2007

Transcription

2007

Rolls-Royce Group plc Annual report 2007
®
©Rolls-Royce plc 2008
Rolls-Royce Group plc
65 Buckingham Gate
London
SW1E 6AT
www.rolls-royce.com
®
Annual report 2007
Aglobalbusiness.
Contents
01
Overview
01
Introduction
02
Chairman’s statement
04
Chief Executive’s review
It is 20 years since Rolls-Royce returned to the London
Stock Exchange as a listed company. In this review the
Chief Executive outlines the transformation of Rolls-Royce
since that time into a global company.
18
46
Governance
65
Financial statements
Business review
18
Our business
24
Review of operations
32
Corporate responsibility
40
Finance Director’s review
46
Board of directors
48
Report of the directors
51
Corporate governance
55
Directors’ remuneration report
66
Consolidated financial statements
66
Consolidated income statement
67
Consolidated balance sheet
68
Consolidated cash flow statement
69
Consolidated statement of recognised
income and expense
70
Notes to the consolidated financial statements
110 Company financial statements
110 Company balance sheet
110 Reconciliation of movements in shareholders’ funds
111 Notes to the Company financial statements
114 Principal subsidiary undertakings
115 Principal joint ventures
117 Independent auditors’ report
118 Group five-year review
119 Shareholder information
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Registered office:
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Website www.rolls-royce.com
Company number 4706930
All images © Rolls-Royce plc 2008 except:
P11, F136 for JSF – Lockheed Martin
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Annual report 2007
01
Governance
Overview
Introduction
Rolls-Royce is a global business providing power
systems for use on land, at sea and in the air.
The Group has a balanced business portfolio
with leading market positions.
Civil aerospace
Marine
Services
We are one of the world’s largest civil aeroengine providers, with more than 12,000 large
Rolls-Royce jet engines in service. We power
30 civil aircraft types, from small executive jets
through to large passenger aircraft.
We are a global leader in marine propulsion for
cruise, fast vessel, naval and offshore markets
and a world leader in ship design for the
offshore sector. We support 2,000 commercial
marine customers and 70 navies use our
propulsion systems and marine equipment.
The Group seeks to be the customer’s first
choice for services by developing long-term
relationships. Our comprehensive support
contracts enable us to add value for
our customers by using our technology,
skills and data management expertise.
Energy
Rolls-Royce is a world leader in the onshore
and offshore oil and gas industry and a growing
force in the global electrical power generation
market. We have energy customers in more
than 120 countries.
2007
2006
Change
Order book – firm and announced
£45.9bn
£26.1bn
Underlying services revenues*
£4,265m
£3,901m
h +76%
h +9%
Profit before financing
£512m
£693m
–26%
Underlying profit before financing**
£832m
£748m
Underlying profit before tax**
£800m
£705m
Earnings per ordinary share
33.67p
57.32p
h +11%
h +13%
–41%
Underlying earnings per ordinary share**
34.06p
29.81p
Average net cash
£350m
£150m
h +14%
h +133%
Net research and development
£381m
£370m
h
+3%
Capital expenditure
£304m
£303m
h
+0%
Employees
39,500
38,000
h
+4%
h
Rolls-Royce is the world’s second largest
defence aero-engine manufacturer, providing
around 25 per cent of the world’s military
engines. Our portfolio covers all major sectors,
including transport, helicopters, combat,
trainers and tactical aircraft.
h
Defence aerospace
* Underlying revenues reflect actual US dollar exchange rates on settled derivative contracts.
** Reconciliation of underlying results is provided in note 2 on page 77 and note 6 on page 81 of the consolidated financial statements.
Annual report 2007
02
Governance
Overview
Simon Robertson
I am very pleased to be able to report that
our Company has again performed strongly
in 2007.
Annual report 2007
03
Governance
Overview
In 2007, Rolls-Royce delivered a strong
profit and cash performance. Our order book
increased by 76 per cent, with the Group
enjoying particular success in the growing
Asian and Middle East markets.
The consistent strategy we have pursued over
many years continues to stand us in good stead.
We are a long-term business which is designed
to generate returns over many decades.
The principal goal of the Board is to ensure
that the Group’s strategy creates value for
the long-term investor within an acceptable
risk profile.
Over the last year, we have carried out a review
of the Group’s financial strategy in the light
of the business’cash generation capabilities
and its long-term investment needs. We have
concluded that it is vitally important to retain
a strong balance sheet in view of the global
markets we address, the long-term relationships
with our customers and for the future
development of our business. However, it is
appropriate that shareholders should benefit
from our stronger financial position. We are,
therefore, proposing a significant increase
in our payment to shareholders of 35 per cent,
reflecting the Board’s confidence in the outlook
for the business.
Rolls-Royce is determined to play a significant
part in addressing climate change. We devote
the major part of our research investment to
improving the environmental performance
of our products.
Our aim is to ensure that our products continue
to improve the quality of life enjoyed by people
across the world, on an environmentally
sustainable basis.
Mike Terrett joined the Board as Chief Operating
Officer in succession to John Cheffins,
who retired after a long and distinguished
career at Rolls-Royce.
I am particularly pleased that our technological
expertise, which has enabled us to reduce the
environmental impact of our engines progressively
over the years, is now being harnessed in a number
of international programmes. We believe that
technology lies at the heart of society’s response
to climate change, and we will continue to work
with governments, customers and industry
partners to find appropriate solutions.
Sir John Taylor also retired from the Board
during the year and I thank him for his
contribution. Carl Symon will retire from the
Board at the conclusion of the 2008 AGM
and he will be succeeded as Chairman of the
remuneration committee by Helen Alexander.
I would like to thank Carl Symon for his
considerable contribution over many years
to your Company.
We are committed to achieving and
maintaining best practice in all areas of
corporate responsibility because we believe
that the resulting benefits give us critical
competitive advantage. Our strong position
on the main corporate responsibility indices
reflects the good progress we have made
on this important issue.
I would also like to thank management and all
our employees for their dedication, hard work and
commitment to the Company in another successful
year. I am particularly indebted to my fellow
directors for the support and guidance they
have given to me personally and to the Group.
2008 is expected to be a challenging year for
the global economy. However, I am confident
There have been several changes to the Board that our business is well placed. We have
during the year. We have welcomed Helen
outstanding technology, a broad product
Alexander CBE, Professor Peter Gregson and
portfolio, long-term relationships with many
John Rishton as new non-executive directors.
customers and a highly skilled workforce.
Iain Conn has become the Senior Independent I believe that we will continue to build on
Director and John Rishton has been appointed the strong position we have established in
the markets we serve.
as the Chairman of the audit committee,
in succession to Peter Byrom who remains
Simon Robertson
Chairman
on our Board.
February 6, 2008
Annual report 2007
04
Governance
Overview
Sir John Rose
£45.9bn
Order book – firm and announced
34.06p
Underlying earnings per
ordinary share
Annual report 2007
05
Governance
Overview
2007 was another year of significant progress
for Rolls-Royce. We have over many years
pursued a consistent strategy which has
enabled us to build a robust business.
The strength of our technology gives us unusually
good access to growing global markets, as well as
creating high barriers to entry. The size of our order
book, the longevity of our programmes and the
scale of our services activity give us clearer visibility
of future revenues. We face inevitable challenges
but we will continue to invest in the technologies
and capability to ensure that our business is run
efficiently and with a strong global footprint.
Our financial results reflect this progress. We increased
sales to £7,435 million (2006 £7,156 million), with
underlying sales growth of six per cent. Underlying
profit before tax rose by 13 per cent to £800 million
(2006 £705 million). We ended the year with a
net cash balance of £888 million, after making a
payment of £500 million into our UK pension funds
as part of our strategy to reduce overall deficits and
reduce volatility. We concluded our strategic financial
review and are proposing a significant increase of
35 per cent in payments to shareholders.
Looking to the future, it is particularly encouraging
that our success in global markets has strengthened
our order book which ended the year at a record
£45.9 billion (2006 £26.1 billion).
Ours is a long-term business and it is important
not to look at one year in isolation.Twenty years ago,
Rolls-Royce returned to the London Stock Exchange
as a listed company. The transformation of the
company since then has been remarkable.
It seems especially fitting to mark this anniversary
by highlighting the progress we have made over
this period against each of the elements of the
Group’s strategy.
Annual report 2007
06
Governance
Overview
Chief Executive’s review continued
We are whereour
customers are.
New programmes
Employees
1987
93%
100%
UK
2007
59%
UK
UK
41%
Rest of the World
50%
UK
50%
Rest of the World
Annual report 2007
07
Governance
Overview
The increasingly global nature of our markets
is illustrated by the composition of our record
order book, which is now balanced between
the Americas, Europe and Asia. The rapid
increase in our business in Asia and the Middle
East was particularly striking in 2007, with the
order book for these regions at the same level
as the total value of the order book just four
years ago. Almost 50 per cent of our order book
Twenty years ago, Rolls-Royce was predominantly is from outside the traditional markets of Europe
and North America.
a UK company, with over 90 per cent of its
employees based in this country. If you look
In 2007, we significantly expanded our
at the Group’s sales at the time, two points
international presence in all four of our business
jump out at you: the extent to which revenue
sectors. We won new customers in the Americas,
was dominated by UK sales and the relative
Europe and Asia, often in countries in which
narrowness of the Group’s global penetration,
previously we had little or no presence.
with Europe and North America accounting
for over 70 per cent of turnover. We were
primarily a defence and civil aerospace business,
with the marine and energy sectors in the early
stages of development.
Addressing four global markets
In 1987, Rolls-Royce was in many
respects a very different company.
The business was, of course,
centred on the gas turbine
but here the similarities stop.
Now, by contrast, we are a genuinely
global company. Over 40 per cent of our
workforce is based outside the UK and our
employees include 50 different nationalities.
We manufacture in 20 countries and have
customer support facilities in 50.
h Trent 900 entered service
with Singapore Airlines on
the Airbus A380
The Group has a fleet of 12,000
large civil aero engines in service.
Singapore
Annual report 2007
08
Governance
Overview
Our manufacturing capabilities, like our R&T
activity, have become far less UK-centric since
1987. In the past year we have continued to
invest globally in new manufacturing capability.
Our priorities have been to modernise our
facilities, introduce more efficient working
practices, improve our business processes
and simplify our supply chain. In September,
we announced plans to open a major new
assembly facility in Singapore to build and test
large civil aero engines. We will also be further
increasing our already strong presence in the
US by building a facility in Virginia to assemble
and test our new RB282 engine for the next
generation of corporate jets.
Investing in technology,
capability and infrastructure
Twenty years ago, almost all
our research and technology
(R&T) activity took place in the
UK. By 2007, 32 per cent was
conducted outside this country,
with our centres of engineering
excellence spread across the
world. We have developed a global
network of University Technology
Centres (UTCs), with nine of our
29 UTCs located outside the UK.
Over the past five years we have invested
around £850 million in new capital projects
in the UK as part of our programme to
improve the operational performance of
our manufacturing facilities.
Some things, however, have not changed.
Our commitment to improving the
environmental performance of our products
is as strong today as it was in 1987. We believe
that technology, applied on an industrial
scale, is central to developing an effective
response to climate change.
We clearly intend to maintain a strong UK
manufacturing presence. However, as the
Group continues to grow, our investments
and capability will reflect the global spread
of our activities.
In 2007, we continued to work with customers,
governments and other stakeholders to help
develop solutions. Central to our approach
is our contribution to international research
programmes aimed at halving aircraft noise
and carbon dioxide emissions by 2020 from
their 2000 levels. Further details of the Group’s
environmental policies are set out in our
recently published environmental report,
‘Powering a better world’, available on the
Group’s website at www.rolls-royce.com or
on request from the Company.
Investment in technology, capability and infrastructure £m
824
747
663
Gross research
and development
619
601
Capital expenditure
excluding IT
178
171
19
43
49
2003
2004
2005
268
225
Net IT investment
88
2006
252
122
2007
Annual report 2007
09
Governance
Overview
Research and technology
1987
Geographic spread of
our UTCs and R&T activity
100%
UK
2007
68%
UK
32%
Rest of the World
We have University Technology
Centres in the US, Canada,
UK; Germany, Sweden, Norway,
Italy, India, China, Singapore,
v World-leading research
Our network of 29 University
Technology Centres is a
dedicated resource funded
by the Group. Through it we
access the very best talents
across a range of science
and technology disciplines.
Korea
Investing
internationally.
Korea, and Japan. The latest
University Technology Centre
to open is at Pusan National
University in Korea.
Annual report 2007
10
Governance
Overview
Today and
tomorrow.
h Broad product portfolio
In 2007, our dry low emission
industrial RB211 was chosen to
power a new gas pipeline from
Africa to Europe.
Africa
Annual report 2007
11
Governance
Overview
Developing a competitive
product portfolio
The Group has successfully
broadened its product portfolio
by investing in technology and
product development and by
acquiring products and capability.
In 1987, our civil aero-engine product portfolio
was limited to just four principal engines, one of
which, the V2500, was still in development.
Today, Rolls-Royce has the most extensive
product portfolio of any of the gas turbine
manufacturers, powering more than
30 applications. The breadth of the portfolio
makes the business model far more robust
as we are not as dependent on the success
of individual applications.
Although Rolls-Royce competed in aerospace,
marine and energy markets 20 years ago,
it was with a much smaller product portfolio,
across a more limited power range.
Our research and development approach
of ‘invent once and use many times’ has since
allowed us to maximise technology across
each of our markets. We now have a wide range
of modern, efficient gas turbines in each of
our key sectors. The way we have developed
the Trent family for aero, marine and energy
markets is the best example of this approach.
We continue to see significant opportunities
for the introduction of new products in each
of our market sectors. Our strategy is to
ensure that we have‘on the shelf’innovative
technologies for future generations of product.
For Rolls-Royce, product development is at
the heart of our competitive advantage and
in many ways is our equivalent of acquisition
activity. For that reason, each product
investment involves a rigorous examination
of the risks and rewards – in effect the
equivalent of due diligence – to ensure
that only business cases that we believe
will create shareholder value are pursued.
Our marine business now has an extensive
product range, which provides a range of
capabilities from ship design to power systems
and controls. Our energy business provides
gas turbines, compressors and reciprocating
engines for the power generation and
oil and gas markets.
Our defence business produces engines
for all the major military aviation markets.
These engines power around a quarter of
the world’s military fleet.
Our expanding product portfolio
Trent 700
Rolls-Royce
is privatised
Bergen Diesels
AE 2100
Industrial Trent
BR710
MT30
LiftFan for JSF
Tay 611C
Trent 1000
1987
RR300
2007
BR715
Trent 800
AE 3007
F136 for JSF
Trent 500
TP400
Trent 900
Trent XWB RB282
AE 1107C
Annual report 2007
12
Governance
Overview
Growing market share and
our installed product base
Since 1987, we have been
successfully growing our market
share in each of our businesses.
l Taking off in major markets
The V-22 Osprey is in service
with the US Marine Corps.
Its engine is designed and
built by Rolls-Royce in the US.
A five-year engine production
contract worth US$700 million
was awarded in 2007.
Our share of the market for large civil aero
engines is nearly 40 per cent and we are
Europe’s number one, and the world’s
number two, defence aero-engine producer.
We are also pre-eminent in capabilities which
20 years ago either did not exist or were at a
very early stage of development. For example,
our marine propulsion business is the market
leader in its field and we have one of the
world’s most successful offshore vessel
ship-design businesses.
In the energy market, we are a world leader
in the supply of power and compression
equipment to the offshore oil and gas markets.
We are also developing our power generation
business with new products such as the
low emissions Bergen series of gas engines.
Leading the way.
US
Annual report 2007
13
Governance
Overview
Addressable global market opportunity
– product and services
Installed product base
– gas turbines in service
Europe
20,000
1987
54,000
2007
US$2trillion
over the next 20 years
Americas
Asia
Annual report 2007
14
Governance
Overview
Our global aftermarket service network
Service locations:
Aerospace
Energy
Marine
17
5
28
Developing aftermarket
services that add value
In 1987, we supported our engines
in service by offering repair and
overhaul arrangements which
often failed to align our interests
with those of our customers.
Today, we have comprehensive through-life
service arrangements in place in each of our
business sectors. These align our interests with
those of our customers and enable us to add
value through the application of our skills and
knowledge of the product.
In 2007, underlying aftermarket service revenues
grew by nine per cent and represented 55 per
cent of Group sales. This growth has been
achieved partly as a result of the introduction
of new products, but also because our
ownership of intellectual property enables us
to turn data into information that adds value
to our customer.
Annual report 2007
15
Governance
Overview
Contribution to underlying Group
revenues from aftermarket services
55%
£4,265m
x Adding value for customers
We manage the engine and
component assets, fleet data,
and provide field services in
addition to repair and overhaul.
We have Operations Rooms in
the UK and Germany managing
fleet data.
Germany
Wide
ranging.
Wide
reaching.
Annual report 2007
16
Governance
Overview
Shaping
the future.
Annual report 2007
17
Governance
Overview
Future prospects
Our consistent strategy has created a business
that is increasingly global in terms of its
operational footprint and has access to a
broad range of growing markets worldwide.
This access to markets is distinctive. It has
profoundly influenced the nature of our
order book, which has increased in line with
our greater geographical spread and also
reflects the growing economic significance
of Asia and the Middle East.
Our strong order book, together with the long
product life cycle and our ability to provide
valuable services to customers, has greatly
increased the predictability of our business.
Responding to these opportunities will
inevitably see the Company continue to
change at an equivalent or faster pace than
that of the past two decades.
Our strong focus on productivity and efficiency,
our broad product and service portfolio and
our access to global markets give us confidence
that in 2008, Rolls-Royce will continue to deliver
profitable growth and a positive cash flow.
Sir John Rose
Chief Executive
February 6, 2008
v Responsible power
Car and passenger ferries
powered by our low emissions
Bergen K gas engine are
operating in the environmentally
sensitive waters of Norway.
Norway
Annual report 2007
18
Governance
Overview
Business review
Our business
One core technology – many uses
We apply technology advances across our businesses
creating value by‘inventing once, using many times’.
Market outlook
The Group operates in four long-term
global markets – civil and defence aerospace,
marine and energy. These markets present,
in aggregate, an opportunity of some two
trillion US dollars over the next 20 years and
have common characteristics. All these markets
have very high entry barriers and:
–
While the market can be temporarily disrupted
by external events, such as war or acts of
terrorism, 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$550 billion for the provision
of product related aftermarket services.
offer the opportunity for organic growth;
Defence aerospace
The Group forecasts that demand for military
engines will be worth US$180 billion over the
– can only be addressed through significant next 20 years.The largest single market is expected
investments in technology, infrastructure
to be the US, followed by Europe and the
and capability; and
Far East. Within Asia, demand will be dominated
– create a significant opportunity for extended by Japan, South Korea and India. Trends are
driven by the scale of defence budgets and
customer relationships, with revenues
geopolitical developments around the world.
from aftermarket services similar in size
to original equipment revenues.
As in the Group’s other business sectors,
programme lives are long and there is a
The size of these markets is generally related
to world Gross Domestic Product (GDP) growth, significant opportunity to support equipment
with aftermarket services. Customers’ budget
or in the case of the defence markets, global
constraints and their need to increase the value
security and the scale of defence budgets.
they derive from their assets have accelerated
the move in this direction. The Group estimates
Civil aerospace
the
value of services revenues over the next
The Group publishes a 20 year global market
20
years
to be US$300 billion.
outlook, which covers passenger and cargo
–
feature extraordinarily long programme
lives, usually measured in decades;
jets, corporate and regional aircraft. We predict
that over the next 20 years 131,000 engines,
worth over US$700 billion, will be required,
for more than 60,000 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 old
aircraft retirements.
Marine
The Group forecasts demand for marine power
and propulsion systems of US$230 billion over
the next 20 years. Demand will be greatest in
the commercial sector, where the merchant
market represents 50 per cent of the total and
the offshore market, 30 per cent.
Commercial shipping plays a crucial role in
the world economy. The need to transport
raw materials, finished goods, people, and oil
and gas requires a large fleet which has to be
renewed progressively.
The expansion of trade and technological
advances mean more ship construction for
growth and for replacement as older designs
become obsolete. Finding and extracting oil
and gas offshore requires a large number of
floating drilling and production units which,
in turn, are supported by a variety of service
craft. Merchant and offshore markets are
rarely at the same stage of the business
cycle, which helps to reduce overall volatility.
In naval markets, the Group expects surface
vessels to represent 15 per cent of the total
demand, and submarines five per cent.
Naval markets are driven by different
considerations, with customers looking
to get more for their budgets, leading to
increasing demand for integrated systems
and through-life servicing arrangements.
As in the Group’s other markets, marine
aftermarket services are expected to generate
significant demand, forecast 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 40 per cent,
for gas by more than 50 per cent and for
power generation by nearly 60 per cent.
To satisfy this demand, there will be a growing
requirement for aero-derived 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
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 derivatives in the
power generation segment is four times that
of oil and gas.
Annual report 2007
19
Governance
Overview
Group financial highlights
Strategy
Order book – firm and announced
The Group delivered underlying organic
sales growth across all businesses, growth in
underlying profits and a further year of positive
cash flow.
45.9
£bn
24.4
Europe
26.1
Address four global markets
We are a leading power systems company
operating in the civil and defence aerospace,
marine and energy markets.
2006
Invest in technology, capability and
infrastructure
Over the past five years, we have invested
£3.5 billion in research and development.
We invest approximately £30 million annually
on training and some £300 million a year on
capital projects.
21.3
18.7
Americas
Middle East/
Asia
2003
Underlying revenues
7,817
£m
7,353
Record order book
Our order book continues
to be balanced with market
success in all the major
regions of the world.
6,458
5,645
2003
5,947
2004
2005
2006
2005
2007
Order book has increased
by 76 per cent compared
to 2006
76%
Employees
832
£m
2004
2007
Underlying profit before financing
'000
748
35.2
35.4
36.2
2003
2004
2005
38.0
39.5
417
375
2004
2005
2006
2007
Underlying earnings per ordinary share
700
Total Shareholder Return (Index)
29.81
24.48
15.62
12.20
2006
2007
Total shareholder return over five years
34.06
pence
Rolls-Royce
FTSE 100
600
500
400
300
200
100
2003
2004
2005
2006
2007
12/2002
12/2003
Develop a competitive portfolio
of products and services
We have more than 50 current product
programmes and we are involved in many
of the major future projects in the markets
we serve. These key projects will define the
power systems market for many years.
Grow market share and installed
product base
Across the Group, the installed base of engines
in service is expected throughout their long
product lives to generate attractive returns
over several decades.
Add value for our customers through
the provision of product-related services
We seek to add value for our customers with
aftermarket services that will enhance the
performance and reliability of our products.
679
2003
We have followed a consistent strategy over
many years to grow the business profitably
based on five key elements:
12/2004 12/2005 12/2006
12/2007
Annual report 2007
20
Governance
Overview
Business review continued
Our business continued
Key performance indicators
The Board uses a range of financial and
non-financial indicators to monitor Group
and segmental performance in line with
the strategy described on the previous page.
These indicators are chosen to monitor
both current performance and the success
of investments that will sustain and enhance
future performance.
Key performance indicators are included
in the appropriate sections of the business
review and are as follows:
Underlying revenue
Monitoring of revenues provides a measure
of business growth. Underlying revenues are
used in order to eliminate the effect of the
decision not to adopt hedge accounting and
to provide a clearer year-on-year measure.
The Group measures foreign currency sales at
the actual exchange rate achieved as a result
of settling foreign exchange contracts from
forward cover.
Underlying revenue grew by six per cent
in 2007 and has grown by eight per cent
compound over the past five years.
Underlying profit before financing
Underlying profit before financing is presented
on a basis that shows the economic substance
of the Group’s hedging strategies in respect
of 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
of the exchange rates achieved during the
year, (b) similar adjustments are made in
respect of commodity derivatives, and (c)
consequential adjustments are made to reflect
the impact of exchange rates on trading
assets and liabilities and long-term contracts
on a consistent basis. The derivation of
underlying profit before financing is shown
in note 2 on page 77 of the consolidated
financial statements.
Underlying profit before financing grew
by 11 per cent in 2007 and has grown by
22 per cent compound over the past five years.
Cash flow
In a business requiring significant investment,
the Board monitors cash flow to ensure that
profitability is converted into cash generation,
both for future investment and as a reward for
shareholders. The Group measures cash flow
as the movement in net funds/debt during
the year, after taking into account the value of
derivatives held to hedge the value of balances
denominated in foreign currencies.
Research and development
Investment in research and development
underpins all the elements of the Group’s
strategy. Programme expenditure is monitored
in conjunction with a gated review process
on each programme and progress is reviewed
at key milestones.
Gross research and development
expenditure
The Group’s research and development
activities comprise both self-funded and
customer funded programmes. Gross
expenditure measures the total research and
development activity and is an indicator of the
effectiveness of the actions taken to improve
continuously the Group’s intellectual property.
New product launches
As discussed in the Chief Executive’s review on
page 11, the Group has broadened its product
portfolio over the past 20 years. This portfolio
is subject to continuous review and new
programmes are launched only after rigorous
review, where the business case confirms that
the programme will create shareholder value.
Order book
The order book provides an indicator of future
business and is measured at constant exchange
rates and list prices and includes both firm
and announced orders. 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. Only the first seven
years’revenue of long-term aftermarket
contracts is included.
Training expenditure
Training is a core element of the Group’s
investment in its capability and is measured
as the expenditure on the training and
Research and development as a proportion
development of employees, customers and
of underlying sales
suppliers. Effectiveness is ensured by using
Research and development is measured as the
a range of external and internal sources,
self-funded expenditure before both amounts
and by gathering user feedback.
capitalised in the year and amortisation of
previously capitalised balances. The Group
Employee engagement surveys
expects to spend approximately five per cent
Regular surveys are undertaken to identify
of revenues on research and development
although this proportion will fluctuate year-by- and address emerging issues.
year depending on the stage of development
Training and employee engagement surveys
of current programmes. This measure reflects
are discussed further in the corporate
the need to generate current returns as well
responsibility section of this review.
as to invest for the future.
Capital expenditure
To deliver on its commitments to customers,
the Group invests significant amounts in its
infrastructure. All investments are subject
to rigorous review to ensure that they are
consistent with forecast activity and will provide
value for money. Annual capital expenditure
is measured as the cost of property, plant and
equipment acquired during the period.
Product cost index
Unit costs are a key determinant of the
Group’s ability to deliver its commitments
on a profitable basis. The Group monitors
the year-on-year change in the actual average
unit product cost of its gas turbine operations
and seeks over time to improve productivity
in all owned facilities and suppliers.
Annual report 2007
21
Governance
Overview
Engine deliveries
The Group’s installed engine base represents
an opportunity to generate future aftermarket
business. Within each business segment
(except marine as its products do not lend
themselves to this measure due to their
diversity), this is measured as the number
of Group products delivered during the year.
Underlying services revenue
Underlying services revenue shows the amount
of business during the year that has been
generated from the installed engine base.
This is measured as the revenue derived from
spare parts, overhaul services and long-term
service arrangements.
Percentage of fleet under management
Long-term contracts are an important way of
generating value for customers. The percentage
of fleet under management gives a measure of
the proportion of the installed base where the
future aftermarket arrangements are agreed
under long-term contracts. This is measured as
the percentage of gas turbines and submarine
propulsion units where the Group has
contracted a long-term service arrangement.
In civil aerospace, marine and energy, the
percentage is weighted to reflect the value
of the equipment under management.
The amounts shown for civil aerospace for
2003 and 2004 differ from those disclosed in
Annual reports for those years as a result of
reflecting this weighting.
Emissions
Much of the research and development
expenditure is focused on reducing emissions
of the Group’s products.
The Group measures both the emissions
of its products and the emissions of its
manufacturing operations. These measures are
described in detail in the environment report,
‘Powering a better world’, which is available
on the Group’s website, www.rolls-royce.com
Annual report 2007
22
Governance
Overview
Our business continued
Principal risks and uncertainties
The Group continues to be exposed to
a number of risks and has an established,
structured approach to identifying, assessing
and managing those risks. The risk committee
has accountability for the system of risk
management and regularly reports to the Board
on the key risks facing the business and the
mitigating actions the Group has put in place
to deal with them. The Group has a consistent
strategy and long performance cycles and
consequently the risks faced by the Group have
not changed significantly over the past year.
The principal risks reflect the global growth
of the business, and the competitive and
challenging business environment in which
it operates. Risks are considered under four
broad headings:
Business environment risks
Environmental impact of products
and operations
External events which might affect demand for
air travel or cause the business to be disrupted
Strategic risks
Aftermarket
Competitive pressures
Financial risks (see pages 43-45)
Counterparty credit risk, funding, liquidity
and credit rating
Market risks – foreign currency, interest rate
and commodity
Sales financing
Operational risks
Performance of supply chain
IT security
Ethics
Programme risk
Business environment risks
Environmental impact of products
and operations
The Group recognises that its activities have
an impact on the environment and the approach
taken is to be part of the solution to resolving
the challenges faced by climate change.
A high priority is given to responding to the
challenge of reducing the environmental
impact of the Group’s products and business
activities. It is recognised that the solutions
are not straightforward and that novel
developments represent both significant
threats and opportunities.
Our Environment report was published in 2007
and shared with key stakeholders. This details
our global strategy to address the risks and
reports on our approach to working towards
achieving challenging performance
improvement targets for noise and carbon
dioxide emissions by 2020. Technology
acquisition programmes for more fuel-efficient
products form a major part of the management
of these risks.
External events which might affect
demand for air travel or cause the
business to be disrupted
Civil aerospace is an important contributor
to Group revenues and profits. The willingness
of passengers to travel by air is influenced
by a range of factors, including economic,
health and security issues. Exposure to this risk
is mitigated by the Group’s business strategy,
which has enabled it to develop a broader,
global business base, with the defence,
marine and energy businesses being less
susceptible to this type of risk. In addition,
the civil aerospace business model, with its
emphasis on increasing aftermarket services
revenues, continues to be resilient, providing a
high degree of protection against any shortfall
in demand. The Group’s ability to respond
rapidly to changes in demand through the
adjustment of its cost base is a key mitigation.
Annual report 2007
23
Governance
Overview
Disruption to the Group’s business operations
and the ability to respond to and recover from
disruption, for example, from an outbreak of
pandemic flu, is recognised as a key element
of, and risk to, both financial performance
and the Company’s reputation. The Group’s
operations strategy aims to deliver world-class
manufacturing capabilities with an increasing
global footprint, providing flexibility and
ability to respond to disruption. A Group Crisis
Management framework and plan is in place
as part of the wider business continuity and
risk management activities.
Financial risks
These are risks that arise as a result of
movements in financial markets. Principal risks
are: movements in foreign currency exchange
rates, interest rates, commodity prices and
counterparty credit risk.
A description of these risks and details of
the Group’s risk mitigation actions in this area
are provided in the Finance Director’s review
on pages 43 to 45.
Operational risks
Performance of supply chain
A significant element of the Group’s risk
Strategic risks
profile is the delivery performance of its
Aftermarket
supply chain. The Group manufactures
The Group’s business model is balanced
approximately 30 per cent by value of its
between original equipment delivery and
gas turbine products, the remainder being
aftermarket services. The growth in product
provided through external supply chains.
sales has provided a larger base from which to
Strong growth in order intake has been
generate aftermarket revenues. These continue
experienced and any failure of the supply chain
to contribute over half of annual sales and
would present a risk to the delivery of products
are an essential element of the returns the
to meet customer requirements and achieve
Group expects to make from its investments.
financial goals. The Group’s supply chain
The ability to deliver the operational service to
strategy is to seek opportunities to simplify and
the satisfaction of its customers while managing
globalise the external supply chain by forging
the costs of the service, will determine the
deeper, strategic relationships with fewer but
Group’s profitability. The Group is focused
stronger global suppliers, working together
on working in partnership with all of its global
on design and manufacture.
customers and driving improvement through
the supply chain to provide a high standard
The Group is close to completing the
of service to all its customers. The Group has
modernisation of its production facilities,
made investments in service delivery capabilities which will improve productivity and reduce
costs. Investment in developing world-class
and works closely with its customers to
manufacturing processes continues in Asia,
understand better their requirements,
North America and the UK. In addition,
with a continued focus on standardisation
the Group has an established global business
and processes to manage cost.
continuity programme, to manage the risk
Competitive pressures
of a loss of a major capability or facility.
The markets in which Rolls-Royce operates
IT security
are highly competitive. The majority of its
programmes are long term in nature and access Continuing globalisation of the business
to key platforms is critical to the success of the and advances in technology have resulted
in more data being transmitted across global
business. This requires sustained investment
communication links, posing an increased
in technology, capability and infrastructure,
which presents a high barrier to entry. However, security risk. Security systems operate with
the latest technology and Rolls-Royce
these factors alone do not protect the Group
maintains effective communications with
from competition, including pricing and
technical advances made by competitors which other industrial companies and the appropriate
could adversely affect the Group’s results.
government agencies to share information
on potential threats.
The Group has developed a balanced business
portfolio and maintained a steady improvement
in operational performance. This, together
with the establishment of long-term customer
relationships and sustained investment in
technology acquisition, allows the Group to
respond to competitive pressure.
Ethics
The Group recognises the benefit that is derived
from conducting business in an ethically and
socially responsible manner. This approach
extends from the supply of raw materials and
components to the manufacture and delivery
of end products and services. It applies to the
provision of a safe and healthy place of work
and investment in technologies to reduce the
environmental impact of the Group’s products
and operations. A failure in any of these areas
could damage the Group’s reputation and
disrupt its business.
The Group is committed to embedding high
ethical standards and a new Global Code of
Business Ethics was issued to all employees
during 2007. A training and engagement
programme for employees will be completed
during 2008 to strengthen employee awareness
of the Group’s values. The Group communicates
its standards to its first-tier supply base through
a supplier code of conduct.
Programme risk
The Group manages complex product
programmes with demanding technical
requirements against stringent customer
schedules. This requires the co-ordination
of the external supply chain, manufacturing
operations, partners and engineering functions.
Failure to achieve programme goals would have
significant financial implications for the Group.
The Group employs project management
controls on a routine basis. All major
programmes are subject to Board approval
and are regularly reviewed by the Board
with a particular focus on any emerging risks.
Annual report 2007
24
Governance
Overview
Civil aerospace
Mark King
President – Civil Aerospace
The 787 aircraft will enter service with All
Nippon Airlines and continues to sell well,
with the firm order book for Trent 1000 engines
exceeding 600 engines at the end of 2007.
Defence aerospace
Axel Arendt
President – Defence Aerospace
The Trent family continues to attract strong
demand. The Trent is the only engine currently
available for the Airbus A350XWB, for which
Airbus received approximately 300 orders
during 2007. An upgraded version of the
Trent 700 will enter service in 2009, and during
2007, almost 70 per cent of customers who
ordered the Airbus A330 chose the Trent 700,
representing business to us of US$3.8 billion.
The civil aerospace business powers over
30 types of commercial aircraft from business
jets to the largest widebody airliners. A fleet of
over 12,000 engines is in service.
The business has performed strongly, increasing
underlying revenue by three per cent and
underlying profit before financing by nine
per cent despite the headwinds of a further
weakening of the US dollar and increased
unit costs. Flying hours continued to grow
at approximately five per cent, with services
revenues representing 63 per cent of
underlying sales.The Rolls-RoyceTotalCare® and
CorporateCare® service products were again
chosen by the vast majority of new operators.
International Aero Engines (IAE), in which
Rolls-Royce is a major shareholder, certified its
SelectOne upgrade of the successful V2500
engine on time in December. The improved
engine saw another record year for new orders,
reflecting the competitive advantage achieved
by its low fuel consumption and maintenance
cost benefits. More than 660 IAE V2500
engines were selected to power over 300
Airbus A320 family aircraft during 2007,
including a follow-on order from US Airways
for 78 V2500 powered aircraft.
The Group’s leadership in the business jet
sector was reinforced by Dassault’s selection
of a new Rolls-Royce engine to power its
next generation, super mid-sized business jet.
Our business jet sector continued to perform
The business continued to benefit from its
strongly with almost 400 engines delivered
strong position on new programmes and
its broad portfolio, as orders for new aircraft and for corporate and regional applications to
engines rose to unprecedented levels. The total Bombardier, Cessna, Embraer and Gulfstream.
order book for civil aerospace was £35.9 billion, In October, the Group announced plans
with record orders for Trent engines in the
to invest in two significant new facilities
widebody sector and for V2500 engines in the to help meet growth. A new facility in
single-aisle market.
Singapore, to be completed in 2009,
will provide Rolls-Royce with a dual-sourcing
Orders for Trent engines covered all six variants,
capability for the assembly and test of large
contributing to an overall total of 1,182.
civil engines, including future new versions
Emerging markets, including South America,
of
the Trent engine. In addition, a new facility
China, Russia and India, accounted for 17 per
in
Virginia,
US, will assemble and test the new
cent of Trent orders while 45 per cent were
engine for the Dassault programme.
won in our established markets in the US,
Europe and Asia.
Significant milestones were reached by the
Trent engine family this year. The Airbus A380
successfully entered service in November with
Singapore Airlines, powered by the Trent 900
as its launch engine. In July, the first Boeing 787
was rolled out with its launch engine, the
Trent 1000, which received Federal Aviation
Authority and Joint Aviation Authority
certification as scheduled in August.
The defence aerospace business has over
20,000 engines in service and is Europe’s
largest aero-engine manufacturer in the
defence sector. We power aircraft in all
the major categories including transport,
helicopters, trainers, combat, tactical and
unmanned aerial vehicles.
2007 marked another year of progress
in all sectors. EJ200 engine business and
support for the fleet of 72 Eurofighter Typhoon
aircraft for the Royal Saudi Air Force will be
worth up to £1 billion to Rolls-Royce. We are
the prime contractor for EJ200 on behalf of
the Eurojet consortium.
The F136 engine, which we are jointly
developing with GE to power the F-35
Lightning II, has been fully funded for 2008
by the US Department of Defense (DoD)
at US$480 million. The engine continues to
perform exceptionally well in both testing
and milestone delivery. The LiftSystem for the
STOVL variant of the F-35 has been installed
in the aircraft and is expected to make its first
flight in the first half of 2008.
The selection of the AE 2100-powered C-27J
for the Joint Cargo Aircraft programme in the
US further enhanced the Group’s position
as the leader in the transport aircraft engine
market. The supply of the engines and
aftermarket services is worth more than
US$500 million over the life of the programme.
For the collaborative TP400 engine programme,
a challenging year culminated in the delivery
of the first engine for the flight test programme.
Incremental development costs of £40 million
associated with the programme have been
provided for in the year.
Annual report 2007
25
Governance
Overview
In the tactical sector, the Advanced Hawkeye
programme, with the T56-A-427A powered
E-2D aircraft, achieved its first flight in August
2007. The programme has a potential contract
value of US$500 million. Initial production for
the programme commences in 2008.
Civil aerospace – 2007 highlights
Operational highlights
Almost 1,200 Trents ordered in the year covering all six variants
Trent 900 successfully entered service on the Airbus A380
Trent 1000 received certification on schedule
Dassault selected Rolls-Royce to power its new super mid-sized business jet
11 customers selected the Trent XWB for a total of more than 600 engines
Key financial data
Underlying revenue £m
Underlying profit before financing £m
2007
2006
2005
2004
2003
4,038
3,907
3,406
3,072
2,715
+3%
+15%
+11%
+13%
–1%
564
519
454
208
168
+9%
+14%
+118%
+24%
–10%
2,468
2,165
1,617
1,740
1,309
35.9
20.0
19.0
16.2
14.4
+80%
+5%
+17%
+13%
+14%
851
856
881
824
2,554
2,310
2,016
1,838
Underlying services revenues %
63
59
59
60
% of fleet under management
55
48
45
45
Net assets £m
Other key performance indicators
Order book £bn
Engine deliveries
Underlying services revenues £m
746 2007 marked a significant year for the
1,460 AE 1107C-Liberty engine with the award
of a five-year production contract from the
54 US DoD worth US$700 million for the V-22
43 Osprey tiltrotor aircraft.
Aftermarket support continued to develop,
both in terms of new contracts and the scope
of services being offered to customers.
Rolls-Royce signed its first contract with the
US Air Force to support its fleet of AE 2100
engines on the C-130J aircraft, worth US$235
million. Adour engine support contracts were
also signed with the US Navy and the UK
Ministry of Defence (MoD). A Memorandum
of Understanding was signed with BAE Systems
to work together to improve support to the
UK MoD and other worldwide customers,
building on two successful availability contracts
for the UK’s RB199-powered Tornado fleet.
Defence aerospace – 2007 highlights
EJ200 engine and support contract signed for Royal Saudi Air Force Eurofighter Typhoon aircraft
F136 programme received US$480 million development funding for 2008
Rolls-Royce selected as propulsion system provider for the US forces Joint Cargo Aircraft programme
V-22 Osprey engine contract for US$700 million gained
RR300 launched to power the Robinson R66
Service contracts worth over US$500 million signed
Key financial data
Net assets £m
2007
2006
2005
2004
2003
1,673
1,601
1,420
1,374
1,398
+4%
+13%
+3%
–2%
+2%
199
193
180
179
147
+3%
+7%
+1%
+22%
–20%
(172)
20
55
131
69
Order book £bn
The launch of the RR300 engine represents
a major step forward in the helicopter
sector with the engine providing 300 shaft
horsepower at take off, excellent hot and high
performance and outstanding value. Federal
Aviation Authority type certification was
achieved ahead of schedule in December 2007,
with full-rate production to follow in 2008.
Under the agreement with Robinson Helicopter,
Rolls-Royce will provide several hundred RR300
engines in forthcoming years. Elsewhere in
the helicopter sector, additional RTM322 orders
were secured from Belgium and Australia,
while the T800 was selected by Turkey to
power the ATAK helicopter.
4.4
3.2
3.3
3.3
2.7
+38%
–3%
0%
+22%
+4%
Engine deliveries
495
514
565
548
510
877
853
787
768
789
52
53
55
56
56
11
11
8
5
5
Annual report 2007
26
Governance
Overview
Review of operations continued
Marine
Marine – 2007 highlights
John Paterson
President – Marine
Largest ever order won by the offshore sector at £155 million
New service centres announced for Singapore, Rio de Janeiro, Mumbai, Galveston,
Fort Lauderdale and Rotterdam
MT30 selected by the US Navy to power two DDG-1000 destroyers
£1 billion service contract won for Royal Navy nuclear power plants for the UK’s submarine fleet
Key financial data
Rolls-Royce provides a range of capabilities
and expertise in the marine sector for naval
surface ships, submarines, offshore and
merchant vessels. The business has installed
equipment on over 20,000 vessels, including
those of 70 navies.
The marine business has enjoyed another
successful year with a strong increase in sales
and good order book growth. Key sectors
of the business saw record order intakes,
and we made progress on some important
new marine programmes.
The offshore sector performed strongly during
the year. In June 2007, we announced an
£83 million contract to deliver designs and
equipment for six new Rolls-Royce offshore
service vessels to Nordcapital, which will be
operated on their behalf by OSM Schiffahrt.
This is the largest single marine offshore
contract ever won by Rolls-Royce. In December
2007, a £72 million contract was signed with
the same company covering a further four
ships taking the total to £155 million.
Our merchant sector also contracted major
new business. We signed our largest contract
so far with Chinese shipbuilder Sinopacific,
to provide steering gear and deck machinery
worth US$42 million. The order marked a record
year in China for the merchant sector with
contracts for more than 700 ship sets of steering
gear and 300 ship sets of deck machinery.
China now presents the biggest single market
opportunity for Rolls-Royce equipment in
commercial merchant ships.
In the naval business, a major milestone was
achieved when Rolls-Royce was selected to
supply the US Navy’s most advanced surface
combatant ship with the world’s most powerful
marine gas turbine. Four MT30 gas turbine
generator sets are being supplied to power
two DDG-1000 Zumwalt Class destroyers,
Net assets £m
2007
2006
2005
2004
2003
1,548
1,299
1,097
963
1,003
+19%
+18%
+14%
–4%
+2%
113
101
89
78
78
+12%
+13%
+14%
0%
–5%
563
619
674
651
577
Order book £bn
4.7
2.4
1.7
1.4
1.2
+96%
+41%
+21%
+17%
–8%
545
487
435
397
380
35
37
40
41
38
33
3
3
0
0
2003
Energy – 2007 highlights
Record orders received totalling £856 million
Services now represent 52 per cent of sales
Largest ever order won at £120 million for maintaining RB211s for BP
Record number of contracts for the industrial Trent
Avon 200 upgrade well received by market in first year
Key financial data
2007
2006
2005
2004
558
546
535
538
529
+2%
+2%
–1%
2%
–17%
Net assets £m
5
(18)
1
(7)
(18)
+128%
–1900%
+114%
+61%
+80%
370
387
390
453
511
0.9
0.5
0.4
0.4
0.4
+80%
+25%
0%
0%
–33%
Order book £bn
Engine deliveries
32
44
61
47
54
289
251
219
248
214
52
46
41
46
40
7
6
5
5
4
Annual report 2007
27
Governance
Overview
with deliveries to begin in 2009. Also in
North America, the US naval architecture
and engineering firm, Seaworthy Systems Inc,
was acquired and added to the marine portfolio
to boost support services. Its work is now part
of a TotalCare service Rolls-Royce is developing
for naval customers, offering long-term
guaranteed power availability and complete
propulsion plant support for ships.
An innovative 10-year contract with the
UK MoD worth £1 billion was secured for
Rolls-Royce to manage the support of the
reactor powerplants of the Royal Navy’s nuclear
submarine fleet. Rolls-Royce and the UK MoD
formed a joint team setting agreed service
levels, and both parties are now sharing the
savings made through improved business
efficiency and effectiveness.
The business has been undertaking a review
of the efficiency of our supply chain in 2007
in order to meet the challenge of higher levels
of production activity.
Marine is creating a fully integrated global
operations business which will help realise
economies of scale, improve efficiency and
thereby reduce the unit cost of production.
This is being achieved through improvements
in manufacturing plant and production
facilities which are aimed at building capacity
to respond to our existing workload and
manage greater volumes in the future.
A good example is the £14 million investment
in our diesels facility in Bergen, Norway,
where we are installing state-of-the-art
machining equipment which will significantly
improve levels of production.
Our large base of installed equipment provides
a platform from which to grow our services
business. To meet this global opportunity we
are upgrading our service facilities in places as
diverse as Singapore, Rio de Janeiro, Mumbai,
Galveston, Fort Lauderdale and Rotterdam
and, at the same time, recruiting more service
engineers to provide better customer service.
Energy
Tom Curley
President – Energy
The energy business has customers in over
120 countries. It is a leading supplier of
power systems to the oil and gas industries
and has a growing presence in the electrical
power generation sector.
In 2007, the energy business won a record
number of contracts in both the oil & gas
and power generation sectors. Services also
had a strong year and now accounts for over
50 per cent of total sales.
With record demand driving a strong oil and
gas market, we continued to expand our global
footprint with orders from customers in the
Americas, Europe, the Middle East and Asia.
The Caspian region proved particularly active.
In Azerbaijan, the energy business secured
its largest single contract to date, a TotalCare
service agreement with British Petroleum (BP)
worth £120 million for the maintenance of
28 industrial RB211 gas turbines operating
onshore and offshore. As part of our strategy to
work more closely with customers, this contract
will be managed from our service centre
in Baku. We also won our first order for the
installation of RB211 units in Turkmenistan.
This order continues the expansion of our
footprint in the central Asia/Caspian region.
Our growing presence in the power generation
sector continues. Momentum is building as
the industrial Trent attracts a broader customer
base, particularly in a recovering North American
market. In 2007, we received a record number
of orders for the industrial Trent, including five
units for installation in the US. Commitments
were also received from customers in South
America, Europe and Australia.
We continue to focus on becoming a service
solutions provider, with the services segment
having doubled its order intake over the
past three years. We now have dedicated
customer service centres in Scotland,
Brazil and Azerbaijan, with plans under way for
an additional site in West Africa. These centres
position the skills and knowledge of our
services team closer to our customers.
Our product upgrades business also delivered
a record year. Demonstrating our commitment
to the existing Rolls-Royce installed gas turbine
fleet, this business applies new technology
into existing products to extend their service
life by enhancing power and performance.
Of particular note is our Avon 200 programme,
which provides Avon gas turbine users
with increased efficiency and power for their
installed units. The market response to this
programme has been extremely positive,
with orders for 19 unit upgrades received
in the first year.
Annual report 2007
28
Governance
Overview
Engineering and Technology – 2007 highlights
Engineering andTechnology
Colin Smith
Director – Engineering and Technology
The Trent 1000, V2500 SelectOne and RR300 helicopter engine all achieved certification on plan
The JSF LiftFan completed ground testing prior to first flight
The revolutionary Rim Driven Tunnel Thruster started sea trials
Two new University Technology Centres and an Advanced Research Centre were opened
A record 400 patent applications were submitted
US$315 million of contracts received for US Air Force work on advanced propulsion concepts
2007
2006
2005
2004
2003
Gross research and development
expenditure £m
824
747
663
601
expenditure £m
454
395
339
282
charge £m
381
370
282
288
5.8
5.4
5.2
4.7
619 In 2007, Rolls-Royce invested a total of
£824 million in research and development,
of which £454 million was funded from
281 Group resources. The net charge to the
income statement was £381 million.
281
Over the past year, we have continued investing
in technology demonstration programmes
5.0 aimed at reducing the environmental impact
of our products. The seven year European
‘Clean Sky’Joint Technology Initiative has now
been successfully launched with Rolls-Royce
leading three of the five engine demonstrator
programmes. This European initiative is aiming
to reduce radically the impact of civil aviation
on the environment.
expenditure % of underlying revenue
In the UK, we are members of the newly
formed Energy Technologies Institute (ETI) whose
remit is to invest in research and development
to accelerate the development of secure,
reliable and cost-effective low-carbon energy
technologies towards commercial deployment.
We have also successfully been awarded
funding from the UK Government’s Technology
Strategy Board for a number of low
carbon/renewable projects.
Development of the innovative Rolls-Royce
fuel cell system continues. This technology
will deliver significant reductions in carbon
dioxide with negligible oxides of nitrogen
emissions relative to existing fossil fuel power
generation technology.
In 2007, we continued the expansion of
our global network of University Technology
Centres (UTCs) with two new UTCs at the
University of Bristol, to focus on composite
materials and at Karlsruhe in Germany, to focus
on cooling in turbines and combustors. We also
launched a new Advanced Research Centre
to develop forming technologies with industry
partners and Strathclyde University.
Annual report 2007
29
Governance
Overview
Building on our research successes of previous
years we filed a record 400 patent applications.
The US Air Force laboratory awarded
Rolls-Royce two contracts within the
Versatile Affordable Advanced Turbine Engines
(VAATE) programme with a total value of
US$315 million. The Adaptive Versatile Engine
Technology (ADVENT) programme will
demonstrate adaptive cycles technologies,
while the Highly Efficient Embedded Turbine
Engine (HEETE) will develop high-pressure
ratio compressor and high temperature
cycles technologies.
In the defence sector, the LiftFan for the Joint
Strike Fighter completed ground testing prior
to its flight test in 2008. The T56-A-427A engine
for the E-2D Advanced Hawkeye successfully
started flight-testing. This latest version of the
T56 family incorporates a new sensor suite plus
state-of-the-art integrated electronic propulsion
system control, monitoring, and maintenance
system. The new RR300 helicopter engine was
certified ahead of schedule and is now
undergoing flight testing.
In the civil aerospace sector, the Trent 1000
achieved certification on schedule in August
and successfully completed a flight test
programme on the Rolls-Royce Flying Test
Bed. The V2500 SelectOne engine, which offers
improved fuel consumption and lower lifecycle costs was also certified.
In the marine propulsion sector, we have started
sea trials of a full-scale prototype of the Rim
Driven Tunnel Thruster, which delivers a step
change in technology for tunnel thrusters
and dynamic positioning. The new lean-burn
Bergen KV gas reciprocated engine made its
entry into service, setting new standards in low
emissions for commercial marine applications.
In 2007, the WR-21-powered Royal Navy
Type 45 destroyer completed initial sea trials.
The WR-21 is developed from the RB211 aero
engine and features an advanced intercooled
recuperated cycle that makes it the world’s
most efficient marine gas turbine.
Annual report 2007
30
Governance
Overview
Operations
Mike Terrett
Chief Operating Officer
Our Process Excellence programme
continued to supply both wide scale and
local improvements, complementing the
benefits from our major process systems
such as SAP and PLM.
Services
Miles Cowdry
President – Services
Worldwide, our engineers can now work
simultaneously on the same live computer
model, improving lead times and productivity
as a result of upgrading key engineering
design tools such as PLM.
The supply chain in 2007 continued to evolve,
meeting strong demand from all markets
and managing the introduction of several
new products.
A mixture of material costs, factory disruption
and supplier pressures all contributed to
a unit cost increase in the year of almost
seven per cent.
The availability of these and other improved
systems and processes will allow us to reduce
the number of employees in management and
support roles by 2,300 worldwide. We continue
to recruit graduates, apprentices and employees
involved directly in delivering growth for the
Group. Consequently the overall productivity
will improve through 2008.
Our plans to become more productive, global
and less exposed to the volatility of the US
dollar exchange rate have continued. There
were several facilities opened around the world
including the new Rotatives plant and a new
test bed for large civil engines in Derby, UK,
and a new facility in Bristol, UK. Our outdoor
test facility in Mississippi, US, was also
commissioned.
The Group’s underlying service revenues
continued to grow strongly in 2007, increasing
nine per cent to £4.3 billion. Services account
for 55 per cent of Group revenues, with longterm TotalCare agreements now representing
the majority of our business in the civil
aerospace sector.
Our services range from the provision of field
support, shop maintenance and logistics
The Trent 900 production line was successfully
solutions to data management and engine
restarted and the engine’s application,
leasing, delivered through a global network
the Airbus A380, entered service successfully.
of service providers, wholly owned, and joint
The Trent 1000 engine for the Boeing 787
venture facilities. Rolls-Royce and joint venture
entered production. Boeing’s decision to
facilities employ over 8,000 people with major
re-schedule the entry into service of the
We selected the locations for two new facilities, locations in the UK, Europe, the Americas
787 means that we will re-plan production
one in Asia and the other in the US. Our new
and Asia. The service delivery organisations
of the engine in line with the requirements
advanced assembly and test plant for Trent
are managed through our operations centres
of the aircraft programme.
engines will be built in Singapore and in Virginia which plan the flow of work and manage
we will build a new manufacturing plant for the the day-to-day activities.
Other new products entering production
assembly
and test of the RB282 engine. Both
include the V2500Select upgrade, TP400,
facilities
will
be operational by the end of 2009. Our relationships with our customers are at
RR300 and WR-21.
the heart of our services strategy. TotalCare, our
We entered 2008 with an increase in load and
preferred contracting model, aligns our interests
As part of managing the introduction of
with those of our customers and provides an
a number of new programmes we maintained we have visibility of load over several years as
a result of our strong order book. Raw materials incentive for Rolls-Royce to build and drive
our focus on simplifying our supply chain,
have been secured and strategic hedging is in improvement in the services supply chain.
resulting in a reduction in the number of
place
to manage supply and cost risks.
external suppliers.
We frequently work closely with our customers
The increase in load, allied to our supply chain in building service delivery capability and we
The drive to improve our productivity
simplification and improvement, gives us an
have recorded a number of milestones this year:
continued with the final exit from our older
opportunity to continue cost reduction and
HAESL, our joint venture in Hong Kong with
UK factories and with the introduction of
to reduce further our exposure to the US dollar. HAECO of the Swire Group, celebrated its
our planning system to more of our facilities.
Continuing investment in IT, facilities, processes tenth year of operations and the opening of
Our SAP system has now been embedded in
and
people will allow us to grow our business
its latest facility extension in December 2007;
32 sites, and was introduced in 2007 to sites in
and better manage the cost of overheads.
SAESL, our joint venture with Singapore Airlines,
the US, Canada and the UK. The smooth and
quick implementation of SAP into our new
We would like to thank all employees, suppliers delivered its 500th engine; and TAESL, our joint
venture with American Airlines, its 1,500th engine.
repair and overhaul joint venture in Germany,
and partners for their commitment during
We continue to build on this successful model
N3, also took place.
the year.
and N3, which is a joint venture with Lufthansa
Modern Working Practices were fully
Technik in Germany, and our newest repair
embedded in all our operational facilities in the
and overhaul centre, opened for business in
UK, including civil aerospace assembly and test.
March 2007.
Annual report 2007
31
Governance
Overview
Operations – 2007 highlights
Trent 900 production line successfully restarted
V2500 SelectOne, TP400, RR300 and WR-21 all entered production
New facilities opened in Derby and Bristol
New outdoor test facility commissioned in Mississippi
Future assembly plants in US and Singapore announced
2007
2006
2005
2004
2003
Capital expenditure £m
304
303
232
191
186
(7)
(5)
0
5
193
192
186
169
Product cost index – year-on-year
(increase)/decrease %
Sales per employee (£k)
One of the ways we measure our progress
in implementing our service strategy is by
reference to the percentage of the installed
base of delivered engines subject to TotalCare
or similar agreements. During 2007, Singapore
Airlines and Emirates converted their Trent
service contracts to TotalCare. Such decisions
and deliveries of new engines subject to
TotalCare have increased the civil engine fleet
under management to 55 per cent, up from
48 per cent last year. This trend is set to continue,
with 77 per cent of future Trent civil deliveries
subject to TotalCare agreements.
In our other sectors the penetration of
TotalCare is lower but we continue to record
4 significant wins. The UK MoD and US DoD
156 are committed to through-life contracting
as the means by which they intend to secure
service support from industry. Of particular
note last year was the award by the UK
MoD of a £1 billion contract covering the
support of powerplant systems for the UK’s
nuclear submarines.
In the energy sector, BP has entered into
a second TotalCare contract. Following on
from the success of the North Sea contract,
Rolls-Royce will now manage the 28 RB211s
operated by BP in Azerbaijan.
We continue to invest in upgrading and
expanding our service capability. During 2007,
we opened an Operations Centre in Dahlewitz,
Germany, to support our corporate and
regional aircraft operators and a new flow
line in Ansty, UK, to repair RB199 and EJ200
modules. We also implemented a new spare
parts forecasting system.
Services – 2007 highlights
Service revenues increased nine per cent to £4,265 million
55 per cent of civil fleet under TotalCare
HAESL celebrates tenth year of operation and expands its operations
N3, our Trent overhaul centre in Germany, opened on time
£1 billion ten year submarine support contract with UK MoD
TotalCare agreement with BP for RB211s in Azerbaijan
Underlying services revenue £m
Underlying services revenue %
2007
2006
2005
2004
4,265
3,901
3,457
3,251
55
53
54
55
2003
Standardised tools and processes are one
of the ways in which we seek to control costs.
We are deploying SAP across the repair and
overhaul network, successfully migrating
our parts service centres, Rolls-Royce Canada
and N3 to our global template during 2007.
2,843 In the marine sector, new service workshops
50 have been opened and we acquired
Seaworthy Systems Inc. to enable us to develop
a new TotalCare service for naval customers,
which will guarantee complete propulsion
plant support and power availability.
Annual report 2007
32
Governance
Overview
Delivering on our
commitments.
The business case for
corporate responsibility
Governance
Each area of corporate responsibility has its own
Corporate responsibility is a fundamental part of governance process or managing committee,
the Group’s business strategy. It is not conducted and each is led by a member of the Board or
Group Executive. These include:
as a separate and self-contained activity, but is
integral to the business. This is because we see
– the Environmental Council, chaired by the
corporate responsibility as making a key
Director – Engineering and Technology;
contribution to the success of Rolls-Royce in the
– the HS&E committee, chaired by the
markets in which we operate. We believe that
Chief Executive;
conducting business in an ethical and responsible
way brings us competitive advantage, because it – the Global Council, chaired by the
helps us to:
Director – Human Resources; and
– attract and retain the best people;
– the Group Community Investment and
Sponsorship committee, chaired by the
– build goodwill and maintain successful
Chief
Executive.
working relationships with customers,
suppliers and governments; and
Individual subject matter expertise is reviewed
by the Corporate Responsibility Steering
– support the global communities in
Group, which reports regularly to the Board.
which our employees live and work.
This group comprises the Director – Human
The Group’s values of reliability, integrity and
Resources, Director of Public Affairs, Director
innovation are embedded in our Global Code
of Risk, the General Counsel and Company
of Business Ethics. This provides a framework
Secretary. In addition, the corporate
for our stakeholder relationships worldwide,
responsibility risk register uses the Company
the strength of which helps to shape the
risk process to identify the potential risks
Group’s reputation.
and opportunities, as well as mitigation plans
to address these risks. Additional information
With around 39,500 employees in 50 countries,
can be found in the Principal risks and
our strongest contribution to society is
uncertainties
section on pages 22 and 23.
the wealth generated by the thousands
of highly skilled jobs we provide worldwide.
External recognition
Rolls-Royce is ranked in a number of
external indexes which benchmark corporate
responsibility performance. During 2007,
we retained our position in both the Dow
Jones World and European Sustainability
Indexes and retained our Platinum position
in Business in the Community’s voluntary
Corporate Responsibility and Business in
the Environment Indexes.
Dow Jones Sustainability
(World and European) Indexes
Rolls-Royce has retained its
position in the Dow Jones
Sustainability (World and
European) Indexes for the sixth
consecutive year, confirming
the Group’s position as amongst
the best in class for addressing
a range of sustainability issues.
BitC BiE Index
In the 2006 Business in the
Environment Index, Rolls-Royce
was once again awarded
Platinum status and placed in
first position in the Aerospace
and Defence Sector.
BitC Corporate
Responsibility Index
In the 2006 Business in
the Community Corporate
Responsibility Index, Rolls-Royce
retained its position as a
Platinum status company.
Rolls-Royce has a long history of being
a responsible business. In the coming
years the world will continue to change,
along with the needs and expectations of
all of our stakeholders. We are committed to
build on our track record and our obligation
to continue to behave responsibly.
Annual report 2007
33
Governance
Overview
Our approach
Our approach to corporate
responsibility is focused broadly
on three key areas of activity:
Health, safety and the
environment (HS&E)
With its long tradition of technological and
engineering excellence, Rolls-Royce is well
placed to help society address the problem of
climate change and other environmental issues.
We also believe that good HS&E performance is
synonymous with good business performance
and good governance.
Read more on pages 34-35
Employees
We aim to create a working environment
that attracts and retains the best people and
which enhances their flexibility, capability
and motivation, and encourages them to be
involved, resulting in improved performance.
In doing this we deliver on the commitment
to all our stakeholders of being trusted to
deliver excellence.
Read more on page 37
Society
Rolls-Royce has a firm, long-standing
commitment to the communities in which we
operate around the world. Sustained investment
in communities makes a positive difference
and delivers tangible benefits to our business.
Corporate responsibility is also a key enabler in
delivering our supply chain strategy globally.
Read more on pages 38-39
Annual report 2007
34
Overview
Governance
Corporate responsibility continued
To ensure that we continue to make rapid
progress, we have updated our HS&E training
for all employees and developed targeted
training plans across our businesses.
Performance against targets
These are being implemented currently,
The Group believes that good HS&E performance with risk management training completed
is synonymous with good business performance. during 2007 as part of this programme.
Our stated vision is to be recognised widely
All the Group’s businesses have third party
for the excellence of our HS&E performance.
To achieve that vision we continue to implement certification to the environmental management
system standard ISO 14001, and our
robust processes in order to deliver against a
comprehensive Corporate HS&E audit
number of key objectives by the end of 2009.
programme assesses the implementation of the
These are detailed in our report‘Responsible
Operations’, published in April 2007 and available HS&E management system across all businesses
on a rolling audit basis. This year, audits took
on the Group’s website at www.rolls-royce.com
place in the UK and US, across our civil
In summary, our 2007-2009 objectives are to:
aerospace, energy, fuel cells, marine services
and submarines businesses, and the
Protect health
combustions and casings, component services
and turbine systems supply chain units. Audit
reviews were also undertaken at four sites on
Target: Reduce the incident rate of
occupational diseases and other work-related the management and effective control of major
hazards as part of an ongoing programme.
ill health by ten per cent by the end of 2009
Health, safety and the
environment (HS&E)
-10%
Prevent injury
-15%
Target: Achieve a 15 per cent reduction in the
lost-time injury rate (over one day) by the
end of 2009
Reduce environmental impact
-10%
Target 1: Achieve a ten per cent reduction
in energy consumed (normalised by financial
revenues) by the end of 2009
-10%
Target 2: Achieve a ten per cent reduction in
solid waste (normalised by financial revenues)
by the end of 2009
58%
Target 3: Achieve a 58 per cent recycle rate
of solid waste by the end of 2009
We will report on progress against these
objectives in April 2008 on the Group’s website
at www.rolls-royce.com
We operate three sites in the UK which
together manufacture, test and support
nuclear reactor cores for Royal Navy submarines.
The Company Nuclear Propulsion Assurance
Committee monitors the performance of
these sites regularly to ensure that the highest
standards of health and safety are maintained
and processes are robust and fit for purpose.
Our annual Company HS&E awards recognise
outstanding initiatives and improvements
worldwide. This year’s winners were the
Civil Aerospace Customer Delivery Centre for
state-of-the-art equipment to allow colleagues
to work safely on an engine at any height.
Six safety performance certificates were
awarded to sites achieving a full year with
no lost-time injury incidents. In addition,
nine sites each achieved over one million
man hours lost-time injury free.
The Group’s contribution to developing best
practice through third party collaboration
continues to grow. We are taking a leading
industry role in REACH, the latest EU chemicals
regulation, and have appointed a REACH
executive dedicated to this programme
during 2008.
We are working closely with other companies,
trade bodies, sectors and regulators in
preparing for the implementation of REACH.
Efforts have been focused on raising awareness
within our manufacturing operations and
supply chains, in order that appropriate
arrangements for compliance and business
continuity, and the targeting of any future
‘substances of very high concern’, are introduced
well ahead of deadlines. Within the aviation
sector, we are helping to develop international
standards for the declaration of substances
in‘articles’supplied to us to facilitate future
REACH compliance and, where required,
substitution programmes.
We continue to take part in the UK’s voluntary
carbon dioxide emissions trading scheme and
the Chicago Climate Exchange. Programmes
we have implemented to reduce carbon dioxide
emissions include an initiative at Inchinnan,
Scotland, where a reduction in furnace
temperatures will reduce annual emissions by
around 1,200 tonnes of carbon dioxide and will
achieve cost savings of £140,000 a year.
Environment: technology
and climate change
Rolls-Royce believes that technology,
applied on an industrial scale, lies at the heart
of society’s response to climate change.
The scale of this challenge should not be
underestimated. The development and
application of such technologies is, in itself,
a formidable task, and must be accompanied
by a step change in consumer behaviour.
We are committed to applying our science
and engineering skills to help overcome
the challenges.
Annual report 2007
35
Governance
Overview
Rising to the
challenge.
The Group is in a unique position to address
these difficult issues, due to its long history
of optimising the environmental performance
of its products. For example, since the 1950s
our engineering expertise has helped to reduce
aircraft noise by 75 per cent and fuel burn by
70 per cent on a passenger per kilometre basis.
We are therefore well placed to contribute
to the search for technological solutions to
climate change.
In 2007, Rolls-Royce was announced as the
leading member of the Environmentally
Friendly Engine programme, a UK government
and industry initiative to develop technologies
which will halve the amount of aviation fuel
used per passenger. The Group was also awarded
a contract by the US Air Force Research Laboratory
to develop a technology demonstrator for
high-thrust, reduced fuel consumption military
aerospace platforms. We also continue to play
a leading role in aiming to achieve, by 2020,
the environmental goals set by the Advisory
Council for Aeronautics Research in Europe
(ACARE). The ACARE targets, which are broadly
in line with the US research goals set by NASA,
are to reduce carbon dioxide emissions by
50 per cent per passenger kilometre, noise by
50 per cent and NOx by 80 per cent, all from
a 2000 baseline.
The drive to improve our products’
environmental performance spans all of our
businesses. For example, in the marine sector
our latest Bergen K gas engine, which is
certified to power the world’s first major car
and passenger ferries running on liquefied
natural gas, produces up to 90 per cent less
NOx and 20 per cent less carbon dioxide than
traditional diesel engines.
v Environmentally
Friendly Engine (EFE)
EFE is planned to deliver
technologies that will lead
to reduced fuel consumption,
emissions and noise.
vv Technology research
We are constantly seeking
to develop new advanced
technologies to improve
environmental performance.
The Group is developing megawatt-scale,
solid oxide fuel cell systems that will deliver
significant reduction in carbon dioxide
emissions, relative to existing fossil fuel power
generation. A 250 kilowatt unit is planned to
be tested in 2008. Other product developments
include exploring the feasibility of renewable
power sources, such as tidal stream and
offshore wind.
The Group published‘Powering a better world’,
a report on the environmental performance
of our products and our Group, in April 2007.
This is available on the Group’s website at
www.rolls-royce.com
Annual report 2007
36
Governance
Overview
k Learning and development
Apprentices working together
on the Group training scheme.
kk Employee engagement
Employee representatives
discussing issues during a
meeting of the Global Council.
At the heart
of everything
we do.
Annual report 2007
37
Governance
Overview
Employees
At the end of 2007, Rolls-Royce employed
39,529 permanent staff in over 50 countries.
The long life cycle associated with the Group’s
products makes it imperative that we have
a skilled workforce which is committed to
delivering excellence to customers over
the long term. To achieve this, we aim to
create a working environment that attracts
and retains the best people, enhances
their flexibility, capability and motivation
and encourages them to be involved,
resulting in improving performance.
Upholding our values
During the year we launched the Rolls-Royce
Global Code of Business Ethics. This sets out
principles and guidelines concerning interaction
with our stakeholders. The Code is available
in 16 languages and its distribution is being
supported by a Group-wide training programme
which is being rolled out in 2008. It can be
viewed online on the Group’s website at
www.rolls-royce.com
Engaging employees
In 2005, we formed a Global Council to improve
consultation and employee engagement.
This meets twice a year and involves over 40
employee representatives from around the world
plus senior managers from each business and
function. In 2007, full Council meetings were held
in Indianapolis, US and Bristol, UK and included
consultation on global policy implementation.
The year saw the launch of the Strategy
Storyboard, an interactive Group-wide briefing
on corporate strategy and performance,
which was delivered via facilitated sessions
to all employees worldwide.
Encouraging diversity
The Group is committed to developing a
diverse workforce and equal opportunities
for all, with a Global Diversity Steering Group
that shapes diversity policies. One example of
our approach focuses on encouraging more
women and people from minority backgrounds
to pursue engineering careers.
In Asia, we made good progress in attracting
leadership talent through the Asian Future
Leaders Programme, attracting several high
calibre early to mid-career managers to
Rolls-Royce. A number of senior managers
were also recruited locally into key roles.
Together they will form the nucleus of
the Group’s evolving regional senior
management team.
During 2007, we recruited 166 graduates and
220 apprentices and technicians worldwide.
An additional 642 undergraduate students were
employed for short-term training programmes
of two months to a year’s duration. At the end
of the year there were 323 graduates and 550
apprentices and technicians on formal training
programmes worldwide. As a measure of our
dedication to graduate training, we were ranked
24th overall in The Times newspaper’s Top 100
Graduate Employers of 2007, coming 2nd in
the Engineering sector.
We also continued to invest in customer
training, an important factor in strengthening
our competitive position, delivering over
21,500 person days of training in our dedicated
facilities or at customers’own premises.
The third Women’s Leadership Forum was held
in North America and the UK Women’s Network Health and wellbeing
The primary objective of the Group’s
was fully established.
occupational health strategy is to create
Our policy is to provide, wherever possible,
a culture of prevention rather than cure.
employment training and development
The strategy has four key areas of focus:
opportunities for disabled people. We are
– screening and surveillance;
committed to supporting employees who
become disabled and to helping disabled
– rehabilitation;
employees make the best possible use of
– health promotion; and
their skills and potential.
–
Learning and development
The Group reviewed its learning and
development strategy in 2007, realigning its
training provision to global business priorities
with the help of new Governance Boards which
are now accountable for training standards
worldwide. This activity was strengthened with
the selection of new supplier partners in the UK,
North America and Asia to ensure consistency
and the highest possible standards.
Expenditure on the education, training and
professional
development of employees during
The bi-annual Global Employee Engagement
the
year
totalled
around £30 million. Training
Survey, which will next be conducted in 2008,
schemes
to
support
future competitiveness
provides valuable feedback on which we
are
developed
continually.
Our quality
act in consultation with employees and their
programmes,
for
example,
were
deployed
representatives. Response to the survey results
globally
to
ensure
consistent
performance
is handled locally by the Group’s businesses
through action planning and feedback sessions. standards across the Group. During the year,
we again increased our use of online learning,
Rolls-Royce provides competitive pay and
delivering over 50,000 hours of training to
benefits in all its locations and actively encourages over 11,000 users.
share ownership by offering ShareSave plans
to all employees. Our employees currently
commit around £105 million to these plans.
In the UK, statutory arrangements enable
employees to receive part of their annual bonus
in shares and to make monthly share purchases
from their salary.
education.
Progress against our screening and surveillance
targets will be reported in April 2008 on
the Group’s website at www.rolls-royce.com
A Health Risk assessment pilot programme
to identify and work with people at risk was
launched in 2007 among employees in operations
functions in the UK and will run until mid 2008.
The importance of managing rehabilitation
effectively was reinforced during the year with
an ongoing training programme. New training
modules were also launched to help managers
assess their own understanding and delivery
of occupational health principles.
A major health promotion campaign,‘Know
Your Numbers’, was held during the year,
providing workstations where nearly 2,000
employees measured their vital health statistics
such as blood pressure, weight and blood
cholesterol. An‘owners handbook’health
manual will be issued to all employees in 2008.
The Group continued to promote best practice in
health education by hosting a major conference
on common health problems. Leading experts
spoke to an audience of employees about the
importance of maintaining a healthy workforce.
Annual report 2007
38
Governance
Overview
v Working in the community kk Rolls-Royce Science Prize
A company trainee gets involved Enthusiastic participants in
in a community project.
the programme from Matthew
Boulton Primary School.
vv Encouraging
science learning
A Cub Scout group visits
Rolls-Royce as part of their
science badge activity.
Society
Suppliers
The Group sets and manages its rigorous
performance standards for suppliers through
its quality system, Supplier Advanced Business
Relationships (SABRe). This includes a supplier
code of conduct, which is complemented
by the Group’s purchasing code of conduct
that ensures suppliers and employees work
together consistently.
The e-business system, Exostar, has encouraged
virtual teamworking between the Group
and its suppliers, significantly reducing the
need to travel. In addition, a drive to
‘revert’– the equivalent of raw materials
recycling – has resulted in an average of
83 per cent achieved globally.
Local sourcing policies reflect government
regulations, such as in the US where particular
rules towards working with small and
disadvantaged businesses apply.
As outlined in previous reports, the Group seeks
to foster productive supplier relationships which: Community investment
The Group has a longstanding commitment
– deliver mutual business benefits;
to supporting its local communities.
– minimise the environmental impact
Community investment is an intrinsic part
of business operations;
of the way we do business, supporting
the Group’s strategy and future success,
– encourage the highest standards of
particularly in the areas of:
ethical behaviour; and
–
promote human rights.
In 2007, we introduced an assessment of
current and potential suppliers which includes
a focus on their approach towards corporate
responsibility, in particular their policies and
their approach to HS&E.
The establishment of local purchasing
offices continues globally, with a new office
opened in South East Asia. Training of suppliers
and the sharing of best practice, with an
emphasis on‘lean’techniques and waste
elimination, have resulted in productivity
improvements among some suppliers of
up to 40 per cent.
A number of activities are helping to minimise
environmental impacts. An active programme
to encourage suppliers to adopt the
environmental standard ISO 14001 continued
in 2007, along with guidance and support to
help them achieve certification.
–
recruitment and retention of employees,
particularly by investing in the science
skills we need;
–
employee engagement, by encouraging
a sense of loyalty and pride and motivation
about our organisation;
–
development of professional and personal
skills such as teamwork, leadership,
adaptability and ethical behaviour; and
–
reputation, by building proactive and
mutually beneficial relationships in
the communities in which we operate.
During 2007, we conducted our fourth
global survey of community contributions,
including cash, employee time and gifts in
kind, using the London Benchmarking Group
model. The Group’s total contributions across
all these areas amounted to approximately
£6.6 million.
Donations and sponsorship
The Group’s charitable donations policy is
to‘directly support causes primarily relating
to educational, engineering and scientific
objectives, as well as social objectives
connected with the Group’s business and place
in the wider community.’ The Group’s charitable
donations amounted to £1.8 million, of which
£1.1 million were made in the UK. These included
support for The Prince’s Trust, Community
Foundations and Duxford Airspace. Elsewhere
Rolls-Royce made charitable donations in other
key regions of £700,000, with £267,000 donated
in North America, including support for the
work of United Way, £144,000 in Germany and
£289,000 in other regions.
A further £2.5 million was contributed in
sponsorships and educational programmes,
including support for the Smithsonian National
Air and Space Museum in North America, the
Brandenberg Summer Festival in Germany and
the London Symphony Orchestra tour of China.
The Group has a stated policy of working
closely with governments and institutions
to highlight the many career opportunities
that science and engineering can offer.
Our flagship programme, the Rolls-Royce
Science Prize, recognises excellent and
innovative science teaching in the UK and
Northern Ireland. This year’s winner, St. Stephen
and All Martyrs’Primary School from Bolton,
England, was awarded a total of £20,000 to
invest in science education, with £120,000
awarded in prizes to 61 schools in all.
Employee time
Employee time contributed during 2007
is estimated at a value of at least £2 million,
with more than 5,000 employees participating
in activities such as community projects and
team building activities with societal benefits.
Annual report 2007
39
Governance
Overview
A number of employees in the UK, North
America, and Germany completed a substantial
community project as a formal part of their
training or personal development programme.
During 2007, over 100 employees took part in
13 projects, which are recognised at the Group’s
Annual Learning and Development Awards.
Employee giving
In addition to the Group’s own contributions,
Rolls-Royce also finances the administration
of a Payroll Giving Scheme for UK employees,
enabling them to make tax-free donations to
their chosen charities. During 2007, employees
gave almost £450,000 to more than 350
charitable causes of their choice. The scheme
was commended at the 2007 UK Payroll Giving
Awards and is recognised as Gold Award
standard by the UK Government’s Payroll Giving
Quality Mark. In North America, employees have
contributed £125,000 directly from payroll to
good causes through the United Way scheme,
a percentage of which is matched by the Group.
In-kind support
The Group also supports community
and educational organisations with in-kind
donations, including surplus computer
equipment and office furniture, use of
office accommodation, the loan of engines
and components and places on Group
training courses.
Playing a
positiverole.
Annual report 2007
40
Governance
Overview
Andrew Shilston
Annual report 2007
41
Governance
Overview
Results for the year
Underlying profit before tax increased by
13 per cent to £800 million (2006 £705 million),
and underlying earnings per ordinary share
were 34.06p (2006 29.81p). Basic earnings
per ordinary share were 33.67p (2006 57.32p).
Summary
Restructuring charges of £52 million (2006
£47 million), which were incurred for ongoing
operational improvements, were included
within operating costs.
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.
On the basis described below, underlying profit
before tax was £800 million (2006 £705 million).
The adjustments are detailed in note 2 on
page 77.
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.
The published profit before tax reduced
to £733 million from £1,391 million in 2006.
Engine deliveries in the civil aerospace
This is primarily due to reduced benefits from
business were broadly flat at 851 in 2007.
the unrealised fair value derivative contracts,
There was a change in the mix, a reduction lower benefit from foreign exchange hedge
in the deliveries of large Trent engines was reserve release and finally the recognition
balanced by increased deliveries of smaller of past service costs for UK pension schemes,
engines for the corporate and regional
all of which are excluded from the calculation
sector. As a consequence, new engine
of underlying performance.
revenues reduced by seven per cent in
The Group is exposed to fluctuations in foreign
2007. Underlying civil aerospace services
currency exchange rates and commodity price
revenues grew by 11 per cent.
movements. These exposures are mitigated
Underlying defence aerospace sales
through the use of currency and commodity
increased by four per cent, with a six per
derivatives for which the Group does not apply
cent increase in original equipment sales
hedge accounting.
and a three per cent increase in services
As a result, reported earnings do not reflect
revenues.
the economic substance of derivatives that
Underlying marine sales increased
have been closed out in the financial year,
by 19 per cent, with continued strong
but do include unrealised gains and losses
growth in the offshore oil and gas
on derivatives which will only affect cash
support market sector.
flows when they are closed out at some point
in the future.
Underlying energy sales were flat,
with a 15 per cent increase in services
Underlying earnings are presented on a basis
revenues, offsetting a decline in original
that shows the economic substance of the
equipment sales.
Group’s hedging strategies in respect of
Underlying sales increased by six per cent.
–
–
–
–
Underlying aftermarket services revenues grew
by nine per cent to £4.3 billion and have grown
by ten per cent per annum compound over
the past ten years. Service revenues accounted
for 55 per cent of total revenues.
84 per cent of sales were to customers outside
the UK.
Underlying profit margins before financing
costs were relatively flat with improvement
in original equipment demand, continuing
growth in services sales and our focus on cost
reduction mitigating headwinds caused by
commodity price inflation and an adverse
trend in our achieved US dollar exchange rate.
Underlying financing amounted to £32 million
(2006 £43 million), comprising net interest
(£6 million) and risk and revenue sharing
partners’finance cost (£26 million).
transactional exchange rate and commodity
price movements. Further information is
included within key performance indicators
on page 20 of this report.
A final payment to ordinary shareholders
of 8.96p in the form of B Shares is proposed
making a total of 13.00p per ordinary share
(2006 9.59p), a 35 per cent increase over the
total payment in 2006.
Aftermarket services agreements, including
TotalCare packages, represented 28 per cent of
the order book having increased by £3.2 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 nine per cent on an underlying
basis in 2007 and accounted for 55 per cent
of Group revenue.
In particular, TotalCare packages in the civil
aerospace sector now cover 55 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
£550 million (2006 £393 million).
Cash
Cash inflow during the year was £562 million
(2006 £491 million) before the special injection
of £500 million in to the UK defined benefit
Order book
pension schemes. Continued growth in
The order book at December 31, 2007,
underlying profits and good cash conversion
at constant exchange rates, was £45.9 billion
was supported by further increases in customer
(2006 £26.1billion).
deposits and progress payments in the year,
This included firm business that was announced increasing by £332 million, and a benefit of
but for which contracts had not yet been signed £41 million from year-end currency revaluations.
Total cash investments of £598 million in plant
of £7.1 billion (2006 £1.7 billion).
and equipment and intangible assets and
payments to shareholders of £97 million
represent the major cash outflows in the
period. Tax payments increased in the year
to £71 million (2006 £25 million).
Annual report 2007
42
Governance
Overview
Finance Director’s review continued
As a consequence average net cash was
£350 million (2006 £150 million). The net cash
balance at the year-end was £888 million
(2006 £826 million).
Pensions
As for 2006, the charges for pensions are
calculated in accordance with the requirements
of IAS 19 Employee Benefits.
As the Group had previously announced,
during 2007 the trustees of each of the UK
The overall tax charge on the profit before tax
defined benefit schemes undertook a review
was £133 million (2006 £397 million) a rate of
of their investment strategies, in consultation
18.1 per cent (2006 28.5 per cent).
with the Group. As a result, revised investment
strategies have been adopted that seek to
The tax charge was reduced by £35 million
reduce the economic risks arising from each
in respect of the adjustment of deferred tax
scheme. The impact on the asset allocation
balances to reflect future lower corporate tax
of each scheme from the implementation of
rates in the UK and Germany and £22 million
the revised investment strategies has been to
in respect of the expected benefit of the
reduce the equity allocation and increase the
UK research and development tax credit.
fixed income allocation. Each scheme has
In addition, £22 million of provisions for prior
years’tax liabilities were written back following appointed a liability-driven investment asset
manager to hedge the majority of the interest
settlement of a number of outstanding
rate and inflation risks associated with the
tax issues.
pension liabilities, using swap contracts backed
The tax charge on underlying profit was
by short-term money market assets. Under the
£193 million (2006 £190 million) a rate of
terms of the swap contracts, each scheme
24.1 per cent (2006 27.0 per cent). The reduction is committed to paying London Inter-Bank
mainly reflects prior years’tax provisions no
Offered Rate (LIBOR) to its counterparties
longer required as noted above.
in exchange for fixed or inflation-linked cash
inflows to match in large part an actuarial
The operation of most tax systems, including
the availability of specific tax deductions, means projection of future benefit payments to
scheme members.
that there is often a delay between the Group
tax charge and the related tax payments, to the Following agreement of the revised investment
benefit of cash flow.
strategies with the trustees of each scheme,
the Group has paid additional contributions of
The Group operates internationally and is
£500 million to the principal UK pension schemes.
subject to tax in many differing jurisdictions.
As a consequence, the Group is routinely
Further information and details of the pensions’
subject to tax audits and examinations
charge and the defined benefit schemes’
which by their nature can take a considerable
assets and liabilities are shown in note 18
period to conclude. Provision is made for
to the financial statements. This shows a net
known issues based on management’s
deficit, after taking account of deferred tax,
interpretation of country specific legislation
of £88 million (2006 £681 million). Changes
and the likely outcome.
in this net position are affected by the
The Group seeks to minimise its tax burden in a assumptions made in valuing the liabilities
manner which is consistent with its commercial and the market performance of the assets.
objectives and meets its legal obligations and
The change in investment strategies agreed
ethical standards. While every effort is made
with the trustees of the principal UK schemes
to maximise the tax efficiency of its business
is expected to lead to lower volatility of the
transactions, the Group does not use artificial
Group’s net pension position for the future.
structures in its tax planning. The Group has
regard for the intention of the legislation
Strategic financial review
concerned rather than just the wording itself.
Following the successful completion of
The Group is committed to building open
relationships with tax authorities and to follow the UK defined benefit pension scheme
restructuring, a review of the Group’s financial
a policy of full disclosure in order to effect
strategy with reference to the manner
the timely settlement of its tax affairs and to
remove uncertainty in its business transactions. and quantity of shareholder remuneration,
and the structure of the balance sheet has
been conducted.
Taxation
The Group has developed a robust financial
position over the previous four years as strong
market positions, increasing market share and
a continued growth in aftermarket revenues
have driven growth in profitability and cash
generation. The review was conducted in the
context that the business model will continue
to strengthen as our portfolio broadens further
and the aftermarket business opportunity
expands, all delivering increasingly resilient
and predictable financial performance.
The length of the investment cycles within
which our products and services operate, and
the long-term relationships that we maintain
with our customers and suppliers all mean that
it is crucial to build and retain a strong balance
sheet on which to continue to compete in
the future. The Group benefits from many
opportunities to deliver long-term growth by
continuing to invest in products, technology,
and improved routes to market. These activities
require both financial strength and continued
investment in the business, not always at a time
of the Group’s choosing.
In 2007, external events have been less positive,
with the dollar weakening significantly against
all major currencies and with a major crisis
in the global banking industry. Confidence
amongst consumers and in businesses has
been eroded and the significant volatility seen
in global markets at the start of 2008 reinforces
the Board’s opinion that financial flexibility is
at a premium.
The review has concluded that the overall
strength of the business and its future prospects
justify a significant increase in the payment to
shareholders. The Board is therefore proposing
that payments to shareholders for 2007 will,
in aggregate, be 35 per cent higher than
2006. Subsequent payments are expected to
increase progressively in the light of the Group’s
future performance.
The Board will be seeking shareholder
agreement at the 2008 AGM to amend
the method used to make payments
to shareholders, this is described further
in the Report of the directors on page 48.
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.
Annual report 2007
43
Governance
Overview
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 investment
amounted to £824 million (2006 £747 million).
Net research and development charged to
the income statement was £381 million (2006
£370 million). The level of self-funded investment
in research and development is expected to
remain at approximately five per cent of Group
sales 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 similar level of
net research and development reported within
the income statement in 2008. Investment
in training was £30 million (2006 £30 million).
They share risk and investment, bring expertise
and access to markets, and provide external
objectivity. Some of our joint ventures have
become substantial businesses. A major
proportion of the debt of the joint ventures
is secured on the assets of the respective
companies and is non-recourse to the Group.
Risk and revenue sharing
partners (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 research and development
(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.
Payments to RRSPs are recorded within cost
of sales and increase as the related programme
sales increase. These payments amounted to
£199 million (2006 £162 million).
The classification of financial RRSPs as financial
instruments has resulted in a liability of
£315 million (2006 £324 million) being recorded in
the balance sheet and an associated underlying
financing cost of £26 million (2006 £27 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 Report of the directors)
has accountability for the system of risk
management and reporting the key risks and
Capital expenditure on property, plant
associated mitigating actions. The Director
and equipment was £304 million (2006
of Risk reports to the Finance Director.
RRSP agreements are a standard form of
£303 million).
The Group’s policy is to preserve the resources
co-operation in the civil aero-engine industry.
They bring benefits to the engine manufacturer upon which its continuing reputation,
Intangible assets
and the partner. Specifically, for the manufacturer viability and profitability are built, to enable the
The Group carried forward £1,761 million
they bring some or all of the following benefits: corporate objectives to be achieved through
the operation of the Rolls-Royce business
(2006 £1,460 million) of intangible assets.
additional financial and engineering resource;
processes. Risks are formally identified and
This comprised purchased goodwill of
sharing of risk; and initial programme
recorded in a corporate risk register and its
£801 million, engine certification costs and
contribution. As appropriate, the partner also
subsidiary registers within the businesses,
participation fees of £354 million, development supplies components and as consideration
which are reviewed and updated on a regular
costs of £364 million, recoverable engine costs for these components, receives a share of the
basis, with risk mitigation plans identified
of £162 million and other intangible assets
long-term revenues generated by the engine
of £80 million.
for significant risks.
programme in proportion to its purchased
Total capital expenditure on property, plant and programme share.
Financial risk
equipment and intangible assets is expected to
The sharing of risk is fundamental to RRSP
increase modestly in 2008.
agreements. In general, partners share financial The Group uses various financial instruments
in order to manage the exposures that arise
investment in the programme; they share
from its business operations as a result of
market
risk
as
they
receive
their
return
from
Partnerships
movements in financial markets. All treasury
future
sales;
they
share
currency
risk
as
their
The development of effective partnerships
activities are focused on the management and
returns
are
denominated
in
US
dollars;
they
share
continues to be a key feature of the Group’s
sales financing obligations; they share warranty hedging of risk. It is the Group’s policy not to
long-term strategy. Major partnerships are
trade financial instruments or to engage in
costs;
and, where they are manufacturing or
of two types: joint ventures and risk and
speculative financial transactions. There have
development
partners,
they
share
technical
revenue sharing partners.
been no significant changes in the Group's
and cost risk. Partners that do not undertake
policies
in the last year.
development work or supply components are
Joint ventures
referred to as financial RRSPs and are accounted The principal economic and market risks
Joint ventures are an integral part of our
for as financial instruments as described here.
continue to be movements in foreign currency
business. They are involved in engineering,
exchange rates, interest rates and commodity
In 2007, the Group received other operating
manufacturing, repair and overhaul, and
prices. The Board regularly reviews the
income of £50 million (2006 £57 million),
financial services. They are also normal business
Group’s exposures and financial risk
primarily in respect of the Trent 1000 engine
structures for companies participating in
management and a specialist committee
programme.
international, collaborative defence projects.
also considers these in detail.
Annual report 2007
44
Governance
Overview
Finance Director’s review continued
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
in the Report of the directors.
Counterparty credit risk
The Group has an established policy towards
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
No new borrowing facilities were entered into
during 2007 and £340 million of borrowing
facilities matured during 2007. As at December
31, 2007 the Group had total committed
borrowing facilities of £1.5 billion (2006
£1.8 billion). There are no material debt facility
maturities until 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,
and no material impact on the Group’s interest
charge would be expected to arise from a
movement in the Group’s credit rating.
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, 2007 the Group’s assigned
long-term credit ratings were:
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.
The Group has tended to manage its translational
exposures through the currency matching
of assets and liabilities where applicable.
The matching is reviewed regularly. Appropriate
risk mitigation is undertaken where material
mismatches arise.
The Group is exposed to a number of foreign
currencies. The most significant transactional
currency exposures are US dollars to sterling
and US dollars to Euros.
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 25 per cent of Group revenues
in 2007 (2006 26 per cent). US dollar
income converted into Euros represented
four per cent of Group revenues in 2007
(2006 four per cent).
The Group finances its operations through
Rating agency
Rating
Outlook
Category
a mixture of shareholders’funds, bank
Moody’s
A3
Stable
Investment
borrowings, bonds, notes and finance leases.
grade
The Group borrows in the major global markets
AStable
Investment
in a range of currencies and employs derivatives Standard
& Poor’s
grade
where appropriate to generate the desired
currency and interest rate profile.
As a long-term business, the Group attaches
The Group’s objective is to hold financial
significant importance to maintaining an
ii) Residual currency exposure is hedged via
investments and maintain undrawn
investment grade credit rating, which it views as
the financial markets. The Group operates
committed facilities at a level sufficient to
necessary for the business to operate effectively.
a hedging policy using a variety of
ensure that the Group has available funds to
financial instruments with the objective
meet its medium-term capital and funding
The Group's objective is to maintain an
of minimising the impact of fluctuations
obligations and to meet any unforeseen
‘A’category investment grade credit rating
in exchange rates on future transactions
obligations and opportunities. The Group holds from both agencies.
and cash flows.
cash and short-term investments which,
together with the undrawn committed facilities,
Market exchange rates
enable the Group to manage its liquidity risk.
2007
2006
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 suitable
counterparty diversification. During 2007, the
Group did not experience any losses related
to its investments as a result of the US subprime crisis.
US$ per £
– Year-end spot rate
1.991
1.957
– Average spot rate
2.001
1.844
– Year-end spot rate
1.362
1.484
– Average spot rate
1.461
1.467
€ per £
Annual report 2007
45
Governance
Overview
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.
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
The forward cover is managed within the
parameters of these policies in order to achieve customers, providing asset-value guarantees
(AVGs) on aircraft for a proportion of their
the Group’s objectives, having regard to the
expected future value, or entering into
Group’s view of long-term exchange rates.
leasing transactions.
Forward cover is in the form of standard
foreign exchange contracts and instruments
The Group manages and monitors its sales
on which the exchange rates achieved are
finance related exposures to customers and
dependent on future interest rates. The Group products within written policies approved by
may also write currency options against a
the Board and within the internal framework
portion of the unhedged dollar income
described in the Report of the directors.
at a rate which is consistent with the Group’s
The contingent liabilities represent the
long-term target rate. At the end of 2007 the
maximum discounted aggregate gross and
Group had US$9.4 billion of forward cover
net exposure that the Group has in respect
(2006 US$10 billion).
of delivered aircraft, regardless of the point
The consequence of this policy has been to
maintain relatively stable long-term foreign
exchange rates. Note 16 includes the impact of
revaluing forward currency contracts at market
values on December 31, 2007, showing a value
of £379 million (2006 £554 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.
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.
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 23 to the financial statements describes
the Group’s contingent liabilities.
There were no material changes to the Group’s
gross and net contingent liabilities in this
respect in 2007.
Accounting standards
The consolidated financial statements have
been prepared in accordance with International
Financial Reporting Standards (IFRS), as adopted
by the EU. In 2007, the Group has adopted
IFRS 7 Financial Instruments: Disclosure and the
Amendment to IAS 1 Presentation of Financial
Statements. These changes both relate to
disclosure and have no impact on the reported
results. Other new standards, amendments to
standards and interpretations effective in 2007
do not have a significant effect on the Group’s
financial statements.
A summary of other changes, which have not
been adopted in 2007, is included within the
accounting policies in note 1 to the financial
statements.
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 are divided approximately 55:45
Interest rate risk
between AVGs and credit guarantees. They are Share price
The Group uses fixed rate bonds and floating
spread over many years and relate to a number During the year the Company’s share price
rate debt as funding sources. The Group’s policy of customers and a broad product portfolio.
increased by 22 per cent from 448p to
is to maintain a proportion of its debt at fixed
546p per share, compared to a 20 per cent
rates of interest having regard to the prevailing The Board regularly reviews the Group’s sales
increase for the aerospace and defence sector
finance related exposures and risk management and a four per cent increase for the FTSE 100.
interest rate outlook. To implement this policy
activities. Each financing commitment is subject The Company’s shares ranged in price from
the Group may utilise a combination of
to a credit and asset review process and prior
interest-rate swaps, forward-rate agreements
444p in January to 570p in July.
and interest-rate caps to manage the exposure. approval in accordance with Board delegations
The number of ordinary shares in issue at the
of authority.
end of the year was 1,820 million, an increase
The Group operates a sophisticated risk-pricing of 39 million of which 24 million related to share
Commodity risk
model to assess risk and exposure.
The Group has an ongoing exposure to the
options and 15 million related to conversion
price of jet fuel and base metals arising from
of B Shares into ordinary shares.
Costs and exposures associated with providing
business operations. The Group’s objective
financing support are incorporated in any
The average number of ordinary shares in
is to minimise the impact of price fluctuations. decision to secure new business.
issue was 1,800 million (2006 1,741 million).
The exposure is hedged in accordance with
The Group seeks to minimise the level of
Andrew Shilston
parameters contained in written policies set
Finance Director
exposure
from
sales
finance
commitments
by:
by the Board.
February 6, 2008
– the use of third-party non-recourse debt
where appropriate;
–
the transfer, sale, or reinsurance of risks; and
–
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.
Annual report 2007
46
Overview
Governance
Board of directors
At February 6, 2008
Simon Robertson
Non-executive Chairman since 2005, Chairman of the nominations committee
Appointed to the Board in 2004. He is the founder member of Simon Robertson
Associates LLP and a non-executive director of HSBC Holdings plc, Berry Bros &
Rudd Ltd, and The Economist Newspaper Limited. He is a director of The Royal Opera
House Covent Garden Limited, a Trustee of The Eden Project and the Royal Opera
House Endowment Fund. He is the former President of Goldman Sachs Europe
Limited. Age 66.
John Rishton
Non-executive director, Chairman of the audit committee,
a member of the nominations committee
Appointed to the Board in March 2007. He is Chief Executive Officer of Royal Ahold.
He began his career in 1979 at Ford Motor Company and held a variety of positions
both in the UK and in Europe. In 1994 he joined British Airways plc where he was
Chief Financial Officer from 2001 to 2005. He is a former non-executive director of
Allied Domecq. Age 49.
Sir John Rose
Chief Executive since 1996, a member of the nominations committee
Appointed to the Board in 1992 having joined Rolls-Royce in 1984. He is a Trustee
of The Eden Project. Age 55.
Andrew B Shilston MA, ACA, MCT
Finance Director
Appointed to the Board in 2003 having joined Rolls-Royce in 2002. He is a
non-executive director of Cairn Energy PLC and was Finance Director of Enterprise
Oil plc from 1993 until 2002. Age 52.
Helen Alexander CBE
Non-executive director, a member of the remuneration and
nominations committees
Appointed to the Board in September 2007. Helen Alexander was appointed
Chief Executive of The Economist Group in January 1997, having joined the company
in 1984. She was Managing Director of The Economist Intelligence Unit from 1993
until the end of 1996. She is a non-executive director of Centrica plc, a Trustee of the
Tate Gallery and a governor of St Paul’s Girls’School. She was awarded a CBE for
services to publishing in 2004. She has an MBA from INSEAD. She is currently
Chairman of PPA, the magazine industry trade association. Age 50.
Peter J Byrom BSc, FCA
Appointed to the Board in 1997. He is Chairman of Domino Printing Sciences plc
and Molins PLC, and a non-executive director of AMEC plc. He is a Fellow of the
Royal Aeronautical Society. He was a director of N M Rothschild & Sons Limited from
1977 to 1996. Age 63.
Iain C Conn
Non-executive director, Senior Independent Director,
a member of the audit and nominations committees
Appointed to the Board in 2005. He is an executive director of BP p.l.c. having held a
range of executive positions within the BP Group worldwide. He is Chairman of the
Advisory Board of The Imperial College London Tanaka Business School. Age 45.
Professor Peter Gregson
Appointed to the Board in March 2007. He is President and Vice-Chancellor of
Queen’s University Belfast and serves on the Northern Ireland Economic
Development Forum, the Council of CBI Northern Ireland and the Steering Group of
the US – Ireland Research and Development Partnership. He is a Fellow and Council
Member of the Royal Academy of Engineering, a member of the Royal Irish Academy,
and Deputy Lieutenant of Belfast. He was formerly Professor of Aerospace Materials
and Deputy Vice-Chancellor of the University of Southampton and has served on the
Council for the Central Laboratory of the Research Councils (CCLRC). Age 50.
Colin P Smith BSc Hons, FREng, FRAeS, FIMechE
Appointed to the Board in 2005 having joined Rolls-Royce in 1974. He has held a
variety of key positions within Engineering, including Director – Research and
Technology and Director of Engineering and Technology – Civil Aerospace. He is a
Fellow of the Royal Academy of Engineering, the Royal Aeronautical Society and the
Institution of Mechanical Engineers. Age 52.
Ian C Strachan
Non-executive director, a member of the audit and nominations committees
Appointed to the Board in 2003. He is a non-executive director of Reuters Group plc,
Johnson Matthey plc, Xstrata plc and Transocean Inc. He was Chief Executive of
BTR plc, Deputy Chief Executive and Chief Financial Officer of Rio Tinto plc
and non-executive Chairman of Instinet Group Inc. Age 64.
Carl G Symon BSc, MSc
Non-executive director, Chairman of the remuneration committee,
a member of the nominations committee
Appointed to the Board in 1999. He is Chairman of HMV Group plc and Clearswift
Systems Ltd. He is also a non-executive director of BT Group plc and Chairman of the
BT Group Equality of Access Board, Senior Independent Director of Rexam plc and an
Advisory Board member of Cross Atlantic Capital Partners. He was previously
Chairman and Chief Executive Officer, IBM UK and held numerous executive positions
with IBM Corp. in Canada, USA, Latin America, Asia and Europe during a 32 year
international career. Age 61.
Mike J Terrett
Chief Operating Officer
Appointed to the Board in September 2007, having joined Rolls-Royce in 1978.
He has held a variety of senior positions in the development of new aero engine
programmes, including Managing Director of Airlines and President and Chief
Executive Officer of International Aero Engines (IAE) based in the United States. Prior
to his appointment as Chief Operating Officer, he was President – Civil Aerospace.
He is a member of the Institute of Mechanical Engineers and a Fellow of the Royal
Aeronautical Society. Age 51.
Tim Rayner
James M Guyette BSc
General Counsel and Company Secretary
President and Chief Executive Officer of Rolls-Royce North America Inc.
He joined Rolls-Royce in 2007 having previously been General Counsel and Company
Appointed to the Board in 1998 having joined Rolls-Royce in 1997. He is a director of Secretary at United Utilities PLC. Age 47.
the Private Bank and Trust Company of Chicago, Illinois and of priceline.com Inc.
Until 1995 he was Executive Vice President, Marketing and Planning of United Airlines.
Age 62.
Annual report 2007
47
Overview
Governance
The Group Executive
The Group Executive is responsible for the management of the Group within the strategy determined by the Board. It is chaired by Sir John Rose, Chief Executive,
and its other members are:
Axel Arendt
President – Defence Aerospace
Dr Mike Lloyd
President – Gas Turbine Operations
Charles Blundell
Director of Public Affairs
Dr Mike Orris
Chief Procurement Officer
Tom Brown
Director – Human Resources
John Paterson
President – Marine
Miles Cowdry
President – Services
Tim Rayner
General Counsel and Company Secretary
Tom Curley
President – Energy
Andrew Shilston
Finance Director
James Guyette
President and Chief Executive Officer of
Rolls-Royce North America Inc.
Colin Smith
Mike Terrett
Chief Operating Officer
Dr Michael Haidinger
Chairman of Rolls-Royce Deutschland Ltd & Co KG
Mark King
President – Civil Aerospace
International Advisory Board
The International Advisory Board (IAB), formed in 2006, advises the Group on emerging political, business and economic trends. Membership of the IAB is as follows:
Lord Powell of Bayswater Chairman of IAB, former Foreign Affairs and Defence
Adviser to Prime Ministers Margaret Thatcher and
John Major
Bernard Duc
Sir Rod Eddington
Senior Partner, Hollingsworth Management
International Ltd (Hong Kong)
former Deputy Chairman of the
Rolls-Royce European Advisory Board
General Counsel, A.Touboul Law firm – Paris
Non-executive Chairman, Australia & New Zealand
JPMorgan Chase Bank NA and former Chief Executive,
British Airways Plc
Boris Federov
Member of Gazprom Board, former Minister of
Finance of the Russian Federation
Dr Fan Gang
Professor at China’s Academy of Social Sciences and
Head of National Economic Research Institute
Carla Hills
Chair and CEO, Hills & Company, International
Consultants, former US Trade Representative,
former Secretary of Housing and Urban Development,
former Assistant Attorney General
General Sir Mike Jackson Former Chief of the General Staff,
UK Ministry of Defence
Mustafa Koç
Chairman of Koç Holding AS
Taizo Nishimuro
Chairman of Tokyo Stock Exchange Group Inc and
former Chairman of Toshiba Corporation
Lubna Olayan
CEO of the Olayan Financing Company
Eduardo Serra
Former Spanish Defence Minister
Ratan Tata
Chairman of Tata Sons Ltd
Matthias Wissmann
Former Minister for Transport and Research in
Germany, President of the Association of the German
Automotive Industry (VDA), Vice-Chairman of the
Federation of German Industries (BDI) and
Partner at WilmerHale
Lee Hsien Yang
Chairman, Fraser & Neave Limited
Ernesto Zedillo
Former President of Mexico, Director, Yale Center for
the Study of Globalization
South East Asia Advisory Board
Rolls-Royce formed the South East Asia Advisory Board (SEAAB) in 1987 to advise the main Board on political, economic and business trends in Singapore, Thailand,
Malaysia, Indonesia and the Philippines. It is chaired by Sir John Rose, Chief Executive, and its other members are:
Chatrachai Bunya-Ananta Member of the National Legislative Council of Thailand
Former Senator of Thailand
Former President of Thai Airways International plc
Edward W Rubin
Chairman of a Hong Kong-based private investment
company, Non-Executive Director of Singapore-listed
Noble Group Ltd
Bernard Duc
Soedibyo
Brigadier-General (retired)
Senior Fellow, Institute for Strategic Studies of Indonesia
Former Vice-Assistant to the Commander-in-Chief
Indonesian Air Force for Policy & Planning
Prof (Mrs) Tan Sook Yee
Member of the Panel of the Strata Titles Board
Ex-Professor of Law, National University of Singapore
Ashadi Tjahjadi
Air Chief Marshall (retired)
Former Chief of Staff of the Indonesian Air Force
Former Indonesia Ambassador to Germany
Dr Bernardo M Villegas
University Professor, University of Asia and the Pacific,
Manila, Philippines, Visiting Professor in Economics,
IESE Business School, Barcelona, Spain
Senior Partner, Hollingsworth Management
International Ltd (Hong Kong)
Deputy Chairman of the Rolls-Royce SEAAB
former Deputy Chairman of the
Rolls-Royce European Advisory Board
General Counsel, A.Touboul Law firm – Paris
Dato’Jaffar Indot
Independent Non-Executive Director, Shell Refining
Company (FO) Berhad
Chairman, Malaysian Dutch Business Council
President, Federation of Family Planning Associations
Malaysia
H E Ambassador
Jose V Romero, Jr
Chairman/President, Philippine Council for Foreign Relations
Former Philippines Ambassador to Italy
Annual report 2007
48
Overview
Governance
The directors present their report and the audited financial statements of Rolls-Royce Authority to purchase own shares
Group plc (the Company) and its subsidiaries (together referred to as the Group) for
At the AGM in 2007, the Company was authorised by shareholders to purchase up to
the year ended December 31, 2007.
180,448,489 of its own ordinary shares representing ten per cent of its issued ordinary
share capital as at February 7, 2007. The Company did not make use of this authority
Business review
during 2007.
A review of the business can be found on pages 4 to 45.
The authority for the Company to purchase its own shares expires at the
conclusion of the AGM in 2008 and a resolution to renew it will be proposed at that
meeting.
The directors’report on corporate governance and the Directors’remuneration report
are on pages 51 to 54 and 55 to 64 respectively.
Adoption of new Articles of Association
Changes to the Articles of Association must be approved by the shareholders,
B Shares
including where applicable with written consent of the Special Shareholder, in
At the Annual General Meeting (AGM) on May 7, 2008, the directors will recommend accordance with the legislation from time to time. A special resolution will be
an issue of 89.6 B Shares with a total nominal value of 8.96p for each ordinary share.
proposed at the AGM, to adopt new Articles of Association in order to incorporate a
Together with the interim issue on January 2, 2008 of 40.4 B Shares for each ordinary number of changes introduced by the Companies Act 2006.
share with a total nominal value of 4.04p, this is the equivalent of a total annual
payment to ordinary shareholders of 13p for each ordinary share.
Auditors
As a result of the strategic financial review referred to on page 42 the directors
A resolution to reappoint the auditors, KPMG Audit Plc, and to authorise the directors
have concluded that the dilution caused by the conversion of B Shares to ordinary
to determine their remuneration, will also be proposed at the AGM.
shares is inconsistent with the Group’s strategy. Consequently, it is intended to create
a new class of share to be titled ‘C Shares’. The directors propose that the 2007 final
Directors
payment to shareholders be made by a further issue of B Shares using the current
The directors’biographical details, including their other significant commitments,
B Share process. Subsequently the directors intend that future shareholder payments, are set out on page 46. During the year there were a number of Board changes:
commencing with the 2008 interim payment to shareholders, will be by the issue of Professor Peter Gregson and John Rishton were appointed non-executive directors
C Shares.
on March 1, 2007; Sir John Taylor retired as a non-executive director on May 1, 2007.
The principal difference between the existing B Shares and the proposed
On September 1, 2007 Helen Alexander was appointed as a non-executive director
C Shares is that the C Shares will not carry an option to convert into ordinary shares. and Mike Terrett was appointed as an executive director. On September 13, 2007
The Company plans to make arrangements with its Registrar to enable shareholders Iain Conn succeeded Peter Byrom as the Company’s Senior Independent Director
to reinvest their payments in a market purchase of ordinary shares. For those
and John Rishton succeeded Peter Byrom as chairman of the audit committee.
shareholders who retain their C Shares, a C Share dividend at a rate of 75 per cent of John Cheffins retired as an executive director on September 30, 2007. Carl Symon will
the London Inter-Bank Offered Rate (LIBOR) will be payable half yearly in arrears.
retire as a non-executive director at the conclusion of the AGM. He will be succeeded
Further details of this proposal and a resolution seeking shareholder approval
as chairman of the remuneration committee by Helen Alexander.
will be included in the Notice for the forthcoming AGM.
Under the Company’s Articles of Association, one third of the directors are
Subject to shareholder approval, following the 2007 final shareholder payment subject to re-election every year, with each director also being subject to re-election
and prior to the issue of C Shares in respect of the interim shareholder payment, the at intervals of not more than three years. Any director appointed during the year is
directors expect that the Company will exercise its rights to redeem for cash any
separately required to retire and seek election by the shareholders at the next AGM.
B Shares that remain in issue.
The Board also requires any non-executive director who has served on the Board for
more than nine years to be subject to annual re-election at the AGM.
Going concern
The directors appointed during the year seeking election by shareholders at the
After making enquiries, the directors have a reasonable expectation that the
AGM are Helen Alexander and Mike Terrett. Peter Byrom, having served 11 years on
Company has adequate resources to continue in operational existence for the
the Board, is subject to annual re-election by shareholders. The directors retiring
foreseeable future. For this reason they continue to adopt the going concern basis in under the annual re-election provisions contained in the Articles of Association are
preparing the financial statements.
Sir John Rose, Andrew Shilston, Colin Smith, Ian Strachan and Carl Symon. With the
exception of Carl Symon they all offer themselves for re-election.
Political donations
The Articles of Association also provide that no person may be appointed to the
In line with its established policy, the Group made no political donations during 2007. office of chairman (in an executive capacity) or to the office of chief executive,
While it remains the Group’s policy not to make donations to political parties
managing director or joint managing director of the Company, unless he is a British
it is possible that certain routine activities undertaken by the Group might
citizen. No person may be appointed to the office of director of the Company if,
immediately following such appointment, the number of directors of the Company
unintentionally fall within the broad scope of the provisions controlling political
who are not British citizens would exceed one half of the total number of directors of
donations and expenditure contained in the Companies Act 2006.
the Company for the time being.
A resolution will therefore be proposed at the 2008 AGM seeking shareholder
Subject to the provisions of relevant statutes, the Company’s Memorandum and
approval for the directors to be given authority to make donations and incur
Articles of Association and any directions given by special resolution, the directors
expenditure up to a maximum amount of £25,000 per Group company and a
may exercise all the powers of the Company.
maximum amount of £50,000 for the entire Group, which might otherwise be
The Company has entered into separate Deeds of Indemnity in favour of its
caught by the terms of the Companies Act 2006.
directors. The deeds provide substantially the same protection as that already
provided to directors under the indemnity in Article 170 of the Company’s Articles of
Association. The Company has also arranged appropriate insurance cover for any
legal action taken against its directors.
Annual report 2007
49
Overview
Governance
Share capital
At December 31, 2007, the Company’s authorised share capital comprised:
2,500,000,000 ordinary shares of 20p; 1,000,000,000,000 B Shares of 0.1p; one Special
Share of £1; 50,000 preference shares of £1. On December 31, 2007, the following
shares were in issue (proportion of total by nominal value): ordinary shares
1,819,812,347 (96 per cent) and B Shares, 15,858,712,652 (4 per cent). Both ordinary
shares and B Shares are listed on the London Stock Exchange.
Rights of each class of share
Ordinary Shares – The rights and obligations attaching to ordinary shares are set out
in the Company’s Articles of Association. Holders of ordinary shares are entitled to
attend and speak at general meetings of the Company, to appoint one or more
proxies or, if they are corporations, corporate representatives, and to exercise voting
rights. Holders of ordinary shares may receive a bonus issue of B Shares or a dividend
and on liquidation may share in the assets of the Company. Holders of ordinary
shares are entitled to receive the Company’s Annual report. Subject to meeting
certain thresholds, holders of ordinary shares may requisition a general meeting of
the Company and the proposal of resolutions at general meetings.
B Shares – Since July 2004, the Company has issued non-cumulative redeemable
convertible preference shares (B Shares) as an alternative to paying a cash dividend.
Shareholders are able to redeem any number of their B Shares for cash or convert
them into ordinary shares. Any B Shares retained attract a dividend of 75 per cent of
LIBOR on the 0.1p nominal value of each share, paid on a twice-yearly basis, and
have limited voting rights. In certain circumstances the Company has the option to
compulsorily redeem the B Shares, at any time, if the aggregate number of B Shares
in issue is less than ten per cent of the aggregate number of B Shares issued, or on
the acquisition or capital restructuring of the Company.
On a return of capital on a winding-up, the holders of B Shares shall be entitled,
in priority to any payment to the holders of ordinary shares, to the repayment of
the nominal capital paid-up or credited as paid-up on the B Shares held by them,
together with a sum equal to the outstanding preferential dividend which will have
been accrued but not been paid until the date of return of capital.
The holders of B Shares are entitled to attend, speak and vote at a General
Meeting only if a resolution to wind up the Company is to be considered, in which
case they may vote only on such resolution.
Special Share – Certain rights, set out in the Company’s Articles of Association, attach
to the special rights non-voting share (Special Share) issued to HM Government
(Special Shareholder). Subject to the provisions of the Companies Act 1985, the
Special Share may be redeemed by the Treasury Solicitor at par at any time. The
Special Share confers no rights to dividends but in the event of a winding-up it
shall be repaid at its nominal value in priority to any other shares.
Certain Articles (in particular those relating to the foreign shareholding limit,
disposals and the nationality of directors) that relate to the rights attached to the
Special Share may only be altered with the consent of the Special Shareholder.
The Special Shareholder is not entitled to vote at any General Meeting or any other
meeting of any class of shareholders.
Preference Shares – The 50,000 preference shares were issued pursuant to the
Company’s incorporation and were subsequently redeemed. They cannot be
reissued.
Restrictions on transfer of shares and limitations on holdings
There are no restrictions on transfer or limitations on the holding of the ordinary
shares or B Shares other than under the Articles of Association (as described below),
under restrictions imposed by law or regulation (for example, insider trading laws) or
pursuant to the Company’s share dealing code.
The Articles of Association provide that the Company should be and remain
under United Kingdom control. As such, an individual foreign shareholding limit is
set at 15 per cent of the aggregate votes attaching to the share capital of all classes
(taken as a whole) and capable of being cast on a poll and to all other shares that the
directors determine are to be included in the calculation of such holding.
Shareholder agreements and consent requirements
There are no known arrangements under which financial rights carried by any of the
shares in the Company are held by a person other than the holder of the shares and
no known agreements between the holders of shares with restrictions on the transfer
of shares or exercise of voting rights.
No disposal may be made to a non Group member which, alone or when
aggregated with, the same or a connected transaction, constitutes a disposal of the
whole or a material part of either the nuclear business or the assets of the Group as a
whole, without consent of the Special Shareholder.
Deadlines for exercising voting rights
Electronic and paper proxy appointment and voting instructions must be received
by the Company’s Registrars not less than 48 hours before a general meeting.
Authority to issue shares
At the AGM in 2007, authority was given to the directors to allot new ordinary shares
up to a nominal value of £124,149,953, equivalent to one third of the issued share
capital of the Company at February 7, 2007. Such authority is valid until the AGM in
2008 or 18 months from May 2, 2007, whichever is the earlier. A further special
resolution was passed to effect a disapplication of pre-emption rights for a maximum
of five per cent of the issued share capital of the Company at February 7, 2007. The
directors propose to renew these authorities at the AGM in 2008.
At the AGM in 2007, authority was given to the directors to allot new B Shares
up to a nominal value of £200 million as an alternative to a cash dividend. Such
authority is valid until the AGM in 2008 or 18 months from May 2, 2007,whichever is
the earlier. The directors propose to renew this authority at the AGM in 2008.
Voting rights for employee share plan shares
Shares are held in various employee benefit trusts for the purpose of satisfying
awards made under the various employee share plans. For shares held in a nominee
capacity or if plan/trust rules provide the participant with the right to vote in respect
of specifically allocated shares, the trustee votes in line with the participants’
instructions. For shares that are not held absolutely on behalf of specific individuals,
the general policy of the trustees, in accordance with investor protection guidelines,
is to abstain from voting in respect of those shares.
Interests in voting rights
At February 6, 2008, the following companies had disclosed an interest in the issued
ordinary share capital of the Company in accordance with the requirements of the
Financial Services Authority’s Disclosure and Transparency Rules:
% of issued ordinary
share capital
Invesco Limited
Legal and General Group Plc
6.91
5.61
Annual report 2007
50
Overview
Governance
Report of the directors continued
Change of control
Employee share plans
In the event of a change of control of the Company, the effect on the employee
share plans would be as follows:
Major contracts
There are a number of contracts and joint venture agreements which would allow
the counterparties to terminate or alter those arrangements in the event of a change –
of control of the Company. These arrangements are commercially confidential and
their disclosure would be seriously prejudicial to the Company.
–
Borrowings and other financial instruments
The Group has a number of borrowing facilities provided by various lenders. These
facilities generally include provisions which, upon the occurrence of a change of
control of the Company, may require any outstanding borrowings to be repaid or the
–
alteration or termination of the facility. At December 31, 2007 these facilities were
substantially undrawn.
The Group has entered into a series of financial instruments to hedge its
–
currency, interest rate and commodity exposures. These contracts provide for
termination or alteration in the event that a change of control of the Company
materially weakens the creditworthiness of the Group.
–
Executive Share Option Plan – All options granted have vested and are
exercisable. Consequently, no early vesting is currently possible. It is not
proposed to make any further grants under this plan, which terminates in 2009.
Performance Share Plan – Awards would vest pro-rata to service in the
performance period, subject to remuneration committee judgement of
company performance.
Annual Performance Related Award deferred shares – The shares would be
released from trust immediately.
ShareSave – Options would become exercisable immediately. The new
company might offer an equivalent option in exchange for cancellation of the
existing option.
Share Incentive Plan – Consideration received as shares would be held within the
Plan, if possible, otherwise the consideration would be treated as a disposal
from the Plan.
By order of the Board
Tim Rayner General Counsel and Company Secretary
February 6, 2008
Annual report 2007
51
Overview
Governance
Statement on corporate governance compliance
Rolls-Royce attaches the highest priority to corporate governance, the system by
which the Company is directed, managed and controlled in the interests of all its
stakeholders. The strength of the Company’s corporate values, its reputation and its
ability to achieve its objectives are influenced by the effectiveness of the Company’s
approach towards corporate governance.
The Board confirms that throughout 2007, the Company complied with the
Combined Code on Corporate Governance (the Combined Code). This corporate
governance report and, where appropriate, the Directors’remuneration report,
explain how the Company discharges its corporate governance responsibilities.
The Board’s composition and directors’ independence
Simon Robertson chairs the Board of directors and Sir John Rose is the Chief
Executive. The division of responsibilities between them is set down in writing and
agreed by the Board. Iain Conn is the Company’s Senior Independent Director.
There are currently 13 directors on the Board comprising the non-executive
Chairman, the Chief Executive, four other executive directors and seven
non-executive directors.
The quality and broad experience of the directors, the balance of the Board’s
composition and the dynamics of the Board as a group, ensure the Board’s
effectiveness and also prevents any individual or small group dominating the
Board’s decision making.
Each executive director receives a service contract on appointment (see the
Directors’remuneration report for further information) and each non-executive
director receives a letter setting out the conditions of his or her appointment.
Non-executive directors are appointed for an initial term of three years, which may
be extended subsequently with the agreement of the Board, although
reappointment is not automatic. Executive directors are employees who have
executive responsibilities in addition to their duties as directors. Non-executive
directors are not employees and do not participate in the daily business
management of the Group.
The Board applies a rigorous process in order to satisfy itself that its
non-executive directors remain independent. The Combined Code does not regard
the Chairman as being independent in view of his unique role in corporate
governance. Although, on his appointment as Chairman on January 1, 2005,
Simon Robertson met the criteria for independence contained in the Combined
Code. His other significant commitments are described on page 46. The Board
reviews the independence of the non-executive directors every year, based on the
criteria in the Combined Code. This review was undertaken in 2007, and the Board
concluded that all the non-executive directors (other than the Chairman) were
independent in character and judgement. The Board determined that Peter Byrom
remains independent in character and judgement notwithstanding that he has
served on the Board for more than nine years, that there are no relationships or
circumstances which are likely to affect his independent judgement and that he is in
no way dependent on the remuneration he receives from the Company. The Board
believes strongly that in a long-term, complex and technologically advanced
business it is essential that non-executive directors have the opportunity to acquire,
over a number of years, the experience and knowledge of the business and the
sectors within which the Group operates. The Board concluded that Helen Alexander
remains independent in character and judgement and, notwithstanding that the
Chairman and Helen Alexander sit on the board of The Economist Newspaper
Limited where she is the Chief Executive, there are no relationships or circumstances
which are likely to affect her independent judgement.
Role of the Board
The Board is responsible to all the Company’s stakeholders for its conduct and
performance of the Company.
The day-to-day running of the Company is delegated by the Board to the
executive team under the leadership of Sir John Rose, the Chief Executive.
The Board retains responsibility for the approval of certain matters which affect
the shape and risk profile of the Company, as well as such items as the annual
budget and performance targets, the published accounts, payments to shareholders,
major capital investments and any substantial change to balance sheet management
policy. This division of responsibilities between the Board and the executive team is
set out in detail in a schedule approved annually by the Board, which defines those
decisions which can only be taken by the Board itself.
The Board has approved the following statement summarising its core
responsibilities:
Primary goal
The primary goal of the Board is to ensure that the Company’s strategy creates value
for the long-term investor within an acceptable risk profile.
The Board’s tasks
In line with its primary goal, the Board's principal tasks are to:
− ensure the development of the Company’s strategy and keep it under
rigorous review;
− monitor the implementation of the strategy, ensuring that the necessary
financial and human resources are in place to deliver it and that effective
controls exist to manage risk;
− safeguard the values of the Company, including its brand and corporate
reputation and the safety of its products;
− oversee the quality and performance of management and ensure through
effective succession planning and remuneration policies that it is maintained
at world-class standards; and
− maintain an effective corporate governance framework that aspires to deliver
long-term value to shareholders.
Directors’ induction, training and information
Newly appointed directors participate in a structured induction programme and
receive a comprehensive data pack providing detailed information on the Group.
An existing executive director acts as a mentor to each newly appointed
non-executive director, giving guidance and advice as required. As part of their
briefing, non-executive directors visit key sites and meet a cross-section of managers
and employees to gain a better understanding of the Group and its operations.
Ongoing training is available for all the directors, including presentations by the
executive team on particular aspects of the business.
There is an agreed procedure for directors to take independent professional
advice at the Company’s expense. This is in addition to the access every director has
to the General Counsel and Company Secretary.
Board effectiveness
The Chairman meets at least once a year with the non-executive directors without
the executive directors present, in order to review the operation of the Board.
The Chairman has an annual meeting with each non-executive director to
review their contribution to the Board. The Senior Independent Director chairs an
annual meeting with the non-executive directors to review the performance of the
Chairman, the outcome of which is reported back to him.
Each year, the Chairman reviews the performance of the Chief Executive as
part of the annual salary review process overseen by the remuneration committee.
The Chief Executive reviews the performance of the other executive directors in the
same way.
In 2007, the annual process to enable the Board to evaluate the effectiveness of
its performance involved the completion of a written questionnaire by the directors
and a series of meetings between the Chairman and each individual director. The
Board reviewed the results of this exercise in December 2007.
Annual report 2007
52
Overview
Governance
Corporate governance continued
The review covered all aspects of corporate governance, including board and
committee structure, board dynamics, the conduct and frequency of board
meetings, the consideration of strategic issues by the Board and the information
provided to directors. The Board considered that it was operating effectively.
However, this review identified the need for improvements in some areas, including
board induction and training and continuing development. These improvements will
be implemented in 2008. The audit, remuneration and nominations committees
have separately undertaken reviews of their terms of reference and effectiveness
during 2007.
Board committees
The Board is assisted by its committees. Details of their membership and principal
terms of reference are set out below. Their full terms of reference are available in the
Investors section on the Group’s website at www.rolls-royce.com
The following table shows the level of attendance by the directors at Board and
principal committee meetings in 2007:
Attendance at meetings of the Board and its principal committees in 2007
Helen Alexander
Peter Byrom
John Cheffins
Iain Conn
Prof Peter Gregson **
James Guyette
John Rishton
Simon Robertson
Sir John Rose
Andrew Shilston
Colin Smith
Ian Strachan
Carl Symon
Sir John Taylor
Mike Terrett
Board
Audit
Nominations
Remuneration
Held * Attended
Held * Attended
Held * Attended
Held * Attended
4
7
5
7
6
7
6
7
7
7
7
7
7
2
4
3
6
5
5
4
7
4
7
7
7
7
6
7
2
4
3
3
4
4
2
4
2
4
2
4
2
4
4
3
3
1
3
1
4
2
4
2
3
3
3
4
4
2
4
4
4
4
4
4
1
4
4
1
* The number of meetings held during the period a director was in office or a member of a committee.
** Professor Gregson was absent for part of the year due to illness.
Remuneration committee
The committee has responsibility for making recommendations to the Board on the
Group’s policy regarding executive remuneration. The committee determines, on the
Board’s behalf, the specific remuneration packages of the executive directors and a
number of senior executives. It also makes recommendations to the Board on the
remuneration of the Chairman. The committee met four times during the year.
The committee’s membership and principal terms of reference are set out in the
Directors’remuneration report on page 55.
Audit committee
The audit committee consists exclusively of independent, non-executive directors.
The committee was chaired by Peter Byrom until September 13, 2007 when he was
succeeded by John Rishton. John Rishton, who became a member of the committee
on his appointment to the Board on March 1, 2007, has recent and relevant financial
experience. In 2007, its other members were Iain Conn and Ian Strachan. The
committee met four times during the year. The Director of Risk, Head of Business
Assurance and a representative of the external auditors normally attend the
meetings. Additionally, the Head of Business Assurance has direct access to the
committee. The Chairman of the Board, the Chief Executive, the Finance Director and
any other Board member or senior executive may attend the meetings as necessary,
at the invitation of the audit committee chairman.
The committee has responsibility for recommending to the Board the
published accounts and for reviewing the Group’s financial reporting and accounting
policies, including major announcements made to a regulatory information service.
It is also responsible for the relationship with the external auditors and for assessing
the role and effectiveness of the internal audit function, which in Rolls-Royce is
termed Business Assurance. In addition, the committee reviews the Group’s
procedures for detecting, monitoring and managing the risk of fraud.
The committee has responsibility for recommending to the Board the
appointment of the external auditors and for reviewing the nature, scope and results
of the annual external audit. It also approves the audit fee and, on an annual basis,
assesses the effectiveness and independence of the external auditors. It keeps under
review the Group’s internal controls and systems for assessing and mitigating
financial and non-financial risk. It also reviews and approves the Business Assurance
work programmes and ensures that this function is adequately resourced and
co-ordinated with the work of the external auditors. Twice a year the committee
receives a written report on the reviews conducted throughout the Group by
Business Assurance, and a report from senior executives on the key business risks
and risk systems in selected sectors.
In order to safeguard auditor independence and objectivity, the following policy
is applied in relation to services provided by the auditors:
Audit related services – these are undertaken by the auditors as it is work that
they must, or are best suited to, perform. It includes formalities relating to borrowings,
shareholder and other circulars, risk management services, various regulatory reports
and work in respect of acquisitions and disposals;
Tax, accounting and mergers and acquisitions – the auditors are used for this work
where they are best suited to undertake it. All other significant consulting work in
these areas is put out to tender; and
All other advisory services/consulting – the auditors are generally prohibited from
providing these services.
Throughout the year the committee monitors the cost of non-audit work
undertaken by the auditors and is, therefore, in a position to take action if at any time
it believes that there is a risk of the auditors' independence being undermined
through the award of this work.
Nominations committee
In 2007, the nominations committee was chaired by Simon Robertson. Its other
members were Helen Alexander (from September 1, 2007), Peter Byrom, Iain Conn,
Professor Peter Gregson (from March 1, 2007), John Rishton (from March 1, 2007),
Sir John Rose, Ian Strachan, Carl Symon and Sir John Taylor (until May 1, 2007). The
committee met four times during the year.
The committee makes recommendations to the Board on the appointment of
executive and non-executive directors and on the membership of Board committees.
It is assisted in the former task by external recruitment consultants. It reviews
succession planning for appointments to the Board and to other senior positions
within the Group. The committee also oversees the annual review of Board
effectiveness.
In carrying out these tasks, the committee gives careful consideration to the
balance of skills required on the Board, including the need to reflect diversity,
international experience and strong managerial and business skills. Before
recommending the appointment of a non-executive director to the Board, the
Risk committee
committee satisfies itself that the candidate will have sufficient time available to
The Board has a risk committee, chaired by the Chief Executive, with specific
discharge his or her responsibilities effectively.
accountability for the system of risk management and for reporting key risks and
their associated mitigating actions to the Board. In 2007, its other members were
John Cheffins (until September 30, 2007), James Guyette, Andrew Shilston,
Colin Smith and Mike Terrett (from September 1, 2007).
Annual report 2007
53
Overview
Governance
Internal controls and risk management
Directors’ responsibilities
The directors are responsible for the Group’s system of internal control and for
maintaining and reviewing its effectiveness from both a financial and operational
perspective. The system of internal control is designed to manage, rather than
eliminate, the risk of failure to achieve business objectives and to provide reasonable
but not absolute assurance against material misstatement or loss. The Group’s
approach to internal control is based on the underlying principle of line
management’s accountability for control and risk management.
In reviewing the effectiveness of the system of internal control, the Board has
taken account of the results of the work carried out to audit and review the activities
of the Group.
There is an ongoing process to identify, assess and manage risk, including
those risks affecting the Group’s reputation. This process is subject to continuous
improvement and has been in place throughout the financial year to which these
statements apply and up to the date of their approval. In 2007, the risk review
framework has been enhanced at both programme and sector level and assurance
activities are more closely co-ordinated with the risk management process.
The Board has reviewed the risk management process and confirms that
ongoing processes and systems ensure that Rolls-Royce continues to be compliant
with the Turnbull guidance as contained in ‘Internal Control: Guidance for Directors
on the Combined Code’.
Systems of internal control
The general managers of individual businesses are aware of their responsibility to
operate systems of internal control which provide reasonable assurance of effective
and efficient operations, reliable financial information and compliance with laws and
regulations. Financial managers are required to acknowledge in writing that their
routine financial reporting is based on reliable data and that their results are properly
stated in accordance with Group requirements.
The Group has a comprehensive budgeting system with an annual budget
approved by the Board. Revised forecasts for the year are reported at least quarterly.
Actual results are reported monthly against budget and variances reviewed.
The activities of the Group are subject to review by the Department of Risk,
including Business Assurance and Product Introduction and Life Cycle Management,
and the assurance functions of Health, Safety and Environment, Quality and
Engineering. These functions operate to work programmes agreed by the
appropriate Board member.
The Business Assurance function, which works closely with the external auditors,
undertakes a programme of financial and operational audits and reviews agreed by
the audit committee and covering all Group activities. The programme includes
independent reviews of the systems of internal control and risk management. The
findings and the status of corrective actions taken to address these are reported in
writing to both the audit and risk committees twice a year.
Export controls
The Group attaches the highest priority to complying fully with export controls in all
Organisation
the jurisdictions in which it operates. Detailed processes have been put in place to
The Group has a clearly defined organisation structure within which operational
ensure that the Group follows all applicable legal and regulatory requirements. The
management has detailed responsibilities and levels of authorisation, supported by
Board has established an exports committee, chaired by the Chief Operating Officer,
written job descriptions and operating manuals.
which has responsibility for the application of appropriate controls to the Group's
export activity.
The risk management system
In the UK, the Group fully complies with the provisions of the UK Export Control
The risk management system is an integral part of management’s approach to
Act on both tangible and intangible exports and with the regulations relating to
delivering business objectives and is a systematic process designed to identify, assess, trade, between third parties outside the UK. Additionally, the Group complies with
treat, manage and communicate risks. It also provides a method of escalation and
the relevant EU regulations regarding the export of dual use goods and technology.
delegation to the appropriate level within the organisation and ensures that actions In relation to other jurisdictions, most notably that of the US, the Group vigorously
are owned, defined, resourced and effective.
enforces a policy of compliance with both the relevant national legislation and its
Management is responsible for the ongoing identification and evaluation of
underlying regulatory intent.
significant risks within its areas of responsibility and, using a common process, for the
operation of suitable controls or mitigation actions. Risks are recorded in regularly
Ethics
updated risk registers operating at all levels of the organisation and are continuously The Board believes strongly that the Group’s business should be conducted in a way
reviewed and monitored. During the review process, significant emphasis is placed
that reflects the highest ethical standards.
on learning from and sharing prior experience. Risks may arise from a variety of
Rolls-Royce has a Global Code of Business Ethics which lays down the principles
internal and external sources. They may be associated with regulations, customer
to be followed by employees when conducting business. The code also gives
requirements and competitor actions, or could result from the capability of the
guidance to support achievement of the required standards. Additionally,
processes used to execute the business, or from external and largely unpredictable
confidential reporting lines enable UK and US employees to report, outside the
events, such as terrorist activity or war. The principal risks and uncertainties for the
normal management chain, any concerns they may have with regard to business
Group are shown on pages 22 and 23.
conduct.
Risks, irrespective of source, are managed through processes operated by
project and functional teams. Management reports regularly to the risk committee
on its view of risks and how they are managed so that the Board can then consider
and review these risks in terms of their potential impact.
Management has continued to perform comprehensive risk reviews for all key
projects, programmes and business change plans. In addition, all the processes
operated by the Group are subject to continuous improvement, including the risk
management process itself.
Annual report 2007
54
Overview
Governance
Corporate governance continued
Communication with shareholders
The Company attaches importance to the effectiveness of its communications with
shareholders. It publishes an Annual review and summary financial statement as well
as a full Annual report. There are also separate reports covering the environment and
community relations.
The Company maintains a regular dialogue with institutional shareholders and
the financial community. This includes presentations of the preliminary and interim
results, regular meetings with major shareholders, participation in stockbrokers’
seminars and site visits.
Each year the Group holds an investors’seminar, in order to improve the
financial community’s understanding of the Group and to introduce investors to a
broader range of management. All shareholders can gain access to these and other
presentations, as well as to the Annual report and other information about the Group,
on the Group’s website at www.rolls-royce.com
Holders of ordinary shares may attend the Company’s AGM at which the
Company highlights key business developments during the year and at which
shareholders have an opportunity to ask questions. The chairmen of the audit,
remuneration and nominations committees are available to answer any questions
from shareholders on the work of their committees.
The Company confirms that it sends the AGM notice and relevant
documentation to all shareholders at least 20 working days before the date of the
AGM. For those shareholders who have elected to receive communications
electronically, notice is given by email of the availability of documents on the Group’s
website. Amendments proposed to be made to the Company’s Articles of
Association at the AGM would permit the Company to take advantage of new
provisions contained in the Companies Act 2006 relating to website and electronic
communications. Further details are set out in the explanatory notes to the
resolutions contained in the Notice of AGM.
Responsibility for maintaining regular communications with shareholders rests
with the executive management team led by the Chief Executive. However, the
Board is informed on a regular basis of key shareholder issues, including share price
performance, the composition of the shareholder register and City expectations.
Independent research is commissioned annually into institutional shareholder
perceptions of the Group. The Chairman, the Senior Independent Director and the
non-executive directors make themselves available to meet with shareholders
as required.
Statement of directors’ responsibilities in respect of the Annual report
and the financial statements
The directors are responsible for preparing the Annual report and the Group and
parent company financial statements, in accordance with applicable law and
regulations.
Company law requires the directors to prepare Group and parent company
financial statements for each financial year. Under that law the directors are required
to prepare the Group financial statements in accordance with International Financial
Reporting Standards (IFRS) as adopted by the EU and have elected to prepare the
parent company financial statements in accordance with UK Accounting Standards.
The Group financial statements are required by law and IFRS as adopted by the
EU to present fairly the financial position and performance of the Group; the
Companies Act 1985 (the ‘Act’) provides in relation to such financial statements that
references in the relevant part of the Act to financial statements giving a true and fair
view are references to their achieving a fair presentation.
The parent company financial statements are required by law to give a true and
fair view of the state of affairs of the parent company.
In preparing each of the Group and parent company financial statements, the
directors are required to:
− select suitable accounting policies and then apply them consistently;
− make judgements and estimates that are reasonable and prudent;
− for the Group financial statements, state whether they have been prepared in
accordance with IFRS as adopted by the EU;
− for the parent company financial statements, state whether applicable UK
Accounting Standards have been followed, subject to any material departures
disclosed and explained in the parent company financial statements; and
− prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Group and the parent company will
continue in business.
The directors are responsible for keeping proper accounting records that disclose
with reasonable accuracy at any time the financial position of the parent company
and enable them to ensure that its financial statements comply with the Act. They
have general responsibility for taking such steps as are reasonably open to them to
safeguard the assets of the Group and to prevent and detect fraud and other
irregularities.
Under applicable law and regulations, the directors are also responsible for
preparing a Report of the directors, Directors’remuneration report and Corporate
governance statement that comply with that law and those regulations. The directors
are responsible for the maintenance and integrity of the corporate and financial
information included on the Group’s website. Legislation in the UK governing the
preparation and dissemination of financial statements may differ from legislation in
other jurisdictions.
Disclosure of information to auditors
Each of the persons who is a director at the date of approval of this report confirms
that:
i)
so far as the director is aware, there is no relevant information of which the
Company’s auditors are unaware.
ii) the director has taken all steps that he/she ought to have taken as a director in
order to make himself/herself aware of any relevant audit information and to
establish that the Company’s auditors are aware of that information.
This confirmation is given and should be interpreted in accordance with the
provisions of Section 234ZA of the Act.
Annual report 2007
55
Overview
Governance
Information not subject to audit
Directors’remuneration report
Introduction
This report to shareholders covers:
− the policy under which the executive directors, the Chairman and the
non-executive directors are remunerated; and
− details of the remuneration, fees and share interests of the directors.
It provides the information required by the Directors’Remuneration Report
Regulations 2002 (the Regulations) and describes how the Company applies the
principles of the Combined Code in relation to executive directors’remuneration. The
Company confirms that it complies with the requirements of the Combined Code.
The report was approved by the remuneration committee (the committee)
on February 5, 2008 and was signed on the Board’s behalf by Carl Symon as the
Chairman of the committee. A resolution will be put to shareholders at the AGM on
May 7, 2008 inviting them to approve this report.
The remuneration committee
The committee has responsibility for making recommendations to the Board on the
Group’s policy regarding executive remuneration. The committee determines, on the
Board’s behalf, the specific remuneration packages of the executive directors and a
number of senior executives. It also makes recommendations to the Board on the
remuneration of the Chairman. A copy of the committee’s terms of reference is
available in the Investors section on the Group’s website at www.rolls-royce.com
The committee consists exclusively of independent, non-executive directors.
During 2007, it was chaired by Carl Symon and its other members were Peter Byrom,
Sir John Taylor (until May 1, 2007), Professor Peter Gregson (from March 1, 2007) and
Helen Alexander (from September 1, 2007). Carl Symon will retire from the Board at
the conclusion of the AGM. He will be succeeded as chairman of the remuneration
committee by Helen Alexander.
In 2007, Simon Robertson, Chairman, Sir John Rose, Chief Executive, the
Director – Human Resources and the Company Secretary, attended meetings by
invitation of the committee but were not present during any discussion of their own
emoluments.
The committee met on four occasions in 2007 and details of members’
attendance are set out in the table on page 52.
Advice to the remuneration committee
The committee may call for information and advice from advisers inside and outside
the Group. In 2007, Simon Robertson and Sir John Rose made recommendations to
the committee relating to the performance of their direct reports. Internal support to
the committee was provided primarily by the Director – Human Resources, advised
by Deloitte & Touche LLP. Additional advice was provided by senior employees from
human resources and finance.
The committee received advice on remuneration matters from Deloitte &
Touche LLP, Kepler Associates and the Company’s lawyers, Freshfields Bruckhaus
Deringer. During 2007, Deloitte & Touche LLP also advised the Group on tax,
assurance, pensions and corporate finance and Deloitte MCS Limited provided
consulting services.
−
the system of remuneration should establish a close identity of interest
between senior executives and shareholders through measures such as
encouraging the senior executives to acquire a significant shareholding in
the Company.
When determining remuneration, the committee takes into account pay and
employment conditions elsewhere in the Group.
The committee regularly reviews both the competitiveness of the Group’s
remuneration structure and its effectiveness in incentivising executives to enhance
value for shareholders over the longer term. It considers that a successful
remuneration policy needs to be sufficiently flexible to take account of future
changes in the Group’s business environment and in remuneration practice.
Accordingly the committee commissioned studies from Deloitte & Touche LLP and
Kepler Associates during 2007 to assess the competitiveness of the remuneration for
senior executives, and to ensure the performance measures and target setting within
the annual and long-term incentive plans effectively incentivise senior executives to
achieve the Group’s strategic objectives.
The main components of remuneration
The main components of remuneration comprise base salary, annual incentive
arrangements, long-term share-based incentives and pension and life assurance
benefits. Executive directors and senior executives are also entitled to a company car
or car allowance, private medical insurance, financial counselling and, in the case of
James Guyette, a housing allowance.
The committee considers that there should be a continuing emphasis on those
elements of remuneration, such as annual and long-term incentives, which directly
influence the performance of senior executives.
Base salaries
In determining the relative importance of these elements of remuneration, the
committee believes that base salaries should be set at levels required to recruit and
retain high quality senior executives.
The committee believes that base salaries should be set with reference to the
levels in the relevant marketplace for companies of a similar size and complexity. All
salary increases must be justified on the basis of performance and are not automatic.
Other benefits are generally at the median of market practice.
Annual incentives
Executive directors and selected senior executives participate in the Annual
Performance Related Award plan (APRA). For UK participants, APRA awards do not
form part of pensionable earnings.
Target and maximum APRA bonus opportunity
Under APRA as operated in 2007, executive directors were eligible for awards in
accordance with the table below:
Target bonus
(as a % of salary) 1
2
Remuneration policy
The policy framework
The Group operates in a highly competitive, international market. Its business is
complex, technologically advanced and has long time horizons. The Group is
committed to achieving sustained improvements in performance and this depends
crucially on the individual contributions made by the executive team and by
employees at all levels. The Board therefore believes that an effective remuneration
strategy plays an essential part in the future success of the Group.
Accordingly the Board has adopted, on the recommendation of the committee,
a remuneration policy reflecting the following broad principles which it will continue
to apply in 2008:
− the remuneration of executive directors and other senior executives should
reflect their responsibilities and contain incentives to deliver the Group’s
performance objectives; it must also be capable of attracting and retaining the
individuals necessary for business success;
− a significant proportion of total remuneration should be based on Group and
individual performance, both in the short and long term; and
John Cheffins
James Guyette
Sir John Rose
Andrew Shilston
Colin Smith
Mike Terrett 3
1
2
3
48
48
60
48
48
48
Maximum bonus
(as a % of salary) 1
80
80
100
80
80
80
It is possible for a bonus award to be increased by a further 20 per cent to reflect exceptional personal
performance.
John Cheffins retired as an executive director with effect from September 30, 2007. Until the
date of his retirement from the Board his maximum bonus award was 80 per cent. Following his
retirement he was no longer eligible for APRA.
Mike Terrett was appointed as an executive director with effect from September 1, 2007.
Annual report 2007
56
Overview
Governance
Directors’ remuneration report continued
APRA performance measures
The APRA performance measures set by the committee are based on the Group’s
annual operating plans. For 2007, the measures for executive directors included
underlying profit, average cash balance, cash flow and individual contribution
assessed with reference to the achievement of personal objectives and overall
personal performance. The committee is mindful of corporate, environmental,
social and governance risks when setting personal objectives. Forty per cent of any
APRA bonus depends on personal performance.
A high proportion of the annual remuneration for executive directors is based
on performance. For the Chief Executive, his 120 per cent maximum bonus
opportunity means that 55 per cent of his combined basic pay and bonus
opportunity is directly related to annual financial and personal performance. In 2007,
the level of achievement against the financial measures was sufficient to generate
up to 60 per cent of the maximum bonus for individual participants subject to the
achievement of their personal objectives.
In 2008, there will be an additional performance measure designed to
incentivise reductions in operating costs.
Deferred APRA award
One third of the value of APRA is delivered in the form of a deferred award in the
Company's shares. A participant who is granted a deferred share award under APRA
must normally continue to remain an employee of the Group for two years from the
date of the award in order to retain the full number of shares, although shares will be
released early in certain circumstances including retirement or redundancy.
The value of any deferred share awards is derived from the annual bonus criteria
and is therefore dependent on personal and business financial performance; the
release of deferred share awards is not dependent on the achievement of any further
performance conditions. The deferred share element operated for 2007 will result in
share awards as described in the directors’emoluments table on page 58. The
committee intends to maintain the deferred share element in respect of 2008.
This arrangement provides a strong link between performance and remuneration,
promotes a culture of share ownership amongst the Group’s senior management
and encourages decisions in the long-term interest of shareholders.
Other annual incentives
The same targets as set for APRA are used for the All-Employee Bonus Scheme, which
typically enables all employees worldwide to receive a bonus of up to two weeks’
pay, based on corporate and business performance. Those executives participating in
APRA are excluded from the All-Employee Bonus Scheme.
Rolls-Royce Group plc Performance Share Plan
The Rolls-Royce Group plc Performance Share Plan (PSP) is designed to reward and
incentivise selected senior executives who can influence the long-term performance
of the Group.
Under the rules of the PSP selected executives are granted conditional share
awards entitling them to a number of shares determined by reference to corporate
performance over a three-year performance period. The measures of corporate
performance are cash generation, earnings and total shareholder return. These
measures are considered particularly important in generating shareholder value and
are explained in more detail below. There is no retesting of the performance criteria
and no automatic vesting in the event of a takeover. In the three-year period to
December 31, 2007 the Company’s financial and Total Shareholder Return (TSR)
performance generated the maximum number of shares under the rules of the plan.
PSP award levels
The size of awards under the PSP are set taking into account competitive levels
within the marketplace for UK companies of a similar size and complexity to the
Group. In 2007, Sir John Rose received a conditional award of shares with a market
value at the time of grant of 110 per cent of his annual salary. For other executive
directors and business heads the grant was 80 per cent, and 65 per cent for other
members of the Group Executive. The rules of the PSP permit grants of up to 200 per
cent of annual salary. As described below, it is possible for the number of shares
under an award to be increased by a further 25 per cent based on TSR performance.
Performance measures
No shares will be released from the PSP unless the growth in the Company’s Earnings
Per Ordinary Share (EPS) exceeds the UK retail price index by three per cent per year
over the performance period.
The number of shares released (if any) will be determined in accordance with
Cash Flow Per Share (CPS) targets, which will not be adjusted for inflation. CPS is
calculated as cash flow after interest, taxation and capital expenditure, but before cost
of business acquisitions or proceeds of disposals and payments to shareholders,
divided by the weighted average number of shares in issue. Additionally, the
committee agreed to adjust the CPS targets for the Company’s one-off £500 million
pension contribution paid in 2007. Intermediate levels of performance attract pro
rata releases. The Company’s TSR over the performance period will be compared with
the TSR of the companies constituting the FTSE 100 index on the date of grant. This
comparison will be carried out by an external independent agency. If the Company’s
TSR exceeds the median of that group of companies, the number of shares due to be
released to an executive following achievement of the EPS and CPS targets will be
increased by 25 per cent.
Shareholders have authorised the committee to set CPS performance targets
for future grants provided that, in the committee’s reasonable judgement, the targets
are no less challenging in the light of the Group’s business circumstances and its
internal forecasts than the targets for the initial grant in 2004 as approved by
shareholders.
The following CPS targets will apply to the grants to be made in 2008:
Aggregate CPS over
three-year performance period
Percentage of
maximum award released
57p
75p
30
100
The committee believes that these CPS targets are challenging and that the
performance necessary to achieve awards towards the upper end of the range is
stretching. They should not, therefore, be interpreted as providing guidance on the
Group’s performance over the relevant period.
Share retention policy
The committee requires participants in the PSP to retain at least one half of the
number of after tax shares released from the PSP, until their shareholding reaches the
level of 1.5 multiplied by the value of the shares conditionally granted to them in
their most recent PSP grant. When this level is reached, it must be retained until
retirement.
Executive share option plan
Following the introduction of the PSP, share options have not been granted and the
Company does not currently intend to make further grants under this plan.
All-employee share plans
The committee believes that share-based plans make a significant contribution to
the close involvement and interest of all employees in the Group’s performance.
Executive directors are eligible to participate in the Group’s all-employee share plans
on the same terms as other employees. There are three main elements to these
arrangements:
i)
the ShareSave Plan – a savings-related share option plan available to all
employees. In the UK, this plan operates within UK tax legislation (including a
requirement to finance the exercise of the option using the proceeds of a
monthly savings contract) but the key principles are applied globally. The
exercise of the option is not subject to the achievement of a performance
target;
ii) the ‘Free Share’element of the Share Incentive Plan, under which UK employees
receive shares of up to the equivalent of one and a half weeks’pay as part of the
Company component of any bonus paid for 2007; and
iii) the ‘Partnership Share’element of the Share Incentive Plan under which UK
employees may make regular purchases of shares from pre-tax income.
Annual report 2007
57
Overview
Governance
Service contracts
The committee’s policy is that executive directors appointed to the Board are
offered notice periods of 12 months. The committee recognises that in the case of
appointments to the Board from outside the Group, it may be necessary to offer a
longer initial notice period, which would subsequently reduce to 12 months after
that initial period.
The committee has a defined policy on compensation and mitigation to be
applied in the event of a UK director’s contract being prematurely terminated. In
these circumstances, steps are taken to ensure that poor performance is not
rewarded. When calculating termination payments, the committee takes into
account a range of factors including the director’s obligation to mitigate his or her
own loss.
The following table summarises the terms of the executive directors’service
contracts:
James Guyette
Sir John Rose
Andrew Shilston
Colin Smith
Mike Terrett
1
2
29 September 1997
4 December 1992
5 November 2002
1 July 2005
1 September 2007
Unexpired term
Indefinite
12 months
12 months
12 months
12 months
Notice period
Company
1
30 days
12 months 2
12 months
12 months
12 months
Notice period
individual
30 days
6 months
6 months
6 months
6 months
Performance graph
The Company’s Total Shareholder Return performance over the previous five years
compared to a broad equity market index is shown in the graph below. The FTSE 100
has been chosen as the comparator index because it contains a broad range of other
leading UK listed companies.
James Guyette has a contract with Rolls-Royce North America Inc, drawn up under the laws of
the State of Virginia, US. It provides that, on termination without cause, he is entitled to
12 months’severance pay without mitigation and, in addition, appropriate relocation costs.
In the event of the service contract being terminated by the Company, other than in
accordance with the contract’s terms, Sir John Rose is entitled to receive a liquidated sum of
12 months’salary and benefits. Performance related payments are not covered under this
arrangement, although an annual bonus may be paid if he is in post at the end of the
performance year.
Executive directors’ directorships of other companies
James Guyette was a director of the Private Bank and Trust Company of Chicago,
Illinois and of priceline.com Inc. and Andrew Shilston was a non-executive director of
Cairn Energy PLC.
In each case, the director retained the relevant fees from serving on the boards
of these companies, as shown in the table below:
External directorship fees
Payment received
£000
James Guyette 1, 2
Andrew Shilston
1
2
James Guyette was paid in US dollars translated at $2.001 = £1.
In addition to his annual fees, James Guyette was granted 3,000 stock options in Private Bank at
an option price of US$33.73 per share and 2,000 shares of restricted stock in priceline.com.
During 2007, 500 shares of restricted stock at US$43.17 per share and 500 shares of restricted
stock at US$61.57 per share vested in priceline.com.
Non-executive directors
The Chairman and the non-executive directors have letters of appointment rather
than service contracts. No compensation is payable to the Chairman or to any
non-executive director if their appointment is terminated early.
44
50
700
Rolls-Royce
FTSE 100
600
Total Shareholder Return (index)
Date of contract
Non-executive directors’ fees
The Board takes account of independent market surveys in determining the fees
payable to the Chairman and the non-executive directors. The committee makes
recommendations to the Board on the remuneration of the Chairman. The fees paid
to the Chairman and non-executive directors are shown in the emoluments table.
In 2007, each non-executive director received an annual fee of £55,000 covering
his or her membership of the Board and of Board committees. The audit committee
chairman and the remuneration committee chairman received additional fees of
£15,000 and £12,000 per annum respectively. The Senior Independent Director
received an additional fee of £10,000 per annum for carrying out this role.
The Board will be proposing a resolution at the AGM to increase the maximum
ceiling on the total remuneration payable to all the non-executive directors and
non-executive Chairman from £850,000 to £950,000. The proposed increase in limit
will provide further headroom for the potential recruitment of additional
non-executive directors.
The Chairman and the non-executive directors are not eligible to participate in
any of the Group’s share schemes, incentive arrangements or pension schemes. A
facility is in place which enables non-executive directors to use some or all of their
fees, after the appropriate statutory deductions, to make market purchases of shares
in the Company on a monthly basis.
500
400
300
200
100
12/2002
12/2003
12/2004
12/2005
12/2006
12/2007
Annual report 2007
58
Overview
Governance
Information subject to audit
Individual directors’ emoluments and compensation
The individual directors’emoluments are analysed as follows:
2007
Annual Performance Related Award plan (APRA)
John Cheffins 5
James Guyette 6
Sir John Rose
Andrew Shilston
Colin Smith
Mike Terrett 7
Helen Alexander 8
Peter Byrom
Iain Conn
Professor Peter Gregson 9
John Rishton 10
Simon Robertson
Ian Strachan
Carl Symon
Sir John Taylor 11
Former directors who did not serve
during the 2007 financial year
2006
Aggregate
Aggregate
emoluments
emoluments
excluding
excluding
Taxable
pensions
pensions
3
4
benefits contributions contributions 4
£000
£000
£000
Basic
salaries
£000
Board and
committee
fees
£000
Cash
bonus
£000
381
371
786
502
363
153
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
18
71
57
46
50
330
54
66
18
99
112
306
179
106
131
—
—
—
—
—
—
—
—
—
50
56
153
89
53
66
—
—
—
—
—
—
—
—
—
149
168
459
268
159
197
—
—
—
—
—
—
—
—
—
95
—
—
—
91
38
—
—
—
—
—
—
—
—
—
18
33
17
14
9
7
—
—
—
—
—
—
—
—
—
643
572
1,262
784
622
395
18
71
57
46
50
330
54
66
18
883
727
1,362
832
605
—
—
70
50
—
—
330
50
62
50
—
2,556
—
710
—
933
—
467
—
1,400
—
224
—
98
—
4,988
201
5,222
Deferred
shares 1
£000
Total
APRA
£000
Pension
payments 2
£000
1
Shares forming part of the bonus under APRA have been valued at the date of award. An investment is expected to be made by March 31, 2008 when the trustee will acquire the required number of shares at
the prevailing market price.
2 John Cheffins, Colin Smith and Mike Terrett received cash allowances in lieu of future pension accrual.
3 Taxable benefits include the following: company car or car allowance, private medical insurance and financial counselling, and in the case of James Guyette, a housing allowance and appropriate club
membership fees.
4 Details of the directors’pensions are set out on page 59.
5 John Cheffins retired as an executive director with effect from September 30, 2007.
6 James Guyette was paid in US dollars translated at $2.001 = £1.
7 Mike Terrett was appointed as an executive director with effect from September 1, 2007. The emoluments shown in the table above are the amounts paid from his date of appointment to the Board.
8 Helen Alexander was appointed as a non-executive director with effect from September 1, 2007.
9 Professor Peter Gregson was appointed as a non-executive director with effect from March 1, 2007.
10 John Rishton was appointed as a non-executive director with effect from March 1, 2007.
11 Sir John Taylor retired as a non-executive director with effect from May 1, 2007.
Payments made to former directors of the Company
John Cheffins retired from the Board on September 30, 2007. Following his retirement, he has continued to be employed by the Company for one day per week to give
support and advice on the strategy and implementation of Rolls-Royce Fuel Cell Systems Limited, supply chain management, and the assembly and test facilities. He was
paid £25,800 and benefits totalling £6,083.
Dr Mike Howse retired from the Board on June 30, 2005. Following his retirement, he has continued to be employed by the Company for his expertise in engineering.
During the financial year he was paid £49,200 and benefits totalling £3,922.
Lord Moore of Lower Marsh retired as interim Chairman on December 31, 2004. He continued to chair the Trustees of the Rolls-Royce Pension Fund and the
Investment Sub-Committee of the Trustees and attended meetings of the Trustees’audit committee until his retirement on December 31, 2007. Lord Moore received an
annual fee of £40,000.
Sir Robin Nicholson retired as a non-executive director on May 4, 2005. He was retained by Rolls-Royce Fuel Cell Systems Limited for his management and technical
expertise, and to provide advice on business related matters. Sir Robin was paid total fees of £30,000.
Phil Ruffles retired from the Board on October 18, 2001. He was retained by Rolls-Royce Fuel Cell Systems Limited to give general advice on the best contacts and
direction for the business. Phil Ruffles received total fees of £6,350. It is expected that he will spend approximately five working days on this activity per year.
Annual report 2007
59
Overview
Governance
Pensions
Andrew Shilston is a member of the Group’s UK pension scheme. John Cheffins, Colin Smith and Mike Terrett have opted out of future pension accrual with effect from
April 1, 2006. Sir John Rose opted out of future pension accrual with effect from February 1, 2008, see note 7 below. The Group’s UK pension schemes are funded, registered
schemes and were approved under the regime applying until April 6, 2006. They are defined benefit pension schemes providing, at retirement, a pension of up to two thirds
of final remuneration, subject to HM Revenue & Customs limits.
Details of the pension benefits, which accrued over the year in the Group’s registered UK defined benefit pension schemes 1, are given below:
Increase in accrued
pension during the year
ended Dec 31, 2007 2
£000pa
John Cheffins 6,7
Sir John Rose 7
Andrew Shilston 8
Colin Smith 7
Mike Terrett 7,9
18
63
2
61
21
(3)
(45)
(2)
(56)
(14)
Transfer value
Total accrued
as at
pension
entitlement Transfer value Dec 31, 2006
at the
of accrued
of accrued
year ended pension as at
pension
Dec 31, 2007 3 Dec 31, 2007 4 at that date 4
£000pa
£000
£000
440
555
10
198
228
7,307
11,225
259
4,160
4,885
6,699
8,849
179
2,549
3,946
Increase in transfer value
over 2007 net of
the member’s
own contributions 5
£000
608
2,329
222
1,611
938
(77)
(1,300)
(193)
(1,173)
(301)
James Guyette participates in pension plans sponsored by Rolls-Royce North America Inc.
Details of the retirement benefits, which accrued over the year in the defined benefit plans sponsored by Rolls-Royce North America Inc., are given below:
Increase in accrued
retirement lump sum
during the year
ended Dec 31, 2007 2
£000pa
James Guyette 12, 13
1
76
(58)
Transfer value
Total accrued
as at
retirement Transfer value
of accrued Dec 31, 2006
lump sum
entitlement
retirement
of accrued
at the
lump sum
retirement
year ended
as at
lump sum
10
11
Dec 31, 2007 Dec 31, 2007
at that date 11
£000pa
£000
£000
447
447
372
Increase in transfer value
over 2007 net of
the member’s
own contributions 5
£000
360
(342)
Members of the schemes have the option to pay Additional Voluntary Contributions. Neither the contributions nor the resulting benefits are included in the above table.
The figure in brackets is the increase in pension/retirement lump sum during the year ended December 31, 2007 but in this case excluding the effect of inflation.
The pension entitlement shown is that which would be paid annually on retirement, based on service to the end of the year, or to April 1, 2006 for members with enhanced protection from ‘A’day.
4 The transfer values stated represent liabilities of the Rolls-Royce sponsored pension schemes and not sums paid to the individuals. The transfer values have been calculated on the basis of actuarial advice in
accordance with Actuarial Guidance Note GN11 (GN11). GN11 covers individual transfer calculations and the above figures have been calculated using assumptions certified by the Actuaries as being
consistent with GN11.
5 The figure in brackets is the transfer value of the increase in pension/retirement lump sum during the year ended December 31, 2007 excluding the effect of inflation, and net of the member’s own
contributions.
6 John Cheffins retired as an executive director with effect from September 30, 2007.
7 Sir John Rose started to receive his pension from February 1, 2008. John Cheffins received a cash allowance in lieu of pension accrual until he started to receive his pension on October 1, 2007. Sir John Rose
and John Cheffins are not accruing any further benefit or allowance in lieu of pension benefit from their ongoing employment with the Group. Colin Smith and Mike Terrett receive a cash allowance in lieu of
future pension accrual. Had they elected to continue to accrue pension the estimated cost of that accrual would be higher than the cash allowance to be paid in lieu.
8 The Group operates the Rolls-Royce Supplementary Retirement Scheme. The purpose of the Scheme is to fund pension provision above the pensionable earnings cap which was imposed on approved
pension schemes under the 1989 Finance Act. Membership of the Scheme is restricted to executive directors and to a limited number of senior executives. Andrew Shilston is a member of this Scheme.
He joined the Group after the introduction of the earnings cap and his terms and conditions on joining the Group included a commitment to provide pension and life cover based on total salary, in line with
other directors and senior executives. Employer contributions to the Scheme during 2007 have been added to the increase in transfer value over 2007 for the registered defined benefit plans, and are therefore
included in the figures shown in the right hand column of the first table.
9 Mike Terrett was appointed as an executive director with effect from September 1, 2007.
10 The lump sum entitlement shown is that which would be paid on immediate retirement based on service to the end of the year.
11 The transfer values have been calculated on the basis of actuarial advice.
12 Benefits are translated at US$1.991 = £1.
13 James Guyette is a member of two defined benefit plans in the US, one qualified and one non-qualified. He accrues a retirement lump sum benefit in both of these plans. The aggregate value of the
retirement lump sums accrued in these two plans, and the transfer values of these benefits, are shown in the second table. In addition, James Guyette is a member of two 401(K) Savings Plans in the US, one
qualified and one non-qualified, to which both he and his employer, Rolls-Royce North America Inc., contribute. James Guyette is also a member of an unfunded non-qualified deferred compensation plan in
the US, to which his employer makes notional contributions. Employer contributions to these three plans during 2007 have been added to the increase in transfer value over 2007 for the defined benefit plans,
and are therefore included in the figures shown in the right hand column of the second table.
2
3
Annual report 2007
60
Overview
Governance
Directors’ share interests
The directors and their immediate families had beneficial interests in the ordinary shares and B Shares 1 of the Company, as shown in the following table:
Ordinary shares
January 1,
2007 *
John Cheffins 2
James Guyette
Sir John Rose
Andrew Shilston
Colin Smith
Mike Terrett 3
Helen Alexander 4
Peter Byrom
Iain Conn
Professor Peter Gregson 5
John Rishton 6
Simon Robertson
Ian Strachan
Carl Symon
Sir John Taylor 7
373,461
375,621
612,420
157,915
45,909
293,786
—
150,179
5,931
—
—
26,701
11,500
6,911
5,208
Changes in December 31,
2007
2007 §
117,656
(120,469)
207,924
102,711
25,992
—
1,000
(3,210)
2,455
—
519
532
—
138
40
491,117
255,152
820,344
260,626
71,901
293,786
1,000
146,969
8,386
—
519
27,233
11,500
7,049
5,248
B Shares
January 1,
2007 *
—
—
—
—
—
—
—
—
20,687
—
—
—
—
—
—
2007
2007 §
—
—
—
—
—
—
—
—
7,817
—
—
—
—
—
—
—
—
—
—
—
—
—
—
28,504
—
—
—
—
—
—
* or date of appointment if later.
§ or date of retirement if earlier.
1
2
3
4
5
6
7
Non-cumulative redeemable convertible preference shares of 0.1p each.
John Cheffins retired as an executive director with effect from September 30, 2007.
Helen Alexander was appointed as a non-executive director with effect from September 1, 2007.
Professor Peter Gregson was appointed as a non-executive director with effect from March 1, 2007.
John Rishton was appointed as a non-executive director with effect from March 1, 2007.
Sir John Taylor retired as a non-executive director with effect from May 1, 2007.
On January 2, 2008, John Rishton received 15,028 B Shares. On January 3, 2008, pursuant to elections submitted, the following directors received ordinary shares in respect of the conversion of B Shares:
James Guyette 2,546; Andrew Shilston 1,904; Colin Smith 527; Mike Terrett 2,147; Peter Byrom 1,074; Iain Conn 59; Simon Robertson 198 and Carl Symon 52. Iain Conn, Professor Peter Gregson and John Rishton
purchased 186, 73 and 73 ordinary shares respectively on January 7, 2008 under arrangements made for non-executive directors to purchase shares on a monthly basis using a percentage of their after tax fees.
Otherwise there have been no changes in the directors' interests between December 31, 2007 and February 6, 2008.
Annual report 2007
61
Overview
Governance
Directors’ share interests continued
‘Partnership Shares’ held in trust under the Share Incentive Plan 1
Ordinary shares
January 1,
2007 *
Sir John Rose 2, 3
Andrew Shilston 2, 3
Colin Smith 2, 3
Mike Terrett 2, 3, 4
3,066
2,598
3,066
3,224
2007
2007 §
356
346
356
95
3,422
2,944
3,422
3,319
'Free Shares' held in trust under the Share Incentive Plan 5
Ordinary shares
January 1,
2007 *
John Cheffins 6
Sir John Rose 7
Andrew Shilston 7
Colin Smith 7
Mike Terrett 4, 7
7,098
6,465
4,303
1,718
1,395
2007
2007 §
741
128
686
634
—
7,839
6,593
4,989
2,352
1,395
1
2
3
4
5
6
7
Under the ‘Partnership Share’element of the Share Incentive Plan, shares may be withdrawn free of UK tax on the fifth anniversary of each monthly purchase.
On January 3, 2008, pursuant to elections submitted Sir John Rose, Andrew Shilston, Colin Smith and Mike Terrett received 24, 21, 24 and 23 ordinary shares respectively following the conversion of B Shares.
Sir John Rose, Andrew Shilston, Colin Smith and Mike Terrett purchased 25 ordinary shares each respectively on January 15, 2008 under the HM Revenue & Customs approved Share Incentive Plan.
Under the ‘Free Share’element of the Share Incentive Plan, shares may be withdrawn free of UK tax after five years.
On January 3, 2008, pursuant to elections submitted Sir John Rose, Andrew Shilston, Colin Smith and Mike Terrett received 48, 36,17 and 11 ordinary shares respectively following the conversion of B Shares.
Annual report 2007
62
Overview
Governance
Share options
The directors held the following options under the Rolls-Royce 1999 Executive Share Option Plan, all of which have vested and are capable of exercise unless otherwise
indicated, and the Rolls-Royce International ShareSave Plan.
All employees were eligible for options under the International ShareSave plan and the 1999 (seven year) and 2001 (five year) plans matured on February 1, 2007.
January 1,
2007 *
John Cheffins 3
James Guyette
Granted
in 2007
Lapsed
in 2007
Exercised December 31,
in 2007 §
2007 1§
15,444
694,445
709,889
15,444
694,445
709,889
716,641
1,397
716,641
718,038
683
683
716,641
Exercise
price
194p 2
216p 1
1,397
683
2,080
506.50p
541.00p
492.50p
1,018,519
7,662
1,026,181
216p 1
108p 4
Andrew Shilston
633,117
633,117
633,117
633,117
77p 2
Colin Smith
15,444
78,704
1,780
6,362
2,396
1,233
105,919
Mike Terrett 6
180,556
6,900
187,456
6,362
2,396
1,233
25,435
194p 2
216p 1
194p 4
142p 4
108p 4
298p 4
178p 5
180,556
6,900
187,456
216p 1
142p 4
213p 5
15,444
78,704
1,780
80,484
493.50p
493.50p
216p 1
298p 4
416p 4
337p 5
1,018,519
7,662
1,026,181
Sir John Rose
Market price
at date
exercised
Aggregate
gains 2007
£000 §
46
1,927
1,973
Aggregate
gains 2006
£000
Exercisable
dates
3,576
2,082
2009
2011
2,082
3,916
3,310
29
3,339
5,603
509.00p
2,735
2,735
506.50p
517.50p
229
6
2008-2010
2008-2009
2009
2011
235
895
2008-2011
2008-2009
1
2
3
4
5
6
Unless otherwise indicated all the above options were granted in 2001 under the Rolls-Royce 1999 Executive Share Option Plan with additional performance and personal shareholding requirements. Vesting
of these Supplementary options was subject to attainment of significant personal share holding targets and the requirement that the growth in EPS exceeded an average of six per cent year-on-year, as well as
exceeding the UK RPI by three per cent per year over a rolling three-year period. The increases were measured from the year 2000 or the base year of the rolling three-year period, whichever was the more
stringent. All options were granted at the market value on the date of issue and no discount was applied. No options were varied during the year and no consideration was paid for the grant of options.
The market price of the Company’s ordinary shares ranged between 443.75p and 570p during 2007. The closing price on December 31, 2007 was 546p.
Granted under the Rolls-Royce 1999 Executive Share Option Plan with the only performance criteria being the growth in EPS must exceed UK RPI by three per cent per annum over a rolling three-year period.
ShareSave plans.
Weighted average exercise price of December 31, 2007 balance.
Annual report 2007
63
Overview
Governance
Long-term incentive awards
The directors as at December 31, 2007 had the following share awards in the Annual Performance Related Award 1 plan:
January 1,
Vested
2007 * during 2007
John Cheffins 2
James Guyette
Sir John Rose
Andrew Shilston
Colin Smith
Mike Terrett 3
64,162
55,035
123,590
70,267
18,951
30,360
43,107
32,764
80,813
46,633
7,910
—
Granted December 31,
during 2007
2007 §
19,394
18,852
42,091
23,237
16,387
—
40,449
41,123
84,868
46,871
27,428
30,360
1
2
3
Under the Annual Performance Related Award plan (APRA), shares vest after two years. Shares went into trust in 2005, 2006 and 2007 at prices of 260.19p, 447.60p and 501.62p. At December 31, 2007, the
amounts stated in the emoluments table representing the 2007 APRA deferred shares had not yet been applied by the Trustee to purchase shares. An investment is expected to be made by March 31, 2008
when the trustee will acquire the required number of shares at the prevailing market price. The market value per share which vested under APRA during 2007 was 486p.
Annual report 2007
64
Overview
Governance
Long-term incentive awards continued
Conditional awards, granted under the Rolls-Royce Group plc Performance Share Plan (PSP) to executive directors are set out below. The number of shares released will be
dependent upon the achievement of the EPS and CPS targets over the three-year performance period and will be increased by 25 per cent if the Total Shareholder Return
exceeds the median for the FTSE 100 companies over the three-year performance period.
PSP
Granted
January 1,
2007 * during 2007
Total
TSR
uplift at
vested December 31,
vesting 1 during 2007
2007 §
Performance
period
Date
of grant
Market price
at date
of grant
John Cheffins 2
112,777
118,517
86,536
—
317,830
—
—
—
82,396
82,396
28,195
—
—
—
28,195
140,972
—
—
—
140,972
—
118,517
86,536
82,396
287,449
Jan 1, 2004 to Dec 31, 2006
Jan 1, 2005 to Dec 31, 2007
Jan 1, 2006 to Dec 31, 2008
Jan 1, 2007 to Dec 31, 2009
June, 8 2004
March 8, 2005
March 1, 2006
March 1, 2007
232.92p
261.58p
443.75p
501.00p
James Guyette
101,654
93,871
72,670
—
268,195
—
—
—
60,669
60,669
25,414
—
—
—
25,414
127,068
—
—
—
127,068
—
93,871
72,670
60,669
227,210
Jan 1, 2004 to Dec 31, 2006
Jan 1, 2005 to Dec 31, 2007
Jan 1, 2006 to Dec 31, 2008
Jan 1 2007 to Dec 31, 2009
June 8, 2004
March 8, 2005
March 1, 2006
March 1, 2007
232.92p
261.58p
443.75p
501.00p
Sir John Rose
270,640
263,782
177,240
—
711,662
—
—
—
175,649
175,649
67,660
—
—
—
67,660
338,300
—
—
—
338,300
—
263,782
177,240
175,649
616,671
Jan 1, 2004 to Dec 31, 2006
Jan 1, 2005 to Dec 31, 2007
Jan 1, 2006 to Dec 31, 2008
Jan 1, 2007 to Dec 31, 2009
June 8, 2004
March 8, 2005
March 1, 2006
March 1, 2007
232.92p
261.58p
443.75p
501.00p
Andrew Shilston
95,352
109,596
82,930
—
287,878
—
—
—
81,438
81,438
23,838
—
—
—
23,838
119,190
—
—
—
119,190
—
109,596
82,930
81,438
273,964
Jan 1, 2004 to Dec 31, 2006
Jan 1, 2005 to Dec 31, 2007
Jan 1, 2006 to Dec 31, 2008
Jan 1, 2007 to Dec 31, 2009
June 8, 2004
March 8, 2005
March 1, 2006
March 1, 2007
232.92p
261.58p
443.75p
501.00p
Colin Smith
24,043
22,403
54,085
—
100,531
—
—
—
59,881
59,881
6,011
—
—
—
6,011
30,054
—
—
—
30,054
—
22,403
54,085
59,881
136,369
Jan 1, 2004 to Dec 31, 2006
Jan 1, 2005 to Dec 31, 2007
Jan 1, 2006 to Dec 31, 2008
Jan 1, 2007 to Dec 31, 2009
June 8, 2004
March 8, 2005
March 1, 2006
March 1, 2007
232.92p
261.58p
443.75p
501.00p
Mike Terrett 3
83,179
60,638
61,693
205,510
—
—
—
—
—
—
—
—
—
—
—
—
83,179
60,638
61,693
205,510
Jan 1, 2005 to Dec 31, 2007
Jan 1, 2006 to Dec 31, 2008
Jan 1, 2007 to Dec 31, 2009
March 8, 2005
March 1, 2006
March 1, 2007
261.58p
443.75p
501.00p
1
2
3
Under the rules of the PSP, the number of shares vesting in 2007 was increased by 25 per cent as the Total Shareholder Return exceeded the median of the FTSE 100 companies during the three-year
performance period to December 31, 2006. The market value per share, which vested under the PSP during 2007, was 506p.
Approval of the Directors’ remuneration report
The Directors’remuneration report above was approved by the Board of directors on February 6, 2008.
Carl G Symon
Chairman of Remuneration committee
Annual report 2007
65
Governance
Overview
66
Consolidated financial statements
66
67
68
69
Consolidated statement of recognised income and expense
70
70
1 Significant accounting policies
74
2 Segmental analysis
78
3 Operating profit and profit before taxation
79
4 Net financing
79
5 Taxation
81
6 Earnings per ordinary share
81
7 Employee information
82
8 Intangible assets
83
9 Property, plant and equipment
84
10 Investments
85
11 Inventory
85
12 Trade and other receivables
85
13 Cash and cash equivalents
86
14 Borrowings
86
15 Trade and other payables
87
16 Financial instruments
99
17 Provisions
100 18 Post-retirement benefits
103 19 Share capital
104 20 Movements in capital and reserves
104 21 Share-based payments
108 22 Operating and finance leases
108 23 Contingent liabilities
109 24 Related party transactions
109 25 Acquisitions and disposals
110
Company financial statements
110 Reconciliation of movements in shareholders’funds
111 1 Accounting policies
111 2 Restatement to reflect UITF 41 and UITF 44
111 3 Investments – subsidiary undertakings
112 4 Financial liabilities
112 5 Share capital
113 6 Movements in capital and reserves
113 7 Contingent liabilities
113 8 Other information
117 Independent auditors’report
Annual report 2007
66
Overview
Governance
For the year ended December 31, 2007
Notes
Revenue
Cost of sales
Gross profit
Other operating income
Commercial and administrative costs
Research and development costs
Share of profit of joint ventures
Operating profit
(Loss)/profit on sale or termination of businesses
2
3
10
25
2
2007
£m
Restated*
2006
£m
7,435
(6,003)
1,432
50
(653)
(381)
66
514
(2)
512
7,156
(5,566)
1,590
57
(632)
(370)
47
692
1
693
Financing income
Financing costs
Net financing
4
4
718
(497)
221
1,196
(498)
698
Profit before taxation 1
Taxation
Profit for the year
3
5
733
(133)
600
1,391
(397)
994
20
606
(6)
600
998
(4)
994
6
6
33.67p
32.97p
57.32p
55.14p
16
(237)
(172)
2
800
705
Attributable to:
Equity holders of the parent
Minority interests
Earnings per ordinary share:
Basic
Diluted
Payments to shareholders in respect of the year
1
Underlying profit before taxation
* During the year the Group has reviewed the classification of costs. As a result, costs of £39m classified as commercial and administrative costs in 2006 have been reclassified as cost of sales.
Annual report 2007
67
Governance
Overview
At December 31, 2007
2007
£m
Restated*
2006
£m
8
9
10
10
5
18
1,761
1,813
284
57
81
210
4,206
1,460
1,706
240
51
141
22
3,620
11
12
2,203
2,585
7
514
40
1,897
7
7,253
11,459
1,845
2,465
5
644
34
2,185
—
7,178
10,798
(34)
(85)
(4,326)
(188)
(121)
(4,754)
(400)
(37)
(3,688)
(191)
(146)
(4,462)
Total liabilities
(1,030)
(303)
(965)
(345)
(180)
(333)
(3,156)
(7,910)
(990)
(336)
(827)
(252)
(189)
(1,017)
(3,611)
(8,073)
Net assets
3,549
2,725
364
67
191
77
62
2,776
3,537
12
3,549
356
43
197
177
(55)
2,000
2,718
7
2,725
Notes
ASSETS
Non-current assets
Intangible assets
Property, plant and equipment
Investments – joint ventures
Other investments
Deferred tax assets
Post-retirement scheme surpluses
Current assets
Inventory
Trade and other receivables
Taxation recoverable
Other financial assets
Short-term investments
Cash and cash equivalents
Assets held for sale
16
13
Total assets
LIABILITIES
Current liabilities
Borrowings
Other financial liabilities
Trade and other payables
Current tax liabilities
Provisions
14
16
15
17
Non-current liabilities
Borrowings
Other financial liabilities
Deferred tax liabilities
Provisions
Post-retirement scheme deficits
14
16
15
5
17
18
EQUITY
Capital and reserves
Called-up share capital
Share premium account
Capital redemption reserves
Transition hedging reserve
Other reserves
Retained earnings
Equity attributable to equity holders of the parent
Minority interests
Total equity
* See notes 11, 15 and 18.
The financial statements on pages 66 to 109 were approved by the Board on February 6, 2008 and signed on its behalf by:
Simon Robertson Chairman
Andrew Shilston Finance Director
19
20
20
20
20
20
20
Annual report 2007
68
Overview
Governance
Notes
Reconciliation of cash flows from operating activities
Profit before taxation
Loss/(profit) on sale or termination of businesses
Loss/(profit) on sale of property, plant and equipment
Net interest payable
Net post-retirement scheme financing
Net other financing
Taxation paid
Amortisation of intangible assets
Depreciation of property, plant and equipment
Decrease in provisions
Increase in inventories
Increase in trade and other receivables
Increase in trade and other payables
Decrease in other financial assets and liabilities
Additional cash funding of post-retirement schemes
Share-based payments charge
Transfers of hedge reserves to income statement
Dividends received from joint ventures
Net cash inflow from operating activities
Cash flows from investing activities
Additions of unlisted investments
Additions to intangible assets
Disposals of intangible assets
Purchases of property, plant and equipment
Disposals of property, plant and equipment
Acquisition of businesses
Disposals of businesses
Investments in joint ventures
Disposals of joint ventures
Net cash outflow from investing activities
Cash flows from financing activities
Borrowings due within one year – repayment of loans
Capital element of finance lease payments
Net cash outflow from decrease in borrowings
Interest received
Interest paid
Interest element of finance lease payments
(Increase)/decrease in government securities and corporate bonds
Issue of ordinary shares
Purchase of own shares
Other transactions in own shares
Redemption of B Shares
Net cash outflow from financing activities
(Decrease)/increase in cash and cash equivalents
Cash and cash equivalents at January 1
Foreign exchange
Net cash of businesses acquired/disposed
Cash and cash equivalents at December 31
* See notes 11 and 15.
10
25
4
4
4
8
9
21
16
10
25
25
2007
£m
Restated*
2006
£m
733
(66)
2
1
6
(30)
(197)
(71)
63
170
(42)
(359)
(128)
778
357
(441)
36
(149)
42
705
1,391
(47)
(1)
(9)
18
(3)
(713)
(25)
60
161
(36)
(226)
(397)
879
250
(21)
36
(289)
44
1,072
(5)
(294)
—
(304)
47
(6)
3
(13)
—
(572)
—
(219)
7
(298)
55
(5)
1
(11)
1
(469)
(350)
(5)
(355)
95
(93)
(3)
(6)
29
(77)
34
(97)
(473)
(53)
(8)
(61)
84
(96)
(2)
3
9
(44)
78
(93)
(122)
(340)
2,171
41
—
1,872
481
1,745
(60)
5
2,171
Annual report 2007
69
Governance
Overview
Reconciliation of increase in cash and cash equivalents to movements in net funds
(Decrease)/increase in cash and cash equivalents
Cash outflow/(inflow) from increase/(decrease) in government securities and corporate bonds
Net cash outflow from decrease in borrowings
Change in net funds resulting from cash flows
Net funds of businesses acquired
Exchange adjustments
Fair value adjustments
Movement in net funds
Net funds at January 1 excluding the fair value of swaps
Net funds at December 31 excluding the fair value of swaps
Fair value of swaps hedging fixed rate borrowings
Net funds at December 31
2007
£m
2006
£m
(340)
6
355
21
—
41
(18)
44
829
873
15
888
481
(3)
61
539
1
(49)
77
568
261
829
(3)
826
The movement in net funds (defined by the Group as including the items shown below) is as follows:
At
January 1,
2007
£m
Cash at bank and in hand
Overdrafts
Short-term deposits
Investments
Other borrowings due within one year
Borrowings due after one year
Finance leases
757
(14)
1,428
2,171
34
(379)
(983)
(14)
829
(3)
826
Exchange
Fair value
Cash flow adjustments adjustments
£m
£m
£m
465
(11)
(794)
(340)
6
350
—
5
21
43
—
(2)
41
—
—
—
—
41
21
41
—
—
—
—
—
27
(45)
—
(18)
18
—
At
Reclassi- December 31,
fications
2007
£m
£m
—
—
—
—
—
(2)
2
—
—
—
1,265
(25)
632
1,872
40
(4)
(1,026)
(9)
873
15
888
Consolidated statement of recognised income and expense
Notes
Foreign exchange translation differences from foreign operations
Net actuarial gains
Transfers from transition hedging reserve
Related tax movements
Change in rates of corporation tax
Net income recognised directly in equity
Total recognised income and expense for the year
Attributable to:
Minority interests
18
16
5
5
2007
£m
2006
£m
117
399
(149)
(86)
(9)
272
600
872
(75)
602
(289)
(91)
—
147
994
1,141
878
(6)
872
1,145
(4)
1,141
Annual report 2007
70
Overview
Governance
1 Significant accounting policies
Financial Statements if it is considered that the Group controls the entity. No such
entities were consolidated at December 31, 2007.
The Company
Sales of services are recognised by reference to the stage of completion based
Rolls-Royce Group plc (the ‘Company’) is a company domiciled in the United
on services performed to date. The assessment of the stage of completion is
Kingdom. The consolidated financial statements of the Company for the year ended dependent on the nature of the contract, but will generally be based on: costs
December 31, 2007 comprise the Company and its subsidiaries (together referred to incurred to the extent these relate to services performed up to the reporting date;
as the ‘Group’) and the Group’s interest in jointly controlled entities. The financial
achievement of contractual milestones where appropriate; or flying hours or
statements were authorised for issue by the directors on February 6, 2008.
equivalent for long-term aftermarket arrangements.
Linked sales of product and services are treated as a single contract where these
Basis of preparation and statement of compliance
components have been negotiated as a single commercial package and are so
In accordance with European Union (EU) regulations, these financial statements have closely interrelated that they do not operate independently of each other and are
been prepared in accordance with International Financial Reporting Standards (IFRS) considered to form a single project with an overall profit margin. Revenue is
issued by the International Accounting Standards Board (IASB), as adopted for use in recognised on the same basis as for other sales of products and services as described
the EU effective at December 31, 2007 (Adopted IFRS). The Company has elected to above.
prepare its parent company accounts under UK Generally Accepted Accounting
Provided that the outcome of construction contracts can be assessed with
Practices (GAAP).
reasonable certainty, the revenues and costs on such contracts are recognised based
The financial statements have been prepared on the historical cost basis except on stage of completion and the overall contract profitability.
where Adopted IFRS require an alternative treatment. The principal variations from
Full provision is made for any estimated losses to completion of contracts
the historical cost basis relate to pensions (IAS 19), monetary items (IAS 21), financial having regard to the overall substance of the arrangements.
instruments (IAS 39) and share-based payments (IFRS 2).
Progress payments received on long-term contracts, when greater than recorded
The Group’s significant accounting policies are set out below, together with the revenue are deducted from the value of work in progress except to the extent that
judgements made by management in applying these policies, which have the most payments on account exceed the value of work in progress on any contract where
significant effect on the amounts recognised in the financial statements, apart from
the excess is included in trade and other payables. The amount by which recorded
those involving estimations, which are dealt with separately below. These accounting revenue of long-term contracts is in excess of payments on account is classified as
policies have been applied consistently to all periods presented in these
‘amounts recoverable on contracts’and is separately disclosed within trade and other
consolidated financial statements and by all Group entities.
receivables.
Restatements to comparative figures are set out in notes 11, 15, and 18. Some
other small adjustments have been made to comparative figures to put them on a
Risk and revenue sharing partnerships (RRSPs)
consistent basis with the current year.
From time to time, the Group enters into arrangements with partners who, in return
for a share in future programme revenues or profits, make cash payments that are
Basis of consolidation
not refundable (except under certain remote circumstances). Cash sums received,
The Group financial statements include the financial statements of the Company and which reimburse the Group for past expenditure, are credited to other operating
all of its subsidiary undertakings made up to December 31, together with the Group’s income. The arrangements also require partners to undertake development work
share of the results of joint ventures up to December 31.
and/or supply components for use in the programme at their own expense. No
A subsidiary is an entity controlled by the Company. Control exists when the
accounting entries are recorded where partners undertake such development work
Company has the power, directly or indirectly to govern the financial and operating or where programme components are supplied by partners because no obligation
policies of the entity so as to derive benefits from its activities.
arises unless and until programme sales are made; instead, payments to partners for
A joint venture is an entity in which the Group holds a long-term interest and
their share in the programme are charged to cost of sales as programme revenues
which is jointly controlled by the Group and one or more other venturers under a
arise.
contractual arrangement. The results of joint ventures are accounted for using the
The Group has arrangements with partners who do not undertake
equity method of accounting.
development work or supply parts. Such arrangements are considered to be financial
Any subsidiary undertakings and joint ventures sold or acquired during the year instruments as defined by IAS 32 Financial Instruments: Presentation and are
are included up to, or from, the dates of change of control.
accounted for using the amortised cost method.
All intra-group transactions, balances, income and expenses are eliminated on
consolidation.
Government investment
Where a government or similar body invests in a development programme, the
Significant accounting policies and judgements applied
Group treats such receipts as the sale of an interest in the programme. Subsequent
payments are royalty payments and are matched to related sales.
Revenue recognition
Revenues comprise sales to outside customers after discounts, excluding value
Interest
added tax.
Interest receivable/payable is credited/charged to the income statement using the
Sales of products are recognised when the significant risks and rewards of
effective interest method. The Group does not capitalise any borrowing costs.
ownership of the goods are transferred to the customer, the sales price agreed and
the receipt of payment can be assured. On occasion, the Group may participate in
Taxation
the financing of engines in conjunction with airframe manufacturers. In such
The tax charge on the profit or loss for the year comprises current and deferred tax.
circumstances, the contingent obligations arising under these arrangements are
Current tax is the expected tax payable for the year, using tax rates enacted or
taken into account in assessing whether significant risk and rewards of ownership
substantively enacted at the balance sheet date, and any adjustment to tax payable
have been transferred to the customer. Where it is judged that sufficient risks and
in respect of previous years.
rewards are not transferred, the transaction is treated as a leasing transaction,
Deferred tax is provided using the balance sheet liability method, providing for
resulting in an operating lease between the Group and the customer. No deliveries of temporary differences between the carrying amounts of the assets and liabilities for
financial reporting purposes and the amounts used for taxation purposes.
engines were treated as operating leases during 2007. Depending on the specific
Deferred tax liabilities are recognised for taxable temporary differences arising
circumstances, where applicable, the financing arrangements may result in the
on investments in subsidiaries and joint ventures, except where the Group is able to
consolidation of the entity established to facilitate the financing. Such special
purpose entities will be consolidated as required by IAS 27 Consolidated and Separate control the reversal of the temporary difference and it is probable that the temporary
difference will not reverse in the foreseeable future. Deferred tax is not recognised on
Annual report 2007
71
Governance
Overview
taxable temporary differences arising on the initial recognition of goodwill or for
temporary differences arising from the initial recognition of assets and liabilities in a
transaction that is not a business combination and that affects neither accounting
nor taxable profit.
Deferred tax is calculated using the enacted or substantively enacted rates that
are expected to apply when the asset or liability is settled. Deferred tax is charged or
credited in the income statement or statement of recognised income and expense
as appropriate, except when it relates to items credited or charged directly to equity
in which case the deferred tax is also dealt with in equity.
Deferred tax assets are recognised only to the extent that it is probable that
future taxable profits will be available against which the assets can be utilised.
Segmental reporting
A segment is a distinguishable component of the Group that is engaged in providing
products and services. As the risks and rates of return are predominantly affected by
differences in these products and services, the primary format for reporting segment
information is based on business segments.
Foreign currency translation
Transactions in overseas currencies are translated into local currency at the exchange
rates ruling on the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are translated into local currency at the rate ruling
at the year-end. Exchange differences arising on foreign exchange transactions and
the retranslation of assets and liabilities into sterling at the rate ruling at the year-end
are taken into account in determining profit before taxation.
The trading results of overseas undertakings are translated at the average
exchange rates for the year. The assets and liabilities of overseas undertakings,
including goodwill and fair value adjustments arising on acquisition, are translated at
the exchange rates ruling at the year-end. Exchange adjustments arising from the
retranslation of the opening net investments, and from the translation of the profits
or losses at average rates, are taken to equity.
Financial instruments
IAS 39 Financial Instruments: Recognition and Measurement requires the classification
of financial instruments into separate categories for which the accounting
requirement is different. Rolls-Royce has classified its financial instruments as follows:
–
Fixed deposits, principally comprising funds held with banks and other financial
institutions and trade receivables, are classified as loans and receivables.
–
Investments (other than interests in joint ventures and fixed deposits) and
short-term deposits (other than fixed deposits) are classified as available for sale.
–
Borrowings, trade payables, financial RRSPs and B Shares are classified as other
liabilities.
–
Derivatives, comprising foreign exchange contracts, interest rate swaps and
commodity swaps are classified as held for trading.
Financial instruments are recognised at the contract date and initially measured at
fair value. Their subsequent measurement depends on their classification:
–
Loans and receivables and other liabilities are held at amortised cost and not
revalued unless they are included in a fair value hedge accounting relationship.
Where such a relationship exists, the instruments are revalued in respect of the
risk being hedged. If instruments held at amortised cost are hedged, generally
by interest rate swaps, and the hedges are effective, the carrying values are
adjusted for changes in fair value, which are included in the income statement.
–
Available for sale assets are held at fair value. Changes in fair value arising from
changes in exchange rates are included in the income statement. All other
changes in fair value are taken to equity. On disposal, the accumulated changes
in value recorded in equity are included in the gain or loss recorded in the
income statement.
–
Held for trading instruments are held at fair value. Changes in fair value are
included in the income statement unless the instrument is included in a cash
flow hedge. If the instruments are included in a cash flow hedging relationship,
which is effective, changes in value are taken to equity. When the hedged
forecast transaction occurs, amounts previously recorded in equity are
recognised in the income statement.
–
Foreign exchange gains and losses arising on transactions are recognised in the
income statement.
Financial instruments are derecognised on expiry or when all contractual rights and
obligations are transferred.
Hedge accounting
The Group does not apply hedge accounting in respect of forward foreign exchange
contracts held to manage the cash flow exposures of forecast transactions
denominated in foreign currencies.
The Group does not apply hedge accounting in respect of commodity swaps
held to manage the cash flow exposures of forecast transactions in those
commodities.
The Group applies hedge accounting in respect of transactions entered into to
manage the fair value and cash flow exposures of its borrowings. Forward foreign
exchange contracts are held to manage the fair value exposures of borrowings
denominated in foreign currencies and are designated as fair value hedges. Interest
rate swaps are held to manage the interest rate exposures and are designated as fair
value or cash flow hedges of fixed and floating rate borrowings respectively.
Changes in the fair values of derivatives designated as fair value hedges and
changes in fair value of the related hedged item are recognised directly in the
income statement.
Changes in the fair values of derivatives that are designated as cash flow hedges
and are effective are recognised directly in equity. Any ineffectiveness in the hedging
relationships is included in the income statement. The amounts deferred in equity
are recognised in the income statement to match the recognition of the hedged
item.
Hedge accounting is discontinued when the hedging instrument expires or is
sold, terminated, or exercised, or no longer qualifies for hedge accounting. At that
time, for cash flow hedges, any cumulative gain or loss on the hedging instrument
recognised in equity, is retained in equity until the forecast transaction occurs. If a
hedged transaction is no longer expected to occur, the net cumulative gain or loss
recognised in equity is transferred to the income statement.
The portion of a gain or loss on an instrument used to hedge a net investment
in a foreign operation that is determined to be an effective hedge is recognised
directly in equity. The ineffective portion is recognised immediately in the income
statement.
Until December 31, 2004, and as allowed by IFRS 1 First-time Adoption of
International Financial Reporting Standards, the Group applied hedge accounting for
forecast foreign exchange transactions and commodity exposures in accordance
with UK GAAP. On January 1, 2005, the fair values of derivatives used for hedging
these exposures were included in the transition hedging reserve. This reserve is
released to the income statement based on the designation of the hedges on
January 1, 2005.
Purchased goodwill
Goodwill represents the excess of the fair value of the purchase consideration for
shares in subsidiary undertakings and joint ventures over the fair value to the Group
of the net identifiable assets acquired.
i)
To December 31, 1997: Goodwill was written off to reserves in the year of
acquisition.
ii) From January 1, 1998: Goodwill was recognised within intangible assets in the
year in which it arose and amortised on a straight line basis over its useful
economic life, up to a maximum of 20 years.
iii) From January 1, 2004, in accordance with IFRS 3 Business Combinations,
goodwill is recognised as per (ii) above but is no longer amortised.
Certification costs and participation fees
Costs incurred in respect of meeting regulatory certification requirements for new
civil areo-engine/aircraft combinations and payments made to airframe
manufacturers for this, and participation fees, are carried forward in intangible assets
to the extent that they can be recovered out of future sales and are charged to the
income statement over the programme life, up to a maximum of 15 years from the
entry-into-service of the product.
Annual report 2007
72
Overview
Governance
Notes to the consolidated financial statements continued
In accordance with IAS 38 Intangible Assets, expenditure incurred on research and
development, excluding known recoverable amounts on contracts, and
contributions to shared engineering programmes, is distinguished as relating
either to a research phase or to a development phase.
All research phase expenditure is charged to the income statement. For
development expenditure, this is capitalised as an internally generated intangible
asset only if it meets strict criteria, relating in particular to technical feasibility and
generation of future economic benefits.
Expenditure that cannot be classified into these two categories is treated as
being incurred in the research phase. The Group considers that, due to the complex
nature of new equipment programmes, it is not possible to distinguish reliably
between research and development activities until relatively late in the programme.
Expenditure capitalised is amortised over its useful economic life, up to a
maximum of 15 years from the entry-into-service of the product.
ii)
As Lessor
Amounts receivable under finance leases are included within receivables and
represent the total amount outstanding under the lease agreements less
unearned income. Finance lease income, having been allocated to accounting
periods to give a constant periodic rate of return on the net investment, is
included in revenue.
Rentals receivable under operating leases are included in revenue on a
straight-line basis.
Impairment of non-current assets
Impairment of non-current assets is considered in accordance with IAS 36
Impairment of Assets. Where the asset does not generate cash flows that are
independent of other assets, impairment is considered for the cash-generating unit
to which the asset belongs.
Goodwill and intangible assets not yet available for use are tested for
impairment annually. Other intangible assets and property, plant and equipment are
Recoverable engine costs
assessed for any indications of impairment annually. If any indication of impairment
On occasion, the Group may sell original equipment to customers at a value below
is identified, an impairment test is performed to estimate the recoverable amount.
its cost, on the basis that this deficit will be recovered from future aftermarket sales to
Recoverable amount is the higher of value in use or fair value less costs to sell –
the original customer. Where the Group has a contractual right to supply aftermarket if this is readily available. The value in use is the present value of future cash flows
parts to the customer and its intellectual rights, warranty arrangements and statutory using a pre-tax discount rate that reflects the time value of money and the risk
airworthiness requirements provide reasonable control over this supply, these
specific to the asset.
arrangements are considered to meet the definition of an intangible asset. Such
If the recoverable amount of an asset (or cash-generating unit) is estimated to
intangible assets are recognised to the extent of the deficit and amortised on a
be below the carrying value, the carrying value is reduced to the recoverable amount
straight-line basis over the expected period of utilisation by the original customer,
and the impairment loss recognised as an expense.
generally a maximum of ten years unless the specific contractual circumstances
indicate a longer period.
Inventory
Inventory and work in progress are valued at the lower of cost and net realisable
Software
value on a first-in, first-out basis. Cost comprises direct materials and, where
The cost of acquiring software that is not specific to an item of property, plant and
applicable, direct labour costs and those overheads, including depreciation of
equipment is classified as an intangible asset and amortised over its useful economic property, plant and equipment, that have been incurred in bringing the inventories
life, up to a maximum of five years.
to their present location and condition. Net realisable value represents the estimated
selling prices less all estimated costs of completion and costs to be incurred in
marketing, selling and distribution.
Property, plant and equipment assets are stated at cost less accumulated
depreciation and any provision for impairments in value.
Depreciation is provided on a straight-line basis to write off the cost, less the
Cash and cash equivalents include cash at bank and in hand and short-term deposits
estimated residual value, of property, plant and equipment over their estimated
with a maturity of three months or less on inception. The Group considers overdrafts
useful lives. Estimated useful lives are as follows:
(repayable on demand) to be an integral part of its cash management activities and
i)
Land and buildings, as advised by the Group’s professional advisors:
these are included in cash and cash equivalents for the purposes of the cash flow
a)
Freehold buildings – five to 45 years (average 23 years)
statement.
b) Leasehold buildings – lower of advisors’estimates or period of lease
c)
No depreciation is provided on freehold land
Provisions
ii) Plant and equipment – five to 25 years (average 14 years)
Provisions are recognised when the Group has a present obligation as a result of a
iii) Aircraft and engines – five to 20 years (average 18 years)
past event, and it is probable that the Group will be required to settle that obligation.
iv) No depreciation is provided on assets in the course of construction
Provisions are measured at the directors’ best estimate of the expenditure required to
settle the obligation at the balance sheet date, and are discounted to present value
Leases
where the effect is material.
i)
As Lessee
Assets financed by leasing agreements that give rights approximating to
Post-retirement benefits
ownership (finance leases) have been capitalised at their fair value and
Pensions and similar benefits (principally healthcare) are accounted for under IAS 19
depreciation is provided on the basis of the Group depreciation policy. The
Employee Benefits. For defined benefit plans, obligations are measured at discounted
capital elements of future obligations under finance leases are included as
present value whilst plan assets are recorded at fair value. The service and financing
liabilities in the balance sheet and the current year’s interest element, having
costs of such plans are recognised separately in the income statement; current
been allocated to accounting periods to give a constant periodic rate of charge service costs are spread systematically over the lives of employees and financing
on the outstanding liability, is charged to the income statement. The annual
costs are recognised in the periods in which they arise. Actuarial gains and losses are
payments under all other lease arrangements, known as operating leases, are
recognised immediately in the statement of recognised income and expense.
charged to the income statement on a straight-line basis.
Surpluses in schemes are recognised as assets only if they represent
unconditional economic benefits available to the Group in the future. Movements in
unrecognised surpluses are included in the statement of recognised income and
expense.
Payments to defined contribution schemes are charged as an expense as they
fall due.
Annual report 2007
73
Governance
Overview
Share-based payments
The Group provides share-based payment arrangements to certain employees. These
are predominantly equity-settled arrangements and are measured at fair value
(excluding the effect of non-market based vesting conditions) at the date of grant.
The fair value is expensed on a straight-line basis over the vesting period. The
amount recognised as an expense is adjusted to reflect the actual number of shares
or options that will vest, except where additional shares vest as a result of the Total
Shareholder Return performance condition in the Performance Share Plan.
The fair values of the share-based payment arrangements are measured as follows:
i)
ShareSave plans – using the binomial pricing model
ii) Performance Share Plan – using a pricing model adjusted to reflect
non-entitlement to dividends (or equivalent) and the Total Shareholder Return
market-based performance condition
iii) Annual Performance Related Award plan deferred shares and free shares under
the Share Incentive Plan – share price on the date of the award
See note 21 for a further description of the share-based payment plans.
Contingent liabilities
In connection with the sale of its products, the Group will, on occasion, provide
financing support for its customers. These arrangements fall into two categories;
credit based guarantees and asset value guarantees. In accordance with the
requirements of IAS 39 Financial Instruments: Recognition and Measurement and
IFRS 4 Insurance Contracts, credit-based guarantees are treated as insurance contracts.
The Group considers asset value guarantees to be non-financial liabilities and
accordingly these are also treated as insurance contracts. Provision for insurance
liabilities is made as described above.
The Group’s contingent liabilities relating to financing arrangements are spread
over many years and relate to a number of customers and a broad product portfolio,
and are reported on a discounted basis.
Key sources of estimation uncertainty
In applying the above accounting policies, management has made appropriate
estimates in many areas, and the actual outcome may differ from those calculated.
The key sources of estimation uncertainty at the balance sheet date, that have a
significant risk of causing material adjustment to the carrying amounts of assets and
liabilities within the next financial year are:
Forecasts and discount rates
The carrying value of a number of items on the balance sheet are dependent on the
estimates of future cash flows arising from the Group’s operations:
–
The impairment tests for goodwill are dependent on forecasts of the cash flows
of the cash generating units that give rise to the goodwill and the discount rate
applied. No impairment resulted from the annual impairment tests in 2007
(carrying value at December 31, 2007 £801m, December 31, 2006 £735m).
–
If the assessment of development, participation, certification and recoverable
engine costs recognised as intangible assets indicates the possibility of
impairment, a detailed impairment test is undertaken. No impairment resulted
from the assessment in 2007 (carrying value at December 31, 2007 £880m,
December 31, 2006 £674m).
–
The financial liabilities arising from financial risk and revenue sharing
partnerships are valued at each reporting date using the amortised cost
method (carrying value at December 31, 2007 £315m, December 31, 2006
£324m). This involves calculating the present value of the forecast cash flows of
the arrangement using the internal rate of return at the inception of the
arrangement as the discount rate.
–
The realisation of the deferred tax assets (carrying value at December 31, 2007
£81m, December 31, 2006 £141m) recognised is dependent on the generation
of sufficient future taxable profits. The Group recognises deferred tax assets
where it is more likely than not that the benefit will be realised.
Assessment of long-term contractual arrangements
The Group has long-term contracts that fall into different accounting periods. In
assessing the allocation of revenues and costs to individual accounting periods, and
the consequential assets and liabilities, the Group estimates the total revenues and
costs forecast to arise in respect of the contract and the stage of completion based
on an appropriate measure of performance as described under revenue recognition
above.
Post-retirement benefits
The Group’s defined benefit pension schemes and similar arrangements are assessed
annually in accordance with IAS 19 Employee Benefits. The accounting valuation,
which was based on assumptions determined with independent actuarial advice,
resulted in a net deficit of £123m before deferred taxation being recognised on the
balance sheet at December 31, 2007 (December 31, 2006 £995m). The size of the net
deficit is sensitive to the market value of the assets held by the schemes and to
actuarial assumptions, which include price inflation, pension and salary increases, the
discount rate used in assessing actuarial liabilities, mortality and other demographic
assumptions and the levels of contributions. Further details are included in note 18.
Provisions
As described in the accounting policy above, the Group measures provisions
(carrying value at December 31, 2007 £301m, December 31, 2006 £335m) at the
directors’ best estimate of the expenditure required to settle the obligation at the
balance sheet date. These estimates are made, taking account of information
available and different possible outcomes.
Taxation
The tax payable on profits is determined based on tax laws and regulations that
apply in each of the numerous jurisdictions in which the Group operates. Where the
precise impact of these laws and regulations is unclear then reasonable estimates
may be used to determine the tax charge included in the financial statements. If the
tax eventually payable or reclaimable differs from the amounts originally estimated
then the difference will be charged or credited in the financial statements for the year
in which it is determined.
As described in note 23 the Group has significant long-term contingent obligations.
The directors consider that the possibility that there will be any significant loss arising
from these contingencies as remote. In reaching this opinion, the directors have
considered the likelihood of the contingency crystallising and have taken account of
forecast aircraft values that generally provide security against the contingent liability.
Revisions to IFRS not applicable in 2007
IAS 8 Operating Segments is applicable for 2009. This standard amends the
requirements for disclosure of segmental performance and will not have any effect
on the Group’s overall reported results.
IFRIC 12 Service Concession Arrangements is applicable for 2008, if endorsed for
adoption in the EU. If endorsed, the Group will adopt this interpretation in
accounting for its interest in the Future Strategic Tanker Aircraft contract with the
UK Ministry of Defence. There would be no effect on the 2007 reported results.
IFRIC 14 IAS 19 – The Limit of a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction is applicable for 2008 if it is endorsed for adoption
in the EU. If endorsed, it will provide additional guidance on the conditions under
which net post-retirement benefit assets may be recognised in the balance sheet. It
may also require additional liabilities to be recognised where minimum funding
requirements exist. The application of this interpretation to the Group is still being
assessed, but any changes to the net post-retirement position recognised would be
included in the statement of recognised income and expense and would not have
any effect on the income statement.
Amendment to IAS 23 Borrowing Costs is applicable for 2009 if it is endorsed for
adoption in the EU. If endorsed, the amendment generally eliminates the option to
expense borrowing costs attributable to the acquisition, construction or production
of qualifying asset as incurred, and instead requires the capitalisation of such
borrowing costs as part of the cost of the specific asset. The Group is currently
assessing the impact of the amendment on the results and net assets.
The Group does not consider that any other standards or interpretations issued
by the IASB, but not yet applicable, will have a significant impact on the financial
statements.
Annual report 2007
74
Overview
Governance
2
Segmental analysis
The Group operates in four segments which reflect the internal organisation and management structure according to the nature of the products and services provided:
Civil aerospace
Defence aerospace
Marine
Energy
–
–
–
–
development, manufacture, marketing and sales of commercial aero engines and aftermarket services.
development, manufacture, marketing and sales of military aero engines and aftermarket services.
development, manufacture, marketing and sales of marine propulsion systems and aftermarket services.
development, manufacture, marketing and sales of power systems for the offshore oil and gas industry, electrical power generation and
aftermarket services.
Details for these primary reporting segments are shown below:
Analysis by business segments for the year ended December 31, 2007
Revenue from sale of original equipment
Revenue from aftermarket services
Total revenue
Operating profit excluding share of profit of joint ventures
Loss on sale or termination of businesses
Profit/(loss) before financing and taxation
Financing income
Financing costs
Taxation
Other information
Segment assets
Cash and short-term investments
Income tax assets
Total assets
Segment liabilities
Borrowings
Income tax liabilities
Total liabilities
Expenditure on intangible assets and property, plant and equipment
Depreciation and amortisation
Civil
aerospace
£m
Defence
aerospace
£m
Marine
£m
1,417
2,301
3,718
263
45
—
308
782
854
1,636
159
11
—
170
996
546
1,542
90
1
—
91
251
288
539
(15)
9
(2)
(8)
—
—
—
(49)
—
—
(49)
718
(497)
(133)
—
—
—
—
—
—
—
3,446
3,989
7,435
448
66
(2)
512
718
(497)
(133)
600
6,032
214
992
34
1,693
5
642
31
—
—
1,937
42
88
210
(461)
—
(3,778)
(1,198)
(1,135)
(303)
—
(1,064)
(27)
(533)
(333)
461
8,898
284
1,937
42
88
210
11,459
(5,953)
(1,064)
(27)
(533)
(333)
(7,910)
479
164
73
28
33
21
15
20
Energy
£m
Central
items
£m
Eliminations
£m
Group
£m
600
233
Annual report 2007
75
Governance
Overview
2
Segmental analysis continued
Analysis by business segments for the year ended December 31, 2006 1
Revenue from sale of original equipment
Revenue from aftermarket services
Total revenue
Operating profit excluding share of profit of joint ventures
Profit on sale or termination of businesses
Profit/(loss) before financing and taxation
Financing income
Financing costs
Taxation
Other information
Segment assets
Cash and short-term investments
Income tax assets
Total assets
Segment liabilities
Borrowings
Income tax liabilities
Total liabilities
Expenditure on intangible assets and property, plant and equipment
Depreciation and amortisation
Impairments
1
Civil
aerospace
£m
Defence
aerospace
£m
Marine
£m
Energy
£m
1,543
2,232
3,775
442
36
1
479
733
836
1,569
181
5
—
186
812
488
1,300
102
1
—
103
267
245
512
(33)
5
—
(28)
5,427
184
945
24
1,395
4
(3,446)
(949)
437
162
(10)
52
30
—
Comparative information has been restated in line with the reclassifications made in the year (see notes 11, 15 and 18).
Central
items
£m
Eliminations
£m
Group
£m
—
—
—
(47)
—
—
(47)
1,196
(498)
(397)
—
—
—
—
—
—
—
3,355
3,801
7,156
645
47
1
693
1,196
(498)
(397)
994
641
28
—
—
2,219
27
146
22
(264)
—
(780)
(282)
—
(1,390)
(30)
(443)
(1,017)
264
8,144
240
2,219
27
146
22
10,798
(5,193)
(1,390)
(30)
(443)
(1,017)
(8,073)
24
20
—
15
19
—
528
231
(10)
Annual report 2007
76
Overview
Governance
2
Geographical segments
The Group’s revenue by destination is shown below:
United Kingdom
Rest of Europe
USA
Canada
Asia
Africa
Australasia
Other
2007
£m
2006
£m
1,185
1,478
2,232
274
1,785
108
137
236
7,435
944
1,159
2,458
207
1,902
78
146
262
7,156
The following analysis shows the carrying amounts of the Group’s assets, and additions to intangible assets and property, plant and equipment, by the geographical area in
which the assets are located:
Segment assets
2007
£m
United Kingdom
North America
Nordic countries
Germany
Other
Eliminations
* Comparative information has been restated in line with the reclassifications made in the year (see notes 11, 15 and 18).
7,737
1,465
1,280
645
394
(62)
11,459
Additions to intangible
assets and property,
plant and equipment
Restated*
2006
£m
2007
£m
2006
£m
7,776
1,284
1,083
604
331
(280)
10,798
517
39
18
20
6
—
600
467
22
15
19
5
—
528
Annual report 2007
77
Governance
Overview
2
Underlying performance
As discussed in the Finance Director’s review on page 41, the Group seeks to present a measure of underlying performance that excludes items considered to be
non-underlying in nature.
Underlying sales exclude the release of the foreign exchange transition hedging reserve and reflect the achieved US dollar exchange rate arising on settled derivative
contracts.
Underlying profit before financing includes amounts realised from settled derivative contracts (primarily relating to civil aerospace) and for 2007, excludes the £130m of
past service post-retirement costs.
In addition, underlying profit before taxation excludes the unrealised amounts arising from revaluations required by IAS 32 Financial Instruments: Presentation and
IAS 39 Financial Instruments: Recognition and Measurement and the net impact of financing costs related to post-retirement scheme benefits.
Underlying profit adjustments:
2006
2007
Profit before Profit before
financing
tax
£m
£m
Profit before
financing
£m
Profit before
tax
£m
Profit per consolidated income statement
512
733
693
1,391
Release of transition hedging reserve
Realised gains on settled derivative contracts
Net unrealised fair value changes to derivative contracts
Effect of currency on contract accounting
Revaluation of trading assets and liabilities
Financial RRSPs – foreign exchange differences and changes in forecast payments
Post-retirement schemes – past service costs 1
Total underlying adjustments
(149)
415
—
(76)
—
—
—
130
320
(149)
420
(251)
(76)
10
13
(30)
130
67
(289)
343
—
1
—
—
—
—
55
(289)
370
(730)
1
4
(39)
(3)
—
(686)
Underlying profit
832
800
748
705
1
As part of its ongoing discussions with the Trustees of its UK pension schemes, the Group agreed to reflect changes in HM Revenue & Customs practice and increase the size of the lump sum payment retirees
are able to receive by commuting part of the pension. Like many other employers, the Group has also increased the amount of the lump sum payment for the pension commuted. Updating the
commutation arrangements to reflect these factors increases the post-retirement liability by £100m.
The Group has also agreed a 2 per cent discretionary increase applicable to pensions that do not benefit from any guaranteed increase, which increases the liability by £30m.
The reconciliation of underlying earnings per ordinary share is provided in note 6.
Underlying profit reconciliation:
2007
Underlying
adjustments
£m
£m
Civil aerospace
Defence aerospace
Marine
Energy
Central items
Net financing
Taxation
Profit after taxation
308
170
91
(8)
(49)
512
221
733
(133)
600
256
29
22
13
—
320
(253)
67
(60)
7
Underlying
results
£m
564
199
113
5
(49)
832
(32)
800
(193)
607
2006
£m
Underlying
adjustments
£m
Underlying
results
£m
479
186
103
(28)
(47)
693
698
1,391
(397)
994
40
7
(2)
10
—
55
(741)
(686)
207
(479)
519
193
101
(18)
(47)
748
(43)
705
(190)
515
Annual report 2007
78
Overview
Governance
3
Operating profit and profit before taxation
After crediting
RRSP receipts – credited to other operating income
Operating lease rentals receivable – credited within revenue from aftermarket services
After charging
Amortisation of certification costs
Amortisation of development costs
Amortisation of recoverable engine costs
Amortisation of software and other intangible assets
Depreciation and impairment of owned property, plant and equipment 1
Depreciation of property, plant and equipment held under finance leases 1
Operating lease rentals payable – hire of plant and equipment
– hire of other assets
Research and development expenditure
RRSP payments – included in cost of sales
1
2007
£m
2006
£m
50
27
57
30
7
18
28
10
163
7
58
18
381
199
5
16
30
9
153
8
62
23
370
162
2007
£m
2006
£m
0.1
0.1
3.7
0.1
0.3
—
4.2
3.4
0.2
0.4
0.3
4.4
0.2
0.1
0.1
0.1
Including appropriate amounts charged to inventories
Fees payable to the Company’s auditors and its associates were as follows:
Fees payable to the Company’s auditors for the audit of the Company’s annual financial statements 2
Fees payable to the Company’s auditors and its associates for other services:
The audit of the Company’s subsidiaries pursuant to legislation
Other services pursuant to legislation
Other services relating to taxation
All other services
Fees payable in respect of the Group’s pension schemes:
Audit
Other services relating to taxation
2
The level of fees payable to the Company’s auditors for the audit of the Company’s annual financial statements reflects the fact that limited incremental work is required in respect of the audit of these financial
statements. Rolls-Royce plc, a subsidiary of the Company, is also required to prepare consolidated financial statements and the fees payable to the Company’s auditors for the audit of those financial
statements, including the audit of the sub-consolidation, is included in the audit of the Company’s subsidiaries pursuant to legislation.
The total fees payable to the Company’s auditors for the audit of the Company’s annual financial statements and for the audit of the Company’s subsidiaries pursuant to legislation amounts to
£3.8m (2006 £3.5m).
Annual report 2007
79
Governance
Overview
4
Net financing
2007
2006
£m
Underlying
financing
£m
£m
Underlying
financing
£m
83
215
—
36
384
—
718
83
—
—
—
—
—
83
82
696
39
34
343
2
1,196
82
—
—
—
—
2
84
Net financing
(89)
(13)
(26)
(354)
(15)
(497)
221
(89)
—
(26)
—
—
(115)
(32)
(100)
—
(27)
(340)
(31)
(498)
698
(100)
—
(27)
—
—
(127)
(43)
Analysed as:
Net interest payable
Net other financing
Net financing
(6)
30
197
221
(6)
—
(26)
(32)
(18)
3
713
698
(18)
—
(25)
(43)
251
—
730
—
Financing income
Interest receivable
Fair value gains on foreign currency contracts (note 16) 1
Fair value gains on commodity derivatives (note 16) 1
Expected return on post-retirement scheme assets (note 18)
Other financing income
Financing costs
Interest payable
Financial charge relating to financial RRSPs
Interest on post-retirement scheme liabilities (note 18)
Net foreign exchange losses
1
5
Net gain on items held for trading
Taxation
UK
2007
£m
Current tax
Current tax charge for the year
Less double tax relief
Adjustments in respect of prior years
Deferred tax
Deferred tax charge for the year
Deferred tax credit resulting from reduction in tax rates 1
Recognised in the income statement
Overseas
2006
£m
2007
£m
2006
£m
47
(7)
40
(27)
13
51
(47)
4
(2)
2
72
—
72
21
93
65
(8)
(23)
34
296
1
—
297
47
299
Total
2007
£m
2006
£m
66
—
66
(6)
60
119
(7)
112
(6)
106
117
(47)
70
(8)
62
13
(8)
(12)
(7)
33
5
—
38
78
(16)
(35)
27
329
6
—
335
86
98
133
397
2007
£m
2006
£m
Other tax charges/(credits)
Recognised in the statement of recognised income and expense – deferred tax 1
Recognised directly in equity – current tax
– deferred tax 1
1
95
(43)
23
75
91
(18)
(58)
15
Deferred tax assets and liabilities have been restated to reflect the reductions in corporate tax rates in the UK and Germany which take effect in 2008. The resulting charges or credits have been recognised in
the income statement except to the extent that they relate to items previously charged or credited to the statement of recognised income and expense or equity. Accordingly in 2007, £35m has been
credited to the income statement, £9m has been charged to the statement of recognised income and expense, and £5m has been charged directly to equity.
Annual report 2007
80
Overview
Governance
5
Taxation continued
Tax reconciliation
2007
£m
2006
£m
Less share of profits of joint ventures (note 10)
Profit before taxation excluding joint ventures
733
(66)
667
1,391
(47)
1,344
Nominal tax charge at UK corporation tax rate 30% (2006 30%)
UK R&D credit
Other items
Reduction in opening deferred taxes resulting from reduction in tax rate
200
(22)
12
(22)
(35)
133
403
(19)
15
(2)
—
397
193
(60)
133
190
207
397
2007
£m
2006
£m
(111)
(27)
(95)
(23)
—
(8)
(264)
261
(335)
(91)
58
1
(5)
(111)
81
(345)
(264)
141
(252)
(111)
160
154
Analysis of taxation charge:
Underlying items (note 2)
Non-underlying items
Deferred taxation assets and liabilities
At January 1
Amount charged to income statement
Amount charged to statement of recognised income and expense (SORIE)
Amount (charged)/credited to equity
On acquisition of business
Exchange movements
At December 31
Analysed as:
Deferred tax assets
Deferred tax liabilities
Deferred tax not recognised on unused tax losses and other items 1
1
Deferred tax not recognised on the basis that the future economic benefit is uncertain.
The analysis of the deferred tax position is as follows:
At
January 1,
2007
£m
Other temporary differences
Pensions and other post-retirement scheme benefits
Foreign exchange and commodity financial assets and liabilities
Losses
Advance corporation tax
(145)
(278)
314
(183)
117
64
(111)
Recognised
in income
statement
£m
2
84
(133)
13
7
—
(27)
Recognised
in SORIE
£m
—
—
(144)
49
—
—
(95)
Recognised
in equity
£m
—
(23)
—
—
—
—
(23)
At
Exchange December 31,
movements
2007
£m
£m
—
(6)
(2)
—
—
—
(8)
(143)
(223)
35
(121)
124
64
(264)
In addition, there are temporary differences of £943m (2006 £593m) relating to investments in subsidiaries and joint ventures. No deferred tax has been provided in respect
of these differences, since the timing of the reversals can be controlled and it is probable that the temporary differences will not reverse in the future.
Annual report 2007
81
Governance
Overview
6
Earnings per ordinary share
Basic earnings per ordinary share of 33.67p (2006 57.32p) are calculated by dividing the profit attributable to ordinary shareholders of £606m (2006 £998m) by 1,800 million
(2006 1,741 million) ordinary shares, being the average number of ordinary shares in issue during the year, excluding own shares held under trust, which have been treated as if
they had been cancelled.
Diluted earnings per ordinary share of 32.97p (2006 55.14p) are calculated by dividing the profit attributable to ordinary shareholders of £606m (2006 £998m) by
1,838 million (2006 1,810 million) ordinary shares, being 1,800 million (2006 1,741 million) as above, adjusted by the bonus element of share options of 38 million
(2006 69 million).
Underlying 1 earnings per ordinary share (EPS) has been calculated as follows:
2006
2007
EPS/Profit attributable to equity holders of the parent
Release of transition hedging reserve
Realised gains on settled derivative contracts
Net unrealised fair value changes to derivative contracts
Effect of currency on contract accounting
Revaluation of trading assets and liabilities
Post-retirement schemes – past service costs (note 18)
Related tax effect
Change in rates of corporation tax (note 5)
Underlying earnings per ordinary share/Underlying profit attributable to equity holders of the parent
1
7
£m
Pence
£m
33.67
(8.28)
23.33
(13.94)
(4.22)
0.56
0.72
(1.67)
7.22
(1.39)
(1.94)
34.06
606
(149)
420
(251)
(76)
10
13
(30)
130
(25)
(35)
613
57.32
(16.60)
21.25
(41.93)
0.06
0.23
(2.24)
(0.17)
—
11.89
—
29.81
998
(289)
370
(730)
1
4
(39)
(3)
—
207
—
519
2007
Number
2006
Number
22,900
15,700
38,600
22,800
5,600
7,700
2,500
38,600
22,500
14,800
37,300
21,800
5,400
7,400
2,700
37,300
£m
£m
1,534
172
36
248
1,990
1,456
158
36
145
1,795
See note 2.
Employee information
Average weekly number of Group employees during the year
United Kingdom
Overseas
Civil aerospace
Defence aerospace
Marine
Energy
Group employment costs 1
Wages and salaries
Social security costs
Share-based payments (note 21)
Pensions and other post-retirement scheme benefits (note 18)
1
Pence
Remuneration of key management personnel is shown in note 24.
Annual report 2007
82
Overview
Governance
8
Intangible assets
Certification
costs and
participation Development Recoverable
Goodwill
fees expenditure engine costs
£m
£m
£m
£m
Cost:
At January 1, 2006
Additions
On acquisitions of businesses
Disposals
At January 1, 2007
Additions
Disposals
Accumulated amortisation and impairment:
At January 1, 2006
Provided during the year (charged to cost of sales)
At January 1, 2007
Provided during the year (charged to cost of sales)
Net book value at December 31, 2007
Net book value at January 1, 2006
Software
and other
£m
Total
£m
751
(23)
—
7
—
735
59
—
7
—
801
284
—
91
—
(1)
374
1
129
—
—
504
381
—
41
—
—
422
—
91
1
—
514
265
—
64
—
—
329
—
37
—
—
366
44
—
29
3
(6)
70
—
39
1
(1)
109
1,725
(23)
225
10
(7)
1,930
60
296
9
(1)
2,294
—
—
—
—
—
138
5
143
7
150
116
16
132
18
150
146
30
176
28
204
10
9
19
10
29
410
60
470
63
533
801
735
751
354
231
146
364
290
265
162
153
119
80
51
34
1,761
1,460
1,315
Goodwill
In accordance with the requirements of IAS 36 Impairment of Assets, goodwill is allocated to the Group’s cash-generating units, or groups of cash-generating units, that are
expected to benefit from the synergies of the business combination that gave rise to the goodwill as follows:
Cash-generating unit (CGU) or group of CGUs.
Rolls-Royce Deutschland Ltd & Co KG
Commercial marine – arising from the acquisition of Vinters plc
Energy – arising from the acquisition of Rolls-Royce Energy Systems Inc.
Other
Primary reporting
segment
2007
£m
2006
£m
Civil aerospace
Marine
Energy
Various
203
514
54
30
801
186
470
55
24
735
Goodwill has been tested for impairment during 2007 on the following basis:
–
The carrying value of goodwill has been assessed by reference to value in use. Values in use have been estimated using cash flows from the most recent forecasts
prepared by management. Given the long-term nature of the business in which the Group operates, these typically forecast the next ten years. Growth rates for the
period not covered by the forecasts are based on a range of growth rates that reflect the products, industries and countries in which the relevant CGU or group of
CGUs operate.
–
The key assumptions on which the cash flow projections for the most recent forecast are based are discount rates, growth rates and the impact of foreign exchange
rates on the relationship between selling prices and costs.
–
The pre-tax cash flow projections have been discounted at 12.75 per cent, based on the Group’s weighted average cost of capital.
Annual report 2007
83
Governance
Overview
9
Land and
buildings
£m
Plant and
equipment
£m
Aircraft and In course of
engines construction
£m
£m
Total
£m
Cost:
At January 1, 2006
Additions
Reclassifications
Disposals/write-offs
At January 1, 2007
Additions
On disposal of businesses
Reclassifications
Transferred to assets held for sale
587
(16)
4
—
28
(16)
587
19
22
1
—
70
—
—
699
1,953
(51)
78
2
97
(83)
1,996
39
88
—
(4)
111
—
(120)
2,110
212
(17)
44
—
—
(84)
155
—
92
—
—
4
(12)
(65)
174
210
(4)
177
—
(125)
(1)
257
2
102
—
—
(185)
—
—
176
2,962
(88)
303
2
—
(184)
2,995
60
304
1
(4)
—
(12)
(185)
3,159
Accumulated depreciation and impairment:
At January 1, 2006
Impairment adjustment 1
Provided during the year
At January 1, 2007
Provided during the year
On disposal of businesses
Transferred to assets held for sale
141
(5)
—
22
(8)
150
7
23
—
—
—
180
1,066
(33)
—
139
(76)
1,096
24
139
(2)
—
(111)
1,146
106
(9)
(10)
10
(54)
43
—
8
—
(5)
(26)
20
—
—
—
—
—
—
—
—
—
—
—
—
1,313
(47)
(10)
171
(138)
1,289
31
170
(2)
(5)
(137)
1,346
Net book value at January 1, 2006
519
437
446
964
900
887
154
112
106
176
257
210
1,813
1,706
1,649
2007
£m
2006
£m
Net book value of finance leased assets:
Land and buildings
Plant and equipment
9
14
9
21
Assets held for use in operating leases:
Cost
Depreciation
Net book value
141
(18)
123
148
(42)
106
94
92
489
13
17
519
406
15
16
437
Capital expenditure commitments – contracted but not provided for
82
91
Net book value of assets held as security for liabilities
—
48
382
420
1
Impairment charge reversal of £nil (2006 £10m) relating to aircraft, as a result of improved lease terms and values provided by independent aircraft appraisers.
Property, plant and equipment includes:
Non-depreciable land
Land and buildings at net book value comprise:
Freehold
Long leasehold
Short leasehold
Cost of fully depreciated assets
Annual report 2007
84
Overview
Governance
10 Investments
Joint ventures
Share of post
acquisition
Shares
reserves
at cost
£m
£m
At January 1, 2006
Additions
Taxation paid by the Group
Impairment
Share of retained profit
Disposals
At January 1, 2007
Additions
Taxation paid by the Group
Disposals
1
2
3
131
(4)
8
—
(21)
—
(4)
110
1
13
—
—
—
124
98
(13)
—
2
17
13
(1)
116
5
—
2
24
(1)
146
Loans
£m
18
—
3
—
(6)
—
(1)
14
—
—
—
—
—
14
Total
£m
Other 1
Unlisted
£m
247
(17)
11
2
(10) 2
13
(6) 3
240
6
13
2
24
(1)
284
52
—
1
—
—
—
(2)
51
—
6
—
—
—
57
These primarily comprise floating rate convertible loan stock.
Impairment charge of £10m recognised in 2006 to reflect the write down of the Group’s investment in Pembroke Group to its recoverable amount of £1m. In addition, previous impairment charges in respect
of Pembroke Group, which were all charged against share of post acquisition reserves, were reallocated in 2006.
Includes £5m for Data Systems & Solutions. The remaining 50 per cent of this joint venture was acquired during 2006 and as such it has been included in the consolidated results of the Group from the date of
the transaction.
Investments in joint ventures are represented by:
Share of aggregate assets:
Non-current assets 4
Current assets
Share of aggregate liabilities: 5
Current liabilities
4
5
Non-current assets include goodwill of
Liabilities include borrowings of
Share of income
Share of interest
Share of taxation
Share of profit of joint ventures recognised in the income statement
Dividend received
2007
£m
2006
£m
658
635
585
645
(523)
(486)
284
(551)
(439)
240
7
(372)
7
(358)
2007
£m
2006
£m
94
(21)
(7)
66
(42)
24
The tax charge on joint venture profits represents an effective tax rate of 10 per cent (2006 20 per cent), a decrease of 10 per cent. This results from a change in profit mix
between joint ventures taxed at different effective rates.
The principal joint ventures are listed on pages 115 and 116.
82
(23)
(12)
47
(44)
3
Annual report 2007
85
Governance
Overview
11 Inventory
2007
£m
Raw materials
Work in progress
Long-term contracts work in progress
Finished goods
Payments on account
Inventory per balance sheet
Progress payments received against other inventory
Net inventory after progress payments
Inventories stated at net realisable value
Amount of inventory write-down
Reversal of inventory write-down
Restated*
2006
£m
223
732
93
1,123
32
2,203
(426)
1,777
156
766
121
771
31
1,845
(398)
1,447
154
79
6
116
46
7
* Progress payments included in the prior year have been reclassified as follows: received against long-term contracts (£18m) offset against ‘Long-term contracts work in progress’above; received against other
inventory (£398m) included within ‘Trade and other payables’– see note 15.
12 Trade and other receivables
2007
£m
2006
£m
889
904
300
315
177
2,585 1
864
820
241
308
232
2,465 1
1,211
321
1,053
2,585
1,210
300
955
2,465
26
704
29
40
28
827
12
624
26
65
99
826
2007
£m
2006
£m
Short-term deposits
1,265
632
1,897
757
1,428
2,185
Overdrafts (note 14)
Cash and cash equivalents per cash flow statement (page 68)
(25)
1,872
(14)
2,171
60
58
Trade receivables
Amounts recoverable on contracts
Amounts owed by joint ventures
Other receivables
Prepayments and accrued income
Analysed as:
Financial instruments:
Trade receivables and similar items (note 16)
Other non-derivative financial assets (note 16)
Non-financial instruments (note 16)
1
Trade and other receivables expected to be recovered in more than one year:
Trade receivables
Amounts recoverable on contracts
Amounts owed by joint ventures
Other receivables
Prepayments and accrued income
13 Cash and cash equivalents
Cash held as collateral against third party obligations
Annual report 2007
86
Overview
Governance
14 Borrowings
Current
Unsecured
Overdrafts
Bank loans
6 3/8% Notes 2007 €500m 1
7 3/8% Notes 2016 £200m
5.84% Notes 2010 US$187m 2
6.38% Notes 2013 US$230m 2
6.55% Notes 2015 US$83m 2
4 1/2% Notes 2011 €750m 1
Other loan 2008 (interest rate nil)
Secured
Bank loans 3
Obligations under finance leases payable: 4 (note 22)
Less than one year
Between one and two years
Between two and five years
After five years
2006
£m
2007
£m
2006
£m
25
3
—
—
—
—
—
—
1
14
4
337
—
—
—
—
—
—
—
2
—
200
97
123
46
534
—
—
3
—
200
96
121
44
494
1
—
38
24
24
5
—
—
—
34
7
—
—
—
400
—
3
—
1
1,030
—
4
2
1
990
4
1
655
1
369
1,030
6
4
614
1
365
990
Repayable
Between one and two years– by instalments
Between two and five years – by instalments
– otherwise
After five years – by instalments
– otherwise
1
2
3
4
Non-current
2007
£m
These notes are the subject of swap agreements under which counterparties have undertaken to pay amounts at fixed rates of interest and exchange in consideration for amounts payable at variable rates of
interest and at fixed exchange rates.
These notes are the subject of interest rate swap agreements under which the Group has undertaken to pay floating rates of interest, and currency swaps which form a fair value hedge.
Secured on aircraft.
Obligations under finance leases are secured by related leased assets.
15 Trade and other payables
Current
2007
£m
2006
£m
1,226
778
272
64
766
1,220
4,326
1,055
654
167
50
731
1,031
3,688
332
—
32
—
103
498
965
171
—
31
—
200
425
827
195
139
25
62
2007
£m
2006
£m
1,872
315
3,104
5,291
1,735
282
2,498
4,515
2007
£m
1
Payments received on account
Trade payables
Amounts owed to joint ventures
Other taxation and social security
Other payables
Accruals and deferred income
1
Includes payments received from joint ventures
Non-current
Restated *
2006
£m
Total trade and other payables are analysed as:
Financial instruments:
Trade payables and similar items (note 16)
Other non-derivative financial liabilities (note 16)
Non-financial instruments (note 16)
* ‘Payments received on account’in 2006 have been restated from £657m due to the reclassification from ‘Inventory’of £398m of progress payments received against other inventory.
Annual report 2007
87
Governance
Overview
16 Financial instruments
This note should be read in conjunction with the Finance Director’s review on pages 40 to 45.
Carrying values and fair values of financial instruments
The carrying values of the Group’s financial instruments (together with non-financial instruments for reconciling purposes) are analysed as follows:
2006
2007
Notes
Assets:
Unlisted non-current asset investments 1,2
Other non-current assets
Trade and other receivables: 3
Trade receivables and similar items 1
Other non-derivative financial assets 1
Non-financial instruments
Other financial assets 4
Short-term investments 1,3
Cash and cash equivalents: 3
Short-term deposits
Other current assets
Liabilities:
Borrowings – current 4
– non-current 4
Other financial liabilities: 4
Financial RRSPs
B Shares
Other
Trade and other payables: 3
Trade payables and similar items
Other non-derivative financial liabilities
Non-financial instruments
Other liabilities
Net assets/(liabilities)
Derivative
£m
Non- Non-financial
derivative instruments
£m
£m
Total
£m
Derivative
£m
Nonderivative
£m
Non-financial
instruments
£m
Total
£m
10
—
—
57
—
—
4,149
57
4,149
—
—
51
—
—
3,569
51
3,569
12
12
12
—
—
—
514
—
1,211
321
—
—
40
—
—
1,053
—
—
1,211
321
1,053
514
40
—
—
—
644
—
1,210
300
—
—
34
—
—
955
—
—
1,210
300
955
644
34
13
13
—
—
—
514
1,265
632
—
3,526
—
—
2,217
7,419
1,265
632
2,217
11,459
—
—
—
644
757
1,428
—
3,780
—
—
1,850
6,374
757
1,428
1,850
10,798
14
14
—
—
(34)
(1,030)
—
—
(34)
(1,030)
—
—
(400)
(990)
—
—
(400)
(990)
—
—
(57)
(315)
(16)
—
—
—
—
(315)
(16)
(57)
—
—
(36)
(324)
(13)
—
—
—
—
(324)
(13)
(36)
—
—
—
—
(57)
457
(1,872)
(315)
—
—
(3,582)
(56)
—
—
(3,104)
(1,167)
(4,271)
3,148
(1,872)
(315)
(3,104)
(1,167)
(7,910)
3,549
—
—
—
—
(36)
608
(1,735)
(282)
—
—
(3,744)
36
—
—
(2,498)
(1,795)
(4,293)
2,081
(1,735)
(282)
(2,498)
(1,795)
(8,073)
2,725
15
15
15
The fair value of a financial instrument is the price at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length
transaction. Fair values have been determined with reference to available market information at the balance sheet date, using the methodologies discussed below.
1
2
3
4
Loans and receivables.
These primarily comprise floating rate convertible loan stock. The conversion conditions are such that fair value approximates to the book value.
Fair values are assumed to approximate to cost either due to the short-term maturity of the instruments or because the interest rate of the investments is reset after periods not exceeding six months.
Where available, market values have been used to determine fair values. Where market values are not readily available (principally in respect of derivatives, borrowings and financial RRSPs), fair values have
been estimated by discounting expected future cash flows using prevailing interest rate curves. Amounts denominated in foreign currencies are valued at the exchange rate prevailing at the balance sheet
date.
Annual report 2007
88
Overview
Governance
16 Financial instruments continued
Fair values equate to book values for both 2007 and 2006, with the following exceptions:
Book value
£m
Borrowings – current
– non-current
Financials RRSPs
(34)
(1,030)
(315)
2007
Fair value
£m
Book value
£m
2006
Fair value
£m
(400)
(990)
(324)
(402)
(1,030)
(347)
2007
£m
2006
£m
514
1,629
632
1,265
644
1,595
1,428
757
(57)
(3,582)
401
(36)
(3,744)
644
(34)
(1,058)
(340)
The carrying values of financial assets and liabilities by category, as defined by IAS 39 Financial Instruments: Recognition and Measurement, are as follows:
Assets
Held for trading
Loans and receivables
Available for sale
Cash
Liabilities
Held for trading
Financial liabilities at amortised cost
Carrying values of other financial assets and liabilities
Foreign
exchange
contracts
£m
Assets
Liabilities
Assets
Liabilities
Commodity
contracts
£m
Interest rate
contracts
£m
Financial
RRSPs
£m
B Shares
£m
Total
£m
433
(54)
379
39
—
39
42
(3)
39
—
(315)
(315)
—
(16)
(16)
514
(388)
126
578
(24)
554
39
—
39
27
(12)
15
—
(324)
(324)
—
(13)
(13)
644
(373)
271
2007
£m
2006
£m
(85)
(303)
(388)
(37)
(336)
(373)
Other financial liabilities are analysed as follows:
Current liabilities
Annual report 2007
89
Governance
Overview
Foreign exchange and commodity financial instruments
The Group uses various financial instruments to manage its exposure to movements in foreign exchange rates. The Group uses commodity swaps to manage its exposure
to movements in the price of commodities (jet fuel and base metals). From January 1, 2005, the Group has not included foreign exchange or commodity financial
instruments in any cash flow hedging relationships for accounting purposes. To hedge the currency risk associated with a borrowing denominated in US dollars, the Group
has currency derivatives designated as part of fair value hedges.
Movements in the fair values of foreign exchange and commodity instruments were as follows:
Foreign exchange instruments
Total
£m
At January 1, 2006
Fair value changes to derivative contracts not in accounting hedging relationships 1
Fair value changes to fair value hedges 1,2
Fair value of contracts settled
Transferred to revenue
At January 1, 2007
Fair value changes to derivative contracts not in accounting hedging relationships 1
Fair value changes to fair value hedges 1,2
Fair value of contracts settled
Transferred to revenue
1
2
228
696
(26)
(344)
—
554
215
(6)
(384)
—
379
Included in
transition
hedging
reserve
£m
538
—
—
—
(284)
254
—
—
—
(149)
105
Included in
income
statement
£m
696
(26)
—
284
215
(6)
—
149
Commodity instruments
Total
£m
31
34
—
(26)
—
39
36
—
(36)
—
39
Included in
transition
hedging
reserve
£m
Included in
income
statement
£m
5
—
—
—
(5)
—
—
—
—
—
—
34
—
—
5
36
—
—
—
Included in financing.
Gain on related hedged items £6m (2006 £26m).
Interest rate financial instruments
The Group uses interest rate swaps, forward rate agreements and interest rate caps to manage its exposure to movements in interest rates. Where the effectiveness of the
hedge relationship in a cash flow hedge is demonstrated, changes in the fair value that are deemed effective are included in the hedging reserve and released to match
actual payments on the hedged item.
Movements in the fair values of interest rate financial instruments were as follows:
Included in
fair value
hedging
Total relationships
£m
£m
At January 1, 2006
Changes deemed ineffective for cash flow hedge accounting purposes 1
Other changes 1,2
At January 1, 2007
Other changes 1,2
1
2
Movement on related hedged items £24m loss (2006 £51m gain).
62
4
(51)
15
24
39
69
—
(51)
18
24
42
Other
interest rate
financial
instruments
£m
(7)
4
—
(3)
—
(3)
Included in
income
statement
£m
4
(51)
24
Annual report 2007
90
Overview
Governance
Financial risk and revenue sharing partnerships (RRSPs)
The Group has financial liabilities arising from financial RRSPs. These financial liabilities are valued at each reporting date using the amortised cost method. This involves
calculating the present value of the forecast cash flows of the arrangements using the internal rate of return at the inception of the arrangements as the discount rate.
Movements in the amortised cost values of financial RRSPs were as follows:
At January 1
Cash paid to partners
Exchange adjustments direct to reserves
Financing charge 1
Excluded from underlying profit:
Exchange adjustments 1
Restructuring of financial RRSP agreements and changes in forecast payments 1
At December 31
1
2007
£m
2006
£m
324
(55)
7
26
423
(87)
—
27
(7)
20
315
(42)
3
324
Risk management policies and hedging activities
The principal financial risks to which the Group is exposed are: foreign currency exchange rate risk; interest rate risk; and commodity price risk. The Board has approved
policies for the management of these risks.
Foreign currency exchange rate risk – The Group has significant cash flows (most significantly US dollars, followed by the Euro) denominated in currencies other than the
functional currency of the relevant trading entity. To manage its exposures to changes in values of future foreign currency cash flows, so as to maintain relatively stable
long-term foreign exchange rates on settled transactions, the Group enters into derivative forward foreign currency transactions. For accounting purposes, these derivative
contracts are not designated as hedging instruments.
The Group also has exposures to the fair values of non-derivative financial instruments denominated in foreign currencies. To manage the risk of changes in these fair
values, the Group enters into derivative forward foreign exchange contracts, which are designated as fair value hedges for accounting purposes.
The Group regards its interests in overseas subsidiary companies as long-term investments. The Group aims to match its translational exposures by matching the
currencies of assets and liabilities. Where appropriate, foreign currency financial liabilities may be designated as hedges of the net investment.
Interest rate risk – The Group’s interest rate risk is primarily in relation to its fixed rate borrowings (fair value risk) and floating rate borrowings (cash flow risk). Interest rate
derivatives are used to manage the overall interest rate profile within the Group policy, which is to maintain a higher proportion of net debt at fixed rates of interest having
regard to the prevailing interest rate outlook. These are designated as either fair value or cash flow hedges as appropriate.
Commodity risk – The Group has exposures to the price of jet fuel and base metals arising from business operations. To minimise its cash flow exposures to changes in
commodity prices, the Group enters into derivative commodity transactions. For accounting purposes, these derivative contracts are not designated as hedging
instruments.
Other price risk – The Group’s cash equivalent balances represent investments in money market instruments, with a term of up to one month. The Group does not consider
that these are subject to significant price risk.
Liquidity risk – The Group’s policy 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 the Group to manage its liquidity risk.
Credit risk – The Group is exposed to credit risk to the extent of non-payment by either its customers or the counterparties of its financial instruments. The Group has credit
policies covering both trading and financial exposures. At the balance sheet date, there were no significant concentrations of credit risk. The maximum exposure to credit
risk at the balance sheet date is represented by the carrying value of each financial asset, including derivative financial instruments.
Annual report 2007
91
Governance
Overview
Derivative financial instruments
The nominal amounts and fair values of derivative financial instruments are as follows, analysed by year of expected maturity:
2007
Expected maturity
Nominal
amount
£m
Foreign exchange contracts:
Fair value hedges
Non-hedge accounted
Interest rate contracts:
Fair value hedges
Non-hedge accounted
Commodity contracts:
Non-hedge accounted
Within Between one Between two
one year and two years and five years
£m
£m
£m
After
five years
£m
Fair value
Assets
£m
Liabilities
£m
(280)
5,168
—
2,135
—
1,816
(105)
1,217
(175)
—
—
433
(27)
(27)
751
74
—
20
—
18
594
16
157
20
42
—
—
(3)
166
5,879
91
2,246
55
1,889
20
1,742
—
2
39
514
—
(57)
2006
Expected maturity
Nominal
amount
£m
Foreign exchange contracts:
Fair value hedges
Non-hedge accounted
Interest rate contracts:
Fair value hedges
Non-hedge accounted
Commodity contracts:
Non-hedge accounted
£m
£m
£m
Fair value
After
five years
£m
Assets
£m
Liabilities
£m
(280)
5,473
—
1,861
—
1,964
(105)
1,648
(175)
—
—
578
(21)
(3)
1,069
98
313
21
—
21
596
34
160
22
27
—
(9)
(3)
152
6,512
68
2,263
49
2,034
35
2,208
—
7
39
644
—
(36)
As described above, all derivative financial instruments are entered into for risk management purposes, although these may not be designated into hedging relationships for
accounting purposes.
Annual report 2007
92
Overview
Governance
Derivative financial instruments related to foreign exchange risks are denominated in the following currencies:
2007
Currencies purchased forward
Currencies sold forward:
Sterling
US dollar
Euro
Other
Sterling
£m
US dollar
£m
Euro
£m
Other
£m
Total
£m
—
5,136
—
3
280
—
—
12
—
922
—
151
30
431
497
98
310
6,489
497
264
2006
Currencies purchased forward
Currencies sold forward:
Sterling
US dollar
Euro
Other
Sterling
£m
US dollar
£m
Euro
£m
Other
£m
Total
£m
—
5,543
—
3
280
—
—
22
—
466
—
77
16
351
241
29
296
6,360
241
131
2007
£m
2006
£m
20
470
500
—
22
484
813
—
Other derivative financial instruments are denominated in the following currencies:
Sterling
US dollar
Euro
Other
Annual report 2007
93
Governance
Overview
Non-derivative financial instruments
Non-derivative financial instruments are denominated in the following currencies:
2007
Assets:
Unlisted non-current investments
Trade receivables and similar items
Other non-derivative financial assets
Short-term deposits
Liabilities:
– non-current
Financial RRSPs
B Shares
Sterling
£m
US dollar
£m
Euro
£m
Other
£m
Total
£m
46
233
150
40
161
319
949
6
720
68
—
376
293
1,463
2
133
40
—
608
3
786
3
125
63
—
120
17
328
57
1,211
321
40
1,265
632
3,526
(5)
(203)
—
(16)
(959)
(148)
(1,331)
(382)
(3)
(290)
(315)
—
(495)
(85)
(1,188)
275
(1)
(537)
—
—
(248)
(35)
(821)
(35)
(25)
—
—
—
(170)
(47)
(242)
86
(34)
(1,030)
(315)
(16)
(1,872)
(315)
(3,582)
(56)
Sterling
£m
US dollar
£m
Euro
£m
Other
£m
Total
£m
46
270
113
34
105
1,250
1,818
1
728
90
—
255
157
1,231
2
114
44
—
335
8
503
2
98
53
—
62
13
228
51
1,210
300
34
757
1,428
3,780
(7)
(206)
—
(13)
(890)
(158)
(1,274)
544
(41)
(285)
(324)
—
(512)
(63)
(1,225)
6
(341)
(498)
—
—
(236)
(5)
(1,080)
(577)
(11)
(1)
—
—
(97)
(56)
(165)
63
(400)
(990)
(324)
(13)
(1,735)
(282)
(3,744)
36
2006
Assets:
Unlisted non-current investments
Short-term deposits
Liabilities:
– non-current
Financial RRSPs
B Shares
Annual report 2007
94
Overview
Governance
Currency exposures
The Group’s actual currency exposures after taking account of derivative foreign currency contracts, which are not designated as hedging instruments for accounting
purposes are as follows:
2007
Functional currency of Group operation
Sterling
US dollar
Euro
Other
Sterling
£m
US dollar
£m
Euro
£m
Other
£m
Total
£m
—
6
—
—
3
—
5
4
—
—
—
9
2
6
—
12
5
12
5
25
Sterling
£m
US dollar
£m
Euro
£m
Other
£m
Total
£m
—
4
(1)
1
3
—
—
7
1
—
—
7
(1)
2
—
7
3
6
(1)
22
Up to
Within three months
terms
overdue
£m
£m
Between
three months
and one year
overdue
£m
More than
one year
overdue
£m
Total
£m
—
186
8
—
—
—
—
194
—
52
17
—
—
—
—
69
—
—
—
—
—
—
—
—
57
1,211
321
514
40
1,265
632
4,040
Up to
Within three months
terms
overdue
£m
£m
Between
three months
and one year
overdue
£m
More than
one year
overdue
£m
Total
£m
—
26
17
—
—
—
—
43
—
—
—
—
—
—
—
—
51
1,210
300
644
34
757
1,428
4,424
2006
Functional currency of Group operation
Sterling
US dollar
Euro
Other
Ageing beyond contractual due date
The ageing beyond contractual due date of the Group’s financial assets is:
2007
Assets:
Unlisted non-current asset investments
Other financial assets
Short-term deposits
57
973
296
514
40
1,265
632
3,777
2006
Assets:
Unlisted non-current asset investments
Other financial assets
Short-term deposits
51
976
263
644
34
757
1,428
4,153
—
208
20
—
—
—
—
228
Annual report 2007
95
Governance
Overview
Contractual maturity analysis
2007
Gross cash flows
£m
£m
£m
Borrowings:
Unsecured bank loans
Other unsecured
Unsecured bond issues
Secured bank loans
Other secured
Other:
Derivative financial liabilities 1
Financial RRSPs
B Shares
After
five years
£m
Discounting
£m
Carrying
value
£m
(26)
(3)
(56)
(1)
(6)
(92)
(1)
—
(56)
(1)
(3)
(61)
(1)
—
(773)
(26)
—
(800)
—
—
(432)
—
(1)
(433)
—
—
317
4
1
322
(28)
(3)
(1,000)
(24)
(9)
(1,064)
(1,862)
(13)
(38)
(16)
(271)
(2,200)
(2,292)
(2)
(2)
(34)
—
(1)
(39)
(100)
(7)
(4)
(201)
—
(29)
(241)
(1,041)
(1)
20
(141)
—
(14)
(136)
(569)
—
(58)
99
—
—
41
363
(1,872)
(57)
(315)
(16)
(315)
(2,575)
(3,639)
2006
Gross cash flows
£m
£m
£m
Borrowings:
Other unsecured
Secured bank loans
Other secured
Other:
Derivative financial liabilities 1
Financial RRSPs
B Shares
1
Foreign exchange contract and interest rate contract liabilities.
After
five years
£m
Discounting
£m
Carrying
value
£m
(18)
—
(412)
(40)
(9)
(479)
(1)
(1)
(54)
(1)
(5)
(62)
(2)
—
(755)
(28)
(3)
(788)
—
—
(460)
—
(1)
(461)
—
—
389
7
4
400
(21)
(1)
(1,292)
(62)
(14)
(1,390)
(1,735)
(17)
(41)
(13)
(247)
(2,053)
(2,532)
—
(12)
(36)
—
—
(48)
(110)
—
(10)
(196)
—
—
(206)
(994)
—
(21)
(170)
—
(35)
(226)
(687)
—
24
119
—
—
143
543
(1,735)
(36)
(324)
(13)
(282)
(2,390)
(3,780)
Annual report 2007
96
Overview
Governance
Interest rate risk
In respect of income earning financial assets and interest bearing financial liabilities, the following table indicates their effective interest rates and the periods in which they
reprice. The value shown is the carrying amount.
2007
Period in which interest rate reprices
Effective
interest rate
%
Short-term investments 1
Cash at bank and in hand 2
Short-term deposits 3
€4m floating rate loan
Overdrafts 4
Effect of other interest rate swaps
Other unsecured
South Korean Won floating rate loan
7 3/8% Notes 2016 £200m
5.84% Notes 2010 US$187m
Effect of interest rate swaps
6.38% Notes 2013 US$230m
6.55% Notes 2015 US$83m
4 1/2% Notes 2011 €750m
Secured bank loans
US$ floating rate loan
Other secured
Obligations under finance leases payable
Total
£m
6 months
or less 6-12 months
£m
£m
1-2 years
£m
2-5 years
£m
More than
5 years
£m
5.5913%
40
1,265
632
14
1,265
632
6
—
—
—
—
—
12
—
—
8
—
—
EURIBOR +1.2
1.2277%
(3)
(25)
—
(3)
(25)
54
—
—
—
—
—
(18)
—
—
(16)
—
—
(20)
KRW LIBOR +0.9
0.0000%
(2)
(1)
(2)
(1)
—
—
—
—
—
—
—
—
7.3750%
5.8400%
USD LIBOR +1.159
6.3800%
USD LIBOR +1.26
6.5500%
USD LIBOR +1.24
4.5000%
GBP LIBOR +0.911
(200)
(97)
—
(123)
—
(46)
—
(534)
—
—
—
(97)
—
(123)
—
(46)
—
(534)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(97)
97
—
—
—
—
(534)
534
(200)
—
—
(123)
123
(46)
46
—
—
USD LIBOR +0.53
(24)
(24)
—
—
—
—
6.0183%
(9)
873
(2)
1,108
(3)
3
(3)
(21)
—
(4)
(1)
(213)
Annual report 2007
97
Governance
Overview
Interest rate risk continued
2006
Period in which interest rate reprices
Total
£m
6 months
or less
£m
6-12 months
£m
1-2 years
£m
2-5 years
£m
More than
5 years
£m
4.8374%
34
757
1,428
15
757
1,428
5
—
—
—
—
—
8
—
—
6
—
—
EURIBOR +1.2
4.1200%
1.1392%
(4)
(3)
(14)
—
(4)
—
(14)
78
—
(3)
—
—
—
—
—
(21)
—
—
—
(35)
—
—
—
(22)
0.0000%
(1)
—
—
(1)
—
—
6.3750%
GBP LIBOR + 0.866
7.3750%
5.8400%
USD LIBOR + 1.159
6.3800%
USD LIBOR + 1.26
6.5500%
USD LIBOR + 1.24
4.5000%
GBP LIBOR + 0.911
(337)
—
(200)
(96)
—
(121)
—
(44)
—
(494)
—
(337)
—
—
—
(96)
—
(121)
—
(44)
—
(494)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(96)
96
—
—
—
—
(494)
494
—
—
(200)
—
—
(121)
121
(44)
44
—
—
USD LIBOR + 0.97
(62)
(62)
—
—
—
—
9.9153%
(14)
829
(4)
1,102
(3)
(1)
(4)
(26)
(2)
(29)
(1)
(217)
Effective
interest rate
%
Short-term investments 1
Cash at bank and in hand 2
Short-term deposits 3
€6m floating rate loan
€5m fixed rate loan
Overdrafts 4
Effect of other interest rate swaps
Other unsecured
6 3/8% Notes 2007 €500m
7 3/8% Notes 2016 £200m
5.84% Notes 2010 US$187m
6.38% Notes 2013 US$230m
6.55% Notes 2015 US$83m
4 1/2% Notes 2011 €750m
Secured bank loans
US$ floating rate loan
Other secured
Obligations under finance leases payable
1
2
3
4
Interest on the short-term investments are at fixed rates.
Cash at bank and in hand comprises bank balances and demand deposits and earns interest at rates based on daily bank deposit rates.
Short-term deposits are deposits placed on money markets for periods up to three months and earn interest at the respective short-term deposit rates.
Overdrafts bear interest at rates linked to applicable LIBOR rates that fluctuate in accordance with local practice.
Some of the Group’s borrowings are subject to the Group meeting certain obligations, including customary financial covenants. If the Group fails to meet its obligations
these arrangements give rights to the lenders, upon agreement, to accelerate repayment of the facilities. 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.
In addition, the Group has undrawn committed borrowing facilities available as follows:
Expiring within one year
Expiring in one to two years
Expiring thereafter
2007
£m
2006
£m
—
—
450
450
—
—
450
450
Annual report 2007
98
Overview
Governance
Sensitivity analysis
The Group is exposed to a number of foreign currencies. The most significant transactional currency exposures are US dollar with sterling and US dollar with euro.
At December 31, 2007 if sterling had weakened five per cent against the US dollar with all other variables held constant, profit after tax for the year and equity would
have been £157m lower (2006 £166m). If sterling had strengthened five per cent against the US dollar with all other variables held constant, profit after tax for the year and
equity would have been £142m higher (2006 £150m). There would have been no change to the underlying results that exclude unrealised gains and losses on foreign
exchange derivatives.
At December 31, 2007 if the euro had weakened five per cent against the US dollar with all other variables held constant, profit after tax and equity for the year would
have been £35m lower (2006 £18m). If the euro had strengthened five per cent against the US dollar with all other variables held constant, profit after tax for the year and
equity would have been £32m higher (2006 £16m). There would have been no change to the underlying results that exclude unrealised gains and losses on foreign
exchange derivatives.
At December 31, 2007 if interest rates at that date had been 25 basis points lower, with all other variables remaining constant, profit after tax for the year and equity
would have been unchanged (2006 unchanged). If interest rates had been 25 basis points higher, with all other variables remaining constant profit after tax for the year and
equity would have been unchanged (2006 unchanged).
At December 31, 2007 if the price of commodities had been five per cent lower, with all other variables remaining constant, profit after tax for the year and equity
would have been £8m lower (2006 £6m), arising mainly as the result of lower fair value gains on derivative contracts. If the price of commodities had been five per cent
higher, with all other variables remaining constant, profit after tax and equity would have been £8m higher (2006 £6m), arising mainly as the result of higher fair value gains
on derivatives. There would have been no change to the underlying results that exclude unrealised gains and losses on commodity derivatives.
B Shares and payments to shareholders
Since July 2004, the Company has issued non-cumulative redeemable convertible preference shares (B Shares) as an alternative to paying a cash dividend. B Shares in
respect of a year are issued in the following year. Shareholders are able to redeem any number of their B Shares for cash or convert them into ordinary shares. Any B Shares
retained attract a dividend of 75 per cent of LIBOR on the 0.1p nominal value of each share, paid on a twice-yearly basis, and have limited voting rights. In certain
circumstances the Company has the option to compulsorily redeem the B Shares, at any time, if the aggregate number of B Shares in issue is less than ten per cent of the
aggregate number of B Shares issued, or on the acquisition or capital restructuring of the Company.
On a return of capital on a winding-up, the holders of B Shares shall be entitled, in priority to any payment to the holders of ordinary shares, to the repayment of the
nominal capital paid-up or credited as paid-up on the B Shares held by them, together with a sum equal to the outstanding preferential dividend which will have been
accrued but not been paid until the date of return of capital.
Movements in the B Shares during the year were as follows:
2007
Authorised
At January 1, and December 31
Issued and fully paid
At January 1
Issued
Converted into ordinary shares
Redeemed
At December 31
2006
B Shares of
0.1p each
Millions
Nominal
value
£m
B Shares of
0.1p each
Millions
Nominal
value
£m
1,000,000
1,000
1,000,000
1,000
12,616
172,006
(71,819)
(96,944)
15,859
13
172
(72)
(97)
16
6,551
153,945
(54,671)
(93,209)
12,616
7
154
(55)
(93)
13
Payments to shareholders in respect of the year represent the value of B Shares to be issued in respect of the results for the year.
Issues of B Shares were declared as follows:
2007
Interim
Final
Pence per
share
4.04
8.96
13.00
2006
£m
Pence per
share
£m
73
164
237
3.67
5.92
9.59
65
107
172
Annual report 2007
99
Governance
Overview
17 Provisions
At
December 31,
Exchange
2006 adjustments
£m
£m
Warranties and guarantees
Contract loss
Customer financing
Insurance
Restructuring
Other
139
44
98
37
3
14
335
4
1
2
—
—
1
8
Unused
amounts
reversed
£m
(4)
(4)
(20)
(3)
—
(1)
(32)
Charged to
income
statement
£m
52
12
5
11
9
2
91
At
December 31,
Utilised
2007
£m
£m
(26)
(25)
(41)
(5)
(1)
(3)
(101)
165
28
44
40
11
13
301
2007
£m
2006
£m
121
180
301
146
189
335
Analysed as:
Current liabilities
Provisions for warranties and guarantees primarily relate to products sold and generally cover a period of up to three years.
Provisions for contract loss and restructuring are generally expected to be utilised within two years.
The Group’s captive insurance company retains a portion of the exposures it insures on behalf of the remainder of the Group. Significant delays occur in the notification and
settlement of claims and judgement is involved in assessing outstanding liabilities, the ultimate cost and timing of which cannot be known with certainty at the balance sheet
date. The insurance provisions are based on information currently available, however it is inherent in the nature of the business that ultimate liabilities may vary. Provisions for
outstanding claims are established to cover the outstanding expected liability as well as claims incurred but not yet reported.
Other provisions comprise a number of liabilities with varying expected utilisation rates.
Customer financing provisions cover guarantees provided for asset value and/or financing. These guarantees are considered to be insurance contracts in nature and
provision is made in accordance with IFRS 4 Insurance Contracts and IAS 37 Provisions, Contingent Liabilities and Contingent Assets. These guarantees, the risks arising and the
process used to assess the extent of the risk are described under the heading ‘Sales financing’in the Finance Director’s review on page 45. The related contingent liabilities
arising from these guarantees and the sensitivity to movements in the value of the underlying security are discussed in note 23. Based on the assumptions used to estimate
the customer finance provision, it is estimated that the provision will be utilised as follows:
Potential claims with specific claim dates:
In one year or less
In more than one year but less than five years
In more than five years
Potential claims that may arise at any time by date of expiry of the guarantee:
Up to one year
Up to five years
Thereafter
2007
£m
2006
£m
1
3
14
—
19
14
16
4
6
44
35
11
19
98
Annual report 2007
100
Overview
Governance
18 Post-retirement benefits
The Group operates a number of defined benefit and defined contribution schemes.
For the UK defined benefit schemes, the assets are held in separate trustee administered funds and employees are entitled to retirement benefits based on their final
salaries and length of service.
Overseas defined benefit schemes are a mixture of funded and unfunded plans. Additionally in the US, and to a lesser extent in some other countries, the Group’s
employment practices include the provision of healthcare and life insurance benefits for retired employees. These schemes are unfunded.
The valuations of the defined benefit schemes are based on the most recent funding valuations, updated by the scheme actuaries to December 31, 2007. The most
recent funding valuations of the main UK schemes were:
Valuation date
Scheme
Rolls-Royce Pension Fund
Rolls-Royce Group Pension Scheme
Vickers Group Pension Scheme
1
March 31, 2006
April 5, 2007 1
March 31, 2007 1
Preliminary
As described in the Finance Director’s review on page 42, during 2007, the trustees of the UK defined benefit schemes, in consultation with the Group, have undertaken a
review of their investment strategies. As a result, revised investment strategies have been adopted that aim to hedge, on an economic basis, the majority of the interest rate
and inflation risks associated with pension liabilities by investing a significant proportion of each schemes’assets in swap contracts, backed by short-term money market
deposits (the liability-driven investment or LDI portfolio). Following the agreement of this revised strategy, new entrants are no longer able to join the schemes and the
Group has paid additional contributions of £500m to the main UK pensions schemes.
As described in note 1, for accounting purposes, the defined benefit schemes are valued in accordance with IAS 19 Employee Benefits. In particular, IAS 19 requires the
discount rate used for the valuation of forecast liabilities to be determined by reference to the market yield on high quality corporate bonds. In contrast, for funding
purposes, the discount rate is determined by reference to the expected rate of return on the scheme's assets, taking account of the specific investment strategy in place.
As a result of this difference in valuation methodologies, the amounts recognised in the balance sheet will differ from those that would have been recognised if the
valuation had been undertaken using the assumptions used for funding purposes.
Accordingly, although the investment strategy aims to hedge interest rate and inflation risk on an economic basis, the net position recognised in the balance sheet for
UK defined benefit schemes may vary over time as a result of actuarial gains and losses that arise due to this difference in valuation methodologies.
Amounts recognised in the income statement
2007
Defined benefit schemes:
Current service cost
Past service cost
Defined contribution schemes
Operating cost
Financing (income)/costs in respect of defined benefit schemes:
Expected return on assets
Interest on liabilities
Total income statement charge
UK
schemes
£m
Overseas
schemes
£m
100
131
231
3
234
(367)
323
(44)
190
2006
Total
£m
UK
schemes
£m
Overseas
schemes
£m
Total
£m
25
2
27
17
44
125
133
258
20
278
102
—
102
2
104
28
2
30
14
44
130
2
132
16
148
(17)
31
14
58
(384)
354
(30)
248
(328)
310
(18)
86
(15)
30
15
59
(343)
340
(3)
145
The operating cost is charged as follows:
Defined benefit
Cost of sales
Commercial and administrative costs
Defined contribution
Total
2007
£m
2006
£m
2007
£m
2006
£m
2007
£m
2006
£m
223
26
9
258
93
30
9
132
15
4
1
20
11
4
1
16
238
30
10
278
104
34
10
148
2007
£m
2006
£m
161
350
(112)
399
132
470
—
602
Amounts recognised in the statement of recognised income and expense
Actuarial gain on scheme assets
Experience gains on scheme liabilities
Movement in unrecognised surplus
Annual report 2007
101
Governance
Overview
18 Post-retirement benefits continued
In December 2007, PaySave was introduced in the UK. This a salary sacrifice scheme under which employees elect to stop making employee contributions and the Group
makes additional contributions in return for a reduction in gross contractual pay. As a result, there has been a decrease in wages and salaries and a corresponding increase in
pension costs of £3m in the year.
Defined benefit schemes
Assumptions
The principal actuarial assumptions used at the balance sheet date were as follows:
2007
UK
schemes
%
Rate of increase in salaries
Rate of increase of pensions in payment
Discount rate
Expected rate of return on scheme assets
Inflation assumption
1
5.0
3.5 1
5.8
5.4
3.5
2006
Overseas
schemes
%
UK
schemes
%
Overseas
schemes
%
3.8
0.4
6.0
7.5
2.5
4.4
2.9
5.1
6.6
2.9
3.6
0.3
5.6
7.0
2.4
Benefits accruing after April 5, 2005 are assumed to increase in payment at a rate of 2.4 per cent.
The discount rates are determined by reference to the market yields on AA rated corporate bonds. For the main UK schemes, the rate is determined by using the profile of
forecast benefit payments to derive a weighted average discount rate from the yield curve. For less significant UK schemes and overseas schemes, the rate is determined as
the market yield at the average duration of the forecast benefit payments. The discount rates above are the weighted average of those for each scheme, based on the value
of their respective liabilities.
The overall expected rate of return is calculated by weighting the individual returns expected from each asset class (see below) in accordance with the actual asset
balance in the schemes’investment portfolios.
The mortality assumptions adopted for the UK pension schemes are derived from the PA92 actuarial tables, with medium cohort, published by the Institute of
Actuaries, projected forward and, where appropriate, adjusted to take account of the relevant scheme’s actual experience. The resulting range of life expectancies in the
principal UK schemes are as follows:
Life expectancy from age 65
Current pensioner
Future pensioner
17.5 years to 22.2 years
19.5 years to 23.9 years
Other demographic assumptions have been set on advice from the relevant actuary, having regard to the latest trends in scheme experience and other relevant data. The
assumptions are reviewed and updated as necessary as part of the periodic actuarial valuation of the schemes.
Assumptions in respect of overseas schemes are also set in accordance with advice from local actuaries.
The future costs of healthcare benefits are based on an assumed healthcare costs trend rate of nine per cent grading down to five per cent over seven years.
Amounts recognised in the balance sheet
2007
UK
schemes
£m
Present value of funded obligations
Fair value of scheme assets
Present value of unfunded obligations
Unrecognised surplus 2
Net asset/(liability) recognised in the balance sheet
Analysed as: 3
Post-retirement scheme deficits
2
3
Overseas
schemes
£m
Total
£m
2006
UK
schemes
£m
Overseas
schemes
£m
Total
£m
(6,335)
6,626
291
—
(110)
181
(293)
277
(16)
(284)
(4)
(304)
(6,628)
6,903
275
(284)
(114)
(123)
(6,338)
5,673
(665)
—
—
(665)
(271)
233
(38)
(290)
(2)
(330)
(6,609)
5,906
(703)
(290)
(2)
(995)
210
(29)
181
—
(304)
(304)
210
(333)
(123)
22
(687)
(665)
—
(330)
(330)
22
(1,017)
(995)
Where a surplus has arisen on a scheme, in accordance with IAS 19, the surplus is recognised as an asset only if it represents an unconditional economic benefit available to the Group in the future. Any
surplus in excess of this benefit is not recognised in the balance sheet. Surpluses have arisen on the UK schemes in 2007, largely as a result of differences between the actuarial and IAS 19 valuation
assumptions.
Comparatives have been restated to show the split between post-retirement scheme surpluses and deficits.
Annual report 2007
102
Overview
Governance
Changes in present value of defined benefit obligations
2007
UK
schemes
£m
At January 1
Current service cost
Past service cost
Finance cost
Contributions by employees
Net benefits paid out
Actuarial gains/(losses)
Settlements/curtailment
At December 31
Funded schemes
Unfunded schemes
(6,338)
—
(100)
(131)
(323)
(38)
286
309
—
(6,335)
(6,335)
—
Overseas
schemes
£m
Total
£m
(561)
(15)
(25)
(2)
(31)
(2)
18
41
—
(577)
(293)
(284)
(6,899)
(15)
(125)
(133)
(354)
(40)
304
350
—
(6,912)
(6,628)
(284)
2006
UK
schemes
£m
Overseas
schemes
£m
Total
£m
(6,661)
—
(102)
—
(310)
(39)
279
495
—
(6,338)
(6,338)
—
(559)
65
(28)
(2)
(30)
(2)
18
(25)
2
(561)
(271)
(290)
(7,220)
65
(130)
(2)
(340)
(41)
297
470
2
(6,899)
(6,609)
(290)
UK
schemes
£m
Overseas
schemes
£m
Total
£m
5,343
—
328
122
39
(279)
120
—
5,673
220
(27)
15
31
2
(18)
12
(2)
233
5,563
(27)
343
153
41
(297)
132
(2)
5,906
Changes in fair value of scheme assets
2006
2007
UK
schemes
£m
At January 1
Expected return on assets
Contributions by employer
Contributions by employees
Benefits paid out
Actuarial gains
Settlements/curtailment
At December 31
5,673
—
367
677
38
(286)
157
—
6,626
Overseas
schemes
£m
Total
£m
233
9
17
30
2
(18)
4
—
277
5,906
9
384
707
40
(304)
161
—
6,903
Actual return on scheme assets
545
475
The fair value of the scheme assets in the principal schemes and the expected rates of return at December 31, were as follows:
2007
UK schemes:
LDI portfolio
Equities
Sovereign debt
Corporate bonds
Other
Overseas schemes:
Equities
Corporate bonds
Other
2006
Expected
rate of return
%
Market
value
£m
Expected
rate of return
%
Market
value
£m
4.7
7.8
4.6
5.1
4.9
5.4
4,595
1,651
48
88
244
6,626
—
7.5
4.5
4.9
5.0
6.6
—
3,876
629
1,164
4
5,673
9.0
4.8
6.4
7.5
165
86
26
277
8.3
4.9
5.1
7.0
146
71
16
233
The scheme assets do not include any of the Group’s own financial instruments, nor any property occupied by, or other assets used by, the Group.
The expected rate of return for LDI portfolios is determined by the implicit yield on the portfolio at the balance sheet date.
The expected rates of return on other individual categories of scheme assets are determined by reference to gilt yields. In the UK, equities and corporate bonds are
assumed to generate returns that exceed the return from gilts by 3.25 per cent and 0.8 per cent per annum respectively.
The expected rates of return above are the weighted average of the rates for each scheme.
Annual report 2007
103
Governance
Overview
Future contributions
The Group expects to contribute approximately £271m to its defined benefit schemes in 2008.
Sensitivities
As described above, the revised investment strategies are designed to hedge the risks from interest rates and inflation. The principle remaining risks relate to the
assumptions for mortality and increases in salaries. If the age ratings in respect of the principal UK defined benefit schemes were increased by one year, the scheme liabilities
would increase by £164m. If the rate of increase in salaries were 0.5 per cent higher, scheme liabilities would increase by £112m.
The defined benefit obligation relating to post-retirement medical benefits would increase by £33m if the healthcare trend rate increases by one per cent, and reduce
by £27m if it decreases by one per cent. The pension expense relating to post-retirement medical benefits, comprising service cost and interest cost, would increase by
£4m if the healthcare trend increases by one per cent, and reduce by £3m if it decreases by one per cent.
History of defined benefit schemes
The history of the schemes for the current and prior years is as follows:
2006
£m
2005
£m
2004
£m
(6,912)
6,903
(114)
(123)
(6,899)
5,906
(2)
(995)
(7,220)
5,563
(2)
(1,659)
(6,107)
4,698
—
(1,409)
161
350
(112)
399
712
132
470
—
602
313
588
(868)
(2)
(282)
(289)
126
(133)
—
(7)
(7)
2007
£m
Balance sheet
Present value of defined benefit obligations
Fair value of scheme assets
Unrecognised surplus
Deficit
Experience gains/losses
Actuarial gains on scheme assets
Experience gains/(losses) on scheme liabilities
Movement in unrecognised surplus
Total amount recognised in the statement of recognised income and expense
Cumulative since January 1, 2004
In accordance with the transitional provision amendments to IAS 19 Employee Benefits in December 2004, the disclosures above are determined prospectively from 2004.
19 Share capital
Non-equity
Authorised
At January 1, 2006 and December 31, 2007
At January 1, 2006
Exercise of share options
B Share conversion into ordinary shares
At January 1, 2007
Equity
Special Share
of £1
Preference
shares
of £1 each
Nominal
value
£m
Ordinary
shares
of 20p each
Millions
1
50,000
—
2,500
500
1
—
—
1
—
—
1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,758
8
15
1,781
24
15
1,820
352
1
3
356
5
3
364
Nominal
value
£m
Certain rights, set out in the Company’s Articles of Association, attach to the special rights redeemable preference share (Special Share) issued to HM Government. Subject to
the provisions of the Companies Act 1985, the Special Share may be redeemed by the Treasury Solicitor at par at any time. The Special Share confers no rights to dividends
or to vote at general meetings but in the event of a winding-up it shall be repaid at its nominal value in priority to any other shares.
In accordance with IAS 32 Financial Instruments: Presentation, the Company’s non-cumulative redeemable convertible preference shares (B Shares) are classified as financial
liabilities. Accordingly, movements in B Shares are included in note 16.
Annual report 2007
104
Overview
Governance
20 Movements in capital and reserves
Attributable to equity holders of the parent
At January 1, 2006
Arising on issues of ordinary shares
Issue of B Shares
Conversion of B Shares into ordinary shares
Own shares purchased
Own shares vesting in share-based payment plans
Share-based payments adjustment
Transactions with minority interests
Related tax movements – current tax
– deferred tax
At January 1, 2007
Arising on issues of ordinary shares
Issue of B Shares
Own shares purchased
Own shares vesting in share-based payment plans
Share-based payments adjustment
Transactions with minority interests
Related tax movements – current tax
– deferred tax
Change in rate of UK corporation tax – deferred tax
1
2
3
Share
capital
£m
Share
premium
£m
352
—
1
—
—
3
—
—
—
—
—
—
356
—
5
—
—
3
—
—
—
—
—
—
—
364
30
—
13
—
—
—
—
—
—
—
—
—
43
—
24
—
—
—
—
—
—
—
—
—
—
67
Capital
redemption
reserves
£m
206
—
—
(154)
93
52
—
—
—
—
—
—
197
—
—
(172)
97
69
—
—
—
—
—
—
—
191
Transition
hedging
reserve 1
£m
Other
reserves 2
£m
Retained
earnings 3
£m
379
(202)
—
—
—
—
—
—
—
—
—
—
177
(100)
—
—
—
—
—
—
—
—
—
—
—
77
20
(75)
—
—
—
—
—
—
—
—
—
—
(55)
117
—
—
—
—
—
—
—
—
—
—
—
62
512
1,422
—
—
(93)
—
(47)
143
(13)
—
18
58
2,000
861
—
—
(97)
(1)
(78)
93
(22)
—
43
(18)
(5)
2,776
Total
£m
1,499
1,145
14
(154)
—
55
(47)
143
(13)
—
18
58
2,718
878
29
(172)
—
71
(78)
93
(22)
—
43
(18)
(5)
3,537
Minority
interests
£m
6
(4)
—
—
—
—
—
—
—
5
—
—
7
(6)
—
—
—
—
—
—
—
11
—
—
—
12
Total
equity
£m
1,505
1,141
14
(154)
—
55
(47)
143
(13)
5
18
58
2,725
872
29
(172)
—
71
(78)
93
(22)
11
43
(18)
(5)
3,549
See accounting policies note 1 – hedge accounting.
‘Other reserves’ include a merger reserve of £3m (2006 £3m) and a translation reserve of £59m (2006 £(58)m).
At December 31, 2007, 5,838,501 shares with a net book value of £24m (2006 16,654,181 shares with a net book value of £38m) were held and included in retained earnings.
21 Share-based payments
Share-based payment plans in operation during the year
The Group had the following share-based payment plans in operation during the year:
Performance Share Plan (PSP)
This plan involves the award of shares to participants subject to performance conditions. Vesting of the performance shares is based on the achievement of both
non-market based conditions (EPS and cash flow per share) and a market based performance condition (Total Shareholder Return – TSR).
ShareSave share option plan
Based on a three or five year monthly savings contract, eligible employees are granted share options with an exercise price of up to 20 per cent below the share price when
the contract is entered into. Vesting of the options is not subject to the achievement of a performance target. In the UK, the plan is HM Revenue & Customs approved.
Overseas, employees in 32 countries participate in ShareSave plans through arrangements broadly comparable to the UK plan. A small proportion of the ShareSave options
are settled in cash.
Executive Share Option Plan (ESOP)
This plan involves the grant of market value share options to participants. The options are subject to a non-market based performance condition (growth in EPS). The
options have a maximum contractual life of ten years. Following the introduction of the PSP, it is not intended to grant any further executive share options.
Annual Performance Related Award (APRA) plan deferred shares
Deferred shares are awarded as part of the APRA plan. One third of the value of any annual bonus is delivered in the form of a deferred share award. The release of deferred
share awards is not dependent on the achievement of any further performance conditions other than that participants remain an employee of the Group for two years from
the date of the award in order to retain the full number of shares. During the two year deferral period, participants are entitled to receive dividends on the deferred shares.
Annual report 2007
105
Governance
Overview
21 Share-based payments continued
Share Incentive Plan (SIP)
There is a ‘Free Share’element of the UK Share Incentive Plan. Eligible employees may receive shares with a value of up to one and a half weeks’salary as part of any bonus
paid. There are no conditions attached to the shares.
Further information regarding the operation of the plans can be found on pages 55 and 56 of the Directors’remuneration report.
In accordance with the transitional provisions of IFRS 2 Share-based Payment, the Group has recognised an expense in respect of all grants under these plans made after
November 7, 2002 and unvested at January 1, 2005.
The Group recognised a total expense of £36m (2006 £36m).
The movements in awards under the Group’s various share plans are shown in the tables below. A further breakdown of the options outstanding at the year end is provided
in the table on page 107.
Number of shares awarded
2007
Millions
PSP
Outstanding at January 1
Awarded during the year
Forfeited during the year
Additional entitlements arising from TSR performance
Vested during the year
Outstanding at December 31
ShareSave
Granted during the year
Exercised during the year
Exercisable at December 31
ESOP
Exercised during the year
Exercisable at December 31
15.7
4.6
(0.8)
1.3
(6.8)
14.0
2006
Millions
11.5
4.8
(0.6)
—
—
15.7
2007
2006
Number
Weighted
of share
average
options exercise price
Millions
Pence
Number
Weighted
of share
average
Millions
Pence
54.7
13.0
(0.8)
(23.6)
43.3
—
160p
416p
207p
116p
260p
—
64.7
—
(1.2)
(8.8)
54.7
0.7
157p
—
168p
140p
160p
141p
2007
2006
Number
Weighted
of share
average
Millions
Pence
Number
Weighted
of share
average
Millions
Pence
19.0
—
(16.7)
2.3
2.3
188p
—
189p
175p
175p
76.8
(1.1)
(56.7)
19.0
5.8
148p
216p
134p
188p
124p
Deferred shares under APRA
Additional shares accrued from conversion of B Shares
Vested during the year
2007
Millions
4.9
1.9
(0.1)
0.2
(3.5)
3.4
2006
Millions
8.2
2.0
(0.1)
0.2
(5.4)
4.9
Free Shares under SIP
Options were exercised on a regular basis during the year. The average share price during the year was 510p (2006 439p).
2007
Millions
2006
Millions
0.7
0.7
Annual report 2007
106
Overview
Governance
Fair values
The weighted average fair values per share for PSP awards, ShareSave grants, APRA deferred share awards, and SIP Free Share awards included in the expense for the year
were as follows:
PSP awards
ShareSave – 3 year grants
ShareSave – 5 year grants
ESOP
APRA deferred share awards
SIP Free Share awards
2007
Pence
2006
Pence
2005
Pence
2004
Pence
2003
Pence
557p
230p
264p
—
502p
499p
494p
—
—
—
448p
462p
282p
131p
154p
—
260p
257p
249p
—
—
—
220p
231p
—
61p
71p
22.7p
—
—
Details of the assumptions used in the calculation of these fair values are set out below. Expected volatility was based on the historical volatility of the Company’s share price
over the seven years prior to the grant or award date. Expected dividends were based on the Company’s payments to shareholders over the five years prior to the grant or
award date.
PSP awards
The fair value of shares awarded under the PSP are calculated using the market value of shares at the time of the award adjusted to take into account non-entitlement to
dividends (or equivalent) during the vesting period and the TSR performance condition. The PSP fair values were calculated using the following assumptions:
Weighted average share price
Expected dividends
Volatility
Correlation
Expected life
Risk free interest rate
2007
2006
2005
2004
501p
8.30p
29%
26%
3 years
5.2%
444p
7.92p
32%
19%
3 years
4.3%
262p
7.81p
34%
19%
3 years
4.9%
233p
7.61p
35%
22%
3 years
5.2%
As explained on page 56 of the Directors’remuneration report, the PSP has a TSR market-based performance condition, such that the Company’s TSR over the performance
period will be compared with the TSR of the companies constituting the FTSE 100 index on the date of grant. If the Company’s TSR exceeds the median TSR of the FTSE 100,
the number of shares that vest will be increased by 25 per cent. The fair value of an award of shares under the PSP has been adjusted to take into account this market-based
performance condition using a pricing model based on expectations about volatility and the correlation of share price returns in the group of FTSE 100 companies and
which incorporates into the valuation the interdependency between share price performance and TSR vesting. This adjustment increases the fair value relative to the share
price at the date of grant.
ShareSave awards
The fair value of options granted under the ShareSave plan are calculated using a binomial pricing model with the following assumptions:
Exercise price
Volatility
Expected dividends
Expected life 1 – 3 year ShareSave
– 5 year ShareSave
Close periods:
From January 1
From July 1
1
2007
2005
2003
553p
416p
37%
8.80p
3.3-3.8 years
5.3-5.8 years
351p
298p
40%
7.86p
3.3-3.8 years
5.3-5.8 years
173p
142p
43%
7.61p
3.2-3.7 years
5.2-5.7 years
6 weeks
1 month
5.0%
6 weeks
1 month
4.4%
6 weeks
1 month
4.6%
The binomial pricing model assumes that participants will exercise their options at the beginning of the six month window if the share price is greater than the exercise price. Otherwise it assumes that
options are held until the expiration of their contractual term. This results in an expected life that falls somewhere between the start and end of the exercise window.
Annual report 2007
107
Governance
Overview
Deferred shares under APRA and Free Shares under SIP
The fair value of shares awarded under these plans is calculated as the share price on the date of the award.
ESOP
These fair values were calculated using the following assumptions:
2003
Weighted average exercise price
Volatility
Expected dividends
Expected life
Close periods:
From January 1
From July 1
79p
78p
43%
7.61p
4.5 years
6 weeks
1 month
4.1%
At December 31, 2007, the following ordinary shares were subject to options:
Date of grant
Executive Share Option Plan
ShareSave plans
Number Exercise price
1999
76,859
2000
235,842
2001 1,073,976
2001
8,161
2002
303,891
2003
603,492
1999
1,288
2001 5,742,295
2003 13,226,160
2005 11,326,501
2007 13,008,650
269p
194p
216p
218p
188p
77p
194p
108p
142p
298p
416p
Exercisable
dates
2008-2009
2008-2010
2008-2011
2008-2012
2008-2012
2008-2013
2008
2009
2009
2009/2011
2011/2013
Under the terms of the Rolls-Royce 1999 Executive Share Option Plan, options granted to 61 directors and senior executives were outstanding at December 31, 2007.
Annual report 2007
108
Overview
Governance
22 Operating and finance leases
Operating leases
Leases as lessee – non-cancellable operating lease rentals are payable as follows:
Within one year
Between one and five years
After five years
2007
£m
2006
£m
77
179
99
355
78
213
106
397
2007
£m
2006
£m
5
13
3
21
8
13
4
25
Leases as lessor – non-cancellable operating lease rentals are receivable as follows:
Within one year
After five years
The Group acts as lessee and lessor for both land and buildings and gas turbine engines, and acts as lessee for some plant and machinery.
–
Sublease payments of £15m (2006 £23m) and sublease receipts of £8m (2006 £11m) were recognised in the income statement in the year.
–
Purchase options exist on aero engines with the period to the purchase option date varying between two to six years.
–
Escalation clauses exist on some leases and are linked to LIBOR.
–
The total future minimum sublease payments expected to be made is £13m (2006 £23m) and sublease receipts expected to be received is £3m (2006 £5m).
Finance leases
Finance lease liabilities are payable as follows:
2007
Within one year
After five years
2006
Payments
£m
Interest
£m
Principal
£m
Payments
£m
Interest
£m
Principal
£m
6
3
1
10
1
—
—
1
5
3
1
9
9
8
1
18
2
2
—
4
7
6
1
14
There were no contingent rents recognised as an expense in the year (2006 £nil) and no future minimum sublease receipts are expected under non-cancellable subleases
(2006 £nil).
23 Contingent liabilities
In connection with the sale of its products the Group will, on some occasions, provide financing support for its customers. The Group’s contingent liabilities relating to
financing arrangements are spread over many years and relate to a number of customers and a broad product portfolio.
Contingent liabilities are disclosed on a discounted basis. As the directors consider the likelihood of these contingent liabilities crystallising to be remote, this amount
does not represent a present value. However, the amounts are discounted at the Group’s borrowing rate to reflect better the time span over which these exposures could
arise. The contingent liabilities are denominated in US dollars. As the Group does not adopt cash flow hedge accounting for forecast foreign exchange transactions, this
amount is reported, together with the sterling equivalent at the reporting date spot rate.
The discounted value of the total gross contingent liabilities relating to delivered aircraft and other arrangements where financing is in place, less insurance
arrangements and relevant provisions, at December 31, 2007 amounted to $1,227m, £616m (2006 $1,109m, £566m). Taking into account the net realisable value of the
relevant security including unrestricted cash collateral of $120m, £60m (2006 $114m, £58m), the discounted value of the net contingent liabilities amounted to $279m,
£140m (2006 $243m, £124m). Sensitivity calculations are complex, but for example, if the value of the relevant security was reduced by 20 per cent, a net contingent liability
with a discounted value of approximately $434m, £218m (2006 $361m, £184m) would result. There are also net contingent liabilities in respect of undelivered aircraft, but it
is not considered practicable to estimate these as deliveries can be many years in the future, and the relevant financing will only be put in place at the appropriate time.
Contingent liabilities exist in respect of guarantees provided by the Group in the ordinary course of business for product delivery, performance and reliability. The
Group has, in the normal course of business, entered into arrangements in respect of export finance, performance bonds, countertrade obligations and minor miscellaneous
items. Various Group undertakings are parties to legal actions and claims which arise in the ordinary course of business, some of which are for substantial amounts. As a
consequence of the insolvency of an insurer as previously reported, the Group is no longer fully insured against known and potential claims from employees who worked
for certain of the Group’s UK based businesses for a period prior to the acquisition of those businesses by the Group. While the outcome of some of these matters cannot
precisely be foreseen, the directors do not expect any of these arrangements, legal actions or claims, after allowing for provisions already made, to result in significant loss to
the Group.
Annual report 2007
109
Governance
Overview
24 Related party transactions
2007
£m
Sales of goods and services to joint ventures
Purchases of goods and services from joint ventures
Operating lease payments to joint ventures
Dividends received from joint ventures
RRSP receipts from joint ventures
Interest received from joint ventures
Other income received from joint ventures
1,289
(1,100)
(41)
42
29
2
25
2006
£m
1,252
(830)
(43)
44
7
3
12
The aggregated balances with joint ventures are shown in notes 12 and 15. Transactions with Group pension schemes are shown in note 18.
In the course of normal operations, related party transactions entered into by the Group have been contracted on an arms-length basis. Rolls-Royce Group plc is a
non-trading holding company for Rolls-Royce plc.
Key management personnel are deemed to be the directors and the members of the Group Executive as set out on pages 46 and 47. Remuneration for key management
personnel is shown below:
Salaries and short-term benefits
Post-retirement schemes
2007
£m
2006
£m
9
2
5
16
10
2
5
17
More detailed information regarding the directors’remuneration, shareholdings, pension entitlements, share options and other long-term incentive plans is shown in the
Directors’remuneration report on pages 55 to 64.
25 Acquisitions and disposals
During the year the Group acquired a number of small businesses as summarised below.
Total
£m
Intangible assets
Net assets acquired
Goodwill arising
Financed by:
Net cash outflow per cash flow statement
Dilution of minority interests due to share issue
2
1
1
(1)
3
7
10
6
4
10
There were no significant fair value adjustments in respect of the net assets acquired.
During the year the Group disposed of its interests in a number of small businesses, as summarised below.
Total
£m
Inventory
Net assets
Loss on sale or termination of businesses
Net cash inflow per cash flow statement
2
1
2
(1)
4
1
5
(2)
3
Annual report 2007
110
Overview
Governance
Company balance sheet
Fixed assets
Investments in shares in subsidiary undertakings at cost
Current assets
Amounts owed by subsidiary undertakings due within one year
Cash at bank
Creditors – amounts falling due within one year
Financial liabilities
Accruals and deferred income
Notes
2007
£m
Restated*
2006
£m
3
2,212
2,193
413
1
414
577
1
578
(16)
(3)
(19)
395
(13)
(3)
(16)
562
2,607
2,607
2,755
2,755
364
67
451
517
59
1,149
2,607
356
43
623
351
40
1,342
2,755
2007
£m
Restated*
2006
£m
4
Net current assets
Total assets less current liabilities
Net assets
Capital and reserves
Share premium account
Merger reserve
Capital redemption reserves
Other reserve
Profit and loss account
Equity shareholders’funds
5
6
6
6
6
6
* See note 2.
The financial statements on pages 110 to 113 were approved by the Board on February 6, 2008 and signed on its behalf by:
Simon Robertson Chairman
Andrew Shilston Finance Director
Reconciliation of movements in shareholders’funds
At January 1, 2006 as previously reported
Prior year adjustment
At January 1, 2007 and January 1, 2006 (restated)
Loss for the year
Arising on issue of ordinary shares
Issue of B Shares
Share-based payment adjustments
At December 31
* See note 2.
2,755
(1)
29
(172)
72
(76)
2,607
2,976
36
3,012
—
14
(154)
55
(172)
2,755
Annual report 2007
111
Governance
Overview
Notes to the Company financial statements
1
Accounting policies
Basis of accounting
The financial statements have been prepared in accordance with applicable UK Accounting Standards on the historical cost basis.
As permitted by section 230(4) of the Companies Act 1985, a separate profit and loss account for the Company has not been included in these financial statements. As
permitted by section 262(1) of the Companies Act 1985 disclosure of non-audit fees information is not included in respect of the Company. As permitted by FRS 1 Cash flow
statements, no cash flow statement for the Company has been included. As permitted by FRS 8 Related party disclosures, no related party disclosures for the Company have
been included.
Investments in subsidiary undertakings
Investments in subsidiary undertakings are reported at cost less amounts written off.
As described in the Directors’remuneration report on pages 55 to 64, the Company grants awards of its own shares to employees of its subsidiary undertakings, (see note 21
of the consolidated financial statements). The costs of share-based payments in respect of these awards are accounted for, by the Company, as an additional investment in
its subsidiary undertakings. The costs are determined in accordance with FRS 20 Share-based payment. Any payments made by the subsidiary undertakings in respect of
these arrangements are treated as a return of this investment.
Own shares for settlement of share-based payment plans
Where the Company acquires its own shares for the purpose of satisfying share-based payment plans, the cost in excess of any exercise price payable by the plan
participants is written off to the profit and loss reserve.
Current assets
Amounts are shown at their recoverable amount.
In accordance with FRS 25 Financial instruments: Presentation, the Company’s B Shares are classified as financial liabilities and held at amortised cost from the date of issue
until redeemed or converted.
Taxation
Provision for taxation is made at the current rate and for deferred taxation at the projected rate on all timing differences which have originated, but not reversed at the
balance sheet date.
2
Restatement to reflect UITF 41 and UITF 44
Following the introduction of UITF 41 Scope of FRS 20 and UITF 44 Group and Treasury Share Transactions, 2006 has been restated to reflect share-based payments occurring in
2006 and earlier years. The revised amounts at December 31, 2006, together with those previously reported are: Investments in shares in subsidiary undertakings £2,193m
(£2,153m), Amounts owed by subsidiary undertakings due within one year £577m (£554m), Accruals and deferred income £3m (£nil), Other reserve £40m (£nil) and Profit
and loss account £1,342m (£1,322m).
3
Investments – subsidiary undertakings
£m
Cost:
At December 31, 2006, as previously reported
Prior year adjustment 1
At December 31, 2006, as restated
Cost of share-based payments in respect of employees of subsidiary undertakings less receipts from subsidiaries in respect of those payments
1
See note 2.
2,153
40
2,193
19
2,212
Annual report 2007
112
Overview
Governance
Notes to the Company financial statements continued
4
Financial liabilities
B Shares
Movements in the B Shares during the year were as follows:
Authorised
At January 1, and December 31, 2007
At January 1, 2007
Shares issued
Shares converted into ordinary shares
Shares redeemed
B Shares
of 0.1p
Millions
Nominal
value
£m
1,000,000
1,000
12,616
172,006
(71,819)
(96,944)
15,859
13
172
(72)
(97)
16
Rights attaching to B Shares are described in note 16 of the Company’s consolidated accounts.
5
Share capital
Non-equity
Authorised
At January 1, 2006 and December 31, 2007
At January 1, 2006
At January 1, 2007
Equity
Special Share
of £1
Preference
shares
of £1 each
Nominal
value
£m
Ordinary
shares
of 20p each
Millions
1
50,000
—
2,500
500
1
—
—
1
—
—
1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,758
8
15
1,781
24
15
1,820
352
1
3
356
5
3
364
Nominal
value
£m
Certain rights, set out in the Company’s Articles of Association, attach to the special rights redeemable preference share (Special Share) issued to HM Government. Subject to
the provisions of the Companies Act 1985, the Special Share may be redeemed by the Treasury Solicitor at par at any time. The Special Share confers no rights to dividends
or to vote at general meetings but in the event of a winding-up it shall be repaid at its nominal value in priority to any other shares.
In accordance with FRS 25 Financial instruments: Presentation, the Company’s non-cumulative redeemable convertible preference shares (B Shares) are classified as financial
liabilities. Accordingly, movements in B Shares are included in note 4.
Annual report 2007
113
Governance
Overview
6
Movements in capital and reserves
Non-distributable reserves
At December 31, 2006, as previously reported
Prior year adjustment 1
At December 31, 2006, as restated
Loss for the year
Arising on issue of ordinary shares
Issue of B Shares
Share-based payment adjustments
1
7
Share
capital
£m
Share
premium
£m
356
—
356
—
5
—
—
3
—
364
43
—
43
—
24
—
—
—
—
67
Merger
reserve
£m
623
—
623
—
—
(172)
—
—
—
451
Capital
redemption
reserves
£m
351
—
351
—
—
—
97
69
—
517
Other
reserve 1
£m
—
40
40
—
—
—
—
—
19
59
Profit
and loss
account
£m
1,322
20
1,342
(1)
—
—
(97)
—
(95)
1,149
Total
£m
2,695
60
2,755
(1)
29
(172)
—
72
(76)
2,607
Following the adoption of UITF 41 Scope of FRS 20 and UITF 44 Group and Treasury Share Transactions, (note 2), the ‘Other reserve’ represents the value of share-based payments in respect of employees of
subsidiary undertakings for which payment has not be received. Consequential adjustments have also been made to the profit and loss account.
Where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within its group, the Company considers these to be
insurance arrangements, and accounts for them as such. In this respect, the Company treats the guarantee contract as a contingent liability until such time as it becomes
probable that the Company will be required to make a payment under the guarantee.
At December 31, 2007 these guarantees amounted to £1,035m (2006 £1,327m).
8
Other information
Emoluments of directors
The remuneration of the directors of the Company is shown in the Directors’remuneration report on pages 55 to 64.
Employees
The Company had no employees in 2007 and 2006.
Shares in the Company have been granted to employees of the Group as part of share-based payment plans, and are charged in the employing company.
Annual report 2007
114
Overview
Governance
Principal subsidiary undertakings
Incorporated within the UK – held by Rolls-Royce Group plc
Rolls-Royce plc
Incorporated within the UK – indirectly held
Civil aerospace
Data Systems & Solutions Limited
Rolls-Royce Aircraft Management Limited
Rolls-Royce Leasing Limited
Rolls-Royce Total Care Services Limited
Marine
Rolls-Royce Marine Electrical Systems Limited
Rolls-Royce Marine Power Operations Limited
Energy
Rolls-Royce Fuel Cell Systems Limited
Rolls-Royce Power Development Limited
Corporate
Rolls-Royce International Limited
Rolls-Royce Power Engineering plc
Principal trading/holding company
Advanced controls and predictive data management
Sales finance and other financial services
Engine leasing
Aftermarket support services
Marine electrical systems
Nuclear submarine propulsion systems
Development of fuel cell systems
Provision of project development capabilities
International support and commercial information services
Power generation and marine systems
The above companies operate principally in the UK and the effective Group interest is 100 per cent, other than Rolls-Royce Fuel Cell Systems Limited in which it is
80 per cent.
Incorporated overseas – indirectly held
Civil aerospace
Brazil
Rolls-Royce Brasil Limitada
France
Rolls-Royce Technical Support SARL
Germany
Rolls-Royce Deutschland Ltd & Co KG
Italy
Europea Microfusioni Aerospaziali S.p.A.
US
Data Systems & Solutions LLC
US
Rolls-Royce Corporation
US
Rolls-Royce Engine Services – Oakland Inc.
Defence aerospace
US
Rolls-Royce Defense Services Inc.
Marine
China
Rolls-Royce Marine (Shanghai) Limited
Finland
Rolls-Royce OY AB
India
Rolls-Royce Energy Systems India Private Limited
Norway
Rolls-Royce Marine AS
Norway
Ulstein Holding AS
Sweden
Rolls-Royce AB
US
Rolls-Royce Commercial Marine Inc.
US
Rolls-Royce Naval Marine Inc.
US
Seaworthy Systems Inc.
Energy
Canada
Rolls-Royce Canada Limited
Singapore
Rolls-Royce Pte Limited
US
Rolls-Royce Energy Systems Inc.
Corporate
Guernsey
Nightingale Insurance Limited
India
Rolls-Royce Operations (India) Private Limited
US
Rolls-Royce North America Holdings Inc.
Repair and overhaul
Project support
Design, development and manufacture of aero engines
Manufacture of castings
Advanced controls and predictive data management
Design, development and manufacture of gas turbine engines
Repair and overhaul
Repair and overhaul
Manufacture and supply of marine equipment
Manufacture of winches and propeller systems
Project management and customer support
Design and manufacture of ship equipment/holding company
Holding company
Manufacture of propeller systems
Aftermarket support services
Design and manufacture of ship propellers
Marine support services
Industrial gas turbines and aero-engine sales, service and overhaul
Engine and turbine compression systems, spares
Turbine generator packages
Insurance services
Provision of support services
Holding company
The above companies operate principally in the country of their incorporation.
The effective Group interest is 100 per cent, other than Europea Microfusioni Aerospaziali S.p.A. in which it is 51 per cent.
A list of all subsidiary undertakings will be included in the Company’s annual return to Companies House.
Annual report 2007
115
Governance
Overview
Principal joint ventures
Incorporated within the UK – indirectly held
% of class
held
A Ordinary
B Ordinary
A Ordinary
B Ordinary
A Ordinary
B Ordinary
100
—
—
100
—
100
Ordinary
20
A Shares
B Shares
A Shares
B Shares
Ordinary
A Shares
—
100
—
100
40
37.5






40
100
—
100
—



50



50
49.5
50
20






A Ordinary
B Ordinary
A Ordinary
B Ordinary
% of total
equity held






Civil aerospace
Alpha Partners Leasing Limited
Engine leasing
TRT Limited
Turbine blade repair services
Turbine Surface Technologies Limited
Turbine surface coatings
Defence aerospace
Airtanker Holdings Limited
Strategic tanker aircraft PFI project
Rolls-Royce Snecma Limited (UK & France)
Engine collaboration
Rolls-Royce Turbomeca Limited (UK & France)
Adour and RTM322 engines collaboration
Turbo-Union Limited (UK, Germany & Italy)
RB199 engine collaboration
Energy
Genistics Holdings Limited
Trailer-mounted field mobile generator sets
Rolls Wood Group (Repair and Overhauls) Limited
Repair and overhaul
Class
50
50
50
Annual report 2007
116
Overview
Governance
Principal joint ventures continued
Incorporated overseas – indirectly held
Hong Kong
Israel
Singapore
Singapore
Spain
Switzerland
US
Alpha Leasing (US) LLC, Alpha Leasing (US) (No. 2) LLC, Alpha Leasing (US) (No. 4) LLC
Engine leasing
US
Rolls-Royce & Partners Finance (US) LLC
Engine leasing
US
Texas Aero Engine Services, LLC
Repair and overhaul
US
Williams-Rolls Inc. (UK & North America)
Small engine collaboration
Defence aerospace
Germany
EPI Europrop International GmbH (effective interest 35.5%)
A400M engine collaboration
Germany
EUROJET Turbo GmbH (UK, Germany, Italy & Spain) (effective interest 39%)
EJ200 engine collaboration
Germany
MTU, Turbomeca, Rolls-Royce GmbH (UK, France & Germany)
MTR390 engine collaboration
US
GE Rolls-Royce Fighter Engine Team LLC
F136 development engine for the Joint Strike Fighter (JSF) Programme
Corporate
US
Exostar LLC
Business to business internet exchange
% of total
equity held
Ordinary
49
49
Ordinary
50
50
Ordinary
45
45
A Ordinary
B Ordinary
Ordinary
50
50
50
Ordinary
30
30
Ordinary
46.9
46.9







Germany
Xian XR Aero Components Co Limited
Manufacturing facility for aero-engine parts
N3 Engine Overhaul Services Verwaltungsgesellschaft mbh
Repair and overhaul
Hong Kong Aero Engine Services Limited
Repair and overhaul
TechJet Aerofoils Limited
Manufacture of compressor aerofoils
International Engine Component Overhaul Pte Limited
Repair and overhaul
Singapore Aero Engine Services Private Limited (effective interest 39%)
Repair and overhaul
Industria de Turbo Propulsores SA
Manufacture and maintenance of aero engines
IAE International Aero Engines AG (UK, Germany, Japan & US)
V2500 engine collaboration
% of class
held



Civil aerospace
China
Class
50
A Shares
B Shares
C Shares
D Shares
Partnerships
100
—
—
—
50
Partnership
50
—
Partnership
50
—
Common
15
15
Ordinary
28
28
Ordinary
33
33
Ordinary
33.3
33.3
Partnership
40
40
Partnership
17.6
—
Unincorporated overseas – held by subsidiary undertakings
Defence aerospace
US
Light Helicopter Turbine Engine Company (LHTEC)
Rolls-Royce Corporation has a 50 per cent interest in this unincorporated partnership which was formed to develop and market jointly the T800 engine
The countries of principal operations are stated in brackets after the name of the company, if not the country of incorporation.
50
32.5
—
Annual report 2007
117
Governance
Overview
Independent auditors’report
To the members of Rolls-Royce Group plc
We have audited the Group and parent Company financial statements (the ‘financial
statements’) of Rolls-Royce Group plc for the year ended December 31, 2007 which
comprise the Group consolidated income statement, the Group and parent
Company balance sheets, the Group consolidated cash flow statement, the Group
consolidated statement of recognised income and expense and the related notes.
These financial statements have been prepared under the accounting policies set
out therein. We have also audited the information in the directors' remuneration
report that is described as having been audited.
This report is made solely to the Company’s members, as a body, in accordance
with section 235 of the Companies Act 1985. Our audit work has been undertaken so
that we might state to the Company’s members those matters we are required to
state to them in an auditor's report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other than
the Company and the Company’s members as a body, for our audit work, for this
report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
The directors’responsibilities for preparing the Annual report and the Group financial
statements in accordance with applicable law and International Financial Reporting
Standards (IFRSs) as adopted by the EU, and for preparing the parent Company
financial statements and the Directors’remuneration report in accordance with
applicable law and UK Accounting Standards (UK Generally Accepted Accounting
Practice) are set out in the statement of directors’responsibilities on page 54.
Our responsibility is to audit the financial statements and the part of the
Directors’remuneration report to be audited in accordance with relevant legal and
regulatory requirements and International Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the financial statements give a true
and fair view and whether the financial statements and the part of the Directors’
remuneration report to be audited have been properly prepared in accordance with
the Companies Act 1985 and, as regards the Group financial statements, Article 4 of
the IAS Regulation. We also report to you whether in our opinion the information
given in the report of the directors is consistent with the financial statements. The
information given in the report of the directors includes that specific information
presented in the business review that is cross-referred from the business review
section of the Report of the directors.
In addition we report to you if, in our opinion, the Company has not kept
proper accounting records, if we have not received all the information and
explanations we require for our audit, or if information specified by law regarding
directors’remuneration and other transactions is not disclosed.
We review whether the Corporate governance statement reflects the
Company’s compliance with the nine provisions of the 2006 Combined Code
specified for our review by the Listing Rules of the Financial Services Authority, and
we report if it does not. We are not required to consider whether the Board’s
statements on internal control cover all risks and controls, or form an opinion on the
effectiveness of the Group’s corporate governance procedures or its risk and control
procedures.
We read the other information contained in the Annual report and consider
whether it is consistent with the audited financial statements. We consider the
implications for our report if we become aware of any apparent misstatements or
material inconsistencies with the financial statements. Our responsibilities do not
extend to any other information.
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing (UK
and Ireland) issued by the Auditing Practices Board. An audit includes examination,
on a test basis, of evidence relevant to the amounts and disclosures in the financial
statements and the part of the Directors’remuneration report to be audited. It also
includes an assessment of the significant estimates and judgements made by the
directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the Group’s and Company’s circumstances,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with sufficient
evidence to give reasonable assurance that the financial statements and the part of
the Directors’remuneration report to be audited are free from material misstatement,
whether caused by fraud or other irregularity or error. In forming our opinion we also
evaluated the overall adequacy of the presentation of information in the financial
statements and the part of the Directors’remuneration report to be audited.
Opinion
In our opinion:
− the Group financial statements give a true and fair view, in accordance with
IFRSs as adopted by the EU, of the state of the Group’s affairs as at
December 31, 2007 and of its profit for the year then ended;
− the Group financial statements have been properly prepared in accordance
with the Companies Act 1985 and Article 4 of the IAS Regulation;
− the parent Company financial statements give a true and fair view, in
accordance with UK Generally Accepted Accounting Practice, of the state of the
parent Company’s affairs as at December 31, 2007;
− the parent Company financial statements and the part of the Directors’
remuneration report to be audited have been properly prepared in accordance
with the Companies Act 1985; and
− the information given in the Report of the directors is consistent with the
financial statements.
KPMG Audit Plc
Chartered Accountants, Registered Auditor
London
February 6, 2008
Annual report 2007
118
Overview
Governance
Group five-year review
For the years ended December 31
2003 1
£m
2007
£m
2006
£m
2005
£m
2004
£m
7,435
827
(381)
66
512
221
733
(133)
600
7,156
1,016
(370)
47
693
698
1,391
(397)
994
6,603
1,113
(282)
46
877
(400)
477
(130)
347
5,947
686
(288)
19
417
(53)
364
(100)
264
5,645
499
(281)
52
270
(90)
180
(64)
116
606
(6)
600
998
(4)
994
350
(3)
347
263
1
264
116
—
116
(824)
(28)
—
—
(747)
(35)
—
—
(663)
(34)
—
—
(601)
(31)
—
—
(619)
—
(24)
(10)
Earnings per ordinary share:
Underlying – Adopted IFRS
Basic – Adopted IFRS
Underlying – UK GAAP
Basic – UK GAAP
34.06p
33.67p
—
—
29.81p
57.32p
—
—
24.48p
20.11p
—
—
15.62p
15.56p
—
—
—
—
12.20p
7.04p
Payments to shareholders per ordinary share
13.00p
9.59p
8.72p
8.18p
8.18p
2007
£m
2006 2
£m
2005 2
£m
2004 2
£m
2003 1,2
£m
11,459
(7,910)
3,549
10,798
(8,073)
2,725
9,627
(8,122)
1,505
8,419
(6,973)
1,446
7,689
(5,546)
2,143
364
3,173
3,537
12
3,549
356
2,362
2,718
7
2,725
352
1,147
1,499
6
1,505
346
1,096
1,442
4
1,446
333
1,807
2,140
3
2,143
2007
£m
2006
£m
2005
£m
2004
£m
2003 1
£m
705
(572)
—
—
(473)
—
—
—
(340)
1,072
(469)
—
—
(122)
—
—
—
481
1,060
(289)
—
—
(443)
—
—
—
328
610
(237)
—
—
189
—
—
—
562
673
—
(198)
(16)
—
(176)
(90)
(17)
176
Income statement/Profit and loss account
Revenue/Group turnover
Profit before net research and development and share of joint venture profit
Research and development (net)
Share of profit of joint ventures
Profit before financing/profit on ordinary activities before interest
Net financing/interest payable
Taxation
Notes
1
2
3
4
Attributable to:
Minority interests
Notes
1 Research and development (gross)
2 Under Adopted IFRS, share of profit of joint ventures is net of share of interest and taxation charges of
3 Under UK GAAP, interest payable includes the joint ventures share of
4 Under UK GAAP, taxation includes the joint ventures share of
Balance sheet
Assets
Liabilities
Reserves
Equity attributable to equity holders of the parent
Minority interests
Cash flow
Cash inflow from operating activities
Cash outflow from investing activities – Adopted IFRS
Capital expenditure and financial investment – UK GAAP
Acquisitions and disposals – UK GAAP
Cash (outflow)/inflow from financing activities – Adopted IFRS
Interest, dividends and taxation – UK GAAP
Management of liquid resources – UK GAAP
Financing – UK GAAP
(Decrease)/increase in cash and cash equivalents (Adopted IFRS)/Increase in cash (UK GAAP)
1
2
Amounts as previously reported under UK GAAP.
Progress payments received against other inventory previously included within ‘Inventory’have been reclassified to ‘Trade and other payables’. Post-retirement scheme surpluses netted against post-retirement
scheme deficits in 2006 have been separately disclosed.
Annual report 2007
119
Governance
Overview
Shareholder information
Internet
The Annual report, Company announcements and other information are available on the Group’s website at www.rolls-royce.com
Financial calendar
Ex entitlement to B Shares
Calculation period for Conversion Share Value for B Shares
Record (qualifying) date for entitlement to B Shares
Annual General Meeting, Platinum Conference Suite, ExCel London, 1 Western Gateway, Royal Victoria Dock, London E16 1XL
Latest time and date for receipt of completed Evergreen Mandates for B Shares
Record (qualifying) date for B Share dividend
Dispatch of cheques/ordinary share certificates/B Share certificates following redemption/conversion of B Shares
Closing of B Share register 1
Dispatch of cheques for compulsory redemption proceeds 1
Ex entitlement to C Shares 1
Record (qualifying) date for entitlement to C Shares 1
Latest time and date for receipt of completed Evergreen Mandates for C Shares 1
Financial year end
Dispatch of cheques/C Share certificates following redemption of C Shares 1
Market purchase of ordinary shares with the proceeds of redemption of C Shares
Dispatch of ordinary share certificates following market purchase
2008 Annual report published
1
March 5, 2008
March 5-11, 2008
March 7, 2008
11.30am May 7, 2008
5pm May 30, 2008
June 6, 2008
July 1, 2008
September 22, 2008
September 29, 2008
October 29, 2008
October 31, 2008
5pm November 28, 2008
December 31, 2008
January 5, 2009
January 5, 2009
no later than January 19, 2009
March, 2009
The Company will announce on February 7, 2008 that it is, subject to shareholder approval at the Annual General Meeting (AGM) on May 7, 2008, proposing to change the arrangements for making payments
to shareholders by issuing C Shares instead of B Shares. If the relevant resolution is not passed at the AGM the references to C Shares should be ignored and the compulsory redemption of B Shares will not
proceed. If the relevant resolution is not passed an updated financial calendar will be made available on the Group’s website.
Shareholder information
If you have any queries on the following:
i)
ii)
iii)
iv)
v)
vi)
Transfer of shares
Change of name or address
Lost share certificates
Lost or out of date redemption/dividend cheques
Death of a registered holder of shares
B Share distributions
or any other query relating to Rolls-Royce Group plc shares, please write or telephone the Registrar at the following address:
Computershare Investor Services PLC
The Pavilions, Bridgwater Road, Bristol, BS99 6ZZ
General helpline: 0870 702 0111 B Share helpline: 0870 703 0162
The Company operates a free-of-charge service for consolidating the individual shareholdings of immediate members of a family. Please ask the Registrar for details if you
are interested.
Share dealing service
In order to buy or sell shares in the Company you will need to contact a stockbroker. Most high street banks offer a stockbroking service as do the Company’s corporate
brokers – Hoare Govett Corporate Finance Limited (tel 020 7678 8000). Hoare Govett Corporate Finance Limited is a member of the Securities and Futures Authority.
You can obtain the current market price of the Company’s shares on the Group’s website at www.rolls-royce.com or by viewing teletext or similar services.
Electronic communications/Proxy voting
If you would like to receive future shareholder documentation electronically or wish to appoint a proxy electronically for this year’s Annual General Meeting, please log onto
the Investors section on the Group’s website at www.rolls-royce.com to register.
Unsolicited mail
The Company is legally obliged to make its share register publicly available and as a consequence some shareholders may receive unsolicited mail. If you wish to limit the
amount of unsolicited mail you receive, you can register free of charge with the Mailing Preference Service.
Mailing Preference Service (MPS)
DMA House, 70 Margaret Street, London W1W 8SS
Tel: 0845 703 4599 www.mpsonline.org.uk
Annual report 2007
120
Overview
Governance
Shareholder information continued
B Share information
Share price on first day of trading
B Shares per
ordinary share
Conversion
Share Value
40.4
59.2
36.7
53.8
33.4
50.0
31.8
50.0
553p
486p
477p
443p
356p
253p
250p
212p
B Share dividends: calculation period
Dividend rate
Record date for
B Share dividend
Payment date
January 1, 2008 to June 30, 2008
July 1, 2007 to December 31, 2007
2.2275000%
2.2973400%
2.0362500%
1.8063300%
1.7205487%
1.7353125%
1.8433613%
1.8890625%
June 6, 2008
November 23, 2007
June 8, 2007
November 24, 2006
June 9, 2006
November 25, 2005
June 10, 2005
November 26, 2004
July 1, 2008
January 2, 2008
July 2, 2007
January 2, 2007
July 3, 2006
January 3, 2006
July 1, 2005
January 4, 2005
B Share issues
January 2, 2008
June 29, 2007
January 2, 2007
June 30, 2006
January 3, 2006
July 1, 2005
January 4, 2005
June 25, 2004
First day of trading
Ordinary
shares
January 2, 2008
June 29, 2007
January 2, 2007
June 30, 2006
January 3, 2006
July 1, 2005
January 4, 2005
July 5, 2004
546.750p
534.500p
450.750p
413.875p
433.045p
291.000p
244.625p
241.875p
CGT apportionment
B Shares
Ordinary
shares
B Shares
0.1000p
0.1010p
0.1000p
0.1005p
0.1015p
0.0995p
0.0955p
0.1130p
99.27%
98.88%
99.19%
98.71%
99.22%
98.32%
98.77%
97.72%
0.73%
1.12%
0.81%
1.29%
0.78%
1.68%
1.23%
2.28%
Copies of the Scheme Circular and Summary of Terms of B Share Issue, which contain more detailed information on B Shares, are available in the Investors section on the
Group’s website at www.rolls-royce.com or on request from the Company or the Registrar’s B Share helpline 0870 703 0162.
Analysis of ordinary shareholders at December 31, 2007
Number of shares
1 – 150
151 – 500
501 – 10,000
10,001 – 100,000
100,001 – 1,000,000
1,000,001 and over
Number of
% of total
shareholders shareholders
69,866
124,957
38,944
1,322
489
197
235,775
29.63
53.00
16.52
0.56
0.21
0.08
100.00
% of total
shares
0.40
1.74
3.52
2.02
9.79
82.53
100.00
ShareGift
In the UK, Rolls-Royce Group plc supports ShareGift, which is administered by the Orr MacKintosh Foundation (registered charity number 1052686) and which operates a
charity share donation scheme for shareholders with small holdings of shares which may prove uneconomical to sell.
If you would like to use ShareGift or receive more information about the scheme, they can be contacted by visiting their website at www.sharegift.org.uk or by writing
to The Orr MacKintosh Foundation, 17 Carlton House Terrace, London SW1Y 5AH.
Contents
01
Overview
01
Introduction
02
04
It is 20 years since Rolls-Royce returned to the London
Stock Exchange as a listed company. In this review the
Chief Executive outlines the transformation of Rolls-Royce
since that time into a global company.
18
46
Governance
65
Business review
18
Our business
24
32
40
46
Board of directors
48
51
55
Directors’ remuneration report
66
Consolidated financial statements
66
67
68
69
Consolidated statement of recognised
income and expense
70
110 Company financial statements
110 Reconciliation of movements in shareholders’ funds
117 Independent auditors’ report
118 Group five-year review
119 Shareholder information
Designed by Radley Yeldar (London)
Typeset by Charnwood Technic Art Limited
Registered office:
65 Buckingham Gate
London SW1E 6AT
Telephone 020 7222 9020
Fax 020 7227 9170
Website www.rolls-royce.com
Company number 4706930
All images © Rolls-Royce plc 2008 except:
P11, F136 for JSF – Lockheed Martin
This document is printed on Revive 50:50 Silk which has been
independently certified according to the rules of the Forestry
Stewardship Council (FSC). Revive 50:50 Silk contains 50% recycled
fibre bleached in an Elementally Chlorine Free (ECF) process.
The manufacturing mill is accredited with the ISO 14001
Environmental Standard. This document has been printed using
vegetable based inks and is recyclable.
Printed by St Ives Westerham Press Ltd. ISO 14001:2004, FSC certified
and CarbonNeutral.
Cert no. SGS-COC-1732
Rolls-Royce Group plc Annual report 2007
®
©Rolls-Royce plc 2008
65 Buckingham Gate
London
SW1E 6AT
www.rolls-royce.com
®
Annual report 2007
Aglobalbusiness.

2007

Transcription

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