated global
polices in multiple languages including: raising concerns, conflicts of
interest, competitive intelligence and, sponsorships and charitable
donations. Training was developed to support these as required.
Rolls-Royce actively supports aerospace and defence industry initiatives to
drive responsible business behaviour in the sector. We are represented on
the Business Ethics Committee of the Aerospace and Defence Industries
Association of Europe (ASD) and we are one of the international
companies on the task force managing the International Forum for
Business Ethics (IFBEC), a body which brings together US and European
aerospace and defence companies to share best practice and develop
common standards.
Encouraging diversity
Our global governance framework for diversity includes a senior executive
Global Diversity Steering Group that provides leadership and shapes
strategic direction.
During 2011, our most senior executives have been reverse mentored by a
colleague who is junior to them in the organisation. The reverse mentors
are a diverse group in terms of gender, nationality, business, function and
their working location. The aim is to give senior executives a different
perspective from a colleague who can share diverse experiences and ideas.
Lord Davies of Abersoch, on behalf of the UK Government, outlined a
number of recommendations in 2011 to improve gender diversity in UK
boardrooms. We will take opportunities to increase diversity at Board level,
and have committed to make demonstrable progress on this by 2015.
Overall female representation across our global workforce is 15 per cent,
seven per cent at the senior executive level and six per cent in our Group
Leadership Team (GLT). Approximately two thirds of our workforce is in
engineering or manufacturing roles where female representation has
been historically low. We continue to counter this through active
involvement in education outreach along with recruitment and
development planning in order to maximise the potential of diverse talent
across our global business. We are encouraged by some of the progress
we are making in graduate recruitment where female representation has
steadily increased over recent years. 25 per cent of participants in our
graduate development programmes are female and this increases
significantly in functions outside of engineering and manufacturing.
We participate in the FTSE 100 Cross Company Mentoring Programme, the
objective of which is for the chairmen and chief executives to provide
advice and guidance to senior females with the aim of attaining a
non-executive and/or an executive director role. Our Chairman is a mentor
and three of our female executives have participated to date.
Our graduate recruitment team won the award for best graduate recruiter
in the Engineering Sector at the TARGETjobs awards. These UK national
awards are voted entirely by students via an online poll.
The Group is committed to developing a diverse workforce and equal
opportunities for all. 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.
Learning
During 2011, we provided over 3,500 learning solutions to our employees
from all of our 57 countries, resulting in 35,500 employees undertaking
more than 105,000 days of learning. We also built new Learning and
Development Centres in Singapore and Ålesund, Norway. The centres will
deliver training to both customers and employees in the regions.
Learning investment for 2011 was £38 million.
Recruitment
In 2011, over 2,500 experienced professionals were recruited to support the
growth of our business, more than double the previous year. More than
50 per cent were recruited from outside of the UK and 34 per cent came
from countries outside the UK/US. We ran major recruitment campaigns
across engineering, manufacturing and purchasing and these constituted
the majority (61 per cent) of our hiring in 2011.
During 2011, more than 400 young graduates joined Rolls-Royce. Our
campus teams actively engaged with more than 60 universities in the UK,
Europe, Asia, and Americas and we recruited 242 graduates (up nine per
cent) on to our graduate programme from 43 universities and 25 nations
globally. We have plans to significantly increase our graduate programme
size to 389 (60 per cent increase) in 2012 to accommodate our long-term
growth objectives.
In addition, we recruited 295 apprentices in Europe and were awarded top
100 apprenticeship employer status in the UK.
Health and safety at work
Over the past five years our focus on improving our health, safety and
environment (HS&E) performance has resulted in the number of significant
injuries that occur each year being almost halved from 1.31 total reportable
injuries (TRI) per 100 employees in 2006, to 0.66 TRI per 100 employees in 2011.
Rolls-Royce Holdings plc Annual report 2011Business review 33
Sustainability
For more information on
sustainability go online:
www.rolls-royce.com/sustainability
Performance improvement is delivered through the implementation
of a focused global HS&E strategy covering: leadership; capability;
management systems; risk; assurance; learning from incidents and
informed decision making.
policies; and renewable energy. We contributed to the development of the
Commission’s proposal for ‘Horizon 2020’ – a new Research and Innovation
funding framework for 2014-2021, and also ‘Flightpath 2050 – Europe’s
vision for Aviation’.
As part of a global safety programme, we have invested more than
£20 million to further enhance the safety standards of our machinery. More
than 11,000 machines have been reviewed worldwide and for around
2,500 machines, opportunities to enhance safety still further were identified
such as improving guarding and the fitting of additional safety features.
Community investment
Rolls-Royce has a firm, long-standing commitment to the communities
in which we operate around the world. During 2011, the Group’s total
contributions (including money, employee time and gifts in kind) were
£7.1 million.
A global programme of review and corrective action is also underway to
improve our control of lifting operations. Similarly, a global programme to
improve process safety management is focusing on our management of
operational processes with hazards.
Our community investment activities support the Group’s strategy and
future success, particularly in the areas of: recruitment and employee
retention, employee engagement, professional development and the
Group’s reputation in the community.
‘Leading excellence in HS&E’ workshops have been held with leadership
teams from all of our sectors and businesses. ‘Leadership in Action’ days
were also held for some 700 senior leaders with HS&E being one of the
topics covered.
Engaging with our communities
Working with governments
Rolls-Royce seeks to build strategic relationships with host governments in
our key market countries. Governments are often our direct customers.
They set the legislative and policy framework within which our business
must be conducted. They are a potential source of funding and support
for R&T, R&D, manufacturing, education and training initiatives, as well as
for certain capital projects. And finally, on occasion, they support or
sponsor our partners, suppliers and competitors.
We engage in dialogue and negotiation to try to align the business needs
of Rolls-Royce with the political, social, economic, industrial and
commercial requirements of the national government. Where we can
achieve such alignment, for example in Singapore, the benefits for both
the Group and the country can be considerable.
On March 6, 2011, we hosted a meeting of the UK Cabinet in Derby.
Sir John Rose addressed the Cabinet before their meeting and later that
day, Prime Minister David Cameron performed the official opening of the
new technology centre on site.
On October 25 and 26, 2011, Rolls-Royce along with the University of
Sheffield and Boeing led a series of high profile events in Westminster to
highlight the importance of high-value manufacturing. These events
generated considerable interest from Government Ministers,
Parliamentarians and officials.
With a majority of legislation affecting our European operations emanating
from the European Union, we are now building extra capacity in our EU
Affairs team. Throughout 2011, our key challenge in the EU has been to
monitor the EU legislation on financial regulatory reform and its impact on
the real economy and potential unintended consequences for non-
financial companies like Rolls-Royce. Other policy areas have also required
our attention, such as the inclusion of marine emissions in EU’s GHG
commitment; new noise regulation in the field of aviation; alternative fuel
During the year, the Group approved a new global charitable contributions
and social sponsorships policy and procedure, confirming our major areas
of support as:
• education and skills, particularly in the areas of STEM which are key
to our future success;
• environment, adding value to the Group’s environment strategy;
• social investment, making a positive difference to the communities
in which we operate;
• arts and culture, contributing to the cultural vibrancy in geographic
areas in which we operate; and
• requests relating to the Group’s business such as armed services
related, engineering and aviation.
The new policy and procedure also sets out a clear structure for global
governance, ensuring consistency of approach and global visibility of
contributions.
2011 charitable contributions and sponsorships, and payroll giving
Charitable contributions and social sponsorships
– UK
– Asia and Middle East £0.3m, Americas £0.7m, Europe £0.6m
Commercial sponsorship
Employee time
Gifts in kind
Total
Payroll giving UK £0.5m and North America £0.3m
£m
2.1
1.6
0.7
2.6
0.1
7.1
0.8
£7.1m
The Group’s total contributions
and sponsorships
Rolls-Royce Holdings plc Annual report 2011Business reviewBusiness review
34
Principal risks and uncertainties
It is recognised that the Group’s business
objectives can only be achieved if risks
are taken and managed effectively. By
understanding the nature of our risks we
can be in a position to make better decisions
and maximise the returns of the Group while
managing our reputation.
Regular review of risks and actions to address risks takes place at all levels
of the Group. Risks are defined as threats to the achievement of business
objectives or to the continuing reputation of the Group. The top level
corporate risk register reflects the outcomes of lower level programme,
function or business unit risk reviews and is reviewed in detail by the risk
committee. Nevertheless, the Board retains its strategic responsibility for
risk decision making regularly reviewing the corporate risk register and
considering these risks in the context of the business strategy, as reported
to it by the risk committee.
The risks and uncertainties on these pages are considered to be principal
to delivering our strategy and business results, and specific to the nature of
our business, notwithstanding that there are other risks that may occur
and may impact on the achievement of the Group’s objectives.
Risk or uncertainty and potential impact
How we manage it
Significant external events affecting demand for transportation such
as terrorism, political change, global pandemic, natural disaster or continued
and deeper economic retrenchment
Failure to minimise the environmental impact of the Group’s products
and operations leading to reputational damage and ultimately loss of
market share
Established a balanced business portfolio
Strong access to parts of the world where demand remains robust
Diversity of global operations
Regularly exercised senior response team
R&D in low carbon technologies such as nuclear power, tidal energy
and fuel cells
Significant investment in innovative solutions for aviation,
marine and energy markets
Governance structure headed by the environment council
to oversee improvements
Reduction in government spending due to global financial uncertainty
and budgetary constraint in Europe and the US in particular causing
reduced revenues on existing platforms and inhibiting investment in
new technologies
Development of a diversified portfolio of products and services for various
markets and regions
Proactive lobbying for research and technology funding
Achieve commitments under current contracts
Failure of counterparties, including financial institutions, customers, joint
venture partners and insurers, driven mainly by the economic uncertainties
and pressures in the current environment, potentially affecting short-term
cash flows
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
Fluctuations in foreign currency exchange rates affecting operational
results or the outcomes of financial transactions
Long-term hedging policy, using a variety of financial instruments
(see note 17, page 101 for more information)
Regulatory changes relating to financial derivatives may require
the Group to post cash collateral, increasing cash flow volatility and the risk
of default
Where applicable, currency matching of assets and liabilities to manage
translational exposures
Regular review of risks and appropriate risk mitigation performed where
material mismatches arise
Close monitoring of proposed changes
Evaluation of potential financial impact in terms of cash collateral required
and use of public trading exchanges
Lobbying politicians and regulators in conjunction with other large
European corporates
If the Group’s 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
Establishment of long-term customer relationships to differentiate
products and services and protect margins
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
Rolls-Royce Holdings plc Annual report 2011Business review 35
Principal risks and uncertainties
Risk or uncertainty and potential impact
How we manage it
Non-compliance with applicable legislation and regulations,
for example export controls, anti-bribery and authorisation of
chemicals and substances compromising the ability to conduct
business in certain jurisdictions and exposing the Group to
reputational damage and potential financial penalties
A business-wide compliance structure focusing on anti-bribery and
corruption legislation
Exports committee, chaired by the Chief Operating Officer directs strategy
and policy on exports
Resources to comply with requirements are embedded throughout
Failure to grow capable resource globally due to demographic trends
and limited supply of appropriately skilled personnel affecting programme
delivery, damaging reputation and stifling opportunities for future innovation
Product performance not meeting expectations affecting safety
and reliability with adverse long-term financial consequences
the business
Employee awareness training
Continued significant investment in resourcing and capability infrastructure
Objective assessment of performance using improved system for
developing and monitoring the competency of individuals
Regularly refreshed framework to develop managers and leaders
Operating a ‘safety first’ culture, including delivery of regularly refreshed
mandated product integrity training to employees and suppliers
Future safety requirements are defined by the product safety assurance team
Activities to improve maturity of products at entry into service
Engineering focus on improvements to product reliability and service lives
Disruption of supply chain due to external factors or failure to deliver
parts to committed costs and quality reducing the ability to meet customer
commitments, win future business or achieve operational results
Continuous improvement of all processes and project management
controls to ensure both technical and business objectives are achieved
Customer excellence centre provides improved response to and analysis
of supply chain disruption
Focus on production quality through plant and supplier improvement plans
Providing duality of capability through establishment of world-class
manufacturing centres
Pursuit of low cost sourcing strategies
Downgrade in credit rating restricting the Group’s ability to secure
funding, hedge forward or provide vendor financing
The Group has developed a strong financial risk profile and continues to
improve the business risk profile
Failure to conduct business in an ethical and socially responsible
manner causing disruption and reputational damage
Ethics committee established to oversee and maintain
the highest ethical standards (see page 50 for its report)
Failure to manage multiple complex product programmes
effectively with potentially significant adverse financial and reputational
consequences, including the risk of impairment of the carrying value of
the Group’s intangible assets and the impact of potential litigation
Breach of IT security through increasing volumes of data being
transmitted electronically across international borders may cause controlled
data to be lost, corrupted or accessed by unauthorised users, impacting the
Group’s reputation
Failure to execute the programme to modernise the IT infrastructure
impacting efficiency and effectiveness of business operations
Global Code, 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
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
Continual upgrading of security equipment and software
Deployment of a multi-layered protection system that includes web
gateway filtering, firewalls and intrusion detection
Specialist resources employed to increase capability
Active sharing of information through industry and government forums
Governance structure established to oversee the programme
Project and risk management methodologies are being followed
Specialist resources have been secured to increase capability
Involvement of multiple service providers to provide competition and
remove dependency on any single supplier
Loss or unintended disclosure of Intellectual Property damaging
the Group’s competitive position and causing potential breach of
contractual requirements
Strengthening of resources to manage patents
Creation of a global framework of Intellectual Property officers
Procurement of a global IT system to make patent information more
widely available to engineers
Rolls-Royce Holdings plc Annual report 2011Business reviewBusiness review 36
Additional financial information
Foreign exchange
Foreign exchange rate movements influence the reported income
statement, the cash flow and closing net cash balance. The average and
spot rates for the principal trading currencies of the Group are shown in
the table below:
USD per GBP
EUR per GBP
Year end spot rate
Average spot rate
Year end spot rate
Average spot rate
2011
1.55
1.60
1.20
1.15
2010
1.57
1.54
1.17
1.17
Change
-1%
+4%
+3%
-2%
Taxation
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. Every effort is made to maximise the tax efficiency of business
transactions and this includes taking advantage of available tax incentives
and exemptions. However, 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.
Investments and capital expenditure
The Group subjects all major investments and capital expenditure to a
rigorous examination of risks and future cash flows to ensure that they
create shareholder value. All major investments require Board approval.
Capital structure
Capital summary – £ million
Total equity
Cash flow hedges
Group capital
Net funds
2011
4,519
52
4,571
223
2010
3,979
37
4,016
1,533
Operations are funded through various shareholders’ funds, bank debt,
bonds, notes and finance leases. The capital structure of the Group
reflects the judgement of the Board as to the appropriate balance of
funding required.
Funding is secured by the Group’s continued access to the global debt
markets. Borrowings are funded in various currencies using derivatives
where appropriate to achieve a required currency and interest rate profile.
The Board’s objective is to retain sufficient financial investments and
undrawn facilities to ensure that the Group can both meet its medium-
term operational commitments and cope with 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.
After repayment from cash resources of the €750 million Eurobond, the
Group retained at year end aggregate liquidity of £2.5 billion. This liquidity
comprised net funds of £223 million and aggregate borrowing facilities of
£2.3 billion, of which £1.2 billion remained undrawn. This represents a
34 per cent decrease in net drawn borrowing facilities during the year.
The maturity profile of the borrowing facilities is regularly reviewed to
ensure that refinancing levels are manageable in the context of the
business and market conditions. No facilities mature in 2012. There are
no rating triggers in any borrowing facility that would require the facility
to be accelerated or repaid due to an adverse movement in the Group’s
credit rating.
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.
During 2011, the £250 million bank revolving credit facility (RCF) due in
2012 and £750 million RCF due in 2013 were both refinanced with a new
£1 billion RCF due in 2016 provided by a syndicate of relationship banks.
The borrowing margin for this new RCF varies for a given credit rating.
Depending on the extent drawn, the current margin would be 0.40 per
cent to 0.70 per cent over sterling LIBOR.
Financial risk management
The Board has an established and structured approach to financial risk
management. The Financial Risk Committee (Frc) is accountable for
managing, reporting and mitigating the Group’s financial risks and
exposures. These risks include the Group’s principal counterparty, currency,
interest rate, commodity price, liquidity and credit rating risks outlined in
more depth in note 17 to the financial statements. The Frc is chaired by the
Finance Director. The Group has a comprehensive financial risk policy that
advocates the use of financial instruments to manage and hedge business
operations risks that arise from movements in financial, commodities,
credit or money markets. The Group’s policy is not to engage in
speculative financial transactions. The Frc sits quarterly to review and
assess the key risks and agree any mitigating actions required.
The Group conducts some of its business through a number of joint
ventures. A major proportion of the debt of these joint ventures is
secured on the assets of the respective companies and is non-recourse
to the Group. This non-recourse debt is further outlined in note 10 to
the financial statements.
Rolls-Royce Holdings plc Annual report 2011Business review 37
Additional financial information
For more financial information go online:
www.rolls-royce.com/investors
Credit rating
Rating agency
Moody’s Investors Service
Standard & Poor’s
Rating
A3
A-
Outlook
Stable
Positive
Grade
Investment
Investment
The Group subscribes to both Moody’s Investors Service and Standard &
Poor’s for independent long-term credit ratings. At December 31, 2011,
the Group maintained investment grade ratings from both agencies.
As a capital-intensive business making long-term commitments to our
customers, the Group attaches significant importance to maintaining
or improving the current investment grade credit ratings.
Accounting and regulatory
The consolidated financial statements have been prepared in accordance
with International Financial Reporting Standards (IFRS), as adopted by the EU.
In 2011, there were no changes that have had a significant effect on the
Group’s financial statements.
A summary of changes which have not been adopted in 2011 is included
within the accounting policies in note 1 to the financial statements.
Governments and regulators around the world continue to consider
reforms to the financial markets with the aim of improving transparency
and reducing systemic risk. Although the proposed reforms are
predominantly directed at financial institutions, they will also affect
non-financial institutions such as the Group. In particular, proposals by
both US and European regulators to reform the Over-the-counter (OTC)
derivatives market may have adverse implications for the Group. If, as is
being contemplated, parties to future OTC derivative transactions are
required to use an exchange to clear the transactions and post cash
collateral to reduce counterparty risk, the Group’s future funding
requirements could be adversely affected and cash flow more volatile.
Share price
During the year the share price increased by 20 per cent from 623p to
746.5p, compared to a 0.7 per cent increase in the FTSE aerospace and
defence sector and a 5.6 per cent decrease in the FTSE 100. The Company’s
share price ranged from 557.5p in March to 746.5p at the year end.
Rolls-Royce Holdings plc Annual report 2011Business reviewBusiness review 38
Governance
Board of directors
Sir Simon Robertson
Non-executive Chairman
John Rishton
Chief Executive
Iain Conn
Senior Independent Director
Dame Helen Alexander
Non-executive director
Lewis Booth
Non-executive director
Peter Byrom
Non-executive director
Sir Frank Chapman
Non-executive director
Sir Peter Gregson
Non-executive director
Sir Simon Robertson (70) 2*
Non-executive Chairman,
appointed January 2005
Skills and experience: Sir Simon brings
to the Board a background in
international corporate advisory with a
wealth of experience in mergers and
acquisitions, merchant banking,
investment banking and financial
markets. During his career he has
worked in France, Germany, the UK and
the US. In June 2010, he was honoured
with a knighthood in recognition of his
services to business.
External appointments: Sir Simon 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. Sir Simon 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.
John Rishton (53) 2, 5*
Chief Executive,
appointed March 2011
Skills and experience: John is the
former 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. Prior to his
appointment as Chief Executive, John
had been appointed as a non-executive
director of the Company in 2007 and
served as Chairman of the audit
committee and a member of the ethics
and nominations committees. He is a
former non-executive director of
Allied Domecq.
Media and Deputy Chairman of esure
Group Holdings, and senior adviser to
Bain Capital. Dame Helen is Chancellor
of the University of Southampton.
Iain Conn (49) 1, 2
Senior Independent Director,
appointed January 2005
Skills and experience: Iain joined
the BP group in 1986 and has held
a number of executive positions
within the BP group worldwide.
External appointments: Iain is a
Group Managing Director and Chief
Executive of Refining and Marketing,
BP p.l.c. He is also Chairman of the
Advisory Board of The Imperial
College Business School and a
member of Imperial College Council.
Dame Helen Alexander (54) 2, 3*, 4
Non-executive director,
appointed September 2007
Skills and experience: Dame Helen
is currently involved with a number of
not-for-profit organisations in media,
the internet, the arts and education.
She has also been a non-executive
director of Northern Foods Limited,
Centrica PLC and BT Group PLC. She
was Chief Executive of the Economist
Group till 2008, having joined the
company in 1985.
External appointments: Dame
Helen is Deputy President of the CBI,
where she was President until June
2011. She is Chairman of the Port of
London Authority (PLA), Incisive
Lewis Booth (63) 1*, 2, 4
Non-executive director,
appointed May 2011
Skills and experience: Lewis has
held a series of senior positions within
the Ford Motor Company in Europe,
Asia, Africa and the United States.
Lewis began his career with British
Leyland, before joining Ford in 1978.
External appointments: Lewis is
executive Vice President and Chief
Financial Officer of Ford Motor
Company, a position he has held since
November 2008.
Peter Byrom (67) 2, 4
Non-executive director,
appointed January 1997
Skills and experience: Peter was a
director of AMEC plc from 2005 to 2011
and of NM Rothschild & Sons Limited
from 1977 to 1996. He is a Fellow of
the Royal Aeronautical Society.
External appointments: Peter is
Chairman of Domino Printing
Sciences plc.
Sir Frank Chapman (58) 2, 3
Non-executive director,
appointed November 2011
Skills and experience: Sir Frank has
worked in the oil and gas industry for
37 years, including operational and
business development roles within
Royal Dutch Shell plc and BP p.l.c.
Sir Frank graduated with first class
honours in Mechanical Engineering
from Queen Mary College, London
University, and is a Fellow of the
Institution of Mechanical Engineers.
He was knighted in 2011 for services
to the oil and gas industries.
External appointments: Sir Frank
has been Chief Executive of BG Group
plc for the past 11 years, managing
the Group through a period of
transformational growth and
international diversification.
Sir Peter Gregson (54) 2, 3
Non-executive director,
appointed March 2007
Skills and experience: Appointed to
the academic staff at the University of
Southampton in 1983, Sir Peter
became Professor of Aerospace
Materials in 1995 and Deputy
Vice-Chancellor in 2000. He is a Fellow
of the Royal Academy of Engineering
and a Member of the Royal Irish
Academy and has served on the
Councils of the Royal Academy of
Engineering and the Central
Laboratory of the Research Councils.
He was knighted in 2011 for services to
higher education.
External appointments: Sir Peter is
President and Vice-Chancellor of
Queen’s University Belfast; he serves
on the Council of CBI Northern Ireland
and is a member of the Board of the
UK Universities and Colleges
Employers Association. He is Deputy
Lieutenant of Belfast.
Rolls-Royce Holdings plc Annual report 2011Governance 39
Board of directors
John McAdam
Non-executive director
John Neill CBE
Non-executive director
Ian Strachan
Non-executive director
James Guyette
President and Chief Executive Officer of
Rolls-Royce North America Inc
Mark Morris
Finance Director
Colin Smith
Director – Engineering and Technology
Mike Terrett
Chief Operating Officer
Paul Davies
Acting Company Secretary
John McAdam (63) 2, 3
Non-executive director,
appointed February 2008
non-executive director of Johnson
Matthey plc, Commercial Union and
Reuters Group plc.
Colin Smith (56) 5
Director – Engineering and Technology,
appointed July 2005
External appointments: Ian is a
non-executive director of Xstrata plc,
Transocean Inc and Caithness
Petroleum Limited.
James Guyette (66) 5
President and Chief Executive Officer
of Rolls-Royce North America Inc.,
appointed January 1998
Skills and experience: Before joining
the Company, Jim was Executive Vice
President, Marketing and Planning of
United Airlines.
External appointments: Jim is
Chairman of PrivateBancorp, Inc., of
Chicago, Illinois and he is a director of
priceline.com Inc., of Norwalk,
Connecticut. Jim is Chairman of the
Smithsonian National Air and Space
Museum, Washington DC.
Mark Morris (48) 5
Finance Director,
appointed January 2012
Skills and experience: Mark joined
Rolls-Royce in 1986. He has held a
number of senior positions
throughout the Group and, prior to his
appointment as Finance Director, was
Group Treasurer from 2001.
Skills and experience: Colin joined
Rolls-Royce in 1974. He has held a
variety of key positions within the
Company, including Director –
Research and Technology and
Director of Engineering and
Technology – Civil Aerospace. Colin is
a Fellow of the Royal Academy of
Engineering, the Royal Aeronautical
Society and the Institution of
Mechanical Engineers.
Mike Terrett (55) 5
Chief Operating Officer,
appointed September 2007
Skills and experience: Mike 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 IAE based in
the United States. Prior to his
appointment as Chief Operating Officer
he was President – Civil Aerospace.
Mike is a Member of the Institute of
Mechanical Engineers and a Fellow of
the Royal Aeronautical Society.
Skills and experience: John was the
Chief Executive of ICI plc until ICI’s
acquisition by Akzo Nobel. He has
held a number of positions at Unilever,
within its Birds Eye, Walls, Quest
International and Unichema
International businesses.
External appointments: John 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.
John Neill CBE (64) 1, 2
Non-executive director,
appointed November 2008
Skills and experience: John is a
member of the Council and Board of
Business in the Community, is Vice
President of the Society of Motor
Manufacturers and Traders, BEN, the
automotive industry charity and The
Institute of the Motor Industry. He was
awarded a CBE in June 1994 for his
services to industry.
Ian Strachan (68) 1, 2, 4*
Non-executive director,
appointed September 2003
Skills and experience: Ian 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 a former
Paul Davies (56)
Acting Company Secretary
Skills and experience: Paul joined
Rolls-Royce in 2008. He began his
career in the secretariat of Ford Motor
Company in 1980 and progressed via
roles with Burberrys and Hunter
Saphir plc. He was appointed
Company Secretary of Norwest Holst
plc in 1991, of Kingsbury Group plc in
1997 and, after the takeover of
Kingsbury, of Galliford plc. He then
worked for United Utilities plc (for
seven years) as both Deputy Company
Secretary, and acting Company
Secretary, before joining Rolls-Royce
as Deputy Company Secretary.
Committee membership
1 Audit committee
2 Nominations committee
3 Remuneration committee
4 Ethics committee
5
Risk committee
* Denotes chairman of committee
Non-executive directors
Executive directors
Acting Company Secretary
Rolls-Royce Holdings plc Annual report 2011GovernanceGovernance 40
International Advisory Board (IAB)
The IAB, formed in 2006, advises
the Board on emerging
worldwide trends and, in 2011,
considered implications of the
World Outlook, the US/China
relationship, cyber security and
cyber warfare.
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 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
Ambassador 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.
Taizo Nishimuro
Former 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),
President of Everis Foundation,
former Spanish Defence Minister,
former President of the Royal
Board of Trustees of the Prado
Museum
Rair Simonyan
Chairman, Morgan Stanley, Russia,
former first VP of Russian State oil
company, Rosneft
Ratan Tata
Chairman of Tata Sons Limited
Matthias Wissmann
President of the German
Association of the Automotive
Industry (VDA), Vice-Chairman of
the Federation of German
Industries (BDI) and Senior
International Counsel at
WilmerHale, former Federal
Minister of Research and
Technology and of Transport of
Germany
Lee Hsien Yang
Chairman, Fraser and Neave
Limited
Ernesto Zedillo
Former President of Mexico,
Director, Yale Center for the Study
of Globalization
The Group Leadership Team (GLT)
John Rishton, Chief Executive, chairs
meetings of the GLT. The GLT acts
as an important communications
channel between the executive
directors and the Group’s senior
managers. In addition to John
Rishton, its other members are:
Miles Cowdry
Director – Global Corporate
Development
Kath Durrant
Director – Human Resources
James Guyette
President and Chief Executive
Officer of Rolls-Royce North
America Inc.
Michael Haidinger
President – Rolls-Royce
Deutschland Ltd & Co KG
Lawrie Haynes
President – Nuclear
Andrew Heath
President – Energy
Peter Morgan
Director – Corporate Affairs
Harry Holt
Director – Global Government
Relations
John Paterson
President – Marine and Industrial
Power Systems
Mark King
President – Civil Aerospace
Dan Korte
President – Defence Aerospace
Alain Michaelis
President – Gas Turbine Supply
Chain & Deputy Chief Operating
Officer
Mark Morris
Finance Director
Colin Smith
Director – Engineering and
Technology
Mike Terrett
Chief Operating Officer
Robert Webb
General Counsel
Tony Wood
President – Marine
Rolls-Royce Holdings plc Annual report 2011Governance 41
Chairman’s introduction
In 2011, the nominations committee commissioned an external review of
the Board’s effectiveness by JCA Partners LLP. I am very pleased to report
that the review found that all members of the Board were united in
believing the Board worked very well and that it is seen as an effective
Board with a unity of purpose. The review is described in more detail in the
nominations committee report on page 48.
In September 2011, we issued our response to the Davies Report on
women on boards confirming our support for the development of a
diverse workforce. We govern this through our Global Diversity and
Inclusion Steering Group, the membership of which includes main board
directors and senior executives. The nominations committee discusses
this topic regularly and expects to make demonstrable progress in this
area by 2015.
In this report, the Board has taken account of the concerns expressed by
the Financial Reporting Review panel (February 2011) about how
companies are reporting risks and the discussions of the Financial
Reporting Council (FRC) summarised in ‘Boards and Risk’ (September 2011).
In December 2011, the Board received a detailed report from the risk
committee (including a review of all internally significant risks), which,
following discussion, confirmed and defined the Board’s tolerance for risk,
ensured all directors understood the Group’s risk exposure and provided
an impact review of potential changes in risk.
We have therefore endeavoured to make sure that the risks we identify on
pages 34 and 35 are indeed the key risks facing the Group, to ensure that
we eliminate risks expressed in generic terms and to show how risks are
managed. A description of our risk management process is set out in the
risk committee report, detailed on page 51.
In December 2011, the FRC published a paper entitled ‘Developments in
Corporate Governance 2011’ in which it expressed concern about the level
of reporting of the activities of a company’s committees in the annual
report, particularly the work of the audit committee. As a result, I have
asked the committee chairmen to make personal reports in this year’s
Annual report in order to provide greater insight into committee work.
In January 2012, the UK Government announced its intention to introduce
reforms to the way directors’ remuneration is set, approved and reported.
At Rolls-Royce, we believe strongly in the alignment of executive rewards
to the creation of long-term shareholder value. In the report by the
chairman of the remuneration committee on pages 52 to 54 we have
endeavoured to provide a clearer view of how we believe we achieve that
and we will engage in a positive way with the proposals outlined by the
UK Government.
I believe that 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,
which is why the Board will continue to attach the highest priority to its
compliance with the Code’s principles.
Following the introduction of the UK Corporate
Governance Code, I am pleased to be able to
provide a fuller view of the operation of the
Board and to confirm how the Company has
met its obligations.
The working of a Board cannot be captured and tabled by a ‘standard’
approach and this introduction, and the following pages, allied to the
usual committees’ reports, will I hope provide a clear insight into the
corporate governance structure and practices of Rolls-Royce.
The Board’s committee structure has been reviewed during the year and
due to the importance of safety in our business, both in terms of the safety
of our products and the health and safety of our employees, the Board has
agreed to the introduction in 2012 of a safety committee, which will be
chaired by Sir Frank Chapman. The safety committee’s terms of reference,
once reviewed and approved by the Board, will be added to those of the
other committees on the Group’s website.
In accordance with the provisions of the UK Corporate Governance Code
(the Code), all Board directors are required to seek re-election at the AGM
in 2012. Following the performance evaluation process, I am pleased to
confirm that each of the non-executive director’s performance and
contribution continues to be timely, thoughtful, challenging and relevant.
In addition, each has provided, and continues to provide, excellent
commitment to the role, ensuring sufficient time is available for meeting
preparation and non-scheduled meetings. However, I would advise that
Sir Peter Gregson has decided to retire at the 2012 AGM and will not seek
re-election.
The Board continues to support our longest serving non-executive
director, Peter Byrom, who has been a Rolls-Royce Board member since
1997. We are a complex and technologically advanced company with a
long business cycle from the development of an engine to its eventual
retirement, and the Board greatly values Peter’s independent experience
and his continuing contribution to debate. In supporting Peter, the Board
has taken full account of the Code’s 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 their first election.
The Group values its communications with existing and potential
shareholders who offer a rich and diverse source of capital to fund the
future growth of the Group. Our engagement with shareholders is
described in more detail on page 42.
Sir Simon Robertson
Chairman
Rolls-Royce Holdings plc Annual report 2011GovernanceGovernance 42
UK Corporate Governance Code
The Code
In the year to December 31, 2011, the revised principles and provisions of
the Code (published in May 2010 by the FRC) applied to the Company.
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.
This report, which includes the Directors’ remuneration report on pages 55
to 65, explains how the Company discharges its corporate governance
responsibilities.
The Board confirms that throughout 2011, the Company complied with
the provisions of the Code, with the following exception:
Code provision
C.3.4 – The audit committee should
review arrangements by which staff of
the company may, in confidence, raise
concerns about possible improprieties
in matters of financial reporting or
other matters.
Explanation
The Board considered it appropriate
that this provision of the Code be the
responsibility of the ethics committee
which refers matters of improprieties in
matters of financial reporting to the
audit committee.
Board membership
The nominations committee monitors the composition and performance
of the Board and the composition of its committees. During 2011, the
Board’s composition changed with the appointment of a new Chief
Executive and two new independent non-executive directors. Following
Andrew Shilston’s retirement, the committee also agreed the proposed
appointment of a new Finance Director. These appointments are
discussed in more depth in the nominations committee report on
page 48.
Roles and responsibilities
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. John Rishton is the Chief Executive responsible for the leadership,
operational and performance management of the Group, defined by the
strategy and business plan agreed by the Board. The division of
responsibilities between them is set down in writing and agreed by the
Board and a copy of this document can be found on our website at www.
rolls-royce.com. Iain Conn is the Company’s Senior Independent Director.
Role of the Board
The principal role of the Board is to ensure that the Group’s strategy
creates long-term success for the Group, within an acceptable risk profile,
and providing value for the long-term investor.
The Board retains responsibility for the approval of 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, substantial changes
to balance sheet management policy and the strategic plan.
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.
The day-to-day running of the Group is delegated by the Board to the
executive team under the leadership of John Rishton, the Chief Executive.
To achieve its long-term success, the Board has set itself the following
tasks to:
• ensure the development of the Group’s strategy, together with
monitoring of both its achievement and the Group’s risk appetite;
• ensure the safety of its products and its people;
• uphold the values of the Group, including its brand and corporate
reputation;
• oversee the quality and performance of management and ensure it is
maintained at world-class standards, through effective succession
planning and remuneration policies; and
• maintain an effective corporate governance framework, with
transparent reporting.
Directors’ induction and training
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. Ongoing training is available for all the directors,
including presentations by the executive team on particular aspects
of the business. There is a procedure for directors to take independent
professional advice at the Company’s expense. This is in addition
to the access every director has to the General Counsel and the
Company Secretary.
Issues
Operation of the Board and
governance
Group strategy development and
current issues
Financial structure
Risk strategy
Facilitated by
Chairman and Company Secretary
Chief Executive
Finance Director
General Counsel
Operational strategy
Chief Operating Officer
Technology and engineering issues
Director – Engineering and Technology
Key site visits
Director – Engineering and Technology
Committee technical requirements
Committee chairman, internal or
external experts
Shareholder relations
Communications with shareholders regarding business strategy and
financial performance are coordinated by a dedicated Investor Relations
department that reports to the Finance Director. Communications
regarding the general administration of shareholdings are coordinated by
the Company Secretariat, reporting to the Company Secretary.
The two primary written sources of information about the Group for
shareholders are the website (www.rolls-royce.com) and the published
Annual report, an online version of which is also available on the website.
The website also carries a wealth of financial and other information about
the Group that includes current business strategy, historical financial data,
recent presentation materials as well as factual data about the Group’s
businesses, products and services.
The Group conducts a dedicated investor relations programme with
institutional investors which includes various formal events during the
year, as well as a regular series of one-to-one and group meetings.
The purpose of the events is to highlight a particular issue, theme or
announcement that the Group believes warrants further explanation or
clarification. The events also provide opportunities for shareholders to
Rolls-Royce Holdings plc Annual report 2011Governance 43
UK Corporate Governance Code
meet members of the senior management team to discuss topics of
interest. Examples of these events in 2011 were: the preliminary and
half-yearly results announcements; the AGM; the announcement of the
intention with Daimler AG to acquire Tognum AG; the update given at
the Paris Air Show on trends in the civil and defence aerospace businesses;
the announcement with Pratt & Whitney to restructure the Group’s
participation in IAE and form a new joint venture; the annual investor
briefing; visits to the Group’s sites; and industry conferences.
The one-to-one and group meetings provide additional context around
the Group’s business strategy and financial performance such that
shareholders are able to consistently and fairly value the Group’s
businesses. In 2011, around 350 meetings took place with 1,350 existing
and potential institutional shareholders. Of those meetings, the Chief
Executive attended over 50 meetings and the Finance Director 30
meetings. From a regional perspective, the majority of meetings took
place in the UK (approximately 250) with over 500 investors. Forty
meetings occurred in the USA involving 90 investors and a further
25 European meetings included around 55 investors.
As well as providing context and answering questions about the
announcements during the year, the principal areas discussed with
shareholders and potential investors were: the Group’s continued
investment over decades in complex technology, people and
infrastructure that creates high-cost barriers to entry; the breadth, balance
and diversity of the product portfolio that underpins the resilient financial
performance of the Group during this time of relative economic
uncertainty; the scale of the record order book that provides opportunities
for operational leverage; the importance of the Group’s strong balance
sheet; the potential impact of budgetary pressures, particularly in the
defence aerospace business; development of the services model in the
marine business; the options for future growth in the energy business and
the initial views of the Chief Executive.
Board and committee attendance 2011
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 Annual General Meeting (AGM)
This year’s AGM will be held at 11.00am on Friday May 4, 2012 at the QEII
Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE. The
Notice of AGM and the Annual report will be available to view on the
Group’s website. Shareholders unable to attend the AGM are invited to
vote on the business of the meeting by completing a proxy form and
returning it to the Computershare Investor Services PLC (the Registrar).
Following agreement to receive electronic communications, shareholders
are able to vote online.
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 consented to receive
communications electronically, notice is given by email or by written
notice of the availability of documents on the Group’s website.
The Board
The Board met 12 times during the year, seven of which were scheduled.
Five meetings were called at short notice to discuss such issues as the
acquisition of Tognum AG, the provision of a new higher thrust version
of the Trent XWB to Airbus for the A350-1000 and the agreement of a
new joint venture with Pratt & Whitney to develop new engines for
future generation mid-size aircraft. The attendance by individual
directors at meetings of the Board and its committees in 2011 is shown
in the table below.
Sir Simon Robertson (Chairman)
Dame Helen Alexander
Lewis Booth1
Peter Byrom
Sir Frank Chapman2
Iain Conn3
Sir Peter Gregson
James Guyette
John McAdam
John Neill CBE
John Rishton
Sir John Rose4
Andrew Shilston5
Colin Smith
Ian Strachan
Mike Terrett
Board
12(12)
11(12)
6(6)
11(12)
1(1)
9(12)
12(12)
12(12)
11(12)
11(12)
11(12)
4(4)
12(12)
12(12)
10(12)
12(12)
Audit
Remuneration
5(5)
0(1)
4(5)
5(5)
2(2)
4(4)
4(4)
4(4)
Nominations
3(3)
3(3)
1(2)
3(3)
0(1)
3(3)
2(3)
3(3)
3(3)
3(3)
0(0)
3(3)
Ethics
Risk
3(3)
2(2)
3(3)
3(3)
2(2)
2(2)
0(0)
2(2)
2(2)
2(2)
Figures in brackets denote the maximum number of meetings that could have been attended (seven Board meetings were scheduled and five called at short notice).
The figures include meetings of the former holding company, Rolls-Royce Group plc to May 23, 2011.
1 Lewis Booth was appointed as a non-executive director on May 25, 2011.
2 Sir Frank Chapman was appointed as a non-executive director on November 10, 2011.
3 Iain Conn attended six out of seven scheduled Board meetings.
4 Sir John Rose retired as Chief Executive on March 31, 2011.
5 Andrew Shilston retired as Finance Director on December 31, 2011 and was replaced by Mark Morris who joined the Board with effect from January 1, 2012.
Rolls-Royce Holdings plc Annual report 2011GovernanceGovernance 44
UK Corporate Governance Code
There are currently 15 directors on the Board comprising the non-executive
Chairman, the Chief Executive, four other executive directors and nine
non-executive directors. Executive directors are employees who have
day-to-day responsibilities as executives of the Group 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. Each
executive director receives a service contract on appointment and each
non-executive director receives a letter setting out the conditions of his or
her appointment (see pages 58 and 65, respectively, for further information).
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
dominating the Board’s decision making.
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 and their term of office is subject to
annual re-election by shareholders at the AGM. Under Article 112 of the
Company’s Articles of Association, all directors (with the exception of
Sir Peter Gregson) will offer themselves for re-election at the 2012 AGM.
The work of the Board in 2011
During the year, in addition to its routine business, matters considered by
the Board included:
• an investment to create a replacement new disc facility at a site close
to Sunderland;
• the resolution of the issues arising from the Qantas QF32 incident and
lessons learned;
• the offer by Engine Holding GmbH, a joint venture with Daimler AG, to
acquire the whole of the issued share capital of Tognum AG;
• the introduction and listing of a new holding company for the Group,
Rolls-Royce Holdings plc;
• the impact on the Group’s people, its operations and its suppliers of
the earthquake in Japan;
• the withdrawal of support by the US Secretary of Defense of the F136
programme;
• plans to modernise the Group’s IT infrastructure;
• development of a new higher thrust version of the Trent XWB for the
Airbus A350-1000;
• the restructuring of the Group’s participation in IAE with Pratt &
Whitney, together with a new partnership for a joint venture to
develop engines for future generation mid-size aircraft; and
• the effects of consolidation in the industry and the European
sovereign debt crisis.
In addition, executive directors (and senior executives, as appropriate)
supplied reports on business and financial performance together with
regular updates on health, safety and the environment, IT infrastructure
and disaster recovery arrangements, corporate governance, corporate
affairs and quality and process excellence. All Board committee chairmen
provided verbal reports on the activities of their committee at the next
Board meeting. In September 2011, the Board held its annual day-long
strategy meeting, which included discussions with the presidents of each
of its business sectors and presentations on the ten-year financial plan,
customer relations, delivery of the order book, technology acquisition and
low-carbon technologies.
Independence of the non-executive directors
The Board applies a rigorous process in order to satisfy itself that its
non-executive directors remain independent by reviewing the
independence of the non-executive directors every year, based on the
criteria in the Code. This review was undertaken in November 2011 and the
Board concluded that all the non-executive directors were independent in
character and judgement.
The 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 in
January 2005. His other external commitments are described on page 38.
As referenced in the Chairman’s introduction on page 41, the Board will
again be asking shareholders to re-appoint Peter Byrom as a director, even
though he has served as a director of the Group since January 1, 1997.
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 nominations committee 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 216 of the
Company’s Articles of Association. The Company has also reviewed,
arranged and maintains appropriate insurance cover for any legal action
taken against its directors and officers.
Board committees
The Board has established a number of committees, the principal ones
being audit, remuneration, nominations, ethics and risk. A safety committee
will also be established during 2012. Terms of reference for each committee
are, or will be available, on the Group’s website at www.rolls-royce.com.
The membership, responsibilities and activities of these committees are
described in this governance report on pages 46 to 65.
Executive committees
During the year, the governance structure of the group below Board level
developed further with the establishment of the Executive Board as the
primary channel for executive approval. The Executive Board, comprised
of all executive directors, carries out a pre-approval review of those items
requiring the approval of the Board and acts as the primary approval
channel for matters below Board level, in accordance with the Group’s
delegated authorities manual. It establishes corporate priorities, assists the
Board in the development of Group policy and strategy, decides on senior
succession and makes recommendations to the nominations committee
in relation to succession to the Executive Board itself and to the GLT.
At each meeting the Executive Board reviews the HS&E performance
of the Group, considers customer relations, reviews financial and operational
performance and receives an update on potential acquisitions and disposals.
Rolls-Royce Holdings plc Annual report 2011Governance
45
UK Corporate Governance Code
The GLT, which generally meets immediately after the Executive Board
meeting, receives an update from the Chief Executive on the work
transacted at that meeting.
The GLT’s responsibilities are:
a) to provide input and advice to the Executive Board on policy
and strategy;
b) to discuss Group performance; and
c) to act as an important communications forum between the executive
directors and the Group’s senior management.
During the year, the GLT met on a face-to-face basis ten times and held
regular catch up meetings by teleconference between each of its
meetings. Like the Executive Board, it routinely considers the HS&E
performance of the Group, customer relations and financial and
operational performance at each of its formal meetings. In addition to its
routine business, the committee received presentations on such subjects
as the Group’s anti-bribery and corruption programme, the introduction of
worldwide all-employee global grading (together with the existing system
of performance appraisal/management), government relations and
product safety.
In addition to the Executive Board and the GLT, the Operations Executive,
chaired by the Chief Operating Officer, considers detailed operational
issues in its pursuit of world-class performance in terms of cost, quality and
delivery. The Group’s functions are placed under similar scrutiny by the
Functional Executive chaired by the Finance Director. Each of the Group’s
business segments have their own governance structures which broadly
mirror that of the holding company. Meetings at sector level generally take
place a week ahead of the Executive Board and GLT meetings.
Rolls-Royce Holdings plc Annual report 2011GovernanceGovernance 46
Report from Lewis Booth
Chairman of the audit committee
I am pleased to present my first report
describing the work of the audit committee,
having taken on the role of chairman of the
committee from July 31, 2011.
I would like to acknowledge the work of my predecessor, Ian Strachan,
who took the chair at short notice in October 2010, ensuring the
committee maintained its critical appraisal. The results of the recent board
evaluation confirmed that the audit committee works well and has a good
relationship with the finance function, which I intend to continue under
my chairmanship.
Membership
The committee (consisting of non-executive directors) met four times in
2011 and attendance by the members is shown in the table on page 43.
During the year, KPMG (KPMG Audit Plc – the external auditors), the Head
of Business Assurance and the General Counsel and Company Secretary
attended the meetings, together with the Chairman of the Board, Chief
Executive and Finance Director. Other Board members and/or senior
executives attend meetings at my invitation.
The General Counsel, and the Head of Business Assurance, have direct
access to the committee.
Responsibilities
The committee recommends the financial statements to the Board and
reviews the Group’s financial reporting and accounting policies, including
formal announcements and trading statements relating to the Company’s
financial performance. It oversees the relationship with KPMG and the role
and effectiveness of the internal audit function (business assurance). The
committee reviews the Group’s procedures for detecting, monitoring and
managing the risk of fraud and the Group’s internal controls and systems
for assessing and mitigating risk.
The committee’s terms of reference are available on the Group’s website at
www.rolls-royce.com.
The Board’s review of the risk management process and its statement
on internal control as required by the ‘Turnbull guidance’ is contained
on page 69.
Work of the committee in 2011
Financial reporting
The committee reviewed the form and content of the Group’s Annual
report and financial statements, half-yearly results announcement and
interim management statements. In conducting its reviews of these
publications, the committee considered reports prepared by
management, business assurance and the external auditor.
Amongst other things, these reports covered the key areas of judgement
and sources of estimation uncertainty described in note 1 of the financial
statements, such as: long-term aftermarket contracts; the carrying value of
intangible assets, including the forecasts on which these are based;
post-retirement benefits; provisions; and contingent liabilities.
The focus at the meetings in February and July was on the Annual report
and financial statements and half-yearly results announcement
respectively, including the going concern statement therein. The May and
November meetings reviewed the interim management statements and
considered those matters which it was expected would require
consideration at the following half year and full year.
Business assurance
In May and November, the Head of Business Assurance presented a
summary of the reviews performed in the previous six months and the
results of control self assessment returns from the businesses. The
committee reviewed the effectiveness of the internal control environment
and the progress on the phased increase in business assurance resources.
It noted the introduction of audit committees at business sector level,
attended by KPMG, to improve the governance structure and, at the
November meeting, reviewed and agreed the work plan for 2012.
In February, the Head of Business Assurance tabled a report on the
compliance with the Group’s policies in respect of expenses incurred by
the director’s and other senior executives.
Auditors
KPMG presented its group audit strategy and plan and the proposed audit
fee and in February, the committee reviewed the directors’ representation
letter to be given to KPMG in respect of the Annual report and considered
the independence and objectivity of the auditors.
Non-audit fees
The committee reviewed non-audit fees charged by KPMG at each
meeting and performed its annual review of the limits for pre-approval of
non-audit fees.
Expenditure on audit and non-audit services is set out in note 7 to the
financial statements.
Other matters
During the year, the committee received presentations on risk
management from the Chief Information Officer and the President of the
Gas Turbine Supply Chain. The committee reviewed and amended its own
terms of reference including the removal of its oversight of the whistle-
blowing policy. This will now be the responsibility of the ethics committee,
subject to any financial irregularity being reported to the audit committee.
Private meetings
As part of the governance structure, during the year, the committee met
with the Finance Director, KPMG and the Head of Business Assurance. In
advance of each meeting, I also meet the lead audit partner in private.
Rolls-Royce Holdings plc Annual report 2011Governance 47
Report of the audit committee
Non-audit services provided by KPMG
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, grants, 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;
All other advisory services/consulting – the auditors are generally prohibited
from providing these services; and
Audit committee pre-approval – this is required for non-audit fees exceeding
pre-determined thresholds which vary according to the nature of the
service being proposed. As noted above, the audit committee reviews the
level of non-audit fees at every meeting.
External auditors’ appointment
Annually, the committee reviews the effectiveness and performance of the
external auditors with feedback from committee members, business
assurance and group finance. The lead audit partner is required to rotate
every five years and other key audit partners are required to rotate every
seven years. The current lead audit partner has served four years of his
term. No contractual obligations restrict the committee’s choice of
external auditors. The committee and the Board has recommended the
reappointment of the existing auditors.
Accordingly, resolutions to reappoint the external auditors, KPMG Audit Plc,
and to authorise the directors to determine the auditors’ remuneration,
will be proposed at the AGM on May 4, 2012. I hope that you will vote in
favour of the resolutions as the directors intend to do in respect of their
own shareholdings.
Lewis Booth
Chairman of the audit committee
Rolls-Royce Holdings plc Annual report 2011GovernanceGovernance 48
Report from Sir Simon Robertson
Chairman of the nominations committee
During the year, the committee considered the tenure of office of the
existing non-executive directors and discussed, at length, plans for an
orderly succession to ensure the necessary skill sets continued to be
represented on the Board, reflecting the increasing range and
geographical spread of activities carried out by the Group.
The committee also invited the executive directors to attend one of its
meetings in 2011 to discuss detailed succession plans for the executive
directors and the GLT. The committee considered carefully arrangements
to ensure that those executives identified as potential successors would
receive suitable development opportunities to broaden their experience.
Following the publication of the Davies Report, the committee spent
some considerable time looking at the composition of the Board and
opportunities to increase diversity on the Board in its widest sense by
considering a number of potential non-executives of high calibre who
could clearly bring an additional dimension to Board debate. Rolls-Royce
continues to be committed to developing a diverse workforce and equal
opportunities for all, improving diversity at all levels of leadership and to
making appointments based on merit at the most senior levels of our
organisation. As already noted, the development of a diverse workforce
and equal opportunities is governed through our Global Diversity and
Inclusion Steering Group, membership of which includes Board directors
and senior executives. We expect to make demonstrable progress in this
area by 2015.
In support of our executive succession planning process, we continue
to participate in the FTSE 100 Cross Company Mentoring Programme,
the objective of which is to increase the pool of eligible senior female
candidates for UK Board positions. We have also issued guidance to
executive search companies outlining the importance of diverse
candidate short lists.
In the autumn of 2011, JCA Partners LLP conducted a Board review
which took the form of a facilitated self-evaluation by the Board. The
review included confidential, unattributable, one-on-one interviews with
each Board member, the incoming Finance Director and the HR Director
which covered corporate governance, Board effectiveness, strategy
development, risk management and Board and committee organisation,
composition, operation and dynamics. All Board members unanimously
agreed that the Board was working as an effective whole. The Board
reviewed the way it had operated during the Qantas incident and
conducted a thorough ‘lessons learnt’ exercise. Following the arrival of a
new Chief Executive, and Finance Director, the Board is reviewing future
key performance indicators and areas for discussion, which will enable it
to assess how the agreed Group strategy is being executed. The Board is
reviewing the committee structure to optimise its focus on safety. Also, the
nominations committee will give increased focus to long-term succession
planning for both executives and Board members.
My first priority is to ensure that Rolls-Royce
has a strong leadership team.
During 2010, the nominations committee was required to find a suitable
successor to Sir John Rose as Chief Executive. Following a search process
with the assistance of independent consultants, the committee
unanimously agreed that John Rishton, who had already served as a
non-executive director for the previous four years, had all of the necessary
qualities to make a success of that role. John Rishton became Chief
Executive at the beginning of April 2011 on John Rose’s retirement.
During 2011, Andrew Shilston expressed his wish to retire as Finance
Director at the end of the year. The committee believed strongly that the
new Finance Director should know the business well and therefore ideally
would be an existing employee. Mark Morris is an outstanding individual,
having served the Group ably for many years across many disciplines,
latterly as the Group Treasurer. Following leadership evaluations
conducted independently by Korn Ferry and Egon Zehnder, the
nominations committee recommended Mark’s appointment, which was
announced in September 2011. Mark was invited to attend Board meetings
from the date of the announcement as part of his induction before
formally taking up the post on January 1, 2012.
In addition, the committee recommended the recruitment of two new
independent non-executive directors. An independent consultant, MWM
Boardroom Consulting LLP, was appointed to conduct the search. The
committee recommended a person of the highest calibre in Lewis Booth,
the Chief Financial Officer of Ford Motor Company. Lewis was appointed to
the Board on May 25, 2011 and, after the publication of the interim results
in 2011, took over the chairmanship of the audit committee from Ian
Strachan, who had taken over the role on a acting basis from John Rishton.
The second non-executive search conducted by MWM in the year was to
find a non-executive who could fulfil a role as chairman of a new safety
committee which the Board intends to form in 2012. We selected Sir Frank
Chapman who has spent over 37 years in the oil and gas industry, the last 11
years as Chief Executive of BG Group (formerly British Gas plc). Frank joined
the Board on November 10, 2011 and has an extensive engineering and
technological background, and experience in a safety conscious industry.
Rolls-Royce Holdings plc Annual report 2011Governance 49
Report of the nominations committee
The principal role of the committee is to consider, and recommend for
approval to the Board, the appointment of suitable persons as directors
of the Company and to lead the process for such appointments. The
committee is also responsible for reviewing and overseeing senior
management development to ensure orderly succession planning at,
and immediately below, Board level. The full terms of reference for the
committee are available on the Group’s website at www.rolls-royce.com.
During 2011, the committee met three times and details of the members
who attended can be found in the table on page 43.
In addition to the work described above, the committee also carried out
the following tasks during the year:
• reviewed its terms of reference;
• considered the independence of the non-executive directors;
• agreed to extend the terms of office of Peter Byrom and John Neill;
• dealt with the authorisation of potential conflicts of interest, reviewed
such authorisations previously agreed by the Board and recommended
their renewal;
• upon the resignation of the Company Secretary, recommended the
appointment of an Acting Company Secretary;
• considered time commitments of non-executive directors who had
declared additional directorships; and
• considered the content of this report.
In conclusion, I would like to confirm that my first priority as chairman of
the nominations committee and of the Board is to ensure that Rolls-Royce
has a strong leadership team and it follows that the committee will
continue to review, recommend and appoint the most able and
appropriate candidates.
Sir Simon Robertson
Chairman of the nominations committee
Rolls-Royce Holdings plc Annual report 2011GovernanceGovernance 50
Report from Ian Strachan
Chairman of the ethics committee
Conducting our business in accordance
with the highest ethical standards is critical
to the long-term success, profitability and
prosperity of Rolls-Royce.
The ethics committee was formed in 2008 and consists exclusively of
independent non-executive directors. During 2011, the committee met
three times and details of its membership and attendance can be found in
the table on page 43. The Director of Risk, who had executive responsibility
for ethics during the year, attended the meetings as did the General
Counsel and Company Secretary. The Chairman of the Board, the Chief
Executive, the Head of Business Ethics and the Chief Compliance Officer
were also invited to attend meetings of the committee on a regular basis.
Responsibilities
The Board believes strongly that the Group’s business should be
conducted in a way that reflects the highest ethical standards and
established the ethics committee to:
• review compliance with the Group’s Global Code, which sets out
the principles and rules to be followed by employees when
conducting business;
• review recommendations on ethical matters made by external
regulatory authorities, or other bodies, and make recommendations to
the Board about whether these should be applied to the Group; and
• monitor reports on issues raised through the Group’s confidential
reporting line and review the results of any subsequent investigations.
The full terms of reference for the committee are available on the Group’s
website at www.rolls-royce.com.
The work of the committee during 2011
During the year, the committee received reports on the ethics and
compliance programmes which continued the extensive activity
undertaken in 2010. Reports were received on the following key topics:
Anti-bribery and corruption (ABC) compliance programme
In 2011, the Group reviewed its policies and procedures ahead of the
introduction of the UK Bribery Act (the Act). This work included updating
the Group’s policies covering gifts and hospitality, as well as third party
intermediaries and other related areas. The Company also created a
compliance organisation, led by a Chief Compliance Officer, to oversee
the introduction of the new procedures and to ensure staff received
appropriate training. The Group was fully compliant with the new Act
upon its introduction on July 1, 2011.
Use of third party intermediaries
At each meeting, the committee received reports upon the Group’s use of
third party intermediaries. The committee ensures that agreements with
intermediaries are subject to strict and continual review. These reviews
cover matters such as payments to intermediaries, their qualifications and
the business case behind the necessity for their use.
Global Code and supporting policies
At the July and November 2011 meetings, the committee reviewed the
Global Code, issued in 2009. Following internal and external scrutiny of its
quality, which demonstrated that it continued to represent best-in-class
standards, it was decided that the Global Code would not require a major
update in 2012.
Nevertheless, the committee agreed that continued training and
communications should take place to ensure the Global Code maintained
a high profile across the organisation. New and updated policies in
support of the Global Code were reviewed and endorsed. These included
policies covering ‘whistle-blowing’, conflicts of interest and competitive
intelligence. These policies, supported by appropriate training and
communications activity, became effective during the year.
Confidential helpline reports
At each meeting the committee received reports on calls made to the
confidential reporting line (‘Tell Us’) and the helpline (‘Ask Us’). These
reports summarised the trends in the numbers of contacts, including
analysis by category of geographical spread and the outcomes of the
investigations undertaken. Information on the nature of the higher risk
cases was also reviewed.
Global Principles of Business Ethics for the Aerospace and Defence Industry
At its February 2011 meeting, the committee agreed that Rolls-Royce
should sign a statement of the Global Principles of Business Ethics for the
Aerospace and Defence Industry. As a signatory, the Group has committed
to follow programmes and policies that foster ethical business conduct.
More information about the Global Principles can be found at
www.ifbec.info.
The committee believes that Rolls-Royce maintains an environment in
which all employees understand the standards of behaviour expected of
them and feel able to report any suspected breaches of the Global Code
and that conducting business in accordance with the highest ethical
standards is critical to the long-term success, profitability and prosperity
of Rolls-Royce.
Ian Strachan
Chairman of the ethics committee
Rolls-Royce Holdings plc Annual report 2011Governance 51
Report from John Rishton
Chairman of the risk committee
We have a well established approach
to risk management.
The risk committee is responsible for developing and, following Board
review and approval, implementing the Group’s risk management strategy
and mitigation policy. Its full terms of reference can be found on our
website at www.rolls-royce.com. All of the executive directors are
members of the committee and, during the year, the Director of Risk, the
General Counsel and Company Secretary and all of the members of the
GLT attended the meeting. In 2011, the committee met twice and details
of the members who attended can be found in the table on page 43.
The committee has noted the challenges made by the Financial Reporting
Review Panel (February 2011) as well as the recent summary on ‘Boards and
Risk’ issued by the FRC (September 2011). We have made a number of
improvements in this area over the year, including expanding our
employee training and enhancing our focus in the Asia-Pacific region.
Work of the committee during the year
In 2011, the committee continued to discuss and agree proposed
additions, deletions and amendments to the top level corporate risk
register and considered the mitigation of those risks. This is the
committee’s principal item of business at each meeting.
At its meeting in June 2011, the Director of the Product Introduction and
Lifecycle Management (PILM) programme gave a presentation on the PILM
process, which applies across all product programmes covering all of our
business sectors and geographical locations. The committee also reviewed
an initiative to improve the Group’s intelligence on political and country
risks as it enters new territories. In addition, it discussed the Group’s
preparedness in respect of business continuity and crisis management.
In November 2011, the committee considered a report from the Director of
Security on data privacy. In addition, it reviewed the Group’s insurance
programme. It also reviewed and recommended certain minor changes to
its terms of reference. The committee also considered the format of its
annual report on risk to the Board which:
• set out the significant risks that it considered might have a financial or
reputational impact to the Group and described the associated plans
to manage/mitigate the risks;
• described changes that had been made to the nature and extent of
risks since 2010;
•
illustrated the movements in the Group’s risk profile over the past
five years;
• described improvements that had been made to the risk process,
tools and reports;
• reported on the status of the business continuity programme; and
• provided an overview of the Group’s insurance programmes.
As noted in the Chairman’s introduction, the Board, with the assistance of
the risk and audit committees, has determined the Group’s approach to
the management of risk. The committee ensures all of the risks on the
register are discussed at Board meetings, either in the normal course of
business or through specific reports. The Group’s key risks and
uncertainties are described in the table on pages 34 and 35, together with
highlights of how the risk will be managed.
Risk management
We recognise that managing risks is a vital part of delivering our business
results. Risks are defined as threats to the achievement of business
objectives or to the continuing reputation of the Group and may arise
from a variety of internal or external sources. Our managers are responsible
for applying the global risk policy in their day-to-day management
activities and promoting a culture of learning from and sharing prior
experience within their teams. The quality of decisions is improved by
employees taking responsibility for communicating key risks to
appropriate levels of management.
The risk policy and risk management process form a key element of the
Group’s internal control system. The structured process is used to identify,
assess, communicate and manage risks at all levels of the organisation,
aided by an enterprise-wide software solution. A dedicated enterprise risk
management team, now reporting to the General Counsel, is responsible
for disseminating the risk management process and tools throughout the
organisation. A global network of risk champions, mentors and facilitators
helps share and embed best practice.
The top level corporate risk register reflects the outcomes of business unit,
programme and function risk reviews. Risks and associated actions are
owned by a senior executive, reviewed and discussed by the risk
committee and communicated to the Board. The risk management
process is continually improving and has been in place throughout 2011
and up to, and including, the date of approval of this Annual report.
The Board’s review of the risk management process and its statement
on internal control as required by the ‘Turnbull guidance’ is contained on
page 69 .
John Rishton
Chairman of the risk committee
Rolls-Royce Holdings plc Annual report 2011GovernanceGovernance 52
Report from Dame Helen Alexander
Chairman of the remuneration committee
Our commitment remains to align pay
with performance.
Rolls-Royce has followed a consistent strategy towards executive
remuneration over many years. We believe that a significant proportion of
senior executives’ remuneration should be made up of performance-
related incentives so that overall reward is closely aligned to the creation of
long-term stakeholder value. These principles are well-established in
Rolls-Royce. In our report this year, we are showing the link between
performance and remuneration in Rolls-Royce even more clearly.
Base salaries
Base salaries are 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, global reach and complexity, taking account of
pay elsewhere in the Group. Salaries are set annually on March 1 with
performance taken into account.
Annual bonus outcome 2011
It is an important principle of the Rolls-Royce executive bonus
arrangements that no bonus can be paid to anyone unless the entire
Group has achieved the financial targets set by the committee. During
2011, the Group delivered 21 per cent growth in underlying profit before
tax and, before the cost of acquisition and foreign exchange translation
effects, a net cash inflow of £210 million. This strong performance was
achieved in challenging economic circumstances whilst maintaining the
long-term investment programmes needed to deliver our record order
book and future growth.
The committee is satisfied that the annual bonus outcome for the
executive directors for 2011 appropriately reflects these results and the
significant value delivered to all stakeholders.
1,200
1,100
1,000
1,157
900
955
800
10
11
65
60
55
50
62.2
59.2
10
11
2011 PERFORMANCE
Underlying profit before tax (£m)
+21%
Order book (£bn)
+5%
2011 REMUNERATION (£000)
4,000
3,000
2,000
1,785
1,000
1,124
1,255
1,021
1,277
For executive directors, 40 per cent of the bonus is delivered in deferred
shares which must be held for a period of two years.
0
226
James
Guyette
John
Rishton
Sir John
Rose
Andrew
Shilston
Colin
Smith
Mike
Terrett
Bonus
Benefits (excluding pension)
Salary
Bonus (cash and shares). This is the total bonus award for performance in 2011. Forty per cent of
the bonus is deferred into shares which are released after two years (ie in early 2014) subject to
continuing employment. Sixty per cent of the bonus is delivered in cash in early 2012.
Benefits (excluding pension). This is the value of total benefits (excluding pension) received
during 2011.
Salary. This is salary paid during 2011.
Pension. In addition to the annual pay and benefits in the table above, the directors received
pension benefits, as described on page 60 of the Directors’ remuneration report.
Rolls-Royce Holdings plc Annual report 2011Governance 53
Report from Dame Helen Alexander Chairman of the remuneration committee
Performance Share Plan (PSP) outcome 2009-2011
The long-term incentive plans at Rolls-Royce are designed to reward
long-term value creation, are calculated over three years and measured
against Total Shareholder Return (TSR), earnings per share and cash
generation. Against all these measures Rolls-Royce has performed well.
The Rolls-Royce share price, for example, has increased by 187 per cent
between March 10, 2009 (date of grant for the 2009 PSP award) and
December 31, 2011, compared to an increase in the FTSE 100 index over
the same period of 58 per cent. This has benefited all Rolls-Royce
shareholders including many employees. We have arrangements such as
ShareSave which we put in place specifically to encourage employees to
have a long-term interest in our success. The March 2009 PSP award was
made on the basis of a share price of 260.42 pence. By the close of the
three-year performance period in December 2011 the share price had
increased to 746.50 pence.
The following chart tracks the value of £100 invested in Rolls-Royce shares
(to be clear, without taking account of dividends) versus the FTSE 100
index from January 1, 2009 to December 31, 2011, in line with the
performance period for the March 2009 PSP award.
Rolls-Royce versus FTSE 100
Rolls-Royce (rebased to 100)
FTSE 100 (rebased to 100)
250
225
200
175
150
125
100
75
50
LONG-TERM PERFORMANCE
Rolls-Royce versus FTSE 100 TSR growth in each performance year
2009
2010
2011
FTSE 100
Rolls-Royce
+14%
+41%
+19%
+37%
+1%
+13%
LONG-TERM REMUNERATION IN 20111 (£000)
4,000
3,000
2,000
3,289
2,327
2,365
FTSE100 (rebased to 100)
Rolls Royce (rebased to 100)
0
1,000
250
225
200
175
150
James
Guyette
125
100
PSP (appreciation in share price)
PSP (value at grant in 2009)
75
50
50% of these shares to be retained until retirement
Sir John
Rose
Andrew
Shilston
Colin
Smith
Mike
Terrett
2,150
1,661
FTSE100 (rebased to 100)
Rolls Royce (rebased to 100)
2009
2010
2011
2012
Rolls-Royce TSR over the ten-year period to December 31, 2011 was 372 per
cent. Only 69 of the companies which made up the FTSE 100 at the
beginning of that period are still trading independently and the median TSR
amongst these 69 companies over the same ten-year period is 30 per cent.
Total returns over the period to December 31, 2011
Last year
Last 3 years
Last 5 years
Last 7 years
Last 10 years
FTSE 100
1%
30%
4%
48%
30%
Rolls-Royce
13%
116%
71%
217%
372%
PSP (appreciation in share price). This is the increase in value of the PSP awards due to share
price appreciation over the period, from 260.42 pence at March 10, 2009 to 746.50 pence at
December 31, 2011.
PSP (value at grant in 2009). This is the value of performance share awards vesting during March
2012, using a share price at grant of 260.42 pence as at March 10, 2009. These shares relate to
performance over the 3-year period 2009-2011. The cash flow per share target was achieved in full
and a 1.5 multiplier was achieved because the Group’s TSR exceeded the upper quartile of the
FTSE 100. Fifty per cent of the after-tax shares must be held until retirement or until minimum
shareholding requirements are achieved.
1 John Rishton was not an employee and did not receive a grant of PSP shares in 2009.
Note: All TSR numbers on this page are calculated based on start and end values for Rolls-Royce
and the FTSE 100 averaged over the previous six months. This is consistent with the rules of the PSP.
The TSR chart on page 58 is based on spot values and does not therefore align to the numbers on
this page, but both spot and average methodologies confirm Rolls-Royce TSR has consistently
out-performed the FTSE 100.
Rolls-Royce Holdings plc Annual report 2011GovernanceGovernance
54
Report from Dame Helen Alexander Chairman of the remuneration committee
In September, the committee considered the principles to be applied
when setting bonus targets and discussed, in particular, whether the cash
hurdle could be refined. It also considered the terms of appointment for
the new Finance Director. Shareholders are asked to note that in line with
the policy applied elsewhere in the Group, the Finance Director’s salary
has been set at a level which is at the lower end of a market competitive
range, allowing headroom for future performance-related growth.
In November, the committee discussed the Department of Business
Innovation and Skills (BIS) consultation paper referred to above and agreed
its response. It also reviewed the ‘Principles of Remuneration’ issued by the
Association of British Insurers (ABI) in September 2011 and resolved to
make every effort to ensure it complied with its overarching principles.
In December, the committee considered the nature of the bonus and PSP
targets to be set for 2012. The committee discussed the methodology
applied by Deloitte LLP when benchmarking senior executive salaries
against current market practice.
Directors’ remuneration report
This year’s remuneration reflects a strong performance against all
measures of success. Rolls-Royce has achieved record underlying revenues,
underlying profits, and has a record order book which should ensure that
the business will remain strong for many years to come. We support the
clear message on executive remuneration sent by BIS in the UK that:
‘generous rewards for leading executives are not an issue where executive
remuneration is well-structured, clearly linked to the strategic objectives of
a company, and which rewards executives that contribute to the long-
term success of that company’. The committee’s view is that the
performance of the Group, backed by the growth in the Rolls-Royce share
price in recent years, warrants the rewards which our executives will
receive in 2012.
Dame Helen Alexander
Chairman of the remuneration committee
Over the three-year performance period for the 2009 PSP grant, our
performance in terms of cash flow and earnings per share was sufficient
to release 100 per cent of the conditional shares originally granted. The
Company’s TSR was eighth in the FTSE 100 over the three-year
performance period. This TSR performance triggers an increase of 50 per
cent in the shares released to executive directors and other members of
the GLT and an increase of 25 per cent for other executives. The value of
the shares vesting under the PSP scheme for the three-year performance
period to the end of December 2011 has been estimated using the share
price as at December 31, 2011 (the actual value will depend on the share
price at the vesting date in March 2012). Executives must retain 50 per
cent of the shares they receive under the scheme until they retire from
the Company or achieve a minimum shareholding requirement which is
200 per cent of salary for the Chief Executive or 150 per cent for other
executive directors. This ensures the directors have a personal financial
interest in the long-term success of the business.
Remuneration and opportunities for other employees
All employees worldwide have the opportunity to benefit from our
success through participation in our global bonus and share plans. All
employees who were with us throughout 2011 will be receiving a bonus of
at least two weeks’ pay as a result of our 2011 performance. More than a
third of our employees currently participate in our global ShareSave plan.
More than 6,000 participate in our SharePurchase and ShareBonus plans
which allow employees to purchase shares on a regular basis and to
convert bonus payments into shares. It is worth noting that Rolls-Royce
employees also enjoy competitive salaries, benefits and career
opportunities which are made possible through the Group’s robust
performance in recent years.
The work of the committee during 2011
In February 2011, the committee endorsed the outturn for bonus and
long-term incentive plans. It also considered a benchmarking report by
Deloitte LLP and assessments of performance before approving salary
increases for senior executives. The committee approved the terms for the
appointment of the Group HR Director and considered a draft of the
Directors’ remuneration report which it agreed to recommend to the
Board for approval.
In May, the committee selected the Organisation for Economic Cooperation
and Development (OECD) index of consumer prices as a measure of the
earnings per share (EPS) growth hurdle for the PSP 2011 grant. In 2011, it was
confirmed that the personal element of management bonuses would be
based on overall performance development ratings rather than on the
achievement of specific performance objectives, thereby strengthening the
link between overall performance and reward. The committee also agreed
the basis for the launch of the 2011 ShareSave offer.
Rolls-Royce Holdings plc Annual report 2011Governance 55
Directors’ remuneration report
Membership of the remuneration committee
The remuneration committee, which consists entirely of non-executive
directors, met five times in 2011 and details of those members attending
can be found in the table on page 43. Peter Byrom retired as a member of
the remuneration committee on February 8, 2011. He continued to attend
meetings by invitation. Sir Frank Chapman was appointed as a member
of the committee on November 10, 2011. Sir Simon Robertson, Chairman,
John Rishton, Chief Executive, the Director – Human Resources, the
HR Director – Performance, Reward and Recognition and the General
Counsel and Company Secretary routinely attended the meetings and
the committee invited the Finance Director to attend for certain items
of business. None of these executives were present during any discussion
of their own emoluments.
Responsibilities
The committee is responsible for making recommendations to the Board
on the Group’s policy regarding executive remuneration and determines,
on the Board’s behalf, the specific remuneration packages of the
Chairman, the executive directors and a number of senior executives.
A copy of the committee’s terms of reference is available on the Group’s
website at www.rolls-royce.com.
Advice to the committee
During 2011, the committee had access to advice from:
• Deloitte LLP 1;
• Kepler Associates; and
• Freshfields Bruckhaus Deringer LLP, the Company’s lawyers.
1
Deloitte LLP advised the Group on tax, assurance, pensions and corporate finance and Deloitte
MCS Limited provided consulting services.
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.
The main components of remuneration
The main components of remuneration for all executives worldwide comprise base salary, annual incentive arrangements, share-based long-term
incentives and benefits. Executives are also entitled to participate in all-employee share plans.
Component
Base salary
Annual Performance
Related Award plan
(APRA)
Summary
•
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.
Time frame
Not applicable
Main features
•
Normally set annually on March 1. Performance is
taken into account.
One year plus two
year deferred
element
•
Compulsory deferral of 40 per cent of bonus into
shares.
• 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.
•
•
•
Bonus can be increased by up to 20 per cent to
reflect exceptional personal performance.
Shares vest after two years subject to continued
employment.
50 per cent must be held until retirement or the
minimum shareholding requirement is met.
• 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.
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.
Performance Share
Plan (PSP)
• Share-based long-term incentive.
• Conditional on corporate performance.
•
Measures based on Cash Flow Per Share (CPS), TSR and an
underlying earnings per ordinary share hurdle (EPS).
Three years
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 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
In addition to the above, pension and other benefits, which are competitive in local markets, are provided.
Rolls-Royce Holdings plc Annual report 2011GovernanceGovernance 56
Directors’ remuneration report
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 share-based long-term 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 all stakeholders over the longer term.
Base salaries
The committee has commissioned a range of 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.
Under APRA as operated in 2011, executive directors were eligible for
awards in accordance with the table below:
The committee has determined that the bonus in respect of 2012 will be
operated on substantially similar terms to 2011 except that access to bonus
earned through profit performance will now be determined by cash flow
based on a linear scale rather than by an all-or-nothing hurdle. The
committee is mindful of corporate, environmental, social and governance
risks when setting personal objectives. There will be no change to the
maximum bonus opportunities for executive directors.
APRA performance measures
For 2011, the performance targets operated so that three Group
underlying profit targets were set in respect of bonus levels as follows:
Base
Stretch (1)
Stretch (2)
(% of maximum)
30
60
100
The bonus payable was also subject to a cash flow hurdle.
For 2011, the performance outturns which resulted in the APRA bonus
outturns were as follows:
Cash flow hurdle
Group underlying
profit
Cash flow* for the year was £216 million which exceeded
the cash flow hurdle.
Group underlying profit* was £1,119 million which
exceeded the Base and the Stretch (1) target but was less
than the Stretch (2) target. The performance resulted in
achievement of 90 per cent of the maximum.
* Cash flow and Group underlying profit are prior to the impact of unbudgeted acquisition
adjustments and exclude the effect of unbudgeted foreign exchange translation where material.
Deferred APRA
For executive directors and other 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. Details of deferred shares held under the plan are shown
in the table on page 63.
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.
James Guyette
John Rishton
Andrew Shilston
Colin Smith
Mike Terrett
Target bonus
(as a % of salary)1
75
81
75
75
75
Maximum bonus
(as a % of salary)1
125
135
125
125
125
1 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.
APRA timeline
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 Jan 12
31 Dec 12
31 Dec 13
31 Dec 14
Rolls-Royce Holdings plc Annual report 2011Governance
57
Directors’ remuneration report
Other annual incentives
The same financial targets as set for APRA are used for the Managers’
Bonus and 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.
Performance measures
Vesting criteria
EPS growth
Purpose of the measure
Hurdle to ensure any
payouts are supported
by sound profitability
Performance condition over
three-year period
•
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.
•
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 take into account competitive levels within the
marketplace for UK companies of a similar size and complexity to the
Group. In 2011, John Rishton received a conditional award of shares with a
market value at the time of grant of 120 per cent of his annual salary
prorated to his date of appointment as an executive director on March 1,
2011. He also received a special award detailed on page 65. The 2011 grant
for other executive directors was 100 per cent of their annual salary, for
business heads 80 per cent, and 65 per cent for other members of the
Group Leadership Team.
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 in the following table.
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, 2011
the Company’s financial and TSR performance generated 100 per cent of
the number of shares conditionally granted in 2009.
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 12
31 Dec 12
31 Dec 13 31 Dec 14
Aggregate CPS
Incentivise generation
of cash flow in line with
the Group’s strategy
TSR performance
against FTSE 100
index
Align interests with
shareholders by
rewarding out-
performance of FTSE
100 returns
• 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.
• 50th percentile (median) and
below – 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 50 per cent
enhancement for upper quartile
TSR performance.
The profit hurdle for the 2012 grant will require EPS to show real growth by
exceeding the OECD index of consumer prices.
The following CPS targets will apply to the grants to be made in 2012:
Aggregate CPS over
three-year performance period
56p
83p
Percentage of maximum
award released
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 2012
For 2012, the size of awards under the PSP will be unchanged from 2011
(except for the additional special award made to John Rishton on his
appointment) and will be as follows:
James Guyette
Mark Morris
John Rishton
Colin Smith
Mike Terrett
PSP award
(as a % of salary)
100
100
120
100
100
PSP award
maximum
(as a % of salary)
150
150
180
150
150
Rolls-Royce Holdings plc Annual report 2011GovernanceGovernance 58
Directors’ remuneration report
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 Group. Details of
the executive directors’ share interests are set out on pages 61 to 65. The
current executive directors have each complied with the minimum
shareholding requirement.
The following table summarises the terms of the executive directors’
service contracts:
James Guyette
Mark Morris
John Rishton
Colin Smith
Mike Terrett
Date of
contract
29 September 1997
1 January 2012
10 March 2011
1 July 2005
1 September 2007
Unexpired
term
Indefinite
12 months
12 months
12 months
12 months
Notice period
Group
30 days1
12 months
12 months
12 months
12 months
Notice period
individual
30 days
6 months
6 months
6 months
6 months
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.
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
applied globally. The exercise of the option is not subject to the
achievement of a performance target;
ii) the ‘Free Share’ element of the 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.
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 John Rishton and 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.
External directorships of executive directors
During 2011, James Guyette was chairman of PrivateBancorp Inc. and a
director of priceline.com Inc. Andrew Shilston was appointed as a
non-executive director of Circle Holdings plc on August 5, 2011. In each
case the director retained the relevant fees from serving on the boards of
these companies, as shown in the table below:
External directorship fees
James Guyette 1, 2
Andrew Shilston
Payment received £000
102
16
1 James Guyette was paid in US dollars translated at £1=US$1.6037
2 I n addition to an annual fee, James Guyette received 3,621 Restricted Stock Units (RSUs) at US$13.81
per share in PrivateBank. During 2011, 3,651 RSUs vested. He was granted 366 shares of restricted
stock at US$464.79 per share in priceline.com. During 2011, 832 shares of restricted stock vested at
US$469.13 per share and 333 shares of restricted stock vested at US$464.79 per share.
TSR 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 below. 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 plc growth in value of a hypothetical £100 holding
in Rolls-Royce Holdings plc (previously 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 £194.00
and £107.90 respectively.
Rolls-Royce (rebased to 100)
FTSE 100 (rebased to 100)
Rolls-Royce – five year TSR data
220
200
180
160
140
120
100
80
60
2006
2007
2008
2009
2010
2011
Rolls-Royce Holdings plc Annual report 2011Governance 59
Directors’ remuneration report
Directors’ aggregate emoluments (audited)
The individual directors’ emoluments are analysed as follows:
Executive directors
James Guyette 5
John Rishton 6
Sir John Rose 7
Andrew Shilston 8
Colin Smith
Mike Terrett
Non-executive directors
Dame Helen Alexander
Lewis Booth 9
Peter Byrom
Sir Frank Chapman 10
Iain Conn
Professor Sir Peter Gregson
John McAdam
John Neill CBE
Sir Simon Robertson
Ian Strachan
Basic
salary/fees
£000
Annual
Bonus
(APRA) 1
£000
Cash
allowance 2
£000
Taxable
benefits 3
£000
Aggregate
emoluments 4
Aggregate
emoluments 4
£000
£000
2011
2010
499
739
217
580
455
543
3,033
74
44
60
11
72
60
60
60
370
86
3,930
561
898
–
657
546
619
3,281
–
–
–
–
–
–
–
–
–
–
3,281
–
125
–
–
114
–
239
–
–
–
–
–
–
–
–
–
–
239
64
148
9
18
20
115
374
–
–
–
–
–
–
–
–
15
–
389
1,124
1,910
226
1,255
1,135
1,277
6,927
74
44
60
11
72
60
60
60
385
86
7,839
1,120
69
2,299
1,308
1,027
1,270
7,093
67
–
55
–
65
55
55
55
386
71
7,902
1 For executive directors, 60 per cent of APRA is delivered in cash and 40 per cent is delivered in the form of a deferred share award. Shares forming part of the bonus under APRA have been valued at the
date of award. The Trustee will acquire the required number of shares at the prevailing market price by March 31, 2012.
2 Colin Smith received a cash allowance in lieu of future pension accrual. John Rishton received employer contributions into the executive defined contribution pension arrangement restricted to the
annual allowance limits with any excess paid as a cash allowance.
3 Taxable benefits may include the following: a car or car allowance; the use of a driver; private medical insurance and financial counselling; in the case of James Guyette, a housing allowance and club
membership fees; in the case of John Rishton, the figure above includes school fees (for one school term following his appointment) paid on his behalf and the tax charge on that benefit paid by the
Group; in the case of John Rishton and Mike Terrett, the figure in the above table includes additional housing costs paid on their behalf and the tax charge on that benefit paid by the Group.
4 Aggregate emoluments exclude pensions contributions. Details of the directors’ pensions are set out on pages 60 and 61.
5 James Guyette was paid in US dollars translated at £1 = US$1.6037.
6 John Rishton was appointed as an executive director on March 1, 2011.
7 Sir John Rose retired as an executive director on March 31, 2011.
8 Andrew Shilston retired as an executive director on December 31, 2011.
9 Lewis Booth was appointed as a non-executive director on May 25, 2011.
10 Sir Frank Chapman was appointed as a non-executive director on November 10, 2011.
Payments made to former directors of the Company (audited)
John Cheffins retired from the Board on September 30, 2007. He 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 £47,617 and benefits totalling £4,770 in 2011 (paid in Canadian dollars translated at
£1= CAD$1.5862). Dr Mike Howse retired from the Board on June 30, 2005. He has continued to be retained by the Group for his expertise in engineering
and was paid £34,650 in 2011.
Rolls-Royce Holdings plc Annual report 2011GovernanceGovernance 60
Directors’ remuneration report
Pensions (audited)
The Group’s UK pension schemes are funded, registered schemes and were
approved under the regime applying until April 6, 2006. They include
defined benefit pension schemes, providing at retirement, a pension of up
to two thirds of final remuneration, subject to HM Revenue & Customs limits.
Mike Terrett opted out of future pension accrual with effect from April 1,
2006 and started to receive his pension from November 1, 2009. Since
starting to receive his pension, he does not accrue any further pension
benefit or allowance in lieu of pension benefit from his ongoing
employment with the Group.
Sir John Rose retired on March 31, 2011 and was already in receipt of his
pension. John Rishton was appointed to the Board on March 1, 2011 and
received employer contributions into the executive defined contribution
pension arrangement restricted to the annual allowance limits with any
excess paid as a cash allowance. The cash allowance is calculated as
equivalent to the cost of the pension contributions allowing for national
insurance costs.
Andrew Shilston was a member of one of the Group’s UK pension
schemes until his retirement on December 31, 2011. He was also a member
of the Rolls-Royce Supplementary Retirement Scheme (the Scheme). The
purpose of the Scheme is to fund pension provision above the
pensionable earnings cap which was imposed on approved pension
schemes by the 1989 Finance Act. Membership of the Scheme is restricted
to executive directors and to a limited number of senior executives.
Employer contributions to the Scheme during 2011 have been added to
the increase in transfer value over 2011 for the registered defined benefit
plans, and are therefore included in the figures shown in the final two
columns of the first table below. Andrew Shilston was replaced on the
Board by Mark Morris with effect from January 1, 2012. His pension
disclosures will be reported in the 2012 Annual report.
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 being 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 2011 have been added to the increase in transfer value over 2011 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 scheme1, are given below:
Increase in accrued
pension during the
year ended
Dec 31, 2011
£000pa
4
Increase/decrease
in accrued
pension during the
year ended
Dec 31, 2011 2
£000pa
(10)
3
42
1
2
34
(6)
Total accrued
pension entitlement
at the year ended
Transfer value of
accrued pension as
Transfer value as at
Dec 31, 2010 of
accrued pension at
Dec 31, 2011 3
at Dec 31, 2011 4
£000pa
457
20
302
241
£000
10,457
575
6,002
5,666
that date 4
£000
8,828
412
4,467
4,739
Increase in
transfer value over
2011 net of the
member’s own
contributions
£000
1,629
327
1,535
927
Transfer value of
increase/decrease
in accrued
pension over 2011
net of the member’s
own contributions 5
£000
(199)
233
613
(119)
Increase in accrued
retirement lump sum
during the year
ended Dec 31, 2011
£000pa
125
Increase in accrued
retirement lump
sum during the year
ended Dec 31, 2011 2
£000pa
92
Total accrued
retirement lump sum
entitlement at the
year ended
Dec 31, 2011 8
£000pa
965
Transfer value of
accrued retirement
lump sum as at
Dec 31, 2011
£000
965
Transfer value as at
Dec 31, 2010 of
accrued retirement
lump sum at that
date
£000
839
Increase in
transfer value over
2011 net of the
member’s own
contributions
£000
520
Transfer value of
increase in accrued
retirement lump sum
over 2011 net of the
member’s own
contributions 5
£000
486
Sir John Rose 6
Andrew Shilston 7
Colin Smith
Mike Terrett
James Guyette 9
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/decrease in pension/retirement lump sum during the year ended December 31, 2011 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, 2011.
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, 2010 and December 31, 2011 have been calculated on a basis adopted by the trustees on October 6, 2008 following receipt of actuarial advice.
5 This column shows the transfer value of the increase/decrease in pension/retirement lump sum during the year ended December 31, 2011 excluding the effect of inflation,
and net of the member’s own contributions.
6 Sir John Rose retired as an executive director on March 31, 2011.
7 Andrew Shilston retired as an executive director on December 31, 2011.
8 The lump sum entitlement shown is that which would be paid on immediate retirement based on service to the end of the year.
9 Benefits are translated at £1 = US$1.5541.
Rolls-Royce Holdings plc Annual report 2011Governance
61
Directors’ remuneration report
Details of the money purchase pension contributions paid by the Group on behalf of the following executive directors are given below:
James Guyette 1
John Rishton
Andrew Shilston 1
2011
£000
381
115
171
2010
£000
373
–
166
1
Employer contributions for the defined contribution plans during 2011, have been included in the increase in transfer value over 2011 for the defined benefit plans and shown in the final two columns
of the tables on page 60 for James Guyette and Andrew Shilston.
Directors’ share interests (audited)
The directors who held office at December 31, 2011 and their connected persons had the following interests in the ordinary shares and C Shares 1 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:
James Guyette
John Rishton
Sir John Rose 2
Andrew Shilston 3
Colin Smith
Mike Terrett
Dame Helen Alexander
Peter Byrom
Lewis Booth 4
Sir Frank Chapman 5
Iain Conn
Sir Peter Gregson
John McAdam
John Neill CBE
Sir Simon Robertson
Ian Strachan
January 1,
2011#
324,231
8,996
914,478
525,427
175,179
428,295
1,071
218,017
–
–
17,918
3,407
1,124
24,614
40,846
11,500
Changes in
2011
(49,434)
690
153,320
87,830
43,375
78,871
–
5,304
5,000
–
2,292
811
447
11,850
993
–
Ordinary shares
December 31,
2011§
274,797
9,686
1,067,798
613,257
218,554
507,166
1,071
223,321
5,000
–
20,210
4,218
1,571
36,464
41,839
11,500
January 1,
2011#
–
–
–
–
–
–
–
–
–
–
–
–
116,769
350,100
–
–
Changes in
2011
–
–
–
–
–
–
102,816
–
–
–
–
–
109,311
1,508,652
–
–
C Shares
December 31,
2011§
–
–
–
–
–
–
102,816
–
–
–
–
–
226,080
1,858,752
–
–
# Or date of appointment if later.
§ Or date of retirement if earlier.
1 Non-cumulative redeemable preference shares of 0.1p each.
2 Sir John Rose retired as an executive director on March 31, 2011.
3 Andrew Shilston retired as an executive director on December 31, 2011.
4 Lewis Booth was appointed as a non-executive director on May 25, 2011.
5 Sir Frank Chapman was appointed as a non-executive director on November 10, 2011.
Directors’ interests in the Company’s share plans are shown separately on pages: 62 (SIP); 63 (share options); 63 (APRA); and 64 (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, 2011.
Changes in the interests of the executive directors and non-executive directors between December 31, 2011 and February 8, 2012 are listed below.
Dame Helen Alexander
Peter Byrom
Iain Conn
Sir Peter Gregson
James Guyette
John McAdam
John Neill
John Rishton
Sir Simon Robertson
Colin Smith
Mike Terrett
Ordinary shares
–
2,020
819
137
2,488
61
254
87
378
2,115
4,593
C Shares
73,899
–
11,178
–
–
103,776
2,025,978
–
–
332,166
112,815
Rolls-Royce Holdings plc Annual report 2011GovernanceGovernance
62
Directors’ remuneration report
Partnership shares held in trust under the SIP 1
Sir John Rose 2
Andrew Shilston 3
Colin Smith 4
Mike Terrett 4
§ Or date of retirement if earlier.
Free shares held in trust under the SIP 1
Andrew Shilston 3
Colin Smith
§ Or date of retirement if earlier.
Unrestricted shares held under the SIP 1
Sir John Rose 2
Andrew Shilston 3
Colin Smith
Mike Terrett
January 1,
2011
1,734
1,734
1,734
1,733
January 1,
2011
3,381
3,381
January 1,
2011
9,638
6,198
3,977
4,186
Changes in
2011
(30)
(123)
(124)
(124)
Ordinary shares
December 31,
2011§
1,704
1,611
1,610
1,609
January 1,
2011
–
382,710
382,533
382,241
Changes in
2011
–
(382,710)
(382,533)
(382,241)
Changes in
2011
(201)
(202)
Ordinary shares
December 31,
2011§
3,180
3,179
January 1,
2011
839,168
839,168
Changes in
2011
(839,168)
(839,168)
Changes in
2011
89
1,039
1,041
359
Ordinary shares
December 31,
2011§
9,727
7,237
5,018
4,545
January 1,
2011
–
90,591
90,298
90,500
Changes in
2011
–
(90,591)
(90,298)
(90,500)
C Shares
December 31,
2011§
–
–
–
–
C Shares
December 31,
2011§
–
–
C Shares
December 31,
2011§
–
–
–
–
§ Or date of retirement if earlier.
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 Group.
2 Sir John Rose retired as an executive director on March 31, 2011.
3 Andrew Shilston retired as an executive director on December 31, 2011.
4 On January 9, 2012 and February 7, 2012 the ordinary shares held as partnership shares by Colin Smith 28 and 28, and Mike Terrett 27 and 28 respectively were classified as unrestricted shares.
Rolls-Royce Holdings plc Annual report 2011Governance 63
Directors’ remuneration report
Share options (audited)
The directors held options under the Rolls-Royce Sharesave plans.
James Guyette
John Rishton
Colin Smith
January 1,
2011
683
–
1,233
Granted
in 2011
–
1,450
–
Lapsed
in 2011
–
–
–
Exercised
in 2011
(683)
–
(1,233)
December 31,
2011
–
1,450
–
Exercise
price
416p
525p
298p
Market price
at date
exercised
613.00p
–
651.50p
Aggregate
gains 2011
£000
1
–
4
Aggregate
gains 2010
£000
–
–
–
Exercisable
dates
–
2017
–
The market price of the Company’s ordinary shares ranged between 557.50p and 746.50p during 2011. The closing price on December 31, 2011 was
746.50p.
Long-term incentive awards (audited)
The directors as at December 31, 2011 had the following share awards arising out of the operation of APRA 1:
James Guyette
Sir John Rose 2
Andrew Shilston 3
Colin Smith
Mike Terrett
Total value of shares vested
January 1,
2011
42,397
73,804
41,009
29,816
37,996
Dividend
enhancement
during 2011
1,645
2,772
1,524
1.090
1,412
Vested
during 2011
(27,770)
(46,791)
(25,735)
(18,426)
(23,853)
Granted
during 2011
35,595
93,481
48,540
32,197
44,127
December 31,
2011§
51,867
123,266
65,338
44,677
59,682
Value of shares
vested in 2011
£000
158
283
156
112
144
853
§ Or date of retirement if earlier.
1 Under APRA, shares vest after two years. Shares went into trust in 2009, 2010 and 2011 at prices of 289.65p, 537.20p and 601.00p respectively. At December 31, 2011, the amounts stated in the
emoluments table representing the 2011 APRA deferred shares had not yet been applied by the Trustee to purchase shares. The market value per share which vested under APRA during 2011 was
605.47p. The effective market value per share which vested under APRA for James Guyette was 569.86p.
2 Sir John Rose retired as an executive director on March 31, 2011.
3 Andrew Shilston retired as an executive director on December 31, 2011.
Conditional awards, granted under the PSP to executive directors are shown on page 64. 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, 2010 and 2011 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.
Rolls-Royce Holdings plc Annual report 2011GovernanceGovernance 64
Directors’ remuneration report
Sir John Rose 3
212,888
391,675
191,005
795,568
Andrew Shilston 4
100,183
211.198
102,993
–
414,374
70,356
148,319
78,025
–
296,700
91,075
191,998
93,630
–
376,703
Colin Smith
Mike Terrett
Total value of
shares vested
PSP
James Guyette
January 1,
2011
Granted during
2011
TSR uplift at
vesting 1
Total vested
during 2011
December 31,
2011§
Value of shares
vested in 2011
£000
17,668
(88,340)
–
504
70,672
207,845
91,383
–
369,900
–
–
–
82,404
82,404
John Rishton 2
–
164,866
–
–
–
17,668
–
–
–
–
(88,340)
207,845
91,383
82,404
381,632
–
164,866
53,222
(266,110)
–
–
–
391,675
–
53,222
–
(266,110)
191, 005
582,680
25,046
(125,229)
–
–
–
–
–
97,091
97,091
–
25,046
–
(125,229)
74,813
74,813
–
17,589
–
(87,945)
17,589
(87,945)
–
–
–
–
–
22,769
(113,844)
–
–
–
–
–
91,438
91,438
–
22,769
–
(113,844)
211,198
102,993
97,091
411,282
148,319
78,025
74,813
301,157
191,998
93,630
91,438
377,066
–
–
–
–
–
–
–
–
–
–
–
–
–
Performance
period
Jan 1, 2008 to
Dec 31, 2010
Jan 1, 2009 to
Dec 31, 2011
Jan 1, 2010 to
Dec 31, 2012
Jan 1, 2011 to
Dec 31, 2013
Jan 1, 2011 to
Dec 31, 2013
Jan 1, 2008 to
Dec 31, 2010
Jan 1, 2009 to
Dec 31, 2011
Jan 1, 2010 to
Dec 31, 2012
Jan 1, 2008 to
Dec 31, 2010
Jan 1, 2009 to
Dec 31, 2011
Jan 1, 2010 to
Dec 31, 2012
Jan 1, 2011 to
Dec 31, 2013
Jan 1, 2008 to
Dec 31, 2010
Jan 1, 2009 to
Dec 31, 2011
Jan 1, 2010 to
Dec 31, 2012
Jan 1, 2011 to
Dec 31, 2013
Jan 1, 2008 to
Dec 31, 2010
Jan 1, 2009 to
Dec 31, 2011
Jan 1, 2010 to
Dec 31, 2012
Jan 1, 2011 to
Dec 31, 2013
Date of grant
March 3,
2008
March 10,
2009
March 1,
2010
March 9,
2011
March 9,
2011
March 3,
2008
March 10,
2009
March 1,
2010
March 3,
2008
March 10,
2009
March 1,
2010
March 9,
2011
March 3,
2008
March 10,
2009
March 1,
2010
March 9,
2011
March 3,
2008
March 10,
2009
March 1,
2010
March 9,
2011
Market price at
date of grant
439.20p
260.42p
544.70p
601.50p
601.50p
439.20p
260.42p
544.70p
439.20p
260.42p
544.70p
601.50p
439.20p
260.42p
544.70p
601.50p
439.20p
260.42p
544.70p
601.50p
–
–
–
504
–
1,615
–
–
1,615
760
–
–
760
534
–
–
534
691
–
–
691
4,104
§ Or date of retirement if earlier.
1 Under the rules of the PSP, the number of shares vesting in 2011 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, 2011. The market value per share, which vested under the PSP during 2011, was 607.03p. For James Guyette, the market value per share, which vested under the PSP was 570.76p.
2 John Rishton was appointed as an executive director on March 1, 2011.
3 Sir John Rose retired as an executive director on March 31, 2011.
4 Andrew Shilston retired as an executive director on December 31, 2011.
Rolls-Royce Holdings plc Annual report 2011Governance 65
Directors’ remuneration report
Grant of shares
John Rishton received a special grant of shares on joining the Company intended to mirror the fair value and vesting profile of the incentives he forfeited
on resigning from his previous employer. This award was reported in the 2010 Annual report and is detailed below:
Performance related
Restricted shares
Performance related
Restricted shares
Performance related
Performance related
Total
Number of shares
49,099
126,019
76,365
76,143
63,397
40,565
431,588
Performance period
Jan 1, 2009 to Dec 31, 2011
n/a
Jan 1, 2010 to Dec 31, 2012
n/a
Jan 1, 2011 to Dec 31, 2013
Jan 1, 2012 to Dec 31, 2014
Vesting date
March 1, 2012
March 1, 2012
March 1, 2013
March 1, 2013
March 1, 2014
March 1, 2015
Market price at date of grant
601.50p
601.50p
601.50p
601.50p
601.50p
601.50p
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.
Statutory requirements
The remuneration report has been prepared on behalf of the Board by the
remuneration committee.
The committee adopts the principles of good governance as set out in the
Code and complies with the Listing Rules of the Financial Services
Authority and the relevant schedules of the Companies Act 2006 and the
Directors’ Report Regulations in Schedule 8 of the Large and Medium-
sized Companies and Groups (Accounts and Reports) Regulations 2008.
The report is divided into audited and unaudited information. The above
regulations require the Company’s auditors to report on the audited
information in their report on page 125 and to state that this section has
been properly prepared in accordance with these regulations. The report
is subject to shareholder approval at the AGM on May 4, 2012.
The Directors’ remuneration report was approved by the Board on
February 8, 2012 and signed on its behalf.
Dame Helen Alexander
Chairman of the remuneration committee
Non-executive directors’ remuneration
Policy
The committee determines, on the Board’s behalf, the remuneration
package 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.
Dame Helen Alexander
Lewis Booth
Peter Byrom
Sir Frank Chapman
Iain Conn
Sir Peter Gregson
John McAdam
John Neill CBE
Sir Simon Robertson
Ian Strachan
Appointment
date
01/09/2007
25/05/2011
01/01/1997
10/11/2011
20/01/2005
01/03/2007
19/02/2008
13/11/2008
01/01/2005
19/09/2003
Current letter of
appointment
start date
23/05/2011
25/05/2011
01/01/2012
10/11/2011
23/05/2011
23/05/2011
23/05/2011
13/11/2011
23/05/2011
23/05/2011
Current letter of
appointment
end date
31/08/2013
24/05/2014
31/12/2012
09/11/2014
19/01/2014
28/02/2013
18/02/2014
12/11/2014
31/12/2013
18/09/2012
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 annually by
the Board. The table below shows the current fee structure with effect
from February 1, 2011.
Chairman
Other non-executive directors
Chairman of audit committee
Chairman of remuneration committee
Chairman of ethics committee
Senior Independent Director
Fee
£000
370
60
20
15
15
12
Rolls-Royce Holdings plc Annual report 2011GovernanceGovernance
66
Shareholders and share capital
Share capital and voting rights
On December 31, 2011 there were 1,872,240,012 ordinary shares,
6,371,021,124 C Shares and one Special Share in issue. The ordinary shares
are listed on the London Stock Exchange.
The Annual General Meeting
This year’s AGM will be held at 11.00am on Friday May 4, 2012 at the
QEII Conference Centre, Broad Sanctuary, Westminster, London, SW1P 3EE.
The Notice of AGM and the Annual report will be available to view on the
Group’s website.
C Shares
The Company issues 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 CRIP operated by the Registrar; or
• keep the C Shares.
Shareholders unable to attend the AGM are invited to vote on the business
of the meeting by completing a proxy form and returning it to the
Registrar. If you have elected to receive electronic communications, you
will be able to vote online.
Payments to shareholders
At the AGM on May 4, 2012, the directors will recommend an issue of 106
C Shares with a total nominal value of 10.6 pence for each ordinary share.
The final issue of C Shares will be made on July 2, 2012. Together with the
interim issue on January 3, 2012 of 69 C Shares for each ordinary share with
a total nominal value of 6.9 pence, this is the equivalent of a total annual
payment to ordinary shareholders of 17.5 pence for each ordinary share.
The payment to shareholders will, as before, be made in the form of
redeemable C Shares which shareholders may either choose to retain or
redeem for a cash equivalent. The Registrar, on behalf of the Company,
operates a C Share Reinvestment Plan (CRIP) and can, on behalf of
shareholders, purchase ordinary shares from the market rather than
delivering a cash payment. Shareholders wishing to redeem their C Shares
or else redeem and participate in the CRIP must ensure that their
instructions are lodged with the Registrar no later than 5pm on Friday
June 1, 2012.
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 Group 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.
Any C Shares retained attract a dividend of 75 per cent of LIBOR on the
0.1p nominal value of each share, paid on a twice-yearly basis, and have
limited voting rights. The Company has the option to compulsorily
redeem the C Shares, at any time, if the aggregate number of C Shares in
issue is less than ten per cent of the aggregate number of all C Shares
issued, or on the acquisition or capital restructuring of the Company.
On a return of capital on a winding-up, the holders of C Shares shall be
entitled, in priority to any payment to the holders of ordinary shares, to the
repayment of the nominal capital paid-up or credited as paid-up on the
C Shares held by them, together with a sum equal to the outstanding
preferential dividend which will have been accrued but not been paid
until the date of return of capital.
The holders of C Shares are entitled to attend, speak and vote at a General
meeting only if a resolution to wind up the Company is to be considered,
in which case they may vote only on such resolution.
Special Share
Certain rights attach to the special rights non-voting share (Special Share)
issued to HM Government (Special Shareholder). Subject to the provisions
of the Companies Act 2006, the Treasury Solicitor may redeem the Special
Share at par at any time. The Special Share confers no rights to dividends
but in the event of a winding-up it shall be repaid at its nominal value in
priority to any other shares.
Certain Articles (in particular those relating to the foreign shareholding
limit, disposals and the nationality of directors) that relate to the rights
attached to the Special Share may only be altered with the consent of the
Special Shareholder. The Special Shareholder is not entitled to vote at any
general meeting or any other meeting of any class of shareholders.
The latest copy of the Articles of the Company can be found on the
Group’s website: www.rolls-royce.com.
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 here), 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.
Rolls-Royce Holdings plc Annual report 2011Governance 67
Shareholders and share capital
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 a general meeting in 2011, authority was given to the directors to allot
new ordinary shares up to a nominal value of £124,811,895, equivalent to
one-third of the issued share capital of the Company. This is called the first
section 551 amount. 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. These authorities are valid until
the AGM in 2012 and the directors propose to renew these authorities at
that AGM.
In line with revised guidance issued by the Association of British Insurers in
November 2009, it is proposed to seek a further authority, as last year, at
the AGM in 2012 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.
Also at a general meeting in 2011, 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
2012. The directors propose to renew an authority to allot new C Shares at
the AGM in 2012 at an increased level of £400 million to provide headroom
for potential future payments to shareholders.
Authority to purchase own shares
At a general meeting in 2011, the Company was authorised by
shareholders to purchase up to 187,217,843 of its own ordinary shares
representing ten per cent of its issued ordinary share capital. The Company
did not make use of this authority during 2011.
The authority for the Company to purchase its own shares expires at the
conclusion of the AGM in 2012 or 18 months from May 16, 2011, 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 appointments, 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 8, 2012, 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
Rolls-Royce Holdings plc Annual report 2011GovernanceGovernance 68
Other statutory information
Political donations
In line with its established policy, the Group made no political donations
pursuant to the authority granted at the 2011 AGM. Although the
Company does not make, and does not intend to make, donations to
political parties, within the normal meaning of that expression, the
definition of political donations under the Companies Act 2006 is very
broad and includes expenses legitimately incurred as part of the process
of talking to members of parliament and opinion formers to ensure that
the issues and concerns of the Group are considered and addressed. These
activities are not intended to support 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 2012 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 business expenses incurred by Rolls-Royce North
America Inc. towards the operation of the Rolls-Royce North America
Political Action Committee (RRNAPAC) in the USA was US$44,436 (2010: nil).
PACs are a common feature of the US political system and are governed by
the Federal Election Campaign Act.
The PAC is independent of the Company and independent of any political
party. The PAC funds are contributed voluntarily by employees and the
Company cannot affect how they are applied, although under US Law, the
business expenses are paid by the Company.
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
banks. 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, 2011 these facilities were less than 20
per cent drawn.
The Group has entered into a series of financial instruments to hedge its
currency, interest rate and commodity exposures. These contracts
provide for termination or alteration in the event that a change of control
of the Company materially weakens the creditworthiness of the Group.
Employee share plans
In the event of a change of control of the Company, the effect on the
employee share plans would be as follows:
• PSP – awards would vest pro rata to service in the performance
period, subject to remuneration committee judgement of
Company performance;
• APRA 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
• SIP – consideration received as shares would be held within the
SIP, if possible, otherwise the consideration would be treated as
a disposal from the SIP.
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.
Customers
The increasingly global nature of the business, balanced across the civil
aerospace, defence aerospace, marine and energy segments, ensures that
the Group is not overly dependent on any individual customer.
Material litigation
During the year, the litigation with United Technologies Corporation in
connection with an alleged patent infringement was withdrawn, without
financial impact.
Creditor days
As the Company is a holding company and does not itself trade, it owed
no amounts to trade creditors at December 31, 2011 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.
Rolls-Royce Holdings plc Annual report 2011Governance
69
Other statutory information
Internal control and risk management
The Board’s responsibility for internal control and risk management
The directors are responsible for the Group’s system of internal control and
for maintaining and reviewing its effectiveness from both a financial and
an operational perspective. The system of internal control is designed to
manage, rather than eliminate, the risk of failure to achieve business
objectives and to provide reasonable but not absolute assurance against
material misstatement or loss.
The Group’s approach to internal control is based on the underlying
principle of line management’s accountability for control and risk
management. In reviewing the effectiveness of the system of internal
control, the Board has taken account of the results of the work carried out
to audit and review the activities of the Group.
Annual report and financial statements
Statement of directors’ responsibilities in respect of the Annual report and the
financial statements
The directors are responsible for preparing the Annual report and the
Group and parent company financial statements in accordance with
applicable law and regulations.
Company law requires the directors to prepare Group and parent
company financial statements for each financial year. Under that law they
are required to prepare the Group financial statements in accordance with
IFRS as adopted by the EU and applicable law and have elected to prepare
the parent company financial statements in accordance with UK
Accounting Standards and applicable law (UK Generally Accepted
Accounting Practice).
There is an ongoing process to identify, assess and manage risk, including
those risks affecting the Group’s reputation. This process is subject to
continuous improvement and has been in place throughout the financial
year to which these statements apply and up to the date of their approval.
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 2011, the effectiveness and consistency of risk management at all levels
of the organisation has been measured, improved and reported via the
sector and function assurance framework.
The Board has reviewed the risk management process and confirms that
ongoing processes and systems ensure that the Group continues to be
compliant with the ‘Turnbull guidance’ as contained in ‘Internal Control:
Guidance for Directors on the Combined Code’.
Financial reporting
The Group has a comprehensive budgeting system with an annual budget
approved by the Board. Revised forecasts for the year are reported at least
quarterly. Actual results, at both a business and Group level, are reported
monthly against budget and variances reviewed.
Financial managers are required to acknowledge in writing that their
routine financial reporting is based on reliable data and that their results
are properly stated in accordance with Group requirements.
In addition, for annual reporting, business presidents and finance directors
are required to acknowledge that their business has complied with the
Group Finance Manual.
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 Group’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.
Rolls-Royce Holdings plc Annual report 2011GovernanceGovernance 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 70 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
Paul Davies
Acting Company Secretary
February 8, 2012
70
Other statutory information
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
70 of the business review and a summary of the principal risks affecting
the business are shown on pages 34 to 35.
The financial position of the Group, its cash flows, liquidity position,
borrowing facilities and financial risks are described in pages 14 to 17 and
36 to 37 of the business review.
In addition, notes 1, 13, 15 and 17 of the consolidated financial statements
include the Group’s objectives, policies and processes for financial risk
management, details of its cash and cash equivalents, indebtedness and
borrowing facilities and its financial instruments, hedging activities and its
exposure to counterparty credit risk, liquidity risk, currency risk, interest
rate risk and commodity pricing risk.
As described on page 36, the Group meets its funding requirements
through a mixture of shareholders’ funds, bank borrowings, bonds, notes
and finance leases. The Group has facilities of £2.3 billion of which
£1.1 billion was drawn at the year end. None of these facilities expire
in 2012.
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
accordance with the guidance ‘Going Concern and Liquidity Risk: Guidance
for Directors of UK Companies 2009’ issued by the FRC) in preparing the
consolidated financial statements.
Disclosure of information to auditors
Each of the persons who is a director at the date of approval of this report
confirms that:
i) so far as the director is aware, there is no relevant information of which
the Company’s auditors are unaware; 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.
Rolls-Royce Holdings plc Annual report 2011Governance 71
Other statutory information
Financial statements
Consolidated financial statements
72 CONSOLIDATED INCOME STATEMENT
72 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
73 CONSOLIDATED BALANCE SHEET
74 CONSOLIDATED CASH FLOW STATEMENT
76 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Company financial statements
119 COMPANY BALANCE SHEET
119 RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’ FUNDS
Accounting policies
Segmental analysis
Taxation
Earnings per ordinary share
Employee information
Auditor’s remuneration
Intangible assets
Property, plant and equipment
Investments
Inventories
77 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
77 1
84 2
88 3 Net financing
88 4
91 5
91 6
92 7
92 8
94 9
95 10
96 11
96 12 Trade and other receivables
97 13 Cash and cash equivalents
97 14 Assets held for sale
98 15 Borrowings
98 16 Trade and other payables
99 17 Financial instruments
108 18 Provisions for liabilities and charges
109 19 Post-retirement benefits
113 20 Share capital
114 21 Share-based payments
116 22 Operating leases
117 23 Contingent liabilities
118 24 Related party transactions
118 25 Acquisitions
Accounting policies
Investments – subsidiary undertakings
Financial liabilities
Share capital
120 NOTES TO THE COMPANY FINANCIAL STATEMENTS
120 1
120 2
120 3
121 4
121 5 Movements in capital and reserves
121 6
121 7 Other information
Contingent liabilities
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statements 72
Consolidated income statement
For the year ended December 31, 2011
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 on disposal of businesses
Profit before financing and taxation
Financing income
Financing costs
Net financing
Profit before taxation 1
Taxation
Profit for the year
Attributable to:
Ordinary shareholders
Non-controlling interests
Profit for the year
Earnings per ordinary share attributable to ordinary shareholders:
Basic
Diluted
Payments to ordinary shareholders in respect of the year
Per share
Total
1 Underlying profit before taxation
Consolidated statement of comprehensive income
For the year ended December 31, 2011
Profit for the year
Other comprehensive income
Foreign exchange translation differences on foreign operations
Movements in post-retirement schemes
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
Notes
2
10
2
3
3
4
5
17
2
Notes
19
10
4
2011
£m
11,124
(8,676)
2,448
69
(984)
(463)
116
1,186
3
1,189
456
(540)
(84)
1,105
(257)
848
850
(2)
848
45.95p
45.33p
17.5p
328
1,157
2011
£m
848
(102)
123
(10)
(54)
805
808
(3)
805
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
29.20p
28.82p
16.0p
299
955
2010
£m
543
22
(94)
(16)
29
484
480
4
484
Rolls-Royce Holdings plc Annual report 2011Financial statements
73
Consolidated balance sheet
At December 31, 2011
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
Liabilities associated with assets held for sale
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 reserve
Cash flow hedging reserve
Other reserves
Retained earnings
Non-controlling interests
Total equity
Notes
8
9
10
10
17
4
19
11
12
17
13
14
15
17
16
18
14
15
17
16
4
18
19
20
2011
£m
2,882
2,338
1,680
10
327
368
503
8,108
2,561
4,009
20
91
11
1,310
313
8,315
16,423
(20)
(111)
(6,236)
(138)
(276)
(135)
(6,916)
(1,184)
(919)
(1,314)
(445)
(226)
(900)
(4,988)
(11,904)
4,519
374
–
173
(52)
433
3,590
4,518
1
4,519
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)
3,979
374
133
209
(37)
527
2,769
3,975
4
3,979
The financial statements on pages 72 to 118 were approved by the Board on February 8, 2012 and signed on its behalf by:
Sir Simon Robertson Chairman
Mark Morris Finance Director
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statements
74
Consolidated cash flow statement
For the year ended December 31, 2011
Reconciliation of cash flows from operating activities
Profit before taxation
Share of results of joint ventures and associates
Profit on disposal of businesses
Profit on disposal of property, plant and equipment
Net financing
Taxation paid
Amortisation of intangible assets
Depreciation and impairment of property, plant and equipment
Impairment of investments
(Decrease)/increase in provisions
(Increase)/decrease in inventories
(Increase)/decrease in trade and other receivables
Increase in trade and other payables
Movement in other financial assets and liabilities
Net defined benefit post-retirement (credit)/cost recognised in profit before financing
Cash funding of defined benefit post-retirement schemes
Share-based payments
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
Government grants received
Disposals of property, plant and equipment
Acquisitions of businesses
Disposals of businesses
Investments in joint ventures and associates
Loan to Engine Holding GmbH
Net cash outflow from investing activities
Cash flows from financing activities
Repayment of loans
Proceeds from increase in loans
Net cash flow from decrease in borrowings
Interest received
Interest paid
Decrease/(increase) in short-term investments
Issue of ordinary shares (net of expenses)
Purchase of ordinary shares
Redemption of C Shares
Net cash outflow from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at January 1
Exchange (losses)/gains on cash and cash equivalents
Cash and cash equivalents at December 31
* Restated to show government grants, previously included in trade and other payables, separately.
Notes
10
3
8
9
10
21
10
2011
£m
1,105
(116)
(3)
(8)
84
(208)
169
241
–
(28)
(140)
(62)
416
68
(43)
(304)
59
76
1,306
–
1
(363)
6
(412)
38
31
(19)
7
(1,329)
(167)
(2,207)
(567)
–
(567)
19
(50)
316
(1)
(57)
(315)
(655)
(1,556)
2,851
(4)
1,291
* Restated
2010
£m
702
(93)
(4)
(10)
432
(168)
130
237
3
99
41
39
248
(299)
147
(282)
50
68
1,340
(1)
46
(321)
–
(354)
38
38
(150)
2
(19)
–
(721)
(108)
68
(40)
23
(77)
(326)
67
(124)
(266)
(743)
(124)
2,958
17
2,851
Rolls-Royce Holdings plc Annual report 2011Financial statements 75
Consolidated cash flow statement
For the year ended December 31, 2011
Reconciliation of movements in cash and cash equivalents to movements in net funds
Decrease in cash and cash equivalents
Cash flow from decrease in borrowings
Cash flow from (decrease)/increase in short-term investments
Change in net funds resulting from cash flows
Net funds (excluding cash and cash equivalents) of businesses acquired
Exchange (losses)/gains 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:
2011
£m
(1,556)
567
(316)
(1,305)
–
(5)
92
(1,218)
1,335
117
106
223
2010
£m
(124)
40
326
242
(1)
17
26
284
1,051
1,335
198
1,533
Cash at bank and in hand
Money-market funds
Short-term deposits
Overdrafts
Cash and cash equivalents
Short-term investments
Other current borrowings
Non-current borrowings
Finance leases
Fair value of swaps hedging fixed rate borrowings
At
January 1,
2011
£m
1,266
381
1,212
(8)
2,851
328
(709)
(1,134)
(1)
1,335
198
1,533
Funds
flow
£m
26
(370)
(1,201)
(11)
(1,556)
(316)
566
1
–
(1,305)
Exchange
differences
£m
(7)
–
3
–
(4)
(1)
–
–
–
(5)
(1,305)
(5)
Fair value
adjustments
£m
–
–
–
–
–
–
142
(50)
–
92
(92)
–
At
December 31,
2011
£m
1,285
11
14
(19)
1,291
11
(1)
(1,183)
(1)
117
106
223
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statements 76
Consolidated statement of changes in equity
For the year ended December 31, 2011
At January 1, 2010
Total comprehensive income for the year
Arising on issues of ordinary shares
Issues of C Shares
Redemptions of C Shares
Ordinary shares purchased
Share-based payments – direct to equity 4
Related tax movements
Other changes in equity in the year
At January 1, 2011
Total comprehensive income for the year
Arising on issues of ordinary shares
Issues of C Shares
Redemptions of C Shares
Ordinary shares purchased
Share-based payments – direct to equity 4
Effect of scheme of arrangement 5
Effect of capital reduction 5
Related tax movements
Other changes in equity in the year
At December 31, 2011
Notes
20
17
17
4
17
17
4
Share
capital
£m
371
–
3
–
–
–
–
–
3
374
–
–
–
–
–
–
2,434
(2,434)
–
–
374
Share
premium
£m
98
–
64
(29)
–
–
–
–
35
133
–
1
(120)
–
–
–
(14)
–
–
(133)
–
Attributable to ordinary shareholders
Cash flow
hedging
reserve1
£m
(19)
(18)
–
–
–
–
–
–
–
(37)
(15)
–
–
–
–
–
–
–
–
–
(52)
Capital
redemption
reserve
£m
191
–
–
(249)
267
–
–
–
18
209
–
–
–
317
–
–
(353)
–
–
(36)
173
Other
reserves2
£m
506
21
–
–
–
–
–
–
–
527
(94)
–
–
–
–
–
–
–
–
–
433
Retained
earnings3
£m
2,635
477
–
1
(267)
(124)
42
5
(343)
2,769
917
–
(176)
(317)
(57)
77
(2,069)
2,434
12
(96)
3,590
Non-
controlling
interests
£m
–
4
–
–
–
–
–
–
–
4
(3)
–
–
–
–
–
–
–
–
–
1
Total
£m
3,782
480
67
(277)
–
(124)
42
5
(287)
3,975
808
1
(296)
–
(57)
77
(2)
–
12
(265)
4,518
Total
equity
£m
3,782
484
67
(277)
–
(124)
42
5
(287)
3,979
805
1
(296)
–
(57)
77
(2)
–
12
(265)
4,519
1 See accounting policies note 1.
2 Other reserves include a merger reserve of £3m (2010 £3m, 2009 £3m) and a translation reserve of £430m (2010 £524m, 2009 £503m).
3 At December 31, 2011, 22,541,187 ordinary shares with a net book value of £116m (2010 28,320,962, 2009 7,156,497 ordinary shares with net book values of £125m and £25m respectively) were held for the
purpose of share-based payment plans and included in retained earnings. During the year, 14,822,563 ordinary shares with a net book value of £66m (2010 6,586,568 shares with a net book value of
£24m) vested in share-based payment plans. During the year the Company acquired 9,042,788 of its ordinary shares through purchases on the London Stock Exchange.
4 Share-based payments – 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.
5 On May 23, 2011, under a scheme of arrangement between Rolls-Royce Group plc, the former holding company of the Group, and its shareholders under Part 26 of the Companies Act 2006, and as
sanctioned by the High Court, all the issued ordinary shares in that company were cancelled and the same number of new ordinary shares were issued to Rolls-Royce Holdings plc in consideration for
the allotment to shareholders of one ordinary share in Rolls-Royce Holdings plc for each ordinary share in Rolls-Royce Group plc held on the record date (May 20, 2011). Pursuant to the scheme of
arrangement, 1,872,188,709 ordinary shares of 150 pence were issued. As required by Section 612 of the Companies Act 2006, no share premium was recognised.
On May 24, 2011, the share capital of Rolls-Royce Holdings plc was reduced by reducing the nominal value of the ordinary shares from 150 pence to 20 pence as sanctioned by the High Court.
Rolls-Royce Holdings plc Annual report 2011Financial statements
77
Notes to the consolidated financial statements
1 Accounting policies
The Company
Rolls-Royce Holdings plc (the ‘Company’) is a company domiciled in the United Kingdom. The consolidated financial statements of the Company for the
year ended December 31, 2011 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 8, 2012.
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, 2011 (Adopted IFRS).
The Company has elected to prepare its parent company accounts under UK Generally Accepted Accounting Practices (GAAP).
The financial statements have been prepared on the historical cost basis except where Adopted IFRS requires the revaluation of financial instruments to
fair value and certain other assets and liabilities on an alternative basis – most significantly post-retirement scheme liabilities are valued on the basis
required by IAS 19 Employee benefits – and on a going concern basis as described on page 70.
The preparation of financial statements in conformity with Adopted IFRS requires the use of certain critical accounting judgements and estimates, which
are set out below.
The Group’s significant accounting policies are set out on the following pages. These accounting policies have been applied consistently to all periods
presented in these consolidated financial statements and by all Group entities.
Key areas of judgement
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.
• 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 23, 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 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.
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.
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statements
78
Notes to the consolidated financial statements
1 Accounting policies (continued)
Forecasts and discount rates
The carrying values 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 as to whether there are any indications of impairment of development, participation, certification and recoverable engine costs
recognised as intangible assets is dependent on forecasts of cash flows generated by the relevant assets (carrying values at December 31, 2011
£1,442m, December 31, 2010 £1,472m).
• 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, 2011 £230m, December 31, 2010 £266m). 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 values at December 31, 2011 £368m, December 31, 2010 £451m) 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 in the revenue recognition accounting policy below.
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 £397m before deferred taxation being recognised
on the balance sheet at December 31, 2011 (December 31, 2010 £856m). 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 19.
Provisions
As described in the accounting policy below, the Group measures provisions (carrying value at December 31, 2011 £502m, December 31, 2010 £544m) 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.
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.
Financial statements 79
1 Accounting policies (continued)
Significant accounting policies
Revenue recognition
Revenues comprise sales to outside customers after discounts, excluding value added tax.
Sales of products are recognised when the significant risks and rewards of ownership of the goods are transferred to the customer, the sales price agreed
and the receipt of payment can be assured. On occasion, the Group may participate in the financing of engines in conjunction with airframe
manufacturers, most commonly by the provision of guarantees as described in note 23. 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.
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.
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statementsNotes to the consolidated financial statements 80
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.
• 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, with the change in value 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.
Financial statementsNotes to the consolidated financial statements 81
1 Accounting policies (continued)
Hedge accounting
The Group does not generally apply hedge accounting in respect of forward foreign exchange contracts held to manage the cash flow exposures of
forecast transactions denominated in foreign currencies. In 2011, the Group has applied cash flow hedge accounting in respect of foreign exchange
contracts entered into to hedge the cost of its investment in Engine Holding GmbH.
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 or, in the case of the cash flow hedges of the investment in Engine Holding GmbH, included in the initial carrying value of
the joint venture.
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.
Purchased goodwill
Goodwill represents the excess of the fair value of the purchase consideration for shares in subsidiary undertakings, joint ventures and associates over the
fair value to the Group of the net of the identifiable assets acquired and the liabilities assumed.
i) To December 31, 1997: Goodwill was written off to reserves in the year of acquisition.
ii) From January 1, 1998: Goodwill was recognised within intangible assets in the year in which it arose and amortised on a straight-line basis over its
useful economic life, up to a maximum of 20 years.
iii) From January 1, 2004, in accordance with IFRS 3 Business Combinations, goodwill is recognised as per (ii) above but is no longer amortised.
Certification costs and participation fees
Costs incurred in respect of meeting regulatory certification requirements for new civil aero-engine/aircraft combinations and payments made to
airframe manufacturers for this, and participation fees, are carried forward in intangible assets to the extent that they can be recovered out of future sales
and are charged to the income statement over the programme life, up to a maximum of 15 years from the entry into service of the product.
Research and development
In accordance with IAS 38 Intangible Assets, expenditure incurred on research and development, excluding known recoverable amounts on contracts, and
contributions to shared engineering programmes, is distinguished as relating either to a research phase or to a development phase.
All research phase expenditure is charged to the income statement. For development expenditure, this is capitalised as an internally generated intangible
asset only if it meets strict criteria, relating in particular to technical feasibility and generation of future economic benefits.
Expenditure that cannot be classified into these two categories is treated as being incurred in the research phase. The Group considers that, due to the
complex nature of new equipment programmes, it is not possible to distinguish reliably between research and development activities until relatively late
in the programme.
Expenditure capitalised is amortised over its useful economic life, up to a maximum of 15 years from the entry into service of the product.
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statementsNotes to the consolidated financial statements 82
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).
Operating leases
Payments made and rentals received under operating lease arrangements are charged/credited to the income statement 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, property, plant and equipment and
investments 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.
Cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand, investments in money-market funds 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.
Financial statementsNotes to the consolidated financial statements 83
1 Accounting policies (continued)
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 TSR performance condition in the PSP.
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) PSP – using a pricing model adjusted to reflect non-entitlement to dividends (or equivalent) and the TSR market-based performance condition; and
iii) APRA plan deferred shares – share price on the date of the award.
See note 21 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.
Revisions to Adopted IFRS in 2011
There were no revisions to Adopted IFRS that became applicable in 2011 which had a significant impact on the Group’s financial statements.
Revisions to IFRS not applicable in 2011
Standards and interpretations issued by the IASB are only applicable if endorsed by the EU. The following may be applicable in the future:
•
IFRS 9 Financial Instruments will simplify the classification of financial assets for measurement purposes, but is not anticipated to have a significant
impact on the financial statements. If endorsed, this will be effective for 2015.
• Amendments to IAS 19 Employee Benefits will require the financing on post-retirement benefits to be calculated on the net surplus or deficit using
•
an ‘AA’ corporate bond rate. This will increase the net post-retirement scheme financing cost. This will be effective for 2013.
IFRS 11 Joint Arrangements may result in certain entities currently classified as joint ventures being classified as joint operations. This would result in
the Group’s share of the individual assets and liabilities of these entities being included in the financial statements rather than the equity method
accounting adopted under the requirements of IAS 31 Interests in Joint Ventures. This will not affect the Group’s net assets or profit for the period.
This will be effective for 2013.
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.
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statementsNotes to the consolidated financial statements 84
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:
– development, manufacture, marketing and sales of commercial aero engines and aftermarket services.
Civil aerospace
Defence aerospace – development, manufacture, marketing and sales of military aero engines and aftermarket services.
Marine
Energy
– development, manufacture, marketing and sales of marine-power 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.
Technology and operations, discussed in the business review, operate on a Group-wide basis across all the above segments. The equity accounted share
of the Engine Holding GmbH business acquired during the year is shown separately.
The operating results reviewed by the Board are prepared on an underlying basis, which the Board considers reflects better the economic substance of
the Group’s trading during the year. The principles adopted to determine underlying results are:
Underlying revenue – 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. There is no inter-segment trading and hence all revenue is 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. In addition, adjustments have also been made to exclude one-off
past-service credits on post-retirement schemes and the effect of acquisition accounting.
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-retirement scheme benefits.
Financial statementsNotes to the consolidated financial statements 85
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, 2011
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
Civil
aerospace
£m
2,232
3,340
5,572
384
115
–
499
Defence
aerospace
£m
1,102
1,133
2,235
367
9
–
376
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
8,218
403
(5,982)
2,639
620
267
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
1,892
3,027
4,919
315
77
–
392
7,790
372
(5,435)
2,727
568
246
1,333
(22)
(1,831)
(520)
70
48
1,020
1,103
2,123
300
9
–
309
1,359
(15)
(1,867)
(523)
53
35
Marine
£m
1,322
949
2,271
318
2
3
323
2,219
8
(1,544)
683
75
57
1,719
872
2,591
330
2
–
332
2,357
6
(1,548)
815
65
58
Energy
£m
602
597
1,199
14
10
–
24
1,243
42
(617)
668
84
38
691
542
1,233
18
5
4
27
1,152
30
(748)
434
16
28
Engine
Holding
£m
36
–
36
169
1,249
–
1,418
1,317
–
Total
reportable
segments
£m
5,258
6,019
11,277
1,083
172
3
1,258
13,182
1,680
(9,974)
4,888
2,166
410
5,322
5,544
10,866
963
93
4
1,060
12,658
393
(9,598)
3,453
702
367
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statementsNotes to the consolidated financial statements 86
2 Segmental analysis (continued)
Reconciliation to reported results
Year ended December 31, 2011
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, 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
1 Central corporate costs
Underlying adjustments
Total
reportable
segments
£m
5,258
6,019
11,277
1,083
172
3
1,258
Underlying
central
items
£m
–
–
–
(52)1
–
–
(52)
(49)
(101)
(261)
(362)
Total
underlying
£m
5,258
6,019
11,277
1,031
172
3
1,206
(49)
1,157
(261)
896
Underlying
adjustments
£m
(19)
(134)
(153)
39
(56)
–
(17)
(35)
(52)
4
(48)
5,322
5,544
10,866
963
93
4
1,060
–
–
–
(50)1
–
–
(50)
(55)
(105)
(236)
(341)
5,322
5,544
10,866
913
93
4
1,010
(55)
955
(236)
719
112
107
219
124
–
–
124
(377)
(253)
77
(176)
Underlying performance
Revenue recognised at exchange rate on date of transaction
Realised (gains)/losses 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
Effect of acquisition accounting 3
Post-retirement scheme past-service credits 4, 5
Net post-retirement scheme financing
Related tax effect
Total underlying adjustments
Reported per consolidated income statement
2011
2010
Profit
before
financing
£m
1,206
–
(116)
(5)
4
–
–
(64)
164
–
–
(17)
1,189
Net
financing
£m
(49)
–
24
(49)
–
–
2
–
–
(12)
–
(35)
(84)
Revenue
£m
11,277
(153)
–
–
–
–
–
–
–
–
–
(153)
11,124
Taxation
£m
(261)
–
–
–
–
–
–
–
–
–
4
4
(257)
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
Group
£m
5,239
5,885
11,124
1,070
116
3
1,189
(84)
1,105
(257)
848
5,434
5,651
11,085
1,037
93
4
1,134
(432)
702
(159)
543
Taxation
£m
(236)
–
–
–
–
–
–
–
–
–
77
77
(159)
1 Realised (gains)/losses on settled derivative contracts include adjustments to reflect the (gains)/losses in the same period as the related trading cash flows.
2 Unrealised fair value changes to derivative contracts include those included in equity accounted joint ventures and exclude those for which the related trading contracts have been cancelled when the
fair value changes are recognised immediately in underlying profit.
3 The adjustment eliminates charges recognised as a result of recognising assets in acquired businesses at fair value.
4 In 2010, the UK Government announced changes to the basis of the statutory indexation for pension increases. As a result, the relevant arrangements have been amended, resulting in a gain in the
income statement of £130m, which has been excluded from underlying profit.
5 The Group has agreed revised post-retirement healthcare arrangements on certain of its overseas schemes. This has resulted in a net gain in the income statement of £34m which has been excluded
from underlying profit.
The reconciliation of underlying earnings per ordinary share is shown in note 5.
Financial statementsNotes to the consolidated financial statements 87
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
Italy
France
Russia
Rest of Europe
USA
Canada
China
South Korea
Middle East and South East Asia
Rest of Asia
Africa
Australasia
Other
2011
£m
13,182
1,680
(757)
1,321
106
388
503
16,423
(9,974)
757
(1,204)
(583)
(900)
(11,904)
4,519
2011
£m
1,361
374
409
189
183
143
143
547
3,578
301
934
210
1,778
290
261
228
195
11,124
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
187
101
133
830
3,096
299
890
355
1,585
228
109
153
395
11,085
In 2011, revenue (included in all reportable segments) of £1,143m (2010 £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
2011
£m
2,980
670
902
1,907
441
6,900
2010
£m
2,925
611
908
625
344
5,413
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statementsNotes to the consolidated financial statements 88
3 Net financing
Financing income
Interest receivable
Financial RRSPs – foreign exchange differences and changes in forecast payments
Fair value gains on commodity derivatives 2
Expected return on post-retirement scheme assets
Net foreign exchange gains
Financing costs
Interest payable
Fair value losses on foreign currency contracts 2
Financial RRSPs – foreign exchange differences and changes in forecast payments
Financial charge relating to financial RRSPs
Fair value losses on commodity derivatives 2
Interest on post-retirement scheme liabilities
Other financing charges
Note
17
17
19
17
17
17
17
19
Net financing
Analysed as:
Net interest payable
Net post-retirement scheme financing
Net other financing
Net financing
1 See note 2
2 Net loss on items held for trading
4 Taxation
Current tax
Current tax (credit)/charge for the year
Less double tax relief
Adjustments in respect of prior years
Deferred tax
Charge/(credit) for the year
Adjustments in respect of prior years
Credit resulting from reduction in UK tax rate
Recognised in the income statement
2011
Per
consolidated
income
statement
£m
Underlying
financing1
£m
2010
Per
consolidated
income
statement
£m
Underlying
financing1
£m
20
2
–
410
24
456
(51)
(21)
–
(11)
(28)
(422)
(7)
(540)
(84)
(31)
(12)
(41)
(84)
(49)
20
–
–
–
–
20
(51)
–
–
(11)
–
–
(7)
(69)
(49)
(31)
–
(18)
(49)
–
23
–
29
400
1
453
(63)
(370)
(6)
(13)
–
(431)
(2)
(885)
(432)
(40)
(31)
(361)
(432)
(341)
UK
2011
£m
(1)
(2)
(3)
1
(2)
69
2
(11)
60
58
2010
£m
(2)
(2)
(4)
1
(3)
(53)
–
(3)
(56)
(59)
Overseas
2011
£m
177
–
177
(8)
169
37
(7)
–
30
199
2010
£m
174
–
174
2
176
41
1
–
42
218
Total
2011
£m
176
(2)
174
(7)
167
106
(5)
(11)
90
257
23
–
–
–
–
23
(63)
–
–
(13)
–
–
(2)
(78)
(55)
(40)
–
(15)
(55)
–
2010
£m
172
(2)
170
3
173
(12)
1
(3)
(14)
159
Financial statementsNotes to the consolidated financial statements 89
4 Taxation (continued)
Other tax (charges)/credits
Current tax:
Share-based payments – direct to equity
Deferred tax:
Net investment hedge
Movements in post-retirement schemes
Share-based payments – direct to equity
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 26.5% (2010 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
Underlying items (note 2)
Non-underlying items
Deferred taxation assets and liabilities
At January 1
Amount (charged)/credited to income statement
Amount (charged)/credited to other comprehensive income
Amount charged to equity
Acquisition of businesses
Transferred to assets held for sale
Exchange differences
At December 31
Deferred tax assets
Deferred tax liabilities
OCI
2011
£m
–
(1)
(53)
–
(54)
2010
£m
–
(2)
31
–
29
Equity
2011
£m
6
–
–
6
12
2011
£m
1,105
(116)
989
262
(29)
40
8
(1)
–
(12)
(11)
257
261
(4)
257
2011
£m
13
(90)
(54)
6
(3)
46
5
(77)
368
(445)
(77)
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
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statementsNotes to the consolidated financial statements
90
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,
2011
£m
(282)
(150)
(64)
(229)
263
94
317
64
13
At
January 1,
2010
£m
(250)
(160)
(22)
(243)
265
54
286
64
(6)
Recognised
in income
statement
£m
(9)
16
(3)
(21)
(111)
27
11
–
(90)
Recognised
in income
statement
£m
(19)
10
(25)
14
(39)
40
33
–
14
Recognised
in OCI
£m
–
–
(1)
–
(53)
–
–
–
(54)
Recognised
in equity
£m
–
–
6
–
–
–
–
–
6
Acquisition
of
businesses
£m
–
–
(3)
–
–
–
–
–
(3)
Transferred
to assets
held for sale
£m
46
–
–
–
–
–
–
–
46
Exchange
differences
£m
2
(1)
4
–
–
–
–
–
5
Recognised
in OCI
£m
–
–
–
–
31
–
(2)
–
29
Recognised
in equity
£m
–
–
5
–
–
–
–
–
5
Acquisition
of businesses
£m
(11)
–
(21)
–
–
–
–
–
(32)
Transferred
to assets
held for sale
£m
–
–
–
–
–
–
–
–
–
At
December 31,
2011
£m
(243)
(135)
(61)
(250)
99
121
328
64
(77)
At
December 31,
2010
£m
(282)
(150)
(64)
(229)
263
94
317
64
13
2010
£m
118
51
169
Exchange
differences
£m
(2)
–
(1)
–
6
–
–
–
3
2011
£m
118
41
159
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
The 2010 Emergency Budget and the 2011 Budget announced that the UK corporation tax rate will reduce from 28 per cent to 23 per cent over a period
of four years from 2011. The reductions to 26 per cent effective from April 1, 2011 and 25 per cent effective from April 1, 2012 were substantively enacted
on March 29, 2011 and July 5, 2011 respectively. As the rate change to 25 per cent was substantively enacted prior to the year end, the closing deferred tax
assets and liabilities have been calculated at this rate. 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 2011, £11m has been credited to the income statement, £5m has
been charged to the OCI and £3m has been charged directly to equity.
Had the further tax rate changes been substantively enacted on or before the balance sheet date it would have had the effect of reducing the deferred
tax asset by £23m and reducing the deferred tax liability by £22m.
There are no unrecognised deferred tax liabilities arising on the aggregate temporary differences associated with investments in subsidiaries, branches,
associates and joint ventures (2010: £nil). Any withholding tax due on the remittance of future earnings is expected to be insignificant.
Financial statementsNotes to the consolidated financial statements 91
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.
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
Rest of the world
Civil aerospace
Defence aerospace
Marine
Energy
Group employment costs 1
Wages and salaries
Social security costs
Share-based payments (note 21)
Pensions and other post-retirement scheme benefits (note 19)
1 Remuneration of key management personnel is shown in note 24.
2011
Potentially
dilutive
share
options
25
(0.62)
Basic
850
1,850
45.95
2010
Potentially
dilutive
share
options
24
(0.38)
Diluted
850
1,875
45.33
Basic
539
1,846
29.20
2011
2010
Pence
48.54
(2.81)
0.22
45.95
47.89
£m
898
(52)
4
850
Pence
38.73
(13.70)
4.17
29.20
38.24
2011
Number
21,600
18,800
40,400
20,600
6,800
9,400
3,600
40,400
£m
2,037
245
59
23
2,364
Diluted
539
1,870
28.82
£m
715
(253)
77
539
2010
Number
21,000
17,900
38,900
19,500
6,900
9,000
3,500
38,900
£m
1,847
212
50
221
2,330
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statementsNotes to the consolidated financial statements 92
7 Auditor’s 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
All other services
Fees payable in respect of the Group’s pension schemes:
Audit
Other services relating to taxation
2011
£m
0.2
4.3
4.5
1.0
0.5
0.2
6.2
0.2
–
2010
£m
0.1
4.3
4.4
0.5
0.5
–
5.4
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, 2010
Exchange differences
Additions
Acquisitions of businesses
Disposals
At January 1, 2011
Exchange differences
Additions
Acquisitions of businesses
Transferred to assets held for sale
Disposals
At December 31, 2011
Accumulated amortisation:
At January 1, 2010
Charge for the year 1
Disposals
At January 1, 2011
Charge for the year 1
Transferred to assets held for sale
Disposals
At December 31, 2011
Net book value:
At December 31, 2011
At December 31, 2010
At January 1, 2010
Certification
costs and
participation
fees
£m
Goodwill
£m
Development
expenditure
£m
Recoverable
engine
costs
£m
Software
and other
£m
991
6
–
118
–
1,115
(20)
–
11
–
–
1,106
7
–
–
7
–
–
–
7
1,099
1,108
984
631
(2)
57
–
–
686
(2)
44
–
–
(8)
720
177
13
–
190
15
–
(8)
197
523
496
454
751
–
111
–
–
862
(1)
93
–
–
–
954
205
27
–
232
36
–
–
268
686
630
546
586
–
111
–
–
697
–
135
–
(368)
–
464
296
55
–
351
62
(182)
–
231
233
346
290
273
(1)
46
96
(1)
413
(2)
95
8
–
(24)
490
75
35
(1)
109
56
–
(16)
149
341
304
198
Total
£m
3,232
3
325
214
(1)
3,773
(25)
367
19
(368)
(32)
3,734
760
130
(1)
889
169
(182)
(24)
852
2,882
2,884
2,472
1 Charged to cost of sales except development costs, which are charged to research and development costs.
Financial statementsNotes to the consolidated financial statements 93
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 (CGUs), or groups of CGUs,
that are expected to benefit from the synergies of the business combination that gave rise to the goodwill as follows:
CGU or group of CGUs
Rolls-Royce Deutschland Ltd & Co KG
Commercial marine – arising from the acquisitions of Vinters plc and Scandinavian Electric Holding AS
Commercial marine – arising from the acquisition of ODIM ASA
Other
Primary
reporting
segment
Civil aerospace
Marine
Marine
Various
2011
£m
230
645
112
112
1,099
2010
£m
236
657
114
101
1,108
Goodwill has been tested for impairment during 2011 on the following basis:
• 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 (2010 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 (2010 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
75 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 2.5 per cent (2010 two 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 (2010 11 per cent), based on the Group’s weighted average cost of capital.
• No impairment is required on this basis. However, a combination of changes in assumptions and adverse movements in variables that are outside
the Group’s control (discount rate, exchange rate and airframe delays), could result in impairment in future years.
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statementsNotes to the consolidated financial statements 94
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, 2010
Exchange differences
Additions
Acquisitions of businesses
Reclassifications
Disposals/write-offs
At January 1, 2011
Exchange differences
Additions
Acquisitions of businesses
Reclassifications
Transferred from/(to) assets held for sale
Disposals/write-offs
At December 31, 2011
Accumulated depreciation:
At January 1, 2010
Exchange differences
Charge for the year 1
Disposals/write-offs
At January 1, 2011
Exchange differences
Charge for the year 1
Impairment
Reclassifications
Transferred from/(to) assets held for sale
Disposals/write-offs
At December 31, 2011
Net book value:
At December 31, 2011
At December 31, 2010
At January 1, 2010
806
6
11
17
41
(4)
877
(4)
17
–
78
15
(2)
981
231
4
37
(1)
271
(2)
39
–
3
6
(2)
315
666
606
575
2,387
16
94
7
108
(74)
2,538
(13)
80
2
123
–
(84)
2,646
1,358
11
190
(62)
1,497
(7)
185
–
(3)
–
(74)
1,598
1,048
1,041
1,029
163
–
35
–
5
(14)
189
–
52
–
5
(13)
(17)
216
34
–
10
(2)
42
–
15
–
–
(7)
(6)
44
172
147
129
1 Depreciation charged during the year is presented in the income statement or included in the cost of inventory as appropriate.
Property, plant and equipment includes:
Net book value of finance leased assets:
Land and buildings
Plant and equipment
Assets held for use in operating leases:
Cost
Depreciation
Net book value
Capital expenditure commitments
Cost of fully depreciated assets
The group’s share of equity accounted entities’ capital commitments is £25m (2010 £24m).
276
1
221
–
(154)
(2)
342
1
318
–
(206)
–
(1)
454
–
–
–
–
–
–
–
2
–
–
–
2
452
342
276
2011
£m
7
5
235
(60)
175
196
655
Total
£m
3,632
23
361
24
–
(94)
3,946
(16)
467
2
–
2
(104)
4,297
1,623
15
237
(65)
1,810
(9)
239
2
–
(1)
(82)
1,959
2,338
2,136
2,009
2010
£m
8
5
159
(35)
124
215
584
Financial statementsNotes to the consolidated financial statements 95
10 Investments
At January 1, 2010
Exchange differences
Additions
Taxation paid by the Group
Impairment
Share of retained profit
Transferred to subsidiary
Disposals
Share of OCI of joint ventures and associates
At January 1, 2011
Exchange differences
Additions 1
Taxation paid by the Group
Share of retained profit
Transferred to assets held for sale
Disposals
Share of OCI of joint ventures and associates
At December 31, 2011
Joint
ventures
£m
363
4
16
3
(1)
24
–
–
(16)
393
(62)
1,329
3
40
(13)
–
(10)
1,680
Associates
£m
74
2
–
–
–
1
(77)
–
–
–
–
–
–
–
–
–
–
–
Total equity
accounted
£m
437
6
16
3
(1)
25
(77)
–
(16)
393
(62)
1,329
3
40
(13)
–
(10)
1,680
Other –
unlisted
£m
58
–
1
–
(2)
–
–
(46)
–
11
–
–
–
–
–
(1)
–
10
1 On August 25, 2011, Rolls-Royce and Daimler AG (Daimler) received all the relevant regulatory approvals for the acquisition of Tognum AG (Tognum). The public tender offer by Engine Holding GmbH
(Engine Holding – the jointly held acquisition vehicle) was concluded in September 2011. At December 31, 2011, Engine Holding held 99 per cent of the Tognum shares, giving the Group an effective
interest of 49.5 per cent. The results for the four month period from September 2011 have been included, after taking account of acquisition fair value adjustments. Subject to certain conditions being
fulfilled, the Group has the option to exercise rights that would result in Engine Holding being classified as a subsidiary and consolidated. It is anticipated that these conditions will be fulfilled during
2012. As part of the Engine Holding shareholders’ agreement, Daimler has the option to sell, for a specified period at a specified price, its shares in Engine Holding to Rolls-Royce. The value of this option
was not significant at December 31, 2011.
The summarised aggregated financial information of the Group’s share of equity accounting investments is as follows:
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
Results recognised in the consolidated income statement
Dividends received
Retained profit
Engine
Holding
1,687
818
(477)
(779)
1,249
(176)
491
(13)
(12)
10
(15)
–
(15)
Joint ventures
Other
1,529
891
(793)
(1,196)
431
(1,176)
3,055
165
(19)
(15)
131
(76)
55
2011
£m
3,216
1,709
(1,270)
(1,975)
1,680
(1,352)
3,546
152
(31)
(5)
116
(76)
40
2010
£m
1,405
1,161
(1,151)
(1,022)
393
(1,043)
2,914
128
(19)
(17)
92
(68)
24
Associates
2011
£m
2010
£m
Total
2011
£m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
26
1
–
–
1
–
1
3,216
1,709
(1,270)
(1,975)
1,680
(1,352)
3,546
152
(31)
(5)
116
(76)
40
2010
£m
1,405
1,161
(1,151)
(1,022)
393
(1,043)
2,940
129
(19)
(17)
93
(68)
25
The principal joint ventures and associates at December 31, 2011 are listed on pages 123 and 124.
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statementsNotes to the consolidated financial statements
96
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
Loan to Engine Holding GmbH
Other receivables
Prepayments and accrued income
Analysed as:
Financial instruments (note 17):
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
2011
£m
319
921
12
1,267
42
2,561
169
114
3
2011
£m
1,123
1,665
421
169
475
156
4,009
1,655
550
1,804
4,009
4
1,314
20
60
28
1,426
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, 2011 includes an allowance of £63m (2010 £55m), 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 Airbus A400M military transport aircraft.
Financial statementsNotes to the consolidated financial statements 97
13 Cash and cash equivalents
Cash at bank and in hand
Money-market funds
Short-term deposits
Overdrafts (note 15)
Cash and cash equivalents per cash flow statement (page 74)
Cash held as collateral against third party obligations (note 23)
14 Assets held for sale
Intangible assets – Recoverable engine costs
Property, plant and equipment
Investment in joint venture
Amounts recoverable on contracts
Amounts owed by joint ventures
Assets held for sale
Accruals and deferred income
Other payables
Provisions for liabilities and charges
Deferred tax liabilities
Liabilities associated with assets held for sale
2011
£m
1,285
11
14
1,310
(19)
1,291
67
2011
£m
186
6
13
59
49
313
(54)
(26)
(9)
(46)
(135)
2010
£m
1,266
381
1,212
2,859
(8)
2,851
68
2010
£m
–
9
–
–
–
9
–
–
–
–
–
On October 12, 2011, the Group announced an agreement to form a new partnership with Pratt & Whitney, a United Technologies Corporation company,
to develop new engines for the next generation of mid-size aircraft (120-230 seats). As part of this agreement, the Group and Pratt & Whitney will
restructure their participation in IAE, which produces the V2500 engine for the Airbus A320 family of aircraft. Under the terms of the agreement, which is
subject to regulatory approvals, Rolls-Royce will sell its equity, programme share and related goodwill in IAE to Pratt & Whitney for US$1.5 billion.
The assets and liabilities shown above are those, included in the civil aerospace segment, that will be derecognised on the completion of the transaction.
However, as Rolls-Royce will continue to be responsible for the manufacture of high-pressure compressors, fan blades as well as the provision of engine
support and final assembly of 50 per cent of V2500 engines, the transaction is not considered to give rise to a discontinued operation.
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statementsNotes to the consolidated financial statements 98
15 Borrowings
Unsecured
Overdrafts
Bank loans
73/8% Notes 2016 £200m
6.38% Notes 2013 US$230m 1
6.55% Notes 2015 US$83m 1
41/2% Notes 2011 €750m 2
6.75% Notes 2019 £500m
Secured
Obligations under finance leases: 3
Current
2011
£m
19
1
–
–
–
–
–
–
20
2010
£m
8
67
–
–
–
642
–
–
717
Non-current
2011
£m
–
204
200
160
62
–
557
1
1,184
2010
£m
–
206
200
162
60
–
506
1
1,135
Total
2011
£m
19
205
200
160
62
–
557
1
1,204
2010
£m
8
273
200
162
60
642
506
1
1,852
1 These notes are the subject of interest rate swap agreements under which the Group has undertaken to pay floating rates of interest, and currency swaps which form a fair value hedge.
2 These notes are the subject of swap agreements under which counterparties have undertaken to pay amounts at fixed rates of interest and exchange in consideration for amounts payable at variable
rates of interest and at fixed exchange rates.
3 Obligations under finance leases are secured by related leased assets.
16 Trade and other payables
Payments received on account 1
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
Current
2011
£m
1,396
1,028
215
88
1,623
1,886
6,236
358
2010
£m
1,560
891
267
81
1,294
1,817
5,910
258
Non-current
2011
£m
487
–
1
–
58
768
1,314
147
2010
£m
475
–
7
–
94
695
1,271
243
Included within trade and other payables are government grants of £104m (2010 £44m). During the year, £2m (2010 £2m) of government grants were
released to the income statement.
Trade and other payables are analysed as follows:
Financial instruments (note 17):
Trade payables and similar items
Other non-derivative financial liabilities
Non-financial instruments
2011
£m
2,356
718
4,476
7,550
2010
£m
2,212
521
4,448
7,181
Financial statementsNotes to the consolidated financial statements 99
17 Financial instruments
Carrying values and fair values of financial instruments
At December 31, 2011
Unlisted non-current asset investments
Trade receivables and similar items
Other non-derivative financial assets
Derivative financial assets
Short-term investments
Cash and cash equivalents
Borrowings
Derivative financial liabilities
Financial RRSPs
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
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 and cash equivalents
Borrowings
Derivative financial liabilities
Financial RRSPs
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
Assets
Liabilities
Basis for
determining
fair value
Notes
Held for
trading
£m
Loans and
receivables
£m
Available
for sale
£m
10
12
12
13
15
16
16
10
12
12
13
15
16
16
A
B
B
C
B
B
D
C
D
B
B
B
A
B
B
C
B
B
D
C
D
B
B
B
–
–
–
418
–
–
–
–
–
–
–
–
418
–
–
–
621
–
–
–
–
–
–
–
–
621
10
1,655
550
–
11
14
–
–
–
–
–
–
2,240
11
1,801
419
–
328
1,212
–
–
–
–
–
–
3,771
–
–
–
–
–
11
–
–
–
–
–
–
11
–
–
–
–
–
381
–
–
–
–
–
–
381
Cash
£m
–
–
–
–
–
1,285
–
–
–
–
–
–
1,285
–
–
–
–
–
1,266
–
–
–
–
–
–
1,266
Held for
trading
£m
–
–
–
–
–
–
–
(796)
–
–
–
–
(796)
–
–
–
–
–
–
–
(761)
–
–
–
–
(761)
Other
£m
–
–
–
–
–
–
(1,204)
–
(230)
(4)
(2,356)
(718)
(4,512)
–
–
–
–
–
–
(1,852)
–
(266)
(23)
(2,212)
(521)
(4,874)
Total
£m
10
1,655
550
418
11
1,310
(1,204)
(796)
(230)
(4)
(2,356)
(718)
(1,354)
11
1,801
419
621
328
2,859
(1,852)
(761)
(266)
(23)
(2,212)
(521)
404
Fair values equate to book values for both 2011 and 2010, with the following exceptions:
Borrowings
Financial RRSPs
2011
Book value
£m
(1,204)
(230)
Fair value
£m
(1,371)
(254)
2010
Book value
£m
(1,852)
(266)
Fair value
£m
(1,963)
(296)
The fair value of a financial instrument is the price at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in
an arms length transaction. Fair values have been determined with reference to available market information at the balance sheet date, using the
methodologies described below.
A These primarily comprise floating rate convertible loan stock. The conversion conditions are such that fair value approximates to the book value.
B Fair values are assumed to approximate to cost either due to the short-term maturity of the instruments or because the interest rate of the investments is reset after periods not exceeding six months.
C Fair values of derivative financial assets and liabilities are estimated by discounting expected future contractual cash flows using prevailing interest rate curves. Amounts denominated in foreign
currencies are valued at the exchange rate prevailing at the balance sheet date. These financial instruments are included on the balance sheet at fair value, derived from observable market prices (Level 2
as defined by IFRS 7 Financial Instruments: Disclosures).
D Borrowing and financial RRSPs are carried at amortised cost. Fair values are estimated by discounting expected future contractual cash flows using prevailing interest rate curves. Amounts denominated
in foreign currencies are valued at the exchange rate prevailing at the balance sheet date. For financial RRSPs, the contractual cash flows are based on future trading activity, which is estimated based on
latest forecasts.
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statementsNotes to the consolidated financial statements 100
17 Financial instruments (continued)
Carrying values of other financial assets and liabilities
At December 31, 2011
Non-current assets
Current assets
Current liabilities
Non-current liabilities
At December 31, 2010
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Foreign
exchange
contracts
£m
Commodity
contracts
£m
Interest
rate
contracts
£m
Total
derivatives
£m
Financial
RRSPS
£m
C Shares
£m
Total
£m
237
84
321
(85)
(683)
(768)
(447)
317
98
415
(38)
(713)
(751)
(336)
7
7
14
(7)
(19)
(26)
(12)
18
10
28
(5)
(2)
(7)
21
83
–
83
–
(2)
(2)
81
36
142
178
–
(3)
(3)
175
327
91
418
(92)
(704)
(796)
(378)
371
250
621
(43)
(718)
(761)
(140)
–
–
–
(15)
(215)
(230)
(230)
–
–
–
(39)
(227)
(266)
(266)
–
–
–
(4)
–
(4)
(4)
–
–
–
(23)
–
(23)
(23)
327
91
418
(111)
(919)
(1,030)
(612)
371
250
621
(105)
(945)
(1,050)
(429)
Derivative financial instruments
The Group uses various financial instruments to manage its exposure to movements in foreign exchange rates. Where the effectiveness of a hedging
relationship in a cash flow hedge is demonstrated, changes in the fair value that are deemed effective are included in the cash flow hedge reserve and
released to match actual payments on the hedged item. The Group uses commodity swaps to manage its exposure to movements in the price of
commodities (jet fuel and base metals). 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 Group uses interest rate swaps, forward rate agreements and interest rate caps to manage its
exposure to movements in interest rates.
Movements in the fair values of derivative financial assets and liabilities were as follows:
At January 1, 2010
Movements in fair value hedges 1
Movements in other derivative contracts 2
Contracts settled 3
At January 1, 2011
Movements in fair value hedges 1
Movements in cash flow hedges
Movements in other derivative contracts 2
Contracts settled 3
At December 31, 2011
1 Loss on related hedged items £85m (2010 £14m net gain).
2 Included in financing.
3 Includes contracts settled in fair value hedges £1m loss (2010 £10m gain).
Foreign
exchange
instruments
£m
(144)
7
(370)
171
(336)
2
(1)
(21)
(91)
(447)
Commodity
instruments
£m
(11)
–
29
3
21
–
–
(28)
(5)
(12)
Interest rate
instruments
£m
199
(21)
(1)
(2)
175
83
–
1
(178)
81
Total
£m
44
(14)
(342)
172
(140)
85
(1)
(48)
(274)
(378)
Financial statementsNotes to the consolidated financial statements 101
17 Financial instruments (continued)
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.
Movements in the amortised cost values of financial RRSPs were as follows:
At January 1
Cash paid to partners
Exchange adjustments included in OCI
Financing charge 1
Excluded from underlying profit:
Exchange adjustments 1
Changes in forecast payments 1
At December 31
1 Included in financing.
2011
£m
(266)
46
(1)
(11)
1
1
(230)
2010
£m
(363)
114
2
(13)
(6)
–
(266)
Risk management policies and hedging activities
The principal financial risks to which the Group is exposed are: foreign currency exchange rate risk; liquidity risk; credit risk; interest rate risk; and
commodity price risk. The Board has approved policies for the management of these risks.
Foreign currency exchange rate risk – The Group has significant cash flows (most significantly US dollars, followed by the euro) denominated in currencies
other than the functional currency of the relevant trading entity. To manage its exposures to changes in values of future foreign currency cash flows, so as
to maintain relatively stable long-term foreign exchange rates on settled transactions, the Group enters into derivative forward foreign currency
transactions. For accounting purposes, these derivative contracts are not designated as hedging instruments.
The Group also has exposures to the fair values of non-derivative financial instruments denominated in foreign currencies. To manage the risk of changes in
these fair values, the Group enters into derivative forward foreign exchange contracts, which are designated as fair value hedges for accounting purposes.
The Group regards its interests in overseas subsidiary companies as long-term investments. The Group aims to match its translational exposures by
matching the currencies of assets and liabilities. Where appropriate, foreign currency financial liabilities may be designated as hedges of the net
investment.
Liquidity risk – The Group’s policy is to hold financial investments and maintain undrawn committed facilities at a level sufficient to ensure that the Group
has available funds to meet its medium-term capital and funding obligations and to meet any unforeseen obligations and opportunities. The Group
holds cash and short-term investments, which together with the undrawn committed facilities, enable the Group to manage its liquidity risk. The profile
of the maturity of the Group’s committed facilities is discussed in additional financial information on page 36.
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 and cash and cash
equivalents (cash flow risk). Interest rate derivatives are used to manage the overall interest rate profile within the Group policy, which is to maintain a
higher proportion of net debt at floating rates of interest as a natural hedge to the net cash position. These are designated as either fair value or cash flow
hedges as appropriate.
Commodity risk – The Group has exposures to the price of jet fuel and base metals arising from business operations. To minimise its cash flow exposures
to changes in commodity prices, the Group enters into derivative commodity transactions. For accounting purposes, these derivative contracts are not
designated as hedging instruments.
Other price risk – The Group’s cash equivalent balances represent investments in money market instruments, with a term of up to three months. The
Group does not consider that these are subject to significant price risk.
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statementsNotes to the consolidated financial statements 102
17 Financial instruments (continued)
Derivative financial instruments
The nominal amounts, analysed by year of expected maturity, and fair values of derivative financial instruments are as follows:
At December 31, 2011
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, 2010
Foreign exchange contracts:
Fair value hedges
Non-hedge accounted
Interest rate contracts:
Fair value hedges
Non-hedge accounted
Commodity contracts:
Non-hedge accounted
Expected maturity
Between
one and
two years
£m
Within
one year
£m
Between
two and
five years
£m
After
five years
£m
Nominal
amount
£m
Fair value
Assets
£m
Liabilities
£m
175
17,563
–
5,438
129
3,625
46
7,568
701
43
–
–
148
–
53
43
–
932
500
–
220
18,702
68
5,506
59
3,961
93
7,803
–
1,432
175
15,561
1,200
46
138
17,120
–
3,806
500
–
60
4,366
–
3,285
–
–
43
3,328
175
7,427
200
46
35
7,883
–
1,043
500
–
–
1,543
23
298
83
–
14
418
20
395
178
–
28
621
–
(768)
–
(2)
(26)
(796)
–
(751)
–
(3)
(7)
(761)
As described above, all derivative financial instruments are entered into for risk management purposes, although these may not be designated into
hedging relationships for accounting purposes.
Currency analysis
Derivative financial instruments related to foreign exchange risks are denominated in the following currencies:
At December 31, 2011
Currencies sold forward:
Sterling
US dollar
Euro
Other
At December 31, 2010
Currencies sold forward:
Sterling
US dollar
Euro
Other
Currencies purchased forward
Sterling
£m
US dollar
£m
–
14,401
–
36
–
13,195
–
76
814
–
–
26
175
–
–
35
Euro
£m
–
1,193
–
67
–
1,161
–
106
Other
£m
Total
£m
147
834
197
23
35
642
285
26
961
16,428
197
152
210
14,998
285
243
Financial statementsNotes to the consolidated financial statements 103
17 Financial instruments (continued)
Other derivative financial instruments are denominated in the following currencies:
Sterling
US dollar
Euro
Other
Non-derivative financial instruments
Non-derivative financial instruments are denominated in the following currencies:
Sterling
£m
US dollar
£m
At December 31, 2011
Assets
Unlisted non-current investments
Trade receivables and similar items
Other non-derivative financial assets
Short-term investments
Cash and cash equivalents
Liabilities
Borrowings
Financial RRSPs
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
At December 31, 2010
Assets
Unlisted non-current investments
Trade receivables and similar items
Other non-derivative financial assets
Short-term investments
Cash and cash equivalents
Liabilities
Borrowings
Financial RRSPs
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
1
204
112
5
50
372
(977)
–
(4)
(1,095)
(252)
(2,328)
(1,956)
1
312
155
325
1,299
2,092
(972)
–
(23)
(1,040)
(211)
(2,246)
(154)
–
1,201
87
–
657
1,945
(222)
(173)
–
(812)
(308)
(1,515)
430
–
1,120
46
–
634
1,800
(222)
(208)
–
(705)
(166)
(1,301)
499
2011
£m
510
421
–
33
2010
£m
514
337
500
33
Other
£m
Total
£m
5
117
134
6
236
498
–
–
–
(174)
(140)
(314)
184
6
159
178
3
453
799
(2)
–
–
(248)
(109)
(359)
440
10
1,655
550
11
1,310
3,536
(1,204)
(230)
(4)
(2,356)
(718)
(4,512)
(976)
11
1,801
419
328
2,859
5,418
(1,852)
(266)
(23)
(2,212)
(521)
(4,874)
544
Euro
£m
4
133
217
–
367
721
(5)
(57)
–
(275)
(18)
(355)
366
4
210
40
–
473
727
(656)
(58)
–
(219)
(35)
(968)
(241)
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statementsNotes to the consolidated financial statements 104
17 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:
Functional currency of Group operation
At December 31, 2011
Sterling
US dollar
Euro
Other
At December 31, 2010
Sterling
US dollar
Euro
Other
Ageing beyond contractual due date
The ageing beyond contractual due date of the Group’s financial assets is:
At December 31, 2011
Unlisted non-current asset investments
Trade receivables and similar items
Other non-derivative financial assets
Derivative financial assets
Short-term investments
Cash and cash equivalents
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 and cash equivalents
Sterling
£m
US dollar
£m
Euro
£m
Other
£m
Total
£m
–
3
(1)
1
–
1
–
1
Within
terms
£m
10
1,377
532
418
11
1,310
3,658
11
1,505
396
621
328
2,859
5,720
1
–
(1)
4
3
–
(1)
–
–
(2)
–
1
1
(1)
–
1
3
10
–
3
1
16
(1)
2
Up to
three
months
overdue
£m
Between
three
months and
one year
overdue
£m
More than
one year
overdue
£m
–
184
15
–
–
–
199
–
180
19
–
–
–
199
–
68
–
–
–
–
68
–
86
1
–
–
–
87
–
26
3
–
–
–
29
–
30
3
–
–
–
33
4
11
(2)
9
5
16
(2)
4
Total
£m
10
1,655
550
418
11
1,310
3,954
11
1,801
419
621
328
2,859
6,039
Financial statementsNotes to the consolidated financial statements 105
17 Financial instruments (continued)
Contractual maturity analysis of financial liabilities
At December 31, 2011
Borrowings
Derivative financial liabilities
Financial RRSPs
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
At December 31, 2010
Borrowings
Derivative financial liabilities
Financial RRSPs
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
Within
one year
£m
(85)
(92)
(37)
(4)
(2,353)
(715)
(3,286)
(812)
(43)
(47)
(23)
(2,199)
(516)
(3,640)
Gross values
Between
one and
two years
£m
Between
two and
five years
£m
After
five years
£m
Discounting
£m
Carrying
values
£m
(213)
(199)
(37)
–
(1)
(2)
(452)
(68)
(110)
(39)
–
(7)
(3)
(227)
(608)
(419)
(91)
–
(1)
–
(1,119)
(575)
(525)
(110)
–
(4)
(1)
(1,215)
(603)
(48)
(127)
–
(1)
(1)
(780)
(887)
(8)
(152)
–
(2)
(1)
(1,050)
305
(38)
62
–
–
–
329
490
(75)
82
–
–
–
497
(1,204)
(796)
(230)
(4)
(2,356)
(718)
(5,308)
(1,852)
(761)
(266)
(23)
(2,212)
(521)
(5,635)
Interest rate risk
In respect of income earning financial assets and interest bearing financial liabilities, the following table indicates their effective interest rates and the
periods in which they reprice. The value shown is the carrying amount.
Short-term investments 1
Cash and cash equivalents 2
Unsecured bank loans
€2m floating rate loan
€5m floating rate loan
Overdrafts 3
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
6.75% Notes 2019 £500m
Effect of interest rate swaps
Other secured
Obligations under finance leases
Effective
interest rate
%
4.3782%
0.5000%
EURIBOR +0.75
10.8775%
GBP LIBOR + 0.267
7.3750%
6.3800%
USD LIBOR + 1.26
6.5500%
USD LIBOR + 1.24
6.7500%
GBP LIBOR + 2.9824
5.0000%
2011
Period in which interest rate reprices
6 months
or less
£m
9
1,310
6-12 months
£m
2
–
1-2 years
£m
–
–
2-5 years
£m
–
–
More than
5 years
£m
–
–
–
(3)
(19)
10
(200)
–
–
(160)
–
(62)
–
(557)
–
328
–
–
–
–
–
–
–
–
–
–
–
–
–
2
–
–
–
–
–
–
(160)
160
–
–
–
–
–
–
–
–
–
(10)
–
(200)
–
–
(62)
62
–
–
–
(210)
(2)
–
–
–
–
–
–
–
–
–
(557)
557
(1)
(3)
Total
£m
11
1,310
(2)
(3)
(19)
–
(200)
(200)
(160)
–
(62)
–
(557)
–
(1)
117
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statementsNotes to the consolidated financial statements 107
17 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, 2011 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 £1,083m lower (2010 £989m). 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 £886m higher (2010 £809m). There would have been no change to the underlying
results that exclude unrealised gains and losses on foreign exchange derivatives.
At December 31, 2011 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 £93m lower (2010 £82m). 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 £78m higher (2010 £66m). There would have been no change to the underlying results that
exclude unrealised gains and losses on foreign exchange derivatives.
At December 31, 2011 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 £15m lower (2010 £11m). 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 £15m higher (2010 £11m). There would have been no change to the underlying results that exclude
unrealised gains and losses on commodity derivatives.
At December 31, 2011 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 101.
C Shares and payments to shareholders
The Company (and Rolls-Royce Group plc, the previous holding 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. As part of the scheme of arrangement described on page 76, all outstanding C Shares were compulsiorly redeemed on April 6, 2011.
Movements in the C Shares during the year were as follows:
Issued and fully paid
At January 1
Issued
Redeemed
Held in employee share trust
At December 31
2011
Millions
Nominal value
£m
23,380
299,522
(316,531)
(1,999)
4,372
23
300
(317)
(2)
4
2010
Millions
12,577
278,115
(267,312)
–
23,380
Nominal value
£m
13
278
(267)
–
23
Payments to shareholders in respect of the year represent the value of C Shares to be issued in respect of the results for the year. Issues of C Shares prior to
the scheme of arrangement (May 23, 2011) were made by Rolls-Royce Group plc and subsequently by Rolls-Royce Holding plc. Issues of C Shares were
declared as follows:
Interim
Final
2011
Pence per
share
6.9
10.6
17.5
2010
Pence per
share
6.4
9.6
16.0
£m
129
199
328
£m
119
180
299
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statementsNotes to the consolidated financial statements 108
18 Provisions for liabilities and charges
Warranty and guarantees
Contract loss
Restructuring
Customer financing
Insurance
Other
Current liabilities
Non-current liabilities
Transferred
to assets
held for
sale
£m
–
–
–
(9)
–
–
(9)
Acquisitions
of
businesses
£m
–
1
–
–
–
–
1
Exchange
differences
£m
(5)
–
–
–
–
–
(5)
Unused
amounts
reversed
£m
(21)
(1)
(5)
–
–
(7)
(34)
Charged to
income
statement
£m
72
11
1
14
7
10
115
At January 1,
2011
£m
298
72
14
78
55
27
544
276
268
Utilised
£m
(59)
(31)
(4)
(2)
(11)
(3)
(110)
At
December 31,
2011
£m
285
52
6
81
51
27
502
276
226
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 ‘Customer financing’ in the Finance
Director’s review on page 16. The related contingent liabilities arising from these guarantees and the sensitivity to movements in the value of the
underlying security are discussed in note 23. 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
2011
£m
12
62
6
–
1
–
81
2010
£m
8
47
6
9
5
3
78
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.
Financial statementsNotes to the consolidated financial statements
109
19 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, 2011.
The most recent funding valuations of the main UK schemes were:
Scheme
Rolls-Royce Pension Fund
Rolls-Royce Group Pension Scheme
Vickers Group Pension Scheme
Amounts recognised in the income statement
Defined benefit schemes:
Current service cost
Past-service (credit)/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 – included in underlying profit
Cost of sales – excluded from underlying profit
Commercial and administrative costs
Research and development
Valuation date
March 31, 2009
April 5, 2010
March 31, 2010
UK
schemes
£m
2011
Overseas
schemes
£m
119
(126)
–
(7)
16
9
(381)
372
(9)
–
34
(68)
(2)
(36)
38
2
(29)
50
21
23
Total
£m
153
(194)
(2)
(43)
54
11
(410)
422
12
23
UK
schemes
£m
2010
Overseas
schemes
£m
118
–
–
118
11
129
(374)
375
1
130
34
1
(6)
29
32
61
(26)
56
30
91
Defined benefit
Defined contribution
Total
2011
£m
114
(204)
36
11
(43)
2010
£m
106
–
31
10
147
2011
£m
38
–
12
4
54
2010
£m
31
–
9
3
43
2011
£m
152
(204)
48
15
11
Total
£m
152
1
(6)
147
43
190
(400)
431
31
221
2010
£m
137
–
40
13
190
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 (2010 £35m) in the year.
Amounts recognised in the other comprehensive income
Actuarial gain on scheme assets
Experience losses on scheme liabilities
Movement in unrecognised surplus
Movement in minimum funding liability
2011
£m
1,426
(720)
(683)
100
123
2010
£m
460
(303)
(300)
49
(94)
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statementsNotes to the consolidated financial statements 110
19 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
Discount rate
Expected rate of return on scheme assets
Inflation assumption 1
2011
2010
UK
schemes
%
4.2
1.7
4.7
3.4
3.1
Overseas
schemes
%
4.0
1.7
4.5
5.6
2.5
UK
schemes
%
4.7
3.0
5.5
5.0
3.6
Overseas
schemes
%
3.9
1.7
5.4
7.2
2.5
1 For the UK schemes, this is the assumption for the Retail Price Index. The Consumer Price Index is assumed to be one per cent lower.
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 overseas schemes, the rate is
determined as the market yield at the average duration of the forecast benefit payments. The discount rates above are the weighted average of those for
each scheme, based on the value of their respective liabilities.
The overall expected rate of return is calculated by weighting the individual returns expected from each asset class (see 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 range of life expectancies in the principal UK schemes are as follows:
Life expectancy from age 65
Current pensioner
Future pensioner currently aged 45
22.2 years
24.3 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 five per cent over 6.3 years.
Financial statementsNotes to the consolidated financial statements 111
19 Post-retirement benefits (continued)
Amounts recognised in the balance sheet
Present value of funded obligations
Fair value of scheme assets
Present value of unfunded obligations
Unrecognised past-service credit 1
Unrecognised surplus 2
Minimum funding liability 3
Net asset/(liability) recognised in the balance sheet
Post-retirement scheme surpluses
Post-retirement scheme deficits
UK
schemes
£m
(7,713)
9,519
1,806
–
–
(1,318)
(236)
252
495
(243)
2011
Overseas
schemes
£m
(557)
497
(60)
(495)
(94)
–
–
(649)
8
(657)
Total
£m
(8,270)
10,016
1,746
(495)
(94)
(1,318)
(236)
(397)
503
(900)
UK
schemes
£m
(7,039)
7,783
744
–
–
(628)
(336)
(220)
164
(384)
2010
Overseas
schemes
£m
(484)
434
(50)
(579)
–
(7)
–
(636)
–
(636)
Total
£m
(7,523)
8,217
694
(579)
–
(635)
(336)
(856)
164
(1,020)
1 The unrecognised past-service credit has arisen as a result of revisions to post-retirement healthcare schemes. It will be amortised over the remaining service lives of the participants (12.3 years).
2 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.
3 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.
Changes in present value of defined benefit obligations
At January 1
Exchange differences
Current service cost
Past-service credit/(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
At December 31
Actual return on scheme assets
UK
schemes
£m
(7,039)
–
(119)
126
(372)
(4)
312
(617)
–
(7,713)
(7,713)
–
UK
schemes
£m
7,783
–
381
256
4
(312)
1,407
9,519
1,788
2011
Overseas
schemes
£m
(1,063)
–
(34)
162
(50)
(3)
37
(103)
2
(1,052)
(557)
(495)
2011
Overseas
schemes
£m
434
1
29
48
3
(37)
19
497
48
Total
£m
(8,102)
–
(153)
288
(422)
(7)
349
(720)
2
(8,765)
(8,270)
(495)
Total
£m
8,217
1
410
304
7
(349)
1,426
10,016
1,836
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
2010
Overseas
schemes
£m
(823)
(27)
(34)
(1)
(56)
(2)
35
(161)
6
(1,063)
(484)
(579)
2010
Overseas
schemes
£m
354
16
26
55
2
(35)
16
434
42
Total
£m
(7,537)
(27)
(152)
(1)
(431)
(5)
348
(303)
6
(8,102)
(7,523)
(579)
Total
£m
7,402
16
400
282
5
(348)
460
8,217
860
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statementsNotes to the consolidated financial statements 113
19 Post-retirement benefits (continued)
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 past-service credit
Unrecognised surpluses
Minimum funding liabilities
Deficit
Experience gains/(losses)
Actuarial gain/(loss) 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
20 Share capital
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
Non-equity
Equity
2011
£m
(8,765)
10,016
(94)
(1,318)
(236)
(397)
1,426
(720)
(683)
–
100
123
(69)
Special
Share
of £1
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statementsNotes to the consolidated financial statements 114
21 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 payments transactions
Total expense recognised for cash-settled share-based payments transactions
Share-based payments recognised in the consolidated income statement
Liability for cash-settled share-based payment transactions
2011
£m
52
7
59
9
2010
£m
47
3
50
5
Share-based payment plans in operation during the year
Performance Share Plan (PSP)
This plan involves the award of shares to participants subject to performance conditions. Vesting of the performance shares is based on the achievement
of both non-market based conditions (EPS and cash flow per share) and a market based performance condition (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.
Movements in the Group’s share-based payment plans during the year
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
Outstanding at January 1, 2011
Granted
Additional entitlements arising from TSR performance
Additional shares accrued from reinvestment of C Shares
Forfeited
Exercised
Outstanding at December 31, 2011
Exercisable at December 31, 2011
ShareSave
ESOP
PSP
APRA
Weighted
average
exercise price
Pence
384
–
–
–
395
366
384
–
384
525
–
–
387
357
447
–
Number
Millions
27.4
–
–
–
(0.8)
(0.1)
26.5
–
26.5
10.6
–
–
(0.9)
(8.7)
27.5
–
Weighted
average
exercise price
Pence
154
–
–
–
–
190
125
125
125
–
–
–
–
207
100
100
Number
Millions
1.2
–
–
–
–
(0.5)
0.7
0.7
0.7
–
–
–
–
(0.2)
0.5
0.5
Number
Millions
18.4
5.5
0.6
–
(0.4)
(4.6)
19.5
–
19.5
5.3
1.1
–
(0.7)
(5.7)
19.5
–
Number
Millions
3.4
1.1
–
0.1
(0.1)
(1.4)
3.1
–
3.1
2.6
–
0.1
(0.1)
(2.4)
3.3
–
Financial statementsNotes to the consolidated financial statements 115
21 Share-based payments (continued)
As share options are exercised throughout the year, the weighted average share price during the year of 642p (2010 579p) is representative of the
weighted average share price at the date of exercise. The closing price at December 31, 2011 was 746.5p, (2010 623p).
The average remaining contractual life of exercisable options is one year (2010 1.7 years).
Share options outstanding
Exercise prices (pence)
At December 31, 2011
0 – 99
100 – 199
300 – 399
400 – 499
500 – 599
At December 31, 2010
0 – 99
100 – 199
200 – 299
300 – 399
400 – 499
ShareSave
ESOP
Total
Weighted
average
remaining
contractual life
Years
Number
Millions
Weighted
average
remaining
contractual life
Years
Number
Millions
Weighted
average
remaining
contractual life
Years
Number
Millions
–
–
10.8
6.0
10.7
27.5
–
–
4.5
11.6
10.4
26.5
–
–
2.3
1.1
4.2
2.7
–
–
0.1
3.2
1.3
2.0
0.4
0.1
–
–
–
0.5
0.4
0.1
0.2
–
–
0.7
1.2
0.2
–
–
–
1.0
2.2
1.2
0.3
–
–
1.7
0.4
0.1
10.8
6.0
10.7
28.0
0.4
0.1
4.7
11.6
10.4
27.2
1.2
0.2
2.3
1.1
4.2
2.7
2.2
1.2
0.1
3.2
1.3
1.9
The range of exercise prices of options outstanding at December 31, 2011 was: for ShareSave between 387p and 525p (2010 298p and 416p); and for ESOP
it was between 77p and 188p (2010 77p and 218p).
Under the terms of the Rolls-Royce 1999 Executive Share Option Plan, options granted to 20 directors and senior executives were outstanding at
December 31, 2011.
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
2011
662p
737p
210p
238p
612p
2010
586p
654p
n/a
n/a
537p
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statementsNotes to the consolidated financial statements 116
21 Share-based payments (continued)
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
PSP
2011
612p
n/a
15.4p
32%
36%
3 years
n/a
n/a
1.9%
2010
545p
n/a
14.6p
33%
35%
3 years
n/a
n/a
1.9%
ShareSave
2011
691p
525p
16.0p
30%
n/a
n/a
3.3 – 3.8 years
5.3 – 5.8 years
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 and which incorporates into the valuation the interdependency between share price performance and TSR vesting.
This adjustment increases the fair value of the award relative to the share price at the date of grant.
ShareSave
The fair value of the options granted under the ShareSave plan is calculated using a binomial pricing model that assumes that participants will exercise
their options at the beginning of the six-month window if the share price is greater than the exercise price. Otherwise it assumes that options are held
until the expiration of their contractual term. This results in an expected life that falls somewhere between the start and end of the exercise window.
APRA
The fair value of shares awarded under APRA is calculated as the share price on the date of the award, excluding expected dividends.
22 Operating 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
2011
£m
104
29
117
401
479
997
2010
£m
82
20
92
265
215
572
Financial statementsNotes to the consolidated financial statements
117
22 Operating leases (continued)
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
2011
£m
36
3
8
2
13
2010
£m
29
3
10
3
16
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 £3m (2010 £23m) and sublease receipts of £23m (2010 £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 £5m (2010 £18m) and sublease receipts expected to be received is
£4m (2010 £3m).
23 Contingent liabilities
In connection with the sale of its products the Group will, on some occasions, provide financing support for its customers. The Group’s contingent
liabilities relating to financing arrangements are spread over many years and relate to a number of customers and a broad product portfolio.
Contingent liabilities are disclosed on a discounted basis. As the directors consider the likelihood of these contingent liabilities crystallising to be remote,
this amount does not represent a value that is expected to crystallise. However, the amounts are discounted at the Group’s borrowing rate to reflect
better the time span over which these exposures could arise. The contingent liabilities are denominated in US dollars. As the Group does not generally
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:
2011
£m
612
124
201
67
$m
951
192
312
104
2010
£m
633
121
200
68
$m
991
190
314
106
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. As a consequence of the insolvency of an insurer as previously reported, the Group is no longer fully
insured against known and potential claims from employees who worked for certain of the Group’s UK based businesses for a period prior to the
acquisition of those businesses by the Group. While the outcome of some of these matters cannot precisely be foreseen, the directors do not expect any
of these arrangements, legal actions or claims, after allowing for provisions already made, to result in significant loss to the Group.
The Group’s share of equity accounted entities’ contingent liabilities is £68m (2010 £24m).
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statementsNotes to the consolidated financial statements 119
Company balance sheet
At December 31, 2011
Fixed assets
Investments – subsidiary undertakings
Creditors – amounts falling due within one year
Financial liabilities
Amounts owed to subsidiary undertakings due within one year
Net current assets
Total assets less current liabilities
Capital and reserves
Called-up share capital
Merger reserve
Capital redemption reserve
Other reserve
Profit and loss account
Equity shareholders’ funds
The financial statements on pages 119 to 121 were approved by the Board on February 8, 2012 and signed on its behalf by:
Sir Simon Robertson Chairman
Mark Morris Finance Director
Reconciliation of movements in shareholders’ funds
For the period ended December 31, 2011
On formation
As a result of scheme of arrangement
Issue of C Shares
Ordinary shares purchased
Share-based payments – direct to equity
At December 31
Notes
2
3
4
5
5
5
5
2011
£m
11,921
(6)
(175)
(181)
(181)
11,740
374
8,897
173
31
2,265
11,740
2011
£m
–
11,885
(180)
(1)
36
11,740
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statements
120
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 55 to 65, the Company grants awards of its own shares to employees of its subsidiary
undertakings, (see note 21 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.
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:
On formation
As a result of scheme of arrangement
Additions
Cost of share-based payments in respect of employees of subsidiary undertakings less receipts from subsidiaries in respect of those payments
At December 31, 2011
3 Financial liabilities
C Shares
Movements in C Shares during the year were as follows:
Issued and fully paid
On formation
Shares issued
Shares redeemed
At December 31, 2011
The rights attaching to C Shares are set out on page 66.
C Shares
of 0.1p
Millions
–
179,730
(173,359)
6,371
£m
–
11,888
2
31
11,921
Nominal
value
£m
–
180
(173)
6
Rolls-Royce Holdings plc Annual report 2011Financial statements
121
Notes to the Company financial statements
4 Share capital
Issued and fully paid
On formation
Issued as a result of the scheme of arrangement (ordinary shares of 150p each)
Capital reduction to 20p each
Redemption of preference shares
At December 31, 2011
The rights attaching to each class of share are set out on page 66.
Non-equity
Preference
shares of
£1 each
50,000
–
–
(50,000)
–
Special
Share
of £1
–
1
–
–
1
Nominal
value
£m
–
–
–
–
–
Equity
Ordinary
shares of
20p each
Millions
–
1,872
–
–
1,872
Nominal
value
£m
–
2,808
(2,434)
–
374
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
On formation
Scheme of arrangement 2
Capital reduction 2
Issue of C Shares
Redemption of C Shares
Ordinary shares purchased
Ordinary shares vesting in share-based payment plans
Share-based payments – direct to equity
At December 31, 2011
Non-distributable reserves
Merger
reserve
£m
–
9,077
–
(180)
–
–
–
–
8,897
Capital
redemption
reserve
£m
–
–
–
–
173
–
–
–
173
Other
reserve1
£m
–
–
–
–
–
–
–
31
31
Own
shares
reserve
£m
–
–
–
–
–
(1)
1
–
–
Share
capital
£m
–
2,808
(2,434)
–
–
–
–
–
374
Profit
and loss
account
£m
–
–
2,434
–
(173)
–
(1)
5
2,265
Total
£m
–
11,885
–
(180)
–
(1)
–
36
11,740
1 The ‘Other reserve’ represents the value of share-based payments in respect of employees of subsidiary undertakings for which payment has not been received.
2 On May 23, 2011, under a scheme of arrangement between Rolls-Royce Group plc, the former holding company of the Group, and its shareholders under Part 26 of the Companies Act 2006, and as
sanctioned by the High Court, all the issued ordinary shares in that company were cancelled and the same number of new ordinary shares were issued to Rolls-Royce Holdings plc in consideration for
the allotment to shareholders of one ordinary share in Rolls-Royce Holdings plc for each ordinary share in Rolls-Royce Group plc held on the record date (May 20, 2011). Pursuant to the scheme of
arrangement, 1,872,188,709 ordinary shares of 150 pence were issued. As required by Section 612 of the Companies Act 2006, no share premium was recognised. On May 24, 2011, the share capital of
Rolls-Royce Holdings plc was reduced by reducing the nominal value of the ordinary shares from 150 pence to 20 pence as sanctioned by the High Court.
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, 2011 these guarantees amounted to £1,101m.
7 Other information
Emoluments of directors
The remuneration of the directors of the Company is shown in the Directors’ remuneration report on pages 55 to 65.
Employees
The Company had no employees in 2011.
Share-based payments
Shares in the Company have been granted to employees of the Group as part of share-based payment plans, and are charged in the
employing company.
Rolls-Royce Holdings plc Annual report 2011Financial statementsFinancial statements 122
Other matters
Subsidiaries, jointly controlled entities and associates
At December 31, 2011
Incorporated within the UK – held by Rolls-Royce Holdings plc
Rolls-Royce Group plc
Holding company
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
Rolls-Royce Brasil Limitada
Rolls-Royce Canada Limited
Rolls-Royce Marine (Shanghai) Limited
Rolls-Royce OY AB
Rolls-Royce Civil Nuclear SAS
Rolls-Royce Technical Support SARL
Rolls-Royce Deutschland Ltd & Co KG
Brazil
Canada
China
Finland
France
France
Germany
Guernsey Nightingale Insurance Limited
Rolls-Royce India Private Limited
India
Rolls-Royce Operations (India) Private Limited
India
Europea Microfusioni Aerospaziali S.p.A.
Italy
Rolls-Royce Marine AS
Norway
Norway
Scandinavian Electric Holding AS
Singapore Rolls-Royce Singapore Pte Limited
Sweden
US
US
US
US
US
US
US
US
US
US
Rolls-Royce AB
Data Systems & Solutions LLC
Optimized Systems and Solutions Inc.
R. Brooks Associates 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.
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
Specialist civil nuclear reactor 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
The above companies operate principally in the country of their incorporation and the effective Group interest is 100 per cent.
Rolls-Royce Holdings plc Annual report 2011 123
Other matters
Subsidiaries, jointly controlled entities and associates
At December 31, 2011
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 and Applications Limited
Development of aero engine fan blades and fan cases
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)
Adour and RTM322 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
% of
class held
20
% of total
equity held
20
22
100
–
100
–
100
–
50
–
100
–
100
100
–
–
100
–
100
40
37.5
22
50
51
50
50
50
50
50
49.5
50
40
The above companies operate principally in the country of their incorporation. The countries of principal operations are stated in brackets after the name
of the company, if not the country of their incorporation.
s
r
e
t
t
a
m
r
e
h
t
O
Rolls-Royce Holdings plc Annual report 2011
124
Other matters
Subsidiaries, jointly controlled entities and associates
At December 31, 2011
Incorporated overseas – indirectly held
China
Germany
Germany
Germany
Germany
Germany
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 GmbH & Co KG
Aero engine repair and overhaul
Engine Holding GmbH
Supplier of engines and power trains for marine propulsion, distributed power generation and
industrial ‘off highway’ sectors. Holding company for Tognum AG.
Hong Kong Hong Kong Aero Engine Services Limited
India
Israel
Malaysia
Singapore
Singapore
Spain
Switzerland
Aero engine repair and overhaul
International Aerospace Manufacturing Private Limited
Manufacture of compressor shrouds, compressor rings, turbine blades and nozzle 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
US
US
US
US
US
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, Alpha
Leasing (US) (No.8) 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)
FJ44 engine collaboration
Unincorporated overseas – held by subsidiary undertaking
Class
Ordinary
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
% of
class held
49
% of total
equity held
49
28
33
33.3
50
50
45
50
50
50
49
50
30
46.9
100
–
–
–
50
18.5
40
50
15
28
33
33.3
50
50
45
50
50
49
50
30
46.9
32.5
–
–
–
–
15
US
Light Helicopter Turbine Engine Company (LHTEC)
Rolls-Royce Corporation has a 50 per cent interest in this unincorporated partnership which was formed to develop and market jointly the T800 engine
The above companies operate principally in the country of their incorporation. The countries of principal operations are stated in brackets after the name
of the company, if not the country of their incorporation.
In accordance with Section 410 of the Companies Act 2006, the subsidiaries, jointly controlled entities and associates listed on pages 122 to 124 whose
results or financial position, in the opinion of the directors, principally affect the financial statements. A list of all related undertakings will be included in
the Company’s annual return to Companies House.
Rolls-Royce Holdings plc Annual report 2011 125
Other matters
Independent Auditor’s report
to the Members of Rolls-Royce Holdings plc
We have audited the financial statements of Rolls-Royce Holdings plc for the year ended December 31, 2011, set out on pages 72 to 124. 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 auditor’s 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 pages 69 and 70, 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/private.cfm.
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, 2011 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; and
• 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 70, in relation to going concern;
• the part of the corporate governance statement on page 42 relating to the Company’s compliance with the nine provisions of the UK Corporate
Governance Code specified for our review; and
• certain elements of the report to shareholders by the Board on Directors’ remuneration.
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 8, 2012
Rolls-Royce Holdings plc Annual report 2011Other matters 126
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 taxation2
Taxation
Profit/(loss) for the year
Attributable to:
Equity shareholders of the parent
Non-controlling interests
Profit/(loss)
1 Research and development (gross)
2 Underlying profit before taxation
Earnings per ordinary share:
Underlying
Basic
Payments to shareholders per ordinary share
Balance Sheet
Assets
Liabilities
Called-up share capital
Reserves
Equity attributable to equity holders of the parent
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
2011
£m
11,124
1,536
(463)
116
1,189
(84)
1,105
(257)
848
850
(2)
848
(908)
1,157
48.54p
45.95p
17.50p
2011
£m
16,423
(11,904)
4,519
374
4,144
4,518
1
4,519
2011
£m
1,306
(2,207)
(655)
(1,556)
223
2010
£m
11,085
1,463
(422)
93
1,134
(432)
702
(159)
543
539
4
543
(923)
955
38.73p
29.20p
16.00p
2010
£m
16,234
(12,255)
3,979
374
3,601
3,975
4
3,979
2010
£m
1,378
(759)
(743)
(124)
1,533
2009
£m
10,414
1,458
(379)
93
1,172
1,785
2,957
(740)
2,217
2,221
(4)
2,217
(864)
915
39.67p
120.38p
15.00p
2009
£m
15,422
(11,640)
3,782
371
3,411
3,782
–
3,782
2009
£m
859
(606)
384
637
1,275
2008
£m
9,082
1,191
(403)
74
862
(2,754)
(1,892)
(547)
(1,345)
(1,340)
(5)
(1,345)
(885)
880
36.70p
(73.63p)
14.30p
2008
£m
15,348
(13,123)
2,225
369
1,847
2,216
9
2,225
2008
£m
1,015
(645)
(221)
149
1,458
2007
£m
7,435
827
(381)
66
512
221
733
(133)
600
606
(6)
600
(824)
800
34.06p
33.67p
13.00p
2007
£m
11,459
(7,910)
3,549
364
2,815
3,179
12
3,191
2007
£m
705
(572)
(473)
(340)
888
Rolls-Royce Holdings plc Annual report 2011 127
Shareholder information
Financial calendar 2012 – 2013
May 4, 11:00am
Annual General
Meeting
QEII Conference
Centre London
July 2 Payment of C Share dividend
July 2 Allotment of C Shares
July 4 Payment of C Share redemption monies
July 12 Purchase of ordinary shares for CRIP
participants (at the latest)
July 26 Announcement of interim results
November 16 Record
date for C Share dividend
January 2 Payment of
C Share dividend
January 2 Allotment of
C Shares
January 4 Payment of
C Share redemption
monies
Apr
2012
May
2012
Jun
2012
Jul
2012
Aug
2012
Sep
2012
Oct
2012
Nov
2012
Dec
2012
Jan
2013
Feb
2013
April 25
Ex-entitlement
to C Shares
April 27
Record date for
entitlement to
C Shares
June 1, 5:00pm
Deadline for
receipt of C Share
elections
June 1 Record
date for C Share
dividend
October 24
Ex-entitlement to
C Shares
October 26 Record
date for entitlement
to C Shares
December 3
Deadline for receipt
of C Share elections
December 31 2012
financial year end
February Preliminary
announcement –
2012 full year results
February Annual
report published
Share administration and share dealing
The administration of our shareholder register is managed by the Registrar,
who also provides both internet and telephone share dealing services.
When making contact with the Registrar quote your Shareholder
Reference Number (SRN), an 11 digit number on the right hand side of
your share certificate.
You can manage your shareholding online at www.investorcentre.co.uk,
speak to the Registrar on +44 (0)870 703 0162 (8.30am to 5.30pm Monday
to Friday) or you can write to them at Computershare Investor Services
PLC, The Pavilions, Bridgwater Road, Bristol, BS13 8AE.
Only existing shareholders can deal either over the
telephone (+44 (0)870 703 0084) or online at
www-uk.computershare.com/Investor/ShareDealing.asp
(8.00am to 4.30pm Monday to Friday excluding Bank holidays).
Please note that stamp duty of 0.5 per cent is also payable
on all purchases, in addition to the any other dealing fees.
There are many other share dealing facilities available and we always
recommend that you use a firm regulated by the Financial Services
Authority (FSA). You can visit the FSA website and check the FSA
register at www.fsa.gov.uk .
Before selling shares, via either internet or telephone dealing, you must
ensure that you have a valid Rolls-Royce Holdings plc share certificate.
Without a valid share certificate you will be unable to complete any
transaction and will be responsible for any costs incurred by the broker.
Payments to shareholders
If you are one of the many shareholders who have chosen to receive cash
then we strongly recommend that you arrange for payments to be
credited direct to your bank account. This removes the risk of a cheque
going astray and also means that cleared payments are credited to your
bank account on the payment date. If you have registered to use
www.investorcentre.co.uk you can update your bank details online.
Alternatively you can request a form by phone from the Rolls-Royce
shareholder helpline on +44 (0)870 703 0162.
Keeping in touch and unclaimed payments
It’s very important that you keep the Registrar informed of any change to
your contact details, especially your postal address. If the Registrar receives
two items of undelivered mail from a shareholder’s registered address, no
further mail will be sent until you confirm or update your registered
address. However, the Registrar will securely retain all future mail, issued by
the Company, on your behalf.
The Company recently authorised Georgeson, a company that specialises
in tracing lost shareholders, to contact shareholders that we have been
unable to contact for many years and has so far been able to transfer
323,541 ordinary shares (currently worth over £2.5 million) to 1,155
shareholders and pay over £280,000 to current and former shareholders.
Additional claims continue to be processed in order to pay a further
estimated £2 million to current and former shareholders.
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Rolls-Royce Holdings plc Annual report 2011Other matters
128
Shareholder information
Warning to shareholders
We are aware some shareholders receive unsolicited phone calls or
correspondence concerning investment matters, 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’ and these ‘brokers’
can be very persistent and extremely persuasive.
If you receive any unsolicited investment advice:
• check that they are properly authorised by the FSA before getting
involved via the following web link: www.fsa.gov.uk/register/home.do
• don’t pay any money up front
• report the matter to the FSA (UK 0845 606 1234 and overseas
+44 207 066 1000) 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.
IF IT SOUNDS TOO GOOD TO BE TRUE, IT PROBABLY IS!
American Depositary Receipts (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 +1888 BNY ADRS (toll free within the US)
Phone outside the US: +1 201 680 6825
Email: shrrelations@bnymellon.com
Website: www.adrbnymellon.com
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).
Dividends paid on C Shares held
C Share calculation period
July 1, 2011 – December 31, 2011
January 1, 2011 – April 5, 2011*
C Share dividend rate (%)
0.414
0.204
Record date for C Share dividend
November 18, 2011
April 5, 2011
Payment date
January 3, 2012
April 15, 2011
* The C Share dividend was prorated due to the compulsory redemption of all Rolls-Royce Group plc C Shares on April 6, 2011 prior to the corporate restructure. There were no C Shares in issue between
April 7, 2011 and June 30, 2011.
Previous C Share issues
Apportionment values
CGT apportionment
No of
C Shares issued
per ordinary
share
69
Record date
for
entitlement
to C Shares
October 28,
2011
Issue date
January 3,
2012
Latest date
for receipt of
Payment
Instruction
Forms by
Registrar
December 5,
2011
Price of
ordinary
shares on first
day of trading
(p)
755.25
Value of
C Share issues
per ordinary
shares (p)
6.90p
Ordinary
shares (%)
99.09
C Shares (%)
0.91
Date of
redemption
of C Shares
January 5,
2012
CRIP
purchase
date
January 10,
2012
CRIP
purchase
price (p)
756.62
July 1, 2011
96 April 26, 2011
June 6, 2011
647.75
9.60p
98.54
1.46
July 5, 2011
July 6, 2011
654.29
For previous C Share issues, please refer to the Group’s website.
Analysis of ordinary shareholders at December 31, 2011
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
214,392
5,727
220,119
% of total
shareholders
97.40
2.60
100.00
68,052
113,385
36,738
1,338
420
186
220,119
30.92
51.51
16.69
0.61
0.19
0.08
100.00
Number of shares
110,941,253
1,761,298,759
1,872,240,012
6,687,131
29,942,853
60,049,391
35,073,218
152,884,275
1,587,603,144
1,872,240,012
% of total
shares
6.15
93.85
100.00
0.37
1.64
3.28
1.87
7.49
85.35
100.00
Rolls-Royce Holdings plc Annual report 2011Other matters
Contents
Civil aerospace
Defence aerospace
p18
p20
Marine
Energy
p22
p24
Technology
Operations
p26
p28
Visit Rolls-Royce online
Below are some examples of the type of information
and services available:
The Group’s business
Governance
Sustainability
News/updates
People
Investors
Heritage
www.rolls-royce.com/investors
Business review
Introduction
1
2 Chairman’s statement
4 Chief Executive’s review
6 Our business model and strategy
8 Our business segments
9 Market opportunities
10 Key performance indicators
14 Finance Director’s review
18 Civil aerospace
20 Defence aerospace
22 Marine
24 Energy
26 Excellence in technology
28 Excellence in operations
30 Sustainability
34 Principal risks and uncertainties
36 Additional financial information
Governance
38 Board of directors
40
International Advisory Board
40 The Group Leadership Team
41 Chairman’s introduction
42 UK Corporate Governance Code
46 Audit committee report
48 Nominations committee report
50 Ethics committee report
51 Risk committee report
52
55 Directors’ remuneration report
66 Shareholders and share capital
68 Other statutory information
Remuneration committee report
Financial statements
Contents listed on page 71
Other matters
122 Subsidiaries, jointly controlled
entities and associates
125 Independent Auditor’s report
126 Group five-year review
127 Shareholder information
129 Glossary
Directors’ report
The Directors’ report which includes the
Business review is set out on pages 1 to 70.
Forward-looking statements
This Annual report contains forward-
looking statements. Any statements
that express forecasts, expectations and
projections are not guarantees of future
performance and will not be updated.
By their nature, these statements involve
risk and uncertainty, and a number of
factors could cause material differences
to the actual results or developments.
This report is intended to provide
information to shareholders, is not designed
to be relied upon by any other party, or for
any other purpose and the Company and
its directors accept no liability to any other
person other than under English law.
129
Glossary
Glossary
ABC
ABI
ACARE
ADR
ADVENT
AEBS
AFRL
AGM
ANA
APB
APRA
ASD
BDI
BIS
BitC
CAD
CDP
CEO
CGU
CO2
CPI
CPS
CRIP
DJSI
EASA
EFE
EPS
ESOP
EU
FSA
GBP
GDP
GHG
GLT
HR
HS&E
I&C
IAB
IAE
IAS
IASB
IFBEC
IFRIC
Anti-bribery and corruption
Association of British Insurers
Advisory Council for Aviation Research and
Innovation in Europe
American Depositary Receipts Programme
Adaptive Versatile Engine Technology
All-Employee Bonus Scheme
US Air Force Research Lab
Annual General Meeting
All Nippon Airways
Auditing Practices Board
Annual Performance Related Award plan
Aerospace and Defence Industries Association of Europe
Federation of German Industries
Department for Business, Innovation and Skills
Business in the Community Corporate Responsibility Index
Canadian dollar
Carbon Disclosure Project
Chief Executive Officer
Cash-generating unit
Carbon dioxide
Consumer Price Index
Cash flow per share
C Share Reinvestment Plan
Dow Jones Sustainability World and European Indexes
European Aviation Safety Agency
Environmentally Friendly Engine
Earnings per ordinary share
Executive Share Option Plan
European Union
Financial Services Authority
Great British pound or pound sterling
Gross domestic product
Greenhouse gas
Group Leadership Team
Human Resources
Health, Safety and Environment
Instrumentation and control
International Advisory Board
IAE International Aero Engines AG
International Accounting Standards
International Accounting Standards Board
International Forum on Business Ethical Conduct
International Financial Reporting Interpretations Committee
International Financial Reporting Standards
IFRS
Integrated Vehicle Energy Technology
INVENT
Integrated Power and Thermal Management System Development
IPTMSD
International Standards Organisation
ISO
Liability-driven investment
LDI
London Inter-bank Offered Rate
LIBOR
Limited Liability Partnership
LLP
Long-Term Service Agreement
LTSA
UK Ministry of Defence
MoD
Memorandum of Understanding
MoU
Megawatt hours
MWh
North Atlantic Treaty Organisation
NATO
Nitrogen oxides
NOx
Other comprehensive income
OCI
Original Equipment
OE
Organisation for Economic Cooperation and Development
OECD
Over-the-counter
OTC
Political Action Committee
PAC
Product Introduction and Lifecycle Management
PILM
Public Limited Company
PLC
Performance Share Plan
PSP
Pressurised Water Reactor
PWR
Research and Development
R&D
Research and Technology
R&T
RCF
Revolving credit facility
Registrar Computershare Investor Services PLC
Rolls-Royce North America
RRNA
Risk and Revenue Sharing Partnerships
RRSPs
Restricted stock units
RSUs
Systems, applications and products
SAP
Supply Chain Relationships in Aerospace
SCRIA
Strategic Defence and Security Review
SDSR
Share Incentive Plan
SIP
Sulphur oxides
SOx
Shareholder Reference Number
SRN
Science, technology, engineering and maths
STEM
Short Take-Off and Vertical Landing
STOVL
Total reportable injuries
TRI
TSR
Total Shareholder Return
UK GAAP UK Generally Accepted Accounting Practices
USD
VDA
United States dollar
Verband der Automobilindustrie (German Association of the
Automotive Industry)
Vice President
VP
Designed and produced by
conran design group
The paper used in the report contains 75% recycled
content, of which 75% is de-inked post-consumer.
All of the pulp is bleached using an elemental
chlorine free process (ECF).
environmental printing technology,
Printed in the UK by PurePrint using their
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Stewardship Council® (FSC) chain-of-custody certified.
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Rolls-Royce Holdings plc
Annual report 2011
Trusted to deliver excellence
R
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®
© Rolls-Royce plc 2012
Rolls-Royce Holdings plc
Registered office:
65 Buckingham Gate
London
SW1E 6AT
T +44 (0)20 7222 9020
www.rolls-royce.com
Company number 7524813
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