Rolls-Royce Holdings plc                               Rolls-Royce Holdings plc Annual report 2011                        ...
129                                                                                                                       ...
1Business reviewIntroductionRolls-Royce is a global company providing powersolutions for customers in civil and defenceaer...
2Business reviewChairman’s statementPerforming strongly inchallenging conditionsRolls-Royce continued to perform well duri...
3Business reviewChairman’s statementRolls-Royce has a highly-skilled and     is being made. One good example is the Boeing...
4Business reviewChief Executive’s reviewDelivering for customers andinvesting in the businessDemand for our products and s...
5Business reviewChief Executive’s reviewOur strategy has stood the test of time   Third, we agreed to sell our equity stak...
6Business reviewOur business model and strategy                                                                  Invest in...
7Business reviewOur business model and strategy                                    A leading producer of mission-critical,...
8Business reviewOur business segments(charts show business segment revenue as a percentage of total revenue)              ...
9Business reviewMarket opportunities over the next 20 years                                                               ...
10Business reviewKey performance indicatorsThe Board uses a range of financialand non-financial indicators to monitorGroup...
11Business reviewKey performance indicatorsUnderlying revenue                                                  Order bookU...
12Business reviewKey performance indicators                                ORDER BOOK                                     ...
13Business reviewKey performance indicators                                INSTALLED THRUST – CIVIL AEROSPACE             ...
14Business reviewFinance Director’s reviewA strong performanceDemand for our products and   Summary                       ...
15Business review                                                                           For more financial information...
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
Annual Report - Rolls Royce 2011
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Annual Report - Rolls Royce 2011

  1. 1. Rolls-Royce Holdings plc Rolls-Royce Holdings plc Annual report 2011 Annual report 2011 Trusted to deliver excellence ® ®© Rolls-Royce plc 2012 Trusted to deliver excellenceRolls-Royce Holdings plcRegistered office:65 Buckingham GateLondonSW1E 6ATT +44 (0)20 7222 9020www.rolls-royce.comCompany number 7524813
  2. 2. 129 GlossaryContents Glossary Business review ABC Anti-bribery and corruption IFRS International Financial Reporting Standards Civil aerospace Defence aerospace   1 Introduction ABI Association of British Insurers INVENT Integrated Vehicle Energy Technology   2 Chairman’s statement   4 Chief Executive’s review ACARE Advisory Council for Aviation Research and IPTMSD Integrated Power and Thermal Management System Development   6 Our business model and strategy Innovation in Europe ISO International Standards Organisation   8 Our business segments ADR American Depositary Receipts Programme LDI Liability-driven investment   9 Market opportunities ADVENT Adaptive Versatile Engine Technology LIBOR London Inter-bank Offered Rate 10 Key performance indicators AEBS All-Employee Bonus Scheme 14 Finance Director’s review LLP Limited Liability Partnership 18 Civil aerospace AFRL US Air Force Research Lab LTSA Long-Term Service Agreement 20 Defence aerospace AGM Annual General Meeting MoD UK Ministry of Defence 22 Marine ANA All Nippon Airways p18 p20 24 Energy MoU Memorandum of Understanding APB Auditing Practices Board MWh Megawatt hours 26 Excellence in technology APRA Annual Performance Related Award plan NATO North Atlantic Treaty Organisation 28 Excellence in operations Marine Energy 30 Sustainability ASD Aerospace and Defence Industries Association of Europe NOx Nitrogen oxides 34 Principal risks and uncertainties BDI Federation of German Industries OCI Other comprehensive income 36 Additional financial information BIS Department for Business, Innovation and Skills OE Original Equipment BitC Business in the Community Corporate Responsibility Index OECD Organisation for Economic Cooperation and Development Governance 38 Board of directors CAD Canadian dollar OTC Over-the-counter 40 International Advisory Board CDP Carbon Disclosure Project PAC Political Action Committee 40 The Group Leadership Team CEO Chief Executive Officer PILM Product Introduction and Lifecycle Management 41 Chairman’s introduction CGU Cash-generating unit 42 UK Corporate Governance Code PLC Public Limited Company 46 Audit committee report CO2 Carbon dioxide PSP Performance Share Plan p22 p24 48 Nominations committee report CPI Consumer Price Index PWR Pressurised Water Reactor 50 Ethics committee report CPS Cash flow per share RD Research and Development 51 Risk committee report CRIP C Share Reinvestment Plan RT Research and Technology Technology Operations 52 Remuneration committee report DJSI Dow Jones Sustainability World and European Indexes 55 Directors’ remuneration report RCF Revolving credit facility 66 Shareholders and share capital EASA European Aviation Safety Agency Registrar Computershare Investor Services PLC 68 Other statutory information EFE Environmentally Friendly Engine RRNA Rolls-Royce North America EPS Earnings per ordinary share RRSPs Risk and Revenue Sharing Partnerships Financial statements ESOP Executive Share Option Plan RSUs Restricted stock units Contents listed on page 71 EU European Union SAP Systems, applications and products Other matters FSA Financial Services Authority SCRIA Supply Chain Relationships in Aerospace 122 ubsidiaries, jointly controlled S GBP Great British pound or pound sterling SDSR Strategic Defence and Security Review entities and associates GDP Gross domestic product p26 p28 125 Independent Auditor’s report SIP Share Incentive Plan 126 Group five-year review GHG Greenhouse gas SOx Sulphur oxides 127 Shareholder information GLT Group Leadership Team SRN Shareholder Reference Number 129 Glossary HR Human Resources STEM Science, technology, engineering and maths HSE Health, Safety and Environment STOVL Short Take-Off and Vertical Landing IC Instrumentation and control TRI Total reportable injuriesVisit Rolls-Royce online IAB IAE International Advisory Board IAE International Aero Engines AG TSR Total Shareholder Return UK GAAP UK Generally Accepted Accounting Practices IAS International Accounting Standards USD United States dollarBelow are some examples of the type of information Directors’ report IASB International Accounting Standards Board VDA Verband der Automobilindustrie (German Association of theand services available: The Directors’ report which includes the IFBEC International Forum on Business Ethical Conduct Automotive Industry) Financial statements Business review is set out on pages 1 to 70. Group’s business The IFRIC International Financial Reporting Interpretations Committee VP Vice President Forward-looking statements Governance This Annual report contains forward- Sustainability looking statements. Any statements News/updates that express forecasts, expectations and projections are not guarantees of future People performance and will not be updated. Investors By their nature, these statements involve risk and uncertainty, and a number of Heritage factors could cause material differences to the actual results or developments. Designed and produced by Printed in the UK by PurePrint using their This report is intended to provide conran design group and environmental printing technology, information to shareholders, is not designed and vegetable inks were used throughout. PurePrint is www.rolls-royce.com/investors to be relied upon by any other party, or for any other purpose and the Company and The paper used in the report contains 75% recycled a CarbonNeutral® company. Both manufacturing mill its directors accept no liability to any other content, of which 75% is de-inked post-consumer. and the printer are registered to the Environmental person other than under English law. All of the pulp is bleached using an elemental Management System ISO 14001 and are Forest chlorine free process (ECF). Stewardship Council® (FSC) chain-of-custody certified.
  3. 3. 1Business reviewIntroductionRolls-Royce is a global company providing powersolutions for customers in civil and defenceaerospace, marine and energy markets. We supportour customers through a worldwide network ofoffices, manufacturing and service facilities in over50 countries. Business reviewOur ability to design and develop high-technologyproducts and then integrate these into sophisticatedsystems for use on land, sea and air, provides us withaccess to global markets. 2010 2011 % change Order book – firm and announced £59.2bn £62.2bn +5% Underlying revenue* £10,866m £11,277m +4% Profit before financing £1,134m £1,189m +5% Underlying profit before tax* £955m £1,157m +21% Underlying earnings per ordinary share* 38.73p 48.54p +25% Payments to shareholders 16.00p 17.50p +9%* See explanation in note 2 on page 84Rolls-Royce Holdings plc Annual report 2011
  4. 4. 2Business reviewChairman’s statementPerforming strongly inchallenging conditionsRolls-Royce continued to perform well during generated in the broader economy. As we grow in scale and strength, these effects are multiplied. Innovation driven by Rolls-Royce has2011 with our order book growing to a record generated wider societal benefits over many years. Engineering£62.2 billion. Underlying profits increased breakthroughs pioneered by this Group have had wide applications in fields as diverse as medical research and the automotive industries.21 per cent to £1,157 million. We are proposing Engineers and scientists trained by Rolls-Royce have gone on to make aa final payment to shareholders of 10.6 pence significant contribution across enterprise and academia, while our growth will create future employment for many of the brightest young scientistsper share, bringing the full year payment studying at schools and universities around the world today. This is whyto 17.5 pence per share. This is an increase advanced economies depend so critically on successful enterprises like Rolls-Royce and why it is of such importance that their wider contributionof nine per cent and reflects the Board’s to society is recognised. As a global business we recognise that to staycontinuing confidence in the Group’s future. competitive we need to attract, retain and develop the best talent from the greatest range of people worldwide. Our Global Diversity Steering Group reinforces our commitment to promoting diversity and equalityThis strong performance has been achieved against a background of throughout the Group and creating an environment in which eachmacro-economic weakness and uncertainty. The recovery, which many individual has the opportunity to realise his or her full potential.people had been expecting in Europe and North America, failed tomaterialise in 2011 and is still some way off. Fiscal imbalances, austerity The UK Government recently outlined a number of recommendationsprogrammes, disruption in the Eurozone and political tensions in the to improve gender diversity in UK boardrooms. We support theseMiddle East continue to affect world markets, undermining confidence recommendations and are committed to making demonstrableabout future macro-economic expansion even in Asia and South America. progress by 2015.It is a tribute to everyone who works at Rolls-Royce that the Group hascontinued along its path of long-term growth despite these testing times. During 2011, more than 400 young graduates joined Rolls-Royce, from more than 25 countries. In addition, 295 people joined our apprentice schemes.Rolls-Royce is a long-term business which has maintained a consistent It is a tribute to the quality of our training that around fifty per cent of ourstrategy over many years. We continually invest in advanced technology apprentices go on to achieve an honours degree and that so many of ourso that we can address both the present needs of our customers and meet senior managers started their working lives at Rolls-Royce as apprentices.their requirements for many years to come. Our power systems have lifecycles that stretch over decades and we generate long-term revenue Continuous training and development is extremely important to ourstreams by servicing the products we sell. We have customers in 120 success. Over the past five years we have invested over £150 millioncountries and we continue to broaden our customer base across the four improving the knowledge and skills of our people. In order to maintain thesegments in which we operate: civil aerospace, defence aerospace, marine highest standards of ethical behaviour and business integrity, we reviewand energy, including civil nuclear. These characteristics have combined to continually our procedures and training programmes, which aremake Rolls-Royce an increasingly resilient business. However, we are not mandatory for all staff. As well as developing our own workforce wecomplacent and continue to invest for the future. In 2011, we invested recognise our wider responsibility towards the next generation of£520 million from Group resources in research and development. This scientists and engineers through the promotion of science, technology,continuing commitment to technological innovation lies at the heart of engineering and maths (STEM) in schools and universities. We invest in aour business model. wide range of educational projects around the world and encourage our staff to take leadership roles as school governors and STEM ambassadors.It is important to remember that Rolls-Royce sustains a global supplychain. Around 8,000 companies in some 70 countries, all generating As part of our responsibilities to the communities in which we work, theemployment, paying taxes and creating wealth, depend upon us and Board is committed to reducing the environmental impact of our productsshare in our success. For every person we employ, more than six jobs are and operations. Across our portfolio we can demonstrate the progress thatRolls-Royce Holdings plc Annual report 2011
  5. 5. 3Business reviewChairman’s statementRolls-Royce has a highly-skilled and is being made. One good example is the Boeing 787 Dreamliner that entered service in September 2011. This extraordinary aeroplane ismotivated team – proud of its heritage designed to be 20 per cent more fuel efficient than the earlier generationand ambitious for its future. 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 progressSir Simon Robertson developing the scope of our civil nuclear capabilities.Chairman I would like to thank my fellow directors for their great support and hardFebruary 8, 2012 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 Business review 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.
  6. 6. 4Business reviewChief Executive’s reviewDelivering for customers andinvesting in the businessDemand for our products and services in 2011 1. Delivering the promises we have made With a record order book of £62.2 billion, our customers have placed aremained strong. Despite the global economic huge amount of trust in us and it is essential we meet our commitments.turbulence of recent years, Rolls-Royce has This will require a very significant increase in capacity. To put this growth into perspective, since we started building Trent engines 18 years ago wecontinued to grow. 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.In my first year as Chief Executive, I have spent much of my time visiting These investments include our new plants at Crosspointe in Virginia, USARolls-Royce sites around the world to meet employees, customers, where we are making discs for civil jet engines and Seletar, in Singapore,suppliers and investors to hear what they have to say about your company. where we will make wide-chord fan blades and assemble and test TrentWithout exception, the employees I have met are dedicated, professional engines. We are also expanding and renewing our facilities in the UK whereand committed to delivering our brand promise – ‘trusted to deliver we still invest half of our capital expenditure and more than half of ourexcellence’. Our customers are supportive and enthusiastic about our research and development budget. As well as investing in our owntechnology and, of course, they want even better performance both from facilities, we are working hard with our suppliers and partners to makeour products and our team. Our suppliers are excited by the opportunity sure our global supply chain can support our growth and keep pacefor growth and understand our requirement for better quality, on time with demand.delivery and lower cost. Investors express support for our strategy andnaturally share our desire for still better financial performance in the future. 2. Deciding where we invest for future growth We can see opportunity in all areas of our business but we need toAt the 2011 AGM, I confirmed that we will continue to follow the strategy concentrate our resources and decide which opportunities we are goingthat has been in place for many years, and can be summarised as: to pursue and which we are not.1. addressing four global markets: civil aerospace, defence aerospace, marine and energy; 3. Continuing to improve the financial performance of the business2. investing in technology, capability and infrastructure; Although we are subject to inflationary pressures and tough competition3. developing a competitive portfolio of products and services; we will benefit from the growth of the business, from investments that will improve efficiency and from an increasing focus on cost performance and4. focusing on growing market share and our installed product base; and cash conversion.5. adding value for our customers through product-related services. In support of our strategy, during 2011 we made three very importantThis strategy has stood the test of time and has proved itself in battle. decisions for the future.Since 2007, and despite the turbulence of recent years, Rolls-Royce hasgrown underlying revenue by 44 per cent, underlying profits by 45 per The first was our acquisition of the German industrial engines groupcent and payments to shareholders by 35 per cent. We have doubled our Tognum, our biggest acquisition, that we made in a joint offer withrevenues in the past decade and, through organic growth alone, we are Daimler. It will bring together highly complementary product andconfident that we will do the same in the decade ahead. technology portfolios and creates significant new opportunities for our marine and energy businesses.While we continue to follow this strategy, in the coming years, I see threemain priorities: 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 2011
  7. 7. 5Business reviewChief Executive’s reviewOur strategy has stood the test of time 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 aand has proved itself in battle. 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.John RishtonChief Executive In addition, we have continued to extend our portfolio and have advanced a number of important programmes. These are described in greater detailFebruary 8, 2012 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 Business review 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.
  8. 8. 6Business reviewOur business model and strategy Invest in leading technologies and skilled people Develop Provide services world-class that add value products Trusted to deliver excellence Develop close Manufacture customer efficiently relationships globallyRolls-Royce is a global company providing power solutions for customers in Two-thirds of our annual RD funding is aimed at improving thecivil and defence aerospace, marine and energy markets. The Group has an environmental performance of our products. We maximise our researchongoing commitment to investing in research and development (RD) and development investment through our approach of ‘invest once usewhich provides the technologies and intellectual property that allow us to many times’ in products across the four major segments. Ourcompete on a global basis and creates high barriers for entry to our markets. manufacturing operations and supply bases are integrated and global.Rolls-Royce Holdings plc Annual report 2011
  9. 9. 7Business reviewOur business model and strategy A leading producer of mission-critical, Revenue 2011 (£m) 1 integrated power systems and services for 4 use in civil and defence aerospace, marine 1. £5,572m civil aerospace Address four and energy segments. 2. £2,235m defence aerospace global markets 3. £2,271m marine 4. £1,199m energy 3 2 We invest close to £1 billion annually in RD Business review and during 2011 we invested £467 million in Invest in capital projects to grow our global capability technology and productivity. infrastructure and capability We have 40 major engineering programmes Develop a under management. We continue to introduce competitive major new products, including the Trent 1000 portfolio of in 2011. Our key projects will help define the products power systems markets for many years ahead. and services Across the Group the growing installed product base and integrated systems will Grow market generate attractive returns for many decades. share and our installed product base Over half our revenues come from services. Add value We seek to develop our customer relationships, for customers through long-term service contracts where we through the can grow strong business collaboration. provision of product-related servicesRolls-Royce Holdings plc Annual report 2011
  10. 10. 8Business reviewOur business segments(charts show business segment revenue as a percentage of total revenue) OVERVIEW OF BUSINESS MAIN OPERATIONAL LOCATIONS Our civil aerospace business – Derby, UK provides the power for more than – Indianapolis, US 30 types of commercial aircraft – Virginia, US Civil aerospace and supports customers around the world. We have a good presence in narrowbody and a – Singapore – Dahlewitz, Germany 49% strong position in widebody, corporate and regional aircraft. OVERVIEW OF BUSINESS MAIN OPERATIONAL LOCATIONS We are the world’s second largest – Bristol, UK provider of defence aero-engine – Indianapolis, US products and services with 160 – Virginia, US Defence aerospace customers in over 100 countries. – Dahlewitz, Germany 20% OVERVIEW OF BUSINESS MAIN OPERATIONAL LOCATIONS Our marine business serves more – Singapore than 4,000 customers and has – Bristol, Derby, UK equipment installed on over – Ulsteinvik, Ålesund, Marine 30,000 vessels, including those of 70 navies. Bergen, Norway – Kristinehamn, Sweden – Rauma, Finland 20% – Hamburg, Germany – Shanghai, China – Pusan, Korea – Vung Tau City, Vietnam – ­ Walpole, US OVERVIEW OF BUSINESS MAIN OPERATIONAL LOCATIONS We are a world leader in power for – Mount Vernon, US the offshore and onshore oil and – Montreal, Canada gas industry. We supply gas – Bergen, Norway Energy turbines and diesel engines for power generation and are developing a strong capability in 11% the civil nuclear power market.Rolls-Royce Holdings plc Annual report 2011
  11. 11. 9Business reviewMarket opportunities over the next 20 years US$800bn 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 Civil engine market 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$600bn Civil services market Business review US$155bn 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 Defence engine market US$155 billion and for services and support equipment we estimate a market of US$260 billion over the same period. US$260bn Defence services market US$215bn 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. Marine equipment market US$125bn Marine services market US$120bn 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. Energy engine and services market Based on the International Energy Agency forecasts, the Group has conservatively estimated that demand for mission-critical US$640bn 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. Civil nuclear equipment and services marketRolls-Royce Holdings plc Annual report 2011
  12. 12. 10Business reviewKey performance indicatorsThe Board uses a range of financialand non-financial indicators to monitorGroup and segmental performancein line with the strategy. UNDERLYING REVENUE £m+4% Monitoring of revenues provides at the actual exchange rate 12,000 a measure of business growth. achieved as a result of settling Underlying revenue is used in order foreign exchange contracts from 11,277 10,866 to eliminate the effect of the forward cover. 8,000 10,108 decision not to adopt hedge 9,147 accounting and to provide a clearer 7,817 year-on-year measure. The Group 4,000 measures foreign currency sales 0 07 08 09 10 11 UNDERLYING PROFIT BEFORE FINANCING £m+19% Underlying profit before financing the year; (b) similar adjustments are 1,200 is presented on a basis that shows made in respect of commodity the economic substance of the derivatives; and (c) consequential 1,206 Group’s hedging strategies in adjustments are made to reflect the 800 983 1,010 respect of the transactional impact of exchange rates on 919 832 exchange rate and commodity trading assets and liabilities and price movements. In particular: long-term contracts on a consistent 400 (a) revenues and costs basis. The derivation of underlying denominated in US dollars and profit before financing is shown in euros are presented on the basis of note 2 on page 84 of the 0 the exchange rates achieved during consolidated financial statements. 07 08 09 10 11 CASH FLOW £m-608% The figure for 2011 includes movement in net funds/debt 700 investment of £1,496 million during the year, after taking into in Tognum. account the value of derivatives 350 570 258 held to hedge the value of balances 0 62 In a business requiring significant denominated in foreign currencies. investment, the Board monitors The figure in 2007 includes a -350 (1,310) (183) cash flow to ensure that profitability £500 million special contribution -700 is converted into cash generation, to the Group’s UK pension schemes, both for future investment and as a as part of the restructuring of these -1050 reward for shareholders. The Group pension schemes. -1400 measures cash flow as the 07 08 09 10 11 RETURN ON CAPITAL EMPLOYED %+0.5% Return on capital employed previously written off. It represents a 18 is calculated as the after-tax measure of the return the Group is underlying profit, divided by making on its investments. 17.2 17.1 17.2 17.3 17.8 the average net assets during the 12 year, adjusted for net cash, net post-retirement deficit and goodwill 6 0 07 08 09 10 11Rolls-Royce Holdings plc Annual report 2011
  13. 13. 11Business reviewKey performance indicatorsUnderlying revenue Order bookUnderlying profit before financing Training and developmentCash flow Underlying revenue per employeeReturn on capital employed Engine deliveriesNet research and development charge Installed thrust – civil aerospaceGross research and development expenditure Percentage of civil fleet under managementNet research and development expenditure Underlying services revenueas a proportion of underlying revenue EmissionsCapital expenditure NET RESEARCH AND DEVELOPMENT CHARGE Business review £m+10% Investment in research and a gated review process on each 500 development underpins all the programme and progress is elements of the Group’s strategy. reviewed at key milestones. 463 375 Programme expenditure is 403 422 monitored in conjunction with 381 379 250 125 0 07 08 09 10 11 GROSS RESEARCH AND DEVELOPMENT EXPENDITURE £m-2% The Group’s RD activities comprise taken to enhance the Group’s 1,000 both self-funded and customer intellectual property. funded programmes. Gross 923 750 885 864 908 expenditure measures total 824 research and development activity and is an indicator of the actions 500 250 0 07 08 09 10 11 NET RESEARCH AND DEVELOPMENT EXPENDITURE AS % A PROPORTION OF UNDERLYING REVENUE-2% 6 RD is measured as the self-funded on the stage of development of expenditure both before amounts current programmes. This measure 5.8 5.4 capitalised in the year and reflects the need to generate 4 4.7 4.7 4.6 amortisation of previously current returns as well as to invest capitalised balances. The Group for the future. expects to spend approximately five 2 per cent of revenues on research and development although this proportion will fluctuate depending 0 07 08 09 10 11 CAPITAL EXPENDITURE £m+29% To deliver on its commitments to Annual capital expenditure is 500 customers, the Group invests measured as the cost of property, significant amounts in its plant and equipment acquired 467 375 infrastructure. All proposed during the period. investments are subject to rigorous 361 review to ensure that they are 250 304 283 291 consistent with forecast activity and will provide value for money. 125 0 07 08 09 10 11Rolls-Royce Holdings plc Annual report 2011
  14. 14. 12Business reviewKey performance indicators ORDER BOOK £bn+5% The order book provides an are often ordered for only one year 60 indicator of future business. It is at a time. In such circumstances, measured at constant exchange even though there may be no 58.3 59.2 62.2 55.5 rates and list prices and includes alternative engine choice available 40 both firm and announced orders. to the customer, only the 45.9 In civil aerospace, it is common for a contracted business is included in customer to take options for future the order book. Only the first seven 20 orders in addition to firm orders years’ revenue of long-term placed. Such options are excluded aftermarket contracts is included. from the order book. In defence 0 aerospace, long-term programmes 07 08 09 10 11 TRAINING AND DEVELOPMENT £m+15% Training and development is a core Effectiveness is monitored by 40 element of the Group’s investment using a range of external and in its capability and is measured as internal sources and by gathering 30 38 the expenditure on the training user feedback. 33 and development of employees, 30 30 customers and suppliers. 20 24 10 0 07 08 09 10 11 UNDERLYING REVENUE PER EMPLOYEE £000+6% A measure of personnel 300 productivity, this indicator measures underlying revenue 274 generated per employee on a 200 259 three-year rolling basis. 233 211 194 100 0 07 08 09 10 11 ENGINE DELIVERIES Engines+12% The Group’s installed engine base each business except for marine, 2,000 represents an opportunity to as its products do not lend generate future aftermarket themselves to this measure due 1,500 1,853 business. This is measured as the to their diversity. 1,621 1,600 1,657 number of Group products 1,439 delivered during the year within 1,000 500 0 07 08 09 10 11Rolls-Royce Holdings plc Annual report 2011
  15. 15. 13Business reviewKey performance indicators INSTALLED THRUST – CIVIL AEROSPACE m lbs Business review+5% Installed thrust is the indicator of 400 the amount of product in use by our customers and therefore the 382 400 300 348 367 scale of opportunity this presents 334 for our services business. 200 100 0 07 08 09 10 11 PERCENTAGE OF CIVIL FLEET UNDER MANAGEMENT %-3% Long-term contracts are an 80 important way of generating value for customers. The percentage of 60 70 68 fleet under management gives a measure of the proportion of the 55 57 59 40 installed engine base where the future aftermarket arrangements are agreed under long-term contracts. 20 0 07 08 09 10 11 UNDERLYING SERVICES REVENUE £m+9% Underlying services revenue shows 6,000 the amount of business during the 6,019 year that has been generated from 5,544 the installed engine base. This is 4,000 4,927 4,755 measured as the revenue derived 4,265 from spare parts, overhaul services and long-term service agreements. 2,000 0 07 08 09 10 11 EMISSIONS Around two-thirds of our research the environment report, ‘Powering and development expenditure is a better world’, which is available focused on reducing emissions of on the Group’s website at the Group’s products. The Group www.rolls-royce.com. measures both the emissions of its products and the emissions of its manufacturing operations. These measures are described in detail inRolls-Royce Holdings plc Annual report 2011
  16. 16. 14Business reviewFinance Director’s reviewA strong performanceDemand for our products and Summary Summary data – £ million 2011 2010 Changeservices remains robust. Order book 62,201 59,153 +5% Underlying revenue* 11,277 10,866 +4% Underlying profit before tax* 1,157 955 +21%Mark Morris Underlying earnings per ordinary 48.54p 38.73p +25% share*Finance Director Full year payment to shareholders 17.5p 16.0p +9% Reported revenue 11,124 11,085 0% Reported profit before financing 1,189 1,134 +5% Net funds 223 1,533 Average net funds 320 960 * See explanation in note 2 on page 84 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 RD 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.
  17. 17. 15Business review For more financial information go online:Finance Director’s review www.rolls-royce.com/investorsUnderlying figures are considered more representative of the trading on selling USD income, £30 million from Tognum net of the costs ofperformance by excluding the impact of year end mark-to-market the acquisition and a number of one-off items, the most significantadjustments of outstanding financial instruments on the reported which relates to a £60 million benefit from the SDSR settlementsperformance, principally relating to the GBP/USD hedge book. In referred to earlier.addition the net post-retirement financing is excluded and, in 2011,adjustments have been made to exclude one-off past-service credits on Further discussion of trading is included in the business segment reportspost-retirement schemes and the effect of acquisition accounting. The on page 18 to 25.adjustments between the underlying income statement and thereported income statement are set out in more detail in note 2 of the Underlying financing costs reduced 11 per cent to £49 million, includingfinancial statements. This basis of presentation has been applied a small reduction in financial Risk Revenue Sharing Partnerships (RRSPs)consistently since the transition to IFRS in 2005. costs and lower funding costs due to the settlement of the Group’s €750 million Eurobond during the year.Underlying income statement Business reviewUnderlying income statement extracts – £ million 2011 2010 Change Underlying taxation was £261 million, an underlying tax rate of 22.6 perRevenue 11,277 10,866 +4% cent compared with 24.7 per cent in 2010. This reduction reflects increased civil aerospace 5,572 4,919 +13% profits from joint ventures (which are accounted for on a post-tax basis) defence aerospace 2,235 2,123 +5% and some adjustments to prior year estimates. marine 2,271 2,591 -12% energy 1,199 1,233 -3% Underlying EPS increased 25 per cent to 48.54 pence, in line with theProfit before financing costs and taxation 1,206 1,010 +19% increase in the underlying profit after tax. civil aerospace 499 392 +27% defence aerospace 376 309 +22% Payments to shareholders At the AGM on May 4, 2012, the directors marine 323 332 -3% will recommend an issue of 106 C Shares with a total nominal value of energy 24 27 -11% 10.6 pence for each ordinary share. The final issue of C shares will be made engine holding (Tognum JV) 36 – – on July 2, 2012 to shareholders on the register on April 27, 2012 and the central costs (52) (50) -4% final day of trading with entitlement to C Shares is April 24, 2012. TogetherNet financing costs (49) (55) +11% with the interim issue on January 3, 2012 of 69 C Shares for each ordinaryProfit before taxation 1,157 955 +21% share with a total nominal value of 6.9 pence, this is the equivalent of aTaxation (261) (236) +11% total annual payment to ordinary shareholders of 17.5 pence for eachProfit for the year 896 719 +25% ordinary share.EPS 48.54p 38.73p +25%Payment to shareholders 17.5p 16.0p +9% The payment to shareholders will, as before, be made in the form ofOther itemsOther operating income 70 87 -20% redeemable C Shares which shareholders may either choose to retain orGross RD investment 908 923 -2% redeem for a cash equivalent. The Registrar, on behalf of the Company,Net RD charged to the income statement 463 422 +10% 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 SharesUnderlying revenue increased four per cent to £11.3 billion. This includes or else redeem and participate in the CRIP must ensure that theira nine per cent growth in services revenue to £6.0 billion that more than instructions are lodged with the Registrar, Computershare Investoroffset a one per cent reduction in OE revenue to £5.3 billion. OE Services Plc, no later than 5pm on Friday June 1, 2012.performance included strong 18 per cent growth in civil aerospace offsetby a greater than anticipated reduction of 23 per cent in marine OE Other operating income relates to programme receipts from RRSPs,revenue. Underlying services revenue continues to represent more than which reimburse past RD costs. These receipts decreased by 20 per centhalf (53 per cent) of the Group’s underlying revenues. In 2011, growth in in 2011 due to the phasing of major programmes such as the Trent XWB.underlying services revenue was due to a number of factors: the installedbase of products grew and the services network expanded; defence Net RD charged to the income statement increased by ten per centaerospace benefited from one-off contract termination settlements to £463 million. The Group recruited an additional 1,000 engineers toresulting from the Strategic Defence and Security Review (SDSR) of the develop the products of the future and to help improve the in-serviceUK Ministry of Defence (MoD); and marine services saw further growth of performance of the existing installed base of products. This investmentnine per cent. and the 29 per cent increase in capital expenditure to £467 million will prepare our infrastructure and global supply chain for significant growth inUnderlying profit before financing costs and taxation increased the next decade. The Group continues to expect net RD investment to21 per cent to £1.16 billion. This was due to a number of factors, a better remain within four to five per cent of Group underlying revenue.mix between OE and services, a significant improvement in productivityresulting from the focus on cost, net foreign exchange (FX) benefits of£54 million including an eight cent improvement in the achieved rateRolls-Royce Holdings plc Annual report 2011
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