rolls-royce full annual report 2009

8/9/2019 Rolls-Royce Full Annual Report 2009

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Delivering today,investing for the future

Rolls-Royce Group plc

Annual report 2009


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Business review

Introduction

We have ollowed a consistent strategy or20 years and our investment in technology,together with our strong order book, positionsus well or uture growth.

Civil aerospace Marine

Deence aerospace Energy

Powering more than 30 civil aircrat types rom

small executive jets to the largest airliners.A world-class range o capabilities in shipdesign and in the supply and support o

power and propulsion systems.

An engine portolio that covers all major

sectors including transport, combat, trainers,

helicopters, tactical and unmanned aircrat.

An established and leading position in power

or onshore and oshore oil and gas

applications, together with a growing

presence in power generation.

47.0bnOrder book

4,481mUnderlying revenue

3.5bnOrder book


1.3bnOrder book


6.5bnOrder book


Introduction

Annual report 2009Rolls-Royce Group plc


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Business review2 Chairmans statement

Chairmans statement

Simon Robertson, ChairmanAt the end o an extremely challenging year or the world

economy, I am pleased to report that Rolls-Royce has delivered

another solid perormance in 2009. This demonstrates both the

resilience and the long-term nature o our business. Underlyingprot beore tax has increased by our per cent and despite intense

competition, our order book has grown rom 55.5 billion in 2008

to 58.3 billion in 2009.

We are proposing a nal payment to shareholders o nine penceper share, bringing the ull year payment to 15.00 pence. This is an

increase o ve per cent, and reects the Boards continued

condence in the Groups business.

In the past year, the degree o uncertainty acing global marketshas somewhat diminished. Sharp declines in output have been

arrested and growth is returning to most o the worlds major

economies, albeit at considerably reduced levels. Overall theeconomic environment remains tough. Thereore we shall

continue to ocus on operational efciency, while maintaining

our commitment to research and development and to investment

which supports our growing order book.

Our strategy o 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 o commercial

opportunities as they arise and to deliver sustained growth. The powersystems 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 natureo our business gives us exceptional visibility o revenues or manyyears to come.

Our balance sheet remains strongand the long-term nature o ourbusiness gives us exceptionalvisibility o revenues or manyyears to come.

Full year payment to shareholders

14.30p 15.00p2008 2009

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Business review

example o this is our sponsorship o the Rolls-Royce Science Prize or

schools which attracts greater interest every year. In 2009, 1,500 schooltook part, with 2,000 schools expected to participate in 2010. Last year

top award o 20,000 went to Kells Lane Primary School, Gateshead,

England or a really innovative wind turbine project.

Rolls-Royce supports a wide range o charitable causes, with much o

that support directed towards educational programmes which promot

engineering and scientic learning.

I would like to thank the management and all our employees or the

commitment and the exibility they have shown in the past challengin

12 months. I would also like to record my gratitude to my ellowdirectors or 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 or his contribution to

Rolls-Royce and his services to the Board where he served as CompanySecretary rom 1995 to 2007. He retired this year rom the position oDirector o Public Aairs.

2010 will present signicant challenges or Rolls-Royce. However the

resilience o the Groups perormance reected in this report, theundamental strength o its business model and the proven capabilitie

o the management team, give me condence that Rolls-Royce will

continue to nd opportunities in the marketplace and deliver

sustainable growth or the benet o all our stakeholders.

Simon Robertson

Chairman

February 10, 2010

Chairmans statement continued

It is particularly important in periods o economic uncertainty that a

companys core values are deended and strengthened. Ourcommitment to acting with integrity is at the heart o the way weoperate. In 2008, Rolls-Royce established an ethics committee, which

reports to the Board. In 2009, we published a new Global Code o

Business Ethics and distributed this, with ace-to-ace training, to all our

employees worldwide. The Global Code establishes industry-leadingstandards and is supported by a rigorous process or reporting and

monitoring to ensure compliance.

The Board is committed to improving the environmental perormance

o our products across all our business sectors. We have alwaysrecognised that technology and innovation are critical to achieving

such improvements. As a consequence we commit two-thirds o our

research and development expenditure to developing solutions to

these challenges. Substantial progress has been made over many years.

Our products are signicantly more uel efcient than they were adecade ago. We continue to look or urther advances through the

Environmentally Friendly Engine and other research programmes.

In our marine business, we have extended our range o engines thatrun on liqueed natural gas, oering ar better emission perormance

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 beneted again in the past year rom the wise counsel o

our International Advisory Board (IAB), which was established in 2006

to advise on emerging political, business and economic trends(membership o the IAB is shown on page 69). The IAB provides

high-level strategic input to the Board and management. Its membersbring a deep understanding o global issues aecting Rolls-Royce and

o the markets and countries we operate in.

The lie-blood o Rolls-Royce is its people. It is their pride in what

Rolls-Royce has achieved and, even more important, their vision o what

can be achieved in the uture, that will secure our continued success.

As I travel around the world, I am constantly impressed by the calibre othe men and women I encounter at every level o the Group. From our

apprentices and recent graduates to the most experienced and

knowledgeable o 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 o uture

generations who will, in time, ensure the success o the Company.

I am very proud o our employees. We remain committed to developingtheir skills through a range o world-class training programmes, as well

as by encouraging a wider interest in science and engineering. A good



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Business review4 Chie Executives review

Chie Executives review

Sir John Rose, Chie Executive

Deliveringtoday,investing

or the uture

Our resilience, coupled with theinherent strength o our businessmodel, will enable us to manageshort-term uncertainties anddeliver uture growth.

In 2009, Rolls-Royce has delivered solid results despite the severity

o the economic downturn, a perormance which has againdemonstrated the benets o 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 nancial results demonstrate the resilience o our business. The

Groups order book increased to a record 58.3 billion, with underlying

revenue growing 11 per cent to 10.1 billion and underlying prot

beore tax improving our per cent to 915 million.

The Group has a strong nancial position with average cash balances

increasing by 260 million to 635 million. The triennial valuation o the

Groups largest pension scheme has just been completed and conrmsthat 2010s cash unding will be maintained at a level similar to that in

2009. This demonstrates the benets o the early action taken to amend

the terms o 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 benet

rom our ability to access the worlds aster growing markets wherethere continues to be demand or investment in transport

and inrastructure.

We will maintain our ocus on cost reduction and improving ouroperational efciency. At the same time we will continue to invest

in technology, in our product and service portolio, in the capital

assets required to deliver growth, in our international ootprint and

in our people.

Group order book

55.5bn 58.3bn2008 2009

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Business review Chie Executives review continued

A long-term business

It is important to recognise that ours is a long-term business. Typically,our product and service liecycles span 40-50 years and we invest in

technology programmes that look ve, ten, 20 years and more intothe uture.

A good example o this is the Avon engine. In its latest version

modied to produce signicant improvements in power and efciency

it is meeting the demands o customers in the oil and gas sector.Yet the Avon rst entered the industrial gas turbine market 40 years ago.

That engine in turn was derived rom the original aero version, which

powered a Canberra aeroplane on the rst non-stop, non-reuelling,

jet ight across the Atlantic in 1951.

Examples like this show why it is so important to set our Groups

progress into a broad context. This review will chart our progress over

the past ten years, during which we more than doubled our revenuesand our underlying prots. This has provided us with a platorm rom

which we are condent we can grow our revenues by at least as much

again in the decade ahead.

A very dierent company

We are now a very dierent company than we were ten years ago. This can

be measured in terms o our scale and geography, in terms o the range o

things we do and in terms o operational efciency. All this has made us a

more resilient business and has established a ar broader oundation romwhich to build revenues in the uture. A ew acts and gures comparing

the Rolls-Royce o 1999 with todays Group illustrate the point.

Today, at any one time around 200,000 people are ying in aircrat

powered by Rolls-Royce engines. Our ability to keep those aircrat in thesky is a powerul illustration o the mission critical nature o what we do.

At peak times that gure can double, which means that the equivalent

o the population o Bristol is being kept alot by Rolls-Royce engines.

That is considerably more than double the number o people we wereying a decade ago.

We have become much more than a civil aerospace company. The

revenues rom our marine, deence aerospace and energy businesseshave grown rom 2.1 billion in 1999 to 5.6 billion in 2009. In 2009,

revenues rom outside our civil aerospace business accounted or more

than hal o Group revenues.

We are becoming less dependent on our traditional markets o Europe and

North America. These geographies, which accounted or around 70 per ceno our revenues in 1999, represent around 66 per cent o our revenues now

and that trend is set to continue, as more than hal our current order book

comes rom Asia, South America and the Middle East.

Around hal our revenues come rom services today compared to

40 per cent a decade ago. This represents an annual compound

growth in services o ten per cent.

Throughout this period we have maintained our ocus on costs andimproving operational efciency. Every year or the past ten years,

revenue per employee has increased, showing a 16 per cent

improvement in the year to 271,000 in 2009. We are now selling more

than twice as much as we were ten years ago, with 2,000 ewer people

Taken together, the pipeline o orders we have already signed,our increased market share, the growth and scale o our services

business and our ocus on costs, underpin our condence that wewill double our annual revenues in the decade ahead by organic

growth alone.

Our shareholders have beneted rom our success to date with

payments increasing rom 7.25 pence in 1999 to 15.00 pence in 2009.

A consistent strategy

The disciplined application o a consistent strategy over many years has

delivered a strong, resilient company, which is well positioned or thelong-term growth we expect.

Our strategy has ve elements and 2009 saw us make progress againsteach o these.

1. Addressing our global markets

Rolls-Royce has become a truly global Group, providing mission

critical power and propulsion systems to a wide range o customers

in over 120 countries. The scale o the progress that has been made isillustrated by the act that the size o our order book in Asia and the

Middle East today is around double the Groups entire order book in 1999

During 2009 we won new customers in Asia, Arica, Europe, the MiddleEast and North and South America.

Our global reach, coupled with the act that very ew companies oer

the highly sophisticated range o products and services that we do,

positions us well to take advantage o opportunities in early recoveringand emerging economies.

Underlying earnings per ordinary share

36.70p 39.67p2008 2009



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Business review6

2. Investing in technology, inrastructure and capability

We have managed our balance sheet cautiously and or the long termso that we can continue to invest in manuacturing capability and

technology. These investments are targeted specically to support

anticipated growth and meet our customers uture needs.

Technology is a critical dierentiator in our our markets, all o which

demand increased uel efciency, reduced environmental impact and

higher levels o reliability and durability. We have invested 7 billion inR&D over the past ten years to maintain our technological advantage,

with a particular emphasis on collaborative research involving a network

o universities around the world.

This ocus continued in 2009, as we championed the development

o a network o Advanced Manuacturing Research Centres our 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 300 million investment in our new

actories in the UK: a casting acility or single crystal turbine blades;

an advanced disc acility; a wide-chord an blade acility or deence

engines and; a civil nuclear acility to assemble and test components.This represents the latest phase in a programme o capital replacement

which has seen Rolls-Royce invest 1.8 billion in UK inrastructure over

the past decade, creating world-class manuacturing acilities in multiple

locations and providing skilled jobs in state-o-the-art environments.

To address our global market opportunities, in 2009 we began work on a

manuacturing and assembly acility at Crosspointe in the United States.

We also conrmed a large engine assembly plant and announced a new

wide-chord an blade actory in Seletar, Singapore, our rst outside theUK. This will bring the total investment in the Seletar campus to around

300 million by the time it is completed in 2012.

We now manuacture in 20 countries and have service centres in over 50.

3. Developing a competitive portolio o products and services

We invest continually in developing proprietary technology which

will meet our customers present and uture needs. We currentlyhave 39 live major engineering programmes, compared to 25 a

decade ago.

2009 was a remarkable year in which we celebrated the rst ight o six

o our customers aircrat: the Boeing 787; Gulstream G650; AirbusA400M; Embraer Legacy 650, the BAE Systems Mantis UAV and the

AgustaWestland Lynx Wildcat helicopter. Early in 2010, the short take-oand vertical landing (STOVL) version o the F-35 Joint Strike Fighter

deployed the unique Rolls-Royce LitSystem or the rst time.

Chie Executives review continued

These are unprecedented achievements, with more entirely new aircrat

taking to the skies in a period o three months than in the previous veyears. The capability to meet these requirements is the direct

consequence o a decade o investment and innovation.

In the marine market in 2009, we saw the US Navys Littoral Combat Shipgo on active duty, the rst sailing o the Royal Navys Astute class

submarine and the commissioning o the Royal Navys rst Type 45

Destroyer, HMS Daring.

All these aircrat and vessels are powered by Rolls-Royce and will enter

active service in the next two to three years. The lives o each o these

programmes is expected to span 40 years or more, giving us exceptional

clarity o uture original equipment and service revenues.

4. Growing market share and our installed product base

We have successully grown our market share in each o our businesses,generating revenues today and establishing a platorm or uture growth.

Our share o the civil aerospace market has expanded rom 27 per cent

in 1999 to 34 per cent today and our uture order book will ensure that

our market share continues to grow, driven by the strong position

Rolls-Royce has established on the new generation o wide-bodiedaircrat. On the new Boeing 787 and the Airbus A350 XWB amilies,

Rolls-Royce has achieved a market share o 64 per cent.

In the deence aerospace sector we are the worlds number two andEuropes number one producer o aero engines, with an extensive

engine portolio or all key sectors o the market.

Revenues in our marine business have more than doubled since 2005.We now design, supply and support power and propulsion systems ornaval and commercial applications, with over 30,000 vessels worldwide

using our equipment.

In 2009, our energy business recorded its highest ever underlyingrevenue and prot. We serve energy customers in over 120 countries.

Our position in providing power or 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 or customers through product-related services

We have unrivalled knowledge o the complex technologies within our

products and a deep understanding o our customers needs. We have

used these to develop services that improve our customers operations.

Our aerospace operations centres are a good illustration o this

capability. In dedicated acilities serving airline, corporate and deence

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Business review Chie Executives review continued

customers, these Rolls-Royce centres collect real-time data rom our

engines as they are operating around the world, 24 hours a day, 365 daysa year. By analysing, sharing and acting upon this inormation we can

optimise the perormance o our engines in service. The centres are aocal point or service delivery, assessing the condition o the eet and

directing logistics and eld maintenance.

We have transerred service best practice across all our businesses so that

each now oers a through-lie service capability. We continue to strengthenour global services network and in the past year opened, or expanded,

marine services acilities in Niteroi in Brazil, Galveston and Seattle in the US

and Newoundland in Canada. We opened an On-Wing Care acility or

corporate and regional aircrat in Indianapolis, in the US, and continue toinvest in our civil aerospace overhaul bases in Hong Kong and Singapore.

Our people

To execute this strategy eectively and on a worldwide basis, the skills,diversity and dedication o our people are key. The global nature o

our customers and our operations means that our people have to be

capable o teamwork across geographies. They need to be exible and

open minded, to have world-class capabilities and shared values. O the

38,500 people we employ, 45 per cent are now based outside the UK.

Today we run a civil aerospace business rom the UK with emerging

capabilities in Germany and the US. The Presidents o both our deence

and energy businesses are based in North America. The US is our biggestdeence market and in our energy business, gas turbines are produced

in Canada and packaged in the US. We have transerred our marine

headquarters to Singapore, reecting the signicance o the Asia region

or shipbuilding.

Eective communication that enables the organisation to work well across

time zones and borders is crucial. We invest time and eort in

communication, using a combination o modern technology and

traditional ormats to help us to stay connected. In 2009, we shared ourstrategy storyboard with every employee. The programme was conducted

in groups o around ten with a presenter and a record keeper. This

amounts to more than 4,000 presentations over 6,000 hours, with a record

o the conversation kept to make sure that we benet rom local insights.

In 2009, Rolls-Royce recruited more than 250 new apprentices and 334

graduates, more than ever beore, young men and women o over 30

nationalities who have the potential to become leaders o the uture.

We are able to attract exceptional people because o the range o

world-class skills we require to deliver high value-added manuacturingand services. These range rom expertise in marketing and law, through to

specialist engineering and logistics, all o which need to be practisedinternationally and at the highest level.

While we have continued to invest, economic conditions have orced u

to take some difcult decisions as well. We have had to reduce our stain parts o the business where demand has been weak, leading to a ne

reduction in headcount across the Group o around 500 people in the

past year.

Taking these difcult decisions early, investing where the business case

is strong and continually looking or ways to improve, have enabled us

to respond to the difcult economic environment. Our employees

have again demonstrated their capability and commitment andI would like to thank them or playing an integral part in our Groups

continuing success.

Prospects

I have described how Rolls-Royce has transormed itsel in the past ten

years and how, in doing so, it has established a platorm or the doublin

o revenues in the decade ahead.

In 1999, Rolls-Royce had an order book o 13.2 billion. Today our orderbook stands at 58.3 billion, with a record number o major global

programmes balanced across our our 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 powerul demonstration o thecondence 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 o the business we have achieved, aordsus access to a global market or products and services we assess to be

worth more than US$2 trillion over the next 20 years, made up o

US$1,400 billion or civil aerospace, US$450 billion or deence aerospac

US$320 billion or marine and US$120 billion or energy.

In the short term, the Group expects the trading environment to remai

difcult, with the implications o delayed air rame programmes and

launch costs adding to demand and operational uncertainty. The

Group expects underlying revenues and prots in the current year tobe broadly similar to those achieved in 2009. We anticipate a modest

cash outow in 2010 with average cash balances remaining above

500 million.

Our resilience, coupled with the inherent strengths o our business

model will enable us to manage these short-term difculties and delive

uture growth.

Sir John Rose

Chie Executive

February 10, 2010



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Business review8 Global activity

Reliable power is mission critical

or our customers

The power systems we deliver are criticalto the operations o our customers.On land, at sea and in the air we deploythe worlds most advanced technologiesor those who depend upon us.

Deence aerospacePilots o 160 armed orces needto know that they can depend

on the power rom Rolls-Royce

engines instantly, whenever

they call or it. Our engines

are employed in all the keysectors o this market.

103Rolls-Royce products providethe deence power systems or103 countries.

15Rolls-Royce is powering 15dierent aircrat types inAghanistan, supportingcombat, transport, medicalevacuation, tactical andsurveillance operations.

Civil aerospaceAirlines and their customers rely

on Rolls-Royce. We recognisethe responsibility that is placed

on us to produce the most

reliable engines with the

highest engineering integrity.

1,000,000Aircrat powered by Rolls-Roycey one million miles every hour,keeping society and the globaleconomy on the move.

67,000Airlines look to us to deliver sae,reliable power on behal o theircustomers to ensure this, wemonitor 67,000 hours o enginedata every day, in real time.

650650 airline, reight and leasecustomers are Rolls-Roycepowered and they y theequivalent o six million ightsaround the world each year.

85Rolls-Royce powers 85 per cento the UK MoDs aircrat inrontline operations. The UKmilitary on average perormsover 2,000 search and rescue

missions annually, many arepowered by Rolls-Royce.

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Business review Global activity continued

EnergySocietys energy demands continuto grow. We are providing essentia

power or the oil and gas industrie

to meet these needs and

increasingly our clean and efcien

gas turbines are providing localelectricity. Rolls-Royce is also at the

oreront o low carbon and

renewable energy products.

Rolls-Royce is a global companyproducing mission criticalpowersolutions or customers in aerospace,marine and energy markets.

MarineThere are 30,000 commercial and

naval vessels operating withRolls-Royce equipment, ensuring

that sea trade o all types keeps on

the move and that coasts, nationa

and international waters are sae

or all. Rolls-Royce has a widerrange o marine products than

any other single supplier.

3,000Our design o specialist vesselscan secure an oshore platormat depths o up to 3,000 metreswith pinpoint accuracy helping access the worlds deepwater oil and gas reserves.

The latest Rolls-Royce nuclearplant, that powers the RoyalNavys Astute class submarines,can circumnavigate the globewithout suracing and will neverneed to be reuelled in its lie.

40The Littoral Combat Ship,USS Freedom, is one o theastest warships aoat.Powered by two Rolls-RoyceMT30 gas turbines it has a topspeed o well over 40 knots.

500Over 500 o our gas turbines areoperating in hostile weatherenvironments, oshore o 25countries, delivering the criticalpower needed on oil and gasplatorms.

16Our new Trent 60 gas turbinehas been sold to 16 countries

and the eet can generateenough power or three millionhomes.

60Over 60 major pipelines in26 countries depend onRolls-Royce gas turbines totransport oil and gas essentialarteries in the worlds energynetwork.


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Business review0 Our strategy

Closeness to our customers

We recognise that our customers determineour strategy and organisation.

Domain knowledge

A deep understanding o our customersand the way in which our products and

services are used.

Integrated systems

Integrating our products into systems thatdeliver increased value or our customers.

Technological superiority

Gaining competitive advantage throughcontinuous investment in technology.

Operational excellence

Working constantly to meet and exceed

customer expectations.

Organisational capability

Attracting and retaining the best

people globally.

Brand

Recognised globally, our brand embodiesqualities that create a common ocus or

all our people worldwide.

Civil aerospace

Broadest engine range in the world

4,481mUnderlying revenue 2009

Deence aerospace

Europes biggest engine maker


Marine

World-leading systems providerand integrator


Energy

World leader in oil and gas and a growingpower generation presence


Our consistent strategy is basedon ve key elements

Address our global marketsWe are a leading producer o mission critical,integrated, power systems or the civil anddeence aerospace, marine and energy markets.

Invest in technology, inrastructureand capabilityOver the past ve years, we have invested4 billion in R&D. We invest substantially inemployee development and invest around300 million a year in capital projects.

Develop a competitive portolio oproducts and servicesWe have 39 major engineering programmesand we are involved in many o the utureprojects in the markets we serve. These keyprojects will dene the power systems marketor many years.

Grow market share and installedproduct baseAcross the Group, the installed base o enginesin service is expected to generate attractivereturns over many decades.

Add value or our customers through theprovision o product-related servicesWe seek to add value or our customers withatermarket services that will enhance theperormance and reliability o our products.

Underpinned bycore characteristics

Across our key markets

Airbus A400M airborne

Rolls-Royce is a major partner in the engine consortium

powering the new airliter, which ew or the rst time in 2009.

Astute class submarine

The Royal Navys latest class o nuclear submarine went to sea in

2009, powered by a new Rolls-Royce designed long-lie core.

STOVL F-35 milestone

The F-35B Lightning engaged its Rolls-Royce designed

STOVL propulsion LitSystem, in ight, or the rst time.

Our consistent strategy

Expanding product portolio

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Business review Our strategy continued

The increasing contribution rom services

We have grown our service revenues ten

per cent compound over the past ten years.Services now account or around 50 per cent

o total underlying revenue.

Organic growth

Our broad product range and expandingservice provision have delivered growth

globally.

Partnerships

We increasingly develop products with risk

and revenue sharing partners and through

strategic long-term relationships.

Acquisition

Major acquisitions such as Allison and Vickers

have enabled growth in key sectors.

Our growth during thepast 20 years has beenachieved organically andthrough partnershipsand acquisitions.

A commitment to R&D creatinghigh barriers to entry

Delivering a 20-year trackrecord o continued growth

A strong record o investment in research

and development

We invest in world-class, cost-eectivetechnology in order to develop products

that add value or our customers, improve

efciency and reduce environmental impact.

Underlying services revenue 2009

4,927m

Investment in research and

development during 2009

864m

Gulstream G650 jet airborne

Powered by the new BR725 engine, this new long-range

business jet took to the air or t he rst time on schedule

during 2009.

Littoral Combat Ship completes sea trials

Lockheed Martins USS Freedom, powered by Rolls-Royce MT30

marine gas turbines, completed its sea trials.

Boeing 787 airborne

Trent 1000 engines powered the new Boeing 787

Dreamliner on a successul rst ight at the e nd o 2009.

An increasing contribution romservices

0

2,000

1,000

3,000

4,000

5,000

09

Underlying services revenue (m)

4,9

27m

08

4,755

07

4,265

06

3,901

05

3,457

04

3,251

03

2,800

02

2,536

01

2,443

00

2,200

0

400

200

600

800

1,000

09

Gross research and development expenditure (m)

864m

08

885

07

824

06

747

05

663

04

601

03

619

02

590

01

636

00

604



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2

Rolls-Royce is growing globally and atthe same time meeting the challengeso managing the business today. Ourconsistent strategy has ensured thatthe Group is resilient in the currenteconomic climate and is still able toplan and invest or uture growth.

Deliveringtoday, investingor the uture

Our strategy in action

Our strategy continuedBusiness review

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Rolls-Royce Group plc Annual report 2009


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Serving a global customer base

We are a leading integrated power systems company, operating in civil and

defence aerospace, marine and energy markets. We serve customers in over 120

countries and forecast a 20-year market opportunity of US$2 tri llion.

Our gas turbine products are shipped tocustomers all over the world, by land, sea

and air. US$320bnMarine market opportunity

US$120bnEnergy market opportunity

US$1,400bnCivil aerospace market opportunity

US$450bnDefence aerospace market opportunity

Addressingour four globalmarkets

Rolls-Royce Group plc Annual report 2009


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4

Investing intechnology,inrastructureand capability



Future capacity

Rolls-Royce is investing in capital projects all over the world as the Group increases

its operational capacity. We are growing as a result o our increased market share

and substantial order book.

During 2009, building work began on the new

US acility in Crosspointe, Virginia, where we willmake discs or gas turbines.

2.7 billionThe Group has invested 2.7 billion in

capital projects over the past ten years.

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Business review

Developing acompetitive portolioo products andservices


Business review Our strategy continued

Powering the F-35 Lightning

Rolls-Royce is a partner with General Electric in producing the F136 main propulsion

engine or the F-35 and, in addition, Rolls-Royce has designed the LitSystem which

is employed in the F-35B, or STOVL, version o the aircrat. This is just one o the

many major new programmes on which the Group is engaged.

The Rolls-Royce designed LitFan is used in the

F-35B as part o the overall LitSystem. The F-35BLitSystem was engaged in ight or the rst time

in early 2010.

3939 major programmes in development.

Annual report 2009Rolls-Royce Group plcRolls-Royce Group plc Annual report 2009


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6


Growing ourmarket shareand installedproduct base



World-leading oshore support and power

Rolls-Royce is a major partner o oil and gas companies all over the world, not

just providing industrial gas turbines as power systems or the platorms but also

providing the designs or, and much o the equipment on board, the specialist

vessels that support the platorms.

The Groups UT-Design o oshore vessels is a

world leader, incorporating signicant amountso Rolls-Royce technology and equipment.

2,0002,000 marine customers.

Energy customers in 120 countries.

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Adding value orour customersthrough product-related services



Data management or predictive maintenance

As the original equipment manuacturer, we have access to data on the Rolls-Royce

eet o gas turbines. We gather, analyse and act upon this data to ensure that we

can maximise the value o the gas turbines in service with our customers.

We have expanded the capability o our operationscentres. These centres manage data and help plan

and drive the services oered by the businesses.

90Ninety per cent o Trent eet under

TotalCare management.


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Business review8

The Group operates in our long-term global

markets civil and deence aerospace, marineand energy. These markets create a totalopportunity worth in excess o US$2 trillionover the next 20 years and:

have very high barriers to entry;

oer the opportunity or organic growth;

eature extraordinarily long programme lives, usually measured

in decades;

can only be addressed through signicant investments in technology,

inrastructure and capability; and

create a signicant opportunity or extended customer relationships,

with revenues rom atermarket services similar in size to originalequipment revenues.

The size o these markets is generally related to world Gross Domestic

Product (GDP) growth, or in the case o the deence markets, global

security and the scale o deence budgets.

Civil aerospace

The Group publishes a 20-year global market outlook, which covers

passenger and cargo jets, corporate and regional aircrat. We predict that

over the next 20 years 141,000 engines, worth over US$800 billion, willbe required or more than 65,000 commercial aircrat and business jets.

The orecast predicts aster growth rates or long-haul markets and those

markets to, rom and within Asia. These markets will continue to benet

rom more liberal air service agreements, which boost demand. Factors

aecting demand include GDP growth, aircrat productivity, operatingcosts, environmental issues and the number o aircrat retirements. While

the market can be temporarily disrupted by external events, such as war,

acts o terrorism, or economic downturns, it has, in the past, alwaysreturned to its long-term growth trend. In addition to the demand or

engines, the Group orecasts a market opportunity worth US$600 billion

or the provision o product-related atermarket services.

Deence aerospace

The Group orecasts that demand or military engines will be worth

US$170 billion over the next 20 years. The largest single market is

expected to be the US, ollowed by Europe and the Far East. Within Asia,

demand will be dominated by Japan, South Korea and India. Trends aredriven by the scale o deence budgets and geopolitical developments

around the world.

Market outlook

Market outlook

As in the Groups other business sectors, programme lives are long and

there is a signicant opportunity to support equipment with atermarketservices estimated at US$280 billion over the same period. Customers

budget constraints and their need to increase the value they derive romtheir assets have accelerated the move in this direction.

Marine

The Group orecasts a demand or 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

o raw materials, nished goods and people, in addition to oil and gas

exploration and production activity, play crucial roles in the world

economy. These activities require large eets o specialised andincreasingly sophisticated ships, which have to be continually

renewed and supported to remain operationally efcient.

Merchant and oshore markets are rarely at the same stage o thebusiness cycle, which helps to reduce overall volatility. Whilst navalmarkets are driven by dierent considerations, customers are similarly

seeking to get more rom their budgets, leading to increasing demand

or integrated systems and through-lie support arrangements. As in

the Groups other markets, marine atermarket services are expectedto generate signicant opportunities, with demand orecasted at

US$120 billion over the next 20 years.

Energy

The International Energy Agency has orecast that over the next 20 years,

the worldwide demand or oil will grow by more than 20 per cent, or

gas by 35 per cent and or power generation by more than 60 per cent.

To satisy this demand, there will be a growing requirement or aero

derivative gas turbines.

The Groups 20-year orecast 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 or associated atermarketservices is expected to be around US$50 billion.

While the oil and gas market is large and growing, demand or

aero-derivative gas turbines in the power generation segment istwice that o oil and gas.

Note: A long-term conversion rate has been used where necessary in order to present all

gures in US$.

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Business review Key perormance indicators

Key perormance indicators

The Board uses a range o nancial and

non-nancial indicators to monitor Groupand segmental perormance in line with thestrategy described on pages 10-11. Theseindicators are chosen to monitor both currentperormance and the success o investmentsthat will sustain and enhance utureperormance. Key perormance indicatorsare included in the appropriate sections othe business review and are as ollows:

Underlying revenue

Monitoring o revenues provides a measure o business growth.

Underlying revenues are used in order to eliminate the eect o thedecision not to adopt hedge accounting and to provide a clearer

year-on-year measure. The Group measures oreign currency sales at

the actual exchange rate achieved as a result o settling oreign

exchange contracts rom orward cover.

Underlying prot beore nancing

Underlying prot beore nancing is presented on a basis that shows

the economic substance o the Groups hedging strategies in respect

o the transactional exchange rate and commodity price movements.In particular: (a) revenues and costs denominated in US dollars and euros

are presented on the basis o the exchange rates achieved during the year;

(b) similar adjustments are made in respect o commodity derivatives; and

(c) consequential adjustments are made to reect the impact o exchange

rates on trading assets and liabilities and long-term contracts on aconsistent basis. The derivation o underlying prot beore nancing is

shown in note 2 on page 104 o the consolidated nancial statements.

Key perormance indicators

Underlying revenue

Underlying prot beore nancing

Cash ow

Return on capital employed

Net research and developmentcharge

Gross research and developmentexpenditure

Net research and developmentexpenditure as a proportion ounderlying revenue

Capital expenditure

Order book

Training and development

Employee engagement

Underlying revenue peremployee

Product cost index

Engine deliveries

Installed thrust civil aerospac

Percentage o civil eetunder management

Underlying services revenue

Emissions

9 8 3

m

0

250

500

750

1,000

m

05 06 07 08 09

679 748 832 919 983

0

3,000

6,000

9,000

12,000

05

m

06 07 08 09

6,458 7,353 7,817 9,147 10,108

1 0 1 0 8 m



22/156

Business review0 Key perormance indicators continued

Cash ow

In a business requiring signicant investment, the Board monitorscash ow to ensure that protability is converted into cash

generation, both or uture investment and as a reward or

shareholders. The Group measures cash ow as the movement innet unds/debt during the year, ater taking into account the value

o derivatives held to hedge the value o balances denominated in

oreign currencies. The gure in 2007 includes a 500 million special

contribution to the Groups UK pensions schemes, as part o therestructuring o its pension schemes.

(183)m

05 06 07 08

090

150

(200)

300

450

600

m

552 491 62 570 (183)

Return on capital employed

Return on capital employed is calculated as the ater-tax underlying

prot, divided by the average net assets during the year, adjusted or

net cash, net post-retirement decit and goodwill previously writteno. It represents a measure o the return the Group is making onits investments.

0

5

10

15

20

05

%

06 07 08 09

14.5 16.0 17.2 17.1 17.2

17.2

%

Net research and development charge

Investment in research and development underpins all the elements

o the Groups strategy. Programme expenditure is monitored in

conjunction with a gated review process on each programme and

progress is reviewed at key milestones.

379m

0

200

100

300

400

500

m

05 06 07 08 09

282 370 381 403 379

Gross research and development expenditure

The Groups research and development activities comprise bothsel-unded and customer unded programmes. Gross expenditure

measures total research and development activity and is an indicator

o the eectiveness o the actions taken to enhance the Groups

intellectual property.

864m

0

400

200

600

800

1,000

m

05 06 07 08 09

663 747 824 885 864

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Business review Key perormance indicators continued

3 8 5

0 0

Net research and development expenditure as a proportion

o underlying revenueResearch and development is measured as the sel-unded

expenditure beore both amounts capitalised in the year and

amortisation o previously capitalised balances. The Group expectsto spend approximately ve per cent o revenues on research and

development although this proportion will uctuate annually

depending on the stage o development o current programmes.

This measure reects the need to generate current returns as wellas to invest or the uture.

0

1

2

3

4

6

5

05

%

06 07 08 09

5.2 5.4 5.8 5.4 4.7

4 7 %

Capital expenditure

To deliver on its commitments to customers, the Group invests

signicant amounts in its inrastructure. All investments are subject

to rigorous review to ensure that they are consistent with orecastactivity and will provide value or money. Annual capital expenditureis measured as the cost o property, plant and equipment acquired

during the period.

2 9 1 m

0

200

150

50

100

250

300

350

m

05 06 07 08 09

232 303 304 283 291

Order book

The order book provides an indicator o uture business. It is measured

at constant exchange rates and list prices and includes both rm and

announced orders. In civil aerospace, it is common or a customer to

take options or uture orders in addition to rm orders placed. Such

options are excluded rom the order book. In deence aerospace,long-term programmes are oten ordered or 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. Only the rst seven years revenue olong-term atermarket contracts is included.

5 8 3 b n

0

20

10

30

40

50

60

bn

05 06 07 08 09

24.4 26.1 45.9 55.5 58.3

Training and development

24 million investment in 2009Training is a core element o the Groups investment in its

capability and is measured as the expenditure on the training

and development o employees, customers and suppliers.

Eectiveness is ensured by using a range o external andinternal sources and by gathering user eedback.

24m

Employee engagement

38,500 employees in 2009Regular surveys are undertaken to identiy and address

emerging issues. A ull employee engagement survey is run

every two years with smaller pulse-check surveys in between.

Training and employee engagement surveys are discussedurther in the corporate responsibility section o this review.



24/156

Business review2 Key perormance indicators continued

Underlying revenue per employee

A measure o personnel productivity, this indicator measuresunderlying revenue generated per employee on a three-year rolling

basis. The basis o calculation has been amended to avoid short-term

distortions caused by uctuations in exchange rates.

Product cost index

Unit costs are a key determinant o the Groups ability to deliver

its commitments on a protable basis. The Group monitors the

year-on-year change in the average unit product cost o its gasturbine operations and seeks over time to improve productivity inall owned acilities and those o its suppliers.

Engine deliveries

The Groups installed engine base represents an opportunity to

generate uture atermarket business. This is measured as the number

o Group products delivered during the year within each business

except or marine, as its products do not lend themselves to thismeasure due to their diversity.

Installed thrust civil aerospace

Installed thrust is the indicator o the amount o product in use by

our customers and thereore the scale o opportunity this presents

or our services business.

0

100

50

250

200

150

05

000

06 07 08 09

169 182 194 211 233

233,0

00

0

10050

350

400

300

250

200

150

05

lbs million

06 07 08 09

305 320 334 348 367

367m

lbs

3%0

4

2

6

8

%

05 06 07 08 09

0 5 7 4 3

1,5

86

0

500

1,000

1,500

2,000

05 06 07 08 09

1,519 1,426 1,393 1,579 1,586

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Business review

Percentage o civil eet under management

Long-term contracts are an important way o generating value orcustomers. The percentage o eet under management gives a

measure o the proportion o the installed base where the uture

atermarket arrangements are agreed under long-term contracts.

The corresponding indicators or the other segments are shown

in the respective sections o the business review o operations.

Underlying services revenue

Underlying services revenue shows the amount o business during

the year that has been generated rom the installed engine base.

This is measured as the revenue derived rom spare parts, overhaulservices and long-term service arrangements.

Emissions

Much o the research and development expenditure is ocused on

reducing emissions o the Groups products. The Group measures both

the emissions o its products and the emissions o its manuacturing

operations. These measures are described in detail in the environmentreport, Powering a better world, which is available on the Groups

website at www.rolls-royce.com/cr/reports.

Key perormance indicators continued

5 9 %

0

30

20

10

40

60

50

%

05 06 07 08 09

45 48 55 57 59

4 9 2 7 m

1,000

0

2,000

3,000

4,000

5,000

m

05 06 07 08 09

3,457 3,901 4,265 4,755 4,927



26/156

Business review4 Principal risks and uncertainties

The Group continues to be exposed to a

number o risks and has an established,structured approach to identiying, assessingand managing these.

The risk committee has accountability or the system o riskmanagement and reports regularly to the Board on the key risks acing

the business and the mitigating actions taken in order to manage them.The Groups consistent strategy and long-term programmes require that

key sources o risk are identied and are kept under continuous review.

Risk prole

Over the past year the risk prole o the Group, in common with many

other large companies, has changed to reect the underlying global

economic uncertainties. The Group continues to experience the

negative eects o the recent economic downturn through a declinein the civil aviation sector, shipbuilding and other capital-intensive

industries, which are prime markets or its products and services.

In the absence o a sustained and general return to growth, uncertainty

remains across nancial and industrial markets. This is reected in theGroups risk prole.

The risks described below are among those that may have an impact

on the Groups perormance. This is notwithstanding other risks anduncertainties that are currently unknown to the Group, or which the

Group does not presently consider to be material. The principal risks

reect the global nature o the business and the competitive and

challenging business environment in which it operates. Risks, includingthose to the Groups reputation, are considered under our broad

headings:

Business environment risks

Strategic risks

Financial risks

Operational risks

Principal risks and uncertainties

Business environment risks

Cyclical downturn global recessionThe Groups largest market, civil aerospace, is cyclical by nature,

although services activity and revenue, which now represents

59 per cent o annual revenue, have historically been less volatilein economic slowdowns and are considered more predictable and

robust than the sales o engines or new aircrat.

The willingness o passengers to travel by air is inuenced by arange o actors, including economic conditions, as well as health

and security issues. Any prolonged reduction in air travel would

impact airlines revenues and cash ows and potentially reduce

their need or new engines, spare parts or atermarketsupport services.

The strategy o growing revenues in other sectors with steady and

substantial long-term growth, will help oset this risk. Access to globalmarkets with greater diversication by sector, customer and geographyand an improved balance between original equipment and services

revenue, are expected to help mitigate the eects o the slowing global

economy in any one sector.

Tight control o the underlying cost base, the cost o managing

operations and the unit cost o products, is essential to protect

margins and maintain protability. Even as the economy begins

to recover, there will be continued pressure to reduce costs andimprove the use o resources. The Group is ocusing on identiying

the principal drivers o unit costs and identiying actions to achieve

sustainable cost reductions.

Environmental impact o products and operationsThe Group recognises that its products and business operations have

an impact on the environment, particularly in relation to climate

change. Rolls-Royce is determined to be part o the solution to these

environmental challenges and continues to make signicant investmentin innovative solutions or the aviation, marine and energy markets.

The challenge is being addressed through the enhancement o

current product ranges and aordable research and development

into low carbon technologies such as nuclear power, uel cells andtidal energy. The Group continues to work closely with its customers,

industry partners and other stakeholders to implement these

development opportunities.

A robust governance structure headed by the Environment Councildirects and monitors improvements in the environmental perormance

o the Groups products, and the Environmental Advisory Board reviewsand makes recommendations on the environmental aspects o the

Groups products and business operations.

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Business review Principal risks and uncertainties continued

Strategic risks

Competitive pressuresThe markets in which Rolls-Royce operates are highly competitive and

this competitiveness is increasing as a result o the global economicuncertainties. The majority o product programmes are long term in

nature and access to key customer platorms is critical to the success o

the business. This requires sustained investment in technology, capability

and inrastructure by the Group, all creating high barriers to entry.

However, these actors alone do not protect the Group rom competitionsuch as pricing and technical advances made by competitors.

The Group has developed a balanced business portolio and continues

to maintain a steady ocus on improvement in operational perormance,or example through the modernisation o its acilities and an increased

ocus on managing the costs o operations and products. Sustained

investment in technology acquisition and robust protection o

intellectual property, together with the establishment o long-termcustomer relationships, allow the Group to dierentiate its products and

services and protect margins in the ace o competitive pressures.

Export controls

Rolls-Royce designs and supplies a number o products and services orthe deence market. Many countries in which the Group conducts its

business have legislation controlling the export o specied goods and

technology intended or adaptable or military application. The Group is

committed to complying with the requirements o nationalgovernments in all jurisdictions when exporting goods, parts,

technologies or inormation, although globalisation o the Groups

operations brings with it complexities o concurrent but diering

national export control legislation. Non-compliance with export controls

is recognised as a principal risk to both programme perormance andthe Groups reputation.

The exports committee, chaired by the Chie Operating Ofcer, directs

the Groups strategy and policy on exports. Export control managers areembedded throughout the business and export controls awareness

training is provided to employees. The Group will continue to implement

any necessary changes to ensure that it maintains the capability to

monitor and comply with requirements.

Financial risks

Principal risks are: movements in oreign currency exchange rates;

interest rates;

commodity prices;

counterparty credit risk; and

regulatory developments.

A description o these risks and details o the Groups risk mitigationactions in this area are provided in the Finance Directors review.

Operational risks

Perormance o supply chain

The Groups products and services are delivered through the eectiveoperation o its acilities and key capabilities, including its supply

chain. The Groups success in strengthening its market position and

its presence on a number o high prole civil and deence aerospaceprogrammes places increased demands on the perormance o thesupply chain. The Group manuactures approximately 30 per cent by

value o its gas turbine products, the remainder being provided

through external suppliers, including risk and revenue sharing partners.

Meeting delivery commitments on schedule, cost and quality arecritical to the achievement o business goals. Investment in developing

world-class manuacturing processes is continuing in Asia, North

America and Europe.

Global supply chains are complex with multiple inter-relationships acroa wide network o organisations. While the Groups strategy is to improv

integration and simpliy the internal and external elements o its supply

chain by building long-term strategic links with ewer, stronger supplie

it remains at risk o disruption rom nancial or physical causes such asbankruptcy, natural disaster, armed conict or pandemic. A signicant

disruption in any o these elements could adversely aect the Groups

ability to deliver i ts operational commitments and would have the

potential to aect nancial returns.

The planning or, and management o, any such interruption is

addressed through the Groups business continuity management

process, which is well established and ocused on critical acilities,

activities, processes, skills and suppliers. The Groups crisis managemenplan and ramework were signicantly revised and exercised in 2009. In

addition to the Groups comprehensive programme o business

interruption insurance, signicant investment is being undertaken to

establish, where possible, dual sourcing o key components or processIncreased ocus is also being applied to understanding and addressing

sources o risk arising in the external supply chain, particularly thoseassociated with nancial instability. Procedures are in place to monitor,

assess and respond to such risks.



28/156

Business review6

IT security

The continuing globalisation o the business and advances in technologyhave resulted in more data being transmitted internationally, posing an

increased security risk. There is also the possibility o unintentional loss o

controlled data by authorised users. In either case, adverse impacts uponoperational eectiveness, the value o intellectual property, legislative

compliance or the reputation o the Group might arise. The active sharing

o inormation through industry and government orums, commitment o

additional specialist resources and the continual upgrading o securityequipment and sotware mitigate these risks.

Ethics

The Group recognises the benet that is derived rom conductingbusiness in an ethical and socially responsible manner. This approach

extends rom the sourcing o raw materials and components to the

manuacture and delivery o products and services in all o its global

locations and markets. It applies to the provision o a sae and healthyplace o work and investment in technologies to reduce theenvironmental impact o the Groups products and operations.

Shortcomings in any o these areas could damage the Groups

reputation, expose it to nancial penalties and disrupt its business.

The Group is committed to maintaining high ethical standards. A Global

Code o Business Ethics, available in 16 languages, has been issued to all

employees supported by a training and engagement programme to

improve awareness o the Groups values. A programme o technicaltraining or specialist roles is underway. The Groups ethical standards

are also communicated to the Groups rst-tier supply base through a

supplier code o conduct. Concerns regarding potentially unethical

behaviours can be reported in condence via dedicated global

telephone and internet channels. All such reports are ollowed upand are monitored by the ethics committee.

Programme risk

The Group manages complex product programmes with demandingtechnical requirements against stringent, and sometimes uctuating,

customer schedules. This requires co-ordination o the engineering

unction, manuacturing operations, the external supply chain and other

partners. Failure to achieve programme goals would have signicantnancial and reputational implications or the Group. These implications

include the risk o impairment o the carrying value o the Groups

intangible assets and the impact o potential litigation. Impairment is

discussed urther in the Finance Directors review on page 58.

The Group seeks continuous improvement o all its processes and

employs project management controls to ensure that both technicaland business objectives are achieved. All major programmes are subject

to Board approval and are reviewed regularly by the Board with aparticular ocus on the nature and potential impact o emerging risks

and the eective mitigation o previously identied threats.

Principal risks and uncertainties continued

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Business review

Review o operations

Overview

Rolls-Royce is a technology leader with a global customer base.We are developing our presence across the world to meetincreasing demand or the advanced products and services thatwe take to market.

As well as introducing new technologies we also place emphasison continuously developing the through-lie perormance o ourproducts or the benet o customers.

Review o operations

Buildingour globaloperations

New acilities

We are expanding our operatio

acilities around the world.


30/156

Business review8 Review o operations continued

Despite a decline in air trafc, the market is beginning to recover, albeitslowly. 2010 trafc will see a return to growth but rom suppressed

levels. We remain cautious but optimistic o seeing the historic trafc

growth level o approximately ve per cent per annum achieved overa 20-year period.

The economic situation also saw the retirement across the industry

o some 500 aircrat, notably older models. The Rolls-Royce powered

eet is, by contrast, relatively young and more uel efcient. The betterperormance and increased atermarket potential in this younger eet

underlined the value o our balanced services and products business

model. The corporate and regional aircrat market has been sensitive

in the downturn but the twin-aisle, large airliner market, has beenmore robust.

Order intake was reduced due to the poor market conditions but

there were some signicant orders, notably rom AirAsia X, Air Chinaand United Airlines. New orders also included rst-time customers or

the Trent amily: Turkish Airlines; Ethiopian Airlines and, the US lessor

Aviation Capital Group. Trent engines continue to win business

across the range o wide-body aircrat and now hold a 50 per cent

market share.

The rst ight o the Boeing 787 in December 2009, powered by

Rolls-Royce Trent 1000 engines, was a signicant and important

milestone or this programme. The majority o the Boeing 787 ighttest and certication programme planned to be completed in 2010

will use Trent 1000 engines.

The Trent amily philosophy continues to demonstrate signicantadvantages with the introduction o new technology or established

engines. Upgrades or the Trent 700 have enhanced its perormance and

The civil aerospace business powers over

30 types o commercial aircrat and has astrong position in all sectors o the market:wide-body, narrow-body and corporateand regional aircrat. Over 13,000 enginesare currently in service with 650 airlines,reight operators and lessors and 4,000corporate operators.

A strong portolio o products

and services combined with

a global customer base has

provided strength during

uncertain times.Mark King President Civil Aerospace

Civil aerospace


US$1,400bnMarket opportunity over 20 years

Trent engine

The Trent amily o large aero engines continues to command a strong market

position on the new generation o wide-bodied aircrat.

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Business review Review o operations continued

Highlights

Record year or Trent delivery with 224 engines shipped

Trent 700 and Trent XWB each exceeded orders or 1,000 engines

Trent 1000 powered the Boeing 787 Dreamliner rst ight

BR725 powered the Gulstream G650 long range business jetrst ight

Corporate jets

Rolls-Royce holds a strong position in this market sector, where there were

notable programme achievements in 2009.

uel efciency and a similar package is planned or the Trent 900.

Technology being developed or new engines such as the Trent 1000and Trent XWB will continue to provide operational, perormance and

environmental advantages across our product range. Orders or the

Trent 700 and the Trent XWB now exceed 1,000 engines or eachprogramme. For the Trent XWB this marks a signicant demonstration

o customer condence as the programme is still three years away rom

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 signicant

contract awards rom Air China, Qatar Airlines and Dubai Aerospace.There are now more than 4,000 V2500 engines ying with 190

customers worldwide.

In the corporate and regional market, the latest addition to the Groupscorporate engine amily is the BR725 engine. It ew or the rst time onthe Gulstream G650 ultra-long-range business jet in November 2009,

and remains on schedule or entry into service in 2012. In September

2009, the rst ight o an Embraer Legacy 650, powered by the new

AE 3007A2 engine, took place. The AE 3007A2 will deliver signicantperormance and reliability improvements over previous engine marks.

It is currently undergoing ight testing ahead o certication and entry

into service in the second hal o 2010.

The majority o orders in the civil aerospace business are now contracted

under TotalCare or CorporateCare long-term support contracts. These

overarching service contracts provide an important and sustainable

revenue stream or the business. They also allow our customers to plan

their business more eectively both nancially and in the use o engineassets. Services revenue has been aected by the current economic

environment with ewer ying hours and airlines deerring non-essential

maintenance. As more engines enter service in line with order

commitments we expect to see ying hours increase. The TotalCareservice 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 own under TotalCare agreements

continue to grow.

Trent engines now hold a50 per cent market share in

wide-bodied aircrat.50

Key nancial data

2005 2006 2007 2008 20

Underlying revenue m 3,406 3,907 4,038 4,502 4,48

+11% +15% +3% +11% 0Underlying prot beore 454 519 564 566 49

nancing m +118% +14% +9% 0% -13

Net assets m 1,617 2,165 2,468 330 2,69

Other key perormance indicators

2005 2006 2007 2008 20

Order book bn 19.0 20.0 35.9 43.5 47

+17% +5% +80% +21% +8

Engine deliveries 881 856 851 987 84

Underlying services

revenues m 2,016 2,310 2,554 2,726 2,62

Underlying services

revenues % 59 59 63 61 5Percentage o eet under

management 45 48 55 57 5



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Business review0 Review o operations continued

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 providegrowth opportunities in these markets. In addition, we are well

positioned to secure growth rom emerging economies in Asia, the

Middle East and South America.

During 2009, key orders were secured in both the combat and transportsectors and we saw new programmes emerge in the helicopter and

unmanned aerial vehicles (UAVs) sectors.

The US Government approved 2010 unding or development othe F136 engine or the F-35 Joint Strike Fighter. This engine, being

developed jointly by Rolls-Royce and General Electric, is designed

to power all variants o the F-35 aircrat.

We also received the second contract, worth US$171 million, or theproduction o the LitSystem or the short take-o and vertical landing(STOVL) or B version o the F-35 Joint Strike Fighter. This programme

reached a signicant milestone in early 2010, when the Rolls-Royce

designed LitSystem was engaged successully in ight or the rst time.

Tranche three o the Euroghter Typhoon aircrat was ordered, whichprovided Rolls-Royce with a 37 per cent production share o 241 Eurojet

engines. The EJ200s reliability and support eectiveness was highlighted

during the year, with a Royal Air Force engine reaching 1,200 ying hours

with no requirement or unscheduled maintenance.

At the end o the year the Airbus A400M airliter, powered by the TP400

turboprop engine, ew or the rst time. Rolls-Royce is a major partner

in the European consortium producing the TP400. There is continuinguncertainty about the A400M programme. However, the TP400 engine

has made good progress, with engine ight testing to date being

encouraging. We believe that our estimated costs to completion

adequately consider the remaining testing and delivery phases.

There were our additional successul Rolls-Royce powered rst ights

during 2009 in the deence 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 SystemsMantis UAV powered by the Model 250 engine, also ew and

demonstrated our capability to design and deliver an integrated

power system.

Conversion work began on the rst Airbus A330 aircrat or the

Future Strategic Tanker Aircrat programme. The A330M multi-roletanker is powered by the Trent 700 engine and is expected to enter

service in 2012.

Rolls-Royce is a global provider o deence

aero-engine products and services, with18,000 engines in service or 160 customersin 103 countries. Our engines power aircratin all key deence market sectors: transport;combat; reconnaissance; training; helicoptersand unmanned aerial vehicles.

Euroghter Typhoon

As a major partner in the Eurojet engine consortium, Rolls-Royce beneted romthe latest tranche o Euroghter aircrat being ordered.

Public spending is under

pressure but we have

strong positions in new and

established programmes.Dan Korte President Deence Aerospace

Deence aerospace


US$450bnMarket opportunity over 20 years

Corp

orategovernance

Businessreview

Financials

tatements



33/156

Business review

Service business under long-term contract programmes, such as

MissionCare, continues to be attractive to deence customers. The USDepartment o Deense awarded us a US$90 million contract to support

the engines or the US Navys T-45 trainer aircrat. 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 or the

AE 1107C Liberty engine in the Bell-Boeing V-22 Osprey vertical lit aircrat.

An 865 million contract to service the EJ200 engines or the UKEuroghter Typhoon eet through to 2019 was also secured. Rolls-Royce is

a major partner in the Eurojet consortium which produces the EJ200.

Over 1 billion worth o orders or services were signed in 2009,presenting signicant opportunities or Rolls-Royce to leverage its

innovative service solutions.

The deence sector has continued to invest successully in newtechnology as demonstrated by the Phase 2 award o the US Air ForceADVENT technology programme. Phase 2 will include the integration o a

variety o advanced technologies, component testing and culminates with

the development o a new technology demonstrator engine. The

demonstrator is designed to reduce uel consumption signicantly,enabling extended mission ranges and loiter times. This advanced engine

is targeted or uture US military aerospace platorms. In the UK, we signed

a jointly unded research and technology contract or ENTAPS (Engine

Technologies or Aircrat Persistence and Survivability) with theUK Ministry o Deence.

Review o operations continued

Highlights

325 million contract secured or EJ200 engine production

US$200 million production contract or AE 1107C V-22 engines

F136 engine development unded or 2010

US$184 million worth o US Army helicopter contracts secured orthe Model 250 eet

865 million contract secured or long-term EJ200 engine support

US$500 million MissionCare contract signed or AE 1107C eet

Key nancial data

2005 2006 2007 2008 20


+3% +13% +4% +1% +19

Underlying prot beore 180 193 199 223 25

nancing m +1% +7% +3% +12% +13

Net assets m 55 20 (172) (197) (34


2005 2006 2007 2008 20

Order book bn 3.3 3.2 4.4 5.5 6

0% -3% +38% +25% +18

Engine deliveries 565 514 495 517 66

Underlying services

revenues m 787 853 877 947 1,04

Underlying services



Market strength

We signed a US$500 million contract to support the engines or the V-22 Osprey

in service with the US Marine Corps.

BAE Systems Mantis

Mantis is an unmanned advanced

technology demonstrator powered

by Rolls-Royce.

US$90 million contract to support

the engines or the US Navys T-45

trainer aircrat.90

AW159 Wildcat

The AW159 Wildcat programme will

deliver a eet o 62 new light

helicopters or the Army and Royal

Navy rom 2014 and 2015, respectively.



34/156


35/156

Business review Review o operations continued

Highlights

Continued strong growth despite challenging market environment

Far Samson, the worlds most powerul oshore vessel,entered service

Service capabilities expanded across North America, South America,Europe and Middle East

Queen Elizabeth class aircrat carrier equipment deliveries commenced

As our installed base o equipment continues to grow, we are actively

expanding our support capacity and capability to realise the signicantopportunity 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 wherethey primarily operate and we are continuing to develop our extensive,

global network to meet customer requirements.

A signicant and growing proportion o our customers, manuacturingcapability and supply chain are based in the Asia region. As a result, and

recognising the importance o being closer to where more o our

activity is located, we established the global headquarters o our marine

business in Singapore.

We continue to invest in technology that can address the need or more

efcient and environmentally sustainable power and propulsion systems.

This is primarily through the reduction o exhaust gas emissions andimprovements in ship design. Our Bergen gas engines already surpassInternational Maritime Organization limits or NOx emissions, whileresearch in propulsor/hull interactions deliver improvements in uel

consumption, stability and general perormance, 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 successul in improving thereliability o 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 oshore sector anddemand or high-specication vessels in support o oil and gas

exploration, provide good visibility o revenues in 2010.

Littoral Combat Ship

The Littoral Combat Ship, USS Freedom, is powered by two MT30 gas turbines.

Key nancial data

2005 2006 2007 2008 20


+14% +18% +19% +42% +17

Underlying prot beore 89 101 113 183 26

nancing m +14% +13% +12% +62% +44

Net assets m 674 619 563 488 64


2005 2006 2007 2008 20

Order book bn 1.7 2.4 4.7 5.2 3

+21% +41% +96% +11% -33

Underlying services

revenues m 435 487 545 712 78

Underlying services



Marine services

Six new marine service centres wereopened during the course o last year

as we seek to build a global network

or our customers.



36/156

Business review4

Energy

Review o operations continued

Energy had a strong perormance in 2009, with revenues up by36 per cent to over 1 billion or the rst time and prots growing

by 26 million.

The number o orders secured by the business reduced by 16 per cent

compared to the previous year. Despite the challenging market

conditions, the size o the order book was broadly maintained in 2009.

The year also saw high original equipment volume deliveries. Themodest prot increase in the year was achieved as a result o the

continued growth in demand or atermarket products and services.

In the main, oil and gas customers took a long-term view rom theoutset o the global recession and continued to invest, albeit at a

reduced level. Market condence has begun to return as a result o the

strengthening in oi l prices, with both oshore and pipeline custome

rolls-royce full annual report 2009

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