2018
ANNUAL
REPORT
Rolls-Royce Holdings plc
PIONEERS
OF POWER
Rolls-Royce pioneers
cutting-edge technologies
that deliver clean, safe and
competitive solutions to
meet our planet’s vital
power needs.
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Financial Highlights and Contents
01
Group Financial Highlights *†
Free cash flow
£568m
2017: £259m
Full year payment to shareholders
11.7p
2017: 11.7p
Underlying revenue
Reported revenue
£15,067m
2017: £13,671m
£15,729m
2017: £14,747m
Underlying operating profit
Reported operating (loss)/profit
£616m
2017: £306m
£(1,161)m
2017: £366m
Underlying profit before tax
Reported (loss)/profit before tax
£466m
2017: £199m
£(2,947)m
2017: £3,898m
Underlying earnings per share
Reported earnings per share
(129.2)p
2017: 184.4p
16.0p
2017: 2.3p
Net funds/(debt) ø
£611m
2017: £(305)m
* All figures in the narrative of the Strategic Report are underlying unless otherwise stated.
The explanation of underlying and the reconciliation to the reported figures is in note 2
to the Consolidated Financial Statements on page 129.
† All references to organic change in the Strategic Report are at constant translational currency
and excluding M&A.
‡ Following the adoption of IFRS 15 Revenue from Contracts with Customers in 2018, the 2017
figures have been restated – see note 27 to the Consolidated Financial Statements.
Free cash flow is defined in note 26 on page 168.
ø Net funds/(debt) is defined on page 111.
Contents
Strategic Report
Group at a Glance
Chairman’s Statement
Chief Executive’s Review
Our Vision and Strategy
Business Model
Key Performance Indicators
Financial Review
Business Review
Civil Aerospace
Power Systems
Defence
ITP Aero
Non-Core Businesses
Sustainability
Technology
Environment
Our People
Ethics and Compliance
Non-Financial Information Statement
Principal Risks
Going Concern and Viability Statements
Directors’ Report
Directors’ Report Contents
Chairman’s Introduction
Board of Directors
Corporate Governance
Committee Reports
Nominations & Governance
Audit
Remuneration
Safety & Ethics
Science & Technology
Responsibility Statements
Other Statutory Information
Financial Statements
Financial Statements Contents
Consolidated Financial Statements
Company Financial Statements
Subsidiaries
Joint Ventures and Associates
Other Information
Independent Auditors’ Report
Sustainability Assurance Statement
Other Financial Information
Other Statutory Information
Shareholder Information
Glossary
02
04
06
10
12
14
16
24
24
30
34
38
40
41
41
42
44
48
49
50
55
56
57
59
62
71
71
75
82
96
102
105
200
106
107
175
178
184
186
197
198
200
204
206
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.
STRATEGIC REPORT 02 Strategic Report
Group at a Glance
Rolls-Royce Holdings plc Annual Report 2018
GROUP AT A GLANCE
Rolls-Royce pioneers cutting-edge
technologies that deliver clean, safe and
competitive solutions to meet our planet’s
vital power needs.
Underlying revenue mix in 2018
Non-core businesses *
5%
ITP Aero
5%
Defence
20%
Order backlog **
£63.1bn
Patents approved for filing
Civil
Aerospace
48%
892
Gross R&D expenditure
£1.4bn
Countries
50
Employees (year average)
54,500
* see page 40 for definition of non-core businesses.
** see page 14 for definition of order backlog.
Power
Systems
22%
Free cash flow
£568m
Underlying revenue
Reported revenue
£15,067m £15,729m
Underlying operating profit
Reported operating loss
£616m
£(1,161)m
Read more in our Business Review
on pages 24 to 40.
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Group at a Glance
03
Our core businesses in 2018
Civil Aerospace
Power Systems
Defence
ITP Aero
Civil Aerospace is a major
manufacturer of aero engines
for the large commercial
aircraft, regional jet and
business aviation markets.
The business uses engineering
expertise, in-depth knowledge
and capabilities to provide
through-life support solutions
for its customers.
Power Systems is a leading
provider of high-speed and
medium-speed reciprocating
engines and complete
propulsion systems. It serves
the marine, defence, power
generation and industrial
markets and includes civil
nuclear operations that supply
safety-critical systems.
Defence is a market leader
in aero engines for military
transport and patrol aircraft
with strong positions in combat
and helicopter applications. It
has significant scale in naval
and is the technical authority
for through-life support of the
nuclear power plant for the
Royal Navy’s submarine fleet.
ITP Aero is a global leader
in aero-engine design,
manufacture and maintenance.
Alongside the development,
manufacturing, assembly and
testing of engines, it provides
MRO services for regional
airlines, business aviation,
helicopters, industrial and
defence applications.
Underlying revenue
Underlying revenue
Underlying revenue
Underlying revenue
£7,378m
£3,484m
£3,124m
£779m
Underlying operating loss
Underlying operating profit
Underlying operating profit
Underlying operating profit
£(162)m
£317m
£427m
£67m
Underlying revenue mix
Underlying revenue mix
Underlying revenue mix
Underlying revenue mix
V2500
13%
Regional
4%
Business
Aviation
15%
Defence
7%
Civil Nuclear
5%
Marine
29%
Other
13%
Naval
8%
Transport
37%
Power
Generation
29%
Large
Engines
68%
Industrial
30%
Submarines
20%
Combat
22%
In-Service
Support
15%
Defence
Business
Unit
18%
Civil
Business
Unit
67%
See page 24
See page 30
See page 34
See page 38
STRATEGIC REPORT
04
Strategic Report
Chairman’s Statement
Rolls-Royce Holdings plc Annual Report 2018
CHAIRMAN’S STATEMENT
The underlying strength of our business model
is increasingly apparent. We are focused on
generating strong returns and the cash flow that
will allow us to compete even more effectively
in what continue to be attractive growth markets.
Our long-term goal is to be the world’s leading
industrial technology company. We have the
potential to achieve that.
In my statement last year I talked about
the momentum that was building in our
Company after a challenging period.
This momentum has continued and there
were some notable achievements and
advances in the year, despite a significant,
unanticipated operational setback in
our Civil Aerospace business.
The underlying strength of our business
model is increasingly apparent. After a
period of heavy investment, we are now
focused on generating strong returns and
the cash flow that will allow us to compete
even more effectively in what continue to
be attractive growth markets. Our long-term
goal is to be the world’s leading industrial
technology company. We have the potential
to achieve that.
2018 Overview
We entered the year with a determination
to improve our efficiency and operating
performance and a refined vision and
strategy (see page 10). We embarked on
an ambitious restructuring programme
and increased the focus of the Group by
rationalising our portfolio and simplifying
our corporate structure. This is an ongoing
task, and pace of implementation has been
uneven, but the signs of progress are
clear. Your Board and management team
absolutely recognise the need to improve
our operational competitiveness and
performance, particularly in our
Civil Aerospace business.
Strategically we have sustained our
investments in the technologies that will
ensure our long-term competitiveness
and innovation ambitions (see page 41).
Advanced materials and electric and hybrid
technologies will be as crucial to our success
as artificial intelligence and digitalisation.
IAN DAVIS
CHAIRMAN
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Chairman’s Statement
05
The successful development and adoption
of digital technologies across the whole
of our Group will be fundamental to both
improved cost efficiency and quality, and
also to our long-term growth platforms.
I am particularly excited about some of our
achievements in this area – for example the
establishment of R² Data Labs and creation
of a digital ecosystem through partnerships
with start-ups and academia.
I would like to highlight the exceptional
performance of Power Systems. The business
has made the most of strong end markets,
but additionally has made some innovative
breakthroughs in services and new
technologies such as hybrid power for trains.
We are also seeing tangible examples of
technology transfer between Power Systems
and our other businesses, particularly in
aftermarket services, a crucial component
of the Rolls-Royce business model.
We have had setbacks, however, the most
significant of which has been operational
issues with our in-service fleet, particularly
with our Trent 1000 engine. This has caused
pain for us and even more importantly for
many of our customers. In the end, businesses
are there for their customers and we very
much regret the disruption caused. This
has been an area of continuing focus and
oversight by the Board. That said, I would
like to draw attention to the heroic efforts
of our engineering and customer support
teams (and indeed to those of our partner
customers) in addressing the issues, while
maintaining their absolute dedication to
ensuring product safety – our most
important priority.
At the time of writing we do not have clarity
on the UK’s withdrawal from the European
Union. During 2018 we took steps to prepare
for different potential outcomes with a
particular focus on supply chain continuity
and retaining essential capabilities. The
potential risks and impacts considered by
our Brexit steering group is included in the
Principal Risks section in this report (see
page 50) and the risks relating to Brexit
were also included in our viability
assessment (see page 55).
Stakeholder trust and confidence
Building credibility and trust with
stakeholders is a priority. We held another
Capital Markets event with our investors
in 2018, at which we clarified our financial
metrics and performance and provided
a detailed review of our Power Systems
business and of the organisational and
cultural changes we are planning.
We specified our targets and ambitions for
cash flow – our priority near-term financial
objective – but also introduced a new
measure: cash return on invested capital
(CROIC). This will be a primary long-term
financial measure and the basis for capital
allocation decisions.
It is proposed that the final payment for 2018
is unchanged from 2017 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.
We have continued also to focus on engaging
with our employees. I talk more about this
in the Corporate Governance section (see
page 67). Irene Dorner has been designated
as Employee Champion on the Board and
she has geographic support in this role
from Beverly Goulet in North America. All
Directors are encouraged, and expected,
to visit our operations across the world and
to engage with employees on these trips at
open invitation Meet the Board events. This
helps us to understand the culture of the
Company as well as to hear employees’
concerns and exciting ideas directly.
Such visits also help us observe progress
on key topics such as diversity and safety
awareness. At the same time, it helps
demystify the Board and, hopefully,
makes us more human and accessible.
We continue to engage actively with
governments and social organisations to
understand our broader impact on issues
such as the environment.
We have always pursued the goal of cleaner,
safer and more competitive power, and we
recognise our role and responsibility in
enabling the transition to a low carbon
world. We understand our obligations and
are keen to partner and collaborate to find
solutions while delivering on our core
business purpose.
“Strategically we
have sustained our
investments in the
technologies that will
ensure our long-term
competitiveness and
innovation ambitions.”
Shareholder payments
Although we are emerging from a very
significant investment cycle, the needs
of the business are substantial. Steps have
been taken in 2018 to further strengthen
the balance sheet. However, it is sustainable
free cash flow from within our business
upon which we must base our shareholder
payment strategy and we still have work to
do in order to deliver that.
Our performance has improved significantly
from the position in which we found
ourselves three years ago and it remains
our stated objective, in the long term,
to progressively rebuild payments to
shareholders to an appropriate level,
subject to the cash needs of the business.
This reflects the Board’s long-standing
confidence in the strong cash generation
potential of Rolls-Royce, as we build our
share of the widebody engine market and
benefit from the consequent increase in
services revenue.
Board developments
During the year we announced the
appointment of Nick Luff as a Non-Executive
Director. He joined the Board following
the AGM and is a member of the Audit
Committee and Safety & Ethics Committee
as well as the Nominations & Governance
Committee. A chartered accountant and
chief financial officer of RELX Group, he
brings to your Board additional financial
and accounting acumen. He also has
expertise and experience in cyber security
and is active in the oversight of this key
activity – and risk – for the Group.
Looking forward
Our medium-term prospects remain bright
and the long-term growth opportunities
are significant. Our immediate focus is
on improved financial and operational
performance so that we have a sound and
credible financial platform for productive
long-term investment into rapidly growing
markets. Our technology platforms – in gas
turbines, in micro-grids and in electrical
propulsion – will be fundamental to this.
We have further work to do on restructuring
and on improving our internal processes
and controls, and shifting the culture
remains an important priority as Warren
talks about in his statement.
I would like to conclude by thanking all my
colleagues and co-workers at Rolls-Royce
for their dedication and hard work in
challenging circumstances. Their pride
in the Company, and the determination
to improve and develop, are one of our
greatest assets.
Ian Davis
Chairman
STRATEGIC REPORT 06
Strategic Report
Chief Executive’s Review
Rolls-Royce Holdings plc Annual Report 2018
CHIEF EXECUTIVE’S REVIEW
Our goal was to make 2018 a breakthrough year for Rolls-Royce
and real progress has been made in realising that ambition. We are
seeing the crucial behavioural changes we need to build momentum
and sustain these positive changes.
Progress in 2018
At the start of the year I made clear that our
goal was to make 2018 a breakthrough year
for Rolls-Royce and real progress has been
made in realising that ambition. We have
taken significant strategic steps, with the
simplification of our Group and subsequent
launch of a more fundamental restructuring
positioning us for success. We are now
starting to see the crucial cultural and
behavioural breakthrough Rolls-Royce
requires to build real momentum and
sustain the positive change seen in 2018
for the long term, in support of our
aspiration to be the world’s leading
industrial technology company.
Underlying financial results were ahead
of expectations with strong growth from
Civil Aerospace and Power Systems and
a steady performance in Defence and
ITP Aero. We reported good growth in
underlying revenues and delivered a
material improvement in underlying profit
and free cash flow – another step along the
journey towards free cash flow of at least
£1bn by 2020. During the year we extended
that financial horizon, with a mid-term
ambition for free cash flow per share to
exceed £1, in line with our ongoing drive
to increase openness and transparency
with investors. The message is clear: after
a decade of significant investment we are
committed to delivering improved returns
while continuing to invest in the innovation
needed to realise our long-term aspiration.
While we achieved a number of important
operational and technical milestones during
the year, we faced the challenge of
in-service issues with the Trent 1000 which
caused significant disruption for a number
of our customers, which we sincerely regret.
Given the advanced nature of the
engineering requirements of aerospace
products, such in-service issues can occur
in our industry and it is the behaviour of our
Company in dealing with them which will be
WARREN EAST
CHIEF EXECUTIVE
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Chief Executive’s Review
07
remembered by customers. We are
recognising a significant exceptional
charge within our financial figures for
2018 as a result of the abnormal cost of
our contribution to dealing with customer
disruption, but we are managing the issues
and good progress was made in the year
on long-term solutions (see page 24).
Our colleagues in Civil Aerospace have
worked tirelessly to minimise disruption:
designing new parts and inspection
techniques and gaining the necessary
regulatory approvals; increasing blade
manufacturing; and growing maintenance
capacity. I have been particularly encouraged
by the attitude of the wider business to this
challenge. Everyone has rallied round and
taken the necessary mitigating actions in
order to accommodate the additional costs
that we incurred during the year. As a whole
organisation we responded and delivered,
and that is a real breakthrough.
Consistent with the announcement from
Airbus in early 2019 that A380 deliveries
will end in 2021, we will deliver our final
tranche of Trent 900 engines over the next
two years. The financial impact of this has
been reflected as an exceptional item.
We look forward to maintaining the in-service
Trent 900 fleet for many years to come.
Strategic and cultural change
We entered the year with a clear, refreshed
vision to pioneer cutting-edge technologies
that deliver clean, safe and competitive
solutions to meet our planet’s vital power
needs (see page 10). Following that vision,
the year began with the further simplification
of the Group from five operating businesses
to three core units – Civil Aerospace, Power
Systems and Defence – enabling us to act
with much greater pace in meeting the needs
of our customers. Creating a Defence
operation with increased scale, for instance,
will present us with further opportunities
in the future. ITP Aero, acquired in 2017,
remains a separate business unit within
the Group.
We also took the decision to carry out a
strategic review of our Commercial Marine
operations, resulting in the sale of the
business, due to complete in the first half
of 2019. The team in Marine has responded
admirably to a significant downturn in the
offshore oil & gas market to reduce its cost
base, while simultaneously carving out an
industry-leading position in ship intelligence
and autonomous shipping. We believe,
however, that its future will be better served
under new ownership. This business has
been reclassified within assets held for sale.
During the year we sold L’Orange, which
supplies fuel injection technology; enabling
Power Systems to focus on other long-term,
high-growth opportunities and the Group
to allocate our capital to core technologies.
These strategic changes enabled us to
embark upon a 24-month programme of
fundamental restructuring, to create smaller
and more cost-effective corporate and
support functions and reduce management
layers and complexity (see page 08). We
expect the proposed restructuring will lead
to the reduction of around 4,600 roles
by mid-2020. By the end of the year our
non-manufacturing headcount had reduced
by around 1,300. It is never an easy decision
to reduce our workforce, but we must
fundamentally change the way we work.
We are replacing a heavily-centralised
control culture with empowered businesses,
operating within a framework, in a leaner
structure with much clearer accountabilities.
We have reduced the size of our head office
to focus solely on corporate governance,
strategy and ensuring that we fulfil our
corporate responsibilities as a publicly-
listed company. From the start of this year,
our businesses are being supported by a
Group Business Services (GBS)
organisation, which pools our professional
and transactional services; and an
Innovation Hub, which draws together
skillsets and expertise which have common
application across the Group including
digital capabilities, future technologies and
strategic insight. This activity will foster
2018 priorities
Customers
Technology
Resilience
Financial progress
mitigate impact to
rectify in-service
issues, ramp up
large engine
production,
grow service
capabilities
focus through
product
digitalisation,
electrification
and revitalisation
through
adaptability with
a spotlight on
safety, diversity &
inclusion, and the
highest ethical
standards
delivering
improving free
cash flow,
strengthening
balance sheet,
more disciplined
capital allocation
quicker decision-making but must be
accompanied by the appropriate behavioural
change; only then will this breakthrough
be sustained into the long term.
The move to more empowered businesses
removed the requirement for a Group Chief
Operating Officer role and the Executive
Team is now firmly focused on driving the
required cultural change across the Group.
We are embedding the behaviours that we
need from our people through our care
framework (see page 44), starting with the
newly created Enterprise Leadership Group
(ELG), consisting of the top senior managers
from across the Group. Formed in 2018, the
ELG gathered together for the first time
early in 2019 and their level of energy was
palpable – a clear signal that senior leaders
are highly engaged. Crucially, there is a
fundamental understanding that they are,
first and foremost, leaders of the whole
enterprise, not solely of a business or
function. That enterprise-first mentality is
vital to create the collaborative and agile
organisation we need to become the world’s
leading industrial technology company.
Delivery on 2018 priorities
At the beginning of the year, we set out
four key priorities:
Priority 1: Customers
Our simplification and restructuring will
shift our centre of gravity much closer
to our customers and during the year we
delivered on many of our promises to them.
We joined Airbus and Qatar Airways to
celebrate the delivery of the first
Airbus A350-1000 to enter service, the first
aircraft to be powered by our Trent XWB-97
engines; welcomed the delivery of the first
A350 to mainland China; and saw the
handover of the first A330neo, powered by
our Trent 7000, to launch customer TAP Air
Portugal. Civil Aerospace deals signed
during the year included Trent XWB engine
and long-term TotalCare service agreements
with China Eastern Airlines and Turkish
Airlines. During the year, the Trent XWB
passed two important milestones as the
fleet recorded two million flying hours just
days after the 500th engine was delivered
to Airbus. The Trent 700 fleet, meanwhile,
passed two even greater milestones as the
fleet recorded 50 million flying hours and
the 2000th engine delivery. We also
announced our first launch customers for
LessorCare, designed to meet the
aftermarket needs of aircraft lessors, and
subsequently added LifeKey, which gives
customers greater control over their assets.
STRATEGIC REPORT 08
Strategic Report
Chief Executive’s Review
Rolls-Royce Holdings plc Annual Report 2018
During the year, we launched a new engine
family for business aviation, with the
introduction of the Pearl, and the first engine
– the Pearl 15 – will be the sole engine for
Bombardier’s latest business jets
(see page 28).
end of the year. Overall we delivered fewer
Trent engines during the year than we
anticipated, a situation which we have been
working hard to address in early 2019. We
also had delivery issues in our Defence and
Power Systems businesses.
two-thirds related to new technologies
for UltraFan, electrical and digital.
Priority 3: Resilience
During the year, we established and
introduced a new simple leadership
framework of behaviours and values and
this will be used as a performance measure
for managers this year. We successfully
rolled out our new Zero Harm programme
and accompanying Life Saving Rules, and
continued to make progress on our health
and safety medium-term goals, though
unfortunately our progress has been slower
than we would have liked.
We continue to make progress towards
our 2020 diversity targets during the year,
actively recruiting from groups typically
under-represented in our sector, particularly
women (see page 46). As part of our
restructuring and simplification work, we
have made a good start on the simplification
of our management system, removing
thousands of spreadsheets and reducing
processes although much remains to be
done in 2019 to simplify how we work.
Priority 4: Financial progress
Our underlying results for 2018 were ahead
of expectations (see page 18), as we
benefited from increased engine flying
hours and higher volumes of shop visits in
Civil Aerospace; growth across most of our
Priority 2: Technology
During the year we made encouraging
progress on existing programmes, new
demonstrators and future technologies.
We are making excellent progress on our
new UltraFan demonstrator (see page 41),
which is not only the foundation upon which
our future large civil aero engines will be
based but provides underlying
technologies that will support other areas
of our Group. We made encouraging
progress in our strategy to champion
electrification: developing programmes
to demonstrate small-scale full-electric and
hybrid-electric flight (see page 09) and
launching our own micro-grids offering
(see page 32); and in our strategy to
reinvent our business with new digital
technologies, R2 Data Labs – our data
innovation team – delivered significant
incremental value during the year for us
and our customers by using new techniques
and technologies. Our Digital Academy
trained hundreds of employees in data
innovation. As evidence of the scale of
progress made in 2018, we had 892 patents
approved for filing, a new record, with
Structure
People
Culture
Processes
Creating empowered businesses, operating
within a clear framework and supported by
a Group Business Services organisation, will
lead to a reduction in our indirect workforce.
The restructuring is being led through
workstreams sponsored and owned by
Executive Team members. We have
challenged inefficiencies: for instance,
we explored over 18,000 different job
types, identifying over 2,000 activities that
we can stop or significantly change. We are
reducing the number of layers in the
organisation and increasing the spans – the
number of direct reports held by managers
– closer to best practice.
We were selected by the UK Government to
play a pivotal role in Team Tempest, providing
power and propulsion for the new UK combat
fighter programme; scored a significant
victory with our first partnership on a major
military programme with Boeing Defense,
powering the US Navy’s new MQ-25 Stingray
aircraft; and, following a concerted effort
over the past few years to get our
performance back on track, 2018 saw us
deliver on all our promises to the Astute and
Dreadnought submarine build programmes.
We signed memoranda of understanding
for hybrid rail PowerPacks in Germany,
Ireland and the UK (see page 31) and
increased the number of long-term service
agreements with customers of Power
Systems, increasing our opportunities in the
aftermarket and further replicating the
model we pioneered in Civil Aerospace.
For some of our customers, however, the
year was marred by the in-service issues
with the Trent 1000 (see page 26). Coupled
with challenges within our external supply
chain, the increased load placed on our test
capacity by the Trent 1000 issue meant
delays in deliveries of the Trent 7000 at the
OUR FUNDAMENTAL
RESTRUCTURING
A significant step towards making 2018 a
breakthrough year came in June with the
launch of our fundamental restructuring.
The 24-month programme will create an
organisation that will better enable us to
maximise the economic value of the very
significant investments Rolls-Royce has
made over the past decade; realise the
growth potential embedded in our
business; and seize the opportunities we
see across all our markets.
We are addressing four areas: structure,
culture, processes and people. They are
highly interconnected and it is only by
simultaneously attacking all four that we
can bring about lasting change. This means
looking at both reducing activity and
enhancing capability.
The restructuring will create a simpler,
healthier and more dynamic organisation
with clearer accountabilities, greater
productivity and quicker decision-making.
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Chief Executive’s Review
09
end markets in Power Systems coupled with
an increasing focus on growing services
revenue; and Defence kept a tight control
on costs, while seeking new opportunities.
ITP Aero performed solidly. We achieved a
modest reduction in the loss we make on
widebody engine sales, though our efforts
were impacted by the need to reallocate
engineering resource to address in-service
issues. Our cash performance was
particularly strong and represents an
important step in the right direction.
2019 priorities and
longer-term outlook
We have established a firm foundation in
2018 on which to build the success of
Rolls-Royce for the longer term. In the
coming year, we will continue to focus on
meeting our commitments to customers,
especially in terms of fixing the current
in-service issues and achieving our
delivery targets.
We must continue to invest in the
technologies that we need, not only to
further improve our current products,
but position ourselves for future growth.
We must further increase diversity within
our business and continue the trajectory
we have established over the past few years
to create real momentum behind the
behavioural changes that we began in 2018.
Too often, our business has looked on cost
reduction measures as a short-term fix and
Building beyond the breakthrough in 2019
2019 priorities
Customers
– Increase
production
volume
– Expand service
network
– Mitigate
disruption
from in-service
issues
Technology
People & culture
Financial
– Revitalise
service
– Develop new
engine
architecture
– Advance
electrification
projects
– Build a
resilient
business
– Continue
restructuring
programme
– Further simplify
processes
– Diversity &
inclusion
– Continue
improving
free cash flow
– Further
strengthen
balance sheet
– Enhance
capital
allocation
discipline
costs have crept back into the business.
We must not allow that to happen again so
that we can take a further significant step
towards our free cash flow ambitions.
We must continue to attack costs, driving
the restructuring at pace – not least
because prolonged uncertainty places
unwelcome strain on our people. Our
longer-term outlook remains very positive.
We have invested significantly over the past
decade to build a commanding position in
our core growth market of civil aerospace.
Since 2010, we have invested significantly in
cutting-edge research and development,
world-class factories and modern facilities.
We have launched six new civil engines
including the world’s fastest-ever selling
civil large engine, the Trent XWB, and
amassed orders for around 2,300 aero
engines for widebody aircraft. As a result of
our innovation and investment, we are well
positioned to become the world leader in
large aircraft engines.
Our restructuring will help us maximise the
economic value of our past investments,
realise the growth potential embedded in
our business and seize the opportunities we
see across all our markets. In order to make
that sustainable, however, we must embed
behavioural change throughout the
organisation. In short, what we must achieve
in 2019 is to build beyond the breakthrough
seen in 2018.
BLUE SKY THINKING
An exciting new market in aerospace
for electric vertical take-off and landing
(EVTOL) vehicles is being opened up
by a combination of new electrical and
autonomous technologies and external
factors including an increasingly urban
population and humanity’s never-ending
desire to move more quickly from A to B.
During 2018, Rolls-Royce unveiled a
concept EVTOL design that could be
adapted for personal transport, public
transport, logistics and military
applications. It could take to the skies as
soon as the early 2020s. It builds upon
experience we gained by providing
hybrid-electric propulsion for trains,
naval vessels and other applications.
Any commercial introduction would
involve working with strategic partners.
The initial concept vehicle uses gas turbine
technology to generate electricity. In this
hybrid-EVTOL configuration it could carry
four or five passengers at speeds up to
250mph for approximately 500 miles.
STRATEGIC REPORT 10
Strategic Report
Our Vision and Strategy
Rolls-Royce Holdings plc Annual Report 2018
OUR VISION AND STRATEGY
We are one of the world’s leading industrial technology companies. As pioneers,
we must continuously innovate to provide the best solutions. This requires us to
anticipate the opportunities and challenges our customers will face.
Our vision
Our strategy
Pioneering
the power
that matters
Rolls-Royce pioneers cutting-edge
technologies that deliver clean, safe
and competitive solutions to meet our
planet’s vital power needs.
Our strategy reflects
three horizons:
Horizon 1 Maintain and
defend core businesses
Horizon 2 Nurture
emerging businesses
Horizon 3 Create genuinely
new businesses
At the same time we need
to manage the transition
of technologies, capabilities,
resources and value across
business horizons.
Transform our business
Champion
electrification
Vitalise
existing
capabilities
Reinvent
with
digital
Build a balanced portfolio
Our progress in 2O18
Horizon 1
Vitalise existing capabilities
We are developing next generation
technologies to sustain and grow our
current competitiveness; investing in our
existing thermo-mechanical products to
ensure that they provide clean, safe and
competitive solutions for our customers.
Over a 12-month period ending in 2018,
Civil Aerospace put an unprecedented
three new large engines into service: the
Trent 1000 TEN on the Boeing 787-10, the
Trent XWB-97 on the Airbus A350-1000
and the Trent 7000 on the Airbus A330neo.
We also launched a new business jet engine,
the Pearl 15, and have made strong progress
with its testing regime ahead of its entry
into service on the Bombardier Global
5500 and 6500.
We continued to progress our next
generation widebody engine programme
by running the Advance3 demonstrator at
full power for the first time. This includes
a new engine core that will sit at the heart
of our UltraFan demonstrator. We tested
UltraFan’s new lean-burn and low-emissions
combustion system and signed a
collaboration agreement with Airbus
for the integration of the UltraFan
demonstrator for flight testing.
Within Power Systems, we launched new
liquid fuel and gas engines; our Chinese
joint venture MTU Yuchai Power unveiled
its first engine; and in India we signed an
agreement to create another engine
manufacturing joint venture.
In Defence, Rolls-Royce engines were
selected by Boeing to power the US Navy’s
new MQ-25 Stingray aircraft, which will
provide unmanned, carrier-based air-to-air
refuelling. Each MQ-25 aircraft will be
powered by a single Rolls-Royce AE 3007N
engine – the latest variant of the AE family.
Horizon 2
Champion electrification
We are investing in new power solutions for
our long-term success. We are building on
our strong heritage in thermo-mechanical
engineering to produce state-of-the-art
electro-mechanical and hybrid power
systems. We already successfully combine
our engines in hybrid systems for trains
(see page 31), naval vessels and micro-grids
(see page 32) and are now taking that
expertise into the air.
We are developing hybrid propulsion
solutions, built around existing gas turbine
engines such as the M250, for a range of
civil aviation applications including personal
mobility vehicles (see page 09) and larger
passenger aircraft. Rolls-Royce Electrical
is increasingly working with partners
ranging from existing airframers such as
Airbus, with whom we are partnering on
the E-Fan X hybrid-electric demonstrator
aircraft programme, to newer entrants
including Aston Martin. Many of these
technologies are likely to have potential
within Defence, which is already testing
electrical generators embedded within
military engines.
Alongside hybrid-electric flight, we are
exploring all-electric aviation, leading
a project known as Accelerating the
Electrification of Flight (ACCEL) to
explore the use of a high-power electrical
system in a demonstrator aircraft; and new
technologies that could provide solutions
to the challenge of energy storage.
Reinvent with digital
We are using digital technologies across
our activities to generate new insights, new
solutions and new opportunities. We are
creating digital versions of products,
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Our Vision and Strategy
11
processes and facilities – known as digital
twins – to improve our performance and
further enhance our service to customers.
At the start of the year, we launched
R² Data Labs, to act as a data innovation
catalyst within the business. It exists to
deliver untapped value from data, acting as
a development hub for new services, and a
data innovation community with hundreds
of employees undertaking projects within
our businesses. It is also an agent for
behavioural change, using data innovation
sprints – short, focused bursts of activity –
to solve issues and create value.
During the year, we built up a digital
ecosystem, sealing partnerships with
leading technology start-up accelerators
and partnering with The Alan Turing
Institute in the UK, Germany’s Hasso
Plattner Institute and Singapore’s Defence
Science and Technology Agency (DSTA).
New digital opportunities unlocked across
the Group in 2018 included: helping airline
customers use data to reduce delays and
cancellations; reducing fuel costs by
understanding taxiing fuel consumption,
diversion flight planning and even drinking
water requirements; and developing an
algorithm to collect comprehensive weather
data for every airport around the world.
This information improves engine
maintenance planning by allowing for the
removal of distorting factors – such as
humidity – from engine health monitoring
readings, which could otherwise lead to
unnecessary maintenance visits.
In Defence, data science is now being used
to streamline maintenance schedules and
significantly reduce disruption to customer
operations. At the same time new digital
products and services from Power Systems
are increasing returns from the aftermarket.
Horizon 3
Transform our business
We are advancing new opportunities that
could capture substantial growth and value
for the Group in the future. In addition to
emerging opportunities linked to our current
activities, electrification and digitalisation
offer the potential for completely new
markets and business models. For example,
in Civil Aerospace, the electrification of
aircraft may transform the movement of
people and freight. Similarly in Power
Systems, the digitalisation of customer
relationships may allow micro-grids to
be funded directly by offering power
as a service.
Rolls-Royce is seeking to act as a disruptor,
rather than an incumbent. We believe that
the competitive marketplaces where we
operate will increasingly be shaped by new
entrants and aggressive innovators from
other industries. To help us participate in
this process, we have established Rolls-Royce
ventures to invest in and collaborate with
new technology start-ups.
Build a balanced portfolio
We actively manage our portfolio of activities
to ensure that technologies, capabilities,
resources and value are effectively and
efficiently allocated across the Group.
As part of this process, we focus on key
activities that are aligned with our strategy
and our business model. During the year,
this led to the disposal of L’Orange and the
announcement of the disposal of our
Commercial Marine business.
TRENDS SHAPING
OUR MARKETS
We believe three key trends will define
the world’s future power needs:
— the growing demand for cleaner,
safer and more competitive power;
— electrification; and
— digitalisation.
As we move to a low carbon global
economy, our engines will become part
of broader, hybrid-electrical systems with
lower emissions and environmental impacts.
We will increasingly act as a systems
integrator, combining our traditional
mechanical expertise with electrical
technology. To provide lifelong performance
for our customers, we will use the huge
power of digitalisation and create new
insights using new technologies including
artificial intelligence.
Global economic power and rising prosperity
will increase demand for travel, trade and
energy. Consensus forecasts are for air
traffic (revenue passenger kilometres) to
achieve a compound annual growth rate
of approximately 4.5% over the next
20 years.
STRATEGIC REPORT 12
Strategic Report
Business Model
Rolls-Royce Holdings plc Annual Report 2018
BUSINESS MODEL
Our resources
Brand
Our brand enables us to
sustain relationships, secure
business and attract talent.
People and culture
Our success is a result of
the commitment, skills and
ingenuity of our employees
and their determination
to be ‘Trusted to Deliver
Excellence’.
Technology
Our technology enables
us to meet emerging
customer needs.
Engineering capability
Our engineering expertise
enables us to embed
cutting-edge technologies
into outstanding products.
Advanced
manufacturing
capability
Our manufacturing processes
enable us to embed advanced
technologies in our products
quickly and efficiently.
Service capability
Our service orientation
enables our customers to
focus on their core activities.
Partners
Our partners enable us to
collaborate in technology,
manufacturing and services.
Financial strength
Our financial strength
enables us to pursue
long-term cutting-edge
technologies and to support
our customers throughout
the entire product lifecycle.
Rolls-Royce is one of the world’s leading industrial
technology companies. We provide power solutions for
our customers which combine three elements: advanced
technologies; system solutions; and system life. These are
delivered as part of a virtuous cycle which begins with the
development of cutting-edge technologies. We optimise
the value of our power solutions throughout their lives.
Cutting-edge
technologies
1
Dynamic
technology
management
5
2
Resilient
business
4
3
Long-term
value creation
Compelling
customer
propositions
Our competitive advantage comes from:
Cutting-edge
technologies
System
solutions
System
life
We apply cutting-edge
technologies to provide
cleaner, safer and more
competitive power. Our
technologies ensure that our
customers have power that
meets their emerging needs.
We package technologies
into systems that provide
complete solutions for our
customers. Our solutions
mean that our customers
have power from a single,
trusted partner.
We care about the
performance of our
solutions throughout their
lives. Our through-life
capabilities maximise
availability and enable
us to meet changing
customer needs.
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Business Model
13
1 Cutting-edge
technologies
Cutting-edge technology allows us
to meet emerging customer needs.
We pursue new technologies that
will help us deliver clean, safe,
competitive solutions.
We identify the key horizon
technologies that will generate
a competitive advantage for
Rolls-Royce in the long term.
3 Compelling
customer propositions
Our customer relationships are
our greatest strength. We offer our
customers a combination of advanced
technology, in a complete systems
solution, optimised throughout its life.
We create combinations of
technology, systems and aftermarket
performance that make our customers
more competitive.
Link to risks A B F
Link to risks A B C D F G
2 Dynamic technology
management
4 Long-term
value creation
Our future technological world is
complex with many exciting new
challenges across everything we
do. We respond to this with broader
and deeper collaboration with others,
and with a more dynamic approach
to ensure that our technology brings
the most value to our customers
and our business.
We are inclusive in the pursuit,
co-operative in the application and
aggressive in the commoditisation
of technology.
Link to risks A B D F G I
Our activities are complex and global.
We share best practice across the
Group and assess where and how
activities can offer the best value.
Link to risks A B D G
5
Resilient business
Our activities have a major impact
on our planet, the global economy
and on communities. To ensure that
we are free to operate and invest for
the long term, we are thoughtful
and careful about the business we
undertake, our financial resources
and our wider impact.
We build balance in our activities,
strength in our balance sheet and
behave sustainably.
Link to risks C D E F H I J
Value creation for
our stakeholders in 2018
Customers
We develop product
solutions that improve our
customers’ competitiveness.
Gross R&D
expenditure
£1.4bn
Investors
We generate attractive
returns for investors over
the long term.
Total shareholder
return
3.4%
Employees
We create an environment
where each employee is
able to be at their best.
Partners
We create partnerships
based on collaboration
where each partner
benefits from the
relationship.
Communities
We improve the
communities that we
impact locally, nationally
and globally.
Invested in
training and
development
£27.1m
Spend with
external suppliers
£10.1bn
Hours of
employee time
volunteered
91,000
Governing bodies and regulators
We aim to create trusted relationships with
governing bodies and regulators, meeting all legal
and regulatory commitments and requirements.
Stakeholder engagement page 66
Our power solutions create revenue from:
Link to principal risks
– original equipment
– maintenance, repair and overhaul
– additional products and services
Our intimate knowledge of our customers and our products enables us to
optimise the value of our power solutions throughout their lives. We share
this value with our customers by offering power as a service.
A Strategic transformation
B Competitive environment
C Cyber threat
D Major product programme delivery
E Business continuity
F Safety
G Talent and capability
H Market and financial shock
I Compliance
J Political risk
Revenue recognition page 115
Principal Risks page 50
STRATEGIC REPORT
14
Strategic Report
Key Performance Indicators
Rolls-Royce Holdings plc Annual Report 2018
KEY PERFORMANCE INDICATORS
Financial key performance indicators
Description
Why we measure it
How we have performed
Order backlog 1
£63.1bn
We measure our order backlog
as an indicator of future business.
Underlying revenue
£15,067m
Monitoring of revenue provides
a measure of business growth. 2
Self-funded R&D
as a proportion of
underlying revenue
This measure reflects the need
to generate current returns as
well as to invest for the future. 3
To deliver on its commitments
to customers, the Group invests
significant amounts in its
infrastructure. 4
This measure reflects the
Group’s underlying economic
performance taking account of
its hedging strategies. 5
7.6%
Capital expenditure
as a proportion of
underlying revenue
6.0%
Underlying
operating profit
£616m
Free cash flow
£568m
We had a 15% increase in Group order
backlog, primarily driven by Civil Aerospace
with ANA TotalCare signed on the
Trent 1000, Trent 7000 inclusion and
new orders on the Trent XWB. Significant
growth in Power Systems of 29% and 17%
growth in Defence.
Underlying revenue rose 8% organically,
with 15% growth in Power Systems,
reflecting strength across almost all
end-markets. Civil Aerospace revenue was
up 12% led by strong growth in services.
Defence revenues were broadly stable
year-on-year.
Disciplined control of spend kept R&D
stable as a percentage of sales, with
self-funded R&D increasing to £1.14bn. This
was primarily due to expenditure within
Civil Aerospace, focused on new engines
coming into service, progress on next
generation technologies, and business jet
development programmes.
Capital expenditure rose 70 basis points as
a proportion of revenue, reaching £905m in
absolute terms. This reflects investment in
capacity across our large engine
manufacturing footprint as we ready
ourselves for future growth, and investment
in Defence as part of our commitment to the
next generation submarines programmes.
Organic growth of £253m, driven by strong
revenue growth in Civil Aerospace and Power
Systems, our focus on reducing costs and
higher capitalised R&D. This was achieved
despite significantly higher contract
accounting adjustments in the year.
£bn
2018
2017
£m
2018
2017
2016
2015
2014
%
2018
2017
2016
2015
2014
%
2018
2017
2016
2015
2014
£m
2018
2017
2016
2015
2014
£m
2018
2017
2016
2015
2014
63.1
55.0
15,067
13,671
13,783
13,354
13,864
7.6
7.6
6.8
6.2
5.9
6.0
5.3
4.2
3.6
4.7
616
306
915
1,492
1,681
568
259
100
179
447
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. 6
Free cash flow more than doubled, driven
by working capital management, material
growth in engine flying hour receipts and
increased customer deposits. This was
partly offset by higher capital and R&D
spend and increased costs to resolve Civil
Aerospace Trent 1000 in-service issues.
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Key Performance Indicators
15
New financial key performance indicators for 2018
Description
Why we measure it
How we have performed
Cash flow per share
30.6p
Cash flow per share ensures
alignment with shareholder
interests and is a key measure
of the economic performance
of the business. 7
Significant increase, reflecting strong
improvement in free cash flow and a modest
increase in share count as a result of shares
issued for the purchase of ITP Aero.
p
2018
2017
30.6
14.1
Cash return on
invested capital
(CROIC)
12%
In a capital-intensive industry,
CROIC is a key measure of the
efficiency of our capital invested
to generate cash flow. 8
The modest decline reflected increased
cash generation from our in-service engine
fleet, which was offset by higher Trent 1000
in-service costs and growing levels of R&D
and capital investments in recent years.
%
2018
2017
12%
13%
Non-financial key performance indicators †
Description
Why we measure it
How we have performed
Customer delivery
83%
Employee engagement
75
Notes
To deliver on our commitments
to our customers we measure the
percentage of on-time deliveries
to our customers including new
equipment, spare parts, equipment
repair and overhaul. This is tracked
Group-wide in our scheduling and
order fulfilment system.
This year we fell short of both our 2018
target of 92% and previous year’s
achievement. This was due to a shortfall
in widebody build and invoiced deliveries,
most evident on the Trent 7000. The
shortfall was due to the significant
ramp-up in new engine programmes
and parts supply constraints.
This is measured through our
employee opinion survey which
produces a composite sustainable
engagement score. The targets
are based on absolute scores
for six key questions within the
overall survey.
Our employee engagement score was
75 in 2018, which was the same as the
previous two years but fell short of our
target by one point. The score was
maintained during a period of significant
transformation and restructuring within
the organisation.
%
2018
2017
2016
2018
2017
2016
83%
91%
88%
75
75
75
Following the adoption of IFRS 15 in 2018, the 2017 figures have been restated.
† These non-financial performance indicators are linked to our remuneration structure.
Reconciliation to statutory results are included in the notes as referenced below:
1 Following the adoption of IFRS 15 in 2018, unrecognised revenue in accordance with IFRS 15 is disclosed in note 2 to the Consolidated Financial Statements. Order backlog, also
known as unrecognised revenue, measures the amount of revenue on current contracts that is expected to be recognised in future periods and hence is measuring a similar, but
not identical indicator to the order book previously shown. To avoid presenting two different measures of a similar indicator, from 2018 we will use the IFRS 15 measure and have
renamed it ‘order backlog’ to distinguish it. In 2017 and earlier, we measured the order book at our long-term planning exchange rate (LTPR) and list prices and included 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 backlog. In Defence, 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 was included in the order backlog. We only included the first seven years’ revenue from long-term aftermarket contracts.
2 Underlying revenue is used as it reflects the impact of our foreign exchange (FX) hedging policy by valuing foreign currency revenue at the actual exchange rates achieved as a
result of settling FX contracts in the year. This provides a clearer measure of the year-on-year performance. See more in note 2 on page 124.
3 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.
4 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 cash purchases of property, plant and equipment acquired during the period; over the medium-term we expect a proportion of around 4%.
5 In particular: (a) revenue and costs denominated in US dollars and euros are presented on the basis of the exchange rates achieved based on our FX hedge book; (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.
6 We measure free cash flow as the movement in net funds during the year, before movements arising from payments to shareholders, acquisitions and disposals, and FX. This
excludes cash cost of the 2018 restructuring plan.
7 We calculate cash flow per share using free cash flow (as defined above) and the average number of shares in issue during the year, consistent with EPS calculations. See note 6
on page 134.
8 CROIC is calculated as cash flow divided by invested capital. We measure free cash flow (as per note 26) which is then adjusted to remove R&D, PPE & software capital
expenditure, certification costs, other intangibles, and working capital (excluding change in the net LTSA balance in Civil Aerospace) and operating lease payments. Invested
capital is defined as the sum of 15 years net R&D investment, PPE and software at cost, certification costs, other intangibles (excluding M&A and goodwill), and working capital
(excluding net LTSA balance in Civil Aerospace) and operating leases.
STRATEGIC REPORT 16
Strategic Report
Financial Review
Rolls-Royce Holdings plc Annual Report 2018
FINANCIAL REVIEW
Rolls-Royce delivered strong growth in 2018 profit
and cash flow. This, together with the execution on
our portfolio reshaping, saw a strengthening of our
balance sheet. We made a good start with our
restructuring plan. I am confident of delivering
further progress in 2019 as we move towards
making our mid-term financial ambitions a reality.
Overview 2018
Rolls-Royce delivered a strong financial
performance in 2018, with a material
improvement in free cash flow, good
growth in underlying operating profit
and a strengthening of our balance
sheet. These were achieved despite the
operational and financial disruption caused
by in-service issues with the Trent 1000.
I was particularly pleased with how our
invigorated management team embraced
the challenges we faced on the Trent 1000,
moving decisively to embed a number of
mitigating actions across the Group to
control costs and deliver our results,
while allowing us to continue to invest
for the long term.
In 2018, we incurred £431m of cash costs on
Trent 1000 in-service issues. Although we
are making good progress on technical
fixes for the engine, a related £790m
exceptional charge was taken for the full
year. This reflects the abnormal portion of
costs to resolve the Trent 1000 in-service
issues, which fall outside the scope of our
normal TotalCare costs. We expect cash
costs within Civil Aerospace for these
issues of around £450m in 2019, before
declining by at least £100m in 2020 and
stepping down materially thereafter.
We made good progress on our
restructuring plan in the year. A reduction
in headcount of around 1,300 was delivered
in 2018 across a variety of overhead and
engineering functions. Finance is embracing
its own role in the drive to transform our
organisation and progress was made
in simplifying our processes and
reducing headcount.
STEPHEN DAINTITH
CHIEF FINANCIAL OFFICER
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Financial Review
17
A £317m exceptional restructuring
charge was taken in 2018, of which £223m
related to our Group-wide restructuring
programme announced in 2018. Cash costs
incurred in 2018 were £70m. In total we
continue to expect around £500m of total
cash costs to be incurred on implementation
of our restructuring programme, with a
target to deliver around £400m of run-rate
cost savings from the end of 2020.
In early 2019, Airbus announced it will cease
delivery of the A380 in 2021. This decision
to shorten the programme has led to us
taking an exceptional item of £186m in 2018.
We achieved significant progress in 2018
focusing our portfolio and improving our
balance sheet. In June we completed the
disposal of L’Orange for €673m. In July, we
announced the sale of Commercial Marine
for a total value of £500m with expected
net proceeds of around £350m to £400m.
Year-end balance sheet net funds improved
by £916m, moving from £305m net debt
to a £611m net cash position. We remain
committed to further improving our balance
sheet strength with a focus on improving
cash generation. We aim to maintain a strong
investment-grade credit rating, while
also focusing on returning shareholder
payments to a more appropriate level.
At our 2018 Capital Markets event, I set
out the three fundamental drivers we are
pursuing to improve cash flow and returns.
Progress was made in 2018 on all of these:
Free cash flow should increase further to
around £700m +/- £100m, as we deliver
another positive step along our journey
towards our mid-term ambitions.
— in Civil Aerospace we made further
positive steps in reducing OE cash
deficits on widebody engines, which
fell by 13% to £1.4m;
— large engine aftermarket cash margin
improved materially led by the 14%
growth in large engine flying hours
driving up aftermarket cash receipts,
which more than outstripped higher
shop visit costs; and
— we remain focused on reducing
commercial and administrative (C&A)
costs and bringing down R&D and capital
expenditure as a percentage of sales.
C&A costs in our core businesses fell
£18m, with further improvements
targeted as we deliver further
restructuring benefits.
2019 outlook
We are confident and committed to
delivering further progress in 2019. We
expect revenue to grow by a mid-single
digit percentage, with underlying operating
profit of around £700m +/- £100m.
“We are committed to
generating significantly
improved cash flow
and returns”
Longer-term outlook
As we exit a period of significant investment
in Civil Aerospace and our restructuring
plan delivers benefits, we are committed to
generating significantly improved returns.
To do this, we must focus on: further
reducing the OE cash deficit per widebody
engine; increasing our aftermarket cash
margins; being more disciplined in the
allocation of our R&D and capital expenditure;
and reducing our C&A costs growth. The
restructuring programme is a key enabler
to delivering such reductions in our fixed
costs. Our mid-term ambition is to deliver
free cash flow per share of over £1 and
to generate annual cash flow return on
invested capital of at least 15% through
the cycle.
Driver-based
forecasting
Improve
financial
insight
Improve
processes and
controls
KEY
OBJECTIVES
– Pace
– Simplicity
– Improve
cash flow
Cash
focused
culture
Cost and
headcount
reduction
Greater
financial
transparency
People
development
FINANCE
TRANSFORMATION
We have made good progress on our
finance transformation in 2018, embracing
the drive to transform by simplifying our
reporting and forecasting processes,
improving our efficiency and reducing
headcount and costs.
We are standardising our processes and
improving the quality of data to free-up
time to focus on insight and analysis,
helping us to drive business performance.
Through our Finance Academy, we
are investing in building our people’s
capabilities to support our new organisation.
Investment in new systems is helping us to
further improve finance efficiency.
Over time, this transformation will eliminate
and automate more activity, and by
leveraging Group Business Services, our
new shared services environment, we will
ensure that routine activities are optimised.
STRATEGIC REPORT 18
Strategic Report
Financial Review
Rolls-Royce Holdings plc Annual Report 2018
Core trading summary
The income statement table below and all commentary relate to the underlying ¹ performance of our core ² businesses and percentage or
absolute change figures in this document are on an organic basis, unless otherwise stated.
Summary income statement – Core businesses
£m
Underlying revenue
Underlying OE revenue
Underlying services revenue
Underlying gross profit
Gross margin %
Commercial and administration costs
Restructuring
Research and development charge
Joint ventures and associates
Underlying operating profit
Underlying operating margin
Financing costs
Underlying profit before tax
Tax
Underlying effective tax rate
Underlying profit for the year
Underlying earnings per share
2018
14,336
7,184
7,152
2,256
15.7%
(991)
(14)
(650)
32
633
4.4%
(150)
483
(152)
31.5%
331
17.4p
2017 ³
Change
Organic
change ⁴
12,786
6,244
6,542
1,998
15.6%
(955)
(16)
(724)
14
317
+12%
+15%
+9%
+13%
+10bps
+4%
-13%
-10%
+129%
+100%
2.5% +190bps
+42%
(106)
272
211
(131)
+16%
62.1%
80
4.4p
251
+13.0p
+10%
+10%
+9%
+4%
-80bps
-2%
-25%
-14%
+150%
+71%
+140bps
+38%
184
+11%
170
+8.7p
1 Underlying: for definition see note 2 on page 124.
2 Core includes: Civil Aerospace, Power Systems, Defence and ITP Aero and excludes L’Orange and Commercial Marine.
3 All prior year comparatives have been restated for IFRS 15: see note 1 on page 113 and note 27 on page 169.
4 Organic change at constant translational currency (constant currency) by applying 2017 average rates to 2018 numbers and excluding M&A, specifically ITP Aero and L’Orange.
Underlying revenue up 10%
Underlying revenue rose 10% to £14,336m
reflecting growth in both OE revenue (10%)
and services (9%), led by Civil Aerospace and
Power Systems. Civil Aerospace revenue
increased 12%, reflecting OE growth of 8%
driven by large engine pricing improvements
and higher volumes of spare engines to
support our growing in-service fleet.
Services revenue in Civil Aerospace rose
15%, reflecting growth in LTSA shop visits
and higher spare parts sales. Power Systems
delivered excellent revenue growth of 15%
with strength across almost all of its end
markets, driving double-digit growth in
both OE (18%) and services (10%). Defence
revenue remained stable with a modest
increase in OE, offset by reduced services
revenue, reflecting phasing of work on
UK submarines.
Underlying gross profit up 4%
Underlying gross profit was up 4% to
£2,256m with gross margins of 15.7%. Civil
Aerospace gross profit was stable with good
progress on reducing widebody OE engine
losses and increased spare engine volumes,
offset by higher negative LTSA contract
accounting adjustments. Before these
contract accounting adjustments, Civil
Aerospace gross margins were up 100bps.
Power Systems recorded lower gross
margins due to product mix, despite the
increased volumes. Defence gross margins
were modestly weaker due to lower OE
combat volumes and lower margins on
submarine services revenue in the year.
Self-funded R&D cash spend
up 8%; income statement
charge down 14%
Gross R&D expenditure grew to £1,378m.
After funding from customers and other
third parties, core self-funded cash R&D
spend rose 8% to £1,106m, primarily driven
by: investment in new engine technologies
in Civil Aerospace, specifically the UltraFan
and on our new business aviation engine
family; higher spend on the Trent 1000;
and future programmes in Defence.
Capitalisation of R&D rose from £347m to
£498m reflecting the full-year impact of our
revised R&D policy application as outlined
at our 2017 full-year results (see note 1).
Overall, the R&D charge to the income
statement reduced by £102m to £650m.
C&A costs down 2%
C&A costs were 2% lower at £(991)m,
reflecting the beneficial effect of reductions
in non-manufacturing headcount across
the Group. C&A costs as a percentage of
revenue fell to 6.9% in 2018 (2017: 7.5%).
Over the mid term, our ambition is to reduce
C&A costs to around 5%.
Underlying operating profit
up £224m
Underlying operating profit saw a material
improvement of £224m on prior year to
£633m, reflecting 20% growth in
Power Systems to £317m, due to strong
volume growth and a £189m improvement
in Civil Aerospace, reflecting a number
of factors:
— further progress in reducing OE unit
losses in large engines, which fell by 13%;
— increased sales of spare engines and
spare parts, and higher LTSA shop
visit volumes;
— offset to an extent by a material increase
in LTSA negative contract accounting
adjustments of £276m, up £127m
versus 2017; and
— £188m higher net R&D capitalisation.
Financing costs
Financing costs increased from £106m in
2017 to £150m in 2018, partly due to the
inclusion of ITP Aero, which was absent
from our 2017 results. Within financing, net
interest payable increased to £72m (2017:
£53m) driven by higher interest rates, and
the carry cost associated with pre-funding
our 2019 debt maturities as part of Brexit
mitigation planning. This was partially offset
by interest received on the L’Orange
disposal proceeds.
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Financial Review
19
Other underlying financing costs were
£78m in 2018 (2017: £54m). The increase
reflects the inclusion of ITP Aero, increased
charges related to discounting of provisions
and higher other financing charges.
Taxation
Core underlying taxation was £152m
(2017: £131m), an underlying rate of 31.5%
compared with 62.1% in 2017. The 2018 core
underlying tax charge has not increased in
line with profits mainly due to reductions in
US tax rates and the benefit of tax credits.
The reduction in the 2018 core underlying
tax rate compared to the prior year is
primarily driven by the increase in the core
underlying profit in 2018 together with the
lower US tax rate and benefit of tax credits.
The rate remains high due to the impact of
UK losses and the mix of profits arising in
other countries with higher tax rates,
predominantly the US and Germany.
Trent 1000 in-service impact
A full-year exceptional charge of £790m
has been recorded to cover the full
anticipated costs of the Trent 1000
in-service issues over 2017 to 2022 that are
considered abnormal in nature. These
abnormal costs fall outside the scope of
our normal LTSA costs and largely
comprise our contribution to additional
customer disruption costs. This charge is
an increase of £236m compared to the
£554m recorded at the half year. While
strong progress has been made in reducing
shop visit costs compared to our prior
estimates, this has been counter-balanced
by an increased level of customer
disruption driven by the higher than
previously anticipated aircraft on ground
(AOG) levels. This change in the mix of
costs has driven the higher exceptional
charge. The total multi-year cash impact of
Trent 1000 in-service issues is now
expected to be £100m higher than our
prior estimates over 2017 to 2022, of which
£431m has been incurred in 2018.
The treatment of such a charge as
exceptional reflects a number of
factors, primarily:
— the unprecedented nature of the issues
with the Trent 1000 – a fleet-wide issue
of an unusual and abnormal scale,
impacting multiple airline customers and
resulting in a significant level of AOG; and
— the fact that this technical issue has
resulted in a number of separate
airworthiness directives and non-
modification service bulletins – a highly
abnormal situation for Rolls-Royce.
The costs which have been included in
the exceptional charge cover those which
we would not typically incur, such as
contributing to additional customer
disruption costs. The total exceptional
charge represents around 55% of the total
estimated cash costs from 2017 to 2022.
The remaining charge will be recognised
over time through our normal contract
accounting margins.
The total cash impact on Civil Aerospace
from the Trent 1000 in-service issues in
2018 was £431m (2017: £119m). In 2019, we
expect the impact to be around £450m,
before declining by at least £100m in 2020
and reducing materially thereafter. All
technical changes are expected to be fully
embodied into the Trent 1000 fleet by 2022.
Costs to mitigate in-service issues on the
Trent 900 in 2018 were £14m. Given their
smaller scale, these costs will be included
within our normal operational costs going
forwards and not split out.
Trent 900 cancellation impact
Following the announcement by Airbus
on 14 February 2019 of its plan to cease
delivery of the A380 in 2021, we have
assessed the impact on our Trent 900
programme and associated customers and
suppliers. We have recorded an
exceptional item of £186m in our 2018
results which relates to onerous contracts,
tooling write-offs and the acceleration of
depreciation and amortisation on
associated Trent 900 programme assets.
Exceptional restructuring charge
An exceptional restructuring charge
of £317m was recognised in the year
(2017: £104m), of which £223m relates
to the cost of our Group-wide restructuring
plan as announced in early 2018. Positive
progress has been made so far and we have
achieved a gross reduction in headcount
of around 2,000 during the year with a net
reduction of around 1,300. The total
expected cash cost to implement this
restructuring programme remains around
£500m and should be completed by the
end of 2020. The remainder of the
exceptional charge taken in 2018 relates
to restructuring programmes that were
already in place in Power Systems and
Defence, reflecting actions to remove
cost and improve operational efficiency.
Order backlog: unrecognised
revenue under IFRS 15
IFRS 15 requires the disclosure of
unrecognised revenue, the amount of
revenue from our customer contracts that
has not yet been traded. For OE, the policy
is prescriptive, including only firm purchase
orders and pricing net of any discounts.
The IFRS 15 disclosure includes the entirety
of any contracted aftermarket revenue.
Total unrecognised revenue at the year end
under IFRS 15 was £63.1bn (2017: £55.0bn).
This new disclosure replaces the valuation
of the order book that we have previously
published and which was prepared on a
different basis.
IFRS 16
IFRS 16 is effective for the year beginning
1 January 2019 and requires the total
commitments of all leases (both finance
and operating leases) to be recognised
on the balance sheet. In broad terms, the
impact of the standard will be:
— on our balance sheet we will record an
additional lease liability of £2.1bn and
leased assets of £1.8bn;
— in the income statement the impact
on operating profit is expected to be a
£40-50m benefit as rental payments are
now replaced with depreciation on the
leased assets. However, higher finance
costs relating to the lease liability will
result in a potential £10-15m reduction
in overall underlying profit before tax
compared with the previous basis of
accounting for leases; and
— there will be no cash flow impact.
Capital allocation strategy/KPIs
As we outlined at our 2018 Capital Markets
event, a disciplined approach to capital
allocation and sustaining a healthy balance
sheet will play a major part in improving
our long-term returns. To support this we
have introduced a new key performance
indicator, cash return on invested capital
(CROIC), to focus on both cash generation
and asset efficiency. In 2018, we generated
a CROIC of 12% (2017: 13%). The modest
decline reflected increased cash generation
from our growing in-service engine fleet
which was offset by higher Trent 1000
in-service costs and growing levels of R&D
and capital investments in recent years. Our
mid-term ambition is to generate a CROIC
of at least 15% through the business cycle.
We also re-iterated our focus on free cash
flow by introducing a cash flow per share
(CPS) KPI. In 2018, core CPS improved
materially to 34.5p (2017: 17.3p). We maintain
our mid-term ambition of at least £1 of free
cash flow per share. With improved cash
generation, we aim to maintain a strong
investment-grade credit rating and ultimately
return to single A-grade status.
STRATEGIC REPORT 20
Strategic Report
Financial Review
Rolls-Royce Holdings plc Annual Report 2018
Group trading summary
Group results include core and non-core
businesses. Group underlying revenue rose
8% to £15,067m, primarily driven by growth
in Civil Aerospace and Power Systems,
offsetting a 16% decline in non-core
revenue. Group underlying operating
profit improved by £253m to £616m as a
result of improved gross profit and lower
expensed R&D.
Group funds flow
Free cash flow
Group free cash flow improved materially
by £309m to £568m, well ahead of the
£259m in 2017, driven by improved trading
performance, increased engine flying hour
receipts in Civil Aerospace and active
working capital management across the
Group. This was achieved despite increased
capital and R&D expenditure reflecting
ongoing investment in bringing new Civil
Aerospace large engines to the market and
supporting our growing in-service fleet. As
expected, Trent 1000 in-service cash costs
were materially higher in 2018 at £431m, an
increase of £312m versus 2017. Given the
one-off nature of the restructuring
announced in early 2018, the £70m
cash costs relating to this restructuring
programme are not included in Group
underlying free cash flow.
Expenditure on property, plant
and equipment and intangibles
The combined £1,585m investment is
broadly aligned with our capital additions
in the year and reflects our ongoing
investment in capacity and capability
projects to modernise facilities in the US,
investment in systems and software
applications and the capitalisation of R&D.
Working capital change
Positive contribution to cash flow from
working capital in 2018 of £581m, reflecting:
— higher payables due to increased trading
activity in Civil Aerospace and Power
Systems. Progress on standardising
supplier payment terms, around £400m
benefit in 2018;
— receivables broadly neutral as
volume-related growth in receivables
was offset by an improvement in
overdue payment collection; and
— partly offset by an increase in inventory
driven by volume growth in Power
Systems and the production challenges
Civil Aerospace encountered in 2018.
Active working capital management
includes the management of trade
receivables and the provision of a supply
chain finance scheme to our suppliers. The
most significant driver of our underlying
working capital improvement in 2018
related to standardisation of supplier
payment terms, which positively impacted
cash flow by around £400m.
Movement in Civil Aerospace
net LTSA balance
The LTSA balance represents deferred
revenue and is a core part of our business
model where we receive payments from our
customers in respect of our long-term
service and overhaul agreements. In 2018,
there was an increase of £944m, reflecting
strong engine flying hour growth and
associated cash receipts from customers
in advance of incurring costs for engine
servicing activity in Civil Aerospace.
The movement in year also reflected the
negative contract accounting adjustments
and foreign exchange.
Summary funds flow statement 1
£m
Opening net (debt)/funds
Closing net funds/(debt)
Change in net funds/(debt)
Underlying profit before tax
Depreciation and amortisation
Capital expenditure (PPE)
Expenditure on intangible assets
Working capital change
Civil Aerospace net LTSA balance change
Other
Trading cash flow
Contributions to defined benefit pensions in excess of underlying PBT charge
Taxation paid
Group free cash flow
Of which: Core free cash flow
Shareholder payments
Disposals and acquisitions
Exceptional group restructuring
Payment of financial penalties
Foreign exchange
Other
Change in net funds/(debt)
Full year to 31 December
2018
(305)
611
916
466
756
(905)
(680)
581
944
(405)
757
59
(248)
568
641
(219)
583
(70)
–
54
–
916
2017
(225)
(305)
(80)
199
652
(730)
(647)
(219)
1,379
(186)
448
(9)
(180)
259
318
(214)
211
–
(286)
(59)
9
(80)
Change
267
104
(175)
(33)
800
(435)
(219)
309
68
(68)
309
323
(5)
372
(70)
286
113
(9)
996
1 The derivation of the summary funds flow statement above from the reported cash flow statement and the definition of free cash flow is included in note 26 to the Consolidated
Financial Statements on page 167.
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Financial Review
21
Pensions
The improvement to pension funding
largely relates to the UK, as contributions
agreed at the 31 March 2017 statutory
valuation came into effect from 1 January
2018. In addition, we agreed to make cash
contributions quarterly in arrears from
1 January 2018 (previously monthly in
arrears) and benefited from a one-off cash
saving in 2018. We expect to contribute
around £145m in respect of the benefits
accruing in 2018 (2017: £117m).
Balance sheet
Summary balance sheet
Taxation
Cash tax was higher in 2018 due to higher
profits and increased payments in Germany
partly offset by the benefit of the US
rate reduction.
Acquisitions and disposals
L’Orange (a subsidiary of Power Systems),
was sold on 1 June 2018. The inflow in
2017 relates to the funds held by
ITP Aero on acquisition.
Shareholder payments
The increase relates to the higher number
of shares in issue resulting from the
acquisition of ITP Aero and a dividend
to a non-controlling interest of £3m.
Payment of financial penalties
Following the agreements reached with
investigating authorities in January 2017,
a payment schedule was agreed and £286m
of penalties were paid in the UK, US and
Brazil in 2017. As part of that schedule, no
payments were due in 2018 and further UK
payments of £100m, £130m and £148m (plus
interest) will be made in 2019, 2020 and
2021 respectively.
£m
Intangible assets
Property, plant and equipment
Joint ventures and associates
Contract assets and liabilities
Working capital 1
Provisions
Net funds/(debt) 2
Net financial assets and liabilities 2
Net post-retirement scheme surpluses/(deficits)
Tax
Held for sale (Commercial Marine)
Other net assets and liabilities
Net (liabilities)/assets
Other items
US$ hedge book (US$bn)
Civil Aerospace LTSA asset
Civil Aerospace LTSA liability
Civil Aerospace net LTSA liability 3
31 December 2017
Exc. L’Orange
and Commercial
Marine
4,998
4,468
375
(5,766)
(1,050)
(891)
(305)
(2,643)
793
193
506
22
700
L’Orange and
Commercial
Marine
567
190
–
–
83
(52)
–
–
(55)
(5)
(499)
4
233
31 Dec 2018
Core
5,295
4,929
412
(7,073)
(1,255)
(1,917)
611
(4,117)
641
1,026
374
22
(1,052)
36.8
1,097
(5,584)
(4,487)
Change
excluding
L’Orange and
Commercial
Marine
297
461
37
(1,307)
(205)
(1,026)
916
(1,474)
(152)
833
(132)
–
(1,752)
Total
5,565
4,658
375
(5,766)
(967)
(943)
(305)
(2,643)
738
188
7
26
933
38.5
1,027
(4,570)
(3,543)
1 Net working capital includes inventories and trade receivables and payables and similar assets and liabilities.
2 Net funds/(debt) includes £293m (2017: £227m) of the fair value of financial instruments which are held to hedge the fair value of borrowings.
3 In August 2018, we reported a net Civil Aerospace net LTSA creditor of £(3,559)m at 31 December 2017. Since then we further reviewed the classification of balances resulting
in a change of £16m being reflected in the balance of £(3,543)m.
Excluding L’Orange and Commercial Marine
key drivers of balance sheet movements were:
Intangible assets
The net increase of £297m includes
additions of £680m, primarily driven by R&D
capitalisation of £498m, largely relating to
Civil Aerospace, together with further
investment in software applications of
£110m. These were partially offset by an
impairment charge of £184m, primarily
relating to the write-off of Commercial
Marine goodwill, and £381m of
amortisation in the year.
Property, plant and equipment
PPE increased by £461m. Capital additions
of £974m in the year were driven by
investments in Civil Aerospace to support
growth. We made a number of investments
to increase the capacity and capability
across our businesses, including addressing
Trent 1000 in-service issues in Civil
Aerospace, upgrade of our Indianapolis
facility in Defence and technical equipment
and specialised tooling in Power Systems.
We also expanded our lease engine pool to
support our growing in-service widebody
engine fleet. Depreciation of £523m was
charged in the year.
Investments in joint ventures
and associates
There was no material change in our
investment in joint ventures and associates
year-on-year.
Contract assets and liabilities
This represents deferred revenue and is a
core part of our business model where we
receive payments from our customers in
respect of our long-term service and
overhaul agreements. The balance
increased by £(1,307)m, of which £(944)m
related to Civil Aerospace. This was driven
STRATEGIC REPORT 22
Strategic Report
Financial Review
Rolls-Royce Holdings plc Annual Report 2018
by strong engine flying hour growth and
associated cash receipts from customers in
advance of engine servicing activity, and
the £276m contract accounting catch-up
adjustment recorded in 2018. The remainder
of the increase reflected growth in deposits.
Working capital
For discussion of the movement in working
capital, see the explanation on page 20
within funds flow.
Provisions
Provisions increased by £1.0bn to £1.9bn.
This reflected a £1.6bn charge (the majority
of which relates to the exceptional items
recorded in 2018), net of £0.6bn utilisation
of provisions in the year. Approximately
£1bn of the closing balance relates to
current provisions.
Group reported results
The changes resulting from underlying
trading are described on pages 18 to 20.
Consistent with past practice and IFRS, we
provide both reported and underlying
figures. As the Group does not generally
hedge account for forecast transactions in
accordance with IFRS 9 Financial
Net funds
Net funds improved from a net debt
position of £305m in 2017 to a net cash
position of £611m. The change reflected
receipt of £573m net proceeds from the
disposal of L’Orange and £568m of free
cash flow generation offset by payments
to shareholders of £219m.
Net financial assets and liabilities
These items principally relate to the fair
value of foreign exchange, commodity and
interest rate contracts. There was a
reduction of £1,474m, primarily relating to
an adverse mark-to-market movement on
the foreign exchange hedge book of £2,122m,
offset by settled contracts of £684m.
Net post-retirement
scheme surpluses
There was a decrease in the surplus
of £152m, with a reduction of £182m
in UK schemes and a £30m increase in
overseas schemes. The reduction in the
UK surplus was primarily the result of
changes in demographic assumptions plus
additional Guaranteed Minimum Pension
liabilities recognised following the Lloyds
Bank High Court decision, which led to an
exceptional charge of £121m.
US$ hedge book
The US$ hedge book at $36.8bn remained
broadly stable as contracts settled were
replaced with new contracts.
Instruments, we believe underlying figures
are more representative of the trading
performance by excluding the impact of
year-end mark-to-market adjustments. In
particular, the USD:GBP hedge book has a
significant impact on the reported results.
In 2018, the USD:GBP rate fell from 1.35 to
1.28 while the EUR:GBP fell from 1.13 to 1.12.
The adjustments between the underlying
income statement and the reported
income statement are set out in note 2
to the Consolidated Financial Statements.
This basis of presentation has been
applied consistently.
Reconciliation between underlying and reported results
Year to 31 December
£m
Underlying
1 Revenue recognised at exchange
rate on date of transaction
2 Mark-to-market adjustments
on derivatives
1 Related foreign exchange adjustments
3 Trent 1000 exceptional charge
3 Trent 900 exceptional item
3 Exceptional restructuring charge
4 Effects of acquisition accounting
5
6 Disposal of L’Orange
7
8 Pension equalisation
Other
Reported
Impairments of Commercial Marine
ITP acquisition
Revenue
2018
15,067
2017
13,671
781
1,076
–
–
–
(119)
–
–
–
–
–
–
–
15,729
–
–
–
–
–
–
–
–
–
–
–
14,747
(Loss)/profit
before financing
Financing
(Loss)/profit before tax
2018
616
–
(1)
(23)
(790)
(186)
(317)
(175)
–
358
(155)
(121)
(9)
(803)
2017
306
2018
(150)
2017
(107)
2018
466
–
–
–
–
24
294
–
–
(104)
(129)
785
–
–
–
(25)
1,151
(2,144)
163
(15)
–
–
(8)
–
–
–
–
10
(2,144)
2,648
196
–
–
–
–
–
–
–
–
10
2,747
(2,145)
140
(805)
(186)
(317)
(183)
–
358
(155)
(121)
1
(2,947)
2017
199
–
2,672
490
–
–
(104)
(129)
785
–
–
–
(15)
3,898
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Financial Review
23
3. As described on page 124, the exceptional
items are excluded from the underlying
results. This includes the exceptional
items in respect of the Trent 1000,
Trent 900 and restructuring costs.
These have been explained on page 19.
7. As described on page 40, the sale of
the Commercial Marine business was
announced on 6 July. It has been
classified as held for sale, and written
down to its expected disposal value,
resulting in a loss of £155m.
8. Following a High Court judgement in
October 2018, the estimated costs of
equalising UK pension benefits for men
and women have been recognised as
a past-service charge.
Tax effecting these adjustments resulted in
a tax credit of £715m (2017: charge £360m).
4. The effects of acquisition accounting
were £183m (2017: £129m) and principally
relate to the amortisation of intangible
assets arising on the acquisition of Power
Systems in 2013 and ITP Aero at the end
of 2017.
5. ITP Aero was acquired on 19 December
2017 and gave rise to a bargain purchase
of £303m and a revaluation of the
existing stake of £482m.
6. The disposal of L’Orange in June 2018
gave rise to a gain of £358m.
The most significant items included in the
reported income statement, but not in
underlying are summarised below.
1. The impact of measuring revenue and
costs at spot rates rather than achieved
hedge rates increased revenue by
£781m (2017: £1,076m) and reduced
profit before financing by £(23)m
(2017: increased by £294m). Adjustments
to profit before financing include the
loss on derivatives settled during the
year of £219m (2017: £453m) and the
impact of valuation of assets and
liabilities using the year-end exchange
rate rather than the underlying hedge
book rate.
2. There was a mark-to-market loss on
the Group’s hedge book of £(2,144)m
(2017: gain of £2,648m). These reflect the
large hedge book held by the Group
(e.g. USD $37bn); and the weakening of
sterling, against the US dollar (1.35 to
1.28) in 2018. At each period 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.
STRATEGIC REPORT 24
Strategic Report
Business Review
Rolls-Royce Holdings plc Annual Report 2018
BUSINESS REVIEW
Civil Aerospace
Civil Aerospace is a major manufacturer of aero
engines for the large commercial aircraft, regional
jet and business aviation markets. The business
uses its engineering expertise, in-depth knowledge
and capabilities to provide through-life support
solutions for its customers.
Underlying revenue mix
Services
58%
V2500
13%
Regional
4%
Business
Aviation
15%
OE
42%
Large
Engines
68%
Underlying
revenue
£7,378m
2017: £6,598m
Underlying
operating loss
£(162)m
2017: £(343)m
Order backlog
£52.3bn
2017: £45.7bn
35
types of commercial
aircraft powered by
Rolls-Royce engines
13,000
engines in service
around the world
Trading cash flow
£201m
2017: £38m
Key highlights
Underlying revenue growth of
12% driven by increased service
activity, higher spare engine
volumes and improved OE pricing
Underlying operating loss halved
to £(162)m reflecting reduced
installed OE losses, higher spare
engine volumes, strong servicing
activity, and increased net R&D
capitalisation of £188m, offsetting
£127m increase in negative LTSA
contract accounting adjustments
Trading cash flow improved from
£38m to £201m led by 14% growth
in widebody engine flying hours and
13% reduction in average installed
OE unit deficit to £(1.4)m. This was
despite a £312m increase in cash
costs for the Trent 1000 and higher
major LTSA shop visits (up from 240
to 286). Trent 1000: 99.9% despatch
reliability, accumulated 6.7 million
flying hours
Good progress introducing
technical fixes on the Trent 1000
with introduction of new design
for IPC blade in Package C
engines and agreement to move
from a hard life on the Trent 1000
TEN to an inspection regime.
AOGs remained at a high level in
the second half of 2018; 34 AOGs
at the end of the year (2017: 18).
Expect a significant improvement
in AOGs over the course of 2019
reflecting the improvement in
fleet health
Milestone programme
achievements; Trent 1000 TEN
entered into service; launched
first of a new family of engines for
business aviation with the Pearl 15;
Trent XWB-97 entered into service
on the Airbus A350-1000; Trent
7000 entered into service on the
A330neo with TAP Portugal
Trent XWB-84; 99.9% despatch
reliability, achieved 3 million flying
hours, OE deficit down 32%
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Business Review
25
Civil Aerospace overview 2018
Civil Aerospace recorded good progress in
2018 with further growth in our widebody
installed fleet to 4,757 engines, generating
increased engine flying hour cash receipts.
It was a year of milestone achievements
in new engine programmes with the entry
into service of the Trent 1000 TEN on the
Boeing 787-10, launch of the first of a new
family of engines for business aviation with
the Pearl 15, entry into service of the Trent
XWB-97 on the Airbus A350-1000 and the
Trent 7000 on the A330neo. While another
relatively quiet year for orders, we expect
this to pick up in the next few years driven
by replacement cycles of both medium and
large widebody aircraft. Good progress
has been made introducing technical fixes
on the Trent 1000 where the fleet health
is expected to improve through 2019.
Financial overview
Underlying revenue
Underlying revenue increased 12% to
£7,378m, reflecting growth in OE, up 8%
to £3,119m, and 15% growth in services
to £4,259m. OE growth was led by large
engines (up 14%) driven by improved
widebody engine pricing and higher sales
volumes of spare engines to support the
growing in-service fleet. Revenue growth
from increased sales of spare engines to
joint ventures contributed £112m to revenue
growth. 2018 large engine OE deliveries
include initial sales of Trent XWB-97 for the
Airbus A350-1000, and Trent 7000 for the
A330neo, both of which entered into
service in the year.
Large engine service revenue increased
15% to £2,666m (2017: £2,327m) driven by
increased LTSA shop visit volumes, with
major refurbishments up 19% and check
& repair volumes up 60%. The growth
in check and repair activity was driven
by Trent 1000 part durability issues. The
increase in major refurbishments reflected
our maturing in-service fleet, with engines
that entered service in the early part of this
decade, largely Trent 700s, reaching their
first refurbishment. Sales of spare parts
not covered by LTSAs also increased
year-on-year.
Financial overview
£m
Engine deliveries (volume)
Underlying revenue
Underlying OE revenue
Underlying services revenue
Underlying gross profit
Gross margin %
Commercial and administrative
Restructuring
Research and
development charge
Joint ventures and associates
Underlying operating loss
Underlying operating margin %
Underlying revenue
£m
Original Equipment
Large engines
Business aviation
V2500
Services
Large engines
Business aviation
Regional
V2500
Metrics
2018
686
7,378
3,119
4,259
493
6.7%
(336)
(8)
(332)
21
(162)
-2.2%
2018
3,119
2,373
620
126
4,259
2,666
464
292
837
Large engine deliveries
Average loss per widebody OE
Large engine in-service fleet
Large engine invoiced flying hours
Large engine LTSA major refurbs
Large engine LTSA check & repair
Total service revenue growth
Within business aviation, OE sales were
6% higher reflecting increased demand
from airframers. The 18% growth in service
revenue reflected a combination of
increased servicing activity and a positive
contract accounting adjustment which
benefitted revenue. The 7% increase in
regional aviation revenue was driven by
higher sales of spare parts. On the V2500,
OE revenue was 42% lower, reflecting
production slowdown on the Airbus
A320ceo. The 18% increase in V2500
service revenue to £837m was driven by
increased servicing and higher spare part
sales together with a modest increase in
the payment for flying hours.
2017
683
6,598
2,890
3,708
473
7.2%
(362)
(11)
(454)
11
(343)
-5.2%
Change
–
+12%
+8%
+15%
+4%
-50bps
-7%
-27%
Organic
change
–
+12%
+8%
+15%
+5%
-40bps
-7%
-27%
-27%
+91%
181
+300bps
-27%
+109%
189
+310bps
2017
Change
2,890
2,089
582
219
3,708
2,327
396
277
708
+8%
+14%
+7%
-42%
+15%
+15%
+17%
+5%
+18%
2018
469
(1.4)
4,757
14.3m
286
569
+15%
Organic
change
+8%
+14%
+6%
-42%
+15%
+15%
+18%
+7%
+18%
2017
483
(1.6)
4,409
12.6m
240
356
n/a
Underlying operating loss
The underlying operating loss halved
to £(162)m. Gross profit increased 5% to
£493m with a slight deterioration in gross
margin to 6.7%. Reduced installed OE
losses, higher profit from increased spare
engine sales and strong demand for time
& materials activity drove increased gross
profit. These were offset by a material
negative impact from long-term contract
assumption changes. Before these contract
accounting adjustments Civil Aerospace
gross margins were up 100bps. Under
long-term accounting, variations in revenue
or cost assumptions, up or down, can lead
to adjustments, positive or negative, for
profits that have already been recognised
over the life of a programme to date; with
STRATEGIC REPORT 26
Strategic Report
Business Review
Rolls-Royce Holdings plc Annual Report 2018
IFRS 15 leading to much greater volatility
for such adjustments than under the
previous revenue recognition standard. In
2018 there was a negative contract
accounting impact of £(276)m (2017: £(149)m)
which comprised three components:
— lifecycle cost benefits of £38m primarily
reflecting lower servicing costs for
business aviation;
— technical costs of £(80)m to reflect the
reassessed costs of technical issues
across various engine programmes
including rectifying manufacturing
quality issues on Trent 900
turbine blades; and
— higher operational costs of £(234)m
reflected the latest information around
future aircraft utilisation patterns and
the resultant effects on shop visit cost
with particular impact from mature
programmes where small changes impact
a significant portion of the profitability
already recognised on the contract.
Contract accounting adjustments
£m
Lifecycle cost benefits
Technical costs
Operational costs
Total contract accounting adjustments
technical maturity across a number of
programmes. It also reflected the policy
application change, applied from half year
2017 that aligns with European peers and
best practice. Overall the expensed R&D
charge reduced from £(454)m in 2017 to
£(332)m in 2018. C&A costs were 7% lower
year-on-year reflecting reductions in
headcount driven by our restructuring
programme. The increase in profit from
joint ventures and associates to £21m (2017:
£11m) reflected higher shop visit volumes in
joint venture overhaul bases, partly offset
by ITP Aero no longer being reported
as a joint venture.
Self-funded R&D rose by £66m to £787m,
reflecting increased investment in the new
family of engines for business aviation and
next generation technology, including the
UltraFan demonstrator. This was more than
offset by an increase in net R&D
capitalisation of £188m reflecting the
Trading cash flow
Civil Aerospace trading cash flow improved
£163m to £201m despite a £312m increase in
cash costs on Trent 1000 in-service issues,
£133m higher capital expenditure, largely
on engines to support the in-service fleet
and £66m higher self-funded R&D. These
2018
38
(80)
(234)
(276)
2017
17
(98)
(68)
(149)
were more than offset by increased flying
hour receipts from our growing in-service
fleet, a 13% reduction in average widebody
OE unit deficits, and higher volumes of
spare engines.
Actions to improve working capital, included
around £400m benefit from standardisation
of supplier payment terms and good cash
collection from a number of customers.
These more than offset the growth in
inventory and an outflow of OE concessions
of £150m led by the changing delivery mix
of our widebody engine programmes.
Trent 1000 in-service update
Since 2016, we have been undertaking a
proactive maintenance programme on the
Trent 1000 to address the lower than
expected durability of a small number of
parts. On 7 March 2018, with our full year
2017 results, we provided further detail as
we progressed our understanding of the
TRENT XWB POWERS
LONGEST FLIGHT
The Trent XWB, which powers the
Airbus A350 family, continued its highly
successful performance during 2018. The
world’s most efficient large aero engine
powered the world’s longest commercial
flight. Passengers on board the
Singapore Airlines Airbus A350-900 ULR
flight from Singapore to New York, flew
over 10,000 miles, passed through 12 time
zones and experienced two nights and one
short day during the 18 hour flight.
This success followed two important
milestones reached during the year. The
500th Trent XWB was delivered, evidence
of our continued ramp-up in production.
As the fleet has continued to grow, the
entire Trent XWB fleet then passed the two
million flying hours milestone, recording
dispatch reliability of 99.9%.
The Trent XWB is the sixth Trent engine
and in 2018 we celebrated 30 years since
the Rolls-Royce Board approved the start
of the whole Trent programme.
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Business Review
27
technical issues impacting compressor
rotor blades, and intermediate and high
pressure turbine blades within the Trent
1000 engine. Subsequent to that we
announced the decision to undertake more
frequent inspections of the compressors of
our fleet of 386 Trent 1000 Package C
engines. A similar durability issue was also
identified on a small number of high-life
Package B engines and we agreed with the
regulatory authorities to carry out a
one-off inspection followed by a regular
inspection regime which we have managed
as part of our ongoing maintenance
programme for the fleet of 166 Package B
engines. Both announcements were
followed by EASA and the FAA issuing
airworthiness directives related to repeat
inspection requirements for Package B
and Package C compressors.
The Trent 1000 in-service engine issues
have caused significant disruption for a
number of our customers, which we
sincerely regret. We continue to work
hard to remedy this situation and have
made further good progress on the
implementation of long-term solutions
during the year. We have significantly
increased our Trent 1000 MRO capacity,
sought ways to reduce engine shop visit
turnaround times and have added
approximately 50% more turbine blade
production capacity since the start of the
year. We recently confirmed that we have
gained certification for a redesigned
intermediate compressor rotor blade for
Trent 1000 Package C engines, with a
redesign for the Trent 1000 Package B
engine to follow. In addition, we have
obtained approval from the authorities
to move from the current hard life for the
Trent 1000 TEN on the intermediate
compressor rotor drum to an inspection
regime. We are also in the process of
developing a redesigned blade for
the Trent 1000 TEN and Trent 7000.
We introduced a new intermediate
pressure turbine blade with an improved
protective coating to defend against
sulphidation, and in relation to the high
pressure turbine blades (which had
impaired durability), a new blade design
was made available from October 2018.
Improvement in the fleet health of the
Trent 1000 is expected to be most clearly
seen through a declining level of AOG as
we progress through 2019.
The total cash impact on Civil Aerospace
from the Trent 1000 in-service issues in
2018 was £431m (2017: £119m). In 2019, we
expect the impact to be around £450m,
before declining by at least £100m in 2020
and stepping down materially thereafter.
All technical changes are expected to be
fully embodied into the Trent 1000 fleet by
2022. Costs to mitigate in-service issues on
the Trent 900 in 2018 were £14m. Given
their smaller scale, these costs will be
included within our normal operational
costs going forwards and not split out.
Operational and strategic review
Long term demand for passenger aircraft
remains strong, driven by the global
expansion of an increasingly mobile
middle-class. We expect this to drive
continued strong widebody airframe
demand, with an increased focus on newer,
more fuel-efficient aircraft which our
engines power. The progress made by our
three newest widebody engines supports
our strong market position in new
widebody aircraft. In March we powered
the entry into service of the Boeing 787-10
Dreamliner with delivery of the first Trent
1000 TEN powered 787-10 to Singapore
Airlines. February saw us join Airbus and
Qatar Airways to celebrate entry into
service of the A350-1000, powered by our
Trent XWB-97 engine. In November we
celebrated the delivery of the first
A330neo aircraft to enter service with TAP
Portugal, which is powered by the Trent
7000 engine. We also powered the first
flight of two new aircraft, the Beluga XL
transporter with the Trent 700 engine and
Bombardier’s latest business jet with the
newly certified Pearl 15.
In 2018 we delivered 469 widebody
engines, and shipped a further 11 engines
to airframer OEMs. This is lower than our
original projections and reflects a
combination of industry wide supply chain
challenges and our own early stage
production ramp-up challenges on the new
Trent 7000 engine. We have continued to
make progress reducing large engine OE
unit losses, down by 13% to £1.4m per engine.
A key contributor was the 32% reduction in
the Trent XWB-84 average OE loss.
Our in-service large engine fleet grew
by 8% in the year to 4,757 engines with
widebody engine flying hours increasing
14%, driven by growth in our Trent 700,
Trent 1000 and Trent XWB fleets. The Trent
700 fleet, which represents 34% of our
in-service fleet with over 1,600 installed
engines in service, celebrated its 2,000th
delivery in December and has now flown
over 50 million flying hours. This has
become the engine of choice for Airbus
A330ceo customers. Our Trent XWB-84
engine, which represents 9% of our
in-service widebody fleet, has now
achieved over three million flying hours
and in 2018 powered the world’s longest
commercial flight. As the world’s fastest-
selling widebody engine with around 1,300
engines on order and excellent reliability,
our Trent XWB engines will be a key driver
of the continued growth in our share of the
passenger widebody market.
At 2,288 engines our current total
widebody order book supports continued
growth in market share and in our installed
base, delivering strong service revenues
for decades.
In October Delta TechOps, based in Atlanta,
US, joined our expanded service network
for widebody engines when it began
operations as a Trent authorised maintenance
centre to carry out services on the
Trent 1000, Trent 7000 and Trent XWB
engines. We also took steps during the
year to increase our engine testing
capacity, signing a lease with American
Airlines for a testbed in Texas, US and
entering into an agreement with Thai
Airways International to support maturity
testing. Work continues to progress well on
the construction of a new testbed in Derby,
UK for the next generation of engines.
We continue to see positive signs of
recovery in the business aviation market
and are well placed to respond with our
new family of Pearl engines, launched
earlier this year with the Pearl 15 to power
the new Bombardier Global 5500 and
Global 6500 aircraft. This supports our
strategy of regaining market share in this
sector and reaffirms our position as the
top engine supplier in the long range,
large cabin sector of the market. We also
announced the expansion of our global
network of authorised service centres for
our business jet customers.
We have made excellent progress on our
future technology programmes. As part
of the continued development of our
new UltraFan demonstrator, we ran our
Advance3 demonstrator at full power for
the first time and successfully started icing
tests on our new lean burn and low
emission combustion system (ALECSys).
The UltraFan programme is not only the
foundation for our future large civil aero
engines but also provides underlying
technologies that will support other areas
of our business.
STRATEGIC REPORT 28
Strategic Report
Business Review
Rolls-Royce Holdings plc Annual Report 2018
PEARL SET TO SHINE
IN THE BUSINESS
JET MARKET
During the year, we proudly unveiled the
first member of a new engine family for
the next generation of business jets. The
Pearl 15 is the first of the planned Pearl
engine family for business aviation and
marks the sixth new civil aerospace engine
introduced by Rolls-Royce in the past decade.
The Pearl engine combines innovative
technologies derived from the Advance2
technology demonstrator programme with
proven features from the Rolls-Royce
BR700, today’s leading engine family in
business aviation. The Pearl 15 will be the
sole engine for Bombardier’s latest
business jets, the Global 5500 aircraft and
the Global 6500 aircraft, strengthening
our leading position in business aviation.
Alongside its luxury connotations, the
name Pearl continues the Rolls-Royce
tradition of naming engines after rivers:
there are Pearl rivers in China and the US,
both key markets for business aviation.
Civil Aerospace outlook
Our current widebody order book supports
the continued growth of our large engine
installed base, which in turn will drive
ongoing engine flying hour growth.
Revenue and profit improvements will be
led by continued reduction in OE deficits
and increased servicing activity. In 2019
we expect these dynamics to deliver
around 10% revenue growth and operating
profits to be closer to break-even. We
expect cash costs for the Trent 1000
in-service issues to be around £450m
in 2019. Given the smaller scale of the
Trent 900 in-service costs, these will
no longer be reported separately.
Encouraging progress was also made in our
strategy to champion electrification. We
are developing programmes to demonstrate
small scale full-electric and hybrid-electric
flight. We continue to design and deliver
new digital services for our customers
under the banner of our IntelligentEngine
vision. With the support of our newly-
established R² Data Labs team we are able
to combine our pioneering technology with
advancements in the digital arena to deliver
greater reliability, efficiency and value.
We continued to develop our service
proposition for our aircraft lessor
customers and have introduced
LessorCare. We now have 15 customers
covering around half of our leased
widebody fleet. LessorCare provides
faster and easier access to lessor services,
whilst maximising returns on investment.
Subsequently, we added LifeKey, which
gives customers greater control over
their assets by offering greater visibility,
accessibility, portability and liquidity.
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Business Review
29
THE FUTURE OF
ENGINE MAINTENANCE
We have teamed up with robotics partners
including Harvard University and University
of Nottingham to explore how robots
could revolutionise the future of engine
maintenance. ‘Inspect’ robots could be
embedded within an engine to improve
monitoring; ‘snake’ robots could work
their way into it for inspections; or tiny
collaborative ‘swarm’ robots could fix it.
Operating environment
Rolls-Royce key differentiators
Our continued development
of advanced world-leading
technology, culture of partnership
with customers and innovation in
services are attributes that
Civil Aerospace customers really
value and are difficult to imitate.
These differentiators will maintain
the business’ position at the
forefront of the civil
aerospace industry.
Market dynamics
— The slow-down in new aircraft orders
highlighted in 2017 has continued
through 2018 across all regions. These
market conditions were to be expected
after the high levels of order placement
over the past few years, as airlines
absorb the increased capacity. There
has been a slowdown in overall growth
in air travel; however, it remains robust
and higher than historical averages.
— Demand growth for air travel in all
regions has remained resilient to
recent geopolitical uncertainties, and
historically growth has recovered
quickly following major economic
shocks. A broad consensus forecasts
that air traffic (revenue passenger
kilometres) will grow by approximately
4.5% compound annual growth rate
over the next 20 years.
— The business jet market is seeing order
intakes improve on US demand, growth
elsewhere is more tentative with
some concern over the prospects
for world trade.
Opportunities
Business risks
— The business has a strong and growing
market position on widebody aircraft
produced by the world’s two major aircraft
manufacturers: Airbus and Boeing. The
current share of the widebody engine
market is 36% of the installed passenger
fleet and is expected to approach 50%
early in the next decade.
— The increasing size of the installed base
delivers significant services growth
opportunities. 90% of the current
Rolls-Royce widebody fleet is covered
by TotalCare service agreements.
— The business continues to invest in
technologies to enhance the existing and
near-future product portfolio. In parallel,
a number of engine demonstrators with
embedded electrical generators have
been successfully run; and work on
innovative hybrid aircraft demonstrator
projects is ongoing.
— The launch of the Pearl family of engines
and the winning of its first application
with Bombardier reinforces and secures
our long-term position in the business
jet sector.
— China’s COMAC and Russia’s UAC joint
venture, the China Russia Commercial
Aircraft International Corporation
(CRAIC) has been formally incorporated.
CRAIC plans to develop the CR929, a
long-haul widebody aircraft. Rolls-Royce
is actively exploring this opportunity.
— If our products do not achieve their
required technical attributes and
maturity, then product performance,
customer satisfaction, unit costs and
aftermarket costs may be impacted
and could result in financial and
reputational damage.
— If a major product failure in service is
experienced, then this could result in
loss of life and significant financial and
reputational damage.
— If an external event or severe economic
downturn significantly reduces air travel
and thereby reduces engine flying hours
and demand for aircraft, then financial
performance may be impacted.
— If aircraft manufacturer customers
significantly delay their production
rates or we cannot ramp up capacity
to deliver planned production and
services, then financial performance
may be impacted.
— If our internal or external supply chain
is not sufficiently resilient to events
that affect our operations, then this
could result in significant financial and
reputational damage. We have taken
appropriate mitigating actions against
the potential risks relating to Brexit
(see page 50).
— If the business experiences significant
pricing pressure from increased
competitor challenge in key markets,
then financial performance may
be impacted.
— If there are significant changes to the
regulatory environment for the airline
industry, then the market position
of the Civil Aerospace business may
be impacted.
STRATEGIC REPORT 30
Strategic Report
Business Review
Rolls-Royce Holdings plc Annual Report 2018
Power Systems
Power Systems is a leading provider of high-speed and medium-speed
reciprocating engines and complete propulsion systems. It serves the marine,
defence, power generation and industrial markets and includes civil nuclear
operations that supply safety-critical systems to approximately half the world's
nuclear power plants.
Underlying revenue mix
Services
33%
Civil Nuclear
5%
Defence
7%
Marine
29%
Power
Generation
29%
OE
67%
Underlying
revenue
£3,484m
2017: £3,008m
Underlying
operating profit
£317m
2017: £261m
Industrial
30%
Order backlog
£3.1bn
2017: £2.4bn
>20,000
reciprocating engines sold
per year
>1,200
development, production,
service and dealership locations
200
reactors in 20 countries
where Rolls-Royce nuclear
technology is installed
Key highlights
Underlying revenue increased by
15% driven by 18% growth in OE,
with some pre-buy ahead of
emission regulation changes, and
10% growth in services; reflecting
strong performance across key
market segments
Underlying operating profit
improved 20% driven by
higher volumes
Order intake growth of more than
20% reflecting strength across a
diverse range of end markets
Continued focus on service growth
with ValueCare agreements
gaining momentum
New power generation products
developed for data centre
applications and micro-grids to
help meet increasingly stringent
environmental regulations
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Business Review
31
Power Systems overview 2018
Power Systems made excellent progress
in 2018 driven by strong demand in key
markets and ongoing actions taken by our
new leadership, with an increased focus on
manufacturing efficiency. Our significant
installed base of engines across a broad
range of end markets, new lifecycle service
solutions, increased digital penetration,
and greater R&D discipline, underpin our
confidence for the future.
Financial overview
Commentary excludes L’Orange which has
been treated as non-core following its
disposal in June 2018.
Underlying revenue
Underlying revenue of £3,484m increased
by 15%. OE revenue rose by 18% driven by
strong demand across a broad range of end
markets. Key contributors were commodity
related markets, emissions regulatory led
demand in construction and agricultural
sectors and increased governmental
project volumes. In power generation the
strong demand for diesel and gas systems
was partly offset by the tough comparison
base following high levels of Chinese
demand in 2017.
Financial overview
£m
Underlying revenue
Underlying OE revenue
Underlying services revenue
Underlying gross profit
Gross margin %
Commercial and administrative
Restructuring
Research and development
charge
Joint ventures and associates
Underlying operating profit
Underlying operating margin %
2018
3,484
2,322
1,162
882
25.3%
(377)
(1)
(188)
1
317
9.1%
2017
3,008
1,956
1,052
797
26.5%
(350)
(1)
(181)
(4)
261
8.7%
Change
+16%
+19%
+10%
+11%
-120bps
+8%
–
+4%
n/a
+21%
+40bps
Organic
change
+15%
+18%
+10%
+10%
-120bps
+7%
–
+3%
n/a
+20%
+40bps
Services revenue increased by 10%,
primarily due to improved commodity
markets driving higher engine running
hours and increasing demand for spare
parts. The growth in major maintenance
activities, in particular with ferry operators,
as well as the growth in service activity in
the Middle East also contributed to the
growth. Good revenue growth on long-term
service contracts reflected our earlier
success in securing new contracts in rail
and marine markets.
Underlying operating profit
Overall underlying operating profit rose
20% to £317m, led by increased sales
volumes. Gross profit rose £78m reflecting
this volume growth albeit product mix
changes saw gross margin decline 120bps
to 25.3% as a result of strong growth in
lower margin construction and agricultural
activity. C&A costs of £(377)m were 7%
higher year-on-year due to pay escalation
and strategic investments. The 3% increase
in our R&D charge reflected increases in
investment in future engine platforms and
progress on our electrification strategy and
automation engineering capabilities.
LAYING THE TRACKS
FOR QUIETER, CLEANER
RAIL TRAVEL
Power Systems has a long heritage of
innovation on the world’s railways. Now, our
hybrid-electric PowerPacks are writing a
new chapter of environmentally-friendly,
quieter and more efficient rail travel.
The MTU Hybrid PowerPack combines the
advantages of diesel and battery-powered
rail traction. It helps reduce emissions,
increase fuel efficiency and improve the
lives of people who live near stations as it
runs more quietly than conventional trains.
It also represents a more economic way of
moving to lower carbon rail transport than
full electrification as it does not require the
installation of overhead power lines.
During the year, we announced letters of
intent with seven partners in the UK,
Ireland and Germany for the future delivery
of several hundred MTU Hybrid
PowerPacks.
STRATEGIC REPORT 32
Strategic Report
Business Review
Rolls-Royce Holdings plc Annual Report 2018
SMALL-SCALE,
BIG POTENTIAL
Renewable energy projects often face the
challenge of maintaining a reliable energy
supply when weather conditions are
unfavourable. Small-scale, autonomous
electricity networks – or micro-grids – that
combine co-generation plants, diesel or
gas powered gensets and renewable
sources, with batteries and a control
system, can provide a real solution.
During the year Power Systems launched
turnkey micro-grids and began
construction of a micro-grid validation
centre in Friedrichshafen, Germany,
enabling customers to see just what such a
system can deliver. As a micro-grid
provides security of supply, it can help to
boost the take-up of renewable energy and
further assist in the global transition to a
low carbon economy.
In the second half of the year a new
operations strategy was launched that
focuses on footprint efficiency and
production flexibility. In addition, digital
solutions introduced into our facilities have
led to efficiency gains.
Future growth was underpinned by the
introduction of a number of new products
during the year. In power generation major
product launches included the S4000 L64
PowerGen gas engine and the S4000
PowerGen diesel engine. Increasingly
stringent emissions regulation led to
the launch of the S1000–S1500
EU Stage V Diesel Engines for agriculture,
commodity and industrial applications.
The new generation S4000 marine diesel
engine was launched meeting the latest
emission legislations and was commissioned
by US ferry operator WETA.
R&D continues to focus on gas strategies
power generation applications, a new
generation of automation systems and
strengthening our electrical design
competence. In 2018 we focused our
engineering resources to reflect new
requirements for systems solutions and
expanded globally with the enlargement
of our India R&D facility. Work is being
carried out on a number of forward-looking
technology development concepts, including
the use of alternative fuels and fuel cells.
Operational and strategic review
Conditions across Power Systems’ diverse
end-markets remained robust throughout
2018. Recovery in the mining and onshore
oil & gas industries, where we saw increased
utilisation after several challenging years,
drove strong aftermarket service demand.
Increasingly stringent diesel engine
emissions regulations drove some pre-buy
in 2018, ahead of regulation changes that
will take effect in 2019. The exponential
growth in data usage and subsequent
expansion of data centres drove increasing
demand for back-up power solutions with
Power Systems’ products. The combination
of rising energy demand in developing
countries and the expansion of renewable
energy sources led to an increase in demand
for our flexible power solutions and products
such as micro-grid, hybridisation,
gasification, electrification and
energy storage.
We have made investments, both organic
and inorganic, and formed new partnerships
to support our strategy to become an
integrated solutions provider. Customers
are focusing on lifecycle performance,
energy optionality and responsiveness and
have an increasing requirement for digital
capabilities. As an example, we launched
turnkey micro-grid solutions and took a
strategic stake in the Berlin-based start-up
Qinous to develop energy storage and
further micro-grid capability.
We continue to make progress increasing
our focus on service solutions. Lifecycle
service contracts such as ValueCare
agreements continue to gain momentum
with several new contracts signed during
the year. The increased number of long-term
service agreements with customers of
Power Systems expands our aftermarket
opportunities and follows the successful
model pioneered in Civil Aerospace.
Demand for civil nuclear energy remains
strong, particularly in those nations where
clean energy policies are focused on
finding solutions with attractive economics.
This plays well to our SMR solution, starting
in the UK with further export potential in
the longer term.
Order intake remained strong with more
than 20% year-on-year growth driven by
the recovery of key markets, including
mining, yachts and onshore oil & gas, the
latter being supported by higher oil prices.
Power generation orders continued to grow
with an increasing number of data centre
projects. We secured the first letters of
intent for hybrid rail systems with
Porterbrook and Irish Rail for the MTU
Hybrid PowerPack. This powerpack is an
eco-friendly drive system combining the
best of diesel and battery-powered rail
traction. It will deliver up to 33% lower fuel
consumption and CO2 emissions, a fall in
noise levels around railway stations of as
much as 75% and significantly lower
operating costs.
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Business Review
33
Power Systems outlook
As we enter 2019 our confidence for the
year ahead is underpinned by significantly
improved order coverage than at this point
last year. After the strong pre-buy effect in
2018, revenue growth is expected to
moderate to mid single-digit growth
supported by continued tightening of
emission regulations, increasing data
storage requirements and the growth
of lifecycle solutions. Operating margins
are expected to increase by around 100bps
and we remain on track to realise our
mid-teens operating margin ambition
in the mid-term.
Business risks
— If electrical storage technologies
develop faster than anticipated, then
these may substitute Rolls-Royce
products and/or affect margins.
— If other players in the industry
consolidate, then they may generate
synergies or capabilities that outpace
the ability of the business to get new
products and services to market.
— If new disruptive service models,
for example 3D printing of spare
parts or new digital service models,
are offered by competitors, then
we may lose attractiveness and
competitive edge.
— If the industry fails to tackle the current
supply chain constraints, then the
market demand cannot be met
as anticipated.
— If nuclear energy is reduced in priority
by certain countries for political or
economic reasons, then the civil
nuclear market will suffer.
— If there is not clarity on UK energy
policy and the willingness of UK
Government to support SMR
development, then continued
investment may be called into question.
Opportunities
— Rising energy demand in developing
countries in combination with expansion
of renewable energy sources will increase
the demand for flexible power solutions
and products beyond combustion
engines (for example, micro-grid,
hybridisation, electrification, energy
storage and gasification).
— There is continued growth forecast in
emerging markets, for example China
and India, where domestic partnerships
including local value creation will
continue to be important.
— Tightening emission regulations in
several regions will require clean diesel
solutions where the business is well
positioned (for example S4000 engine).
— Exponentially growing data usage requires
rapid expansion of data centres and
infrastructure and therefore
corresponding back-up power solutions,
Power Systems power generation
systems are in particular demand due
to their reliability.
— Increased utilisation in recovering
resource markets due to wear and tear
of existing fleets is leading to emerging
services opportunities.
— Nuclear energy demand remains
significant across developed nations,
with the need for attractive economics
and ability to finance dominating
customer requirements. Our SMR
technology is well placed to meet these
requirements, with opportunities in the
UK, Eastern Europe, the Middle East
and Canada.
Operating environment
Rolls-Royce key differentiators
Technology leadership and a
reputation for market-leading
performance and system approach,
new product innovation, full
lifecycle service solutions and
high levels of customisation in
collaboration with customers
will maintain a strong market
position for Power Systems.
Market dynamics
— Almost all OE markets continued to
improve in 2018, with the exception of
the offshore marine markets. There is
strong demand in mining and onshore
oil & gas markets.
— Increased utilisation in resource
industries, especially oil & gas and
mining, is driving aftermarket service
demand after several years of
challenging market conditions.
— There continues to be increasingly
stringent government regulation in
most markets with regards to emissions
from diesel engines.
— The industry is increasingly focused on
service solutions, electric and hybrid
power solutions as well as renewable
energy solutions and digital capabilities;
this is stimulating organic and inorganic
investments and accelerating
acquisitions and partnerships.
— Power Systems is experiencing
increasing competition in its core
markets as existing competitors launch
new engine series and new players
emerge with new technologies, for
example battery container offerings
from adjacent industries such
as automotive.
— The civil nuclear market has strengthened
in areas with set energy policy and
financing mechanisms but weakened in
areas where GHG reductions are not
being prioritised.
STRATEGIC REPORT 34
Strategic Report
Business Review
Rolls-Royce Holdings plc Annual Report 2018
Defence
Defence is a market leader in aero engines for military transport and patrol
aircraft with strong positions in combat and helicopter applications. It has
significant scale in naval markets across the world and is the technical
authority for the through-life support of the nuclear power plant for the
Royal Navy’s submarine fleet.
Underlying revenue mix
Key highlights
Services
54%
Other
13%
Naval
8%
OE
46%
Submarines
20%
Underlying
revenue
£3,124m
2017: £3,180m
Underlying
operating profit
£427m
2017: £454m
Transport
37%
Combat
22%
Order backlog
£6.8bn
2017: £5.8bn
16,000
engines in service around
the world
150
customers in over
100 countries
>50
years powering the UK’s nuclear
submarine fleet
Underlying revenue broadly flat
with modest increase in OE offset
by reduced service revenues
Underlying operating profit down
£16m due to higher R&D spend
reflecting our focus on future
technology development, partly
offset by lower C&A costs
Strong year for new order intake
with £3.9bn of customer orders
and 1.3 book-to-bill ratio; notable
orders included a further
production contract for the
F-35 LiftSystem and EJ200
engines for Qatar
MT30 engine continued to prove
its success in the Naval market;
selection on Japan’s 30FFM
frigate programme; negotiations
progressing to secure
further exports
Confirmed as one of four partner
companies on Tempest, UK combat
demonstrator programme
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Business Review
35
Defence overview 2018
Defence had a solid year, with good progress
on the full integration of defence aerospace,
naval marine and submarines into one
business and delivering on our 2018 facility
modernisation plans. OE revenues increased,
driven in part by demand for transport
engines. Service revenue declined reflecting
lower activity in submarines. Underlying
operating profit was lower due to increased
R&D on ongoing future technology
development partly offset by reduced C&A
cost. As we look to the year ahead, our stable
outlook is underpinned by strong order
intake achieved in 2018.
Financial overview
Underlying revenue
Underlying revenue of £3,124m was broadly
flat compared to the prior year. OE revenue,
6% higher year-on-year, was driven by
increased demand for transport engines
such as the Multi-Role Tanker Transport
(MRTT) aircraft and an OE contract for the
UK’s Dreadnought submarine programme.
This was partly offset by reduced combat
volumes after the completion of the Oman
EJ200 production contract in 2017. Service
revenue was 4% lower, as increased LTSA
revenues on EJ200 and Adour were offset
by lower service revenue due to the
phasing of work on UK submarines.
Financial overview
£m
Underlying revenue
Underlying OE revenue
Underlying services revenue
Underlying gross profit
Gross margin %
Commercial and administrative
Restructuring
Research and
development charge
Joint ventures and associates
Underlying operating profit
Underlying operating margin %
2018
3,124
1,452
1,672
690
22.1%
(170)
(3)
(100)
10
427
13.7%
2017
3,180
1,398
1,782
728
22.9%
(188)
(4)
(89)
7
454
14.3%
Change
-2%
+4%
-6%
-5%
-80bps
-10%
-25%
+12%
+43%
-6%
-60bps
Organic
change
+0%
+6%
-4%
-3%
-80bps
-9%
-25%
+13%
+43%
-4%
-50bps
Underlying operating profit
Underlying operating profit of £427m was
£16m lower than the prior year. Gross profit
of £690m fell 3%, driven by lower OE
combat volumes and lower margins on a
bridging contract for submarines services
following the introduction of single source
contract regulations (SSCR). This was
partially offset by increased sales of MRTT
engines and improved LTSA margins driven
by customer settlements and higher
AE engine volume.
An increase in R&D spend of £11m largely
reflected ongoing future technology
development. C&A costs were £17m lower
as a result of actions taken across the
business to manage discretionary spend.
Operational and strategic review
Overall, our Defence markets remain stable.
The United States continues to be our largest
addressable market, where we have a
particularly strong position in the transport
and patrol segment. While annual US
Department of Defense budgets can
fluctuate from year to year, we expect
modest growth over the long term. The UK
and Europe remain important markets for
us; the political environment in these markets
typically leads to large defence programmes
being developed by a consortium of two
or more companies, a trend we expect to
continue. In Asia and the Middle East,
indigenisation and regional threat levels
have led to areas of higher growth.
BRINGING DEFENCE
TOGETHER
The Royal Navy’s new carrier strike force
showcases the combined capability of the
newly integrated Rolls-Royce Defence
business. Four months after the UK’s first
F-35B Lightning II aircraft arrived at RAF
Marham, the new Queen Elizabeth (QE)
class aircraft carrier conducted its first
flight operations. Twin Rolls-Royce MT30
engines powered the ship into position
while the Rolls-Royce LiftSystem enabled
the F-35B to perform the first ever
shipborne rolling vertical landing. This
manoeuvre allows the jet to land with a
heavier load, removing the need to jettison
fuel or weapons.
Once fully deployed, the QE class carriers
will be the heart of a potent carrier strike
capability group, supported by escort
frigates, destroyers and nuclear-powered
Astute-class submarines – all reliant on
Rolls-Royce propulsion systems.
STRATEGIC REPORT 36
Strategic Report
Business Review
Rolls-Royce Holdings plc Annual Report 2018
MT30 POWERS
AHEAD IN JAPAN
The MT30 marine gas turbine continued its
success during 2018 with Japan becoming
the fifth navy to select the engine –
which is derived from Trent aero-engine
technology. The Japan Maritime Self
Defence Force (JMSDF) selected the MT30
to power a new class of frigates, the 30FFM.
The power and performance of the MT30
provides shipbuilders and system designers
with new options and the ability to
futureproof their latest naval platforms. It
also provides the additional benefit of low
on-board maintenance requirements while
retaining its high power throughout its life.
The world’s navies are demanding more
power and for Japan the MT30 will deliver
a power rating in excess of 40 megawatts
– enough to power a small town.
In terms of new technology and R&D,
Defence continues to make good progress
towards securing a substantive role in
delivering a new combat engine through
our position as one of four partner companies
on Team Tempest, a UK programme aimed
at maintaining the nation’s position as a
leader in combat capability. Furthermore,
our AE 3007 engine was selected to power
the US Navy’s MQ-25 Stingray, a new
unmanned tanker aircraft. The UK
Government has further underpinned the
Dreadnought submarine programme for
which our Defence business will supply
the nuclear power capability.
Defence outlook
The Defence order backlog remains strong
with a healthy number of new orders
received in 2018 giving us confidence in
our medium-term outlook. In 2019, revenue
is expected to remain stable with operating
margins around 100bps lower as we increase
investment in new platforms to position us
for the next generation opportunities in
transport and combat end markets.
Operationally, Defence completed the
implementation of its simplified five-layer
organisation as part of the Group’s wider
restructuring programme. This has
streamlined Defence programmes and
services activities and created aligned
functional support.
Defence achieved its 2018 facility
modernisation milestones in Indianapolis
which included the relocation of over half
of manufacturing operations into new
facilities. The business also successfully
started the transition of a substantial element
of AE transport overhaul capability to
Standard Aero, progressing towards a 2019
exit of the Oakland, US repair and overhaul
facility. Together, these transformations will
enable our Defence business to be more
responsive to our customer needs while
focusing our capital allocation on future
products and technology.
2018 was a strong year for new order intake
with Defence capturing £3.9bn of customer
orders, a 1.3 book-to-bill ratio. Accordingly,
our Defence order backlog grew 17% in the
year to £6.8bn.
In aerospace, notable orders included; an
additional production contract for the
F-35 LiftSystem and EJ200 engines for
Typhoon from Qatar. In addition, the first
deliveries of the Trent 700 powered
Airbus A330 MRTT were made to France,
Singapore and the Republic of Korea.
In maritime, we secured contracts in
submarines representing orders for
decommissioning, development and
sustainment activity in the near-term.
Our MT30 engine continued to prove its
success in the naval market, including a
further application secured this year with
the selection for Japan’s 30FFM frigate
programme and with negotiations
progressing to secure further exports.
In services, the US Department of Defense
renewed around £0.9bn of contracts to
support in-service fleets across our
transport, combat and trainer markets and
Saudi Arabia renewed the RB199 support
contract for its Tornado fleet.
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Business Review
37
FROM DREADNOUGHT
TO DREADNOUGHT
The year 2018 marked 60 years since the
signing of the mutual defence agreement
between the US and the UK, which heralded
the involvement of Rolls-Royce in nuclear
propulsion and led to the launch of the
first Royal Navy nuclear submarine,
HMS Dreadnought.
In a fitting tribute to this milestone, the
Dreadnought Alliance was launched during
2018, which will see a second submarine
named Dreadnought enter into service in
the early 2030s. Powered by a new design
of propulsion plant, PWR3, the next
Dreadnought will further extend Operation
Resilience, the Royal Navy’s continuous
at-sea deterrence capability, which in 2019
will celebrate its 50th year.
Operating environment
Rolls-Royce key differentiators
Advanced technology, innovation,
and collaboration with partners
and customers are unique hallmarks
of Defence. These differentiators
ensure successful delivery of
products and services tailored
to customers’ evolving needs.
Market dynamics
— Long-term defence investment is tied
to economic growth while threat levels
and politics drive near-term spend; the
business expects to see modest growth
across the globe in the coming years.
— While higher-growth areas exist in
Asia and the Middle East, driven by
indigenisation and regional threats,
the US represents nearly half of
addressable defence spend globally.
— Programme wins are generally
long-term and as a result barriers
to entry are high, which leads to
entrenched competitors and
aggressive competition for
new opportunities.
Opportunities
Business risks
— There is strong interest in electrification
across land, sea, and air platforms; the
business is exploring more electric and
hybrid-electric propulsion technologies
as well as power generation for
high-energy systems.
— Combat propulsion remains the largest
market segment, with opportunities for
current products (LiftSystem and EJ200),
UK investment in future combat air
technologies (Tempest), and new
international and next generation
programmes (Turkey TF-X).
— In transport, Defence is well positioned
for various next-generation opportunities,
as demonstrated by the recent win of the
US Navy MQ-25A program.
— Building on success as preferred gas
turbine provider on Korean FFX Batch III
and Australian SEA 5000 programmes,
Defence is well positioned to capture
other large maritime opportunities with
the MT30.
— There is strong service growth potential
via technology insertion, and emerging
service opportunities using digital
technology and data analytics to
generate new solutions.
— If a major product failure in service is
experienced, then this may result in
loss of life and significant financial and
reputational damage.
— If global defence spending experiences
a significant downturn, then financial
performance would be impacted.
— If we do not continue to invest in
improving the performance and cost
of Rolls-Royce products, then market
share may be lost.
— If the business suffers a major disruption
in its supply chain, then delivery
schedules would be delayed, damaging
financial performance and reputation.
We have taken appropriate mitigating
actions against the potential risks
relating to Brexit (see page 50).
— If new applications are not secured,
then the business may have to increase
investment or accept erosion
in capabilities.
— If electrification and digitalisation
technology proceeds at a faster rate
than expected, then the business may
not be positioned to fully capitalise
on this potential growth.
STRATEGIC REPORT 38
Strategic Report
Business Review
Rolls-Royce Holdings plc Annual Report 2018
ITP Aero
ITP Aero is a global leader in aero engine design, manufacture and
maintenance. Alongside the development, manufacturing, assembly and
testing of engines, it provides MRO services for regional airlines, business
aviation, helicopters, industrial and defence applications.
Underlying revenue mix
Services
15%
OE
85%
In Service
Support
15%
Defence
Business
Unit
18%
Key highlights
Underlying revenue increased by
6% primarily driven by higher civil
aerospace OE deliveries
Operating profit broadly flat;
lower gross profit; offset by
lower C&A cost and R&D costs
Good progress on footprint
expansion plans
Civil
Business
Unit
67%
Underlying
revenue
£779m
2017: £725m
Underlying
operating profit
£67m
2017: £65m
Order backlog
£0.9bn
2017: £1.1bn
16
facilities in six countries
(India, Malta, Mexico, Spain,
UK and US)
7
Trent engine programmes in
which ITP Aero is a risk and
revenue sharing partner
>575
engines and modules serviced
by ITP Aero per year
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Business Review
39
ITP Aero overview 2018
ITP Aero delivered good growth in 2018
driven by its exposure to civil aerospace
growth programmes. Capacity was increased
to support this, with 5% higher headcount.
Underlying operating profit rose by 3%
despite the impact of the share of Trent
1000 in-service issues shared with ITP Aero.
We are well positioned to deliver further good
growth, supported by long-term demand
for growth in air travel and our exposure
to growing civil aero engine programmes.
Financial overview
Underlying revenue
Underlying revenue grew 6% to £779m led by
progress in civil aerospace OE revenues, which
saw good growth from increased volumes
across Rolls-Royce and Pratt & Whitney
programmes as well as improved pricing. This
more than offset lower defence OE revenues,
driven by a reduction in EJ200 and TP400
delivery volumes. Services revenues were
lower, with weaker aftermarket revenues on
certain civil aerospace programmes which
more than offset a significant improvement
in defence aftermarket.
Underlying operating profit
Underlying operating profit was 3% higher
primarily driven by higher gross margins in
civil OE, reflecting better pricing and good
progress reducing unit costs. Operating
profit growth was delivered despite a profit
headwind from the impact of the share of
Trent 1000 in-service issues that were
allocated to ITP Aero. Gross margins in
defence were lower due to reduced EJ200
engine volumes.
Financial overview
£m
Underlying revenue
Underlying OE revenue
Underlying services revenue
Underlying gross profit
Gross margin %
Commercial and administrative
Restructuring
Research and
development charge
Underlying operating profit
Underlying operating margin %
2018
779
666
113
156
20.0%
(57)
(2)
(30)
67
8.6%
2017 *
725
554
171
159
21.9%
(61)
–
(33)
65
9.0%
Change
+7%
+20%
-34%
-2%
-190bps
-7%
–
-9%
+3%
-40bps
Organic
change
+6%
+19%
-35%
-3%
-200bps
-8%
–
-12%
+3%
-30bps
* ITP Aero was acquired on 19 December 2017. Prior year comparatives are unaudited and are presented for
comparison purposes only
Operational and strategic review
The long-term trends driving demand
growth in passenger aircraft remain strong.
Our business continues to expect strong
demand for aero engines across both narrow
and widebody aircraft, with an increased
focus on newer, more fuel efficient aircraft
types. This, coupled with our presence on
newly launched platforms that are currently
ramping up, provides a solid base for ongoing
growth in our civil aerospace business.
The production ramp-up in the year on
growth programmes from both Rolls-Royce
and Pratt & Whitney was supported by 8%
capacity growth. To cater for further ongoing
growth, we made good progress in 2018 on
our capital investment plans, with the
expansion of production facilities in Spain
and Mexico to support development of new
products. Actions taken to improve
manufacturing cost efficiency delivered good
progress in unit cost reduction, particularly
across our civil engine programmes.
We made significant progress on the
industrial plans included within our
ITP Aero 2020 strategic plan, announcing
an investment of €14.2 million (2018-2021)
in new facilities in Derio, Spain, focused on
the design and manufacturing of engine
external parts. This new plant will be
operational by late spring 2019. Our newly
built castings facility in Sestao, Spain is now
fully operational.
Significant milestones in 2018 included
delivery of the 600th low pressure turbine
for the Trent XWB-84; delivery of the last
EJ200 Tranche 3A engine to the Spanish
Air Force; and more than 575 engines and
modules serviced across plants in Spain,
US and Malta. We continue to execute our
R&T plan with good progress on UltraFan
turbine technology development and a
strengthening of the Centro de Fabricación
Aeronautica Avanzada (CFAA) in Biscay,
Spain with a large number of
development programmes.
ITP Aero outlook
Our exposure to growing civil aerospace
platforms supports our expectation of
around 10% revenue growth in 2019 with
a stable operating margin.
PARTNERING ON THE
TRENT XWB-97
ITP Aero has a long heritage supporting
Rolls-Royce as a risk and revenue sharing
partner. In 2013, ITP Aero started work on
the low pressure turbine for the high-thrust
variant of the Trent XWB, the Trent XWB-97.
That work involved an in-depth analysis of
the aerodynamic efficiency of the earlier
variant, the Trent XWB-84. As a result of
this work, ITP Aero achieved a decrease in
fuel consumption per pound of thrust on
the Trent XWB-97, which celebrated its
entry into service in 2018.
STRATEGIC REPORT 40
Strategic Report
Business Review
Rolls-Royce Holdings plc Annual Report 2018
NON-CORE BUSINESSES
Non-core businesses primarily comprise L’Orange, sold on
1 June 2018, and Commercial Marine, the proposed disposal
of which was announced on 6 July 2018.
L’Orange
In April, we announced an agreement to
sell L’Orange, a wholly owned subsidiary
of Rolls-Royce Power Systems, to
Woodward, Inc., a designer, manufacturer
and service provider of control system
solutions and components for aerospace
and industrial markets. The deal completed
in June. L’Orange supplies fuel injection
technology for engines that power a wide
range of industrial applications including
marine power and propulsion systems,
special-application vehicles and power
generation. L’Orange remains an important
partner and supplier for Power Systems
through a long-term supply agreement,
with an initial term of 15 years.
L’Orange financial overview
£m
Underlying revenue
Underlying operating profit
2018
(5 months)
89
21
2017
212
55
Commercial Marine
In January, we announced plans to
consolidate our naval marine and
submarines operations within our existing
Defence business and that we would be
evaluating strategic options for our
Commercial Marine operation. Since 2015
our Marine business has responded to
weak demand for products and services
for the offshore oil & gas market, which
significantly impacted its profitability. It has
divested non-core businesses, consolidated
its sites and reduced its workforce. At the
same time, the business has been investing
Commercial Marine financial overview
£m
Underlying revenue
Underlying operating profit
in new facilities and new technologies and
become an industry leader in the fields of
ship intelligence and autonomous vessels.
In July, we announced an agreement to sell
the business to KONGSBERG, the provider
of systems and solutions to clients within
the oil & gas industry, merchant marine,
defence and aerospace sectors.
KONGSBERG will, through a trading
arrangement, continue to have access to
products from Bergen Engines, which
remains part of Power Systems. The deal
is expected to complete during 2019.
2018
726
(35)
2017
810
(60)
Rolls-Royce Holdings plc Annual Report 2018
TECHNOLOGY
Strategic Report
Sustainability – Technology
41
Rolls-Royce develops products which are underpinned by cutting-edge
technologies and we are continuing to invest to maintain our competitive edge,
both today and in the future.
During 2018 we increased our momentum on
technologies to protect the competitiveness
of our core products; on digital technologies
to drive productivity across manufacturing,
design and services; and on developing
electrification technologies to prepare for
the third generation of aviation.
We made substantial progress on our
UltraFan demonstrator, which will offer 25%
fuel efficiency improvement over the first
generation of Trent engines. The underlying
gas turbine technologies will also support
our military and business jet customers.
Progress included:
— the Advance3 core at the heart of the
UltraFan demonstrator achieved full
power on test and performed in-line with
expectations;
— the power gearbox, which transmits the
UltraFan’s propulsive power to the large
fan, has achieved over 250 hours on test,
having proven its capability to run at
70,000 horsepower; and
— engine testing of the lean burn combustion
system has so far shown around half the
NOx emissions at cruise compared to
today’s levels.
We also welcomed the UK Government’s
announcement of the Tempest programme
to revitalise sovereign capability in combat
aviation. We supported advanced concept
activity with testing of the embedded
high-power electrical machines required to
power a modern sixth-generation fighter.
In dealing with the in-service issues with the
Trent 1000, we accelerated the implementation
of capabilities in advanced manufacturing
to increase turbine blade output by 75%,
and developed new near-wing overhaul
techniques to approximately halve engine
turnaround time from 30 days.
The ACCEL programme will create an all-electric plane that will fly at over 300mph.
Our global network of 31 University
Technology Centres and seven Advanced
Manufacturing Research Centres continued
to deliver world-class applied research. This
ranged from materials modelling developed
in the UK – which will enable extending the
service life of certain critical parts – to
increased efficiency axi-centrifugal compressor
technologies validated in the US, and smart
manufacturing and visual corrosion inspection
technology developed in Singapore. In total
we support around 500 PhD students
through our relationships with universities.
We supported our strategic goal of
championing electrification with the
formation of Rolls-Royce Electrical,
a self-contained capability group, to
advance technologies and new solutions.
It had a number of notable successes:
— established a number of technology
demonstration programmes to position
us to support the future of hybrid-electric
flight for regional aviation (E-Fan X) and
urban air mobility (EVTOL);
— progressed the development of power-
dense electrical technologies for kW and
MW power in hybrid systems. Our 2.5MW
power generation system is currently in
the build stage while our M250-based
hybrid-electric system has completed
ground testing;
— received a UK research grant for the
ACCEL programme to demonstrate
all-electric flight technologies; and
— signed customer letters of intent to
develop our first series hybrid-electric
system for marine yachts and to retrofit
over 140 diesel railcars as part of the
ongoing hybridisation of rail travel and
based on the successful demonstration
of MTU PowerPacks.
We also retained a dedicated team to work
on SMRs and we are in discussions with the
UK Government to develop these as an
affordable zero carbon electricity solution.
As a result of our focus on new technologies,
2018 saw us deliver 892 patents approved for
filing, aided by a series of focused workshops
and engaging our global population of
engineers through our innovation portal,
which now has more than 26,000 users.
Key facts
Number of engineers (at 31 Dec 2018)
2018 Gross R&D expenditure (£m)
892
Patents approved for filing
17,326
Number of engineers
across the Group
£1.4bn
Gross R&D expenditure
Other
2,681
Electrical
1,916
Services
1,162
Manufacturing
3,922
Other
6
Design
7,645
German
government
12
US
government
14
EU
funding
21
UK
government
228
Rolls-Royce
1,144
STRATEGIC REPORT
42
Strategic Report
Sustainability – Environment
Rolls-Royce Holdings plc Annual Report 2018
ENVIRONMENT
As a leading industrial technology company we have an irrefutable role in enabling
the transition to a low carbon global economy. We are committed to utilising our
engineering skills and technology capabilities to enable and accelerate this.
Our approach
We believe that the successful management of climate change will depend upon a
structured transition to a low carbon economy, driven by the development of
sustainable power solutions.
During 2018, our executive-level environment & sustainability committee reviewed our
governance, strategy and policies in relation to our environmental impacts. Our
environmental commitments are embedded within our governance framework and
operational procedures, including Our Code and associated Group policies. We have
also begun developing dedicated scenarios to understand the potential opportunities
and risks associated with climate change.
AS GOOD AS NEW,
SEVEN MILLION
MILES LATER
Our TotalCare model helps us to reduce waste and
optimise resource efficiency, whilst enabling our
customers to maximise the availability of their
engines. Through TotalCare we are able to extend
the service intervals between engine overhauls by
around 25%, with engines typically flying up to
seven million miles between shop visits. By keeping
engines flying for longer there is less demand for
new products and components that require complex
materials and are expensive and resource intensive to
manufacture.
Products and technology
We recognise the significant environmental
impacts of the markets in which we operate,
and as a result have a long-standing
commitment to minimising the impacts of
our products and services. The
technologies we are developing will
contribute significantly to decarbonising
global transport and the built environment.
In 2018, we spent £1.4bn on R&D to develop
the technology we embed in our products
and services. Over two-thirds of our R&D
expenditure is dedicated to improving the
environmental performance of our
products. This helps ensure that each
generation of product has a better
environmental performance than the last.
We are making good progress towards
achieving the industry level ACARE goals
for civil aviation, including reducing CO2
emissions per passenger kilometre by 75%
by 2050. With significant forecasted
growth in passenger demand it is critical
that we continue to develop new engine
technologies that meet customer’s
expectations for efficiency. Our
Trent 7000, which entered service this
year, builds upon the industry-leading
performance of the Trent XWB to deliver
10% better fuel efficiency than the engine
it is designed to replace.
We recognise that electrification and
hybrid solutions will deliver a step-change
in emissions performance. We are leading
the development of electric flight through
our R&D projects, including EVTOL and
E-Fan X. To support this, we are investing in
our electrical capabilities, including
launching focused graduate and
apprentice development programmes.
Our Power Systems business is the leading
provider of hybrid rail applications, which
can enable fast, quiet and efficient rail
transportation without the need for major
infrastructure change. Our micro-grid
technologies support wider uptake of
renewable energy solutions, such as wind
and solar, by providing battery and control
solutions. These can mitigate challenges
associated with storing renewable energy.
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Sustainability – Environment
43
Operations and facilities
Managing the environmental impacts of
our operations and facilities are a key part
of being a responsible and resilient business.
We seek to consider the environmental
impact of major business decisions, including
property developments, to reduce our
exposure to the physical and transitional
risks of climate change.
We apply circular economy principles across
our operations. Each year, we use over
30,000 tonnes of high-value metal alloys
in our manufacturing and production.
Through our revert programme of
closed-loop recycling, we seek to recover
and reuse materials wherever reasonably
possible to reduce the cost and
environmental impacts associated with
manufacturing. We have continued to
make progress in maturing our waste
management practices during 2018, and
are working in partnership with waste
management specialists and research
bodies to identify alternatives to landfill.
We continue to invest in low carbon and
renewable technologies, including
completion of a ground source heat pump
thermal storage project in Bristol, UK in 2018.
Following the early achievement of our
2020 energy reduction target in 2017, we
are extending this with a longer-term target
to reduce energy consumption by a further
20% by 2025.
TARGETING
ZERO EMISSIONS
BY 2030
We recognise the significance of climate change
and the global commitments made to reduce
greenhouse gas (GHG) emissions. We are replacing
our existing GHG target with a longer-term ambition
to achieve zero emissions from our operations and
facilities by 2030. This science-based target, aligned
to the GHG emissions reduction pathways required
to limit global temperature rise to 1.5oC, will drive
further investment in low carbon and renewable
energy solutions across our global footprint, and
reduce our vulnerability to volatile energy prices.
Absolute GHG
emissions (ktCO2e)
Energy consumption
(MWh/£m)
Total solid and
liquid waste (t/£m)
92 MWh/£m
4.78 t/£m
Waste to landfill
(000 tonnes)
2.7 kilotonnes
381 ktCO2e
2030
TARGET
0
2018
2017
2016
2015
2014
381
392
405
432
BASELINE
484
2025
TARGET
58
2025
TARGET
3.46
2020
TARGET
0
2018
2017
2016
2015
2014
BASELINE
92
94
94
104
115
2018
2017
2016
2015
2014
BASELINE
4.78
4.54
3.99
4.18
4.62
2018
2017
2016
2015
2014
2.7
3.4
4.8
BASELINE
7.2
8.2
Target: Achieve zero scope 1 + 2
GHG emissions by 2030 1,2,3,4
Target: Reduce energy
consumption by 50% by 2025 1,2,3,4
Target: Reduce solid and
liquid waste by 25% by 2025 1,2,3
Target: Achieve zero waste
to landfill by 2020 1,2
The GHG emissions associated with
our global operations and facilities
has reduced by 21% since 2014.
This has been achieved through
significant investment in renewable
and low carbon energy installations,
including solar and energy storage.
We continue to invest in renewable
and energy efficient technologies,
such as upgrading lighting and
heating, to reduce our energy use.
Our consumption has reduced by
20% from 2014, and we are on track
to meet our longer-term target.
Our total waste generation has
increased slightly as we have
improved our data reporting
processes and accuracy. We
continue to identify opportunities to
minimise the generation of waste at
source in our manufacturing.
The amount of waste sent to landfill
from our operations has reduced by
67% since 2014. This has been
achieved through continued
investment in waste management
improvements and the use of
innovative alternatives to landfill.
1 External assurance over the STEM, energy, GHG, and TRI rate data provided by Bureau Veritas. See page 197 for its sustainability assurance statement.
2 Data has been reported in accordance with our basis of reporting, available at www.rolls-royce.com/sustainability. Data for prior years has been restated to reflect the disposal of
L’Orange and the acquisition of ITP Aero. Data associated with ITP Aero is included in the GHG, energy and total waste targets for 2017 and 2018 only.
3 Emissions associated with product test and development, critical to ensuring product safety, and power generation are excluded from our GHG target. Statutory GHG emissions
data, including emissions from these sources, are detailed on page 203. Our energy and total waste reduction targets are normalised by revenue.
4 We have extended our previous energy consumption reduction target with a new target to 2025, the baseline year remains 2014. We have replaced our GHG emissions reduction
target with a new target to 2030.
STRATEGIC REPORT
44
Strategic Report
Sustainability – Our People
Rolls-Royce Holdings plc Annual Report 2018
OUR PEOPLE
It is through our people that we fulfil our potential, achieve our vision and execute
our strategy. We are committed to creating an environment where all of our
people can be at their best.
Our people framework
We introduced our people framework in 2017, consisting of five constituents to deliver our vision and strategy. The core competencies
and growing capabilities are determined by our existing and future strategic and operational needs, whilst our values and behaviours
drive our culture and conduct throughout the Group.
Care
Creating a working environment where each of us is able to be at our best.
Growing capabilities
Key capabilities needed to secure emerging opportunities:
Growing behaviours
Key behaviours needed to secure emerging opportunities:
— systems integration
— electrical engineering
— data sciences
— embrace agility
— be bold
— pursue collaboration
— seek simplicity
Core competencies
Key competencies needed to safeguard our current
competitiveness:
— engineering pre-eminence
— programme management
— business acumen
Core values
Key values needed to safeguard our current competitiveness:
— trusted to deliver excellence
— act with integrity
— operate safely
Restructuring and
cultural change
We continue to make progress with our
fundamental restructuring programme.
From the beginning of 2019, our core
businesses have been supported by a
Group Business Services organisation,
which pools our professional and
transactional services into one entity.
It will act and feel like a customer service
provider. During the latter half of 2018,
our head office reduced dramatically to
focus on corporate governance and Group
strategy, as well as our corporate
responsibilities. We have also created an
Innovation Hub, which draws together
skillsets and expertise which have common
application across the businesses, including
digital capabilities and future technologies.
Through these changes we are reducing
our non-manufacturing headcount. It is
never an easy decision to reduce our
workforce, but we must create a commercial
organisation that is as world-leading as our
technologies. Over the 24 months starting
in mid-2018, we expect the fundamental
restructuring to lead to the reduction of
around 4,600 roles. In 2018, we saw a
reduction of around 1,300 roles, taking our
non-manufacturing related headcount to
27,800. The programme is expected to gain
further momentum through 2019 with full
implementation of headcount reductions
and structural changes by mid-2020.
From its outset, the restructuring was
designed as more than just a cost-saving
exercise of reducing our headcount. It is a
simultaneous and strategic change of our
structure, our culture, our processes and
our people; transforming Rolls-Royce to be
the world’s leading industrial technology
company. It is nothing less than setting
ourselves up for success for this century.
There are elements of our current culture,
especially our employees’ pride and sense
of purpose, that we need to preserve and
enhance. However, there are other aspects
of our current culture that need changing.
We will do this by embedding our values
and behaviours throughout the
organisation so that every employee can
enjoy the same standard of care no matter
where they work. Particular areas of focus
will be centred around anti-bullying and
harassment, safety and wellbeing.
54,500 employees total
Non-core businesses
7.8%
Civil
Aerospace
47%
Corporate
0.2%
ITP Aero
7%
Power
Systems
19%
Defence
19%
Employees in 50 countries
Rest of World
15%
Spain
5%
Nordics
6%
USA &
Canada
13%
Germany
18%
UK
43%
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Sustainability – Our People
45
Leadership
Embedding our values and behaviours and
culture change hinges upon strong
leadership. We have renewed our Executive
Team and will continue to refresh our
Enterprise Leadership Group, comprising
our senior leadership, throughout 2019.
This group has reduced by more than a
third compared to the previous senior
leadership team, with 30% of the new group
being promoted internally, placed in a new
role or brought in from outside the
organisation. We continue to concentrate
on increasing the diversity of our leadership
population, including making progress
towards our 2020 target.
We have been working hard to ensure that
the expectations of our leaders and the
accountability deriving from their positions
within the Company are clear. The way we
assess, reward and promote our leaders is
increasingly linked to how they embody and
cast the shadow of these values and
behaviours in their teams and beyond.
To support these leaders, we are completely
refreshing our approach to leadership
learning not only to embed the new
expectations, but also so that our leaders
have a licence to operate before they move
to the next level of leadership – or become
a leader in the first place. Linked closely to
this leadership learning programme is a
refresh of our talent management system to
ensure we have the right leaders and to
encompass strengthened activities such as
succession planning, spotting potential and
structuring our talent groups.
Employee development
Investing in people is a core component
of our talent attraction and retention
programmes. During 2018 we invested
£27.1m in employee learning and
development, delivering over one million
hours of employee training.
This year, for the first time, employees were
required to complete all mandatory training
to be eligible for certain reward outcomes.
Mandatory training includes courses linked
to our code of conduct (Our Code) and
Group policies. Our broader learning
programmes include HSE, product safety,
ethics and leadership development; 70% of
our courses are now taken digitally as we
seek to develop a more agile culture.
Our approach to performance enablement
is based on providing regular, less formal
feedback and coaching. Dedicated training
and toolkits are available to support
managers with this and to enable some
great performance conversations across
the organisation.
Career framework
In 2018 we began work to launch a new
career framework, which is a refreshed
approach to the way we manage careers at
Rolls-Royce. This streamlined framework
contains broader job levels and removes
the complexity associated with multiple
layers of management. It should enable our
employees to move between roles within
the Group with more ease and greater
opportunity to broaden their experiences.
In 2018, 1,340 employees were promoted
internally and our employee turnover rate
decreased to 7.6% (2017: 9.3%).
Key facts
Female employee population
15.5%
91,000
Hours of employee
time volunteered
£27.1m
Invested in learning
and development
A STRONG AND
DIVERSE FUTURE
TALENT PIPELINE
A strong pipeline of future talent and
diverse experience is critical to our
ongoing success.
In 2018, 319 graduates and 450 apprentices
joined the Group into dedicated early
career development programmes; 62% of
these graduates joined engineering
development programmes. These include
new dedicated programmes for electrical
systems engineering and digital and
technology solutions. Other development
programmes include programme
management, human resources and
procurement. These provide a vital pipeline
of talent into our functions.
This year, 32% of graduates recruited were
female, supporting our target of achieving
a 30% female population on our graduate
programmes by 2020; 21% of apprentices
recruited were female.
STRATEGIC REPORT 46
Strategic Report
Sustainability – Our People
Rolls-Royce Holdings plc Annual Report 2018
Employee engagement
We provide a variety of channels to
communicate and engage with, and listen
to, our employees and their representatives.
We encourage participation and
engagement throughout the organisation,
through both formal and informal channels,
including our intranet, newsletters and
employee magazines. Team briefings and
employee forums allow employees to
discuss key developments and business
performance, and to contribute their views.
We consult and work closely with elected
employee representatives through
well-established frameworks, including
our European Works Council.
Our annual employee engagement survey
helps provide a measure of success for our
engagement activities. This year, 57% of
our in-scope employees participated in the
survey. The 2018 results highlighted strong
belief in our Company vision and values.
Our sustainable employee engagement
score remained stable for the third year
running, despite the ongoing
restructuring programme.
Our incentive schemes and all-employee
share programmes enable everyone to
share in our success.
For more information on the Board’s
stakeholder engagement see
Corporate Governance section,
page 67.
Diversity and inclusion
We are committed to building an inclusive
culture and diverse workforce. We believe
that a culture of inclusion is paramount to
creating an environment where all our
people can be at their best.
Our employee resource groups (ERGs)
support this by connecting people with
shared characteristics or experiences.
We have 18 ERGs globally, including our
PRISM and Propel with Pride groups for
LGBT+ employees; women and gender
diversity groups; and faith and ethnicity
based groups. Additional support networks
are also available in key geographies,
such as working parents, veterans and
disabilities groups.
Diversity continues to be a significant
challenge for the engineering sector as a
whole, but we are making progress as an
organisation. We are committed to increasing
the number of women at all levels, and have
made good progress towards our 2020
diversity targets during the year. We are
actively recruiting from groups typically
under-represented in our sector, particularly
women and minority ethnic groups. To
support the number of women in senior
manager positions we have introduced
50:50 shortlists and have partnered with
the FT 125 Women’s Forum in the UK.
Through our community investment and
education outreach programmes we aim
to engage young people from diverse
backgrounds in STEM subjects at an early
age. Our activities are focused on
promoting the opportunities that education
and career choices in STEM can offer.
We continue to work with organisations
such as Women in Science and Engineering,
Women in IT, Women in Finance and Women
in Nuclear to boost our visibility amongst
potential female talent. We support initiatives
driven by these organisations and others,
and sponsor awards such as Female
Undergraduate of the Year and Young
Woman Engineer of the Year to celebrate
success and showcase role models in the
engineering sector.
Our global diversity and inclusion and
anti-discrimation policies ensure that all
employees, regardless of gender, race,
religion, physical ability or any other
characteristic, are treated with dignity and
respect, and feel safe and empowered to
work without fear of bullying and
harassment. At the end of 2018 we
launched a global anti-bullying campaign,
championed by our Chief People Officer.
This will continue into 2019 and will focus
on encouraging employees to recognise
and challenge inappropriate behaviours.
We give full and fair consideration to all
employment applications from people with
disabilities and support disabled employees
in the workplace, helping them to make the
best use of their skills and expertise to
reach their full potential.
For Board members by gender
see page 59.
For Board diversity, see pages
73 and 74.
Progress against our 2020 diversity targets
In 2017 we launched a diversity and
inclusion strategy with global targets to
increase female participation at all levels
by 2020. These are supported by local
targets in key regions where we face
specific diversity challenges associated
with ethnicity, nationality and age.
TARGET
2020
2018
2016
2017
Our inclusiveness score is measured by a
subset of our employee engagement survey,
including questions related to whether
people feel they can be themselves at work
and are treated with fairness and respect.
2015
2014
Female employee population 1
Female senior manager population 2
17%
2020
TARGET
25%
15.5% (8,300)
15.1% (7,400)
14.8% (7,400)
15.2% (7,700)
14.8% (8,000)
2018
2017
2016
2015
2014
14.7% (13)
13.6% (18)
11.4% (16)
7.3% (14)
6.7% (12)
Inclusiveness score
2020
TARGET
2018
2017
2016
Female graduate population 3
Female high potentials population 3
2020
TARGET
30%
2020
TARGET
30%
2018
2017
2016
2015
2014
84
81
80
79
26%
23%
24%
26%
25%
2018
2017
2016
2015
2014
26%
25%
25%
25%
24%
1
2
Employee headcount data is calculated as the average number of full time equivalents throughout the year. Certain joint ventures are classified as joint operations. As a result,
1,000 employees associated with joint operations are included within our overall headcount, however we do not collect diversity information from these employees, therefore they
are omitted from this data.
Senior management population for 2018 is calculated as Executive Team and ELG population (2018 total: 88), prior years data refers to the senior leadership team that has been
replaced by the ELG through restructuring.
3 The graduate and high potentials targets refer to the number of employees on development programmes as at 31 December each year.
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Sustainability – Our People
47
INSPIRING
TOMORROW’S
PIONEERS
We recognise the need to inspire young
people in STEM subjects at an early age, to
enable them to make informed career and
education choices. In 2018, we reached
1.6 million people through our STEM
activities and programmes, and are now
92% towards our target to reach 6 million
people by 2020 ¹. We are extending this
target with a longer-term ambition to inspire
25 million of tomorrow’s pioneers by 2030.
During the year we invested £7m in broader
community engagement activities, including
£3.8m in cash contributions and 91,000
hours in employee time.
Employee wellbeing
Supporting employee wellbeing is
particularly important during times of
change. Our approach to wellbeing aims
to create a work environment which is
supportive of wellbeing, to remove barriers
to healthy behaviour, and to motivate
employees to lead healthy lifestyles at work.
During the year we have concentrated on
increasing awareness of employee wellbeing,
particularly mental health, at all levels of
the organisation. This included encouraging
employees to make personal commitments
to improving their individual wellbeing. We
have a comprehensive range of support
and guidance materials available to
employees, including resilience toolkits,
manager guides and online training. In key
regions, employees can access dedicated
support for work and non-work related
mental health challenges through our
employee assistance programmes. This
year, we have piloted mental health
champions in the UK, and now have 190
trained volunteers who can act as a first
point of call for employees who may need
support. We have also introduced
dedicated mental health first aid training.
We continue to build upon our site-based
wellbeing programme. This recognises sites
that have taken steps to enable employees
in making healthier choices, for example
introducing flexible workplace arrangements,
healthier catering options, or onsite
exercise facilities. To date, 68% of sites
have achieved a LiveWell award.
Health and safety
We believe that a safe and healthy workplace
is a better place for our people, our
customers and our business. Our health
and safety performance is fundamental to
our success and is integral to creating an
environment where everyone can be at
their best.
Operate safely is one of our core values
and we are committed to promoting a
Zero Harm culture.
To support this, we have introduced a suite
of Life Saving Rules, a clear set of simple
guidelines that focus on our most frequent
safety incidents and high-hazard activities.
These rules, accompanied by training and
communications, are aimed at supporting
our people in prioritising their personal
safety, and the safety of those around them,
in their daily decisions.
Throughout the ongoing Group-wide
restructuring we have concentrated on
building greater leadership accountability
for HSE risk. To support this, we have
launched dedicated training and toolkits
for our management population,
supporting them in recognising and
understanding HSE risk and the control
systems we have in place.
During 2018 we initiated a programme of
comprehensive safety reviews at some of
our major and high-hazard sites. From
these reviews we have identified and
prioritised a series of improvement actions.
TRI rate (per 100 employees) 1,2
2020
TARGET
0.3
2018
2017
2016
2015
2014
BASELINE
0.58
0.62
0.58
0.62
0.77
These risk-based improvement programmes
have contributed to a 6% improvement in
our total reportable injury (TRI) rate since
2014. This improvement rate is lower than
anticipated when our 2020 target was first
introduced, primarily due to changes within
the Group structure including the disposal
of L’Orange and inclusion of ITP Aero data
in our reporting for 2017 and 2018. The
continued promotion of a safety-conscious
culture, as well as increased maturity of our
HSE reporting, has led to increases in the
reporting of restricted work cases that has
impacted our overall TRI rate.
We remain committed to reducing our
injury rate and minimising the exposure of
our people to potential harm, and are
pleased to have made significant progress
following particularly poor performance in
2015. Our TRI rate for 2018 was 0.58 per
100 employees 1.
For more information on our safety
performance see the Safety & Ethics
Committee report, pages 96–101.
¹ External assurance over STEM, energy, GHG and TRI rate data provided by Bureau Veritas. See page 197 for the sustainability assurance statement.
² The TRI rate for prior years has been restated to reflect the disposal of L’Orange and the acquisition of ITP Aero. ITP Aero data is included for years 2017 and 2018 only.
STRATEGIC REPORT
48
Strategic Report
Sustainability – Ethics and Compliance
Rolls-Royce Holdings plc Annual Report 2018
ETHICS AND COMPLIANCE
We work hard to create an environment where everyone in Rolls-Royce can
work safely, act with integrity, and deliver excellence. This helps ensure that we are
a company that people want to work for and want to work with. It helps to keep us
strong, sustainable and resilient as a business.
We continue to meet the requirements of
the DPAs entered into in 2017, including
reporting progress made with our ethics
and compliance programme. During the
year we published an enhanced code
of conduct (Our Code), as well as a suite
of consolidated Group policies. Our Code
focuses on our new values and behaviours,
and brings together our commitments to
adhere to the highest standards and to
supporting our people to be at their best.
Our Code applies to all employees,
wherever they are located.
We have a zero tolerance approach to
misconduct of any kind, and will take
disciplinary action, up to and including
dismissal, in the event of a breach. In 2018,
59 employees (2017: 65 employees) left the
Group for reasons related to breaches of
Our Code.
Our Code sets out the behaviours and
principles we expect each of our people
to demonstrate. It also provides guidance
on how to apply these principles in our
daily activities through real life examples.
Our Code can be accessed online or as a
mobile app, as well as in booklet form.
In 2018, 99% of managers certified their
commitment to adhere to these principles;
98% of employees completed our ethics
training. We flow these commitments to our
suppliers through our Supplier Code of
Conduct, which was also reviewed during
the year. All suppliers are contracted
to adhere to this, or to a mutually
agreed alternative.
OUR VALUES
Our values and behaviours drive our culture
and conduct throughout the Group.
Our values, Our Code and associated
Group policies support employees in
doing the right thing, making the right
decisions and working in the right way.
Trusted to deliver
excellence
Operate safely
Act with integrity
Anti-bribery and corruption
Our Code and anti-bribery and corruption
policies are clear in our commitment not to
tolerate bribery or corruption of any form.
During 2018, we continued to take steps to
strengthen our anti-bribery and corruption
compliance, including updating our
policies and continuing our monitoring and
assurance work.
Our due diligence is dependent on the level
of risk that a particular third party presents,
and may include verification visits, screening,
interviews and obtaining reports from
specialist providers. This year we have
conducted a number of external audits on
some of our highest-risk third parties. We
also conduct extensive due diligence before
entering into joint ventures, and are working
with our existing joint ventures to enhance
their own ethics and compliance programmes.
Those employees who have a higher
likelihood of exposure to potential bribery
and corruption, due for example to their
work location or role type, are required to
complete dedicated training. This year’s
training focused on gifts and hospitality.
Human rights
We are committed to maintaining the
highest ethical standards, and to
maintaining and improving global policies
and processes to avoid any potential
complicity in human rights violations
related to our operations or supply chain.
This commitment, including our position on
forced labour, involuntary labour, child
labour, and human trafficking, is embedded
within Our Code, as well as our Global
Human Rights policy and Supplier Code
of Conduct. Human rights due diligence is
embedded within our operating systems
and processes, including recruitment and
procurement processes.
More information on our approach
can be found in our anti-slavery and
human trafficking statement, available
at www.rolls-royce.com.
For more information see
Safety & Ethics Committee Report,
pages 96 to 101.
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Sustainability – Non-financial Information Statement
49
NON-FINANCIAL INFORMATION STATEMENT
The EU Non-Financial Reporting Directive applies to the Group for the first time this
year and the following chart summarises where you can find further information on
each of the key areas of disclosure that the directive requires. Further disclosures,
including our Group policies and non-financial targets and performance data, can
be found in the sustainability section at www.rolls-royce.com.
Environmental, social and
employee related matters
Business model, policies,
principal risks and KPIs
— As a leading industrial technology company we have
an irrefutable role in enabling the transition to a low
carbon global economy. We are committed to utilising
our engineering skills and technological capabilities
to enable and accelerate this. See page 42
— Our place in communities around the world
is important and we have built close ties with local
communities. In addition, our activities to inspire
young people in STEM subjects at an early age is
important to enable them to make informed career
choices. See page 47.
— It is through our people that we fulfil our potential,
achieve our vision and execute our strategy. We are
committed to creating an environment where all of
our people can be at their best, with the right values
and competencies for today, and the right capabilities
and behaviours for the future. See page 44.
— Our business model provides an insight into the
key resources and relationships that support the
generation and preservation of value within
Rolls-Royce. See page 12. We believe that
stakeholder engagement remains vital to building a
sustainable business and in 2018 the Board reviewed
the engagement across the Group. See page 66.
— We develop Group policies that are applicable across
our global operations to address material issues
pertinent to our operations and activities. These are
publicly available in English. Group policies are
translated and made available to employees in local
languages that reflect our key geographies.
— Principal risks are identified by the Group and a
robust risk assessment of each one is carried out by
the Board or one of its committees. See page 50.
— Non-financial key performance indicators allow us
to assess progress against objectives and monitor
the development and performance of specific areas
of the business. These are set out on page 15 and
metrics specific to environment and people can be
found on pages 43 and 46 respectively.
Human rights and
anti-bribery related matters
— We are committed to maintaining the highest ethical
standards and to maintaining and improving global
policies and processes to avoid any potential
complicity in human rights violations related to our
operations or supply chain. See page 48 together
with our anti-slavery and human trafficking statement
at www.rolls-royce.com.
— We work hard to create an environment where
everyone in Rolls-Royce can work safely, act with
integrity, and deliver excellence. Our Code and
anti-bribery and corruption policies are clear in our
commitment to not tolerate bribery or corruption of
any form. See page 48.
Diversity policy and approach
— We are committed to building an inclusive culture
and diverse workforce. We believe that a culture of
inclusion is paramount to creating an environment
where all our people can be at their best. However,
diversity continues to be a significant challenge for
the engineering sector as a whole but we are making
progress as an organisation.
— In 2017 we launched a diversity and inclusion
strategy with global targets – see page 46.
— The Board reviews its diversity policy annually to
ensure it is at least aligned with best practice and
any proposed changes are appropriate for the Group.
See pages 73 and 74 and www.rolls-royce.com.
STRATEGIC REPORT
50
Strategic report
Principal Risks
Rolls-Royce Holdings plc Annual Report 2018
PRINCIPAL RISKS
Risk management
The Board is responsible for the Group’s
risk management system (RMS) and internal
control systems.
Our RMS is designed to identify and manage,
rather than eliminate, the risk of failure to
achieve business objectives and to provide
reasonable, but not absolute, assurance
against material misstatement or loss.
We continue to build risk management into
the way we work to help us to make better
decisions. It is implemented through a
mandated Group-wide risk management
policy, including our process, software tools
and governance structures. Our risk policy
is supported by training and a team of experts.
Businesses and functions are accountable
for identifying and managing risks in line
with this policy.
The Executive Team recently refreshed their
principal risks, based on the new organisation
structure, strategy and Group priorities.
Business continuity plans are in place to
mitigate continuity risks and there has
continued to be regular testing of the
adequacy of these plans through
exercises at every level of our incident
management framework.
Joint ventures constitute a large part of the
Group’s activities. Responsibility for risk and
internal controls in joint ventures lies with
the managers of those operations. Through
Board representation, we seek to align the
approach to risk and internal controls with
that of the Group. Management and internal
audit regularly review the activities of these
joint ventures.
Improvements to our
risk management system
During the past year we have continued to
build and enhance our RMS, specifically:
— embedding the improvements to our risk
appetite framework, with key early warning
metrics being introduced;
— launching a refreshed and simplified suite
of Group policies, which set the tone by
confirming that managing risk effectively
Management of principal risks
is critical to the ongoing success and
resilience of the Group;
— introducing a risk assurance programme
assessing how effectively the Group-wide
RMS has been implemented and
providing visibility of where further
improvement is needed;
— strengthening focus on assessment
and treatment of our safety, compliance
and business continuity risks at our
remote locations;
— improving our horizon scanning, by
uncovering previously hidden risks
which commonly arise from external
factors, incorrect assumptions or a
lack of clear accountability;
— evaluating climate change scenarios; and
— increasing the number of exercises of
our incident management framework,
focused on our principal risks.
In 2019, we plan further enhancements to
all of these areas, including placing greater
focus on emerging risks and near misses,
launching an improved training offering
promoting a culture of risk management,
increased digital support and integrated
testing of contingency plans. These
improvements will also support changes
recommended in the FRC's recently revised
Code, together with the revised Guidance
on Board Effectiveness.
Principal risks
The Executive Team has refreshed the
principal risks (pages 51 to 54) that we need
to manage to deliver our strategic objectives.
Responsibility for oversight of all the
refreshed principal risks have been
allocated to the Board itself or one of its
committees to ensure there is appropriate
monitoring and challenge.
We continued the deep dives we introduced
last year and all principal risks, including
their mitigation plans and controls, have
been reviewed by the Board or one of its
committees. The following changes were
made to our principal risks for 2019:
— added Strategic Transformation to
recognise the significance and extent of
the organisational and cultural changes
required to achieve our vision, improve
our financial returns and meet our
stakeholders' expectations;
— expanded Safety to reflect our
expectations of having a safe and healthy
place of work and the increasing
importance of sustaining the environment
that we live and operate in;
— re-named IT Vulnerability as Cyber
Threat to better reflect the nature of
this risk, placing more emphasis on the
potential threat of cyber-attacks to our
products as well as the additional
controls we have introduced; and
— Disruptive Technologies and Business
Models is a key risk relating to our
competitiveness and this has been
brought under the re-named principal
risk of Competitive Environment
(replacing Competitive Position).
Political risk
Our Brexit steering group has continued
to assess potential impacts of the UK
leaving the EU, including uncertainties
related to our principal risks. We have
continued to brief the UK Government,
other governments, and regulatory
agencies on our Brexit-related issues.
While we wait for clarity on the Brexit
process, we have identified and
implemented contingency plans to minimise
interruption to our service to customers as
a result of Brexit. These contingency plans
include: building inventory and relocating
some inventory to mainland Europe;
increasing our options for logistics
movements; assessing our suppliers’
readiness and liaising with higher-risk
suppliers; and transferring our EASA Design
Organisation Approval to Rolls-Royce
Deutschland Ltd & Co KG. We update our
people regularly on key Brexit issues and
the steps we are taking, and are supporting
EU nationals in the UK and UK nationals in
the EU on steps they may need to take to
retain the right to work. We will keep our
contingency measures under review during
the Brexit process and the Board is regularly
updated on our risk mitigation activities.
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
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Principal Risks
51
Building beyond the breakthrough in 2019
2019 priorities
1 Customers
— Increase
production
volume
— Expand service
network
— Mitigate
disruption from
in-service issues
2 T echnology
3 People & culture
— Revitalise service
— Build a resilient
4 Financial progress
— Continue
— Develop new
engine
architecture
— Advance
electrification
projects
business
— Continue
restructuring
programme
— Further simplify
processes
— Diversity &
inclusion
improving
free cash flow
— Further
strengthen
balance sheet
— Enhance capital
allocation
discipline
Change in risk level
from 2018
Increased
Decreased
Static
PRINCIPAL RISK OR UNCERTAINTY
HOW WE MANAGE IT
KEY CONTROLS
CHANGE
PRIORITY
New
for
2019
1
2
3
4
1
2
4
STRATEGIC
TRANSFORMATION
Failure to deliver our strategic
transformation, including changing
our behaviours could result in: missed
opportunities; dissatisfied customers;
disengaged employees; ineffective use
of our scarce resources; and
increasing the likelihood of other
principal risks occurring. This could
lead to a business that is overly
dependent on a small number of
products and customers; failure to
achieve our vision; non-delivery of
financial targets and not meeting
investor expectations.
COMPETITIVE
ENVIRONMENT
The presence of competitors in the
majority of our markets means that
the Group is susceptible to significant
price pressure for original equipment
or services. Our main competitors
have access to significant government
funding programmes as well as the
ability to invest heavily in technology
and industrial capability. Disruptive
technologies or new entrants with
alternative business models could
also reduce our ability to sustainably
win future business, achieve
operating results and realise
future growth opportunities.
— Implementing a new organisational operating model.
— Executive Team
— Focusing on behaviours to drive cultural change.
— Gated reviews
— Simplifying the processes in our Rolls-Royce
Management System, whilst ensuring we comply with
our legal, contractual and regulatory requirements.
— Horizon scanning and scenario planning.
— Investing in products with lower emissions, reducing
our impact on climate change.
— Employee innovation portal.
This principal risk is subject to review by the Board and
the Safety & Ethics Committee.
— Horizon scanning for emerging technology and other
— Financial
competitive threats, including patent searches.
— Establishing our Innovation Hub to invest in innovation,
manufacturing and production, and ensure continuing
governance of technology programmes.
— Enhancing our capabilities to access, invest in and
develop key technologies and innovative service
offerings which differentiate us competitively.
— Improving the quality, delivery and durability of our
products and services through investment in
innovation, manufacturing and production capabilities.
— Forming strategic partnerships and conducting joint
research programmes with our partners.
performance
review
— Strategic planning
process
— Investment review
committee
— Science &
Technology
Committee
— Digital strategy
leadership
committee
— Driving down cost to improve margins.
— Protecting credit lines.
— Strengthening our balance sheet to enable access
to cost-effective sources of third party funding.
This principal risk is subject to review by the Board.
STRATEGIC REPORT
52
Strategic report
Principal Risks
Rolls-Royce Holdings plc Annual Report 2018
PRINCIPAL RISK OR UNCERTAINTY
HOW WE MANAGE IT
KEY CONTROLS
CHANGE
PRIORITY
1
2
3
1
2
4
1
3
4
CYBER THREAT
An attempt to cause harm to the
Group, its customers, suppliers and
partners through the unauthorised
access, manipulation, corruption,
or destruction of data, systems or
products through cyber space.
MAJOR PRODUCT
PROGRAMME
DELIVERY
Failure to deliver a major programme
on time, within budget, to technical
specification or 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.
BUSINESS
CONTINUITY
The major disruption of the Group’s
operations, which results in our failure
to meet agreed customer commitments
and damages our prospects of winning
future orders. Disruption could be
caused by a range of events, for
example: extreme weather or natural
hazards (e.g. earthquakes, floods);
political events; financial insolvency of
a critical supplier; scarcity of materials;
loss of data; and fire or infectious
disease. The consequences of these
events could have adverse impact on
our people, our internal facilities or
our external supply chain.
— 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.
— Running security and network operations centres.
— Actively sharing cyber security information through
industry, government and security forums.
— Information and product assurance processes.
— Training and awareness to improve cyber
security culture.
This principal risk is subject to review by the
Audit Committee.
— Digital strategy
leadership
committee
— IT executive
— Product cyber
security working
groups in high
risk areas
— Information
assurance and
engineering
processes
— Crisis management
team
— Major programmes are subject to Board approval.
— Rolls-Royce
— 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 lifecycle.
— Investing in facilities and people to manage the level
of disruption to our customers from Trent 1000
in-service issues and developing longer-term
solutions to these issues.
— Conducting technical audits at pre-defined points
which are performed by a team that is independent
from the programme.
Management
System
— Operational
performance
review
— Project audit and
risk assurance
reviews
— Gated business
and technical
reviews
— Requiring programmes to address the actions arising
— Quality compliance
from reviews and audits and monitoring and
controlling progress through to closure.
— Applying knowledge management principles to
provide benefit to current and future programmes.
This principal risk is subject to review by the Board.
— Sustaining investment in adequate capacity, modern
equipment and facilities, dual sources of supply and
researching alternative materials.
— Promoting and developing resilience within our
external supplier partners.
— Providing a supplier finance programme in partnership
with banks to enable our suppliers to benefit from the
Rolls-Royce credit rating and access funds at low
interest rates (in 2018, 155 suppliers used the programme).
— Building a resilient culture through flexible and
collaborative working, using our single group-wide
incident management framework.
— Developing, maintaining and regularly exercising
effective business continuity and crisis management
plans to prepare our people to respond quickly and
confidently to any business disruption.
— Sharing lessons learned identified through exercises
or incidents.
— Scanning the horizon to provide awareness of
emerging risks/potential incidents.
This principal risk is subject to review by the
Audit Committee.
audit
— Quality committee
— Incident
management
framework
— Business
continuity
readiness
assessment
— External supplier
audits and robust
contractual
agreements
— Training and
exercising in
incident response
and recovery
— Environment &
sustainability
committee
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Principal Risks
53
PRINCIPAL RISK OR UNCERTAINTY
HOW WE MANAGE IT
KEY CONTROLS
CHANGE
PRIORITY
For the safety
of our products:
— Company product
safety assurance
committee
— Business product
safety committee
— Quality
compliance audit
— Engineering
technical audit
— Crisis
management team
For people’s safety
and wellbeing:
— HSE management
system
— HSE accountability
framework
— HSE committee
— Crisis
management team
— Environment &
sustainability
committee
— Remuneration
Committee
— Executive Team
— Enterprise
Leadership Group
— People leadership
team
1
2
3
1
2
3
4
SAFETY
Failure to meet the expectations of:
i) our customers to provide safe
products which also minimise the
impact on the environment during
their production or use; or
ii) people who work for or with us to
provide a safe and healthy place of
work which minimises the impact on
the environment;
would adversely affect our reputation
and long-term sustainability.
TALENT AND
CAPABILITY
Inability to identify, attract, retain and
apply the critical capabilities and skills
needed in appropriate numbers to
effectively organise, deploy and
incentivise our people would threaten
the delivery of our strategies, business
plans and projects.
We manage product safety by:
— Ensuring clear accountability for safety and a culture
that puts safety first.
— Applying our engineering design and validation
process from initial design, through production and
into service to reduce the safety risks so far as is
reasonably practicable; always ensuring that we meet
or better the relevant company, legal, regulatory and
industry requirements.
— Operating a safety management system, governed
by the product safety assurance board, and subject
to continual improvement based on review of existing
and emerging threats, experience, and industry
best practice.
— Ensuring that our products and those of our suppliers
conform to their specification.
— Ensuring that everyone receives appropriate product
safety awareness training.
We manage people’s safety and wellbeing by:
— Ensuring clear accountability for HSE and a culture
that puts operating safely first.
— Refreshing our global HSE policy and introducing our
Zero Harm programme.
— Operating an HSE management system, including
reporting, investigating and learning lessons
from incidents.
— Driving sustainable use of resources.
This principal is subject to review by the
Safety & Ethics Committee.
— Attracting, rewarding and retaining the right people
with the right skills globally and locally in a planned
and targeted way, including regular benchmarking
of remuneration.
— Developing and enhancing organisational, leadership,
technical and functional capability to deliver
global programmes.
— Continuing a strong focus on individual development
and succession planning, recognising the changing
nature of careers and expectations of work.
— 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
where everyone can be at their best that tightly aligns
Group strategy with individual and team objectives.
— 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 regular employee
opinion surveys and a commitment to drive
year-on-year improvement to employee engagement.
This principal risk is subject to review by the
Nominations & Governance Committee.
STRATEGIC REPORT 54
Strategic report
Principal Risks
Rolls-Royce Holdings plc Annual Report 2018
PRINCIPAL RISK OR UNCERTAINTY
HOW WE MANAGE IT
KEY CONTROLS
CHANGE
PRIORITY
MARKET AND
FINANCIAL SHOCK
The Group is exposed to a number of
market risks, some of which are of a
macro-economic nature (for example,
foreign currency, oil price, rates) and
some of which are more specific to the
Group (for example, liquidity and
credit risks, reduction in air travel
or disruption to other customer
operations). Significant extraneous
market events could also materially
damage the Group’s competitiveness
and/or creditworthiness. This would
affect operational results or the
outcomes of financial transactions.
COMPLIANCE
Non-compliance by the Group with
legislation, the terms of the DPAs or
other regulatory requirements in the
heavily regulated environment in which
it operates (for example, export
controls; use of controlled chemicals
and substances; anti-bribery and
corruption; environmental regulations;
and tax and customs legislation). This
could affect our ability to conduct
business in certain jurisdictions and
would expose the Group to potential:
reputational damage; financial
penalties; debarment from government
contracts for a period of time; and
suspension of export privileges
(including export credit financing),
each of which could have a material
adverse effect.
— Maintaining a strong balance sheet, through managing
— Financial
performance
review
— Financial risk
committee
— Operational
performance
review
— Group finance,
treasury and
tax teams
— Governance
framework
— Compliance
and export
control teams
— Governance team
— Legal team
cash balances and debt levels.
— 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.
— 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).
— Review debt financing and hedging in light of volatility
in external financial markets caused by external events,
such as Brexit or other geopolitical changes.
This principal risk is subject to review by the
Audit Committee.
— Taking an uncompromising approach to compliance.
— Operating an extensive compliance programme. Global
mandatory policies, processes and training 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.
— Regular reviews of the strength of relevant teams
including the ethics, anti-bribery and corruption,
compliance, tax, sustainability and export
control teams.
— A legal team is in place to manage any ongoing
regulatory investigations.
— Engaging with all relevant external regulatory
authorities.
— Implementing a comprehensive REACH compliance
programme. This includes ensuring that we and our
supply chain are covered by REACH authorisations
for a number of chemicals needed for our products,
establishing appropriate data systems and processes
and working with our suppliers, customers and
trade associations.
This principal risk is subject to review by the
Safety & Ethics Committee.
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.
Examples include: changes in key
political relationships; explicit trade
protectionism, differing tax or
regulatory regimes, potential for
conflict or broader political issues;
and heightened political tensions.
— Where possible, diversifying our global operations
to avoid excessive concentration of risks in
particular areas.
— The Group’s businesses, strategic marketing network
and global government relations teams proactively
monitoring local situations.
— Global government
relations network
— Group tax and
export control
teams
— Strategic planning
— We develop and maintain relationships with
process
governments and stakeholders and proactively
influence policy, regulation and legislation where
it affects us.
— Steering committee to co-ordinate activities across
the Group and minimise the impact of Brexit.
This principal risk is subject to review by the Board.
— Brexit steering
committee
4
3
4
1
2
3
4
Rolls-Royce Holdings plc Annual Report 2018
Strategic Report
Going Concern and Viability Statements
55
GOING CONCERN AND
VIABILITY STATEMENTS
Introduction
Viability
In making this statement, the Directors have
made the following key assumptions:
— That maturing facilities will be refinanced.
The Group currently has access to global
debt markets and expects to be able to
refinance these facilities on commercially
acceptable terms. The Group’s medium
and long-term financing plans are
designed to allow for periods of adverse
conditions in world capital markets but
not a prolonged (say 12 month) period
where debt markets were effectively
closed to the Group.
— That in the event of one or more risks
occurring, which has 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.
Signed on behalf of the Board
Warren East
Chief Executive
28 February 2019
The viability assessment considers solvency
and liquidity over a longer period than the
going concern assessment. Consistent with
previous years, we have assessed our viability
over a five-year period. 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; worsening or
new in-service issues on new Civil
Aerospace programmes; or, the impact of a
political risk such as Brexit on the Group
(see page 50 for further information on the
process we are taking to manage the risks
related to Brexit).
The scenarios assume an appropriate
management response to the specific
event, but not broader mitigating actions
which could be undertaken, which have
been considered separately. The cash flow
impacts of these scenarios were overlaid on
the five-year forecast to assess how the
Group’s liquidity and solvency would be
affected. Reverse stress testing has also
been performed to assess the severity of
scenario that would have to occur to
exceed headroom, including a scenario
where existing borrowing facilities could
not be refinanced as they mature.
The assessment took account of the Group’s
current funding, forecast requirements and
existing committed borrowing facilities.
On the basis described above, the Board
confirms that it has a reasonable expectation
that the Company will be able to continue
in operation and meet its liabilities as they
fall due over the next five years.
Rolls-Royce operates an annual planning
process. Our plans and risks to their
achievement are reviewed by the Board and
once approved are cascaded throughout
the Group and are used as the basis for
monitoring our performance, incentivising
employees and providing external guidance
to our shareholders.
The processes for identifying and managing
the principal risks are described on page 50.
As also described there, the risk management
process, and 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. The Board has also
considered the net liability position at
31 December 2018 and the going concern
status of the Group’s material subsidiaries.
As described on page 199, the Group meets
its funding requirements through a mixture
of shareholders’ funds, bank borrowings,
bonds and notes. At 31 December 2018, the
Group had borrowing facilities of £6.9bn and
total liquidity of £7.5bn, including
cash and cash equivalents of £5bn and
undrawn facilities of £2.5bn. £858m of the
facilities mature in 2019.
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 FRC in
September 2014).
STRATEGIC REPORT 56
Directors’ Report
Chairman’s Introduction
Rolls-Royce Holdings plc Annual Report 2018
DIRECTORS’ REPORT
Compliance with the UK Corporate
Governance Code 2016
Chairman’s introduction to
Directors’ Report
Board of Directors
Corporate governance
The Board and its committees
Board’s focus during the year
Areas of focus for 2019
Stakeholder engagement
Board induction and development
Board effectiveness
Nominations & Governance
Committee Report
Membership and operation
of the Committee
Areas of focus for 2019
Committee focus for 2018
Board and committee composition
Board nominations
Succession planning
Diversity and inclusion
Governance
Audit Committee Report
Membership and operation
of the Committee
Areas of focus for 2019
Focus during 2018
Financial reporting
Fair, balanced and understandable
Areas of focus for the
2018 Financial Statements
Risk and control environment
Internal audit
External audit
56
57
59
62
64
64
66
69
70
71
71
72
72
73
73
73
74
75
75
76
77
77
78
79
80
80
Remuneration Committee Report
Chairman’s introduction
Membership and operation
of the Committee
Areas of focus for 2019
Focus during 2018
Summary of our remuneration policy
Directors’ Remuneration Report
Executive Directors’ remuneration
Implementation of remuneration
policy in 2019
Chief Executive pay ratio
Gender pay reporting
Non-Executive Directors’ remuneration
Safety & Ethics Committee Report
Membership and operation
of the Committee
Areas of focus for 2019
Focus during 2018
Product safety
HSE
Sustainability
Ethics and compliance
Science & Technology Committee Report
Membership and operation
of the Committee
Areas of focus for 2019
Focus during 2018
2018 overview
Responsibility statements
Other statutory information
82
83
83
84
85
86
90
92
93
94
96
96
97
98
99
100
101
102
102
103
103
105
200
Compliance with the UK Corporate Governance Code 2016
The Company is subject to the principles and provisions of the UK Corporate Governance Code 2016 (the Code), a copy of which is available
at www.frc.org.uk. For the year ended 31 December 2018, the Board considers that it has complied in full with the provisions of the Code.
Further information on the application of the principles can be found in the Directors’ Report on pages 57 to 105 and 200 to 203. With the
publication in July 2018 of the revised UK Corporate Governance Code 2018 (the revised Code), the Board has reviewed its governance
initiatives and programmes. Whilst reporting on the Company’s compliance with the Code, we have also reported where possible in the spirit
of the revised Code.
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Chairman’s Introduction
57
CHAIRMAN’S INTRODUCTION
TO DIRECTORS’ REPORT
IAN DAVIS
CHAIRMAN
Introduction
Corporate culture
2018 has been an important year for the
strengthening of corporate governance
practices externally. This provided a
backdrop for a review of our programmes
and initiatives.
We saw the introduction of the FRC’s
revised Code in July. The Board welcomes
the considered yet concise approach
apparent in the revised Code that helps
to clarify and guide in promoting a strong
governance environment. From the good
work that we have undertaken over recent
years, we are pleased that we are well
placed to meet the requirements of the
revised Code.
I consider that we are a particularly active
Board. We seek opportunities outside of
the boardroom to find out about what is
happening across the organisation and
gain assurance that the Group is operating
responsibly and effectively. For example,
some Non-Executive Directors and I have
attended executive-level committee
meetings such as those of the environment
& sustainability committee, the digital
steering committee and the business audit
committees. This enables us to gain deeper
insights while visibly supporting
management’s goals in these areas.
This additional level of commitment by
Board members has been of particular
assistance to the Board during 2018 as
much of our work has been centred on
the themes of corporate culture and our
engagement with stakeholders.
We have continued to support the
Executive Team with its ambitious
restructuring programme. A key part of
this depends on reinforcing the values,
behaviours and mindset needed to position
and drive the Group’s strategy towards
achieving its vision. The Board recognises
that, to be successful in this, requires not
just organisational restructuring but a
cultural shift in inspiring our people to
take accountability, be innovative and
continuously seek out improved and
more efficient ways of working.
This must, however, all be within the bounds
of a defined framework that reflects our
values and the type of group that Rolls-Royce
wishes to be known and admired for. As well
as other aspects, this of course includes a
continuing strong focus on ethics and
compliance, driving the highest standards
of integrity, and in doing so meeting our
obligations to regulators under our DPA.
The Board has overseen and directly
contributed to the work in this area during
the year, which expands upon the Group’s
governance framework that we have
previously endorsed.
In the summer, we reviewed and approved
a refreshed version of our Code of Conduct
and a simplified set of Group policies. These
are aligned to our core values and are
available at www.rolls-royce.com.
With the recognition that we need to
continuously reinforce safety as a core
value, we strongly supported the
deployment of our Zero Harm Life-Saving
Rules across the workforce earlier in the
year. Occupational safety and wellbeing
remain priorities for the Group and you can
read more on this in the Safety & Ethics
Committee Report on pages 96 to 101.
In September, we were briefed on the
Group’s new people framework, providing
a structured approach to the development
of our talented people and the nurturing of
the skills and behaviours that will lead the
Group to a successful and sustainable future.
We are taking a keen interest in how the
diversity and inclusion (D&I) agenda is
being progressed and promoted across the
Group. I was personally delighted to be
invited back to speak with the African and
Caribbean professional network, one of a
growing number of Rolls-Royce employee
resource groups, having attended its
inaugural conference in 2015.
For more information on D&I
and employee engagement see
Our People on pages 44 to 47.
Stakeholders
The revised Code has reinforced and
expanded on the long-standing
requirements of the UK Companies Act for
directors to remain mindful of their duties
to consider the interests of key stakeholders.
At Rolls-Royce, we understand that who we
are and how we behave matters not only to
our people but to the many stakeholders
who have an interest in our business.
In September, the Board undertook a
thorough review of the Group’s stakeholders
and how we engage. This is set out in detail
on pages 66 to 68.
Talent and succession
The Board was pleased with the increased
focus by the Executive Team on leadership
talent and the succession pipeline.
Development plans are in place for those
emerging leaders with potential to succeed
current members of the Executive Team
in due course. Following management
restructuring activities, the Enterprise
Leadership Group has also been refined and
reset to a smaller, diverse core of key leaders
who will take the business forward. There
remains much to do in improving diversity
amongst our leadership and management
populations, a challenge which we are
committed to support through monitoring of
careful plans to attract and recruit, retain
and develop our leaders of the future.
DIRECTORS’ REPORT 58
Directors’ Report
Chairman’s Introduction
Rolls-Royce Holdings plc Annual Report 2018
After the success of our inaugural Board
apprentice programme launched in 2017,
we incorporated the feedback received
into a refined programme for 2018/19.
This initiative provides coaching and board
experience to a diverse group of emerging
leaders selected from the Group’s talent
pool. Six individuals were selected for our
second cohort. Under the sponsorship of
two Board members and one Executive
Team member for each apprentice, we were
delighted to welcome them to their first
meetings of the committees to which they
have been assigned in November 2018.
The programme will run for 18 months with
a rotation to a different committee half way
through the period. There are opportunities
to participate in supplementary committees,
masterclasses on board-relevant topics and
other networking forums. As well as the
experience gained by the apprentices,
the Directors value the participation and
perspectives brought by these individuals
to our discussions.
Board developments
The Board has a diverse membership with
varied and balanced experience and skills
that are highly relevant to the Group’s
needs and challenges.
In February 2018, we agreed to extend
Brad Singer’s initial two-year appointment
for a further three years. The Company and
Brad are party to a relationship agreement
with ValueAct. A new, simplified agreement
was put in place in February (a summary of
which can be found at www.rolls-royce.com).
At the AGM in May, shareholders confirmed
the Board’s recommendation to appoint
Nick Luff as a Non-Executive Director with
effect from the conclusion of the AGM.
As chief financial officer at RELX plc,
Nick brings listed company regulatory
experience and technical financial and
accounting skills. He also has extensive
non-executive experience. These add real
value to the work of the Board and the
Audit Committee. Details of the selection
and appointment process are in the
Nominations & Governance Committee
Report on page 73.
On the recommendation of the Nominations
& Governance Committee, the Board agreed
to extend Jasmin Staiblin’s appointment for
a third three-year term and Irene Dorner
and Sir Kevin Smith’s appointments for a
second three-year term. Their biographies,
including their Board skills and experience,
can be found on pages 59 to 61.
All Directors will stand for re-election
at the AGM in May 2019.
Looking forward
With the introduction of the revised Code,
we have been able to reflect on our own
governance framework and initiatives.
Corporate culture, including anti-bullying
and harrassment, safety and wellbeing,
together with stakeholder engagement,
will be areas of focus as we look forward
to the year ahead.
Ian Davis
Chairman
STRATEGIC DECISIONS
In 2018, the Board made some important
strategic decisions.
In January, the Board approved a strategic
review of the Group’s Commercial Marine
business. After several options had been
explored, we resolved later in the year to
dispose of the business to KONGSBERG.
In arriving at such a decision, we considered
the interests of our key stakeholders,
including our shareholders, customers,
employees and the communities in which
they work. We concluded that the Group
was not in a position to make the
investments required to enable the
Commercial Marine business to reach its
potential. However, we believed that under
the right ownership the business could
develop strongly over time for the benefit
of its stakeholders. As a well-regarded
marine industry company headquartered
in Norway, KONGSBERG presented an
attractive proposition as a trade buyer
which was interested in working with
the talented people in the business to
drive it forward. When the deal concludes
in 2019, the proceeds will serve to strengthen
the Company’s balance sheet as we
look to both the challenges and the
opportunities ahead.
Very similar considerations were applied
by the Board when we resolved in March
to dispose of our Power Systems fuel
injection technologies business, L’Orange.
We concluded that the business was a
better fit in the hands of Woodward Group
as an appropriate owner but only after
considering alternative options.
Stakeholder interests, including those
of the employees of the business who
would be able to continue to contribute
to the business under its new ownership,
were considered by the Board.
To ensure that the interests of customers
were recognised, the Board acknowledged
that L’Orange, which is based in Stuttgart,
Germany, would remain an important
partner and supplier to Rolls-Royce.
Therefore, Power Systems entered into a
long-term supply agreement with L’Orange
for an initial term of 15 years.
The transaction completed in June 2018.
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Board of Directors
59
BOARD OF DIRECTORS
IAN DAVIS
Chairman of the Board
Chairman, Nominations & Governance
Committee
NG WARREN EAST CBE
Chief Executive
STEPHEN DAINTITH
Chief Financial Officer
Appointed to the Board in March 2013
and as Chairman in May 2013.
Appointed to the Board in January 2014 and as
Chief Executive in July 2015.
Career Ian was a partner at McKinsey for
31 years and, during his time, served as chairman
and worldwide managing director.
Board skills and experience Ian brings significant
financial and strategic experience and has
worked with and advised global organisations
and companies. This enables him to draw on
knowledge of diverse issues and outcomes to
assist the Board.
Other principal roles
— BP p.l.c., senior independent director
— Johnson & Johnson Inc., non-executive director
— McKinsey & Company, senior partner emeritus
Career Warren is an engineer and joined
ARM Holdings plc in 1994 where he was
CEO from 2001 until 2013. He is a fellow of
the Institute of Engineering and Technology;
the Royal Academy of Engineering; the Royal
Society; and the Royal Aeronautical Society.
He was awarded a CBE in 2014 for services
to the technology industry.
Board skills and experience Warren brings
a deep understanding of technology and
developing long-term partnerships. He also
has proven strategic and leadership skills
within a global business and a strong record
of value creation.
Appointed in April 2017.
Career Stephen is a chartered accountant.
His previous roles include CFO of Daily Mail
and General Trust plc from January 2011 to
April 2017. He was CFO and COO of Dow Jones
in New York and CFO of News International in
London, both part of News Corporation. Prior
to this, he held executive positions at British
American Tobacco plc.
Board skills and experience Stephen has a
strong understanding of international business
and an appreciation for looking beyond numbers
to help improve performance. His change
management experience allows him to make
a significant contribution to the long-term
growth of the business.
Other principal roles
— Dyson James Group Limited, director
Other principal roles
— 3i Group plc, non-executive director
Composition of the Board
Board skills and experience
Board members by gender
Balance of the Board
11
11
Female
4
Executive
Directors
2
8
8
8
8
6
6
5
5
3
3
Number of Directors with:
Number of Directors with:
■ Chairman/CEO/CFO experience
■ Chairman/CEO/CFO experience
■ Related industry/operational
■ Related industry/operational
■ Financial
■ Financial
■ Engineering/technology
■ Engineering/technology
■ Safety/regulatory/risk
■ Safety/regulatory/risk
■ Remuneration/HR
■ Remuneration/HR
NG Nominations & Governance Committee
A Audit Committee
R Remuneration Committee
SE Safety & Ethics Committee
ST Science & Technology Committee
Male
9
Non-Executive
Directors
11
Non-Executive Directors’ tenure
Board members by nationality *
6–9 years
4
0–3 years
2
German
1
Singaporean
1
American
2
3–6 years
5
British
9
* According to the Company’s Articles of Association,
at least 50% of our Directors must be British citizens.
DIRECTORS’ REPORT
60
Directors’ Report
Board of Directors
Rolls-Royce Holdings plc Annual Report 2018
LEWIS BOOTH CBE
Independent Non-Executive Director
Chairman, Audit Committee
NG A R
RUTH CAIRNIE
Independent Non-Executive Director
Chairman, Remuneration Committee
NG R ST
SIR FRANK CHAPMAN
Independent Non-Executive Director
Chairman, Safety & Ethics Committee
NG SE ST
Appointed in May 2011.
Appointed in September 2014.
Appointed in November 2011.
Career After gaining a bachelor of engineering
degree with honours in mechanical engineering,
Lewis began his career with British Leyland.
He spent 34 years at Ford Motor Company
including as executive vice president and CFO.
He was awarded a CBE in 2012 for services to the
UK automotive and manufacturing industries.
Career A physicist by background, Ruth joined
Royal Dutch Shell plc as a scientist. During her
37 years with the company, she held a number
of senior positions, in the UK and internationally.
From 2011 until her retirement in 2014, Ruth was
executive vice president of strategy and planning
for the global business.
Board skills and experience Lewis has considerable
financial expertise and experience, of great
benefit to both the Board and in his role as
Chairman of the Audit Committee. He brings a
global perspective and is recognised as one
of the strongest and most experienced
international leaders in his sector.
Other principal roles
— Mondelez International Inc., director
Board skills and experience Ruth has strong
strategic and commercial knowledge. Skilled
in addressing technological and environmental
challenges, she brings real value to the Science
& Technology Committee. She also has significant
experience as remuneration committee chair,
both at Associated British Foods plc (ABF) and
previously Keller Group plc.
Other principal roles
— ABF, non-executive director
— ContourGlobal plc, non-executive director
— POWERful Women, industry chair
Career Sir Frank is a chartered engineer. With
40 years spent in the oil & gas sector, he was
chief executive of BG Group plc for 12 years and
chairman of Golar LNG Ltd. 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.
Board skills and experience Sir Frank has an
outstanding record of business achievement, a
life-long passion for engineering and innovation
and a deep understanding of technology. His
significant industrial and safety experience are
invaluable to the Board and in particular in his
role as chairman of the Safety & Ethics Committee.
Other principal roles
— Myeloma UK, vice chairman
IRENE DORNER
Independent Non-Executive Director
Employee Champion
NG A SE
BEVERLY GOULET
Independent Non-Executive Director
Employee Champion, North America
NG R A
LEE HSIEN YANG
Independent Non-Executive Director
NG A SE
Appointed in July 2015.
Appointed in July 2017.
Appointed in January 2014.
Career Irene was CEO and president of HSBC,
US until retiring in December 2014. During her
30-year career with HSBC, she held a number
of international roles including CEO of HSBC in
Malaysia. Irene is an honorary fellow of St Anne’s
College Oxford, she qualified as a barrister-at-law
in London and until 2016, was a consultant at PwC.
Career Beverly, a US national, started her career
as a securities and M&A lawyer and has spent a
considerable amount of her career in the airline
industry. From 1993 until June 2017, Beverly
was a key member of the executive team of
American Airlines where she served in a
number of senior roles.
Board skills and experience With a strong
background in risk management, gained from
the financial sector, Irene brings valuable insight
as part of her role on our Audit Committee. As a
passionate advocate of diversity and inclusion,
she has embraced the role of Employee
Champion and ensures the views of the workforce
are properly reflected in the Board’s discussions.
Other principal roles
— AXA SA, director
— Control Risks Group Holdings Limited,
chairman
Board skills and experience Beverly brings
valuable knowledge and operational experience
gained from within the airline sector. Together
with her expertise in finance, treasury, strategy,
legal and governance matters, she actively takes
part in the development and strengthening of
our business.
Other principal roles
— Xenia Hotels, non-executive director
— Texas Women’s Foundation, board member
— Rolls-Royce North America Holdings, Inc.,
board member
Career A Singaporean, Hsien Yang was chief
executive of Singapore Telecommunications
Limited for 12 years. He was a former member of
the Rolls-Royce International Advisory Board, he
served as chairman and non-executive director
of Fraser and Neave Limited from 2007 to 2013
and Chairman of the Civil Aviation Authority
of Singapore.
Board skills and experience Hsien Yang combines
a strong background in engineering with
extensive international business and management
experience in a key market for the Company.
His significant industrial and financial skills prove
valuable in his committee memberships.
Other principal roles
— The Islamic Bank of Asia Private
Limited, chairman
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Board of Directors
61
NICK LUFF
Independent Non-Executive Director
NG SE A
BRADLEY SINGER
Non-Independent Non-Executive Director
ST
PAMELA COLES
Company Secretary
Chief Governance Officer
Appointed in May 2018.
Appointed in March 2016.
Appointed in October 2014.
Career Nick is a chartered accountant. He is
chief financial officer at RELX Group PLC,
playing a key role in driving shareholder returns
as the company transforms its business and
simplifies its corporate structure. Nick was
previously CFO of Centrica plc for 7 years and,
prior to that, P&O Group. Nick has formerly been
audit committee chairman and a non-executive
director of both Lloyds Banking Group plc and
QinetiQ Group plc.
Boards skills and experience Nick has broad
financial skills and a track record of driving
business performance. In addition, he has
extensive non-executive experience. This
exposure together with both financial and
accounting expertise and a passion for
engineering is invaluable to the Board.
Other principal roles
— RELX Group PLC, chief financial officer
Career Brad, a US national, is a partner and
COO of ValueAct Capital Management LP.
He has been senior executive vice president
and CFO of Discovery Communications, Inc.
and CFO and treasurer of American Tower
Corp. Before these appointments, he worked
as an investment banker at Goldman Sachs.
Career Pamela is a fellow of the ICSA: The
Governance Institute. 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 and head of legal at RAC plc.
Board skills and experience Brad has an
outstanding record as a business leader, with
experience of public companies during periods
of change, growth and significant financial
outperformance, particularly in the US. He
provides an investor perspective drawing on
his experience as COO of ValueAct.
Other principal roles
— ValueAct Capital, partner and COO
— The Posse Foundation, chairman
— McIntire School Foundation, University
of Virginia, trustee
Board skills and experience Pamela is an expert
in corporate governance and company law. With
a pragmatic approach to how the Governance
Team supports the business, she has been
instrumental in supporting the Chairman and the
Non-Executive Directors to build strong
relationships with the management team and has
been able to offer advice and guidance on a wide
range of topics.
Other principal roles
— E-ACT, non-executive director
SIR KEVIN SMITH CBE
Senior Independent Director
Chairman, Science & Technology
Committee
NG R ST
JASMIN STAIBLIN
Independent Non-Executive Director
NG ST
Appointed in November 2015.
Appointed in May 2012.
Career Sir Kevin was CEO of GKN plc for nine
years. Before GKN, he spent nearly 20 years
with BAE Systems in a number of senior executive
positions. He has an honorary fellowship
doctorate from Cranfield University and is an
honorary fellow of the University of Central
Lancashire. He was awarded a CBE in 1997 and
knighted in 2006 for services to industry.
Board skills and experience Sir Kevin has extensive
industrial leadership experience and a deep
knowledge of engineering and manufacturing
businesses, as well as the aerospace industry.
He makes a significant contribution to the growth
and development of our key strategies, both as a
member of the Board and as Chairman of the
Science & Technology Committee.
Other principal roles
— Unitas Capital, senior adviser
— L.E.K. Consulting, European advisory
board member
Career A German national, Jasmin was the CEO
of Alpiq Holding AG from 2013 to 2018. Prior to
this, she held a number of senior positions in the
ABB Group working in Switzerland, Sweden and
Australia, becoming CEO of ABB Switzerland
from 2006 until 2012.
Board skills and experience Jasmin combines a
strong background in advanced engineering and
deep technology knowledge with extensive
international business experience in the industrial
sector. With a background dominated by science
and technology, she makes a significant
contribution both to the Board and as a member
of the Science & Technology Committee.
Other principal roles
— Georg Fischer AG, non-executive director
— Seves, non-executive director
Board committee membership
NG
A
R
SE
ST
Ian Davis
C
Lewis Booth
Ruth Cairnie
C
C
Sir Frank Chapman
C
Irene Dorner
Beverly Goulet
Lee Hsien Yang
Nick Luff
Bradley Singer
Sir Kevin Smith
Jasmin Staiblin
Key
C
NG Nominations & Governance Committee
A Audit Committee
R Remuneration Committee
SE Safety & Ethics Committee
ST Science & Technology Committee
C Chairman
Full Director’s biographies can be
found at: www.rolls-royce.com
DIRECTORS’ REPORT
62
Directors’ Report
Corporate Governance
Rolls-Royce Holdings plc Annual Report 2018
CORPORATE GOVERNANCE
The Board
The role of the Board
Key matters reserved to the Board
The Board is ultimately responsible to shareholders for
the direction, management, performance and long-term
sustainable success of the Company. It sets the Group’s
strategy and objectives and oversees and monitors internal
controls, risk management, principal risks, governance and
viability of the Company. In doing so, the Directors comply
with their duties under section 172 of the Companies Act
2006.
The Board has established certain principal committees
to assist it in fulfilling its oversight responsibilities, providing
dedicated focus on particular areas, as set out below.
Each committee chairman 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. Beverly Goulet,
a US national and independent Non-Executive Director, also
sits on the board of Rolls-Royce North America Holdings,
Inc. to create a link between the Board and the Group’s
North American governance structure.
The Board committees
The Group’s long-term objectives, strategy and
risk appetite
The Group’s organisation and capability
Shareholder engagement and general meetings
Overall corporate governance arrangements including
Board and committee composition, committee terms
of reference, 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
Annual budgets and financial expenditure and
commitments above levels set by the Board
Nominations &
Governance Committee
Audit
Committee
Remuneration
Committee
Safety & Ethics
Committee
Science & Technology
Committee
Board & committee composition
Financial reporting
Remuneration policy
Product safety
Technology strategy
Board nominations
Succession planning for Directors
and senior management
Internal controls &
risk management
Internal audit
Corporate governance
External audit
Oversight of principal risk –
talent & capability
Oversight of principal risks –
business continuity, market &
financial shock, cyber threat
Incentive design and setting
of targets
Executive and senior management
remuneration review
Workforce remuneration review
and related policies
HSE
Sustainability
Cross-sector technology
Technology capabilities and skills
Ethics & compliance
Technology trends and risks
Oversight of principal risks –
compliance, strategic
transformation, safety
Roles and responsibilities
The roles of the Chairman and Chief Executive are clearly defined and the Board supports the separation of the two roles. The Chairman
is responsible for the leadership and effectiveness of the Board. The Chief Executive is responsible for the running of the Company’s
business and leads the Executive Team which comes together to communicate, review and agree on issues and actions of Group-wide
significance. Non-Executive Directors support the Chairman and provide objective and constructive challenge to management. The
Senior Independent Director (SID) provides a sounding board for the Chairman and serves as an intermediary for the Chief Executive,
other Directors and shareholders when required. The Company Secretary makes sure that appropriate and timely information is provided
to the Board and its committees and is responsible for advising and supporting the Chairman and Board on all governance matters.
All Directors have access to the Company Secretary and may take independent professional advice at the Company’s expense in conducting
their duties.
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Corporate Governance
63
Board and committee meetings held in 2018
ST
SE
R
A
NG
B
R
B
B
ST
R
A
NG
B
NG
B
B
ST
ST
SE
A
NG
B
R
NG
B
ST
R
A
NG
B
ST
SE
R
A
NG
B
January
February
March
April
May
June
July
August
September
October
November
December
Key
B Board
R Remuneration Committee
NG B ST Denotes unscheduled meeting
NG Nominations & Governance Committee
SE Safety & Ethics Committee
A Audit Committee
ST Science & Technology Committee
At the end of most scheduled meetings, the Chairman holds
meetings with the Non-Executive Directors without the Executive
Directors or management present.
with the technology efficiency and effectiveness review and the
second in December was to follow up after a technical risk deep
dive at the meeting held in November.
Unscheduled meetings
The unscheduled meeting of the Board in June was to review
the programme and content for the Capital Markets event.
The unscheduled meeting of the Nominations & Governance
Committee in June was to consider the re-appointment of
Irene Dorner as a Non-Executive Director following the expiry
of her first three-year term.
Two additional Science & Technology Committee calls were held.
The first, in July, was for the Committee to be updated on progress
Non-attendance
Some Board members were unable to participate in certain Board
and committee meetings due to the meeting being held to discuss
the Director’s reappointment, for medical reasons or due to critical
business commitments, as noted in the table below.
If any Directors are unable to attend a meeting they communicate
their opinions and comments on the matters to be considered via the
Chairman of the Board or the relevant committee chairman.
Board and committee members and attendance at scheduled meetings in 2018
Ian Davis
Warren East
Stephen Daintith
Lewis Booth
Ruth Cairnie
Sir Frank Chapman
Irene Dorner
Beverly Goulet
Lee Hsien Yang
Nick Luff (appointed 3 May 2018)
Brad Singer
Sir Kevin Smith¹
Jasmin Staiblin²
Board
(9 meetings)
9/9
9/9
9/9
9/9
9/9
9/9
9/9
9/9
9/9
5/5
9/9
8/9
9/9
Nominations &
Governance
(6 meetings)
6/6
Audit
(5 meetings)
Remuneration
(6 meetings)
Safety &
Ethics
(3 meetings)
Science &
Technology
(4 meetings)
6/6
6/6
6/6
6/6
6/6
6/6
4/4
5/6
4/6
5/5
5/5
5/5
5/5
3/3
6/6
6/6
6/6
6/6
3/3
3/3
3/3
4/4
4/4
4/4
4/4
¹ Sir Kevin Smith did not attend the August Board and Nominations & Governance Committee meetings due to medical reasons.
² Jasmin Staiblin did not attend the May meeting of the Nominations & Governance Committee as it was convened to discuss her re-appointment. She did not attend the December
meeting of the same Committee due to critical business commitments.
Committee changes
From 1 January 2019, on the recommendation of the Nominations & Governance Committee, the Board approved the following changes
to its committees: Sir Frank Chapman stepped down from the Remuneration Committee and joined the Science & Technology Committee;
Beverly Goulet joined the Remuneration Committee; and Nick Luff joined the Safety & Ethics Committee.
DIRECTORS’ REPORT 64
Directors’ Report
Corporate Governance
Rolls-Royce Holdings plc Annual Report 2018
Board’s focus during the year
Area of focus
Matters considered
Outcome
Strategy
and risk
Review the Group’s strategy
Review of risk appetite and principal risks,
including deep dives on:
— political risk;
— competitive position; and
— major product programme delivery
The refreshed vision and strategy for the Group, approved by the
Board in 2017, was rolled out internally and externally from early
2018. In September, the Board held a two-day meeting with the
Executive Team focused on reviewing the progress with the
execution of the Group’s strategic plan and the longer-term
context, including discussions on all areas of the business, people
capability and the restructuring programme. The Board provided
reflections on the day at the subsequent Board meeting. Feedback
and content of discussions were shared with the Executive Team
and businesses.
The Board reviewed and approved the Group’s risk appetite
framework in February. Furthermore, the Board carried out a robust
assessment of the principal risks facing the Company, set out on
pages 51 to 54 and including those that would threaten its business
model, future performance, solvency or liquidity. The Board
received an update on the effectiveness of risk management
from the Audit Committee in December.
Lord Powell ¹ supported a deep dive on political risk in March 2018,
which included: the implications of Brexit; current geo-political
factors; and the changing cyber security threats.
The Board considered the Group's competitive position as part
of its strategy sessions in September. The Board reviewed the
risks associated with the delivery of Civil Aerospace programmes
during the year and received regular updates from the
President – Civil Aerospace, including the in-service issues
with the Trent 1000 programme. The Board reviewed Power
Systems in detail during its visit to Friedrichshafen, Germany
in March and discussed the Defence business and strategy with
the President – Defence in August.
Disposal of the Commercial Marine business
and Power Systems fuel injection
technologies business, L’Orange
During the year, the Board approved the disposal of the Group’s
Commercial Marine business to KONGSBERG Gruppen ASA and
the disposal of L’Orange to the Woodward Group. Progress
updates were received by the Board. See page 58 for more details.
Ongoing co-operation with regulators
following deferred prosecution
agreements (DPAs)
Board appointments
Succession
and leadership
The Board kept oversight of compliance with the DPAs with
regular updates provided by the Group’s General Counsel.
During the course of the year, the Board welcomed Nick Luff as a
Non-Executive Director. In addition, the Board approved the
re-appointments of Brad Singer, Irene Dorner, Jasmin Staiblin and
Sir Kevin Smith.
Effectiveness of the Board, Chairman
and Chief Executive
An external evaluation was undertaken and it concluded that the
Board operated effectively in 2018. See page 70 for more details.
Financial
performance
Review of financial KPIs
Introduction of new accounting standards
(IFRS 9 and IFRS 15)
The Chairman and Chief Executive received constructive feedback
on their respective performance.
The Board obtained monthly financial performance reports
and discussed the reports with the Chief Financial Officer at each
Board meeting. Two new KPIs were approved by the Board: cash
flow per share and cash return on invested capital. See page 15
for more details.
The financial reporting basis from the start of the year was in
compliance with IFRS 9 and IFRS 15. In preparation for the changes,
the Board had received updates regarding the introduction and
impact of the new accounting standards during 2017.
1 Lord Powell from the Council of Foreign Relations has been retained by the Company as an adviser on geo-political issues.
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Corporate Governance
65
Area of focus
Matters considered
Outcome
Operational
performance/
challenges
Operational performance updates
Civil Aerospace programme challenges,
including new product introduction
Safety incidents
Stakeholder
engagement
and governance
Investor engagement
Employee engagement
Other stakeholder engagement
Year-to-date status across key operational performance measures
and key priorities presented throughout the year. The operational
KPIs for each business were also discussed.
Operational challenges during the year are described in the
Civil Aerospace review on pages 24 to 29. The Board remained
regularly informed on the management of these issues, including
steps to minimise customer disruption, and received regular
briefings from the Chief Executive and President – Civil Aerospace.
The Board was briefed on the RIDDOR report that had resulted in
the UK H&S Executive visiting the relevant site (more detail can be
found on page 99). The safety walks quick guide was provided to
the Directors for their future reference when visiting facilities.
Continued transparency in investor briefings. The Capital Markets
event held in June was well received and introduced members of
the Executive Team to our investors. In July, we published our first
ESG newsletter which is available at www.rolls.royce.com.
The Board held two Meet the Board events for employees, in the
UK and in Germany.
Regular updates were given by Irene Dorner on her employee
champion role and meetings/events she had attended. The Board
considered a report on global employee relations.
Irene Dorner also highlighted an emerging theme arising
across her discussions with employees concerning bullying and
harassment. This was considered by the Safety & Ethics Committee
– see page 101 – and resulted in a global anti-bullying campaign
which was launched at the end of the year and will continue
into 2019.
The Board reviewed in detail its stakeholder groups and current
engagement programmes. This is discussed in detail on pages 66
to 68.
FRC’s publication of the 2018 UK Corporate
Governance Code (revised Code)
The Board was updated on the implications for Rolls-Royce of the
changes following the publication of the revised Code.
Matters reserved to the Board and
delegated authorities
The Board carried out a full review of its matters reserved to ensure
alignment with the revised Code and its delegated authorities.
UK Modern Slavery Act
The anti-slavery and human trafficking statement was presented and
approved by the Board in February 2018.
The Board’s areas of focus in 2019 are expected to include:
The Group’s culture
Execution of strategic priorities
Continuing to monitor compliance with the terms of the DPAs
The implications of Brexit on the Group’s activities
Overview of the restructuring of the businesses, support and
management functions including management of associated risk
Principal risk reviews
Increased emphasis on sustainability
Civil Aerospace operational delivery programme ramp-up
Continued monitoring of financial and operational performance
Implementation of any required changes to the corporate
governance framework introduced by the revised Code
Continued strong focus on safety improvements
DIRECTORS’ REPORT 66
Directors’ Report
Corporate Governance
Rolls-Royce Holdings plc Annual Report 2018
Stakeholder engagement
At Rolls-Royce, we understand that who we are and how we behave
matters not only to our people but to the many stakeholders who
have an interest in our business. We believe that stakeholder
engagement remains vital to building a sustainable business and
we interact with many stakeholders at different levels of the
organisation. Engagement is carried out by those most relevant to
the stakeholder group or issue.
The table below identifies some of our stakeholders and how both
the Company and the Board engages with them. More details can
be found on www.rolls-royce.com. During the year, the Board has
reviewed the different stakeholder groups and the current
engagement programmes and identified further opportunities for
strengthening both its relationships and understanding to facilitate
the decisions and contributions made by the Board to the success
of the business.
Customers
Why they matter to us
Focusing on the needs of our customers is critical to the success of our business. We collaborate and innovate
with our customers to improve product performance and value.
Type of engagement
Contract negotiation, execution and management of ongoing relationships
Customer training
Satisfaction surveys and net promoter scores
Participation in industry forums and events
Partnerships with industry, STEM, graduate and apprentice activities
What matters to them
Safety, quality and reliability
Value for money
Product performance and efficiency
Competitiveness
Our availability and responsiveness
Research and innovation
Sustainability performance
Relationship
Compliance
How the Board engages
The Board has kept very close to our businesses’ customer engagement throughout the year, due to the highly
regrettable and significant operational disruption caused to our affected airline customers as a result of the
in-service issues with the Trent 1000. Civil Aerospace customers have been invited to present to the Board to
share views on what it is like to work with us. Customer relationships across our businesses are discussed at most
Board meetings as part of the Chief Executive’s report. In addition, all business presidents regularly present to the
Board and key customer relationships are part of the discussions. The Board’s discussions benefit from Beverly
Goulet’s experience in the sector and she provides valuable insights into what matters to airline customers.
Investors
Why they matter to us
Continued access to capital is vital to the long term performance of our business.
We work to ensure that our investors and investment analysts have a strong understanding of our strategy,
performance, ambition and culture.
Type of engagement
Dedicated investor relations (IR) team
Annual report and accounts and Annual General Meeting
Corporate website, including dedicated investor section
Investor roadshows
Results presentations and post-results engagement with top shareholders
Stock Exchange announcements and press releases
Addressing regular analyst enquiries
Governance days for fund managers and governance analysts
IR briefing papers and governance newsletter
Capital Markets events
Investor consultations
Meetings with institutional shareholders on request to discuss governance approach and areas of interest
What matters to them
Financial performance and economic impact
Governance and transparency
Sustainability performance
Confidence in Company’s leadership
Stability and predictability with no surprises
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Corporate Governance
67
Investors
continued
How the Board engages
The Board receives a regular report from the director of investor relations on shareholder analyst feedback,
especially post results. A Capital Markets event was held in June which proved to be a success and introduced two
new members of the Executive Team to our key investors. In 2018, the Chief Executive and Chief Financial Officer
met with investors in the UK and North America, following both the preliminary and interim results, and at various
times throughout the year. The IR team is in constant dialogue with investors in the UK and North America. At our
strategy day in September, we welcomed the external perspectives of bull and bear fund managers who presented
their investment theses prior to taking questions from the Board. We have held ‘governance days’ in two of the last
three years following the release of our Annual Report. These are led by the Chairman and attended by the Chief
Executive and our committee chairs and seeks to provide a discussion forum for fund managers and governance
analysts. With relative stability on governance topics in 2018, we published a well-received ESG newsletter instead
to provide an update on our activities in these areas. The Chairman, Senior Independent Director and members of
the Board make themselves available to meet with institutional investors when requested with the Chairman and
SID meeting with the ESG representatives of some of our major shareholders in both London and Edinburgh in
the first half of the year. The Company’s AGM is held in different locations in order to reach a wider shareholder
base. Of real benefit to the Board is the institutional investor perspective shared by Brad Singer as chief operating
officer of ValueAct.
Employees
Why they matter to us
Employee engagement is critical to our success. We work to create a diverse and inclusive workplace where
every employee can reach their full potential and be at their best. We engage with our people to ensure we are
delivering to their expectations, supporting wellbeing and making the right business decisions. This ensures we
can retain and develop the best talent.
Type of engagement
Non-Executive Directors identified as Employee Champions
Board apprentice programme
Graduate and apprentice focused events
Meet the Board events and ‘town hall’ briefings
Informal leadership blogs, all employee webex programme and videos by Executive Team
Employee relations and HSE dedicated teams
Global HSE week, ongoing occupational safety and wellbeing programme
Annual global employee opinion survey and individual performance reviews
Employee volunteering
Trade union representative participation
What matters to them
Reputation
Reward
Employee development
Employee engagement
Talent pipeline and retention
Career opportunities
HSE performance
Diversity and inclusion
How the Board engages
Irene Dorner has continued to meet with employee groups and has attended the employee stakeholder
engagement meetings. She regularly provides feedback to the Board on employee topics of interest and/or
concern, including our graduate and apprentice population. This direct link that Irene provides between the
employees and the Directors is proving to be extremely valuable, particularly through this period of extensive
change. The Board has recognised the success of Irene’s role and has recently appointed Beverly Goulet as the
Board’s Employee Champion for our North American employees. Following on from the success of the first
programme, the second Board apprentice programme for 2018/19 has been launched (see Nominations &
Governance Committee Report on page 73). During the year, the Meet the Board events for employees were held
in Friedrichshafen, Germany and Derby, UK. Both Directors and Executive Team members take every opportunity
to meet with local employees and conduct town hall sessions when visiting different business locations. In 2018, in
addition to the work of the employee champions, members of the Board met with employees during their visits to
Indianapolis, US; Pune and Bangalore, India; and Singapore. The Board discussed employee relations in August
and this will be reviewed by the Board as required but at least annually. Diversity statistics in respect of the
graduate and apprentice programmes are reported to the Board periodically. Finally, when considering M&A
activity, the Board always remains mindful of any impacts on employees (see strategic decisions on page 58).
DIRECTORS’ REPORT 68
Directors’ Report
Corporate Governance
Rolls-Royce Holdings plc Annual Report 2018
Partners
Why they matter to us
Our external supply chain and our suppliers are vital to our performance. We engage with them to build trusting
relationships from which we can mutually benefit and to ensure they are performing to our standards and conducting
business to our expectations.
Type of engagement
Global Supplier Code of Conduct and associated certification and risk monitoring processes
Supplier conferences and forums, globally, regionally and by business
Webex programme and global supplier portal
Supplier working groups, information gathering, assessments and awards
What matters to them
Winning more work
Competitiveness
Security of pipeline and programmes
Maintaining strong relationships
Building capability and expertise
Responsible procurement, trust and ethics
Operational improvement
Technological advances, including digital solutions
How the Board engages
Suppliers’ interests are considered as part of the Board’s discussions on manufacturing strategy and when
reviewing specific projects. Critical suppliers are, of course, considered as part of the assessment of the business
continuity risks. However, with some 2,300 suppliers alone in the UK, the Board has agreed that this is a group
they would like greater visibility of in 2019.
Communities
Why they matter to us
We are committed to building positive relationships with the communities in which we operate. We support
communities and groups local and relevant to our operations, particularly educational outreach.
Type of engagement
Dedicated community investment team
Sponsorship and employee volunteering
Employee volunteering on boards, committees and councils
Engagement with local councils on community matters
Corporate website
What matters to them
Future talent pipeline
Local operational impact
Health, safety and environment performance
How the Board engages
Directors meet with relevant community groups on their site visits and will engage with certain community
programmes should they be requested to do so. As Employee Champion, Irene Dorner takes opportunities to meet
with relevant community groups as will Beverly Goulet in her new role as Employee Champion for North America.
Governing bodies
and regulators
Why they matter to us
We engage with national governments, national/transnational agencies and key politicians and regulators to
ensure that we can help shape policy, have licence to operate, attract funding, enable markets and ultimately
win business. We work with governments globally where we have operations or future business opportunities.
Type of engagement
Dedicated government relations team
Rolls-Royce North America government security committee
Group policy development on key issues aligned with government priorities
Relationship management, both parliament and government, and responses to consultations
Participation in industry bodies and government and industry working groups
Conferences and speaking opportunities
Dedicated export controls, compliance and tax teams to manage compliance to regulatory/legal requirements
What matters to them
Trust and ethics
Governance and transparency
Industry support for policies
Regulations, policies and standards
Research and innovation
Sustainability performance
Regulatory compliance
How the Board engages
The Board receives frequent regulatory updates from the General Counsel. Briefings on how the business
engages with airworthiness regulators are discussed at the Safety & Ethics Committee. In addition, regular
updates are provided to both the Board and the Safety & Ethics Committee on engagement with the SFO, DoJ
and other regulators in relation to ethics and compliance improvement programmes. Engagement with the tax
authorities and related regulatory landscape is discussed at the Board and the Audit Committee. In addition,
meetings with ministers and senior officials are held as relevant throughout the year, with the Chairman supporting
the Chief Executive’s engagement programme at various airshows. The Board’s considerations are benefited by
the previous experience of Lee Hsien Yang, having been Chairman of the Singapore CAA.
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Corporate Governance
69
Board induction and development
The Chairman and Company Secretary arrange a comprehensive,
tailored induction programme for newly-appointed Non-Executive
Directors, which includes dedicated time with Group executives and
scheduled trips to business operations. The programme is tailored
based on experience and background and the requirements of
the role. 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. In 2018, Board
members visited locations including: Oberursel and Friedrichshafen
in Germany, Derby and Rotherham in the UK, Indianapolis and
Reston in the US, Pune and Bangalore in India and Singapore. 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 Group’s activities through direct
experience of seeing processes in operation and by having
discussions with a range of employees.
Nick Luff was appointed to the Board in May 2018 and at that
time joined the Nominations & Governance and Audit Committees.
Since his appointment he has undertaken a thorough induction
and met with members of the Executive Team. He was also briefed
by the Company Secretary on the Company’s corporate governance
arrangements. Nick has attended a number of site visits, including
Derby in the UK, Indianapolis and Crosspointe in the US,
and Singapore.
It is important that the Directors continue to develop and refresh
their understanding of the Group’s activities. To facilitate this,
the Board met local management at its meetings in Derby, UK and
Friedrichshafen, Germany.
It is also important that the Directors regularly refresh and update
their skills and knowledge and receive relevant training when
necessary. Members of the Board also attend relevant seminars,
conferences and training events to keep up-to-date on developments
in key areas.
Board induction programme for Nick Luff
Timing
People to meet
Key topics covered
Within first three
months
Chairman
Overview of the Board
Nominations & Governance Committee
Committee chairmen
Chief Executive
Chief Financial Officer
Company Secretary
Executive Team members
Auditors
Overview of committees
Plan of work for the year
Current issues
Business model
Current strategic priorities
Opportunities/risks
Current issues
Finance, treasury, M&A and tax overviews
Budget
Accounting issues
UK Corporate Governance Code and directors’ duties
UK listed company requirements
Rolls-Royce governance framework
Board arrangements and meeting dates
Overview of each area of responsibility, including
— Markets and competition
— Operational and financial performance including KPIs
— Functional responsibility
— Current issues
Audit report and findings
Controls
Accounting issues
Within first
nine months
Senior management, including investor
relations, internal audit and corporate affairs
Overview of specific business/functional areas
DIRECTORS’ REPORT 70
Directors’ Report
Corporate Governance
Rolls-Royce Holdings plc Annual Report 2018
Board effectiveness
Board and committee review
This year, having undertaken both benchmarking and tender
exercises, Belinda Hudson Limited (BHL), experts in enhancing
board effectiveness, was invited to undertake our externally-
facilitated effectiveness review. BHL’s appointment, in July, was
based on cultural-fit, the research that BHL had undertaken which
highlighted the areas that needed addressing, and commercial
competitiveness. BHL has been appointed for a three-year term,
with a slightly less in-depth review to be conducted in 2019.
A review of the effectiveness of the Board committees was
undertaken at the same time as the Board. BHL has not provided
any other service to the Company during the year.
This review took the form of confidential one-to-one discussions
between BHL and members of the Board and several senior
management executives and BHL’s attendance at Board and
committee meetings as well as at the Board strategy day. The
review covered specific areas identified as requiring further
development during the previous year’s review. The scope was
agreed with the Company Secretary after consultation with the
Chairman. The specific areas of focus were: Board composition
and dynamics, the Board’s role and the Board at work.
Good progress had been made since the last review and the
Board feels that it is working more effectively. The Board
discussed the findings of the report at its meeting in November,
which BHL attended.
Stages of the Board and committees
effectiveness review
July
Briefing and
areas of focus
identified
December
Priorities and
action plans
agreed for
the Board
and each
committee
November
Board
discussion
with Belinda
Hudson Limited
6
5
1
4
October
Results collated
and evaluated
2
3
September
One-to-one
discussions
with Board
members and
senior
management
July to
September
Review of
Board and
committee
papers and
attendance
at meetings
At a private meeting of the Non-Executive Directors,
Sir Kevin Smith, SID, led a review of the Chairman’s performance
without the Chairman present. The Nominations & Governance
Committee also met without any management present to discuss
the performance of the Chief Executive. The meetings concluded
that both the Chairman and the Chief Executive continued to be
effective and constructive feedback was shared with each of them.
Progress on key areas
Areas of focus
BHL’s findings in 2018
Focus for 2019
Board composition
and dynamics
The Board’s role
The Board at work
The Board has a strong cadre of Non-Executive
Directors and highly regarded executives who bring
a good range of skills and a wealth of useful and
relevant experience. Diversity is good in terms of
nationality, gender, perspective and style. All Board
members have shown strong commitment and
resilience and collectively it is working effectively.
Continued focus on the Board succession
programme and skills matrix together with
a review of the composition of the Board’s
committees to maximise co-ordination across
their respective duties and to prepare for future
Board changes.
Responsibility: Chairman
The Board is seen as a positive asset. Together with
its committees, they are seen to add significant value.
The Board’s impact and how it has encouraged the
executives to address specific matters was highlighted
with those Non-Executive Directors with strong
operational experience able to provide useful
challenge, input and support during the restructuring
and cultural change programme.
The combination of face-to-face meetings and
telephone calls is working well, with the latter only
being used for routine updates and not a forum for
discussion of major proposals. There have been some
positive and welcome developments in the quality
of information provided to the Board which has
increased the level of knowledge, understanding and
confidence on the part of the Non-Executive Directors.
With engagement from different parts of the
business, a restructuring update to be provided
at each Board meeting with a watchful eye on the
cultural impact as the change programme
continues to be embedded across the Group.
Responsibility: Chairman/Company Secretary
Emphasis on the co-ordination of agendas and
papers between the Board and its committees
and the Executive Team to strengthen further
the linkage and feedback mechanisms.
Responsibility: Chief Executive/Chief Financial
Officer/Company Secretary
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Nominations & Governance Committee Report
71
NOMINATIONS & GOVERNANCE
COMMITTEE REPORT
IAN DAVIS
CHAIRMAN OF
THE NOMINATIONS
& GOVERNANCE
COMMITTEE
“I was pleased that this year’s evaluation
concluded that the Committee was
proactive in promoting good governance
with an innovative approach.”
Key highlights
Appointment of Nick Luff as a Non-Executive Director
Diversity and inclusion detailed update
Talent and succession approach for Executive Team
Implications of UK Corporate Governance Code 2018
(revised Code)
Introduction
The Committee leads the process for nominations to the Board,
making recommendations to the Board as appropriate. It gives full
consideration to the composition of the Board and succession
planning for Directors and senior management and, in so doing,
oversees the development of a diverse pipeline for succession.
The Committee also keeps the Group’s corporate governance
arrangements under review and ensures they are consistent with
best practice standards.
Membership and operation of the Committee
The Committee comprises wholly of independent Non-Executive
Directors. Biographies are on pages 59 to 61 and meeting
attendance is on page 63. Directors do not attend discussions
relating to their re-appointment.
appropriate for the Group and its stakeholders. Early in 2019,
we reviewed the committees’ composition to ensure skills and
experience are best placed to support management in the delivery
of the strategy. In addition, together with the Executive Directors,
we will review the succession plan to identify the desired skills of
future appointments and to continue the focus on the diversity and
inclusion agenda.
Principal responsibilities
Board and committee composition
Review the structure, size and composition of the Board and its
committees regularly.
Evaluate and consider the Directors’ conflicts of interest.
Board nominations
Recommend new appointments to the Board.
Oversee the induction plans, training and site visits for
the Directors.
Succession planning
Consider succession plan for Directors and senior management.
Oversee the development of a diverse pipeline for succession.
Review implementation of diversity and inclusion policy.
The Committee’s responsibilities are outlined in its terms of
reference which can be found at www.rolls-royce.com. We review
these annually and refer them to the Board for approval. This year,
we have made changes to our remit to ensure it aligns with the
principles of the revised Code.
Evaluation of Chairman, Chief Executive and
Non-Executive Directors
Evaluate annually the Chairman and Chief Executive.
Review the independence of the Non-Executive Directors.
Other attendees
In addition to the members of the Committee, both the Chief
Executive and Brad Singer, non-independent Non-Executive
Director, attend when it is considered appropriate.
Committee evaluation review
This year, Belinda Hudson Limited (BHL) was appointed to
undertake a review of the Committee. The effectiveness review
process of the Board and its committees is discussed in greater
detail on page 70. The Committee considered the review at its
meeting in December and I was pleased that it concluded that the
Committee is particularly strong and proactive in promoting good
governance, with an innovative approach and a desire to ensure
Rolls-Royce’s governance is best in class, adds value and is
Corporate governance
Review the Group’s global governance framework.
Keep up-to-date with the changing governance landscape and
report on the Group’s corporate governance practices.
Principal risk
Talent and capability
Areas of focus for 2019
Culture and behaviour
Employee engagement
Diversity and inclusion
Talent, capability and succession
DIRECTORS’ REPORT 72
Directors’ Report
Nominations & Governance Committee Report
Rolls-Royce Holdings plc Annual Report 2018
Nominations & Governance Committee focus during 2018
Area of focus
Matters considered
Outcome
Board and
committee
composition
Board
nominations
A review of the composition of the Board and
committee membership
Re-appointment of four Non-Executive Directors
The appointment of Nick Luff as Non-Executive
Director and oversight of Nick’s induction plan
A review of site visits undertaken by Board members
Succession
planning
Progress on succession planning
Update on diversity and inclusion
Evaluation of
Chairman,
Chief Executive
and Non-Executive
Directors
Corporate
governance
Oversight
of principal risk –
talent and capability
Annual review of the effectiveness of the Chairman and
the Chief Executive, led by the Senior Independent
Director and the Chairman respectively
Annual review of whether the Non-Executive Directors
remained independent, in accordance with the Code
Governance updates from the Company Secretary
The principal risk is considered when discussing
talent and capability
In 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 reviewed the composition of the Board and
its committees and recommended to the Board some
changes to certain committees effective January 2019,
as set out on page 63.
Following individual reviews of each Director,
the Committee satisfied itself that the Directors
considered for re-appointment continued to be
committed and effective.
Members of the Committee were involved in the
interview process for the new Non-Executive Director
and the Committee recommended Nick Luff’s
appointment to the Board. You can read more about
the appointment process on page 73.
The Committee focused primarily on the approach to
Executive Team succession, following the introduction
of a new talent review process.
The Committee received a detailed update on the work
to improve the diversity and inclusion agenda across
the Group. You can read more about our diversity and
inclusion programmes on pages 46 and 73.
The Chairman and Chief Executive continue to be
effective. Feedback was shared directly with them.
The review concluded that all Non-Executive
Directors, with the exception of Brad Singer,
remained independent.
The Committee has been kept informed about the
changes to the governance landscape following
the introduction of the revised Code and reviewed
progress against its related initiatives.
A revised approach to talent review was considered
in September and it was agreed that continuing
focus was required, particularly on the high-potential
and emerging talent pools in key geographies. Our
second Board apprentice programme was launched in
November 2018 (see page 73).
Board and committee composition
The Committee regularly reviews the balance and composition
of the Board, its committees and the Executive Team, as well as
Non-Executive Director independence, skills and tenure.
When reviewing the Non-Executive Directors appointments
the Committee considers the current skills and experience of the
Board and assesses future needs against longer-term succession
planning in light of the Group’s strategy.
The Committee also takes into account the need to make sure
there is appropriate diversity on the Board. During the year, the
Committee considered the external reviews on diversity, namely
the Hampton-Alexander Review, published in November 2018.
Further details on our approach to diversity are set out on pages
73 and 74. The Committee is satisfied with the current composition
of the Board committees and believes that undue reliance is not
placed on particular individuals. The Board committee membership
is set out on pages 61 and 63. This will be regularly reviewed and
refreshed by the Board.
Board inductions, training and development
The Company Secretary is responsible for ensuring that new
Directors have a thorough and appropriate induction. Each newly
appointed Director has a structured programme and receives a
comprehensive data pack providing detailed information on the
Group. You can read more about inductions and continuing
development on page 69.
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Nominations & Governance Committee Report
73
Board nominations
In February 2018, the Committee recommended to the Board the
appointment of Nick Luff as Non-Executive Director.
During the year, we considered and recommended to the Board
the terms of appointment for Brad Singer for a further three-year
term, his initial appointment being for a two-year term. In addition,
the Committee considered and recommended to the Board the
re-appointment of Jasmin Staiblin for a third three-year term and
Irene Dorner and Sir Kevin Smith both for second three-year terms
subject to annual shareholder re-election. For each, we consider the
effectiveness and commitment of the Director and undertake a more
thorough review of those Directors who are being re-appointed for
their third three-year term. The Committee was satisfied with the
Directors’ continued commitment and effectiveness.
As announced in February 2018, Nick Luff, chief financial officer
of RELX Group, was appointed as a Non-Executive Director with
effect from close of the AGM in May 2018, following shareholder
approval. Nick is a member of the Audit Committee and Nominations
& Governance Committee. You can read Nick’s full biography at
www.rolls-royce.com. Nick was identified as a candidate who would
bring significant expertise in finance and accounting to the Board.
Prior to his appointment, Nick met with eight members of the Board
including the Chairman, Chief Executive and Chief Financial Officer.
For Nick’s appointment, the Committee appointed MWM
Consulting. MWM Consulting had no other connection to the
Company during the year. In accordance with our Board diversity
policy, we will only engage firms who have signed up to the
Voluntary Code of Conduct for Executive Search firms. Prior to the
new appointment, the Chairman agreed a Non-Executive Director
profile and the Committee provided input into a shortlist of
candidates for the role.
Succession planning
The Committee is committed to regularly reviewing succession
planning and it plays a vital role in promoting effective board
succession, making sure that this is aligned to the Group’s strategy.
A principal risk to the Group 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.
The Committee was pleased with the increased focus by the
Executive Team on leadership talent and the succession pipeline.
Development plans are in place for those emerging leaders with
potential to succeed current members of the Executive Team in
due course. Following management restructuring activities, the
Enterprise Leadership Group below the Executive Team has also
been refined and reset to a smaller, diverse core of key leaders
who will take the business forward. There remains much to do
in improving diversity amongst our leadership and management
populations, a challenge which we are committed to addressing
through monitoring of careful plans to attract and recruit, retain
and develop our leaders of the future.
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. Throughout the year, Directors took
opportunities to meet with senior management across the Group.
At the beginning of 2018, we announced the appointments of
Chris Cholerton, former President – Defence Aerospace, as the
new President – Civil Aerospace, and Tom Bell, a former employee,
as the new President – Defence. These appointments came at a
crucial time for our business as the Company set out to make
2018 a breakthrough year.
Board apprentice programme
In November 2018, we launched our second programme, the format
of which incorporates the feedback from our pilot programme
which ran in 2016/2017. Six individuals from different areas of the
Group have been selected for the programme, via our talent
succession process, which will run for 18 months. The purpose of
the programme is to provide these individuals with leadership
development experience and demonstrate our commitment to their
career progression and development as leaders in the organisation.
Each apprentice will join two core Board committees, attending
each one for a total of nine months. They have been aligned to one
committee which is more synonymous with their current job role
and one that provides them with more of a challenge. In addition
to this, apprentices will be able to participate in supplementary
committees to broaden their experience, attend masterclasses on a
variety of board-relevant topics and take advantage of frequent
networking opportunities. Throughout the programme, each
apprentice will be mentored by two Board members and sponsored
by the relevant Executive Team member as well as attending
one-to-one sessions with the Chief People Officer. This framework
intends to provide them with the right support and guidance for
both them and the Board to get as much out of the programme
as possible.
Diversity and inclusion
Diversity and inclusion continues to be an area of focus for the
Committee. The Board has long understood the importance of
diversity within our workforce and particularly the value of
developing a diverse pipeline for succession to senior
management. We continue to work to improve women’s
representation at Board level and in senior leadership positions,
including as a supporter of The Mentoring Foundation, which owns
and operates both the FTSE 100 cross-company mentoring
executive programme and the next generation women leaders
programme (the FTSE programmes). These programmes match
high-potential female mentees with mentors who are chairs or
senior leaders in other companies. In recent years, Ian Davis has
acted as a mentor on the FTSE programmes to several senior
women from other organisations and Rolls-Royce itself has placed
eight mentees into the FTSE 100 cross-company mentoring
programme. The Committee is pleased to be able to make this
contribution and to offer our high-performing and aspirational
women this opportunity to further their careers.
Furthermore, the Board is committed to supporting and monitoring
Group activities to increase the percentage of senior management
roles held by women and other under-represented groups across
the organisation. In September, the Committee was updated on the
Executive Team’s diversity and inclusion strategy against the backdrop
of the restructuring programme, see page 46. In December, the
Board reviewed the Board diversity policy and approved certain
amendments to ensure alignment with the revised Code and the
recommendations of both the Hampton-Alexander Review
regarding gender diversity and the Parker Review in respect of
ethnic diversity. Our policy will continue to promote an inclusive
and diverse culture and it reaffirms our aspiration to meet and
exceed the recommended voluntary target of 33% of Board
positions being held by women in 2020. It is recognised that there
will be periods of change on the Board and that this number may
be smaller for periods of time while the Board is refreshed. However,
it is our longer-term intention to at least maintain this balance. You
can find the full policy at www.rolls-royce.com.
DIRECTORS’ REPORT 74
Directors’ Report
Nominations & Governance Committee Report
Rolls-Royce Holdings plc Annual Report 2018
Board diversity policy
Objective
Progress
All Board appointments will be made in the context of the skills
and experience that are needed for the Board to be effective.
Maintain a balance so that, as a minimum, one third of the Directors
are women.
Support and monitor Group activities to increase the
percentage of senior management* roles held by women
and other under-represented groups to 25% by 2020.
Monitor, challenge and support internally set targets for diversity
and inclusion at all levels across the organisation.
The Committee regularly reviews the composition of the Board.
The chart on page 59 shows that the percentage of women on the
Board is 30.8% This has reduced slightly since 2017 following the
appointment of Nick Luff as a Non-Executive Director in May 2018.
The Committee received an update on the diversity and inclusion
strategy across the restructured business. This recognises the
need to bring different people with different ways of thinking
together to find simpler, more innovative, bolder ways of doing
things to deliver better business outcomes.
The charts on page 59 provide a clear picture of our Board
diversity. Progress against our 2020 diversity targets across
the Group are set out on page 46.
* Senior management defined as Executive Team and Enterprise Leadership Group which currently comprises 88 most senior roles.
Executive Team Diversity
The Executive Team currently comprises ten members, all of whom
are male, following the departures of Mary Humiston and Marion
Blakey during the year. The Committee has agreed a 2020 gender
diversity target for the Executive Team of 23%. In September, the
Committee considered the detailed succession plan for the
Executive Team and noted that 36% of the candidates were female
(2017: 21%). Currently 17% of the Enterprise Leadership Group are
female as are half our Board apprentices.
Governance
We strive to take an innovative approach in all that we do and that
includes our approach to governance. In 2018, we have carried
out a number of initiatives including two Meet the Board events
in the UK and Germany, the launch of our second Board apprentice
programme and the appointment of Beverly Goulet as our
Employee Champion for North America following the very successful
employee engagement initiatives supported by Irene Dorner as
our first Non-Executive Director Employee Champion. We continue
to look to be best in class and to ensure our governance is
appropriate for the Group and all our stakeholders.
The Group’s governance framework has been reviewed in depth
to ensure it is aligned with the objectives and ambitions of the
restructured business. Having the framework in place enables the
Executive Team to manage risk, drive critical business decisions and
maintain consistent standards. It means the Group can act with pace
and confidence in a way that meets the expectations of our
stakeholders, including our customers, regulators, colleagues,
partners and shareholders.
We also refreshed and simplified our Group policies. We now have
a more succinct set of policies that communicate clear expectations
of employees in a new, consistent format. The new Group policies
were launched across the organisation in the autumn simultaneously
with our code of conduct and are available to view in the
sustainability section on www.rolls-royce.com.
The General Counsel and the Company Secretary will continue to
help to keep the governance framework and the development of the
Group policies under review. They will oversee the effectiveness of
the framework across the organisation and ensure that the Group’s
corporate governance and corporate compliance arrangements,
practices and procedures (below Board level) are consistent with
appropriate best practice principles and standards for a group of
the size and complexity of Rolls-Royce.
The Nominations & Governance Committee is provided with regular
updates on key developments to corporate governance. This year,
the Committee has been kept informed about the changes to the
governance landscape with the introduction of the revised Code.
Conflicts of interest and independence
The Board continues to monitor and note potential conflicts of
interest that each Director may have and recommends to the Board
whether these should be authorised and whether any conditions
should be attached to any authorisation. The Directors are regularly
reminded of their continuing obligations in relation to conflicts and
are required annually to review and confirm their external interests,
which helps to determine whether each of them continue to be
considered independent.
Brad Singer, as a representative of a significant shareholder, is not
considered to be independent. As noted on page 58, the conflict
of interest was managed throughout the year by a relationship
agreement between the Company, ValueAct and Brad Singer.
During the year, no additional conflicts of interest were identified
which required approval by the Board. This was confirmed in an
annual review by the Board. The Committee advised the Board that
it considered that each of the remaining Non-Executive Directors
continued to be independent.
Looking forward
In 2018, I believe the Committee has made strong progress in a
number of key areas, particularly our detailed review of the Group’s
stakeholder engagement programme as well as gaining greater
insight into the Group’s culture as part of the restructuring
programme. These areas of our remit have been emphasised in
the revised Code and we will keep under review any enhancements
to our work during 2019 to ensure our governance initiatives
continue to aspire to be best in class and remain innovative,
thoughtful and appropriate for the Group and all our stakeholders.
Ian Davis
Chairman of the Nominations & Governance Committee
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Audit Committee Report
75
AUDIT COMMITTEE REPORT
LEWIS BOOTH
CHAIRMAN OF THE
AUDIT COMMITTEE
“The long business cycle coupled with
complex contractual arrangements
leads to the need for well considered
judgements. In 2018, these have included
embedding IFRS 15, accounting for the
Trent 900 and Trent 1000 programmes
and assessing the recognition of
deferred tax assets.”
Key highlights
IFRS 15 embedded and IFRS 16 implementation on schedule
Trent 900 and Trent 1000 exceptional items
Focus on assessment of potential onerous contracts
Transition to PwC as auditors
Focus on risk management and internal control systems,
including cyber security
Introduction
I am pleased to present the 2018 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 the
external auditors for the open discussions that take place at our
meetings and the importance they all attach to its work.
We have had a number of key issues to consider in 2018,
most significantly:
— matters arising from embedding IFRS 15 Revenue from Contracts
with Customers and the impact of IFRS 16 Leases;
— key judgements and estimates in accounting for the Trent 900
and Trent 1000 exceptional items;
— consideration of the recognition of UK deferred tax assets,
particularly in light of the Group’s negative balance sheet position;
— the impact of the restructuring programme announced in June
2018 on the people and processes on which the financial
reporting and risk and control environment are based; and
— following the audit tender in 2016, PricewaterhouseCoopers LLP
(PwC) appointment as the Company’s new auditor.
Areas for focus in 2019
We will continue to pay particular attention to the maintenance of
the control environment as the restructuring programme progresses,
particularly within the finance transformation programme. We will
continue to oversee the Group's management of its cyber threat
principal risk. We will also focus on the smooth transition to
IFRS 16 Leases.
Membership and operation of the Committee
In addition to myself, members of the Committee are Irene Dorner,
Beverly Goulet, Nick Luff and Lee Hsien Yang. All members of the
Committee are independent Non-Executive Directors. For the
purposes of the Code and DTR 7.1, Irene Dorner, Beverly Goulet,
Nick Luff and I have recent and relevant financial experience. The
Board has confirmed that it believes the Committee as a whole has
competence relevant to the Company's sector. Our biographies are
on pages 60 and 61 and our meeting attendance is shown on page 63.
The Committee’s responsibilities are outlined in its terms of reference
which can be found at www.rolls-royce.com. We review these annually
and refer them to the Board for approval. This year, we have made
changes to our remit to ensure it aligns with the principles of the
revised Code.
Other attendees
In addition to the members of the Committee, the Chairman,
Chief Executive, Chief Financial Officer and any of the Non-Executive
Directors may attend one or more meetings at the Committee's
invitation. The Committee is supported by the General Counsel,
the Company Secretary, the group controller, the head of group
reporting, the group chief accountant, the director of internal audit,
the head of enterprise risk management and the external auditors.
Committee evaluation review
This year, Belinda Hudson Limited (BHL) was appointed to undertake
a review of the Committee. The effectiveness review process of the
Board and its committees is discussed on page 70. I was pleased with
the conclusion that the Committee had been strengthened and is
becoming increasingly effective with the benefit of the support from
the Chief Financial Officer and his team. To ensure we continuously
improve, the review recommended that, in 2019, our focus will include:
supporting the new director of internal audit; a review of the
effectiveness of the internal audit function; and oversight of
the non-financial aspects of the control environment.
Principal responsibilities
Financial reporting
Financial announcements, focusing on: accounting policies,
judgements and estimates; inclusion of appropriate disclosures;
compliance with relevant regulations; and whether the Annual
Report is fair, balanced and understandable.
Risk and control environment
Monitoring the effectiveness of the risk management and
internal control systems.
Reviewing concerns of financial fraud.
2018 principal risks
Business continuity, market and financial shock and
IT vulnerability.
Internal audit
Scope, resources, results and effectiveness.
External audit
Relationship with, and effectiveness of, the external auditor.
Approving the external auditor’s terms of engagement and fees.
DIRECTORS’ REPORT 76
Directors’ Report
Audit Committee Report
Rolls-Royce Holdings plc Annual Report 2018
Audit Committee focus during 2018
Area of focus
Matters considered
Outcome
The accounting policies, judgements and estimates
are appropriate and balanced.
Agreed the judgements and estimates to adopt
IFRS 16 and the assessment of the impact included
on page 123.
The Annual Report, taken as a whole, is fair, balanced
and understandable.
Financial
reporting
The appropriateness and disclosure of accounting
policies, key judgements and key estimates with a
focus on:
— the adoption of IFRS 15
— the methodology for the identification of abnormal
costs on the Trent 1000 programme
— judgements and estimates on the Trent 900
programme following the decision to shorten the
Airbus A380 programme
— recognition and disclosure of restructuring costs
— judgements and estimates necessary to assess the
recognition of the UK deferred tax assets
— finalisation of the acquisition of ITP Aero
The implementation project for IFRS 16. In particular,
the preparation of the restated information on an
IFRS 16 basis which is included in note 1 to the
Consolidated Financial Statements
The form and content of the Annual Report
Risk and control
environment
The continuing development of the enterprise
risk management and internal controls systems
The internal control system has been enhanced to
include compliance controls required for the DPAs.
The processes for identifying and managing risks
The effectiveness of the Group’s systems of
internal control
The progress against the commitments under the
DPAs as they relate to financial reporting
The process and assumptions underlying the going
concern and viability statements
2018 Principal risks
Management’s assessment of the risk of, and
procedures to manage, a business continuity event
The procedures for preventing, detecting and
recovering from any breaches of the Group’s
IT systems security
The Group’s policies, procedures and controls for
identifying, managing and mitigating a market or
financial shock
The effectiveness of the internal audit function, its
key findings and trends arising, and the resolution
of these matters
Internal audit
Agreed the importance of ensuring that emerging
risks were considered and the need to maintain focus
on further embedding risk management during the
restructuring activities.
Reported to the Board that an appropriate process
is in place to make the going concern and viability
statements, particular attention was given to the going
concern status of the Group's material subsidiaries.
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 resources are being focused on managing
the business continuity, IT vulnerability and market
and financial shock principal risks, in line with the
Group's agreed risk appetite.
While the scope and extent of internal audit are
appropriate and the function remains effective, we
noted the importance of maintaining this through
the restructuring programme and the opportunity
to further enhance its robustness.
External audit
The transition to PwC as auditor in 2018
Monitored PwC’s transition work plan and activities.
The approach, scope and risk assessments of external
audit and the effectiveness and independence of the
external auditor
The extent of non-audit services provided by the
external auditors
No concerns over the nature and amount of the
non-audit services provided by PwC.
Recommended that PwC be re-appointed as the
Group’s auditor at the 2019 AGM.
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Audit Committee Report
77
Business audit committees
Financial reporting
Each of the Group’s businesses has its own audit committee. These
committees are now chaired by the respective business president,
and comprise business functional leaders, internal audit and senior
finance personnel and are also attended by PwC. They meet twice
a year and:
— review the application of accounting policies, judgements
and estimates;
— review risk management, internal control systems and issues
arising at a more detailed level;
— give us further assurance as to the extent of management control
and accountability;
— promote the governance culture within the Group; and
— inform areas for further consideration at our meetings.
We receive reports on key matters arising and updates on the work
and effectiveness of the business audit committees during the year.
During 2018, the business audit committees focused on the
continuous improvement of our internal control and risk
management processes, in particular the embedding of these
in our normal operational processes.
Members of the Committee were invited to the business audit
committee meetings during 2018 and do periodically attend
meetings during the year. We believe that this provides a key level
of support to the reviews we undertake in our meetings.
Business and function presentations
In addition to a regular review of the business audit committee
process and any key issues identified, we have a regular schedule
of presentations from each of the Group’s businesses and its key
functions. During 2018, we received presentations from the following:
— Civil Aerospace – issues arising from the embedding of IFRS 15,
the financial implications of the Trent 1000 in-service issues and
the shortening of the Trent 900 programme, including the key
estimates underlying these, and the impact on existing contracts,
in particular whether they are onerous.
— Defence – the business environment and in particular pressure
on UK and US defence budgets; business risk process, monitoring
and planned enhancements; key accounting judgements and
estimates for long-term contracts; and the status of the Defence
internal control framework.
— Power Systems – key accounting estimates (including warranty
and compliance provisions); the introduction of an enhanced
‘Controls Framework for Finance and Controlling’ with a specific
focus on fraud prevention; and the risk management process
(including risk culture and risk management tools).
— Group Tax – the main drivers of the Group’s tax position and key
tax risks and how they are managed (with specific consideration
of tax audits and disputes); key tax law developments and new
requirements (in particular developments in the taxation of the
digital economy); and key sources of estimation uncertainty (in
particular the recognition of deferred tax assets).
As I have previously noted, the Group has complex long-term
accounting and every year we spend much of our time reviewing
the accounting policies and accounting judgements implicit in
our financial results. For 2018, the Trent 900 and Trent 1000
exceptional items have again highlighted these complexities and
the need for well-considered judgements on the appropriate
accounting for the costs of meeting our obligations under our
long-term agreements.
The Group has an established process for preparing the
Consolidated Financial Statements, including:
— maintenance of internal financial controls – see page 79;
— monitoring of developments in financial reporting;
— review of financial statements by local management prior to
submission to group finance for further review and explanations;
— certification by management of each business unit;
— preparation and review of consolidation adjustments;
— review of the draft Consolidated Financial Statements prior
to submission to the Committee and the Board; and
— review of the Consolidated Financial Statements by the Committee
and the Board together with reports from management and the
auditors on significant judgements, estimates, changes in
accounting policies and any other relevant matters.
The scope of the external audit is set out in PwC's report on page 187.
A summary of the principal matters we considered in respect of
the 2018 Consolidated Financial Statements is set out in the table
on page 78.
Fair, balanced and understandable
Since the year end, we have reviewed the form and content of the
Company’s 2018 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 position and 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 Executive Team
and PwC) and ensured that all feedback was appropriately
reflected; and
— the presentation and discussion in the Strategic Report of: (i) the
underlying as well as reported results; (ii) the in-service issues on
the Trent 1000 programme; and (iii) trends, in particular, the impact
of individually significant items.
DIRECTORS’ REPORT 78
Directors’ Report
Audit Committee Report
Rolls-Royce Holdings plc Annual Report 2018
Areas of focus for the 2018 Financial Statements
Key issue
Matters considered
Outcome
Adoption of IFRS 15
Revenue from Contracts
with Customers
The embedding of the significant changes, most
significantly in Civil Aerospace, and the resolution
of additional matters arising, in particular, how
changes in estimates on long-term aftermarket
contracts impact in the reported results
The appropriateness of the long-term planning
rate that is used to translate transactions in
long-term contracts
The appropriateness of the disclosures in the
financial statements – see pages 113 to 116
We were satisfied that:
— while additional matters arose on transferring the new
IFRS 15 processes to a live environment, these have
been resolved satisfactorily;
— the long-term planning rate remains appropriate; and
— the required disclosures are included in the
Financial Statements.
Adoption of IFRS 9
Financial Instruments
The appropriateness of the disclosures in the
financial statements – see page 113
We were satisfied that the required disclosures
are included in the Financial Statements.
Accounting for Trent 1000
in-service issues
Development of a methodology for identifying
abnormal costs of wasted material, labour and
other resources and the application of this to the
Trent 1000 – see page 115
We were satisfied that the methodology adopted
appropriately reflects the nature of the costs and
that these abnormal costs should be excluded from
the performance.
Accounting for the
impact of the decision to
shorten the Airbus A380
programme on the
Trent 900 programme
Consideration of
onerous contracts
The consequences on existing contractual
arrangements with both customers and suppliers
The potential impairment of programme assets
We were satisfied, that, while at this early stage
estimates were necessary, the impacts have been
appropriately reflected in the results and that these
should be excluded from the underlying performance.
Review of procedures to assess whether contracts
are onerous, including the consequential impact
of the Trent 1000 and Trent 900 issues above
We were satisfied that an appropriate assessment had
been made and that appropriate provision had been
made for contracts identified as onerous.
Classification of
restructuring costs
The criteria for excluding certain costs from
the underlying results and whether the costs
meet this criteria – see page 124
We reviewed the criteria in the context of the ongoing
restructuring programme and were satisfied that they
are appropriate and have been consistently applied.
Finalisation of accounting
of the acquisition of
ITP Aero
The update of the fair value of the assets and
liabilities acquired, which were provisional in the
2017 Consolidated Financial Statements
We were satisfied that the updated values have
been prepared appropriately, including third-party
valuations where necessary.
Accounting for
business disposals
Treatment of contingent consideration on the
disposal of L’Orange – see page 165
Classification of the Commercial Marine business
as a disposal group held for sale to be completed
in 2019 – see page 166
A review of the classification of
joint arrangements in accordance with
IFRS 10 Consolidated Financial Statements and
IFRS 11 Joint Arrangements
We reviewed the assessment of the potential
contingent consideration and were satisfied that there
are currently no indications that it will be significant.
We reviewed the anticipated disposal in the context
of the definitions within IFRS 5 Non-current Assets
Held for Sale and Discontinued Operations and were
satisfied that it is appropriately classified.
The review resulted in the reclassification of a number
of joint arrangements. However, we were satisfied that
these were not significant individually or in aggregate.
Basis for assessing the selling price –
see page 163
We were satisfied that the price represents the fair
value of the engines.
Basis for recognition of DTAs arising from tax
losses and advance corporation tax in the UK
Based on the forecasts of the relevant Group entities,
we were satisfied that the treatment is appropriate.
The progress to implement IFRS 16 in 2019 and
the preparation of the disclosures of the impact
of the change for 2018 – see page 123
We were satisfied that the judgements and estimates
made are appropriate and consistent with the new
requirements; that the disclosures of the impact in
the Financial Statements are appropriate; and that the
Group has systems and processes in place to report
on the new basis in 2019.
Classification of joint
arrangements
The sale of engines
to joint ventures
Deferred tax assets
(DTAs)
Implementation
of IFRS 16 Leases
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Audit Committee Report
79
Risk and control environment
Assessment of principal risks
All risks are managed through a risk management system (RMS
described on page 50) in accordance with policies and guidance
approved by the Board. On behalf of the Board, the Committee
monitors the RMS, including continued developments and
improvements. We continue to pay particular attention to the
assessment and management of risks at remote sites. The processes
are designed to identify and manage, rather than eliminate, the risk
of failure to achieve our business objectives.
In managing the identified risks, judgement is necessary to:
— evaluate the risks facing the Group in achieving its objectives;
— determine the risks that are considered acceptable;
— determine the likelihood of those risks materialising;
— assess the Group’s ability to reduce the impact of risks that do
materialise; and
— ensure the costs of operating particular controls are proportionate
to the benefit provided.
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 Board 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 Group had been undertaken.
The principal risks arising are described on pages 51 to 54. These
formed a key element of our assessment of the going concern and
viability statements, described further below.
Internal control
The Board has overall responsibility to 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 system is based on
business best practice and comprises:
— entity-level controls covering leadership and direction from
the top; and
— specific control activities, covering detailed process controls,
and internal and external assurance activities.
We have reviewed controls over the Group’s principal risks and the
key risks and critical processes in each of the Group’s businesses.
In addition, both the business audit committees and this Committee
consider the auditor’s observations on the control environment.
During 2018, we reviewed the results of attestation and testing
performed by the internal control and internal audit teams to
confirm the effective operation of key financial controls across the
Group, with an improving trend in the results compared to previous
years. We also reviewed the progress of the programme to strengthen
financial reporting and compliance controls to meet our DPA
commitments, including the work to document and assess the process
risks and design of controls in our key finance processes. We have
made progress in embedding a financial controls awareness and
culture with additional training and guidance provided to our finance
teams. Opportunities to further strengthen and automate the
financial controls have been identified and will be addressed in the
2019 work plan. These focus on strengthening the supervisory review
and oversight controls that provide assurance over the detailed key
financial controls, and enhancing and embedding standardised
IT controls to operate consistently over all of our key financial
systems. We will pay particular attention to ensuring that the
control environment is maintained during the restructuring activities.
We have conducted a review of the effectiveness of the Group’s
risk management and internal control systems, including those
relating to the financial reporting process, in accordance with
the Code. Where opportunities for improvement were identified,
action plans have been put in place and progress is monitored
by the Committee. We consider that our review of the risk
management and internal control systems, in place throughout
2018, meet the requirements of the Code and the DTR.
Going concern and viability statements
Having regard to the net liabilities of £1,052m on the Group's 2018
balance sheet, we paid particular attention to these assessments.
We reviewed the processes and assumptions underlying the
statements set out on page 55, considering in particular:
— the Group’s forecast funding position over the next five years;
— the forecasts for material subsidiaries making up this position;
— 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 could be taken in extreme
circumstances; and
— 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.
2018 Principal risks
As set out on page 50, the Board allocated certain principal risks to
the Committee and we considered these in detail through the year.
From our discussions we are satisfied that all of the principal risks
that we oversee have received significant management attention
during the year. We reviewed:
Business continuity
In November, the chief information officer updated the Committee
on business continuity risks related to the Group’s key IT systems.
In December, we reviewed plans to mitigate business continuity
risks related to the Group’s supply chain and received an update on
the business continuity exercises that the Civil Aerospace business
had undertaken. We also received updates on investment plans to
help to reduce these risks.
IT vulnerability
In May and November, the chief information officer and the cyber
security director updated the Committee on IT vulnerability risks,
including the increasingly hostile landscape that the Group is
experiencing.
We also reviewed the cyber security strategy, the resources and
investments required to maintain resilience and the potential risks
that need to be managed during the restructuring activities.
DIRECTORS’ REPORT 80
Directors’ Report
Audit Committee Report
Rolls-Royce Holdings plc Annual Report 2018
Market and financial shock
In July, we reviewed potential key risks, focusing particularly on
liquidity and credit rating risks and how they are managed by the
financial risk committee.
We satisfied ourselves that any market or financial shock that could
result from Brexit has been included in the scenario analysis on
which the viability statement is based.
Our risk management system
We satisfied ourselves that appropriate progress had been made
during the year to strengthen the RMS, as described on page 50.
We also identified opportunities to further improve the RMS, for
example the requirement of the revised Code to consider emerging
risks and how the Group’s horizon scanning activities can be
applied further.
Internal audit
The director of internal audit regularly reports to the Committee:
— Quarterly – a dashboard identifying the key trends and findings
from internal audit reports, and the resolution of actions agreed.
— Biannually – a detailed update of significant findings and his
perspectives on the internal control environment, management
responses to underlying root causes and systemic issues.
— Annually – compliance with expenses policies for the directors
and the Executive Team; and an internal audit work plan for the
following year.
— As required – the results of audits on advisor processes
(including payments) and offset and monitoring, as part of the
Group's response to the DPAs.
At least once a year, the Committee meets the director of internal
audit privately to discuss: the activities, findings and resolution of
control weaknesses; progress against the agreed plan; and the
resourcing of the department. Specific topics discussed in 2018
included: process and control design; compliance to process; data
security and integrity; project management; and accountability.
I also meet the director of internal audit before each meeting and
on an ad-hoc basis throughout the year, as do other members of
the Committee.
We continue to focus on the nature and number of issues raised by
internal audit and the time to complete the related actions. While
we are pleased to observe a continued reduction in the time to
complete actions, we noted that the underlying root causes remain
largely unchanged. These areas will be a focus for the improved
systems and processes being designed to achieve the restructuring
plans. The future work plan is developed to focus on the key risks
facing the business. We monitor changes during the course of
the year.
We 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. There has
been increased turnover in resource in the second half of 2018
and we discussed plans to maintain sufficient resource.
Based on the reports and discussion, we are satisfied that the scope,
extent and effectiveness of internal audit work are appropriate
for the Group and that there is an appropriate plan for ensuring
that this continues to be the case, particularly through the
restructuring activities.
External audit
Audit transition and the 2018 audit
Following the audit tender process in 2016, PwC was formally
appointed as the Company’s auditor at the 2018 AGM. We assessed
PwC’s qualifications, expertise and resources, independence and
the effectiveness of the external audit process.
The Committee reviewed the quality of the external audit
throughout the year and considered the performance of PwC,
taking into account the Committee’s own assessment and feedback,
the results of a survey of senior finance personnel across the
Group focusing on a range of factors we considered relevant to
audit quality, feedback from the auditors on their performance
against their own performance objectives and the firm-wide audit
quality inspection report issued by the FRC in June 2018.
Based on these reviews, the Committee concluded that there had
been appropriate focus and challenge by PwC on the primary
areas of the audit and that they had applied robust challenge
and scepticism throughout the audit. Consequently, as noted
above, the Committee has recommended to the Board that
they be reappointed at the AGM in May 2019.
During the year significant time has been spent on transition
activities, including:
— shadowing KPMG through the 2017 year-end process;
— planning workshops held with Group and business teams;
— review of KPMG’s working papers; and
— detailed walkthrough tests of key processes and controls.
In May 2018, PwC presented its audit plan, which identified its
assessment of the key audit risks and the proposed scope of audit
work. We agreed the approach and scope to be undertaken.
Subsequently, an updated plan was agreed in November 2018,
building on the work undertaken at the half-year and other
transition activities.
Key risks and the audit approach to these risks are discussed in the
Independent Auditor’s Report (pages 186 to 196), which also highlights
the other significant risks that PwC drew to our attention.
As part of the reporting of the half-year and full-year results,
in July 2018 and February 2019, PwC 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. Where
effective to do so, PwC also reported on its assessment of the
Group’s controls.
I meet with the lead partner prior to each Committee meeting
and the whole Committee has a private meeting with PwC at least
once a year.
During 2018, the Audit Quality Review team (AQRT) of the FRC
conducted a review of KPMG’s audit of the Group's Financial
Statements for the year ended 31 December 2017. In January 2019,
the AQRT provided its final report to me. The report highlighted
two areas of estimation risk which we discussed initially with PwC
in January 2019 and again in February 2019 as part of the final
audit discussions.
Rolls-Royce Holdings plc Annual Report 2018
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Audit Committee Report
81
Non-audit services
In order to safeguard the auditor’s independence and objectivity,
and in accordance with the FRC’s Ethical Standard, we do not
engage PwC for any non-audit services except where it is work that
they must, or are clearly best-suited to, perform. Accordingly, our
policies for the engagement of the auditor to undertake non-audit
services broadly limit these to audit-related services such as
reporting to lenders and grant providers.
Fees paid to PwC are set out in note 7 to the Consolidated Financial
Statements. All proposed services must be pre-approved in
accordance with the policy which is reviewed and approved
annually. Above defined levels, my approval is also required before
PwC is engaged. Quarterly, we also review the non-audit fees
charged by PwC. In addition, in 2018, we continued to review fees
charged by KPMG until they had completed the 2017 audits of all
significant subsidiary companies.
Non-audit related fees paid to the auditor during the year were
£0.9m (including £0.5m relating to the review of the half-year
results) representing 10% (2017 (KPMG): 24%) of the audit fee.
Our annual review of the external auditor takes into account the
nature and level of all services provided.
Based on our review of the services provided by PwC 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 PwC.
Compliance
During 2018, the Company complied with The Statutory Audit
Services for Large Companies Market Investigation (Mandatory
Use of Competitive Tender Processes and Audit Committee
Responsibilities) Order 2014.
Looking forward
As well as our regular review of accounting policies, our focus will
include monitoring:
— the finance transformation programme (see page 17);
— the impact of the restructuring activities on the risk and internal
control environment;
— the continued improvements to the internal control systems, with
particular focus on the supervisory review and oversight
controls; and
— in light of the current environment, a continuing focus on the
Group’s response to cyber security risks.
In addition to the continuing oversight by the Safety & Ethics
Committee of the ethics and compliance programme (see page 101),
we will continue to monitor actions relating to risk management,
internal controls and other matters relevant to the Committee that
arise out of Lord Gold’s recommendations and the DPAs.
Lewis Booth
Chairman of the Audit Committee
DIRECTORS’ REPORT 82
Directors’ Report
Remuneration Committee Report
Rolls-Royce Holdings plc Annual Report 2018
REMUNERATION COMMITTEE REPORT
RUTH CAIRNIE
CHAIRMAN OF THE
REMUNERATION
COMMITTEE
“Our policy is designed to support
the strategic focus of the Company
as it undergoes its transformation.
We remain satisfied that the policy
works well.”
Key highlights
First LTIP payout for four years
Business performance drives bonus above target
Consideration of revised Code
Introduction
I am pleased to present my report as Chair of the Remuneration
Committee, outlining what we have achieved in the year.
Our remuneration policy
Our policy is designed to support the strategic focus of the Company
as it undergoes its industrial transformation to new engine models
and greatly increased volumes. This is reflected in the key policy
themes of transformation, competitiveness, alignment with
shareholders and simplicity, with a strong emphasis on ramp-up
in cash flow generation as the most important financial metric.
We remain satisfied that the policy works well.
2018 outturns
In terms of customer delivery, 2018 was a challenging year especially
in dealing with the issues on the Trent 1000 engines. In addition,
our delivery of widebody engines fell short of the significant
ramp-up we had targeted, in part due to industry-wide supply chain
constraints. We also had delivery issues in the Defence and Power
Systems businesses. As a result, our customer delivery metric in the
annual bonus did not hit the base level and no bonus element was
earned, reflecting that the experience of some of our customers
was disappointing in 2018.
Our other non-financial metric in our bonus plan is employee
engagement, where in 2018 we maintained the same level as in 2017.
As a result, the bonus outcome was at the base level; year-on-year
improvement would have been required for on-target performance,
which was known to be a challenging target given the significant
restructuring activity in 2018 and the impact this has had across
the organisation.
On our key financial bonus metrics, both profit and cash finished
ahead of target. Our operational cash flow increased significantly
in 2018 and has positioned us well to achieve at least £1bn of free
cash flow by 2020. Similarly underlying profit increased, with
strong performances from all businesses despite the
challenges arising from Trent 1000 in-service issues.
Underlying profit 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. This year,
there were also several exceptional charges not included in
underlying profit, as detailed on page 124. After due consideration,
the Committee concluded that underlying profit remained the
appropriate basis for our bonus calculation, in line with the normal
definitions we use.
In determining the outcomes for bonus purposes, the Committee
continues rigorously to examine the quality of both profit and cash,
ensuring that executives are being rewarded for genuine
operational improvements. The Committee also reviewed the
resulting outturn in the round, to assess whether it was a fair
reflection of performance over the year, taking into account a number
of factors. While the underlying profit measure excludes the
exceptional Trent 1000 charge, the free cash flow measure, which
this year had a higher weighting of 50%, includes the unplanned
costs incurred in the year. The Trent 1000 issues also contributed
to the zero outturn for the customer delivery metric, as described
above. The in-service issues therefore had a significant impact on
the bonus outturn, and the Committee did not consider it
appropriate to make any further adjustment. The Committee also
recognised the way in which the organisation responded to the
challenge, both in terms of mitigating actions and progress on
long-term solutions.
Overall it was felt than an outcome of 56% of maximum was
reflective of the Group’s progress and performance during the year.
The targets for the 2016 long term incentive plan (LTIP) have been
met and as a result awards will vest. This is the first time in four years
that LTIP awards have vested, and it reflects the actions taken by
Warren and his team to improve business performance, particularly
a significant growth in cash generation. As our LTIP extends to
wider management, I am pleased that the significant efforts of
this group will be recognised. In line with the agreement with
shareholders in 2016 to modify the EPS hurdle measure, Warren’s
award is capped at 150% of salary.
2019 salary review and incentives
The Committee has reviewed the salary levels of the Executive
Directors and concluded that no increases will be made for 2019.
For the bonus for 2019 the same financial and non-financial metrics
will be retained; however, we will change how we measure the
non-financial elements. In relation to customers, we want to
recognise that there are a number of different ways that our
customers experience our performance, so we have developed
a balanced scorecard of metrics for each business, that better
reflects the broader aspects of performance in addition to on-time
delivery, which has been our only measure to date. For example, in
Civil Aerospace we will include a measure of aircraft on ground
(AOG) as this is clearly a critical driver of customer satisfaction.
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Remuneration Committee Report
83
On employee engagement we are moving to a simpler employee
survey tool in 2019, the Gallup Q12 survey. This survey aligns better
to the key levers that will drive cultural change. We are not making
any changes to the design of the LTIP for 2019 as we believe that
the current design and measures continue to align with our
strategic priorities.
The revised Code
During 2018, the Committee has considered the revised corporate
governance requirements relevant to remuneration. We will use the
review of our remuneration policy in 2019, for approval at the 2020
AGM, as our main opportunity to assess how we will take the
revised Code into account.
In 2019, the Committee will place an increased focus on the linkage
between our culture and reward, to ensure that incentives drive
behaviours consistent with that culture. Part of the personal
element of our bonus plan is already dependent on demonstration
of the Company behaviours and values. This has been a strong
focus for the Executive Team in 2018 and will continue to be a focus
across the organisation in 2019. We have chosen to publish our
CEO pay ratio versus UK employees for a second year, in advance
of it becoming a mandatory requirement, as we recognise the
importance of being open and transparent about executive pay.
As we review our policy during 2019, we will be giving further
consideration to our post-employment shareholding policy and
pensions, mindful of shareholders' views in these areas.
The revised Code emphasises judgement and discretion. As I have
outlined in my report in previous years, the Committee rigorously
reviews incentive outturns to ensure that they reflect business
performance. We have a history of applying discretion to adjust
awards to ensure outcomes reflect the broader context, including
shareholder experience. The Committee also reviews the underlying
performance of the business on potential outcomes of incentives
on a regular basis to ensure that, before and during the life of
awards, an ongoing level of scrutiny of performance and reward
is maintained.
UK gender pay
We are now in the second year of publishing our gender pay gap
and our results this year reflect a similar position to the previous
year. As with many engineering organisations, we need to increase
the number of women at all levels in the Group. We have global
targets to improve the representation of women and have increased
the number of women in our succession and talent pipelines.
We continue to focus on encouraging young women to see STEM
as a future career, but we recognise that there is more to do.
Ruth Cairnie
Chairman of the Remuneration Committee
Other attendees
In addition to the members of the Committee, the Chairman, Chief
Executive, Chief Financial Officer and any of the Non-Executive
Directors may attend one or more meetings at the Committee’s
invitation, although none were present during discussion of his
or her own remuneration package. The Committee is supported
by the Company Secretary, Harry Holt – Chief People Officer and
Natasha Rice – People Director, Performance and Reward.
Advisers
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 £73,415 (2017: £126,750). Fees are based on a time and materials
basis. Deloitte also advised the Company on tax, corporate
compliance, employee global mobility, 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 and is satisfied that the advice it has
received has been objective and independent.
Committee evaluation review
This year, Belinda Hudson Limited (BHL) was appointed to undertake
a review of the Board and its Committees; the review is discussed in
greater detail on page 70. The Committee was pleased that the
review concluded that it is operating effectively with the members
providing strong views and robust challenge to support management
in this area. It was particularly encouraging that BHL recognised the
Committee for adopting current best practice in all respects and being
an early adopter of developing best practice. The Committee discussed
the review in December and agreed to continue the approach
of open dialogue and innovative thinking into our review of the
remuneration policy and our response to the revised Code in 2019.
Principal responsibilities
Determine the remuneration policy for the Executive Directors
and set the remuneration for the Chairman, the Executive
Directors and Senior Management.
Review workforce remuneration and related policies and the
alignment of incentives and rewards with our culture.
Determine the design, conditions and coverage of annual
incentives and LTIPs for senior executives and approve total
and individual payments under the plans.
Determine targets for any performance-related pay plans.
Determine the issue and terms of all-employee share plans.
Membership and operation of the Committee
Oversee any major changes in remuneration.
In 2018, members of the Committee were Ruth Cairnie, Lewis Booth,
Sir Frank Chapman and Sir Kevin Smith. Following a review of the
Board committees' composition, Sir Frank Chapman stepped down
from the Committee at the end of the year and Beverly Goulet joined
the Committee from 1 January 2019. All members of the Committee
are independent Non-Executive Directors. Our biographies are on
pages 60 and 61 and our meeting attendance is shown on page 63.
The Committee’s responsibilities are outlined in its terms of reference
which can be found at www.rolls-royce.com. We review these annually
and refer them to the Board for approval. This year, we have made
changes to our remit to ensure it aligns with the principles of the
revised Code.
Areas of focus for 2019
In 2019, in addition to our regular activities we will:
Review the remuneration policy to ensure that it continues to
support the business strategy and is aligned to the broader
executive remuneration landscape, including the revised Code.
Continue to focus on incentive measures and targets to ensure
they remain aligned with performance and strategy.
Develop our approach to understanding remuneration across
the wider workforce and how this should be taken into account
by the Committee in setting executive remuneration.
DIRECTORS’ REPORT
84
Directors’ Report
Remuneration Committee Report
Rolls-Royce Holdings plc Annual Report 2018
Remuneration Committee focus during 2018
Area of focus
Matters considered
Outcome
Base salaries
Review of base salaries in accordance with
the remuneration policy and the broader
employee context
The Committee reviewed the salary levels of the Executive
Directors and concluded that no increases would be made
in 2018.
Annual bonus
2018 bonus – review of performance against
the 2018 bonus targets
Warren East and Stephen Daintith received a bonus of 60%
of maximum. 40% of the awards were deferred into shares.
2019 bonus – review of measures and targets
to ensure continued alignment to strategy
Long-term
incentive plan
2016 PSP – review of achievement of
performance measures
2019 LTIP – setting targets that ensure
significant stretch
Revised Code
requirements
Review of the revised Code and impacts for
the Committee
The Committee agreed that for the 2019 bonus plan the same
measures would apply as in 2018:
— Profit – 25%
— Cash – 50%
— Customer satisfaction – 12.5%
— Employee engagement – 12.5%
Awards will be based 80% on Group performance and 20%
on individual performance. The maximum opportunities remain
at 180% of salary for the Chief Executive and 150% for other
Executive Directors.
The 2016 awards will vest in March 2019 capped at 150% of
salary for the Chief Executive and 130% of salary for other
Executive Directors, prior to the impact of share price growth
and dividends.
For 2019 grants, targets will continue to be based on CPS (60%),
EPS (20%) and TSR (20%). The EPS targets for threshold, on target
and maximum vesting are now based on IFRS 15 accounting.
The maximum opportunities remain at 250% for the Chief
Executive and 225% for other Executive Directors.
The Committee undertook a detailed review of the revised Code
and approved appropriate changes to its terms of reference at
its meeting in December.
As part of this review, the Committee’s remit has been revised
to ensure the remuneration and policies applying to the wider
workforce are taken into account by the Committee in setting
executive remuneration. The Committee is already periodically
briefed by the Chief People Officer and the People Director,
Performance & Reward on topics relating to workforce
practices, such as gender pay, employee engagement and wider
employee pay and conditions. However it was determined
that during 2019 this would be supplemented by an additional
meeting to provide the Committee with a more in-depth briefing
on overall workforce pay and practices.
During the year, the revised Code provisions relating to
executive remuneration were considered. A number of the new
provisions such as holding periods and the use of judgement
and discretion already form part of the remuneration policy
and the Committee’s approach. We will present a new policy
for approval at the 2020 AGM, and during 2019 will consult
with shareholders on any proposed changes, including areas
such as post-employment shareholding requirements and
executive pensions.
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Remuneration Committee Report
85
Summary of our remuneration policy
Fixed pay
Base salary
Bene�ts
Pension
Variable pay
Annual bonus
Long-term incentive plan
80% Group
performance
+
20% individual
performance
75%
Financial
• Pro�t
• Cash
25%
Non-�nancial
• Customer delivery
• Employee engagement
60%
CPS
20%
EPS
20%
TSR
40% deferral for 2 years
3-year performance period plus 2-year holding period
Malus and clawback – provisions apply where there has been: a material misstatement of audited results;
serious �nancial irregularity which invalidates the targets set; reputational damage; material failure
of risk management; a serious breach of Our Code; or individual gross misconduct.
Clawback will apply until three years after the release of shares.
Shareholding requirement – Executive Directors are required to work towards holding bene�cially-owned
shares equivalent in value to a percentage of their salary by retaining at least one half of after-tax shares released
from the PSP/LTIP until this requirement is met. For the Chief Executive this requirement is 250% of salary and
for other Executive Directors this requirement is 200% of salary.
There are four key themes that underpin the policy:
Simplification
Stewardship
Talent
Supporting transformation
These themes continue to align to our organisational strategy and our reward programmes support them through a combination of salary,
benefits, annual bonus and long-term incentives, underpinned by stretching performance measures and appropriate award levels. The full
policy can be found in the 2016 Annual Report, available at www.rolls-royce.com.
Remuneration policy – worked examples for 2019
Chief Executive £000
Chief Financial Of�cer £000
Minimum
On-target cash
On-target total
Maximum
£1,197
£2,046
£3,225
£5,254
Minimum
On-target cash
On-target total
Maximum
£850
£1,360
£2,125
£3,400
■ Fixed remuneration (including salary, bene�ts and pension)
■ Annual bonus
■ Long-term incentive plan – this does not include share price growth
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.
Shareholder voting
The remuneration policy was last approved by shareholders at our AGM on 4 May 2017. The remuneration report was last approved by
shareholders at our AGM on 3 May 2018. Details of voting are shown below.
Approval of the Directors’ remuneration policy (4 May 2017)
Approval of the Directors’ remuneration report (3 May 2018)
1,357,109,903
1,390,091,256
95.79
98.87
1 Withheld votes are not counted towards the total percentage of votes cast.
Number
of votes
For
%
Number
of votes
59,613,198
15,919,095
Against
%
4.21
1.13
Withheld 1
Number
of votes
2,505,008
3,639,984
DIRECTORS’ REPORT
86
Directors’ Report
Remuneration Committee Report
Rolls-Royce Holdings plc Annual Report 2018
Executive Directors’ remuneration
The following pages 86 to 94 show how we have applied our remuneration policy during 2018 and disclose all elements of remuneration
received by our Executive Directors. Details of remuneration received by our Non-Executive Directors during 2018 can be found on pages
94 and 95.
Executive Directors’ single figure of remuneration (audited)
Executive
Directors
Warren East
Stephen Daintith ³
Salary (a) ¹
£000
Benefits (b)
£000
Bonus (c)
£000
Long-term
incentives (d) ²
£000
Pension (e)
£000
Total remuneration
£000
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
944
680
931
499
17
19
17
15
1,012
608
1,150
565
–
1,734
1,644 1,259
236
150
233 3,943
110
3,101
2,331
2,448
1 Neither Warren East nor Stephen Daintith received a salary increase in 2018. The last increase made to Warren East was in September 2017.
2 The average share price for the three months to 31 December 2018 has been used to calculate the LTIP value (as the actual value is not known at the date of signing this report).
3 Stephen Daintith took up his role at Rolls-Royce on 7 April 2017. The LTIP awards which vested in 2017 represent part of his buy-out awards – see page 91. The remaining buy-out
awards will vest in 2019 and have been included in the table above as they are both based on performance up to 31 December 2018.
a) Salary
The Company provides competitive salaries suitable to attract and retain individuals of the right calibre to develop and execute the
business strategy. The Committee reviewed the salaries of Warren East and Stephen Daintith in early 2019 and agreed there would be
no increases for 2019.
Executive Director
Warren East
Stephen Daintith
Base salary as at
1 March 2019
Base salary as at
1 March 2018
£943,500
£680,000
£943,500
£680,000
b) Executive Directors’ benefits (audited)
Benefits are provided to ensure that remuneration packages remain sufficiently competitive to attract and retain individuals of the
right calibre to develop and execute the business strategy and to enable them to devote themselves fully to their roles. The taxable value
of all benefits paid to Executive Directors during 2018 is shown below.
Executive Directors
Warren East
Stephen Daintith
Car or car
allowance inc.
fuel allowance
£000
Financial
planning
£000
Medical
insurance
£000
Travel and
subsistence
£000
Accommodation
costs
£000
2018
15
17
2017
15
13
2018
–
–
2017
–
–
2018
2
2
2017
2
1
2018
–
–
2017
–
1
2018
–
–
2017
–
–
2018
17
19
Total
£000
2017
17
15
c) Annual bonus outturn (audited)
The Company’s annual bonus scheme is designed to incentivise the execution of the business strategy, delivery of financial targets and
the achievement of personal objectives. Executive Directors receive any annual bonus awarded in March following the performance
period. 60% of the bonus is paid in cash with the remaining 40% awarded in deferred shares. Deferred shares are held in trust for two
years before being released, subject to the recipient still being employed by the Group and include the right to receive an amount equal
in value to the C shares issued during the deferral period. The annual maximum for the Chief Executive is 180% of salary and 150% for
the other Executive Director(s):
— 80% of the award is based on Group performance
— 20% of the award is based on individual performance
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Remuneration Committee Report
87
2018 annual bonus outturn
The Committee reviewed the 2018 outturn against the performance measures; 80% of annual bonus is based on Group performance
and 20% is based on individual performance. The Group performance measures are shown below:
Weighting
Base (25%)
Target (50%)
Maximum (100%)
2018 performance ¹
% of maximum
Adjusted % of maximum ²
Profit
25%
£256m
£356m
£556m
£400m
61%
Cash
50%
£426m
£576m
£876m
£727m
75%
Customer
delivery
12.5%
85%
92%
100%
83%
0%
Employee
engagement
12.5%
75
76
80
75
25%
Total
100%
56%
56%
1 Adjusted to exclude ITP Aero, non-core businesses, FX, exceptional items and the impact of accounting effects.
2 The Committee reviewed the Group and business unit outturns in the round, based on assessment of overall underlying performance during the year and the experience of shareholders.
Factors taken into account include the quality of financial performance and the manner in which the Trent 1000 issues have been managed.
The Committee retains overriding discretion on the outturns of the annual bonus.
Definitions used for performance measures:
Profit – underlying profit before tax that is reported by the Group for 2018, adjusted for 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 engagement survey. 57% of our people participated
in our survey in 2018 and our sustainable engagement score was 75.
Individual performance
Executive Directors have 20% of their bonus based on achievement of their personal objectives. 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:
— deliver Group revenue, profit and cash for 2018 and key operational and entry into service targets, ensuring a clear path to £1bn free
cash flow by 2020 and beyond;
— address in-service quality problems to rebuild customer confidence and trust;
— deliver the next phase of restructuring, including headcount, a simpler structure and simplification of portfolio;
— deliver culture change through changing behaviours, new leadership model;
— drive M&A disposals to deliver targeted disposal proceeds in 2018;
— deliver a new finance operating model; and
— accelerate progress on diversity and HSE.
The Committee assesses performance against the objectives. The overall assessed percentage is based on the Committee’s judgement and
may include other factors and achievements in the year.
DIRECTORS’ REPORT 88
Directors’ Report
Remuneration Committee Report
Rolls-Royce Holdings plc Annual Report 2018
The following provides an overview of key achievements during the year for each Executive Director:
Warren East
Profit and cash exceeded budget expectation despite challenges.
Operational disruption of Trent 1000 has been managed and a
permanent solution identified.
New, simpler organisation structure launched with three
empowered businesses, leaner head office and Group Business
Services established.
One third of total headcount reduction target delivered in 2018.
Implemented a simpler management grading structure and new
behaviour framework.
D&I targets and plans progressed across the Group; Group
governance strengthened; increased focus on HSE performance
across the organisation with progress made but more to do.
2018 annual bonus outturn (paid in March 2019)
Stephen Daintith
Core free cashflow delivered ahead of budget, business
positioned well to achieve £1bn by 2020.
Clear goals established on cashflow per share and cash returns on
invested capital, linked to key business drivers; compelling Group
commitments for the mid-term established and communicated.
Led the restructuring programme; good progress delivered and
real momentum for change.
A new driver-based budgeting process launched as a key
foundation for the new finance model.
Strengthened the finance function with focus on talent and
improving capability.
Balance sheet strengthened with improved trading and disposal of
L'Orange and divestment of Commercial Marine nearing completion.
Warren East
Stephen Daintith
Group
performance
(% of maximum)
56%
56%
Individual
performance
(% of maximum)
75%
75%
Total bonus
(% of maximum)
60%
60%
Total bonus
(% of salary)
107%
89%
d) Long-term incentives (audited)
Conditional share awards are made to Executive Directors under the LTIP to reward the execution and development of the business strategy
over a multi-year period. The conditional shares are then subject to a further two-year holding period.
LTIP awards made in March 2018
The performance targets for awards made in March 2018 are shown below. Performance will be measured over three years to
31 December 2020.
Threshold (20% vesting)
Mid (50% vesting)
Maximum (100% vesting)
Warren East
Stephen Daintith
CPS (60%)
95p
126p
158p
Number
of shares
275,083
178,432
EPS (20%)
73p
86p
103p
Relative TSR (20%)
Median
Between median and upper quartile
Upper quartile
% of salary
250
225
Face value
of award
£000
2,359
1,530
Performance
period end date
31 December 2020
31 December 2020
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Remuneration Committee Report
89
PSP awards vesting in March 2019
The following sets out details in respect of the March 2016 PSP award (made under the 2014 remuneration policy) for which the final year
of performance was the 2018 financial year. Subject to performance conditions, the vesting date of these awards is March 2019, three years
after the awards were made.
EPS growth (hurdle) ¹
Aggregate CPS
Relative TSR
Outturn
Targets for 2017-2018 period
Awards will vest if EPS growth exceeds the OECD
index of consumer prices. Awards will lapse if the
hurdle is not met.
Aggregate CPS over three-year period of less than
10p – zero vesting.
Aggregate CPS over three-year period of
50p – 100% vesting.
Relative TSR versus FTSE 100 constituents less than
median – 1.0 x multiplier.
Relative TSR versus FTSE 100 constituents equal
to median – 1.25 x multiplier.
Relative TSR versus FTSE 100 constituents equal
to upper quartile – 1.5 x multiplier.
Performance against targets
Hurdle achieved ²
Aggregate CPS performance over three-year
period of 51p.
Relative TSR over the three-year period was
between median and upper quartile, generating
a 1.4 multiplier.
The 2016 awards will vest in March 2019 capped at
150% of salary for the CEO and 130% of salary for
other Executive Directors
1 As disclosed in the 2015 Annual Report, the EPS hurdle was measured over the period 2017 and 2018. In recognition of this change, the maximum vesting level was reduced from
180% of salary to a cap of 150% for the Chief Executive and from 150% to 130% of salary for other Executive Directors, prior to the impact of share price growth and dividends.
2 Over the performance period of the PSP award, the Company was required to change from accounting under IAS 18 to IFRS 15. As extensively disclosed, this had a significant effect on
reported profit and EPS. Audited results are available under IAS 18 for 2016 and 2017, and under IFRS 15 for 2017 and 2018. We have therefore tested for achievement of the hurdle for
each performance year separately. Between 2016 and 2017, under IAS 18, EPS grew by 22.6% (from 30.1p to 36.8p). Compared to OECD consumer price inflation of 2.3%. Between 2017
and 2018, under IFRS 15, EPS grew 242% from (1.4p) to 3p compared to OECD consumer price inflation of 2.4%. The hurdle was therefore considered to be met.
Outstanding PSP awards made to Stephen Daintith in May 2017
The remaining buy-out awards made to Stephen Daintith will vest in March and October 2019. As previously disclosed, they were based on
the 2016 PSP and, as shown above, the performance conditions have been met and the awards will vest at 130% of grant value.
e) Pension entitlements (audited)
The Company provides competitive pension arrangements suitable to attract and retain individuals of the right calibre to develop and
execute the business strategy. Executive Directors are offered membership of a defined contribution pension plan. A cash allowance may
be payable in lieu of pension contributions. The cash allowance is generally calculated as equivalent to the cost of the pension contributions
after allowing for National Insurance costs. However, some historic levels of cash allowance will continue to be honoured. Warren East
receives a cash allowance of 25% and Stephen Daintith receives a cash allowance of 22% of salary in lieu of pension accrual. 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 and there is now only one defined benefit pension plan, the ‘Rolls-Royce UK
Pension Fund’. None of the current Directors are members of this plan. The Committee will consider the requirements of the revised Code,
to align pension contributions for newly-hired Executive Directors to the wider workforce as part of its policy review in 2019.
Other (audited)
PSP awards vesting in March 2019
Colin Smith stepped down from the Board on 4 May 2017 and left the Group on 31 May 2017. He retained pro-rated PSP awards. In
accordance with the rules of the Performance Share Plan, 48% of the 2016 PSP award will vest on 1 March 2019 and Colin will receive
38,415 shares worth around £422,000 (based on the average share price for the three months to 31 December 2018). Colin has no
further outstanding awards.
David Smith left the Group on 28 February 2017 and retained pro-rated PSP awards. In accordance with the rules of the Performance
Share Plan, 39% of the 2016 PSP award will vest on 1 March 2019 and David will receive 31,005 shares worth around £340,000 (based on
the average share price for the three months to 31 December 2018). David has no further outstanding awards.
Payments to past directors
A short-term agreement was put in place between the Company and Colin Smith, for Colin to represent the Company in an ambassadorial
capacity for a maximum of 15 days to the end of 2017 (which was extended to 21.5 days) and 35 days to the end of 2018. Total payments of
£114,000 have been made under this agreement. This arrangement has been extended into 2019 up to a maximum of 35 days.
Payments for loss of office
As set out in last year's report, Colin Smith, having served four months of his 12 month's notice, was entitled to receive payments of
£469,000 in lieu of notice payable to him in eight instalments. Seven of these instalments were paid to Colin in 2017 and the final
instalment of £49,000 was paid to him in January 2018.
DIRECTORS’ REPORT 90
Directors’ Report
Remuneration Committee Report
Rolls-Royce Holdings plc Annual Report 2018
Implementation of remuneration policy in 2019
Base salary
Benefits
Pensions
There will be no change to base salary for 2019; base salaries remain as:
— Warren East – £943,500
— Stephen Daintith – £680,000
There will be no change to our approach to benefits in 2019, which includes car or car allowance, financial
planning assistance, insurances and other benefits.
There will be no change to our approach to pensions in 2019. Pension arrangements will be:
— Warren East: cash allowance of 25% of salary
— Stephen Daintith: cash allowance of 22% of salary
In the event of any new appointment, the Committee will be mindful of shareholder views and relativity to the
wider workforce.
Annual bonus
For 2019, bonuses will continue to 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 2019, the Group measures and weightings will be unchanged.
Profit (25%) – Free cash flow (50%) – Customer satisfaction (12.5%) – Employee engagement (12.5%)
Targets are commercially sensitive and will be disclosed following assessment of performance.
Maximum opportunities will remain unchanged:
— Chief Executive – 180% of salary
— Other Executive Directors – 150% of salary
LTIP awards
For awards to be granted in 2019 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 2021. Performance targets will be:
Threshold (20% vesting)
Mid (50% vesting)
Maximum (100% vesting)
CPS
112p
150p
187p
EPS
IFRS 15 basis
81p
95p
109p
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 –
EPS –
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.
calculated as cumulative absolute underlying EPS over the three-year performance period
on an IFRS 15 basis.
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.
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Remuneration Committee Report
91
Other information
Executive Directors’ share interests (audited)
The Directors and their connected persons hold the following interests in the ordinary shares of the Company:
Ordinary shares
Conditional shares
not subject to
performance
conditions
(Deferred share bonus)
Options over
shares subject to
savings contract
(Sharesave)
27 February 2019 31 December 2018 31 December 2018 31 December 2018 31 December 2018
1,264
925
Conditional
shares subject to
performance
conditions (PSP)
Conditional
shares subject to
performance
conditions (LTIP)
557,037
364,979
164,202
149,753
101,039
26,374
35,680
71,320
Warren East
Stephen Daintith
31 December 2018
35,540
70,937
Executive Directors’ interests in vested and unvested shares – changes in 2018 (audited)
Warren East
PSP 2015
PSP 2016
Total
LTIP 2017
LTIP 2018
Total
Deferred share bonus (2016)
Deferred share bonus (2017)
Total
Sharesave (options) 1
Stephen Daintith
PSP 2017 (buy-out award) 2
PSP 2017 (buy-out award) 2
Total
LTIP 2017
LTIP 2018
31 December
2017
126,643
164,202
290,845
281,954
–
281,594
47,398
–
47,398
1,264
31 December
2017
70,027
79,726
149,753
186,547
–
Total
Deferred share bonus (2017)
Sharesave (options) 1
186,547
–
925
Granted
during the
year
–
–
–
–
275,083
275,083
–
53,641
53,641
–
Granted
during the
year
–
–
–
–
178,342
178,342
26,374
–
Vested
awards
–
–
–
–
–
Lapsed
awards
126,643
–
126,643
–
–
31 December
2018
–
164,202
164,202
281,954
275,083
–
–
–
–
–
Vested
awards
–
–
–
–
–
–
–
–
–
–
–
–
–
557,037
47,398
53,641
101,039
1,264
Lapsed
awards
–
–
–
–
–
31 December
2018
70,027
79,726
149,753
186,547
178,432
–
–
–
364,979
26,374
925
Market price
at date of
award (p)
730.00
676.00
Date
of grant
01/09/15
01/03/16
Vesting Date/
Lapse Date
01/09/18
01/03/19
Market price
at vesting (p)
n/a
–
820.17 05/05/17 05/05/20
08/03/21
857.47 08/03/18
772.83
01/03/17
857.47 08/03/18
01/03/19
01/03/20
616.80
12/10/15
01/02/21
–
–
–
–
–
Market price
at date of
Date
award (p)
of grant
754.70 05/05/17
754.70 05/05/17
Date
of vesting
01/03/19
31/10/19
Market price
at vesting (p)
–
–
820.17 05/05/17 05/05/20
08/03/21
857.47 08/03/18
857.47 08/03/18
13/10/17
758.40
01/03/20
01/02/21
–
–
–
–
1 For Sharesave, the price shown is the exercise price which was 85% of the market price at the date of the award.
2 The grant price for PSP awards made to Stephen Daintith was the average closing mid-market price calculated over one month, up to 22 September 2016 (the date that his
appointment to Rolls-Royce was announced).
Shareholding requirement (audited)
Executive Directors are required to work towards holding beneficially-owned shares equivalent in value to a percentage of their salary
by retaining at least one half of after-tax shares released from the PSP/LTIP until this requirement is met. For the Chief Executive this
requirement is 250% of salary and for other Executive Directors this requirement is 200% of salary. The current shareholdings, as a
percentage of the requirement, for Warren East and Stephen Daintith are 61% and 68% respectively *. As part of our 2019 policy review
we will be developing post-employment shareholding requirements in line with the revised Code requirement.
* The percentage of the requirement was calculated by reference to the average share price, over the three months to 31 December 2018, and salary as at the date of the last grant
on 8 March 2018. Unvested PSP awards, LTIP awards and Sharesave options are not included in this calculation.
DIRECTORS’ REPORT 92
Directors’ Report
Remuneration Committee Report
Rolls-Royce Holdings plc Annual Report 2018
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 UK;
— a year-on-year comparison of the total amount spent on employment costs across the Group and shareholder payments;
— a ten-year history of our Chief Executive’s remuneration;
— our TSR performance over the same period; and
— an indication of the ratio between our Chief Executive’s remuneration and the remuneration of employees.
Percentage change in Chief Executive remuneration
The following table compares the percentage change in the Chief Executive’s salary, bonus and benefits (excluding LTIP) to the average
percentage change in salary, bonus and benefits for all UK employees from 2017 to 2018.
Change in remuneration
Chief Executive
UK employees average 1
Salary
0%
-2.06%
Benefits
0%
-9.86%
Annual bonus
-12%
-12%
1 UK employees were chosen as a comparator group in order to avoid the impact of exchange rate movements over the year. UK employees including apprentices, graduates and
interns, make up 43% of the total employee population. The decline in the year reflects the significant reduction in senior manager headcount.
Chief Executive pay ratio
The Committee is mindful of the relationship between the remuneration of the Chief Executive and the wider employee population. This is
the second year that we have voluntarily published our CEO pay ratio and we have taken into account the new regulations in how this has
been approached.
We have used Method A in determining the ratio, using the full-time equivalent total remuneration of all UK employees. This has led to us
including additional groups of employees in the calculation this year, including graduates, apprentices and interns.
The ratio has increased significantly in 2018 due to the vesting of long term incentives (compared to no vesting in 2017) and a small impact
of including additional employees as noted above.
CEO pay ratio (total remuneration)
CEO pay ratio (salary only)
2018
2017
72:1
41:1
The ratios shown above reflect average remuneration for the Chief Executive and UK employees.
CEO pay ratio quartiles (total remuneration)
25th
92:1
Median
77:1
In terms of the wider workforce:
— all employees participate in a bonus plan; and
21.1
21.1
75th
72:1
— we encourage all employees to join our Sharesave plan, launched every two years. For our most recent launch in 2017, around 50% of
our employees joined the plan, sharing in 14 million shares/stock appreciation rights.
Relative importance of spend on pay
The following chart sets out the percentage change in payments to shareholders and overall expenditure on pay across the Group.
Payment to shareholders (£m) *
(Consolidated Cash Flow Statement)
Group employment costs (£m)
(Note 8 – Employee Information)
2018
2018
2017
2017
-29%
-29%
216 0.9%
216 0.9%
214
214
2018
2018
2017
2017
4,192 10.3%
4,192 10.3%
3,801
3,801
* Value of C Shares redeemed during the year
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Remuneration Committee Report
93
Chief Executive pay
Year
2018
2017
2016
2015
2015
2014
2013
2012
2011
2011
2010
2009
Chief Executive 1
Warren East
Warren East
Warren East
Warren East
John Rishton
John Rishton
John Rishton 2
John Rishton 2
John Rishton
Sir John Rose 3
Sir John Rose 3
Sir John Rose
Single figure
of total
remuneration
£000
3,943
2,331
2,089
543
754
2,596
6,228
4,577
3,677
3,832
3,914
2,409
Annual bonus
as a % of
maximum
60
68
55
0
0
0
55
85
63
–
100
29
LTIP
as a % of
maximum
100
–
–
–
–
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 ten 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 ten years, relative to the FTSE 100 index.
500
400
300
200
100
d
n
u
o
P
£
Rolls-Royce
FTSE 100
2008
2009
2010
2011
2012
2013
Year
2014
2015
2016
2017
2018
Gender pay reporting
The Company is committed to creating a diverse and inclusive place to work where our people can be themselves and be at their best.
We published our UK gender pay gap in December 2018, which showed:
Median gender pay gap across all Rolls-Royce
employees in the UK
Mean gender pay gap across all Rolls-Royce
employees in the UK
2018
2018
2017
2017
8.1
8.1
8.1
8.1
2018
2018
2017
2017
6.6%
6.6%
8.3%
8.3%
Overall, women currently represent 15.5% of our total workforce, however we have increased the percentage of women in the top pay quartile
this year. Diversity remains a challenge for our business and the engineering sector as a whole, but we are committed to improving both these
issues. In 2017 we launched a diversity and inclusion strategy with targets to increase female participation at all levels in our organisation. More
details of the initiatives we are undertaking to support this can be found on page 46.
DIRECTORS’ REPORT
94
Directors’ Report
Remuneration Committee Report
Rolls-Royce Holdings plc Annual Report 2018
Contractual arrangements
Each Executive Director has a service agreement that sets out the contract between that Executive Director and the Company.
Executive Directors’ service contracts
Warren East
Stephen Daintith
Date of contract
21 April 2015
21 September 2016
Notice period from Company
12 months
12 months
Notice period from individual
6 months
12 months
Payments received for serving on external boards
Executive Directors retain payments received from serving on the boards of external companies, the details of which are given below:
Warren East
Stephen Daintith
Non-Executive Directors’ remuneration
Single figure of remuneration (audited)
Directorships held
Dyson James Group Limited
3i Group plc
Payments received and retained
£000
80
65
Chairman and Non-Executive Directors
Ian Davis
Lewis Booth 1
Ruth Cairnie
Sir Frank Chapman
Irene Dorner 2
Beverly Goulet
Lee Hsien Yang
Nick Luff 3
Brad Singer
Sir Kevin Smith
Jasmin Staiblin
Former Non-Executive Directors
John McAdam
Total
Fees
(£000)
Benefits
(£000)
Total
(£000)
2018
425
95
90
90
76
70
70
46
70
105
70
–
1,207
2017
425
95
90
90
70
35
70
–
70
105
70
24
1,144
2018
2
29
3
5
1
7
4
–
6
2
10
–
69
2017
2
69
4
4
–
11
3
–
20
5
7
–
125
2018
427
124
93
95
77
77
74
46
76
107
80
–
1,276
2017
427
164
94
94
70
46
73
–
90
110
77
24
1,269
1 The tax treatment of travel expenses incurred by Lewis Booth, for travel to and from the UK, changed in May 2016 (five years from his date of appointment and in accordance with
HMRC rules). This change is reflected in the value of benefits reported.
2 Irene Dorner received an increase of £15,000 per annum in July 2018 to reflect the additional time commitment as a result of taking on the role of Employee Champion.
3 Nick Luff joined the Board on 3 May 2018.
Non-Executive Directors’ fees
The Chairman’s fee is reviewed by the Board as a whole on the recommendation of the Committee. The review of the other Non-Executive
Directors’ base fees is reserved to the Executive Directors, who consider recommendations from the Chairman. No individual may be
involved in setting his or her own fee. The Chairman and the Non-Executive Directors are not eligible to participate in any of the Group’s
share schemes, incentive arrangements or pension schemes. A facility is in place which enables Non-Executive Directors (who reside in a
permitted dealing territory) 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, Ian Davis and Lee Hsien Yang use this facility.
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Remuneration Committee Report
95
Non-Executive Directors’ fees
Chairman
Other Non-Executive Directors base fee
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
Employee Champion
2018
£000
425
70
25
20
20
20
15
15
2017
£000
425
70
25
20
20
20
15
–
Non-Executive Directors’ benefits (audited)
The benefits for Non-Executive Directors relate predominantly to travel, hotel and subsistence incurred in attending meetings.
For Non-Executive Directors based outside the UK the Company may also pay towards tax advice and the cost of making tax filings.
Non-Executive Directors’ share interests (audited)
The Non-Executive Directors and their connected persons hold the following interests in the ordinary shares of the Company:
Chairman and Non-Executive Directors
Ian Davis
Lewis Booth
Ruth Cairnie
Sir Frank Chapman
Irene Dorner
Beverly Goulet
Lee Hsien Yang
Nick Luff
Brad Singer
Sir Kevin Smith
Jasmin Staiblin
31 December 2018
60,747
60,000
16,876
33,203
10,370
4,302
6,871
10,000
–
26,536
–
Non-Executive Directors’ letters of appointment
Our Non-Executive Directors serve a maximum of three, three-year terms (nine years in total).
Chairman and Non-Executive Directors
Ian Davis *
Lewis Booth
Ruth Cairnie
Sir Frank Chapman
Irene Dorner
Beverly Goulet
Lee Hsien Yang
Nick Luff
Brad Singer
Sir Kevin Smith
Jasmin Staiblin
Original appointment date
1 March 2013
25 May 2011
1 September 2014
10 November 2011
27 July 2015
3 July 2017
1 January 2014
3 May 2018
2 March 2016
1 November 2015
21 May 2012
27 February 2019
61,534
60,000
17,415
33,226
10,425
4,325
7,135
10,000
–
26,679
–
Current letter of
appointment end date
28 February 2019
24 May 2020
31 August 2020
9 November 2020
26 July 2021
2 July 2020
31 December 2019
2 May 2021
2 May 2021
31 October 2021
20 May 2021
* On 26 February 2019, the Board unanimously approved a further three-year extension to the appointment term of Ian Davis. A revised letter of appointment will be issued on
1 March 2019.
Statutory requirements
The Committee’s composition, responsibilities and operation comply with the principles of good governance, as set out in the UK
Corporate Governance Code 2016, with the Listing Rules (of the Financial Conduct Authority) and with the Companies Act 2006. The
Directors’ Remuneration Report has been prepared on the basis prescribed in the Large and Medium-sized Companies and Groups
(Accounts and Reports) (Amendment) Regulations 2013.
DIRECTORS’ REPORT 96
Directors’ Report
Safety & Ethics Committee Report
Rolls-Royce Holdings plc Annual Report 2018
SAFETY & ETHICS COMMITTEE REPORT
SIR FRANK CHAPMAN
CHAIRMAN OF THE
SAFETY & ETHICS
COMMITTEE
“Matters of product safety, the safety and
wellbeing of our people, the integrity
of our assets and infrastructure, and
ensuring ethical, respectful and
compliant behaviours are critical
to the Group’s sustainability”
Key highlights
Supporting executive leadership with embedding its value of
‘operate safely’ and promoting safety culture as a ‘state of being’
Review of product safety management in Civil Aerospace, with a
particular focus on the Trent 1000 in-service issues
Maintaining product safety, occupational safety and asset
integrity focus during organisational change
Monitoring of compliance with obligations under the DPAs
Maintaining oversight of the implementation of Lord Gold’s
recommendations on ethics and compliance
Overseeing deployment of the enhanced code of conduct
(Our Code)
Introduction
The Committee played an important role during 2018, supporting
management in promoting a sharp focus on our core values. This is
particularly important with the significant organisational changes
that the Group is working through and the operational and
financial challenges presented by the in-service issues with the
Trent 1000.
Matters of product safety, the safety and wellbeing of our people,
the integrity of our assets and infrastructure, and ensuring ethical,
respectful and compliant behaviours are critical to the Group’s
sustainability and must be preserved when other high priority
challenges present themselves.
The Committee has therefore continued to encourage and support
the Group’s progress in seeking to embed a culture where these
values remain front of mind.
Membership and operation of the Committee
In addition to myself, members of the Committee during 2018 were
Irene Dorner and Lee Hsien Yang. Nick Luff joined the Committee
with effect from 1 January 2019. All members of the Committee are
independent Non-Executive Directors. Our biographies are on
pages 60 and 61 and our meeting attendance is on page 63.
The Committee’s responsibilities are outlined in its terms of
reference which can be found at www.rolls-royce.com. We review
these annually and refer them to the Board for approval. This year,
we have made changes to our remit to ensure it aligns with the
principles of the revised Code.
Committee evaluation review
This year, Belinda Hudson Limited (BHL) was appointed to undertake
a review of the Committee. The effectiveness review process of the
Board and its committees is discussed in greater detail on page 70.
I was pleased that the review concluded that the Committee is strong
and diligent, in particular in overseeing product safety, occupational
safety, ethics and compliance. The Committee discussed the review
at its meeting in December and considered the areas for ongoing
development that had been highlighted. With the desire to improve
continuously, we agreed that in 2019 our work would continue to
support the executives with efforts to improve safety culture across
the organisation, as well as conducting a review of the Committee’s
role in overseeing sustainability issues.
Principal responsibilities
Product safety
Maintain an understanding of and keep under review the
Group’s framework for effective governance of product safety.
Monitor product safety performance, the response to product
in-service issues and lessons learned.
HSE
Oversee HSE governance, review performance, incidents and
monitor improvement projects.
Guide and support management in the promotion of a culture
of leadership in HSE.
Sustainability
Oversee the Group’s approach to sustainability, including how
environmental/climate impacts from its operations are managed,
and monitor performance towards sustainability targets.
Ethics & compliance
Review the Group’s compliance with relevant legislation.
Keep Our Code and anti-bribery and corruption policies
under review.
Support the Board with their review of issues raised through the
Ethics Line and other channels including reviewing the results
of any investigations into ethical or compliance breaches or
allegations of misconduct.
2018 principal risks
Compliance and product safety.
Areas of focus for 2019
Oversight of activities to meet continuing obligations under the
DPAs and to implement Lord Gold’s recommendations, including
review of Lord Gold’s final report due during the year
Supporting leadership’s performance improvement on HSE
Product
safety
HSE
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Safety & Ethics Committee Report
97
Safety & Ethics Committee focus during 2018
Area of focus
Matters considered
Outcome
Maintaining safety during organisational change
Product safety policy and processes, training,
safety assurance framework and competence
in manufacturing
Product safety performance and in-service issues
Product safety management systems
Product safety in Civil Aerospace
The Committee was satisfied that product safety
governance remained robust following organisational
restructuring.
The safety assurance framework is a sound
incremental development.
Safety performance remained at expected levels,
with safety aspects of in-service issues handled
competently and appropriately.
Product safety in digital products and in
technology development
The product safety management system in
Civil Aerospace is effective and well-operated.
Detailed reviews of serious injury, high potential
incidents and interventions by regulators
Events, key findings, shared learning and actions
HSE ambition, strategy and plans for continuous
improvement
HSE performance including incidents, injuries, waste,
energy use and GHG emissions metrics
HSE programmes – LiveWell, asset care, waste action
Sustainability
Review of sustainability strategy and governance
in-year and planned activity
Ethics &
compliance
Compliance with continuing obligations under the DPAs
and implementation of Lord Gold’s recommendations
Deployment of Our Code and Group policies
Resourcing of ethics and compliance team and
effectiveness of compliance officers
Embedding of ethics and compliance culture and
behaviours. Review of number and nature of concerns
raised through the Ethics Line
Management of intermediaries including screening,
appointments, payments, termination and settlements
Oversight of 2018
principal risks
Principal risks of compliance and product
safety reviewed
Digital products are deemed to be emerging, and
less mature, and therefore require particular focus
to ensure high standards are observed.
Overall, despite some year-on-year HSE improvements,
the 2018 TRI performance was disappointing and missed
key targets. Investigations from some serious incidents
are being rigorously pursued, and lessons learned
implemented. Rolls-Royce recognises that HSE
is a top leadership priority and on-going efforts
focus on reaching the Company’s Zero Harm
campaign objectives.
Strengthening of HSE leadership, strategies, plans
and communications as part of a structured approach
to achieve continuous improvement.
HSE programmes are at varying maturity levels but
there are signs of progress.
Planning for an additional 2019 focus on
environmental performance, combining both current
operational metrics and longer-term strategic product
development investments, to provide a complete
picture of the environmental trajectory of the Group.
Reviewed detailed plans for, and progress on,
compliance. Reviewed the second annual report
to DoJ.
The enhanced code of conduct and simplified suite
of Group policies were issued in 2018.
The ethics and compliance team is effective.
Bullying and harassment were prevalent themes
and we will be monitoring the effectiveness of
management’s campaigns to address this.
The intermediary processes are effective to manage
the risks.
These principal risks are reviewed and discussed at
every meeting of the Committee and both continue
to be managed effectively.
DIRECTORS’ REPORT 98
Directors’ Report
Safety & Ethics Committee Report
Rolls-Royce Holdings plc Annual Report 2018
Product safety
Rolls-Royce aims to go beyond compliance with regulatory product
safety standards, setting a goal of continuous product safety
improvement in common with other industry participants. This is
regarded as fundamental to the Group’s licence to operate and to
the sustainability of our business. Product safety encompasses the
design, manufacture, assembly, installation, in-service operation,
maintenance and repair of products, across all of our businesses
and regions where we operate. It is critical that product safety
processes develop continuously to keep pace with the science
and technological innovation that enables product designs to
evolve and extend operational boundaries.
In 2018, we continued with our rolling review programme of key
product safety topics across the Rolls-Royce businesses, as well
as considering special topics and in-service issues as they arose.
As in 2017, we maintained a focus throughout the year on how
safety risk was being managed through the period of major
organisational restructuring for the Group. We oversaw changes
made to the product safety governance and risk management
model. The principles behind the way accountability is assigned
and product safety is governed remain. However, some adjustments
to the structure of the business-level product safety review boards
were required to align to the new organisational structure.
The Committee was assured that appropriate checks and balances
were being used. Phased efficiencies were being introduced that
preserved and improved product safety governance while
achieving headcount reductions in the wider restructured Group.
Each year the Committee reviews particular aspects of the Group’s
product safety management system (PSMS) to ensure we maintain
a good working knowledge of it and can oversee how it is being
continuously improved. At our meeting in February 2018, we
discussed a report on product safety assurance, covering the work
undertaken to monitor effectiveness and improvements that are
proposed to the PSMS and the processes within it. We reviewed
delivery against 2017 plans, noting some excellent progress, and
discussed the product safety assurance team’s workplan for the
remainder of 2018.
A key component of the 2018 workplan was the phased deployment
of a new product safety assurance framework. This encourages a
more consistent, structured and pro-active approach across the
enterprise to assess what could go wrong, which complements the
existing product safety processes. We discussed this in February and
reviewed it in more detail in July. The framework will enable a more
comprehensive means of managing our product safety principal
risk in each of the businesses and provide clear lines of sight to key
controls. This more forward-looking approach is particularly
important in the current operating environment of organisational
and technological change.
We also reviewed how product safety is managed through in-service
product life. This covered three aspects: the identification during
design of the limitations on operation and necessary maintenance;
the processes used to identify and manage in-service safety concerns;
and the performance of pro-active periodic safety reviews of
products in service, where operational knowledge is used to identify
opportunities to improve the safety or safety assurance of products.
We were briefed in February 2018 on enhancements to the
programme of product safety training. A new course for senior
managers had been added and the Board undertook an abridged
version of this in May 2018. This interactive course was based on real
case studies from outside Rolls-Royce. My colleagues and I found it
CIVIL AEROSPACE PRODUCT
SAFETY – TRENT 1000 WORKSHOP
The Committee received briefings at each of its meetings during
the year on specific issues that had arisen with products in service.
This centred around the in-service issues with the Trent 1000 and
included updates on investigations of root cause, assessment of
implications, and oversight of the Group’s response including
redesign of certain components.
Following the briefings we had received in 2017 and in
February 2018, and given the significance of the issues, the
Committee felt it important to gain a deeper insight into how the
product safety aspects were being assessed and managed in
practice in line with the PSMS. We therefore arranged for members
of the Committee to meet with Civil Aerospace engineering leaders
and members of the product safety assurance team during two
workshops held in May 2018 at the Group’s facilities in Derby, UK.
In the first of the workshops, we received updates on product safety
for the Trent 1000 from the chief engineer of this programme.
We then undertook a tour of the large engine test bed in Derby,
before a discussion on the regulatory framework and requirements
in Civil Aerospace.
The second session was a more detailed technical review, where we
examined the Trent 1000 intermediate pressure compressor (IPC)
rotor blade issue, and received an explanation and demonstration
of how numerical risk assessments are performed using data to
predict the rate of events. We undertook a detailed comparison of
the original risk assessment with the then current risk assessment,
noting the significant degree of learning that the ongoing
assessments were generating to enable the modelling system to be
improved. Finally, we spent some time reviewing the management
of other Trent 1000 issues that had been experienced in service.
Overall, the workshop provided a good level of confidence to
the Committee. It allowed us to endorse to the Board in July
the conclusion that the PSMS was being robustly applied to the
Trent 1000 in-service issues and that it was effective in managing
the product safety risk to be as low as reasonably practicable.
The Committee will continue to oversee the resolution of the
issues from a product safety perspective in 2019.
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Safety & Ethics Committee Report
99
thought provoking and powerful in reinforcing the role that we, the
Company’s employees and our partners, must play in driving a
culture where safety is an uncompromised priority and concerns are
openly raised and addressed. In addition to the senior managers
course, the more technical classroom-based product safety training
for engineers was also refreshed later in the year. Feedback received
on the new courses has been very positive and the Committee
welcomed this as a key step in reinforcing product safety awareness.
In February 2018, we reviewed the overall metrics for product
safety in the previous year. The metrics indicated that the safety
performance of our mature and maturing products was stable or
improving and that the businesses were managing safety issues
effectively. The data did show an increase in Trent engine ‘potential
hazard red tops’. These are issues which have been identified and
have the potential to result in an accident or incident but had not
done so. This increase was principally driven by the rate of
introduction of new engine types in the fleet and the associated
early-life safety learning. We were assured that the Civil Aerospace
business was addressing these issues during the year.
In late 2017, the Company acquired full ownership of ITP Aero, and
as a consequence now has inherent accountability for the product
safety risk arising from its activities. We therefore discussed a
review of how it managed product safety. ITP Aero was already
a long-standing supplier and a risk and revenue sharing partner
of the Group on key components for a number of programmes,
including Trent XWB. The Group therefore already had a good level
of understanding of ITP Aero’s approach to product safety. The
Group now has oversight of the product safety processes and the
product safety assurance team reported to us that they were
comfortable with how these were being applied to its products.
It was noted that the Company was not permitted to obtain detailed
visibility over ITP Aero’s supplies to the Company’s competitors
but we took comfort that its other OEM customers would have
oversight as part of their programmes.
During the year, we reviewed and endorsed some relatively minor
changes to the Group’s product safety policy, that now incorporates
some statements of expectations taken from the PSMS.
In December, we reviewed safety in digital products and safety in
technology development. It was recognised that, as these were both
emerging areas of high activity and innovation in the Company,
a particular degree of focus on product safety was warranted to
ensure consistency with the high standards observed in more
mature areas of the business. This will be maintained in 2019.
We also reviewed the product safety principal risk and were satisfied
this was being managed effectively and within the boundaries of the
agreed risk appetite. At each of our meetings we received updates
on incidents in service and, as part of these reviews, discussed any
emerging product safety risks and how these were being identified
and managed as part of the PSMS. We were particularly pleased to
see examples of lessons learned from working on issues in older
fleets being applied to the Group’s newer products.
HSE
The Committee and management objective remains to drive
continuous improvement in HSE performance. We discussed HSE
matters at each of our meetings during the year and the different
levels of maturity in HSE leadership across the business of
the Group.
In February, we were updated on the conclusion of the investigations
into the fatalities of the two employees in separate incidents in 2017,
as reported in the previous annual report. The Company has extracted
learning from these incidents and implemented improvements. These
include: assessing lock-out mechanisms for electrical cabinet doors
on the Group’s estate, requiring second-level approval to open them;
more use of CCTV for lone workers; work on ergonomics and state of
mind commissioned with Grenoble University; improvements to the
driving for work standard and global travel policy; a road safety
awareness campaign in Power Systems; specialist securing of loads
in vehicles; the specification of minimum car safety requirements; and
the promotion of defensive driver training for high mileage drivers.
Safety culture was the prevalent theme of our meetings in the year
and in February we reviewed the planned Zero Harm activity to
improve this. This included: reinforcing HSE across the Group’s
leadership by using it as a theme at the senior leadership conference
in March; holding HSE engagement sessions with the business and
function leadership teams; refreshing the approach to HSE training
for managers; improving HSE inductions across the Group’s estate;
reporting HSE leading indicators to the Executive Team; and initiating
a dedicated electrical safety programme. There were also two
additional new measures introduced to increase awareness of HSE.
The first was the introduction across the Group of Zero Harm
Life-Saving Rules, a set of ten simple safety messages chosen with
reference to particular areas of safety concern within the Group
based on previous incidents. Their introduction and reinforcement
campaigns are a very welcome step forward to support the
embedding of our safety culture.
The second was the promotion of HSE safety walks, supported by a
pocket-sized guide containing suggested questions to ask related
to HSE. The Committee continues to encourage observation and
intervention as one of the most effective methods of incident
prevention and so we were very supportive of the new guide and the
promotion of safety walks. The Committee itself conducted safety
walks at the Power Systems plant in Friedrichshafen, Germany in
March and at the large engine assembly and test facility in Derby,
UK in May, making an intervention to improve working practices
regarding the use of temporary platforms.
At each of our meetings, we review the Group’s HSE key activities,
performance metrics, insights and learning, including the total
reportable injury (TRI) rate. This is discussed in more detail on page 47.
The Group failed to meet its target TRI rate for 2018, primarily due to
the rates at Power Systems and ITP Aero remaining significantly
higher than for the rest of the Group. However, both of these
businesses have made significant improvements against their 2017
TRI performance through concerted focus and this will continue into
2019 and beyond.
The Committee however remains concerned that the number of
major and high potential incidents in 2018, while fewer than in 2017,
is still unacceptably high. The most serious injury in the year was
a fall from height in which an employee in Derby suffered a fracture
of both wrists. The UK Health and Safety Executive conducted an
investigation across our Derby and Hucknall sites, also engaging with
me directly. Corrective actions were required, which the Committee
is overseeing to ensure full implementation.
DIRECTORS’ REPORT 100
Directors’ Report
Safety & Ethics Committee Report
Rolls-Royce Holdings plc Annual Report 2018
Sustainability
We were briefed in July about the work across the Group on
sustainability topics, focused through the executive-level
environment & sustainability committee (E&SC).
At the Safety & Ethics Committee in December 2017 (as reported
in the previous Annual Report), we agreed that the pre-existing
sustainability strategy would be reconsidered. This has enabled
the Group to concentrate on developing position statements on
material issues. This includes developing a single environmental
position statement that crystallises operational and longer-term
strategic commitments. It also sets out the Company’s commitment
through investment to the decarbonisation of its product portfolio
and supporting the global transition to a low carbon economy.
Through reports from the E&SC and the Science & Technology
Committee, this Committee will oversee how this position statement
is applied across the Group and summarise in future annual reports
sustainability progress across all activities in the Group.
We were briefed on: the Company’s approach to the management
of the risk of ‘conflict minerals’ being potentially used in our supply
chain; the review of a sustainable alternative fuels strategy; and a
review of the approach to investor engagement in sustainability
topics. This resulted in the development of the Group’s first
environmental, social and governance (ESG) newsletter, which was
sent to investors and other external stakeholders in July this year.
The newsletter highlighted progress made against the
commitments set out in our previous annual report and
demonstrates commitment to increasing our external engagement
on these important topics.
The Company has maintained its listing in the Dow Jones
Sustainability Index (DJSI), one of only five aerospace and defence
companies to achieve this. Overall, our score improved slightly
from 2017 and we achieved industry leading scores for the social
dimension of the assessment, including top scores for the
environmental reporting and corporate citizenship and
philanthropy question sets.
Sustainability Award
Silver Class 2019
You can read more about the Group’s sustainability activities on
pages 41 to 49.
We were briefed on steps taken to help manage HSE risks that may
arise from the organisational change. There were 11 sites in total
occupied by civil nuclear, submarines or naval marine operations
that were being integrated into the Power Systems or Defence
businesses as part of the reorganisation. HSE packs for each site
were developed and handover meetings arranged to ensure the
receiving business understood the operational activities,
infrastructure and related site risks.
We were updated on the Zero Harm safety case programme, with
sites having been assessed against numbers of high consequence
hazards, business activity complexity and incident history. This had
resulted in 53 out of 195 sites being assessed as requiring a safety
case, and the development of these being prioritised over an
18-month programme plan, accelerated from three years. The
programme is generating momentum in HSE reporting and
improvement activity and we will keep progress under review.
Good progress was noted with the LiveWell programme, including
the Group’s approach to workplace wellbeing. This is recognised as
leading practice by the Royal Society of Public Health. The Group
introduced its global tobacco-free campus policy from 1 January
2019 following preparatory work through the year, including
support to smokers. Local legislative requirements have, however,
prevented the policy from being implemented in Germany, France
and Italy. LiveWell accreditation was achieved by 68% of the
Group’s sites by the end of 2018.
The Group’s mental health strategy and approach was also revised
during the year. We discussed this very important topic at our
meeting in December and will keep this under review. In 2018,
a trained mental health champions network and community of
practice was established, after a pilot in the UK. The Chief Executive
has signed the ‘time to change’ pledge committing the Group to
combat stigma attached to mental health issues in the workplace.
We discussed management’s proposed move to a regional HSE
model, designed to reinforce line accountability for HSE, enable
more agile support and provide improved assurance to business
leaders. To support this, the Committee was well-positioned to draw
on lessons from the ethics and compliance improvement
programme. We discussed with the HSE team that business line
management accountability needed to be underpinned and
resourced with central professional support during a transition
period until this reached an appropriate level of embedded
maturity in the businesses with appropriate policies, processes
and controls in place. The Committee was also able to provide
anecdotes from the oil & gas majors, where gaining appropriate
levels of experience and competence in safety was a pre-requisite
to career advancement in operations and general management
roles. We noted that, organisationally, the HSE function had been
moved from the operations function to report to the Chief
People Officer, as a means of driving centrally a cultural change
in behaviours.
The Committee conducted an annual review of the HSE Group policy,
which was subject to some minor changes to align with the Group’s
new vision and values launched early in 2018.
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Safety & Ethics Committee Report
101
Ethics and compliance
Looking forward
In the year ahead, we will be carefully reviewing the content of
Lord Gold’s final report to be issued later this year and progress with
all previous, and any final, recommendations made. We will continue
to oversee the Company’s compliance with the DPAs and its annual
reporting to the DoJ.
We will monitor developments with the Civil Aerospace large engine
in-service issues towards full mitigation of product safety risk to
expected levels.
We will continue to monitor and support progress and performance
on the Zero Harm and LiveWell programmes to mitigate HSE risks,
with a particular interest in seeing injury rates and high potential
incidents reduce. A careful eye will be kept on leading indicator
trends as a pre-cursor to future underlying outturn performance.
We will also keep the environmental performance of our operations,
and other sustainability measures, under review.
In 2019, we look forward to seeing tangible progress from the
continuing efforts by management to drive the desired behaviours
and mindset, reinforcing an ethical and safety-focused culture across
the organisation.
Sir Frank Chapman
Chairman of the Safety & Ethics Committee
Following the DPAs, much of the Committee’s focus in the year has
been on overseeing the Group’s ethics and compliance work plans
– see Ethics and Compliance report on page 48. This included
obligations to the regulators and monitoring progress in
implementing the recommendations put forward by Lord Gold in
his reports. Lord Gold attended all Committee meetings during the
year and updated the Committee on how he has been overseeing
and supporting this work, as well as reporting on his particular areas
of focus and activities. This included: continuing his engagement
with employee focus groups to understand how the ethics and
compliance programme is working in practice; monitoring the
continuing work to embed the right behaviours and attitudes across
the organisation; and assessing the resource needed to drive the
programme, both centrally and within the businesses.
The Group’s ethics and compliance workplans were reported to the
Committee throughout the year, including monitoring resourcing of
the teams across the organisation. We noted the reports of a good
level of engagement by ITP Aero as it sought to align to the
requirements of the Group’s programme, having joined the Group
at the end of 2017.
At each of our meetings during the year, we received an update
from the General Counsel on the Group’s continuing dialogue and
co-operation with regulators and government agencies. We also
received reports and briefings from the head of ethics and
compliance on ethics and compliance matters generally.
We continued to keep the level and nature of adviser engagements
under review following a significant reduction in 2017 and were
notified of any claims received during the year from any advisers
who had been terminated in the past.
The Committee reviews statistics and details of Ethics Line reports at
our meetings and in 2018 we observed that bullying and harassment
were prevalent themes. This had also been picked up as a theme by
Irene Dorner in her role as Employee Champion and brought to the
Board’s attention. This warranted a focused response and in December
we received a briefing from the Chief People Officer and members
of his team, with input from the head of ethics and compliance, on the
planned campaign activity to seek to drive out such behaviours.
We will review the impact of this activity during 2019.
In autumn 2018, we oversaw the roll-out of our enhanced code
of conduct and a suite of refreshed and simplified Group policies
combined into one simple manual for employees. The Group’s
enhanced code of conduct was developed in digital format including
a mobile-enabled app, allowing employees to access it wherever they
are, which is of particular benefit to shop floor workers or those in
remote locations. The launch of Our Code was supported by new
training modules that were subject to mandatory completion during
the year, with managers who failed to do so being subject to capped
performance reviews. Of the population of several thousand managers
required to complete the training, only one failed to do so by the
due date without having acceptable grounds for mitigation; a
remarkable improvement on previous completion rates for core
training modules.
We also monitored the Company’s ongoing compliance with the
General Data Privacy Regulations and progress with the Company’s
application for Data Privacy Binding Corporate Rules.
DIRECTORS’ REPORT 102
Directors’ Report
Science & Technology Committee Report
Rolls-Royce Holdings plc Annual Report 2018
SCIENCE & TECHNOLOGY
COMMITTEE REPORT
SIR KEVIN SMITH
CHAIRMAN OF THE
SCIENCE & TECHNOLOGY
COMMITTEE
“The Committee feels privileged and
excited to participate in the technology
journey with the many extremely talented
people who will deliver the future for
Rolls-Royce and its shareholders.”
Key highlights
Technology strategy, investment and programmes review
Electrical systems strategy
Review of UltraFan, Advance3 and power gearbox programmes
Services strategy
Micro-grids strategy
Workshop on new product offerings
Visit to the IT innovation hub and manufacturing facilities
Introduction
The Group invests more than £1bn each year in R&D to conceive,
design and deliver world-class technology that meets our customers’
current and future needs. In a fast-changing world, the Committee
provides dedicated focus on the research and technology part of
this, providing directional input and oversight of the Group’s scientific
and technological strategy, processes and related investments.
Membership and operation of the Committee
Members of the Committee during 2018, all Non-Executive Directors,
were myself, Ruth Cairnie, Brad Singer and Jasmin Staiblin.
Sir Frank Chapman joined the Committee from 1 January 2019. Our
biographies are on pages 60 and 61 and meeting attendance is on
page 63.
The Committee’s responsibilities are outlined in its terms of
reference, available at www.rolls-royce.com. We review these
annually and refer them to the Board for approval.
Other attendees
In addition to the members of the Committee, the Chairman,
Chief Executive, Chief Financial Officer and any of the
Non-Executive Directors may attend one or more meetings at
the Committee’s invitation. The Committee is supported by the
Company Secretary and the Chief Technology Officer (CTO).
Committee evaluation review
This year, Belinda Hudson Limited (BHL) was appointed to undertake
a review of the Committee. The effectiveness review process of the
Board and its committees is discussed in greater detail on page 70.
The Committee considered the review in December and I was
pleased that it concluded that the Committee is playing a key role
in helping the CTO and his team with their approach to technology.
In 2019, our focus will include the continued reinforcement of the
alignment between technology and competitiveness and the need
for efficient execution of our technology plans. We will also keep
under review the composition of the Committee and future
technology knowledge, and encourage the improvement in the
Committee’s meeting materials.
Principal responsibilities
Technology strategy
Review the strategic direction of the Group’s research,
technology and development activities and ensure investment
is allocated appropriately.
Keep under review the key technology programmes.
Assist the Board in its oversight of major R&D investment and
provide assurance on its competitiveness and the adequacy
of R&D investment.
Cross-sector technology
Oversee the effectiveness of key engineering and technology
processes and operations, including delivery of major product
development and technology programmes.
Technology capabilities and skills
Oversee processes for ensuring effective resourcing and
development of required technological capability and skills.
Conduct visits to R&D facilities.
Technology trends and risks
Provide assurance on the identification and management
of key technological risks.
Review and consider any other topics or risks appropriate
to the overall remit of the Committee as delegated by the Board.
2018 principal risk
Disruptive technologies and business model.
Areas of focus for 2019
Oversight of the Group’s technology programme
Update on key programmes including SMRs and UltraFan
Review of Group activities in digital and electrical technologies
Review of technology across the Defence business
Follow-up on services and the technology efficiency and
effectiveness reviews
Assessment of skills and capability development and alignment
with the technology strategy
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Science & Technology Committee Report
103
Science & Technology Committee focus during 2018
Area of focus
Matters considered
Outcome
Technology
strategy
Cross-sector
technology
Technology
capabilities
and skills
The Group’s technology strategy
Investment allocation
Review of key technology
programmes
Efficiency and effectiveness review
UltraFan demonstrator
The Group’s electrical systems
strategy
Micro-grids
Engineering capabilities
of the future
Visits to large engine assembly,
test bed and IT innovation hub
The strategic objectives and associated investment funding allocations were
confirmed to be appropriate.
The review of key technology programmes helped shape the agenda and
discussions at the Board strategy meeting.
The Committee made a number of recommendations to management to
improve the efficiency and effectiveness of the Group’s future research and
technology programme.
UltraFan demonstrator review confirmed that progress was satisfactory and
advised the Board on approval of the next phase of programme funding.
Direction of the Group electrical strategy supported and the excellent
progress to date acknowledged.
Potential for micro-grid synergies across the Group recognised.
Plan endorsed to shift to electrical system skills from mechanical capability.
Visits were insightful, provided physical evidence of progress on key
technology programmes and gave an invaluable opportunity to meet the teams.
Technology trends
and risks
Internet of Things
Endorsement of the Internet of Things programme.
Ceramic matrix composites (CMCs)
Support for future programme recognising the strategic importance of CMCs
for the Group.
Oversight of
principal risk
Disruptive technologies and
business model
The principal risk review confirmed that the identification of disruptive
technology threats and ongoing mitigation activities supported the direction for
future key activities.
2018 overview
In 2018, the Committee continued with its work from the previous year
in overseeing technology strategy, the prioritisation of resources
towards technology development and acquisition and assessing
competitiveness in key technology and product areas. In doing this,
we place importance on ensuring an active dialogue with engineering
and technology leaders and experts, inviting relevant employees to
Committee meetings, meeting with employees during site visits and
developing future leaders through the Board apprentice programme.
At the first meeting of the year in February 2018, we reviewed the
2018 technology programme and the investment funding allocation,
and received an update on the progress made on technology plans
for each business. As reported last year, significant investment is
directed towards aerospace technology demonstrators to validate new
architectures and gas turbine technologies vital to supporting future
competitiveness. We dedicated one meeting to conducting a
detailed review of the UltraFan demonstrator programme, noting its
scalable architecture design and its differentiating technologies
which would enable a step change in efficiency. We discussed the
phased investments proposed to deliver the programme and the
approach to managing risks and programme dependencies. During the
year, we received regular updates on the progress of the programme
and the Committee visited the dedicated team area in Derby and met
with key staff. We also viewed the Advance3 test vehicle which forms
the core of the UltraFan demonstrator and undertook a tour of the
Civil Aerospace large engine assembly and test facility in Derby, UK.
The Committee advised the Board on progress and funding
continuation of the programme.
The Committee also reviewed key enabling technologies for gas
turbines including the Group’s strategy and competitive position on
silicon carbide CMCs and progress on development and maturing
of the technology.
The Group’s new vision and strategy recognises the need to grow
capability in electrical technologies and we received an update on
the Group’s electrical strategy and exciting plans in this increasingly
important area of focus. We were encouraged by the progress made
on a number of demonstrator programmes and electrical component
technologies. The potential for deployment of electrical and hybrid
technologies in civil aviation, marine, defence and rail for propulsion
and power generation applications was clear and we support the
direction of the technology roadmap. This included the E-Fan X
programme launched with Airbus and Siemens in 2017 that is
working towards a flight demonstration of a complete hybrid
regional aircraft-sized propulsion system in 2020.
We received a detailed presentation on opportunities in
micro-grids from the Power Systems business unit’s strategy and
systems design representatives. The micro-grid market is attractive
with high growth potential, including export markets. As well as
helping decarbonise electricity production, micro-grids can
provide the required operational flexibility to optimise costs,
emissions and the availability of the integrated system. We were
briefed on the principal components that comprise a micro-grid
and their respective characteristics and on the system controls
architecture. We examined the rationale for the Company to enter
this market, the strength of its offering and achievements to date,
as well as areas planned for future development. We discussed the
possible business models to address this market and the business
case associated with each, noting Power Systems’ existing and
developing capabilities and the opportunities available to fill
capability gaps. Finally, we reviewed the planned investment
roadmap that will enable the business to continue to pursue
developing micro-grid markets.
We had a briefing on the future market for transport for long-range
supersonic business jets and commercial aircraft. This covered the
DIRECTORS’ REPORT 104
Directors’ Report
Science & Technology Committee Report
Rolls-Royce Holdings plc Annual Report 2018
design challenges and different propulsion system concepts that
apply to supersonic flight, how the Group’s technology was
positioned with regard to powering a new generation of supersonic
aircraft, and the associated research and technology budget
requirements. We also considered the concept of hypersonic
passenger transport, discussing the vehicle requirements,
propulsion system concepts and feasibility challenges.
Further, the Committee reviewed the Group’s services strategy
and associated technology development plans. We encouraged
management to be bolder in pursuing new technology and ways of
working, noting that services would in future contribute significantly
more than half of the Group’s revenue.
We also reviewed manufacturing technologies to improve productivity.
During the course of the year, we benefited from various visits to UK
facilities in Derby, Sheffield, Rotherham, Barnoldswick and Washington
to see the application of advanced technologies and to meet Company
experts. We encouraged management to fully embed across the
Group the many good improvement initiatives as a prerequisite of
the advanced manufacturing programme.
Together with our other Board colleagues, we visited the IT
innovation hub, an area dedicated to facilitate the generation and
testing of innovative ideas to further the Company’s ambitions
through creative thinking and best use of digital technology. We
received a briefing on the work of the hub by the R² Data Labs
team and learned about some recent projects and ideas that were
showcased. We were also briefed on plans to transform engineering
and how this will drive major changes in our skills mix in the coming
years. This is driven by the introduction of new technology and the
associated automation of many transactional engineering tasks. It is
also impacted by the expectation that certain skill sets will grow
significantly as electrical systems and digital capability become
more prevalent in our product portfolio over the coming years.
We reviewed the work that is being done to support these changes.
The Committee added an additional meeting by teleconference to
undertake a detailed review of the efficiency and effectiveness of
technology programmes and their delivery. We received information
on the effectiveness of historical investments in technology to
understand what proportion of the investment has carried through
to the final product. The Committee supports the changes the
Company is introducing to improve the impact of technology
programmes in the context of managing technology acquisition as
a portfolio. We recommended broad leadership engagement and
governance around setting investment priorities and the delivery
of technology programmes.
We also gave our support to further development of the approach
to strategic management of technology acquisition and reviewed
the Company’s approach to technology partnering as a means of
obtaining access to co-investment, skilled resources and accelerating
technology development. We discussed in general terms the various
models and opportunities that could be used to achieve this.
We discussed the risks and opportunities arising from each,
notably in respect of the protection/exploitation of intellectual
property and considered specific examples of previous partnering
arrangements the Company had put in place. We then went on to
consider a number of specific opportunities and their potential value.
We further reviewed the Company’s risk appetite with regard to the
Group’s 2018 principal risk of disruptive technologies and business
models. We considered assessments on a range of potentially
disruptive technologies and the Group’s activities in each area.
This will remain a live process to ensure awareness of potential
shifts. We received a progress report on the Group’s work on the
Internet of Things and tagging and tracking technology for use
on our assets and those of our customers, with activities covering
ULTRAFAN
In May, we visited the test beds to see the Advance3 engine
between test runs and were briefed on initial performance results
of test data compared to pre-test predictions. The Advance3
reflects a new engine core architecture which, together with a
power gearbox, will form the new UltraFan demonstrator.
the full lifecycle of our products including design, manufacture,
operations and services.
Our Committee dedicated a workshop to assess the Group’s
technology position with regard to supporting new product
offerings and managing risk and new ways of working to reduce
development timescales. While it is not possible to completely
de-couple the strategic, financial and operational aspects of a
proposed new programme from technological aspects, the focus of
the Committee’s review was on the latter so that we could report
our conclusions to the Board to assist its broader decision-making.
The review was attended by representatives from the Civil Aerospace
technology project team, the technical assurance team, and a team
of former senior engineers of the Company, as quasi-independent
participants. We held a follow-on meeting by teleconference in
early December before reporting back to the Board with our
conclusions and recommendations.
Looking forward
The Company sits at a pivotal point in its development. 2018 started
with the launch of a new vision grounded in innovation. This
prioritised the development of new capabilities in electrical and
digital technologies along with those critical to the future
competitiveness of our existing products such as Ultrafan,
Advance3 and micro-grids. This technology will build the future
Rolls-Royce with exciting new products and services delivering
value in existing and new markets, with current and new customers.
The Committee feels privileged and excited to participate in this
journey with the many extremely talented people who will deliver
that future for Rolls-Royce and its shareholders. The Committee will
continue to focus on the alignment of our research and technology
strategy with the future needs of the business, the efficient
execution of our research and technology programmes and the
assessment of skills and capabilities to support them.
In conclusion, I would like to pay tribute to the support Rolls-Royce
receives from governments both in the UK and our key international
locations. Their foresight and recognition of the future economic
value of technology and its contribution to national industrial
competitiveness is a credit to them and their support is both
necessary and welcome.
Sir Kevin Smith
Chairman of the Science & Technology Committee
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Responsibility Statements
105
RESPONSIBILITY STATEMENTS
Statement of Directors’ responsibilities in respect
of the Financial Statements
The Directors are responsible for preparing the Annual Report
and the Financial Statements in accordance with applicable law
and regulation.
Directors’ confirmations
The Directors consider that the Annual Report, taken as a whole,
is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Group and parent
company’s position and performance, business model and strategy.
Each of the Directors, whose names and functions are listed in the
Directors’ Report, confirm that to the best of his or her knowledge:
— the Group Financial Statements, which have been prepared in
accordance with IFRSs as adopted by the European Union, give
a true and fair view of the assets, liabilities, financial position and
loss of the Group;
— the parent company Financial Statements, which have been
prepared in accordance with United Kingdom Generally
Accepted Accounting Practice (United Kingdom Accounting
Standards, comprising FRS 101 Reduced Disclosure Framework,
and applicable law), give a true and fair view of the assets,
liabilities, financial position and result of the Company; and
— the Strategic Report includes a fair review of the development
and performance of the business and the position of the Group
and parent company, together with a description of the principal
risks and uncertainties that it faces.
By order of the Board
Pamela Coles
Company Secretary
28 February 2019
Company law requires the Directors to prepare financial statements
for each financial year. Under that law the Directors have prepared
the Group Financial Statements in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the European
Union and the parent company Financial Statements in accordance
with United Kingdom Generally Accepted Accounting Practice
(United Kingdom Accounting Standards, comprising FRS 101
Reduced Disclosure Framework, 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
the profit or loss of the Group and parent company for that period.
In preparing the Financial Statements, the Directors are required to:
— select suitable accounting policies and then apply
them consistently;
— state whether applicable IFRSs, as adopted by the European
Union, have been followed for the Group Financial Statements
and United Kingdom Accounting Standards comprising FRS 101,
have been followed for the Company Financial Statements,
subject to any material departures disclosed and explained in the
Financial Statements;
— make judgements and accounting estimates that are reasonable
and prudent; and
— prepare the Financial Statements on the going concern basis
unless it is inappropriate to presume that the Group and parent
company will continue in business.
The Directors are also responsible for safeguarding the assets
of the Group and parent company and hence for taking
reasonable steps for the prevention and detection of fraud
and other irregularities.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group and
parent company’s transactions and disclose with reasonable
accuracy at any time the financial position of the Group and
parent company. This enables them to ensure that the Financial
Statements and the Directors’ Remuneration Report comply with
the Companies Act 2006 and, as regards the Group’s Consolidated
Financial Statements, Article 4 of the IAS Regulation.
The Directors are responsible for the maintenance and integrity of
the parent company’s website. Legislation in the United Kingdom
governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
DIRECTORS’ REPORT 106 Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
FINANCIAL STATEMENTS
Consolidated Financial Statements
Company Financial Statements
Company Balance Sheet
Company Statement
of Changes in Equity
Investments – subsidiary undertakings
Notes to the Company
Financial Statements
1 Accounting policies
2
3 Trade and other receivables
4 Trade and other payables
5 Financial liabilities
6 Share capital
7 Contingent liabilities
8 Other information
Subsidiaries
Joint Ventures and Associates
175
175
176
176
176
176
177
177
177
177
178
184
Consolidated Income Statement
Consolidated Statement
of Comprehensive Income
Consolidated Balance Sheet
Consolidated Cash Flow Statement
Consolidated Statement
of Changes in Equity
Research and development
Notes to the Consolidated
Financial Statements
1 Accounting policies
2 Segmental analysis
3
4 Net financing
5 Taxation
6 Earnings per ordinary share
7 Auditors’ remuneration
8 Employee information
9
Intangible assets
10 Property, plant and equipment
11
Investments
12 Inventories
13 Trade receivables and other assets
14 Cash and cash equivalents
15 Borrowings
16 Trade payables and other liabilities
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
27 Impact of new accounting standards
and other adjustments
107
108
109
110
112
113
124
130
131
131
134
135
135
136
138
140
142
142
143
143
143
144
154
156
160
161
162
163
163
164
167
169
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Consolidated Income Statement
107
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2018
Revenue
Cost of sales 1
Gross profit
Commercial and administrative costs 1
Research and development costs
Share of results of joint ventures and associates
Operating (loss)/profit
Gain arising on the acquisition of ITP Aero
Gain arising on the disposal of L’Orange
(Loss)/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
Other comprehensive income
Total comprehensive (loss)/income 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
2018
£m
15,729
(14,531)
1,198
(1,595)
(768)
4
(1,161)
–
358
(803)
271
(2,415)
(2,144)
(2,947)
554
(2,393)
(2,401)
8
(2,393)
182
(2,211)
Restated *
2017
£m
14,747
(12,325)
2,422
(1,222)
(843)
9
366
785
–
1,151
2,911
(164)
2,747
3,898
(515)
3,383
3,382
1
3,383
290
3,673
Notes
2
3
11
25
25
2
4
4
5
6
6
(129.15)p
(129.15)p
184.41p
183.80p
11.7p
220
2
466
11.7p
216
199
* The 2017 figures have been restated for IFRS 15 Revenue from Contracts with Customers, an update to the provisional fair values of the ITP Aero acquisition and other adjustments.
1
See note 27 for more details.
Included within cost of sales and commercial and administrative costs are exceptional charges relating to the Trent 1000 and Trent 900 Civil Aerospace programmes and restructuring
costs. Further details can be found in note 2.
FINANCIAL STATEMENTS 108
Financial Statements
Consolidated Statement of Comprehensive Income
Rolls-Royce Holdings plc Annual Report 2018
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2018
(Loss)/profit for the year
Other comprehensive income (OCI):
Actuarial movements on 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 L’Orange
Cash flow hedge reserve movements
Share of OCI of joint ventures and associates
Related tax movements
Items that may be reclassified to profit or loss
Total other comprehensive income
Total comprehensive (loss)/income for the year
Attributable to:
Ordinary shareholders
Non-controlling interests
Total comprehensive (loss)/income for the year
Notes
2018
£m
(2,393)
Restated *
2017
£m
3,383
19
11
5
11
5
27
(1)
(2)
24
171
(19)
(17)
18
5
158
182
735
(1)
(307)
427
(133)
–
–
(5)
1
(137)
290
(2,211)
3,673
(2,219)
8
(2,211)
3,672
1
3,673
* The 2017 figures have been restated for IFRS 15 Revenue from Contracts with Customers, an update to the provisional fair values of the ITP Aero acquisition and other adjustments.
See note 27 for more details.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Consolidated Balance Sheet
109
CONSOLIDATED BALANCE SHEET
At 31 December 2018
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 receivables and other assets
Contract assets
Taxation recoverable
Other financial assets
Short-term investments
Cash and cash equivalents
Current assets
Assets held for sale
TOTAL ASSETS
LIABILITIES
Borrowings
Other financial liabilities
Trade payables and other liabilities
Contract liabilities
Current tax liabilities
Provisions for liabilities and charges
Current liabilities
Borrowings
Other financial liabilities
Trade payables and other liabilities
Contract liabilities
Deferred tax liabilities
Provisions for liabilities and charges
Post-retirement scheme deficits
Non-current liabilities
Liabilities associated with assets held for sale
TOTAL LIABILITIES
NET (LIABILITIES)/ASSETS
EQUITY
Called-up share capital
Share premium account
Capital redemption reserve
Cash flow hedging reserve
Merger reserve
Translation reserve
Accumulated losses
Equity attributable to ordinary shareholders
Non-controlling interests
TOTAL EQUITY
Restated *
Notes
2018
£m
31 December
2017
£m
1 January
2017
£m
9
10
11
11
17
5
19
12
13
13
17
14
25
15
17
16
16
18
15
17
16
16
5
18
19
25
20
5,295
4,929
412
22
343
2,092
1,944
15,037
4,287
4,690
2,057
34
22
6
4,974
16,070
750
31,857
(858)
(647)
(8,292)
(3,794)
(138)
(1,122)
(14,851)
(3,804)
(3,542)
(1,940)
(5,336)
(962)
(795)
(1,303)
(17,682)
(376)
(32,909)
5,565
4,658
375
26
610
1,451
2,125
14,810
3,803
4,353
1,945
17
36
3
2,953
13,110
7
27,927
(82)
(601)
(6,885)
(4,104)
(209)
(550)
(12,431)
(3,406)
(2,461)
(2,238)
(3,607)
(1,071)
(393)
(1,387)
(14,563)
–
(26,994)
4,116
4,134
555
38
382
1,785
1,346
12,356
3,353
3,683
1,875
32
5
3
2,771
11,722
5
24,083
(172)
(693)
(6,133)
(3,366)
(211)
(632)
(11,207)
(3,185)
(5,129)
(1,822)
(2,946)
(713)
(263)
(1,375)
(15,433)
–
(26,640)
(1,052)
933
(2,557)
379
268
161
(106)
406
809
(2,991)
(1,074)
22
(1,052)
368
195
162
(112)
3
657
(343)
930
3
933
367
181
162
(107)
3
789
(3,954)
(2,559)
2
(2,557)
* The figures at 1 January and 31 December 2017 have been restated for IFRS 15 Revenue from Contracts with Customers, an update to the provisional fair values of the ITP Aero
acquisition and other adjustments. See note 27 for more details.
The financial statements on pages 107 to 174 were approved by the Board on 28 February 2019 and signed on its behalf by:
Warren East
Chief Executive
Stephen Daintith
Chief Financial Officer
FINANCIAL STATEMENTS
110
Financial Statements
Consolidated Cash Flow Statement
Rolls-Royce Holdings plc Annual Report 2018
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 31 December 2018
Reconciliation of cash flows from operating activities
Operating (loss)/profit
Profit 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 and other movements on investments
Increase/(decrease) in provisions
Increase in inventories
Increase in trade receivables and other assets
Increase in contract assets
Decrease in amounts payable for financial penalties from agreements with investigating bodies
Increase in trade payables and other liabilities
Increase in contract liabilities
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 – net of government grants of £5m (2017: £14m)
Disposals of property, plant and equipment
Acquisition of ITP Aero
Disposal of L’Orange
Other investments in joint ventures and associates and other investment movements
Net cash outflow from investing activities
Cash flows from financing activities
Repayment of loans
Proceeds from increase in loans
Capital element of finance lease payments
Net cash flow from increase in borrowings and finance leases
Interest received
Interest paid
Interest element of finance lease payments
Increase in short-term investments
Issue of ordinary shares (net of expenses)
Purchase of ordinary shares
Dividends to NCI
Redemption of C Shares
Net cash inflow/(outflow) from financing activities
Change in cash and cash equivalents
Cash and cash equivalents at 1 January
Exchange 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
2018
£m
(1,161)
11
(4)
105
565
521
6
1,003
(616)
(469)
(112)
–
1,732
1,419
(732)
352
(181)
35
2,474
(248)
2,226
(6)
(680)
13
(905)
43
–
573
(13)
(975)
(37)
1,054
(23)
994
27
(92)
(5)
(3)
1
(1)
(3)
(216)
702
1,953
2,933
66
4,952
Restated *
2017
£m
366
11
(9)
79
343
450
14
(1)
(194)
(169)
(70)
(286)
398
1,399
(664)
240
(249)
34
1,692
(180)
1,512
(4)
(647)
7
(730)
4
263
–
(47)
(1,154)
(160)
309
(6)
143
14
(64)
(3)
–
21
(24)
–
(214)
(127)
231
2,771
(69)
2,933
* The 2017 figures have been restated for IFRS 15 Revenue from Contracts with Customers, an update to the provisional fair values of the ITP Aero acquisition and other adjustments.
See note 27 for more details. This does not affect cash flows, but has changed the reconciliation of operating profit to net cash inflow from operating activities.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Consolidated Cash Flow Statement
111
CONSOLIDATED CASH FLOW STATEMENT CONTINUED
For the year ended 31 December 2018
Reconciliation of movements in cash and cash equivalents to movements in net funds/(debt)
Change in cash and cash equivalents
Cash flow from increase in borrowings and finance leases
Cash flow from increase in short-term investments
Change in net funds/(debt) resulting from cash flows
New finance leases in the year
Net debt (excluding cash and cash equivalents) on acquisition of ITP Aero
Net debt (excluding cash and cash equivalents) of previously unconsolidated subsidiary
Exchange gains/(losses) on net funds/(debt)
Fair value adjustments
Movement in net funds/(debt)
Net debt at 1 January excluding the fair value of swaps
Net funds/(debt) at 31 December excluding the fair value of swaps
Fair value of swaps hedging fixed rate borrowings
Net funds/(debt) at 31 December
2018
£m
1,953
(994)
3
962
(97)
–
–
54
(69)
850
(532)
318
293
611
2017
£m
231
(143)
–
88
(57)
(34)
(18)
(59)
131
51
(583)
(532)
227
(305)
The movement in net funds/(debt) (defined by the Group as including the items shown below) is as follows:
At
1 January
£m
Funds
flow
£m
Net funds on
acquisition
and disposal
of businesses
£m
Net funds
of previously
unconsolidated
subsidiaries
£m
Exchange
differences
£m
Fair value
adjustments
£m
Reclassi-
fications
£m
At
31 December
£m
2018
Cash at bank and in hand
Money market funds
Short-term deposits
Cash and cash equivalents (per balance sheet)
Overdrafts
Cash and cash equivalents
(per cash flow statement)
Short-term investments
Other current borrowings
Non-current borrowings
Finance leases
Financial liabilities
Net funds/(debt) excluding fair value swaps
Fair value of swaps hedging fixed rate borrowings
Net funds/(debt)
2017
Cash at bank and in hand
Money market funds
Short-term deposits
Cash and cash equivalents (per balance sheet)
Overdrafts
Cash and cash equivalents
(per cash flow statement)
Short-term investments
Other current borrowings
Non-current borrowings
Finance leases
Financial liabilities
Net debt excluding fair value swaps
Fair value of swaps hedging fixed rate borrowings
Net debt
838
589
1,526
2,953
(20)
2,933
3
(39)
(3,292)
(137)
(3,468)
(532)
227
(305)
872
552
1,347
2,771
–
2,771
3
(169)
(3,121)
(67)
(3,357)
(583)
358
(225)
170
630
1,155
1,955
(2)
1,953
3
(38)
(972)
(81)
(1,091)
865
865
(5)
44
212
251
(20)
231
–
159
(280)
(79)
(200)
31
31
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(6)
(28)
–
(34)
(34)
(34)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(18)
–
–
(18)
(18)
15
3
48
66
–
66
–
(1)
–
(11)
(12)
54
54
(29)
(7)
(33)
(69)
–
(69)
–
3
(2)
9
10
(59)
(18)
(59)
–
–
–
–
–
–
–
15
(84)
–
(69)
(69)
66
(3)
–
–
–
–
–
–
–
–
131
–
131
131
(131)
–
–
–
–
–
–
–
–
(739)
739
–
–
–
–
–
–
–
–
–
–
–
(8)
8
–
–
–
–
1,023
1,222
2,729
4,974
(22)
4,952
6
(802)
(3,609)
(229)
(4,640)
318
293
611
838
589
1,526
2,953
(20)
2,933
3
(39)
(3,292)
(137)
(3,468)
(532)
227
(305)
FINANCIAL STATEMENTS 112
Financial Statements
Consolidated Statement of Changes in Equity
Rolls-Royce Holdings plc Annual Report 2018
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2018
Attributable to ordinary shareholders
Notes
Share
capital
£m
367
–
–
367
–
Share
premium
£m
181
–
–
181
–
Capital
redemption
reserve
£m
162
–
–
162
–
Cash flow
hedging
reserve 2
£m
(107)
–
–
(107)
–
Merger
reserve
£m
3
–
–
3
–
Translation
reserve
£m
811
(22)
–
789
–
Accumu-
lated
losses 3
£m
445
Total
£m
1,862
(4,442) (4,464)
43
(3,954) (2,559)
3,382 3,382
43
At 1 January 2017 as previously reported
Impact of adopting IFRS 15 1
Other 1
At 1 January 2017 restated 1
Profit for the year 1
Foreign exchange translation
differences on foreign operations 1
Movements on post-retirement schemes
OCI of joint ventures and associates
Related tax movements
Total comprehensive income for the year
Arising on issues of ordinary shares
Issue of C Shares 4
Redemption of C Shares
Ordinary shares purchased
Share-based payments – direct to equity 5
Related tax movements
Other changes in equity in the year
At 31 December 2017
Impact of adopting IFRS 9
At 1 January 2018
(Loss)/profit for the year
Foreign exchange translation
differences on foreign operations
Reclassified to income statement on
disposal of L’Orange
Movements on post-retirement schemes
Debited to cash flow hedge reserve
OCI of joint ventures and associates
Related tax movements
Total comprehensive loss for the year
Shares issued in respect of acquisition
of ITP Aero
Other issues of ordinary shares
Issue of C Shares 4
Redemption of C Shares
Shares issued to employee share trust
Share-based payments – direct
to equity 5
Transfer of joint operations
to subsidiaries
Transactions with NCI
Related tax movements
Other changes in equity in the year
At 31 December 2018
19
11
5
20
5
19
11
5
20
5
–
–
–
–
–
1
–
–
–
–
–
1
368
–
368
–
–
–
–
–
–
–
–
10
1
–
–
–
–
–
–
–
–
–
14
–
–
–
–
–
14
195
–
195
–
–
–
–
–
–
–
–
–
73
–
–
–
–
–
–
–
11
379
–
–
–
73
268
–
–
–
–
–
–
(215)
215
–
–
–
–
162
–
162
–
–
–
–
–
–
–
–
–
–
(217)
216
–
–
–
–
–
(1)
161
–
–
(5)
–
(5)
–
–
–
–
–
–
–
(112)
–
(112)
–
–
–
–
(17)
18
5
6
–
–
–
–
–
–
–
–
–
–
(106)
–
–
–
–
–
–
–
–
–
–
–
–
3
–
3
–
–
–
–
–
–
–
–
403
–
–
–
–
–
–
–
–
403
406
Non-
controlling
Total
interests
equity
(NCI)
£m
£m
2
1,864
– (4,464)
–
43
2 (2,557)
1 3,383
–
(133)
735
–
(6)
–
–
(306)
1 3,673
1
–
(214)
–
–
–
(24)
–
51
–
3
–
(183)
–
933
3
(15)
–
918
3
8 (2,393)
–
–
–
–
–
–
8
–
–
–
–
–
–
171
(19)
27
(17)
17
3
(2,211)
413
74
(216)
–
(75)
32
(133)
–
–
1
(132)
–
–
–
–
–
–
–
657
–
657
171
(19)
–
–
–
–
152
–
–
–
–
–
–
–
(133)
735
(1)
(307)
735
(6)
(306)
3,809 3,672
1
(214)
–
(24)
51
3
(183)
930
(15)
915
(2,401) (2,401)
(14)
1
(215)
(24)
51
3
(198)
(343)
(15)
(358)
–
171
–
27
–
(1)
(2)
(2,377)
(19)
27
(17)
17
3
(2,219)
–
–
1
(216)
(75)
413
74
(216)
–
(75)
32
32
–
–
–
–
809
–
–
2
(256)
(2,991)
–
–
2
230
(1,074)
15
(4)
–
11
22
15
(4)
2
241
(1,052)
1 The 2017 figures have been restated for IFRS 15 Revenue from Contracts with Customers, an update to the provisional fair values of the ITP Aero acquisition and other adjustments.
See note 27 for more details.
2 See accounting policies note 1.
3 At 31 December 2018, 13,538,921 ordinary shares with a net book value of £123m (2017: 6,466,153, 2016: 6,854,216 ordinary shares with net book values of £52m and £56m respectively)
were held for the purpose of share-based payment plans and included in accumulated losses. During the year, 468,165 ordinary shares with a net book value of £4m (2017: 4.992,304
shares with a net book value of £42m) vested in share-based payment plans. During the year, the Company acquired 80,810 (2017: 92,537) of its ordinary shares via reinvestment of
dividends received on its own shares and purchased nil (2017: 2,711,349) of its ordinary shares through purchases on the London Stock Exchange. During the year, the Company issued
47,556,914 new ordinary shares relating to the first five instalments for the acquisition of ITP Aero and 7,460,173 new ordinary shares (2017: 1,740,355) to the Group’s share trust for its
employee share-based payment plans with a net book value of £74m (2017: £14m).
4 In Rolls-Royce Holdings plc’s own Financial Statements, C Shares are issued from the merger reserve, this reserve was created by a scheme of arrangement in 2011. 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 Share-based payments – direct to equity is the share-based payment charge for the year less the actual cost of vesting excluding those vesting from own shares and cash received on
share-based schemes vesting.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
113
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 Accounting policies
The Company
Rolls-Royce Holdings plc (the Company) is a public company incorporated under the Companies Act 2006 and domiciled in the United
Kingdom. The Consolidated Financial Statements of the Company for the year ended 31 December 2018 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 the Companies Act 2006 and European Union (EU) regulations, these Consolidated Financial Statements have been
prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board
(IASB) and interpretations issued by the IFRS Interpretations Committee (IFRIC), as adopted for use in the EU effective at 31 December
2018 (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 175 to 177 and the accounting policies in respect of Company Financial Statements are set out on page 176.
The 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 55.
The Consolidated Financial Statements are presented in sterling which is the Company’s functional currency.
The preparation of Consolidated 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 Consolidated Financial Statements and the reported
amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Revisions to Adopted IFRS in 2018
IFRS 15 Revenue from Contracts with Customers
The Group adopted IFRS 15 on 1 January 2018 using the ‘full’ retrospective approach.
IFRS 15 provides a single, principles-based five-step model to be applied to all sales contracts with customers. It is based on the transfer
of control of goods and services to customers. In summary:
– revenues on original equipment (OE) and time and material aftermarket contracts are generally recognised at the point of delivery;
– revenues on long-term aftermarket contracts and some OE contracts (generally for products without an alternative use to the specific
contract) are recognised on an activity basis using the costs incurred as the measure of the activity;
– costs to fulfil contracts are recognised as they are incurred; and
– costs to obtain a contract are amortised over the period of the contract against revenue.
The impact on the Group of adopting IFRS 15 is very significant, with a cumulative adjustment to equity at 1 January 2017 being £4.5bn. The
income statement for 2017 and the balance sheets at 1 January and 31 December 2017 have been restated to reflect the adoption
of IFRS 15 – see note 27.
IFRS 9 Financial Instruments
The Group adopted IFRS 9 on 1 January 2018. IFRS 9 relates to the accounting for financial instruments and covers:
– classification and measurement – certain trade receivables are now classified as ‘fair value through other comprehensive income’;
– impairment – additional requirements for the measurement of expected credit losses on financial assets; and
– hedge accounting – amendments to requirements.
Except for hedge accounting, retrospective application is not required with any adjustment being made to reserves on 1 January 2018.
In accordance with the transitional provisions in IFRS 9, the Group has not restated its 2017 comparative information. For hedge accounting,
the Group considered the new requirements; no changes to the existing hedge relationships were necessary and the Group has applied
the standard prospectively.
The cumulative impact of IFRS 9 on the balance sheet at 1 January 2018 of £15m is set out in more detail in note 27.
FINANCIAL STATEMENTS 114
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
1 Accounting policies continued
Key areas of judgement and sources of estimation uncertainty
The determination of the Group’s accounting policies requires judgement. The subsequent application of these policies requires estimates;
the actual outcome may differ from that calculated. The key judgements and 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 summarised below. Further details are included within the significant accounting policies as indicated.
Revenue recognition
Key judgements
Whether Civil Aerospace OE and
aftermarket contracts should be combined
Key sources of estimation uncertainty
Estimates of future revenues and costs of
long-term contractual arrangements
Page
115
How performance on long-term aftermarket
contracts should be measured
Whether any costs should be treated
as wastage
Whether sales of spare engines to joint ventures
are at fair value
Determination of the nature of entry fees
received
Whether deferred tax assets should
be recognised
Risk and revenue sharing
arrangements
Taxation
Financial instruments
Business combinations
Capitalisation of internally
generated developments costs
Identification of acquired assets and liabilities
Determination of the criteria for starting, and
subsequently ceasing, capitalisation
Impairment of non-current assets Determination of cash-generating units for
Determination of the basis for amortising
capitalised development costs
Provisions
Post-retirement benefits
assessing impairment of goodwill
Assessment of satisfying the criteria for the
recognition of a provision, particularly in
respect of restructuring
Estimates necessary to assess whether it is
probable that sufficient suitable taxable profits
will arise in the UK to utilise the deferred
tax assets
Valuation of financial instruments without an
observable market value
Estimates to allocate purchase price
Estimates of cash flow forecasts and discount
rates to assess the value in use
Estimates of expenditure required to settle the
obligation, in particular where long-term
contracts are assessed as onerous
Estimates of market value of scheme assets
without an observable market value and
assumptions for valuing the defined benefit
obligation
116
117
118
119
119
121
121
122
Sensitivities for key sources of estimation risk are disclosed in the relevant notes where this is appropriate and practicable.
Significant accounting policies
The Group’s significant accounting policies are set out below. With the exception of IFRS 9, which has been adopted with effect from
1 January 2018, these accounting policies have been applied consistently to all periods presented in these Consolidated Financial Statements.
Basis of consolidation
The Consolidated Financial Statements include the Company Financial Statements and its subsidiary undertakings together with the
Group’s share of the results of joint arrangements and associates made up to 31 December. ITP Aero was acquired on 19 December 2017.
ITP Aero did not have any significant trading activity between the acquisition date and 31 December 2017. L’Orange (a subsidiary of Power
Systems) was sold on 1 June 2018.
A subsidiary is an entity controlled by the Company. Control exists when the Company has power over an entity, exposure to variable
returns from its involvement with an entity and the ability to use its power over an entity so as to affect the Company’s returns.
A joint arrangement is an entity in which the Group holds a long-term interest and which is jointly controlled by the Group and one or
more other venturers under a contractual arrangement. Joint arrangements may be either joint ventures or joint operations. An associate
is an entity, being neither a subsidiary nor a joint arrangement, in which the Group holds a long-term interest and where the Group has a
significant influence. The results of joint ventures and associates are accounted for using the equity method of accounting. Joint
operations are accounted for using proportionate accounting.
Any subsidiary undertaking, joint arrangement or associate 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.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
115
1 Accounting policies continued
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.
As a result of the announcement on 6 July 2018 of the proposed disposal of the Commercial Marine business, it has been treated as
a disposal group held for sale, with its assets and liabilities presented separately on the balance sheet.
Revenue recognition
Key judgement – Whether Civil Aerospace OE and aftermarket contracts should be combined
In the Civil Aerospace business, OE contracts are with the airframers (except for spare engines), while the aftermarket contracts are
with the aircraft operators, although there may be interdependencies between them. IFRS 15 includes additional guidance on the
combination of contracts, in particular that contracts with unrelated parties should not be combined. Notwithstanding the
interdependencies, the Directors’ consider that, as the operators are ultimately purchasing an aircraft from the airframer, of which
the engines are part, the engine contract should be consider separately from the aftermarket contract. In making this judgement,
they also took account of evolving industry practice.
Key estimate – Estimates of future revenues and costs of long-term contractual arrangements
The Group has long-term contracts that fall into different accounting periods and which can extend over significant periods
(generally up to 25 years) – the most significant of these are long-term service arrangements (LTSAs) in the Civil Aerospace business.
The estimated revenue 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; lifecycle cost
improvements over the term of the contracts and escalation of revenue and costs. The estimates take account of the inherent
uncertainties, constraining the expected level of revenue as appropriate. 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 and economic forecasts.
Key judgement – How performance on long-term aftermarket contracts should be measured
The Group generates a significant proportion of its revenue from aftermarket arrangements. These aftermarket contracts, such as
TotalCare and CorporateCare agreements in the Civil Aerospace business, cover a range of services and generally have contractual
terms covering more than one year. Under these contracts, the Group’s primary obligation is to maintain customers’ engines in an
operational condition and this is achieved by undertaking various activities, such as repair, overhaul and engine monitoring over the
period of the contract. Revenue on these contracts is recognised over the period of the contract and the basis for measuring
progress is a matter of judgement. The Directors consider that the stage of completion of the contract is best measured by using the
actual costs incurred to date compared to the estimated costs to complete the performance obligations, as this reflects the extent of
completion of the activities performed.
Key judgement – Whether any costs should be treated as wastage
In rare circumstances, the Group may incur costs of wasted material, labour or other resources to fulfil a contract where the level of
cost was not reflected in the contract price. The identification of such costs is a matter of judgement and would only be expected to
arise where there has been a series of abnormal events which give rise to a significant level of cost which is also of a nature that the
Group would not expect to incur and hence is not reflected in the contract price. For example, where there are technical issues that
require resolution to meet regulatory requirements; have a wide-ranging impact across a product type; and cause significant
operational disruption to customers. Similarly, in these rare circumstances, significant disruption costs to support customers resulting
from the actual performance of a delivered good or service may be treated as a cost in the period. Any costs identified as wastage are
expensed when the obligation to incur them arises – see note 2.
Key judgement – Whether sales of spare engines to joint ventures are at fair value
The Civil Aerospace business maintains a pool of spare engines to support its customers. Some of these engines are sold to, and held
by, joint venture companies. The assessment of whether the sales price reflects fair value is a key judgement.
Revenue recognised comprises sales to the Group’s customers after discounts and amounts payable to customers. The transaction price
of a contract is typically clearly stated within the contract, although the absolute amount may be dependent on escalation indices and
long-term contracts require the key estimates highlighted above. Refund liabilities where sales are made with a right of return are not
typical in the Group’s contracts. Where they do exist, and consideration has been received, a portion, based on an assessment of the
expected refund liability is recognised within other payables. Revenue excludes value added taxes. The Group has elected to use the
practical expedient not to adjust revenue for the effect of financing components, where the expectation is that the period between the
transfer of goods and services to customers and the receipt of payment is less than a year.
Sales of standard OE, spare parts and time and material overhaul services are generally recognised on transfer of control to the customer.
This is generally on delivery to the customer, unless the specific contractual terms indicate a different point. Management consider
whether there is a need to constrain the amount of revenue to be recognised on delivery based on the contractual position and any
relevant facts, however, this is not typically required.
Sales of services and OE specifically designed for the contract (most significantly in the Defence business) are recognised by
reference to the progress towards completion of the performance obligation, using the costs method described in the key judgements,
provided the outcome of contracts can be assessed with reasonable certainty.
FINANCIAL STATEMENTS 116
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
1 Accounting policies continued
The Group generates a significant portion of its revenue and profit on aftermarket arrangements arising from the installed OE fleet. As a
consequence, in particular in the Civil Aerospace large engine business, the Group will often agree contractual prices for OE deliveries
that take into account the anticipated aftermarket arrangements. As described in the key judgements, these contracts are not combined.
The consideration in the OE contract is therefore allocated to OE performance obligations and the consideration in the aftermarket
contract to aftermarket performance obligations.
– Future variable revenue from long-term contracts is constrained to take account of the risk of non-recovery of resulting contract
balances from reduced utilisation e.g. engine flying hours, based on historical forecasting experience and the risk of aircraft being
parked by the customer.
– A significant amount of revenue and cost related to long-term contract accounting is denominated in currencies other than that of the
relevant Group undertaking, most significantly US dollar transactions in sterling and euro denominated undertakings. These are
translated at estimated long-term exchange rates.
– The assessment of stage of completion is generally measured for each contract. However, in certain cases, such as for CorporateCare
agreements where there are many contracts covering aftermarket services, each for a small number of engines, the Group accounts for
a portfolio of contracts together as the effect on the Consolidated Financial Statements would not differ materially from applying the
standard to the individual contracts in the portfolio. When accounting for a portfolio of long-term service arrangements the Group uses
estimates and assumptions that reflect the size and composition of the portfolio.
– A contract asset/liability is recognised where payment is received in arrears/advance of the costs incurred to meet performance obligations.
– Where material, wastage costs (see key judgements on page 115) are recorded as an exceptional non-underlying expense.
If the expected costs to fulfil a contract exceed the expected revenues, a contract loss provision is recognised for the excess costs.
The Group pays participation fees to airframe manufacturers, its customers for OE, on certain programmes. Amounts paid are initially
treated as contract assets and subsequently charged as a reduction to the OE revenue when the engine is transferred to the customer.
The Group has elected to use the practical expedient to expense as incurred any incremental costs of obtaining or fulfilling a contract
if the amortisation period of an asset created would have been one year or less. Where costs to obtain a contract are recognised in the
balance sheet they are amortised over the performance of the related contract (average of three years).
Risk and revenue sharing arrangements (RRSAs)
Key judgment – Determination of the nature of entry fees received
RRSAs with key suppliers (workshare partners) are a feature of the 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 cash flows as a ‘life of type’ supplier (i.e.
as long as the engine remains in service). The share of development costs borne by the workshare partner and of the revenue 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.
These receipts are deferred and recognised against cost of sales over the estimated number of units to be delivered. In previous
years, these cash entry fees were treated as a reduction to research and development costs. However, in assessing the accounting
under IFRS 15 for the participation fee payments we sometimes make to our OE customers, we have also re-assessed the entry fees
received from the Group’s suppliers under RRSAs.
The payments to suppliers of their shares of the programme cash flows for their production components are charged to cost of sales as
programme revenue arises. Cash entry fees received are initially deferred on the balance sheet and recognised as a reduction in cost of
sales incurred, on a 15-year straight-line basis pro rata over the estimated number of units produced.
The Group has arrangements with third parties who invest in a programme and receive a return based on its performance, but do
not undertake development work or supply parts. Such arrangements (financial RRSAs) are financial instruments as defined by
IAS 32 Financial Instruments: Presentation and are accounted for using the amortised cost method.
Royalty payments
Where a government or similar body has previously acquired an interest in the intellectual property of a programme, royalty payments are
matched to the related sales.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
117
1 Accounting policies continued
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 initially recognised in the balance sheet and released
to match the related expenditure. 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
Key judgement – Whether deferred tax assets should be recognised
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.
Key estimate – Estimates necessary to assess whether it is probable that sufficient suitable taxable profits will arise in the UK to utilise
the deferred tax assets.
Further details can be found in note 5
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; and
– 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. In the UK, the deferred tax liability on the
pension surplus is recognised consistently with the basis for recognising the surplus, i.e. at the rate applicable to refunds from a trust.
Tax is charged or credited to the income statement or 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.
Further details on the Group’s tax position can be found on page 198.
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 average monthly exchange rate when the transaction occurs. Monetary assets and liabilities denominated in
foreign currencies are translated into the relevant functional currency at the rate prevailing at the year end. Exchange differences arising
on foreign exchange transactions and the retranslation of assets and liabilities into functional currencies at the rate prevailing at the
year-end are included in 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 prevailing
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 STATEMENTS 118
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
1 Accounting policies continued
Financial instruments
Key estimate – Valuation of financial instruments without an observable market value
Financial liabilities include financial RRSAs, the value of which is determined based on the estimated future cash flows.
Financial instruments – Classification and measurement
IFRS 9 has changed the classification of financial assets compared to IAS 39. A summary of the changes is included in note 27.
Financial assets
Financial assets primarily include trade receivables, cash and cash equivalents (comprising cash at bank, money market funds and short term
deposits), short term investments, derivatives (foreign exchange contracts, commodity contracts, interest rate contracts), and unlisted
investments.
– Trade receivables are classified either as ‘held to collect’ and measured at amortised cost or as ‘held to collect and sell’ and measured at
fair value through other comprehensive income (FVOCI). The Group may sell trade receivables due from certain customers before the
due date. Any trade receivables from such customers that are not sold at the reporting date are classified as ‘held to collect and sell’.
– Cash and cash equivalents (consisting of balances with banks and other financial institutions, money-market funds, short-term deposits)
and short-term investments are subject to low market risk. Cash balances and short-term investments are measured at fair value through
profit and loss (FVPL). Money market funds and short-term deposits are measured at FVOCI.
– Derivatives and unlisted investments are measured at FVPL.
Financial liabilities
Financial liabilities primarily consist of trade payables, borrowings, derivatives, financial RRSAs and C Shares.
The classification of financial liabilities under IFRS 9 is unchanged with respect to the previous requirements under IAS 32.
– Derivatives are classified and measured at FVPL.
– All other financial liabilities are classified and measured at amortised cost.
Financial instruments – Impairment of financial assets and contract assets
IFRS 9 codifies the basis for the accounting of expected credit losses (ECLs) on financial assets and contract assets resulting from
transactions within the scope of IFRS 15. The Group has adopted the simplified approach to provide for ECLs, measuring the loss
allowance at a probability weighted amount that considers reasonable and supportable information about past events, current conditions
and forecasts of future economic conditions of the customers. The ECLs are updated at each reporting date to reflect changes in credit
risk since initial recognition. ECLs are calculated for all financial assets in scope, regardless of whether or not they are overdue or not.
On adoption of IFRS 9 on 1 January 2018, additional ECLs of £17m were recognised. Since adoption, there have been no material changes
in estimates and assumptions that have led to a significant change in the ECLs allowance.
Financial instruments – Hedge accounting
Forward foreign exchange contracts and commodity swaps (derivative financial instruments) are held to manage the cash flow exposures of
forecast transactions denominated in foreign currencies or in commodities respectively. In general, the Group has chosen to not apply hedge
accounting in respect of these exposures. Prior to its acquisition in 2017, ITP Aero adopted hedge accounting for its equivalent exposures.
It has continued to do so, although the value of the related derivatives is not significant, relative to those held by the rest of the Group.
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 of fixed and floating
rate borrowings and are designated as fair value or cash flow hedges respectively.
Derivative financial instruments qualify for hedge accounting when: (i) there is a formal designation and documentation at inception of the
hedge of the hedging relationship and the Group’s risk management objective and strategy for undertaking the hedge; and (ii) the hedge
is expected to be effective.
Changes in the fair values of derivatives that are designated as fair value hedges are recognised directly in the income statement. The fair
value changes of effective cash flow hedges derivatives are recognised in OCI subsequently recycled in the income statement to match
the recognition of the hedged item. Any ineffectiveness in the hedging relationships is included in the income statement.
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 OCI is retained until the forecast transaction occurs. If a hedged transaction is no longer expected to occur, the
net cumulative gain or loss is recycled in 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 in the OCI. 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.
All existing effective hedging relationships continue to qualify for hedge accounting under IFRS 9.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
119
1 Accounting policies continued
Business combinations and goodwill
Key judgement – Identification of acquired assets and liabilities
In allocating the purchase price to the acquired assets and liabilities, such as technology, patents and licences, customer
relationships, trademarks and in-process development, judgement is required. The assessments based on the Group’s industry
experience and the advice of third party valuers.
Key estimate – Estimates to allocate purchase price
On the acquisition of a business, fair values are attributed to the identifiable assets and liabilities of the acquired business. This requires
estimates of future trading and cash flows of the acquired business. The Group will generally engage an independent valuer to advise
on the determination of these fair values.
The fair values attributed to the identifiable assets and liabilities of ITP Aero in 2017 were provisional. In 2018, these have been finalised
with the changes shown in note 25.
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.
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.
Certification costs
Costs incurred in respect of meeting regulatory certification requirements for new Civil Aerospace aero engine/aircraft combinations
including payments made to airframe manufacturers for this are recognised as intangible assets to the extent that they can be recovered
out of future sales. They are charged to the income statement over the programme life on a 15-year straight-line basis pro rata over the
estimated number of units produced.
Research and development
Key judgement – Determination of the criteria for starting, and subsequently ceasing, capitalisation
IAS 38 requires that internally generated development costs should only be capitalised if strict criteria are met, in particular relating
to technical feasibility and generation of future economic benefits. The Group incurs significant research and development
expenditure in respect of various development programmes, most notably in the Civil Aerospace business. Determining when
capitalisation should commence and cease is a critical judgement, as is the determination of when subsequent expenditure on the
programme assets should be capitalised.
Within the Group there is an established Product Introduction and Lifecycle Management process (PILM) in place. This is a gated
process which assesses both the technical feasibility and commercial viability of programmes. A multi-functional team is involved in
the assessment ensuring the technical and operational aspects of the programme have been assessed, together with the financial
assessment. Until the programme has obtained sign off on the criteria set out below, all expenditure is expensed as incurred.
Subsequent expenditure after entry-into-service which enhances the performance of the engine and the economic benefits to the
Group is capitalised. This expenditure is referred to as enhanced performance and is governed by the PILM process referred to
above. All other development costs are expensed as incurred.
Key judgement – Determination of the basis for amortising capitalised development costs
The economic benefits of the development costs are primarily those cash inflows arising from long-term service agreements, which
are expected to be relatively consistent for each engine. Consequently, the development costs associated with engine are amortised
on a straight-line basis, over a 15-year period from its delivery. The period of 15 years is an estimate of the period of operation of the
engine by its initial operator.
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 (which predominantly relates to Civil
Aerospace engine programmes) is recognised as an internally generated intangible asset (programme asset) only if it meets strict criteria,
relating in particular to technical feasibility and generation of future economic benefits.
FINANCIAL STATEMENTS 120
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
1 Accounting policies continued
More specifically, development costs are capitalised from the point at which the following conditions have been met:
– the technical feasibility of completing the programme and the intention and ability (availability of technical, financial and other
resources) to complete the programme asset and use or sell it;
– the probability that future economic benefits will flow from the programme asset; and
– the ability to measure reliably the expenditure attributable to the programme asset during its development.
Capitalisation continues until the point at which the programme asset meets its originally contracted technical specification (defined
internally as the point at which the asset is capable of operating in the manner intended by management). Previously, until 30 June 2017,
development costs were capitalised from engine certification until entry-into-service. The impact of this change on the 2018 results was an
increase in the amount capitalised of £323m (2017: £127m).
Subsequent expenditure is capitalised where it enhances the functionality of the programme asset and demonstrably generates an
enhanced economic benefit to the Group. All other subsequent expenditure on programme assets is expensed as incurred.
Development expenditure capitalised is amortised on a straight-line basis. In accordance with IAS 38, the basis on which programme assets
are amortised is assessed annually. At the end of 2017, the basis was amended to amortise programme assets on a 15-year straight-line basis
pro rata over the estimated number of units produced. This basis has been applied prospectively from 1 January 2018; the impact in the
year is not significant.
Software
Software that is not specific to an item of property, plant and equipment is classified as an intangible asset, recognised at its acquisition
cost and amortised on a straight-line basis over its useful economic life, up to a maximum of five years. The cost of internally developed
software includes direct labour and an appropriate proportion of overheads.
Other intangible assets
These principally include intangible assets arising on acquisition of businesses, such as technology, patents and licences which are
amortised on a straight-line basis over a maximum of 15 years and trademarks which are not amortised.
Property, plant and equipment
Property, plant and equipment are stated at acquisition cost less accumulated depreciation and any provision for impairment in value. The
cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of overheads and, where
appropriate, interest. Assets held that are funded by a customer (in particular in Defence) are not recognised.
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 recorded on assets in the course of construction. Estimated useful lives are reassessed
annually and are as follows:
– Land and buildings, as advised by the Group’s professional advisers:
– freehold buildings – five to 45 years (average 25 years);
– leasehold buildings – lower of adviser’s estimates or period of lease; and
– 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 14 years).
Leases
Where the Group has substantially all the risks and rewards of ownership of an asset subject to a lease, the lease is treated as a finance
lease. Assets held under finance leases are recognised as assets of the Group at their fair value at the inception of the lease. The
corresponding liability to the lessor is included in borrowings. Lease payments are apportioned between interest expense and a reduction
of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Other leases are treated as
operating leases, with payments and receipts taken to the income statement on a straight-line basis over the life of the lease.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
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1 Accounting policies continued
Impairment of non-current assets
Key judgement – Determination of cash-generating units for assessing impairment of goodwill
If it is not possible to assess the recoverable amount of a non-current asset individually (most significantly for goodwill), its
recoverable amount is assessed by reference to the cash-generating unit to which the asset belongs. For the purposes of goodwill,
the Group considers the cash-generating units to be Rolls-Royce Power Systems AG, Rolls-Royce Deutschland Ltd & Co KG and the
Commercial Marine business. Where the Group is reorganised, goodwill is re-allocated to cash-generating units based on where
the goodwill originated.
Key estimate – Estimates of cash flow forecasts and discount rates to assess the value in use
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 2018: £1,045m, 31 December 2017: £1,545m), arising on the
consolidation of acquired businesses, is impaired is dependent on the present value of the future cash flows expected to be
generated by the relevant business and the discount rate used to calculate a present value.
– The assessment as to whether there are any indications of impairment of development expenditure, certification costs, and
customer relationships recognised as intangible assets (carrying values at 31 December 2018: £3,427m, 31 December 2017: £3,168m)
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 typically reduces as programmes become more established.
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 is recognised as an expense. The recoverable amount is the higher of value in use or
fair value less costs to dispose, 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. Cost comprises direct materials and, where
applicable, direct labour costs and those direct and indirect 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. Where the Group operates
pooled banking arrangements across multiple accounts, these are presented on a net basis when it has both a legal right and intention to
settle the balances on a net basis.
Provisions
Key judgement – Assessment of satisfying the criteria for the recognition of a provision, particularly in respect of restructuring
Judgement is required to determine whether a valid expectation has been created on those affected by restructuring.
Key estimate – Estimates of expenditure required to settle the obligation
The Group measures provisions (carrying value at 31 December 2018: £1,835m, 31 December 2017: £943m) 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. Where onerous contracts are being assessed, this will involve similar estimates to those
described on page 115 under ‘Estimates of future revenues and costs of long-term contractual arrangements’.
FINANCIAL STATEMENTS 122
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
1 Accounting policies continued
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 and are discounted to present value where the effect is material.
The principal provisions are recognised as follows:
– warranties and guarantees – based on an assessment of future claims with reference to past experience and recognised at the earlier
of when the underlying products and services are sold and when the likelihood of a future cost is identified;
– contract loss – when the direct costs to fulfil a contract are assessed as being greater than the expected revenue;
– restructuring – when the Group has approved a detailed and formal restructuring plan, and the restructuring has either commenced
or has been publicly announced; and
– Trent 1000 in-service issues – when wastage costs are identified as described on page 115.
Post-retirement benefits
Key estimate – Estimates of market value of scheme assets without an observable market value and assumptions for valuing the
defined benefit obligation
The Group’s defined benefit pension schemes and similar arrangements are assessed annually in accordance with IAS 19. The
valuation, which is based on assumptions determined with independent actuarial advice, resulted in a net surplus of £641m before
deferred taxation being recognised on the balance sheet at 31 December 2018 (31 December 2017: £738m). The size of the net
surplus/deficit is sensitive to: (i) the market value of the assets held by the schemes, some of which do not have observable market
values and which are estimated based on third party advice; and (ii) 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 and sensitivities are included in note 19.
Pensions and similar benefits (principally healthcare) are accounted for under IAS 19.
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.
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; and
– financing costs are recognised in the periods in which they arise.
Actuarial gains and losses are recognised immediately in OCI.
In 2018, following clarification provided by the High Court judgement on the Lloyds Banking Group on 26 October 2018, in the UK, the
Group has recognised the estimated impact of the obligation to equalise pensions for men and women as a past-service cost – see note 19.
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
long-term incentive plan (LTIP).
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 IFRS 9 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 155, the Directors consider the
likelihood of crystallisation in assessing whether provision is required for any contingent liabilities.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
123
1 Accounting policies continued
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.
Presentation of underlying results
Underlying results are presented to reflect the economic impact of the Group’s foreign exchange risk management activities and to adjust
for exceptional items. Further details are given in note 2.
Revisions to IFRS not applicable in 2018
Standards and interpretations issued by the IASB are only applicable if endorsed by the EU. Other than IFRS 16 Leases described below, the
Group does not consider that any standards, amendments or interpretations issued by the IASB, but not yet applicable will have a significant
impact on the Consolidated Financial Statements.
IFRS 16 Leases
The new lease accounting standard IFRS 16 is effective for the year beginning 1 January 2019. It requires all leases to be recognised on the
balance sheet with a right-of-use asset capitalised and depreciated over the estimated lease term together with a corresponding liability
that will reduce over the same period with an appropriate interest charge recognised. IAS 17 Leases only requires leases categorised as
finance leases to be recognised on the balance sheet.
At 31 December 2018, the Group held operating leases with a future obligation of £2.3bn (excluding the disposal group held for sale)
on a non-discounted basis as disclosed in note 22. The impact of IFRS 16 will be as follows.
Lease liability
A lease liability of £2.1bn will be recognised, being the present value of the future payments, using the Group’s incremental borrowing rate
applicable to the currency and term of each lease. This is incremental to the existing finance lease liabilities of £0.2bn, resulting in a total
liability of £2.3bn. The most significant lease liabilities relate to aircraft engines (£1.7bn) and property (£0.5bn).
The liability relating to operating leases is lower than the IAS 17 future lease obligation due to the discounting of the future payments.
Existing balance sheet liabilities for leased aero-engine residual value guarantees will be included in the lease liability classification.
Where leases are held in non-sterling currencies, the spot exchange rates on 1 January 2019 have been used to value them. Lease liabilities
will be revalued to spot exchange rates at each future balance sheet date. The most significant exposure will be to changes in the US dollar
where a movement of ten cents would have an impact of around £100m on the Group’s lease liability.
Right-of-use asset
A right-of-use asset of £1.8bn will be recognised in addition to the existing £0.2bn of property, plant and equipment under finance lease
contracts, resulting in a total asset of £2.0bn. The right-of-use asset has been measured either: as if the standard had applied since
commencement of the lease (for a small number of high value property leases); or at an amount equal to the lease liability on transition.
The opening right-of-use asset is lower than the opening lease liability due to a combination of:
– the recognition of high value property leases from the commencement of the lease, resulting in: (i) the amortisation of the right-of-use
asset being greater than the reduction in the lease liability over the same period; and (ii) where the lease liability is not in the functional
currency of the relevant entity it will be revalued for changes in foreign exchange rates, while the right-of use-asset will not be revalued; and
– the right-of-use asset has been reduced to reflect charges previously recognised in the income statement when aero-engine residual
value liabilities and an onerous lease provision were established.
Based on the current portfolio of lease contracts above, the Group’s full-year expense under IFRS 16 in 2019 will be around £0.3bn
depreciation expense within operating profit and a £0.1bn finance charge. The total pre-tax charge to the income statement
will be broadly consistent with the previous accounting standard.
Transition
The Group is applying the modified retrospective transition method under which comparative information will not be restated and has
elected to use the following practical expedients permitted by the standard:
– on initial application, IFRS 16 will be only been applied to contracts that were previously classified as leases;
– lease contracts with a duration of less than 12 months will continue to be expensed to the income statement on a straight-line basis over
the lease term; and
– the lease term has been determined with the use of hindsight where the contract contains options to extend the lease.
The cumulative impact of less than £0.1bn resulting from the adoption of the new standard will be recognised in equity as at 1 January 2019.
FINANCIAL STATEMENTS 124
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
2 Segmental analysis
The analysis by divisions (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 (who act as the Chief Operating Decision Maker as defined by IFRS 8). Our
four divisions are set out below and referred to collectively as the core businesses.
Civil Aerospace – development, manufacture, marketing and sales of commercial aero engines and aftermarket services.
Power Systems – development, manufacture, marketing and sales of reciprocating engines, power systems and nuclear systems for civil
power generation.
Defence
ITP Aero
– development, manufacture, marketing and sales of military aero engines, naval engines, submarines and aftermarket services.
– design, research and development, manufacture and casting, assembly and test of aeronautical engines and gas turbines
(acquired on 19 December 2017, with no significant trading from acquisition date to 31 December 2017).
In 2017, the Group had five operating segments; Civil Aerospace, Defence, Power Systems, Marine and Nuclear. Following the decision
to simplify the Group, announced on 17 January 2018, the 2017 segmental analysis has been presented on a consistent basis with the new
structure.
Non-core businesses are shown separately and include the results of L’Orange until the date of its disposal on 1 June 2018, Commercial
Marine (held for sale from 30 June 2018) and other smaller businesses including former Energy businesses not included in the disposal to
Siemens in 2014 (Retained Energy).
Underlying results
We present the financial performance of our businesses in accordance with IFRS 8 and consistently with the basis on which performance
is communicated to the Board each month. Underlying results are presented to reflect the economic impact of the Group’s foreign
exchange risk management activities. Trading transactions are valued at the exchange rates achieved on the derivative contracts settled
to cover the net exposures.
Underlying performance excludes the following:
– the effect of acquisition accounting and business disposals;
– the impairment of goodwill and other assets arising on acquisition; and
– exceptional items.
We classify items as exceptional where the Directors believe that presentation of our results in this way is more relevant to an
understanding of our financial performance, as exceptional items are identified by virtue of their size, nature or incidence.
In determining whether an event or transaction is exceptional, management considers quantitative as well as qualitative factors such as the
frequency or predictability of occurrence. Examples of exceptional items include one-off costs and charges in respect of Civil Aerospace
programmes, costs of restructuring programmes and one-off past-service charges and credits on our post-retirement schemes.
Exceptional items are not allocated to segments and may not be comparable to similarly titled measures used by other companies.
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 are also excluded.
See page 129 for the reconciliation between underlying performance and reported performance.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
125
2 Segmental analysis continued
The following analysis sets out the results of the core businesses on the basis described on the previous page and also includes a
reconciliation of the underlying results to those reported in the consolidated income statement.
Civil
Aerospace
£m
Power
Systems
£m
Defence
£m
ITP Aero
£m
Corporate
£m
Inter-
segment
£m
Core
businesses
£m
Year ended 31 December 2018
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 1
Underlying operating (loss)/profit
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 2017 restated *
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 1
Underlying operating (loss)/profit
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
3,119
4,259
7,378
493
(336)
(8)
(332)
21
(162)
14,272
380
(21,310)
(6,658)
2,322
1,162
3,484
882
(377)
(1)
(188)
1
317
3,745
14
(1,668)
2,091
1,452
1,672
3,124
690
(170)
(3)
(100)
10
427
666
113
779
156
(57)
(2)
(30)
–
67
2,612
16
(2,924)
(296)
2,210
–
(1,168)
1,042
1,283
500
120
238
151
92
74
87
2,890
3,708
6,598
473
(362)
(11)
(454)
11
(343)
13,038
357
(16,598)
(3,203)
1,956
1,052
3,008
797
(350)
(1)
(181)
(4)
261
3,758
15
(1,388)
2,385
1,398
1,782
3,180
728
(188)
(4)
(89)
7
454
–
–
–
–
–
–
–
–
–
2,159
2
(2,560)
(399)
2,190
–
(1,538)
652
1,156
438
124
227
163
85
–
–
–
–
–
–
(51)
–
–
–
(51)
–
–
–
–
–
–
–
–
–
–
(55)
–
–
–
(55)
–
–
–
–
–
–
(375)
(54)
(429)
35
–
–
–
–
35
7,184
7,152
14,336
2,256
(991)
(14)
(650)
32
633
(1,621)
–
1,743
122
21,218
410
(25,327)
(3,699)
–
–
–
–
–
–
–
–
–
–
–
1,628
917
6,244
6,542
12,786
1,998
(955)
(16)
(724)
14
317
(1,557)
–
1,799
242
19,588
374
(20,285)
(323)
–
–
1,443
750
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 27 for more details.
1 The elimination of transactions with joint ventures has been included in the results of joint ventures and associates, previously this was included within cost of sales – see note 11.
FINANCIAL STATEMENTS 126
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
2 Segmental analysis continued
Reconciliation to reported results
Year ended 31 December 2018
Revenue from sale of original equipment
Revenue from aftermarket services
Total revenue
Gross profit
Commercial and administrative costs
Restructuring
Research and development costs
Share of results of joint ventures and associates 2
Operating profit/(loss)
Gain arising on the disposal of L’Orange
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 2017 restated *
Revenue from sale of original equipment
Revenue from aftermarket services
Total revenue
Gross profit
Commercial and administrative costs
Restructuring
Research and development costs
Share of results of joint ventures and associates 2
Operating profit/(loss)
Gain arising on the acquisition of ITP Aero
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
Core
businesses
£m
Non-core
businesses 1
£m
Total
underlying
£m
Underlying
adjustments
and foreign
exchange
£m
Group at
actual
exchange
rates
£m
7,184
7,152
14,336
2,256
(991)
(14)
(650)
32
633
–
633
(150)
483
(152)
331
6,244
6,542
12,786
1,998
(955)
(16)
(724)
14
317
–
317
(106)
211
(131)
80
346
385
731
194
(170)
(2)
(39)
–
(17)
–
(17)
–
(17)
(9)
(26)
504
381
885
248
(195)
(2)
(52)
(10)
(11)
–
(11)
(1)
(12)
(24)
(36)
7,530
7,537
15,067
2,450
(1,161)
(16)
(689)
32
616
–
616
(150)
466
(161)
305
297
8
6,748
6,923
13,671
2,246
(1,150)
(18)
(776)
4
306
–
306
(107)
199
(155)
44
43
1
285
377
662
(1,252)
(434)
16
(79)
(28)
(1,777)
358
(1,419)
(1,994)
(3,413)
715
(2,698)
(2,698)
–
520
556
1,076
176
(72)
18
(67)
5
60
785
845
2,854
3,699
(360)
3,339
3,339
–
7,815
7,914
15,729
1,198
(1,595)
–
(768)
4
(1,161)
358
(803)
(2,144)
(2,947)
554
(2,393)
(2,401)
8
7,268
7,479
14,747
2,422
(1,222)
–
(843)
9
366
785
1,151
2,747
3,898
(515)
3,383
3,382
1
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 27 for more details.
1 Includes Commercial Marine (held for sale from 30 June 2018), L’Orange sold on 1 June 2018 and other smaller non-core businesses.
2 The elimination of transactions with joint ventures has been included in the results of joint ventures and associates, previously this was included within cost of sales – see note 11.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
127
2 Segmental analysis continued
Disaggregation of revenue from contracts with customers
Analysis by type and basis of recognition
Year ended 31 December 2018
Original equipment recognised at a point in time
Original equipment recognised over time
Aftermarket services recognised at a point in time
Aftermarket services recognised over time
Total underlying customer contract revenue 1
Other underlying revenue
Total underlying revenue
Year ended 31 December 2017
Original equipment recognised at a point in time
Original equipment recognised over time
Aftermarket services recognised at a point in time
Aftermarket services recognised over time
Total underlying customer contract revenue 1
Other underlying revenue
Total underlying revenue
Civil
Aerospace
£m
3,119
–
1,575
2,630
7,324
54
7,378
2,890
–
1,329
2,343
6,562
36
6,598
Power
Systems
£m
2,258
64
1,019
143
3,484
–
3,484
1,931
25
929
123
3,008
–
3,008
Defence
£m
694
758
718
954
3,124
–
3,124
682
716
829
953
3,180
–
3,180
ITP Aero
£m
666
–
113
–
779
–
779
Corporate
£m
–
–
–
–
–
–
–
Inter-
segment
£m
(375)
–
21
(75)
(429)
–
(429)
Core
businesses
£m
6,362
822
3,446
3,652
14,282
54
14,336
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5,503
741
3,087
3,419
12,750
36
12,786
1 Includes £(196)m (2017: £(14)m) of revenue recognised in the year relating to performance obligations satisfied in previous years.
Year ended 31 December 2018
Original equipment recognised at a point in time
Original equipment recognised over time
Aftermarket services recognised at a point in time
Aftermarket services recognised over time
Total customer contract revenue
Other revenue
Total revenue
Year ended 31 December 2017
Original equipment recognised at a point in time
Original equipment recognised over time
Aftermarket services recognised at a point in time
Aftermarket services recognised over time
Total customer contract revenue
Other revenue
Total revenue
Core
businesses
£m
Non-core
businesses 1
£m
Total
underlying
£m
Underlying
adjustments
and foreign
exchange
£m
Group at
actual
exchange
rates
£m
6,362
822
3,446
3,652
14,282
54
14,336
5,503
741
3,087
3,419
12,750
36
12,786
63
283
365
20
731
–
731
106
398
373
8
885
–
885
6,425
1,105
3,811
3,672
15,013
54
15,067
5,609
1,139
3,460
3,427
13,635
36
13,671
283
2
148
229
662
–
662
520
–
165
391
1,076
–
1,076
6,708
1,107
3,959
3,901
15,675
54
15,729
6,129
1,139
3,625
3,818
14,711
36
14,747
1 Includes Commercial Marine (held for sale from 30 June 2018), L’Orange sold on 1 June 2018 and other smaller non-core businesses.
FINANCIAL STATEMENTS 128
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
2 Segmental analysis continued
Analysis by geographical destination
The Group’s revenue by destination of the ultimate operator 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
2018
£m
1,505
1,177
675
251
343
246
304
79
815
5,395
5,041
366
5,407
351
282
407
689
1,483
452
365
334
111
82
588
3,415
152
229
91
15,729
2017 *
£m
1,709
915
787
379
256
194
283
56
664
5,243
4,279
313
4,592
173
285
734
1,019
1,534
449
216
243
89
110
530
3,171
235
205
109
14,747
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 27 for more details.
Order backlog
Contracted consideration that is expected to be recognised as revenue when performance obligations are satisfied in the future (referred
to as order backlog) is as follows:
Civil Aerospace
Power Systems
Defence
ITP Aero
Within
five years
£bn
22.1
2.9
6.3
0.8
32.1
2018
After
five years
£bn
30.2
0.2
0.5
0.1
31.0
Total
£bn
52.3
3.1
6.8
0.9
63.1
The contracted consideration disclosed above meets the IFRS 15 definition of unrecognised performance obligations. Specifically, the
parties to these contracts have approved the contract and our customers do not have a unilateral enforceable right to terminate the
contract without compensation. We exclude Civil Aerospace OE orders (for deliveries beyond the next 7-12 months) that our customers
have placed where they retain a right to cancel. Our expectation based on historical experience is that these orders will
be fulfilled. Within the 0–5 years category, contracted revenue in: Defence will largely be recognised in the next three years; Power
Systems will be recognised over the next two years as it is a short-cycle business; and ITP Aero (where internal Group revenues have been
eliminated) evenly spread over the next five years.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
129
2 Segmental analysis continued
Underlying adjustments
Underlying performance
Revenue recognised at exchange rate on date of
transaction
Realised losses on settled derivative contracts 1
Net unrealised fair value changes to derivative contracts 2
Effect of currency on contract accounting
Revaluation of trading assets and liabilities
Net post-retirement scheme financing
Financial RRSAs – foreign exchange differences and
changes in forecast payments
Gain arising on the acquisition of ITP Aero
Effect of acquisition accounting
Gain arising on the disposal of L’Orange 3
Impairment of goodwill 4
Trent 1000 exceptional charges 5
Trent 900 exceptional charges 5
Exceptional restructuring charge 6
Pension equalisation 7
Other
Total underlying adjustments
Reported per consolidated income statement
2018
2017 Restated *
Revenue
£m
15,067
Profit before
financing
£m
616
Net
financing
£m
(150)
Revenue
£m
13,671
Profit before
financing
£m
306
Net
financing
£m
(107)
781
–
–
–
–
–
–
–
–
–
–
–
(119)
–
–
–
662
15,729
–
219
(1)
(265)
23
–
–
–
(175)
358
(155)
(790)
(186)
(317)
(121)
(9)
(1,419)
(803)
–
465
(2,144)
–
(302)
23
(2)
–
(8)
–
–
(15)
–
–
–
(11)
(1,994)
(2,144)
1,076
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,076
14,747
–
453
24
(153)
(6)
–
–
785
(129)
–
–
–
–
(104)
–
(25)
845
1,151
–
195
2,648
–
1
1
12
–
–
–
–
–
–
–
–
(3)
2,854
2,747
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 27 for more details.
1
The adjustments for realised (gains)/losses on settled derivative contracts include adjustments to reflect the losses in the same period as the related trading cash flows.
2 The adjustments for unrealised fair value changes to derivative contracts include those included in equity accounted joint ventures and exclude those for which the related trading
contracts have been cancelled when the fair value changes are recognised immediately in underlying profit.
3 Gain on the disposal of L’Orange business to Woodward Inc. on 1 June 2018 – see note 25.
4 Relates to the impairment of Commercial Marine goodwill given the planned disposal in 2019 – see note 9.
The table below summarises the exceptional items recorded in 2018 and 2017.
Programme exceptional items 5
Related foreign exchange impact 5
Restructuring charge 6
Pension equalisation charge 7
Year to 31 December
2018
£m
976
147
317
121
1,561
2017
£m
–
–
104
–
104
5 Included within programme exceptional items is £790m (£905m at prevailing exchange rates) in respect of the abnormal wastage costs on the Trent 1000. In addition there is an
exceptional item of £186m (£218m at prevailing exchange rates) that relates to the decision by Airbus to cease A380 deliveries in 2021.
6 The Group recorded an exceptional restructuring charge of £317m (2017: £104m) in the year. The costs include: £223m in respect of the Group-wide restructuring programme announced
on 14 June 2018; costs relating to ongoing multi-year significant restructuring programmes including restructuring at Power Systems (RRPS2018) and in respect of Defence, reflecting
actions to remove cost and improve operational efficiency.
7 The cost of equalisation of pension benefits between men and women - see note 19.
Appropriate rates of tax have been applied to adjustments made to profit before tax in the table above. The total underlying adjustments
to profit before tax in 2018 are a credit of £715m (2017: charge of £360m). The credit in 2018 was £672m plus an additional £43m relating to
the reduction in the Spanish Basque region tax rate. The charge in 2017 was £473m plus an additional charge of £50m, relating to the US
Federal tax rate reduction and a credit of £163m, relating to the recognition of advance corporation tax.
FINANCIAL STATEMENTS
130
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
2 Segmental analysis continued
Reconciliation to the balance sheet
Reportable segment assets
Investments – joint ventures and associates
Non-core businesses
Assets held for sale
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
Non-core businesses
Liabilities associated with assets held for sale
Borrowings
Fair value of swaps hedging fixed rate borrowings
Income tax liabilities
Post-retirement scheme deficits
Total liabilities
Net (liabilities)/assets
2018
£m
21,218
412
134
750
4,980
293
2,126
1,944
31,857
(25,327)
(141)
(376)
(4,662)
–
(1,100)
(1,303)
(32,909)
(1,052)
Restated *
2017
£m
19,588
375
1,181
7
2,956
227
1,468
2,125
27,927
(20,285)
(554)
–
(3,488)
–
(1,280)
(1,387)
(26,994)
933
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 27 for more details.
The carrying amounts of the Group’s non-current assets including investments but 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
Spain
United States
Nordic countries
Other
3 Research and development
Expenditure in the year
Capitalised as intangible assets
Amortisation and impairment of capitalised costs 1
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
£m
4,626
2,604
1,380
1,338
71
639
£m
4,085
2,680
1,387
1,258
502
712
10,658
10,624
2018
£m
(1,145)
498
(121)
(768)
79
(689)
Restated *
2017
£m
(1,041)
347
(149)
(843)
67
(776)
* The 2017 figures have been restated for the revised policy for recognition of entry fees received from risk and revenue sharing arrangements as a result of the adoption of IFRS 15.
1
See note 27 for more details.
From 1 January 2018, the Group adopted the approach of amortising programme assets on a 15-year straight-line basis pro rata over the estimated number of units produced.
See note 1 for more details.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
131
4 Net financing
Interest receivable
Net fair value gains on foreign currency contracts
Financial RRSAs – foreign exchange differences and changes
in forecast payments
Net fair value gains on commodity contracts
Financing on post-retirement scheme surpluses
Net foreign exchange gains
Financing income
Interest payable
Net fair value losses on foreign currency contracts
Financial RRSAs – foreign exchange differences and changes
in forecast payments
Financial charge relating to financial RRSAs
Net fair value losses on commodity contracts
Financing on post-retirement scheme deficits
Other financing charges
Financing costs
Net financing
Analysed as:
Net interest payable
Net fair value (losses)/gains on derivative contracts
Net post-retirement scheme financing
Net other financing
Net financing
Notes
17
17
17
19
17
17
17
19
2018
2017 Restated *
Per
consolidated
income
statement
£m
27
–
Per
consolidated
income
statement
£m
11
2,611
Underlying
financing 1
£m
27
–
Underlying
financing 1
£m
11
–
25
–
56
163
271
(107)
(2,122)
(27)
(8)
(22)
(33)
(96)
(2,415)
–
–
–
–
27
(99)
–
–
(8)
–
–
(70)
(177)
17
37
39
196
2,911
(67)
–
(5)
(5)
–
(38)
(49)
(164)
–
–
–
–
11
(64)
–
–
(5)
–
–
(49)
(118)
(2,144)
(150)
2,747
(107)
(80)
(2,144)
23
57
(2,144)
(72)
–
–
(78)
(150)
(56)
2,648
1
154
2,747
(53)
–
–
(54)
(107)
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 27 for more details.
1
See note 2 for definition of underlying results.
5 Taxation
Current tax charge for the year
Less double tax relief
Adjustments in respect of prior years
Current tax
Deferred tax (credit)/charge for the year
Adjustments in respect of prior years
Recognition of advance corporation tax
Deferred tax charge resulting from reduction
in tax rates
Deferred tax
Recognised in the income statement
UK
Overseas
Total
Restated *
Restated *
Restated *
2018
£m
13
–
13
(13)
–
(630)
22
–
–
(608)
(608)
2017
£m
33
–
33
–
33
366
(2)
(163)
–
201
234
2018
£m
167
–
167
15
182
(43)
(42)
–
(43)
(128)
2017
£m
244
–
244
(10)
234
(16)
13
–
50
47
2018
£m
180
–
180
2
182
(673)
(20)
–
(43)
(736)
54
281
(554)
2017
£m
277
–
277
(10)
267
350
11
(163)
50
248
515
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 27 for more details.
FINANCIAL STATEMENTS 132
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
5 Taxation continued
Other tax (charges)/credits
Deferred tax:
Movement in post-retirement schemes
Share-based payments – direct to equity
Cash flow hedge
Net investment hedge
Other tax (charges)/credits
Tax reconciliation
OCI
Equity
Items that will not
be reclassified
Items that may
be reclassified
2018
£m
(2)
–
–
–
(2)
2017
£m
(307)
–
–
–
(307)
2018
£m
2017
£m
2018
£m
2017
£m
–
–
5
–
5
–
–
–
1
1
–
2
–
–
2
–
3
–
–
3
(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 19% (2017: 19.25%)
UK tax rate differential 1
Overseas rate differences 2
Impairment of goodwill
Exempt gain on the disposal of L’Orange
R&D credits
Gain arising on the acquisition of ITP Aero
Other permanent differences
Tax losses in year not recognised in deferred tax
Adjustments in respect of prior years
Recognition of advance corporation tax
Reduction in closing deferred taxes resulting from decrease in tax rates 3
Underlying items (note 2)
Non-underlying items
2018
£m
(2,947)
(114)
(3,061)
Restated *
2017
£m
3,898
(131)
3,767
(582)
51
91
29
(117)
(23)
–
36
22
(18)
–
(43)
(554)
161
(715)
(554)
725
(47)
89
–
–
(5)
(151)
(8)
24
1
(163)
50
515
155
360
515
The UK tax rate differential arises on the difference between the deferred tax rate and the UK statutory tax rate.
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 27 for more details.
1
2 Overseas rate differences mainly relate to tax on profits in countries, such as the US and Germany, which have higher tax rates than the UK.
3 The 2018 reduction in corporation tax rates relates to the reduction in the Spanish Basque region tax rate. The 2017 comparative relates to the reduction in the Federal tax rate in the US.
Deferred taxation assets and liabilities
At 1 January
Impact of adopting IFRS 9
Amount credited/(charged) to income statement
Amount charged to other comprehensive income
Amount credited to cash flow hedge reserve
Amount credited to equity
On disposal/acquisition of businesses
Transferred to assets held for sale
Exchange differences
At 31 December
Deferred tax assets
Deferred tax liabilities
2018
£m
380
2
736
(2)
5
2
6
(4)
5
1,130
2,092
(962)
1,130
Restated *
2017
£m
1,072
–
(248)
(307)
–
3
(118)
–
(22)
380
1,451
(1,071)
380
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 27 for more details.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
133
5 Taxation continued
The analysis of the deferred tax position is as follows:
2018
Intangible assets
Property, plant and equipment
Other temporary differences
Net contract liabilities
Pensions and other post-retirement
scheme benefits
Foreign exchange and commodity
financial assets and liabilities
Losses
R&D credit
Advance corporation tax
At
1 January
£m
Impact of
adopting
IFRS 9
£m
At
1 January
restated
£m
Recognised
in income
statement
£m
Recognised
in OCI
£m
Recognised
in equity
£m
Merger and
acquisition
related
activity 1
£m
Exchange
differences
£m
At 31
December
£m
(419)
(158)
258
63
(482)
381
306
268
163
380
–
–
2
–
–
–
–
–
–
2
(419)
(158)
260
63
(203)
77
(106)
(6)
(482)
19
381
306
268
163
382
244
704
7
–
736
–
–
5
–
(2)
–
–
–
–
3
–
–
2
–
–
–
–
–
–
2
5
1
(1)
–
(3)
–
–
–
–
2
(3)
(5)
4
–
7
–
–
2
–
5
(620)
(85)
164
57
(461)
625
1,010
277
163
1,130
At
1 January
£m
Impact of
adopting
IFRS 15
£m
At
1 January
restated
£m
Recognised
in income
statement
£m
Recognised
in OCI
£m
Recognised
in equity
£m
Merger and
acquisition
related
activity 1
£m
Exchange
differences
£m
At 31
December
£m
2017 restated *
Intangible assets
Property, plant and equipment
Other temporary differences
Net contract liabilities
Pensions and other post-retirement
scheme benefits
Foreign exchange and commodity
financial assets and liabilities
Losses
R&D credit
Advance corporation tax
(389)
(191)
28
(512)
(131)
926
339
30
–
100
170
(15)
299
518
(219)
(206)
327
6
167
95
(74)
57
–
–
–
–
–
(131)
(69)
(307)
–
–
–
–
972
926
339
30
–
1,072
(545)
(50)
8
163
(248)
–
–
–
–
(307)
–
–
3
–
–
–
–
–
–
3
(319)
(29)
(12)
–
(48)
(18)
14
–
(419)
(158)
258
63
–
25
(482)
–
12
230
–
(118)
–
5
–
–
(22)
381
306
268
163
380
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 27 for more details.
1 Merger and acquisition activity includes Commercial Marine deferred tax transferred to assets held for sale, the disposal of L’Orange and the 2017 comparative includes the acquisition
of ITP Aero.
Unrecognised deferred tax assets
Advance corporation tax
Losses and other unrecognised deferred tax assets
Deferred tax not recognised on unused tax losses and other items on the basis that future economic
benefit is uncertain
2018
£m
19
111
130
Restated *
2017
£m
19
103
122
* Restated for ITP Aero.
Deferred tax assets include £998m (2017: £285m) relating to tax losses in the UK and £163m (2017: £163m) relating to advance corporation tax
(ACT), as we conclude it is probable that the UK business will generate taxable profits and tax liabilities in the future against which we can
utilise these losses and ACT. They do not time expire.
Most of the tax losses relate to our Civil Aerospace business in the UK which makes initial losses through the investment period of a
programme and margin through its services contracts. The programme lifecycles typically range between 30 and 55 years with more of our
widebody engine programmes forecast at the upper end of that range. In the past few years there have been four new engines that have
entered into service (Trent 1000–TEN, Trent 7000 and Trent XWB-84 and Trent XWB-97), all of which are still in the investment stage.
FINANCIAL STATEMENTS 134
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
5 Taxation continued
The increase in the losses in 2018 is mainly due to the adoption of IFRS 15 (where the most significant impact of adopting the standard was in
our Civil Aerospace business in the UK) together with a number of large one off exceptional profit-impacting items relating to the Trent
1000 and Trent 900 programmes and the impact of the restructuring charge. Details of these are included in note 2. 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.
A recoverability assessment has been undertaken, taking account of deferred tax liabilities against which the reversal can be offset and
using latest UK forecasts, which are mainly driven by the Group’s Civil Aerospace business, to assess the level of future taxable profits.
The recoverability of UK deferred tax assets has been assessed in 2018 on the following basis:
– using the most recent UK profit forecasts prepared by management, which are consistent with past experience and external sources on
market conditions. These forecasts cover the next five years;
– growth rates for the period beyond the forecasts reflecting the markets in which the UK businesses operate and external sources
(circa 2% to 4.4%);
– the long-term profit growth profile of certain of our more recently launched large engine programmes; and
– the term of our large engine programmes which is typically between 30 and 55 years from initial investment to retirement of the fleet,
including the aftermarket revenues earned from airline customers. The assessment takes into account the UK tax laws effective from
April 2017 that in broad terms restrict the offset of the carried forward tax losses to 50% of current year profits.
Based on this, the Group concludes that it is probable that the UK business will generate taxable income and tax liabilities in the future
against which we can use the losses and ACT. Any future changes in tax law or the structure of the Group could have a significant effect on
the use of losses and ACT, including the period over which they can be used. Based on current forecasts and using various scenarios the
losses and ACT will be used in full within the next 20 to 30 years. Whilst there is significant judgement involved in the assessment the range
is well within our expected programme lifecycles. This is an area the Board continuously reassesses.
As announced in the Spanish Basque region tax reform legislation, the corporation tax rate reduced from 28% to 26% with effect from
1 January 2018 and will reduce to 24% with effect from 1 January 2019. The rate reduction to 24% was enacted on 27 March 2018. As this
rate reduction was enacted prior to the year end, the closing deferred tax assets and liabilities of the Spanish ITP Aero companies have
been calculated at this rate. The resulting credit of £43m has been recognised in the income statement.
The Budget 2016 announced that the UK tax rate will reduce to 17% with effect from 1 April 2020. The rate reduction to 17% was
substantively enacted on 6 September 2016. The deferred tax assets and liabilities of UK companies within the group have therefore been
calculated at 17%.
The temporary differences associated with investments in subsidiaries, joint ventures and associates, for which a deferred tax liability has not
been recognised, aggregate to £99m (2017: £188m). 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)
2018
Potentially
dilutive
share options 1
–
−
Basic
(2,401)
1,859
(129.15p)
Diluted
(2,401)
1,859
(129.15p)
Basic
3,382
1,834
184.41p
2017 Restated *
Potentially
dilutive
share options
6
(0.61p)
Diluted
3,382
1,840
183.80p
1 As there is a loss, the effect of the potentially dilutive ordinary shares is anti-dilutive.
The reconciliation between underlying EPS and basic EPS is as follows:
Underlying EPS/Underlying profit attributable to ordinary shareholders
Total underlying adjustments to (loss)/profit before tax (note 2)
Related tax effects
EPS/(Loss)/profit attributable to ordinary shareholders
Diluted underlying EPS
2018
2017 Restated *
Pence
15.98
(183.59)
38.46
(129.15)
15.98
£m
297
(3,413)
715
(2,401)
Pence
2.34
201.70
(19.63)
184.41
2.34
£m
43
3,699
(360)
3,382
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 27 for more details.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
135
7 Auditors’ remuneration
Fees payable to the Company’s auditor for the audit of the Company’s annual Financial Statements 1
Fees payable to the Company’s auditor and its associates for the audit of the Company’s subsidiaries
pursuant to legislation 2
Total fees payable for audit services
Fees payable to the Company’s auditor and its associates for other services:
Audit related assurance services 3
Taxation compliance services
Taxation advisory services
All other services
Total fees payable to the Company’s auditor and its associates 4
Fees payable in respect of the Group’s pension schemes:
Audit
Taxation compliance services
2018
£m
0.4
8.7
9.1
0.8
–
–
0.1
10.0
0.1
–
2017
£m
0.3
7.3
7.6
0.7
0.1
–
1.0
9.4
0.2
–
The Company’s auditor changed in 2018. 2018 fees are those paid to PwC, 2017 fees are those paid to KPMG.
1
2 The level of fees payable to the Company’s auditor 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
auditor 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.
3 This includes £0.5m (2017: £0.3m) for the review of the half-year report.
4 Audit fees for overseas entities are reported at the average exchange rate for the year.
8 Employee information
United Kingdom
Germany
United States
Nordics
Spain
Canada
Rest of world
Average number of employees
Civil Aerospace
Power Systems
Defence
ITP Aero
Corporate 1
Core businesses
Non-core businesses 2
Average number of employees
Wages, salaries and benefits
Social security costs
Share-based payments (note 21)
Pensions and other post-retirement scheme benefits (note 19)
Group employment costs 3
2018
Number
23,400
10,000
6,300
3,000
2,800
1,000
8,000
54,500
25,500
10,500
10,500
3,700
100
50,300
4,200
54,500
£m
3,208
479
35
470
4,192
Restated *
2017
Number
22,500
10,600
6,200
3,000
–
1,000
6,700
50,000
24,300
10,300
10,300
–
200
45,100
4,900
50,000
£m
2,982
413
34
372
3,801
* The segmental employee numbers have been restated to reflect the Group restructuring described in note 2.
1 Corporate consists of 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.
2 Includes Commercial Marine (held for sale from 30 June 2018), L’Orange (sold on 1 June 2018) and Retained Energy.
3 Remuneration of key management personnel is shown in note 24.
FINANCIAL STATEMENTS
136
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
9 Intangible assets
Cost
At 1 January 2017 as
previously reported
Impact of adoption
of IFRS 15 1
Foreign exchange
adjustment 2
At 1 January 2017 restated
Additions
Acquisition of ITP Aero 3
Disposals
Reclassifications
Exchange differences
At 1 January 2018
Additions
Transferred to assets held
for sale 4
Disposal of L’Orange 5
Disposals
Reclassifications
Exchange differences
At 31 December 2018
Accumulated amortisation
and impairment
At 1 January 2017 as
previously reported
Impact of adoption
of IFRS 15 1
At 1 January 2017 restated
Charge for the year 6
Disposals
Exchange differences
At 1 January 2018
Charge for the year 6
Impairment
Transferred to assets held
for sale 4
Disposal of L’Orange 5
Disposals
Reclassifications
Exchange differences
At 31 December 2018
Net book value
At 31 December 2018
At 31 December 2017 restated
At 31 December 2017 as
previously reported
Goodwill
£m
Certification
costs
£m
Development
expenditure
£m
Contractual
aftermarket
rights
£m
Customer
relationships
£m
Software
£m
Other
£m
Total
£m
1,874
1,325
1,944
1,007
540
742
663
8,095
–
(503)
–
(1,007)
–
–
1,874
–
–
–
–
(5)
1,869
–
(666)
(136)
–
5
15
1,087
337
–
337
–
–
(13)
324
–
155
(439)
–
–
5
(3)
42
1,045
1,545
(21)
801
112
4
–
–
–
917
35
–
–
(4)
–
–
948
440
(134)
306
33
–
–
339
35
–
–
–
–
(1)
–
373
575
578
–
1,944
347
162
–
(9)
15
2,459
498
(38)
(48)
(1)
–
13
2,883
888
–
888
149
–
8
1,045
114
7
(29)
(31)
–
–
5
1,111
1,772
1,414
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
433
(433)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
540
–
895
–
–
(3)
1,432
–
(26)
(40)
–
–
18
1,384
209
–
209
51
–
(4)
256
90
–
(21)
(27)
–
–
6
304
1,080
1,176
1,545
1,117
1,450
873
1,247
–
–
742
135
7
(13)
–
(2)
869
110
(6)
–
(16)
3
4
964
414
–
414
81
(6)
(1)
488
103
22
(1)
–
(8)
1
2
607
357
381
380
–
(1,510)
–
663
53
61
–
9
8
794
37
(12)
(11)
–
(3)
6
811
294
–
294
29
–
–
323
39
–
(12)
(8)
–
–
3
345
466
471
(21)
6,564
647
1,129
(13)
–
13
8,340
680
(748)
(235)
(21)
5
56
8,077
3,015
(567)
2,448
343
(6)
(10)
2,775
381
184
(502)
(66)
(8)
5
13
2,782
5,295
5,565
451
7,063
The adoption of IFRS 15 results in the reclassification of participation fees as contract assets and the de-recognition of contractual aftermarket rights (CARs).
1
2 The foreign exchange adjustment relates to the revision of the foreign exchange rate applied to the initial recognition of non-monetary assets and liabilities – see note 27.
3 Changes to the provisional balances presented at 31 December 2017 reflect additional information during 2018 about facts which existed at the date of acquisition, since the
acquisition occurred close to the year end – see note 27.
4 The Commercial Marine business was classified as a ‘held for sale’ disposal group on 30 June 2018 – see note 25.
5 The disposal of the L’Orange business to Woodward Inc. was completed on 1 June 2018 – see note 25.
6 Charged to cost of sales except development costs, which are charged to research and development costs.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
137
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
Rolls-Royce Deutschland Ltd & Co KG
Commercial Marine – arising from the acquisitions of Vinters Limited and
Scandinavian Electric Holding AS 1,2
Other 1
Primary reporting
segment
Power Systems
Civil Aerospace
Non-core
Various
2018
£m
750
246
–
49
1,045
2017
£m
868
244
382
51
1,545
1 Commercial Marine goodwill in 2017 has been restated for the reorganisation of the Marine business following the announcement to simplify the group on 17 January 2018.
2 Commercial Marine goodwill of £382m at 1 January 2018 has been impaired by £155m and the balance of £227m transferred to assets held for sale – see note 25.
Goodwill has been tested for impairment during 2018 on the following basis:
– With the exception of the Commercial Marine business (see below), 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. These forecasts generally cover the next five years.
Growth rates for the period not covered by the forecasts are based on a range of growth rates (1.8-2.5%) 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.
The principal value in use assumptions for goodwill balances considered to be individually significant are:
Commercial Marine
On 6 July 2018, the Group announced the sale of Commercial Marine to KONGSBERG for a cash consideration of approximately £425m.
The disposal is expected to complete in 2019 and the business meets the criteria of IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations that where the carrying value of a disposal group is expected to be recovered through a sale transaction, the
disposal group should be treated as held for sale, with assets and liabilities presented separately on the balance sheet measured at the
lower of carrying value or fair value less costs to dispose. Following reclassification, the non-current assets of Commercial Marine are no
longer amortised.
As a result of the classification of the Commercial Marine business as a disposal group, its carrying value was assessed against the
anticipated proceeds and the disposal costs. An impairment charge of £155m for the related goodwill (with an additional £5m impairment
charge to property, plant and equipment) has been recognised in the income statement and the remaining net balance of £227m
transferred to assets held for sale.
Rolls-Royce Power Systems AG
– trading assumptions (e.g. volume of equipment deliveries, pricing achieved and cost escalation) are based on current and known future
programmes, estimates of capture of market share and long-term economic forecasts;
– cash flows beyond the five-year forecasts are assumed to grow at 1.8% (2017: 1.8%); and
– pre-tax discount rate 12% (2017: 11.7%).
The Directors do not consider that any reasonably possible changes in the key assumptions would cause the value in use of the goodwill
to fall below its carrying value.
Rolls-Royce Deutschland Ltd & Co KG
– trading assumptions (e.g. volume of engine deliveries, flying hours of installed fleet and cost escalation) are based on current and
known future programmes, estimates of customers’ fleet requirements and long-term economic forecasts;
– cash flows beyond the five-year forecasts are assumed to grow at 2.5% (2017: 2.5%); and
– pre-tax discount rate 13% (2017: 13%).
The Directors do not consider that any reasonably possible changes in the key assumptions would cause the value in use of the goodwill
to fall below its carrying value.
FINANCIAL STATEMENTS 138
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
9 Intangible assets continued
Other intangible assets
Other intangible assets 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 7-13% (2017: 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.
On the basis of impairment reviews and tests performed, no impairments are required. However, a combination of adverse changes in
assumptions (e.g. market size and share, unit costs and programme delays) and other variables (e.g. discount rate and foreign exchange rates),
could result in impairment in future years.
10 Property, plant and equipment
Cost
At 1 January 2017 previously presented
Foreign exchange adjustment *
At 1 January 2017 restated
Additions
Acquisition of ITP Aero *
Transferred to assets held for sale
Disposals/write-offs
Reclassifications
Exchange differences
Adjustment 1
At 1 January 2018 restated *
Additions
Disposal of L’Orange 2
Transferred to assets held for sale 3
Disposals/write-offs
Reclassifications
Exchange differences
At 31 December 2018
Land and
buildings
£m
Plant and
equipment
£m
Aircraft
and engines
£m
In course of
construction
£m
1,667
–
1,667
45
74
(5)
(13)
92
(18)
–
1,842
54
(23)
(91)
(29)
140
23
1,916
4,599
–
4,599
156
142
(11)
(111)
308
(61)
–
5,022
273
(72)
(138)
(140)
287
64
5,296
491
20
511
156
27
–
(4)
29
(5)
20
734
251
–
–
(19)
(3)
4
967
765
–
765
446
11
–
(9)
(429)
(11)
–
773
396
(4)
(30)
–
(424)
11
722
Total
£m
7,522
20
7,542
803
254
(16)
(137)
–
(95)
20
8,371
974
(99)
(259)
(188)
–
102
8,901
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP Aero acquisition and other adjustments.
See note 27 for more details. The update to the provisional fair values of ITP Aero are set out in note 25.
1 Adjustment relates to industrial engines sold with the Energy business in 2014.
2 The disposal of the L’Orange business to Woodward Inc. was completed on 1 June 2018 – see note 25.
3 The Commercial Marine business was classified as a held for sale disposal group on 30 June 2018 – see note 25.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
139
10 Property, plant and equipment continued
Land and
buildings
£m
Plant and
equipment
£m
Aircraft
and engines
£m
In course of
construction
£m
Accumulated depreciation
At 1 January 2017
Charge for the year 4
Impairment
Transferred to assets held for sale
Disposals/write-offs
Reclassifications
Exchange differences
Adjustment 1
At 1 January 2018 restated *
Charge for the year 4
Impairment
Disposal of L’Orange 2
Transferred to assets held for sale 3
Disposals/write-offs
Exchange differences
At 31 December 2018
515
58
3
(3)
(3)
(7)
(9)
–
554
67
–
(4)
(26)
(19)
7
579
2,765
351
3
(10)
(100)
7
(32)
–
2,984
376
2
(34)
(96)
(123)
33
3,142
Net book value
At 31 December 2018
At 31 December 2017 restated *
At 31 December 2017 as previously reported
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP Aero acquisition and other adjustments.
See note 27 for more details. The update to the provisional fair values of ITP Aero are set out in note 25.
1 Adjustment relates to industrial engines sold with the Energy business in 2014.
2 The disposal of the L’Orange business to Woodward Inc. was completed on 1 June 2018 – see note 25.
3 The Commercial Marine business was classified as a held for sale disposal group on 30 June 2018 – see note 25.
4 Depreciation charged during the year is presented in the income statement or included in the cost of inventory as appropriate.
2,154
2,038
2,051
1,337
1,288
1,288
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 £9m (2017: £20m).
126
35
–
–
(1)
–
(1)
14
173
80
–
–
–
(9)
–
244
723
561
514
2
–
–
–
–
–
–
–
2
–
5
–
–
–
–
7
715
771
771
2018
£m
4
5
153
813
(192)
621
362
1,573
Total
£m
3,408
444
6
(13)
(104)
–
(42)
14
3,713
523
7
(38)
(122)
(151)
40
3,972
4,929
4,658
4,624
2017
£m
5
7
82
552
(140)
412
257
1,355
FINANCIAL STATEMENTS 140
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
11 Investments
Composition of the Group
The entities contributing to the Group’s financial results are listed on pages 178 to 185.
Where the Group does not own 100% of the shares of a Group undertaking, there are a number of arrangements with the other
shareholder(s) that give the Group the option or potential obligation to acquire the third parties’ shares. These arrangements have been
assessed and are not considered to have a significant value, individually or in aggregate.
Non-controlling interests
The Group does not have any material non-wholly owned subsidiaries.
Equity accounted and other investments
At 1 January 2017
Reclassification from deferred income
At 1 January 2017 restated 1
Exchange differences
Additions
Transfer ITP Aero from joint venture to subsidiary
Impairment 2
Consolidation of previously non-consolidated subsidiary
Share of retained loss 3
Reclassification of deferred profit to deferred income 1
Share of OCI
At 1 January 2018 restated 1
Exchange differences
Additions
Impairment
Disposals
Consolidation of previously non-consolidated subsidiary
Share of retained loss 3
Reclassification of deferred profit to deferred income 1
Share of OCI
At 31 December 2018
Equity accounted
Joint ventures
£m
835
(289)
546
(47)
47
(204)
–
–
(60)
99
(6)
375
41
17
(7)
–
–
(101)
70
17
412
Associates
£m
9
–
9
2
1
–
(2)
–
(10)
–
–
–
–
–
–
–
–
–
–
–
–
Total
£m
844
(289)
555
(45)
48
(204)
(2)
–
(70)
99
(6)
375
41
17
(7)
–
–
(101)
70
17
412
Other
Unlisted
£m
38
–
38
2
4
–
(12)
(6)
–
–
–
26
–
6
(2)
(3)
(5)
–
–
–
22
1
Deferred profit on sales to joint ventures was previously credited to deferred income. During the year, the Group has concluded that it is more appropriate for the credit to be
included in the carrying value of the investment in the entity – up to the extent of the Group’s interest in the entity. The corresponding income statement treatment has been
reassessed on a consistent basis; previously this was included in cost of sales. The Group has concluded that it is more appropriate for this to be included in the share of results of joint
ventures and associates. The 2017 comparatives have been restated for this change.
2 The unlisted investment impairment of £12m relates to the consolidation of a previously non-consolidated subsidiary.
3 See table below.
Reconciliation of share of retained profit/(loss) to the income statement and cash flow statement
Share of results of joint ventures and associates
Adjustments for intercompany trading
Share of results of joint ventures and associates (income statement)
Dividends paid by joint ventures and associates to the Group (cash flow statement)
3 Share of retained loss above
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)
Principal location Activity
UK
Hong Kong
Singapore
Aero engine leasing
Aero engine repair and overhaul
Aero engine repair and overhaul
2018
£m
114
(110)
4
(105)
(101)
2017
£m
131
(122)
9
(79)
(70)
Ownership interest
50.0%
50.0%
50.0%
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
141
ITP Aero 1
2017
£m
689
46
–
(51)
11
(15)
–
11 Investments continued
Summarised financial information of the Group’s individually material joint ventures is as follows:
Revenue
Profit and total comprehensive income for
the year
Dividends paid 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 2
Non-current financial liabilities 2
Reconciliation to the carrying amount
recognised in the Financial Statements
Ownership interest
Group share of net assets above
Goodwill
Adjustments for intercompany trading
Included in the balance sheet
APL
2018
£m
254
61
(47)
(110)
1
(58)
(14)
355
2,759
(755)
(1,825)
534
103
(702)
(1,603)
50.0%
267
–
(267)
–
2017
£m
188
60
(25)
(94)
–
(34)
(10)
185
2,116
(531)
(1,299)
471
23
(503)
(1,101)
50.0%
235
–
(235)
–
HAESL
2018
£m
1,497
72
(65)
(13)
–
(2)
(14)
421
124
(248)
(101)
196
46
–
(88)
2017
£m
954
48
(44)
(11)
–
(1)
(9)
268
114
(116)
(91)
175
9
–
(83)
SAESL
2018
£m
1,141
41
(43)
(12)
–
(3)
(4)
379
161
(207)
(164)
169
17
–
(164)
2017
£m
933
40
(47)
(12)
–
(2)
–
362
148
(202)
(138)
170
32
–
(137)
50.0%
98
36
(3)
131
50.0%
88
34
–
122
50.0%
85
97
–
182
50.0%
85
92
–
177
1 On 19 December 2017, the Group acquired the remaining share of ITP Aero to take the total shareholding to 100% – see note 25.
2 Excluding trade payables and other liabilities.
The summarised aggregated results of the Group’s share of equity accounted investments is as follows:
Assets:
Non-current assets
Current assets
Liabilities: 1
Current liabilities
Non-current liabilities
1 Liabilities include
borrowings of
Individually material joint
ventures (above)
Other joint ventures
Associates
Total
2018
£m
271
402
(230)
(130)
313
(126)
2017
£m
259
314
(160)
(114)
299
2018
£m
559
393
(240)
(613)
99
2017
£m
561
367
(350)
(502)
76
(111)
(439)
(488)
2018
£m
2017
£m
–
–
–
–
–
–
–
–
–
–
–
–
2018
£m
830
795
(470)
(743)
412
2017
£m
820
681
(510)
(616)
375
(565)
(599)
FINANCIAL STATEMENTS 142
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
12 Inventories
Raw materials
Work in progress
Finished goods
Payments on account
Inventories stated at net realisable value
Amount of inventory write-down
Reversal of inventory write-down
2018
£m
553
1,551
2,168
15
4,287
223
69
21
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 27 for more details.
13 Trade receivables and other assets
Trade receivables 1
Amounts owed by joint ventures and associates 1
Costs to obtain contracts with customers 2
Other receivables
Prepayments
Contract assets 3
Participation fee contract assets 3
Total contract assets
Analysed as:
Financial instruments (note 17):
Trade receivables and similar items
Other non-derivative financial assets
Non-financial instruments
Trade receivables and other assets expected to be recovered in more than one year:
Trade receivables
Amounts owed by joint ventures and associates
Costs to obtain contracts
Other receivables
Prepayments
Contract assets
Participation fee contract assets
Total contract assets
2018
£m
2,680
229
42
1,146
593
4,690
1,403
654
2,057
6,747
3,361
489
2,897
6,747
2018
£m
–
–
34
63
91
188
1,108
605
1,713
1,901
Restated *
2017
£m
558
1,398
1,818
29
3,803
244
85
4
Restated *
2017
£m
2,709
270
51
1,115
208
4,353
1,290
655
1,945
6,298
3,375
477
2,446
6,298
Restated *
2017
£m
16
1
39
41
61
158
1,020
578
1,598
1,756
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 27 for more details.
1 Includes £146m of trade receivables held to collect or sell and nil receivables from joint ventures and associates held to collect or sell.
2 These are amortised over the term of the related contract, resulting in amortisation of £13m (2017: £6m) in the year. There were no impairment losses.
3 Contract assets include £1,097m (2017: £1,027m) of Civil Aerospace LTSA assets where the increase is primarily due to revenue being recognised based on stage of completion of
LTSAs, measured on a cost-to-cost basis, that is circa £180m greater than the revenue invoiced in the year on these customer contracts i.e. those with debit balances. Catch-up
adjustments of £111m in Civil Aerospace have reduced the contract asset primarily due to revised measurement of progress towards completing performance obligations as cost
estimates have increased (an offsetting £27m catch-up adjustment relating to the RRSA partner share is included in prepayments). Similar timing differences between revenue
recognised on a stage of completion basis and invoices raised have occurred to a lesser extent in other businesses. No impairment losses on contract assets have arisen during the
year. Participation fee contract assets are flat year-on-year with additional amounts paid during 2018 being offset by amortisation.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
143
14 Cash and cash equivalents
Cash at bank and in hand
Money-market funds
Short-term deposits
Cash and cash equivalents per the balance sheet
Overdrafts (note 15)
Cash and cash equivalents per cash flow statement (page 110)
Cash held as collateral against third party obligations (note 18)
2018
£m
1,023
1,222
2,729
4,974
(22)
4,952
4
2017
£m
838
589
1,526
2,953
(20)
2,933
22
Cash and cash equivalents at 31 December 2018 includes £31m (2017: £23m) that is not available for general use by the Group. This balance
predominantly relates to cash held in non-wholly owned subsidiaries and joint arrangements.
Balances are presented on a net basis when the Group has both a legal right of offset and the intention to either settle on a net basis or
realise the asset and settle the liability simultaneously.
15 Borrowings
Unsecured
Overdrafts
Bank loans
6.75% Notes 2019 £500m 1
2.375% Notes 2020 US$500m 2
2.125% Notes 2021 €750m 2
0.875% Notes 2024 €550m 2
3.625% Notes 2025 US$1,000m 2
3.375% Notes 2026 £375m 1
1.625% Notes 2028 €550m 2
Other loans 3
Secured
Obligations under finance leases 4
Current
2018
£m
2017
£m
22
298
504
–
–
–
–
–
–
–
34
858
20
39
–
–
–
–
–
–
–
–
23
82
Non-current
2018
£m
–
354
–
383
699
498
765
403
502
5
2017
£m
–
572
519
362
701
–
726
412
–
–
Total
2018
£m
22
652
504
383
699
498
765
403
502
5
2017
£m
20
611
519
362
701
–
726
412
–
–
195
3,804
114
3,406
229
4,662
137
3,488
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.
1
2 These notes are the subject of cross-currency interest rate swap agreements under which the Group has undertaken to pay floating rates of GBP interest, which form a fair value hedge.
3 Other loans are held by entities classified as joint operations. The loans are disclosed after adjustments have been made on consolidation to eliminate the extent of the Group’s interest
in the entity – see note 1.
4 Obligations under finance leases are secured by related leased assets.
16 Trade payables and other liabilities
Trade payables
Amounts owed to joint ventures and associates
Accruals
Deferred receipts from RRSA workshare partners
Government grants 1
Other taxation and social security
Other payables 2
Contract liabilities 3
Current
Non-current
Total
2018
£m
2,520
635
1,673
9
14
125
3,316
8,292
3,794
12,086
Restated *
2017
£m
2,014
43
1,452
73
20
126
3,157
6,885
4,104
10,989
2018
£m
–
18
109
520
85
–
1,208
1,940
5,336
7,276
Restated *
2017
£m
10
7
94
482
82
–
1,563
2,238
3,607
5,845
2018
£m
2,520
653
1,782
529
99
125
4,524
10,232
9,130
19,362
Restated *
2017
£m
2,024
50
1,546
555
102
126
4,720
9,123
7,711
16,834
During the year £8m (2017: £7m) of government grants were released to the income statement.
1
2 Other payables include £378m (2017: £378m) for financial penalties from agreements with investigating bodies and £245m (2017: £648m) for deferred consideration in relation to the
acquisition of ITP Aero. During the year £2,823m (2017: £2,570m) of the opening contract liability was recognised as revenue.
3 During the year £2,823m (2017: £2,570m) of the opening contract liability was recognised as revenue. Contract liabilities have increased by £1,419m with the main reasons being (i) an
increase of £1,014m in Civil Aerospace LTSA liabilities to £5,584m (2017: £4,570m) including a £192m catch-up adjustment as progress towards completing performance obligations has
been re-measured with cost estimates updated to reflect technical issues across various engine programmes including rectifying manufacturing quality issues on Trent 900 turbine
blades and the latest information around future aircraft utilisation patterns and their resultant effect on shop visit costs. Invoices raised in Civil Aerospace during 2018 for LTSA
services as engines were utilised by customers were greater than revenue recognised as costs were incurred; (ii) an increase in OE deposits mainly on Civil Aerospace and Power
Systems programmes; (iii) an increase of £190m in Defence with a greater value of invoices raised in the year than recognised as revenue and favourable catch-up adjustments of circa
£40m; (iv) a £40m reduction in ITP Aero including a favourable catch-up adjustment on its external customer contracts of around £20m; and (vi) a reclassification of £148m of
Commercial Marine balances now as held for sale.
FINANCIAL STATEMENTS
144
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
16 Trade payables and other liabilities continued
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
2018
£m
5,659
1,754
11,949
19,362
Restated *
2017
£m
4,088
2,096
10,650
16,834
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 27 for more details.
17 Financial instruments
Carrying values and fair values of financial instruments
2018
Unlisted non-current asset investments
Trade receivables and similar items
Other non-derivative financial assets
Derivative financial assets 1
Short-term investments
Cash and cash equivalents
Borrowings
Derivative financial liabilities 1
Financial RRSAs
Other
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
Assets
Liabilities
Total
Basis for
determining
fair value
Fair value
through
profit or loss
£m
Fair value
through
OCI
£m
Amortised
cost
£m
Fair value
through
profit or loss
£m
Notes
Other
£m
£m
11
13
13
14
15
16
16
A
B/C
B
C
B
B
D/E
C
F
F
B
B
B
22
–
–
365
–
1,222
–
–
–
–
–
–
–
1,609
–
146
–
–
–
–
–
–
–
–
–
–
–
146
–
3,215
489
–
6
3,752
–
–
–
–
–
–
–
7,462
–
–
–
–
–
–
–
(3,871)
–
–
–
–
–
(3,871)
–
–
–
–
–
–
(4,662)
–
(227)
(62)
(29)
(5,659)
(1,754)
(12,393)
22
3,361
489
365
6
4,974
(4,662)
(3,871)
(227)
(62)
(29)
(5,659)
(1,754)
(7,047)
Basis for
determining
fair value
Fair value
through
profit or loss
£m
Notes
Loans and
receivables
£m
Available
for sale
£m
Fair value
through
profit or loss
£m
Cash
£m
Other
£m
£m
Assets
Liabilities
Total
2017, restated *
Unlisted non-current asset investments
Trade receivables and similar items
Other non-derivative financial assets
Derivative financial assets 1
Short-term investments
Cash and cash equivalents
Borrowings
Derivative financial liabilities 1
Financial RRSAs
Other
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
11
13
13
14
15
16
16
A
B/C
B
C
B
B
D/E
C
F
F
B
B
B
–
–
–
646
–
–
–
–
–
–
–
–
–
646
26
3,375
477
–
3
1,526
–
–
–
–
–
–
–
5,407
–
–
–
–
–
589
–
–
–
–
–
–
–
589
–
–
–
–
–
838
–
–
–
–
–
–
–
838
–
–
–
–
–
–
–
(2,730)
–
–
–
–
–
(2,730)
–
–
–
–
–
–
(3,488)
–
(247)
(57)
(28)
(4,088)
(2,096)
(10,004)
26
3,375
477
646
3
2,953
(3,488)
(2,730)
(247)
(57)
(28)
(4,088)
(2,096)
(5,254)
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 27 for more details.
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 £11m (2017: £31m) and liabilities £3,517m (2017: £2,115m).
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
145
17 Financial instruments continued
Fair values equate to book values for both 2018 and 2017, with the following exceptions:
Borrowings
Borrowings
Financial RRSAs
2018
2017
Basis for
determining
fair value
Book value
£m
Fair value
£m
Book value
£m
Fair value
£m
D
E
F
(3,754)
(908)
(227)
(3,634)
(887)
(235)
(2,720)
(768)
(247)
(2,750)
(768)
(250)
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 and trade receivables held to collect or sell are estimated by discounting expected future contractual cash flows using prevailing
interest rate curves. Amounts denominated in foreign currencies are valued at the exchange rate prevailing at the balance sheet date. These financial instruments are included on the
balance sheet at fair value, derived from observable market prices (Level 2 as defined by IFRS 13 Fair Value Measurement).
D Borrowings are carried at amortised cost. Amounts denominated in foreign currencies are valued at the exchange rate prevailing at the balance sheet date. The fair value of
borrowings is estimated using quoted prices. (Level 1 as defined by IFRS 13).
E Borrowings 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).
F The fair value of RRSAs and other liabilities are 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 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
Carrying values of other financial assets and liabilities
2018
Non-current assets
Current assets
Assets
Current liabilities
Non-current liabilities
Liabilities
2017 restated *
Non-current assets
Current assets
Assets
Current liabilities
Non-current liabilities
Liabilities
Foreign
exchange
contracts
£m
47
16
63
(523)
(3,304)
(3,827)
(3,764)
362
27
389
(493)
(2,208)
(2,701)
(2,312)
Commodity
contracts
£m
Interest rate
contracts 1
£m
Total
derivatives
£m
Financial
RRSAs
£m
Other
£m
C Shares
£m
Total
£m
4
2
6
(15)
(25)
(40)
(34)
16
9
25
(10)
(14)
(24)
1
292
4
296
–
(4)
(4)
292
232
–
232
–
(5)
(5)
227
343
22
365
(538)
(3,333)
(3,871)
(3,506)
610
36
646
(503)
(2,227)
(2,730)
(2,084)
–
–
–
(52)
(175)
(227)
(227)
–
–
–
(50)
(197)
(247)
(247)
–
–
–
(28)
(34)
(62)
(62)
–
–
–
(20)
(37)
(57)
(57)
–
–
–
(29)
–
(29)
(29)
–
–
–
(28)
–
(28)
(28)
343
22
365
(647)
(3,542)
(4,189)
(3,824)
610
36
646
(601)
(2,461)
(3,062)
(2,416)
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 27 for more details.
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 a foreign currency, 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.
FINANCIAL STATEMENTS
146
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
17 Financial instruments continued
Movements in the fair values of derivative financial assets and liabilities were as follows:
Foreign exchange instruments
Commodity instruments
Interest rate instruments
Total
2018
£m
(2,312)
2017
£m
(5,551)
–
–
(14)
7
–
–
(2,122)
684
(3,764)
2,611
621
(2,312)
2018
£m
1
–
–
(9)
(22)
(4)
(34)
2017
£m
(56)
2
–
–
37
18
1
2018
£m
227
–
66
(1)
–
–
292
2017
£m
358
–
(131)
–
–
–
227
2018
£m
(2,084)
2017
£m
(5,249)
–
66
(24)
9
(131)
–
(2,144)
680
(3,506)
2,648
639
(2,084)
At 1 January
Acquisition of business
Movements in fair
value hedges
Movements in
cash flow hedges
Movements in other
derivative contracts 1
Contracts settled
At 31 December
1 Included in financing.
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.
Movements in the carrying values were as follows:
At 1 January as previously reported
Impact of adopting IFRS 15 1
At 1 January as restated
Exchange adjustments included in OCI
Acquisition of business
Additions
Financing charge 2
Excluded from underlying profit:
Changes in forecast payments 2
Exchange adjustments 2
Cash paid
Other
At 31 December
Financial RRSAs
Other
2018
£m
(247)
–
(247)
(3)
–
(3)
(8)
(2)
–
36
–
(227)
Restated *
2017
£m
(101)
–
(101)
(14)
(161)
–
(5)
2
10
22
–
(247)
2018
£m
(57)
–
(57)
(1)
–
(25)
(1)
–
–
22
–
(62)
Restated *
2017
£m
(15)
(42)
(57)
–
–
(3)
(1)
–
1
–
3
(57)
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP Aero acquisition and other adjustments – see note 27 for more details.
1
IFRS 15 adoption results in a change in accounting treatment for parts sold with an option to repurchase and also future obligations to airframers arising from sale of our OE on their
airframes – see note 27.
2 Included in financing.
Effect of hedging instruments on the financial position and performance
To manage the risk of changes in the fair values of fixed rate borrowings (the hedged items) the Group has entered into fixed-to-floating
interest rate swaps and cross-currency interest rate swaps (the hedging instruments) which for accounting purposes are designated as fair value
hedges. Although the hedging instruments have similar critical terms to the hedged item, some ineffectiveness, predominantly due to cross
currency basis, will still remain. The impact of any hedge ineffectiveness on the financial position and performance of the Group is as follows:
Hedged item 1
Hedging Instrument 2
FV
adjustment
in the
period
£m
25
(61)
(33)
FV
adjustment
since
inception
£m
(34)
(165)
(97)
Nominal
£m
(875)
(987)
(1,607)
Carrying
amount
£m
(907)
(1,148)
(1,699)
Nominal
£m
875
987
1,607
Carrying
amount
asset
£m
34
169
90
Carrying
amount
liability
£m
–
–
–
FV
movement
in the
period
£m
(25)
65
26
Hedge
ineffect-
iveness
in the
period 3
£m
–
4
(7)
Weighted
average FX
rate
1.00
1.52
1.15
Sterling
US Dollar
Euro
1 Hedged items are included in borrowings in the balance sheet.
2 Hedging instruments are included in other financial assets or liabilities in the balance sheet.
3 Hedge ineffectiveness is included in net financing in the income statement.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
147
17 Financial instruments continued
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.
The Group economically hedges its GBP/USD exposure by forecasting highly probable net USD receipts up to ten years forward. Hedges
are taken out within prescribed maximum and minimum hedge positions set out in the Group FX policy. The maximum and minimum policy
bands decline gradually over the ten year horizon and are calculated as a percentage of forecast net income. A similar policy is operated
for the Group’s EUR/USD exposure. For accounting purposes, these derivative contracts are not designated in hedging relationships with
the exception of those taken out by the Group’s Spanish subsidiary, ITP Aero, where they are designated in cash flow hedges. ITP Aero is
exposed predominantly to net US dollar receipts that it hedges against the euro using foreign exchange forward contracts.
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.
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 of the Group.
The fixed or floating rate interest rate decision on long-term borrowings is determined for each new agreement at the point it is entered
into. The aggregate interest rate position of the Group is reviewed regularly and can be revised at any time in order to react to changes in
market conditions or circumstances.
The Group also has exposures to the fair values of non-derivative financial instruments such as EUR, GBP and USD fixed rate borrowings.
To manage the risk of changes in these fair values, the Group has entered into fixed-to-floating interest rate swaps and cross-currency
interest rate swaps which for accounting purposes are designated as fair value hedges. The swaps have similar critical terms to the hedged
items, such as the reference rate, reset dates, notional amounts, payment dates and maturities. Therefore, there is an economic relationship
and the hedge ratio is established as 1:1. Possible sources of ineffectiveness in the fair value hedge relationship are changes in the credit
risk of either party to the interest rate swap and, for cross-currency interest rate swaps, the cross-currency basis risk as this risk is present
in the hedging instrument only. Another possible source of ineffectiveness would be if the notional amount of the borrowings is less than
the notional amount of the derivative, for example, in the event of a partial repayment of hedged debt prior to its maturity.
The Group’s Spanish subsidiary, ITP Aero, has also entered into a floating-to-fixed interest rate swap to hedge the cash flow risk on a
floating rate borrowing which for accounting purposes is designated as a cash flow hedge.
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. The commodity hedging policy
is similar to the FX policy, in that the Group forecasts highly probable exposures to commodities, and takes out hedges within prescribed
maximum and minimum levels as set out in the policy. The maximum and minimum policy bands decline gradually over time. For
accounting purposes, these derivative contracts are generally not designated in hedging relationships.
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.
FINANCIAL STATEMENTS 148
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
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 2018
Foreign exchange contracts:
Cash flow hedges
Non-hedge accounted
Interest rate contracts:
Fair value hedges
Cash flow hedges
Non-hedge accounted
Commodity contracts:
Cash flow hedges
Non-hedge accounted
At 31 December 2017 restated *
Foreign exchange contracts:
Cash flow hedges
Non-hedge accounted
Interest rate contracts:
Fair value hedges
Cash flow hedges
Non-hedge accounted
Commodity contracts:
Cash flow hedges
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
335
29,080
3,469
19
–
6
250
33,159
214
29,375
2,500
19
–
41
241
32,390
162
5,528
500
4
–
2
92
6,288
120
5,113
329
4
–
1
79
5,646
53
14,808
639
11
–
1
77
15,589
97
5,793
81
4,503
36
12,626
–
4
–
8
85
5,987
500
4
–
7
68
5,163
967
11
–
19
81
13,740
–
3,631
2,001
–
–
2
2
5,636
–
6,453
1,033
–
–
7
7
7,500
4
59
293
–
3
1
5
365
7
382
227
–
5
5
20
646
(11)
(3,816)
–
(1)
(3)
(8)
(32)
(3,871)
–
(2,701)
–
–
(5)
(3)
(21)
(2,730)
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 27 for more details.
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
Foreign exchange contracts are denominated in the following currencies:
At 31 December 2018
Currencies sold forward:
Sterling
US dollar
Euro
Other
At 31 December 2017 restated *
Currencies sold forward:
Sterling
US dollar
Euro
Other
Nominal amount of currencies purchased forward
Sterling
£m
US dollar
£m
Euro
£m
Other
£m
Total
£m
–
24,376
84
87
–
25,426
136
27
–
–
119
39
–
–
177
29
63
3,280
–
94
127
2,268
–
89
230
753
274
16
241
802
251
16
293
28,409
477
236
368
28,496
564
161
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 27 for more details.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
149
17 Financial instruments continued
The nominal value of interest rate and commodity contracts are denominated in the following currencies:
Sterling
US dollar
Euro
2018
£m
875
1,233
1,636
Restated *
2017
£m
875
1,260
666
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 27 for more details.
Non-derivative financial instruments are denominated in the following currencies:
Sterling
£m
US dollar
£m
Euro
£m
Other
£m
Total
£m
At 31 December 2018
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
Other
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
Liabilities
At 31 December 2017 restated *
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
Other
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
Liabilities
2
376
72
–
2,008
2,458
(1,441)
–
(24)
(29)
(2,099)
(854)
(4,447)
(1,989)
–
244
106
–
827
1,177
(1,462)
–
(18)
(28)
(1,600)
(696)
(3,804)
(2,627)
7
2,246
341
–
928
3,522
(1,435)
(47)
(38)
–
(2,600)
(421)
(4,541)
(1,019)
5
2,282
262
–
1,055
3,604
(1,225)
(60)
(39)
–
(1,645)
(515)
(3,484)
120
13
687
47
–
1,792
2,539
(1,753)
(180)
–
–
(860)
(379)
(3,172)
(633)
20
747
62
–
807
1,636
(767)
(187)
–
–
(710)
(828)
(2,492)
(856)
–
52
29
6
246
333
(33)
–
–
–
(100)
(100)
(233)
100
1
102
47
3
264
417
(34)
–
–
–
(133)
(57)
(224)
193
22
3,361
489
6
4,974
8,852
(4,662)
(227)
(62)
(29)
(5,659)
(1,754)
(12,393)
(3,541)
26
3,375
477
3
2,953
6,834
(3,488)
(247)
(57)
(28)
(4,088)
(2,096)
(10,004)
(3,170)
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 27 for more details.
FINANCIAL STATEMENTS
150
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
17 Financial instruments continued
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 2018
Sterling 1
US dollar
Euro
Other
At 31 December 2017
Sterling 1
US dollar
Euro
Other
Sterling
£m
US dollar
£m
–
(2)
2
–
–
(10)
3
–
3
–
(14)
10
3
–
212
4
Euro
£m
(237)
(5)
–
13
(642)
(5)
–
18
Other
£m
6
5
12
–
11
8
7
(3)
Total
£m
(228)
(2)
–
23
(628)
(7)
222
19
1 The euro exposure primarily relates to deferred consideration on the acquisition of ITP Aero. Movements in this balance in relation to foreign exchange (recognised through the
consolidated income statement) are partially matched by the related foreign exchange movement in the subsidiary’s net assets, recognised through the consolidated statement
of other comprehensive income.
Ageing beyond contractual due date of financial assets
At 31 December 2018
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 2017 restated *
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
Up to
three
months
overdue
£m
Between
three
months and
one year
overdue
£m
More than
one year
overdue
£m
–
265
–
–
–
–
265
–
200
–
–
–
–
200
–
132
–
–
–
–
132
–
72
1
–
–
–
73
–
73
–
–
–
–
73
–
50
–
–
–
–
50
Within
terms
£m
22
2,891
489
365
6
4,974
8,747
26
3,053
476
646
3
2,953
7,157
Total
£m
22
3,361
489
365
6
4,974
9,217
26
3,375
477
646
3
2,953
7,480
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 27 for more details.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
151
17 Financial instruments continued
Contractual maturity analysis of non-derivative financial liabilities
At 31 December 2018
Borrowings
Financial RRSAs
Other
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
At 31 December 2017
Borrowings
Financial RRSAs
Other
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
Gross values
Between
one and
two years
£m
Between
two and
five years
£m
After
five years
£m
Carrying
value
£m
(520)
(62)
(3)
–
(51)
(150)
(786)
(831)
(50)
(3)
–
(44)
(436)
(1,364)
(1,014)
(59)
(25)
–
(40)
(259)
(1,397)
(1,345)
(96)
(26)
–
(17)
(331)
(1,815)
(2,699)
(73)
(7)
–
(26)
(72)
(2,877)
(1,598)
(80)
(7)
–
–
(121)
(1,806)
(4,662)
(227)
(62)
(29)
(5,659)
(1,754)
(12,393)
(3,488)
(247)
(57)
(28)
(4,088)
(2,096)
(10,004)
Within
one year
£m
(983)
(48)
(27)
(29)
(5,542)
(1,273)
(7,902)
(186)
(40)
(21)
(28)
(4,027)
(1,208)
(5,510)
Expected maturity analysis of derivative financial instruments
At 31 December 2018
Derivative financial assets:
Cash inflows
Cash outflows
Other net cash flows
Derivative financial liabilities:
Cash inflows
Cash outflows
Other net cash flows
At 31 December 2017
Derivative financial assets:
Cash inflows
Cash outflows
Other net cash flows
Derivative financial liabilities:
Cash inflows
Cash outflows
Other net cash flows
Gross values
Between
one and
two years
£m
Between
two and
five years
£m
Within
one year
£m
After
five years
£m
Carrying
value
£m
1,001
(979)
24
46
4,753
(5,531)
(14)
(792)
2,018
(1,955)
32
95
3,922
(4,504)
(11)
(593)
934
(869)
7
72
2,187
(2,185)
15
17
4,753
(5,656)
(12)
(915)
13,481
(16,298)
(12)
(2,829)
1,345
(1,307)
30
68
3,288
(3,847)
(6)
(565)
5,810
(5,788)
21
43
8,005
(9,551)
(10)
(1,556)
2,061
(1,934)
16
143
3,437
(4,257)
–
(820)
2,912
(2,835)
21
98
4,362
(5,392)
–
(1,030)
365
(3,871)
646
(2,730)
The Group regularly renegotiates the contractual maturities of its foreign exchange contracts. In general, the effect of such negotiations is
the settlement of derivative financial liabilities somewhat earlier than the contractual maturity date.
FINANCIAL STATEMENTS 152
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
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 2018
Short-term investments 1
Cash and cash equivalents 2
Unsecured bank and other loans
Other bank borrowings
£200m floating rate loan
£43m floating rate loan
£280m floating rate loan
€50m fixed rate loan
€20m floating rate loan
€30m floating rate loan 3
Other loans 4
Unsecured bond issues
6.75% Notes 2019 £500m
Effect of interest rate swaps
2.375% Notes 2020 US$500m
Effect of interest rate swaps
2.125% Notes 2021 €750m
Effect of interest rate swaps
0.875% Notes 2024 €550m
Effect of interest rate swaps
3.625% Notes 2025 US$1,000m
Effect of interest rate swaps
3.375% Notes 2026 £375m
Effect of interest rate swaps
1.625% Notes 2028 €550m
Effect of interest rate swaps
Other secured
Obligations under finance leases
Effective interest rate
%
GBP LIBOR + 1.260
GBP LIBOR + 0.402
GBP LIBOR + 0.805
2.350%
EUR LIBOR + 1.931
EUR LIBOR + 2.001
6.750%
GBP LIBOR + 2.982
2.375%
GBP LIBOR + 0.841
2.125%
GBP LIBOR + 0.701
0.8750%
GBP LIBOR + 0.7437
3.625%
GBP LIBOR + 1.466
3.375%
GBP LIBOR + 0.893
1.625%
GBP LIBOR + 1.0934
4.126%
Period in which interest rate reprices
Total
£m
6
4,974
6 months or less
£m
6
4,974
6-12 months
£m
–
–
(109)
(200)
(43)
(280)
(14)
(13)
(15)
(5)
(504)
–
(383)
–
(699)
–
(498)
–
(765)
–
(403)
–
(502)
–
(229)
318
(22)
(200)
(43)
(280)
–
(13)
(15)
(5)
–
(504)
–
(383)
–
(699)
–
(498)
–
(765)
–
(403)
–
(502)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1 Interest on the short-term investments are at fixed rates.
2 Cash and cash equivalents comprises bank balances and demand deposits and earn interest at rates based on daily deposit rates.
3 Interest rate swap in place to hedge floating rate loan.
4 Other loans are held by entities classified as joint operations. The loans are disclosed after adjustments have been made on consolidation to eliminate the extent of the Group’s interest
in the entity – see note 1.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
153
17 Financial instruments continued
At 31 December 2017
Short-term investments 1
Cash and cash equivalents 2
Unsecured bank and other loans
Other borrowings
£200m floating rate loan
£43m floating rate loan
£280m floating rate loan
€50m fixed rate loan
€20m floating rate loan
€30m floating rate loan 3
Unsecured bond issues
6.75% Notes 2019 £500m
Effect of interest rate swaps
2.375% Notes 2020 US$500m
Effect of interest rate swaps
2.125% Notes 2021 €750m
Effect of interest rate swaps
3.625% Notes 2025 US$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 + 1.260
GBP LIBOR + 0.402
GBP LIBOR + 0.805
2.350%
EUR LIBOR + 1.931
EUR LIBOR + 2.001
6.750%
GBP LIBOR + 2.982
2.375%
GBP LIBOR + 0.841
2.125%
GBP LIBOR + 0.701
3.625%
GBP LIBOR + 1.466
3.375%
GBP LIBOR + 0.893
4.144%
Period in which interest rate reprices
Total
£m
3
2,953
6 months or less
£m
1
2,953
6-12 months
£m
2
–
(20)
(200)
(43)
(280)
–
(15)
(19)
–
(519)
–
(362)
–
(701)
–
(726)
–
(412)
(54)
(200)
(43)
(280)
(20)
(15)
(19)
(519)
–
(362)
–
(701)
–
(726)
–
(412)
–
(137)
(532)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1 Interest on the short-term investments are at fixed rates.
2 Cash and cash equivalents comprises bank balances and demand deposits and earn interest at rates based on daily deposit rates.
3 Interest rate swap in place to hedge floating rate loan.
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. At 31 December 2018, none of these were in breach. 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 £2,500m (2017: £2,106m) of undrawn committed borrowing facilities which is available for at least the
next four 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
2018
£m
(2,421)
2,014
(268)
219
(32)
26
(21)
21
Restated *
2017
£m
(2,348)
1,968
(148)
118
(77)
62
(22)
22
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 27 for more details.
At 31 December 2018 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 147.
FINANCIAL STATEMENTS 154
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
17 Financial instruments continued
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
2018
2017
Millions
28,429
216,717
(216,075)
29,071
Nominal
value
£m
28
217
(216)
29
Millions
28,125
215,235
(214,931)
28,429
Nominal
value
£m
28
215
(215)
28
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
18 Provisions for liabilities and charges
Warranties and guarantees
Contract loss
Restructuring
Customer financing
Insurance
Tax related interest and penalties
Employer liability claims
Trent 1000 exceptional costs 1
Other
Current liabilities
Non-current liabilities
2018
2017
Pence
per share
4.60
7.10
11.70
£m
86
135
221
Pence
per share
4.60
7.10
11.70
£m
85
131
216
Restated *
At
1 January
2018
£m
Charged to
income
statement
£m
Transferred to
liabilities held
for sale
£m
Utilised
£m
Exchange
differences
£m
At
31 December
2018
£m
75
125
263
2
41
(2)
(1)
1,069
40
1,612
(132)
(46)
(96)
(10)
(17)
(1)
(3)
(290)
(21)
(616)
(25)
(1)
(1)
–
–
–
–
–
(5)
(32)
450
127
36
25
63
64
52
–
126
943
550
393
5
1
2
–
–
1
–
–
1
10
373
206
204
17
87
62
48
779
141
1,917
1,122
795
* The 2017 figures have been restated for IFRS 15, an update to the provisional fair values of the ITP acquisitions and other adjustments. See note 27 for more details.
1 The exceptional charge to the income statement for Trent 1000 exceptional costs of £790m shown in note 2 is calculated taking into account foreign exchange derivative contracts in
place. The above charge is calculated at prevailing exchange rates.
Provisions for warranties and guarantees primarily relate to products sold and generally cover a period of up to three years.
Provisions for contract losses are recorded when the direct costs to fulfil a contract are assessed as being greater than the expected
revenue.
Restructuring provisions are made for Group approved, formal restructuring programmes where the restructuring has either commenced
or has been publicly announced. Included is the Group-wide restructuring programme announced on 14 June 2018, which is an on-going
multi-year restructuring programme across the business and reflects the severance costs as well as the consultancy costs that will help
deliver the planned reductions. The majority of the provision is expected to be utilised over the next two years.
Customer financing provisions cover guarantees provided for asset value and/or financing.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
155
18 Provisions for liabilities and charges continued
Provisions for tax related interest and penalties relate to uncertain tax positions in some of the jurisdictions in which the Group operates.
Utilisation of the provisions will depend on the timing of resolution of the issues with the relevant tax authorities.
The provision relating to employer healthcare liability claims is as a result of an historic insolvency of the previous provider and is
expected to be utilised over the next 30 years.
The Trent 1000 exceptional costs provision relates to the full anticipated costs of the Trent 1000 in-service issues over 2017 to 2022 that
are considered abnormal in nature, which fall outside the scope of normal TotalCare costs. These costs are mostly in respect of non-
contractual customer compensation claims.
Other provisions comprise a number of liabilities with varying expected utilisation rates.
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$2.3bn (2017: US$3.3bn) (on a discounted basis) to provide facilities to enable customers to purchase aircraft (of which approximately
US$630m could be called during 2019). 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.
Commitments on delivered aircraft in excess of the amounts provided are shown in the table below. These are reported on a discounted basis
at the Group’s borrowing rate to reflect better the time span over which these exposures could arise. These amounts do not represent values
that are expected to crystallise. The commitments are denominated in US dollars. As the Group does not generally adopt cash flow hedge
accounting for future foreign exchange transactions, this amount is reported, together with the sterling equivalent at the reporting date spot
rate. The values of aircraft providing security are based on advice from a specialist aircraft appraiser.
Gross commitments
Value of security 1
Indemnities
Net commitments
Net commitments with security reduced by 20% 2
1 Security includes unrestricted cash collateral of
2018
2017
£m
93
(24)
(19)
50
60
4
$m
119
(30)
(24)
65
77
6
£m
145
(41)
(51)
53
64
22
$m
196
(55)
(69)
72
86
29
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.
FINANCIAL STATEMENTS 156
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
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 fund. 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 2018.
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 and Canadian 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 (LOI) 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.
Amounts recognised in the income statement
Defined benefit schemes:
Current service cost and administrative expenses
Past-service cost in respect of equalisation 1
Other past-service credit 2
Defined contribution schemes
Operating cost
Net financing (credit)/charge in respect of defined
benefit schemes
Total income statement charge
UK
schemes
£m
2018
Overseas
schemes
£m
183
121
(9)
295
41
336
(55)
281
58
–
(1)
57
100
157
32
189
UK
schemes
£m
2017
Overseas
schemes
£m
190
–
(8)
182
33
215
(38)
177
58
–
–
58
100
158
37
195
Total
£m
241
121
(10)
352
141
493
(23)
470
Total
£m
248
–
(8)
240
133
373
(1)
372
1
In the UK, past-service costs of £121m have been recognised relating to the estimated cost of equalising benefits earned after May 1990 between men and women. The Rolls-Royce
UK Pension Fund has to provide Guaranteed Minimum Pensions (GMPs) which, as a result of statutory rules, have been calculated differently for men and women. Although equal
treatment in pension provision for males and females has been required since 1990, there has been uncertainty on whether and how pension schemes are required to equalise GMPs.
A High Court judgement on the Lloyds Banking Group hearing was published on 26 October 2018. The judgement confirmed that GMPs earned from 1990 must be equalised and
highlighted an acceptable range of methods. The estimated cost of this equalisation is £97m. In addition, a cost of £24m has been recognised in relation to obligations to equalise
certain other post-1990 benefits between men and women. The total cost of £121m represents the Directors’ best estimate of the cost, based on actuarial advice. However, the final
cost will differ from this amount when the actual method of equalisation is agreed with the Trustee and subsequently implemented.
2 In addition, a past-service credit of £9m has arisen related to the restructuring activities. This credit has been offset against the restructuring costs. All amounts have been excluded
from the underlying results.
The operating cost is charged as follows:
Cost of sales
Commercial and administrative costs
Research and development
Defined benefit
Defined contribution
Total
2018
£m
176
148
28
352
2017
£m
169
38
33
240
2018
£m
104
21
16
141
2017
£m
92
23
18
133
2018
£m
280
169
44
493
2017
£m
261
61
51
373
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 (2017: £30m) in the year.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
157
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
286
(341)
(55)
(55)
–
2018
Overseas
schemes
£m
59
(27)
32
(1)
33
Amounts recognised in OCI in respect of defined benefit schemes
Actuarial gains and losses arising from:
– demographic assumptions
– financial assumptions
– experience adjustments
Return on scheme assets excluding financing income
UK
schemes
£m
2018
Overseas
schemes
£m
(130)
782
(6)
(705)
(59)
(4)
134
9
(53)
86
UK
schemes
£m
317
(355)
(38)
(38)
–
2017
Overseas
schemes
£m
65
(28)
37
(1)
38
UK
schemes
£m
2017
Overseas
schemes
£m
208
96
173
265
742
15
(88)
9
57
(7)
Total
£m
345
(368)
(23)
(56)
33
Total
£m
(134)
916
3
(758)
27
Total
£m
382
(383)
(1)
(39)
38
Total
£m
223
8
182
322
735
Amounts recognised in the balance sheet in respect of defined benefit schemes
Present value of funded obligations
Fair value of scheme assets
Net asset/(liability) on funded schemes
Present value of unfunded obligations
Net asset 1/(liability) recognised in the balance sheet
Post-retirement scheme surpluses
Post-retirement scheme deficits
Included in liabilities associated with assets held for sale
UK
schemes
£m
(10,847)
12,773
1,926
–
1,926
1,926
–
–
2018
Overseas
schemes
£m
(758)
735
(23)
(1,289)
(1,312)
18
(1,303)
(27)
Total
£m
(11,605)
13,508
1,903
(1,289)
614
1,944
(1,303)
(27)
UK
schemes
£m
(11,499)
13,607
2,108
–
2,108
2,108
–
2017
Overseas
schemes
£m
(774)
750
(24)
(1,346)
(1,370)
17
(1,387)
Total
£m
(12,273)
14,357
2,084
(1,346)
738
2,125
(1,387)
1
The surplus in the UK scheme is recognised as, on ultimate wind-up when there are no longer any remaining members, 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
2018
Obligations
£m
(227)
(749)
(596)
(446)
(29)
(2,047)
Assets
£m
186
–
549
–
–
735
Net
£m
(41)
(749)
(47)
(446)
(29)
(1,312)
2017
Obligations
£m
(243)
(789)
(602)
(460)
(26)
(2,120)
Assets
£m
197
–
553
–
–
750
Net
£m
(46)
(789)
(49)
(460)
(26)
(1,370)
FINANCIAL STATEMENTS 158
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
19 Post-retirement benefits continued
Defined benefit schemes
Assumptions
Significant actuarial assumptions for the UK scheme 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.
2018
2.95%
3.40%
3.65%
22.1 years
23.4 years
23.4 years
25.2 years
2017
2.55%
3.40%
3.65%
22.2 years
23.5 years
23.5 years
25.3 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 SAPS S2 ‘All’ actuarial tables, with future improvements
in line with the CMI 2017 core projections and long-term improvements of 1.25%. Where appropriate, these are adjusted to take account of
the scheme’s actual experience.
Other assumptions have been set on advice from the 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 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
2018
3.40%
2.90%
4.80%
21.1 years
23.1 years
2017
2.90%
2.10%
4.80%
20.2 years
22.1 years
At 1 January
Exchange differences
Current service cost
Past service cost
Finance cost
Contributions by employees
Benefits paid out
Disposal of businesses
Actuarial gains/(losses)
Transfers
Settlement curtailment
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
UK
schemes
£m
(11,499)
–
(179)
(112)
(286)
(2)
585
–
646
–
–
(10,847)
(10,847)
–
(4,229)
(1,975)
(4,643)
19
2018
Overseas
schemes
£m
(2,120)
(56)
(56)
–
(59)
(3)
78
31
140
(2)
–
(2,047)
(758)
(1,289)
(1,088)
(157)
(802)
15
Total
£m
(13,619)
(56)
(235)
(112)
(345)
(5)
663
31
786
(2)
–
(12,894)
(11,605)
(1,289)
(5,317)
(2,132)
(5,445)
18
UK
schemes
£m
(12,014)
–
(183)
8
(317)
(3)
533
–
477
–
–
(11,499)
(11,499)
–
(4,625)
(2,243)
(4,631)
20
2017
Overseas
schemes
£m
(2,112)
81
(56)
–
(65)
(7)
87
–
(64)
(3)
19
(2,120)
(774)
(1,346)
(1,124)
(164)
(832)
16
Total
£m
(14,126)
81
(239)
8
(382)
(10)
620
–
413
(3)
19
(13,619)
(12,273)
(1,346)
(5,749)
(2,407)
(5,463)
19
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
159
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 1
LDI portfolios 2
Longevity swap 3
Listed equities
Unlisted equities
Synthetic equities 4
Sovereign debt
Corporate debt instruments
Cash
Other
At 31 December
UK
schemes
£m
13,607
–
(4)
341
(705)
117
2
(585)
–
12,773
(364)
UK
schemes
£m
9,388
–
3,447
1,342
(375)
(1,991)
11,811
(292)
592
128
(13)
–
548
–
(1)
12,773
2018
Overseas
schemes
£m
750
24
(2)
27
(53)
64
3
(78)
–
735
(26)
2018
Overseas
schemes
£m
315
–
356
–
–
22
693
–
39
–
(4)
5
–
2
–
735
UK
schemes
£m
13,350
–
(7)
355
265
174
3
(533)
–
13,607
620
UK
schemes
£m
9,135
–
3,223
2,266
(480)
(1,761)
12,383
(187)
1,141
162
–
–
100
8
–
13,607
2017
Overseas
schemes
£m
747
(56)
(2)
28
57
75
7
(87)
(19)
750
85
2017
Overseas
schemes
£m
308
2
337
–
–
20
667
–
76
–
2
4
–
2
(1)
750
Total
£m
14,357
24
(6)
368
(758)
181
5
(663)
–
13,508
(390)
Total
£m
9,703
–
3,803
1,342
(375)
(1,969)
12,504
(292)
631
128
(17)
5
548
2
(1)
13,508
Total
£m
14,097
(56)
(9)
383
322
249
10
(620)
(19)
14,357
705
Total
£m
9,443
2
3,560
2,266
(480)
(1,741)
13,050
(187)
1,217
162
2
4
100
10
(1)
14,357
1
Cash and similar instruments include repurchase agreements on UK Government bonds amounting to £(1,991)m (2017: £(2,285)m). The latest maturity date for these short-term
borrowings is 12 October 2020.
2 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.
3 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 – see note 17.
4 A portfolio of swap contracts designed to provide investment returns in line with global equity markets. The notional value of the portfolio was $281m (2017: $84m).
The investment strategy for the UK scheme is controlled by the Trustee in consultation with the Group. The scheme assets do not directly
include any of the Group’s own financial instruments, nor any property occupied by, or other assets used by, the Group. At 31 December
2018, there was an indirect holding of £0.3m in the Group’s financial instruments.
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
(e.g. 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.
FINANCIAL STATEMENTS 160
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
19 Post-retirement benefits continued
Future contributions
The Group expects to contribute approximately £220m to its defined benefit schemes in 2019 (UK: £140m, Overseas: £80m).
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) which may differ from those used for accounting
set out above. The assumptions used to value Technical Provisions must be prudent rather than a best estimate of the liability. Most
notably, the Technical Provision discount rate is currently based upon UK Government yields plus 0.5% 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 cost and any contributions from the employer to eliminate a deficit. The most recent valuation,
as at 31 March 2017, agreed by the Trustee in December 2017, showed that the UK scheme was estimated to be 112% funded on the
Technical Provisions basis. Employer contributions (inclusive of employee contributions paid by a salary sacrifice arrangement) will
subsequently be paid at a rate of 27% in 2019 and 28.5% in 2020 (2018: 27%). The SoC includes an arrangement for a potential increase
in contributions during 2021 to 2023 (capped at £48.3m a year) if the Technical Provisions funding position is below 107% at 31 March
2020. As at 31 December 2018 the Technical Provisions funding position was estimated to be 111%.
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 2018,
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.
The sensitivity analyses set out below have been determined based on a method that estimates the impact on the defined benefit
obligation as a result of reasonable changes in key assumptions occurring at the end of the reporting period.
Reduction in the discount rate of 0.25% 1
Increase in inflation of 0.25% 1
Obligation
Plan assets (LDI portfolio)
Obligation
Plan assets (LDI portfolio)
Increase in real increase in salaries of 0.25% Obligations
Obligations
One year increase in life expectancy
2018
£m
(510)
624
(275)
272
(90)
(465)
2017
£m
(590)
675
(310)
291
(105)
(545)
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.
20 Share capital
Issued and fully paid
At 1 January 2017
Shares issued to employee share trust
At 31 December 2017
Shares issued to employee share trust
Shares issued in relation to the acquisition of ITP Aero
At 31 December 2018
Non-equity
Equity
Special
Share
of £1
Nominal
value
£m
Ordinary
shares
of 20p each
Millions
Nominal
value
£m
1
–
1
–
–
1
–
–
–
–
–
–
1,838
2
1,840
8
48
1,896
367
1
368
2
9
379
The rights attaching to each class of share are set out on page 200.
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.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
161
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 expense 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
2018
£m
32
3
35
6
2017
£m
31
3
34
3
A description of the share-based payment plans is included in the Directors’ Remuneration Report on pages 86 to 95.
Movements in the Group’s share-based payment plans during the year
ShareSave
PSP and LTIP
APRA
Outstanding at 1 January 2017
Granted
Forfeited
Exercised
Outstanding at 1 January 2018
Granted
Forfeited
Exercised
Outstanding at 31 December 2018
Exercisable at 31 December 2018
Exercisable at 31 December 2017
Weighted
average
exercise price
Pence
672
758
886
527
714
–
738
656
713
–
–
Number
Millions
21.4
14.0
(3.3)
(4.6)
27.5
–
(1.3)
(0.1)
26.1
–
–
Number
Millions
11.6
5.8
(3.4)
(1.0)
13.0
5.7
(4.4)
(0.4)
13.9
–
–
Number
Millions
–
0.2
–
–
0.2
0.2
–
–
0.4
–
–
The weighted average share price at the date share options were exercised was 883p (2017: 756p). The closing price at 31 December 2018
was 830p (2017: 847p).
The weighted average remaining contractual life for the share options as at 31 December 2018 was two years (2017: three years).
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:
LTIP
PSP – (CFO) 1
LTIP (ELT & Board)
ShareSave – 3 year grant
ShareSave – 5 year grant
APRA
2018
815p
n/a
739p
n/a
n/a
858p
2017
739p
882p
714p
244p
260p
773p
1
Stephen Daintith (CFO) received one-off awards in 2017 to compensate him for unvested incentives awarded to him at Daily Mail & General Trust plc (DMGT) which were forfeited as a
result of him joining Rolls-Royce – see Remuneration Committee Report on page 89.
PSP and LTIP
The fair value of shares awarded 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 decreases the fair value of the award relative to the share price at the date of grant.
ShareSave
The fair value of the options granted is calculated using a 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).
FINANCIAL STATEMENTS
162
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
22 Leases
Operating leases
Leases as lessee
Non-cancellable operating lease rentals are payable as follows:
Within one year
Between one and five years
After five years
2018
£m
303
991
1,049
2,343
2017
£m
281
849
741
1,871
– Operating lease rental obligations at 31 December 2018 relate to: aero engines £1,422m (2017: £1,143m) that are used to support
customer’s aircraft fleets; land and buildings £834m (2017: £630m) used for production, administration or training purposes; and
equipment £87m (2017: £98m).
– Operating leases for aero engines typically contain no specific contractual right to renew. Certain land and building operating leases
have renewal options with renewal dates for the most significant property leases, evenly spread between 2022 and 2028, and in 2041.
Lease obligations beyond the renewal dates are included in the rentals payable data above where we are reasonably certain to extend
the lease.
– Of the operating lease rentals payable, £61m relates to Commercial Marine, classified as held for sale, of which £60m relates to property.
– Both aircraft engines and property contain some contracts where payments are linked to an index such as LIBOR.
– During the year £300m was recognised as an expense in the income statement in respect of operating leases (2017: £277m).
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
2018
£m
64
23
82
55
160
2017
£m
53
14
46
32
92
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 (2017: nil) and sublease receipts of £40m (2017: £36m) were recognised in the income statement in the year.
– The total future minimum sublease payments expected to be made is £1m (2017: £1m) and sublease receipts expected to be received are
£55m (2017: £51m).
Finance leases
Finance lease liabilities are payable as follows:
Within one year
Between one and five years
After five years
Payments
£m
2018
Interest
£m
Principal
£m
Payments
£m
2017
Interest
£m
Principal
£m
45
137
96
278
11
33
5
49
34
104
91
229
28
94
42
164
5
18
4
27
23
76
38
137
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
163
23 Contingent liabilities
Contingent liabilities in respect of customer financing commitments are described in note 18.
In January 2017, after full co-operation, 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. Prosecutions of individuals may follow and other
investigations or enforcement action may be taken by other authorities. 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 material 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 nil (2017: nil).
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
Other income received from joint ventures and associates
2018
£m
3,237
(2,957)
(189)
–
105
2
2017
£m
2,469
(2,224)
(127)
5
79
2
Included in sales of goods and services to joint ventures and associates are sales of spare engines amounting to £563m (2017: £418m).
Profit recognised in the year on such sales amounted to £157m (2017: £75m), 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
£132m (2017: £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 (pages 59 to 61) and the members of the Executive Team (described on
page 62). Remuneration for key management personnel is shown below:
Salaries and short-term benefits
Post-retirement schemes
Share-based payments
2018
£m
19
–
5
24
2017
£m
16
–
7
23
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 86 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 then when the shares
vest, which is the basis used in the Directors’ Remuneration Report.
FINANCIAL STATEMENTS 164
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
25 Acquisitions and disposals
Acquisitions
ITP Aero
On 19 December 2017, the Group completed the acquisition of the 53.1% of the shares of Industria de Turbo Propulsores SA (ITP Aero)
owned by SENER Grupo de Ingenieria SA (SENER) which it did not already own.
The consideration of €718m is payable in eight instalments, commencing on 15 January 2018. At the Group’s election, each instalment may
be settled in either cash or Rolls-Royce Holdings plc shares. If the consideration is in shares, a 3% premium is applied. Interest is accrued
on the outstanding balance based on EUR LIBOR + 1.5%.
In 2017, and as permitted by IFRS 3 Business Combinations, the fair value of acquired identifiable assets and liabilities was presented on
a provisional basis. This has been finalised during 2018 and is set out below.
Fair values are determined on the basis of an assessment performed by an independent professional expert, using measurement
techniques and estimation of future cash flows to assess the values of intangible assets at the date of acquisition. The total fair value
of acquired identifiable assets and liabilities is £1,637m and a significant part of value was allocated to intangible assets. The valuation
indicated a bargain purchase of £303m, which has been recognised in the income statement. Changes to the provisional balances
presented at
31 December 2017 reflects additional information obtained during 2018 about facts which existed at the date of acquisition, since the
acquisition occurred close to the year end. The adjustments mainly relate to customer relationships and the restatement of balances for
IFRS 15.
Recognised amounts of identifiable assets acquired and liabilities assumed
Intangible assets
Property, plant and equipment
Deferred tax assets
Inventory
Trade receivables and other assets
Current tax
Cash and cash equivalents
Trade payables and other liabilities
Borrowings
Other financial assets and liabilities
Deferred tax liability
Provisions
Total identifiable assets and liabilities
Total consideration
Bargain purchase gain arising
Gain from revaluation of existing shares
Gain arising on the acquisition of ITP Aero recognised in the income statement
Consideration satisfied by:
Deferred consideration to be paid in cash or shares
Existing shareholding
Identifiable intangible assets comprise:
Technology, patents and licences
Customer relationships
Trademark
In-process development
Other
Provisional
£m
1,417
268
148
316
497
2
263
(625)
Purchase
price
adjustments
£m
(288)
(14)
(148)
(84)
(73)
–
–
309
(34)
(148)
(386)
(68)
1,650
(1,405)
245
553
798
648
757
1,405
245
833
44
91
204
1,417
–
(4)
268
21
(13)
71
58
(71)
(13)
–
(71)
(71)
(111)
62
17
(63)
(193)
(288)
Final
£m
1,129
254
–
232
424
2
263
(316)
(34)
(152)
(118)
(47)
1,637
(1,334)
303
482
785
648
686
1,334
134
895
61
28
11
1,129
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
165
25 Acquisitions and disposals continued
Disposals
L’Orange
On 1 June 2018, the Group sold its L’Orange business, a subsidiary of Power Systems, to Woodward Inc. for €673m.
Proceeds
Cash consideration 1
Cash and cash equivalents disposed
Net cash consideration
Disposal costs paid
Cash inflow per cash flow statement
Assets and liabilities disposed
Intangible assets
Property, plant and equipment
Investments
Deferred tax assets
Inventory
Deposits (payments received on account)
Trade receivables and other assets
Trade payables and other liabilities
Current tax
Provisions for liabilities and charges
Deferred tax liabilities
Post-retirement scheme deficits
Net assets disposed
Profit on disposal before disposal costs and continuing obligations
Cumulative currency translation gain
Profit on disposal of the business
Disposal costs
Non-underlying profit before tax
1 Under the sale agreement, the cash consideration may be adjusted by up to +/-€44m, based on L’Orange aftermarket sales over the five-year period to 31 May 2023. This was
reassessed at 31 December 2018, no significant adjustments were identified.
2018
£m
589
(3)
586
(13)
573
169
61
3
6
40
(1)
27
(21)
(1)
(6)
(12)
(31)
234
352
19
371
(13)
358
FINANCIAL STATEMENTS 166
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
25 Acquisitions and disposals continued
Commercial Marine – held for sale
On 6 July 2018, the Group announced the sale of Commercial Marine to KONGSBERG for a cash consideration of approximately £425m.
The disposal is expected to complete in 2019.
The transaction meets the criteria of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations that where the carrying value
of a disposal group is expected to be recovered through a sale transaction, the disposal group should be treated as held for sale, with
assets and liabilities presented separately on the balance sheet measured at the lower of carrying value or fair value less costs to dispose.
As a result of the decision to classify the Commercial Marine business as held for sale, its carrying value has been assessed against the
anticipated proceeds and the disposal costs. An impairment charge of £155m for the related goodwill (with an additional £5m impairment
charge to property, plant and equipment) has been recognised in the income statement and the remaining balance of £227m transferred
to assets held for sale.
The table below summarises the categories of assets and liabilities classified as held for sale:
Assets and liabilities held for sale
Intangible assets
Property, plant and equipment 1
Deferred tax assets
Inventory 1
Trade receivables and other assets
Current tax assets
Assets held for sale
Trade payables and other liabilities
Current tax liabilities
Provisions for liabilities and charges
Post-retirement scheme deficits
Liabilities associated with assets held for sale
Net assets held for sale
2018
£m
246
140
4
191
166
3
750
(313)
(3)
(33)
(27)
(376)
374
1 £7m of assets related to the steering gear business were held for sale at the end of 2017. £3m of property, plant and equipment and £4m of inventory held for sale in 2017 are due to be
sold in 2019 as part of the proposed sale to KONGSBERG.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
167
26 Derivation of summary funds flow statement
The table below shows the derivation of the summary funds flow statement (lines marked *) on page 20 from the cash flow statement (CFS)
on page 110.
* Underlying profit before tax (PBT) – overleaf
Depreciation and impairment of PPE
Amortisation and impairment of intangible assets
Impairment of goodwill
Acquisition accounting
* Depreciation and amortisation
Increase in inventories
Movement in receivables/payables
Movement in contract assets and liabilities
Realised derivatives in financing
Revaluation of trading assets (excluding exceptional items)
* Movement on net working capital
* Civil Aerospace LTSA contract balances
Additions of intangible assets
Purchases of PPE
* Expenditure on PPE and intangible assets
Realised losses on hedging instruments
Foreign exchange on contract accounting
Net unrealised fair value changes to derivatives
Exceptional restructuring charges (excluding cash spent of £70m)
Underlying financing
New finance leases in year
Impact of joint venture trading
Increase/(decrease) in provisions
Trent 900 exceptional items in payables
Trent 1000 exceptional charges at expected rates
Trent 900 exceptional items at expected rates
Trent 1000 and Trent 900 adjustments to spot rates
Cash flows on other financial assets and liabilities
Share based payments
Disposal of intangible assets and PPE
Investments in joint ventures and associates
Net interest received and paid
Transactions in ordinary shares
Other movements
* 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
* Acquisition of ITP Aero
* Disposal of L’Orange
* Exceptional restructuring costs
* DPA payments
* Other
* Foreign exchange
* Change in net debt
2018
£m
£m
466
2017
£m
£m
199
521
565
(155)
(175)
(616)
1,129
363
(465)
170
(680)
(905)
219
(265)
(1)
(256)
150
(97)
101
1,003
134
(790)
(186)
(147)
(267)
35
67
(13)
(70)
–
(22)
240
(181)
450
343
(12)
(129)
(194)
226
(50)
(195)
(6)
(647)
(730)
756
581
944
652
(219)
1,379
(1,585)
(1,377)
453
(153)
24
(104)
107
(57)
70
(1)
–
–
–
–
(469)
34
21
(47)
(53)
(3)
(8)
240
(249)
(186)
448
(9)
(180)
259
(214)
229
–
–
(286)
(9)
(59)
(80)
(405)
757
59
(248)
568
(219)
–
573
(70)
–
10
54
916
Source
CFS
CFS
Reversal of underlying adjustment
Reversal of underlying adjustment
CFS
CFS
CFS
Underlying adjustment (note 2)
Reversal of underlying adjustment
CFS
CFS
Reversal of underlying adjustment
Reversal of underlying adjustment
Reversal of underlying adjustment
Reversal of underlying adjustment
Reversal of charge in underlying PBT
CFS
JV dividends less share of results – CFS
CFS
Reversal of underlying adjustment
Reversal of underlying adjustment
Reversal of underlying adjustment
CFS
CFS
CFS
CFS
CFS
CFS
CFS
CFS
CFS
C Shares and NCI dividends – CFS
CFS
CFS
CFS
CFS
FINANCIAL STATEMENTS 168
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
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. It excludes 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 changes to derivatives
Foreign exchange on contract accounting
Revaluation of trading assets and liabilities
Trent 900 and Trent 1000 exceptional charges
Effect of acquisition accounting
UK pension equalisation
Impairment of goodwill
Exceptional restructuring charge
Other
Adjustments to reported operating profit
Underlying profit before financing
Underlying financing
Underlying profit before tax
2018
£m
£m
(1,161)
2017
£m
£m
366
(219)
1
265
(23)
976
175
121
155
317
9
(453)
(24)
153
6
–
129
–
24
104
1
1,777
616
(150)
466
(60)
306
(107)
199
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)
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 cash flow statement
on page 110.
Change in cash and cash equivalents
Returns to shareholders
Net cash flow from changes in borrowings and finance leases
Increase in short-term investments
Acquisition of ITP Aero
Disposal of L’Orange
Other acquisitions and disposals
Changes in group structure
Payments of financial penalties from agreements with investigating bodies
Exceptional restructuring expenditure
Other
Free cash flow
Exclude cash outflow of ITP Aero
Free cash flow excluding ITP Aero
2017
£m
(263)
–
(1)
2018
£m
–
(573)
(10)
£m
1,953
219
(1,091)
3
(583)
–
70
(3)
568
£m
231
214
(200)
–
(264)
286
–
(8)
259
14
273
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
169
27 Impact of new accounting standards and other adjustments
IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments
The restatements of the primary statements arising from adopting IFRS 15, IFRS 9 and other adjustments are summarised below.
Consolidated income statement
For the year ended 31 December 2017
Revenue
Cost of sales
Gross profit 2
Commercial and administrative costs
Research and development costs 3
Share of results of joint ventures and associates
Operating profit
Gain arising on the acquisition of ITP Aero
Profit before financing and taxation
Financing income
Financing costs
Net financing 4
Profit before taxation
Taxation 5
Profit for the year
Attributable to:
Ordinary shareholders
Non-controlling interests
Profit for the year
Previous
accounting
£m
16,307
(13,134)
3,173
(1,222)
(795)
131
1,287
798
2,085
IFRS 15 impact
£m
(1,547)
687
(860)
–
(48)
–
(908)
–
(908)
ITP Aero
adjustments 6
£m
–
–
–
–
–
–
–
(13)
(13)
Other
adjustments 1
£m
(13)
122
109
–
–
(122)
(13)
–
(13)
IFRS 15 basis
31 December
2017
£m
14,747
(12,325)
2,422
(1,222)
(843)
9
366
785
1,151
2,973
(161)
2,812
4,897
(689)
4,208
4,207
1
4,208
(58)
(8)
(66)
(974)
172
(802)
(802)
–
(802)
–
–
–
(13)
–
(13)
(13)
–
(13)
(4)
5
1
(12)
2
(10)
(10)
–
(10)
2,911
(164)
2,747
3,898
(515)
3,383
3,382
1
3,383
Earnings per ordinary share attributable to shareholders
Basic
Diluted
229.40p
228.64p
(43.73p)
(43.59p)
(0.71p)
(0.71p)
(0.55p)
(0.54p)
184.41p
183.80p
1 The other adjustments impacting profit before taxation for the year arise from the revised calculation of the foreign exchange rate applied to non-monetary assets and liabilities of
£(4)m and the revised unwind of discounting of non-current liabilities of £(8)m. As per note 11 deferred profit on sales to joint ventures was previously recognised in cost of sales but is
now recognised within the share of results of joint ventures and associates.
2 The IFRS 15 impact is predominantly due to de-recognition of contractual aftermarket rights, de-linkage of OE from aftermarket contracts and a change to recognise revenue on
long-term service agreements as costs are incurred rather than when the engines are operated.
3 Reclassification of the recognition of contributions received from the Group’s suppliers under RRSAs to cost of sales.
4 Revised phasing of foreign exchange in line with revised phasing of long-term service agreement revenues and unwind of discounting of future guarantee payments due to customers.
5 Consequential change from the restated reported profit before taxation.
6 Changes to the provisional balances presented at 31 December 2017 reflect additional information obtained during 2018 about facts which existed at the date of acquisition, since the
acquisition occurred close to the year end, together with the impact of IFRS 15 transition in ITP Aero.
FINANCIAL STATEMENTS 170
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
27 Impact of new accounting standards and other adjustments continued
Consolidated statement of comprehensive income
For the year ended 31 December 2017
Previous
accounting
£m
4,208
IFRS 15 impact
£m
(802)
ITP Aero
adjustments
£m
(13)
Other
adjustments
£m
(10)
IFRS 15 basis
31 December
2017
£m
3,383
Profit for the year
Other comprehensive income (OCI)
Actuarial movements on 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
Share of OCI of joint ventures and associates
Related tax movements
Items that may be reclassified to profit or loss
Total other comprehensive income
735
(1)
(307)
427
(142)
(5)
1
(146)
281
–
–
–
–
5
–
–
5
5
Total comprehensive income for the year
4,489
(797)
Attributable to:
Ordinary shareholders
Non-controlling interests
Total comprehensive income for the year
4,488
1
4,489
(797)
–
(797)
–
–
–
–
3
–
–
3
3
(10)
(10)
–
(10)
–
–
–
–
1
–
–
1
1
(9)
(9)
–
(9)
735
(1)
(307)
427
(133)
(5)
1
(137)
290
3,673
3,672
1
3,673
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
171
27 Impact of new accounting standards and other adjustments continued
Previous
Accounting
£m
IFRS 15
impact 1
£m
ITP Aero
adjustments 2
£m
Other
adjustments 3
£m
IFRS 15 basis
31 December
2017
£m
IFRS 9
impact 4
£m
1 January
2018
£m
Consolidated balance sheet
At 31 December 2017
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 receivables and other assets
Contract assets
Taxation recoverable
Other financial assets
Short-term investments
Cash and cash equivalents
Current assets
Assets held for sale
TOTAL ASSETS
LIABILITIES
Borrowings
Other financial liabilities
Trade payables and other liabilities
Contract liabilities
Current tax liabilities
Provisions for liabilities and charges
Current liabilities
Borrowings
Other financial liabilities
Trade payables and other liabilities
Contract liabilities
Deferred tax liabilities
Provisions for liabilities and charges
Post-retirement scheme deficits
Non-current liabilities
TOTAL LIABILITIES
7,063
4,624
688
26
610
271
2,125
15,407
3,660
7,919
–
17
36
3
2,953
14,588
7
30,002
(82)
(581)
(9,527)
–
(209)
(526)
(10,925)
(3,406)
(2,435)
(4,178)
–
(1,144)
(357)
(1,387)
(12,907)
(23,832)
(1,221)
–
–
–
–
608
–
(613)
64
(1,587)
–
–
–
–
–
(1,523)
–
(2,136)
–
(20)
(1,762)
–
–
36
(1,746)
–
(23)
(1,901)
–
545
–
–
(1,379)
(3,125)
(291)
(13)
–
–
–
(148)
–
(452)
(84)
(74)
–
–
–
–
–
(158)
–
(610)
–
–
300
–
–
7
307
–
(3)
14
–
268
14
–
293
600
(10)
14
47
(313)
–
–
720
–
468
163
(1,905)
1,945
–
–
–
–
203
–
671
–
–
4,104
(4,104)
–
(67)
(67)
–
–
3,827
(3,607)
(740)
(50)
–
(570)
(637)
5,565
4,658
375
26
610
1,451
2,125
14,810
3,803
4,353
1,945
17
36
3
2,953
13,110
7
27,927
(82)
(601)
(6,885)
(4,104)
(209)
(550)
(12,431)
(3,406)
(2,461)
(2,238)
(3,607)
(1,071)
(393)
(1,387)
(14,563)
(26,994)
–
–
–
–
–
2
–
2
–
(12)
(5)
–
–
–
–
(17)
–
(15)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5,565
4,658
375
26
610
1,453
2,125
14,812
3,803
4,341
1,940
17
36
3
2,953
13,093
7
27,912
(82)
(601)
(6,885)
(4,104)
(209)
(550)
(12,431)
(3,406)
(2,461)
(2,238)
(3,607)
(1,071)
(393)
(1,387)
(14,563)
(26,994)
34
933
(15)
918
NET ASSETS
6,170
(5,261)
1
The main balance sheet impacts of IFRS 15 have been as follows:
Intangible assets: De-recognition of Contractual Aftermarket Rights (CARs) and reclassification of participation fees as contract assets as IFRS 15 provides additional guidance on the
treatment of payments to customers.
Deferred tax: Consequential change from the restated cumulative profits.
Inventories: The cost of parts sold where an option to repurchase is retained e.g. within a larger manufactured assembly. The customer has not obtained control based on the IFRS 15
definition, so the asset has been added to the inventory balance.
Trade receivables/payables and other assets/liabilities: There are a number of factors: (a) revised revenue allocation between years (deferred income) as a result of de-linkage of OE
from aftermarket contracts and a change to recognise revenue on long-term service agreements as costs are incurred rather than as engines are operated, (b) recognition of an
additional asset where costs are incurred to obtain a contract that will subsequently be amortised as a reduction against the associated revenue as goods and services are delivered;
and (c) reclassifications of: participation fees from intangible assets to contract assets; RRSA payments made ahead of parts usage as a prepayment from trade payables and other
liabilities; and amounts billed in advance have increased the trade receivables asset (amount billed) and the contract liability within trade payables and other liabilities to better reflect
the contractual position.
Other financial liabilities: Parts sold with an option to repurchase and future obligations to airframers arising from sale of our OE on their airframes.
Provisions: As a result of the more refined guidance on contract liabilities in IFRS 15 we have reclassified a balance from provisions.
Net assets: All of the adjustments to net assets are included within retained earnings in equity, with the exception of £13m (2016: £22m) which arises from the consolidation of overseas
entities and is included in the translation reserve.
2 Changes to the provisional ITP Aero balances presented at 31 December 2017 reflecting additional information obtained during 2018 about facts which existed at the date of
acquisition, since the acquisition occurred close to the year end, together with the impact of IFRS 15. Balances reflect the exchange rate at the balance sheet date, rather than the
date of acquisition. See note 25.
3 Further information on other adjustments is provided on page 173.
4 Re-assessment of recoverability of financial assets using IFRS 9 principles has resulted in a reduction in net assets of £15m.
FINANCIAL STATEMENTS
172
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
27 Impact of new accounting standards and other adjustments continued
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 receivables and other assets
Contract assets
Taxation recoverable
Other financial assets
Short-term investments
Cash and cash equivalents
Current assets
Assets held for sale
TOTAL ASSETS
LIABILITIES
Borrowings
Other financial liabilities
Trade payables and other liabilities
Contract liabilities
Current tax liabilities
Provisions for liabilities and charges
Current liabilities
Borrowings
Other financial liabilities
Trade payables and other liabilities
Contract liabilities
Deferred tax liabilities
Provisions for liabilities and charges
Post-retirement scheme deficits
Non-current liabilities
TOTAL LIABILITIES
Previous
Accounting
£m
IFRS 15
impact 1
£m
Other
adjustments 3
£m
IFRS 15 basis
31 December
2016
£m
5,080
4,114
844
38
382
876
1,346
12,680
3,086
6,956
–
32
5
3
2,771
12,853
5
25,538
(172)
(651)
(7,957)
–
(211)
(543)
(9,534)
(3,185)
(5,129)
(3,459)
–
(776)
(216)
(1,375)
(14,140)
(23,674)
(985)
–
–
–
–
465
–
(520)
89
(1,405)
–
–
–
–
–
(1,316)
–
(1,836)
–
(42)
(1,497)
–
–
(73)
(1,612)
–
–
(1,549)
–
533
–
–
(1,016)
(2,628)
21
20
(289)
–
–
444
–
196
178
(1,868)
1,875
–
–
–
–
185
–
381
–
–
3,321
(3,366)
–
(16)
(61)
–
–
3,186
(2,946)
(470)
(47)
–
(277)
(338)
4,116
4,134
555
38
382
1,785
1,346
12,356
3,353
3,683
1,875
32
5
3
2,771
11,722
5
24,083
(172)
(693)
(6,133)
(3,366)
(211)
(632)
(11,207)
(3,185)
(5,129)
(1,822)
(2,946)
(713)
(263)
(1,375)
(15,433)
(26,640)
NET ASSETS/(LIABILITIES)
1,864
(4,464)
43
(2,557)
Footnote references as per previous page.
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Notes to the Consolidated Financial Statements
173
27 Impact of new accounting standards and other adjustments continued
Other adjustments can be analysed as follows:
At 31 December 2017
Intangible assets
Property, plant and equipment
Investments – joint ventures and associates
Deferred tax assets
Non-current assets
Inventories
Trade receivables and other assets
Contract assets
Current assets
Trade payables and other liabilities
Contract liabilities
Provisions for liabilities and charges
Current liabilities
Trade payables and other liabilities
Contract liabilities
Deferred tax liabilities
Provisions for liabilities and charges
Non-current liabilities
NET ASSETS
At 31 December 2016
Intangible assets
Property, plant and equipment
Investments – joint ventures and associates
Deferred tax assets
Non-current assets
Inventories
Trade receivables and other assets
Contract assets
Current assets
Trade payables and other liabilities
Contract liabilities
Provisions for liabilities and charges
Current liabilities
Trade payables and other liabilities
Contract liabilities
Deferred tax liabilities
Provisions for liabilities and charges
Non-current liabilities
NET ASSETS
Deferred profit
on JV sales 1
£m
–
–
(313)
–
(313)
–
–
–
–
35
–
–
35
278
–
–
–
278
Other
classification
changes 2
£m
–
–
–
–
–
–
(1,945)
1,945
–
4,193
(4,104)
(67)
22
3,635
(3,607)
–
(50)
(22)
Other 3
£m
14
47
–
–
61
163
40
–
203
(124)
–
–
(124)
(86)
–
–
–
(86)
Deferred
tax 4
£m
–
–
–
720
720
–
–
–
–
–
–
–
–
–
–
(740)
–
(740)
Other
adjustments
£m
14
47
(313)
720
468
163
(1,905)
1,945
203
4,104
(4,104)
(67)
(67)
3,827
(3,607)
(740)
(50)
(570)
–
–
54
(20)
34
Deferred profit
on JV sales 1
£m
–
–
(289)
–
(289)
–
–
–
–
–
–
–
289
–
–
–
289
–
Other
classification
changes 2
£m
–
–
–
–
–
–
(1,868)
1,875
7
3,393
(3,366)
(16)
11
2,975
(2,946)
–
(47)
(18)
–
Other 3
£m
Deferred
tax 4
£m
21
20
–
–
41
178
–
–
178
(72)
–
–
(72)
(78)
–
–
–
(78)
69
–
–
–
444
444
–
–
–
–
–
–
–
–
–
–
(470)
–
(470)
(26)
Other
adjustments
£m
21
20
(289)
444
196
178
(1,868)
1,875
185
3,321
(3,366)
(16)
(61)
3,186
(2,946)
(470)
(47)
(277)
43
1 As per note 11 deferred profit on sales to joint ventures of £313m (2016: £289m) was previously included in trade payables and other liabilities but during the year the Group concluded
that it is more appropriate for the credit to be included in the carrying value of the investment in the entity (included within Investments – joint ventures and associates).
2 Other classification changes are primarily the result of separately disclosing contract assets and contract liabilities on the face of the balance sheet. In addition, some balances have
been reclassified to better reflect the nature of the liability.
3 Other adjustments includes the revision of the foreign exchange rate applied to the initial recognition of non-monetary assets and liabilities that increases net assets by £140m
(2016: £147m) and the use of a revised discount rate that increases non-current liabilities by £86m (2016: £78m).
4 Includes a gross-up of deferred tax assets and liabilities on pension surpluses that cannot be offset with other deferred tax balances. The impact on net assets arises from the tax effect
on the other adjustments that are stated gross and a change in treatment of industrial building allowances.
FINANCIAL STATEMENTS
174
Financial Statements
Notes to the Consolidated Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
27 Impact of new accounting standards and other adjustments continued
Cash flows
The adjustments to the income statement and balance sheet described above do not affect the cash balances, but do alter the
categorisation of some items in the cash flow statement. In particular, the de-recognition of contractual aftermarket rights and the transfer
of participation fees to contractual assets reduce additions to intangible assets. These cash flows are now included in the net cash flows
from operating activities and there is a consequential change to the adjustment for amortisation of intangible assets. Other adjustments
are principally within monetary working capital movements.
Classification of financial instruments
IFRS 9 was adopted on 1 January 2018 and affects the classification of financial instruments. If it had been adopted at 31 December 2017,
the classifications (see page 144) would have been as follows:
2017
Unlisted non-current asset investments
Trade receivables and similar items 1
Other non-derivative financial assets
Derivative financial assets
Short-term investments
Cash and cash equivalents 2
Borrowings
Derivative financial liabilities
Financial RRSAs
Other
C Shares
Trade payables and similar items
Other non-derivative financial liabilities
Assets
Liabilities
Fair value
through profit
or loss
Fair value
through OCI
Amortised
cost
Fair value
through profit
or loss
£m
£m
£m
£m
26
–
–
646
–
589
–
–
–
–
–
–
–
1,261
–
285
–
–
–
–
–
–
–
–
–
–
–
285
–
3,090
477
–
3
2,364
–
–
–
–
–
–
–
5,934
–
–
–
–
–
–
–
(2,730)
–
–
–
–
–
(2,730)
Other
£m
–
–
–
–
–
–
(3,488)
(247)
(57)
(28)
(4,088)
(2,096)
(10,004)
Total
£m
26
3,375
477
646
3
2,953
(3,488)
(2,730)
(247)
(57)
(28)
(4,088)
(2,096)
(5,254)
1 Trade receivables are classified as FVTOCI if the Group may sell before the due date.
2 Money-market funds are classified as FVTPL, other cash and cash equivalent balances are classified as amortised cost.
Rolls-Royce Holdings plc Annual Report 2018
Financial statements
Company Balance Sheet
Company Statement of Changes in Equity
175
COMPANY BALANCE SHEET
At 31 December 2018
ASSETS
Investments – subsidiary undertakings
Trade and other receivables
Cash and cash equivalents
Current assets
TOTAL ASSETS
LIABILITIES
Other financial liabilities
Trade and other payables
Current liabilities
NET ASSETS
EQUITY
Called-up share capital
Share premium account
Merger reserve
Capital redemption reserve
Other reserve
Retained earnings
TOTAL EQUITY
Notes
2018
£m
2017
£m
2
3
5
4
6
12,521
12,076
371
–
371
12,892
(29)
(2,008)
(2,037)
371
2
373
12,449
(28)
(1,794)
(1,822)
10,855
10,627
379
268
7,029
2,432
218
529
10,855
368
195
6,843
2,216
186
819
10,627
The Financial Statements on pages 175 to 177 were approved by the Board on 28 February 2019 and signed on its behalf by:
Warren East
Chief Executive
Stephen Daintith
Chief Financial Officer
Company’s registered number: 7524813
COMPANY STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2018
At 1 January 2018
Profit for the year
Arising on issues of ordinary shares 2
Issue of C Shares
Redemption of C Shares
Share-based payments – direct to equity
At 31 December 2018
Attributable to ordinary shareholders
Share
capital
£m
368
–
11
–
–
–
379
Share
premium
£m
195
–
73
–
–
–
268
Merger
reserve
£m
6,843
–
403
(217)
–
–
7,029
Capital
redemption
reserve
£m
2,216
–
–
–
216
–
2,432
Other
reserve 1
£m
186
–
–
–
–
32
218
Retained
earnings
£m
819
–
–
–
(216)
(74)
529
Total
equity
£m
10,627
–
487
(217)
–
(42)
10,855
1 The ‘Other reserve’ represents the value of the share-based payments in respect of employees of subsidiary undertakings for which payment has not been received.
2 During the year, the Company issued 47,556,914 new ordinary shares relating to the first five instalments of the Group’s acquisition of ITP Aero and 7,460,173 new ordinary shares
(2017: 1,740,355) to the Group’s share trust for its employee share-based payment plans with a net book value of £74m (2017: £14m).
FINANCIAL STATEMENTS 176 Financial statements
Notes to the Company Financial Statements
Rolls-Royce Holdings plc Annual Report 2018
NOTES TO THE COMPANY FINANCIAL STATEMENTS
1 Accounting policies
Basis of accounting
Rolls-Royce Holdings plc (the ‘Company’) is a company incorporated and domiciled in the United Kingdom. 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.
There were no changes to accounting standards that had a material impact on the 2018 Financial Statements.
The Company’s Financial Statements are presented in sterling, which is the Company’s functional currency.
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 86 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 2018
Additions 1
Cost of share-based payments in respect of employees of subsidiary undertakings less receipts from subsidiaries in
respect of those payments
At 31 December 2018
1 Additions relate to investments in Rolls-Royce plc, relating to the first five instalments for the Group’s acquisition of ITP Aero (2017: nil).
The subsidiary and joint venture undertakings are listed on pages 178 to 185.
3 Trade and other receivables
Amounts owed by subsidiary undertakings
4 Trade and other payables
Amounts owed to subsidiary undertakings
£m
12,076
413
32
12,521
2018
£m
371
2017
£m
371
2018
£m
2,008
2017
£m
1,794
Rolls-Royce Holdings plc Annual Report 2018
Financial statements
Notes to the Company Financial Statements
177
5 Financial liabilities
C Shares
Movements during the year were as follows:
At 1 January 2018
Issued
Redeemed
At 31 December 2018
The rights attaching to C Shares are set out on page 200.
6 Share capital
Issued and fully paid
At 1 January 2018
Shares issued to employee share trust
Shares issued in relation to the acquisition of ITP Aero
At 31 December 2018
The rights attaching to each class of share are set out on page 200.
C Shares
of 0.1p
millions
Nominal
value
£m
28,429
216,717
(216,075)
29,071
28
217
(216)
29
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
–
–
–
–
–
–
–
–
1,840
8
48
1,896
368
2
9
379
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 5.
7 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 2018, these guarantees amounted to £3,982m (2017: £2,930m).
8 Other information
Employees
The Company had no employees in 2018.
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.
Emoluments of Directors
The remuneration of the Directors of the Company is shown below, further information is in the Directors’ Remuneration Report on pages
86 to 95.
Remuneration
Gains made on share options
Company contributions to pension schemes
Highest paid
director
£000
2,209
1,734
–
3,943
2018
Other
directors
£000
2,733
1,644
–
4,377
Total
£000
4,942
3,378
–
8,320
Highest paid
director
£000
1,189
1,259
–
2,448
2017
Other
directors
£000
4,635
–
–
4,635
Total
£000
5,824
1,259
–
7,083
No Director accrued any retirement benefits in the year (2017: nil).
FINANCIAL STATEMENTS 178
Financial Statements
Subsidiaries
Rolls-Royce Holdings plc Annual Report 2018
SUBSIDIARIES
As at 31 December 2018, the companies listed below and on the following pages are indirectly held by Rolls-Royce Holdings plc except
Rolls-Royce Group plc which is 100% directly owned by Rolls-Royce Holdings plc. The financial year end of each company is 31 December
unless otherwise indicated.
Company name
Aeromaritime America, Inc.
Address
M&H Agent Services, Inc., 1850 North Central Avenue, Suite 2100,
Phoenix, Arizona 85004, United States
Aeromaritime Mediterranean Limited
7 Industrial Estate, Hal Far, Birzebbuga, BBG 3000, Malta
Aerospace Transmission Technologies GmbH** Adelheidstrasse 40, D-88046, Friedrichshafen, Germany
Derby 1
Amalgamated Power Engineering Limited *
Bergen Engines AS
Bergen Engines Bangladesh Private Limited Green Granduer, 6th Floor, Plot no.58 E, Kamal Ataturk Avenue
Hordvikneset 125, N-5108, Hordvik, Bergen 1201, Norway
Bergen Engines BV
Bergen Engines Denmark A/S
Bergen Engines India Private Limited 3
Bergen Engines Limited
Bergen Engines PropertyCo AS
Bergen Engines S.L.
Bergen Engines S.r.l.
Bristol Siddeley Engines Limited *
Brown Brothers & Company Limited
C.A. Parsons & Company Limited *
Data Systems & Solutions, LLC
Derby Specialist Fabrications Limited *
Europea Microfusioni Aerospaziali S.p.A.
Heaton Power Limited *
Industria de Tuberías Aeronáuticas
México S.A. de C.V.
Industria de Tuberías Aeronáuticas S.A.U.
Industria de Turbo Propulsores S.A.
ITP Engines UK Limited
ITP Externals India Private Ltd
ITP Externals S.L.U.
ITP Ingeniería y Fabricación S.A. de C.V.
ITP México Fabricación S.A. de C.V.
Banani, C/A Dhaka, 1213, Bangladesh
Werfdijk 2, 3195HV Pernis, Rotterdam, Netherlands
Ostre Havnepromenade 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
Via Castel Morrone 13, 16161, Genoa, Italy
Derby 1
Taxiway, Hillend Industrial Estate, Dalgety Bay, Dunfermline,
Fife, KY11 9JT, Scotland
Derby 1
Wilmington 2
Derby 1
Zona Industriale AS1, 83040 Morra de Sanctis, Avellino, Italy
Derby 1
Acceso IV, No.6B, Zona Industrial Benito Juárez, Querétaro,
76120, Mexico
Pabellón Industrial, Torrelarrgoiti, Parcela 5H, Naves 7 a 10, Zamudia,
Vizcaya, Spain
Parque Technológico Edificio 300, 48170 Zamudio, Vizcaya, Spain Ordinary
Ordinary
The Whittle Estate, Cambridge Road, Whetstone, Leicester,
LE8 6LH, England
Plot 60/A, IDA Gandhi Nagar, Hyderabad, 500037, India
Pabellón Industrial, Polígono Ugaldeguren I, PIIIA,
Pab 1-2 Zamudio, Vizcaya, Spain
Acceso IV, No.6D, Zona Industrial Benito Juárez, Querétaro,
76120, Mexico
Acceso IV, No.6, Zona Industrial Benito Juárez, Querétaro,
76120, Mexico
Ordinary
Ordinary
Ordinary
ITP México S.A. de C.V.
Acceso IV, No.6, Zona Industrial Benito Juárez, Querétaro,
76120, Mexico
ITP Next Generation Turbines S.L.U.
John Thompson Cochran Limited *
Kamewa AB *
Kamewa do Brazil Equipmentos
Maritimos Limitada (in liquidation)
Kamewa Holding AB *
Karl Maybach-Hilfe GmbH
MTU Africa (Proprietary) Limited
Parque Technológico Edificio 300, 48170 Zamudio, Vizcaya, Spain Ordinary
Taxiway, Hillend Industrial Estate, Dalgety Bay, Dunfermline, Fife,
KY11 9JT, Scotland
Box 1010, S-68129, Kristinehamn, Sweden
401 Rua Visconde de Pitaja 433, Rio de Janeiro, Brazil
Box 1010, S-68129, Kristinehamn, Sweden
Maybachplatz 1, 88045, Friedrichshafen, Germany
36 Marconi Street, Montague Gardens, Cape Town, 7441,
South Africa
Ordinary
Capital Stock
Capital Stock
* Dormant entity.
** Though the interest held is 50%, the Company controls the entity (see note 1 accounting policies) and, as a result, consolidates the entity and records a non-controlling interest.
1 Moor Lane, Derby, DE24 8BJ, England.
2 Corporation Service Company, 251 Little Falls Drive, Wilmington, Delaware 19808, United States.
3 Reporting year end is 31 March.
Class
of shares
Common
Ordinary
Capital Stock
Deferred
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Social
Participation
Social Capital
Ordinary
Ordinary
Ordinary
Partnership
(no equity)
Ordinary
Ordinary
Ordinary
Class A
Class A
Class B
Fixed capital B
Variable capital
B
Fixed capital B
Variable capital
B
6% Cumulative
Preference
Ordinary
Ordinary
Quotas
% of
class
held
100
100
50
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 2018
Financial Statements
Subsidiaries
179
Class
of shares
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Capital Stock
Ordinary
Capital Stock
Ordinary
Capital Stock
Capital Stock
Capital Stock
Ordinary
Ordinary
Company name
MTU America Inc.
MTU Asia PTE Limited
MTU Benelux B.V.
MTU China Company Limited
Address
Wilmington 2
10 Tukang Innovation Drive, Singapore 618302
Merwedestraat 86, 3313 CS, Dordrecht, Netherlands
Room 1803 18/F Ascendas Plaza, No.333 Tian Qiao Road, Xuhai
Distrcit, Shanghai, 200030, China
Via Anhanguera, KM 29203, 05276-000 Sao Paulo – SP, Brazil
MTU do Brasil Limitada
MTU Engineering (Suzhou) Company Limited 9 Long Yun Road, Suzhou Industrial Park, Suzhou 215024,
MTU France S.A.S.
MTU Friedrichshafen GmbH
MTU Hong Kong Limited
MTU Ibérica Propulsión y Energia S.L.
MTU India Private Limited 3
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 GmbH
MTU Onsite Energy Systems GmbH
MTU Polska Sp. z o.o.
MTU Power Systems Sdn. Bhd
MTU Reman Technologies GmbH
MTU Rus Limited Liability Company
MTU South Africa (Proprietary) Limited
MTU UK Limited
Navis Consult d.o.o.
NEI International Combustion Limited *
NEI Mining Equipment Limited *
NEI Nuclear Systems Limited *
NEI Parsons Limited *
NEI Peebles Limited *
NEI Power Projects Limited *
Nightingale Insurance Limited
PKMJ Technical Services, Inc.
Power Jets
(Research and Development) Limited *
Powerfield Limited *
Precision Casting Bilbao S.A.U.
Prokura Diesel Services (Proprietary) Limited *
(in liquidation)
PT MTU Indonesia
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Jiang Su, China
Immeuble Colorado, 8/10 rue de Rosa Luxembourg-Parc des
Bellevues 95610, Erangy-sur-Oise, France
Maybachplatz 1, 88045, Friedrichshafen, Germany
Room 1006, 10/F, Hang Seng Tsimshatsui Building, 18 Carnarvon
Road, Tsimshatsui, Kowloon, Hong Kong
Calle Copérnico 26-28, 28823 Coslada, Madrid, Spain
6th Floor, RMZ Galleria, S/Y No. 144 Bengaluru, Bangalore,
Kamataka 560,064, India
4 Ha’Alon Street, South Building, Third Floor,
4059300 Kfar Neter, Israel
Via Aurelia Nord, 328, 19021 Arcola (SP), Italy
Resorttrust Building 4-14-3, Nishitenma Kita-ku,
Osaka 530-0047, Japan
22nd Floor, Olive Tower, 41 Sejongdaero 9 gil, Junggu,
100-737 Seoul, Republic of Korea
S3B5SR06, Jebel Ali Free Zone, South P.O. Box 61141, Dubai,
United Arab Emirates
Hatira Sokak, No. 5, Ömerli Mahellesi, 34555 Arnavutköy,
Istanbul, Turkey
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 Ordinary
Ordinary
Level 10 Menara LGB, 1 Jalan Wan Kadir Taman Tun Dr Ismail,
6000 Kuala Lumpur, Malaysia
Friedrich-List-Strasse 8, 39122 Magdeburg, Germany
Shabolovka Street 2, 119049, Moscow, Russian Federation
36 Marconi Street, Montague Gardens, Cape Town, 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
Maison Trinity, Trinity Square, St. Peter Port, GY1 4AT, Guernsey
Wilmington 2
The Whittle Estate, Cambridge Road, Whetstone, Leicester,
LE8 6LH, England
Derby 1
Calle El Barracón 1, Baracaldo, Vizcaya, 48910 Spain
36 Marconi Street, Montague Gardens, Cape Town, 7441, South
Africa
Secure Building Blok B, Jl. Raya Protokol Halim,
Perdanakusuma, Jakarta, 13610, Indonesia
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
* Dormant entity.
1 Moor Lane, Derby, DE24 8BJ, England.
2 Corporation Service Company, 251 Little Falls Drive, Wilmington, Delaware 19808, United States.
3 Reporting year end is 31 March.
% 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
75
100
100
100
100
100
100
100
100
100
100
100
100
100
FINANCIAL STATEMENTS 180
Financial Statements
Subsidiaries
Rolls-Royce Holdings plc Annual Report 2018
Class
of shares
Ordinary
Ordinary
Ordinary
Address
Secure Building Blok B JL, Raya Protokol Halim Perdanakusuma,
Halim P.K. Makasar, Jakarta, Timur DKI Jakarta
Ulster International Finance, 1st Floor IFSC House, IFSC,
Dublin 1, Ireland
4, 4.5 Level 12, Suite 1299, Rajdamri Road, Pathumwan, Bangkok,
10330, Thailand
Box 1010, S-68129, Kristinehamn, Sweden
Derby 1
G/F, No 1-3 Wing Yip Street, Kwai Chung, New Territories,
Hong Kong
Suite 102, 2-4 Lyonpark Road, Macquarie Park, NSW 2113, Australia Ordinary
Suite 102, 2-4 Lyonpark Road, Macquarie Park, NSW 2113, Australia Ordinary
Rua drive Cincinato Braga No. 47, Planalto District, São Bernando
do Campo, SP, 09890-900, Brazil
9500 Côte de Liesse, Lachine, Québec H8T 1A2, Canada
305-306 Indigo Building 1, 20 Jiuxianqiao Road, Beijing,
100016, China
597 The Queensway, Peterborough Ontario K9J 7J6, Canada
23 chemin du Vieux Chêne, 38240, Meylan, France
Derby 1
Ordinary
Ordinary
Ordinary
Quotas
Wilmington 2
c/o Deloitte, 80 Queen Street, Auckland Central, Auckland 1010,
New Zealand
Derby 1
Company name
PT Rolls-Royce
Rolls-Royce (Ireland) Unlimited Company *
Rolls-Royce (Thailand) Limited
Rolls-Royce AB
Rolls-Royce Aero Engine Services Limited *
Rolls-Royce Asia Limited
Rolls-Royce Australia Pty Limited
Rolls-Royce Australia Services Pty Limited
Rolls-Royce Brasil Limitada
Rolls-Royce Canada Limited
Rolls-Royce China Holding Limited
Rolls-Royce Civil Nuclear Canada Limited
Rolls-Royce Civil Nuclear S.A.S.
Rolls-Royce Commercial Aero
Engines Limited *
Rolls-Royce Control Systems Holdings Co
Rolls-Royce Controls and Data Services
(NZ) Limited
Rolls-Royce Controls and Data Services
(UK) Limited
Rolls-Royce Controls and Data Services, Inc. Wilmington 2
Rolls-Royce Controls and Data Services
Limited*
Rolls-Royce Corporation
Rolls-Royce Crosspointe LLC
Wilmington 2
Wilmington 2
Derby 1
Rolls-Royce Defense Products
and Solutions, Inc.
Rolls-Royce Defense Services, Inc.
Rolls-Royce Deutschland Ltd & Co KG
Rolls-Royce Electrical Norway AS
Rolls-Royce Energy Angola, Limitada *
Rolls-Royce Energy Systems Inc.
Rolls-Royce Engine Services Holdings Co.
Rolls-Royce Engine Services Limitada Inc.
(in liquidation)
Rolls-Royce Erste Beteiligungs GmbH
Rolls-Royce Finance Company Limited
Wilmington 2
Wilmington 2
Eschenweg 11, 15827 Blankenfelde-Mahlow, Germany
Jarleveien 8A, 7041, Trondheim 500, Norway
Rua Rei Katyavala, Edificio Rei Katyavala, Entrada B, Piso 8,
Luanda, Angola
Wilmington 2
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 Finance Holdings Co.
Rolls-Royce Fuel Cell Systems Limited
Rolls-Royce General Partner Limited *
Rolls-Royce Group plc
Wilmington 2
Derby 1
Derby 1
62 Buckingham Gate, London, SW1E 6AT, England
Rolls-Royce High Temperature
Composites, Inc.
Rolls-Royce Holdings Canada Inc.
Rolls-Royce India Limited * 3
Corporation Service Company, 2710 Gateway Oaks Drive,
Suite 150N, Sacramento, California 95833, United States
9500 Côte de Liesse, Lachine, Québec H8T 1A2, Canada
Derby 1
* Dormant entity.
1 Moor Lane, Derby, DE24 8BJ, England.
2 Corporation Service Company, 251 Little Falls Drive, Wilmington, Delaware 19808, United States.
3 Reporting year end is 31 March.
% 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
Common Stock
Registered
Capital
Common Shares
Ordinary
Ordinary
Common Stock
Ordinary
Ordinary
Common Stock
Ordinary
Common Stock
Partnership
(no equity)
Common Stock
Common Stock
Ordinary
Ordinary
Quota
Common Stock
Common Stock
Capital Stock
Capital Stock
Deferred
Ordinary
Common Stock
Ordinary
Ordinary
Ordinary
Ordinary A
Ordinary
Common C
Ordinary
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Subsidiaries
181
Company name
Rolls-Royce India Private Limited 3
Rolls-Royce Industrial & Marine
Power Limited *
Rolls-Royce Industrial Power (India) Limited * 3 Derby 1
Derby 1
Rolls-Royce Industrial Power Engineering
(Overseas Projects) Limited
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 Korea Limited
Rolls-Royce Leasing Limited
Rolls-Royce Malaysia Sdn. Bhd.
Rolls-Royce Marine (Shanghai) Limited
Rolls-Royce Marine A/S
Rolls-Royce Marine AS
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 España 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 3
Rolls-Royce Marine North America, Inc.
Rolls-Royce Mexico Administration S. de R.L.
de C.V.
Rolls-Royce Mexico S. de R.L. de C.V.
Address
Birla Tower West, 2nd Floor 25, Barakhamba Road, New Delhi,
110001, India
Derby 1
Derby 1
Derby 1
Office 41 H, 32-34 Liter A, Nevsky Office, St. Petersburg,
191186, Russian Federation
Pobřežní 620/3, Postal code 186 00, Karlin - Prague 8,
Czech Republic
Via Castel Morrone 13, 16161, Genoa, Italy
31st Floor, Kasumigaseki Building, 3-2-5 Kasumigaseki,
Chiyoda-Ku, Tokyo, 100-6031, Japan
197 Noksan SanEop Buk-Ro (Songjeong-dong), Gangseo-gu,
Busan 46753, Republic of Korea
Derby 1
Level 10, Menara LGB, 1 Jalan Wan Kadir Taman Tun Dr Ismail,
6000 Kuala Lumpur, Malaysia
1st Floor Building 14, Lane 8666, Hu Nan Road, Pudong District,
Shanghai, PRC
Ostre Havnepromenade 34, 9000, Aalborg, Denmark
Borgundvegen 340, Ålesund, 6009, Norway
Werfdijk 2, 3195 HV Pernis, Rotterdam, Netherlands
Alcantra 200, Piso 6, C,O, 7550159 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, No 1-3 Wing Yip Street, Kwai Chung, New Territories,
Hong Kong
Birla Tower West, 2nd Floor, 25 Barakhamba Road, New Delhi,
110001, India
Wilmington 2
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
Rolls-Royce Military Aero Engines Limited * 3 Derby 1
Rolls-Royce Namibia (Proprietary) Limited
Rolls-Royce New Zealand Limited
2nd Floor, Unit 4, LA Chambers, Ausspann Plaza, Dr Agostinho
Neto Road, Ausspannplatz, Windhoek, Namibia
c/o Deloitte, 80 Queen Street, Auckland Central, Auckland 1010,
New Zealand
Rolls-Royce Nigeria Limited * (in liquidation) Civic Towers, Plot GA1, Ozumba Mbadiwe Avenue,
Victoria Island, Lagos, Nigeria
Rolls-Royce North America (USA) Holdings Co. Wilmington 2
Wilmington 2
Rolls-Royce North America Holdings, Inc.
Wilmington 2
Rolls-Royce North America, Inc.
Wilmington 2
Rolls-Royce North America Ventures, Inc.
* Dormant entity.
1 Moor Lane, Derby, DE24 8BJ, England.
2 Corporation Service Company, 251 Little Falls Drive, Wilmington, Delaware 19808, United States.
3 Reporting year end is 31 March.
Class
of shares
Equity
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Capital Stock
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Common Stock
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Common Stock
Common Stock
Common Stock
Common Stock
% 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
FINANCIAL STATEMENTS 182
Financial Statements
Subsidiaries
Rolls-Royce Holdings plc Annual Report 2018
Company name
Rolls-Royce North American Technologies, Inc. Wilmington 2
Rolls-Royce Nuclear Field Services
France S.A.S.
Rolls-Royce Nuclear Field Services, Inc.
Address
Rolls-Royce Oman LLC
ZA Notre-Dame, 84430, Mondragon, France
Corporation Service Company, 80 State Street, Albany, New York
12207, United States
Bait Al Reem, Business Office #131, Building No 81, Way No 3409,
Block No 234, Al Thaqafa Street, Al Khuwair, PO Box 20,
Postal Code 103, Oman
Rolls-Royce Operations (India) Private Limited Birla Tower West, 2nd Floor, 25 Barakhamba Road, New Delhi,
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 Retirement Savings
Trust Limited * 3
Rolls-Royce Singapore Pte. Limited
Rolls-Royce Sp z.o.o.
Rolls-Royce Submarines 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 * (in liquidation)
Sharing in Growth UK Limited **
110001, India
Derby 1
Derby 1
P.O. Box 220, Suojantie 5, 26101, Rauma, Finland
Derby 1
62 Buckingham Gate, London, SW1E 6AT, England
Gniew 83-140, ul. Kopernika 1, Poland
Derby 1
Derby 1
Maybachplatz 1, 88045, Friedrichshafen, Germany
PO Box 88545, Riyadh, 11672, Saudi Arabia
Derby 1
6 Shenton Way, #33-00 OUE, Downtown Singapore 068809,
Singapore
Budynek Fronton ul Kamienna 21, Krakow, 31-403, Poland
Derby 1
Centreda I, Avenue Didier Daurat, 31700 Blagnac,
Toulouse, France
Derby 1
Levazim Mahellesi, Koru Sokagi, Zorlu Center, No. 2 Teras Evler T2
D:204, Zincirlikuyu, Besiktas, Istanbul, Turkey
Derby 1
Dông Xuyên Industrial Zone, Rach Dùa Ward, Vüng Tàu City,
Bà Ria-Vüng 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
Derby 1
Spare IPG 20 Limited *
Spare IPG 21 Limited *
Spare IPG 24 Limited *
Spare IPG 32 Limited *
Derby 1
Derby 1
Derby 1
Derby 1
Spare IPG 4 Limited *
The Bushing Company Limited *
Timec 1487 Limited *
Trigno Energy S.R.L.
Derby 1
Derby 1
Derby 1
Zona Industriale, San Salvo, 66050, Italy
* 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.
1 Moor Lane, Derby, DE24 8BJ, England.
2 Corporation Service Company, 251 Little Falls Drive, Wilmington, Delaware 19808, United States.
3 Reporting year end is 31 March.
Class
of shares
Common Stock
Ordinary
% of
class
held
100
100
Common Stock
100
Ordinary
100
Ordinary
Ordinary
Ordinary
Ordinary
A shares
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Cash shares
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Cash shares
Ordinary
100
100
100
100
100
100
100
99.9
100
100
100
100
100
100
100
100
100
100
100
100
Capital Stock
100
Capital Stock
Ordinary
Ordinary
Quotas
Limited by
guarantee
Ordinary
Ordinary
Ordinary
7.25%
Cumulative
Preference
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100
100
67
66
100
100
100
100
100
100
100
100
100
100
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Subsidiaries
183
Company name
Turbine Surface Technologies Limited **
Turborreactores S.A. de C.V.
Ulstein Holding AS
Ulstein Maritime Limited *
Vessel Lifter, Inc. *
Vinters Defence Systems Limited *
Vinters Engineering Limited
Vinters International Limited
Vinters Limited
Vinters-Armstrongs (Engineers) Limited *
Vinters-Armstrongs Limited *
Address
Derby 1
Class
of shares
Ordinary A
Ordinary B
Class A
Acceso IV, No.6C, Zona Industrial Benito Juárez, Querétaro,
Class B
76120, Mexico
Sjøgata 80, 6065 Ulsteinvik, Norway
Ordinary
8 Adelaide Street West, Suite 200, Toronto, ON M5H 0A9, Canada Common
Corporation Service Company, 1201 Hays Street, Tallahassee,
Florida 32301, United States
Derby 1
Derby 1
Derby 1
Derby 1
Derby 1
Derby 1
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary B
Common Stock
% of
class
held
Nil
100
100
100
100
100
100
100
100
100
100
100
100
* Dormant entity.
** Though the interest held is 50%, the Company controls the entity (see note 1 accounting policies) and, as a result, consolidates the entity and records a non-controlling interest.
1 Moor Lane, Derby, DE24 8BJ, England.
FINANCIAL STATEMENTS 184
Financial Statements
Joint Ventures and Associates
Rolls-Royce Holdings plc Annual Report 2018
JOINT VENTURES AND ASSOCIATES
Company name
Aero Gearbox International SAS **
Airtanker Holdings Limited
Airtanker Services Limited
Alpha Leasing (US) (No.2) LLC
Address
18 Boulevard Louis Sequin, 92700 Colombes, France
Airtanker Hub, RAF Brize Norton, Carterton, Oxfordshire,
OX18 3LX, England
Airtanker Hub, RAF Brize Norton, Carterton, Oxfordshire,
OX18 3LX, England
Wilmington 2
Alpha Leasing (US) (No.4) LLC
Wilmington 2
Alpha Leasing (US) (No.5) LLC
Wilmington 2
Alpha Leasing (US) (No.6) LLC
Wilmington 2
Alpha Leasing (US) (No.7) LLC
Wilmington 2
Alpha Leasing (US) (No.8) LLC
Wilmington 2
Alpha Leasing (US) LLC
Wilmington 2
Alpha Partners Leasing Limited
Anecom Aerotest GmbH
CFMS Limited
62 Buckingham Gate, London, SW1E 6AT, England
122 Freiheitstrasse, Wildau, D-15745, Germany
43 Queen Street, Bristol, BS1 4QP, England
Clarke Chapman Portia Port Services
Limited
Consorcio Español para el
Desarrollo Industrial del Helicóptero de
Ataque Tigre, A.I.E.
Consorcio Español para el
Desarrollo Industrial del Programa
Eurofighter, A.I.E.
Egypt Aero Management Services
EPI Europrop International GmbH
EPIX Power Systems, LLC
Eurojet Turbo GmbH
Force MTU Power Systems Private
Limited
Genistics Holdings Limited
Global Aerospace Centre for Icing
and Environmental Research Inc.
Hong Kong Aero Engine
Services Limited
Hovden Klubbhus AS
International Aerospace
Manufacturing Private Limited ** 3
LG Fuel Cell Systems, Inc.
Light Helicopter Turbine
Engine Company
(unincorporated partnership)
MEST Co., Limited
Metlase Limited
Maritime Centre, Port of Liverpool, Liverpool, L21 1LA,
England
Avda. de Aragón 404, 28022 Madrid, Spain
Paseo de John Lennon, s/n, edificio T22, 2ª planta,
Getafe, Madrid, Spain
Partnership
(no equity held)
EgyptAir Engine Workshop, Cairo International Airport,
Cairo, Egypt
Dachauer Strasse 655, 80995, Munich, Germany
The Corporation Trust Company, 1209 Orange Street,
Wilmington, Delaware 19801, United States
Lilienthalstrasse 2b, 85399 Halbergmoos, Germany
Mumbai Pune Road, Akurdi, Pune, Maharashtra 411035,
India
Derby 1
1000 Marie-Victorin Boulevard, Longueuil Québec
J4G 1A1, Canada
33rd Floor, One Pacific Place, 88 Queensway,
Hong Kong
Stålhaugen 5, Ulsteinvik, 6065, Norway
Survey No. 3 Kempapura Village, Varthur Hobli,
Bangalore, KA 560037, India
Wilmington 2
Suite 119, 9238 Madison Boulevard, Madison, Alabama
35758, United States
97 Bukjeonggongdan 2-gil, Yangsan-si,
Gyeongsangnam-do, 50571, Republic of Korea
Unipart House, Garsington Road, Cowley, Oxford,
OX4 2PG, England
Ordinary
Capital Stock
Partnership
(no equity held)
Capital Stock
Capital Stock
Ordinary A
Ordinary
Ordinary
Ordinary
Ordinary
Common Stock
Partnership
(no equity held)
Normal
Ordinary B
* Dormant company.
** These entities are accounted for as joint operations (see note 1 accounting policies).
1 Moor Lane, Derby, DE24 8BJ, England.
2 Corporation Service Company, 251 Little Falls Drive, Wilmington, Delaware 19808, United States.
3 Reporting year end is 31 March.
Class
of shares
Ordinary
Ordinary
% of
class held
50
20
Ordinary
22
Partnership
(no equity held)
Partnership
(no equity held)
Partnership
(no equity held)
Partnership
(no equity held)
Partnership
(no equity held)
Partnership
(no equity held)
Partnership
(no equity held)
Ordinary A
Capital Stock
Limited by
guarantee
Ordinary A
Partnership
(no equity held)
Group
interest
held %
50
20
22
50
50
50
50
50
50
50
50
35.6
50
50
50
50
50
44
50
46
49
50
50
50
62
50
22.2
50
46.8
20
–
–
–
–
–
–
–
100
35.6
–
100
–
–
50
44
–
46
49
100
50
50
62
50
22.2
–
46.8
100
Rolls-Royce Holdings plc Annual Report 2018
Financial Statements
Joint Ventures and Associates
185
Gerhard-Höltje-Strasse 1, D-99310, Arnstadt, Germany
Capital Stock
Company name
MTU Turbomeca Rolls-Royce GmbH
MTU Turbomeca Rolls-Royce
ITP GmbH
MTU Yuchai Power Company Limited No 7 Danan Road, Yuzhou, Yulin, Guangxi, China,
Address
Am Söldnermoos 17, 85399 Hallbergmoos, Germany
Am Söldnermoos 17, 85399 Hallbergmoos, Germany
537005, China
Gerhard-Höltje-Strasse 1, D-99310, Arnstadt, Germany
N3 Engine Overhaul Services
GmbH & Co KG
N3 Engine Overhaul Services
Verwaltungsgesellschaft Mbh
Offshore Simulator Centre AS
Qinous GmbH
Borgundvegen 340, 6009, Ålesund, Norway
Villa Rathenau, Wilhelminenhofstrasse 75,
12459 Berlin, Germany
Rolls Laval Heat Exchangers Limited * Derby 1
Rolls-Royce & Partners Finance (US)
(No 2) LLC
Rolls-Royce & Partners Finance (US)
LLC
SAFYRR Propulsion Limited
Shanxi North MTU Diesel Co. Limited No.97 Daqing West Road, Datong City,
Wilmington 2
Wilmington 2
Derby 1
Singapore Aero Engine Services
Private Limited
Taec Ucak Motor Sanayi AS
Techjet Aerofoils Limited **
Texas Aero Engine Services LLC
TRT Limited
Turbo-Union Limited
Shanxi Province, China
11 Calshot Road, 509932, Singapore
Buyukdere Caddesi, Prof. Ahmet Kemal Aru, Sokagi
Kaleseramik, Binasi Levent No. 4, Besiktas, Istanbul
Tefen Industrial Zone, PO Box 16, 24959, Israel
The Corporation Trust Company, 1209, Orange Street,
Wilmington, Delaware 19801, United States
Derby 1
Derby 1
UK Nuclear Restoration Limited *
Xian XR Aero Components Co.,
Limited **
Booths Park, Chelford Road, Knutsford, Cheshire,
WA16 8QZ, England
Xujiawan, Beijiao, Po Box 13, Xian 710021, Shaanxi,
China
* Dormant company.
** These entities are accounted for as joint operations (see note 1 accounting policies).
1 Moor Lane, Derby, DE24 8BJ, England.
2 Corporation Service Company, 251 Little Falls Drive, Wilmington, Delaware 19808, United States.
3 Reporting year end is 31 March.
Class
of shares
Capital Stock
Capital Stock
% of
class held
33.3
50
Group
interest
held %
33.3
50
Capital Stock
Capital Stock
Ordinary
Preference
Ordinary
Partnership
(no equity held)
Partnership
(no equity held)
B Shares
Ordinary
Ordinary
Cash Shares
Ordinary A
Ordinary B
Partnership
(no equity held)
Ordinary B
A Shares
Ordinary
Ordinary
Ordinary
50
50
50
25
22
50
–
–
100
49
50
49
50
50
–
100
37.5
40
20
49
50
50
50
25
22
50
50
50
50
49
50
49
50
50
49.9
40
20
49
FINANCIAL STATEMENTS 186
Other Information
Independent Auditors’ Report
Rolls-Royce Holdings plc Annual Report 2018
INDEPENDENT AUDITORS’ REPORT
to the members of Rolls-Royce Holdings plc
Report on the audit of the financial statements
Opinion
In our opinion:
– Rolls-Royce Holdings plc’s Consolidated Financial Statements
and Company Financial Statements (the “financial statements”)
give a true and fair view of the state of the Group’s and of the
Company’s affairs as at 31 December 2018 and of the Group’s loss
and cash flows for the year then ended;
– the Consolidated Financial Statements have been properly
prepared in accordance with International Financial Reporting
Standards (IFRSs) as adopted by the European Union;
– the Company Financial Statements have been properly prepared
in accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards,
comprising FRS 101 “Reduced Disclosure Framework”, and
applicable law); and
– the financial statements have been prepared in accordance with
the requirements of the Companies Act 2006 and, as regards the
Consolidated Financial Statements, Article 4 of the IAS Regulation.
We have audited the financial statements, included within the
Annual Report, which comprise: the Consolidated and Company
Balance Sheets at 31 December 2018; the Consolidated Income
Statement and Consolidated Statement of Comprehensive Income;
the Consolidated Cash Flow Statement for the year then ended; the
Consolidated and Company Statements of Changes in Equity for the
year then ended; and the notes to the Consolidated and Company
Financial Statements, which include a description of the significant
accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
Basis for opinion
We conducted our audit in accordance with International Standards
on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities
under ISAs (UK) are further described in the Auditors’ responsibilities
for the audit of the financial statements section of our report. We
believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Independence
We remained independent of the group in accordance with the
ethical requirements that are relevant to our audit of the financial
statements in the UK, which includes the FRC’s Ethical Standard, as
applicable to listed public interest entities, and we have fulfilled our
other ethical responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit
services prohibited by the FRC’s Ethical Standard were not provided
to the Group or the Company.
Other than those disclosed in note 7, we have provided no non-audit
services to the Group or the Company in the period from 1 January
2018 to 31 December 2018.
Our audit approach
Overview
— Overall Group materiality: £56 million, based on 0.4% of underlying revenue.
Materiality
— Overall Company materiality: £128 million, based on 1.0% of total assets. This exceeds Group materiality
as it is determined on a different basis given the nature of the Company’s operations. For the purposes
of the audit of the Consolidated Financial Statements, our procedures, including those on balances in
the Company, are undertaken with reference to the Group materiality.
Audit Scope
Key Audit
Matters
— Following our assessment of the risks of material misstatement of the Consolidated Financial Statements
we subjected 35 individual components (including 3 joint ventures) to full scope audits for group
purposes, which following an element of consolidation, equates to 16 group reporting opinions.
In addition 7 components performed targeted specified procedures.
— In addition the Group engagement team audited the Company and other centralised functions including
those covering the Group treasury operations, corporate taxation, pensions, fair value assessments on
acquired entities and goodwill and intangible asset impairment assessments.
— The components on which full scope audits, targeted specified procedures and centralised work was
performed accounted for 87 % of revenue, 80% of loss before tax and 84% of total assets.
— Central audit testing was performed where appropriate for reporting components in Group audit scope
supported by the Group’s Finance Service Centres (FSCs).
— As part of the supervision process, the Group engagement team have visited 12 components as well as
the FSCs. Interactions with component auditors also included formal written instructions, meetings and
reviewing selected audit papers.
Our assessment of the risk of material misstatement also informed our views of the areas of particular
focus of our work which are listed below:
— Long-term contract accounting and associated provisions;
— The implementation of IFRS 15;
— The valuation of and accounting for the acquisition of Industrial De Turbo Propulsores SA (“ITP Aero”);
— The presentation and accuracy of underlying results and disclosure of other one-off items (including
exceptional items);
— The response of the Group to the Deferred Prosecution and Leniency Agreements in connection with
alleged bribery and corruption in overseas markets;
— The capitalisation and amortisation of development costs;
— The recognition of Deferred tax assets; and
— The translation of foreign-currency denominated transactions and balances.
Rolls-Royce Holdings plc Annual Report 2018
Other Information
Independent Auditors’ Report
187
The scope of our audit
As part of designing our audit, we determined materiality and
assessed the risks of material misstatement in the financial statements.
In particular, we looked at where the directors made subjective
judgements, for example in respect of significant accounting estimates
that involved making assumptions and considering future events
that are inherently uncertain.
We gained an understanding of the legal and regulatory framework
applicable to the Group and the industries in which it operates, and
considered the risk of acts by the Group which were contrary to
applicable laws and regulations, including fraud. We designed audit
procedures at Group and significant component level to respond to
the risk, recognising that the risk of not detecting a material
misstatement due to fraud is higher than the risk of not detecting
one resulting from error, as fraud may involve deliberate concealment
by, for example, forgery or intentional misrepresentations, or through
collusion. We focused on laws and regulations that could give rise
to a material misstatement in the Consolidated and Company
Financial Statements, including, but not limited to, financial
reporting and related company legislation, taxation, export control,
defence contracting, anti-bribery and corruption legislation. Our
tests included, but were not limited to, agreement of the financial
statement disclosures to underlying supporting documentation,
review of correspondence with regulators, review of correspondence
with legal advisors, enquiries of management, review of significant
component auditors’ working papers and review of internal audit
reports in so far as they related to the financial statements. There
are inherent limitations in the audit procedures described above
and the further removed non-compliance with laws and regulations
is from the events and transactions reflected in the financial
statements, the less likely we would become aware of it.
We identified the Group’s response to deferred prosecution and
leniency agreements as a key audit matter, and this is discussed
further below. As in all of our audits we also addressed the risk of
management override of internal controls, including testing journals
and evaluating whether there was evidence of bias by the directors
that represented a risk of material misstatement due to fraud.
Key audit matters
Key audit matters are those matters that, in the auditors’ professional
judgement, were of most significance in the audit of the financial
statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to
fraud) identified by the auditors, including those which had the
greatest effect on: the overall audit strategy; the allocation of
resources in the audit; and directing the efforts of the engagement
team. These matters, and any comments we make on the results of
our procedures thereon, were addressed in the context of our audit
of the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters.
This is not a complete list of all risks identified by our audit.
Key changes in the assessment of audit risks for the current period
compared to the assessment made by the prior period auditor that
we consider to be key audit matters are:
– Capitalisation and amortisation of development costs is now
considered a key audit matter due to a change in the methodology
for starting, and subsequently ceasing, the capitalisation of
development costs. In addition a change has been made to the
basis for amortising those capitalised development costs effective
from 1 January 2018;
– Deferred tax asset recognition is now considered a key audit
matter due to a significant increase in the value of deferred tax
assets and the period over which they are expected to reverse,
requiring the exercise of significant judgement in assessing
levels of profitability over an extended period; and
– Translation of foreign currency denominated transactions and
balances has been identified as a new significant risk and key
audit matter in the current year given the nature of manual
adjustments that are needed to retranslate non-monetary assets
and liabilities to applicable spot rates and resulting correction
recorded in equity at 1 January 2017.
t
n
e
m
e
t
a
t
s
s
i
m
l
a
i
t
n
e
t
o
p
f
o
d
o
o
h
i
l
e
k
i
L
1
2
C
6
7
5
8
3
4
9
10
14
11
15
13
12
16
F
Potential magnitude of misstatement
■ Key audit matter
■ Elevated risk
Risk
ref
Risk description
Key audit matters
Change
compared
to prior
year
1
2
3
4
5
6
7
8
Long-term contract accounting and associated provisions
Implementation of IFRS 15
Valuation of and accounting for the acquisition
of ITP Aero
Presentation and accuracy of underlying results
and disclosure of other one-off items (including
exceptional items)
Response of the Group to the Deferred Prosecution and
Leniency Agreements in connection with alleged bribery
and corruption in overseas markets
Capitalisation and amortisation of development costs
Deferred tax asset recognition
Translation of foreign currency denominated transactions
and balances
new
Elevated Risk
9
10
11
Accounting for complex treasury instruments
Measurement of post-retirement benefits
Risk and Revenue Sharing Arrangements
12 Warranties and other provisions
13
14
15
16
Consolidation process and Joint Venture accounting
new
Sales financing
Carrying value and accounting for disposals and assets
held for sale
new
Uncertain tax positions
OTHER INFORMATION
188
Other Information
Independent Auditors’ Report
Rolls-Royce Holdings plc Annual Report 2018
Key audit matter
How our audit addressed the key audit matter
Long-term contract accounting and associated provisions
(relevant to the Consolidated Financial Statements)
Our procedures over the long term contract accounting applied
in the Civil Aerospace and Defence businesses included:
Page 78 (Audit Committee report) and page 115 (Note 1 to the
Consolidated Financial Statements – Accounting policies –
Revenue recognition)
The Civil Aerospace and Defence businesses operate primarily
with long-term customer contracts that span multiple periods.
These long-term contracts require a number of assumptions to
be made in order to determine the level of revenue and profit
that is recognised in each period.
For Civil Aerospace aftermarket contracts, the profitability
typically assumes that there will be significant cost improvements
over the lifetime (15-25 years) of the contracts. Significant
judgement needs to be applied in determining the engine flying
hours, time on wing, whether incremental costs should be treated
as wastage or are part of the ongoing cost of servicing a contract,
and other operating parameters used to calculate the projected life
cycle. These future costs are also risk adjusted to take into account
forecasting accuracy which represents an additional judgement.
Small adjustments can have a significant impact on the results
of an individual financial year.
In addition, changes to the operating conditions of engines such
as changes in route structure can result in different performance
assumptions and hence cost profiles which impact the
profitability of a contract.
The Group continues to experience significant in-service issues
on the Trent 1000 programme. The assessment of the total cost
of delivering this programme, including the cost of the proposed
engineering solutions, speed of implementation and the level of
customer disruption which was not expected at the inception of
the contract are all significant judgements which impact the value
and timing of revenue and profit recognition. In addition, we have
had to assess the impact of the announcement of the cessation
of A380 deliveries after 2021 on the forecast contract profitability
and the recoverability of the associated assets.
At the development stage of a programme agreements are entered
into with certain suppliers to share in the risk and rewards of the
contracts (Risk and Revenue Sharing Partners – ‘RRSP’). This can
involve upfront participation fees from the RRSP which are amortised
over the engine production phase. In addition, specified revenue
and costs are recorded in the income statement net of the
RRSP’s share.
The nature of the Civil Aerospace business gives rise to a number
of contractual guarantees, warranties and potential claims. The
accounting for these can be complex and judgemental and may
impact the Income Statement immediately or over time through
the long term contract pack. The valuation of associated amounts
may be highly judgemental and needs to be considered on a
contract by contract basis.
– We attended meetings with Civil Aerospace and Defence
programme and contract managers in order to understand the
operational matters impacting the performance of specific
contracts and any amendments to contractual arrangements;
– We obtained and read the relevant sections of a sample of
contracts to understand the key terms including performance
obligations and pricing structures;
– We re-performed the calculations used to determine the
degree of completion for a sample of contracts and this
was also used in assessing the magnitude of any
catch-up adjustments;
– We compared the previously forecast results of a sample of
contracts with the actual results to assess the performance
of the contract and the historical accuracy of forecasting;
– We verified a sample of costs incurred to third party
documentation in order to assess the validity of the forecast
costs to complete;
– We challenged management’s judgement around whether
incremental contract costs arising from in-service issues should
be accounted for over the expected duration of the underlying
contract or recognised immediately;
– We assessed the assumptions relating to life cycle cost reductions
to determine the likelihood of realisation and where relevant
the speed at which they would be achieved, including validating
these assumptions directly with the senior programme engineers.
Where the revision of assumptions has resulted in catch-up
adjustments we have understood the driver of the adjustments
and assessed the appropriateness of the key changes in the
estimates and judgements;
– We obtained support for the risk adjustments made in respect
of future costs and challenged management’s assumptions
through assessment against historical performance, known
technical issues and the stage of completion of the programme;
– We challenged the assessment of provisions for loss making
or onerous contracts to determine the completeness of the
unavoidable costs to fulfill the contractual obligations;
– We reviewed a sample of RRSP contracts to assess whether
revenue and costs had been appropriately reflected, net of the
share attributable to the RRSP in the income statement; and
– We also assessed the adequacy of disclosures in note 1 of the
key judgements and estimates involved in long-term contract
accounting and the description of changes arising as a result
of the adoption of IFRS 15.
Overall we concluded that the key estimates and judgements
used by management in the long-term contract accounting
to be supportable and the balances recorded in the financial
statements to be materially correct.
Rolls-Royce Holdings plc Annual Report 2018
Other Information
Independent Auditors’ Report
189
Key audit matter
How our audit addressed the key audit matter
Implementation of IFRS 15
(relevant to the Consolidated Financial Statements)
We completed the majority of our procedures on the initial adoption
of IFRS 15 by the half year. These procedures were as follows:
Pages 78 (Audit Committee report), page 113 (Note 1 to the
Consolidated Financial Statements – Accounting policies –
IFRS 15 Revenue from Contracts with Customers) and pages
169 to 174 (Note 27 to the Consolidated Financial Statements –
Impact of new accounting standards and other adjustments)
IFRS 15 has had a very significant impact on the timing of revenue
and cost recognition for the Civil Aerospace and Defence
businesses which generally operate large long-term contracts.
Revenue on aftermarket arrangements is now recognised based
upon the stage of completion of the contract which is assessed
by using the actual costs incurred to date compared to the
estimated costs to complete the performance obligations.
Judgement is involved in a number of areas impacting revenue
and costs such as engine flying hours, time on wing, the operating
pattern of the aircraft and the nature and timing of future
maintenance activity, which increases the risk of misstatement.
Given the significant adjustments required to the previously
reported figures in order to reflect all of the IFRS 15 impacts,
there is a risk that other accounting adjustments are
inappropriately reported as IFRS 15 impacts.
– Review of the predecessor auditors’ working papers on the
impact assessment disclosed in the 2017 financial statements
and audit work performed thereon;
– We sampled a number of contracts to understand the terms
and how management had assessed the five step process in
its IFRS 15 impact assessment for determining the appropriate
revenue recognition;
– With assistance from our in-house technical specialists, we
critically appraised a number of position papers produced
by management, who were assisted by their external technical
specialists, on key aspects of its impact assessment and
proposed changes to revenue recognition policy;
– We appraised the revisions to the Group’s revenue recognition
accounting policy under IFRS 15, including both its
appropriateness under the new standard and its completeness
in reflecting the Group’s different activities, including, for
example, Original Equipment and long term aftermarket service
contracts; and
– We assessed the appropriateness of the methods used to
determine the estimated impact of the initial application of
IFRS 15 as reflected in the restatements booked at the half year.
We instructed in-scope component audit teams with significant
revenue streams to perform:
– audit procedures on a sample basis to test the accuracy and
completeness of the application of IFRS 15 on local contracts;
– an assessment of any material new contracts or contract
amendments where revenue recognition under IFRS 15 is
complex; and
– substantive testing to support the new additional quantitative
information disclosed in the Consolidated Financial Statements.
We found that the changes required by IFRS 15 were well embedded
in the business and we reviewed key changes that impact the
Group’s more significant contracts. We also considered the
adequacy of the Group’s disclosures on the impact of the adoption
of IFRS 15 as set out in notes 1, 2 and 27. No material uncorrected
misstatements or disclosure exceptions arose from these procedures.
OTHER INFORMATION 190
Other Information
Independent Auditors’ Report
Rolls-Royce Holdings plc Annual Report 2018
Key audit matter
How our audit addressed the key audit matter
Valuation of and accounting for the acquisition of ITP Aero
(relevant to the Consolidated Financial Statements)
Pages 78 (Audit Committee report), page 119 (Note 1 to the
Consolidated Financial Statements – Accounting policies –
Business combinations and goodwill) and page 164 (Note 25
to the Consolidated Financial Statements – Acquisitions
and disposals)
Following the acquisition of the remaining 53.1% of ITP in
December 2017, the fair value of the assets and liabilities acquired
was assessed on a provisional basis in the 2017 Annual Report.
The purchase price allocation exercise was finalised during the year.
Calculating the fair value of the intangible assets of ITP at the date
of acquisition involves the use of complex valuation techniques
and significant judgements in relation to the future profitability
of its long term programmes. Management utilised an expert to
perform this exercise.
In addition, the existing risk-sharing arrangements between ITP
and the Civil Aerospace business are complex and the consolidated
position needs to be carefully considered to ensure that the post
acquisition recognised revenues and profits are appropriate.
We obtained the updated purchase price allocation performed by
management’s valuation experts and considered their methodology
and assumptions using our own valuation experts.
Our work focused on the appropriateness of the valuation models
used for each of the significant acquired intangible assets and
consideration paid (including the fair value of the existing
shareholding). We also assessed the competence and objectivity
of management’s expert.
In light of the bargain purchase gain arising on the transaction,
we considered whether all identifiable liabilities and assets had
been recognised by comparing the intangible assets recognised
to those recognised in other similar acquisitions.
We understood the drivers of the change in the fair value of net
assets acquired compared to the provisional purchase price
allocation disclosed in the 2017 Annual Report, which was
predominantly driven by changes in cash flow forecasts and the
availability of more up to date information. We challenged the
cash flow projections that underpinned each of these valuations,
by comparing them to historical cash flows and understanding
the reasons for the growth profile in those projections. Where
applicable we reconciled the cash flow projections to those used
elsewhere in the business including for long-term contract
accounting or for the recognition of deferred tax assets.
We considered whether adjustments were required to the purchase
price allocation for the settlement of pre-existing relationships
between Rolls-Royce and ITP, by comparing the contracted
programme share to actual experience.
Overall we found the disclosures in respect of the transaction
and updated purchase price allocation and resultant adjustments
to the opening balance sheet to be in line with the results of our
audit work with no material exceptions arising.
Presentation of underlying results and disclosure of other
one-off items (including exceptional items)
(relevant to the Consolidated Financial Statements)
Page 123 (Note 1 to the Consolidated Financial Statements –
Accounting policies – Presentation of underlying results)
In addition to the performance measures prescribed by
International Financial Reporting Standards, the Group also
presents the results on an “underlying” basis, as the Directors
believe this better reflects the performance of the Group during
the year.
We considered the judgements by management to determine
what should be treated as a one-off or exceptional item and the
translation of foreign currency amounts and obtained
corroborative evidence for these.
We also considered whether there were items that were recorded
within underlying profit that we consider are exceptional in nature
and should be reported as an exceptional item. No such material
items were identified. As part of this assessment we challenged
management’s rationale for the designation of certain items as
exceptional or one-off and assessed such items against the Group’s
accounting policy considering the nature and value of those items.
The most significant adjustment between the statutory results and
the underlying results relates to the foreign exchange rates used
to translate foreign currency transactions. The underlying results
reflect the achieved rate on foreign currency contracts settled
in the period and retranslates assets and liabilities at the foreign
currency rates expected to be achieved in the future. As the Group
can influence which contracts are settled in each reporting period
it has the ability to influence the achieved rate and hence the
underlying result.
We tested management’s calculation to translate foreign currency
transactions to reflect the achieved foreign exchange rates based
on foreign currency contracts settled in the year, and to translate
year end assets and liabilities at foreign currency rates that are
expected to be achieved in the future. We corroborated these
rates to the Group’s hedging contracts. We also assessed whether
the discretion used by management over the date on which forward
foreign exchange contracts are settled indicated any evidence
of bias.
The underlying results differ significantly from the reported
statutory results and are used extensively to explain performance
to the shareholders. Alternative performance measures can provide
investors with a better understanding of the Group’s performance
if properly used and presented. However, when improperly used
and presented, these kinds of measures can mislead investors by
masking the real financial performance and position.
Overall we found that the classification judgements made by
management were in line with their policy for underlying results
and exceptional items, had been consistently applied and found
no material exceptions from our testing. We also assessed the
appropriateness and completeness of the disclosures of the impact
of one-off or non-underlying items in note 1 and note 2 and other
related notes to the Consolidated Financial Statements and found
them to be appropriate.
Rolls-Royce Holdings plc Annual Report 2018
Other Information
Independent Auditors’ Report
191
Key audit matter
How our audit addressed the key audit matter
Response to deferred prosecution and leniency agreements
in connection with alleged bribery and corruption in
overseas markets
(relevant to the Consolidated and Company Financial
Statements)
We planned and designed our audit approach to this area in
conjunction with our in-house forensic specialists and after
reading the Agreements and compliance reports made to the
SFO and DoJ during the year. Where applicable, we vouched
the assertions made by management to objective evidence.
Pages 101 (Safety & Ethics Committee report – Ethics and
compliance) and page 163 (Note 23 to the Consolidated Financial
Statements – Contingent liabilities)
In January 2017 the Group became party to deferred prosecution
agreements with the UK Serious Fraud Office (“SFO”) and the US
Department of Justice (“DOJ”) and a leniency agreement with the
Brazilian Federal Prosecution Service (“MPF”) (collectively the
“Agreements”) as a consequence of allegations of fraudulent
payments to overseas intermediaries and prosecution was deferred
provided that the Group fulfils certain requirements, including
the settlement of a financial penalty.
The Group operates in industries which are characterised by
competition for individually significant contracts with customers
which are often directly or indirectly associated with governments,
and in a number of territories where the use of intermediaries is
viewed as normal practice. This means that the risk of future
instances of corruption remains present.
The possible implications of these high profile and sensitive
Agreements on the future business if the terms are not met,
including additional fines and prosecution, are significant.
Capitalisation and amortisation of development costs
(relevant to the Consolidated Financial Statements)
Pages 119 to 120 (Note 1 to the Consolidated Financial Statements
– Accounting policies – Research and development, and pages
136 to 138 (Note 9 to the Consolidated Financial Statements –
Intangible assets)
The value of development costs (including participation payments)
on the balance sheet is financially significant. In addition, there is
a high degree of judgement involved in determining the point at
which capitalisation should commence and cease and when
subsequent expenditure which enhances the performance of an
engine should be capitalised.
The basis for amortising capitalised development costs also
represents an area of judgement, as is the carrying value in
light of overall programme performance.
We assessed the overall control environment and ‘tone at the
top’, including understanding and assessing the Group’s internal
investigations processes which identify and assess possible
non-compliance, such as whistle-blowing hotlines. We evaluated
key controls over the appointment, monitoring and payments
made to intermediaries.
We made inquiries of the Safety and Ethics Committee and the
Audit Committee as to whether the Group is in compliance with
laws and regulations relating to bribery and corruption. We met
with management including the head of ethics and compliance
to assess the risk of occurrence of inappropriate activities, the
status of the ongoing control improvement process, and the
possibility of further fines or penalties.
We independently circularised and spoke with the Group’s external
legal counsel to obtain their views about the status of the Agreements
and to test management’s assertions of the likely outcome.
We tested journals and other transactions with unusual
characteristics, including searching for transactions with previously
rejected intermediaries and for words that could indicate that
inappropriate commercial payments have been made.
We designed additional inquiries to be performed in certain
markets not otherwise included in the Group audit scope to
assess the risk of arrangements being in place in those markets,
which may require follow-up procedures to be performed.
Taking into account the findings from our audit procedures
we then assessed the appropriateness of the contingent liability
disclosure in note 23 of the Consolidated Financial Statements,
and found it to be reasonable and consistent with the information
we obtained during the course of our audit.
We reviewed projects where development costs are recognised
for ongoing viability and considered management’s assessment
of the carrying value for those assets which may be impaired.
Our focus was on those assets with a higher risk of impairment,
including the Trent 900 programme following the announcement
of the cessation of A380 deliveries after 2021.
We tested a sample of additions in the year to assess the
appropriateness of capitalisation and the amortisation period set
based on an assessment of the point at which technical feasibility
and commercial viability have been reached. This also included
underlying testing of standard labour and material rates used to
determine the value of the capitalised amounts.
We performed a review of changes to amortisation rates in the
year and assessed whether these were appropriate based on our
understanding of the underlying programmes or other
explanations from management.
We also assessed the consistency of assumptions across
programmes and customers with reference to publically
available data where available.
OTHER INFORMATION 192
Other Information
Independent Auditors’ Report
Rolls-Royce Holdings plc Annual Report 2018
Key audit matter
How our audit addressed the key audit matter
Capitalisation and amortisation of development costs (continued)
Deferred tax asset recognition
(relevant to the Consolidated Financial Statements)
Page 78 (Audit Committee report), page 117 (Note 1 to the
Consolidated Financial Statements – Accounting policies –
Taxation), and pages 131 to 134 (Note 5 to the Consolidated
Financial Statements – Taxation)
The Group has recognised significant deferred tax assets on the
basis of future levels of profitability in the relevant tax jurisdictions.
The magnitude of the assets recognised necessitates the need for
significant judgement in assessing the levels of profitability over
an extended period.
The recent increase in the assets recognised and hence the
forecasting period presents a heightened risk that deferred tax
assets are recognised inappropriately and there is an inherent
increased level of uncertainty in the forecasting process over
an extended period.
For capitalised programme assets our procedures included
the following:
– We obtained the Directors’ trigger assessment which is
performed at a programme level to identify whether any
programme assets should be subject to an impairment assessment;
– Specific focus was placed on the Trent 900 programme given
the announcement of the cessation of A380 deliveries after 2021;
– We obtained the impairment models prepared by management
and assessed the key assumptions used and agreed the
underlying cash flows with respect to aftermarket contracts to
underlying books and records that support the long-term
contract results. We also challenged management on the key
estimates, such as the pre-tax discount rate used and evidence
to support forecast profits from engines in the secondary market,
following the completion of the initial aftermarket contract;
– For the Trent 900 programme we also agreed the updated cash
flows to the latest delivery forecast; and
– We challenged management as not all programme dedicated
assets were initially included in the impairment models. In
addition, we challenged the inclusion of the Joint Venture
overhaul base profits given these are separate cash generating
units. Models were subsequently updated to reflect both of
these points.
We did not identify any uncorrected material exceptions from
our audit work.
We evaluated management’s assessment as to whether there will
be sufficient taxable profits in future periods to support the
recognition of deferred tax assets by tax jurisdiction. We assessed
the future cash flow forecasts and the assumptions which
underpinned them in light of the extended period.
Where applicable we reconciled the forecasts used to justify the
recognition of deferred tax assets to those used elsewhere in the
business including for long-term contract accounting or for the
Directors’ viability and going concern statements.
The right of offset of certain deferred tax liabilities and deferred
tax assets was also assessed which led to the identification of a
correction to the opening balance sheet which has been
reflected in the Consolidated Financial Statements. We also
assessed the adequacy of disclosures over this area.
We note that the period of time over which this asset will be
utilised is estimated at between 20 to 30 and this has been
disclosed in note 5. Given this time period for utilisation the
balance will need to be constantly re-assessed against the
Group’s future performance.
We did not identify any uncorrected material exceptions from
our audit work.
Rolls-Royce Holdings plc Annual Report 2018
Other Information
Independent Auditors’ Report
193
Key audit matter
How our audit addressed the key audit matter
Translation of foreign currency denominated transactions
and balances
(relevant to the Consolidated Financial Statements)
In addition to our testing in other areas of the various financial
statement line items we performed the following specific audit
procedures over this area:
Page 117 (Note 1 to the Consolidated Financial Statements –
Accounting policies – Foreign currency translation)
Foreign exchange rate movements influence the reported income
statement, the cash flow and closing net funds balance. One of
the Group’s primary accounting systems translates transactions
denominated in foreign currencies at a fixed rate. Foreign currency
denominated transactions and balances are then re-translated to
actual average and spot rates through manual adjustments.
Due to the manual nature and significance of the recurring
adjustment there is a risk that transactions and balances
denominated in foreign currencies are inappropriately translated
in the Consolidated Financial Statements.
– Obtained an understanding of the process employed by
management to correct the translation of foreign currency
balances and transactions;
– Tested system reports identifying transactions and balances in
source currency by agreeing these to general ledger balances;
– Reperformed manual calculations of the adjustment needed to
correct the translation of the foreign currency denominated
transactions and balances;
– Where assumptions are used to calculate the adjustment
necessary, for example, assumptions that certain categories of
transactions, revenue or costs, are foreign currency
denominated, we assessed the reasonableness of this and then
reperformed management’s calculation;
– We reconciled the balances and transactions requiring
adjustment by source currency to source data and assessed the
completeness of these balances and transactions;
– For exchange rates used in management’s calculations for the
translation adjustments we agreed these to an independent
source; and
– For each adjustment sampled we assessed whether the foreign
currency denominated balance or transaction was translated at
the appropriate exchange rate depending on its nature.
We did not identify any material uncorrected exceptions from
this work.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed
enough work to be able to give an opinion on the financial
statements as a whole, taking into account the structure of the
Group and the parent Company, the accounting processes and
controls, and the industry in which they operate.
Our scoping is based on the Group’s consolidation structure. We
define a component as a single reporting unit which feeds into the
Group consolidation. Of the Group’s 362 reporting components, 35
individual components (including 3 joint ventures) were subject to
full scope audits for group purposes, which following an element of
consolidation, equates to 16 group reporting opinions; and 7
components performed targeted specified procedures.
In order to achieve audit coverage over the financial statements,
under our audit methodology, we test both the design and
operation of relevant business process controls and perform
substantive testing over each financial statement line item.
The Group operates Finance Service Centres (FSCs) to bulk
process financial transactions in Derby (UK), Indianapolis (US) and
Bangalore (India). Based on our assessment with management it is
not possible to fully test revenue and profit centrally as certain key
processes, such as long-term contracting, remain within the
business due to their nature.
Our audit covered 87% of revenue, 80% of loss before tax and 84%
of total assets. All entities that contribute in excess of 3% of the
Group’s revenue were included in full scope.
OTHER INFORMATION 194
Other Information
Independent Auditors’ Report
Rolls-Royce Holdings plc Annual Report 2018
Revenue
Loss before tax
Total assets
■ 85%
■ 2%
■ 13%
■ 80%
■ 0%
■ 20%
■ 82%
■ 2%
■ 16%
■ Full scope
■ Speci�ed procedures
■ Out of scope
Further specific audit procedures over central functions, the Group
consolidation and areas of significant judgement (including taxation,
goodwill, intangible assets, treasury and post-retirement benefits)
were directly led by the Group audit team.
Where work was performed by component auditors, we determined
the level of involvement we needed to have in the audit work at
those reporting units to be able to conclude whether sufficient
appropriate audit evidence had been obtained as a basis for our
opinion on the Consolidated Financial Statements.
We issued formal written instructions to all component auditors
setting out the audit work to be performed by each of them and
maintained regular communication with the component auditors
throughout the audit cycle. These interactions included attending
certain component clearance meetings and holding regular
conference calls, as well as reviewing and assessing any matters
reported. The Group engagement team also reviewed selected
audit working papers for certain component teams.
In addition, senior members of the Group engagement team visited
component teams across all group segments in the United
Kingdom, United States of America, Germany, Spain, Norway and
Singapore. These visits included meetings with local management
and with the component auditors.
Materiality
The scope of our audit was influenced by our application of
materiality. We set certain quantitative thresholds for materiality.
These, together with qualitative considerations, helped us to
determine the scope of our audit and the nature, timing and extent
of our audit procedures on the individual financial statement line items
and disclosures and in evaluating the effect of misstatements, both
individually and in aggregate on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Consolidated Financial Statements
Company Financial Statements
Overall materiality
£56 million
£128 million
How we determined it
0.4% of total underlying revenue
1.0% of total assets
Rationale for
benchmark applied
The benchmark used has changed compared to that
used in prior years by the predecessor auditors.
Historically a benchmark based on a three-year
average of profit before tax, adjusted for exchange
impacts was used. The reason for our change is that
there has been considerable volatility in this profit
before tax figure which has been further
exacerbated by the impact of IFRS 15. Underlying
revenue is much less volatile and remains a key
focus for investors as evidenced by its inclusion
as a key performance indicator.
We determined our materiality based on total
assets, which is more applicable than a
performance-related measure as the company
is an investment holding company for the Group.
For each component in the scope of our Group audit, we allocated a materiality that is less than our overall group materiality and set a
performance materiality threshold lower than the allocated materiality that was used to determine the nature, timing and extent of audit
procedures on individual accounts or balances at a component level. This was set so as to reflect the risk of misstatements and experience
of audit adjustments arising from our work. The range of performance materiality thresholds determined for components was between
£4 million and £32 million. Certain components were audited to a local statutory audit materiality that was also less than our overall
Group materiality.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £2 million as well
as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.
Rolls-Royce Holdings plc Annual Report 2018
Other Information
Independent Auditors’ Report
195
Going concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
Outcome
We are required to report if we have anything material to add or
draw attention to in respect of the Directors’ statement in the
financial statements about whether the Directors considered it
appropriate to adopt the going concern basis of accounting in
preparing the financial statements and the Directors’ identification
of any material uncertainties to the Group’s and the parent
Company’s ability to continue as a going concern over a period of
at least twelve months from the date of approval of the financial
statements.
We have nothing material to add or to draw attention to.
As not all future events or conditions can be predicted, this
statement is not a guarantee as to the Group’s and parent
Company’s ability to continue as a going concern. For example, the
terms on which the United Kingdom may withdraw from the
European Union, which is currently due to occur on 29 March
2019, are not clear, and it is difficult to evaluate all of the potential
implications on the Group’s and Company’s trade, customers,
suppliers and the wider economy.
We are required to report if the directors’ statement relating to
Going Concern in accordance with Listing Rule 9.8.6R(3) is
materially inconsistent with our knowledge obtained in the audit.
We have nothing to report.
Reporting on other information
The other information comprises all of the information in the
Annual Report other than the financial statements and our auditors’
report thereon. The Directors are responsible for the other
information. Our opinion on the financial statements does not
cover the other information and, accordingly, we do not express
an audit opinion or, except to the extent otherwise explicitly stated
in this report, any form of assurance thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the
audit, or otherwise appears to be materially misstated. If we identify
an apparent material inconsistency or material misstatement, we are
required to perform procedures to conclude whether there is
a material misstatement of the financial statements or a material
misstatement of the other information. If, based on the work we
have performed, we conclude that there is a material misstatement
of this other information, we are required to report that fact.
We have nothing to report based on these responsibilities.
With respect to the Strategic Report and Directors’ Report, we also
considered whether the disclosures required by the UK Companies
Act 2006 have been included.
Based on the responsibilities described above and our work
undertaken in the course of the audit, the Companies Act 2006
(CA06), ISAs (UK) and the Listing Rules of the Financial Conduct
Authority (FCA) require us also to report certain opinions and matters
as described below (required by ISAs (UK) unless otherwise stated).
Strategic Report and Directors’ Report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors’
Report for the year ended 31 December 2018 is consistent with the financial statements and has been prepared in accordance with
applicable legal requirements. (CA06)
In light of the knowledge and understanding of the Group and parent Company and their environment obtained in the course of the
audit, we did not identify any material misstatements in the Strategic Report and Directors’ Report. (CA06)
The directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the
Group
We have nothing material to add or draw attention to regarding:
– The directors’ confirmation on page 64 of the Annual Report that they have carried out a robust assessment of the principal risks
facing the Group, including those that would threaten its business model, future performance, solvency or liquidity.
– The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
– The directors’ explanation on page 55 of the Annual Report as to how they have assessed the prospects of the Group, over what
period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a
reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period
of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
We have nothing to report having performed a review of the directors’ statement that they have carried out a robust assessment of the
principal risks facing the Group and statement in relation to the longer-term viability of the Group. Our review was substantially less in
scope than an audit and only consisted of making inquiries and considering the directors’ process supporting their statements; checking
that the statements are in alignment with the relevant provisions of the UK Corporate Governance Code (the “Code”); and considering
whether the statements are consistent with the knowledge and understanding of the Group and parent Company and their environment
obtained in the course of the audit. (Listing Rules)
OTHER INFORMATION 196
Other Information
Independent Auditors’ Report
Rolls-Royce Holdings plc Annual Report 2018
Other Code Provisions
We have nothing to report in respect of our responsibility to report when:
– The statement given by the directors, on page 105, that they consider the Annual Report taken as a whole to be fair, balanced and
understandable, and provides the information necessary for the members to assess the Group’s and parent Company’s position and
performance, business model and strategy is materially inconsistent with our knowledge of the Group and parent Company obtained
in the course of performing our audit.
– The section of the Annual Report on pages 76 to 81 describing the work of the Audit Committee does not appropriately address
matters communicated by us to the Audit Committee.
– The directors’ statement relating to the parent Company’s compliance with the Code does not properly disclose a departure from
a relevant provision of the Code specified, under the Listing Rules, for review by the auditors.
Directors’ Remuneration
In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the
Companies Act 2006. (CA06)
Responsibilities for the financial statements
and the audit
Other required reporting
Responsibilities of the directors for the financial statements
As explained more fully in the Statement of the Directors’
Responsibilities set out on page 105, the directors are responsible
for the preparation of the financial statements in accordance with
the applicable framework and for being satisfied that they give a
true and fair view. The directors are also responsible for such
internal control as they determine is necessary to enable the
preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible
for assessing the Group’s and the parent Company’s ability to
continue as a going concern, disclosing as applicable, matters
related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the
Group or the parent Company or to cease operations, or have no
realistic alternative but to do so.
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you
if, in our opinion:
– we have not received all the information and explanations we
require for our audit; or
– 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
– certain disclosures of directors’ remuneration specified by law
are not made; 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.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the audit committee, we
were appointed by the members on 3 May 2018 to audit the
financial statements for the year ended 31 December 2018 and
subsequent financial periods. This is therefore our first year
of uninterrupted engagement.
Ian Chambers (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
28 February 2019
Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditors’
report that includes our opinion. Reasonable assurance is a high
level of assurance, but is not a guarantee that an audit conducted
in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the
financial statements is located on the FRC’s website at: www.frc.org.
uk/auditorsresponsibilities. This description forms part of our
auditors’ report.
Use of this report
This report, including the opinions, has been prepared for and only
for the parent Company’s members as a body in accordance with
Chapter 3 of Part 16 of the Companies Act 2006 and for no other
purpose. We do not, in giving these opinions, accept or assume
responsibility for any other purpose or to any other person to
whom this report is shown or into whose hands it may come save
where expressly agreed by our prior consent in writing.
Rolls-Royce Holdings plc Annual Report 2018
Other Information
Sustainability Assurance Statement
197
SUSTAINABILITY ASSURANCE STATEMENT
To the stakeholders of Rolls-Royce Holdings plc
Independent limited assurance statement
Summary of work performed
Introduction and objectives of work
Bureau Veritas UK Limited (Bureau Veritas) has been engaged by
Rolls-Royce Holdings plc (the Company) to provide limited assurance
over selected sustainability performance indicators for inclusion in
its 2018 Annual Report for the year ended 31 December 2018 (the
Report) and on its website. This Assurance Statement applies to
the related information included within the scope of work
described below.
Scope of work
The scope of our work was limited to assurance over the following
information included within the Report (the ‘Selected Information’):
– energy consumption;
– scope 1 & 2 greenhouse gases (GHG) emissions;
– total reportable injury; and
– the number of people reached through the STEM education
outreach programmes.
Reporting criteria
The Selected Information is reported according to the
Rolls-Royce ‘Basis of Reporting’, a copy of which can be found in
the sustainability section at www.rolls-royce.com/sustainability.
Limitations and exclusions
Excluded from the scope of our work is verification of any
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 the Company.
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 management of the Company.
Assessment standard
We performed our work in accordance with the 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 the main
requirements of ISO 14064:2006 Part 3 – Specification with
Guidance for the Validation and Verification of Greenhouse
Gas Assertions.
As part of its independent verification, Bureau Veritas undertook
the following activities:
– assessed the appropriateness of the Reporting Criteria for the
Selected Information;
– conducted interviews with relevant personnel;
– carried out nine site visits, selected employing a risk-based
approach, in the UK, US, France, Spain and Poland;
– reviewed the data collection and consolidation processes used to
compile the Selected Information, including assessing assumptions
made, the data scope and reporting boundaries;
– reviewed documentary evidence produced by the Group;
– agreed a sample of the Selected Information to the corresponding
source documentation; and
– 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 certified 1 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 the Group.
Bureau Veritas UK Limited
London
18 February 2019
1 Certificate of Registration FS 34143 issued by BSI Assurance UK Limited
2 International Federation of Inspection Agencies – Compliance Code – Third Edition
OTHER INFORMATION 198
Directors’ Report
Other Financial Information
Rolls-Royce Holdings plc Annual Report 2018
OTHER FINANCIAL INFORMATION
Foreign exchange
Foreign exchange rate movements influence the reported income
statement, the cash flow and closing net funds balance. The average
and spot rates for the principal trading currencies of the Group are
shown in the table below:
USD per GBP Year-end spot rate
Average spot rate
EUR per GBP Year-end spot rate
Average spot rate
2018
1.28
1.33
1.12
1.13
2017
1.35
1.29
1.13
1.14
Change
-5%
+4%
-1%
-1%
The Group’s global corporate income
tax contribution
The Group’s total corporation tax payments in 2018 were £248m.
Around 85% of this was paid in the US, Germany, UK and Singapore
which reflects the fact that the majority of the Group’s business is
undertaken, and employees are based, in these countries. The
balance was paid in around 40 other 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 loss before tax reported on page 107. The main
reasons for this are:
(i)
the consolidated income statement is prepared under Adopted
IFRS, whereas tax is paid on the profits of each Group company,
which are determined by local accounting rules;
(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
Further information on the tax position of the Group can be found
as follows:
– Audit Committee Report (page 77) – 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 114 and
117) – Details of key areas of uncertainty and accounting policies
for tax; and
– note 5 to the Consolidated Financial Statements (pages 131 to
134) – 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 impact of significant adjustments to reported
profits, in particular the net unrealised fair value changes to
derivative contracts and the recognition of advance corporation tax.
Information on the Group’s approach to managing its tax affairs can
be found at www.rolls-royce.com/sustainability.
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
lifecycles. All of our major investments and projects are assessed
using a range of financial metrics, including discounted cash flow
and return on investment.
(iii) specific tax rules including exemptions or incentives as
determined by the tax laws in each country.
Financial risk management
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. The core
underlying tax rate can be found on page 19. 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.
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 or Group Controller. 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.
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Other Financial Information
199
Capital structure
Credit rating
£m
Total equity
Cash flow hedges
Group capital
Net funds
2018
(1,052)
106
946
611
2017
933
112
1,045
(305)
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.
Moody’s Investors Service
Standard & Poor’s
Fitch
Rating
A3
BBB+
A-
Outlook
Grade
Negative Investment
Negative Investment
Stable Investment
The Group subscribes to Moody’s, Standard & Poor’s and Fitch for
independent long-term credit ratings. At the date of this report, the
Group maintained investment-grade rating from all three agencies.
As a capital-intensive business making long-term commitments
to its customers, the Group attaches significant importance
to maintaining or improving the current investment-grade
credit ratings.
Accounting
The Group holds cash and short-term investments which, together
with the undrawn committed facilities, enable it to manage its
liquidity risk.
The Consolidated Financial Statements have been prepared in
accordance with International Financial Reporting Standards (IFRS),
as adopted by the EU.
During the year, the Group replaced the £1,500m and £500m
committed bank borrowing facilities with a new £2,500m facility
with a maturity date of 2023. This facility was undrawn at the period
end. Also during 2018, the Group issued €1,100m of bond notes of
which €550m mature in 2024 and €550m in 2028. At the year end,
the Group retained aggregate liquidity of £7.5bn, including cash
and cash equivalents of £5.0bn and undrawn borrowing facilities of
£2.5bn. Circa £858m of drawn borrowings mature in 2019.
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.
IFRS 15 Revenue from Contracts with Customers and IFRS 9
Financial Instruments were adopted from 1 January 2018 and the
impacts are described in note 1 and note 27 of the Consolidated
Financial Statements. In particular, IFRS 15 has had a material
impact, with a reductions of net assets of £4.5bn and £5.2bn at
31 December 2016 and 2017 respectively.
IFRS 16 Leases is effective from 1 January 2019 and the estimated
impact is set out in note 1 of the financial statements.
Share price
During the year, the share price reduced by 2% from 847p to 830p,
compared to a 13% reduction in the FTSE aerospace and defence
sector and a 11% reduction in the FTSE 100. The Company’s share
price ranged from 759p in December 2018 to 1094p in August 2018.
OTHER INFORMATION 200
Directors’ Report
Other Statutory Information
Rolls-Royce Holdings plc Annual Report 2018
OTHER STATUTORY INFORMATION
Share capital
Share class rights
On 31 December 2018, the Company’s issued share capital
comprised of:
1,895,710,451
29,071,130,784
1
Ordinary shares
C Shares
Special Share
20p each
0.1p each
£1
The ordinary shares are listed on the London Stock Exchange.
Payment to shareholders
The Company issues non-cumulative redeemable preference shares
(C Shares) as an alternative to paying a cash dividend.
Shareholders can choose to:
– redeem all C Shares for cash;
– redeem all C Shares for cash and reinvest the proceeds in the
C Share Reinvestment Plan (CRIP); or
– keep the C Shares.
The CRIP is operated by Computershare Investor Services PLC
(the Registrar). The Registrar will purchase ordinary shares in the
market for shareholders electing to reinvest their C Share proceeds.
Shareholders wishing to participate in the CRIP or redeem their
C Shares in July 2019 must ensure that their instructions are lodged
with the Registrar no later than 5.00pm (BST) on 3 June 2019 (CREST
holders must submit their election in CREST before 3.00pm (BST)
on 3 June 2019). Redemption will take place on 4 July 2019.
At the 2019 AGM, the Directors will recommend an issue of
71 C Shares with a total nominal value of 7.1p for each ordinary share.
The C Shares will be issued on 1 July 2019 to shareholders on the
register on 26 April 2019 and the final day of trading with entitlement
to C Shares is 25 April 2019. Together with the interim issue
on 3 January 2019 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 204 and 205.
The full share class rights are set out in the Company’s Articles
of Association (Articles), which are available at www.rolls-royce.com.
The rights 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 preferential
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 on or prior to that time or the event
of a capital restructuring of the Company; the introduction of a new
holding company; the acquisition of the Company by another
company; or a demerger from the Group.
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 the UK Secretary of State for Business,
Energy & Industrial Strategy (Special Shareholder). These rights are
set out in the Articles. Subject to the provisions of the Companies
Act 2006 (the Act), the Treasury Solicitor may redeem the Special
Share at par value 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.
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Other Statutory Information
201
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
The Company and Bradley Singer are party to a relationship
agreement with ValueAct (a summary of which can be found at
www.rolls-royce.com).
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.
Authority to issue shares
At the AGM in 2018, 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, an ordinary resolution was passed authorising the
Directors to allot new ordinary shares up to a nominal value
of £123,347,889 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 2019 or 2 August 2019,
whichever is earlier, and the Directors propose to renew each of
them at the 2019 AGM. The Board believes that these authorities
will allow the Company to retain flexibility to respond to
circumstances and opportunities as they arise.
ITP Aero
Following approval from the relevant authorities in Spain, on
19 December 2017 the Group acquired a 53.1% shareholding in ITP
Aero from SENER resulting in ITP Aero becoming a wholly-owned
subsidiary of the Company. The consideration of €718m will be
settled over a two-year payment period, payable in eight equal
instalments, and the agreement with SENER allows the Company
flexibility to settle up to 100% of the consideration in the form of
ordinary shares. Five payments were settled in 2018, all in the form
of ordinary shares, as follows:
Instalment
1st
2nd
3rd
4th
5th
No. of
ordinary shares
9,612,581
9,624,396
9,719,544
8,398,166
10,202,227
Date
15 January 2018
19 March 2018
19 June 2018
19 September 2018
19 December 2018
Final consideration as to whether the remaining three instalments will
be settled in the form of cash or ordinary shares will be determined
by the Company during the remaining payment period.
Authority to purchase own shares
At the AGM in 2018, the Company was authorised by shareholders
to purchase up to 185,021,833 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 2019 or 2 August 2019, whichever
is the earlier. A resolution to renew the authority will be proposed
at the 2019 meeting.
Deadlines for exercising voting rights
Electronic and paper proxy appointments, and voting instructions,
must be received by the Registrar not less than 48 hours before a
general meeting.
Voting rights for employee share plan shares
Shares are held in an employee benefit trust 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.
OTHER INFORMATION 202
Directors’ Report
Other Statutory Information
Rolls-Royce Holdings plc Annual Report 2018
Change of control
Major shareholdings
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 2018,
these facilities were less than 19% drawn (2017: 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 controlling 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.
– LTIP – 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.
Accounting policies, financial instruments
and risk
Details of the Group’s accounting policies, together with details of
financial instruments and risk, are provided in notes 1 and 17 to the
Consolidated Financial Statements on pages 117 and 144.
Employment of disabled people
Rolls-Royce is an inclusive employer committed to building a
diverse workforce. We give full and fair consideration to all
applications for employment by disabled persons together with the
continued employment of any employee who suffers disability
whilst employed by the Group. All employees are able to take
advantage of our training programmes in developing their careers
and promotion opportunities are open to employees regardless of
disability. For more information please see page 44.
At 31 December 2018, the following shareholders had notified an
interest in the issued ordinary share capital of the Company in
accordance with the DTR:
Shareholder
ValueAct Capital Master
Fund, L.P.
The Capital Group
Companies, Inc
Credit Suisse Group AG
Date notified
% of issued ordinary
share capital *
1 February 2018
13 October 2017
3 May 2017
10.94
5.07
3.91
* Percentages are shown as a percentage of the Company’s issued share capital when the
Company was notified of the change in holding.
On 4 January 2019, in accordance with the DTR, BlackRock, Inc.
disclosed an increase in their shareholding to 5.01% *. As at
28 February 2019, no further changes had been notified.
Directors
The names of the Directors who held office during the year are
set out on page 63.
Directors’ Indemnities
The Directors have the benefit of an indemnity provision contained
in the Company’s Articles of Association. In addition, the Directors
have been granted a qualifying third party indemnity provision
which was in force throughout the financial year and remains in
force. Also, throughout the year, the Company purchased and
maintained Directors’ and Officers’ liability insurance in respect of
itself and for its Directors and Officers.
Disclosures in the Strategic Report
The Board has taken advantage of Section 414C(11) of the Act
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; and
– particulars of important events affecting the Company since the
financial year end.
Political donations
The Company’s policy is that it does not, directly or through any
subsidiary, make what are commonly regarded as donations to any
political party. However, the Act defines political donations very
broadly and so it is possible that normal business activities, such as
sponsorship, subscriptions, payment of expenses, paid leave for
employees fulfilling certain public duties and support for bodies
representing the business community in policy review or reform,
which might not be thought of as political expenditure in the usual
sense, could be captured. Activities of this nature would not be
thought of as political donations in the ordinary sense of those
words. The resolution to be proposed at the AGM, authorising
political donations and expenditure, is to ensure that the Group does
not commit any technical breach of the Act.
Rolls-Royce Holdings plc Annual Report 2018
Directors’ Report
Other Statutory Information
203
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$111,961
(2017: US$118,104). 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 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 2018 AGM.
Greenhouse gas emissions
In 2018, our total greenhouse gas (GHG) emissions were 596
kilotonnes carbon dioxide equivalent (ktCO2e). This represents a
decrease of 5% compared with 627 ktCO2e in 2017.
We have revised our total GHG emissions for 2017 to reflect the
actual figures for the full year, rather than estimated figures
prepared in line with our basis of reporting. This has had a material
impact on previously reported figures. The figures for 2016, 2017
and 2018 include emissions associated with ITP Aero. Emissions
associated with L’Orange have been removed from these figures
but do not have a material impact.
We have included the reporting of fugitive emissions of
hydrofluorocarbons (HFCs), associated with air conditioning
equipment, into our GHG emissions figures from 2016. Figures from
2014 and 2015 exclude emissions from these sources. 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.
2014
2015
2016
2017
2018
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 2018.
Further details on our methodology for reporting and the criteria
used can be found within our basis of reporting, available to
download at www.rolls-royce.com/sustainability.
Branches
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 178 to 185.
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.
Management report
456
374
368
331
305
The Strategic Report and the Directors’ Report together are the
management report for the purposes of Rule 4.1.8R of the DTR.
Total GHG emissions (ktCO2e)
Direct emissions
(Scope 1)
Indirect emissions
(Scope 2)
Total emissions
(Scope 1 + Scope 2)
Intensity ratio
(total emissions normalised
by revenue)
(ktCO2e/£m)
396
375
336
296
291
852
749
704
627
596
0.062 0.055 0.047 0.043 0.038
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
and
over the energy, GHG, TRI rate and STEM data that has been highlighted with
as set out on pages 43 to 47 and in the table above. The sustainability assurance
statement is included on page 197.
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.
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 Act.
OTHER INFORMATION
204
Other Information
Shareholder Information
Rolls-Royce Holdings plc Annual Report 2018
SHAREHOLDER INFORMATION
Financial calendar 2019-2020
2 MAY 11.00AM
AGM
Ashton Gate Stadium
Ashton Road
Bristol
BS3 2EJ
1 JULY
Allotment of C Shares
2 JULY
Payment of cash dividend on C Shares
4 JULY
Payment of C Share redemption monies
22 JULY
New share certificates issued (at the latest)
6 AUGUST
Announcement of half-year results
15 NOVEMBER
Record date for
cash dividend on
C Shares
3 JANUARY
Allotment of C Shares
6 JANUARY
Payment of cash dividend on C Shares
6 JANUARY
Payment of C Share redemption
monies
20 JANUARY
New share certificates issued
(at the latest)
APR
2019
MAY
2019
JUN
2019
JUL
2019
AUG
2019
SEP
2019
OCT
2019
NOV
2019
DEC
2019
JAN
2020
FEB
2020
MAR
2020
25 APRIL
Ex-entitlement
to C Shares
26 APRIL
Record date for
entitlement to
C Shares
3 JUNE 5.00PM
Deadline for receipt
by Registrar of C Share
instructions (3.00pm
for CREST holders)
3 JUNE
Record date for cash
dividend on C Shares
24 OCTOBER
Ex-entitlement
to C Shares
25 OCTOBER
Record date for
entitlement to
C Shares
2 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). This is 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.
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.
If you hold your shares in a share dealing account (sometimes
referred to as a nominee account) then you must contact your
account provider with any questions about your shareholding.
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 shareholders an internet dealing service
at www.computershare.co.uk and a telephone dealing service
(+44 (0)370 703 0084). Real-time dealing is available during market
hours, 8.00am to 4.30pm, Monday to Friday excluding bank
holidays. Orders can still be placed outside of market hours. 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 value plus £35. Stamp duty of 0.5% is payable on all
purchases. This service is only available to shareholders resident
in certain jurisdictions. Before you can trade you must register
to use the service. 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. 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 +1 (651) 453 2128
(outside the US) or emailing adr@jpmorgan.com.
Rolls-Royce Holdings plc Annual Report 2018
Other Information
Shareholder Information
205
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 at
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
www.actionfraud.police.uk.
Remember: if it sounds too good to be true it probably is.
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.
Dividends paid on C Shares held
C Share calculation period
1 July 2018 – 31 December 2018
1 January 2018 – 30 June 2018
Previous C Share issues
C Share dividend rate (%)
0.30
0.22
Record date for
C Share dividend
16 November 2018
4 June 2018
Payment date
3 January 2019
3 July 2018
Apportionment values
Record
date for
entitlement
to C Shares
26 October
2018
27 April
2018
Latest date
for receipt
of payment
instruction
forms by
Registrar
3 December
2018
1 June
2018
No. of C
Shares
issued per
ordinary
share
46
71
Issue date
3 January
2019
2 July
2018
Price of
ordinary
shares on
first day
of trading
(p)
788.20
975.00
CGT apportionment
Value of
C Share
issues per
ordinary
shares (p)
Ordinary
shares (%) C Shares (%)
4.6
7.1
99.42
99.28
0.58
0.72
Date of
redemption
of C Shares
7 January
2019
5 July
2018
CRIP
purchase
date
8 January
2019
5 July
2018
CRIP
purchase
price (p)
846.0466
983.6912
For information on earlier C Share issues, please refer to www.rolls-royce.com.
Analysis of ordinary shareholders at 31 December 2018
Type of holder
Individuals
Institutional and other investors
Total
Size of holding (number of ordinary shares)
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
170,690
4,112
174,802
56,186
84,667
32,298
1,143
334
174
174,802
% of total
shareholders
97.65
2.35
100.00
32.14
48.44
18.48
0.65
0.19
0.10
100.00
Number
of shares
87,362,888
1,808,347,563
1,895,710,451
5,128,416
22,851,592
49,522,520
31,244,558
113,567,593
1,673,395,772
1,895,710,451
% of total
shares
4.61
95.39
100.00
0.27
1.21
2.61
1.65
5.99
88.27
100.00
OTHER INFORMATION 206
Other Information
Glossary
Rolls-Royce Holdings plc Annual Report 2018
GLOSSARY
ABC
ACARE
anti-bribery and corruption
Advisory Council for Aviation Research
and Innovation in Europe
Annual General Meeting
AGM
Advanced Manufacturing Research Centres
AMRCs
aircraft on ground
AOG
Articles of Association of Rolls-Royce Holdings plc
Articles
Authorised Service Centres
ASC
basis points
bps
UK exit from the European Union
Brexit
non-cumulative redeemable preference shares
C Shares
commercial and administrative
C&A
contractual aftermarket rights
CARs
chief executive officer
CEO
chief financial officer
CFO
capital gains tax
CGT
Global Code of Conduct
Our Code
revised Code UK Corporate Governance Code 2018
UK Corporate Governance Code 2016
the Code
Rolls-Royce Holdings plc
Company
cash flow per share
CPS
C Share reinvestment plan
CRIP
cash return on invested capital
CROIC
Dow Jones Sustainability Index
DJSI
US Department of Justice
DoJ
deferred prosecution agreements
DPAs
the FCA’s Disclosure Guidance and
DTR
Transparency Rules
European Aviation Safety Agency
Enterprise Leadership Group
earnings per share
employee resource group
environment, social and governance
European Union
euro
electric vertical take-off and landing
Financial Conduct Authority
free cash flow
Financial Reporting Council
full time equivalent
foreign exchange
Great British pound or pound sterling
greenhouse gas
Rolls-Royce Holdings plc and its subsidiaries
health, safety and environment
International Aero Engines AG
EASA
ELG
EPS
ERG
ESG
EU
EUR
EVTOL
FCA
FCF
FRC
FTE
FX
GBP
GHG
Group
HSE
IAE
Trade marks
International Accounting Standards Board
International financial reporting standards
Industria de Turbo Propulsores S.A.
key performance indicators
kilotonnes carbon dioxide equivalent
kilowatts
lesbian, gay, bisexual and transgender
London inter-bank offered rate
long-term incentive plan
long-term planning exchange rate
long-term service agreement
memorandum of understanding
Ministério Público Federal, Brazil
maintenance repair and overhaul
megawatts
non-controlling interest
nitrogen oxide
other comprehensive income
original equipment
Organisation for Economic Co-operation
and Development
original equipment manufacturer
profit and loss
profit before tax
property, plant and equipment
product safety management system
performance share plan
research and development
research and technology
registration, evaluation, authorisation and restriction
of chemicals
Computershare Investor Services PLC
risk and revenue sharing arrangements
SENER Grupo de Ingeniería, S.A.
UK Serious Fraud Office
small modular reactors
Special Security Agreement
science, technology, engineering and mathematics
Taskforce on Climate-related Financial Disclosures
Thrust, Efficiency and New technology
total reportable injuries
total shareholder return
United States dollar
University Technology Centres
IASB
IFRS
ITP Aero
KPIs
ktCO2e
kW
LGBT+
LIBOR
LTIP
LTPR
LTSA
MOU
MPF
MRO
MW
NCI
NOx
OCI
OE
OECD
OEM
P&L
PBT
PPE
PSMS
PSP
R&D
R&T
REACH
Registrar
RRSAs
SENER
SFO
SMR
SSA
STEM
TCFD
Trent 1000
TEN
TRI
TSR
USD/US$
UTCs
Credits
The following trade marks which appear throughout this Annual Report are trade
Designed and produced by
marks registered and owned by companies within the Rolls-Royce Group:
BR710®
CorporateCare®
Flex®
Gnome®
LiftSystem™
MTU®
MTU PowerPacks®
Pearl®
Pioneering the power that matters™
RB211®
Reman®
TotalCare®
Trent®
UltraFan®
Photograph credits
The F-35B Lightning II aircraft image shown on page 35 is reproduced courtesy
of Lockheed Martin.
The Dreadnought submarine image shown on page 37 is reproduced courtesy
of BAE Systems.
Printed on Innovation Premium which is an FSC® certified paper. The pulps used
are Totally Chlorine Free (TCF), and the manufacturing mill has ISO 14001
environmental management certification. The mill’s energy is produced from 100%
biomass fuels sourced from local forestry and no fossil fuels are used. The carbon
emissions have been measured and offset using the World Land Trust’s Carbon
Balanced scheme.
using their
Printed in the UK by
environmental printing technology, using vegetable
is a CarbonNeutral®
inks throughout.
company. Both the paper manufacturing mill and
the printer are registered to the Environmental
Management System ISO 14001 and are
Forest Stewardship Council® (FSC®)
chain-of-custody certified.
CBP000256
© Rolls-Royce plc 2018
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