22
February
2024
ROLLS-ROYCE HOLDINGS PLC -
2023 Full Year Results
Step-change in performance driven by
transformation; strong momentum into 2024
|
|
-
|
Underlying operating profit of £1.6bn and
underlying margin of 10.3%, reflecting the impact of our strategic
initiatives, with commercial optimisation and cost efficiency
benefits across the Group
|
|
-
|
Record free cash flow of £1.3bn driven by
operating profit and continued LTSA balance growth
|
|
-
|
Return on capital more than doubled to 11.3%
reflecting improved operating profit, disciplined capital
allocation and working capital management
|
|
-
|
Statutory net cash flow from operating
activities of £2.5bn, £1.0bn higher year on year
|
|
-
|
Net debt of £2.0bn, down from £3.3bn at the
end of 2022, as we strengthen the balance sheet and build
resilience
|
|
-
|
2024 guidance: continued progress with
underlying operating profit between £1.7bn and £2.0bn and free cash
flow between £1.7bn and £1.9bn
|
Tufan Erginbilgic, CEO said: "Our transformation has
delivered a record performance in
2023, driven by commercial optimisation, cost efficiencies and
progress on our strategic initiatives. This step-change has been
achieved across all our divisions, despite a volatile environment
with geopolitical uncertainty, supply chain
challenges and inflationary pressures.
We are managing the business differently and our significant
performance improvement in the year reflects the hard work and
focused actions of all our teams. We are also continuing to invest
to drive future sustainable growth. Our strong delivery
in 2023 gives us confidence in our 2024 guidance and is a
significant step towards our mid-term targets. We are unlocking our
full potential as a high-performing, competitive, resilient, and
growing Rolls-Royce."
Full Year 2023 Group continuing operations
|
Underlying
2023
|
Underlying 2022
|
Statutory
2023
|
Statutory
2022
|
£
million
|
Revenue
|
15,409
|
12,691
|
16,486
|
13,520
|
Operating profit
|
1,590
|
652
|
1,944
|
837
|
Operating margin (%)
|
10.3%
|
5.1%
|
11.8%
|
6.2%
|
Profit/(loss) before taxation
|
1,262
|
206
|
2,427
|
(1,502)
|
Earnings/(loss) per share (pence)
|
13.75
|
1.95
|
28.85
|
(14.24)
|
|
|
|
|
|
Free cash flow
|
1,285
|
505
|
|
|
Return on capital (%) 1
|
11.3%
|
4.9%
|
|
|
Net cash flow from operating activities
2
|
|
|
2,485
|
1,524
|
Net debt
|
|
|
(1,952)
|
(3,251)
|
1 Adjusted return on capital
is defined on page 52 and is abbreviated to return on
capital
2 Represented. See page 18
for further details
A reconciliation of alternative
performance measures to their statutory equivalent is provided on
pages 49 to 52
2023 performance summary
·
Driving growth in attractive
markets: Large engine flying hours (EFH) in
Civil Aerospace recovered to 88% of 2019 levels, up from 65% in
2022. Large engine orders were the highest in more than 15 years,
with major orders from Air India and Turkish Airlines. In Defence,
the AUKUS submarine agreement was announced, which will be
supported by the expansion of our submarines site in Raynesway, and
work on our future programmes in the UK and US progressed well. In
Power Systems, we are capturing strong demand for power generation
solutions and services in the rapidly expanding data centre
market.
·
Significantly improved
profit and margins: Underlying operating profit
rose by £0.9bn to £1.6bn supported by our transformation programme
and strategic initiatives, with commercial optimisation and cost
efficiency benefits across the Group. Underlying operating margin
more than doubled to 10.3%. Civil Aerospace, Defence
and Power Systems all delivered materially higher margins compared
to last year. The largest improvement was in Civil Aerospace, which
delivered an operating margin of 11.6% compared to 2.5% in the
previous year. This was driven by increased aftermarket profit, in
both the large engines and business aviation segments, reflecting
commercial optimisation and cost efficiencies, as well as volume
growth. Defence delivered an improved operating margin of 13.8%
(2022: 11.8%), which primarily reflected improved pricing and cost
efficiencies. In Power Systems, which reported an operating margin
of 10.4% (2022: 8.4%), pricing and cost efficiency actions in the
first half of the year resulted in a significantly
improved operating profit and margin in the second half and in the
full year.
·
Record cash
generation: Free cash flow from continuing
operations grew by approximately 150% to £1.3bn, principally due to
higher operating profit. Civil net LTSA creditor growth net of risk
and revenue sharing agreements (RRSAs) was £1.1bn (2022: £0.8bn).
Continued LTSA balance growth reflects higher EFHs and the benefit
of commercial optimisation, with LTSA invoiced flying hour receipts
of £4.6bn (2022: £3.6bn). Our focus on working capital resulted in
a release in the second half despite ongoing supply chain
challenges. For the full year there was a net working capital
outflow of £0.4bn (2022: £0.5bn). Inventory and debtor days both
improved year on year building further confidence in the actions we
are taking to improve the quality of cash delivery.
·
Building financial
resilience: Total underlying cash costs as a
proportion of underlying gross margin (TCC/GM) ratio improved to
0.59x in 2023 from 0.80x in 2022. Net debt improved to £2.0bn
(2022: £3.3bn). We have £4.1bn of drawn debt, of which
£0.5bn matures in 2024, £0.8bn in 2025 and £2.8bn in 2026-2028, and
£1.7bn of lease liabilities. We have £3.7bn in cash and cash
equivalents and £3.5bn undrawn facilities, totalling £7.2bn of
liquidity, and expect to repay the 2024 and 2025 bonds from cash.
We cancelled a £1.0bn undrawn UK Export Finance (UKEF) backed
facility in the year, and a £1.0bn undrawn bank loan facility
reflecting our higher cash balance and more resilient financial
position.
·
Shareholder
payments: We are not making shareholder
payments for 2023. As we shared at our capital markets day in
November 2023, once we are comfortably within an investment grade
profile and the strength of our balance sheet is assured, we are
committed to reinstating and growing shareholder
distributions.
Transformation programme and strategic
review
The early results of our transformation
programme and strategic initiatives are already evident in the
step-change in performance reported for 2023, but there is more
still to do. Our strategy framework is founded on four
pillars:
·
Portfolio choices &
partnerships: We have clear plans for the
markets we will operate and invest in. In Civil Aerospace, we
successfully tested our UltraFan demonstrator engine to full power
and achieved certification for our Pearl 700 business jet engine.
In Defence, investment continued in the growing combat, transport
and submarines markets and we progressed well with testing and
development on the GCAP and B-52 programmes. In Power Systems, we
successfully tested a new engine prototype that will join our
portfolio alongside our current Series 4000 and acquired a yacht
automation and bridge specialist business to extend our Marine
offering. We also identified areas for divestment, which we expect
to generate £1.0bn-£1.5bn gross proceeds by 2028. We are in
advanced discussions to sell the off-highway lower power range
engines division in Power Systems and we decided to exit Electrical
in the short term or alternatively, for the right value, reduce our
position to a minority with an intention to exit fully in the
mid-term.
·
Advantaged businesses &
strategic initiatives: In Civil Aerospace, we
have now retrofitted 20% of the Trent 7000 fleet with the improved
HPT blade, which has doubled its time on wing, and we expect the
same improvement to be certified on the Trent 1000 TEN in 2024. All
key Civil Aerospace OEM and major airline contract renegotiations
were either concluded or progressed. Our cost initiatives reduced
total shop visit costs across large engines dispatched in 2023,
which helped to deliver an improved LTSA margin. In Defence, cost
efficiencies and value-based pricing helped to deliver improved
performance and we delivered strong growth in combat and
submarines. In Power Systems, in addition to our pricing and cost
actions, we commissioned one of the largest battery and energy
storage systems in Europe, helping to integrate renewable energy
into the Dutch public grid and grow our power generation
business.
·
Efficiency &
simplification: Our actions to deliver
sustainable cost efficiencies and improve competitiveness are well
underway. In 2023, we delivered around £150m towards an annualised
total Efficiency & Simplification savings target of £400m-£500m
in the mid-term. We announced a reduction of 2,000-2,500 roles by
the end of 2025 with expected annual benefits of approximately
£200m and associated severance costs of £200m-£250m, which will be
taken as an exceptional charge in 2024. We also have a renewed
focus on third party costs, where we delivered gross savings of
£130m in the year, making a strong start towards our target to save
£1bn gross procurement spend by the mid-term, helping to partly
offset inflationary pressures. In 2024, we have launched zero based
budgeting, focusing initially on Civil Aerospace.
·
Lower carbon & digitally
enabled businesses: We remain committed to
becoming a net zero company by 2050 and supporting our customers to
do the same. In 2023 we powered the first 100% sustainable aviation
fuelled commercial flight across the Atlantic and met our target
for 100% SAF compatibility testing for our in production commercial
aero engines. Our S2000 and S4000 engines in Power Systems were
approved for use with sustainable fuels and we also progressed our
hydrogen test programmes. We invested in digital tools as we look
to unlock the potential to remove 20% of repetitive tasks with
digital and AI capability.
Delivery of our strategic framework and clear
plans for the mid-term will realise our Rolls-Royce proposition to
become a high-performing, competitive, resilient and growing
business. Our people are energised and aligned to the new One
Rolls-Royce ways of working and our progress to date further
strengthens our confidence in the delivery of our mid-term
targets.
Outlook and 2024 Guidance
As we continue to deliver our strategy, we
expect further improvements towards all our mid-term targets. This
is despite the impact of continued supply chain challenges, which
we expect to persist for 18-24 months, geopolitical uncertainty and
inflationary pressures.
2024 financial guidance
|
|
Underlying operating
profit
|
£1.7bn-£2.0bn
|
Free cash flow
|
£1.7bn-£1.9bn
|
In Civil Aerospace, we expect 2024 large EFHs
will grow to 100-110% of 2019's level, 500-550 total original
equipment (OE) deliveries and 1,300-1,400 total shop visits. Our
2024 free cash flow guidance is based on civil net LTSA creditor
growth at the low end of the mid-term range (£0.8bn - £1.2bn),
compared to £1.1bn in 2023. Additional detail is included in the
results presentation and supplementary data slides.
Strong progress in the early years of our plan
demonstrates a front-end loaded delivery of performance
improvement. Our 2023 performance and 2024 guidance on operating
profit and free cash flow means that by 2024 we will have delivered
more than 50% of the improvement set out in our mid-term targets.
As a reminder, we are targeting underlying operating profit of
£2.5bn-£2.8bn, operating margin of 13-15%, free cash flow of
£2.8bn-£3.1bn and return on capital of 16-18% in the mid-term.
These targets are based upon our expectations for a 2027
timeframe.
Underlying financial performance by
division
£
million
|
Underlying
revenue
|
Organic Change
1
|
Underlying operating
profit/(loss)
|
Organic change
1
|
Underlying operating
margin
|
Organic margin change
(pts)
|
Civil Aerospace
|
7,348
|
29%
|
850
|
497%
|
11.6%
|
9.1pt
|
Defence
|
4,077
|
12%
|
562
|
30%
|
13.8%
|
1.9pt
|
Power Systems
|
3,968
|
16%
|
413
|
44%
|
10.4%
|
2.0pt
|
New Markets
|
4
|
nm
|
(160)
|
(20)%
|
nm
|
nm
|
Other businesses
|
12
|
nm
|
(15)
|
52%
|
nm
|
nm
|
Corporate/eliminations
|
−
|
nm
|
(60)
|
(49)%
|
nm
|
nm
|
Total (continuing operations)
|
15,409
|
21%
|
1,590
|
143%
|
10.3%
|
5.2pt
|
1 Organic change is the
measure of change at constant translational currency applying full
year 2022 average rates to 2023. All underlying income statement
commentary is provided on an organic basis unless otherwise
stated
All results are shown for Group continuing operations, on an
underlying basis, excluding discontinued operations (ITP Aero). For
more details, see note 2 of the Condensed Consolidated Financial
Statements (page 22).
nm is defined as not meaningful
Trading cash flow
£
million
|
2023
|
2022
|
Civil Aerospace
|
626
|
226
|
Defence
|
511
|
426
|
Power Systems
|
461
|
158
|
New Markets
|
(63)
|
(57)
|
Other businesses
|
5
|
5
|
Corporate/eliminations
|
(57)
|
(49)
|
Total trading cash flow (continuing
operations)
|
1,483
|
709
|
Underlying operating profit charge
exceeded by contributions to defined benefit schemes
|
(26)
|
(32)
|
Taxation
|
(172)
|
(172)
|
Total free cash flow (continuing
operations)
|
1,285
|
505
|
Civil Aerospace
2023 key operational metrics:
|
Large
engine
|
Business aviation/
regional
|
Total
|
Change
|
Original Equipment (OE)
deliveries
|
262
|
196
|
458
|
29%
|
LTSA engine flying hours
(millions)
|
13.5
|
3.0
|
16.5
|
25%
|
Total LTSA shop visits
|
839
|
388
|
1,227
|
18%
|
…of which major shop
visits
|
368
|
363
|
731
|
27%
|
Significantly improved Civil Aerospace
operating profit and margins reflect higher aftermarket profit, due
to increased volumes, commercial optimisation, and cost
efficiencies.
Civil Aerospace large EFHs rose by 36% year on
year to 88% of 2019 levels, reflecting the continued strong demand
for travel coupled with a recovery in traffic in China as COVID-19
restrictions eased. Business aviation demand remained robust. In
2023, around 700 large engines were ordered, the highest level
since 2007 including major orders from Air India, Emirates and EVA
Air. Turkish Airlines also placed an order for new engine
deliveries in 2023, which is set to make them the largest operator
of Trent XWB engines in the world. In January 2024 we also received
a substantial order from Delta Airlines for 40 Trent XWB-97
engines. Our large engine order book increased by almost 30% to
1,632 engines at year end with a 2023 book to bill of
2.6x.
Total OE engine deliveries rose by 29% year on
year, with 196 business aviation deliveries (2022: 165) and 262
total large engine deliveries (2022: 190). In 2023 we delivered 53
large spare engines (2022: 44), which represented 20% of total
large engine deliveries (2022: 23%). Total shop visits increased
18% year on year to 1,227
(2022: 1,044), of these 368 were large engine major shop visits
(2022: 248). The ramp up in shop visits was achieved despite
ongoing supply chain constraints.
Underlying revenue of £7.3bn increased 29%
year on year, driven by higher shop visits and OE engine deliveries
and commercial optimisation. Underlying OE revenues grew by 36% in
the year to £2.7bn and services revenues grew by 25% to £4.6bn.
LTSA revenue catch-ups were £(104)m (2022: £360m).
Underlying operating profit was £850m (11.6%
margin) versus £143m in 2022 (2.5% margin). The year on year
improvement was driven by higher large engine LTSA shop visit
volumes and profitability, increased time and materials profits
from life limited parts sales for large engines, and higher
business aviation profits, again driven by aftermarket profit
growth. In each case, our commercial optimisation actions helped
drive margin improvements. This was complemented by cost
efficiencies, with lower indirect costs net of
inflation.
Contract catch-ups were £(29)m (2022: £319m).
The prior year benefitted from material positive contract catch-ups
mostly associated with inflation assumption changes in 2022. Net
onerous provisions/releases were £(25)m
(2022: £51m). We made good progress on onerous contracts in the
year, releasing £385m of provisions taken in prior periods.
However, this was more than offset by £410m new provisions taken in
2023 mostly related to industry wide supply chain
constraints.
Trading cash flow was £626m versus £226m in
2022. Improved cash flows were driven by higher operating profit,
continued strong growth in the LTSA balance, partly offset by net
working capital movements and increased investments in the year
including improving time on wing for our Trent engines, investment
in the Pearl business aviation engines and the UltraFan
demonstrator engine test. LTSA invoiced flying hour receipts
increased to £4.6bn (2022: £3.6bn).
Defence
Higher operating profit in Defence was driven
by our commercial optimisation action, cost efficiencies and volume
growth in submarines.
Demand remained strong in all key markets -
transport, combat and submarines - with order intake of £5.2bn in
the year; a book-to-bill ratio of 1.3x. This resulted in a record
order backlog of £9.2bn at the year end, with 90% order cover in
2024 and a high degree of cover in 2025 and beyond. Key awards in
the year included the AUKUS agreement, which underpins the
long-term growth outlook for our submarines business.
Revenues increased by 12% in 2023 to £4.1bn,
with year-on-year growth in all major end markets, notably
double-digit revenue growth in combat and submarines. Combat growth
was driven by the GCAP programme in the UK and the ramp-up of the
F130 programme for the B-52 in the US. Total OE revenues grew by 8%
in the year to £1.8bn and services revenues grew by 14% to
£2.3bn.
Operating profit was £562m (13.8% margin)
versus £432m (11.8% margin) in the prior year, reflecting
commercial optimisation, cost efficiencies, and growth in
submarines. A lower R&D charge reflected increased customer
funding and our strategic focus on the most attractive future
programmes.
Trading cash flow of £511m improved versus
£426m last year, driven by higher underlying operating profit and
our working capital initiatives which resulted in inventory
reductions, and increased customer deposits.
Power Systems
In Power Systems, as we stated in our upgraded
2023 guidance at the half year, our cost and pricing actions in the
first half of the year supported a significantly higher margin and
profit in the second half, and a higher margin for the full year,
with a material improvement in power generation profit, taking the
division to a level which represents an all-time record in the 114
year history of the business.
Order intake in Power Systems was £4.3bn, flat
year on year, but with a book-to-bill ratio of 1.1x and OE order
coverage for 2024 of 80%. Demand remained strong with high order
intake in power generation and governmental in particular.
Underlying revenue was £4.0bn, an increase of
16% year on year with 34% growth in the power generation end market
driven by data centre growth, where we have a leading position.
Underlying OE revenues grew by 19% to £2.7bn. Underlying Services
revenues grew by 10% to £1.3bn.
Operating profit was £413m, a 44% year on year
increase. This was driven by commercial optimisation and cost
efficiencies. In power generation, profitability tripled in 2023
as we took steps to ensure we are appropriately
remunerated for our products and services through value-based
pricing. The year on year improvement in operating
margin to 10.4% in 2023 versus 8.4% in 2022 was achieved despite a
slight product mix headwind in the year.
Trading cash flow was £461m with a conversion
ratio of 112% versus £158m and 56% last year. The increase in
trading cash flow was due to increased operating profit and working
capital initiatives including a benefit from increased customer
advance payments and reduced inventories in the year.
New Markets
Rolls-Royce SMR (small modular reactors)
continued to progress well through stage two of the Generic Design
Assessment (GDA) regulatory process in the UK. First power is still
planned in the early 2030s, which will be dependent on securing
orders and the outcome of the final investment decision by the UK
Government. In 2023 we were successfully shortlisted in the first
stage of the Great British Nuclear Small Modular Reactor technology
selection process and look forward to the next steps.
Planned cost increases in both Electrical and
SMR to meet development milestones resulted in an increased
operating loss of £(160)m a 20% increase from £(132)m in the prior
year.
Trading cash flow was an outflow of £(63)m
compared to £(57)m in the prior year, with SMR costs covered by
third party funding.
Statutory and underlying Group financial performance from
continuing operations
|
2023
|
2022
|
£
million
|
Statutory
|
Impact of hedge book
1
|
Impact of acquisition
accounting
|
Impact of other
non-underlying items
|
Underlying
|
Underlying
|
Revenue
|
16,486
|
(1,077)
|
−
|
−
|
15,409
|
12,691
|
Gross profit
|
3,620
|
(461)
|
46
|
26
|
3,231
|
2,477
|
Operating profit
|
1,944
|
(475)
|
50
|
71
|
1,590
|
652
|
Gain arising on disposal of
businesses
|
1
|
−
|
−
|
(1)
|
−
|
−
|
Profit before financing and taxation
|
1,945
|
(475)
|
50
|
70
|
1,590
|
652
|
Net financing
income/(costs)
|
482
|
(915)
|
−
|
105
|
(328)
|
(446)
|
Profit before taxation
|
2,427
|
(1,390)
|
50
|
175
|
1,262
|
206
|
Taxation 2
|
(23)
|
285
|
(12)
|
(370)
|
(120)
|
(48)
|
Profit for the year from continuing
operations
|
2,404
|
(1,105)
|
38
|
(195)
|
1,142
|
158
|
Basic earnings per share (pence)
|
28.85
|
|
|
|
13.75
|
1.95
|
1
Reflecting the impact of measuring revenue and costs at the average
exchange rate during the year and the valuation of assets and
liabilities using the year end exchange rate rather than the rate
achieved on settled foreign exchange contracts in the year or the
rate expected to be achieved by the use of the hedge
book
2 Taxation
includes the recognition of a deferred tax asset on UK tax losses
of £328m in other non-underlying items
Revenue: Underlying
revenue of £15.4bn was up 21%, with double-digit growth in all
three core divisions and particularly strong growth in Civil
Aerospace. Statutory revenue of £16.5bn was 22% higher compared
with 2022. The difference between statutory and underlying revenue
is driven by statutory revenue being measured at average prevailing
exchange rates (2023: GBP:USD 1.24; 2022: GBP:USD 1.24) and
underlying revenue being measured at the hedge book achieved rate
during the year (2023 GBP:USD 1.50; 2022:
1.50).
Operating
profit: Underlying operating profit of £1,590m
(10.3% margin) versus £652m (5.1% margin) in the prior year. This
was due primarily to strong aftermarket growth in Civil Aerospace
and commercial optimisation and cost efficiencies across the Group.
The largest year on year improvement in margin was in Civil
Aerospace, but Defence and Power Systems margins also rose
materially. Statutory operating profit was £1,944m, higher than the
£1,590m underlying operating profit largely due to the £475m
negative impact from currency hedges in the underlying results. Net
charges of £71m were excluded from the underlying results as these
related to non-underlying items comprising net
transformation and restructuring charges of £102m; partly offset by
net impairment reversals of £8m, the write back of exceptional
Trent 1000 programme charges of £21m; and a £2m pension past
service credit.
Profit before
taxation: Underlying profit before taxation of
£1,262m included £(328)m net financing costs comprising £164m
interest receivable, £(275)m interest payable and £(217)m of other
financing charges and costs of undrawn facilities. Statutory profit
before tax of £2,427m included £515m net fair value gains on
derivative contracts, £(205)m net interest payable and net foreign
exchange gains of £394m.
Taxation:
Underlying tax charge of £(120)m (2022: £(48)m) reflects a
tax charge on profits of £(198)m net of a tax credit arising on the
recognition of a £78m deferred tax asset on previously unrecognised
UK tax losses. The 2022 underlying tax charge relates to tax on
overseas profits of £(175)m net of a tax credit on the increase in
certain UK deferred tax assets of £127m. The statutory tax charge
of £(23)m is lower than the underlying charge due to an additional
£328m recognition of a deferred tax asset on UK tax losses. This is
partially offset by a net tax charge of £(231)m on non-underlying
items.
Free cash flow
|
2023
|
2022
|
£
million
|
Cash flow
|
Impact of hedge
book
|
Impact of acquisition
accounting
|
Impact of other
non-underlying items
|
Funds flow
|
Funds
flow
|
Operating profit
|
1,944
|
(475)
|
50
|
71
|
1,590
|
652
|
Operating profit from discontinued
operations
|
−
|
−
|
−
|
−
|
−
|
86
|
Depreciation, amortisation and
impairment
|
1,019
|
−
|
(50)
|
9
|
978
|
953
|
Movement in provisions
|
(325)
|
46
|
−
|
21
|
(258)
|
(23)
|
Movement in Civil LTSA
balance
|
1,708
|
(377)
|
−
|
−
|
1,331
|
792
|
Movement in prepayments to RRSAs for
LTSA parts
|
(315)
|
63
|
−
|
−
|
(252)
|
(8)
|
Settlement of excess derivatives
1
|
(389)
|
−
|
−
|
−
|
(389)
|
(326)
|
Interest received
|
159
|
−
|
−
|
−
|
159
|
36
|
Other operating cash flows
2
|
(63)
|
(8)
|
−
|
3
|
(68)
|
5
|
Operating cash flow before working capital and income
tax
|
3,738
|
(751)
|
−
|
104
|
3,091
|
2,167
|
Working capital (excluding Civil
LTSA balance and prepayment to RRSAs) 3
|
(236)
|
(123)
|
−
|
(37)
|
(396)
|
(524)
|
Cash flows on other financial assets
and liabilities held for operating purposes
|
(845)
|
853
|
−
|
−
|
8
|
77
|
Income tax
|
(172)
|
−
|
−
|
−
|
(172)
|
(174)
|
Cash from operating activities
|
2,485
|
(21)
|
−
|
67
|
2,531
|
1,546
|
Capital element of lease
payments
|
(291)
|
21
|
−
|
−
|
(270)
|
(198)
|
Capital expenditure
|
(699)
|
−
|
−
|
4
|
(695)
|
(504)
|
Investment
|
69
|
−
|
−
|
−
|
69
|
28
|
Interest paid
|
(333)
|
−
|
−
|
−
|
(333)
|
(352)
|
Other
|
54
|
−
|
−
|
(71)
|
(17)
|
(29)
|
Free cash flow
|
1,285
|
−
|
−
|
−
|
1,285
|
491
|
-
of which is continuing operations
|
1,285
|
|
|
|
1,285
|
505
|
1 The funds flow to 31
December 2022 has been represented to disclose cash flows on
settlement of excess derivative contracts as cash flows from
operating activities. As a result, operating cash flows before
working capital and income tax during the year to 31 December 2022
have reduced by £(326)m to £2,167m. Cash flows on settlement of
excess derivative contracts were previously shown after cash from
operating activities in arriving at free cash flow. There is no
impact to free cash flow
2 Other operating cash flows
includes profit/(loss) on disposal, share of results and dividends
received from joint ventures and associates, flows relating to our
defined benefit post-retirement schemes, and share based
payments
3 Working capital includes
inventory, trade and other receivables and payables, and contract
assets and liabilities (excluding Civil LTSA balances and
prepayment to RRSAs). Working capital was previously defined as
inventory, trade and other receivables and payables, and contract
assets and liabilities, excluding Civil LTSA
Free cash
flow in the year was £1.3bn, an improvement of
£0.8bn compared with the prior year driven by:
Operating
cash flow before working capital and income tax of
£3.1bn, £0.9bn higher than the prior year. The
improvement at the Group level was principally due to our actions
on commercial optimisation and cost discipline. The movement in
Civil LTSA balance was £1,331m (2022: £792m) driven by higher EFH
receipts. RRSA prepayments were £252m (2022: £8m). The movement in
provisions of £(258)m largely related to utilisation of the Trent
1000 provision, contract loss provisions and the settlement of a
legal claim. The settlement of excess derivative contracts of
£(389)m was in line with expectations, with a further cash outflow
of £146m expected to be incurred in 2024, £148m in 2025 and £27m in
2026. Interest received was £159m, up from £36m in 2022 due to
higher cash balances and higher interest rates in the year.
Working
capital £(396)m, compared to £(524)m in the
prior year. Inventory increased by £(0.2)bn in the year primarily
driven by Civil Aerospace as a result of continued supply chain
disruption. There was a net £(0.2)bn outflow from receivables,
payables and contract liabilities reflecting the net of volume
growth in receivables and an increase in advance payments from
customers.
Income tax of
£(172)m, net cash tax payments in 2023 were
marginally lower than the prior year of £(174)m, mainly due to the
receipt of refunds in respect of prior periods in the US and timing
of payments in Germany.
The capital
element of lease payments was £(270)m, £(72)m
higher than the prior year as a result of timing of lease
payments.
Capital
expenditure of £(695)m, mainly £(429)m
property, plant and equipment additions and £(284)m intangibles
additions. The combined additions were higher than last year as a
result of investment in site improvements across the
Group.
Interest paid
of £(333)m, including lease interest payments,
has reduced by £19m as a result of the settlement of the UKEF £2bn
loan facility in September 2022 slightly offset by higher interest
on gross overdrafts.
Balance Sheet
£
million
|
2023
|
2022
|
Change
|
Intangible assets
|
4,009
|
4,098
|
(89)
|
Property, plant and
equipment
|
3,728
|
3,936
|
(208)
|
Right of use assets
|
905
|
1,061
|
(156)
|
Joint ventures and
associates
|
479
|
422
|
57
|
Civil LTSA 1
|
(9,080)
|
(7,372)
|
(1,708)
|
RRSA prepayments for LTSA parts
1
|
1,320
|
1,005
|
315
|
Working capital
1
|
(1,386)
|
(2,017)
|
631
|
Provisions
|
(2,029)
|
(2,333)
|
304
|
Net debt 2
|
(1,952)
|
(3,251)
|
1,299
|
Net financial assets and
liabilities 2
|
(2,060)
|
(3,649)
|
1,589
|
Net post-retirement scheme
deficits
|
(253)
|
(420)
|
167
|
Taxation
|
2,605
|
2,468
|
137
|
Held for sale
3
|
54
|
-
|
54
|
Other net assets and
liabilities
|
31
|
36
|
(5)
|
Net liabilities
|
(3,629)
|
(6,016)
|
2,387
|
Other items
|
|
|
|
US$ hedge book (US$bn)
|
15
|
19
|
|
1 The total of these lines
represents inventory, trade receivables and payables, contract
assets and liabilities and other assets and liabilities in the
statutory balance sheet
2 Net debt includes £23m
(2022: £86m) of the fair value of derivatives included in fair
value hedges and the element of fair value relating to exchange
differences on the underlying principal of derivatives in cash flow
hedges
3 Held for sale assets relate
to the sale of the off-highway engines business in the lower power
range based in Power Systems
Key drivers of balance sheet movements
were:
Civil
LTSA: The £(1.7)bn movement in the net
liability balance was mainly driven by an increase in invoiced LTSA
receipts exceeding revenue recognised in the year, this is
especially prevalent on new contracts where shop visits are not
immediately scheduled.
RRSA
prepayments for LTSA parts: The £0.3bn increase
corresponds to the increase seen in the civil LTSA balance above.
RRSA prepayments typically move in line with the civil LTSA as the
RRSA prepayment represents amounts that we have paid to Risk and
Revenue Share Partners for the parts that they will ultimately
provide in support of our contracts.
Working
capital: The £(1.4)bn net working capital
position decreased by £0.6bn compared to the prior year. The
movement comprised £0.1bn increase in inventory, mainly in Civil
Aerospace due to supply chain disruption, £0.9bn increase in
receivables due to higher trading volumes and prepayments from
customers, £0.5bn reduction in payables due to changes in
operational volumes and timing of supplier payments, partly offset
by an increase in contract liabilities of £(0.9)bn driven by
advanced payments received across the divisions.
Provisions: The
£0.3bn net reduction was primarily driven by the settlement of a
legal claim, utilisation of the Trent 1000 provision, and a net
£0.1bn reduction in contract loss provisions due to provision
utilisation, renegotiations and extensions of some major contracts
resulting in improved margins, partly offset by increased cost
estimates from supply chain issues.
Net
debt: Decreased from £(3.3)bn to £(2.0)bn
driven by free cash inflow of £1.3bn. Our liquidity position is
strong with £7.2bn of liquidity including cash and cash equivalents
of £3.7bn and undrawn facilities of £3.5bn. Two undrawn facilities,
totalling £2.0bn, were cancelled in 2023 reflecting our higher cash
balance and more resilient financial position. Net debt included
£(1.7)bn of lease liabilities (2022: £(1.8)bn).
Net financial
assets and liabilities: A £1.6bn reduction in
the net financial liabilities driven by contracts maturing in the
year and a change in fair value of derivative contracts largely due
to the impact of the movement in GBP:USD exchange rates.
Taxation: The net
tax asset has increased by £137m. This includes an overall increase
in the deferred tax asset of £267m, due to increases in the
deferred tax asset recognised on UK tax losses of £422m and other
deferred tax assets of £101m, partly offset by a reduction of £256m
on the deferred tax on foreign exchange derivative contracts. Other
tax balance movements include increases in the deferred tax
liability of £44m and net current tax liabilities of
£86m.
Results
meeting and conference call
Our results presentation will be held at UBS,
5 Broadgate, London EC2M 2QS and webcast live at 09:00 (GMT) today.
Downloadable materials will also be available on the Investor
Relations section of the Rolls-Royce website:
https://www.rolls-royce.com/investors/results-and-events.aspx
To register for the webcast, including
Q&A participation, please visit the
following link: https://app.webinar.net/3K4kP3kPLYx
Please use this same link to access the
webcast replay which will be made available shortly after the event
concludes. Photographs and broadcast-standard video are available
at www.rolls-royce.com
Enquiries:
Investors:
|
|
|
Media:
|
|
Isabel Green
Jeremy Bragg
|
+44 7880 160976
+44 7795 840875
|
|
Richard Wray
|
+44 7810 850055
|
This results
announcement contains forward-looking statements. Any statements
that express forecasts, expectations and projections are not
guarantees of future performance and will not be updated. By their
nature, these statements involve risk and uncertainty, and a number
of factors could cause material differences to the actual results
or developments. This report is intended to provide information to
shareholders, is not designed to be relied upon by any other party,
or for any other purpose and Rolls-Royce Holdings plc and its
directors accept no liability to any other person other than under
English law.
LSE: RR.; ADR: RYCEY; LEI:
213800EC7997ZBLZJH69
Condensed Consolidated Financial Statements
Condensed consolidated income statement
For the year ended 31 December 2023
|
|
|
|
|
|
|
|
2023
|
2022
|
|
|
|
Notes
|
£m
|
£m
|
|
Continuing operations
|
|
|
|
|
|
|
Revenue
|
|
|
2
|
16,486
|
13,520
|
|
Cost of sales
1
|
|
|
|
(12,866)
|
(10,763)
|
|
Gross profit
|
|
|
2
|
3,620
|
2,757
|
|
Commercial and administrative
costs
|
|
|
2
|
(1,110)
|
(1,077)
|
|
Research and development
costs
|
|
|
2,
3
|
(739)
|
(891)
|
|
Share of results of joint ventures
and associates
|
|
|
|
173
|
48
|
|
Operating profit
|
|
|
|
1,944
|
837
|
|
Gain arising on disposal of
businesses
|
|
|
23
|
1
|
81
|
|
Profit before financing and taxation
|
|
|
|
1,945
|
918
|
|
|
|
|
|
|
|
|
Financing income
|
|
|
4
|
1,163
|
355
|
|
Financing costs
|
|
|
4
|
(681)
|
(2,775)
|
|
Net financing income/(costs) 2
|
|
|
|
482
|
(2,420)
|
|
|
|
|
|
|
|
|
Profit/(loss) before taxation
|
|
|
|
2,427
|
(1,502)
|
|
Taxation
|
|
|
5
|
(23)
|
308
|
|
Profit/(loss) for the year from continuing
operations
|
|
|
|
2,404
|
(1,194)
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
Profit for the year from ordinary
activities
|
|
|
|
-
|
68
|
|
Loss on disposal of discontinued
operations
|
|
|
|
-
|
(148)
|
|
Loss for the year from discontinued
operations
|
|
|
23
|
-
|
(80)
|
|
|
|
|
|
|
|
|
Profit/(loss) for the year
|
|
|
|
2,404
|
(1,274)
|
|
|
|
|
|
|
|
|
Attributable to:
|
|
|
|
|
|
|
Ordinary shareholders
|
|
|
|
2,412
|
(1,269)
|
|
Non-controlling interests
(NCI)
|
|
|
|
(8)
|
(5)
|
|
Profit/(loss) for the year
|
|
|
|
2,404
|
(1,274)
|
|
Other comprehensive
(expense)/income (OCI)
|
|
|
|
(171)
|
522
|
|
Total comprehensive income/(expense) for the
year
|
|
|
|
2,233
|
(752)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) per ordinary share
attributable to ordinary shareholders:
|
|
|
6
|
|
|
|
From continuing operations:
|
|
|
|
|
|
|
Basic
|
|
|
|
28.85p
|
(14.24)p
|
|
Diluted
|
|
|
|
28.70p
|
(14.24)p
|
|
|
|
|
|
|
|
|
From continuing and discontinued
operations:
|
|
|
|
|
|
|
Basic
|
|
|
|
28.85p
|
(15.20)p
|
|
Diluted
|
|
|
|
28.70p
|
(15.20)p
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
1 Cost of sales
includes a net release for expected credit losses (ECLs) of £48m
(2022: charge of £73m). Further details can be found in note
12
2 Included within net financing are fair value changes
on derivative contracts. Further details can be found in notes 2, 4
and 18
Condensed consolidated statement of comprehensive
income
For the year ended 31 December 2023
|
|
2023
|
2022
|
|
Notes
|
£m
|
£m
|
Profit/(loss) for the year
|
|
2,404
|
(1,274)
|
Other comprehensive income/(expense) (OCI)
|
|
|
|
Actuarial movements in
post-retirement schemes
|
20
|
116
|
(156)
|
Revaluation to fair
value of other investments
|
10
|
(4)
|
(4)
|
Share of OCI of joint
ventures and associates
|
|
1
|
2
|
Related tax
movements
|
|
(43)
|
89
|
Items that will not be reclassified to profit or
loss
|
|
70
|
(69)
|
|
|
|
|
Foreign exchange
translation differences on foreign operations
|
|
(226)
|
452
|
Foreign exchange
translation differences reclassified to income statement on
disposal of businesses
|
23
|
1
|
65
|
Hedging reserves
reclassified to income statement on disposal of
businesses
|
|
-
|
111
|
NCI disposed of on
disposal of businesses
|
|
-
|
1
|
Movement on fair
values charged to cash flow hedge reserve (CFHR)
|
|
(82)
|
(7)
|
Reclassified to
income statement from cash flow hedge reserve (CFHR)
|
|
61
|
(55)
|
Costs of hedging
|
|
-
|
10
|
Share of OCI of joint ventures and
associates
|
|
1
|
−
|
Related tax movements
|
|
4
|
14
|
Items that will be reclassified to profit or
loss
|
|
(241)
|
591
|
|
|
|
|
Total other comprehensive (expense)/income
|
|
(171)
|
522
|
|
|
|
|
Total comprehensive income/(expense) for the
year
|
|
2,233
|
(752)
|
|
|
|
|
Attributable to:
|
|
|
|
Ordinary shareholders
|
|
2,241
|
(748)
|
NCI
|
|
(8)
|
(4)
|
Total comprehensive income/(expense) for the
year
|
|
2,233
|
(752)
|
|
|
|
|
Total comprehensive income/(expense) for the
year attributable to ordinary shareholders arises
from:
|
|
|
|
Continuing operations
|
|
2,241
|
(673)
|
Discontinued operations
|
|
-
|
(75)
|
Total comprehensive income/(expense) for the
year attributable to ordinary shareholders
|
|
2,241
|
(748)
|
Condensed consolidated balance sheet
At 31 December 2023
|
|
2023
|
2022
|
|
Notes
|
£m
|
£m
|
ASSETS
|
|
|
|
Intangible assets
|
7
|
4,009
|
4,098
|
Property, plant and
equipment
|
8
|
3,728
|
3,936
|
Right-of-use assets
|
9
|
905
|
1,061
|
Investments - joint ventures and
associates
|
10
|
479
|
422
|
Investments - other
|
10
|
31
|
36
|
Other financial assets
|
18
|
360
|
542
|
Deferred tax assets
|
|
2,998
|
2,731
|
Post-retirement scheme
surpluses
|
20
|
782
|
613
|
Non-current assets
|
|
13,292
|
13,439
|
Inventories
|
11
|
4,848
|
4,708
|
Trade receivables and other
assets
|
12
|
8,123
|
6,936
|
Contract assets
|
13
|
1,242
|
1,481
|
Taxation recoverable
|
|
80
|
127
|
Other financial assets
|
18
|
34
|
141
|
Short-term investments
|
|
-
|
11
|
Cash and cash equivalents
|
14
|
3,784
|
2,607
|
Current assets
|
|
18,111
|
16,011
|
Assets held for sale
|
23
|
109
|
−
|
TOTAL ASSETS
|
|
31,512
|
29,450
|
|
|
|
|
LIABILITIES
|
|
|
|
Borrowings and lease
liabilities
|
15
|
(809)
|
(358)
|
Other financial
liabilities
|
18
|
(448)
|
(1,016)
|
Trade payables and other
liabilities
|
17
|
(6,896)
|
(6,983)
|
Contract liabilities
|
13
|
(6,098)
|
(4,825)
|
Current tax liabilities
|
|
(143)
|
(104)
|
Provisions for liabilities and
charges
|
19
|
(532)
|
(632)
|
Current liabilities
|
|
(14,926)
|
(13,918)
|
Borrowings and lease
liabilities
|
15
|
(4,950)
|
(5,597)
|
Other financial
liabilities
|
18
|
(1,983)
|
(3,230)
|
Trade payables and other
liabilities
|
17
|
(1,927)
|
(2,364)
|
Contract liabilities
|
13
|
(8,438)
|
(7,337)
|
Deferred tax liabilities
|
|
(330)
|
(286)
|
Provisions for liabilities and
charges
|
19
|
(1,497)
|
(1,701)
|
Post-retirement scheme
deficits
|
20
|
(1,035)
|
(1,033)
|
Non-current liabilities
|
|
(20,160)
|
(21,548)
|
Liabilities associated with assets held for
sale
|
23
|
(55)
|
−
|
TOTAL LIABILITIES
|
|
(35,141)
|
(35,466)
|
|
|
|
|
NET
LIABILITIES
|
|
(3,629)
|
(6,016)
|
|
|
|
|
EQUITY
|
|
|
|
Called-up share capital
|
|
1,684
|
1,674
|
Share premium
|
|
1,012
|
1,012
|
Capital redemption
reserve
|
|
167
|
166
|
Hedging reserves
|
|
12
|
26
|
Translation reserve
|
|
634
|
861
|
Accumulated losses
|
|
(7,190)
|
(9,789)
|
Equity attributable to ordinary
shareholders
|
|
(3,681)
|
(6,050)
|
Non-controlling interest
(NCI)
|
|
52
|
34
|
TOTAL EQUITY
|
|
(3,629)
|
(6,016)
|
Condensed consolidated cash flow statement
For the year ended 31 December 2023
|
Notes
|
2023
£m
|
Restated
1
2022
£m
|
Reconciliation of cash flows from operating
activities
|
|
|
|
Operating profit from continuing
operations
|
|
1,944
|
837
|
Operating profit from discontinued
operations
|
23
|
-
|
86
|
Operating profit
|
|
1,944
|
923
|
Loss on disposal of property, plant
and equipment
|
|
18
|
18
|
Share of results of joint ventures
and associates
|
10
|
(173)
|
(48)
|
Dividends received from joint
ventures and associates
|
10
|
54
|
73
|
Amortisation and impairment of
intangible assets
|
7
|
272
|
287
|
Depreciation and impairment of
property, plant and equipment
|
8
|
423
|
430
|
Depreciation and impairment of
right-of-use assets
|
9
|
334
|
287
|
Adjustment of amounts payable under
residual value guarantees within lease liabilities
|
|
(10)
|
(3)
|
Impairment of and other movements on
investments
|
10
|
-
|
75
|
Decrease in provisions
|
|
(325)
|
(197)
|
Increase in inventories
|
|
(200)
|
(887)
|
Movement in trade
receivables/payables and other assets/liabilities
|
|
(1,346)
|
(56)
|
Movement in contract
assets/liabilities
|
|
2,703
|
1,753
|
Cash flows on other financial assets
and liabilities held for operating purposes 2
|
|
(845)
|
(660)
|
Cash flows on settlement of excess
derivative contracts 1, 3
|
|
(389)
|
(326)
|
Interest received
|
|
159
|
36
|
Net defined benefit post-retirement
cost recognised in profit before financing
|
20
|
41
|
27
|
Cash funding of defined benefit
post-retirement schemes
|
20
|
(69)
|
(81)
|
Share-based payments
|
|
66
|
47
|
Net
cash inflow from operating activities before
taxation
|
|
2,657
|
1,698
|
Taxation paid
|
|
(172)
|
(174)
|
Net
cash inflow from operating activities
|
|
2,485
|
1,524
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
Movement in other
investments
|
|
1
|
(5)
|
Additions of intangible
assets
|
7
|
(284)
|
(237)
|
Disposals of intangible
assets
|
7
|
4
|
8
|
Purchases of property, plant and
equipment
|
|
(429)
|
(359)
|
Disposals of property, plant and
equipment
|
|
10
|
48
|
Acquisition of businesses
|
23
|
(14)
|
-
|
Disposal of businesses (including
cash flows on disposals in prior periods)
|
23
|
(4)
|
1,398
|
Movement in investments in joint
ventures and associates
|
|
(9)
|
(24)
|
Movement in short-term
investments
|
|
11
|
(3)
|
Cash flows on other financial
assets and liabilities held for non-operating purposes
|
|
(12)
|
-
|
Net
cash (outflow)/inflow from investing activities
|
|
(726)
|
826
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
Repayment of loans
|
|
(1)
|
(2,024)
|
Proceeds from increase in
loans
|
|
2
|
1
|
Capital element of lease
payments
|
|
(291)
|
(218)
|
Net
cash flow from decrease in borrowings and lease
liabilities
|
|
(290)
|
(2,241)
|
Interest paid
|
|
(196)
|
(235)
|
Interest element of lease
payments
|
|
(85)
|
(68)
|
Fees paid on undrawn
facilities
|
|
(52)
|
(49)
|
Transactions with NCI
4
|
|
77
|
57
|
Dividends to NCI
|
|
(2)
|
(3)
|
Redemption of C Shares
|
|
(1)
|
(1)
|
Net
cash outflow from financing activities
|
|
(549)
|
(2,540)
|
|
|
|
|
Change in cash and cash equivalents
|
|
1,210
|
(190)
|
Cash and cash equivalents at 1 January
|
|
2,605
|
2,639
|
Exchange (losses)/gains on cash and
cash equivalents
|
|
(84)
|
156
|
Cash and cash equivalents at 31 December
5
|
|
3,731
|
2,605
|
1 The cash flow statement to 31 December 2022 has been
represented as a result of a change in accounting policy to
disclose cash flows on settlement of excess derivative contracts as
cash flows from operating activities. As a result, cash flows from
operating activities during the year to 31 December 2022 have
reduced by £(326)m to £1,524m with the corresponding decrease in
cash outflow from financing activities by £326m from £(2,866)m to
£(2,540)m. There is no impact to the total change in cash and cash
equivalents or to any alternative performance measures. See note 1
for further detail
2 Predominantly
relates to cash settled on derivative contracts held for operating
purposes
3 In 2020, the Group
experienced a significant decline in its medium-term outlook and
consequently a significant deterioration to its forecast net USD
cash inflows. The Group took action to reduce the size of the USD
hedge book by $11.8bn across 2020-2026 to reflect the fact that at
that time, future operating cash flows were no longer forecast to
materialise. To achieve the necessary reduction in the hedge book,
a separate and distinct set of foreign exchange derivative
instruments were entered into to buy $11.8bn. The associated cash
outflow of these transactions is £1,674m and occurs over the period
2020-2026. This action had the impact of fixing the fair value of
the over-hedged position and provided certainty over when the cash
flows to settle the position would occur in future periods. During
the year, the Group incurred a cash outflow of £389m (2022: £326m)
and estimates that future cash outflows of £146m will be incurred
in 2024 and £175m spread over 2025 and 2026
4 Relates to NCI
investment received in the year, in respect of Rolls-Royce SMR
Limited
5 The Group
considers overdrafts (repayable on demand) and cash held for sale
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
Condensed consolidated cash flow statement continued
For the year ended 31 December 2023
In deriving the condensed
consolidated cash flow statement, movements in balance sheet line
items have been adjusted for non-cash items. The cash flow in the
year includes the sale of goods and services to joint ventures and
associates - see note 22.
|
2023
£m
|
2022
£m
|
Reconciliation of movements in cash and cash equivalents to
movements in net debt
|
|
|
Change in cash and cash
equivalents
|
1,210
|
(190)
|
Cash flow from decrease in
borrowings and lease liabilities
|
290
|
2,241
|
Cash flow from (decrease)/increase
in short-term investments
|
(11)
|
3
|
Change in net debt resulting from cash
flows
|
1,489
|
2,054
|
Lease additions, modifications and
other non-cash adjustments on borrowings and lease
liabilities
|
(191)
|
(170)
|
Exchange gains/(losses) on net
debt
|
57
|
(150)
|
Fair value adjustments
|
7
|
70
|
Debt disposed of on disposal of
businesses
|
-
|
53
|
Movement in net debt
|
1,362
|
1,857
|
Net
debt at 1 January
|
(3,337)
|
(5,194)
|
Net
debt at 31 December excluding the fair value of
swaps
|
(1,975)
|
(3,337)
|
Fair value of swaps hedging fixed
rate borrowings
|
23
|
86
|
Net debt at 31
December
|
(1,952)
|
(3,251)
|
The movement in net debt (defined
by the Group as including the items shown below) is as
follows:
|
At 1
January
|
Funds flow
|
Net debt on
disposal
|
Exchange
differences
|
Fair value
adjustments
|
Reclassifi-cations
|
Other
movements
|
At 31
December
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
2023
|
|
|
|
|
|
|
|
|
Cash at bank and in hand
|
847
|
(79)
|
-
|
(29)
|
-
|
-
|
-
|
739
|
Money market funds
|
34
|
1,043
|
-
|
-
|
-
|
-
|
-
|
1,077
|
Short-term deposits
|
1,726
|
297
|
-
|
(55)
|
-
|
-
|
-
|
1,968
|
Cash and cash equivalents
(per balance sheet)
|
2,607
|
1,261
|
-
|
(84)
|
-
|
-
|
-
|
3,784
|
Overdrafts
|
(2)
|
(51)
|
-
|
-
|
-
|
-
|
-
|
(53)
|
Cash and cash equivalents
(per cash flow statement)
|
2,605
|
1,210
|
-
|
(84)
|
-
|
-
|
-
|
3,731
|
Short-term
investments
|
11
|
(11)
|
-
|
-
|
-
|
-
|
-
|
-
|
Other current borrowings
|
(1)
|
(1)
|
-
|
-
|
(13)
|
(462)
|
(1)
|
(478)
|
Non-current borrowings
|
(4,105)
|
-
|
-
|
59
|
20
|
462
|
(4)
|
(3,568)
|
Lease liabilities
|
(1,847)
|
291
|
-
|
82
|
-
|
-
|
(186)
|
(1,660)
|
Financial liabilities
|
(5,953)
|
290
|
-
|
141
|
7
|
-
|
(191)
|
(5,706)
|
Net
debt excluding fair value of swaps
|
(3,337)
|
1,489
|
-
|
57
|
7
|
-
|
(191)
|
(1,975)
|
Fair value of swaps hedging fixed
rate borrowings 1
|
86
|
-
|
-
|
(59)
|
(4)
|
-
|
-
|
23
|
Net debt
|
(3,251)
|
1,489
|
-
|
(2)
|
3
|
-
|
(191)
|
(1,952)
|
|
|
|
|
|
|
|
|
|
2022
|
|
|
|
|
|
|
|
|
Cash at bank and in hand
|
795
|
17
|
-
|
35
|
-
|
-
|
-
|
847
|
Money market funds
|
49
|
(15)
|
-
|
-
|
-
|
-
|
-
|
34
|
Short-term deposits
|
1,777
|
(171)
|
-
|
120
|
-
|
-
|
-
|
1,726
|
Cash and cash equivalents
(per balance sheet)
|
2,621
|
(169)
|
-
|
155
|
-
|
-
|
-
|
2,607
|
Cash and cash equivalents included
within assets held for sale
|
25
|
(26)
|
-
|
1
|
-
|
-
|
-
|
-
|
Overdrafts
|
(7)
|
5
|
-
|
-
|
-
|
-
|
-
|
(2)
|
Cash and cash equivalents
(per cash flow statement)
|
2,639
|
(190)
|
-
|
156
|
-
|
-
|
-
|
2,605
|
Short-term investments
|
8
|
3
|
-
|
-
|
-
|
-
|
-
|
11
|
Other current borrowings
|
(2)
|
2
|
-
|
(1)
|
-
|
-
|
-
|
(1)
|
Non-current borrowings
|
(6,023)
|
2,000
|
-
|
(125)
|
72
|
-
|
(29)
|
(4,105)
|
Borrowings included within
liabilities held for sale
|
(59)
|
21
|
40
|
-
|
(2)
|
-
|
-
|
-
|
Lease liabilities
|
(1,744)
|
217
|
-
|
(179)
|
-
|
-
|
(141)
|
(1,847)
|
Lease liabilities included within
liabilities held for sale
|
(13)
|
1
|
13
|
(1)
|
-
|
-
|
-
|
-
|
Financial liabilities
|
(7,841)
|
2,241
|
53
|
(306)
|
70
|
-
|
(170)
|
(5,953)
|
Net debt excluding fair value of
swaps
|
(5,194)
|
2,054
|
53
|
(150)
|
70
|
-
|
(170)
|
(3,337)
|
Fair value of swaps hedging fixed
rate borrowings 1
|
37
|
-
|
-
|
125
|
(76)
|
-
|
-
|
86
|
Net debt
|
(5,157)
|
2,054
|
53
|
(25)
|
(6)
|
-
|
(170)
|
(3,251)
|
1 Fair value of
swaps hedging fixed rate borrowings reflects the impact of
derivatives on repayments of the principal amount of debt. Net debt
therefore includes the fair value of derivatives included in fair
value hedges (2023: £34m, 2022: £38m) and the element of fair value
relating to exchange differences on the underlying principal of
derivatives in cash flow hedges (2023: £(11)m, 2022:
£48m)
Condensed consolidated statement of changes in
equity
For the year ended 31 December 2023
|
|
Attributable to ordinary
shareholders
|
|
|
|
Notes
|
Share
capital
|
Share
premium
|
Capital redemption
reserve
|
Hedging reserves
1
|
Merger
reserve
|
Translation
reserve
|
Accum-ulated losses
2
|
Total
|
NCI
|
Total
equity
|
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
At
1 January 2023
|
|
1,674
|
1,012
|
166
|
26
|
-
|
861
|
(9,789)
|
(6,050)
|
34
|
(6,016)
|
Profit/(loss) for the
year
|
|
-
|
-
|
-
|
-
|
-
|
-
|
2,412
|
2,412
|
(8)
|
2,404
|
Foreign exchange translation
differences on foreign operations
|
|
-
|
-
|
-
|
-
|
-
|
(226)
|
-
|
(226)
|
-
|
(226)
|
Foreign exchange translation
differences reclassified to income statement on disposal of
businesses
|
23
|
-
|
-
|
-
|
-
|
-
|
1
|
-
|
1
|
-
|
1
|
Actuarial movements on
post-retirement schemes
|
20
|
-
|
-
|
-
|
-
|
-
|
-
|
116
|
116
|
-
|
116
|
Fair value movement on
CFHR
|
|
-
|
-
|
-
|
(82)
|
-
|
-
|
-
|
(82)
|
-
|
(82)
|
Reclassified to income statement
from CFHR
|
|
-
|
-
|
-
|
61
|
-
|
-
|
-
|
61
|
-
|
61
|
Revaluation to fair value of other
investments
|
|
-
|
-
|
-
|
-
|
-
|
-
|
(4)
|
(4)
|
-
|
(4)
|
OCI of joint ventures and
associates
|
|
-
|
-
|
-
|
2
|
-
|
(1)
|
1
|
2
|
-
|
2
|
Related tax movements
|
|
-
|
-
|
-
|
5
|
-
|
(1)
|
(43)
|
(39)
|
-
|
(39)
|
Total comprehensive (expense)/income for the
year
|
|
-
|
-
|
-
|
(14)
|
-
|
(227)
|
2,482
|
2,241
|
(8)
|
2,233
|
Issue of ordinary
shares
|
|
10
|
-
|
-
|
-
|
-
|
-
|
-
|
10
|
-
|
10
|
Redemption of C shares
|
|
-
|
-
|
1
|
-
|
-
|
-
|
(1)
|
-
|
-
|
-
|
Shares issued to employee share
trust
|
|
-
|
-
|
-
|
-
|
-
|
-
|
(10)
|
(10)
|
-
|
(10)
|
Share-based payments - direct to
equity 3
|
|
-
|
-
|
-
|
-
|
-
|
-
|
49
|
49
|
-
|
49
|
Dividends to NCI
|
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(2)
|
(2)
|
Transactions with NCI
4
|
|
-
|
-
|
-
|
-
|
-
|
-
|
57
|
57
|
28
|
85
|
Related tax movements
|
|
-
|
-
|
-
|
-
|
-
|
-
|
22
|
22
|
-
|
22
|
Other changes in equity in the year
|
|
10
|
-
|
1
|
-
|
-
|
-
|
117
|
128
|
26
|
154
|
At
31 December 2023
|
|
1,684
|
1,012
|
167
|
12
|
-
|
634
|
(7,190)
|
(3,681)
|
52
|
(3,629)
|
|
|
|
|
|
|
|
|
|
|
|
|
At
1 January 2022
|
|
1,674
|
1,012
|
165
|
(45)
|
650
|
342
|
(9,189)
|
(5,391)
|
26
|
(5,365)
|
Loss for the year
|
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,269)
|
(1,269)
|
(5)
|
(1,274)
|
Foreign exchange translation
differences on foreign operations
|
|
-
|
-
|
-
|
-
|
-
|
452
|
-
|
452
|
-
|
452
|
Hedging reserves reclassified to
income statement on disposal of businesses
|
|
-
|
-
|
-
|
111
|
-
|
-
|
-
|
111
|
-
|
111
|
Foreign exchange translation
differences reclassified to income statement on disposal of
businesses
|
|
-
|
-
|
-
|
-
|
-
|
65
|
-
|
65
|
-
|
65
|
NCI disposed of on disposal of
businesses
|
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1
|
1
|
Actuarial movements on
post-retirement schemes
|
20
|
-
|
-
|
-
|
-
|
-
|
-
|
(156)
|
(156)
|
-
|
(156)
|
Fair value movement on
CFHR
|
|
-
|
-
|
-
|
(7)
|
-
|
-
|
-
|
(7)
|
-
|
(7)
|
Reclassified to income statement
from CFHR
|
|
-
|
-
|
-
|
(55)
|
-
|
-
|
-
|
(55)
|
-
|
(55)
|
Costs of hedging
|
|
-
|
-
|
-
|
10
|
-
|
-
|
-
|
10
|
-
|
10
|
Revaluation to fair value of other
investments
|
|
-
|
-
|
-
|
-
|
-
|
-
|
(4)
|
(4)
|
-
|
(4)
|
OCI of joint ventures and
associates
|
|
-
|
-
|
-
|
-
|
-
|
-
|
2
|
2
|
-
|
2
|
Related tax movements
|
|
-
|
-
|
-
|
12
|
-
|
2
|
89
|
103
|
-
|
103
|
Total comprehensive expense for the year
|
|
-
|
-
|
-
|
71
|
-
|
519
|
(1,338)
|
(748)
|
(4)
|
(752)
|
Redemption of C Shares
|
|
-
|
-
|
1
|
-
|
-
|
-
|
(1)
|
-
|
-
|
-
|
Share-based payments - direct to
equity 3
|
|
-
|
-
|
-
|
-
|
-
|
-
|
46
|
46
|
-
|
46
|
Dividends to NCI
|
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(3)
|
(3)
|
Transactions with NCI
4
|
|
-
|
-
|
-
|
-
|
-
|
-
|
42
|
42
|
15
|
57
|
Transfer to realised profit
5
|
|
-
|
-
|
-
|
-
|
(650)
|
-
|
650
|
-
|
-
|
-
|
Related tax movements
|
|
-
|
-
|
-
|
-
|
-
|
-
|
1
|
1
|
-
|
1
|
Other changes in equity in the year
|
|
-
|
-
|
1
|
-
|
(650)
|
-
|
738
|
89
|
12
|
101
|
At
31 December 2022
|
|
1,674
|
1,012
|
166
|
26
|
-
|
861
|
(9,789)
|
(6,050)
|
34
|
(6,016)
|
Condensed consolidated statement of changes in equity
continued
For the year ended 31 December 2023
1
Hedging reserves include the cash flow hedge
reserve of £12m and the cost of hedging reserve of £nil (2022: £26m
and £nil respectively)
2
At 31 December 2023, 52,912,406 ordinary shares
with a net book value of £22m (2022: 11,402,796 ordinary shares
with a net book value of £27m) were held for the purpose of
share-based payment plans and included in accumulated losses.
During the year:
- 7,875,240 ordinary shares with a net book value of £15m
(2022: 18,488,558 ordinary shares with a net book value of £39m)
vested in share-based payment plans;
- the
Company issued 49,100,000 (2022: none) new ordinary shares to the
Group's share trust for its employee share-based payment plans with
a net book value of £10m (2022: £nil); and
- the
Company acquired none (2022: none) of its ordinary shares via
reinvestment of dividends received on its own shares and purchased
284,850
(2022: 486,163) of its ordinary shares through purchases on the
London Stock Exchange
3
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
4 Relates to NCI investment received in the year in
respect of Rolls-Royce SMR Limited
5
On disposal of ITP Aero on 15 September 2022, the
premium recognised on issue of shares for the previous acquisition
became realised on receipt of qualifying consideration. As such,
the total merger reserve has been transferred to accumulated
losses
Notes to the Condensed Consolidated Financial
Statements
1 Basis of
preparation and accounting policies
Reporting entity
Rolls-Royce Holdings plc (the
'Company') is a public company limited by shares incorporated under
the Companies Act 2006 and domiciled in the UK. These Condensed
Consolidated Financial Statements of the Company as at and for the
year ended 31 December 2023 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.
The Consolidated Financial
Statements of the Group as at and for the year ended 31 December
2023 (2023 Annual Report) are available upon request from the
Company Secretary, Rolls-Royce Holdings plc, Kings Place, 90 York
Way, London, N1 9FX.
Statement of compliance
These Condensed Consolidated
Financial Statements have been prepared in accordance with UK
adopted International Accounting Standards (IAS) and
interpretations issued by the IFRS Interpretations Committee
applicable to companies reporting under UK adopted IFRS. They do
not include all the information required for full annual statements
and should be read in conjunction with the 2023 Annual
Report.
The Board of Directors approved
the Condensed Consolidated Financial Statements on 22 February
2024. They are not statutory accounts within the meaning of section
435 of the Companies Act 2006.
The Group's Financial Statements
for the year ended 31 December 2023 were approved by the Board on
22 February 2024. They have been reported on by the Group's
auditors and will be delivered to the registrar of companies in due
course. The report of the auditors was (i) unqualified, (ii) did
not include a reference to any matters to which the auditors drew
attention by way of emphasis without qualifying their report, and
(iii) did not contain a statement under section 498(2) or (3) of
the Companies Act 2006.
The comparative figures for the
financial year 31 December 2022 have been extracted from the
Group's statutory accounts for that financial year. The Board of
Directors approved the Group financial statements on 23 February
2023. The report of the auditors was (i) unqualified, (ii) did not
include a reference to any matters to which the auditors drew
attention by way of emphasis without qualifying their report, and
(iii) did not contain a statement under section 498(2) or (3) of
the Companies Act 2006.
Revisions to IFRS applicable in 2023
IFRS 17 Insurance Contracts
IFRS 17, issued in May 2018,
establishes the principles for the recognition, measurement,
presentation and disclosure of insurance contracts within the scope
of the Standard. The Standard is effective for years beginning on
or after 1 January 2023 with a requirement to restate
comparatives.
The Group has reviewed whether its
arrangements meet the accounting definition of an insurance
contract. While some contracts, including Civil Aerospace LTSAs,
may transfer an element of insurance risk, they relate to warranty
and service type agreements that are issued in connection with the
Group's sales of its goods or services and therefore will remain
accounted for under the existing revenue and provisions standards.
The Directors have judged that such arrangements entered into after
the original equipment sale remain sufficiently related to the sale
of the Group's goods and services to allow the contracts to
continue to be measured under IFRS 15 Revenue from Contracts with Customers
and
IAS 37 Provisions, Contingent
Liabilities and Contingent Assets.
The Group has identified that the
Standard will impact the results of its captive insurance company
as it issues insurance contracts, however, since the contracts
insure other group companies, there is no impact on the Condensed
Consolidated Financial Statements.
The Group has assessed that its
parent company guarantee arrangements in the form of financial or
performance guarantees, that meet the IFRS 17 definition of
insurance contracts, have no impact on the Consolidated Financial
Statements of the Group for the year to 31 December 2023, however
there could be an impact on individual sets of financial statements
of companies within the Group.
The Directors are not aware of any
other contracts where IFRS 17 would have an impact on the Condensed
Consolidated Financial Statements.
Other
IAS 12 Income Taxes has been amended to
incorporate the following revisions for 'Deferred Tax related to
Assets and Liabilities arising from a Single Transaction' and
'International Tax Reform: Pillar Two Model Rules'. There is no
material impact on the Group as a result of the amendments relating
to Deferred Tax related to Assets and Liabilities arising from a
Single Transaction.
The Group is within the scope of
the OECD Pillar Two (Global Minimum Tax) model rules. The
legislation has been substantively enacted in some of the material
jurisdictions in which the Group operates, including the UK and
Germany, where the rules will be effective from 1 January 2024.
Further information can be found in note 5.
There are no other new standards
or interpretations issued by the IASB that had a significant impact
on the Condensed Consolidated Financial Statements. Standards and
interpretations issued by the IASB are only applicable if endorsed
by the UK.
1 Basis of
preparation and accounting policies continued
Change in accounting policy
At 31 December 2023, cash flows on
settlement of excess derivatives have been reclassified from cash
flows from financing activities to cash flows from operating
activities in the cash flow statement as a result of a change in
accounting policy. In line with IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors, a change in accounting policy can be
made either where it is required by an IFRS or results in the
financial statements providing reliable and more relevant
information about the effects of transactions, other events or
conditions on the entity's financial position, performance or cash
flows.
The previous classification as
cash flows from financing activities was based on the Directors'
judgement of the economic nature of the activities as the cash
flows relate to cash payments deferred in connection with the
Group's action taken in 2020 to reduce the size of the USD hedge
book by $11.8bn across 2020 to 2026. The Directors have reassessed
their judgement in line with IAS 7 Statement of Cash Flows and have
concluded that it would be more appropriate to classify these cash
flows as cash flows from operating activities.
As a result of the above, cash
flows from operating activities during the year to 31 December 2022
have reduced by £(326)m to £1,524m with a corresponding decrease in
cash outflow from financing activities from £(2,866)m to £(2,540)m.
There is no impact to the total change in cash and cash equivalents
or to any alternative performance measures.
The above change resulted from a
review which was prompted by an enquiry arising from a review of
the Group's 2022 Annual Report and Accounts by the Corporate
Reporting Review team of the Financial Reporting Council (FRC). The
FRC review was part of a regular review and assessment of the
quality of corporate reporting in the UK undertaken by the FRC.
Further information regarding the review of the Group's 2022 Annual
Report and Accounts is set out in the Audit Committee report in the
2023 Annual Report. The Group agreed to make the above change
within its 2023 Annual Report and Accounts. The FRC review was
limited to the published 2022 Annual Report; it did not benefit
from a detailed understanding of underlying transactions and
provides no assurance that the 2022 Annual Report is correct in all
material respects.
Post balance sheet events
The Group has taken the latest
legal position in relation to any ongoing legal proceedings and
reflected these in the 31 December 2023 results as
appropriate.
Climate
change
In preparing the Condensed
Consolidated Financial Statements, the Directors have continued to
consider the impact of climate change, particularly in the context
of the disclosures made in the Strategic Report within the 2023
Annual Report. The following specific points were
considered:
- The Group continues to
invest in: onsite renewable energy installations; the procurement
of green energy for its facilities; and in energy efficiency
improvements to reduce its overall energy demands and operating
costs. An estimate of the investment required to meet these scope 1
and 2 emission improvements is included in the forecasts that
support the Condensed Consolidated Financial Statements;
- The Group is enabling
its customers to operate their products in a way that is compatible
with low or net zero carbon emissions and has demonstrated that all
the commercial aero engines it produces, and the most popular
reciprocating engines (that represent 80% of the Power Systems
product portfolio) are compatible for use on sustainable
fuels;
- The Group has invested
in delivering new products and solutions that can accelerate the
global energy transition, including in battery energy storage
solutions in Power Systems, and in small modular reactors (SMRs).
Future investment required to deliver these technologies is
included in the forecasts that support the Consolidated Financial
Statements.
The Directors have considered the
impact of climate change on a number of key estimates within the
financial statements. The climate-related estimates and assumptions
that have been considered to be key areas of judgement or sources
of estimation uncertainty for the year ended
31 December 2023 are those relating to:
- long-term service
agreement revenue recognition and onerous contract provision
assumptions, such as the level of EFHs which recognises the future
expectations of consumer and airline customer behaviour, and
changes in costs due to carbon pricing and commodity price
changes;
- the estimates of future
cash flows considered for trigger assessments or used in impairment
assessments, where applicable, of the carrying value of non-current
assets (such as programme intangible assets and goodwill);
and
- the estimates of future
profitability used in assessing the recoverability of deferred tax
assets in the UK (see note 5).
As details of what specific future
intervention measures will be taken by governments are not yet
available, carbon pricing has been used to quantify the potential
impact of future policy changes on the Group. The approach is
consistent with that disclosed in note 1 in the 2023 Annual
Report.
There have been no significant
changes to assumptions, including the potential impact of carbon
prices on the Group's cost base, since the year ended 31 December
2022. This is consistent with the assessment that climate change is
not expected to have a significant impact on the Group's going
concern assessment to August 2025, nor on the viability of the
Group over the next five years.
1 Basis of
preparation and accounting policies continued
Going
concern
Overview
In accordance with the
requirements of the 2018 UK Corporate Governance Code, the
Directors have assessed the prospects of the Group, taking into
account its current position, the Group's principal risks and the
Group's mid-term forecasts that considered a range of internal and
external factors as part of the strategic review to support setting
the Group's new mid-term targets which are set out on pages 10 to
12 of the 2023 Annual Report.
The Strategic Report in the 2023
Annual Report on pages 10 to 12 sets out the activities of the
Group and the factors likely to impact its future development,
performance and position.
The Financial Review on pages 19
to 23 of the 2023 Annual Report sets out the financial position of
the Group, its cash flows, liquidity position and the Group's
capital framework. The notes to the accounts include the
objectives, policies and procedures over financial risk management
including financial instruments and hedging activities, exposure to
credit risk, liquidity risk, interest rate risk and commodity price
risk.
In adopting the going concern
basis for preparing the Consolidated and Company Financial
Statements, the Directors have undertaken a review of the Group's
cash flow forecasts and available liquidity, along with
consideration of possible risks and uncertainties over an 18-month
period from the date of this report to August 2025. The Directors
have determined that an 18-month period is an appropriate timeframe
over which to assess going concern as it considers the Group's
short to medium-term cash flow forecasts and available
liquidity.
Forecasts
Recognising the challenges of
reliably estimating and forecasting the impact of external factors
on the Group, the Directors have considered two forecasts in their
assessment of going concern, along with a likelihood assessment of
these forecasts. The base case forecast reflects the Directors
current expectations of future trading. A stressed downside
forecast has also been modelled which envisages a 'stressed' or
'downside' situation that is considered severe but plausible. Both
forecasts have been modelled over an 18-month period.
Industry forecasts predict a
return to 2019 large engine flying levels in 2024, which is
reflected in the Group's base case forecast. Macro-economic
assumptions have been modelled using externally available data
based on the most likely forecasts with general inflation at around
2%-3%, wage inflation at an average of 3%-5%, interest rates at
around 3%-4% and GDP growth at around 2%-3%.
The stressed downside forecast
assumes Civil Aerospace large engine flying hours remain at average
fourth quarter 2023 levels throughout the 18-month period to August
2025, reflecting slower GDP growth in this forecast when compared
with the base case. It also assumes a more pessimistic view of
general inflation at around 1%-2% higher than the base case
covering a broad range of costs including energy, commodities and
jet fuel. Wage inflation in the stressed downside is 1%-5% higher
than the base case and interest rates in the stressed downside are
1%-2% higher than the base case. These macro-economic pressures
have been modelled across the whole going concern period. The
stressed downside also considers lower demand as a result of slower
market growth and potential output risks associated with increasing
volumes and possible ongoing supply chain challenges.
The future impact of climate
change on the Group has been considered through climate scenarios.
The climate scenarios modelled do not have a material impact on
either the base case or stressed downside forecast over the
18-month period to August 2025.
Liquidity and
borrowings
During 2023, the Group cancelled a
£1bn undrawn UKEF-supported loan facility that was due to mature in
March 2026 and a £1bn undrawn bank loan facility due to mature in
January 2024. The £2.5bn undrawn revolving credit facility that was
due to mature in April 2025 was refinanced in November 2023 with
the new facility having a term of three years with the banks
having the option to extend with two one-year extension options
(3+1+1).
At 31 December 2023, the Group had
liquidity of £7.2bn including cash and cash equivalents of £3.7bn
and undrawn facilities of £3.5bn. The
18-month going concern period includes the maturity of a €550m bond
repayable in May 2024 which the Group does not intend to refinance
given the Group's cash and liquidity position, our assessment of
the Group's cash flow forecasts and available liquidity over the
18-month period.
Based on borrowing facilities
available at the date of this report the Group's committed
borrowing facilities at 31 December 2023 and 31 August 2025 are set
out below. None of the facilities are subject to any financial
covenants or rating triggers which could accelerate
repayment.
£m
|
31 December
2023
|
31 August
2025
|
Issued bond notes
1
|
3,995
|
3,511
|
UKEF £1bn loan (undrawn)
2
|
1,000
|
1,000
|
Revolving credit facility
(undrawn) 3
|
2,500
|
2,500
|
Total committed borrowing facilities
|
7,495
|
7,011
|
1 The value of issued bond notes reflects the impact of
derivatives on repayments of the principal amount of debt. The
bonds mature by May 2028
2 The £1bn UKEF sustainability-linked loan matures in September
2027 (currently undrawn)
3 The refinanced £2.5bn revolving credit facility matures in
November 2026 (currently undrawn)
Taking into account the maturity
of these borrowing facilities, the Group has committed facilities
of at least £7bn available throughout the period to 31 August 2025.
The next debt maturity is a $1bn bond that is due to be repaid in
October 2025, which is outside the 18-month going concern
period.
Conclusion
After reviewing the current
liquidity position and the cash flow forecasts modelled under both
the base case and stressed downside, the Directors consider that
the Group has sufficient liquidity to continue in operational
existence for a period of at least 18 months from the date of this
report and are therefore satisfied that it is appropriate to adopt
the going concern basis of accounting in preparing the Consolidated
and Company financial statements.
1 Basis of
preparation and 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 and the actual outcome may
differ from that calculated. The key areas
of judgement and sources of estimation uncertainty as at 31
December 2023, that were assessed as having a significant risk of
causing material adjustments to the carrying amount of assets and
liabilities, are set out in
note 1 to the Consolidated Financial Statements in the 2023 Annual
Report and are summarised below. Sensitivities for key sources of
estimation uncertainty are disclosed where this is appropriate and
practical.
Area
|
Key judgements
|
Key sources of estimation uncertainty
|
Sensitivities performed
|
Revenue recognition and contract
assets and liabilities
|
Whether Civil Aerospace OE and
aftermarket contracts should be combined.
How performance on long-term
aftermarket contracts should be measured.
Whether long-term aftermarket
contracts contain a significant financing component.
Whether any costs should be
treated as wastage.
Whether the Civil Aerospace LTSA
contracts are warranty style contacts entered into in connection
with OE sales and therefore can be accounted for under IFRS
15.
Whether sales of spare engines to
joint ventures are at fair value.
When revenue should be recognised
in relation to spare engine sales.
|
Estimates of future revenue,
including customer pricing, and costs of long-term contractual
arrangements, including the impact of climate change.
|
Based upon the stage of completion
of all large engine LTSA contracts within Civil Aerospace as at 31
December 2023, the following changes in estimate would result in
catch-up adjustments being recognised in the period in which the
estimates change (at underlying FX rates):
- A change in forecast EFHs
of 1% over the remaining term of the contracts would impact LTSA
income and to a lesser extent costs, resulting in an impact of
around £20m.
- A 2% increase or decrease
in our pricing to customers over the life of the contracts would
lead to a revenue
catch-up adjustment in the next 12 months of around
£280m.
- A 2% increase or decrease
in shop visit costs over the life of the contracts would lead to a
revenue catch-up adjustment in the next 12 months of around
£80m.
|
Risk and revenue sharing
arrangements (RRSAs)
|
Determination of the nature of
entry fees received.
|
|
|
Taxation
|
|
Estimates necessary to assess
whether it is probable that sufficient suitable taxable profits
will arise in the UK to utilise the deferred tax assets
recognised.
|
A 5% change in margin or shop
visits (which could be driven by fewer EFHs as a result of climate
change) would result in an increase/decrease in the deferred tax
asset in respect of UK losses of around £90m.
If only 90% of assumed future cost
increases from climate change are passed on to customers, this
would result in a decrease in the deferred tax asset of around
£10m, and if the potential impact of carbon prices on the Group's
cost base was to double, the recoverable value of deferred tax
assets would decrease by around £50m.
|
Research and
development
|
Determination of the point in time
where costs incurred on an internal programme development meet the
criteria for capitalisation.
Determination of the basis for
amortising capitalised development costs.
|
|
|
Leases
|
Determination of the lease
term.
|
|
|
Impairment of non-current
assets
|
Determination of cash-generating
units for assessing impairment of goodwill.
Whether there are indicators of
potential reversal of previous impairments of programme-related
intangible assets
|
|
|
Provisions
|
Whether any costs should be
treated as wastage.
Whether the criteria to recognise
a transformation and restructuring provisions have been
met
|
Estimates
of the time to incorporate a modified and certified high-pressure
turbine (HPT) blade into the fleet to resolve technical issues on
the Trent 1000, and the implications of this on forecast future
costs when assessing onerous contracts.
Estimates of the future revenues
and costs to fulfil onerous contracts.
Assumptions implicit within the
calculation of discount rates.
|
A 12-month delay in the
availability of the modified HPT blade could lead to a
£30-50m charge in relation to the Trent 1000 programme.
An increase in Civil Aerospace
large engines estimates of LTSA costs of 1% over the remaining term
of the contracts could lead to a £90-120m increase in the provision
for contract losses across all programmes.
A 1% change in the discount rates
used could lead to around a £70-80m change in the onerous contract
provision.
|
Post-retirement
benefits
|
|
Estimates of the assumptions for
valuing the net defined benefit obligation.
|
A reduction in the discount rate
of 0.25% from 4.50% could lead to an increase in the defined
benefit obligations of the RR UK Pension Fund (RRUKPF) of
approximately £185m. This would be expected to be broadly offset by
changes in the value of scheme assets, as the scheme's investment
policies are designed to mitigate this risk.
An increase in the assumed rate of
inflation of 0.25% (RPI of 3.30% and CPI of 2.85%) could lead to an
increase in the defined benefit obligations of the RRUKPF of
approximately £75m.
A one-year increase in life
expectancy from 20.8 years (male aged 65) and from 21.5 years (male
aged 45) would increase the defined benefit obligations of the
RRUKPF by approximately £155m.
|
The analysis by 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 acts as the Chief Operating Decision Maker as
defined by IFRS 8). The Group's four divisions are set out
below.
Civil Aerospace
|
- development,
manufacture, marketing and sales of commercial aero engines and
aftermarket services
|
Defence
|
- development,
manufacture, marketing and sales of military aero engines, naval
engines, submarine nuclear power plants and aftermarket
services
|
Power Systems
|
- development,
manufacture, marketing and sales of integrated solutions for onsite
power and propulsion
|
New Markets
|
- development,
manufacture and sales of small modular reactor (SMR) and new
electrical power solutions
|
Other businesses include the
trading results of the UK Civil Nuclear business.
Underlying results
The Group presents the financial
performance of the divisions in accordance with IFRS 8 and
consistently with the basis on which performance is communicated to
the Board each month.
Underlying results are presented
by recording all relevant revenue and cost of sales transactions at
the average exchange rate achieved on effective settled derivative
contracts in the period that the cash flow occurs. The impact of
the revaluation of monetary assets and liabilities (other than
lease liabilities) using the exchange rate that is expected to be
achieved by the use of the effective hedge book is recorded within
underlying cost of sales. Underlying financing excludes the impact
of revaluing monetary assets and liabilities to period end exchange
rates. Lease liabilities are not revalued to reflect the expected
exchange rates due to their multi-year remaining term, the
Directors believe that doing so would not be the most appropriate
basis to measure the in-year performance. Transactions between
segments are presented on the same basis as underlying results and
eliminated on consolidation. Unrealised fair value gains/(losses)
on foreign exchange contracts, which are recognised as they arise
in the statutory results, are excluded from underlying results. To
the extent that the previously forecast transactions are no longer
expected to occur, an appropriate portion of the unrealised fair
value gain/(loss) on foreign exchange contracts is recorded
immediately in the underlying results.
Amounts receivable/(payable) on
interest rate swaps which are not designated as hedge relationships
for accounting purposes are reclassified from fair value movement
on a statutory basis to interest receivable/(payable) on an
underlying basis, as if they were in an effective hedge
relationship.
In the year to 31 December 2023,
the Group was a net seller of USD at an achieved exchange rate of
GBP:USD 1.50 (2022: 1.50) based on the USD hedge book.
In 2020, the Group experienced a
significant decline in its medium-term outlook and consequently a
significant deterioration to its forecast net USD cash inflows. The
Group took action to reduce the size of the USD hedge book by
$11.8bn across 2020-2026 to reflect the fact that, at that time,
future operating cash flows were no longer forecast to materialise.
An underlying charge of £1.7bn was recognised within the underlying
finance costs in 2020 and the associated cash settlement costs
occur over the period 2020-2026. The derivatives relating to this
underlying charge have been subsequently excluded from the hedge
book, and therefore are also excluded from the calculation of the
average exchange rate achieved in the current and future
periods.
Underlying performance also
excludes the following:
- the effect of acquisition accounting and business
disposals;
- impairment of goodwill and other non-current and current
assets where the reasons for the impairment are outside of normal
operating activities;
- exceptional items; and
- certain other items which are market driven and outside of
the control of management.
Subsequent changes in items
excluded from underlying performance recognised in a prior period
will also be excluded from underlying performance. All other
changes will be recognised within underlying
performance.
Acquisition accounting, business disposals and
impairment
The Group exclude these from
underlying results so that the current period and comparative
results are directly comparable.
Exceptional items
Items are classified as
exceptional where the Directors believe that presentation of the
results in this way is useful in providing an understanding of the
Group's financial performance. Exceptional items are identified by
virtue of their size, nature or incidence.
In determining whether an event or
transaction is exceptional, the Directors consider quantitative as
well as qualitative factors such as the frequency or predictability
of occurrence. Examples of exceptional items include one-time costs
and charges in respect of aerospace programmes, costs of
exceptional transformation and restructuring programmes and
one-time past service charges and credits on post-retirement
schemes.
Exceptional items are not
allocated to segments and may not be comparable to similarly titled
measures used by other companies.
Other items
The financing component of the
defined benefit pension scheme cost is determined by market
conditions and has therefore been included as a reconciling
difference between underlying and statutory performance.
The tax effects of adjustments
above are excluded from the underlying tax charge. Changes in tax
rates are excluded from the underlying tax charge. In addition,
changes in the amount of recoverable deferred tax recognised are
excluded from the underlying results to the extent that their
recognition or derecognition was not originally recorded within the
underlying results.
2
Segmental analysis continued
The following analysis sets out
the results of the Group's businesses on the basis described above
and also includes a reconciliation of the underlying results to
those reported in the Condensed Consolidated Income
Statement.
-
|
Civil
Aerospace
|
Defence
|
Power
Systems
|
New
Markets
|
Other
businesses
|
Corporate and Inter-segment
1
|
Total
underlying
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
Year ended 31 December 2023
|
|
|
|
|
|
|
|
Underlying revenue from sale of
original equipment
|
2,703
|
1,766
|
2,661
|
2
|
12
|
-
|
7,144
|
Underlying revenue from aftermarket
services
|
4,645
|
2,311
|
1,307
|
2
|
-
|
-
|
8,265
|
Total underlying revenue
|
7,348
|
4,077
|
3,968
|
4
|
12
|
-
|
15,409
|
Gross profit/(loss)
|
1,394
|
804
|
1,050
|
1
|
(15)
|
(3)
|
3,231
|
Commercial and administrative
costs
|
(354)
|
(173)
|
(456)
|
(24)
|
-
|
(57)
|
(1,064)
|
Research and development
costs
|
(343)
|
(72)
|
(187)
|
(137)
|
-
|
-
|
(739)
|
Share of results of joint ventures
and associates
|
153
|
3
|
6
|
-
|
-
|
-
|
162
|
Underlying operating profit/(loss)
|
850
|
562
|
413
|
(160)
|
(15)
|
(60)
|
1,590
|
|
|
|
|
|
|
|
|
Year ended 31 December
2022
|
|
|
|
|
|
|
|
Underlying revenue from sale of
original equipment
|
1,982
|
1,634
|
2,187
|
1
|
-
|
(5)
|
5,799
|
Underlying revenue from aftermarket
services
|
3,704
|
2,026
|
1,160
|
2
|
-
|
-
|
6,892
|
Total underlying revenue
|
5,686
|
3,660
|
3,347
|
3
|
-
|
(5)
|
12,691
|
Gross profit/(loss)
|
853
|
726
|
918
|
(1)
|
(29)
|
10
|
2,477
|
Commercial and administrative
costs
|
(371)
|
(174)
|
(441)
|
(23)
|
(2)
|
(51)
|
(1,062)
|
Research and development
costs
|
(452)
|
(122)
|
(204)
|
(108)
|
-
|
-
|
(886)
|
Share of results of joint ventures
and associates
|
113
|
2
|
8
|
-
|
-
|
-
|
123
|
Underlying operating
profit/(loss)
|
143
|
432
|
281
|
(132)
|
(31)
|
(41)
|
652
|
1 Corporate and Inter-segment consists of costs that are
not attributable to a specific segment and consolidation
adjustments
2
Segmental analysis continued
Reconciliation to statutory results
|
Total
underlying
|
Underlying adjustments and
adjustments to
foreign
exchange
|
Group statutory
results
|
|
|
|
£m
|
£m
|
£m
|
|
Year ended 31 December 2023
|
|
|
|
|
Continuing operations
|
|
|
|
|
Revenue from sale of original
equipment
|
7,144
|
491
|
7,635
|
|
Revenue from aftermarket
services
|
8,265
|
586
|
8,851
|
|
Total revenue
|
15,409
|
1,077
|
16,486
|
|
Gross profit
|
3,231
|
389
|
3,620
|
|
Commercial and administrative
costs
|
(1,064)
|
(46)
|
(1,110)
|
|
Research and development
costs
|
(739)
|
-
|
(739)
|
|
Share of results of joint ventures
and associates
|
162
|
11
|
173
|
|
Operating profit
|
1,590
|
354
|
1,944
|
|
Gain arising on the disposal of
businesses
|
-
|
1
|
1
|
|
Profit before financing and taxation
|
1,590
|
355
|
1,945
|
|
Net financing
|
(328)
|
810
|
482
|
|
Profit before taxation
|
1,262
|
1,165
|
2,427
|
|
Taxation
|
(120)
|
97
|
(23)
|
|
Profit for the year
|
1,142
|
1,262
|
2,404
|
|
|
|
|
|
|
Attributable to:
|
|
|
|
|
Ordinary shareholders
|
1,150
|
1,262
|
2,412
|
|
NCI
|
(8)
|
-
|
(8)
|
|
|
|
|
|
|
Year ended 31 December
2022
|
|
|
|
|
Continuing operations
|
|
|
|
|
Revenue from sale of
original equipment
|
5,799
|
474
|
6,273
|
|
Revenue from aftermarket
services
|
6,892
|
355
|
7,247
|
|
Total revenue
|
12,691
|
829
|
13,520
|
|
Gross profit
|
2,477
|
280
|
2,757
|
|
Commercial and administrative
costs
|
(1,062)
|
(15)
|
(1,077)
|
|
Research and development
costs
|
(886)
|
(5)
|
(891)
|
|
Share of results of joint ventures
and associates
|
123
|
(75)
|
48
|
|
Operating profit
|
652
|
185
|
837
|
|
Gain arising on the disposal of
businesses
|
-
|
81
|
81
|
|
Profit before financing and
taxation
|
652
|
266
|
918
|
|
Net financing
|
(446)
|
(1,974)
|
(2,420)
|
|
Profit/(loss) before
taxation
|
206
|
(1,708)
|
(1,502)
|
|
Taxation
|
(48)
|
356
|
308
|
|
Profit/(loss) for the year from
continuing operations
|
158
|
(1,352)
|
(1,194)
|
|
Discontinued operations
1
|
67
|
(147)
|
(80)
|
|
Profit/(loss) for the
year
|
225
|
(1,499)
|
(1,274)
|
|
|
|
|
|
|
Attributable to:
|
|
|
|
|
Ordinary shareholders
|
230
|
(1,499)
|
(1,269)
|
|
NCI
|
(5)
|
-
|
(5)
|
|
1 Discontinued
operations relate to the results of ITP Aero and are presented net
of intercompany trading eliminations and related consolidation
adjustments
2
Segmental analysis continued
Disaggregation of revenue from contracts with
customers
Analysis by type and basis of recognition
|
Civil
Aerospace
|
Defence
|
Power
Systems
|
New
Markets
|
Other
businesses
|
Corporate and
Inter-segment
|
Total
underlying
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
Year ended 31 December 2023
|
|
|
|
|
|
|
|
Original equipment recognised at a
point in time
|
2,703
|
632
|
2,611
|
2
|
-
|
-
|
5,948
|
Original equipment recognised over
time
|
-
|
1,134
|
50
|
-
|
12
|
-
|
1,196
|
Aftermarket services recognised at a
point in time
|
1,227
|
854
|
1,206
|
2
|
-
|
-
|
3,289
|
Aftermarket services recognised over
time
|
3,335
|
1,457
|
101
|
-
|
-
|
-
|
4,893
|
Total underlying customer contract revenue
|
7,265
|
4,077
|
3,968
|
4
|
12
|
-
|
15,326
|
Other underlying revenue
1
|
83
|
-
|
-
|
-
|
-
|
-
|
83
|
Total underlying revenue 2
|
7,348
|
4,077
|
3,968
|
4
|
12
|
-
|
15,409
|
|
|
|
|
|
|
|
Year ended 31 December
2022
|
|
|
|
|
|
|
|
Original equipment recognised at a
point in time
|
1,982
|
689
|
2,155
|
1
|
-
|
(5)
|
4,822
|
Original equipment recognised over
time
|
-
|
945
|
32
|
-
|
-
|
-
|
977
|
Aftermarket services recognised at
a point in time
|
865
|
769
|
1,076
|
2
|
-
|
-
|
2,712
|
Aftermarket services recognised
over time
|
2,772
|
1,257
|
84
|
-
|
-
|
-
|
4,113
|
Total underlying customer contract
revenue
|
5,619
|
3,660
|
3,347
|
3
|
-
|
(5)
|
12,624
|
Other underlying revenue
1
|
67
|
-
|
-
|
-
|
-
|
-
|
67
|
Total underlying revenue
2
|
5,686
|
3,660
|
3,347
|
3
|
-
|
(5)
|
12,691
|
|
|
|
|
|
|
|
|
| |
1
Includes leasing revenue
2 Includes £(136)m, of which £(104)m relates to Civil
LTSA contracts, (2022: £367m, of which £360m relates to Civil LTSA
contracts) of revenue recognised in the year relating to
performance obligations satisfied in previous years
|
|
|
|
|
|
Total
underlying
|
Underlying adjustments and
adjustments to foreign exchange
|
Group statutory results
1
|
|
|
|
£m
|
£m
|
£m
|
|
Year ended 31 December 2023
|
|
|
|
|
Original equipment recognised at a
point in time
|
5,948
|
491
|
6,439
|
|
Original equipment recognised over
time
|
1,196
|
-
|
1,196
|
|
Aftermarket services recognised at
a point in time
|
3,289
|
186
|
3,475
|
|
Aftermarket services recognised
over time
|
4,893
|
382
|
5,275
|
|
Total customer contract revenue
|
15,326
|
1,059
|
16,385
|
|
Other revenue
|
83
|
18
|
101
|
|
Total revenue
|
15,409
|
1,077
|
16,486
|
|
|
|
|
|
|
Year ended 31 December
2022
|
|
|
|
|
Original equipment recognised at a
point in time
|
4,822
|
474
|
5,296
|
|
Original equipment recognised over
time
|
977
|
-
|
977
|
|
Aftermarket services recognised at
a point in time
|
2,712
|
164
|
2,876
|
|
Aftermarket services recognised
over time
|
4,113
|
176
|
4,289
|
|
Total customer contract
revenue
|
12,624
|
814
|
13,438
|
|
Other revenue
|
67
|
15
|
82
|
|
Total revenue
|
12,691
|
829
|
13,520
|
|
1
During the year to 31 December 2023, revenue
recognised within Civil Aerospace, Defence and Power Systems of
£1,766m (2022: £1,788m) was received from a single
customer
2
Segmental analysis continued
Underlying adjustments
|
|
2023
|
|
2022
|
|
|
Revenue
£m
|
Profit before
financing
£m
|
Net
financing
£m
|
Taxation
£m
|
|
Revenue
£m
|
Profit
before financing
£m
|
Net
financing
£m
|
Taxation
£m
|
Underlying performance
|
|
15,409
|
1,590
|
(328)
|
(120)
|
|
12,691
|
652
|
(446)
|
(48)
|
Impact of foreign exchange
differences as a result of hedging activities on trading
transactions 1
|
A
|
1,077
|
469
|
394
|
(210)
|
|
829
|
267
|
(358)
|
(81)
|
Unrealised fair value changes on
derivative contracts held for trading 2
|
A
|
-
|
6
|
514
|
(130)
|
|
-
|
(3)
|
(1,768)
|
451
|
Unrealised fair value change to
derivative contracts held for financing 3
|
A
|
-
|
-
|
7
|
(2)
|
|
-
|
-
|
191
|
(47)
|
Exceptional programme
credits/(charges) 4
|
B
|
-
|
21
|
-
|
(5)
|
|
-
|
69
|
(3)
|
-
|
Exceptional transformation and
restructuring charges/(credits) 5
|
B
|
-
|
(102)
|
-
|
25
|
|
-
|
(47)
|
-
|
4
|
Impairment reversals/(charges)
6
|
C
|
-
|
8
|
-
|
(2)
|
|
-
|
(65)
|
-
|
-
|
Effect of acquisition accounting
7
|
C
|
-
|
(50)
|
-
|
12
|
|
-
|
(58)
|
-
|
9
|
Other 8
|
D
|
-
|
2
|
(105)
|
24
|
|
-
|
22
|
(36)
|
(71)
|
Gains arising on the disposals of
businesses
|
C
|
-
|
1
|
-
|
-
|
|
-
|
81
|
-
|
(2)
|
Recognition of deferred tax assets
9
|
D
|
-
|
-
|
-
|
385
|
|
-
|
-
|
-
|
93
|
Total underlying adjustments
|
|
1,077
|
355
|
810
|
97
|
|
829
|
266
|
(1,974)
|
356
|
Statutory performance per condensed consolidated income
statement
|
|
16,486
|
1,945
|
482
|
(23)
|
|
13,520
|
918
|
(2,420)
|
308
|
A - FX and derivatives, B -
Exceptional, C - M&A and impairment, D - Other
1 The impact of
measuring revenues and costs at the average exchange rate during
the year and the impact of valuation of assets and liabilities
using the year end exchange rate rather than the achieved rate or
the exchange rate that is expected to be achieved by the use of the
hedge book increased statutory revenues by £1,077m (2022: £829m)
and increased profit before financing and taxation by £469m (2022:
£267m). Underlying financing excludes the impact of revaluing
monetary assets and liabilities at the year end exchange
rate
2 The underlying results
exclude the fair value changes on derivative contracts held for
trading. These fair value changes are subsequently recognised in
the underlying results when the contracts are settled
3 Includes net fair value gain of £1m (2022: gains of £190m) on
any interest rate swaps not designated into hedging relationships
for accounting purposes
4 During the year to 31 December 2023, £21m of Trent 1000
wastage costs provision previously recognised in respect of
estimated costs to settle obligations have been reversed to reflect
the current status of claims in respect of the Trent 1000 technical
issues which were identified in 2019
5 During the year to 31 December 2023, the Group incurred total
transformation and restructuring related charges of £102m (2022:
£47m). In 2023, the Group announced a major multi-year
transformation programme which consists of seven workstreams that
are set out in the 2022 Annual Report. During the year, £88m was
incurred in relation to this multi-year programme, comprising £45m
for advisory fees and transformation office costs, £37m related to
impairments and
write-offs and £6m related to severance costs. In the year to 31
December 2023, a £14m (2022: £47m) charge related to initiatives to
enable restructuring under a previous programme
6 The Group has
assessed the carrying value of its assets. Further details are
provided in notes 7,8 and 9
7 The effect of acquisition
accounting includes the amortisation of intangible assets arising
on previous acquisitions
8 Includes interest received of £83m (2022: interest
received of £14m) on interest rate swaps which are not designated
into hedge relationships for statutory purposes from interest
payable on an underlying basis to fair value movement and £2m
(2022: credit of £22m) of past-service credit on defined benefit
schemes
9 Relates to the recognition of deferred tax assets on
UK tax losses of £328m and foreign exchange derivatives of £57m.
The £93m recognised in 2022 relates to foreign exchange
derivatives
2
Segmental analysis continued
Balance sheet analysis
|
|
|
Civil
Aerospace
£m
|
Defence
£m
|
Power
Systems
£m
|
New
Markets
£m
|
Total reportable
segments
£m
|
At 31 December 2023
|
|
|
|
|
|
|
|
Segment assets
|
|
|
17,718
|
3,517
|
3,814
|
115
|
25,164
|
Interests in joint ventures and
associates
|
|
|
444
|
7
|
28
|
-
|
479
|
Segment liabilities
|
|
|
(24,447)
|
(3,376)
|
(1,765)
|
(88)
|
(29,676)
|
Net (liabilities)/assets
|
|
|
(6,285)
|
148
|
2,077
|
27
|
(4,033)
|
|
|
|
|
|
|
|
|
At 31 December 2022
|
|
|
|
|
|
|
|
Segment assets
|
|
|
17,537
|
3,430
|
4,084
|
135
|
25,186
|
Interests in joint ventures and
associates
|
|
|
387
|
4
|
31
|
-
|
422
|
Segment liabilities
|
|
|
(25,357)
|
(3,146)
|
(1,802)
|
(97)
|
(30,402)
|
Net
(liabilities)/assets
|
|
|
(7,433)
|
288
|
2,313
|
38
|
(4,794)
|
Reconciliation to the balance sheet
|
|
|
|
|
2023
|
2022
|
|
|
|
|
|
£m
|
£m
|
Total reportable segment assets
(excluding assets held for sale)
|
|
|
|
|
25,164
|
25,186
|
Other businesses
|
|
|
|
|
8
|
19
|
Corporate and
Inter-segment
|
|
|
|
|
(2,010)
|
(2,460)
|
Interests in joint ventures and
associates
|
|
|
|
|
479
|
422
|
Assets held for sale
|
|
|
|
|
109
|
-
|
Cash and cash equivalents and
short-term investments
|
|
|
|
|
3,784
|
2,618
|
Fair value of swaps hedging fixed
rate borrowings
|
|
|
|
|
118
|
194
|
Deferred and income tax
assets
|
|
|
|
|
3,078
|
2,858
|
Post-retirement scheme
surpluses
|
|
|
|
|
782
|
613
|
Total assets
|
|
|
|
|
31,512
|
29,450
|
Total reportable segment
liabilities (excluding liabilities held for sale)
|
|
|
|
|
(29,676)
|
(30,402)
|
Other businesses
|
|
|
|
|
(58)
|
(34)
|
Corporate and
Inter-segment
|
|
|
|
|
2,010
|
2,456
|
Liabilities associated with assets
held for sale
|
|
|
|
|
(55)
|
-
|
Borrowings and lease
liabilities
|
|
|
|
|
(5,759)
|
(5,955)
|
Fair value of swaps hedging fixed
rate borrowings
|
|
|
|
|
(95)
|
(108)
|
Deferred and income tax
liabilities
|
|
|
|
|
(473)
|
(390)
|
Post-retirement scheme
deficits
|
|
|
|
|
(1,035)
|
(1,033)
|
Total liabilities
|
|
|
|
|
(35,141)
|
(35,466)
|
Net liabilities
|
|
|
|
|
(3,629)
|
(6,016)
|
3
Research and development
|
2023
|
2022
|
|
£m
|
£m
|
Gross research and development
costs
|
(1,390)
|
(1,287)
|
Contributions and fees
1
|
548
|
359
|
Expenditure in the year
|
(842)
|
(928)
|
Capitalised as intangible
assets
|
192
|
131
|
Amortisation and impairment of
capitalised costs
|
(89)
|
(94)
|
Net
cost recognised in the income statement
|
(739)
|
(891)
|
Underlying adjustments relating to
the effects of acquisition accounting and foreign
exchange
|
-
|
5
|
Net
underlying cost recognised in the income
statement
|
(739)
|
(886)
|
1
Includes £531m (2022: £350m) of government funding
|
2023
|
2022
|
|
Statutory
|
Underlying
1
|
Statutory
|
Underlying 1
|
|
£m
|
£m
|
£m
|
£m
|
|
|
|
|
|
Interest receivable and similar
income 2
|
164
|
164
|
35
|
35
|
Net fair value gains on foreign
currency contracts
|
574
|
-
|
-
|
-
|
Net fair value gains on non-hedge
accounted interest rate swaps 3
|
1
|
-
|
190
|
-
|
Net fair value gains on commodity
contracts
|
-
|
-
|
106
|
-
|
Financing on post-retirement
scheme surpluses
|
30
|
-
|
24
|
-
|
Net foreign exchange
gains
|
394
|
-
|
-
|
-
|
Financing income
|
1,163
|
164
|
355
|
35
|
|
|
|
|
|
Interest payable
|
(369)
|
(275)
|
(343)
|
(320)
|
Net fair value losses on foreign
currency contracts
|
-
|
-
|
(1,875)
|
-
|
Foreign exchange differences and
changes in forecast payments relating to financial RRSAs
|
(1)
|
-
|
(7)
|
-
|
Net fair value losses on commodity
contracts
|
(60)
|
-
|
-
|
-
|
Financing on post-retirement
scheme deficits
|
(42)
|
-
|
(26)
|
-
|
Net foreign exchange
losses
|
-
|
-
|
(358)
|
-
|
Cost of undrawn
facilities
|
(57)
|
(57)
|
(61)
|
(61)
|
Other financing charges
|
(152)
|
(160)
|
(105)
|
(100)
|
Financing costs
|
(681)
|
(492)
|
(2,775)
|
(481)
|
|
|
|
|
|
Net financing income/(costs)
|
482
|
(328)
|
(2,420)
|
(446)
|
|
|
|
|
|
Analysed as:
|
|
|
|
|
Net interest payable
|
(205)
|
(111)
|
(308)
|
(285)
|
Net fair value gains/(losses) on
derivative contracts
|
515
|
-
|
(1,579)
|
-
|
Net post-retirement scheme
financing
|
(12)
|
-
|
(2)
|
-
|
Net foreign exchange
gains/(losses)
|
394
|
-
|
(358)
|
-
|
Net other financing
|
(210)
|
(217)
|
(173)
|
(161)
|
Net financing income/(costs)
|
482
|
(328)
|
(2,420)
|
(446)
|
1 See note 2 for definition of underlying
results
2
Includes interest income on cash balances and
short-term deposits of £117m (2022: £28m) and similar income of
£47m (2022: £7m) on money market funds
3 The condensed
consolidated income statement shows the net fair value
gains/(losses) on any interest rate swaps not designated into
hedging relationships for accounting purposes. Underlying financing
reclassifies the realised fair value movements on these interest
rate swaps to net interest payable
|
UK
|
|
Overseas
|
|
Total
|
|
|
2023
£m
|
2022
£m
|
|
2023
£m
|
2022
£m
|
|
2023
£m
|
2022
£m
|
Current tax charge for the
year
|
19
|
18
|
|
256
|
159
|
|
275
|
177
|
Adjustments in respect of prior
years
|
-
|
(5)
|
|
2
|
(8)
|
|
2
|
(13)
|
Current tax
|
19
|
13
|
|
258
|
151
|
|
277
|
164
|
|
|
|
|
|
|
|
|
|
Deferred tax credit for the
year
|
224
|
(427)
|
|
(69)
|
(61)
|
|
155
|
(488)
|
Adjustments in respect of prior
years
|
(5)
|
4
|
|
2
|
12
|
|
(3)
|
16
|
Recognition of deferred
tax
|
(406)
|
-
|
|
-
|
-
|
|
(406)
|
-
|
Deferred tax
|
(187)
|
(423)
|
|
(67)
|
(49)
|
|
(254)
|
(472)
|
|
|
|
|
|
|
|
|
|
(Credited)/charged in the income statement
|
(168)
|
(410)
|
|
191
|
102
|
|
23
|
(308)
|
|
|
|
|
|
|
|
|
|
|
| |
Deferred taxation assets and liabilities
|
2023
|
2022
|
|
£m
|
£m
|
At 1 January
|
2,445
|
1,792
|
Amount credited to income
statement
|
254
|
495
|
Amount credited/(charged) to
OCI
|
(44)
|
91
|
Amount credited/(charged) to
hedging reserves
|
5
|
12
|
Amount credited to
equity
|
22
|
1
|
On disposal of businesses
1
|
(1)
|
28
|
Exchange differences
|
(13)
|
26
|
At 31 December
|
2,668
|
2,445
|
Deferred tax assets
|
2,998
|
2,731
|
Deferred tax liabilities
|
(330)
|
(286)
|
|
2,668
|
2,445
|
1 The 2023 deferred tax relates to the acquisition of
Team Italia Marine S.R.L. The 2022 deferred tax relates to the
disposal of ITP Aero
Of the total deferred tax asset of
£2,998m, £2,399m (2022: £2,183m) relates to the UK and is made up
as follows:
- £1,476m (2022: £1,054m)
relating to tax losses;
- £412m (2022: £668m)
arising on unrealised losses on derivative contracts;
- £162m (2022: £162m) of
advance corporation tax; and
- £349m (2022: £299m)
relating to other deductible temporary differences, in particular
tax depreciation and relief for interest expenses.
The UK deferred tax assets
primarily arise in Rolls-Royce plc and have been recognised based
on the expectation that the business will generate taxable profits
and tax liabilities in the future against which the losses and
deductible temporary differences can be utilised.
Most of the UK tax losses relate
to the Civil Aerospace large engine business which makes initial
losses through the investment period of a programme and then makes
a profit through its contracts for services. The programme
lifecycles are typically in excess of 30 years.
Deferred tax assets are recognised
only to the extent 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 Civil
Aerospace large engine business, to assess the level of future
taxable profits.
The recoverability of deferred tax
assets has been assessed on the following basis:
- using the most recent
UK profit forecasts, covering the next five years which are
consistent with external sources on market conditions;
- the long-term forecast
profit profile of existing large engine programmes which are
typically in excess of 30 years from initial investment to
retirement of the fleet, including the aftermarket revenues earned
from airline customers;
- the long-term forecast
is adjusted to exclude engine programmes which are in the
development stage with no confirmed orders;
- taking into account the
risk that regulatory changes could materially impact demand for our
products;
- consideration that
although all Civil Aerospace large engines are now compatible with
sustainable fuels, there is a risk that in the longer term demand
will shift towards more sustainable products and
solutions;
- the long-term forecast
profit and cost profile of the other parts of the UK
business;
- taking into
consideration past performance and experience as well as a 25%
probability of a severe but plausible downside forecast
materialising in relation to the civil aviation industry;
and
- consideration that,
whilst profitable in 2023, the UK business has historically been
loss making.
The assessment takes into account
UK tax laws that, in broad terms, restrict the offset of carried
forward tax losses to 50% of current year profits. In addition, the
amounts and timing of future taxable profits
incorporate:
- the impact of new
contracts signed in 2023. These include the trilateral AUKUS
agreement involving the UK Defence business;
- the outcomes of
strategic initiatives including cost and commercial
optimisation;
- the growth in Civil
Aerospace engine flying hours; and
- management's
assumptions on the impact of macroeconomic factors and climate
change on the UK business.
The climate change scenarios
previously prepared to assess the viability of our business
strategy, decarbonisation plans and approach to managing
climate-related risks have continued to develop over the last year.
The scale up of sustainable aviation fuel is expected to play a
crucial role in reaching net zero carbon emissions by 2050 and the
Group has demonstrated that all Civil Aerospace production engines
are compatible with sustainable aviation fuels. The impact that
this could have on our costs and customer pricing is factored into
the deferred tax assessment. However, benefits that may arise in
the future from the development of breakthrough new technologies
are not taken into account.
Based on the assessment, the Group
has recognised a total UK deferred tax asset of £2,399m, which
includes the re-recognition of a £57m deferred tax asset on
unrealised losses on foreign exchange derivative contracts and
recognition of a further £406m (of which £328m is non-underlying
and £78m is underlying) deferred tax asset relating to UK tax
losses. This reflects the conclusions that:
- Based on current
financial results and an improved outlook it is probable that the
UK business will generate taxable income and tax liabilities in the
future against which these losses can be utilised.
- Using current forecasts
and various scenarios these losses and other deductible temporary
differences will be used in full within 30-40 years, which is
within the expected programme lifecycles. An explanation of
the potential impact of climate change on forecast profits and
sensitivity analysis can be found in note 1.
- Any future changes in
tax law or the structure of the Group could have a significant
effect on the use of losses and other deductible temporary
differences, including the period over which they can be used. In
view of this and the significant judgement involved the Board
continuously reassesses this area.
The other significant deferred tax
asset arises in Rolls-Royce Deutschland Ltd & Co KG, where the
main activity is business aviation. The total net deferred tax
asset is £328m (2022: £284m), which has been recognised in full.
The deferred tax asset relates to revenue being recognised and
taxed earlier under local tax rules resulting in a benefit when
revenue is recognised in the accounts.
The Group is within the scope of
the OECD Pillar Two (Global Minimum Tax) model rules. The
legislation has been substantively enacted in some of the main
jurisdictions in which the Group operates including the UK and
Germany where the rules will be effective from 1 January 2024.
Initial assessments indicate that Pillar Two income taxes will not
be material to the Group and a majority of the jurisdictions in
which the Group operates will meet one of the transitional safe
harbours. For those jurisdictions which are material or where the
statutory tax rate is close to 15%, the assessment is based on 2023
data. Elsewhere prior year data has been used.
For the year to 31 December 2023,
the Group has applied the mandatory exception to recognising and
disclosing information about deferred tax assets and liabilities
related to Pillar Two income taxes.
The temporary differences
associated with investments in subsidiaries, joint ventures and
associates, for which a deferred tax liability has not been
recognised, aggregate to £1,230m (2022: £1,062m). 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 share (EPS) is
calculated by dividing the profit/(loss) 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.
Where there is a continuing loss
during the year, the effect of potentially dilutive ordinary shares
is anti-dilutive.
|
2023
|
|
|
2022
|
|
Basic
|
Potentially dilutive share
options
|
Diluted
|
|
|
Basic
|
Potentially dilutive share options
|
Diluted
|
Profit/(loss) attributable to
ordinary shareholders (£m):
|
|
|
|
|
|
|
|
|
Continuing operations
|
2,412
|
|
2,412
|
|
|
(1,189)
|
|
(1,189)
|
Discontinued operations
|
-
|
|
-
|
|
|
(80)
|
|
(80)
|
|
2,412
|
|
2,412
|
|
|
(1,269)
|
|
(1,269)
|
Weighted average number of
ordinary shares (millions)
|
8,361
|
44
|
8,405
|
|
|
8,349
|
-
|
8,349
|
EPS (pence):
|
|
|
|
|
|
|
|
|
Continuing operations
|
28.85
|
(0.15)
|
28.70
|
|
|
(14.24)
|
-
|
(14.24)
|
Discontinued operations
|
-
|
-
|
-
|
|
|
(0.96)
|
-
|
(0.96)
|
|
28.85
|
(0.15)
|
28.70
|
|
|
(15.20)
|
-
|
(15.20)
|
The reconciliation between
underlying EPS and basic EPS is as follows:
|
2023
|
|
2022
|
|
Pence
|
£m
|
|
Pence
|
£m
|
Underlying EPS / Underlying profit from continuing operations
attributable to ordinary shareholders
|
13.75
|
1,150
|
|
1.95
|
163
|
Total underlying adjustments to
profit/(loss) before tax (note 2)
|
13.94
|
1,165
|
|
(20.45)
|
(1,708)
|
Related tax effects
|
1.16
|
97
|
|
4.26
|
356
|
EPS
/ Profit/(loss) from continuing operations attributable to ordinary
shareholders
|
28.85
|
2,412
|
|
(14.24)
|
(1,189)
|
Diluted underlying EPS from
continuing operations attributable to ordinary
shareholders
|
13.68
|
|
|
1.95
|
|
|
Goodwill
£m
|
Certification
costs
£m
|
Development
expenditure
£m
|
Customer
relationships
£m
|
Software
1
£m
|
Other
2
£m
|
Total
£m
|
Cost:
|
|
|
|
|
|
|
|
At
1 January 2023
|
1,135
|
935
|
3,604
|
512
|
978
|
886
|
8,050
|
Additions
|
-
|
-
|
192
|
-
|
79
|
13
|
284
|
Acquisition of businesses (see
note 23)
|
8
|
-
|
-
|
2
|
-
|
-
|
10
|
Transferred to assets held for
sale 3
|
(10)
|
-
|
-
|
-
|
-
|
(185)
|
(195)
|
Transferred to current assets
4
|
-
|
-
|
-
|
-
|
(23)
|
-
|
(23)
|
Disposals
|
-
|
(4)
|
-
|
-
|
(27)
|
(2)
|
(33)
|
Reclassifications
5
|
-
|
-
|
(1)
|
-
|
3
|
(1)
|
1
|
Exchange differences
|
(32)
|
(1)
|
(32)
|
(16)
|
(6)
|
(12)
|
(99)
|
At
31 December 2023
|
1,101
|
930
|
3,763
|
498
|
1,004
|
699
|
7,995
|
|
|
|
|
|
|
|
Accumulated amortisation and impairment:
|
|
|
|
|
|
|
At
1 January 2023
|
36
|
447
|
1,912
|
406
|
675
|
476
|
3,952
|
Charge for the year
6
|
-
|
24
|
89
|
41
|
84
|
41
|
279
|
Impairment
|
-
|
-
|
-
|
-
|
-
|
(7)
|
(7)
|
Transferred to assets held for
sale 3
|
-
|
-
|
-
|
-
|
-
|
(144)
|
(144)
|
Transferred to current assets
4
|
-
|
-
|
-
|
-
|
(14)
|
-
|
(14)
|
Disposals
|
-
|
(4)
|
-
|
-
|
(23)
|
(2)
|
(29)
|
Reclassifications
5
|
-
|
-
|
-
|
-
|
1
|
(1)
|
-
|
Exchange differences
|
(1)
|
-
|
(25)
|
(14)
|
(5)
|
(6)
|
(51)
|
At 31 December
2023
|
35
|
467
|
1,976
|
433
|
718
|
357
|
3,986
|
|
|
|
|
|
|
|
|
Net
book value at:
|
|
|
|
|
|
|
|
31
December 2023
|
1,066
|
463
|
1,787
|
65
|
286
|
342
|
4,009
|
1
January 2023
|
1,099
|
488
|
1,692
|
106
|
303
|
410
|
4,098
|
1 Includes £97m
(2022: £93m) of software under course of construction which is not
amortised
2
Other intangibles includes trademarks, brands and
the costs incurred testing and analysing engines with the longest
time in service (fleet leader engines) to gather technical
knowledge on engine endurance which will improve reliability and
enable us to reduce the costs of meeting our LTSA
obligations
3
At 31 December 2023, the Group held for sale the
assets and liabilities of the off-highway engines business in the
lower power range based in Power Systems. See note 23 for further
detail
4
During the year, the Group signed a service
concession arrangement with a customer effective from 1 January
2024. Accordingly, assets that will be derecognised have been
transferred to trade receivables and other assets to reflect the
nature of these assets as current assets
5
Includes reclassifications within intangible
assets or from property, plant and equipment when available for
use
6
Charged to cost of sales and commercial and administrative
costs except development costs, which are charged to research and
development costs
The carrying amount of goodwill or
intangible assets allocated across multiple CGUs is not significant
in comparison with the Group's total carrying amount of goodwill or
intangible assets with indefinite useful lives.
Goodwill has been tested for
impairment during 2023 on the following basis:
- The carrying values of goodwill have been assessed by
reference to the recoverable amount, being the higher of value in
use or fair value less costs of disposal (FVLCOD).
- The recoverable amount has been estimated using cash flows
from the most recent forecasts prepared by the Directors, 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 growth rates of 2% which reflects the products, industries
and countries in which the relevant CGU or group of CGUs operate.
Inflation has been included based on contractual commitments where
relevant. Where general inflation assumptions have been required,
these have been estimated based on externally sourced data. General
inflation assumptions of 2% to 4% have been included in the
forecasts, depending on the nature and geography of the
flows.
- The key forecast assumptions for the impairment tests are the
discount rate and the cash flow projections, in particular the
programme assumptions (such as sales volumes and product costs),
the impact of foreign exchange rates on the relationship between
selling prices and costs, and growth rates. Impairment tests are
performed using prevailing exchange rates.
- The Group believes there are significant business growth
opportunities to come from Rolls-Royce playing a leading role in
the transition to net zero, whilst at the same time climate change
poses potentially significant risks. The assumptions used by the
Directors are based on past experience and external sources of
information. Based on the climate scenarios prepared, the forecasts
do not assume a significant deterioration of demand for Civil
Aerospace (including Rolls-Royce Deutschland) programmes given that
all commercial aero-engines were compatible with sustainable fuels
by the end of 2023. Similarly, 80% of the engines in Power Systems
are compatible with sustainable fuels. The investment required to
ensure our new products will be compatible with net zero operation,
and to achieve net zero scope 1 and 2 GHG emissions is reflected in
the forecasts used.
7 Intangible
assets continued
A 1.5°C scenario has been prepared
using key data points from external sources, including Oxford
Economics, Global Climate Service and Databank and the
International Energy Agency. This scenario has been used as the
basis of a sensitivity. It is assumed that governments adopt
stricter product and behavioural standards and measures that result
in higher carbon pricing. Under these conditions, it is assumed
that markets are willing to pay for low carbon solutions and that
there is an economic return from strategic investments in low
carbon alternatives. The sensitivity has considered the likelihood
of demand changes for our products based on their relative fuel
efficiency in the marketplace and the probability of alternatives
being introduced earlier than currently expected. The sensitivity
also reflects the impact of a broad range of potential costs
imposed by policy or regulatory interventions (through carbon
pricing). This sensitivity does not indicate the need for an
impairment charge.
The principal assumptions for
goodwill balances considered to be individually significant
are:
Rolls-Royce Power Systems AG
- Recoverable amount represents FVLCOD to reflect the future
strategy of the business. The Directors consider that disclosing
information prepared on a FVLCOD basis here is a more useful
representation of the recoverable amount when considering the
future strategy of the business, including the impact of
climate-related risks and opportunities. Due to the unavailability
of observable market inputs or inputs based on market evidence, the
fair value is estimated by discounting future cash flows (Level 3
as defined by IFRS 13 Fair Value
Measurement) modified for market participants
views;
- Trading assumptions (e.g. volume of equipment deliveries,
pricing achieved and cost escalation) that are based on current and
known future programmes, estimates of market share and long-term
economic forecasts;
- Plausible downside scenario in relation to macro-economic
factors included with a 25% weighting;
- Cash flows beyond the five-year forecasts are assumed to grow
at 2.0% (2022: 1.0%); and
- Nominal post-tax discount rate 9.2% (2022: 10.0%).
The Directors do not consider that
any reasonably possible changes in the key assumptions (including
taking consideration of the climate-related risks above) would
cause the FVLCOD of the business to fall below its carrying value
of goodwill.
Rolls-Royce Deutschland Ltd & Co KG
- Recoverable amount represents the value in use of the assets
in their current condition;
- Trading assumptions (e.g. volume of engine deliveries, flying
hours of installed fleet, including assumptions on the recovery of
the aerospace industry, and cost escalation) that are based on
current and known future programmes, estimates of market share and
long-term economic forecasts;
- Plausible downside scenario in relation to macro-economic
factors included with a 25% weighting;
- Cash flows beyond the five-year forecasts are assumed to grow
at 2.0% (2022: 2.0%); and
- Nominal pre-tax discount rate 14.4% (2022: 13.2%).
The Directors do not consider that
any reasonably possible changes in the key assumptions (including
taking consideration of the climate-related risks above) would
cause the value in use of the goodwill to fall below its carrying
value.
Other cash generating units
Goodwill balances across the Group
that are not considered to be individually significant were also
tested for impairment, resulting in no impairment charge (2022:
£nil) being recognised at 31 December 2023.
Material intangible assets (excluding
goodwill)
The carrying amount and the
residual life of the material intangible assets (excluding
goodwill) for the Group are as follows:
|
Residual
life 1
|
2023
|
2022
|
|
|
£m
|
£m
|
Trent programme intangible assets
2
|
2-15
years
|
1,920
|
1,826
|
Business aviation programme
intangible assets 3
|
11-15
years
|
238
|
250
|
Intangible assets related to Power
Systems 4
|
|
370
|
466
|
|
|
2,528
|
2,542
|
1
Residual life reflects the remaining amortisation
period of those assets where amortisation has commenced. The
amortisation period of 15 years will commence on those assets which
are not being amortised as the units are delivered
2 Included within the Trent programmes are the Trent
1000, Trent 7000 and Trent XWB
3
Included within business aviation are the Pearl
700 and Pearl 15
4
Includes £112m (2022: £114m) in respect of a
brand intangible asset which is not amortised. Remaining assets are
amortised over a range of three to 15 years
Intangible assets (including
programme intangible assets) have been reviewed for impairment in
accordance with IAS 36 Impairment
of Assets. Assessments have considered potential triggers of
impairment such as external factors including climate change,
significant changes with an adverse effect on a programme and by
analysing latest management forecasts against those prepared in
2022 to identify any deterioration in performance. Where a trigger
event has been identified, an impairment test has been carried out.
Where an impairment was required the test was 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 the Directors, which are consistent with past experience and
external sources of information on market conditions over the lives
of the respective programmes; and
- The key assumptions
underpinning cash flow projections are based on estimates of
product performance related estimates, future market share and
pricing and cost for uncontracted business. Climate-related risks
are considered when making these estimates consistent with the
assumptions above.
There have been no (2022: none)
individually material impairment charges or reversals recognised
during the year.
8 Property,
plant and equipment
|
Land and
buildings
£m
|
Plant and
equipment
£m
|
Aircraft and
engines
£m
|
In course of
construction
£m
|
Total
£m
|
Cost:
|
|
|
|
|
|
At 1 January 2023
|
1,936
|
5,225
|
999
|
400
|
8,560
|
Additions
|
19
|
147
|
34
|
223
|
423
|
Transferred to current assets
1
|
(90)
|
(93)
|
-
|
(43)
|
(226)
|
Disposals/write-offs
|
(19)
|
(309)
|
(33)
|
(9)
|
(370)
|
Reclassifications
2
|
69
|
78
|
13
|
(146)
|
14
|
Exchange differences
|
(32)
|
(86)
|
(7)
|
(13)
|
(138)
|
At 31 December 2023
|
1,883
|
4,962
|
1,006
|
412
|
8,263
|
|
|
|
|
|
|
Accumulated depreciation and impairment:
|
|
|
|
|
|
At 1 January 2023
|
695
|
3,507
|
413
|
9
|
4,624
|
Charge for the year
3
|
70
|
296
|
40
|
-
|
406
|
Impairment 4
|
4
|
6
|
1
|
6
|
17
|
Transferred to current
assets
|
(48)
|
(61)
|
-
|
-
|
(109)
|
Disposals/write-offs
|
(18)
|
(299)
|
(25)
|
-
|
(342)
|
Reclassifications
2
|
17
|
(9)
|
8
|
(7)
|
9
|
Exchange differences
|
(11)
|
(56)
|
(3)
|
-
|
(70)
|
At 31 December 2023
|
709
|
3,384
|
434
|
8
|
4,535
|
|
|
|
|
|
|
Net book value at:
|
|
|
|
|
|
31 December 2023
|
1,174
|
1,578
|
572
|
404
|
3,728
|
1
January 2023
|
1,241
|
1,718
|
586
|
391
|
3,936
|
1
During the year, the Group signed a service
concession arrangement with a customer effective from 1 January
2024. Accordingly, assets that will be derecognised have been
transferred to trade receivables and other assets to reflect the
nature of these assets as current assets
2
Includes reclassifications of assets under
construction to the relevant classification in property, plant and
equipment, right-of-use assets or intangible assets when available
for use
3
Depreciation is charged to cost of sales and
commercial and administrative costs or included in the cost of
inventory as appropriate
4
The carrying values of property, plant and
equipment have been assessed during the year in line with IAS 36.
Material items of plant and equipment and aircraft and engines are
assessed for impairment together with other assets used in
individual programmes - see potential triggers considered in note
7. Land and buildings are generally used across multiple programmes
and are considered based on future expectations of the use of the
site, which includes any implications from
climate-related risks. As a result of this assessment, there are no
(2022: none) individually material impairment charges or
reversals in the year
|
Land and
buildings
£m
|
Plant and
equipment
£m
|
Aircraft and
engines
£m
|
Total
£m
|
Cost:
|
|
|
|
|
At 1 January 2023
|
506
|
162
|
1,827
|
2,495
|
Additions/modification of
leases
|
38
|
56
|
104
|
198
|
Acquisition of businesses (See
note 23)
|
2
|
-
|
-
|
2
|
Disposals
|
(6)
|
(22)
|
(54)
|
(82)
|
Transferred to current assets
1
|
(4)
|
-
|
-
|
(4)
|
Reclassifications to
PPE
|
(5)
|
-
|
(10)
|
(15)
|
Exchange differences
|
(18)
|
(2)
|
(3)
|
(23)
|
At 31 December 2023
|
513
|
194
|
1,864
|
2,571
|
|
|
|
|
|
Accumulated depreciation and impairment:
|
|
|
|
|
At 1 January 2023
|
230
|
84
|
1,120
|
1,434
|
Charge for the year
2
|
42
|
42
|
179
|
263
|
Impairment
3
|
3
|
6
|
62
|
71
|
Disposals
|
(6)
|
(22)
|
(54)
|
(82)
|
Reclassifications to
PPE
|
(1)
|
-
|
(8)
|
(9)
|
Exchange differences
|
(9)
|
(1)
|
(1)
|
(11)
|
At 31 December 2023
|
259
|
109
|
1,298
|
1,666
|
|
|
|
|
|
Net
book value at:
|
|
|
|
|
31
December 2023
|
254
|
85
|
566
|
905
|
1
January 2023
|
276
|
78
|
707
|
1,061
|
1 During the year,
the Group signed a service concession arrangement with a customer
effective from 1 January 2024. Accordingly, assets that will be
derecognised have been transferred to trade receivables and other
assets to reflect the nature of these assets as current
assets
2
Depreciation is charged to cost of sales and
commercial and administrative costs as appropriate
3
The carrying values of right-of-use assets have
been assessed during the year in line with IAS 36. Material items
of plant and equipment and aircraft and engines are assessed for
impairment together with other assets used in individual programmes
- see potential triggers considered in note 7. Land and
buildings are generally used across multiple programmes and are
considered based on future expectations of the use of the site
(which includes any implications from climate-related risks). As a
result of this assessment, the carrying values of assets, where a
trigger was identified, have been assessed by reference to value in
use considering assumptions such as estimated future cash flows,
product performance related estimates and climate-related risks. An
impairment charge of £71m has been recognised, which includes £27m
in relation to lease engines that have been returned following the
termination of the lease by the lessee. In addition, during the
year, a number of existing leases were extended as a result of
renegotiations. An assessment was performed in reference to value
in use to support the increase in asset value over the extended
lease term, and as a result, an impairment of £26m has been
recognised in Civil Aerospace (2022: no individually material
impairment charges or reversals)
Equity accounted and other investments
|
Equity
accounted
|
|
Other
1
|
|
Joint
ventures
£m
|
Associates
£m
|
Total
£m
|
|
£m
|
At 1 January 2023
|
422
|
−
|
422
|
|
36
|
Additions 2
|
9
|
-
|
9
|
|
-
|
Disposals
|
(5)
|
-
|
(5)
|
|
(1)
|
Share of retained profit
3
|
119
|
-
|
119
|
|
-
|
Reclassification of deferred
profit to deferred income 4
|
(18)
|
-
|
(18)
|
|
-
|
Revaluation of other investments
accounted for at FVOCI
|
-
|
-
|
-
|
|
(4)
|
Exchange differences
|
(50)
|
-
|
(50)
|
|
-
|
Share of OCI
|
2
|
-
|
2
|
|
-
|
At 31 December 2023
|
479
|
-
|
479
|
|
31
|
1 Other investments includes unlisted investments of £24m
(2022: £26m) and listed investments of £7m (2022: £10m)
2
During the year, additions to investments of £9m
includes the second instalment of investment related to the joint
venture, Beijing Aero Engine Services Company Limited of
£6m
3 See table below
4 The Group's share of unrealised profit on sales to
joint ventures is eliminated against the carrying value of the
investment in the entity. Any excess amount, once the carrying
value is reduced to £nil, is recorded as deferred income
Reconciliation of share of
retained profit/(loss) to the income statement and cash flow
statement:
|
2023
|
2022
|
|
£m
|
£m
|
Share of results of joint ventures
and associates
|
139
|
9
|
Adjustments for intercompany
trading 1
|
34
|
39
|
Share of results of joint venture
and associates to the Group
|
173
|
48
|
Dividends paid by joint ventures
and associates to the Group (cash flow statement)
|
(54)
|
(73)
|
Share of retained (loss)/profit
attributable to continuing operations (above)
|
119
|
(25)
|
1 During the year, the Group sold spare engines to Rolls-Royce
& Partners Finance, a joint venture and subsidiary of Alpha
Partners Leasing Limited. The Group's share of the profit on these
sales is deferred and released to match the depreciation of the
engines in the joint venture's financial statements. In 2023 and
2022, profit deferred on the sale of engines was lower than the
release of that deferred in prior years
|
2023
|
2022
|
|
£m
|
£m
|
Raw materials
|
516
|
479
|
Work in progress
|
1,679
|
1,633
|
Finished goods
|
2,653
|
2,593
|
Payments on account
|
-
|
3
|
|
4,848
|
4,708
|
12 Trade receivables
and other assets
|
Current
|
|
Non-current
1
|
|
Total
|
|
2023
£m
|
2022
£m
|
|
2023
£m
|
2022
£m
|
|
2023
£m
|
2022
£m
|
Trade receivables
|
2,724
|
2,376
|
|
40
|
43
|
|
2,764
|
2,419
|
Prepayments
2
|
1,032
|
737
|
|
102
|
37
|
|
1,134
|
774
|
RRSA prepayment for LTSA parts
2
|
236
|
149
|
|
1,084
|
856
|
|
1,320
|
1,005
|
Receivables due on
RRSAs
|
1,159
|
928
|
|
193
|
255
|
|
1,352
|
1,183
|
Amounts owed by joint ventures and
associates
|
731
|
632
|
|
10
|
16
|
|
741
|
648
|
Other taxation and social security
receivable
|
160
|
147
|
|
13
|
9
|
|
173
|
156
|
Costs to obtain contracts with
customers 3
|
7
|
12
|
|
109
|
67
|
|
116
|
79
|
Other receivables and similar
assets 4
|
478
|
617
|
|
45
|
55
|
|
523
|
672
|
|
6,527
|
5,598
|
|
1,596
|
1,338
|
|
8,123
|
6,936
|
1 Trade receivables and other assets have been presented
on the face of the balance sheet in line with the operating cycle
of the business. Further disclosure is included in the table
above and relate to amounts not expected to be received in the next
12 months in line with specific customer payment arrangements,
including customers on payment plans
2
At 31 December 2023, prepayments to RRSA partners
for LTSA parts have been shown separately to provide additional
detail for the reader. These amounts reflect the contractual share
of EFH flows from customers paid to RRSA partners in return for the
supply of parts in future periods under long-term supply contracts.
In the prior year, these amounts were included within prepayments.
There is no change to the total amount of trade receivables and
other assets
3
These are amortised over the term of the related
contract in line with engine deliveries, resulting in amortisation
of £9m (2022: £11m) in the year. There were no impairment
losses
4 Other receivables includes unbilled recoveries
relating to completed overhaul activity where the right to
consideration is unconditional
The Group has adopted the
simplified approach to provide for expected credit losses (ECLs),
measuring the loss allowance at a probability weighted amount
incorporated by using credit ratings which are publicly available,
or through internal risk assessments derived using the customer's
latest available financial information.
The ECLs for trade receivables and
other assets has decreased by £104m to £242m (2022: increased by
£87m to £346m). This movement is mainly driven by the Civil
Aerospace business of £(100)m, of which £(82)m relates to specific
customers and £(18)m relates to updates to the recoverability of
other receivables.
The movements of the Group's ECLs
provision are as follows:
|
2023
|
2022
|
|
£m
|
£m
|
At 1 January
|
(346)
|
(259)
|
Increases in loss allowance
recognised in the income statement during the year
|
(80)
|
(118)
|
Loss allowance utilised
|
34
|
22
|
Releases of loss allowance
previously provided
|
128
|
45
|
Exchange differences
|
22
|
(36)
|
At 31 December
|
(242)
|
(346)
|
13 Contract assets and
liabilities
|
Current
|
|
Non-current
1
|
|
Total
|
|
2023
£m
|
2022
£m
|
|
2023
£m
|
2022
£m
|
|
2023
£m
|
2022
£m
|
Contract assets
|
|
|
|
|
|
|
|
|
Contract assets with
customers
|
534
|
621
|
|
481
|
617
|
|
1,015
|
1,238
|
Participation fee contract
assets
|
26
|
28
|
|
201
|
215
|
|
227
|
243
|
|
560
|
649
|
|
682
|
832
|
|
1,242
|
1,481
|
1 Contract assets and contract
liabilities have been presented on the face of the balance sheet in
line with the operating cycle of the business. Contract liabilities
are further split according to when the related performance
obligation is expected to be satisfied and therefore when revenue
is estimated to be recognised in the income statement. Further
disclosure of contract assets is provided in the table above, which
shows within current the element of consideration that will become
unconditional in the next year
The balance includes £494m (2022:
£885m) of Civil Aerospace LTSA assets and £410m (2022: £263m)
Defence LTSA assets.
The decrease in the Civil
Aerospace balance is due to higher invoicing than revenue
recognised in relation to the completion of performance obligations
on those contracts with a contract asset balance. Revenue
recognised relating to performance obligations satisfied in
previous years was £64m (2022: £26m) in Civil Aerospace.
The increase in the Defence
balance is due to revenue recognition in relation to performance
obligations completed being higher than the payments received from
the customer.
No impairment losses in relation
to these contract assets (2022: none) have arisen during the
year.
Participation fee contract assets
have reduced by £16m (2022: £3m) due to amortisation of £15m and
foreign exchange on consolidation of £1m.
The absolute value of ECLs for
contract assets has decreased by £15m to £6m (2022: £21m).
13 Contract assets and
liabilities continued
|
Current
|
|
Non-current
|
|
Total
|
|
2023
£m
|
2022
£m
|
|
2023
£m
|
2022
£m
|
|
2023
£m
|
2022
£m
|
Contract liabilities
|
6,098
|
4,825
|
|
8,438
|
7,337
|
|
14,536
|
12,162
|
During the year £3,813m (2022:
£3,321m) of the opening contract liability was recognised as
revenue.
Contract liabilities have
increased by £2,374m. The movement in the Group balance is
primarily as a result of increases in Civil Aerospace of £1,865m
and Defence of £381m. The Civil Aerospace increase is primarily a
result of growth in LTSA liabilities of £1,317m to £9,574m (2022:
£8,257m) driven by price escalation, the continued rise in EFHs and
the associated customer receipts, as well as commercial discipline
driving more timely invoicing and recovery of contractual fees. In
2023 contract liabilities increased by £168m as a result of revenue
recognised in relation to performance obligations satisfied in
previous years (2022: £334m decrease). The increase in Defence is
from the receipt of deposits in advance of performance obligations
being completed.
14
Cash and cash
equivalents
|
2023
|
2022
|
|
£m
|
£m
|
Cash at bank and in
hand
|
739
|
847
|
Money-market funds
|
1,077
|
34
|
Short-term deposits
|
1,968
|
1,726
|
Cash and cash equivalents per the
balance sheet
|
3,784
|
2,607
|
Overdrafts (note 15)
|
(53)
|
(2)
|
Cash and cash equivalents per cash
flow statement (page 14)
|
3,731
|
2,605
|
Cash and cash equivalents at 31
December 2023 includes £279m (2022: £235m) that is not available
for general use by the Group. This balance includes £40m (2022:
£40m) which is held in an account that is exclusively for the
general use of Rolls-Royce Submarines Limited and £195m (2022:
£138m) which is held exclusively for the use of Rolls-Royce Saudi
Arabia Limited. This cash is not available for use by other
entities within the Group. The remaining balance 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 and
lease liabilities
|
Current
|
|
Non-current
|
|
Total
|
|
2023
£m
|
2022
£m
|
|
2023
£m
|
2022
£m
|
|
2023
£m
|
2022
£m
|
Unsecured
|
|
|
|
|
|
|
|
|
Overdrafts
|
53
|
2
|
|
-
|
-
|
|
53
|
2
|
Bank loans
|
3
|
1
|
|
-
|
-
|
|
3
|
1
|
Loan notes
|
475
|
-
|
|
3,559
|
4,095
|
|
4,034
|
4,095
|
Other loans
|
-
|
-
|
|
9
|
10
|
|
9
|
10
|
Total unsecured
|
531
|
3
|
|
3,568
|
4,105
|
|
4,099
|
4,108
|
|
|
|
|
|
|
|
|
|
Lease liabilities
|
278
|
355
|
|
1,382
|
1,492
|
|
1,660
|
1,847
|
|
|
|
|
|
|
|
|
|
Total borrowings and lease liabilities
|
809
|
358
|
|
4,950
|
5,597
|
|
5,759
|
5,955
|
All outstanding items described as
loan notes above are listed on the London Stock Exchange
15 Borrowings and
lease liabilities continued
The Group has access to the
following undrawn committed borrowing facilities at the end of the
year:
|
|
|
|
|
|
|
2023
£m
|
2022
£m
|
Expiring within one
year
|
|
|
|
|
|
|
-
|
−
|
Expiring after one year
|
|
|
|
|
|
|
3,500
|
5,500
|
Total undrawn facilities
|
|
|
|
|
|
|
3,500
|
5,500
|
Further details can be found in
the going concern statement on page 19
During the year to 31 December
2023, the Group cancelled its undrawn £1bn bank loan facility which
was due to mature in January 2024 and its undrawn UK Export Finance
(UKEF) £1bn facility which was due to mature in March 2026. These
facilities had remained undrawn during the year. In addition, the
Group replaced the £2,500m committed bank borrowing facility with a
new £2,500m facility with a maturity date of November 2026 with the
banks having the option to extend with two one-year extension
options (3+1+1).
Under the terms of the £1bn UKEF
loan facility, the Company is restricted from declaring, making or
paying distributions to shareholders unless certain conditions are
satisfied. The conditions are linked to free cash flow performance
in the prior year, and actual and forecast minimum liquidity
levels. At 31 December 2023, these conditions were met but the
Group is not making shareholder distributions. Once the Group is
comfortably within an investment grade profile and the strength of
the balance sheet is assured, the Group is committed to reinstating
and growing shareholder distributions. This loan facility expires
in 2027. The restrictions on distributions do not prevent the
Company from redeeming any unredeemed C Shares issued prior to
March 2021.
16
Leases
Leases as lessee
The net book value of right-of-use
assets at 31 December 2023 was £905m (2022: £1,061m), with a lease
liability of £1,660m (2022: £1,847m), per notes 9 and 15
respectively. Leases that have not yet commenced to which the Group
is committed have a future liability of £5m and consist of mainly
plant and equipment and properties. The consolidated income
statement shows the following amounts relating to
leases:
|
2023
|
2022
|
|
£m
|
£m
|
Land and buildings depreciation
and impairment 1
|
(45)
|
(41)
|
Plant and equipment depreciation
and impairment 2
|
(48)
|
(36)
|
Aircraft and engines depreciation
and impairment 3
|
(241)
|
(210)
|
Total depreciation and impairment charge for right-of-use
assets
|
(334)
|
(287)
|
Adjustment of amounts payable
under residual value guarantees within lease liabilities 3,
4
|
10
|
3
|
Expense relating to short-term
leases of 12 months or less recognised as an expense on a
straight-line basis 2
|
(49)
|
(28)
|
Expense relating to variable lease
payments not included in lease liabilities
3,5
|
(5)
|
(2)
|
Total operating costs
|
(378)
|
(314)
|
Interest expense
6
|
(85)
|
(68)
|
Total lease expense
|
(463)
|
(382)
|
Income from sub-leasing
right-of-use assets
|
31
|
32
|
Total amount recognised in income statement
|
(432)
|
(350)
|
1 Included in cost of sales and
commercial and administration costs depending on the nature and use
of the right-of-use asset
2 Included in cost of sales, commercial and
administration costs, or research and development depending on the
nature and use of the right-of-use asset
3 Included in cost of sales
4 Where the cost of meeting
residual value guarantees is less than that previously estimated,
as costs have been mitigated or liabilities waived by the lessor,
the lease liability has been remeasured. To the extent that the
value of this remeasurement exceeds the value of the right-of use
asset, the reduction in the lease liability is credited to cost of
sales
5 Variable lease payments
primarily arise on a small number of contracts where engine lease
payments are solely dependent upon utilisation rather than a
periodic charge
6 Included in financing
costs
The total cash outflow for leases
in 2023 was £429m (2022: £316m). Of this, £375m related to leases
reflected in the lease liability, £49m to short-term leases where
lease payments are expensed on a straight-line basis and £5m for
variable lease payments where obligations are only due when the
assets are used. The timing difference between income statement
charge and cash flow relates to costs incurred at the end of leases
for residual value guarantees and restoration costs that are
recognised within depreciation over the term of the lease, the most
significant amounts relate to engine leases.
Engine leases in the Civil
Aerospace business often include clauses that require the engines
to be returned to the lessor with specific levels of usable life
remaining or cash payments to the lessor. The costs of meeting
these requirements are included in the lease payments. The amounts
payable are calculated based upon an estimate of the utilisation of
the engines over the lease term, whether the engine is restored to
the required condition by performing an overhaul at our own cost or
through the payments of amounts specified in the contract and any
new contractual arrangements arising when the current lease
contracts end. Amounts due can vary depending on the level of
utilisation of the engines, overhaul activity prior to the end of
the contract, and decisions taken on whether ongoing access to the
assets is required at the end of the lease term. During the year,
adjustments to return conditions at the end of leases resulted in a
credit of £10m to the income statement. The lease liability at 31
December 2023 included £354m relating to the cost of meeting these
residual value guarantees in the Civil Aerospace business. Up to
£76m is payable in the next 12 months, £185m is due over the
following four years and the remaining balance after five
years.
17 Trade payables and
other liabilities
|
Current
|
|
Non-current
|
|
Total
|
|
2023
£m
|
2022
£m
|
|
2023
£m
|
2022
£m
|
|
2023
£m
|
2022
£m
|
Trade payables
|
1,608
|
1,735
|
|
-
|
-
|
|
1,608
|
1,735
|
Accruals
|
1,134
|
1,477
|
|
96
|
199
|
|
1,230
|
1,676
|
Customer discounts
1
|
1,018
|
828
|
|
773
|
1,016
|
|
1,791
|
1,844
|
Payables due on RRSAs
|
1,713
|
1,392
|
|
-
|
-
|
|
1,713
|
1,392
|
Deferred receipts from RRSA
workshare partners
|
56
|
32
|
|
774
|
829
|
|
830
|
861
|
Amounts owed to joint ventures and
associates
|
542
|
567
|
|
-
|
-
|
|
542
|
567
|
Government grants
2
|
30
|
21
|
|
54
|
41
|
|
84
|
62
|
Other taxation and social
security
|
92
|
88
|
|
-
|
-
|
|
92
|
88
|
Other payables
3
|
703
|
843
|
|
230
|
279
|
|
933
|
1,122
|
|
6,896
|
6,983
|
|
1,927
|
2,364
|
|
8,823
|
9,347
|
1 Customer
discounts include customer concession credits. Revenue recognised
comprises sales to the Group's customers after such items. Customer
concession credits are discounts given to a customer upon the sale
of goods or services. A liability is recognised to correspond with
the recognition of revenue when the performance obligation is met.
The largest element of the balance, approximately £1.2bn arises
when the Civil business delivers its engines to an airframer. A
concession is often payable to the end customer (e.g. an airline)
on delivery of the aircraft from the airframer. The concession
amounts are known and the payment date is reasonably certain, hence
there is no significant judgement or uncertainty associated with
the timing of these amounts. Warranty credits of £364m and customer
concessions of £1,480m have been represented at 31 December 2023 to
be included within customer discounts to better reflect the nature
of these balances
2
During the year, £74m, (2022: £20m) of government
grants were released to the income statement
3 Other payables
includes payroll liabilities and HM Government UK levies
The Group's payment terms with
suppliers vary on the products and services being sourced, the
competitive global markets the Group operates in and other
commercial aspects of suppliers' relationships. Industry average
payment terms vary between 90 to 120 days. The Group offers reduced
payment terms for smaller suppliers, who are typically on 75-day
payment terms, so that they are paid in 30 days. In line with civil
aviation industry practice, the Group offers a supply chain
financing (SCF) programme in partnership with banks to enable
suppliers, including joint ventures who are on 90-day standard
payment terms, to receive their payments sooner. The SCF programme
is available to suppliers at their discretion and does not change
rights and obligations with suppliers nor the timing of payment of
suppliers. At 31 December 2023, suppliers had drawn £418m under the
SCF scheme (2022: £422m) of which £154m (2022: £180m) is
drawn by joint ventures. The Group, in some cases, settles the
costs incurred by joint venture as a result of them utilising
either the Group offered SCF arrangement, or an alternative SCF
arrangement. During the year to 31 December 2023, the Group
incurred costs of £28m (2022: £12m) to settle the costs incurred by
joint ventures as a result of them utilising the Group offered SCF
arrangement. These costs are included within other financing
charges.
18 Financial assets
and liabilities
Carrying value of other financial assets and
liabilities
|
Derivatives
|
|
|
|
|
|
|
Foreign exchange
contracts
£m
|
Commodity
contracts
£m
|
Interest rate contracts
1
£m
|
|
Total
derivatives
£m
|
Financial
RRSAs
£m
|
Other
£m
|
C Shares
£m
|
Total
£m
|
At 31 December 2023
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
72
|
-
|
254
|
|
326
|
-
|
34
|
-
|
360
|
Current assets
|
10
|
6
|
8
|
|
24
|
-
|
10
|
-
|
34
|
Assets
|
82
|
6
|
262
|
|
350
|
-
|
44
|
-
|
394
|
Current liabilities
|
(351)
|
(10)
|
(13)
|
|
(374)
|
(10)
|
(41)
|
(23)
|
(448)
|
Non-current liabilities
|
(1,766)
|
(15)
|
(73)
|
|
(1,854)
|
(7)
|
(122)
|
-
|
(1,983)
|
Liabilities
|
(2,117)
|
(25)
|
(86)
|
|
(2,228)
|
(17)
|
(163)
|
(23)
|
(2,431)
|
|
(2,035)
|
(19)
|
176
|
|
(1,878)
|
(17)
|
(119)
|
(23)
|
(2,037)
|
|
|
|
|
|
|
|
|
|
|
At 31 December 2022
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
58
|
25
|
436
|
|
519
|
-
|
23
|
-
|
542
|
Current assets
|
87
|
40
|
2
|
|
129
|
-
|
12
|
-
|
141
|
Assets
|
145
|
65
|
438
|
|
648
|
-
|
35
|
-
|
683
|
Current liabilities
|
(966)
|
(1)
|
(2)
|
|
(969)
|
(8)
|
(15)
|
(24)
|
(1,016)
|
Non-current liabilities
|
(3,030)
|
(2)
|
(98)
|
|
(3,130)
|
(14)
|
(86)
|
-
|
(3,230)
|
Liabilities
|
(3,996)
|
(3)
|
(100)
|
|
(4,099)
|
(22)
|
(101)
|
(24)
|
(4,246)
|
|
(3,851)
|
62
|
338
|
|
(3,451)
|
(22)
|
(66)
|
(24)
|
(3,563)
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
1 Includes the
foreign exchange impact of cross-currency interest rate
swaps
18 Financial assets
and liabilities continued
Derivative financial instruments
Movements in fair value of
derivative financial assets and liabilities were as
follows:
|
Year ended 31 December
2023
£m
|
Year
ended
31
December 2022
£m
|
|
Foreign exchange
instruments
£m
|
Commodity
instruments
£m
|
Interest rate instruments -
hedge accounted 1
£m
|
Interest rate instruments -
non-hedge accounted
£m
|
|
Total
|
Total
|
At 1 January
|
(3,851)
|
62
|
125
|
213
|
|
(3,451)
|
(2,913)
|
Movements in fair value
hedges
|
-
|
-
|
(71)
|
-
|
|
(71)
|
(74)
|
Movements in cash flow
hedges
|
-
|
-
|
(78)
|
-
|
|
(78)
|
86
|
Movements in other derivative
contracts 2
|
574
|
(60)
|
-
|
1
|
|
515
|
(1,579)
|
Contracts settled
|
1,242
|
(21)
|
69
|
(83)
|
|
1,207
|
1,029
|
At 31 December
|
(2,035)
|
(19)
|
45
|
131
|
|
(1,878)
|
(3,451)
|
1 Includes the foreign exchange impact of cross-currency
interest rate swaps
2 Included in net financing
Financial risk and revenue sharing arrangements (RRSAs) and
other financial assets and liabilities
Movements in the carrying values
were as follows:
|
Financial
RRSAs
|
|
Other -
assets
|
|
Other -
liabilities
|
|
2023
£m
|
2022
£m
|
|
2023
£m
|
2022
£m
|
|
2023
£m
|
2022
£m
|
At 1 January
|
(22)
|
(12)
|
|
25
|
15
|
|
(101)
|
(75)
|
Exchange adjustments included in
OCI
|
1
|
(2)
|
|
-
|
2
|
|
2
|
(4)
|
Additions
|
-
|
(6)
|
|
-
|
11
|
|
(80)
|
(35)
|
Financing charge
1
|
-
|
-
|
|
-
|
-
|
|
(8)
|
(4)
|
Excluded from underlying
profit:
|
|
|
|
|
|
|
|
|
Changes in forecast payments
1
|
(1)
|
(7)
|
|
-
|
-
|
|
-
|
-
|
Cash paid
|
5
|
5
|
|
-
|
(3)
|
|
11
|
8
|
Other
|
-
|
-
|
|
-
|
-
|
|
13
|
9
|
At 31 December
|
(17)
|
(22)
|
|
25
|
25
|
|
(163)
|
(101)
|
1 Included
in net financing
18 Financial assets
and liabilities continued
Fair values of financial
instruments equate to book values with the following
exceptions:
|
2023
|
|
2022
|
|
Book value
£m
|
Fair value
£m
|
|
Book
value
£m
|
Fair
value
£m
|
Other assets - Level 2
|
12
|
12
|
|
-
|
-
|
Borrowings - Level 1
|
(4,034)
|
(3,977)
|
|
(4,095)
|
(3,812)
|
Borrowings - Level 2
|
(65)
|
(67)
|
|
(13)
|
(15)
|
Financial RRSAs - Level 3
|
(17)
|
(16)
|
|
(22)
|
(22)
|
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. There have been no transfers during the
year from or to Level 3 valuation. Fair values have been determined
with reference to available market information at the balance sheet
date, using the methodologies described below.
-
Non-current investments primarily comprise
unconsolidated companies where fair value approximates to the book
value. Listed investments are valued using
Level 1 methodology.
-
Money market funds, included within cash and cash
equivalents, are valued using Level 1 methodology. Fair values are
assumed to approximately equal 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.
-
The fair values of held to collect trade
receivables and similar items, trade payables and other similar
items, other
non-derivative financial assets and liabilities, short-term
investments and cash and cash equivalents 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.
-
Fair values of derivative financial assets and
liabilities and trade receivable held to collect or sell are
estimated by discounting expected future contractual cash flows
using prevailing interest rate curves or cost of borrowing, as
appropriate. 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).
-
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) or
by discounting contractual future cash flows (Level 2 as defined by
IFRS 13).
-
The fair values of RRSAs and other
liabilities, which primarily includes
royalties to be paid to airframers, 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).
-
Other assets and 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).
-
In addition, other assets can be included on the
balance sheet at fair value, derived from observable market prices
or latest forecast (Level 2/3 as defined by IFRS 13). At 31
December 2023, Level 3 assets totalled £25m (31 December 2022:
£25m).
-
The fair value of lease liabilities are estimated
by discounting future contractual cash flows using either the
interest rate implicit in the lease or the Group's incremental cost
of borrowing (Level 2 as defined by IFRS 13).
19 Provisions for
liabilities and charges
|
At
1 January
2023
|
Charged to income statement
1
|
Reversed
|
Utilised
|
Transfer to held for
sale
|
Exchange
differences
|
At 31 December
2023
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
Contract losses
|
1,592
|
500
|
(433)
|
(185)
|
-
|
(2)
|
1,472
|
Warranty and guarantees
|
317
|
112
|
(14)
|
(91)
|
(8)
|
(10)
|
306
|
Trent 1000 wastage
costs
|
179
|
45
|
(29)
|
(79)
|
-
|
-
|
116
|
Employer liability
claims
|
33
|
1
|
(7)
|
(3)
|
-
|
-
|
24
|
Tax related interest and
penalties
|
16
|
9
|
-
|
(2)
|
-
|
(1)
|
22
|
Claims and litigation
|
122
|
71
|
(39)
|
(111)
|
-
|
-
|
43
|
Other
|
74
|
26
|
(18)
|
(35)
|
-
|
(1)
|
46
|
|
2,333
|
764
|
(540)
|
(506)
|
(8)
|
(14)
|
2,029
|
Current liabilities
|
632
|
|
|
|
|
|
532
|
Non-current liabilities
|
1,701
|
|
|
|
|
|
1,497
|
1
The charge to the
income statement within net financing includes £59m (2022: £33m) as
a result of the unwinding of the discounting of provisions
previously recognised
Contract losses
Provisions for contract losses are
recorded when the direct costs to fulfil a contract are assessed as
being greater than the expected recoverable amount. Provisions for
contract losses are measured on a fully costed basis and during the
year, £185m of the provision has been utilised. Additional contract
losses for the Group of £500m have been recognised as a result of
increases in the estimates of future LTSA costs, due to
inflationary increases and costs associated with supply chain
challenges. Contract losses of £433m previously recognised have
been reversed following the renegotiation of some major contracts
resulting in contract extensions and improved margins. The Group
continues to monitor the contract loss provision for changes in the
market and revises the provision as required. The value of the
remaining contract loss provisions reflect, in each case, the
single most likely outcome. The provisions are expected to be
utilised over the term of the customer contracts, typically within
eight to 16 years.
IAS 37 requires a company to
recognise any impairment loss that has occurred on assets used in
fulfilling the contract before recognising a separate provision for
an onerous contract. No impairments were required for any of the
assets used solely for the fulfilment of onerous contracts.
However, as per note 9, a number of aero engine
lease right-of-use assets were impaired during the year and these
will be used on a range of contracts some of which are
onerous.
The Trent 1000 intangible assets
(certification costs and development costs) and Trent 1000 spare
engines (right of use and owned) are tested for impairment as part
of the Trent 1000 Cash generating unit (CGU) and no impairment was
required.
Warranty and guarantees
Provisions for warranty and
guarantees relate to products sold and are calculated based on an
assessment of the remediation costs related to future claims based
on past experience. During the year, £112m of additional provision
has been recognised representing the single best estimate of
warranty and guarantee costs to be incurred on relevant sales and
£91m of previously recognised costs have been utilised. The
provision generally covers a period of up to three
years.
Trent 1000 wastage costs
In November 2019, the Group
announced the outcome of testing and a thorough technical and
financial review of the Trent 1000 TEN programme, following
technical issues which were identified in 2019, resulting in a
revised timeline and a more conservative estimate of durability for
the improved HP turbine blade for the TEN variant. During the year,
the Group has utilised £79m of the Trent 1000 wastage costs
provision. This represents customer disruption costs and
remediation shop visit costs attributable to the wastage costs
provision. During the year, a net charge to the provision of £16m
has been recognised reflecting the discount unwind and updates to
forecasted costs based on the latest available information.
The value of the remaining provision reflects the single most
likely outcome and is expected to be utilised in 2024.
Employer liability claims
The provision relating to employer
healthcare liability claims is as a result of an historical
insolvency of the previous provider and is expected to be utilised
over the next 30 years.
19 Provisions for
liabilities and charges continued
Claims and litigation
Provisions for claims and
litigation represent ongoing matters where the outcome for the
Group may be unfavourable. On
3 July 2023, judgement in respect of a legal claim was rendered by
the High Court, resulting in a charge to the income statement of
£34m. The judgment was satisfied in August 2023 resulting in a £92m
utilisation. The value of any remaining provisions reflects the
single most likely outcome in each
case.
The balance also includes the best
estimate of any retained exposure by the Group's captive insurance
company for any claims that have been incurred but not yet reported
to the Group as that entity retains a portion of the exposures it
insures on behalf of the remainder of the Group. Such exposures
include policies for aviation claims, employer liabilities and
healthcare claims. Significant delays can 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 if the frequency or severity of claims differs
from estimated.
Other
Other items are individually
immaterial. The value of any remaining provisions reflects the
single most likely outcome in each
case.
20 Post-retirement
benefits
The net post-retirement deficit as
at 31 December 2023 is calculated on a year to date basis, using
the latest valuation as at 31 March 2023 for the UK scheme, updated
to 31 December 2023 for the principal schemes.
Amounts recognised in the balance sheet in respect of defined
benefit schemes
|
UK schemes
|
Overseas
schemes
|
Total
|
|
£m
|
£m
|
£m
|
At 1 January 2023
|
594
|
(1,014)
|
(420)
|
Exchange adjustments
|
-
|
33
|
33
|
Current service cost and
administrative expenses
|
(8)
|
(33)
|
(41)
|
Past service cost
|
-
|
2
|
2
|
Financing recognised in the income
statement
|
29
|
(41)
|
(12)
|
Contributions by
employer
|
-
|
69
|
69
|
Actuarial gains/(losses)
recognised in OCI 1
|
164
|
(62)
|
102
|
Returns on plan assets excluding
financing recognised in OCI 1
|
(12)
|
26
|
14
|
Transfers
|
-
|
(2)
|
(2)
|
Transfer to held for
sale
|
-
|
2
|
2
|
At 31 December 2023
|
767
|
(1,020)
|
(253)
|
Post-retirement scheme surpluses -
included in non-current assets 2
|
767
|
15
|
782
|
Post-retirement scheme deficits -
included in non-current liabilities
|
-
|
(1,035)
|
(1,035)
|
1
Actuarial gains and losses arising from financial
assumptions arise primarily due to changes in discount rate and
inflation
2
The surplus in the Rolls-Royce UK Pension Fund (RRUKPF)
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
Changes to defined benefit schemes
During the year, Power Systems
continued to replace a number of their existing defined benefit
schemes with a new company pension scheme to offer payment options
at time of retirement for other employee populations not included
in 2022. The new system, which is similar in structure to a defined
contribution scheme with a guarantee from the company in accordance
with German legislation, significantly reduces interest risks and
longevity risks for the employer for future commitments. A past
service cost of £3m has been recognised within non-underlying
operating profit in relation to this new scheme.
In addition, Rolls-Royce Power
Systems concluded a works agreement resulting in a change to
jubilee benefits offered to employees based in Friedrichshafen. A
past service credit of £5m has been recognised within
non-underlying operating profit.
Other
The Group is aware of a UK High
Court legal ruling in June 2023 between Virgin Media Limited and
NTL Pension Trustees II Limited, which decided that certain
historic rule amendments were invalid if they were not accompanied
by the actuarial certifications. The ruling is subject to appeal
and the Group is monitoring developments. Whilst this ruling was in
respect of another scheme, any final judgment would need to be
reviewed for its relevance to the RRUKPF scheme. As yet the RRUKPF
pension advisers have not completed any analysis and, as the
outcome of the appeal is still unknown, no adjustments have been
made to the Condensed Consolidated Financial Statements at 31
December 2023.
20 Post-retirement
benefits continued
Contributions
The Group expects to contribute
approximately £73m to its overseas defined benefit schemes in 2024
(2023: £70m).
In the UK, any cash funding of
RRUKPF is based on a statutory triennial funding valuation process.
The Group and the Trustee negotiate and agree the actuarial
assumptions used to value the liabilities (Technical Provisions);
assumptions which may differ from those used for accounting
are 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 Provisions discount rate is
currently based upon UK Government bond yields plus a margin (0.5%
at the 31 March 2023 valuation) rather than being based on yields
of AA corporate bonds. Once each valuation is signed, a Schedule of
Contributions (SoC) must be agreed which sets out the cash
contributions to be paid. The most recent valuation, as at 31 March
2023, agreed by the Trustee in October 2023, showed that the RRUKPF
was estimated to be 115% funded on the Technical Provisions basis
(estimated to be 113% at 31 December 2023). All cash due has been
paid in full and the current SoC does not currently require any
cash contributions to be made by the Group.
21 Contingent
liabilities and commitments
In January 2017, after full
cooperation, the Company concluded deferred prosecution agreements
(DPA) with the SFO and the US Department of Justice (DoJ) and a
leniency agreement with the MPF, the Brazilian federal prosecutors.
The terms of both DPAs have now expired. The Company has submitted
a final report to the Controller General, Brazil (CGU) under the
terms of a two-year leniency agreement signed in October 2021
relating to the same historical matters. Certain authorities are
investigating members of the Group for matters relating to
misconduct in relation to historical matters. The Group is
responding appropriately. Action may be taken by further
authorities against the Group or individuals. In addition, the
Group could still be affected by actions from other parties,
including customers, customers' financiers and the Company's
current and former investors, including certain potential claims in
respect of the Group's historical ethics and compliance disclosures
which have been notified to the Group. The Directors are not
currently aware of any matters that are likely to lead to a
material financial loss over and above the penalties imposed to
date, but cannot anticipate all the possible actions that may be
taken or their potential consequences.
The Group has, in the normal
course of business, entered into arrangements in respect of export
finance, performance bonds, grant funding, countertrade
obligations and minor miscellaneous items, which could result in
potential outflows if the requirements related to those
arrangements are not met. Various Group undertakings are party to
legal actions and claims (including with tax authorities) which
arise in the ordinary course of business, some of which are for
substantial amounts.
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 $0.9bn
(2022: $1.2bn) (on a discounted basis) to provide facilities to
enable customers to purchase aircraft (of which approximately
$0.7bn could be called during 2024). 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. Significant events
impacting the international aircraft financing market, the failure
by customers to meet their obligations under such financing
agreements, or inadequate provisions for customer financing
liabilities may adversely affect the Group's financial
position.
Customer financing provisions are
made to cover guarantees provided for asset value and/or financing
where it is probable that a payment will be made. These are
reported on a discounted basis at the Group's borrowing rate to
better reflect the time span over which these exposures could
arise. The values of aircraft providing security are based on
advice from a specialist aircraft appraiser. There were no
provisions for customer financing provisions at 31 December 2023 or
31 December 2022.
The Group has responded
appropriately to the Russia-Ukraine conflict to comply with
international sanctions and export control regime, and to continue
to implement the business decision to exit from Russia. The Group
could be subject to action by impacted customers, suppliers and
other contract parties.
While the outcome of the above
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.
22 Related party
transactions
|
2023
£m
|
2022
£m
|
Sale of goods and
services
|
6,700
|
5,074
|
Purchases of goods and services
1
|
(7,471)
|
(5,577)
|
Lease payments to joint ventures
and associates
|
(244)
|
(163)
|
Guarantees of joint arrangements'
and associates' borrowings
|
2
|
3
|
Guarantees of non-wholly owned
subsidiaries' borrowings
|
3
|
3
|
Dividends received from joint
ventures and associates
|
54
|
73
|
Other income received from joint
ventures and associates
|
6
|
2
|
1 The Group has both sales and purchasing arrangements with its
maintenance, repair and overhaul joint ventures. As part of
this arrangement, the Group issues and receives credit notes usable
against amounts receivable and payable to these related parties.
Purchases of goods and services from related parties are
presented to be shown gross of these concessions. This is
consistent with the presentation of sales to related parties.
Purchases from related parties incurred during the year to 31
December 2022 have been represented on this basis resulting in an
increase to this balance of £662m
Included in sales of goods and
services to related parties are sales of spare engines amounting to
£48m (2022: £19m). Profit recognised in the year on such sales
amounted to £88m (2022: £50m), including profit on current year
sales and recognition of profit deferred on similar sales in
previous years. Cash receipts relating to the sale of spare engines
amounted to £73m (2022: £40m).
Included in other financing
charges in the income statement are interest costs of £34m (2022:
£17m) incurred during the year which have been settled by the Group
on behalf of joint ventures, including the £28m of costs incurred
of using the Group offered SCF arrangement set out in note
17.
23 Acquisitions,
disposals, held for sale and discontinued
operations
Acquisitions
On 30 June 2023, the Group
completed its acquisition of Team Italia/Onyx Marine SRL for a cash
consideration of £14m. Team Italia specialises in yacht bridges and
marine navigation and automation systems. The acquisition will
provide key technology for marine automation systems and will
strengthen Power Systems' position as a yacht market leader. The
acquisition price of £14m has been allocated to £8m of goodwill,
£2m of customer relationships, £2m to right-of-use assets and £2m
to other current assets and liabilities.
Disposals
During the year, the Group
divested their 49% shareholding in joint venture, Shanxi North MTU
Diesel Co. Limited to the current JV partner for proceeds of £5m.
The carrying value of the Group's investment that was disposed was
£5m. This has been derecognised on the disposal resulting in nil
profit on disposal.
Reconciliation of profit on disposal of businesses in
continuing operations to the income statement:
|
Total
|
|
|
|
|
|
|
£m
|
Profit before taxation on
disposal
|
|
|
|
|
-
|
Cumulative currency translation loss
on liquidation of joint venture
|
|
|
|
(1)
|
Adjustment to consideration on
disposals completed in prior periods
|
|
|
|
2
|
Profit on disposal of businesses per income
statement
|
|
1
|
Reconciliation of cash flow on acquisition and disposal of
businesses to the cash flow statement:
|
Total
|
|
|
|
|
|
|
£m
|
Proceeds on disposal (see
above)
|
|
|
|
|
|
5
|
Cash outflow on
acquisitions
|
|
|
|
|
|
(14)
|
Cash outflow on disposals completed
in prior periods
|
|
|
|
|
|
(9)
|
Cash flow on acquisition and disposal of businesses per cash
flow statement
|
|
(18)
|
Businesses held for sale
At 31 December 2023, the Group was
in positive discussions with Deutz AG for the sale of the
off-highway engines business in the lower power range based in
Power Systems. The business is available for sale in its current
condition and the sale is considered highly probable based on the
agreement-in-principle reached as at 31 December 2023. In line with
IFRS 5, the assets and liabilities related to the business have
been classified as held for sale and measured at the lower of their
carrying value or fair value less costs to sell, resulting in a £7m
impairment reversal.
The table below summarises the
categories of assets and liabilities classified as held for sale at
31 December 2023. There were no assets or liabilities held for sale
at 31 December 2022.
|
|
|
|
2023
|
|
|
|
|
£m
|
Intangible assets
|
|
|
|
51
|
Inventory
|
|
|
|
11
|
Trade receivables and other
assets
|
|
|
|
47
|
Assets held for sale
|
|
|
|
109
|
Trade payables and other
liabilities
|
|
|
|
(41)
|
Contract liabilities
|
|
|
|
(4)
|
Provisions for liabilities and
charges
|
|
|
|
(8)
|
Post-retirement scheme
deficits
|
|
|
|
(2)
|
Liabilities associated with assets held for
sale
|
|
|
|
(55)
|
Net assets held for sale
|
|
|
|
54
|
23 Acquisitions,
disposals, held for sale and discontinued operations continued
Discontinued operations
ITP Aero represented a separate
major line of business and was classified as a disposal group held
for sale up to the date of disposal. Therefore the results up to 15
September 2022, in line with IFRS 5, were presented as discontinued
operations.
The financial performance and cash
flow information presented reflects the operations for the year
that have been classified as discontinued operations.
|
|
|
2023
|
2022
|
|
|
|
£m
|
£m
|
Revenue
|
|
|
−
|
275
|
Operating profit 1
|
|
|
−
|
86
|
Profit before taxation 1
|
|
|
−
|
78
|
Income tax charge
1
|
|
|
−
|
(10)
|
Profit for the year from discontinued operations on ordinary
activities
|
|
|
−
|
68
|
Costs on disposal of discontinued
operations 2
|
|
|
−
|
−
|
Loss on disposal of discontinued
operations
|
|
|
−
|
(148)
|
Profit for the year from discontinued
operations
|
|
|
−
|
(80)
|
|
|
|
|
|
Net cash inflow from operating
activities 2
|
|
|
−
|
85
|
Net cash outflow from investing
activities 2
|
|
|
−
|
(67)
|
Net cash outflow from financing
activities
|
|
|
−
|
(25)
|
Exchange gains
|
|
|
−
|
−
|
Net
change in cash and cash equivalents
|
|
|
−
|
(7)
|
1
Profit/(loss) from discontinued operations on
ordinary activities is presented net of intercompany trading
eliminations and related consolidation adjustments
2
Cash flows from investing activities include £nil
(2022: £42m) costs of disposal paid during the year that are not a
movement in the cash balance of the disposal group as they were
borne centrally
24 Derivation of
summary funds flow statement
|
2023
|
|
2022
|
|
Cash flow
|
Impact of hedge
book
|
Impact of acquisition
accounting
|
Impact of other
non-underlying items
|
Funds
flow
|
|
Funds flow
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
£m
|
Operating profit
|
1,944
|
(475)
|
50
|
71
|
1,590
|
|
652
|
Operating profit from discontinued
operations
|
−
|
−
|
−
|
−
|
−
|
|
86
|
Depreciation, amortisation and
impairment
|
1,019
|
−
|
(50)
|
9
|
978
|
|
953
|
Movement in provisions
|
(325)
|
46
|
−
|
21
|
(258)
|
|
(23)
|
Movement in Civil LTSA
balance
|
1,708
|
(377)
|
−
|
−
|
1,331
|
|
792
|
Movement in prepayments to RRSAs for
LTSA parts
|
(315)
|
63
|
−
|
−
|
(252)
|
|
(8)
|
Settlement of excess
derivatives
|
(389)
|
−
|
−
|
−
|
(389)
|
|
(326)
|
(Profit)/loss on disposal of
property, plant and equipment 1
|
18
|
−
|
−
|
−
|
18
|
|
18
|
Joint venture trading
1
|
(119)
|
−
|
−
|
−
|
(119)
|
|
25
|
Interest received
|
159
|
−
|
−
|
−
|
159
|
|
36
|
Contributions to defined benefit
schemes in excess of underlying operating profit charge
1
|
(28)
|
−
|
−
|
2
|
(26)
|
|
(32)
|
Share-based payments
1
|
66
|
−
|
−
|
−
|
66
|
|
47
|
Other 1
|
−
|
(8)
|
−
|
1
|
(7)
|
|
(53)
|
Operating cash flow before working capital and taxation
2
|
3,738
|
(751)
|
−
|
104
|
3,091
|
|
2,167
|
Increase in inventories
|
(200)
|
−
|
−
|
−
|
(200)
|
|
(887)
|
Movement in trade
receivables/payables and other assets/liabilities (excluding
prepayments to RRSAs for LTSA parts) 3
|
(2,090)
|
(164)
|
−
|
(37)
|
(2,291)
|
|
(745)
|
Movement in contract
assets/liabilities
(excluding Civil LTSA) 3
|
995
|
51
|
−
|
−
|
1,046
|
|
892
|
Revaluation of trading assets
(excluding exceptional items) 3
|
206
|
(10)
|
−
|
−
|
196
|
|
(521)
|
Realised derivatives in financing
3
|
853
|
−
|
−
|
−
|
853
|
|
737
|
Cash flows on other financial assets
and liabilities held for operating purposes
|
(845)
|
853
|
−
|
−
|
8
|
|
77
|
Income tax
|
(172)
|
−
|
−
|
−
|
(172)
|
|
(174)
|
Cash from operating activities 2
|
2,485
|
(21)
|
−
|
67
|
2,531
|
|
1,546
|
Capital element of lease
payments
|
(291)
|
21
|
−
|
−
|
(270)
|
|
(198)
|
Capital expenditure
|
(699)
|
−
|
−
|
4
|
(695)
|
|
(504)
|
Investment
|
69
|
−
|
−
|
−
|
69
|
|
28
|
Interest paid
|
(333)
|
−
|
−
|
−
|
(333)
|
|
(352)
|
Other (M&A, restructuring and
exceptional transformation costs)
|
54
|
−
|
−
|
(71)
|
(17)
|
|
(29)
|
Free cash flow
|
1,285
|
−
|
−
|
−
|
1,285
|
|
491
|
Of
which is continuing operations
|
1,285
|
|
|
|
1,285
|
|
505
|
1 Included in other operating cash flows in the
summarised free cash flow on page 8
2
The funds flow to 31 December 2022 has been
represented to disclose cash flows on settlement of excess
derivative contracts as cash flows from operating activities. As a
result, operating cash flows before working capital and income tax
during the year to 31 December 2022 have reduced by £(326)m to
£2,167m. Cash flows on settlement of excess derivative contracts
were previously shown after cash from operating activities in
arriving at free cash flow. There is no impact to free cash
flow
3 Included in working capital (excluding Civil LTSA
balance) in the summarised free cash flow on page 8
The comparative information to 31
December 2023 has been presented in a different format to align to
the current year presentation. In some instances, the groupings of
items may have changed.
Free cash flow is a measure of the
financial performance of the businesses' cash flows which is
consistent with the way in which performance is communicated with
the Board. Free cash flow is defined as cash flows from operating
activities including capital expenditure and movements in
investments, capital elements of lease payments, interest paid,
amounts paid relating to the settlement of excess derivatives and
excluding amounts spent or received on activity related to business
acquisitions or disposals and other material exceptional or one-off
cash flows. The Board considers that free cash flow reflects cash
generated from the Group's underlying trading.
Cash flow from operating
activities is determined to be the nearest statutory measure to
free cash flow. The reconciliation between free cash flow and cash
flow from operating activities can be found on page
51.
Reconciliation of Alternative Performance
Measures (APMs) to their statutory equivalent
Alternative Performance Measures (APMs)
Business performance is reviewed
and managed on an underlying basis. These alternative performance
measures reflect the economic substance of trading in the year. In
addition, a number of other APMs are utilised to measure and
monitor the Group's performance.
Definitions and reconciliations to
the relevant statutory measure are included below. All comparative
periods relate to 31 December 2022.
Underlying results from continuing
operations
Underlying results are presented
by recording all relevant revenue and cost of sales transactions at
the average exchange rate achieved on effective settled derivative
contracts in the period that the cash flow occurs. Underlying
results also exclude: the effect of acquisition accounting and
business disposals, impairment of goodwill and other non-current
assets where the reasons for the impairment are outside of normal
operating activities, exceptional items and certain other items
which are market driven and outside of managements control.
Statutory results have been adjusted for discontinued operations
and underlying results from continuing operations have been
presented on the same basis. Further detail can be found in note 2
and note 23.
|
|
2023
£m
|
2022
£m
|
Revenue from continuing
operations
|
Statutory revenue
|
|
16,486
|
13,520
|
Derivative and FX
adjustments
|
|
(1,077)
|
(829)
|
Underlying revenue
|
|
15,409
|
12,691
|
|
Gross profit from continuing
operations
|
Statutory gross profit
|
|
3,620
|
2,757
|
Derivative and FX
adjustments
|
|
(461)
|
(262)
|
Programme exceptional
credits
|
|
(21)
|
(69)
|
Exceptional transformation and
restructuring charges
|
|
55
|
8
|
Acquisition accounting and
M&A
|
|
46
|
53
|
Impairments
|
|
(8)
|
(10)
|
Underlying gross profit
|
|
3,231
|
2,477
|
|
|
|
|
Commercial and
administrative costs from continuing operations
|
|
|
Statutory commercial and
administrative (C&A) costs
|
|
(1,110)
|
(1,077)
|
Derivative and FX
adjustments
|
|
1
|
(2)
|
Exceptional transformation and
restructuring charges
|
|
47
|
39
|
Other underlying
adjustments
|
|
(2)
|
(22)
|
Underlying C&A Costs
|
|
(1,064)
|
(1,062)
|
|
|
|
|
Research and development
costs from continuing operations
|
|
|
Statutory research and development
(R&D) costs
|
|
(739)
|
(891)
|
Derivative and FX
adjustments
|
|
(4)
|
-
|
Acquisition accounting
|
|
4
|
5
|
Underlying R&D costs
|
|
(739)
|
(886)
|
|
|
|
|
Operating profit from
continuing operations
|
|
|
|
Statutory operating
profit
|
|
1,944
|
837
|
Derivative and FX
adjustments
|
|
(475)
|
(264)
|
Programme exceptional
credits
|
|
(21)
|
(69)
|
Exceptional transformation and
restructuring charges
|
|
102
|
47
|
Acquisition accounting and
M&A
|
|
50
|
58
|
Impairments
|
|
(8)
|
65
|
Other underlying
adjustments
|
|
(2)
|
(22)
|
Underlying operating profit
|
|
1,590
|
652
|
Underlying operating profit margin
|
|
10.3%
|
5.1%
|
|
|
|
2023
pence
|
2022
pence
|
Basic EPS from continuing
operations
|
Statutory basic EPS
|
|
28.85
|
(14.24)
|
Effect of underlying adjustments
to profit/(loss) before tax
|
|
(13.94)
|
20.45
|
Related tax effects
|
|
(1.16)
|
(4.26)
|
Basic underlying EPS
|
|
13.75
|
1.95
|
Reconciliation of Alternative Performance
Measures (APMs) to their statutory equivalent continued
Underlying results from discontinued
operations
|
|
2023
£m
|
2022
£m
|
Results from discontinued
operations
|
Profit for the year on ordinary
activities
|
|
−
|
68
|
Loss on disposal of discontinued
operations
|
|
−
|
(148)
|
Statutory operating
profit
|
|
−
|
(80)
|
Acquisition accounting and
M&A
|
|
−
|
179
|
Derivative and FX
adjustments
|
|
−
|
(1)
|
Related tax effects
|
|
−
|
(31)
|
Underlying operating
profit
|
|
−
|
67
|
Organic change
Organic change is the measure of
change at constant translational currency applying full year 2022
average rates to 2023. The movement in underlying change to organic
change is reconciled below.
All amounts below are shown on an
underlying basis and reconciled to the nearest statutory measure
above.
Total Group income statement
|
|
2023
|
2022
|
Change
|
FX
|
Organic
Change
|
Organic
Change
|
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
%
|
Underlying revenue
|
|
15,409
|
12,691
|
2,718
|
88
|
2,630
|
21%
|
Underlying gross profit
|
|
3,231
|
2,477
|
754
|
22
|
732
|
30%
|
Underlying operating profit
|
|
1,590
|
652
|
938
|
5
|
933
|
143%
|
Net financing costs
|
|
(328)
|
(446)
|
118
|
-
|
118
|
(26)%
|
Underlying profit before taxation
|
|
1,262
|
206
|
1,056
|
5
|
1,051
|
-
|
Taxation
|
|
(120)
|
(48)
|
(72)
|
(1)
|
(71)
|
-
|
Underlying profit for the year (continuing
operations)
|
1,142
|
158
|
984
|
4
|
980
|
-
|
Civil Aerospace
|
|
2023
|
2022
|
Change
|
FX
|
Organic
Change
|
Organic
Change
|
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
%
|
Underlying revenue
|
|
7,348
|
5,686
|
1,662
|
17
|
1,645
|
29%
|
Underlying OE revenue
|
|
2,703
|
1,982
|
721
|
15
|
706
|
36%
|
Underlying services
revenue
|
|
4,645
|
3,704
|
941
|
2
|
939
|
25%
|
Underlying gross profit
|
|
1,394
|
853
|
541
|
1
|
540
|
63%
|
Commercial and administrative
costs
|
|
(354)
|
(371)
|
17
|
(1)
|
18
|
(5)%
|
Research and development
costs
|
|
(343)
|
(452)
|
109
|
(3)
|
112
|
(25)%
|
Joint ventures and
associates
|
|
153
|
113
|
40
|
-
|
40
|
35%
|
Underlying operating profit
|
|
850
|
143
|
707
|
(3)
|
710
|
-
|
Defence
|
|
2023
|
2022
|
Change
|
FX
|
Organic
Change
|
Organic
Change
|
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
%
|
Underlying revenue
|
|
4,077
|
3,660
|
417
|
(11)
|
428
|
12%
|
Underlying OE revenue
|
|
1,766
|
1,634
|
132
|
(4)
|
136
|
8%
|
Underlying services
revenue
|
|
2,311
|
2,026
|
285
|
(7)
|
292
|
14%
|
Underlying gross profit
|
|
804
|
726
|
78
|
-
|
78
|
11%
|
Commercial and administrative
costs
|
|
(173)
|
(174)
|
1
|
(1)
|
2
|
(1)%
|
Research and development
costs
|
|
(72)
|
(122)
|
50
|
1
|
49
|
(40)%
|
Joint ventures and
associates
|
|
3
|
2
|
1
|
-
|
1
|
50%
|
Underlying operating profit
|
|
562
|
432
|
130
|
-
|
130
|
30%
|
Power Systems
|
|
2023
|
2022
|
Change
|
FX
|
Organic
Change
|
Organic
Change
|
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
%
|
Underlying revenue
|
|
3,968
|
3,347
|
621
|
82
|
539
|
16%
|
Underlying OE revenue
|
|
2,661
|
2,187
|
474
|
55
|
419
|
19%
|
Underlying services
revenue
|
|
1,307
|
1,160
|
147
|
27
|
120
|
10%
|
Underlying gross profit
|
|
1,050
|
918
|
132
|
21
|
111
|
12%
|
Commercial and administrative
costs
|
|
(456)
|
(441)
|
(15)
|
(8)
|
(7)
|
2%
|
Research and development
costs
|
|
(187)
|
(204)
|
17
|
(4)
|
21
|
(10)%
|
Joint ventures and
associates
|
|
6
|
8
|
(2)
|
-
|
(2)
|
(25)%
|
Underlying operating profit
|
|
413
|
281
|
132
|
9
|
123
|
44%
|
Reconciliation of Alternative Performance
Measures (APMs) to their statutory equivalent continued
New
Markets
|
|
2023
|
2022
|
Change
|
FX
|
Organic
Change
|
Organic
Change
|
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
%
|
Underlying revenue
|
|
4
|
3
|
1
|
-
|
1
|
33%
|
Underlying OE revenue
|
|
2
|
1
|
1
|
-
|
1
|
100%
|
Underlying services
revenue
|
|
2
|
2
|
-
|
-
|
-
|
-
|
Underlying gross profit/(loss)
|
|
1
|
(1)
|
2
|
-
|
2
|
-
|
Commercial and administrative
costs
|
|
(24)
|
(23)
|
(1)
|
-
|
(1)
|
4%
|
Research and development
costs
|
|
(137)
|
(108)
|
(29)
|
(2)
|
(27)
|
25%
|
Underlying operating loss
|
|
(160)
|
(132)
|
(28)
|
(2)
|
(26)
|
20%
|
Trading cash flow
Trading cash flow is defined as
free cash flow (as defined below) before the deduction of recurring
tax and post-employment benefit expenses. Trading cash flow per
segment is used as a measure of business performance for the
relevant segments.
|
|
2023
£m
|
2022
£m
|
Civil Aerospace
|
|
626
|
226
|
Defence
|
|
511
|
426
|
Power Systems
|
|
461
|
158
|
New Markets
|
|
(63)
|
(57)
|
Total reportable segments trading
cash flow
|
|
1,535
|
753
|
Other businesses
|
|
5
|
5
|
Central and
inter-segment
|
|
(57)
|
(49)
|
Trading cash flow from continuing
operations
|
|
1,483
|
709
|
Discontinued operations
|
|
-
|
(12)
|
Trading cash flow
|
|
1,483
|
697
|
Underlying operating profit charge
exceeded by contributions to defined benefit schemes
|
|
(26)
|
(32)
|
Tax 1
|
|
(172)
|
(174)
|
Free cash flow
|
|
1,285
|
491
|
1 See page 14 for tax paid in the statutory cash flow
statement
Free cash flow
Free cash flow is a measure of the
financial performance of the businesses' cash flows which is
consistent with the way in which performance is communicated with
the Board. Free cash flow is defined as cash flows from operating
activities including capital expenditure and movements in
investments, capital elements of lease payments, interest paid,
amounts paid relating to the settlement of excess derivatives and
excluding amounts spent or received on activity related to business
acquisitions or disposals and other material exceptional or one-off
cash flows. Free cash flow from continuing operations has been
presented to remove free cash flow from discontinued operations as
defined in note 23. For further detail, see note 24.
|
|
2023
£m
|
2022
£m
|
Statutory cash flows from
operating activities 1
|
|
2,485
|
1,524
|
Capital expenditure
|
(699)
|
(540)
|
Investment (including investment
from NCI and movement in joint ventures, associates and other
investments)
|
69
|
28
|
Capital element of lease
payments
|
|
(291)
|
(218)
|
Interest paid
|
|
(333)
|
(352)
|
Exceptional transformation and
restructuring costs
|
|
69
|
76
|
M&A costs
|
|
2
|
2
|
Other
|
|
(17)
|
(29)
|
Free cash flow
|
|
1,285
|
491
|
Discontinued operations free cash
flow 2
|
|
-
|
14
|
Free cash flow from continuing
operations
|
|
1,285
|
505
|
1
Statutory cash flows from operating activities at
31 December 2022 have been represented. See note 1.
2
Discontinued operations free cash flow excludes:
transactions with parent company of £nil (2022: £(65)m), movements
in borrowings of £nil (2022: £22m), exceptional restructuring costs
of £nil (2022: £nil), M&A costs of £nil (2022: £44m) and other
of £nil (2022: £(6)m)
Gross R&D expenditure
In year gross cash expenditure on
R&D excludes contributions and fees, amortisation and
impairment of capitalised costs and amounts capitalised during the
year. For further detail, see note 3.
Gross capital expenditure
Gross capital expenditure during
the year excluding capital expenditure from discontinued
operations. All proposed investments are subject to rigorous review
to ensure that they are consistent with forecast activity and
provide value for money. The Group measures annual capital
expenditure as the cash purchases of PPE acquired during the
year.
|
|
2023
£m
|
2022
£m
|
Purchases of PPE (cash flow
statement)
|
429
|
359
|
Less: capital expenditure from
discontinued operations
|
-
|
(14)
|
Net capital
expenditure
|
429
|
345
|
Reconciliation of Alternative Performance
Measures (APMs) to their statutory equivalent continued
Key performance indicators
The following measures are key
performance indicators and are calculated using APMs or statutory
results. See below for calculation of these key performance
indicators. All comparative periods relate to 31 December 2022,
unless otherwise stated.
Order backlog
Order backlog, also known as
unrecognised revenue, is the amount of revenue on current contracts
that is expected to be recognised in future periods. Civil
Aerospace OE orders where the customer has retained the right to
cancel (for deliveries in the next seven to 12 months) are
excluded.
Adjusted return on capital (abbreviated to return on
capital)
Return on capital is defined as
net operating profit after tax ('NOPAT') as a percentage of average
invested capital. NOPAT is defined as underlying net profit
excluding net finance costs and the tax shield on net finance
costs. Invested capital is defined as current and non-current
assets less current liabilities. It excludes pension assets, cash
and cash equivalents, and borrowings and lease liabilities. Return
on capital assesses the efficiency in allocating capital to
profitable investments.
|
|
2023
£m
|
2022
£m
|
Underlying operating
profit
|
1,590
|
652
|
Less: taxation
1
|
(151)
|
(48)
|
Underlying operating profit
(post-taxation)
|
1,439
|
604
|
|
|
|
Total assets
|
31,512
|
29,450
|
Less: post-retirement scheme
surpluses
|
(782)
|
(613)
|
Less: cash and cash
equivalents
|
(3,784)
|
(2,607)
|
Current liabilities
|
(14,926)
|
(13,918)
|
Liabilities held for
sale
|
(55)
|
−
|
Less: borrowings and lease
liabilities
|
809
|
358
|
Invested capital
(closing)
|
12,774
|
12,670
|
Invested capital
(average)
|
|
12,722
|
12,334
|
|
|
%
|
%
|
Return on invested
capital
|
11.3
|
4.9
|
|
|
|
| |
1 Excluding
underlying taxation on underlying finance income/(costs) of £31m
(2022: £nil)
Total underlying cash costs as a proportion of underlying
gross margin (abbreviated to TCC/GM)
Total underlying cash costs during
the year (represented by underlying research and development
(R&D) expenditure and underlying commercial and administrative
(C&A) costs) as a proportion of underlying gross profit. This
measure provides an indicator of total cash costs relative to gross
profit. A reduction in total cash costs relative to gross profit
indicates how effective the business is at managing and/or reducing
its costs.
|
2023
£m
|
2022
£m
|
Underlying R&D expenditure
1
|
836
|
928
|
Underlying C&A
|
1,064
|
1,062
|
Total cash costs
|
1,900
|
1,990
|
Underlying gross
profit
|
3,231
|
2,477
|
|
|
|
Total cash costs as a proportion
of underlying gross profit
|
0.59
|
0.80
|
1 Excludes
£6m (2022: £nil) impact of derivative and FX adjustments
Principal risks and uncertainties
Our risk management system is
described on pages 50 to 57 of our 2023 Annual Report. It sets out
requirements for managing risk across the organisation, in a
continuous process where risk owners define, quantify, control,
assure and respond to risks, including ongoing monitoring and
oversight.
In November 2023, we refreshed the
risk profile to reflect where risks could impact the organisation
in light of the strategy review. As a result, elements of the
previous competitive environment risk are now captured in the
strategy, execution and technology risks, with strategy risk also
replacing some elements of the previous transformation risk.
Information and data includes cyber risk and has been expanded to
include physical data. In addition, business continuity which was
previously a standalone risk has now been captured within business
interruption. As part of this, we also looked at risk
interdependencies, categorising principal risks as either a
'pillar' or a 'driver', with drivers being those risks that could
cause one or more risk pillars to happen and/or make them worse if
they do. All principal risks facing the Group are summarised below
and reported in detail on pages 52 to 57 of our 2023 Annual
Report.
Principal risk
pillars
Safety
Failure to: i) provide safe
products; or ii) create a place to work which minimises the risk of
harm to our people, those who work with us, and the environment,
would adversely affect our reputation and long-term
sustainability.
Compliance
Non-compliance by the Group with
legislation or other regulatory requirements in the heavily
regulated environment in which we operate (e.g. export controls;
data privacy; use of controlled chemicals and substances;
anti-bribery and corruption; human rights; and tax and customs
legislation). This could affect our ability to conduct business in
certain jurisdictions and would potentially expose us to:
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.
Strategy
Failure to develop an optimal
strategy and continuously evolve it, investing in key areas for performance improvement
and growth (taking into account risk reward), making
difficult decisions for competitive advantage and the right
portfolio and partnership choices, could result in us
underperforming against our competitors and significantly reduce
our ability to build a high performing, competitive, resilient and
growing company.
Execution
Failure to deliver as One
Rolls-Royce on short- to medium-term financial plans, including
efficient and effective delivery of quality products, services and
programmes, or falling significantly short of customer
expectations, would reduce our resilience and 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 interruption
A major disruption of our
operations and ability to deliver our products, services and
programmes could have an adverse impact on our people, internal
facilities or external supply chain which could result in failure
to meet agreed customer commitments and damage our prospects of
winning future orders.
Disruption could be caused by a
range of events, e.g. extreme weather or natural hazards (e.g.
earthquakes or floods) which could increase in severity or
frequency given the impact of climate change; political events;
financial insolvency of a critical supplier; scarcity of materials;
loss of data; fire; pandemic or other infectious
disease.
Principal risk
drivers
Climate change
Failure to become a net zero
company by 2050, leveraging technology to transition from carbon
intensive products and services at pace could impact our ability to
win future business; achieve operating results; attract and retain
talent; secure access to funding; realise future growth
opportunities; or force government intervention to limit
emissions.
In addition, physical risks from
extreme weather events (and/or natural hazards) could potentially
materialise, which may result in disruption.
Information and data
Failure to protect the integrity
and availability of data, both physical and digital, from attempts
to cause us harm, such as through a cyber attack. Potential impacts
include hindering data driven decision making, disrupting internal
business operations and services for customers, or a data
breach, all of which could damage our reputation, reduce
resilience, and cause financial loss.
Causes include ransomware threats,
unauthorised access to property or systems for the extraction,
corruption, destruction of data, or availability of access to
critical data and intellectual property.
Market and Financial shock
The Group is exposed to market and
financial risks, some of which are of a macroeconomic nature (e.g.
economic growth rates, foreign currency, oil price, interest rates)
and some of which are more specific to us (e.g. reduction in air
travel or defence spending, disruption to other customer
operations, liquidity and credit risks).
Significant extraneous market
events could also materially damage our competitiveness and/or
creditworthiness and our ability to access funding. This would
affect operational results or the outcomes of financial
transactions.
Demand for our products and
services could be adversely affected by factors such as current and
predicted air traffic, fuel prices and age/replacement rates of
customer fleets. A large proportion of our business is reliant on
the civil aviation industry, which is cyclical in
nature.
Political risk
Geopolitical factors leading to an
unfavourable business climate and significant tensions between
major trading parties or blocs could impact our strategy,
execution, resilience, safety and compliance. 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.
Talent and capability
Failure to create a company where
our people can build a successful career with better choices for
development and personal growth will hinder our ability to
identify, attract, retain and apply the critical capabilities and
skills needed in appropriate numbers for the successful execution
of our business strategy.
Payments to shareholders
Our capital framework is focused
on three clear priorities: a strong balance sheet with an
investment grade profile; a commitment to reinstating and growing
shareholder returns; and a disciplined approach to investments.
Strengthening the balance sheet is a clear priority. We are
positioning Rolls-Royce to withstand better volatility and external
shocks and to give us financial flexibility for the future. When
the Board is confident that the strength of the balance sheet is
assured and we are comfortably within an investment grade profile,
we are committed to reinstating and growing shareholder
distributions.
Shareholders wishing to redeem
their existing C Shares, or participate in the CRIP must lodge
instructions with the Registrar to arrive no later than 5.00pm on
31 May 2024 (CREST holders must submit their election in CREST by
2.55pm). The payment of C Share redemption monies will be made on 4
July 2024 and the CRIP purchase will begin as soon as practicable
after 5 July 2024.
Statement of Directors'
responsibilities
The statements below have been
prepared in connection with the Company's full Annual Report for
the year ended 31 December 2023. Certain parts are not included in
this announcement.
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's and Company 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 their knowledge:
-
the Group Financial Statements, which have been
prepared in accordance with UK-adopted international accounting
standards, give a true and fair view of the assets, liabilities,
financial position and loss of the Group;
-
the Company Financial Statements, which have been
prepared in accordance with United Kingdom Accounting Standards,
comprising FRS 101, give a true and fair view of the assets,
liabilities, financial position of the Company;
-
the Strategic Report includes a fair review of
the development and performance of the business and the position of
the Group and Company, together with a description of the principal
risks and uncertainties that it faces; and
In the case of each Director in
office at the date the Directors' Report is approved:
-
so far as the Director is aware, there is no
relevant audit information of which the Group's and Company's
auditors are unaware; and
-
they have taken all steps that they ought to have
taken as a Director in order to make themselves aware of any
relevant audit information and to establish that the Group's or
Company's auditor are aware of that information.
By order of the Board
Tufan
Erginbilgic Helen
McCabe
Chief Executive
Chief Financial
Officer
22 February
2024 22 February 2024