Annual Financial Report

February 24, 2012 Rolls-Royce Holdings plc Publication of the Annual report 2011 Rolls-Royce Holdings plc announces that its Annual report for the year ended December 31, 2011 is now available on the Group's website: www.rolls-royce.com Printed copies of this document will be posted to shareholders on or around March 21, 2012. 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 9, 2012 contained a condensed set of financial statements. The Annual General Meeting (AGM) of the Company will take place at 11.00am on Friday May 4, 2012 at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE. The financial calendar for the next 12 months is set out below: Financial calendar 2011-2013 Ex-entitlement to C Shares April 25, 2012 Record date for entitlement to C Shares April 27, 2012 1st Interim management statement May 4, 2012 AGM, Queen Elizabeth II Conference Centre, London 11.00am May 4, 2012 Record date for C Share dividend June 1, 2012 Deadline for receipt of C Share elections 5.00pm June 1, 2012 Allotment of C Shares July 2, 2012 Payment of C Share redemption monies July 4, 2012 Purchase of ordinary shares for CRIP participants By July 12, 2012 Announcement of interim results July 26, 2012 Ex-entitlement to C Shares October 24, 2012 Record date for entitlement to C Shares October 26, 2012 Record date for C Share dividend November 16, 2012 Deadline for receipt of C Share elections 5.00pm December 3, 2012 2012 Financial year end December 31, 2012 Allotment of C Shares January 2, 2013 Payment of C Share redemption monies January 4, 2013 Purchase of ordinary shares for CRIP participants By January 11, 2013 Preliminary announcement - 2012 full year results February, 2013 2012 Annual report published February, 2013 Enquiries: Investor relations: Simon Goodson, Director of Financial Communication, Rolls-Royce plc Tel: +44 (0)20 7227 9241 simon.goodson@rolls-royce.com Chairman's statement Performing strongly in challenging conditions Rolls-Royce continued to perform well during 2011 with our order book growing to a record Â£62.2 billion. Underlying profits increased 21 per cent to Â£1,157 million. We are proposing a final payment to shareholders of 10.6 pence per share, bringing the full year payment to 17.5 pence per share. This is an increase of nine per cent and reflects the Board's continuing confidence in the Group's future. This strong performance has been achieved against a background of macro-economic weakness and uncertainty. The recovery, which many people had been expecting in Europe and North America, failed to materialise in 2011 and is still some way off. Fiscal imbalances, austerity programmes, disruption in the Eurozone and political tensions in the Middle East continue to affect world markets, undermining confidence about future macro-economic expansion even in Asia and South America. It is a tribute to everyone who works at Rolls-Royce that the Group has continued along its path of long-term growth despite these testing times. Rolls-Royce is a long-term business which has maintained a consistent strategy over many years. We continually invest in advanced technology so that we can address both the present needs of our customers and meet their requirements for many years to come. Our power systems have life cycles that stretch over decades and we generate long-term revenue streams by servicing the products we sell. We have customers in 120 countries and we continue to broaden our customer base across the four segments in which we operate: civil aerospace, defence aerospace, marine and energy, including civil nuclear. These characteristics have combined to make Rolls-Royce an increasingly resilient business. However, we are not complacent and continue to invest for the future. In 2011, we invested Â£520 million from Group resources in research and development. This continuing commitment to technological innovation lies at the heart of our business model. It is important to remember that Rolls-Royce sustains a global supply chain. Around 8,000 companies in some 70 countries, all generating employment, paying taxes and creating wealth, depend upon us and share in our success. For every person we employ, more than six jobs are generated in the broader economy. As we grow in scale and strength, these effects are multiplied. Innovation driven by Rolls-Royce has generated wider societal benefits over many years. Engineering breakthroughs pioneered by this Group have had wide applications in fields as diverse as medical research and the automotive industries. Engineers and scientists trained by Rolls-Royce have gone on to make a significant contribution across enterprise and academia, while our growth will create future employment for many of the brightest young scientists studying at schools and universities around the world today. This is why advanced economies depend so critically on successful enterprises like Rolls-Royce and why it is of such importance that their wider contribution to society is recognised. As a global business we recognise that to stay competitive we need to attract, retain and develop the best talent from the greatest range of people worldwide. Our Global Diversity Steering Group reinforces our commitment to promoting diversity and equality throughout the Group and creating an environment in which each individual has the opportunity to realise his or her full potential. The UK Government recently outlined a number of recommendations to improve gender diversity in UK boardrooms. We support these recommendations and are committed to making demonstrable progress by 2015. During 2011, we recruited 242 graduates from 25 countries. In addition, 295 young people joined our apprentice schemes. It is a tribute to the quality of our training that around 50 per cent of our apprentices go on to achieve an honours degree and so many of our senior managers started their working lives at Rolls-Royce as apprentices. Continuous training and development is extremely important to our success. Over the past five years we have invested over Â£150 million on improving the knowledge and skills of our people. In order to maintain the highest standards of ethical behaviour and business integrity, we review continually our procedures and training programmes, which are mandatory for all staff. As well as developing our own workforce we recognise our wider responsibility towards the next generation of scientists and engineers through the promotion of science, technology, engineering and maths (STEM) in schools and universities. We invest in a wide range of educational projects around the world and encourage our staff to take leadership roles as school governors and STEM ambassadors. As part of our responsibilities to the communities in which we work, the Board is committed to reducing the environmental impact of our products and operations. Across our portfolio we can demonstrate the progress that is being made. One good example is the Boeing 787 Dreamliner that entered service in September 2011. This extraordinary aeroplane is designed to be 20 per cent more fuel efficient than the earlier generation of aircraft it replaces, thanks largely to advances in aero-engine technology. Our marine business has advanced hull designs, engines, and integrated propulsion systems that are reducing emissions dramatically. In our energy business we have continued to make good progress developing the scope of our civil nuclear capabilities. I would like to thank my fellow directors for their great support and hard work in the past year. I would also like particularly to express my gratitude to Andrew Shilston, who retired from the Board at the year end. Andrew served Rolls-Royce as Finance Director for nine years and has done an outstanding job. I wish him well in his future endeavours. My congratulations go to Mark Morris, who succeeds Andrew and was appointed to the Board in January 2012. Mark joined Rolls-Royce as a graduate 25 years ago. Sir John Rose, who had been with the Group for 27 years and was Chief Executive for 15 years, retired at the end of March and was succeeded by John Rishton. I have paid tribute to John Rose on a number of occasions including in last year's Annual report. Suffice it for me to say, we owe John a huge amount for what he achieved. I am very pleased to report that John Rishton has made a tremendous start as our new Chief Executive. Sir Peter Gregson has expressed his wish to retire as a non-executive director of Rolls-Royce at this year's Annual General Meeting (AGM) and therefore will not be seeking re-election. Peter has made a valuable contribution during the past five years and I would like to thank him for his commitment. I am delighted to welcome both Lewis Booth and Sir Frank Chapman onto the Board as non-executive directors. Lewis Booth, who chairs the audit committee, is Executive Vice President and Chief Financial Officer of Ford Motor Company and one of the most senior leaders within the auto industry. Sir Frank has been Chief Executive at BG Group for the past 11 years. He brings an additional deep technical understanding and knowledge of advanced engineering to the Board. He has agreed to chair a new safety committee that will be formed in 2012. We are fortunate to benefit from the advice of an International Advisory Board (IAB), comprised of some of the world's most distinguished business and political leaders. The IAB, whose membership is detailed later, provides invaluable strategic advice about the global markets in which we operate under the able guidance of Lord Powell of Bayswater. I would like to thank its members for their time and wisdom. Through the disciplined application of a long-term strategy, Rolls-Royce has doubled its revenues in the past decade and we are confident of doubling them again in the coming ten years. Rolls-Royce has a strong balance sheet and we intend to run our business so that we maintain a single `A' credit rating. In all parts of our business we see opportunities for profitable growth, building on the firm foundations I have described above. At the heart of our business lie our people. Our past, current and future success rests entirely with them. I believe Rolls-Royce has a highly-skilled and motivated team which is proud of its heritage and ambitious for its future. The strength of our order book demonstrates the confidence our customers have placed in us. We are focused on delivering these commitments for the long-term good of the families and communities who depend upon us and for the benefit of our customers and of our shareholders. Rolls-Royce has a highly-skilled andmotivated team - proud of its heritageand ambitious for its future. Sir Simon Robertson Chairman February 8, 2012 Chief Executive's review Delivering for customers andinvesting in the business Demand for our products and services in 2011 remained strong. Despite the global economic turbulence of recent years, Rolls-Royce has continued to grow. In my first year as Chief Executive, I have spent much of my time visiting Rolls-Royce sites around the world to meet employees, customers, suppliers and investors to hear what they have to say about your company. Without exception, the employees I have met are dedicated, professional and committed to delivering our brand promise - `trusted to deliver excellence'. Our customers are supportive and enthusiastic about our technology and, of course, they want even better performance both from our products and our team. Our suppliers are excited by the opportunity for growth and understand our requirement for better quality, on time delivery and lower cost. Investors express support for our strategy and naturally share our desire for still better financial performance in the future. At the 2011 AGM, I confirmed that we will continue to follow the strategy that has been in place for many years, and can be summarised as: 1. addressing four global markets: civil aerospace, defence aerospace, marine and energy; 2. investing in technology, capability and infrastructure; 3. developing a competitive portfolio of products and services; 4. focusing on growing market share and our installed product base; and 5. adding value for our customers through product-related services. This strategy has stood the test of time and has proved itself in battle. Since 2007, and despite the turbulence of recent years, Rolls-Royce has grown underlying revenue by 44 per cent, underlying profits by 45 per cent and payments to shareholders by 35 per cent. We have doubled our revenues in the past decade and, through organic growth alone, we are confident that we will do the same in the decade ahead. While we continue to follow this strategy, in the coming years, I see three main priorities: 1. Delivering the promises we have made With a record order book of Â£62.2 billion, our customers have placed a huge amount of trust in us and it is essential we meet our commitments. This will require a very significant increase in capacity. To put this growth into perspective, since we started building Trent engines 18 years ago we have delivered just over 2,000 units. We will deliver the next 2,000 in just five years which means more than doubling our current rate of production. To achieve this we continue to invest in new facilities around the world. These investments include our new plants at Crosspointe in Virginia, USA where we are making discs for civil jet engines and Seletar, in Singapore, where we will make wide-chord fan blades and assemble and test Trent engines. We are also expanding and renewing our facilities in the UK where we still invest half of our capital expenditure and more than half of our research and development budget. As well as investing in our own facilities, we are working hard with our suppliers and partners to make sure our global supply chain can support our growth and keep pace with demand. 2. Deciding where we invest for future growth We can see opportunity in all areas of our business but we need to concentrate our resources and decide which opportunities we are going to pursue and which we are not. 3. Continuing to improve the financial performance of the business Although we are subject to inflationary pressures and tough competition we will benefit from the growth of the business, from investments that will improve efficiency and from an increasing focus on cost performance and cash conversion. In support of our strategy, during 2011 we made three very important decisions for the future. The first was our acquisition of the German industrial engines group Tognum, our biggest acquisition, that we made in a joint offer with Daimler. It will bring together highly complementary product and technology portfolios and creates significant new opportunities for our marine and energy businesses. Second, we signed an exclusive deal with Airbus to power the long-range Airbus A350-1000 aircraft, for which we will develop an enhanced Trent XWB engine. Third, we agreed to sell our equity stake in International Aero Engines (IAE) to Pratt & Whitney, at the same time announcing our intention to form a new joint venture to develop engines for the next generation of mid-size aircraft. This agreement builds on a long and successful partnership with Pratt & Whitney, and charts a clear course for our future in this important market segment. In addition, we have continued to extend our portfolio and have advanced a number of important programmes. These are described in greater detail later in this Annual report, but it is encouraging to note progress in each of our customer facing businesses. In civil aerospace, we celebrated the first commercial flight of the Boeing 787 Dreamliner, operated by All Nippon Airways (ANA) and powered by Trent 1000 engines. The Trent XWB engine programme for the Airbus A350 XWB is progressing well with over 1,500 test hours completed. Our BR725 engine, developed for Gulfstream's new flagship executive jet, the G650, is due to enter service later this year. In defence, our LiftFanâ„¢ system for the Joint Strike Fighter has performed well during intensive flight tests that included more than 70 short take-offs and vertical landings on board the aircraft carrier USS Wasp. The TP400 engine for the Airbus A400M is on course to enter service in 2013, further strengthening our position in the military transport market. In our marine business, we have secured the first orders for our award winning Environship, a cargo vessel powered by liquid natural gas that substantially increases fuel efficiency through a combination of innovative hull design and power systems. In May 2011, the UK Government awarded Rolls-Royce the contract to develop a new propulsion system for the next generation of nuclear-powered submarines. Our energy business signed its biggest ever single contract to supply Petrobras, Brazil's leading oil company, with 32 gas turbine generation packages to support its offshore operations. Within our civil nuclear business we have continued to expand our instrumentation and controls business while strategic relationships with reactor vendors and utility operators were further strengthened during 2011 through a number of cooperation agreements. In 2011, Rolls-Royce performed well in difficult market conditions. We have a Â£ 62.2 billion order book, underlying revenue has grown to Â£11.3 billion and underlying profit has increased 21 per cent to Â£1.2 billion. This success is due to the extraordinary team of over 40,000 people that work for Rolls-Royce. I thank all of them for their support and effort in 2011. Their skills, the breadth of our portfolio, the strength of our order book and the access we have to parts of the world where demand for our products and services remain strong, make your company increasingly resilient. Finance Director's review A strong performance Summary data - Â£ million 2011 2010 Change Order book 62,201 59,153 +5% Underlying revenue* 11,277 10,866 +4% Underlying profit before tax* 1,157 955 +21% Underlying earnings per ordinary 48.54p 38.73p +25% share* Full year payment to shareholders 17.5p 16.0p +9% Reported revenue 11,124 11,085 0% Reported profit before financing 1,189 1,134 +5% Net funds 223 1,533 Average net funds 320 960 The difficulties faced by the global economy, by the Eurozone and by those governments with budgetary imbalances are well publicised. However, demand for our products and services remains robust, particularly in developing markets. This demand results from the breadth and diversity of our businesses, customers and programmes, the competitive strength of our products and the relative youth of our installed base. The visibility of significant growth in the next decade provided by the record order book underpins our continued investment in technology, operations and services. These investments safeguard our competitive advantage, support delivery on our commitments to customers and improve our operational effectiveness. The Group's 2011 performance was achieved after absorbing a ten per cent increase in net R&D expense to Â£463 million and a 29 per cent increase in capital expenditure to Â£467 million. The Group's joint venture with Daimler now owns over 99 per cent of Tognum for which Rolls-Royce paid cash consideration of Â£1.5 billion in 2011. This joint venture investment made a Â£30 million net contribution (after costs and financing) to underlying profit before tax but did not impact the Group's 2011 revenues. On January 2, 2012, the Group contributed its Bergen Diesels business to the joint venture, resulting in a cash benefit to the Group of â‚¬200 million. The Group's proposed sale of its 32.5 per cent shareholding in IAE is subject to regulatory approval and did not impact 2011 financial performance. Rolls-Royce will continue to play an active role as a first tier supplier to IAE of high-pressure compressors and fan blades and remains responsible for the final assembly of 50 per cent of the production engines. The announced new joint venture with Pratt & Whitney to develop an engine to power the next generation of mid-size aircraft is also subject to regulatory approval and had no effect on 2011 financial performance. Underlying figures are considered more representative of the trading performance by excluding the impact of year end mark-to-market adjustments of outstanding financial instruments on the reported performance, principally relating to the GBP/USD hedge book. In addition the net post-retirement financing is excluded and, in 2011, adjustments have been made to exclude one-off past-service credits on post-retirement schemes and the effect of acquisition accounting. The adjustments between the underlying income statement and the reported income statement are set out in more detail in note 2 of the financial statements. This basis of presentation has been applied consistently since the transition to IFRS in 2005. Underlying income statement Underlying income statement extracts - 2011 2010 Change Â£million Revenue 11,277 10,866 +4% civil aerospace 5,572 4,919 +13% defence aerospace 2,235 2,123 +5% marine 2,271 2,591 -12% energy 1,199 1,233 -3% Profit before financing costs and 1,206 1,010 +19% taxation civil aerospace 499 392 +27% defence aerospace 376 309 +22% marine 323 332 -3% energy 24 27 -11% engine holding (Tognum JV) 36 - -- central costs (52) (50) -4% Net financing costs (49) (55) +11% Profit before taxation 1,157 955 +21% Taxation (261) (236) +11% Profit for the year 896 719 +25% EPS 48.54p 38.73p +25% Payment to shareholders 17.5p 16.0p +9% Other items Other operating income 70 87 -20% Gross R&D investment 908 923 -2% Net R&D charged to the income statement 463 422 +10% Underlying revenue increased four per cent to Â£11.3 billion. This includes a nine per cent growth in services revenue to Â£6.0 billion that more than offset a one per cent reduction in OE revenue to Â£5.3 billion. OE performance included strong 18 per cent growth in civil aerospace offset by a greater than anticipated reduction of 23 per cent in marine OE revenue. Underlying services revenue continues to represent more than half (53 per cent) of the Group's underlying revenues. In 2011, growth in underlying services revenue was due to a number of factors: the installed base of products grew and the services network expanded; defence aerospace benefited from one-off contract termination settlements resulting from the Strategic Defence and Security Review (SDSR) of the UK Ministry of Defence (MoD); and marine services saw further growth of nine per cent. Underlying profit before financing costs and taxation increased 21 per cent to Â£1.16 billion. This was due to a number of factors, a better mix between OE and services, a significant improvement in productivity resulting from the focus on cost, net foreign exchange (FX) benefits of Â£54 million including an eight cent improvement in the achieved rate on selling USD income, Â£30 million from Tognum net of the costs of the acquisition and a number of one-off items, the most significant which relates to a Â£60 million benefit from the SDSR settlements referred to earlier. Further discussion of trading is included in the business segment reports on page 18 to 25. Underlying financing costs reduced 11 per cent to Â£49 million, including a small reduction in financial Risk & Revenue Sharing Partnerships (RRSPs) costs and lower funding costs due to the settlement of the Group's â‚¬750 million Eurobond during the year. Underlying taxation was Â£261 million, an underlying tax rate of 22.6 per cent compared with 24.7 per cent in 2010. This reduction reflects increased profits from joint ventures (which are accounted for on a post-tax basis) and some adjustments to prior year estimates. Underlying EPS increased 25 per cent to 48.54 pence, in line with the increase in the underlying profit after tax. Payments to shareholders At the AGM on May 4, 2012, the directors will recommend an issue of 106 C Shares with a total nominal value of 10.6 pence for each ordinary share. The final issue of C shares will be made on July 2, 2012 to shareholders on the register on April 27, 2012 and the final day of trading with entitlement to C Shares is April 24, 2012. Together with the interim issue on January 3, 2012 of 69 C Shares for each ordinary share with a total nominal value of 6.9 pence, this is the equivalent of a total annual payment to ordinary shareholders of 17.5 pence for each ordinary share. The payment to shareholders will, as before, be made in the form of redeemable C Shares which shareholders may either choose to retain or redeem for a cash equivalent. The Registrar, on behalf of the Company, operates a C Share Reinvestment Plan (CRIP) and can, on behalf of shareholders, purchase ordinary shares from the market rather than delivering a cash payment. Shareholders wishing to redeem their C Shares or else redeem and participate in the CRIP must ensure that their instructions are lodged with the Registrar, Computershare Investor Services Plc, no later than 5pm on Friday June 1, 2012. Other operating income relates to programme receipts from RRSPs, which reimburse past R&D costs. These receipts decreased by 20 per cent in 2011 due to the phasing of major programmes such as the Trent XWB. Net R&D charged to the income statement increased by ten per cent to Â£463 million. The Group recruited an additional 1,000 engineers to develop the products of the future and to help improve the in-service performance of the existing installed base of products. This investment and the 29 per cent increase in capital expenditure to Â£467 million will prepare our infrastructure and global supply chain for significant growth in the next decade. The Group continues to expect net R&D investment to remain within four to five per cent of Group underlying revenue. Balance sheet Summary balance sheet - Â£ million 2011 2010 Intangible assets 2,882 2,884 Property, plant and equipment 2,338 2,136 Net post-retirement scheme deficits (397) (856) Net working capital (1,098) (973) Net funds 223 1,533 Provisions (502) (544) Net financial assets and liabilities (718) (627) Share of results of joint ventures and 1,680 393 associates Assets held for sale 178 9 Other net assets and liabilities (67) 24 Net assets 4,519 3,979 Other items USD hedge book (US$ million) 22,000 20,900 Net TotalCare assets 956 920 Gross customer finance contingent 612 633 liabilities Net customer finance contingent 124 121 liabilities Intangible assets relate to goodwill, certification costs, participation fees, development expenditure, recoverable engine costs, software and other costs that represent long-term assets of the Group. In aggregate, these assets remained broadly unchanged at Â£2.9 billion: this was largely due to increased development, certification and software costs being offset by the reclassification of V2500 assets on the balance sheet as assets held for sale. The carrying values of the intangible assets are assessed for impairment against the present value of forecast cash flows generated by the intangible asset. The principal risks remain: reductions in assumed market share; programme timings; increases in unit cost assumptions; and adverse movements in discount rates. There have been no impairments in 2011. Further details are given in note 8 of the financial statements. Property, plant and equipment increased by nine per cent to Â£2.3 billion due to the ongoing development and refreshment of facilities and tooling as the Group prepares for increased production volumes. Net post-retirement scheme deficits decreased 54 per cent to Â£397 million, including: (i) the impact of the change in pensions' indexing to CPI in the UK (Â£130 million); (ii) revised healthcare benefits in certain overseas schemes (Â£ 74 million); and (iii) the reduction in discount rates having a larger impact on the value of the assets than the obligations (calculated on an IAS 19 basis). Overall funding across the schemes has improved in recent years as the Group has adopted a lower risk investment strategy that reduces volatility going forward and enables the funding position to remain stable: interest rate and inflation risks are largely hedged; exposure to equities has reduced to around 20 per cent of scheme assets, this has been achieved against the headwind of increasing life expectancy assumptions. In 2011, the Group made further arrangements to reduce volatility and enable future funding to be predicted with more certainty. A longevity swap was transacted with a third party to eliminate the risk of increasing life expectancy of pensioners in the largest UK defined benefit scheme. No significant change is expected to the ongoing funding levels of the UK pension schemes in 2012. Net funds decreased by 85 per cent to Â£223 million largely due to the Â£1.5 billion consideration paid during the year for the Group's shared investment in Tognum. As a result, average net funds fell by Â£640 million to Â£320 million (Â£ 805 million excluding acquisitions). Investment - joint ventures and associates increased in the year as a result of the investment in Tognum. Assets held for sale represent the assets and liabilities expected to be derecognised of as a result of the anticipated restructuring of IAE. Provisions largely relate to warranties and guarantees provided to secure the sale of OE and services. These provisions reduced modestly during the year. Net financial assets and liabilities relate to financial RRSPs and the fair value of foreign exchange, commodity and interest rate contracts, set out in detail in note 17 to the financial statements. The change largely reflects the impact of the change in the GBP/USD exchange rate on the valuation of foreign exchange contracts. The USD hedge book increased five per cent to US$22.0 billion. This represents around four and a half years of net exposure and has an average book rate of Â£1 to US$1.60. Current forward market exchange rates are similar to current average book rates. Net TotalCareÂ® assets relate to long-term service agreement (LTSA) contracts in the civil aerospace business, including the flagship services product TotalCare. These assets represent the timing difference between the recognition of income and costs in the income statement and cash receipts and payments. Customer financing facilitates the sale of original equipment (OE) and services by providing financing support to certain customers. Where such support is provided by the Group, it is generally to customers of the civil aerospace business and takes the form of various types of credit and asset value guarantees. These exposures produce contingent liabilities that are outlined in note 23 to the financial statements. The contingent liabilities represent the maximum aggregate discounted gross and net exposure in respect of delivered aircraft, regardless of the point in time at which such exposures may arise. During 2011, the Group's exposure remained stable with gross and net exposures of Â£612 million and Â£124 million respectively. As has been well-publicised, some banks that have been active in recent years in providing funds for aircraft financing have chosen during 2011 to substantially reduce their exposure in this market segment. Although this may have some effect on the terms and pricing of new aircraft finance transactions in the near future, the Group expects that other providers of USD funding and ongoing support from the export credit agencies will largely fill the gap left by these banks. Group 2012 guidance Excluding the impact of the Tognum acquisition and the proposed IAE transaction, in 2012 the Group expects to see good growth in underlying revenue and underlying profit with a cash flow around breakeven as we continue to invest for future growth. In civil aerospace, we anticipate good growth in underlying revenue and strong growth in underlying profit. In defence aerospace, we expect modest growth in underlying revenue and profit. In marine, we expect a modest increase in underlying revenue, with underlying profit broadly flat. And in energy, we see growth in revenue and some improvement in profit. Other relevant data: Foreign exchange: neutral. Taxation: the underlying tax rate is expected to be around 24 per cent. R&D: a modest increase in expenditure combined with lower net capitalisation and higher amortisation due to the phasing of new programmes. Capital expenditure: a modest increase, including increased investment in IT. Pensions: no material changes expected to funding levels. Intangible assets: modest increase compared with 2011 due to a modest increase in recoverable engine costs partially offset by a decrease in development costs due to the phasing of new programmes. Property, plant and equipment: modest increase compared with 2011 as we continue to invest in capability and infrastructure. Tognum Tognum is expected to contribute in the first half to the Group's share of results of joint ventures and associates. Tognum's results are expected to be fully consolidated around the half year with Daimler's 50 per cent share of the result recorded as a non-controlling interest. For 2012, Tognum will be reported separately. As Tognum remains a listed company and will issue its preliminary results on March 8, 2012, the Group is not providing guidance at this time. IAE The sale of the Group's 32.5 per cent shareholding in IAE is expected to receive regulatory approval during 2012, at which time the initial cash consideration of US$1.5 billion will be received. For the first full year following settlement, the impact of the sale on subsequent trading will have a small negative effect on underlying revenue and a positive effect of around Â£ 140 million on underlying profit. The impact on the order book will be a reduction of around Â£4 billion. Additional financial information can be found on pages 36 and 37. Civil aerospace Strong programme positions supported further robust order flow in 2011. A 47 per cent increase in the order intake to Â£11.0 billion contributed to a record order book of Â£52 billion, up seven per cent on 2010. The order book contains over 5,000 engines that will add, over time, around 250 million pounds of installed thrust, or 65 per cent, to our current installed base of 400 million pounds of thrust. 2011 saw a strong performance as revenue increased by 13 per cent. (OE) revenue grew 18 per cent, largely as a result of significantly higher deliveries of widebody and corporate and regional engines. Services revenue grew by ten per cent, reflecting the growth in TotalCare revenue during the year, some recovery in time and materials revenue and some benefit from a better achieved USD exchange rate in the period Highlights * Trent 1000 enters service on Boeing 787 * Trent XWB exclusive contract on longer range Airbus A350 XWB * I,000th Trent 700 delivered for Airbus A330 * New joint venture announced to address engines for future mid-size aircraft * BR725 certification programme for the Gulfstream G650 on course Key financial data 2007 2008 2009 2010 2011 Order book Â£bn 35.9 43.5 47.0 48.5 51.9 +80% +21% +8% +3% +7% Engine deliveries 851 987 844 846 962 Underlying revenue Â£m 4,038 4,502 4,481 4,919 5,572 +3% +11% 0% +10% +13% Underlying OE revenue Â£m 1,484 1,776 1,855 1,892 2,232 Underlying service revenue Â£m 2,554 2,726 2,626 3,027 3,340 Underlying profit before 564 566 493 392 499 financing Â£m +9% 0% -13% -20% +27% The civil aerospace business is a major manufacturer of aero engines for all sectors of the airliner and corporate jet market. Rolls-Royce powers more than 30 types of commercial aircraft and over 13,000 engines are in service with customers around the world. In 2011, the airline industry continued a slow but steady recovery despite continued economic uncertainty. Passenger traffic continued to show above average growth but the cargo market slackened. Whilst the small and mid-size business jet market remained flat, Rolls-Royce continued to benefit from the resilience of the market for large-cabin business aircraft. Widebody 2011 was an important year for the Trent family of engines. In September 2011, Rolls-Royce was proud to power the entry into service of the Boeing 787 Dreamliner with launch customer ANA. During the year two new customers placed orders for Trent 1000s to power their Dreamliners. Development of the Trent XWB continued apace, with the test programme yielding exceptional results in terms of fuel efficiency and reliability. The Trent XWB for the Airbus A350 XWB, is the fastest ever selling member of the Trent family of engines. Over 1,100 Trent XWBs have been ordered so far, more than the total number of Trent 700s currently in service. Market successes in 2011 included significant orders from Thai Airways International and Air France. Entry into service is now expected in the first half of 2014. In June 2011, Rolls-Royce announced an exclusive engine provider agreement with Airbus for Rolls-Royce to produce a higher-thrust version of the Trent XWB, enabling Airbus to offer increased range and capacity for the A350-1000. In October 2011, the 1,000th Trent 700 engine was delivered for the A330 programme. During the year, further orders were received for approximately 150 Trent 700 engines from customers around the world including major orders from Cathay Pacific, Saudi Arabian Airlines and Singapore Airlines. There are three engine options for the A330 and the Trent 700 won 75 per cent of the orders contested in 2011. The Trent 900 continues to be the leading engine for the Airbus A380 in terms of through-life fuel burn and emissions. The Trent 900 has been selected by 11 of the 16 airlines that have so far made an engine choice. China Southern is the latest customer to place Rolls-Royce powered A380s into service. New order announcements in 2011 came from Asiana of Korea and Skymark of Japan. In November 2011, American Airlines entered Chapter 11 bankruptcy protection. The Group has equipment in service and a joint venture repair and overhaul business with the airline and remains in close contact with the customer as the airline manages this process. There was no significant impact on the financial results. Narrowbody A new joint venture with Pratt & Whitney was announced in October 2011to develop engines for future generation mid-size aircraft. This move enhances the strong position of Rolls-Royce in the mid-size airliner market. Rolls-Royce is also to sell its shareholding in IAE, manufacturer of the V2500 engine, to Pratt & Whitney. The relevant agreements remain subject to various closing conditions including regulatory approvals. Rolls-Royce will remain a key supplier, responsible for the engineering support and manufacture of high-pressure compressors and the final assembly of 50 per cent of the V2500 engine. Orders for over 150 V2500-powered aircraft were taken in 2011. Corporate and regional In March 2011, Rolls-Royce delivered the 2,000th BR710 engine from the Dahlewitz plant in Germany where the engine was developed. The BR710 powers a number of Bombardier and Gulfstream business jets. The certification programme for the Gulfstream G650 powered by Rolls-Royce BR725 engines remains on course despite the tragic accident suffered by one of the test aircraft in April 2011. Service entry is expected in mid-2012. The development programme for the AE 3007C engine for the Cessna Citation TEN is on plan and the first flight took place in December 2011. Entry into service is planned by the end of 2013. Services Revenue and engine flying hours from TotalCare improved during 2011, driven by the growth of aircraft in service and increased utilisation of existing fleets. Defence aerospace A broad and diverse base of customers and products underpinned a resilient performance in 2011. Demand for our products and services, particularly in the military transport sector, held up well. Revenue increased five per cent as a result of an eight per cent increase in OE revenue and a three per cent increase in services revenue. A seven per cent decline in the order book reflects the cautious budgetary environment in many nations. However, new orders of Â£1.8 billion provides continued confidence that opportunities remain, both in traditional and in developing markets. Profit grew 22 per cent as a result of increased revenue, cost reduction and the Â£60 million benefit of termination settlements as a result of the UK MoD's SDSR. Highlights * TP400 engine for A400M transporter is certified * F-35B LiftSystemâ„¢ achieves programme and test milestones * US Navy renews Adour F405 support contract * 750th EJ200 engine delivered for the Eurofighter programme Key financial data 2007 2008 2009 2010 2011 Order book Â£bn 4.4 5.5 6.5 6.5 6.0 +38% +25% +18% 0% -7% Engine deliveries 495 517 662 710 814 Underlying revenue Â£m 1,673 1,686 2,010 2,123 2,235 +4% +1% +19% +6% +5% Underlying OE revenue Â£m 796 739 964 1,020 1,102 Underlying service revenue Â£m 877 947 1,046 1,103 1,133 Underlying profit before 199 223 253 309 376 financing Â£m +3% +12% +13% +22% +22% 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. Transport We are a world leader in the military transport market with over 6,700 engines in service. The global fleet of AE 2100 engines, which powers both the Lockheed Martin C-130J and the Alenia C-27J transport aircraft, continues to expand. The Emirate of Qatar and the Indian Air Force both received their first C-130Js in 2011. The global AE 2100 fleet also passed the three million flight hour milestone during the year. The TP400 engine for the Airbus A400M military transport aircraft received civil certification from EASA in May 2011 and has amassed over 8,000 flying hours as part of the flight-test programme. Delivery of the engines for the first production aircraft are due to begin in early 2012, part of the initial order of 180 aircraft. Important milestones were achieved in the T56 upgrade programme for legacy variants of the C-130 and P-3 Orion aircraft. This engine variant provides significant fuel and operating cost savings. Combat In the combat sector the Rolls-Royce LiftSystemÂ® for the short take-off and vertical landing (STOVL) variant of Lockheed Martin's F-35 Lightning II Joint Strike Fighter achieved its `Initial Service Release'. In October 2011, two F-35B aircraft accomplished 72 STOVLs on the USSWasp during a successful three-week testing period of sea trials. In the same month, the first LiftFanâ„¢ to be assembled at our new dedicated state-of-the-art factory in Indianapolis, USA, rolled off the production line. In January 2012, probationary status was lifted for the F-35B and the first STOVL aircraft were delivered to the customer. Funding for the development programme of the F136 engine, in which Rolls-Royce is a 40 per cent partner, for the F-35 Joint Strike Fighter was terminated by the US Department of Defense in February 2011, despite strong continuing Congressional support. During 2011, we delivered the 750th EJ200 engine on behalf of Eurojet for the Eurofighter programme. The Eurofighter Typhoon was deployed on combat operations for the first time as part of the NATO operation in Libya, displaying outstanding levels of performance and reliability. The Typhoon is a contender for the KF-X programme in South Korea. We continue to make good progress on the US Air Force Adaptive Versatile Engine Technology (ADVENT) demonstrator programme. It is designed to significantly reduce fuel consumption, enabling extended mission ranges and loiter times for future generations of military aircraft. Unmanned vehicles In the unmanned air systems sector we successfully completed a US Air Force funded flight-test programme for the growth variant of the AE 3007H engine for Global Hawk. Small engines GippsAero of Australia selected the M250 turboprop engine to power its new ten seat passenger aircraft, the GA10. In the helicopter market, the Apache fleet of the UK Army Air Corps, powered by the RTM322 engine, reached 200,000 flying hours. Services The success of our services business continued in 2011, with MissionCareâ„¢ contracts secured to provide availability-based engine support for the C-130 fleets of the UK and US air forces. The US Navy again renewed its US$100 million support agreement for Adour F405 engines in the T-45 Goshawk trainer. Rolls-Royce also earned praise for its support of the frontline operations of the UK armed forces air campaign over Libya which involved eight different types of Rolls-Royce powered aircraft. Marine Despite the uncertain market and macro-economic conditions, a resilient performance was achieved in 2011, as demand for our products and services gradually returns. New order intake during the year was strong, up 15 per cent to Â£2.1 billion, although the order book decreased largely due to the slower than expected conversion of OE bid activity to new orders. Revenue decreased 12 per cent, impacted mainly by slow second half OE revenue that resulted in OE revenue for the full year down 23 per cent. This slower than expected recovery of OE revenue was partially offset by a nine per cent increase in underlying service revenue. Our expanding network of service centres continues to take advantage of the growth in recent years of the global fleet of vessels equipped with our products, engines and propulsion systems. Profit declined by three per cent relative to a fall in revenue of 12 per cent, reflecting an improved revenue mix and an increased focus on costs and operational performance. Highlights * Significant increase in new orders and continued growth in offshore oil and gas sector * First contract secured for award-winning NVC 405 Environship liquid natural gas-powered cargo vessels * Service centres in Europe, Africa and Asia opened or expanded * Customer training and simulator centres opened in Norway and Singapore * Tognum acquisition largely completed Key financial data 2007 2008 2009 2010 2011 Order book Â£bn 4.7 5.2 3.5 3.0 2.7 +96% +11% -33% -16% -8% Underlying revenue Â£m 1,548 2,204 2,589 2,591 2,271 +19% +42% +17% +0% -12% Underlying OE revenue Â£m 1,003 1,492 1,804 1,719 1,322 Underlying service revenue Â£m 545 712 785 872 949 Underlying profit before 113 183 263 332 323 financing Â£m +12% +62% +44% +26% -3% Rolls-Royce has a world-leading range of capabilities in the marine market, encompassing vessel design, the integration of complex systems and the supply and support of power and propulsion equipment. We are leaders in mission-critical systems for offshore oil and gas, merchant and naval vessels. Offshore Marine performed strongly in the offshore oil and gas sector. This was largely based on the proven success of our specialist UT vessel design capabilities and our proficiency at integrating sophisticated systems into complex ships. As the industry continues to explore ever deeper waters, like those in the South Atlantic off the coast of Brazil, we will continue to be a strong partner for our customers for offshore oil and gas exploration, production, service and support. Merchant We continue to invest in technology that addresses the need for more efficient and environmentally sustainable power and propulsion systems. Our successful design and systems integration approach was validated in 2011 through an order by NorLines for two award-winning NVC 405 Environship short sea cargo vessels. These vessels incorporate a wavepiercing hull, a liquid natural gas engine and an integrated rudder and propeller system, which, in combination, reduces fuel consumption and cuts CO2 emissions by up to 40 per cent compared to conventional vessels. Naval Power and propulsion equipment was delivered for the UK's Queen Elizabeth class aircraft carriers. In early 2011, we received an order from Lockheed Martin for the provision of MT30s, the world's most powerful marine gas turbine, to power a further ten US Navy Littoral Combat Ships. The MT30's success on this programme is generating interest from navies in Europe, Asia and South America. We have established a naval ship design team, specifically to address the growing opportunity in the patrol craft and support ship market. The business now has ship design teams for each of the offshore, merchant and naval sectors. The submarines business celebrated the UK Government's decision in May 2011, to replace the UK's Vanguard class nuclear submarine with a new design of submarine utilising the Group's Pressurised Water Reactor (PWR) Generation 3 reactor technology. Services We expanded our service capacity to better realise the significant opportunity that our large installed base of equipment represents. Five facilities in Namibia, the Netherlands, Poland, Germany and Hong Kong were either constructed or expanded during the year. We also continued developing our service related capabilities by enhancing our spare parts delivery network and opening customer training facilities in Norway and Singapore. Tognum Through our joint venture with Daimler, we largely completed the acquisition of Tognum, which owns world-class high-speed reciprocating engine manufacturer MTU Friedrichshafen and subsequently, in January 2012, contributed our Bergen medium-speed engines business into the new entity in January 2012. The benefits of these complementary technologies create greater design and power and propulsion systems integration opportunities across marine, particularly for our naval and merchant businesses. Access to a large installed base of equipment, and a mature customer support network, creates further growth opportunities. Energy Significant demand for our products and services in offshore oil and gas applications drove a 57 per cent increase in the order intake to Â£1.5 billion, as the order book increased 28 per cent. Revenue declined by three per cent, largely due to the phasing of OE delivery in the power generation business. Demand for aftermarket products and services continued to grow strongly, with an increase of ten per cent over 2010. Profit fell by 11 per cent to Â£24 million as a result of a change in revenue mix and the additional charges incurred to develop the civil nuclear business and our options in tidal and fuel cells. This was despite the benefit of the non-recurring industrial Trent retrofit charges incurred in 2010. Highlights * 50 RB211 gas turbine packages ordered for oil and gas applications * 50 Bergen diesel engines ordered for land-based power applications * Service revenue up ten per cent, with 701 engines under long-term agreements * Achieved the prestigious ASME-N accreditation for UK nuclear manufacturing facilities * Completed acquisition of leading US Remote inspection services business, R. Brooks Associates Signed a 14-year contract with EDF to supply I&C technologies for the world's largest reactor modernisation projectKey financial data 2007 2008 2009 2010 2011 Order book Â£bn 0.9 1.3 1.3 1.2 1.5 +80% +44% 0% -8% +28% Engine deliveries 78 106 87 95 75 Underlying revenue Â£m 558 755 1,028 1,233 1,199 +2% +35% +36% +20% -3% Underlying OE revenue (Â£m) 269 385 558 691 602 Underlying service revenue Â£m 289 370 470 542 597 Underlying profit before 5 (2) 24 27 24 financing Â£m +128% -140% +1300% +13% -11% Our energy business supplies customers with gas turbines, compressors, reciprocating engines, and related services to support the efficient production of oil and gas, and power generation around the world. We are establishing a strong position in the civil nuclear sector for the provision of mission-critical equipment, systems and engineering services. The balanced nature of our portfolio has enabled us to deliver solid revenues of Â£1.2 billion, broadly in line with 2010. While the power generation sector in mature economies remains suppressed, due to excess generating capacity and low industrial demand, we continue to see growth in developing countries. The demand for oil and gas remains high, driven by a resilient oil price and global demand growth. In the second half of the year we secured significant oil and gas orders, increasing market share in the key Brazilian offshore market. Oil and gas In total, 50 RB211 packages were ordered during the year for oil and gas applications, 38 of which were for offshore. The high price of oil continues to drive capital investment in the sector, particularly in deepwater exploration and production environments where the Group has technologies and expertise that are applicable. The business was awarded a new contract, valued at up to US$650 million to supply 32 RB211 gas turbine power generation packages and related services to Petrobras to support its long-term production activities offshore Brazil. This order increases the number of Rolls-Royce RB211-powered industrial gas turbine units installed in Brazil over the past ten years to 62. In February 2011, we announced plans for the construction of a new purpose-built packaging, assembly and test facility in Rio de Janeiro, Brazil. The facility, expected to become operational in the first quarter of 2013, will strengthen our support of Petrobras' exploration and production activities in the rapid growth pre-salt deepwater oil fields offshore Brazil. In addition, we expanded our role in China's gas pipeline industry with contracts to supply PetroChina, the largest oil and gas producer in China, with six RB211 gas turbine compressor packages for Line 2 of the West-East China Pipeline Project. Power generation The power generation sector remains suppressed in the developed world, the traditional market for the Trent gas turbine, which resulted in three new Trent unit orders. Demand for Bergen reciprocating engines remains strong, reflected by an order intake of 50 units, of which 30 are for Bangladesh to help address the country's power shortfalls, bringing total Bergen engines orders in Bangladesh to 82. Services Demand for aftermarket products and services again grew strongly, delivering revenue of Â£597 million, an increase of ten per cent over 2010. Including the land-based reciprocating engines, there are now a total of 701 units, or 35 per cent of the engine fleet, under long-term service agreements. In 2012, we will launch the RB211 Gzero, an aftermarket upgrade product for the RB211-G gas generator that increases power by a nominal ten per cent. Tognum As with the marine business, our energy business will benefit from the acquisition of Tognum through our joint venture with Daimler. By combining our medium-speed diesel and gas Bergen engines business with Tognum's high-speed reciprocating engines, we will create a world leading reciprocating engines offering in the energy industry, significantly enhancing our core product and systems portfolio and global network of sales and service facilities. This will benefit customers across high-growth applications, including offshore and shale gas fracturing, as well as primary, standby and rental land-based power generation. In January 2012, the ownership of Bergen Engines transferred from Rolls-Royce to Engine Holding GmbH, the 50/50 joint venture company formed with Daimler. Civil nuclear Rolls-Royce made significant progress in developing its nuclear business in 2011, securing the prestigious ASME-N stamp accreditation at our UK nuclear manufacturing facilities. Plans for a new UK civil manufacturing facility progressed throughout 2011 and the business received outline planning permission for a potential site in South Yorkshire. Strategic relationships with reactor vendors and utility operators were further strengthened. An important cooperation agreement was signed with Areva in March 2011, to cover the manufacture of complex components for the first European Pressurised Water Reactors (PWR) to be built in the UK. Enhanced MoUs were also signed with Nuclear Power Delivery UK and EDF, the world's largest utility operator. Additionally, the business entered into a landmark agreement with Rosatom, the Russian state-owned nuclear company, for the development of global civil nuclear programmes. As a key step in growing its reactor services business, Rolls-Royce completed the acquisition of US-based R. Brooks Associates, a world leader in remote visual inspection. We signed a â‚¬250 million contract with EDF to supply instrumentation and control (I&C) technologies to the world's largest reactor upgrade programme, being carried out in France. We also opened a dedicated I&C service centre to enhance our operations for customers in China. Excellence in technology In 2011, Rolls-Royce invested Â£908 million in gross research and development, of which Â£520 million was funded from Group resources. Globally, 475 new patent applications were approved for filing -a record number for the Group. Research and technology The Group's 12,400 engineers are an increasingly integrated global resource, whose activities include research and technology, product development and in-service support. Our successful model of collaboration, through a network of 28 University Technology Centres and seven advanced manufacturing research centres, provides access to world-class research. With the opening of three advanced manufacturing research centres in the UK during 2011, a total of five are now operational. The next two are due to be opened in the US in 2012 and Singapore in 2013. These centres bring companies, industrial sectors and universities around the world together, in a common endeavour to develop step-change improvements across a portfolio of manufacturing technologies. In addition, the Advanced Simulation Research Centre was opened in Bristol, UK, in March 2011 and is now enabling Rolls-Royce and member organisations to access the latest simulation technologies for product development, reducing the need for costly physical testing and improving product design efficiency. Civil aerospace The year was notable for the successful entry into service of our latest large engine, the Trent 1000, as launch engine for the Boeing 787 Dreamliner. The Trent 1000 completed 670 flights in service with launch customer ANA by the year end. Flight testing of the BR725-powered Gulfstream G650 recovered from the tragic loss of a test aircraft in April to achieve Provisional Type Certification from the Federal Aviation Authority in November 2011. The Trent XWB development programme continued successfully, with several key functional, maturity and certification tests completed at sites in four countries. The engine is the only option for the Airbus A350 airliner family. The Trent XWB promises to be the most efficient, large aero gas turbine ever produced. Our ongoing work to improve the environmental performance of our products continued with key technology demonstrators. The Environmentally Friendly Engine (EFE) completed successful testing of an advanced `lean burn' combustor. Meanwhile, the latest E3E medium-size, two-shaft demonstrator core completed testing at the University of Stuttgart's altitude facility during the year. Defence aerospace Our engineers in Indianapolis are working on key enabling technologies for the US Air Force ADVENT contract. This work focuses on developing and demonstrating variable cycle engine technologies aimed at incorporation in future generation US military aircraft. The team completed designs and procured test hardware in preparation for a core engine test which will take place in 2012 and a full demonstrator engine test in 2013. In addition, during the year we won contracts for the US Air Force Research Lab (AFRL) Integrated Vehicle Energy Technology (INVENT) and Integrated Power and Thermal Management System Development (IPTMSD) programmes. These both focus on development of electrical and thermal management architectures to support the next generation of military aircraft. Marine Engineers in our submarines business are engaged in detailed design of the PWR3 reactor plant, which, in May 2011, was selected for the next generation of Royal Navy submarines. This project now represents the second largest technology programme in Rolls-Royce after the Trent XWB. Rolls-Royce has been designing and supplying nuclear reactors for the Royal Navy for over 50 years, with the PWR2 model currently the latest version in service. At the Nor-Shipping Exhibition in Oslo, our Environship concept, the NVC 405 Environship, won the `Next Generation Ship' award, and we launched a new `concept bridge' for marine vessels. In other marine programmes, we completed our first production Permanent Magnet Tunnel Thruster, and the Rolls-Royce operated NATO Submarine Rescue Service achieved full operational capability. A prototype carbon fibre azimuthing thruster exceeded performance and noise expectations during sea trials. Azimuthing thrusters rotate 360 degrees allowing them to perform both the propulsion and steering duties for a vessel. Energy In civil nuclear, EDF selected Rolls-Royce to modernise the safety-critical I&C systems of 20 French nuclear power plants. This contract, combined with a 25-year services agreement, means we are committed to support our SPINLINEâ„¢ technology with EDF until 2048. Summary Rolls-Royce has developed a reputation for engineering excellence and has been at the forefront of innovation for over 100 years. We continue to push technological barriers, create intellectual property on behalf of our stakeholders and develop advanced power products across each of our chosen markets. Excellence in operations We continue to invest in operational capacity to fulfil the commitments we have made to our customers and to enable the long-term growth and productivity of our business. Focused on efficiency and delivery We are focused on improving the efficiency of all our operational activities while, at the same time, expanding capacity in order to deliver our record order book. In 2011, our capital investment on new and improved facilities was Â£467 million. Over the last decade underlying revenue per employee has more than doubled from Â£128k in 2001 to Â£274k in 2011. Our Group is headquartered in the UK which remains our main employment centre and a key operations and manufacturing base. However, we are an increasingly global company. Early in 2012 we celebrated the opening of our major new facilities at Seletar, in Singapore, where we will manufacture wide-chord fan blades, and assemble and test Trent aero engines - the first time we have undertaken these activities outside the UK. This represents an important commitment to our growing customer base in Asia, and is one of 14 new facilities that we have opened over the past three years in locations including the UK, Germany, the US, Norway, China and Brazil. As well as extending our global footprint, we continue to expand our product portfolio. 2011 saw the Trent 1000 engine enter service with ANA and the production programme for this latest member of the Trent family come on stream. In other major programmes we started production deliveries of the LiftSystem for the Joint Strike Fighter and the marine gas turbine, MT30 for the US Navy. The BR725 which powers the new Gulfstream G650 is scheduled to enter service later this year. In October 2011, we announced a new joint venture with Pratt & Whitney to develop engines for the next generation of mid-sized aircraft. We also decided to restructure our participation in IAE, the joint venture which produces the V2500 engine for the A320 family of aircraft. We agreed to sell our equity stake in IAE to Pratt & Whitney, while remaining an important supplier of parts and engineering support for the engine programme. We continue to assemble 50 per cent of V2500 engines. At the same time we continue to aim to offset all inflationary pressures through improved productivity and waste reduction programmes. Integrated global approach As we expand around the world, our operations strategy demands an integrated approach across activities, time zones and locations. We continue to develop local capabilities to meet our customer requirements where appropriate. Brazil is a good example of this. We have had an aero repair and overhaul business there for over 50 years. In 2009 we opened a service centre to support our growing marine business and, in 2011, we announced plans for the construction of a new US$100 million-plus gas turbine package, assembly and test facility for our energy business. This is expected to become operational in the first quarter of 2013. These investments not only grow our global footprint but bring us closer to our customers in Brazil, adding significantly to our capabilities in a key growth market and enabling us to pursue further opportunities. Supply partnerships and new programmes Close collaboration with our suppliers is critical to our continued success. Around 70 per cent of our manufacturing is conducted within our supply chain. As we continually develop intellectual property in technology, manufacturing, materials and processes we decide which elements of our programmes we produce ourselves and those which will be subcontracted to our suppliers. Our relationship is open, analytical and collaborative. We estimate that our supply base is currently investing at around twice the level of Rolls-Royce in order to accommodate growth and deliver greater efficiency. As well as working with suppliers, we partner with universities and manufacturing research centres around the world to develop new technologies and processes which are more effective, efficient and robust. Rolls-Royce is a long-term business in which consistent investment sustained over many years has delivered expanding global capability, accompanied by steadily improving productivity and performance. These factors coupled with a high focus on product integrity, enable us to effectively address both our customers' current needs and their future requirements. Principal risks and uncertainties It is recognised that the Group's business objectives can only be achieved if risks are taken and managed effectively. By understanding the nature of our risks we can be in a position to make better decisions and maximise the returns of the Group while managing our reputation. Regular review of risks and actions to address risks takes place at all levels of the Group. Risks are defined as threats to the achievement of business objectives or to the continuing reputation of the Group. The top level corporate risk register reflects the outcomes of lower level programme, function or business unit risk reviews and is reviewed in detail by the risk committee. Nevertheless, the Board retains its strategic responsibility for risk decision making regularly reviewing the corporate risk register and considering these risks in the context of the business strategy, as reported to it by the risk committee. The risks and uncertainties on these pages are considered to be principal to delivering our strategy and business results, and specific to the nature of our business, notwithstanding that there are other risks that may occur and may impact on the achievement of the Group's objectives. Risk or uncertainty and Mitigation potential impact Significant external events * Established a balanced business affecting demand for portfolio transportation such as terrorism, political change, * Strong access to parts of the global pandemic, natural world where demand remains robust disaster or continued and deeper economic retrenchment * Diversity of global operations * Regularly exercised senior response team Failure to minimise the * Research and development in low environmental impact of the carbon technologies such as Group's products and operations nuclear power, tidal energy and leading to reputational damage fuel cells and ultimately loss of market share * Significant investment in innovative solutions for aviation, marine and energy markets * Governance structure headed by the Environment Council to oversee improvements Reduction in Government * Development of a diversified spending due to global portfolio of products and services financial uncertainty and for various markets and regions budgetary constraint in Europe and the US in particular * Proactive lobbying for research causing reduced revenues on and technology funding existing platforms and inhibiting investment in new * Achieve commitments under current technologies contracts Failure of counterparties, * Established policy for managing including financial counterparty credit risk institutions, customers, joint venture partners and insurers, * Common framework to measure, driven mainly by the economic report and control exposures to uncertainties and pressures in counterparties across the Group the current environment, using value-at-risk and fair-value potentially affecting short techniques term cash flows * Internal credit rating assigned to each counterparty, assessed with reference to publicly available credit information and subject to regular review Fluctuations in foreign * Long-term hedging policy, using a currency exchange rates variety of financial instruments affecting operational results (see note 17, page 101 for more or the outcomes of financial information) transactions * Where applicable, currency matching of assets and liabilities to manage translational exposures * Regular review of risks and appropriate risk mitigation performed where material mismatches arise Regulatory changes relating to * Close monitoring of proposed financial derivatives may changes require the Group to post cash collateral, increasing cash * Evaluation of potential financial flow volatility and the risk of impact in terms of cash collateral default required and use of public trading exchanges * Lobbying politicians and regulators in conjunction with other large European corporates If the Group'sproducts, * Establishment of long-term services and pricing do not customer relationships to remain competitive, this could differentiate products and result in the loss of market services and protect margins share, with attendant impact on long-term financial * Steady focus on improvement in performance. operational performance, for example through the modernisation of facilities * Increased focus on managing the costs of operations and products * Sustained investment in technology acquisition Non-compliance with applicable * A business-wide compliance legislation and regulations, structure focusing on anti-bribery for example export controls, and corruption legislation anti-bribery and authorisation of chemicals and substances * Exports Committee, chaired by the compromising the ability to Chief Operating Officer directs conduct business in certain strategy and policy on exports jurisdictions and exposing the Group to reputational damage * Resources to comply with and potential financial requirements are embedded penalties throughout the business * Employee awareness training Failure to grow capable * Continued significant investment resource globally due to in resourcing and capability demographic trends and limited infrastructure supply of appropriately skilled personnel affecting programme * Objective assessment of delivery, damaging reputation performance using improved system and stifling opportunities for for developing and monitoring the future innovation competency of individuals * Regularly refreshed framework to develop managers and leaders Product performance not meeting * Operating a "safety first"culture, expectations affecting safety including delivery of regularly and reliability with adverse refreshed mandated product long term financial integrity training to employees consequences and suppliers * Future safety requirements are defined by the Product Safety Assurance team * Activities to improve maturity of products at entry into service * Engineering focus on improvements to product reliability and service lives Disruption of supply chain due * Continuous improvement of all to external factors or failure processes and project management to deliver parts to committed controls to ensure both technical costs and quality reducing the and business objectives are ability to meet customer achieved commitments, win future business or achieve operational * Customer Excellence Centre results provides improved response to and analysis of supply chain disruption * Focus on production quality through plant and supplier improvement plans * Providing duality of capability through establishment of world-class manufacturing centres * Pursuit of low cost sourcing strategies Downgrade in credit rating * The Group has developed a strong restricting the Group's ability financial risk profile and to secure funding, hedge continues to improve the business forward or provide vendor risk profile financing Failure to conduct business in * Ethics Committee established to an ethical and socially oversee and maintain the highest responsible manner causing ethical standards disruption and reputational damage * Global Code of Business Ethics, in 18 languages, issued to all employees supported by a training and engagement programme to improve awareness of the Group's values * Global telephone and intranet channels are available for employees to report in confidence any concerns regarding potentially unethical behaviours Failure to manage multiple * Continuous improvement of all complex product programmes processes and project management effectively with potentially controls to ensure both technical significant adverse financial and business objectives are and reputational consequences, achieved including the risk of impairment of the carrying * All major programmes subject to value of the Group's intangible approval and regular review by the assets and the impact of Board, with particular focus on potential litigation the nature and potential impact of emerging risks and the effective mitigation of previously identified threats Breach of IT security through * Continual upgrading of security increasing volumes of data equipment and software being transmitted electronically across * Deployment of a multi-layered international borders may cause protection system that includes controlled data to be lost, web gateway filtering, firewalls corrupted or accessed by and intrusion detection unauthorised users, impacting the Group's reputation * Specialist resources employed to increase capability * Active sharing of information through industry and government forums Failure to execute the * Governance structure established programme to modernise the IT to oversee the programme infrastructure impacting efficiency and effectiveness of * Project and risk management business operations methodologies are being followed * Specialist resources have been secured to increase capability * Involvement of multiple service providers to provide competition and remove dependency on any single supplier Loss or unintended disclosure * Strengthening of resources to of Intellectual Property manage patents damaging the Group's competitive position and * Creation of a global framework of causing potential breach of Intellectual Property officers contractual requirements * Procurement of a global IT system to make patent information more widely available to engineers Going concern The Group's business activities, together with the factors likely to affect its future development, performance and position are set out on pages 1 to 70 of the business review and a summary of the principal risks affecting the business are shown on pages 34 to 35. The financial position of the Group, its cash flows, liquidity position, borrowing facilities and financial risks are described in pages 14 to 17 and 36 to 37 of the business review. In addition, notes 1, 13, 15 and 17 of the consolidated financial statements include the Group's objectives, policies and processes for financial risk management, details of its cash and cash equivalents, indebtedness and borrowing facilities and its financial instruments, hedging activities and its exposure to counterparty credit risk, liquidity risk, currency risk, interest rate risk and commodity pricing risk. As described on page 36, the Group meets its funding requirements through a mixture of shareholders' funds, bank borrowings, bonds, notes and finance leases. The Group has facilities of Â£2.3 billion of which Â£1.1 billion was drawn at the year end. None of these facilities expire in 2012. The Group's forecasts and projections, taking into account reasonably possible changes in trading performance, show that the Group has sufficient financial resources. As a consequence, the directors have a reasonable expectation that the Company and the Group are well placed to manage their business risks and to continue in operational existence for the foreseeable future, despite the current uncertain global economic outlook. Accordingly, the directors continue to adopt the going concern basis (in accordance with the guidance `Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009' issued by the FRC) in preparing the consolidated financial statements. Responsibility statement The Responsibility Statement below has been extracted in unedited text from the Company's full Annual report for the year ended 31 December 2011. 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 70 includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. By order of the Board Paul Davies Acting Company Secretary February 8, 2012 Cautionary statement regarding forward-looking statements This announcement contains forward-looking statements. Any statements that express forecasts, expectations and projections are not guarantees of future performance and will not be updated. By their nature, these statements involve risk and uncertainty, and a number of factors could cause material differences to the actual results or developments. This report is intended to provide information to shareholders, is not designed to be relied upon by any other party, or for any other purpose and the Company and its directors accept no liability to any other person other than under English law. 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 2011, 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.

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Rolls-Royce Holdings (RR.)

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