Annual Financial Report 2012

RNS Number : 9412Y

Rolls-Royce Holdings PLC

01 March 2013

 



1 March 2013

Rolls-Royce Holdings plc

Publication of the annual report 2012

Rolls-Royce Holdings plc announces that its annual report for the year ended 

31 December 2012 is now available on the Group's website at www.rolls-royce.com

Printed copies of this document will be posted to shareholders on or around 18 March 2013. A copy of the above document has been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/NSM

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 14 February 2013 contained a condensed set of financial statements.

The Annual General Meeting (AGM) of the Company will take place at 11.00am on

Thursday 2 May 2013 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 2012-2014
Ex-entitlement to C Shares	24 April 2013
Record date for entitlement to C Shares	26 April 2013
1st Interim management statement	2 May 2013
AGM, Queen Elizabeth II Conference Centre, London	11.00am 2 May 2013
Record date for C Share dividend	3 June 2013
Deadline for receipt of C Share elections	5.00pm 3 June 2013
Allotment of C Shares	1 July 2013
Payment of C Share redemption monies	3 July 2013
Purchase of ordinary shares for CRIP participants	By 11 July 2013
Announcement of interim results	26 July 2013
Ex-entitlement to C Shares	23 October 2013
Record date for entitlement to C Shares	26 October 2013
Record date for C Share dividend	15 November 2013
Deadline for receipt of C Share elections	5.00pm 2 December 2013
2013 Financial year end	31 December 2013
Allotment of C Shares	2 January 2014
Payment of C Share redemption monies	6 January 2014
Preliminary announcement - 2013 full year results	February 2014
2013 Annual report published	February 2014

Enquiries:

Investor relations:

Simon Goodson, Director of Financial Communication, Rolls-Royce plc

Tel: [phone] [e-mail]

Chairman's statement

In 2012, Rolls-Royce continued to grow underlying profits as it has done every year for the past decade. During that time the Group has doubled its revenues, trebled its order book and more than quadrupled its profits.

During 2012, the order book rose by four per cent, underlying revenues increased by eight per cent and underlying profits grew by 24 per cent. The Group's performance in 2012 is a testament to the strength of our strategy, the quality of our technology and the ability and determination of our people. We are proposing a final payment to shareholders of 11.9 pence per share bringing the full year payment to 19.5 pence per share, an increase of 11 per cent.

Many of the markets in which we operate remain challenging. European economies are stagnant or contracting. In North America, recovery is fragile and, in the emerging economies of South America and Asia, growth is relatively subdued. Government spending in the developed world remains under intense pressure, whilst political tensions in the Middle East further undermine confidence.

Nonetheless, Rolls-Royce remains well positioned. Millions of people in developing nations continue to join the real economy, which drives the requirement for power on land, sea and air. In addition, all of our customers demand increasingly fuel efficient and environmentally friendly power systems. Rolls-Royce continues to invest for future growth throughout the business cycle. This includes over £900 million a year in research and development (R&D), with two thirds of this total devoted to improving the environmental performance of our products. The result of these investments can be seen across our portfolio.

The Trent 1000 aero engine, which powers the Boeing 787 Dreamliner, has enabled this new composite aircraft to achieve fuel efficiency improvements of 20 per cent compared with the aircraft it is replacing. Looking ahead, the Trent XWB that will power the new Airbus A350 XWB is proving itself to be the most efficient jet engine in the world. In our Marine business, the introduction of Liquefied Natural Gas (LNG) engines and radical hull designs have enabled our newest vessels to reduce CO2 emissions by up to 40 per cent and practically eliminate emissions of sulphur and nitrogen oxides. In our Energy business, the latest variant of our industrial Trent engine offers significant efficiency improvements. We continue to invest in our Civil Nuclear business in order to support the development of non-fossil fuel power generation.

In order to fulfil our substantial order book and to increase our productivity, Rolls-Royce has continued to develop new state-of-the-art facilities around the world. This investment creates a demand for highly-skilled labour and generates economic activity. In the US, we were pleased to welcome President Obama to our new facility at Crosspointe in Virginia where we are manufacturing discs for our latest Trent engines. It was a particular pleasure for me to welcome the Prime Minister of Singapore, Lee Hsien Loong, to the official opening of our new campus at Seletar in Singapore, where later in 2012 the Duke and Duchess of Cambridge unveiled the first Trent 900 engine to be assembled at the site. We also made substantial investments in the UK. These include our new apprentice academy in Derby, which was opened by the Chancellor of the Exchequer, George Osborne. This facility enables us to double the number of apprentices we can train, providing a supply of highly-trained young men and women for companies in our supply chain.

In 2012, 318 apprentices joined the Group, along with 312 graduates from 89 universities and 36 nations. We provide these young men and women with opportunities to gather experience across the Group by working on different projects and in various locations before settling on a career path within the Group.

We encourage all employees to undertake training throughout their careers. We invested £39 million in training and development during 2012 with major teaching facilities operating in the UK, US and Singapore. We also have a comprehensive online resource that this year delivered nearly 250,000 hours of training in subjects as wide ranging as export control legislation to health and safety.

We have an outstanding community of new recruits who give me tremendous confidence about the future of the Group. Among the many awards accumulated by our young men and women, Patrick Reiman came top in a national ranking of apprentices in Germany, having completed his final exams with a mark of 98 per cent. Neeraj Sunger, Oliver Jukes and Laura Grey all won 'Outstanding Achievement' awards from the Engineering Employers Federation in the UK. For the first time in 2012, one of our own graduates, Philippa Davies, acted as master of ceremonies at the Rolls-Royce Science Prize award, an annual event that celebrates the very best science teaching in the UK. These diverse young people show that engineering can attract the brightest and best by offering stimulating, varied and rewarding careers.

Rolls-Royce has a significant requirement for educated young people to support our future growth. Therefore we invest time, energy and financial resource in encouraging Science, Technology, Engineering and Mathematics (STEM) education. This includes our participation in 'Project Enthuse', an industry and government initiative that provides professional development of STEM teachers in the UK; a partnership to raise the skills of science teachers in primary schools in Germany; sponsorship of a 'Rocket Challenge' in the US; and a technology laboratory in Dubai, where teachers and pupils can learn about the practical applications of physics.

Rolls-Royce is dedicated to improving the environmental performance of its products and to bring better power to a changing world. The Group provides world-class training and its people give their time and energy to support educational projects. We donate around £8 million a year to charitable causes. In all of these ways Rolls-Royce demonstrates its commitment to sustainability and to investing in the communities in which it operates.

As previously reported, the Serious Fraud Office (SFO) asked us, early in 2012, to investigate allegations of bribery and corruption in Indonesia and China. In response to its request we asked a leading law firm to conduct a wide review which has raised matters of concern in these and in other markets. We have now referred a file to the SFO.

Rolls-Royce has significantly strengthened its compliance procedures in recent years. We established an ethics committee in 2008 and subsequently introduced a new Global Code of Business Ethics in 2009 and an Intermediaries Policy. We have also expanded our compliance function. In January 2013, we appointed Lord Gold to lead a review of our current procedures and to report to the ethics committee. Lord Gold is one of the UK's most respected litigators and has extensive experience working at the most senior levels with corporations, governments and regulators around the world. As we have made clear, the Board will not tolerate improper business conduct of any sort and will take all necessary action to ensure compliance.

I would like to thank my fellow directors for their great support and hard work in the last year. In particular, I would pay tribute to Mike Terrett, who retired from the Board and from his role as Chief Operating Officer at the end of 2012. Mike joined Rolls-Royce as a graduate trainee and over the course of 34 years played a significant role in the Group's transformation, as Chief Engineer on the Trent 700 and the Trent 800, President of International Aero Engines, President of Civil Aerospace and, since 2007, as Chief Operating Officer.

We bid farewell to Peter Byrom, our longest serving non-executive director and to Ian Strachan. Both retire at the 2013 annual general meeting (AGM). Their wise counsel, constructive challenge and support has been of enormous value to me and the Board. Iain Conn will replace Ian Strachan as Chairman of the ethics committee.

As well as thanking departing colleagues, it has been a great pleasure to welcome onto the Board, Jasmin Staiblin, who is Chief Executive of the Swiss energy group, Alpiq, and previously worked for many years for ABB. Jasmin brings engineering expertise and international experience to the Board.

Four executives at Rolls-Royce and one non-executive director were recognised this year by Her Majesty the Queen as Commanders of the Most Excellent Order of the British Empire (CBEs). I congratulate Colin Smith, Mike Terrett, Professor Ric Parker, Richard Thornley and Lewis Booth.

I would like to thank the members of our International Advisory Board (IAB) who continue to provide great insight into our global markets. The IAB is led by Lord Powell of Bayswater and its members are distinguished political and business leaders. We are fortunate to have their support, and I am grateful for the time and energy they devote on our behalf.

This will be the final review I write as Chairman of Rolls-Royce, as I will be retiring at the AGM after eight years with this great company.

It has been an honour to lead Rolls-Royce through a period of growth and transformation. I am proud of what has been achieved and believe strongly that the best is still to come. Rolls-Royce has earned itself an enviable position from which it can see abundant opportunities for profitable growth. The talent of its management team ably led by John Rishton, the strength of its order book, the quality and range of its technology and its access to global markets augur well for an outstanding future.

I have met extraordinary people at every level of the Group and have enjoyed my tenure as Chairman. I am in no doubt that my successor, Ian Davis, who will join the Board on 1 March 2013 and who will succeed me as Chairman at the conclusion of the AGM on 2 May, will shepherd Rolls-Royce to even greater success. He brings to the Group a wealth of international and Board level experience.

Lastly I wish the Board, John Rishton and the management team every success. I am grateful to my fellow directors, Rolls-Royce employees, customers, suppliers, partners and our long-term shareholders for their loyal support.

Sir Simon Robertson

Chairman

13 February 2013

Chief Executive's review

In 2012, Rolls-Royce continued to build the capacity required to deliver our £60 billion order book. Among these investments, we opened a new engine test and assembly facility at Seletar in Singapore that is now producing Trent 900 engines. We announced an expansion of our facilities at Crosspointe in Virginia, US, where we will produce turbine blades and nozzle guide vanes. In South America, construction of a new assembly plant to support our Energy and Marine businesses is well advanced and will open later this year. In the UK, as well as having opened our new apprentice academy in Derby, we are developing a new turbine blade facility in Rotherham and a new disc factory in Washington, Tyne and Wear.

In the past decade, Rolls-Royce has transformed its business. Today we are more global, with over half our order book from the Middle East and Asia. Our portfolio has become more diversified, both through organic growth and acquisition, and we have significantly increased the revenues generated from servicing the power systems we produce. During 2012, we changed the way we describe our vision, values and strategy to reflect better the Group we have become, to set clear direction for the future and to reinforce standards in the way we conduct business:

Values - trusted to deliver excellence

Vision - better power for a changing world

Strategy - understanding our customers, innovation, profitable growth

These are described on pages 8-9.

As well as looking at the expression of our vision, values and strategy, we have made an important structural change, bringing together our Civil and Defence businesses to create one Aerospace division with an integrated supply chain. This change, effective from 1 January 2013, will improve accountability and align our business more closely with our customers' requirements.

The priorities for the business remain the same as last year:

1. deliver on the promises we have made

2. decide where to grow and where not to

3. improve financial performance.

In 2012, we have made progress towards these objectives.

1. Deliver on the promises we have made

The quality of the products and services we supply is measured across the Group and has shown steady improvement. Increased focus on delivery has led to significant improvement in widebody engines in Civil aerospace and in our Marine products. Across the Group, we are investing in a wide range of projects that will improve operational performance and reduce cost. This includes continuing investment in modernising our IT infrastructure that is a key enabler for our business.

Significant milestones have been achieved in our major programmes.

These include: in Civil aerospace, the certification of the Trent XWB engine (in February 2013) that will power the Airbus A350 XWB, the launch of the Trent 1000-TEN that will power Boeing 787s entering service from 2016 and, the entry into service of the BR725 engine powering the new Gulfstream G650 corporate jet. In Defence aerospace, the short take-off and vertical landing (STOVL) variant of the F35B Lightning II Joint Strike Fighter entered service with the US Marine Corps and deliveries were made to the UK MoD.

In Marine, gas turbine power and propulsion equipment was delivered for the US Navy's Littoral Combat Ship and the UK's Queen Elizabeth class aircraft carriers. And, in Energy, we expanded our fleet of gas turbine compressor units through contracts for China's West-East Pipeline Project (WEPP) and the Uzbekistan section of the Asia Trans Gas (ATG) pipeline.

2. Decide where to grow and where not to

We continue to invest in capacity to fulfil our order book and in technology to expand our portfolio.

In Civil aerospace, we are committed to investing in the widebody, narrowbody and corporate market segments. In Defence aerospace, we continue to see opportunities both in developing economies and in our traditional markets, despite the pressure on government spending. In Marine, offshore oil and gas remains a fast growing market and, in Energy, we continue to invest in our Civil Nuclear business where we believe Rolls-Royce can play an important part supporting both existing and new build nuclear capacity. Our acquisition of Tognum, in a joint venture with Daimler, expands our Marine and Energy portfolios and brings significant opportunities for synergies.

Areas where we have decided not to invest include the sale of our tidal power generation business to Alstom in January 2013 and the sale of a 51 per cent stake in our fuel cell business to LG.

3. Improve financial performance

We continue to focus on margin progression. In 2012, margins at Group level improved to 12.2 per cent (2011 10.7 per cent). The Tognum and the IAE restructuring, together contributed 1.1 percentage points, with 0.4 percentage point improvement coming from the underlying business. Overall, profits grew by 24 per cent enabling us to raise our full year distribution to shareholders to 19.5 pence, an 11 per cent increase.

Cost and cash generation remain areas of intense focus for the Group, as we seek to improve quality, on-time delivery and working capital while continuing to invest to meet the rising load. Around £50 million of unit cost improvements were realised in 2012.

As noted in the Chairman's statement, we have passed information to the Serious Fraud Office (SFO) relating to concerns about bribery and corruption involving intermediaries in overseas markets. This follows a request for information from the SFO about allegations of malpractice in Indonesia and China. We have significantly strengthened our compliance procedures in recent years, including new policies for Global Ethics and Intermediaries. We have also expanded the Compliance function. As a further measure, we have appointed Lord Gold to lead a review of current procedures and report to the ethics committee of the Board.

In February 2013, we announced that Sir Simon Robertson will retire as Chairman at our AGM in May. Simon has made an exceptional contribution to Rolls-Royce over the past eight years. He has worked tirelessly on behalf of the Group and his energy and enthusiasm have been an example to us all. He has led the Board with distinction and has made the time to offer guidance and encouragement to colleagues all around the world and at every level of the business. Simon has been a great support to me during my first years as Chief Executive and I wish him every success in the future. I am delighted to welcome Ian Davis as our new Chairman and look forward to working closely with him.

During 2012, the Group has once again increased its profits, revenues and its order book, providing a solid foundation for further progress in the year ahead. Our cash inflow of £137 million, prior to acquisitions and disposals, was delivered after a heavy year of investment in technology, capability and infrastructure.

The achievements of Rolls-Royce are made possible by the more than 40,000 employees whose combined expertise and enthusiasm give us the ability to do extraordinary things. I am constantly impressed by their commitment and am grateful for their hard work and customer focus.

John Rishton

Chief Executive

13 February 2013

Finance Director's review

Summary                                             

	2012	2011	Change
Order book £m	60,146	57,630*	+4%
Underlying revenue** £m	12,209	11,277	+8%
Underlying profit before tax** £m	1,429	1,157	+24%
Underlying earnings per share	59.27p	48.54p	+22%
Full year payment to shareholders	19.5p	17.5p	+11%
Reported revenue £m	12,161	11,124	+9%
Reported profit before financing £m	2,072	1,189	+74%
Net cash £m	1,317	223
Average net cash £m	(145)	320

* Restated 2011 year-end data excluding IAE order book of £4,571 million

** See explanation opposite and on page 86

The pace of recovery of the global economy remains uncertain and some of our customers continue to operate in challenging budgetary environments. However, our customers operate across a broad range of businesses and markets and our relatively young and competitive installed portfolio of power systems and products will generate demand for aftermarket services for many years to come. Demand from existing customers remains strong, as it does from the new customers included in our growing order book.

Our investments in technology, operations and people are underpinned by the significant growth inherent in our order book. These investments will safeguard our competitive advantage, support our commitments to customers and improve our operational effectiveness.

The Group's 2012 performance was achieved after absorbing a 27 per cent increase in the net R&D charge to £589 million and a ten per cent increase in capital expenditure, including software, to £610 million.

Engine Holding (EH), our collaboration with Daimler, owns over 99 per cent of Tognum. We transferred Bergen Engines to EH on 2 January 2012, which resulted in a £167 million cash inflow to the Group. We continue to consolidate Bergen. We will consolidate the whole of EH, including Tognum, from 1 January 2013.

EH's contribution of £287 million to 2012 revenue came wholly from Bergen. EH's profit contribution of £109 million comprised £32 million from Bergen and £77 million from the equity accounted contribution from Tognum.

The Group's sale of its 32.5 per cent programme share and related goodwill in IAE in 2012, generated a profit before tax of £699 million and a cash inflow of £942 million. The profit is excluded from our underlying results. The Group continues 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 proposed joint venture with Pratt & Whitney to develop an engine to power the next mid-size aircraft is subject to regulatory approval and had no material effect on 2012's 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 and the effects of acquisition accounting are excluded. In 2011, adjustments were made to exclude one-off past-service credits on post-retirement schemes. 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    

£ million           

	2012	2011	Change
Revenue	12,209	11,277	932	8%
Civil aerospace	6,437	5,572	865	16%
Defence aerospace	2,417	2,235	182	8%
Marine	2,249	2,271	(22)	-1%
Energy	962	1,083	(121)	-11%
Engine Holding	287	331	(44)	-13%
Intra-segment	(143)	(215)	72
Profit before financing costs and taxation	1,490	1,206	284	24%
Civil aerospace	727	499	228	46%
Defence aerospace	404	376	28	7%
Marine	294	287	7	2%
Energy	21	16	5	31%
Engine Holding	109	80	29	36%
Intra-segment	(11)	-	(11)
Central costs	(54)	-52	(2)	4%
Net financing costs	(61)	-49	(12)	24%
Profit before taxation	1,429	1,157	272	24%
Taxation	(318)	-261	(57)	22%
Profit for the year	1,111	896	215	24%
EPS	59.27p	48.54p	10.73p	22%
Payment to shareholders	19.5p	17.5p	2.0p	11%
Other items
Other operating income	33	70	(37)
Gross R&D investment	919	908	11
Net R&D charged to the income statement	589	463	126

Underlying revenue increased eight per cent to £12.2 billion.

This includes a five per cent growth in services revenue to £6.3 billion and a 12 per cent increase in OE revenue to £5.9 billion. OE performance included strong 31 per cent growth in Civil aerospace and 12 per cent growth in Defence aerospace offset by reductions in each of Marine, Energy and EH. Underlying services revenue continues to represent more than half (52 per cent) of the Group's underlying revenue. In 2012, services revenue grew in all businesses as the installed base of products continued to grow and the services network expanded.

Underlying profit before financing costs and taxation increased 24 per cent to £1.49 billion. This was due to a number of factors: increased revenue; better mix; unit cost reduction; a full year's benefit from Tognum (compared to four months' contribution to Group results in 2011); and improved trading following the IAE restructuring settlement completed during the year. These improvements were partly offset by a significant increase in the R&D charge and lower other operating income.

Further discussion of trading is included in the business segment reports on pages 20 to 27.

Underlying financing costs increased 24 per cent to £61 million, including an increase in net interest charges reflecting lower average net funds after funding the Tognum acquisition in the second half of 2011.

Underlying taxation was £318 million, an underlying tax rate of 22.3 per cent compared with 22.6 per cent in 2011.

Underlying EPS increased 22 per cent to 59.27 pence, in line with the increase in the underlying profit after tax.

Payments to shareholders: at the AGM on 2 May 2013, the directors will recommend an issue of 119 C Shares with a total nominal value of 11.9 pence for each ordinary share. The final issue of C shares will be made on 1 July 2013 to shareholders on the register on 26 April 2013 and the final day of trading with entitlement to C Shares is 23 April 2013. Together with the interim issue on 2 January 2013 of 76 C Shares for each ordinary share with a total nominal value of 7.6 pence, this is the equivalent of a total annual payment to ordinary shareholders of 19.5 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 5.00pm on 3 June 2013. Redemption will take place on 3 July 2013.

Other operating income relates to programme receipts from Risk and Revenue Sharing Partnerships (RRSPs), which reimburse past expenditure. These receipts decreased by 53 per cent in 2012 due to the phasing of major programmes such as the Trent XWB.

Net R&D charged to the income statement increased by 27 per cent to £589 million reflecting a combination of increased spend of £56 million and lower net capitalisation of £69 million due to the phasing of major new programmes. This investment and the ten per cent increase in capital expenditure including software to £610 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 data - £ million	2012	2011
Intangible assets	2,901	2,882
Property, plant and equipment	2,564	2,338
Net post-retirement scheme deficits	(545)	(397)
Net working capital	(1,100)	(1,098)
Net funds	1,317	223
Provisions	(461)	(502)
Net financial assets and liabilities	(127)	(718)
Joint ventures and associates	1,800	1,680
Assets held for sale	4	178
Other net assets and liabilities	(248)	(67)
Net assets	6,105	4,519
Other items
USD hedge book (US$ million)	22,500	22,000
Net TotalCare assets	1,312	956
Gross customer finance contingent liabilities	569	612
Net customer finance contingent liabilities	70	124

 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 £2.9 billion with additional development, certification and software costs being offset by annual amortisation charges. 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 significant impairments in 2012. Further details are given in note 8 of the financial statements.

Property, plant and equipment increased by ten per cent to £2.6 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 increased 37 per cent to £545 million. This was principally due to the movements in the assumptions used to value the underlying assets and liabilities in accordance with IAS 19 - in particular the discount rate which is derived from AA corporate bond yields. The impact of the revisions to IAS 19 is described in note 19 of the financial statements. 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, and the exposure to equities has reduced to around 12 per cent of scheme asset. This has been achieved against the headwind of increasing life expectancy assumptions.

A modest reduction in the Group's cash contribution to the overall funding level of the schemes is expected in 2013.

Net funds increased by £1.1 billion to £1.3 billion largely due to the £0.9 billion proceeds received on the restructuring of IAE. Average net funds fell by £465 million to (£145) million due to the timing of the Tognum acquisition in the second half of 2011 and the restructuring of IAE in June 2012.

Investment - joint ventures and associates increased by seven per cent, largely as a result of the capitalisation of a loan to EH in respect of the acquisition of Tognum.

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 the fair value of foreign exchange, commodity and interest rate contracts, financial RRSPs and the put option on Bergen Engine AS, 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 and the inclusion of the put option (£167 million) for the first time.

The USD hedge book increased two per cent to US$22.5 billion. This represents around five years of net exposure and has an average book rate of £1 to US$1.60. Current forward market exchange rates are similar to current average book rates.

Net TotalCare® 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 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 2012, the Group's gross exposure remained stable at £569 million. On a net basis, exposure reduced by £54 million to £70 million predominantly due to an indemnity from United Technologies for all Airbus A320 commitments following the restructuring of IAE. Whilst some banks, particularly European institutions, continue to find circumstances challenging and offer limited participation in financing new aircraft deliveries, the Group expects that other providers of US dollar funding and ongoing support from the export credit agencies will largely fill the gap left by these banks.

Engine Holding

EH made progress towards achieving full ownership and management control of Tognum. At the end of 2012, EH owned over 99 per cent of the shares in Tognum. A squeeze-out  process to acquire the remaining shares is ongoing, and is expected to conclude in 2013. During the year, EH registered a domination and profit and loss transfer agreement with Tognum, which provides a greater degree of management control and flexibility to pursue initiatives together. By bringing together Tognum and Bergen and leveraging the skills from Rolls-Royce and Daimler, we see significant opportunities for synergies.

In our Marine business, our design and integration skills will be further enhanced by the additional product range that Tognum's high-speed diesel engines will bring. And in the aftermarket, by combining the installed bases of equipment, we see good opportunities to leverage our customer support networks. Recently, we announced a contract to design and power four offshore supply vessels where, for the first time, we were able to incorporate Tognum's engines into our integrated design. Similarly, Tognum's high-speed diesels will add additional capabilities to our Energy portfolio, allowing us to offer both gas and diesel products as well as options for primary and stand-by power.

Group 2013 guidance excluding Engine Holding

For the full year 2013, we expect the Group to see modest growth in underlying revenue and good growth in underlying profit, with cash flow around breakeven as we continue to invest for future growth.

In Civil aerospace, we anticipate modest growth in revenue and strong growth in profit. In Defence aerospace we expect modest growth in revenue and a modest reduction in profit. In Marine, we expect modest growth in revenue and profit. And in Energy, we expect some improvement in revenue and profit.

This guidance excludes the impact of EH. The Group cannot provide financial guidance on EH while Tognum is still listed. Further information about Tognum's business and future prospects can be found on its website at www.tognum.de/investors.

Additional financial information can be found on pages 37 and 38.

Principal risks and uncertainties

Risk or uncertainty and potential impact	How we manage it
Product failure	· Operating a 'safety first' culture
Product not meeting safety expectations, or causing significant impact to customers or the environment through failure in quality control.	· Our engineering design and validation process is applied from initial design, through production and into service
	· A safety management system has been established by a dedicated team, which is subject to continual improvement based on experience and industry best practice
	· Plan to accelerate quality improvements launched, including involvement from our suppliers
	· Crisis management team chaired by Director of Engineering and Technology or General Counsel as appropriate
Business continuity
Complete breakdown of external supply chain or internal facilities that could be caused by destruction of key facilities, natural disaster, regional conflict, financial insolvency of a critical supplier or scarcity of materials which would reduce the ability to meet customer commitments, win future business or achieve operational results.	· Continued investment in adequate capacity and modern equipment and facilities · Identifying and reducing single points of failure · Selection of stronger suppliers, developing dual sources or dual capability · Developing and testing site level incident management and business recovery plans
	· Customer excellence centres provide improved response to supply chain disruption
Competitor action
The presence of large, financially strong competitors in the majority of our markets means that the Group is susceptible to significant price pressure even where our markets are mature or the competitors are few. Our main competitors have access to significant government funding programmes as well as the ability to invest heavily in capability.	· Accessing and developing key capabilities in technology and service offerings which differentiate us competitively · Focusing on our customers and partnering with others effectively · Driving down cost and improving margins · Protecting credit lines · Investing in innovation, manufacturing and production · Understanding our competitors
International trade friction
Geopolitical factors that lead to significant tensions between major trading parties or blocs which could impact the Group's operations. For example: explicit trade protectionism; differing tax or regulatory regimes; potential for conflict; or broader political issues.	· Where possible, locating our domestic facilities in politically stable countries and/or ensuring that we retain dual capability · Diversifying global operations to avoid excessive concentration of risks in particular areas · Understanding our supply chain risks · Proactively influencing regulation where it affects us
Major product programme delivery
Failure to deliver a major product programme on time, to specification or technical performance falling significantly short of customer expectations would have potentially significant adverse financial and reputational consequences, including the risk of impairment of the carrying value of the Group's intangible assets and the impact of potential litigation.	· Major programmes are subject to Board approval · Major programmes are reviewed at levels and frequencies appropriate to their performance against key financial and non-financial deliverables and potential risks · Technical audits are conducted at pre-defined points performed by a team that is independent from the programme · Formal independent gated reviews are conducted throughout a programme's lifecycle to review non-technical risks · Programmes are required to address the actions arising from reviews and audits and progress is monitored and controlled through to closure · Knowledge management principles are applied to provide benefit to current and future programmes
Compliance
Non-compliance by the Group with legislation or other regulatory requirements in the heavily regulated environment in which it operates (for example: export controls; use of controlled chemicals and substances; and anti-bribery and corruption legislation) compromising the ability to conduct business in certain jurisdictions and exposing the Group to potential: reputational damage; financial penalties; debarment from government contracts for a period of time; and/or suspension of export privileges (including export credit financing), each of which could have a material adverse effect.	· An uncompromising approach to compliance is now, and should always be, the only way to do business · The Group has an extensive compliance programme as separately described in the ethics and risk committee reports. These programmes and the Global Code of Business Ethics are promulgated throughout the Group and are updated and reinforced from time to time, to ensure their continued relevance and, to ensure that they are complied with both in spirit and to the letter · A legal and compliance team has been put in place to manage the current specific issue through to a conclusion
	· The appointment of Lord Gold to lead a review of the Group's current compliance procedures and report to the ethics committee
Market shock
The Group is exposed to a number of market risks: some of which are of a macro-economic nature, for example, foreign currency exchange rates, and some which are more specific to the Group, for example, liquidity and credit risks or disruption to aircraft or other operations. Significant extraneous market events could also materially damage the Group's competitiveness and/or credit worthiness. This would affect operational results or the outcomes of financial transactions.	· Maintaining a strong balance sheet, through healthy cash balances and a continuing low level of debt · Providing financial flexibility by maintaining high levels of liquidity and an investment grade 'A' credit rating · The portfolio effect from our business interests, both in terms of original equipment to aftermarket split and our different segments provide a natural shock absorber since the portfolios are not correlated · Deciding where and what currencies to source in, where and how much credit risk is extended or taken and hedging residual risk through the financial derivatives markets (foreign exchange, interest rates and commodity price risk)
IT vulnerability
Breach of IT security causing controlled data to be lost, made inaccessible, corrupted or accessed by unauthorised users, impacting the Group's reputation.	· Establishing 'defence in depth' through deployment of multiple layers of software and processes including web gateways, filtering, firewalls, intrusion and advanced persistent threat detectors
	· Establishment of security and network operations centres
	· Active sharing of information through industry, government and security forums

Civil aerospace

The order book increased by five per cent* including new orders of £10.3 billion (2011 £11.0 billion). We continue to grow our widebody market share, with Trent engines making up around 75 per cent of our order book. We remain committed to the mid-size market both as a supplier to IAE and via our planned new joint venture with the IAE partners to develop the next generation of engines for this market segment. Our continued success in the corporate market is being driven primarily by our BR700 series of engines for large cabin Gulfstream and Bombardier aircraft.

*when compared to the 2011 Civil order book of £47,370 with IAE orders of £4,571 million excluded

Revenue increased by 16 per cent. There was a 31 per cent growth in OE revenue, primarily reflecting higher deliveries of Trent and corporate engines. Services revenue grew by five per cent, consistent with growth in the installed base of thrust.

Profit increased by 46 per cent, including £92 million related to the restructured trading arrangements with IAE. Excluding these, profit increased by 27 per cent due to increased OE volume, better OE mix,

services growth and unit cost improvements. This growth was tempered by a higher R&D charge due to higher spend and lower capitalisation related to major new programme activity and by lower entry fees related to the Trent XWB.

Key financial data

	2008	2009	2010	2011	2012
Order book £m*	43,524	47,102	48,490	51,942	49,608
	+21%	+8%	+3%	+7%	-4%
Engine deliveries*	987	844	846	962	888
Underlying revenue £m	4,502	4,481	4,919	5,572	6,437
	+11%	0%	+10%	+13%	+16%
Underlying OE revenue £m	1,776	1,855	1,892	2,232	2,934
Underlying service revenue £m	2,726	2,626	3,027	3,340	3,503
Underlying profit before	566	493	392	499	727
financing £m	0%	-13%	-20%	+27%	+46%

*all years prior to 2012 include IAE order book and engine deliveries include IAE V2500

Highlights

·      Order book now stands at £49.6 billion

·      Trent XWB gained certification

·      Trent 1000-TEN launched

·      Major new Trent XWB orders from Cathay Pacific and Singapore Airlines

·      BR725 enters service on new Gulfstream G650 business jet

·      IAE restructuring completed

 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 has 12,500 engines in service with customers around the world. Demand for our products remains robust and underpins strong performance.

In 2012, the airline industry saw overall passenger traffic growth at around five per cent. Airlines were careful to match capacity to demand and the industry as a whole will record a profit on passenger business despite the rising price of oil. The air cargo sector faced a tougher year as shippers moved away from air freight due to the impact of increasing fuel prices on shipment costs.

The large-cabin business aircraft market, which is characterised by a diverse customer base of large global corporations and high net worth individuals, remained resilient. The demand for small and

medium-sized business aircraft continued to be subdued in 2012 but our exposure to this sector is relatively small.

Widebody

The Trent XWB engine flew for the first time in February 2012, on an Airbus A380 test aircraft in Toulouse, France. It went on to complete a successful flight-test programme and gained certification on 7 February 2013. This is the fastest selling Trent engine ever, with more than 1,200 engines sold to 35 customers.

During 2012, Singapore Airlines ordered 20 Trent XWB-powered Airbus A350-900s, while Cathay Pacific ordered ten A350-1000s and converted previously announced orders for 16 A350-900s

to A350-1000s.

The Trent 1000 completed one year in service powering Boeing 787 Dreamliners with Japan's All Nippon Airways (ANA). The engine also entered service with South American airline LAN (the first Boeing 787s in the Americas), and with Polish flag-carrier LOT, the first in Europe. During the year, Trent 1000 orders were received from Avianca and Air New Zealand.

In July, we launched the Trent 1000-TEN (Thrust, Efficiency and New technology) that is due to enter service in 2016. This engine, which incorporates proven next generation technology from the Trent XWB, will be capable of powering all versions of the Boeing 787.

Trent 900-powered Airbus A380s entered service with two of Asia's leading airlines, Malaysia Airlines in July and Thai Airways in September. Skymark of Japan ordered the engine and Singapore

Airlines, who launched the engine in service five years ago, ordered five more Trent 900-powered aircraft to add to the 19 A380s it already has in service.

The first Trent 900 engine to be completed at our new Seletar campus in Singapore was delivered in September. The engine was unveiled to an audience of VIPs and international media by Their Royal Highnesses The Duke and Duchess of Cambridge during their visit to Seletar.

The Trent 700 continues to be popular, winning orders in 2012 to power 54 Airbus A330 aircraft for China Eastern, Etihad, Avianca, Synergy, Garuda Indonesia, Air Pacific and Skymark. We announced

plans to make performance improvements to the Trent 700 by incorporating proven technologies from the Trent 1000, Trent XWB and BR725 engines to deliver further increased efficiency. These enhancements will complement the improvements to the A330 aircraft that Airbus announced in 2012.

Narrowbody

In June 2012, we completed the restructuring of our participation in IAE, which produces the V2500 engine for the Airbus A320 family of aircraft selling our equity and programme shares to Pratt & Whitney.

We remain committed to the mid-size market through our new joint venture with the IAE partners. We will also continue to be responsible for the manufacture of high-pressure compressors, fan blades and discs as well as providing engineering support and final assembly for 50 per cent of IAE V2500  engines.

Corporate and regional

The flight-test programmes for two new Rolls-Royce powered business jets continued through the year. The BR725-powered Gulfstream G650 entered service in December 2012. The AE 3007C-powered Cessna Citation TEN is due to enter service in 2013.

Services

Revenue from services increased by five per cent in 2012, reflecting growth in the fleet of wide-bodied engines, 92 per cent of Trent engines are sold with TotalCare agreements.

Over 1,200 aircraft are covered by CorporateCare® and more than 70 per cent of customers for new Rolls-Royce powered business jets enrol in CorporateCare.                                                                  

Defence aerospace

The order book contracted by 15 per cent reflecting the budgetary pressures on our major customers in Europe and North America. The net order intake of £1.6 billion (2011 £1.8 billion) includes cancellations of £0.4 billion, principally the proposed cancellations of a number of contracts for C-27J aircraft, including those by the US Department of Defense. Despite the challenging environment,

we continue to see opportunities both in our traditional markets and the developing economies.

Revenue increased by eight per cent, reflecting a 12 per cent increase in OE revenue and a five per cent increase in services revenue. However, adjusted for the non-recurrence of the £60 million Strategic Defence and Security Review (SDSR) benefit in 2011, services revenue increased by 11 per cent. This highlights how our large installed base continues to provide services opportunities, as customers seek to optimise the efficiency of their aircraft.

Profit increased by seven per cent. Adjusted for the SDSR benefit in 2011, profit increased by 28 per cent due to increased OE volumes and mix, growth in services, unit cost improvements and a lower R&D charge.

Key financial data

	2008	2009	2010	2011	2012
Order book £m	5,527	6,451	6,506	6,035	5,157
	+23%	+17%	+1%	-7%	-15%
Engine deliveries	517	662	710	814	864
Underlying revenue £m	1,686	2,010	2,123	2,235	2,417
	+1%	+19%	+6%	+5%	+8%
Underlying OE revenue £m	739	964	1,020	1,102	1,231
Underlying service revenue £m	947	1,046	1,103	1,133	1,186
Underlying profit before	223	253	309	376	404
financing £m	+12%	+13%	+22%	+22%	+7%

Highlights

·      US$1 billion of contracts for OE and services for military transport, trainer and helicopter engines for the US Army,US Air Force, US Marine Corps and US Navy

·      A US$315 million contract for LiftSystems for the F-35B STOVL variant of the Lightning II aircraft

·      Launch of fuel-saving initiative with the Royal Australian Air Force on C-130 operations and a £100 million contract extension to maintain engines for C-130 and VC-10 aircraft from the UK MoD

·      An order for new Adour engines to power Hawk trainers for the Royal Saudi Air Force

Rolls-Royce remains the second largest provider of defence aero-engine products and services globally with 18,000 engines in the service of 160 customers in 103 countries. Our engines power

aircraft in every major sector, including: transport; combat; patrol; trainers; helicopters; and unmanned aerial vehicles (UAVs).

Transport/Patrol

We are a world leader in the military transport/patrol market with over 8,000 engines in service. The AE 2100 engine fleet for the Lockheed Martin C-130J, the Alenia C-27J, and other transport/patrol aircraft, expanded in 2012.

The TP400 engine for the Airbus A400M military transport aircraft has amassed over 16,000 engine flying hours in its flight-test programme. Engine deliveries for the first production aircraft began in 2012, with entry into service planned for 2013.

Flight-tests of a technology upgrade for the T56 engine were successfully concluded by the US Air Force. Our '3.5 upgrade' kit will provide operators of legacy variants of the C-130 and P-3 aircraft with significant fuel savings and, therefore, reduced operating costs.

Combat

2012 was a significant year for the Rolls-Royce LiftSystem® which provides the STOVL capability for Lockheed Martin's F-35B Lightning II Joint Strike Fighter. The US Marine Corps and the UK MoD received their first deliveries of their STOVL aircraft. The F-35B exceeded the 500th short take-off milestone early in the year and the US Marine Corps commissioned its first operational squadron of F-35Bs in Yuma, US.

We delivered the 300th EJ200 engine built by Rolls-Royce for the Eurofighter Typhoon programme, which has significant export opportunities in the Middle East and Asia. The Kingdom of Saudi Arabia is already a major export customer and at the end of 2012 Oman announced its intention to purchase 12 Typhoon aircraft.

In the US, we initiated testing on a new, advanced technology engine compressor, focusing on reducing fuel consumption as part of our involvement in the Highly Energy Efficient Turbine Engine

(HEETE) programme for the US Air Force. Together with Snecma, we signed a contract to study the

architecture and characteristics required for the next generation of UK and French combat aircraft engines.

Unmanned vehicles

The fleet of AE 3007H engines which power the Northrop Grumman Global Hawk high-altitude long-endurance and Triton platforms continues to grow, with 67 engines delivered and about 50 additional engines projected.

Rolls-Royce is to power the US Navy's Broad Area Maritime Surveillance (BAMS) aircraft and we also see opportunities in the US Navy's Unmanned Carrier Launched Surveillance and Strike (UCLASS) aircraft programme.

The first flight of the Adour-powered nEUROn, an unmanned combat air vehicle developed by six European partners, took place. The stealth technology demonstrator will undergo testing in France

before moving to Sweden, in 2014 for operational trials, and also to Italy to measure stealth characteristics and undergo live-firing tests.

Small engines

We delivered the first production M250 engines to Grob for its new G120TP trainer aircraft, while in helicopters the RR300 achieved its first 30,000 hours flight time on the Robinson R66 and the CTS800

engine surpassed 100,000 in-service flight hours. The M250, which has now amassed over 200 million flight hours, powered the first flight of the GippsAero GA10, while the CTS800 achieved FAA certification for the Turkish T129 ATAK helicopter.

Services

The provision of engine support through MissionCare™ continues to generate significant revenues across a wide range of engines. The US Armed Forces placed contracts to support engines powering

C-130, V-22, T-45 Goshawk aircraft and Kiowa Warrior helicopters totalling over US$560 million.

The Royal Australian Air Force became the first military customer to implement fuel usage analysis and modelling techniques, to help improve the fuel efficiency of its C-130 transport fleet. The techniques were first developed by Rolls-Royce for civil airline customers.

We opened our first US Operations Centre in Indianapolis, US. The US$2 million investment will offer technical support from a 50-strong team of technical and engineering experts. We also opened the first Defence Service Delivery Centre at RAF Marham in the UK.

Marine

The order book increased 44 per cent including new orders of £3.3 billion (2011 £2.1 billion). This includes the £1.1 billion order by the UK MoD to deliver reactor cores for its future fleet of nuclear-powered submarines. Offshore orders reflected improved demand in the oil and gas sector, especially for drill ships and support vessels in Brazil. This was partially offset by continued weak order flow in the merchant sector.

Revenue reduced by one per cent, reflecting increased pricing pressure and adverse foreign exchange movements. Both OE and services revenue improved in the second half, reflecting improvement in the offshore sector and a better capture of the services market resulting from the recent expansion of our global network of services centres.

Profit increased by two per cent due to better revenue mix and cost reduction, partially offset by pricing pressures and adverse foreign exchange movement.

Key financial data

	2008	2009	2010	2011*	2012
Order book £m	5,190	3,526	2,977	2,737	3,954
	+10%	-32%	-16%	-8%	+44%
Underlying revenue £m	2,204	2,589	2,591	2,271	2,249
	+42%	+17%	0%	-12%	-1%
Underlying OE revenue £m	1,492	1,804	1,719	1,322	1,288
Underlying service revenue £m	712	785	872	949	961
Underlying profit before	183	263	332	287*	294
financing £m	+62%	+44%	+26%	-14%	+2%

* 2011 figures restated due to transfer of Bergen to new Engine Holding segment

Highlights

·      £147 million in new orders from Brazil for drill ships and highly complex offshore vessels

·      £119 million of contracts to design and equip ten offshore supply vessels for COSCO, Farstad and Hyundai

·      First contract for MT30 gas turbine outside of US and UK home markets - chosen by Republic of Korea Navy for future frigate

·      US Navy contract to power the two latest Littoral Combat Ships

·      MT7 gas turbines chosen for US Navy's future hovercraft fleet

·      World's first gas-powered tug commissioned and world's first gas-powered cargo vessel entered service

·      £1.1 billion order for naval nuclear reactor core programmes

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 systems for offshore oil and gas, merchant and naval surface and submarine vessels. Comprehensive through-life support for our customers is provided through an expanding global network of service facilities.

Increased price pressure had an effect on trading, there was a reduced order flow in some merchant sectors and challenges to naval budgets in developed economies. Despite these headwinds, the Marine business continued to perform well in 2012.

We remain well positioned to capitalise on opportunities in the highly specialised offshore oil and gas sector. In addition, we are leveraging our global support network to service an increasing proportion of the installed base of equipment.

We continue to strengthen our position in new markets, including Brazil and Korea.

Offshore

We further consolidated our strong position in the oil and gas sector with encouraging growth in order intake, revenues and profitability. This was largely based on the success of our specialist UT vessel design capabilities, which now includes highly efficient wave-piercing vessels.

As the industry continues to explore deeper and more challenging environments, like those in the South Atlantic off the coast of Brazil and in the Arctic region, our core product and systems capabilities

enable us to be a strong partner for our offshore customers.

Merchant

We continue to invest in technology that addresses the need for cleaner, more efficient and environmentally sustainable power and propulsion systems. Our market leading LNG-fuelled C engine

positions us well for opportunities that arise from stricter environmental standards from 2016. Ship design enhances our ability to offer integrated solutions.

Naval

In our surface naval activities, we are developing greater design capabilities for auxiliary craft. Our innovative commercial ship design capability was extended with a new team to design ships for navies, coastguards and other maritime agencies.

In 2012, we delivered gas turbine-based power and propulsion equipment for the US Navy's Littoral Combat Ship and the Royal Navy's Queen Elizabeth class aircraft carriers. The MT30 gas turbine's success on both of these programmes has generated strong interest from navies in Europe, South America and in Asia where the Republic of Korea Navy chose the MT30 to power its next generation frigate programme.

The MT7 gas turbine was selected to power the US Navy's future fleet of up to 73 hovercraft.

Underlining the high level of confidence that the MoD has in our technology and our people, the Submarines business secured a contract worth £1.1 billion for the regeneration of the reactor core

manufacturing facility at Derby and the continued delivery of reactor cores for the UK's nuclear powered submarine fleet.

Rolls-Royce continued to deliver against key milestones in the programme to replace the current Vanguard class of nuclear submarines, ensuring further long-term stability for the naval reactor business.

The opening of the new Primary Components Operations facility in the UK during the year, allowed the Group to rationalise its component manufacturing capability, delivering improved efficiencies for our customer.

Services

In 2012, we enhanced our capacity to realise better the significant opportunity that our large installed base of equipment represents. We expanded our service centre network through the opening of

new facilities in China, and introduced a streamlined global spare parts distribution network and 24/7 service desks to improve customer delivery and responsiveness. In addition, we also opened a state-of-the-art technology and training centre to provide closer customer support.

Energy

The order book reduced by nine per cent, with new orders of £0.8 billion (2011 £1.3 billion). In the oil and gas market, high oil prices and global growth continue to sustain bid activity, albeit with pricing pressures and order deferrals by some customers. While the power generation market in mature economies remains suppressed, we are seeing growth in developing countries. We continue to invest

for future growth in Civil Nuclear.

Revenue fell by 11 per cent due to a significant reduction in OE revenue and adverse revenue mix in oil and gas, and in power generation. The OE reduction was partially offset by an 11 per cent

increase in services revenue. Services revenue, particularly in oil and gas, benefited from a better penetration of the aftermarket from the installed base across all sectors.

Key financial data

	2008	2009	2010	2011*	2012
Order book £m	1,250	1,262	1,180	1,420	1,290
	+45%	+1%	-6%	+20%	-9%
Engine deliveries	106	87	95	48	49
Underlying revenue £m	755	1,028	1,233	1,083	962
	+35%	+36%	+20%	-12%	-11%
Underlying OE revenue £m	385	558	691	527	344
Underlying service revenue £m	370	470	542	556	618
Underlying profit before	(2)	24	27	16	21
financing £m	-140%	+1300%	+13%	-41%	+31%

* 2011 figures restated due to transfer of Bergen to new Engine Holding segment

Highlights

·      Six RB211 gas turbine packages ordered by PetroChina

·      Service revenue up 11 per cent, 333 engines under management

·      LG acquired 51 per cent of Rolls-Royce Fuel Cell Systems (US) Inc.

·      Tidal Generation Ltd sold to Alstom in January 2013

·      RB211-Gzero launched

·      £1.5 million investment 24/7 global Operational Service Desk completed

·      Enhanced agreement with AREVA for UK civil nuclear new build

·      Collaboration agreement with Hitachi following its acquisition of Horizon Nuclear Power

·     Expanded global footprint with acquisition of US-based nuclear services business 

With over 4,600 industrial gas turbines sold, recording over 180 million hours of operating experience, our energy business plays a critical role in supporting global infrastructure.

Our technology powers offshore oil platforms around the world and transports oil and gas through 35 pipelines in 24 countries. Our power generation technology solutions ensure that reliable, dependable and flexible electricity supplies are efficiently met, without comprising emissions performance. We have also established a strong position in the civil nuclear sector.

Oil and gas

In total, ten RB211 gas turbines were ordered for oil and gas applications, nine of which are for pipeline compression projects. We secured a US$75 million contract to supply PetroChina with an additional six RB211-driven pipeline compressor units and related services to power the flow of natural gas through Line 3 of the West-East Pipeline Project (WEPP), the world's longest pipeline and a crucial element of China's drive towards cleaner energy consumption. When completed in 2015, the 7,000km WEPP Line

3 will link China's western Xinjiang autonomous region to Fuijan province in the south-east, transporting up to 30 billion cubic metres of gas per year. The contract significantly increases our

supply to the WEPP network, bringing the total number of RB211 units sold for this huge infrastructure project to 37.

In addition, we secured a £24 million contract to supply three RB211 units for duty on the Uzbekistan section of the Asia Trans Gas (ATG) pipeline, and a contract to supply PTT's Ethane Separation

Plant in Rayong, Thailand, with an additional unit to extend our scope at the site.

Construction of our new purpose-built packaging, assembly and test facility at Santa Cruz outside Rio de Janeiro, Brazil, is on track. The facility will open in 2013, positioning us for long-term growth from within Brazil. The first units to be delivered from Santa Cruz will be in fulfilment of the US$650 million contract awarded by Petrobras in 2011 which requires 32 RB211 gas turbine units to support its offshore production activities in the pre-salt, ultra-deepwater oil fields.

Power generation

Despite subdued demand for new power generation capacity in mature economies, £62 million in orders were received for four industrial Trent 60 gas turbines. Two units will support production

expansion of LUKOIL's Stavrolen petrochemicals plant in Russia, and single units will respectively support Empresa Nacional de Electricidad's El Alto power plant in Bolivia, and textile and chemicals conglomerate CYDSA's processing plants at Coatzacoalcos Veracruz, México. We successfully completed several landmark installation and commissioning projects, including eight Trents for

the Bayonne Energy Centre electric power plant in Bayonne, NJ, US, which supplies electricity to 400,000 homes in New York City at peak times.

Service

Our strategy to strengthen our aftermarket products and services capability delivered solid revenue growth. Excluding the land-based reciprocating engines that are now reported in Engine Holding,

there are a total of 333 units, or 19 per cent of the core engine fleet, under long-term service agreements. We launched the RB211-Gzero, a retrofit upgrade product for the RB211-G gas generator, which provides many existing users of industrial RB211 aero-derivative gas turbine engines with a nominal power increase of ten per cent depending on ambient temperature and engine type.

Our new Operational Service Desk provides 24/7 technical support to customers, considerably enhancing our global service and parts delivery capabilities.

Civil Nuclear

During 2012, Rolls-Royce maintained its focus on the global and strategic growth of its Nuclear business and made solid progress in strengthening its position in this market.

We signed a strategic collaboration agreement in support of Areva 's plans to build new nuclear reactors and continued our collaboration with Rosatom on the development of global civil nuclear programmes. We have an agreement to support Hitachi, with its plans to build nuclear power stations at two sites in the UK.

The Group is modernising safety-critical instrumentation and control (I&C) systems on EDF's 1,300MW nuclear fleet in France and we are delivering I&C solutions to eight new nuclear power stations being built in China.

Our Nuclear Services business delivered a multi-million dollar package of automated handling, transportation and storage technology to Atomic Energy of Canada Ltd and secured a contract

to provide specialist inspection solutions to Canadian nuclear utility, Bruce Power. At the end of 2012, we acquired PKMJ Technical Services, a specialist US-based software and nuclear engineering

services company. 

Excellence in technology

In 2012, Rolls-Royce invested £919 million in gross research and development of which £577 million was funded from the Group's own resources. We create intellectual property which is then embedded in our products and services. This year, 475 patents were filed.

Rolls-Royce has a track record of innovative products and services founded on a robust investment in technology. During 2012, we launched an Innovation Strategy which put in place a number of mechanisms to encourage our people to share and develop new ideas, ensuring that the flow of future technology remains strong. Through 'open innovation' we also invited other organisations to contribute to our technical challenges.

This year we invested significantly on our high-performance computing (HPC) capability and on several Design Key Systems which automate much of the design and make process for components, freeing up engineers to apply their skills to more complex and critical tasks.

Research and technology

We have an engineering resource inside the Group of 14,700 engineers. Many work as integrated teams across international borders on our major programmes and a number of our top engineers, or Rolls-Royce Fellows, are recognised as world-renowned experts in their fields.

In addition to our in-house R&D capability, Rolls-Royce undertakes advanced research via a global network of 28 university technology centres. Each centre is funded by the Group and undertakes

specialist work in a particular engineering field, led by world-class academics. In 2012, we celebrated the 21st anniversary of this network.

In 2012, we invested £139 million in research and technology in addition to the significant government funding. In October 2012, together with the University of Birmingham, we announced a new £60 million centre for research into high-temperature metallurgy. This is the latest in a series of seven new research and advanced manufacturing centres the Group has helped to establish in the past four years. We believe our leading position in these centres will deliver significant benefit for the future in technologies and advanced manufacturing processes.

Civil aerospace

Our newest large engine programme, the Trent XWB for the Airbus A350 XWB family was successfully certificated on 7 February 2013. It began its flight-test programme in February 2012 on a modified

A380 and completed over 150 flying hours. The initial engine entering service will be rated at 84,000lb thrust. The more powerful 97,000lb thrust engine for the later A350-1000 aircraft programme is progressing into the design and definition phase.

The new Trent 1000 engine was the first to enter service on the Boeing 787 Dreamliner and completed its first year in service with launch customer ANA, in October 2012.

Gulfstream's ultra-large-cabin, ultra-long-range G650 business jet aircraft with the BR725 engine, has received its final certification from Federal Aviation Administration and entered into service.

We successfully completed the E3E programme in 2012 which demonstrated core technology for our future two-shaft engine portfolio. Offering significant improvements in fuel consumption, unit cost, weight and emissions, it provides technologies for our BR700-NextGen and into our wider portfolio.

Defence aerospace

Since the T56 entered production in 1954, over 18,000 T56/501-D turboprops have been installed on a wide variety of propeller-driven aircraft. We recently successfully created a technology insertion package to significantly improve fuel efficiency on the US Air Force's C-130H Hercules transporter. In tests, our T56 Series 3.5 Enhancement Package demonstrated an eight per cent fuel consumption improvement. Once certified, the T56 Series 3.5 will help extend the life of this ageing fleet.

Our T56-A427A engine, with a modern electronic engine control and fuel pump metering unit replacing the previous hydro-mechanical control, is now ready for full production after receiving US Navy military qualification and successfully completing the initial operational test and evaluation. Two of these engines power the US Navy's E-2D advanced Hawkeye airborne early warning and electronic warfare systems aircraft.

The Rolls-Royce LiftSystem for the F-35B Lightning II STOVL fighter aircraft entered service with the US Marine Corps in late 2012.

Marine

The Far Solitaire, a Rolls-Royce designed platform supply vessel for the offshore oil and gas industry, was named ship of the year at the Shipbuilding, Machinery and Marine Technology exhibition, the

leading international maritime trade fair. This is the third time in five years a Rolls-Royce-designed vessel has won the award.

We have delivered our first permanent magnet tunnel thruster. This new design reduces noise and vibration and increases power by 25 per cent, compared to traditional models of the same size.

Design of the PWR3 nuclear power plant for the UK Trident Successor Programme is progressing well. The new reactor plant design was selected by the UK MoD to provide easier operation, longer service life and lower through-life costs. A UK Government decision on the successor to Trident is planned for 2016.

Energy

The successful industrial version of the RB211 gas turbine is used all over the world in oil and gas and power generation markets. Over 700 industrial RB211s have been sold, achieving more than 30 million operating hours. In 2012, we announced the launch of the RB211-Gzero a retrofit upgrade product that provides the engine with a nominal power increase of ten per cent.

The distinctive power and efficiency of the industrial Trent were strengthened in 2012, together with its capability on low emissions and its operational flexibility for oil and gas applications.

Excellence in operations

We continue to invest globally in capacity and capability that will help our customers and our business succeed.

Manufacturing technology and infrastructure

Through the year, good progress has been made on the introduction of a broad spectrum of technology projects that will reduce operational costs, increase output and improve product performance.

Manufacturing capacity

We have added significant manufacturing capacity to meet our customers' needs and to successfully deliver our substantial order book.

Rolls-Royce has opened 19 new facilities in the past three years in locations including the UK, Germany, Norway, US, Singapore, China and Brazil.

In 2012, we opened our largest facility in Asia, at Seletar Aerospace Park in Singapore, and delivered our first Trent 900 engine from the site. At full capacity, this facility will be capable of producing a Trent

engine every working day and 6,000 fan blades each year.

Other major projects include: construction of an advanced blade casting facility in Rotherham, UK, and our advanced blade and vane machining facility at our Crosspointe campus in Virginia, US. We also made a significant extension to our engine testing facility in Dahlewitz, Germany and developed a major facility for assembly and test in Rio de Janeiro, Brazil, that will support our Marine and Energy businesses.

Advanced centres

Five advanced manufacturing research centres are now all fully operational in the UK with the number of research projects doubling over the past 12 months to more than 160.

The sixth centre of the network, in Virginia, US, opened its doors in September and building work has started in Singapore on an advanced remanufacturing and technology centre.

These centres, which are the result of collaboration between governments, universities and industrial partners, form a vital bridge between the creation of a concept and industrial application. This allows us to work with suppliers, university research teams and technology providers to develop and prove manufacturing processes before making major investment decisions.

Suppliers

As an increasingly global business, we continue to develop our supply base in emerging markets, whilst also deepening our relationship with existing suppliers.

In the UK, we are taking a leading role in the UK Government's 'Sharing in Growth' initiative which will provide around 30 UK suppliers with a tailored, in-depth training and development programme. The aim is to create a competitive group of UK suppliers to help achieve sustainable, competitive  performance as the industry continues to grow.

As we work alongside our suppliers, we also have to make sure we strike the right balance between what we choose to do ourselves and what we buy. We have acquired the Aero Engine Controls (AEC)

business, in order to strengthen our offering in the increasingly important engine control systems  market.

Information technology

In 2012, we invested over £100 million in IT as part of our ongoing investment programme. This programme is addressing the need to modernise data centres, improve networks, and upgrade  personal computers and software across more than 265 sites in 39 countries.

Continuous improvement

We continually apply technology and operational improvements to drive productivity and the efficiency of the power systems we produce. We apply lean techniques to our design, manufacture and our

suppliers so that the actions of everyone involved will drive efficiency, quality and safety in all we do.

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 38 of the business review and a summary of the

principal risks affecting the business are shown on pages 18 to 19.

The financial position of the Group, its cash flows, liquidity position, borrowing facilities and financial risks are described on pages 12 to 15 and pages 37 to 38 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 37, the Group meets its funding requirements through a mixture of shareholders' funds, bank borrowings, bonds, notes and finance leases. The Group has facilities of £2.3 billion

of which £1.3 billion was drawn at the year end. US$230 million of these facilities mature in 2013.

The Group's forecasts and projections, taking into account reasonably possible changes in trading performance, show that the Group has sufficient financial resources. In the event that the put option on Engine Holding GmbH is exercised, (estimated cost £1.6 billion), the directors consider that the Group would be able to raise additional resources in the necessary timeframe to meet this commitment. As a consequence, the directors have 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 2012. 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 72 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

Nigel Goldsworthy

Deputy Company Secretary

            13 February 2013

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 2012, 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.

 

END

 

 

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