Annual Financial Report

February 23, 2011 Rolls-Royce Group plc Publication of the Annual report 2010 Rolls-Royce Group plc announces that its Annual report for the year ended 31 December 2010 is now available on the Company's website: www.rolls-royce.com Printed copies of this document will be posted to shareholders on or around 22 March 2011. A copy of the above document has been submitted to the National Storage Mechanism and will shortly be available for inspection at: www.Hemscott.com/nsm.do. In accordance with paragraph 6.3.5 of the Disclosure and Transparency Rules we set out below a management report extracted from the Annual report in unedited full text. Accordingly, page references in the text below refer to page numbers in the Annual report. Our final results announcement issued on February 10, 2011 contained a condensed set of financial statements and a description of the principal risks and uncertainties facing the business. The Annual General Meeting (AGM) of the Company will take place at 11.00am on Friday May 6, 2010 at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE. It will be followed by a meeting convened by the High Court to consider a scheme of arrangement (Scheme) under Part 26 of the Companies Act 2006. The Scheme will introduce a new holding company for the Group and will generate appropriate reserves which will allow it to continue its progressive shareholder payment policy and the Company's practice of providing cash returns to shareholders in the most efficient manner through the issue and redemption of C Shares. Further details of the Scheme will be provided in due course. The financial calendar for the next twelve months is set out below: Financial calendar 2011-2012 Ex entitlement to C Shares April 20, 2011 Record date for entitlement to C Shares April 26, 2011 AGM, Queen Elizabeth II Conference Centre, London 11.00am May 6, 2011 Court Meeting, Queen Elizabeth II Conference Centre, London 11.30am May 6, 2011 Record date for dividend payable on C Shares June 3, 2011 Deadline for receipt of C Share elections 5.00pm June 6, 2011 Allotment of C Shares July 1, 2011 Payment of C Share redemption monies July 5, 2011 Purchase of ordinary shares for CRIP participants By July 12, 2011 Announcement of interim results July 28, 2011 Ex entitlement to C Shares October 26, 2011 Record date for entitlement to C Shares October 28, 2011 Deadline for receipt of C Share elections 5.00pm December 5, 2011 2011 Financial year end December 31, 2011 Allotment of C Shares January 3, 2012 Payment of C Share redemption monies January 5, 2012 Purchase of ordinary shares for CRIP participants By January 13, 2012 Preliminary announcement - 2011 full year results February, 2012 2011 Annual report published March, 2012 Enquiries: Investor relations: Mark Alflatt Director of Financial Communications Rolls-Royce plc Tel: +44 (0)20 7227 9285 mark.alflatt@rolls-royce.com BUSINESS REVIEW Chairman's statement The Group conducts business on a global basis and has customers in 120 countries. It is this broad customer base, coupled with an extensive product and services portfolio, which underpins our success. We have continued to grow our order book in 2010 to Â£59.2 billion. Underlying profits before tax increased by four per cent to Â£955 million. We are proposing a final payment to shareholders of 9.6 pence per share, bringing the full year payment to 16 pence per share. This is an increase of 6.7 per cent and reflects the Board's continuing confidence in the Group's business. International trade tensions, uneven growth, fiscal tightening and currency instability have combined to make the economic environment uncertain. In these circumstances it is important to have a balanced business portfolio. This Annual report records that our three businesses outside civil aerospace - marine, defence aerospace and energy - have all grown underlying profits at double digit rates during 2010, adding to the resilience of the business. We continue to benefit from the high barriers to entry which are a consequence of our long-term investments and the businesses in which we are involved. Our high-technology products and services require sophisticated systems integration and are hard to replicate. We continuously explore new ways in which technologies developed in one part of our business can be applied in others, reinforcing this strong market position. As well as meeting the challenges of the marketplace in 2010, Rolls-Royce has had to manage the high profile failure of a Trent 900 engine on a Qantas Airbus A380. Rolls-Royce behaved as you would expect of a highly proficient engineering company. We identified the problem quickly, and applied ourselves to the swift return of the fleet to normal operation. I would like to thank our customers for their support, and recognise the tremendous efforts of Rolls-Royce management and staff in responding so professionally to this very regrettable incident. The safety of our products has always been, and always will be our first priority. We are committed to conducting business to the highest standards, and to enriching the societies in which we live and work. As well as creating employment and generating wealth, we invest heavily and consistently in improving the environmental performance of our products. Through our own research, and in collaboration with universities around the world, we are driving innovation and extending the boundaries of human knowledge. Our training programmes raise levels of skills and capability and set new standards of engineering excellence. Rolls-Royce people around the world are directly involved in community projects and voluntary activities, contributing to the communities in which we operate. This year we took further steps to embed our Global Code of Business Ethics. Rolls-Royce is a responsible Group and we are committed to ensuring that we conduct business appropriately and to the highest levels of integrity. In order to ensure that we achieve best practice, our procedures and training programmes are continually reviewed and involve all our employees. We have continued to invest in our own people through training and development programmes. These programmes operate worldwide, including from dedicated training facilities in the UK and US. These facilities are used to run a range of programmes for our worldwide workforce and for our customers. The Board is committed to improving our environmental performance across all business sectors. Continuous investment in the gas turbine engine, the core product for Rolls-Royce, has progressively improved fuel efficiency and will continue to do so. The new Trent XWB, for example, will be 16 per cent more fuel efficient than the first Trent aero engine to enter service 15 years ago. This means less cost for our customers as well as lower emissions. The application of gas turbines and efficient diesel engines in the marine sector also offers the possibility of significant reductions in emissions at sea. As well as developing core technologies, the Group is exploring other low carbon energy sources including civil nuclear power, fuel cell technology and tidal power. In 2011, we are proposing to introduce a new holding company for the Group. This will enable us to continue our progressive shareholder payment policy and provide cash returns to shareholders in the most efficient manner through the issue and redemption of C Shares. Rolls-Royce supports a wide range of charitable causes with particular emphasis on the armed forces benevolent funds and educational programmes involved with science and engineering. This year's Rolls-Royce Science Prize was won by a team from Teesdale School, County Durham for their design project to enhance the lives of animals in their local zoo. They received their award of Â£20,000 from John Rose at an awards dinner attended by senior industry leaders, academics and government ministers. The Science Prize attracts entrants from thousands of schools across the UK. I would like to thank all our management and employees very much for their loyalty and hard work during the past year. Our results are a testament to the focus and commitment I see demonstrated in every part of the business and at all levels of the organisation. I am constantly impressed by the initiative shown by Rolls-Royce people in seizing opportunities and responding to the needs of our customers. Once again the Group benefited from the wise counsel of the International Advisory Board (IAB ) during 2010. This Board, whose membership is set out later in this report, was established in 2006 to help provide a broad perspective on issues such as global political developments, business risks and opportunities and economic trends. The advice they give is extremely valuable to us as we develop our global footprint and become more international in our outlook and behaviour. I would like to thank the members of the IAB for their work during the year in providing such high-level strategic advice. I would also like to thank my fellow directors for their superb support and hard work over the past year. There is of course one very important tribute to be paid by the Board and everyone else in Rolls-Royce to our Chief Executive, John Rose, who has announced his decision to retire at the end of March this year. John has been Chief Executive for 15 years, during which time he has done the most extraordinary job. He has transformed Rolls-Royce into a world-class company operating on a global stage. His strategic vision has led to the construction of a resilient business with a powerful portfolio of internationally competitive products and services. His leadership and tenacity have helped establish a platform from which we expect revenues to double in the decade ahead. We owe John a huge debt of gratitude for what he has done for the Company, not only as Chief Executive, but during his career of 27 years with Rolls-Royce. John has also been a driving force in public policy, championing the cause of high value added manufacturing and services. He argued for the importance of rebalancing the UK economy long before it became fashionable to do so. I am sure he will continue to be a powerful advocate for the importance of science, technology and maths, and of the importance of technical education in a nation's ability to generate wealth. John Rose will be succeeded as Chief Executive by John Rishton, who is currently the Chief Executive Officer of the Dutch based, global retail group Royal Ahold. John Rishton has been a member of the Rolls-Royce Board for four years. As well as knowing Rolls-Royce well, John has a deep understanding of the aviation industry gained as Chief Financial Officer at British Airways. He also has manufacturing experience gathered from a number of senior positions at Ford. I have come to know John Rishton well. He is an outstanding individual, with experience as the successful Chief Executive of a global publicly listed company. He is an instinctive team player, and was the unanimous choice of the Board. I am certain he will prove himself a distinguished Chief Executive of Rolls-Royce when he takes up his new role at the end of March this year. The technologies that Rolls-Royce deploys are at the frontiers of engineering. We continue to invest in the long-term growth of our Group. We enjoy the long-term support of our large customer base and suppliers, and we will continue to broaden our portfolio organically or by acquisition in our core sectors. We intend to maintain a strong balance sheet and a single A credit rating which we believe provides the foundation for the long-term growth of our businesses. A great company is built by first class, passionate and highly skilled people. We have these in Rolls-Royce and I believe that we will continue to improve our business and deliver excellent value for all our shareholders. Simon Robertson Chairman February 9, 2011 Chief Executive's review This is my fifteenth and final Chief Executive's review, and so it is a particular pleasure to report that Rolls-Royce has delivered a strong performance in 2010 despite challenging economic conditions. Underlying revenue has grown seven per cent to Â£10.9 billion and underlying profit before tax has increased by four per cent to Â£955 million. Our financial position has also continued to improve with average net cash balances reaching Â£960 million, an improvement of Â£325 million over the same period in 2009. This demonstrates once again the strength and resilience of the Group and the progress that we have made in recent years. It is a measure of this progress that the civil, defence and marine businesses now each generate underlying profits of more than Â£300 million. I was an early pessimist about the condition of the world economy and I expect to be a late optimist. The situation remains fragile, recovery has been asymmetric and the global financial system retains the capacity to surprise unpleasantly. However, our consistent investment in a broad portfolio of products and services and our strong customer relationships have given us access to a wide range of global markets. This breadth has allowed Rolls-Royce to maintain progress through the downturn and the disruption to the world economy which began in 2007. Since then the business has grown its order book, revenues, profits and average net cash, and increased payments to shareholders while at the same time we have invested more than Â£4 billion in the business. Total Shareholder Return (TSR) during this period has been 27 per cent, which compares to an average TSR of four per cent for the FTSE All Share index. Investing for the long term During 2010, we have continued our programme of investment, funding world-class facilities in all major geographies, providing capacity for future growth, contributing to improved productivity and delivering products with operational lives which may well extend to half a century. We remain confident in our ability to double revenues in the coming decade through organic growth alone. However, we also have the management and financial capability to accelerate growth through acquisition and partnership. Strategy Our consistent strategy, applied over many years, has helped deliver a more broadly based, better balanced and more resilient portfolio. This strategy has five key elements: â€¢ address four global markets, civil aerospace, defence aerospace, marine and energy; â€¢ invest in technology, infrastructure and capability; â€¢ develop a competitive portfolio of products and services; â€¢ grow market share and our installed product base; and â€¢ add value for customers through the provision of product-related services. We have high barriers to entry as a result of the technology required for the design, systems integration, manufacture and support of our products. In addition, we work hard to transfer intellectual property, products and innovation across businesses to achieve competitive advantage in the markets which we serve. An increasingly global business The business today is the consequence of decisions and investments made over many years. When I first joined the Company in 1984, Rolls-Royce had a narrow product range and its business was mainly UK focused with some presence in the US. This position has changed fundamentally. We are now able to trade successfully on a global basis and are developing our presence around the world. This brings us closer to customers and allows us access to funding and skills. Our customer insight and our ability to develop technologies and integrate them into complex power systems, give us access to markets where demand remains strong for the products and services that we provide. The decision to locate the head office of our marine business in Singapore will have a profound impact on our ability to develop a global view. We now manage about one third of our revenue from Singapore, a further third from North America and the balance from the United Kingdom and Europe. This means that management teams, running businesses that in themselves are the size of FTSE 100 companies, will think about challenges and opportunities from a different perspective. This will be of huge benefit to the Group as we respond to customer requirements and competition. In 2010, rapid progress was made in the construction of our major new aerospace facilities at Crosspointe in the US to manufacture discs and at Seletar in Singapore where we will assemble and test large civil engines and manufacture wide-chord fan blades. During the year, we also opened a new Mechanical Test complex at Dahlewitz in Germany to conduct testing for our businesses worldwide. We continue to expand our marine services. We already have 34 facilities around the world and the network is growing fast, ensuring that our locations match our customers' requirements. Of course our supply chain has also become increasingly global with around 8,000 suppliers in North and South America, Europe and Asia. We continue to invest in improving our supply chain management, to integrate these suppliers into our worldwide operations and to improve our quality and capabilities. Our business today Our business is conducted through four major customer focused businesses: Civil aerospace We have seen signs of recovery in the civil aerospace sector, although the strength of this recovery varies between regions. Nonetheless, we have continued to sign significant new orders, particularly with customers based in Asia and the Middle East. This includes two individual orders worth more than Â£ 1 billion from China and the Middle East. In all, new orders amounted to Â£7.5 billion during 2010, demonstrating the continued confidence of our customers in our portfolio. The two new members of the Trent family continued their development programmes through 2010. The Trent 1000 is powering the Boeing 787 on the aircraft's flight test schedule. The engine for the Airbus A350 XWB , which is due to enter service in 2013, ran for the first time in June. This promises to be the most successful member of the Trent family with 1,150 engines already on order. Across the portfolio, our order book requires us to more than double our output of Trent engines by the middle of this decade. An uncontained disc release occurred on a Trent 900 engine on board a Qantas operated Airbus A380 in November 2010. This regrettable incident attracted widespread attention. Uncontained disc failures happen with a frequency of about once a year on the world's large civil aircraft fleet. However, this was the first time an event of this nature had occurred on a large civil Rolls-Royce engine since 1994. The safety of our products is our highest priority and each time a serious incident happens Rolls-Royce and the aviation industry learns lessons. These are embedded in the rigorous certification requirements, safety procedures and standards of regulation which make flying an extraordinarily safe form of transport. In line with this regime, Rolls-Royce worked closely with the regulators, Airbus and our customers to put in place an effective inspection programme, to identify root cause and to achieve a rapid return of the Trent 900 fleet to normal operation. Marine The growth of our marine business over the past decade has been a major feature in the broadening of our portfolio. In that time revenues have grown by six times, and we now have equipment on board 30,000 vessels. This growth is a consequence of our focus on power systems integration for increasingly complex and efficient vessels. Rolls-Royce has a strong position in the offshore support industry with production facilities in nine countries and a growing support network. The acquisition of ODIM ASA during 2010, has added significantly to our systems capability and gives us greater access to the growing markets of seismic surveying and subsea deepwater installation. This will be particularly important as oil and gas exploration moves into ever deeper waters, for instance in Brazil, where more complex and capable vessels are required. Our naval business secured a breakthrough order from the US Navy to power ten Littoral Combat Ships with MT 30 marine gas turbine engines. This represents the largest naval surface vessel contract the Group has signed. In the UK, all six Type 45 Destroyers for the Royal Navy have now been launched, equipped with our highly-efficient WR-21 gas turbine power system. In the merchant sector, our technology enables us to respond to the growing demand for improved environmental performance of marine engines. As just one example of this, in 2010 we signed a contract for the world's largest gas-powered ferry which will operate in the environmentally sensitive coastalwaters of Norway, fuelled by liquefied natural gas. This technologydramatically reduces CO2 emissions and virtually eliminates soot and sulphur emissions. Defence aerospace Our defence aerospace business is highly diversified with 160 customers in more than 100 countries. Despite the pressure on public spending in its traditional markets we continue to benefit from our investment in a broad product and services portfolio, all of which have global applications. In particular, we see growth opportunities in emerging economies in Asia, the Middle East and South America. In the UK, the Strategic Defence and Security Review has impacted a number of long-standing programmes, including the Harrier jump jet, which was taken out of service during 2010. However, new products and our substantial service activities will both ensure the resilience of this part of the defence business and create opportunities. New European collaborative ventures are progressing well and are expected to have a strong export market. In particular, the TP400 turboprop on the Airbus A400M has now successfully completed 3,000 hours of flight testing. Rolls-Royce is also the leading supplier of engines for transport aircraft globally, powering large fleets such as the C-130, C-130J, Spartan C-27 and Osprey V-22. In the US, the government approved 2010 funding for the development of the F136 engine for the Joint Strike Fighter. We believe this is an important programme not just for the aircraft but to ensure competition and value for taxpayers and customers. We are also involved in major research projects such as Adoptive Versatile Engine Technology (ADVENT), which is designed to significantly reduce fuel consumption. These position us well for future military programmes. Energy and nuclear Our energy business has two main activities. These are supplying power to the oil and gas sector and the provision of power generation products and services. Rolls-Royce has been a major supplier of power systems for rigs and platforms since the earliest days of offshore oil and gas production. Our gas turbines and compressors operate in harsh conditions and remote locations on behalf of major oil companies. For example, our industrial RB211, Avon and Trent units are now employed on 60 major pipelines around the world. New discoveries and the associated distribution of their output are creating strong demand for our products and services. The power generation market continues to be restrained by weak demand for electricity in our traditional markets. However, we have secured significant new orders in emerging economies including India and Venezuela and we see good opportunities for long-term growth for both our gas turbine and reciprocating engine portfolio. It is clear that future developments in this sector are likely to be driven by the need for affordable, efficient, distributed multi-fuel systems. Our gas turbine and reciprocating engine portfolio provides a good basis to address these markets. In addition, over the past decade, the Group has invested in new technologies such as tidal power and fuel cells. During 2010, we conducted a full scale test of a tidal power turbine, anchored on the sea bed off the coast of Scotland. This has generated 500kW at full power and has been successfully linked into the national grid. We continue to expand our activities in civil nuclear power generation. During 2010, we secured contracts to provide nuclear safety systems in France and in China and have developed supply relationships with reactor vendors and utilities both in the UK and globally. These areas of investment enable us to address the particular requirements of low or zero carbon power generation with solutions that build on our core capabilities. Strength through teamwork The successful development of our portfolio depends critically on world-class people and teamwork. The global nature of our business means that our people must work effectively across time zones, geographies and cultures. Of the 38,900 men and women we employ, 45 per cent are now based outside the UK. This makes communications and shared values critical. This year we built on the success of our annual strategy storyboard with a televised presentation to most of the senior managers in the Group. The managers who attended this event have been responsible for presenting the storyboard to every employee of the Group. This has enabled people at all levels and in every location in the organisation to understand our objectives and to feed back their own thoughts. We believe that effective recruitment and continuous training are critical to our success. This year, we recruited 220 apprentices and over 300 graduates from 25 countries. We devote significant resource to the continuous development and training of our people. Over the past five years the Group has committed Â£150 million to this area alone. Our UK Apprenticeship scheme has been awarded Beacon Status by the Office for Standards in Education (Ofsted) and we have schemes of similar quality globally. We benefit from the diversity that our global presence brings, recognising that a clear understanding of developing customer requirements, world-class technology and exceptional teamwork are the keys to our future success. Prospects The long-term disciplined application of our strategy has created a broad portfolio of products, services and capabilities that ensures a wide range of options for future growth. The expected doubling of revenue over the next decade is underpinned by a record order book, which gives good visibility of the future, and a strong balance sheet which enables us to invest in the people, technology and capability that will enhance competitiveness. In the short term we expect demand in some markets to remain subdued. However, we have access to the faster growing global markets and our large installed base allows us to benefit from an increasing emphasis on the services we can provide to our customers. Last September, when I announced my intention to retire, I said there were three considerations that made me comfortable with my decision: I know Rolls-Royce is in a strong position with more choices than we have had in the past; we have a world-class team; and I am confident in the Board's appointment of John Rishton as my successor. He will be an outstanding Chief Executive. Rolls-Royce has been my working life for 27 years. Wherever I have gone in the world, I have always been proud to be Chief Executive of this Company. It has been an extraordinary privilege to work with so many outstanding people and to contribute to the development of a business that has been at the forefront of engineering and technology for over 100 years. I wish Rolls-Royce, its employees and its shareholders continued success. Sir John Rose Chief Executive February 9, 2011 REVIEW OF OPERATIONS Civil aerospace Key financial data 2006 2007 2008 2009 2010 Underlying revenue Â£m 3,907 4,038 4,502 4,481 4,919 +15% +3% +11% 0% +10% Underlying profit before financing Â£m 519 564 566 493 392 +14% +9% 0% -13% -20% Net assets Â£m 2,165 2,468 330 2,694 2,727 Other key performance indicators 2006 2007 2008 2009 2010 Order book Â£bn 20.0 35.9 43.5 47.0 48.5 +5% +80% +21% +8% +3% Engine deliveries 856 851 987 844 846 Underlying service revenues Â£m 2,310 2,554 2,726 2,626 3,027 Underlying service revenues % 59 63 61 59 62 Percentage of fleet under management 48 55 57 59 70 The civil aerospace business powers over 30 types of commercial aircraft and has a strong position in all sectors of the market: widebody, narrowbody and corporate and regional aircraft. Over 13,000 engines are currently in service with 650 airlines, freight operators and lessors and 4,000 corporate operators. A Rolls-Royce powered aircraft takes off or lands every 2.5 seconds. The airline industry has shown recovery in 2010, (after significant losses in 2008 and 2009) with above-average passenger and cargo traffic growth and a return to profit for many airlines. Business jet flights also increased, although not to the levels before the downturn. Large cabin business aircraft deliveries, where Rolls-Royce has a strong position, have been more resilient, driven by demand in Asia and Europe, although the US market remains weak. The small- and mid-size aircraft sectors, which are concentrated in the US market, continued to be subdued. Widebody We made good progress with the latest members of the Trent engine family, the Trent XWB and Trent 1000. The Trent XWB will power the Airbus A350 XWB and ran for the first time in June - fulfilling a schedule commitment we made four years ago. Seven engines will run in 2011 as part of a comprehensive test programme. The Trent 1000, which powers the Boeing 787 Dreamliner, has accumulated more than 2,000 hours of test flight time on four aircraft. The engine won several new orders in 2010, taking the total on order to nearly 550. The aircraft is now expected to enter service in the third quarter of 2011. The business continues to work closely with both large aircraft manufacturers, Airbus and Boeing, to support these programmes. Of the Trent engines already in service, the Trent 700 confirmed its market leading position on the Airbus A330. It has won more than 90 per cent of orders announced in 2010 and more than 70 per cent in the past five years. Orders were particularly strong in the second half of 2010, with US$5 billion of business announced since the start of July. Rolls-Royce continued to enjoy success in growth markets. In China, Air China, China Eastern and Cathay Pacific selected Trent XWB and Trent 700 engines. In South East Asia, Thai Airways and Garuda ordered Trent 700s, and in the Middle East, Emirates and Egyptair extended TotalCare service agreements and Tunisair became a new member of the Trent family, ordering Trent 700s. A Trent 900 engine suffered a significant failure on a Qantas Airbus A380. The cause of this failure, which was specific to the Trent 900 and related to a component in the turbine area, was quickly established and addressed. The A380 fleet has returned to normal operation. Narrowbody In the narrowbody market the V2500 engine, produced by International Aero Engines (IAE) in which Rolls-Royce is a major partner, delivered 371 engines in 2010, its highest ever production level. IAE gained significant contract awards from Sichuan Airlines, Vietnam Airlines, TAM Airlines, BOC Airlines and China Southern. There are now more than 4,500 V2500 engines flying with more than 190 customers worldwide. Corporate and regional In the small- and medium-size engine market the BR725 remains on schedule for entry into service on the Gulfstream G650 in 2012, following an exemplary flight and engine test programme. The first Embraer Legacy 650 large executive jet, powered by the new Rolls-Royce AE 3007A2 engine, was delivered to a Middle East customer in December. Services Revenues from TotalCare long-term support agreements remained resilient in 2010. The proportion of Trent engines in service with TotalCare reached more than 90 per cent, while time and materials activity showed some recovery in the second half of the year. Overall reliability of the Rolls-Royce engine fleet continued to improve with Trent engines achieving on average one million hours between in-flight shut downs, a rate 20 times better than that required by the regulators for approval of Extended Range Twin Operations. Future The business continues to plan for the future, with new two-shaft and three-shaft engines. The Advance2 and Advance3 technology programmes are being driven to support the potential for new engine requirements in the latter part of the decade. The business is also continuing its research into open rotor technology, which we believe could provide a step change in engine performance. Construction work at the Seletar large engine assembly complex in Singapore is well advanced and is scheduled to open in 2012. Work at the new Crosspointe facility in Virginia, US, is also proceeding to plan. While economic prospects remain uncertain in many countries for 2011, traffic growth is improving and we expect to see it return to its historic average of five per cent per annum. Oil prices have remained generally high, encouraging airlines to retire older aircraft during the economic downturn. The Rolls-Royce powered fleet is relatively young and as a result, more fuel efficient. We are benefiting from the upturn as hours flown under TotalCare agreements continue to grow. This underlines the value of our balanced services and products business model. Defence aerospace Key financial data 2006 2007 2008 2009 2010 Underlying revenue Â£m 1,601 1,673 1,686 2,010 2,123 +13% +4% +1% +19% +6% Underlying profit before financing Â£m 193 199 223 253 309 +7% +3% +12% +13% +22% Net assets Â£m 20 (172) (197) (345) (523) Other key performance indicators 2006 2007 2008 2009 2010 Order book Â£bn 3.2 4.4 5.5 6.5 6.5 -3% +38% +25% +18% 0% Engine deliveries 514 495 517 662 710 Underlying service revenues Â£m 853 877 947 1,046 1,103 Underlying service revenues % 53 52 56 52 52 Percentage of fleet under management 11 11 12 16 18 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. There continues to be pressure on defence spending in our key markets in Europe and the US. However, our broad product portfolio and strong service and support position on many of the new and established defence aircraft programmes have continued to provide protection against the changes in defence spending by these important customers. We still see growth opportunities in these markets and, in addition, we are well positioned to secure growth from emerging economies in Asia, the Middle East and South America. Transport Rolls-Royce consolidated its position as a world leader in the transport market as our AE 2100 engine for the Lockheed Martin C-130J transport aircraft continued to register orders with existing customers, such as the US Air Force, while the global fleet expanded with the Indian Air Force taking delivery of its first aircraft. The Airbus A400M military transport aircraft enjoyed a year of flight test success with its TP400 engines achieving more than 3,000 flying hours and completing the final bench test requirements, thereby clearing the path to certification. In 2011, we expect to begin flight testing with the US Air Force for the certification of the T56 engine enhancement kit for the C-130. This will provide significant fuel savings, a substantial improvement to engine reliability and improved hot day/high-altitude performance over the existing engine fleet. Combat In the combat sector our twin contributions to the Lockheed Martin F-35 programme continue to make significant progress in the test phase. The unique short take-off and vertical landing (STOVL) Rolls-Royce LiftSystemÂ® powered the F-35B variant aircraft to its first vertical landing in March 2010. It is now ready for Initial Service Release in advance of the first customer deliveries to the US Marine Corps, scheduled for 2011. The F136 engine programme for the F-35 Joint Strike Fighter has continued to illustrate the benefits of its advanced design and technologies, which are uniquely tailored for the requirements of the aircraft. Six production-standard F136 engines have been tested during 2010 and the programme is making excellent progress on the path to first flight. Trainers In India, the Government placed an order for a second tranche of Adour-powered Hawk Advanced Jet Trainers, worth up to Â£200 million. Helicopters In the helicopter market we were awarded a multi-million dollar contract by the US Army to design and develop a dual-channel, full authority, digital engine control (FADEC) for the M250-powered OH-58 Kiowa Warrior helicopter. We also received the US Army Kiowa Warrior Supplier Excellence Award. In addition, the LHTEC CTS800 engine, which powered three first flights in 2009, achieved the milestone of 50,000 in-service flying hours. Services The success of our services business continued in 2010, attracting major contracts worth around Â£1.5 billion. Among these was an extension of the long-term support for the RB199 engines powering the UK's Tornado fleet, and MissionCareâ„¢ contracts to provide availability-based engine support for V-22 Osprey transport aircraft and the C-130J in service with the US. The US Navy again renewed its support agreement for Adour F405 engines in the T-45 Goshawk trainer. The Canadian Air Force's AE 2100 engines are now also part of the MissionCare fleet. Future We continue to make good progress on the US Air Force Adaptive Versatile Engine Technology (ADVENT) demonstrator programme. It is designed to reduce fuel consumption significantly, enabling extended mission ranges and loiter times. In December, we completed the fan rig tests and work continues in preparation for the core and engine demonstrator phases of the programme. Our Unmanned Air Systems portfolio was further increased by the roll out of the BAE Systems Taranis technology demonstrator powered by the Adour engine. We continue to invest in performance improvements of established fleets such as the Northrop Grumman Global Hawk which is powered by our AE 3007. Despite the budget cuts in traditional geographical markets, the defence business has the opportunity to compete in a global market potentially worth around US$430 billion over the next 20 years. Many of our customer requirements for the next ten years are already contracted and there are key export opportunities for programmes across all market sectors. Marine Key financial data 2006 2007 2008 2009 2010 Underlying revenue Â£m 1,299 1,548 2,204 2,589 2,591 +18% +19% +42% +17% +0% Underlying profit before financing Â£m 101 113 183 263 332 +13% +12% +62% +44% +26% Net assets Â£m 619 563 488 641 815 Other key performance indicators 2006 2007 2008 2009 2010 Order book Â£bn 2.4 4.7 5.2 3.5 3.0 +41% +96% +11% -33% -16% Underlying service revenues Â£m 487 545 712 785 872 Underlying service revenues % 37 35 32 30 34 Rolls-Royce has a world-leading range of capabilities in the marine market, encompassing the design, supply and support of power and propulsion systems. We are leaders in the integration of technologically complex, mission critical systems for offshore oil and gas, merchant and naval vessels. Rolls-Royce has more than 2,500 marine customers and has equipment installed on over 30,000 vessels worldwide, including those of 70 navies. The marine business had another strong year, despite lingering macroeconomic uncertainty and a sluggish recovery in new shipbuilding activity. Service opportunities continued to increase as a result both of the large number of vessels incorporating Rolls-Royce equipment entering the market in recent years and our expanding services network. Revenues proved to be resilient in 2010 despite a slowdown in original equipment orders. Growth was driven by our aftermarket services and ongoing success in the offshore market. As a result, marine profit has increased by 26 per cent in 2010. Offshore The design of offshore vessels and the high-technology equipment they employ is central to our business today, and we continued our strong performance in this sector. This was largely based on the success of our specialist UT Design vessels and ability to integrate sophisticated systems into complex ships. The latter part of 2010 saw a slight rebound in orders for highly specialised offshore vessels, highlighted by the first order for the innovative UT 790 wave-piercing series. This new design improves stability and crew safety, while minimising environmental impact. During 2010, we completed the acquisition of ODIM. The advanced automated handling solutions ODIM brings to our marine business has further extended our capabilities in the range of vessels and equipment we supply to support oil and gas customers in areas such as seismic surveys, deepwater installation, well intervention and other subsea operations. As the oil and gas industry continues to explore ever deeper waters, the capabilities that the business now has in these highly-skilled areas will mean that we continue to be a strong partner for our offshore exploration and production customers. Naval Our naval business had a strong year, with significant activity in the UK, the US and South Korea. In early 2011, we received an order from Lockheed Martin for the provision of MT30s, the world's most powerful gas turbine, together with Kamewa waterjets, to power a further ten US Navy Littoral Combat Ships. This is the largest surface fleet order ever achieved by Rolls-Royce. We continued to deliver power and propulsion equipment for the UK's new Queen Elizabeth class aircraft carriers. Merchant We invest in technology that addresses the need for more efficient marine power and propulsion systems. This is primarily through the reduction of exhaust gas emissions and improvements in ship design. Our Bergen gas engines already surpass International Maritime Organization (IMO) limits for NOx emissions, and several orders for these cleaner engines were secured for specialist coastal vessels and ferries in 2010. We believe that our strong focus on environment and safety technology will be increasingly attractive to customers, resulting in new business opportunities in the merchant and specialist vessel sector. Services Our services revenues grew by 11 per cent in 2010, now representing 34 per cent of total marine revenue, and we have continued to develop both capacity and capability to realise the significant opportunity that our increasing installed base represents. Our global pool of service engineers increased by 20 per cent during the year and we have further extended our service centre network with four facilities across Europe and Africa being expanded or opened. We have enhanced our range of equipment upgrades and successfully introduced an innovative underwater repair service that reduces vessel downtime and increases our ability to support customers operating in remote locations. In addition, we are continuing to develop equipment health monitoring capabilities, leveraging proven expertise in other Group sectors. Future Our strong profit performance in 2010 was a result of delivery of existing orders combined with continued growth in service related activity. Although new orders in equipment reduced in 2010, there was some recovery in the second half of the year. This, combined with anticipated further growth in services, provides us with good visibility of revenues in 2011. Energy Key financial data 2006 2007 2008 2009 2010 Underlying revenue Â£m 546 558 755 1,028 1,233 +2% +2% +35% +36% +20% Underlying profit before financing Â£m (18) 5 (2) 24 27 -1900% +128% -140% +1300% +13% Net assets Â£m 387 370 392 533 434 Other key performance indicators 2006 2007 2008 2009 2010 Order book Â£bn 0.5 0.9 1.3 1.3 1.2 +25% +80% +44% 0% -8% Engine deliveries 87 78 106 87 95 Underlying service revenues Â£m 251 289 370 470 542 Underlying service revenues % 46 52 49 46 44 Percentage of fleet under management 6 7 9 10 10 The energy business supplies gas turbines, compressors and diesel power units to customers around the world. The business is a world leader in the supply of power for onshore and offshore oil and gas applications. Our developing civil nuclear capability has further strengthened our position in the power generation market. The energy business delivered a strong performance in 2010 with underlying revenue of Â£1.2 billion, an increase of 20 per cent over 2009, and profit growth of 13 per cent as the business delivered a strong second half recovery to offset the Â£26 million charge taken in the first half of the year related to the industrial Trent engine. During 2010, the land-based diesel power business was integrated into energy, increasing revenue by Â£140 million. Oil prices continued to strengthen during the year and, as a result, bid activity increased in the oil and gas sector, although it is also the case that a number of potential projects were delayed. The traditional power generation market for the Trent continues to be depressed by the low demand for electricity in developed countries. However, the business has been successful in securing new unit orders for both the Trent gas turbine and Bergen reciprocating engines in countries where significant power shortfalls exist, with major orders received from Bangladesh, India, and Venezuela. Orders for land-based diesel and gas engine power generation applications tripled in 2010 when compared to the preceding two years. A packaging partnership for the industrial Trent was agreed with STX in South Korea, further broadening territorial coverage. Services Demand for aftermarket products and services again grew strongly with another record year delivering revenue of Â£542 million, an increase of 15 per cent over 2009. Including the land-based diesel units there are now a total of 662 units, or 33 per cent of the fleet under long-term service agreements. Operators continue to benefit from product upgrades that incorporate the latest technology, including the Avon 200 upgrade, which was introduced in 2006 and has now been delivered to more than 24 customers. Developments Investment in low carbon technology products continued with the ongoing development of fuel cell technology. In tidal generation the 500kW demonstration unit at the European Marine Energy Centre in the Orkney Islands successfully achieved its technical milestones, generating in excess of 50MWh in the process and earning a Renewable Offset Credit under the UK Government's tariff regime. Plans are now underway to build a 1MW unit that will provide the basis for a commercially available product. Nuclear During 2010, we continued to progress plans for a UK nuclear manufacturing base and announced the opening of two new nuclear-specific University Technology Centres (UTCs), located at Imperial College London and the University of Manchester. Rolls-Royce is also a lead partner in the UK Government's Nuclear Advanced Manufacturing Research Centre (NAMRC) facility, which is due to open in September 2011. The business further extended its nuclear manufacturing skills base through the integration of Canada-based ODIM Numet, specialising in engineering, manufacturing and through-life support of nuclear island systems. In India, a Memorandum of Understanding was signed with Larsen & Toubro Ltd for a collaborative approach to address new nuclear build markets both in India and internationally. At the beginning of 2011, Rolls-Royce signed an agreement to collaborate with Nuclear Power Delivery UK consortium on its plans to deploy the Westinghouse nuclear reactor in the UK. The nuclear instrumentation and control business performed well in 2010, establishing a solid platform for global growth across Central and Eastern Europe, China and India. It is also delivering 20 safety instrumentation and control systems for eight new plants in China. FutureTraditionally a strong oil price has resulted in increased business for original equipment in the oil and gas sector. We would therefore expect the market to continue to strengthen for products and services if the oil price remains relatively high. In power generation we now have a broad range of systems to offer and this puts us in a position of strength to take advantage of any market upturn. We will also continue to explore opportunities in emerging economies. Engineering and technology Key performance indicators 2006 2007 2008 2009 2010 Gross research and development expenditure Â£m 747 824 885 864 923 Net research and development expenditure Â£m 395 454 490 471 506 Net research and development charge Â£m 370 381 403 379 422 Net research and development expenditure % of underlying revenue 5.4 5.8 5.4 4.7 4.7 In 2010, Rolls-Royce invested a total of Â£923 million in gross research and development, of which Â£506 million was funded from Group resources. Research and development are fundamental to our future success, providing technologies and intellectual property that allow us to compete on a global basis in highly competitive markets. The Group's engineering and technology activities are undertaken by close to 10,000 product, engineering and technology specialists covering more than 40 major programmes. The activity is global with main engineering centres located in the UK, US, Germany, the Nordic countries, Singapore and India. Research Our advanced research is supported through our worldwide network of 28 Rolls-Royce University Technology Centres, working across a range of specialist subject areas such as materials, noise, vibration and combustion. Two new centres for nuclear technology at Imperial College London and at the University of Manchester were added during the year. During 2010, we strengthened our new Advanced Technology Centre (ATC) in Singapore which is developing manufacturing and electrical systems and high-power computing capabilities. Work began on the new, dedicated home for the ATC as part of the Seletar development. We opened our new Mechanical Test Operations Centre in Dahlewitz, Germany, during the year. This centre provides mechanical testing capability for all areas of the Group. Building on the success of our membership of the Advanced Manufacturing Research Centre (AMRC), we continue to increase our focus on advanced manufacturing. In the UK, we opened the Advanced Fabrication Research Centre at Strathclyde, Scotland, and the Nuclear Advanced Manufacturing Research Centre project was launched. We are also establishing the Commonwealth Centre for Advanced Manufacturing (CCAM) at the Crosspointe complex in the Commonwealth of Virginia, USA. In 2010, we established the Manufacturing Technology Centre (MTC) in Coventry, UK. MTC will be the largest in the network of AMRCs when it opens in 2011. Technology programmes in the areas of high integrity joining, intelligent automation, advanced fixturing and net shape powder manufacture have already been launched through MTC partnerships with founder members Rolls-Royce, Airbus and Aero Engine Controls. Environmental performance Further improving the environmental performance of our products and operations is a key driver for research and development in Rolls-Royce. We completed the first build of the Environmentally Friendly Engine, and the second build of our mid-size technology demonstrator engine, E3E, was tested successfully in Germany. The E3E, two-shaft core demonstrated, amongst other successes, critical operability throughout the flight envelope up to 38,000ft, for the novel lean-burn combustor. The European STREAMLINE programme led by Rolls-Royce was launched in 2010. The project includes 22 partners in eight countries and focuses on demonstrating radical new marine propulsion concepts, aimed at delivering increases in efficiency of at least 15 per cent. We achieved notable engineering successes in each of our key business sectors in 2010. Civil aerospace In the civil aerospace business, the first Trent XWB engine went to test on schedule in June, running to 100,000lbs of thrust later in the year. Flight testing of the BR725 for the new Gulfstream G650 progressed well and has now achieved 1,000 hours. The Trent 1000 flight test programme for the Boeing 787 continued, although Boeing announced in early 2011 that the entry into service for the aircraft would be further delayed until later in 2011. 2010 also brought a number of challenges to the civil aerospace business. The eruption of a volcano in Iceland in April 2010 resulted in significant disruption to the aviation industry. Our engineering team took a leading role and worked in a systematic way to assist the airlines and industry regulators on this issue. Towards the end of 2010, a Trent 900 suffered a high-profile failure on a Qantas A380, which initiated a significant and urgent response from the engineering team in order to return to normal operations. Marine In 2010, the marine business acquired ODIM and we have successfully integrated the engineers of this business into the Rolls-Royce engineering community. ODIM's people have a wealth of skills and technological knowledge. We anticipate the acquisition will enhance our offshore capability significantly. Marine sold the first offshore vessel with a wave-piercing design (UT 754 WP) for delivery in 2012 and the Dynamic Positioning Release 3 (DP3) successfully passed concept design review. Defence aerospace In defence aerospace, the STOVL variant of the Lockheed Martin F-35 Lightning II, equipped with the Rolls-Royce LiftSystemÂ®, successfully completed a flawless first hover and vertical landing in March 2010. The pace of the F136 engine development programme accelerated significantly during 2010 with six new test engines delivered during the year. Approximately 900 test hours were completed according to plan for the F136 programme in 2010. The programme also continued its successful history of meeting contractual milestones with the first STOVL propulsion system delivered to test, on time. LibertyWorksÂ® in Indianapolis continues to perform well on the ADVENT demonstrator programme; rig testing demonstrated fan performance as expected and with a favourable stability margin. Work continues in preparation for the core and engine demonstrator phases of the programme. In 2010, Robinson Helicopter obtained FAA certification for the RR300-powered R66 helicopter and commenced customer deliveries. Energy We continue to develop our business activities in the civil nuclear market and also continued with further investment in nuclear engineers and in infrastructure. Our first tidal stream generator was deployed offshore of the Orkney Islands. A major milestone was reached on November 10,2010 when the turbine generated 500kW at full power for the first time at the test site. The turbine is now being operated unrestricted with several periods of fully automatic 24-hour operation and has achieved all requirements to gain a renewable obligation certificate. Operations Key performance indicators 2006 2007 2008 2009 2010 Capital expenditure Â£m 303 304 283 291 361 Underlying revenue per employee* Â£000 182 194 211 233 259 * Calculated on a three-year rolling basis We continue to invest in operational capability to enable the long-term growth plans of the Group to be executed. Our strong positions in growing markets, represented by a record order book, together with increasing services activity, place a demand on us to deliver world-class operational excellence from modern and efficient facilities. There has been significant uncertainty in the economic environment during the last two years and our supply chain has performed well throughout this volatile period, with an increasing emphasis on productivity, flexibility and execution. The 2010 results reflect this performance through a marginal reduction in inventory and progress in productivity, reflected by an improvement in revenue per employee. Our global operational network is a highly integrated activity including our own facilities, partners and other external suppliers feeding the gas turbine applications in all four businesses. In addition, we are managing substantial global supply chains to support our growing range of marine and nuclear activities. Delivering excellence During 2010, we have continued to focus on operational excellence with our programme of investments to improve current productivity and support the inevitable growth embedded in the order book. We work in partnership with our external partners and suppliers to reduce waste, improve designs and introduce better manufacturing methods for new and existing products. Our achievements have helped offset inflationary pressures in 2010, however, there remains more to do. Creating simple, scalable processes and a culture of `right first time' are key to operational excellence and will help achieve cost reductions in every aspect of our operations. The ongoing drive to reduce inventory provided further benefits in 2010. We are establishing systematic changes that can transform working capital management and, in time, release cash. Investing for growth 2009 proved to be a year of firsts with an unprecedented number of new programmes reaching first flight or launch. In 2010 the work to support these programmes progressed well. In June 2010, the first Trent XWB engine ran for the first time, in line with the plans we set out four years ago. Flight test work progressed on the new Trent 1000 for the Boeing 787 and the TP400 for the Airbus A400M transport aircraft. In marine, we introduced a new wave-piercing design of offshore support vessel, and in energy we launched the upgraded industrial RB211, the -H63. Our success at winning business in the wide-bodied aircraft market means we expect to more than double the number of Trent engines being delivered by the middle of this decade. To manage this change in volume, investment in new facilities, tooling and capability continued during 2010. Building work has progressed as planned on the Crosspointe facility in Virginia, US, and at Seletar Aerospace Park in Singapore. With the external building work broadly complete, both are on target to be in operation by 2011 and 2012 respectively. We opened the new Mechanical Test Operations Centre at Dahlewitz, Germany, and a new facility to support the F-35 LiftFanÂ® assembly in Indianapolis, US. We also expanded the civil aerospace repair and overhaul joint venture, Singapore Aero Engine Services Limited, increasing capacity to 250 large engines per year. In the UK, the new disc manufacturing plant in Sunderland is progressing to plan and, in addition, we are supporting the development of four advanced manufacturing research centres. Two similar centres are being developed outside the UK. All of these will help improve manufacturing performance across the supply chain. Additional manufacturing capacity, for the submarines and civil nuclear businesses, is being added to our existing facilities in Derby. People and capability We are committed to investing in, and developing, our people to equip them with the skills required to meet the challenges and opportunities we face as the business grows. Through our ethics, health and safety programmes, we are helping our people to make the right decisions and ensuring that the safety of our people and products are at the forefront of our minds and actions. In 2010, we continued to invest heavily in information and technology across the Group. Investments in Product Lifecycle Management (PLM), Computer Aided Process Planning (CAPP) and Manufacturing Execution Systems (MES) are key to providing the tools to enable effectiveness and efficiency. Future Our journey to create a global, best-in-class, and fully integrated operations function is well underway. While economic uncertainty seems likely to continue, our priorities remain to improve the effectiveness of our delivery and ensure we are well placed to meet the operational demands of the future. Services Key performance indicators 2006 2007 2008 2009 2010 Underlying revenue Â£m 3,901 4,265 4,755 4,927 5,544 Underlying services as a percentage of Group revenue 53% 55% 52% 49% 51% Rolls-Royce provides power systems for applications that routinely operate in particularly harsh environments, often with years between intervention. Service activities provide over one half of the Group's revenues, having increased ten per cent compound over the past ten years. As the original equipment manufacturer, Rolls-Royce is best placed to provide mission critical support, long-term product care and well planned maintenance on behalf of customers in each of the markets we serve. The Group's service capabilities include field maintenance and support services, the provision of replacement parts, equipment overhaul services, component repair, data management, equipment leasing and inventory management. These are typically packaged together and sold as long-term support agreements such as our TotalCare suite. We work closely with customers to align each service package to their operational needs, helping to maximise the availability and efficient operation of the equipment on their behalf. Civil aerospace We have 76 per cent of the large engine fleet and 92 per cent of the in-service Trent fleet now managed under TotalCare. We also have 900 corporate and business jet aircraft enrolled in CorporateCareÂ®, the equivalent offering for this market sector. In 2010, operational planning has been further enhanced across the Trent family of engines with the adoption of sophisticated proactive engine life management policies. These combine our technical knowledge with the service data on each individual engine to enable each customer to manage their whole fleet in a more predictable manner. Our network of On-Wing Care facilities supported over 3,500 events globally in 25 different countries. Defence aerospace We continued to develop MissionCareâ„¢ provision worldwide and service presence on military bases. A long-term service agreement was signed with Lockheed Martin to support the Canadian Air Force fleet of C-130J military transport aircraft. New contracts were also signed with the UK Ministry of Defence to increase the scope of support for the frontline Tornado and Typhoon fighter aircraft operations. In 2010, Rolls-Royce completed 500,000 flight hours of MissionCare support for the Adour engines that power the US Navy's T-45 training aircraft. Energy We secured further long-term service agreements which, together with the additional 38 new gas turbine units that became operational during 2010, mean the number of gas turbines under long-term service agreements is approaching 350. Additionally, a number of long-term service agreements were renewed, the most significant being with Total in the North Sea supporting 14 gas turbine packages on two platforms for a period of ten years. We continue to develop the service infrastructure to support the growth of the Rolls-Royce fleet in China, India, Brazil, Malaysia and Russia, along with extending the global footprint of the business with expanding operations in West Africa and Central Asia. 2010 also saw the 20-year anniversary of the Rolls Wood Group repair and overhaul joint venture. The Rolls Wood joint venture continues to maintain its position as the major supplier of repair and overhaul services for Rolls-Royce industrial gas turbine engines. The scope of the joint venture was expanded in the year with the official opening of a facility in Malaysia in partnership with OTEC. Marine Service opportunities have continued to increase in marine as a result of the large number of vessels with Rolls-Royce equipment installed, now totalling over 30,000 vessels worldwide. As this installed base of equipment continues to grow, we are actively expanding our support capacity and capability and now have over 30 dedicated marine service centres serving customers across North and South America, Africa, Europe, the Middle East, Asia and Oceania. Marine customers seek to have their ships serviced close to where they primarily operate, and we continued our expansion by adding around 200 service engineers globally. We continue to expand our service capabilities and in 2010 we completed more than 50 successful underwater intervention repair services which enabled major propulsion overhauls to be completed without the need for time consuming dry docking. Future The Group invested over Â£26 million this year in developing and restructuring our wholly-owned gas turbine repair and overhaul network, which will deliver significant improvements in operational performance and customer satisfaction. 2010 also saw the celebration of ten years of Rolls-Royce ownership of the Oakland repair and overhaul facility in the US. Our component repair business continues to grow rapidly and delivered Â£150 million in benefit across all sectors in 2010. Asset optimisation service development has advanced strongly, led by the Optimized Systems and Solutions Inc. (OSyS) business. OSyS has expanded our in-service diagnostic, risk management and predictive capabilities. Through OSyS, we continue to advance the health monitoring services and capabilities already applied successfully to aircraft engines and energy systems with more than 8,900 assets being monitored. Market outlook The Group operates in four long-term global markets - civil and defence aerospace, marine and energy. These markets create a total opportunity worth in excess of US$2 trillion over the next 20 years and: â€¢ have very high barriers to entry; offer the opportunity for organic growth; â€¢ feature extraordinarily long programme lives, usually measured in decades; â€¢ can only be addressed through significant investments in technology, infrastructure and capability; and â€¢ create a significant opportunity for extended customer relationships with revenues from aftermarket services similar in size to original equipment revenues. Civil aerospace The Group produces a 20-year global market outlook, which covers passenger and cargo jets, corporate and regional aircraft. We predict that, over the next 20 years 137,000 engines, worth over US$800 billion, will be required for more than 63,000 commercial aircraft and business jets. The forecast predicts faster growth rates for long-haul markets and those markets to, from and within Asia. These markets will continue to benefit from more liberal air service agreements, which boost demand. Factors affecting demand include GDP growth, aircraft productivity, operating costs, environmental issues and the number of aircraft retirements. While the market can be temporarily disrupted by external events, such as war, acts of terrorism, or economic downturns, it has, in the past, always returned to its long-term growth trend. In addition to the demand for engines, the Group forecasts a market opportunity worth US$600 billion for the provision of product-related aftermarket services. Defence aerospace The Group forecasts that demand for military engines will be worth US$160 billion over the next 20 years. This outlook was moderated, slightly based on US and European budget pressures. The largest single market is expected to be the US, followed by Europe and the Far East. Within Asia, demand will be dominated by Japan, South Korea and India. Trends are driven by the scale of defence budgets and geopolitical developments around the world. As in the Group's other business sectors, programme lives are long and there is a significant opportunity to support equipment with aftermarket services, estimated at US$270 billion over the same period. Customers' budget constraints and their need to increase the value they derive from their assets have accelerated the move in this direction. Marine The Group forecasts a demand for marine power and propulsion systems valued at US$215 billion over the next 20 years. Demand will be greatest in the commercial sector, where the shipping of raw materials, finished goods and people, in addition to oil and gas exploration and production activity, play crucial roles in the world economy. These activities require large fleets of specialised and increasingly sophisticated ships, which have to be continually renewed and supported to remain operationally efficient. Merchant and offshore markets are rarely at the same stage of the business cycle, which helps to reduce overall volatility. Whilst naval markets are driven by different considerations, customers are similarly seeking to get more from their budgets, leading to increasing demand for integrated systems and through-life support arrangements. As in the Group's other markets, marine aftermarket services are expected to generate significant opportunities, with demand forecasted at US$125 billion over the next 20 years. Energy The International Energy Agency has forecast that over the next 20 years, the worldwide demand for oil will grow by more than 18 per cent, for gas by 44 per cent and for energy by more than 30 per cent. To satisfy this demand, there will be a growing requirement for aero-derivative gas turbines in various applications. The Group's 20-year forecast values the total aero-derivative gas turbine sales in the oil and gas and power generation sectors at more than US$70 billion. Over this period, demand for associated aftermarket services is expected to be around US$50 billion. While the oil and gas market is large and growing, demand for aero-derivative gas turbines in the power generation segment is twice that of oil and gas. Finance Director's review The trading performance in 2010 met the expectations of the Board and the guidance provided throughout the year, delivering a seven per cent increase in underlying Group revenues with underlying profit before taxes up four per cent to Â£955 million. There was a cash inflow of Â£258 million in the year delivering a period end net cash balance in excess of Â£1.5 billion. These achievements came in a period that saw the broader environment remaining difficult and unpredictable with significant macro-economic, industry and Company-specific challenges throughout 2010. It was especially pleasing that further significant milestones on major new programmes, considerable investment in product development and continued expansion of the global facilities and supply chain were also delivered along with a resilient trading outturn. This performance continues to highlight the strength of the portfolio and the benefits of the long-term and disciplined application of the power systems strategy. All of our businesses have been affected by the economic factors that have been prevalent in the last few years and that have had an impact on our competitors. However, the Group has significant advantages in the diversity of its businesses, both by sector and geographical dispersal. The age of our installed fleet of products, the strong positions we hold on current and future major programmes, together with the Group's services revenues have all helped to deliver significant progress in the last three years. This is demonstrated by: growth in the order book of 29 per cent; increase in underlying revenues of 39 per cent; and growth in underlying profits of 19 per cent; all of which supported a 23 per cent improvement in payments to shareholders over the same period. Throughout this time, the portfolio has continued to evolve with investments totalling more than Â£4 billion in product development, acquisitions, capacity and facilities. This establishes a strong platform for long-term growth in revenue and productivity and hence profitability. The results were affected by the movements in foreign exchange rates through 2010, especially the GBP/USD and the GBP/EUR which are explained below. The Group has maintained a strong financial position throughout the year and continues to hold strong credit ratings from both Standard & Poor's (A-, Stable) and Moody's (A3, Stable). At the year end, the Group held gross cash balances of Â£3.2 billion with Â£1.7 billion of outstanding debt commitments - a net cash position in excess of Â£1.5 billion with the average net cash position having improved by Â£325 million to Â£960 million in 2010. The maturities of the Group's existing bond facilities, at around Â£1.7 billion, are well spread with the â‚¬750 million Eurobond due in the first half of 2011, as shown in the chart below. The Group had a further Â£450 million in term funding available to it that was undrawn at the year end. The Group essentially completed the refinancing of the 2011 Eurobond via the successful ten year Â£500 million GBP bond issued in the first half of 2009, the proceeds of which are currently held on term deposit and will be available to settle the 2011 bond when it falls due. There are no other material maturities until 2013. Foreign exchange effects on published results Whilst continuing to influence the Group's published results in 2010, currency movements were less distortive than in prior years given that average and spot rates for the GBP/USD and GBP/EUR remained in a relatively narrow range throughout the year, as shown in the table below. Market exchange rates 2009 2010 USD per GBP - Year end spot rate 1.615 1.566 - Average spot rate 1.566 1.543 EUR per GBP - Year end spot rate 1.126 1.167 - Average spot rate 1.123 1.167 These movements have influenced both the reported income statement and the cash flow and closing net cash position (as set out in the cash flow statement and note 2 in the financial statements) in the following ways: Income statement The most important impact was the end of year mark to market of outstanding financial instruments (foreign exchange contracts, interest rate, commodity and jet fuel swaps). The principal adjustments related to the GBP/USD hedge book. The impact of this mark to market is included in net financing in the income statement and caused a net Â£432 million loss, contributing to a published profit before tax of Â£702 million. These adjustments are non-cash, accounting adjustments required under IAS 39 Financial Instruments: Recognition and Measurement. As a result, reported earnings do not reflect the economic substance of derivatives that have been settled in the financial year, but do include the unrealised gains and losses on derivatives that will only affect cash flows when they are settled at some point in the future to match trading cash flows. Underlying earnings are presented on a basis that shows the economic substance of the Group's hedging strategies in respect of transactional exchange rates and commodity price movements. Further details and information are included within the section on key performance indicators on page 22 and in notes 2 and 5 of the financial statements. Underlying profit before tax of Â£955 million benefited from Â£74 million of foreign exchange benefits compared to 2009. The achieved rate on selling USD income was around nine cents better in 2010 than 2009 and is expected to improve by a similar level in 2011. In 2010 these better achieved rates contributed Â£72 million of transactional benefits. In addition, the improvement in the average GBP-USD of three cents contributed net translation benefits totalling Â£2 million to underlying profit before tax in the year. Cash flow and balance sheet The Group maintains a number of currency cash balances which vary throughout the financial year. These net cash balances were improved by the effects of retranslation, causing an improvement of Â£17 million in the 2010 cash flow and hence the closing balance sheet net cash position. Summary The Group's revenues increased by six per cent in 2010 to Â£11,085 million with 86 per cent of revenues from customers outside the UK. Underlying revenues grew seven per cent in 2010, consisting of a three per cent improvement in original equipment revenues with services growing 13 per cent including double digit services growth in civil aerospace, marine and energy and a five per cent improvement in defence. Services activities represented 51 per cent of underlying Group revenues in 2010. â€¢ Underlying revenues in the civil aerospace segment grew ten per cent to Â£4,919 million (2009 Â£4,481 million) with a 15 per cent improvement in service revenues and a two per cent improvement in revenues from original equipment. New engine deliveries were stable at 846 (2009 844 engines) and included a record 371 V2500 engines for the Airbus A320 family of aircraft, and a small recovery in engine deliveries for corporate and regional applications. Trent deliveries for widebody commercial aircraft totalled 185 engines including a record number, 139, of Trent 700, for the Airbus A330 aircraft. The overall total was held back by delayed entry to service and slower production ramp up in major new applications (the Boeing 787 and Airbus A380 respectively). Services revenues grew strongly reflecting three key elements: the completion of a spares distribution and logistics arrangement with Aviall Inc, and the disposal of associated spares inventory which contributed around one third of the annual services growth; the effect of better USD achieved foreign exchange rates which represented around one third of the service improvement; and the ongoing utilisation and some limited recovery in discretionary service activity. â€¢ Underlying defence aerospace revenues grew by six per cent to Â£2,123 million (2009 Â£2,010 million) supported by strong growth in deliveries for the military transport sector. New equipment revenues grew six per cent and services revenues increased by five per cent over 2009. The portfolio proved to be resilient despite some modest effects from the completion of the Strategic Defence and Security Review (SDSR) in the UK and is expected to grow revenues at a similar overall rate in 2011. â€¢ Underlying revenues in the marine business were stable in 2010 at Â£2,591 million (2009 Â£2,589 million) reflecting a five per cent decline from original equipment, as the subdued order cycle began to impact deliveries. This was offset by further services growth, with underlying revenues 11 per cent higher in the year benefiting from a growing installed base and new services centres commencing operation around the world. â€¢ The energy business made significant progress again in 2010 with a 20 per cent growth in underlying revenue to Â£1,233 million (2009 Â£1,028 million), and is now more than 60 per cent higher than 2008. Underlying profit margins before financing costs reduced slightly from 9.7 per cent in 2009 to 9.3 per cent in 2010. The reduction in margin reflected changes in revenue mix, higher levels of research and development charges, increasing costs associated with the launch phase of major new programmes. In addition, the performance reflected the net impact of a number of positive and negative one-off items in the year including the Aviall distribution agreement and costs associated with the Trent 900 failure on an Airbus A380 in 2010 which offset improvements in operational performance and productivity and the benefits of better achieved foreign exchange rates in the period. Underlying financing costs reduced by Â£13 million to Â£55 million (2009 Â£68 million), primarily a function of lower finance costs associated with financial risk and revenue sharing partnerships as one of the major arrangements came to an end in late 2009. Restructuring charges in 2010 totalled Â£46 million down Â£9 million from the prior year. These costs are included within operating costs. A final payment to shareholders of 9.60 pence per share, in the form of C Shares, is proposed, making a total of 16.00 pence per share, a 6.7 per cent increase over the 2009 total. Order book The order book at December 31, 2010, at constant exchange rates, has remained resilient at Â£59.2 billion (2009 Â£58.3 billion). This included firm business that had been announced but for which contracts had not yet been signed of Â£4.5 billion (2009 Â£6.8 billion). Aftermarket services agreements, including TotalCareÂ® packages, represented 31 per cent of the order book, having increased by more than 40 per cent in the last three years. These are long-term contracts where only the first seven years' revenue is included in the order book. Aftermarket services The Group continues to be successful in developing its aftermarket services activities. These grew by 13 per cent on an underlying basis in 2010, reflecting increasing installed base of products across all four markets, expansion of the global services network, especially in the marine sector, and some encouraging signs of improving trends in the discretionary service spend in some large civil engine programmes. Underlying services accounted for 51 per cent of the Group revenues in 2010. In particular, TotalCare packages in civil aerospace now cover 70 per cent, by value, of the installed fleet. TotalCare packages cover long-term management of the maintenance and associated logistics for our engines and systems, monitoring the equipment in service to deliver the system availability our customers require with predictable costs. The pricing of such contracts reflects their long-term nature. Revenues and costs are recognised based on the stage of completion of the contract, generally measured by reference to flying hours. The overall net position of assets and liabilities on the balance sheet for TotalCare packages was an asset of Â£920 million (2009 Â£970 million). Cash There was a cash inflow in the year of Â£258 million (2009 Â£183 million outflow) and an improvement in average net cash balances to Â£960 million (2009 Â£635 million). A modest increase in operating profits combined with a strong working capital performance offset more than Â£800 million in investment in product development, operational facilities and tooling and the acquisition of ODIM ASA in the period. These total cash investments of Â£842 million (2009 Â£688 million) in intangible assets, property, plant and equipment and acquisitions together with payments to shareholders of Â£266 million (2009 Â£250 million) and tax payments of Â£168 million (2009 Â£119 million) represented the major cash outflows in the period. The net cash balance at the year end was Â£1,533 million (2009 Â£1,275 million). Taxation The overall tax charge on the profit before tax was Â£159 million (2009 Â£740 million), a rate of 22.6 per cent (2009 25.0 per cent). The tax charge on underlying profit was Â£236 million (2009 Â£187 million) a rate of 24.7 per cent (2009 20.4 per cent). The overall tax charge was reduced by Â£29 million in respect of the expected benefit of the UK research and development tax credit. The underlying tax rate is expected to be around 25 per cent in 2011. The operation of most tax systems, including the availability of specific tax deductions, means that there is often a delay between the Group tax charge and the related tax payments, to the benefit of cash flow. The Group operates internationally and is subject to tax in many differing jurisdictions. As a consequence, the Group is routinely subject to tax audits and examinations which, by their nature, can take a considerable period to conclude. Provision is made for known issues based on management's interpretation of country-specific legislation and the likely outcome of negotiation or litigation. The Group believes that it has a duty to shareholders to seek to minimise its tax burden but to do so in a manner which is consistent with its commercial objectives and meets its legal obligations and ethical standards. While every effort is made to maximise the tax efficiency of its business transactions, the Group does not use artificial structures in its tax planning. The Group has regard for the intention of the legislation concerned rather than just the wording itself. The Group is committed to building open relationships with tax authorities and to following a policy of full disclosure in order to effect the timely settlement of its tax affairs and to remove uncertainty in its business transactions. Where appropriate, the Group enters into consultation with tax authorities to help shape proposed legislation and future tax policy. Transactions between Rolls-Royce subsidiaries and associates in different jurisdictions are conducted on an arms-length basis and priced as if the transactions were between unrelated entities, in compliance with the OECD Model Tax Convention and the laws of the relevant jurisdictions. Before entering into a transaction the Group makes every effort to determine the tax effect of that transaction with as much certainty as possible. To the extent that advance rulings and clearances are available from tax authorities, in areas of uncertainty, the Group will seek to obtain them and adhere to their terms. Pensions The changes made to the Group's UK pension schemes over the last few years have enabled the deficit to remain stable and modest. The charges for pensions are calculated in accordance with the requirements of IAS 19 Employee Benefits. The Group's principal UK defined benefit schemes employ a lower risk investment strategy in which the interest rate and inflation risks are largely hedged and the exposure to equities has reduced to less than 20 per cent of scheme assets. As reported last year, the primary objective of the revised investment strategy is to reduce the volatility of the pension schemes to enable greater stability in the funding requirements. Over the last two years our three major defined benefit pension schemes have increased the assumed life expectancy of members and pensioners but, even after allowing for these changes, the overall funding level across these schemes has improved. Further information and details of the pensions' charge and the defined benefit schemes' assets and liabilities are shown in note 18 to the financial statements. The net deficit, after taking account of deferred tax, was Â£593 million (2009 Â£590 million). Changes in this net position are affected by the assumptions made in valuing the liabilities and the market performance of the assets. Investments The Group continues to subject all investments to rigorous examination of risks and future cash flows to ensure that they create shareholder value. All major investments require Board approval. The Group has a portfolio of projects at different stages of their life cycles. Discounted cash flow analysis of the remaining life of projects is performed on a regular basis. Sales of engines in production are assessed against criteria in the original development programme to ensure that overall value is enhanced. Gross research and development (R&D) investment amounted to Â£923 million (2009 Â£864 million). Net research and development charged to the income statement was Â£422 million (2009 Â£379 million). The level of self-funded investment in research and development is expected to remain at approximately four to five per cent of Group revenues in the future. The impact of this investment on the income statement will reflect the mix and maturity of individual development programmes and will result in an increase in the level of net research and development charged within the income statement in 2011. The continued development and replacement of operational facilities contributed to the total expenditure in property, plant and equipment of Â£361 million (2009 Â£291 million). Investment in 2011 is anticipated to be increased compared to the 2010 level as the investments in new facilities in the US and Singapore continue. Investment in training was Â£33 million (2009 Â£24 million). Intangible assets The Group carried forward Â£2,884 million (2009 Â£2,472 million) of intangible assets. This comprised purchased goodwill of Â£1,108 million, engine certification costs and participation fees of Â£496 million, development expenditure of Â£630 million, recoverable engine costs of Â£346 million and other intangible assets of Â£304 million. Expenditure on intangible assets is expected to reduce modestly in 2011, largely as a result of the status of development programmes. Intangible assets of Â£211 million arose during the year as a result of the acquisition of ODIM ASA. The carrying values of the intangible assets are assessed for impairment against the present value of forecast cash flows generated by the intangible asset. The principal risks remain reductions in assumed market share, programme timings, increases in unit cost assumptions and adverse movements in discount rates. There have been no impairments in 2010. Further details are given in note 8. Partnerships The development of effective partnerships continues to be a key feature of the Group's long-term strategy. Major partnerships are of two types: joint ventures and risk and revenue sharing partnerships. Joint ventures Joint ventures are an integral part of our business. They are involved in engineering, manufacturing, repair and overhaul, and financial services. They are also common business structures for companies participating in international, collaborative defence projects. They share risk and investment, bring expertise and access to markets and provide external objectivity. Some of our joint ventures have become substantial businesses. A major proportion of the debt of the joint ventures is secured on the assets of the respective companies and is non-recourse to the Group. Risk and revenue sharing partnerships (RRSPs) RRSPs have enabled the Group to build a broad portfolio of engines, thereby reducing the exposure of the business to individual product risk. The primary financial benefit is a reduction of the burden of R&D expenditure on new programmes. The related R&D expenditure is expensed through the income statement and the initial programme receipts from partners, which reimburse the Group for past R& D expenditure, are also recorded in the income statement, as other operating income. RRSP agreements are a standard form of co-operation in the civil aero-engine industry. They bring benefits to the engine manufacturer and the partner. Specifically, for the engine manufacturer, they bring some or all of the following benefits: additional financial and engineering resource; sharing of risk; and initial programme contribution. As appropriate, the partner also supplies components and as consideration for these components, receives a share of the long-term revenues generated by the engine programme in proportion to its purchased programme share. The sharing of risk is fundamental to RRSP agreements. Partners share financial investment in the programme, typically through: â€¢ market risk as they receive their return from future sales; â€¢ currency risk as their returns are denominated in US dollars; â€¢ sales financing obligations; â€¢ warranty costs; and â€¢ where they are manufacturing or development partners, technical and cost risk. Partners that do not undertake development work or supply components are referred to as financial RRSPs and are accounted for as financial instruments as described in the accounting policies on page 90. In 2010, the Group received other operating income of Â£95 million (2009 Â£89 million). Payments to RRSPs are recorded within cost of sales and increase as the related programme sales increase. These payments amounted to Â£198 million (2009 Â£231 million). The classification of financial RRSPs as financial instruments has resulted in a liability of Â£266 million (2009 Â£363 million) being recorded in the balance sheet and an associated underlying financing cost of Â£13 million (2009 Â£25 million) recorded in the income statement. The Group also receives government launch investment in respect of certain programmes. The treatment of this investment is similar to non-financial RRSPs. Risk management The Board has an established, structured approach to risk management. The risk committee (see page 64) has accountability for the system of risk management and reporting the key risks and associated mitigating actions. The Director of Risk reports to the Finance Director. The Group's policy is to preserve the resources upon which its continuing reputation, viability and profitability are built, to enable the corporate objectives to be achieved through the operation of the Rolls-Royce business processes. Risks are formally identified and recorded in a corporate risk register and its subsidiary registers within the businesses. These are reviewed and updated on a regular basis, with risk mitigation plans identified for key risks. Principal risks and uncertainties are identified on pages 26 to 27 and certain financial risks are described below. Financial risk The Group uses various financial instruments in order to manage the exposures that arise from its business operations as a result of movements in financial markets. All treasury activities are focused on the management and hedging of risk. It is the Group's policy not to trade financial instruments or to engage in speculative financial transactions. During the year the Group reviewed and amended its credit and short term cash investment policies to reflect the state of the credit market and to ensure the Group can continue to lay-off market risks associated with its business. As a result, the Group has revised the minimum publicly assigned long-term credit rating requirements for transacting financial instruments with a counterparty from Standard & Poor's `A- ` to `BBB+' (or the equivalent ratings from Moody's and/or Fitch) to reflect the general lower level of ratings within the banking sector. Deposits and investments in other debt instruments continue to require a short-term rating from Standard & Poor's of `A-1' (or the equivalent ratings from Moody's and/or Fitch). The most significant economic and market risks continue to be movements in foreign currency exchange rates, interest rates and commodity prices. The Board regularly reviews the Group's exposures and financial risk management and a specialist committee also considers these in detail. All such exposures are managed by the Group Treasury function, which reports to the Finance Director and which operates within written policies approved by the Board and within the internal control framework described on page 65. Currency risk The Group is exposed to movements in exchange rates for both foreign currency transactions and the translation of net assets and income statements of foreign subsidiaries. The Group regards its interests in overseas subsidiary companies as long-term investments and manages its translational exposures through the currency matching of assets and liabilities where applicable. The matching is reviewed regularly, with appropriate risk mitigation performed where material mismatches arise. The Group has exposure to a number of foreign currencies. The most significant transactional currency exposures are USD to GBP and USD to EUR. The Group manages its exposure to movements in exchange rates at two levels: i) Revenues and costs are currency matched where it is economic to do so. The Group actively seeks to source suppliers with the relevant currency cost base to avoid the risk or to flow down the risk to those suppliers that are capable of managing it. Currency risk is also a prime consideration when deciding where to locate new facilities. US dollar income converted into sterling represented 19 per cent of Group revenues in 2010 (2009 23 per cent). US dollar income converted into euros represented four per cent of Group revenues in 2010 (2009 two per cent). ii) Residual currency exposure is hedged via the financial markets. The Group operates a hedging policy using a variety of financial instruments with the objective of minimising the impact of fluctuations in exchange rates on future transactions and cash flows. The permitted range of the amount of cover taken is determined by the written policies set by the Board, based on known and forecast income levels. The forward cover is managed within the parameters of these policies in order to achieve the Group's objectives, having regard to the Group's view of long-term exchange rates. Forward cover is in the form of standard foreign exchange contracts and instruments on which the exchange rates achieved are dependent on future interest rates. The Group may also write currency options against a portion of the unhedged dollar income at a rate which is consistent with the Group's long-term target rate. At the end of 2010 the Group had US$20.9 billion of forward cover (2009 US$18.8 billion). The consequence of this policy has been to maintain relatively stable long-term foreign exchange rates. Note 16 to the financial statements includes the impact of revaluing forward currency contracts at market values on December 31, 2010, showing a negative value of Â£336 million (2009 negative value of Â£144 million) which will fluctuate with exchange rates over time. The Group has entered into these forward contracts as part of the hedging policy, described above, in order to mitigate the impact of volatile exchange rates. Interest rate risk The Group uses fixed rate bonds and floating rate debt as funding sources. The Group's policy is to maintain a proportion of its debt at fixed rates of interest having regard to the prevailing interest rate outlook. To implement this policy the Group may utilise a combination of interest-rate swaps, forward-rate agreements and interest-rate caps to manage the exposure. Commodity risk The Group has an ongoing exposure to the price of jet fuel and base metals arising from business operations. The Group's objective is to minimise the impact of price fluctuations. The exposure is hedged, on a similar basis to that adopted for currency risks, in accordance with parameters contained in written policies set by the Board. Counterparty credit risk The Group has an established policy for managing counterparty credit risk. A common framework exists to measure, report and control exposures to counterparties across the Group using value-at-risk and fair-value techniques. The Group assigns an internal credit rating to each counterparty, which is assessed with reference to publicly available credit information, such as that provided by Fitch, Moody's, Standard & Poor's, and other recognised market sources, and is reviewed regularly. Funding and liquidity The Group finances its operations through a mixture of shareholders' funds, bank borrowings, bonds, notes and finance leases. The Group borrows in the major global markets in a range of currencies and employs derivatives where appropriate to generate the desired currency and interest rate profile. The Group's objective is to hold financial investments and maintain undrawn committed facilities at a level sufficient to ensure that the Group has available funds to meet its medium-term capital and funding obligations and to meet any unforeseen obligations and opportunities. The Group holds cash and short-term investments which, together with the undrawn committed facilities, enable it to manage its liquidity risk. Short-term investments are generally held as bank deposits or in `AAA' rated money market funds. The Group operates a conservative investment policy which limits investments to high quality instruments with a short-term credit rating of `A-1' from Standard & Poor's or better (or the equivalent ratings from Moody's and/or Fitch). Counterparty diversification is achieved with suitable risk-adjusted concentration limits. Investment decisions are refined through a system of monitoring real-time equity and credit-default swap (CDS) price movements of potential investment counterparties which are compared to other relevant benchmark indices and then risk-weighted accordingly. The Group's borrowing facilities decreased during 2010 following the maturity of a US$187 million US private placement. As at December 31, 2010 the Group had total committed borrowing facilities of Â£2.10 billion (2009 Â£2.15 billion). The proceeds of the Â£500 million bond issue in 2009 are anticipated to be fully used to pay down the debt maturities occurring in 2011. The maturity profile of the borrowing facilities is staggered to ensure that refinancing levels are manageable in the context of the business and market conditions. There are no rating triggers contained in any of the Group's facilities that could require the Group to accelerate or repay any facility for a given movement in the Group's credit rating. The Group's Â£250 million bank revolving credit facility contains a rating price grid, which determines the borrowing margin for a given credit rating. The Group's current borrowing margin would be 20 basis points (bp) over sterling LIBOR if drawn. The borrowing margin on this facility increases by approximately 5bp per one notch rating downgrade, up to a maximum borrowing margin of 55bp. The facility was not drawn during 2010. There are no rating price grids contained in the Group's other borrowing facilities. The Group continues to have access to all the major global debt markets. Credit rating The Group subscribes to both Moody's Investors Service and Standard & Poor's for its official publicised credit ratings. As at December 31, 2010 the Group's assigned long-term credit ratings were: Rating agency Rating Outlook Category Moody's A3 Stable Investment grade Standard & Poor's A- Stable Investment grade As a long-term business, the Group attaches significant importance to maintaining an investment grade credit rating, which it views as necessary for the business to operate effectively. The Group's objective is to maintain an `A' category investment grade credit rating from both agencies. Sales financing In connection with the sale of its products, the Group will, on some occasions, provide financing support for its customers. This may involve the Group guaranteeing financing for customers, providing asset-value guarantees (AVGs) on aircraft for a proportion of their expected future value, or entering into leasing transactions. The Group manages and monitors its sales finance related exposures to customers and products within written policies approved by the Board and within the internal framework described in the corporate governance section. The contingent liabilities represent the maximum discounted aggregate gross and net exposure that the Group has in respect of delivered aircraft, regardless of the point in time at which such exposures may arise. The Group uses Ascend Worldwide Limited as an independent appraiser to value its security portfolio at both the half year and year end. Ascend provides specific values (both current and forecast future values) for each asset in the security portfolio. These values are then used to assess the Group's net exposure. The permitted levels of gross and net exposure are limited in aggregate, by counterparty, by product type and by calendar year. At the year end, the gross level of commitments on delivered aircraft was US$991 million, comprising US$618 million for AVGs and US$373 million for credit guarantees. The Board regularly reviews the Group's sales finance related exposures and risk management activities. Each financing commitment is subject to a credit and asset review process and prior approval in accordance with Board delegations of authority. The Group operates a sophisticated risk-pricing model to assess risk and exposure. Costs and exposures associated with providing financing support are incorporated in any decision to secure new business. The Group seeks to minimise the level of exposure from sales finance commitments by: â€¢ the use of third-party non-recourse debt where appropriate; â€¢ the transfer, sale, or reinsurance of risks; and â€¢ ensuring the proportionate flow down of risk and exposure to relevant RRSPs. Each of the above forms an active part of the Group's exposure management process. Where exposures arise, the strategy has been, and continues to be, to assume where possible liquid forms of financing commitment that may be sold or transferred to third parties when the opportunity arises. Note 22 to the financial statements describes the Group's contingent liabilities. There were no material changes to the Group's gross and net contingent liabilities during 2010. Accounting standards The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the EU. In 2010, the changes that have had the most significant effect on the Group's financial statements are the revisions to IFRS 3 Business Combinations and amendments to IAS 27 Consolidated and Separate Financial Statements. These amendments affect the accounting for acquisitions and transactions with non-controlling interests and have been applied to the acquisition of ODIM ASA (see note 24). There is no retrospective impact. A summary of other less significant changes, and those which have not been adopted in 2010, is included within the accounting policies in note 1 to the consolidated financial statements. Regulatory developments In response to the financial crisis, governments and regulators around the world are considering various regulatory reforms to the financial markets with the aim of improving transparency and reducing systemic risk. While the proposed reforms are predominantly directed at financial institutions, some of them may have implications for non-financial institutions. In particular, proposals by both US and European regulators to reform the Over-the-Counter (OTC) derivatives market could have implications for the Group in terms of future funding requirements and increased cash flow volatility, if parties to future OTC derivative transactions were required to clear such transactions via an exchange or central clearing and be required to post cash collateral to reduce counterparty risk. Share price During the year the Company's share price increased by 29 per cent from 483.5p to 623p, compared to an eight per cent increase in the FTSE aerospace and defence sector and a nine per cent increase in the FTSE 100. The Company's shares ranged in price from 473.4p in January to 654.5p in November. The number of ordinary shares in issue at the end of the year was 1,872 million, an increase of 18 million relating to the issue of shares for share option schemes. The average number of ordinary shares in issue (excluding ordinary shares held under trust) was 1,846 million (2009 1,845 million). Andrew Shilston Finance Director February 9, 2011 Responsibility statement of the directors on the Annual report The Responsibility Statement below has been extracted in unedited text from the Company's full Annual report for the year ended 31 December 2010. Certain parts of the Annual report are not included within this announcement. Each of the persons who is a director at the date of approval of this report confirms that to the best of his or her knowledge: i) each of the Group and parent company financial statements, prepared in accordance with IFRS and UK Accounting Standards respectively, gives a true and fair view of the assets, liabilities, financial position and profit or loss of the issuer and the undertakings included in the consolidation taken as a whole; and ii) the Directors' report on pages 1 to 82 includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. By order of the Board Tim Rayner General Counsel and Company Secretary February 9, 2011 Cautionary statement regarding forward-looking statements This announcement 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 Company, anticipated cost savings or synergies and the completion of the Company'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 February 9, 2010, the date of signing of the Annual report, and will not be updated during the year. Nothing in this announcement should be construed as a profit forecast. This announcement contains non-statutory accounts within the meaning of section 435 of the Companies Act 2006. The statutory accounts for the year ended 31 December 2010, upon which an unqualified audit opinion has been given and which did not contain a statement under Section 498(2) or 498(3) of the Companies Act 2006, will be filed in due course with the Registrar of Companies.

Companies

Rolls-Royce Holdings (RR.)

Full Archive

UK 100

Latest directors dealings

8 hours ago SSP Group
10 hours ago Card Factory
10 hours ago HSBC Holdings
10 hours ago Direct Line Insurance Group
11 hours ago CRH (CDI)

All directors dealings today