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RNS Number : 7744Q Rolls-Royce Holdings plc 23 February 2023
23 February 2023
ROLLS-ROYCE HOLDINGS PLC - 2022 Full Year Results
Improved profit and cash in 2022; transformation programme underway to create
a high-performing, growing and competitive business
· Improved orders, revenue, profit and cash flow in 2022
- Strong new order wins in Civil Aerospace and Defence and a record order
book in Power Systems
- Underlying operating profit of £652m, £238m higher than the prior year,
with the increase driven by Civil Aerospace and Power Systems
- Free cash flow from continuing operations of £505m, £2.0bn higher than
the prior year, led by engine flying hour recovery
- Net debt of £3.3bn, down from £5.2bn at end 2021, due to disposals and
improved cash flow
· Focused on delivering significant performance improvement in
2023 and beyond
- Transformation programme in place to deliver further performance
improvements from 2023, informed by rigorous benchmarking
- Underlying operating profit guidance of £0.8-£1.0bn and free cash flow
of £0.6-£0.8bn in 2023; includes early benefits from transformation
- Strategic review underway to identify investment priorities; medium-term
financial targets to be set in the second half of 2023
Tufan Erginbilgic, CEO said: "It is an honour to lead Rolls-Royce, one of the
world's most trusted brands and a business with strong positions in growing
markets. Our people take tremendous pride in our innovation and engineering
solutions. Together, we must now move at pace and harness that pride to create
a high-performing, growing and competitive business.
While our performance improved in 2022, we are capable of much more. Our
transformation programme will improve our efficiency and commercial outcomes,
and deliver a sustainable reduction in working capital. This will require a
winning culture, underpinned by more effective performance management and a
shared determination to deliver cash and reduce debt. Our success will enable
us to reward investors for their support and invest in future growth.
Our transformation programme is already underway and is moving at pace. It
will include a strategic review so that we can prioritise our investment
towards the most profitable opportunities. We will report the findings
together with our medium-term goals in the second half of this year."
Full Year 2022 Group continuing operations
Underlying Underlying 2021 Statutory Statutory
2022 2022 2021
£ million
Revenue 12,691 10,947 13,520 11,218
Operating profit 652 414 837 513
Operating margin (%) 5.1% 3.8% 6.2% 4.6%
Profit/(loss) before taxation 206 36 (1,502) (294)
Earnings/(loss) per share (pence) 1.95 0.11 (14.24) 1.48
Free cash flow 505 (1,485)
Net cash flow from operating activities (1) 1,850 (259)
Net debt (1) (3,251) (5,157)
(1 ) Includes discontinued operations
A reconciliation of alternative performance measures to their statutory
equivalent is provided on pages 48 to 51
2022 performance summary
· Recovering demand. Large engine flying hours (EFH) in Civil Aerospace
grew by 35% year on year as recovery in international travel continued. New
large engine orders were received from Malaysia Aviation Group, Norse Atlantic
Airways and Qantas. The Bell V-280 Valor, powered by our AE1107F engines, was
selected by the US Army for the Future Long Range Assault Aircraft programme.
Order intake in Power Systems grew 29% to £4.3bn.
· Higher profit and margins. The year on year increase in Group
operating profit was driven by higher profits in Civil Aerospace and Power
Systems, partly offset by lower profit in Defence and increased investment in
New Markets. The higher Group margin versus the prior year was driven by
improvements in long-term service agreement (LTSA) contract margins and
increased spare engines profit in Civil Aerospace. This was partly offset by
the non-repeat of a foreign exchange revaluation credit in Civil Aerospace and
legacy spare parts sales in Defence in 2021, and lower margins in Power
Systems due to cost increases.
· Stronger cash flows. Free cash flow from continuing operations improved
from an outflow of £1.5bn in 2021 to an inflow of £0.5bn, driven by 35%
growth in large engine flying hours, comparatively lower growth in large
engine major shop visits at 19%, and higher Defence cash flow. Higher
inventory in Power Systems saw its cash conversion ratio fall. Free cash flow
benefitted from higher Civil Aerospace LTSA invoiced flying hour receipts of
£3,564m (2021: £2,289m), the collection of overdue balances in Civil
Aerospace (c£180), and a customer advance in Defence (£63m) and Power
Systems (year on year increase of c£150m).
· Lower net debt. Net debt was reduced from £5.2bn to £3.3bn, as we
completed our disposal programme. 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 £1.8bn
of lease liabilities. We have £2.6bn cash and £5.5bn undrawn facilities.
· Shareholder payments will not be made for 2022. We are committed to
returning to an investment grade credit rating through performance
improvement, and to resuming shareholder payments.
Transformation programme and strategic review
We have carried out extensive work to benchmark our performance against that
of our peers. This work shows that there is significant scope for us to
deliver materially higher profit, cash flows and returns. We will create a
stronger, growing business with a clear proposition for investors based upon
delivering:
· a high quality and competitive business, focused on profitable
performance and operational efficiency;
· growing sustainable cash flows, generated from operations and
disciplined capital investment; and
· a strong balance sheet and growing shareholder returns.
We have already begun an ambitious transformation programme to deliver a
step-change in our performance. It consists of seven workstreams, each led by
a senior executive:
Efficiency and simplification - delivering sustainable cost efficiencies.
Commercial optimisation - getting the right reward for the risks we take and
the value we create for customers.
Working capital - delivering a significant and structural reduction across the
Group.
Business improvement - each business unit building and delivering plans to
address performance gaps to realise its potential.
Strategic review - enabling prioritisation of investment opportunities.
Performance management - delivering on our expectations of high performance
from all businesses and employees.
Purpose and culture - instilling our people with the right mindset to be
confident, proactive and timely in our actions.
The outcomes of these workstreams will drive a clear and granular plan. We
will communicate this to you alongside medium-term financial targets in the
second half of the year.
Outlook and 2023 Guidance
A continued recovery in our end markets and the actions we are taking give us
confidence in delivering higher profit and cash flows in 2023.
Underlying 2023 financial guidance
Operating profit £0.8bn-£1.0bn
Free cash flow £0.6bn-£0.8bn
Our 2023 operating profit guidance of £0.8-1.0bn assumes £100-200m of
targeted contract improvements (2022: £319m).
Our 2023 free cash flow guidance of £0.6-0.8bn is based on c£500-700m growth
in the Civil LTSA Creditor
(2022: £792m), a year on year headwind of approximately £200m associated
with legacy Boeing OE concessions and a c£100m adverse impact in 2023 due to
fires at two suppliers' premises in late 2022 and early 2023. This cash impact
will reverse in 2024.
In 2023, we assume large engine flying hours at 80-90% of 2019's level and
1,200-1,300 total shop visits.
Additional detail is included in the results presentation and supplementary
data slides.
Underlying financial performance by business
£ million Underlying revenue Organic Change (1) Underlying operating profit/(loss) Underlying operating margin Margin change (pts)
Organic change (1)
Civil Aerospace 5,686 25% 143 nm 2.5% 6.3pt
Defence 3,660 2% 432 (10)% 11.8% (1.8)pt
Power Systems 3,347 23% 281 17% 8.4% (0.4)pt
New Markets 3 nm (132) nm nm nm
Other businesses − nm (31) nm nm nm
Corporate/eliminations (5) nm (41) nm nm nm
Total (continuing operations) 12,691 14% 652 48% 5.1% 1.3pt
(1 ) Organic change is the measure of change at constant translational
currency applying full year 2021 average rates to 2022. 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 measurable.
Trading cash flow
£ million 2022 2021
Civil Aerospace 226 (1,670)
Defence 426 377
Power Systems 158 219
New Markets (57) (56)
Other businesses 5 (43)
Corporate/eliminations (49) (38)
Total trading cash flow (continuing operations) 709 (1,211)
Taxation (172) (182)
Underlying operating profit charge exceeded by contributions to defined (32) (92)
benefit schemes
Total free cash flow (continuing operations) 505 (1,485)
Civil Aerospace
2022 key Civil operational metrics: Large engine Business aviation/ Regional Total Change
OE deliveries 190 165 355 15%
LTSA engine flying hours (millions) 10.0 3.2 13.2 29%
Total LTSA shop visits 703 341 1,044 10%
…of which major shop visits 248 328 576 8%
Our Civil Aerospace business continues to recover from the impact of COVID-19.
Large engine flying hours were up 35% year on year at 65% of 2019 levels, with
an improvement at the end of the year as travel restrictions in China eased.
We expect large EFH at 80-90% of 2019 levels in 2023. Business aviation demand
continues to remain above 2019 levels.
We saw new large engine orders from Malaysia Aviation Group, Norse Atlantic
Airways and Qantas in 2022 and we welcomed the launch of the new A350
freighter. In February 2023, we received an order from Air India for 68 Trent
XWB-97 engines, plus options for 20 more, and 12 Trent XWB-84 engines.
OE deliveries rose by 15% year on year, with 165 business aviation deliveries
(2021: 114) and 190 total large engine deliveries (2021: 195). In 2022, we
delivered 44 large spare engines (2021: 36), which represented 23% of total
large engine deliveries (2021: 18%). This is above the typical range of 10-15%
of total engine deliveries, as we grow the pool of spare engines to underpin
fleet health and improve resilience. We expect this elevated level of spare
engine deliveries to continue in 2023 and 2024.
Total shop visits were 1,044 versus 953 in 2021. There were 248 large engine
major shop visits in 2022 versus 208 in 2021. In 2022, we agreed with Air
China to create a joint venture overhaul facility that will eventually support
up to 250 shop visits per year.
Underlying revenue of £5.7bn was up 25%. OE revenue of £2.0bn was up 23%
reflecting higher spare engine deliveries. Services revenue of £3.7bn was up
26% on the prior year, reflecting higher large engine shop visits, aftermarket
revenue growth from business aviation, regional and V2500, and positive LTSA
catch-ups £360m, (2021: £214m).
Underlying operating profit was £143m (a 2.5% margin) versus a loss of
£(172)m in 2021. The year on year increase was driven by improvements in LTSA
contract margins, with an onerous provision credit of £51m
(2021: a £122m charge) and £319m of positive LTSA catch-ups (2021: £256m),
a higher volume and different mix of large spare engine sales with more third
party sales to capacity providers than in the prior year, increased
aftermarket profit, and reduced losses on installed large engine OE
deliveries. This was partly offset by the
non-repeat of a foreign exchange revaluation credit of c£140m in 2021.
Trading cash flow was £226m versus £(1,670)m in the prior year. The
improvement was due to higher engine flying hour receipts reflecting the
growth in LTSA flying hours, which grew at a materially faster rate than shop
visits in 2022. Cash flows in 2022 benefited from the recovery of overdue
balances from airlines incurred during the pandemic of c£180m.
Improvements in underlying operating profit and cash flows were delivered
despite the challenges associated with inflation and the supply chain, which
are expected to persist in 2023.
Defence
Order intake in our Defence business was £5.4bn in 2022 versus £2.3bn in
2021, with a book-to-bill of 1.5x versus 0.7x last year. The Bell V-280 Valor,
powered by our AE1107F engines, was selected by the US Army for the Future
Long Range Assault Aircraft programme. Major contract awards included the
renewal of $1.8bn of services contracts in the U.S. for trainer and transport
aircraft over the next five years. These awards, combined with increased
military activity and spending underpin the long-term outlook for the
business. Our order backlog at the year end was £8.5bn, with 86% order cover
in 2023 and a high degree of cover in 2024 and beyond.
Revenue increased 2% to £3.7bn. OE revenue was up 10% year on year, with
strong growth in Submarines along with new programmes (including B-52 and UK
Combat). This more than offset reductions in services revenue, down 3% due to
the non-repeat of legacy spare parts sales made in 2021.
Operating profit was £432m (11.8% margin) versus £457m (13.6% margin) in the
prior year, reflecting the non-repeat of £45m of high margin one time legacy
spare parts sales in the prior year and the changing mix of the business.
Self-funded R&D and investment levels were elevated, as we support growth
across the portfolio including the UK Future Combat programme and
opportunities in North America.
Trading cash flow of £426m improved versus £377m last year, despite slightly
lower underlying profit and increased inventory, due to an advance payment
from one of our customers of £63m.
Power Systems
Order intake in our Power Systems business was £4.3bn, 29% higher than the
prior year, a record level for the business. We saw strong demand in many of
our end markets, notably Power Generation including mission critical backup
power, and for our engine systems and services. As a result, we now have 76%
order cover for 2023.
Underlying revenue was £3.3bn, up 23% and above the previous peak in 2019.
Services revenues grew 16% as product utilisation increased in our end
markets, and OE revenue rose by 26%. Sales were strongest in the industrial
and power generation end markets, partly offset by lower activity in China.
Operating profit was £281m (8.4% margin) versus £242m (8.8% margin) in the
prior year. The lower margin versus the prior year reflects higher costs
associated with inflation and supply chain disruption, increased
self-funded R&D, one-off charges including intangible asset impairments
and write-downs of assets due to the Russia-Ukraine conflict, partly offset by
the benefit of higher volumes.
Trading cash flow was £158m, a conversion ratio of 56% versus 90% last year.
The lower conversion year on year reflects a higher level of inventories due
to supply chain disruption and the pace of revenue growth, partly offset by
increased customer advance payments.
New Markets
Investment increased in both Electrical and Small Modular Reactors (SMR),
which resulted in an increased operating loss of £132m versus £70m last
year. In 2022, Rolls-Royce Electrical entered into an agreement with Hyundai
Motor Group to bring all-electric propulsion and hydrogen fuel cell technology
for the Advanced Air Mobility market. We also entered into partnership with
Embraer EVE to develop propulsion systems for their platform. Technologies
developed in our Electrical business can be leveraged across the Group.
We have shortlisted three possible sites which will be home to one of our
major factories in the production of our SMRs, whilst we await our first order
in the UK or abroad. This supports our ambitions to manufacture the first
fully operational SMR before 2030.
Statutory and underlying Group financial performance from continuing
operations
2022 2021
£ million Impact of hedge book (1) Impact of acquisition accounting Impact of
Statutory non-underlying items Underlying Underlying
Revenue 13,520 (829) − − 12,691 10,947
Gross profit 2,757 (264) 58 (74) 2,477 1,996
Operating profit 837 (264) 58 21 652 414
Gain arising on disposal of businesses 81 − − (81) − −
Profit before financing and taxation 918 (264) 58 (60) 652 414
Net financing costs (2,420) 1,935 − 39 (446) (378)
(Loss)/profit before taxation (1,502) 1,671 58 (21) 206 36
Taxation 308 (416) (9) 69 (48) (26)
(Loss)/profit for the year from continuing operations (1,194) 1,255 49 48 158 10
Basic (loss)/earnings per share (pence) (14.24) 1.95 0.11
(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
- Revenue: Underlying revenue of £12.7bn was up 14%, largely driven by
underlying revenue increases across Civil Aerospace, Defence and Power
Systems. Statutory revenue of £13.5bn was 21% higher compared with 2021. The
difference between statutory and underlying revenue is driven by statutory
revenue being measured at average prevailing exchange rates (2022: GBP:USD
1.24; 2021: GBP:USD 1.38) and underlying revenue being measured at the hedge
book achieved rate during the year (2022 GBP:USD 1.50; H1 2021: GBP:USD 1.39;
H2 2021: GBP:USD 1.59).
- Operating profit: Underlying operating profit of £652m (5.1% margin)
versus £414m (3.8% margin) in the prior year. The year-on-year growth was led
by Civil Aerospace and Power Systems, partly offset by marginally lower
year-on-year profits in Defence and increased investment in New Markets.
Statutory operating profit was £837m, higher than the £652m underlying
operating profit largely due to the £264m negative impact from currency
hedges in the underlying results. Net charges of £21m were excluded from the
underlying results as these related to non-underlying items comprising: net
restructuring charges of £47m; net impairments of £65m, partly offset by the
write back of exceptional Trent 1000 programme credits of £69m; and a £22m
pension past service credit.
- Profit before taxation: Underlying profit before tax of £206m included
£(446)m net financing costs primarily related to net interest payable.
Statutory loss before tax of £(1,502)m included £(1,579)m net fair value
losses on derivative contracts, £(308)m net interest payable and a net £81m
profit from disposals of businesses from continuing operations.
- Taxation: Underlying taxation charge of £(48)m (2021: £(26)m). This
reflects a tax charge on overseas profits of £(175)m and a tax credit due to
increases in certain UK deferred tax assets of £127m. Deferred tax has not
been recognised on current year UK tax losses. The tax charge in 2021 was
driven by similar factors.
Free cash flow
2022 2021
£ million Cash flow Impact of hedge book Impact of acquisition accounting Impact of other non-underlying items Funds flow Funds flow
Operating profit 837 (264) 58 21 652 414
Operating profit/(loss) from discontinued operations 86 − − − 86 (43)
Depreciation, amortisation and impairment 1,076 − (58) (65) 953 971
Movement in provisions (197) 91 − 83 (23) (136)
Movement in Civil LTSA balance 1,158 (366) − − 792 66
Other operating cash flows (1) 72 (53) − 22 41 (90)
Operating cash flow before working capital and income tax 3,032 (592) − 61 2,501 1,182
Working capital (excluding Civil LTSA balance) (2) (348) (165) − (19) (532) (810)
Cash flows on other financial assets and liabilities held for operating (660) 737 − − 77 (85)
purposes
Income tax (174) − − − (174) (185)
Cash from operating activities 1,850 (20) − 42 1,872 102
Capital element of lease payments (218) 20 − − (198) (374)
Capital expenditure and investment (512) − − 36 (476) (426)
Interest paid (352) − − − (352) (331)
Settlement of excess derivatives (326) − − − (326) (452)
Other 49 − − (78) (29) 39
Free cash flow 491 − − − 491 (1,442)
- of which is continuing operations 505 505 (1,485)
(1 ) Other operating cash flows includes profit/(loss) on disposal, share of
results and dividends received from joint ventures and associates, interest
received, flows relating to our defined benefit post-retirement schemes, and
share based payments
(2 ) Working capital includes inventory, trade and other receivables and
payables, and contract assets and liabilities (excluding Civil LTSA balances)
Free cash flow in the year was £0.5bn, an improvement of £2.0bn compared
with the prior year driven by:
- Operating cash flow before working capital and income tax of £2.5bn,
£1.3bn higher year on year. The improvement at the Group level was
principally due to higher flying hours in Civil Aerospace. Large engine flying
hours increased by 35%, driving a £1.3bn increase in invoiced EFH receipts
(from £2.3bn in 2021 to £3.6bn in 2022). Large engine major shop visit
volumes of 248 were 19% higher than in the prior year (2021: 208). The
movement in provisions of £(23)m largely related to utilisation of the Trent
1000 provision and movements in the contract loss provisions. Other operating
cash flow movement of £41m included £36m interest received, the £131m
improvement year on year was mainly due to lower pension contributions and
higher dividends received from joint ventures.
- Working capital £(0.5)bn, £0.3bn better year on year. Supply chain
disruption resulted in an increase in inventories through 2022, notably in
Civil Aerospace and Power Systems, which partly unwound at the end of the
year. This was partly offset by a net inflow across payables and receivables
reflecting collections of overdue debts in Civil Aerospace (c£180m in 2022),
increased advance payment receipts in Power Systems (a c£150m year on year
benefit) and a £63m advance payment received in Defence.
- Income tax of £(174)m, net cash tax payments in 2022 were £(174)m (2021:
£(185)m).
- The capital element of lease payments was £(198)m, £(176)m lower than
2021 (£(374)m). In the prior year the elevated cost was driven by end of
lease payments made on a small number of engines, as well as timing impacts on
lease payments, with 2022 returning to more typical levels.
- Capital expenditure and investments of £(476)m, comprising £(302)m PPE
additions net of disposals, £(202)m intangibles additions, partly offset by a
net movement in investments of £28m. The combined additions were similar to
last year.
- Interest paid of £(352)m, including lease interest payments, similar to
the £(331)m in 2021. Following the repayment of the £2bn UK Export Finance
backed loan in September 2022, we would expect interest paid to fall in 2023.
- Settlement of excess derivative contracts of £(326)m, down from £(452)m
in 2021. The decrease was in line with previously communicated guidance and
reflects the profile of derivative contracts taken out to reduce the size of
the hedge book. In total £710m of excess derivative settlements are left to
be settled between 2023 and 2026.
Balance Sheet
£ million 2022 2021 Change
Intangible assets 4,098 4,041 57
Property, plant and equipment 3,936 3,917 19
Right of use assets 1,061 1,203 (142)
Joint ventures and associates 422 404 18
Contract assets and liabilities (10,681) (8,836) (1,845)
Working capital (1) 2,297 1,458 839
Provisions (2,333) (1,582) (751)
Net debt (2) (3,251) (5,110) 1,859
Net financial assets and liabilities (3,649) (3,034) (615)
Net post-retirement scheme deficits (420) (225) (195)
Taxation 2,468 1,787 681
Held for sale (3) − 1,305 (1,305)
Other net assets and liabilities 36 36 −
Net liabilities (6,016) (4,636) (1,380)
Other items
USD hedge book (US$bn) 19 22
Civil LTSA asset 885 915
Civil LTSA liability (8,257) (7,129)
Civil net LTSA liability (7,372) (6,214)
(1 ) Net working capital includes inventory, trade receivables and payables
and similar assets and liabilities
(2 ) Net debt (adjusted by £0.1bn to exclude net debt held for sale in
2021) includes £86m (2021: £37m) 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 in 2021 mainly related to ITP Aero which was disposed of
on 15 September 2022
Key drivers of balance sheet movements were:
Contract assets and liabilities: The £(1,845)m movement in the net liability
balance was mainly driven by an increase in deposits, foreign exchange
movements and invoiced LTSA receipts in Civil Aerospace exceeding revenue
recognised in the year, partly offset by £360m positive LTSA catch-ups.
Working capital: The £2.3bn net current asset position was £0.8bn higher
than prior year, due to increased inventory of £1.0bn mostly in Civil
Aerospace due to delayed outputs and supply chain disruption and Power Systems
to support sales. Receivables increased by £1.6bn and payables increased by
£(1.8)bn primarily driven by ITP Aero being external to the Group at
year-end. Other drivers included higher trading volumes resulting in higher
payables and receivables.
Provisions: The £(751)m increase primarily reflected the adoption of the
amendment to IAS 37 for Onerous Contracts - Cost of Fulfilling a Contract
which increased contract loss provisions by £(723)m on 1 January 2022. The
amendment clarifies that the direct cost of fulfilling a contract comprises
the incremental costs of fulfilling that contract and also an allocation of
other costs that relate directly to fulfilling contracts.
Net debt: Decreased from £(5.1)bn to £(3.3)bn driven by the completion of
the disposal programme and free cash inflow of £0.5bn. Our liquidity position
is strong with £8.1bn of liquidity including cash and cash equivalents of
£2.6bn and undrawn facilities of £5.5bn. Net debt included £(1.8)bn of
lease liabilities (2021: £(1.7)bn).
Net financial assets and liabilities: A £(615)m increase in the net financial
liabilities driven by a change in fair value of derivative contracts largely
due to the impact of the movement in GBP:USD exchange rates, partly offset by
deals that matured in the year.
Net post-retirement scheme deficits: A £(195)m increase in the net deficit
driven by an increase in bond yields and inflation impacting both plan assets
and obligations.
Taxation: The net tax asset increased by £681m, most of which related to an
increase in the deferred tax asset on unrealised losses on derivatives of
£329m and certain other UK deferred tax assets of £118m reflecting tax
relief that will be taken in the future, based on profit forecasts. There has
also been a £165m decrease in deferred tax liabilities, the majority of which
related to a reduction in the UK pension surplus.
Results meeting and conference call
Our results presentation will be held at the London Stock Exchange and webcast
live at 08:30 (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
(https://www.rolls-royce.com/investors/results-and-events.aspx)
To register for the webcast, including Q&A participation, please visit the
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https://app.webinar.net/0LPb3yGpVaO
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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
(http://www.rolls-royce.com)
Enquiries:
Investors: Media:
Isabel Green +44 7880 160976 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
Notes:
Statutory results were referred to as "reported" results in the 2021 full year
results statement.
Condensed Consolidated Financial Statements
Condensed consolidated income statement
Year ended 31 December 2022
( )
2022 2021
Notes £m £m
Continuing operations
Revenue 2 13,520 11,218
Cost of sales (1) (10,763) (9,082)
Gross profit 2 2,757 2,136
Commercial and administrative costs 2 (1,077) (890)
Research and development costs 2, 3 (891) (778)
Share of results of joint ventures and associates 10 48 45
Operating profit 837 513
Gain arising on disposal of businesses 23 81 56
Profit before financing and taxation 918 569
Financing income 4 355 229
Financing costs (2) 4 (2,775) (1,092)
Net financing costs (2,420) (863)
Loss before taxation (1,502) (294)
Taxation 5 308 418
(Loss)/profit for the year from continuing operations (1,194) 124
Discontinued operations
Profit for the year from ordinary activities 23 68 36
Costs of disposal of discontinued operations prior to disposal 23 - (39)
Loss on disposal of discontinued operations 23 (148) -
Loss for the year from discontinued operations (80) (3)
(Loss)/profit for the year (1,274) 121
Attributable to:
Ordinary shareholders (1,269) 120
Non-controlling interests (NCI) (5) 1
(Loss)/profit for the year (1,274) 121
Other comprehensive income 522 41
Total comprehensive (expense)/income for the year (752) 162
(Loss)/earnings per ordinary share attributable to ordinary shareholders: 6
From continuing operations:
Basic (14.24)p 1.48p
Diluted (14.24)p 1.47p
From continuing and discontinued operations:
Basic (15.20)p 1.44p
Diluted (15.20)p 1.43p
Underlying earnings per ordinary share are shown in note 6.
(1)( ) Cost of sales includes a net charge for expected credit losses of
£73m (2021: £78m). Further details can be found in note 12
(2) Included within 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
Year ended 31 December 2022
2022 2021
Notes £m £m
(Loss)/profit for the year (1,274) 121
Other comprehensive income/(expense) (OCI)
Actuarial movements on post-retirement schemes 20 (156) 254
Revaluation to fair value of other investments 10 (4) (2)
Share of OCI of joint ventures and associates 10 2 1
Related tax movements 89 (79)
Items that will not be reclassified to profit or loss (69) 174
Foreign exchange translation differences on foreign operations 452 (178)
Foreign exchange translation differences reclassified to income statement 23 65 (1)
on disposal of businesses
Hedging reserves reclassified to income statement on disposal of 23 111 -
businesses
NCI disposed of on disposal of businesses 23 1 -
Movement on fair values charged to cash flow hedge reserve (7) (32)
Reclassified to income statement from cash flow hedge reserve (1) (55) 39
Costs of hedging 10 -
Share of OCI of joint ventures and associates 10 - 44
Related tax movements 14 (5)
Items that will be reclassified to profit or loss 591 (133)
Total other comprehensive income 522 41
Total comprehensive (expense)/income for the year (752) 162
( )
Attributable to:
Ordinary shareholders (748) 161
NCI (4) 1
Total comprehensive (expense)/income for the year (752) 162
( ) ( ) ( ) ( )
Total comprehensive (expense)/income for the year attributable to ordinary ( ) ( ) ( )
shareholders arises from:
Continuing operations ( ) (673) 278
Discontinued operations ( ) (75) (117)
Total comprehensive (expense)/income for the year attributable to ordinary ( ) (748) 161
shareholders
(1)( ) Includes £(52)m loss on the deal contingent forward reclassified to
loss on disposal in the same period as the hedged cash flow proceeds. See note
18 and 23 for further detail
Condensed consolidated balance sheet
At 31 December 2022
2022 2021
Notes £m £m
ASSETS
Intangible assets 7 4,098 4,041
Property, plant and equipment 8 3,936 3,917
Right-of-use assets 9 1,061 1,203
Investments - joint ventures and associates 10 422 404
Investments - other 10 36 36
Other financial assets 18 542 361
Deferred tax assets 2,731 2,249
Post-retirement scheme surpluses 20 613 1,148
Non-current assets 13,439 13,359
Inventories 11 4,708 3,666
Trade receivables and other assets 12 6,936 5,383
Contract assets 13 1,481 1,473
Taxation recoverable 127 90
Other financial assets 18 141 46
Short-term investments 11 8
Cash and cash equivalents 14 2,607 2,621
Current assets 16,011 13,287
Assets held for sale 23 - 2,028
TOTAL ASSETS 29,450 28,674
LIABILITIES
Borrowings and lease liabilities 15 (358) (279)
Other financial liabilities 18 (1,016) (689)
Trade payables and other liabilities 19 (6,983) (6,016)
Contract liabilities 13 (4,825) (3,599)
Current tax liabilities (104) (101)
Provisions for liabilities and charges 19 (632) (475)
Current liabilities (13,918) (11,159)
Borrowings and lease liabilities 15 (5,597) (7,497)
Other financial liabilities 18 (3,230) (2,715)
Trade payables and other liabilities 17 (2,364) (1,575)
Contract liabilities 13 (7,337) (6,710)
Deferred tax liabilities (286) (451)
Provisions for liabilities and charges 19 (1,701) (1,107)
Post-retirement scheme deficits 20 (1,033) (1,373)
Non-current liabilities (21,548) (21,428)
Liabilities associated with assets held for sale 23 - (723)
TOTAL LIABILITIES (35,466) (33,310)
NET LIABILITIES (6,016) (4,636)
EQUITY
Called-up share capital 1,674 1,674
Share premium 1,012 1,012
Capital redemption reserve 166 165
Hedging reserves 26 (45)
Merger reserve - 650
Translation reserve 861 342
Accumulated losses (9,789) (8,460)
Equity attributable to ordinary shareholders (6,050) (4,662)
NCI 34 26
TOTAL EQUITY (6,016) (4,636)
Condensed consolidated cash flow statement
Year ended 31 December 2022
Notes 2022 2021
£m £m
Reconciliation of cash flows from operating activities
Operating profit from continuing operations 837 513
Operating profit/(loss) from discontinued operations 23 86 (43)
Operating profit 923 470
Loss on disposal of property, plant and equipment 18 9
Share of results of joint ventures and associates 10 (48) (45)
Dividends received from joint ventures and associates 10 73 27
Amortisation and impairment of intangible assets 287 290
Depreciation and impairment of property, plant and equipment 430 462
Depreciation and impairment of right-of-use assets 287 257
Adjustment of amounts payable under residual value guarantees within lease 16 (3) (4)
liabilities (1)
Impairment of and other movements on investments 10 75 7
Decrease in provisions (197) (394)
Increase in inventories (887) (169)
Movement in trade receivables/payables and other assets/liabilities (56) (507)
Movement in contract assets/liabilities 1,753 (134)
Financial penalties paid (2) - (156)
Cash flows on other financial assets and liabilities held for operating (660) (85)
purposes (3)
Interest received 36 9
Net defined benefit post-retirement cost recognised in profit before financing 20 27 23
Cash funding of defined benefit post-retirement schemes 20 (81) (162)
Share-based payments 47 28
Net cash inflow/(outflow) from operating activities before taxation 2,024 (74)
Taxation paid (174) (185)
Net cash inflow/(outflow) from operating activities 1,850 (259)
Cash flows from investing activities
Movement in other investments 10 (5) (26)
Additions of intangible assets (237) (231)
Disposals of intangible assets 7 8 5
Purchases of property, plant and equipment (359) (328)
Disposals of property, plant and equipment 48 61
Disposal of businesses 23 1,398 99
Movement in investments in joint ventures and associates 10 (24) -
Movement in short-term investments (3) (8)
Net cash inflow/(outflow) from investing activities 826 (428)
Cash flows from financing activities
Repayment of loans (4) (2,024) (965)
Proceeds from increase in loans 1 2,005
Capital element of lease payments (218) (374)
Net cash flow from (decrease)/increase in borrowings and leases (2,241) 666
Interest paid (235) (206)
Interest element of lease payments (68) (63)
Fees paid on undrawn facilities (49) (62)
Cash flows on settlement of excess derivative contracts (5) 4 (326) (452)
Transactions with NCI (6) 57 30
NCI on formation of subsidiary - 3
Dividends to NCI (3) (1)
Redemption of C Shares (1) (3)
Net cash outflow from financing activities (2,866) (88)
Change in cash and cash equivalents (190) (775)
Cash and cash equivalents at 1 January 2,639 3,496
Exchange gains/(losses) on cash and cash equivalents 156 (82)
Cash and cash equivalents at 31 December (7) 2,605 2,639
( )(
)
Condensed consolidated cash flow statement continued
Year ended 31 December 2022
( )
(1) 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
(2) Relates to penalties paid on agreements with investigating bodies
(3 ) Predominately relates to cash settled on derivative contracts held for
operating purposes
(4) Repayment of loans includes repayments of £2,000m relating to the loan
supported by an 80% guarantee from UK Export Finance. Further details are
provided in note 15
(5) During the year, the Group incurred a cash outflow of £326m (2021:
£452m) as a result of settling foreign exchange contracts that were
originally in place to sell $2,200m (2021: $3,184m) receipts. Further detail
is provided in note 4
(6 ) Relates to NCI investment received in the year, in respect of
Rolls-Royce SMR Limited
(7 ) 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
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.
2022 2021
£m £m
Reconciliation of movements in cash and cash equivalents to movements in net
debt
Change in cash and cash equivalents (190) (775)
Cash flow from decrease/(increase) in borrowings and lease liabilities 2,241 (666)
Less: settlement of related derivatives included in fair value of swaps below - 6
Cash flow from increase in short-term investments 3 8
Change in net debt resulting from cash flows 2,054 (1,427)
New leases and other non-cash adjustments on borrowings and lease liabilities (170) (86)
Exchange losses on net debt (150) (51)
Fair value adjustments 70 170
Debt disposed of on disposal of business 53 8
Reclassifications - 19
Movement in net debt 1,857 (1,367)
Net debt at 1 January (5,194) (3,827)
Net debt at 31 December excluding the fair value of swaps (3,337) (5,194)
Fair value of swaps hedging fixed rate borrowings 86 37
Net debt at 31 December (3,251) (5,157)
Condensed consolidated cash flow statement continued
Year ended 31 December 2022
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 (1) ( ) Other movements At 31 December
£m £m £m £m £m £m £m £m
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 2,639 (190) - 156 - - - 2,605
(per cash flow statement)
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 (2) 37 - - 125 (76) - - 86
Net debt (5,157) 2,054 53 (25) (6) - (170) (3,251)
2021
Cash at bank and in hand 940 (87) - (20) - (38) - 795
Money market funds 669 (620) - - - - - 49
Short-term deposits 1,843 - - (66) - - - 1,777
Cash and cash equivalents (per balance sheet) 3,452 (707) - (86) - (38) - 2,621
Cash and cash equivalents included within assets held for sale 51 (68) - 4 - 38 - 25
Overdrafts (7) - - - - - - (7)
Cash and cash equivalents 3,496 (775) - (82) - - - 2,639
(per cash flow statement)
Short-term investments − 8 - - - - - 8
Other current borrowings (1,006) 950 - 1 35 18 - (2)
Non-current borrowings (4,274) (2,002) - 38 136 88 (9) (6,023)
Borrowings included within liabilities held for sale − 18 - 1 (1) (77) - (59)
Lease liabilities (2,043) 370 - (9) - 15 (77) (1,744)
Lease liabilities included within liabilities held for sale − 4 8 - - (25) - (13)
Financial liabilities (7,323) (660) 8 31 170 19 (86) (7,841)
Net debt excluding fair value of swaps (3,827) (1,427) 8 (51) 170 19 (86) (5,194)
Fair value of swaps hedging fixed rate borrowings (2) 251 (6) - (35) (173) - - 37
Net debt (3,576) (1,433) 8 (86) (3) 19 (86) (5,157)
(1) Reclassifications during the year to 31 December 2021 included the
transfer of ITP Aero to held for sale and fees of £29m paid in previous
periods for the £2,000m loan (supported by an 80% guarantee from UK Export
Finance) that have been reclassified to borrowings on the draw down of the
facility during the prior period
(2 ) 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
(2022: £38m, 2021: £114m) and the element of fair value relating to exchange
differences on the underlying principal of derivatives in cash flow hedges
(2022: £48m, 2021: £(77)m)
Condensed consolidated statement of changes in equity
Year ended 31 December 2022
Attributable to ordinary shareholders
Notes share capital Share premium Capital redemption reserve Hedging reserves (1) Merger reserve Translation reserve Accumulated losses (2) Total NCI Total equity
£m £m £m £m £m £m £m £m £m £m
At 31 December 2021 as previously reported 1,674 1,012 165 (45) 650 342 (8,460) (4,662) 26 (4,636)
Adoption of amendment to IAS 37 (post-tax) 1 - - - - - - (729) (729) - (729)
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 23 - - - 111 - - - 111 - 111
Foreign exchange translation differences reclassified to income statement on 23 - - - - - 65 - 65 - 65
disposal of businesses
NCI disposed of on disposal of businesses 23 - - - - - - - - 1 1
Movement on post-retirement schemes 20 - - - - - - (156) (156) - (156)
Fair value movement on cash flow hedges - - - (7) - - - (7) - (7)
Reclassified to income statement from cash flow hedge reserve - - - (55) - - - (55) - (55)
Costs of hedging - - - 10 - - - 10 - 10
Revaluation to fair value of other investments 10 - - - - - - (4) (4) - (4)
OCI of joint ventures and associates 10 - - - - - - 2 2 - 2
Related tax movements - - - 12 - 2 89 103 - 103
Total comprehensive income/(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)
At 1 January 2021 1,674 1,012 162 (94) 650 524 (8,825) (4,897) 22 (4,875)
Loss for the year - - - - - - 120 120 1 121
Foreign exchange translation differences on foreign operations - - - - - (178) - (178) - (178)
Foreign exchange translation differences classified to income statement on - - - - - (1) - (1) - (1)
disposal of businesses
Movement on post-retirement schemes 20 - - - - - - 254 254 - 254
Fair value movement on cash flow hedges - - - (32) - - - (32) - (32)
Reclassified to income statement from cash flow hedge reserve - - - 39 - - - 39 - 39
Revaluation to fair value of other investments 10 - - - - - - (2) (2) - (2)
OCI of joint ventures and associates 10 - - - 44 - - 1 45 - 45
Related tax movements - - - (2) - (3) (79) (84) - (84)
Total comprehensive income/(expense) for the year - - - 49 - (182) 294 161 1 162
Redemption of C Shares - - 3 - - - (3) - - -
Share-based payments - direct to equity (3) - - - - - - 28 28 - 28
Dividends to NCI - - - - - - - - (1) (1)
Transactions with NCI (4) - - - - - - 29 29 1 30
NCI on formation of subsidiary - - - - - - - - 3 3
Related tax movements - - - - - - 17 17 - 17
Other changes in equity in the year - - 3 - - - 71 74 3 77
At 31 December 2021 1,674 1,012 165 (45) 650 342 (8,460) (4,662) 26 (4,636)
(1 ) Hedging reserves include the cash flow hedge reserve of £26m and the
cost of hedging reserve of £nil. During the year, costs of hedging of £10m
were recognised and reclassified to the income statement
(2 ) At 31 December 2022, 11,402,796 ordinary shares with a net book value
of £27m (2021: 29,405,191 ordinary shares with a net book value of £65m)
were held for the purpose of share-based payment plans and included in
accumulated losses. During the year:
- 18,488,558 ordinary shares with a net book value of £39m (2021: 10,667,095
ordinary shares with a net book value of £24m) vested in share-based payment
plans; and
- the Company acquired none (2021: none) of its ordinary shares via
reinvestment of dividends received on its own shares and purchased 486,163
(2021: none) 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 year-end 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 2022 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 2022 (2022 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 2022 Annual Report.
The Board of Directors approved the Condensed Consolidated Financial
Statements on 23 February 2023. 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 2022 were
approved by the Board on 23 February 2023. 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 2021 have been
extracted from the Group's statutory accounts for that financial year. The
Board of Directors approved the Group financial statements on 24 February
2022. 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.
Changes to accounting policies
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
The Group adopted the amendment to IAS 37 Provisions, Contingent Liabilities
and Contingent Assets for Onerous Contracts - Cost of Fulfilling a Contract on
1 January 2022. The amendment clarifies the meaning of 'costs to fulfil a
contract', explaining that the direct cost of fulfilling a contract comprises
the incremental costs of fulfilling that contract (for example, direct labour
and materials) and also an allocation of other costs that relate directly to
fulfilling contracts. As a result of the amendment, the Group now includes
additional allocated costs when determining whether a contract is onerous and
in the quantification of the provision recognised in the event of a contract
being onerous. These additional allocated costs primarily relate to (a) fixed
overheads in our operational areas that are incurred irrespective of
manufacturing load, (b) fixed overheads of providing services, including
engine health monitoring and IT costs, and (c) depreciation of spare engines
that the Group owns are used to support the delivery of our contractual
commitments to customers under long-term service agreements (LTSAs). The Group
has assessed the impact of this amendment on its contracts and has included
additional allocated costs that increased the total contract loss provision by
£723m, as at 1 January 2022 (see note 19). All material elements impact Civil
Aerospace contracts. Of this increase, £38m relates to current provisions and
£685m to non-current provisions. A tax credit has not been recognised on the
increase in the provision relating to the UK (see note 5 for details). As
required by the transition arrangement in relation to the amendment,
comparative information has not been restated. The cumulative effect of
initially applying the amendment has been recognised as an adjustment to the
opening balance of retained earnings as at 1 January 2022. It is estimated
that the impact of the IAS 37 amendment has had a favourable immaterial impact
on the 2022 income statement.
Revision to IFRS not applicable in 2022
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 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 goods
or services and therefore will remain accounted for under the existing revenue
and provision 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.
The Group has identified that the Standard will impact the results of its
captive insurance company as it issues insurance contracts, however, the
impact is expected to largely consolidate out in the Condensed Consolidated
Financial Statements. The Standard includes a simplified approach and
modifications to its general measurement model that can be applied in certain
circumstances. Given the coverage period of these insurance policies within
the captive insurance company are 12 months or less, it is intended to make
use of the 'premium allocation approach' for the recognition of premiums. The
confidence level and risk adjustments have been calculated using a weighted
average cost of capital calculation with discount rates based on the European
Insurance and Occupational Pension Authority (EIOPA) risk-free interest rates.
The opening balances on 1 January 2022, as well as the results for 2022, have
been run under IFRS 17, and the expected impact on accumulated losses is less
than £1m.
The Group is in the process of concluding its analysis of whether there is any
further impact as a result of adopting the new Standard. This will conclude in
the first half of 2023. At this time there is no further known or reasonably
estimatable information to disclose that is relevant to assessing the possible
impact that application of the new IFRS will have on the Condensed
Consolidated Financial Statements.
Other
IBOR reform transition
A number of the Group's lease liabilities are based on a LIBOR index. These
are predominantly referencing USD LIBOR, which is not expected to cease until
2023, hence the change in relation to these contracts has not impacted the
2022 financial statements. Amendments to these contracts is in progress at the
balance sheet date.
Post balance sheet events
The Group has taken the latest legal position in relation to any ongoing legal
proceedings and reflected these in the 2022 results as appropriate.
1 Basis of preparation and accounting policies continued
Going concern
Overview
In adopting the going concern basis for preparing these Condensed Consolidated
Financial Statements, the Directors have undertaken a review of the Group's
cash flow forecasts and available liquidity, along with consideration of the
principal risks and uncertainties over an 18-month period to August 2024. The
Directors consider an 18-month period to be appropriate as it includes the
maturity of £1bn of the Group's £5.5bn undrawn borrowing facilities in
January 2024 and the repayment at maturity of a €550m (£484m) bond in May
2024.
The approved plans are used as the basis for monitoring the Group's
performance, incentivising employees, and providing external guidance to
shareholders.
The processes for identifying and managing risk are described on pages 42 to
49 of the 2022 Annual Report. As described on those pages, the risk management
process and the going concern and viability statements are designed to provide
reasonable but not absolute assurance.
Forecasts
Recognising the challenges of reliably estimating and forecasting the impact
of external factors on the Group, the Directors have considered two forecasts
in the 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 'stress' or 'downside' situation that is considered
severe but plausible.
The Group's base case forecast reflects a steady and ongoing recovery of
trading towards pre-pandemic levels. Macro-economic assumptions have been
modelled using externally available data based on the most likely forecasts
with inflation at 3% - 4%, interest rates at 4% - 6% and GDP growth at around
2%. In the base case forecast Civil large engine EFHs are expected to recover
to pre-pandemic levels by the end of 2024.
The stressed downside forecast assumes no further recovery in Civil large
engines, with EFHs modelled at the average fourth quarter 2022 levels
throughout the 18-month period to August 2024, reflecting slower GDP growth in
this forecast when compared with the base case. It also assumes a more
pessimistic view of inflation at around 6% higher than the base case covering
a broad range of costs including energy, commodities, and jet fuel. Interest
rates in the stressed downside are 1% - 2% higher than the base case. The
stressed downside also considers lower demand and load reduction through our
factories, and possible ongoing supply chain challenges.
The future impact of climate change on the Group has been considered through
climate scenarios. Key variables include carbon prices based on the IEA Net
Zero scenario, which assumes an increase from $46 per tonne of carbon in 2022
to $250 per tonne in 2050, commodity price trends, temperature rises and GCP
information Oxford Economics Global Climate Service Net Zero scenario aligned
to IPCC SSP1-19. The climate scenarios modelled do not have a material impact
on either the base case or downside forecast over the 18-month period to
August 2024.
Liquidity and borrowings
The proceeds from the disposal of ITP Aero, which completed in September 2022,
were used towards the repayment of a drawn £2bn UKEF loan which was due to
mature in August 2025. A new £1bn UKEF facility was entered into in September
2022, this remains undrawn.
At 31 December 2022, the Group had liquidity of £8.1bn including cash and
cash equivalents of £2.6bn and undrawn facilities of £5.5bn.
The Group's committed borrowing facilities at 31 December 2022 and 31 August
2024 are set out below. None of the facilities are subject to any financial
covenants or rating triggers which could accelerate repayment.
(£m) 31 December 2022 31 August 2024
Issued Bond Notes (1) 3,995 3,511
UKEF £1bn loan (undrawn) (2) 1,000 1,000
UKEF £1bn loan (undrawn) (3) 1,000 1,000
Revolving Credit Facility (undrawn) (4) 2,500 2,500
Bank Loan Facility (undrawn) (5) 1,000 −
Total committed borrowing facilities 9,495 8,011
(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 £1,000m UKEF loan matures in March 2026 (currently undrawn)
(3) The £1,000m UKEF loan matures in September 2027 (currently undrawn)
(4) The £2,500m Revolving Credit Facility matures in April 2025 (currently
undrawn)
(5) The £1,000m Bank Loan Facility matures in January 2024 (currently
undrawn)
Taking into account the maturity of these borrowing facilities, the Group has
committed facilities of at least £8.0bn available throughout the period to 31
August 2024.
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 financial statements.
1 Basis of preparation and accounting policies continued
Climate change
In preparing the Condensed Consolidated Financial Statements the Directors
have considered the potential impact of climate change, particularly in the
context of the disclosures included in the Strategic Report and Climate Review
this year and the stated decarbonisation strategy. Based on the Taskforce for
Climate-related Financial Disclosures (TCFD) recommendations, the Group
assesses the potential impact of climate-related risks which cover both
transition risks and physical risks. The eight key risks and the opportunities
considered in the climate scenarios prepared include extensive policy, legal,
technological, and market changes and physical risks which could include
direct damage to assets and supply chain disruption. Two of the assessed key
transition risks have been identified as potentially having a high impact on
the Group. These relate to the risk that regulatory changes could materially
impact demand for our products and that addressing climate change will require
shifting investment focus towards more sustainable products and solutions.
Both of these risks are being actively addressed through the Group's
decarbonisation strategy and the financial implications, as reflected in the
quantified climate scenarios, have been considered when preparing the
financial statements.
The Group has set its decarbonisation strategy and identified longer-term
considerations in response to the climate challenge and is engaging
proactively with external stakeholders to advocate for the conditions that
society needs to achieve its net zero target. The Group's main short- and
longer-term priorities include:
- achieving net zero greenhouse gas (GHG) emissions by 2030
from all energy purchased and consumed in the Group's offices, manufacturing
and production activities (with the exception of product testing and
development). This will be met through continued investment in onsite
renewable energy installations; the procurement of renewable energy; and
continued investment in energy efficiency improvements to reduce the Group's
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 these Condensed Consolidated Financial Statements;
- the scale up of sustainable fuels that will play a crucial
role in reaching net zero carbon. To accelerate this, the Group are working to
demonstrate that all the commercial aero engines produced, and the most
popular reciprocating engines, representing 80% of the product portfolio, are
compatible with sustainable fuels by the end of 2023 and working with our
armed forces customers to achieve the same goals for the Rolls-Royce engines
they use; and
- developing breakthrough new technologies, including
investment in hybrid-electric solutions in Power Systems, continued
development of the more efficient UltraFan aero engine, testing of sustainable
aviation fuels, small modular reactors (SMRs) and hybrid and fully electric
propulsion. New products will be compatible with net zero operation by 2030
and all products will be compatible with net zero operation by 2050. In the
year, R&D costs of £(108)m (2021: £(68)m) within New Markets included
design development to ready the SMRs to progress through the UK generic design
assessment (GDA) process and investment in electrical propulsion technology.
Future investment required to deliver these technologies is included in the
forecasts that support the Condensed Consolidated Financial Statements.
The climate change scenarios previously prepared to assess the viability of
our business strategy, decarbonisation plans and approach to managing
climate-related risk have continued to develop over the last year as set out
in our Climate Review. There remains inherent uncertainty over the assumptions
used within these and how they will impact the Group's business operations,
cash flows and profit projections. The Directors assess the assumptions on a
regular basis to ensure that they are consistent with the risk management
activities and the commitments made to investors and other stakeholders.
Assumptions used within the Condensed Consolidated Financial Statements in
relation to areas such as revenue recognition for long-term contracts,
impairment reviews of non-current assets and the carrying amount of deferred
tax assets consider the findings from the climate scenarios prepared. Key
variables include carbon pricing based on the International Energy Agency
(IEA) Net Zero scenario, which assumes an increase from $46 per tonne of
carbon in 2022 to $250 per tonne in 2050, and commodity price, temperature
rise and GDP information from the Oxford Economics Global Climate Service Net
Zero scenario aligned to IPCC SSP1-19.
As details of what incremental 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. To ensure
revenue recognition or the carrying value of assets is not overstated it has
been assumed that carbon pricing falls on our own manufacturing facilities and
those of our supply chain. The Group will be able to mitigate an element of
the financial impact as it reduces the scope 1 and 2 emissions from its
offices, manufacturing and production activities, the costs of which have been
incorporated into forecasts. The Group has made estimates in relation to
decarbonisation in its external supply chain and the impact this may have on
the Group's costs, whilst acknowledging in its financial modelling that this
is complex and will therefore take some time. The financial modelling
performed recognises the extent to which the Group's current supplier
contracts offer protection from cost increases in the short to medium term
where pricing is fixed or subject to capped escalation clauses. The Group has
made a cautious assessment of whether higher costs would be passed on to
customers in the short and medium term that considers the markets operated in
and the pricing mechanisms in place. For example, in Civil Aerospace it is
recognised that escalation caps within a number of its LTSA contracts would be
triggered, meaning additional costs could remain within the business under
current commercial arrangements until the end of existing contract periods.
When determining the amount of cumulative revenue recognised on long-term
contracts, and the obligation in relation to onerous contracts, the
assumptions above have been used to reflect the climate uncertainties. Changes
in estimates have not had a significant impact on revenue catch-ups in the
year (2021: £(17)m) or on contract loss provisions (2021: £(20)m). Increases
in carbon and commodity price estimates over the term of the current contracts
are estimated to be around 1% (2021: 1%). A sensitivity is presented within
the key sources of estimation uncertainty (page 20) to disclose the impact of
a further 1% cost increase that might arise from further unmitigated increases
in carbon and/or commodity pricing.
Impairment testing of non-current assets including goodwill and programme
assets has considered the above risks as well as assessing how the Group's
1.5(o)C and 3.6(o)C scenarios may change the demand for products over the
medium and longer term. Given the headroom, the climate scenarios modelled do
not indicate any potential impairment. Further information is provided in note
7.
Deferred tax assets are recognised to the extent it is probable that future
taxable profits will be available, against which the unused tax losses and
deductible temporary difference can be utilised. The weighted downside
forecast includes the climate-related estimates and assumptions. Whilst carbon
pricing illustrates pressure on costs, decarbonisation and new supplier and
customer contracts offer the opportunity to receive value for more efficient
and sustainable products. Further details are included in note 5 together with
sensitivity analysis in the key sources of estimation uncertainty section
below.
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 2022 are those relating to the recoverable amount of non-current
assets including goodwill, capitalised development costs, recovery of deferred
tax assets, recognition and measurement of provisions and recognition of
revenue on long-term contracts. These items are included within the key areas
of judgement and key sources of estimation uncertainty summarised on page 20.
Further detail is set out in note 1 to the Financial Statements in the 2022
Annual Report.
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 2022, 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 financial statements in the 2022 Annual Report and are
summarised below.
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. Estimates of future revenue, including customer pricing, and costs of Based upon the stage of completion of all large engine LTSA contracts within
long-term contractual arrangements including the impact of climate change. Civil Aerospace as at 31 December 2022, the following changes in estimate
How performance on
would result in catch-up adjustments being recognised in the period in which
long-term aftermarket contracts should be measured. the estimates change (at underlying rates):
Whether any costs should be treated as wastage. - 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
Whether sales of spare engines to joint ventures are at fair value. of around £20m.
When revenue should be recognised in relation to spare engine sales. - 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 £260m.
- 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 £100m.
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 A 5% change in margin or shop visits (which could be driven by fewer EFHs as a
taxable profits will arise in the UK to utilise the deferred tax assets result of climate change) would result in an increase/decrease in the deferred
recognised. tax asset in respect of UK losses of around £130m.
If only 90% of assumed future cost increases are passed on to customers, this
would result in a decrease in the deferred tax asset of around £50m, and if
the potential impact of carbon prices on the Group's cost base was to double,
this would be around £80m.
Discontinued operations and business disposals The assets, liabilities and associated consolidation adjustments of the ITP
Aero business recognised on disposal.
Research and development Determination of the point in time where costs incurred on an internal
programme development meet the criteria for capitalisation or ceasing
capitalisation.
Determination of the basis for amortising capitalised development costs.
Impairment of Determination of cash-generating units for assessing impairment of goodwill.
non-current assets
Leases Determination of the lease term. Estimates of the payments required to meet residual value guarantees at the The lease liability at 31 December 2022 included £434m relating to the cost
end of engine leases. of meeting these residual value guarantees in the Civil Aerospace business. Up
to £114m is payable in the next 12 months, £175m is due over the following
four years and the remaining balance after five years.
Provisions Whether any costs should be treated as wastage. Estimates of the time to resolve the technical issues on the Trent 1000, A 12-month delay in the availability of the modified HPT blade could lead to a
including the development of the modified high-pressure turbine (HPT) blade
£40-70m increase in the Trent 1000 wastage costs provision.
and estimates of the expenditure required to settle the obligation relating to
Trent 1000 long-term contracts assessed as onerous. An increase in Civil Aerospace large engines estimates of LTSA costs of 1%
over the remaining term of the contracts could lead to a £100-125m increase
Estimates of the future revenues and costs to fulfil onerous contracts. in the provision for contract losses across all programmes.
Assumptions implicit within the calculation of discount rates. A 1% change in the discount rates used could lead to around a £80-100m change
in the 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 4.80% could lead to an increase
in the defined benefit obligations of the RR UK Pension Fund (RRUKPF) of
approximately £205m. 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 3.50% and CPI of
2.95%) could lead to an increase in the defined benefit obligations of the
RRUKPF of approximately £70m.
A one-year increase in life expectancy from 21.9 years (male aged 65) and from
23.2 years (male aged 45) would increase the defined benefit obligations of
the RRUKPF by approximately £165m.
2 Segmental analysis
The analysis by business segment is presented in accordance with IFRS 8
Operating Segments, on the basis of those segments whose operating results are
regularly reviewed by the Board (who acts as the Chief Operating Decision
Maker as defined by IFRS 8). The Group's four businesses 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 Bergen Engines AS business
until the date of disposal on 31 December 2021 and the results of the Civil
Nuclear Instrumentation & Control business until the date of disposal on 5
November 2021 and the trading results of the UK Civil Nuclear business.
Underlying results
The Group presents the financial performance of the businesses in accordance
with IFRS 8 and consistently with the basis on which performance is
communicated to the Board each month.
Underlying results are presented 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 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. 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 2022, the Group was a net seller of USD at an
achieved exchange rate GBP:USD of 1.50 (2021: In the first half of the year,
the Group was a net purchaser of USD at an achieved exchange rate of 1.39. In
the second half of 2021, the Group was a net seller of USD at an achieved
exchange rate of 1.59) based on the USD hedge book.
Estimates of future USD cash flows have been determined using the Group's
base-case forecast. These USD cash flows have been used to establish the
extent of future USD hedge requirements. In 2020, the Group took action to
reduce the size of the USD hedge book by $11.8bn across 2020-2026, resulting
in an underlying charge of £1.7bn being recognised within underlying finance
costs and the associated cash settlement costs occurring 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. This charge was reversed in arriving at the 2020 statutory
performance on the basis that the cumulative fair value changes on these
derivative contracts are recognised as they arise.
Underlying performance 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.
Acquisition accounting, business disposals and impairment
The Group exclude these from underlying results so that the current year 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 restructuring
programmes and one-time past service charges and credits on post-retirement
schemes.
Subsequent changes in exceptional items recognised in a prior period will also
be recognised as exceptional. All other changes will be recognised within
underlying performance.
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 the adjustments above are excluded from the underlying tax
charge. In addition, changes in tax rates or changes in the amount of
recoverable deferred tax or advance corporation tax recognised are also
excluded.
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 Total underlying
£m £m £m £m £m £m £m
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
Year ended 31 December 2021
Underlying revenue from sale of original equipment 1,612 1,411 1,744 - 155 (11) 4,911
Underlying revenue from aftermarket services 2,924 1,957 1,005 2 148 - 6,036
Total underlying revenue 4,536 3,368 2,749 2 303 (11) 10,947
Gross profit/(loss) 474 721 778 1 32 (10) 1,996
Commercial and administrative costs (297) (161) (383) (3) (20) (35) (899)
Research and development costs (434) (105) (157) (68) (10) - (774)
Share of results of joint ventures and associates 85 2 4 - - - 91
Underlying operating (loss)/profit (172) 457 242 (70) 2 (45) 414
2 Segmental analysis continued
Reconciliation to statutory results
Total underlying Underlying adjustments and adjustments to Group statutory results
foreign exchange
£m £m £m
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)
Year ended 31 December 2021
Continuing operations
Revenue from sale of original equipment 4,911 152 5,063
Revenue from aftermarket services 6,036 119 6,155
Total revenue 10,947 271 11,218
Gross profit 1,996 140 2,136
Commercial and administrative costs (899) 9 (890)
Research and development costs (774) (4) (778)
Share of results of joint ventures and associates 91 (46) 45
Operating profit 414 99 513
Gain arising on the disposal of businesses - 56 56
Profit before financing and taxation 414 155 569
Net financing (378) (485) (863)
Profit/(loss) before taxation 36 (330) (294)
Taxation (26) 444 418
Profit for the year from continuing operations 10 114 124
Discontinued operations (1) 51 (54) (3)
Profit for the year 61 60 121
Attributable to:
Ordinary shareholders 60 60 120
NCI 1 - 1
(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 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 (1) 5,619 3,660 3,347 3 - (5) 12,624
Other underlying revenue 67 - - - - - 67
Total underlying revenue 5,686 3,660 3,347 3 - (5) 12,691
Year ended 31 December 2021
Original equipment recognised at a point in time 1,612 604 1,720 - 142 (11) 4,067
Original equipment recognised over time - 807 24 - 13 - 844
Aftermarket services recognised at a point in time 629 825 871 2 148 - 2,475
Aftermarket services recognised over time 2,223 1,132 134 - - - 3,489
Total underlying customer contract revenue (1) 4,464 3,368 2,749 2 303 (11) 10,875
Other underlying revenue 72 - - - - - 72
Total underlying revenue 4,536 3,368 2,749 2 303 (11) 10,947
(1 ) Includes £367m, of which £360m relates to Civil LTSA contracts,
(2021: £159m, of which £214m 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 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
Year ended 31 December 2021
Original equipment recognised at a point in time 4,067 152 4,219
Original equipment recognised over time 844 - 844
Aftermarket services recognised at a point in time 2,475 38 2,513
Aftermarket services recognised over time 3,489 75 3,564
Total customer contract revenue 10,875 265 11,140
Other revenue 72 6 78
Total revenue 10,947 271 11,218
(1 ) During the year to 31 December 2022, revenue recognised within Civil
Aerospace, Defence and Power Systems of £1,788m (2021: £1,634m) was received
from a single customer
2 Segmental analysis continued
Underlying adjustments 2021
2022
Revenue Profit before financing Net financing Revenue Profit before financing Net financing
£m £m £m £m £m £m
Taxation Taxation
£m £m
Underlying performance 12,691 652 (446) (48) 10,947 414 (378) (26)
Impact of foreign exchange differences as a result of hedging activities on A 829 267 (358) (81) 271 (34) 62 33
trading transactions (1)
Unrealised fair value changes on derivative contracts held for trading (2) A - (3) (1,768) 451 - (6) (618) 110
Unrealised net gain on closing future A - - - - - - (8) -
over-hedged position (3)
Realised net gain on closing over-hedged position (3) A - - - - - - (6) -
Unrealised fair value change to derivative contracts held for financing (4) A - - 191 (47) - - 79 (20)
Exceptional programme credits/(charges) (5) B - 69 (3) - - 105 - (1)
Exceptional restructuring (charges)/credits (6) B - (47) - 4 - 45 - 1
Impairment (charges)/reversals (7) C - (65) - - - 9 - -
Effect of acquisition accounting (8) C - (58) - 9 - (50) - 12
Pension past-service credit (9) B - 22 - (2) - 47 - (13)
Other (10) D - - (36) (69) - (17) 6 (37)
Gains arising on the disposals of businesses (11) C - 81 - (2) - 56 - 2
Impact of tax rate change (12) - - - - - - - 327
Re-recognition of deferred tax assets (13) - - - 93 - - - 30
Total underlying adjustments 829 266 (1,974) 356 271 155 (485) 444
Statutory performance per condensed consolidated income statement 13,520 918 (2,420) 308 11,218 569 (863) 418
A - FX, 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
reported revenues by £829m (2021: increased by £271m) and increased profit
before financing and taxation by £267m (2021: reduced profit by £34m).
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) In 2020, the Group took action to reduce the size of the USD hedge book by
$11.8bn across 2020-2026, resulting in an underlying charge of £1.7bn at 31
December 2020. In 2021, this estimate was updated to reflect the actual cash
cost and resulted in a £15m gain to underlying finance costs
(4) Includes the gains on hedge ineffectiveness in the year of £1m (2021:
losses of £1m) and net fair value gains of £190m (2021: gains of £80m) on
any interest rate swaps not designated into hedging relationships for
accounting purposes
(5) During the year to 31 December 2022 and 2021, contract loss provisions
previously recognised in respect of the Trent 1000 technical issues which were
identified in 2019 have been reversed due to a reduction in the estimated cost
of settling the obligation
(6) During the year to 31 December 2022, the Group recorded an exceptional
restructuring charge of £47m (2021: credit of £45m) which included £57m
(2021: £93m) associated with initiatives to enable the restructuring offset
by £10m (2021: £138m) released from the provision
(7)( ) The Group has assessed the carrying value of its assets. Further
details are provided in notes 7,8 and 9
(8) The effect of acquisition accounting includes the amortisation of
intangible assets arising on previous acquisitions
(9) The past-service credit of £22m includes a £23m credit as a result of
changes in the schemes in Power Systems, a settlement loss of £7m on the
Rolls-Royce North America retirement scheme and a credit of £6m as a result
of a constructive obligation recognised for the offering of the Bridging
Pension Option (BPO) to other deferred members in the RRUKPF
(10) Includes £(14)m (2021: £14m) reclassification of amounts
(received)/paid on interest rate swaps which are not designated as hedge
relationship for accounting purposes from interest payable on an underlying
basis to fair value movement
(11) Gains/(losses) arising on the acquisitions and disposals of
businesses are set out in note 23
(12) The 2021 tax credit relates to the increase in the UK tax rate from
19% to 25%
(13) The re-recognition of deferred tax assets relates to foreign exchange
derivatives
2 Analysis by business segment continued
Balance sheet analysis
( ) Civil Aerospace Defence Power Systems New Markets Total reportable segments
£m £m £m £m £m
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)
At 31 December 2021
Segment assets 15,846 2,766 3,531 90 22,233
Interests in joint ventures and associates 378 9 16 - 403
Segment liabilities (20,745) (2,635) (1,503) (33) (24,916)
Net (liabilities)/assets (4,521) 140 2,044 57 (2,280)
Reconciliation to the balance sheet
2022 2021
£m £m
Total reportable segment assets excluding held for sale 25,186 22,233
Other businesses 19 14
Corporate and inter-segment (2,460) (2,255)
Interests in joint ventures and associates 422 403
Assets held for sale (1) - 2,028
Cash and cash equivalents and short-term investments 2,618 2,629
Fair value of swaps hedging fixed rate borrowings 194 135
Deferred and income tax assets 2,858 2,339
Post-retirement scheme surpluses 613 1,148
Total assets 29,450 28,674
Total reportable segment liabilities excluding held for sale (30,402) (24,916)
Other businesses (34) (11)
Corporate and inter-segment 2,456 2,139
Liabilities associated with assets held for sale (1) - (723)
Borrowings and lease liabilities (5,955) (7,776)
Fair value of swaps hedging fixed rate borrowings (108) (98)
Deferred and income tax liabilities (390) (552)
Post-retirement scheme deficits (1,033) (1,373)
Total liabilities (35,466) (33,310)
Net liabilities (6,016) (4,636)
(1) At 31 December 2021, assets and liabilities relating to ITP Aero, the
investment in Airtanker Holdings and other non-current assets related to the
Group's site rationalisation activities are classified as held for sale. For
further details see note 23
3 Research and development
2022 2021
£m £m
Gross research and development costs (1,287) (1,179)
Contributions and fees (1) 359 366
Expenditure in the year (928) (813)
Capitalised as intangible assets 131 105
Amortisation and impairment of capitalised costs (2) (94) (70)
Net cost recognised in the income statement (891) (778)
Underlying adjustments relating to the effects of acquisition accounting and 5 4
foreign exchange
Net underlying cost recognised in the income statement (886) (774)
(1) ( ) Includes government funding
(2) ( ) See note 7 for analysis of amortisation and impairment. During the
year, amortisation of £nil (2021: £5m) has been incurred within the disposal
group recognised as a discontinued operation
4 Net financing
2022 2021
Statutory Underlying (1) Statutory Underlying (1)
£m £m £m £m
Interest receivable 35 35 7 7
Net fair value gains on foreign currency contracts - - 80 -
Net fair value gains on non-hedge accounted interest rate swaps (2) 190 - - -
Net fair value gains on commodity contracts 106 - 63 -
Financing on post-retirement scheme surpluses 24 - 17 -
Net foreign exchange gains - - 62 -
Realised net gains on closing over-hedged position (3) - - - 6
Unrealised net gains on closing over-hedged position (3) - - - 8
Financing income 355 35 229 21
Interest payable (343) (320) (252) (262)
Net fair value losses on foreign currency contracts (1,875) - (681) -
Foreign exchange differences and changes in forecast payments relating to (7) - (7) -
financial RRSAs
Financing on post-retirement scheme deficits (26) - (20) -
Net foreign exchange losses (358) - - -
Cost of undrawn facilities (61) (61) (62) (62)
Other financing charges (105) (100) (70) (75)
Financing costs (2,775) (481) (1,092) (399)
Net financing costs (2,420) (446) (863) (378)
Analysed as:
Net interest payable (308) (285) (245) (255)
Net fair value (losses)/gains on derivative contracts (1,579) - (538) 14
Net post-retirement scheme financing (2) - (3) -
Net foreign exchange (losses)/gains (358) - 62 -
Net other financing (173) (161) (139) (137)
Net financing costs (2,420) (446) (863) (378)
(1) See note 2 for definition of underlying results
(2 ) 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
fair value movements on these interest rate swaps to net interest payable
(3) In 2020, the Group took action to reduce the size of the USD hedge book by
$11.8bn across 2020-2026, resulting in an underlying charge of £1,689m at 31
December 2020. In 2021, this estimate was updated to reflect the actual cash
settlement cost of £1,674m and resulted in a £15m gain to underlying finance
costs in the year to 31 December 2021. The cash settlement costs of £1,674m
covers the period 2020-2026, £326m was incurred in the year to 31 December
2022 (2021: £452m, 2020: £186m). The Group estimates that future cash
outflows of £389m will be incurred in 2023 and £321m spread over 2024-2026
5 Taxation
UK Overseas Total
2022 2021 2022 2021 2022 2021
£m £m £m £m £m £m
Current tax charge for the year 18 17 159 151 177 168
Adjustments in respect of prior years (5) 2 (8) 12 (13) 14
Current tax 13 19 151 163 164 182
Deferred tax credit for the year (427) (173) (61) (59) (488) (232)
Adjustments in respect of prior years 4 (15) 12 (26) 16 (41)
Deferred tax credit resulting from an increase in UK tax rate - (327) - - - (327)
Deferred tax (423) (515) (49) (85) (472) (600)
(Credited)/charged in the income statement (410) (496) 102 78 (308) (418)
Deferred taxation assets and liabilities
2022 2021
£m £m
At 31 December (as previously reported) 1,798 1,332
Adoption of amendment to IAS 37 (6) -
At 1 January 1,792 1,332
Amount credited to income statement 495 636
Amount credited/(charged) to OCI 91 (82)
Amount credited/(charged) to hedging reserves 12 (2)
Amount credited to equity 1 17
On disposal of businesses (1) 28 (4)
Transferred to assets held for sale (2) - (85)
Exchange differences 26 (14)
At 31 December 2,445 1,798
Deferred tax assets 2,731 2,249
Deferred tax liabilities (286) (451)
2,445 1,798
(1) ( ) The 2022 deferred tax relates to the disposal of ITP Aero. The 2021
deferred tax relates to the disposal of Bergen Engines AS and the Civil
Nuclear Instrumentation and Control business
(2) The 2021 deferred tax transferred to assets held for sale relates to ITP
Aero
Of the total deferred tax asset of £2,731m, £2,183m (2021: £1,736m) relates
to the UK and is made up as follows:
- £1,054m (2021: £1,054m) relating to tax losses;
- £668m (2021: £339m) arising on unrealised losses on derivative
contracts;
- £162m (2021: £162m) of advance corporation tax; and
- £299m (2021: £181m) 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 that it is probable that
future taxable profits will be available against which the assets can be
utilised. A recoverability assessment has been undertaken, taking account of
deferred tax liabilities against which the reversal can be offset and using
latest UK forecasts, which are mainly driven by the 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 which are consistent with
past experience and external sources on market conditions. These forecasts
cover the next five years;
- the long-term forecast profit profile of certain major large engine
programmes which is typically in excess of 30 years from initial investment to
retirement of the fleet, including the aftermarket revenues earned from
airline customers;
- taking into account the risk that regulatory changes could
materially impact demand for our products and shifting investment focus
towards more sustainable products and solutions;
- consideration that all commercial aero-engines will be compatible
with sustainable fuels by the end of 2023;
- a 25% probability of the severe but plausible downside forecast
materialising in relation to the civil aviation industry; and
- the long-term forecast profit and cost profile of the other parts
of the business.
5 Taxation continued
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, management's assumptions relating to the amounts and timing of
future taxable profits include the impact of macroeconomic factors and climate
change on existing large engine programmes. Based on this assessment, the
Group has recognised a total UK deferred tax asset of £2,183m. This reflects
the conclusions that:
- It is probable that the business will generate taxable income and
tax liabilities in the future against which these losses can be utilised.
- Based on current forecasts and using various scenarios these losses
and other deductible temporary differences will be used in full within the
expected large engine programme lifecycles. An explanation of the potential
impact of climate change on forecast profits and sensitivity analysis can be
found in note 1.
The Group has not recognised a deferred tax asset in respect of 2022 UK tax
losses. This includes the impact of the IAS 37 amendment.
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 £284m (2021: £254m), 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.
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 temporary differences associated with investments in subsidiaries, joint
ventures and associates, for which a deferred tax liability has not been
recognised, aggregate to £1,062m (2021: £957m). 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.
The Group is reviewing the impact of the Organisation for Economic
Co-operation and Development (OECD) Pillar Two (global minimum tax) rules and
the associated UK draft legislation, which was released on 20 July 2022. These
rules will apply to the Group from 2024.
6 Earnings per ordinary share
Basic earnings per share (EPS) is calculated by dividing the (loss)/profit
attributable to ordinary shareholders by the weighted average number of
ordinary shares in issue during the year, excluding ordinary shares held under
trust, which have been treated as if they had been cancelled.
As there is a continuing loss during the year, the effect of potentially
dilutive ordinary shares is anti-dilutive.
2022 2021
Basic Potentially dilutive share options Diluted Basic Potentially dilutive share options Diluted
(Loss)/profit attributable to ordinary shareholders (£m):
Continuing operations (1,189) (1,189) 123 123
Discontinued operations (80) (80) (3) (3)
(1,269) (1,269) 120 120
Weighted average number of ordinary shares (millions) 8,349 - 8,349 8,332 20 8,352
EPS (pence):
Continuing operations (14.24) - (14.24) 1.48 (0.01) 1.47
Discontinued operations (0.96) - (0.96) (0.04) - (0.04)
(15.20) - (15.20) 1.44 (0.01) 1.43
The reconciliation between underlying EPS and basic EPS is as follows:
2022 2021
Pence £m Pence £m
Underlying EPS / Underlying profit from continuing operations attributable to 1.95 163 0.11 9
ordinary shareholders
Total underlying adjustments to (loss)/profit before tax (note 2) (20.45) (1,708) (3.96) (330)
Related tax effects 4.26 356 5.33 444
EPS / (loss)/profit from continuing operations attributable to ordinary (14.24) (1,189) 1.48 123
shareholders
Diluted underlying EPS from continuing operations attributable to ordinary 1.95 0.11
shareholders
7 Intangible assets
Goodwill Certification costs Development expenditure Customer relationships Software (1) Other Total
£m £m £m £m £m £m £m
Cost:
At 1 January 2022 1,060 933 3,393 475 978 833 7,672
Additions - - 131 - 78 21 230
Disposals - - - - (90) (1) (91)
Exchange differences 75 2 80 37 12 33 239
At 31 December 2022 1,135 935 3,604 512 978 886 8,050
Accumulated amortisation and impairment:
At 1 January 2022 34 425 1,760 342 650 420 3,631
Charge for the year (2) - 21 77 35 86 33 252
Impairment - - 17 - 13 5 35
Disposals - - - - (82) (1) (83)
Exchange differences 2 1 58 29 8 19 117
At 31 December 2022 36 447 1,912 406 675 476 3,952
Net book value at:
31 December 2022 1,099 488 1,692 106 303 410 4,098
1 January 2022 1,026 508 1,633 133 328 413 4,041
(1 ) Includes £93m (2021: £115m) of software under course of construction
which is not amortised
(2 ) Charged to cost of sales and commercial and administrative costs except
development costs, which are charged to research and development costs
Goodwill has been tested for impairment during 2022 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 1% to 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 3% 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 believe 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. The main
climate-related areas that have been considered are the risk that regulatory
changes could materially impact demand for our products (and hence the
utilisation of the products whilst in service and their useful lives) and
shifting investment focus towards more sustainable products and solutions.
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 will be
compatible with sustainable fuels by the end of 2023. Similarly, the most
popular reciprocating engines in Power Systems will be compatible with
sustainable fuels by the end of 2023. The investment required to ensure our
new products will be compatible with net zero operation by 2030, and to
achieve net zero scope 1 and 2 GHG emissions is reflected in the forecasts
used.
A 1.5(o)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
7 Intangible assets continued
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. Whilst there are no indicators of impairment under the value
in use method presented in 2021, 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;
- Severe but plausible downside scenario in relation to
macro-economic factors included with a 20% weighting;
- Cash flows beyond the five-year forecasts are assumed to grow at
1.0% (2021: 2.0%); and
- Nominal post-tax discount rate 10.0% (2021: 8.2%).
The Directors do not consider that any reasonably possible changes in the key
assumptions (including taking consideration of the climate 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% (2021: 2.0%); and
- Nominal pre-tax discount rate 13.2% (2021: 11.9%).
The Directors do not consider that any reasonably possible changes in the key
assumptions (including taking consideration of the climate 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
(2021: no) being recognised at 31 December 2022.
The carrying amount and the residual life of the material intangible assets
(excluding goodwill) for the Group are as follows:
Residual life (1) 2022 2021
£m £m
Trent programme intangible assets (2) 3-15 years 1,826 1,787
Business aviation programme intangible assets (3) 12-15 years 250 237
Intangible assets related to Power Systems (4) 466 491
2,542 2,515
(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 £114m (2021: £108m) in respect of a brand intangible asset
which is not amortised. Remaining assets are amortised over a range of three
to 20 years
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.
Other 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 2021 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 risks are considered when
making these estimates consistent with the assumptions above.
There have been no (2021: no) individually material impairment charges or
reversals recognised during the year.
8 Property, plant and equipment
Land and buildings Plant and equipment Aircraft and engines In course of construction Total
£m £m £m £m £m
Cost:
At 1 January 2022 1,865 4,986 1,046 300 8,197
Additions 34 127 26 162 349
Disposals/write-offs (38) (142) (81) (1) (262)
Reclassifications (1) 3 82 (3) (82) -
Exchange differences 72 172 11 21 276
At 31 December 2022 1,936 5,225 999 400 8,560
Accumulated depreciation and impairment:
At 1 January 2022 614 3,244 414 8 4,280
Charge for the year (2) 79 296 55 - 430
Impairment (3) 5 (5) - - -
Disposals/write-offs (24) (142) (57) - (223)
Reclassifications (1) (2) 5 (3) - -
Exchange differences 23 109 4 1 137
At 31 December 2022 695 3,507 413 9 4,624
Net book value at:
31 December 2022 1,241 1,718 586 391 3,936
1 January 2022 1,251 1,742 632 292 3,917
(1 ) 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
(2 ) Depreciation is charged to cost of sales and commercial and
administrative costs or included in the cost of inventory as appropriate
(3 ) 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 assumptions 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 explained in note 7. As a result of this
assessment, there are no individually material impairment charges or reversals
in the year. The reversal in the year relates to an element of the
non-underlying impairments recorded in 2020 in Civil Aerospace for site
rationalisation where there has been a subsequent change in strategy to
continue production on those sites
9 Right-of-use assets
Land and buildings Plant and equipment Aircraft and engines Total
£m £m £m £m
Cost:
At 1 January 2022 456 143 1,785 2,384
Additions/modification of leases 52 34 59 145
Disposals (30) (19) (22) (71)
Exchange differences 28 4 5 37
At 31 December 2022 506 162 1,827 2,495
Accumulated depreciation and impairment:
At 1 January 2022 186 66 929 1,181
Charge for the year 43 37 190 270
Impairment (1) (2) (1) 20 17
Disposals (13) (19) (22) (54)
Exchange differences 16 1 3 20
At 31 December 2022 230 84 1,120 1,434
Net book value at:
31 December 2022 276 78 707 1,061
1 January 2022 270 77 856 1,203
(1 ) 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 assumptions 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 explained in note 7). During the year, a
reversal was recognised relating to an element of the non-underlying
impairments recorded in 2020 in Civil Aerospace for site rationalisation where
there has been a subsequent change in strategy to continue production on those
sites. In addition, a charge of £20m was recognised due to the current
sanctions applicable over assets in Russia. At the balance sheet date the
Group could not access the assets that were on lease and it is not known when
this situation would be resolved to enable the Group to generate a recoverable
amount
10 Investments
Equity accounted and other investments
Equity accounted Other (1)
Joint ventures Associates Total £m
£m £m £m
At 1 January 2022 403 1 404 36
Additions (2) 29 - 29 7
Disposals - (1) (1) (2)
Impairment (3) (74) - (74) (1)
Share of retained loss (4) (25) - (25) -
Reclassification of deferred profit to deferred income (5) (4) - (4) -
Repayment of loans (5) - (5) -
Revaluation of other investments accounted for at FVOCI - - - (4)
Exchange differences 96 - 96 -
Share of OCI 2 - 2 -
At 31 December 2022 422 - 422 36
(1) Other investments includes unlisted investments of £26m (2021: £29m) and
listed investments of £10m (2021: £7m)
(2) During the year, additions to investments of £29m include the following
significant transactions: On 20 June 2022, the Group acquired a 54% investment
in Hoeller Electrolyzer. Although the Group has acquired a 54% stake, the
Group has considered whether the majority stake constitutes a subsidiary as
per the basis of consolidation on page 120 of the 2022 Annual Report. Based on
key decisions requiring consent from both shareholders, the Group has
concluded that Hoeller Electrolyser is jointly controlled and is equity
accounted in the Consolidated Financial Statements. On 1 September 2022,
Rolls-Royce and Air China established a joint venture called Beijing Aero
Engine Services Company Limited
(3) During the year, one of the Group's investments in its Civil Aerospace
joint venture repair and overhaul facilities has been impaired by £74m. This
reflects the Directors' updated judgement of the recoverable amount from that
investment when measured on a value in use basis by discounting expected
future dividends at 12.4% (cost of equity for the Civil Aerospace business).
The charge in the year reflects a higher discount rate and revised assumptions
taking into account the impact of inflation and interest rates on that
business, reflecting current market conditions
(4) See table on page 35
(5 ) 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
10 Investments continued
Reconciliation of share of retained (loss)/profit to the income statement and
cash flow statement:
2022 2021
£m £m
Share of results of joint ventures and associates 9 22
Adjustments for intercompany trading (1) 39 23
Share of results of joint venture and associates to the Group 48 45
Dividends paid by joint ventures and associates to the Group (cash flow (73) (27)
statement)
Share of retained (loss)/profit attributable to continuing operations (above) (25) 18
(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 2022 and 2021, profit deferred on the sale of engines
was lower than the release of that deferred in prior years
11 Inventories
2022 2021
£m £m
Raw materials 479 376
Work in progress 1,633 1,135
Finished goods 2,593 2,146
Payments on account 3 9
4,708 3,666
12 Trade receivables and other assets
Current Non-current Total
2022 2021 2022 2021 2022 2021
£m £m £m £m £m £m
Trade receivables (1, 2) 2,376 2,141 43 52 2,419 2,193
Prepayments 886 572 893 378 1,779 950
Receivables due on RRSAs (2) 928 702 255 67 1,183 769
Amounts owed by joint ventures and associates 632 598 16 1 648 599
Other taxation and social security receivable 147 197 9 8 156 205
Costs to obtain contracts with customers (3) 12 13 67 41 79 54
Other receivables (4) 617 593 55 20 672 613
5,598 4,816 1,338 567 6,936 5,383
(1) Non-current trade receivables relate to amounts not expected to be
received in the next 12 months from customers on payment plans
(2 ) Includes receivables due from ITP Aero that were previously eliminated
on consolidation
(3) These are amortised over the term of the related contract in line with
engine deliveries, resulting in amortisation of £11m (2021: £9m) 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 increased by £87m to
£346m (2021: increased by £7m to £259m). This movement is mainly driven by
the Civil Aerospace business of £90m, of which £83m relates to specific
customers and £7m relates to updates to the recoverability of other
receivables.
The movements of the Group's ECLs provision are as follows:
2022 2021
£m £m
At 1 January (259) (252)
Increases in loss allowance recognised in the income statement during the year (118) (124)
Loss allowance utilised 22 46
Releases of loss allowance previously provided 45 46
Transferred to assets held for sale - 2
Exchange differences (36) 23
At 31 December (346) (259)
13 Contract assets and liabilities
Current Non-current (1) Total (2)
2022 2021 2022 2021 2022 2021
£m £m £m £m £m £m
Contract assets
Contract assets with customers 621 586 617 641 1,238 1,227
Participation fee contract assets 28 27 215 219 243 246
649 613 832 860 1,481 1,473
(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
(2) Contract assets are classified as non-financial instruments
The balance includes £885m (2021: £915m) of Civil Aerospace LTSA assets,
with most of the remaining balance relating to Defence. The decrease in the
Civil Aerospace balance is due to collection of higher cash receipts than
revenue recognised in relation to completion of performance obligations on
those contracts with a contract asset balance. Revenue recognised relating to
performance obligations satisfied in previous years was £26m in Civil
Aerospace. No impairment losses in relation to these contract assets (2021:
none) have arisen during the year.
Participation fee contract assets have reduced by £3m (2021: £188m) due to
amortisation exceeding additions by £7m, offset by foreign exchange on
consolidation of £4m.
The absolute value of ECLs for contract assets has increased by £6m to £21m
(2021: £15m).
Current Non-current Total
2022 2021 2022 2021 2022 2021
£m £m £m £m £m £m
Contract liabilities 4,825 3,599 7,337 6,710 12,162 10,309
During the year £3,321m (2021: £2,713m) of the opening contract liability
was recognised as revenue.
Contract liabilities have increased by £1,853m. The movement in the Group
balance is as a result of increases in Civil Aerospace of £1,395m and Defence
of £324m. The main reason for the Civil Aerospace increase is a growth in
LTSA liabilities of £1,128m to £8,257m (2021: £7,129m) driven by growth in
customer payments as engine flying hours continue to recover from the COVID-19
pandemic and price escalation. There have also been additional buy-in fees
received in relation to new contracts. This has been partly offset by revenue
being recognised in relation to performance obligations satisfied in previous
years of £334m as contract performance improves, which decreases the contract
liability. An increase in Defence is from the receipt of deposits in advance
of performance obligations being completed.
14 Cash and cash equivalents
2022 2021
£m £m
Cash at bank and in hand 847 795
Money-market funds 34 49
Short-term deposits 1,726 1,777
Cash and cash equivalents per the balance sheet 2,607 2,621
Cash and cash equivalents within assets held for sale (note 23) - 25
Overdrafts (note 15) (2) (7)
Cash and cash equivalents per cash flow statement (page 13) 2,605 2,639
Cash and cash equivalents at 31 December 2022 includes £235m (2021: £89m)
that is not available for general use by the Group. This balance includes
£40m which is held in an account that is exclusively for the general use of
Rolls-Royce Submarines Limited and £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
2022 2021 2022 2021 2022 2021
£m £m £m £m £m £m
Unsecured
Overdrafts 2 7 - - 2 7
Bank loans (1) 1 2 - 1,975 1 1,977
0.875% Notes 2024 €550m (2) - - 472 471 472 471
3.625% Notes 2025 $1,000m (2) - - 801 781 801 781
3.375% Notes 2026 £375m (3) - - 351 394 351 394
4.625% Notes 2026 €750m (4) - - 661 624 661 624
5.75% Notes 2027 $1,000m (4) - - 825 735 825 735
5.75% Notes 2027 £545m - - 541 540 541 540
1.625% Notes 2028 €550m (2) - - 444 493 444 493
Other loans - - 10 10 10 10
Total unsecured 3 9 4,105 6,023 4,108 6,032
Lease liabilities 355 270 1,492 1,474 1,847 1,744
Total borrowings and lease liabilities 358 279 5,597 7,497 5,955 7,776
All outstanding items described as notes above are listed on the London Stock
Exchange
(1) On 16 September 2022, the Group repaid the £2,000m loan maturing in
2025 (supported by an 80% guarantee from UK Export Finance)
(2) These notes are the subject of cross-currency interest rate swap
agreements under which the Group has undertaken to pay floating rates of GBP
interest, which form a fair value hedge. They are also subject to interest
rate swap agreements under which the Group has undertaken to pay fixed rates
of interest, which are classified as fair value through profit and loss
(3) These notes are the subject of interest rate swap agreements under which
the Group has undertaken to pay floating rates of interest, which form a fair
value hedge. They are also subject to interest rate swap agreements under
which the Group has undertaken to pay fixed rates of interest, which are
classified as fair value through profit and loss
(4 ) These notes are the subject of cross-currency interest rate swap
agreements under which the Group has undertaken to pay fixed rates of GBP
interest, which form a cash flow hedge
During the year ended 31 December 2022, the Group entered into a new £1,000m
sustainability-linked facility, maturing in 2027 (supported by an 80%
guarantee from UK Export Finance). The facility was undrawn at 31 December
2022.
At 31 December 2022, the Group had total undrawn facilities of £5,500m (2021:
£4,500m).
Under the terms of certain recent loan facilities, the Company is restricted
from declaring, making or paying distributions to shareholders on or prior to
31 December 2022 and from declaring, making or paying distributions to
shareholders from
1 January 2023 unless certain conditions are satisfied. 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 2022 was £1,061m
(2021: £1,203m), with a lease liability of £1,847m (2021: £1,744m), per
notes 9 and 15 respectively. Leases that have not yet commenced to which the
Group is committed have a future liability of £39m and consist of mainly
plant and equipment and properties. The condensed consolidated income
statement shows the following amounts relating to leases:
2022 2021
£m £m
Land and buildings depreciation and impairment (1) (41) (41)
Plant and equipment depreciation and impairment (2) (36) (24)
Aircraft and engines depreciation and impairment (3) (210) (192)
Total depreciation and impairment charge for right-of-use assets (287) (257)
Adjustment of amounts payable under residual value guarantees within lease 3 4
liabilities (3, 4)
Expense relating to short-term leases of 12 months or less recognised as an (28) (16)
expense on a straight-line basis (2)
Expense relating to variable lease payments not included in lease liabilities (2) (2)
(3,5)
Total operating costs (314) (271)
Interest expense (6) (68) (63)
Total lease expense (382) (334)
Income from sub-leasing right-of-use assets 32 35
Total amount recognised in income statement (350) (299)
(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 2022 was £316m (2021: £448m). Of this
£286m related to leases reflected in the lease liability, £28m to short-term
leases where lease payments are expensed on a straight-line basis and £2m 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.
17 Trade payables and other liabilities
Current Non-current Total
2022 2021 2022 2021 2022 2021
£m £m £m £m £m £m
Trade payables (1) 1,735 1,272 - - 1,735 1,272
Accruals 1,477 1,361 199 192 1,676 1,553
Customer concession credits (2) 616 1,106 864 399 1,480 1,505
Payables due on RRSAs (1) 1,392 739 - - 1,392 739
Deferred receipts from RRSA workshare partners 32 23 829 484 861 507
Amounts owed to joint ventures and associates 567 486 - - 567 486
Warranty credits 212 201 152 161 364 362
Government grants (3) 21 28 41 39 62 67
Other taxation and social security 88 40 - - 88 40
Other payables (4) 843 760 279 300 1,122 1,060
6,983 6,016 2,364 1,575 9,347 7,591
(1 ) Includes payables due from ITP Aero that were previously eliminated on
consolidation
(2 ) Customer concession credits are a form of discount and are reported
within revenue
(3 ) During the year, £20m, including £5m in discontinued operations,
(2021: £13m) of government grants were released to the income statement
(4 ) Other payables includes parts purchase obligations, payroll
liabilities, HM Government UK levies and and payables associated with business
disposals
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, 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 standard 75-day 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 2022, suppliers had drawn £422m under
the SCF scheme
(2021: £540m).
18 Financial assets and liabilities
Carrying value of other financial assets and liabilities
Derivatives
Foreign exchange contracts Commodity contracts Interest rate contracts (1) Total Financial RRSAs Other C Shares Total
£m £m £m derivatives £m £m £m £m
£m
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)
At 31 December 2021
Non-current assets 159 11 176 346 - 15 - 361
Current assets 12 21 - 33 - 13 - 46
Assets 171 32 176 379 - 28 - 407
Current liabilities (629) - - (629) (7) (28) (25) (689)
Non-current liabilities (2,581) - (82) (2,663) (5) (47) - (2,715)
Liabilities (3,210) - (82) (3,292) (12) (75) (25) (3,404)
(3,039) 32 94 (2,913) (12) (47) (25) (2,997)
(1 ) Includes the foreign exchange impact of cross-currency interest rate
swaps
Derivative financial instruments
Movements in fair value of derivative financial assets and liabilities were as
follows:
Foreign exchange instruments Commodity instruments Interest rate instruments - hedge accounted (1) Interest rate instruments - non-hedge accounted Total
2022 2021 2022 2021 2022 2021 2022 2021 2022 2021
£m £m £m £m £m £m £m £m £m £m
At 1 January (3,039) (2,871) 32 (11) 57 233 37 (57) (2,913) (2,706)
Movements in fair value hedges - - - - (74) (143) - - (74) (143)
Movements in cash flow hedges (56) (13) - 4 142 (2) - - 86 (11)
Movements in other derivative contracts (2) (1,875) (681) 106 63 - - 190 80 (1,579) (538)
Contracts settled 1,119 538 (76) (9) - (31) (14) 14 1,029 512
Reclassification to held for sale - (12) - (15) - - - - - (27)
At 31 December (3,851) (3,039) 62 32 125 57 213 37 (3,451) (2,913)
(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
2022 2021 2022 2021 2022 2021
£m £m £m £m £m £m
At 1 January (12) (81) 15 15 (75) (73)
Exchange adjustments included in OCI (2) 4 2 - (4) 4
Additions (6) - 11 - (35) (9)
Financing charge (1) - - - - (4) (1)
Excluded from underlying profit:
Changes in forecast payments (1) (7) (7) - - - -
Cash paid 5 3 (3) - 8 3
Other - - - - 9 1
Reclassification to held for sale - 69 - - - -
At 31 December (22) (12) 25 15 (101) (75)
(1 ) Included in financing
18 Financial assets and liabilities continued
Fair values of financial instruments equate to book values with the following
exceptions:
2022 2021
Book value Fair value Book value Fair value
£m £m £m £m
Borrowings - Level 1 (4,095) (3,812) (4,038) (4,106)
Borrowings - Level 2 (13) (15) (1,994) (2,122)
Financial RRSAs - Level 3 (22) (22) (12) (13)
Fair values
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 period
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 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 are 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 2022, Level 3 assets totalled £25m (2021: £15m).
- 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).
Effect of hedging instruments on the financial position and performance
During the year to 31 December 2022, the Group entered into deal contingent
forwards with a nominal amount of €1,500m to manage the foreign exchange
risk in Euro proceeds expected from the disposal of ITP Aero (hedged item).
These contracts were designated as the hedging instrument in cash flow hedges
with hedge ratio of 1:1. At inception, the existence of an economic
relationship between the hedged item and the hedging instrument is verified.
Both the spot component and the contingent element were designated as the
hedging instrument.
At deal completion these contracts had a fair value of £(56)m based on the
weighted average foreign exchange rate of 0.8339. £52m was reclassified to
loss on disposal in the income statement from hedging reserves (£62m from
hedging reserve and £(10)m from cost of hedging reserve). There was
ineffectiveness of £4m recognised in net financing during the year. The
forward element and basis were excluded from the hedging instrument
designation and separately accounted for in the equity reserve for cost of
hedging.
19 Provisions for liabilities and charges
At 31 December 2021 as previously reported On adoption of amendment to IAS 37 At Charged to income statement (1) Reversed Utilised Exchange differences At 31 December 2022
1 January 2022
£m £m £m £m £m £m £m £m
Contract losses 845 723 1,568 520 (395) (106) 5 1,592
Warranty and guarantees 305 - 305 98 (20) (87) 21 317
Trent 1000 wastage costs 157 - 157 106 - (84) - 179
Insurance 52 - 52 15 (20) (7) - 40
Employer liability claims 47 - 47 3 (14) (3) - 33
Restructuring 21 - 21 - (10) (6) 1 6
Customer financing 17 - 17 - (7) (10) - -
Tax related interest and penalties 14 - 14 3 (2) - 1 16
Other 124 - 124 47 (18) (7) 4 150
1,582 723 2,305 792 (486) (310) 32 2,333
Current liabilities 475 513 632
Non-current liabilities 1,107 1,792 1,701
(1 ) The charge to the income statement includes £33m (2021: £32m) 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 revenue. As a result
of the amendment to IAS 37 for Onerous Contracts, from 1 January 2022
provisions for contract losses have been measured on a fully costed basis
resulting in a £723m increase of the total contract loss provision as at 1
January 2022 (see note 1 for details). During the year, additional contract
losses for the Group of £520m have been recognised as a result of changes in
future cost estimates, primarily in relation to LTSA shop visits and includes
£157m which arose from the sale of ITP Aero resulting in the recognition of
the additional costs which were previously eliminated on consolidation.
Contract losses of £395m previously recognised have been reversed following
improvements to cost estimates across various large engine programmes as a
result of operational improvements and updates to the discount rate. 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 8 to 16 years.
Warranty and guarantees
Provisions for warranty and guarantees primarily relate to products sold and
are calculated based on an assessment of the remediation costs related to
future claims based on past experience. 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
£84m of the Trent 1000 wastage costs provision. This represents customer
disruption costs and remediation shop visit costs. During the year, additional
Trent 1000 costs of £106m relating to wastage have been recognised reflecting
delays in certification which have led to revised cost and timing estimates.
The value of the remaining provision reflects the single most likely outcome
and is expected to be utilised over the period 2023-2024.
Insurance
The Group's captive insurance company retains a portion of the exposures it
insures on behalf of the remainder of the Group which 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. Provisions for
outstanding claims are established to cover the outstanding expected liability
as well as claims incurred but not yet reported.
19 Provisions for liabilities and charges continued
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.
Customer financing
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 2022 (2021: £17m). The Group has contingent liabilities for customer
financing arrangements where the payment is not probable. See note 21.
Tax related interest and penalties
Provisions for tax related interest and penalties relate to uncertain tax
positions in some of the jurisdictions in which the Group operates.
Utilisation of the provisions will depend on the timing of resolution of the
issues with the relevant tax authorities.
Other
During the year, £47m of other provisions have been charged to the income
statement. The items that make up the charge in the year are individually
immaterial and predominately relate to claims. At 31 December 2022, other
provisions includes those items as well as others (predominantly supplier
claims), where the related legal proceedings are ongoing and utilisation will
depend upon their resolution. The value of the provision reflects the single
most likely outcome in each case.
20 Post-retirement benefits
Amounts recognised in the income statement
2022 2021
UK schemes £m Overseas schemes Total UK schemes £m Overseas schemes Total
£m £m £m £m
Defined benefit schemes:
Current service cost and administrative expenses 8 44 52 10 61 71
Past-service credit and settlement loss (6) (19) (25) (15) (33) (48)
2 25 27 (5) 28 23
Defined contribution schemes 154 87 241 146 81 227
Operating cost 156 112 268 141 109 250
Net financing (credit)/charge in respect of defined benefit schemes (21) 23 2 (16) 19 3
Total income statement charge 135 135 270 125 128 253
Amounts recognised in the balance sheet in respect of defined benefit schemes
UK schemes Overseas schemes Total
£m £m £m
At 1 January 2022 1,118 (1,343) (225)
Exchange adjustments - (88) (88)
Current service cost and administrative expenses (8) (44) (52)
Past service credit 6 24 30
Settlement cost - (7) (7)
Financing recognised in the income statement 21 (26) (5)
Contributions by employer 1 80 81
Actuarial gains recognised in OCI (1) 3,207 599 3,806
Returns on plan assets excluding financing recognised in OCI (1) (3,751) (207) (3,958)
Transfers - (2) (2)
At 31 December 2022 594 (1,014) (420)
Post-retirement scheme surpluses - included in non-current assets (2) 594 19 613
Post-retirement scheme deficits - included in non-current liabilities - (1,033) (1,033)
(1 ) A net loss of £156m has been recognised in OCI in the year to 31
December 2022 which has been driven by market conditions at 31 December 2022,
in particular due to higher discount rates across the various schemes and
realised inflation being higher than expected
(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
20 Post-retirement benefits continued
Changes to defined benefit schemes
As at 31 December 2022, a constructive obligation has been recognised for the
extension of the Bridging Pension Option (BPO) to other deferred members in
RRUKPF. As a result, a past service credit of £6m has been recognised within
non-underlying operating profit.
The Rolls-Royce North America salaried plan was closed to future accruals in
2021. On 1 December 2022, the remaining assets and liabilities were
transferred to Legal and General America Group as a bulk annuity purchase and
were derecognised from the balance sheet. This resulted in a settlement loss
of £7m.
During the year, Power Systems replaced a number of their existing defined
benefit schemes with a new company pension scheme to offer payment options at
time of retirement. 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. Invested assets for the scheme will
be managed by Swiss Life. A past service credit of £23m has been recognised
within non-underlying operating profit.
Sensitivities
A reduction in the discount rate by 0.25% from 4.80% could lead to an increase
in the defined benefit obligations of the RR UK Pension Fund (RRUKPF) of
approximately £205m. 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% from RPI of 3.5% and CPI
of 2.95% could lead to an increase in the defined benefit obligations of the
RRUKPF of approximately £70m.
A one-year increase in life expectancy from 21.9 years (male aged 65) and from
23.2 years (male aged 45) would increase the defined benefit obligations of
the RR UK Pension Fund by approximately £165m.
Contributions
The Group expects to contribute approximately £70m to its overseas defined
benefit schemes in 2023 (2022: £66m).
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 set out above. The
assumptions used to value Technical Provisions must be prudent rather than a
best estimate of the liability. Most notably, the Technical Provision discount
rate is currently based upon UK Government yields plus a margin (0.5% at the
31 March 2020 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 2020, agreed by the Trustee in June 2021, showed
that RRUKPF was estimated to be 105% funded on the Technical Provisions basis
(estimated to be 109% at 31 December 2022). All cash due has been paid in full
and the current SoC does not require any cash contributions to be made by the
Group. The current SoC does include an agreement for contributions between
2024 to 2027 (capped at £145m in total) if the Technical Provisions funding
position is below 107% at 31 March 2023.
21 Contingent liabilities
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 continues to
co-operate with 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 Company 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 Company. 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.
Contingent liabilities exist in respect of guarantees provided by the Group in
the ordinary course of business for product delivery, commitments made for
future service demand in respect of maintenance, repair and overhaul, and
performance and reliability. The Group has, in the normal course of business,
entered into arrangements in respect of export finance, performance bonds,
countertrade obligations and minor miscellaneous items. Various Group
undertakings are parties to legal actions and claims (including with tax
authorities) which arise in the ordinary course of business, some of which are
for substantial amounts. As a consequence of the insolvency of an insurer as
previously reported, the Group is no longer fully insured against known and
potential claims from employees who worked for certain of the Group's UK based
businesses for a period prior to the acquisition of those businesses by the
Group.
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 $1.2bn (2021: $1.7bn) (on a discounted basis) to
provide facilities to enable customers to purchase aircraft (of which
approximately $0.9bn could be called during 2023). 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.
The Group has responded appropriately to the Russia-Ukraine conflict to comply
with international sanctions and export control regime, and also to implement
our business decision to exit from Russia. The Group could be subject to
action by impacted customers 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
2022 2021
£m £m
Sale of goods and services (1) 5,074 3,548
Purchases of goods and services (1) (4,915) (3,677)
Lease payments to joint ventures and associates (163) (225)
Guarantees of joint arrangements' and associates' borrowings 3 1
Guarantees of non-wholly owned subsidiaries' borrowings 3 3
Dividends received from joint ventures and associates 73 27
Other income received from joint ventures and associates 2 3
(1) Sales of goods and services to related parties and purchases of goods and
services from related parties, including joint ventures and associates, are
included at the average exchange rate, consistent with the statutory income
statement
Included in sales of goods and services to related parties are sales of spare
engines amounting to £19m (2021: £157m). Profit recognised in the year on
such sales amounted to £50m (2021: £47m), 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 £40m (2021:
£181m).
23 Disposals, held for sale and discontinued operations
Disposals
On 13 September 2021, the Group signed an agreement with Equitix Investment
Management Limited to dispose its 23.1% shareholding in Airtanker Holdings Ltd
for a cash consideration of £189m. In accordance with IFRS 5, the Group had
classified £47m of the Airtanker assets as held for sale at 31 December 2021.
The sale completed on 9 February 2022 for a value of £189m. On disposal, the
Group has recycled the Group's share of cash flow hedge reserve through the
income statement during the year.
On 27 September 2021, the Group signed an agreement for the sale of ITP Aero
to Bain Capital for £1.3bn. In accordance with IFRS 5, at 31 December 2021,
the Group had classified the net assets of the ITP Aero disposal group of
£1.2bn as held for sale. The sale completed on 15 September 2022 for a value
of £1.3bn. On disposal, the Group has recycled the Group's share of hedging
reserve and the cumulative currency translation reserve through the income
statement during the year. In addition, as part of the disposal, costs have
been recognised in loss on disposal for continuing obligations (£157m), in
particular where previous amounts were eliminated on consolidation in the
Group's results. ITP Aero was acquired in 2017 resulting in a gain on bargain
purchase of £303m recognised in 2018. The consideration for the acquisition
was settled by issue of shares and the premium on the share issues, of £650m,
recognised as merger reserve. As a result of the sale of ITP Aero for
qualifying consideration, the merger reserve arising from the acquisition has
been realised in accumulated losses.
ITP Aero - Total subsidiaries Airtanker Total
£m £m £m
Proceeds
Cash consideration at prevailing exchange rate 1,387 189 1,576
Impact of deal contingent forward (52) - (52)
Cash consideration at effective hedged rate 1,335 189 1,524
Cash and cash equivalents disposed (60) - (60)
Net cash consideration 1,275 189 1,464
Intangible assets 912 - 912
Property, plant and equipment 338 - 338
Right-of-use assets 13 - 13
Investments 1 34 35
Deferred tax assets 57 - 57
Inventory 283 - 283
Trade receivables and other assets (1) 768 14 782
Borrowings and lease liabilities (53) - (53)
Trade payables and other liabilities (1) (1,148) - (1,148)
Provisions for liabilities and charges (22) - (22)
Less: Net assets disposed 1,149 48 1,197
Profit on disposal before disposal costs and accounting adjustments 126 141 267
Disposal costs (33) (3) (36)
De-recognition of NCI (1) - (1)
Cumulative currency translation loss (65) - (65)
Cumulative cash flow hedge reserve loss (49) (62) (111)
Impact of disposal on consolidated position of onerous contracts (2) (157) - (157)
(Loss)/profit before taxation (179) 76 (103)
Tax on disposal 31 - 31
(Loss)/profit on disposal of business after tax (148) 76 (72)
(1) As at 15 September 2022, trading balances that ITP Aero held with other
group undertakings, that were previously eliminated on consolidation, have
been reclassified as external balances and are included in the net assets
disposed
(2) Reflects increased future costs in Civil Aerospace in respect of amounts
charged by ITP Aero that were previously eliminated on consolidation. These
future costs relate to onerous contract provisions and have therefore
crystallised on disposal as a result of the ongoing trading with ITP Aero no
longer being classified as intra-group
23 Disposals, held for sale and discontinued operations continued
Reconciliation of profit on disposal of businesses in continuing operations to Total
the income statement:
£m
Profit on disposal of (see above) 76
Adjustment to consideration on disposals completed in prior periods 5
Profit on disposal of businesses per income statement 81
Reconciliation of cash flow on disposal of businesses to the cash flow Total
statement:
£m
Proceeds on disposal of businesses (see above) 1,464
Disposal costs paid (45)
Cash outflow on disposals completed in prior periods (21)
Cash flow on disposal of businesses per cash flow statement 1,398
Discontinued operations
ITP Aero represents a separate major line of business and was classified as a
disposal group held for sale. Therefore, in line with IFRS 5, ITP Aero has
been classified as a discontinued operation.
The financial performance and cash flow information presented reflects the
operations for the year that have been classified as discontinued operations.
2022 2021
£m £m
Revenue 275 365
Operating profit/(loss) (1) 86 (4)
Profit before taxation (1) 78 2
Income tax (charge)/credit (1) (10) 34
Profit for the year from discontinued operations on ordinary activities 68 36
Costs on disposal of discontinued operations (2) - (39)
Loss on disposal of discontinued operations (see above) (148) -
Loss for the year from discontinued operations (80) (3)
Net cash inflow from operating activities (2) 85 12
Net cash outflow from investing activities (2) (67) (32)
Net cash outflow from financing activities (25) (25)
Exchange gains - 4
Net change in cash and cash equivalents (7) (41)
(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 £42m (2021: included in
operating activities of £39m) costs of disposal paid during the year to 31
December 2022 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
2022 2021
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 837 (264) 58 21 652 414
Operating profit/(loss) from discontinued operations 86 − − − 86 (43)
Depreciation, amortisation and impairment 1,076 − (58) (65) 953 971
Movement in provisions (197) 91 − 83 (23) (136)
Movement in Civil LTSA balance 1,158 (366) − − 792 66
Loss on disposal of property, plant and equipment 18 − − − 18 9
Joint venture trading 25 − − − 25 (18)
Interest received 36 − − − 36 9
Contributions to defined benefit schemes in excess of underlying operating (54) − − 22 (32) (92)
profit charge
Share-based payments 47 − − − 47 28
Other − (53) − − (53) (26)
Cash flow before working capital and taxation 3,032 (592) − 61 2,501 1,182
Increase in inventories (887) − − − (887) (169)
Movement in trade receivables/payables and other assets/liabilities (386) (348) − (19) (753) (469)
Movement in contract assets/liabilities (excluding Civil LTSA) 595 297 − − 892 (289)
Revaluation of trading assets (excluding exceptional items) (1) (407) (114) − − (521) 32
Realised derivatives in financing (1) 737 − − − 737 85
Cash flows on other financial assets and liabilities held for operating (660) 737 − − 77 (85)
purposes
Income tax (174) − − − (174) (185)
Cash from operating activities 1,850 (20) − 42 1,872 102
Capital element of lease payments (218) 20 − − (198) (374)
Capital expenditure and investment (512) − − 36 (476) (426)
Interest paid (352) − − − (352) (331)
Settlement of excess derivatives (326) − − − (326) (452)
Other (M&A, restructuring and financial penalties paid) 49 − − (78) (29) 39
Free cash flow 491 − − − 491 (1,442)
Of which is continuing operations 505 505 (1,485)
(1) Included in working capital
The comparative information to 31 December 2021 has been presented in a
different format to align to the current year presentation. In some instances,
the groupings of items may have changed. All comparative figures remain
unchanged versus those reported in the 2021 Annual Report.
Free cash flow is a measure of financial performance of the business' cash
flow to see what is available for distribution among those stakeholders
funding the business (including debt holders and shareholders). Free cash flow
is calculated as trading cash flow less recurring tax and post-employment
benefit expenses. It excludes payments made to shareholders, amounts spent (or
received) on business acquisitions or disposals, financial penalties paid and
foreign exchange changes on net funds. 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 50.
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, including the impact of the Group's foreign exchange activities. 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.
Underlying results from continuing operations
Underlying results including underlying revenue, underlying operating profit
and underlying EPS. 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, note
6 and note 23.
2022 2021
£m £m
Revenue from continuing operations
Statutory revenue 13,520 11,218
Derivative & FX adjustments (829) (271)
Underlying revenue 12,691 10,947
Operating profit from continuing operations
Statutory operating profit 837 513
Derivative & FX adjustments (264) 40
Programme exceptional credits (69) (105)
Restructuring exceptional charges/(credits) 47 (45)
Acquisition accounting & M&A 58 50
Impairments 65 (9)
Pension past service credit (22) (47)
Other underlying adjustments - 17
Underlying operating profit 652 414
2022 2021
pence pence
Basic EPS from continuing operations
Statutory basic EPS (14.24) 1.48
Effect of underlying adjustments to (loss)/profit before tax 20.45 3.96
Related tax effects (4.26) (5.33)
Basic underlying EPS 1.95 0.11
Underlying results from discontinued operations
2022 2021
£m £m
Results from discontinued operations
Profit for the period on ordinary activities 68 36
Costs of disposal of discontinued operations prior to disposal - (39)
Loss on disposal of discontinued operations (148) -
Statutory operating loss (80) (3)
Derivative & FX adjustments (1) 5
Restructuring exceptional charges - (1)
Acquisition accounting & M&A 179 64
Related tax effects (31) (14)
Underlying profit 67 51
Reconciliation of Alternative Performance Measures (APMs) to their statutory
equivalent continued
Organic change
Organic change is the measure of change at constant translational currency
applying full year 2021 average rates to 2022. 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
2022 2021 Change FX Organic Change Organic Change
£m £m £m £m £m %
Underlying revenue 12,691 10,947 1,744 210 1,534 14%
Underlying gross profit 2,477 1,996 481 45 436 22%
Underlying operating profit 652 414 238 41 197 48%
Net financing costs (446) (378) (68) (3) (65) 17%
Underlying profit before taxation 206 36 170 38 132 367%
Taxation (48) (26) (22) (6) (16) 62%
Underlying profit for the year from continuing operations 158 10 148 32 116 1,160%
Civil Aerospace
2022 2021 Change FX Organic Change Organic Change
£m £m £m £m £m %
Underlying revenue 5,686 4,536 1,150 24 1,126 25%
Underlying OE revenue 1,982 1,612 370 (4) 374 23%
Underlying services revenue 3,704 2,924 780 28 752 26%
Underlying gross profit 853 474 379 20 359 76%
Commercial and administrative costs (371) (297) (74) (3) (71) 24%
Research and development costs (452) (434) (18) (3) (15) 3%
Joint ventures and associates 113 85 28 5 23 27%
Underlying operating profit/(loss) 143 (172) 315 19 296 nm
Defence
2022 2021 Change FX Organic Change Organic Change
£m £m £m £m £m %
Underlying revenue 3,660 3,368 292 214 78 2%
Underlying OE revenue 1,634 1,411 223 87 136 10%
Underlying services revenue 2,026 1,957 69 127 (58) (3)%
Underlying gross profit 726 721 5 33 (28) (4)%
Commercial and administrative costs (174) (161) (13) (7) (6) 4%
Research and development costs (122) (105) (17) (8) (9) 9%
Joint ventures and associates 2 2 - 1 (1) -
Underlying operating profit 432 457 (25) 19 (44) (10)%
Power Systems
2022 2021 Change FX Organic Change Organic Change
£m £m £m £m £m %
Underlying revenue 3,347 2,749 598 (28) 626 23%
Underlying OE revenue 2,187 1,744 443 (19) 462 26%
Underlying services revenue 1,160 1,005 155 (9) 164 16%
Underlying gross profit 918 778 140 (8) 148 19%
Commercial and administrative costs (441) (383) (58) 4 (62) 16%
Research and development costs (204) (157) (47) 2 (49) 31%
Joint ventures and associates 8 4 4 - 4 -
Underlying operating profit 281 242 39 (2) 41 17%
New Markets
2022 2021 Change FX Organic Change Organic Change
£m £m £m £m £m %
Underlying revenue 3 2 1 - 1 50%
Underlying OE revenue 1 - 1 - 1 -
Underlying services revenue 2 2 - - - -
Underlying gross (loss)/profit (1) 1 (2) - (2) nm
Commercial and administrative costs (23) (3) (20) - (20) 667%
Research and development costs (108) (68) (40) - (40) 59%
Joint ventures and associates - - - - - -
Underlying operating loss (132) (70) (62) - (62) 89%
Reconciliation of Alternative Performance Measures (APMs) to their statutory
equivalent continued
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. For a reconciliation of Group trading cash flow to free cash flow
and statutory cash flow, see note 24.
2022 2021
£m £m
Civil Aerospace 226 (1,670)
Defence 426 377
Power Systems 158 219
New Markets (57) (56)
Total reportable segments trading cash flow 753 (1,130)
Other businesses 5 (43)
Central and Inter-segment (49) (38)
Trading cash flow from continuing operations 709 (1,211)
Discontinued operations (12) 46
Trading cash flow 697 (1,165)
Underlying operating profit charge exceeded by contributions to defined (32) (92)
benefit schemes
Tax (1) (174) (185)
Free cash flow 491 (1,442)
(1) See page 13 for tax paid in the statutory cash flow statement
Free cash flow
Free cash flow is a measure of financial performance of the businesses' cash
flow to see what is available for distribution among those stakeholders
funding the business (including debt holders and shareholders). Free cash flow
is cash flows from operating activities including capital expenditure and
movements in investments, capital elements of lease payments, interest paid
and excluding amounts spent or received on activity related to business
acquisitions or disposals, financial penalties paid and exceptional
restructuring payments. 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.
2022 2021
£m £m
Statutory cash flows from operating activities 1,850 (259)
Capital investment (including investment from NCI and movement in joint (512) (489)
ventures, associates and other investments)
Capital element of lease payments (218) (374)
Interest paid (352) (331)
Settlement of excess derivatives (326) (452)
Exceptional restructuring costs 76 231
M&A costs 2 50
Financial penalties paid - 156
Other (29) 26
Free cash flow 491 (1,442)
Discontinued operations free cash flow (1) 14 (43)
Free cash flow from continuing operations 505 (1,485)
(1 ) Discontinued operations free cash excludes: transactions with parent
company of £(65)m (2021: £(15)m), movements in borrowings of £22m (2021:
£22m), exceptional restructuring costs of £nil (2021: £8m), M&A costs
of £44m (2021: £44m) and other of £(6)m (2021: £29m)
Group R&D expenditure
R&D expenditure during the year excluding the impact of contributions and
fees, including government funding, amortisation and impairment of capitalised
costs and amounts capitalised during the year. For further detail, see note 3.
2022 2021
£m £m
Statutory research and development costs (891) (778)
Amortisation and impairment of capitalised cost 94 70
Capitalised as intangible assets (131) (105)
Contributions and fees (359) (366)
Gross R&D expenditure (1,287) (1,179)
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
alternative performance measures or statutory results. See below for
calculation of these amounts.
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-12 months are excluded.
Self-funded R&D as a proportion of underlying revenue
Self-funded cash expenditure on R&D before any capitalisation or
amortisation relative to underlying revenue. Self-funded R&D and
underlying revenue are presented for continuing operations in line with
presentation in the statutory income statement.
2022 2021
£m £m
Gross R&D expenditure (1,287) (1,179)
Contributions and fees 359 366
Self funded R&D (928) (813)
Underlying revenue 12,691 10,947
% %
Self funded R&D as a proportion of underlying revenue 7.3 7.4
Capital expenditure as a proportion of underlying revenue
Cash purchases of PPE in the year relative to underlying revenue presented for
continuing 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 period.
2022 2021
£m £m
Purchases of PPE (cash flow statement) 359 328
Less: capital expenditure from discontinued operations (14) (24)
Net capital expenditure 345 304
Underlying revenue 12,691 10,947
% %
Capital expenditure as a proportion of underlying revenue 2.7 2.8
Principal risks and uncertainties
Our risk management system is described on pages 42 to 47 of our 2022 Annual
Report as a continuous process that requires risk owners to constantly
reassess risks and include learning from incidents to drive improvements in
our control environment.
Safety Business continuity
Failure to: i) meet the expectations of our customers to provide safe The major disruption of the Group's operations, which results in our failure
products; or ii) create a place to work which minimises the risk of harm to to meet agreed customer commitments and damages our prospects of winning
our people, those who work with us, and the environment, would adversely future orders. Disruption could be caused by a range of events, for example:
affect our reputation and long-term sustainability. extreme weather or natural hazards (for example earthquakes, floods) which
could increase in severity or frequency given the impact of climate change;
Climate change political events; financial insolvency of a critical supplier; scarcity of
materials; loss of data; fire; or infectious disease. The consequences of
We recognise the urgency of the climate challenge and have committed to net these events could have an adverse impact on our people, our internal
zero carbon by 2050. The principal risk to meeting these commitments is the facilities or our external supply chain.
need to transition our products and services to a lower carbon economy.
Failure to transition from carbon intensive products and services at pace Competitive environment
could impact our ability to win future business; achieve operating results;
attract and retain talent; secure access to funding; realise future growth Existing competitors: the presence of competitors in the majority of our
opportunities; or force government intervention to limit emissions. In markets means that the Group is susceptible to significant price pressure for
addition, physical risks from extreme weather events (and/or natural hazards) original equipment or services and we may have to absorb cost increases caused
could potentially materialise, which may result in disruption for Rolls-Royce. by high inflation. Our main competitors have access to significant government
funding programmes as well as the ability to invest heavily in technology and
Compliance industrial capability.
Non-compliance by the Group with legislation or other regulatory requirements Existing products: failure to achieve cost reduction, contracted technical
in the heavily regulated environment in which we operate (for example, export specification, product (or component) life or falling significantly short of
controls; data privacy; use of controlled chemicals and substances; customer expectations, would have potentially significant adverse financial
anti-bribery and corruption; human rights; and tax and customs legislation). and reputational consequences, including the risk of impairment of the
This could affect our ability to conduct business in certain jurisdictions and carrying value of the Group's intangible assets and the impact of potential
would potentially expose the Group to: reputational damage; financial litigation.
penalties; debarment from government contracts for a period of time; and
suspension of export privileges (including export credit financing), each of New programmes: failure to deliver an NPI project on time, within budget, to
which could have a material adverse effect. technical specification or falling significantly short of customer
expectations would have potentially significant adverse financial and
Cyber threat reputational consequences.
An attempt to cause harm to the Group, its customers, suppliers and partners Disruptive technologies (or new entrants with alternative business models):
through the unauthorised access, manipulation, corruption, or destruction of could reduce our ability to sustainably win future business, achieve operating
data, systems or products through cyberspace. results and realise future growth opportunities.
Financial shock Market shock
The Group is exposed to a number of financial risks, some of which are of a The Group is exposed to a number of market risks, some of which are of a
macroeconomic nature (for example foreign currency, interest rates, high macroeconomic nature (e.g. economic growth rates) and some of which are more
inflation) and some of which are more specific to the Group (for example, specific to the Group (for example, reduction in air travel or defence
liquidity and credit risks). spending, or disruption to other customer operations). A large proportion of
our business is reliant on the civil aviation industry, which is cyclical in
Significant extraneous market events could also materially damage the Group's nature.
competitiveness and/or creditworthiness and our ability to access funding.
This would affect operational results or the outcomes of financial Demand for our products and services could be adversely affected by factors
transactions. such as current and predicted air traffic, fuel prices and age/replacement
rates of customer fleets.
Strategic transformation
Political risk
We see significant opportunities in leading the transition to net zero. Our
strategy is to focus on delivering on our plans for existing and nascent Geopolitical factors that lead to an unfavourable business climate and
business and to focus on exploiting opportunities to grow into new net zero significant tensions between major trading parties or blocs which could impact
areas, both organically and inorganically. Failure to execute this plan will the Group's operations. Examples include: changes in key political
prevent us from achieving our longer term ambitions. relationships; explicit trade protectionism, differing tax or regulatory
regimes, potential for conflict or broader political issues; and heightened
political tensions.
Talent and capability
Inability to identify, attract, retain and apply the critical capabilities and
skills needed in appropriate numbers to effectively organise, deploy and
incentivise our people would threaten the delivery of our strategies.
Payments to shareholders
We had a ten year track record of payments to shareholders prior to the
pandemic but had to cease payments in 2020 to protect our balance sheet. We
are still restricted by some of the conditions attached to our loan facilities
from making payments to shareholders at this time. We are committed to
returning to an investment grade credit rating through performance improvement
and to resuming shareholder payments.
Shareholders wishing to redeem their existing C Shares must lodge instructions
with the Registrar to arrive no later than 5.00pm on 01 June 2023 (CREST
holders must submit their election in CREST by 2.55pm). The payment of C Share
redemption monies will be made on 05 July 2023 and the CRIP purchase will
begin as soon as practicable after 06 July 2023.
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 2022. 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 Panos Kakoullis
Chief Executive Chief Financial Officer
23 February 2023 23 February 2023
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