Annual Financial Report

1 March 2010 Rolls-Royce Group plc Publication of the Annual report 2009 Rolls-Royce Group plc announces that its Annual report for the year ended 31 December 2009 is now available on the Company's website: www.rolls-royce.com Printed copies of this document will be posted to shareholders on or around 23 March 2010 and it will shortly be available for inspection at the UK Listing Authority's document viewing facility at 25 The North Colonnade, Canary Wharf, London E14 5HS. 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 11, 2010 contained a condensed set of financial statements and a description of the principal risks and uncertainties facing the business. The Annual General Meeting of the Company will take place at 11.00am on Wednesday April 28, 2010 at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE. The financial calendar for the next twelve months is set out below: Financial calendar 2010-2011 Ex entitlement to C Shares April 21, 2010 Record date for entitlement to C Shares April 23, 2010 AGM - Queen Elizabeth II Conference Centre, London 11.00am April 28, 2010 Deadline for receipt of C Share elections 5.00pm June 4, 2010 Record date for dividend payable on C Shares June 4, 2010 Allotment of C Shares July 1, 2010 Payment of C Share redemption monies July 2, 2010 Purchase of ordinary shares for CRIP participants By July 13, 2010 Announcement of interim results July 29, 2010 Ex entitlement to C Shares October 27, 2010 Record date for entitlement to C Shares October 29, 2010 Deadline for receipt of C Share elections 5.00pm December 3, 2010 2010 Financial year end December 31, 2010 Allotment of C Shares January 4, 2011 Payment of C Share redemption monies January 5, 2011 Purchase of ordinary shares for CRIP participants By January 13, 2011 Preliminary announcement - 2010 full year results February, 2011 2010 Annual report published March, 2011 Enquiries: Investor relations: Mark Alflatt Director of Financial Communications Rolls-Royce plc Tel: +44 (0)20 7227 9285 mark.alflatt@rolls-royce.com Business review Chairman's statement At the end of an extremely challenging year for the world economy, I am pleased to report that Rolls-Royce has delivered another solid performance in 2009. This demonstrates both the resilience and the long-term nature of our business. Underlying profit before tax has increased by four per cent and despite intense competition, our order book has grown from Â£55.5 billion in 2008 to Â£58.3 billion in 2009. We are proposing a final payment to shareholders of nine pence per share, bringing the full year payment to 15.00 pence. This is an increase of five per cent, and reflects the Board's continued confidence in the Group's business. In the past year, the degree of uncertainty facing global markets has somewhat diminished. Sharp declines in output have been arrested and growth is returning to most of the world's major economies, albeit at considerably reduced levels. Overall the economic environment remains tough. Therefore we shall continue to focus on operational efficiency, while maintaining our commitment to research and development and to investment which supports our growing order book. Our strategy of developing our business in new markets and geographies and increasing the revenues we earn through long-term service contracts, positions us well to take advantage of commercial opportunities as they arise and to deliver sustained growth. The power systems and services we sell employ complex technologies and demand advanced engineering skills, which together create high barriers to entry. Our balance sheet remains strong and the long-term nature of our business gives us exceptional visibility of revenues for many years to come. It is particularly important in periods of economic uncertainty that a company's core values are defended and strengthened. Our commitment to acting with integrity is at the heart of the way we operate. In 2008, Rolls-Royce established an ethics committee, which reports to the Board. In 2009, we published a new Global Code of Business Ethics and distributed this, with face-to-face training, to all our employees worldwide. The Global Code establishes industry-leading standards and is supported by a rigorous process for reporting and monitoring to ensure compliance. The Board is committed to improving the environmental performance of our products across all our business sectors. We have always recognised that technology and innovation are critical to achieving such improvements. As a consequence we commit two thirds of our research and development expenditure to developing solutions to these challenges. Substantial progress has been made over many years. Our products are significantly more fuel-efficient than they were a decade ago. We continue to look for further advances through the Environmentally Friendly Engine and other research programmes. In our marine business, we have extended our range of engines that run on liquefied natural gas, offering far better emission performance than conventional diesel powered engines. We also actively explore the opportunities presented by civil nuclear and other sustainable energy technologies. Rolls-Royce is a long-term business operating in global markets and we have benefited again in the past year from the wise counsel of our International Advisory Board (IAB), which was established in 2006 to advise on emerging political, business and economic trends (membership of the IAB is shown on page 69). The IAB provides high-level strategic input to the Board and management. Its members bring a deep understanding of global issues affecting Rolls-Royce and of the markets and countries we operate in. The life-blood of Rolls-Royce is its people. It is their pride in what Rolls-Royce has achieved and, even more important, their vision of what can be achieved in the future, that will secure our continued success. As I travel around the world, I am constantly impressed by the calibre of the men and women I encounter at every level of the Group. From our apprentices and recent graduates to the most experienced and knowledgeable of our engineers and scientists, it is their ideas, their insight and their motivation which give Rolls-Royce its competitive edge. The Board is committed to investing in the development of future generations who will, in time, ensure the success of the Company. I am very proud of our employees. We remain committed to developing their skills through a range of world-class training programmes, as well as by encouraging a wider interest in science and engineering. A good example of this is our sponsorship of the Rolls-Royce Science Prize for schools which attracts greater interest every year. In 2009, 1,500 schools took part, with 2,000 schools expected to participate in 2010. Last year's top award of Â£20,000 went to Kells Lane Primary School, Gateshead, England for a really innovative wind turbine project. Rolls-Royce supports a wide range of charitable causes, with much of that support directed towards educational programmes which promote engineering and scientific learning. I would like to thank the management and all our employees for the commitment and the flexibility they have shown in the past challenging 12 months. I would also like to record my gratitude to my fellow directors for their continued hard work and support. There have been no changes to the Board during the past year, but I would like to take this opportunity to thank Charles Blundell for his contribution to Rolls-Royce and his services to the Board where he served as Company Secretary from 1995 to 2007. He retired this year from the position of Director of Public Affairs. 2010 will present significant challenges for Rolls-Royce. However the resilience of the Group's performance reflected in this report, the fundamental strength of its business model and the proven capabilities of the management team, give me confidence that Rolls-Royce will continue to find opportunities in the marketplace and deliver sustainable growth for the benefit of all our stakeholders. Simon Robertson Chairman February 10, 2010 Chief Executive's review In 2009, Rolls-Royce has delivered solid results despite the severity of the economic downturn, a performance which has again demonstrated the benefits of pursuing a consistent strategy over a long period. This approach has created a broadly-based business with deep customer knowledge, outstanding technology and world-class people. Our financial results demonstrate the resilience of our business. The Group's order book increased to a record Â£58.3 billion, with underlying revenue growing 11 per cent to Â£10.1 billion and underlying profit before tax improving four per cent to Â£915 million. The Group has a strong financial position with average cash balances increasing by Â£260 million to Â£635 million. The triennial valuation of the Group's largest pension scheme has just been completed and confirms that 2010's cash funding will be maintained at a level similar to that in 2009. This demonstrates the benefits of the early action taken to amend the terms of the scheme and to adopt an investment strategy that reduces volatility. The economic environment remains challenging and it seems likely that world growth will be slower in the years ahead than it has been in the past decade. In these circumstances, we will benefit from our ability to access the world's faster growing markets where there continues to be demand for investment in transport and infrastructure. We will maintain our focus on cost reduction and improving our operational efficiency. At the same time we will continue to invest in technology, in our product and service portfolio, in the capital assets required to deliver growth, in our international footprint and in our people. A long-term business It is important to recognise that ours is a long-term business. Typically, our product and service lifecycles span 40-50 years and we invest in technology programmes that look five, ten, 20 years and more into the future. A good example of this is the Avon engine. In its latest version - modified to produce significant improvements in power and efficiency - it is meeting the demands of customers in the oil and gas sector. Yet the Avon first entered the industrial gas turbine market 40 years ago. That engine in turn was derived from the original aero version, which powered a Canberra aeroplane on the first non-stop, non-refuelling, jet flight across the Atlantic in 1951. Examples like this show why it is so important to set our Group's progress into a broad context. This review will chart our progress over the past ten years, during which we more than doubled our revenues and our underlying profits. This has provided us with a platform from which we are confident we can grow our revenues by at least as much again in the decade ahead. A very different company We are now a very different company than we were ten years ago. This can be measured in terms of our scale and geography, in terms of the range of things we do and in terms of operational efficiency. All this has made us a more resilient business and has established a far broader foundation from which to build revenues in the future. A few facts and figures comparing the Rolls-Royce of 1999 with today's Group illustrate the point. Today, at any one time around 200,000 people are flying in aircraft powered by Rolls-Royce engines. Our ability to keep those aircraft in the sky is a powerful illustration of the `mission critical' nature of what we do. At peak times that figure can double, which means that the equivalent of the population of Bristol is being kept aloft by Rolls-Royce engines. That is considerably more than double the number of people we were flying a decade ago. We have become much more than a civil aerospace company. The revenues from our marine, defence aerospace and energy businesses have grown from Â£2.1 billion in 1999 to Â£5.6 billion in 2009. In 2009, revenues from outside our civil aerospace business accounted for more than half of Group revenues. We are becoming less dependent on our traditional markets of Europe and North America. These geographies, which accounted for around 70 per cent of our revenues in 1999, represent around 66 per cent of our revenues now and that trend is set to continue, as more than half our current order book comes from Asia, South America and the Middle East. Around half our revenues come from services today compared to 40 per cent a decade ago. This represents an annual compound growth in services of ten per cent. Throughout this period we have maintained our focus on costs and improving operational efficiency. Every year for the past ten years, revenue per employee has increased, showing a 16 per cent improvement in the year to Â£271,000 in 2009. We are now selling more than twice as much as we were ten years ago, with 2,000 fewer people. Taken together, the pipeline of orders we have already signed, our increased market share, the growth and scale of our services business and our focus on costs, underpin our confidence that we will double our annual revenues in the decade ahead by organic growth alone. Our shareholders have benefited from our success to date with payments increasing from 7.25 pence in 1999 to 15.00 pence in 2009. A consistent strategy The disciplined application of a consistent strategy over many years has delivered a strong, resilient company, which is well positioned for the long-term growth we expect. Our strategy has five elements and 2009 saw us make progress against each of these. 1. Addressing four global markets Rolls-Royce has become a truly global Group, providing `mission critical' power and propulsion systems to a wide range of customers in over 120 countries. The scale of the progress that has been made is illustrated by the fact that the size of our order book in Asia and the Middle East today is around double the Group's entire order book in 1999. During 2009 we won new customers in Asia, Africa, Europe, the Middle East and North and South America. Our global reach, coupled with the fact that very few companies offer the highly sophisticated range of products and services that we do, positions us well to take advantage of opportunities in early recovering and emerging economies. 2. Investing in technology, infrastructure and capability We have managed our balance sheet cautiously and for the long term so that we can continue to invest in manufacturing capability and technology. These investments are targeted specifically to support anticipated growth and meet our customers' future needs. Technology is a critical differentiator in our four markets, all of which demand increased fuel efficiency, reduced environmental impact and higher levels of reliability and durability. We have invested Â£7 billion in R&D over the past ten years to maintain our technological advantage, with a particular emphasis on collaborative research involving a network of universities around the world. This focus continued in 2009, as we championed the development of a network of Advanced Manufacturing Research Centres - four in the UK and one each in the US and Singapore - bringing business and academia together to undertake research relevant to industry. In 2009, the Group announced a Â£300 million investment in four new factories in the UK: a casting facility for single crystal turbine blades; an advanced disc facility; a wide-chord fan blade facility for defence engines; and a civil nuclear facility to assemble and test components. This represents the latest phase in a programme of capital replacement which has seen Rolls-Royce invest Â£ 1.8 billion in UK infrastructure over the past decade, creating world-class manufacturing facilities in multiple locations and providing skilled jobs in state-of-the-art environments. To address our global market opportunities, in 2009 we began work on a manufacturing and assembly facility at Crosspointe in the United States. We also confirmed a large engine assembly plant and announced a new wide-chord fan blade factory in Seletar, Singapore, our first outside the UK. This will bring the total investment in the Seletar campus to around Â£300 million by the time it is completed in 2012. We now manufacture in 20 countries and have service centres in over 50. 3. Developing a competitive portfolio of products and services We invest continually in developing proprietary technology which will meet our customers' present and future needs. We currently have 39 `live' major engineering programmes, compared to 25 a decade ago. 2009 was a remarkable year in which we celebrated the first flight of six of our customers' aircraft: the Boeing 787; Gulfstream G650; Airbus A400M; Embraer Legacy 650, the BAE Systems Mantis UAV and the AgustaWestland Lynx Wildcat helicopter. Early in 2010, the short take-off and vertical landing (STOVL) version of the F-35 Joint Strike Fighter deployed the unique Rolls-Royce LiftSystemÂ® for the first time. These are unprecedented achievements, with more entirely new aircraft taking to the skies in a period of three months than in the previous five years. The capability to meet these requirements is the direct consequence of a decade of investment and innovation. In the marine market in 2009, we saw the US Navy's Littoral Combat Ship go on active duty, the first sailing of the Royal Navy's Astute class submarine and the commissioning of the Royal Navy's first Type 45 Destroyer, HMS Daring. All these aircraft and vessels are powered by Rolls-Royce and will enter active service in the next two to three years. The lives of each of these programmes is expected to span 40 years or more, giving us exceptional clarity of future original equipment and service revenues. 4. Growing market share and our installed product base We have successfully grown our market share in each of our businesses, generating revenues today and establishing a platform for future growth. Our share of the civil aerospace market has expanded from 27 per cent in 1999 to 34 per cent today and our future order book will ensure that our market share continues to grow, driven by the strong position Rolls-Royce has established on the new generation of wide-bodied aircraft. On the new Boeing 787 and the Airbus A350 XWB families, Rolls-Royce has achieved a market share of 64 per cent. In the defence aerospace sector we are the world's number two and Europe's number one producer of aero engines, with an extensive engine portfolio for all key sectors of the market. Revenues in our marine business have more than doubled since 2005. We now design, supply and support power and propulsion systems for naval and commercial applications, with over 30,000 vessels worldwide using our equipment. In 2009, our energy business recorded its highest ever underlying revenue and profit. We serve energy customers in over 120 countries. Our position in providing power for the oil and gas sector remains strong and the industrial Trent engine continues to establish its presence in the power generation market. 5. Adding value for customers through product-related services We have unrivalled knowledge of the complex technologies within our products and a deep understanding of our customers needs. We have used these to develop services that improve our customers' operations. Our aerospace operations centres are a good illustration of this capability. In dedicated facilities serving airline, corporate and defence customers, these Rolls-Royce centres collect real-time data from our engines as they are operating around the world, 24 hours a day, 365 days a year. By analysing, sharing and acting upon this information we can optimise the performance of our engines in service. The centres are a focal point for service delivery, assessing the condition of the fleet and directing logistics and field maintenance. We have transferred service best practice across all our businesses so that each now offers a through-life service capability. We continue to strengthen our global services network and in the past year opened, or expanded, marine services facilities in Niteroi in Brazil, Galveston and Seattle in the US and Newfoundland in Canada. We opened an On-Wing Care facility for corporate and regional aircraft in Indianapolis, in the US, and continue to invest in our civil aerospace overhaul bases in Hong Kong and Singapore. Our people To execute this strategy effectively and on a worldwide basis, the skills, diversity and dedication of our people are key. The global nature of our customers and our operations means that our people have to be capable of teamwork across geographies. They need to be flexible and open minded, to have world-class capabilities and shared values. Of the 38,500 people we employ, 45 per cent are now based outside the UK. Today we run a civil aerospace business from the UK with emerging capabilities in Germany and the US. The Presidents of both our defence and energy businesses are based in North America. The US is our biggest defence market and in our energy business, gas turbines are produced in Canada and packaged in the US. We have transferred our marine headquarters to Singapore, reflecting the significance of the Asia region for shipbuilding. Effective communication that enables the organisation to work well across time zones and borders is crucial. We invest time and effort in communication, using a combination of modern technology and traditional formats to help us to stay connected. In 2009, we shared our strategy storyboard with every employee. The programme was conducted in groups of around ten with a presenter and a record keeper. This amounts to more than 4,000 presentations over 6,000 hours, with a record of the conversation kept to make sure that we benefit from local insights. In 2009, Rolls-Royce recruited more than 250 new apprentices and 334 graduates, more than ever before, young men and women of over 30 nationalities who have the potential to become leaders of the future. We are able to attract exceptional people because of the range of world-class skills we require to deliver high value-added manufacturing and services. These range from expertise in marketing and law, through to specialist engineering and logistics, all of which need to be practiced internationally and at the highest level. While we have continued to invest, economic conditions have forced us to take some difficult decisions as well. We have had to reduce our staff in parts of the business where demand has been weak, leading to a net reduction in headcount across the Group of around 500 people in the past year. Taking these difficult decisions early, investing where the business case is strong and continually looking for ways to improve, have enabled us to respond to the difficult economic environment. Our employees have again demonstrated their capability and commitment and I would like to thank them for playing an integral part in our Group's continuing success. Prospects I have described how Rolls-Royce has transformed itself in the past ten years and how, in doing so, it has established a platform for the doubling of revenues in the decade ahead. In 1999, Rolls-Royce had an order book of Â£13.2 billion. Today our order book stands at Â£58.3 billion, with a record number of major global programmes balanced across our four business sectors. These include the Trent XWB, which is not due to enter service until 2013, yet has already achieved more than 1,000 orders - a powerful demonstration of the confidence our customers have in our ability to deliver. The market share we have gained, the investments in new products we have made and the balance of the business we have achieved affords us access to a global market for products and services we assess to be worth more than US$2 trillion over the next 20 years, made up of US$1,400 billion for civil aerospace, US$450 billion for defence aerospace, US$320 billion for marine and US$120 billion for energy. In the short term, the Group expects the trading environment to remain difficult, with the implications of delayed airframe programmes and launch costs adding to demand and operational uncertainty. The Group expects underlying revenues and profits in the current year to be broadly similar to those achieved in 2009. We anticipate a modest cash outflow in 2010 with average cash balances remaining above Â£500 million. Our resilience, coupled with the inherent strengths of our business model will enable us to manage these short-term difficulties and deliver future growth. Sir John Rose Chief Executive February 10, 2010 Review of operations Civil aerospace Key financial data 2005 2006 2007 2008 2009 Underlying revenue Â£m 3,406 3,907 4,038 4,502 4,481 11% 15% 3% 11% 0% Underlying profit before 454 519 564 566 493 financing Â£m 118% 14% 9% 0% -13% Net assets Â£m 1,617 2,165 2,468 330 2,694 Other key performance indicators 2005 2006 2007 2008 2009 Order book Â£bn 19 20 35.9 43.5 47 17% 5% 80% 21% 8% Engine deliveries 881 856 851 987 844 Underlying services revenues Â£ 2,016 2,310 2,554 2,726 2,626 m Underlying services revenues % 59 59 63 61 59 Percentage of fleet under 45 48 55 57 59 management The civil aerospace business powers over 30 types of commercial aircraft and has a strong position in all sectors of the market: wide-body, narrow-body and corporate and regional aircraft. Over 13,000 engines are currently in service with 650 airlines, freight operators and lessors and 4,000 corporate operators. Despite a decline in air traffic, the market is beginning to recover, albeit slowly. 2010 traffic will see a return to growth but from suppressed levels. We remain cautious but optimistic of seeing the historic traffic growth level of approximately five per cent per annum achieved over a 20 year period. The economic situation also saw the retirement across the industry of some 500 aircraft, notably older models. The Rolls-Royce powered fleet is, by contrast, relatively young and more fuel efficient. The better performance and increased aftermarket potential in this younger fleet underlined the value of our balanced services and products business model. The corporate and regional aircraft market has been sensitive in the downturn but the twin-aisle, large airliner market, has been more robust. Order intake was reduced due to the poor market conditions but there were some significant orders, notably from AirAsia X, Air China and United Airlines. New orders also included first-time customers for the Trent family: Turkish Airlines; Ethiopian Airlines and, the US lessor Aviation Capital Group. Trent engines continue to win business across the range of wide-body aircraft and now hold a 50 per cent market share. The first flight of the Boeing 787 in December 2009, powered by Rolls-Royce Trent 1000 engines, was a significant and important milestone for this programme. The majority of the Boeing 787 flight test and certification programme planned to be completed in 2010 will use Trent 1000 engines. The Trent family philosophy continues to demonstrate significant advantages with the introduction of new technology for established engines. Upgrades for the Trent 700 have enhanced its performance and fuel efficiency and a similar package is planned for the Trent 900. Technology being developed for new engines such as the Trent 1000 and Trent XWB will continue to provide operational, performance and environmental advantages across our product range. Orders for the Trent 700 and the Trent XWB now exceed 1,000 engines for each programme. For the Trent XWB this marks a significant demonstration of customer confidence as the programme is still three years away from entry into service. In the narrow-body market the V2500 engine, produced by International Aero Engines (IAE) in which Rolls-Royce is a major partner, continues to win orders. IAE delivered 347 engines in 2009. IAE also gained significant contract awards from Air China, Qatar Airlines and Dubai Aerospace. There are now more than 4,000 V2500 engines flying with 190 customers worldwide. In the corporate and regional market, the latest addition to the Group's corporate engine family is the BR725 engine. It flew for the first time on the Gulfstream G650 ultra-long-range business jet in November 2009, and remains on schedule for entry into service in 2012. In September 2009, the first flight of an Embraer Legacy 650, powered by the new AE 3007A2 engine, took place. The AE 3007A2 will deliver significant performance and reliability improvements over previous engine marks. It is currently undergoing flight testing ahead of certification and entry into service in the second half of 2010. The majority of orders in the civil aerospace business are now contracted under TotalCareÂ® or CorporateCareÂ® long-term support contracts. These overarching service contracts provide an important and sustainable revenue stream for the business. They also allow our customers to plan their business more effectively both financially and in the use of engine assets. Services revenue has been affected by the current economic environment with fewer flying hours and airlines deferring non-essential maintenance. As more engines enter service in line with order commitments we expect to see flying hours increase. The TotalCare service structure has been particularly robust and the model we have in place is designed to be responsive to this change and match the market and customer demand. Hours flown under TotalCare agreements continue to grow. Defence aerospace Key financial data 2005 2006 2007 2008 2009 Underlying revenue Â£m 1,420 1,601 1,673 1,686 2,010 3% 13% 4% 1% 19% Underlying profit before 180 193 199 223 253 financing Â£m 1% 7% 3% 12% 13% Net assets Â£m 55 20 -172 -197 -345 Other key performance indicators 2005 2006 2007 2008 2009 Order book Â£bn 3.3 3.2 4.4 5.5 6.5 0% -3% 38% 25% 18% Engine deliveries 565 514 495 517 662 Underlying services revenues Â£ 787 853 877 947 1,046 m Underlying services revenues % 55 53 52 56 52 Percentage of fleet under 8 11 11 12 16 management Rolls-Royce is a global 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 key defence market sectors: transport; combat; reconnaissance; training; helicopters and unmanned aerial vehicles. The downturn in the global economy has put pressure on public spending in our key markets in Europe and the US. However, our position on new and established programmes continues to provide growth opportunities in these markets. In addition, we are well positioned to secure growth from emerging economies in Asia, the Middle East and South America. During 2009, key orders were secured in both the combat and transport sectors and we saw new programmes emerge in the helicopter and unmanned aerial vehicles (UAVs) sectors. The US Government approved 2010 funding for development of the F136 engine for the F-35 Joint Strike Fighter. This engine, being developed jointly by Rolls-Royce and General Electric, is designed to power all variants of the F-35 aircraft. We also received the second contract, worth US$171 million, for the production of the LiftSystem for the short take-off and vertical landing (STOVL) or `B' version of the F-35 Joint Strike Fighter. This programme reached a significant milestone in early 2010, when the Rolls-Royce designed LiftSystem was engaged successfully in flight for the first time. Tranche three of the Eurofighter Typhoon aircraft was ordered, which provided Rolls-Royce with a 37 per cent production share of 241 Eurojet engines. The EJ200's reliability and support effectiveness was highlighted during the year, with a Royal Air Force engine reaching 1,200 flying hours with no requirement for unscheduled maintenance. At the end of the year the Airbus A400M airlifter, powered by the TP400 turboprop engine, flew for the first time. Rolls-Royce is a major partner in the European consortium producing the TP400. There is continuing uncertainty about the A400M programme. However, the TP400 engine has made good progress, with engine flight testing to date being encouraging. We believe that our estimated costs to completion adequately consider the remaining testing and delivery phases. There were four additional successful Rolls-Royce powered first flights during 2009 in the defence sector: the AgustaWestland Lynx AH Mk.9A; the AgustaWestland AW159 Wildcat; and the AgustaWestland T129 Attack Helicopter, all powered by the CTS800 engine. The BAE Systems Mantis UAV powered by the Model 250 engine, also flew and demonstrated our capability to design and deliver an integrated power system. Conversion work began on the first Airbus A330 aircraft for the Future Strategic Tanker Aircraft programme. The A330M multi-role tanker is powered by the Trent 700 engine and is expected to enter service in 2012. Service business under long-term contract programmes, such as MissionCareâ„¢, continues to be attractive to defence customers. The US Department of Defense awarded us a US$90 million contract to support the engines for the US Navy's T-45 trainer aircraft. We agreed a US$200 million production contract and a US$500 million service contract, through to 2014, with the US Marine Corps to provide support for the AE 1107C Liberty engine in the Bell-Boeing V-22 Osprey vertical lift aircraft. An Â£865 million contract to service the EJ200 engines for the UK Eurofighter Typhoon fleet through to 2019 was also secured. Rolls-Royce is a major partner in the Eurojet consortium which produces the EJ200. Over Â£1 billion worth of orders for services were signed in 2009, presenting significant opportunities for Rolls-Royce to leverage its innovative service solutions. The defence sector has continued to successfully invest in new technology as demonstrated by the Phase 2 award of the US Air Force ADVENT technology programme. Phase 2 will include the integration of a variety of advanced technologies, component testing and culminates with the development of a new technology demonstrator engine. The demonstrator is designed to reduce fuel consumption significantly, enabling extended mission ranges and loiter times. This advanced engine is targeted for future US military aerospace platforms. In the UK, we signed a jointly funded research and technology contract for ENTAPS (Engine Technologies for Aircraft Persistence and Survivability) with the UK Ministry of Defence. Marine Key financial data 2005 2006 2007 2008 2009 Underlying revenue Â£m 1,097 1,299 1,548 2,204 2,589 14% 18% 19% 42% 17% Underlying profit before 89 101 113 183 263 financing Â£m 14% 13% 12% 62% 44% Net assets Â£m 674 619 563 488 641 Other key performance indicators 2005 2006 2007 2008 2009 Order book Â£bn 1.7 2.4 4.7 5.2 3.5 21% 41% 96% 11% -33% Underlying services revenues Â£ 435 487 545 712 785 m Underlying services revenues % 40 37 35 32 30 Percentage of fleet under 3 3 33 35 26 management Rolls-Royce has a world-class range of capabilities and expertise in the design, supply and support of power and propulsion systems for offshore oil and gas, merchant and naval vessels. Our marine business has more than 2,000 customers and equipment installed on over 30,000 vessels worldwide, including those of 70 navies. The marine business has enjoyed another year of strong growth, despite macroeconomic challenges and a slowdown in orders. Although the demand for original equipment has reduced, service opportunities have increased as a result of the large number of ships introduced to the market in recent years. As a systems integrator, Rolls-Royce has an advantage in being able to provide a wide range of services for the sophisticated vessels that utilise our systems. Since 2005, our revenues have more than doubled and increased by 17 per cent on 2008, driven primarily by the continued growth in our offshore business. Marine profit increased 44 per cent in 2009 as a result of strong revenue growth, the increasing importance of support services and improved operational performance. The offshore sector has been central to our continued strong performance, based on the success of our specialist UT-Design and integrated systems capability. 2009 saw the launch of the Rolls-Royce designed Far Samson, the world's most powerful offshore vessel, and the introduction of an innovative wave-piercing design that improves stability and crew safety while minimising environmental impact. During 2009 we acquired a 33 per cent holding in ODIM ASA, a leading provider of specialist marine handling systems. This investment increases our already strong presence in the offshore oil and gas sector. Our naval business had a good year, with significant activity in the UK, the US, France, India and Korea. We began delivering power and propulsion equipment for the UK's new, Queen Elizabeth class, aircraft carriers. Stabilisers have already been delivered for the first carrier and our MT30 gas turbine has successfully completed trials. MT30 gas turbines installed in the US Navy Littoral Combat Ship, USS Freedom, also completed sea trials during the year. As our installed base of equipment continues to grow, we are actively expanding our support capacity and capability to realise the significant opportunity that this represents. Six marine service centres across North America, South America, Europe and the Middle East were opened in 2009. Marine customers seek to have their ships serviced close to where they primarily operate and we are continuing to develop our extensive, global network to meet customer requirements. A significant and growing proportion of our customers, manufacturing capability and supply chain are based in the Asia region. As a result, and recognising the importance of being closer to where more of our activity is located, we established the global headquarters of our marine business in Singapore. We continue to invest in technology that can address the need for more efficient and environmentally sustainable power and propulsion systems. This is primarily through the reduction of exhaust gas emissions and improvements in ship design. Our Bergen gas engines already surpass International Maritime Organization limits for NOx emissions, while research in propulsor/hull interactions deliver improvements in fuel consumption, stability and general performance, as demonstrated by our Promas integrated rudder/propeller system. Rolls-Royce and Royal Caribbean Cruises have settled the lawsuit regarding the Mermaid podded-propulsion system, which experienced technical issues that have now been resolved. By working together, Rolls-Royce and Royal Caribbean have been successful in improving the reliability of the design. As anticipated, there were some order cancellations in 2009 as customers reviewed their requirements given the economic downturn. However, our strong market-leading position in the offshore sector and demand for high-specification vessels in support of oil and gas exploration, provide good visibility of revenues in 2010. Energy Key financial data 2005 2006 2007 2008 2009 Underlying revenue Â£m 535 546 558 755 1,028 -1% 2% 2% 35% 36% Underlying profit before 1 -18 5 -2 24 financing Â£m 114% -1900% 128% -140% 1300% Net assets Â£m 390 387 370 392 533 Other key performance indicators 2005 2006 2007 2008 2009 Order book Â£bn 0.4 0.5 0.9 1.3 1.3 0% 25% 80% 44% 0% Engine deliveries 61 44 32 64 73 Underlying service revenues Â£m 219 251 289 370 470 Underlying service revenues % 41 46 52 49 46 Percentage of fleet under 5 6 7 9 10 management The energy business is a world-leading supplier of power systems for onshore and offshore oil and gas applications and has a growing presence in the electric power generation sector. It has supplied products to customers in over 120 countries. Energy had a strong performance in 2009, with revenues up by 36 per cent to over Â£1 billion for the first time and profits growing by Â£26 million. The number of orders secured by the business reduced by 16 per cent compared to the previous year. Despite the challenging market conditions, the size of the order book was broadly maintained in 2009. The year also saw high original equipment volume deliveries. The modest profit increase in the year was achieved as a result of the continued growth in demand for aftermarket products and services. In the main, oil and gas customers took a long-term view from the outset of the global recession and continued to invest, albeit at a reduced level. Market confidence has begun to return as a result of the strengthening in oil prices, with both offshore and pipeline customers now persisting with previous expansion plans. Pipeline bid activity continued in the year, with a total of 24 gas turbine units ordered, comprising 11 units for Kazakhstan, nine for China and four for India. In other oil and gas markets, orders for five gas turbine units were received for installation offshore of Azerbaijan and Malaysia. The power generation market remained depressed due to the high cost and restricted availability of finance, coupled with reduced demand for electricity. However, market interest in the Trent 60 continued to grow and contracted projects proceeded as planned. Sales growth continued to advance on the back of high order levels in recent years and the increasing aftermarket business. In the power generation market, successful commercial operation of the Trent 60 began in the US, Israel, Germany, China and Australia. Orders for 15 Trent 60 packages were secured in 2009. Demand for aftermarket products and services grew strongly with another record year resulting in revenues of Â£470 million, an increase of 27 per cent. The growth of the installed fleet has resulted in an increase in demand for services and product upgrades which incorporate the latest gas turbine technology. Operators are benefiting from the additional power and efficiency that these upgrades provide. Units under long-term service agreements increased to approximately 300 units from 250 units the previous year. The energy business strategy to consolidate its gas turbine packaging operations into the Mount Vernon, Ohio, US facility progressed with the latest site improvements becoming fully operational in the middle of 2009. While the energy business currently centres its product portfolio on the gas turbine, the skills and technical knowledge within the Group allow the business to identify and explore new growth opportunities in the energy market. During 2009, good progress was made on the establishment of the new Rolls-Royce civil nuclear business unit. The business announced plans to build a new factory in the UK to assemble and test systems and components for nuclear power stations. This facility will have strong links with the UK Government-funded Nuclear Advanced Manufacturing Research Centre, in which Rolls-Royce is a lead partner. The Rolls-Royce position in the nuclear market was further strengthened with the signing of a memorandum of understanding in 2009 with EDF Energy to support the UK facility. Rolls-Royce is already a global leader in the supply of digital instrumentation and control systems for nuclear power plants, with products installed in over 184 nuclear reactors worldwide. Investment in fuel cell development technology continued, although at a reduced cost to the Group as planned. Other energy research included tidal power, where preparations for sea trials got underway during the year, following the Group taking full ownership of Tidal Generation Limited. Engineering and technology Key performance indicators 2005 2006 2007 2008 2009 Gross research and development expenditure 663 747 824 885 864 Â£m Net research and development expenditure Â£m 339 395 454 490 471 Net research and development charge Â£m 282 370 381 403 379 Net research and development expenditure % 5.2 5.4 5.8 5.4 4.7 of underlying revenue In 2009, Rolls-Royce invested a total of Â£864 million in research and development, of which Â£471 million was funded from Group resources. The Group believes that its ongoing commitment to research and development is fundamental to its future success, providing technologies and intellectual property that allow us to compete on a global basis in highly competitive markets. During 2009, we created a new advanced research centre in Singapore to develop manufacturing, electrical systems and high-power computing capabilities. Our new Mechanical Test Operations Centre in Dahlewitz, Germany, neared completion during the year. This centre will provide mechanical testing capability for all areas of the Group. Building on the success of our membership of the Advanced Manufacturing Research Centre, we have increased our focus on advanced manufacturing. In the UK, we announced our partnership in the new National Composites Centre, the Advanced Fabrication Research Centre, the Advanced Nuclear Research Centre and became the inaugural industrial partner in the Manufacturing Technology Centre. Additionally, we became a partner of the US Commonwealth of Virginia in two new centres studying advanced aerospace propulsion systems and advanced manufacturing. We continue to invest in our worldwide network of 27 Rolls-Royce University Technology Centres, which undertake advanced research for the Group across a range of specialist subject areas such as materials, noise, vibration and combustion. During the year we filed 440 patent applications. Improving the environmental performance of our products and operations continues to be a key driver for research and development in Rolls-Royce. We have completed the first build of the Environmentally Friendly Engine and the second build of our mid-size technology demonstrator engine. These will begin testing in early 2010, delivering technology for the next generation of civil gas turbine engines. We also continue to invest in several other large-scale demonstrator programmes to reduce carbon emissions with focus both on future gas turbine technology and advanced manufacturing. We completed wind tunnel testing of our open rotor aero-engine concept. This concept uses large unducted fan blades to secure a significant reduction in fuel burn when compared with modern turbofans. Our results demonstrated efficient performance and low-noise characteristics in line with our expectations. Our work for the US Air Force on the Adaptive Versatile Engine Technology (ADVENT) programme has led to us being awarded the second phase of funding, which will include the incorporation of Phase 1 technologies in a demonstrator engine. ADVENT focuses on the variable cycle and geometry to meet demanding US defence requirements for the next generation of military engines. We achieved notable engineering successes in each of our key business sectors. In the civil aerospace business, the Trent 1000 successfully completed its Extended Twin Operations (ETOPS) testing and, at the end of the year, powered the Boeing 787 on its first flight. The BR725 engine was certified and delivered on time and powered the new Gulfstream G650 corporate jet on its maiden flight. The AE 3007A2 engine for the Embraer Legacy 650 completed the majority of its certification testing and started flight testing. Our marine business has designed a radical wave-piercing hull concept for applications in the offshore marine market. For the second year running Rolls-Royce won the coveted `Ship of the year award', this time for the `Far Samson' - the most powerful offshore vessel ever built. The Littoral Combat Ship, USS Freedom, completed US Navy acceptance trials in preparation for entering service. The first Type 45 destroyer, HMS Daring, has entered service with the Royal Navy powered by the WR-21 and work on her sister ships is progressing well. The first Astute class nuclear-powered attack submarine with the Rolls-Royce designed, full-life, PWR2 power system has sailed for initial trials. In defence aerospace, the Airbus A400M powered by the Europrop TP400 turboprop engine made a successful first flight in 2009 and the BAE Systems Mantis unmanned aerial vehicle, powered by Rolls-Royce, also operated flawlessly during its flight trials. In the F-35 Joint Strike Fighter programme, the first development F136 engine was delivered one month ahead of schedule. The Rolls-Royce LiftSystem, for the short take-off and vertical landing variant, completed ground testing and aircraft taxi trials ahead of its first engagement in-flight, which was achieved early in 2010. In energy, the latest industrial Trent combustion system entered service during the year and the design of the high efficiency RB211-H63 has progressed significantly. We continue our work on low carbon energy solutions. During 2009, we began installation of a 500kW tidal power generator in the waters off the coast of Scotland and the Group continues to invest in engineering capability to support its move into the civil nuclear energy market. Operations Key performance indicators 2005 2006 2007 2008 2009 Capital expenditure Â£m 232 303 304 283 291 Product cost index - year-on-year - -5 -7 -4 -3 (increase)/decrease % Underlying revenue per employee Â£000 * 169 182 194 211 233 * Calculated on a three-year rolling basis 2009 proved to be a challenging year but also one of notable achievement for our operations. We improved our revenue per employee significantly from Â£ 211,000 in 2008 to Â£233,000 in 2009. The Group managed the disruptive effects of the recession and changes to programmes, we reduced our inventory levels and, although gas turbine product costs increased slightly, these were held at a level of three per cent above those of 2008. Our operational activity in 2009 centred around two prime objectives: managing our own activities and those of the supply chain in a weak global economic climate, while at the same time continuing with our programme of investment for the future. The Group's operations and its supply chain faced the challenges of uncertain market conditions, depressed financing markets and volatility in major programmes such as the Boeing 787 Dreamliner, Airbus A380 airliner and the A400M military airlifter. Weaker demand in the corporate and regional jet market and for civil engine overhauls and spare parts in the large engine market, reduced levels of activity and impacted on productivity and unit costs. Our marine business had a record year, placing additional demand on operations. Although certain product areas saw a slowdown in production, we also introduced an unprecedented number of new products in this sector. Nevertheless, the supply chain coped well by using our production planning and management tools and we were able to successfully match capacity to demand. Across the Group we sought to ensure that we maintained the correct balance of employees to meet current and anticipated demand. This did involve some difficult decisions and, regrettably, some redundancies. Our employees remain understanding, loyal and cooperative, working with us to help mitigate the effects wherever possible and I would like to thank them for their support. Our process excellence and improvement journeys continued throughout 2009. Our joint venture engine overhaul facilities, Hong Kong Aero Engine Services Limited (HAESL) and Singapore Aero Engine Services Limited (SAESL), were the latest to benefit from the rollout of the enterprise resource planning and SAP process systems. Around 500 engineers based at our engineering support services business in India, also became connected to our design network, Product Life-cycle Management, and are now able to work concurrently on design models with colleagues around the world. Continuing with our investment plan is important, as the Group must increase its operational capability in order to deliver the inevitable growth over the next decade that we will experience. This growth is as a result of the Group's improved market position and current order book commitments. We announced further new investments in facilities in 2009 and work commenced on facilities that had already been announced. Construction of our new US-based disc manufacturing centre in Crosspointe, Virginia, began during the year. Our plans progressed on the building of the new assembly and test facility for Trent engines at the Seletar Aerospace Park, Singapore. We also announced that we will build an additional wide-chord fan blade facility on an adjacent site at Seletar, bringing the total investment on the site to Â£300 million and creating 500 jobs over the next few years. A further Â£300 million of significant capital investment in the UK was also announced, creating or securing 800 jobs. The Group is to build a new single crystal turbine blade facility at a location yet to be determined and in Sunderland we are to build a new discs facility. We are also extending our wide-chord fan blade facility at Barnoldswick to support our defence business. These gas turbine facilities are addressing the planned increase in the manufacturing of components that the Group sees as necessary over the next five years and they will help provide improved productivity benefits on our current product range. In addition, we announced in 2009 our intention to create a new facility in the UK to support our emerging civil nuclear business. Despite the planned increases in our own capability, the proportion of parts that the Group buys, including through our partnerships, will also continue to increase as we move towards having fewer, larger and more capable suppliers to support our global operations. The increasing globalisation of our own operations and of our supply chain will, over time, bring together world-class capabilities, while also helping to reduce the Group's US dollar exposure. Our focus continues to be on operational excellence, strong partnerships and technological superiority, as we manage the current economic situation alongside continuing with our investments to provide the increased operational capacity we require for future growth. While we expect 2010 to be no less volatile, it is pleasing to reflect on a year of strong progress. Our operations have proven to be robust and adaptable, giving us confidence in our ability to cope well with challenges and changes as we move ahead. Services Key performance indicators 2005 2006 2007 2008 2009 Underlying services revenue Â£m 3,457 3,901 4,265 4,755 4,927 Underlying services as percentage of 54 53 55 52 49 Group revenue Services activities provide around one half of the Group's revenues, having increased ten per cent compound over the past ten years. As the original equipment manufacturer, Rolls-Royce is best placed to provide `mission critical' support, long-term product care and well planned maintenance on behalf of customers in each of the markets we serve. The Group's service business capabilities include field services, the sale of spare parts, equipment overhaul services, component repair, data management, field support, equipment leasing and inventory management. These are typically sold as packages such as our TotalCare suite. We work closely with customers to align these service packages to their operational needs, helping to maximise the efficient operation of the equipment on their behalf. In civil aerospace, over 65 per cent of the total large-engine fleet and nearly 90 per cent of the in-service Trent fleet is now managed under TotalCare. We also have over 900 corporate and business jet aircraft enrolled in CorporateCare, the equivalent offering for this market sector. This year, significant TotalCare contracts were signed with airlines in Asia, the Middle East and the US. Defence continued to develop its MissionCare provision worldwide and its service presence on military bases. A number of long-term engine service agreements were signed with customers of the C-130J airlifter worldwide and contracts were signed with the UK Ministry of Defence in support of frontline fighter aircraft engines. The US Department of Defense also signed major agreements for support of Rolls-Royce engines in service. Energy secured 12 long-term service agreements which, together with the additional 35 new gas turbine units that will become operational during 2010, will take the number of gas turbines under long-term service agreement to over 300. In support of the Rolls-Royce fleet in China, a 22-year maintenance, repair and overhaul agreement was signed with PetroChina for the West to East Gas Pipeline Project. New service operations serving energy customers were opened in Angola, India, Israel, Kazakhstan and Qatar. In the marine market our investment in capability and capacity continued to deliver benefits, with ten per cent services revenue growth in 2009. Marine customers require their service centres to be close to their operational base and therefore the expansion of our network to serve their needs continued. Six new centres were opened during the year in North America, South America, Europe and the Middle East. We have also developed underwater intervention capability, enabling Rolls-Royce to complete major propulsion overhauls without the need for time-consuming dry dockings. The Group invested over Â£10m this year in developing and restructuring our gas turbine repair and overhaul network, which will deliver significant improvements in performance and customer satisfaction. We also upgraded our service processes and continued to make progress in standardising our IT systems for global services. Our SAESL joint venture celebrated its 1,000th Trent engine overhaul and a Â£25 million facility extension was opened. A similar investment in our HAESL joint venture is planned to open in 2010. N3, our German-based repair and overhaul joint venture with Lufthansa marked its 100th Trent engine overhaul this year and is now fully capable for Trent 500 and 700 overhaul, with Trent 900 capability development underway. 2009 also saw the celebration of 50 years of repair and overhaul operations in Brazil. During 2009 we opened our sixth On-Wing Care facility in Indianapolis, US, and our field service capability supported over 4,000 aero engines globally. Good progress has been made in applying this capability across all sectors. Our focus on asset optimisation was further reinforced by the Optimized Systems and Solutions Inc. (OsyS) business, created in 2009. OSyS has further expanded our in-service diagnostic and predictive capabilities and signed contracts this year with Qatar Airways and easyJet for its fuel management system, enabling them both to realize substantial fuel savings. OSyS also expanded the health monitoring services and capabilities already applied successfully to aircraft engines and energy systems. We expanded component repair coverage and capability across all sectors and delivered savings to Rolls-Royce of Â£120 million during 2009. Our International Engine Component Overhaul Limited (IECO) joint venture in Singapore completed its 11th year of operation and the repair of its one millionth component. Both SAESL and IECO were recognized with several prestigious awards, highlighting their contribution to the Asia Pacific region, process innovation, new technology introduction and service delivery. Market outlook The Group operates in four long-term global markets - civil and defence aerospace, marine and energy. These markets create a total opportunity worth in excess of US$2 trillion over the next 20 years and: â€¢ have very high barriers to entry; â€¢ offer the opportunity for organic growth; â€¢ feature extraordinarily long programme lives, usually measured in decades; â€¢ can only be addressed through significant investments in technology, infrastructure and capability; and â€¢ create a significant opportunity for extended customer relationships, with revenues from aftermarket services similar in size to original equipment revenues. The size of these markets is generally related to world Gross Domestic Product (GDP) growth, or in the case of the defence markets, global security and the scale of defence budgets. Civil aerospace The Group publishes a 20 year global market outlook, which covers passenger and cargo jets, corporate and regional aircraft. We predict that over the next 20 years 141,000 engines, worth over US$800 billion, will be required for more than 65,000 commercial aircraft and business jets. The forecast predicts faster growth rates for long-haul markets and those markets to, from and within Asia. These markets will continue to benefit from more liberal air service agreements, which boost demand. Factors affecting demand include GDP growth, aircraft productivity, operating costs, environmental issues and the number of aircraft retirements. While the market can be temporarily disrupted by external events, such as war, acts of terrorism, or economic downturns, it has, in the past, always returned to its long-term growth trend. In addition to the demand for engines, the Group forecasts a market opportunity worth US$600 billion for the provision of product-related aftermarket services. Defence aerospace The Group forecasts that demand for military engines will be worth US$170 billion over the next 20 years. The largest single market is expected to be the US, followed by Europe and the Far East. Within Asia, demand will be dominated by Japan, South Korea and India. Trends are driven by the scale of defence budgets and geopolitical developments around the world. As in the Group's other business sectors, programme lives are long and there is a significant opportunity to support equipment with aftermarket services estimated at US$280 billion over the same period. Customers' budget constraints and their need to increase the value they derive from their assets have accelerated the move in this direction. Marine The Group forecasts a demand for marine power and propulsion systems valued at more than US$200 billion over the next 20 years. Demand will be greatest in the commercial sector, where the shipping of raw materials, finished goods and people, in addition to oil and gas exploration and production activity, play crucial roles in the world economy. These activities require large fleets of specialised and increasingly sophisticated ships, which have to be continually renewed and supported to remain operationally efficient. Merchant and offshore markets are rarely at the same stage of the business cycle, which helps to reduce overall volatility. Whilst naval markets are driven by different considerations, customers are similarly seeking to get more from their budgets, leading to increasing demand for integrated systems and through-life support arrangements. As in the Group's other markets, marine aftermarket services are expected to generate significant opportunities, with demand forecasted at US$120 billion over the next 20 years. Energy The International Energy Agency has forecast that over the next 20 years, the worldwide demand for oil will grow by more than 20 per cent, for gas by 35 per cent and for power generation by more than 60 per cent. To satisfy this demand, there will be a growing requirement for aero derivative gas turbines. The Group's 20 year forecast values the total aero-derivative gas turbine sales in the oil and gas and power generation sectors at more than US$70 billion. Over this period, demand for associated aftermarket services is expected to be around US$50 billion. While the oil and gas market is large and growing, demand for aero-derivative gas turbines in the power generation segment is twice that of oil and gas. Note: A long-term conversion rate has been used where necessary in order to present all figures in US$. Finance Director's review The Group delivered another year of strong progress in the face of significant challenges in 2009. The global recession, together with industry specific issues, provided substantial challenges, including the continued delay of a number of major new aerospace programmes. However, a resilient financial performance provides clear evidence of the strength of the business and its ability to adjust quickly in a volatile environment. Our businesses are being affected by the same economic factors as many of our peers and competitors. However, the Group's breadth both by sector and geographical mix, the age of our installed fleet of products, the strong positions we hold on current and future major programmes, together with the Group's services revenues, provide us with significant advantages and have helped deliver a resilient overall result for the year. The financial performance in 2009 met the expectations of the Board and the guidance provided at the start of the year, delivering an 11 per cent increase in underlying Group revenues with underlying profit before taxes up four per cent to Â£915 million. As anticipated there was a cash outflow in the year of Â£183 million. This was as a consequence of the global economic downturn and programme delays impacting the working capital cycle which was exacerbated by year-end revaluation effects. The published results were heavily influenced by the significant movements in foreign exchange rates in 2009, especially the GBP/USD and the GBP/EUR which are explained on page 59. The Group has maintained a strong financial position throughout the year and continues to hold strong credit ratings from both Standard & Poor's (A-, Stable) and Moody's (A3, Stable). At the year end, the Group held gross cash balances of Â£3.0 billion with Â£1.7 billion of outstanding debt commitments - a net cash position of Â£1.3 billion with the average net cash having also increased to Â£635 million over 2009. The redemptions on the Group's existing bond financing, at around Â£1.7 billion, are well spread with around US$187 million due in the second half of 2010 and a â‚¬750 million Eurobond due in 2011 as shown in the chart below. The Group had a further Â£450 million in term funding available to it that was undrawn at the year end. The Group has essentially completed the refinancing of the 2011 Eurobond via the successful Â£ 500 million GBP bond issued in the first half of 2009, the proceeds of which are now held on term deposit and will be available to settle the 2011 bond when it falls due. There are no other material maturities until 2013. The changes made to the Group's UK pension schemes over the last few years have enabled the deficit to remain stable and modest and the schemes ended the year with a net deficit of Â£380 million on an accounting basis, as detailed in note 18 of the financial statements on page 131. The triennial actuarial valuation of the Rolls-Royce Pension Fund, representing 64 per cent of future liabilities, was completed in the year producing a pleasing result with no material changes in the scale of the deficit or future funding levels. The stability in ongoing funding is a direct result of changes made to the Group's pension schemes to reduce the volatility of the deficit, and to provide stability and visibility of cash funding requirements over the next three years. Foreign exchange effects on published results The pace and extent of currency movements have continued to have a significant effect on the Group's financial reporting in 2009, with the GBP/USD and GBP/EUR rates having the biggest impact. These movements have influenced both the reported income statement and the cash flow and closing net cash position (as set out in the cash flow statement and note 2 in the financial statements) in the following ways: 1. Income statement - the most important impact was the end of year mark to market of outstanding financial instruments (foreign exchange contracts, interest rate, commodity and jet fuel swaps). The principal adjustments related to the GBP/USD hedge book. The principal movements in 2009 were as follows: Open Close GBP-USD Â£1-$1.438 Â£1-$1.615 GBP-EUR Â£1-â‚¬1.034 Â£1-â‚¬1.126 Oil-Spot $49/bbl $77/bbl Brent The impact of this mark to market is included in net financing in the income statement and caused a net Â£1,835 million benefit, contributing to a published profit before tax of Â£2,957 million. These adjustments are non-cash, accounting adjustments required under IAS 39 Financial Instruments: Recognition and Measurement. As a result, reported earnings do not reflect the economic substance of derivatives that have been settled in the financial year, but do include the unrealised gains and losses on derivatives that will only affect cash flows when they are settled at some point in the future to match trading cash flows. Underlying earnings are presented on a basis that shows the economic substance of the Group's hedging strategies in respect of transactional exchange rates and commodity price movements. Further details and information are included within the section on key performance indicators on page 19 and in notes 2 and 5 of the financial statements. Underlying profit before finance costs of Â£915 million benefited from Â£71 million of foreign exchange benefits compared to 2008. The achieved rate on selling USD income around one and a half cents better in 2009 than 2008, contributing Â£16 million of transactional benefits. In addition, the improvement in the average GBP-USD and GBP-EUR exchange rates, 29 and 14 cents respectively, contributed translation benefits totalling Â£55 million to underlying profit before tax in the year. The achieved rate on selling net US dollar income is expected to improve by six to nine cents in 2010 compared to 2009, as the Group is able to benefit from forward contracts at better rates. Revaluation effects, which are measured at a point in time, do not, therefore, represent additional currency headwinds or benefits. 2. Cash flow and balance sheet - the Group maintains a number of currency cash balances which vary throughout the financial year. Given the significant movements in foreign exchange rates in 2009, a number of these cash balances were reduced by the effects of retranslation at the year end, causing a reduction of Â£141 million in the 2009 cash flow and hence the closing balance sheet cash position. Summary The Group's revenues increased by 15 per cent in 2009 to Â£10,414 million with 86 per cent of revenues from customers outside the UK. Underlying revenues grew 11 per cent in 2009 with double digit increases in defence aerospace, marine and energy and stable revenues in civil aerospace. â€¢ Underlying revenues in the civil aerospace division were stable at Â£4,481 million (2008 Â£4,502 million) with a four per cent decline in service revenues being offset by a four per cent improvement in revenues from original equipment. Original equipment revenues were supported by a record year for the Trent family, with 224 engines delivered, helping to offset a 39 per cent reduction in deliveries for the corporate and regional sector. Overall 844 engines were delivered in the year, including 347 V2500 engines, and 273 engines for various corporate and regional applications. Revenues from services were held back by reduced discretionary spares and service activity as customers reduced overhaul activity given lower utilisation patterns on a number of large aircraft types. â€¢ Underlying defence aerospace revenues grew by 19 per cent supported by strong growth in deliveries for the military transport sector. New equipment revenues grew 30 per cent and services revenues increased by ten per cent over 2008. â€¢ The marine business continued to grow strongly in the year with underlying revenues increasing 17 per cent from 2008 to Â£2,589 million. Overall new equipment revenues increased by 21 per cent to Â£1,804 million with services revenues increasing ten per cent to Â£785 million supported by the expansion of the marine services network as six facilities were opened or expanded in the year. â€¢ The energy business made strong progress in the year with underlying revenues up 36 per cent to Â£1,028 million, supported by good growth in both original equipment and services activities. Overall underlying services revenues increased by four per cent in 2009 to Â£ 4,927 million and accounted for 49 per cent of Group revenues for the year. Underlying profit margins before financing costs reduced slightly from 10.0 per cent in 2008 to 9.7 per cent in 2009. The reduction in margin reflected an increased mix of original equipment and increased unit costs. Underlying financing costs increased by Â£29 million to Â£68 million (2008 Â£39 million) including an increase in the net interest charge of Â£33 million as a consequence of the additional Â£500 million bond issue in April 2009, and finance costs associated with financial risk and revenue sharing partnerships. Restructuring charges in 2009 totalled Â£55 million (2008 Â£82 million) as the Group continued its focus on operational improvements, including the reduction in the number of people working in support functions. These costs are included within operating costs. A final payment to shareholders of nine pence per share, in the form of C Shares, is proposed, making a total of 15.00 pence per share, a five per cent increase over the 2008 total. Order book The order book at December 31, 2009, at constant exchange rates, has remained resilient at Â£58.3 billion (2008 Â£55.5 billion). This included firm business that had been announced but for which contracts had not yet been signed of Â£6.8 billion (2008 Â£6.1 billion). In civil aerospace, it is common for a customer to take options for future orders in addition to firm orders placed. Such options are excluded from the order book. In defence aerospace, long-term programmes are often ordered for only one year at a time. In such circumstances, even though there may be no alternative engine choice available to the customer, only the contracted business is included in the order book. Aftermarket services agreements, including TotalCare packages, represented 28 per cent of the order book, having increased by Â£2 billion in the year. These are long-term contracts where only the first seven years' revenue is included in the order book. Aftermarket services The Group continues to be successful in developing its aftermarket services activities. These grew by four per cent on an underlying basis in 2009 and accounted for 49 per cent of the Group revenues. In particular, TotalCare packages in the civil aerospace sector now cover 59 per cent, by value, of the installed fleet. TotalCare packages cover long-term management of the maintenance and associated logistics for our engines and systems, monitoring the equipment in service to deliver the system availability our customers require with predictable costs. The pricing of such contracts reflects their long-term nature. Revenues and costs are recognised based on the stage of completion of the contract, generally measured by reference to flying hours. The overall net position of assets and liabilities on the balance sheet for TotalCare packages was an asset of Â£970 million (2008 Â£848 million). Cash There was a cash outflow in the year of Â£183 million (2008 Â£570 million inflow) partly the consequence of revaluing year end non-GBP cash balances of Â£141 million (2008 Â£439 million inflow) but also reflecting Â£94 million of investments in acquisitions and joint ventures and associates during the period. Working capital increased by Â£78 million during the year with increased financial working capital offsetting inventory which reduced by Â£119 million. Reduced inventory levels was a significant achievement given the volatility caused by the economic downturn, ongoing delays of major new programmes and the growth in the non-civil aerospace segments during 2009. Cash investments of Â£597 million (2008 Â£675 million) in property, plant and equipment and intangible assets, payments to shareholders of Â£250 million (2008 Â£200 million) and tax payments of Â£119 million (2008 Â£117 million) represented the major cash outflows in the period. Despite a modest cash outflow in 2009, the average net cash was Â£635 million (2008 Â£375 million). The net cash balance at the year end was Â£1,275 million (2008 Â£1,458 million). Taxation The overall tax charge on the profit before tax was Â£740 million (2008 Â£547 million credit), a rate of 25.0 per cent (2008 28.9 per cent). The tax charge on underlying profit was Â£187 million (2008 Â£217 million) a rate of 20.4 per cent (2008 24.7 per cent). The overall tax charge was reduced by Â£26 million in respect of the expected benefit of the UK research and development tax credit. In addition, Â£35 million of prior years' tax provisions were released in the year. This was partly following settlement of a number of outstanding tax issues and partly as a result of a change in UK tax law generally exempting foreign dividends from UK taxation. These items also reduced the underlying tax charge by the same amounts. The underlying tax rate is expected to increase in 2010 to around 24 per cent. The operation of most tax systems, including the availability of specific tax deductions, means that there is often a delay between the Group tax charge and the related tax payments, to the benefit of cash flow. The Group operates internationally and is subject to tax in many differing jurisdictions. As a consequence, the Group is routinely subject to tax audits and examinations which, by their nature, can take a considerable period to conclude. Provision is made for known issues based on management's interpretation of country specific legislation and the likely outcome of negotiation or litigation. The Group believes that it has a duty to shareholders to seek to minimise its tax burden but to do so in a manner which is consistent with its commercial objectives and meets its legal obligations and ethical standards. While every effort is made to maximise the tax efficiency of its business transactions, the Group does not use artificial structures in its tax planning. The Group has regard for the intention of the legislation concerned rather than just the wording itself. The Group is committed to building open relationships with tax authorities and to following a policy of full disclosure in order to effect the timely settlement of its tax affairs and to remove uncertainty in its business transactions. Where appropriate, the Group enters into consultation with tax authorities to help shape proposed legislation and future tax policy. Transactions between Rolls-Royce subsidiaries and associates in different jurisdictions are conducted on an arms-length basis and priced as if the transactions were between unrelated entities, in compliance with the OECD Model Tax Convention and the laws of the relevant jurisdictions. Before entering into a transaction the Group makes every effort to determine the tax effect of that transaction with as much certainty as possible. To the extent that advance rulings and clearances are available from tax authorities, in areas of uncertainty, the Group will seek to obtain them and adhere to their terms. Pensions The charges for pensions are calculated in accordance with the requirements of IAS 19 Employee Benefits. During 2007 the Group's principal UK defined benefit schemes adopted a lower risk investment strategy in which the interest rate and inflation risks were largely hedged and the exposure to equities reduced to around 20 per cent of scheme assets. As reported last year, the primary objective of the revised investment strategy was to reduce the volatility of the pension schemes to enable greater stability in the funding requirements. The March 31, 2009 valuation of our largest pension fund has demonstrated the success of these measures. After increasing the allowance for life expectancy, the deficit has fallen slightly compared to the previous valuation in 2006. This means that the deficit reduction contributions which have been in place since 2003 will continue at their current level but are now projected to end slightly earlier than previously envisaged. Further information and details of the pensions' charge and the defined benefit schemes' assets and liabilities are shown in note 18 to the financial statements. The net deficit, after taking account of deferred tax, was Â£590 million (2008 Â£399 million restated). Changes in this net position are affected by the assumptions made in valuing the liabilities and the market performance of the assets. Investments The Group continues to subject all investments to rigorous examination of risks and future cash flows to ensure that they create shareholder value. All major investments require Board approval. The Group has a portfolio of projects at different stages of their life cycles. Discounted cash flow analysis of the remaining life of projects is performed on a regular basis. Sales of engines in production are assessed against criteria in the original development programme to ensure that overall value is enhanced. Gross research and development (R&D) investment amounted to Â£864 million (2008 Â£885 million). Net research and development charged to the income statement was Â£379 million (2008 Â£403 million). The level of self-funded investment in research and development is expected to remain at approximately four to five per cent of Group revenues in the future. The impact of this investment on the income statement will reflect the mix and maturity of individual development programmes and will result in a modest increase in the level of net research and development charged within the income statement in 2010. The continued development and replacement of operational facilities contributed to the total expenditure in property, plant and equipment of Â£291 million (2008 Â£283 million). Investment in 2010 is anticipated to be slightly increased compared to the 2009 level as the investments in new facilities in the US and Singapore commence. Investment in training was Â£24 million (2008 Â£30 million). Intangible assets The Group carried forward Â£2,472 million (2008 Â£2,286 million) of intangible assets. This comprised purchased goodwill of Â£984 million, engine certification costs and participation fees of Â£454 million, development expenditure of Â£546 million, recoverable engine costs of Â£290 million and other intangible assets of Â£198 million. Expenditure on intangible assets is expected to increase modestly in 2010. 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 2009. Further details are given in note 8. Partnerships The development of effective partnerships continues to be a key feature of the Group's long-term strategy. Major partnerships are of two types: joint ventures and risk and revenue sharing partnerships. 1. Joint ventures Joint ventures are an integral part of our business. They are involved in engineering, manufacturing, repair and overhaul, and financial services. They are also common business structures for companies participating in international, collaborative defence projects. They share risk and investment, bring expertise and access to markets and provide external objectivity. Some of our joint ventures have become substantial businesses. A major proportion of the debt of the joint ventures is secured on the assets of the respective companies and is non-recourse to the Group. 2. Risk and revenue sharing partnerships (RRSPs) RRSPs have enabled the Group to build a broad portfolio of engines, thereby reducing the exposure of the business to individual product risk. The primary financial benefit is a reduction of the burden of R&D expenditure on new programmes. The related R&D expenditure is expensed through the income statement and the initial programme receipts from partners, which reimburse the Group for past R& D expenditure, are also recorded in the income statement, as other operating income. RRSP agreements are a standard form of co-operation in the civil aero-engine industry. They bring benefits to the engine manufacturer and the partner. Specifically, for the engine manufacturer they bring some or all of the following benefits: additional financial and engineering resource; sharing of risk; and initial programme contribution. As appropriate, the partner also supplies components and as consideration for these components, receives a share of the long-term revenues generated by the engine programme in proportion to its purchased programme share. The sharing of risk is fundamental to RRSP agreements. Partners share financial investment in the programme, typically through: â€¢ market risk as they receive their return from future sales; â€¢ currency risk as their returns are denominated in US dollars; â€¢ sales financing obligations; â€¢ warranty costs; and â€¢ where they are manufacturing or development partners, technical and cost risk. Partners that do not undertake development work or supply components are referred to as financial RRSPs and are accounted for as financial instruments as described in the accounting policies on page 97. In 2009, the Group received other operating income of Â£89 million (2008 Â£79 million). Payments to RRSPs are recorded within cost of sales and increase as the related programme sales increase. These payments amounted to Â£231 million (2008 Â£268 million). The classification of financial RRSPs as financial instruments has resulted in a liability of Â£363 million (2008 Â£455 million) being recorded in the balance sheet and an associated underlying financing cost of Â£25 million (2008 Â£26 million) recorded in the income statement. In the past, the Group has also received government launch investment in respect of certain programmes. The treatment of this investment is similar to non-financial RRSPs. Risk management The Board has an established, structured approach to risk management. The risk committee (see page 73) has accountability for the system of risk management and reporting the key risks and associated mitigating actions. The Director of Risk reports to the Finance Director. The Group's policy is to preserve the resources upon which its continuing reputation, viability and profitability are built, to enable the corporate objectives to be achieved through the operation of the Rolls-Royce business processes. Risks are formally identified and recorded in a corporate risk register and its subsidiary registers within the businesses, which are reviewed and updated on a regular basis, with risk mitigation plans identified for key risks. Financial risk The Group uses various financial instruments in order to manage the exposures that arise from its business operations as a result of movements in financial markets. All treasury activities are focused on the management and hedging of risk. It is the Group's policy not to trade financial instruments or to engage in speculative financial transactions. There have been no significant changes in the Group's policies in the last year. The principal economic and market risks continue to be movements in foreign currency exchange rates, interest rates and commodity prices. The Board regularly reviews the Group's exposures and financial risk management and a specialist committee also considers these in detail. All such exposures are managed by the Group Treasury function, which reports to the Finance Director and which operates within written policies approved by the Board and within the internal control framework described on page 74. Counterparty credit risk The Group has an established policy for managing counterparty credit risk. A common framework exists to measure, report and control exposures to counterparties across the Group using value-at-risk and fair-value techniques. The Group assigns an internal credit rating to each counterparty, which is assessed with reference to publicly available credit information, such as that provided by Moody's, Standard & Poor's, and other recognised market sources, and is reviewed regularly. Financial instruments are only transacted with counterparties that have a publicly assigned long-term credit rating from Standard & Poor's of `A-' or better and from Moody's of `A3' or better. Funding and liquidity The Group finances its operations through a mixture of shareholders' funds, bank borrowings, bonds, notes and finance leases. The Group borrows in the major global markets in a range of currencies and employs derivatives where appropriate to generate the desired currency and interest rate profile. The Group's objective is to hold financial investments and maintain undrawn committed facilities at a level sufficient to ensure that the Group has available funds to meet its medium-term capital and funding obligations and to meet any unforeseen obligations and opportunities. The Group holds cash and short-term investments which, together with the undrawn committed facilities, enable it to manage its liquidity risk. Short-term investments are generally held as bank deposits or in `AAA' rated money market funds. The Group operates a conservative investment policy which limits investments to high quality instruments with a short-term credit rating of `A-1' from Standard & Poor's or better and `P-1' from Moody's. Counterparty diversification is achieved with suitable risk-adjusted concentration limits. Investment decisions are refined through a system of monitoring real-time equity and credit default swap (CDS) price movements of potential investment counterparties which are compared to other relevant benchmark indices and then risk-weighted accordingly. The Group's borrowing facilities increased during 2009 following the successful placement of a Â£500 million ten-year bond. As at December 31, 2009 the Group had total committed borrowing facilities of Â£2.15 billion (2008 Â£1.65 billion). Debt maturities in 2010 and 2011 are Â£108 million and Â£501 million respectively. The proceeds of the recent Â£500 million bond issue are anticipated to be used to pay down the Â£501 million of debt maturities in 2011. The maturity profile of the borrowing facilities is staggered to ensure that refinancing levels are manageable in the context of the business and market conditions. There are no rating triggers contained in any of the Group's facilities that could require the Group to accelerate or repay any facility for a given movement in the Group's credit rating. The Group's Â£250 million bank revolving credit facility contains a rating price grid, which determines the borrowing margin for a given credit rating. The Group's current borrowing margin would be 20 basis points (bp) over sterling LIBOR if drawn. The borrowing margin on this facility increases by approximately 5bp per one notch rating downgrade, up to a maximum borrowing margin of 55bp. The facility was not drawn during 2009. There are no rating price grids contained in the Group's other borrowing facilities. The Group continues to have access to all the major global debt markets. Credit rating The Group subscribes to both Moody's Investors Service and Standard & Poor's for its official publicised credit ratings. As at December 31, 2009 the Group's assigned long-term credit ratings were: Rating agency Rating Outlook Category Moody's A3 Stable Investment grade Standard & A- Stable Investment grade Poor's As a long-term business, the Group attaches significant importance to maintaining an investment grade credit rating, which it views as necessary for the business to operate effectively. The Group's objective is to maintain an `A' category investment grade credit rating from both agencies. Currency risk The Group is exposed to movements in exchange rates for both foreign currency transactions and the translation of net assets and income statements of foreign subsidiaries. The Group regards its interests in overseas subsidiary companies as long-term investments and manages its translational exposures through the currency matching of assets and liabilities where applicable. The matching is reviewed regularly, with appropriate risk mitigation performed where material mismatches arise. The Group has exposure to a number of foreign currencies. The most significant transactional currency exposures are USD to GBP and USD to EUR. The Group manages its exposure to movements in exchange rates at two levels: i. Revenues and costs are currency matched where it is economic to do so. The Group actively seeks to source suppliers with the relevant currency cost base to avoid the risk or to flow down the risk to those suppliers that are capable of managing it. Currency risk is also a prime consideration when deciding where to locate new facilities. US dollar income converted into sterling represented 23 per cent of Group revenues in 2009 (2008 26 per cent). US dollar income converted into euros represented two per cent of Group revenues in 2009 (2008 four per cent). ii. Residual currency exposure is hedged via the financial markets. The Group operates a hedging policy using a variety of financial instruments with the objective of minimising the impact of fluctuations in exchange rates on future transactions and cash flows Market exchange rates 2008 2009 USD per GBP - Year-end spot rate 1.438 1.615 - Average spot rate 1.854 1.566 EUR per GBP - Year-end spot rate 1.034 1.126 - Average spot rate 1.258 1.123 The permitted range of the amount of cover taken is determined by the written policies set by the Board, based on known and forecast income levels. The forward cover is managed within the parameters of these policies in order to achieve the Group's objectives, having regard to the Group's view of long-term exchange rates. Forward cover is in the form of standard foreign exchange contracts and instruments on which the exchange rates achieved are dependent on future interest rates. The Group may also write currency options against a portion of the unhedged dollar income at a rate which is consistent with the Group's long-term target rate. At the end of 2009 the Group had US$18.8 billion of forward cover (2008 US$17.1 billion). The consequence of this policy has been to maintain relatively stable long-term foreign exchange rates. Note 16 to the financial statements includes the impact of revaluing forward currency contracts at market values on December 31, 2009, showing a negative value of Â£144 million (2008 negative value of Â£2,181 million) which will fluctuate with exchange rates over time. The Group has entered into these forward contracts as part of the hedging policy, described above, in order to mitigate the impact of volatile exchange rates. Interest rate risk The Group uses fixed rate bonds and floating rate debt as funding sources. The Group's policy is to maintain a proportion of its debt at fixed rates of interest having regard to the prevailing interest rate outlook. To implement this policy the Group may utilise a combination of interest rate swaps, forward-rate agreements and interest-rate caps to manage the exposure. Commodity risk The Group has an ongoing exposure to the price of jet fuel and base metals arising from business operations. The Group's objective is to minimise the impact of price fluctuations. The exposure is hedged, on a similar basis to that adopted for currency risks, in accordance with parameters contained in written policies set by the Board. Sales financing In connection with the sale of its products, the Group will, on some occasions, provide financing support for its customers. This may involve the Group guaranteeing financing for customers, providing asset-value guarantees (AVGs) on aircraft for a proportion of their expected future value, or entering into leasing transactions. The Group manages and monitors its sales finance related exposures to customers and products within written policies approved by the Board and within the internal framework described in the corporate governance section. The contingent liabilities represent the maximum discounted aggregate gross and net exposure that the Group has in respect of delivered aircraft, regardless of the point in time at which such exposures may arise. The Group uses Ascend Worldwide Limited as an independent appraiser to value its security portfolio at both the half year and year end. Ascend provides specific values (both current and forecast future values) for each asset in the security portfolio. These values are then used to assess the Group's net exposure. The permitted levels of gross and net exposure are limited in aggregate, by counterparty, by product type and by calendar year. The Group's gross exposures were divided approximately 55:45 between AVGs and credit guarantees in 2009 (2008 55:45). They are spread over many years and relate to a number of customers and a broad product portfolio. The Board regularly reviews the Group's sales finance related exposures and risk management activities. Each financing commitment is subject to a credit and asset review process and prior approval in accordance with Board delegations of authority. The Group operates a sophisticated risk-pricing model to assess risk and exposure. Costs and exposures associated with providing financing support are incorporated in any decision to secure new business. The Group seeks to minimise the level of exposure from sales finance commitments by: â€¢ the use of third-party non-recourse debt where appropriate; â€¢ the transfer, sale, or reinsurance of risks; and â€¢ ensuring the proportionate flow down of risk and exposure to relevant RRSPs. Each of the above forms an active part of the Group's exposure management process. Where exposures arise, the strategy has been, and continues to be, to assume where possible liquid forms of financing commitment that may be sold or transferred to third parties when the opportunity arises. Note 22 to the financial statements describes the Group's contingent liabilities. There were no material changes to the Group's gross and net contingent liabilities during 2009. Accounting standards The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the EU. In 2009, the changes that have had the most significant effect on the Group's financial statements are: â€¢ Amendments to IAS 1 Presentation of Financial Statements: this relates to presentation only and there is no impact on the reported results. The amendments require (i) a statement of comprehensive income in place of the statement of recognised income and expense; (ii) a balance sheet at the beginning of the comparative period when there has been a change in accounting policy; and (iii) the statement of changes in equity to be presented as a primary statement. â€¢ IFRIC 14 IAS 19 The Limit of a Defined Benefit Asset, Minimum Funding Requirements and their Interaction: this interpretation applies where regulatory funding requirements for pension schemes will result in an unrecognisable surplus arising in the future. It has been adopted with effect from January 1, 2008. An additional liability of Â£491m was recognised at that date. Further details are shown in note 18. â€¢ IFRS 8 Operating Segments: this standard amends the requirements for disclosure of segmental performance and does not have any effect on the Group's overall reported results. Note 2 is presented in accordance with the new requirements. The key change is that the basis for reporting the segmental results is the same as that used internally, which is equivalent to the underlying results, reported as additional information in prior years. A summary of other less significant changes, and those which have not been adopted in 2009, is included within the accounting policies in note 1 to the financial statements. Regulatory developments In response to the financial crisis, governments and regulators around the world are considering various regulatory reforms to the financial markets with the aim of improving transparency and reducing systemic risk. While the proposed reforms are predominantly directed at financial institutions, some of them may have implications for non-financial institutions. In particular, proposals by both US and European regulators to reform the Over-the-Counter (OTC) derivatives market could have implications for the Group in terms of future funding requirements and increased cash flow volatility, if parties to future OTC derivative transactions are required to post collateral to reduce counterparty risk. Share price During the year the Company's share price increased by 44 per cent from 335.5p to 483.5p, compared to a 16 per cent increase in the FTSE aerospace and defence sector and a 22 per cent increase in the FTSE100. The Company's shares ranged in price from 258.50p in March to 500.0p in December. The number of ordinary shares in issue at the end of the year was 1,854 million, an increase of 12 million relating to the exercise of share options. The average number of ordinary shares in issue was 1,845 million (2008 1,820 million). Andrew Shilston Finance Director February 10, 2010 Responsibility statement of the directors on the Annual report The Responsibility Statement below has been extracted in unedited text from the Company's full Annual report for the year ended 31 December 2009. 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 79, incorporating by reference the Directors' remuneration report on pages 80 to 90, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. By order of the Board Tim Rayner General Counsel and Company Secretary February 10, 2010 Cautionary statement regarding forward-looking statements This announcement contains certain forward-looking statements. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. In particular, all statements that express forecasts, expectations and projections with respect to future matters, including trends in results of operations, margins, growth rates, overall market trends, the impact of interest or exchange rates, the availability of financing to the Company, anticipated cost savings or synergies and the completion of the Company's strategic transactions, are forward-looking statements. By their nature, these statements and forecasts involve risk and uncertainty because they relate to events and depend on circumstances that may or may not occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts. The forward-looking statements reflect the knowledge and information available at February 10, 2010, the date of signing of the Annual report, and will not be updated during the year. Nothing in this announcement should be construed as a profit forecast. This announcement contains non-statutory accounts within the meaning of section 435 of the Companies Act 2006. The statutory accounts for the year ended 31 December 2009, 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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