Rolls-Royce Holdings plc
Annual Report 2015
FOCUS
TRANSFORM
DELIVER
2015 Annual Report
ROLLS-ROYCE IS A PRE-EMINENT
ENGINEERING COMPANY FOCUSED
ON WORLD-CLASS POWER AND
PROPULSION SYSTEMS.
This page
A Trent 1000 engine for the
Boeing 787 Dreamliner is prepared
for testing.
Financial highlights
Contents
Order book
£76,399m
2014: £73,674m
Free cash flow
£179m
2014: £447m
Underlying* revenue
Reported** revenue
£13,354m
2014: £13,864m
£13,725m
2014: £13,736m
STRATEGIC REPORT
Group at a glance
Chairman’s statement
Chief Executive’s review
Review of 2015
Strategic priorities
Business model
Engineering and innovation
Business review
Financial review
Sustainability
Underlying* profit before tax
Reported** profit before tax
Key performance indicators
£1,432m
2014: £1,620m
£160m
2014: £67m
Underlying* earnings per share
Reported earnings per share
58.7p
2014: 65.4p
4.5p
2014: (3.9)p
Full year payment to shareholders
Net cash
16.37p
2014: 23.1p
£(111)m
2014: £666m
* Underlying explanation is in note 2 on page 122
**From continuing operations
All figures in the narrative of the Strategic Report are underlying unless otherwise stated
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements. Any statements that express
forecasts, expectations and projections are not guarantees of future performance and guidance
may be updated from time to time. This report is intended to provide information to
shareholders, and is not designed to be relied upon by any other party or for any other purpose,
and the Company and its Directors accept no liability to any other person other than that
required under English law. Latest information will be made available on the Group’s website.
By their nature, these statements involve risk and uncertainty, and a number of factors could
cause material differences to the actual results or developments.
Principal risks
Going concern and viability statements
DIRECTORS’ REPORT
Board of Directors
Chairman’s introduction
Corporate governance
Committee reports
Nominations & Governance Committee
Remuneration Committee
Audit Committee
Safety & Ethics Committee
Science & Technology Committee
Responsibility statements
Other statutory information
FINANCIAL STATEMENTS
Financial statements contents
Group financial statements
Company financial statements
OTHER INFORMATION
Subsidiaries, joint ventures and associates
Independent auditor’s report
Sustainability assurance
Additional financial information
Other statutory information
Shareholder information
Glossary
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8
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16
18
22
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48
52
54
57
58
62
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184
Rolls-Royce Holdings plc Annual Report 2015
1
Strategic Report
Strategic Report / Group at a glance
GROUP AT
A GLANCE
Rolls-Royce ship design
The Far Samson multi-function subsea
service vessel is 121.5m long and 26m wide.
2
Rolls-Royce Holdings plc Annual Report 2015
Group
The Group is organised into five
customer-facing businesses:
Civil Aerospace, Defence Aerospace,
Power Systems, Marine and Nuclear.
Underlying revenue
£13,354m
Underlying profit before tax
£1,432m
Underlying revenue mix
Civil Aerospace
Defence Aerospace
Power Systems
Marine
Nuclear
52%
15%
18%
10%
5%
Order book
£76.4bn
Invested in R&D
£1.2bn
Patents applied for
Countries
626
46
Engineers (year end)
Employees (year average)
15,690
50,500
Group at a glance
Civil Aerospace
Defence Aerospace
Underlying revenue mix
Underlying revenue mix
Underlying revenue
£6,933m
Underlying profit*
£812m
Underlying revenue mix
Underlying revenue mix
Underlying revenue
£2,035m
Underlying profit*
£393m
OE revenue
Services revenue
47%
53%
OE revenue
Services revenue
39%
61%
Power Systems
Marine
Underlying revenue mix
Underlying revenue mix
Underlying revenue mix
Underlying revenue mix
Underlying revenue
£1,324m
Underlying profit*
£15m
OE revenue
Services revenue
68%
32%
OE revenue
Services revenue
58%
42%
Underlying revenue
£2,385m
Underlying profit*
£194m
Nuclear
Underlying revenue
Underlying revenue mix
Underlying revenue mix
£687m
Underlying profit*
£70m
OE revenue
Services revenue
37%
63%
* Underlying profit before financing and taxation
Rolls-Royce Holdings plc Annual Report 2015
3
Strategic Report
Strategic Report / Chairman’s statement
Strategic Report / Chairman’s statement
FOCUS
Underlying EPS
58.73p
Payment to shareholders
16.37p
4
Rolls-Royce Holdings plc Annual Report 2015
We have made some
important changes to our
management in 2015 and
laid the groundwork for
further performance
improvements as we
tackle some near-term
challenges.”
Ian Davis
Chairman
Rolls-Royce is a business in transition.
The next few years are going to be very
important as we capitalise on our
outstanding portfolio of products and
services and the £76.4bn order book
that supports them. Underpinning this
journey will be significant changes to
our business. Warren East, our new
Chief Executive, will talk more about
these in the Strategic Report.
During this period of transition we should
not forget the core strengths of the business.
Our products, technologies and customer
relationships have been further strengthened
as a result of focused investment and the
continued hard work of our teams. The
sustained strong growth in our order book
shows that our customers recognise the
value Rolls-Royce delivers.
The fundamentals of our business are
unchanged. We are investing today, as we
have for many years, in building a strong
installed base of mission-critical industrial,
marine and aerospace power systems. Our
market share, particularly in powering large
civil airliners, will grow significantly over the
next ten years providing a cash generative,
sustainable platform from which to further
develop the business. Investing today to
secure that future is essential.
Chairman’s statement
In summary…
Fundamental strengths
of the business unchanged
Continue to invest in market-
leading products, technologies
and customer services
Lay stronger foundations to rebuild
trust and confidence in a world-
class engineering business
At the same time, we are facing some
challenges in key markets, particularly in
Marine, and are managing a major change
in product mix within Civil Aerospace, which
has a direct impact on how we recognise
revenues and profits. This meant we took the
decision to undertake a major restructuring
of the business. Warren’s recent review of
operations, unanimously supported by
the Board, highlighted a number of areas
where, over time, costs have grown in an
unsustainable way. This clearly needs to
change. We have approved a plan to reduce our
fixed cost base by £150m to £200m per annum
and simplify the way we manage the business.
Shareholder payments
The pace of investment required to transform
the business creates near-term pressure
on free cash flow. At the same time, we need
to sustain a healthy balance sheet to ensure
we have the financial flexibility to maintain
a strong investment-grade credit rating.
As a result, the Board is recommending
that the payment to shareholders is halved
in cash terms at the full year and the next
half year. We recognise the importance
of a healthy ‘dividend’ to our shareholders.
Subject to short-term cash needs, we intend to
review the payment so that it will be rebuilt
over time to an appropriate level. This reflects
the Board’s long-standing confidence in the
strong future cash generation of the business.
As a result, the proposed final payment
for 2015 is 7.1p per share, 50% of the final
payment made for full year 2014. It is further
proposed that the interim payment for 2016
will also be reduced to 50% of the prior year.
Corporate governance
2015 has proven to be a strong test of our
governance processes and, while we will
take away several important learnings from
different events, I have been impressed by
how your Board and senior management at
Rolls-Royce have performed at a difficult time.
This has not been an easy year for the
Company, its employees, investors or other
stakeholders. We have had to communicate
some challenging messages both internally
and externally about our market outlook,
our performance and, very importantly, the
essential changes we will be making to cut
waste and restore confidence in the business.
We have not taken our eye off some of the
historic issues that have undermined confidence
in the business in the past. Concerns about
bribery and corruption involving intermediaries
in overseas markets remain subject to
examination by the Serious Fraud Office and
other authorities and these investigations
are not yet complete. We have done much to
address the root of these problems and this
work is being continually reinforced to ensure
we all meet the high standards expected of us.
engineering and manufacturing experience,
after a long career at GKN and BAE Systems.
Lewis Booth, a US resident and an independent
Non-executive Director since 2011 has
indicated his intention to relinquish his
responsibility as Senior Independent Director
once a successor has been appointed. He will
continue as Chairman of the Audit Committee.
Dame Helen Alexander, an independent
Non-executive Director since 2007, will be
stepping down from the Board after the AGM
in May 2016 having completed her nine-year
term. At that time she will be succeeded as
Chairman of the Remuneration Committee
by Ruth Cairnie, who joined the Board in
September 2014. On behalf of the Board
I would like to thank Dame Helen for her
dedicated service to the Company. She has
been a wise and insightful member of the
Board and her well-judged advice and
leadership of our Remuneration Committee
have been highly valued by her colleagues.
Board developments
During the year there have been a number of
important changes to the Board. On 22 April
we announced that John Rishton had decided
to retire as Chief Executive on 2 July, to be
succeeded by Warren East. At the AGM on
8 May James Guyette, President and Chief
Executive Officer of Rolls-Royce North
America, retired and stepped down from the
Board. John Neill also stood down at the AGM
after six years as a Non-executive Director.
Irene Dorner, formerly CEO and President
of HSBC USA, joined the Board in July.
Alan Davies, Chief Executive of Rio Tinto’s
Diamonds and Minerals division, and Sir Kevin
Smith, the former Chief Executive of GKN, the
multinational automotive and aerospace
business, both joined the Board from
1 November. In February 2016, Sir Kevin
assumed Chairmanship of the Science &
Technology Committee.
Irene brings a wealth of international expertise,
particularly in risk management and
operational performance. Alan, as well
as having a strong financial background,
brings relevant experience in transforming
operational performance and driving cultural
change through a complex global organisation,
together with a deep knowledge of China and
other key emerging markets. Sir Kevin also
brings recent Asian experience together with
significant aerospace industry knowledge, with
Rebuilding trust and confidence
In the first months since his appointment last
July, Warren has made an enormous impact
on the business with a clear, well-structured
review. This has examined the strengths and
weaknesses of our businesses and highlighted
the critical investment priorities required
to develop our competitive advantages and
market position. I have also been pleased
by the steps he and his team have taken
to improve communication to our investors.
While it is early days, I believe his approach
has been well received and has laid good
foundations from which we can rebuild trust
and confidence in the business.
Looking forward
2016 will be another challenging year for
Rolls-Royce. As Warren sets out in his review,
we are doing a great deal within the business
to ensure we successfully transition over the
next few years to a more strongly profitable
and cash-generative future. The Group is well
positioned to grow strongly on the back of
innovative, market-leading technology. We do
have some near-term challenges but the
fundamentals of the business remain strong,
underpinned by a record order book and
some great people across the organisation.
Ian Davis
Chairman
11 February 2016
Rolls-Royce Holdings plc Annual Report 2015
5
Strategic Report
Strategic Report / Chief Executive’s review
TRANSFORM
In the context of challenging trading
conditions our overall performance
for the year was in line with the
expectations we set out in July 2015.
It was a year of considerable change
for Rolls-Royce: in our management,
in some market conditions and in our
near-term outlook. At the same time,
there were some important
constants: the underlying growth
of our long-term markets, the quality
of our mission-critical technology and
services, and strength of customer
demand for these, which are reflected
in our growing order book. While we
have some near-term challenges,
these constants provide us with
confidence in a strong, profitable,
cash-generative future.”
Warren East
Chief Executive
6
Rolls-Royce Holdings plc Annual Report 2015
Chief Executive’s review
In this Strategic Report, I will describe
the business in depth and we will provide
further information on our financial position
and business performance.
Welcome to my first Chief Executive’s
review for Rolls-Royce. My intention
is that this report will share with
you all, in a clear and open way,
how we performed last year,
the opportunities ahead of us
and the clear goals and priorities
we are setting ourselves to
maximise value creation.
We are now taking great steps to
transform the business, adding pace
and simplicity to what we do, a process
we started in November 2015. This will
be covered extensively in next year’s
report. In the meantime, we have
significantly enhanced the disclosure
in this year’s report to present our
performance in a more transparent
and understandable way. I hope you
find it informative.
Rolls-Royce Holdings plc Annual Report 2015
7
Strategic Report
Strategic Report / Chief Executive’s review
Review of 2015
REVIEW OF 2015
AND BUSINESS
TRANSFORMATION
After an underlying tax charge of £351m
(2014: £388m) and adjusting for non-
controlling interests, underlying profit
for the year was £1,080m (2014: £1,226m).
With an average 1,839 million shares in
issue, underlying earnings per share were
58.7p (2014: 65.4p).
Reported profit before tax was £160m
(2014: £67m), compared to an underlying
profit before tax of £1,432m (2014: £1,620m).
A full reconciliation of headline to underlying
profit can be found in note 2 to the
Consolidated Financial Statements.
Free cash flow of £179m was materially
higher than our third quarter expectations,
reflecting strong cash collections at the end
of the year from a number of key customers,
a better than expected overall working
capital performance and the non-recurring
cash settlement arising from the intellectual
property agreement mentioned above.
Some of this positive variance is likely to
reverse early in 2016.
A more detailed review of financial
performance is included in the
Financial review.
Order book (£bn)
Performance in 2015
2014
2015
0
10
20
30
40 50
60 70
80
Underlying revenue (£m)
2014
2015
0
3,000 6,000 9,000
12,000 15,000
Underlying profit before tax (£m)
2014
2015
0
500
1,000
1,500
2,000
Our performance in 2015 was broadly in line
with our early expectations, with Marine
markets causing most of the weakness.
At the same time we have continued to
invest in products and services to support
our customers and reinforce the long-term
strength of our order book, valued at
£76.4bn at the year end, up 4% on 2014.
Group revenue was broadly unchanged on
a constant currency basis with good growth
in Civil Aerospace offsetting weaknesses
in Marine. The combination of some difficult
market conditions, sustained engineering
investment and high fixed costs led to
underlying profit before finance charges
and tax 11% being lower at £1,492m.
Civil Aerospace delivered an underlying
profit before finance charges and tax of
£812m (2014: £942m). Defence Aerospace
delivered £393m (2014: £366m), Power
Systems £194m (2014: £253m) and Marine
£15m (2014: £138m). Nuclear delivered £70m
(2014: £50m). More detail on each business
is included in the Business review.
After underlying financing costs of £60m
(2014: £61m), underlying profit before tax
was £1,432m (2014: £1,620m). Excluding the
benefit of a one-off intellectual property
settlement of £58m, triggered by the
third-party acquisition of a former business
partner, and a favourable £19m R&D credit
benefiting our Nuclear business, underlying
profit before tax would have been £1,355m,
in line with the lower half of the 2015
guidance range set out in July 2015.
8
Rolls-Royce Holdings plc Annual Report 2015
Chief Executive’s review / Review of 2015
Our strategic priorities in 2015
Customer
Innovation
Profitable growth
Placing the customer at the heart of our
organisation is key. We listen to our
customers, share ideas, really understand
their needs and then relentlessly focus on
delivering our promises.
This is our lifeblood. We continually innovate
to remain competitive. To drive innovation,
we create the right environment – curious,
challenging, unafraid of failure, disciplined,
open-minded and able to change with pace.
Most importantly, we ensure our innovation
is relevant to our customers’ needs.
By focusing on our customers and offering
them a competitive portfolio of products
and services, we create the opportunity to
grow our market share. We have to make
sure that we are not just growing, but
growing profitably. That means ensuring
our costs are competitive. We look after our
cash and we win right.
Performance in 2015
Trent XWB completes exemplary first year
in service with Qatar Airways.
Testing of Trent 1000 TEN and Trent XWB-97
development engines is progressing well.
Our largest ever order secured: US$9.2bn
from Emirates for Trent 900s.
Gulfstream G650 corporate jet with
BR725 engines enters service .
F-35B Lightning II with Rolls-Royce
LiftSystem® declared operational by
US Marine Corps.
MTU signs agreement with Daimler to jointly
develop EU Stage 5, emissions compliant
diesel engines for off-highway applications.
We expand TotalCare® service offering
range and our maintenance, repair and
overhaul (MRO) network.
We produce the world’s largest 3D
component for the aerospace industry.
€100m order for MTU engines to power rail
locomotives for Dalian of China.
US Air Force, Boeing and Embraer all name
Rolls-Royce in their top supplier categories.
We are leading an international research
programme into remote and autonomous
ship control.
US$600m investment announced
for re-developing our production facilities
in Indianapolis, US.
Underlying revenue (£m)
Civil Aerospace
Defence Aerospace
Power Systems
Marine
Nuclear
8,000
6,000
4,000
2,000
0
8,000
6,000
4,000
2,000
0
8,000
6,000
4,000
2,000
0
8,000
6,000
4,000
2,000
0
8,000
6,000
4,000
2,000
0
2014 2015
2014 2015
2014 2015
2014 2015
2014 2015
Rolls-Royce Holdings plc Annual Report 2015
9
Strategic Report
Strategic Report / Chief Executive’s review
Review of 2015
Positive market developments
continue to drive long-term growth
The long-term positive market trends for our
leading power systems remain unchanged
despite some near-term uncertainties that
are expected to impact small aerospace
engine production volumes and service
activity on older widebody engines over the
next couple of years. The trends driving
demand for growth in large passenger
aircraft, corporate jets and maritime activity
remain strong; in particular a growing
aspirational and mobile middle-class,
particularly in Asia, and globalisation in
business, trade and tourism. In addition,
capacity constraints at the airframe
manufacturers and a strong underlying
demand for newer, more fuel efficient
aircraft, should provide resilience to
manufacturing schedules over the next few
years as the industry transitions to new
airframes during a strong replacement cycle.
The most significant short-term challenge
that has emerged in 2015 relates to the
changing demand for our Trent 700 engine
as Airbus transitions production from old to
new airframes. This has had a knock on
effect on both demand for and pricing of the
remaining engines to be delivered. Once
completed, we will benefit from an exclusive
position with the new Trent 7000 on the
A330neo. In the near-term the profit impact
of this transition is negative; the impact of
lower pricing and gross margin is
exacerbated by the accounting effects of
changes within our large engine aerospace
product mix as we transition to a portfolio
increasingly comprising ‘unlinked’ platform
positions. However, the roll-out of new
engines will significantly grow our market
share and the installed base of new engines
will deliver strong aftermarket revenues for
decades to come.
We recognise that these changes have been
exacerbated by market uncertainty as to the
impact of TotalCare accounting on our
financial statements. As a result, we are
increasing our financial disclosure to present
a simpler narrative that will more clearly
describe how the key drivers of performance
translate into our financial results and aid
transparency and understanding. These are
included in the Business review.
Announced initial findings of a
detailed operational review
Our strategic priorities for 2015 remained
largely consistent throughout the year, with
a clear focus on the customer, innovation
and on driving long-term profitable growth.
However, with short-term market conditions
around us changing, it has been appropriate
to review these priorities as we look to the
next three or four years.
Since July 2015, we have been conducting
a review of operations and presented the
initial conclusions in November 2015.
As part of this we shared our views on the
strengths and weaknesses of our business
portfolio and updated management’s
future focus and priorities around delivery
and transformation.
Strong growth expected in installed widebody fleet
10,000
8,000
6,000
4,000
2,000
0
t
f
a
r
c
r
i
a
f
o
r
e
b
m
u
N
1974
1979
1984
1989
1994
1999
2004
2009
2014
2019
2024
2029
2034
Year
Company estimates
10 Rolls-Royce Holdings plc Annual Report 2015
Chief Executive’s review / Review of 2015
Rolls-Royce is in…
growing markets. We are
strongly positioned and…
growing market share.”
Warren East
24 November 2015
Clear areas for business
improvement
The review of operations also highlighted
a number of opportunities to drive further
performance improvements over and above
the extensive restructuring programmes
already underway. As we grew as an
organisation we embedded costs and
complexity in the business which, in periods
of significant investment and product
transition like now, are impacting our
performance. But the higher costs also
present a significant opportunity; to simplify
what we do and sustainably reduce the cost of
management, creating a more streamlined,
resilient and sustainable business.
Strategic focus going forward
The review has led us to recast our priorities
for 2016 onwards. As before, the overarching
theme continues to be developing our
products, services and order book to drive
long-term profitable growth. We will do this
by focusing on three common themes across
all our businesses:
•
•
•
investing in and developing engineering
excellence;
driving a manufacturing and supply
chain transformation which will embed
operational excellence in lean, lower-cost
facilities and processes; and
leveraging our installed base, product
knowledge and engineering capabilities
to provide customers with outstanding
service through which we can capture
aftermarket value long into the future.
Our ability to deliver these priorities will be
enhanced by a major transformation of our
organisation; to simplify our processes and
management structure, to add pace to our
decision making and execution, and to
provide space to develop our people and
create a stronger, high performance culture.
These themes will become the cornerstones
of our operational priorities going forward.
Portfolio analysis
“We have a strong portfolio of products
and services with strong competitive
positions and many in sustainably
attractive markets. We have the
opportunity to strengthen products,
routes to market or to reduce their costs
so they can be more competitive
in the future.”
Warren East
24 November 2015
Group portfolio 2015
Group portfolio 2020
High
High
n
o
i
t
i
s
o
p
e
v
i
t
i
t
e
p
m
o
C
50%
n
o
i
t
i
s
o
p
e
v
i
t
i
t
e
p
m
o
C
~70%
Low
Market attractiveness
High
Low
Market attractiveness
High
Rolls-Royce Holdings plc Annual Report 2015 11
Strategic Report
Strategic Report / Chief Executive’s review
Review of 2015
Major new transformation
programme creating meaningful
cost savings
Restructuring initiatives started
prior to November continue to make
good progress
We have significant
opportunities to improve
our operating performance
and our pace, customer
delivery, programme delivery,
project delivery, lean
manufacturing, as well
as reducing our footprint.”
David Smith
Chief Financial Officer
24 November 2015
During 2014 and 2015 restructuring initiatives
were started, largely focused on our operational
footprint within Aerospace and Marine.
In 2015, we consolidated our Civil Aerospace
repair and overhaul activities, enabling the
closure of sites in Brazil and the UK, along
with further rationalisation of our UK
manufacturing footprint. To date, nearly
80% of the targeted 2,600 Civil and Defence
Aerospace headcount reductions have been
completed, with an 11% reduction in our
2013 operational footprint.
In May 2015, we announced a Marine
restructuring programme to make significant
reductions in both manufacturing footprint
and headcount (by 600) and generate £25m
in annual savings from 2016 onwards. This
included work to consolidate our footprint
and increase lower-cost country sourcing.
At the start of October 2015, we announced
an additional programme of restructuring,
focused largely on back-office administrative
functions. This will lead to a further 400
reduction in headcount.
Good progress has been made overall,
with related headcount reductions across
Aerospace and Marine totalling 2,500
by the end of 2015.
The objective of our new transformation
programme is to simplify the organisation,
streamline senior management, reduce
fixed costs and add greater pace and
accountability to decision making. Our
target is to deliver incremental gross cost
savings of between £150m and £200m per
annum, with the full benefits accruing from
the end of 2017 onwards.
In the last two months, we have already
announced a 20% reduction in the top two
layers of senior management with further
reductions planned for 2016 and onwards.
This has included removal of the divisional
structure. To date we have already identified
around 50%, or £75-100m, of targeted cost
savings with a related exceptional
restructuring charge of £75-100m. Around
£30-50m of the initial savings should be
achieved in 2016 with the full run rate
benefiting 2017. Further actions are
underway to quantify the additional savings
needed to reach our goals, together with the
related costs which we expect to take in 2017.
To ensure we remain focused, we have set
up a transformation team which will drive
change to simplify processes and activities
across the Group to deliver sustainable
performance improvements. The new team
will ensure other restructuring programmes
maintain progress. They will also help
develop the comprehensive range of key
performance indicators needed to support
the changes we are looking to make inside
the business. Several measures around site
level productivity and aerospace engine unit
costs have already been adopted within the
business. These and other measures will be
important indicators of the changing
culture around productivity, cost reduction,
investment efficiency and process waste.
Details on new measures will be set out in
further announcements.
Right
UltraFan is a future
civil aerospace engine
concept that could
be ready for service
from 2025.
12 Rolls-Royce Holdings plc Annual Report 2015
HOW WE ARE
TRANSFORMING
THE BUSINESS
Chief Executive’s review / Review of 2015
My review… has
highlighted a number
of areas where we can
simplify the way we work
and inject pace into our
decision making”
Warren East
24 November 2015
RESTRUCTURING PROGRAMMES
ANNOUNCED PRIOR TO NOVEMBER 2015
Incremental changes
(as previously announced)*
2015
2016
2017
Aerospace
Net improvement
Headcount reduction
Marine
Net improvement
Headcount reduction
2015
2020
Aerospace
Footprint
1.4 million sqm
1.1 million sqm
£0m
2,200**
£80m
400
£0m
–
£(10)m
600
£35m
400
£40m
–
Output –
number of
widebody
engines
~330
~600
20%
80%
* Overall benefits expected to be broadly in line with previously announced estimates
** Includes 545 who left the business in 2014
NOVEMBER 2015: NEW TRANSFORMATION
PROGRAMME TO CREATE SIGNIFICANT
INCREMENTAL SAVINGS
Focus and deploy
resources to
maximise value
to customers and
add pace and
simplicity to the
business
Engineering excellence
Operational excellence
Capturing aftermarket value
£150–200m
initial saving targeted with
maximum 1-2 year payback
Primarily senior level, corporate
and divisional fixed costs
Rolls-Royce Holdings plc Annual Report 2015 13
Strategic Report
Strategic Report / Chief Executive’s review
Review of 2015
Transforming our US operations
In October 2015, we confirmed the
decision to invest nearly US$600m in
modernising our manufacturing base
in Indianapolis, US.
This investment is the largest by
Rolls-Royce in the US since we purchased
the Allison Engine Company in 1995.
The new facility is part of a five-year
modernisation plan and the investment
is in line with the Group’s ongoing
commitment to consolidate operations
and significantly reduce operational costs.
The new facility will be a state-of-the-art
manufacturing centre that combines
modern production systems and machinery
together with a highly-skilled workforce.
We currently employ around 4,000
people in Indianapolis, where engines
are designed, assembled and tested for
US defence aircraft, civil helicopters,
regional and business jets and power
systems for US naval vessels.
Below
Our re-developed facilities in Indianapolis
will cover 1.5 million square feet when
complete.
Outlook for 2016
Looking further ahead
Our outlook for 2016 is unchanged from that
set out in November 2015. On a constant
currency basis, Group revenue for 2016 is
expected to be marginally lower than that
achieved in 2015, partially reflecting the
pricing and volume effects in Civil Aerospace
and the continued weakness in offshore
marine markets. Overall, the net profit
trading headwinds discussed in previous
announcements are unchanged at around
£650m compared to our underlying profit
before financing, excluding £58m intellectual
property settlement included in ‘Other’
and £19m research and development (R&D)
credit which benefited Nuclear.
The successful roll-out of new engines,
led in particular by the Trent XWB, Trent 1000
and Trent 7000, together with a growing
aftermarket, is expected to drive significant
revenue growth over the next ten years
as we build toward a 50% plus share of the
installed widebody passenger market.
While the impact of the transition to the
Trent 7000 has reduced Trent 700 deliveries,
and will hold back Civil Aerospace profit
in the near term, we are confident that the
important investments we are making
to transition our production will create
a strong platform to drive customer service,
improved margins and strong cash flows.
Individual outlooks are provided for each
business in the Business review.
Our 2014 and 2015 initiatives to reduce
manufacturing and back office costs within
Aerospace and Marine are on track to reduce
costs by £145m by the end of 2017.
In addition, we have made a good start to
the transformation programme that will add
pace and simplify our business, and create
incremental enduring cost savings of between
£150m and £200m per annum from the end
of 2017 onwards. These initiatives will make
us a more efficient and resilient business.
At the same time, we will continue to invest
appropriately to strengthen our engineering
and operational excellence and aftermarket
products and services. We have started the
journey that will return the Company to its
long-term trend of profitable growth.
14 Rolls-Royce Holdings plc Annual Report 2015
Chief Executive’s review / Strategic priorities
OUR STRATEGIC PRIORITIES
GOING FORWARD
VISION – BETTER POWER
FOR A CHANGING
WORLD
‘…to be the market leader in high-performance power systems
where our engineering expertise, global reach and deep
industry knowledge deliver outstanding customer
relationships and sustainable solutions.’
STRATEGIC FOCUS –
OUR PRIORITIES FOR
DEVELOPING THE
BUSINESS
‘…focus on differentiated, mission-critical power systems which
create high barriers to entry in our chosen markets. Leverage
world-leading engineering, operational and customer service
excellence to drive growing market shares, capture long-term
aftermarket value and deliver profitable growth.’
1
Engineering
excellence
2
Operational
excellence
3
Capturing
aftermarket value
Investing in and developing the
excellence of our engineering
to produce high-performance
power systems
Transforming our manufacturing
and supply chain to embed a lean
approach across our facilities and
processes
Leveraging our installed base, product
knowledge and capabilities to provide
outstanding services to customers
Underpinned by a commitment to developing our people
and our culture in a safe and ethical environment.
Rolls-Royce Holdings plc Annual Report 2015 15
Strategic Report
Strategic Report / Chief Executive’s review
Business model
Chief Executive’s review / Business model
OUR
BUSINESS
MODEL
Our business model is to capture value from
markets for high-performance power. We do
this by developing advanced, integrated power
and propulsion systems and providing long-term
aftermarket support and delivery of outstanding
customer services.
Our long-life products operate in challenging
environments where they are expected to deliver
sustained levels of differentiated performance. They
deliver value to customers through outstanding power
or other performance capabilities, together with greater
fuel efficiency and mission-critical reliability. This is
often combined with a flexible service offering to best
suit each customer’s operating needs.
We make significant investments in advanced
technology and engineering programmes to deliver
market-leading products. We seek to recoup our
investment through developing superior products,
many of which are selected for use on major multi-year
programmes. We benefit from increasingly cost-efficient
manufacturing as production levels rise, and by
securing strong aftermarket revenues. In certain
markets we strengthen our customer relationships
typically through long-term service agreements where
we commit to deliver exceptional standards of service,
including high levels of product operational availability.
This provides significant value to customers and in
return we achieve long-term predictable revenues.
By growing our installed base of power systems over
time and leveraging our aftermarket service activities,
we enhance revenue, profit and cash flow. Cash flow is
then invested to support future product development
and technology programmes to drive growth while
providing good shareholder returns.
Invest in R&D and skilled people
Developing and protecting
leading-edge technology and
deploying it across our businesses
allows us to compete on a global
basis and creates high barriers
to entry.
Design and make world-class products
We differentiate on performance.
We win and retain customers by
developing and delivering products
that provide more capability and offer
better through-life value than those
of our competitors.
Manufacturing capability
We manufacture cost-efficiently
through a combination of economies
of scale, developing a lean enterprise
and integrated management of our
supply chain.
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
Develop technology that
anticipates customer needs
Our deep understanding
of customer needs drives
the development of new
technologies and products.
1
Engineering
excellence
2
Operational
excellence
Industry-leading R&D
Strong supply chain partnerships
Proven mission-critical reliability
Exceptional long-life products
Differentiated product performance
Sustained cost reduction
Transforming to world-class
production capability
Cost-focused lean enterprise
High-performance culture
3
Capturing
aftermarket
value
Long-term relationships with
civil and defence customers
Decades of in-service experience
Flexible range of service offerings
Growing installed base and global
service footprint
Grow market share
and installed base
Our substantial order book
for both original equipment
and services provides good
visibility of future revenues
and provides a firm
foundation to invest
with confidence.
Disciplined capital allocation
We allocate our capital to achieve
a balance of financial strength
and liquidity to deliver commercial
advantage and sustainable
long-term shareholder returns.
Investment in future
programme development
We make significant investment
in development programmes which
we believe will deliver cost-efficient
and competitive next-generation
products.
Secure and maximise
service opportunity
Our equipment is in service for decades.
Our deep design knowledge and
in-service experience ensures that
we are best placed to optimise product
performance and availability.
16 Rolls-Royce Holdings plc Annual Report 2015
Rolls-Royce Holdings plc Annual Report 2015 17
Strategic Report / Chief Executive’s review
Engineering and innovation
ENGINEERING
OUR FUTURE
INVESTING IN
PEOPLE AND SKILLS
18 Rolls-Royce Holdings plc Annual Report 2015
Our investment in
technology and skilled
people is vital for a
company that has
advanced engineering
at its core. Ultimately it
delivers the differentiated,
high-technology products
that attract our customers.”
Colin Smith
Group President
Director – Engineering & Technology
throughout 2015
CREATING WORLD-
CLASS TECHNOLOGY
In 2015, we invested £1.2bn in gross R&D,
which includes funding from governments
and other bodies. £831m was from our
own funds. As a result, we applied for
626 patents during the year. It is this
investment that creates the intellectual
property we then develop and embed
in our products.
We leverage our own scientific and
engineering talent globally to create
world-class technology and also partner
with leading academic institutions. This
ensures we benefit from the knowledge
of renowned experts in their fields, and
get the best value from our investment.
READ MORE AT ROLLS-ROYCE.COM
We seek to attract and retain the best
and brightest engineers. We then create
a culture of innovation that allows them
to develop their skills. We encourage
all employees to contribute to our
Innovation Portal via the Company
intranet. In 2015, this generated well over
1,000 ideas from which we conducted
dozens of challenges.
Graduates recruited in 2015
Apprentices recruited in 2015
228
277
Chief Executive’s review / Engineering and innovation
£1.2bn
Gross R&D investment in 2015
RESEARCH AND
TECHNOLOGY
CENTRES
We have a network of 31 University
Technology Centres (UTCs) dedicated to
advancing our understanding in
specialist science and technologies that
are core to our business. 2015 marked the
25th anniversary of our UTC network.
University Technology Centres
31
SCIENCE & TECHNOLOGY COMMITTEE REPORT P104
EXPERT
KNOWLEDGE
Within our engineering community,
we have some of the world’s most
knowledgeable people in specialist
disciplines. There are over 100 members
of the Rolls-Royce Fellowship (fellows
and associate fellows) – each recognised
as an expert in a particular field
of science and technology.
STEM SUPPORT
We are actively engaged in supporting the
study and teaching of science, technology,
engineering and mathematics (STEM)
subjects. The Rolls-Royce Science Prize is
a prime example. This is an annual award
programme that rewards excellence in
science teaching – this year, we received
2,000 entries.
OTHER ENGINEERS
(SAFETY/TEST/
TRANSFORMATION)
2,108
ELECTRICAL
ENGINEERS
1,614
MANUFACTURING
ENGINEERS
3,204
SERVICES
ENGINEERS
1,554
TOTAL
ENGINEERS
15,690
YEAR-END
DESIGN
ENGINEERS
7,210
Rolls-Royce Holdings plc Annual Report 2015 19
Strategic Report
Strategic Report / Chief Executive’s review
Engineering and innovation
ENGINEERING
EXCELLENCE
...THROUGH DESIGN
Structured development
Lean thinking
Our latest Product Development System,
introduced in 2015, provides an even more
rigorous and structured method for
developing game-changing capabilities
and embedding these across the Group.
It allows us to substantially improve
our performance.
We further increased focus on lean thinking
and behaviours during 2015, with the aim
of transforming our business into a true
lean enterprise. By a relentless pursuit
of efficiency and continuous improvement
we are seeking to empower our people to
reduce waste in all its forms and deliver
products and services efficiently.
Our Vision 20 approach to research
and development of technology over
a 20-year horizon
VISION
5Near-term technologies ready
to embed into new products
VISION
10Leading-edge and
validated technologies
VISION
20Emerging and as yet
unproven technologies
LATEST MARINE
THRUSTERS
Permanent magnet tunnel
thrusters are now entering
service. These improve efficiency
and response, while reducing
vibration, noise and emissions.
20 Rolls-Royce Holdings plc Annual Report 2015
Chief Executive’s review / Engineering and innovation
FUTURE MAKING
...THROUGH
MANUFACTURING
An important part of the design
process is to consider the most
effective way of manufacturing
the often complex components
that go into our products. These
considerations are an intrinsic part
of design engineering for any
Rolls-Royce product. Teams of design
and manufacturing engineers
work closely on the development
of future products.
Advanced Manufacturing
Research Centres (AMRCs)
Our growing network of seven AMRCs forms
a unique resource to bridge the gap
between early research and industrial
application, delivering step-change
improvements in product competitiveness
and business performance. The network
supports all our key manufacturing process
technologies including additive layer
manufacturing (3D printing) and advanced
composites.
These highly collaborative public/private
partnerships are a national asset, supported
by long-term government commitment and
delivering benefits through the entire
supply chain for both original equipment
and aftermarket activities.
A Trent fan disc being
manufactured at our new
facility in Washington,
Tyne and Wear, UK.
Advanced Manufacturing Research Centres
7
Rolls-Royce Holdings plc Annual Report 2015 21
Strategic Report
Strategic Report / Chief Executive’s review
Business review
BUSINESS REVIEW
Summary
The Civil Aerospace business is a major manufacturer of aero engines
for the commercial large aircraft and corporate jet markets. We power
35 types of commercial aircraft and have more than 13,000 engines
in service around the world.
CIVIL
AEROSPACE
Key highlights
Underlying
revenue mix
Underlying revenue mix
Underlying revenue up 3%; solid growth
in aftermarket revenues offset lower
new engine sales.
Underlying profit before financing 14%
lower than 2014; largely reflecting lower
gross margins, due to adverse mix
effects and higher R&D charges, partially
offset by the impact of life-cycle cost
improvements, retrospective long-term
contract accounting benefits, a reversal
of impairment of contractual
aftermarket rights and lower
restructuring costs.
£3.8bn order book growth; led by Trent 900
and Trent XWB orders – Trent XWB now
nearly 50% of order book.
New Trent engines, 1000 TEN, XWB-97
and 7000, on track for entry into service
in 2017 and 2018.
Good progress modernising supply chain
to reduce costs and increase capacity for
Trent XWB ramp up over next four years.
OE revenue
Services revenue
47%
53%
Underlying
revenue by sector
Underlying revenue by sector
Large engines
Small & medium
63%
37%
Trent 1000 in service
A Trent 1000 engine seen
here on an Air New Zealand
Boeing 787-9 aircraft.
22 Rolls-Royce Holdings plc Annual Report 2015
OPERATIONAL
REVIEW
Overall, underlying revenue for Civil Aerospace
grew 3% on a constant currency basis (up 1%
at actual rates) with steady growth in services
(up 9% at constant rates, including a £189m
one-off benefit discussed below) which more
than offset the reduction in original
equipment (down 3% at constant rates).
Second-half growth was particularly strong
as the business improved original equipment
delivery performance on a number of
programmes, notably in corporate jets.
Original equipment revenues from
widebody engines: linked and other reduced
11% reflecting a slow-down in linked Trent
700 deliveries for the Airbus A330 ahead of
the introduction of the Trent 7000 for the
A330neo, together with reduced sales of
linked Trent 900 engines for the Airbus A380,
partly offset by increased linked Trent 1000
engine sales for the Boeing 787 Dreamliner.
In addition, sales of spare engines to joint
ventures generated revenue of £189m
(2014: £138m).
Original equipment revenues from unlinked
widebody engines increased by 29%, largely
a result of an increase in unlinked Trent XWB
and other Trent engine deliveries.
The 17% increase in widebody services
revenue was mainly driven by increased
flying hours from our growing fleet of
installed Trent 700, Trent 900 and Trent 1000
engines and a £189m one-off benefit
resulting from refining the basis for taking
account of risk in our forecasts of future
revenue on long-term contracts. This was
partially offset by lower utilisation of some
of our more mature engine types, notably
the Trent 500 and Trent 800.
Chief Executive’s review / Business review
proportion of linked Trent 700 engine sales,
weaker corporate jet engine volumes and a
declining regional aftermarket, partially offset
by £16m higher gross margin contribution
from sales of spare engines to joint ventures
(£67m in 2015 compared to £51m in 2014).
In addition, these factors were partially
offset by a number of contract accounting
adjustments and reversals of impairments
and provisions.
The in-year benefit of retrospective long-term
contract accounting adjustments as expected
was a net positive of £222m (2014: total benefit
of £150m). Of this, £189m was a one-off benefit
resulting from refining the basis for taking
account of risk in our forecasts of future
revenue. In 2012, it was agreed with the Group
Audit Committee that a comprehensive review
would be completed during 2015. The new
enhanced methodology should better reflect
risk, current experience and expected
long-term performance. Other long-term
contract accounting adjustments totalled a net
benefit of £33m (2014: total benefit of £150m).
This comprised a retrospective charge of £107m
(2014: benefit of £90m), reflecting reduced
customer fleet utilisation, mainly in respect of
the Trent 500 and Trent 800, other commercial
changes and technical risks, offset by the
benefit of £140m (2014: benefit of £60m)
from life-cycle cost improvements.
Full-year performance also benefited
from the reversal of previously recognised
impairments on contractual aftermarket
rights (CARs) and release of a related
provision with a profit of £65m being
recognised (2014: impairment charge of
£19m). This reflected a significantly more
positive outlook for future maintenance
costs for a Trent 1000 launch customer
which enabled the reversal of a previous
impairment. This also resulted in the
capitalisation of £22m of 2015 CARs that
would otherwise have been impaired.
Costs below gross margin were £5m lower
than the previous year. Within this, R&D
charges were £64m higher, reflecting
increased spend on key programmes,
particularly in respect of the Trent 1000 TEN,
the Trent 7000 and the Trent XWB-97.
These engines, now in their final stages
of preparation before flight testing, are
due to enter service in 2017 and 2018. They
represent a significant advance on previous
Trent designs, providing substantial fuel
burn improvements. The Trent 7000 and
Trent XWB-97 programmes have yet to reach
a point at which their costs can be capitalised.
In addition, following its successful entry
into service, continuing investment in the
Trent XWB-84 engine can no longer be
capitalised. Investment also increased to
develop future corporate jet engine technology.
2014
63,229
739
6,837
3,463
3,374
1,675
24.5%
(283)
(82)
(461)
93
942
13.8%
Underlying
change
3,800
(27)
201
+3%
(117)
-3%
318
+9%
(139)
-270 bps
(14)
75
(65)
8
(135)
-14%
-230 bps
Acquisitions
& disposals
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Foreign
exchange
–
–
(105)
-2%
(88)
-3%
(17)
+1%
(10)
–
1
–
11
3
5
–
–
2015
67,029
712
6,933
+1%
3,258
-6%
3,675
+9%
1,526
22.0%
(296)
(7)
(515)
104
812
-14%
11.7%
Within our corporate engine business we had
good revenue growth from our BR725 engine
which powers the Gulfstream G650 and
G650ER. This was offset by lower volumes
for our other products due to weaker demand
from Chinese, Russian and Brazilian customers.
As a result, corporate original equipment
revenues declined 1%. Despite a reduction in
new corporate engine deliveries, our installed
base of corporate jet engines continued to
grow, contributing to a 13% increase in
services revenues from these products.
Services revenues from our regional jet
engines declined 14%, reflecting
retirements and reduced utilisation of
relevant fleets by North American operators.
On the V2500 programme, original
equipment revenues declined 9% due to
reduced demand from International Aero
Engines (IAE) for V2500 modules to power the
Airbus A320ceo, reflecting a mix change in
engine types powering the aircraft ahead
of the introduction of the A320neo. Despite
continued growth in the installed base of
engines, services revenues on the V2500 were
down 1% overall reflecting a combination
of fewer overhauls, lower spare parts sales
and reduced engine flying hours.
Overall gross margins for Civil Aerospace were
22.0% (2014: 24.5%). The year-on-year reduction
in margin of £139m reflected the lower
CIVIL AEROSPACE / KEY FINANCIAL DATA
Order book
Engine deliveries
Underlying revenue
Change
Underlying OE revenue*
Change
Underlying services revenue*
Change
Underlying gross margin
Gross margin %
Commercial and administrative costs
Restructuring costs
Research and development costs
Joint ventures and associates
Underlying profit before financing
Change
Underlying operating margin
* The methodology basis for the allocation of Civil Aerospace revenues on linked TotalCare contracts between original equipment and aftermarket has been reviewed and
amendments made to reflect better the commercial substance of the combined contracts. Historically, the allocation has resulted in original equipment revenue and
aftermarket revenue reflecting the contractual terms rather than the commercial substance of the contracts. The 2014 figures have been restated on the same basis;
the impact was an increase in original equipment revenue of £198m and an equal decrease in aftermarket revenue
Rolls-Royce Holdings plc Annual Report 2015 23
Strategic Report
Strategic Report / Chief Executive’s review
Business review
The R&D charge was reduced by £94m
(2014: £71m) by the recognition of entry fees
receivable from risk and revenue sharing
arrangements (RRSA).
Underlying corporate, administration and
other costs were £14m higher. Restructuring
costs were £75m lower reflecting the
significant charges taken in 2014.
As a result, profit before financing and tax
was 14% down, reflecting a combination of
lower overall gross margins, increased R&D
and reduced restructuring costs. Taking
account of foreign exchange effects,
underlying profit before financing and tax
was £812m (2014: £942m).
Trading cash flow before working capital
movements improved year-on-year by £48m,
despite the headline drop in underlying
profit before financing of £130m and the
higher level of CARs additions. This is largely
due to a reduced level of property, plant and
equipment additions and a lower spend on
certification costs and participation fees.
The £286m year-on-year difference in
working capital movements was largely due
to differences in the timing of payments
to suppliers and increased draw down
of deposits in 2015.
Investment and business
development
Order intake of £12.8bn in 2015 for Civil
Aerospace was £1.1bn up on the previous
year. As a result, the order book closed at
£67.0bn, up £3.8bn or 6% on the previous year.
Significant orders during the year included
our largest ever order by value to provide
Trent 900 engines and TotalCare service
support for 50 Airbus A380s for Emirates
worth $9.2bn of which $6.1bn is recognised
within the order book. Other major orders
included Trent 1000 engines to power 21
Boeing 787 Dreamliner aircraft and
long-term TotalCare support for Air China
and Ethiopian Airlines, and a $2.4bn order
for engines and services with HNA Group.
Engineering excellence remains
the cornerstone of our value to
Civil Aerospace customers
Several important engineering milestones
were achieved during 2015. For widebody
engines, the focus has been on completing
the development and testing of the new
Trent 1000 TEN and the Trent XWB-97.
The results of initial tests on both engines
are broadly in line with expectations.
In December 2015, the Trent XWB-97 flew
for the first time and has since undergone
rigorous testing in a number of conditions.
The Trent 1000 TEN has also completed
several major milestones. In addition,
a hybrid Trent 7000, produced to de-risk the
development programme, ran for the first
CIVIL AEROSPACE / NEW DISCLOSURE ON REVENUE SEGMENTATION
Underlying revenue
Underlying OE revenue
Widebody engines: linked and other
Widebody engines: unlinked installed
Corporate (and other small engines)
V2500
Underlying services revenue
Widebody engines
Corporate
Regional
V2500
2014
%
100%
51%
26%
6%
14%
5%
49%
30%
6%
6%
7%
£m
6,837
3,463
1,766
392
974
331
3,374
2,029
383
427
535
Underlying
change
201
(117)
(191)
114
(9)
(31)
318
336
50
(61)
(7)
CIVIL AEROSPACE / NEW DISCLOSURE ON TRADING CASH FLOW
£m
Underlying profit before financing
Depreciation and amortisation
Sub-total
CARs additions
Property, plant, equipment and other intangibles
Other timing differences*
Trading cash flow pre-working capital movements
Net long-term contract debtor movements
Other working capital movements
Trading cash flow**
Foreign
exchange
(105)
(88)
(5)
(2)
(62)
(19)
(17)
6
(8)
(6)
(9)
2015
812
410
1,222
(161)
(502)
(75)
484
(406)
(78)
0
2015
%
100%
48%
23%
7%
14%
4%
52%
34%
6%
5%
7%
2014
942
381
1,323
(86)
(748)
(53)
436
(463)
208
181
£m
6,933
3,258
1,570
504
903
281
3,675
2,371
425
360
519
Change
(130)
29
(101)
(75)
246
(22)
48
57
(286)
(181)
*
Includes timing differences between underlying profit before financing and cash associated with: joint venture profits less dividends received; provision charges higher/
(lower) than cash payments; non-underlying cash and profit timing differences (including restructuring); and financial assets and liabilities movements
** Trading cash flow is cash flow before: deficit contributions to the pension fund; taxes; payments to shareholders; foreign exchange on cash balances; and acquisitions
and disposals
24 Rolls-Royce Holdings plc Annual Report 2015
time and is now being put through its paces
with a series of rigorous tests.
bringing us closer to our customers,
working in their time-zones.
For corporate jets, developments in the year
were more modest. Strong orders for the
BR725 have sustained steady original
equipment volumes as the new Gulfstream
G650ER entered service, despite a
weakening market. Failure in past years
to secure new positions on some important
new corporate jet platforms contributed
to a weak order intake in the year which
will impact future volumes and revenues
adversely. As part of our technology
strategy, investments are being made
to secure future opportunities and regain
its position as the leading provider to the
important market of large-cabin,
long-range corporate jets.
Investing in new aerospace supply
chain capabilities to help drive
operational excellence
As part of the supply chain transformation
underway in the business, several
important new facilities were completed
during the year. These included the opening
of our Advanced Blade Casting Facility in
Rotherham, UK, which will halve the time
it takes to manufacture turbine blades, and
an expansion of our Trent XWB production
centre in Derby. We also announced plans
to invest in our facility in Inchinnan to
create a new Centre of Competence for
manufacturing aerofoils and established
a joint venture with Liebherr to develop
manufacturing capability and capacity
for the power gearbox for our UltraFan™
demonstrator programme.
Strengthening our aerospace
aftermarket service offering
During 2015, we broadened our service
offering and strengthened our support
network to provide customers with greater
choice, flexibility and capability at all
stages of the engine lifecycle, supporting
a growing installed base.
This included making improvements to our
Trent service network which will result in
increased competition among our Approved
Maintenance Centres (AMCs) and the
announcement of our first independent
AMC, Delta TechOps. We have also set up a
global network of Customer Service Centres,
We launched a new service, SelectCare™,
which fits between our comprehensive
TotalCare and general maintenance, repair
and overhaul services, where customers
contract for individual shop visit support.
At the same time, we announced American
Airlines as the launch customer. We also
announced our first customers for TotalCare
Flex®, a new service targeting owners and
operators of more mature engines. Cathay
Pacific, AerCap, South African Airways and
BMI Regional chose the service for Trent 800,
Trent 500 and AE 3007 engines.
Civil Aerospace outlook
As we set out in November 2015, we believe
the long-term outlook for Civil Aerospace
remains very good, led by a strong widebody
order book for fuel efficient engines. Key to
the long-term success of the business is
converting this exceptional order book into
a large installed base of engines that meet
customer demands for safe, reliable, efficient
operation while driving profitable engine
flying hour revenues. The next few years will
be very important as we ramp up production
of new engines – in new, efficient facilities –
and invest in the development of future
engine platforms that will benefit the order
book from 2020 onwards. As a result, until we
gain additional aftermarket scale, or complete
our industrial transformation and improve
unit costs and cash margins, the business will
continue to be a net investor of cash.
Over the next few years the transition
from ‘linked’ to ‘unlinked’ contracts creates
a headwind to reported profit but no
change to cash flows.
In the future, an increasing proportion
of our new engines will be sold to the
airframer on a sole-source basis,
in particular the new Trent XWB and
Trent 7000 for use on the Airbus A350
and A330neo respectively. As a result,
a significantly larger proportion of our sales
in the future will be accounted for on an
‘unlinked’ basis. While this does not change
cash flows, it does change the timing of
when profit is recognised across the OE and
aftermarket contracts. Under ‘unlinked’
accounting, the engine sale and aftermarket
contracts are accounted for separately.
Chief Executive’s review / Business review
Engines delivered in 2015
>700
This typically results in lower upfront
profit recognition on engine delivery,
with significantly higher proportion of
profit in the aftermarket period. This is in
comparison to ‘linked’ accounting, where a
blended margin is applied across the engine
sale and aftermarket contracts.
Near-term conditions in some segments
remain challenging. We continue to expect
our Civil Aerospace business to underperform
2015 underlying profit before finance and
tax by around £550m. The significant
headwinds related to Trent 700 volume
reductions and the non-recurrence of a
number of one-off benefits seen in 2015
remain broadly unchanged. In addition,
we still expect to see weaker demand for
new corporate jets and declines in demand
within our regional jet aftermarket. The
aftermarket benefit of higher levels of
engine deliveries and increased installed
thrust is expected to be largely offset by
the underutilisation of older large engines.
However, the business will benefit from
reduced costs from the restructuring
initiatives started in 2014.
We now expect the TotalCare net asset to grow
from £2.2bn and peak at around £2.5bn,
allowing for a more positive demand outlook
for our ‘linked’ accounted engines and the
benefit of further life-cycle cost improvements
now being seen in engine performance.
Rolls-Royce Holdings plc Annual Report 2015 25
Strategic Report
Strategic Report / Chief Executive’s review
Business review
Market dynamics
• Overall there has been a slowdown in all major
geographical markets for new aircraft orders
reflecting a period of higher than normal order
placement for new airframe products in recent
years (principally Airbus A350 and A330neo,
and Boeing 787 and 777X).
• Long-term growth in the number of widebody
aircraft in the global fleet has historically been
strongly correlated to global GDP growth.
• Asia and the Middle East are strong drivers of
growth, correlating to their regional GDP growth.
• Historically, growth has recovered quickly
following major economic shocks.
• Our current share in the widebody engine
market is at 31% of the installed widebody
passenger fleet and is expected to reach
50% early in the next decade.
• Older widebody aircraft are experiencing
reduced utilisation by certain airlines, in
particular Boeing 777s and Airbus A340s.
• The re-engining of the A330, announced in
summer 2014, reduced Trent 700 sales ahead
of the new Trent 7000 entering service in 2017
as the sole source engine for A330neo.
• Over 90% of Rolls-Royce large engine fleet is
covered by our TotalCare service agreements.
• We are the market leader in large business jet
aircraft engines, with 55% market share of the
large/very large business jet market in 2015.
• Over 65% of Rolls-Royce business jet engines
are covered by our CorporateCare® service
agreements.
• Demand for large business jets is related
to global economic growth and increases
in the number of high net-worth individuals;
the sector has historically been fairly resilient
to financial shocks.
• The current business jet market is slowly
recovering in the US (our largest market), but is
currently going through a slowdown elsewhere
due to political tensions and customer
anticipation of new models about to enter into
service. Overall, this sector is expected to grow
faster than global GDP in the long term.
• In the regional sector, aftermarket demand
for engines on 50-70 seat aircraft is reducing
as aircraft approach the end of their lives.
Business risks
Competition
• If we experience a major product failure in
service, then this could result in loss of life and
critical damage to our reputation.
• If an external event or severe economic
downturn significantly reduces air travel, then
our financial performance may be impacted.
• If our airframer customers significantly delay
their production rates, then our financial
performance may be impacted.
• If we fail to achieve cost reductions at the
necessary pace, then our ability to invest in future
programmes and technology may be reduced.
• If we experience significant pricing pressure
from increased competitor challenge in our
key markets, then our financial performance
may be impacted.
• If we suffer a major disruption in our supply
chain, then our delivery schedules may be
delayed, damaging our financial performance
and reputation.
• If there are significant changes to the
regulatory environment for the airline industry,
then our market position may be impacted.
• GE is the main competitor supplying engines
in the widebody sector. In 2015, deliveries of
engines for widebody passenger aircraft were
split Rolls-Royce 38%, GE 54%, Pratt & Whitney
2%, and Engine Alliance 6%.
• Rolls-Royce is well positioned on all Airbus
widebody airliner programmes and competes
with GE on the Boeing 787 family.
• Rolls-Royce is the sole engine provider on the
Airbus A350 XWB family where 775 aircraft
have been ordered so far.
• GE is the sole engine provider on the
Boeing 777X aircraft, scheduled to enter into
service in 2020 where 306 have been ordered
so far.
• In large business jets the main competition
is GE, Pratt & Whitney and Safran; in 2015 the
GE-Honda joint venture entered the market
in very low thrust engines.
• Rolls-Royce has 3,100 powered business jets
flying, representing 55% market share of the
large/very large business jet fleet.
MARKET REVIEW
Rolls-Royce is one of the world’s leading
civil aero-engine manufacturers with
particular strengths in engines for civil
widebody aircraft and large business jets,
underpinned by our strength and
continued investment in technology.
We are market leaders in the large business
jet fleet market powering aircraft from most
of the main airframers. We have a strong
market position on widebody aircraft
produced by the world’s two major
airframers: Boeing and Airbus, who are
broadly consistent in forecasting traffic
growth (Revenue Passenger Kilometres)
of approximately 5% CAGR over the next
20 years. In the engine market for
narrowbody aircraft, we continue to supply
some parts and services for the IAE V2500
engine family.
Potential for OE and services
over the next 20 years
Civil Aerospace – all sectors
$1,720bn
Original equipment
$1,110bn
Aftermarket
$610bn
26 Rolls-Royce Holdings plc Annual Report 2015
Opportunities
• Our position and long-term prospects in the
widebody sector are strong across our Trent family.
• The Trent XWB has successfully completed its
first year in service and the new Trent XWB-97
engine made its first test flight in November
2015 and is on schedule to enter into service
in 2017.
• The new Trent 7000 is scheduled to enter
into service in 2017 on the A330neo. We have
sole source on this platform which will replace
the A330, on which we are one of three
engine providers.
• We will be introducing the new Trent 1000 TEN
in 2017 for the Boeing 787. On the 787, Rolls-Royce
engines have been selected for 42% of the
current order book.
• A potential significant new entrant into the
civil sector is China’s COMAC which is developing
a narrowbody aircraft for entry into service
towards the end of the decade. COMAC is also
planning a joint programme with Russia’s UAC to
develop a widebody aircraft, targeting entry into
service around 2025. We remain in close dialogue
with COMAC and UAC to understand their plans
and whether their widebody programme
presents an opportunity for Rolls-Royce.
• Our business jet market share is likely to fall
in the medium term with the success of new
entrants into the large/very large sector,
but the market remains attractive and we
will continue to invest to improve our position
and retain leadership.
Key Rolls-Royce differentiators
• Barriers to entry are extremely high in the civil
sector. We invest heavily to maintain market
leading technologies and system level
integration capabilities to deliver the best
engine performance for our customers.
We offer a wide range of aftermarket services
which provide flexible and cost-effective
options to our customers and build long-term
customer relationships.
Chief Executive’s review / Business review
Exemplary year for Trent XWB
On 15 January 2016, the world’s
most efficient aero engine
completed its first year in service.
The Trent XWB on the A350 XWB
airliner achieved the milestone
in style having delivered
outstanding performance over its
first 12 months of operation, with
launch customer Qatar Airways.
The engine lived up to its credentials in
terms of being the most efficient engine
ever and the Trent XWB also managed to
claim the crown of being the most reliable
engine with a dispatch rate of 99.83%.
Designed as the next generation of
medium-/long-haul airliners, the A350 is
an all-new family of aircraft from Airbus.
The Trent XWB engine represents the
largest single element of our £76.4bn
order book by some margin. Over 1,500
of the engines have been ordered by more
than 40 airlines, from important existing
customers and from new Rolls-Royce
customers all over the world.
READ MORE AT ROLLS-ROYCE.COM
Rolls-Royce Holdings plc Annual Report 2015 27
Strategic Report
Strategic Report / Chief Executive’s review
Business review
Summary
We are a leading engine maker for the military transport
market and the second largest provider of defence aero-engine
products and services globally. Defence has 16,000 engines
in service with 160 customers in over 100 countries.
DEFENCE
AEROSPACE
Key highlights
Underlying
revenue mix
Underlying revenue mix
Underlying revenue 5% lower; revenues
impacted by weaker helicopter and
trainer volumes, partially offset by
higher combat original equipment sales.
Underlying profit before financing
up 4%; steady gross margin and lower
restructuring costs offset higher
R&D charges.
Strong positions in transport and patrol,
and combat underpin outlook for a
steady performance in 2016.
Major five-year $600m investment in
Indianapolis, US, to improve cost base
and benefit long-term growth.
OE revenue
Services revenue
39%
61%
Underlying
revenue by sector
Underlying revenue by sector
F-35B Lightning II
The F-35B aircraft, which employs the
Rolls-Royce LiftSystem, was declared
operational in 2015.
Combat
Transport and patrol
Other
36%
43%
21%
OPERATIONAL
REVIEW
Underlying revenue at £2,035m was 5% lower
on a constant currency basis (down 2% at
actual exchange rates). Lower original
equipment volumes for helicopters and
trainers were partially offset by growth
in LiftSystem™ volumes. Aftermarket
revenues reflected lower volumes on
helicopter spares partially offset by higher
revenues related to long-term service
agreements for UK combat aircraft.
Despite the reduced revenues, gross margin
improved to 28.5%. Lower helicopter volumes
and lower margins on some transport
contract extensions were offset by higher
LiftSystem volumes and increased
retrospective margin improvements of
£101m (2014: £53m) on existing long-term
contracts. These relate to various combat
platforms, where overall profitability has
been improved by changed flying patterns
and lower service costs, including
approximately £40m (2014: £nil) due to
one-off contract and scope variations.
Overall R&D costs were £20m higher in 2015
reflecting increased investment in new
programmes. Restructuring costs were
lower due to reduced level of severance costs
and lower costs related to changing our
operational footprint.
Underlying profit before financing of £393m
was 4% up on the prior year on a constant
currency basis, reflecting the lower volumes,
the one-off margin improvements, increased
R&D charges and lower restructuring
charges. As a result, operating margin
improved by 170 basis points to 19.3%.
28 Rolls-Royce Holdings plc Annual Report 2015
Chief Executive’s review / Business review
Free cash flow from Defence Aerospace is
expected to remain strong in the longer
term, reflecting the high proportion of
aftermarket revenues. However, in the
coming year free cash flow is expected to be
lower reflecting the increased cost of
investment and the run out of costs on key
UK programmes where deposits have been
received in advance of delivery.
Investment in US facilities
$600m
Long term, it remains essential that we have
a cost-efficient supply chain to support the
profitable growth of our business in a
competitive market. To support future
business competitiveness we initiated
a major $600m investment in the upgrading
of our Indianapolis facility, which will bring
a combination of cost reductions,
operational efficiencies and greater
development capabilities for defence
technologies. This investment recognises
the importance of the US market and our
strong position there.
Defence Aerospace outlook
The long-term outlook for Defence Aerospace
remains positive with good opportunities to
capitalise on its strong positions in transport
and patrol and combat. Investment in
developing new advanced technologies
will be a feature of R&D for the next few
years as the business ensures it can compete
for new opportunities.
The outlook for revenues in 2016 remains
steady. Operating profit will be adversely
impacted by the lower level of expected
long-term contract benefits in 2016,
together with higher R&D and operational
restructuring costs.
2014
4,564
744
2,069
816
1,253
567
27.4%
(112)
(55)
(50)
16
366
17.7%
Underlying
change
(248)
(95)
(101)
-5%
(45)
-6%
(56)
-5%
(9)
+90bps
(7)
48
(20)
3
15
+4%
+170bps
Acquisitions
& disposals
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Foreign
exchange
–
–
67
+3%
30
+4%
37
+3%
21
–
(5)
(1)
(3)
–
12
–
–
2015
4,316
649
2,035
-2%
801
-2%
1,234
-2%
579
28.5%
(124)
(8)
(73)
19
393
+7%
19.3%
Rolls-Royce Holdings plc Annual Report 2015 29
Investments and business
development
Overall, the Defence order book declined 5%,
in large part reflecting the 2014 benefit of the
significant multi-year order for engines to
power C-130J aircraft. With a major focus
within defence budgets on cost control, 2015
saw significant interest in availability-based
service contracts and also on offering efficiency
upgrades. New contracts included an extension
of the UK’s Hercules Integrated Operational
Support contract and commitment to the UK’s
Future Combat Air System (FCAS) programme.
After successful first flights on US ‘Hurricane
Hunter’ P-3 aircraft in May, we received strong
international interest including an initial USAAF
order for the T56 3.5 technology insertion kit
upgrade delivering both fuel saving and
performance benefits for an engine
programme which has been in existence for
over 50 years.
Outside the UK and US markets, our
particular focus has been on positioning
ourselves to be competitive for forthcoming
combat programmes. We had success in
South Korea in conjunction with Airbus,
with the contract being awarded to power
the A330 tanker fleet with Trent 700
engines, as well as agreeing an order for our
largest ever number of engines – a ten-year
order with Robinson to supply at least 1,000
RR300 engines.
DEFENCE AEROSPACE / KEY FINANCIAL DATA
£m
Order book
Engine deliveries
Underlying revenue
Change
Underlying OE revenue
Change
Underlying services revenue
Change
Underlying gross margin
Gross margin %
Commercial and administrative costs
Restructuring costs
Research and development costs
Joint ventures and associates
Underlying profit before financing
Change
Underlying operating margin
Strategic Report
Strategic Report / Chief Executive’s review
Business review
Market dynamics
Competition
• Defence budgets are expected to show modest
growth, flat in real terms in the US and UK,
partially offset by growth in other emerging
markets.
• Western customers are seeking to reduce and
minimise costs by delaying or deferring
purchases, improving asset availability and
extending lifecycles of aircraft/engines.
• Increasing levels of economic affluence and
political tension in the Asia Pacific and
Middle East regions are leading to increases
in both original equipment and services spend.
• Revenue has historically been broadly balanced
between original equipment sales and
aftermarket services, biased towards the latter.
• GE, Pratt & Whitney, Honeywell and Safran
are the main competition in our sectors.
• In Europe, large defence programmes tend
to be addressed by consortia of two or more
companies due to the political environment.
Examples include our collaboration with ITP,
MTU and Safran on the TP400 engine for the
Airbus A400M and with GE Avio, ITP and
MTU on the EJ200 engine for the
Eurofighter Typhoon.
• We support/lead sales campaigns globally on
behalf of Eurojet for export sales opportunities
of Eurofighter Typhoon.
• Barriers to entry are high and we do not
envisage the competitive landscape changing
significantly in the near future.
Business risks
Opportunities
• If we experience a major product failure
in service, then this could result in loss of life
and critical damage to our reputation.
• The UK’s FCAS potentially a joint programme
with France, presents a longer-term combat
opportunity to Rolls-Royce.
• If global defence spending experiences
a further downturn, then our financial
performance may be impacted.
• Our LiftFan™ system for the F-35B is only just
entering service and we expect to deliver over
400 systems in the next 20 years.
• If we do not continue to invest to improve
the performance and cost of our products,
then we may lose market share.
• If we suffer a major disruption in our supply
chain, then our delivery schedules may be
delayed, damaging our financial performance
and reputation.
• If we do not secure new applications, then our
capabilities may be eroded in the long term.
• Emerging markets, such as India, Turkey
and South Korea are inviting bids on new
combat aircraft. We estimate a potential
of over 300 aircraft for these programmes.
• In transport, we believe the Airbus A400M
transport aircraft and V-22 Osprey have
overseas sales opportunities.
• We see strong growth potential for increased
service provision to the military and we
are well positioned with programmes such
as MissionCare®.
Key Rolls-Royce differentiators
• We are investing heavily in technology,
integration capabilities and facility
modernisation to deliver capable, affordable
engines for our customers. Additionally,
we leverage our large installed base and strong
services capabilities to provide superior and
affordable service solutions.
MARKET REVIEW
Rolls-Royce is a market leader in defence
aero engines for military transport aircraft
and has strong positions in other sectors,
including combat, trainer aircraft and
helicopters. We are pursuing new
opportunities emerging in Asia and the
Middle East to mitigate flat defence
budgets in the established North American
and European markets.
Potential for OE and services
over the next 20 years
Defence Aerospace – all sectors
$400bn
Original equipment
$125bn
Aftermarket
$275bn
30 Rolls-Royce Holdings plc Annual Report 2015
Chief Executive’s review / Business review
World leader in transport engines
A KC-130J tanker-transport aircraft
is seen here (above left) preparing
to refuel a V-22 tiltrotor Osprey
transporter. Both aircraft are in
service with the US Marine Corps
and both are powered by
Rolls-Royce.
The Lockheed Martin C-130J is one of the most
reliable and versatile transport aircraft in the
world (the KC-130J being the tanker version).
Powered by the Rolls-Royce AE 2100 engine,
the C-130J family of aircraft follows on from
the original, venerable, C-130, which is still
giving sterling service all over the world
with its Rolls-Royce T56 powerplants.
In fact, Rolls-Royce has breathed further life
into the T56 by developing a new version
of the engine which is delivering significant
fuel savings and which the Group believes
will see the T56 continue in service for many
years to come. In December 2015, we
announced that Rolls-Royce was one of three
companies to benefit from a £369m contract
to support the RAF’s C-130 fleet.
The C-130J has also seen developments
beyond its transport and refuelling role.
One of the lessons learned in Afghanistan
was the constant demand for airborne video
surveillance and the requirement for a
‘quick strike’ weapon to help protect troops
on the ground. The US Marine Corps turned
to the KC-130J. The aircraft can loiter in the air
for over ten hours thanks to the performance
of its AE 2100 engines and so they armed it
with a quick strike weapon that would not
affect the core mission of aerial refuelling.
In its tanker role, the aircraft has the ability
to refuel both low-speed helicopters and
high-speed jet aircraft by changing the
basket on the drogue system. The aerial
refuelling pods can deliver more than
12,000 US gallons of fuel and can refuel
two aircraft simultaneously.
In addition to the V-22 and C-130J families,
Rolls-Royce also powers the Airbus
A330 Voyager tanker/transport with
Trent 700 engines and we are a major partner
in the Europrop International consortium
responsible for the design and build of the
TP400 engine for the new A400M military
transport aircraft. The first A400M began
active service with the RAF during 2015.
Rolls-Royce Holdings plc Annual Report 2015 31
Strategic Report
Strategic Report / Chief Executive’s review
Business review
Summary
Power Systems is a leading provider of high- and medium-speed
reciprocating engines, complete propulsion and drive systems, distributed
energy solutions and fuel injection systems. The business serves the
marine, naval, land defence, rail, mining, oil & gas, construction &
agriculture and power generation markets through its core brands MTU,
MTU Onsite Energy, Bergen and L’Orange.
Key highlights
Underlying revenue mix
Underlying revenue 3% lower; weaker
original equipment partially offset
by good growth in services.
Underlying profit before financing
15% lower; led by lower gross margin.
Positive outlook for 2016; healthy closing
order book with good positions in key
market segments.
Long-term R&D investments to increase
cost competitiveness in higher volume
engine applications .
OE revenue
Services revenue
68%
32%
Underlying revenue by sector
POWER
SYSTEMS
OPERATIONAL
REVIEW
Underlying revenue of £2,385m was 3% lower
on a constant currency basis (12% lower at
actual rates). Original equipment revenue
was 5% lower, reflecting weaker oil & gas
markets and weaker governmental demand
which peaked in 2014. This was partially
offset by an improved luxury yacht demand
and some recovery in our sections of the
construction and agriculture market where
new emissions regulations increased
demand. Underlying service revenues were
up 3% despite some weakness in spare parts
sales in North America and Europe.
Gross margins were slightly lower at 26.6%
(2014: 27.3%) reflecting a change in product
mix and lower overall volumes as expected.
Underlying profit declined 15% as a result
of the lower gross margins. On a constant
currency basis costs below gross margin
were unchanged.
MTU diesel engine
Our MTU brand is a world leader
in high-speed diesel engine power.
Marine
Industrial
Energy
Defence and other
37%
21%
30%
12%
32 Rolls-Royce Holdings plc Annual Report 2015
Chief Executive’s review / Business review
Closing order book
£1.9bn
The energy segment generated an increased
order intake in 2015 reflecting good growth
in gas gensets, particularly in Asia. In
addition, the easing of the trading embargo
with Iran is enabling the business to secure
a good foothold in the country. As a result,
we enjoy a strong market position within
back-up power, particularly for larger
mission-critical applications, which is
a growing market. Recent notable orders
came from Kuwait, Turkey and Bangladesh
for the provision of back-up power
for hospital modernisations and continuous
power for a steel mill.
Power Systems outlook
The outlook for Power Systems remains
steady. The business finished the year
with a healthy order book for many of its
key markets. As a result, while some markets
remain difficult, we continue to expect
the business to deliver modest growth
in revenue and profit in 2016.
2014
1,971
2,720
1,893
827
742
27.3%
(296)
(7)
(183)
(3)
253
9.3%
Underlying
change
(43)
(72)
-3%
(97)
-5%
25
+3%
(37)
-70bps
(9)
3
3
3
(37)
-15%
-110bps
Acquisitions
& disposals
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Foreign
exchange
–
(263)
-10%
(178)
-9%
(85)
-10%
(70)
–
30
–
18
–
(22)
–
–
2015
1,928
2,385
-12%
1,618
-15%
767
-7%
635
26.6%
(275)
(4)
(162)
–
194
-23%
8.1%
Rolls-Royce Holdings plc Annual Report 2015 33
Investment and business
development
Our Power Systems business serves a variety
of markets ranging from marine, industrial,
construction & agriculture to defence and
power generation. This diversity enabled
the business to mitigate some of the weak
environment, particularly that linked to oil
and commodities.
2015 order intake was £2.5bn (2014: £2.6bn)
with the closing order book broadly unchanged
at £1.9bn. Within this, the defence sector
demonstrated greater resilience with a
combination of a higher proportion of
long-term service contracts together with the
winning of the first order worth approximately
€80m from the British Army for 589 MTU diesel
engines for the new Scout Specialist Vehicle.
Within the broad range of industrial
applications, while a number of markets
deteriorated through the year, there was
positive news. This included contract wins
from a Chinese company for 232 MTU Series
4000 engines for freight locomotives bound
for South Africa, and further orders for
luxury yacht engines. An extension to our
longstanding co-operation with Daimler
was also agreed for the development
of a new range of industrial engines,
which comply with new EU off-highway
regulations for reduced soot emissions.
POWER SYSTEMS / KEY FINANCIAL DATA
£m
Order book
Underlying revenue
Change
Underlying OE revenue
Change
Underlying services revenue
Change
Underlying gross margin
Gross margin %
Commercial and administrative costs
Restructuring costs
Research and development costs
Joint ventures and associates
Underlying profit before financing
Change
Underlying operating margin
Strategic Report
Strategic Report / Chief Executive’s review
Business review
Market dynamics
Competition
• Population growth and increasing urbanisation
• Fragmented competitor landscape in
are driving rising demands for energy,
resources and food and continuous
infrastructure developments.
‘off-highway’ engine markets which varies
depending on specific market segments –
many players although a few dominate.
• Global GDP development with particular
• Continuing industry consolidation results
growth in Asia.
in strong, large scale and integrated players.
• Increasing global and regional trade
• Expansion of western competitors in our
and transport of goods.
specific core engine markets.
• Competition from Asia increasingly focusing
on higher power ranges where MTU operates.
• While traditional competition has been limited
to engine suppliers, solution providers are
becoming more relevant.
• Geopolitics and an increasing multipolar
world are driving modest defence budget
growth (1-2%) in NATO countries with more
growth in emerging markets.
• Increasing focus on renewable energy sources
requires decentralised and clean energy
solutions (eg. continuous gas and back-up
power generation solutions).
• Increasing environmental legislation and
efficiency requirements drive emission
and efficiency technologies.
• Current weak environment in certain markets
(eg. oil & gas and mining), due to current
low oil and commodity price levels.
Business risks
Opportunities
• Economic: some markets are currently
• Regional growth, eg. Asia, through leveraging
affected by low oil and commodity prices
(oil & gas, mining) while some regional
markets show challenges due to the current
economic situation.
• Political: increasing political tensions and
sanctions might limit levels of global trade and
customer access.
• Competitive: upcoming competitors from Asia
and new entrants into our existing markets
can potentially put pressure on volumes
and margins.
• Technological: complementary technologies
might replace existing solutions eg. energy
storage for back-up power.
partner companies.
• Continuous development into clean propulsion
and energy solutions which are compliant with
new emissions regulations.
• Development of efficiency solutions, eg. e-drive/
hybrid drives and fuel diversification towards
gas/dual-fuel.
• Enhancement of system competence and
solutions to create customer value through
optimised total system functionality and
performance.
• Expansion of service portfolio, customised
offerings and intelligent applications
and services.
Key Rolls-Royce differentiators
• Technology leadership and reputation with
market-leading performance and system
approach especially in mission-critical
applications; new product innovation
(eg. hybrid/e-drive); and high level
of customisation.
MARKET REVIEW
The markets served by Power Systems
are driven by global megatrends such
as increasing population growth, rising
energy, resource and food demand,
increasing and stricter emissions legislation
and government defence budgets. Despite
the current market downturn in some of
our markets, most noticeably in oil & gas
and offshore, we expect long-term recovery
in these and continuous growth in all
of our markets. We estimate that
Power Systems ‘off-highway’ reciprocating
engine markets offer an opportunity
of £650bn.
Potential for OE and services
over the next 20 years
Power Systems – all sectors
£650bn
34 Rolls-Royce Holdings plc Annual Report 2015
Chief Executive’s review / Business review
High-efficiency power for trains
Hybrid rail technology is the
energy-saving combination of a
conventional diesel engine and
an electric drive system.
The recovery of the kinetic energy in braking
mode is extremely energy- and cost-efficient,
particularly in stop-and-go situations on
local public transport lines where there are
a large number of stops and on inclined rail
sections on hilly terrains.
In 2015, for the first time, MTU performed
its own tests on a hybrid train. During the
tests, fuel consumption was shown to be
reduced by more than 23% compared
to straightforward diesel mode. Under
optimum conditions, MTU believes fuel
savings of 25% or more are possible.
During 2015, Rolls-Royce completed further
trials on its hybrid drive power system, the
result of five years of pioneering work.
A conventional MTU railway PowerPack
combines all the individual elements needed
for power and efficiency into a single
functional unit mounted on a supporting
frame. MTU has delivered more than 6,000
of these PowerPacks to the rail industry.
The MTU hybrid PowerPack combines the
benefits of a conventional diesel system
with an electric propulsion module, energy
storage and propulsion control system.
The basic idea of hybrid rail technology is
that the kinetic energy initially generated by
the diesel engine is recovered via an electric
motor operating as an electric brake. This
energy is stored chemically in a powerful
battery for later use.
Rolls-Royce Holdings plc Annual Report 2015 35
Strategic Report
Strategic Report / Chief Executive’s review
Business review
Summary
Marine is a leading provider of complex and integrated propulsion and
handling systems to the maritime offshore, merchant and naval markets.
The product offering ranges from individual items of equipment
to integrated systems and flexible mission-critical solutions, including
complete vessel designs. The business has more than 4,000 customers.
Seventy naval forces and over 30,000 commercial vessels use our equipment.
Key highlights
Underlying revenue mix
Underlying revenue down 16%; weak
offshore markets impacting both OE
and aftermarket revenues.
Underlying profit before financing down
94%; significant reduction in gross
margin, led by lower volumes, and higher
restructuring costs only partially offset
by reduced commercial and
administration costs.
Challenging outlook for 2016; led
by reduced demand in offshore
oil & gas markets.
Launched two restructuring programmes
in 2015 focused on manufacturing
footprint and back-office functions;
expected benefits to start to accrue
from 2016 onwards.
OE revenue
Services revenue
58%
42%
Underlying revenue by sector
MARINE
OPERATIONAL
REVIEW
Underlying revenue of £1,324m was 16% lower
on a constant currency basis (down 23% at
actual rates). Within this, original equipment
revenues were 19% down at £773m. Service
revenues were more robust, although still
declined 10%. This reflected weaknesses
in offshore and merchant, as ship owners
deferred overhaul and maintenance on the
back of reduced utilisation of their vessels.
As a result of the revenue weaknesses, price
pressure and cost under-recovery, gross
margins declined 500 basis points to 19.6%
and overall gross margin was £260m, £139m
lower than in 2014. As a result, with only
modest reductions to date being achieved
in corporate, administration and other costs,
underlying profit was £15m, 94% down
on a constant currency basis.
Around £15m of restructuring charges
were incurred in 2015 and excluding these,
underlying profit declined 83%. In the first
half we took a non-underlying charge
of £69m for the impairment of goodwill
on two of our businesses owing to a less
favourable business outlook, partly driven
by the impact of market deteriorations
on our offshore businesses.
Latest bridge designs
Our Unified Bridge is ergonomically
designed to be intuitive for crews.
Merchant
Offshore
Naval
24%
56%
20%
36 Rolls-Royce Holdings plc Annual Report 2015
Chief Executive’s review / Business review
Closing order book
26%
>
Marine outlook
Overall the outlook for Marine remains
cautious. We expect that the market will
continue to be hit by low oil prices which
will impact on demand for our products
and services. As a result we will sustain our
cost reduction programmes, focusing on
manufacturing facilities, supply chain
and overhead costs, in order to drive a more
competitive business while also adapting
to volume risks.
As set out in November 2015, we expect the
net impact of weak trading conditions and
cost saving initiatives to result in 2016 profits
being between £75m and £100m lower
than those achieved in 2015. As a result,
the business is expected to be significantly
loss making in 2016.
ship equipment for a dive support vessel.
We also saw demand from non-oil related
sectors such as wind farm support and
fishing trawlers.
Activity within our target merchant sectors
was subdued, but we made progress in our
strategy of developing markets for offshore
derived technologies within specialist areas
such as azimuth propulsion systems for
double-ended ferries. We also delivered Asia’s
first LNG-powered tug and the first of two
all-gas powered cargo vessels for a Norwegian
transport company.
The naval business was focused on further
development work and deliveries against
contracts in both the UK and US. These
included the first DDG 1000 multi-mission
destroyer class for the US Navy and the world’s
largest, gas turbine engines, the MT30 for the
UK’s two new aircraft carriers. We also signed
a contract to supply MT30s for operation
on the first three of the Royal Navy’s new
Type 26 Global Combat Ship.
Product development work within the
business included expanding the range
of permanent magnet-based propulsion
systems, as well as spearheading research
into our pioneering ship intelligence
technology focused on data-driven value-
added services.
2014
1,567
1,709
1,070
639
425
24.9%
(254)
(4)
(29)
138
8.1%
Underlying
change
(403)
(269)
-16%
(204)
-19%
(65)
-10%
(139)
-500bps
27
(16)
(2)
(130)
-94%
-750bps
Acquisitions
& disposals
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Foreign
exchange
–
(116)
-7%
(93)
-9%
(23)
-4%
(26)
–
26
4
3
7
–
–
2015
1,164
1,324
-23%
773
-28%
551
-14%
260
19.6%
(201)
(16)
(28)
15
-89%
1.1%
Rolls-Royce Holdings plc Annual Report 2015 37
Investment and business
development
The focus in 2015 has been on repositioning
the Marine business to reflect the very
challenging market environment and outlook.
During the year, we also announced a number
of restructuring programmes that will in total
lead to the loss of around 1,000 employees
in operations and back-office functions as
we shrink our Northern European footprint,
reduce indirect headcount, and consolidate
manufacturing activity. This will deliver
projected cost savings of £65m per annum
from 2017 onwards and create a business
better able to compete in an increasingly
cost-conscious market place which is
geographically shifting towards Asia.
Overall, the Marine order book declined 26%
during the year, mainly reflecting a very weak
offshore market, particularly in Northern
Europe. Orders for new vessels, projects
and services were all sharply lower than 2014
and as a result order intake was only £997m,
45% down on the previous year.
The offshore market was extremely weak
reflecting a low oil price and reduced capital
expenditure within the upstream oil
exploration and related services sectors.
Targeted investment in R&D and improving
our Asian position saw progress later in the
year with two major orders from China. These
comprised an equipment contract for nine
tug supply vessels and a package of advanced
MARINE / KEY FINANCIAL DATA
£m
Order book
Underlying revenue
Change
Underlying OE revenue
Change
Underlying services revenue
Change
Underlying gross margin
Gross margin %
Commercial and administrative costs
Restructuring costs
Research and development costs
Underlying profit before financing
Change
Underlying operating margin
Strategic Report
Strategic Report / Chief Executive’s review
Business review
MARKET REVIEW
In Marine, where we offer integrated ship
solutions (including design, propulsion,
deck machinery, automation and control,
and power electrics), we forecast the
market opportunity across the offshore,
merchant and naval market segments
to be £250bn.
Market dynamics
Competition
• Increasing environmental legislation
and system efficiency requirements.
• Population growth is leading to an increasing
energy and resources demand for cargo and
passenger transportation in the long term.
• Increasing global and regional trade and
transport of goods with effects on short-
sea shipping.
• Major competitors fall into two groups
– focus on strengthening systems capability
or focus on product and technology.
• Industry consolidation within recent years
has resulted in the establishment of large
market players.
• Increasing competition from Asia,
especially China.
• Strong shift from traditional markets towards
Asia, both in shipbuilding and operation.
• Geopolitics and an increasing multipolar world
• Increasing competition from industrial and
electric companies driven by more focus on
efficiency and electrification.
results in increasing defence expenditures
especially in emerging markets which
stimulates demand for naval vessels.
• Increased technology requirements for harsher
environments, eg. deepwater.
• Currently significant challenges in offshore
markets due to low oil prices and weak
investment signals.
Business risks
Opportunities
• Markets: significant reduction in oil price
• Capture value on more advanced vessels
in offshore.
• Grow in tugs, ferries and workboats and
short-sea shipping in merchant segments.
• Continue to leverage the joint value proposition
in naval markets together with MTU.
• Continue to develop clean propulsion solutions
which are emission compliant to new regulations,
including alternative fuels (eg. gas/dual-fuel).
• Grow in integrated propulsion and
electric systems.
• Establish a leading position in ship intelligence.
• Leverage local partnerships to generate
regional growth in Asia, especially China.
creates pressure in the offshore market with
all customer groups seeking to reduce costs
and capital commitments.
• Order delays and cancellations impact our
revenue, cash and profit but also put our supply
chain under financial stress.
• Competition: competitors react to a depressed
market by cutting costs, pricing aggressively
and partnering with other players.
• Business continuity: the main risk is our key
suppliers remaining solvent. We monitor and
manage this to ensure no supplier has critical
mass and maintain business continuity plans for
these risks and other operational risks such as IT.
• Technology: failure to invest in the right
technologies to meet customer demand
in the future.
• Risk of product failure in the field resulting
in the need for intervention to rectify the issue
with financial consequences.
Key Rolls-Royce differentiators
• Unique domain knowledge; unique system
portfolio including vessel design; joint value
proposition within naval together with MTU;
continuous innovation and technology
leadership; and leadership in ship intelligence.
Potential for OE and services
over the next 20 years
Marine – all sectors
£250bn
38 Rolls-Royce Holdings plc Annual Report 2015
Chief Executive’s review / Business review
Waterjets for fast cats
These Watercat M18 multi-purpose
vessels use Rolls-Royce Steel Series
Kamewa waterjets to propel them
at speeds of over 40 knots.
These lightweight, agile boats
from Marine Alutech of Finland
are ideal for fast patrol and troop
transportation roles.
Rolls-Royce Holdings plc Annual Report 2015 39
Strategic Report
Strategic Report / Chief Executive’s review
Business review
Summary
Nuclear is a leader in propulsion system design and development for the
Royal Navy’s nuclear submarine fleet and is the sole provider and technical
authority, managing all aspects of plant design, safety, manufacture,
performance and through-life support.
In civil nuclear we provide nuclear reactor vendors and utility operators
with integrated, long-term support services and solutions spanning the
whole reactor lifecycle, from concept design through to obsolescence
management and plant-life extension. Safety-critical systems have been
supplied to around 50% of the global nuclear power plants in service.
We have been a key player in the nuclear industry for more than 50 years.
Key highlights
Underlying revenue mix
Underlying revenue 9% higher; strong
service revenues led by increased
submarine work.
Underlying profit before financing
unchanged, excluding the benefit from a
£19m R&D credit; volume benefit offset
by lower margins.
2016 outlook steady; focus on improving
delivery performance and developing
civil nuclear opportunities.
Investing in the business to extend
systems offering and increase
service scope.
Potential for OE and services
in civil nuclear over the next 20 years
£360bn
Submarine nuclear power
The Royal Navy Astute class is the latest
to enter service with a Rolls-Royce
designed nuclear propulsion plant.
OE revenue
Services revenue
37%
63%
Underlying revenue by sector
Submarines
Civil
80%
20%
40 Rolls-Royce Holdings plc Annual Report 2015
NUCLEAR
OPERATIONAL REVIEW
Underlying revenue increased 9% on a
constant currency basis, led by growth
in both original equipment and services.
In particular, growth in submarine activities
was strong. Revenue growth for our
instrumentation and controls businesses
was also good, particularly in Europe.
Despite the growth in revenue, gross margin
declined by 240 basis points to 16.2% or
£111m. This was largely due to increased
costs on a number of projects with lower
margin. Gross margin was also impacted by a
reclassification of site costs from commercial,
administration and other of around £7m.
This favourably benefited costs below gross
margin which also benefited from lower
R&D charges as a result of an R&D credit
of £19m which covered the current and the
two previous years. Excluding this, underlying
profit before tax was £50m, in line with the
prior year. After the release, underlying profit
of £70m is 40% up on the prior year.
Investment and business
developments
The order book fell around 13%, reflecting
delivery of our long-term contracts across
both submarines and civil nuclear businesses.
New orders were biased to the second half
of the year, benefiting from the expansion
of our business reach and capabilities.
Our civil nuclear business focuses on
multi-year projects and specialist services
for what is a growing global industry.
We were selected as preferred bidder by
EDF to work on heat exchangers and waste
treatment for the Hinkley Point C project in
the UK and we were selected by Hitachi to be
part of the Wylfa power station delivery team,
the second nuclear power station scheduled
in the UK’s new-build programme. We also
won a contract to supply safety measurement
systems for the entire French fleet of 900MW
reactors. These mandates help to further
consolidate our significant position in the
European marketplace and position us well
to seek further opportunities for partnerships
in growing nuclear markets.
In the US our acquisition of R.O.V. Technologies
Inc. in March 2015 expanded our nuclear
services portfolio, bringing complementary
Boiling Water Reactor expertise and
broadening our existing Pressurised Water
Reactor remote inspection capability.
Our submarine activities have concentrated
on delivering against long-term contracts for
the Royal Navy’s nuclear submarine fleet,
including delivery of the nuclear propulsion
system to power HMS Artful, the third
Astute-class submarine, which was launched
in August 2015. Our work on the Vanguard
class included work on a refuelling
programme and also the first successful
upgrade to the reactor control and
instrumentation update for HMS Vengeance.
At the Naval Reactor Test Establishment,
HMS Vulcan, the PWR2 test facility reactor
was safely shut down having completed its
prototyping role. Development work on the
new PWR3 power plant for the Successor
submarine fleet continues with contract
extensions agreed in preparation ahead of
the government final investment decision.
MARKET REVIEW
All respected global energy forecasts predict
that nuclear power will continue to play
a significant role in providing low-carbon,
continuous and secure power. The demand
for mission-critical equipment, systems and
engineering services and the associated
reactor support services for the civil nuclear
market is forecast to be £360bn over the next
20 years.
Market dynamics
• Population growth and improved living
standards in emerging markets are driving
a rise in demand for electricity.
• Within the future energy mix, low-carbon
energy is expected to increase, with nuclear
energy accounting for a significant share.
• Growth in nuclear power generation is
predominantly driven by non-OECD countries;
strong growth is expected especially in China.
• Solid growth in mature markets based
on current operations and plant life extensions.
Nuclear outlook
Competition
• In civil nuclear the competitor landscape is
fragmented and comprises reactor vendors,
original equipment manufacturers, multi-skilled
companies and nuclear operators in service.
• Plant operators increasingly outsource
service activities.
The outlook for Nuclear remains steady. Both
submarines and civil nuclear enjoy long-term
secure aftermarket revenues. While business
development opportunities remain modest
in the near-term, new power plants for the
Successor together with long-term
opportunities to develop relevant products
for civil nuclear applications should provide
incremental growth.
NUCLEAR / KEY FINANCIAL DATA
£m
Order book
Underlying revenue
Change
Underlying OE revenue
Change
Underlying services revenue
Change
Underlying gross margin
Gross margin %
Commercial and administrative costs
Restructuring costs
Research and development costs
Underlying profit before financing
Change
Underlying operating margin
Chief Executive’s review / Business review
Business risks
• Delivery: failure to meet customer expectations
or regulatory requirements.
• Markets: if nuclear markets do not grow as
anticipated due to external or other political
events then business will be diminished.
• Customer strategy: if programmes are cancelled
as a result of strategic decisions, such as
abandonment of the UK nuclear deterrent,
or vertical integration by reactor vendors,
then future revenues will be diminished.
• If we experience a major product failure
in service, then this could result in loss of life
and critical damage to our reputation.
• If we suffer a major disruption in our supply
chain, then our delivery schedules may be
delayed, damaging our financial performance
and reputation.
Opportunities
• Increasing the pace of growth of the civil
nuclear business.
• Focusing on growth regions beyond current
core markets.
• Strengthening our position with the rapidly
growing importance of China in the civil
nuclear market.
• Capturing a higher share of the nuclear service
market through extension of our geographic reach.
Key Rolls-Royce differentiators
• Unique key technology capability in defence
and civil nuclear with substantial credibility
(more than 50 years’ experience); broad mix
of offerings over the whole lifecycle; reactor
independent portfolio, capable of global reach.
2014
2,499
638
230
408
119
18.7%
(61)
(1)
(7)
50
7.8%
Underlying
change
(331)
56
+9%
27
+12%
29
+7%
(6)
-240bps
6
(1)
21
20
+40%
+230bps
Acquisitions
& disposals
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Foreign
exchange
–
(7)
-1%
(6)
-3%
(1)
–
(2)
–
2
–
–
–
–
–
2015
2,168
687
+8%
251
+9%
436
+7%
111
16.2%
(53)
(2)
14
70
+40%
10.2%
Rolls-Royce Holdings plc Annual Report 2015 41
Strategic Report
Strategic Report / Chief Executive’s review
Financial review
DELIVER
Consistent with the plans we laid out in November 2015, we have enhanced
the financial disclosures for all our reporting segments to include gross margin,
R&D and other costs below gross margin, as well as restructuring charges.
In addition, within Civil Aerospace we have provided additional revenue
segmentation and a trading cash flow breakdown. These disclosures apply
to both 2014 and 2015 and should help further analysis of trading performance.
Order book and order intake
Underlying trading
We have significantly enhanced
this year’s Annual Report with
additional disclosures to
increase transparency and
understanding.”
David Smith
Chief Financial Officer
During the year our order book increased by
£2.7bn to £76.4bn. Key orders included our
record single order from Emirates for 200
Trent 900 engines which contributed $6.1bn
to the order book. Throughout the year new
order intake in our Marine business was
very weak, driven by significant market
deterioration in offshore. Overall, orders
were lower in Defence and Nuclear,
although we view the prospects for these
businesses as unchanged, reflecting
long-term orders won in previous years.
Underlying Group revenue declined 1%
in 2015 compared to 2014 on a constant
currency basis. This reflects a 5% decline
in revenue from original equipment, partially
offset by a 4% increase in services revenue,
led by Civil Aerospace. By business on a
constant currency basis, Civil Aerospace
revenue increased 3%, Defence Aerospace
revenue decreased 5%, Power Systems revenue
decreased 3%, Marine revenue decreased 16%
and Nuclear revenue increased 9%.
Underlying profit before financing of £1,492m
(2014: £1,681m) was 11% lower on a constant
currency basis, led by a significant reduction in
Marine profit, driven by weak offshore markets
in particular. Civil Aerospace was down
year-on-year, although performance was
helped by around £222m of retrospective
benefits (2014: £150m) led by refining the basis
for taking account of risk in our forecasts of
GROUP TRADING SUMMARY
£m
Order book
Underlying revenue
Change
Underlying OE revenue
Change
Underlying services revenue
Change
Underlying gross margin
Gross margin %
Corporate and administrative costs
Restructuring costs
Research and development costs
Joint ventures and associates
Underlying profit before financing
Change
Underlying operating margin
42 Rolls-Royce Holdings plc Annual Report 2015
2014
73,674
13,864
7,418
6,446
3,523
25.4%
(1,069)
(149)
(730)
106
1,681
12.1%
Underlying
change
2,725
(96)
-1%
(363)
-5%
267
+4%
(251)
-160bps
11
107
(64)
10
(187)
-11%
-130bps
Acquisitions
& disposals
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Foreign
exchange
–
(414)
-3%
(331)
-5%
(83)
-1%
(90)
–
54
3
29
2
(2)
–
–
2015
76,399
13,354
-4%
6,724
-9%
6,630
+3%
3,182
23.8%
(1,004)
(39)
(765)
118
1,492
-11%
11.2%
Chief Executive’s review / Financial review
Underlying revenue
Underlying operating margin
Underlying profit before financing
£13,354m
11.2%
£1,492m
2014 exc £13,864m
2014 inc £14,588m
£15,505m
£12,209m
2013
2012
2011
y
g
r
e
n
E
c
n
i
y
g
r
e
n
E
c
x
e
2014
2015
2014 exc
2014 inc
2013
2012
2011
12.1%
11.5%
11.8%
12.0%
10.7%
y
g
r
e
n
E
c
n
i
2011
2012
2013
2014
y
g
r
e
n
E
c
x
e
2014
2014 exc £1,681m
2014 inc £1,678m
2013
2012
2011
2015
£1,831m
£1,495m
£11,277m
2011
2012
2013
2014
£1,206m
2011
2012
2013
2014
y
g
r
e
n
E
c
n
i
y
g
r
e
n
E
c
x
e
2014
2015
future revenue on long-term contracts, and the
reversal of previously recognised impairment
on contractual aftermarket rights (CARs) and
release of a related provision. Defence
Aerospace delivered an improved year-on-year
profit which included one-time contract
benefits, led by contract extensions and
reduced long-term costs. Power Systems was
down year-on-year in line with our
expectations on a constant currency basis
as the business managed well within a
number of weaker markets. Marine, as
expected, was sharply lower, reflecting the
weak oil & gas offshore sector and Nuclear was
in line, after excluding the positive R&D credit.
The R&D charge increased 11% over 2014 on
a constant currency basis, largely reflecting
ongoing investments in Civil Aerospace for
the Trent 1000 TEN and Trent XWB-97, together
with higher spending on the Trent 7000
and corporate jet programmes. In addition,
we increased investment in future technology
demonstrator programmes and improved
emissions solutions for Power Systems
applications. In addition, capitalisation of R&D
declined significantly largely due to the entry
Debt retirement (£m)
into service of the Trent XWB-84 in January
2015 and increased recognition of entry fees.
Net debt
Underlying financing charges were £60m
(2014: £61m). Underlying profit before tax
was £1,432m (2014: £1,620m). The underlying
tax charge was £351m, with an effective tax
rate of 24.5% (2014: 24.0%).
Free cash flow
Cash capital expenditure in 2015 reduced
to £479m (2014: £616m), largely reflecting
lower spend on new aerospace facilities.
Cash taxes were £160m (2014: £265m
excluding Energy). The cash cost of defined
benefit pension schemes in excess of the
earnings charge was £46m (2014: £154m
excluding Energy).
Overall, the free cash inflow for the year
was £179m (2014: inflow of £447m, adjusted
for Energy). The significant decline from 2014
primarily reflects lower trading margins
and adverse working capital movements.
The TotalCare net asset movement year-on-
year was slightly higher than expectations.
The Group is committed to maintaining
a robust balance sheet and a strong,
investment-grade credit rating, which it
believes are important when selling products
which will be in service for decades. Standard
& Poor’s updated its rating in January 2016
to A/negative outlook and Moody’s
maintained a rating of A3/stable.
At the end of 2015, the Group’s net cash
balance reduced from £666m to a net debt
position of £111m, reflecting the £179m
positive free cash inflow, share repurchases
totalling £414m and shareholder payments
of £421m. Other items include residual
payments related to the divestment of the
Energy business and non-cash foreign
exchange movements. On 6 July 2015, we
announced that we had curtailed the share
buyback associated with the Energy business
sale at the to-date total of £500m, including
the shares purchased in 2014. During the
year we refinanced our revolving credit
facility, increasing it to £1.5bn, and issued
two new US bonds, totalling US$1.5bn.
2,000
1,500
1,000
500
0
Undrawn
Drawn
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
Rolls-Royce Holdings plc Annual Report 2015 43
Strategic Report
Strategic Report / Chief Executive’s review
Financial review
FINANCIAL REVIEW CONTINUED
Results broadly in line with the expectations set out in July 2015
UNDERLYING INCOME STATEMENT
£m
Revenue
Gross profit
Commercial and administrative costs
Restructuring
Research and development costs
Share of results of joint ventures and associates
Profit before financing
Net financing
Profit before tax
Tax
Profit for the year
Earnings per share (EPS)
Payment to shareholders
Gross R&D investment
Net R&D charge
SEGMENTAL ANALYSIS
2015
13,354
3,182
(1,004)
(39)
(765)
118
1,492
(60)
1,432
(351)
1,081
58.73p
16.37p
(1,240)
(765)
2014
13,864
3,523
(1,069)
(149)
(730)
106
1,681
(61)
1,620
(388)
1,232
65.42p
23.10p
(1,249)
(730)
Revenue
Gross profit
Profit before financing
£m
Civil
Defence
Aerospace Division
Power Systems
Marine
Nuclear
Other
Intra-segment
Land & Sea Division
Central costs
Group
2015
6,933
2,035
8,968
2,385
1,324
687
96
(106)
4,386
2014
6,837
2,069
8,906
2,720
1,709
638
46
(155)
4,958
Change
+96
-34
+62
-335
-385
+49
+50
+49
-572
13,354
13,864
-510
2015
1,526
579
2,105
635
260
111
64
7
1,077
3,182
2014
1,675
567
2,242
742
425
119
8
(13)
1,281
3,523
Change
-149
+12
-137
-107
-165
-8
+56
+20
-204
-341
2015
812
393
1,205
194
15
70
52
7
338
(51)
1,492
2014
942
366
1,308
253
138
50
(2)
(13)
426
(53)
1,681
Change
-510
-341
+65
+110
-35
+12
-189
+1
-188
+37
-151
-6.69p
-6.73p
+9
-35
Change
-130
+27
-103
-59
-123
+20
+54
+20
-88
+2
-189
Reported revenue
£13,725m
Reported profit before taxation
£160m
Net R&D as a proportion of underlying revenue
6.2%
2014
2013
2012
2011
£13,736m
£15,513m
£12,161m
£11,124m
2011
2012
2013
2014
2015
2014
2013
2012
2011
£67m
£1,759m
£2,705m
£1,105m
2011
2012
2013
2014
2015
2014 exc
2014 inc
2013
2012
2011
5.9%
5.8%
4.8%
4.7%
4.6%
y
g
r
e
n
E
c
n
i
2011
2012
2013
2014
y
g
r
e
n
E
c
x
e
2014
2015
44 Rolls-Royce Holdings plc Annual Report 2015
Chief Executive’s review / Financial review
Underlying income statement
PROFIT BEFORE TAXATION
£m
Underlying profit before tax
Mark-to-market of derivatives and related adjustments
Movements on other financial instruments
Effects of acquisition accounting
Exceptional restructuring
Acquisitions and disposals
Impairment of goodwill
Post-retirement scheme financing
Other
Reported profit before tax from continuing operations
2015
1,432
(1,065)
8
(124)
(49)
2
(75)
32
(1)
160
2014
1,620
(1,258)
(87)
(142)
(39)
8
–
(29)
(6)
67
Mark-to-market adjustments are principally
driven by movements in the GBP:USD
exchange rate which moved from 1.56 to 1.48
during 2015.
Movements in other financial instruments
relate entirely to financial risk and revenue
sharing arrangements. The put option on
the non-controlling interest in Power
Systems was exercised in 2014, so this had
no impact in 2015.
The effects of acquisition accounting
in accordance with IFRS 3 are excluded
from underlying profit so that all businesses
are measured on an equivalent basis.
Impairment of goodwill principally relates
to the Marine business.
Costs associated with the substantial
closure, or exit from, a site, facility or activity
are classified as exceptional restructuring
and excluded.
Profits and losses arising on acquisitions
and disposals during the year are excluded.
Net financing on post-retirement schemes
is excluded from underlying profit.
Appropriate tax rates are applied to these
adjustments, the net effect of which was an
increase of £275m in the reported tax charge
(2014: £237m increase, including a £64m
reduction in the amount of recoverable
advance corporation tax recognised).
The 2014 reported results also included
£142m relating to discontinued operations.
Balance sheet
Intangible assets (note 9) represent
long-term assets of the Group. These assets
decreased by £159m in the year, with
additions of £408m being more than offset
by amortisation of £407m, impairments to
goodwill of £75m (including £69m Marine
impairment reported in the first half) and
exchange losses of £134m (largely relating
to euro-denominated intangible assets
arising from the acquisition of Rolls-Royce
Power Systems AG).
The CARs balance increased by £156m to
£405m. The increase included £50m arising
from the reversal of previously recognised
impairments. During the year, following
analysis of the first major overhauls of
Trent 1000 engines, the recoverable amount
of certain CARs has been reassessed. This
demonstrated that aftermarket cash flows
from these engines are better than originally
assumed, arising from both operational and
contractual performance improvements.
Accordingly, cumulative impairments prior
to 2015 of £50m have been reversed.
This has resulted in the capitalisation of
£22m of CARs in 2015 that would otherwise
have been impaired, including £16m
recognised in the interim results.
The ‘Other’ category in the segmental analysis
includes residual retained assets relating to
the Energy business which were not included
in the sale to Siemens in 2014 and a one-off
intellectual property settlement of £58m.
The value of these is not material to the Group.
Underlying profit before financing and
taxation is discussed in the Business review
on pages 22 to 41.
Underlying financing costs were stable
versus 2014. An increase in net interest
of £13m was offset by changes in other
underlying financing costs. An underlying
foreign exchange gain of £34m is included,
arising from realised gains on foreign
exchange contracts settled to translate
overseas dividends into sterling.
Underlying taxation was £351m, an
underlying tax rate of 24.5% compared with
24.0% in 2014.
Underlying EPS was lower reflecting the
reduction in underlying profit after tax,
partially offset by a reduction in the
average number of shares as a result
of the share buyback.
At the Annual General Meeting on 5 May
2016, the Directors will recommend an issue
of 71 C Shares with a total nominal value
of 7.1p for each ordinary share. Together with
the interim issue on 4 January 2016 of 92.7
C Shares for each ordinary share with a total
nominal value of 9.27p; this is the equivalent
of a total annual payment to ordinary
shareholders of 16.37p for each ordinary share.
Further details are included on page 178.
Reported results
Consistent with past practice and IFRS
accounting standards, the Group provides both
reported and underlying figures. We believe
underlying figures are more representative
of the trading performance, by excluding
the impact of year-end mark-to-market
adjustments, principally the GBP:USD hedge
book. In addition, financing of post-retirement
benefits, effects of acquisition accounting and
impairment of goodwill are also excluded.
Adjustments between underlying profit and
reported profit in the income statement are set
out in more detail in note 2 to the Consolidated
Financial Statements. This basis of presentation
has been applied consistently.
Rolls-Royce Holdings plc Annual Report 2015 45
Strategic Report
Strategic Report / Chief Executive’s review
Financial review
FINANCIAL REVIEW CONTINUED
SUMMARY BALANCE SHEET
£m
Intangible assets
Property, plant and equipment
Joint ventures and associates
Net working capital
Net funds
Provisions
Net post-retirement scheme (deficits)/surpluses
Net financial assets and liabilities
Other net assets and liabilities
Net assets
Other items
US$ hedge book (US$bn)
TotalCare assets
TotalCare liabilities
Net TotalCare assets
Customer financing contingent commitments:
Gross
Net
Carrying values of intangible assets are
assessed for impairment against the present
value of forecast cash flows generated by
the intangible asset. The principal risks
remain: reductions in assumed market
share; programme timings; increases in unit
cost assumptions; and adverse movements
in discount rates. Other than noted above,
there have been no significant impairments
in 2015.
Property, plant and equipment (note 10)
increased by £44m. Capital expenditure
of £494m was largely offset by depreciation
of £373m, disposals of £34m and foreign
exchange movements of £32m.
Investments in joint ventures and associates
(note 11) increased modestly, principally
as the share of retained profit exceeded
dividends received.
Net post-retirement scheme (deficits)/
surpluses (note 19) decreased by £632m,
comprising a reduction of £692m in the
UK and an increase of £60m overseas.
The reduction in UK schemes is principally
due to relative movements in assumptions
used to value the underlying assets and
liabilities in the UK schemes in accordance
46 Rolls-Royce Holdings plc Annual Report 2015
2015
4,645
3,490
576
(501)
(111)
(640)
(77)
(1,883)
(483)
5,016
28.8
2,994
(783)
2,211
269
54
2014
4,804
3,446
539
(1,134)
666
(807)
555
(855)
(827)
6,387
25.6
2,492
(687)
1,805
388
59
with IAS 19. While the corporate bond yields
used to measure the liabilities remained
broadly stable, gilt yields which are the
principal driver of asset valuations
increased, reducing the value of the assets.
The schemes adopt a low risk investment
strategy that reduces funding volatility
(for which both assets and liabilities are
measured on a gilt basis); interest rate
and inflation risks are largely hedged and
the exposure to equities is around 9%
of scheme assets.
The increase in overseas schemes arose largely
due to higher discount rates in Germany and
the US.
Provisions (note 18) largely relate to
warranties and guarantees provided to
secure the sale of OE and services. The
decrease is largely a result of the utilisation
of warranty and restructuring provisions.
Net financial assets and liabilities (note 17)
include the fair value of derivatives,
financial RRSAs and C Shares. The increase
in liabilities primarily reflects the impact
on the US$ hedge book of the GBP:USD
exchange rate falling to 1.48 from 1.56 at
the beginning of the year.
The Group hedges transactional foreign
exchange exposures to reduce volatility.
The most significant exposure is net US$
income. The US$ hedge book increased
by 12.5% to US$28.8bn, which represents
around five years of net exposure and has
an average book rate of £1 to US$1.59.
Net TotalCare assets relate to long-term
service agreement contracts in the Civil
Aerospace business, including the flagship
services product TotalCare. These assets
represent the timing difference between the
recognition of income and costs in the income
statement and cash receipts and payments.
The net asset increased in 2015 by £406m
(2014: £463m), reflecting accounting for
new ‘linked’ engines of £521m (2014: £588m)
and retrospective TotalCare accounting
adjustments of £222m (2014: £150m) taken
in the year, offset by cash flows and other
items of £337m (2014: £275m).
Customer financing facilitates the sale of OE
and services by providing financing support
to certain customers. Where such support is
provided by the Group, it is almost exclusively
to customers of the Civil Aerospace business
and takes the form of various types of credit
Chief Executive’s review / Financial review
Free cash flow
£179m
2014 exc
2014 inc
2013
2012
2011
447
254
781
548
581
y
g
r
e
n
E
c
n
i
2011
2012
2013
2014
y
g
r
e
n
E
c
x
e
2014
2015
and asset value guarantees. These exposures
produce contingent liabilities that are
outlined in note 18. Contingent liabilities
represent the maximum aggregate
discounted gross and net exposure in respect
of delivered aircraft, regardless of the point in
time at which such exposures may arise.
During 2015, the Group’s gross exposure on
delivered aircraft reduced by £119m, mainly
due to guarantees expiring.
Pensions: contributions to defined benefit
pension schemes in 2015 reduced by £63m,
which included a reduction in the UK deficit
funding payments of £36m and the non-
recurrence of discretionary increase
contributions of £33m. The total operating
charge increased by £43m largely due to past
service credits of £8m in 2015 compared to
£31m in 2014. Funding of defined benefit
schemes is expected to be similar in 2016.
Shareholder payments: the reduction
reflects the fact that no dividend was
paid by Power Systems to Daimler AG
(2014: £76m), offset by an increase in the
redemption of C Shares of £15m.
Discontinued operations in 2015 reflect a
sales price adjustment of £42m paid in 2015
on the 2014 disposal of the Energy business
and wind-down costs.
Summary funds flow
Movement in working capital includes an
increase in the net TotalCare asset of £406m
and a reduction in the amount of net
customer deposits of £143m. The reduction
in customer deposits is largely in the Marine
business as a result of lower order intake in the
offshore market and lower government spend.
Expenditure on property, plant and
equipment and intangible assets: the
decrease reflects reductions in additions to
property, plant and equipment (£174m),
participation fees and certification costs
(£86m) and capitalised development costs
(£45m), offset by increased expenditure on
contractual aftermarket rights (£68m) and
foreign exchange movements of £51m.
SUMMARY FUNDS FLOW
£m
Opening net funds
Closing net funds
Change in net funds
Underlying profit before tax
Depreciation and amortisation
Movement in net working capital
Expenditure on property, plant and equipment and intangible assets
Other
Trading cash flow
Contributions to defined benefit post-retirement schemes in excess of PBT charge
Tax
Free cash flow
Shareholder payments
Share buyback
Acquisitions and disposals
Net funds of businesses acquired
Discontinued operations
Foreign exchange
Change in net funds
2015
666
(111)
(777)
1,432
613
(544)
(887)
(229)
385
(46)
(160)
179
(421)
(414)
(3)
–
(121)
3
(777)
Previously
reported
1,939
666
(1,273)
1,617
600
(509)
(1,114)
88
682
(152)
(276)
254
(482)
(69)
(965)
(30)
–
19
(1,273)
2014
Energy
Excluding
Energy
Change
(3)
18
(152)
(30)
(17)
(184)
2
(11)
(193)
–
–
–
–
193
–
–
1,620
582
(357)
(1,084)
105
866
(154)
(265)
447
(482)
(69)
(965)
(30)
(193)
19
(1,273)
-188
+31
-187
+197
-334
-481
+108
+105
-268
+61
-345
+962
+30
+72
-16
Rolls-Royce Holdings plc Annual Report 2015 47
Strategic Report
Strategic Report / Chief Executive’s review
Sustainability
DEVELOPING A
SUSTAINABLE BUSINESS
As a leading power systems provider
we have a fundamental role in
meeting the environmental and
societal opportunities and
challenges that the world faces.
WHAT MATTERS MOST
Understanding and prioritising the
issues that matter most to the Group
and our stakeholders enables us to
manage our business effectively for the
long term. This informs our strategy,
approach and reporting. We have
policies, processes, targets and
governance in place to manage the most
important issues.
Better power
Better future
Better business
EXTERNAL RECOGNITION
BUSINESS ETHICS
ABC AND EXPORT
CONTROL
SUPPLIER ETHICS
EMPLOYEE SAFETY
MATERIAL
STEWARDSHIP
DIVERSITY AND INCLUSION
EMPLOYEE WELLBEING
HUMAN RIGHTS
INNOVATION
EMPLOYEE ENGAGEMENT
TALENT MANAGEMENT
DATA AND CYBER
SECURITY
PRODUCT SAFETY
PRODUCT
PERFORMANCE
PRODUCT
COMPLIANCE
CUSTOMER
SATISFACTION
RITICAL
C
H
I
G
H
OUR
MATERIAL
ISSUES
MODERAT E
TRANSPARENCY
AND DISCLOSURE
GHG EMISSIONS
FROM OUR OPERATIONS
AND FACILITIES
ENERGY CONSUMPTION
WASTE AND RECYCLING
TAXATION
SUPPLIER OPERATIONS
EXTERNAL PARTNERSHIPS
COMMUNITY INVESTMENT
LOCAL ECONOMIC
DEVELOPMENT
STEM EDUCATION
OUTREACH
Dow Jones Sustainability Index
We have been awarded Industry
Leader, Industry Mover and Gold
Class award for the Aerospace and
Defense sector in the Dow Jones
Sustainability Index. Achieving an
overall score of 77, we have been
listed in the DJSI World and
DJSI Europe indexes.
CDP Climate Change Index
Our score of 99B in the CDP is our
highest to date and has earned
us a place in the FTSE 350 Climate
Disclosure Leadership Index.
This reflects our commitment
to continuously improve our
environmental performance
and disclosure.
48 Rolls-Royce Holdings plc Annual Report 2015
Chief Executive’s review / Sustainability
OUR APPROACH
Better power
Helping our customers do more, using less
Our engineering expertise helps us to
deliver more efficient products for our
customers. Our commitment is to improve
continuously the environmental
performance of our products and services.
Each year we invest over £1.2bn in gross
R&D, two thirds of which is aimed at
improving environmental performance.
Our environment strategy focuses on three
areas: supporting our customers by further
reducing the environmental impact of our
products and services; developing new
technology for future low emissions
products; and maintaining our drive to
reduce the environmental impact of our
business activities.
We work with our customers to ensure
optimal performance from our products
throughout their operational life. We deliver
a broad range of learning solutions, ranging
from product operations and maintenance
to simulation activities.
We have an extensive range of field service
personnel and service operations centres
that ensure we have the expertise and
equipment available to service our products
with minimal disruption.
Our products and services are designed
to the highest standards of product safety,
and we consistently pursue proactive
opportunities for improvement. Product
safety and environmental requirements
are an integral part of each stage of the
product lifecycle.
Better future
Better business
Committed to innovation, powering better,
cleaner economic growth
Investing in technology, people and ideas
to improve all aspects of performance
Innovation is embedded in all of our
products and services and is a key
competitive advantage. The skills,
knowledge and passion of our workforce
help us to innovate and to deliver on behalf
of customers. We are working towards
creating an environment where everyone
can reach their full potential. We encourage
diversity, engagement and development.
We are committed to protecting the human
rights of our employees. Our Global Human
Rights policy sets out this commitment
through employment standards covering:
employee involvement; diversity and equality;
pay and benefits; working hours; forced
labour and child labour. Compliance is
assessed on a regular basis.
Employee health and wellbeing are the
foundation of high performance. We focus
our health improvement programmes on
key areas in accordance with our risk profile:
health risk management; resilience and
wellbeing.
A diverse workforce will help ensure our
continued success as a global business and
contribute towards a better future. More
information on our approach to diversity
and gender distribution can be found in the
Nominations & Governance Committee
report, on pages 71 and 72.
We use a variety of channels to communicate
with employees and encourage participation
and engagement. Our community
investment and education outreach
programmes are a key component of our
employee involvement activities.
We are committed to conducting every
aspect of our business to the highest ethical
standards and ensuring we are in line with
all applicable laws. We have a zero tolerance
approach to any form of ethical misconduct,
bribery or corruption.
We have a Global Code of Conduct that
applies to all employees of Rolls-Royce, our
subsidiaries and controlled joint ventures,
wherever they are located. We set equivalent
standards for our supply chain through our
Global Supplier Code of Conduct.
We regard the health and safety of our
employees and those working on our
premises, or on our behalf, as paramount.
We continue to focus on managing the
health and safety risks through risk-based
improvement programmes, strengthening
leadership and cultural change.
Reducing the environmental impact
of our business activities is a key part of
our environment strategy. We continue
to invest in improving the performance
of our operations by reducing energy use,
greenhouse gas emissions and waste.
We are committed to optimising material
and resource efficiency. We are working to
better manage the use of chemicals in our
processes and to phase out the use of
substances that are considered dangerous
to the environment or harmful to health.
Average number of employees per region*
Average number of employees by business unit*
UK
USA
Canada
23,200
Germany
10,700
6,400
1,100
Nordic countries 3,800
Rest of world
5,300
Civil Aerospace 23,200
Marine
Defence Aerospace 6,400
Nuclear
Power Systems 10,600
Other
6,000
4,100
200
*Headcount data is calculated in terms of average full-time employees for 2015
See note 7 Employee information on page 131 for comparative data
Rolls-Royce Holdings plc Annual Report 2015 49
Strategic Report
Strategic Report / Chief Executive’s review
Sustainability
SUSTAINABILITY PERFORMANCE INDICATORS
We launched our dashboard of sustainability performance indicators in 2015,
with higher stretching targets base-lined on our 2014 performance.
Better power
Description
Why we measure it
How we have performed
Improving efficiency
levels of each
generation of the
Trent engine family
to meet the ACARE
Flightpath 2050 goals
The Advisory Council for Aviation Research
and Innovation in Europe (ACARE) has set
challenging goals for aviation to meet by
2050. These include developing technologies
and procedures to:
This chart shows the
improved efficiency
levels of each generation
of Trent engine from the
Trent 800 onwards.
• Reduce aircraft CO2 emissions
by 75% (per passenger kilometre)
• Reduce noise by 65%
• Reduce oxides of nitrogen (NOx) by 90%.
This is all relative to a typical new aircraft
produced in 2000.
Improving emissions
levels of each
generation of the
MTU Series 4000 C&I
engines
to meet future emissions
regulations
Our MTU Series 4000 C&I engines meet the
strictest current regulations for NOx and
particulates reduction. This is achieved
through field-tested and proven technology
such as two-stage turbocharging and
exhaust gas recirculation. We continue to
invest in product R&D to meet future
emissions regulations.
Trent 800
Trent 500
Trent 900
Trent 1000
Trent XWB
Advance
UltraFan
n
r
u
b
l
e
u
f
r
o
2
O
C
%
-5
-10
-15
-20
-25
-30
2000
2010
2020
Entry into service
2030
2040
2050
CO1
0
-20
-40
-60
-80
-100
CO3
CO4
CO5
1998
2003
2008
2013
2018
2023
Entry into service
)
h
W
k
/
g
(
n
o
i
s
s
i
m
e
n
i
e
g
n
a
h
c
%
Trent family
Technology demonstrator
engine targets
Rolls-Royce contribution to
ACARE Flightpath 2050 target
This chart shows the improved
emissions levels of each generation
of the MTU Series 4000 C&I engine.
% change in particulates (g/kWh)
% change in NOx (g/kWh)
Future trend
Better future
Description
Why we measure it
How we have performed
STEM
Reach 6 million people
through our STEM
education programmes
and activities by 2020
We aim to inspire future generations
in Science, Technology, Engineering and
Mathematics (STEM) through education
outreach programmes and activities that
demonstrate the life-long opportunities
that STEM careers can offer.
Our programmes reached 1.6 million people
worldwide in 2015, 70% of whom were actively
engaged in one or more STEM activity. Many
programmes were aimed at groups currently
under-represented in engineering careers,
reflecting our commitment to encouraging
greater diversity in the workplace.
Employee wellbeing
All sites to achieve our
employee health and
wellbeing LiveWell
accreditation by 2020
Employee engagement
Ensure our Sustainable
Employee Engagement Index
is greater than, or equal to,
the Global High Performance
Norm1 by 2020
Our goal is to enhance the personal health and
wellbeing of our people to help them reach
their full potential. The Rolls-Royce LiveWell
accreditation programme will help to create a
culture where healthy choices are encouraged
and rewarded, including; smoke-free site
policies, healthy food choices and exercise
facilities. Sites are also required to establish
local employee wellbeing committees with
annual objectives.
We want all of our employees to be able
to perform to their best ability and
encourage open collaboration,
engagement and involvement.
During 2015, all sites were required to complete
an initial LiveWell accreditation gap analysis. One
site, Bristol UK, met the criteria for accreditation
and was awarded the LiveWell award. The
introduction of our Global Smoke Free Campus
policy in 2016 will enable more sites to obtain
LiveWell accreditation.
Our Sustainable Engagement Score declined
slightly, from 84 in 2014 to 81 in 2015, as we
continue to undergo significant change as a
business. As a result, our Executive Leadership
Team has committed to and is driving a
programme of improvement actions relating
to leadership, communication and enablement.
These are aimed at improving our work
environment and strengthening our climate
for success.
Number of people reached (million)
6
5
4
3
2
1
0
2015
2016
2017
2018
2019
2020
target
LiveWell site accreditation (%)
100
80
60
40
20
0
2015
2016
2017
2018
2019
2020
target
Sustainable Employee Engagement Score
100
80
60
40
20
0
2015 2016 2017 2018 2019
2020
2014
baseline
Score
High performance norm
1 Employee Engagement survey, Sustainable Employee Engagement Index and Global High Performance Norm provided independently by Towers Watson
50 Rolls-Royce Holdings plc Annual Report 2015
Chief Executive’s review / Sustainability
Better business
Description
Why we measure it
How we have performed
Ethics
All employees to complete
year-on-year Global Code
of Conduct certification
and mandatory ethics
training
Energy
Reduce energy use in our
operations and facilities
by 30%, normalised by
revenue, by 2020
(excluding product test and
development)
GHG emissions4
Reduce greenhouse gas
(GHG) emissions in our
operations and facilities
by 50%, absolute, by 2025
(excluding product test and
development)
Our Global Code of Conduct sets out the
ethical principles that underpin our values
and the way we do business. It also provides
guidance on how to apply these principles
in everything we do.
During the year, 100% of our managers have
certified that they have access to, understand
and will comply with our Global Code of Conduct.
Our ethics training continued to require
managers to lead ethical discussions around
dilemmas with their teams. During 2015, 97% of
employees completed dilemma-based training.
Understanding our energy use helps us to
identify inefficiency and opportunities for
improvement across our global operations
and activities. Upgrading existing facilities
and investing in energy efficient technology
helps us to reduce energy consumption
and cost.
We continue to invest in energy efficient
technology to reduce our energy consumption
and cost. Our energy use in 2015 was
112 MWh/£m. This represents a decrease
of 3% compared to 2014. We have invested
in upgrading lighting systems, variable speed
drives and voltage optimisation. We have also
introduced more efficient cooling systems.
Investing in renewable energy sources and
other opportunities to reduce our GHG
emissions reduces cost and mitigates risk
associated with energy price volatility.
Our total GHG emissions for 2015, excluding
product test and development, was 455 ktCO2e.
This represents an 8% reduction from 2014.
We continue to drive energy efficiency and
have developed a number of low carbon and
renewable energy projects across our global
facilities. These include combined heat and
power, tri-generation power systems and solar.
Waste
Reduce total solid and liquid
waste in our operations and
facilities by 25%, normalised
by revenue, by 2020
We recognise that improving the
environmental performance of our
operations contributes to profitable growth.
The four principal waste streams that
contribute to our waste production are:
recyclable solid wastes; liquid wastes sent
for disposal; recyclable metals; and solid
wastes sent for landfill.
We have seen a modest reduction in the amount
of waste that we dispose of from our sites.
Our total solid and liquid waste, normalised
by revenue, was 4.31 t/£m in 2015.
This represents a 3% reduction compared to
2014. New programmes launched in 2015 and
continuing into 2016 are expected to accelerate
waste reduction across our global operations.
Ethics employee certification and training
(% of employees)2
100
75
50
25
0
2015 2016 2017 2018 2019
2020
2014
baseline
Certification
Training
Energy use (MWh/£m)3
120
100
80
60
40
20
0
2014
baseline
2015 2016 2017 2018 2019
2020
target
Absolute GHG emissions (ktCO2e)3
500
400
300
200
100
0
2015 2016 2017 2018
2019
2020
2014
baseline
2025
target
Total solid and liquid waste (t/£m)3
5
4
3
2
1
0
2015 2016 2017 2018 2019
2014
baseline
2020
target
Recycling
Zero waste to landfill
in our operations and
facilities, by 2020
(excluding hazardous waste)
Safety
Reduce total reportable
injury (TRI) rate to 0.3 per
100 employees by 2020,
to achieve first quartile
performance
Suppliers
All suppliers aligned
to our own ambitions:
all suppliers agree
adherence to the Global
Supplier Code of Conduct
by 2016
We are committed to both increasing our
recycling rates and achieving zero waste to
landfill from our manufacturing and office
facilities. We are concentrating on the
recycling of metals and packaging.
Hazardous waste will continue to be
managed in a safe and controlled manner.
The amount of waste sent to landfill has increased
from 6,700 tonnes in 2014 to 7,200 tonnes in 2015.
This is due in part to an increase in waste from
our Power Systems business and improved waste
reporting across the Group. Since 2009, we have
reduced our waste to landfill by 3,000 tonnes
and remain confident that more sites will achieve
zero waste to landfill.
Waste to landfill (000 tonnes)3
8
6
4
2
0
2014
baseline
2015 2016 2017 2018 2019 2020
target
We are dedicated to providing a safe and
healthy place of work for all our employees,
contractors and visitors to our facilities and
wherever they may work on our behalf.
Our TRI rate deteriorated in 2015 to 0.82,
compared to 0.64 in 2014. This is primarily
due to the inclusion of Power Systems data and
improved reporting of safety incidents across the
Group. We continue to focus our improvement
programmes on high consequence activities
in accordance with our risk profile, for example
electrical safety and process safety management.
Our Global Supplier Code of Conduct sets
out the minimum standards of behaviour
and practices we require of our suppliers.
We work to align them to our own
ambitions in ethics, and support suppliers
in managing their energy and waste, and
in completing submissions to the CDP.
We released a revision to our Global Supplier
Code of Conduct at the start of 2015. Our terms
of business now include agreement to the Code,
which makes our compliance expectations clear.
75% of our suppliers have now contractually
agreed adherence. We plan to launch strategic
supplier monitoring programmes in 2016.
TRI rate (per 100 employees)3
1.0
0.75
0.50
0.25
0
2014
baseline
2015 2016 2017 2018 2019
2020
target
Power Systems
Rest of Group
Suppliers agreed adherence to the
Global Supplier Code of Conduct (%)
2016
target
2015
0
20
40
60
80
100
2 2015 certification by managers only
3 2014 data has been restated to reflect the inclusion
of Power Systems
4 Regulatory GHG emissions data detailed on page 180
Limited external assurance provided by Bureau
Veritas, using the assurance standards ISAE 3000
and ISAE 3410, over the energy, GHG, and TRI data
as indicated. More information detailed on page 175
Rolls-Royce Holdings plc Annual Report 2015 51
Strategic Report
Strategic Report / Chief Executive’s review
Key performance indicators
KEY PERFORMANCE INDICATORS
Financial performance indicators are shown below. The areas of focus
of the Board and its committees are described on pages 63 to 104,
and other non-financial performance indicators are shown in the
Sustainability section on pages 50 and 51.
Description
Why we measure it
Order book
+4%
Order intake
-4%
The order book provides an indicator of future business.
We measure it at constant exchange rates and list prices
and include both firm and announced orders. In Civil Aerospace,
it is common for a customer to take options for future orders
in addition to firm orders placed. Such options are excluded from
the order book. In Defence Aerospace, long-term programmes
are often ordered for only one year at a time. In such
circumstances, even though there may be no alternative engine
choice available to the customer, only the contracted business
is included in the order book. Conservatively, we only include the
first seven years’ revenue of long-term aftermarket contracts.
Order intake is a measure of new business secured during
the year and represents new firm orders, adjusted for the
movement in the announced order book between the start and
end of the period. Any orders which were recorded in previous
periods and which are subsequently cancelled, reducing the
order book, are included as a reduction to intake. We measure
order intake at constant exchange rates and list prices and,
consistent with the order book policy of recording the first seven
years’ revenue of long-term aftermarket contracts, include the
addition of the following year of revenue on long-term
aftermarket contracts.
How we have performed
The order book grew by
£2.7bn. An increase
of £3.8bn in Civil Aerospace
was offset by a reduction of
£0.4bn in Marine, reflecting
the current weak market
conditions.
£bn
62.2
60.1
71.6
73.7
76.4
An increase of £0.9bn
in Civil Aerospace order
intake was offset by weaker
intake in Defence
Aerospace and Marine.
2011 2012 2013 2014 2015
£bn
26.9
16.3
16.1
19.4
19.0
18.2
y
g
r
e
n
E
c
n
i
y
g
r
e
n
E
c
x
e
2011 2012 2013 2014 2014 2015
Underlying revenue
-4%
-1% excluding FX
Monitoring of revenue provides a measure of business growth.
Underlying revenue is used as it reflects the impact of our
FX hedging policy by valuing foreign currency revenue at the
actual exchange rates achieved as a result of settling FX contracts.
This provides a clearer measure of the year-on-year trend.
The reduction reflects
a 9% reduction in OE
revenue, offset by a
3% increase in services
revenue. Marine revenue
fell by 23%, reflecting the
weak market conditions.
£m
12,209
11,277
15,505
14,588
13,864 13,354
Net R&D expenditure
as a proportion of
underlying revenue
6.2%
This measure reflects the need to generate current returns
as well as to invest for the future. We measure R&D as the
self-funded expenditure before both amounts capitalised in
the year and amortisation of previously-capitalised balances.
We expect to spend approximately 5% of underlying revenues
on R&D although this proportion will fluctuate depending on
the stage of development of current programmes. We expect
this proportion will reduce modestly over the medium term.
The increase is largely
due to changes in net
capitalisation, reflecting
the phasing of new Civil
Aerospace programmes,
in particular the
Trent XWB-84 and the
Trent 1000 TEN.
52 Rolls-Royce Holdings plc Annual Report 2015
y
g
r
e
n
E
c
n
i
y
g
r
e
n
E
c
x
e
2011 2012 2013 2014 2014 2015
%
4.6
4.7
4.8
5.8
5.9
6.2
y
g
r
e
n
E
c
n
i
y
g
r
e
n
E
c
x
e
2011 2012 2013 2014 2014 2015
Chief Executive’s review / Key performance indicators
Description
Why we measure it
Capital expenditure
as a proportion of
underlying revenue
3.7%
To deliver on its commitments to customers, the Group
invests significant amounts in its infrastructure. All proposed
investments are subject to rigorous review to ensure that they
are consistent with forecast activity and will provide value
for money. We measure annual capital expenditure as the cost
of property, plant and equipment acquired during the period
and, over the medium term, expect a proportion of around 4%.
How we have performed
Expenditure reduced
to £494m (2014: £668m)
principally reflecting
the major investment in
Civil Aerospace facilities
nearing completion.
%
4.1
4.0
4.6
4.7
4.4
3.7
y
g
r
e
n
E
c
n
i
y
g
r
e
n
E
c
x
e
2011 2012 2013 2014 2014 2015
Underlying profit
before financing
-11%
We measure underlying profit before financing on a basis
that shows the economic substance of the Group’s hedging
strategies in respect of the transactional exchange rate and
commodity price movements. In particular: (a) revenues and
costs denominated in US dollars and euros are presented on the
basis of the exchange rates achieved during the year; (b) similar
adjustments are made in respect of commodity derivatives; and
(c) consequential adjustments are made to reflect the impact
of exchange rates on trading assets and liabilities and long-term
contracts on a consistent basis.
The reduction reflects
the reduction in revenues
and the Group’s high level
of fixed costs, which the
transformation
programme is addressing.
£m
1,206
1,831
1,678 1,681
1,495
1,492
y
g
r
e
n
E
c
n
i
y
g
r
e
n
E
c
x
e
2011 2012 2013 2014 2014 2015
Free cash flow
£179m
In a business requiring significant investment, we monitor
cash flow to ensure that profitability is converted into cash
generation, both for future investment and as a return
to shareholders. We measure free cash flow as the movement
in net funds/debt during the year, before movements
arising from payments to shareholders, acquisitions and
disposals, and FX.
The reduction reflects
the lower profits and the
utilisation of provisions.
£m
781
581
548
y
g
r
e
n
E
c
n
i
254
447
y
g
r
e
n
E
c
x
e
179
2011 2012 2013 2014 2014 2015
Average cash is no longer being monitored as a key performance indicator, as the focus is now on the free cash flow.
Non-financial KPIs
As we undertake significant restructuring, reorganisation and transformation, it is imperative that we do not lose focus on our customers,
and that we ensure our employees are fully engaged in the transformation. So for 2016, we are introducing two non-financial measures to the
Annual Performance Related Award relating to customers and employees. In line with our remuneration policy, financial performance will still
be required for any payout, as the non-financial measures will be subject to achieving a profit before taxation threshold.
Description
How performance is measured
Customer satisfaction
This is measured by the percentage of ‘on-time to purchase order’ and includes measures for new equipment,
spare parts, equipment repair and overhaul. This is tracked Group-wide in our scheduling and order
fulfilment system.
Employee engagement
This is measured through our Employee Opinion Survey which produces a composite engagement score.
The targets will be based on absolute scores.
Rolls-Royce Holdings plc Annual Report 2015 53
Strategic Report
Strategic Report / Chief Executive’s review
Principal risks
PRINCIPAL RISKS
Risk management
Risk management is built into our daily
activities and is an integral part of how we
work: from our engineering design, through
to engine production, servicing and how
we run our operations.
The Board is responsible for the Group’s risk
management and internal control system and
reviewing its effectiveness. The system is
designed to identify and manage, rather than
eliminate, the risk of failure to achieve business
objectives and to provide reasonable but not
absolute assurance against material
misstatement or loss. More information about
our internal control system can be found in the
Audit Committee report on page 95.
Our risk management system (RMS) helps
us make better decisions and to deal with
problems if they occur. It is implemented
through: a Group-wide framework mandated
in the Group risk management policy;
a network of trained risk management
facilitators; and a software tool.
In 2015, we performed a comprehensive review
of our RMS and are implementing
a programme of work to enhance our RMS
which will continue to be embedded
throughout 2016. This activity is sponsored by
the General Counsel and Chief Financial Officer
and is regularly reviewed by the Audit
Committee. The enhancements touch all areas
of our RMS including: categorisation,
governance, operating model, reporting and
infrastructure.
Our RMS is designed so that principal risks can
be identified from multiple sources. Key
bottom-up risks are identified by businesses
and functions and the detail of risks that meet
the Group threshold are subject to review and
challenge by the Executive Leadership Team
(ELT) and the Board during their risk reviews.
This includes monitoring the status of
mitigation actions, adequacy of controls and
any incidents that have occurred since the last
review. Risks are also captured during the
strategy and business planning activities to
inform the development of the principal risks.
The Board, assisted by the ELT, has carried out a
robust assessment of, and reviewed our
appetite for, the principal risks facing the
Group. These include those that threaten the
business model, future performance, solvency
and liquidity. These reviews have been
complemented by financial scenario modelling
of our principal risks which is also used to
support our viability statement on page 57.
The Board, or the most appropriate Board
committee, undertakes periodic in-depth
reviews of our principal risks in which it
assesses our material controls and the
effectiveness of our risk management and
mitigation activities.
Business units and functions are accountable
for identifying and managing risk in line with
the Group risk management policy. Business
continuity plans are in place to mitigate
continuity risks.
The Group’s enterprise risk team, led by the
Director of Risk, is responsible for disseminating
risk policy and processes and co-ordinating the
effective operation of the RMS. Progress of
actions to mitigate risks and the adequacy
of risk controls are also now regularly reviewed
by the sector audit committees.
Joint ventures constitute an increasingly large
part of the Group’s activities. Responsibility for
risk and internal control in joint ventures lies
with the managers of those operations. We seek
to exert influence over such joint ventures
through board representation. Management
and internal audit regularly review the activities
of these joint ventures.
The Board is aware that the effectiveness of risk
management is highly dependent on behaviours,
as a good process does not automatically lead
to a good outcome. Our ethics and compliance
improvement programme, aimed at securing
compliance with our ethical standards, and the
Global Code of Conduct are reinforcing the
values and behaviours required, which in turn
will continue to strengthen our risk
management culture.
Principal risks
During the year, the Board and ELT focused on
the principal risks and the actions and controls
in place to manage them.
This involved: discussing changes to the risks;
reviewing the risk indicators for principal risks;
and hearing from management about how
risks will be managed.
This ongoing review of risks has resulted in
a further principal risk being added this year:
talent and capability. This risk has been added
to reflect the significant transformation
agenda ahead and our future growth
requirements and plans.
Management of principal risks
Our risk framework ensures that risks are identified, managed and communicated at every level of the Group.
Identify
principal risks
(PRs)
Governance
of PRs
Impact of
PRs on long-
term viability
Set risk appetite
for PRs
Monitor
mitigation and
control of PRs
Reporting
Assess effectiveness of risk management system (RMS)
54 Rolls-Royce Holdings plc Annual Report 2015
Chief Executive’s review / Principal risks
Risk or uncertainty and potential impact
How we manage it
Strategic
priorities
Product failure
Product not meeting safety expectations,
or causing significant impact to customers
or the environment through failure
in quality control.
• Embedding and operating a safety-first culture.
• Applying our engineering design and validation process from initial design through production
and into service.
• The Safety & Ethics Committee reviewing the scope and effectiveness of the Group’s product
safety policies to ensure that they operate to the highest industry standards (see Safety & Ethics
Committee report on page 99).
• Operating a safety management system (SMS), governed by the product safety review board,
and subject to continual improvement based on experience and industry best practice. Product
safety training is an integral part of our SMS. (see Safety & Ethics Committee report on page 100
for details of the SMS).
• Improving our supply chain quality.
• Crisis management team jointly chaired by the Group President and the General Counsel.
This principal risk is subject to review by the Safety & Ethics Committee.
Business continuity
Breakdown of external supply chain or
internal facilities that could be caused by
destruction of key facilities, natural disaster,
regional conflict, insolvency of a critical
supplier or scarcity of materials which
would reduce the ability to meet customer
commitments, win future business
or achieve operational results.
• Continued investment in adequate capacity and modern equipment and facilities.
• Identifying and assessing points of weakness in our internal and external supply chain,
our IT systems and our people skills.
• Selecting and developing stronger suppliers.
• Developing dual sources or dual capability.
• Developing and testing incident management and business continuity plans.
• Crisis management team jointly chaired by the Group President and the General Counsel.
• Customer excellence centres providing improved response to supply chain disruption.
This principal risk is subject to review by the Audit Committee.
Competitive position
The presence of large, financially strong
competitors in the majority of our markets
means that the Group is susceptible
to significant price pressure for original
equipment or services, even where our
markets are mature, or the competitors
are few. Our main competitors have
access to significant government funding
programmes, as well as the ability
to invest heavily in technology and
industrial capability.
Political risk
Geopolitical factors that lead to an
unfavourable business climate and
significant tensions between major trading
parties or blocs which could impact the
Group’s operations. For example: explicit
trade protectionism, differing tax or
regulatory regimes, potential for conflict,
or broader political issues.
• Accessing and developing key technologies and service offerings which differentiate
us competitively (see Engineering and innovation on page 18).
• Focusing on being responsive to our customers and improving the quality, delivery and reliability
of our products and services.
• Partnering with others effectively.
• Driving down cost and improving margins (see Chief Executive’s review on page 12).
• Protecting credit lines.
• Investing in innovation, manufacturing and production, and continuing governance of
technology programmes (see Engineering and innovation on page 18 and Science & Technology
Committee report on page 103).
• Maintaining a strong balance sheet to enable access to cost-effective sources of third-party funding.
• Understanding our competitors.
This principal risk is subject to review by the Board.
• Where possible, locating our facilities and supply chain in countries with a low level of political
risk and/or ensuring that we maintain dual capability.
• Diversifying global operations to avoid excessive concentration of risks in particular areas.
• The international network of Rolls-Royce and its business units proactively monitoring
local situations.
• Maintaining a balanced business portfolio with high barriers to entry and a diverse customer
base (see Chief Executive’s review on page 8).
• Proactively influencing regulation where it affects us.
This principal risk is subject to review by the Board.
Major programme delivery
Failure to deliver a major programme
on time, within budget, to specification, or
technical performance falling significantly
short of customer expectations, or not
delivering the planned business benefits,
would have potentially significant adverse
financial and reputational consequences,
including the risk of impairment of the
carrying value of the Group’s intangible
assets and the impact of potential litigation.
• Major programmes are subject to Board approval (see Additional financial information on page 176).
• Reviewing major programmes at levels and frequencies appropriate to their criticality
and performance, against key financial and non-financial deliverables and potential risks
throughout the programme’s life cycle (see Additional financial information on page 176).
• Conducting technical audits at pre-defined points which are performed by a team that
is independent from the programme.
• Requiring programmes to address the actions arising from reviews and audits and monitoring
and controlling progress through to closure.
• Applying knowledge management principles to provide benefit to current and future programmes.
This principal risk is subject to review by the Board.
1 Engineering excellence
2 Operational excellence
3 Capturing aftermarket value
1
2
3
2
3
1
2
3
2
1
2
Rolls-Royce Holdings plc Annual Report 2015 55
Strategic Report
Strategic Report / Chief Executive’s review
Principal risks
PRINCIPAL RISKS CONTINUED
Risk or uncertainty and potential impact
How we manage it
Compliance
Non-compliance by the Group with
legislation or other regulatory requirements
in the regulated environment in which it
operates (eg. export controls; offset; use of
controlled chemicals and substances; and
anti-bribery and corruption legislation)
compromising our ability to conduct
business in certain jurisdictions and
exposing the Group to potential reputational
damage, financial penalties, debarment from
government contracts for a period of time,
and/or suspension of export privileges or
export credit financing, any of which could
have a material adverse effect.
Market and financial shock
The Group is exposed to a number of market
risks, some of which are of a macro-economic
nature (eg. foreign currency, oil price,
exchange rates) and some of which are more
specific to the Group (eg. liquidity and credit
risks, reduction in air travel or disruption
to other customer operations). Significant
extraneous market events could
also materially damage the Group’s
competitiveness and/or creditworthiness.
This would affect operational results or the
outcomes of financial transactions.
IT vulnerability
Breach of IT security causing controlled
or critical data to be lost, made inaccessible,
corrupted or accessed by unauthorised users.
Talent and capability
Inability to attract and retain the critical
capabilities and skills needed in sufficient
numbers and to effectively organise, deploy
and incentivise our people to deliver our
strategy, business plan and projects.
• Taking an uncompromising approach to compliance.
• Operating an extensive compliance programme. This programme and the Global Code
of Conduct are disseminated throughout the Group and are updated from time to time to ensure
their continued relevance, and to ensure that they are complied with, both in spirit and to the
letter. The Global Code of Conduct and the Group’s compliance programme are supported by
appropriate training (see Safety & Ethics Committee report on page 102).
• Strengthening of the ethics, anti-bribery and corruption, compliance and export control teams.
• A legal team is in place to manage any ongoing regulatory investigations.
• Implementing a comprehensive REACH compliance programme. This includes establishing
appropriate data systems and processes, working with our suppliers, customers and trade
associations and conducting research on alternative materials.
This principal risk is subject to review by the Safety & Ethics Committee.
• Maintaining a strong balance sheet, through managing cash balances and debt levels
(see Financial review on page 42).
• Providing financial flexibility by maintaining high levels of liquidity and an investment
grade credit rating.
• Sustaining a balanced portfolio through earning revenue both from the sale of original
equipment and aftermarket services, providing a broad product range and addressing
diverse markets that have differing business cycles (see Chief Executive’s review on page 8).
• Deciding where and what currencies to source in, and where and how much credit risk is
extended or taken. The Group has a number of treasury policies that are designed to
hedge residual risks using financial derivatives (foreign exchange, interest rates and
commodity price risk).
This principal risk is subject to review by the Audit Committee.
• Implementing ‘defence in depth’ through deployment of multiple layers of software
and processes including web gateways, filtering, firewalls, intrusion, advanced persistent
threat detectors and integrated reporting (see Audit Committee report on page 95).
• Running security and network operations centres.
• Actively sharing IT security information through industry, government and security forums.
This principal risk is subject to review by the Audit Committee.
• Attracting, rewarding and retaining the right people with the right skills globally in a planned
and targeted way, including regular benchmarking of remuneration.
• Developing and enhancing organisational, leadership, technical and functional capability
to deliver global programmes.
• Continuing a strong focus on individual development and succession planning.
• Proactively monitoring retirement in key areas and actively managing the development
and career paths of our people with a special focus on employees with the highest potential.
• Embedding a lean, agile high performance culture that tightly aligns Group strategy
with individual and team objectives.
• Retaining, incentivising and effectively deploying the critical capabilities, skills and people
needed to deliver our strategic priorities, plans and projects whilst implementing the Group’s
major programme to transform its business, to be resilient and to act with pace and simplicity.
• Tracking engagement through our annual employee opinion survey and a commitment
to drive year-on-year improvement to the employee experience and communications
(see Sustainability on page 50).
This principal risk is subject to review by the Nominations & Governance Committee.
1 Engineering excellence
2 Operational excellence
3 Capturing aftermarket value
Strategic
priorities
2
2
3
1
2
1
2
3
56 Rolls-Royce Holdings plc Annual Report 2015
Chief Executive’s review / Going concern and viability
GOING CONCERN AND VIABILITY
STATEMENTS
Introduction
Rolls-Royce operates an annual planning
process which includes strategic (greater
than five years), medium-term (five year)
and short-term (one year) financial forecasts,
based on the inputs from each of the
businesses. These plans and risks to their
achievement are reviewed by the Board
as part of its strategy review and budget
approval processes. Once approved these
plans are cascaded throughout the Group
and are used as the basis for monitoring
our performance, incentivising employees
and providing external guidance
to our shareholders.
The processes for identifying and managing
the principal risks are described on pages 54
to 56. As also described there, the risk
management process, and in consequence
the going concern and viability statements,
are designed to provide reasonable but not
absolute assurance.
Going concern
The going concern assessment considers
whether it is appropriate to prepare the
financial statements on a going concern basis.
As described on page 177, the Group meets
its funding requirements through a mixture
of shareholders’ funds, bank borrowings,
bonds and notes. At 31 December 2015, the
Group had borrowing facilities of £5.1bn and
total liquidity of £5.0bn, including cash and
cash equivalents of £3.2bn and undrawn
facilities of £1.8bn. £419m of the facilities
mature in 2016.
The Group’s forecasts and projections, taking
into account reasonably possible changes in
trading performance, show that the Group has
sufficient financial resources. The Directors
have reasonable expectations that the
Company and the Group are well placed to
manage business risks and to continue
in operational existence for the foreseeable
future (which accounting standards require to
be at least a year from the date of this report)
and have not identified any material
uncertainties to the Company’s and the
Group’s ability to do so.
On the basis described above, the Directors
consider it appropriate to adopt the going
concern basis in preparing the consolidated
financial statements (in accordance with the
‘Guidance on Risk Management, Internal
Control and Related Financial and Business
Reporting’ published by the Financial
Reporting Council in September 2014).
Viability
The viability assessment considers solvency
and liquidity over a longer period than
for the purposes of the going concern
assessment above. Inevitably, the degree
of certainty reduces over this longer period.
In making the assessment, severe but
plausible scenarios have been considered
that estimate the potential impact of each
of the principal risks arising over the
assessment period, for example: the loss of
a key element of the supply chain; the impact
on aircraft travel of a global pandemic; or,
a failure to achieve planned cost reductions.
The scenarios assume an appropriate
management response to the specific event,
but not broader mitigating actions which
could be undertaken, which were considered
separately. The impacts of these scenarios
were overlaid on the medium-term forecast
to assess how the Group’s liquidity and
solvency would be affected.
The assessment took account of the Group’s
current funding, forecast requirements and
existing committed borrowing facilities.
It assumed that existing facilities could be
refinanced as they mature. There are modest
maturities over the first three years of the
medium-term forecast with more significant
maturities in 2019 and 2020.
On the basis described above, the Board
confirms that it has a reasonable expectation
that the Company will be able to continue in
operation and meet its liabilities as they fall
due over the next five years, consistent with
the period of the medium-term forecast.
In making this statement, the Directors have
made the following key assumptions:
• that maturing facilities will be refinanced.
The Group currently has access to global
debt markets and expects to be able to
refinance these facilities on commercially
acceptable terms. The Group’s medium-
and long-term financing plans are
designed to allow for periods of adverse
conditions in world capital markets but
not a prolonged (say 12 month) period
where debt markets were effectively
closed to the Group;
• that in the event of multiple risks
occurring and having a particularly severe
effect on the Group, all potential actions,
such as constraining capital spending
and reducing or suspending payments
to shareholders, would be taken on a
timely basis. The Group believes it has
the early warning mechanisms to identify
the need for such actions and the ability
to implement them on a timely basis
if necessary;
• that implausible scenarios, whether
involving multiple risks occurring at the
same time or the impact of individual
risks occurring that cannot be mitigated
by management actions to the degree
assumed, do not occur. For instance,
whilst the Directors have considered
a scenario where cost reductions are
not achieved and a major programme
is delayed, they have not considered it
plausible that any other of the key risks
would crystallise in a way that would
create a worse outcome over the five-year
assessment period.
Warren East
Chief Executive
11 February 2016
Rolls-Royce Holdings plc Annual Report 2015 57
Strategic Report
Directors’ Report / Board of Directors
BOARD OF DIRECTORS
Ian Davis
Chairman
NG
Appointment to the Board
Appointed to the Board in March 2013
and as Chairman in May 2013
Current directorships and
business interests
• Johnson & Johnson Inc,
non-executive director
• BP p.l.c., non-executive director
• UK Cabinet Office Board
non-executive member
(stepping down in March 2016)
• Apax Partners LLP, senior adviser
• Temasek, European Advisory
Panel member
• Teach for All Inc, director
• Majid Al Futtaim Holdings LLC,
director
Career, skills and experience
Ian spent his early career at Bowater,
moving to McKinsey & Company in
1979. He was managing partner of
McKinsey’s practice in the UK and
Ireland from 1996 to 2003. In 2003,
he was appointed as chairman and
worldwide managing director of
McKinsey, serving in this capacity
until 2009 and retiring as senior
partner in 2010. During his career
with McKinsey, Ian served as a
consultant to a range of global
organisations across the private,
public and not-for-profit sectors.
He is now senior partner emeritus
of McKinsey.
Warren East CBE
Chief Executive
David Smith
Chief Financial Officer
Colin Smith CBE
Group President
Appointment to the Board
Appointed as an Executive Director
in November 2014
Appointment to the Board
Appointed as an Executive Director
in July 2005
Current directorships and
business interests
• Motability Operations Group plc,
Current directorships and
business interests
• Council for Science and Technology,
non-executive director
member
• Warwick Business School, advisory
board member
• Chartered Institute of
Management Accountants,
member of Advisory Panel
Career, skills and experience
David joined Rolls-Royce in January
2014 as Chief Financial Officer for the
Aerospace Division. Before joining
Rolls-Royce he was chief financial
officer for technology group, Edwards.
He has spent over 25 years in the
automotive industry at Ford and
Jaguar Land Rover.
Career, skills and experience
Colin joined Rolls-Royce in 1974.
He has held a variety of key positions
within the Group, including:
Director – Research & Technology;
Director of Engineering & Technology
– Civil Aerospace; and, Group Director
– Engineering & Technology, before
being appointed as Group President
in January 2016. Colin is a fellow of
the Royal Society, the Royal Academy
of Engineering, the Royal Aeronautical
Society and the Institution of
Mechanical Engineers. In June 2012
he was awarded a CBE for services
to UK engineering.
Appointment to the Board
Appointed as an independent
Non-executive Director in January
2014 and as Chief Executive in
July 2015
Current directorships and
business interests
• Dyson Ltd, non-executive director
• A member of the UK Government’s
Business Advisory Group
• Trustee of the Institute of
Engineering and Technology
Career, skills and experience
Warren held various senior
appointments at ARM Holdings plc
from 1994 including CEO from 2001
to 2013. He is a fellow of the Institute
of Engineering and Technology,
a fellow of the Royal Academy of
Engineering and a distinguished
fellow of the BCS, the Chartered
Institute for IT. He was awarded
a CBE in 2014 for services to the
technology industry.
Prior to his appointment as Chief
Executive, Warren was Chairman of
the Science & Technology Committee
and a member of the Audit
Committee and the Nominations &
Governance Committee.
58 Rolls-Royce Holdings plc Annual Report 2015
Board of Directors
Dame Helen Alexander
Independent
Non-executive Director
Lewis Booth CBE
Senior Independent
Non-executive Director
Ruth Cairnie
Independent
Non-executive Director
Sir Frank Chapman
Independent
Non-executive Director
R NG SE
A NG ST
NG R ST
SE NG R
Appointment to the Board
Appointed as an independent
Non-executive Director in
September 2007
Current directorships and
business interests
• UBM plc, chairman
• Huawei Technologies (UK) Co.
Appointment to the Board
Appointed as an independent
Non-executive Director in May 2011
Current directorships and
business interests
• Mondelez International Inc,
non-executive director
Appointment to the Board
Appointed as an independent
Non-executive Director in
September 2014
Current directorships and
business interests
• Associated British Foods plc,
• Gentherm Inc., non-executive
non-executive director
Limited, non-executive director
director
• Keller Group plc, non-executive
Career, skills and experience
Lewis is the former executive vice
president and chief financial officer
of Ford Motor Company, a position he
held for over three years until his
retirement from the company in
April 2012. During his 34-year career
at Ford he held a series of senior
positions in Europe, Asia, Africa and
the US. Lewis began his career with
British Leyland, before joining Ford in
1978. He was awarded a CBE in June
2012 for services to the UK
automotive and manufacturing
industries.
• Bain Capital, senior adviser
• EDF Energy’s Stakeholder Advisory
Panel, member
• University of Southampton,
chancellor
• She is also involved in not-for-profit
organisations in media and the arts
Career, skills and experience
Dame Helen was chief executive
of the Economist Group until 2008,
having joined the company in 1985,
and was managing director of the
Economist Intelligence Unit from
1993 to 1997. She was president of the
CBI from 2009 to 2011; she has also
been chairman of Incisive Media and
Port of London Authority, and
a non-executive director of
Northern Foods plc, BT Group plc
and Centrica plc. She was awarded
a DBE in 2011 for services to business.
director
• Rotterdam School of Management,
member of the advisory board
• Cambridge University, finance
committee member
Career, skills and experience
Ruth was executive vice president
strategy and planning at Royal Dutch
Shell Plc until 2014, before which she
held a number of other senior
international roles at Shell, including
managing its global commercial fuels
business from 2005 to 2011.
Ruth served on the boards of Shell
Pakistan Ltd and joint venture
companies in Germany and Thailand.
She also chairs the POWERful women
initiative, supporting the progression
of women to senior positions in the
energy sector.
Appointment to the Board
Appointed as an independent
Non-executive Director in
November 2011
Current directorships and
business interests
• Myeloma UK, vice chairman
Career, skills and experience
Sir Frank has worked in the oil & gas
industry for 38 years including
appointments within Royal Dutch
Shell plc and BP p.l.c. He was chief
executive of BG Group plc for 12 years
until December 2012 and chairman
of Golar LNG Ltd from 2014 to 2015.
Sir Frank is a fellow of the Royal
Academy of Engineering, the
Institution of Mechanical Engineers
and the Energy Institute. He was
knighted in 2011 for services to the
oil & gas industry.
Committee membership
A
Audit
Committee
NG
Nominations & Governance
Committee
R
Remuneration
Committee
SE
ST
Safety & Ethics
Committee
Science & Technology
Committee
Denotes
Chairman
Rolls-Royce Holdings plc Annual Report 2015 59
Directors’ Report
Directors’ Report / Board of Directors
Alan Davies
Independent
Non-executive Director
Irene Dorner
Independent
Non-executive Director
Lee Hsien Yang
Independent
Non-executive Director
John McAdam
Independent
Non-executive Director
NG A
NG A SE
NG A SE
NG R SE
Appointment to the Board
Appointed as an independent
Non-executive Director in
November 2015
Current directorships and
business interests
• Rio Tinto Diamonds and Minerals
Appointment to the Board
Appointed as an independent
Non-executive Director in July 2015
Current directorships and
business interests
• OUTleadership Advisory Board,
member
division, chief executive
• South East Asia Rainforest Research
Career, skills and experience
Alan joined Rio Tinto in 1997 and has
held a number of senior positions
in Australia, London and the US,
predominantly in Rio Tinto’s iron ore
product group where he has served
as CFO, managing director global
development and as president
international operations. Alan is
a fellow of the Institute of Chartered
Accountants in Australia.
Partnership, trustee
Career, skills and experience
Irene was CEO and president of
HSBC, US, until December 2014 where
she was responsible for all of HSBC’s
operations in the US and played a key
role in strengthening the financial
institution’s risk processes. During
a 29-year career at HSBC, she held
a number of international roles
including as the first woman to lead
HSBC in Malaysia and launching its
Islamic banking unit.
Irene was a consultant at PwC until
February 2016. She is a fellow of
St. Anne’s College, Oxford.
Appointment to the Board
Appointed as an independent
Non-executive Director in
January 2014
Appointment to the Board
Appointed as an independent
Non-executive Director in
February 2008
Current directorships and
business interests
• General Atlantic LLC and associated
Current directorships and
business interests
• J. Sainsbury plc, senior independent
funds, special adviser
• Civil Aviation Authority of
Singapore, chairman
director
• Rentokil Initial plc, chairman
• United Utilities Group PLC,
• The Islamic Bank of Asia Private
chairman
Career, skills and experience
John was the chief executive of ICI plc
until ICI’s acquisition by Akzo Nobel in
2008. He held a number of positions
at Unilever, within its Birds Eye Walls,
Quest International and Unichema
International businesses and is
a former non-executive director
of Severn Trent plc and Sara Lee
Corporation.
Limited, chairman
• The Australian and New Zealand
Banking Group Ltd, director
• Lee Kuan Yew School of Public Policy,
member of the Board of governors
• INSEAD SE Asia Council, president
• Singapore Exchange Ltd, director
• Capital International Inc,
consultant to advisory board
Career, skills and experience
Hsien Yang was chief executive
of Singapore Telecommunications
Limited for 12 years until 2007. He
served as chairman and
non-executive director of Fraser
and Neave Limited from 2007 until
February 2013.
Board members by gender
Balance of the Board
Tenure of Non-executive Directors
Nationalities of Directors*
Male
Female
10
4
Executive Directors
Non-executive Directors
3
11
0 - 3 years
3 - 6 years
6 - 9 years
6
3
2
British
German
Singaporean
Australian
11
1
1
1
*
According to the Company’s Articles of
Association, at least 50% of all Directors
must be British citizens
60 Rolls-Royce Holdings plc Annual Report 2015
Board of Directors
Sir Kevin Smith CBE
Independent
Non-executive Director
Jasmin Staiblin
Independent
Non-executive Director
Pamela Coles
Company Secretary
ST NG R
NG ST
Appointment to the Board
Appointed as an independent
Non-executive Director in May 2012
Appointment
Appointed as Company Secretary
in October 2014
Current directorships and
business interests
• Alpiq Holding AG, CEO
• Georg Fischer AG, non-executive
director
• Federal Institute of Technology,
the ETH Domain, board member
Career, skills and experience
Jasmin is the CEO of Alpiq Holding AG.
She held a number of senior positions
at ABB Switzerland Ltd, a subsidiary
of the ABB Group, culminating in her
serving as CEO of ABB Switzerland Ltd
until December 2012. She has lived
and worked in Switzerland, Sweden
and Australia.
Career, skills and experience
Pamela has been a fellow of the
Institute of Chartered Secretaries
and Administrators since 1997,
and is an expert in governance
and company law. She has held a
variety of company secretary roles
throughout her career. She joined
Rolls-Royce from Centrica plc,
where she was head of secretariat.
Pamela’s previous roles also include
group company secretary and a
member of the executive committee
at The Rank Group plc and company
secretary & head of legal at RAC plc.
Appointment to the Board
Appointed as an independent
Non-executive Director in
November 2015
Current directorships and
business interests
• Unitas Capital, senior adviser
Career, skills and experience
Sir Kevin joined Unitas Capital in 2012
and served as partner and chairman
of its operating advisor group until
October 2015. He was chief executive
officer of GKN plc until 31 December
2011, having led GKN’s Aerospace
division from 1999 to 2003. Before
joining GKN, he spent nearly 20 years
with British Aerospace (BAe plc),
becoming group managing director of
BAe’s New Business division. Sir Kevin
served as a non-executive director
of Scottish and Southern Energy plc
between June 2004 and July 2008.
He was knighted in 2006 for services
to industry and is a fellow of the
University of Central Lancashire, The
Royal Aeronautical Society and The
Chartered Institute of Management.
EXECUTIVE
LEADERSHIP TEAM
The Executive Leadership Team
is the executive forum in which
the Group’s senior leaders come
together to communicate,
review and agree on issues
and actions of Group-wide
significance, and assist the
Chief Executive in the
performance of his duties.
Warren East CBE
Chief Executive
Colin Smith CBE
Group President
David Smith
Chief Financial Officer
Chris Barkey
Group Director –
Engineering & Technology
Marion Blakey
President & CEO Rolls-Royce
North America
Chris Cholerton
President – Defence Aerospace
Mary Humiston
Group Human Resources Director
Miles Cowdry
Corporate Development Director
Mikael Makinen
President – Marine
Dr Ulrich Döhle
CEO – Power Systems
Mark Gregory
General Counsel
Harry Holt
Group Operations Strategy Director
(Transitional support)
President – Nuclear
Eric Schulz
President – Civil Aerospace
Lawrie Haynes
Executive
(Transitional support)
Tony Wood
Executive
(Transitional support)
Rolls-Royce Holdings plc Annual Report 2015 61
Directors’ Report
Directors’ Report / Chairman’s introduction
CHAIRMAN’S
INTRODUCTION
Early in the year we adopted and published
on our website a new Board governance
document that recognises the requirements
of the UK Corporate Governance Code 2014
(the Code). It contains the terms of reference
of our principal Board committees and the
matters reserved to the Board, and was
further updated by the Board to reflect best
practice in December 2015.
However, we did not stop at Code
compliance. Our governance improvement
work went much deeper this year by steering
and supporting an update of internal
governance arrangements at executive and
operational levels. As a result, a new internal
governance framework document is being
rolled out to employees in 2016 to provide
a clear and common understanding about
how Rolls-Royce works and what is expected
across the key governance areas. You can
read about this important milestone project
in the Nominations & Governance
Committee report on page 73.
The following Board committees met for
the first time under their new mandates:
•
•
the Nominations & Governance
Committee, with an expanded remit
to provide more dedicated time and focus
on corporate governance in addition to
traditional nominations matters;
our combined Safety & Ethics Committee,
created as a dedicated and focused
oversight forum in acknowledgement
of the critical emphasis we place on:
– promoting the highest standards
of ethical behaviours throughout our
organisation and with our partners,
– the safety of our products and our
workforce which can be jeopardised
by inappropriate behaviours as well
as other factors, and
– the continuing development of a
sustainable, socially and
environmentally responsible business;
•
the new Science & Technology
Committee, formed to provide greater
oversight of the Group’s innovation
strategy and the direction of research,
technology and development activities
taking into account scientific and
technological trends.
I led a review that resulted in some
changes to the composition of our
committees during 2015. The changes
reflected the diversity of skills and
experience amongst our Non-executive
Directors (including those who joined the
Board during 2015) and the value that
they could each bring to the particular
work of the committees. More
information on the experience of our
Directors is contained in the Nominations
& Governance Committee report
on page 71. Our current committee
memberships are set out on pages 58
to 61 and on page 65, and you can read
about the remit and work of each
committee during the year in the reports
which follow on pages 69 to 104.
The Board is satisfied that all committees
are working effectively to deliver strong
oversight and governance over their
respective areas of responsibility, and are
reporting appropriately to the Board, in
accordance with their terms of reference.
The Board and each of its committees
have also worked during the year to
implement the recommendations made
by Independent Audit in its 2014 Board
effectiveness review. Independent Audit
returned to conduct a follow-on survey
and review in 2015 of how this work had
progressed. You can read more about this
on page 66. This was a useful
independent assessment of
improvements made throughout the year
and also served to identify further areas
for our continued focus into 2016.
Strong corporate governance
sets the right tone to drive
appropriate conduct and
behaviour across all that we do.”
Ian Davis
Chairman
In its stewardship of Rolls-Royce, the Board
recognises that excellence in corporate
governance is essential in order to generate and
protect value for our investors. This requires
continuous focus but is particularly important
in times of change and transformation. It is not
just a matter of ensuring compliance with the
latest regulatory guidance; strong corporate
governance is the over-arching principle which
gives management the confidence to run
a sustainable business within an agreed
framework of strategic direction and risk
appetite. It sets the right tone to drive
appropriate conduct and behaviour across
all that we do.
This year we have taken steps to improve the
frequency and quality of our interactions
with major shareholders and will continue
to work on this. You can read more about
this activity on page 68.
62 Rolls-Royce Holdings plc Annual Report 2015
Corporate governance
CORPORATE GOVERNANCE
The Board
The role of the Board
providing leadership, knowledge and experience
overseeing and monitoring business performance,
to support and guide the Executive Leadership Team
setting Group strategy and objectives, considering
internal controls, governance and risk
management
recommendations from the Executive Leadership Team
shareholder engagement
Chairman*
Ian Davis
effective running of the Board and its
committees in accordance with the highest
standards of corporate governance
setting the Board agenda
managing the Board to ensure adequate
time for discussion of all agenda items
ensuring the Board receives accurate,
timely and clear information
Senior Independent Director*
Lewis Booth
being available to major shareholders if they
have concerns which have not been resolved
through the normal channels of the Chairman,
Chief Executive or other Executive Directors
conducting an annual review of the
performance of the Chairman
providing a sounding board for the Chairman
Other Non-executive Directors
providing skills and external experience to support the Chairman and management
Chief Executive*
Warren East
overseeing the day-to-day operation
of the Group’s business
establishing and maintaining formal
and appropriate delegations of authority
developing and implementing the Group’s
maintaining a close working relationship
strategy as approved by the Board
with the Chairman
Other Executive Directors
providing management perspective to support the Board’s decision making
Company Secretary*
Pamela Coles
providing governance, advisory and
administrative support to all Directors
acting as Secretary to the Board and its committees
ensuring compliance with Board procedures
and corporate governance requirements
administering the process for Directors
to access external independent advice
at the Company’s expense
assisting the Nominations & Governance
Committee with plans for Directors’ induction
and ongoing training
* These roles are set out in writing and have been agreed by the Board.
The Board committees
Nominations & Governance
Committee
Remuneration
Committee
Audit
Committee
Safety & Ethics
Committee
Science & Technology
Committee
Board composition
Remuneration policy
Financial reporting
S&E governance framework
R&T/R&D strategy
Succession planning
Board nominations
Board evaluation
Corporate governance
Incentive design and setting
of targets
Executive remuneration
review
Internal controls
S&E policies and practices
E&T processes
Risk management
S&E training
Internal audit
S&E risk management
External auditor
S&E investigations
Cyber security
Sustainability
Technology capabilities
and skills
R&D investments
Technology trends and risks
Rolls-Royce Holdings plc Annual Report 2015 63
Directors’ Report
Directors’ Report / Corporate governance
CORPORATE GOVERNANCE CONTINUED
The UK Corporate Governance Code 2014 (the Code)
Key matters reserved to the Board:
The Board considered the Company’s compliance with the Code
during the year. Please see our compliance statement on page 67.
• the Group’s long-term objectives, strategy and risk appetite
• shareholder engagement and general meetings
The Board
The Board is ultimately responsible to shareholders for the direction,
management and performance of the Company.
Details of the Board are set out on pages 58 to 61 and on page 63.
Details of the Executive Directors’ service contracts and the
Non-executive Directors’ letters of appointment are on page 85.
Details of their remuneration and share interests are set out in the
Directors’ Remuneration Report on pages 77 and 86.
The Board has a schedule of matters reserved for its approval, generally
being those items which affect the shape, risk profile or strategic
direction of the Group, as well as key financial items. The schedule of
reserved matters was reviewed during the year and is contained within
our Board governance document available on the Group’s website.
• overall corporate governance arrangements including Board composition,
committee terms of reference and Directors’ independence and conflicts
of interest
• internal controls, governance and risk management frameworks
• changes to the corporate or capital structure of the Company
• annual report and accounts, and financial and regulatory announcements
• significant changes in accounting policies or practices
• policy on, and declarations of, payments to shareholders
• annual budgets and financial expenditure and commitments above levels
set by the Board
• remuneration policy and remuneration of Directors and senior executives
• new share incentive or pension plans or major changes to existing plans
Area of focus
Matters considered
Outcome
Strategy and
risk
Merits of maintaining a balanced portfolio of power
systems businesses; markets, technology and product
strategy; risks to the strategy; effectiveness of risk
management system and review of principal risks with
detailed review of export control compliance, business
continuity, competitive position, talent and capability,
and major programme delivery principal risks.
Strategic priorities endorsed and re-set; considered
approach to risk appetite; enhanced risk
management system and principal risks approved.
Individual principal risks considered in detail and
the Board was assured that they are managed
appropriately.
Key areas of focus for 2016
Driving new strategic priorities
towards future return to growth.
Enhanced internal controls
and assurance framework.
Shareholder
engagement
Need to improve shareholder communications;
ValueAct’s acquisition of significant shareholding.
More detail provided in investor presentations;
greater level of engagement with investors;
constructive dialogue with ValueAct.
Continued engagement to rebuild
investor confidence.
Financial and
operational
performance
Changes to
capital structure
Payments to
shareholders
Board
composition
Financial performance and outlook; product incidents
in service; health, safety and the environment.
Updates to trading outlook; oversight
of management information project.
Share buyback; levels of access to debt capital; ADR
programme; new US bond programme; new EIB loan;
update of EMTN programme and refinancing
of revolving credit facility (RCF).
Share buyback halted. Approved revised ADR
programme, US bond, EIB loan, update to EMTN
programme and refinancing of RCF.
Driving operational performance
improvements and better
forecasting.
New share plans and updated
remuneration policy for adoption
in 2017.
Progressive payment policy and level of payment
declared in February 2015.
Approved final payment to shareholders in respect
of financial year 2014 and interim payment for 2015.
Review of policy on payments
to shareholders.
Succession planning for Chief Executive and
Non-executive Directors.
Appointment of a representative of ValueAct as a
director.
Appointments of Warren East as Chief Executive,
and Irene Dorner, Alan Davies and Sir Kevin Smith
as Non-executive Directors approved.
Executive succession and
retention planning.
Considered appointing a representative of ValueAct
under usual nomination process, which continued
into 2016.
Further consideration of balance
of Board and its committees in light
of Directors’ terms of office.
Corporate
governance
Committee terms of reference, Directors’
independence, Chairman’s evaluation.
Changes to composition of committees and updates
to committee terms of reference approved.
Embedding new internal governance
framework into the businesses.
New internal governance framework.
Internal governance framework approved subject
to reflecting changes to organisational design.
Further implementation of Board
evaluation recommendations.
Annual budgets
2016 budget in light of 2015 financial performance
and headwinds.
Budget approved.
Capital
investments
Investment in new facilities in Indianapolis.
Investment approved subject to State funding.
Delivering competitively to our
customers’ needs.
Continuing transformation
of our infrastructure.
64 Rolls-Royce Holdings plc Annual Report 2015
Corporate governance
Board and committee meetings held in 2015
NG
R
A
SE
B
B
NG
R
IAB
B
NG
R
B
NG
R
A
ST
AGM
B
SE
B
January
February
March
April
May
June
NG
A
SE
B
July
B
B
NG
R
A
SE
ST
B
NG
R
A
B
NG
B
NG
R
B
August
September
October
November
December
Committee meetings
Other meetings
NG Nominations & Governance Committee
SE Safety & Ethics Committee
B Board
R Remuneration Committee
ST Science & Technology Committee
IAB International Advisory Board
A Audit Committee
AGM Annual General Meeting
Denotes unscheduled meeting
The unscheduled meetings were held to consider:
• Warren East’s selection and appointment as Chief Executive
(March and April)
• ValueAct’s acquisition of a major shareholding in the Company
(September and November)
• Board committee composition arising from director changes (May)
• Sir Kevin Smith’s appointment as a Non-executive Director (September)
• the Group’s trading outlook and market updates (July and November)
Some of the Directors were unable to participate in the unscheduled meetings of the Nominations & Governance Committee held in April and November and the unscheduled
Board meetings in July and November as these meetings were called on short notice.
Board and committee attendance at scheduled meetings
Number of meetings
Current Directors
Ian Davis
Warren East 1 (appointed Chief Executive on 3 July 2015)
Dame Helen Alexander 2
Lewis Booth
Ruth Cairnie
Sir Frank Chapman
Alan Davies (appointed 1 November 2015)
Irene Dorner (appointed 27 July 2015)
Lee Hsien Yang (joined Audit Committee 2 March 2015)
John McAdam 3
Colin Smith
David Smith
Sir Kevin Smith (appointed 1 November 2015)
Jasmin Staiblin
Former Directors
James Guyette (left 8 May 2015)
John Neill (left 8 May 2015)
John Rishton (left 2 July 2015)
Board
(9)
9/9
9/9
6/9
9/9
9/9
8/9
2/2
4/4
9/9
8/9
9/9
9/9
2/2
8/9
4/4
4/4
5/5
Audit
(5)
–
2/2
–
5/5
–
–
2/2
3/3
4/4
–
–
–
–
–
–
2/2
–
Nominations &
Governance
(4)
4/4
1/1
3/4
4/4
4/4
4/4
2/2
2/2
Remuneration
(5)
–
–
5/5
–
5/5
5/5
–
–
Safety & Ethics
(4)
–
–
1/4
–
–
4/4
–
2/2
Science &
Technology
(2)
–
1/1
–
2/2
2/2
–
–
–
4/4
4/4
–
–
2/2
4/4
–
–
–
–
5/5
–
–
–
–
–
–
–
4/4
2/4
–
–
–
–
–
–
–
–
–
–
–
1/1
2/2
–
–
–
1 Warren East stepped down from the Nominations & Governance, Audit and Science & Technology Committees upon his appointment as Chief Executive on 3 July 2015.
2 Dame Helen Alexander missed the scheduled Board meetings in January, March and July, the scheduled Nominations & Governance Committee meeting in July and the
Safety & Ethics Committee meetings in February and July for medical reasons. She also missed the Safety & Ethics Committee meeting in December due to an unavoidable
diary clash with a board meeting of UBM plc, of which she is chairman.
3
John McAdam missed the scheduled meetings of the Board and Safety & Ethics Committee in June and the Safety & Ethics Committee meeting in July due to unavoidable
diary clashes with board meetings of J. Sainsbury plc, of which he is the senior independent director. The clashes in June were caused by the Company needing
to reschedule to an alternative date at short notice.
Rolls-Royce Holdings plc Annual Report 2015 65
Directors’ Report
Directors’ Report / Corporate governance
CORPORATE GOVERNANCE CONTINUED
Appointments and re-appointments
We refreshed the composition of the Board with the appointment
of three new Non-executive Directors; Irene Dorner, Alan Davies and
Sir Kevin Smith. Warren East, who was previously a Non-executive
Director, became the Chief Executive in July. Details of the
appointment process are set out in the Nominations & Governance
Committee report on pages 70 and 71.
Board induction and development
Newly appointed Directors follow a tailored induction programme,
facilitated by the Company Secretary, which includes dedicated time
with Group executives and scheduled trips to a variety of business
sites. All Directors are encouraged to visit the Group’s facilities and to
undertake additional training. Details are set out in the Nominations &
Governance Committee report on page 72, which includes information
on Warren East’s induction into the role of Chief Executive.
Independence of the Non-executive Directors
The Board conducts a review of the independence of the Non-executive
Directors every year, based on the criteria in the Code and following
consideration by the Nominations & Governance Committee as
detailed on page 73. This review was undertaken in December 2015
and the Board concluded that all the Non-executive Directors
remained independent in character and judgement.
The Code does not consider the test of independence to be appropriate
to the chairman of a company. However, Ian Davis did meet the Code’s
independence criteria upon his appointment as Chairman in May 2013.
His other external commitments are described on page 58.
We are satisfied that, based on the Directors’ current declared
interests, the Board will comply with the Financial Reporting
Council’s (FRC) forthcoming independence requirements
on the maximum number of external directorships.
Board evaluation
The Board and its committees undertake an annual evaluation of their
performance. At least once every three years this is conducted by
external consultants. In 2014, the evaluation was conducted by
Independent Audit who returned in 2015 to conduct a follow-up review
of progress made. During the year, the Company subscribed to an online
service from Independent Audit which was used to support the Board’s
review. Independent Audit also acted as an external sounding board in
support of the Company’s review of its internal governance, risk
management, controls and assurance frameworks and in supporting
an online survey of the effectiveness of the external audit process.
Independent Audit does not have any other connection to the Company.
The original Board evaluation included; a review of Board and
committee papers; interviews with Directors and others who have
significant interaction with the Board or its committees including
external auditors and remuneration advisors; and observations
of a number of the meetings. In 2015, Independent Audit were engaged
to conduct a follow-up review of progress towards the 2014
recommendations. This was not a full independent board evaluation
assessment but, as an externally-facilitated review, it involved the
Directors completing an online, tailored, self-assessment questionnaire
and Independent Audit speaking with the Chairman, the Chief
Executive and each of the Board committee chairs. Independent Audit
also observed the November Board and Audit Committee meetings
with a review of the papers for those meetings. The meetings observed
were heavily focused on the Company’s revised financial outlook,
resulting in the market update given on 12 November 2015.
Independent Audit presented the results of the 2015 follow-up
review to the Board in December 2015. In the context of 2015 having
been a particularly challenging year for the Company and its
shareholders, Independent Audit noted that progress had been
made in certain areas, including the Board’s overall composition
and clearer risk management processes.
There were several areas identified as needing further attention.
These were generally related to making the most effective use
of the Board’s time, and included:
• making sure the Board’s discussions and agenda focus on and align to
the transformation agenda and near-term priorities;
• ensuring that the Board devotes sufficient time to support this
focus through discussion, and minimises lengthy management
presentations;
• drawing out clear conclusions from Board discussions more
effectively to guide management activity;
• giving due time and attention to people development,
talent and succession; and
• better use of metrics and risk reporting in Board papers.
Having gone through the effectiveness review described above, and
acknowledging the disappointing and difficult financial position that
dominated discussions at the November Board and Audit Committee
meetings, with the consequential market update, the Directors are
satisfied that the Board and each of its committees operated
effectively during 2015. Nonetheless, based on Independent Audit’s
observations, the Board is continuing to work on actions to improve
its effectiveness for the future.
Lewis Booth, as the Senior Independent Director, led the Board’s
annual review of the Chairman’s performance. Lewis obtained input
from each of the Directors individually and then led a review at the
Board meeting in December (without the Chairman present). The
Board unanimously agreed that the Chairman’s performance
continued to be very strong through a difficult year for the Group,
with him showing particular leadership and commitment in the
process to select and appoint a new Chief Executive and further
Non-executive Directors. The Board noted the Chairman’s exceptional
level of dedication to his role and to his engagement with the other
Directors in keeping them informed and soliciting their views.
66 Rolls-Royce Holdings plc Annual Report 2015
Corporate governance
Executive Leadership Team (ELT)
International Advisory Board (IAB)
The ELT is an executive-level forum of the Group’s most senior leaders,
chaired by the Chief Executive. It helps to develop, implement and
monitor strategic and operational plans, considers the continuing
applicability, appropriateness and impact of risks, leads the Group’s
culture and aids the decision making of the Chief Executive in
managing the business. Following the initial results of the Chief
Executive’s operational review announced in November, the ELT
membership was restructured under the oversight of the
Nominations & Governance Committee to reflect the transformation
agenda. The current ELT composition is set out on page 61.
Directors’ indemnities and insurance
In accordance with the Articles, and to the extent permitted by law,
the Company has entered into separate deeds of indemnity with its
Directors, which were in force during the financial year and remain
in force at the date of this report. The Company also maintains
directors’ and officers’ liability insurance cover for its Directors and
officers. This cover also extends to directors of subsidiary companies.
Internal control and risk management
In developing our internal governance framework we looked at how
the Company’s risk management and internal control systems work
together. You can read about our risk management system on
page 54 and details of our internal control system are in the Audit
Committee report on page 95. As noted on page 54, these systems
are designed to manage, rather than eliminate, the risk of failure
to achieve objectives and so can only provide reasonable and not
absolute assurance against material misstatement or loss. The
Board, with the advice of the Audit Committee, has reviewed the
effectiveness of the risk management and internal control systems,
including controls in relation to the financial reporting process,
for the year under review and to the date of this report. The Board
confirms that the Group continues to be compliant with the standards
in the Code and with the Financial Conduct Authority’s (FCA)
Disclosure Rules and Transparency Rules in this regard.
Financial reporting
The Group has a comprehensive budgeting system with an annual
budget approved by the Board. Revised forecasts for the year are
reported at least quarterly. Actual results, at both a business and
Group level, are reported monthly against budget and variances are
kept under scrutiny. Since his appointment in November 2014, the
Chief Financial Officer has undertaken an in-depth review of our
management reporting and budgeting processes to ensure that
they fully provide what we need, taking into account the size and
shape of the Group and the structure of our operations.
Financial managers are required to acknowledge in writing that
their routine financial reporting is based on reliable data and that
results are properly stated in accordance with Group requirements.
In addition, for annual reporting, business presidents and finance
directors are required to confirm that their business has complied
with the Group’s finance manual.
The IAB meets annually with the Board in order to provide
perspective and to guide strategy development through discussions
on the geo-political and global economic landscape that may
present risks or opportunities to the Group’s current or future
activities. The members of the IAB during the year were as follows:
Lord Powell of Bayswater
(Chairman of the IAB)
Former Foreign Affairs and
Defence Adviser to Prime
Ministers Baroness Thatcher
and Sir John Major
Vladimír Dlouhý
International advisor to
Goldman Sachs for Central and
Eastern Europe, European
deputy chairman of the
Trilateral Commission,
president, Czech Chamber
of Commerce and a former
member of the Czech
Government
Sir Rod Eddington
Chairman of JP Morgan
(Australia & New Zealand)
and former chief executive
of British Airways Plc
Dr Fan Gang
Professor at China’s Academy
of Social Sciences and director
of National Economic Research
Institute, China
*Mustafa Koç
Chairman of Koç Holding, A.Ş.,
Turkey
* Mr Koç passed away on 21 January 2016
Dr Pedro Sampaio Malan
Chairman of Itaú Unibanco’s
international advisory board and
a member of the boards of EDP
– Energias do Brasil, Souza Cruz,
Brazil, Mills Engenharia, a director
of Thomson Reuters Founders
Share Company and a member of
the Temasek international panel
Akio Mimura
Senior advisor, honorary chairman
Nippon Steel & Sumitomo
Metal Corporation, Japan,
chairman of The Japan Chamber
of Commerce and Industry
Lubna Olayan
CEO and deputy chairperson
of the Olayan Financing
Company, Saudi Arabia
Ratan Tata
Chairman Emeritus of Tata
Sons Limited, India
Ambassador Robert B. Zoellick
Chairman of Goldman Sachs
International Advisors, senior
fellow at the Belfer Center at
Harvard University, former
president of World Bank Group,
US Trade Representative and
US Deputy Secretary of State
Compliance with the UK Corporate Governance Code 2014
(the Code)
The Company is subject to the provisions of the Code, a copy of
which is available from the FRC’s website.
The Board considers that the Company complied in all material
respects with the Code for the whole of the year to 31 December
2015. The Board has agreed that arrangements by which staff may
raise concerns in confidence are considered and reviewed by the
Safety & Ethics Committee. Matters relating to financial reporting,
the integrity of financial management or fraud are also reported
to the Audit Committee.
The Audit Committee has again considered the requirement to
put the audit out to tender every ten years and in line with the
FRC’s transitional arrangements will do so during the tenure
of the current lead partner which expires in 2017. The current
auditors will not be invited to tender. More detail is in the Audit
Committee report on page 96.
Rolls-Royce Holdings plc Annual Report 2015 67
Directors’ Report
Directors’ Report / Corporate governance
Directors’ Report / Corporate governance
CORPORATE GOVERNANCE CONTINUED
Shareholder engagement
The Board recognises and values the importance of building strong
investor relations through a proactive communication programme.
During 2015, various steps have been taken to improve performance
in this area. These have included strengthening our investor relations
function with the addition of experienced professionals and
enhancing our disclosure and transparency through improved
reporting. In addition, the frequency of meetings with investors has
significantly increased under the new management team. As a result,
we have also been proactive in obtaining an understanding of
shareholder views on key matters affecting the Group and have
incorporated these into our Board deliberations around strategy,
performance improvement and governance. In addition, we have
benefited from a review of investor opinion undertaken by an
independent investor representative body towards the end of the year.
Our Investor Relations department plays a key role in building
stronger, clearer discussions with current and potential investors
and the sell-side analysts that help inform them. During the year,
the team have undertaken an extensive investor relations
programme involving formal events, smaller group and one-on-one
investor meetings. The purpose of the larger events is to highlight
particular issues, themes or announcements that the Group believes
develop a better understanding of the business or which warrant
further explanation or clarification. The events also provide
opportunities for shareholders to meet members of the senior
management team. The one-to-one and group meetings provide
an opportunity for investors to ask more detailed questions that can
improve individual knowledge or clarify areas of misunderstanding.
This is a critical process in ensuring market participants make
decisions based on a consistent understanding of the information
available. In this way, shareholders should be able to consistently
and fairly value the Group’s businesses.
As a matter of best practice, the Chairman and Senior Independent
Director, together with other members of the Board, make
themselves available to meet with investors at their request
and regularly attend key investor relations events.
During the year, it has been necessary to provide material updates
on performance and expectations to the market alongside regular
results communications. This included a capital markets
presentation in London on 24 November 2015, attended by over
200 investors and analysts. At the same time, the team have held
over 500 one-to-one and group meetings, led by the Chief Executive,
Chief Financial Officer, the Director of Investor Relations or
members of the Investor Relations team. In addition, the Chairman
has undertaken 20 meetings or detailed discussions with investors,
five at their request. Lewis Booth, our Senior Independent Director,
has met with a further six investors, two at their request. Both the
Chairman and Senior Independent Director, together with other
68 Rolls-Royce Holdings plc Annual Report 2015
members of the Board, attended various formal meetings, including
the capital markets presentation on 24 November 2015.
In early 2016, Dame Helen Alexander, as chair of the Remuneration
Committee, consulted with a number of investors on proposed
changes to the 2016 annual bonus and Performance Share Plan
(PSP). You can read more about this in the Remuneration Committee
report on pages 74 to 76.
The Group’s website rolls-royce.com contains up-to-date
information for shareholders, including an online version of the
Annual Report, share price information, news releases,
presentations to the investment community and information on
shareholder services. It also contains factual data about the Group’s
businesses, products and services.
Annual General Meeting (AGM)
All holders of ordinary shares may attend the Company’s AGM at
which the Chairman and Chief Executive present a review of the key
business developments during the year. This year’s AGM will be held
at 11.00am on 5 May 2016 at the East Midlands Conference Centre,
University Park, Nottingham NG7 2RJ.
Shareholders can ask questions of the Board on the matters put to
the meeting, including the Annual Report and the running of the
Company generally. All Directors are invited to attend each AGM.
Unless unforeseen circumstances arise, all committee chairmen
will be present to take questions at the AGM.
The Company intends to send the AGM notice and any relevant
related papers to shareholders at least 20 working days before
the meeting. The AGM notice will be available to view on the
Group’s website.
A poll is conducted on each resolution at the AGM and at all other
Company general meetings. Shareholders have the opportunity
to cast their votes in respect of proposed resolutions either in
person at the general meeting, or by appointing a proxy to vote on
their behalf. Proxy appointments can be made either electronically
or by post. Following the AGM, the voting results for each resolution
are published and made available on our website.
Information included in the Directors’ report
Certain additional information can be found in the section
headed ‘Other statutory information’ on pages 178 to 181 and
is incorporated into and forms part of this Corporate Governance
report by reference.
Committee reports / Nominations & Governance Committee
NOMINATIONS &
GOVERNANCE COMMITTEE
Highlights
Warren East appointed as Chief Executive
Three new independent Non-executive Directors appointed
Board governance document adopted and published
Development of internal governance framework
Committee members and attendance
The members of the committee are shown
on pages 58 to 61 and their attendance
is shown on page 65. The Chief Executive
may attend meetings of the committee
by invitation.
The committee met nine times during
2015 and focused in particular on the
composition of the Board resulting in the
appointments of three new Non-executive
Directors and the appointment of a new
Chief Executive. The committee also
oversaw the restructuring of the ELT.
2015 overview
Introduction
In January 2015, the Nominations
Committee’s remit was widened to include
governance issues and was renamed the
Nominations & Governance Committee.
This committee is now responsible for
advising the Board on governance best
practice, ensuring that the Group policies
are appropriate and for keeping the
composition and balance of the Board and
senior executive team under review. The
committee also has responsibility for the
identification of the future composition
needs of the Board in light of the business
strategy and for maintaining the Group’s
position on diversity and inclusion.
The committee reports to the Board on
Directors’ conflicts and regularly reviews
the Non-executive Directors’
independence.
The committee has been allocated
responsibility on behalf of the Board for
overseeing the Group’s principle risk
relating to talent and capability.
Principal responsibilities
The key areas of responsibility of the
committee are:
to review the structure, size and
composition (including skills, knowledge,
experience and diversity) of the Board and
its committees, to ensure that it remains
appropriate, and to make recommendations
to the Board of any changes;
to consider and formulate succession
plans for Directors and senior executives;
to evaluate any conflicts of interest that
the Directors may have;
to review the Board’s diversity policy
and its implementation;
to report to the Board on the Company’s
corporate governance practices and
procedures to ensure that they remain
appropriate for a group of the size and
complexity of Rolls-Royce, taking account
of best practice principles;
to oversee the induction plans
for Directors;
to review the results of the annual Board
performance evaluation;
to review the independence of the
Non-executive Directors; and
to conduct an annual evaluation of the
Chief Executive.
Rolls-Royce Holdings plc Annual Report 2015 69
Directors’ Report
Directors’ Report / Committee reports
Directors’ Report / Corporate governance
Nominations & Governance Committee
NOMINATIONS & GOVERNANCE
COMMITTEE CONTINUED
At a glance
Area of focus
Matters considered
Outcome
Succession
planning and talent
management
The selection and appointment of a new Chief Executive
following John Rishton’s decision to retire.
Identifying the need for, and leading the process to select
and recruit, additional Non-executive Directors.
The committee recommended the appointment of Warren East as
Chief Executive and the appointments of Irene Dorner, Alan Davies
and Sir Kevin Smith as Non-executive Directors during 2015.
Pages 58 to 61 set out their biographies.
Succession planning below Board level, including the
composition of the current ELT.
Changes to the ELT were agreed during 2015, resulting in the
composition shown on page 61.
Committee
membership
Committee refreshment arising from the retirement
of one Non-executive Director and from the appointment
of Warren East as Chief Executive.
The Board committees were restructured, and care was taken
during the recruitment process to ensure the skills and experience
of the new Non-executive Directors were closely matched to the
needs of the committees.
The revised committee membership is shown on pages 58 to 61 and
on page 65.
Governance
framework
The implementation of the revised governance
framework and the extension of the framework below
Board level.
Approval of the new framework, including new delegated
authorities, and a process for rolling out the framework across
the business.
Security clearance Management of sensitive information to ensure good
oversight and control.
Shareholder
engagement
Liaison with ValueAct, a major shareholder, and
consideration of its request for a seat on the Board.
The committee established a sub-committee of Non-executive
Directors who have received appropriate clearance to enable them
to review highly sensitive and secure data.
The committee agreed appropriate levels of engagement with the
board of Rolls-Royce North America following the departure of
James Guyette.
A constructive dialogue was established with ValueAct and
the committee initiated a nomination process to consider the
proposed candidacy. This process continued into 2016.
Conflicts of interest Directors are required to declare any potential or actual
conflicts of interest that could interfere with their ability
to act in the best interests of the Group.
The committee considered the schedule of Directors’ conflicts
of interests and recommended that the schedule be approved
by the Board.
Reviewed its own
terms of reference
Evaluation of how well the members and the committee
operated during the year.
The committee reviewed and updated its terms of reference.
In November 2015, it reviewed whether it had undertaken all the
work required under its terms of reference and concluded that
it had done so.
Principal risk
Board composition
A principal risk to the business is the inability to attract, retain and
incentivise sufficiently talented individuals to deliver our strategy.
The committee is responsible for reviewing talent and capability
management and it held two sessions during 2015 which looked
at the processes to develop and maintain talent. These discussions
focused around the need to reconfigure the ELT and resulted
in its new composition to deliver business transformation,
as shown on page 61.
The committee reviews the balance and composition of the Board,
its committees and the senior executive team on a regular basis.
This review is not just to identify current needs, but also to consider
longer term succession planning. To this end a sub-committee of the
Nominations & Governance Committee was formed in February 2015
to look specifically at contingency planning for senior positions.
This sub-committee reported back to the committee in February 2015
and in April 2015, when the committee considered the appointment
of a new Chief Executive.
70 Rolls-Royce Holdings plc Annual Report 2015
Committee reports / Nominations & Governance Committee
At the start of the year, the committee discussed James Guyette’s
wish to retire and recommended to the Board that he step down at
the end of the 2015 Annual General Meeting. As part of the Board
evaluation carried out in 2014, the current Board mix was discussed
and it had been agreed that, subsequent to James leaving the Board,
his role as CEO & President of Rolls-Royce North America would
no longer be a Board position, although his successor would still
be a member of the Executive Leadership Team.
In early 2014, the committee had carried out work with Korn Ferry on
succession planning. Korn Ferry provides services of this nature,
including the recruitment of senior executives, for the Group but
does not have any other relationship with the Group. When, in 2015,
John Rishton indicated his desire to retire as Chief Executive,
Korn Ferry’s work was revisited by a sub-committee of the
Nominations & Governance Committee. This sub-committee
comprised the Chairman, the Senior Independent Director and three
other independent Non-executive Directors. Specific criteria for
the role were drawn up and approved by the full committee and a
comprehensive international search was undertaken with assistance
from Korn Ferry. This search identified a small number of suitable
candidates, each of whom was assessed against the objective
criteria. The members of the Nominations & Governance Committee
met each of the candidates on the shortlist and, as a result of this
process and following formal meetings with the remaining Board
members, Warren East was confirmed as the preferred candidate.
Warren has been a Non-executive Director of Rolls-Royce since
January 2014 and he was CEO of ARM Holdings from 2001 to 2013.
On becoming Chief Executive of Rolls-Royce on 3 July 2015, Warren
stepped down from the Audit, Nominations & Governance and
Science & Technology Committees.
The Chairman led the evaluation of Warren’s performance as
Chief Executive, including obtaining the individual views of the other
Directors and certain members of the ELT, before a discussion at the
committee’s meeting in December 2015. It was recognised that in his
first few months in the role Warren had made a strong start. He
very quickly identified the need for improvements in operational
performance and cost reduction, set the priorities and communicated
these effectively both internally and with investors, and is reshaping the
leadership team to support the transformation agenda.
The committee started the process for recruiting additional Non-
executive Directors during 2014 by considering the areas of expertise
that should be added to the Board. An external search consultant was
appointed and a wide range of high calibre independent candidates
was considered and a number of interviews were carried out.
As a result of this process, Irene Dorner joined the Board as a
Non-executive Director in July 2015 and joined the Audit Committee,
the Safety & Ethics Committee and the Nominations & Governance
Committee. Irene has considerable international and risk
management experience and is a powerful advocate for diversity
and inclusion in the workplace.
The committee considered that strengthening the level of financial
and technical accounting knowledge on the Board would be beneficial
and, again following the process outlined above, Alan Davies joined
the Board as Non-executive Director with effect from 1 November
2015 and joined the Audit and Nominations & Governance
Committees. Alan is a fellow of the Institute of Chartered Accountants
in Australia. As well as his strong financial background which includes
serving as CFO of Rio Tinto’s iron ore division, Alan brings with him a
wealth of leadership experience, including transforming operational
performance and driving cultural change through a complex global
organisation. He has deep knowledge of China and key emerging
markets. Alan’s appointment also adds further expertise in safety
and operations to the Rolls-Royce Board.
Dame Helen Alexander will be stepping down from the Board after the
AGM in May 2016, having served on the Board for nine years. At that
time, she will be succeeded as Chairman of the Remuneration
Committee by Ruth Cairnie. Being mindful of the need for progressive
refreshing of the Board and committees, the committee recommended
to the Board the appointment of a further Non-executive Director
in 2015 to ensure that there was scope for an orderly hand over.
Sir Kevin Smith was appointed on 1 November 2015 as a
Non-executive Director, joining the Remuneration, Nominations &
Governance and Science & Technology committees. Sir Kevin was a
full-time partner at Unitas Capital, a leading Asian private equity
firm, having served for nine years as CEO of GKN plc, the global
engineering and manufacturing company. Before then, Sir Kevin
spent nearly 20 years with British Aerospace (BAE plc). In February
2016, Sir Kevin was appointed as chairman of the Science &
Technology Committee. Kevin’s knowledge of Asia and of complex
technological and engineering companies is extremely relevant to
Rolls-Royce and we look forward to his contribution.
In February 2016, Lewis Booth indicated his intention to relinquish his
responsibility as Senior Independent Director once a successor has been
appointed. Lewis will continue as Chairman of the Audit Committee.
Details of the Non-executive Directors’ experience are on pages 58 to 61.
MWM Consulting was engaged as the search consultant for the
new Non-executive Directors. The committee set out the particular
skills required in its brief, and this resulted in the appointment of
Irene, Alan and Sir Kevin. MWM does not provide any other services to,
and is not otherwise connected with, the Company.
Each of the Directors continues to be effective and able to devote
sufficient time to the business of the Company and the Board
will continue to keep its composition under review.
Succession planning and diversity
The Board fully recognises and embraces the benefits of diversity
throughout the Group as it brings a broader and more rounded
perspective to decision making. Increasing diversity influences our
approach to succession planning and training and development.
The percentage of women on the Board has increased to 29%
(2014: 21%).
We believe a wide range of people and experiences is beneficial
to achieving a high performance culture and enables innovation
helping us to deliver excellence. Rolls-Royce is a founder patron
of the FTSE 100 Cross-Company Mentoring Programme which aims
to widen the pool of eligible female board candidates.
Rolls-Royce Holdings plc Annual Report 2015 71
Directors’ Report
Directors’ Report / Committee reports
Directors’ Report / Corporate governance
Directors’ Report
Nominations & Governance Committee
NOMINATIONS & GOVERNANCE
COMMITTEE CONTINUED
We will continue to consider candidates for future Board appointments
from the widest possible pool and will only engage executive search
firms that have signed up to the Voluntary Code of Conduct for Executive
Search Firms in relation to gender diversity on corporate boards.
We acknowledge the challenges of increasing diversity within our
industry, and during 2015 we have introduced a refreshed global
diversity and inclusion policy and a revised anti-discrimination policy.
These policies aim to ensure that all employees are treated with respect
and are empowered to deliver without fear of bullying or harassment.
We recognise that succession planning includes nurturing our
own talent pool and giving opportunities to those who are
capable of growing into more senior roles. We give full and fair
consideration to all employment applications from people with
disabilities, and support disabled employees, helping them to make
the best use of their skills and potential. We have continued to roll
out High Performance Culture training across the globe to help
employees increase their personal effectiveness.
We have established several Employee Resource Groups (ERGs) to
support our diversity and inclusion strategy. These include Women’s
ERGs in Germany, US and the UK, a Lesbian, Gay, Bisexual and
Transgender ERG and an African Caribbean ERG, both in the UK.
The committee held two focused sessions during the year
to consider succession planning at a senior level including the
re-organisation of the ELT announced in December 2015.
Board induction and development
The Company Secretary is responsible for ensuring that new
Directors have a thorough and appropriate induction. Each of the
newly appointed Non-executive Directors has participated in a
structured induction programme and received a comprehensive
data pack providing detailed information on the Group.
Each induction has been based on the individual Director’s
requirements and included meetings with relevant employees,
committee members and external advisers to ensure that each
new Director understands the Group’s governance structure.
Warren East received a comprehensive induction when he was
appointed as Chief Executive. Before he took over as Chief Executive,
Warren met with a number of key customers, suppliers and partners.
He also spent several weeks visiting Rolls-Royce sites and meeting the
senior personnel as well as Board members. In gaining an understanding
of the business challenges, he listened to feedback from most areas
of the business. Since joining, Warren has conducted town hall meetings
at sites he has visited and introduced a blog on the Group’s intranet
which has been well received as it opens up a constructive dialogue
with employees on the issues that affect the businesses.
In 2015, the training programme was improved to ensure that all
Directors had the opportunity to visit our operations. We regard
visits by Board members to our operating sites as an important part
of continuing education as well as an essential part of the induction
process. They help Directors understand the business through direct
experience of operating processes with employees at different
levels. This also gives the Non-executive Directors the chance to
spend time with their fellow Directors in a less formal setting,
which helps them to understand the concerns of their colleagues.
In 2015, Irene Dorner and Sir Kevin Smith visited operational sites
in Derby, UK and Irene visited production sites in the US (Indianapolis
and Crosspointe); Ian Davis spent time with the supply chain team
in Derby, UK and visited customers and suppliers in Japan, Singapore,
Dubai and Washington, DC. Ruth Cairnie visited Friedrichshafen,
Germany and Singapore, and Dame Helen Alexander visited our
operations in Alesund, Norway. The members of the Audit Committee
visited the Company’s IT security operations centre to better
understand the Group’s preventative and reactive cyber security
measures. Metrics to support cyber security assurance have since
been developed and are periodically reviewed by the Audit Committee.
Further training is available for all Directors, as appropriate,
including presentations by the executive team on particular aspects
of the business. For example, all Non-executive Directors undertook
the Group’s ethics training programme during the year.
Board members by gender
Senior managers by gender
Employee headcount by gender
Female
Male
2014
2015
4 (29%)
10 (71%)
2014
2015
Female
Male
14 (7%)
177 (93%)
2014
2015
Female
Male
7,700 (15%)
42,800 (85%)
72 Rolls-Royce Holdings plc Annual Report 2015
Committee reports / Nominations & Governance Committee
There is a procedure for Directors to take independent professional
advice at the Company’s expense and every Director has
independent access to the Company Secretary.
Governance
The committee has taken on responsibility for corporate governance.
Early in the year, we adopted the Company’s Board governance document
which sets out the roles and responsibilities of the Board members, the
matters reserved to the Board and the terms of reference of the Board
committees. This was revised for best practice in December 2015.
We also oversaw the development of the Company’s internal governance
framework, which documents how the Group is run, and recommended
its adoption by the Board. It sets out the mandatory policies, processes
and procedures that must be observed by all employees, clarifies the way
in which we take decisions, and sets out our system of internal controls,
risk management and assurance. Greater clarification around these
issues is important in strengthening our governance and ensuring that
all employees know what is expected of them.
We reviewed an updated schedule of delegated authorities and
recommended it to the Board for adoption. The revised authority
levels are better aligned with business needs, helping the Group to
eliminate unnecessary bureaucracy whilst still providing sufficient
control to manage the business responsibly at appropriate levels.
The committee reviewed the process through which sensitive
information is handled and recommended the formation of
a sub-committee, comprising only Directors who have received
security clearance, to ensure proper oversight and control of classified
information. This sub-committee will meet whenever necessary.
During 2015, an executive-level Disclosure Committee was
established to review all significant market announcements and
to oversee the process for handling any price-sensitive information.
At its first meeting in October 2015, the committee members agreed
its terms of reference, and received a refresher training session on
inside information from the Company’s external legal counsel. The
committee met in November 2015 to consider the operating review
update and interim management statement before their release to
the market, and again in February 2016 to review at executive level
this Annual Report (including as to whether it is fair, balanced and
understandable) and our draft preliminary results announcement.
A key challenge has been to improve the quality and timeliness
of information going to the Board and its committees. The Company
has worked to develop better information systems, creating a more
consistent and thoughtful approach to presenting technical materials.
This has included the creation of templates and the introduction of a
new board portal for easier and more timely access to key information.
As recommended in the 2014 Board evaluation, we have encouraged
more frequent conversations between senior management and
the Directors, resulting in greater and more constructive challenge,
although the latest Board evaluation indicated that we can do more
in this area, see page 66.
We reviewed Board committee membership during the year, following
Warren East’s appointment as Chief Executive, John Neill’s departure
from the Board and the appointments of Irene Dorner, Alan Davies and
Sir Kevin Smith. The committee took care to ensure that the skills and
experience of the new Board members were closely aligned with the
needs of the Board committees. Committee membership is set out
on pages 58 to 61 and on page 65. The Nominations & Governance
Committee is satisfied with the composition of the committees and
confident that they are appropriately resourced to carry out their work.
The committee also reviewed and recommended to the Board that
Jasmin Staiblin, who has served on the Board for three years, be
reappointed for a further three-year term, subject to shareholder
support at the AGM.
As part of its consideration of Board governance, the committee
discussed the implications of ValueAct increasing its shareholding
in the Company and encouraged engagement with ValueAct
to better understand its views.
Conflicts of interest and independence
The Nominations & Governance Committee reviews the Non-executive
Directors’ external interests every year to determine whether each
Non-executive Director continues to be independent. In undertaking
this evaluation, the committee considers among other things the
criteria set out in the UK Corporate Governance Code.
It also reviews any potential conflicts of interest as they arise and
recommends to the Board whether these should be authorised and
whether any conditions should be attached to any such authorisation.
Additionally, an annual review of conflicts of interest is undertaken
to ensure that any previously authorised conflicting situations are
still being dealt with appropriately.
Having carried out a rigorous review, the committee advised the
Board that it considered that each of the Non-executive Directors,
with the exception of the Chairman for whom the test is not
appropriate, continued to be independent and recommended
to the Board that each of the Directors’ potential conflicts of interest
be authorised, without attaching any conditions.
Looking forward
Good progress has been made on governance during the year.
For 2016, the key focus for the committee will be the development
of succession plans to ensure that the transformation of the
business is adequately supported below Board level and
underpinned by the internal governance framework.
Ian Davis
Chairman of the Nominations & Governance Committee
Rolls-Royce Holdings plc Annual Report 2015 73
Directors’ Report
Directors’ Report / Committee reports
Remuneration Committee
REMUNERATION
COMMITTEE REPORT
Highlights
No salary increases in 2016
No annual bonus payout for 2015
Amended 2016 Performance Share Plan (PSP) awards, including reduction in value
New operational measures for annual bonus
Principal responsibilities
The key areas of responsibility of the
committee are:
to set and monitor the strategy and policy
for the remuneration of the Executive
Directors, the Chairman and members
of the ELT;
to determine the design, conditions
and coverage of annual and long-term
incentive plans for senior executives and
approve total and individual payments
under the plans;
to determine targets for any
performance-related pay plans;
to determine the issue and terms
of all share-based plans available
to all employees; and
to oversee any major changes in
remuneration.
Committee members and attendance
The committee membership and attendance
throughout 2015 is shown on page 65.
In addition to the committee members, the
Chief Executive, the Chief Financial Officer
and any of the Non-executive Directors may
attend one or more meetings at the
committee’s invitation, although none was
present during any discussions of his or her
own remuneration package. The committee
is supported by the Company Secretary,
the Senior Reward Consultant, the Group
Human Resources Director, and the Global
Performance, Reward & Pensions Director.
The committee is advised by Deloitte LLP,
an independent reward adviser.
2015 overview
Introduction
On behalf of the Board, I am pleased
to introduce our 2015 Directors’
Remuneration Report, for which we seek
your support at our forthcoming AGM,
in May 2016. This report is designed
to demonstrate the link between the
Group’s strategy, its performance,
and the remuneration outcomes for
our executives, in particular the
Executive Directors. 2015 has been a
challenging year for the Group and this is
reflected in the performance outcomes
for Executive Directors under the annual
bonus and Performance Share Plan (PSP).
At the beginning of 2016, we consulted
with shareholders on proposed changes
to the 2016 annual bonus and PSP. These
changes are within the terms of the
approved policy, but we nevertheless
considered it important to receive input
from shareholders to maintain an open
dialogue on remuneration and inform our
judgement. The changes were driven by
our desire to ensure we properly motivate
our Executive Directors to deliver the
transformation of the business, whilst
balancing the interests of shareholders
and other stakeholders.
Following Warren East’s appointment
as Chief Executive and the changes he is
introducing to the business, we will be
reviewing our Group-wide remuneration
policies in the second half of 2016.
74 Rolls-Royce Holdings plc Annual Report 2015
Committee reports / Remuneration Committee
At a glance
Area of focus
Matters considered
Outcome
Base salaries
Base salaries, in accordance with the
remuneration policy.
Increases to salaries for Colin Smith and David Smith March 2015.
There will be no salary increases for Executive Directors in 2016.
Bonus outcome
Performance against bonus targets under
the Annual Performance Related Award
(APRA).
No bonus was paid in 2015 for 2014 performance and there will be no awards
for 2015 performance.
The maximum bonus opportunity for the Chief Executive was 180% of salary,
and for the other Executive Directors 150% of salary.
Performance
Share Plan
award
Performance under the 2012 and 2013 PSP.
The 2012 PSP awards vested at 67% of the maximum award. The 2013 PSP awards
will lapse in their entirety in March 2016 based on performance to 31 December 2015.
Leadership team
changes
The terms of appointment for Warren
East, who was appointed as Chief
Executive on 3 July 2015.
The committee agreed the terms for Warren East’s appointment. His base salary on
appointment was £925,000 (equivalent to his predecessor) with a maximum annual
bonus opportunity of 180% of salary, a maximum PSP opportunity of 180% of salary
and a pension allowance of 25% of salary.
James Guyette retired from the Board
on 8 May 2015 and John Rishton retired
as Chief Executive on 2 July 2015.
Neither James Guyette nor John Rishton participated in the 2015 annual bonus. No bonus
was paid in respect of 2014 and therefore no entitlement to shares arose on retirement.
The deferred portion of their 2013 APRA awards was released following retirement.
2016 Annual
Performance
Related Award
Performance measures for the APRA
to align better with the operational
strategy for 2016. As Rolls-Royce enters a
year of transformation it is important that
the Group does not lose focus on the
customer, and that employees are fully
engaged in the transformation.
2016 PSP award
Performance conditions for the 2016
PSP award.
Governance
matters
Terms of reference to ensure their
adequacy and we assessed whether
all the requirements of the terms of
reference had been satisfied during
the year.
PSP awards made in 2013 and 2014 remained subject to performance targets with any
vesting time-apportioned for the period that they were employed by the Group. The 2013
award has now lapsed in full based on Company performance.
The committee agreed that for 2016, the weightings of the bonus performance measures
will be:
•
37.5% Profit and 37.5% Cash performance
•
12.5% Customer performance (measured through on-time delivery percentage)
•
12.5% People engagement (measured through our Employee Opinion Survey)
Any bonus payments in relation to non-financial measures will be subject to achieving
a PBT threshold. Awards earned based on the above measures will continue to be subject
to the personal performance assessment which allows an uplift of up to 20% or a
reduction, potentially to zero.
The maximum opportunities will remain 180% of salary for the Chief Executive and 150%
of salary for other Executive Directors.
For 2016 our PSP will continue to be based on CPS and TSR measures with an EPS hurdle.
The EPS hurdle will be measured over the period 2017-2018. This change reflects the
current business circumstances and the intended level of stretch of the EPS hurdle which
is used as an underpin rather than as a primary performance measure.
In recognition of the change, the maximum 2016 PSP award level will be reduced
from 180% to 150% of salary for the Chief Executive and from 150% to 130% for other
Executive Directors.
The terms of reference for the committee were reviewed and minor amendments made.
The committee was satisfied that it had covered all the requirements of the terms
of reference during the year.
Rolls-Royce Holdings plc Annual Report 2015 75
Directors’ Report
Directors’ Report / Committee reports
Remuneration Committee
Remuneration policy
This year we have sought to improve the design and content of this
report to include a summary of our remuneration policy, which
remains unchanged. It is shown on page 90 and the full policy
is available on the Group’s website at rolls-royce.com.
The remuneration policy is designed to attract, retain and motivate
executives of the highest quality, incentivising them to deliver
exceptional business performance aligned with the interests
of shareholders, and to deliver the Group’s strategy and objectives.
The committee has taken care to ensure any change or decision
made around remuneration potential for Executive Directors remains
consistent and in line with the policy as approved by shareholders.
We value shareholder comments on our remuneration policy and
its implementation. We strive to ensure that the policy is aligned
to our strategy to enable the Group to attract and keep the experts
and expertise it needs to deliver business success. To this end, the
committee will begin a review of the policy in 2016 and propose
any changes necessary to ensure that it continues to support
our strategy. We will consult with shareholders on any proposed
changes before bringing a revised policy to the 2017 AGM
for approval.
Committee composition
I was delighted to welcome Sir Kevin Smith as a new member
to the committee when he joined the Company as a Non-executive
Director in November 2015. With his operational experience,
Sir Kevin is well placed to offer challenge and support in ensuring
that our remuneration is aligned to our strategy and incentivises
exceptional performance.
We reviewed our annual bonus plan to ensure that it will support
the transformation of the business. As a result, and following
consultation with shareholders, we have introduced two new metrics
into the APRA, relating to on-time delivery to customers and to
employee engagement, that reflect the strategic priorities of the
business over the next year. Underlying financial performance will
still be required in order for the bonus to pay out. The introduction
of the measures will support the work being carried out on business
transformation and operational effectiveness.
In recognition that 2016 is set to be a challenging year, and to ensure
that our incentives are motivating for the management team during
the transformation of the business, the committee reviewed the PSP.
Following consultations with shareholders, we agreed that, for
awards made in 2016 only, the EPS condition which underpins the
award would measure growth over two years (2017-2018) against
a baseline set in 2016. In recognition of this, the 2016 awards will be
scaled back so that the maximum PSP award for the Chief Executive
will be reduced from 180% to 150% of salary, and from 150% to 130%
of salary for other Executive Directors.
2015 outturn
Group underlying profit and cash flow were below the base level
performance targets and therefore no bonus will be paid for 2015.
Over the three-year performance period for the 2013 PSP grant,
earnings per share growth was -13.7% which was below the growth
measured by the OECD index of consumer prices of 3.8%. Cash flow
per share was 45p against a threshold of 53p. As EPS growth and CPS
were below the performance targets the awards have not vested
and have lapsed.
The committee composition is shown on page 65.
2016 salary review
The committee has reviewed the salary levels of the Executive
Directors in accordance with the remuneration policy and
concluded that no increases to Executive Directors’ base salaries
will be made in 2016.
2016 Annual General Meeting (AGM)
The main part of this report sets out the way in which our
remuneration policy was implemented during the year ended
31 December 2015 and shows how we intend to apply it in 2016.
This will be subject to an advisory shareholder vote at the AGM.
Having served for nine years, I will be stepping down from the
Board after the AGM in May 2016 and Ruth Cairnie will become
chairman of the Remuneration Committee at that point. We look
forward to your continuing support.
Dame Helen Alexander
Chairman of the Remuneration Committee
Activities
No substantial changes have been made to Directors’ remuneration
in 2015 and all payments made have been in line with the approved
remuneration policy.
We reviewed the executive reward framework as a precursor to
the review of the remuneration policy and considered the high-level
assumptions that would be used for the review.
We set the package terms for the appointment of Warren East
as Chief Executive and delegated authority to the Chairman
to finalise the terms of his contract within the agreed parameters.
Details of his terms of appointment are shown on page 75.
We also considered and agreed the overall remuneration proposals
for the new members of the ELT who were appointed during the year.
John Rishton and James Guyette both retired during the year, and the
committee considered the terms of their departures. The committee
agreed that neither should participate in the 2015 APRA, and that the
deferred shares under the 2013 APRA be released to them after
retirement. Their existing PSP awards remained, subject to performance
conditions and time apportionment for the period that they were
employed by the Group, in accordance with the rules of the PSP.
76 Rolls-Royce Holdings plc Annual Report 2015
Committee reports / Directors’ Remuneration Report
DIRECTORS’ REMUNERATION REPORT
The table below shows how we have applied the remuneration policy during the year. It discloses all the elements of remuneration received
by the Executive and Non-executive Directors during 2015.
SINGLE FIGURE OF REMUNERATION (AUDITED)
Salary/fees (A)
£000
Benefits (B)
£000
Bonus (C)
£000
LTIP (D)12
£000
Other (E)
£000
Sub-total
£000
Pension (F)
£000
Total
£000
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
421
546
535
274
–
519
Executive Directors
Warren East1
–
525
Colin Smith
David Smith2
84
James Guyette3
510
Mark Morris4
429
John Rishton5
925
2,295 2,473
Sub-total
Chairman and Non-executive Directors
425
Ian Davis
85
Dame Helen Alexander
100
Lewis Booth
Ruth Cairnie6
23
85
Sir Frank Chapman
Alan Davies7
–
Irene Dorner8
–
Warren East1
67
67
Lee Hsien Yang
67
John McAdam
67
Jasmin Staiblin
Sir Kevin Smith9
–
Iain Conn10
29
John Neill11
67
1,119 1,082
Sub-total
3,555
3,414
Total
425
90
110
70
90
12
30
45
70
70
70
12
–
25
8
140
35
47
–
82
312
1
–
11
3
4
–
–
–
8
–
7
–
–
3
37
349
–
138
2
108
149
151
548
3
1
6
–
3
–
–
–
2
–
1
–
–
2
18
566
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
395
–
–
–
404
–
–
–
– 1,217
– 2,016
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– 2,016
–
–
–
–
597
–
597
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
597
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
429
–
686 1,058
86
570
321 1,022
597
578
601 2,293
5,037
3,204
426
90
121
73
94
12
30
45
78
70
77
12
–
28
428
86
106
23
88
–
–
67
69
67
68
–
29
69
1,156 1,100
4,360 6,137
–
114
131
140
27
171
504
262
137
–
153
303
840 1,102
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
840 1,102
543
–
826 1,189
113
741
583 1,526
597
715
754 2,596
4,044 6,139
426
90
121
73
94
12
30
45
78
70
77
12
–
28
428
86
106
23
88
–
–
67
69
67
68
–
29
69
1,156 1,100
5,200 7,239
1 Warren East was appointed as Chief Executive on 3 July 2015, having served as a Non-executive Director since 1 January 2014
2 David Smith was appointed on 4 November 2014
3 James Guyette left the Board on 8 May 2015. His 2014 pension contributions have been restated to allow for the 2014 employer true up match contribution paid in March 2015 of £42,000
4 Mark Morris left the Board on 4 November 2014
5 John Rishton stepped down as Chief Executive, and left the Board, on 2 July 2015
6 Ruth Cairnie was appointed on 1 September 2014
7 Alan Davies was appointed as a Non-executive Director on 1 November 2015
8 Irene Dorner was appointed as a Non-executive Director on 27 July 2015
9 Sir Kevin Smith was appointed as a Non-executive Director on 1 November 2015
10 Iain Conn left the Board on 1 May 2014
11 John Neill left the Board on 8 May 2015
12 The 2014 LTIP has been recalculated using the actual vesting prices of 935.19p per share for James Guyette and Colin Smith and 1042.00p per share for John Rishton. The original
calculation used a share price of 863.65p per share, the average share price over the quarter ended 31 December 2014, as the vesting price was not known at the date of approval
of the 2014 Directors’ Remuneration Report.
Rolls-Royce Holdings plc Annual Report 2015 77
Directors’ Report
Directors’ Report / Committee reports
Directors’ Remuneration Report
DIRECTORS’ REMUNERATION REPORT
CONTINUED
Notes to the table
A. Salary and fees
BASE SALARY
The Executive Directors’ salaries are normally reviewed, but not necessarily increased, with effect from 1 March each year.
The committee reviewed the salary levels of Executive Directors during the year and the result of the review is shown below.
David Smith’s increase reflected that his salary on appointment was positioned to allow scope for progression in the role and the increase
made in the year reflects that progression. The increase in March 2015 for Colin Smith reflected the importance of the role to the business
along with the current modest positioning compared to the external market range. No salary increases will be made for any Executive
Directors in 2016.
EXECUTIVE DIRECTORS’ BASE SALARY
Name
Warren East1
Colin Smith
David Smith2
1 Warren East’s salary level was effective from the date of his appointment on 3 July 2015
2 David Smith’s salary level was effective from the date of his appointment on 4 November 2014
Base salary as at
1 March 2016
£925,000
£550,000
£540,000
Base salary as at
1 March 2015 or date of
appointment if later
£925,000
£550,000
£540,000
Base salary as at
1 March 2014 or date of
appointment if later
n/a
£525,000
£510,000
NON-EXECUTIVE DIRECTORS’ FEES
The Chairman’s fee is reviewed by the Board as a whole on the recommendation of the Remuneration Committee and the review of the
Non-executive Directors’ fees is reserved to the Executive Directors, who take recommendations from the Chairman. No individual may
be involved in setting his or her own fee. The Non-executive Directors’ fees were last increased with effect from 1 May 2014.
The Chairman and Non-executive Directors are not eligible to participate in any of the Group’s share schemes, incentive arrangements
or pension schemes. We have in place a facility to enable Non-executive Directors to use some or all of their fees, after the appropriate
statutory deductions, to make market purchases of shares in the Company on a monthly basis. Dame Helen Alexander, Ruth Cairnie,
Sir Frank Chapman, Ian Davis, Lee Hsien Yang and John McAdam participate in this facility.
NON-EXECUTIVE DIRECTORS’ BASE FEES
Chairman
Other Non-executive Directors
Chairman of the Audit Committee
Chairman of the Safety & Ethics Committee
Chairman of the Remuneration Committee
Chairman of the Science & Technology Committee
Senior Independent Director
2015
£000
425
70
25
20
20
20
15
2014
£000
425
70
25
20
20
–
15
OUR APPROACH TO SALARY AND FEES IN 2016
The committee reviewed Executive Directors’ salaries in early 2016 and agreed that no increases would be made in 2016
No increases will be made to Non-executive Directors’ fees in 2016
78 Rolls-Royce Holdings plc Annual Report 2015
Committee reports / Directors’ Remuneration Report
B. Benefits
Benefits are provided to ensure that remuneration packages remain sufficiently competitive to recruit and retain directors and to enable
them to devote themselves fully to their roles. The benefits for the Non-executive Directors relate predominantly to travel and subsistence
associated with attending Board meetings, although for Directors who are based outside the UK, the Company may pay towards tax advice
and filing. Additionally, the Chairman has occasional use of a chauffeur service to enable him to undertake his duties. The taxable value
of all benefits paid to Executive Directors in the year is shown below.
BENEFITS PAID TO EXECUTIVE DIRECTORS
Car or car
allowance
including fuel
allowance
£000
Chauffeur
services
£000
Financial
planning
£000
Medical
insurance
£000
Life
assurance
£000
Club
membership
fees
£000
Travel and
subsistence
£000
Housing
costs
£000
Total
£000
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
2015 2014
2015
2014
2015
2014
7
30
16
5
–
14
72
–
24
2
11
21
21
79
–
–
–
–
–
14
14
–
–
–
–
–
14
14
–
6
–
20
–
6
32
–
5
–
18
5
5
33
1
2
2
–
–
1
6
–
2
–
7
1
2
12
–
–
–
–
–
–
–
–
–
–
33
–
–
33
–
–
–
6
–
–
6
–
–
–
24
–
–
24
–
4
5
–
–
–
9
–
3
–
–
23
3
29
–
98
12
16
–
47
173
–
104
–
15
99
106
324
8
140
35
47
–
82
312
–
138
2
108
149
151
548
Executive Directors
Warren East1
Colin Smith
David Smith2
James Guyette3
Mark Morris4
John Rishton5
Total
1 Warren East was appointed as Chief Executive on 3 July 2015, having served as a Non-executive Director since 1 January 2014
2 David Smith was appointed on 4 November 2014
3 James Guyette left the Board on 8 May 2015
4 Mark Morris left the Board on 4 November 2014
5 John Rishton stepped down as Chief Executive, and left the Board, on 2 July 2015
OUR APPROACH TO BENEFITS IN 2016
There will be no change to our approach to benefits in 2016.
C. Annual bonus
Annual bonuses may be awarded under the Annual Performance Related Award plan (APRA).
Executive Directors receive any annual bonus awarded in March following the performance period. The bonus is paid partially in cash
and partially in deferred shares. The deferred shares are held in trust for two years before being released, subject to the recipient being
still employed by the Group. Ordinary shares held as deferred shares may receive a bonus issue of C Shares during the deferral period.
Malus and clawback provisions apply from the date of deferral until three years after the release of shares where there is: a material
misstatement of the audited results; failure of risk management; serious reputational damage to the Company as a result of misconduct;
serious breach of the Company’s global code of conduct; or gross misconduct.
APRA 2015
The Remuneration Committee reviewed the 2015 outturn against the performance measures, which are shown overleaf, and determined
that bonuses would not be payable this year in respect of performance in 2015.
The APRA bonus is determined by Group financial performance and personal performance. The Group financial performance is based on
the addition of the cash and profit outturns, with a specified minimum level to be achieved on both, after deduction of the cost of bonus
from profit. For 2015, the Group financial measures were cash flow performance and group underlying profit. Levels for both of these
measures and their outcome are shown overleaf.
Rolls-Royce Holdings plc Annual Report 2015 79
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DIRECTORS’ REMUNERATION REPORT
CONTINUED
APRA 2015 PERFORMANCE MEASURES
Base
Target
Maximum
2015 performance measures
Profit1
Cash1
%
15
30
50
£m
1,526
1,526
1,536
%
15
30
50
£m
250
350
500
2015 outcome
Profit
£m
1,339
Cash
£m
123
Total bonus
£m
–
1
Group underlying profit and cash flow, after deduction of the cost of bonus, and excludes the impact of acquisitions and disposals in the year and unbudgeted foreign
exchange translation effects where material. To reflect the disposal of the Energy business, the December 2014 forecast cash and profit were added back to the 11 month
actual results for bonus purposes.
For 2015 the base level of profit was set to be equivalent to target profit. This was to take into account the cost of the all-employee bonus
plan which was aligned to the base and target profit levels.
OUR APPROACH TO APRA IN 2016
Following consultation with shareholders at the start of 2016, the committee has determined that the bonus in respect of 2016 will be
operated on similar terms to 2015, but with the introduction of two new measures relating to customer and employee engagement.
Any bonus in relation to the non-financial targets will be subject to achieving the underlying profit threshold. The maximum bonus
opportunities for Executive Directors will remain at 180% for the Chief Executive and 150% of salary for other Executive Directors.
2016 WEIGHTINGS OF ANNUAL BONUS MEASURES
Target
Profit
%
37.5
Cash
%
37.5
Customer
%
12.5
Employee
engagement
%
12.5
Maximum
business outturn
%
100
Base, target and maximum performance levels are set for all business measures and result in 30%, 60% and 100% outturns respectively.
The individual performance multiplier can increase or decrease the business outturn in a range of 0-120%.
D. Long-term incentives – Performance Share Plan
The PSP is designed to attract, reward and incentivise selected senior executives who can influence the long-term performance of the Group
and execute the business strategy. Under the PSP, awards of shares are made annually at the start of a three-year performance period. Vesting is
subject to continued employment and achievement of Group performance conditions. The number of shares vesting will be determined by the
growth in aggregate cash flow per share (CPS) over the performance period. CPS is calculated as reported cash flow before the cost of business
acquisitions or proceeds of disposals, foreign exchange translation effects, special payments into pension schemes and payments to
shareholders, divided by the weighted average number of shares in issue. CPS is cumulative over a three-year period.
A further performance measure is growth in TSR relative to the FTSE 100 or other appropriate index. Where the Company’s TSR is ranked
above median in the comparator group, the shares vesting will be increased by 25%. Where the ranking is at or within upper quartile,
the vesting will be increased by 50%. Between these two points, the increase will be on a straight-line basis.
The above measures are underpinned by growth in earnings per share (EPS). Growth in EPS must exceed the growth in an appropriate
consumer price index over the performance period for any shares to vest.
PSP awards are conditional share awards and are usually made in March with the release date being in March of the year following the
completion of the three-year performance period, subject to the performance criteria being met. Malus and clawback provisions apply
where: there has been a material misstatement of audited results; serious financial irregularity which invalidates the targets set;
reputational damage; material failure of risk management; a serious breach of the Company’s global code of conduct; or individual
gross misconduct. Clawback will apply for three years after the vesting of an award.
80 Rolls-Royce Holdings plc Annual Report 2015
Committee reports / Directors’ Remuneration Report
PSP 2015 AWARD CPS TARGETS (AUDITED)
The cash flow per share targets for awards made in 2015 were as follows and straight-line vesting will apply between these points.
Aggregate cash flow per share over the three-year period
Less than 60p
60p
100p
Maximum award released %
0
30
100
PSP AWARDS MADE IN MARCH AND SEPTEMBER 2015
In 2015, Executive Directors received PSP awards in line with the remuneration policy as follows:
Warren East
Colin Smith
David Smith
Date
of award
01/09/2015
02/03/2015
02/03/2015
Number
of shares
awarded
126,643
58,263
57,204
% of
salary
100
100
100
Performance
period
end date
31/12/2017
31/12/2017
31/12/2017
All awards are made as performance shares based on a percentage of salary and the value is divided by the average share price over
a three-day period before the date of grant, being 944p for the award on 2 March 2015 and 730p for the award on 1 September 2015.
The face value is the maximum number of shares that would vest (150% of the award) multiplied by the share price at the date of grant.
If the EPS and base CPS targets are not achieved, no shares vest.
PSP AWARDS VESTING IN MARCH 2016
The following sets out details in respect of the March 2013 PSP award, for which the final year of performance was the 2015 financial year.
Subject to performance conditions, these shares would be due to vest in March 2016, three years after the award was made.
EPS growth (hurdle)
Aggregate CPS
(100% of award)
Outcome
Targets for 2013 – 2015 period
Awards may vest if EPS growth exceeds the OECD index of consumer prices.
Awards will lapse if hurdle not met.
Aggregate CPS over three-year period of less than 56p – zero vesting.
Aggregate CPS over three-year period of 94p – 100% vesting.
Performance against targets
EPS growth of -13.7% over the three-year period
underperformed the hurdle which was 3.8%.
Aggregate CPS performance over three years of 45p.
None of the 2013 shares will vest in March 2016.
OUR APPROACH TO PSP IN 2016
Following consultation with shareholders in early 2016, the committee has confirmed that CPS and TSR measures will continue to determine
the vesting level of PSP awards for 2016 as described on page 80. The EPS hurdle will also apply, although we have adjusted the calculation
of the EPS hurdle to reflect the very significant changes in our business environment and our financial forecasts, so that the measurement
will be based on two years’ performance from 2016. Without such adjustments, the awards would have been inappropriate as they would be
unlikely to vest. To balance this, we have reduced the PSP award levels from a maximum of 180% to 150% of salary for the Chief Executive and
from a maximum of 150% to 130% of salary for other Executive Directors. These targets have been chosen to ensure that the participants
maintain focus on people and customers during the transformation of our business. The performance targets in respect of the 2016 to 2018
performance period under the aggregate CPS measure will be as follows:
PSP AWARDS TO BE MADE IN MARCH 2016
Aggregate CPS over the three-year period
Less than 10p
10p
50p
Maximum award released %
0
30
100
The stretch of these targets reflects that, during this period, we will be investing in ramping up Trent production, IT, new product technology
and aftermarket capability, while at the same time implementing cost reductions and inventory and working capital improvements. We
believe that the combination of the EPS hurdle, CPS and TSR targets are challenging and that the performance necessary to achieve awards
towards the upper end of the range is stretching. They should not, therefore, be interpreted as providing guidance on the Group’s
future performance.
Rolls-Royce Holdings plc Annual Report 2015 81
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DIRECTORS’ REMUNERATION REPORT
CONTINUED
E. Other items
As reported last year, loss of office payments were made to Mark Morris who left the Group on 4 November 2014. The contractual payments
were made in accordance with his service agreement. The total amount paid to him in 2015 in respect of the termination of his employment
was £597,000.
Dr Mike Howse retired from the Board on 30 June 2005. Following his retirement, he has continued to be retained by the Company
for his expertise in engineering and was paid £21,420 in 2015 (2014: £27,720).
F. Pension entitlements (audited)
The Group’s UK pension schemes are funded, registered schemes and were approved under the regime applying until 6 April 2006.
They include both defined contribution and defined benefit schemes. In the defined benefit schemes, normal retirement age is 62.
Warren East and David Smith receive a cash allowance in lieu of a defined contribution pension accrual. Colin Smith, who opted out
of future pension accrual with effect from 1 April 2006 and opted out of salary linkage with effect from 30 November 2015, receives
a cash allowance in lieu of future pension accrual.
John Rishton, who left the Group and started to receive his pension on 2 July 2015, was a member of one of the Group’s UK defined
contribution pension schemes and received employer contributions restricted to the annual allowance limits with any excess paid as a cash
allowance. The cash allowance was calculated as equivalent to the cost of the pension contributions allowing for National Insurance costs.
James Guyette, who retired and started to receive his pension on 8 May 2015, participated in pension plans sponsored by Rolls-Royce North
America Inc (RRNA). He was a member of two defined benefit plans in the US, one qualified and one non-qualified. He accrued a retirement
lump sum in both of these plans. In addition, he was a member of two 401(k) Savings Plans in the US, one qualified and one non-qualified,
to which both he and RRNA contributed. He was also a member of an unfunded non-qualified deferred compensation plan in the US, to which
RRNA made notional contributions. Under the defined benefit plans, the earliest age at which benefits could be taken without consent and
without actuarial reduction was 65.
Details of the defined benefits of the Executive Directors as at 31 December 2015 in the Group’s UK and US pensions schemes are given below.
DEFINED BENEFITS SCHEMES
Year
Colin Smith (UK pension funds)
James Guyette1 (US pension funds)
2015
£000
385
–
2014
£000
393
1,380
1 James Guyette retired on 8 May 2015 and received his full accrued lump sum entitlement amounting to £1,577,000, translated at £1=US$1.4833
Details of defined contribution pension contributions paid by the Group on behalf of the following Executive Directors are given below.
DEFINED CONTRIBUTION SCHEMES
James Guyette1 (left 8 May 2015)
John Rishton (left 2 July 2015)
2015
£000
183
20
2014
£000
391
42
1 Benefits are translated at £1=US$1.5292 (2014: US$1.6477). There has been an adjustment to the defined pension contributions over 2014 to allow for the 2014 employer true up
match contribution paid in March 2015 of £42,000
82 Rolls-Royce Holdings plc Annual Report 2015
Committee reports / Directors’ Remuneration Report
OUR APPROACH TO PENSIONS IN 2016
We will continue to operate both defined benefit and defined contributions pension plans on the basis outlined above.
We will continue to allow Directors to receive a cash allowance in lieu of contributions to the defined contribution pension scheme.
Where a Director has opted out of future accrual under the defined benefit pension scheme, we will continue to pay a cash allowance
in lieu of that accrual.
OTHER INFORMATION
A. CHIEF EXECUTIVE PAY, TSR AND ALL-EMPLOYEE PAY
This section of the report enables our remuneration arrangements to be seen in context by providing:
• a seven-year history of our Chief Executive’s remuneration;
• our TSR performance over the same period;
• a comparison of the year-on-year change in our Chief Executive’s remuneration with the change in average remuneration across the Group; and
• a year-on-year comparison of the total amount spent on employment costs across the Group and shareholder payments.
CHIEF EXECUTIVE PAY
Year
2015
2015
2014
2013
2012
2011
2011
2010
2009
Single figure
of total
remuneration
£000
543
754
2,596
6,228
4,577
3,677
3,832
3,914
2,409
Annual bonus
as a % of
maximum
–
–
–
55
85
63
–
100
29
Chief Executive1
Warren East
John Rishton2
John Rishton
John Rishton
John Rishton
John Rishton
Sir John Rose3
Sir John Rose
Sir John Rose
PSP
as a % of
maximum
–
–
45
100
–
–
75
100
93
1 On 31 March 2011, Sir John Rose retired and John Rishton was appointed. John Rishton retired on 2 July 2015 and Warren East was appointed on 3 July 2015.
2
John Rishton received a special grant of shares on joining the Company on 1 March 2011 to mirror the shares he forfeited on resigning from his previous employer.
The share price had increased from 483.50p at the time this grant was made to 870p at the end of 2014. These are the main reasons why John Rishton’s remuneration
in 2012 and 2013 exceeded that of his predecessor.
The remuneration for Sir John Rose does not include any pension accrual or contribution as he received his pension from 1 February 2008.
3
Rolls-Royce Holdings plc Annual Report 2015 83
Directors’ Report
Directors’ Report / Committee reports
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DIRECTORS’ REMUNERATION REPORT
CONTINUED
TSR PERFORMANCE
The Company’s TSR performance over the previous seven years compared to a broad equity market index is shown in the graph below.
The FTSE 100 has been chosen as the comparator because it contains a broad range of other UK listed companies.
The graph shows the growth in value of a hypothetical £100 holding in the Company’s ordinary shares over seven years, relative to the
FTSE 100 index.
e
c
n
e
P
500
400
300
200
100
2008
2009
2010
2011
2012
2013
2014
2015
Rolls-Royce TSR
FTSE 100 TSR
PERCENTAGE CHANGE IN CHIEF EXECUTIVE REMUNERATION
The following table compares the percentage change in the Chief Executive’s salary, bonus and benefits to the average percentage change
in salary, bonus and benefits for all UK employees from 2014 to 2015.
CHANGE IN REMUNERATION
Chief Executive
UK employees average
Salary
–%
3.2%
Benefits
(40)%
0.6%
Annual
bonus
–%
–%
UK employees were chosen as a comparator group in order to avoid the impact of exchange rate movements over the year. UK employees
make up 46% of the total employee population.
RELATIVE SPEND ON PAY
The following chart sets out the percentage change in payments to shareholders and overall expenditure on pay across the Group.
Payments to shareholders (£m)*
(note 17 – Financial Statements)
Group employment costs (£m)
(note 7 – Financial Statements)
2014
2014
2015
2015
414
430
+4%
2014
2015
3,357
3,080
-8%
0
0
100
100
200
200
300
300
400
400
500
500
0 500 1,000 1,500 2,000 2,500 3,000 3,500
*
Value of C Shares issued during the year
84 Rolls-Royce Holdings plc Annual Report 2015
Committee reports / Directors’ Remuneration Report
B. CONTRACTUAL ARRANGEMENTS
The Executive Directors have service agreements that set out the contract between each Executive Director and the Company. Executive
Directors retain payments received from serving on the boards of external companies, the details of which are given below.
The Chairman and other Non-executive Directors have letters of appointment. Each Non-executive Director serves for a term of three
years, which may be extended twice up to a total of nine years.
EXECUTIVE DIRECTORS’ SERVICE CONTRACTS
Warren East
Colin Smith
David Smith
PAYMENTS RECEIVED FOR SERVING ON EXTERNAL BOARDS
Warren East1
David Smith
1 Warren East stepped down from the board of De La Rue Holdings plc on 23 July 2015
NON-EXECUTIVE DIRECTORS’ LETTERS OF APPOINTMENT
Ian Davis
Dame Helen Alexander
Lewis Booth
Ruth Cairnie
Sir Frank Chapman
Alan Davies
Irene Dorner
Lee Hsien Yang
John McAdam
Jasmin Staiblin
Sir Kevin Smith
Date of contract
21 April 2015
1 July 2005
19 November 2014
Notice period
Company
12 months
12 months
12 months
Notice period
individual
6 months
6 months
6 months
Directorships held
Dyson Limited, De La Rue
Motability Operations Group plc
Payments Received £000
44
43
Date of appointment letter
1 March 2013
1 September 2007
25 May 2011
1 September 2014
10 November 2011
29 July 2015
12 February 2015
1 January 2014
19 January 2008
21 May 2012
1 October 2015
Current letter of appointment end date
29 February 2016
31 August 2016
24 May 2017
31 August 2017
9 November 2017
31 October 2018
26 July 2018
31 December 2016
18 February 2017
20 May 2018
31 October 2018
Rolls-Royce Holdings plc Annual Report 2015 85
Directors’ Report
Directors’ Report / Committee reports
Directors’ Remuneration Report
DIRECTORS’ REMUNERATION REPORT
CONTINUED
C. DIRECTORS’ INTERESTS IN SHARES (AUDITED)
We believe it is important that the interests of the Executive Directors should be closely aligned with those of shareholders. The deferred
APRA award and the PSP provide considerable alignment. However, participants in the PSP are also required to retain at least one half of
the number of after-tax shares released from the PSP until the value of their shareholding reaches the percentage of salary shown in the
table below. When this level is reached it must be maintained until retirement or departure from the Group. Each Executive Director’s total
shareholding, for the purposes of comparing it with the minimum shareholding requirement, includes shares held: by connected persons;
in the all-employee Share Incentive Plan; and PSP shares that have vested, but does not include unvested PSP awards. The shareholding
requirement is 250% of salary for the Chief Executive and 200% of salary for the other Executive Directors. APRA deferred shares do not
count towards their minimum shareholding requirement.
Each Executive Director has built towards compliance with the minimum shareholding requirement as detailed in the table below.
MINIMUM SHAREHOLDINGS
Year
Warren East
Colin Smith
David Smith
Base salary
£000
925
550
540
Total
shareholding
24,990
208,105
20,328
Minimum
shareholding
requirement
as % of salary
250
200
200
Minimum
shareholding
requirement1
244,969
116,526
114,407
Actual
shareholding as
% of minimum
requirement
10
179
18
1 Salary divided by the March 2015 PSP grant price of 944.00p multiplied by percentage of salary
The Directors and their connected persons had the following interests in the ordinary shares and C Shares of the Company at 31 December 2015,
or at date of leaving or retirement if earlier, as shown in the table below.
DIRECTORS’ SHARE INTERESTS
Conditional
shares not
subject to
performance
conditions
(APRA)
Unvested awards
Conditional
shares
subject to
performance
conditions
(PSP)
Vested awards
Options over
shares subject
to savings
contracts
(ShareSave)
Vested shares
and options
exercised
in year
–
16,000
–
16,307
33,490
126,643
162,903
75,491
103,484
221,238
1,264
758
758
–
1,745
–
66,427
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
C Shares1
–
–
–
–
–
–
–
–
–
1,515,481
–
–
–
–
–
–
–
Ordinary
shares
24,990
208,105
20,328
388,846
503,807
37,476
4,969
60,000
7,482
14,948
10,370
5,000
2,170
2,803
–
20,000
46,616
Executive Directors
Warren East (appointed 3 July 2015)
Colin Smith
David Smith
James Guyette (left 8 May 2015)
John Rishton (left 2 July 2015)
Chairman and Non-executive Directors
Ian Davis
Dame Helen Alexander
Lewis Booth
Ruth Cairnie
Sir Frank Chapman
Alan Davies
Irene Dorner
Lee Hsien Yang
John McAdam
Jasmin Staiblin
Sir Kevin Smith
John Neill (left 8 May 2015)
1 Non-cumulative redeemable preference shares of 0.1p each
86 Rolls-Royce Holdings plc Annual Report 2015
CHANGES IN INTERESTS (AUDITED)
Executive Directors
Warren East
Colin Smith
David Smith
Chairman and Non-executive Directors
Ian Davis
Dame Helen Alexander
Lewis Booth
Ruth Cairnie
Sir Frank Chapman
Alan Davies
Irene Dorner
Lee Hsien Yang
John McAdam
Jasmin Staiblin
Sir Kevin Smith
Committee reports / Directors’ Remuneration Report
Ordinary shares
C Shares
31 December
2015
Changes from
31 December
2015 to
February 2016
31 December
2015
Changes from
31 December
2015 to
February 2016
24,990
208,105
20,328
37,476
4,969
60,000
7,482
14,948
10,370
5,000
2,170
2,803
–
20,000
126
3,403
260
1,362
413
–
782
1,502
–
83
404
89
–
–
–
–
–
–
–
–
–
1,515,481
–
–
–
–
–
–
–
–
–
–
–
–
–
1,273,883
–
–
–
–
–
–
DIRECTORS’ INTERESTS IN UNVESTED AND VESTED AWARDS
WARREN EAST
31 December
2014
–
–
Granted
during year
126,643
126,643
TSR uplift/
dividend
enhancement
–
–
PSP 2015
Total
ShareSave (options)1
Total
–
–
1,264
1,264
–
–
Vested
awards
–
–
–
–
Lapsed
–
–
31 December
2015
126,643
126,463
–
–
1,264
1,264
1 For ShareSave, the share price shown is the exercise price which was 85% of the market price at the date of the award
Market price at
date of award
(p)
730.00
Date of
grant
01/09/2015
Date of
vesting
01/09/2018
Market price
at vesting
(p)
–
616.80 12/10/2015
01/02/2021
–
COLIN SMITH
PSP 2012
PSP 2013
PSP 2014
PSP 2015
Total
APRA 2012
APRA 2013
Total
31 December
2014
Granted
during year
TSR uplift/
dividend
enhancement
62,987
51,304
53,336
–
167,627
23,207
16,000
39,207
–
–
–
58,263
58,263
–
–
–
758
758
11,420
–
–
–
11,420
936
–
936
–
–
Vested
awards
42,284
–
–
–
42,284
24,143
–
24,143
–
–
Lapsed
32,123
–
–
–
32,123
–
–
–
–
–
31 December
2015
Market price at
date of award
(p)
Date of
grant
Date of
vesting
Market price
at vesting
(p)
–
51,304
53,336
58,263
162,903
–
16,000
16,000
758
758
809.70
1023.33
984.33
944.00
01/03/2012
01/03/2013
07/05/2014
02/03/2015
02/03/2015
01/03/2016
03/03/2017
02/03/2018
935.19
–
–
–
1023.33
984.40
01/03/2013
07/05/2014
02/03/2015
03/03/2016
935.19
–
616.80 12/10/2015 01/02/2019
–
ShareSave (options)1
Total
–
–
1 For ShareSave, the share price shown is the exercise price which was 85% of the market price at the date of the award
Rolls-Royce Holdings plc Annual Report 2015 87
Directors’ Report
Directors’ Report / Committee reports
Directors’ Remuneration Report
DIRECTORS’ REMUNERATION REPORT
CONTINUED
DAVID SMITH
PSP 2014
PSP 2015
Total
31 December
2014
18,287
–
18,287
Granted
during year
–
57,204
57,204
TSR uplift/
dividend
enhancement
–
–
–
ShareSave (options)1
Total
–
–
758
758
–
–
Vested
awards
–
–
–
–
–
Lapsed
–
–
–
31 December
2015
18,287
57,204
75,491
–
–
758
758
Market price at
date of award
(p)
984.33
944.00
Date of
grant
03/03/2014
02/03/2015
Date of
vesting
03/03/2017
02/03/2018
Market price
at vesting
(p)
–
–
616.80 12/10/2015 01/02/2019
–
1 For ShareSave, the share price shown is the exercise price which was 85% of the market price at the date of the award
JAMES GUYETTE1
31 December
2014
64,385
51,714
51,770
167,869
25,770
16,307
42,077
Granted
during year
–
–
–
–
TSR uplift/
dividend
enhancement
11,674
–
–
11,674
–
–
–
1,039
–
1,039
PSP 2012
PSP 2013
PSP 2014
Total
APRA 2012
APRA 2013
Total
1 James Guyette stepped down from the Board on 8 May 2015
JOHN RISHTON1
PSP 2012
PSP 2013
PSP 2014
Total
Performance
related shares2
Total
APRA 2012
APRA 2013
Total
ShareSave (options)3
ShareSave (options)3
Total
31 December
2014
133,383
108,470
112,768
354,621
Granted
during year
–
–
–
–
TSR uplift/
dividend
enhancement
24,183
–
–
24,183
40,565
40,565
48,250
33,490
81,740
1,450
295
1,745
–
–
–
–
–
–
–
–
7,355
7,355
1,946
–
1,946
–
–
–
Vested
awards
43,223
–
–
43,223
26,809
–
26,809
Vested
awards
89,541
–
–
89,541
27,232
27,232
50,196
–
50,196
–
–
–
Lapsed
32,836
–
–
32,836
–
–
–
Lapsed
68,025
–
–
68,025
20,688
20,688
–
–
–
–
–
–
Market price at
date of award
(p)
809.70
1023.33
984.33
Date of
grant
01/03/2012
01/03/2013
07/05/2014
Date of
vesting
02/03/2015
01/03/2016
03/03/2017
Market price
at vesting
(p)
935.19
–
–
1,023.33
984.40
01/03/2013
07/05/2014
02/03/2015
01/03/2016
935.19
–
8 May
2015
–
51,714
51,770
103,484
–
16,307
16,307
Market price at
date of award
(p)
809.70
1023.33
984.33
02 July
2015
–
108,470
112,768
221,238
Date of
grant
Date of
vesting
01/03/2012 23/04/2015
01/03/2016
01/03/2013
03/03/2017
07/05/2014
Market price
at vesting
(p)
1042.00
–
–
–
–
–
33,490
33,490
1,450
295
1,745
601.50
09/03/2011 23/04/2015
1042.00
1,023.33
984.40
01/03/2013 23/04/2015
03/03/2016
07/05/2014
1042.00
–
525.00 01/02/2012
01/02/2014
961.60
01/02/2017
01/02/2017
–
–
1 John Rishton stepped down as Chief Executive, and from the Board, on 2 July 2015
2 The performance related shares were awarded as part of a special grant of shares to John Rishton on joining the Company and were intended to mirror the fair value and vesting
profile of incentives he forfeited on leaving his previous employer
3 For ShareSave, the share price shown is the exercise price which was 85% of the market price at the date of the award
88 Rolls-Royce Holdings plc Annual Report 2015
Committee reports / Directors’ Remuneration Report
D. ADDITIONAL INFORMATION
Advisers to the committee
During the year, the committee had access to advice from Deloitte LLP’s executive compensation advisory practice. Total fees for advice
provided to the committee during the year by Deloitte were £125,150 (2014: £81,432). Deloitte also advised the Company on tax, assurance,
pensions and corporate finance and Deloitte MCS Limited provided consulting services. The committee is exclusively responsible for
reviewing, selecting and appointing its advisers. The committee reviewed its appointment of Deloitte LLP during the year and confirmed
its reappointment as adviser.
Deloitte is a founding member of the Remuneration Consultants Group and adheres to its code in relation to executive remuneration
consulting. The committee requests Deloitte to attend meetings periodically during the year. The committee is satisfied that the advice
it has received has been objective and independent.
Statement of shareholder voting
Results of the resolution approving the 2014 remuneration report at the AGM held on 8 May 2015
Percentage of votes (%)
Number of votes cast
For
Against
Votes withheld
98.11
1,228,258,116
1.89
23,643,321
4.38
54,797,128
The remuneration policy was approved by shareholders at the 2014 AGM. We monitor carefully shareholder voting on our remuneration
policy and implementation. We recognise the importance of ensuring that our shareholders continue to support our remuneration
arrangements and have consulted with shareholders even on changes within the policy.
Statutory requirements
The Directors’ Remuneration Report has been prepared on behalf of the Board by the Remuneration Committee.
We adopt the principles of good governance as set out in the UK Corporate Governance Code 2014 and comply with the regulations
contained in Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013,
the Listing Rules of the Financial Conduct Authority and the relevant schedules of the Companies Act 2006.
The Companies Act 2006 and the Listing Rules require the Company’s auditor to report on the audited information in their report on
page 173 and to state that this section has been properly prepared in accordance with these regulations. The Directors’ Remuneration
Report is subject to shareholder approval at the AGM on 5 May 2016.
The Directors’ Remuneration Report was approved by the Board on 11 February 2016 and signed on its behalf.
Dame Helen Alexander
Chairman of the Remuneration Committee
A summary of the remuneration policy is shown on page 90 and the full policy is available on our website, rolls-royce.com.
Rolls-Royce Holdings plc Annual Report 2015 89
Directors’ Report
Directors’ Report / Committee reports
Remuneration policy summary
REMUNERATION
POLICY SUMMARY
Fixed remuneration
Purpose
Base salaries
The Company provides competitive salaries, suitable to attract and retain individuals of the right calibre to develop and execute
the business strategy.
Salaries are set using careful judgement taking into account a range of factors including experience, role and responsibilities,
performance and salaries elsewhere in the Group. Decisions on salary are informed but not led by reference to companies
of a similar size, complexity and international reach.
Salaries are reviewed, although not necessarily increased, annually. Any salary increases will not normally exceed average increases
for employees in other appropriate parts of the Group.
The committee may exercise discretion to make larger increases in circumstances where it is necessary to address particular issues
or risks, although in exercising such discretion the resulting salary will not exceed the competitive market range. Executive Directors
may be appointed at salaries below the target level to enable pay progression commensurate with growth in the new role.
Benefits
Benefits include car or car allowance and related costs, financial planning assistance and certain insurances and other appropriate
benefits at the discretion of the committee.
Relocation support, or support for accommodation and travel, may be offered to executives where necessary.
Benefits excluding any accommodation, relocation and associated tax costs will not exceed £100,000 per annum.
Pension
The maximum employer contribution to defined contribution pension arrangements is 38% of base salary. Pension contributions
are based on base salary only.
A cash allowance may be paid in lieu of pension contributions, reduced to allow for the additional NI incurred.
A number of legacy plans are also in operation, including defined benefits plans which are closed to new members under which a
maximum of two thirds of final salary may be accrued. A cash allowance may be paid in lieu of pension contributions.
At risk remuneration
Purpose
Annual bonus
The annual bonus is designed to incentivise execution of the business strategy, delivery of financial targets and the achievement
of personal objectives.
The bonus payout level is determined primarily by Group financial performance but the committee may introduce non-financial
metrics and/or adjust the payout level to reflect other factors as appropriate. The final bonus awarded to each Director is also linked
to personal performance.
No bonus is payable unless the base financial targets are achieved and this also applies if non-financial measures are introduced.
The committee also has discretion to increase the bonus to 200% for the Chief Executive and 175% for other Executive Directors
respectively subject to this not being above the competitive market range.
Between 30% and 50% of the bonus is compulsorily deferred into shares for a period of two years and released subject to continued
employment.
Performance
Share Plan
The PSP is designed to reward the development and execution of the business strategy over the longer term, providing alignment
with shareholder interests through the performance conditions and a retention element through the plan timescale.
Executive Directors are granted awards over shares annually at the start of a three-year performance period. The proportion
of award that vests is determined at the end of the period according to a set of Company performance measures.
The three corporate performance measures are CPS (the prime measure), TSR (relative to the FTSE 100 or other appropriate index)
and EPS.
Maximum face values of annual awards are 180% of salary for the Chief Executive and 150% for the other Executive Directors.
The Executive Directors may participate in the ShareSave and Share Incentive plans on the same terms as other employees.
All employee
share plans
90 Rolls-Royce Holdings plc Annual Report 2015
Committee reports / Audit Committee
AUDIT COMMITTEE REPORT
Highlights
Accounting policies and key judgements and estimates are appropriate
Procedures in place to identify, manage and review principal risks
Internal control system meets Code requirements
KPMG recommended for re-appointment
Audit will be tendered in 2016, in line with EU directive
2015 overview
Introduction
I am pleased to present the 2015 report
of the Audit Committee which describes
how the committee has carried out its
responsibilities during the year. I would like
to thank the members of the committee,
the executive management team and
KPMG for the open discussions that take
place at our meetings and the importance
they all attach to its work.
All members of the committee are
independent Non-executive Directors.
There have been a number of changes to
the committee’s composition during the
year. Lee Hsien Yang joined the committee
in March 2015. John Neill stood down from
the Board in May and Warren East stepped
down before taking on the role of Chief
Executive in July 2015. Irene Dorner joined
the committee on 27 July 2015. Irene’s
background in banking gives her a strong
understanding of complex financial issues
and risk management processes. Alan
Davies joined the committee on
1 November 2015. Alan is a fellow of the
Institute of Chartered Accountants in
Australia and through his career at Rio Tinto
has amassed considerable financial
experience, including serving as CFO of its
Iron Ore group.
Lewis Booth, Alan Davies and Irene Dorner
are considered by the Board to have recent
and relevant financial experience. Their
biographies are on page 59 and 60.
Principal responsibilities
The key areas of responsibility of the
committee are:
Financial reporting
review financial results announcements
and financial statements, focusing on:
– the appropriateness of critical accounting
policies, judgements and estimates and
consistent application of those
accounting policies;
– inclusion of appropriate disclosures;
– compliance with relevant regulations;
– reporting to the Board as to whether the
Annual Report, as a whole, is fair,
balanced and understandable.
Risk and control environment
assess the scope and effectiveness of the
systems to identify, manage and monitor
financial and non-financial risks;
assess the management of principal risks
allocated to the committee: business
continuity, market and financial shock
and IT vulnerability;
review the procedures for detecting,
monitoring and managing the risk of fraud;
review the system of internal control over the
business processes and the risks identified
through the risk management process.
Internal audit
review the scope, resources, results and
effectiveness of internal audit.
External auditors
oversee the relationship with the external
auditor, reviewing the effectiveness
of the external audit process and making
recommendations to the Board for the
external auditor’s appointment and fees.
Areas of focus in 2015
reviewing key accounting judgements
and estimates and the consistent
application of accounting policies
which had the most significant impacts
on the financial results in 2015;
overseeing the activities undertaken
to maintain compliance with the UK
Corporate Governance Code 2014
(the Code) requirements, including
enhancements to the risk management
and internal control systems to
improve oversight by the Board and
its committees;
assessing the effectiveness of internal
control over financial reporting and
agreeing an improvement plan;
overseeing the development of the
Group’s approach to the viability
statement;
agreeing an audit tender plan,
scheduled for 2016;
monitoring the project to assess the
impact of IFRS 15 and implement its
requirements;
detailed reviews of cyber security and
business continuity risks;
supporting the implementation
of the new management information
system.
Rolls-Royce Holdings plc Annual Report 2015 91
Directors’ Report
Directors’ Report / Corporate governance
Directors’ Report / Committee reports
Audit Committee
AUDIT COMMITTEE REPORT
CONTINUED
At a glance:
Area of focus
Matters considered
Outcome
Financial
reporting
The appropriateness of accounting policies and key accounting judgements
and estimates, including:
• reversal of impairment on contractual aftermarket rights;
• estimates used in accounting for long-term contractual arrangements,
including the regular review of the methodologies for taking account of
uncertainties in these estimates and the financial impact;
• impairment of goodwill in Marine;
• adequacy of warranty provisions in Marine;
• carrying value of goodwill in Rolls-Royce Power Systems AG; and
• disclosures of contingent liabilities.
The form and content of the 2015 Annual Report.
The requirements and necessary judgements of IFRS 15 Revenue from
Contracts with Customers.
Improvements to the risk management and internal controls systems
to address new requirements of the Code.
Management’s assessment of the risk of a disruptive event.
The procedures for monitoring and combatting breaches of the IT system.
The processes for identifying and managing risks.
The model for assessing the effectiveness of the Group’s systems
of internal control.
The process and assumptions underlying the viability statement.
Risk and
control
environment
The accounting policies and key judgements and
estimates are appropriate and key estimates used
are balanced.
The Annual Report, taken as a whole, is fair, balanced
and understandable.
Recommended that the Group should seek, as far as
possible, to implement IFRS 15 in a way which
appropriately reflects the underlying business drivers and
the interpretations of other aerospace and defence
companies.
Appropriate procedures are in place to identify and
manage principal risks and all of these have been subject
to a review by the Board or an appropriate Board
committee.
Appropriate procedures are in place to manage business
continuity and cyber-security risks.
The internal control system is sufficient to meet the
requirements of the Code. It will continue to be enhanced
during 2016.
Reported to the Board that an appropriate process
is in place to make the viability statement.
Internal audit
The effectiveness of the internal audit function, its key findings and trends
arising, and the resolution of these matters.
The scope, extent and effectiveness of internal audit
are appropriate.
External audit
The approach and scope of external audit and the effectiveness and
independence of the external auditor.
Assessed KPMG as effective and independent and
recommended their re-appointment at the 2016 AGM.
Plans for the tendering of the external audit to meet the requirements
of the EU directive.
The extent of non-audit services provided by KPMG.
Agreed plan to tender the audit during 2016, with
new auditor to be appointed to report in the 2018
Annual Report.
No concerns over the nature and scale of the non-audit
services provided.
92 Rolls-Royce Holdings plc Annual Report 2015
Committee reports / Audit Committee
Operation of the committee
The committee’s responsibilities are outlined in its terms of reference
which can be found in the Board governance document on the Group’s
website. We review these annually and refer them to the Board for
approval. During 2015, we made revisions to clarify our interaction
with other committees in meeting the requirements of the Code.
Following the changes agreed in 2014, which gave us additional
responsibilities for the oversight of risk management, the
committee has worked closely with the Director of Risk to enhance
the Group’s risk management system.
As described on page 66, the performance of the committee was
independently assessed in 2014, with a follow-up in 2015.
Sector audit committees
In support of our work, each of the Group’s businesses has its own
sector audit committee, each of which comprises senior finance
personnel and is attended by KPMG. These committees:
• allow the review of accounting policies and their consistent
application, risk management, internal systems and issues arising
at a more detailed level;
• give us further assurance as to the extent of management control
and accountability;
• promote the governance culture within the Group; and
• inform areas for further consideration at our meetings.
In 2015, additional committees were established to cover central
functions including group finance, treasury, tax, transaction
processing shared-service centres, property, human resources,
engineering and technology, information technology, and our
regional offices. These additional committees provide assurance
that all key areas are covered. In particular, they consider issues
arising from the interactions between the businesses and central
functions. All the committees meet twice a year to consider the
accounting policies, judgements and estimates and the internal
control environment. They are chaired by the Director of Internal
Audit, who then reports to us.
In 2015, the sector audit committees have focused on internal control
and risk management processes in support of the new requirements
of the Code. We expect this to continue in 2016, as we seek to enhance
these processes, making them as effective and efficient as possible.
Business and function presentations
We have a regular schedule of presentations from each of the
Group’s businesses and its key functions. During 2015, we received
presentations from the following:
• Civil Aerospace business – key business risks (including
major product failure, on-time and profitable delivery of new
programmes, business continuity risks including supply chain
disruption and market shock due to external events or factors
reducing air travel); accounting policies; key accounting
judgements, estimates and controls; credit risks associated
with customers; and TotalCare and CorporateCare accounting.
• Nuclear business – key business risks (including the future of the UK
submarine programme, government relations, new programmes,
and product safety); growth in civil nuclear markets; accounting
policies and key accounting estimates (which principally relate to
accounting for long-term contracts); and controls.
• Power Systems – key business risks (including competitor actions,
the low oil price, and warranties); new programme developments;
accounting policies; key accounting estimates (largely relating to
warranty provisions) and controls.
• Director of Tax – approach to managing the Group’s tax affairs;
key tax risks and how they are managed (with specific consideration
of customs duties); effective tax rate; UK tax position; and key
tax-related accounting policies and judgements.
Financial reporting
We place considerable emphasis on making sure that the accounting
policies are appropriate and are consistently applied so that the
financial statements faithfully represent the results and financial
position of the Group and its underlying contractual arrangements.
Given the long-term nature of the Group’s businesses, most of the
accounting policies subject to significant judgement do not change
significantly year-on-year. However, the facts and circumstances on
which those judgements are based do vary over time, with a
consequential impact on the application of the policies. The key
areas of focus in 2015 are set out in the table overleaf. In part, these
reflect the current weak trading conditions in Marine. Overall, we
are satisfied that the judgements and estimates made are balanced.
During the year, we discussed the requirements of IFRS 15 Revenue
from Contracts with Customers, which will be applicable for 2018.
This new standard will have a significant impact on our accounting
policies for revenue recognition in our Civil Aerospace business.
The Group is consulting with other companies in the aerospace
and defence sector, and we will take account of other
interpretations in our implementation of the new requirements.
This is discussed further in the accounting policies on page 121.
Since the year end, we have reviewed the form and content of the
Group’s 2015 Annual Report together with the processes used
to prepare and verify it. We have reported to the Board that, taken
as a whole, we consider the Annual Report to be fair, balanced and
understandable. We further believe the Annual Report provides
the necessary information for shareholders to adequately assess
the Company’s performance, business model and strategy.
The Group is also implementing a new management information
system covering both financial and non-financial information.
The committee strongly supports this initiative and is reviewing
the progress of this project to ensure that it provides improvements
in the information used to manage the business.
Rolls-Royce Holdings plc Annual Report 2015 93
Directors’ Report
Directors’ Report / Corporate governance
Directors’ Report
Directors’ Report / Committee reports
Audit Committee
AUDIT COMMITTEE REPORT
CONTINUED
Key issues
Matters considered
Outcome
Reversal of impairment on contractual
aftermarket rights
The background to the impairment charges originally made
on certain Trent 1000 contractual aftermarket rights and
the reasons and supporting evidence as to why it is considered
that the circumstances have changed, requiring the reversal
of these charges.
We are satisfied that this is an appropriate
judgement. We paid particular attention to the
requirements of accounting standards and to the
engineering assessment of the improved outlook
for the cost of maintaining these engines.
Indications of impairment of the
carrying values of intangible assets
in Civil Aerospace
The assessments of the value-in-use of the principal
intangible assets, including the key assumptions and
estimates on which they are based.
We are satisfied that there were no indications
of impairment.
The estimates used in accounting for
long-term contractual arrangements
in Civil Aerospace are appropriate
The basis on which the estimates are prepared and,
in particular, how the inherent uncertainties are reflected
in these estimates.
We are satisfied that the process produces
balanced estimates, with appropriate
consideration of the uncertainties.
In 2015, as we had agreed in 2012, the methodologies
to reflect risk, current experience and expected long-term
performance were reviewed.
Refinements to the methodologies as a result
of the review, resulted in a one-off profit benefit
to the income statement of £189m.
The sale of engines to joint ventures
The basis for assessing the selling price.
Impairment of goodwill in Marine
The forecasts for each of the relevant cash generating units,
including the key assumptions on which they are based.
The business plan, and the underlying assumptions
on which it is based.
We are satisfied that the price represents the
fair value of the engines.
We are satisfied with the analysis and that
impairments should be recognised where these
did not support the carrying value of the goodwill.
We are satisfied that, although the headroom has
reduced as a result of the current trading
environment, there is no indication of impairment.
The basis for specific warranty and contractual provisions,
including those established in 2014 and 2015 for product
quality issues.
We are satisfied that the estimates reflect
a balanced assessment of the likely outcome.
Legal advice received in respect of the SFO enquiries.
We are satisfied that the disclosures appropriately
reflect the current position.
Whether there is any impairment
to the carrying value of the goodwill
in Rolls-Royce Power Systems AG
Warranty and contractual provisions
in Marine
The disclosures of contingent liabilities,
in particular those in respect of the
possible outcome of the SFO enquiries,
are adequate
Risk and control environment
Assessment of principal risks
Risk management is fundamental and forms an integral part of how
we work. All risks are managed through a risk management system
(described on page 54) in accordance with policies and guidance
established by the Director of Risk and his team and approved by the
Board. The new requirements of the Code have provided a catalyst to
review and enhance these, to improve Board oversight and to enable
continuous monitoring within the businesses. On behalf of the
Board, we monitored this system and the enhancements.
In addition, as described in last year’s Annual Report, the Board
allocated responsibility for reviewing certain principal risks to an
appropriate committee.
94 Rolls-Royce Holdings plc Annual Report 2015
This process and the principal risks arising then formed the basis
for our assessment of the going concern and viability statements
which are discussed later in this report. As described on page 54,
the processes are designed to identify and manage, rather than
eliminate, the risk of failure to achieve our business objectives.
We satisfied ourselves that the processes for identifying
and managing the principal risks are appropriate and that all risks
and mitigating actions had been subject, during the year, to a
detailed review by the Board or an appropriate committee. Based
on this and on our other activities including consideration of the
work of internal and external audit and presentations from senior
management of each business which include risk management,
we reported to the Board that a robust assessment of the principal
risks facing the Company had been undertaken.
Committee reports / Audit Committee
We also considered in detail the principal risks that have been
allocated to us by the Board.
Business continuity – we reviewed management’s contingency
plans in the event of a disruptive event, most particularly within
the aero gas turbine supply chain, both external and internal.
These take account of the likelihood of such an incident, its impact
on the business and its likely duration, and the cost and availability
of mitigating actions. The Group has an incident management
framework in place, including a crisis management team to deal
with any significant event.
IT vulnerability – recent events make it clear that this is an
increasing issue for all companies, and particularly for Rolls-Royce
given the nature of the data held. During the year, we visited the
Group’s security centre where we met with the senior IT security
team. During this visit, the Group’s systems for preventing breaches
of the IT system and procedures for monitoring and combatting
those arising were demonstrated. We discussed with the team the
evolving nature of cyber attacks and how its procedures are
evolving in parallel. During the year, a dashboard was developed
to monitor attacks and how they are dealt with.
Market and financial shock – as part of the decision to issue the
US$1.5bn bond in October 2015, the Board considered the exposure
of the Group to financial market risks including: foreign currency
exchange rates; oil price; liquidity and credit risks; and reduction
in air travel or other disruption to customer operations. The Board
also reviewed the Group’s management of these risks. As this area
was subject to detailed review by the Board, we did not consider it
necessary to repeat this.
Internal control
The Board has overall responsibility to the shareholders for the
Group’s system of internal control over its business and risk
management processes and the risks identified through the risk
management process. The committee has responsibility for
reviewing the system’s operation and effectiveness.
The Group has a long-standing process for identifying risks and
planning mitigating actions and for assessing the effectiveness of
internal control. In assessing the Code requirements, enhancements
to the existing processes were identified. We approved an enhanced
model for representing the system, comprising:
We considered that the existing process, together with the
enhancements implemented to date, are sufficient to meet the
requirements of the Code and the FCA’s Disclosure Rules and
Transparency Rules and we concluded that the operation and
monitoring of controls, including those relating to the financial
reporting process, were effective during the year. Work will
continue during 2016 to complete the definition and
documentation of the controls in the enhanced model.
Judgement is required in evaluating the risks facing the Group in
achieving its objectives, in determining the risks that are considered
acceptable, in determining the likelihood of those risks
materialising, in identifying the Group’s ability to reduce the
incidence and impact on the business of risks that do materialise,
and in ensuring the costs of operating particular controls are
proportionate to the benefit provided.
The enhanced control model has been reviewed by the sector audit
committees and a summary by this committee. Going forward, this
will be included in the presentations we receive from the Group’s
businesses and key functions, giving us the opportunity to discuss
and challenge the assessments and judgements underlying the
internal control systems.
The Group is also using this standardisation of the internal control
framework as an opportunity to improve the consistency of
reporting, in particular from the Group’s smaller operations.
We paid particular attention to internal controls over financial
reporting and, mindful of the current business challenges the
Group is facing, have instigated, and will monitor progress in
achieving, a wide-ranging plan to improve controls in this area.
The going concern and viability statements
We reviewed the processes and assumptions underlying the
statements set out on page 57. In particular, we focused on the new
viability statement and considered:
• the consistency of the analysis of risk impact with that reviewed
by the Board as part of its strategy review;
• the assessment of the impact of individual risks, both in amount
and timing;
• the analysis of multiple risk impacts; and
• the current financing in place and the availability of future
• entity-level controls covering leadership and direction from the
financing.
As a result, we were satisfied that the viability statement had been
prepared on an appropriate basis.
top; and
• specific control activities, covering detailed process controls,
and internal and external assurance activities.
This model was then populated and the operation and effectiveness
of the controls rated. This commenced in 2015 and prioritised:
• entity-level controls;
• controls over principal risks as described on pages 55 and 56;
• controls over key risks and critical processes for each of the
Group’s business; and
• core financial controls.
Rolls-Royce Holdings plc Annual Report 2015 95
Directors’ Report
Directors’ Report / Corporate governance
Directors’ Report
Directors’ Report / Committee reports
Audit Committee
AUDIT COMMITTEE REPORT
CONTINUED
Internal audit
External auditor
We receive a quarterly dashboard from the Director of Internal
Audit identifying key trends and findings of internal audit reports,
and the resolution of actions agreed. Twice a year, we review
detailed updates of significant findings. In particular, we review the
nature and number of issues raised by internal audit and the time
to complete the related actions, which during 2015 we considered
to be reasonable.
2015 audit
During the year, KPMG presented the audit strategy, which identified
their assessment of the key audit risks and the proposed scope of audit
work. We agreed the approach and scope of audit work to be undertaken.
Key risks and the audit approach to these risks are discussed in the
Independent Auditor’s report (pages 167 to 174), which also highlights
the other significant risks that KPMG drew to our attention.
Increasing focus has been put on identifying the root causes of
unsatisfactory internal audit reports, both to consider whether
there are any systemic areas of concern in the Group’s control
environment and to inform the development of future internal
audit planning.
The committee considered and reviewed the effectiveness of the
Group’s internal audit function, including internal audit resources,
plans and performance as well as the function’s interaction with
management. The outcome of the 2014 review of the audit function
provided a number of improvements and changes which have been
implemented during 2015. In particular, the recruitment process
has been improved to ensure that the function maintains adequate
resource to meet its objectives.
I meet the Director of Internal Audit privately before each meeting
and on an ad-hoc basis throughout the year, and the committee as
a whole has a private meeting with him at least once a year. These
discussions cover the activities, findings, resolution of control
weaknesses, progress against the agreed plan and the resourcing
of the department.
We were satisfied that the scope, extent and effectiveness of
internal audit work are appropriate for the Group and that there
is a sound plan for ensuring that this continues to be the case
as our business progresses and risks change.
We also undertook an assessment of KPMG’s qualifications, expertise
and resources, independence and the effectiveness of the external
audit process. We reviewed the fees of the external auditor. Our
conclusions were that the external audit was carried out effectively,
efficiently and with the necessary objectivity and independence.
As part of the reporting of the half and full-year results, in July 2015
and February 2016, KPMG reported to the committee on their
assessment of the Group’s judgements and estimates in respect
of these risks and the adequacy of the reporting. KPMG also report
on their assessment of the Group’s control environment.
We continue to be supportive of the extended auditor’s report and
KPMG’s approach which goes beyond the minimum requirements,
providing additional clarity on the key judgements and estimates.
I meet with the lead partner prior to each meeting and the whole
committee has a private meeting with KPMG at least once a year.
In 2015, upon their appointments to the committee, Lee Hsien Yan,
Irene Dorner and Alan Davies had briefings with KPMG.
Reappointment of KPMG and audit tender process
The committee reviews and makes recommendations to the Board
with regard to the reappointment of the external auditor. In doing
so, we take into account auditor independence and audit partner
rotation. KPMG were appointed as auditors in 1990 and we have not
tendered the audit since. No contractual obligations restrict our
choice of external auditor. The lead audit partner is required
to rotate every five years and other key audit partners are required
to rotate every seven years. Jimmy Daboo took over as lead audit
partner in 2013, and will be required to rotate after the 2018 AGM.
The committee and the Board have recommended KPMG’s
re-appointment at the 2016 AGM.
The new EU directive requires us to appoint a different auditor
no later than 2020. During 2015, we have considered the plans for
meeting these requirements. We believe that it is in the best
interests of the Company and its shareholders to allow an
appropriate period for the new auditor to build up a detailed
knowledge of the business. A tender of the audit will be undertaken
during 2016. The new auditor will then be appointed at the 2018
AGM and provide its first auditor’s report in the 2018 Annual Report.
96 Rolls-Royce Holdings plc Annual Report 2015
Committee reports / Audit Committee
The Committee considers that the Company has, throughout
the year ended 31 December 2015, complied with the provisions
of the The Statutory Audit Services for Large Companies Market
Investigation (Mandatory Use of Competitive Tender Processes
and Audit Committee Responsibilities) Order 2014.
Non-audit services provided by KPMG
In order to safeguard auditors’ independence and objectivity, we do
not engage KPMG for any non-audit services except where it is work
that they must, or are clearly best suited to, perform. Fees paid to
KPMG for audit, audit-related and other services are set out in note 8
to the Financial Statements and summarised below.
All proposed services must be pre-approved in accordance with the
non-audit services policy which is reviewed and approved annually.
Above defined levels, my pre-approval is required. The committee also
reviews the non-audit fees charged by KPMG quarterly.
Non-audit related fees paid to KPMG during the year were 29% (2014:
39%) of the audit fee. Our annual review of the external auditor takes
into account the nature and level of all services provided.
Audit
Audit-related
Tax compliance
Other
Non-audit
2015
2014
£m
5.9
1.3
0.4
–
1.7
%
22
7
–
29
£m
5.7
1.1
0.7
0.4
2.2
%
19
12
7
39
Based on our review of the services provided by KPMG and
discussion with the lead audit partner, we concluded that neither
the nature nor the scale of these services gave any concerns
regarding the objectivity or independence of KPMG.
As part of the EU audit reform, further restrictions will be placed on
auditors undertaking non-audit services from 2017. In the UK, these
will be implemented by the Financial Reporting Council, which is
expected to publish the final requirements in the first half of 2016.
We will continue to monitor developments in this area and make
amendments as necessary to the policy. We have also put in place
additional procedures to monitor engagements with potential
future auditors to ensure that, following the tender process,
we can discontinue or transition any engagements as required.
Looking forward
The introduction of the recent changes to the Code has increased the
focus of the committee on business risk, which continues to be
a high profile topic in boardrooms. During 2015, we have made
significant progress in developing further the existing processes
for risk management and internal controls. However, we believe that
that this is a continuous activity of improvement to the underlying
processes, making them as effective and efficient as possible and
ensuring that they are fully embedded as part of ‘business-as-usual’
activities. In championing this in 2016 and beyond, we will ensure
that the Board, its committees and senior management have a
sound basis for understanding the principal risks in the Group,
assurance that they are being managed effectively and that the
internal controls are appropriate and are operating effectively.
We will continue to monitor the key accounting judgements and
estimates, focusing on ensuring consistent application across
the Group. In particular, we will review the accounting impact of the
transition in the Civil Aerospace business from mainly linked to
mainly unlinked TotalCare contracts.
During 2016, we will also continue to review the development of the
plans to implement IFRS 15 in 2018.
We will also continue to review the implementation of the improved
management information system, ensuring that this will provide
a robust basis for the management of the business and will support
high quality analysis and will monitor progress on the internal
financial control improvement programme.
As noted above, we plan to tender the audit in 2016 and this will be
a significant activity for both the committee and management.
We will ensure that the selection of the new auditor is based
on a robust assessment, focusing on the qualities of the proposed
audit team and their understanding of our business. As this process
develops, our attention will also turn to ensuring that there
is a seamless transition from KPMG to the new auditor.
Lewis Booth
Chairman of the Audit Committee
Rolls-Royce Holdings plc Annual Report 2015 97
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SAFETY & ETHICS
COMMITTEE REPORT
Highlights
Successful migration to a single Safety & Ethics Committee
Product safety management system effective in responding to incidents in service
Key HS&E global improvement programmes delivering results
Good progress with the ethics and compliance improvement programme,
including introduction of a global local ethics adviser network
Aerospace and Defense industry leader in Dow Jones Sustainability Index 2015
Principal responsibilities
Under its wide remit, the committee’s
responsibilities include:
to maintain an understanding of and
keep under review the Group’s
frameworks for the effective governance
of safety and ethics and the Group’s
culture in these areas;
to oversee and review annually the
Group’s key safety and ethics policies,
including: the Global Code of Conduct,
anti-bribery and corruption and export
controls, fraud, product safety, HS&E
and sustainability policies, and ensuring
appropriate independent scrutiny
of policies and practices;
to review the Group’s compliance
with relevant legislation, regulation
and make recommendations in the
key policy areas;
to oversee training in respect of safety
and ethics, including ensuring adequate
arrangements exist to enable employees
and contractors to raise concerns,
in confidence;
to review reports on issues raised through
the Ethics Line and review the results of any
investigations into ethical or compliance
breaches or allegations of misconduct;
to review reports on risks in relation
to products not meeting safety
expectations;
to review reports on health and safety
risk and proposed actions to manage
such risks;
to review remedial actions and lessons
learned in relation to material
investigations;
to review disciplinary action taken
following safety and ethics concerns; and
to keep under review the key
performance indicators in relation
to safety and ethics.
The committee regularly reports to the
Board and refers any concerns about
possible financial improprieties to the
Audit Committee.
The Director – Engineering & Technology,
General Counsel, Director of Risk and
other senior safety and risk executives
attend committee meetings.
During the year the committee reviewed
its terms of reference and recommended
certain changes to reflect its oversight of
the Company’s strengthened commitment
to sustainability. The terms of reference for
the committee are available in the Board
governance document available on the
Group’s website.
2015 overview
Introduction
On 1 January 2015 the Group’s separate
Safety and Ethics Committees combined
to become one committee.
The committee assists the Board in
fulfilling its oversight responsibilities
in respect of safety and ethics matters,
which include: product safety; HS&E
(occupational health, process safety,
asset integrity, personal security and
the environment); sustainability;
and ethics (business ethics, anti-bribery
and corruption and export controls
compliance). It has been allocated
responsibility on behalf of the Board
for overseeing the Group’s principal risks
of product failure and compliance
(see pages 54 to 56).
In addition to its oversight role for the
Board, the committee supports
management in its aim to create, promote
and maintain an ethical, compliant,
safety-conscious, environmentally-aware
and socially-responsible culture across
the Group as a means of delivering its
safety and ethics goals.
98 Rolls-Royce Holdings plc Annual Report 2015
Committee reports / Safety & Ethics Committee
At a glance
Area of focus
Matters considered
Outcome
Product safety
Product safety incidents in service and the Group’s response.
Satisfactory response to incidents and support to investigations.
Review of product safety policy, assurance framework and safety
management systems including in Marine and Power Systems.
The framework and systems are robust and provide appropriate
governance and accountability.
Review of product safety learning and development framework. Widely deployed training across the Group, tailored to different
HS&E
Review of HS&E risk profile and learning from incidents.
categories of employees depending on role.
Satisfactory process to contain and mitigate against future
emergence of risks, including communication of learning points.
Review of HS&E governance and accountability framework,
learning and development programme and communications.
Model remains satisfactory and was strengthened in the non-
aerospace businesses during the year. Training is being consolidated.
Review of global HS&E improvement programmes.
Programmes are delivering improvements.
Plans to improve rating in Dow Jones Sustainability Index.
Target exceeded and achieved sector Industry Leader.
Monitoring of ethics and compliance improvement programme.
Significant progress made in implementing the Group’s plans,
including Lord Gold’s recommendations.
Monitoring deployment of ABC policies and use of advisers.
Good progress and significant decrease in advisers.
Sustainability
Ethics and
compliance
Principal risks
The Board has allocated responsibility to the committee for
reviewing the principal risks of product failure and compliance.
These topics form a core part of discussions at our meetings, as
described in more detail in the remainder of this committee report.
Product safety
The Group recognises that its products are mission critical to its
customers, and the people its customers serve, all over the world.
As Rolls-Royce products become increasingly technologically
advanced, they are expected to always be reliable and safe whenever
they are used, often in harsh operating environments. Our
commitment to meet this expectation is essential to the Group’s
business, its reputation and its sustainability. As a committee we
draw on our collective industry and regulatory experience to oversee
the Group’s work in achieving this.
Throughout the year, we were kept regularly updated on aviation
product-related safety incidents in service and considered the
potential impact on the Group and its products. We also oversaw
the Group’s response to a marine equipment product issue. Our
work in reviewing incidents in service involved: monitoring
management’s progress in root cause identification; being briefed
on the development and deployment of technical solutions
required; testing the Group’s approach in engaging with affected
operators; and overseeing plans for the timely mitigation and
retirement of any safety risk including through the application of
lessons learned back into product design. The committee was
satisfied with the Group’s response in swiftly deploying its safety
assessment process to mitigate, control and monitor any potential
product safety risks as they emerged.
The committee considered the Group’s product portfolio in offshore
marine applications. We discussed with management the potential
safety risk and associated liabilities were the Group in future to be
requested to provide dynamic positioning equipment or systems
for drill rigs and work-over vessels. The Group does not presently
provide any such equipment for these specific applications. However
this resulted in management reviewing its processes for ensuring
that novel products, and novel applications of existing products,
cannot be introduced without being the subject of a rigorous safety
assessment and a suitability and performance review.
Throughout the year, the committee received detailed briefings
in relation to elements of the product safety assurance framework
and safety management system outlined on the following page.
This included a review of how the Group is managing product safety
assurance while major updates to the engineering processes in the
Group’s quality system are being implemented.
We spent time during 2015 gaining a more detailed understanding
of product safety management in the Marine and Power Systems
businesses. The committee was assured that progress is being made
in deploying many of the rigorous safety methodologies used in
aerospace to the Marine business in order to align the Group’s
global safety standards. Power Systems operates its own mature
product safety assurance system to comparable standards. Further
shared learning and closer alignment are planned for the future.
To maintain the highest standards of product safety requires that
engineering tasks are carried out only by those with a suitable level
of competence. During the year, the committee assessed the Group’s
product safety learning and development framework as it applies
to different categories of employees depending upon their roles.
To experience training first-hand, the committee members
undertook an employee product safety training module.
Rolls-Royce Holdings plc Annual Report 2015 99
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Directors’ Report / Committee reports
Safety & Ethics Committee
SAFETY & ETHICS COMMITTEE
REPORT CONTINUED
Safety management system
In order to help the organisation to follow these five principles
and meet the required standards through operational processes,
the Group maintains a product safety management system (SMS).
During 2015, it was agreed to develop the SMS manual further to
clarify how accountability for product safety, in particular the
conforming product element, flows through the organisation;
and to define the role of Quality and Safety Assurance Boards
in identifying and addressing causes of non-conformance.
The Group’s engineering and safety processes must work together
closely in order to ensure that we efficiently produce safe designs
for our products. Safety assessments are undertaken in support
of the design of all Rolls-Royce products and during in-service
operation to support the response to arising safety issues.
The test applied to all product safety risks is that they are both
tolerable and as low as reasonably practicable. Tolerable risks are
those that satisfy all relevant targets. The targets are set internally
by the Group and externally by customers and regulators.
The safety assessment process that has been developed is based
upon a standard industry approach as follows:
Safety assessment
IDENTIFY AND
ASSESS THE
HAZARDS
REVIEW AND
MONITOR THE
RISKS
MITIGATE
THE RISKS
CONTROL THE
REMAINING RISK
Product safety policy
The Group’s product safety policy sets out the internal standards
that we expect to be met across the Group, through the following
five governing principles:
1. Leadership
commitment
and
accountability
2. Level of
product
safety
3. Maintaining
and
improving
product
safety
4. Conforming
product
5. Safety
awareness
and
competence
Our leaders champion product safety and
prioritise it so that safety-related tasks receive
the right level of attention, time and resource.
We make accountability for product safety
clear and ensure people understand what they
are accountable for.
We design our products to achieve a high level
of safety consistent with their application,
always ensuring that we meet or better the
relevant Group, legal, regulatory and industry
requirements. We assess what potentially
could go wrong and put in place controls to
meet the required safety levels, thereby
reducing safety risks as far as is reasonably
practicable.
We are committed to the continuous
improvement of product safety and actively
engage in setting industry standards and good
practice. We continually measure our
performance and rigorously investigate and
resolve safety-related issues, systematically
embedding the learning from these back into
our practices and processes. Everyone is
encouraged to report any product safety
concerns.
Robust quality is an essential building block of
product safety and by following our processes
we can ensure that our products and those of
our suppliers conform to specification.
Everyone who works in the Group shares
responsibility for product safety and we are
mindful of the safety implications of our
actions. Training is provided to ensure a clear
understanding of the product safety policy and
processes. There is a collective and personal
responsibility accepted by all.
The product safety policy is subject to annual
review by both the Group product safety
review board and the committee. No
significant policy weakness or omission was
identified during the period of review.
100 Rolls-Royce Holdings plc Annual Report 2015
Committee reports / Safety & Ethics Committee
Health, safety and the environment (HS&E)
During the year, we receive a number of briefings and presentations
as part of an annual agreed cycle of HS&E topics. This enables
oversight, discussion and year-on-year monitoring of the Group’s
progress on key aspects of its HS&E management and assurance.
At each meeting, the committee receives HS&E performance
reports and a balanced scorecard showing performance trends
against the objectives of protecting health, preventing injury and
reducing environmental impact. Overall, in 2015, this showed
improvement in all areas except personal safety. Areas for
improvement were identified.
The committee also oversees the ‘learning from incidents’ process that
examines root causes of significant and major incidents and defines
measures to mitigate against the risk of similar incidents. In July 2015,
we were saddened to learn that a contractor working in Italy had died
from an electric shock at a customer site. A detailed investigation was
conducted and a Group-wide HS&E bulletin was issued to share lessons
learned and to stipulate actions needed to prevent any similar incident.
The Group also suffered two dust fires during the year at one of its
facilities in Hucknall, UK. Whilst these were contained and no-one was
injured, again the lessons learned were promptly shared and steps
taken to mitigate against any re-occurrence at other Group sites.
We conducted an annual review of HS&E governance and
concluded that this remained satisfactory, noting that it had been
strengthened during the year to include a rolling calendar of
executive level reviews. The committee also examined the HS&E
Group risk profile which had been adapted during the year, and
received assurance on the steps taken to contain known issues and
to mitigate against the effects of future emerging risks. In December
2015, we endorsed the adoption of a revised Group HS&E policy.
The Group’s HS&E experts gave progress updates to the committee
during the year on the key HS&E improvement programmes:
• the process safety management programme is driving
improvements in the management of high hazard processes,
including relating to chemicals;
• the electrical safety programme has successfully raised the level
of electrical safety management and control across the Group;
• waste control standards and tools, innovation, multi-site
solutions and the development of exemplar sites are being used
to manage and further the Group’s waste action programme; and
• development of an improved HS&E management system
continued throughout 2015 and is starting to be deployed.
The committee was satisfied that these programmes will continue
to deliver improvements.
We also learned about the Group’s management of the integrity
of its infrastructure and assets, in order that HS&E risk can be
profiled to reflect age or environmental conditions.
This year, as part of its occupational health strategy, the Group
has increased the level of focus and resources being applied in
promoting health risk management, resilience and wellbeing
among the workforce. This has included the launch of toolkits,
workshops, videos and blogs from the Chief Medical Officer.
The committee reviewed the overall HS&E learning and development
programme and discussed how HS&E culture can be promoted and
strengthened. The HS&E communications plan and initiatives were
discussed, including the regular inclusion of HS&E ‘moments’ at team
meetings (including the ELT), promotion of HS&E walks and talks, and
the HS&E Week held Group-wide in October 2015. In September 2015,
the committee undertook an HS&E walk with members of management
at operational facilities in Derby, UK.
The committee received a presentation on the Group’s environmental
strategy, centred around efficient products, advanced technology
for future low emission products, and reducing the environmental
impact of business operations.
The model for governance of environmental aspects of the Group’s
business, product and operational strategies was also reviewed.
This includes support provided to the management by an
Environmental Advisory Board whose members and supporting
project teams are respected authorities in their fields drawn from
academia and external organisations.
Sustainability
The committee oversees and helps guide the Group’s approach to
sustainability, as well as monitoring progress towards goals in this
area. In 2015, we discussed how sustainability can be used as
a driver of value creation. To support this, the Group has been
focusing in the year on reducing what it uses, re-using waste
material, and recycling end-of-life products.
We were delighted that, in September 2015, Rolls-Royce achieved
Industry Leader for the Aerospace and Defense sector in the Dow Jones
Sustainability Index. This marked a significant (17%) improvement
since 2014 reflecting the Group’s progress across sustainability and
corporate responsibility disciplines. All scores were well above the
industry average for all sections. Of particular note to the committee
was that the Group achieved industry best scores for product
stewardship, corporate citizenship and philanthropy, as well as the
environmental and social dimensions as a whole. You can read more
about the Group’s approach to sustainability on pages 48 to 51.
Ethics and compliance
There is recognition that the Board and the ELT must continue to
demonstrate leadership around ethical and behavioural standards.
The Board is determined to ensure this is embedded into the culture
of the business. The committee plays a vital role in providing
dedicated focus and attention on behalf of the Board to this critical
area, including reviewing the Group’s 2015 ethics and compliance
employee communications plan.
Regulatory investigations
We previously reported that the SFO had begun a formal investigation.
The Group is continuing to co-operate with the authorities in the UK,
US and elsewhere. The committee received regular updates on the
regulatory investigations. As the investigations are still ongoing we
are unable to give any further details or a timescale for when they
will conclude.
Rolls-Royce Holdings plc Annual Report 2015 101
Directors’ Report
Directors’ Report / Committee reports
Safety & Ethics Committee
Disciplinary proceedings under the Global Code of Conduct
(Global Code)
If an employee is found to have acted in breach of the Company’s Global
Code, the Group takes appropriate action to address that breach. That
action may include giving a disciplinary warning, imposing another
penalty or, ultimately, terminating employment in the most serious
of cases. In 2015, there were 33 employees whose employment ended
for reasons relating to breaches of the Global Code.
Ethics and compliance improvement programme and
Lord Gold’s review
Lord Gold was engaged in 2013 to provide independent assessment and
guidance to assist the Company in improving its ethics and compliance
culture. In December 2014, Lord Gold issued a second interim report and
recommendations on the results from his detailed review. The Group has
been implementing these recommendations in 2015 through its ethics
and compliance improvement programme under the committee’s
oversight, and has continued to make good progress. Lord Gold attended
three meetings of the committee during the year. We discussed the
results of his review and his observations, including insights from focus
groups held with a mix of employees in different countries.
The size, structure and skills of the risk team were kept under review
during the year with regard to required resourcing to deliver and
maintain the appropriate level of focus.
Anti-bribery and corruption (ABC) policies
In 2014, the ABC compliance team completed a thorough and successful
review and update of the Group’s policies on ABC, advisers, confidential
information, gifts and hospitality and facilitation payments. In 2015,
this work expanded to the review and updating of policies on offset,
conflicts of interest and lobbying and political donations together with
guidance on managing the ABC risks of sponsorship and donations.
All of these refreshed policies were fully operational by the end of 2015
and are being rolled out in the Power Systems business in 2016.
Completion of this roll-out will mean that unified global ABC policies
will be implemented across the entire Group. The committee,
throughout the year, turned its focus to ensuring the effective
monitoring of the suite of policies and their implementation.
During the year, the risk team also launched a due diligence toolkit,
which enables managers across the Group to understand and manage
ABC risks relating to lower risk third parties such as maintenance
repair and overhaul centres, logistics providers and suppliers.
Following the introduction of the Group’s new adviser policy,
the number of advisers engaged has reduced dramatically for
all businesses except Power Systems, which has a large network of
distributors and is more reliant on the services of third parties to sell,
distribute and support its products. However, the Group is applying its
new adviser policies to all Power Systems’ third parties and this review
is expected to be completed during 2016. In addition, every new
proposal to engage an adviser must go through rigorous review by the
Group’s advisers and offset panel, presently comprised of the Director
of Risk, Lord Gold, and a partner from an external law firm.
Ethics Line and local ethics advisers
As part of the committee’s responsibility, the Group’s confidential
reporting line, the Ethics Line, was discussed and reviewed. The Group
continues to improve awareness of the ‘speak-up’ channels available
to employees through training and ongoing engagement. Ethical
questions and concerns that are raised by employees and other
stakeholders are recorded as contacts in the Ethics Line system.
Whilst the total number of Ethics Line contacts decreased in 2015 to
729 (2014: 850 contacts) this was largely driven by a reduction in the
number of questions asked, with the number of ethical concerns raised
remaining at a similar level to last year at 439 (2014: 434 concerns).
The Ethics Line oversight group, which was originally formed in 2014,
continued to review cases, analyse the contact trends and provide
updates to the committee highlighting any high-risk cases. We share
any concerns about possible improprieties in matters of financial
reporting with the Audit Committee.
During 2015, the committee supported and welcomed the
introduction of a global network of local ethics advisers appointed
from the existing workforce who are trained in how to respond to
ethical issues raised. The presence of these 76 local points of contact is
designed to promote ‘speaking-up’ and tackling of ethical issues locally
where appropriate to provide staff with an alternative to using other
‘speak-up’ channels including the Ethics Line.
Export control
During the year, the committee received briefings and a presentation
on the export control compliance landscape, the key risks, and the
Group’s export control enhancement programme to address those
risks. This included discussion of the Group’s processes and systems
for classification of parts, and the deployment of extra export control
professionals into the business.
Training
The committee reviewed the proposal for an integrated ethics training
and communications campaign to engage the Group’s employees
further, and to create the right environment for our employees to
‘speak-up and ask’ and ‘think and act’. This built on the manager-led
ethics toolkit discussions undertaken in 2014 whilst bringing a fresh
approach for 2015, built around a series of filmed scenarios to prompt
manager-led group discussions. Annual ethics training is mandatory
for all employees across the Group, and the Board and the ELT
undertook this ethics training in the year. Each member of the ELT also
had a personal objective to lead an ethics session with their teams
during 2015. A series of monthly dilemma-based stories drawn from
real cases were also published on the Group’s intranet during 2015,
inviting employees to vote on what action they would take.
In 2015, a further mandated ABC training programme for employees
was rolled out, as well as annual online export control training.
Conclusion
The committee is pleased with the progress made by the Group
during the year promoting the safety and ethics agenda, and in
particular in developing and undertaking detailed improvement
plans. These plans are making a difference across the Group. The
focus of the committee in 2016 is expected to turn to the challenge
of ensuring that the improvement programmes transition into
a sustainable ‘steady-state’ position that will provide a strong
platform for achievement of the Group’s safety, ethics, and wider
objectives and targets over the years to come.
Sir Frank Chapman
Chairman of the Safety & Ethics Committee
102 Rolls-Royce Holdings plc Annual Report 2015
Committee reports / Science & Technology Committee
SCIENCE & TECHNOLOGY
COMMITTEE REPORT
Highlights
Broad review of key technologies undertaken
Technology acquisition process and relevant benchmarks reviewed
Technology selection and funding outcomes for 2015 reviewed
Deep reviews of selected key technologies for aerospace and marine
Group’s approach to digitisation as a disruptive enabler reviewed in detail
Principal responsibilities
The remit of the committee is to:
to review the strategic direction of the
Company’s research, technology and
development activities;
to provide assurance that significant
trends in science, technology, software
and data are identified and incorporated
into management plans;
to assist the Board in its oversight of
major R&D investment and provide
assurance on the competitiveness and
adequacy of any R&D;
to oversee the effectiveness of key
engineering and technological processes
and operations, including delivery of
major product development and
technology programmes, intellectual
property management and interactions
with institutions;
to provide assurance on the
identification and management of key
technological risks;
to oversee processes for ensuring
effective resourcing and development
of required technological capability
and skills;
to conduct visits to R&D facilities;
to ensure dialogue with the Group’s
engineering and technology leaders
and employees; and
to review industry and scientific
benchmark data and best practices.
The Director – Engineering & Technology,
and other senior engineering and
technology executives, attend the
committee meetings.
Rolls-Royce Holdings plc Annual Report 2015 103
2015 overview
Introduction
I am pleased to present the inaugural
report of the Science & Technology
Committee, which the Board agreed to
establish with effect from 1 January 2015.
The Group invests more than £1bn each
year in R&D to enable us to conceive,
design and deliver world-class technology
that meets our customers’ current and
future requirements. The Board considers
that this key area of the business will
benefit from the dedicated focus and
support of the committee especially in
helping with the formulation of strategic
direction. It is the aim of the committee to
provide high level oversight and assurance
of the Group’s scientific and technological
strategy, processes and investments.
Upon its creation, Warren East (then a
Non-executive Director) assumed the
chairmanship of the committee. In May 2015,
he chaired the first of the two meetings
of the committee held during the year
(a planning session also having taken place
in March 2015). Warren stepped down from
the committee when he became Chief
Executive in July 2015, and as an interim
arrangement Ruth Cairnie chaired the
second meeting of the committee in
December 2015. I was appointed as the new
chairman of the committee in February
2016. The membership of the committee
presently comprises four independent
Non-executive Directors.
Directors’ Report
Directors’ Report / Committee reports
Science & Technology Committee
SCIENCE & TECHNOLOGY
COMMITTEE REPORT CONTINUED
At a glance
Area of focus
Matters considered
Outcome
Overview of
technology
Deep dives
How the Group selects, develops and acquires new technology across all
areas of the business; and the outcome of the process during 2015.
The technology process was appropriate and supported
the development of the business.
Detailed technical briefings on certain key technologies for aerospace and
marine applications.
The committee supported areas of innovation and the
commercial application of new technologies.
Governance
The adequacy of the committee’s terms of reference.
No changes were made to the terms of reference.
University Technology Centres (UTCs)
We have established a global network of UTCs, with the first
formal collaborations being signed in 1990. At first, UTCs
were established mostly in the UK and more recently they have
been founded in the US, Norway, Sweden, Italy, Germany and
Korea. Additionally, Rolls-Royce has significant relationships
with many other research centres around the world, including
Japan, Singapore, China, Germany and the US.
Each UTC addresses a key technology; collectively they tackle
a wide range of engineering disciplines from combustion
and aerodynamics to noise and manufacturing technology.
This consistent strategy of developing long-term relationships
with selected universities has provided close contact with
world-class academic institutions, and given access to a
wealth of talent and creativity to help protect our capability
into the future.
The aim is to satisfy the needs of the business and its
customers whilst providing technical input that enhances
the research reputation of the university. UTCs are long-term,
funded collaborations that ensure continuity of work, offering
high-quality technology for the Group and real-world
challenges for academic partners. Each is led by a world-class
academic and supported by a strong team of research fellows,
associates, students, technicians, staff and facilities.
While the main focus of the UTC is long-term research,
an additional advantage of the relationship is to provide
the Group with access to highly capable people to support
short-term needs. This can be beneficial to both parties,
providing practical experience for the research team and
valuable solutions for the Group.
Overview and deep dive reviews
The first meeting of the committee served as an orientation session
at which the members received detailed briefings and presentations
from senior engineering and technology executives. This included
a review of the Group’s technology acquisition process, and a detailed
walkthrough of each of the Group’s identified key technologies
in its businesses.
The committee learned about how the Group benchmarks
its activities in R&D and research & technology providing measures
to establish whether the Group is doing enough to capture its
intellectual property.
In December 2015, a briefing was provided on technologies which could
be potential disruptors (both as potential risks and opportunities).
A detailed discussion was held with the Group’s Chief Scientific
Officer and Chief Information Officer on steps taken in identifying
and mitigating the risks and opportunities in emerging digital
capabilities, and the Group’s future plans for digital business.
This included consideration of how digitisation could be applied
to particular technologies reviewed in detail by the committee.
The committee reviewed the processes and outcomes of current
technology selection and related funding, including a discussion
of items that did not get funded and the reasons why.
The committee is continuing to review the Group’s current and
emerging technologies, as well as the measures that the Group deploys
continually to assess the competitive and technological landscape.
Maintaining technological advantage through leading-edge R&D,
engineering and manufacturing techniques in the development of our
products whilst ensuring they remain reliable, safe and compliant with
regulatory standards is core to what the Group does. The committee
will continue to support and guide management in its strategic
decision-making on technology investments, and in assessing scientific
and technology risks and opportunities for our business.
Sir Kevin Smith
Chairman of the Science & Technology Committee
104 Rolls-Royce Holdings plc Annual Report 2015
Responsibility statements
RESPONSIBILITY
STATEMENTS
STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT
OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS
The Directors, as listed on pages 58 to 61, are responsible
for preparing the Annual Report and the Group and parent
company financial statements in accordance with applicable
law and regulations.
Company law requires the Directors to prepare Group and parent
company financial statements for each financial year. Under that
law they are required to prepare the Group financial statements
in accordance with IFRS as adopted by the EU and applicable law
and have elected to prepare the parent company financial
statements in accordance with UK Accounting Standards and
applicable law.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and parent company and
of their profit or loss for that period.
In preparing each of the Group and parent company financial
statements, the Directors are required to:
• select suitable accounting policies and then apply them
consistently;
• make judgements and estimates that are reasonable and
prudent;
• for the Group financial statements, state whether they have been
prepared in accordance with IFRS as adopted by the EU;
Under applicable law and regulations, the Directors are also
responsible for preparing a Directors’ Report, Directors’
Remuneration Report and Corporate Governance Statement
that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the Group’s
website. Legislation in the UK governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
RESPONSIBILITY STATEMENTS UNDER THE DISCLOSURE RULES
AND TRANSPARENCY RULES
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 Company and the
undertakings included in the consolidation taken as a whole;
ii) the Strategic Report on pages 2 to 57 and Directors’ Report
on pages 58 to 104 and pages 178 to 181 include 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; and
• for the parent company financial statements, state whether
iii) the Annual Report, taken as a whole, is fair, balanced and
applicable UK Accounting Standards have been followed, subject
to any material departures disclosed and explained in the parent
company financial statements; and
understandable and provides the information necessary for
shareholders to assess the Group’s position and performance,
business model and strategy.
• prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and the
parent company will continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the parent and
Group’s transactions and disclose with reasonable accuracy at any
time the financial position of the parent company and enable them
to ensure that its financial statements comply with the Companies
Act 2006. They have general responsibility for taking such steps as
are reasonably open to them to safeguard the assets of the Group
and to prevent and detect fraud and other irregularities.
By order of the Board
Pamela Coles
Company Secretary
11 February 2016
Rolls-Royce Holdings plc Annual Report 2015 105
Directors’ Report
FINANCIAL
STATEMENTS
157
157
158
158
158
158
159
159
159
CONSOLIDATED FINANCIAL STATEMENTS
COMPANY FINANCIAL STATEMENTS
Consolidated income statement
107
Company balance sheet
Consolidated statement
of comprehensive income
Consolidated balance sheet
Consolidated cash flow statement
Consolidated statement
of changes in equity
Notes to the Consolidated
Financial Statements
1 Accounting policies
2 Segmental analysis
3
Research and development
4 Net financing
5 Taxation
6 Earnings per ordinary share
7 Employee information
8 Auditors’ remuneration
9
Intangible assets
10 Property, plant and equipment
11 Investments
12 Inventories
13 Trade and other receivables
14 Cash and cash equivalents
15 Borrowings
16 Trade and other payables
17 Financial instruments
18 Provisions for liabilities
and charges
19 Post-retirement benefits
20 Share capital
21 Share-based payments
22 Leases
23 Contingent liabilities
24 Related party transactions
25 Acquisitions and disposals
Company statement of changes in equity
108
109
110
Notes to the Company
Financial Statements
1 Accounting policies
112
2
Investments –
subsidiary undertakings
3 Financial liabilities
4 Share capital
5 Contingent liabilities
6 Other Information
113
113
122
127
127
128
130
131
131
132
134
135
138
138
138
139
139
140
148
149
153
153
154
155
156
156
106 Rolls-Royce Holdings plc Annual Report 2015
Financial Statements
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2015
Continuing operations
Revenue
Cost of sales
Gross profit
Other operating income
Commercial and administrative costs
Research and development costs
Share of results of joint ventures and associates
Operating profit
Profit on acquisition/reclassification of joint ventures
Profit on disposal of businesses
Profit before financing and taxation
Financing income
Financing costs
Net financing
Profit before taxation 1
Taxation
Profit for the year from continuing operations
Discontinued operations
Profit for the year from ordinary activities
Profit on disposal
Profit for the year from discontinued operations
Profit for the year
Attributable to:
Ordinary shareholders
Non-controlling interests
Profit for the year
Earnings per ordinary share attributable to ordinary shareholders:
From continuing operations
Basic
Diluted
From continuing and discontinued operations
Basic
Diluted
Payments to ordinary shareholders in respect of the year:
Per share
Total
1 Underlying profit before taxation
2015
£m
2014
£m
13,725
(10,459)
3,266
10
(1,059)
(818)
100
1,499
–
2
1,501
115
(1,456)
(1,341)
160
(76)
84
–
–
–
84
83
1
84
13,736
(10,533)
3,203
10
(1,124)
(793)
94
1,390
2
6
1,398
121
(1,452)
(1,331)
67
(151)
(84)
4
138
142
58
69
(11)
58
Notes
2
3
11
2
4
4
5
2
6
4.51p
4.48p
4.51p
4.48p
(3.90)p
(3.90)p
3.68p
3.68p
17
16.37p
301
23.10p
435
2
1,432
1,620
Rolls-Royce Holdings plc Annual Report 2015 107
Financial StatementsFinancial Statements
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2015
Profit for the year
Other comprehensive income (OCI)
Movements in post-retirement schemes
Related tax movements
Items that will not be reclassified to profit or loss
Foreign exchange translation differences on foreign operations
Reclassified to income statement on disposal of businesses
Share of OCI of joint ventures and associates
Related tax movements
Items that may be reclassified to profit or loss
Total comprehensive income for the year
Attributable to:
Ordinary shareholders
Non-controlling interests
Total comprehensive income for the year
Notes
19
11
5
2015
£m
84
(722)
257
(465)
(129)
1
(19)
(2)
(149)
2014
£m
58
1,192
(431)
761
(158)
(29)
(13)
(2)
(202)
(530)
617
(530)
–
(530)
650
(33)
617
108 Rolls-Royce Holdings plc Annual Report 2015
Financial Statements CONSOLIDATED BALANCE SHEET
At 31 December 2015
ASSETS
Intangible assets
Property, plant and equipment
Investments – joint ventures and associates
Investments – other
Other financial assets
Deferred tax assets
Post-retirement scheme surpluses
Non-current assets
Inventories
Trade and other receivables
Taxation recoverable
Other financial assets
Short-term investments
Cash and cash equivalents
Assets held for sale
Current assets
TOTAL ASSETS
LIABILITIES
Borrowings
Other financial liabilities
Trade and other payables
Current tax liabilities
Provisions for liabilities and charges
Current liabilities
Borrowings
Other financial liabilities
Trade and other payables
Non-current tax liabilities
Deferred tax liabilities
Provisions for liabilities and charges
Post-retirement scheme deficits
Non-current liabilities
TOTAL LIABILITIES
NET ASSETS
EQUITY
Called-up share capital
Share premium account
Capital redemption reserve
Cash flow hedging reserve
Other reserves
Retained earnings
Equity attributable to ordinary shareholders
Non-controlling interests
TOTAL EQUITY
Notes
2015
£m
2014
£m
9
10
11
11
17
5
19
12
13
17
14
15
17
16
18
15
17
16
5
18
19
20
4,645
3,490
576
33
83
318
1,063
10,208
2,637
6,244
23
29
2
3,176
5
12,116
22,324
(419)
(331)
(6,923)
(164)
(336)
(8,173)
(2,883)
(1,651)
(2,317)
(1)
(839)
(304)
(1,140)
(9,135)
(17,308)
4,804
3,446
539
31
107
369
1,740
11,036
2,768
5,509
19
22
7
2,862
1
11,188
22,224
(68)
(209)
(6,791)
(184)
(433)
(7,685)
(2,193)
(717)
(2,445)
(10)
(1,228)
(374)
(1,185)
(8,152)
(15,837)
5,016
6,387
367
180
161
(100)
(51)
4,457
5,014
2
5,016
376
179
159
(81)
78
5,671
6,382
5
6,387
The financial statements on pages 107 to 156 were approved by the Board on 11 February 2016 and signed on its behalf by:
WARREN EAST Chief Executive
DAVID SMITH Chief Financial Officer
Rolls-Royce Holdings plc Annual Report 2015 109
Financial StatementsFinancial Statements
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 31 December 2015
Reconciliation of cash flows from operating activities
Operating profit from continuing operations
Operating loss from discontinued operations
Operating profit
Loss/(profit) on disposal of property, plant and equipment
Share of results of joint ventures and associates
Dividends received from joint ventures and associates
Return of capital from joint ventures
Gain on consolidation of previously non-consolidated subsidiary
Amortisation and impairment of intangible assets
Depreciation and impairment of property, plant and equipment
Impairment of investments
(Decrease)/increase in provisions
Decrease in inventories
Increase in trade and other receivables
Increase in trade and other payables
Cash flows on other financial assets and liabilities held for operating purposes
Net defined benefit post-retirement cost recognised in profit before financing
Cash funding of defined benefit post-retirement schemes
Share-based payments
Net cash inflow from operating activities before taxation
Taxation paid
Net cash inflow from operating activities
Cash flows from investing activities
Additions of unlisted investments
Additions of intangible assets
Disposals of intangible assets
Purchases of property, plant and equipment
Government grants received
Disposals of property, plant and equipment
Acquisitions of businesses
Acquisition of non-controlling interest
Disposal of discontinued operations
Disposals of other businesses
Investments in joint ventures and associates
Net cash outflow from investing activities
Cash flows from financing activities
Repayment of loans
Proceeds from increase in loans and finance leases
Capital element of finance lease payments
Net cash flow from increase/(decrease) in borrowings and finance leases
Interest received
Interest paid
Interest element of finance lease payments
Decrease in short-term investments
Issue of ordinary shares (net of expenses)
Purchase of ordinary shares – share buyback
Purchase of ordinary shares – other
Dividend paid to non-controlling interest
Redemption of C Shares
Net cash inflow/(outflow) from financing activities
Change in cash and cash equivalents
Cash and cash equivalents at 1 January
Exchange (losses)/gains on cash and cash equivalents
Cash and cash equivalents at 31 December
110 Rolls-Royce Holdings plc Annual Report 2015
Notes
11
11
11
9
10
11
19
21
2015
£m
1,499
–
1,499
8
(100)
63
–
–
432
378
2
(151)
63
(836)
242
(305)
213
(259)
5
1,254
(160)
1,094
(6)
(408)
4
(487)
8
33
(5)
–
(121)
2
(15)
(995)
(54)
1,150
(1)
1,095
5
(58)
(2)
5
32
(433)
(2)
–
(421)
221
320
2,862
(6)
3,176
2014
£m
1,390
(1)
1,389
(3)
(94)
73
3
(3)
367
375
–
129
166
(878)
214
(30)
170
(322)
21
1,577
(276)
1,301
(11)
(477)
–
(648)
11
65
(3)
(1,937)
1,027
24
(17)
(1,966)
(233)
49
–
(184)
18
(63)
–
313
1
(69)
(2)
(76)
(406)
(468)
(1,133)
3,987
8
2,862
Financial Statements Reconciliation of movements in cash and cash equivalents to movements in net funds
Change in cash and cash equivalents
Cash flow from (increase)/decrease in borrowings and finance leases
Cash flow from decrease in short-term investments
Change in net funds resulting from cash flows
Net funds (excluding cash and cash equivalents) of businesses acquired
Exchange gains on net funds
Fair value adjustments
Movement in net funds
Net funds at 1 January excluding the fair value of swaps
Net funds at 31 December excluding the fair value of swaps
Fair value of swaps hedging fixed rate borrowings
Net funds at 31 December
2015
£m
2014
£m
320
(1,095)
(5)
(780)
–
3
45
(732)
608
(124)
13
(111)
(1,133)
184
(313)
(1,262)
(30)
19
(59)
(1,332)
1,940
608
58
666
The movement in net funds (defined by the Group as including the items shown below) is as follows:
Cash at bank and in hand
Money-market funds
Short-term deposits
Cash and cash equivalents
Short-term investments
Other current borrowings
Non-current borrowings
Finance leases
Net funds excluding fair value of swaps
Fair value of swaps hedging fixed rate borrowings
Net funds
At
1 January
2015
£m
739
692
1,431
2,862
7
(67)
(2,149)
(45)
608
58
666
Funds
flow
£m
(69)
92
297
320
(5)
(64)
(1,027)
(4)
(780)
Exchange
differences
£m
(8)
(1)
3
(6)
–
–
12
(3)
3
(780)
3
Fair value
adjustments
£m
–
–
–
–
–
8
37
–
45
(45)
–
Reclassifications
£m
–
–
–
–
–
(294)
294
–
–
–
At
31 December
2015
£m
662
783
1,731
3,176
2
(417)
(2,833)
(52)
(124)
13
(111)
Rolls-Royce Holdings plc Annual Report 2015 111
Financial StatementsFinancial Statements
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2015
At 1 January 2014
Profit for the year
Foreign exchange translation differences on foreign
operations
Reclassified to income statement on disposal
of businesses
Movement on post-retirement schemes
Share of other comprehensive income of joint ventures
and associates
Related tax movements
Total comprehensive income for the year
Arising on issues of ordinary shares
Issue of C Shares
Redemption of C Shares
Ordinary shares purchased – share buyback 4
Ordinary shares cancelled 4
Ordinary shares purchased – other
Share-based payments – direct to equity 5
Transactions with NCI – acquisition of NCI shares
Dividend paid to NCI
Related tax movements
Other changes in equity in the year
At 1 January 2015
Profit for the year
Foreign exchange translation differences on foreign
operations
Reclassified to income statement on disposal
of businesses
Movement on post-retirement schemes
Share of other comprehensive income of joint ventures
and associates
Related tax movements
Total comprehensive income for the year
Arising on issues of ordinary shares
Issue of C Shares
Redemption of C Shares
Ordinary shares purchased – share buyback 4
Ordinary shares cancelled 4
Ordinary shares purchased – other
Share-based payments – direct to equity 5
Transactions with NCI
Related tax movements
Other changes in equity in the year
At 31 December 2015
Attributable to ordinary shareholders
Notes
Share
capital
£m
376
–
Share
premium
£m
80
–
Capital
redemption
reserve
£m
163
–
Cash flow
hedging
reserve1
£m
(68)
–
Other
reserves2
£m
250
–
Retained
earnings3
£m
4,804
69
Non-
controlling
interests
(NCI)
£m
698
(11)
Total
£m
5,605
69
Total
equity
£m
6,303
58
–
–
–
–
–
–
2
–
–
–
(2)
–
–
–
–
–
–
376
–
–
–
–
–
–
–
–
–
–
–
(9)
–
–
–
–
(9)
367
–
–
–
–
–
–
99
–
–
–
–
–
–
–
–
–
99
179
–
–
–
–
–
–
–
1
–
–
–
–
–
–
–
–
1
180
–
–
–
–
–
–
–
(414)
408
–
2
–
–
–
–
–
(4)
159
–
–
–
–
–
–
–
–
(430)
423
–
9
–
–
–
–
2
161
–
–
–
(13)
–
(13)
–
–
–
–
–
–
–
–
–
–
–
(81)
–
–
–
–
(19)
–
(19)
–
–
–
–
–
–
–
–
–
–
(100)
(141)
–
(141)
(17)
(158)
(29)
–
–
1,199
(29)
1,199
–
(7)
(29)
1,192
–
(2)
(172)
–
–
–
–
–
–
–
–
–
–
–
78
–
–
(433)
835
(100)
2
(408)
(69)
–
(2)
29
584
–
(4)
32
5,671
83
(13)
(435)
650
1
(412)
–
(69)
–
(2)
29
584
–
(4)
127
6,382
83
–
2
(33)
–
–
–
–
–
–
–
(584)
(76)
–
(660)
5
1
(13)
(433)
617
1
(412)
–
(69)
–
(2)
29
–
(76)
(4)
(533)
6,387
84
(128)
–
(128)
(1)
(129)
1
–
–
(722)
1
(722)
–
(2)
(129)
–
–
–
–
–
–
–
–
–
–
(51)
–
257
(382)
–
2
(423)
(433)
–
(2)
30
–
(6)
(832)
4,457
(19)
255
(530)
1
(428)
–
(433)
–
(2)
30
–
(6)
(838)
5,014
–
–
–
–
–
–
–
–
–
–
–
–
(3)
–
(3)
2
1
(722)
(19)
255
(530)
1
(428)
–
(433)
–
(2)
30
(3)
(6)
(841)
5,016
19
11
5
20
17
17
20
5
19
11
5
17
17
20
5
1 See accounting policies note 1.
2 Other reserves include a merger reserve of £3m (2014: £3m, 2013 £3m) and a translation reserve of £(54)m (2014: £75m, 2013: £247m).
3 At 31 December 2015, 5,894,064 ordinary shares with a net book value of £52m (2014 14,561,097, 2013 11,960,535 ordinary shares with net book values of £129m and £91m
respectively) were held for the purpose of share-based payment plans and included in retained earnings. During the year, 10,892,026 ordinary shares with a net book value of £98m
(2014 7,770,113 shares with a net book value of £64m) vested in share-based payment plans. During the year the Company acquired 224,993 (2014 169,404) of its ordinary shares via
reinvestment of dividends received on its own shares and purchased 2,000,000 (2014 nil) of its ordinary shares through purchases on the London Stock Exchange. During the year,
the Company issued no new ordinary shares (2014 10,200,000) to the Group’s share trust for its employees share-based payment plans with a net book value of nil (2014 £100m).
4 Following the completion of the sale of the Energy business to Siemens on 1 December 2014 and further to the announcement on 19 June 2014 of a £1bn share buyback, the Company
put in place a programme to enable the purchase of its ordinary shares. The aim of the buyback was to reduce the issued share capital of the Company, helping enhance returns
for shareholders. In the period to 31 December 2014, 8,215,000 shares were purchased at an average price of 840p. These shares were cancelled. In the year to 31 December 2015,
46,016,303 shares were purchased at an average price of 937p. 44,016,303 of these shares were cancelled and 2,000,000 were retained for use in share-based payment programmes.
On 6 July 2015, the Company announced that the share buyback programme had been curtailed at the to-date total of £500m.
5 Share-based payments – direct to equity 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.
112 Rolls-Royce Holdings plc Annual Report 2015
Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 Accounting policies
THE COMPANY
Rolls-Royce Holdings plc (the ‘Company’) is a company domiciled in the United Kingdom. The consolidated financial statements
of the Company for the year ended 31 December 2015 consist of the consolidation of the financial statements of the Company
and its subsidiaries (together referred to as the ‘Group’) and include the Group’s interest in jointly controlled and associated entities.
BASIS OF PREPARATION AND STATEMENT OF COMPLIANCE
In accordance with European Union (EU) regulations, these financial statements have been prepared in accordance with International
Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), as adopted for use in the EU effective
at 31 December 2015 (Adopted IFRS).
The Company has elected to prepare its individual company financial statements under FRS 101 Reduced Disclosure Framework. This year is
the first year that the financial statements have been prepared under FRS 101. They are set out on pages 157 to 159 and the accounting
policies in respect of Company financial statements are set out on page 158.
These consolidated financial statements have been prepared on the historical cost basis except where Adopted IFRS requires the
revaluation of financial instruments to fair value and certain other assets and liabilities on an alternative basis – most significantly
post-retirement scheme obligations are valued on the basis required by IAS 19 Employee Benefits – and on a going concern basis
as described on page 57.
The consolidated financial statements are presented in sterling which is the Company’s functional currency.
The preparation of financial statements in conformity with Adopted IFRS requires management to make judgements and estimates that
affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
KEY AREAS OF JUDGEMENT
Introduction
The Group generates a significant portion of its revenues and profit on aftermarket arrangements arising from the installed original
equipment (OE) fleet. As a consequence, the Group will often agree contractual prices for OE deliveries that take into account the
anticipated aftermarket arrangements. Accounting policies reflect this aspect of the business model, in particular the policies for
the recognition of contractual aftermarket rights and the linkage of OE and aftermarket arrangements.
When a civil large engine is sold, the economic benefits received usually far exceed the cash receivable under the contract, due to the
rights to valuable aftermarket spare parts business. However, because the value of this right cannot be estimated with enough precision,
accounting standards require that the revenue recognised in the accounts on sale of the engine is restricted to a total amount that results
in a break even position. The amount of the revenue recognised in excess of cash receivable is recognised as an intangible asset, which is
called a ‘contractual aftermarket right’ (previously referred to as a ‘recoverable engine cost’; this change has been made to reflect better
the nature of the asset).
There is only one circumstance where accounting standards require the recognition of more of the value of the aftermarket rights
when an engine is sold. This occurs where a long-term aftermarket contract (generally a TotalCare agreement – TCA) and an engine
sale contract have been negotiated together. In this circumstance, the part of the aftermarket rights covered by the TCA can be valued
much more precisely and is recognised at the time of the engine sale through accounting for the engine sale and TCA as a single contract.
Nevertheless, the accounting profit recognised is still less than the economic benefits on the sale as there will be other valuable
aftermarket rights (for instance for the period beyond the TCA term or for the sale of parts which are outside the scope of the TCA)
which cannot be recognised.
The Group enters into arrangements with long-term suppliers to share the risks and rewards of major programmes – risk and revenue
sharing arrangements (RRSAs). The accounting policy for these arrangements has been chosen, consistent with Adopted IFRS, to reflect
their commercial effect.
The key judgements in determining these accounting policies are described below.
Contractual aftermarket rights (CARs)
On delivery of Civil Aerospace engines, the Group has contractual rights to supply aftermarket parts to the customers and its intellectual
rights, warranty arrangements and, where relevant, statutory airworthiness or other regulatory requirements provide reasonable control
over this supply. The Directors consider that these rights meet the definition of an intangible asset in IAS 38 Intangible Assets. However,
the Directors do not consider that it is possible to determine a reliable fair value for this intangible asset. Accordingly, an intangible asset
(CAR) is only recognised on the occasions where the contractual price of the engine is below the cost of manufacture and then only to the
extent of this deficit, as this amount is reliably measureable. An equal amount of revenue is recognised at the same point. Where a
long-term aftermarket contract is linked to the OE contract (see below), the contractual price of the engine (including amounts allocated
from the aftermarket contract) is above its cost of manufacture; consequently no CAR is recognised.
Rolls-Royce Holdings plc Annual Report 2015 113
Financial StatementsFinancial Statements
1 Accounting policies continued
Measure of performance on long-term aftermarket contracts
A large proportion of the Group’s activities relate to long-term aftermarket contracts, in particular TotalCare and similar arrangements
in the Aerospace Division. Under these contracts, the Group’s primary obligation is to maintain customers’ equipment in an operational
condition and achieves this by undertaking various activities, such as engine monitoring, line maintenance and repair and overhaul, over
the period of the contract. In general, the Directors consider that the stage of performance of the contract should be by reference to the
obligation to maintain an operational fleet and that this is best measured by the operation of the fleet. Accordingly, stage of performance
is measured by reference to flying hours of each fleet under contract.
Linkage of original and long-term aftermarket contracts
Where the key terms of a long-term aftermarket contract are substantively agreed (eg. in a term sheet) at the same time as an OE contract
with the operator, the Directors consider these to be linked for accounting purposes and they are treated as a single contract, as this best
reflects the overall commercial effect. Where the OE contract is not with the operator, eg. where it is with an OE manufacturer or a lessor,
the contracts are not linked as they were not negotiated on a unified basis.
Risk and revenue sharing arrangements
RRSAs with key suppliers (workshare partners) are a feature of our Civil Aerospace business. Under these contractual arrangements the
key commercial objectives are that: (i) during the development phase the workshare partner shares in the risks of developing an engine
by performing its own development work, providing development parts and paying a non-refundable cash entry fee; and (ii) during the
production phase it supplies components in return for a share of the programme revenues as a ‘life of type’ supplier (ie. as long as the
engine remains in service). The share of development costs borne by the workshare partner and of the revenues it receives reflect the
partner’s proportionate cost of providing its production parts compared to the overall manufacturing cost of the engine. The share is
based on a jointly agreed forecast at the commencement of the arrangement.
These arrangements are complex and have features that could be indicative of: a collaboration agreement, including sharing of risk and
cost in a development programme; a long-term supply agreement; sharing of intellectual property; or a combination of these. In summary,
and as described below, the Directors’ view is that the development and production phases of the contract should be considered separately
in accounting for the RRSA, which results in the entry fee being matched against the non-recurring costs incurred by the Group.
Having considered the features above, the Directors considered that there is no directly applicable IFRS to determine an accounting policy
for the recognition of entry fees of this nature in the income statement. Consequently, in developing an accounting treatment for such
entry fees that best reflects the commercial objectives of the contractual arrangement, the Directors have analysed these features in the
context of relevant accounting pronouncements (including those of other standard setters where these do not conflict with IFRS) and have
weighed the importance of each feature in faithfully representing the overall commercial effect. The most important considerations that
need to be balanced are: the transfer of development risk; the workshare partner receiving little standalone value from the payment of the
entry fee; and the overall effect being collaboration between the parties which falls short of being a joint venture as the Group controls the
programme. Also important in the analysis is the fact that, whilst the Group and the workshare partner share risks and rewards through
the life of the contract, these risks and rewards are very different during the development and production phases.
In this context, the entry fee might be considered to represent: an amount paid as an equalisation of development costs; a payment to
secure a long-term supply arrangement; a purchase of intellectual property; or some combination thereof. The accounting under these
different scenarios could include: recognition of the entry fee to match the associated costs in the income statement; being spread over
the life of the programme as a reduction in the cost of supply during production; or being spread over the time period of the access to the
intellectual property by the workshare partner.
The Directors consider that the most important features of the arrangement are the risk sharing and that the entry fee represents a
contribution to the development costs that the Group incurs in excess of its proportionate programme share. The key judgements taken in
reaching this view are: the entry fee is determined by the parties on that basis and the contract specifies that, in the event that a derivative
engine is to be developed, additional entry fees will also be calculated on this basis; the workshare partners describe the entry fee in this
way; although the workshare partner receives little stand-alone value from paying the entry fee, the entry fee together with its own
development activities represent its aggregate investment in the collaboration; the amount of the entry fee does not include any amount
in excess of that necessary to equalise forecast development costs; the Group is not ‘on risk’ for the full development costs it incurs but for
that amount less the entry fees received; and, as far as can be determined, this appears to be common industry accounting for
arrangements of this type, under both Adopted IFRS and US accounting standards (which the Directors do not believe conflicts with IFRS
in this regard).
The resulting accounting policy (described on page 117) represents the commercial effect of the contractual arrangements in that the
Group recognises only those development costs to which it is exposed (and thus reflects the significant transfer of development risk to the
workshare partner) and the costs of supply of parts during the production phase is measured at the workshare partner’s share of
programme revenues (which we consider to be a commercial fair value). The Directors do not consider that accounting which would result
in entry fees only being recognised in the production phase would appropriately reflect the sharing of development risk. Accordingly, the
Directors believe that the policy adopted best reflects the commercial objectives of the arrangements, the nature of the relationship with
the workshare partner and is in accordance with Adopted IFRS.
114 Rolls-Royce Holdings plc Annual Report 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFinancial Statements 1 Accounting policies continued
As described in the 2013 Annual Report, an alternative view is that the RRSA contract cannot be divided into separate development and
production phases, as the fees and development components received by the Group during the development phase are exchanged for
the obligation to pay the supplier a predetermined share of any sales receipts during the production phase. On this basis the entry fees
received would be deferred in their entirety and recognised over the period of production. The size of the difference between the two
approaches is monitored and is not currently expected to become material in the foreseeable future. The impact of the different
approaches on profit before tax and net assets, which is not considered to be material, is as follows:
Adopted policy
Difference
Alternative policy
2015
2014
Reported
profit before tax
£m
160
(28)1
132
Underlying profit
before tax
£m
1,432
(28)
1,404
Net assets
£m
5,016
(435)
4,581
Reported
profit before tax
£m
67
(30)1
37
Underlying profit
before tax
£m
1,617
(30)
1,587
Net assets
£m
6,387
(402)
5,985
1 If the alternative policy were adopted, the difference would be included in profit before financing, which would change from £1,501m as reported to £1,473m (2014: £1,398m to £1,368m)
Internally generated development costs
IAS 38 requires that internally generated development costs should only be recognised if strict criteria are met, in particular relating to
technical feasibility and generation of future economic benefits. The Directors consider that, due to the complex nature of new equipment
programmes, these criteria are not met until relatively late in the programme – Civil Aerospace programmes represent around half of
development costs recognised; for these, the criteria are generally satisfied around the time of the initial engine certification.
Customer financing contingent liabilities
The Group has contingent liabilities in respect of financing support provided to customers. In order to assess whether a provision should
be recognised, judgement as to the likelihood of these crystallising is required. This judgement is based on an assessment on the knowledge
of the customers’ fleet plans, the underlying value of the security provided and, where appropriate, the customers’ creditworthiness.
KEY SOURCES OF ESTIMATION UNCERTAINTY
In applying the accounting policies, estimates are made in many areas; the actual outcome may differ from that calculated. The key sources of
estimation uncertainty at the balance sheet date, that have a significant risk of causing material adjustment to the carrying amounts of assets
and liabilities within the next financial year are set out below. The estimation of the relevant assets and liabilities involves the combination
of a number of assumptions. Sensitivities are disclosed in the relevant notes where this is appropriate and practicable.
Forecasts and discount rates
The carrying values of a number of items on the balance sheet are dependent on the estimates of future cash flows arising from the
Group’s operations, in particular:
• The assessment of whether the goodwill and other intangible assets (carrying value at 31 December 2015: £1,502m, 31 December
2014: £1,658m) arising on the consolidation of RRPS is impaired is dependent of the present value of the future cash flows expected to be
generated by the business.
• The assessment as to whether there are any indications of impairment of development, participation, certification, customer relationships
and contractual aftermarket rights recognised as intangible assets (carrying values at 31 December 2015: £2,533m, 31 December 2014:
£2,533m) is dependent on estimates of cash flows generated by the relevant assets and the discount rate used to calculate a present value.
These estimates include the performance of long-term contractual arrangements as described below, as well as estimates for future market
share, pricing and unit cost for uncontracted business. The risk of impairment is generally higher for newer programmes and for customer
specific intangible assets (CARs) for launch customers and typically reduces as programmes become more established.
Assessment of long-term contractual arrangements
The Group has long-term contracts that fall into different accounting periods and which can extend over significant periods – the most
significant of these are long-term service arrangements in the Civil Aerospace business. The estimated revenues and costs are inherently
imprecise and significant estimates are required to assess: engine flying hours, time on wing and other operating parameters; the pattern
of future maintenance activity and the costs to be incurred; and life cycle cost improvements over the term of the contracts. The estimates
take account of the inherent uncertainties and the risk of non-recovery of any resulting contract balances. During 2015, the methodologies
for making these estimates were reviewed and refined.
Post-retirement benefits
The Group’s defined benefit pension schemes and similar arrangements are assessed annually in accordance with IAS 19. The accounting
valuation, which is based on assumptions determined with independent actuarial advice, resulted in a net deficit of £77m before deferred
taxation being recognised on the balance sheet at 31 December 2015 (31 December 2014: net surplus £555m). The size of the net surplus/
deficit is sensitive to the market value of the assets held by the schemes and to actuarial assumptions, which include price inflation,
pension and salary increases, the discount rate used in assessing actuarial liabilities, mortality and other demographic assumptions and
the levels of contributions. Further details are included in note 19.
Rolls-Royce Holdings plc Annual Report 2015 115
Financial StatementsFinancial Statements
1 Accounting policies continued
Provisions
As described in the accounting policy on page 120, the Group measures provisions (carrying value at 31 December 2015: £640m,
31 December 2014: £807m) at the Directors’ best estimate of the expenditure required to settle the obligation at the balance sheet date.
These estimates take account of information available and different possible outcomes.
Taxation
The tax payable on profits is determined based on tax laws and regulations that apply in each of the numerous jurisdictions in which the
Group operates. Where the precise impact of these laws and regulations is unclear, or uncertain, then reasonable estimates may be used
to determine the tax charge included in the financial statements.
The main area of uncertainty is in relation to cross border transactions, entered into in the normal course of business, as the amount of
income or profit taxable in each country involved can be subjective and therefore open to interpretation by the relevant tax authorities.
This can result in disputes and possibly litigation.
Accruals for tax contingencies require management to make judgements and estimates of exposures in relation to tax audit issues and
other areas of uncertainty. Contingent liabilities, including in respect of any tax disputes or litigation, are covered in note 23 (contingent
liabilities). All provisions are in current liabilities. Any liability relating to interest or penalties on tax liabilities is included in the tax charge.
Deferred tax assets are recognised to the extent it is probable that future taxable profits will be available, against which the deductable
temporary difference can be utilised, based on management’s assumptions relating to the amounts and timing of future taxable profits.
Further details on the Group’s tax position can be found on page 176.
SIGNIFICANT ACCOUNTING POLICIES
The Group’s significant accounting policies are set out below. These accounting policies have been applied consistently to all periods
presented in these consolidated financial statements and by all Group entities.
Basis of consolidation
The Group consolidated financial statements include the financial statements of the Company and its subsidiary undertakings together
with the Group’s share of the results of joint arrangements and associates made up to 31 December. In line with common practice in
Germany, a small number of immaterial subsidiaries of Rolls-Royce Power Systems are not consolidated and are carried at cost in other
investments. If such subsidiaries become material, they are consolidated. The difference between the net assets recognised and the
investment cost eliminated is recognised in other operating income.
A subsidiary is an entity controlled by the Company. Control exists when the Company has power over an entity, exposure to variable
returns from its involvement with an entity and the ability to use its power over an entity so as to affect the Company’s returns.
A joint arrangement is an entity in which the Group holds a long-term interest and which is jointly controlled by the Group and one or more
other venturers under a contractual arrangement. Joint arrangements may be either joint ventures or joint operations. An associate is an
entity, being neither a subsidiary nor a joint arrangement, in which the Group holds a long-term interest and where the Group has a
significant influence. The results of joint ventures and associates are accounted for using the equity method of accounting. Joint operations
are accounted for using proportionate accounting.
Any subsidiary undertakings, joint arrangements or associates sold or acquired during the year are included up to, or from, the date
of change of control. Transactions with non-controlling interests are recorded directly in equity.
Where a put option over shares held by a non-controlling interest has been agreed, the Group recognises a liability for the estimated
exercise value of that option. Movements in the estimated liability after initial recognition are recognised in the income statement.
All intra-group transactions, balances, income and expenses are eliminated on consolidation. Adjustments are made to eliminate the
profit or loss arising on transactions with joint arrangements and associates to the extent of the Group’s interest in the entity.
Revenue recognition
Revenues comprise sales to outside customers after discounts, excluding value added taxes.
Sales of products (both original equipment and spare parts) are recognised when the significant risks and rewards of ownership of the goods
are transferred to the customer, the sales price agreed and the receipt of payment can be assured – this is generally on delivery. On occasion,
the Group may participate in the financing of OE, most commonly by the provision of guarantees as described in note 18. In such circumstances,
the contingent obligations arising under these arrangements are taken into account in assessing when the significant risks and rewards of
ownership have been transferred to the customer. As described on page 113, a sale of OE at a contractual price below its cost of manufacture
is considered to give rise to revenue to the extent that an intangible asset (contractual aftermarket right) is recognised at the same time.
116 Rolls-Royce Holdings plc Annual Report 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFinancial Statements 1 Accounting policies continued
Sales of services are recognised by reference to the stage of completion based on services performed to date. As described on page 114,
the assessment of the stage of completion is dependent on the nature of the contract, but will generally be based on: flying hours or
equivalent for long-term aftermarket arrangements where the service is provided on a continuous basis; costs incurred to the extent these
relate to services performed up to the reporting date; or achievement of contractual milestones where relevant.
As described on page 114, sales of products and services are treated as though they are a single contract where these components have
been negotiated as a single commercial package and are so closely interrelated that they do not operate independently of each other and
are considered to form a single transaction with an overall profit margin. The total revenue is allocated between the two components such
that the total agreed discount to list prices is allocated to revenue for each of the two components pro rata, based on list prices. The
revenue is then recognised for each component on this basis as the products are delivered and services provided, as described above.
Where the contractual price of the OE component is below the revenue allocated from the combined arrangement, this will give rise
to an asset included in ‘amounts recoverable on contracts’. This asset reduces as services are provided, increases as costs are incurred,
and reduces to zero by the end of the contract. Where the balance is a liability, it is recognised in ‘accruals and deferred income’.
Provided that the outcome of construction contracts can be assessed with reasonable certainty, the revenues and costs on such contracts are
recognised based on stage of completion and the overall contract profitability. Full provision is made for any estimated losses to completion
of contracts, having regard to the overall substance of the arrangements.
Progress payments received, when greater than recorded revenue, are deducted from the value of work in progress except to the extent
that payments on account exceed the value of work in progress on any contract where the excess is included in accruals and deferred
income within trade and other payables. The amount by which recorded revenue of long-term contracts is in excess of payments on
account is classified as amounts recoverable on contracts and is separately disclosed within trade and other receivables.
TotalCare arrangements
As described above, these are accounted for on a stage of completion basis, with the stage of completion based on the proportion of flying
hours completed compared to the total estimated under the contract. In making the assessment of future revenues, costs and the level of
profit recognised the Group takes account of: (i) the forecast utilisation of the engines by the operator; (ii) the forecast costs to maintain the
engines in accordance with the contractual requirements – the principal variables being the time between shop visits and the cost of each
shop visit; and (iii) the recoverability of any contract asset arising. The Group benchmarks the forecast costs against previous programmes,
recognising that the reliability of the forecasts will improve as operational experience of the engine increases. To the extent that actual
costs differ from forecast costs or that forecast costs change, the cumulative impact is recognised in the period. An allowance is made
against forecast contract revenues given the potential for reduced engine flying hours based on historical forecasting accuracy, the risk of
aircraft being parked by the customer and the customer’s creditworthiness (previously assessed against contract assets arising, based on
both the customer’s creditworthiness and an assessment of the importance of the particular engine fleet to the customer). Again, changes
in this allowance are recognised in the period.
Risk and revenue sharing arrangements (RRSAs)
As described on page 114, the Group enters into arrangements with certain workshare partners under which these suppliers: (i) contribute
to the forecast costs of developing an engine by performing their own development work, providing development parts and paying a
non-refundable cash entry fee; and (ii) supply components for the production phase for which they receive consideration, which is an
agreed proportion of the total programme revenues. Both the suppliers’ contributions to the forecast non-recurring development costs
and their consideration are determined by reference to their proportionate forecast scopes of supply relative to that of the engine overall.
Once the forecast costs and the scopes of supply have been agreed at the inception of the contract, each party is then accountable for its
own incurred costs. No accounting entries are recorded when the suppliers undertake development work or when development
components are supplied. Cash sums received are recognised in the income statement, as a reduction in research and development costs
incurred, to match the expensing of the Group’s related costs – where the cash sums are received in advance of the related costs being
expensed or where the related costs are capitalised as intangible assets, the recognition of the cash received is deferred (in accruals and
deferred income) to match the recognition of the related expense or the amortisation of the related intangible asset respectively. The
payments to suppliers of their shares of the programme revenues for their production components are charged to cost of sales as
programme revenues arise.
The Group has arrangements with partners who do not undertake development work or supply parts. Such arrangements are considered
to be financial instruments as defined by IAS 32 Financial Instruments: Presentation and are accounted for using the amortised cost method.
Government investment
Where a government or similar body has previously invested in a development programme, the Group treats payments to that body
as royalty payments, which are matched to related sales.
Government grants
Government grants are recognised in the income statement so as to match them with the related expenses that they are intended to
compensate. Where grants are received in advance of the related expenses, they are included in the balance sheet as deferred income.
Non-monetary grants are recognised at fair value.
Rolls-Royce Holdings plc Annual Report 2015 117
Financial StatementsFinancial Statements
1 Accounting policies continued
Interest
Interest receivable/payable is credited/charged to the income statement using the effective interest method. Where borrowing costs are
attributable to the acquisition, construction or production of a qualifying asset, such costs are capitalised as part of the specific asset.
Taxation
The tax charge/credit on the profit or loss for the year comprises current and deferred tax:
• Current tax is the expected tax payable for the year, using tax rates enacted or substantively enacted at the balance sheet date, and
any adjustment to tax payable in respect of previous years.
• Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts
of the assets and liabilities for financial reporting purposes and the amounts used for tax purposes and is calculated using the enacted
or substantively enacted rates that are expected to apply when the asset or liability is settled.
Tax is charged or credited in the income statement or other comprehensive income (OCI) as appropriate, except when it relates to items
credited or charged directly to equity in which case the tax is also dealt with in equity.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and joint arrangements,
except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not
reverse in the foreseeable future. Deferred tax is not recognised on taxable temporary differences arising on the initial recognition of
goodwill or for temporary differences arising from the initial recognition of assets and liabilities in a transaction that is not a business
combination and that affects neither accounting nor taxable profit.
Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the
assets can be utilised.
Foreign currency translation
Transactions denominated in currencies other than the functional currency of the transacting Group undertaking are translated into
the functional currency at the exchange rates ruling on the date of the transaction. Monetary assets and liabilities denominated in foreign
currencies are translated into the relevant functional currency at the rate ruling at the year end. Exchange differences arising on foreign
exchange transactions and the retranslation of assets and liabilities into functional currencies at the rate ruling at the year end are taken
into account in determining profit before taxation.
The trading results of Group undertakings are translated into sterling at the average exchange rates for the year. The assets and liabilities of
overseas undertakings, including goodwill and fair value adjustments arising on acquisition, are translated at the exchange rates ruling at the
year end. Exchange adjustments arising from the retranslation of the opening net investments, and from the translation of the profits or losses
at average rates, are recognised in OCI. The cumulative amount of exchange adjustments was, on transition to IFRS in 2004, deemed to be nil.
Financial instruments
IAS 39 Financial Instruments: Recognition and Measurement requires the classification of financial instruments into separate categories
for which the accounting requirement is different. The Group has classified its financial instruments as follows:
• short-term investments are generally classified as available for sale;
• short-term deposits (principally comprising funds held with banks and other financial institutions), trade receivables and short-term
investments not designated as available for sale are classified as loans and receivables;
• borrowings, trade payables, financial RRSAs, put options on NCI, and C Shares are classified as other liabilities; and
• derivatives, comprising foreign exchange contracts, interest rate swaps and commodity swaps are classified as fair value through profit
or loss.
Financial instruments are recognised at the contract date and initially measured at fair value. Their subsequent measurement depends
on their classification:
• Available for sale assets are held at fair value. Changes in fair value arising from changes in exchange rates are included in the income
statement. All other changes in fair value are taken to equity. On disposal, the accumulated changes in value recorded in equity are
included in the gain or loss recorded in the income statement.
• Loans and receivables and other liabilities are held at amortised cost and not revalued (except for changes in exchange rates and
forecast contractual cash flows, which are included in the income statement) unless they are included in a fair value hedge accounting
relationship. Where such a hedging relationship exists, the instruments are revalued in respect of the risk being hedged, with the change
in value included in the income statement.
• Fair value through profit or loss items are held at fair value. Changes in fair value are included in the income statement unless the
instrument is included in a cash flow hedge. If the instruments are included in an effective cash flow hedging relationship, changes
in value are taken to equity. When the hedged forecast transaction occurs, amounts previously recorded in equity are recognised
in the income statement.
Financial instruments are derecognised on expiry or when all contractual rights and obligations are transferred.
118 Rolls-Royce Holdings plc Annual Report 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFinancial Statements 1 Accounting policies continued
Hedge accounting
The Group does not generally apply hedge accounting in respect of forward foreign exchange contracts or commodity swaps held
to manage the cash flow exposures of forecast transactions denominated in foreign currencies or in commodities respectively.
The Group applies hedge accounting in respect of transactions entered into to manage the fair value and cash flow exposures of its
borrowings. Forward foreign exchange contracts are held to manage the fair value exposures of borrowings denominated in foreign
currencies and are designated as fair value hedges. Interest rate swaps are held to manage the interest rate exposures and are designated
as fair value or cash flow hedges of fixed and floating rate borrowings respectively.
Changes in the fair values of derivatives designated as fair value hedges and changes in fair value of the related hedged item are
recognised directly in the income statement.
Changes in the fair values of derivatives that are designated as cash flow hedges and are effective are recognised directly in equity.
Any ineffectiveness in the hedging relationships is included in the income statement. The amounts deferred in equity are recognised
in the income statement to match the recognition of the hedged item.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, exercised, or no longer qualifies for hedge
accounting. At that time, for cash flow hedges and if the forecast transaction remains probable, any cumulative gain or loss on the hedging
instrument recognised in equity is retained in equity until the forecast transaction occurs. If a hedged transaction is no longer expected
to occur, the net cumulative gain or loss previously recognised in equity is transferred to the income statement.
The portion of a gain or loss on an instrument used to hedge a net investment in a foreign operation that is determined to be an effective
hedge is recognised directly in equity. The ineffective portion is recognised immediately in the income statement. Gains and losses
accumulated in the translation reserve will be recycled to profit when the foreign operation is sold.
Business combinations and goodwill
On the acquisition of a business, fair values are attributed to the identifiable assets and liabilities and contingent liabilities unless the fair value
cannot be measured reliably, in which case the value is subsumed into goodwill. Where fair values of acquired contingent liabilities cannot be
measured reliably, the assumed contingent liability is not recognised but is disclosed in the same manner as other contingent liabilities.
Goodwill recognised represents the excess of the fair value of the purchase consideration over the fair value to the Group of the net of
the identifiable assets acquired and the liabilities assumed. On transition to IFRS on 1 January 2004, business combinations were not
retrospectively adjusted to comply with Adopted IFRS and goodwill was recognised based on the carrying value under the previous
accounting policies. Goodwill in respect of the acquisition of a subsidiary is recognised as an intangible asset. Goodwill arising on the
acquisition of joint arrangements and associates is included in the carrying value of the investment.
Certification costs and participation fees
Costs incurred in respect of meeting regulatory certification requirements for new civil aero-engine/aircraft combinations including
payments made to airframe manufacturers for this and participation fees are carried forward in intangible assets to the extent that they
can be recovered out of future sales and are charged to the income statement over the programme life, up to a maximum of 15 years
from the entry into service of the product.
Research and development
In accordance with IAS 38 Intangible Assets, expenditure incurred on research and development is distinguished as relating either
to a research phase or to a development phase.
All research phase expenditure is charged to the income statement. Development expenditure is capitalised as an internally generated
intangible asset only if it meets strict criteria, relating in particular to technical feasibility and generation of future economic benefits.
As described on page 115, the Group considers that it is not possible to distinguish reliably between research and development activities
until relatively late in the programme.
Expenditure capitalised is amortised over its useful economic life, up to a maximum of 15 years from the entry into service of the product.
Contractual aftermarket rights
As described under key judgements on page 113, the Group may sell OE to customers at a price below its cost, on the basis that it also
receives valuable aftermarket rights. Such a sale is considered to give rise to an intangible asset which is recognised, in accordance with
IAS 38, at the same time as the revenue at an amount equal to the cash deficit and is amortised on a straight-line basis over the period
that highly probable aftermarket sales are expected to be earned.
Customer relationships
The fair value of customer relationships recognised as a result of a business combination relate to the acquired company’s established
relationships with its existing customers that result in repeat purchases and customer loyalty. Amortisation occurs on a straight-line
basis over its useful economic life, up to a maximum of 15 years.
Rolls-Royce Holdings plc Annual Report 2015 119
Financial StatementsFinancial Statements
1 Accounting policies continued
Software
The cost of acquiring software that is not specific to an item of property, plant and equipment is classified as an intangible asset and
amortised over its useful economic life, up to a maximum of five years.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and any provision for impairment in value.
Depreciation is provided on a straight-line basis to write off the cost, less the estimated residual value, of property, plant and equipment
over their estimated useful lives. No depreciation is provided on assets in the course of construction. Estimated useful lives are as follows:
i) land and buildings, as advised by the Group’s professional advisers:
a) freehold buildings – five to 45 years (average 25 years);
b) leasehold buildings – lower of adviser’s estimates or period of lease;
c) no depreciation is provided on freehold land;
ii) plant and equipment – five to 25 years (average 13 years);
iii) aircraft and engines – five to 20 years (average 13 years).
Operating leases
Payments made and rentals received under operating lease arrangements are charged/credited to the income statement on a straight-
line basis.
Impairment of non-current assets
Impairment of non-current assets is considered in accordance with IAS 36 Impairment of Assets. Where the asset does not generate cash
flows that are independent of other assets, impairment is considered for the cash-generating unit to which the asset belongs. Goodwill
and intangible assets not yet available for use are tested for impairment annually. Other intangible assets, property, plant and equipment
and investments are assessed for any indications of impairment annually. If any indication of impairment is identified, an impairment
test is performed to estimate the recoverable amount.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be below the carrying value, the carrying value is reduced
to the recoverable amount and the impairment loss recognised as an expense. The recoverable amount is the higher of value in use or fair
value less costs to sell, if this is readily available. The value in use is the present value of future cash flows using a pre-tax discount rate
that reflects the time value of money and the risk specific to the asset.
Inventories
Inventories and work in progress are valued at the lower of cost and net realisable value on a first-in, first-out basis. Cost comprises direct
materials and, where applicable, direct labour costs and those overheads, including depreciation of property, plant and equipment, that
have been incurred in bringing the inventories to their present location and condition. Net realisable value represents the estimated
selling prices less all estimated costs of completion and costs to be incurred in marketing, selling and distribution.
Cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand, investments in money-market funds and short-term deposits with
a maturity of three months or less on inception. The Group considers overdrafts (repayable on demand) to be an integral part of its
cash management activities and these are included in cash and cash equivalents for the purposes of the cash flow statement.
Provisions
Provisions are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will
be required to settle that obligation. Provisions are measured at the Directors’ best estimate of the expenditure required to settle the
obligation at the balance sheet date, and are discounted to present value where the effect is material.
Post-retirement benefits
Pensions and similar benefits (principally healthcare) are accounted for under IAS 19 Employee Benefits.
For defined benefit plans, obligations are measured at discounted present value, using a discount rate derived from high-quality corporate
bonds denominated in the currency of the plan, whilst plan assets are recorded at fair value. Surpluses in schemes are recognised as assets
only if they represent economic benefits available to the Group in the future. A liability is recognised to the extent that the minimum
funding requirements in respect of past service will give rise to an unrecognisable surplus.
The service and financing costs of such plans are recognised separately in the income statement:
• current service costs are spread systematically over the lives of employees;
• past service costs are recognised immediately; and
• financing costs are recognised in the periods in which they arise.
Actuarial gains and losses and movements in unrecognised surpluses and minimum funding liabilities are recognised immediately in OCI.
Payments to defined contribution schemes are charged as an expense as they fall due.
120 Rolls-Royce Holdings plc Annual Report 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFinancial Statements
1 Accounting policies continued
Share-based payments
The Group provides share-based payment arrangements to certain employees. These are principally equity-settled arrangements and
are measured at fair value (excluding the effect of non-market based vesting conditions) at the date of grant. The fair value is expensed
on a straight-line basis over the vesting period. The amount recognised as an expense is adjusted to reflect the actual number of shares
or options that will vest, except where additional shares vest as a result of the total shareholder return (TSR) performance condition
in the Performance Share Plan (PSP).
Cash-settled share options (grants in the International ShareSave plan) are measured at fair value at the balance sheet date. The Group
recognises a liability at the balance sheet date based on these fair values, taking into account the estimated number of options that will
actually vest and the relative completion of the vesting period. Changes in the value of this liability are recognised in the income statement
for the year.
The cost of shares of Rolls-Royce Holdings plc held by the Group for the purpose of fulfilling obligations in respect of employee share plans
is deducted from equity in the consolidated balance sheet. See note 21 for a further description of the share-based payment plans.
Sales financing support
In connection with the sale of its products, the Group will, on occasion, provide financing support for its customers. These arrangements
fall into two categories: credit-based guarantees and asset-value guarantees. In accordance with the requirements of IAS 39 and IFRS 4
Insurance Contracts, credit-based guarantees are treated as insurance contracts. The Group considers asset-value guarantees to be
non-financial liabilities and accordingly these are also treated as insurance contracts. As described on page 115, the Directors consider the
likelihood of crystallisation in assessing whether provision is required for any contingent liabilities.
The Group’s contingent liabilities relating to financing arrangements are spread over many years and relate to a number of customers
and a broad product portfolio, and are reported on a discounted basis.
Revisions to Adopted IFRS in 2015
There were no changes to accounting standards that had a material impact on the 2015 financial statements.
Revisions to IFRS not applicable in 2015
Standards and interpretations issued by the IASB are only applicable if endorsed by the EU.
Once endorsed, IFRS 9 Financial Instruments will simplify the classification of financial assets for measurement purposes, but is not
anticipated to have a significant impact on the financial statements.
IFRS 15 Revenue from Contracts with Customers (effective for the year ending 31 December 2018, not yet endorsed by the EU) provides
a single, principles-based five-step model to be applied to all sales contracts, based on the transfer of control of goods and services
to customers. It replaces the separate models for goods, services and construction contracts currently included in IAS 11 Construction
Contracts and IAS 18 Revenue. Given the nature of the Group’s long-term contracts, it is likely that the adoption of IFRS 15 will require
significant judgement.
Based on the provisional assessment, IFRS 15 will have a significant impact on the timing of recognition of revenue on individual long-term
contracts, most particularly in the Civil Aerospace business, although this impact is likely to be significantly reduced at a Group level when all
long-term contracts (with different start and end dates) are combined. The key areas of judgement are: (i) whether contractual aftermarket
rights can continue to be recognised; (ii) whether OE and TotalCare contracts can be linked for accounting purposes; and (iii) how performance
should be measured on TotalCare contracts. The Group will continue to assess the impact during 2016 and also consider the interpretations
of other aerospace and defence companies .
IFRS 16 Leases (effective for the year ending 31 December 2019, not yet endorsed by the EU) will require all leases to be recognised on the
balance sheet. Currently, IAS 17 Leases only requires leases categorised as finance leases to be recognised on the balance sheet, with leases
categorised as operating leases not recognised. In broad terms, the impact will be to recognise a lease liability and corresponding asset
for the operating lease commitments set out in note 22.
The Group does not consider that any other standards, amendments or interpretations issued by the IASB, but not yet applicable, will have
a significant impact on the financial statements.
Rolls-Royce Holdings plc Annual Report 2015 121
Financial StatementsFinancial Statements
2 Segmental analysis
The analysis by Division (business segment) is presented in accordance with IFRS 8 Operating Segments, on the basis of those segments
whose operating results are regularly reviewed by the Board (the Chief Operating Decision Maker as defined by IFRS 8), as follows:
AEROSPACE DIVISION:
Civil
Defence
– development, manufacture, marketing and sales of commercial aero engines and aftermarket services.
– development, manufacture, marketing and sales of military aero engines and aftermarket services.
LAND & SEA DIVISION:
Power Systems – development, manufacture, marketing and sales of reciprocating engines and power systems.
Marine
Nuclear
– development, manufacture, marketing and sales of marine-power propulsion systems and aftermarket services.
– development, manufacture, marketing and sales of nuclear systems for civil power generation and naval
propulsion systems.
The Energy business was sold on 1 December 2014 and is excluded from the 2014 comparative figures. The residual businesses previously
included in the Energy sector and costs associated with the wind-down are shown as ‘Other’.
The operating results reviewed by the Board are prepared on an underlying basis, which the Board considers reflects better the economic
substance of the Group’s trading during the year. Additional disclosure of the two segments is also provided. The principles adopted to
determine underlying results are:
Underlying revenues – Where revenues are denominated in a currency other than the functional currency of the Group undertaking,
these reflect the achieved exchange rates arising on settled derivative contracts.
Underlying profit before financing – Where transactions are denominated in a currency other than the functional currency of the Group
undertaking, this reflects the transactions at the achieved exchange rates on settled derivative contracts. In addition, adjustments have
been made to exclude one-off past service credits on post-retirement schemes, exceptional restructuring costs, the effect of acquisition
accounting and the impairment of goodwill.
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; and
• excludes unrealised amounts arising from revaluations required by IAS 39 Financial Instruments: Recognition and Measurement,
changes in value of financial RRSA contracts arising from changes in forecast payments, changes in the value of put options on NCI
and the net impact of financing costs related to post-retirement scheme benefits.
Taxation – the tax effect of the adjustments above are excluded from the underlying tax charge. In addition changes in the amount
of recoverable advance corporation tax recognised and the impact of changes in tax rates are also excluded.
This analysis also includes a reconciliation of the underlying results to those reported in the consolidated income statement.
122 Rolls-Royce Holdings plc Annual Report 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFinancial Statements 2 Segmental analysis continued
Aerospace
Land & Sea
Civil
£m
Defence
£m
Total
£m
Power
Systems
£m
Marine
£m
Nuclear
£m
Other 1
£m
Intra-
segment
£m
Inter-
segment
£m
Total
reportable
segments
£m
Total
£m
773
551
1,324
260
(201)
(16)
(28)
–
15
1,481
7
(783)
705
Year ended 31 December 2015
Underlying revenue from sale of original
equipment
Underlying revenue from aftermarket services
Total underlying revenue
Gross profit
Commercial and administrative costs
Restructuring
Research and development costs
Share of results of joint ventures and associates
Underlying profit before financing and taxation
3,258
3,675
6,933
1,526
(296)
(7)
(515)
104
812
801
1,234
2,035
579
(124)
(8)
(73)
19
393
4,059
4,909
8,968
2,105
(420)
(15)
(588)
123
1,205
1,618
767
2,385
635
(275)
(4)
(162)
–
194
Segment assets
Investments in joint ventures and associates
Segment liabilities
Net assets/(liabilities)
Investment in intangible assets, property, plant
and equipment and joint ventures and associates
Depreciation, amortisation and impairment
11,229
545
(8,709)
3,065
1,437 12,666
557
(10,407)
2,816
12
(1,698)
(249)
3,376
8
(1,017)
2,367
668
410
84
58
752
468
108
197
36
111
Year ended 31 December 2014
Underlying revenue from sale of original
equipment 2
3,463
Underlying revenue from aftermarket services 2 3,374
6,837
Total underlying revenue
1,675
Gross profit
(283)
Commercial and administrative costs
(82)
Restructuring
(461)
Research and development costs
93
Share of results of joint ventures and associates
942
Underlying profit before financing and taxation
816
1,253
2,069
567
(112)
(55)
(50)
16
366
4,279
4,627
8,906
2,242
(395)
(137)
(511)
109
1,308
1,893
827
2,720
742
(296)
(7)
(183)
(3)
253
1,070
639
1,709
425
(254)
(4)
(29)
–
138
Segment assets
Investments in joint ventures and associates
Segment liabilities
Net assets/(liabilities)
Investment in intangible assets, property, plant
and equipment and joint ventures and associates
Depreciation, amortisation and impairment
10,268
507
(7,418)
3,357
1,460
13
(1,743)
(270)
11,728
520
(9,161)
3,087
3,581
7
(1,100)
2,488
1,636
5
(1,075)
566
836
381
78
49
914
430
144
221
36
38
251
436
687
111
(53)
(2)
14
–
70
300
3
(324)
(21)
18
23
230
408
638
119
(61)
(1)
(7)
–
50
333
3
(389)
(53)
23
22
76
20
96
64
(4)
(2)
(1)
(5)
52
119
1
(120)
–
–
11
24
22
46
8
(10)
–
–
–
(2)
621
4
(491)
134
8
13
(53)
(53)
(106)
7
–
–
–
–
7
–
–
–
–
–
–
(78)
(77)
(155)
(13)
–
–
–
–
(13)
(22)
–
–
(22)
–
–
2,665
1,721
4,386
1,077
(533)
(24)
(177)
(5)
338
5,276
19
(2,244)
3,051
162
342
3,139
1,819
4,958
1,281
(621)
(12)
(219)
(3)
426
6,724
–
6,630
–
– 13,354
3,182
–
(953)
–
(39)
–
(765)
–
118
–
1,543
–
(850) 17,092
576
(11,801)
5,867
–
850
–
–
–
914
810
7,418
–
–
6,446
– 13,864
3,523
–
(1,016)
–
(149)
–
(730)
–
106
–
1,734
–
6,149
19
(3,055)
3,113
(1,269) 16,608
539
(10,947)
6,200
–
1,269
–
211
294
–
–
1,125
724
1 Energy business retained following 2014 disposal.
2 The basis for the allocation of Civil Aerospace revenues on linked TotalCare contracts between OE and aftermarket has been reviewed and amendments made to reflect better the
commercial substance of the combined contracts. Historically, the allocation has resulted in OE revenue and aftermarket revenue reflecting the contractual terms rather than the
commercial substance of the contracts. The 2014 figures have been restated on the same basis; the impact was an increase in OE revenue of £198m and an equal decrease in
aftermarket revenue.
Rolls-Royce Holdings plc Annual Report 2015 123
Financial StatementsFinancial Statements
2 Segmental analysis continued
RECONCILIATION TO REPORTED RESULTS
Year ended 31 December 2015
Revenue from sale of original equipment
Revenue from aftermarket services
Total revenue
Gross profit
Other operating income
Commercial and administrative costs
Restructuring
Research and development costs
Share of results of joint ventures and associates
Profit on disposal of businesses
Profit before financing and taxation
Net financing
Profit before taxation
Taxation
Profit for the year from continuing operations
Profit for the year from discontinued operations
Profit for the year
Attributable to:
Ordinary shareholders
Non-controlling interests
Year ended 31 December 2014
Revenue from sale of original equipment
Revenue from aftermarket services
Total revenue
Gross profit
Other operating income
Commercial and administrative costs
Restructuring
Research and development costs
Share of results of joint ventures and associates
Profit on transfer of joint ventures to subsidiaries
Profit on disposal of businesses
Profit before financing and taxation
Net financing
Profit before taxation
Taxation
Profit for the year from continuing operations
Profit for the year from discontinued operations
Profit for the year
Attributable to:
Ordinary shareholders
Non-controlling interests
1 Central corporate costs.
CASH FLOWS FROM DISCONTINUED OPERATIONS
Revenue
Profit before taxation
Tax on ordinary activities
Profit for the year from ordinary activities
Profit on disposal of discontinued operations
Tax on profit on disposal of discontinued operations
Profit for the year from discontinued operations
Net cash outflow from operating activities
Net cash outflow from investing activities
Net change in cash and cash equivalents
124 Rolls-Royce Holdings plc Annual Report 2015
Total reportable
segments
£m
Underlying
central items
£m
Total
underlying
£m
Underlying
adjustments
£m
Discontinued
business
£m
6,724
6,630
13,354
3,182
–
(953)
(39)
(765)
118
–
1,543
7,418
6,446
13,864
3,523
–
(1,016)
(149)
(730)
106
–
–
1,734
–
(51)1
–
–
–
–
(51)
(60)
(111)
(351)
–
(53)1
–
–
–
–
–
(53)
(61)
(114)
(388)
6,724
6,630
13,354
3,182
–
(1,004)
(39)
(765)
118
–
1,492
(60)
1,432
(351)
1,081
–
1,081
1,080
1
7,418
6,446
13,864
3,523
–
(1,069)
(149)
(730)
106
–
–
1,681
(61)
1,620
(388)
1,232
–
1,232
1,226
6
215
156
371
84
10
(55)
39
(53)
(18)
2
9
(1,281)
(1,272)
275
(997)
–
(997)
(997)
–
(1)
(127)
(128)
(320)
10
(55)
149
(63)
(12)
2
6
(283)
(1,270)
(1,553)
237
(1,316)
–
(1,316)
(1,299)
(17)
142
142
142
–
Group
£m
6,939
6,786
13,725
3,266
10
(1,059)
–
(818)
100
2
1,501
(1,341)
160
(76)
84
–
84
83
1
7,417
6,319
13,736
3,203
10
(1,124)
–
(793)
94
2
6
1,398
(1,331)
67
(151)
(84)
142
58
69
(11)
2014
£m
713
1
3
4
136
2
142
(127)
(35)
(162)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFinancial Statements 2 Segmental analysis continued
UNDERLYING ADJUSTMENTS
Underlying performance previously
reported
Energy disposed in 2014
Underlying performance
Revenue recognised at exchange rate
on date of transaction
Realised losses/(gains) on settled
derivative contracts 1
Net unrealised fair value changes to
derivative contracts 2
Effect of currency on contract
accounting
Revaluation of trading assets and
liabilities
Put option on NCI and financial RRSAs
– foreign exchange differences and
other unrealised changes in value
Effect of acquisition accounting 3
Impairment of goodwill
Net post-retirement scheme financing
Gain on reclassification of joint ventures
to subsidiaries
Disposal of businesses
Restructuring 4
Other
Related tax effect 5
Total underlying adjustments
Reported per consolidated
income statement
2015
2014
Revenue
£m
Profit before
financing
£m
Net
financing
£m
Taxation
£m
Revenue
£m
Profit before
financing
£m
Net
financing
£m
Taxation
£m
13,354
1,492
371
–
–
–
–
–
–
–
–
–
–
–
–
–
371
–
287
(9)
(9)
(13)
–
(124)
(75)
–
–
2
(49)
(1)
–
9
(60)
–
(35)
(1,306)
–
20
8
–
–
32
–
–
–
–
–
(1,281)
14,588
(724)
13,864
(128)
–
–
–
–
–
–
–
–
–
–
–
–
–
(128)
(351)
–
–
–
–
–
–
–
–
–
–
–
–
–
275
275
1,678
3
1,681
–
(91)
(15)
13
(11)
–
(142)
–
–
2
6
(39)
(6)
–
(283)
(61)
–
(61)
–
(5)
(1,141)
–
(8)
(87)
–
–
(29)
–
–
–
–
–
(1,270)
(387)
(1)
(388)
–
–
–
–
–
–
–
–
–
–
–
–
–
237
237
13,725
1,501
(1,341)
(76)
13,736
1,398
(1,331)
(151)
1
2
3
4
Realised losses/(gains) on settled derivative contracts include adjustments to reflect the losses/(gains) in the same period as the related trading cash flows.
Unrealised fair value changes to derivative contracts included in profit before financing: (i) include those included in equity accounted joint ventures; and (ii) exclude those for which
the related trading contracts have been cancelled when the fair value changes are recognised immediately in underlying profit.
The adjustment eliminates charges recognised as a result of recognising assets in acquired businesses at fair value.
Restructuring is excluded from underlying performance when it concerns the closure of a significant business or site.
5 2015 includes an £18m credit relating to changes in UK tax rates. 2014 included a charge of £64m for the derecognition of advance corporation tax.
The reconciliation of underlying earnings per ordinary share is shown in note 6.
RECONCILIATION TO THE BALANCE SHEET
Reportable segment assets
Investments in joint ventures and associates
Cash and cash equivalents and short-term investments
Fair value of swaps hedging fixed rate borrowings
Income tax assets
Post-retirement scheme surpluses
Total assets
Reportable segment liabilities
Borrowings
Fair value of swaps hedging fixed rate borrowings
Income tax liabilities
Post-retirement scheme deficits
Total liabilities
Net assets
2015
£m
17,092
576
3,178
74
341
1,063
22,324
(11,801)
(3,302)
(61)
(1,004)
(1,140)
(17,308)
5,016
2014
£m
16,608
539
2,869
80
388
1,740
22,224
(10,947)
(2,261)
(22)
(1,422)
(1,185)
(15,837)
6,387
Rolls-Royce Holdings plc Annual Report 2015 125
Financial StatementsFinancial Statements
2 Segmental analysis continued
GEOGRAPHICAL SEGMENTS
The Group’s revenue by destination from continuing operations is as follows:
United Kingdom
Germany
Switzerland
Norway
France
Italy
Spain
Russia
Rest of Europe
Europe
United States of America
Canada
North America
South America
Saudi Arabia
Rest of Middle East
Middle East
China
South Korea
Singapore
Malaysia
Japan
India
Rest of Asia
Asia
Africa
Australasia
Other
2015
£m
1,780
642
782
280
249
222
200
59
786
5,000
3,591
475
4,066
425
365
445
810
1,236
278
549
78
136
99
546
2,922
144
278
80
13,725
2014
£m
1,599
734
670
322
292
201
113
86
575
4,592
3,751
472
4,223
407
327
418
745
1,290
485
396
280
272
161
493
3,377
115
207
70
13,736
No single customer represented 10% or more of the Group’s revenue.
The carrying amounts of the Group’s non-current assets, excluding financial instruments, deferred tax assets and post-employment
benefit surpluses, by the geographical area in which the assets are located, are as follows:
2015
£m
4,072
835
598
2,339
900
8,744
2014
£m
3,864
827
724
2,493
912
8,820
United Kingdom
United States of America
Nordic countries
Germany
Other
126 Rolls-Royce Holdings plc Annual Report 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFinancial Statements 3 Research and development
Expenditure in the year
Capitalised as intangible assets
Amortisation of capitalised costs
Net research and development cost
Entry fees received
Entry fees deferred in respect of charges in future years
Recognition of previously deferred entry fees
Net cost recognised in the income statement
Underlying adjustments relating to effects of acquisition accounting and foreign exchange
Net underlying cost recognised in the income statement
Discontinued operations
Net underlying cost recognised in the income statement previously reported
4 Net financing
2015
£m
(831)
51
(136)
(916)
83
(28)
43
(818)
53
(765)
2014
£m
(818)
83
(125)
(860)
51
(38)
54
(793)
63
(730)
(25)
(755)
Financing income
Interest receivable
Fair value gains on foreign currency contracts 1
Put option on NCI and financial RRSAs – foreign exchange differences and other
unrealised changes in value
Finance income on post-retirement scheme surpluses
Net foreign exchange gains 3
Financing costs
Interest payable
Fair value losses on foreign currency contracts 1
Put option on NCI and financial RRSAs – financing
Put option on NCI and financial RRSAs – foreign exchange differences and other
unrealised changes in value
Fair value losses on commodity derivatives 1
Finance cost on post-retirement scheme deficits
Net foreign exchange losses
Other financing charges
Net financing
Analysed as:
Net interest payable
Net post-retirement scheme financing
Net other financing
Net financing
1 Net loss on fair value items through profit or loss
2015
2014
Per
consolidated
income
statement
£m
Underlying
financing 2
£m
Per
consolidated
income
statement
£m
Notes
Underlying
financing 2
£m
17
17
19
17
17
17
17
19
12
–
21
65
17
115
(71)
(1,217)
(8)
(13)
(89)
(33)
–
(25)
(1,456)
(1,341)
(59)
32
(1,314)
(1,341)
(1,306)
12
–
–
–
32
44
(71)
–
(8)
–
–
–
–
(25)
(104)
(60)
(59)
–
(1)
(60)
–
17
2
89
13
–
121
(63)
(1,127)
(7)
(174)
(15)
(42)
(13)
(11)
(1,452)
(1,331)
(46)
(29)
(1,256)
(1,331)
(1,140)
17
–
–
–
–
17
(63)
–
(5)
–
–
–
–
(10)
(78)
(61)
(46)
–
(15)
(61)
–
2 See note 2
3
The underlying financing income includes £34m from gains on settlement of foreign exchange contracts following the receipt in the UK of dividends from overseas subsidiaries.
Rolls-Royce Holdings plc Annual Report 2015 127
Financial StatementsFinancial Statements
5 Taxation
Current tax
Current tax charge for the year
Less double tax relief
Adjustments in respect of prior years
Deferred tax
Deferred tax credit for the year
Adjustments in respect of prior years
Derecognition of advance corporation tax
Deferred tax credit resulting from reduction in tax rates
Recognised in the income statement
OTHER TAX CREDITS/(CHARGES)
Current tax:
Share-based payments – direct to equity
Deferred tax:
Movement in post-retirement schemes
Share-based payments – direct to equity
Net investment hedge
TAX RECONCILIATION ON CONTINUING OPERATIONS
Profit before taxation
Less share of results of joint ventures and associates (note 11)
Profit before taxation excluding joint ventures and associates
UK
2015
£m
9
–
9
6
15
(37)
10
–
(18)
(45)
(30)
2014
£m
8
–
8
1
9
(72)
(14)
64
–
(22)
(13)
Overseas
Total
2015
£m
157
–
157
(23)
134
(23)
(5)
–
–
(28)
2014
£m
240
–
240
12
252
(77)
(11)
–
–
(88)
106
164
2015
£m
166
–
166
(17)
149
(60)
5
–
(18)
(73)
76
2014
£m
248
–
248
13
261
(149)
(25)
64
–
(110)
151
OCI
Equity
Items that will not
be reclassified
Items that may
be reclassified
2015
£m
2014
£m
2015
£m
2014
£m
2015
£m
2014
£m
257
(431)
257
(431)
(2)
(2)
(2)
(2)
–
(6)
(6)
2015
£m
160
(100)
60
12
–
63
13
–
5
(7)
20
(12)
–
(18)
76
351
(275)
76
3
(7)
(4)
2014
£m
67
(94)
(27)
(6)
(6)
71
–
17
22
(3)
4
(12)
64
–
151
388
(237)
151
Nominal tax charge at UK corporation tax rate 20.25% (2014: 21.5%)
UK R&D credit
Rate differences 1
Impairment of goodwill
Change in value of put option on NCI
Other permanent differences
Benefit to deferred tax from previously unrecognised tax losses and temporary differences
Tax losses in year not recognised in deferred tax
Adjustments in respect of prior years
Derecognition of advance corporation tax
Reduction in closing deferred taxes resulting from decrease in tax rates
Underlying items (note 2)
Non-underlying items
1 Rate differences mainly relate to tax on profits in countries, such as the US and Germany, which have higher tax rates than the UK.
128 Rolls-Royce Holdings plc Annual Report 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFinancial Statements 5 Taxation continued
TAX ON DISCONTINUED OPERATIONS
Tax credit on ordinary activities of the discontinued operations
Tax credit on profit on disposal of discontinued operations
DEFERRED TAXATION ASSETS AND LIABILITIES
At 1 January
Amount credited to income statement
Amount credited/(charged) to other comprehensive income
Amount charged to equity
Acquisition of businesses
Exchange differences
At 31 December
Deferred tax assets
Deferred tax liabilities
The analysis of the deferred tax position is as follows:
Intangible assets
Property, plant and equipment
Other temporary differences
Amounts recoverable on contracts
Pensions and other post-retirement scheme benefits
Foreign exchange and commodity financial assets and liabilities
Losses
R&D expenditure credit
Advance corporation tax
Intangible assets
Property, plant and equipment
Other temporary differences
Amounts recoverable on contracts
Pensions and other post-retirement scheme benefits
Foreign exchange and commodity financial assets
and liabilities
Losses
R&D expenditure credit
Advance corporation tax
Included in: Taxation
Discontinued operations
At
1 January
2014
£m
(511)
(210)
80
(380)
153
(92)
323
7
64
(566)
2015
£m
–
–
–
2015
£m
(859)
73
255
(6)
–
16
(521)
318
(839)
(521)
2014
£m
(3)
(2)
(5)
2014
£m
(566)
120
(433)
(7)
(3)
30
(859)
369
(1,228)
(859)
Recognised
in income
statement
£m
52
7
(69)
(13)
(30)
171
(49)
4
–
Recognised
in OCI
£m
–
–
(2)
–
257
–
–
–
–
Recognised
in equity
£m
–
–
(7)
–
–
–
1
–
–
Exchange
differences
£m
11
(2)
2
–
7
–
(2)
–
–
At
31 December
2015
£m
(392)
(190)
21
(539)
(90)
306
343
20
–
73
255
(6)
16
(521)
Recognised
in OCI
£m
–
–
(2)
–
(431)
Recognised
in equity
£m
–
–
(10)
–
–
Disposals
of businesses
£m
–
(6)
(1)
–
–
Exchange
movements
£m
15
1
7
–
8
At
31 December
2014
£m
(455)
(195)
97
(526)
(324)
–
–
–
–
(433)
–
3
–
–
(7)
–
4
–
–
(3)
1
(2)
–
30
135
393
16
–
(859)
At
1 January
2015
£m
(455)
(195)
97
(526)
(324)
135
393
16
–
(859)
Recognised
in income
statement
£m
41
20
23
(146)
(54)
226
65
9
(64)
120
110
10
Rolls-Royce Holdings plc Annual Report 2015 129
Financial StatementsFinancial Statements
5 Taxation continued
UNRECOGNISED DEFERRED TAX ASSETS
Advance corporation tax
Losses and other unrecognised deferred tax assets
Deferred tax not recognised on unused tax losses and other items on the basis that future economic benefit is uncertain 1
1 Advance corporation tax, tax losses and other deductible temporary differences are not expected to expire under current legislation.
2015
£m
182
36
218
2014
£m
182
35
217
DEFERRED TAXATION ASSETS AND LIABILITIES
The Summer Budget 2015 announced that the UK corporation tax rate will reduce to 19% from 1 April 2017 and 18% from 1 April 2020;
these reductions were substantively enacted on 26 October 2015. As the reductions were substantively enacted prior to the year end,
the closing deferred tax assets and liabilities have been calculated at this rate. The resulting charges or credits have been recognised in
the income statement except to the extent that they relate to items previously charged or credited to OCI or equity. Accordingly, in 2015,
£18m has been credited to the income statement and £3m has been charged directly to equity.
The temporary differences associated with investments in subsidiaries, joint ventures and associates, for which a deferred tax liability
has not been recognised, aggregate to £347m (2014: £512m). No deferred tax liability has been recognised on the potential withholding
tax due on the remittance of undistributed profits as the Group is able to control the timing of such remittances and it is probable that
consent will not be given in the foreseeable future.
6 Earnings per ordinary share
Basic earnings per ordinary share (EPS) are calculated by dividing the profit attributable to ordinary shareholders by the weighted average
number of ordinary shares in issue during the year, excluding ordinary shares held under trust, which have been treated as if they had
been cancelled.
Diluted EPS are calculated by adjusting the weighted average number of ordinary shares in issue during the year for the bonus element
of share options.
Profit attributable to ordinary shareholders (£m):
Continuing operations
Discontinued operations
Weighted average number of ordinary shares (millions)
EPS (pence):
Continuing operations
Discontinued operations
2015
Potentially
dilutive
share options
Diluted
Basic
2014
Potentially
dilutive
share options
83
–
83
1,851
4.48
–
4.48
(73)
142
69
1,874
(3.90)
7.58
3.68
12
(0.03)
–
(0.03)
18
–
–
–
Basic
83
–
83
1,839
4.51
–
4.51
1 As profit from continuing operations is negative, the effect of potentially dilutive ordinary shares is anti-dilutive.
The reconciliation between underlying EPS and basic EPS is as follows:
Underlying EPS/Underlying profit attributable to ordinary shareholders
Total underlying adjustments to profit before tax (note 2)
Related tax effects
Profit on disposal of discontinued operations
Related NCI effects
EPS/Profit attributable to ordinary shareholders
Diluted underlying EPS
2015
2014
Pence
58.73
(69.17)
14.95
–
–
4.51
58.35
£m
1,080
(1,272)
275
–
–
83
Pence
65.42
(82.88)
12.65
7.58
0.91
3.68
64.80
Diluted1
(73)
142
69
1,892
(3.90)
7.58
3.68
£m
1,226
(1,553)
237
142
17
69
130 Rolls-Royce Holdings plc Annual Report 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFinancial Statements 7 Employee information
Average number of employees
United Kingdom
United States of America
Canada
Germany
Nordics
Rest of world
Civil
Defence
Aerospace
Power Systems
Marine
Nuclear
Other (2014: included discontinued operations)
Land & Sea
Group employment costs 1
Wages and salaries
Social security costs
Share-based payments (note 21)
Pensions and other post-retirement scheme benefits (note 19)
1 Remuneration of key management personnel is shown in note 24.
8 Auditors’ remuneration
Fees payable to the Company’s auditors and its associates were as follows:
Fees payable to the Company's auditors for the audit of the Company's annual financial statements 1
Fees payable to the Company's auditors and its associates for the audit of the Company's subsidiaries pursuant to legislation
Total fees payable for audit services
Fees payable to the Company's auditors and its associates for other services:
Audit related assurance services 2
Taxation compliance services
All other services
Fees payable in respect of the Group's pension schemes:
Audit
2015
Number
2014
Number
23,200
6,400
1,100
10,700
3,800
5,300
50,500
23,200
6,400
29,600
10,600
6,000
4,100
200
20,900
50,500
24,500
7,900
1,500
10,500
4,000
5,700
54,100
23,900
7,000
30,900
10,700
6,400
4,100
2,000
23,200
54,100
£m
£m
2,442
334
5
299
3,080
2,646
362
21
328
3,357
2015
£m
0.3
5.6
5.9
1.3
0.4
–
7.6
0.2
2014
£m
0.2
5.5
5.7
1.1
0.7
0.4
7.9
0.2
1 The level of fees payable to the Company’s auditors for the audit of the Company’s annual financial statements reflects the fact that limited incremental work is required in respect of
the audit of these financial statements. Rolls-Royce plc, a subsidiary of the Company, is also required to prepare consolidated financial statements and the fees payable to the Company’s
auditors for the audit of those financial statements, including the audit of the sub-consolidation, is included in the audit of the Company’s subsidiaries pursuant to legislation.
2 This includes £0.3m (2014: £0.3m) for the review of the half-year report.
Rolls-Royce Holdings plc Annual Report 2015 131
Financial StatementsFinancial Statements
9 Intangible assets
Cost:
At 1 January 2014
Reclassifications 1
Exchange differences
Additions
Acquisitions of businesses
Disposals of businesses
At 1 January 2015
Exchange differences
Additions
Acquisitions of businesses
Disposals
At 31 December 2015
Accumulated amortisation:
At 1 January 2014
Reclassifications 1
Exchange differences
Charge for the year 2
Impairment
Disposal of business
At 1 January 2015
Exchange differences
Charge for the year 2
Impairment
Reversal of impairment
Disposals
At 31 December 2015
Net book value:
At 31 December 2015
At 31 December 2014
At 1 January 2014
Certification
costs and
participation
fees
£m
Goodwill
£m
Development
expenditure
£m
Contractual
aftermarket
rights
£m
Customer
relationships
£m
Software
£m
Other
£m
Total
£m
1,861
(8)
(112)
–
1
(67)
1,675
(87)
–
1
–
1,589
23
(8)
–
–
1
–
16
(5)
–
75
–
–
86
1,503
1,659
1,838
928
–
(8)
159
–
–
1,079
(7)
73
–
–
1,145
265
–
–
46
–
–
311
(1)
63
–
–
–
373
772
768
663
1,646
4
(43)
100
–
–
1,707
(32)
55
–
–
1,730
444
4
(9)
125
–
–
564
(10)
137
–
–
–
691
1,039
1,143
1,202
580
–
–
93
–
(35)
638
–
161
–
–
799
352
–
–
37
–
–
389
–
55
–
(50)
–
394
405
249
228
475
11
(17)
–
–
–
469
(14)
–
1
–
456
69
(11)
(4)
42
–
–
96
(3)
46
–
–
–
139
317
373
406
453
19
(1)
83
–
(11)
543
–
79
–
(6)
616
198
5
–
63
–
(7)
259
–
68
–
–
(2)
325
291
284
255
532
(28)
(28)
42
–
–
518
(16)
40
1
–
543
137
6
(6)
53
–
–
190
(3)
38
–
–
–
225
318
328
395
6,475
(2)
(209)
477
1
(113)
6,629
(156)
408
3
(6)
6,878
1,488
(4)
(19)
366
1
(7)
1,825
(22)
407
75
(50)
(2)
2,233
4,645
4,804
4,987
1 In 2013, following the acquisition of RRPS, the Group revised the classification of intangible assets. During 2014, a number of minor inconsistencies in these classifications were
identified and amended. The net movement of £2m relates to software previously included in property, plant and equipment.
2 Charged to cost of sales except development costs, which are charged to research and development costs.
GOODWILL
In accordance with the requirements of IAS 36 Impairment of Assets, goodwill is allocated to the Group’s cash-generating units, or groups of
cash-generating units, that are expected to benefit from the synergies of the business combination that gave rise to the goodwill as follows:
CASH-GENERATING UNIT (CGU) OR GROUP OF CGUs
Rolls-Royce Deutschland Ltd & Co KG
Commercial marine – arising from the acquisitions of Vinters Limited and Scandinavian Electric Holding AS
Commercial marine – arising from the acquisition of ODIM ASA
Rolls-Royce Power Systems AG
Other
Primary reporting
segment
Civil Aerospace
Marine
Marine
Power Systems
Various
2015
£m
202
491
25
739
46
1,503
2014
£m
215
552
77
760
55
1,659
132 Rolls-Royce Holdings plc Annual Report 2015
Financial StatementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 9 Intangible assets continued
Goodwill has been tested for impairment during 2015 on the following basis:
• The carrying values of goodwill 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. Given the long-term and established nature of many of the Group’s products (product lives are often measured in
decades), these forecasts generally cover the next ten years. Growth rates for the period not covered by the forecasts are based on a
range of growth rates 2.0-2.75%) that reflect the products, industries and countries in which the relevant CGU or group of CGUs operate.
• The key assumptions for the impairment tests are the discount rate and, in the cash flow projections, the programme assumptions,
the growth rates and the impact of foreign exchange rates on the relationship between selling prices and costs. Impairment tests are
performed using prevailing exchange rates.
• The pre-tax cash flow projections have been discounted at rates based on the Group’s weighted average cost of capital, adjusted for
specific risk where appropriate. The discount rate used, before taking account of specific risks, is 13% (2014: 13%).
As a result of the continuing poor market conditions in the Marine offshore business caused by the low crude oil price and the
consequential reduced order intake in the period, the Group has recognised an impairment loss of £69m (included in the total impairment
charge of £75m) to the carrying value of goodwill of cash generating units in this market. This is included in cost of sales in the income
statement, but excluded from the underlying results. The impairment loss primarily relates to the cash generating units Scandinavian
Electric Holding AS (acquired in 2008) and ODIM ASA (acquired in 2010), which are both business operations included in Marine. The
impairment loss is based on a value in use calculation using cash flows forecast over a ten-year period and a pre-tax discount rate of 13%
which indicated a recoverable amount of £74m compared with a pre-impairment carrying value of £143m.
The principal value in use assumptions for goodwill balances considered to be individually significant are:
• Rolls-Royce Power Systems AG – Volume of equipment deliveries, pricing achieved and cost escalation. These are based on current and
known future programmes, estimates of capture of market share and long-term economic forecasts. The principal foreign exchange
exposures are on translating income in a variety of non-functional currencies into euros. For the purposes of the impairment only, cash
flows from recent management forecasts for a five-year period have been included. Cash flows beyond five years are assumed to grow at
2% (2014 2%). Reasonably possible change in the key assumptions would cause the value in use of the goodwill to fall below its carrying
value, which include a reduction in the level of cash generation of 9%, or an increase in the assumed discount rate of 2%.
• Rolls-Royce Deutschland Ltd & Co KG – Volume of engine deliveries, flying hours of installed fleet and cost escalation. These are based
on current and known future programmes, estimates of customers’ fleet requirements and long-term economic forecasts. The principal
foreign exchange exposure is on translating US dollar income into euros. For the purposes of the impairment test only, cash flows
beyond the ten-year forecasts are assumed to grow at 2.5% (2014: 2.5%). The Directors do not consider that any reasonably possible
change in the key assumptions would cause the value in use of the goodwill to fall below its carrying value. The overall level of business
would need to reduce by more than 69% to cause an impairment of this balance.
• Vinters Limited – Volume of equipment deliveries, capture of aftermarket and cost escalation. These are based on current and known
future programmes, estimates of customers’ fleet requirements and long-term economic forecasts. The principal foreign exchange
exposures are on translating income in a variety of non-functional currencies into Norwegian kroner. For the purposes of the
impairment test only, cash flows beyond the ten-year forecasts are assumed to grow at 2.5% (2014: 2.5%). The Directors do not consider
that any reasonably possible change in the key assumptions would cause the value in use of the goodwill to fall below its carrying value.
The overall level of business would need to reduce by more than 54% to cause an impairment of this balance.
OTHER INTANGIBLE ASSETS
Certification costs and participation fees, development costs and contractual aftermarket rights 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% (2014: 11%), based on the Group’s weighted average cost of capital,
reduced where relevant to take account of the lower risk associated with contracted aftermarket flows.
No impairment is required on this basis. However, a combination of changes in assumptions and adverse movements in variables that
are outside the Group’s control (discount rate, exchange rate and airframe delays), could result in impairment in future years.
During the year, following analysis of the first major overhauls of the Trent 1000 engines, the recoverable amount of certain contractual
aftermarket rights have been reassessed. This analysis demonstrated that the aftermarket cash flows from the engines were better than
originally assumed, arising from both operational and contractual performance improvements. As a result of this analysis, the value in use
(based on a pre-tax discount rate of 9%) has increased to around £140m, exceeding the unimpaired carrying value of £72m. Accordingly,
cumulative impairments prior to 2015 of £50m have been reversed. This reversal is included in the Civil Aerospace business cost of sales.
Rolls-Royce Holdings plc Annual Report 2015 133
Financial StatementsFinancial Statements
10 Property, plant and equipment
Cost:
At 1 January 2014
Exchange differences
Additions
Acquisitions of businesses
Disposals of businesses
Reclassifications
Disposals/write-offs
At 1 January 2015
Exchange differences
Additions
Acquisitions of businesses
Disposals of businesses
Reclassifications
Transferred to assets held for sale
Disposals/write-offs
At 31 December 2015
Accumulated depreciation:
At 1 January 2014
Exchange differences
Charge for the year 1
Impairment
Reclassifications
Disposals/write-offs
At 1 January 2015
Exchange differences
Charge for the year 1
Impairment
Disposals of businesses
Transferred to assets held for sale
Disposals/write-offs
At 31 December 2015
Net book value:
At 31 December 2015
At 31 December 2014
At 1 January 2014
Land and
buildings
£m
Plant and
equipment
£m
Aircraft
and engines
£m
In course of
construction
£m
1,297
(23)
24
–
(88)
134
(10)
1,334
(20)
18
–
–
81
(8)
(30)
1,375
386
(8)
49
–
(29)
(7)
391
(7)
48
3
–
(5)
(14)
416
959
943
911
3,490
(42)
160
–
(94)
137
(51)
3,600
(39)
117
1
(1)
335
(23)
(96)
3,894
1,949
(26)
294
–
(62)
(46)
2,109
(24)
299
2
(1)
(20)
(81)
2,284
1,610
1,491
1,541
324
(1)
57
38
(77)
32
(52)
321
(2)
19
–
–
7
(2)
(4)
339
84
–
31
–
(9)
(3)
103
(1)
26
–
–
(1)
(2)
125
214
218
240
700
2
427
–
(28)
(305)
(1)
795
(3)
340
–
–
(423)
–
(1)
708
–
–
–
1
–
–
1
–
–
–
–
–
–
1
707
794
700
Total
£m
5,811
(64)
668
38
(287)
(2)
(114)
6,050
(64)
494
1
(1)
–
(33)
(131)
6,316
2,419
(34)
374
1
(100)
(56)
2,604
(32)
373
5
(1)
(26)
(97)
2,826
3,490
3,446
3,392
1 Depreciation charged during the year is presented in the income statement or included in the cost of inventory as appropriate.
134 Rolls-Royce Holdings plc Annual Report 2015
Financial StatementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 10 Property, plant and equipment continued
Property, plant and equipment includes:
Net book value of finance leased assets:
Land and buildings
Plant and equipment
Aircraft and engines
Assets held for use in operating leases:
Cost
Depreciation
Net book value
Capital expenditure commitments
Cost of fully depreciated assets
2015
£m
5
7
40
321
(87)
234
167
853
2014
£m
6
9
43
267
(64)
203
194
792
The Group’s share of equity accounted entities’ capital commitments is £75m (2014: £82m).
11 Investments
COMPOSITION OF THE GROUP
The entities contributing to the Group’s financial results are listed on pages 160 to 166.
NON-CONTROLLING INTERESTS
In 2015 the Group did not have any material non-wholly owned subsidiaries. On 7 March 2014, Daimler AG announced its intention
to exercise its put option on its 50% of Rolls-Royce Power Systems Holding GmbH (RRPSH). Formal notice of this intention was served
on 24 March 2014. From this date, the Group had an effective economic interest in RRPSH of 100% and NCI of £584m was transferred to
retained earnings. The Group acquired the shares on 26 August 2014, giving it a 100% interest in RRPSH.
Summarised financial information for RRPSH is as follows:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Equity attributable to Rolls-Royce shareholders
Non-controlling interests
1 Immediately prior to the exercise of the put option
Revenue
Loss for the period
Attributable to ordinary shareholders
Non-controlling interests
Total comprehensive income for the period
Attributable to ordinary shareholders
Non-controlling interests
Dividends paid to non-controlling interests
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net cash outflow
At
24 March
20141
£m
1,529
2,511
(974)
(1,118)
1,364
584
Period to
24 March
2014
£m
551
(25)
(12)
(12)
(69)
(35)
(35)
(76)
33
(17)
(158)
(142)
Rolls-Royce Holdings plc Annual Report 2015 135
Financial StatementsFinancial Statements
11 Investments continued
EQUITY ACCOUNTED AND OTHER INVESTMENTS
At 1 January 2014
Reclassification 1
Exchange differences
Additions
Taxation paid by the Group
Transfer to subsidiary
Share of retained profit
Disposals
Return of capital
Consolidation of previously non-consolidated subsidiary
Share of OCI – may be reclassified to profit or loss
At 1 January 2015
Exchange differences
Additions
Taxation paid by the Group
Share of retained profit/(loss)
Impairment
Share of OCI – may be reclassified to profit or loss
At 31 December 2015
Equity accounted
Other
Joint ventures
£m
599
(25)
7
15
3
(1)
23
(70)
(3)
–
(13)
535
7
12
(3)
42
–
(19)
574
Associates
£m
2
–
–
2
–
–
–
–
–
–
–
4
–
3
–
(5)
–
–
2
Total
£m
601
(25)
7
17
3
(1)
23
(70)
(3)
–
(13)
539
7
15
(3)
37
–
(19)
576
Unlisted
£m
27
–
(2)
11
–
–
–
–
–
(5)
–
31
(2)
6
–
–
(2)
–
33
1
The reclassification relates to an adjustment in 2013 relating to transactions between the Group and a joint venture which was included in creditors. It was transferred
to investments in joint ventures in 2014.
RECONCILIATION TO THE INCOME STATEMENT AND CASH FLOW STATEMENT
Share of profit after tax
Share of dividends paid
Share of retained profit
Continuing operations
Discontinued operations
Total
2015
£m
100
(63)
37
2014
£m
94
(71)
23
2015
£m
–
–
–
2014
£m
2
(2)
–
2015
£m
100
(63)
37
2014
£m
96
(73)
23
The following joint ventures are considered to be individually material to the Group:
Alpha Partners Leasing Limited (APL)
Hong Kong Aero Engine Services Limited (HAESL)
Singapore Aero Engine Services Pte Limited (SAESL)
Industria de Turbo Propulsores SA (ITP)
Principal location
UK
Hong Kong
Singapore
Spain
Activity
Aero engine leasing
Aero engine repair and overhaul
Aero engine repair and overhaul
Aero engine component manufacture and maintenance
Ownership interest
50.0%
45.0%
39.0%
46.9%
136 Rolls-Royce Holdings plc Annual Report 2015
Financial StatementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 11 Investments continued
Summarised financial information of the Group’s individually material joint ventures is as follows:
APL
HAESL
SAESL
ITP
Revenue
Profit from continuing operations
Post-tax profit from discontinued operations
Profit for the year
Other comprehensive operations
Total comprehensive income for the year
Dividends received during the year
Profit for the year included the following:
Depreciation and amortisation
Interest income
Interest expense
Income tax expense
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net assets
Included in the above:
Cash and cash equivalents
Current financial liabilities 1
Non-current financial liabilities 1
1 Excluding trade and other payables.
2015
£m
130
65
–
65
–
65
(29)
(59)
–
(17)
(7)
129
1,349
(70)
(1,123)
285
20
(19)
(969)
2014
£m
105
39
–
39
–
39
(13)
(47)
–
(15)
(11)
72
1,171
(62)
(959)
222
11
(13)
(815)
2015
£m
652
27
–
27
–
27
(23)
(8)
–
(1)
(5)
223
85
(116)
(38)
154
4
–
(30)
2014
£m
652
34
–
34
–
34
(30)
(8)
–
(1)
(7)
159
86
(61)
(37)
147
8
–
(29)
2015
£m
626
46
–
46
–
46
(35)
(5)
–
–
–
218
125
(75)
(136)
132
10
–
(136)
2014
£m
815
60
–
60
–
60
(56)
(5)
–
(1)
–
207
102
(88)
(106)
115
11
–
(106)
2015
£m
520
40
–
40
–
40
(19)
(37)
10
(16)
7
576
554
(416)
(431)
283
225
(25)
(273)
2014
£m
529
24
–
24
–
24
(19)
(37)
19
(12)
4
603
525
(415)
(418)
295
256
(10)
(282)
Reconciliation to the carrying amount recognised in the consolidated financial statements
Ownership interest
Group share of net assets above
50.0%
143
50.0%
111
45.0%
69
45.0%
66
39.0%
51
39.0%
45
46.9%
133
46.9%
138
The summarised aggregated results of the Group’s share of all equity accounted investments is as follows:
Assets:
Non-current assets
Current assets
Liabilities: 2
Current liabilities
Non-current liabilities
2 Liabilities include borrowings of:
Post-tax profit from continuing operations
Post-tax profit from discontinued operations
Profit for the year
Other comprehensive income
Total comprehensive income for the year
Joint ventures
Associates
2015
£m
2014
£m
2015
£m
2014
£m
Total
2015
£m
1,998
843
(541)
(1,726)
574
(1,473)
105
–
105
(19)
86
1,911
715
(519)
(1,572)
535
(1,376)
94
2
96
(13)
83
–
2
–
–
2
–
(5)
–
(5)
–
(5)
2
4
(1)
(1)
4
–
–
–
–
–
–
1,998
845
(541)
(1,726)
576
(1,473)
100
–
100
–
100
2014
£m
1,913
719
(520)
(1,573)
539
(1,376)
94
2
96
(13)
83
Rolls-Royce Holdings plc Annual Report 2015 137
Financial StatementsFinancial Statements
12 Inventories
Raw materials
Work in progress
Long-term contracts work in progress
Finished goods
Payments on account
Inventories stated at net realisable value
Amount of inventory write-down
Reversal of inventory write-down
13 Trade and other receivables
Trade receivables
Amounts recoverable on contracts 1
Amounts owed by joint ventures and associates
Other receivables
Prepayments and accrued income
Analysed as:
Financial instruments (note 17):
Trade receivables and similar items
Other non-derivative financial assets
Non-financial instruments
Trade and other receivables expected to be recovered in more than one year:
Trade receivables
Amounts recoverable on contracts
Amounts owed by joint ventures and associates
Other receivables
Prepayments and accrued income
1 Amounts recoverable on contracts include £2,994m (2014: £2,492m) of TotalCare assets
14 Cash and cash equivalents
Cash at bank and in hand
Money-market funds
Short-term deposits
Overdrafts (note 15)
Cash and cash equivalents per cash flow statement (page 110 )
2015
£m
509
882
23
1,173
50
2,637
221
64
14
2015
£m
1,612
3,179
252
1,006
195
6,244
2,061
843
3,340
6,244
57
2,768
1
131
68
3,025
2015
£m
662
783
1,731
3,176
–
3,176
2014
£m
553
984
22
1,149
60
2,768
265
62
1
2014
£m
1,531
2,684
309
785
200
5,509
1,981
671
2,857
5,509
40
2,444
–
61
55
2,600
2014
£m
739
692
1,431
2,862
–
2,862
Cash held as collateral against third party obligations (note 18)
35
42
Cash and cash equivalents at 31 December 2015 include £21m (2014: £30m) that is not available for general use by the Group. This balance
relates to cash held in non-wholly owned subsidiaries and the Group’s captive insurance company.
138 Rolls-Royce Holdings plc Annual Report 2015
Financial StatementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 15 Borrowings
Unsecured
Overdrafts
Bank loans
7 3⁄8% Notes 2016 £200m
6.55% Notes 2015 US$83m 1
6.75% Notes 2019 £500m 2
2.375% Notes 2020 US$500m 1
2.125% Notes 2021 €750m 1
3.625% Notes 2025 US$1,000m 1
3.375% Notes 2026 £375m 2
Secured
Obligations under finance leases 3
Current
Non-current
Total
2015
£m
–
217
200
–
–
–
–
–
–
2
419
2014
£m
–
12
–
55
–
–
–
–
–
1
68
2015
£m
–
330
–
–
536
333
576
668
390
2014
£m
–
392
200
–
547
–
615
–
395
2015
£m
–
547
200
–
536
333
576
668
390
2014
£m
–
404
200
55
547
–
615
–
395
50
2,883
44
2,193
52
3,302
45
2,261
1 These notes are the subject of interest rate swap agreements under which the Group has undertaken to pay floating rates of interest, and currency swaps which form a fair value hedge.
2 These notes are the subject of interest rate swap agreements under which the Group has undertaken to pay floating rates of interest which form a fair value hedge.
3 Obligations under finance leases are secured by related leased assets.
16 Trade and other payables
Payments received on account 1
Trade payables
Amounts owed to joint ventures and associates
Other taxation and social security
Other payables
Accruals and deferred income
1 Includes payments received on account from joint ventures
and associates
Current
Non-current
Total
2015
£m
1,491
1,397
197
90
1,784
1,964
6,923
2014
£m
1,291
1,348
235
109
1,756
2,052
6,791
2015
£m
516
23
2
1
361
1,414
2,317
2014
£m
860
13
4
1
320
1,247
2,445
2015
£m
2,007
1,420
199
91
2,145
3,378
9,240
2014
£m
2,151
1,361
239
110
2,076
3,299
9,236
161
158
35
99
196
257
Included within trade and other payables are government grants of £64m (2014: £80m). During the year, £21m (2014: £24m) of government
grants were released to the income statement.
Included in accruals and deferred income are deferred receipts from RRSA workshare partners of £228m (2014: £244m) and £783m
(2014: £687m) of TotalCare liabilities.
Trade and other payables are analysed as follows:
Financial instruments (note 17):
Trade payables and similar items
Other non-derivative financial liabilities
Non-financial instruments
2015
£m
3,101
817
5,322
9,240
2014
£m
3,049
831
5,356
9,236
Rolls-Royce Holdings plc Annual Report 2015 139
Financial StatementsFinancial Statements
17 Financial instruments
CARRYING VALUES AND FAIR VALUES OF FINANCIAL INSTRUMENTS
2015
Unlisted non-current asset investments
Trade receivables and similar items
Other non-derivative financial assets
Derivative financial assets 1
Short-term investments
Cash and cash equivalents
Borrowings
Derivative financial liabilities 1
Financial RRSAs
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
2014
Unlisted non-current asset investments
Trade receivables and similar items
Other non-derivative financial assets
Derivative financial assets 1
Short-term investments
Cash and cash equivalents
Borrowings
Derivative financial liabilities 1
Financial RRSAs
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
Assets
Liabilities
Total
Basis for
determining
fair value
Notes
Fair value
through
profit or loss
£m
Loans and
receivables
£m
Available
for sale
£m
11
13
13
14
15
16
16
11
13
13
14
15
16
16
A
B
B
C
B
B
D
C
E
B
B
B
A
B
B
C
B
B
D
C
E
B
B
B
–
–
–
112
–
–
–
–
–
–
–
–
112
–
–
–
129
–
–
–
–
–
–
–
–
129
33
2,061
843
–
2
1,731
–
–
–
–
–
–
4,670
31
1,981
671
–
7
1,431
–
–
–
–
–
–
4,121
–
–
–
–
–
783
–
–
–
–
–
–
783
–
–
–
–
–
692
–
–
–
–
–
–
692
Fair value
through
profit or loss
£m
–
–
–
–
–
–
–
(1,843)
–
–
–
–
(1,843)
–
–
–
–
–
–
–
(759)
–
–
–
–
(759)
Cash
£m
–
–
–
–
–
662
–
–
–
–
–
–
662
–
–
–
–
–
739
–
–
–
–
–
–
739
Other
£m
–
–
–
–
–
–
(3,302)
–
(110)
(29)
(3,101)
(817)
(7,359)
–
–
–
–
–
–
(2,261)
–
(145)
(22)
(3,049)
(831)
(6,308)
£m
33
2,061
843
112
2
3,176
(3,302)
(1,843)
(110)
(29)
(3,101)
(817)
(2,975)
31
1,981
671
129
7
2,862
(2,261)
(759)
(145)
(22)
(3,049)
(831)
(1,386)
1
In the event of counterparty default relating to derivative financial assets and liabilities, offsetting would apply and financial assets and liabilities held with the same counterparty
would net off. If this occurred with every counterparty, total financial assets would be nil and liabilities £1,731m.
Fair values equate to book values for both 2015 and 2014, with the following exceptions:
Borrowings
Financial RRSAs
2015
2014
Book value
£m
Fair value
£m
Book value
£m
Fair value
£m
(3,302)
(110)
(3,312)
(110)
(2,261)
(145)
(2,362)
(152)
The fair value of a financial instrument is the price at which an asset could be exchanged, or a liability settled, between knowledgeable,
willing parties in an arms-length transaction. Fair values have been determined with reference to available market information at the
balance sheet date, using the methodologies described below.
A These primarily comprise unconsolidated companies where fair value approximates to the book value.
B Fair values are assumed to approximate to cost either due to the short-term maturity of the instruments or because the interest rate of the investments is reset after periods not
exceeding six months.
C Fair values of derivative financial assets and liabilities are estimated by discounting expected future contractual cash flows using prevailing interest rate curves. Amounts
denominated in foreign currencies are valued at the exchange rate prevailing at the balance sheet date. These financial instruments are included on the balance sheet at fair value,
derived from observable market prices (Level 2 as defined by IFRS 13 Fair Value Measurement).
D Borrowings are carried at amortised cost. Amounts denominated in foreign currencies are valued at the exchange rate prevailing at the balance sheet date.
E The fair value of RRSAs is estimated by discounting expected future cash flows. The contractual cash flows are based on future trading activity, which is estimated based on latest
forecasts (Level 3 as defined by IFRS 13).
IFRS 13 Fair Value Measurement defines a three level valuation hierarchy:
Level 1 – quoted prices for similar instruments
Level 2 – directly observable market inputs other than Level 1 inputs
Level 3 – inputs not based on observable market data
140 Rolls-Royce Holdings plc Annual Report 2015
Financial StatementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 17 Financial instruments continued
CARRYING VALUES OF OTHER FINANCIAL ASSETS AND LIABILITIES
2015
Non-current assets
Current assets
Assets
Current liabilities
Non-current liabilities
Liabilities
2014
Non-current assets
Current assets
Assets
Current liabilities
Non-current liabilities
Liabilities
Foreign
exchange
contracts
£m
3
29
32
(244)
(1,428)
(1,672)
(1,640)
28
22
50
(144)
(545)
(689)
(639)
Commodity
contracts
£m
Interest rate
contracts
£m
Total
derivatives
£m
Financial
RRSAs
£m
C Shares
£m
Total
£m
–
–
–
(39)
(65)
(104)
(104)
–
–
–
(21)
(22)
(43)
(43)
80
–
80
–
(67)
(67)
13
79
–
79
–
(27)
(27)
52
83
29
112
(283)
(1,560)
(1,843)
(1,731)
107
22
129
(165)
(594)
(759)
(630)
–
–
–
(19)
(91)
(110)
(110)
–
–
–
(22)
(123)
(145)
(145)
–
–
–
(29)
–
(29)
(29)
–
–
–
(22)
–
(22)
(22)
83
29
112
(331)
(1,651)
(1,982)
(1,870)
107
22
129
(209)
(717)
(926)
(797)
DERIVATIVE FINANCIAL INSTRUMENTS
The Group uses various financial instruments to manage its exposure to movements in foreign exchange rates. Where the effectiveness
of a hedging relationship in a cash flow hedge is demonstrated, changes in the fair value that are deemed effective are included in the cash
flow hedge reserve and released to match actual payments on the hedged item. The Group uses commodity swaps to manage its exposure
to movements in the price of commodities (jet fuel and base metals). To hedge the currency risk associated with a borrowing denominated
in US dollars, the Group has currency derivatives designated as part of fair value hedges. The Group uses interest rate swaps and forward
rate agreements to manage its exposure to movements in interest rates.
Movements in the fair values of derivative financial assets and liabilities were as follows:
At 1 January
Currency options at inception 1
Movements in fair value hedges 2
Movements in other derivative contracts 3
Contracts settled 4
At 31 December
Foreign exchange instruments
Commodity instruments
Interest rate instruments
Total
2015
£m
(639)
(20)
1
(1,217)
235
(1,640)
2014
£m
498
–
3
(1,125)
(15)
(639)
2015
£m
(43)
–
–
(89)
28
(104)
2014
£m
(39)
–
–
(15)
11
(43)
2015
£m
52
–
(36)
–
(3)
13
2014
£m
(6)
–
58
–
–
52
2015
£m
(630)
(20)
(35)
(1,306)
260
(1,731)
2014
£m
453
–
61
(1,140)
(4)
(630)
1 The Group has written currency options to sell USD and buy GBP as part of a commercial agreement. The fair value of this option on inception is treated as a discount to the customer
2 Gain on related hedged items £35m (2014: £61m loss)
3 Included in financing
4 Includes £8m contracts settled in fair value hedges (2014: £nil). Contracts settled in 2014 included a loss of £76m in relation to contracts put in place to hedge the settlement of the
put option on RRPS
EXERCISE PRICE OF PUT OPTION ON NON-CONTROLLING INTERESTS AND FINANCIAL RISK AND REVENUE SHARING ARRANGEMENTS
The Group has financial liabilities arising from financial RRSAs. These financial liabilities are valued at each reporting date using the
amortised cost method. This involves calculating the present value of the forecast cash flows of the arrangements using the internal rate
of return at the inception of the arrangements as the discount rate.
The Group had agreed a put option with Daimler AG, such that Daimler could sell its interest in Rolls-Royce Power Systems Holding GmbH
to the Group. Daimler AG exercised this option on 24 March 2014 and the Group acquired Daimler’s 50% share of RRPSH on 26 August 2014.
Prior to this, the fair value of the exercise value of this option was included as a financial liability.
Rolls-Royce Holdings plc Annual Report 2015 141
Financial StatementsFinancial Statements
17 Financial instruments continued
Movements in the carrying values were as follows:
At 1 January
Exchange adjustments included in OCI
Financing charge 1
Excluded from underlying profit:
Financing charge 1
Changes in put option exercise price 1
Exchange adjustments 1
Cash paid to partners
Settlement of put option
At 31 December
1 Included in financing.
Financial RRSAs
Put option on
non-controlling
interests
2015
£m
(145)
–
(8)
–
–
8
35
–
(110)
2014
£m
(167)
3
(5)
–
–
(8)
32
–
(145)
2014
£m
(1,858)
–
–
(2)
(166)
89
–
1,937
–
RISK MANAGEMENT POLICIES AND HEDGING ACTIVITIES
The principal financial risks to which the Group is exposed are: foreign currency exchange rate risk; liquidity risk; credit risk; interest rate
risk; and commodity price risk. The Board has approved policies for the management of these risks.
Foreign currency exchange rate risk – The Group has significant cash flows (most significantly US dollars, followed by the euro)
denominated in currencies other than the functional currency of the relevant trading entity. To manage its exposures to changes in values
of future foreign currency cash flows, so as to maintain relatively stable long-term foreign exchange rates on settled transactions, the
Group enters into derivative forward foreign currency transactions. For accounting purposes, these derivative contracts are not
designated as hedging instruments.
The Group also has exposures to the fair values of non-derivative financial instruments denominated in foreign currencies. To manage the
risk of changes in these fair values, the Group enters into derivative forward foreign exchange contracts, which are designated as fair value
hedges for accounting purposes.
The Group regards its interests in overseas subsidiary companies as long-term investments. The Group aims to match its translational
exposures by matching the currencies of assets and liabilities. Where appropriate, foreign currency financial liabilities may be designated
as hedges of the net investment.
Liquidity risk – The Group’s policy is to hold financial investments and maintain undrawn committed facilities at a level sufficient to
ensure that the Group has available funds to meet its medium-term capital and funding obligations and to meet any unforeseen
obligations and opportunities. The Group holds cash and short-term investments, which together with the undrawn committed facilities,
enable the Group to manage its liquidity risk.
Credit risk – The Group is exposed to credit risk to the extent of non-payment by either its customers or the counterparties of its financial
instruments. The effective monitoring and controlling of credit risk is a key component of the Group’s risk management activities. The
Group has credit policies covering both trading and financial exposures. Credit risks arising from treasury activities are managed by a
central treasury function in accordance with the Group credit policy. The objective of the policy is to diversify and minimise the Group’s
exposure to credit risk from its treasury activities by ensuring the Group transacts strictly with ‘BBB+’ or higher rated financial institutions
based on pre-established limits per financial institution. At the balance sheet date, there were no significant concentrations of credit risk to
individual customers or counterparties. The maximum exposure to credit risk at the balance sheet date is represented by the carrying
value of each financial asset, including derivative financial instruments.
Interest rate risk – The Group’s interest rate risk is primarily in relation to its fixed rate borrowings (fair value risk), floating rate borrowings
and cash and cash equivalents (cash flow risk). Interest rate derivatives are used to manage the overall interest rate profile within the
Group policy, which is to maintain a higher proportion of net debt at floating rates of interest as a natural hedge to the net cash position.
These are designated as either fair value or cash flow hedges as appropriate.
Commodity risk – The Group has exposures to the price of jet fuel and base metals arising from business operations. To minimise its cash
flow exposures to changes in commodity prices, the Group enters into derivative commodity transactions. For accounting purposes, these
derivative contracts are not designated as hedging instruments.
Other price risk – The Group’s cash equivalent balances represent investments in money-market instruments, with a term of up to three
months. The Group does not consider that these are subject to significant price risk.
142 Rolls-Royce Holdings plc Annual Report 2015
Financial StatementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 17 Financial instruments continued
DERIVATIVE FINANCIAL INSTRUMENTS
The nominal amounts, analysed by year of expected maturity, and fair values of derivative financial instruments are as follows:
At 31 December 2015
Foreign exchange contracts:
Fair value hedges
Non-hedge accounted
Interest rate contracts:
Fair value hedges
Non-hedge accounted
Commodity contracts:
Non-hedge accounted
At 31 December 2014
Foreign exchange contracts:
Fair value hedges
Non-hedge accounted
Interest rate contracts:
Fair value hedges
Non-hedge accounted
Commodity contracts:
Non-hedge accounted
Expected maturity
Fair value
Nominal
amount
£m
Within
one year
£m
Between
one and
two years
£m
Between
two and
five years
£m
After
five years
£m
Assets
£m
Liabilities
£m
–
22,418
2,437
–
268
25,123
46
20,889
1,512
2
240
22,689
–
5,736
–
4,266
–
11,637
–
–
–
–
500
–
90
5,826
72
4,338
83
12,220
46
5,431
53
2
79
5,611
–
4,793
–
10,665
–
–
500
–
62
4,855
71
11,236
–
779
1,937
–
23
2,739
–
–
959
–
28
987
–
32
74
6
–
112
6
44
74
5
–
129
–
(1,672)
(61)
(6)
(104)
(1,843)
–
(689)
(22)
(5)
(43)
(759)
As described above, all derivative financial instruments are entered into for risk management purposes, although these may not be
designated into hedging relationships for accounting purposes.
CURRENCY ANALYSIS
Derivative financial instruments related to foreign exchange risks are denominated in the following currencies:
Currencies purchased forward
Sterling
£m
US dollar
£m
Euro
£m
Other
£m
Total
£m
At 31 December 2015
Currencies sold forward:
Sterling
US dollar
Euro
Other
At 31 December 2014
Currencies sold forward:
Sterling
US dollar
Euro
Other
–
18,869
2
131
–
16,659
150
167
383
–
76
12
429
–
61
9
–
1,552
–
143
–
2,014
–
114
Other derivative financial instruments are denominated in the following currencies:
Sterling
US dollar
Euro
221
902
125
2
199
938
185
10
2015
£m
875
1,279
550
604
21,323
203
288
628
19,611
396
300
2014
£m
877
292
584
Rolls-Royce Holdings plc Annual Report 2015 143
Financial StatementsFinancial Statements
17 Financial instruments continued
Non-derivative financial instruments are denominated in the following currencies:
At 31 December 2015
Unlisted non-current investments
Trade receivables and similar items
Other non-derivative financial assets
Short-term investments
Cash and cash equivalents
Assets
Borrowings
Financial RRSAs
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
Liabilities
At 31 December 2014
Unlisted non-current investments
Trade receivables and similar items
Other non-derivative financial assets
Short-term investments
Cash and cash equivalents
Assets
Borrowings
Financial RRSAs
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
Liabilities
Sterling
£m
US dollar
£m
Euro
£m
Other
£m
Total
£m
–
131
280
–
1,554
1,965
(1,369)
–
(29)
(1,536)
(242)
(3,176)
(1,211)
–
232
400
–
513
1,145
(1,341)
–
(22)
(1,489)
(248)
(3,100)
(1,955)
1
1,228
350
–
959
2,538
(1,162)
(75)
–
(859)
(303)
(2,399)
139
–
1,180
53
–
1,404
2,637
(101)
(97)
–
(887)
(333)
(1,418)
1,219
31
613
102
–
446
1,192
(768)
(35)
–
(523)
(139)
(1,465)
(273)
30
479
101
–
619
1,229
(819)
(48)
–
(545)
(161)
(1,573)
(344)
1
89
111
2
217
420
(3)
–
–
(183)
(133)
(319)
101
1
90
117
7
326
541
–
–
–
(128)
(89)
(217)
324
33
2,061
843
2
3,176
6,115
(3,302)
(110)
(29)
(3,101)
(817)
(7,359)
(1,244)
31
1,981
671
7
2,862
5,552
(2,261)
(145)
(22)
(3,049)
(831)
(6,308)
(756)
CURRENCY EXPOSURES
The Group’s actual currency exposures after taking account of derivative foreign currency contracts, which are not designated as hedging
instruments for accounting purposes are as follows:
Sterling
£m
US dollar
£m
Euro
£m
Other
£m
Total
£m
–
(12)
4
–
–
(2)
2
5
–
1
–
3
28
–
5
19
1
–
–
1
2
(1)
–
6
27
8
–
(1)
35
8
11
1
28
(3)
4
3
65
5
18
31
Functional currency of Group operations
At 31 December 2015
Sterling
US dollar
Euro
Other
At 31 December 2014
Sterling
US dollar
Euro
Other
144 Rolls-Royce Holdings plc Annual Report 2015
Financial StatementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 17 Financial instruments continued
AGEING BEYOND CONTRACTUAL DUE DATE OF FINANCIAL ASSETS
At 31 December 2015
Unlisted non-current asset investments
Trade receivables and similar items
Other non-derivative financial assets
Derivative financial assets
Short-term investments
Cash and cash equivalents
At 31 December 2014
Unlisted non-current asset investments
Trade receivables and similar items
Other non-derivative financial assets
Derivative financial assets
Short-term investments
Cash and cash equivalents
CONTRACTUAL MATURITY ANALYSIS OF FINANCIAL LIABILITIES
At 31 December 2015
Borrowings
Derivative financial liabilities
Financial RRSAs
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
At 31 December 2014
Borrowings
Derivative financial liabilities
Financial RRSAs
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
Up to
three
months
overdue
£m
Between
three
months and
one year
overdue
£m
More than
one year
overdue
£m
–
184
5
–
–
–
189
–
206
4
–
–
–
210
–
98
1
–
–
–
99
–
104
–
–
–
–
104
–
34
2
–
–
–
36
–
14
–
–
–
–
14
Within
terms
£m
33
1,745
835
112
2
3,176
5,903
31
1,657
667
129
7
2,862
5,353
Total
£m
33
2,061
843
112
2
3,176
6,227
31
1,981
671
129
7
2,862
5,681
Gross values
Between
one and
two years
£m
Between
two and
five years
£m
After
five years
£m
Discounting
£m
Carrying
value
£m
(161)
(329)
(20)
–
(38)
(43)
(591)
(385)
(115)
(19)
–
(32)
(95)
(646)
(1,317)
(1,026)
(76)
–
(4)
(74)
(2,497)
(214)
(324)
(72)
–
(2)
(20)
(632)
(1,897)
(314)
(10)
–
–
(60)
(2,281)
(1,880)
(181)
(52)
–
(3)
(66)
(2,182)
603
112
12
–
–
–
727
366
35
15
–
–
–
416
(3,302)
(1,843)
(110)
(29)
(3,101)
(817)
(9,202)
(2,261)
(759)
(145)
(22)
(3,049)
(831)
(7,067)
Within
one year
£m
(530)
(286)
(16)
(29)
(3,059)
(640)
(4,560)
(148)
(174)
(17)
(22)
(3,012)
(650)
(4,023)
Rolls-Royce Holdings plc Annual Report 2015 145
Financial StatementsFinancial Statements
17 Financial instruments continued
INTEREST RATE RISK
In respect of income earning financial assets and interest bearing financial liabilities, the following table indicates their effective interest
rates and the periods in which they reprice. The value shown is the carrying amount.
At 31 December 2015
Short-term investments 1
Cash and cash equivalents 2
Unsecured bank loans
Other borrowings
£200m floating rate loan
£43m floating rate loan
€125m fixed rate loan
€75m fixed rate loan
€50m fixed rate loan
Unsecured bond issues
7 3⁄8% Notes 2016 £200m
6.75% Notes 2019 £500m
Effect of interest rate swaps
2.375% Notes 2020 $500m
Effect of interest rate swaps
2.125% Notes 2021 €750m
Effect of interest rate swaps
3.625% Notes 2025 $1,000m
Effect of interest rate swaps
3.375% Notes 2026 £375m
Effect of interest rate swaps
Other secured
Obligations under finance leases
At 31 December 2014
Short-term investments 1
Cash and cash equivalents 2
Unsecured bank loans
Other borrowings
Interest rate swaps
£200m floating rate loan
€125m fixed rate loan
€75m fixed rate loan
€50m fixed rate loan
Unsecured bond issues
7 3⁄8% Notes 2016 £200m
6.55% Notes 2015 US$83m
Effect of interest rate swaps
6.75% Notes 2019 £500m
Effect of interest rate swaps
2.125% Notes 2021 €750m
Effect of interest rate swaps
3.375% Notes 2026 £375m
Effect of interest rate swaps
Other secured
Obligations under finance leases
Effective
interest rate
%
GBP LIBOR + 1.26
GBP LIBOR + 0.402
2.6000%
2.0600%
2.3500%
7.3750%
6.7500%
GBP LIBOR + 2.9824
2.3750%
GBP LIBOR + 0.8410
2.1250%
GBP LIBOR + 0.7005
3.6250%
GBP LIBOR + 1.4658
3.3750%
GBP LIBOR + 0.8930
4.1089%
Effective
interest rate
%
5.8156%
GBP LIBOR + 1.26
2.6000%
2.0600%
2.3500%
7.3750%
6.5500%
USD LIBOR + 1.24
6.7500%
GBP LIBOR + 2.9824
2.1250%
GBP LIBOR + 0.7005
3.3750%
GBP LIBOR + 0.8930
4.1089%
Period in which interest
rate reprices
6 months
or less
£m
2
3,176
6-12 months
£m
–
–
(1)
(200)
(43)
–
–
–
–
–
(536)
–
(333)
–
(576)
–
(668)
–
(390)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Period in which interest
rate reprices
6 months
or less
£m
5
2,862
6-12 months
£m
2
–
(1)
2
(200)
–
–
–
–
–
(55)
–
(547)
–
(615)
–
(395)
(1)
–
(2)
–
–
–
–
–
(55)
55
–
–
–
–
–
–
(1)
Total
£m
2
3,176
(129)
(200)
(43)
(92)
(55)
(28)
(200)
(536)
–
(333)
–
(576)
–
(668)
–
(390)
–
(52)
(124)
Total
£m
7
2,862
(12)
–
(200)
(97)
(59)
(36)
(200)
(55)
–
(547)
–
(615)
–
(395)
–
(45)
608
1 Interest on the short-term investments are at fixed rates.
2 Cash and cash equivalents comprise bank balances and demand deposits and earn interest at rates based on daily deposit rates
146 Rolls-Royce Holdings plc Annual Report 2015
Financial StatementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 17 Financial instruments continued
Some of the Group’s borrowings are subject to the Group meeting certain obligations, including customary financial covenants. If the
Group fails to meet its obligations these arrangements give rights to the lenders, upon agreement, to accelerate repayment of the
facilities. There are no rating triggers contained in any of the Group’s facilities that could require the Group to accelerate or repay any
facility for a given movement in the Group’s credit rating.
In addition, the Group has £1,780m (2014: £1,277m) of undrawn committed borrowing facilities available for at least the next two years.
SENSITIVITY ANALYSIS
Sensitivities at 31 December (all other variables held constant) – impact on profit after tax and equity
Sterling 10% weaker against the US dollar
Sterling 10% stronger against the US dollar
Euro 10% weaker against the US dollar
Euro 10% stronger against the US dollar
Sterling 10% weaker against the Euro
Sterling 10% stronger against the Euro
Commodity prices 10% lower
Commodity prices 10% higher
2015
£m
(1,574)
1,288
(130)
111
18
(15)
(13)
13
2014
£m
(1,336)
1,093
(147)
123
15
(12)
(15)
15
At 31 December 2015 the Group had no material sensitivity to changes in interest rates on that date. The main interest rate sensitivity for the Group
arises as a result of the gross up of net cash and this is mitigated as described under the interest rate risk management policies on page 142.
C SHARES AND PAYMENTS TO SHAREHOLDERS
The Company issues non-cumulative redeemable preference shares (C Shares) as an alternative to paying a cash dividend. C Shares in
respect of a year are issued in the following year. Shareholders are able to redeem any number of their C Shares for cash. Any C Shares
retained attract a dividend of 75% of LIBOR on the 0.1p nominal value of each share, paid on a twice-yearly basis, and have limited voting
rights. The Company has the option to compulsorily redeem the C Shares, at any time, if the aggregate number of C Shares in issue is less
than 10% of the aggregate number of C Shares issued, or on the acquisition or capital restructuring of the Company.
Movements in issued and fully paid C Shares during the year were as follows:
At 1 January
Issued
Redeemed
At 31 December
2015
2014
Millions
22,005
429,536
(422,581)
28,960
Nominal
value
£m
22
430
(423)
29
Millions
16,286
413,669
(407,950)
22,005
Nominal
value
£m
16
414
(408)
22
Payments to shareholders in respect of the year represent the value of C Shares to be issued in respect of the results for the year. Issues of
C Shares were declared as follows:
Interim
Final
2015
2014
Pence
per share
9.27
7.10
16.37
£m
170
131
301
Pence
per share
9.00
14.10
23.10
£m
170
265
435
Rolls-Royce Holdings plc Annual Report 2015 147
Financial StatementsFinancial Statements
18 Provisions for liabilities and charges
Warranty and guarantees
Contract loss
Restructuring
Customer financing
Insurance
Other
Current liabilities
Non-current liabilities
Exchange
differences
£m
(14)
(1)
–
–
–
(2)
(17)
Disposal
of
businesses
£m
(1)
–
–
–
–
–
(1)
Unused
amounts
reversed
£m
(28)
(1)
(30)
(27)
(5)
(9)
(100)
Charged to
income
statement
£m
106
10
106
11
15
2
250
At
1 January
2015
£m
426
41
122
47
65
106
807
433
374
Utilised
£m
(108)
(13)
(132)
(11)
(8)
(27)
(299)
At
31 December
2015
£m
381
36
66
20
67
70
640
336
304
Provisions for warranties and guarantees primarily relate to products sold and generally cover a period of up to three years.
Provisions for contract loss and restructuring are generally expected to be utilised within two years.
In connection with the sale of its products the Group will, on some occasions, provide financing support for its customers – generally in respect
of civil aircraft. The Group’s commitments relating to these financing arrangements are spread over many years, relate to a number of customers
and a broad product portfolio and are generally secured on the asset subject to the financing. These include commitments of US$3.1bn to provide
borrowing facilities to enable customers to purchase aircraft (of which approximately US$322m could be called during 2016). These facilities may
only be used if the customer is unable to obtain financing elsewhere and are priced at a premium to the market rate. Consequently the Directors
do not consider that there is a significant exposure arising from the provision of these facilities.
Customer financing provisions cover guarantees provided for asset value and/or financing. These guarantees, the risks arising and the
process used to assess the extent of the risk are described under the heading ‘Customer financing’ in the Financial review on page 46. It is
estimated that the provision will be utilised as follows:
Potential claims with specific claim dates:
In one year or less
In more than one year but less than five years
In more than five years
2015
£m
3
12
5
20
2014
£m
32
11
4
47
Commitments on delivered aircraft in excess of the amounts provided are shown in the table below. These are reported on a discounted
basis at the Group’s borrowing rate to reflect better the time span over which these exposures could arise. These amounts do not represent
values that are expected to crystallise. The commitments are denominated in US dollars. As the Group does not generally adopt cash flow
hedge accounting for future foreign exchange transactions, this amount is reported, together with the sterling equivalent at the reporting
date spot rate. The values of aircraft providing security are based on advice from a specialist aircraft appraiser.
Gross commitments
Value of security 1
Indemnities
Net commitments
Net commitments with security reduced by 20% 2
1 Security includes unrestricted cash collateral of:
2015
2014
£m
269
(136)
(79)
54
78
35
$m
399
(201)
(118)
80
115
52
£m
388
(245)
(84)
59
90
42
$m
605
(382)
(132)
91
140
66
2 Although sensitivity calculations are complex, the reduction of relevant security by 20% illustrates the sensitivity to changes in this assumption.
The Group’s captive insurance company retains a portion of the exposures it insures on behalf of the remainder of the Group. Significant
delays occur in the notification and settlement of claims and judgement is involved in assessing outstanding liabilities, the ultimate cost
and timing of which cannot be known with certainty at the balance sheet date. The insurance provisions are based on information
currently available, however it is inherent in the nature of the business that ultimate liabilities may vary. Provisions for outstanding claims
are established to cover the outstanding expected liability as well as claims incurred but not yet reported.
Other provisions comprise a number of liabilities with varying expected utilisation rates.
148 Rolls-Royce Holdings plc Annual Report 2015
Financial StatementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 19 Post-retirement benefits
The Group operates a number of defined benefit and defined contribution schemes:
• UK defined benefit schemes are funded, with the assets held in separate trustee administered funds. Employees are entitled to
retirement benefits based on either their final or career average salaries and length of service; and
• Overseas defined benefit schemes are a mixture of funded and unfunded plans and provide benefits in line with local practice.
Additionally in the US, and to a lesser extent in some other countries, the Group’s employment practices include the provision of
healthcare and life insurance benefits for retired employees. These schemes are unfunded.
The valuations of the defined benefit schemes are based on the most recent funding valuations, where relevant, updated by the scheme
actuaries to 31 December 2015.
The defined benefit schemes expose the Group to actuarial risks such as longevity, interest rate, inflation and investment risks. In the UK,
and in the principal US pension schemes, the Group has adopted investment policies to mitigate some of these risks. This involves
investing a significant proportion of the schemes’ assets in Liability Driven Investment portfolios, which hold investments designed to
offset interest rate and inflation rate risks. In addition, in the UK, the Rolls-Royce Pension Fund has invested in a longevity swap, which is
designed to offset longevity risks in respect of existing pensioners.
In the UK, surpluses are recognised on schemes where, on ultimate wind-up when there are longer any remaining members, any surplus
will be returned to the Group.
AMOUNTS RECOGNISED IN THE INCOME STATEMENT
Defined benefit schemes:
Current service cost and administrative expenses
Past-service and curtailment (credit)/cost
Defined contribution schemes
Operating cost
Net financing in respect of defined benefit schemes
Total income statement charge
The operating cost is charged as follows:
Cost of sales
Commercial and administrative costs
Research and development
Operating cost – continuing operations
Discontinued operations
Total operating cost
UK
schemes
£m
2015
Overseas
schemes
£m
169
(16)
153
33
186
(65)
121
52
8
60
85
145
33
178
UK
schemes
£m
2014
Overseas
schemes
£m
156
(18)
138
32
170
(11)
159
45
(13)
32
97
129
40
169
Total
£m
221
(8)
213
118
331
(32)
299
Defined benefit
Defined contribution
Total
2015
£m
147
32
34
213
–
213
2014
£m
117
21
27
165
5
170
2015
£m
80
21
17
118
–
118
2014
£m
84
23
17
124
5
129
2015
£m
227
53
51
331
–
331
Total
£m
201
(31)
170
129
299
29
328
2014
£m
201
44
44
289
10
299
The Group operates a PaySave scheme in the UK. This is a salary sacrifice scheme under which employees elect to stop making employee
contributions and the Group makes additional contributions in return for a reduction in gross contractual pay. As a result, there is a
decrease in wages and salaries and a corresponding increase in pension costs of £32m (2014: £35m) in the year.
Net financing comprises:
Financing on scheme obligations
Financing on scheme assets
Financing on unrecognised surpluses and minimum funding liability
Net financing (income)/charge in respect of defined benefit schemes
Financing income on scheme surpluses
Financing cost on scheme deficits
UK
schemes
£m
375
(440)
–
(65)
(65)
–
2015
Overseas
schemes
£m
57
(24)
–
33
–
33
Total
£m
432
(464)
–
(32)
(65)
33
UK
schemes
£m
390
(427)
26
(11)
(13)
2
2014
Overseas
schemes
£m
64
(24)
–
40
–
40
Total
£m
454
(451)
26
29
(13)
42
Rolls-Royce Holdings plc Annual Report 2015 149
Financial StatementsFinancial Statements
19 Post-retirement benefits continued
AMOUNTS RECOGNISED IN OCI IN RESPECT OF DEFINED BENEFIT SCHEMES
Actuarial gains and losses arising from demographic assumptions
Actuarial gains and losses arising from financial assumptions
Actuarial gains and losses arising from experience adjustments
Return on scheme assets excluding financing income
Movement in unrecognised surplus and related finance cost
Movement in minimum funding liability and related finance cost
Included in other comprehensive income
UK
schemes
£m
(185)
(70)
56
(593)
–
–
(792)
2015
Overseas
schemes
£m
8
70
8
(16)
–
–
70
AMOUNTS RECOGNISED IN THE BALANCE SHEET IN RESPECT OF DEFINED BENEFIT SCHEMES
Present value of funded obligations
Fair value of scheme assets
Net asset/(liability) on funded schemes
Present value of unfunded obligations
Net asset/(liability) recognised in the balance sheet
Post-retirement scheme surpluses
Post-retirement scheme deficits
Overseas schemes are located in the following countries:
Canada
Germany
US pension schemes
US healthcare schemes
Other
Net asset/(liability) recognised in the balance sheet
UK
schemes
£m
(10,914)
11,957
1,043
–
1,043
1,059
(16)
2015
Overseas
schemes
£m
(650)
597
(53)
(1,067)
(1,120)
4
(1,124)
Assets
£m
152
–
429
–
16
597
2015
Obligations
£m
(188)
(553)
(513)
(426)
(37)
(1,717)
UK
schemes
£m
23
(1,099)
(343)
2,258
513
47
1,399
UK
schemes
£m
(10,606)
12,341
1,735
–
1,735
1,735
–
2014
Overseas
schemes
£m
(17)
(228)
(17)
55
–
–
(207)
2014
Overseas
schemes
£m
(664)
593
(71)
(1,109)
(1,180)
5
(1,185)
Assets
£m
160
–
414
–
19
593
2014
Obligations
£m
(208)
(592)
(508)
(423)
(42)
(1,773)
Total
£m
(177)
–
64
(609)
–
–
(722)
Total
£m
(11,564)
12,554
990
(1,067)
(77)
1,063
(1,140)
Net
£m
(36)
(553)
(84)
(426)
(21)
(1,120)
Total
£m
6
(1,327)
(360)
2,313
513
47
1,192
Total
£m
(11,270)
12,934
1,664
(1,109)
555
1,740
(1,185)
Net
£m
(48)
(592)
(94)
(423)
(23)
(1,180)
DEFINED BENEFIT SCHEMES
Assumptions
Significant actuarial assumptions for UK schemes (weighted average, weighted by the size of the obligation) used at the balance sheet date
were as follows:
Discount rate
Inflation assumption (RPI) 1
Rate of increase in salaries
Male life expectancy from age 65: current pensioner
future pensioner currently aged 45
1 This is the assumption for the Retail Price Index. The Consumer Price Index is assumed to be 1.1% lower
2015
3.6%
3.2%
4.0%
22.8 years
24.8 years
2014
3.6%
3.2%
4.2%
22.5 years
24.1 years
Discount rates are determined by reference to the market yields on AA rated corporate bonds. The rate is determined by using the profile
of forecast benefit payments to derive a weighted average discount rate from the yield curve.
The inflation assumption is determined by the market implied assumption based on the yields on long-term indexed linked government
securities and increases in salaries are based on actual experience, allowing for promotion, of the real increase above inflation.
The mortality assumptions adopted for the UK pension schemes are derived from the SAP actuarial tables, with future improvements in
line with the CMI 2015 core projections and long-term improvements of 1.5%. Where appropriate, these are adjusted to take account of the
relevant scheme’s actual experience.
150 Rolls-Royce Holdings plc Annual Report 2015
Financial StatementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
19 Post-retirement benefits continued
Other assumptions have been set on advice from the relevant actuary, having regard to the latest trends in scheme experience and the
assumptions used in the most recent funding valuation. The rate of increase of pensions in payment is based on the rules of the relevant
scheme, combined with the inflation assumption where the increase is capped.
Assumptions for overseas schemes are less significant and are based on advice from local actuaries. The principal assumptions are:
Discount rate
Inflation assumption
Long-term healthcare cost trend rate
Male life expectancy from age 65: current pensioner
future pensioner currently aged 45
Changes in present value of defined benefit obligations
At 1 January
Exchange differences
Current service cost
Past service cost
Finance cost
Contributions by employees
Benefits paid out
Disposal of businesses
Actuarial (losses)/gains
Settlement curtailment
Other movements
At 31 December
Funded schemes
Unfunded schemes
The defined benefit obligations are in respect of:
Active plan participants
Deferred plan participants
Pensioners
Weighted average duration of obligations (years)
Changes in fair value of scheme assets
At 1 January
Exchange differences
Administrative expenses
Financing
Return on plan assets excluding financing
Contributions by employer
Contributions by employees
Benefits paid out
Settlements/curtailment
At 31 December
Total return on scheme assets
2015
3.6%
2.2%
5.0%
21.1 years
23.3 years
2014
3.3%
2.2%
5.0%
21.1 years
23.3 years
UK
schemes
£m
(10,606)
–
(164)
16
(375)
(3)
417
–
(199)
–
–
(10,914)
(10,914)
–
(4,273)
(1,946)
(4,695)
18
UK
schemes
£m
12,341
–
(5)
440
(593)
188
3
(417)
–
11,957
(153)
2015
Overseas
schemes
£m
(1,773)
17
(50)
(5)
(58)
(4)
75
–
84
–
(3)
(1,717)
(650)
(1,067)
(921)
(130)
(666)
16
2015
Overseas
schemes
£m
593
(2)
(2)
24
(16)
71
4
(75)
–
597
8
Total
£m
(12,379)
17
(214)
11
(433)
(7)
492
–
(115)
–
(3)
(12,631)
(11,564)
(1,067)
(5,194)
(2,076)
(5,361)
17
Total
£m
12,934
(2)
(7)
464
(609)
259
7
(492)
–
12,554
(145)
UK
schemes
£m
(9,046)
–
(151)
18
(390)
(4)
376
10
(1,419)
–
–
(10,606)
(10,606)
–
(4,170)
(2,009)
(4,427)
17
UK
schemes
£m
9,776
–
(5)
427
2,258
257
4
(376)
–
12,341
2,685
2014
Overseas
schemes
£m
(1,493)
(7)
(44)
16
(63)
(5)
71
16
(266)
6
(4)
(1,773)
(664)
(1,109)
(974)
(97)
(702)
16
2014
Overseas
schemes
£m
504
18
(1)
24
55
65
5
(71)
(6)
593
79
Total
£m
(10,539)
(7)
(195)
34
(453)
(9)
447
26
(1,685)
6
(4)
(12,379)
(11,270)
(1,109)
(5,144)
(2,106)
(5,129)
17
Total
£m
10,280
18
(6)
451
2,313
322
9
(447)
(6)
12,934
2,764
Rolls-Royce Holdings plc Annual Report 2015 151
Financial StatementsFinancial Statements
19 Post-retirement benefits continued
Fair value of scheme assets at 31 December
Sovereign debt
Derivatives on sovereign debt
Corporate debt instruments
Interest rate swaps
Inflation swaps
Cash and similar instruments
Liability driven investment (LDI) portfolios 1
Longevity swap 2
Listed equities
Unlisted equities
Sovereign debt
Corporate debt instruments
Cash
Other
Fair value of scheme assets
UK
schemes
£m
7,283
(5)
1,977
1,868
(477)
118
10,764
(142)
810
232
110
24
68
91
11,957
2015
Overseas
schemes
£m
297
(1)
239
–
–
21
556
–
1
–
3
–
21
16
597
UK
schemes
£m
7,282
(2,622)
2,053
4,218
(360)
193
10,764
10
787
216
105
15
166
278
12,341
2014
Overseas
schemes
£m
167
2
237
–
–
127
533
–
3
–
4
–
32
21
593
Total
£m
7,580
(6)
2,216
1,868
(477)
139
11,320
(142)
811
232
113
24
89
107
12,554
Total
£m
7,449
(2,620)
2,290
4,218
(360)
320
11,297
10
790
216
109
15
198
299
12,934
1 A portfolio of gilt and swap contracts, backed by LIBOR generating assets, that is designed to hedge the majority of the interest rate and inflation risks associated with the schemes’
obligations.
2 Under the longevity swap, the Rolls-Royce Pension Fund has agreed an average life expectancy of pensioners with a counterparty. If pensioners live longer than expected the
counterparty will make payments to the Fund to offset the additional cost of paying pensioners. If the reverse applies the cost of paying pensioners will be reduced but the scheme
will be required to make payments to the counterparty. The longevity swap is valued at fair value in accordance with IFRS 13 (Level 3).
The scheme assets do not include any of the Group’s own financial instruments, nor any property occupied by, or other assets used by, the Group.
The longevity swap is valued by the scheme actuaries based on the difference between the agreed longevity assumptions at inception and
actual longevity experience. All other fair values are provided by the fund managers. Where available, the fair values are quoted prices (eg. listed
equity, sovereign debt and corporate bonds). Unlisted investments (private equity) are included at values provided by the fund manager in
accordance with relevant guidance. Other significant assets are valued based on observable inputs such as yield curves.
Movements in unrecognised surplus and minimum funding liability
At 1 January
Movements in unrecognised surplus through OCI 1
Movements in minimum funding liability through OCI 2
Related finance costs
At 31 December
UK
schemes
£m
–
–
–
–
–
2015
Overseas
schemes
£m
–
–
–
–
–
Total
£m
–
–
–
–
–
UK
schemes
£m
(534)
513
47
(26)
–
2014
Overseas
schemes
£m
–
–
–
–
–
Total
£m
(534)
513
47
(26)
–
1 Where a surplus has arisen on a scheme, in accordance with IAS 19 and IFRIC 14, the surplus is recognised as an asset only if it represents an unconditional economic benefit available
to the Group in the future. Any surplus in excess of this benefit is not recognised in the balance sheet. During 2014, the rules of one scheme were amended, which removed the
restriction on recognising the surplus.
2 A minimum funding liability arises where the statutory funding requirements require future contributions in respect of past service that will result in a future unrecognisable surplus.
FUTURE CONTRIBUTIONS
The Group expects to contribute approximately £260m to its defined benefit schemes in 2016.
In the UK, the funding is set on the basis of a triennial funding valuation by the actuaries for which the assumptions may differ from those
above. In particular, the discount rate used to value the obligations takes account of the investment strategy, rather than being based on
market yields of AA corporate bonds. As a result of these valuations, the Group and the scheme trustees agree a Schedule of Contributions
(SoC), which sets out the required contributions from the employer and employees for current service. Where the scheme is in deficit, the
SoC also includes required contributions from the employer to eliminate the deficit. The most recent agreed triennial valuations for the
principal schemes are:
Rolls-Royce Pension Fund
Rolls-Royce Group Pension Scheme
Vickers Group Pension Scheme
152 Rolls-Royce Holdings plc Annual Report 2015
Obligations at
31 December 2015
£m
(7,871)
(1,913)
(702)
Valuation date
31 March 2015
5 April 2013
31 March 2013
Financial StatementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 19 Post-retirement benefits continued
Sensitivities
The calculations of the defined benefit obligations are sensitive to the assumptions set out above. The following table summarises how the
estimated impact of a change in a significant assumption would affect the UK defined benefit obligation at 31 December 2015, while holding
all other assumptions constant. This sensitivity analysis may not be representative of the actual change in the defined benefit obligation as it is
unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated.
For the most significant funded schemes, the investment strategies are designed to hedge the risks from interest rates and inflation on an
economic basis and in the Rolls-Royce Pension Fund in the UK, the longevity of pensioners. Where appropriate, the table also includes the
corresponding movement in the value of the plan assets.
Reduction in the discount rate of 0.25% 1
Increase in inflation of 0.25% 1
Real increase in salaries of 0.25%
One year increase in life expectancy
Obligation
Plan assets (LDI portfolio)
Obligation
Plan assets (LDI portfolio)
Obligations
Obligations
£m
(524)
569
(249)
231
(86)
(308)
1 The difference between the sensitivities on obligations and plan assets arises largely due to differences in the methods used to value the obligations for accounting and economic
purposes. On an economic basis the correlation is approximately 97% for discount rates and 89% for inflation.
20 Share capital
Issued and fully paid
At 1 January 2014
Proceeds from shares issued for share option schemes
Purchase and cancellation of ordinary shares
At 31 December 2014
Purchase and cancellation of ordinary shares
At 31 December 2015
Non-equity
Equity
Special
Share
of £1
Nominal
value
£m
Ordinary
shares
of 20p each
Millions
Nominal
value
£m
1
1
1
–
–
–
1,880
10
(8)
1,882
(44)
1,838
376
2
(2)
376
(9)
367
The rights attaching to each class of share are set out on page 178.
In accordance with IAS 32 Financial Instruments: Presentation, the Company’s non-cumulative redeemable preference shares (C Shares) are
classified as financial liabilities. Accordingly, movements in C Shares are included in note 17.
21 Share-based payments
EFFECT OF SHARE-BASED PAYMENT TRANSACTIONS ON THE GROUP’S RESULTS AND FINANCIAL POSITION
Total expense recognised for equity-settled share-based payments transactions
Total credit recognised for cash-settled share-based payments transactions
Share-based payments recognised in the consolidated income statement
Liability for cash-settled share-based payment transactions
A description of the share-based payment plans is included in the Directors’ Remuneration Report on pages 77 to 89.
2015
£m
6
(1)
5
–
2014
£m
26
(5)
21
13
Rolls-Royce Holdings plc Annual Report 2015 153
Financial StatementsFinancial Statements
21 Share-based payments continued
MOVEMENTS IN THE GROUP’S SHARE-BASED PAYMENT PLANS DURING THE YEAR
Outstanding at 1 January 2014
Granted
Additional entitlements arising from TSR performance
Additional shares accrued from reinvestment of C Shares
Forfeited
Exercised
Outstanding at 1 January 2015
Granted
Additional entitlements arising from TSR performance
Forfeited
Exercised
Outstanding 31 December 2015
Exercisable at 31 December 2015
Exercisable at 31 December 2014
ShareSave
PSP
APRA
Weighted
average
exercise price
Pence
660
–
–
–
775
487
660
617
–
908
445
677
–
–
Number
Millions
26.0
–
–
–
(1.0)
(0.5)
24.5
13.0
–
(4.6)
(9.7)
23.2
–
–
Number
Millions
12.0
2.9
0.5
–
(1.2)
(4.4)
9.8
3.0
0.5
(2.9)
(1.7)
8.7
–
–
Number
Millions
3.1
1.1
–
0.1
(0.2)
(1.7)
2.4
–
–
(0.1)
(1.4)
0.9
–
–
As share options are exercised throughout the year, the weighted average share price during the year of 820p (2014: 1013p) is
representative of the weighted average share price at the date of exercise. The closing price at 31 December 2015 was 575p (2014: 870p).
FAIR VALUES OF SHARE-BASED PAYMENT PLANS
The weighted average fair value per share of equity-settled share-based payment plans granted during the year, estimated at the date
of grant, are as follows:
PSP – 25% TSR uplift
PSP – 50% TSR uplift
ShareSave – 3 year grant
ShareSave – 5 year grant
APRA
2015
1,015p
1,036p
192p
219p
n/a
2014
1,105p
1,227p
n/a
n/a
984p
PSP
The fair value of shares awarded under the PSP is calculated using a pricing model that takes account of the non-entitlement to dividends
(or equivalent) during the vesting period and the market-based performance condition based on expectations about volatility and the correlation
of share price returns in the group of FTSE 100 companies and which incorporates into the valuation the interdependency between share price
performance and TSR vesting. This adjustment increases the fair value of the award relative to the share price at the date of grant.
ShareSave
The fair value of the options granted under the ShareSave plan is calculated using a binomial pricing model that assumes that participants
will exercise their options at the beginning of the six-month window if the share price is greater than the exercise price. Otherwise it
assumes that options are held until the expiration of their contractual term. This results in an expected life that falls somewhere between
the start and end of the exercise window.
APRA
The fair value of shares awarded under APRA is calculated as the share price on the date of the award, excluding expected dividends (or equivalent).
22 Leases
OPERATING LEASES
Leases as lessee
Rentals paid – hire of plant and machinery
– hire of other assets
Non-cancellable operating lease rentals are payable as follows:
Within one year
Between one and five years
After five years
154 Rolls-Royce Holdings plc Annual Report 2015
2015
£m
122
124
190
488
496
1,174
2014
£m
123
75
182
542
438
1,162
Financial StatementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
22 Leases continued
Leases as lessor
Rentals received – credited within revenue from aftermarket services
Non-cancellable operating lease rentals are receivable as follows:
Within one year
Between one and five years
After five years
2015
£m
3
12
12
8
32
2014
£m
15
16
30
13
59
The Group acts as lessee and lessor for both land and buildings and gas turbine engines, and acts as lessee for some plant and equipment.
• Sublease payments of £1m (2014: £1m) and sublease receipts of £3m (2014: £12m) were recognised in the income statement in the year.
• Purchase options exist on aero engines, land and buildings and plant and equipment with the period to the purchase option date
varying between one to eight years.
• Renewal options exist on aero engines, land and buildings and plant and equipment with the period to the renewal option varying
between one to 52 years at terms to be negotiated upon renewal.
• Escalation clauses exist on some leases and are linked to LIBOR.
• The total future minimum sublease payments expected to be made is £3m (2014: £6m) and sublease receipts expected to be received
are £24m (2014: £31m).
FINANCE LEASES
Finance lease liabilities are payable as follows:
Within one year
Between one and five years
After five years
Payments
£m
5
18
46
69
2015
Interest
£m
2
8
7
17
Principal
£m
3
10
39
52
Payments
£m
3
13
47
63
2014
Interest
£m
2
7
9
18
Principal
£m
1
6
38
45
23 Contingent liabilities
Contingent liabilities in respect of customer financing commitments are described in note 18.
On 6 December 2012, the Company announced that it had passed information to the Serious Fraud Office (SFO), following a request from
the SFO for information about allegations of malpractice in overseas markets. On 23 December 2013, the Company announced that it had
been informed by the SFO that it had commenced a formal investigation. Since the initial announcement, the Company has continued its
investigations and is engaging with the SFO and other authorities in the UK, the USA and elsewhere in relation to the matters of concern.
The consequence of these disclosures will be decided by the regulatory authorities. It is too early to predict the outcomes, but these could include
the prosecution of individuals and of the Group. Accordingly, the potential for fines, penalties or other consequences cannot currently be
assessed. As the investigation is ongoing, it is not yet possible to identify the timescale in which these issues might be resolved.
Contingent liabilities exist in respect of guarantees provided by the Group in the ordinary course of business for product delivery,
performance and reliability. The Group has, in the normal course of business, entered into arrangements in respect of export finance,
performance bonds, countertrade obligations and minor miscellaneous items. Various Group undertakings are parties to legal actions
and claims which arise in the ordinary course of business, some of which are for substantial amounts. As a consequence of the
insolvency of an insurer as previously reported, the Group is no longer fully insured against known and potential claims from
employees who worked for certain of the Group’s UK-based businesses for a period prior to the acquisition of those businesses by the
Group. While the outcome of some of these matters cannot precisely be foreseen, the Directors do not expect any of these
arrangements, legal actions or claims, after allowing for provisions already made, to result in significant loss to the Group.
The Group’s share of equity accounted entities’ contingent liabilities is £11m (2014: £11m).
Rolls-Royce Holdings plc Annual Report 2015 155
Financial StatementsFinancial Statements
24 Related party transactions
Sales of goods and services to joint ventures and associates
Purchases of goods and services from joint ventures and associates
Operating lease payments to joint ventures and associates
Guarantees of joint ventures' and associates' borrowings
Dividends received from joint ventures and associates
RRSA receipts from joint ventures and associates
Other income received from joint ventures and associates
2015
£m
1,896
(2,266)
(88)
9
63
16
2
2014
£m
2,138
(2,544)
(81)
9
73
2
2
Included in sales of goods and services to joint ventures and associates are sales of spare engines amounting to £189m (2014: £138m).
Profit recognised in the year on such sales amounted to £71m (2014: £54m), including profit on current year sales and recognition of profit
deferred on sales in previous years.
The aggregated balances with joint ventures are shown in notes 13 and 16. Transactions with Group pension schemes are shown in note 19.
In the course of normal operations, related party transactions entered into by the Group have been contracted on an arms-length basis.
Key management personnel are deemed to be the Directors and the members of the ELT as set out on pages 58 to 61. Remuneration for key
management personnel is shown below:
Salaries and short-term benefits
Post-retirement schemes
Share-based payments
2015
£m
8
–
–
8
2014
£m
9
1
4
14
More detailed information regarding the Directors’ remuneration, shareholdings, pension entitlements, share options and other long-term
incentive plans is shown in the Directors’ Remuneration Report on pages 77 to 89. The charge for share-based payments above is based on
when the award is charged to the income statement in accordance with IFRS 2 Share-Based Payments, rather than when the shares vest,
which is the basis used in the Directors’ Remuneration Report.
25 Acquisitions and disposals
ACQUISITIONS
On 27 March 2015, the Group acquired 100% of R.O.V. Technologies Inc. for US$8m. The acquisition gave rise to goodwill of £1m and other
intangible assets of £2m.
DISPOSALS
On 27 November 2015, the Group completed the sale of its Michell Bearings business (comprising a business based in the UK, and a 51%
shareholding in Michell Bearings (India) Pvt Ltd, a subsidiary company based in Bangalore) for net consideration of £2m.
156 Rolls-Royce Holdings plc Annual Report 2015
Financial StatementsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED COMPANY BALANCE SHEET
At 31 December 2015
Assets
Non-current assets
Investments – subsidiary undertakings
Current assets
Trade and other receivables
TOTAL ASSETS
Liabilities
Current liabilities
Other financial liabilities
Trade and other payables
TOTAL LIABILITIES
NET ASSETS
Equity
Called-up share capital
Share premium account
Merger reserve
Capital redemption reserve
Other reserve
Retained earnings
TOTAL EQUITY
Notes
2015
£m
2014
£m
2
12,016
12,015
–
12,016
57
12,072
3
4
(29)
(842)
(871)
(22)
–
(22)
11,145
12,050
367
180
7,359
1,699
126
1,414
11,145
376
179
7,789
1,267
124
2,315
12,050
The financial statements on pages 157 to 159 were approved by the Board on 11 February 2016 and signed on its behalf by:
WARREN EAST Chief Executive
DAVID SMITH Chief Financial Officer
Company’s registered number: 7524813
COMPANY STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2015
At 1 January 2015
Profit for the year
Shares issued to share trust
Cancellation of ordinary shares
Purchase of ordinary shares
Issue of C Shares
Redemption of C Shares
Share-based payments – direct to equity
At 31 December 2015
Attributable to ordinary shareholders
Share
capital
£m
376
–
–
(9)
–
–
–
–
367
Share
premium
£m
179
–
1
–
–
–
–
–
180
Merger
reserve
£m
7,789
–
–
–
–
(430)
–
–
7,359
Capital
redemption
reserve
£m
1,267
–
–
9
–
–
423
–
1,699
Other
reserve1
£m
124
–
–
–
–
–
–
2
126
Retained
earnings
£m
2,315
–
–
–
(414)
–
(423)
(64)
1,414
Total
equity
£m
12,050
–
1
–
(414)
(430)
–
(62)
11,145
1 The ‘Other reserve’ represents the value of share-based payments in respect of employees of subsidiary undertakings for which payment has not been received
Rolls-Royce Holdings plc Annual Report 2015 157
Financial StatementsFinancial Statements
NOTES TO THE COMPANY FINANCIAL STATEMENTS
1 Accounting policies
BASIS OF ACCOUNTING
These financial statements have been prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework
(‘FRS 101’) on the historical cost basis.
These are the Company’s first financial statements prepared in accordance with FRS 101.
In preparing these financial statements, the Company applies the recognition, measurement and disclosure requirements of International
Financial Reporting Standards as adopted by the EU (‘Adopted IFRS’), but makes amendments where necessary in order to comply with the
Companies Act 2006.
In the transition to FRS 101, the Company has applied IFRS 1, whilst ensuring that its assets and liabilities are measured in compliance
with FRS 101.
In these financial statements the Company has applied the exemptions available under FRS 101 in respect of the following disclosures:
• a cash flow statement and related notes; and
• the requirements of IAS 24 Related Party Transactions and has, therefore, not disclosed transactions between the Company and its wholly
owned subsidiaries.
FRS 101 has had no impact on the figures presented in these financial statements.
As permitted by Section 408 of the Companies Act 2006, a separate income statement for the Company has not been included in these
financial statements. As permitted by the audit fee disclosure regulations, disclosure of non-audit fees information is not included in
respect of the Company.
INVESTMENTS IN SUBSIDIARY UNDERTAKINGS
Investments in subsidiary undertakings are reported at cost less any amounts written off.
SHARE-BASED PAYMENTS
As described in the Directors’ Remuneration Report on pages 77 to 89, the Company grants awards of its own shares to employees of its
subsidiary undertakings (see note 21 of the consolidated financial statements). The costs of share-based payments in respect of these
awards are accounted for, by the Company, as an additional investment in its subsidiary undertakings. The costs are determined in
accordance with IFRS 2 Share-based Payment. Any payments made by the subsidiary undertakings in respect of these arrangements are
treated as a return of this investment.
FINANCIAL INSTRUMENTS
In accordance with IAS 32 Financial Instruments: Presentation, the Company’s C Shares are classified as financial liabilities and held
at amortised cost from the date of issue until redeemed.
2 Investments – subsidiary undertakings
Cost:
At 1 January 2015
Additions
Cost of share-based payments in respect of employees of subsidiary undertakings
less receipts from subsidiaries in respect of those payments
At 31 December 2015
3 Financial liabilities
C SHARES
Movements during the year of issued and fully paid C Shares were as follows:
At 1 January 2015
Shares issued
Shares redeemed
At 31 December 2015
The rights attaching to C Shares are set out on page 178.
158 Rolls-Royce Holdings plc Annual Report 2015
£m
12,015
–
1
12,016
C Shares
of 0.1p
Millions
22,005
429,536
(422,581)
28,960
Nominal
value
£m
22
430
(423)
29
Financial Statements 4 Share capital
Issued and fully paid
At 1 January 2015
Cancellation of ordinary shares
At 31 December 2015
Non-equity
Equity
Special
Share
of £1
Preference
shares of
£1 each
Nominal
value
£m
1
1
–
–
–
–
Ordinary
shares of
20p each
Millions
1,882
(44)
1,838
Nominal
value
£m
376
(9)
367
The rights attaching to each class of share are set out on page 178.
In accordance with IAS 32, the Company’s non-cumulative redeemable preference shares (C Shares) are classified as financial liabilities.
Accordingly, movements in C Shares are included in note 3.
5 Contingent liabilities
Where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within its group, the
Company considers these to be insurance arrangements, and accounts for them as such. In this respect, the Company treats the guarantee
contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under
the guarantee.
At 31 December 2015, these guarantees amounted to £1,937m (2014: £959m).
6 Other information
EMOLUMENTS OF DIRECTORS
The remuneration of the Directors of the Company is shown in the Directors’ Remuneration Report on pages 77 to 89.
EMPLOYEES
The Company had no employees in 2015.
SHARE-BASED PAYMENTS
Shares in the Company have been granted to employees of the Group as part of share-based payment plans, and are charged in the
employing company.
Rolls-Royce Holdings plc Annual Report 2015 159
Financial StatementsFinancial Statements
SUBSIDIARIES
Company name
A.F.C Wultex Limited*
A.P.E. – Allen Gears Limited*
Allen Power Engineering Limited*
Amalgamated Power Engineering Limited*
Bergen Engines AS
Bergen Engines Bangladesh Private Limited
Bergen Engines BV
Bergen Engines Denmark A/S
Bergen Engines India Private Limited
Bergen Engines Limited
Bergen Engines Property Co AS
Bergen Engines S.L.
Bergen Engines S.r.l
Bristol Energy Limited*
Bristol Siddeley Engines Limited*
Brooks Inspection Solutions Limited
Brown Brothers & Company Limited*
C.A. Parsons & Company Limited*
Composite Technology and Applications Limited
Crossley-Premier Engines (Sales) Limited*
Croydon Energy Limited*
Data Systems & Solutions, LLC
Deeside Titanium Limited*
Derby Cogeneration Limited*
Derby Specialist Fabrications Limited*
Europea Microfusioni Aerospaziali S.p.A.
Exeter Power Limited*
Fluid Mechanics LLC
Gate Leasing Limited
Hartshill Ventures Limited
Heartlands Power Limited*
Heaton Power Limited*
John Hastie of Greenock (Holdings) Limited*
John Thompson Cochran Limited*
John Thompson Limited*
Kalvet Engineering (Proprietary) Limited*
Kamewa AB*
Kamewa Do Brazil Equipmentos Maritimos Limitada*
Kamewa Holding AB*
Kamewa UK Limited*
Karl Maybach-Hilfe GmbH
L’Orange Unterstützungkasse GmbH
L’Orange Fuel Injection (Ningbo) Co, Ltd
L’Orange Fuel Injection Trading (Suzhou) Co, Ltd
L’Orange GmbH
M.L. Limited
Mansfield Holdings Limited*
MTU America Inc
MTU Anlagenvermietung GmbH
MTU Asia PTE. Limited
MTU Benelux B.V.
MTU China Company Limited
MTU Do Brazil Limitada
100
* Dormant entity
1 Moor Lane, Derby, Derbyshire, England DE24 8BJ
2 62 Buckingham Gate, London, England SW1E 6AT
160 Rolls-Royce Holdings plc Annual Report 2015
Address
Derby1
Derby1
Derby1
Derby1
125 Hordvikneset, 5108 Hordvik, Bergen, 1201, Norway
Plot n.58E, Kemal Ataturk Avenue, Dhaka, 1213, Bangladesh
% held
90
100
100
100
100
100
100 Werfdijk 2, 3195HV Pernis, Rotterdam, Netherlands
23 Værftsvej, 9000 Aalborg, Denmark
100
52-b Okhla Industrial Estate, Phase 3, New Delhi 110-020, India
100
Derby1
100
125 Hordvikneset, 5108 Hordvik, Bergen, 1201, Norway
100
Calle Dinamarca, 43120 Constanti, Tarragona, Spain
100
13 Via Castel Morrone, 16161, Genoa, Italy
100
Derby1
100
Derby1
100
Derby1
100
Taxiway, Hillend Industrial Estate, Dalgety Bay, Dunfermline, Scotland, KY11 9JT
100
Derby1
100
Derby1
100
Derby1
100
Derby1
100
5959 Shallowford Road, Chattanooga, TN 37421, USA
100
Derby1
82.5
Derby1
100
Derby1
100
Zona Industriale AS1, 83040 Morra De Sanctis, Avellino, Italy
100
Derby1
100
39525 MacKenzie Drive, Novi, Michigan 48377, USA
100
London2
100
Derby1
100
Derby1
100
Derby1
100
Derby1
100
Taxiway, Hillend Industrial Estate, Dalgety Bay, Dunfermline, Scotland KY11 9JT
100
Derby1
100
Corner Marcony Rd and 3rd St, Western Cape, 7441, South Africa
100
Box 1010, S-68129, Kristinehamn, Sweden
100
401 Rua Visconde de Piraja 433, Rio de Janeiro, Brazil
100
Box 1010, S-68129, Kristinehamn, Sweden
100
Derby1
100
1 Maybachplatz, 88045 Friedrichshafen, Germany
100
Harteckweg 9, 72293 Glatten, Germany
100
#3 South Qihang Rd 55, Yinzhou Economic Development Zone Ningbo City, 315145, China
100
#399 Suhong Middle Rd, Suzhou Industrial Park, Suzhou 215000, China
100
30 Porschestrabe, 70435 Stuttgart, Germany
100
Derby1
100
Derby1
100
39625 McKenzie Drive, Novi, MI 48377, USA
100
1 Maybachplatz, 88045 Friedrichshafen, Germany
100
100
#05-01, Robinson Rd 112, 068902, Singapore
100 Merwedestraat 86, 3313 CS, Dordrecht, Netherlands
100
1801–1803, 18/F Ascendas Plaza, No.333 Tian Yao Qiao Road Xuhai District, Shanghai,
200030, China
Via Anhanguera, KM 29203, 05276-000 Sao Paulo SP Brazil
Other information Company name
% held
Address
MTU Engineering (Suzhou) Company Limited
MTU France SAS
MTU Friedrichshafen GmbH
MTU Hong Kong Limited
MTU Iberica Propulsion Y Energia S.L.
MTU India Private Limited
MTU Israel Limited
MTU Italia S.r.l
MTU Japan Co Limited
MTU Korea Limited
MTU Middle East FZE
MTU Motor Turbin Sanayi Ve Ticaret. A.S
MTU Onsite Energy Corporation
MTU Onsite Energy GmbH
MTU Onsite Energy Systems GmbH
MTU Polska SP. ZOO
MTU Reman Technologies GmbH
MTU RUS LLC
MTU South Africa (Pty) Limited
MTU UK Limited
Navis Consult d.o.o
NEI Allen Limited*
NEI Combustion Engineering Limited*
NEI International Combustion Limited*
NEI Limited*
NEI Mining Equipment Limited*
NEI Nuclear Systems Limited*
NEI Overseas Holdings Limited
NEI Parsons Limited*
NEI Peebles Limited*
NEI Power Projects Limited*
NEI Services Limited*
Nightingale Insurance Limited
Optimized Systems and Solutions (US) LLC
Optimized Systems and Solutions Limited*
Oxygenaire Limited*
PKMJ Technical Services, Inc.
Powerfield Limited*
Powerfield Specialist Engines Limited*
Prokura Diesel Services (pty) Limited
PT Rolls-Royce
PT MTU Indonesia
Quay Leasing Limited
R. Brooks Associates, Inc.
Rallyswift Limited*
Reyrolle Belmos Limited*
Rolls E.L Turbofans Limited*
Rolls-Royce (Ireland)*
Rolls-Royce (Thailand) Limited
Rolls-Royce (Xi’an) Mechanical Manufacturing Co. Limited
Rolls-Royce AB
* Dormant entity
1 Moor Lane, Derby, Derbyshire, England DE24 8BJ
2 62 Buckingham Gate, London, England SW1E 6AT
100
100
100
100
100
100
100
100
100
100
100
100
100
9 Long Yun Rd, Suzhou Industrial Park, Suzhou 215024 Jiang Su, China
281 Chaussée Jules César, 95250 Beauchamp, France
1 Maybachplatz, 88045 Friedrichshafen, Germany
1-3 Wing Yip St, Kwai Chung, New Territories, Hong Kong
26-28 Calle Copernico, 28823 Coslada, Madrid, Spain
159/1 Tathawade, Pune Mumbai Highway, Pune 411033, India
4 Ha"Alon Str, Kfar Neter, 4059300, Israel
Via Aurelia Nord, 328, 19021 Arcola (SP), Italy
2-15-19 Takanawa-Meiko, Minato-ku, Tokyo, 108-0074, Japan
20F Kores First Bank Building, 100 Gongpyung-dong, Jongno-gu Seoul, 100-702,
Republic of Korea
Showroom No. S3B5SR06 , Jebel Ali Free Zone, P.O. Box 61141 Dubai, United Arab Emirates
113. Ada 3.Parsel No.11, Çorlu, Tekirdag, 34555,Turkey
100 Power Drive, Mankato, MIN 56001, USA
8 Rotthofer Straße, 94099 Ruhstorf a.d. Rott, Germany
8 Rotthofer Straße, 94099 Ruhstorf a.d. Rott, Germany
Ul. Slaska, Nr 9. Raum, Stargard Szczecinski, 73-110, Potsdam Stargard Szczecinski, Poland
8 Friedrich-List-Strabe, 39122 Magdeburg, Germany
Shabolovka Street 2, 119049, Moscow, Russian Federation
Corner Marcony Rd and 3rd St, Western Cape, 7441 South Africa
Unit 29 The Birches Industrial Estate, East Grinstead, England RH19 1XZ
Ul. Bartola Kasica 5/4, HR-51000, Rijeka, Croatia
Derby1
Derby1
Derby1
Derby1
Derby1
Derby1
Derby1
Derby1
Derby1
Derby1
Derby1
100
100
100
100
100
100
100
100
100
100
75
100
100
100
100
100
100
100
100
100
100
100
100 Maison Trinity, Trinity Square, St. Peter Port, GY1 4AT, Guernsey
100
100
100
100
100
100
100
100 Mid Plaza 2, Lantai 16 Jl. Jenderal Sudirman 10-11, JakartaPusat, 10220, Indonesia
100
100
100
100
100
100
100
Secure Building Blok B, Jl. Raya Protokol Halim, Perdanakusuma Jakarta, 13610, Indonesia
London2
6546 Pound Road, Williamson, NY14589, USA
Derby1
Taxiway, Hillend Industrial Estate, Dalgety Bay, Dunfermline, Scotland KY11 9JT
Derby1
1st Floor, IFSC House, International Financial Services Centre, Customs House Quay,
Dublin, Irish Republic
900, 11th Fl, Tonson Tower, Ploenchit Rd, Bangkok, Thailand
E-1, No. 5 Lan Tian Road, Xian Yanliang National Aviation Hi-Tech Industrial Base,
China
Box 1010, S-68129, Kristinehamn, Sweden
Suite 500, 54 Monument Circle, Indianapolis, IN46204, USA
Derby1
Derby1
465 Malcolm Dr., Moon Township, PA15108, USA
Derby1
Derby1
Corner Marcony Rd and 3rd St, Western Cape, 7441 South Africa
Rolls-Royce Holdings plc Annual Report 2015 161
Other informationOther information
SUBSIDIARIES CONTINUED
Company name
% held
Rolls-Royce Aero Engine Services Limited*
Rolls-Royce Aircraft Management Limited
Rolls-Royce Australia Limited
Rolls-Royce Australia Services PTY Limited
Rolls-Royce Brazil Limitada
Rolls-Royce Canada Limited
Rolls-Royce Capital Limited
Rolls-Royce Civil Nuclear Canada Limited
Rolls-Royce Civil Nuclear SAS
Rolls-Royce Commercial (Beijing) Co., Limited
Rolls-Royce Commercial Aero Engines Limited*
Rolls-Royce Control Systems Holdings Co
Rolls-Royce Controls and Data Services (NZ) Limited
Rolls-Royce Controls and Data Services (UK) Limited
Rolls-Royce Controls and Data Services Inc.
Rolls-Royce Controls and Data Services Limited
Rolls-Royce Corporation
Rolls-Royce Côte d’Ivoire Sarl
Rolls-Royce Credit Corporation
Rolls-Royce Crosspointe LLC
Rolls-Royce de Venezuela SA
Rolls-Royce Defense Holdings Inc.
Rolls-Royce Defense Products and Solutions Inc.
Rolls-Royce Defense Services Inc.
Rolls-Royce Deutschland Ltd & Co KG
Rolls-Royce Directorate Limited*
Rolls-Royce Energy Angola Limitada
Rolls-Royce Energy Systems Inc.
Rolls-Royce Engine Control Systems Pension Trustees Ltd
Rolls-Royce Engine Controls Holdings Limited
Rolls-Royce Engine Services – Oakland Inc.
Rolls-Royce Engine Services Holdings Co
Rolls-Royce Engine Services Limitada Inc.*
Rolls-Royce Erste Beteiligungs GmbH
Rolls-Royce Finance Company Limited*
Rolls-Royce Finance Holdings Co
Rolls-Royce Fuel Cell Systems Limited
Rolls-Royce General Partner Limited
Rolls-Royce Group plc
Rolls-Royce High Temperature Composites Inc.
Rolls-Royce Holdings Canada Inc.
Rolls-Royce India Limited
Rolls-Royce India Private Limited
Rolls-Royce Industrial & Marine Gas Turbines*
Rolls-Royce Industrial & Marine Power Limited*
Rolls-Royce Industrial Power (India) Limited
Rolls-Royce Industrial Power (Overseas Projects) Limited
Rolls-Royce Industrial Power Engineering
(Overseas Projects) Limited
Rolls-Royce Industrial Power Investments Limited*
Rolls-Royce Industrial Power Systems Limited*
Rolls-Royce Industries Limited*
* Dormant entity
1 Moor Lane, Derby, Derbyshire, England DE24 8BJ
2 62 Buckingham Gate, London, England SW1E 6AT
162 Rolls-Royce Holdings plc Annual Report 2015
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
Address
Derby1
London2
Suite 102, 2-4 Lyonpark Rd, Macquarie Park, NSW- 2113, Australia
Suite 102, 2-4 Lyonpark Rd, Macquarie Park, NSW- 2113, Australia
Rua Dr Cincinato Braga 47, Planalto, Sao Bernando do Campo/SP 09890-900, Brazil
9500 Cote De Liesse Rd, Lachine QC H8T 1A2, Canada
Derby1
597 The Queensway, Peterborough ON K9J7J6, Canada
23 Chemin du Vieux Chene, 38240, Meylan, France
2109 China Life Building, 16 Chao Yang Men Wai Street, Beijing 100020, China
Derby1
Suite 200, 1875 Explorer Street, Reston, VA20190, USA
L7 Bayleys Building, 36 Brandon St, Wellington, 6011 New Zealand
Derby1
Suite 200, 1875 Explorer Street, Reston, VA20190, USA
Derby1
2001 S Tibbs Avenue, Indianapolis, IN46206, USA
7 Boulevard Latrille, 25 BP 945, Abidjan, Côte d'Ivoire
Suite 200, 1875 Explorer Street, Reston, VA20190, USA
Suite A, 3811 Corporate Rd. Petersburg, VA 23805-0848, USA
Avenida 3E, entre Calles 78 y 79, Torre Empresarial Claret
Piso 10, Oficina 10-3, Sector Valle Frio, Maracaibo, Venezuela
2001 S Tibbs Avenue, Indianapolis, IN46206, USA
2001 S Tibbs Avenue, Indianapolis, IN46206, USA
2001 S Tibbs Avenue, Indianapolis, IN46206, USA
11 Eschenweg, 15827 Blankenfelde-Mahlow, Germany
Derby1
Rua Rei Katyavala, Entrada B, Piso 8, Luanda, Angola
Suite 200, 1875 Explorer Street, Reston, VA20190, USA
Derby1
Derby1
7200 Earhart Road, Oakland, CA 64621-4504, USA
Suite 200, 1875 Explorer Street, Reston, VA20190, USA
Bldg 06 Berthaphil Compound, Jose Abad Santos Avenue, Clark Special Eco Zone,
Pampanga, Philippines
11 Eschenweg, 15827 Blankenfelde-Mahlow, Germany
Derby1
Suite 200, 1875 Explorer Street, Reston, VA20190, USA
Derby1
Derby1
London2
18411 Gothard Street #8, Huntington Beach, CA92648, USA
9500 Cote De Liesse Rd, Lachine QC H8T 1A2, Canada
Derby1
Birla Tower West 25, Barakhamba Rd, New Delhi, 110001, India
Derby1
Derby1
Derby1
Derby1
Derby1
Derby1
Derby1
Derby1
Other information Company name
Rolls-Royce International Limited
Rolls-Royce International LLC
Rolls-Royce International S.R.O.
Rolls-Royce Investment Co
Rolls-Royce Italia SRL
Rolls-Royce Japan Co. Limited
Rolls-Royce JSF Holdings Inc.
Rolls-Royce Leasing Limited
Rolls-Royce Malaysia SDN BHD
Rolls-Royce Marine A/S
Rolls-Royce Marine AS
Rolls-Royce Marine Asia Limited
Rolls-Royce Marine Australia Pty Limited
Rolls-Royce Marine Benelux BV
Rolls-Royce Marine Chile SA
Rolls-Royce Marine Deutschland GmbH
Rolls-Royce Marine Electrical Systems Limited
Rolls-Royce Marine Espana S.A.
Rolls-Royce Marine France Sarl
Rolls-Royce Marine Hellas S.A.
Rolls-Royce Marine Hong Kong Limited
Rolls-Royce Marine India Private Limited
Rolls-Royce New Zealand Limited
Rolls-Royce Nigeria Limited
Rolls-Royce North America (USA) Holdings Co.
Rolls-Royce North America Holdings Inc.
Rolls-Royce North America Inc.
Rolls-Royce North America Ventures Inc.
Rolls-Royce North American Technologies Inc.
Rolls-Royce Nuclear Field Services France SAS
Rolls-Royce Oman LLC
Rolls-Royce Operations (India) Private Limited
Rolls-Royce Overseas Holdings Limited
Rolls-Royce Overseas Investments Limited
Rolls-Royce Overseas Projects Limited
Rolls-Royce Oy Ab
Rolls-Royce Placements Limited
Rolls-Royce plc
Rolls-Royce Poland Sp z.o.o
Rolls-Royce Power Development Limited
Rolls-Royce Power Engineering plc
Rolls-Royce Power Systems AG
* Dormant entity
1 Moor Lane, Derby, Derbyshire, England DE24 8BJ
2 62 Buckingham Gate, London, England SW1E 6AT
Rolls-Royce Marine Korea Limited
Rolls-Royce Marine Manufacturing (Shanghai)
Rolls-Royce Marine North America Inc.
Rolls-Royce Marine Power Operations Limited
Rolls-Royce Mechanical Test Operations Centre GmbH
Rolls-Royce Mexico Administration S de RL de CV,
Rolls-Royce Mexico S de RL de CV
Rolls-Royce Military Aero Engines Limited*
Rolls-Royce Namibia (Proprietary) Limited
100
100
100
100
100
100
100
100
% held
100
100
100
100
100
100
100
100
100
Address
Derby1
10 B. Sadovaya St, 123001, Moscow, Russia
Pobřežní 620/3, 186 00, Karlin - Prague 8, Czech Republic
Suite 200, 1875 Explorer Street, Reston, VA20190, USA
Via Castel Morrone 13,16161, Genova, Italy
31 Fl, Kasumigaseki bldg, 3-2-5 Kasumigaseki, Chiyoda-Ku, Tokyo 100-6031, Japan
2001 S Tibbs Avenue, Indianapolis, IN46206, USA
Derby1
Suite 13.03, 13th Fl, Menara Tan & Tan, 207 Jalan Tun Razak 50400 Kuala Lumpur,
Malaysia
Vaerftsvej 23 , 2300, Aalborg, Denmark
100
Sjogata 80, 6065 Ulsteinvik, Norway
100
1-3 Wing Yip St, Kwai Chung, New Territories, Hong Kong
100
100
Unit 2/8 Wallace Way, Fremantle WA 6160, Australia
100 Werfdijk 2, 3195HV Pernis, Rotterdam, Netherlands
100
100
100
100
100
100
100
100
Alcantara 200, Office 1303, Las Condes, Santiago, Chile
Fahrstieg 9, 21107, Hamburg, Germany
Derby1
Poligono Industrial de Constanti, 43120 Constanti, Tarragona, Spain
4 Place Des Etats Unis, Imm Monaco Silic 261, Rungis, France
25 Atki Poseidonos & Makrigianni corner, Athens 18344, Greece
1-3 Wing Yip St, Kwai Chung, New Territories, Hong Kong
PLOT D-505, TTC Industrial Area, MIDC, Sharaya Hyundai Lane Turbhe, Navi Mumbai,
Maharashtra, 400710, India
197 Noksansaneopbung-ro , Gangseogu, Busan, Republic of Korea
1 Xuanzhong Rd, Xuanqiao Town, Pudong New Area, Shanghai 201399, China
Suite 200, 1875 Explorer Street, Reston, VA20190, USA
Derby1
Kiefernstrasse 1,15827 Blankenfelde-Mahlow, Dahlewitz, Germany
Adolfo Ruiz Cortinez 3642-403, Costa de Oro, Veracruz 94299 6, Mexico
Derby1
Ausspann Plaza, Dr Agostinho Neto Rd, Private Bag 12012, Asspannplatz, Windhoek,
Namibia
L7 Bayleys Building, 36 Brandon St, Wellington, 6011, New Zealand
22A Gerrard Street, Ikoyi, Lagos, Nigeria
Suite 200, 1875 Explorer Street, Reston, VA20190, USA
Suite 200, 1875 Explorer Street, Reston, VA20190, USA
Suite 200, 1875 Explorer Street, Reston, VA20190, USA
Suite 200, 1875 Explorer Street, Reston, VA20190, USA
2059 S Tibbs Avenue, Indianapolis, IN46241, USA
ZA Notre-Dame, 84430, Mondragon, France
PO Box 686, Ruwi, 112, Oman
100
100
100
100
100
100
100
100
100
100 Whitefield Rd, EPIP Zone, Mahadevapura Bangalore 560066, India
100
100
100
100
100
100
99.5
100
100
100
Derby1
Derby1
Derby1
PO Box 220, Suojantie 5, 26101, Rauma, Finland
Derby1
London2
GNIEW 83-140, ul. Kopernika 1, Poland
Derby1
Derby1
1 Maybachplatz, 88045, Friedrichshafen, Germany
Rolls-Royce Holdings plc Annual Report 2015 163
Other informationOther information
SUBSIDIARIES CONTINUED
Company name
% held
Address
Rolls-Royce Saudi Arabia Limited
Rolls-Royce Secretariat Ltd*
Rolls-Royce Singapore Pte. Ltd
Rolls-Royce Technical Support Sarl
Rolls-Royce Total Care Services Limited
Rolls-Royce Transmission and Distribution Limited*
Rolls-Royce Turkey Power Solutions Industry and Trade Limited
Rolls-Royce Vietnam Limited
Rolls-Royce Zweite Beteiligungs GmbH
Ross Ceramics Limited
R.O.V Technologies, Inc.
R-R Industrial Controls Limited*
Scandinavian Electric Gdansk Sp. z.o.o.
Scandinavian Electric Systems do Brazil Limitada
Spare IPG (AGL) Limited, Spare IPG (CEL) Limited,
Spare IPG 3 Limited, Spare IPG 4 Limited, Spare IPG 11 Limited,
Spare IPG 15 Limited, Spare IPG 20 Limited,
Spare IPG 22 Limited, Spare IPG 24 Limited,
Spare IPG 27 Limited, Spare IPG 28 Limited,
Spare IPG 30 Limited, Spare IPG 32 Limited*
Spare IPG 18 Ltd*
Stone Vickers Limited*
Superstructure Capital Limited
The Bushing Company Limited*
Timec 1487 Limited*
Trigno Energy S.r.l.
Ulstein Holding AS
Ulstein Maritime Limited
Ulstein Trading Ltd AS*
Vessel Lifts Inc*
Vickers Pension Trustees Limited*
Vickers Pressings Limited*
Viking Power Limited*
Vinters Defence Systems Limited*
Vinters Engineering Limited
Vinters International Limited
Vinters Limited
Vinters-Armstrongs (Engineers) Limited*
Vinters-Armstrongs Limited*
Wultex Machine Company Limited*
* Dormant entity
1 Moor Lane, Derby, Derbyshire, England DE24 8BJ
2 62 Buckingham Gate, London, England SW1E 6AT
100
100
100
100
100
100
100
100
100
100
100
100
PO Box 88545, Riyadh, 11672, Saudi Arabia
Derby1
1 Seletar Aerospace Crescent, 797565 Singapore
Centreda 1, av Didier Daurat, 31700 Blagnac, Toulouse, France
Derby1
Derby1
Ekemen Han No:1 Kat:6 Kabataş Beyoğlu , Istanbul, Turkey
Dong Xuyen Industrial Zone, Rach Dua Ward, Vung Tau City Ba Ria –
Vung Tau Province, Vietnam
11 Eschenweg, 15827 Blankenfelde-Mahlow, Germany
Derby1
49 Bennett Drive, Guilford, Vermont, USA
Derby1
67 M. Reja 3, Gdansk, 80-404, Poland
66
100
Rua Sao Jose 90, salas 1406-07, Rio de Janeiro, RJ, Brazil
Derby1
90
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
Derby1
Derby1
Derby1
Derby1
Derby1
Zona Industrial, San Salvo, 66050, Italy
Sjøgata 80, 6065 Ulsteinvik, Norway
96 North Bend St, Coquitlam, BC V3K 6H1, Canada
Sjøgata 80, 6065, Ulsteinvik, Norway
Suite 102, 9130 S Dadeland Blvd, Miami, FL33156, USA
Derby1
Derby1
Derby1
Derby1
Derby1
Derby1
Derby1
Derby1
Derby1
Derby1
164 Rolls-Royce Holdings plc Annual Report 2015
Other information JOINT VENTURES AND ASSOCIATES
Company name
Aero Gearbox International SAS
Aerospace Transmission Technologies GmbH
Airtanker 1 Limited*
Airtanker Finance Limited
Airtanker Holdings Limited
Airtanker Limited
Airtanker Services Limited
Alpha Leasing Limited, Alpha Leasing (No.4) Limited, Alpha
Leasing (No.9) Limited, Alpha Leasing (No.10) Limited, Alpha
Leasing (No.11) Limited, Rolls-Royce & Partners Finance Limited
Alpha Leasing (US) LLC, Alpha Leasing (US) (No 2) LLC, Alpha
Leasing (US) (No 4) LLC, Alpha Leasing (US) (No 5) LLC, Alpha
Leasing (US) (No.6) LLC, Alpha Leasing (US) (No.7) LLC, Alpha
Leasing (US) (No.8) LLC, Rolls-Royce & Partners Finance (US) LLC,
Rolls-Royce & Partners Finance (US) (NO.2) LLC
Alpha Partners Leasing Limited
Anecom Aerotest GmbH
Clarke Chapman Portia Port Services Limited
Egypt Aero Management Services
EPI Europrop International GmbH
EPI Europrop International Madrid S.L.
Eurojet Turbo GmbH
GE Rolls-Royce Fighter Engine Team LLC
Genistics Holdings Limited
Genistics Limited
Glacier LP
Class
Address
of shares
18 Boulevard Louis Seguin, 92700 Colombes, France Ordinary
Ordinary
Adelheidstrasse 40, D-88046, Friedrichshafen,
Germany
One London Wall, London, England EC2Y 5EB
One London Wall, London, England EC2Y 5EB
One London Wall, London, England EC2Y 5EB
One London Wall, London, England EC2Y 5EB
Airtanker Hub, RAF Brize Norton, Carterton,
Oxfordshire, England OX18 3LX
London2
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Suite 200, 1875 Explorer Street, Reston, VA20190,
USA
Partnerships
(no equity held)
A Ordinary
London2
124/126 Freiheitsstrasse, Wildau, D-15745, Germany Ordinary
Maritime centre, Port of Liverpool, Liverpool L21 1LA A Ordinary
EgyptAir Engine Workshop, Cairo International
Airport, Cairo, Egypt
Dachauer Strasse 655, 80995 Munich, Germany
Edificio Berlin – First Floor, Parque Empresarial San
Fernando, Avenida Castilla 2, 28830 San Fernando De
Henares, Madrid, Spain
Lilienthalstrasse 2b, 85399 Hallbergmoos, Germany Ordinary
2001 S Tibbs Avenue, Indianapolis, IN46206, USA
Ordinary
Ordinary
Ordinary
Derby1
Derby1
Suite 300, Bank Tower, 66 Wellington Street West,
Toronto, ON M5K 1E6, Canada
Partnership
(no equity held)
Ordinary A
Ordinary
Ordinary
Global Aerospace Centre for Icing and Environmental Research Inc. 1000 Marie-Victorin Boulevard, Montreal,
Ordinary
Hong Kong Aero Engine Services Limited
Hovden Klubbhaus AS
Industria De Turbo Propulsores SA
International Aerospace Manufacturing Private Ltd
International Engine Component Overhaul Pte Ltd
LG Fuel Cell Systems Inc.
Light Helicopter Turbine Engine Company
(unincorporated partnership)
Metlase Limited
Ordinary
Ordinary
Ordinary
QC J4G 1A1, Canada
33/F, 2 Pacific Place, 88 Queensway, Hong Kong
Stalhaugen 5, Ulsteinvik, 6065 Norway
Suite 300, Parque Technologico, 48170 Zamudio,
Vizcaya, Spain
3 Kempapure Village, Bangalore, 560037, India
No.3 Loyang Way 2, 507102, Singapore
6065 Strip Ave, Canton, OH44720-9207, USA
Suite 119, 9238 Madison Boulevard, Madison,
AL35758, USA
Unipart House, Garsington Road, Cowley, Oxford,
England OX4 2PG
Am Soldnermoos 17, 85399 Hallbergmoos, Germany Ordinary
Am Soldnermoos 17, 85399 Hallbergmoos, Germany Ordinary
Ordinary
1 Gerhard-Höltje-Str, D-99310, Arnstadt, Germany
Ordinary
1 Gerhard-Höltje-Str, D-99310, Arnstadt, Germany
Ordinary
Ordinary
Ordinary
Common Stock
Partnership
(no equity held)
Ordinary B
MTU Turbomeca Rolls-Royce GmbH
MTU Turbomeca Rolls-Royce ITP GmbH
N3 Engine Overhaul Services GmbH & Co KG
N3 Engine Overhaul Services Verwaltungsgesellschaft Mbh
Northern Engineering Industries Africa Limited (in liquidation)* 2nd floor, Ristone Office Park, 15 Sherborne Rd,
Offshore Simulator Centre AS
* Dormant entity
1 Moor Lane, Derby, Derbyshire, England DE24 8BJ
2 62 Buckingham Gate, London, England SW1E 6AT
Parktown 2193, South Africa
4 Larsgardsvegen, 6009, Alesund, Norway
Ordinary
% of
class held
50
50
Group interest
held %
50
50
20
20
20
20
22
100
–
100
24.9
100
50
20
20
20
20
22
50
50
50
24.9
50
50
28 Effective 35.5
28 Effective 35.5
33
–
Effective 39
40
100
100
50
50
45
69
46.9
50
50
32
–
100
33.3
25
50
50
24.4
25
50
50
50
50
45
69
46.9
50
50
32
50
20
33.3
Effective 26
50
50
24.4
25
Rolls-Royce Holdings plc Annual Report 2015 165
Other informationOther information
Group interest
held %
50
50
50
50
50
50
50
50
50
49
25
Effective 39
50
50
49.5
50
40
20
50
49
49
–
100
100
100
100
100
100
100
49
25
30
50
50
–
100
100
37.5
40
20
50
49
100
Class
of shares
Ordinary
% of
class held
100
JOINT VENTURES AND ASSOCIATES CONTINUED
Company name
Address
London2
Omega Leasing Limited, Omega Leasing (No.4) Limited,
Omega Leasing (No.9) Limited, Omega Leasing (No.10) Limited,
Omega Leasing (No.11) Limited
Omega Leasing (US) LLC, Omega Leasing (US) (No 2) LLC,
Omega Leasing (US) (No 4) LLC, Omega Leasing (US) (No 5) LLC,
Omega Leasing (US) (No.6) LLC, Omega Leasing (US) (No.7) LLC,
Omega Leasing (US) (No.8) LLC
Rolls Laval Heat Exchangers Limited
Rolls-Royce Engine Leasing (Labuan) Limited,
Rolls-Royce Engine Leasing (Labuan) (No.2) Limited
Rolls-Royce Snecma Limited
RRPF Engine Leasing Limited, RRPF Engine Leasing (No.2) Limited
RRPF Engine Leasing (US) LLC, RRPF Engine Leasing (US) (No.2) LLC Suite 200, 1875 Explorer Street, Reston, VA20190,
Derby1
Unit Level 13(A), Main Office Tower, Financial Park
Labuan Jalan Merdeka, 87000, Malaysia
Derby1
London2
Suite 200, 1875 Explorer Street, Reston, VA20190,
USA
Partnerships
(no equity held)
Ordinary A
Ordinary
Ordinary B
Ordinary
Ordinary
Ordinary
Ordinary
USA
28-00, 1 Marina Boulevard, Singapore 018989
Puerto In Buitrago, 804 Casilla de Correo, CP 2900,
Buenos Aires, Argentina
97 Daqing West Rd, Datong, Shanxi Province, China Ordinary
Ordinary
8 Jubilee Drive, Loughborough, England LE11 5XS
Ordinary
11 Calshot Rd, 509932, Singapore
Ordinary A
Tefen Ind Zone, PO Box 16, 24959, Carmiel, Israel
Ordinary B
Partnership
(no equity held)
Ordinary B
Ordinary B
Shares A
Ordinary
Ordinary
1209 Orange St, Wilmington, DE19801, USA
Derby1
Derby1
Derby1
Booths Park, Chelford Rd, Knutsford, England
WA16 8QZ
Saunesvn. 10, Ulsteinvik, NO-6067, Norway
Xujiawan, Beijiao, PO Box 13, Xian 710021, Shaanxi
China
XEPZ 12th Fengcheng Rd, Xian 710018, Shaanxi
China
Ordinary
Ordinary
Ordinary
RRPF Engine Leasing (Singapore) Pte. Limited
Servicios de Operation y Mantenimiento S.A.
Shanxi North MTU Diesel Co. Limited
Sign Assured Limited
Singapore Aero Engine Services Private Limited
Techjet Aerofoils Limited
Texas Aero Engine Services LLC
TRT Limited
Turbine Surface Technologies Limited
Turbo-Union Limited
UK Nuclear Restoration Limited
Viking Reisebyra AS
Xian XR Aero Components Co., Limited
Xian XR Turbine Machining Components Co., Ltd
* Dormant entity
1 Moor Lane, Derby, Derbyshire, England DE24 8BJ
2 62 Buckingham Gate, London, England SW1E 6AT
166 Rolls-Royce Holdings plc Annual Report 2015
Other information INDEPENDENT AUDITOR’S REPORT
to the members of Rolls-Royce Holdings plc only
OPINIONS AND CONCLUSIONS ARISING FROM OUR AUDIT
1 OUR OPINION ON THE FINANCIAL STATEMENTS
IS UNMODIFIED
We have audited the financial statements of Rolls-Royce Holdings plc
for the year ended 31 December 2015 set out on pages 107 to 166.
In our opinion:
•
•
•
•
the financial statements give a true and fair view of the state of
the Group’s and of the parent company’s affairs as at 31 December
2015 and of the Group’s profit for the year then ended;
the Group financial statements have been properly prepared
in accordance with International Financial Reporting Standards
as adopted by the European Union (Adopted IFRS);
the parent company financial statements have been properly
prepared in accordance with UK Accounting Standards, including
FRS 101 Reduced Disclosure Framework; and
the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006 and, as regards
the Group financial statements, Article 4 of the IAS Regulation.
Dynamic Audit planning tool
F
O
B
E
J
K
L
C
H
G
A
P
I
D
M
N
Q
R
Likelihood of material misstatement
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
i
f
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Independent Auditor’s report
2 OUR ASSESSMENT OF RISKS OF MATERIAL MISSTATEMENT
When planning our audit, we made an assessment of the relative
significance of the key risks of material misstatement to the
Group financial statements initially without taking account of the
effectiveness of controls implemented by the Group. This initial
assessment is shown below in the output from our Dynamic Audit
planning tool. As there has been no significant change in the Group’s
operations or in our assessment of materiality these key risks are the
same as in the prior year, though there have been some changes in
the significance to our audit of some of the risks.
Of the 18 key risks identified, we describe below (i) the eight risks
of material misstatement that had the greatest effect on our audit
(those in dark blue on the risk map – the descriptions of risks include
an explanation for the changes in significance of these risks from last
year), (ii) our key audit procedures to address those risks and (iii) our
findings from those procedures in order that the Company’s members
as a body may better understand the process by which we arrived
at our audit opinion. Our findings are the result of procedures
undertaken in the context of and solely for the purpose of our
statutory audit opinion on the financial statements as a whole and
consequently are incidental to that opinion, and we do not express
discrete opinions on separate elements of the financial statements.
A
B
C
D
E
The pressure on and incentives
for management to meet revised
revenue and profit guidance
The basis of accounting for revenue
and profit in the Civil Aerospace
business
The measurement of revenue and
profit in the Civil Aerospace business
Recoverability of intangible assets
in the Civil Aerospace business
Liabilities arising from sales
financing arrangements
F
Bribery and corruption
G
The presentation of ‘underlying profit’
H
I
Disclosure of the effect on the trend
in profit of items which are uneven
in frequency or amount
Measurement of revenue and profit
on long term contracts outside the
Civil Aerospace business
(see page 115)
J
K
L
M
N
O
P
Q
Determination of development costs
to be capitalised (See page 115)
The basis of accounting for
contractual aftermarket rights
(see page 113)
Determination of the amortisation
period of development costs and
CARs (see page 119)
The basis of accounting for Risk
and Revenue Sharing Arrangement
(see page 114)
Estimating provisions for warranties
and guarantees (see page 116)
Valuation of derivatives and hedge
accounting (see page 118 and 119)
Measurement of post retirement
benefits (see page 115)
Accounting for uncertain tax
positions and deferred tax assets
(see page 116)
R
Valuation of goodwill (see page 115)
A
The pressure on and incentives for management to meet
revised revenue and profit guidance
Refer to pages 22 to 41 (Business review) and pages 93 to 94 (Audit
Committee report – Financial reporting)
The risk – The Group has published a number of revisions to its revenue
and profit guidance during the last two years with a generally
decreasing trend in profit and revenue and there have been significant
associated decreases in the Group’s share price. Clear instructions were
given to the Executive Leadership Team and the senior finance
executives on more than one occasion not to take any account of the
pressure to meet forecasts in preparing the financial results and to
manage and be alert to how this pressure might affect personnel
across the wider Group. Nevertheless, the continuing heightened
Rolls-Royce Holdings plc Annual Report 2015 167
Other information
Other information / Independent Auditor’s report
INDEPENDENT AUDITOR’S REPORT CONTINUED
pressure on and incentives for management to meet the latest
guidance increases the inherent risk of manipulation of the Group
financial statements. The financial results are sensitive to significant
estimates and judgements, particularly in respect of revenues and
costs associated with long-term contracts, and there is a broad range
of acceptable outcomes of these that could lead to different levels
of profit and revenue being reported in the financial statements.
Relatively small changes in the basis of those judgements and
estimates could result in the Group meeting, exceeding or falling
short of guidance.
•
when considering the risk relating to The presentation of
underlying profit ( G refer to page 171) and the risk relating
to Disclosure of the effect on the trend in profit of items which are
uneven in frequency or amount ( H refer to page 172), we sought
to identify items that affected profit (and/or the trend in profit)
unevenly in frequency or amount (especially those where
management had a greater degree of discretion over the timing
or scale of transactions entered into) at a much lower level than
we would otherwise have done and to assess the balance and
transparency of disclosure of these items.
The significance of the risk has increased marginally due to revisions
to guidance issued during the year, continuing deterioration in the
short-term business outlook and the incidence of individually
significant items affecting profit.
Our response – We have: (i) extended our enquiries designed to assess
whether judgements and estimates exhibited unconscious bias or
whether management had taken systematic actions to manipulate
the reported results; (ii) compared the results to forecasts and
challenged variances at a much lower level than we would otherwise
have done based on our understanding of factors affecting business
performance with corroboration using external data where possible;
and (iii) applied an increased level of scepticism throughout the audit
by increasing the involvement of the senior audit team personnel,
with particular focus on audit procedures designed to assess whether
revenues and costs have been recognised in the correct accounting
period, whether central adjustments were appropriate and whether
the segmental analysis has been properly prepared.
In particular:
•
•
•
when considering the risk relating to The measurement of revenue
and profit in the Civil Aerospace business ( C refer to page 169),
we challenged the basis for changes in the estimated revenues
and costs in long-term contracts, with a heightened awareness
of the possibility of unconscious or systematic bias, particularly
regarding the refinement in the basis of measurement of the risk
contingency for forecasts of future revenue to be earned under
long-term contracts which resulted in recognition of profit
of £189m;
when considering the risk relating to Recoverability of intangible
assets in the Civil Aerospace business ( D refer to page 170),
we challenged with a heightened awareness of the possibility
of unconscious or systematic bias the basis for changes in the
estimated maintenance costs which led to the reversal of the
impairment on certain Trent 1000 launch engine Contractual
aftermarket rights (“CARs”) assets and a related provision which
resulted in recognition of profit of £65m and avoidance
of impairments of £22m that otherwise would have been recorded;
when considering the risk relating to The basis of accounting for
revenue and profit in the Civil Aerospace business ( B refer below),
we challenged the basis on which management had accounted
for a sale of engines and a long-term service agreement as a
single arrangement which resulted in recognition of profit of
£44m despite there being a significant period of time between
concluding these agreements; and
Our findings – Our testing did not identify any indication of
manipulation of results (2014 audit finding: one instance which
was corrected by management). We found the degree of caution/
optimism adopted in estimates to be slightly less cautious than
in the previous year, but balanced overall. We found that there was
ample unbiased disclosure of items affecting the trend in profit.
B
The basis of accounting for revenue and profit in the
Civil Aerospace business
Refer to page 113 and 114 (Key areas of judgement – Introduction,
Contractual aftermarket rights, Linkage of original and long-term
aftermarket contracts), pages 116 and 117 (Significant accounting
policies – Revenue recognition) and pages 93 and 94
(Audit Committee report – Financial reporting)
The risk – The amount of revenue and profit recognised in a year on
the sale of engines and aftermarket services is dependent, inter alia,
on the appropriate assessment of whether or not each long-term
aftermarket contract for services is linked to or separate from the
contract for sale of the related engines as this drives the accounting
basis to be applied. As the commercial arrangements can be
complex, significant judgement is applied in selecting the
accounting basis in each case. The most significant risk is that
the Group might inappropriately account for sales of engines and
long-term service agreements as a single arrangement as this
would usually lead to revenue and profit being recognised too early
because the margin in the long-term service agreement is usually
higher than the margin in the engine sale agreement.
The significance of the risk has increased marginally during the year
due to the identification of one instance where the Group had to
apply significant judgement in concluding that it was appropriate
to account for the sale of engines and the long-term service
agreement as a single arrangement.
Our response – We re-evaluated the appropriateness of the
accounting bases the Group applies in the Civil Aerospace business
by reference to accounting standards and re-examining historical
long-term aftermarket contracts. We considered whether the
disclosure included in the financial statements enables shareholders
to understand how the accounting policies represent the commercial
substance of the Group’s contracts with its customers. We made
our own independent assessment, with reference to the relevant
accounting standards, of the accounting basis that should be applied
to each long-term aftermarket contract entered into during the year
and compared this to the accounting basis applied by the Group.
Our findings – We found that the Group has developed a framework
for selecting the accounting bases which is consistent with a
balanced interpretation of accounting standards (2014 audit
finding: balanced) and has applied this consistently. We found that
the disclosure was ample.
168 Rolls-Royce Holdings plc Annual Report 2015
Independent Auditor’s report
For the agreements entered into during this year, it was generally
clear which accounting basis should apply. We identified one
instance where the Group had to apply significant judgement in
concluding that it was appropriate to account for the sale of engines
and the long-term service agreement as a single arrangement,
resulting in the recognition of incremental profit of £44m. In this
case there was a longer than usual period between conclusion of the
engine sale contract and conclusion of the long-term service
agreement. We found sufficient evidence that the key commercial
terms included in the long-term service agreement had been
established at the time the engine sale contract had been concluded
and that the intention of both parties had always been to enter
into a long-term service agreement on those terms. Consequently,
we found the judgements made in the application of the Group’s
accounting bases to these particular contracts to be balanced.
Our response – We tested the controls designed and applied by the
Group to provide assurance that the estimates used in assessing
revenue and cost profiles are appropriate and that the resulting
estimated cumulative profit on these contracts is accurately
reflected in the financial statements; these controls operated over
both the inputs and the outputs of the calculations. We challenged
the appropriateness of these estimates for each programme and
assessed whether or not the estimates showed any evidence of
systematic or unconscious management bias in the context of the
heightened pressure on and incentives for management to meet
the latest guidance discussed above. Our challenge was based on
our assessment of the historical accuracy of the Group’s estimates
in previous periods, identification and analysis of changes in
assumptions from prior periods and an assessment of the
consistency of assumptions within programmes.
C
The measurement of revenue and profit in the
Civil Aerospace business
Refer to page 114 (Key areas of judgement – Measurement of
performance on long-term aftermarket contracts), pages 116 and 117
(Significant accounting policies – Revenue recognition and TotalCare
arrangements) and pages 93 and 94 (Audit Committee report –
Financial reporting)
The risk – The amount of revenue and profit recognised in a year
on the sale of engines and aftermarket services is dependent, inter
alia, on the assessment of the percentage of completion of long-term
aftermarket contracts and the forecast cost profile of each
arrangement. As long-term aftermarket contracts can extend over
significant periods and the profitability of these arrangements
typically assumes significant life-cycle cost improvement over the
term of the contracts, the estimated outturn requires significant
judgement to be applied in estimating future engine flying hours,
time on wing and other operating parameters, the pattern of future
maintenance activity and the costs to be incurred. The nature of these
estimates means that their continual refinement can have an impact
on the profits of the Civil Aerospace business that can be significant in
an individual financial year. The assessment of the estimated outturn
for each arrangement involves detailed calculations using large and
complex databases with a significant level of manual intervention.
In 2012, the Group made changes to the way it takes account of risk
in making these estimates and agreed with the Audit Committee that
it would carry out a comprehensive review of how well the revised
basis reflected actual experience after three years. In 2015, the Group
has refined the basis of taking account of risk in its estimates of future
revenue resulting in an increase in estimated future revenue of
approximately 2% which had a one-off profit benefit of £189m.
This refinement in basis together with changes in customer flying
patterns on some of the older engine programmes resulted in the
significance of the risk increasing marginally in the year.
In particular with regard to the refined approach to revenue
forecasting risk, we assessed the extent to which the new basis
better incorporates business risks affecting the Group’s customers
based on recently emerging trends being experienced by the Group
and our own experience.
In terms of future cost estimates, we undertook detailed assessments
of the achievability of the Group’s plans to reduce life-cycle costs
and an analysis of the impact of these plans on forecast cost profiles
taking account of contingencies and analysis of the impact of known
technical issues on cost forecasts. Our analysis considered each
significant airframe that is powered by the Group’s engines and
was based on our own experience supplemented by discussions with
an aircraft valuation specialist engaged by the Group. We assessed
whether the valuation specialist was objective and suitably qualified.
We also checked the mathematical accuracy of the revenue and profit
for each arrangement and considered the implications of identified
errors and changes in estimates.
Our findings – Control weaknesses identified in earlier periods
have been partially remediated. The scope and depth of our detailed
testing and analysis was expanded to take account of the remaining
weaknesses. We found no evidence that the refinement to the basis
for incorporating revenue risk was motivated by the positive impact
it has had on profit in the current year. Overall, our assessment is that
the refined basis for incorporating revenue risk is an improvement
and the assumptions and resulting estimates (including appropriate
contingencies) resulted in balanced (2014 audit finding: mildly
cautious) profit recognition. We found the disclosure of the impact
of the refined basis for incorporating revenue risk to be ample.
Rolls-Royce Holdings plc Annual Report 2015 169
Other information
Other information / Independent Auditor’s report
INDEPENDENT AUDITOR’S REPORT CONTINUED
D
Recoverability of intangible assets (certification costs and
participation fees, development expenditure and contractual
aftermarket rights) in the Civil Aerospace business
Refer to page 115 (Key sources of estimation uncertainty – Forecasts and
discount rates), pages 119 and 120 (Significant accounting policies –
Certification costs and participation fees, Research and development,
Contractual aftermarket rights and Impairment of non-current assets),
pages 132 and 133 (Note 9 to the financial statements – Intangible
assets) and pages 93 and 94 (Audit Committee report – Financial
reporting)
The risk – The recovery of these assets depends on a combination
of achieving sufficiently profitable business in the future as well
as the ability of customers to pay amounts due under contracts
often over a long period of time. Assets relating to a particular engine
programme are more prone to the risk of impairment in the early
years of a programme as the engine’s market position is established.
In addition, the pricing of business with launch customers makes
assets relating to these engines more prone to the risk of impairment.
In 2015, the Group reduced its estimate of the future maintenance
costs on certain Trent 1000 launch engines which in previous
periods had been at a level requiring the impairment of the related
CARs assets and the recording of a related provision. This resulted in
the reversal of previously recognised impairments and the related
provision with a profit of £65m being recognised (2014: impairment
charge of £19m) and the capitalisation of £22m that would otherwise
have been impaired.
The significance of the risk has decreased somewhat during the year
due to better information on the performance of the Trent 1000 engine
following the first shop visits and confirmation of the Emirates order
for Trent 900 engines (the Trent 900 programme assets had been
identified as being at higher risk of impairment in the prior year).
Our response – We tested the controls designed and applied by the
Group to provide assurance that the assumptions used in preparing
the impairment calculations are regularly updated, that changes are
monitored, scrutinised and approved by appropriate personnel and
that the final assumptions used in impairment testing have been
appropriately approved. We challenged the appropriateness of the
key assumptions in the impairment test (including market size,
market share, pricing, engine and aftermarket unit costs, individual
programme assumptions, price and cost escalation, discount rate
and exchange rates). Our challenge was based on our assessment
of the historical accuracy of the Group’s estimates in previous
periods, our understanding of the commercial prospects of key
engine programmes, identification and analysis of changes in
assumptions from prior periods and an assessment of the
consistency of assumptions across programmes and customers
and comparison of assumptions with publicly available data where
this was available. We tested the mathematical accuracy of the
impairment calculations. We considered whether the disclosures
in note 9 to the financial statements describe the inherent degree of
subjectivity in the estimates and the potential impact on future
periods of revisions to these estimates.
In particular, with regard to the reversal of impairments on
certain Trent 1000 launch engine CARs and a related provision,
we challenged the key assumptions underlying the forecast future
cash flows to be derived from the engines including: the period
and mode of operation of the engines, the time and materials
maintenance revenue (which the Group has guaranteed will not
exceed a specified maximum amount) and the cost of required
maintenance activity. Our assessment was that the amount of
profit to be recognised depended critically on the Group
engineering department’s judgement as to the impact on estimated
future maintenance costs of the wear and tear on the engines based
on their first few years of operation (evidenced by the first strip
down and detailed off-wing investigations of engines in the second
half of 2015). Given the specialist knowledge necessary to make
these judgements appropriately, we assessed the capabilities and
objectivity of the employees making the judgement and the members
of management reviewing and approving the judgements. Finally
to supplement this and to ensure that the matter had received
appropriate attention from the Board, we sought and received
written representations from the Directors that, based on their
enquiries, they consider that the engineering judgement is
appropriate and that, based on that consideration, the recognition
of the profit of £65m is appropriate.
Our findings – Our testing did not identify weaknesses in the
design and operation of controls that would have required us
to expand the nature or scope of our planned detailed test work.
We found that the assumptions and resulting estimates were
balanced (2014 audit finding: balanced) and that the disclosures
were proportionate (2014 audit finding: proportionate). We found
no errors in calculations (2014 audit finding: none).
With regard to the reversal of impairments on certain Trent 1000
launch engine CARs and a related provision, we found no evidence
that this was motivated by the positive impact it has had on profit
in the current year. We found that the change in estimate from the
prior periods was based on improved information becoming
available in 2015 as the engine programme moved out of its earliest
stages which has reduced estimation uncertainty, that there was
no indication of bias and that the estimate of forecast future cash
flows to be derived from the engines was balanced and supported
the accounting treatments adopted by the Group. We found the
disclosure of the impact to be ample.
E Liabilities arising from sales financing arrangements
Refer to page 115 (Key areas of judgement – Customer financing
contingent liabilities), page 121 (Significant accounting policies –
Sales financing support), page 148 (Note 18 to the financial
statements – Provisions for liabilities and charges) and pages 93
and 94 (Audit Committee report – Financial reporting)
The risk – The Group has contingent liabilities in respect of financing
and asset value support provided to customers. This support
typically takes the form of a guarantee with respect to the value
of an aircraft at a future date, a commitment to buy used aircraft
or a guarantee of a customer’s future payments under an aircraft
financing arrangement. The Group also provides standby finance
lines to certain customers that can be accessed if they fail
to arrange alternative financing at the time they take delivery
of engines. Judgement is required to assess the likelihood of these
liabilities crystallising, in order to assess whether a provision
should be recognised and, if so, the amount of that provision.
The total potential liability is significant and can be affected
by the assessment of the residual value of the aircraft and the
creditworthiness of the customers.
The significance of the risk has not changed during the year.
170 Rolls-Royce Holdings plc Annual Report 2015
Independent Auditor’s report
Our response – We analysed the terms of guarantees on aircraft
delivered during the year in detail and obtained aircraft values from
and held discussions with aircraft valuation specialists engaged
by the Group. We assessed whether the valuer was objective and
suitably qualified, had been appropriately instructed and had been
provided with complete, accurate data on which to base its
evaluation. For all contracts on delivered aircraft, we assessed
the commercial factors relevant to the likelihood of the guarantees
being called, including the credit ratings and recent financial
performance of the relevant customers and their fleet plans, and
critically assessed the Group’s estimate of the required provisions
for those liabilities. We considered movements in aircraft values
and potential changes in the assessed probability of a liability
crystallising since the previous year end and considered whether
the evidence supported the Group’s assessment as to whether or
not a liability needs to be recognised and the amount of the liability
recognised or contingent liability disclosed. We considered whether
the related disclosure in note 18 to the financial statements
appropriately explains the potential liability in excess of the amount
provided for in the financial statements for delivered aircraft and
highlights the significant but unquantifiable contingent liability
in respect of aircraft which will be delivered in the future.
Our findings – We found that the level of exposure from asset value
support had reduced during the year and that the assumptions and
estimates were balanced (2014 audit finding: balanced) and that the
disclosures were proportionate (2014 audit finding: proportionate).
F Bribery and corruption
Refer to page 155 (Note 23 to the financial statements –
Contingent liabilities) and pages 93 and 94 (Audit Committee report
– Financial reporting)
The risk – A large part of the Group’s business is characterised
by competition for individually significant contracts with
customers, which are often directly or indirectly associated with
governments, and the award of individually significant contracts
to suppliers. The procurement processes associated with these
activities are highly susceptible to the risk of corruption. In addition
the Group operates in a number of territories where the use
of commercial intermediaries is either required by the government
or is normal practice. In December 2013, the Group announced that
it had been informed by the Serious Fraud Office in the UK that it
had commenced a formal investigation into bribery and corruption
in overseas markets. The Group is cooperating with the Serious
Fraud Office and other agencies, including the US Department
of Justice. Breaches of laws and regulations in this area can lead to
fines, penalties, criminal prosecution, commercial litigation and
restrictions on future business.
The significance of the risk has not changed during the year.
Our response – We evaluated and tested the Group’s policies,
procedures and controls over the selection and renewal of
intermediaries, contracting arrangements, ongoing management,
payments and responses to suspected breaches of policy. We sought
to identify and tested payments made to intermediaries during the
year, made enquiries of appropriate personnel and evaluated the tone
set by the Board and the Executive Leadership Team and the Group’s
approach to managing this risk. Having enquired of management,
the Audit Committee and the Board as to whether the Group is in
compliance with laws and regulations relating to bribery and
corruption, we made written enquiries of and met with the Group’s
legal advisers to cross check the results of those enquiries with third
parties and maintained a high level of vigilance to possible indications
of significant non-compliance with laws and regulations relating to
bribery and corruption whilst carrying out our other audit procedures.
We discussed the areas of potential or suspected breaches of law,
including the ongoing investigations, with the Audit Committee and
the Board as well as the Group’s legal advisers and assessed related
documentation. We assessed whether the disclosure in note 23 to the
financial statements of the Group’s exposure to the financial effects
of potential or suspected breaches of law or regulation complies with
accounting standards and in particular whether it is the case that the
investigations remain at too early a stage to assess the consequences
(if any), including in particular the size of any possible fines.
Our findings – We found that disclosure to be proportionate
(2014 audit finding: proportionate).
Presentation and explanation of results
Refer to pages 22 to 41 (Business review), pages 42 to 47
(Financial review), pages 122 to 126 (Note 2 to the financial statements
– Segmental analysis) and pages 93 and 94 (Audit Committee report
– Financial reporting)
The presentation of ‘underlying profit’
G
The risk – In addition to its Adopted IFRS financial statements, the
Group presents an alternative income statement on an ‘underlying’
basis. The directors believe the ‘underlying’ income statement
reflects better the Group’s trading performance during the year.
The basis of adjusting between the Adopted IFRS and ‘underlying’
income statements and a full reconciliation between them is set
out in note 2 to the financial statements on pages 124 and 125.
A significant recurring adjustment between the Adopted IFRS
income statement and the ‘underlying’ income statement relates
to the foreign exchange rates used to translate foreign currency
transactions. The Group uses forward foreign exchange contracts
to manage the cash flow exposures of forecast transactions
denominated in foreign currencies but does not generally apply
hedge accounting in its Adopted IFRS income statement. The
‘underlying’ income statement translates these amounts at the
achieved foreign exchange rate on forward foreign exchange
contracts settled in the period, retranslates assets and liabilities
at exchange rates forecast to be achieved from future settlement
of such contracts and excludes unrealised gains and losses on such
contracts which are included in the Adopted IFRS income statement.
The Group has discretion over which forward foreign exchange
contracts are settled in each financial year, which could impact the
achieved rate both for the period and in the future.
In addition, adjustments are made to exclude one-off past-service
costs on post-retirement schemes, restructuring activities that
significantly change the shape of the Group’s operations and the effect
of acquisition accounting (including any subsequent impairments
of goodwill or other intangible assets) and a number of other items.
Alternative performance measures can provide shareholders with
appropriate additional information if properly used and presented.
In such cases, measures such as these can assist shareholders
in gaining a more detailed and hence better understanding
of a company’s financial performance and strategy. However,
when improperly used and presented, these kinds of measures
Rolls-Royce Holdings plc Annual Report 2015 171
Other information
Other information / Independent Auditor’s report
INDEPENDENT AUDITOR’S REPORT CONTINUED
might prevent the Annual Report being fair, balanced and
understandable by hiding the real financial position and results
or by making the profitability of the reporting entity seem
more attractive.
Our findings – We identified a number of significant items that
had affected profit for the year or the prior year that required
appropriate disclosure in the Annual Report to enable shareholders
to assess the Group’s performance. The key items are:
The significance of the risk has not changed during the year.
Our response – We assessed the appropriateness of the basis for the
adjustments between the Adopted IFRS income statement and the
‘underlying’ income statement and the consistency of application of
this basis and we recalculated the adjustments with a particular focus
on the impact of the foreign exchange rates used to translate foreign
currency amounts in the ‘underlying’ income statement. We assessed
whether or not the selection of forward foreign exchange contracts
settled in the year showed any evidence of management bias.
We also assessed: (i) the extent to which the prominence given to the
‘underlying’ financial information and related commentary in the
Annual Report compared to the Adopted IFRS financial information
and related commentary could be misleading; (ii) whether the Adopted
IFRS and ‘underlying’ financial information are reconciled with
sufficient prominence given to that reconciliation; (iii) whether the
basis of the ‘underlying’ financial information is clearly and accurately
described and consistently applied; and (iv) whether the ‘underlying’
financial information is not otherwise misleading in the form and
context in which it appears in the Annual Report.
Our findings – We found no concerns regarding the basis of the
‘underlying’ financial information or its calculation and no indication
of management bias in the settlement of forward foreign exchange
contracts. We consider that there is proportionate disclosure of the
nature and amounts of the adjustments to allow shareholders
to understand the implications of the two bases on the financial
measures being presented (2014 audit finding: proportionate).
We found the overall presentation of the ‘underlying’ financial
information to be balanced (2014 audit finding: balanced).
H Disclosure of the effect on the trend in profit of items which
are uneven in frequency or amount
The risk – The Group’s profits are significantly impacted by items
such as cumulative adjustments to profit recognised on long-term
contracts, impairments (and reversals of impairments) of goodwill,
CARs and other intangible assets, sale and leasebacks of spare
engines to joint ventures, research and development charges,
reorganisation costs and foreign exchange translation which
can be uneven in frequency and/or amount. If significant either
to the profit for the year or to the trend in profit, appropriate
disclosure of the effect of these items is necessary in the Annual
Report and financial statements to provide the information
necessary to enable shareholders to assess the Group’s performance.
The significance of the risk has not changed during the year.
Our response – We undertook detailed analysis of business
performance at Group and sector level that sought to identify items
that affect profit (and the trend in profit) which are uneven in
frequency or amount at a much lower level than we would otherwise
have done and to assess the transparency of disclosure of these items.
We focused on the enhanced financial disclosures included in note 2
to the financial statements and the Business and Financial reviews.
1)
2)
3)
4)
5)
the £1,315m unrealised fair value losses (2014: £1,156m)
on derivative contracts;
the £189m profit (2014: nil) arising from refinement in the
basis of measurement of the risk contingency for forecasts
of future revenue to be earned under long-term contracts;
the £140m profit (2014: £60m profit) arising from the impact
of improvements in lifecycle costs on long-term contracts;
the £107m loss (2014: £90m profit) arising from other estimate
changes on long-term contracts;
the £65m profit (2014: £19m charge) (and capitalisation of
£22m that otherwise would have been impaired) arising from
the reversal of the impairment on certain Trent 1000 launch
engine CARs and the related provision;
6)
the £818m (2014: £793m) of research and development charges;
7)
8)
the £88m, net of a release of prior year provisions of £30m,
(2014: £188m) of restructuring charges;
the £71m (2014: £54m) profit arising from sales of spare
engines to joint ventures;
9)
the £75m (2014: £1m) impairments of goodwill;
10) the £142m profit for the year from discontinued operations
in 2014; and
11) the £64m tax charge arising from derecognition of advance
corporation tax in 2014.
We found that the Group had improved the disclosure of its results
and the transparency of its commentary on profit trends and that
ample disclosure of these items had been provided in the Annual
Report and financial statements taken as a whole (2014 audit
finding: proportionate).
In reaching our audit opinion on the financial statements we took
into account the findings that we describe above and those for other,
lower risk areas including those included in the output from our
Dynamic Audit planning tool set out above. Overall the findings from
across the whole audit are that the financial statements have been
prepared on the basis of appropriate accounting policies, reflect
balanced estimates compared to the mildly cautious estimates made
last year resulting in slightly favourable current year profit
recognition, and provide proportionate disclosure. Having assessed
these findings and evaluated uncorrected misstatements in the
context of materiality and considered the qualitative aspects of the
financial statements as a whole, we have not modified our opinion
on the financial statements.
172 Rolls-Royce Holdings plc Annual Report 2015
3 OUR APPLICATION OF MATERIALITY AND AN OVERVIEW
OF THE SCOPE OF OUR AUDIT
Our measure of materiality for the Group financial statements as
a whole has reduced in line with the reduction in the Group’s profit.
This was set at £66m (2014: £70m) and was, as last year, determined
with reference to a benchmark of Group profit before taxation,
normalised to exclude the volatility in reported profit due to gains
and losses on revaluation of foreign currency and other derivative
financial instruments which could otherwise result in an
inappropriate materiality level being determined. This materiality
measure represents 4.5% (2014: 4.6%) of this benchmark and 41.3%
(2014: 34.3%) of total reported profit before tax. We carry out audit
procedures to assess the accuracy of the gains and losses on these
derivative financial instruments (which this year amounted to a
£1.3bn (2014: £1.1bn) loss) as part of our audit of the Group’s
treasury operations.
We report to the Audit Committee: (i) all material corrected identified
misstatements; (ii) uncorrected identified misstatements exceeding
£3m (2014: £4m) for income statement items; and (iii) other identified
misstatements that warrant reporting on qualitative grounds.
We subjected 31 (2014: 33) of the Group’s reporting components
to audits for group reporting purposes and 11 (2014: 14) to specified
risk-focused audit procedures. The latter were not individually
financially significant enough to require an audit for group reporting
purposes, but did present specific individual risks that needed to be
addressed. This work also provided further audit coverage. For the
remaining components, the Group audit team performed analysis
at an aggregated group level to re-examine our assessment that there
were no significant risks of material misstatement within these
components. The reduction in reporting components subject to audit
primarily resulted from the disposal of the Energy business in late 2014.
The Group operates shared service centres for the bulk processing
of financial transactions in Derby (UK) and Indianapolis (US), the
outputs of which are included in the financial information of the
reporting components they service and therefore they are not
separate reporting components. Each of the service centres is
subject to specified risk-focused audit procedures, predominantly
the testing of transaction processing and review controls.
Additional audit procedures are performed at certain reporting
components to address the audit risks not covered by the work
performed over the shared service centres.
Independent Auditor’s report
SUMMARY AUDIT SCOPE
Revenue
Underlying profit before tax
92% (2014: 91%)
6% (2014: 9%)
2% (2014: 0%)
Audits for group reporting purposes
Specified risk-focused
audit procedures
Group-level procedures only
94% (2014: 90%)
5% (2014: 7%)
1% (2014: 3%)
Total assets
91% (2014: 83%)
7% (2014: 12%)
2% (2014: 5%)
The Group audit team instructed component auditors, and the
auditors of the shared service centres, as to the significant areas
to be covered, including the relevant risks detailed above, and the
information to be reported back. The Group audit team approved
the component materialities, which ranged from £0.2m to £52m
(2014: £0.3m to £60m), having regard to the mix of size and risk profile
of the Group across the components. The work on 21 of the 42
(2014: 29 of 47) components was performed by component auditors
and the rest by the Group audit team. The Group audit team visited
31 (2014: 25) component locations in the UK, the US, Germany, China
and Scandinavia, the purpose of which included an assessment of the
audit risk and strategy. Telephone conference meetings were also
held with these component auditors and with those of the higher risk
components that were not physically visited. At these visits and
meetings, the findings reported to the Group audit team were
discussed in more detail, and any further work required by the Group
audit team was then performed by the component auditor.
Rolls-Royce Holdings plc Annual Report 2015 173
Other information
Other information / Independent Auditor’s report
INDEPENDENT AUDITOR’S REPORT CONTINUED
Under the Companies Act 2006 we are required to report to you if,
in our opinion:
•
•
•
•
adequate accounting records have not been kept by the parent
company, or returns adequate for our audit have not been
received from branches not visited by us; or
the parent company financial statements and the part of the
Directors’ Remuneration Report to be audited are not in
agreement with the accounting records and returns; or
certain disclosures of directors’ remuneration specified by law
are not made; or
we have not received all the information and explanations
we require for our audit.
Under the Listing Rules we are required to review:
•
•
the directors’ statements, set out on page 57, in relation to going
concern and longer term viability; and
the part of the corporate governance report on page 67 relating
to the Company’s compliance with the eleven provisions of the
2014 UK Corporate Governance Code specified for our review.
We have nothing to report in respect of the above responsibilities.
Scope of report and responsibilities
As explained more fully in the directors’ responsibilities statement
set out on page 105, the directors are responsible for the preparation
of the financial statements and for being satisfied that they give a
true and fair view. A description of the scope of an audit of financial
statements is provided on the Financial Reporting Council’s website
at www.frc.org.uk/auditscopeukprivate. This report is made solely
to the Company’s members as a body and is subject to important
explanations and disclaimers regarding our responsibilities, published
on our website at www.kpmg.com/uk/auditscopeukco2014b, which
are incorporated into this report as if set out in full and should be read
to provide an understanding of the purpose of this report, the work
we have undertaken and the basis of our opinions.
JIMMY DABOO (SENIOR STATUTORY AUDITOR)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London E14 5GL
11 February 2016
4 OUR OPINION ON OTHER MATTERS PRESCRIBED
BY THE COMPANIES ACT 2006 IS UNMODIFIED
In our opinion:
•
•
the part of the directors’ remuneration report to be audited has
been properly prepared in accordance with the Companies Act
2006; and
the information given in the strategic report and directors’ report
for the financial year for which the financial statements are
prepared is consistent with the financial statements.
Based solely on the work required to be undertaken in the course of
the audit of the financial statements and from reading the strategic
report and the directors’ report:
•
we have not identified material misstatements in those reports; and
•
in our opinion, those reports have been prepared in accordance
with the Companies Act 2006.
5 WE HAVE NOTHING TO REPORT ON THE DISCLOSURES
OF PRINCIPAL RISKS
Based on the knowledge we acquired during our audit, we have
nothing material to add or draw attention to in relation to:
•
•
the directors’ viability statement on page 57, concerning the
principal risks, their management, and, based on that, the Directors’
assessment and expectations of the Group’s continuing
in operation over the five years to 31 December 2020; or
the disclosures on page 57 and in note 1 of the financial
statements concerning the use of the going concern basis
of accounting.
6 WE HAVE NOTHING TO REPORT IN RESPECT OF THE
MATTERS ON WHICH WE ARE REQUIRED TO REPORT
BY EXCEPTION
Under ISA (UK and Ireland) we are required to report to you if, based
on the knowledge we acquired during our audit, we have identified
other information in the Annual Report that contains a material
inconsistency with either that knowledge or the financial
statements, a material misstatement of fact, or that is otherwise
misleading. In particular, we are required to report to you if:
•
we have identified material inconsistencies between the
knowledge we acquired during our audit and the directors’
statement that they consider that the Annual Report and financial
statements taken as a whole is fair, balanced and understandable
and provides the information necessary for shareholders to assess
the Group’s performance, business model and strategy; or
•
the Audit Committee report does not appropriately address
matters communicated by us to the Audit Committee.
174 Rolls-Royce Holdings plc Annual Report 2015
Sustainability assurance
OPINION
Based on the assurance work we carried out and the evidence we
were presented with, as per the scope of work above, nothing came
to our attention to suggest that factual information, performance
metrics and data contained within the Annual Report 2015, as far as
the verified sustainability performance indicators are concerned,
are not:
•
•
demonstrative of Rolls-Royce Holdings plc’s understanding of the
material issues that are important to its key stakeholder groups;
a fair summary of Rolls-Royce Holdings plc’s sustainability-related
activities and performance; and
•
free from significant error or omission.
STATEMENT OF INDEPENDENCE, IMPARTIALITY AND COMPETENCE
Rolls-Royce Holdings plc was responsible for the content of the Annual
Report 2015 and Bureau Veritas was responsible for the assurance of
the selected sustainability performance indicators, as per scope of
works mentioned above. Bureau Veritas is an independent professional
services company that specialises in quality, environmental, health,
safety and social accountability with over 185 years history. Its
assurance team has extensive experience in conducting assurance
over environmental, social, ethical and health and safety information,
systems and processes. The assurance team for this work does not have
any involvement in any other Bureau Veritas projects with Rolls-Royce.
Bureau Veritas has implemented a Code of Ethics across the business to
ensure that its staff maintains high ethical standards in their day-to-
day business activities.
Flavio Gomes
Sustainability Services Manager
Bureau Veritas Certification UK Ltd
London
1 February 2016
SUSTAINABILITY ASSURANCE
Bureau Veritas Independent Assurance Statement
INDEPENDENT LIMITED ASSURANCE STATEMENT
Bureau Veritas Certification UK Ltd (Bureau Veritas) has been engaged
by Rolls-Royce Holdings plc to provide limited external assurance
of selected sustainability performance indicators for the year ended
31 December 2015, for inclusion in its Annual Report and Accounts
2015. The aim of this activity is to provide assurance over the accuracy
and reliability of the reported information.
SCOPE AND METHODOLOGY
The reporting boundary for Rolls-Royce Holdings plc sustainability
performance indicators covers all of its global business operations.
The reporting period is from the 1 January 2015 to the 31 December
2015. The scope of the assurance work includes quantitative
performance data only.
The following sustainability performance indicators were verified:
•
Energy use;
•
Greenhouse gas (GHG) emissions;
•
Safety – total reportable injuries (TRI).
We did not verify any other information that may be presented
in Rolls-Royce Holdings plc Annual Report 2015.
A limited level of assurance was undertaken taking into account
the requirements of the International Standard on Assurance
Engagements 3000 – Assurance Engagements other than Audits
or Reviews of Historical Financial Information (ISAE 3000) and,
concerning GHG emissions, the requirements of the International
Standard on Assurance Engagements 3410 – Assurance
Engagements on Greenhouse Gas Statements (ISAE 3410),
incorporated to Bureau Veritas internal protocol for the assurance
of sustainability reports. The assurance process included interviews
with content owners, documentary reviews, checking of the
calculation of datasets and the application of appropriate conversion
factors, and the sampling of data for a number of Rolls-Royce
Holdings plc’s operations.
The integrity and accuracy of site data was tested by sampling
data back to source in cases but mostly through the checking
of aggregated data managed centrally.
LIMITATIONS AND EXCLUSIONS
This statement should not be relied upon to detect all errors,
omissions or misstatements.
The following exclusion applies:
•
Emissions of HFCs were not accounted for in the determination of
the organisation’s overall GHG emissions, therefore, the verification
of those emissions was excluded from this assurance exercise.
Rolls-Royce Holdings plc Annual Report 2015 175
Other information
Other information
ADDITIONAL FINANCIAL INFORMATION
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:
USD per GBP
EUR per GBP
Year end spot rate
Average spot rate
Year end spot rate
Average spot rate
2015
1.48
1.53
1.36
1.38
2014
1.56
1.65
1.28
1.24
Change
-5%
-7%
+6%
+11%
The Group’s approach to managing its tax affairs
The Board is involved in setting the Group’s tax policies which
govern the way its tax affairs are managed. In summary, this means:
i)
ii)
the Group manages its tax costs through maximising the tax
efficiency of business transactions. This includes taking
advantage of available tax incentives and exemptions;
this must be done in a way which is aligned with the Group’s
commercial objectives and meets its legal obligations and
ethical standards;
iii) the Group also has regard for the intention of the legislation
concerned rather than just the wording itself;
iv) the Group is committed to building constructive working
relationships with tax authorities based on a policy of full
disclosure in order to remove uncertainty in its business
transactions and to allow the authorities to review possible risks;
v)
where appropriate and possible, the Group enters into
consultation with tax authorities to help shape proposed
legislation and future tax policy; and
vi) the Group seeks to price transactions between Rolls-Royce group
companies as if they were between unrelated parties, in compliance
with the OECD Transfer Pricing Guidelines and the laws of the
relevant jurisdictions.
The Group’s global corporate income tax contribution
Around 95% of the Group’s underlying profit before tax (excluding
joint ventures and associates) is generated in the UK, the US,
Germany, Norway, Finland and Singapore. The remaining profits are
generated across more than 40 other countries. This reflects the
fact that the majority of the Group’s business is undertaken, and
employees are based, in the above countries.
In common with most multinational groups the total of all profits
in respect of which corporate income tax is paid is not the same as
the consolidated profit before tax reported on page 107. The main
reasons for this are:
i)
the consolidated income statement is prepared under adopted
IFRS whereas tax is paid on the profits of each Group company,
which are determined by local accounting rules;
176 Rolls-Royce Holdings plc Annual Report 2015
ii)
accounting rules require certain income and costs relating
to our commercial activities to be eliminated from, or added to,
the aggregate of all the profits of the Group companies when
preparing the consolidated income statement (‘consolidation
adjustments’); and
iii) specific tax rules including exemptions or incentives
as determined by the tax laws in each country.
The Group’s total corporation tax payments in 2015 were £160m.
The level of tax paid in each country is impacted by the above.
In most cases, (i) and (ii) are only a matter of timing and therefore
tax will be paid in an earlier or later year. As a result they only have
a negligible impact on the Group’s underlying tax rate, which
excluding joint ventures and associates would be 26.6%
(the underlying tax rate including joint ventures and associates can
be found on page 45). This is due to deferred tax accounting, details
of which can be found in note 5 to the Consolidated Financial
Statements. The impact of (iii) will often be permanent depending
on the relevant tax law.
Further information on the tax position of the Group can be found
as follows:
• Audit Committee report (page 93) – The Director of Tax gave a
presentation to the Audit Committee during the year which covered
various matters including tax risks and how they are managed;
• Note 1 to the Consolidated Financial Statements (page 116 and
118) – Details of key areas of uncertainty and accounting policies
for tax;
• Note 5 to the Consolidated Financial Statements (page 128 to 130)
– Details of the tax balances in the Consolidated Financial
Statements together with a tax reconciliation on continuing
operations. This explains the main drivers of the tax rate.
At this stage we expect these items to continue to influence the
underlying tax rate. The reported tax rate is more difficult to forecast
due to the volatility of significant items in reported profits, in particular
the net unrealised fair value changes to derivative contracts.
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, including
the launch of major programmes, 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.
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. 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.
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 debt is further outlined in note 11.
Credit rating
Moody’s Investors Service
Standard & Poor’s
Rating
A3
A
Outlook
Grade
Stable Investment
Negative Investment
The Group subscribes to both Moody’s Investors Service and
Standard & Poor’s for independent long-term credit ratings. At the
date of this report, 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
The Consolidated Financial Statements have been prepared in
accordance with International Financial Reporting Standards (IFRS),
as adopted by the EU.
No new accounting standards had a material impact in 2015.
The impact of changes to IFRS which have not been adopted in 2015
is included within the accounting policies in note 1.
Share price
During the year, the share price decreased by 34% from 870p to 575p,
compared to a 12% decrease in the FTSE aerospace and defence sector
and 5% decrease in the FTSE 100. The Company’s share price ranged
from 1054p in April 2015 to 514p in November 2015.
Financial risk management
The Board has established a 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. The Frc is chaired by the
Chief Financial Officer. 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
£m
Total equity
Cash flow hedges
Group capital
Net funds
2015
5,016
100
5,116
(111)
2014
6,387
81
6,468
666
Operations are funded through various shareholders’ funds, bank
borrowings, bonds and notes. 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.
On 6 October 2015 the Group issued US$500m 2.375% Notes due
2020 and US$1,000m 3.625% Notes due 2025.
During the year the Group renegotiated the £1,000m committed
bank borrowing facility, increasing the amount to £1,500m and
extending the maturity to 2020. This facility was undrawn at the
period end. A €300m committed borrowing facility was cancelled
during the period.
At the year end, the Group retained aggregate liquidity of £5.0bn,
including cash and cash equivalents of £3.2bn and undrawn borrowing
facilities of £1.8bn. £419m of the facilities mature in 2016.
Rolls-Royce Holdings plc Annual Report 2015 177
Other informationOther information
Other information
OTHER STATUTORY INFORMATION
Share capital
C Shares
On 31 December 2015, 1,838,677,392 ordinary shares of 20p each,
28,959,754,116 C Shares of 0.1p each and one Special Share of £1
were in issue. The ordinary shares are listed on the London Stock
Exchange.
Payment to shareholders
The Company issues non-cumulative redeemable preference shares
(C Shares) as an alternative to paying a cash dividend.
Shareholders can choose to:
•
redeem all C Shares for cash;
•
redeem all C Shares for cash and reinvest the proceeds in the
C Share Reinvestment Plan (CRIP); or
•
keep the C Shares.
The CRIP is operated by Computershare Investor Services PLC
(the Registrar). The Registrar will purchase ordinary shares in the
market for shareholders electing to reinvest their C Share proceeds.
Shareholders wishing to participate in the CRIP or redeem their
C Shares must ensure that their instructions are lodged with the
Registrar no later than 5pm BST on 1 June 2016 (CREST holders must
submit their election in CREST before 3pm BST on 1 June 2016).
Redemption will take place on 4 July 2016.
At the AGM, the Directors will recommend an issue of 71 C Shares
with a total nominal value of 7.1p for each ordinary share.
The C Shares will be issued on 1 July 2016 to shareholders on the
register on 29 April 2016 and the final day of trading with
entitlement to C Shares is 27 April 2016. Together with the interim
issue on 4 January 2016 of 92.7 C Shares for each ordinary share with
a total nominal value of 9.27p, this is the equivalent of a total annual
payment to ordinary shareholders of 16.37p for each ordinary share.
Further information for shareholders is on pages 182 and 183.
Share class rights
The full share class rights are set out in the Company’s Articles
of Association (Articles), which are available on the Group’s website
at rolls-royce.com, and are summarised below.
Ordinary shares
Each member has one vote for each ordinary share held. Holders
of ordinary shares are entitled to: receive the Company’s Annual
Report; attend and speak at general meetings of the Company;
appoint one or more proxies or, if they are corporations, corporate
representatives; and exercise voting rights. Holders of ordinary
shares may receive a bonus issue of C Shares or a dividend and on
liquidation may share in the assets of the Company.
C Shares have limited voting rights and attract a dividend of 75%
of LIBOR on the 0.1p nominal value of each share, paid on a twice-
yearly basis. The Company has the option to redeem the C Shares
compulsorily, at any time, if the aggregate number of C Shares
in issue is less than 10% of the aggregate number of all C Shares
issued, or on the acquisition or capital restructuring of
the Company.
On a return of capital on a winding-up, the holders of C Shares shall
be entitled, in priority to any payment to the holders of ordinary
shares, to the repayment of the nominal capital paid-up or credited
as paid-up on the C Shares held by them, together with a sum equal
to the outstanding preferential dividend which will have been
accrued but not been paid until the date of return of capital.
The holders of C Shares are only entitled to attend, speak and vote
at a general meeting if a resolution to wind up the Company is to
be considered, in which case they may vote only on such resolution.
Special Share
Certain rights attach to the special rights non-voting share
(Special Share) issued to HM Government (Special Shareholder).
These rights are set out in the Articles. Subject to the provisions
of the Companies Act 2006, the Treasury Solicitor may redeem the
Special Share at par at any time. The Special Share confers no rights
to dividends but in the event of a winding-up it shall be repaid at
its nominal value in priority to any other shares.
Certain Articles (in particular those relating to the foreign
shareholding limit, disposals and the nationality of the Company’s
Directors) that relate to the rights attached to the Special Share may
only be altered with the consent of the Special Shareholder. The
Special Shareholder is not entitled to vote at any general meeting
or any other meeting of any class of shareholders.
Restrictions on transfer of shares and limitations
on holdings
There are no restrictions on transfer or limitations on the holding
of the ordinary shares or C Shares other than under the Articles
(as described here), under restrictions imposed by law or regulation
(for example, insider trading laws) or pursuant to the Company’s
share dealing code. The Articles provide that the Company should
be and remain under UK control. As such, an individual foreign
shareholding limit is set at 15% of the aggregate votes attaching
to the share capital of all classes (taken as a whole) and capable
of being cast on a poll and to all other shares that the directors
determine are to be included in the calculation of such holding.
The Special Share may only be issued to, held by and transferred
to the Special Shareholder or his successor or nominee.
178 Rolls-Royce Holdings plc Annual Report 2015
Shareholder agreements and consent requirements
Voting rights for employee share plan shares
There are no known arrangements under which financial rights
carried by any of the shares in the Company are held by a person other
than the holder of the shares and no known agreements between the
holders of shares with restrictions on the transfer of shares or exercise
of voting rights. No disposal may be made to a non-Group member
which, alone or when aggregated with the same or a connected
transaction, constitutes a disposal of the whole or a material part
of either the Nuclear business or the assets of the Group as a whole,
without the consent of the Special Shareholder.
Shares are held in various employee benefit trusts for the purpose
of satisfying awards made under the various employee share plans.
For shares held in a nominee capacity or if plan/trust rules provide
the participant with the right to vote in respect of specifically
allocated shares, the trustee votes in line with the participants’
instructions. For shares that are not held absolutely on behalf of
specific individuals, the general policy of the trustees, in accordance
with investor protection guidelines, is to abstain from voting in
respect of those shares.
Authority to issue shares
Change of control
At the AGM in 2015, authority was given to the Directors to allot
new ordinary shares up to a nominal value of £124,333,948
equivalent to one-third of the issued share capital of the Company.
In addition, a special resolution was passed to effect a
disapplication of pre-emption rights for a maximum of 5% of the
issued share capital of the Company. These authorities are valid
until the AGM in 2016, and the directors propose to renew these
authorities at that AGM. It is proposed to seek a further authority,
at the AGM in 2016 to allot up to two thirds of the total issued share
capital, but only in the case of a rights issue.
The Board believes that this additional authority will allow the
Company to retain the maximum possible flexibility to respond
to circumstances and opportunities as they arise; and to allot new
C Shares up to a nominal value of £500 million as an alternative
to a cash dividend. Such authority expires at the conclusion of the
AGM in 2016. The directors propose to renew the authority to allot
new C Shares at the AGM in 2016.
Authority to purchase own shares
At the AGM in 2015, the Company was authorised by shareholders to
purchase up to 186,500,921 of its own ordinary shares representing
10% of its issued ordinary share capital.
On 6 July 2015 the Company issued revised guidance for 2015 and
announced that it would be cancelling its share buyback
programme, having completed £500m of the planned £1bn
programme during the first half of the year.
The authority for the Company to purchase its own shares expires
at the conclusion of the AGM in 2016 or 18 months from 8 May 2015
whichever is the earlier. A resolution to renew it will be proposed at
the 2016 meeting.
Voting rights
DEADLINES FOR EXERCISING VOTING RIGHTS
Electronic and paper proxy appointments, and voting instructions,
must be received by the Company’s Registrar not less than 48 hours
before a general meeting.
CONTRACTS AND JOINT VENTURE AGREEMENTS
There are a number of contracts and joint venture agreements
which would allow the counterparties to terminate or alter those
arrangements in the event of a change of control of the Company.
These arrangements are commercially confidential and their
disclosure could be seriously prejudicial to the Company.
BORROWINGS AND OTHER FINANCIAL INSTRUMENTS
The Group has a number of borrowing facilities provided by various
banks. These facilities generally include provisions which may
require any outstanding borrowings to be repaid or the alteration
or termination of the facility upon the occurrence of a change
of control of the Company. At 31 December 2015 these facilities
were less than 22% drawn (2014: 24%).
The Group has entered into a series of financial instruments
to hedge its currency, interest rate and commodity exposures.
These contracts provide for termination or alteration in the event
that a change of control of the Company materially weakens the
creditworthiness of the Group.
EMPLOYEE SHARE PLANS
In the event of a change of control of the Company, the effect
on the employee share plans would be as follows:
•
•
•
•
PSP – awards would vest pro rata to service in the performance
period, subject to Remuneration Committee judgement of
Group performance;
APRA deferred shares – the shares would be released from
trust immediately;
ShareSave – options would become exercisable immediately.
The new company might offer an equivalent option in exchange
for cancellation of the existing option; and
Share Incentive Plan (SIP) – consideration received as shares
would be held within the SIP, if possible, otherwise the
consideration would be treated as a disposal from the SIP.
Rolls-Royce Holdings plc Annual Report 2015 179
Other informationOther information
Other information
OTHER STATUTORY INFORMATION CONTINUED
Major shareholdings
Greenhouse gas emissions
At 11 February 2016 the following companies had notified
an interest in the issued ordinary share capital of the Company
in accordance with the Financial Conduct Authority’s Disclosure
Rules and Transparency Rules.
In 2015, our total greenhouse gas (GHG) emissions from our facilities
and processes, including product test and development, was
602 kilotonnes carbon dioxide equivalent (ktCO2e). This represents
a decrease of 12% compared with 683 ktCO2e in 2014.
Company
Date notified
ValueAct Capital Master Fund, L.P. 18 November 2015
2 February 2016
Blackrock, Inc.
% of issued ordinary
sharecapital
10.01
5.00
All figures exclude fugitive emissions of hydrofluorocarbons (HFCs)
associated with air conditioning equipment. We are putting in
place a system to be able to extract this data from records kept
under the F-Gas regulations. We do not anticipate a material impact
on our reported GHG emissions.
Directors
The names of the Directors who held office during the year are
set out on page 65.
Disclosures in the strategic report
The Board has taken advantage of Section 414C(11) of the
Companies Act 2006 to include disclosures in the Strategic Report:
• employee involvement
• the future development, performance and position of the Group
• the financial position of the Group
• R&D activities
• the principal risks and uncertainties
page(s)
49
2 to 57
42 to 47
18
54 to 57
Political donations
The Group’s policy is not to make political donations and therefore
did not donate any money to any political party during the year.
However, it is possible that certain activities undertaken by
the Group may unintentionally fall within the broad scope
of the provisions contained in the Companies Act 2006 (the Act).
The resolution to be proposed at the AGM is to ensure that the
Group does not commit any technical breach of the Act.
During the year, expenses incurred by Rolls-Royce North America
Inc. in providing administrative support for the Rolls-Royce
North America Political Action Committee (RRNAPAC) was
US$45,021 (2014: US$52,690). PACs are a common feature of the
US political system and are governed by the Federal Election
Campaign Act.
The PAC is independent of the Group and independent of any
political party. The PAC funds are contributed voluntarily by
employees and the Company cannot affect how they are applied,
although under US Law, the business expenses are paid by the
Company. Such contributions do not require authorisation by
shareholders under the Companies Act 2006 and therefore do not
count towards the limits for political donations and expenditure
for which shareholder approval will be sought at this year’s AGM
to renew the authority given at the 2015 AGM.
Total GHG emissions (ktCO2e)
Direct emissions – facilities,
processes, product test and
development (Scope 1)
Indirect emissions – facilities,
processes, product test and
development (Scope 2)
Total for facilities, processes,
product test and development
Direct emissions – power
generation to grid (Scope 1)
Indirect emissions – power
generation to grid (Scope 2)
Total for facilities, processes,
product test and development,
and power generation to grid
Intensity ratio (total emissions
normalised by revenue) for
facilities, processes, product test
and development, and power
generation to grid (ktCO2e/£m)
2011
2012
2013
2014*
2015
218
219
241
301
242
327
313
313
382
360
545
532
554
683
602
153
155
132
12
14
15
719
852
749
0.048
0.062
0.055
* 2014 data has been restated to reflect the inclusion of greenhouse gas emissions data
from Power Systems. Figures for prior years (2011 to 2013) do not include data from
Power Systems and therefore are not directly comparable
We engaged Bureau Veritas to undertake a limited assurance engagement, reporting
to Rolls-Royce Holdings plc, using the assurance standards ISAE 3000 and ISAE 3410 over
the energy, GHG and TRI data that has been highlighted with
page 51 and in the table above. The full statement is included on page 175
and as set out on
With the exceptions noted above, we have reported on all of
the emission sources required under the Companies Act 2006
(Strategic Report and Directors Reports) Regulations 2013.
These sources fall within our Consolidated Financial Statements.
We do not have responsibility for any emission sources that are
not included in our Consolidated Financial Statement.
We have used the GHG Protocol Corporate Accounting and
Reporting Standard (revised edition) as of 31 December 2014, data
gathered to fulfil our requirements under the Carbon Reduction
Commitment (CRC) Energy Efficiency scheme and emission factors
from the UK Government’s GHG Conversion Factors for Company
Reporting 2015.
Further details on our methodology for reporting and the criteria
used can be found within our Basis of Reporting, available to
download from our website at rolls-royce.com/sustainability.
180 Rolls-Royce Holdings plc Annual Report 2015
Branches
Management report
Rolls-Royce is a global company and our activities and interests
are operated through subsidiaries, branches of subsidiaries,
joint ventures and associates which are subject to the laws and
regulations of many different jurisdictions. Our subsidiaries, joint
ventures and associates are listed on pages 160 to 166.
Post balance sheet events
There have been no events affecting the Group since 31 December
2015 which need to be reflected in the 2015 Consolidated
Financial Statements.
Financial instruments
Details of the Group’s financial instruments are set out in note 17
to the Financial Statements.
Related party transactions
Related party transactions are set out in note 24 to the Consolidated
Financial Statements.
Information required by UK Listing Rule (LR) 9.8.4
There are no disclosures to be made under LR 9.8.4.
The Strategic Report and the Directors’ Report together are the
management report for the purposes of Rule 4.1.8R of the Financial
Conduct Authority’s (FCA’s) Disclosure Rules and Transparency Rules.
Disclosure of information to auditors
Each of the persons who is a Director at the date of approval of this
report confirms that:
i) so far as the Director is aware, there is no relevant audit
information of which the Company’s auditor is unaware; and
ii) the Director has taken all steps that he or she ought to have taken
as a director in order to make himself or herself aware of any
relevant audit information and to establish that the Company’s
auditor is aware of that information.
This confirmation is given, and should be interpreted, in accordance
with the provisions of Section 418 of the Companies Act 2006.
Rolls-Royce Holdings plc Annual Report 2015 181
Other informationOther information
Other information
SHAREHOLDER INFORMATION
Financial calendar 2016-2017
5 MAY 11.00AM
AGM
East Midlands
Conference Centre,
Nottingham
1 JULY
Payment of cash dividend on C Shares
1 JULY
Allotment of C Shares
4 JULY
Payment of C Share redemption monies
11 JULY
Purchase of ordinary shares
for CRIP participants (at the latest)
28 JULY
Announcement of half-year results
11 NOVEMBER
Record date for cash
dividend on C Shares
4 JANUARY
Payment of cash
dividend on C Shares
4 JANUARY
Allotment of C Shares
6 JANUARY
Payment of C Share
redemption monies
13 JANUARY
Purchase of ordinary shares for
CRIP participants (at the latest)
APR
2016
MAY
2016
JUN
2016
JUL
2016
AUG
2016
SEP
2016
OCT
2016
NOV
2016
DEC
2016
JAN
2017
FEB
2017
MAR
2017
28 APRIL
Ex-entitlement
to C Shares
29 APRIL
Record date for
entitlement to
C Shares
1 JUNE 5.00PM
Deadline for receipt by
Registrar of C Share
instructions (3pm for
CREST holders)
3 JUNE
Record date for cash
dividend on C Shares
20 OCTOBER
Ex-entitlement
to C Shares
21 OCTOBER
Record date for
entitlement to
C Shares
1 DECEMBER
5.00PM
Deadline for receipt by
Registrar of C Share
instructions (3pm for
CREST holders)
31 DECEMBER
Financial year end
FEBRUARY
Announcement
of full year results
MARCH
Annual Report published
Managing your shareholding
Share dealing
Your shareholding is managed by Computershare Investor Services PLC
(the Registrar). When making contact with the Registrar please
quote your Shareholder Reference Number (SRN), an 11-digit number
beginning with the letter ‘C’ that can be found on the right-hand
side of your share certificate or in any other shareholder
correspondence. It is very important that you keep your shareholding
account details up to date by notifying the Registrar of any changes
in your circumstances.
You can manage your shareholding at www.investorcentre.co.uk,
speak to the Registrar on +44 (0)370 703 0162 (8.30am to 5.30pm
Monday to Friday) or you can write to them at Computershare Investor
Services PLC, The Pavilions, Bridgwater Road, Bristol BS13 8AE.
Payments to shareholders
The Company makes payments to shareholders by issuing
redeemable C Shares of 0.1p each. You can still receive cash
or additional ordinary shares from the Company providing you
complete a payment instruction form, which is available from the
Registrar. Once you have submitted your payment instruction form,
you will receive cash or additional ordinary shares each time the
Company issues C Shares. If you choose to receive cash we strongly
recommend that you include your bank details on the payment
instruction form and have payments credited directly to your bank
account. This removes the risk of a cheque going astray and means
that cleared payments will be credited to your bank account on the
payment date.
The Registrar offers existing shareholders an internet dealing
service at www-uk.computershare.com/investor/sharedealing.asp
and a telephone dealing service (+44 (0)370 703 0084). The service is
available during market hours, 8.00am to 4.30pm, Monday to Friday
excluding bank holidays. The fee for internet dealing is 1% of the
transaction value subject to a minimum fee of £30. The fee for
telephone dealing is 1% of the transaction plus £35. Stamp duty of
0.5% is payable on all purchases. Other share dealing facilities are
available but you should always use a firm regulated by the FCA
(see fca.org.uk/register).
Your share certificate
Your share certificate is an important document. If you sell or
transfer your shares you must make sure that you have a valid share
certificate in the name of Rolls-Royce Holdings plc. If you place an
instruction to sell your shares and cannot provide a valid share
certificate, the transaction cannot be completed and you may be
liable for any costs incurred by the broker. Share certificates issued
in the name of Rolls-Royce plc or Rolls-Royce Group plc are invalid
and should be destroyed. If you are unable to find your share
certificate please inform the Registrar immediately.
American Depositary Receipts (ADR)
ADR holders should contact the depositary, JP Morgan,
by calling +1 (800) 990 1135 (toll free within the US) or emailing
adr@jpmorgan.com.
182 Rolls-Royce Holdings plc Annual Report 2015
WARNING TO SHAREHOLDERS – INVESTMENT SCAMS
Visit Rolls-Royce online
We are aware that some of our shareholders have received unsolicited
telephone calls or correspondence, offering to buy or sell their shares
at very favourable terms. The callers can be very persuasive and
extremely persistent and often have professional websites and
telephone numbers to support their activities. These callers will
sometimes imply a connection to Rolls-Royce and provide incorrect
or misleading information. This type of call should be treated as an
investment scam – the safest thing to do is hang up.
You should always check that any firm contacting you about potential
investment opportunities is properly authorised by the FCA. If you deal
with an unauthorised firm you won’t be eligible for compensation
under the Financial Services Compensation Scheme. You can find out
more about protecting yourself from investment scams by visiting the
FCA’s website fca.org.uk/consumers, or by calling the FCA’s consumer
helpline on 0800 111 6768 (overseas callers dial +44 20 7066 1000).
If you have already paid money to share fraudsters contact Action
Fraud immediately on 0300 123 2040, whose website is at
actionfraud.police.uk
Remember: if it sounds too good to be true it probably is.
DIVIDENDS PAID ON C SHARES HELD
C Share calculation period
1 July 2015 – 31 December 2015
1 January 2015 – 30 June 2015
PREVIOUS C SHARE ISSUES
Visit rolls-royce.com to find out more about the latest financial
results, the share price, payments to shareholders, the financial
calendar and shareholder services.
Available as a free
download from
the app store
Keeping up to date
You can sign up to receive the latest news to your phone or inbox.
You can also download the Rolls-Royce Investor Relations app which
provides the latest media and financial information.
C Share dividend rate (%)
0.276
0.257
Record date for
C Share dividend
13 November 2015
29 May 2015
Payment date
4 January 2016
1 July 2015
No. of
C Shares issued
per ordinary
share
92.7
141
Record date
for
entitlement
to C Shares
23 October
2015
24 April
2015
Latest date
for receipt of
payment
instruction
forms by
Registrar
1 December
2015
1 June
2015
Issue date
4 January
2016
1 July
2015
Apportionment values
CGT apportionment
Price of
ordinary
shares on first
day of trading
(p)
Value of
C Share issues
per ordinary
shares (p)
Ordinary
shares (%)
C Shares (%)
559.75
883.19
9.27
14.1
98.37
98.43
1.63
1.57
Date of
redemption
of C Shares
6 January
2016
3 July
2015
CRIP
purchase
date
12 January
2016
7 July
2015
CRIP
purchase
price (p)
557.9420
792.8752
For information on earlier C Share issues, please refer to the Group’s website rolls-royce.com.
ANALYSIS OF ORDINARY SHAREHOLDERS AT 31 DECEMBER 2015
Type of holder:
Individuals
Institutional and other investors
Total
Size of holding:
1 – 150
151 – 500
501 – 10,000
10,001 – 100,000
100,001 – 1,000,000
1,000,001 and over
Total
Number of
shareholders
189,421
8,255
197,676
62,852
98,014
34,992
1,246
405
167
197,676
% of total
shareholders
95.82
4.18
100.00
31.80
49.58
17.70
0.63
0.21
0.08
100.00
Number
of shares
97,169,761
1,741,507,631
1,838,677,392
5,942,067
26,777,158
56,893,428
33,698,261
137,315,629
1,578,050,849
1,838,677,392
% of total
shares
5.28
94.72
100.00
0.32
1.46
3.09
1.83
7.47
85.83
100.00
Rolls-Royce Holdings plc Annual Report 2015 183
Other informationOther information
Other information
GLOSSARY
anti-bribery and corruption
American Depositary Receipts
Annual General Meeting
Approved Maintenance Centre
Annual Performance Related Award plan
Articles of Association of Rolls-Royce Holdings plc
non-cumulative redeemable preference shares
commercial and administrative
Compound Annual Growth Rate
contractual aftermarket rights
chief executive officer
chief financial officer
cash-generating unit
carbon dioxide
Rolls-Royce Holdings plc
cash flow per share
C Share Reinvestment Plan
Executive Leadership Team
earnings per share
European Union
euro
Financial Conduct Authority
Future Combat Air System
Financial Reporting Council
foreign exchange
Great British pound or pound sterling
greenhouse gas
ABC
ADR
AGM
AMC
APRA
Articles
C Shares
C&A
CAGR
CARs
CEO
CFO
CGU
CO2
Company
CPS
CRIP
ELT
EPS
EU
EUR
FCA
FCAS
FRC
FX
GBP
GHG
Global Code Global Code of Conduct
Group
HMRC
HS&E
I&C
IAB
IAS
Rolls-Royce Holdings plc and its subsidiaries
HM Revenue & Customs
health, safety and environment
instrumentation and control
International Advisory Board
International Accounting Standards
IASB
IFRIC
IFRS
KPIs
ktCO2e
LIBOR
LTSA
LNG
MRO
NCI
NOx
OCI
OE
OECD
PBT
PSP
R&D
R&T
REACH
Registrar
RRPS
RRSAs
SFO
SIP
SOx
STEM
TCA
the Code
TRI
TSR
USD/US$
UTCs
International Accounting Standards Board
International Financial Reporting Interpretations Committee
International Financial Reporting Standards
key performance indicators
kilotonnes carbon dioxide equivalent
London Inter-Bank Offered Rate
long-term service agreement
liquefied natural gas
Maintenance, repair and overhaul
non-controlling interest
nitrogen oxides
other comprehensive income
original equipment
Organisation for Economic Cooperation and Development
profit before tax
Performance Share Plan
research and development
research and technology
Registration, Evaluation Authorisation and restriction
of CHemicals
Computershare Investor Services PLC
Rolls-Royce Power Systems AG
risk and revenue sharing arrangements
Serious Fraud Office
Share Incentive Plan
sulphur oxides
science, technology, engineering and mathematics
TotalCare agreement
UK Corporate Governance Code
total reportable injuries
total shareholder return
United States dollar
University Technology Centres
184 Rolls-Royce Holdings plc Annual Report 2015
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© Rolls-Royce plc 2016
Rolls-Royce Holdings plc
Registered office:
62 Buckingham Gate
London
SW1E 6AT
T +44 (0)20 7222 9020
www.rolls-royce.com
Company number 7524813