Delivering Today, Investing for the Future

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Delivering Today, Investing for the Future Delivering today, investing for the future Rolls-Royce plc Annual report 2009 Contents and Financial highlights Business review Other matters Financial statements 01 Introduction 49 Board of directors 54 Independent Auditors’ report 02 Chief Executive’s review 51 Internal control and risk management 55 Financial statement contents 05 Global activity 52 Shareholders and share capital 06 Our strategy 52 Other statutory information 08 Market outlook 53 Annual report and financial statements 09 Key performance indicators 14 Principal risks and uncertainties 17 Review of operations 17 Civil aerospace 19 Defence aerospace 21 Marine 23 Energy 25 Engineering and technology 27 Operations 29 Services 31 Corporate responsibility 41 Finance Director’s review 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Order book – firm and announced (£bn) 58.3 55.5 45.9 26.1 24.4 21.3 18.7 17.1 16.7 14.5 Underlying revenue (£m) 10,108 9,147 7,817 7,353 6,458 5,947 5,645 5,788 6,328 5,864 Profit before financing (£m) 1,172 862 512 700 855 417 270 212 311 289 Underlying profit before tax (£m) 915 883 845 851 579 364 285 255 475 436 Underlying EBITDA (£m) 1,300 1,244 1,065 986 911 715 661 672 849 837 Directors’ report Directors’ Return on capital employed (%) 17.4 17.1 17.2 16.0 14.5 8.5 7.7 7.2 11.8 11.2 Cautionary statement regarding forward-looking statements This Annual report has been prepared for the members of the Company only. The Company, its directors, employees or agents do not accept or assume responsibility to any other person in connection with this document and any such responsibility or liability is expressly disclaimed. This Annual report contains certain forward-looking statements. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. In particular, all statements that express forecasts, expectations and projections with respect to future matters, including trends in results of operations, margins, growth rates, overall market trends, the impact of interest or exchange rates, the availability of financing to the Group, anticipated cost savings or synergies and the completion of the Group’s strategic transactions, are forward-looking statements. By their nature, these statements and forecasts involve risk and uncertainty because they relate to events and depend on circumstances that may or may not occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts. The forward-looking statements reflect the knowledge and information available at the date of preparation of this Annual report, and will not be updated during the year. Nothing in this Annual report should be construed as a profit forecast. Note: The reconciliation of underlying revenues and results is provided in note 2 and on page 68 of the consolidated financial statements. Directors’ report The Directors present the Annual report for the year ended December 31, 2009 which includes the business review and audited financial statements for the year. References to ’Rolls-Royce’, the ‘Group’, the ’Company’, ‘we’, or ‘our’ are to Rolls-Royce plc and/or its subsidiaries, or any of them as the context may require. Pages 01 to 53, inclusive, of this Annual report comprise a Directors’ report that has been drawn up and presented in accordance with English company law and the liabilities of the Directors in connection with that report shall be subject to the limitations and restrictions provided by such law. Rolls-Royce plc is incorporated as a public limited company and is registered in England under the UK Companies Act 1985 with the registered number 1003142. Financial statements Financial Rolls-Royce plc’s registered office is 65 Buckingham Gate, London SW1E 6AT. Rolls-Royce plc Annual report 2009 Directors’ report Introduction 1 Introduction We have followed a consistent Civil aerospace strategy for 20 years and our Powering more than 30 civil aircraft types from small executive jets to the largest airliners. investment in technology, together with our strong order £47.0bn £4,481m book, positions us well for Order book Underlying revenue future growth. Defence aerospace An engine portfolio that covers all major sectors including transport, combat, trainers, helicopters, tactical and unmanned aircraft. £6.5bn £2,010m Order book Underlying revenue Marine A world-class range of capabilities in ship design and in the supply and support of power and propulsion systems. Directors’ report Directors’ £3.5bn £2,589m Order book Underlying revenue Energy An established and leading position in power for onshore and offshore oil and gas applications, together with a growing presence in power generation. £1.3bn £1,028m Order book Underlying revenue statements Financial Rolls-Royce plc Annual report 2009 2 Directors’ report Chief Executive’s review Chief Executive’s review “ Our resilience, coupled with the inherent Examples like this show why it is so important to set our Group’s progress into a broad context. This review will chart our progress over the past strength of our business model, will enable ten years, during which we more than doubled our revenues and our us to manage short-term uncertainties and underlying profits. This has provided us with a platform from which we are confident we can grow our revenues by at least as much again in deliver future growth.” the decade ahead. A very different company In 2009, Rolls-Royce has delivered solid results despite the severity We are now a very different company than we were ten years ago. This can of the economic downturn, a performance which has again be measured in terms of our scale and geography, in terms of the range of demonstrated the benefits of pursuing a consistent strategy over things we do and in terms of operational efficiency. All this has made us a a long period. This approach has created a broadly-based business more resilient business and has established a far broader foundation from with deep customer knowledge, outstanding technology and which to build revenues in the future. A few facts and figures comparing world-class people. the Rolls-Royce of 1999 with today’s Group illustrate the point. Our financial results demonstrate the resilience of our business. Today, at any one time around 200,000 people are flying in aircraft The Group’s order book increased to a record £58.3 billion, with powered by Rolls-Royce engines. Our ability to keep those aircraft in the underlying revenue growing 11 per cent to £10.1 billion and sky is a powerful illustration of the ‘mission critical’ nature of what we do. underlying profit before tax improving four per cent to £915 million. At peak times that figure can double, which means that the equivalent of the population of Bristol is being kept aloft by Rolls-Royce engines. The Group has a strong financial position with average cash balances That is considerably more than double the number of people we were increasing by £259 million to £633 million. The triennial valuation of flying a decade ago. the Group’s largest pension scheme has just been completed and confirms that 2010’s cash funding will be maintained at a level similar We have become much more than a civil aerospace company. The to that in 2009. This demonstrates the benefits of the early action revenues from our marine, defence aerospace and energy businesses taken to amend the terms of the scheme and to adopt an investment have grown from £2.1 billion in 1999 to £5.6 billion in 2009. In 2009, strategy that reduces volatility. revenues from outside our civil aerospace business accounted for more than half of Group revenues. The economic environment remains challenging and it seems likely that world growth will be slower in the years ahead than it We are becoming less dependent on our traditional markets of Europe and has been in the past decade. In these circumstances, we will benefit North America. These geographies, which accounted for around 70 per cent Directors’ report Directors’ from our ability to access the world’s faster growing markets where of our revenues in 1999, represent around 66 per cent of our revenues now there continues to be demand for investment in transport and that trend is set to continue, as more than half our current order book and infrastructure. comes from Asia, South America and the Middle East. We will maintain our focus on cost reduction and improving our Around half our revenues come from services today compared to operational efficiency. At the same time we will continue to invest 40 per cent a decade ago. This represents an annual compound in technology, in our product and service portfolio, in the capital growth in services of ten per cent. assets required to deliver growth, in our international footprint and in our people. Throughout this period we have maintained our focus on costs and improving operational efficiency. Every year for the past ten A long-term business years, revenue per employee has increased, showing a 16 per cent It is important to recognise that ours is a long-term business. Typically, improvement in the year to £271,000 in 2009. We are now selling more our product and service lifecycles span 40-50 years and we invest in than twice as much as we were ten years ago, with 2,000 fewer people. technology programmes that look five, ten, 20 years and more into the future. Taken together, the pipeline of orders we have already signed, our increased market share, the growth and scale of our services business A good example of this is the Avon engine.
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