Rolls-Royce Holdings plc
Annual Report 2016
FOCUS
TRANSFORM
DELIVER
Rolls-Royce is a pre-eminent
engineering company focused
on world-class power and
propulsion systems.
Front cover
A Trent 1000 engine being
assembled at our Seletar
plant in Singapore.
This page
A Trent XWB, the world’s
most efficient large
aero engine.
Financial highlights
ORDER BOOK
£79,810m
2015: £76,399m
FREE CASH FLOW
£100m
2015: £179m
UNDERLYING* REVENUE
REPORTED REVENUE
£13,783m
2015: £13,354m
£14,955m
2015: £13,725m
UNDERLYING* PROFIT BEFORE TAX
REPORTED (LOSS)/PROFIT BEFORE TAX
£813m
2015: £1,432m
£(4,636)m
2015: £160m
UNDERLYING* EARNINGS PER SHARE
REPORTED EARNINGS PER SHARE
30.1p
2015: 58.7p
(220.1)p
2015: 4.5p
FULL YEAR PAYMENT TO SHAREHOLDERS
NET DEBT
11.70p
2015: 16.37p
£(225)m
2015: £(111)m
* All figures in the narrative of the Strategic Report are underlying unless otherwise stated.
Underlying explanation is in note 2 on page 131.
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.
1
Contents
STRATEGIC REPORT
Group at a glance
Chairman’s statement
Chief Executive’s review
Introduction
Review of 2016
Priorities for 2017
Business model
Financial summary
Business review
Financial review
Sustainable business
Key performance indicators
Principal risks
Going concern and viability statements
DIRECTORS’ REPORT
Board of Directors
Chairman’s introduction
Corporate governance
Committee reports
Nominations & Governance Committee
Remuneration introduction
Remuneration policy
Directors’ remuneration report
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 statement
Additional financial information
Other statutory information
Shareholder information
Glossary
2
4
6
6
7
13
14
16
18
36
40
46
48
53
54
58
59
67
67
72
76
83
96
103
110
113
186
114
115
167
170
176
183
184
186
190
192
Rolls-Royce Holdings plc Annual Report 2016FINANCIAL HIGHLIGHTS AND CONTENTSSTRATEGIC REPORT
2
STRATEGIC REPORT GROUP AT A GLANCE
Rolls-Royce Holdings plc Annual Report 2016
Group at
a glance
The Group is organised into five
customer-facing businesses:
Civil Aerospace, Defence
Aerospace, Power Systems,
Marine and Nuclear.
GROUP
UNDERLYING REVENUE
£13,783m
UNDERLYING PROFIT BEFORE FINANCING
£915m
UNDERLYING REVENUE MIX
Civil Aerospace
Defence Aerospace
Power Systems
Marine
Nuclear
51%
16%
19%
8%
6%
ORDER BOOK
GROSS R&D EXPENDITURE
£79.8bn
£1.3bn
PATENTS APPLIED FOR
COUNTRIES
672
50
ENGINEERS (YEAR END)
EMPLOYEES (YEAR AVERAGE)
16,526
49,900
Our award-winning Unified Bridge is the
result of detailed studies of how crews
use the equipment on the bridge, making
the vessel safer and easier to operate.
Rolls-Royce Holdings plc Annual Report 2016
GROUP AT A GLANCE
3
CIVIL AEROSPACE
DEFENCE AEROSPACE
POWER SYSTEMS
UNDERLYING REVENUE
£7,067m
UNDERLYING REVENUE
£2,209m
UNDERLYING REVENUE
£2,655m
UNDERLYING PROFIT BEFORE FINANCING
UNDERLYING PROFIT BEFORE FINANCING
UNDERLYING PROFIT BEFORE FINANCING
£367m
£384m
£191m
UNDERLYING REVENUE MIX
UNDERLYING REVENUE MIX
UNDERLYING REVENUE MIX
OE revenue
Services revenue
48%
52%
OE revenue
Services revenue
40%
60%
OE revenue
Services revenue
68%
32%
PAGES 18 TO 23 FOR MORE INFORMATION
PAGES 24 TO 26 FOR MORE INFORMATION
PAGES 27 TO 29 FOR MORE INFORMATION
MARINE
UNDERLYING REVENUE
£1,114m
NUCLEAR
UNDERLYING REVENUE
£777m
UNDERLYING LOSS BEFORE FINANCING
UNDERLYING PROFIT BEFORE FINANCING
£(27)m
£45m
UNDERLYING REVENUE MIX
UNDERLYING REVENUE MIX
OE revenue
Services revenue
57%
43%
OE revenue
Services revenue
46%
54%
PAGES 30 TO 32 FOR MORE INFORMATION
PAGES 33 TO 35 FOR MORE INFORMATION
GROUP AT A GLANCESTRATEGIC REPORT
4
Chairman’s
statement
Ian Davis
Chairman
Progress in 2016 can be
judged by how we have
overcome our challenges;
we have delivered on our
commitments in a difficult
year while at the same time
embarking on a significant
transformation.”
UNDERLYING EPS
30.1p
PAYMENT TO SHAREHOLDERS
11.7p
OTHER STATUTORY INFORMATION P186
Last year I talked about how Rolls-Royce
is a business in transition and how
important the next few years were
going to be, laying the groundwork for
future success. In 2016, we have made
a good start to the transformation
programme, designed to bring
significant and sustainable benefits
over the coming years.
Our core strengths lie in our product portfolio,
admired by our customers and respected by
our competitors. This underpins our
exceptional order book which will drive future
shareholder value. To unlock these benefits, we
need to sustain our investment in our key
competitive advantages, including our
world-leading research & development
capability, as we introduce new products,
ramp up production and expand our service
capability to support our growing aftermarket.
By necessity, the transformation programme
targeted simplifying the way we manage the
business and reducing our fixed cost base.
I have been very encouraged by the
engagement across the Group on what is,
understandably, a difficult exercise for
many and which has seen around 20% of
management roles being removed.
There is much more to do in terms of
efficiency and behavioural change to achieve
greater cost competitiveness. Key to this will
be embedding the thinking around pace and
simplicity that Warren East, your Chief
Executive, has brought to the business. He
will talk more about how we are doing
this in the Strategic report.
Corporate governance
The recent settlements, with the UK Serious
Fraud Office and other authorities, are a
salient reminder of how critical it is to
'win right'. As a result of past, unacceptable
conduct we have agreed to pay financial
penalties and costs of around £671m. These
dishonest acts, some as recent as 2013, are a
major blemish on the reputation of the
business and we have apologised unreservedly.
Importantly, the Board has taken extensive
action to strengthen ethics and compliance
procedures across the Group over recent
years, so that high standards of conduct are
embedded as an essential part of the way we
do business. We share a determination to see
that Rolls-Royce comes out of this episode as a
more trusted, resilient and better managed
business that wins right every time. Every
employee, from the bottom to the top of the
Group, is fully aware of the importance of
doing the right thing.
As described in the Nominations &
Governance Committee report (see page 70)
our governance framework was rolled out in
the summer and provides clarity and
accountability, providing additional integrity
to our business.
Rolls-Royce Holdings plc Annual Report 2016STRATEGIC REPORT CHAIRMAN’S STATEMENT 5
Colin Smith will be leaving the Company after
43 years of service and will be stepping down
from the Board after this year’s AGM. Colin has
made a major contribution to the success
of the business over many years, including
12 years on the Board. I would like to thank
both David and Colin for their valuable
support during their time with Rolls-Royce.
More detail on the changes to the Board are
set out in the Nominations & Governance
Committee report on page 68.
Overall I believe we have a strong and
experienced Board, fully engaged with the
business and well able to provide both
support and scrutiny in equal measure.
Rebuilding trust and confidence
We made significant efforts in 2016 to
improve our communication with
stakeholders. The foundations laid in the
second half of 2015 were enhanced by a
broad range of engagement, including
formal events such as the corporate
governance seminar in April, which I hosted,
and the capital markets' event in November,
led by Warren and his team. This latter event
brought together senior management from
all of our business units with analysts and
investors. The event gave our guests the
chance to ask questions and improve their
understanding of the business.
Despite the challenges we face as a business,
we know how important it is to sustain our
investment in our people and communities.
This has included maintaining active
graduate and apprenticeship schemes, as well
as investing in our research partnerships
and STEM (science, technology, engineering
and mathematics) programmes. Internally, we
are working hard on employee engagement,
including initiatives around diversity and
wellbeing (see Sustainable business on
page 42 and the Safety & Ethics Committee
report on page 109).
During the year, we have also done significant
work on the new revenue reporting standard,
IFRS 15 Revenue from Contracts with
Customers. Due to be adopted at the start of
2018, this will go a long way to better align the
recognition of profit and cash for our original
equipment business in particular, and will
help make our performance improvements
more transparent. I believe this will be
welcomed by many stakeholders, but may take
time to be properly understood. As a result,
we have undertaken a progressive
communication programme in 2016 to
outline the changes, culminating in the capital
markets' event in November. You can read
more about this on pages 66 and 130.
We have noted with interest the
Government’s green paper on UK Corporate
Governance: The Options for Change and we
are actively taking steps to strengthen our
interaction with stakeholders, particularly
employees. Further detail is included in my
introduction to the Directors’ report on
page 58. I look forward to reporting our
progress in our Annual Report next year.
Since taking over as chairman of the
Remuneration Committee in May, Ruth
Cairnie has undertaken a comprehensive
consultation on our proposed new incentive
schemes, ahead of this year’s AGM. You can
read more about our proposed remuneration
policy in the Directors’ remuneration report
on pages 72 to 82.
Feedback from investors suggests that we
have improved the level of engagement,
transparency and openness in many of our
communications. While we can always do
better, I believe the team has made a strong
start in rebuilding trust.
I know Warren looks forward to introducing
Stephen Daintith and Simon Kirby, our new
Chief Operating Officer, to the market in the
coming months to present their combined
views on the strategic priorities for the
business, which will define our future path.
Looking forward
2017 will be another transformative year
for Rolls-Royce. We continue to operate in
uncertain markets and will need to respond
to shifting market dynamics, while at the
same time make progress on our core
priorities both in terms of customer deliveries
and internal organisation changes.
Warren has been building a strong and
experienced management team to help him
achieve his strategic and operational goals.
The Board will continue to both challenge
and support their actions as they work to
ensure we transition successfully over the
next few years to a more profitable and
cash-generative future.
Ian Davis
Chairman
13 February 2017
These dishonest acts…
are a major blemish
on the reputation of the
business and we have
apologised unreservedly.”
Shareholder payments
Our stated objective in the long term is
to progressively rebuild our payment to
shareholders to an appropriate level, subject
to the short-term cash needs of the business.
This reflects the Board’s long-standing
confidence in the strong future cash
generation of Rolls-Royce.
At this stage, the investment needs of the
business remain high, reflected in the low
level of free cash flow in 2016 and this is
expected again in 2017. In addition, the Board
sees the need to retain a degree of balance
sheet flexibility.
As a result, it is proposed that the final
payment for 2016 is unchanged from 2015
at 7.1 pence per share. Taken together with
the interim payment, this brings the full year
payment to 11.7 pence per share. As with past
payments, the distribution will be in the form
of C Shares.
Board developments
During the year, there have been a number of
important changes to the Board. In March, we
appointed Brad Singer, a partner of ValueAct
Capital, to the Board, at which time he also
joined the Science & Technology Committee.
Sir Kevin Smith took over the role of Senior
Independent Director from Lewis Booth, who
continues as chairman of the Audit
Committee, an important role for us at the
present time. In May, following the 2016 AGM,
Dame Helen Alexander stepped down from
the Board. In November 2016, Alan Davies
stepped down from the Board.
In addition, we announced in September
that Stephen Daintith will join the Board in
2017 as Chief Financial Officer. His record of
achievement in change management is
particularly relevant to the Group. He will
succeed David Smith.
Rolls-Royce Holdings plc Annual Report 2016CHAIRMAN’S STATEMENTSTRATEGIC REPORT 6
STRATEGIC REPORT CHIEF EXECUTIVE’S REVIEW
Rolls-Royce Holdings plc Annual Report 2016
Chief Executive’s review
2016 has been an
important year as
we accelerated the
transformation of
Rolls-Royce.”
Warren East
Chief Executive
Introduction
Overall, we have performed ahead of our expectations for the year as a whole
while delivering significant changes to our management and processes.
We increased our large aero-engine production output by 25%, supported the
needs of our customers, and made good technical progress in the final stages
of the development of the three new large engines, due to enter service over the
next twelve months. At the same time we have improved manufacturing lead
times for our key Civil Aerospace programmes, an important goal as we ramp
up production over the next few years. Progress with our transformation
programme was also better than expected, delivering over £60m of in-year
benefits compared to our initial target of between £30-50m. Overall, the
performance improvements have helped offset a number of changing trading
conditions and higher research & development (R&D) spend.
7
This Strategic report describes the business in depth and provides
further information on our financial position and business performance.
7 Review of 2016
13 Priorities for 2017
14 Business model
How the Group performed in a
year of significant change.
Our clear focus and priorities for
developing the business.
How we deliver value from our
products and services.
16 Financial summary
18 Business review
36 Financial review
Summary of our 2016
financial performance.
Reviewing each of our five
customer-facing businesses;
with analysis of their markets.
Explaining our 2016 financial
performance in more detail.
40 Sustainable business
46 Key performance indicators
48 Principal risks
Setting out the approach
we take to ensure we are
a sustainable business.
How financial and
non-financial indicators are
used to measure the Group.
Outlining our main risks
together with our risk
management process.
Review of 2016
Performance in 2016
In 2015, we identified a number of significant
headwinds that would hold back performance
in 2016, including mixed market conditions
and the revenue and cost impacts of some key
product transitions.
Looking first at our markets, demand for our
large Civil Aerospace products and services
remained robust, despite some specific
weaknesses for service demand in respect
of older engines. At the same time, demand
for new corporate jets softened, as did the
aftermarket for the regional jets powered
by our AE 3007 engines. Defence Aerospace
markets held up well with a steady demand
for our aftermarket services in particular.
Offshore oil & gas markets for our
Marine business continued to suffer from
the consequences of low oil prices.
Alongside weaker industrial demand, this
also impacted Power Systems.
Other known headwinds transpired broadly
as expected, led by lower Trent 700 volumes
and prices, legacy civil large engine
aftermarket reductions and weakness in
marine markets. 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 the end of the year at around £80bn.
Against this backdrop, Group underlying
revenue reduced by 2% on a constant
currency basis with reductions in both
original equipment and aftermarket
revenues, led by the Marine business where
revenues were down 24%. More details are
included in the Financial summary on page 16
and the Business reviews on pages 18 to 35.
Compared to 2015, underlying profit before
finance charges and tax was 45% lower at
£915m. On this basis, Civil Aerospace
delivered £367m (2015: £812m); Defence
Aerospace delivered £384m (2015: £393m);
Power Systems delivered £191m
(2015: £194m); Marine generated a loss
of £27m (2015: £15m profit) and Nuclear
delivered £45m (2015: £51m excluding the
£19m R&D credit benefits highlighted in
2015). More detail on each business is
included in the Business review.
After underlying financing costs of £102m
(2015: £60m including a £34m gain from
hedging overseas dividends), underlying
profit before tax was £813m (2015: £1,432m).
Since the EU referendum at the end
of June, the value of sterling relative to the
US dollar has fallen significantly. As a result,
we have recognised a £4.4bn in-year
non-cash mark-to-market valuation
adjustment for our currency hedge book as
part of our reported financing costs of
£(4,677)m (2015: £(1,341)m). While reported
revenue of £14,955m (2015: £13,725m) was
unaffected by this adjustment, it impacted
reported profit. In addition, our reported
results also included a £671m charge for
financial penalties from agreements with
investigating authorities in connection with
historic bribery and corruption involving
Rolls-Royce Holdings plc Annual Report 2016REVIEW OF 2016STRATEGIC REPORT 8
A more detailed review of financial
performance is included in the Financial
summary on page 16 and the Financial review
on page 36.
Our focus on clear priorities for 2016
has helped deliver positive outcomes
Our 2016 priorities were threefold: to
strengthen our focus on engineering,
operational and aftermarket excellence
to drive long-term profitable growth; to
deliver a strong start to our transformation
programme; and to start rebuilding
trust and confidence in our long-term
growth prospects.
ORDER BOOK (£BN)
2015
2016
0
10
20
30
40 50
60 70
80
UNDERLYING REVENUE (£BN)
2015
2016
0
3
6
9
12
UNDERLYING PROFIT BEFORE FINANCING (£M)
2015
2016
0
300
600
900
1,200
1,500
FREE CASH FLOW (£M)
2015
2016
0
300
600
900
1,200
1,500
intermediaries in a number of overseas
markets. Our reported loss before tax was
£(4,636)m (2015: £160m profit).
After an underlying tax charge of £261m
(2015: £351m), underlying profit after tax
for the year was £552m (2015: £1,081m).
With an average 1,832m shares in issue,
underlying earnings per share were 30.1p
(2015: 58.7p).
After a reported tax credit of £604m
(2015: £76m charge), the reported loss for
the year was £(4,032)m (2015: £84m profit).
Reported earnings per share were (220.1)p
(2015: +4.5p).
A full reconciliation of underlying to
reported profit can be found in note 2
on page 134.
Free cash inflow in the year was £100m
(2015: inflow of £179m), better than
expected, reflecting strong cash collections
from a number of key customers at the very
end of the period and an improvement in
underlying working capital performance.
While some of this positive variance is a
timing impact and likely to reverse early
in 2017, improved efficiencies should drive
a level of sustainable benefit.
Agreement reached with various
investigating authorities
In mid-January 2017, we announced that we
had entered into Deferred Prosecution
Agreements (DPAs) with the UK’s Serious
Fraud Office (SFO) and the US Department
of Justice (DoJ) and completed a Leniency
Agreement with Brazil’s Ministério Público
Federal (MPF). These agreements relate to
bribery and corruption involving
intermediaries in a number of overseas
markets, concerns about which we passed
to the SFO from 2012 onwards following
a request from the SFO.
The agreements are voluntary and result in
the suspension of prosecution provided that
the Company fulfils certain requirements,
including the payment of financial penalties.
The agreements will result in the total
payment of around £671m. This is recognised
within our 2016 accounts.
total payment in 2017 is expected to be
£293m (at prevailing exchange rates) with
some elements having already been paid.
Under the terms of the DPA with the SFO,
we agreed to pay £497m plus interest under
a schedule lasting up to five years, plus a
£13m payment in respect of the SFO’s costs.
We also agreed to make payments to the DoJ
totalling around US$170m and to the MPF
totalling around US$26m. As a result, the
It is our intention that these financial
penalties will be paid from existing facilities
and an improved underlying cash flow
performance in the longer term.
Payment schedule
2017
2019
2020
2021
* Plus interest.
SFO
£119m* + £13m
£100m*
£130m*
£148m*
DoJ
US$170m
MPF
US$26m
Total
£293m*
£100m*
£130m*
£148m*
Rolls-Royce Holdings plc Annual Report 2016STRATEGIC REPORT REVIEW OF 2016 9
PRIORITY 1
Strengthen focus to drive long-term profitable growth
Increased our focus on engineering,
operational and aftermarket
excellence
Over the last few years, we have invested
significantly in new product development
and manufacturing capabilities. In
engineering, in 2016 we invested over
£1.3bn in gross R&D. The net investment
of £937m was higher than 2015 and our
expectations for 2016. A large proportion
of this was focused on Civil Aerospace
to support delivery of three new engine
programmes which will enter service over
the next 12 months: the Trent 1000 TEN
(Thrust, Efficiency, and New technology)
the Trent XWB-97 and the Trent 7000.
Supporting these investments was a
Group-wide engineering efficiency
programme, known internally as E3,
which has formed part of our overarching
transformation programme. Within the
engineering team, this change programme
has focused on delivering a lean, resilient,
lower-cost engineering function
through reducing complexity, improving
work prioritisation and simplifying
management structures.
In operations, over £1.4bn has been
invested in new capital equipment since
2011 (£225m in 2016) in transforming our
manufacturing footprint across the business.
In Civil Aerospace, these investments in
state-of-the-art manufacturing facilities will
enable us to meet the significant growth in
engine deliveries required to match customer
demand for our new Trent engines,
particularly the Trent 1000, Trent XWB and
Trent 7000. At the same time, the
investments lower unit costs and reduce the
net cash outflows related to engine
production. In Defence Aerospace, the
investments have focused on modernisation
of facilities such as in Indianapolis to reduce
costs and improve delivery performance of
both original equipment and spares to
support higher standards of customer
service. In Marine, new facilities will
contribute to a more efficient and scalable
manufacturing capability that will address
the demands of our customers today, while
markets are weak, and tomorrow, when they
have recovered.
The benefits of these investments are
starting to be seen in improved delivery
performance, lower assembly lead times,
lower unit costs and increased capacity.
For example, in Civil Aerospace, large engine
deliveries increased by over 15% to over 355
and capacity is now in place to deliver around
500 engines in 2017; an increase of over
a third.
The focus on improving aftermarket
excellence has been driven business-by-
business, by customer needs as well as
through the broader transformation
activities. In Civil Aerospace for example,
this has resulted in a progressive change
to the structure of our engine overhaul
services, our commercial TotalCare® and
time and materials product offerings, and
management structures. These have
enabled us to respond to a changing market
and maturing installed engine portfolio by
adapting our resources to focus on areas of
greatest value to the Group and our
customers – such as supporting airframe
transitions and rolling out SelectCare™ and
TotalCare Flex® offerings and preparing for
the launch of LessorCare™. In Defence
Aerospace, the focus has been driven by the
customer need for more embedded support.
This has included increasing our service
presence at key customer facilities in the
UK and overseas, improving response time
and resolving a greater proportion of
issues on-wing.
Engineering
excellence
Operational
excellence
Capturing
aftermarket value
Invested to support delivery of three
new engine programmes to enter
service in the next 12 months.
£225m invested in 2016 in
transforming our manufacturing
footprint across the business.
New powered gearbox design
successfully tested at new
German facility.
Launched a Group-wide engineering
efficiency programme, known as E3
– part of our Group-wide
transformation programme.
Increased large aero-engine
production output by 25%.
Started modernisation of Defence
Aerospace facility in Indianapolis to
reduce costs and improve delivery
performance.
Invested to support delivery of the UK’s
new Astute and Dreadnought class
nuclear-powered submarines.
Investment driven business-by-
business, by customer needs.
Restructured our engine overhaul
services including an increased equity
investment in our MRO JVs.
Launched new commercial TotalCare
product offerings to support maturing
installed base.
Embedded aftermarket support for key
Defence Aerospace customers at key
customer facilities in the UK and
overseas.
Rolls-Royce Holdings plc Annual Report 2016REVIEW OF 2016STRATEGIC REPORT 10
PRIORITY 2
Deliver a strong start to our transformation programme
Transformation programme ahead
of expectations
In November 2015, we announced a major
transformation programme focused on
simplifying the organisation, streamlining
senior management, reducing fixed costs
and adding greater pace and accountability
to decision making. The initial target was to
deliver incremental gross cost savings of
between £150m-£200m per annum, with
the full benefits accruing from the end of
2017 onwards.
Against these initial objectives, which
included a target of delivering in-year
savings of £30m-50m in 2016, we have made
a better than expected start. In-year savings
in 2016 were above target, at over £60m.
During the year, we also identified
significant opportunities to drive
sustainable cost savings from the business.
As a result, we expect the in-year savings
that can be delivered in 2017 to be between
£80m-£110m and we are on track to achieve
the top end of the target for the programme
as a whole, targeting a run rate of over
£200m by the end 2017.
At the same time, other restructuring
initiatives have delivered their expected
benefits. These included programmes
to improve operational efficiency in
Civil Aerospace and Defence Aerospace
(announced in 2014) and Marine
(announced in May 2015), as well as a back
office cost saving programme in Marine
(announced in October 2015).
In December 2016, an additional
reorganisation of the Marine business was
announced to further rationalise
manufacturing activities in Scandinavia,
targeting incremental annualised savings
of £50m from mid-2017. Reflecting our
cautious near-term outlook for the Marine
business, we have also taken an exceptional
charge of around £200m for the impairment
of goodwill, principally associated with the
acquisition of Vickers in 1999.
In summary, expected ongoing benefits
of all current restructuring programmes
initiated since 2014 will reduce costs by
around £400m by the end of 2018,
compared to a 2014 baseline.
In aggregate, ongoing divisional
restructuring programmes together
with the new programme announced in
November 2015 are expected to reduce
costs by around £400m by the end of 2018,
including the full benefit of the Marine
restructuring announced in December 2016.
The cost reduction breaks down into
incremental legacy Civil Aerospace and
Defence Aerospace restructuring savings of
£80m, Marine savings of now around
£110m and the transformation programme
savings of around £200m.
2016 progress on our US transformation
In January 2016, construction began on a five-year, US$600m
modernisation programme for our manufacturing and technology
research plant in Indianapolis, Indiana, US. This is the largest
investment by the Group in the US since we purchased
the Allison Engine Company in 1995.
In September 2016, we achieved a major milestone by opening a new,
dedicated pre-production facility. This enables us to digitally design,
develop, test and perfect new manufacturing methods for the entire
site as modern production comes online over the next four years.
When complete, the 1.5 million square feet manufacturing facility will
leverage the latest technologies and production methods which,
alongside a highly-skilled workforce, will establish our Indianapolis plant
as one of the most competitive manufacturing facilities in the world.
The site will also house new technology development capabilities which
we will apply to our next-generation engines in the US.
We currently employ about 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.
1
3
2
1. Turbines manufacturing
and pre-production method
development.
2. Production assembly
and test, and customer
delivery centre.
3. Experimental assembly
and test labs,
and LibertyWorks®.
Rolls-Royce Holdings plc Annual Report 2016STRATEGIC REPORT REVIEW OF 2016 11
Making transformation happen
Civil
Aerospace
Defence
Aerospace
Power
Systems
Marine
Nuclear
Group
Simpler
organisation
Simpler
processes
Right behaviours
and culture
Competitiveness:
improved productivity and cost
Continuous improvement:
embedded change for ongoing results
£200m
cost savings
On track to deliver £200m
of annual cost savings by the
end of 2017.
25%
growth in large engines
Significant improvement in
Trent 1000 and Trent XWB
lead times enabling a 25%
year-on-year increase in
production output of large
aero engines.
30%
performance improvement
30% improvement in the lead
time and cost of instrumentation
and control products for civil
nuclear reactors.
42,000
employees involved in
improvement activities
42,000 employees involved in
2016 continuous improvement
activities, supported by a
network of over 700 facilitators
and champions.
Pace and simplicity:
the right tools to stay ahead of our competitors
Accountability:
clear ownership and responsibility to deliver
20%
reduction in senior
management positions
Five market-facing businesses
have replaced a divisional
structure with significant
reduction in management
layers and central bureaucracy.
20%
fewer engine variants
Power Systems has met its
customers’ needs while cutting
engine variants by 20% as a
result of its simplified portfolio
of reciprocating engines.
Increased P&L
accountability
Full accountability for legacy
spares business has allowed
service teams in Defence
Aerospace to react faster to
customer needs and
increase revenues.
Efficiencies in
Marine
Restructuring of the Marine
business has placed full
accountability under four
market-facing businesses,
while right-sizing the
organisation to meet
the challenges of the
offshore marine market.
Rolls-Royce Holdings plc Annual Report 2016REVIEW OF 2016STRATEGIC REPORT 12
PRIORITY 3
Rebuild trust and confidence in our long-term growth prospects
Rebuilding trust and confidence;
steady year with few major surprises
2016 out-turned ahead of expectations with
only a few unexpected developments from
an operational perspective, despite the
challenges presented by a changing
macro-environment and some known
weaknesses in the business. The expected
headwinds in Civil Aerospace and Marine
transpired largely as forecast. In addition,
the benefits of outperformance on
transformation savings and foreign
exchange hedging more than offset some
additional programme costs in Civil
Aerospace and a range of other smaller
one-off items. As a result, external
expectations remained largely unchanged
throughout the year.
The introduction of the new revenue
reporting standard, IFRS 15 Revenue from
Contracts with Customers, will have a
significant impact on how we present our
revenues and profits, particularly for Civil
Aerospace. As a result, a combination of
significant in-house analysis and
appropriate progressive communication
was undertaken, culminating in a capital
markets’ event in November. This set out in
some detail how we now expect the new
standard to change the presentation of
our financial results, illustrated through a
re-presentation of 2015 performance. All
the materials from this investor event were
shared at the time and are available on the
Company’s website at www.rolls-royce.com.
Priorities for 2017 broadly
unchanged; additional focus on
developing our long-term vision
and strategy
Overall, the priorities for 2017 are largely
unchanged from those set out in 2016.
We will continue to invest in strengthening
our focus on engineering, operational and
aftermarket excellence to drive long-term
profitable growth. At the same time,
2017 will be an important year to drive
incremental savings from our
transformation programme.
At our capital markets’ event in November
2016 we set out how our focus is turning
towards the Group’s long-term goals. Over
the next few months, the senior leadership
team will be concluding the review of our
strengths and investment opportunities to
define an appropriate vision for the business
and the best way we can deliver sustainable
shareholder value. Conclusions from this
work will be shared during 2017.
the high volume Trent 1000 and Trent XWB
engines, where ITP has played a key role as
a participant in RRSAs. It also enhances the
Group’s own manufacturing and services
capabilities and adds value to the Defence
Aerospace business, particularly on the
TP400 and EJ200 programmes.
Rebuilding trust and confidence in the
Group and its long-term prospects remains
a key priority for the management team.
The focus remains on progressive, effective
communication combined with strong
operational delivery. While we have made a
steady start, more remains to be done. The
addition of new management and a
renewed focus within the business
leadership teams, with clear goals and
stronger accountabilities, should provide a
strong platform for further progress in 2017.
Acquisition of outstanding 53.1%
stake in Industria de Turbo
Propulsores SA (ITP)
We were notified in early July that SENER
Grupo de Ingeniería SA (SENER) had decided
to exercise the put option in respect of its
53.1% stake in ITP. This decision provides us
with the opportunity to effectively
consolidate several key large engine risk and
revenue sharing arrangements (RRSAs) into
the business, strengthen our position on a
number of important defence aero engine
platforms and will enable us to enjoy greater
benefits from future aftermarket growth.
Under the shareholder agreement, the
consideration of €720m will be settled over
a two-year period following completion in
eight equal, evenly-spaced instalments. The
agreement allows flexibility to settle up to
100% of the consideration in the form of
Rolls-Royce shares. Final consideration as to
whether the payments will be settled in
cash, shares or cash and shares will be
determined by Rolls-Royce during the
payment period. Completion remains
subject to regulatory clearances and is
expected in mid-2017.
The acquisition of ITP strengthens our
position on Civil Aerospace large engine
growth programmes by capturing
significant additional value from its
long-term aftermarket revenues, including
Further details of its impact on the Group
will be made available on completion of
the acquisition.
New Trents to
enter service
2017 will be a milestone year for our
Civil Aerospace business and its Trent
engine programmes, with three new
engines approaching entry into service.
The Trent 1000 TEN will power all
variants of the Boeing 787 Dreamliner
family and draws on technologies
from the Trent XWB and Advance
engine programmes.
The Trent XWB-97 will be the sole
powerplant for the Airbus A350-1000.
Delivering an increased 97,000lbs
of thrust, the new engine will allow
Airbus to increase the aircraft’s payload,
range and maximum take-off weight.
The Trent 7000 builds on the success of
its predecessor, the Trent 700, delivering
a 10% improvement in specific fuel
consumption while halving noise
output. It will be the sole powerplant
for the Airbus A330neo.
Taken together, these developments
underline the scale of our
commitment to research and
technology and delivering on the
needs of our customers.
Rolls-Royce Holdings plc Annual Report 2016STRATEGIC REPORT REVIEW OF 2016 PRIORITIES FOR 2017
13
Priorities For 2017
1 Strengthen our focus to drive long-term profitable growth
Engineering
excellence
Operational
excellence
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.
2 Sustain the strong start to our transformation programme.
3 Continue to rebuild trust and confidence in our long-term growth prospects.
4 Develop our long-term vision and strategy.
Underpinned by a commitment to developing our people and our culture in a safe
and ethical environment.
Outlook for 2017
After a better than expected 2016,
year-on-year incremental progress will be
modest. Our medium-term trajectory for
revenue, profit and free cash flow remains
unchanged. On a constant currency basis,
Group revenue for 2017 should be
marginally higher than that achieved in
2016, despite expected further weakening
in offshore oil & gas markets in Marine.
Underlying improvements in performance
should be driven largely by transformation
savings and free cash flow should benefit
from increased aftermarket cash revenues
in Civil Aerospace, further improvements
in working capital efficiency and cost
savings. As a result, we expect a modest
performance improvement overall and we
are targeting free cash flow to be similar to
that achieved in 2016. Individual outlooks
are provided in the Business review starting
on page 18.
Looking further ahead: long-term
outlook remains strong
We continue to see value in the underlying
strengths of our business: the underlying
growth of our long-term markets; the
quality of our mission-critical technology
and services; and the strength of customer
demand for these which is reflected in our
strong order book. While we have near-term
challenges and some core execution
priorities, these constants provide us with
confidence in a strong, profitable and
cash-generative future.
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 coming
ten years as we build towards a 50% plus
share of the installed widebody passenger
market. As a result, we remain confident
that the important investments we are
making to modernise our production will
create a strong platform to drive customer
service and strong cash flows, together with
the current investments in new products
and the streamlining of our existing product
portfolios to ensure we are providing
high-value, cost-competitive products into
our target end markets.
Rolls-Royce Holdings plc Annual Report 2016STRATEGIC REPORT 14
Our business model
Our business model seeks 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. We seek to recoup
our investment through developing
superior products, many of which
are selected for use on major
multi-year programmes.
Value creation
Our highly-skilled people create value
through a combination of a deep research
and product development capability,
world-class technology and engineering
expertise, and a substantial and experienced
supply chain with many relationships and
collaborations going back over 25 years.
We make significant investments in
advanced technology and engineering
programmes to deliver market-leading
products together with the manufacturing
capability to produce them.
Outputs
The outputs from the operation of this
business model are: long-term value
creation for our customers; a sustainable
and competitive market position; and the
generation of returns for our shareholders.
Our long-life products typically operate
in challenging environments where they
are expected to deliver sustained levels
of performance, such as fuel efficiency
and reliability. For our customers, they
deliver value through enhancing the
competitiveness of their own product or
service, whether airframe or other transport
or industrial application.
The product offering is often combined with
flexible service options to best suit each
customer’s operating needs. In certain
markets we further strengthen our
customer relationships 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.
Our long-term competitive position also relies
on having a full lifecycle design, sourcing
and manufacturing platform which is capable
of developing products which incorporate
advanced materials often operating close to
the limits of their capabilities. Our operational
focus is on ensuring we can deliver these
on-time and in increasing scale. As production
levels rise, we will benefit from increasingly
cost-efficient manufacturing and lower
unit costs.
By growing our installed base of power
systems and leveraging our aftermarket
service activities, we enhance our revenue,
profit and cash flow. Cash flow is then
invested to support future product
development and technology programmes,
driving growth while providing
shareholder returns.
How we create value
Inputs
• People and expertise
• R&D capability
• Supply chain collaboration
• Advanced manufacturing
• Customer relationships
• Financial investment
Engineering
excellence
Operational
excellence
Capturing
aftermarket value
Value creation
Customers:
Differentiated products
aligned to their
operating requirements
Corporate:
Strong market position
World-class development
and production facilities
Shareholders:
Long-term
cash flow generation
Rolls-Royce Holdings plc Annual Report 2016STRATEGIC REPORT BUSINESS MODEL
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.
Develop technology
that anticipates
customer needs
Our deep understanding
of customer needs drives
the development of new
technologies and products.
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.
Design, make and service
world-class products
We win and retain customers by
developing and delivering products
and services that provide more capability
and offer better through-life value than
those of our competitors.
1 Engineering excellence
Proven product reliability
Industry-leading R&D
Exceptional long-life products
Differentiated products and services
2 Operational excellence
Strong supply chain partnerships
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
aftermarket footprint
Investment in future
programme development
We make significant investment
in development programmes
which we believe will deliver
cost-efficient and competitive
next-generation products
and services.
15
Manufacturing capability
We manufacture
cost-efficiently through
a combination
of economies of scale,
developing a lean
enterprise and integrated
management of our
supply chain.
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.
Secure and maximise
aftermarket 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.
Rolls-Royce Holdings plc Annual Report 2016BUSINESS MODELSTRATEGIC REPORT 16
STRATEGIC REPORT FINANCIAL SUMMARY
Financial summary
Order book and order intake
During the year, our order book increased
by £3.3bn to £79.8bn, led by Civil Aerospace,
which, alongside strong order intake, also
benefited from a £2.1bn uplift from a
five cent decrease to our long-term US dollar
planning rate. Order intake in our Marine
business was poor, largely as a result of the
continuing weak offshore market. Overall,
orders were also lower in Defence Aerospace,
Power Systems and Nuclear, although we
view the prospects for these businesses as
unchanged, reflecting long-term orders won
in previous years.
Underlying trading
Underlying Group revenue declined 2%
in 2016 compared to 2015 on a constant
currency basis, reflecting declines in both
original equipment revenue (down 2%)
and services (down 3%) and driven almost
entirely by Marine. By business on a
constant currency basis, Civil Aerospace
revenue was unchanged, Defence Aerospace
revenue increased 1%, Power Systems
revenue decreased 1%, Marine revenue
decreased 24% and Nuclear revenue
increased 11%.
Underlying profit before financing of £915m
(2015: £1,492m) was 45% lower on a
constant currency basis, led by a significant
reduction in Civil Aerospace profit. This
reflected the previously communicated
volume and margin reductions on
link-accounted Trent 700 engines, reduced
business jet original equipment volumes,
reduced large engine utilisation and
increased technical costs for large engines.
In addition, reported 2015 numbers
included one-off benefits from a
methodology change in respect of risk
assessment and reversal of impairments
and provisions in respect of a Trent 1000
launch customer, totalling £189m and £65m
respectively. These were partially offset by
strong lifecycle cost improvements on
installed engines and some provision
releases. Profit in Defence Aerospace at
£384m was 8% lower on a constant currency
basis largely reflecting additional costs
related to the TP400 programme. Power
Systems was down 14% year-on-year
principally due to volume reduction and
adverse changes to product mix.
GROUP TRADING SUMMARY
£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
6,724
6,630
2015*
76,399
13,354
Underlying
change**
3,329
(296)
-2%
(112)
-2%
(184)
-3%
(577)
3,203
24.0% -390bps
(71)
(1,025)
(39)
41
(47)
(765)
(11)
118
(665)
1,492
-45%
11.2% -480bps
Foreign
exchange***
82
725
+5%
415
+6%
310
+5%
197
(67)
(2)
(50)
10
88
+6%
2016
79,810
13,783
+3%
7,027
+5%
6,756
+2%
2,823
20.5%
(1,163)
–
(862)
117
915
-39%
6.6%
*
2015 figures have been restated as a result of £21m of costs previously reported in ‘cost of sales’, being reclassified
as ‘other commercial and administrative costs’ to ensure consistent treatment with 2016.
** Order book underlying change includes £2.1bn increase from a change to our long-term US dollar planning rate.
*** Translational foreign exchange impact.
David Smith
Chief Financial
Officer
Marine profit was sharply lower led by
continuing weakness in the offshore
markets. Nuclear profit was 37% lower than
2015 due to a lower margin mix in
submarine projects.
Underlying gross margin was £2,823m,
down 390 basis points to 20.5% largely
reflecting the lower margins in Civil
Aerospace, Defence Aerospace and Marine.
Commercial and administrative costs
include accruals for employee incentive
schemes in line with our current policies.
Given the good performance relative to
original plan, these are higher than in the
prior year. This contributed to commercial
and administrative costs being £71m higher
on a constant currency basis year-on-year.
The R&D charge increased by 6% over 2015
on a constant currency basis, reflecting
increased charges in Civil Aerospace and
the adverse year-on-year effect of the
favourable R&D credit adjustment taken
in 2015 in Nuclear.
Underlying restructuring charges reduced by
£41m reflecting the lower level of underlying
restructuring as most costs in 2016 were
taken as exceptional due to the nature of the
restructuring activities within the Group.
The exceptional charge in relation to these
programmes was £129m in 2016. This
included £92m for the transformation
programme launched in November 2015,
which delivered in-year benefits of over £60m
in 2016. The underlying tax rate for 2016
increased to 32.1% (2015: 24.5%). The primary
reasons for the increase are the
non-recognition of deferred tax assets on
losses in Norway, which reflects the current
uncertainty in the oil & gas markets, and
a different profit mix with more profits
arising in countries with higher tax rates.
Reported results
Reported results are impacted by the
mark-to-market adjustments driven by
movements in USD:GBP and EUR:GBP
exchange rates over the year. In addition, we
recognised the £671m charge related to the
agreements reached in respect of regulatory
Rolls-Royce Holdings plc Annual Report 2016 17
investigations, a goodwill impairment
charge of £219m largely reflecting a more
cautious outlook for our Marine business
and £129m of exceptional restructuring
cost. As a result, the reported loss before tax
was £(4,636)m (2015: a profit of £160m).
Free cash flow
Free cash inflow in the year was £100m
(2015: £179m), better than expected,
reflecting strong cash collections from a
number of key customers at the very end of
the period and an improvement in underlying
working capital performance. This helped
offset the lower profit before tax and higher
expenditure on property, plant and
equipment and intangibles. The latter reflects
the increased capital investment in new
manufacturing capacity, higher capitalised
R&D, mainly related to the Trent 1000 TEN
and higher certification costs on the Trent
XWB-97. More details on the movement in
trading and free cash are included in the
Funds flow section of the Financial review.
While some of this positive variance is a
timing impact and likely to reverse early in
2017, improved efficiencies should drive a
level of sustainable benefit.
Net debt and foreign currency
The Group is committed to maintaining
a robust balance sheet with a healthy,
investment-grade credit rating.
We believe this is important when selling
high-performance products and support
packages which will be in operation for
decades. Standard & Poor’s updated its
rating in January 2017 to BBB+ from
A-/negative outlook and Moody’s
maintained a rating of A3/stable.
During 2016, the Group’s net debt position
increased from £111m to £225m, reflecting
the £100m free cash inflow, shareholder
payments of £301m and £154m for the
increased investment in our approved
maintenance centre joint ventures following
receipt of regulatory approval for the
changes to the joint venture agreements
in June 2016. In April, we increased our
revolving credit facilities by £500m to
£2bn to provide additional liquidity.
The Group hedges the transactional foreign
exchange exposures to reduce volatility to
revenues, costs and resulting margins.
The hedging policy sets maximum and
minimum cover ratios of hedging for net
transactional foreign exchange exposure.
It allows us to take advantage of attractive
foreign exchange rates, whilst remaining
within the cover ratios. A level of flexibility
is built into the hedging instruments to
manage changes in exposure from one
period to the next and to reduce volatility
by smoothing the achieved rates over time.
The most significant exposure is the net
US dollar income which is converted into GBP
(currently approximately $5bn per year and
forecast to increase significantly by 2021).
Following the fall in the value of sterling,
which resulted from the outcome of the EU
referendum, additional cover has been taken
out to benefit from the favourable rates.
This has resulted in an increase in the nominal
value of the hedge book to approximately
$38bn at the end of 2016 (end 2015: $29bn)
together with a reduction in the average rate
in the hedge book to £/$1.55 (end
2015: £/$1.59). The movement in the average
achieved rate year-on-year was around two
and a half cents, providing a net underlying
Group benefit, after balance sheet effects
(the movement in achieved rate also affects
creditor and debtor balances of hedged
cash flows), of around £20m.
UNDERLYING REVENUE
UNDERLYING PROFIT BEFORE TAX
UNDERLYING OPERATING MARGIN
£13,783m
£813m
6.6%
2015
£13,354m
2014 exc £13,864m
2014 inc £14,588m
£15,505m
2013
2012
y
g
r
e
n
E
c
n
i
y
g
r
e
n
E
c
x
e
2014
2015
2016
2013
2012
2015
£1,432m
2014 exc
£1,617m
2014 inc
£1,618m
£1,759m
y
g
r
e
n
E
c
n
i
y
g
r
e
n
E
c
x
e
2014
2015
2016
2015
2014 exc
2014 inc
2013
2012
11.2%
12.1%
11.5%
11.8%
y
g
r
e
n
E
c
n
i
12.0%
2012
2013
2014
y
g
r
e
n
E
c
x
e
2014
2015
2016
£12,209m
2012
2013
2014
£1,434m
2012
2013
2014
REPORTED REVENUE
REPORTED (LOSS)/PROFIT BEFORE TAX
NET R&D AS A PROPORTION OF UNDERLYING REVENUE
£14,955m
£(4,636)m
6.8%
2015
2014
2013
2012
£13,725m
£13,736m
£15,513m
£12,161m
2012
2013
2014
2015
2016
2015
2014
2013
2012
£160m
£67m
£1,759m
£2,766m
2012
2013
2014
2015
2015
2014 exc
2014 inc
2013
2012
6.2%
5.9%
5.8%
4.8%
4.7%
2016
y
g
r
e
n
E
c
n
i
2012
2013
2014
y
g
r
e
n
E
c
x
e
2014
2015
2016
Rolls-Royce Holdings plc Annual Report 2016FINANCIAL SUMMARYSTRATEGIC REPORT
18
Business review
Summary
The Civil Aerospace business is a major manufacturer of aero engines for the large
commercial 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
Operational review
Underlying revenue unchanged; gross
margins lower:
• Original equipment (OE): increased
deliveries of newer Trent engines but
lower link-accounted Trent 700 and
business aviation sales reduced
achieved margins.
• Services: growth from in-production
large engine fleet, but declining regional
and older large engine fleet aftermarket
revenues; increase in technical costs for
large engines, including the Trent 700
and Trent 900, largely mitigated by
foreign exchange benefits.
£4.4bn order book growth; includes
£2.1bn benefit from long-term US dollar
planning rate change.
New programmes: Trent 1000 TEN
received EASA certification in July; first
test run of new UltraFan® gearbox; first
flight of the Airbus A350-1000 powered
by the Trent XWB-97.
Supply chain modernisation reducing
costs and increasing capacity for Trent
XWB ramp up.
OE revenue
Services revenue
48%
52%
UNDERLYING REVENUE BY SECTOR
Large engine
Business aviation
Regional
V2500
66%
17%
5%
12%
2017 outlook: modest growth in revenue
and profit; cost improvements offsetting
OE and aftermarket mix effects.
In 2016, the Trent 1000 was selected to
power the first test flight of the Boeing
787-10 Dreamliner. It has already powered
the first flights of the 787-8 and 787-9.
Financial overview
Overall, underlying revenue for
Civil Aerospace was unchanged (up 2%
at actual exchange rates). OE revenue
was unchanged, with increases from
higher volumes of large engines being
offset by the decline in business jet
engines and V2500 modules. Aftermarket
revenue was down 1% despite strong
growth from our in-production engines.
OE revenue from Large engine: linked
and other* was up 2% reflecting increased
volumes of Trent 900s and a higher
number of spare Trent XWB engines,
partly offset by Trent 700 volume and
price reductions, ahead of the introduction
of the Trent 7000 for the Airbus A330neo.
Sales of spare engines to joint ventures,
included in Large engine: linked and
other*, generated revenue of £288m
(2015: £189m).
OE revenue from Large engine: unlinked
installed* increased 47%, led by higher
volumes of Trent XWBs.
* See table on page 20.
Rolls-Royce Holdings plc Annual Report 2016STRATEGIC REPORT BUSINESS REVIEW
Large engine service revenue reflected
double digit growth from our in-production
engines which more than offset the
reduction from older engines, including
the expected lower year-on-year utilisation
of Trent 500 and Trent 800 engines. Time
and material revenue reduced, as a result
of fewer overhauls of engines across the
out-of-production fleet. Contract
accounting effects within service revenue
in 2016 were significantly lower than prior
year. As a result, while there was a small
foreign exchange improvement in 2016,
underlying service revenue from large
engines was down 4%. Adjusting for
contract accounting effects, service revenue
from large engines would have been up 2%.
Revenue from business aviation* OE engine
sales was, as expected, lower, particularly
for the BR710 engines, reflecting general
market weakness and a transition to newer
non Rolls-Royce powered platforms. Volumes
of our newer BR725 engine, which powers
the Gulfstream G650 and G650ER, were
stable. Overall, business aviation* OE
revenues declined 25% while aftermarket
revenue was slightly down. Service revenue
from our regional *jet engines declined 14%,
reflecting retirements and reduced
utilisation of relevant fleets by North
American operators in particular.
On the V2500* programme, which powers
aircraft including the Airbus A320, revenue
CIVIL AEROSPACE | KEY FINANCIAL DATA
from OE modules declined 10% reflecting
the production slow-down as Airbus
transitions to the A320neo, powered by
another engine provider. However, V2500*
service revenues were 21% higher, reflecting
price escalation on flying hour payments
together with increased overhaul activity.
Overall gross margins for Civil Aerospace
were 16.8% (2015: 22.0%), declining £397m
from 2015 on a constant currency basis.
The main headwinds were as forecast at the
start of the year: OE reductions to the Trent
700 programme; business aviation engines
and V2500 modules; reduced utilisation and
fewer overhauls of our out-of-production
Trent 500 and Trent 800 and RB211 engines;
and the declining regional aftermarket.
In addition, we also incurred programme
charges of around £30m for engines still
in development. These were partially offset
by the release, after accounting and legal
review, of accruals related to the
termination in prior years of intermediary
services, totalling £53m (2015: £nil). Gross
margin from spare engine sales to joint
ventures contributed £97m (2015: £67m).
The in-year net benefit from long-term
contract accounting adjustments totalled
£90m (2015: total benefit of £222m, which
included a £189m one-off benefit associated
with the refinement of our methodology for
risk assessment of future revenue). The
£90m included a £217m benefit from
lifecycle cost improvements (2015: benefit of
£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
3,675
3,258
2015
67,029
712
6,933
Underlying
change*
4,395
(63)
(27)
–
14
–
(41)
-1%
(397)
1,526
22.0% -570bps
(43)
(4)
(34)
(8)
(486)
-60%
11.7% -700bps
(296)
(7)
(515)
104
812
Foreign
exchange **
2
161
+2%
85
+3%
76
+2%
56
(3)
–
(19)
7
41
+5%
2016
71,426
649
7,067
+2%
3,357
+3%
3,710
+1%
1,185
16.8%
(342)
(11)
(568)
103
367
-55%
5.2%
* Order book underlying change includes £2.1bn increase from a change to our long-term US dollar planning rate.
** Translational foreign exchange impact.
19
ORDER BOOK
£71.4bn
£140m). We also recognised in this period a
£35m benefit from a five cent change (2015:
£nil) to our estimated long-term US dollar
to sterling exchange rate to bring our own
planning rate within updated external
benchmark long-term forecast data. These
benefits were offset by technical costs of
£98m (2015: £24m) for large engines,
including the Trent 900, relating to the need
for increased shop visits in the short term,
and the Trent 700, where we are upgrading
the engine management system, together
with a charge of £64m (2015: £83m),
reflecting other operational changes.
The year-on-year change was also impacted
by a one-off £65m write-back in 2015
of a previously recognised impairment of
contractual aftermarket rights (CARs) for
sales to a launch customer and the release
of a related provision; in 2016 these sales
were capitalised as CARs.
Costs below gross margin were £89m higher
than the previous year at £818m on an
underlying basis. Within this, R&D charges
of £568m were £34m higher, reflecting
higher spend on key programmes,
particularly in respect of the Trent 7000
which are being expensed ahead of
capitalisation and lower development cost
contributions from risk and revenue sharing
partners, partly offset by increased R&D
capitalisation on the Trent 1000 TEN.
Underlying commercial and administrative
costs were £43m higher than 2015 reflecting
increased employee incentive charges.
Underlying restructuring costs of £11m were
£4m higher than 2015 and profits from joint
ventures and associates were down £8m.
As a result, profit before financing and tax
was 55% down, reflecting a combination
of lower overall gross margins, higher
commercial and administrative, R&D and
restructuring costs and reduced joint venture
and associate profits. Taking account of
foreign exchange effects, underlying profit
before financing and tax was £367m
(2015: £812m).
Rolls-Royce Holdings plc Annual Report 2016BUSINESS REVIEWSTRATEGIC REPORT 20
Trading cash flow
Trading cash flow before working capital
movements of £22m declined year-on-year
by £462m, driven by a reduction in
underlying profit before financing of
£445m and increased property, plant and
equipment additions. There were also
increased certification costs driven by the
Trent XWB-97 and higher R&D capitalisation
of the Trent 1000 TEN development costs,
offset in part by other timing differences
including provision movements.
The overall trading cash flow improvement
of £43m resulted largely from a significant
year-on-year improvement in working
capital, due mainly to differences in the
timing of payments to suppliers and
increased deposits, offset in part by an
increase in inventory. In addition, reflecting
the lower profits recorded on our linked
engines such as the Trent 700, net long-term
contract debtor additions were also lower.
CIVIL AEROSPACE | REVENUE SEGMENTATION
TotalCare net assets and contractual
aftermarket rights
Investment and business
development
TotalCare net assets increased in 2016 by
£230m (2015: £406m) to £2.44bn reflecting
accounting for new linked engines of £432m
(2015: £521m), contract accounting
adjustments taken in the year of £90m
(2015: £222m) offset by the cash inflows and
net other items of £(292)m (2015: £(337)m).
It should be noted that the £230m net asset
increase is different from the £246m used in
the trading cash flow above because of
foreign exchange effects on evaluating
TotalCare net debtor balance movements.
The CARs balance increased by £169m (2015:
increase of £156m) to £574m reflecting
higher sales of unlinked Trent XWB engines
partly offset by engine cost improvements.
Order intake of £14.1bn in 2016 for Civil
Aerospace was £1.3bn higher than the
previous year. The order book closed at
£71.4bn, up £4.4bn or 7% from 2015, which
included a £2.1bn benefit from the change
in the long-term planning foreign exchange
rate discussed previously. Excluding this, the
order book was up 3%.
Significant orders in 2016 included a US$2.7bn
order from Norwegian for Trent 1000 engines,
an order from Garuda Indonesia worth $1.2bn
for Trent 7000 engines and a $900m order
from Virgin Atlantic for Trent XWB. All of these
include the provision of long-term TotalCare
engine services.
Foundations for future growth are built from
our investment in engineering excellence
During the year, we committed resources
in order to ensure we made significant
Original equipment
Large engine: linked and other
Large engine: unlinked installed
Business aviation
V2500
Service
Large engine
Business aviation
Regional
V2500
2015
£m
3,258
1,570
504
903
281
3,675
2,371
425
360
519
% of total
48%
23%
7%
14%
4%
52%
34%
6%
5%
7%
Underlying
change
14
32
237
(228)
(27)
(41)
(84)
(13)
(52)
108
Underlying
change %
–
+2%
+47%
-25%
-10%
-1%
-4%
-3%
-14%
+21%
CIVIL AEROSPACE | 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
£m
85
2
1
82
–
76
2
40
34
–
2016
367
491
858
(208)
(739)
111
22
(246)
267
43
2016
% of total
48%
23%
10%
11%
4%
52%
32%
6%
5%
9%
2015
812
410
1,222
(161)
(502)
(75)
484
(406)
(78)
–
£m
3,357
1,604
742
757
254
3,710
2,289
452
342
627
Change
(445)
81
(364)
(47)
(237)
186
(462)
160
345
43
* 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 including the effect of foreign exchange
movements on non-cash balances.
** 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.
Rolls-Royce Holdings plc Annual Report 2016STRATEGIC REPORT BUSINESS REVIEW 21
progress across all key engineering
programmes in 2016. The Trent 1000 TEN
engine undertook its first test flight in
March and received its European Aviation
Safety Agency (EASA) certification on 11 July.
The Trent 1000 TEN will power all variants of
the Boeing 787 Dreamliner family and will
power the first flight of the 787-10 in 2017.
In November, the latest version of the Trent
XWB, the higher thrust -97 engine,
successfully powered the first flight of the
Airbus A350-1000 in Toulouse. The Trent
7000 engine, which will exclusively power
the Airbus A330neo, undertook ground
testing for the first time and we started
assembly of the first flight test engines.
In respect of future technologies, the
Advance3 large engine demonstrator is
proceeding well. The engine will test the
new core architecture for future engine
families and other key technologies such
as lean burn combustion, ceramic matrix
composites (CMC), CastBond (specialist
turbine manufacturing) plus additive layer
manufacturing (or 3D printing). It is currently
in development at our Bristol, UK, facility with
all core modules advancing well.
In September, we successfully ran the
world’s most powerful aerospace gearbox
for the first time under the joint venture
Aerospace Transmission Technologies (ATT).
The gearbox is designed to reach up to
100,000 horsepower and is a significant step
in the development of the new UltraFan
engine technology.
Supporting our commitment to research
and development, we also announced a
US$30m expansion into a new facility in
Cypress, California, that will be dedicated
to research and development of ceramic
matrix composite materials and processes
for use in next generation aircraft
engine components.
Investing in new aerospace supply chain
capabilities to help drive operational
excellence
In January 2016, we announced plans to
invest more than £30m at our site in
Washington, Tyne & Wear, UK, creating a
new facility to manufacture a range of
aerospace discs for in-service engines. The
new facility is expected to be fully
operational in 2018 and will have the
capacity to manufacture well over 1,500 fan
and turbine discs a year for use in a wide
range of existing engines.
The construction of a £50m extension
to our wide-chord fan blade facility in
Barnoldswick, UK, started in December.
The expanded facility will be able to
manufacture 6,000 large Trent fan blades
a year, almost twice its current capacity.
We also announced the creation of a
centre of excellence in structures
& transmissions at the same site. The new
centre, supported by £20m of investment,
will manufacture many of the complex
structures that feature in all Rolls-Royce
aero engines.
Good progress strengthening our aerospace
aftermarket service offering
We have continued to invest in our service
capabilities to support our customers with
state-of-the-art facilities and relevant
products and services, particularly within
our portfolio of TotalCare offerings.
During the year, we completed changes to
three Approved Maintenance Centre (AMC)
joint ventures. This included investing
£154m to increase our stake in both Hong
Kong Aero Engine Services Limited (HAESL)
and Singapore Aero Engine Services Pte
Limited (SAESL) to 50%. These AMCs support
our strategy to offer a competitive, capable
and flexible Trent service network to meet
the changing needs of customers across the
lifecycle of engines and to support the
growing Trent engine fleet.
Additionally, we announced further details
of a new AMC in Abu Dhabi with Mubadala
Development Company, the emirate-based
investment and development organisation.
This purpose-built facility will carry out
work on the Trent XWB.
We also announced that we are further
expanding our global network of Authorised
Service Centres (ASC) for business aviation
aircraft under our CorporateCare® service
provision for customers. Rolls-Royce now
has 62 ASCs in place with key maintenance
providers worldwide.
Following the launch of SelectCare in 2016,
we secured our first agreement for Trent
800 engines as part of a wide-ranging deal
with Delta Airlines.
Civil Aerospace outlook
On a constant currency basis, our Civil
Aerospace business should deliver modest
growth in revenue and profit in 2017,
supported by large engine aftermarket
growth, further lifecycle cost reductions and
a higher level of R&D capitalisation. Business
jet demand is expected to weaken further,
as will the demand for aftermarket services
to support Rolls-Royce powered regional
aircraft. After a better year for trading cash
flow in 2016, we now expect this to be
broadly unchanged year-on-year reflecting
higher volumes of cash-loss-making engines
offsetting the positive effects of higher
aftermarket cash revenues.
We expect the TotalCare net asset to peak in
the next 12 months at between £2.5bn and
£2.7bn, reflecting further targeted lifecycle
cost improvements and other timing
differences between cost and cash.
Positive market developments continue to
drive long-term growth in Civil Aerospace
The long-term positive market trends for
our leading power and propulsion systems
remain unchanged despite some near-term
uncertainties in Civil Aerospace that continue
to impact business jet engine production
volumes and service activity on older large
engines. The long-term trends driving
demand for growth in large passenger
aircraft, business jets, power systems and
maritime activity remain strong; in particular
a growing aspirational and mobile
middle-class, particularly in Asia, and
globalisation in business, trade and tourism.
While recent political and economic
developments have added some uncertainty
to near-term utilisation, we continue to
expect that strong widebody airframe
demand – driven by the need for newer,
more fuel-efficient aircraft – should provide
resilience to manufacturing schedules over
the next few years as the industry
undergoes a strong replacement cycle.
New airframe growth and transitions are
in line with expectations
Preparations for the transition of the Airbus
A330ceo to A330neo models are also
progressing well and once the transition is
completed we will benefit from an exclusive
position with the new Trent 7000 on
the A330neo.
The roll-out of new engines, including the
Trent XWB for the highly successful Airbus
A350 family, will significantly grow our
market share and the installed base of new
engines that will deliver strong aftermarket
revenues for decades to come.
Rolls-Royce Holdings plc Annual Report 2016BUSINESS REVIEWSTRATEGIC REPORT 22
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 have a strong market position on
widebody aircraft produced by the world’s
two major aircraft manufacturers: Airbus
and Boeing, who are broadly consistent in
forecasting air traffic growth (revenue
passenger kilometres) of approximately
5% compound annual growth rate 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.
We are market leaders in the large business
jet fleet market powering aircraft from
most of the main aircraft manufacturers.
Key Rolls-Royce differentiators
Barriers to entry are extremely
high. 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 relationships.
Market dynamics
Competition
•
•
•
•
•
•
•
•
•
•
Overall there has been a slowdown in all
major geographical markets for new aircraft
orders after a period of higher than normal
order placement for new airframe products
in recent years (principally Airbus A350 XWB
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 and disposable income.
Historically, growth has recovered quickly
following major economic shocks. The
geographic spread of our installed base and
wide customer base spreads our risk and
reduces our exposure to any one shock.
Our current share in the widebody engine
market is at 32% of the installed passenger
fleet and is expected to exceed 50% early in
the next decade.
Older widebody aircraft are experiencing
reduced utilisation by certain airlines.
Trent-powered aircraft are starting to
transition from their original operators
to other operators as the fleet matures.
This year, 46 Trent-powered aircraft
transitioned, 13 of which were
Trent 800-powered Boeing 777 aircraft.
Over 90% of the Rolls-Royce widebody
engine fleet is covered by our TotalCare
service agreements.
Over 65% of Rolls-Royce business jet engines
are covered by our CorporateCare service
agreements.
Long-term 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 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.
•
Aftermarket demand for engines on
50-70 seat aircraft is reducing in line
with expectations.
•
•
•
•
•
•
GE is the main competitor supplying
engines in the widebody sector. In 2016,
deliveries of engines for widebody passenger
aircraft were split Rolls-Royce 38%, GE 54%,
Engine Alliance 6% and Pratt & Whitney 2%.
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 810 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.
Rolls-Royce has 3,100 powered business jets
flying, representing 55% market share of the
large/very large business jet fleet.
Business risks
•
•
•
•
•
•
•
If we experience a major product failure
in service, then this could result in significant
adverse financial and reputational
consequences and potential litigation.
If an external event or severe economic
downturn significantly reduces air travel
and thereby reduces engine flying hours
and demand for aircraft, then our financial
performance may be impacted.
If our aircraft manufacturer 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.
Rolls-Royce Holdings plc Annual Report 2016STRATEGIC REPORT BUSINESS REVIEW
23
Trent XWB
The latest version of the Rolls-Royce
Trent XWB, the most efficient large aero
engine flying in the world today, has
powered the Airbus A350-1000 aircraft to
the skies for the first time. The Trent
XWB-97 is the sole powerplant for the
longer range A350-1000, which will enter
service in 2017.
The first test flight, which took place in
November at Toulouse, France, marked
another milestone for the Trent XWB, our
largest Civil Aerospace programme.
The Trent XWB-84 has already delivered
outstanding performance and reliability
since it first went into service in January
2015, powering the A350-800 and
A350-900. The Trent XWB, specifically
designed for the A350 XWB, is the fastest-
selling widebody engine ever, with more
than 1,600 already sold or on order.
READ MORE AT WWW.ROLLS-ROYCE.COM
Opportunities
•
•
Our position and long-term prospects in
the widebody sector are strong across our
Trent family.
We continue to invest in our technology
demonstrator programmes which underpin
our Advance and UltraFan engine
programmes. We are well positioned for
future aircraft requirements, while also
delivering technologies to enhance our
existing product portfolio.
•
•
•
The Trent XWB has now been in service for
two years, with 64 Airbus A350s delivered
to ten airlines and one lessor. In November,
the A350-1000 successfully completed its
first flight.
Rolls-Royce is the sole supplier of engines
for the new Airbus A330neo. The Trent 7000
engine is in development, and the first flight
is expected in 2017.
The new Trent 1000 TEN for the Boeing 787
is scheduled to enter service in 2017, which
will deliver significant fuel efficiency
improvement and an opportunity for greater
market capture.
•
•
China’s 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.
Rolls-Royce Holdings plc Annual Report 2016BUSINESS REVIEWSTRATEGIC REPORT 24
24
STRATEGIC REPORT BUSINESS REVIEW
Rolls-Royce Holdings plc Annual Report 2016
Summary
We are a leading engine maker for the military transport and patrol market and
the second largest provider of defence aero-engine products and services globally.
Rolls-Royce has 16,000 defence engines in service with 160 customers in over
100 countries.
DEFENCE
AEROSPACE
Key highlights
UNDERLYING REVENUE MIX
Underlying revenue up slightly; modest
growth in OE.
Underlying profit before financing down
8%; reflecting adverse product mix and
costs related to the TP400 programme,
partially offset by through-life cost-
savings on a major EJ200 contract.
Investing to enhance manufacturing,
aftermarket service and closer proximity
to core customers.
OE revenue
Services revenue
2017 outlook: revenue steady; margin
and profit expected to soften from
recent levels.
UNDERLYING REVENUE BY SECTOR
The F-35 Lightning II employing the
Rolls-Royce LiftSystem®, demonstrated
its vertical landing capabilities in the
UK for the first time in 2016.
Combat
Transport and patrol
Other
Operational review
Financial overview
Underlying revenue of £2,209m was up
slightly on the prior year. Higher volumes
for TP400 production, together with
increased Adour engine deliveries, helped
original equipment (OE) revenues increase
3%. Service revenues were stable, with lower
demand for spare parts offset by increased
revenues from long-term Eurofighter
Typhoon and C-130J service contracts.
Gross margin declined by £49m, reflecting
lower sales of spare parts, an adverse
change in OE product mix, additional
expenditure of £31m on the TP400
programme and higher payroll costs.
Retrospective contract margin
improvements totalled £82m, £5m lower
than prior year, but ahead of early
expectations. Of this, around half relates
to delivering significant cost saving
benefits on the largest Eurofighter
Typhoon contract, which triggered a
cost-saving incentive award.
40%
60%
33%
45%
22%
25
While overall R&D costs were slightly lower
than the prior year, the business continued
to invest in future programme development
and the Indianapolis transformation.
Restructuring costs were lower due to
reduced level of severance costs and reversal
of a provision for the closure of the defence
facility at Ansty, UK, through better cost
recovery than expected. Underlying
commercial and administrative costs and
other costs were similar to prior year.
Profit before financing of £384m was 8%
lower than the prior period, driven by the
lower gross margin.
Investment and business
development
Order intake for 2016 was £1.5bn (2015:
£1.7bn), reflecting significant follow-on
export orders being delayed to 2017.
Significant activities in 2016 included:
winning orders for the F-35B LiftSystem™;
increased MRTT engines for A330 aircraft;
and contract renewals for services.
Deliveries of engines were slightly higher
in 2016, driven by increased units for TP400
and Adour export. Services revenues were
steady, reflecting higher flying hours from
newer EJ200, F405 Adour and AE 2100
powered aircraft in the UK, North America
and the Middle East.
The first T56 Series 3.5 technology insertion
kits delivered to the US Air Force (USAF)
for its legacy Hercules C-130 fleet have
validated the expected fuel saving and
performance benefits, prompting growing
interest in the upgrade.
The UK and French Governments also
committed to the €2bn UK-France Unmanned
Combat Air System (FCAS) unmanned combat
air system programme in December, enabling
progress through to the demonstrator phase
of the programme in 2017. Our LibertyWorks
development unit was selected to provide
the vertical lift propulsion for the new DARPA
VTOL X-Plane. The unit also launched an
infrared footprint suppression module,
reflecting our diverse and cutting-edge
technology capability.
Within the Services portfolio, the support
contract for the US C-130J transport
fleet was renewed and we signed a
memorandum of understanding with
Pratt & Whitney to extend support for
the UK’s new F-35B Lightning fleet beyond
the Rolls-Royce LiftSystem.
This strategy of strengthening our service
offerings closer to our major customers saw
the opening of new on-base Service Delivery
Centres in the UK (at RAF Brize Norton) and
in the US (at Kingsville, Texas), as well as a
new joint engine support facility for the
USAF Global Hawk fleet.
ORDER BOOK
£3.9bn
As part of the TP400 consortium, the focus
was on delivering solutions to improve
the on-wing reliability of the GE-Avio
gearbox. This included an on-wing exchange
procedure which has greatly helped to
reduce the service time and backlog.
Transformation milestones were achieved
as planned, including completion of the first
production cell as part of the investment
activity in Indianapolis. Further
manufacturing changes are due to come
on stream in the first half of 2017.
Defence Aerospace outlook
While revenues should remain steady,
margins are expected to come under
pressure from the essential investments
in efficiency and long-term growth. These
reflect important product development and
manufacturing transformation initiatives
as the business looks to capitalise on its
strong positions, particularly in combat and
transport & patrol, and the absence of
significant incentive arrangements under
remaining long-term service agreements. As
a result, margins and profits are expected to
soften from the recent levels.
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
Research and development costs
Joint ventures and associates
Underlying profit before financing
Change
Underlying operating margin
* Translational foreign exchange impact.
2015
4,316
649
2,035
801
1,234
579
28.5%
(124)
(8)
(73)
19
393
19.3%
Underlying
change
(391)
12
17
+1%
22
+3%
(5)
–
(49)
-260bps
(3)
18
5
(4)
(33)
-8%
-180bps
Foreign
exchange*
1
–
157
+8%
67
+8%
90
+7%
34
(7)
–
(3)
–
24
+6%
2016
3,926
661
2,209
+9%
890
+11%
1,319
+7%
564
25.5%
(134)
10
(71)
15
384
-2%
17.4%
Rolls-Royce Holdings plc Annual Report 2016BUSINESS REVIEWBUSINESS REVIEWSTRATEGIC REPORT 26
Market review
Rolls-Royce is a market leader in defence
aero engines for military transport and
patrol aircraft and has strong positions in
other sectors, including combat aircraft,
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.
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.
Improving fuel
efficiency
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
purchase, 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
OE and services spend.
Revenue has historically been broadly balanced
between OE sales and aftermarket services,
biased towards the latter.
Business risks
•
•
•
•
If we experience a major product failure
in service, then this could result in loss of
life and have a major, negative impact on
our reputation.
If global defence spending experiences
a further downturn, then our financial
performance may be impacted.
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.
•
•
•
•
GE, Pratt & Whitney, Honeywell, and Safran
are our main competitors 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 work with our EJ200 engine partners on
campaigns for Eurofighter Typhoon export
sales opportunities as well as new indigenous
combat programmes.
Barriers to entry are high and we do not
envisage the competitive landscape changing
significantly in the near future.
Opportunities
•
•
•
•
•
The UK’s commitment to the next phase of
the FCAS programme presents a
next-generation combat development
opportunity for Rolls-Royce.
Our LiftFan system for the F-35B is just
entering service and we expect to deliver
over 400 systems in the next 20 years.
Developing markets, such as India and Turkey,
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®.
Technical advances for our T56 engines on legacy Lockhead Martin C-130 and P-3 aircraft
have led to significant improvements in fuel economy. The US National Oceanic and
Atmospheric Administration (NOAA) was the launch customer and installed T56 engine
upgrade kits, known as the Series 3.5, on its two ‘Hurricane Hunter’ P-3 aircraft. The result:
fuel economy improvement of 12% on average after more than 3,000 engine flight hours
through and around hurricanes. The USAF completed a Series 3.5 installation on the first
of its fleet of C-130H aircraft and early flights showed similar results. The USAF will roll out
the upgrades into C-130s operated by USAF Reserve and Air National Guard units, leading
the way for installation of the Series 3.5 kits into the global fleet of hundreds of transport
aircraft flown by other customers around the world.
READ MORE AT WWW.ROLLS-ROYCE.COM
Rolls-Royce Holdings plc Annual Report 2016STRATEGIC REPORT BUSINESS REVIEW
Rolls-Royce Holdings plc Annual Report 2016
BUSINESS REVIEW 27
27
Summary
Power Systems is a leading provider of high-speed and medium-speed reciprocating
engines, complete propulsion systems and distributed energy solutions as well as
key engine components including fuel injection systems and turbochargers. The
business serves the marine, defence, power generation and industrial markets
through its core brands MTU, MTU Onsite Energy and L’Orange.
POWER
SYSTEMS
Key highlights
UNDERLYING REVENUE MIX
Underlying revenue 1% lower; growth in
power generation and industrial markets
offset by reduction in commodity and oil
price driven sales.
Underlying profit before financing 14%
lower; volume reduction and adverse
product mix.
Good start to transformation with new
leadership in place to drive further
performance improvement.
2017 outlook: steady, healthy order
book in key segments offsetting some
challenging markets.
A 20-cylinder MTU Series 4000 engine
powers a Liebherr mining truck.
OE revenue
Services revenue
68%
32%
UNDERLYING REVENUE BY SECTOR
Marine
Energy
Industrial
Defence and other
33%
33%
21%
13%
Operational review
Financial overview
Underlying revenue of £2,655m was 1%
lower at constant currency (11% higher
including the impact of translational foreign
exchange). Overall original equipment (OE)
revenue declined 1%. Growth in sales of
diesel and gas products to power generation
and industrial customers offset reductions
within markets where demand is linked to
low oil and commodity prices, and reduced
activity in naval markets.
Service revenues reduced 2%, largely
reflecting weaker marine medium-speed
markets, once again reflecting low oil prices.
Gross margin reduced by £28m in absolute
terms and by 90 basis points, to 26.6% (2015:
27.5%) with good progress on cost reduction
generated from transformation activity
offsetting some of the impact of volume
reduction, adverse changes in product mix
and a reduction in the discount rate applied
to the warranty provision.
Overall, underlying profit declined £27m or
14%, led by the reduction in gross margin.
Costs below gross margin remained
broadly unchanged on an underlying basis.
The £9m increase in commercial and
STRATEGIC REPORT
28
STRATEGIC REPORT BUSINESS REVIEW
Rolls-Royce Holdings plc Annual Report 2016
administrative costs was offset by a £5m
reduction in R&D reflecting a more focused
approach to future product development
activity together with reduced underlying
restructuring costs. An exceptional
charge of £45m has been taken for
restructuring activity.
Investment and business
development
Power Systems’ customers span a range
of markets from power generation and
defence to marine, industrial and
construction markets. This end-market
diversity has enabled the business to
mitigate some of the weak market
environments and as a result, the order book
ended the year at £1.8bn (2015: £1.9bn).
2016 order intake of £2.4bn (2015: £2.5bn)
was 2% down at constant currency, with
the year-on-year reduction being mainly in
oil & gas and commodity-related markets
including marine, together with lower
government project orders. This was offset
by improvements within power generation,
agricultural and industrial markets.
Within power generation markets, we
delivered 200 gensets (a package of engine
and generator) to the Asian VPower Group,
one of our strategic partners in the region. We
have continued to strengthen our position in
the growing market for back-up power for
larger mission-critical applications.
Order intake later in the year was healthy for
solutions to support data systems in both
Europe and the US and also for independent
power customers. We have also agreed to
establish a 50/50 joint venture with Yuchai
Machinery Company Ltd for the production
under licence of MTU Series 4000 diesel
engines in China, targeting the Chinese
off-highway market.
Demand for our marine products remained
good. Naval orders included gensets for the
UK Royal Navy’s Type 26 Global Combat
Ship and a supply contract for the Italian
Navy relating to a new multi-purpose
ocean-going patrol vessel. Within the land
defence markets, there was a follow-up
order for use in a German armoured vehicle.
In other areas, we continued to attract
new customers in new regional markets
including Japanese high-tech crane producer
Kato. We also made progress within the
rail market in both Europe and Asia. This
included a notable order from Hitachi Rail
Europe for over 100 MTU PowerPacks® for
use in the UK and an order to remanufacture
(an in-house process, known as Reman, to
refurbish and extend the life of existing
systems) around 400 MTU PowerPacks
for Transdev Group in Germany.
Innovation was again strong with some
notable new products coming to market in
the year. We launched new advanced diesel
and gas propulsion systems which meet
new IMO and EPA emissions standards.
ORDER BOOK
£1.8bn
At the same time, we launched advanced
propulsion systems for the construction
and industrial markets which satisfy new
emission standards in those industries.
Finally, we launched a hybrid power pack
and energy pack battery system for the
rail market.
Power Systems also made progress with
the transformation programme, targeting
reductions in product costs as well as
strengthening sales and service resources
and leveraging digital capabilities to develop
value adding services.
Power Systems outlook
The outlook for Power Systems remains
steady. The business finished the year with
a strong order book for several of its key
markets. Whilst some markets, particularly
those impacted by oil and commodity prices,
remain difficult, we expect the business to
deliver modest growth in revenue and profit
in 2017.
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
Research and development costs
Joint ventures and associates
Underlying profit before financing
Change
Underlying operating margin
2015*
1,928
2,385
1,618
767
656
27.5%
(296)
(4)
(162)
–
194
8.1%
Underlying
change
(113)
(25)
-1%
(9)
-1%
(16)
-2%
(28)
-90bps
(9)
4
5
1
(27)
-14%
-110bps
Foreign
exchange**
–
295
+12%
201
+12%
94
+12%
79
(35)
–
(20)
–
24
+12%
2016
1,815
2,655
+11%
1,810
+12%
845
+10%
707
26.6%
(340)
–
(177)
1
191
-2%
7.2%
* 2015 figures have been restated as a result of costs previously reported in ‘cost of sales’, being reclassified as ‘other commercial and administrative costs’ to ensure consistent
treatment with 2016.
** Translational foreign exchange impact.
Rolls-Royce Holdings plc Annual Report 2016
BUSINESS REVIEW
29
Market review
The markets served by Power Systems are
driven by long-term global trends such as
increasing population growth, rising
demand for energy, natural resources and
food as well as stricter emissions legislation.
Despite an unprecedented downturn in
commodity prices in recent years, the
utilisation rates in the exploration and
production industry are showing some
early signs of recovery. Demand for
high-specification system solutions such as
power for data centres and rail power packs
has proved robust. We remain confident of
long-term growth in our principal markets.
Power Systems continues to invest in new
technology, improved customer solutions
and aftermarket services to address market
developments and new requirements.
Key Rolls-Royce differentiators
Technology leadership and
reputation with market-leading
performance and system
solutions; new product innovation
(eg. hybrid/e-drive and mobile
gas solutions); and high level of
customisation.
Market dynamics
Competition
•
•
•
•
•
•
•
Population growth and increasing urbanisation
are driving demand for clean, efficient power
and infrastructure investments.
Global GDP development with particular
growth in Asia and Africa.
Increasing global and regional trade and
transport of goods.
Geopolitics and migration are driving modest
defence budget growth (1-2%) in NATO
countries with higher growth in emerging
markets and the Middle East.
Increasing focus on renewable energy
sources requires decentralised and clean
energy solutions (eg. back-up power).
Increasing environmental legislation and
efficiency requirements help drive emission
and efficiency technologies.
Current weak environment in certain end
markets (eg. oil & gas and mining), due to
current low oil and commodity price levels.
Business risks
•
•
•
•
Economic: some of our markets, especially
oil & gas and mining, continue to be impacted
by low commodity prices – this has been
partially offset by a resilient performance in
other sectors (eg. power generation and rail).
Political: increasing political tensions and
uncertainties, and remaining sanctions limit
levels of global trade and customer access in
certain regions.
Competitive: increasing activities of Asian
competitors and new market entrants in our
core power range of MTU Series 4000 engines
potentially influence volumes and margins.
Technological: emerging new technologies
with falling costs (eg. battery and solar) might
influence existing solutions such as back-up
power generators.
•
•
•
•
•
Fragmented competitor landscape in
off-highway engine markets which varies
depending on specific market segments –
multiple players although a few dominate.
Continuing industry consolidation results
in strong, large-scale and integrated players.
Expansion of western competitors in our
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.
Opportunities
•
•
•
•
•
•
•
Regional growth, especially in China,
India and South East Asia.
Leveraging partnerships to expand
geographical reach and extend product
scope in core market segments.
Stricter global emission legislation
strengthens demand for emission and
efficiency technologies (eg. exhaust
after treatment).
Enhancement of system competence and
solutions to create customer value through
optimised total system functionality and
performance.
Growth in service and digital offerings
to serve complete lifecycle solutions and
improve customer operations.
Growth through extended key engine
component offering, including turbochargers.
Leveraging trend towards increasing
electrification through strengthening
electric capabilities (eg. hybrid
and diesel-electric propulsion systems).
MTU drives for key
British railway projects
The Intercity Express Programme (IEP) is one of the biggest transport projects in the UK:
122 new high-speed trains built by Hitachi Rail Europe are scheduled to go into service
on the East Coast Main Line and Great West Main Line routes from 2017.
Rolls-Royce is supplying more than 330 MTU PowerPacks each producing up to
700 kilowatts for these super express trains. At the heart of the drive system is the
state-of-the-art, fuel efficient MTU 12V 1600 R80L engine, which meets the stringent EU
Stage IIIB emission standard thanks to an integrated selective catalytic reduction system.
MTU will maintain and guarantee the availability of the engines throughout the entire
27-year lifetime of Hitachi’s contract for IEP.
READ MORE AT WWW.ROLLS-ROYCE.COM
STRATEGIC REPORT
30
30
STRATEGIC REPORT BUSINESS REVIEW
Rolls-Royce Holdings plc Annual Report 2016
Summary
Marine is a leading provider of propulsion and handling solutions for the maritime
offshore, merchant and naval markets. The offerings range from standalone
products to complex integrated systems including ship design. The business has
more than 4,000 customers, with 70 naval forces and over 30,000 commercial
vessels using our equipment.
Key highlights
UNDERLYING REVENUE MIX
Underlying revenue down 24%; weak
offshore markets impacting both OE
and service revenues.
Underlying profit before financing
negative; lower volumes and reduced
overhead absorption.
Net restructuring benefits from current
and legacy programmes starting to
improve performance.
£200m impairment of goodwill reflecting
a more cautious outlook; further
weakness in offshore oil & gas markets
offset by ongoing cost improvements as
we refocus the business.
OE revenue
Services revenue
57%
43%
UNDERLYING REVENUE BY SECTOR
The Bergensfjord, a ferry operating between
Norway and Denmark, has won awards for
environmental performance thanks to four
Bergen pure gas engines and a Rolls-Royce
propulsion and steering system.
Offshore
Merchant
Naval
47%
28%
25%
MARINE
Operational review
Financial overview
Underlying revenue of £1,114m was 24%
lower on a constant currency basis. Within
this, original equipment (OE) and services
revenues were 26% and 21% lower
respectively. This reflected continued
weakness in offshore and merchant,
as ship owners deferred overhaul and
maintenance on the back of reduced
utilisation of their vessels.
Gross margin was £236m, an improvement
of 170 basis points versus 2015, but £(44)m
lower in absolute terms, as a result of the
lower volume. The improved gross margin
percentage partly resulted from cost
reduction actions. Overall this resulted
in a net loss of £27m.
The announcement in December 2016 of
further organisational changes and
headcount reduction in 2017 has led to an
exceptional £5m restructuring charge.
In addition, £200m of the Group impairment
of goodwill was in Marine and mainly
related to the acquisition of Vickers in 1999.
Rolls-Royce Holdings plc Annual Report 2016
BUSINESS REVIEW
31
Investment and business
development
Overall, the Marine order book declined
29% during the year at constant currency,
reflecting adjustments for a number of
postponed or cancelled orders and very
weak offshore markets. Orders for new
vessels, projects and services were all
sharply lower than 2015 and, as a result,
order intake was only £715m, 29% down
on the previous year at constant currency.
The offshore market was extremely
challenging, driven by a low oil price and
reduced capital expenditure within the
upstream oil exploration and related
services sectors. Several merchant segments
were also subdued, reflecting generally
weak conditions in the global marine
industry. The business focused on using
its strengths as a system integrator to
leverage across adjacencies, including
designing and equipping the UK’s new polar
research ship, RSS Sir David Attenborough.
It also landed a major deal to design and
equip Hurtigruten’s new explorer cruise
ships, along with battery solutions to make
full electric propulsion possible.
The business announced a contract to supply
the world’s first automatic crossing system
to ferry operator, Fjord 1, and also launched
our new Azipull Carbon thruster with yacht
builder Benetti, reflecting the increasing
importance of newer technologies. The fishing
segment remained strong, with contracts won
for a range of vessels. The naval business was
focused on further development work and
supporting customers across Asia, Europe and
the US. These included supporting successful
sea-trials for the US Navy’s most advanced
warship the USS Zumwalt, further MT30
orders for new Italian helicopter landing craft
and selection by the New Zealand Navy for
ship design of its MSC programme.
The Marine business continues to lower its
cost base and build flexibility into the
organisation, particularly across back-office
and operational activities. The restructuring
programmes announced in 2015 have led to
a reduction of around 1,100 headcount with
£65m of annual savings recognised from 2017.
Reflecting the ongoing subdued and
increasingly cost-conscious market
environment, in December further
restructuring to take place in early 2017
was announced, targeting annualised
savings of around £50m. This included a
further headcount reduction of around 800
across operations and back-office functions
as the business continues to shrink
footprint, reduce indirect headcount, and
consolidate manufacturing activity.
At the same time, investments were made
in the strategic enablers of the future,
including upgrading our azimuth thruster
production facility in Rauma, Finland.
The £44m project will create a state-of-the-
art production facility for one of our most
important product groups.
ORDER BOOK
£905m
The pace of technology change in the sector
is accelerating, and we continue to invest in
pioneering research into ship intelligence
technologies focused on data-driven,
value-added services that facilitate full
ship automation in the long term.
Marine outlook
Overall, the outlook for Marine remains
cautious. We expect that the market will
continue to feel the impact of low oil prices,
and the general overcapacity in several
segments will take time to reach
equilibrium. This will impact the demand
for our products and services. We will
sustain our active cost reduction
programmes, focusing on manufacturing,
supply chain and overhead costs, in order
to drive a more competitive business
adapted to the current market conditions.
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
Research and development costs
Underlying profit before financing
Change
Underlying operating margin
* Translational foreign exchange impact.
2015
1,164
1,324
773
551
260
19.6%
(201)
(16)
(28)
15
1.1%
Underlying
change
(337)
(312)
-24%
(198)
-26%
(114)
-21%
(44)
+170bps
(6)
19
(11)
(42)
-280%
-380bps
Foreign
exchange*
78
102
+8%
56
+7%
46
+8%
20
(17)
(1)
(2)
–
2016
905
1,114
-16%
631
-18%
483
-12%
236
21.2%
(224)
2
(41)
(27)
-280%
-2.4%
STRATEGIC REPORT 32
STRATEGIC REPORT BUSINESS REVIEW
Rolls-Royce Holdings plc Annual Report 2016
Market review
We forecast long-term growth
opportunities across our commercial
and naval market segments. Short-term
performance will continue to be impacted
by the weakness in offshore oil & gas
exploration.
Key Rolls-Royce differentiators
Unique domain knowledge,
portfolio of products with
overlaying levels of systems
integration; joint value proposition
within naval markets with Power
Systems; continuous maritime
innovation and technology
leadership, and leadership in
emerging digital marine markets.
Stealth power
The commissioning of the world’s most
advanced naval ship, USS Zumwalt, took
place in October. Powered by two
Rolls-Royce MT30 main gas turbine
generators and two auxiliary turbine
generators, and driven by two fixed
pitch Rolls-Royce propellers, the USS
Zumwalt is an all-electric ship at the
cutting edge of naval technology.
Rolls-Royce technicians joined the ship
throughout an extensive period of
sea trials to ensure a successful entry
into service.
READ MORE AT WWW.ROLLS-ROYCE.COM
Market dynamics
•
•
•
•
•
•
•
•
•
We operate in three key markets – offshore,
merchant and naval – with growth
fundamentally driven by GDP, trade, oil
price and defence spending.
Population growth, urbanisation and
industrialisation support growth in demand
for energy and trade, in turn driving demand
for offshore and merchant vessels.
Exploration and production spending cuts
result in the offshore segment experiencing
very low fleet utilisation, declining charter
rates, lay up of vessels (impacting services
revenue) and increased scrapping.
We expect exploration activity to return to
growth over time to compensate for the
depletion rate of current wells. However, there
is unlikely to be a positive impact in 2017.
Merchant segment facing overcapacity and
weak earnings in most cargo segments;
however, good opportunities in cruise and
passenger vessels, and a stable tug and
workboat market.
Expect strong efficiency and cost focus when
merchant and offshore markets rebound.
Naval market is forecast to remain stable as
defence expenditure remains consistent.
Overcapacity in shipbuilding and vessel fleets
leading to consolidation at customer level.
Asian yards are expected to continue playing
a major role in shipbuilding with further
increased regional vessel ownership,
particularly in China.
•
Continuing trend of supply chain moving
east to where the majority of ships are built.
Business risks
•
•
•
•
Markets: continuing low oil price results in
sustained pressure in the offshore market
with customer groups reducing costs and
capital commitments, thereby delaying
market recovery.
Competition: competitors react to a depressed
market by cutting costs, pricing aggressively
and partnering with other players.
Contracting: order delays and cancellations
impact our revenue, cash and profit but also
put our supply chain under financial stress.
Customer and supply chain financial
pressure: continuing market downturn
leaves some customers and suppliers
exposed to consolidation and/or market exit.
•
•
Technology: failure to invest in the
right technologies to meet customer
future demand.
Product failure: risk of failure in the field
resulting in the need for intervention to
rectify the issue with financial and/or
reputational consequences.
Competition
•
•
•
•
Array of competitors is diverse but falls
generally into two main groups: systems
integrators with broad portfolios and
specialists in narrow product categories.
Competitors reacting to current market
dynamics with cost reduction programmes.
Cross-industry electrical specialists
increasingly active in several vessel
segments to capitalise on marine vessel
electrification trend.
Key competitors looking to grow into digital
offerings with investment and niche
acquisitions.
•
Increased pricing pressure with competition
for fewer orders in challenging market.
Opportunities
•
•
•
•
•
•
•
•
Continue growth in merchant segments
(eg. ferries, tugs and short-sea cargo) and
adjacent offshore markets (eg. special
purpose and offshore wind) with more
advanced offerings.
Continue to leverage the joint value
proposition in naval markets together with
Power Systems.
Leverage local partnerships to generate
regional growth in Asia, especially China.
Owners are increasingly interested in
solutions to improve efficiency and
environmental impact as well as safety
in more diverse and complex operations.
Increasing role of data and analytics in
optimising asset operations and
reducing costs.
Growth in intelligent shipping with
greater integration of propulsion and
electric systems.
Increased modularisation and
standardisation as well as advanced
manufacturing methods.
Increased uptake of long-term service
agreements to create greater value within
the market.
33
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 11% higher;
strong revenues led by increased
submarine work.
Underlying profit before financing 37%
lower; adverse margin mix in submarine
projects, lower R&D credit than 2015 and
R&D spend on small modular reactor
concept development.
2017 outlook: focus on further delivery
improvements and investing to address
future opportunities.
OE revenue
Services revenue
46%
54%
UNDERLYING REVENUE BY SECTOR
The Royal Navy Astute class is the latest
submarine powered by a Rolls-Royce
designed nuclear propulsion unit.
Submarines
Civil nuclear
79%
21%
Crown copyright 2013. Contains public sector information licensed under the Open Government Licence v3.0
NUCLEAR
Operational review
Financial overview
Underlying revenue increased by 11%
to £777m, led by growth in several key
programmes in the submarines business,
including support for the next generation
Dreadnought class submarines
(the successor to the Vanguard class),
various refuelling projects and
decommissioning activities. Volumes
on key civil instrumentation and control
programmes in both France and Finland
were also good.
Gross margin was lower at 15.6%, reflecting
the revenue mix favouring lower margin
government-led submarine projects. Below
gross margin, the change in treatment of
R&D credits, which significantly impacted
the full year in 2015, produced an R&D credit
of £7m in 2016. This was offset by additional
costs to support the higher volumes and to
improve delivery performance. In addition,
there were extra payroll costs, as well as
additional R&D to support the initial design
phase for small modular reactors (SMRs).
As a result, underlying profit before
financing excluding the R&D credit was
£37m at constant currency, 27% below
the prior year (2015: £51m adjusted for
the R&D credit). After the R&D credit and
including a £1m foreign exchange benefit,
underlying profit was £45m.
Rolls-Royce Holdings plc Annual Report 2016BUSINESS REVIEWSTRATEGIC REPORT
34
ORDER BOOK
£1.8bn
Nuclear outlook
The long-term outlook for Nuclear remains
positive, supported by confirmation from the
UK Government of the ongoing investment in
the Dreadnought class submarines. Together
with renewed activities in the civil market,
particularly in the UK and China, these
provide encouraging growth opportunities.
Performance in 2017 will be impacted by the
loss of R&D credits on investments and
further modest increases in the investment in
SMR technology. As a result, profit is expected
to be around half that achieved in 2016.
Investment and business
developments
Order intake of £385m was 8% higher than
2015. Notwithstanding, the closing order
book of £1.8bn was 17% below 2015,
reflecting the business working through
the large multi-year orders, particularly
in submarines, received in prior years.
Submarine activities focused on continuing
our support to the Royal Navy’s current
operational fleet of nuclear-powered
submarines, as well as delivery of
propulsion systems for the remaining
Astute class submarines and for the
Dreadnought programme. As well as
implementing a range of performance
improvement initiatives during the year,
we also completed delivery of the nuclear
propulsion system for the fourth (of seven)
Astute class submarine and have made
good progress both in the preparation for
the refuelling programme of HMS
Vanguard and for decommissioning the
Naval Reactor Test Establishment in
Scotland. In conjunction with the UK’s
Ministry of Defence and BAE Systems,
we have also advanced discussions around
a long-term alliance framework for the
Dreadnought programme. Once concluded,
this new framework should ensure that the
delivery structure and commercial benefits
are clarified for all key partners in this
£31bn investment programme.
The civil nuclear business successfully
concluded the first phase of its major
instrumentation and control modernisation
programme at Fortum's Loviisa plant in
Finland, using our Spinline® technology.
It also continued with its upgrade
programme across the French civil nuclear
fleet as part of a multi-year contract.
The UK government announced final
approval for the Hinkley Point C nuclear
power station in September, where our
Nuclear business was awarded preferred
bidder status for contracts covering waste
treatment systems, heat exchangers and
diesel generators.
The business also announced the
strengthening of the strategic collaboration,
started in 2014, with the China National
Nuclear Corporation, including engineering
and training services. The Chinese market is
expected to sustain strong growth and we
are well positioned with relevant technology.
During the year we started an R&D
programme, together with a number of
partners, to scope out the initial design
phase for SMRs. These smaller, more flexible
nuclear power generation units offer the
potential for a more flexible power
generation in future decades and directly
build on the knowledge and specialist
skills of our Nuclear business. Any significant
further development work will be
dependent on government support for
this technology.
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
Research and development costs
Underlying profit before financing
Change
Underlying operating margin
* Translational foreign exchange impact.
2015
2,168
687
251
436
111
16.2%
(53)
(2)
14
70
10.2%
Underlying
change
(379)
74
+11%
95
+38%
(21)
-5%
6
-80bps
(14)
2
(20)
(26)
-37%
-440bps
Foreign
exchange*
1
16
+2%
8
+3%
8
+2%
4
(3)
–
–
1
+1%
2016
1,790
777
+13%
354
+41%
423
-3%
121
15.6%
(70)
–
(6)
45
-36%
5.8%
Rolls-Royce Holdings plc Annual Report 2016STRATEGIC REPORT BUSINESS REVIEW 35
Market review
Respected global energy forecasts continue
to predict that nuclear power will play a
significant role in providing low-carbon,
continuous, secure power. More than
80% of today’s civil nuclear capacity is in
the Organisation for Economic Co-operation
and Development (OECD) member
countries; however non-OECD countries,
including some new to nuclear, will account
for the bulk of growth whilst mature
markets will focus on current operations
and life extension.
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.
Small modular reactors
Market dynamics
Competition
•
•
•
•
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.
In the US, lower energy prices are putting
nuclear operating costs under pressure.
Market conditions have changed, notably
the slowdown in western new build
programmes. China and Russia dominate
large reactor new build projects.
Business risks
•
•
•
•
•
If we experience a major product failure in
service, then this could result in loss of life
and significant damage to our reputation.
Delivery: failure to meet customer
expectations or regulatory requirements.
Markets: if civil nuclear markets do not grow as
anticipated due to political or other external
events then business will be diminished.
Customer strategy: if programmes are
cancelled as a result of strategic decisions, or
vertical integration by reactor vendors, then
future revenues will be diminished.
If we suffer a major disruption in our supply
chain, then our delivery schedules may be
delayed, damaging our financial performance
and reputation.
•
•
•
In civil nuclear the competitor landscape is
fragmented and comprises reactor vendors,
original equipment manufacturers,
diversified industrial companies and nuclear
operators in service.
Plant operators increasingly outsource
service activities.
Key competitors and independent data
service providers are investing and acquiring
capabilities to further enhance their
digital offerings.
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.
Exploiting our historical data acquisition
coupled with digital investment to launch a
digital service portfolio that enables growth
into asset management.
Our capabilities in nuclear can be applied
to the development of SMRs for civil
power stations.
SMRs can provide safe, reliable and affordable low-carbon electricity. An SMR
programme presents the opportunity to create a UK nuclear plant through the design
phase, to construction and delivery; establishing a sustainable skills base and supply
chain capability that demonstrates the UK’s overall nuclear excellence to international
export markets. Compared with current large-scale reactors, SMRs can deliver
significant programme risk reduction through controlled offsite modular
manufacturing, compact passive safety systems and easier financing.
With our unique position and over 50 years’ experience in developing nuclear
technologies, Rolls-Royce has the capability to develop proprietary SMR nuclear reactor
technology and bring together its UK industrial and academic partners to deliver an
SMR plant solution which will offer lower build, through-life and decommissioning
costs, as well as increased regulatory and programme certainty.
A Rolls-Royce led UK consortium offers a significant opportunity to position the UK
as a global leader in innovative nuclear technologies.
READ MORE AT WWW.ROLLS-ROYCE.COM
Rolls-Royce Holdings plc Annual Report 2016BUSINESS REVIEWSTRATEGIC REPORT
36
STRATEGIC REPORT FINANCIAL REVIEW
Rolls-Royce Holdings plc Annual Report 2016
Financial review
UNDERLYING INCOME STATEMENT
Year to 31 December
£m
Revenue – 2015 exchange rates
Translation to 2016 exchange rates
Revenue
Gross profit
Commercial and administrative costs
Restructuring
Research and development costs
Share of results of joint ventures and associates
Profit before financing at 2015 exchange rates
Translation to 2016 exchange rates
Profit before financing
Net financing
Profit before tax
Tax
Profit for the year
Earnings per share (EPS)
Payment to shareholders
Gross R&D expenditure
Net R&D charge
2016
13,058
725
13,783
2,626
(1,096)
2
(812)
107
827
88
915
(102)
813
(261)
552
30.13p
11.70p
(1,331)
(862)
2015*
13,354
13,354
3,203
(1,025)
(39)
(765)
118
1,492
1,492
(60)
1,432
(351)
1,081
58.73p
16.37p
(1,240)
(765)
SEGMENTAL ANALYSIS
Year to 31 December
£m
Civil Aerospace
Defence Aerospace
Power Systems
Marine
Nuclear
Other
Intra-segment
Central costs
Group at 2015
exchange rates
Translation to 2016
exchange rates
Group
Revenue
Gross profit
Profit before financing
2016
6,906
2,052
2,360
1,012
761
35
(68)
2015
6,933
2,035
2,385
1,324
687
96
(106)
Change
-27
+17
-25
-312
+74
-61
+38
2016
1,129
530
628
216
117
6
–
2015
1,526
579
656
260
111
64
7
Change
-397
-49
-28
-44
+6
-58
-7
13,058
13,354
-296
2,626
3,203
-577
725
13,783
13,354
+429
422
3,048
3,203
-155
2016
326
360
167
(27)
44
1
–
(44)
827
88
915
2015
812
393
194
15
70
52
7
(51)
1,492
-665
1,492
-577
* 2015 figures have been restated as a result of £21m of costs previously reported in ‘cost of sales’, being reclassified as ‘other commercial and administrative costs’ to ensure consistent
treatment with 2016.
Underlying revenue and underlying profit
before financing are discussed in the Review
of 2016 (page 7), the Financial summary
(page 16) and the Business reviews (pages
18 to 35).
Underlying financing costs increased by
£42m to £102m. Net interest payable
increased by £4m to £63m. Other underlying
financing costs increased by £38m to £39m,
principally due to the non-recurrence of
an underlying foreign exchange gain
recognised in 2015, which arose from the
realised gains on foreign exchange contracts
settled to translate overseas dividends
into sterling.
reasons for the increase are the
non-recognition of deferred tax assets on
losses in Norway, which reflects the current
uncertainty in the oil & gas market, and
a different profit mix with more profits
arising in countries with higher tax rates.
Underlying taxation was £261m (2015:
£351m), an underlying rate of 32.1%
compared with 24.5% in 2015. The primary
Underlying EPS decreased 49% to 30.13p,
reflecting the reduction in profit for
the year.
Change
-296
+429
-577
-71
+41
-47
-11
-665
-577
-42
-619
+90
-529
-28.60p
-4.67p
-91
-97
Change
-486
-33
-27
-42
-26
-51
-7
+7
Rolls-Royce Holdings plc Annual Report 2016
FINANCIAL REVIEW
37
At the Annual General Meeting on 4 May
2017, the Directors will recommend an issue
of 71 C Shares with a total nominal value of
7.1 pence for each ordinary share. Together
with the interim issue on 4 January 2017
of 46 C Shares for each ordinary share with
a total nominal value of 4.6 pence, this is the
equivalent of a total annual payment to
ordinary shareholders of 11.7 pence for
each ordinary share. Further details are
included on page 186.
Reported results
The changes in 2016 resulting from
underlying trading are described in the
previous sections.
Consistent with past practice and IFRS,
we provide both reported and underlying
figures. As the Group does not hedge
account in accordance with IAS 39
Financial Instruments, we believe underlying
figures are more representative of the
trading performance, by excluding the
impact of year-end mark-to-market
adjustments, principally the USD:GBP
hedge book, which has had a significant
impact on the reported results in 2016 as
the USD:GBP rate has fallen from 1.48 to
1.23 and the EUR:GBP has fallen from
1.36 to 1.17. The adjustments between
the underlying income statement and
the reported income statement are set
out in note 2 to the Consolidated financial
REPORTED INCOME STATEMENT
Year to 31 December
£m
Revenue
Gross profit
Other operating income
Commercial and administrative costs2
Research and development costs
Share of results of joint ventures and associates
Operating profit
(Loss)/profit on disposal of businesses
Profit before financing
Net financing
(Loss)/profit before tax
Tax
(Loss)/profit for the year
Earnings per share (EPS)
2016
14,955
3,048
5
(2,208)
(918)
117
44
(3)
41
(4,677)
(4,636)
604
(4,032)
(220.08)p
20151
13,725
3,277
10
(1,070)
(818)
100
1,499
2
1,501
(1,341)
160
(76)
84
4.51p
1 2015 figures have been restated as a result of £11m costs previously reported in ‘cost of sales’, being reclassified
as ‘commercial and administrative costs’ to ensure consistent treatment with 2016.
2 In 2016, ‘commercial and administrative costs’ include £671m for financial penalties from agreements with
investigating bodies and £306m for the restructuring of the UK pension schemes.
statements. This basis of presentation has
been applied consistently.
increased profit before financing by £570m
(2015: £265m).
The most significant items included in
the reported income statement, but not
in underlying, are summarised below.
Profit before financing
The impact of measuring revenues and
costs at spot rates rather than rates achieved
on hedging transactions. This increased
revenues by £1,172m (2015: £371m) and
The effects of acquisition accounting £115m
(2015: £124m), principally relating to the
amortisation of intangible assets arising on
the acquisition of Power Systems in 2013.
The impairment of goodwill of £219m
(2015: £75m), principally relating to the
Marine business as a result of the continued
weakness in the oil & gas market (see note 9).
RECONCILIATION BETWEEN UNDERLYING AND REPORTED RESULTS
Year to 31 December
Revenue
Profit before financing
Financing
(Loss)/profit before tax
£m
Underlying
Revenue recognised at exchange
rate on date of transaction
Mark-to-market adjustments
on derivatives
Related foreign exchange
adjustments
Movements on other financial
instruments
Effects of acquisition accounting
Impairment of goodwill
Exceptional restructuring
Acquisitions and disposals
Financial penalties
Post-retirement schemes
Other
Reported
2016
13,783
2015
13,354
2016
915
2015
1,492
1,172
371
–
–
–
–
–
–
–
–
–
–
14,955
–
–
–
–
–
–
–
–
–
–
13,725
–
–
570
–
(115)
(219)
(129)
(3)
(671)
(306)
(1)
41
2016
(102)
–
2015
(60)
–
2016
813
–
2015
1,432
–
(4,420)
(1,306)
(4,420)
(1,315)
–
(9)
265
(151)
(15)
419
–
(124)
(75)
(49)
2
–
–
(1)
1,501
(8)
–
–
–
–
–
3
1
(4,677)
8
–
–
–
–
–
32
–
(1,341)
(8)
(115)
(219)
(129)
(3)
(671)
(303)
–
(4,636)
250
8
(124)
(75)
(49)
2
–
32
(1)
160
STRATEGIC REPORT 38
STRATEGIC REPORT FINANCIAL REVIEW
Rolls-Royce Holdings plc Annual Report 2016
SUMMARY BALANCE SHEET
At 31 December
£m
Intangible assets
Property, plant and equipment
Joint ventures and associates
Net working capital1
Net funds2
Provisions
Net post-retirement scheme deficits
Net financial assets and liabilities2
Other net assets and liabilities3
Net assets
Other items
US$ hedge book (US$bn)
TotalCare assets
TotalCare liabilities
Net TotalCare assets
Gross customer finance commitments
Net customer finance commitments
2016
5,080
4,114
844
(1,553)
(225)
(759)
(29)
(5,751)
143
1,864
37.8
3,348
(907)
2,441
238
61
2015
4,645
3,490
576
(501)
(111)
(640)
(77)
(1,883)
(483)
5,016
28.8
2,994
(783)
2,211
269
54
1 Net working capital includes inventories, trade and other receivables, trade and other payables and current tax assets
and liabilities.
2 Net funds includes £358m (2015 £13m) of the fair value of financial instruments which are held to hedge the fair value
of borrowings.
3 Other includes other investments and deferred tax assets and liabilities.
Exceptional restructuring costs of £129m
(2015: £49m). These are costs associated
with the substantial closure or exit of a site,
facility or activity and increased as a result
of the ongoing transformation programme.
Financial penalties of £671m from agreements
with investigating bodies (see page 8).
Costs of restructuring the UK pension
schemes in 2016 of £306m, principally a
settlement charge on the transfer of the
Vickers Group Pension Scheme to an
insurance company (see note 19).
Financing and taxation
The mark-to-market adjustments on the
Group’s hedge book of £4,420m (2015:
£1,306m). These reflect: the large hedge
book held by the Group (eg. US$38bn);
and the weakening of sterling, particularly
against the US dollar and the euro, as noted
above. At each year end, our foreign
exchange hedge book is included in the
balance sheet at fair value (mark-to-market)
and the movement in the year included in
reported financing costs.
Appropriate tax rates are applied to these
additional items included in the reported
results, leading to an additional tax credit
of £865m (2015: £275m), largely as a result
of the mark-to-market adjustments.
Balance sheet
Intangible assets (note 9) increased by
£435m mainly due to exchange differences
of £438m. Additions of £631m (including
£154m of certification and participation
fees, £100m of development costs and
£208m of contractual aftermarket rights)
were largely offset by amortisation of
£406m and impairment of £222m (including
£200m on Marine goodwill).
The carrying values of the 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.
Property, plant and equipment (note 10)
increased by £624m, around half of which
was caused by exchange differences of
£330m. Additions of £701m (including £75m
of TotalCare Flex engines) were offset by
depreciation of £424m and £41m was added
from the reclassification of joint ventures to
joint operations.
Investments in joint ventures and
associates (note 11) increased by £268m,
including an increase of £154m in the
Group’s share of authorised maintenance
centre joint ventures. The other main
movements were: exchange gains of £107m;
and the Group’s share of retained profit
of £43m; offset by a £57m reclassification
of certain joint ventures to joint operations.
Movements in net funds are shown
opposite.
Net working capital reduced by £1,052m,
including a £671m accrual for financial
penalties, £134m increased deposits and
£265m of foreign exchange movements.
This was partially offset by higher inventory
of £194m.
Provisions (note 18) largely relate to
warranties and guarantees provided
to secure the sale of OE and services.
The increase of £119m includes
reclassifications from accruals of £92m,
following a review of accounting
consistency during the period. The
remaining increase of £27m includes net
additional charges of £271m (including
£147m for warranties and guarantees),
and foreign exchange movements of
£75m, offset by utilisation of £227m.
Net post-retirement scheme deficits
(note 19) have reduced by £48m.
In the UK (increase in surplus of £293m),
changes in actuarial estimates increased
the value of the obligations £1.8bn, largely
due to the discount rate reducing from
3.6% to 2.7%. This was more than offset by
returns (in excess of those assumed) on the
scheme assets of £2.3bn. This return is
largely due to the liability-driven investment
policy of the assets being invested to match
changes in value of the obligations (on a
proxy solvency basis, which is more onerous
than the accounting valuation). The net
increase in surplus was reduced by the
recognition of a settlement charge of £301m
on the insurance buy-out of the Vickers
Group Pension Scheme.
The principal movements in overseas
schemes (increase in deficit of £245m)
were exchange differences of £208m.
Net financial assets and liabilities (note 17)
principally relate to the fair value of foreign
exchange, commodity and interest rate
contracts. All contracts continue to be held
for hedging purposes. The fair value of
foreign exchange derivatives is a net
financial liability of £5.6bn, an increase of
£3.9bn in the period, mainly a result of the
Rolls-Royce Holdings plc Annual Report 2016
FINANCIAL REVIEW
39
weakening of sterling against the US dollar
and euro.
Funds flow
The US$ hedge book increased by 31% to
US$37.8bn. This represents around 5½ years
of net exposure and has an average book
rate of £1 to US$1.55.
Net TotalCare assets relate to long-term
service agreement (LTSA) 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.
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
generally to customers of the Civil
Aerospace business and takes the form
of various types of credit and asset value
guarantees. These exposures produce
contingent liabilities that are outlined in
note 23. The 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. The
reduction in gross exposures is a result of
guarantees expiring.
Movement in working capital – the £55m
increase in working capital includes an
increase in inventory, partially offset by a
net reduction in financial working capital.
These movements are largely driven by the
increased sales volumes during 2016.
Expenditure on property, plant and
equipment and intangibles – the major
increases are: £98m higher PPE expenditure
as we build the supply chain; £37m software
costs relating to systems development;
£81m certification costs driven by the Trent
XWB-97 programme; £45m capitalised
development costs largely relating to the
Trent 1000 TEN; and £46m higher
contractual aftermarket rights, mainly on
Trent XWB sales.
Pensions – the increase in pension
contributions in excess of the underlying
income statement largely reflects changes
in net past service costs of £13m.
Shareholder payments – the change in
shareholder payments reflects the
difference between the 2014 and 2015
payments, which are paid in the following
year.
Acquisitions and disposals include the
£154m increase in stake in joint ventures
described on the opposite page.
FREE CASH FLOW
£100m
2015
2014 exc
2014 inc
2013
2012
y
g
r
e
n
E
c
n
i
179
447
254
781
548
2012
2013
2014
y
g
r
e
n
E
c
x
e
2014
2015
2016
NET (DEBT)/FUNDS
£(225)m
2015
2014
2013
2012
(111)
666
1,939
1,317
2012
2013
2014
2015
2016
SUMMARY FUNDS FLOW STATEMENT1
Year to 31 December
£m
Opening net (debt)/funds
Closing net debt
Change in net (debt)/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 pensions in excess of underlying PBT charge
Taxation paid
Free cash flow
Shareholder payments
Share buyback
Acquisitions and disposals
Discontinued operations
Foreign exchange
Change in net debt
2016
(111)
(225)
(114)
813
720
(55)
(1,201)
47
324
(67)
(157)
100
(301)
–
(153)
–
240
(114)
2015
666
(111)
(777)
1,432
613
(544)
(887)
(229)
385
(46)
(160)
179
(421)
(414)
(3)
(121)
3
(777)
Change
-619
+107
+489
-314
+276
-61
-21
+3
-79
+120
+414
-150
+121
+237
1 The derivation of the summary funds flow statement above from the reported cash flow statement is included in note 26 of the condensed consolidated financial statements.
STRATEGIC REPORT
40
A sustainable business
We continue to invest in the resources and capabilities which underpin
our future success as we transform the business.
THROUGH
ENGINEERING
AND INNOVATION
Our investments in world-class technology, research and engineers are
essential for sustaining our competitive advantages and creating new
growth opportunities. Ultimately, our innovations deliver the differentiated
high-technology products and services that attract our customers.
In 2016, we spent over £1.3bn on gross R&D
to develop the technology we embed in our
products and deliver to market. As a result,
we applied for 672 patents in the year, a
Rolls-Royce record.
PATENTS FILED
672
Over two-thirds of our R&D expenditure is
dedicated to improving the environmental
performance of our products, helping
our customers do more using less and
minimising the environmental impact
of our engines.
ACARE flightpath 2050 goals
We continue to meet the environmental performance targets for 2050 set by the
Advisory Council for Aviation Research and Innovation in Europe (ACARE).
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
Trent family
Technology demonstrator
engine targets
Rolls-Royce contribution to
ACARE Flightpath 2050 target
2000
2010
2020
Entry into service
2030
2040
2050
2016 GROSS R&D EXPENDITURE
£1.3bn
RSS Sir David Attenborough
Rolls-Royce has designed the UK’s future polar research ship, the RSS Sir David
Attenborough, one of the most advanced scientific maritime vessels ever constructed.
It will be equipped with highly efficient Bergen B33:45 engines, running on low sulphur
fuel, and a supporting electrical system that will reduce the vessel’s fuel consumption,
emissions, noise and vibration, minimising the impact in the sensitive polar environment.
Rolls-Royce
UK government
EU funding
US government
German government
Other sources
£936m
£309m
£20m
£18m
£31m
£18m
READ MORE AT WWW.ROLLS-ROYCE.COM
Rolls-Royce Holdings plc Annual Report 2016STRATEGIC REPORT SUSTAINABLE BUSINESS
41
5
19
4
UTCs
31
AMRCs
7
We are also growing our in-house
capabilities to capitalise on emerging
opportunities. In 2016, we established
our digital business to leverage decades
of data-driven in-service product
knowledge to develop new customer
services, and we are leading the way in
the development of intelligent ships.
NUMBER OF ENGINEERS (YEAR END)
16,5261
Inspiring future
generations of engineers
We aim to reach six million people
through our science, technology,
engineering and mathematics (STEM)
education outreach programmes
by 2020. Our activities are designed
to demonstrate the life-long
opportunities that STEM careers can
offer, helping to secure a future talent
pipeline for ourselves and the wider
industry. In 2016, we reached 1.2 million
people , 68% of whom were actively
engaged in our programmes. Since
launching in 2014, we are now 47%
towards our 2020 target.
Research partnerships
For over 25 years, Rolls-Royce has been
co-ordinating research with leading
academic institutions and industry
partners to harness the knowledge of
renowned experts and gain the best value
from our investments.
University Technology Centres (UTCs)
This global network of university research
partners advances our understanding of
specialist science and technologies which
are core to our next-generation products.
Advanced Manufacturing Research
Centres (AMRCs)
These collaborative public/private
partnerships help us to bridge the gap
between early research and industrial
application, with a focus on developing new
manufacturing processes and technologies.
Engineering expertise
We seek to attract the best and brightest
engineers by providing them with
world-class projects, tools and processes.
We have a culture of developing our people
within the Group through opportunities
such as our Specialist Academy and the
Rolls-Royce Fellowship programmes. We
value professional development and work
closely with a number of institutes and
external organisations to encourage our
engineers to earn professional recognition.
In 2016, we invested £21m to enhance our
digital engineering toolset across all our
businesses. These developments include:
• DaVinci
This new software enables our engineers
to create and test whole engine models
virtually. This reduces costs, improves
our designs and removes expensive
physical hardware tests as we develop
new products.
• High performance computing
We have continued investing in upgrades
to our high performance computing
infrastructure to enable our engineers
to make the most of the software tools
we have available.
Design
Manufacturing
Services
Electrical
Other
Total
7,611
3,435
1,623
1,622
2,235
16,526
External assurance over STEM, Energy, GHG and TRI rate data provided by Bureau Veritas. See page 183 for the sustainability assurance statement.
1 Our total number of engineers rose slightly from 15,564 in 2015. This is primarily due to reclassification of 517 roles in Power Systems, and the recruitment
of around 270 roles at the new engineering campus in Bangalore, India.
Rolls-Royce Holdings plc Annual Report 2016SUSTAINABLE BUSINESSSTRATEGIC REPORT 42
THROUGH
OUR PEOPLE
We continue to develop our employee base, ensuring we have the
right skills for our business today and the right capabilities for the future.
The skills, knowledge and passion of our
workforce are key enablers to our
transformation programme. We are
embedding a high performance culture
across the organisation that encourages
pace and simplicity.
As part of our people transformation we
have simplified the organisation through
management restructuring and leadership
change. This has included a reduction of
around 700 management positions in 2016
to drive accountability, simplicity and pace
through the organisation and improve
decision making. In addition, we have
continued to make changes to our
headcount mix to align with our markets
and associated challenges. This has affected
our Marine business in particular.
Our transformation is underpinned by
our ongoing commitment to maintain
the highest standards of ethics, safety
and human rights.
In 2016, 97% of Rolls-Royce employees
completed annual ethics training, focused
on dealing with ethical dilemmas. We are
committed to having an environment
where anyone can ask questions or raise
concerns without fear of retaliation,
anonymously if required.
PERCENTAGE OF EMPLOYEES WHO COMPLETED
ANNUAL ETHICS TRAINING
97%
TOTAL REPORTABLE INJURY RATE
(PER 100 EMPLOYEES)
0.60
During the year, all of our management
population completed Global Code of
Conduct certification. We also introduced an
ethics e-learning module for new employees
to help familarise them with our approach
and expectations. In 2016, 99% of new
employees who joined us during the year
completed this course within the first three
months of their employment.
We regard the health and safety of our
employees and those working on our
premises, or on our behalf, as paramount.
In 2016, there were no fatalities in the
Group, and our Total Reportable Injury (TRI)
rate was 0.60 per 100 employees . This
represents a 6% improvement since 2014.
We continue to concentrate on global
improvement programmes aligned to our
risk profile. Electrical safety and process
safety programmes concluded this year
and have now transitioned to form part of
our ongoing Group assurance activity.
For more information see the Safety & Ethics
Committee report, on pages 103 to 109.
We remain committed to protecting and
preserving the human rights of our
employees, those working in our global
supply chain and those who may be
impacted by our operations. Our Global
Code of Conduct and global human rights
policy set out this commitment. More
information on our approach can be found
in our 2016 anti-human trafficking and
modern slavery statement, available at
www.rolls-royce.com.
Headcount by business unit1,2,3
Headcount by location1,3
Civil Aerospace
Defence Aerospace
Power Systems
Marine
Nuclear
Other businesses and corporate
Total
2015
23,100
6,300
10,600
6,000
4,100
400
50,500
2016
23,800
6,000
10,300
5,300
4,300
200
49,900
UK
US
Canada
Germany
Nordic countries
Rest of world
Total
2015
23,200
6,400
1,100
10,700
3,800
5,300
50,500
2016
22,300
6,300
1,000
10,700
3,400
6,200
49,900
External assurance over STEM, Energy, GHG and TRI rate data provided by Bureau Veritas. See page 183 for the
sustainability assurance statement.
1 Headcount data is calculated in terms of average full-time employees.
2 Other businesses and corporate includes Energy businesses not sold into Siemens in 2014 and corporate employees who
do not provide a shared service to the segments. Where corporate functions provide such a service, employees have
been allocated on an appropriate basis. 2015 figures have been restated on this basis.
3 Certain joint ventures have been reclassified as joint operations from 1 January 2016. This has increased the Group
reported headcount by 800 employees.
Rolls-Royce Holdings plc Annual Report 2016STRATEGIC REPORT SUSTAINABLE BUSINESS
43
Our sustainable employee engagement
index score declined slightly from 81 in 2015
to 75 in 2016, six points below the high
performance norm.
We consider a subset of the results of our
employee opinion survey when calculating
our non-financial KPIs, recognising that an
engaged workforce is a key measure of
success. For more information see page 47.
We provide 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 invested £9.5m in supporting
communities in 2016, including £5.6m
in cash contributions and £3.9m in
employee time equivalent.
We are committed to creating an
environment where every employee
can reach his or her full potential, by
encouraging diversity, wellbeing and
development. We have employee resource
groups in our UK, US and Germany
operations. These bring together employees
who share similar characteristics or
experiences.
More information on our approach to
diversity and gender distribution can be
found in the Nominations & Governance
Committee report, on pages 67 and 69.
Our early career development programmes
continue to attract large numbers of
high-quality graduates and apprentices,
providing a pipeline of talent into finance,
HS&E, operations, HR and engineering.
Our training programmes have helped
employees to embrace and drive change.
In 2016, we invested over £32m in employee
learning and development, delivering over
one million hours of employee training.
• High Performance Culture (HPC)
HPC is our flagship cultural change
programme. It is designed to provide
insights and tools to help our people
operate and collaborate with pace,
simplicity and accountability. More than
80% of employees have been engaged in
the programme to date.
• Columbus Academy
The Columbus Academy is our principal
executive development programme, run
in partnership with Oxford Said Business
School. It challenges our leadership teams
to consider larger, strategic issues as we
continue to transform our business. All our
senior leaders have attended the course.
As part of our cultural change programme,
we have introduced assessments of
individuals’ alignment to our values and
behaviours into our performance
management approach for all employees.
Maintaining employee engagement is
critical during times of change and
transformation. More than 30,000
employees took part in our employee
opinion survey this year, our highest
participation rate to date.
Our programmes include technical and
practical engineering, specialist sciences
and corporate function programmes
including accountancy, supply chain
management and project management.
GRADUATES RECRUITED IN 2016
274
PERCENTAGE OF OUR GRADUATES WHO ENTERED
ENGINEERING DEVELOPMENT PROGRAMMES
60%
327
APPRENTICES RECRUITED IN 2016
PERCENTAGE OF OUR APPRENTICES WHO JOINED
HIGHER APPRENTICESHIP PROGRAMMES
33%
OUR APPRENTICE SCHEME HAS BEEN
RUNNING FOR OVER
100 years
Rolls-Royce Holdings plc Annual Report 2016SUSTAINABLE BUSINESSSTRATEGIC REPORT 44
THROUGH OUR
OPERATIONS
AND FACILITIES
We continue to develop world-class production capabilities while
optimising our operational footprint.
In 2016, we invested £50m in improvements
to existing facilities and £184m in the
development of new facilities, while at the
same time reducing our global operational
footprint by 2%.
Our investments in state-of-the-art facilities
also enable us to reduce the environmental
impacts of our operations.
ENERGY USE (MWH/£M)
TOTAL SOLID AND LIQUID WASTE (T/£M)§
120
100
80
60
40
20
0
2015 2016 2017 2018 2019
2014
baseline
2020
target
5
4
3
2
1
0
2015 2016 2017 2018 2019
2014
baseline
2020
target
Target: reduce energy use in our operations and
facilities by 30%, normalised by revenue, by 2020.
(excluding product test and development)
Target: reduce total solid and liquid waste in our
operations and facilities by 25%, normalised
by revenue, by 2020.
Our total energy consumption for 2016, excluding
product test, was 95 MWH/£m, which represents
a 17% reduction since 2014. This has been driven
by continued investment in energy efficiency
improvement projects, including upgrading
lighting and heating systems, and building
management systems. Our expenditure for
2016 totalled £10m, our highest annual
investment to date.
Our total solid and liquid waste production in
2016 was 4.48 t/£m, a 2% increase from 2014. This
is largely driven by improved data collection and
validation, particularly in Power Systems.
We continue to focus on opportunities to prevent
and reduce the amount of waste we generate.
We expect waste reduction activity to be
accelerated in 2017 through a global waste
action programme.
.
ABSOLUTE GHG EMISSIONS (KTCO2E) †
WASTE TO LANDFILL (000 TONNES)§
500
400
300
200
100
0
2015 2016 2017 2018
2014
baseline
2019
2020
2025
target
8
6
4
2
0
2014
baseline
2015 2016 2017 2018 2019
2020
target
Target: reduce greenhouse gas (GHG) emissions
in our operations and facilities by 50%,
absolute, by 2025.
(excluding product test and development)
Our total GHG emissions for 2016, excluding
product test, was 424 ktCO2e. This represents a
13% reduction since 2014. This has been achieved
by investing in a number of low carbon and
renewable energy projects across our global
facilities, including completing two large solar
power installations at our Singapore and Bristol,
UK manufacturing sites.
Target: zero waste to landfill in our operations
and facilities, by 2020.
(excluding hazardous waste)
The amount of waste sent to landfill has
decreased by 28% from 6,700 tonnes in 2014 to
4,800 tonnes in 2016, with particularly good
progress in our Defence Aerospace and Power
Systems businesses. This has been accelerated in
2016 by a reduction in output from our two major
foundries. We continue to work closely with our
waste management partners to identify recycling
and recovery alternatives to landfill across a
variety of waste streams.
Derby Campus, UK
As part of our commitment to retain
manufacturing and engineering
capability in the UK, we launched a
five-year investment programme to
redevelop our Derby Campus.
Over 10,000 employees, including
7,500 engineers
Future product development
programmes
Final assembly of our Trent XWB
and Trent 1000 engines
Our corporate functions
INVESTMENT IN ENERGY EFFICIENCY
IMPROVEMENT PROJECTS
£10m
† Regulatory greenhouse gas (GHG) emissions data details on page 188.
External assurance over STEM, Energy, GHG and TRI rate data provided by Bureau Veritas. See page 183 for the sustainability assurance statement.
§ Waste data for 2016 is calculated in accordance with our basis of reporting, as set out on www.rolls-royce.com/sustainability. Whilst we were able to determine the total waste
production and waste to landfill for 2016, we maintain a limited degree of uncertainty in the waste categorisation and quantities which may impact our reported numbers.
We will continue to review historical and source data and if a material impact is identified will restate in accordance with our basis of reporting.
Rolls-Royce Holdings plc Annual Report 2016STRATEGIC REPORT SUSTAINABLE BUSINESS 45
THROUGH OUR
SUPPLIER AND
CUSTOMER
RELATIONSHIPS
Our external suppliers
We pride ourselves on being trusted partners to suppliers and
customers in more than 150 countries worldwide. Our long-term
relationships provide insights and capabilities which enable us to
deliver world-class products and services.
Rolls-Royce spends over £7bn annually with
suppliers. We invest significant resources to
ensure this complex supply chain is resilient,
efficient and able to consistently deliver to
Rolls-Royce standards. Our supply chain is
built on long-term relationships, frequently
based on shared investments and capability.
We engage collaboratively with key
suppliers to drive out cost and enhance
value, underpinned by full transparency
and agreed joint improvement plans.
Over 65% of our spend is managed through
mature and collaborative supplier
engagement programmes.
ANNUAL SPEND WITH OUR SUPPLIERS
>£7bn
SUPPLIERS CONTRACTUALLY AGREED TO ADHERE TO
OUR GLOBAL SUPPLIER CODE OF CONDUCT
We also invest in developing new supplier
relationships as we move into new
technologies, new customer markets and
geographies, particularly in the Asia Pacific
region.
At the same time, we are rationalising our
supply base as we continue to streamline our
product portfolio and operational footprint,
particularly in our Marine business where we
have reduced the number of OE suppliers by
40% since 2013.
We remain committed to maintaining the
highest levels of ethical behaviour across
our supply chain. At the end of 2016, 99% of
our suppliers had contractually agreed to
adhere to our Global Supplier Code of
Conduct. We have also introduced risk-based
compliance monitoring; 22% of our
prioritised suppliers have completed this
assessment, covering business ethics, labour
practices, anti-bribery and human rights.
99%
50-year partnership with
the Royal Navy
Rolls-Royce is a world-leader in nuclear
submarine systems and support
services incorporating design,
procurement and operation. For the
past 50 years, we have been the
Technical Authority for the UK Nuclear
Steam Raising Plant, responsible for
powering the UK's Royal Navy
submarine fleet.
A superior supplier to the
US Air Force
In September 2016, the USAF recognised
Rolls-Royce as a Superior Supplier.
We are the only engine manufacturer
to be recognised by the USAF as a Tier 1
Superior Supplier three years in a row.
Our customers
Our customers expect outstanding product
performance and reliability. They operate
our products for decades, frequently in
combination with aftermarket services. This
leads to a deep understanding of their needs
which we apply to the development of new
technologies and products.
The quality of our customer relationships
is based on mutual trust, as well as our
engineering expertise. As a steering
committee member of the International
Forum on Business Ethical Conduct for the
Aerospace and Defence Industry (IFBEC), we
strive to implement best practice ethical
business standards and continue to apply a
zero tolerance approach to bribery and
corruption.
In addition, we have introduced a
customer delivery metric into our
remuneration policy to ensure continued
focus on the delivery of our commitments
to customers. For more information see
page 47.
Rolls-Royce Holdings plc Annual Report 2016SUSTAINABLE BUSINESSSTRATEGIC REPORT 46
STRATEGIC REPORT KEY PERFORMANCE INDICATORS
Rolls-Royce Holdings plc Annual Report 2016
Key performance indicators
Our key financial and non-financial performance indicators are shown below. The areas of focus of the Board and its
committees are described on pages 58 to 112, and other non-financial performance indicators are shown in the
Sustainable business section on pages 40 to 45 and the Safety & Ethics Committee report on pages 103 to 109.
Description
Order book
£79.8bn
Order intake
£19.1bn
Why we measure it
We measure our order book in line with industry practice and
believe it is an indicator of future business; however, its value
may not be reflective of future revenue. We measure it at our
long-term planning exchange rate (LTPR) 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.
Underlying revenue
£13,783m
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
foreign exchange (FX) contracts in the year. This provides a
clearer measure of the year-on-year trend.
How we have performed
The order book grew by
£3.4bn. An increase of
£4.4bn in Civil Aerospace
(including £2.1bn from a
five cent improvement in
the LTPR) was offset by a
reductions in the other
segments, reflecting the
current weak market
conditions, particularly in
oil & gas markets.
£bn
60.1
71.6
73.7
79.8
76.4
2012 2013 2014 2015 2016
An increase of £1.3bn in
Civil Aerospace order intake
was offset by weaker intake
in Defence Aerospace and
Marine.
£bn
26.9
19.4
19.0
18.2
19.1
16.1
y
g
r
e
n
E
c
n
i
y
g
r
e
n
E
c
x
e
2012 2013 2014 2014 2015 2016
£m
12,209
At constant exchange rates,
revenue was broadly stable
except in Marine where it
fell by 24%. Improved
achieved rates on currency
hedging increased
underlying revenues by
£0.7bn.
15,505
14,588
13,864
13,354
13,783
y
g
r
e
n
E
c
n
i
y
g
r
e
n
E
c
x
e
2012 2013 2014 2014 2015 2016
Net R&D expenditure
as a proportion of
underlying revenue
6.8%
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 revenue
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 increased expenditure
on three large engine
programmes, Trent 1000
TEN, Trent XWB-97 and
Trent 7000, as they
approach entry into service.
%
4.7
4.8
6.8
5.8
5.9
6.2
y
g
r
e
n
E
c
n
i
y
g
r
e
n
E
c
x
e
2012 2013 2014 2014 2015 2016
Rolls-Royce Holdings plc Annual Report 2016
KEY PERFORMANCE INDICATORS
47
Description
Why we measure it
Capital expenditure
as a proportion of
underlying revenue
4.5%
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%. (Capital expenditure excludes additions arising
from TotalCare Flex arrangements.)
Underlying profit
before financing
£915m
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.
How we have performed
Expenditure increased to
£626m (2015: £494m)
principally reflecting the
major investment in
aerospace footprint and
capacity.
%
4.0
4.6
4.7
4.4
4.5
3.7
y
g
r
e
n
E
c
n
i
y
g
r
e
n
E
c
x
e
2012 2013 2014 2014 2015 2016
£m
1,495
1,831
1,678 1,681
1,492
915
y
g
r
e
n
E
c
n
i
y
g
r
e
n
E
c
x
e
2012 2013 2014 2014 2015 2016
The reduction is
predominantly in Civil
Aerospace reflecting
reductions in: volume and
margin on link accounted
Trent 700 engines; business
jet original equipment
volumes; large engine
aftermarket utilisation; and
increased technical costs
for large engines. In
addition, 2015 benefited
from changes in risk
assessments, partially
offset by strong lifecycle
cost improvements and
provision releases.
Free cash flow
£100m
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 debt/funds during the year, before movements
arising from payments to shareholders, acquisitions and
disposals, and FX.
The reduction reflects
lower profits and increased
capital expenditure offset
by improvements in net
working capital.
£m
548
781
y
g
r
e
n
E
c
n
i
254
447
y
g
r
e
n
E
c
x
e
179
100
2012 2013 2014 2014 2015 2016
Non-financial key performance indicators*
Description
Why we measure it
How we have performed
Customer delivery
88%
To deliver on our commitments to our customers we measure
the percentage of ‘on-time to purchase order’ including new
equipment, spare parts, equipment repair and overhaul.
This is tracked Group-wide in our scheduling and order
fulfilment system.
As we continue to ramp up our delivery of Trent Engines, the
challenge to improve on-time delivery remains a priority.
The 2016 score of 88% fell slightly short of our target of 90%.
Employee engagement
75
This is measured through our long-standing employee opinion
survey which produces a composite engagement score.
The targets are based on absolute scores for six key questions
within the overall survey.
Our employee engagement score achieved our target of 75 in
2016. This was the same score as in 2015 and the target reflected
the significant impact of the transformation programme on our
employees in 2016.
* 2016 is the first year that we have included these non-financial performance indicators in our remuneration structure.
REMUNERATION COMMITTEE REPORT ON PAGE 72
STRATEGIC REPORT
48
STRATEGIC REPORT PRINCIPAL RISKS
Rolls-Royce Holdings plc Annual Report 2016
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 systems
and reviews their effectiveness. These
systems are 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 pages 100 and 101.
Our risk management system
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 and a network of trained risk
management facilitators. It is supported
through the use of risk software.
Businesses and functions are accountable
for identifying and managing risks in line
with the Group risk management policy.
Business continuity plans are in place
to mitigate continuity risks and this year
there has been more regular testing of the
adequacy of these plans through exercises
with the businesses.
The Group’s enterprise risk team, led by
the Director of Risk, is responsible for
disseminating the 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
regularly reviewed by the sector audit
committees.
Joint ventures constitute a 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.
In 2016, we continued to embed
enhancements to our RMS throughout
the Group, including strengthening risk
governance and building improvements
to our risk operating model, reporting,
infrastructure and assurance processes.
Examples of enhancements implemented
in 2016 include:
• Launching a new risk policy which was
mandated as part of the governance
framework and supported by improved
risk management training, which is
mandatory for new employees.
• Adopting a risk visualisation tool for use
at the Board, Executive Leadership Team
(ELT) and in the businesses to bring risk
discussions to life and enable better
interrogation of risk information.
• Holding more regular ELT risk committee
meetings (quarterly) to conduct deep
dives into specific risks, in particular their
mitigation plans and controls, and to
consider systemic issues and common
root causes.
• Building much closer links to strategic
and business financial planning and
forecasting processes to develop risk
scenarios used to support our viability
statement.
• Updating the way we monitor and
measure the effectiveness of the RMS,
including the use of incident information
to drive learning and continuous
improvement of our risk mitigation
activities.
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. The
roll-out of the Group’s High Performance
Culture programme will continue to
strengthen risk management as part of our
culture. In addition, the emphasis in our
ethics and compliance programme of
providing a culture of speaking up,
reinforces the values and behaviours
required for an effective RMS.
In 2017, we will continue to look for
opportunities to strengthen our RMS
and our corporate culture by focusing
on embedding risk content in leadership
training programmes, discussing our
principal risks in employee communications
and regularly evaluating the effectiveness of
our risk management activities.
Management of principal risks
Our risk framework ensures that risks are identified, managed and communicated throughout 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)
Rolls-Royce Holdings plc Annual Report 2016
PRINCIPAL RISKS
49
details of Brexit are still unclear, we are
working with the UK government and
others to ensure the implications of leaving
the EU are understood and mitigated
if possible. We recognise we have an
obligation to look after our people in the UK,
Europe and beyond, and to ensure that we
take the necessary steps to position the
Group to address both the opportunities
and threats presented so that we can
continue to do business effectively in and
with Europe and the rest of the world with
minimal disruption.
Additionally, Rolls-Royce has significant
operations, a substantial employee base,
and important customers in North America,
where the new US administration has
signalled broad policy changes. Some of
these changes in policy with regard to
trade, tax and defence and infrastructure
spending could affect the industries which
we serve. The North America leadership
team is actively monitoring these
developments to mitigate risk and position
us advantageously in this new environment.
Principal risks
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 ELT and the
Board during their risk reviews.
These include monitoring the status of
mitigation actions, adequacy of controls
and any incidents that have occurred since
the last review. Risks captured during the
strategy and business planning activities
also 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 principal
risks that threaten the business model,
future performance, solvency and liquidity
of the Group. These reviews have been
informed by the financial evaluation of
severe but plausible scenarios of our
principal risks which has also been used to
support our viability statement on page 53.
During the year, the Board and ELT reviews
have involved: discussing changes to the
risks; reviewing the risk indicators for
principal risks; understanding any
unplanned incidents that have occurred to
support the Board’s consideration of our risk
appetite; and, discussing with management
about how risks will be managed.
The Board, or the most appropriate Board
committee, undertakes in-depth reviews
(deep dives) of our principal risks in which
it assesses our material controls and the
effectiveness of our risk management and
mitigation activities. These reviews are
supported by the ELT risk committee
performing deep dives of related bottom-up
key risks and the actions and controls in
place to manage them. During the year, the
Board or the most appropriate Board
committee has undertaken a deep dive on
all of the Group’s principal risks. The Board
has also conducted a review of our strategic
risks as part of its annual strategy review.
This ongoing review of risks has resulted in a
further principal risk being added this year:
Disruptive technologies and business
models. This risk has been added to reflect
the increasing importance of transformative
technologies and new ways of doing
business, not least digitisation of processes,
products and services, that if not properly
managed, could impact our future growth
and profitability. This risk will be overseen
by the Science & Technology Committee and
was subject to a deep dive by the ELT at its
meeting in December 2016.
The principal risks are also used to help
select scenarios to exercise our Group crisis
management team (CMT). This year an
appropriate scenario was developed based
on the IT vulnerability principal risk. This
provided an opportunity for the CMT to
understand the nature and complexity of
cyber threats and to test the Group’s
response procedures and identify where our
plan can be further strengthened.
The Board gave initial consideration to the
implications of Brexit for the Group, and due
to the prevailing uncertainty of timing and
impact set up a steering group to monitor
developments and report back to the Board.
Rolls-Royce is headquartered in the UK but
across continental Europe the Group has
significant infrastructure, a large workforce,
many business units and a very important
customer and supplier base. Whilst the
STRATEGIC REPORT 50
STRATEGIC REPORT PRINCIPAL RISKS
Rolls-Royce Holdings plc Annual Report 2016
Risk management enables our strategy
1 Engineering excellence
2 Operational excellence
3 Capturing aftermarket value
PRIORITIES FOR 2017 ON PAGE 13
Change in risk level
Increased
Decreased
Static
New risk
Risk or uncertainty and potential impact
How we manage it
Disruptive technologies
and business models
Disruptive technologies, new entrants
with alternative business models
or disruptions to key markets or
customers could reduce our ability
to win sustainable future business,
achieve operating results and realise
future growth opportunities.
• Horizon and emerging technology scanning, and understanding
our competitors, including patent searches.
• Investing in innovation and new technologies (see page 9).
• Focusing on enhancing our skills and capabilities to maintain our
technology leadership (see page 41).
• Forming strategic partnerships and conducting joint research
programmes.
• Establishing our digital business.
This principal risk is subject to review by the Science & Technology
Committee.
Product failure
Product not meeting safety
expectations, or causing significant
impact to customers or the
environment through failure
in quality control.
Business continuity
Breakdown of external supply chain
or internal facilities that could
be caused by destruction of key
facilities, natural disaster, regional
conflict, financial 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.
IT vulnerability
Breach of IT security causing
controlled or critical data to be lost,
made inaccessible, corrupted or
accessed by unauthorised users.
• Ensuring a culture that puts safety first.
• Applying our engineering design and validation process from initial
design, through production and into service.
• Reviewing the scope and effectiveness of the Group’s product
safety policies to ensure that they operate to the highest industry
standards.
• 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 pages 104 and 107).
• Improving our supply chain quality.
This principal risk is subject to review by the Safety & Ethics Committee.
• Continuing our investment in adequate capacity and modern
equipment and facilities (see page 21).
• Identifying and assessing points of weakness in our internal
and external supply chain, our IT systems and the skills of our people.
• Selecting stronger suppliers, developing dual sources or
dual capability (see page 45).
• Developing and testing site-level incident management and
business recovery plans.
• Providing improved response to supply chain disruption through
customer excellence centres.
• Understanding potential changes to supply chain responsiveness
and resilience resulting from Brexit and change to the US
administration (eg. due to logistics delays).
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 page 100).
• 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.
Key controls
• Strategic planning
•
process
Investment review
committee
• Digital board
• Research &
technology board
• Product safety
review board
• Quality compliance
audit
• Engineering
technical audit
• Crisis management
team
• Crisis management
team
• Major incidents
board
• Quality board and
process councils
• Operations and
IT executive teams
• Supplier audit
• Operations and
•
IT executive teams
IT security
management
• Crisis management
team
Change in
risk level
Strategic
priorities
1
2
3
1
2
3
2
3
1
2
Rolls-Royce Holdings plc Annual Report 2016
PRINCIPAL RISKS
51
Risk or uncertainty and potential impact
How we manage it
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 few.
Our main competitors have access
to significant government funding
programmes as well as the ability
to invest heavily in technology and
industrial capability.
• Accessing and developing key technologies and service offerings which
differentiate us competitively (see page 40).
• 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 page 10).
• Protecting credit lines.
• Investing in innovation, manufacturing and production,
and continuing governance of technology programmes
(see pages 111 and 112).
• Maintaining a healthy balance sheet to enable access to cost-effective
sources of third-party funding.
• Understanding our competitors.
• Understanding the potential implications on our competitiveness
resulting from Brexit and change to the US administration.
This principal risk is subject to review by the Board.
Key controls
• Financial
performance review
• Strategic planning
•
process
Investment review
committee
• Science &
Technology
Committee
• Research &
technology board
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.
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.
• 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.
• Government
relations and
Group tax teams
• Strategic planning
process
• Supplier audit
• The Group’s international network and its businesses proactively
monitoring local situations.
• Maintaining a balanced business portfolio with high barriers
to entry and a diverse customer base (see page 14).
• Proactively influencing regulation where it affects us.
• Steering committee, chaired by Group President, to co-ordinate
activities across the Group and minimise the impact of Brexit.
• Monitoring the potential impact of changes following the change to
the US administration, relating to tax policy, trade and relationships
with the UK government.
This principal risk is subject to review by the Board.
• Major programmes are subject to Board approval (see page 185).
• 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
programmes lifecycles (see page 185).
• 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 then 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.
• Rolls-Royce
management
system
• Operational
performance review
• Project assurance
• Gated business and
technical reviews
• Quality compliance
audit
Change in
risk level
Strategic
priorities
1
2
3
2
1
2
STRATEGIC REPORT 52
STRATEGIC REPORT PRINCIPAL RISKS
Rolls-Royce Holdings plc Annual Report 2016
Change in
risk level
Strategic
priorities
2
2
3
1
2
3
Risk or uncertainty and potential impact
How we manage it
Compliance
Non-compliance by the Group with
legislation or other regulatory
requirements in the heavily regulated
environments in which it operates
(eg. export controls; use of controlled
chemicals and substances; and
anti-bribery and corruption
legislation) compromising the 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 (including export credit
financing), each of which could have
a material adverse effect.
• 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 page 105).
• Strengthening of the ethics, anti-bribery and corruption, compliance
and export control teams.
• A legal team is in place to manage regulatory investigations.
• Engaging with external regulatory authorities.
• Implementing a comprehensive Registration, Evaluation,
Authorisation and restriction of CHemicals (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.
Market and financial shock
The Group is exposed to a number of
market risks, some of which are of a
macro-economic nature (eg. oil price,
exchange rates) and some of which are
more specific to the Group (eg.
liquidity and credit risks, credit rating,
profitability post IFRS 15, 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.
• Maintaining a healthy balance sheet, through managing cash balances
and debt levels and maturities (see page 17).
• 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 page 18).
• 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 – see page 185).
• Review debt financing and hedging in light of volatility in external
financial markets caused by external events, such as Brexit and change
of US administration.
This principal risk is subject to review by the Audit Committee.
Key controls
• Corporate
governance
framework
• Compliance and
export control
teams
• Group Secretariat
• Legal teams
• Financial
performance review
• Financial risk
committee
• Operational
performance review
• Group finance,
treasury and
taxation teams
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.
• Attracting, rewarding and retaining the right people with the right
skills globally in a planned and targeted way, including regular
benchmarking of remuneration (see pages 70 and 72).
• Developing and enhancing organisational, leadership, technical and
• Remuneration
Committee
• ELT
• HR executive team
functional capability to deliver global programmes and
transformational change.
• Continuing a strong focus on individual development and
succession planning (see page 58).
• 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 page 43).
• Reviewing employee mobility as part of Brexit steering committee.
This principal risk is subject to review by the Nominations
& Governance Committee.
Rolls-Royce Holdings plc Annual Report 2016
GOING CONCERN AND VIABILITY
53
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. These were updated to reflect
the impact of the financial penalties from
agreements with investigating bodies.
The processes for identifying and managing
the principal risks are described on pages 48
and 49. 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 185, the Group meets
its funding requirements through a mixture
of shareholders’ funds, bank borrowings,
bonds and notes. At 31 December 2016, the
Group had borrowing facilities of £5.3bn
and total liquidity of £5.1bn, including cash
and cash equivalents of £2.8bn and
undrawn facilities of £2.3bn. £170m of the
facilities mature in 2017.
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 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 two years
of the medium-term forecast with more
significant maturities in 2019 and 2021.
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-term 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 a single risk or
multiple lesser risks occurring which have
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.
Signed on behalf of the Board
On the basis described above, the Board
confirms that it has a reasonable
expectation that the Company will be able
Warren East
Chief Executive
13 February 2017
STRATEGIC REPORT 54
DIRECTORS’ REPORT BOARD OF DIRECTORS
Rolls-Royce Holdings plc Annual Report 2016
Board of Directors
Ian Davis
Chairman
NG Warren East CBE
Chief Executive
David Smith
Chief Financial Officer
Colin Smith CBE
Group President
Appointed to the Board in March
2013 and as Chairman in May 2013
Career, skills and experience
Ian is senior partner emeritus of
McKinsey & Company. He was a
partner at McKinsey for 31 years until
2010 and served as chairman and
worldwide managing director of
McKinsey between 2003 and 2009.
He brings significant financial and
strategic experience to the Board.
He has worked with and advised
global organisations and companies
in a wide variety of sectors as well as
in the public sector, enabling him to
draw on knowledge of diverse issues
and outcomes to assist the Board.
His role in the Cabinet Office, from
which he stepped down in March
2016, gives him a unique perspective
on government affairs.
Other current principal roles
• BP p.l.c., non-executive director
• Johnson & Johnson Inc., director
• Teach for All Inc., director
• Majid Al Futtaim Holding LLC,
director
• McKinsey & Company, senior
partner emeritus
Appointed as an independent
Non-executive Director in January
2014, Warren became Chief
Executive in July 2015
Career, skills and experience
Warren is an engineer by training
and had an outstanding record at
ARM Holdings plc which he joined in
1994 and where he was CEO from
2001 until 2013. He has a deep
understanding of technology and of
developing long-term partnerships
and has proven strategic and
leadership skills in a global business
with a strong record of value creation
– all of which are relevant to
Rolls-Royce particularly as it
undergoes a period of transformation.
He is a fellow of the The Institution of
Engineering and Technology, a fellow
of the Royal Academy of Engineering
and a distinguished fellow of BCS, the
Chartered Institute for IT. He was
awarded a CBE in 2014 for services to
the technology industry.
Other current principal roles
• Dyson James Group Limited,
director
• The Institution of Engineering
and Technology, trustee
Appointed in November 2014
Appointed in July 2005
Career, skills and experience
David has extensive industrial
experience having worked for over
25 years with Ford and Jaguar Land
Rover and latterly with Edwards
Group Limited, a major manufacturer
of industrial vacuum products. He
joined Rolls-Royce as Chief Financial
Officer for the Aerospace Division in
January 2014 before being appointed
as CFO to the Group. David’s skills in
developing systems have particular
benefit to Rolls-Royce where he has
introduced a new management
information and forecasting system.
He is a member of the Chartered
Institute of Management
Accountants’ Advisory Panel.
David has resigned from Rolls-Royce
and will leave the Group following
the appointment of Stephen Daintith,
whose biography is shown on page 57.
Other current principal roles
• Motability Operations Group plc,
non-executive director
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 Institute of
Mechanical Engineers. In June 2012,
he was awarded a CBE for services to
UK engineering.
Colin will step down from the Board
at the 2017 AGM.
Other current principal roles
• Council for Science and
Technology, member
Composition of Board
committees
NG R
A SE ST
Committee membership
NG Nominations &
Governance Committee
R
Remuneration
Committee
A Audit
Committee
SE Safety & Ethics
Committee
ST Science & Technology
Committee
Denotes chairman
of committee
Ian Davis
Lewis Booth
C
•
• C
Ruth Cairnie
Sir Frank Chapman • •
Irene Dorner
Lee Hsien Yang
John McAdam
Bradley Singer
Sir Kevin Smith
Jasmin Staiblin
C
C
• •
• •
•
•
•
•
C
•
•
•
• •
• •
•
C Denotes chairman of committee
Rolls-Royce Holdings plc Annual Report 2016
BOARD OF DIRECTORS
55
Lewis Booth CBE
Independent
Non-executive Director
A
NG
ST
Ruth Cairnie
Independent
Non-executive Director
R
NG
ST
Sir Frank Chapman
Independent
Non-executive Director
SE
NG
R
Irene Dorner
Independent
Non-executive Director
NG
A
SE
Appointed in May 2011
Appointed in September 2014
Appointed in November 2011
Appointed in July 2015
Career, skills and experience
Lewis has considerable financial
expertise and experience, having
been the former executive vice
president and chief financial officer
for Ford Motor Company. He brings
an international perspective, having
worked in Europe, Asia, Africa and the
US during his 34-year career in the
motor industry. After gaining a
bachelor of engineering degree with
honours in mechanical engineering,
Lewis began his career with British
Leyland before joining Ford in 1978.
He was awarded a CBE in 2012 for
services to the UK automotive and
manufacturing industries.
Other current principal roles
• Mondelez International, Inc.,
director
• Gentherm Inc., director
Career, skills and experience
A physicist by background, Ruth has
strong strategic and commercial
experience gained at Royal Dutch
Shell Plc where she held a number of
senior international roles, most
recently as executive vice president
strategy and planning, before her
retirement in 2014.
Ruth also has significant
remuneration committee experience
having chaired the remuneration
committee at Keller Group plc since
April 2012 and as a member of the
remuneration committee at
Associated British Foods plc. She
chairs the POWERful Women
initiative, supporting the progression
of women to senior positions in the
energy sector, and is a strong
supporter of our diversity and
inclusion initiatives.
Other current principal roles
• Associated British Foods plc,
non-executive director
• Keller Group plc, non-executive
director
• POWERful Women, chairman
Career, skills and experience
Sir Frank has significant industrial
and safety experience, having worked
in the oil & gas industry for 38 years
including appointments within Royal
Dutch Shell plc and BP p.l.c. He has a
life-long passion for engineering and
innovation and a deep understanding
of technology, together with an
outstanding record of business
achievement. He was chief executive
of BG Group plc for 12 years until
2012 and chairman of Golar LNG Ltd
from 2014 to 2015. Sir Frank is a fellow
of the Royal Academy of Engineering,
the Institute of Mechanical Engineers
and the Energy Institute. He was
knighted in 2011 for services to the
oil & gas industry.
Other current principal roles
• Myeloma UK, vice chairman
Career, skills and experience
Irene has a strong background in risk
management and is very familiar
with regulatory requirements.
She was chief executive officer and
president of HSBC, US, until December
2014. Her background in risk
management played a key role in
strengthening the financial
institution’s risk processes and she
brings this insight as part of her role
on our Audit Committee. During a
29-year career at HSBC, she held a
number of international roles
including leading HSBC in Malaysia
and launching its Islamic banking
unit. Irene is a passionate advocate
of diversity and inclusion and an
active supporter of our employee
resource groups.
Irene was a consultant at
PricewaterhouseCoopers until
February 2016. She is also an honorary
fellow of St Anne’s College, Oxford.
Other current principal roles
• AXA SA, director
• Control Risks International
Limited, non-executive director
• OUTLeadership Advisory Board,
member
DIRECTORS’ REPORT 56
DIRECTORS’ REPORT BOARD OF DIRECTORS
Rolls-Royce Holdings plc Annual Report 2016
Lee Hsien Yang
Independent
Non-executive Director
NG
A
SE
John McAdam
Independent
Non-executive Director
NG
R
SE
Bradley Singer
Non-independent
Non-executive Director
ST
Sir Kevin Smith CBE
Senior Independent
Non-executive Director
ST
NG
R
Appointed in January 2014
Appointed in February 2008
Appointed in March 2016
Appointed in November 2015
Career, skills and experience
A Singaporean, Hsien Yang was
formerly a member of our
International Advisory Board and
combines a strong background in
engineering with extensive
international business experience in
our most important growth markets.
He 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
to February 2013. He has significant
industrial and financial skills.
Career, skills and experience
John has extensive international and
industrial experience. He was
appointed to the board of ICI plc in
1999 and became chief executive in
2003, a position he held until 2008.
He held a number of senior positions
at Unilever, within its Birds Eye Walls,
Quest International and Unichema
International businesses. He is a
former non-executive director of
Severn Trent plc and Sara Lee
Corporation and stepped down as
senior independent director of
J Sainsbury plc in 2016.
Other current principal roles
• Civil Aviation Authority of
Singapore, chairman
Other current principal roles
• Rentokil Initial plc, chairman
• United Utilities Group PLC,
• The Islamic Bank of Asia Private
chairman
Limited, chairman
• Electra Private Equity PLC, director
• The Australian and New Zealand
Banking Group Limited, director
• General Atlantic LLC and associated
funds, special adviser
• Lee Kuan Yew School of Public
Policy, member of the board of
governors
• INSEAD SE Asia Council, president
Career, skills and experience
Brad has an outstanding record as a
business leader in the US. He brings
with him experience of public
companies during periods of change,
growth and significant financial
outperformance, particularly in the
US where Rolls-Royce has important
business interests and a significant
shareholder base. He has been senior
executive vice president and chief
financial officer of Discovery
Communications, Inc. and chief
financial officer and treasurer of
American Tower Corp. Before these
appointments, he worked as an
investment banker at Goldman Sachs.
He is a former director of Martha
Stewart Living, Omnimedia, Inc.,
Citizens Communications Corp and
Motorola Solutions Inc.
Other current principal roles
• ValueAct Capital Master Fund P.L.,
partner and chief operating officer
• Posse Foundation, director
• McIntire School Foundation,
University of Virginia, trustee
Career, skills and experience
Sir Kevin has extensive industrial
leadership experience and a deep
knowledge of global engineering and
manufacturing businesses, as well as
the aerospace industry. He was chief
executive officer of GKN plc for nine
years until 31 December 2011. Before
joining GKN, he spent nearly 20 years
with BAE Systems where he held a
number of senior executive positions.
He joined Unitas Capital in 2012 and
served as partner and chairman of its
operating advisor group until
October 2015, based in Hong Kong.
His private equity experience in
operation- intensive businesses
with Unitas is extremely valuable
to Rolls-Royce. He served as a
non-executive director of SSE plc
between June 2004 and July 2008.
He has an honorary fellowship
doctorate from Cranfield University,
is an honorary fellow of the University
of Central Lancashire and a fellow of
the Royal Aeronautical Society.
He was awarded a CBE in 1997 and
was knighted in 2006 for services
to industry.
Other current principal roles
• Unitas Capital, senior adviser
• LEK Consulting, European advisory
board member
• University of Central Lancashire,
industry steering group member
BOARD MEMBERS BY GENDER
BALANCE OF THE BOARD
NON-EXECUTIVE DIRECTORS’ TENURE
NATIONALITIES OF DIRECTORS*
Female
Male
3
10
Executive Directors
Non-executive Directors
3
10
0–3 years
3–6 years
6–9 years
4
5
1
British
German
Singaporean
US
10
1
1
1
* According to the Company’s Articles
of Association, at least 50% of its
Directors must be British citizens.
Rolls-Royce Holdings plc Annual Report 2016
BOARD OF DIRECTORS
57
Jasmin Staiblin
Independent
Non-executive Director
NG
ST
Pamela Coles
Company Secretary
Stephen Daintith
Appointed in May 2012
Appointed in October 2014
Expected to be appointed as Chief Financial Officer in Spring 2017
Career, skills and experience
A German national, Jasmin combines
a strong background in advanced
engineering and deep technology
knowledge with extensive
international business experience,
having worked in Switzerland,
Sweden and Australia. She has been
the chief executive officer of Alpiq
Holding AG since 2013. She held a
number of senior positions in the ABB
Group becoming chief executive
officer of ABB Switzerland from 2006
to December 2012.
Other current principal roles
• Alpiq Holding AG,
chief executive officer
• Georg Fischer AG, board member
Career, skills and experience
Pamela is an expert in corporate
governance and company law. She
has been a fellow of the ICSA: The
Governance Institute since 1997. 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.
Career, skills and experience
Stephen will join Rolls-Royce from Daily Mail and General Trust plc where
he has served on its board of directors since 2011. He was a member of the
Euromoney Institutional Investor plc audit committee, and a non-executive
director of Zoopla Property Group plc, both of which are associated
companies of Daily Mail and General Trust plc. Stephen is a chartered
accountant and has held a number of senior positions at News Corporation,
British American Tobacco, Forte, the Civil Aviation Authority and
PricewaterhouseCoopers. He is currently a non-executive director of
3i Group plc.
Stephen has extensive experience of strategic financial management and he
has a deep understanding of international business. His record of achievement
in change management is particularly relevant to Rolls-Royce.
Other current principal roles
• None
International Advisory Board (IAB)
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. The members of the IAB during the year were
as follows:
BOARD SKILLS AND EXPERIENCE
Chairman, CEO or
CFO experience
Engineering/technology
Related industry/operational
Safety/regulatory/risk
Financial
Remuneration/HR
10
4
4
3
2
2
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.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, and chairman of The Japan Chamber of Commerce and Industry.Lubna Olayan CEO and deputy chairperson of the Olayan Financing Company, Saudi Arabia.Ratan Tata Interim chairman 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.Murad Bayar Board member and CEO of CCN Investment Holdings.DIRECTORS’ REPORT 58
DIRECTORS’ REPORT CHAIRMAN’S INTRODUCTION
Rolls-Royce Holdings plc Annual Report 2016
Chairman’s
introduction
Ian Davis
Chairman
2016 was a year of significant organisational
transformation, market headwinds and
operational challenges for the Group,
including managing a number of new
product introduction programmes. In
January 2017, after lengthy regulatory
investigations with which we co-operated
fully, we concluded deferred prosecution
and leniency agreements with the UK
Serious Fraud Office, US Department of
Justice and the Brazilian authority, MPF.
It is times such as these when the
importance of corporate governance comes
sharply into focus. It serves to ensure
valuable oversight, guidance and
experienced support to management as it
balances risks and opportunities and
navigate difficult and complex issues at a
time of significant change. The Board’s
oversight and engagement on the critical
issues ensured that decisions were taken in
the Group’s best interests and in pursuit of
its strategic, financial and operational
objectives and transformation milestones.
To facilitate more regular oversight, reporting
and interaction with management we added
Board calls to our annual schedule, in April
and October. We held a number of other
ad-hoc Board and committee meetings
outside of our annual cycle to deal with
matters that required attention between our
regular scheduled meetings. Some of the
Non-executive Directors also spent time
during the year with the business and finance
leadership teams outside of formal meetings
to gain deeper insight into the operational
challenges at a programme and business
level. This combination allowed us to
understand better, and more closely track,
the progress being made by the Group on its
transformation agenda and priorities
throughout the year, so that we could focus
on the right areas.
In 2016, as part of the simpler governance
workstream of the transformation
programme, we continued to strengthen
aspects of our governance arrangements,
building on the work undertaken in 2015.
We complemented this by increasing focus
on talent and succession planning, including
supporting Warren East as he reshaped his
Executive Leadership Team (ELT).
The 2015 Board effectiveness review
conducted by Independent Audit
highlighted a need to improve the quality of
information presented to the Board. During
the year, the Company Secretary led a major
piece of governance improvement work to
provide tools, templates and training to help
management write more effective and
relevant papers. This has resulted in
significant improvements in the content,
length and insightfulness of our Board and
committee packs, which in turn prompts
more informed discussion and better
decision making. In parallel, new
management information dashboards
developed during 2016 have enabled ‘at a
glance’ views of the status of key
programmes and business performance.
One of the most important responsibilities I
have as Chairman is to ensure the right
balance of skills, experience, independence
and knowledge on the Board to provide
effective support and challenge to
management. There were a number of
Board and ELT changes announced during
the year, which you can read about in more
detail in the Nominations & Governance
Committee report on pages 67 to 71.
In March, we welcomed Brad Singer as a
new member of the Board and the Science
& Technology Committee. Brad is chief
operating officer of ValueAct, a
major shareholder.
Our relationship with ValueAct has been,
and remains, thoughtful and productive.
We have a relationship agreement in place
which, although less usual in the UK, is fairly
standard practice in the US.
In May, Sir Kevin Smith was appointed as
Senior Independent Director.
In September, we announced the
appointment to the Board of Stephen
Daintith as Chief Financial Officer to
succeed David Smith. Stephen will take
up his new post in Spring 2017.
Colin Smith will also be stepping down
from the Board at the 2017 AGM after a
distinguished career with the Group spanning
over 40 years. We are indebted to Colin for his
exemplary contribution to engineering.
In May, Dame Helen Alexander stepped
down from the Board having completed her
nine-year term. Dame Helen has shown
dedication and valued insight throughout
her tenure, including in her leadership of the
Remuneration Committee. On behalf of the
Board, I would like to thank Dame Helen for
her contribution and commitment.
In November 2016, I accepted Alan Davies’
resignation from the Board. Alan was
appointed as a Non-executive Director one
year previously and his contribution,
expertise and perspectives were highly
valued by his colleagues during his period
in office.
The Board resolved in December to propose to
shareholders the appointment of PwC
as auditor with effect from the 2018 AGM.
Details of the tender process are contained in
the Audit Committee report on page 102.
We consulted with major shareholders
during the year on the proposed changes
to our remuneration policy. Further details
of the consultation and the new policy are
in the Directors’ remuneration report on
pages 72 to 82. We also held our first
governance event in the UK and a
governance roadshow for major investors
in the US. Further details of these events
can be found in the Corporate governance
report on page 66.
We note with interest the government’s
green paper on UK corporate governance.
The Board is considering the level of
interaction with stakeholders, particularly
employees. We are planning to hold an
‘AGM for employees’ in 2017, and Irene
Dorner will take the lead at looking at how
we can strengthen our links between the
boardroom and our employees.
I look forward to reporting our progress on
corporate governance in our Annual Report
next year.
Ian Davis
Chairman
13 February 2017
Rolls-Royce Holdings plc Annual Report 2016
CORPORATE GOVERNANCE
59
Corporate governance
The Board
The role of the Board
Providing leadership, knowledge and experience
to support and guide the ELT.
Overseeing and monitoring business performance,
internal controls, governance and risk management.
Setting Group strategy and objectives after
considering recommendations from the ELT.
Shareholder engagement.
Oversight of principal risks – competitive position,
political risk, programme delivery.
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
Sir Kevin Smith
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
Overseeing the design and effectiveness of the
Providing governance, advisory and
Group’s governance arrangements.
administrative support to all Directors.
Acting as Secretary to the Board and its committees,
Assisting the Nominations & Governance
ensuring compliance with Board procedures
and corporate governance requirements.
Committee with plans for Directors’ induction
and ongoing training.
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
Incentive design and setting
of targets
Executive remuneration
review
Succession planning
Board nominations
Board evaluation
Corporate governance
Oversight of principal risk –
talent & capability
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
Oversight of principal risks –
IT vulnerability,
business continuity,
market & financial shock
Sustainability
Oversight of principal risks –
compliance, product failure
Technology capabilities
and skills
R&D investments
Technology trends and risks
Oversight of principal risk –
disruptive technologies
& business models
DIRECTORS’ REPORT 60
DIRECTORS’ REPORT CORPORATE GOVERNANCE
Rolls-Royce Holdings plc Annual Report 2016
The Board and its committees
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 54 to 57. Details of the
Executive Directors’ service contracts and the Non-executive
Directors’ letters of appointment are on pages 91 and 92. Details of
their remuneration and share interests are set out in the Directors’
remuneration report on pages 83 to 95.
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 the key financial items.
The Board reviewed the schedule of matters during the year.
The Board has established certain principal committees to provide
dedicated focus on particular areas, as set out on the previous page.
The chairman of each committee reports to the Board on the
committee’s activities after each committee meeting.
In addition to the Board’s principal committees, it has established a
sub-committee of Directors who each hold an appropriate level of
UK national security clearance for the purpose of receiving and
considering, on behalf of the Board, any UK classified information
relating to the Group's programmes and activities.
Matters that are not reserved to shareholders, the Board or one of its
committees are the responsibility of the Chief Executive who has
established and maintains a schedule of delegations of authority to
members of the ELT and other management.
Key matters reserved to the Board:
• The Group’s long-term objectives, strategy and risk appetite.
• Shareholder engagement and general meetings.
• Overall corporate governance arrangements including Board and
committee 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.
The way in which principles of the UK Corporate Governance Code
(the Code) are applied, including the role of the Board and the
Chairman, Chief Executive, Senior Independent Director and
Company Secretary, the matters reserved to the Board, the terms of
reference of each of the Board committees, and details of Directors’
induction and training have been agreed by the Board and are set
out in our Board governance document available on the corporate
governance pages of the Group’s website www.rolls-royce.com.
Appointments and re-appointments
The Board was advised by the Nominations & Governance Committee
regarding all Board changes. Details of the appointment process,
and the changes made during the course of the year, are set out in the
Nominations & Governance Committee report on pages 67 to 71.
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 pages 70 and 71. This review
was undertaken in November 2016 and the Board concluded that all
the Non-executive Directors, with the exception of Brad Singer,
remained independent in character and judgement.
Brad Singer is a partner and the chief operating officer of ValueAct,
a major shareholder, and therefore not considered to be an
independent Non-executive Director under the provisions set out in
the Code. The Company has in place a relationship agreement to
manage any conflicts of interest that arise from his connection to
ValueAct. A summary of the relationship agreement is on the
corporate governance pages of the Group’s website.
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 54.
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 which also extends to directors
of subsidiary companies.
Compliance with the UK Corporate Governance Code
The Company is subject to the principles and provisions of the Code,
a copy of which can be found on the Financial Reporting Council’s
(FRC) website, www.frc.org.uk.
The Board considers that the Company complied in all material
respects with the Code for the whole of the year to 31 December
2016. The Board has agreed that arrangements by which staff may
raise concerns in confidence are considered and reviewed by the
Safety & Ethics Committee. Any matters relating to financial
reporting, the integrity of financial management or fraud are also
reported to the Audit Committee.
Rolls-Royce Holdings plc Annual Report 2016
CORPORATE GOVERNANCE
61
Board and committee meetings held in 2016
NG
R
A
SE
B
B
IAB
B
NG
A
B
R
A
ST
AGM
B
SE
B
NG
R
A
SE
ST
B
NG
R
R
R
B
NG
R
A
B
B
B
R
NG
R
A
SE
B
B
B
January
February
March
April
May
June
July
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
Denotes unscheduled meeting
AGM Annual General Meeting
The unscheduled meetings of the Board in November and
December were held to consider progress towards reaching
agreements with investigating authorities in UK, US and Brazil.
The unscheduled meeting of the Nominations & Governance
Committee held in April was to consider the appointment of
Sir Kevin Smith as Senior Independent Director.
The unscheduled meeting of the Audit Committee in April was to
consider the audit tender process and the potential consequences
of IFRS 15 for the Group’s accounting.
The unscheduled meetings of the Remuneration Committee
held in August and September were to consider:
• Remuneration packages for the new Chief Financial Officer
and Chief Operating Officer.
• Feedback from the initial shareholder consultation on
remuneration policy proposals.
Some of the Directors were unable to participate in the
unscheduled meetings of the Nominations & Governance
Committee held in April and of the Remuneration Committee
held in September as these meetings were called on short notice.
BOARD AND COMMITTEE ATTENDANCE AT SCHEDULED MEETINGS
Directors as at 31 December 2016
Ian Davis
Warren East
Lewis Booth
Ruth Cairnie
Sir Frank Chapman1
Irene Dorner
Lee Hsien Yang
John McAdam2
Bradley Singer (appointed 2 March 2016)
Colin Smith
David Smith
Sir Kevin Smith
Jasmin Staiblin3
Former Directors
Dame Helen Alexander (left 5 May 2016)
Alan Davies (left 18 November 2016)
Board
(11 meetings)
11/11
11/11
11/11
11/11
10/11
11/11
11/11
11/11
Nominations &
Governance
(5 meetings)
5/5
–
5/5
5/5
4/5
5/5
5/5
5/5
Remuneration
(6 meetings)
–
–
–
6/6
5/6
–
–
6/6
Audit
(5 meetings)
–
–
5/5
–
–
5/5
5/5
–
Safety & Ethics
(4 meetings)
–
–
–
–
4/4
4/4
4/4
3/4
8/8
11/11
11/11
11/11
10/11
5/5
8/10
–
–
–
5/5
4/5
1/1
3/4
–
–
–
6/6
–
2/2
–
–
–
–
–
–
–
3/4
–
–
–
–
–
1/1
–
Science &
Technology
(2 meetings)
–
–
2/2
2/2
–
–
–
–
2/2
–
–
2/2
1/2
–
–
1 Sir Frank Chapman missed the meetings of the Board, Nominations & Governance Committee and Remuneration Committee in November for medical reasons.
2 John McAdam missed the meeting of the Safety & Ethics Committee in December due to an unavoidable diary clash with a Board meeting of Rentokil Initial plc where he is Chairman.
3 Jasmin Staiblin missed the meeting of the Nominations & Governance Committee in July and the Board meeting in December due to needing to attend to urgent business at
Alpiq Holding AG, where she is CEO. She also missed the meeting of the Science & Technology Committee in May due to unavoidable last-minute travel disruptions.
DIRECTORS’ REPORT
62
DIRECTORS’ REPORT CORPORATE GOVERNANCE
Rolls-Royce Holdings plc Annual Report 2016
The Board’s areas of focus
Matters considered
Strategy and risk
Outcome
Key areas of focus for 2017
Progress with the transformation programme.
Significant senior management headcount reductions,
tracked to underlying cost base.
Continued oversight of execution of
transformation plans to deliver
targeted benefits.
Board priorities and financial assumptions over the
timeframes of three, five and ten years, including key
risks, assumptions and sensitivities.
Strategic options clarified. Update of strategic priorities
underway to evaluate the best way to deliver enhanced
shareholder value in the long term.
The Group’s vision, values
and culture. Execution of strategic
priorities.
Put option exercised by SENER regarding ITP joint venture.
Agreed valuation for acquisition of remaining stake in ITP.
Progress with regulatory investigations, with increased
oversight as potential deferred prosecution agreements
(DPAs) were being discussed with the authorities.
Full co-operation with investigating authorities, leading to
agreements with UK, US and Brazilian authorities in
January 2017. Lord Gold continued to attend Audit and
Safety & Ethics Committee meetings to oversee progress
on the ethics and compliance improvement programme.
Execution of transaction and
integration of ITP into the Group.
Monitoring of compliance with the
terms of the DPAs and leniency
agreement. Considering the
conclusions and recommendations
in Lord Gold’s latest report, and
oversight of actions required.
Principal risks including changes to those risks, the
underlying principal risk indicators and risks related to the
transformation programme.
The Board added a further principal risk: disruptive
technologies and business models. With this addition the
Board confirmed that the principal risks remained
appropriate.
Principal risks will be kept under
review, and all will be the subject of
‘deep dives’ by the Board or a Board
committee during 2017.
More focus on talent and succession risks and increased
Board time dedicated to updates on major programmes.
EU referendum preparations and outcome.
A steering group was set up to monitor developments
and report back to the Board.
Further planning and preparations
for Britain’s exit from the EU.
Coming into force of EU Market Abuse Regulations (MAR).
The Group took appropriate steps, including updating its
policies and procedures, to ensure compliance with MAR.
Monitoring of market best practice
and any updates or guidance issued.
Succession and leadership
Board and ELT composition.
Diversity and inclusion.
Effectiveness of the Board, Chairman and Chief Executive.
Key appointments made including Chief Financial Officer,
Chief Operating Officer and Strategy & Marketing Director.
Appointments of Sir Kevin Smith as Senior Independent
Director and Brad Singer as Non-independent
Non-executive Director.
Search for at least one new
Non-executive Director to replace
Alan Davies who resigned in
December 2016 and John McAdam
who will step down in 2017.
Increasing diversity retained as a key priority for the Group
and as a critical part of the transformation programme.
Continued Board oversight and
sponsorship of diversity and
inclusion within the Group.
The Board and its committees operated effectively in 2016.
The Chairman and Chief Executive received constructive
feedback on their respective performance and the Board
supported their continuation in office.
Implementing recommendations
made by Independent Audit as part
of Board effectiveness review. See
page 65 for more details.
Shareholder engagement and governance
Terms of a relationship agreement with ValueAct
following its acquisition of a significant shareholding
and the appointment of Brad Singer to the Board.
Relationship agreement in place.
Investor communications, feedback and governance
events and roadshows in the UK and US.
Increased transparency in investor briefings. The
governance events were well-received with good input
from investors.
Continuing constructive
engagement with ValueAct and
other significant shareholders on
appropriate matters.
Continue shareholder engagement
to build investor confidence.
A further governance event will be
held in 2017.
Private meetings with institutional shareholders to
discuss particular areas of interest to them.
Directors met with several institutional shareholders upon
request during the year. Topics included sustainability and
our ethics and compliance improvement programme.
We will maintain an active
shareholder engagement
programme in 2017.
Rolls-Royce Holdings plc Annual Report 2016
CORPORATE GOVERNANCE
63
Matters considered
Outcome
Key areas of focus for 2017
US governance under Special Security Agreement (SSA)
Arrangements with the Rolls-Royce North America (RRNA)
board, whose members are appointed with the approval
of the US Department of Defense to oversee and ensure
compliance with laws and regulations concerning security
and technology controls.
Financial performance
Financial performance and outlook, liquidity and funding
including discussions with credit rating agencies.
IFRS 15 impact.
Following the retirement of James Guyette in 2015, the role
of President & CEO of RRNA is no longer a Board position.
However, arrangements with the RRNA board continue to
be effective. These arrangements permit the Group, under
the SSA, to operate US security-cleared facilities and
participate in classified technology development and
production programs.
Maintaining a good dialogue with,
and support to, the RRNA board as
required.
Regular reports on financial performance and outlook
received throughout the year. Group liquidity and funding
kept under review considering strategic priorities, the
Company’s credit ratings and contingencies.
Regular oversight of financial
performance against 2017 budget,
and of funding plans against strategic
priorities and liquidity needs.
The Board was briefed on the impact of IFRS 15 on the
Group’s accounting for revenue and profit, by reference to
a notional restatement of 2015 results which was shared
with investors at the Group’s capital markets’ event in
November 2016.
Ongoing oversight of preparations
for introduction of IFRS 15 in 2018.
The Group’s management information (MI) and
forecasting project.
A progress update on the project was provided, including a
demonstration of the new MI system and KPI dashboard
being used by management.
Progress on further improvements
will be monitored in 2017.
Financial support for critical supplier.
Reviewed and approved a package of financial support to a
key supplier to ensure continuity of materials supply for
some of the Group’s programmes.
Audit tender.
The Board resolved to recommend to shareholders the
appointment of PwC as the Company’s auditor with effect
from the 2018 AGM, following recommendations from the
Audit Committee.
The Group’s risk management
measures to ensure continuity of
supply of critical components and
materials will remain an area of
Audit Committee review as part of
its oversight of the business
continuity principal risk.
Not applicable.
Review of the Group’s pension arrangements.
A merger of four of the Group’s pension schemes and the
transfer of one scheme to an insurer.
The level of funding of the remaining
schemes will remain under review.
Operational performance
Civil large engine programmes.
The Board undertook detailed reviews of several of the
Group’s civil large engine programmes with the Civil
Aerospace executive team to understand management’s
plans to address operational challenges faced.
Product incidents in service and HS&E.
Received reports from the Chairman of the Safety & Ethics
Committee and executive management on product-related
incidents in service and HS&E matters.
More detailed Board oversight will
continue in 2017 as the business
moves through key milestones in
its new product introduction
programmes and transformation
activities.
Continued ‘tone from the top’
emphasising the paramount
importance of product and people
safety, particularly during a period
of transformation.
Sustainability targets.
Payments to shareholders
Overall score in the Dow Jones Sustainability Index
improved in 2016.
Progress towards published targets
for 2020 will be monitored in 2017.
The Group’s policy on shareholder payments.
Agreed to maintain payments at the level established in
early 2016.
Policy to be kept under review in
balancing the near-term strategic
and operational funding needs with
the desire to return in future to a
position of year-on-year progressive
growth in payments to
shareholders.
DIRECTORS’ REPORT 64
DIRECTORS’ REPORT CORPORATE GOVERNANCE
Rolls-Royce Holdings plc Annual Report 2016
Information included in the Directors’ report
Internal control and risk management
Certain additional information that fulfils the requirements of the
Corporate governance statement can be found in the Other statutory
information section on pages 186 to 189 and is incorporated into, and
forms part of, this Corporate governance report by reference.
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
operations. All Directors are encouraged to undertake additional
training and to visit the Group’s facilities. Details are set out in the
Nominations & Governance Committee report on page 70.
Board visit to Indianapolis
The Board meeting in September was held in Indianapolis, US,
where the Board visited a number of our key sites in the area
and met the local management teams, the RRNA board and
US-based employee resource groups. They also reviewed
progress with the programme to transform and revitalise our
legacy plant and took the opportunity to celebrate the opening
of the new Rolls-Royce Development Centre building. The
Science & Technology Committee met the teams working on
our advanced technology programmes and received detailed
briefings and practical demonstrations. You can read more on
this in the Science & Technology Committee report on pages
110 to 112.
In developing our internal governance framework (see page 70)
we looked at how the Group’s risk management and internal control
systems work together. You can read about our risk management
system on page 48 and details of our internal control system are in
the Audit Committee report on pages 100 and 101. As noted on
page 48, 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 Disclosure Guidance 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
a Group level, are reported monthly against budget and variances
are kept under scrutiny.
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. This contains the Group’s key
accounting policies.
Executive Leadership Team (ELT)
The ELT is an executive-level forum of the Group’s most senior
leaders, chaired by the Chief Executive. It comes together to
communicate, review and agree on issues and actions of
Group-wide significance. 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 in the performance of his duties.
EXECUTIVE
LEADERSHIP TEAM
Chris Barkey
Group Director – Engineering
& Technology
Marion Blakey
President & CEO Rolls-Royce
North America
Chris Cholerton
President – Defence Aerospace
Warren East CBE
Chief Executive
Mark Gregory
General Counsel
Harry Holt
President – Nuclear
Mary Humiston
Group Human Resources Director
Simon Kirby
Chief Operating Officer
Mikael Makinen
President – Marine
Andreas Schell
CEO – Power Systems
Eric Schulz
President – Civil Aerospace
Colin Smith CBE
Group President (until 4 May 2017)
David Smith
Chief Financial Officer
(until 28 February 2017)
Ben Story
Strategy & Marketing Director
Stephen Daintith
Chief Financial Officer
(from Spring 2017)
Rolls-Royce Holdings plc Annual Report 2016
CORPORATE GOVERNANCE
65
Board evaluation
The Board and its committees undertake an annual evaluation of
their effectiveness. In 2016, Independent Audit was again asked to
conduct an external evaluation, following up from its reviews in
2014, when first appointed, and 2015. Independent Audit also
supported the Audit Committee in the assessment of KPMG as
external auditor for 2015. It does not have any other connection to
the Company.
The evaluation included a review of Board and committee papers
and interviews with the Directors and the Company Secretary.
Interviews were also held with other senior managers who interact
regularly with the Board and its committees including the General
Counsel, Director of Internal Audit and the Director of Compliance
and Risk.
The 2015 review specifically focused on strategically important
questions and challenges for the Board. The 2016 review noted that
improvements had been made on the provision of information,
although more could be done to ensure greater clarity on the
medium- to long-term development plans. The review recommended
that more time be spent on culture and behaviours, while noting that
the Board was better informed on talent and succession.
Having gone through the effectiveness review described above, the
Directors are satisfied that the Board and each of its committees
operated effectively during 2016.
PROGRESS ON KEY AREAS IDENTIFIED
Key areas identified in 2015
Progress in 2016
Focusing Board
debate and improving
Board processes
The Board gave more focus to the transformation agenda and to the
near-term strategy with detailed discussions on cash, cost reductions,
status of key engine programmes and operational performance.
The Company Secretary’s office worked with the ELT and other Board
paper authors, providing training, tools and templates which resulted
in more effective and relevant papers for the Board and committees.
Less time was dedicated to presentations and more to debate and
discussion on presented topics.
Transformation
and principal risks
Particular discussion was held around risks to the transformation
programme identified in the 2015 evaluation. However, it was agreed
that these risks were covered in the principal risks relating to major
programme delivery and competitive position.
Focus for 2017
More focus is needed on the main
drivers, levers and challenges faced.
The work during the year on Board
papers has resulted in welcome
improvements in their content,
length and insightfulness. However,
more work is needed to show, with more
quantification and detail, progress
against well-defined priorities.
More time will be spent discussing
the culture and behavioural aspects
of the transformation programme.
Talent and succession
Disruptive technologies and business models was added as a further
principal risk during the year, to reflect the increasing importance of
transformative technologies.
Disruptive technologies and business
models will be an area of focus for the
Science & Technology Committee.
The Board held a deep dive on succession planning in March 2016 and the
Nominations & Governance Committee carried out further reviews and
worked with the Chief Executive to support his work refreshing the ELT.
The Board also took opportunities to meet with senior managers below
ELT level and greater participation by senior managers was encouraged
in Board meetings. Further details can be found in the Nominations &
Governance Committee report on page 70.
The Board has been better informed on
senior personnel issues and changes.
Work should continue to strengthen
lower management levels.
Management
information (MI)
The development of new MI dashboards during the year has helped
to provide the Board and management with ‘at a glance’ indicators of
the status of key programmes and business and function performance.
The output from the MI dashboards
will help support the further
improvements identified for Board
paper content.
DIRECTORS’ REPORT 66
DIRECTORS’ REPORT CORPORATE GOVERNANCE
Rolls-Royce Holdings plc Annual Report 2016
In early 2016, we consulted with a number of investors on proposed
changes to the 2016 annual bonus and performance share plan (PSP).
In the autumn, the new chairman of the Remuneration Committee,
Ruth Cairnie, undertook an extensive consultation programme to
discuss the proposals for the new remuneration policy which will be
put to shareholders at the 2017 AGM. Feedback from meetings with
over 20 stakeholders helped to determine the shape and quantum of
the proposed new policy framework (see Remuneration report on
pages 72 to 82).
The Group’s website (www.rolls-royce.com) contains up-to-date
shareholder information, including an online version of the Annual
Report, materials from the capital markets’ and corporate governance
events, share price information, news releases, presentations to the
investment community and information on shareholder 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 BST on Thursday, 4 May 2017 at the Pride Park Stadium, Pride
Park, Derby, DE24 8XL. 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 all Company general
meetings. All shareholders have the opportunity to cast their votes in
respect of proposed resolutions by proxy, either electronically or by
post. Following the AGM, the voting results for each resolution are
published and are made available on our website.
Shareholders unable to attend the AGM can vote on the business of
the meeting either by post or online.
The Company will propose at the AGM certain changes to the Articles
relating to shareholders who we have been unable to trace for a period
of 12 years. In line with many other companies, the Articles currently
allow the Company to sell any shares held by an untraced shareholder.
The changes to the Articles are intended to clarify when a shareholder
is considered to be untraced and to allow the Company to use the net
proceeds of the sale of an untraced shareholder’s shares to support the
Group’s community investment and education outreach programmes
and to fund other good causes at the Company’s discretion. At the
same time, the Company intends to continue its use of a professional
asset reunification agent to search for shareholders who have not kept
their details up-to-date.
Shareholder engagement
The Board recognises and values the importance of building strong
investor relations through a proactive communication programme.
Having strengthened the investor relations department in mid-2015,
various initiatives were implemented in 2016 to improve further
investors’ understanding of the business. This included enhancing
disclosure and transparency through improved reporting and
engagement, particularly over the forthcoming adoption of IFRS 15
from January 2018.
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 has
undertaken an extensive investor relations programme involving
formal events, site visits, smaller group and one-to-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. One-to-one meetings requested by
investors focus on areas of particular interest to them, which in 2016
included our approach to sustainability and our ethics and compliance
improvement programme. These events also provide opportunities
for shareholders to meet members of the senior management team.
Notable events in 2016 included the capital markets’ event held
in November with updates from the Chief Executive on
transformation progress and strategic priorities and the Chief
Financial Officer on the impact of IFRS 15 in particular. The business
leaders each presented the market position of their segments, and
examples of progress being made were discussed in breakout sessions.
The team also hosted a significant number of investors and analysts at
the Farnborough air show and undertook a number of site visits to
facilities both in the UK and Singapore.
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 appropriately and fairly value the
Group’s businesses.
We have held over 600 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. The team has also
published five newsletters throughout the year which provide a
summary of the core news flow from around the Group, updates on
future investor relations events and questions and answers on various
topics of current interest to investors.
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 institutional investors upon request and
regularly attend key investor relations events. The Chairman and
Senior Independent Director have each met investors in both the UK
and the US on scheduled roadshows. In addition, the Chairman hosted
a very well-received corporate governance event in April. He was
joined by all Board committee chairmen who presented the key areas
of focus for their individual committees before questions were taken
from major shareholders and corporate governance analysts in
smaller workshop sessions.
Rolls-Royce Holdings plc Annual Report 2016
NOMINATIONS & GOVERNANCE COMMITTEE REPORT
67
Nominations & Governance
Committee report
Ian Davis
Chairman of the
Nominations
& Governance
Committee
Highlights
Considered and recommended
to the Board:
– appointment of Brad Singer
as a Non-executive Director
– appointment of Sir Kevin Smith
as Senior Independent Director
– appointment of Stephen Daintith
as Chief Financial Officer
– re-appointment of Ian Davis
as Chairman.
Global governance framework
launched.
Talent, succession and diversity
reviews.
Principal responsibilities
The key areas of responsibility of the
Committee are:
To review the structure, size and
composition of the Board and its
committees, to ensure that they remain
appropriate, and to make recommendations
to the Board of any changes.
To consider succession plans for
Directors and senior executives.
To oversee the induction plans
for Directors.
To review the independence of the
Non-executive Directors.
To conduct an annual evaluation
of the Chief Executive.
To review the Board’s diversity policy
and its implementation.
To oversee the principal risk relating
to talent and capability.
To report to the Board on the Group’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 evaluate any conflicts of interest that
the Directors may have.
The Chairman and the independent
Non-executive Directors are members of
this Committee and the Chief Executive
attends the Committee meetings.
At a glance
Area of focus
Board and
committee
composition
Matters considered
Outcome
Re-appointment of one Non-executive
Director and of the Chairman.
The Board made the following appointments after receiving recommendations
from the Committee:
The appointment of a new Senior
Independent Director and changes
to the chairmanship and composition
of Board committees.
• Sir Kevin Smith was appointed as Senior Independent Director and chairman
of the Science & Technology Committee.
• Lee Hsien Yang and Ian Davis were each re-appointed for a second
three-year term (subject to annual shareholder approval).
Appointments
to the Board
Appointment of Brad Singer, partner
and the chief operating officer of major
shareholder ValueAct Capital.
The appointment of a new
Chief Financial Officer.
• Ruth Cairnie was appointed as chairman of the Remuneration Committee.
Recommended the appointment of Brad Singer to the Board as a Non-executive
Director recognising that he was not considered to be independent.
Members of the Committee were involved in the interview process for the
Chief Financial Officer and the Committee recommended Stephen Daintith’s
appointment to the Board.
Succession
planning
and talent
management
Talent and succession, diversity
and inclusion reviews.
This will be a continued area of focus. Further details of the reviews are shown
on page 70.
Progress on appointments to the ELT.
Members of the Committee were involved in the interview process for the
Chief Operating Officer and the Strategy & Marketing Director.
Board inductions,
training and
development
A schedule of site visits by all Directors
and feedback from inductions from
the Directors appointed in 2015.
A number of site visits had been carried out during the year as part of ongoing
induction schedules. It was recommended that each Non-executive Director
undertake at least one site visit each year, in addition to the Board and committee
meetings held outside London.
Governance
Roll out of the global governance
framework.
The Group’s global governance framework was communicated to all employees
during the year.
DIRECTORS’ REPORT 68
DIRECTORS’ REPORT NOMINATIONS & GOVERNANCE COMMITTEE REPORT
Rolls-Royce Holdings plc Annual Report 2016
Board and committee composition
The Committee regularly reviews the balance and composition of
the Board, its committees and the executive team. These reviews
identify current needs and consider longer-term succession
planning in light of the Group’s strategy. When reviewing
Non-executive Director appointments the Committee considers the
current skills, experience and tenure of the Directors and assesses
future needs against the longer-term strategy of the Group.
The Committee recommended the appointments of a new Senior
Independent Director and new chairmen for the Remuneration and
Science & Technology committees. We take care to ensure that the
skills and experience of Board members are closely aligned with the
needs of the Board committees.
In February 2016, Lewis Booth indicated his intention to relinquish
his responsibility as Senior Independent Director once a successor
had been appointed. He remains chairman of the Audit Committee.
Sir Kevin Smith, first appointed to the Board in November 2015,
became Senior Independent Director following the AGM in May
2016. He is well known by the UK investor base and the Committee
agreed he would be an excellent successor to Lewis. Sir Kevin was
also appointed as chairman of the Science & Technology Committee
in February 2016. Sir Kevin has significant aerospace industry
knowledge with engineering and manufacturing experience,
gained during a long career at GKN and BAE Systems.
Brad Singer joined the Science & Technology Committee on his
appointment to the Board on 2 March 2016.
Dame Helen Alexander stepped down from the Board after the AGM
in May 2016, having served as a Director for nine years. She was
succeeded as chairman of the Remuneration Committee by Ruth
Cairnie. Ruth first became a member of the Remuneration
Committee when she joined the Board in September 2014. Ruth has
been chairman of the remuneration committee at Keller Group plc
since April 2012 and also sits on the remuneration committee of
Associated British Foods plc. She therefore has both the experience
and skills to chair the Rolls-Royce Remuneration Committee.
Alan Davies stepped down from the Board on 18 November 2016.
As announced in July 2016, he had been appointed to the Safety &
Ethics Committee with effect from 1 September 2016. However,
he stepped down from the Board before any subsequent meetings
of that committee took place.
Colin Smith will step down from the Board at the 2017 AGM after a
distinguished career with the Group spanning over 40 years.
David Smith will leave the Company on 28 February 2017.
The Committee considered and recommended to the Board the
terms of appointment for Lee Hsien Yang for a second three-year
term subject to annual shareholder re-election. It also
recommended my re-appointment, again for a three-year term
subject to annual shareholder re-election. A full evaluation of my
performance as Chairman was carried out by Lewis Booth, as Senior
Independent Director, prior to confirmation of my re-appointment.
Board committee membership is set out on page 54.
The Nominations & Governance Committee is satisfied with the
composition of the Board committees however, with the resignation
of Alan Davies in November 2016 and with the completion of John
McAdam's nine-year term in 2017, we have recommended that the
Board seeks at least one additional Non-executive Director, in
particular someone who can complement the skills and experience
on the Audit Committee.
Appointments to the Board
In November 2015, ValueAct notified us that it had increased its
shareholding in the Company to above 10%. The Committee
discussed the implications of ValueAct increasing its shareholding
and encouraged engagement to understand better its
management's views, noting that it had requested a seat on the
Board. The Committee agreed that any proposed appointee should
be credible and have the appropriate skills and experience to bring
valued contributions as a Non-executive Director on the Board,
particularly as the Group continued to execute its transformation
programme. Candidates would be required to follow the rigorous
selection process that applies to all Board appointments. The
Committee also considered the implications of having a shareholder
representative as a Director and referred this matter to the Board
for further consideration. The Committee agreed that any
shareholder representative would not be considered independent.
During January and February 2016, Brad Singer, a partner and
the chief operating officer of ValueAct, met with members of the
Committee and with the Executive Directors. I also had several
extended meetings with him and took up a number of references
both on him as an individual and from other chairmen who
have experience of having an active shareholder represented
on their boards.
Previously, Brad had been senior executive vice president and the
chief financial officer of Discovery Communications Inc, and chief
financial officer and treasurer of American Tower Corp. He has also
worked as an investment banker at Goldman Sachs in New York
and London. The Committee agreed that Brad has an excellent
record as a business leader. He has experience of public companies
during periods of change, growth and significant financial
outperformance, particularly in the US where Rolls-Royce has
important business interests and a significant shareholder base.
The Committee considered that Brad was an appropriate candidate
and recommended his appointment. The Board took account of
the discussion of the Committee and of the terms of the proposed
relationship agreement between the Company, ValueAct and
Brad Singer and agreed that appointing him to the Board was in the
best interests of shareholders.
Both Brad’s appointment and the terms of the relationship
agreement were finalised and published on 2 March 2016. Details
of the relationship agreement are available on the corporate
governance page of the Group's website, www.rolls-royce.com.
Stephen Daintith will join the Board as Chief Financial Officer in
Spring 2017. Details of his career, skills and experience can be found
on page 57.
Rolls-Royce Holdings plc Annual Report 2016
NOMINATIONS & GOVERNANCE COMMITTEE REPORT
69
The Inzito Partnership (Inzito) was engaged as the search consultant
for the Chief Financial Officer. A candidate brief, which included
technical and personal qualities and skills, was drawn up by the
Chief Executive and Group Human Resources Director and shared
with members of the Nominations & Governance Committee. Inzito
drew up a list of potential candidates and the Chief Executive and
Group Human Resources Director interviewed a number of them
before presenting a shortlist of candidates for members of the
Committee to interview. Formal and informal references were
taken on the shortlisted candidates and Stephen Daintith met all
members of the Committee, and met with the Chief Executive and
Chairman several times, before his appointment was recommended
to the Board. The terms of his appointment were also considered
and agreed by the Remuneration Committee in principle before
the Board formally appointed Stephen.
making preparations to report under the Gender Pay Gap Reporting
Regulations by April 2018.
The Group acknowledges the challenges of increasing diversity
within our industry. We are working closely with the Royal Academy
of Engineering's Diversity Leadership Group which has launched
working groups to drive change and challenge the status quo for
diversity and inclusion in the engineering sector. We have
representation on its steering group and support four of its five
action groups.
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. Our
high performance culture training continues to be rolled out across
the globe to help employees increase their personal effectiveness.
Each of the Directors continues to be effective and able to devote
sufficient time to the business of the Company and the
Nominations & Governance Committee will continue to keep the
Board's composition under review.
Diversity and inclusion
The Board and Committee actively support the Group’s diversity
and inclusion vision.
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. Following the departure of Dame Helen
Alexander the percentage of women on the Board has fallen to
23% (2015:29%). Appointments will always be made on merit,
however, for future Board appointments the Committee will
instruct search consultants to identify as a priority female
candidates who meet the skills and experience brief. As with
previous Board appointments, we will consider candidates from
the widest possible pool and will only engage search firms that
have signed up to the Voluntary Code of Conduct for Executive
Search firms. The Board has noted the Hampton Alexander
recommendation for FTSE 100 companies to have at least 33% of the
positions in their executive pipeline filled by women by 2020.
Our global diversity and inclusion policy and anti-discrimination
policies aim to ensure that all employees are treated with dignity
and respect and are empowered to deliver without fear of bullying
or harassment (for more information see pages 42 and 43). We are
In March 2016, the Group Human Resources Director and Head of
Global Talent Management shared with the Committee key diversity
and inclusion achievements during 2015 and provided current
global demographics and key elements of the diversity and inclusion
strategy and priorities.
Non-executive Directors took positive action to meet a number of
employee groups throughout the year to support these priorities. This
included: an informal lunch with the Women’s Group in Dahlewitz,
Germany, on International Women’s Day; dinner with high potential
women in Derby, UK in May; and a meeting with representatives of
the six employee resource groups (ERGs) in North America during the
Board's visit to Indianapolis in September. In addition, individual
members of the Committee took opportunities to support various
activities by the ERGs in the UK, Germany and the US.
Diversity and inclusion strategy and priorities
• Senior leaders committing to a diverse and inclusive
environment.
• Hiring diverse talent at all levels.
• Continual improvement in the way we act and behave
to ensure full inclusion of all our talent and enable them
to perform at their best.
• Engage and retain our best talent.
• Provide equal opportunity and advance diverse talent on merit.
BOARD MEMBERS BY GENDER
SENIOR MANAGERS BY GENDER
EMPLOYEE HEADCOUNT BY GENDER
3
11
4
10
3
10
14
177
12
168
16
125
8,000
46,100
7,700
100
7,400
42,800
42,400
2014
2015
2016
Female
Male
2016
3 (23%)
10 (77%)
2014
2015
2016
Female
Male
2016
16 (11%)
125 (89%)
2014
2015
2016
2016
7,400 (14.8%)
Female
Male
42,400 (85.0%)
Undeclared 100 (0.2%)
* Changes to our HR management system has enabled employees to choose whether to declare gender information. This has introduced an undeclared category to our
gender reporting in 2016.
DIRECTORS’ REPORT 70
DIRECTORS’ REPORT NOMINATIONS & GOVERNANCE COMMITTEE REPORT
Rolls-Royce Holdings plc Annual Report 2016
Succession planning and talent management
A principal risk to the business is the inability to attract, retain
and incentivise talented individuals to deliver our strategy. The
Committee is responsible for reviewing talent, capability and
succession at the most senior levels of the business.
Following the announcement of the senior management
restructuring in December 2015, and as part of our continuing
transformation programme, there has been an increase in focus on
our succession planning. Both the Committee and the Board held
deep dives in these areas during 2016. Our desire to increase
diversity, as described above, influences our approach to succession
planning, training and development.
The Chief Executive and Group Human Resources Director led
discussions on succession planning with the Board and the Committee
in March and September 2016 respectively. In March, the Board
considered skills and capability gaps at ELT level and succession
planning both immediately below ELT level and those that would be
ready to take up an ELT position in one or two moves. A new senior
management structure was announced in December 2015 including
the intention to appoint a new Chief Operating Officer. It was also
agreed that a new role, Strategy & Marketing Director, would be
added to the ELT. It was agreed that it was appropriate to recruit these
roles from outside the business to help bring a fresh perspective.
Members of the Committee were involved in the appointments of
Simon Kirby as Chief Operating Officer and Ben Story as Strategy
& Marketing Director.
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. Therefore, the review by the
Committee in September focused on the executive pipeline from
which the future leaders of the Company were likely to emerge,
both for ELT roles and other key management areas. The Board also
had dinner with a number of senior managers below ELT level in
November 2016 and certain Non-executive Directors attended the
senior leadership conference during the year to meet and exchange
views with key managers.
Board inductions, training and continuing development
The Company Secretary is responsible for ensuring that new
Directors have a thorough and appropriate induction. Each newly
appointed Director has a structured induction programme and
receives a comprehensive data pack providing detailed information
on the Group. Each induction is based on the individual Director’s
requirements and includes meetings with all other Directors and
members of the ELT as well as other relevant employees, committee
attendees and external advisers. All Directors visit the Group’s main
operating sites as part of their induction and are encouraged to
make at least one visit to other sites each year throughout their
tenure. Often these visits take place in small groups of two or three
Directors together as it is often useful to have a common
understanding and insight into an area of the business that may be
less well known to one or more of them. It also gives the Directors
the chance to spend time with their fellow Board members in a less
formal setting which helps them to understand the concerns of
their colleagues. We regard these site visits 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 seeing processes in operation and by having
discussions with a range of employees.
A summary of the visits carried out by individual Board members
and Board committee in 2016 (as referred to in the Safety & Ethics
and Science & Technology Committee reports) is shown on
page 71.
Further training is available for all Directors, as appropriate,
including presentations by the ELT on particular aspects of
the business. The transformation team also presented to
Non-executive Directors on progress, and the Board undertook
the Group’s ethics training.
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, who reports to the Chairman.
Governance
A core element of our transformation is world-class governance:
excellence in how we govern our business, manage risk, and make
sure standards are maintained throughout the Group.
The Group's governance framework, which was approved by the
Committee in December 2015, was deployed Group wide during
the year in five languages. It was supported by an all-employee
communications campaign which included a video message
from the Chief Executive and a dedicated intranet site. Rolling out
the framework has been an important step in clarifying the Group’s
expectations of its employees and supports the work being
undertaken on transformation.
The framework outlines the rules which apply to all Rolls-Royce
employees and is intended to guide them in making the right
decisions on behalf of the Group, faster and with more confidence.
In particular, the framework:
• Describes the Group's organisational structure, accountabilities
and responsibilities.
• Clarifies decision-making authorities.
• Gives employees an overview of our mandatory policies,
processes and procedures.
The Committee was kept up to date on progress as the framework
was rolled out across the Group. The framework is kept under
review and further enhancements will be communicated to
employees in 2017.
Conflicts of interest and independence
The Committee reviews the Non-executive Directors’ external
interests every year to determine whether each of them may
continue to be considered independent. In undertaking the
evaluation the Committee considers, among other things, the
criteria set out in the Code.
Rolls-Royce Holdings plc Annual Report 2016
NOMINATIONS & GOVERNANCE COMMITTEE REPORT
71
The Committee 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
authorisation. Additionally, an annual review of conflicts of interest
is undertaken to ensure that any previously authorised conflicting
situations are still dealt with appropriately.
Brad Singer, as a representative of a significant shareholder, is not
considered to be independent. As noted on page 68, the conflict
of interest is managed by a relationship agreement between the
Company, ValueAct and Brad Singer.
Having carried out the review, the Committee advised the Board
that it considered that each of the remaining Non-executive
Directors, with the exception of the Chairman for whom the test
is not appropriate, continued to be independent. The Committee
therefore recommended to the Board that each of the Director's
potential conflicts of interest be authorised, without imposing
any conditions.
Looking forward
We have made good progress on our priorities for 2016 which were
to develop succession plans, to ensure that the transformation of
the business was adequately supported below Board level, and to
oversee the development and roll out of the internal governance
framework. These areas will continue to be priorities for the
Committee in 2017.
Ian Davis
Chairman of the
Nominations & Governance Committee
NON-EXECUTIVE DIRECTORS' SITE VISITS IN 2016
Montreal
Canada
4
Indianapolis
USA
10
Crosspointe/
Reston
USA
3
Derby
UK
10
UTCs
Nottingham
UK
8
Manufacturing
Technology Centre
Coventry UK
3
Washington
Tyne and Wear
UK
2
Ålesund/
Ulsteinvik
Norway
4
HAESL
Hong Kong
1
Seletar and
UTC/ARTC* sites
Singapore
4
Board members present
* Advanced Remanufacturing & Technology Centre
Friedrichshafen
Germany
6
DIRECTORS’ REPORT
72
DIRECTORS’ REPORT REMUNERATION COMMITTEE REPORT
Rolls-Royce Holdings plc Annual Report 2016
Remuneration
Committee report
Highlights
New remuneration policy.
Outturns for 2016.
Terms of appointment for
Chief Financial Officer.
2016 overview
Introduction
I am pleased to present my first report as
chairman of the Remuneration Committee
describing what we have done in the
year and how we have reviewed our
remuneration policy.
Policy review
Much of the Committee’s activity in 2016
has focused on reviewing our policy.
Business context
The Group is at a critical stage in undergoing
a major transition of the business including
a ramp-up in delivery of new Trent engines,
the associated modernisation of the
manufacturing footprint and the far-
reaching organisational transformation
that is underway.
Whilst the transition has an expected
short-term negative impact on profit,
performance will improve through
successful delivery of our transformation
programme driving cost reduction and
improving operational execution, and
through achieving the increase in rate
of engine delivery. This underpins our
investment case and remuneration
should be strongly linked to delivering
this programme over the coming years.
Ruth Cairnie
Chairman of the
Remuneration
Committee
Policy drivers
Four key themes have emerged to underpin
our policy design: supporting transformation,
talent, stewardship and simplification.
We focused on the linkage to successful
delivery of the transformation agenda
which is closely matched to shareholder
interests.
We also needed to address the
competitiveness of our current rewards.
Through 2016, we have sought to recruit
into a number of senior positions to
strengthen skills in some areas, or to
support an overall raising of our
leadership capability to deliver the
transformation, bringing in experience
from other sectors. In this we have
encountered real evidence of our rewards
not being sufficiently competitive
to secure some key talent that would
make a strong contribution to Rolls-Royce.
We have continued to focus on aligning
the interests of Executive Directors and
shareholders.
We have also looked for opportunities
to simplify our reward structure, and
to ensure a coherent framework that
can be cascaded to lower levels in the
organisation.
Proposed changes
The overall structure will be unchanged,
comprising base salary, benefits, annual
bonus and a new long-term incentive plan
(LTIP). This reflects our continued focus on
pay for performance.
A number of simplifications are proposed
in the structure of both annual bonus and
LTIP, replacing multiplicative structures,
hurdles and kickers with simpler
additive components.
The performance measures are proposed to
be unchanged for both annual bonus and
LTIP, but with careful consideration having
being given to the weightings of the LTIP
components and a primary focus on growth
in free cash flow.
Cash flow targets will be based on
cumulative cash flow per share (CPS) as
now; earnings per share (EPS) targets will be
set on cumulative EPS over the three-year
performance period; total shareholder
return (TSR) will be measured relative to the
constituents of the FTSE 100 as now, as well
as the S&P Global Industrials Index.
This approach better reflects our status
as a FTSE 100 company and a global
engineering group.
The maximum level of LTIP award is
proposed to be increased to 250% of salary
for the Chief Executive and 225% for other
Executive Directors, to enhance our ability
to attract and retain the talent we need in
competitive markets. We also seek
headroom up to 300% for the Chief
Executive and 250% for other Executive
Directors if this should be necessary for
future recruitment. We have no other
intention to use this headroom. Our current
discretion to award a higher level of annual
bonus on recruitment will be removed.
Shares received upon the vesting of LTIP
awards, following the three-year
performance period, will be subject to a
two-year holding period. This approach
further aligns incentives with long-term
interests of shareholders.
The level of LTIP vesting for threshold
performance will be reduced from 30%
to 20% of the maximum.
Rolls-Royce Holdings plc Annual Report 2016
REMUNERATION COMMITTEE REPORT
73
Shareholder engagement
We have consulted extensively with major
shareholders throughout the policy review.
Early in the year several shareholders
expressed concerns about retention and
motivation given our more limited incentive
levels. We continued to discuss our thinking
with shareholders as we developed our policy
during the year. The majority of shareholders
who participated in this process:
nature of our businesses, differing sources
of R&D funding and their long investment
cycles. Some shareholders were ambivalent
about inclusion of relative TSR, however we
wanted to maintain a portion linked to the
in-period value delivered to shareholders.
Our shareholders also recognised the
significant changes to EPS, as we transition
to reporting under IFRS 15, but understood
the approach we propose to take.
Recognised the level of challenge in
delivering the transformation and our
need to attract top class talent.
Supported the simplified remuneration
structures.
Welcomed the inclusion of a holding
period and reduced threshold vesting for
LTIP awards.
Strongly supported cash as the most
important measure.
Supported an increase in the LTIP
maximum award in the context of
delivering our transformation.
Some shareholders favoured a more
highly-geared approach to remuneration,
with significantly higher incentive
opportunities. Other shareholders, while
supportive of an increase, were mindful,
as are we, of the increasing attention to high
levels of executive pay and concerns about
inequality. On balance, we have opted for an
operational LTIP maximum that, while a
significant increase, was not as high as
some of our shareholders suggested.
A small number of shareholders suggested
a fundamentally different approach to
remuneration with higher salaries and
lower leverage based on performance.
However, at this time our strong preference
is to link reward firmly with performance
and the delivery of our transformation
programme.
We also consulted widely with shareholders
on LTIP performance measures. We received
a very strong message that cash flow was
the most important performance measure.
Several shareholders asked us to consider
a long-term return measure in the mix.
On reflection, we were of the view that this
would be too opaque as a Group-level
incentive metric given the very diverse
Agreements with investigating
authorities
As announced on 17 January 2017,
agreements were entered into between
Rolls-Royce and the UK Serious Fraud Office
(SFO), US Department of Justice (DoJ) and
Brazilian Federal Prosecution Service (MPF).
These agreements relate to bribery and
corruption involving intermediaries in a
number of overseas markets from January
1989 to November 2013 and will result in
penalties totalling £671m over the next
five years. The agreements that have been
reached relate to legacy behaviour, and,
Lord Justice Leveson, made clear in his
judgment, no current member of the
Board was involved. As set out in his
judgment, the new executive team
demonstrated extraordinary co-operation
and has made essential changes, creating
new policies, practices and cultures.
As a Committee we have considered
remuneration consequences for individuals
who were in office at the time. Our clawback
provisions were introduced in 2014, which
was after the relevant period of these
events. In cases where employees have been
dismissed or resigned as a result of
Rolls-Royce’s own internal investigation,
shares and incentives have been cancelled
in full as a consequence of the termination
of their employment.
Because the SFO, DoJ and MPF agreements
relate to legacy matters, and given that the
legal judgment was very clear that there
was no culpability in relation to existing
management, the Committee has concluded
that the impact of the penalties should be
excluded from the 2016 bonus and from
future incentive targets.
2016 outturns
We have given careful consideration to
both the reported numbers and the external
context in determining the bonus outturns
for 2016.
Group underlying profit and cash flow, our
key financial metrics, were both above the
target levels and therefore a bonus will be
paid for the first time in three years.
Underlying profit is a key measure of
performance and as such does not include
the accounting impacts of non-operational
factors. In particular it excludes our US
dollar hedge book valuation adjustment,
which is a non-cash consequence of
managing our foreign exchange risk,
and is larger this year due to the post-
referendum sterling decline.
In assessing the achievement of bonus
targets, the Committee made overall
downwards adjustments to both profit
and cash flow elements. Adjustments were
made to remove gains from unbudgeted
foreign exchange movements and cash
receipts as well as restructuring payments.
Following these adjustments the Committee
also reviewed the bonus outturn in the
round, taking into account the Company’s
performance and the shareholder context.
2016 was a solid year in which we exceeded
cash and profit expectations and our
transformation programme is off to
a good start. However, reflecting the overall
experience of our shareholders, in a year
when underlying profits have fallen, the
Committee agreed with the management
and Board that it would be appropriate for
the business element of the executive
team’s bonuses to be reduced to
target levels.
The 2014 performance share plan (PSP)
awards will not vest as the performance
conditions were not met over the three-year
performance period to 31 December 2016.
DIRECTORS’ REPORT 74
DIRECTORS’ REPORT REMUNERATION COMMITTEE REPORT
Rolls-Royce Holdings plc Annual Report 2016
Board changes
Principal responsibilities
In September 2016, we announced that
David Smith would leave Rolls-Royce after
two years as Chief Financial Officer and will
be succeeded by Stephen Daintith. Stephen is
expected to take up the role in Spring 2017.
Colin Smith will also be stepping down from
the Board at the 2017 AGM, after 43 years
with Rolls-Royce.
The Committee considered appropriate
terms for David and Colin on their
departure. Their remaining contractual
entitlements will be subject to phasing and
mitigation. PSP awards will be pro-rated for
service and will vest at the normal time,
depending on achievement against the
relevant performance targets. The 2014
awards have lapsed as the targets were not
met and 2015 awards, for all participants,
are not expected to vest either. Neither will
participate in incentive schemes for 2017.
The Committee also considered the
remuneration package for Stephen on his
appointment, and believe his package is
appropriate for the role and for someone of
his experience and capabilities. We will also
make some buyout awards in respect of his
forfeited awards, retaining performance
conditions where relevant and matching or
exceeding time horizons.
2017 salary review
The Committee has reviewed the salary levels
of the Executive Directors and has concluded
that an increase of 2% will be made to
Warren East in line with those made
to other employees. All salary increases
for management are being deferred until
1 September 2017. No increases are being
made for other Executive Directors.
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 Executive Leadership Team (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.
To oversee any major changes in
remuneration.
Resolutions
At our AGM in 2017 we will be asking
shareholders to pass resolutions to approve:
Our new Directors’ remuneration policy.
Our Directors’ remuneration report
which sets out how we have applied our
existing policy during 2016.
Our new LTIP to accommodate the new
remuneration policy.
I would like to thank the shareholders who
contributed to the Committee’s discussions
during the year, and we hope that all our
shareholders will support these resolutions.
Ruth Cairnie
Chairman of the
Remuneration Committee
Rolls-Royce Holdings plc Annual Report 2016
REMUNERATION COMMITTEE REPORT
75
Remuneration for 2016 – at a glance*
Fixed pay
+
Annual bonus
(APRA)
+
Performance
share plan (PSP)
Fixed pay
Base salary
No increases for Executive Directors in 2016. Base salaries during the year were:
Warren East – £925,000; Colin Smith – £550,000; David Smith – £540,000.
Pension
Pension arrangements during the year were:
• Warren East – cash allowance of 25% of salary.
Other benefits
Annual bonus (APRA)
Maximum award**
• Colin Smith – continued participation in defined benefit scheme with no further accrual.
– cash allowance of 32% of salary.
• David Smith – cash allowance of 32% of salary.
Benefits include car or car allowance and related costs, financial planning assistance, certain insurances
and other benefits.
For 2016, the maximum APRA was 180% of salary for the Chief Executive and 150% of salary for other
Executive Directors.
Performance
measures
Group performance for 2016 was based on:
• 75% financial (profit and cash performance).
• 25% non-financial (employee and customer metrics).
Group performance outcomes can be multiplied by 0% to 120% based on individual performance.
Deferral
40% of awards are deferred into shares for two years.
Award for 2016
GROUP AND INDIVIDUAL PERFORMANCE AND BONUS OUTCOMES
Warren East
Colin Smith
David Smith
Group performance
(percentage of max)
60%
60%
60%
Individual multiplier
1.1
1.0
1.0
Overall percentage
of salary
99%
75%
75%
Overall percentage
of maximum
55%
50%
50%
Discretion was applied to reduce the Group performance outturn to on-target (60% of maximum).
Performance share plan (PSP)
Maximum award**
The maximum annual PSP award is normally 180% of salary for the Chief Executive and 150% of salary
for other Executive Directors.
As disclosed last year, for 2016 awards only, the maximum opportunities were reduced to 150% of salary
and 130% of salary respectively as a balance to changes to the measurement of the EPS hurdle.
Performance measures
Awards are subject to an aggregate CPS performance condition measured over three years. The number of
shares awarded can then be adjusted (up to 125% for 2016 awards) based on relative TSR versus constituents
of the FTSE 100.
No awards can vest until an EPS hurdle is met. As disclosed last year, for 2016 awards EPS must exceed
the Organisation for Economic Co-operation and Development (OECD) index of consumer prices over the two-year
period 2017 and 2018.
Vesting of 2014 award
The 2014 PSP awards will lapse in March 2017 based on performance to 31 December 2016 as the performance
measures were not met.
Shareholding
Shareholding
requirements
The Chief Executive is required to build up a holding equal to 250% of salary. For other Executive Directors
the requirement is 200% of salary.
* Based on current policy which is available on our website at www.rolls-royce.com.
** APRA and PSP awards are subject to malus and clawback in certain circumstances (see page 79).
DIRECTORS’ REPORT
76
Remuneration policy from 2017
Introduction
The policy will take effect from 4 May 2017, subject to shareholder
approval at the AGM.
Consideration of shareholder feedback
During the policy review we have had extensive and constructive
consultation with our largest shareholders which has been a
significant factor in shaping the new policy. Further details are
set out on page 73.
The overall consensus that came out of the consultation was:
• Recognition of the level of challenge in delivering transformation
and attracting top talent.
• Support for simplified remuneration structures.
• Strong support for cash as the most important measure of
performance.
• Welcome for the inclusion of a holding period post the
performance period on the LTIP.
• Support for an increase in the LTIP maximum award in the
context of delivering the transformation, linked to appropriately
stretching targets.
• Recognition of the value of having some objective and
quantifiable non-financial measures in addition to financial
measures in our short-term incentive plan.
These views have been reflected in the final policy design for 2017.
Key policy themes
As part of the remuneration policy review, the Committee has taken
the opportunity to take a broad look at our remuneration approach
underpinned by four key themes:
Supporting transformation – our policy should incentivise and
reward the delivery of our transformation programme over the next
three years. This programme aims to simplify the organisation and
processes and embed the right cultural behaviours; these set the
foundation for cost reduction and improved productivity, as well as
greater pace, simplicity and clearer accountability in the way we
work. This programme is essential to achieving both the production
ramp-up and cost efficiencies that underpin the cash flow
generation that is key to our long-term investment case. Our view
is that remuneration should be strongly linked to the successful
delivery of this programme and its financial benefits.
Talent – we must be able to attract and retain the individuals
necessary for business success across a global and diverse talent
pool. Our recent experience has shown that our current level of
reward is not sufficiently competitive to secure some key talent
that would make a strong contribution to the Group.
Stewardship – the system of remuneration should align interests of
executives and shareholders and comprise a significant proportion
of share-based long term incentives.
Simplification – our reward structure and performance measures
should be aligned to the strategy and be simple to communicate to
participants and shareholders. It should reflect the business
priorities in terms of both financial and non-financial parameters
and be seen to incentivise the right behaviours and the right
outcomes for a long term, sustainable and profitable future.
Given the importance of delivering our business transformation
over the next three years, we believe that retaining a strong
emphasis on performance-related incentives is appropriate. We
therefore plan to retain a structure of salary, benefits, annual bonus
and long term incentives, underpinned by appropriate performance
measures and award levels.
Main changes to policy design
Supporting transformation – we will better align the incentive
performance measures and weighting of those measures to our
business strategy. For 2017, LTIP awards will be weighted 60% CPS,
20% EPS, and 20% TSR.
Talent – we will increase the level of award so that we can attract
and retain the talent that we need. Under the new policy the normal
maximum level of long-term incentive award is increased from
180% for the Chief Executive and 150% for the other Executive
Directors to 250% of salary for the Chief Executive and 225% for
other Executive Directors. The overall maximum under the policy
will be 300% for the Chief Executive and 250% for other Executive
Directors (for use in recruitment only).
Stewardship – we will introduce a two-year shareholding period
following the three-year LTIP performance period. This will support
the continued alignment of Executive Directors’ reward to the
interests of shareholders. We will reduce the amount of the
long-term incentive award that vests for threshold performance
from 30% of the award (equivalent to 54% of salary for the Chief
Executive) to 20% of the award (equivalent to 50% of salary).
Simplification – we are simplifying the structure of our bonus
and LTIP replacing multiplicative structures, hurdles and kickers
with simpler additive components.
Rolls-Royce Holdings plc Annual Report 2016DIRECTORS’ REPORT REMUNERATION POLICY 77
Summary of policy design changes and link to policy themes*
Fixed pay
Base Salary
Benefits
Pension
Annual bonus
Long-term incentive plan
80% Group
performance
+
20% individual
performance
25%
non-financial
• Customer
• Employee
75%
financial
• Profit
• Cash
60%
CPS
20%
EPS
20%
TSR
Shareholding requirement
40% of award deferred into
shares for two years
Three-year performance period followed
by two-year holding period
Malus and clawback
* Weightings and non-financial measures are as applied in 2017.
Element
Fixed pay
Commentary
No changes are proposed to the fixed pay element of the remuneration policy approved by shareholders
at the 2014 AGM. The new remuneration policy to be approved at the 2017 AGM will continue to apply
until the 2020 AGM.
Annual bonus
Performance measures remain appropriate following the introduction of customer and employee
metrics in 2016. Bonuses are determined primarily by Group financial performance but the Committee
may apply non-financial metrics that support the underlying strategic priorities for the forthcoming year.
Policy theme
Talent
Transformation
From 2017, Executive Director bonuses will be awarded using a simple additive approach:
Simplification
• 80% of the award will be based on Group performance.
• 20% of the award will be based on individual performance.
40% of any bonus will be deferred into shares for two years.
Long-term
incentive plan
CPS, EPS and TSR remain our long-term measures of success and reflect the strategic focus on profitable
growth, the quality of profit, and returns to shareholders. During shareholder consultation we received
strong support for the continued use of cash flow as the central measure of long-term performance.
The structure will be amended so elements are measured independently, rather than using an EPS hurdle
and a TSR multiplier.
The introduction of a two-year shareholding period following the three-year performance period.
This includes a requirement to continue to hold shares after participants have left the Group.
20% of the maximum award will vest for threshold performance (a reduction from 30% in the current
remuneration policy).
Stewardship
Transformation
Simplification
Stewardship
The new remuneration policy includes an overall maximum of up to 300% of salary for the Chief Executive
and 250% for other Executive Directors. The intention is that this flexibility will only be used in recruitment
(to secure talent across a global and diverse talent pool).
Talent
The intended operational maximum for the three-year period of this policy is 250% of salary for the
Chief Executive and 225% of salary for other Executive Directors.
Rolls-Royce Holdings plc Annual Report 2016REMUNERATION POLICYDIRECTORS’ REPORT
78
Remuneration policy table
The table below sets out each element of Executive Directors’ remuneration.
Pay element – fixed pay
Base salary
Purpose and
link to strategy
The Company provides competitive salaries suitable to attract and retain individuals of the right calibre to develop and execute
the business strategy.
Operation
Maximum
opportunity
Benefits
Salaries are reviewed, but not necessarily increased, annually. Decisions on salary are informed but not led by reference to
companies of a similar size, complexity and international reach.
Any salary increases will be assessed annually and 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, including growth in the role for new appointments.
Purpose and
link to strategy
The Company provides competitive benefits suitable to attract and retain individuals of the right calibre to develop and execute
the business strategy.
Operation
Benefits may include car or car allowance and related costs, financial planning assistance, private medical insurance, life assurance
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.
Executive Directors may participate in all-employee share plans including ShareSave and the Share Incentive Plan.
Benefits excluding all employee share plans, and any accommodation, relocation and associated tax costs will not exceed £100,000
per annum.
Maximum
opportunity
Pension
Purpose and
link to strategy
The Company provides competitive pension schemes suitable to attract and retain individuals of the right calibre to develop
and execute the business strategy.
Operation
Maximum
opportunity
Executive Directors are offered membership of a defined contribution pension plan. A cash allowance may be payable in lieu
of pension contributions, reduced to allow for additional National Insurance incurred. There are a number of legacy pension
arrangements, including defined benefit plans, which were in place before 27 June 2012 and have not changed. Commitments
to these arrangements will be honoured.
The maximum employer contribution to defined contribution plans (or to be taken as a cash allowance) is 25% of salary.
Pension contributions are based on base salary only.
Defined benefit legacy plans, now closed to new members, accrue pension up to a maximum of two thirds of final salary.
Rolls-Royce Holdings plc Annual Report 2016DIRECTORS’ REPORT REMUNERATION POLICY 79
Pay element – variable pay
Annual bonus
Purpose and
link to strategy
Operation
Maximum
opportunity
Performance
measures
To incentivise the execution of the business strategy, delivery of financial targets, and the achievement of personal objectives.
Bonuses are determined primarily by Group financial performance, but the Committee may apply non-financial metrics that support
the underlying strategic priorities for the forthcoming year and/or adjust the payout level to ensure the outturns reflect performance.
The bonuses payable are also linked to personal performance of the Executive Directors.
The financial and non-financial metrics are set with reference to the prior year and to the budgets and business plans for the
coming year, ensuring the levels to achieve base, on-target and maximum payout are appropriately stretching. At least 40%
of the bonus is compulsorily deferred into shares for a further two years, and released subject to continued employment.
Deferred shares may attract an issue of C Shares or equivalent during the deferral period.
Awards are subject to malus and clawback provisions 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 Group’s Global Code of Conduct; or individual gross misconduct.
These provisions apply from the date of deferral until three years after the release of shares.
The annual maximum for the Chief Executive is 180% of salary and 150% for other Executive Directors.
The bonus is weighted 80% on Group metrics, and 20% on individual performance. Within the Group metrics:
• At least 60% is based on Group financial targets (for example profit and free cash flow).
• Up to 40% of the bonus is based on non-financial metrics such as employee engagement and customer delivery.
• Individual objectives are set and agreed with the Remuneration Committee at the start of each year, to reflect the prevailing
business context.
• The Committee may, in the context of the underlying business strategy, use different performance measures.
Long-term incentive plan (LTIP)
Purpose and
link to strategy
To reward the development and execution of the business strategy over a multi-year period.
Operation
Executive Directors are granted awards over shares annually with a three-year performance period.
The number of shares relative to the proportion of the award that vests is determined at the end of the performance period
according to the achievement against the performance measures. The proportion of award that vests is then held for a further
two-year holding period.
Awards are subject to malus and clawback provisions 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 Group’s Global Code of Conduct; or individual gross misconduct. These provisions apply from the
date of the award until three years from the date of vesting.
Maximum
opportunity
Normal annual awards:
• Chief Executive – 250% of salary.
• Other Executive Directors – 225% of salary.
The maximum face value of annual awards is 300% of salary for the Chief Executive and 250% for other Executive Directors.
This flexibility would only be used in recruitment to secure individuals with the required skills and experience.
This flexibility would not be used in the normal course of business.
Performance
measures
Performance measures may include CPS, EPS, and/or relative TSR.
For 2017 awards the measures will be weighted 60% CPS, 20% EPS, 20% TSR.
No more than 20% of awards will vest for threshold performance.
The Committee may, in the context of the underlying business strategy, use different performance measures and/or
vary the weightings of the measures.
Rolls-Royce Holdings plc Annual Report 2016REMUNERATION POLICYDIRECTORS’ REPORT 80
The table below sets out the main elements of Non-executive Directors’ remuneration.
Pay element
Fees
Purpose and
link to strategy
Operation
Maximum
opportunity
Benefits
Purpose and
link to strategy
Operation
Maximum
opportunity
To reward individuals for fulfilling their role and attract individuals of the skills and calibre required.
The Committee makes recommendations to the Board on the Chairman’s remuneration. The Chairman and the
Executive Directors determine the remuneration of the Non-executive Directors. Levels take into account fees paid
by other companies of a similar size and complexity.
The Chairman is paid a single fee. Other Non-executive Directors are paid a base fee covering Board and Board
Committee membership, with committee chairmen and the Senior Independent Director receiving an additional fee.
The maximum total remuneration payable to Non-executive Directors, including the Chairman, is £1,600,000
per annum.
To devote maximum time and attention to the requirements of the role.
The Chairman has occasional use of chauffeur services. Travel, hotel and subsistence incurred in attending meetings
are reimbursed by the Company. The Group may pay tax on such benefits, or provide support with tax matters for
Non-executive Directors based outside the UK.
Maximum value for chauffeur services will not exceed £15,000 per annum.
£5,000 maximum towards tax advice and filing per annum.
Rolls-Royce Holdings plc Annual Report 2016DIRECTORS’ REPORT REMUNERATION POLICY 81
Performance measures and targets
The Committee will set Group financial targets for annual bonus
and LTIP awards with reference to the prior year and to
forward-looking business forecasts, ensuring the levels of
performance required to achieve base, on-target and maximum
bonus awards are appropriately challenging.
The Committee may, in the context of the underlying business
strategy, use different performance measures for incentives and/or
vary the weightings of the measures used for LTIP awards. For
example, during the next two years we will transition to IFRS 15
which will impact the reporting of revenue and profit. The
Committee may choose to increase the weighting on EPS as this
new reporting standard becomes more established.
The measurement of performance against performance targets is
at the Committee’s discretion, which may include appropriate
adjustments to financial or non-financial elements and/or
consideration of overall performance in the round.
Performance conditions may also be replaced or varied if an event
occurs or circumstances arise which cause the Committee to
determine that the performance conditions have ceased to be
appropriate. If the performance conditions are varied or replaced,
the amended conditions must, in the opinion of the Committee, be
fair, reasonable and materially no less difficult than the original
condition when set.
Policy on new appointments
The Committee will appoint new Executive Directors with a
package that is in line with the remuneration policy in place and
agreed by shareholders at the time. Base salary may be set at a
higher or lower level than the previous incumbent. The Committee
may use its discretion to make individual incentive awards up to the
maximum policy headroom limits outlined in the policy table.
Remuneration forfeited on resignation from a previous employer
may be compensated. This will be considered on a case-by-case
basis and may comprise cash or shares. In general:
• If such remuneration was in the form of shares, compensation
Remuneration policy – worked examples below
2017 POLICY ILLUSTRATION
Chief Executive (£000)
£1,173
£2,006
Minimum
On-target
cash
On-target
total
Maximum
£3,162
£5,151
Chief Financial Officer (£000)
£892
£1,402
Minimum
On-target
cash
On-target
total
Maximum
£2,167
£3,442
Executive Director (£000)
£730
£1,142
Minimum
On-target
cash
On-target
total
Maximum
£1,761
£2,792
Fixed remuneration (including salary, benefits and pension)
Annual bonus
Long-term incentive plan
Minimum – fixed remuneration (salary, pension, benefits), no bonus award or LTIP vesting.
On-target cash – fixed remuneration, 50% of maximum bonus award, no LTIP vesting.
On-target total – fixed remuneration, 50% of maximum bonus award, 50% of LTIP vesting.
Maximum – fixed remuneration, 100% of maximum bonus award, 100% of LTIP vesting.
Group employee considerations
When setting remuneration for Executive Directors the Committee
takes into account contextual information about pay and conditions
within the Group, including:
will be in the Company’s shares.
• Salary increases for all employees.
• If remuneration was subject to achievement of performance
• Bonus awards for all employees.
conditions, compensation will be normally be subject to
performance (either Rolls-Royce performance conditions or
actual/forecast performance outturns from the previous
company).
• The timing of any compensation will, where practicable, match
the vesting schedule of the remuneration forfeited.
Legacy terms for internal appointments may be honoured,
including pension entitlements and any outstanding
incentive awards.
If an Executive Director is appointed following a merger or
an acquisition of a company by Rolls-Royce, legacy terms and
conditions may be honoured.
• Pay ratios between Executive Directors and other employees.
We are committed to sharing business success across the
organisation with all employees participating in a short-term
incentive plan. At more senior levels, remuneration is increasingly
long term and larger proportions are dependent on both Group and
individual performance and paid in the form of shares.
The Committee has not consulted all employees when reviewing
the policy, considering the scale and geography of the population.
Rolls-Royce Holdings plc Annual Report 2016REMUNERATION POLICYDIRECTORS’ REPORT 82
Termination
Service contracts
The Company is required to give Executive Directors 12 months’
notice under their service contracts. Payment in lieu of notice will
not exceed the value of 12 months’ salary, benefits and pension
contributions. Both mitigation and the timing of payments through
the notice period will be considered by the Committee where
appropriate, as will the funding of reasonable outplacement and
other professional fees. Pension benefits will normally be payable in
accordance with the rules of the pension plan. There is no automatic
entitlement to annual bonus. Taking into account the circumstances,
the Committee has discretion to award a bonus in respect of
performance in the financial year with appropriate consideration of
time prorating.
Deferred shares will generally be released in cases such as
retirement, death, injury, ill-health, redundancy or any other reason
at the discretion of the Committee. In these cases any annual bonus
awarded immediately prior to leaving may be delivered in cash
rather than deferred shares.
For the LTIP, the rules state that unvested awards may be preserved
at the Committee’s discretion according to the circumstances. In
such cases vesting will be at the normal date, subject to the
established performance conditions, and prorated to employment
in the performance period. In cases such as death and terminal
illness, the Committee also has the discretion to vest the awards
immediately using an estimate of future outturn. If an individual
leaves after the LTIP shares have vested but during the holding
period, shares will not be forfeited but the holding period will
remain in force.
The treatment of leavers in ShareSave and the Share Incentive Plan
is covered by the respective plan rules. Change of control provisions
in respect of employee share plans are set out on page 187.
Any termination payments will be in line with the remuneration
policy agreed by shareholders at that time.
The service contracts for Warren East, Colin Smith and David Smith
include 12 months’ notice of termination from the Company and six
months’ notice from the Executive. The service contracts of Stephen
Daintith, and any new appointee, will include 12 months’ notice
from the Company and 12 months’ notice from the Executive
Director. All contracts include the entitlement to paid holidays, sick
pay, and other standard employment terms including
reimbursement of reasonable business expenses.
The Chairman and Non-executive Directors have letters of
appointment. No compensation is payable to the Chairman or to
any Non-executive Director if the appointment is terminated early
or if they fail to be re-elected at an AGM.
Legacy commitments
Any remuneration payments and/or payments for loss of office
made under legacy arrangements prior to the approval of the
Company’s remuneration policy may be paid out subject to the
terms of any remuneration policy in place at the time they were
agreed. For these purposes ‘payments’ include the Company
satisfying awards of variable remuneration and, in relation to an
award over shares, the terms of the payment are agreed at the time
the award is granted.
This provision includes PSP awards granted under the previous
approved remuneration policy. These awards were subject to CPS
and relative TSR performance conditions, with vesting only possible
if the EPS hurdle was met. The Chief Executive received awards of
180% of salary, and other executives received awards of 150% of
salary (including the relative TSR multiplier).
Minor amendments
The Committee may make minor amendments to the policy (for
regulatory, exchange control, tax or administrative purposes or to
take account of a change in legislation) without obtaining
shareholder approval.
Rolls-Royce Holdings plc Annual Report 2016DIRECTORS’ REPORT REMUNERATION POLICY Rolls-Royce Holdings plc Annual Report 2016
DIRECTORS’ REMUNERATION REPORT
83
Directors’ remuneration report
The table below shows how we have applied the current remuneration policy during 2016. It discloses all the elements of remuneration
received by the Directors during the year. The current remuneration policy, as approved by shareholders in 2014, is available on our website.
Single figure of remuneration (audited)
Salary/fees (A)
£000
Benefits (B)
£000
Bonus (C)
£000
LTIP (D)
£000
Other (E)
£000
Sub-total
£000
Pension (F)
£000
Total
£000
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
Executive Directors
Warren East1
Colin Smith2
David Smith
Former Executive Directors
James Guyette3
Mark Morris4
John Rishton5
925
550
540
–
–
–
421
546
535
274
–
519
2,015 2,295
425
110
70
90
30
70
70
–
12
70
425
100
83
90
70
70
70
58
98
70
Sub-total
Chairman and Non-executive Directors
Ian Davis
Lewis Booth
Ruth Cairnie
Sir Frank Chapman
Irene Dorner6
Lee Hsien Yang
John McAdam
Bradley Singer7
Sir Kevin Smith8
Jasmin Staiblin
Former Non-executive Directors
Dame Helen
Alexander9
Alan Davies10
Warren East1
John Neill11
Sub-total
Total
90
12
45
25
1,227 1,119
3,242 3,414
31
62
–
–
17
156
51
–
–
3
8
150
35
47
–
82
916
413
405
–
–
–
227
322
1,734
2
14
2
2
–
3
–
–
2
4
–
1
–
–
30
257
1
11
3
4
–
8
–
–
–
7
–
–
–
–
–
–
–
–
–
–
–
–
–
3
37
359
–
–
–
–
–
1,734
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,858
1,119
996
429
696
570
321
597
601
231
176
173
–
–
–
–
–
3
3,976 3,214
580
427
114
85
92
70
73
70
58
100
74
426
121
73
94
30
78
70
–
12
77
–
–
–
–
–
–
–
–
–
–
–
597
–
597
–
–
–
–
–
–
–
–
–
–
114
140
171
262
–
153
840
2,089
1,295
1,169
–
–
3
543
836
741
583
597
754
4,556 4,054
–
–
–
–
–
–
–
–
–
–
427
114
85
92
70
73
70
58
100
74
426
121
73
94
30
78
70
–
12
77
–
–
–
–
–
597
31
63
–
–
90
12
45
28
1,257 1,156
5,233 4,370
–
–
–
–
–
580
–
–
–
–
–
840
31
63
–
–
90
12
45
28
1,257 1,156
5,813 5,210
1 Warren East was appointed as Chief Executive on 3 July 2015, having served as a Non-executive Director from 1 January 2014 to 2 July 2015.
2 Colin Smith’s benefits have been restated for 2015 due to late receipt of invoices relating to accommodation costs totalling £10,000.
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. A final payment in settlement of chauffeur expenses was made to John Rishton in December 2016.
6 Irene Dorner was appointed as a Non-executive Director on 27 July 2015.
7 Bradley Singer was appointed as a Non-executive Director on 2 March 2016.
8 Sir Kevin Smith was appointed as a Non-executive Director on 1 November 2015.
9 Dame Helen Alexander left the Board on 5 May 2016.
10 Alan Davies was appointed as a Non-executive Director on 1 November 2015 and left the Board on 18 November 2016.
11 John Neill left the Board on 8 May 2015.
DIRECTORS’ REPORT 84
DIRECTORS’ REPORT DIRECTORS’ REMUNERATION REPORT
Rolls-Royce Holdings plc Annual Report 2016
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. In 2016 there
were no increases.
EXECUTIVE DIRECTORS’ BASE SALARY
Warren East
Colin Smith1
David Smith2
Stephen Daintith3
1 Colin Smith will step down as an Executive Director on 4 May 2017.
2 David Smith will leave the Company on 28 February 2017.
3 Stephen Daintith is expected to take up his role in Spring 2017.
Base salary as at
1 September 2017
£943,500
n/a
n/a
£680,000
Base salary as at
1 March 2016
£925,000
£550,000
£540,000
n/a
Base salary as at
1 March 2015
£925,000
£550,000
£540,000
n/a
The Committee reviewed Executive Directors’ salaries in early 2017 and concluded that an increase of 2% will be made to Warren East in
line with those made to other employees. All salary increases for management are being deferred until 1 September 2017. No increases are
being made for other Executive Directors.
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 Executive Directors and the Chairman reviewed Non-executive Directors' fees in December 2016
and resolved that there will be no increase in fees in 2017. The Non-executive Directors’ fees were last increased in 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. Ruth Cairnie, Sir Frank Chapman, Ian Davis,
Lee Hsien Yang, John McAdam and Sir Kevin Smith participate in this facility.
NON-EXECUTIVE DIRECTORS’ BASE FEES
Chairman
Other Non-executive Directors
Chairman of the Audit Committee
Chairman of the Remuneration Committee
Chairman of the Safety & Ethics Committee
Chairman of the Science & Technology Committee
Senior Independent Director
2017
£000
425
70
25
20
20
20
15
2016
£000
425
70
25
20
20
20
15
2015
£000
425
70
25
20
20
20
15
Rolls-Royce Holdings plc Annual Report 2016
DIRECTORS’ REMUNERATION REPORT
85
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. The taxable value of all benefits paid to Executive Directors in the year is shown below.
BENEFITS PAID TO EXECUTIVE DIRECTORS (AUDITED)
Car or car
allowance
including fuel
allowance
£000
2016
15
30
28
Warren East1
Colin Smith2
David Smith
Former Non-executive Directors
James Guyette3
John Rishton4
Total
–
–
73
2015
7
30
16
5
14
72
Chauffeur
services
£000
2016
–
–
–
2015
–
–
–
Financial
planning
£000
2016
–
6
–
2015
–
6
–
Medical
insurance
£000
2016
2
2
2
2015
1
2
2
Club
membership
fees
£000
2016
–
–
–
2015
–
–
–
2016
–
7
6
2015
–
4
5
–
3
3
–
14
14
–
–
6
20
6
32
–
–
6
–
1
6
–
–
–
6
–
6
–
–
13
–
–
9
2016
–
111
15
–
–
126
2015
–
108
12
16
47
183
2016
17
156
51
–
3
227
2015
8
150
35
47
82
322
Travel and
subsistence
£000
Accommodation
costs
£000
Total
£000
1 Warren East was appointed as Chief Executive on 3 July 2015, having served as a Non-executive Director from 1 January 2014 to 2 July 2015.
2 Colin Smith’s benefits have been restated for 2015 due to late receipt of invoices relating to accommodation costs totalling £10,000.
3 James Guyette left the Board on 8 May 2015.
4 John Rishton stepped down as Chief Executive and left the Board on 2 July 2015. A final payment in settlement of chauffeur expenses was made to John Rishton in December 2016.
C. Annual bonus outcome
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 still being
employed by the Group. Ordinary shares held as deferred shares will include the right to receive an enhancement equal in value to the
C Shares issued during the deferral period.
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 Group’s Global Code
of Conduct; or individual gross misconduct. Clawback will apply within three years from the date of grant.
Following consultation with shareholders at the start of 2016, the Committee introduced two new measures relating to customer delivery
and employee engagement, subject to any bonus in relation to these targets being underpinned by the underlying profit threshold. The
maximum bonus opportunity for Executive Directors was 180% for the Chief Executive and 150% of salary for other Executive Directors.
The Remuneration Committee reviewed the 2016 outturn against the performance measures, which are shown below:
APRA 2016 PERFORMANCE MEASURES AND OUTTURN (AUDITED)
GROUP PERFORMANCE
Weighting
Base (30%)
Target (60%)
Maximum (100%)
2016 performance
Bonus outturn (as a % of maximum)
Profit
37.5%
£650m
£712m
£790m
£713m
60%
Cash
37.5%
(£250m)
(£169m)
0
£48m
100%
Customer
delivery
12.5%
80%
90%
100%
88%
54%
Employee
engagement
12.5%
73
75
78
75
60%
Discretion was applied to reduce the overall Group performance outturn to on-target (60% of maximum).
DIRECTORS’ REPORT 86
DIRECTORS’ REPORT DIRECTORS’ REMUNERATION REPORT
Rolls-Royce Holdings plc Annual Report 2016
Definitions used for performance measures:
Profit – underlying profit before tax that is reported by the Group for 2016, adjusted to exclude unbudgeted acquisitions and disposals.
Cash – free cash flow which is cash flow before acquisitions and disposals, shareholder payments, foreign exchange and
share buybacks.
Customer delivery – % on-time to purchase order, measured for new equipment, spare parts or equipment repair and overhaul.
Employee engagement – measured through our long-standing global employee opinion survey.
For the purposes of assessing performance the Committee adjusted the actual underlying profit of £813m downwards to £713m and free
cash flow of £100m downwards to £48m to remove gains from unbudgeted foreign exchange movements and cash receipts as well as
restructuring payments.
INDIVIDUAL PERFORMANCE
The individual performance multiplier can increase or decrease the business outturn in a range of 0 – 120%, where on-target is 100%.
Personal performance objectives are set at the beginning of the year and are aligned with the Group’s internal strategic priorities.
For Executive Directors these have included:
• Driving the transformation programme; simplification, cost reduction and improved behaviours.
• Engineering excellence – advancing our world-class technology.
• Operational excellence – embedding a lean enterprise and high-performance culture.
• Capturing aftermarket value and providing outstanding service to customers.
• Restoring investor confidence.
• Developing our people and our culture in a safe and ethical environment.
• Improving profitable growth.
The Committee assesses performance against the objectives and the overall assessed multiplier is based on the Committee’s judgement
and may include other factors and achievements in the year.
The following provides an overview of key achievements during the year for each Executive Director:
Warren East
Colin Smith
David Smith
Launched transformation including cultural
change and process improvements, delivering
cost reduction at the top end of the target range.
Progressed engineering supply chain interface,
lead time reductions and product cost
improvement ahead of target.
Continued to develop the finance function
including review of management structures
and achievement of key hires.
Drove the reorganisation of the Group with
restructuring at many levels in the organisation.
Built talent within engineering to support
succession planning.
Strengthened engagement with shareholders.
Drove transformation, including cultural and
behavioural change programmes with cost
reduction at the top end of the target range.
Finalised plan for cost and margin work streams,
tracking transformation and underlying
cost actions.
Improved effectiveness of forecasting and
management information systems.
BONUS OUTTURN
Group performance (% of salary)
Individual performance multiplier
Total bonus (% of salary)
Total bonus (% of maximum)
Warren East
Colin Smith
David Smith
90%
1.1
99%
55%
75%
1.0
75%
50%
75%
1.0
75%
50%
Rolls-Royce Holdings plc Annual Report 2016
DIRECTORS’ REMUNERATION REPORT
87
D. LTIP
PSP 2016 AWARD CPS TARGETS (AUDITED)
The cash flow per share targets for awards made in 2016 were as follows and straight-line vesting will apply between these points.
Aggregate CPS over the three-year period
Less than 10p
10p
50p
Maximum award released %
0
30
100
2016 PSP Awards are based on CPS and TSR measures with an EPS hurdle. As disclosed in the 2015 Annual Report, for the 2016 awards, the
EPS hurdle will be measured over the period 2017 and 2018. This change reflected business circumstances and the intended level of stretch
of the EPS hurdle which is used as an underpin rather than a primary performance measure. In recognition of the change the maximum
vesting level for 2016 awards was reduced from 180% to 150% of salary for the Chief Executive and from 150% to 130% of salary for other
Executive Directors.
PSP AWARDS MADE IN MARCH 2016
In 2016, Executive Directors received PSP awards in line with the remuneration policy as follows:
Warren East
Colin Smith
David Smith
Date
of award
1 March 2016
1 March 2016
1 March 2016
Number
of shares
awarded
164,202
81,361
79,882
% of
salary
120
100
100
Face values
(% of salary
maximum)
Performance
period
end date
150 31 December 2018
130 31 December 2018
130 31 December 2018
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 676p for the award on 1 March 2016.
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 Group’s Global Code
of Conduct; or individual gross misconduct. Clawback will apply for three years after the vesting of an award.
If the EPS and base CPS targets are not achieved, no awards vest.
PSP AWARDS VESTING IN MARCH 2017
The following sets out details in respect of the March 2014 PSP award, for which the final year of performance was the 2016 financial year.
Subject to performance conditions, the vesting date of these awards is in March 2017, three years after the award was made.
EPS growth (hurdle)
Aggregate CPS
Relative TSR
Outcome
Targets for 2014 – 2016 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 117p – zero vesting.
Aggregate CPS over three-year period of 147p – 100% vesting.
Relative TSR versus FTSE 100 constituents less than median – 1x multiplier.
Relative TSR versus FTSE 100 constituents equal to median – 1.25x multiplier.
Relative TSR versus FTSE 100 constituents equal to upper quartile –
1.5x multiplier.
Performance against targets
EPS growth of (53.42%) over the three-year period
underperformed the hurdle which was 3.06%.
Aggregate CPS performance over three years of 27p.
Relative TSR performance over three years was
below median versus FTSE 100 companies. No
multiplier applied.
None of the 2014 awards will vest in March 2017.
DIRECTORS’ REPORT 88
DIRECTORS’ REPORT DIRECTORS’ REMUNERATION REPORT
Rolls-Royce Holdings plc Annual Report 2016
IMPLEMENTATION OF REMUNERATION POLICY FOR 2017*
Base salary
Warren East's salary will be increased by 2% in line with increases made to other employees. All salary increases for management are
being deferred until September 2017. Base salaries from September 2017 will be:
• Warren East – £943,500.
• Stephen Daintith – £680,000 (expected to take up his role in Spring 2017).
Benefits
There will be no change to our approach to benefits in 2017, which includes car or car allowance, financial planning assistance,
insurances and other benefits.
Pensions
There will be no change to our approach to pensions in 2017. Pension arrangements will be:
• Warren East: cash allowance of 25% of salary.
• Stephen Daintith: cash allowance of 25% of salary.
Annual bonus
For 2017, bonuses will be awarded using a simple additive approach:
• 80% of the award will be based on Group performance.
• 20% of the award will be based on individual performance.
For 2017, the Group measures will be unchanged:
• Profit (37.5%).
• Free cash flow (37.5%).
• On-time customer delivery (12.5%).
• Employee engagement (12.5%).
Maximum opportunities will remain unchanged:
• Chief Executive – 180% of salary.
• Other Executive Directors – 150% of salary.
LTIP awards
For awards to be granted in 2017 performance measures will be weighted:
• 60% on CPS.
• 20% on EPS.
• 20% on relative TSR (versus FTSE 100 and Global S&P Index, to recognise that Rolls-Royce is a global company).
Performance will be measured over three years to 31 December 2019. Performance targets will be:
Threshold (20% vesting)
Mid (50% vesting)
Maximum (100% vesting)
CPS
60p
80p
110p
EPS
115p
135p
160p
Relative TSR
Median
Between median
and upper quartile
Upper quartile
Performance below threshold will result in that element lapsing in full.
The above targets are not an indication of forecast numbers for the three-year period.
Methodologies
CPS – 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. The Committee will review CPS performance to ensure that it is a fair reflection of
achievements over the period.
EPS – calculated as cumulative absolute underlying EPS over the three-year performance period. With the introduction of IFRS 15 in
2018, the first three-year period starting in 2017 will use existing contract accounting, but will be restated in 2018 under IFRS 15. The
Committee will ensure that translated targets are based on the same underlying assumptions under both accounting bases.
Relative TSR – measured 50% against the constituents of the FTSE 100 and 50% against the constituents of the S&P Global Industrials index.
Award sizes for maximum performance
• Chief Executive: 250% of salary.
• Other Executive Directors: 225% of salary.
Threshold vesting at 20% equates to 50% of salary for the Chief Executive and 45% of salary for other Executive Directors.
LTIP awards will be subject to an additional shareholding period of two years following the three-year performance period.
* Subject to shareholder approval at the 2017 AGM.
The SFO, DoJ and MPF agreements relate to legacy matters and the legal judgment was clear that there was no culpability in relation
to existing management. The future impact of these agreements are therefore excluded from incentive targets.
Rolls-Royce Holdings plc Annual Report 2016
DIRECTORS’ REMUNERATION REPORT
89
E. Other
PAYMENTS FOR LOSS OF OFFICE (AUDITED)
Mark Morris left the Group on 4 November 2014 and contractual payments of £597,000 were made to him in 2015 in respect of the
termination of his employment. No further payments were made in 2016.
PAYMENTS TO PAST DIRECTORS (AUDITED)
Dr Mike Howse retired from the Board on 30 June 2005. Following his retirement he was retained by the Company for his expertise in
engineering and received his final payment of £2,520 under this arrangement in January 2016.
No other payments were made to former Directors.
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 pension schemes. In the defined benefit pension schemes normal retirement age
is 62. During the year, the Group restructured its UK defined benefit arrangements. Four of the five UK schemes merged together into a
consolidated scheme, renamed the Rolls-Royce UK Pension Fund. The merged scheme is estimated to have a material surplus on its
statutory funding basis, with a largely de-risked investment strategy. All future defined benefit accrual will be provided from this scheme
(limited to employees who joined the Group before 1 April 2007). The scheme merger will simplify future administration and governance.
As part of this merger, three transferring schemes are being wound up and over 3,400 former employees with benefits below statutory
limits elected to receive lump sums in exchange for their existing benefits. The liabilities of the fifth scheme, the Vickers Group Pension
Scheme have been fully insured with Legal & General Assurance Company Limited and that scheme is also in the process of being fully
wound up. Neither of these transactions required any additional funding by the Group.
John Rishton, who left the Company 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 after allowing for National Insurance costs.
Warren East and David Smith receive a cash allowance in lieu of pension accrual. Stephen Daintith will receive a cash allowance in lieu of
pension accrual.
Colin Smith opted out of future pension accrual with effect from 1 April 2006 and opted out of salary linkage with effect from 30
November 2015. He started to receive his pension from 1 December 2016. He receives a cash allowance in lieu of pension accrual.
DEFINED BENEFIT SCHEME
Details of the defined benefit of the Executive Directors as at 31 December 2016 in the Group’s pension schemes are given below.
Colin Smith
OTHER INFORMATION
2016
£000
pa
350
2015
£000
pa
385
BOARD CHANGES DURING 2016
On 22 September 2016, it was announced that David Smith would leave the Group after three years to pursue other business interests.
Stephen Daintith is expected to take up his role in Spring 2017. Remuneration arrangements in respect of these changes are set out below.
David Smith
On leaving Rolls-Royce, David Smith will receive payment in lieu of any outstanding portion of his 12 months' notice period, which started
on 21 September 2016. He may also receive a payment in respect of any unused leave. He remained eligible for an APRA award for 2016.
He will not participate in the incentive plans for 2017. Mitigation will be applied to reflect his new employment at QinetiQ Group plc.
His outstanding PSP awards will be prorated for time based on his leaving date. The performance conditions will be assessed following
the end of the three-year performance period and any vested shares will be released at the normal vesting date. The 2014 and 2015 awards
are not expected to meet the performance measures.
DIRECTORS’ REPORT
90
DIRECTORS’ REPORT DIRECTORS’ REMUNERATION REPORT
Rolls-Royce Holdings plc Annual Report 2016
Stephen Daintith
On appointment Stephen Daintith’s annual base salary will be £680,000. He will receive a pension allowance of 25% of salary.
For 2017 he will be eligible to participate in annual bonus up to a maximum of 150% of salary per annum. His maximum 2017 LTIP award
will be 225% of salary.
Following his appointment he will be made awards to compensate for unvested incentives awarded to him at Daily Mail and General
Trust plc which were forfeited as a result of him joining Rolls-Royce. All such awards will be of equivalent value to the awards forfeited
and match or exceed the time horizons and reflect performance conditions.
His forfeited bonus awards will be replaced with Rolls-Royce shares vesting over the same time horizons. Buy out awards in respect of
forfeited LTIP awards with a performance period to October 2017 will be assessed against the original Daily Mail and General Trust plc
performance conditions and will vest at that time. For LTIP awards with performance measured to October 2018 and October 2019,
buy-out awards will be assessed against the 2016 Rolls-Royce PSP performance conditions. All awards will be in Rolls-Royce shares and
will be forfeited in the event of resignation within two years of his appointment. Full details of the buy out awards will be provided at
the time the awards are granted and will be included in the 2017 Annual Report.
PAY ACROSS THE ORGANISATION
This section of the report enables our remuneration arrangements to be seen in context by providing:
• A comparison of the year-on-year percentage change in our Chief Executive’s remuneration with the change in average remuneration
across the Group.
• A year-on-year comparison of the total amount spent on employment costs across the Group and shareholder payments.
• An eight-year history of our Chief Executive’s remuneration.
• Our TSR performance over the same period.
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 2015 to 2016.
CHANGE IN REMUNERATION
Chief Executive
UK employees1 average
Salary
–
2.35%
Benefits
(82)%
(4.31)%
Annual bonus2
n/a
n/a
1
UK employees were chosen as a comparator group in order to avoid the impact of exchange rate movements over the year. UK employees excluding apprentices, graduates and interns,
make up 43.5% of the total employee population.
2 No annual bonus was paid for the financial years 2014 or 2015. For 2016, the annual bonus paid out at 78% of the maximum bonus level. The Chief Executive received 55% of his
maximum bonus. The percentage of maximum is shown above. No bonus was paid in 2015.
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)*
(Cash flow statement)
GROUP EMPLOYMENT COSTS (£M)
(note 7 – Financial statements)
2015
2016
421
301
-29%
2015
2016
3,152
3,822**
+21%
0
100
200
300
400
500
0
1,000
2,000
3,000
4,000
* Value of C Shares issued during the year.
** Includes £306m costs of restructuring the UK
defined benefit pension schemes.
Rolls-Royce Holdings plc Annual Report 2016
DIRECTORS’ REMUNERATION REPORT
91
CHIEF EXECUTIVE PAY
Year
2016
2015
2015
2014
2013
2012
2011
2011
2010
2009
Chief Executive1
Warren East
Warren East
John Rishton2
John Rishton
John Rishton
John Rishton
John Rishton
Sir John Rose3
Sir John Rose
Sir John Rose
Single figure
of total
remuneration
£000
2,089
543
754
2,596
6,228
4,577
3,677
3,832
3,914
2,409
Annual bonus
as a % of
maximum
55
0
0
0
55
85
63
–
100
29
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 as Chief Executive 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.
3 The remuneration for Sir John Rose does not include any pension accrual or contribution as he received his pension from 1 February 2008.
TSR PERFORMANCE
The Company’s TSR performance over the previous eight 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 eight years, relative to the FTSE 100 index.
e
c
n
e
P
500
400
300
200
100
Rolls-Royce
FTSE 100
2008
2009
2010
2011
2012
2013
2014
2015
2016
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
Stephen Daintith*
* Stephen Daintith is due to take up his role in Spring 2017.
Date of contract
21 April 2015
1 July 2005
19 November 2014
21 September 2016
Notice period
Company
12 months
12 months
12 months
12 months
Notice period
individual
6 months
6 months
6 months
12 months
DIRECTORS’ REPORT 92
DIRECTORS’ REPORT DIRECTORS’ REMUNERATION REPORT
Rolls-Royce Holdings plc Annual Report 2016
PAYMENTS RECEIVED FOR SERVING ON EXTERNAL BOARDS
Warren East
Warren East1
David Smith
1 Warren East stepped down from the board of Micron Technology Inc on 27 January 2016.
NON-EXECUTIVE DIRECTORS’ LETTERS OF APPOINTMENT
Directorships held
Dyson James Group Limited
Micron Technology, Inc.
Motability Operations Group plc
Payments received and retained £000
80
6
43
Ian Davis
Lewis Booth
Ruth Cairnie
Sir Frank Chapman
Irene Dorner
Lee Hsien Yang
John McAdam
Bradley Singer
Sir Kevin Smith
Jasmin Staiblin
Appointment date
Current letter of appointment end date
1 March 2013
25 May 2011
1 September 2014
10 November 2011
27 July 2015
1 January 2014
19 February 2008
2 March 2016
1 November 2015
21 May 2012
28 February 2019
24 May 2017
31 August 2017
9 November 2017
26 July 2018
31 December 2019
4 May 2017
3 May 2018
31 October 2018
20 May 2018
DIRECTORS’ INTERESTS IN SHARES (AUDITED)
Each Executive Director’s total shareholding, for the purposes of comparing it with the 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.
Shareholding requirements are 250% of salary for the Chief Executive and 200% of salary for the other Executive Directors. APRA deferred
shares do not count towards their shareholding requirement. Participants in the PSP are 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.
SHAREHOLDING REQUIREMENT
Warren East
Colin Smith
David Smith
1 Salary divided by the March 2016 PSP grant price of 676p multiplied by percentage of salary.
Base salary
£000
925
550
540
Total
shareholding
25,365
222,798
42,038
Shareholding
requirement
as % of salary
250
200
200
Shareholding
requirement1
342,086
162,722
159,763
Actual
shareholding
as % of
requirement
7
137
26
Rolls-Royce Holdings plc Annual Report 2016
DIRECTORS’ REMUNERATION REPORT
93
The Directors and their connected persons had the following interests in the ordinary shares and C Shares of the Company at 31 December
2016, as shown in the following table.
DIRECTOR’S SHARE INTERESTS
Executive Directors
Warren East
Colin Smith
David Smith
Chairman and Non-executive Directors
Ian Davis
Lewis Booth
Ruth Cairnie
Sir Frank Chapman
Irene Dorner
Lee Hsien Yang
John McAdam
Bradley Singer
Sir Kevin Smith
Jasmin Staiblin
1 Non-cumulative redeemable preference shares of 0.1p each.
DIRECTOR’S CHANGE IN SHARE INTERESTS
Executive Directors
Warren East
Colin Smith
David Smith
Chairman and Non-executive Directors
Ian Davis
Lewis Booth
Ruth Cairnie
Sir Frank Chapman
Irene Dorner
Lee Hsien Yang
John McAdam
Bradley Singer
Sir Kevin Smith
Jasmin Staiblin
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
Vested shares
and options
exercised
in 2016
–
–
–
–
–
–
–
–
–
–
–
–
–
290,845
192,960
155,373
1,264
758
758
–
8,977
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Ordinary
shares
25,365
222,798
42,038
42,049
60,000
11,137
22,091
5,132
4,005
3,230
–
20,587
–
C Shares1
–
–
–
–
–
–
5,061,879
–
–
–
–
–
–
Ordinary shares
C Shares
Changes from
31 December
2016 to
13 February 2017
31 December
2016
Changes from
31 December
2016 to
13 February 2017
31 December
2016
25,365
222,798
42,038
42,049
60,000
11,137
22,091
5,132
4,005
3,230
–
20,587
–
174
1,525
329
873
–
649
1,178
35
317
71
–
924
–
–
–
–
–
–
–
5,061,879
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
DIRECTORS’ REPORT 94
DIRECTORS’ REPORT DIRECTORS’ REMUNERATION REPORT
Rolls-Royce Holdings plc Annual Report 2016
DIRECTORS’ INTERESTS IN UNVESTED AND VESTED AWARDS
WARREN EAST
31 December
2015
126,643
–
126,643
Granted
during year
–
164,202
164,202
TSR uplift/
dividend
enhancement
–
–
–
Vested
awards
–
–
–
Lapsed
–
–
–
31 December
2016
126,643
164,202
290,845
Market price at
date of award
(p)
Date of
grant
730.00 01/09/2015
01/03/2016
676.00
Date of
vesting
01/09/2018
01/03/2019
Market price
at vesting
(p)
–
–
1,264
1,264
–
–
–
–
–
–
–
–
1,264
1,264
616.80 12/10/2015 01/02/2021
–
PSP 2015
PSP 2016
Total
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.
COLIN SMITH
PSP 2013
PSP 2014
PSP 2015
PSP 2016
Total
APRA 2013
Total
ShareSave
(options)1
Total
31 December
2015
Granted
during year
TSR uplift/
dividend
enhancement
Vested
awards
51,304
53,336
58,263
–
162,903
16,000
16,000
758
758
–
–
–
81,361
81,361
–
–
–
–
–
–
–
–
–
–
–
–
–
–
939
939
16,939
16,939
–
–
–
–
Lapsed
51,304
–
–
–
51,304
–
–
–
–
31 December
2016
Market price at
date of award
(p)
Date of
grant
Date of
vesting
Market price
at vesting
(p)
–
53,336
58,263
81,361
192,960
–
–
758
758
1023.33 01/03/2013
01/03/2016
984.33 07/05/2014 03/03/2017
944.00 02/03/2015 02/03/2018
01/03/2019
676.00
01/03/2016
–
–
–
–
984.40 07/05/2014 03/03/2016
687.78
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.
DAVID SMITH
PSP 2014
PSP 2015
PSP 2016
Total
ShareSave
(options)1
Total
31 December
2015
18,287
57,204
–
75,491
Granted
during year
–
–
79,882
79,882
TSR uplift/
dividend
enhancement
–
–
–
–
Vested
awards
–
–
–
–
Lapsed
–
–
–
–
31 December
2016
18,287
57,204
79,882
155,373
Market price at
date of award
(p)
Date of
Date of
grant
vesting
984.33 03/03/2014 03/03/2017
944.00 02/03/2015 02/03/2018
01/03/2019
676.00
01/03/2016
Market price
at vesting
(p)
–
–
–
758
758
–
–
–
–
–
–
–
–
758
758
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.
Rolls-Royce Holdings plc Annual Report 2016
DIRECTORS’ REMUNERATION REPORT
95
Committee members and attendance
The Committee membership and attendance throughout 2016 is shown on pages 54 and 61. In addition to the Committee members,
the Chairman, 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 discussion of his or her own remuneration package.
The Committee is supported by the Company Secretary, the Group Human Resources Director and the Global Performance, Reward &
Pensions Director.
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 £159,175 (2015: £125,150). 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.
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 2015 remuneration report at the AGM held on 5 May 2016
Percentage of votes (%)
Number of votes cast
For
Against
Votes withheld
98.71
1,370,054,216
1.29
17,870,398
0.85
11,922,905
The current remuneration policy was approved by shareholders at the 2014 AGM. We monitor carefully shareholder voting on our
remuneration policy and implementation. The full 2014 policy is available on our website, www.rolls-royce.com. We have undertaken a
comprehensive review of our remuneration policy, with significant contribution from shareholders. The 2017 remuneration policy
on pages 76 to 82 and available on our website, will be put to shareholders for approval at the AGM on 4 May 2017.
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 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 pages 176 to 182 and to state that this section has been properly
prepared in accordance with these regulations. The Directors’ remuneration report and the Directors’ remuneration policy are subject to
shareholder approval at the AGM on 4 May 2017. The Directors’ remuneration report was approved by the Board on 13 February 2017
and signed on its behalf.
Ruth Cairnie
Chairman of the Remuneration Committee
DIRECTORS’ REPORT 96
Audit Committee report
Lewis Booth
Chairman of the
Audit Committee
Highlights
Implementation of enhanced
risk management system.
Issue of governance framework
for internal controls.
Review of key judgements and
estimates and consistency of
accounting policies.
Significant progress on the
adoption of IFRS 15.
PwC selected as auditor
for 2018.
During 2016, we recommended revisions
to reflect the review of Directors’ and senior
managers’ expenses that we undertake
and to remove the requirements for the
Committee to review payments to
shareholders, which are considered by the
Board as a whole.
The Committee met six times in 2016.
In addition, the audit tender steering
group (see page 102) also met six times.
The Chief Financial Officer, Deputy CFO &
Group Controller, Group Chief Accountant,
Director of Internal Audit, General Counsel,
Director of Risk and representatives from our
external auditor are also invited to attend.
Lord Gold also attended the Committee’s
meetings in July and December.
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 auditor
Oversee the relationship with the external
auditor, review the effectiveness of the
external audit process and make
recommendations to the Board for the
external auditor’s appointment and fees.
2016 overview
Introduction
I am pleased to present the 2016 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.
Alan Davies stepped down from the Board
and the Committee in November 2016.
For the purposes of the Code, Irene Dorner
and I have recent and relevant financial
experience. Our biographies are on pages
55 and 56.
Operation of the Committee
The Committee’s responsibilities are outlined
in its terms of reference which we review
annually and refer to the Board for approval.
Principal responsibilities
Areas of focus for 2016
The principal responsibilities of the
Committee are to assist the Board in
fulfilling its oversight responsibilities.
Overseeing the ongoing projects to
enhance the systems for risk
management and internal control.
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;
and
• 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.
Assessing the effectiveness of internal
control over financial reporting.
Reviewing key accounting judgements
and estimates and the consistent
application of accounting policies which
had the most significant impacts on the
financial results in 2016. In addition,
we requested a comprehensive review
of the application of all accounting
policies across the Group.
Reviewing the Group’s basis for the
viability statement.
Overseeing the project for the
implementation of IFRS 15 Revenue from
Contracts with Customers, which will be
adopted in 2018.
Reviewing the progress of the
management information systems project.
Reviewing principal risks on behalf
of the Board.
Leading the audit tender process.
Rolls-Royce Holdings plc Annual Report 2016DIRECTORS’ REPORT AUDIT COMMITTEE REPORT 97
At a glance
Area of focus
Matters considered
Financial
reporting
The appropriateness of accounting policies and key accounting judgements
and estimates, including:
• 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;
• further impairment of goodwill in Marine;
• carrying value of goodwill in Rolls-Royce Power Systems AG; and
• disclosures of contingent liabilities.
The consistency of the application of accounting policies across the Group.
The form and content of the Annual Report.
The implementation project for IFRS 15 and the communication to investors
in November 2016.
Risk and control
environment
Improvements to the risk management and internal controls systems to address
requirements of the Code.
Management’s assessment of the risk of a disruptive event.
The procedures for preventing, monitoring and combatting breaches of the security
of the Group’s IT systems.
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.
Outcome
The accounting policies and key
judgements and estimates are
appropriate and key estimates used
are balanced.
The reviews of consistent application
of accounting policies identified some
minor differences, which have now
been amended.
The Annual Report, taken as a whole,
is fair, balanced and understandable.
IFRS 15 will introduce some very
significant changes in accounting
policies, particularly in the Civil
Aerospace business.
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,
cyber-security and market shock risks.
The internal control system meets
the requirements of the Code. It will
continue to be enhanced during 2017.
Reported to the Board that an
appropriate process is in place to make
the viability statement.
Internal audit
External 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.
The approach and scope of external audit and the effectiveness and independence
of the external auditor and the review of the 2015 Rolls-Royce audit by the FRC’s
Audit Quality Review team.
Assessed KPMG as effective and
independent and recommended their
re-appointment at the 2017 AGM.
The extent of non-audit services provided by KPMG and the tendering firms during
the tender process.
No concerns over the nature and scale
of the non-audit services provided.
The requirements of the FRC’s new Ethical Standard on non-audit services.
The audit tender process.
Approved a revised policy on the
provision of non-audit services.
A thorough process resulted in the
Committee recommending to the Board
that PricewaterhouseCoopers LLP (PwC)
be proposed at the 2018 AGM to succeed
KPMG as the Group’s auditor.
Rolls-Royce Holdings plc Annual Report 2016AUDIT COMMITTEE REPORTDIRECTORS’ REPORT 98
Business and function presentations
We have a regular schedule of presentations from each of the
Group’s businesses and its key functions. During 2016, we received
presentations from the following:
• Civil Aerospace – 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.
• Defence Aerospace – key business risks (including the impact
of government spending and pricing in the traditional
UK and US markets and the protection of our position in the
transport and patrol markets); and key accounting estimates
(which principally relate to long-term contracts, in particular
the contract loss provisions on the contract for TP400
development and production); and controls.
• Marine – key business risks (including the impact of the current
low oil price to the offshore business and the restructuring
programme); and key accounting estimates (which principally
relate to the carrying value of goodwill and inventory, warranty
and restructuring provisions); and controls.
• Group Tax Director – approach to managing the Group’s tax
affairs; key tax risks and how they are managed (with specific
consideration of tax disputes); key sources of estimation
uncertainty (in particular the recognition of deferred tax assets);
and key tax-related disclosures (in particular we considered the
disclosure of the Group’s approach to managing its tax affairs).
We also reviewed the introduction of enhanced management
information systems. To date, these have covered the introduction
of new dashboards and forecasting processes which have improved
visibility to the ELT and the Board, although more work is required.
The full benefits will also be dependent on the implementation of
improvements to underlying IT systems over the next few years.
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
materially 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 2016 are set out in the table opposite. In part, these
reflect the current weak trading conditions in Marine. Overall, we
are satisfied that the judgements and estimates made are balanced.
In July, the FRC wrote to the Company following its review of the
2015 Annual Report. This review, which was based solely on the
Annual Report, did not identify any questions or queries which the
FRC wished to pursue, although a number of suggestions for
improvements were noted, and these have been taken into account
in preparing the 2016 Annual Report.
During the year, we reviewed the conclusions reached by the
implementation project on IFRS 15, which will be applicable
for 2018.
This new standard will have a significant impact on our accounting
policies for revenue recognition, most particularly in our Civil
Aerospace business. We agreed with the conclusions reached that
will require us to account for OE and aftermarket contracts
separately and to recognise aftermarket revenues based on
activities performed rather than flying hours.
These changes were presented at an investor event in November
2016 and are discussed further in the accounting policies on
page 130.
The Group continues to consult with other companies in the
aerospace and defence sector. We believe that the new policies will
be broadly comparable across the sector.
Since the year end, we have reviewed the form and content of the
Company’s 2016 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. In making
this assessment, we considered:
• The process for preparing the Annual Report, including a steering
committee, the core team, and instructions to contributors.
• Written representations from management in respect of the
business reviews, sustainability, principal risks and financial
statements.
• The completion of a regulatory compliance checklist.
• All reviews performed (including the Board, the ELT and KPMG).
We ensured that all feedback was appropriately reflected.
Rolls-Royce Holdings plc Annual Report 2016DIRECTORS’ REPORT AUDIT COMMITTEE REPORT 99
Financial reporting: key areas of focus
Key issues
Matters considered
Outcome
Indications of impairment of
the carrying values of intangible
assets in Civil Aerospace
The estimates used in accounting
for long-term contractual
arrangements in Civil Aerospace are
appropriate
The assessments of the value-in-use
of the principal intangible assets,
including the key assumptions and
estimates on which they are based.*
The basis on which the estimates
are prepared and, in particular,
how the inherent uncertainties are
reflected in these estimates.
In particular:
• Lifecycle cost improvements.
• Long-term exchange rates.
We are satisfied that there were no indications of impairment.
We are satisfied that the process produces balanced estimates,
with appropriate consideration of the uncertainties.
The Civil Aerospace business continued to review the estimates
and compare them to the actual outcome. Based on this actual
experience, which was generally better than previously assumed,
this led to a revision to the estimates, which resulted in a net profit
benefit of £90m.
The estimates for long-term exchange rates were reviewed against
third-party forecasts. This led to a reduction in these forecasts,
resulting in a one-off profit benefit of £35m.
The sale of engines to joint ventures
The basis for assessing the selling price. We are satisfied that the price represents the fair value
of the engines.
Impairment of goodwill in Marine
The forecasts for each of the relevant
cash generating units, including the key
assumptions on which they are based.*
We are satisfied with the analysis and that impairments should
be recognised where these did not support the carrying value
of the goodwill.
Whether there is any impairment
to the carrying value of the goodwill
in Rolls-Royce Power Systems AG
The business plan and the underlying
assumptions on which it is based.*
We are satisfied that, although the headroom has reduced as
a result of the current trading environment, there is no indication
of impairment.
Warranty and contractual
provisions in Marine
The basis for specific warranty and
contractual provisions.
We are satisfied that the estimates reflect a balanced assessment
of the likely outcome.
Post-retirement benefits
The impact of the restructuring
of the five UK defined benefit schemes.
We are satisfied that the impacts are reflected in accordance
with IAS 19 Employee Benefits, in particular their recognition in the
Income Statement and Other Comprehensive Income.
Deferred tax assets (DTAs)
The recognition of DTAs arising from
tax losses in the UK and Norway.
* See note 9 to the financial statements for further details of the assumptions.
We were also satisfied that the exclusion of the settlement and
related costs of £306m from the underlying results is appropriate
(see page 157).
Based on the Group’s forecasts, we are satisfied that it is appropriate
to continue to recognise the UK DTAs, and that, given the current
uncertainty in the oil & gas market, those in Norway should cease
to be recognised.
Rolls-Royce Holdings plc Annual Report 2016AUDIT COMMITTEE REPORTDIRECTORS’ REPORT 100
Sector audit committees
In support of our work, each of the Group’s businesses and principal
functions has its own sector audit committee, each of which
comprises senior finance personnel and is attended by business
and functional leaders and 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.
• Inform areas for further consideration at our meetings.
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. During the year, both Irene Dorner and I
attended sector audit committee meetings.
In 2016, the sector audit committees have focused on the improvement
project for internal control and risk management processes.
Risk and control environment
Assessment of principal risks
Risk management is a fundamental and integral part of how we
work. All risks are managed through a risk management system
(RMS) (described on page 48) in accordance with policies and
guidance established by the Director of Risk and his team and
approved by the Board.
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.
On behalf of the Board, we monitored the RMS. During 2016, we
focused on the continued implementation of the enhancements
identified in 2015. These are described in more detail on page 48.
This process and the principal risks arising (see page 50) then
formed the basis for our assessment of the going concern and
viability statements which are discussed later in this report.
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.
Review of principal risks
We considered in detail the principal risks that have been allocated
to us by the Board. We reviewed:
Business continuity
• The generic design of the Civil Aerospace supply chain and the risks
that arise due to constraints (such as single sources of supply).
• The management of these risks using business continuity
processes and controls.
• Improvements planned to enhance the visibility of key risks.
IT vulnerability
• The changing threat landscape (in particular the Nation State
threat has diminished, but there has been an increase in targeting
of supply chain, joint ventures and other partners, and a very
significant increase in organised crime threats).
• How the principal risks are being tracked and managed.
• Improvement activities over the past year.
• Plans for the future.
Market and financial shock
• The Group’s exposure to market risks (in particular: exchange
rates, oil prices, interest rates, liquidity, credit risk reductions in
air travel or other disruption to customers’ operations).
• The Group’s policies, procedures and controls for identifying,
managing and mitigating these risks, in particular through the
Financial Risk Committee which meets quarterly, chaired by the
Chief Financial Officer.
We are satisfied that appropriate procedures are in place to monitor
and manage these risks.
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 in 2015, the
Group identified improvements to the existing processes. In 2016,
the implementation of these improvements has continued. Our
model for representing the system comprises:
• Entity-level controls covering leadership and direction from the top.
• Specific control activities, covering detailed process controls, and
internal and external assurance activities.
In 2016, the Group issued a governance framework providing an
overview of how internal control frameworks to manage risk in key
business activities are established. This gives a framework for the
entity-level controls. The Group has continued to document and
assess the effectiveness of core financial controls, and we routinely
review controls over the Group’s principal risks, and the key risks
and critical processes in each of the Group’s businesses. Both the
sector audit committees and this Committee also consider KPMG’s
observations on the Group’s control environment. We noted a
general improvement in the control environment, including the
ongoing improvements to the controls around the accounting for
long-term aftermarket contracts in Civil Aerospace referred to in
the Independent auditor’s report on pages 177 and 178.
Rolls-Royce Holdings plc Annual Report 2016DIRECTORS’ REPORT AUDIT COMMITTEE REPORT 101
The Group has also used 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 have implemented
a wide-ranging plan to improve controls in this area.
We have conducted a review of the effectiveness of the Group’s
systems of risk management and internal control, including those
relating to the financial reporting process, in accordance with the
Code. The Group’s systems of risk management and internal control
have been in place throughout 2016. We consider that these existing
systems, together with the enhancements made in 2016, are
sufficient to meet the requirements of the Code and the FCA’s
Disclosure Guidance and Transparency Rules.
Going concern and viability statements
We reviewed the processes and assumptions underlying the
statements set out on page 53. In particular, we considered:
• The Group’s forecast funding position over the next five years.
• An analysis of impacts of severe but plausible risk scenarios,
ensuring that these were consistent with the risks reviewed by
the Board as part of its strategy review.
• The impact of multiple risks occurring simultaneously.
• Additional mitigating actions that Group could take in extreme
circumstances.
• The current borrowing facilities in place and the availability
of future facilities.
As a result, we were satisfied that the going concern and viability
statements have been prepared on an appropriate basis.
Internal audit
We receive a quarterly dashboard from the Director of Internal
Audit identifying key trends and findings from 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. The small
number of overdue actions received particular attention and the
time to complete all actions has reduced, and is now in line with
expectations. In November, we reviewed and approved the internal
audit plan. I am confident that the plan is strongly correlated to the
key risks facing the business, and we monitor changes during the
course of the year.
We also receive two reports each year setting out the Director of
Internal Audit’s perspectives on the internal control environment.
These are used to drive management responses to underlying root
causes and systemic issues. Topics discussed in 2016 included:
process and control design; compliance to process; data integrity;
and management behaviours.
The Committee considered and reviewed the effectiveness
of the Group’s internal audit function, including resources, plans
and performance as well as the function’s interaction with
management. The outcome of the 2016 review was positive
and identified opportunities for ongoing improvement which
have been implemented.
I meet the Director of Internal Audit privately before each meeting
and on an ad-hoc basis throughout the year, as do other members
of the Committee. As a whole we have 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 are 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.
External audit
2016 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 176
to 182), which also highlights the other significant risks that KPMG
drew to our attention.
As part of the reporting of the half-year and full-year results, in July
2016 and February 2017, KPMG reported to the Committee on its
assessment of the Group’s judgements and estimates in respect of
these risks and the adequacy of the reporting. KPMG also reported
on its assessment of the Group’s control environment.
We also undertook an assessment of KPMG’s qualifications,
expertise and resources, independence and the effectiveness of the
external audit process. This included:
• A presentation to the Committee of KPMG’s Quality Control
Framework and Internal Quality Evaluation, the experience of the
key members of the audit team and the extent of their individual
involvement in the audit work. This also included KPMG’s
responses to matters identified by management in a survey
conducted following the 2015 audit.
• Consideration of the FRC’s Audit Quality Inspection (AQI) Annual
Report 2015/16 on KPMG.
• The results of the AQI review of KPMG’s audit of Rolls-Royce. The
FRC’s Audit Quality Review (AQR) team monitors the quality of audit
work of UK audit firms, including inspections of a sample of audits.
During 2016, the AQR reviewed the 2015 audit. The review findings
noted limited areas for improvement and commended KPMG on the
particularly high standard of its auditor’s report. We have discussed
these findings with the AQR and KPMG; KPMG’s responses to the
areas for improvement were incorporated into the 2016 audit work.
The Committee does not consider any of the findings to have a
significant impact on KPMG’s audit approach. We also 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.
We continue to support the extended auditor’s report and KPMG’s
approach which goes beyond the minimum requirements,
providing additional clarity on the key judgements and estimates.
Rolls-Royce Holdings plc Annual Report 2016AUDIT COMMITTEE REPORTDIRECTORS’ REPORT 102
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.
Re-appointment of KPMG
The Committee reviews and makes recommendations to the Board
with regard to the re-appointment of the external auditor. In doing
so, we take into account auditor independence and audit partner
rotation. KPMG was appointed as auditor in 1990. 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. For the first time since KPMG’s
appointment, in 2016, we have tendered the audit for appointment
in 2018, coinciding with Jimmy Daboo’s rotation.
The Committee and the Board have recommended KPMG’s
re-appointment at the 2017 AGM.
Non-audit services provided by KPMG
In order to safeguard the auditor’s 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.
Audit tender
As reported last year, we are required to appoint a new auditor no
later than 2020. As planned, we tendered the audit in 2016, for the
appointment of a new external auditor for the financial year 2018.
The process was led by an audit tender steering group (comprising
the Committee members, the Chief Financial Officer and the
Director of Internal Audit and supported by Group Finance and
Purchasing), which met six times from May until November.
We issued a request for proposal in August 2016 to suitable,
appropriately experienced candidates to participate in the tender.
The process included: provision of data on the Group operations,
finances and processes; meetings with key management from the
businesses and Group functions and two presentations to the
Committee. In December, the Committee concluded that PwC was
the preferred firm to conduct the audit engagement, judged
against the selection criteria including quality of the proposed
team, experience within the aerospace and defence industry, and
available resources and organisation.
The Committee recommended that the Board propose, to the
2018 AGM, the appointment of PwC as the external auditor of the
Company for the financial year 2018. On behalf of the Committee,
I would like to thank all the candidates for the quality and
professionalism of their proposals.
The Committee considers that the Company has, throughout the
year ended 31 December 2016, complied with The Statutory Audit
Services for Large Companies Market Investigation (Mandatory Use
of Competitive Tender Processes and Audit Committee
Responsibilities) Order 2014.
Non-audit related fees paid to KPMG during the year were 12%
(2015: 29%) of the audit fee. Our annual review of the external auditor
takes into account the nature and level of all services provided.
Looking forward
During 2017, we will monitor the transition activities so that PwC
can take over the audit in 2018 in a seamless manner.
2015
Audit
Audit-related1
Tax compliance
Other
Non-audit
2016
%
9
7
1
17
£m
6.8
0.6
0.5
0.1
1.2
£m
5.9
1.3
0.4
–
1.7
%
22
7
–
29
1 Includes £0.3m for the review of the half-year report.
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, with effect from 1 January 2017,
the FRC’s Ethical Standard places further restrictions on auditors
undertaking non-audit services. Accordingly, we have revised our
policies for the engagement of the auditor to undertake non-audit
services, broadly limiting these to audit-related services such as
reporting to lenders and grant providers.
During the audit tender process, we also implemented additional
procedures to monitor engagements with each potential future
auditor to ensure that we can discontinue or transition any
engagements with the new auditor as required.
We will also continue to monitor:
• The implementation of IFRS 15, focusing on the development of
the supporting processes and controls.
• The key accounting judgements and estimates.
• The continuous improvements planned for the documentation of
controls.
• The continuing development of the management information
systems and improvements to the underlying systems and tools.
IFRS 16 Leases will be applicable to the Group in 2019. The Group will
address its implementation during 2017, and we will review the
development of these plans.
In addition to the continuing oversight by the Safety & Ethics
Committee of the Company’s ethics and compliance programme
(see pages 105 and 106), we will monitor the Group’s actions relating
to risk management, internal controls and other matters relevant
to the Committee that arise out of Lord Gold’s recommendations,
and from the agreements with prosecuting authorities.
Lewis Booth
Chairman of the Audit Committee
Rolls-Royce Holdings plc Annual Report 2016DIRECTORS’ REPORT AUDIT COMMITTEE REPORT Rolls-Royce Holdings plc Annual Report 2016
SAFETY & ETHICS COMMITTEE REPORT
103
Safety & Ethics
Committee report
Highlights
Ethics and compliance
improvement programmes
well embedded and reaching
sustainable steady state.
Detailed review of product
safety management in Marine
undertaken, providing good
levels of assurance.
Key safety and ethics Group
policies rolled out to Power
Systems.
Improved score in Dow Jones
Sustainability Index.
2016 overview
Introduction
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.
Ethics (business ethics, anti-bribery and
corruption, data privacy and export
controls compliance).
The Committee has been allocated
responsibility on behalf of the Board for
overseeing the Group’s principal risks of
product failure and compliance (see pages
50 and 52). These topics form a core part of
discussions at our meetings.
Sir Frank Chapman
Chairman of the
Safety & Ethics
Committee
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.
Principal responsibilities
Under its wide remit, the Committee’s key
responsibilities are:
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, product safety, HS&E and
sustainability policies, and ensuring
appropriate independent scrutiny of
policies and practices.
To review compliance with relevant
legislation and regulations and make
recommendations in 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
risks 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.
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. Two of the four members
are also members of the Audit Committee;
this enables strong links to be made
between the oversight of behavioural and
cultural issues, and the detection and
control of the consequential financial risks
and implications.
The Group President, Group Director
– Engineering and Technology, General
Counsel, Director of Risk and other senior
safety and risk executives attend Committee
meetings. Lord Gold attended the
Committee’s meetings in July and
December. More on Lord Gold’s role and his
work is on page 105.
The Committee considered its terms of
reference during the year and proposed
certain revisions for the Board to consider.
This included: the deletion of reference to
oversight of fraud policy, since fraud
prevention and risk management
procedures are reviewed by the Audit
Committee; and minor definitional
amendments to reflect the breadth of topics
overseen by the Committee. The terms of
reference otherwise remained appropriate.
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Rolls-Royce Holdings plc Annual Report 2016
At a glance
Area of focus
Matters considered
Outcome
Ethics and
compliance
Progress with ethics and compliance improvement
programme.
Continuing very good progress made in implementing plans and
Lord Gold’s independent recommendations. Lord Gold relayed his
views to the Committee from his participation in employee focus
groups at various locations during 2016.
Ethics and compliance KPIs established.
Monitoring deployment of anti-bribery and corruption
(ABC) policies.
Global ABC policies adopted and published by Power Systems
after approval by works councils.
Promotion of an ethical culture, and handling of cases
of unethical behaviour.
Employee performance assessments now include review of
behaviours including creating trust and being a positive role
model for ethical behaviour, fairness and integrity.
Review of maturity of ethics and compliance processes
and policies at joint ventures.
Mixed picture highlighting areas where more focus is required to
increase maturity.
Impact of local ethics advisers (LEAs).
Met with LEAs to discuss their experiences. Presence of LEAs means
more concerns being raised and dealt with locally.
Use of commercial intermediaries and advisers.
Response to the General Data Protection Regulations.
Product safety
Product safety incidents in service and the Group’s
response. Annual review of product safety metrics and
the product failure principal risk dashboard.
Management of personal and product safety risks
during transformation and organisational changes.
The role and impact of culture on product safety.
The product safety policy, elements of the product
safety assurance framework and aspects of safety
management systems.
Workshop on product safety in Marine, followed by
visit to facilities in Norway.
Significant reduction in number of commercial intermediaries
and advisers used.
Application made to the Information Commissioner's office for
Binding Corporate Rules.
Satisfactory response to incidents and support to investigations.
Product failure risk can never be fully mitigated but the Group’s
exposure is well-managed and reducing through better identification
and controls.
Consistent, regular messaging from senior leadership and the safety
teams serve to keep safety front of mind to reduce risk. Expected
cultural safety behaviours defined and endorsed. Plans are in place
to drive improvement where gaps identified.
The framework and systems are robust and provide appropriate
governance and accountability.
The Marine business has made significant improvements in its
governance of product safety, the maturity of its processes and
the embedding of its safety culture.
Sustainability
Consideration of Modern Slavery Act disclosure
requirements, and the mechanism for imposing
assurance requirement on suppliers.
We reviewed and strengthened the policy and processes relating
to human rights and facilitated the disclosure statement that will
be required in 2017.
The Group’s Dow Jones Sustainability Index submission
and results.
Improved score versus 2015 and industry-best scores in several
categories.
Travel security
Review of travel security programme.
Robust and well-managed arrangements are in place.
Rolls-Royce Holdings plc Annual Report 2016
SAFETY & ETHICS COMMITTEE REPORT
105
Area of focus
Matters considered
Outcome
Health,
safety & the
environment
(HS&E)
Review of HS&E risk profile, total reportable injuries
(TRI) performance reports, learning from incidents
and global HS&E improvement programmes.
Review of HS&E governance as adjusted following
removal of the Aerospace and Land & Sea divisions in
January 2016.
Review of HS&E strategy and assurance.
Implementation of new HS&E management system.
HS&E learning and development.
Risk profile updated to reflect identified risks and their likelihood.
TRI performance improved in all businesses, though remains high
in Power Systems. We reviewed Power Systems’ improvement plan
concluding that it was robust. New standards and procedures on
control of contractors are being implemented and electrical safety
will remain an area of focus.
Governance changes considered appropriate for new organisational
structure.
We endorsed the HS&E strategy. HS&E assurance methodology
was adapted to improve quality of audits.
Progress is being made which will facilitate better reporting and
shared learning across the Group.
Strong crossover between product safety and HS&E could be better
exploited. The new human resources system will allow training
requirements to be added to employees’ work plans.
Visit to the Group’s Precision Castings Facility
examining HS&E management of processes.
HS&E methodologies and good practices common with other
facilities were observed.
Ethics and compliance
Ethics and compliance are at the heart of the Group’s culture and
are part of everything that we do at Rolls-Royce. There is continued
recognition that the Board and the ELT must demonstrate
leadership around ethical and behavioural standards. The Board is
determined to ensure that ethical conduct remains embedded in
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.
Regulatory investigations
Following a lengthy period of investigation into allegations of
bribery and corruption, in January 2017 the Group entered into
deferred prosecution agreements with the UK Serious Fraud Office
and the US Department of Justice, and a leniency agreement with
the Brazilian authority, MPF (together the DPAs). During 2016, the
Committee was kept informed on the ongoing status of the
investigations and developments and discussions with the relevant
authorities. We fully supported and endorsed the Group’s approach
of full and open co-operation with the investigations, for which the
Group was highly praised in the judgment of Lord Justice Leveson.
Lord Gold’s work
Lord Gold, a leading expert on regulatory compliance matters, was
appointed by the Group in 2013 to conduct an independent review
of its ethics and compliance procedures and to provide oversight of
the Group’s ethics and compliance improvement programme, under
which the recommendations contained in his interim reports to the
Company in 2013 and December 2014 have been implemented.
As part of his work, Lord Gold has reviewed the Group’s policies and
procedures, met with many members of management, the ethics
and compliance teams, and a wide range of other employees to gain
an understanding of the extent to which ethics and compliance
awareness and adherence to the Group’s Global Code of Conduct
(Global Code) is embedded in the Group’s culture, and the
robustness of the risk management, controls and assurance
framework that supports this.
Lord Gold is invited to meetings of the Committee, and attended
in July and December 2016. He updated us on his findings and
observations to date, including insights from the latest focus groups
that he held with a range of employees in different businesses
across different countries. We discussed his observations and
identified areas for continued focus. Lord Gold’s latest report was
issued to the Company in January 2017, and will be considered
by the Committee during this year.
Lord Gold will continue his role as an independent specialist in
2017 and beyond, to report on findings and where appropriate
advise and make recommendations to be implemented. His ongoing
oversight is an important factor that led to the investigating
authorities deciding not to appoint their own monitor to oversee
the Group’s adherence to the terms of the DPAs. We welcome
Lord Gold’s ongoing valuable insight and counsel as we maintain
our focus on sustaining a culture of compliance and zero tolerance
for unethical behaviour and misconduct.
Our ethics and compliance programme
Over the last few years the Group has continued to invest significantly
in its ethics and compliance programme. The Committee and the
Group’s management recognise that companies that are run ethically
and have a strong compliance culture are sustainable, enabling
profitable and long-term partnerships with their customers,
suppliers and investors.
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Rolls-Royce Holdings plc Annual Report 2016
We have continued to oversee significant progress in the Group’s
ethics and compliance improvement programme throughout 2016.
Having established the programme, there was increased focus in
2016 on the oversight and assurance of ethics and compliance
issues ensuring that ‘we do what we say we do’.
The size, structure and skills of the risk function were kept under
review during the year with regard to the required resourcing to
deliver and maintain the appropriate level of focus. This included a
restructuring of the Power Systems’ senior ethics and compliance
leadership to allow more central oversight, specialist expertise and
better integration.
Anti-bribery and corruption (ABC) policies
During 2016, the full suite of ABC Group policies, which had been
revised in 2014 and 2015, were rolled out into the Power Systems
business following approval by the local works councils, providing
coverage across the entire Group for the first time.
Since the introduction of the Group’s new adviser policy in 2014, all
advisers engaged by the Group are rigorously vetted through the
Group’s advisers panel, presently comprised of the Director of Risk,
Lord Gold, and a partner from an external law firm. The new adviser
policy has significantly reduced the number of advisers engaged by
the Group including at 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, in a similar way to
automotive dealerships. In 2016, the review of Power Systems’
advisers in accordance with the Group adviser policy progressed
well towards completion during 2017.
Ethics Line and local ethics advisers
Ethical questions and concerns that are raised by employees and
other stakeholders are recorded as contacts in the Ethics Line
system, the Group’s confidential reporting helpline. The total
number of Ethics Line contacts marginally decreased in 2016 to 683
(2015: 729 contacts) with the number of ethical concerns discussed
remaining at a similar level to last year at 428 (2015: 439 concerns).
The Ethics Line oversight group continued to review cases, analyse
the contact trends, focus on the root cause of reported cases 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.
In December 2016, the Committee met with some of the Group’s
local ethics advisers (LEAs) to hear from them about their
experiences and engagement with employees on ethics issues. The
LEAs are appointed from the existing workforce, are trained in how
to respond to ethical issues raised, and are in place to promote
speaking up and tackling of ethical issues locally where appropriate
to provide staff with an alternative to using the Ethics Line. At the
end of 2016 there were a total of 80 LEA roles across the Group.
Data privacy
Recognising the importance of data privacy to employees,
customers, suppliers and other stakeholders, the Group is investing
in data privacy compliance by preparing to adopt the Binding
Corporate Rules regime. We were briefed on the implications for the
Group of the rules, which are due to come into force in May 2018,
and reviewed the Group’s plans to ensure compliance with them.
Training
The Committee attaches significant importance to regular, relevant
and focused training and therefore has spent time reviewing the
Group’s ethics and compliance training programme including the
levels of participation and feedback from the 2015 business ethics
training programme. It approved the proposal for the 2016 business
ethics training, built on manager-led group discussions based on
real ethical dilemma scenarios. Annual ethics training is mandatory
for all employees across the Group.
ABC training is mandatory for all employees who have dealings with
persons outside of the Company and focused face-to-face training is
provided to those employees whose roles have higher exposure to
ABC risk. Monthly dilemma-based stories drawn from real cases also
continued to be published on the Group’s intranet during 2016
inviting employees to vote on what action they would take.
Mandatory training programmes will continue in 2017.
ETHICS EMPLOYEE CERTIFICATION AND TRAINING (% OF EMPLOYEES)1,2
100
80
60
40
20
0
100
97
97
97
2015
2016
Certification
Training
1 2015 certification by managers only.
2 2016 certification excludes Power Systems.
Disciplinary proceedings under the Global Code of Conduct
If an employee is found to have acted in breach of the 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 2016, there were 38 employees (2015: 33 employees) whose
employment ended for reasons relating to breaches of the Global Code.
An improved investigations protocol was introduced in 2016 to
underpin the Global Code and the suite of ABC Group policies, and to
support faster resolution of issues.
Behavioural expectations linked to performance and reward
In 2016, the Group updated its performance review process so that it
provided an increased focus on behavioural expectations as a core
assessment feature in all employees’ formal performance reviews. The
required behaviours include creating trust and a baseline by which
employees will be recognised and rewarded for acting as a positive
role model for ethical behaviour. From 2016, manager bonuses include
an element based on what objectives managers have achieved and the
behaviours they have demonstrated. The Committee welcomed this
positive step as a means of embedding expectations and maintaining
individuals’ focus.
Rolls-Royce Holdings plc Annual Report 2016
SAFETY & ETHICS COMMITTEE REPORT
107
Product safety
The Group recognises that its products are 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.
A key theme in 2016 was to ensure that safety of people and
product remained front of mind across the workforce during the
Group’s current period of transformation. We discussed this topic
regularly during the year and reviewed the risk implications for
safety of organisational and role changes, and the lack of focus that
can emerge in times of uncertainty and change. We were pleased to
see that regular and clear communications, including videos from
senior leaders and poster campaigns, were taking place in order to
reinforce these messages.
We discussed and endorsed a set of expected behaviours that will
promote and strengthen a culture where safety is prevalent. These
behaviours are aligned to many of the expectations and principles
within the Group’s values, the Global Code of Conduct and the
product safety Group policy, as well as features of the Group’s high
performance culture training. Assessments against the expected
behaviours have led to plans for targeted improvements.
Again this year, the Committee received detailed briefings in
relation to further elements of the product safety assurance
framework and safety management system. In February 2016, we
reviewed the work of the product safety process council that was
completed in 2015 and its plans for 2016. This body is responsible for
the definition and implementation of product safety processes,
process effectiveness, compliance, governance of improvements,
development and training, and sharing of knowledge and best
practice in the area of product safety within the Group. We also
considered the role of external learning and regulation in product
safety. We concluded that the framework and system remain robust
and provide appropriate governance and accountability.
Rolls-Royce recognises in its product safety Group policy, reviewed
annually by the Committee, that robust quality is an essential
building block of product safety. In 2016, we looked at the increasing
role of product quality planning which links the ‘design’ and ‘make’
parts of product safety. We also reviewed product conformity
performance metrics which showed that process compliance, as
indicated by audit findings, is improving. We conducted a review of
the product safety training programme, and considered how the
Group manages the competency of its purchasing function given
the high proportion of components produced in the supply chain.
Throughout the year, we were kept regularly updated on product-
related safety incidents in service and considered the potential
impact on the Group and its products. This included the Airbus
A400M crash near Seville, Spain in May 2015, and the Group’s
response to an issue detected on Trent 1000 intermediate pressure
turbine (IPT) blades on All Nippon Airways’ Boeing 787 aircraft.
We also reviewed the learnings from a fire arising in an engine
assembled into an MTU railcar powerpack on a London Midland
diesel locomotive, and had an initial briefing on the grounding
of a vessel in the Scottish Hebrides.
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 applying lessons
learned back into product design. The Committee was again
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. As well as incidents in service,
we were also assured by seeing examples of eradication of
conformity issues identified between the manufacturing and
assembly phases, through design and build instruction changes.
We conducted our annual review of the product safety metrics used
as a management information indicator of the performance of the
safety management system. This includes trend data on the number
of ‘Red Tops’ raised by each of the Rolls-Royce businesses, which is the
document raised when a safety issue is identified on a product.
We also reviewed the Group’s product failure principal risk
dashboard. Although product failure can never be fully mitigated,
the Group’s approach to risk identification and management,
assurance and controls gave us confidence that the likelihood of
incidents is very low.
During the year, the Committee continued the work started in
2015 to gain a deep understanding of how the product safety
management system is applied in the Marine business. This started
with a half-day workshop in March 2016 with members of the
Marine leadership and product safety teams, where we covered the
applicable legislative and industry regulatory framework, accident
prevention methodology, and each of the detailed product safety
processes that underpin the product safety Group policy.
This provided a good foundation upon which we were able to
examine the maturity of implementation of these processes during
a visit by the Committee members in September to the Group’s
Marine facilities in Ålesund and Ulsteinvik, Norway. We met with
local management and explored the product safety framework and
processes as they apply to design, manufacturing engineering,
production, assembly and testing, operator training, operational
performance monitoring and servicing of some of the business’
core products. It was very valuable to gain an understanding
of the history and development of the business from the local
teams, as well as to see up close the current and planned products
and technology. This helped the Committee to understand better
the journey the business had undertaken to increase the maturity
of product safety governance, and the areas of continued focus
for improvement.
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Rolls-Royce Holdings plc Annual Report 2016
Sustainability
The Committee oversees and helps guide the Group’s approach to
sustainability, as well as monitoring progress towards goals in
this area.
In September, Rolls-Royce once again improved its overall score in
the Dow Jones Sustainability Index (DJSI), remaining listed in the
DJSI World and Europe Indexes and achieving a bronze class award.
We achieved industry best scores for corporate governance,
materiality, product stewardship and human capital development,
and significantly improved our scores in the social reporting and
risk and crisis management categories. This recognition reflects the
Group’s continuing focus on public disclosure and transparency,
with the breadth of the 2016 submission enhanced by the inclusion
of social and HS&E data sets from Power Systems.
The Committee reviewed the Group’s approach and steps being
taken in preparation for the statement required to be made in 2017
under the UK Modern Slavery Act 2015. This statement outlines the
steps the Group has taken to minimise the risk of slavery and human
trafficking taking place in any part of the Group’s supply chain. Our
2016 anti-human trafficking and modern slavery statement is
available at www.rolls-royce.com.
We also discussed the growing importance, underpinned by
developing legislation, on engaging external suppliers on
sustainability issues. The Group’s principal enabler for this is its
Global Supplier Code of Conduct (the Supplier Code), adherence to
which is mandated through contractual terms. In 2016, the Group
focused on embedding sustainability and ethical considerations
into sourcing and supplier selection, on strengthening
understanding and application of the Supplier Code, and on
monitoring compliance with it.
You can read more about the Group’s approach to sustainability
on pages 40 to 45.
Travel security
In July 2016, the Committee reviewed the Group’s programme
and arrangements for ensuring the security of its workforce while
travelling on business and were assured that these were robust
and managed well.
Health, safety and the environment
During the year, we received 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,
performance and assurance.
The HS&E strategy and corporate strategic plan were presented to
the Committee, including measures and targets aligned to delivery
of the strategic themes.
In February 2016, the Committee reviewed the 2015 Group HS&E
performance report and a balanced scorecard showing
performance trends against the Group’s published target objectives
on protecting health, preventing injury and reducing environmental
impact. We then looked at in-year progress in June and again in
December. Overall, with recovery improvements to be made in some
areas, performance remained on track towards achievement of the
target objectives (see the Sustainable business section on page 42),
with the exception of our 2020 targets for the total reportable injury
(TRI) rate and for total solid and liquid waste reduction, which
remain challenging. The TRI rate for all our businesses has however
improved. From 2015, the inclusion of Power Systems’ TRI data has
significantly impacted the Group’s overall TRI rate. Extraordinary
effort has been applied to improve Power Systems’ performance in
this area and significant improvements were achieved in 2016, but
there is more to do to drive this to a level matching that of the
remainder of the Group.
TRI RATE (PER 100 EMPLOYEES)*
1
0.8
0.6
0.4
0.2
0
2015
2016
2017
2018
2019
2020
target
Power Systems
Rest of Group
* External assurance over STEM, Energy, GHG and TRI rate data provided by Bureau Veritas.
See page 183 for the sustainability assurance statement.
In December, representatives from Power Systems attended the
Committee meeting to report on their HS&E recovery plans based
on implementation of Group standards, policies and processes. We
were assured that the team recognised the need for improvements
and are actively progressing with robust plans, supported by the
central Group HS&E team.
The Committee also oversees the learning from incidents process
that examines root causes of significant and major incidents,
identifies any systemic issues, and defines measures to mitigate
against the risk of similar incidents. We focused on the global
improvement programmes, in particular on electrical safety,
infrastructure integrity and control of contractors which continue
to be higher risk areas for the Group contributing to several serious
incidents in the year. The implementation of new Group-wide
control standards and the continued use of HS&E bulletins are
expected to contribute to better risk identification and hazard and
incident reduction in these and other areas.
The Group’s HS&E experts also provided updates to the Committee
during the year on the HS&E improvement programme for field
services, and on the wellbeing element of the occupational health
strategy. The Committee was satisfied that good progress was
being made on these programmes.
Rolls-Royce Holdings plc Annual Report 2016
SAFETY & ETHICS COMMITTEE REPORT
109
Looking forward
The Group continues to have a high degree of focus on the
management of product safety, peoples’ health and safety,
environmental, ethics and compliance risks, with constant
improvements being sought. With sustained support from senior
leadership and the central expert teams, there is encouraging
evidence that consideration and awareness of these topics is
becoming ever more a part of everyday life for the Group’s
employees. We observe a growing peer culture of being curious,
speaking up and challenging any potentially unsafe, unhealthy,
unethical or wasteful behaviour. The Committee and I look forward
to supporting and seeing this culture develop in 2017 and beyond.
In particular, the Committee will oversee the implementation of
all outstanding recommendations made by Lord Gold and monitor
compliance with the Group’s obligations under the DPAs.
Sir Frank Chapman
Chairman of the Safety & Ethics Committee
We conducted an annual review of HS&E governance, which
includes a rolling calendar of executive level reviews. The
governance structure was adapted following the removal of the
Aerospace and Land & Sea divisional structures from the start of
2016. We concluded that this remained satisfactory.
The Committee examined the HS&E Group risk profile twice in the
year, which remained largely stable against the previous reporting
period. We reviewed the steps taken to contain known issues and to
mitigate against the effects of future emerging risks. We were also
briefed on a revised approach to corporate HS&E auditing and
assurance, which had been adapted to make this more focused,
effective and efficient.
The Committee reviewed the overall HS&E learning and
development programme, and were satisfied that a comprehensive
enhancement of the programme through standardised global HS&E
training had been endorsed and was underway. This included
working with a selected training provider to produce new courses
to close identified gaps, as well as making existing modules
available in more languages.
In October, a Group-wide HS&E week was held with all employees
encouraged to take part in activities and discussions, with very
positive feedback having been received.
In December, we received an update on implementation of the
Group’s new HS&E management system, which provides more
capability to support risk identification and reporting. This is being
deployed across all of the businesses.
We also maintained our oversight of the Group’s occupational
health strategy, with further increase in the level of focus and
resources being applied in promoting health risk management,
resilience and wellbeing among the workforce. We are committed to
creating workplaces that enhance the wellbeing of our people. At
the end of 2016, 35% of our sites have achieved a LiveWell Award,
recognising the steps they have taken to create an environment that
supports employee wellbeing, where our people are motivated and
enabled to make healthy choices and lead healthier lives.
LIVEWELL SITE ACCREDITATION (%)1
100
80
60
40
20
0
2015
2016
2017
2018
2019
2020
target
SEE FURTHER HS&E KPIS ON PAGES 42 AND 44
DIRECTORS’ REPORT
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Rolls-Royce Holdings plc Annual Report 2016
Science & Technology
Committee report
Sir Kevin Smith
Chairman of the
Science & Technology
Committee
Principal responsibilities
The remit of the Committee is to:
Review the strategic direction of the
Group’s research, technology and
development activities.
Provide assurance that significant trends
in science, technology, software and data
are identified and incorporated into
management plans.
Assist the Board in its oversight of major
R&D investment and provide assurance
on its competitiveness and adequacy.
Oversee the effectiveness of key
engineering and technology processes and
operations, including delivery of major
product development and technology
programmes, intellectual property
management and interactions with
professional and academic institutions.
Provide assurance on the identification
and management of key technological risks.
Oversee processes for ensuring effective
resourcing and development of required
technological capability and skills.
Conduct visits to research and
development facilities.
Ensure dialogue with the Group’s
engineering and technology leaders and
employees.
Review industry and scientific benchmark
data and best practices.
Review and consider any other topics or
risks appropriate to the overall remit of
the Committee as delegated by the Board.
The Group President, Director – Engineering
& Technology and other senior engineering
and technology executives attend the
Committee meetings.
Highlights
Review of small modular reactor
nuclear technology.
Review of technology
acquisition process.
Review of Advance3,
UltraFan and MTU Series 5000
programmes.
Visit to University Technology
Centres in Nottingham, UK.
Detailed briefing on
manufacturing R&T strategy
and programme.
Visit to facilities in Indianapolis,
US and Coventry, UK to review
manufacturing technologies.
At a glance
Area of focus
Matters considered
Outcome
Technology acquisition
process 2016 outcome
How the Group develops and acquires new technology, and the
outcome of the process during 2016.
Technology deep
dive reviews
The Committee received briefings on key technologies for small
modular reactors (SMRs), and on required manufacturing
capabilities and potential partnerships.
New product
programme reviews
Status of the Advance3, UltraFan and MTU Series 5000
programmes.
University Technology
Centres (UTCs)
Review of the UTCs’ role in partnering with Rolls-Royce, and tour
of the work of the Gas Turbine Transmission Systems and
Manufacturing Technology UTCs at Nottingham, UK.
The technology process was appropriate and
supported the technology development strategy
of the businesses.
The Group’s core nuclear technologies and potential
partners position it well to address SMR opportunities,
and the Group is focused on developing and deploying
competitive manufacturing solutions.
These programmes will bring a step-change in
technology to key products enhancing their efficiency
and effectiveness.
The UTC model is highly beneficial in supporting R&D
by leading academics in key technology areas for
improving the Group’s tools and processes and for
application in future products.
Manufacturing
technology
As well as the visit to the Nottingham UTCs, review of
manufacturing technology strategy and development
programme, including visits to facilities in Indianapolis, US and
the Manufacturing Technology Centre at Coventry, UK.
The manufacturing technology strategy and
programme are well defined across the businesses
and there are visible signs of new technologies
starting to be deployed.
Rolls-Royce Holdings plc Annual Report 2016
SCIENCE & TECHNOLOGY COMMITTEE REPORT
111
2016 overview
Introduction
The Group invests more than £1 billion each year in R&D to enable it
to conceive, design and deliver world-class technology that meets
customers’ current and future needs. The Committee was
established by the Board to provide dedicated focus and support to
this key area of the business 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.
Work of the Committee in 2016
In 2016, the Committee focused on deepening our understanding
of some of the Group’s existing and developing core technologies
differentiators and enablers, and on reviewing critical technology
programmes. These technologies help differentiate us from our
competitors and enable us to meet customers’ needs. We covered
technologies deployed inside the Group’s products as well as
technologies that support their design and manufacture.
In May, the Committee undertook a review with the Group’s
experts of the technology capabilities necessary to address SMR
opportunities. The Group has decades of experience in the design
and manufacture of small nuclear-powered propulsion plants for
the UK Royal Navy’s submarine fleet. We also have extensive
knowledge of civil nuclear reactor technology, components and
systems through our instrumentation & controls and nuclear
services businesses. These factors, together with proven expertise
in high-volume, high-tech precision manufacturing through the
aerospace businesses, provide the Group with a very strong and
credible technology proposition. The Committee therefore
supported the Group’s initial investment in progressing the SMR
opportunity as the UK Government considers its future energy
options to meet projected demand.
We received a briefing on the new ‘innovation accelerator’ network
introduced across the Group to engage our people worldwide
enabling them to turn ideas into value-generating activities.
The Committee visited two UTCs at Nottingham, UK. The Group’s
established global network of UTCs enables long-term funded
research as well as close contact with world-class academic
institutions and access to leading talent and innovation in key
engineering and technology disciplines.
We first met with researchers and staff at the Gas Turbine
Transmissions Systems UTC where we were shown some of the
expert work being undertaken in advanced fluid mechanics. This
enables the modelling of fluid flow and heat transfer in complex oil
flows within the gas turbine core and transmissions architectures,
and analysis of the behaviours of seals, shafts, bearings and support
structures in different conditions. This work impacts directly on the
development of new engines in considering material strength and
wear at high temperatures.
We then moved on to the UTC in Manufacturing Technology where
we saw some of the innovative work being undertaken in the fields
of robotic inspection and repair, and in miniature machine tools.
It is easy to see the potential this brings for enabling high-precision
work in restricted space environments such as within engines.
The Committee was hugely impressed by the quality of work
undertaken at the UTCs and the strength of the relationships.
We were also satisfied with arrangements for the protection
and management of intellectual property.
At our meeting in July, we examined progress with the Group’s
research and technology programmes, reviewing the 2016
technology themes and master programmes for each of the Group’s
businesses, and the planned sources of R&T co-funding. We
conducted a review of the key technologies within the Advance and
UltraFan programmes, including the Rolls-Royce Power Gearbox,
which are driving changes to engine architecture and component
technologies to form the core of the next generation of more
efficient Rolls-Royce aero engines. Representatives from Rolls-Royce
Power Systems also briefed us on the core technologies planned for
the new MTU Series 5000 engine programme and the modular
nature of its design.
The Committee endorsed the Group’s critical programmes and will
continue to keep them, and their key contributing technologies,
under review.
The Committee was updated in July on the Group’s technology
strategy and programme in the field of manufacturing technology.
This is an important area as the Group drives operational
improvements in the near-term, as well as positioning the Group
competitively for the future. We were briefed on the activities
undertaken through the Group’s global advanced manufacturing
research centre network, and the particular areas of focus within
each of the Group’s businesses. This helped provide context for the
Committee’s visit in September to some of the Group’s facilities in
Indianapolis, US where we were briefed on advanced technology
across several of the Group’s businesses and programmes.
This included: technology used in the Advance1 engine core
architecture; development by LibertyWorks of engine infrared
suppression technology; a review of CastBond technology which
combines cooling and manufacturing techniques; and a briefing on
the Group’s investment in ceramic matrix composites (CMC) in
Cypress, California to serve as a dedicated centre for CMC R&D to
support the development of next-generation turbine materials.
During this visit, we also received briefings on advanced methods to
reduce cost and shorten schedules for development programmes,
and on repair technologies that decrease lifecycle cost and enhance
fleet readiness. The LibertyWorks team provided a briefing on some
of their areas of technology development. This included: engine
infrared signature suppression technology that provides a benefit
to defence customers; integrated power and thermal management;
and other aspects of improving the Group’s electrical capability in
all business sectors. The DARPA VTOL X-Plane project was
highlighted, that will lead to a demonstration of a distributed
turbo-electric powered vertical take-off/landing aircraft.
DIRECTORS’ REPORT 112
DIRECTORS’ REPORT SCIENCE & TECHNOLOGY COMMITTEE REPORT
Rolls-Royce Holdings plc Annual Report 2016
In December, the Committee visited the Manufacturing Technology
Centre (MTC) at Coventry, UK, the largest of a network of advanced
manufacturing research centres. Here, we saw close up how
advanced technologies, in particular in additive layer
manufacturing and laser welding, are being applied to bring
step-change efficiency improvements to the production process.
We were particularly impressed by the capability of the MTC
personnel, a team of industrially experienced process experts who,
together with the world-class facilities at the MTC, provide fantastic
capability in manufacturing solutions to Rolls-Royce and others.
I was delighted to attend this year’s Rolls-Royce Science Prize finals.
This flagship annual event at the London Science Museum gives
recognition and reward to teachers that have undertaken innovative
work in implementing science teaching ideas in their schools and
colleges across the UK. The passion and enthusiasm of all of the
finalists for their projects was evident, and their achievements in
inspiring the next generation to pursue learning in STEM subjects
in novel and engaging ways were truly deserving of this recognition.
Looking forward
The Committee will continue to support management in overseeing
the Group’s technology strategy and its response to emerging
technology risks and opportunities. In December 2016, the Committee
was allocated responsibility for overseeing management of the
Group’s new principal risk of disruptive technologies and business
models, which we will be examining more in 2017.
Building on the understanding we have developed on the Group’s
technologies and plans, in 2017, the Committee expects to have a
particular focus on how they contribute to sustaining
competitiveness in our key business areas. We will also review the
impact of transformation on our R&T strategy. We are excited by the
possibilities ahead to build on the Group’s strengths and harness new
technologies to create and address future market opportunities.
Sir Kevin Smith
Chairman of the Science & Technology Committee
The Rolls-Royce Science Prize
The Rolls-Royce Science Prize is an annual awards programme
launched in 2004 as part of the Group’s continuing commitment
to science education, designed to foster, recognise and reward
outstanding work in science and maths teaching. It promotes
innovative and sustainable strategies for teaching science and
at the same time contributes to teachers’ continuing
professional development. Since its launch, over £1,250,000 of
prize money has been awarded to over 550 schools.
Rolls-Royce works with the National STEM Learning Centre and
Network, The National Centre for Excellence in Teaching
Mathematics (NCETM) and the Institute of Mathematics and its
Applications (IMA) to invite teachers, technicians and teaching
assistants throughout the UK to submit a proposal for any
science, or combined maths and science, project that meets a
need in their school or college.
Up to 60 special merit awards of £1,000 are awarded by
Rolls-Royce to selected schools that have submitted proposals of
a very high standard. From these shortlisted schools up to six
finalists receive an additional £5,000 from Rolls-Royce to
develop and enhance their projects. Finalists are lent a video
camera which records their progress and are aligned to a
Rolls-Royce STEM Ambassador mentor to support them through
to successful project completion.
The winning entrant is announced at an annual awards
ceremony held at the London Science Museum, and the school
receives a prize of £10,000. You can read about the 2016
finalists and their projects on the Group’s website
www.rolls-royce.com.
113
Responsibility statements
STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT
OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS
The Directors, as listed on pages 54 to 57, 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.
• For the parent company financial statements, state whether
applicable UK Accounting Standards have been followed, subject
to any material departures disclosed and explained in the parent
company financial statements.
• 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.
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 GUIDANCE
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:
• 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.
• The Strategic report on pages 2 to 53 and Directors’ Report
on pages 54 to 113 and pages 186 to 189 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.
• The Annual Report, taken as a whole, is fair, balanced and
understandable and provides the information necessary for
shareholders to assess the Group’s position and performance,
business model and strategy.
By order of the Board
Pamela Coles
Company Secretary
13 February 2017
Rolls-Royce Holdings plc Annual Report 2016RESPONSIBILITY STATEMENTSDIRECTORS’ REPORT 114
FINANCIAL STATEMENTS
Rolls-Royce Holdings plc Annual Report 2016
167
167
168
168
168
168
169
169
169
Financial
statements
CONSOLIDATED FINANCIAL STATEMENTS
COMPANY FINANCIAL STATEMENTS
Consolidated income statement
115
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
26 Derivation of summary funds
flow statement
Company statement of changes in equity
116
117
118
Notes to the Company
financial statements
1 Accounting policies
120
2 Investments –
subsidiary undertakings
3 Financial liabilities
4 Share capital
5 Contingent liabilities
6 Other Information
121
121
131
136
136
137
139
139
140
140
143
144
146
146
147
147
147
148
156
157
161
161
162
163
164
164
165
Rolls-Royce Holdings plc Annual Report 2016
CONSOLIDATED
115
Consolidated income statement
For the year ended 31 December 2016
Revenue
Cost of sales
Gross profit
Other operating income
Commercial and administrative costs2
Research and development costs
Share of results of joint ventures and associates
Operating profit
(Loss)/profit on disposal of businesses
Profit before financing and taxation
Financing income
Financing costs
Net financing
(Loss)/profit before taxation*
Taxation
(Loss)/profit for the year
Attributable to:
Ordinary shareholders
Non-controlling interests
(Loss)/profit for the year
Earnings per ordinary share attributable to ordinary shareholders:
Basic
Diluted
Payments to ordinary shareholders in respect of the year:
Per share
Total
* Underlying profit before taxation
Notes
2
3
11
2
4
4
5
6
17
2
2016
£m
14,955
(11,907)
3,048
5
(2,208)
(918)
117
44
(3)
41
96
(4,773)
(4,677)
(4,636)
604
(4,032)
(4,032)
–
(4,032)
20151
£m
13,725
(10,448)
3,277
10
(1,070)
(818)
100
1,499
2
1,501
115
(1,456)
(1,341)
160
(76)
84
83
1
84
(220.08)p
(220.08)p
4.51p
4.48p
11.70p
215
16.37p
301
813
1,432
1 2015 figures have been restated as a result of £11m of Power Systems costs previously reported in ‘cost of sales’, being reclassified as ‘commercial and administrative costs’ to ensure
consistent treatment with 2016. The applicable notes have also been restated.
2 In 2016, ‘commercial and administrative costs’ include £671m for financial penalties from agreements with investigating bodies (see note 23) and £306m for the restructuring of the
UK pension schemes (see note 19).
FINANCIAL STATEMENTS 116
FINANCIAL STATEMENTS CONSOLIDATED
Rolls-Royce Holdings plc Annual Report 2016
Consolidated statement of comprehensive income
For the year ended 31 December 2016
(Loss)/profit for the year
Other comprehensive income (OCI)
Movements in post-retirement schemes
Share of OCI of joint ventures and associates
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
2016
£m
(4,032)
19
11
5
11
5
495
(2)
(179)
314
861
–
(7)
4
858
2015
£m
84
(722)
–
257
(465)
(129)
1
(19)
(2)
(149)
(2,860)
(530)
(2,860)
–
(2,860)
(530)
–
(530)
Rolls-Royce Holdings plc Annual Report 2016
CONSOLIDATED
117
Consolidated balance sheet
At 31 December 2016
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
2016
£m
2015
£m
9
10
11
11
17
5
19
12
13
17
14
15
17
16
18
15
17
16
5
18
19
20
5,080
4,114
844
38
382
876
1,346
12,680
3,086
6,956
32
5
3
2,771
5
12,858
25,538
(172)
(651)
(7,957)
(211)
(543)
(9,534)
(3,185)
(5,129)
(3,459)
–
(776)
(216)
(1,375)
(14,140)
(23,674)
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)
1,864
5,016
367
181
162
(107)
814
445
1,862
2
1,864
367
180
161
(100)
(51)
4,457
5,014
2
5,016
The financial statements on pages 115 to 166 were approved by the Board on 13 February 2017 and signed on its behalf by:
WARREN EAST
Chief Executive
DAVID SMITH
Chief Financial Officer
FINANCIAL STATEMENTS 118
FINANCIAL STATEMENTS CONSOLIDATED
Rolls-Royce Holdings plc Annual Report 2016
Consolidated cash flow statement
For the year ended 31 December 2016
Operating profit
Loss on disposal of property, plant and equipment
Share of results of joint ventures and associates
Dividends received from joint ventures and associates
Amortisation and impairment of intangible assets
Depreciation and impairment of property, plant and equipment
Impairment of investments
Increase/(decrease) in provisions
(Increase)/decrease in inventories
Decrease/(increase) in trade and other receivables
Accruals for financial penalties from agreements with investigating bodies
Other 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
Disposal of discontinued operations
Disposals of other businesses
Increase in share in joint ventures
Other investments in joint ventures and associates
Cash and cash equivalents of joint ventures reclassified as joint operations
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 (decrease)/increase in borrowings and finance leases
Interest received
Interest paid
Interest element of finance lease payments
(Increase)/decrease in short-term investments
Issue of ordinary shares (net of expenses)
Purchase of ordinary shares – share buyback
Purchase of ordinary shares – other
Redemption of C Shares
Net cash (outflow)/inflow from financing activities
Change in cash and cash equivalents
Cash and cash equivalents at 1 January
Exchange gains/(losses) on cash and cash equivalents
Cash and cash equivalents at 31 December
Notes
11
11
9
10
11
19
19
21
11
9
9
25
25
11
11
2016
£m
44
5
(117)
74
628
426
–
44
(161)
54
671
234
(608)
510
(271)
35
1,568
(157)
1,411
–
(631)
8
(585)
15
8
(6)
–
7
(154)
(30)
5
(1,363)
(434)
93
(4)
(345)
14
(84)
(2)
(1)
1
–
(21)
(301)
(739)
(691)
3,176
286
2,771
2015
£m
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
Rolls-Royce Holdings plc Annual Report 2016
CONSOLIDATED
119
Consolidated cash flow statement continued
For the year ended 31 December 2016
Reconciliation of movements in cash and cash equivalents to movements in net debt
Change in cash and cash equivalents
Cash flow from decrease/(increase) in borrowings and finance leases
Cash flow from increase/(decrease) in short-term investments
Change in net debt resulting from cash flows
Net debt (excluding cash and cash equivalents) of joint ventures reclassified as joint operations
Exchange gains on net debt
Fair value adjustments
Movement in net debt
Net debt at 1 January excluding the fair value of swaps
Net debt at 31 December excluding the fair value of swaps
Fair value of swaps hedging fixed rate borrowings
Net debt at 31 December
2016
£m
(691)
345
1
(345)
(9)
240
(345)
(459)
(124)
(583)
358
(225)
2015
£m
320
(1,095)
(5)
(780)
–
3
45
(732)
608
(124)
13
(111)
The movement in net debt (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 debt excluding fair value of swaps
Fair value of swaps hedging fixed rate borrowings
Net debt
At
1 January
2016
£m
662
783
1,731
3,176
2
(417)
(2,833)
(52)
(124)
13
(111)
Reclassification
of joint ventures
to joint
operations
£m
5
–
–
5
–
(9)
–
–
(4)
Exchange
differences
£m
109
29
148
286
–
(24)
(11)
(11)
240
(4)
240
Funds
flow
£m
96
(260)
(532)
(696)
1
350
(1)
(4)
(350)
(350)
Fair value
adjustments
£m
–
–
–
–
–
–
(345)
–
(345)
345
–
Reclassifications
£m
–
–
–
–
–
(69)
69
–
–
–
At
31 December
2016
£m
872
552
1,347
2,771
3
(169)
(3,121)
(67)
(583)
358
(225)
FINANCIAL STATEMENTS 120
FINANCIAL STATEMENTS CONSOLIDATED
Rolls-Royce Holdings plc Annual Report 2016
Consolidated statement of changes in equity
For the year ended 31 December 2016
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 Shares4
Redemption of C Shares
Ordinary shares purchased – share buyback 5
Ordinary shares cancelled 5
Ordinary shares purchased – other
Share-based payments – direct to equity 6
Transactions with NCI
Related tax movements
Other changes in equity in the year
At 1 January 2016
Loss for the year
Foreign exchange translation differences on foreign
operations
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 Shares4
Redemption of C Shares
Ordinary shares purchased
Share-based payments – direct to equity 6
Related tax movements
Other changes in equity in the year
At 31 December 2016
Attributable to ordinary shareholders
Notes
Share
capital
£m
376
–
Share
premium
£m
179
–
Capital
redemption
reserve
£m
159
–
Cash flow
hedging
reserve1
£m
(81)
–
Other
reserves 2
£m
78
–
Retained
earnings 3
£m
5,671
83
Non-
controlling
interests
(NCI)
£m
5
1
Total
£m
6,382
83
Total
equity
£m
6,387
84
–
–
–
–
–
–
–
–
–
–
(9)
–
–
–
–
(9)
367
–
–
–
–
–
–
–
–
–
–
–
–
–
367
–
–
–
–
–
–
1
–
–
–
–
–
–
–
–
1
180
–
–
–
–
–
–
1
–
–
–
–
–
1
181
–
–
–
–
–
–
–
(430)
423
–
9
–
–
–
–
2
161
–
–
–
–
–
–
–
(301)
302
–
–
–
1
162
–
–
–
(19)
–
(19)
–
–
–
–
–
–
–
–
–
–
(100)
–
–
–
(7)
–
(7)
–
–
–
–
–
–
–
(107)
19
11
5
17
17
20
5
19
11
5
17
17
5
(128)
–
(128)
(1)
(129)
1
–
–
(722)
1
(722)
–
(2)
(129)
–
–
–
–
–
–
–
–
–
–
(51)
–
861
–
–
4
865
–
–
–
–
–
–
–
814
–
257
(382)
–
2
(423)
(433)
–
(2)
30
–
(6)
(832)
4,457
(4,032)
(19)
255
(530)
1
(428)
–
(433)
–
(2)
30
–
(6)
(838)
5,014
(4,032)
–
495
861
495
(2)
(179)
(3,718)
–
1
(302)
(21)
30
(2)
(294)
445
(9)
(175)
(2,860)
1
(300)
–
(21)
30
(2)
(292)
1,862
–
–
–
–
–
–
–
–
–
–
–
–
(3)
–
(3)
2
–
–
–
–
–
–
–
–
–
–
–
–
–
2
1
(722)
(19)
255
(530)
1
(428)
–
(433)
–
(2)
30
(3)
(6)
(841)
5,016
(4,032)
861
495
(9)
(175)
(2,860)
1
(300)
–
(21)
30
(2)
(292)
1,864
1 See accounting policies note 1.
2 Other reserves include a merger reserve of £3m (2015: £3m, 2014: £3m) and a translation reserve of £811m (2015: £(54)m, 2014: £75m).
3 At 31 December 2016, 6,854,216 ordinary shares with a net book value of £56m (2015: 5,894,064, 2014: 14,561,097 ordinary shares with net book values of £52m and £129m
respectively) were held for the purpose of share-based payment plans and included in retained earnings. During the year, 1,955,390 ordinary shares with a net book value of £17m
(2015: 10,892,026 shares with a net book value of £98m) vested in share-based payment plans. During the year, the Company acquired 165,542 (2015: 224,993) of its ordinary shares via
reinvestment of dividends received on its own shares and purchased 2,750,000 (2015: 2,000,000) of its ordinary shares through purchases on the London Stock Exchange.
4 In Rolls-Royce Holdings plc’s own financial statements, C Shares are issued from the merger reserve. As this reserve is eliminated on consolidation, in the consolidated financial
statements, the C Shares are shown as being issued from the capital redemption reserve.
5 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 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.
6 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.
121
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 2016 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 2016 (Adopted IFRS).
The Company has elected to prepare its individual company financial statements under FRS 101 Reduced Disclosure Framework. They are
set out on pages 167 to 169 and the accounting policies in respect of Company financial statements are set out on page 168.
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 53.
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 actual 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 (CAR).
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
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 measurable. An equal amount of revenue is recognised at the same point. Where a long-term
aftermarket contract is linked to the OE contract (see page 122), the contractual price of the engine (including amounts allocated from
the aftermarket contract) is above its cost of manufacture; consequently no CAR is recognised.
FINANCIAL STATEMENTSRolls-Royce Holdings plc Annual Report 2016CONSOLIDATED 122
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 Civil Aerospace. Under these contracts, the Group’s primary obligation is to maintain customers’ equipment in an operational condition
and it 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 OE 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.
Sales of spare engines to joint ventures
Whether the sales price reflects fair value when the Group sells spare engines to a joint venture company.
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 consider 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.
The resulting accounting policy (described on page 125) 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.
Notes to the consolidated financial statements continuedRolls-Royce Holdings plc Annual Report 2016FINANCIAL STATEMENTS CONSOLIDATED 123
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 policy1
2016
2015
Reported
profit before tax
£m
(4,636)
(2)
(4,638)
Underlying profit
before tax
£m
813
(2)
811
Net assets
£m
1,864
(442)
1,422
Reported
profit before tax
£m
160
(28)
132
Underlying profit
before tax
£m
1,432
(28)
1,404
Net assets
£m
5,016
(435)
4,581
1 If the alternative policy were adopted, the difference would be included in profit before financing, which would change from £41m as reported to £39m (2015: £1,501m to £1,473m).
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 (carrying value at 31 December 2016: £1,537m, 31 December 2015: £1,503m) arising on the
consolidation of acquired businesses 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 2016: £2,846m, 31 December 2015:
£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; life-cycle cost improvements over the term of the contracts and escalation of
revenues and costs. The estimates take account of the inherent uncertainties and the risk of non-recovery of any resulting contract
balances. In addition many of the revenues and costs are denominated in currencies other than that of the relevant Group undertaking.
These are translated at an estimated long-term exchange rate, based on historical trends. In 2016, the US dollar long-term exchange rate
was reduced by five cents, resulting in a one-off benefit to profit before tax of £35m.
FINANCIAL STATEMENTSRolls-Royce Holdings plc Annual Report 2016CONSOLIDATED 124
1 Accounting policies continued
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 £29m before deferred
taxation being recognised on the balance sheet at 31 December 2016 (31 December 2015: net deficit £77m). 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.
Provisions
As described in the accounting policy on page 128, the Group measures provisions (carrying value at 31 December 2016: £759m,
31 December 2015: £640m) 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.
Tax provisions 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 deductible
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 184.
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.
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.
During the year, the Group has reassessed the categorisation of joint arrangements. As a result of this review, certain entities, previously
classified as joint ventures, have been reclassified as joint operations from 1 January 2016. This reclassification does not affect profit before
tax or net assets, but the Group’s share of the individual income statement and balance sheet categories are included on a proportional
basis, rather than as a single figure. The adjustment to the opening balance was to reclassify £57m of investments in joint ventures to:
property, plant and equipment (£41m), inventory (£19m), receivables (£18m), cash (£5m), payables (£17m) and borrowings (£9m). Prior year
figures have not been restated.
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.
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.
Notes to the consolidated financial statements continuedRolls-Royce Holdings plc Annual Report 2016FINANCIAL STATEMENTS CONSOLIDATED 125
1 Accounting policies continued
Revenue recognition
Revenues comprise sales to outside customers after discounts, excluding value added taxes.
Sales of products (both OE 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 121, 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.
Sales of services are recognised by reference to the stage of completion based on services performed to date. As described on page 122,
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 122, 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. Again, changes in this allowance are recognised in the period.
Risk and revenue sharing arrangements (RRSAs)
As described on page 122, 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.
FINANCIAL STATEMENTSRolls-Royce Holdings plc Annual Report 2016CONSOLIDATED 126
1 Accounting policies continued
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.
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, and C Shares are classified as other liabilities.
• 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.
Notes to the consolidated financial statements continuedRolls-Royce Holdings plc Annual Report 2016FINANCIAL STATEMENTS CONSOLIDATED 127
1 Accounting policies continued
• 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.
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 on a straight-line basis, 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 123, 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 on a straight-line basis, up to a maximum of 15 years from the entry into
service of the product.
FINANCIAL STATEMENTSRolls-Royce Holdings plc Annual Report 2016CONSOLIDATED 128
1 Accounting policies continued
Contractual aftermarket rights
As described under key judgements on page 121, 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.
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 on a straight-line basis 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:
• Land and buildings, as advised by the Group’s professional advisers:
– freehold buildings – five to 45 years (average 26 years);
– leasehold buildings – lower of adviser’s estimates or period of lease;
– no depreciation is provided on freehold land.
• Plant and equipment – five to 25 years (average 12 years).
• Aircraft and engines – five to 20 years (average 13 years).
Where the Group obtains effective control of customers’ installed engines as a result of a TotalCare Flex arrangement, the fair value
of these engines is recognised as an addition (shown separately in note 10). The corresponding liability is recognised either as deferred
revenue or a financial liability depending on the precise nature of the arrangement.
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.
Notes to the consolidated financial statements continuedRolls-Royce Holdings plc Annual Report 2016FINANCIAL STATEMENTS CONSOLIDATED 129
1 Accounting policies continued
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 and settlements are recognised immediately.
• 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.
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.
Customer 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 123, 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 2016
There were no changes to accounting standards that had a material impact on the 2016 financial statements.
Revisions to IFRS not applicable in 2016
Standards and interpretations issued by the IASB are only applicable if endorsed by the EU.
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.
FINANCIAL STATEMENTSRolls-Royce Holdings plc Annual Report 2016CONSOLIDATED 130
1 Accounting policies continued
IFRS 15 Revenue from Contracts with Customers (effective for the year beginning 1 January 2018), 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.
The Group has undertaken significant analysis of how IFRS 15 should be implemented and has taken tentative accounting policy decisions.
Based on this analysis, we expect that adoption of 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. The most significant changes are:
• IFRS 15 contains more specific requirements on the combination of contracts. Contracts can only be combined if they are with the same
counterparty or related counterparties. The existing standards require contracts with different counterparties to be combined where
that reflects the overall substance of a transaction. As a result, it will no longer be possible to link contracts entered into at the same
time for: (i) installed OE, with an airframer; and (ii) long-term service agreements (LTSAs), relating to that OE, with the aircraft operator.
• For similar reasons, it will no longer be possible to recognise an intangible asset in respect of contractual aftermarket rights (relating
to future aftermarket business with an operator) when OE is sold to an airframer.
• For each performance obligation identified, IFRS 15 requires revenue to be recognised based on the transfer of control of the relevant
goods or services. In contrast, under the existing standards, revenue is recognised based on when risk and reward is transferred. As a
result it will no longer be possible to use flying hours (or equivalent) as a basis for measuring the stage of completion of LTSAs.
• Compared to IAS 11, IFRS 15 includes only limited guidance on accounting for costs incurred to fulfil a performance obligation and in
general these will be recognised as incurred. It is no longer possible to defer or accrue costs to report a consistent margin percentage
over the term of the LTSAs.
In summary, the impact of these changes will be that, upon adoption of IFRS 15:
• Revenues and costs relating to deliveries of engines will be recognised when they are is delivered. The revenue recognised will comprise
that included in the contract with the airframer reduced (if applicable) by any OE concession agreed with the operator (which IFRS 15
describes as a payment to a ‘customer’s customer’). Consequently, the revenues and costs recognised on OE deliveries will more closely
match the related cash flows. No contractual aftermarket revenue will be allocated to the OE delivery (where contracts are currently
combined – ‘linked accounting’) and no intangible asset will be recognised (where contracts are not currently combined – ‘unlinked
accounting’). This will result in a loss being recognised on engine deliveries when the direct costs exceed the direct revenues.
• Revenues on LTSAs will be recognised as services are performed rather than as the equipment is used (engine flying hours) as is the case
under the current accounting policy. The stage of completion will be measured using the actual costs incurred to date compared to the
estimated costs to complete the performance obligation. In practice the bulk of the revenue and costs will relate to overhaul activity
which occurs at distinct points of time during the period of the LTSA. As the first major overhaul typically occurs some years after
delivery, this change will generally defer the recognition of revenue on LTSAs, as compared to the current accounting policy.
Taken together, had IFRS 15 been applicable with effect from 1 January 2015, the Group currently estimates the results for the year ended
31 December 2015 would have been as follows:
Revenue
Civil Aerospace original equipment
Civil Aerospace aftermarket services
Other segments
Total revenue
Gross profit
Civil Aerospace
Other segments
Total gross profit
Profit before financing and taxation
Net financing
Taxation
Profit for the year
Net assets
IAS 11 and IAS 18
IFRS 15
Reported
£bn
Underlying
£bn
Reported
£bn
Underlying
£bn
3.3
3.7
6.4
13.4
1.5
1.7
3.2
1.5
(0.1)
(0.3)
1.1
12.8
2.4
0.6
(1.3)
0.1
(0.6)
2.0
2.6
3.5
6.4
12.5
0.6
1.7
2.3
0.6
(0.1)
(0.1)
0.4
13.7
3.3
1.5
(1.3)
(0.1)
0.1
5.0
Notes to the consolidated financial statements continuedRolls-Royce Holdings plc Annual Report 2016FINANCIAL STATEMENTS CONSOLIDATED 131
1 Accounting policies continued
The Group plans to adopt IFRS 15 in 2018 using the ‘full’ retrospective approach. The comparative 2017 results included in the 2018
financial statements will be restated, with an adjustment to equity as at 1 January 2017.
The Group will continue to work during 2017 to design, implement and refine procedures to apply the new requirements of IFRS 15 and to
finalise accounting policy choices. As a result of this ongoing work, it is possible that some changes to the impact above may result.
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.
2 Segmental analysis
The analysis by 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:
– development, manufacture, marketing and sales of commercial aero engines and aftermarket services.
Civil Aerospace
Defence Aerospace – development, manufacture, marketing and sales of military aero engines and aftermarket services.
Power Systems
Marine
Nuclear
– development, manufacture, marketing and sales of reciprocating engines and power systems.
– 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 operating results are reviewed by the Board and are prepared on an underlying basis, which the Board considers reflects better the
economic substance of the Group’s trading during the year and provides financial measures that, together with the results prepared in
accordance with Adopted IFRS, allow better analysis of the factors affecting the year’s results compared to the prior year. The principles
adopted to determine underlying results are:
Underlying revenues and costs
Where revenues and costs are denominated in a currency other than the functional currency of the Group undertaking and the Group
hedges the net exposure, these reflect the achieved exchange rates arising on derivative contracts settled to cover the net exposure. These
achieved exchange rates are applied to all relevant revenues and costs, including those for which there is a natural offsetting position,
rather than translating the offsetting transactions at spot rates. The underlying profits would be the same under both approaches, but the
Board considers that the approach taken provides a better indication of trends over time.
Underlying profit before financing
In addition to the impact of exchange rates on revenues and costs above, adjustments have been made to exclude one-off past service
costs or credits on post-retirement schemes, exceptional restructuring costs (associated with the substantial closure or exit of a site,
facility or line of business or other major transformation activities), the effect of acquisition accounting, the effect of business disposals,
the impairment of goodwill, and in 2016 financial penalties from agreements with investigating bodies.
Underlying profit before taxation
In addition to those adjustments in underlying profit before financing:
• Includes amounts realised from settled derivative contracts and revaluation of relevant assets and liabilities to exchange rates forecast
to be achieved from future settlement of derivative contracts.
• Excludes unrealised amounts arising from revaluations required by IAS 39 Financial Instruments: Recognition and Measurement,
changes in value of financial RRSA contracts arising from changes in forecast payments 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.
FINANCIAL STATEMENTSRolls-Royce Holdings plc Annual Report 2016CONSOLIDATED
132
2 Segmental analysis continued
Year ended 31 December 2016
Underlying revenue from sale of original equipment
Underlying revenue from aftermarket services
Total underlying revenue at 2015 exchange rates
Translation to 2016 exchange rates
Total underlying revenue
Gross profit
Commercial and administrative costs
Restructuring
Research and development costs
Share of results of joint ventures and associates
Underlying profit/(loss) before financing and taxation at 2015 exchange rates
Translation to 2016 exchange rates
Underlying profit/(loss) before financing and taxation
Segment assets
Investments in joint ventures and associates
Segment liabilities
Net (liabilities)/assets
Investment in intangible assets, property, plant and equipment
and joint ventures and associates
Depreciation, amortisation and impairment
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
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
Civil
£m
Defence
£m
Power
Systems
£m
Marine
£m
Nuclear
£m
Inter-
segment
£m
Total
reportable
segments
£m
3,272
3,634
6,906
161
7,067
1,129
(339)
(11)
(549)
96
326
41
367
823
1,229
2,052
157
2,209
530
(127)
10
(68)
15
360
24
384
1,609
751
2,360
295
2,655
628
(305)
–
(157)
1
167
24
191
13,030
826
(14,510)
(654)
1,755
4
(1,996)
(237)
3,828
9
(1,151)
2,686
575
437
1,012
102
1,114
216
(207)
3
(39)
–
(27)
–
(27)
1,518
2
(903)
617
1,215
491
112
67
123
207
37
239
3,258
3,675
6,933
1,526
(296)
(7)
(515)
104
812
11,229
545
(8,709)
3,065
801
1,234
2,035
579
(124)
(8)
(73)
19
393
1,437
12
(1,698)
(249)
1,618
767
2,385
656
(296)
(4)
(162)
–
194
3,376
8
(1,017)
2,367
668
410
84
58
108
197
773
551
1,324
260
(201)
(16)
(28)
–
15
1,481
7
(783)
705
36
111
346
415
761
16
777
117
(67)
–
(6)
–
44
1
45
351
1
(435)
(83)
19
39
251
436
687
111
(53)
(2)
14
–
70
300
3
(324)
(21)
18
23
(33)
(35)
(68)
(8)
(76)
–
–
–
–
–
–
–
–
6,592
6,431
13,023
723
13,746
2,620
(1,045)
2
(819)
112
870
90
960
(1,223)
–
1,223
–
19,259
842
(17,772)
2,329
–
–
1,506
1,043
(53)
(53)
(106)
7
–
–
–
–
7
(850)
–
850
–
6,648
6,610
13,258
3,139
(970)
(37)
(764)
123
1,491
16,973
575
(11,681)
5,867
–
–
914
799
Notes to the consolidated financial statements continuedRolls-Royce Holdings plc Annual Report 2016FINANCIAL STATEMENTS CONSOLIDATED 133
2 Segmental analysis continued
RECONCILIATION TO REPORTED RESULTS
Year ended 31 December 2016
Revenue from sale of original equipment
Revenue from aftermarket services
Total underlying revenue at 2015 exchange rates
Translation to 2016 exchange rates
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/(loss) before financing and taxation at 2015 exchange rates
Translation to 2016 exchange rates
Loss on disposal of businesses
Profit/(loss) before financing and taxation
Net financing
Profit/(loss) before taxation
Taxation
Profit/(loss) for the year
Attributable to:
Ordinary shareholders
Non-controlling interests
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/(loss) before taxation
Taxation
Profit/(loss) for the year
Attributable to:
Ordinary shareholders
Non-controlling interests
Total reportable
segments
£m
Other business 1
and corporate
£m
Total
underlying
£m
Underlying
adjustments and
foreign exchange
£m
Group at actual
exchange rates
£m
6,592
6,431
13,023
723
13,746
2,620
–
(1,045)
2
(819)
112
870
90
–
960
6,648
6,610
13,258
3,139
–
(970)
(37)
(764)
123
–
1,491
20
15
35
2
37
6
–
(51)
–
7
(5)
(43)
(2)
–
(45)
(102)
(147)
(261)
76
20
96
64
–
(55)
(2)
(1)
(5)
–
1
(60)
(59)
(351)
(410)
6,612
6,446
13,058
725
13,783
2,626
–
(1,096)
2
(812)
107
827
88
–
915
(102)
813
(261)
552
552
–
6,724
6,630
13,354
3,203
–
(1,025)
(39)
(765)
118
–
1,492
(60)
1,432
(351)
1,081
1,080
1
976
921
1,897
(725)
1,172
422
5
(1,112)
(2)
(106)
10
(783)
(88)
(3)
(874)
(4,575)
(5,449)
865
(4,584)
(4,584)
–
215
156
371
74
10
(45)
39
(53)
(18)
2
9
(1,281)
(1,272)
275
(997)
(997)
–
7,588
7,367
14,955
–
14,955
3,048
5
(2,208)
–
(918)
117
44
–
(3)
41
(4,677)
(4,636)
604
(4,032)
(4,032)
–
6,939
6,786
13,725
3,277
10
(1,070)
–
(818)
100
2
1,501
(1,341)
160
(76)
84
83
1
1 Other businesses comprise former Energy businesses not included in the disposal to Siemens in 2014.
FINANCIAL STATEMENTSRolls-Royce Holdings plc Annual Report 2016CONSOLIDATED 134
2 Segmental analysis continued
UNDERLYING ADJUSTMENTS
Underlying performance
Revenue recognised at exchange rate
on date of transaction
Realised losses/(gains) on settled
derivative contracts1
Net unrealised fair value changes to
derivative contracts2
Effect of currency on contract
accounting
Revaluation of trading assets and
liabilities
Financial RRSAs – foreign exchange
differences and changes in forecast
payments
Effect of acquisition accounting3
Impairment of goodwill
Pension restructuring4
Net post-retirement scheme financing
Disposal of businesses
Exceptional restructuring
Financial penalties from agreements
with investigating bodies
Other
Reduction in rate of UK corporation tax
Total underlying adjustments
Reported per consolidated
income statement
Revenue
£m
13,783
1,172
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,172
2016
2015
Profit before
financing
£m
915
Net
financing
£m
(102)
Taxation
£m
(261)
Revenue
£m
13,354
Profit before
financing
£m
1,492
Net
financing
£m
(60)
Taxation
£m
(351)
–
426
–
77
67
–
(115)
(219)
(306)
–
(3)
(129)
(671)
(1)
–
(874)
–
162
(4,420)
–
(313)
(8)
–
–
–
3
–
–
–
1
–
(4,575)
–
371
(107)
792
(14)
56
(1)
35
–
107
(2)
–
34
–
(5)
(30)
865
–
–
–
–
–
–
–
–
–
–
–
–
–
–
371
–
287
(9)
(9)
(13)
–
(124)
(75)
–
–
2
(49)
–
(1)
–
9
–
(35)
(1,306)
–
20
8
–
–
–
32
–
–
–
–
–
(1,281)
–
(51)
270
2
(6)
(1)
31
–
–
(12)
15
11
–
(2)
18
275
(76)
14,955
41
(4,677)
604
13,725
1,501
(1,341)
1 Realised (gains)/losses on settled derivative contracts include adjustments to reflect the losses/(gains) in the same year as the related trading cash flows.
2 Unrealised fair value changes to derivative contracts included in profit before financing: (i) include those of 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.
3 The adjustment eliminates charges recognised as a result of recognising assets in acquired businesses at fair value.
4 In the UK, tax is provided on pension surpluses at a rate of 35%, which is the relevant rate if the surpluses were to be returned to the Group.
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
Other businesses and corporate
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
Other businesses and corporate
Borrowings
Fair value of swaps hedging fixed rate borrowings
Income tax liabilities
Post-retirement scheme deficits
Total liabilities
Net assets
2016
£m
19,259
844
49
2,774
358
908
1,346
25,538
(17,772)
(183)
(3,357)
–
(987)
(1,375)
(23,674)
1,864
2015
£m
16,973
576
119
3,178
74
341
1,063
22,324
(11,681)
(120)
(3,302)
(61)
(1,004)
(1,140)
(17,308)
5,016
Notes to the consolidated financial statements continuedRolls-Royce Holdings plc Annual Report 2016FINANCIAL STATEMENTS CONSOLIDATED 2 Segmental analysis continued
GEOGRAPHICAL SEGMENTS
The Group’s revenue by destination is as follows:
United Kingdom
Germany
Switzerland
France
Spain
Norway
Italy
Russia
Rest of Europe
Europe
United States
Canada
North America
South America
Saudi Arabia
Rest of Middle East
Middle East
China
Singapore
Japan
South Korea
Malaysia
India
Rest of Asia
Asia
Africa
Australasia
Other
135
2016
£m
1,821
850
745
294
289
279
232
75
700
5,285
4,176
341
4,517
314
486
570
1,056
1,417
518
333
251
117
99
508
3,243
290
188
62
14,955
2015
£m
1,780
642
782
249
200
280
222
59
786
5,000
3,591
475
4,066
425
365
445
810
1,236
549
136
278
78
99
546
2,922
144
278
80
13,725
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:
United Kingdom
Germany
United States
Nordic countries
Other
2016
£m
4,643
2,714
1,046
512
1,161
10,076
2015
£m
4,072
2,339
835
598
900
8,744
FINANCIAL STATEMENTSRolls-Royce Holdings plc Annual Report 2016CONSOLIDATED 136
3 Research and development
Expenditure in the year
Capitalised as intangible assets
Amortisation of capitalised costs
Impairment 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
Translation to 2015 exchange rates
Net underlying cost at 2015 exchange rates
4 Net financing
2016
£m
(937)
99
(147)
(2)
(987)
73
(40)
36
(918)
56
(862)
50
(812)
2015
£m
(831)
51
(136)
–
(916)
83
(28)
43
(818)
53
(765)
–
(765)
2016
2015
Per
consolidated
income
statement
£m
Notes
Underlying
financing 2
£m
Per
consolidated
income
statement
£m
Underlying
financing 2
£m
Financing income
Interest receivable
Net fair value gains on foreign currency contracts1
Financial RRSAs – foreign exchange differences and changes in forecast payments
Net fair value gains on commodity contracts1
Financing on post-retirement scheme surpluses
Net foreign exchange gains3
Financing costs
Interest payable
Net fair value losses on foreign currency contracts1
Financial RRSAs – foreign exchange differences and changes in forecast payments
Financial charge relating to financial RRSAs
Net fair value losses on commodity contracts1
Financing on post-retirement scheme deficits
Net foreign exchange losses
Other financing charges
Net financing
Analysed as:
Net interest payable
Net fair value losses on derivative contracts
Net post-retirement scheme financing
Net other financing
Net financing
17
17
17
19
17
17
17
17
19
14
1
23
16
42
–
96
(77)
(4,437)
(31)
(6)
–
(39)
(145)
(38)
(4,773)
(4,677)
(63)
(4,420)
3
(197)
(4,677)
14
–
–
–
–
–
14
(77)
–
–
(6)
–
–
–
(33)
(116)
(102)
(63)
–
–
(39)
(102)
12
–
21
65
17
115
(71)
(1,217)
(13)
(8)
(89)
(33)
–
(25)
(1,456)
(1,341)
(59)
(1,306)
32
(8)
(1,341)
1 Net loss on fair value items through profit or loss
(4,420)
–
(1,306)
12
–
–
–
32
44
(71)
–
–
(8)
–
–
–
(25)
(104)
(60)
(59)
–
–
(1)
(60)
–
2 See note 2.
3
The underlying financing income includes nil (2015: £34m) from gains on settlement of foreign exchange contracts following the receipt in the UK of dividends from overseas subsidiaries.
Notes to the consolidated financial statements continuedRolls-Royce Holdings plc Annual Report 2016FINANCIAL STATEMENTS CONSOLIDATED 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
Deferred tax charge/(credit) resulting from reduction in tax rates
Recognised in the income statement
OTHER TAX (CHARGES)/CREDITS
Deferred tax:
Movement in post-retirement schemes
Share-based payments – direct to equity
Net investment hedge
TAX RECONCILIATION
(Loss)/profit before taxation
Less share of results of joint ventures and associates (note 11)
(Loss)/profit before taxation excluding joint ventures and associates
Nominal tax (credit)/charge at UK corporation tax rate 20% (2015: 20.25%)
UK tax rate differential1
Overseas rate differences2
Impairment of goodwill
Financial penalties from agreements with investigating bodies
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 years3
Reduction in closing deferred taxes resulting from decrease in tax rates
Underlying items (note 2)
Non-underlying items
137
UK
2016
£m
12
–
12
(8)
4
(804)
(5)
30
(779)
(775)
2015
£m
9
–
9
6
15
(37)
10
(18)
(45)
(30)
Overseas
Total
2016
£m
187
–
187
4
191
(44)
24
–
(20)
2015
£m
157
–
157
(23)
134
(23)
(5)
–
(28)
2016
£m
199
–
199
(4)
195
(848)
19
30
(799)
171
106
(604)
2015
£m
166
–
166
(17)
149
(60)
5
(18)
(73)
76
OCI
Equity
Items that will not
be reclassified
Items that may
be reclassified
2016
£m
(179)
2015
£m
257
2016
£m
2015
£m
2016
£m
2015
£m
(179)
257
4
4
(2)
(2)
(2)
(2)
2016
£m
(4,636)
(117)
(4,753)
(951)
41
25
44
153
11
(2)
30
15
30
(604)
261
(865)
(604)
(6)
(6)
2015
£m
160
(100)
60
12
20
43
13
–
5
(7)
20
(12)
(18)
76
351
(275)
76
1 The UK tax rate differential arises on the difference between the appropriate deferred tax rate and the UK statutory tax rate.
2 Overseas rate differences mainly relate to tax on profits in countries, such as the US, which have higher tax rates than the UK.
3 The adjustments in respect of prior years include a £14m charge relating to losses in Norway no longer recognised due to the current uncertainty in the oil & gas market (see note 9).
FINANCIAL STATEMENTSRolls-Royce Holdings plc Annual Report 2016CONSOLIDATED 138
5 Taxation continued
DEFERRED TAXATION ASSETS AND LIABILITIES
At 1 January
Amount credited to income statement
Amount (charged)/credited to other comprehensive income
Amount charged to equity
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
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
UNRECOGNISED DEFERRED TAX ASSETS
2016
£m
(521)
799
(175)
(2)
(1)
100
876
(776)
100
2015
£m
(859)
73
255
(6)
16
(521)
318
(839)
(521)
At
1 January
2016
£m
(392)
(190)
21
(539)
(90)
306
343
20
(521)
At
1 January
2015
£m
(455)
(195)
97
(526)
(324)
135
393
16
(859)
Recognised
in income
statement
£m
11
14
15
27
103
620
(1)
10
Recognised
in OCI
£m
–
–
4
–
(179)
–
–
–
Recognised
in equity
£m
–
–
–
–
–
–
(2)
–
Exchange
differences
£m
(8)
(15)
(12)
–
35
–
(1)
–
At
31 December
2016
£m
(389)
(191)
28
(512)
(131)
926
339
30
799
(175)
(2)
(1)
100
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)
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 uncertain1
1 Advance corporation tax, tax losses and other deductible temporary differences are not expected to expire under current legislation.
2016
£m
182
71
253
2015
£m
182
36
218
DEFERRED TAXATION ASSETS AND LIABILITIES
Following announcements in the Summer Budget 2015 and the Budget 2016, the UK corporation tax rate will reduce to 19% from 1 April
2017 and 17% from 1 April 2020. The Summer Budget 2015 had originally announced that the rate would reduce to 18% from 1 April 2020.
This reduction was substantively enacted on 26 October 2015 and so the prior year deferred tax assets and liabilities were calculated at
this rate. The subsequent announcement in the Budget 2016 that the rate will reduce to 17% from 1 April 2020 was substantively enacted
on 6 September 2016. As this reduction was 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 2016, £30m has been charged to the income statement (2015: £18m credited) and £2m
has been charged directly to equity (2015: £3m).
Notes to the consolidated financial statements continuedRolls-Royce Holdings plc Annual Report 2016FINANCIAL STATEMENTS CONSOLIDATED 139
5 Taxation continued
The temporary differences associated with investments in subsidiaries, joint ventures and associates, for which a deferred tax liability has
not been recognised, aggregate to £276m (2015: £347m). 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.
(Loss)/profit attributable to ordinary shareholders (£m)
Weighted average number of ordinary shares (millions)
EPS (pence)
1 As there is a loss, the effect of potentially dilutive ordinary shares is anti-dilutive.
2016
Potentially
dilutive
share options1
–
–
Basic
(4,032)
1,832
(220.08)
Diluted
(4,032)
1,832
(220.08)
2015
Potentially
dilutive
share options
12
(0.03)
Basic
83
1,839
4.51
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
EPS/(Loss)/profit attributable to ordinary shareholders
Diluted underlying EPS
2016
2015
Pence
30.13
(297.43)
47.22
(220.08)
30.08
£m
552
(5,449)
865
(4,032)
Pence
58.73
(69.17)
14.95
4.51
58.35
Diluted
83
1,851
4.48
£m
1,080
(1,272)
275
83
7 Employee information
Average number of employees
United Kingdom
Germany
United States
Nordics
Canada
Rest of world
Civil Aerospace
Defence Aerospace
Power Systems
Marine
Nuclear
Other businesses and corporate1, 2
Group employment costs3
Wages, salaries and benefits
Social security costs
Share-based payments (note 21)
Pensions and other post-retirement scheme benefits (note 19)
2016
2015
22,300
10,700
6,300
3,400
1,000
6,200
49,900
23,800
6,000
10,300
5,300
4,300
200
49,900
23,200
10,700
6,400
3,800
1,100
5,300
50,500
23,100
6,300
10,600
6,000
4,100
400
50,500
£m
£m
2,788
376
35
623
3,822
2,514
334
5
299
3,152
1
Other businesses and corporate includes the Energy businesses not sold to Siemens in 2014 and corporate employees who do not provide a shared service to the segments. Where
corporate functions provide such a service, employees have been allocated to the segments on an appropriate basis. 2015 figures have been restated on this basis.
2 As described in note 1, the Group has reclassified certain joint ventures to joint operations from 1 January 2016. This increased the reported Group employees by 800.
3 Remuneration of key management personnel is shown in note 24.
FINANCIAL STATEMENTSRolls-Royce Holdings plc Annual Report 2016CONSOLIDATED 140
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 statements1
Fees payable to the Company's auditors and its associates for the audit of the Company's subsidiaries pursuant to legislation2
Total fees payable for audit services
Fees payable to the Company's auditors and its associates for other services:
Audit related assurance services3
Taxation compliance services
All other services
Fees payable in respect of the Group's pension schemes:
Audit
2016
£m
0.3
6.5
6.8
0.6
0.5
0.1
8.0
0.3
2015
£m
0.3
5.6
5.9
1.3
0.4
–
7.6
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 Audit fees for overseas entities are reported at the average exchange rate for the year. The weakening of sterling during 2016 gave rise to an increase of £0.4m compared to 2015.
3 This includes £0.3m (2015: £0.3m) for the review of the half-year report.
9 Intangible assets
Cost
At 1 January 2015
Exchange differences
Additions
Acquisitions of businesses
Disposals
At 1 January 2016
Exchange differences
Additions
Acquisitions of businesses
Disposals
At 31 December 2016
Accumulated amortisation
At 1 January 2015
Exchange differences
Charge for the year1
Impairment
Reversal of impairment
Disposals
At 1 January 2016
Exchange differences
Charge for the year1
Impairment
At 31 December 2016
Net book value
At 31 December 2016
At 31 December 2015
At 1 January 2015
Certification
costs and
participation
fees
£m
Goodwill
£m
Development
expenditure
£m
Contractual
aftermarket
rights
£m
Customer
relationships
£m
Software
£m
Other
£m
Total
£m
1,675
(87)
–
1
–
1,589
284
–
1
–
1,874
16
(5)
–
75
–
–
86
32
–
219
337
1,537
1,503
1,659
1,079
(7)
73
–
–
1,145
26
154
–
–
1,325
311
(1)
63
–
–
–
373
3
64
–
440
885
772
768
1,707
(32)
55
–
–
1,730
116
100
–
(2)
1,944
564
(10)
137
–
–
–
691
48
147
2
888
1,056
1,039
1,143
638
–
161
–
–
799
–
208
–
–
1,007
389
–
55
–
(50)
–
394
–
39
–
433
574
405
249
469
(14)
–
1
–
456
84
–
–
–
540
96
(3)
46
–
–
–
139
28
42
–
209
331
317
373
543
–
79
–
(6)
616
16
116
–
(6)
742
259
–
68
–
–
(2)
325
8
81
–
414
328
291
284
518
(16)
40
1
–
543
66
53
1
–
663
190
(3)
38
–
–
–
225
35
33
1
294
369
318
328
6,629
(156)
408
3
(6)
6,878
592
631
2
(8)
8,095
1,825
(22)
407
75
(50)
(2)
2,233
154
406
222
3,015
5,080
4,645
4,804
1 Charged to cost of sales except development costs, which are charged to research and development costs.
Notes to the consolidated financial statements continuedRolls-Royce Holdings plc Annual Report 2016FINANCIAL STATEMENTS CONSOLIDATED 141
9 Intangible assets continued
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 Power Systems AG
Marine – arising from the acquisitions of Vinters Limited, Scandinavian Electric Holding AS and ODIM ASA
Rolls-Royce Deutschland Ltd & Co KG
Other
Primary reporting
segment
Power Systems
Marine
Civil Aerospace
Various
2016
£m
871
401
236
29
1,537
2015
£m
739
516
202
46
1,503
Goodwill has been tested for impairment during 2016 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 five-ten years. Growth rates for the period not covered by the forecasts are based on a
range of growth rates (2.0-3.5%) 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.
Prior to 2016, goodwill in the Marine business was considered as separate CGUs, based on the original acquisitions (including ODIM ASA,
Scandinavian Electric Holdings and Vinters Limited (formerly Vickers plc)). However, following re-organisations, including those resulting
from the current transformation programme, we now consider that the Marine business (excluding the UK marine defence business) is a
single CGU.
The Marine business has continued to be impacted by the low crude oil price and over supply of vessels to its offshore support customers.
The downturn has been deeper and more prolonged than forecast a year ago and, as a consequence, the Group has recognised an
impairment loss of £200m to the carrying value of goodwill of the CGU. This is included in cost of sales in the income statement, but
excluded from the underlying results. The impairment loss is based on a value in use calculation using cash flows forecast over a ten-year
period (which is considered to take account of the cyclicality of the market). The impairment test indicated a recoverable amount of £473m
(including allowance for identified risks of £18m) compared with a pre-impairment carrying value of £673m.
The Group has also recognised other impairments to goodwill of £19m, including £14m in relation to its North American civil nuclear
business. This reflects the current weakness in the services market, although the Directors expect these to recover in the medium term.
The principal value in use assumptions for goodwill balances considered to be individually significant are:
• Rolls-Royce Power Systems AG – Discount rate 11.7% (2015: 11.7%). 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% (2015: 2%). Reasonably possible changes 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 13%, or an increase in the assumed
discount rate of 1.5%. At 31 December 2016, the value in use exceeded the carrying value by £440m.
• Marine business – Discount rate 13%, including an allowance of 0.8% to reflect uncertainties in market recovery and the achievement of
cost savings, (2015: 13%). 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% (2015: 2.5%). Any further deterioration of
the market would require additional impairment. For example if the market recovery were delayed by one year, compared to that
assumed, this would result in an additional impairment of around £60m.
• Rolls-Royce Deutschland Ltd & Co KG – Discount rate 13% (2015: 13%). 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% (2015: 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 around 70% to cause an impairment of this balance.
FINANCIAL STATEMENTSRolls-Royce Holdings plc Annual Report 2016CONSOLIDATED 142
9 Intangible assets continued
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 9-13% (2015: 9-13%), based on the Group’s weighted average cost of capital,
adjusted for the estimated programme risk, for example taking account of whether or not the forecast cash flows arise from contracted
business.
No impairment is required on this basis. However, a combination of adverse changes in assumptions (eg. market size and share, unit costs
and programme delays) and other variables (eg. discount rate and foreign exchange rates), could result in impairment in future years.
Notes to the consolidated financial statements continuedRolls-Royce Holdings plc Annual Report 2016FINANCIAL STATEMENTS CONSOLIDATED 10 Property, plant and equipment
Cost
At 1 January 2015
Exchange differences
Additions
Acquisitions of businesses
Disposals of businesses
Reclassifications
Transferred to assets held for sale
Disposals/write-offs
At 1 January 2016
Exchange differences
Reclassification of joint ventures to joint operations
Additions – purchased
Additions – arising from TotalCare Flex contracts (non-cash)
Disposals of businesses
Reclassifications
Disposals/write-offs
At 31 December 2016
Accumulated depreciation
At 1 January 2015
Exchange differences
Charge for the year1
Impairment
Disposals of businesses
Transferred to assets held for sale
Disposals/write-offs
At 1 January 2016
Exchange differences
Reclassification of joint ventures to joint operations
Charge for the year1
Impairment
Disposals of businesses
Reclassifications
Disposals/write-offs
At 31 December 2016
Net book value
At 31 December 2016
At 31 December 2015
At 1 January 2015
143
Land and
buildings
£m
Plant and
equipment
£m
Aircraft
and engines
£m
In course of
construction
£m
1,334
(20)
18
–
–
81
(8)
(30)
1,375
141
7
25
–
(1)
131
(11)
1,667
391
(7)
48
3
–
(5)
(14)
416
44
1
63
1
–
–
(10)
515
1,152
959
943
3,600
(39)
117
1
(1)
335
(23)
(96)
3,894
352
87
124
–
(3)
230
(85)
4,599
2,109
(24)
299
2
(1)
(20)
(81)
2,284
182
52
333
–
(2)
(9)
(75)
2,765
1,834
1,610
1,491
321
(2)
19
–
–
7
(2)
(4)
339
12
–
51
75
–
63
(49)
491
103
(1)
26
–
–
(1)
(2)
125
4
–
28
–
–
9
(40)
126
365
214
218
795
(3)
340
–
–
(423)
–
(1)
708
55
–
426
–
–
(424)
–
765
1
–
–
–
–
–
–
1
–
–
–
1
–
–
–
2
763
707
794
Total
£m
6,050
(64)
494
1
(1)
–
(33)
(131)
6,316
560
94
626
75
(4)
–
(145)
7,522
2,604
(32)
373
5
(1)
(26)
(97)
2,826
230
53
424
2
(2)
–
(125)
3,408
4,114
3,490
3,446
1 Depreciation charged during the year is included in the income statement or included in the cost of inventory as appropriate.
FINANCIAL STATEMENTSRolls-Royce Holdings plc Annual Report 2016CONSOLIDATED 144
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
The Group’s share of equity accounted entities’ capital commitments is £72m (2015: £75m).
11 Investments
COMPOSITION OF THE GROUP
The entities contributing to the Group’s financial results are listed on pages 170 to 175.
NON-CONTROLLING INTERESTS
The Group does not have any material non-wholly owned subsidiaries.
EQUITY ACCOUNTED AND OTHER INVESTMENTS
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 1 January 2016
Exchange differences
Increase in share in joint ventures
Other additions
Reclassification of joint ventures to joint operations
Share of retained profit/(loss)
Share of OCI – will not be reclassified to profit or loss
Share of OCI – may be reclassified to profit or loss
At 31 December 2016
Equity accounted
Joint ventures
£m
535
7
12
(3)
42
–
(19)
574
109
154
20
(57)
44
(2)
(7)
835
Associates
£m
4
–
3
–
(5)
–
–
2
(2)
–
10
–
(1)
–
–
9
2016
£m
5
6
42
413
(108)
305
252
1,059
Total
£m
539
7
15
(3)
37
–
(19)
576
107
154
30
(57)
43
(2)
(7)
844
2015
£m
5
7
40
321
(87)
234
167
853
Other
Unlisted
£m
31
(2)
6
–
–
(2)
–
33
5
–
–
–
–
–
–
38
Notes to the consolidated financial statements continuedRolls-Royce Holdings plc Annual Report 2016FINANCIAL STATEMENTS CONSOLIDATED 145
11 Investments continued
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 Activity
UK
Hong Kong
Singapore
Spain
Aero engine leasing
Aero engine repair and overhaul
Aero engine repair and overhaul
Aero engine component manufacture and maintenance
Ownership interest1
50.0%
50.0% (45.0%)
50.0% (39.0%)
46.9%
1 Figures in brackets are 2015 ownership interest, if different. During 2016, the Group completed the changes to the Approved Maintenance Centres announced in November 2015,
resulting in increases in the ownership interests in HAESL and SAESL.
Summarised financial information of the Group’s individually material joint ventures is as follows:
APL
HAESL
SAESL
ITP
Revenue
Profit for the year
Other comprehensive income
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.
2016
£m
151
58
–
58
(27)
(82)
–
(24)
(5)
176
1,888
(348)
(1,296)
420
21
(292)
(1,111)
2015
£m
130
65
–
65
(29)
(59)
–
(17)
(7)
129
1,349
(70)
(1,123)
285
20
(19)
(969)
2016
£m
799
233
–
233
(237)
(10)
–
(1)
(8)
248
105
(88)
(79)
186
12
(7)
(71)
2015
£m
652
27
–
27
(23)
(8)
–
(1)
(5)
223
85
(116)
(38)
154
4
–
(30)
2016
£m
763
33
–
33
(24)
(12)
–
(2)
–
307
167
(146)
(143)
185
7
–
(143)
2015
£m
626
46
–
46
(35)
(5)
–
–
–
218
125
(75)
(136)
132
10
–
(136)
2016
£m
615
50
–
50
(19)
(45)
11
(16)
7
731
701
(497)
(485)
450
274
(12)
(331)
2015
£m
520
40
–
40
(19)
(37)
10
(16)
7
576
626
(416)
(431)
355
225
(25)
(273)
Reconciliation to the carrying amount recognised in the consolidated financial statements
Ownership interest
Group share of net assets above
Goodwill
Adjustments for intercompany trading
Included in the consolidated balance sheet
50.0%
210
–
–
210
50.0%
143
–
–
143
50.0%
93
38
–
131
45.0%
69
–
–
69
50.0%
93
100
–
193
39.0%
51
–
–
51
46.9%
211
–
(43)
168
46.9%
166
–
(33)
133
On 11 July 2016, the Group announced that it will purchase the outstanding 53.1% shareholding in ITP owned by SENER Grupo de
Ingeniería SA (SENER). This follows a decision by SENER to exercise its put option. On 28 November 2016, and following due diligence, the
Group confirmed the valuation of €720m. Under the agreement, consideration will be settled over a two-year period following completion
in eight evenly spaced instalments of equal value. The updated agreement allows flexibility to settle the consideration either in cash, in the
form of Rolls-Royce shares or any mixture of the two, as preferred by Rolls-Royce. A decision as to whether each payment will be settled in
cash, shares or cash and shares will be determined by Rolls-Royce during the payment period.
Completion remains subject to regulatory clearances and is expected in 2017.
FINANCIAL STATEMENTSRolls-Royce Holdings plc Annual Report 2016CONSOLIDATED 146
11 Investments continued
The summarised aggregated results of the Group’s share of all equity accounted investments is as follows:
Individually material
joint ventures (above)
2016
£m
2015
£m
1,503
710
1,016
523
(524)
(987)
702
(970)
84
–
84
(312)
(831)
396
(700)
82
–
82
Other joint ventures
Associates
Total
2016
£m
921
383
(266)
(905)
133
(761)
34
(7)
27
2015
£m
982
320
(229)
(895)
178
(773)
23
(19)
4
2016
£m
2015
£m
2016
£m
2015
£m
8
1
–
–
9
–
(1)
–
(1)
–
2
–
–
2
–
(5)
–
(5)
2,432
1,094
1,998
845
(790)
(1,892)
844
(1,731)
(541)
(1,726)
576
(1,473)
117
(7)
110
100
(19)
81
Assets:
Non-current assets
Current assets
Liabilities: 1
Current liabilities
Non-current liabilities
1 Liabilities include borrowings of
Profit for the year
Other comprehensive income
Total comprehensive income for the year
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 contracts1
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 £3,348m (2015: £2,994m) of TotalCare assets.
2016
£m
529
1,199
18
1,312
28
3,086
271
74
8
2016
£m
1,945
3,514
297
1,003
197
6,956
2,470
811
3,675
6,956
81
3,020
–
109
69
3,279
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
Notes to the consolidated financial statements continuedRolls-Royce Holdings plc Annual Report 2016FINANCIAL STATEMENTS CONSOLIDATED 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 118)
Cash held as collateral against third party obligations (note 18)
147
2016
£m
872
552
1,347
2,771
–
2,771
38
2015
£m
662
783
1,731
3,176
–
3,176
35
Cash and cash equivalents at 31 December 2016 include £34m (2015: £21m) 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.
15 Borrowings
Unsecured
Overdrafts
Bank loans
7 3⁄8% Notes 2016 £200m
6.75% Notes 2019 £500m1
2.375% Notes 2020 US$500m2
2.125% Notes 2021 €750m2
3.625% Notes 2025 US$1,000m2
3.375% Notes 2026 £375m1
Secured
Obligations under finance leases3
Current
Non-current
Total
2016
£m
–
169
–
–
–
–
–
–
3
172
2015
£m
–
217
200
–
–
–
–
–
2
419
2016
£m
–
271
–
534
403
682
814
417
2015
£m
–
330
–
536
333
576
668
390
2016
£m
–
440
–
534
403
682
814
417
2015
£m
–
547
200
536
333
576
668
390
64
3,185
50
2,883
67
3,357
52
3,302
1 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.
2 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.
3 Obligations under finance leases are secured by related leased assets.
16 Trade and other payables
Payments received on account1
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
2016
£m
1,246
1,981
268
93
2,243
2,126
7,957
140
2015
£m
1,491
1,397
197
90
1,784
1,964
6,923
161
2016
£m
1,024
–
3
–
784
1,648
3,459
17
2015
£m
516
23
2
1
361
1,414
2,317
35
2016
£m
2,270
1,981
271
93
3,027
3,774
11,416
157
2015
£m
2,007
1,420
199
91
2,145
3,378
9,240
196
Included within trade and other payables are government grants of £75m (2015: £64m). During the year, £11m (2015: £21m) of
government grants were released to the income statement.
Included in accruals and deferred income are deferred receipts from RRSA workshare partners of £233m (2015: £228m), £907m
(2015: £783m) of TotalCare liabilities and £671m (2015: nil) for financial penalties from agreements with investigating bodies.
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
2016
£m
3,889
1,660
5,867
11,416
2015
£m
3,101
817
5,322
9,240
FINANCIAL STATEMENTSRolls-Royce Holdings plc Annual Report 2016CONSOLIDATED 148
17 Financial instruments
CARRYING VALUES AND FAIR VALUES OF FINANCIAL INSTRUMENTS
Assets
Liabilities
Total
2016
Unlisted non-current asset investments
Trade receivables and similar items
Other non-derivative financial assets
Derivative financial assets1
Short-term investments
Cash and cash equivalents
Borrowings
Derivative financial liabilities1
Financial RRSAs
TotalCare Flex
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
2015
Unlisted non-current asset investments
Trade receivables and similar items
Other non-derivative financial assets
Derivative financial assets1
Short-term investments
Cash and cash equivalents
Borrowings
Derivative financial liabilities1
Financial RRSAs
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
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
D
B
B
B
A
B
B
C
B
B
D
C
E
B
B
B
–
–
–
387
–
–
–
–
–
–
–
–
–
387
–
–
–
112
–
–
–
–
–
–
–
–
112
38
2,470
811
–
3
1,347
–
–
–
–
–
–
–
4,669
33
2,061
843
–
2
1,731
–
–
–
–
–
–
4,670
–
–
–
–
–
552
–
–
–
–
–
–
–
552
–
–
–
–
–
783
–
–
–
–
–
–
783
Fair value
through
profit or loss
£m
–
–
–
–
–
–
–
(5,636)
–
–
–
–
–
(5,636)
–
–
–
–
–
–
–
(1,843)
–
–
–
–
(1,843)
Cash
£m
–
–
–
–
–
872
–
–
–
–
–
–
–
872
–
–
–
–
–
662
–
–
–
–
–
–
662
Other
£m
–
–
–
–
–
–
(3,357)
–
(101)
(15)
(28)
(3,889)
(1,660)
(9,050)
–
–
–
–
–
–
(3,302)
–
(110)
(29)
(3,101)
(817)
(7,359)
£m
38
2,470
811
387
3
2,771
(3,357)
(5,636)
(101)
(15)
(28)
(3,889)
(1,660)
(8,206)
33
2,061
843
112
2
3,176
(3,302)
(1,843)
(110)
(29)
(3,101)
(817)
(2,975)
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 £5,249m.
Fair values equate to book values for both 2016 and 2015, with the following exceptions:
Borrowings
Financial RRSAs
2016
2015
Book value
£m
(3,357)
(101)
Fair value
£m
(3,413)
(109)
Book value
£m
(3,302)
(110)
Fair value
£m
(3,312)
(110)
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 and TotalCare Flex liabilities are carried at amortised cost. Amounts denominated in foreign currencies are valued at the exchange rate prevailing at the balance sheet
date. The fair value of borrowings is estimated by discounting contractual future cash flows. (Level 2 as defined by IFRS 13 Fair Value Measurement).
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
Notes to the consolidated financial statements continuedRolls-Royce Holdings plc Annual Report 2016FINANCIAL STATEMENTS CONSOLIDATED 149
17 Financial instruments continued
CARRYING VALUES OF OTHER FINANCIAL ASSETS AND LIABILITIES
2016
Non-current assets
Current assets
Assets
Current liabilities
Non-current liabilities
Liabilities
2015
Non-current assets
Current assets
Assets
Current liabilities
Non-current liabilities
Liabilities
Foreign
exchange
contracts
£m
13
4
17
(566)
(5,002)
(5,568)
(5,551)
3
29
32
(244)
(1,428)
(1,672)
(1,640)
Commodity
contracts
£m
Interest rate
contracts1
£m
Total
derivatives
£m
Financial
RRSAs
£m
TotalCare
Flex
£m
C Shares
£m
Total
£m
5
1
6
(24)
(38)
(62)
(56)
–
–
–
(39)
(65)
(104)
(104)
364
–
364
–
(6)
(6)
358
80
–
80
–
(67)
(67)
13
382
5
387
(590)
(5,046)
(5,636)
(5,249)
83
29
112
(283)
(1,560)
(1,843)
(1,731)
–
–
–
(33)
(68)
(101)
(101)
–
–
–
(19)
(91)
(110)
(110)
–
–
–
–
(15)
(15)
(15)
–
–
–
–
–
–
–
–
–
–
(28)
–
(28)
(28)
–
–
–
(29)
–
(29)
(29)
382
5
387
(651)
(5,129)
(5,780)
(5,393)
83
29
112
(331)
(1,651)
(1,982)
(1,870)
1 Includes the foreign exchange impact of cross-currency interest rate swaps.
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
2016
£m
(1,640)
(33)
–
(4,436)
558
(5,551)
2015
£m
(639)
(20)
1
(1,217)
235
(1,640)
2016
£m
(104)
–
–
16
32
(56)
2015
£m
(43)
–
–
(89)
28
(104)
2016
£m
13
–
345
–
–
358
2015
£m
52
–
(36)
–
(3)
13
2016
£m
(1,731)
(33)
345
(4,420)
590
(5,249)
2015
£m
(630)
(20)
(35)
(1,306)
260
(1,731)
1
The Group has written currency options to sell USD and buy GBP as part of a commercial agreement. The fair values of these options on inception are treated as a discount to the
customer.
2 Loss on related hedged items £345m (2015: £35m gain).
3 Included in financing.
4 Includes nil contracts settled in fair value hedges (2015: £8m).
FINANCIAL RISK AND REVENUE SHARING ARRANGEMENTS (RRSAS) AND OTHER FINANCIAL LIABILITIES
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.
FINANCIAL STATEMENTSRolls-Royce Holdings plc Annual Report 2016CONSOLIDATED 150
17 Financial instruments continued
Movements in the carrying values were as follows:
At 1 January
Exchange adjustments included in OCI
Additions
Financing charge1
Excluded from underlying profit:
Changes in forecast payments1
Exchange adjustments1
Cash paid to partners
Other
At 31 December
1 Included in financing.
Financial RRSAs
TotalCare Flex
2016
£m
(110)
5
–
(6)
5
(13)
18
–
(101)
2015
£m
(145)
–
–
(8)
11
(3)
35
–
(110)
2016
£m
–
–
(14)
(1)
–
(3)
–
3
(15)
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.
Notes to the consolidated financial statements continuedRolls-Royce Holdings plc Annual Report 2016FINANCIAL STATEMENTS CONSOLIDATED 151
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 2016
Foreign exchange contracts:
Non-hedge accounted
Interest rate contracts:
Fair value hedges
Non-hedge accounted
Commodity contracts:
Non-hedge accounted
At 31 December 2015
Foreign exchange contracts:
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
29,327
5,826
4,867
15,011
3,623
17
(5,568)
2,735
–
300
32,362
–
–
–
–
83
5,909
80
4,947
1,548
–
122
16,681
1,187
–
15
4,825
22,418
5,736
4,266
11,637
779
2,437
–
268
25,123
–
–
–
–
500
–
90
5,826
72
4,338
83
12,220
1,937
–
23
2,739
358
6
6
387
32
74
6
–
112
–
(6)
(62)
(5,636)
(1,672)
(61)
(6)
(104)
(1,843)
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 2016
Currencies sold forward:
Sterling
US dollar
Euro
Other
At 31 December 2015
Currencies sold forward:
Sterling
US dollar
Euro
Other
–
25,330
36
13
–
18,869
2
131
–
–
148
101
383
–
76
12
246
1,885
–
105
–
1,552
–
143
Other derivative financial instruments are denominated in the following currencies:
Sterling
US dollar
Euro
274
984
196
9
221
902
125
2
2016
£m
875
1,515
645
520
28,199
380
228
604
21,323
203
288
2015
£m
875
1,279
550
FINANCIAL STATEMENTSRolls-Royce Holdings plc Annual Report 2016CONSOLIDATED 152
17 Financial instruments continued
Non-derivative financial instruments are denominated in the following currencies:
At 31 December 2016
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
TotalCare Flex
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
Liabilities
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
Sterling
£m
US dollar
£m
Euro
£m
Other
£m
Total
£m
–
160
284
–
1,134
1,578
(1,194)
9
–
(28)
(1,730)
(889)
(3,832)
(2,254)
–
131
280
–
1,554
1,965
(1,369)
–
(29)
(1,536)
(242)
(3,176)
(1,211)
1
1,567
271
–
831
2,670
(1,374)
(78)
(15)
–
(1,437)
(588)
(3,492)
(822)
1
1,228
350
–
959
2,538
(1,162)
(75)
–
(859)
(303)
(2,399)
139
36
653
123
–
507
1,319
(783)
(32)
–
–
(573)
(138)
(1,526)
(207)
31
613
102
–
446
1,192
(768)
(35)
–
(523)
(139)
(1,465)
(273)
1
90
133
3
299
526
(6)
–
–
–
(149)
(45)
(200)
326
1
89
111
2
217
420
(3)
–
–
(183)
(133)
(319)
101
38
2,470
811
3
2,771
6,093
(3,357)
(101)
(15)
(28)
(3,889)
(1,660)
(9,050)
(2,957)
33
2,061
843
2
3,176
6,115
(3,302)
(110)
(29)
(3,101)
(817)
(7,359)
(1,244)
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:
Functional currency of Group operations
At 31 December 2016
Sterling
US dollar
Euro
Other
At 31 December 2015
Sterling
US dollar
Euro
Other
Sterling
£m
US dollar
£m
Euro
£m
Other
£m
Total
£m
–
(22)
(2)
3
–
(12)
4
–
(1)
–
(1)
9
–
1
–
3
3
(2)
–
18
1
–
–
1
–
19
1
2
27
8
–
(1)
2
(5)
(2)
32
28
(3)
4
3
Notes to the consolidated financial statements continuedRolls-Royce Holdings plc Annual Report 2016FINANCIAL STATEMENTS CONSOLIDATED 153
17 Financial instruments continued
AGEING BEYOND CONTRACTUAL DUE DATE OF FINANCIAL ASSETS
At 31 December 2016
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 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
CONTRACTUAL MATURITY ANALYSIS OF FINANCIAL LIABILITIES
At 31 December 2016
Borrowings
Derivative financial liabilities
Financial RRSAs
TotalCare Flex
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
At 31 December 2015
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
–
218
13
–
–
–
231
–
184
5
–
–
–
189
–
85
–
–
–
–
85
–
98
1
–
–
–
99
–
34
2
–
–
–
36
–
34
2
–
–
–
36
Within
terms
£m
38
2,133
796
387
3
2,771
6,128
33
1,745
835
112
2
3,176
5,903
Gross values
Between
one and
two years
£m
Between
two and
five years
£m
After
five years
£m
Discounting
£m
(114)
(1,297)
(26)
–
–
(15)
(68)
(1,520)
(161)
(329)
(20)
–
(38)
(43)
(591)
(2,007)
(3,190)
(66)
(18)
–
–
(438)
(5,719)
(1,317)
(1,026)
(76)
–
(4)
(74)
(2,497)
(1,458)
(1,418)
(2)
–
–
(14)
(74)
(2,966)
(1,897)
(314)
(10)
–
–
(60)
(2,281)
498
873
17
3
–
–
–
1,391
603
112
12
–
–
–
727
Within
one year
£m
(276)
(604)
(24)
–
(28)
(3,860)
(1,080)
(5,872)
(530)
(286)
(16)
(29)
(3,059)
(640)
(4,560)
Total
£m
38
2,470
811
387
3
2,771
6,480
33
2,061
843
112
2
3,176
6,227
Carrying
value
£m
(3,357)
(5,636)
(101)
(15)
(28)
(3,889)
(1,660)
(14,686)
(3,302)
(1,843)
(110)
(29)
(3,101)
(817)
(9,202)
FINANCIAL STATEMENTSRolls-Royce Holdings plc Annual Report 2016CONSOLIDATED 154
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 2016
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
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 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
Effective
interest rate
%
GBP LIBOR + 1.26
GBP LIBOR + 0.402
2.6000%
2.0600%
2.3500%
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
4.5488%
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%
Period in which interest
rate reprices
6 months
or less
£m
1
2,771
6-12 months
£m
2
–
–
(200)
(43)
–
–
–
–
(534)
–
(403)
–
(682)
–
(814)
–
(417)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
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)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
£m
3
2,771
(107)
(200)
(43)
–
(64)
(26)
(534)
–
(403)
–
(682)
–
(814)
–
(417)
–
(67)
(583)
Total
£m
2
3,176
(129)
(200)
(43)
(92)
(55)
(28)
(200)
(536)
–
(333)
–
(576)
–
(668)
–
(390)
–
(52)
(124)
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.
Notes to the consolidated financial statements continuedRolls-Royce Holdings plc Annual Report 2016FINANCIAL STATEMENTS CONSOLIDATED 155
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 £2,280m (2015: £1,780m) 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
2016
£m
(2,552)
2,089
(158)
133
26
(21)
(19)
19
2015
£m
(1,574)
1,288
(130)
111
18
(15)
(13)
13
At 31 December 2016 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 185.
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
2016
2015
Millions
28,960
300,993
(301,828)
28,125
Nominal
value
£m
29
301
(302)
28
Millions
22,005
429,536
(422,581)
28,960
Nominal
value
£m
22
430
(423)
29
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
2016
2015
Pence
per share
4.60
7.10
11.70
£m
85
130
215
Pence
per share
9.27
7.10
16.37
£m
170
131
301
FINANCIAL STATEMENTSRolls-Royce Holdings plc Annual Report 2016CONSOLIDATED 156
18 Provisions for liabilities and charges
Warranties and guarantees1
Contract loss
Restructuring
Customer financing
Insurance
Other
Current liabilities
Non-current liabilities
Exchange
differences
£m
55
7
3
–
–
10
75
Unused
amounts
reversed
£m
(24)
(4)
(19)
–
(24)
(27)
(98)
Charged to
income
statement
£m
171
18
35
5
36
104
369
At
1 January
2016
£m
381
36
66
20
67
70
640
336
304
Utilised
£m
(109)
(3)
(41)
(6)
(11)
(57)
(227)
At
31 December
2016
£m
474
54
44
19
68
100
759
543
216
1 During 2016, following a review of consistency, £92m of accruals have been reclassified as provisions. Prior figures have not been restated.
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$3.2bn
(2015: US$3.1bn) to provide borrowing facilities to enable customers to purchase aircraft (of which approximately US$421m could be called
during 2017). 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 39.
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
2016
£m
2015
£m
2
12
5
19
3
12
5
20
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 security1
Indemnities
Net commitments
Net commitments with security reduced by 20%2
1 Security includes unrestricted cash collateral of:
2016
2015
£m
238
(103)
(74)
61
86
38
$m
293
(126)
(91)
76
106
47
£m
269
(136)
(79)
54
78
35
$m
399
(201)
(118)
80
115
52
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.
Notes to the consolidated financial statements continuedRolls-Royce Holdings plc Annual Report 2016FINANCIAL STATEMENTS CONSOLIDATED 157
19 Post-retirement benefits
The Group operates a number of defined benefit and defined contribution schemes:
• The UK defined benefit scheme is funded, with the assets held in a separate trustee administered funds. Employees are entitled to
retirement benefits based on either their final or career average salaries and length of service.
• 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 2016.
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 scheme has invested in a longevity swap, which is designed to offset
longevity risks in respect of approximately two thirds of current pensioners.
During the year, the Group has restructured its UK defined benefit arrangements. Four of the five UK schemes have been merged together
into a consolidated scheme, renamed the ‘Rolls-Royce UK Pension Fund’. All future defined benefit accrual will be provided from this
scheme, limited to employees who joined the Company before 1 April 2007. The scheme merger will simplify future administration and
governance. As part of this merger, the three transferring schemes are being wound up. Members of these schemes with benefits below
statutory limits were offered lump sums in exchange for their existing benefits, which resulted in a settlement charge of £2m.
The liabilities of the fifth scheme, the Vickers Group Pension Scheme, have been fully bought-out with a UK insurance company, Legal &
General Assurance Company Limited, resulting in a settlement charge of £301m. This scheme is expected to be wound up in 2017.
Neither of these transactions required any additional funding by the Group.
AMOUNTS RECOGNISED IN THE INCOME STATEMENT
Defined benefit schemes:
Current service cost and administrative expenses1
Past-service (credit)/cost
Settlements1
Defined contribution schemes
Operating cost
Net financing (credit)/charge in respect of defined benefit schemes
Total income statement charge
UK
schemes
£m
2016
Overseas
schemes
£m
169
(22)
302
449
29
478
(41)
437
50
1
10
61
87
148
38
186
UK
schemes
£m
2015
Overseas
schemes
£m
169
(16)
–
153
33
186
(65)
121
52
8
–
60
85
145
33
178
Total
£m
219
(21)
312
510
116
626
(3)
623
Total
£m
221
(8)
–
213
118
331
(32)
299
1
£306m of costs have been excluded from the underlying results, comprising: £301m settlement cost on the buy-out of the Vickers Group Pension Scheme; £3m of administrative expenses on the
restructuring all the UK defined benefit plans; and £2m settlement cost in relation to winding-up lump sums on small pensions as a consequence of the restructuring.
The operating cost is charged as follows:
Cost of sales
Commercial and administrative costs
Research and development
Defined benefit
Defined contribution
Total
2016
£m
133
343
34
510
2015
£m
147
32
34
213
2016
£m
72
27
17
116
2015
£m
80
21
17
118
2016
£m
205
370
51
626
2015
£m
227
53
51
331
Pension contributions to UK pension arrangements are generally paid via a salary sacrifice scheme under which employees agree to a
reduction in gross contractual pay in return for the Group making additional pension contributions on their behalf. As a result, there is a
decrease in wages and salaries and a corresponding increase in pension costs of £31m (2015 £32m) in the year.
FINANCIAL STATEMENTSRolls-Royce Holdings plc Annual Report 2016CONSOLIDATED 158
19 Post-retirement benefits continued
Net financing comprises:
Financing on scheme obligations
Financing on scheme assets
Net financing (income)/charge in respect of defined benefit schemes
Financing income on scheme surpluses
Financing cost on scheme deficits
UK
schemes
£m
385
(426)
(41)
(41)
–
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
UK
schemes
£m
566
(2,360)
(16)
2,326
516
2016
Overseas
schemes
£m
65
(27)
38
(1)
39
2016
Overseas
schemes
£m
12
(90)
52
5
(21)
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 asset1/(liability) recognised in the balance sheet
Post-retirement scheme surpluses
Post-retirement scheme deficits
UK
schemes
£m
(12,014)
13,350
1,336
–
1,336
1,336
–
2016
Overseas
schemes
£m
(798)
747
(51)
(1,314)
(1,365)
10
(1,375)
UK
schemes
£m
375
(440)
(65)
(65)
–
UK
schemes
£m
(185)
(70)
56
(593)
(792)
UK
schemes
£m
(10,914)
11,957
1,043
–
1,043
1,059
(16)
2015
Overseas
schemes
£m
57
(24)
33
–
33
2015
Overseas
schemes
£m
8
70
8
(16)
70
2015
Overseas
schemes
£m
(650)
597
(53)
(1,067)
(1,120)
4
(1,124)
Total
£m
432
(464)
(32)
(65)
33
Total
£m
(177)
–
64
(609)
(722)
Total
£m
(11,564)
12,554
990
(1,067)
(77)
1,063
(1,140)
Total
£m
450
(453)
(3)
(42)
39
Total
£m
578
(2,450)
36
2,331
495
Total
£m
(12,812)
14,097
1,285
(1,314)
(29)
1,346
(1,375)
1 The surplus in the UK scheme is recognised as, on ultimate wind-up when there are no longer any remaining beneficiaries, any surplus would be returned to the Group, which has the
power to prevent the surplus being used for other purposes in advance of this event.
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
Assets
£m
194
–
553
–
–
747
2016
Obligations
£m
(243)
(717)
(631)
(497)
(24)
(2,112)
Net
£m
(49)
(717)
(78)
(497)
(24)
(1,365)
Assets
£m
152
–
429
–
16
597
2015
Obligations
£m
(188)
(553)
(513)
(426)
(37)
(1,717)
Net
£m
(36)
(553)
(84)
(426)
(21)
(1,120)
Notes to the consolidated financial statements continuedRolls-Royce Holdings plc Annual Report 2016FINANCIAL STATEMENTS CONSOLIDATED 159
19 Post-retirement benefits continued
DEFINED BENEFIT SCHEMES’ ASSUMPTIONS
Significant actuarial assumptions for the UK schemes used at the balance sheet date were as follows:
Discount rate
Inflation assumption (RPI) 1
Rate of increase in salaries
Life expectancy from age 65: current male pensioner
future male pensioner currently aged 45
current female pensioner
future female 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.
2016
2.70%
3.50%
4.25%
22.7 years
24.3 years
24.1 years
26.4 years
2015
3.60%
3.25%
4.00%
22.8 years
24.8 years
24.2 years
27.0 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 2016 Proposed 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.
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
Actuarial (losses)/gains
Settlement
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)
2016
3.3%
2.1%
4.8%
21.0 years
22.5 years
2015
3.6%
2.2%
5.0%
21.1 years
23.3 years
UK
schemes
£m
(10,914)
–
(160)
22
(385)
(3)
430
(1,810)
806
–
(12,014)
(12,014)
–
(5,279)
(2,146)
(4,589)
20
2016
Overseas
schemes
£m
(1,717)
(339)
(48)
(1)
(64)
(2)
79
(27)
10
(3)
(2,112)
(798)
(1,314)
Total
£m
(12,631)
(339)
(208)
21
(449)
(5)
509
(1,837)
816
(3)
(14,126)
(12,812)
(1,314)
(1,120)
(154)
(838)
16
(6,399)
(2,300)
(5,427)
19
UK
schemes
£m
(10,606)
–
(164)
16
(375)
(3)
417
(199)
–
–
(10,914)
(10,914)
–
(4,273)
(1,946)
(4,695)
18
2015
Overseas
schemes
£m
(1,773)
17
(50)
(5)
(58)
(4)
75
84
–
(3)
(1,717)
(650)
(1,067)
(921)
(130)
(666)
16
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
FINANCIAL STATEMENTSRolls-Royce Holdings plc Annual Report 2016CONSOLIDATED
160
19 Post-retirement benefits continued
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
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
UK
schemes
£m
11,957
–
(9)
426
2,326
185
3
(430)
(1,108)
13,350
2,752
UK
schemes
£m
7,574
–
3,061
2,063
(420)
(51)
12,227
(175)
969
214
–
–
25
90
13,350
2016
Overseas
schemes
£m
597
131
(2)
27
5
86
2
(79)
(20)
747
32
2016
Overseas
schemes
£m
335
3
297
–
–
18
653
–
82
–
4
–
9
(1)
747
UK
schemes
£m
12,341
–
(5)
440
(593)
188
3
(417)
–
11,957
(153)
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
593
(2)
(2)
24
(16)
71
4
(75)
–
597
8
2015
Overseas
schemes
£m
297
(1)
239
–
–
21
556
–
1
–
3
–
21
16
597
Total
£m
12,554
131
(11)
453
2,331
271
5
(509)
(1,128)
14,097
2,784
Total
£m
7,909
3
3,358
2,063
(420)
(33)
12,880
(175)
1,051
214
4
–
34
89
14,097
Total
£m
12,934
(2)
(7)
464
(609)
259
7
(492)
–
12,554
(145)
Total
£m
7,580
(6)
2,216
1,868
(477)
139
11,320
(142)
811
232
113
24
89
107
12,554
1 A portfolio of gilt and swap contracts, backed by investment grade credit instruments and 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 UK 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 investment strategy for the UK scheme is controlled by the Trustee in consultation with the Company. 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.
FUTURE CONTRIBUTIONS
The Group expects to contribute approximately £210m to its defined benefit schemes in 2017.
In the UK, the funding is based on a statutory triennial funding valuation process. This includes a negotiation between the Group and the
Trustee on actuarial assumptions used to value obligations (Technical Provisions or TPs) which may differ from those used for accounting
set out above. In particular, the discount rate used to value TPs must be prudent and take account of the investment strategy, rather than
being based on yields of AA corporate bonds. Following the triennial valuation process, a Schedule of Contributions (SoC) must be agreed
which sets out the required contribution for current service. If the scheme is in deficit, the SoC must also include agreed contributions
from the employer to eliminate any deficit. The most recent update provided to the Trustee, as at 30 September 2016, showed that the UK
scheme was estimated to be 108% funded on a provisional TPs basis calculated using a discount rate equal to UK Government bond yields
plus 0.5%. Contributions to this scheme are currently being paid in line with the SoCs of the predecessor schemes in place pre-merger,
which result in an average contribution rate of 30.8% of salary.
Notes to the consolidated financial statements continuedRolls-Royce Holdings plc Annual Report 2016FINANCIAL STATEMENTS CONSOLIDATED 161
19 Post-retirement benefits continued
The first consolidated funding valuation is planned to be undertaken as at 31 March 2017. Any adjustment to contributions payable
following this valuation are expected to take effect in 2018.
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 2016, 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 hedge the risks from interest rates and inflation measured on a proxy
solvency basis. For the UK scheme, the interest rate and inflation hedging is currently based on UK Government bond yields without any
adjustment for any credit spread . The longevity risk of approximately two thirds of UK pensioner liabilities is also hedged. 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
2016
£m
(625)
630
(320)
272
(115)
415
2015
£m
(524)
569
(249)
231
(91)
(308)
1 The differences between the sensitivities on obligations and plan assets arise largely due to differences in the methods used to value the obligations for accounting purposes and the
adopted proxy solvency basis. On a UK Government bond yield basis the correlation is approximately 86% for discount rates and 89% for inflation.
20 Share capital
Issued and fully paid
At 1 January 2015
Purchase and cancellation of ordinary shares
At 1 January 2016
Purchase and cancellation of ordinary shares
At 31 December 2016
Non-equity
Equity
Special
Share
of £1
Nominal
value
£m
Ordinary
shares
of 20p each
millions
Nominal
value
£m
1
1
–
1
–
–
–
–
1,882
(44)
1,838
–
1,838
376
(9)
367
–
367
The rights attaching to each class of share are set out on page 186.
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 83 to 95.
2016
£m
34
1
35
1
2015
£m
6
(1)
5
–
FINANCIAL STATEMENTSRolls-Royce Holdings plc Annual Report 2016CONSOLIDATED
162
21 Share-based payments continued
MOVEMENTS IN THE GROUP’S SHARE-BASED PAYMENT PLANS DURING THE YEAR
Outstanding at 1 January 2015
Granted
Additional entitlements arising from TSR performance
Forfeited
Exercised
Outstanding at 1 January 2016
Granted
Forfeited
Exercised
Outstanding 31 December 2016
Exercisable at 31 December 2016
Exercisable at 31 December 2015
ShareSave
PSP
APRA
Weighted
average
exercise price
Pence
Number
Millions
Number
Millions
Number
Millions
24.5
13.0
–
(4.6)
(9.7)
23.2
–
(1.7)
(0.1)
21.4
–
–
660
617
–
908
445
677
–
752
538
672
–
–
9.8
3.0
0.5
(2.9)
(1.7)
8.7
7.3
(3.4)
(1.0)
11.6
–
–
2.4
–
–
(0.1)
(1.4)
0.9
–
–
(0.9)
–
–
–
As share options are exercised throughout the year, the weighted average share price during the year of 682p (2015: 820p) is representative
of the weighted average share price at the date of exercise. The closing price at 31 December 2016 was 668p (2015: 575p).
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 – 30% TSR uplift
PSP – 50% TSR uplift
ShareSave – three-year grant
ShareSave – five-year grant
APRA
2016
714p
731p
795p
n/a
n/a
n/a
2015
1,015p
n/a
1,036p
192p
219p
n/a
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
2016
£m
48
176
200
548
469
1,217
20151
£m
24
222
190
488
496
1,174
1 2015 figures have been re-presented to follow the ‘property, plant and equipment’ classification of aero engines, with aero engine costs of £98m previously reported as ‘hire of plant
and machinery’ being reclassified as ‘hire of other assets’ to ensure consistent treatment with 2016.
Notes to the consolidated financial statements continuedRolls-Royce Holdings plc Annual Report 2016FINANCIAL STATEMENTS CONSOLIDATED
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
163
2016
£m
35
11
35
27
73
2015
£m
25
12
18
8
38
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 (2015: £1m) and sublease receipts of £35m (2015: £25m) 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 51 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 £2m (2015: £3m) and sublease receipts expected to be received
are £49m (2015: £24m).
FINANCE LEASES
Finance lease liabilities are payable as follows:
Within one year
Between one and five years
After five years
Payments
£m
7
30
54
91
2016
Interest
£m
3
10
8
21
Principal
£m
4
20
46
70
Payments
£m
5
18
46
69
2015
Interest
£m
2
8
7
17
Principal
£m
3
10
39
52
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 continued its
investigations and engaged with the SFO and other authorities in the UK, the US and elsewhere in relation to the matters of concern.
In January 2017, after full cooperation, the Company concluded deferred prosecution agreements with the SFO and the US Department of Justice
and a leniency agreement with the MPF, the Brazilian federal prosecutors which are described on page 8. Prosecutions of individuals may follow
and investigations may be commenced in other jurisdictions. In addition, we could still be affected by actions from customers and customers’
financiers. The Directors are not currently aware of any matters that are likely to lead to a financial loss, but cannot anticipate all the possible
actions that may be taken or their potential consequences.
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 £12m (2015: £11m).
FINANCIAL STATEMENTSRolls-Royce Holdings plc Annual Report 2016CONSOLIDATED 164
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
2016
£m
2,022
(1,881)
(101)
5
74
22
2
2015
£m
1,896
(2,266)
(88)
9
63
16
2
Included in sales of goods and services to joint ventures and associates are sales of spare engines amounting to £356m (2015: £189m).
Profit recognised in the year on such sales amounted to £119m (2015: £71m), including profit on current year sales and recognition of
profit deferred on sales in previous years. On an underlying basis (at actual achieved rates on settled derivative transactions), the amounts
were £97m (2015: £67m).
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 54 to 57 and 64. Remuneration
for key management personnel is shown below:
Salaries and short-term benefits
Post-retirement schemes
Share-based payments
2016
£m
13
–
1
14
2015
£m
8
–
–
8
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 83 to 95. 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
During 2016, the Group acquired trade and assets from Fluid Mechanics Inc. for £6m, giving rise to goodwill of £1m.
DISPOSALS
During 2016, the Group completed the sales of: its rigid pipes business in the UK and China to Sigma Precision Components Limited for
consideration of £4m; and Allen Diesels for consideration of £3m.
Notes to the consolidated financial statements continuedRolls-Royce Holdings plc Annual Report 2016FINANCIAL STATEMENTS CONSOLIDATED 165
26 Derivation of summary funds flow statement
*Underlying profit before tax (PBT) – page 166
Depreciation of property, plant and equipment
Amortisation of intangible assets
Impairment of goodwill
Impairment of investments
Acquisition accounting
*Depreciation and amortisation
(Increase)/decrease in inventories
Decrease/(increase) in trade and other receivables
(Decrease)/increase in trade and other payables
Revaluation of trading assets
*Movement on net working capital
Additions of intangible assets
Purchases of property, plant and equipment
Government grants received
* Expenditure on PP&E and intangible assets
Realised losses on hedging instruments
Net unrealised fair value to changes to derivatives
Foreign exchange on contract accounting
Exceptional restructuring
Other
Underlying financing
Non-underlying exchange differences on receivables
Non-underlying exchange differences on payables
Loss on disposal of property, plant and equipment
Joint ventures
Increase/(decrease) in provisions
Cash flows on other financial assets and liabilities
Share-based payments
Additions of unlisted investments
Disposal of intangible assets
Disposal of property, plant and equipment
Investments in joint ventures and associates
Net interest
Net funds of JVs reclassified to joint operations
Issue of ordinary shares
Purchase of ordinary shares for share schemes
*Other
*Trading cash flow
Net defined benefit plans – underlying operating charge
Cash funding of defined benefit plans
*Contributions to defined benefit schemes
in excess of underlying PBT charge
*Tax
*Free cash flow
*Shareholder payments
*Share buyback
* Increase in share of JVs and other acquisitions
and disposals
*Discontinued operations
*Foreign exchange
*Change in net funds
2016
£m
426
628
(219)
–
(115)
(161)
312
(273)
67
(631)
(585)
15
426
–
77
(129)
(1)
102
(258)
507
5
(43)
44
(608)
35
–
8
8
(30)
(72)
(4)
1
(21)
204
(271)
£m
813
720
(55)
(1,201)
47
324
(67)
(157)
100
(301)
–
(153)
–
240
(114)
2015
£m
£m
1,432
378
432
(75)
2
(124)
63
(836)
242
(13)
(408)
(487)
8
287
(9)
(9)
(49)
(1)
60
−
−
8
(37)
(151)
(305)
5
(6)
4
33
(15)
(55)
32
(21)
213
(259)
613
(544)
(887)
(229)
385
(46)
(160)
179
(421)
(414)
(3)
(121)
3
(777)
Source
Cash flow statement (CFS)
CFS
Reversal of adjustment in underlying PBT
CFS
Reversal of adjustment in underlying PBT
CFS
CFS adjusted for non-underlying exchanges
differences of £258m
CFS adjusted for non-underlying exchanges
differences of £507m
Reversal of adjustment in underlying PBT
CFS
CFS
CFS
Reversal of adjustment in underlying PBT
Reversal of adjustment in underlying PBT
Reversal of adjustment in underlying PBT
Reversal of adjustment in underlying PBT
Reversal of adjustment in underlying PBT
Reversal of charge in underlying PBT
Reversal of adjustment above
Reversal of adjustment above
CFS
JV dividends less share of results – CFS
CFS
CFS
CFS
CFS
CFS
CFS
CFS
Interest received and paid – CFS
Net cash and borrowings reclassified – CFS
CFS
CFS, 2015 includes £19m from share buyback
CFS
CFS
CFS
Redemption of C Shares – CFS
CFS, 2015 excludes £19m
retained for share incentive schemes
CFS
CFS
CFS
This table shows the derivation of the summary funds flow statement (lines marked *) on page 39 from the cash flow statement on page 118.
FINANCIAL STATEMENTSRolls-Royce Holdings plc Annual Report 2016CONSOLIDATED
166
26 Derivation of summary funds flow statement continued
Free cash flow is a measure of financial performance of the business’s cash flow to see what is available for distribution among those
stakeholders funding the business (including debt holders and shareholders). Free cash flow is calculated as trading cash flow less
recurring tax and post-employment benefit expenses excluding capital expenditures, payments made to shareholders, amounts spent (or
received) on business acquisitions and foreign exchange changes on net funds. The Board considers that free cash flow reflects cash
generated from the Group’s underlying trading.
Reported operating profit
Realised losses on hedging instruments
Net unrealised fair value to changes to derivatives
Foreign exchange on contract accounting
Revaluation of trading assets and liabilities
Effect of acquisition accounting
UK pension restructuring
Impairment of goodwill
Exceptional restructuring
Deferred prosecution agreement costs
Other
Adjustments to reported operating profit
Underlying profit before financing
Underlying financing
Underlying profit before tax
2016
£m
£m
44
2015
£m
£m
1,499
(426)
–
(77)
(67)
115
306
219
129
671
1
(287)
9
9
13
124
–
75
49
–
1
871
915
(102)
813
(7)
1,492
(60)
1,432
Source
Reported to underlying adjustment (note 2)
Reported to underlying adjustment (note 2)
Reported to underlying adjustment (note 2)
Reported to underlying adjustment (note 2)
Reported to underlying adjustment (note 2)
Reported to underlying adjustment (note 2)
Reported to underlying adjustment (note 2)
Reported to underlying adjustment (note 2)
Reported to underlying adjustment (note 2)
Reported to underlying adjustment (note 2)
Underlying income statement (note 2)
The table below shows a reconciliation of free cash flow to the change in cash and cash equivalents presented in the consolidated cash
flow statement.
Change in cash and cash equivalents
Shareholder payments
Share buy back
Less amount retained for share incentive schemes
Returns to shareholders
Net cash flow from changes in borrowings and finance leases
Increase/decrease in short-term investments
Increase in share in joint ventures
Debt of joint ventures reclassified as joint operations
Disposal of discontinued operations
Acquisition of businesses
Disposal of other businesses
Changes in group strucuture
Free cash flow
2016
£m
301
−
−
154
(9)
−
6
(7)
£m
(691)
301
345
1
144
100
2015
£m
421
433
(19)
−
−
121
5
(2)
£m
320
835
(1,095)
(5)
124
179
Notes to the consolidated financial statements continuedRolls-Royce Holdings plc Annual Report 2016FINANCIAL STATEMENTS CONSOLIDATED
Company balance sheet
At 31 December 2016
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
COMPANY
167
Notes
2016
£m
2015
£m
2
12,046
12,016
–
12,046
–
12,016
3
4
(28)
(1,204)
(1,232)
(29)
(842)
(871)
10,814
11,145
367
181
7,058
2,001
156
1,051
10,814
367
180
7,359
1,699
126
1,414
11,145
The financial statements on pages 167 to 169 were approved by the Board on 13 February 2017 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 2016
At 1 January 2016
Profit for the year
Shares issued to share trust
Issue of C Shares
Redemption of C Shares
Acquisition of own shares2
Share-based payments – direct to equity
At 31 December 2016
Attributable to ordinary shareholders
Share
capital
£m
367
–
–
–
–
–
–
367
Share
premium
£m
180
–
1
–
–
–
–
181
Merger
reserve
£m
7,359
–
–
(301)
–
–
–
7,058
Capital
redemption
reserve
£m
1,699
–
–
–
302
–
–
2,001
Other
reserve1
£m
126
–
–
–
–
–
30
156
Retained
earnings
£m
1,414
–
–
–
(302)
(45)
(16)
1,051
Total
equity
£m
11,145
–
1
(301)
–
(45)
14
10,814
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.
2 On 2 December 2016, the Company acquired 6,854,216 of its ordinary shares (including the group’s share-based payment trust) from its subsidiary, Rolls-Royce Group plc (RRG plc) for
£45m which represented fair value of those shares at that date. RRG plc had previously held these shares in a share trust for the purpose of the group’s share-based payment plans.
FINANCIAL STATEMENTSRolls-Royce Holdings plc Annual Report 2016 168
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.
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 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.
• Comparative period reconciliations for share capital.
• The effects of new, but not yet effective accounting standards.
• The requirements of IAS 24 Related Party Transactions and has, therefore, not disclosed transactions between the Company and
its wholly-owned subsidiaries.
The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods 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 83 to 95, 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 2016
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 2016
3 Financial liabilities
C SHARES
Movements during the year of issued and fully paid C Shares were as follows:
At 1 January 2016
Shares issued
Shares redeemed
At 31 December 2016
The rights attaching to C Shares are set out on page 186.
£m
12,016
–
30
12,046
C Shares
of 0.1p
millions
28,960
300,993
(301,828)
28,125
Nominal
value
£m
29
301
(302)
28
Rolls-Royce Holdings plc Annual Report 2016FINANCIAL STATEMENTS COMPANY COMPANY
169
4 Share capital
Issued and fully paid
At 1 January and 31 December 2016
The rights attaching to each class of share are set out on page 186.
Non-equity
Equity
Special
Share
of £1
Preference
shares of
£1 each
Nominal
value
£m
Ordinary
shares of
20p each
millions
Nominal
value
£m
1
–
–
1,838
367
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 2016, these guarantees amounted to £2,235m (2015: £1,937m).
6 Other information
EMOLUMENTS OF DIRECTORS
The remuneration of the Directors of the Company is shown in the Directors’ remuneration report on pages 83 to 95.
EMPLOYEES
The Company had no employees in 2016.
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.
FINANCIAL STATEMENTSRolls-Royce Holdings plc Annual Report 2016 170
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 PropertyCo AS
Bergen Engines S.L.
Bergen Engines S.r.l.
Bristol Siddeley Engines Limited*
Brooks Inspection Solutions Limited*
Brown Brothers & Company Limited*
C.A. Parsons & Company Limited*
Composite Technology and Applications 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
Heartlands Power Limited*
Heaton Power 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*
Address
Derby 1
Derby 1
Derby 1
Derby 1
Hordvikneset 125, N-5108, Hordvik, Bergen 1201, Norway
Green Granduer, 6th Floor, Plot n.58 E, Kamal Ataturk Avenue Banani, C/A
Dhaka, 1213, Bangladesh
Werfdijk 2, 3195HV Pernis, Rotterdam, Netherlands
Værftsvej 23, 9000 Ålborg, Denmark
52-b, 2nd Floor, Okhla Industrial Estate, Phase III, New Delhi 110020, India
Derby 1
Hordvikneset 125, N-5108, Hordvik, Bergen 1201, Norway
Calle Dinamarca s/n (esquina Calle Alemania), Poligono Industrial de
Constanti, 43120 Constanti, Tarragona, Spain
13 Via Castel Morrone, 16161, Genoa, Italy
Derby 1
Derby 1
Taxiway, Hillend Industrial Estate, Dalgety Bay, Dunfermline, Fife,
Scotland, KY11 9JT
Derby 1
Derby 1
Derby 1
Wilmington 2
Derby 1
Derby 1
Derby 1
Zona Industriale AS1, 83040 Morra de Sanctis, Avellino, Italy
Derby 1
Wilmington 2
Derby 1
Derby 1
Taxiway, Hillend Industrial Estate, Dalgety Bay, Dunfermline, Fife,
Scotland, KY11 9JT
Derby 1
Corner Marconi Road and 3rd Street Montague Gardens, Western Cape,
7441, South Africa
Box 1010, S-68129, Kristinehamn, Sweden
401 Rua Visconde de Pitaja 433, Rio de Janeiro, Brazil
Box 1010, S-68129, Kristinehamn, Sweden
Derby 1
Karl Maybach-Hilfe GmbH
L'Orange Fuel Injection (Ningbo) Co, Limited
Maybachplatz 1, 88045, Friedrichshafen, Germany
#3 Hall, No.55 South Qihang Road, Yinzhou Economic Development Zone,
Ningbo City, 315145, China
Class
of shares
Ordinary
Ordinary
Ordinary
Deferred
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Social
participation
Social capital
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Partnership
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Partnership
Ordinary
Ordinary
6% Cumulative
preference
Ordinary
Ordinary
Ordinary
Ordinary
Quotas
Ordinary
Deferred
Preference
Ordinary
Capital Stock
Capital Stock
L'Orange Fuel Injection Trading (Suzhou) Co. Limited No. 88 Suhong Middle Road, Suzhou Industrial Park, Suzhou 215000, China
L'Orange GmbH
L'Orange Unterstützungskasse GmbH
Mansfield Holdings Limited*
MTU America Inc.
MTU Asia PTE Limited
MTU Benelux B.V.
MTU China Company Limited
Porschestrasse 30, 70435 Stuttgart, Germany
Rudolph-L'Orange-Strasse 1, 72293 Glatten, Germany
Derby 1
Wilmington 2
112 Robinson Road, #05-01, The Corporate Office, 068902, Singapore
Merwedestraat 86, 3313 CS, Dordrecht, Netherlands
Room 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
9 Long Yun Road, Suzhou Industrial Park, Suzhou 215024, Jiang Su, China
281 Chaussée Jules César, 95250 Beauchamp, France
Maybachplatz 1, 88045, Friedrichshafen, Germany
36/F Tower Two, Time Square, 1 Matheson Street, Causeway Bay, Hong Kong Ordinary
Ordinary
Calle Copérnico 26-28, 28823 Coslada, Madrid, Spain
MTU do Brasil Limitada
MTU Engineering (Suzhou) Company Limited
MTU France S.A.S.
MTU Friedrichshafen GmbH
MTU Hong Kong Limited
MTU Ibérica Propulsión y Energia S.L.
Capital Stock
Capital Stock
Capital Stock
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Capital Stock
* Dormant entity.
1 Moor Lane, Derby, DE24 8BJ, England.
2 Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, DE19808, United States.
3 62 Buckingham Gate, London, SW1E 6AT, England.
% of
class held
90
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
82.5
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
Rolls-Royce Holdings plc Annual Report 2016OTHER INFORMATION SUBSIDIARIES SUBSIDIARIES
171
Company name
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 Türbin Sanayi ve Ticaret. A.Ş.
MTU Onsite Energy Corporation
MTU Onsite Energy GmbH
MTU Onsite Energy Systems GmbH
MTU Polska Sp. Z o.o.
MTU Reman Technologies GmbH
MTU Rus Limited Liability Company
MTU South Africa (Proprietary) Limited
MTU UK Limited
Navis Consult d.o.o.
NEI Combustion Engineering Limited*
NEI International Combustion 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
PKMJ Technical Services, Inc.
Powerfield Limited*
Powerfield Specialist Engines Limited*
Prokura Diesel Services (Proprietary) Limited
PT MTU Indonesia
PT Rolls-Royce
R.O.V. Technologies, Inc.
Rallyswift Limited*
Reyrolle Belmos Limited*
Rolls-Royce (Ireland) Unlimited Company*
Rolls-Royce (Thailand) Limited
Rolls-Royce AB
Rolls-Royce Aero Engine Services Limited*
Rolls-Royce Australia Limited*
Rolls-Royce Australia Services PTY Limited
Rolls-Royce Brasil Limitada
Rolls-Royce Canada Limited
Rolls-Royce Capital Limited*
Rolls-Royce Civil Nuclear Canada Limited
Address
HM Geneva House, Unit No. 303, 3rd Floor, No. 14 Cunningham Road,
Bangalore, KA 560052, India
4 Ha’Alon Street, South Building, Third Floor, 4059300 Kfar Neter, Israel
Via Aurelia Nord, 328, 19021 Arcola (SP), Italy
Takanawa-Meiko Building, 2-Chome 15-19, Takanawa, Minato-ku, 108-0074
Tokyo, Japan
22nd Floor, Olive Tower, 41 Sejongdaero 9 gil, Junggu, 100-737 Seoul,
Republic of Korea
S3B5SR06 , Jebel Ali Free Zone, P.O. Box 61141, Dubai, United Arab Emirates
Hatira Sokak, No. 5, Ömerli Mahellesi, 34555 Arnavutköy, Istanbul, Turkey
100 Power Drive, Mankato, Minnesota 56001, United States
Dasinger Strasse 11, 86165, Augsburg, Germany
Rotthofer Strasse 8, 94099 Ruhstorf a.d. Rott, Germany
Ul. Śląska, Nr 9. Raum, Ort: Stargard Szczeciński, Plz: 73-110, Poland
Friedrich-List-Strasse 8, 39122 Magdeburg, Germany
Vashutinskoye Sh. 24 B, Khimki, 141402, Moscow, Russian Federation
Corner Marconi Road and 3rd Street Montague Gardens, Western Cape,
7441, South Africa
Derby 1
Ul. Bartola Kašića 5/4, HR-51000, Rijeka, Croatia
Derby 1
Derby 1
Derby 1
Derby 1
Derby 1
Derby 1
Derby 1
Derby 1
Derby 1
Maison Trinity, Trinity Square, St. Peter Port, Guernsey, GY1 4AT
Wilmington 2
Wilmington 2
Derby 1
Derby 1
Corner Marconi Road and 3rd Street Montague Gardens, Western Cape,
7441, South Africa
Secure Building Blok B, Jl. Raya Protokol Halim, Perdanakusuma, Jakarta,
13610, Indonesia
Mid Plaza 2 , Lantai 16 Jl. Jenderal Sudirman 10-11, Jakarta, Pusat, 10220,
Indonesia
Corporation Service Company, 100 North Main Street, Suite 2, Barre, VT
05641, United States
Derby1
Taxiway, Hillend Industrial Estate, Dalgety Bay, Dunfermline, Fife,
Scotland, KY11 9JT
Ulster International Finance, 1st Floor, IFSC House, IFSC, Dublin 1, Ireland
900, 11th Floor Tonson Tower, Ploenchit Road, Lumpini, Pathumwan,
Bangkok, Thailand
Box 1010, S-68129, Kristinehamn, Sweden
Derby1
Suite 102, 2-4 Lyonpark Road, Macquarie Park, NSW 2113, Australia
Suite 102, 2-4 Lyonpark Road, Macquarie Park, NSW 2113, Australia
Rua dr Cincinato Braga 47, Planalto, São Bernando do Campo/SP, 09890-900,
Brazil
9500 Côte de Liesse, Lachine, Québec H8T 1A2, Canada
London 3
597 The Queensway, Peterborough ON K9J7J6, Canada
Rolls-Royce Civil Nuclear S.A.S.
23 Chemin du Vieux Chêne, 38240, Meylan, France
* Dormant entity.
1 Moor Lane, Derby, DE24 8BJ, England.
2 Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, DE19808, United States.
3 62 Buckingham Gate, London, SW1E 6AT, England.
Class
of shares
Ordinary
Ordinary
Capital Stock
Ordinary
Ordinary
Ordinary
Ordinary
Common Stock
Capital Stock
Capital Stock
Ordinary
Capital Stock
Ordinary
Ordinary
Ordinary
Ordinary
A Ordinary
B Ordinary
Deferred
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Partnership
Redeemable
non-cumulative
preference
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Quotas
Common Stock
Ordinary
Class A Preferred
Common Shares
Ordinary
% of
class held
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
75
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
Rolls-Royce Holdings plc Annual Report 2016OTHER INFORMATION 172
Subsidiaries continued
Company name
Address
Rolls-Royce Commercial (Beijing) Co., Limited
305-306 Indigo Building 1, 20 Jiuxianqiao Road, Beijing, 100016, China
Derby 1
Wilmington 2
Rolls-Royce Commercial Aero Engines Limited*
Rolls-Royce Control Systems Holdings Co
Rolls-Royce Controls and Data Services (NZ) Limited Level 7 Bayleys Building, 36 Brandon Street, Wellington, 6011, New Zealand
Rolls-Royce Controls and Data Services 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 Crosspointe LLC
Rolls-Royce de Venezuela SA*
Derby 1
Wilmington 2
Derby 1
Wilmington 2
7 Boulevard Latrille, Abidjan-Cocody, 25 BP 945, Abidjan 25, Côte d'Ivoire
Wilmington 2
Avenida 3E, entre Calles 78 y 79, Torre Empresarial Claret, Piso 10, Oficina
10-3, Sector Valle Frio, Maracaibo, Estado Zulia, Venezuela
Wilmington 2
Wilmington 2
Eschenweg 11, 15827 Blankenfelde-Mahlow, Germany
Rua Rei Katyavala, Edificio Rei Katyavala, Entrada B, Piso 8, Luanda, Angola
Wilmington 2
Derby 1
Corporation Service Company, 2710 Gateway Oaks Dr., Suite 150N,
Sacramento, CA 95833, United States
Wilmington 2
Bldg 06 Berthaphil Compound, Jose Abad Santos Avenue, Clark Special
Economic Zone, Clark, Pampanga, Philippines
Eschenweg 11, 15827 Blankenfelde-Mahlow, Germany
Derby 1
Rolls-Royce Defense Products and Solutions Inc.
Rolls-Royce Defense Services Inc.
Rolls-Royce Deutschland Ltd & Co KG
Rolls-Royce Energy Angola, Limitada*
Rolls-Royce Energy Systems Inc.
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.
Wilmington 2
Derby 1
Derby 1
London 3
Corporation Service Company, 2710 Gateway Oaks Dr., Suite 150N,
Sacramento, CA 95833, United States
9500 Côte de Liesse, Lachine, Québec H8T 1A2, Canada
Rolls-Royce India Limited*
Rolls-Royce India Private Limited
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*
Derby 1
Birla Tower West, 2nd Floor 25, Barakhamba Road, New Delhi, 110001, India
Derby 1
Derby 1
Derby 1
Derby 1
Derby 1
Rolls-Royce Industries Limited*
Rolls-Royce International Limited
Rolls-Royce International LLC
Rolls-Royce International s.r.o.
Rolls-Royce Italia S.r.l.
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
Derby 1
Derby 1
Office 41N, Lit. A, 32-34 Nevsky Prospect, St. Petersburg, 19186, Russia
Pobřežní 620/3, postal code 186 00, Karlín - Prague 8, Czech Republic
13 Via Castel Morrone, 16161, Genoa, Italy
31st Floor, Kasumigaseki Building, 3-2-5 Kasumigaseki, Chiyoda-Ku,
Tokyo, 100-6031, Japan
Wilmington 2
Derby 1
Suite 13.03, 13th Floor, Menara Tan & Tan, 207 Jalan Tun Razak, 50400
Kuala Lumpur, Malaysia
Værftsvej 23, 9000 Ålborg, Denmark
Borgundvegen 340, Ålesund, 6009, Norway
G/F, No 1-3 Wing Yip Street, Kwai Chung, New Territories, Hong Kong
* Dormant entity.
1 Moor Lane, Derby, DE24 8BJ, England.
2 Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, DE19808, United States.
3 62 Buckingham Gate, London, England, SW1E 6AT.
Class
of shares
Registered
capital
Ordinary
Common Stock
Ordinary
Ordinary
Common Stock
Ordinary
Common Stock
Ordinary
Partnership
Registered shares
Common Stock
Common Stock
Ordinary
Quota
Common Stock
Ordinary
Common Stock
Common Stock
Capital Stock
Capital Stock
Deferred
Ordinary
Common Stock
Ordinary
Ordinary
Ordinary
Ordinary
Common C
shares
Ordinary
Equity
Ordinary
Ordinary
Ordinary
Ordinary
2.8% cumulative
redeemable
preference stock
4.9% cumulative
preference stock
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Common Stock
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
% of
class held
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
Rolls-Royce Holdings plc Annual Report 2016OTHER INFORMATION SUBSIDIARIES Company name
Address
Rolls-Royce Marine Australia PTY. Limited
Rolls-Royce Marine Benelux BV
Rolls-Royce Marine Chile S.A.
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 Marine Korea Limited
Rolls-Royce Marine Manufacturing (Shanghai)
Limited
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 Militiary Aero Engines Limited*
Rolls-Royce Namibia (Proprietary) 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 S.A.S
Rolls-Royce Nuclear Field Services Inc.
Rolls-Royce Oman LLC
Rolls-Royce Operations (India) Private Limited
Rolls-Royce Overseas Holdings Limited
Rolls-Royce Overseas Investments 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
Rolls-Royce Saudi Arabia Limited
Rolls-Royce Singapore Pte. Limited
Rolls-Royce Technical Support Sarl
Rolls-Royce Total Care Services Limited
Rolls-Royce Turkey Power Solutions Industry
and Trade Limited
Rolls-Royce UK Pension Fund Trustees Limited*
Rolls-Royce Vietnam Limited
Rolls-Royce Zweite Beteiligungs GmbH
Ross Ceramics Limited
Scandinavian Electric Gdansk Sp. z.o.o.
Scandinavian Electric Systems do Brazil Limitada
Unit 2/8 Wallace Way, Fremantle WA 6160, Australia
Werfdijk 2, 3195 HV Pernis, Rotterdam, Netherlands
Alcantara 200, 6th floor, office 601, Las Condes, Santiago, Chile
Fährstieg 9, 21107, Hamburg, Germany
Derby 1
Calle Dinamarca s/n (esquina Calle Alemania), Poligono Industrial de
Constanti, 43120 Constanti, Tarragona, Spain
122 avenue Charles de Gaulle, 92200 Neuilly sur Seine, France
25 Atki Poseidonos str. & Makrigianni str., Moschato, Athens, GR-18344,
Greece
G/F, Chung Shun Knitting Centre, No.’s 1-3 Wing Yip Street, Kwai Chung,
New Territories, Hong Kong
Plot D-505, TTC Industrial Area, MIDC, Turbhe, Navi Mumbai, 400703
Maharashtra, India
197 Noksan SanEop Buk-Ro, (Songjeong-dong) Gangseo-gu, Busan 46753,
Republic of Korea
No.1 Xuanzhong Road, Xuanqiao Town, Pudong New Area, Shanghai, 201399,
China
Wilmington 2
Derby 1
Kiefernstrasse 1, 15827 Blankenfelde-Mahlow OT, Dahlewitz, Germany
Class
of shares
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Common Stock
A Ordinary
B Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Ordinary
Boulevard Adolfo Ruiz Cortinez 3642-403, Fracc Costa de Oro, Verzcruz CP
94299 6, Mexico
Boulevard Adolfo Ruiz Cortinez 3642-403, Fracc Costa de Oro, Verzcruz CP
94299 6, Mexico
Derby 1
2nd Floor, Unit 4, LA Chambers, Ausspann Plaza, Dr Agostinho Neto Road,
Ausspannplatz, Windhoek, Namibia
Level 7 Bayleys Building, 36 Brandon Street, Wellington, 6011, New Zealand
7th Floor Marble House, 1 Kingsway Road, Falomo, Ikoyi, Lagos, Nigeria
Wilmington 2
Wilmington 2
Wilmington 2
Wilmington 2
Wilmington 2
ZA Notre-Dame, 84430, Mondragon, France
Corporation Service Company, 80 State Street, Albany, NY 12207, United States Common Stock
Bait Al Reem, Business Office #131, Building No 81, Way No 3409, Block No 234,
Al Thaqafa Street, Al Khuwair, Sultanate of Oman, PO Box 20, Postal Code 103
RMZ-NXT, Campus 2A, Unit 001 Ground Floor, Near to SAP, Whitefield Road,
EPIP Zone, Mahadevapura, Bangalore 560066, Karnataka, India
Derby 1
Derby 1
PO Box 220, Suojantie 5, 26101, Rauma, Finland
Derby 1
London 3
Gniew 83-140, ul. Kopernika 1, Poland
Derby1
Derby1
Maybachplatz 1, 88045, Friedrichshafen, Germany
PO Box 88545, Riyadh, 11672, Saudi Arabia
1 Marina Boulevard, #28-00 One Marina Boulevard, Singapore, 018989
Centreda I, Avenue Didier Daurat, 31700 Blagnac, Toulouse, France
Derby 1
Meclis-i Mebusan Cad No 1, Ekemen Han, 34427 Kabataş Istanbul, Turkey
Ordinary
Ordinary
A Shares
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Cash shares
Ordinary
Ordinary
Ordinary
Cash shares
Ordinary
Ordinary
Derby 1
Dông Xuyên Industrial Zone, Rach Dùa Ward, Vũng Tàu City, Bà Ria-Vũng
Tàu Province, Vietnam
Eschenweg 11, 15827 Blankenfelde-Mahlow, Germany
Derby 1
ul. Reja No.3, 80-404, Gdansk, Poland
Rua Sao Jose 90, salas 1406 e 1407, Centro, Rio De Janeiro, Brazil
Ordinary
Capital Stock
Capital Stock
Ordinary
Ordinary
Quotas
* Dormant entity.
1 Moor Lane, Derby, DE24 8BJ, England.
2 Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, DE19808, United States.
3 62 Buckingham Gate, London, England, SW1E 6AT.
173
% of
class held
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
99.9
100
100
100
100
100
100
100
100
100
100
100
100
67
66
Rolls-Royce Holdings plc Annual Report 2016SUBSIDIARIESOTHER INFORMATION 174
Subsidiaries continued
Company name
Sharing in Growth UK Limited **
Address
Derby 1
Spare IPG (AGL) Limited*
Spare IPG 4 Limited*
Spare IPG 15 Limited*
Spare IPG 18 Limited*
Spare IPG 20 Limited*
Spare IPG 24 Limited*
Spare IPG 27 Limited*
Spare IPG 32 Limited*
Stone Vickers Limited*
The Bushing Company Limited*
Timec 1487 Limited*
Trigno Energy S.R.L.
Ulstein Holdings AS
Ulstein Maritime Limited
Vessel Lifter 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*
Derby 1
Derby 1
Derby 1
Derby 1
Derby 1
Derby 1
Taxiway, Hillend Industrial Estate, Dalgety Bay, Dunfermline, Fife,
Scotland, KY11 9JT
Derby 1
Derby 1
Derby 1
Derby 1
Zona Industriale, 66050 San Salvo, Italy
Sjøgata 80, 6065 Ulsteinvik, Norway
96 North Bend Street, Coquitlam, British Columbia V3K 6H1 Canada
Corporation Service Company, 1201 Hays Street, Tallahassee, FL32301,
United States
Derby 1
Derby 1
Derby 1
Derby 1
Derby 1
Derby 1
Derby 1
Derby 1
Derby 1
Derby 1
Class
of shares
Limited by
Guarantee
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
7.25% cumulative
preference
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Common
Common Stock
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary B
Ordinary
% of
class held
100
100
100
100
90
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
The following companies were dissolved on 3 January 2017 - NEI Allen Limited, NEI Limited, Oxygenaire Limited, R-R Industrial Controls Limited, Rolls-Royce Industrial & Marine Gas
Turbines Limited, Rolls-Royce Industrial Power Systems Limited, Rolls-Royce Transmission & Distribution Limited, Spare IPG (CEL) Limited, Spare IPG 3 Limited, Spare IPG 11 Limited, Spare
IPG 22 Limited, Spare IPG28 Limited and Spare IPG 30 Limited. Crossley-Premier Engine (Sales) Limited was dissolved on 10 January 2017. John Hastie of Greenock (Holdings) Limited and
Spare RRPD (BEL) Limited were dissolved on 17 January 2017.
Joint ventures and associates
Company name
Address
Class
of shares
% of
class held
Group
interest
held %
Aero Gearbox International SAS ***
Aerospace Transmission Technologies GmbH ***
Airtanker Holdings Limited
Airtanker Services 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
Alpha Partners Leasing Limited
Anecom Aerotest GmbH
CFMS Limited
Clarke Chapman Portia Port Services Limited
Egypt Aero Management Services
18 boulevard Louis Seguin, 92700 Colombes, France Ordinary
Adelheidstrasse 40, D-88046, Friedrichshafen,
Germany
One London Wall, London, England EC2Y 5EB
Airtanker Hub, RAF Brize Norton, Carterton,
Oxfordshire, England OX18 3LX
Wilmington 2
Ordinary
Ordinary
Capital Stock
Partnerships
(no equity held)
London 3
122 Freiheitstrasse, Wildau, D-15745, Germany
Victoria House, 51 Victoria Street, Bristol, England,
BS1 6AD
Maritime Centre, Port of Liverpool, Liverpool,
England, L21 1LA
EgyptAir Engine Workshop, Cairo International
Airport, Cairo, Egypt
A Ordinary
Capital Stock
Limited by
guarantee
A Ordinary
Ordinary
50
50
20
22
–
100
24.9
n/a
100
50
50
50
20
22
50
50
24.9
50
50
50
* Dormant entity.
** The entity is not included in the consolidation as Rolls-Royce plc does not have a beneficial interest in the net assets of the entity.
*** As at 31 December 2016, these entities are accounted for as joint operations (see note 1 accounting policies).
1 Moor Lane, Derby, DE24 8BJ, England.
2 Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, DE19808, United States.
3 62 Buckingham Gate, London, England, SW1E 6AT.
Rolls-Royce Holdings plc Annual Report 2016OTHER INFORMATION SUBSIDIARIES JOINT VENTURES AND ASSOCIATES
175
Company name
Address
Class
of shares
% of
class held
Group
interest
held %
EPI Europrop International GmbH
Eurojet Turbo GmbH
GE Rolls-Royce Fighter Engine Team LLC
Genistics Holdings Limited
Global Aerospace Centre for Icing and Environmental
Research Inc.
Hong Kong Aero Engine Services Limited
Hovden Klubbhus AS
Industria De Turbo Propulsores SA
International Aerospace Manufacturing Private Ltd**
LG Fuel Cell Systems Inc.
Light Helicopter Turbine Engine Company
(unincorporated partnership)
Metlase Limited
MTU Turbomeca Rolls-Royce GmbH
MTU Turbomeca Rolls-Royce ITP GmbH
N3 Engine Overhaul Services GmbH & Co KG
N3 Engine Overhaul Services Verwaltungsgesellschaft Mbh
Offshore Simulator Centre AS
Rolls Laval Heat Exchangers Limited*
Rolls-Royce & Partners Finance (US) LLC, Rolls-Royce & Partners
Finance (US) (No.2) LLC
Rolls-Royce Snecma Limited
Shanxi North MTU Diesel Co. 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**
Ordinary
Ordinary
Ordinary
Dachauer Strasse 655, 80995 Munich, Germany
Capital Stock
Lilienthalstrasse 2b, 85399 Hallbergmoos, Germany Capital Stock
Partnership
The Corporation Trust Company, 1209, Orange
(no equity held)
Street, Wilmington, DE19801, United States
Derby 1
Ordinary A
Ordinary
1000 Marie-Victorin Boulevard, Longueuil,
Québec, J4G 1A1, Canada
33rd Floor, One Pacific Place, 88 Queensway,
Hong Kong
Stålhaugen 5, Ulsteinvik, 6065 Norway
Parque Technológico Edificio 300, 48170 Zamudio,
Vizcaya, Spain
Survey No.3 Kempapura Village, Varthur Hobli,
Bangalore, KA 560037, India
Wilmington 2
Suite 119, 9238 Madison Boulevard, Madison,
AL35758, USA
Unipart House, Garsington Road, Cowley, Oxford,
England, OX4 2PG
Am Söldnermoos 17, 85399 Hallbergmoos, Germany Capital Stock
Am Söldnermoos 17, 85399 Hallbergmoos, Germany Capital Stock
Capital Stock
Gerhard-Höltje-Strasse 1, D-99310, Arnstadt,
Germany
Gerhard-Höltje-Strasse 1, D-99310, Arnstadt,
Germany
Borgundvegen 340, 6009, Ålesund, Norway
Derby 1
Wilmington 2
Common Stock
Partnership
(no equity held)
Ordinary B
Capital Stock
Ordinary
Derby 1
No. 97 Daqing West Road, Datong City, Shanxi
Province, China
11 Calshot Road, 509932, Singapore
Tefen Industrial Zone, PO Box 16, 24959, Israel
The Corporation Trust Company, 1209, Orange
Street, Wilmington, DE19801, United States
Derby 1
Derby 1
Derby 1
Booths Park, Chelford Road, Knutsford, Cheshire,
England, WA16 8QZ
Stålhaugen 10, 6065 Ulsteinvik, Norway
Xujiawan, Beijiao, PO Box 13, Xian 710021, Shaanxi
China
Ordinary
Ordinary A
Partnerships
(no equity held)
Ordinary B
Ordinary
Ordinary
Ordinary A
Ordinary B
Partnership
(no equity held)
Ordinary B
Ordinary B
Shares A
Ordinary
Ordinary
Ordinary
Ordinary
* Dormant entity.
** As at 31 December 2016, these entities are accounted for as joint operations (see note 1 accounting policies).
1 Moor Lane, Derby, DE24 8BJ, England.
2 Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, DE19808, United States.
28 Effective 35.5
Effective 39
33
40
–
100
50
50
69
46.9
50
25
–
100
33.3
25
50
50
25
100
–
100
49
50
50
50
–
100
100
37.5
40
20
50
49
50
50
50
69
46.9
50
25
50
20
33.3
Effective 37
50
50
25
50
50
50
49
50
50
50
49.5
50
40
20
50
49
Rolls-Royce Holdings plc Annual Report 2016OTHER INFORMATION 176
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 2016 set out on pages 115 to 175.
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
2016 and of the Group’s loss 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.
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 year
our testing generally showed these controls to have increased
in effectiveness.)
Dynamic Audit planning tool
(Relative significance of audit risks before taking account of controls)
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
i
f
n
o
t
c
a
p
m
i
S
l
a
i
t
n
e
t
o
P
O
F
B
E
J
K
L
A
P
I
D
Q
C
H
G
M
N
R
Likelihood of material misstatement
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 and as the reduction in our assessment of
materiality did not change the ranking of risks, the key risks are the
same as in the prior year, though there have been some changes in
the relative significance to our audit of some of the risks. (For last
year's audit, the risk relating to Bribery and corruption covered both
(i) the risk that the Group had entered into corrupt transactions that
could materially affect the financial statements and (ii) the risk that
the consequences of the then ongoing investigations into bribery and
corruption in overseas markets were not properly reflected in the
financial statements. These are now shown as separate risks as,
following the conclusion of the investigations by the UK, US and
Brazilian investigating authorities, the significance of the second
element of the risk has reduced substantially.)
Of the 19 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.
Our 2015 audit was reviewed by the Financial Reporting Council’s
Audit Quality Review (AQR) team. The review findings noted limited
areas for improvement. These have been incorporated into our
continuous improvement process for our approach to the 2016
audit and are reflected in the descriptions of the audit procedures
set out below.
A
B
C
D
E
The pressure on and incentives for
management to meet revenue and
profit targets
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 customer
financing arrangements
F
Bribery and corruption
G
H
The presentation of
‘underlying profit’
Disclosure of the effect on the trend
in profit of items which are uneven
in frequency or amount
I
J
K
L
M
N
O
P
Q
Measurement of revenue and profit on
long-term contracts outside the Civil
Aerospace business (see page 123)
Determination of development costs
to be capitalised (see page 123)
The basis of accounting for
contractual aftermarket rights
(see page 121)
Determination of the amortisation
period of development costs and
CARs (see page 128)
The basis of accounting for Risk
and Revenue Sharing Arrangements
(see pages 122 and 123)
Estimating provisions for warranties
and guarantees (see page 124)
Valuation of derivatives and hedge
accounting (see pages 126 and 127)
Measurement of post-retirement
benefits (see page 124)
Accounting for uncertain tax positions
and deferred tax assets (see page 124)
R
Valuation of goodwill (see page 123)
S
Consequences of investigations into
bribery and corruption in overseas
markets (see page 163)
Rolls-Royce Holdings plc Annual Report 2016OTHER INFORMATION INDEPENDENT AUDITOR’S REPORT
177
A The pressure on and incentives for management to meet
revenue and profit targets
technical issues on these engines, the response to which is
forecast to be costly; and
Refer to pages 18 to 35 (Business review) and pages 98 and 99
(Audit Committee report – Financial reporting)
The risk – In recent years the Group has published a number
of revisions to its revenue and profit guidance with a generally
decreasing trend in profit and revenue and there have been
significant associated decreases in the Group’s share price. The
Group's employee incentive schemes include profit targets. 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 pressure on and incentives for management to meet
targets 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 forecasts, guidance or targets.
The significance of this risk increased marginally following changes
to the Group's employee incentive schemes that involved the
introduction of individual business profit targets as well as a Group
profit target.
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, guidance and targets, 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 178), 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;
• when considering the risk relating to Recoverability of intangible
assets in the Civil Aerospace business ( D refer to pages 178 and
179), we challenged with a heightened awareness of the
possibility of unconscious or systematic bias the basis for an
increase in the estimated market size and share of the Trent 900
engine which offset the significant reduction in the recoverable
amount of Trent 900 programme assets arising from new
• when considering the risk relating to The presentation of
underlying profit ( G refer to pages 179 and 180) 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 pages 180
and 181), 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 we assessed the
balance and transparency of disclosure of these items.
Our findings – Our testing did not identify any indication of
manipulation of results (2015 audit finding: none). We found the
degree of caution/optimism adopted in estimates to be balanced
overall (2015 audit finding: balanced). 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 pages 121 and 122 (Key areas of judgement – Introduction,
Contractual aftermarket rights, Linkage of original and long-term
aftermarket contracts), page 125 (Significant accounting policies
– Revenue recognition) and pages 98 and 99 (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 not changed during the year.
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 and has applied
this consistently. We found that the disclosure was ample.
OTHER INFORMATIONRolls-Royce Holdings plc Annual Report 2016INDEPENDENT AUDITOR’S REPORT 178
Independent auditor’s report continued
For the agreements entered into during this year, it was clear which
accounting basis should apply.
C The measurement of revenue and profit in the Civil
Aerospace business
Refer to pages 122 (Key areas of judgement – Measurement of
performance on long-term aftermarket contracts), page 125
(Significant accounting policies – Revenue recognition and TotalCare
arrangements) and pages 98 and 99 (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 lifecycle 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.
The significance of the risk has not changed during the year.
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
forecasts, guidance and targets 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.
In terms of future cost estimates, we undertook detailed
assessments of the achievability of the Group’s plans to reduce
lifecycle 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. We
focused on the estimates of costs expected to be incurred to
respond to new technical issues emerging during the year, notably
in relation to the Trent 700 and 900 programmes.
Our analysis of forecast revenues considered each significant
airframe that is powered by the Group’s engines and was based
on discussions with commercial and operational management and
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 – We focused our controls testing on controls that we
assessed as likely to provide effective audit evidence, largely those
relating to revenue estimates. We also considered the operation of
other controls in order to provide relevant comment to
management and the audit committee. We found that the
remediation of control weaknesses identified in earlier periods had
continued. The scope and depth of our detailed testing and analysis
was expanded to take account of the remaining control weaknesses.
Overall, our assessment is that the assumptions and resulting
estimates (including appropriate contingencies) resulted in
balanced (2015 audit finding: balanced) profit recognition.
D Recoverability of intangible assets (certification costs and
participation fees, development expenditure and contractual
aftermarket rights) in the Civil Aerospace business
Refer to page 123 (Key sources of estimation uncertainty – Forecasts
and discount rates), pages 127 and 128 (Significant accounting
policies – Certification costs and participation fees, Research and
development, Contractual aftermarket rights and Impairment of
non-current assets), pages 140 to 142 (Note 9 to the financial
statements – Intangible assets) and pages 98 and 99 (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.
The significance of the risk has increased somewhat during the year
due to the emergence of new technical issues on the Trent 900
engines, the response to which is forecast to be costly.
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 tests (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 public data where this was available. We focused
on the Trent 900 programme assets where the impact of the
estimated cost of responding to new technical issues would have led
to a significant impairment had the effect not been offset by an
increase in estimated market size and share. We tested the
mathematical accuracy of the impairment calculations. We
considered whether the disclosures in Note 9 to the financial
Rolls-Royce Holdings plc Annual Report 2016OTHER INFORMATION INDEPENDENT AUDITOR’S REPORT 179
statements describe the inherent degree of subjectivity in the
estimates and the potential impact on future periods of revisions
to these estimates.
Our findings – We found that the assumptions and estimates were
balanced (2015 audit finding: balanced) and that the disclosures
were proportionate (2015 audit finding: proportionate).
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
(2015 audit finding: balanced) and that the disclosures were
proportionate (2015 audit finding: proportionate). We found no
errors in calculations (2015 audit finding: none).
With regard to the Trent 900 programme assets, we found no
evidence that the increase in estimated market size and share that
resulted in no impairment being recognised was motivated by the
impact on profit and we found that this estimate was based on a
balanced assessment of the data available.
E Liabilities arising from customer financing arrangements
Refer to page 123 (Key areas of judgement – Customer financing
contingent liabilities), page 129 (Significant accounting policies –
Customer financing support), page 156 (Note 18 to the financial
statements – Provisions for liabilities and charges) and pages 98
and 99 (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 credit 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.
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.
F Bribery and corruption
Refer to pages 105 and 106 (Safety & Ethics Committee report – Ethics
and compliance)
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 common practice.
The significance of the risk has not changed during the year.
Our response – We designed an approach to provide reasonable
assurance that we would identify bribery and corruption that would
have a material impact on the financial statements. We evaluated
and tested the Group’s policies, procedures and controls over the
selection and renewal of intermediaries, contracting arrangements,
ongoing management and payments and over responses to
suspected breaches of policy. We sought to identify payments made
to intermediaries during the year using data analysis techniques,
including focusing on intermediaries that have been rejected
through the Group's selection process or were identified during
investigations. We tested whether these had been subject to the
Group's controls, 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/or 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.
Our findings – We did not find any evidence of payments of bribes
or other corrupt behaviour during the year that would have had a
material impact on the financial statements (2015 audit finding: none).
Presentation and explanation of results
Refer to pages 18 to 35 (Business review), pages 36 to 39 (Financial
review), pages 131 to 135 (Note 2 to the financial statements –
Segmental analysis) and pages 98 and 98 (Audit Committee report
– Financial reporting)
G The presentation of ‘underlying profit’
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 133 and 134.
A significant recurring adjustment between the Adopted IFRS
income statement and the ‘underlying’ income statement relates
OTHER INFORMATIONRolls-Royce Holdings plc Annual Report 2016INDEPENDENT AUDITOR’S REPORT 180
Independent auditor’s report continued
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, the cost of restructuring
programmes that involve the substantial closure or exit from a site,
facility or line of business or other major transformation activities,
the effect of acquisition accounting (including any subsequent
impairments of goodwill or other intangible assets) and a number
of other items, including this year the £671m financial penalties
from agreements with investigating authorities in connection
with historic bribery and corruption involving intermediaries in
a number of overseas markets.
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 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.
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 (and
somewhat improved) 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 (2015
audit finding: proportionate). We found the overall presentation of
the ‘underlying’ financial information to be balanced (2015 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 segment 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.
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:
(1) the £4,420m unrealised fair value losses (2015: £1,315m losses) on
derivative contracts;
(2) the £217m profit (2015: £140m profit) arising from the impact of
improvements in lifecycle costs on long-term contracts;
(3) the £35m profit (2015: nil) arising from the impact of revising the
forecast long-term US dollar to sterling exchange rate on
long-term contracts;
(4) the £98m loss (2015: £24m loss) on long-term contracts arising
from new technical issues on Civil Aerospace large engines;
(5) the £64m loss (2015: £83m loss) arising from other estimate
changes on long-term contracts;
(6) the £30m loss (2015: nil) arising on Civil Aerospace new engine
programmes;
(7) the £918m (2015: £818m) of research and development charges;
(8) the £127m, net of a release of prior year provisions of £19m,
(2015: £88m, net of a £30m release) of restructuring charges;
(9) the £119m (2015: £71m) profit arising from sales of spare
engines to joint ventures;
(10) the £219m (2015: £75m) impairments of goodwill;
Rolls-Royce Holdings plc Annual Report 2016OTHER INFORMATION INDEPENDENT AUDITOR’S REPORT 181
(11) the £671m (2015: nil) financial penalties from agreements with
investigating authorities in connection with historic bribery
and corruption involving intermediaries in a number of
overseas markets;
(12) the £53m (2015: nil) release of accruals relating to termination
in prior years of intermediary services;
(13) the £306m loss (2015: nil) from the restructuring of the
UK pension schemes, including the buyout of the Vickers Group
Pension Scheme;
We subjected 34 (2015: 31) of the Group’s reporting components to
audits for group reporting purposes and 13 (2015: 11) to specified
risk-focused audit procedures. The latter were not individually
sufficiently financially significant 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.
(14) the £189m profit arising from refinement in the basis of
measurement of the risk contingency for forecasts of future
revenue to be earned under long-term contracts in 2015; and
(15) the £65m profit arising from the release of provisions against
previously impaired intangible assets for contractual
aftermarket rights in 2015.
We found that ample disclosure of these items had been provided in
the Annual Report and financial statements taken as a whole (2015
audit finding: ample).
The Group operates shared service centres for the bulk processing of
financial transactions in Derby (UK), Indianapolis (US) and Singapore,
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.
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 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, 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.
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 £30m (2015: £66m) and was determined with
reference to a benchmark of Group profit before taxation, averaged
over the last three years in order to take into account the volatility in
profits over this period, and normalised to exclude the impact of
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 2.9% (2015: 4.5%) of this benchmark and 0.6%
(2015: 41.3%) of total reported profit/loss 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 £4.4bn loss (2015: £1.3bn 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 £1.5m (2015: £3m) for income statement items; and
(iii) other identified misstatements that warrant reporting on
qualitative grounds.
SUMMARY AUDIT SCOPE
REVENUE
UNDERLYING PROFIT BEFORE TAX
89% (2015: 92%)
8% (2015: 6%)
3% (2015: 2%)
Audit for group reporting purposes
Specified risk-focused
audit procedures
Group-level procedures only
94% (2015: 94%)
5% (2015: 5%)
1% (2015: 1%)
TOTAL ASSETS
89% (2015: 91%)
8% (2015: 7%)
3% (2015: 2%)
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 materiality assessments, which ranged from £0.3m
to £24m (2015: £0.2m to £52m), having regard to the mix of size and
risk profile of the Group across the components. The work on 19 of
OTHER INFORMATIONRolls-Royce Holdings plc Annual Report 2016INDEPENDENT AUDITOR’S REPORT 182
OTHER INFORMATION INDEPENDENT AUDITOR’S REPORT
Independent auditor’s report continued
the 47 (2015: 21 of 42) components was performed by component
auditors and the rest by the Group audit team. The Group audit
team visited 33 (2015: 31) component locations in the UK, the US,
Germany 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.
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
• 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.
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
• the information given in the Strategic report and the Directors’
not made; or
report for the financial year is consistent with the financial
statements.
• we have not received all the information and explanations we
require for our audit.
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 53, 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 2021; or
• the disclosures on page 53 and in Note 1 to 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:
Under the Listing Rules we are required to review:
• the Directors’ statements, set out on page 53, in relation to going
concern and longer term viability; and
• the part of the corporate governance report on page 60 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 113, 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
13 February 2017
Rolls-Royce Holdings plc Annual Report 2016 SUSTAINABILITY ASSURANCE STATEMENT
183
Sustainability assurance statement
To: The stakeholders of Rolls-Royce Holdings plc
Independent limited assurance statement
INTRODUCTION AND OBJECTIVES OF WORK
Bureau Veritas UK Limited (Bureau Veritas) has been engaged by
Rolls-Royce Holdings plc (Rolls-Royce) to provide limited assurance
of selected sustainability performance indicators for inclusion in its
2016 Annual Report and website. This assurance statement applies
to the related information included within the scope of work
described below.
SELECTED INFORMATION
The scope of our work was limited to assurance over the following
information included within Rolls-Royce’s 2016 Annual Report (the
Report) for the period 1 of January to 31 of December 2016 (the
Selected Information):
• Energy consumption;
• Scope 1 and scope 2 greenhouse gas (GHG) emissions;
• Total reportable injury (TRI) rate; and
• The number of people reached through the science, technology,
engineering and mathematics (STEM) education outreach
programmes.
REPORTING CRITERIA
The Selected Information needs to be read and understood
together with the basis of reporting document, as set out at
www.rolls-royce.com/sustainability.
LIMITATIONS AND EXCLUSIONS
Excluded from the scope of our work is any verification of
information relating to:
• Activities outside the defined verification period; and
• Other information included in the Report.
This limited assurance engagement relies on a risk-based selected
sample of sustainability data and the associated limitations that
this entails. This independent statement should not be relied upon
to detect all errors, omissions or misstatements that may exist.
RESPONSIBILITIES
This preparation and presentation of the Selected Information in the
Report are the sole responsibility of the management of Rolls-Royce.
Bureau Veritas was not involved in the drafting of the Report or of
the Reporting Criteria. Our responsibilities were to:
• obtain limited assurance about whether the Selected Information
has been prepared in accordance with the Reporting Criteria;
• form an independent conclusion based on the assurance
procedures performed and evidence obtained; and
• report our conclusions to the Directors of Rolls-Royce.
ASSESSMENT STANDARD
We performed our work in accordance with International Standard
on Assurance Engagements (ISAE) 3000 Revised, Assurance
Engagements Other than Audits or Reviews of Historical Financial
Information (effective for assurance reports dated on or after
15 December 2015), and in accordance with International Standard
on Assurance Engagements (ISAE) 3410, Assurance Engagements on
Greenhouse Gas Statements, issued by the International Auditing
and Assurance Standards Board.
SUMMARY OF WORK PERFORMED
As part of its independent verification, Bureau Veritas undertook
the following activities:
1. Assessed the appropriateness of the Reporting Criteria for the
Selected Information;
2. Conducted interviews with relevant personnel of Rolls-Royce;
3. Carried out nine site visits, selected employing a risk-based
approach, in the UK, US, Germany, Italy and Singapore;
4. Reviewed the data collection and consolidation processes used
to compile the Selected Information, including assessing
assumptions made, the data scope and reporting boundaries;
5. Reviewed documentary evidence produced by Rolls-Royce;
6. Agreed a selection of the Selected Information to the
corresponding source documentation; and
7. Re-performed aggregation calculations of the Selected Information.
CONCLUSION
On the basis of our methodology and the activities described above,
nothing has come to our attention to indicate that the Selected
Information has not been properly prepared, in all material
respects, in accordance with the Reporting Criteria.
STATEMENT OF INDEPENDENCE, INTEGRITY AND COMPETENCE
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 verification over environmental,
social, ethical and health and safety information, systems
and processes.
Bureau Veritas operates a certified1 Quality Management System
which complies with the requirements of ISO 9001:2008, and
accordingly maintains a comprehensive system of quality control
including documented policies and procedures regarding
compliance with ethical requirements, professional standards and
applicable legal and regulatory requirements.
Bureau Veritas has implemented and applies a Code of Ethics, which
meets the requirements of the International Federation of
Inspections Agencies (IFIA)2 across the business to ensure that its
employees maintain integrity, objectivity, professional competence
and due care, confidentiality, professional behaviour and high
ethical standards in their day-to-day business activities.
The assurance team for this work does not have any involvement in
any other Bureau Veritas projects with Rolls-Royce.
Bureau Veritas UK Limited
London
2 February 2017
1 Certificate of Registration FS 34143 issued by BSI Assurance UK Limited.
2 International Federation of Inspection Agencies – Compliance Code – Third Edition.
OTHER INFORMATIONRolls-Royce Holdings plc Annual Report 2016
184
Additional financial information
Foreign exchange
The Group’s global corporate income tax contribution
Foreign exchange rate movements influence the reported income
statement, the cash flow and closing net debt 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
2016
1.23
1.36
1.17
1.22
2015
1.48
1.53
1.36
1.38
Change
-17%
-11%
-14%
-12%
The Group’s approach to managing its tax affairs
Introduction
Rolls-Royce is committed to (i) complying with laws in a responsible
manner and (ii) building and maintaining professional and
constructive working relationships with tax authorities based on
principles of mutual transparency and trust.
These commitments, which are explained in more detail below,
apply to all countries and all employees.
1. Tax planning
The Group manages tax costs through maximising the tax
efficiency of business transactions which 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. It must also be
done in a way that gives a tax result the Group reasonably believes
is not contrary to the clear intentions of the legislation concerned.
2. Relationships with tax authorities
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
allow the authorities to review possible risks.
Where appropriate and possible, the Group enters into consultation
with tax authorities to help shape proposed legislation and future
tax policy.
3. Transfer pricing
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.
4. Governance
The Board has approved this approach.
The Group Audit Committee oversees the Group’s tax affairs and
risks through periodic reviews.
The Group’s governance framework is used to manage tax risks,
establish controls and monitor their effectiveness.
The Group Tax Director is responsible for ensuring that appropriate
policies, processes and systems are in place and that the global tax
team has the required skills and support to implement this approach.
Around 85% 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. This is lower than 2015
(95%) due to losses in the Marine businesses. 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 115. 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;
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 2016 were £157m.
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 37.5%
(2015: 26.6%). The underlying tax rate including joint ventures and
associates can be found on pages 16 and 36. 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 98) – The Group Tax Director 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 (pages 124 and
126) – Details of key areas of uncertainty and accounting policies
for tax;
• Note 5 to the Consolidated financial statements (pages 137 to 139)
– Details of the tax balances in the Consolidated financial
statements together with a tax reconciliation. 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.
Rolls-Royce Holdings plc Annual Report 2016OTHER INFORMATION ADDITIONAL FINANCIAL INFORMATION 185
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.
and undrawn borrowing facilities of £2.3bn. Circa £170m of the
facilities mature in 2017.
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
BBB+
Outlook
Grade
Stable Investment
Stable 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 2016.
The impact of changes to IFRS, in particular IFRS 15 Revenue from
Contracts with Customers which have not been adopted in 2016
is included within the accounting policies in note 1.
Share price
During the year, the share price increased by 16% from 575p
to 668p, compared to a 12% increase in the FTSE aerospace and
defence sector and a 14% increase in the FTSE 100. The Company’s
share price ranged from 504p in February 2016 to 826p in July 2016.
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 debt
2016
1,864
107
1,971
(225)
2015
5,016
100
5,116
(111)
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.
During the year the Group extended the maturity of the £1,500m
committed bank borrowing facility from 2020 to 2021. The Group
also added a further £500m committed bank borrowing facility
with a maturity of 2019. Both of these facilities were undrawn at
the period end. At the year end, the Group retained aggregate
liquidity of £5.1bn, including cash and cash equivalents of £2.8bn
OTHER INFORMATIONRolls-Royce Holdings plc Annual Report 2016ADDITIONAL FINANCIAL INFORMATION 186
Other statutory information
Share capital
On 31 December 2016 1,838,796,763 ordinary shares of 20p each,
28,124,943,825 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).
• 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 in July 2017 must ensure that their instructions are lodged
with the Registrar no later than 5.00pm (BST) on 1 June 2017 (CREST
holders must submit their election in CREST before 3.00pm (BST)
on 1 June 2017). Redemption will take place on 5 July 2017.
At the 2017 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 3 July 2017 to shareholders on the
register on 28 April 2017 and the final day of trading with
entitlement to C Shares is 26 April 2017. Together with the interim
issue on 4 January 2017 of 46 C Shares for each ordinary share with
a total nominal value of 4.6p, this is the equivalent of a total annual
payment to ordinary shareholders of 11.7p for each ordinary share.
Further information for shareholders is on pages 190 and 191.
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 www.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
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 that 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 that holding.
The Special Share may only be issued to, held by and transferred
to the Special Shareholder or his successor or nominee.
SHAREHOLDER AGREEMENTS AND CONSENT REQUIREMENTS
There are no known arrangements under which financial rights
carried by any of the shares in the Company are held by a person
other than the holder of the shares and no known agreements
between the holders of shares with restrictions on the transfer of
shares or exercise of voting rights. No disposal may be made to a
non-Group member which, alone or when aggregated with
the same or a connected transaction, constitutes a disposal of the
whole or a material part of either the Nuclear propulsion business
or the assets of the Group as a whole, without the consent of the
Special Shareholder.
Rolls-Royce Holdings plc Annual Report 2016OTHER INFORMATION OTHER STATUTORY INFORMATION 187
Authority to issue shares
Change of control
At the AGM in 2016, authority was given to the Directors to allot
new C Shares up to a nominal value of £500m as an alternative to a
cash dividend.
In addition, a special resolution was passed authorising the
Directors to allot new ordinary shares up to a nominal value of
£122,579,775 equivalent to one-third of the issued share capital of
the Company. This resolution also authorised the Directors to allot
up to two thirds of the total issued share capital of the Company,
but only in the case of a rights issue.
A further 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 2017, and the Directors
propose to renew each of them at that AGM. The Board believes that
these authorities will allow the Company to retain flexibility to
respond to circumstances and opportunities as they arise.
Authority to purchase own shares
At the AGM in 2016, the Company was authorised by shareholders
to purchase up to 183,869,662 of its own ordinary shares
representing 10% of its issued ordinary share capital.
The authority for the Company to purchase its own shares expires
at the conclusion of the AGM in 2017 or 18 months from 5 May 2016
whichever is the earlier. A resolution to renew it will be proposed at
the 2017 meeting.
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.
Voting rights for employee share plan shares
Shares are held in various employee benefit trusts for the purpose
of satisfying awards made under the various employee share plans.
For shares held in a nominee capacity or if plan/trust rules provide
the participant with the right to vote in respect of specifically
allocated shares, the trustee votes in line with the participants’
instructions. For shares that are not held absolutely on behalf of
specific individuals, the general policy of the trustees, in accordance
with investor protection guidelines, is to abstain from voting in
respect of those shares.
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 2016, these facilities were
less than 15% drawn (2015: 22%).
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.
• 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.
• New LTIP (subject to shareholder approval) – awards would vest on
the change of control, subject to the Remuneration Committee's
judgement of performance and may be reduced pro rata to
service in the vesting period. Any applicable holding period will
cease in the event of a change in control.
OTHER INFORMATIONRolls-Royce Holdings plc Annual Report 2016OTHER STATUTORY INFORMATION 188
Other statutory information continued
Major shareholdings
Greenhouse gas emissions
At 13 February 2017 the following shareholders had notified an
interest in the issued ordinary share capital of the Company in
accordance with the Financial Conduct Authority’s (FCA's) Disclosure
Guidance and Transparency Rules.
In 2016, our total greenhouse gas (GHG) emissions from our
facilities and processes, including product test and development,
was 587 kilotonnes carbon dioxide equivalent (ktCO2e). This
represents a decrease of 3% compared with 602 ktCO2e in 2015.
Shareholder
BlackRock, Inc.
The Capital Group Companies, Inc.
ValueAct Capital Master Fund, L.P.
Harbor International Fund
Date notified
23 November 2016
6 January 2017
27 January 2017
2 February 2017
% of issued ordinary
share capital
5.00
4.69
11.01
3.98
We have introduced reporting of fugitive emissions of
hydroflurocarbons (HFCs), associated with air conditioning
equipment, into our GHG emissions figures for 2016. These include
emissions from our facilities in the UK, US, Canada and France only.
We do not anticipate that emissions from other facilities will have a
material impact. Figures from prior years (2012 to 2015) exclude
emissions associated with HFCs.
Directors
The names of the Directors who held office during the year are
set out on page 61.
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 including:
• 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.
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 (PAC) was US$42,742
(2015: US$45,021). 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 Group cannot affect how they are applied,
although under US Law, the business expenses are paid by the
employee's company. Such contributions do not require
authorisation by shareholders under the Act 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 2016 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)
2012
2013
2014* 2015
2016
219
241
301
242
240
313
313
382
360
347
532
554
683
602
587
153
155
132
132
12
14
15
11
719
852
749
730
0.048
0.062 0.055
0.052
* 2014 data has been restated to reflect the inclusion of greenhouse gas emissions data
from Power Systems. Figures for prior years (2012 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
and as set out
the energy, GHG, TRI rate and STEM data that has been highlighted with
on pages 41 to 44 and in the table above. The sustainability assurance statement is
included on page 183.
With the exceptions noted above, we have reported on all of
the emission sources required under the Companies Act 2006
(Strategic Report and Directors' Report) 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 statements.
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 2016.
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 www.rolls-royce.com/sustainability.
Rolls-Royce Holdings plc Annual Report 2016OTHER INFORMATION OTHER STATUTORY INFORMATION 189
Branches
Management report
The Strategic report and the Directors’ report together are the
management report for the purposes of Rule 4.1.8R of the FCA’s
Disclosure Guidance 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:
• So far as the Director is aware, there is no relevant audit
information of which the Company’s auditor is unaware.
• 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 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 170 to 175.
Post balance sheet events
In January 2017, the Group entered into Deferred Prosecution
Agreements with the UK Serious Fraud Office and the US
Department of Justice, and a leniency agreement with the Brazilian
authority, MPF. These agreements require that the Group pays
financial penalties, the details of which are set out on page 8.
There have been no other events affecting the Group since
31 December 2016 which need to be reflected in the 2016
Consolidated financial statements.
Financial instruments
Details of the Group’s financial instruments are set out in note 17
to the consolidated 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.
OTHER INFORMATIONRolls-Royce Holdings plc Annual Report 2016OTHER STATUTORY INFORMATION 190
OTHER INFORMATION SHAREHOLDER INFORMATION
Shareholder information
Financial calendar 2017-2018
4 MAY 11.00 AM
AGM
Pride Park Stadium
Pride Park
Derby
DE24 8XL
3 JULY
Payment of cash dividend on C Shares
3 JULY
Allotment of C Shares
5 JULY
Payment of C Share redemption monies
12 JULY
Purchase of ordinary shares for
CRIP participants (at the latest)
1 AUGUST
Announcement of half-year results
17 NOVEMBER
Record date for cash
dividend on C Shares
3 JANUARY
Payment of cash dividend on C Shares
3 JANUARY
Allotment of C Shares
5 JANUARY
Payment of C Share redemption monies
12 JANUARY
Purchase of ordinary shares for
CRIP participants (at the latest)
APR
2017
MAY
2017
JUN
2017
JUL
2017
AUG
2017
SEP
2017
OCT
2017
NOV
2017
DEC
2017
JAN
2018
FEB
2018
MAR
2018
27 APRIL
Ex-entitlement
to C Shares
28 APRIL
Record date for
entitlement to
C Shares
1 JUNE 5.00PM
Deadline for receipt
by Registrar of C Share
instructions (3:00pm
for CREST holders)
2 JUNE
Record date for cash
dividend on C Shares
26 OCTOBER
Ex-entitlement
to C Shares
27 OCTOBER
Record date for
entitlement to
C Shares
1 DECEMBER
5.00PM
Deadline for receipt
by Registrar of C Share
instructions (3:00pm
for CREST holders)
31 DECEMBER
Financial year end
FEBRUARY/
MARCH
Announcement
of full-year results
and 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), a 10-digit number
prefixed 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 the Registrar 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 redeem C Shares for cash
and either take the cash or reinvest the cash to purchase additional
ordinary shares 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 available from its website www.computershare.co.uk 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 www.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.
Rolls-Royce Holdings plc Annual Report 2016 SHAREHOLDER INFORMATION
191
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 will not 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
www.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
www.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 2016 – 31 December 2016
1 January 2016 – 30 June 2016
PREVIOUS C SHARE ISSUES
Visit www.rolls-royce.com to find out more about the latest
financial results, the share price, payments to shareholders,
the financial calendar and shareholder services.
Keeping up to date
You can sign up to receive the latest news updates to your phone or
email address by visiting www.rolls-royce.com and registering for
our alert service.
C Share dividend rate (%)
0.254
0.282
Record date for
C Share dividend
11 November 2016
3 June 2016
Payment date
4 January 2017
1 July 2016
No. of
C Shares issued
per ordinary
share
46
71
Record date
for
entitlement
to C Shares
21 October
2016
29 April
2016
Latest date
for receipt of
payment
instruction
forms by
Registrar
1 December
2016
1 June
2016
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 (%)
670.00
711.25
4.60
7.10
99.32
99.01
0.68
0.99
Issue date
4 January
2017
1 July
2016
Date of
redemption
of C Shares
6 January
2017
4 July
2016
CRIP
purchase
date
12 January
2017
5 July
2016
CRIP
purchase
price (p)
665.4883
709.4997
For information on earlier C Share issues, please refer to the Group’s website www.rolls-royce.com.
ANALYSIS OF ORDINARY SHAREHOLDERS AT 31 DECEMBER 2016
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
186,217
4,850
191,067
62,115
94,927
32,319
1,163
378
165
191,067
% of total
shareholders
97.46
2.54
100.00
32.51
49.68
16.91
0.61
0.20
0.09
100.00
Number
of shares
95,144,774
1,743,651,989
1,838,796,763
5,793,739
26,096,749
52,267,639
32,145,373
125,958,367
1,596,534,896
1,838,796,763
% of total
shares
5.17
94.83
100.00
0.32
1.42
2.84
1.75
6.85
86.82
100.00
OTHER INFORMATIONRolls-Royce Holdings plc Annual Report 2016 192
OTHER INFORMATION GLOSSARY
Glossary
anti-bribery and corruption
Annual General Meeting
Approved Maintenance Centre
Advanced Manufacturing Research Centres
annual performance related award plan
Articles of Association of Rolls-Royce Holdings plc
Authorised Service Centres
UK exit from the European Union
non-cumulative redeemable preference shares
commercial and administrative
contractual aftermarket rights
chief executive officer
chief financial officer
Rolls-Royce Holdings plc
cash flow per share
C Share reinvestment plan
Defense Advanced Research Projects Agency
US Department of Justice
Deferred Prosecution Agreements
European Aviation Safety Agency
Executive Leadership Team
earnings per share
European Union
euro
Financial Conduct Authority
UK-France Unmanned Combat Air System
Financial Reporting Council
foreign exchange
Great British pound or pound sterling
greenhouse gas
ABC
AGM
AMC
AMRCs
APRA
Articles
ASC
Brexit
C Shares
C&A
CARs
CEO
CFO
Company
CPS
CRIP
DARPA
DoJ
DPA
EASA
ELT
EPS
EU
EUR
FCA
FCAS
FRC
FX
GBP
GHG
Global Code Global Code of Conduct
Group
HPC
HS&E
IAB
IAS
Rolls-Royce Holdings plc and its subsidiaries
high performance culture
health, safety and environment
International Advisory Board
International accounting standards
IASB
IFRS
KPIs
ktCO2e
LIBOR
LTIP
LTPR
LTSA
MPF
MRO
MTC
NCI
OCI
OE
OECD
P&L
PBT
PPE
PSP
R&D
R&T
Registrar
RMS
RRSAs
SFO
SMR
SMS
SSA
STEM
the Code
Trent 1000
TEN
TRI
TSR
USD/US$
UTCs
International Accounting Standards Board
International financial reporting standards
key performance indicators
kilotonnes carbon dioxide equivalent
London inter-bank offered rate
long-term incentive plan
long-term planning exchange rate
long-term service agreement
Ministério Público Federal, Brazil
maintenance repair and overhaul
Manufacturing Technology Centre
non-controlling interest
other comprehensive income
original equipment
Organisation for Economic Co-operation and Development
profit and loss
profit before tax
property, plant and equipment
performance share plan
research and development
research and technology
Computershare Investor Services PLC
risk management system
risk and revenue sharing arrangements
UK Serious Fraud Office
small modular reactors
safety management system
Special Security Agreement
science, technology, engineering and mathematics
UK Corporate Governance Code
Thrust, Efficiency and New Technology
total reportable injuries
total shareholder return
United States dollar
University Technology Centres
Rolls-Royce Holdings plc Annual Report 2016 Designed and produced by
The paper used in the report contains 75% recycled
content, of which 75% is de-inked post-consumer.
All of the pulp is bleached using an elemental chlorine
free process (ECF).
Printed in the UK by PurePrint using their
environmental printing technology, using vegetable inks
throughout. PurePrint is a CarbonNeutral® company. Both
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Forest Stewardship Council® (FSC) chain-of-custody certified.
© Rolls-Royce plc 2017
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