11th Feb 2010 07:00
February 11 2010 ROLLS-ROYCE GROUP plc 2009 PRELIMINARY RESULTS Group Highlights
- Order intake of £13.4bn resulted in a record order book at the year-end of
£58.3bn (2008 £55.5bn).
- Group revenues increased to £10,414m (2008 £9,082m). Revenues on an underlying
basis* increased by 11 per cent to £10,108m. Services revenues increased by
four per cent to £4,927m on an underlying basis.
- Profit before financing was £1,172m (2008 £862m).
- Underlying profit before taxation* increased by four per cent to £915m
(2008 £880m).
- Strong financial position
- Average net cash for the period improved by £260m to £635m (2008 £375m).
- Robust balance sheet with net cash of £1,275m at the period end (2008 £1,458m).
- No major changes in pension cash funding requirements.
- Proposed final payment to shareholders of nine pence per share, an increase of
five per cent over 2008, bringing the full year payment to 15 pence per share.
* see note 1
Sir John Rose, Chief Executive, said:
"Rolls-Royce has delivered a solid set of results despite difficult trading conditions. This demonstrates the resilience of our business.
"Our record order book, the breadth of the portfolio across all four sectors,our strong balance sheet and the early action we have taken to reduce costswill enable us to manage short-term difficulties and deliver long-term growth.These fundamental strengths give us the confidence to increase the finalpayment to shareholders by five per cent.
"In 2010 we expect underlying revenues and profits to be broadly similar to those achieved in 2009".
Group OverviewResilient performance:
Rolls-Royce continued to make solid progress in 2009 despite difficult trading conditions. The order book (£58.3bn), underlying revenues (£10.1bn) and underlying profit before tax (£915m) all increased. The Group has a strong financial position with average net cash balances improving by £260m to £635m.
In 2009 the business was affected by the global economic downturn and bycontinued delays in a number of major programmes. These include the AirbusA380, the Boeing 787 and the Airbus A400M military transport aircraft. TheGroup continued to focus on increasing productivity and efficiency across thebusiness, both to improve the long-term competitive position and to mitigatethe effects of the recent global downturn.The economic environment remains challenging and it seems likely that worldgrowth will be slower in the years ahead than it has been in the past decade.However Rolls-Royce will benefit from its ability to access the world's fastergrowing markets where there continues to be demand for investment in transportand infrastructure.Our success in winning new customers and orders, the breadth and mix of ourproduct and service portfolio and the financial performance of the Group alldemonstrate the increasing resilience of our business. Revenues generated fromoutside civil aerospace continued to grow strongly comprising 56 per cent ofrevenues in 2009. This was driven by increases of 19 per cent and 17 per centrespectively in our defence and marine segments, and 36 per cent growth in ourenergy business where revenues exceeded £1bn for the first time.
A consistent strategy:
Ours is a long-term business. Over the last decade the disciplined applicationof our strategy has delivered a better balanced and more resilient performance.We have expanded our portfolio significantly, and improved market share in allour four markets. This has led to a more than four fold increase in the orderbook, and a far better mix and balance of our revenues. Group revenues havegrown at an average rate of eight per cent a year with profit before taxgrowing by close to ten per cent a year, causing both to more than double since1999.During the same period we have become less dependent on our traditional marketsof Europe and North America. These geographies, which accounted forapproximately 70 per cent of our revenues in 1999, represent 66 per cent of ourrevenues today. This trend is set to continue as almost half of the Group'sorder book now relates to business in Asia, the Middle East and South America. Around half our revenues today come from services, compared to 40 per cent adecade ago. This represents an annual growth in services of around ten percent.We have become a much more international company, with new manufacturing andservice facilities spread across five continents. These changes helped delivergood results in 2009 and we believe will ensure another robust performance in2010.2009 has been a remarkable year in which we celebrated the first flight of sixnew types of aircraft powered by Rolls-Royce engines - the Boeing 787,Gulfstream G650, Airbus A400M, Embraer Legacy 650, the BAES MANTIS UAV and theLynx Wildcat helicopter. Early in 2010 the short take-off and vertical landing(STOVL) version of the F-35 Lightning II Joint Strike Fighter Lightning (JSF)deployed the unique Rolls-Royce LiftSystemâ„¢ for the first time.This rate of new product introduction is at an unprecedented level with moreentirely new aircraft taking to the skies in just three months than in theprevious five years. These new product introductions combined with thevolatility in load during 2009 created significant capacity challenges whichwere well managed by the company and our supply chain. Our abilities to meetthese challenges are the direct consequence of a decade of investment andinnovation.In the marine market, in 2009 we saw the US Navy's Littoral Combat Shipcomplete sea trials ready for active duty in 2010, as well as the first sailingof the Royal Navy's Astute class submarine and the commissioning of the RoyalNavy's first Type 45 Destroyer, HMS Daring.All these aircraft and vessels are powered by Rolls-Royce and are expected toenter active service in the next few years. Each of these programmes has alifespan of 40 years or more, giving us exceptional visibility of futureoriginal equipment and service revenues. Our continuing level of targetedinvestment supports these programmes as well as the further expansion of ourportfolio. This includes programmes such as the Trent XWB engine which will runfor the first time in 2010, and the LiftSystem for the JSF which is alreadyundergoing flight tests. Our strong market positions, supported by the entryinto service of these major new programmes, reinforce our belief that revenueswill double in the next ten years, just as they have in the last decade.The balance of the business we have today, our operational performance and ourprospects for long-term growth provide the Board with the confidence toincrease the payment to shareholders by five per cent to nine pence per share,a total of 15 pence per share for the year.
Strong financial position:
Average net cash balances were £635m for the year, and year-end cash balanceswere almost £1.3bn. Debt maturities are well spread and were extended furtherduring 2009 with the successful issue of a 10-year £500m GBP bond designed torefinance a maturing obligation in 2011.The year-end IAS 19 valuation of the Group's pension schemes revealed a modestdeterioration in the net deficit to £855m. This is primarily a function of thereturn to more normal levels of the benchmark AA Corporate discount rate uponwhich this valuation is based. More important was the completion of the triennial actuarial valuation of theGroup's largest UK pension scheme which represents around two-thirds of theGroup's forecast liabilities. This confirmed that there will be no change tofunding requirements in 2010. This demonstrates the benefits of the earlyaction taken to amend the terms of the scheme and to adopt an investmentstrategy that reduces volatility.Despite challenging financing markets and a strong year for aircraft and enginedeliveries there has been no significant change in the outstanding amount offinancial or contingent support to customers.
Strengthening productivity, and investing for long-term growth:
We have maintained our focus on costs and improving operational efficiency. This is demonstrated by a further improvement in underlying revenue per employee which increased last year by ten per cent to £233,000. We have improved this key metric every year for more than a decade. During this time we have doubled our revenues whilst employing 2,000 fewer people.
As our market share and the scale of the aftermarket grows, and as major newprogrammes move into serial production, it remains crucial that we continue toinvest to meet our customer's needs. In 2009 we expanded our global servicesnetwork with six new marine service centres in the USA, Brazil, Canada, UAE andItaly. We also expanded two civil overhaul bases in Asia. Looking forward weannounced investments in new world-class facilities in the UK, Singapore andthe USA. These will come on line over the next three years to meet demand andto improve operational effectiveness.The Group's ability to identify and pursue new options for global growth isfurther illustrated by two developments in the year. In July the Marinebusiness broadened its involvement in the offshore oil and gas sector by takinga 33 per cent shareholding in ODIM ASA. Further progress has been made in theGroup's civil nuclear business with the announcement that Rolls-Royce willbuild a new civil nuclear manufacturing facility, and will take the leadingrole in the UK Government-supported Nuclear Advanced Manufacturing ResearchCentre.
Over the last decade Rolls-Royce has invested more than £2.7bn in capital expenditure including new facilities, plant and equipment. This includes more than £1.8bn to upgrade its UK operations.
Trading Summary:
The broad portfolio of products and services that the Group delivers, an improving market position and access to a broad global customer base helped secure orders worth £13.4bn in 2009. At the year-end the order book reached £58.3bn, approximately £16.5bn of which relates to service contracts.
Revenues increased by 15 per cent to £10.4bn. This strong performance was aidedby weaker average GBP exchange rates, mainly against the USD and Euro. Underlying revenues improved by 11 per cent, with double digit increases in alldivisions other than civil aerospace where revenues were stable.The Group maintained its foreign exchange hedging policy and increased thehedge book over the year to $18.8bn, with an average rate of $1.63. Betterrates locked into the hedge book provide visibility of improving rates over thenext few years. Underlying profits in 2009 benefited by around £71m fromimproving exchange rates. This was made up of £16m from a one and a half centimprovement in the achieved rate, and a further £55m from translation benefitson overseas businesses, mainly in the Civil aerospace and Marine segments. 2010 achieved rates are expected to improve by between six and nine centscompared to the 2009 levels.Unit costs of our gas turbine products increased by around three per cent. Thisreflects the continuing effect of operational volatility caused by programmedelays and difficult trading conditions and increased commodity costs. In theMarine business, which is less focused on gas turbine products, unit costsreduced modestly in the year. In the year ahead we expect unit costs to berelatively flat.Investment in research and development was £864m (2008 £885m), of which theGroup funded around 55 per cent (£471m). The charge to the income statementdeclined slightly for the full year, by £24m to £379m. This was partly afunction of lower cash spend, but also due to a small increase in the net levelof spend capitalised in the period. The charge in 2010 is expected to increaseby around £35m as more engineering time focuses on early stage programmes, suchas the Trent XWB, on which research and development spending is charged ratherthan capitalised.Underlying profit before tax, which excludes the non-cash impact of the hedgebook and other financial instruments, increased by four per cent to £915m (2008 £880m). This growth in profit reflected a significant increase in originalequipment and a more modest growth in services revenues, along with lower R&D,lower restructuring charges and improved foreign exchange rates. It also tookaccount of increased unit costs, and the higher financing costs resulting fromthe new GBP bond issued in April 2009.The Group's reported profit before tax of £2,957m includes the effects of"mark-to-market" of its financial instruments, for which hedge accounting isnot adopted. This effectively reverses much of the revaluation reported in thesecond half of 2008. The impact of mark to market is included within netfinancing in the income statement (see note 2).
The underlying tax charge of £187m benefited from a one-off £35m credit following the successful completion of overseas tax audits and changes in legislation. This resulted in a reduction in the underlying tax rate to 20.4 per cent. The 2010 tax rate is expected to return to a more normal 24 per cent effective rate.
The Group reported a net cash outflow of £183m for the period: £141m of thiswas caused by the revaluation of currency balances at the end of the period.The remaining outflow reflected the combined effects of an increase in profits,a £50m increase in payments to shareholders, a slow-down in order flow andassociated customer deposits, slightly increased net financial working capitaland significant investment in the business. The Group invested £76m in addingcapability through acquisitions in the year. This included £71m to acquire a 33 per cent holding in ODIM ASA, a Norwegian company involved in the offshore oiland gas sector.
The Group expects a modest cash outflow in 2010, reflecting a further slowdown in customer deposits, increased investment in capacity and capability and increased payments to shareholders in the period.
Basic earnings per share were 120.38p (2008 loss of 73.63p), reflecting themark-to-market adjustments above, with underlying earnings per share increasingby eight per cent to 39.67p (2008 36.70p), partly reflecting an improved taxrate.Group prospects:
Rolls-Royce benefits from the disciplined application of a long-term strategy. This has given us a broad, well balanced portfolio and a strong financial position.
Long-term growth is underpinned by a strong market position, a record number ofmajor programmes, new service facilities and our expanded aftermarket servicepropositions. We expect these factors to lead to a doubling of revenues overthe next ten years.In the short-term the Group expects the trading environment to remaindifficult, with some continuing demand and operational uncertainty. The Groupexpects underlying revenues, underlying profits and average net cash in 2010 tobe broadly similar to those achieved in 2009 with a modest cash outflow in
theyear.Enquiries:Investor relations: Mark Alflatt Director of Financial Communications Rolls-Royce plc Tel: +44 (0)20 7227 9285 [email protected] Media relations:Nicky Louth-Davies
Director of Corporate Communications Rolls-Royce plcTel: +44 (0)20 7227 9232
www.rolls-royce.com
An interview on the results with Rolls-Royce Chief Executive, Sir John Rose, isavailable on video, audio and text on www.rolls-royce.com and www.cantos.com. For news desks requiring visual material, photographs are available at www.rolls-royce.com and news broadcasters requiring broadcast-standard videocan visit www.thenewsmarket.com/rolls-royce. If you are a first-time user,please take a moment to register. In case you have any questions, please email [email protected].
A copy of this report in Portable Document Format (PDF) can be downloaded from the investors section of the website at www.rolls-royce.com.
This Results Announcement contains certain forward-looking statements. Theseforward-looking statements can be identified by the fact that they do notrelate only to historical or current facts. In particular, all statements thatexpress forecasts, expectations and projections with respect to future matters,including trends in results of operations, margins, growth rates, overallmarket trends, the impact of interest or exchange rates, the availability offinancing to the Company, anticipated cost savings or synergies and thecompletion of the Company's strategic transactions, are forward-lookingstatements. By their nature, these statements and forecasts involve risk anduncertainty because they relate to events and depend on circumstances that mayor may not occur in the future. There are a number of factors that could causeactual results or developments to differ materially from those expressed orimplied by these forward-looking statements and forecasts. The forward-lookingstatements reflect the knowledge and information available at the date ofpreparation of this Results Announcement, and will not be updated during theyear. Nothing in this Results Announcement should be construed as a profitforecast.
Review by Business segment*
* Commentaries relate to underlying revenues and profits unless specifically noted. Civil aerospace 2009 2008Order book (£bn) 47.0 43.5Engine deliveries 844 987Underlying revenues (£m) 4,481 4,502
Underlying services revenues (£m) 2,626 2,726 Underlying profit before financing (£m) 493 566
The Civil aerospace business made considerable progress in 2009 with major technical and commercial milestones achieved on a number of programmes. However, volatile trading conditions and the continuing effects of major programme delays impacted performance. The civil portfolio benefits from having a large, broad-based and relatively young fleet of engines which helped mitigate some of the consequences of the global downturn in the period.
Three new Rolls-Royce powered civil aircraft flew for the first time during2009. The Boeing 787, Gulfstream G650 and the Embraer Legacy 650 all completedfirst flights and will enter service progressively over the next three yearsfurther expanding the portfolio, market share and underpinning long-termgrowth.The order book grew to £47bn at the end of 2009 with orders totalling £9.4bn inthe year. This included contracts and announcements for 178 V2500 engines and236 Trent engines for the Trent 700, Trent 1000 and Trent XWB programmes,including new customers from Turkey, Ethiopia and the US. The Trent 700 and Trent XWB passed important programme milestones during theyear, with each achieving orders of more than 1,000 engines. It is significantthat the new Trent XWB has taken just five years to reach this landmark, aquarter of the time it took the Trent 700 to achieve this level of orders. TheTrent order book now includes more than 2,400 engines across six programmes -most due for delivery in the next 5~10 years. This order book, together withmore than 1,600 engines delivered in the previous 15 years, underpins thelong-term growth of the civil fleet over the next decade.
The trading environment remained difficult throughout 2009. Reduced flying hours, deferred support requirements by our customers and the continuing effects of delays to major new airframe programmes impacted segments of the aerospace market differently. However, revenues were stable at £4.5bn for the year, demonstrating the resilient characteristics of the portfolio.
Total engine deliveries for the year were 844, 143 lower than in 2008. Therewas a shift in mix towards Trent engines for the widebody and away from thecorporate and regional sector. A record 224 Trent engines were delivered in theyear with strong growth of the Trent 700 for the Airbus A330 underpinning arecord year. In the narrow-body market the V2500 remained resilient withdeliveries of 347 units, similar to 2008. This included the delivery of the4,000th engine on this programme over the past 25 years. Corporate and regionaldeliveries were 39 per cent lower at 272 engines. Despite delivering fewerengines in 2009, the delivered installed thrust, at 25 million lbs, was similarto 2008. The move to larger engines supported an increase of four per cent inoriginal equipment revenues.An increasing proportion of new engine deliveries include long-term servicecontracts (TotalCareâ„¢ and CorporateCareâ„¢). More than 90 per cent of the lastthree years of Trent engine announcements include TotalCare. Today 76 airlines,including 40 of the top 50, benefit from our TotalCare proposition. Thesecontracts are an important driver of long-term service revenue growth and giveus greater visibility of future workloads. These trends continued in 2009 andsupported further growth in revenues from engines operated under long-termcontacts. However, service revenues from engines maintained on morediscretionary time and material arrangements were lower in 2009. This reflectscustomer actions to delay non-essential maintenance activities reducing thenumber of engine overhauls and the scope of service. As a consequence, overallservice revenues declined by four per cent compared to 2008.The total number of parked aircraft remained stable over 2009 at around 2,700.Of these around 465 were powered by Rolls-Royce. The main Rolls-Royceprogrammes affected were the fleet of AE3007 powered Embraer 135 and 145 typeregional aircraft, with around 100 powered by Rolls-Royce.
Reduced R&D charges, increased fee income from Risk and Revenue Sharing Partners (RRSP's) and favourable foreign exchange effects were more than offset by a weaker original equipment mix, reduced services revenues and increased unit costs. This resulted in lower reported margins and profits in the period.
Civil aerospace outlook
Air travel and airfreight remain at subdued levels. Although there are some signs of improvement in traffic, the sustainability of these trends is uncertain.
In 2010 further detrimental mix changes in revenues are expected as new programmes commence delivery with the consequent impact of launch costs. Services revenues are expected to increase by around ten per cent in 2010, partly benefiting from improved foreign exchange achieved rates. Increased charges from R&D are expected because of the higher activity levels associated with these early phase programmes, such as the Trent XWB. Improved GBP~USD achieved rates will help mitigate some of these effects.
As a result underlying profits are expected to be modestly lower in 2010 thanin 2009.Defence aerospace 2009 2008Order book (£bn) 6.5 5.5Engine deliveries 662 517Underlying revenues (£m) 2,010 1,686
Underlying services revenues (£m) 1,046 947 Underlying profit before financing (£m) 253 223
The Defence aerospace portfolio is characterised by its large installed fleetof engines across a broad range of applications and geographies in support ofmore than 160 customers in 103 countries.A number of new programmes helped to further extend the portfolio in 2009.Three Augusta Westland helicopters, including the Lynx Wildcat, flew for thefirst time, all powered by the CTS800. In addition, the BAES MANTIS UAV,powered by the Model 250, and the Airbus A400M military multi-role aircraft,powered by the TP400, both flew for the first time in 2009. In the first fewdays of 2010 the Rolls-Royce LiftSystemâ„¢ on the JSF was successfully engagedfor the first time in flight. There is continuing uncertainty about the A400M programme. However, the TP400engine has made good progress, with engine flight test results to date beingencouraging. We believe that our estimated costs of completion adequatelyconsider the remaining testing and delivery phases.Investment in technology for the defence markets continued through 2009. Rolls-Royce was awarded funding under more than 20 different technologyprogrammes from the U.S. Department of Defense (DoD) including the second phaseof the ADVENT programme. This phase will include the integration of a varietyof advanced technologies, component-testing culminating in the development of anew technology demonstrator engine. The demonstrator is designed to reduce fuelconsumption significantly, enabling extended mission duration. This advancedengine is targeted for future U.S. military aerospace platforms.
The business continued to make good progress in 2009 with the order book growing strongly to £6.5bn. Orders of almost £3bn in the year included more than £1.7bn in service contracts.
A 28 per cent increase in engine deliveries, driven primarily by engines forthe transport sector including the C130-J and V-22 Osprey, supported a 30 percent increase in original equipment revenues. Services revenues increased byten per cent, reflecting the utilisation of the large installed fleet andforeign exchange translation benefits.
In the military transport sector, engine contracts worth more than $720m for the V-22 Osprey covering delivery and in-service support were signed in the year, providing further evidence of the success of this programme.
In the combat sector, engine contracts worth more than £1.2bn for Tranche IIIEurofighter production and an innovative 10-year service and support contractwith the UK Ministry of Defence were signed. As in previous years, fundingfor the F136 engine contract, to power the JSF, remained uncertain. It waspleasing that funding for 2010 was ultimately confirmed although risks to 2011funding remain.
Margins deteriorated slightly in 2009 as higher unit costs and one-off charges more than offset strong revenue growth and improvements from better USD translation rates. Despite this, a 13 per cent improvement in profits was a strong result in a challenging year.
Defence aerospace outlook
The expansion of the portfolio, the strong positions in military transport andaccess to a global customer base leave the defence portfolio well positioned toaccess growing markets. These factors provide resilience in an uncertainbudgetary environment.
The defence portfolio remains well positioned to deliver a solid performance in 2010 with revenues and profits expected to be similar to those in 2009.
Marine
2009 2008Order book (£bn) 3.5 5.2Underlying revenues (£m) 2,589 2,204
Underlying services revenues (£m) 785 712 Underlying profit before financing (£m) 263 183
The Marine business has continued to perform well, with further strong revenueand profit growth despite a challenging trading environment. £1.2bn of neworders were booked in the year. Modest cancellations of £385m and a furtheryear of strong revenue growth caused the year-end order book to decline to £3.5bn. The offshore oil and gas sector remains encouraging, with continued deepwaterdevelopments in a number of major offshore locations. These include Brazil,West Africa and Russia. The market for specialist vessels continues to offergood opportunities.A number of important milestones were achieved during the year. The LittoralCombat Ship (LCS) completed sea trials, the WR21 powered Type 45 Destroyerentered service with the Royal Navy and the nuclear powered Astute classsubmarine progressed to its commissioning phase. In addition the Far Samson,the world's most powerful offshore vessel, designed and equipped byRolls-Royce, entered service.
The Group continued to expand its network of service centres with six new facilities opened in Seattle, Galveston, Newfoundland, Rio de Janeiro, Genoa and Dubai and with a new customer training facility being developed in Norway.
Market leading positions in the offshore oil and gas sector were further extended with the acquisition of a 33 per cent holding in ODIM ASA, a specialist in marine handling systems.
Rolls-Royce and Royal Caribbean Cruises have settled the lawsuit regarding theMermaid podded propulsion system which experienced technical issues that havebeen resolved. The costs and settlement of this claim were partially coveredby provisions carried forward from prior years and had no significant effect on2009 trading performance.2009 saw strong growth in both original equipment revenues, which increased by21 per cent, and service revenues, up by ten per cent. Services growthreflected the increasing installed base of equipment and the expanding servicenetwork. Margins and profitability made progress in the year. A combination of betteroperational performance, lower input costs and more favourable contract pricingall contributed to a strong improvement in margins to more than ten per centfor the year, and a 44 per cent increase in underlying profits.
Marine outlook
The order book remains strong, despite a slow down in new order activity. Marine's market leading position in the offshore sector, demand for high specification vessels and the opportunity to continue to develop services provide good visibility of performance. In 2010 revenues and profits are expected to be similar to those in 2009.
Energy 2009 2008Order book (£bn) 1.3 1.3Engine deliveries 73 64Underlying revenues (£m) 1,028 755Underlying services revenues (£m) 470 370
Underlying profit/(loss) before financing (£m) 24 (2)
Energy made solid progress in 2009, despite reduced demand and difficult financing conditions in the oil & gas and power generation markets. Improvements in operational performance were accompanied by exceptional revenue growth in the period. We continued to invest in low carbon technologies, including the tidal power demonstrator and the new civil nuclear business.
Despite the challenging environment, order intake of £0.9bn in the period enabled the order book to remain resilient at £1.3bn at the end of 2009. Revenues increased by 36 per cent and exceeded £1bn for the first time.
In the main, oil and gas companies continued to move ahead with substantialinvestment plans, albeit more cautiously than in previous years. The progressof new power generation programmes has slowed because of a lack of affordableproject finance and lower demand for electricity. Order growth in prior years and improved USD translation rates helped Energydeliver a 45 per cent improvement in original equipment revenues, with both oiland gas and power generation contributing.
The Group's oil and gas activity has remained particularly robust, and a growing installed base and high utilisation rates contributed to a 27 per cent increase in service revenues across the oil & gas and power generation markets.
The Group continues to focus on improving operating performance and has invested in new assembly facilities and test beds to support both improved execution and future load growth.
In low carbon technology programmes, the tidal power demonstrator project inthe Pentland Firth, Scotland is expected to commence trials within the nextyear. Ongoing development of the fuel cell technology programme continued withinvestment at a lower level than in prior years. The Group's civil nuclear ambitions made progress through 2009 as we continuedto expand the civil nuclear team. Rolls-Royce announced that it will lead a UKGovernment-supported Nuclear Advanced Manufacturing Research Centre, and willdevelop a new UK based manufacturing facility.
As a result of strong growth in revenues, improving operational performance and reduced investment in fuel cells, profitability improved by £26m in the period.
Energy outlook
Improved operational performance and reduced investment in new programmes will cause profits to approximately double in 2010.
Financial Review - 2009 Performance
Foreign exchange:
The pace and extent of currency movements had a material effect on the Group'sreported financial performance in 2009, with the GBP exchange rates against theUSD and the Euro having the largest effect. These movements have influencedboth the reported income statement and the cash flow and closing net cashposition (as set out in the cash flow statement) in the following ways: 1. Income statement- the most meaningful impact was the period-end mark-to-market of outstanding financial instruments (foreign exchange contracts, interest rate, commodity and jet fuel swaps). The principal adjustments related to the GBP~USD hedge book. The principal spot rate movements in the year were as follows: Jan 1 2009 Dec 31 2009 GBP ~ USD £1~$1.438 £1~$1.615 GBP ~ Euro £1~€1.034 £1~€1.126 The average rates throughout the year were: FY2008 FY 2009 GBP ~ USD £1~$1.854 £1~$1.566 GBP ~ Euro £1~€1.258 £1~€1.123
The impact of the period-end mark-to-market on all of the outstanding financial
instruments is the principal element included within net financing income in
the income statement of £1,785m (2008 £2,754m net financing charge),
contributing to a published profit before tax of £2,957m (compared to a loss
before tax of £1,892m in 2008). These adjustments are non-cash accounting
adjustments required under IAS 39 and do not, therefore, reflect the underlying
trading performance of the Group for the period.
Underlying profit before tax of £915m benefited from £71m of foreign exchange
benefits compared to 2008. The achieved rate on selling net USD income was
around one and a half cents better in 2009 than 2008, contributing £16m of
transactional benefits. In addition, the improvement in the average GBP~USD
and GBP ~ Euro exchange rates, 29 and 14 cents respectively, contributed
translation benefits totalling £55m to underlying profit before tax in the
year.
2. Balance sheet and cash flow - The Group maintains a number of currency cash
balances which vary throughout the financial year. Given the movements in
foreign exchange rates in the period, a number of these cash balances were
impacted by the stronger GBP exchange rates at the period-end, causing a
reduction of £141m in the periodic cash flow and hence the closing balance
sheet cash position.Income statement:
The firm and announced order book, at constant exchange rates, was £58.3bn (2008 £55.5bn) after reflecting new order intake of £13.4bn in the period. Aftermarket services included in the order book totalled £16.5bn (2008 £14.5bn).
Revenues increased by 15 per cent, compared with 2008, to £10,414m. Revenues on an underlying basis grew by 11 per cent. Payments to industrial RRSPs, charged in cost of sales, amounted to £231m (2008 £268m).
Gross research and development investment was £864m (2008 £885m). Net researchand development investment, charged to the income statement was £379m (2008 £403m) after net capitalisation of £92m (2008 £87m) on development programmes in the period. Receipts from RRSPs in respect of new programme developments,shown as other operating income, were £89m (2008 £79m), as key partners joinedmajor new programmes, primarily the Trent XWB.Restructuring costs of £55m (2008 £82m) were charged, reflecting the ongoingreduction in headcount and improvement programmes designed to improve futureoperational performance.
Underlying profit margins before financing fell by approximately 0.3 per cent to 9.7 per cent in the period, reflecting strong growth in lower margin original equipment and an increase in unit costs of around three per cent relative to 2008, partially offset by both transactional and translational foreign exchange benefits of £71m.
Net financing income was £1,785m (2008 charge of £2,754m) including the effectsof mark to market revaluations. Underlying finance costs increased to £68m(2008 £39m), reflecting lower interest rates on cash deposits and increasedfunding costs associated with the £500m GBP bond issued in 2009.
Underlying profit before tax was £915m (2008 £880m). Underlying earnings per share increased by eight per cent, to 39.67p (2008 36.70p) (see note 3).
The income statement tax charge of £740m (2008 credit of £547m), reflects thelarge mark-to-market gain caused by the revaluation of various financialinstruments at the period end. The taxation charge on an underlying basis was£187m (2008 £217m), representing 20.4 per cent of underlying profit beforetax. The underlying rate benefited from the settlement of certain overseas taxaudits and is affected by the geographical mix of profits, changes inlegislation and the benefit of research and development tax credits. The 2010full year underlying tax rate is expected to be around 24 per cent.
Balance sheet:
Investment in intangibles during the period was £342m (2008 £393m) and included£123m (2008 £97m) for recoverable engine costs, £121m (2008 £113m) forcapitalised development costs and a further £66m (2008 £55m) for certificationcosts and participation fees. The continued development and replacement of operational facilities contributedto a total investment in property, plant and equipment of £291m (2008 £283m). Overall investment in tangible and intangible assets for the full year 2010 isexpected to be similar to 2009.The overall net position of assets and liabilities for TotalCare packages onthe balance sheet was an asset of £970m (2008 £848m). The movements reflectnew agreements, timing of overhauls and changes in foreign exchange rates.
Provisions were £442m (2008 £369m), including increased provisions against warranties and guarantees reflecting increased volumes. Provisions carried forward in respect of potential customer financing exposure were similar to 2008 at £71m.
Cash flow:
Working capital increased by £78m during the period. Lower inventory levels,reduced by £119m, partially offset financial working capital which increased by£197m.
Cash outflow in the period of £183m (2008 inflow £570m) included a £141m outflow (2008 £439m benefit), relating to the period end revaluation of foreign currency cash balances.
Cash flow for the period was £173m lower than 2008, excluding the effects of period end revaluations. The main changes from 2008 included increased cash payments to shareholders, higher pension scheme contributions and reduced customer deposits.
Average net cash for the period was £635m (2008 £375m). The net cash balance at the period-end was £1,275m (2008 £1,458m).
There were no material changes to the Group's gross and net contingentliabilities in the period. Contingent liabilities include commitments made tocivil aerospace customers in the form of asset value guarantees (AVGs) andcredit guarantees. At the end of 2009, the gross level of commitments ondelivered aircraft was $1,137m (£704m), including $628m for AVGs and $509m forcredit guarantees. The net exposure after reflecting the level of security was$217m (£134m). The payment to shareholders will, as before, be made in the form of redeemableC Shares which shareholders may either choose to retain or redeem for a cashequivalent. The Registrar, on behalf of the Company, operates a C ShareReinvestment Plan (CRIP) and can, on behalf of shareholders, purchase ordinaryshares from the market rather than delivering a cash payment. The proposedfinal payment to shareholders is equivalent to 9.00 pence per ordinary share(2008 8.58 pence), a five per cent increase over 2008, bringing the full yearpayment to 15 pence per share. The final payment is payable on July 1, 2010 to shareholders on the register onApril 23, 2010. The final day of trading with entitlement to C Shares is April20, 2010.Condensed consolidated income statementFor the year ended December 31, 2009 Restated* 2009 2008 Notes £m £mRevenue 1 10,414 9,082Cost of sales (8,303) (7,278)Gross profit 2,111 1,804Other operating income 89 79
Commercial and administrative costs (740)
(699)
Research and development costs (379)
(403)
Share of profit of joint ventures and associates 93
74
Operating profit 1,174
855
(Loss)/profit on sale or termination of businesses (2)
7Profit before financing 1 1,172 862 Financing income 2,276 432Financing costs (491) (3,186)Net financing 2 1,785 (2,754) Profit/(loss) before taxation*1 2,957 (1,892)Taxation (740) 547Profit/(loss) for the year 2,217 (1,345) Attributable to: Equity holders of the parent 2,221 (1,340)Minority interests (4) (5) Profit/(loss) for the year 2,217 (1,345) * During the year, the Group has reviewed the allocation of costs. As a result, costs of £33m classified as cost of sales in 2008 have been reclassified as commercial and administrative costs. Earnings per ordinary share 3 Basic 120.38p (73.63p)Diluted 119.09p (73.63p)
Underlying earnings per share are shown in note 3. Payments to shareholders in respect of the year 4
Pence per share 15.00 14.30pTotal (£m) 278 263
*1 Underlying profit before taxation (£m) 915
880
Condensed consolidated statement of comprehensive income For the year ended December 31, 2009
Restated* 2009 2008 £m £mProfit/(loss) for the year 2,217 (1,345)Other comprehensive income Foreign exchange translation differences on foreign (158) 603 operations Net actuarial gains (1,148) 944
Movement in unrecognised post-retirement surplus 707
(928)
Movement in post-retirement minimum funding liability 40
66
Transfers from transition hedging reserve (27)
(80)
Net movements on cash flow hedging reserve in respect of 22 (41)
joint ventures and associates Related tax movements 141
(4)
Total comprehensive income for the year 1,794 (785) Attributable to: Equity holders of the parent 1,799 (782)Minority interests (5) (3)Total comprehensive income for the year 1,794
(785)
* 2008 figures have been restated to reflect the adoption of IFRIC 14 with effect from January 1, 2008 - see note 8.
Condensed consolidated balance sheetAt December 31, 2009 Restated* 2009 2008 Notes £m £mASSETS Non-current assets Intangible assets 5 2,472 2,286Property, plant and equipment 2,009
1,995
Investments - joint ventures and associates 437
345Other investments 58 53Other financial assets 6 637 366Deferred tax assets 360 804
Post-retirement scheme surpluses 8 75
453 6,048 6,302 Current assets Inventory 2,432 2,600Trade and other receivables 3,877 3,929Taxation recoverable 12 9Other financial assets 6 80 24Short-term investments 2 1Cash and cash equivalents 2,962 2,471Assets held for sale 9 12 9,374 9,046Total assets 15,422 15,348 LIABILITIES Current liabilities Borrowings (126) (23)Other financial liabilities 6 (181) (316)Trade and other payables (5,628) (5,735)Current tax liabilities (167) (184)Provisions (210) (181) (6,312) (6,439) Non-current liabilities Borrowings 7 (1,787) (1,325)Other financial liabilities 6 (868) (2,525)Trade and other payables (1,145) (1,318)Non-current tax liabilities - (1)Deferred tax liabilities (366) (307)Provisions (232) (188)Post-retirement scheme deficits 8 (930) (1,020) (5,328) (6,684)Total liabilities (11,640) (13,123) Net assets 3,782 2,225 EQUITY Capital and reserves Called-up share capital 371 369Share premium account 98 82Capital redemption reserves 191 204Hedging reserves (19) (22)Other reserves 506 663Retained earnings 2,635 920Equity attributable to equity holders of the parent 3,782 2,216Minority interests - 9Total equity 3,782 2,225
* 2008 figures have been restated to reflect the adoption of IFRIC 14 witheffect from January 1, 2008 (see note 8) and the adoption of Amendments to IAS1 relating to the classification of derivative financial instruments as currentor non-current (see note 6).Condensed consolidated cash flow statementFor the year ended December 31, 2009 2009
2008
Notes £m
£m
Reconciliation of cash flows from operating activities Profit/(loss) before taxation 2,957
(1,892)
Share of profit of joint ventures and associates (93)
(74)
Loss/(profit) on sale or termination of businesses 2
(7)
Profit on sale of property, plant and equipment (40)
(11)Net financing 2 (1,785) 2,754Taxation paid (119) (117)
Amortisation of intangible assets 121
107
Depreciation and impairment of property, plant and 194
208equipment Increase in provisions 81 39Decrease/(increase) in inventories 119
(208)
Increase in trade and other receivables (14)
(1,072)
(Decrease)/increase in trade and other payables (183)
1,242
(Increase)/decrease in other financial assets and (303)
144
liabilities Additional cash funding of post-retirement schemes (159)
(117)
Share-based payments charge 31
40
Transfers of hedge reserves to income statement (27)
(80)
Dividends received from joint ventures and associates 77
59
Net cash inflow from operating activities 859
1,015
Cash flows from investing activities Additions of unlisted investments (2)
(1)
Disposals of unlisted investments -
6
Additions to intangible assets (339)
(389)
Disposals of intangible assets 2
-
Purchases of property, plant and equipment (258)
(286)
Disposals of property, plant and equipment 82
68Acquisitions of businesses (7) (47)Disposals of businesses 3 6
Investments in joint ventures and associates (87)
(32)
Disposals of joint ventures and associates -
30
Net cash outflow from investing activities (606)
(645)
Cash flows from financing activities Current borrowings - repayment (10)
(1)
Non-current borrowings - increase/(repayment) 693
(22)
Capital element of finance lease payments (3)
(4)
Net cash inflow/(outflow) from increase/(decrease) in 680
(27)borrowings Interest received 24 52Interest paid (66) (53)
Interest element of finance lease payments (1)
(1)
(Increase)/decrease in government securities and (1)
39corporate bonds Issue of ordinary shares 18 17Purchase of ordinary shares (17) (44)
Other transactions in ordinary shares (3)
(4)
Redemption of B/C Shares (250)
(200)
Net cash inflow/(outflow) from financing activities 384
(221)
Increase in cash and cash equivalents 637
149
Cash and cash equivalents at January 1 2,462
1,872
Foreign exchange (141)
441
Cash and cash equivalents at December 31 2,958
2,462
Reconciliation of movement in cash and cash equivalents to movements in net funds 2009 2008 £m £m
Increase in cash and cash equivalents 637
149
Net cash (inflow)/outflow from (increase)/decrease in borrowings (680)
27
Cash outflow/(inflow) from increase/(decrease) in government 1
(39)
securities and corporate bondsChange in net funds resulting from cash flows (42)
137
Net funds (excluding cash and cash equivalents) of businesses - (6) acquired/disposed Exchange adjustments (141) 439Fair value adjustments 110 (319)Movement in net funds (73) 251
Net funds at January 1 excluding the fair value of swaps 1,124
873
Net funds at December 31 excluding the fair value of swaps 1,051 1,124 Fair value of swaps hedging fixed rate borrowings
224
334
Net funds at December 31 1,275
1,458
The movement in net funds (defined by the Group as including the items shown below) is as follows:
At Funds Exchange Fair value Reclassi- At January flow adjustments adjustments fications December 1, 2009 31, 2009 £m £m £m £m £m £mCash at bank and in 940 358 (58) - - 1,240hand Overdrafts (9) 5 - - - (4)Short-term deposits 1,531 274 (83) - - 1,722Cash and cash 2,462 637 (141) - - 2,958equivalents Investments 1 1 - - - 2Other current (11) 10 - - (121) (122)borrowings Non-current (1,324) (693) - 110 121 (1,786)borrowings Finance leases (4) 3 - - - (1) 1,124 (42) (141) 110 - 1,051Fair value of swaps 334 (110) 224hedging fixed rate borrowings 1,458 (42) (141) - - 1,275Condensed statement of changes in equityFor the year ended December 31, 2009 Attributable to equity holders of the parent Share Share Capital Hedging Other Retained
Total Minority Total
capital premium redemption reserves reserves earnings interests equity reserves *1 *2 *3 £m £m £m £m £m £m £m £m £mAt January 1, 364 67 191 77 62 2,776 3,537 12 3,5492008 Adoption of - - - - - (353) (353) - (353)IFRIC 14 (note 8) At January 1, 364 67 191 77 62 2,423 3,184 12 3,1962008 restated Loss for the - - - - - (1,340) (1,340) (5) (1,345)year Foreign - - - - 601 - 601 2 603 exchange translation differences on foreign operations Net actuarial - - - - - 944 944 - 944gains Movement in - - - - - (928) (928) - (928)unrecognised post-retirement surplus Movement in - - - - - 66 66 - 66post-retirement minimum funding liability Transfers from - - - (80) - - (80) - (80)transition hedging reserve Transfers to - - - (41) - - (41) - (41)cash flow hedging reserve Related tax - - - 22 - (26) (4) - (4)movements Total - - - (99) 601 (1,284) (782) (3) (785)comprehensive income for the year Arising on 2 15 - - - - 17 - 17issues of ordinary shares Issue of B - - (237) - - - (237) - (237)Shares Redemption of B - - 200 - - (200) - - -Shares Conversion of B 3 - 50 - - - 53 - 53Shares into ordinary shares Ordinary shares - - - - - (44) (44) - (44)purchased Share-based - - - - - 36 36 - 36payments adjustment *4 Related tax - - - - - (11) (11) - (11)movements - deferred tax Other changes 5 15 13 - - (219) (186) - (186)in equity in the year At January 1, 369 82 204 (22) 663 920 2,216 9 2,2252009 Profit for the - - - - - 2,221 2,221 (4) 2,217year Foreign - - - - (157) - (157) (1) (158)exchange translation differences on foreign operations Net actuarial - - - - - (1,148) (1,148) - (1,148)gains Movement in - - - - - 707 707 - 707unrecognised post-retirement surplus Movement in - - - - - 40 40 - 40post-retirement minimum funding liability Transfers from - - - (27) - - (27) - (27)transition hedging reserve Transfers to - - - 22 - - 22 - 22cash flow hedging reserve Related tax - - - 8 - 133 141 - 141movements Total - - - 3 (157) 1,953 1,799 (5) 1,794comprehensive income for the year Arising on 2 16 - - - - 18 - 18issues of ordinary shares Issue of C - - (264) - - 1 (263) - (263)Shares Redemption of C - - 251 - - (251) - - -Shares Ordinary shares - - - - - (17) (17) - (17)purchased Share-based - - - - - 28 28 - 28payments adjustment*4 Transactions - - - - - - - (4) (4)with minority interests Related tax - - - - - 1 1 - 1movements - deferred tax Other changes 2 16 (13) - - (238) (233) (4) (237)in equity in the year At December 31, 371 98 191 (19) 506 2,635 3,782 - 3,7822009
*1 Hedging reserves include nil (2008 £19m) in respect of the transition
hedging reserve and £(19)m (2008 £(41)m) in respect of the cash flow hedging
reserve.
*2 Other reserves include a merger reserve of £3m (2008 £3m) and a
translation reserve of £503m (2008 £660m).*3 At December 31, 2009, 7,156,497 ordinary shares with a net book value of
£25m (2008 8,017,635 ordinary shares with a net book value of £34m) were held
and included in retained earnings. During the year, 6,766,884 ordinary shares
with a net book value of £25m (2008 8,782,658 shares with a net book value of
£37m) vested in share based payment plans.*4 The share-based payment adjustment is the net of the credit to equity in
respect of the share-based payment charge to the income statement and the
actual cost of shares vesting, excluding those vesting from own shares.
Basis of preparationThese financial statements have been prepared in accordance with InternationalFinancial Reporting Standards (IFRS) adopted for use in the EU (Adopted IFRS)in accordance with EU law (IAS Regulation EC 1606/2002).The financial information set out above does not constitute the Company'sstatutory accounts for the years ended December 31, 2009 or 2008. Statutoryaccounts for 2008 have been delivered to the registrar of companies, and thosefor 2009 will be delivered in due course. The auditors have reported on thoseaccounts; their reports were (i) unqualified, (ii) did not include referencesto any matters to which the auditors drew attention by way of emphasis withoutqualifying their reports and (iii) did not contain a statement under section237(2)or (3) of the Companies Act 1985 in respect of the accounts for 2008,nor a statement under section 498(2) or (3) of the Companies Act 2006 inrespect of the accounts for 2009.
The following revisions to Adopted IFRS have been adopted in the Group's financial statements in 2009:
- Amendments to IAS 1 Presentation of Financial Statements - these amendments
revise requirements for the presentation of the financial statements and do not
affect the Group's overall reported results.
- Improvements to IFRSs (2008) - The amendments to IAS 1 clarify the
classification of derivative financial instruments as current or non-current.
Previously the Group has classified all derivative financial instruments within
the IAS 39 category 'held for trading' as current. As a result of these
amendments, they have now been classified according to their maturity dates.
The impact is shown in note 6.
- Amendments to IFRS 2 Share-based Payments: Vesting Conditions and Cancellations
- these amendments concern certain aspects of the valuation of share-based
payments and the impact of a cancellation by a grantee. These amendments have
not had a significant impact on the charges recognised to date for share-based
payments.
- Amendments to IFRS 7 Financial Instruments: Disclosure - these amendments
require additional disclosure of the basis of fair value measurements and
liquidity risks.
- IFRS 8 Operating Segments - this standard amends the requirements for
disclosure of segmental performance and does not have any effect on the Group's
overall reported results. Note 1 reflects the new requirements.
- Amendment to IAS 23 Borrowing Costs - the amendment generally eliminates the
option to expense borrowing costs attributable to the acquisition, construction
or production of a qualifying asset as incurred, and instead requires the
capitalisation of such borrowing costs as part of the cost of the specific
asset. There is no significant impact.
- IFRIC 12 Service Concession Arrangements - this interpretation is applicable to
the Group's investments in the joint ventures operating the Future Strategic
Tanker Aircraft contract with the UK Ministry of Defence. This contract
commenced in 2008 and the adoption of IFRIC 12 does not have a material
transitional impact.
- IFRIC 14 IAS 19 The Limit of a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction - this interpretation applies where
regulatory funding requirements will result in an unrecognisable surplus
arising in the future. It has been adopted with effect from January 1, 2008.
The impact of the adoption of this interpretation is set out in note 8.
1 Analysis by business segment
The analysis by business segment is presented in accordance the basis set outin IFRS 8 Operating segments, on the basis of those segments whose operatingresults are regularly reviewed by the Board (the Chief Operating Decision Makeras defined by IFRS 8). The analyses for 2008 have been restated on aconsistent basis.
The operating results are prepared on an underlying basis that excludes items considered to be non-underlying in nature. The principles adopted are:
Underlying revenues - Where revenues are denominated in a currency other thanthe functional currency of the Group undertaking, these exclude the release ofthe foreign exchange transition hedging reserve and reflect the achievedexchange rates arising on settled derivative contracts.Underlying profit before financing - Where transactions are denominated in acurrency other than the functional currency of the Group undertaking, thisexcludes the release of the foreign exchange transition hedging reserve andreflects the transactions at the achieved exchange rates on settled derivativecontracts.
Underlying profit before taxation - In addition to those adjustments in underlying profit before financing:
- Includes amounts realised from settled derivative contracts and revaluation of
relevant assets and liabilities to exchange rates forecast to be achieved from
future settlement of derivative contracts.
- Excludes unrealised amounts arising from revaluations required by IAS 39
Financial Instruments: Recognition and Measurement, changes in value of
financial RRSP contracts arising from changes in forecast payments and the net
impact of financing costs related to post-retirement scheme benefits.
This analysis also includes a reconciliation of the underlying results to those reported in the consolidated income statement.
2009 2008 Original Original equipment Services Total equipment Services Total £m £m £m £m £m £mUnderlying revenues Civil aerospace 1,855 2,626 4,481 1,776 2,726 4,502Defence aerospace 964 1,046 2,010 739 947 1,686Marine 1,804 785 2,589 1,492 712 2,204Energy 558 470 1,028 385 370 755 5,181 4,927 10,108 4,392 4,755 9,147 2009 2008 £m £m
Underlying profit before financing
Civil aerospace 493 566Defence aerospace 253 223Marine 263 183Energy 24 (2)Reportable segments 1,033 970Central items (50) (51) 983 919Underlying net financing (68) (39)
Underlying profit before taxation 915
880
Underlying taxation (187)
(217)
Underlying profit for the year 728
663 Attributable to: Equity holders of the parent 732 668Minority interests (4) (5)
Total comprehensive income for the year 728
663Net assets/(liabilities) Total assets Total liabilities Net assets 2009 2008 2009 2008 2009 2008 £m £m £m £m £m £mCivil aerospace 7,612 7,543 (4,918) (7,213) 2,694 330Defence aerospace 1,228 1,037 (1,573) (1,234) (345) (197)Marine 2,379 2,339 (1,738) (1,851) 641 488Energy 1,025 834 (492) (442) 533 392Reportable segments 12,244 11,753 (8,721) (10,740) 3,523 1,013Eliminations (457) (477) 457 477 - -Net funds/(debt) 3,188 2,806 (1,913) (1,348) 1,275 1,458Tax assets/liabilities 372 813 (533) (492) (161) 321Unallocated post-retirement 75 453 (930) (1,020) (855) (567) scheme surpluses/deficits Net assets 15,422 15,348 (11,640) (13,123) 3,782 2,225 Group employees at year end 2009 2008 Number NumberCivil aerospace 21,500 22,600Defence aerospace 5,500 5,700Marine 8,700 8,300Energy 2,600 2,300 38,300 38,900 Reconciliation to reported Total Underlying results reportable central Total Underlying segments items underlying adjustments Group £m £m £m £m £mYear ended December 31, 2009 Revenue from sale of 5,181 - 5,181 128 5,309 original equipment Revenue from services 4,927 - 4,927 178 5,105Total revenue 10,108 - 10,108 306 10,414Operating profit excluding 942 (50) 892 189 1,081 share of profit of joint ventures and associates Share of profit of joint 93 - 93 - 93 ventures and associates Profit on sale of (2) - (2) - (2) businesses Profit before financing 1,033 (50) 983 189 1,172 and taxation Net financing (68) (68) 1,853 1,785Profit before taxation (118) 915 2,042 2,957Taxation (187) (187) (553) (740)Profit for the year (305) 728 1,489 2,217 Year ended December 31, 2008 Revenue from sale of 4,392 - 4,392 (15) 4,377original equipment Revenue from services 4,755 - 4,755 (50) 4,705Total revenue 9,147 - 9,147 (65) 9,082Operating profit excluding 893 (51) 842 (61) 781share of profit of joint ventures Share of profit of joint 70 - 70 4 74ventures and associates Profit on sale of 7 - 7 - 7businesses Profit before financing 970 (51) 919 (57) 862and taxation Net financing (39) (39) (2,715) (2,754)Profit before taxation (90) 880 (2,772) (1,892)Taxation (217) (217) 764 547Profit for the year (307) 663 (2,008) (1,345)Underlying adjustments 2009 2008
Profit Profit before Net before Net Revenue financing financing Taxation Revenue financing
financing Taxation £m £m £m £m £m £m £m £mUnderlying 10,108 983 (68) (187) 9,147 919 (39) (217)performance Release of 27 27 - - 80 80 - - transition hedging reserve Recognise 279 - - - (145) - - -revenue at exchange rate on date of transaction Realised gains - 274 60 - - (185) (107) -on settled derivative contracts*1 Net unrealised - 14 1,835 - - 4 (2,479) -fair value changes to derivative contracts*2 Effect of - (126) - - - 44 - -currency on contract accounting Revaluation of - - (17) - - - 14 -trading assets and liabilities Financial RRSPs - - 72 - - - (121) -- foreign exchange differences and changes in forecast payments Net - - (97) - - - (22) - post-retirement scheme financing Related tax - - - (553) - - - 764effect Total 306 189 1,853 (553) (65) (57) (2,715) 764underlying adjustments Reported per 10,414 1,172 1,785 (740) 9,082 862 (2,754) 547consolidated income statement
*1 Realised (gains)/losses on settled derivative contracts included in profit
before tax:
- includes £15m of realised losses (2008 nil) deferred from prior years;
- excludes £6m of gains (2008 losses of £24m) realised in the year on derivative
contracts settled in respect of trading cash flows that occurred after the
year-end;
- excludes £14m of losses (2008 nil) realised in respect of derivatives held in
net investment hedges. *2 The adjustment for unrealised fair value changes included in profit before
financing includes the reversal of £5m of unrealised gains (2008 £4m) in
respect of derivative contracts held by joint ventures and associates and £9m
(2008 nil) of unrealised losses for which the related trading contracts have
been cancelled and consequently the fair value loss has been recognised
immediately in underlying profit.
2 Net financing 2009 2008 Underlying Underlying net net financing*1 financing*1 £m £m £m £mFinancing income Interest receivable 21 21 59 59
Fair value gains on foreign currency contracts 1,783 - -
-
Financial RRSPs - foreign exchange differences and 72 - -
- changes in forecast payments Fair value gains on commodity derivatives 52 - -
-
Expected return on post-retirement scheme assets 305 - 373
-Net foreign exchange gains 43 - - - 2,276 21 432 59 Financing costs Interest payable (64) (64) (69) (69)
Fair value losses on foreign currency contracts - - (2,383)
-
Financial RRSPs - foreign exchange differences and changes in forecast payments - - (121)
-
Financial charge relating to financial RRSPs (25) (25) (26)
(26)
Fair value losses on commodity derivatives - - (96)
-
Interest on post-retirement scheme liabilities (402) - (395)
-Net foreign exchange losses - - (91) -Other financing charges - - (5) (3) (491) (89) (3,186) (98)Net financing 1,785 (68) (2,754) (39) Analysed as: Net interest payable (43) (43) (10) (10)
Net post-retirement scheme financing (97) - (22)
-Net other financing 1,925 (25) (2,722) (29)Net financing 1,785 (68) (2,754) (39)* 1 See note 1
3 Earnings per ordinary share (EPS)
Basic EPS are calculated by dividing the profit attributable to ordinaryshareholders by the weighted average number of ordinary shares in issue duringthe year, excluding ordinary shares held under trust, which have been treatedas if they had been cancelled.
Diluted EPS are calculated by dividing the profit attributable to ordinary shareholders by weighted average number of ordinary shares in issue during the year as above, adjusted by the bonus element of share options.
2009 2008 Potentially Potentially dilutive dilutive share share Basic options Diluted Basic options*1 DilutedProfit/(loss) (£m) 2,221 - 2,221 (1,340) - (1,340)Weighted average 1,845 20 1,865 1,820 - 1,820number of shares (millions) EPS 120.38p (1.29p) 119.09p (73.63p) - (73.63p)
*1 As the 2008 basic EPS is negative, in accordance with IAS 33 Earnings per Share, share options are not considered dilutive.
The reconciliation between underlying EPS and basic EPS is as follows:
2009
2008
Pence £m Pence
£m Underlying EPS/Underlying profit attributable 39.67 732 36.70 668
to equity holders of the parent
Total underlying adjustments to profit before 110.68 2,042 (152.31) (2,772)
tax (note 1) Related tax effects (29.97) (553) 41.98
764 EPS/Profit/ (loss)attributable to equity 120.38 2,221 (73.63) (1,340)
holders of the parent
4 Payments to shareholders in respect of the year
2009 2008 Pence Pence per share £m per share £mInterim 6.00 111 5.72 105Final 9.00 167 8.58 158 15.00 278 14.30 263 5 Intangible assets Certification costs and Recoverable Software participation Development engine and Goodwill fees expenditure costs other Total £m £m £m £m £m £mCost: At January 1, 1,013 568 632 463 254 2,9302009 Exchange (28) (3) (2) - (2) (35)adjustments Additions - 66 121 123 32 342On acquisitions 6 - - - - 6of businesses Disposals - - - - (11) (11)At December 31, 991 631 751 586 273 3,2322009 Accumulated amortisation and impairment: At January 1, 5 165 176 250 48 6442009 Exchange - (1) - - (1) (2)adjustments Provided during 2 13 29 46 31 121the year Disposals - - - - (3) (3)At December 31, 7 177 205 296 75 7602009 Net book value 984 454 546 290 198 2,472at December 31, 2009 Net book value 1,008 403 456 213 206 2,286at December 31, 2008
Certification costs and participation fees, development costs and recoverable engine costs have been reviewed for impairment in accordance with the requirements of IAS 36 Impairment of Assets. Where an impairment test was considered necessary, it has been performed on the following basis: - The carrying values have been assessed by reference to value in use. These have
been estimated using cash flows from the most recent forecasts prepared by
management, which are consistent with past experience and external sources of
information on market conditions over the lives of the respective programmes. - The key assumptions underlying cash flow projections are assumed market share,
programme timings, unit cost assumptions, discount rates, and foreign exchange
rates.
- The pre-tax cash flow projections have been discounted at 11 per cent, based on
the Group's weighted average cost of capital. - No impairment is required on this basis. However, a combination of changes in
assumptions and adverse movements in variables that are outside the company's
control (eg: discount rate, exchange rate and airframe delays), could result in
impairment in future years.
6 Other financial assets and liabilities
Further to the amendments to IAS 1 in the Improvements to IFRS (2008),derivative contracts are now classified as current or non-current based ontheir maturity dates. Previously all 'held for trading' items were deemed tobe current. Derivatives Foreign Interest exchange Commodity rate Financial C contracts contracts contracts Total RRSPs Shares Total £m £m £m £m £m £m £mAt December 31, 2009 Non-current 429 11 197 637 - - 637assets Current 72 4 4 80 - - 80assets Current (56) (12) - (68) (100) (13) (181)liabilities Non current (589) (14) (2) (605) (263) - (868)liabilities (144) (11) 199 44 (363) (13) (332)At December 31, 2008 Non-current 88 - 278 366 - - 366assets Current 24 - - 24 - - 24assets Current (214) (36) (2) (252) (64) - (316)liabilities Non current (2,079) (53) (2) (2,134) (391) - (2,525)liabilities (2,181) (89) 274 (1,996) (455) - (2,451)
Foreign exchange and commodity financial instruments
Movements in the fair value of foreign exchange and commodity contracts were asfollows: 2009 2008 Foreign exchange Commodity Total Total £m £m £m £mAt January 1 (2,181) (89) (2,270) 418
Fair value (losses)/gains to fair value (33) - (33)
83
hedges
Fair value losses to net investment hedges (14) - (14)
-
Fair value gains/(losses) to other 1,783 52 1,835
(2,479)
derivative contracts Fair value of contracts settled 301 26 327
(268)
Fair value of derivative contracts assumed - - - (24)on formation of joint venture At December 31 (144) (11) (155) (2,270)
Financial risk and revenue sharing partnerships (RRSPs)
Movements in the recognised values of financial RRSPs were as follows:
2009 2008 £m £mAt January 1 (455) (315)Cash paid to partners 55 53Addition (15) (40)
Exchange adjustments direct to reserves 6
(6)
Financing charge*1 (26)
(26)
Excluded from underlying profit*1 Exchange adjustments 45
(118)
Restructuring of financial RRSP agreements and changes in 27 (3) forecast payments At December 31 (363) (455)
*1 Total credit included within finance in the income statement is £47m (2008
charge £147m). £1m (2008 nil) of the financing charge has been capitalised
in intangible assets.7 Borrowings
On February 5, 2009, the Group borrowed £200m from an existing facility. Interest is payable at 3 month LIBOR + 26.7bp and the loan matures in 2014. On April 30, 2009, the Group issued £500m 6.75% Notes maturing in 2019. There were no other significant changes in the Group's borrowings during the year ended December 2009.
8 Pensions and other post-retirement benefits
IFRIC 14 IAS 19 - The Limit on a Defined Benefit Asset, Minimum FundingRequirements and their Interaction has been adopted in 2009. Theinterpretation requires that, where statutory funding requirements will resultin surpluses arising in the future that cannot be recognised, a liabilityshould be recognised. The rules of the Rolls-Royce Pension Fund are such thatfuture contributions set out in the scheme's Recovery Plan will give rise to anunrecoverable surplus. In accordance with the transition rules of theinterpretation, it has been applied from January 1, 2008, and the 2008 figureshave been restated accordingly. The impact of adopting IFRIC 14 is as follows: Deferred tax Net post- Retained retirement liability Assets Liabilities Total earnings £m £m £m £m £mAt January 1, 2008, as (123) 81 (345) (264) 2,776previously reported Adoption of IFRIC 14 (491) 51 87 138 (353)At January 1, 2008, (614) 132 (258) (126) 2,423restated At December 31, 2008, (142) 685 (307) 378 1,226as previously reported Adoption of IFRIC 14 (425) 119 - 119 (306)At December 31, 2008, (567) 804 (307) 497 920restated Movements in 2008 66 68 (87) (19) recognised in other comprehensive income Movements in the net post-retirement position recognised in the balance sheetwere as follows: UK Overseas schemes schemes Total £m £m £mAt January 1, 2009 408 (550) (142)Minimum funding liability at January 1, 2009 (425) - (425)At January 1, 2009 restated (17) (550) (567)Exchange adjustments - 51 51Current service cost (94) (29) (123)Past service cost (2) (4) (6)Interest on post-retirement scheme (355) (47)
(402)
liabilities Expected return on post-retirement scheme 285 20
305assets Contributions by employer 232 56 288Actuarial (losses)/gains (1,176) 28 (1,148)
Movement in unrecognised surplus*1 707 -
707
Movement on minimum funding liability 40 -
40At December 31, 2009 (380) (475) (855) Analysed as:
Post-retirement scheme surpluses 75 -
75
- included in non-current assets Post-retirement scheme deficits (455) (475)
(930)
- included in non-current liabilities
(380) (475) (855)
*1 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 economic benefit
available to the Group in the future. Any surplus in excess of this benefit is
not recognised in the balance sheet.
9 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 liabilitiesrelated to financing arrangements are spread over many years and relate to anumber of customers and a broad product portfolio. Contingent liabilities are disclosed on a discounted basis. As the directorsconsider the likelihood of these contingent liabilities crystallising to beremote, this amount does not represent the value that is expected tocrystallise. However, the amounts are discounted at the Group's borrowing rateto reflect better the time span over which these exposures could arise. Thecontingent liabilities are denominated in US dollars. As the Group does notadopt hedge accounting for forecast foreign currency transactions, this amountis reported, together with the sterling equivalent at the reporting date spotrate.
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 were:
2009
2008
£m $m £m
$m
Gross contingent liabilities 704 1,137 775
1,086
Contingent liabilities net of relevant security *1 134 217 155 222Contingent liabilities net of relevant security reduced 233 376 246
354by 20% *2
*1 Security includes unrestricted cash collateral of: 77 124 85 123 *2 Although sensitivity calculations are complex, the reduction of the relevant
security by 20% illustrates the sensitivity of the contingent liability to
changes in this assumption
There are also net contingent liabilities in respect of undelivered aircraft,but it is not considered practicable to estimate these as deliveries can bemany years in the future, and the relevant financing will only be put in placeat the appropriate time.Contingent liabilities exist in respect of guarantees provided by the Group inthe ordinary course of business for product delivery, performance andreliability. The Group has, in the normal course of business, entered intoarrangements in respect of export finance, performance bonds, countertradeobligations and minor miscellaneous items. Various Group undertakings areparties to legal actions and claims which arise in the ordinary course ofbusiness, some of which are for substantial amounts. These include claimsreceived, which are yet to be substantiated, by EPI Europrop International GmbH(EPI) in which the Group is a partner, which is developing the TP400 engine forthe Airbus A400M aircraft. The Group has deducted from the amounts recoverableon this contract an allowance of £43m, being the directors' best estimate ofthe expected loss on this programme. As a consequence of the insolvency of aninsurer as previously reported, the Group is no longer fully insured againstknown and potential claims from employees who worked for certain of the Group'sUK based businesses for a period prior to the acquisition of those businessesby the Group. While the outcome of some of these matters cannot precisely beforeseen, the directors do not expect any of these arrangements, legal actionsor claims, after allowing for provisions already made, to result in significantloss to the Group.
There is continuing uncertainty about the A400M programme. Airbus is currently in negotiation with its customers to determine the future of the programme.
The timing and outcome of these negotiations, and their possible impact on EPIand the Group, is uncertain. In the event that the programme had beencancelled, at December 31, 2009, the Group's balance sheet included net assetsof £17m in relation to the programme, which would have required impairment.
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 these.
The risk committee has accountability for the system of risk management and reports regularly to the Board on the key risks facing the business and the mitigating actions taken in order to manage them. The Group's consistent strategy and long-term programmes require that key sources of risk are identified and are kept under continuous review.
Risk profile
Over the past year the risk profile of the Group, in common with many otherlarge companies, has changed to reflect the underlying global economicuncertainties. The Group continues to experience the negative effects of therecent economic downturn through a decline in the civil aviation sector,shipbuilding and other capital-intensive industries, which are prime marketsfor its products and services.In the absence of a sustained and general return to growth, uncertainty remainsacross financial and industrial markets. This is reflected in the Group's riskprofile.The risks described below are among those that may have an impact on theGroup's performance. This is notwithstanding other risks and uncertainties thatare currently unknown to the Group, or which the Group does not presentlyconsider to be material. The principal risks reflect the global nature of thebusiness and the competitive and challenging business environment in which itoperates. Risks, including those to the Group's reputation, are considered
under four broad headings:- Business environment risks- Strategic risks- Financial risks- Operational risksBusiness environment risksCyclical downturn - global recessionThe Group's largest market, civil aerospace, is cyclical by nature, althoughservices activity and revenue, which now represents some 60 per cent of annualrevenue, have historically been less volatile in economic slowdowns and areconsidered more predictable and robust than the sales of engines for newaircraft.The willingness of passengers to travel by air is influenced by a range offactors, including economic conditions, as well as health and security issues.Any prolonged reduction in air travel would impact airlines' revenues and cashflows, and potentially reduce their need for new engines, spare parts oraftermarket support services.
The strategy of growing revenues in other sectors with steady and substantial long-term growth will help offset this risk. Access to global markets with greater diversification by sector, such as the recently established civil nuclear business, customer and geography and an improved balance between original equipment and services revenue, are expected to help mitigate the effects of the slowing global economy in any one sector.
Tight control of the underlying cost base, the cost of managing operations andthe unit cost of products, is essential to protect margins and maintainprofitability. Even as the economy begins to recover, there will be continuedpressure to reduce costs and improve the use of resources. The Group isfocusing on identifying the principal drivers of unit costs and identifyingactions to achieve sustainable cost reductions.Environmental impact of products and operationsThe Group recognises that its products and business operations have an impacton the environment, particularly in relation to climate change. Rolls-Royce isdetermined to be part of the solution to these environmental challenges andcontinues to make significant investment in innovative solutions for theaviation, marine and energy markets. The challenge is being addressed throughthe enhancement of current product ranges and affordable research anddevelopment into low carbon technologies such as nuclear power, fuel cells andtidal energy. The Group continues to work closely with its customers, industrypartners and other stakeholders to implement these development opportunities.A robust governance structure headed by the Environment Council directs andmonitors improvements in the environmental performance of the Group's products,and the Environmental Advisory Board reviews and makes recommendations on theenvironmental aspects of the Group's products and business operations.
Strategic risksCompetitive pressuresThe markets in which Rolls-Royce operates are highly competitive and thiscompetitiveness is increasing as a result of the global economic uncertainties.The majority of product programmes are long-term in nature and access to keycustomer platforms is critical to the success of the business. This requiressustained investment in technology, capability and infrastructure by the Group,all creating high barriers to entry. However, these factors alone do notprotect the Group from competition such as pricing and technical advances madeby competitors.The Group has developed a balanced business portfolio and continues to maintaina steady focus on improvement in operational performance, for example throughthe modernisation of its facilities and an increased focus on managing theunderlying cost of operations and products. Sustained investment in technologyacquisition and robust protection of intellectual property, together with theestablishment of long-term customer relationships, allow the Group todifferentiate its products and services and protect margins in the face ofcompetitive pressures.Export controlsRolls-Royce designs and supplies a number of products and services for thedefence market. Many countries in which the Group conducts its business operatelegislation controlling the export of specified goods and technology intendedor adaptable for military application. The Group is committed to complying withthe requirements from national governments in all jurisdictions when exportinggoods, parts, technologies or information, although globalisation of theGroup's operations brings with it complexities of concurrent but differingnational export control legislation. Non-compliance with export controls isrecognised as a principal risk to both programme performance and the Group'sreputation.The exports committee, chaired by the Chief Operating Officer, directs theGroup's strategy and policy on exports. Export control managers are embeddedthroughout the business and export controls awareness training is provided toemployees. The Group will continue to implement any necessary changes to ensurethat it maintains the capability to monitor and comply with requirements.
Financial risks
The Group uses various financial instruments in order to manage the exposuresthat arise from its business operations as a result of movements in financialmarkets. All treasury activities are focused on the management and hedging ofrisk. It is the Group's policy not to trade financial instruments or to engagein speculative financial transactions. There have been no significant changesin the Group's policies in the last year.The principal economic and market risks continue to be movements in foreigncurrency exchange rates, interest rates and commodity prices. The Boardregularly reviews the Group's exposures and financial risk management and aspecialist committee also considers these in detail. All such exposures aremanaged by the Group Treasury function, which reports to the Finance Directorand which operates within written policies approved by the Board and within theinternal control framework.Currency riskThe Group is exposed to movements in exchange rates for both foreign currencytransactions and the translation of net assets and income statements of foreignsubsidiaries.The Group regards its interests in overseas subsidiary companies as long-terminvestments and manages its translational exposures through the currencymatching of assets and liabilities where applicable. The matching is reviewedregularly, with appropriate risk mitigation performed where material mismatchesarise.The Group is exposed to a number of foreign currencies. The most significanttransactional currency exposures are US dollars to sterling and US dollars toeuros.
The Group manages its exposure to movements in exchange rates at two levels:
i) Revenues and costs are currency matched where it is economic to do so.
The Group actively seeks to source suppliers with the relevant currency cost
base to avoid the risk or to flow down the risk to those suppliers that are
capable of managing it. Currency risk is also a prime consideration when
deciding where to locate new facilities. US dollar income converted into
sterling represented 23 per cent of Group revenues in 2009 (2008 26 per cent).
US dollar income converted into euros represented 2 per cent of Group revenues
in 2009 (2008 4 per cent).
ii)Residual currency exposure is hedged via the financial markets. The Group
operates a hedging policy using a variety of financial instruments with the
objective of minimising the impact of fluctuations in exchange rates on future
transactions and cash flows.
Market exchange rates 2009 2008USD per GBP - Year-end spot rate 1.615 1.438- Average spot rate 1.566 1.854EUR per GBP - Year-end spot rate 1.126 1.034- Average spot rate 1.123 1.258
The permitted range of the amount of cover taken is determined by the written policies set by the Board, based on known and forecast income levels.
The forward cover is managed within the parameters of these policies in orderto achieve the Group's objectives, having regard to the Group's view oflong-term exchange rates. Forward cover is in the form of standard foreignexchange contracts and instruments on which the exchange rates achieved aredependent on future interest rates. The Group may also write currency optionsagainst a portion of the unhedged dollar income at a rate which is consistentwith the Group's long-term target rate. At the end of 2009 the Group hadUS$18.8 billion of forward cover (2008 US$17.1 billion).The consequence of this policy has been to maintain relatively stable long-termforeign exchange rates. Note 6 to the condensed financial statements includesthe impact of revaluing forward currency contracts at market values on December31, 2009, showing a negative value of £144 million (2008 negative value of
£2,181 million) which will fluctuate with exchange rates over time. The Group has entered into these forward contracts as part of the hedging policy, described above, in order to mitigate the impact of volatile exchange rates.
Interest rate riskThe Group uses fixed rate bonds and floating rate debt as funding sources. TheGroup's policy is to maintain a proportion of its debt at fixed rates ofinterest having regard to the prevailing interest rate outlook. To implementthis policy the Group may utilise a combination of interest rate swaps,forward-rate agreements and interest-rate caps to manage the exposure.Counterparty credit riskThe Group has an established policy for managing counterparty credit risk. Acommon framework exists to measure, report and control exposures tocounterparties across the Group using value-at-risk and fair-value techniques.The Group assigns an internal credit rating to each counterparty, which isassessed with reference to publicly available credit information, such as thatprovided 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.
Commodity risk The Group has an ongoing exposure to the price of jet fuel and base metals arising from business operations. The Group's objective is to minimise the impact of price fluctuations. The exposure is hedged, on a similar basis to that adopted for currency risks, in accordance with parameters contained in written policies set by the Board.
Regulatory developmentsIn response to the financial crisis governments and regulators around the worldare considering various regulatory reforms to the financial markets with theaim of improving transparency and reducing systemic risk. While the proposedreforms are predominantly directed at financial institutions some of them mayhave implications for non-financial institutions.In particular, proposals by both US and European regulators to reform theOver-the-Counter (OTC) derivatives market could have implications for the Groupin terms of future funding requirements and increased cash flow volatility, ifparties to future OTC derivative transactions are required to post collateralto reduce counterparty risk.Operational risksPerformance of supply chainThe Group's products and services are delivered through the effective operationof its facilities and key capabilities, including its supply chain. The Group'ssuccess in strengthening its market position and its presence on a number ofhigh profile civil and defence aerospace programmes places increased demands onthe performance of the supply chain. The Group manufactures approximately 30 per cent by value of its gas turbine products, the remainder being providedthrough external suppliers, including risk and revenue sharing partners.Meeting delivery commitments on schedule, cost and quality are critical to theachievement of business goals. Investment in developing world-classmanufacturing processes is continuing in Asia, North America and Europe.Global supply chains are complex with multiple inter-relationships across awide network of organisations. While the Group's strategy is to improveintegration and simplify the internal and external elements of its supply chainby building long-term strategic links with fewer, stronger suppliers, itremains at risk of disruption from financial or physical causes such asbankruptcy, natural disaster, armed conflict or pandemic. A significantdisruption in any of these elements could adversely affect the Group's abilityto deliver its operational commitments and would have the potential to affectfinancial returns.The planning for, and management of, any such interruption is addressed throughthe Group's business continuity management process, which is well establishedand focused on critical facilities, activities, processes, skills andsuppliers. The Group's crisis management plan and framework were significantlyrevised and exercised in 2009. In addition to the Group's comprehensiveprogramme of business interruption insurance, significant investment is beingundertaken to establish, where possible, dual sourcing of key components orprocesses. Increased focus is also being applied to understanding andaddressing sources of risk arising in the external supply chain, particularlythose associated with financial instability. Procedures are in place tomonitor, assess and respond to risks.IT securityThe continuing globalisation of the business and advances in technology haveresulted in more data being transmitted internationally, posing an increasedsecurity risk. There is also the possibility of unintentional loss ofcontrolled data by authorised users. In either case, adverse impacts uponoperational effectiveness, the value of intellectual property, legislativecompliance or the reputation of the Group might arise. The active sharing ofinformation through industry and government forums, commitment of additionalspecialist resources and the continual upgrading of security equipment andsoftware mitigate these risks.
Ethics
The Group conducts business in an ethical and socially responsible manner. Thisapproach extends from the sourcing of raw materials and components to themanufacture and delivery of products and services in all of its globallocations and markets. It applies to the provision of a safe and healthy placeof work and investment in technologies to reduce the environmental impact ofthe Group's products and operations. Shortcomings in any of these areas coulddamage the Group's reputation, expose it to financial penalties and disrupt itsbusiness.The Group is committed to maintaining high ethical standards. A Global Code ofBusiness Ethics in 16 languages has been issued to all employees, supported bya training and engagement programme to strengthen employee awareness of theGroup's values. A programme of technical training for specialist roles isunderway. The Group's ethical standards are also communicated to the Group'sfirst-tier supply base through a supplier code of conduct. Concerns regardingpotentially unethical behaviours can be reported in confidence via dedicatedglobal telephone and internet channels. All such reports are followed up andare monitored by the ethics committee.Programme riskThe Group manages complex product programmes with demanding technicalrequirements against stringent, and sometimes fluctuating, customer schedules.This requires the co-ordination of the engineering function, manufacturingoperations, the external supply chain and other partners. Failure to achieveprogramme goals would have significant financial and reputational implicationsfor the Group. These implications include the risk of impairment of thecarrying value of the Group's intangible assets and the impact of potentiallitigation.The Group seeks continuous improvement of all its processes and employs projectmanagement controls to ensure that both technical and business objectives areachieved. All major programmes are subject to Board approval and are reviewedregularly by the Board with a particular focus on the nature and potentialimpact of emerging risks and the effective mitigation of previously identifiedthreats.The statements below have been prepared in connection with the Company's fullAnnual report for the year ended December 31, 2009. Certain parts thereof arenot included with this announcement.
Going concern
The Group's business activities, together with the factors likely to affect itsfuture development, performance and position are set out in the businessreview. The financial position of the Group, its cash flows, liquidityposition, borrowing facilities and financial risks are described in thebusiness review. In addition, the consolidated financial statements include theGroup's objectives, policies and processes for financial risk management,details of its cash and cash equivalents, indebtedness, and borrowingfacilities, and its financial instruments, hedging activities and its exposureto counterparty credit risk, liquidity risk, currency risk, interest rate riskand commodity pricing risk.The Group meets its funding requirements through a mixture of shareholders'funds, bank borrowings, bonds, notes and finance leases. The table in theFinance Director's review shows the maturity profile of the Group's outstandingdebt facilities; a total of £108 million is due to expire in 2010. The Grouphas a further £450 million of term funding available that is currently undrawn.The Group's forecasts and projections, taking into account reasonably possiblechanges in trading performance, show that the Group has sufficient financialresources. As a consequence the Directors have a reasonable expectation thatthe Company and the Group are well placed to manage their business risks and tocontinue in operational existence for the foreseeable future, despite thecurrent uncertain global economic outlook. Accordingly, the Directors continueto adopt the going concern basis in preparing the consolidated financialstatements.
Responsibility statement
Each of the persons who is a director at the date of approval of this report confirms that to the best of his or her knowledge: i) each of the Group and parent company financial statements, prepared in
accordance with IFRS and UK Accounting Standards respectively, gives a true and
fair view of the assets, liabilities, financial position and profit or loss of
the issuer and the undertakings included in the consolidation taken as a whole;
and
ii)the Directors' report includes a fair review of the development and
performance of the business and the position of the Company and the
undertakings included in the consolidation taken as a whole, together with a
description of the principal risks and uncertainties that they face.
By order of the BoardSir John RoseChief Executive February 10, 2010 Andrew ShilstonFinance DirectorFebruary 10, 2010
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