Foreign exchange
Foreign exchange rate movements influence the reported income statement, the cash flow and closing net cash balance. The average and spot rates for the principal trading currencies of the Group are shown in the table below:
| 2011 | 2010 | Change | ||
|---|---|---|---|---|
| USD per GBP | Year end spot rate | 1.55 | 1.57 | -1% |
| Average spot rate | 1.60 | 1.54 | +4% | |
| EUR per GBP | Year end spot rate | 1.20 | 1.17 | +3% |
| Average spot rate | 1.15 | 1.17 | -2% |
Taxation
The Group believes that it has a duty to shareholders to seek to minimise its tax burden but to do so in a manner which is consistent with its commercial objectives and meets its legal obligations and ethical standards. Every effort is made to maximise the tax efficiency of business transactions and this includes taking advantage of available tax incentives and exemptions. However, the Group has regard for the intention of the legislation concerned rather than just the wording itself.
The Group is committed to building open relationships with tax authorities and to following a policy of full disclosure in order to effect the timely settlement of its tax affairs and to remove uncertainty in its business transactions. Where appropriate, the Group enters into consultation with tax authorities to help shape proposed legislation and future tax policy.
Transactions between Rolls-Royce subsidiaries and associates in different jurisdictions are conducted on an arms-length basis and priced as if the transactions were between unrelated entities, in compliance with the OECD Model Tax Convention and the laws of the relevant jurisdictions.
Investments and capital expenditure
The Group subjects all major investments and capital expenditure to a rigorous examination of risks and future cash flows to ensure that they create shareholder value. All major investments require Board approval.
The Group has a portfolio of projects at different stages of their life cycles. Discounted cash flow analysis of the remaining life of projects is performed on a regular basis.
Sales of engines in production are assessed against criteria in the original development programme to ensure that overall value is enhanced.
Financial risk management
The Board has an established and structured approach to financial risk management. The Financial Risk Committee (Frc) is accountable for managing, reporting and mitigating the Group’s financial risks and exposures. These risks include the Group’s principal counterparty, currency, interest rate, commodity price, liquidity and credit rating risks outlined in more depth in note 17 to the financial statements. The Frc is chaired by the Finance Director. The Group has a comprehensive financial risk policy that advocates the use of financial instruments to manage and hedge business operations risks that arise from movements in financial, commodities, credit or money markets. The Group’s policy is not to engage in speculative financial transactions. The Frc sits quarterly to review and assess the key risks and agree any mitigating actions required.
Capital structure
| Capital summary – £ million | 2011 | 2010 |
|---|---|---|
| Total equity | 4,519 | 3,979 |
| Cash flow hedges | 52 | 37 |
| Group capital | 4,571 | 4,016 |
| Net funds | 223 | 1,533 |
Operations are funded through various shareholders’ funds, bank debt, bonds, notes and finance leases. The capital structure of the Group reflects the judgement of the Board as to the appropriate balance of funding required.
Funding is secured by the Group’s continued access to the global debt markets. Borrowings are funded in various currencies using derivatives where appropriate to achieve a required currency and interest rate profile. The Board’s objective is to retain sufficient financial investments and undrawn facilities to ensure that the Group can both meet its medium-term operational commitments and cope with unforeseen obligations and opportunities.
The Group holds cash and short-term investments which, together with the undrawn committed facilities, enable it to manage its liquidity risk.
After repayment from cash resources of the €750 million Eurobond, the Group retained at year end aggregate liquidity of £2.5 billion. This liquidity comprised net funds of £223 million and aggregate borrowing facilities of £2.3 billion, of which £1.2 billion remained undrawn. This represents a 34 per cent decrease in net drawn borrowing facilities during the year.
The maturity profile of the borrowing facilities is regularly reviewed to ensure that refinancing levels are manageable in the context of the business and market conditions. No facilities mature in 2012. There are no rating triggers in any borrowing facility that would require the facility to be accelerated or repaid due to an adverse movement in the Group’s credit rating.
During 2011, the £250 million bank revolving credit facility (RCF) due in 2012 and £750 million RCF due in 2013 were both refinanced with a new £1 billion RCF due in 2016 provided by a syndicate of relationship banks. The borrowing margin for this new RCF varies for a given credit rating. Depending on the extent drawn, the current margin would be 0.40 per cent to 0.70 per cent over sterling LIBOR.
The Group conducts some of its business through a number of joint ventures. A major proportion of the debt of these joint ventures is secured on the assets of the respective companies and is non-recourse to the Group. This non-recourse debt is further outlined in note 10 to the financial statements.
Credit rating
| Rating agency | Rating | Outlook | Grade |
|---|---|---|---|
| Moody’s Investors Service | A3 | Stable | Investment |
| Standard & Poor’s | A- | Positive | Investment |
The Group subscribes to both Moody’s Investors Service and Standard & Poor’s for independent long-term credit ratings. At December 31, 2011, the Group maintained investment grade ratings from both agencies.
As a capital-intensive business making long-term commitments to our customers, the Group attaches significant importance to maintaining or improving the current investment grade credit ratings.
Accounting and regulatory
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the EU.
In 2011, there were no changes that have had a significant effect on the Group’s financial statements.
A summary of changes which have not been adopted in 2011 is included within the accounting policies in note 1 to the financial statements.
Governments and regulators around the world continue to consider reforms to the financial markets with the aim of improving transparency and reducing systemic risk. Although the proposed reforms are predominantly directed at financial institutions, they will also affect non-financial institutions such as the Group. In particular, proposals by both US and European regulators to reform the Over-the-counter (OTC) derivatives market may have adverse implications for the Group. If, as is being contemplated, parties to future OTC derivative transactions are required to use an exchange to clear the transactions and post cash collateral to reduce counterparty risk, the Group’s future funding requirements could be adversely affected and cash flow more volatile.
Share price
During the year the share price increased by 20 per cent from 623p to 746.5p, compared to a 0.7 per cent increase in the FTSE aerospace and defence sector and a 5.6 per cent decrease in the FTSE 100. The Company’s share price ranged from 557.5p in March to 746.5p at the year end.
