Rolls-Royce Holdings plc plc Holdings Rolls-Royce Rolls-Royce Holdings plc Annual report 2011 Trusted to deliver excellence Annual reportAnnual 2011 ® ® © Rolls-Royce plc 2012 Trusted to deliver excellence deliver to Trusted 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 129 Glossary Contents 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 p18 p20 ANA All Nippon Airways MoU Memorandum of Understanding 24 Energy APB Auditing Practices Board 26 Excellence in technology MWh Megawatt hours APRA Annual Performance Related Award plan 28 Excellence in operations NATO North Atlantic Treaty Organisation ASD Aerospace and Defence Industries Association of Europe Marine Energy 30 Sustainability 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 Governance OECD Organisation for Economic Cooperation and Development 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 R&D Research and Development 51 Risk committee report CRIP C Share Reinvestment Plan R&T Research and Technology 52 Remuneration committee report Technology Operations 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 Contents listed on page 71 RSUs Restricted stock units EU European Union SAP Systems, applications and products Other matters FSA Financial Services Authority SCRIA Supply Chain Relationships in Aerospace 122 Subsidiaries, jointly controlled 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 GHG Greenhouse gas 126 Group five-year review 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 HS&E Health, Safety and Environment STOVL Short Take-Off and Vertical Landing I&C Instrumentation and control TRI Total reportable injuries Visit Rolls-Royce online IAB International Advisory Board TSR Total Shareholder Return IAE IAE International Aero Engines AG UK GAAP UK Generally Accepted Accounting Practices IAS International Accounting Standards USD United States dollar Below are some examples of the type of information Directors’ report IASB International Accounting Standards Board VDA Verband der Automobilindustrie (German Association of the and services available: The Directors’ report which includes the IFBEC International Forum on Business Ethical Conduct Automotive Industry) Business review is set out on pages 1 to 70. The Group’s business IFRIC International Financial Reporting Interpretations Committee VP Vice President Forward-looking statements Gover nance This Annual report contains forward- Sust ainability looking statements. Any statements News/ updates that express forecasts, expectations and projections are not guarantees of future statements Financial People performance and will not be updated. Inve stors By their nature, these statements involve risk and uncertainty, and a number of Heri tage 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. 1 Business review 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 Business review 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 +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 84 Rolls-Royce Holdings plc Annual report 2011 3 Business review Chairman’s statement Rolls-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 is motivated team – proud of its heritage designed to be 20 per cent more fuel efficient than the earlier generation and 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 progress Sir Simon Robertson developing the scope of our civil nuclear capabilities. Chairman I would like to thank my fellow directors for their great support and hard February 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 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. Business review 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