REG - Rolls-Royce Holdings - Full Year Results 2023
22/02/2024 07:00
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RNS Number : 0057E Rolls-Royce Holdings plc 22 February 2024
22 February 2024
ROLLS-ROYCE HOLDINGS PLC - 2023 Full Year Results
Step-change in performance driven by transformation; strong momentum into 2024
- Underlying operating profit of £1.6bn and underlying margin of 10.3%,
reflecting the impact of our strategic initiatives, with commercial
optimisation and cost efficiency benefits across the Group
- Record free cash flow of £1.3bn driven by operating profit and continued LTSA
balance growth
- Return on capital more than doubled to 11.3% reflecting improved operating
profit, disciplined capital allocation and working capital management
- Statutory net cash flow from operating activities of £2.5bn, £1.0bn higher
year on year
- Net debt of £2.0bn, down from £3.3bn at the end of 2022, as we strengthen
the balance sheet and build resilience
- 2024 guidance: continued progress with underlying operating profit between
£1.7bn and £2.0bn and free cash flow between £1.7bn and £1.9bn
Tufan Erginbilgic, CEO said: "Our transformation has delivered a record
performance in 2023, driven by commercial optimisation, cost efficiencies and
progress on our strategic initiatives. This step-change has been achieved
across all our divisions, despite a volatile environment with geopolitical
uncertainty, supply chain challenges and inflationary pressures.
We are managing the business differently and our significant performance
improvement in the year reflects the hard work and focused actions of all our
teams. We are also continuing to invest to drive future sustainable growth.
Our strong delivery in 2023 gives us confidence in our 2024 guidance and is a
significant step towards our mid-term targets. We are unlocking our full
potential as a high-performing, competitive, resilient, and growing
Rolls-Royce."
Full Year 2023 Group continuing operations
Underlying Underlying 2022 Statutory Statutory
2023 2023 2022
£ million
Revenue 15,409 12,691 16,486 13,520
Operating profit 1,590 652 1,944 837
Operating margin (%) 10.3% 5.1% 11.8% 6.2%
Profit/(loss) before taxation 1,262 206 2,427 (1,502)
Earnings/(loss) per share (pence) 13.75 1.95 28.85 (14.24)
Free cash flow 1,285 505
Return on capital (%) (1) 11.3% 4.9%
Net cash flow from operating activities (2) 2,485 1,524
Net debt (1,952) (3,251)
(1 ) Adjusted return on capital is defined on page 52 and is abbreviated to
return on capital
(2 ) Represented. See page 18 for further details
A reconciliation of alternative performance measures to their statutory
equivalent is provided on pages 49 to 52
2023 performance summary
· Driving growth in attractive markets: Large engine flying hours (EFH)
in Civil Aerospace recovered to 88% of 2019 levels, up from 65% in 2022. Large
engine orders were the highest in more than 15 years, with major orders from
Air India and Turkish Airlines. In Defence, the AUKUS submarine agreement was
announced, which will be supported by the expansion of our submarines site in
Raynesway, and work on our future programmes in the UK and US progressed well.
In Power Systems, we are capturing strong demand for power generation
solutions and services in the rapidly expanding data centre market.
· Significantly improved profit and margins: Underlying operating
profit rose by £0.9bn to £1.6bn supported by our transformation programme
and strategic initiatives, with commercial optimisation and cost efficiency
benefits across the Group. Underlying operating margin more than doubled to
10.3%. Civil Aerospace, Defence and Power Systems all delivered materially
higher margins compared to last year. The largest improvement was in Civil
Aerospace, which delivered an operating margin of 11.6% compared to 2.5% in
the previous year. This was driven by increased aftermarket profit, in both
the large engines and business aviation segments, reflecting commercial
optimisation and cost efficiencies, as well as volume growth. Defence
delivered an improved operating margin of 13.8% (2022: 11.8%), which primarily
reflected improved pricing and cost efficiencies. In Power Systems, which
reported an operating margin of 10.4% (2022: 8.4%), pricing and cost
efficiency actions in the first half of the year resulted in a significantly
improved operating profit and margin in the second half and in the full year.
· Record cash generation: Free cash flow from continuing operations
grew by approximately 150% to £1.3bn, principally due to higher operating
profit. Civil net LTSA creditor growth net of risk and revenue sharing
agreements (RRSAs) was £1.1bn (2022: £0.8bn). Continued LTSA balance growth
reflects higher EFHs and the benefit of commercial optimisation, with LTSA
invoiced flying hour receipts of £4.6bn (2022: £3.6bn). Our focus on working
capital resulted in a release in the second half despite ongoing supply chain
challenges. For the full year there was a net working capital outflow of
£0.4bn (2022: £0.5bn). Inventory and debtor days both improved year on year
building further confidence in the actions we are taking to improve the
quality of cash delivery.
· Building financial resilience: Total underlying cash costs as a
proportion of underlying gross margin (TCC/GM) ratio improved to 0.59x in 2023
from 0.80x in 2022. Net debt improved to £2.0bn (2022: £3.3bn). We have
£4.1bn of drawn debt, of which £0.5bn matures in 2024, £0.8bn in 2025 and
£2.8bn in 2026-2028, and £1.7bn of lease liabilities. We have £3.7bn in
cash and cash equivalents and £3.5bn undrawn facilities, totalling £7.2bn of
liquidity, and expect to repay the 2024 and 2025 bonds from cash. We cancelled
a £1.0bn undrawn UK Export Finance (UKEF) backed facility in the year, and a
£1.0bn undrawn bank loan facility reflecting our higher cash balance and more
resilient financial position.
· Shareholder payments: We are not making shareholder payments for
2023. As we shared at our capital markets day in November 2023, once we are
comfortably within an investment grade profile and the strength of our balance
sheet is assured, we are committed to reinstating and growing shareholder
distributions.
Transformation programme and strategic review
The early results of our transformation programme and strategic initiatives
are already evident in the step-change in performance reported for 2023, but
there is more still to do. Our strategy framework is founded on four pillars:
· Portfolio choices & partnerships: We have clear plans for the
markets we will operate and invest in. In Civil Aerospace, we successfully
tested our UltraFan demonstrator engine to full power and achieved
certification for our Pearl 700 business jet engine. In Defence, investment
continued in the growing combat, transport and submarines markets and we
progressed well with testing and development on the GCAP and B-52 programmes.
In Power Systems, we successfully tested a new engine prototype that will join
our portfolio alongside our current Series 4000 and acquired a yacht
automation and bridge specialist business to extend our Marine offering. We
also identified areas for divestment, which we expect to generate
£1.0bn-£1.5bn gross proceeds by 2028. We are in advanced discussions to sell
the off-highway lower power range engines division in Power Systems and we
decided to exit Electrical in the short term or alternatively, for the right
value, reduce our position to a minority with an intention to exit fully in
the mid-term.
· Advantaged businesses & strategic initiatives: In Civil
Aerospace, we have now retrofitted 20% of the Trent 7000 fleet with the
improved HPT blade, which has doubled its time on wing, and we expect the same
improvement to be certified on the Trent 1000 TEN in 2024. All key Civil
Aerospace OEM and major airline contract renegotiations were either concluded
or progressed. Our cost initiatives reduced total shop visit costs across
large engines dispatched in 2023, which helped to deliver an improved LTSA
margin. In Defence, cost efficiencies and value-based pricing helped to
deliver improved performance and we delivered strong growth in combat and
submarines. In Power Systems, in addition to our pricing and cost actions, we
commissioned one of the largest battery and energy storage systems in Europe,
helping to integrate renewable energy into the Dutch public grid and grow our
power generation business.
· Efficiency & simplification: Our actions to deliver sustainable
cost efficiencies and improve competitiveness are well underway. In 2023, we
delivered around £150m towards an annualised total Efficiency &
Simplification savings target of £400m-£500m in the mid-term. We announced a
reduction of 2,000-2,500 roles by the end of 2025 with expected annual
benefits of approximately £200m and associated severance costs of
£200m-£250m, which will be taken as an exceptional charge in 2024. We also
have a renewed focus on third party costs, where we delivered gross savings of
£130m in the year, making a strong start towards our target to save £1bn
gross procurement spend by the mid-term, helping to partly offset inflationary
pressures. In 2024, we have launched zero based budgeting, focusing initially
on Civil Aerospace.
· Lower carbon & digitally enabled businesses: We remain committed
to becoming a net zero company by 2050 and supporting our customers to do the
same. In 2023 we powered the first 100% sustainable aviation fuelled
commercial flight across the Atlantic and met our target for 100% SAF
compatibility testing for our in production commercial aero engines. Our S2000
and S4000 engines in Power Systems were approved for use with sustainable
fuels and we also progressed our hydrogen test programmes. We invested in
digital tools as we look to unlock the potential to remove 20% of repetitive
tasks with digital and AI capability.
Delivery of our strategic framework and clear plans for the mid-term will
realise our Rolls-Royce proposition to become a high-performing, competitive,
resilient and growing business. Our people are energised and aligned to the
new One Rolls-Royce ways of working and our progress to date further
strengthens our confidence in the delivery of our mid-term targets.
Outlook and 2024 Guidance
As we continue to deliver our strategy, we expect further improvements towards
all our mid-term targets. This is despite the impact of continued supply chain
challenges, which we expect to persist for 18-24 months, geopolitical
uncertainty and inflationary pressures.
2024 financial guidance
Underlying operating profit £1.7bn-£2.0bn
Free cash flow £1.7bn-£1.9bn
In Civil Aerospace, we expect 2024 large EFHs will grow to 100-110% of 2019's
level, 500-550 total original equipment (OE) deliveries and 1,300-1,400 total
shop visits. Our 2024 free cash flow guidance is based on civil net LTSA
creditor growth at the low end of the mid-term range (£0.8bn - £1.2bn),
compared to £1.1bn in 2023. Additional detail is included in the results
presentation and supplementary data slides.
Strong progress in the early years of our plan demonstrates a front-end loaded
delivery of performance improvement. Our 2023 performance and 2024 guidance on
operating profit and free cash flow means that by 2024 we will have delivered
more than 50% of the improvement set out in our mid-term targets. As a
reminder, we are targeting underlying operating profit of £2.5bn-£2.8bn,
operating margin of 13-15%, free cash flow of £2.8bn-£3.1bn and return on
capital of 16-18% in the mid-term. These targets are based upon our
expectations for a 2027 timeframe.
Underlying financial performance by division
£ million Underlying revenue Organic Change (1) Underlying operating profit/(loss) Underlying operating margin Organic margin change (pts)
Organic change (1)
Civil Aerospace 7,348 29% 850 497% 11.6% 9.1pt
Defence 4,077 12% 562 30% 13.8% 1.9pt
Power Systems 3,968 16% 413 44% 10.4% 2.0pt
New Markets 4 nm (160) (20)% nm nm
Other businesses 12 nm (15) 52% nm nm
Corporate/eliminations − nm (60) (49)% nm nm
Total (continuing operations) 15,409 21% 1,590 143% 10.3% 5.2pt
(1) Organic change is the measure of change at constant translational
currency applying full year 2022 average rates to 2023. All underlying income
statement commentary is provided on an organic basis unless otherwise stated
All results are shown for Group continuing operations, on an underlying basis,
excluding discontinued operations (ITP Aero). For more details, see note 2 of
the Condensed Consolidated Financial Statements (page 22).
nm is defined as not meaningful
Trading cash flow
£ million 2023 2022
Civil Aerospace 626 226
Defence 511 426
Power Systems 461 158
New Markets (63) (57)
Other businesses 5 5
Corporate/eliminations (57) (49)
Total trading cash flow (continuing operations) 1,483 709
Underlying operating profit charge exceeded by contributions to defined (26) (32)
benefit schemes
Taxation (172) (172)
Total free cash flow (continuing operations) 1,285 505
Civil Aerospace
2023 key operational metrics: Large engine Business aviation/ regional Total Change
Original Equipment (OE) deliveries 262 196 458 29%
LTSA engine flying hours (millions) 13.5 3.0 16.5 25%
Total LTSA shop visits 839 388 1,227 18%
…of which major shop visits 368 363 731 27%
Significantly improved Civil Aerospace operating profit and margins reflect
higher aftermarket profit, due to increased volumes, commercial optimisation,
and cost efficiencies.
Civil Aerospace large EFHs rose by 36% year on year to 88% of 2019 levels,
reflecting the continued strong demand for travel coupled with a recovery in
traffic in China as COVID-19 restrictions eased. Business aviation demand
remained robust. In 2023, around 700 large engines were ordered, the highest
level since 2007 including major orders from Air India, Emirates and EVA Air.
Turkish Airlines also placed an order for new engine deliveries in 2023, which
is set to make them the largest operator of Trent XWB engines in the world. In
January 2024 we also received a substantial order from Delta Airlines for 40
Trent XWB-97 engines. Our large engine order book increased by almost 30% to
1,632 engines at year end with a 2023 book to bill of 2.6x.
Total OE engine deliveries rose by 29% year on year, with 196 business
aviation deliveries (2022: 165) and 262 total large engine deliveries (2022:
190). In 2023 we delivered 53 large spare engines (2022: 44), which
represented 20% of total large engine deliveries (2022: 23%). Total shop
visits increased 18% year on year to 1,227
(2022: 1,044), of these 368 were large engine major shop visits (2022: 248).
The ramp up in shop visits was achieved despite ongoing supply chain
constraints.
Underlying revenue of £7.3bn increased 29% year on year, driven by higher
shop visits and OE engine deliveries and commercial optimisation. Underlying
OE revenues grew by 36% in the year to £2.7bn and services revenues grew by
25% to £4.6bn. LTSA revenue catch-ups were £(104)m (2022: £360m).
Underlying operating profit was £850m (11.6% margin) versus £143m in 2022
(2.5% margin). The year on year improvement was driven by higher large engine
LTSA shop visit volumes and profitability, increased time and materials
profits from life limited parts sales for large engines, and higher business
aviation profits, again driven by aftermarket profit growth. In each case, our
commercial optimisation actions helped drive margin improvements. This was
complemented by cost efficiencies, with lower indirect costs net of inflation.
Contract catch-ups were £(29)m (2022: £319m). The prior year benefitted from
material positive contract catch-ups mostly associated with inflation
assumption changes in 2022. Net onerous provisions/releases were £(25)m
(2022: £51m). We made good progress on onerous contracts in the year,
releasing £385m of provisions taken in prior periods. However, this was more
than offset by £410m new provisions taken in 2023 mostly related to industry
wide supply chain constraints.
Trading cash flow was £626m versus £226m in 2022. Improved cash flows were
driven by higher operating profit, continued strong growth in the LTSA
balance, partly offset by net working capital movements and increased
investments in the year including improving time on wing for our Trent
engines, investment in the Pearl business aviation engines and the UltraFan
demonstrator engine test. LTSA invoiced flying hour receipts increased to
£4.6bn (2022: £3.6bn).
Defence
Higher operating profit in Defence was driven by our commercial optimisation
action, cost efficiencies and volume growth in submarines.
Demand remained strong in all key markets - transport, combat and submarines -
with order intake of £5.2bn in the year; a book-to-bill ratio of 1.3x. This
resulted in a record order backlog of £9.2bn at the year end, with 90% order
cover in 2024 and a high degree of cover in 2025 and beyond. Key awards in the
year included the AUKUS agreement, which underpins the long-term growth
outlook for our submarines business.
Revenues increased by 12% in 2023 to £4.1bn, with year-on-year growth in all
major end markets, notably
double-digit revenue growth in combat and submarines. Combat growth was driven
by the GCAP programme in the UK and the ramp-up of the F130 programme for the
B-52 in the US. Total OE revenues grew by 8% in the year to £1.8bn and
services revenues grew by 14% to £2.3bn.
Operating profit was £562m (13.8% margin) versus £432m (11.8% margin) in the
prior year, reflecting commercial optimisation, cost efficiencies, and growth
in submarines. A lower R&D charge reflected increased customer funding and
our strategic focus on the most attractive future programmes.
Trading cash flow of £511m improved versus £426m last year, driven by higher
underlying operating profit and our working capital initiatives which resulted
in inventory reductions, and increased customer deposits.
Power Systems
In Power Systems, as we stated in our upgraded 2023 guidance at the half year,
our cost and pricing actions in the first half of the year supported a
significantly higher margin and profit in the second half, and a higher margin
for the full year, with a material improvement in power generation profit,
taking the division to a level which represents an all-time record in the 114
year history of the business.
Order intake in Power Systems was £4.3bn, flat year on year, but with a
book-to-bill ratio of 1.1x and OE order coverage for 2024 of 80%. Demand
remained strong with high order intake in power generation and governmental in
particular.
Underlying revenue was £4.0bn, an increase of 16% year on year with 34%
growth in the power generation end market driven by data centre growth, where
we have a leading position. Underlying OE revenues grew by 19% to £2.7bn.
Underlying Services revenues grew by 10% to £1.3bn.
Operating profit was £413m, a 44% year on year increase. This was driven by
commercial optimisation and cost efficiencies. In power generation,
profitability tripled in 2023 as we took steps to ensure we are appropriately
remunerated for our products and services through value-based pricing. The
year on year improvement in operating margin to 10.4% in 2023 versus 8.4% in
2022 was achieved despite a slight product mix headwind in the year.
Trading cash flow was £461m with a conversion ratio of 112% versus £158m and
56% last year. The increase in trading cash flow was due to increased
operating profit and working capital initiatives including a benefit from
increased customer advance payments and reduced inventories in the year.
New Markets
Rolls-Royce SMR (small modular reactors) continued to progress well through
stage two of the Generic Design Assessment (GDA) regulatory process in the UK.
First power is still planned in the early 2030s, which will be dependent on
securing orders and the outcome of the final investment decision by the UK
Government. In 2023 we were successfully shortlisted in the first stage of the
Great British Nuclear Small Modular Reactor technology selection process and
look forward to the next steps.
Planned cost increases in both Electrical and SMR to meet development
milestones resulted in an increased operating loss of £(160)m a 20% increase
from £(132)m in the prior year.
Trading cash flow was an outflow of £(63)m compared to £(57)m in the prior
year, with SMR costs covered by third party funding.
Statutory and underlying Group financial performance from continuing
operations
2023 2022
£ million Statutory Impact of hedge book (1) Impact of acquisition accounting Impact of other non-underlying items Underlying Underlying
Revenue 16,486 (1,077) − − 15,409 12,691
Gross profit 3,620 (461) 46 26 3,231 2,477
Operating profit 1,944 (475) 50 71 1,590 652
Gain arising on disposal of businesses 1 − − (1) − −
Profit before financing and taxation 1,945 (475) 50 70 1,590 652
Net financing income/(costs) 482 (915) − 105 (328) (446)
Profit before taxation 2,427 (1,390) 50 175 1,262 206
Taxation (2) (23) 285 (12) (370) (120) (48)
Profit for the year from continuing operations 2,404 (1,105) 38 (195) 1,142 158
Basic earnings per share (pence) 28.85 13.75 1.95
(1) Reflecting the impact of measuring revenue and costs at the average
exchange rate during the year and the valuation of assets and liabilities
using the year end exchange rate rather than the rate achieved on settled
foreign exchange contracts in the year or the rate expected to be achieved by
the use of the hedge book
(2) Taxation includes the recognition of a deferred tax asset on UK tax
losses of £328m in other non-underlying items
Revenue: Underlying revenue of £15.4bn was up 21%, with double-digit growth
in all three core divisions and particularly strong growth in Civil Aerospace.
Statutory revenue of £16.5bn was 22% higher compared with 2022. The
difference between statutory and underlying revenue is driven by statutory
revenue being measured at average prevailing exchange rates (2023: GBP:USD
1.24; 2022: GBP:USD 1.24) and underlying revenue being measured at the hedge
book achieved rate during the year (2023 GBP:USD 1.50; 2022: 1.50).
Operating profit: Underlying operating profit of £1,590m (10.3% margin)
versus £652m (5.1% margin) in the prior year. This was due primarily to
strong aftermarket growth in Civil Aerospace and commercial optimisation and
cost efficiencies across the Group. The largest year on year improvement in
margin was in Civil Aerospace, but Defence and Power Systems margins also rose
materially. Statutory operating profit was £1,944m, higher than the £1,590m
underlying operating profit largely due to the £475m negative impact from
currency hedges in the underlying results. Net charges of £71m were excluded
from the underlying results as these related to non-underlying items
comprising net transformation and restructuring charges of £102m; partly
offset by net impairment reversals of £8m, the write back of exceptional
Trent 1000 programme charges of £21m; and a £2m pension past service credit.
Profit before taxation: Underlying profit before taxation of £1,262m included
£(328)m net financing costs comprising £164m interest receivable, £(275)m
interest payable and £(217)m of other financing charges and costs of undrawn
facilities. Statutory profit before tax of £2,427m included £515m net fair
value gains on derivative contracts, £(205)m net interest payable and net
foreign exchange gains of £394m.
Taxation: Underlying tax charge of £(120)m (2022: £(48)m) reflects a tax
charge on profits of £(198)m net of a tax credit arising on the recognition
of a £78m deferred tax asset on previously unrecognised UK tax losses. The
2022 underlying tax charge relates to tax on overseas profits of £(175)m net
of a tax credit on the increase in certain UK deferred tax assets of £127m.
The statutory tax charge of £(23)m is lower than the underlying charge due to
an additional £328m recognition of a deferred tax asset on UK tax losses.
This is partially offset by a net tax charge of £(231)m on non-underlying
items.
Free cash flow
2023 2022
£ million Cash flow Impact of hedge book Impact of acquisition accounting Impact of other non-underlying items Funds flow Funds flow
Operating profit 1,944 (475) 50 71 1,590 652
Operating profit from discontinued operations − − − − − 86
Depreciation, amortisation and impairment 1,019 − (50) 9 978 953
Movement in provisions (325) 46 − 21 (258) (23)
Movement in Civil LTSA balance 1,708 (377) − − 1,331 792
Movement in prepayments to RRSAs for LTSA parts (315) 63 − − (252) (8)
Settlement of excess derivatives (1) (389) − − − (389) (326)
Interest received 159 − − − 159 36
Other operating cash flows (2) (63) (8) − 3 (68) 5
Operating cash flow before working capital and income tax 3,738 (751) − 104 3,091 2,167
Working capital (excluding Civil LTSA balance and prepayment to RRSAs) (3) (236) (123) − (37) (396) (524)
Cash flows on other financial assets and liabilities held for operating (845) 853 − − 8 77
purposes
Income tax (172) − − − (172) (174)
Cash from operating activities 2,485 (21) − 67 2,531 1,546
Capital element of lease payments (291) 21 − − (270) (198)
Capital expenditure (699) − − 4 (695) (504)
Investment 69 − − − 69 28
Interest paid (333) − − − (333) (352)
Other 54 − − (71) (17) (29)
Free cash flow 1,285 − − − 1,285 491
- of which is continuing operations 1,285 1,285 505
(1 ) The funds flow to 31 December 2022 has been represented to disclose
cash flows on settlement of excess derivative contracts as cash flows from
operating activities. As a result, operating cash flows before working capital
and income tax during the year to 31 December 2022 have reduced by £(326)m to
£2,167m. Cash flows on settlement of excess derivative contracts were
previously shown after cash from operating activities in arriving at free cash
flow. There is no impact to free cash flow
(2) Other operating cash flows includes profit/(loss) on disposal, share of
results and dividends received from joint ventures and associates, flows
relating to our defined benefit post-retirement schemes, and share based
payments
(3) Working capital includes inventory, trade and other receivables and
payables, and contract assets and liabilities (excluding Civil LTSA balances
and prepayment to RRSAs). Working capital was previously defined as inventory,
trade and other receivables and payables, and contract assets and liabilities,
excluding Civil LTSA
Free cash flow in the year was £1.3bn, an improvement of £0.8bn compared
with the prior year driven by:
Operating cash flow before working capital and income tax of £3.1bn, £0.9bn
higher than the prior year. The improvement at the Group level was principally
due to our actions on commercial optimisation and cost discipline. The
movement in Civil LTSA balance was £1,331m (2022: £792m) driven by higher
EFH receipts. RRSA prepayments were £252m (2022: £8m). The movement in
provisions of £(258)m largely related to utilisation of the Trent 1000
provision, contract loss provisions and the settlement of a legal claim. The
settlement of excess derivative contracts of £(389)m was in line with
expectations, with a further cash outflow of £146m expected to be incurred in
2024, £148m in 2025 and £27m in 2026. Interest received was £159m, up from
£36m in 2022 due to higher cash balances and higher interest rates in the
year.
Working capital £(396)m, compared to £(524)m in the prior year. Inventory
increased by £(0.2)bn in the year primarily driven by Civil Aerospace as a
result of continued supply chain disruption. There was a net £(0.2)bn outflow
from receivables, payables and contract liabilities reflecting the net of
volume growth in receivables and an increase in advance payments from
customers.
Income tax of £(172)m, net cash tax payments in 2023 were marginally lower
than the prior year of £(174)m, mainly due to the receipt of refunds in
respect of prior periods in the US and timing of payments in Germany.
The capital element of lease payments was £(270)m, £(72)m higher than the
prior year as a result of timing of lease payments.
Capital expenditure of £(695)m, mainly £(429)m property, plant and equipment
additions and £(284)m intangibles additions. The combined additions were
higher than last year as a result of investment in site improvements across
the Group.
Interest paid of £(333)m, including lease interest payments, has reduced by
£19m as a result of the settlement of the UKEF £2bn loan facility in
September 2022 slightly offset by higher interest on gross overdrafts.
Balance Sheet
£ million 2023 2022 Change
Intangible assets 4,009 4,098 (89)
Property, plant and equipment 3,728 3,936 (208)
Right of use assets 905 1,061 (156)
Joint ventures and associates 479 422 57
Civil LTSA (1) (9,080) (7,372) (1,708)
RRSA prepayments for LTSA parts (1) 1,320 1,005 315
Working capital (1) (1,386) (2,017) 631
Provisions (2,029) (2,333) 304
Net debt (2) (1,952) (3,251) 1,299
Net financial assets and liabilities (2) (2,060) (3,649) 1,589
Net post-retirement scheme deficits (253) (420) 167
Taxation 2,605 2,468 137
Held for sale (3) 54 - 54
Other net assets and liabilities 31 36 (5)
Net liabilities (3,629) (6,016) 2,387
Other items
US$ hedge book (US$bn) 15 19
(1) The total of these lines represents inventory, trade receivables and
payables, contract assets and liabilities and other assets and liabilities in
the statutory balance sheet
(2) Net debt includes £23m (2022: £86m) of the fair value of derivatives
included in fair value hedges and the element of fair value relating to
exchange differences on the underlying principal of derivatives in cash flow
hedges
(3) Held for sale assets relate to the sale of the off-highway engines
business in the lower power range based in Power Systems
Key drivers of balance sheet movements were:
Civil LTSA: The £(1.7)bn movement in the net liability balance was mainly
driven by an increase in invoiced LTSA receipts exceeding revenue recognised
in the year, this is especially prevalent on new contracts where shop visits
are not immediately scheduled.
RRSA prepayments for LTSA parts: The £0.3bn increase corresponds to the
increase seen in the civil LTSA balance above. RRSA prepayments typically move
in line with the civil LTSA as the RRSA prepayment represents amounts that we
have paid to Risk and Revenue Share Partners for the parts that they will
ultimately provide in support of our contracts.
Working capital: The £(1.4)bn net working capital position decreased by
£0.6bn compared to the prior year. The movement comprised £0.1bn increase in
inventory, mainly in Civil Aerospace due to supply chain disruption, £0.9bn
increase in receivables due to higher trading volumes and prepayments from
customers, £0.5bn reduction in payables due to changes in operational volumes
and timing of supplier payments, partly offset by an increase in contract
liabilities of £(0.9)bn driven by advanced payments received across the
divisions.
Provisions: The £0.3bn net reduction was primarily driven by the settlement
of a legal claim, utilisation of the Trent 1000 provision, and a net £0.1bn
reduction in contract loss provisions due to provision utilisation,
renegotiations and extensions of some major contracts resulting in improved
margins, partly offset by increased cost estimates from supply chain issues.
Net debt: Decreased from £(3.3)bn to £(2.0)bn driven by free cash inflow of
£1.3bn. Our liquidity position is strong with £7.2bn of liquidity including
cash and cash equivalents of £3.7bn and undrawn facilities of £3.5bn. Two
undrawn facilities, totalling £2.0bn, were cancelled in 2023 reflecting our
higher cash balance and more resilient financial position. Net debt included
£(1.7)bn of lease liabilities (2022: £(1.8)bn).
Net financial assets and liabilities: A £1.6bn reduction in the net financial
liabilities driven by contracts maturing in the year and a change in fair
value of derivative contracts largely due to the impact of the movement in
GBP:USD exchange rates.
Taxation: The net tax asset has increased by £137m. This includes an overall
increase in the deferred tax asset of £267m, due to increases in the deferred
tax asset recognised on UK tax losses of £422m and other deferred tax assets
of £101m, partly offset by a reduction of £256m on the deferred tax on
foreign exchange derivative contracts. Other tax balance movements include
increases in the deferred tax liability of £44m and net current tax
liabilities of £86m.
Results meeting and conference call
Our results presentation will be held at UBS, 5 Broadgate, London EC2M 2QS and
webcast live at 09:00 (GMT) today. Downloadable materials will also be
available on the Investor Relations section of the Rolls-Royce website:
https://www.rolls-royce.com/investors/results-and-events.aspx
(https://www.rolls-royce.com/investors/results-and-events.aspx)
To register for the webcast, including Q&A participation, please visit the
following link: https://app.webinar.net/3K4kP3kPLYx
(https://app.webinar.net/3K4kP3kPLYx)
Please use this same link to access the webcast replay which will be made
available shortly after the event concludes. Photographs and
broadcast-standard video are available at www.rolls-royce.com
(http://www.rolls-royce.com)
Enquiries:
Investors: Media:
Isabel Green +44 7880 160976 Richard Wray +44 7810 850055
Jeremy Bragg +44 7795 840875
This results announcement contains forward-looking statements. Any statements
that express forecasts, expectations and projections are not guarantees of
future performance and will not be updated. By their nature, these statements
involve risk and uncertainty, and a number of factors could cause material
differences to the actual results or developments. This report is intended to
provide information to shareholders, is not designed to be relied upon by any
other party, or for any other purpose and Rolls-Royce Holdings plc and its
directors accept no liability to any other person other than under English
law.
LSE: RR.; ADR: RYCEY; LEI: 213800EC7997ZBLZJH69
Condensed Consolidated Financial Statements
Condensed consolidated income statement
For the year ended 31 December 2023
( )
2023 2022
Notes £m £m
Continuing operations
Revenue 2 16,486 13,520
Cost of sales (1) (12,866) (10,763)
Gross profit 2 3,620 2,757
Commercial and administrative costs 2 (1,110) (1,077)
Research and development costs 2, 3 (739) (891)
Share of results of joint ventures and associates 173 48
Operating profit 1,944 837
Gain arising on disposal of businesses 23 1 81
Profit before financing and taxation 1,945 918
Financing income 4 1,163 355
Financing costs 4 (681) (2,775)
Net financing income/(costs) (2) 482 (2,420)
Profit/(loss) before taxation 2,427 (1,502)
Taxation 5 (23) 308
Profit/(loss) for the year from continuing operations 2,404 (1,194)
Discontinued operations
Profit for the year from ordinary activities - 68
Loss on disposal of discontinued operations - (148)
Loss for the year from discontinued operations 23 - (80)
Profit/(loss) for the year 2,404 (1,274)
Attributable to:
Ordinary shareholders 2,412 (1,269)
Non-controlling interests (NCI) (8) (5)
Profit/(loss) for the year 2,404 (1,274)
Other comprehensive (expense)/income (OCI) (171) 522
Total comprehensive income/(expense) for the year 2,233 (752)
Earnings/(loss) per ordinary share attributable to ordinary shareholders: 6
From continuing operations:
Basic 28.85p (14.24)p
Diluted 28.70p (14.24)p
From continuing and discontinued operations:
Basic 28.85p (15.20)p
Diluted 28.70p (15.20)p
(1)( ) Cost of sales includes a net release for expected credit losses
(ECLs) of £48m (2022: charge of £73m). Further details can be found in note
12
(2) Included within net financing are fair value changes on derivative
contracts. Further details can be found in notes 2, 4 and 18
Condensed consolidated statement of comprehensive income
For the year ended 31 December 2023
2023 2022
Notes £m £m
Profit/(loss) for the year 2,404 (1,274)
Other comprehensive income/(expense) (OCI)
Actuarial movements in post-retirement schemes 20 116 (156)
Revaluation to fair value of other investments 10 (4) (4)
Share of OCI of joint ventures and associates 1 2
Related tax movements (43) 89
Items that will not be reclassified to profit or loss 70 (69)
Foreign exchange translation differences on foreign operations (226) 452
Foreign exchange translation differences reclassified to income statement 23 1 65
on disposal of businesses
Hedging reserves reclassified to income statement on disposal of - 111
businesses
NCI disposed of on disposal of businesses - 1
Movement on fair values charged to cash flow hedge reserve (CFHR) (82) (7)
Reclassified to income statement from cash flow hedge reserve (CFHR) 61 (55)
Costs of hedging - 10
Share of OCI of joint ventures and associates 1 −
Related tax movements 4 14
Items that will be reclassified to profit or loss (241) 591
Total other comprehensive (expense)/income (171) 522
Total comprehensive income/(expense) for the year 2,233 (752)
Attributable to:
Ordinary shareholders 2,241 (748)
NCI (8) (4)
Total comprehensive income/(expense) for the year 2,233 (752)
Total comprehensive income/(expense) for the year attributable to ordinary
shareholders arises from:
Continuing operations ( ) 2,241 (673)
Discontinued operations ( ) - (75)
Total comprehensive income/(expense) for the year attributable to ordinary ( ) 2,241 (748)
shareholders
Condensed consolidated balance sheet
At 31 December 2023
2023 2022
Notes £m £m
ASSETS
Intangible assets 7 4,009 4,098
Property, plant and equipment 8 3,728 3,936
Right-of-use assets 9 905 1,061
Investments - joint ventures and associates 10 479 422
Investments - other 10 31 36
Other financial assets 18 360 542
Deferred tax assets 2,998 2,731
Post-retirement scheme surpluses 20 782 613
Non-current assets 13,292 13,439
Inventories 11 4,848 4,708
Trade receivables and other assets 12 8,123 6,936
Contract assets 13 1,242 1,481
Taxation recoverable 80 127
Other financial assets 18 34 141
Short-term investments - 11
Cash and cash equivalents 14 3,784 2,607
Current assets 18,111 16,011
Assets held for sale 23 109 −
TOTAL ASSETS 31,512 29,450
LIABILITIES
Borrowings and lease liabilities 15 (809) (358)
Other financial liabilities 18 (448) (1,016)
Trade payables and other liabilities 17 (6,896) (6,983)
Contract liabilities 13 (6,098) (4,825)
Current tax liabilities (143) (104)
Provisions for liabilities and charges 19 (532) (632)
Current liabilities (14,926) (13,918)
Borrowings and lease liabilities 15 (4,950) (5,597)
Other financial liabilities 18 (1,983) (3,230)
Trade payables and other liabilities 17 (1,927) (2,364)
Contract liabilities 13 (8,438) (7,337)
Deferred tax liabilities (330) (286)
Provisions for liabilities and charges 19 (1,497) (1,701)
Post-retirement scheme deficits 20 (1,035) (1,033)
Non-current liabilities (20,160) (21,548)
Liabilities associated with assets held for sale 23 (55) −
TOTAL LIABILITIES (35,141) (35,466)
NET LIABILITIES (3,629) (6,016)
EQUITY
Called-up share capital 1,684 1,674
Share premium 1,012 1,012
Capital redemption reserve 167 166
Hedging reserves 12 26
Translation reserve 634 861
Accumulated losses (7,190) (9,789)
Equity attributable to ordinary shareholders (3,681) (6,050)
Non-controlling interest (NCI) 52 34
TOTAL EQUITY (3,629) (6,016)
Condensed consolidated cash flow statement
For the year ended 31 December 2023
Notes 2023 Restated (1)
£m 2022
£m
Reconciliation of cash flows from operating activities
Operating profit from continuing operations 1,944 837
Operating profit from discontinued operations 23 - 86
Operating profit 1,944 923
Loss on disposal of property, plant and equipment 18 18
Share of results of joint ventures and associates 10 (173) (48)
Dividends received from joint ventures and associates 10 54 73
Amortisation and impairment of intangible assets 7 272 287
Depreciation and impairment of property, plant and equipment 8 423 430
Depreciation and impairment of right-of-use assets 9 334 287
Adjustment of amounts payable under residual value guarantees within lease (10) (3)
liabilities
Impairment of and other movements on investments 10 - 75
Decrease in provisions (325) (197)
Increase in inventories (200) (887)
Movement in trade receivables/payables and other assets/liabilities (1,346) (56)
Movement in contract assets/liabilities 2,703 1,753
Cash flows on other financial assets and liabilities held for operating (845) (660)
purposes (2)
Cash flows on settlement of excess derivative contracts (1, 3) (389) (326)
Interest received 159 36
Net defined benefit post-retirement cost recognised in profit before financing 20 41 27
Cash funding of defined benefit post-retirement schemes 20 (69) (81)
Share-based payments 66 47
Net cash inflow from operating activities before taxation 2,657 1,698
Taxation paid (172) (174)
Net cash inflow from operating activities 2,485 1,524
Cash flows from investing activities
Movement in other investments 1 (5)
Additions of intangible assets 7 (284) (237)
Disposals of intangible assets 7 4 8
Purchases of property, plant and equipment (429) (359)
Disposals of property, plant and equipment 10 48
Acquisition of businesses 23 (14) -
Disposal of businesses (including cash flows on disposals in prior periods) 23 (4) 1,398
Movement in investments in joint ventures and associates (9) (24)
Movement in short-term investments 11 (3)
Cash flows on other financial assets and liabilities held for non-operating (12) -
purposes
Net cash (outflow)/inflow from investing activities (726) 826
Cash flows from financing activities
Repayment of loans (1) (2,024)
Proceeds from increase in loans 2 1
Capital element of lease payments (291) (218)
Net cash flow from decrease in borrowings and lease liabilities (290) (2,241)
Interest paid (196) (235)
Interest element of lease payments (85) (68)
Fees paid on undrawn facilities (52) (49)
Transactions with NCI (4) 77 57
Dividends to NCI (2) (3)
Redemption of C Shares (1) (1)
Net cash outflow from financing activities (549) (2,540)
Change in cash and cash equivalents 1,210 (190)
Cash and cash equivalents at 1 January 2,605 2,639
Exchange (losses)/gains on cash and cash equivalents (84) 156
Cash and cash equivalents at 31 December (5) 3,731 2,605
(1) The cash flow statement to 31 December 2022 has been represented as a
result of a change in accounting policy to disclose cash flows on settlement
of excess derivative contracts as cash flows from operating activities. As a
result, cash flows from operating activities during the year to 31 December
2022 have reduced by £(326)m to £1,524m with the corresponding decrease in
cash outflow from financing activities by £326m from £(2,866)m to
£(2,540)m. There is no impact to the total change in cash and cash
equivalents or to any alternative performance measures. See note 1 for further
detail
(2)( ) Predominantly relates to cash settled on derivative contracts held
for operating purposes
(3) In 2020, the Group experienced a significant decline in its medium-term
outlook and consequently a significant deterioration to its forecast net USD
cash inflows. The Group took action to reduce the size of the USD hedge book
by $11.8bn across 2020-2026 to reflect the fact that at that time, future
operating cash flows were no longer forecast to materialise. To achieve the
necessary reduction in the hedge book, a separate and distinct set of foreign
exchange derivative instruments were entered into to buy $11.8bn. The
associated cash outflow of these transactions is £1,674m and occurs over the
period 2020-2026. This action had the impact of fixing the fair value of the
over-hedged position and provided certainty over when the cash flows to settle
the position would occur in future periods. During the year, the Group
incurred a cash outflow of £389m (2022: £326m) and estimates that future
cash outflows of £146m will be incurred in 2024 and £175m spread over 2025
and 2026
(4)( ) Relates to NCI investment received in the year, in respect of
Rolls-Royce SMR Limited
(5)( ) The Group considers overdrafts (repayable on demand) and cash held
for sale to be an integral part of its cash management activities and these
are included in cash and cash equivalents for the purposes of the cash flow
statement
Condensed consolidated cash flow statement continued
For the year ended 31 December 2023
In deriving the condensed consolidated cash flow statement, movements in
balance sheet line items have been adjusted for non-cash items. The cash flow
in the year includes the sale of goods and services to joint ventures and
associates - see note 22.
2023 2022
£m £m
Reconciliation of movements in cash and cash equivalents to movements in net
debt
Change in cash and cash equivalents 1,210 (190)
Cash flow from decrease in borrowings and lease liabilities 290 2,241
Cash flow from (decrease)/increase in short-term investments (11) 3
Change in net debt resulting from cash flows 1,489 2,054
Lease additions, modifications and other non-cash adjustments on borrowings (191) (170)
and lease liabilities
Exchange gains/(losses) on net debt 57 (150)
Fair value adjustments 7 70
Debt disposed of on disposal of businesses - 53
Movement in net debt 1,362 1,857
Net debt at 1 January (3,337) (5,194)
Net debt at 31 December excluding the fair value of swaps (1,975) (3,337)
Fair value of swaps hedging fixed rate borrowings 23 86
Net debt at 31 December (1,952) (3,251)
The movement in net debt (defined by the Group as including the items shown
below) is as follows:
At 1 January Funds flow Net debt on disposal Exchange differences Fair value adjustments Reclassifi-cations ( ) Other movements At 31 December
£m £m £m £m £m £m £m £m
2023
Cash at bank and in hand 847 (79) - (29) - - - 739
Money market funds 34 1,043 - - - - - 1,077
Short-term deposits 1,726 297 - (55) - - - 1,968
Cash and cash equivalents 2,607 1,261 - (84) - - - 3,784
(per balance sheet)
Overdrafts (2) (51) - - - - - (53)
Cash and cash equivalents 2,605 1,210 - (84) - - - 3,731
(per cash flow statement)
Short-term investments 11 (11) - - - - - -
Other current borrowings (1) (1) - - (13) (462) (1) (478)
Non-current borrowings (4,105) - - 59 20 462 (4) (3,568)
Lease liabilities (1,847) 291 - 82 - - (186) (1,660)
Financial liabilities (5,953) 290 - 141 7 - (191) (5,706)
Net debt excluding fair value of swaps (3,337) 1,489 - 57 7 - (191) (1,975)
Fair value of swaps hedging fixed rate borrowings (1) 86 - - (59) (4) - - 23
Net debt (3,251) 1,489 - (2) 3 - (191) (1,952)
2022
Cash at bank and in hand 795 17 - 35 - - - 847
Money market funds 49 (15) - - - - - 34
Short-term deposits 1,777 (171) - 120 - - - 1,726
Cash and cash equivalents 2,621 (169) - 155 - - - 2,607
(per balance sheet)
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 (1) 37 - - 125 (76) - - 86
Net debt (5,157) 2,054 53 (25) (6) - (170) (3,251)
(1)( ) Fair value of swaps hedging fixed rate borrowings reflects the
impact of derivatives on repayments of the principal amount of debt. Net debt
therefore includes the fair value of derivatives included in fair value hedges
(2023: £34m, 2022: £38m) and the element of fair value relating to exchange
differences on the underlying principal of derivatives in cash flow hedges
(2023: £(11)m, 2022: £48m)
Condensed consolidated statement of changes in equity
For the year ended 31 December 2023
Attributable to ordinary shareholders
Notes Share capital Share premium Capital redemption reserve Hedging reserves (1) Merger reserve Translation reserve Accum-ulated losses (2) Total NCI Total equity
£m £m £m £m £m £m £m £m £m £m
At 1 January 2023 1,674 1,012 166 26 - 861 (9,789) (6,050) 34 (6,016)
Profit/(loss) for the year - - - - - - 2,412 2,412 (8) 2,404
Foreign exchange translation differences on foreign operations - - - - - (226) - (226) - (226)
Foreign exchange translation differences reclassified to income statement on 23 - - - - - 1 - 1 - 1
disposal of businesses
Actuarial movements on post-retirement schemes 20 - - - - - - 116 116 - 116
Fair value movement on CFHR - - - (82) - - - (82) - (82)
Reclassified to income statement from CFHR - - - 61 - - - 61 - 61
Revaluation to fair value of other investments - - - - - - (4) (4) - (4)
OCI of joint ventures and associates - - - 2 - (1) 1 2 - 2
Related tax movements - - - 5 - (1) (43) (39) - (39)
Total comprehensive (expense)/income for the year - - - (14) - (227) 2,482 2,241 (8) 2,233
Issue of ordinary shares 10 - - - - - - 10 - 10
Redemption of C shares - - 1 - - - (1) - - -
Shares issued to employee share trust - - - - - - (10) (10) - (10)
Share-based payments - direct to equity (3) - - - - - - 49 49 - 49
Dividends to NCI - - - - - - - - (2) (2)
Transactions with NCI (4) - - - - - - 57 57 28 85
Related tax movements - - - - - - 22 22 - 22
Other changes in equity in the year 10 - 1 - - - 117 128 26 154
At 31 December 2023 1,684 1,012 167 12 - 634 (7,190) (3,681) 52 (3,629)
At 1 January 2022 1,674 1,012 165 (45) 650 342 (9,189) (5,391) 26 (5,365)
Loss for the year - - - - - - (1,269) (1,269) (5) (1,274)
Foreign exchange translation differences on foreign operations - - - - - 452 - 452 - 452
Hedging reserves reclassified to income statement on disposal of businesses - - - 111 - - - 111 - 111
Foreign exchange translation differences reclassified to income statement on - - - - - 65 - 65 - 65
disposal of businesses
NCI disposed of on disposal of businesses - - - - - - - - 1 1
Actuarial movements on post-retirement schemes 20 - - - - - - (156) (156) - (156)
Fair value movement on CFHR - - - (7) - - - (7) - (7)
Reclassified to income statement from CFHR - - - (55) - - - (55) - (55)
Costs of hedging - - - 10 - - - 10 - 10
Revaluation to fair value of other investments - - - - - - (4) (4) - (4)
OCI of joint ventures and associates - - - - - - 2 2 - 2
Related tax movements - - - 12 - 2 89 103 - 103
Total comprehensive expense for the year - - - 71 - 519 (1,338) (748) (4) (752)
Redemption of C Shares - - 1 - - - (1) - - -
Share-based payments - direct to equity (3) - - - - - - 46 46 - 46
Dividends to NCI - - - - - - - - (3) (3)
Transactions with NCI (4) - - - - - - 42 42 15 57
Transfer to realised profit (5) - - - - (650) - 650 - - -
Related tax movements - - - - - - 1 1 - 1
Other changes in equity in the year - - 1 - (650) - 738 89 12 101
At 31 December 2022 1,674 1,012 166 26 - 861 (9,789) (6,050) 34 (6,016)
Condensed consolidated statement of changes in equity continued
For the year ended 31 December 2023
(1 ) Hedging reserves include the cash flow hedge reserve of £12m and the
cost of hedging reserve of £nil (2022: £26m and £nil respectively)
(2 ) At 31 December 2023, 52,912,406 ordinary shares with a net book value
of £22m (2022: 11,402,796 ordinary shares with a net book value of £27m)
were held for the purpose of share-based payment plans and included in
accumulated losses. During the year:
- 7,875,240 ordinary shares with a net book value of £15m (2022:
18,488,558 ordinary shares with a net book value of £39m) vested in
share-based payment plans;
- the Company issued 49,100,000 (2022: none) new ordinary shares to
the Group's share trust for its employee share-based payment plans with a net
book value of £10m (2022: £nil); and
- the Company acquired none (2022: none) of its ordinary shares via
reinvestment of dividends received on its own shares and purchased 284,850
(2022: 486,163) of its ordinary shares through purchases on the London Stock
Exchange
(3)( ) Share-based payments - direct to equity is the share-based payment
charge for the year less the actual cost of vesting excluding those vesting
from own shares and cash received on share-based schemes vesting
(4) Relates to NCI investment received in the year in respect of Rolls-Royce
SMR Limited
(5 ) On disposal of ITP Aero on 15 September 2022, the premium recognised
on issue of shares for the previous acquisition became realised on receipt of
qualifying consideration. As such, the total merger reserve has been
transferred to accumulated losses
Notes to the Condensed Consolidated Financial Statements
1 Basis of preparation and accounting policies
Reporting entity
Rolls-Royce Holdings plc (the 'Company') is a public company limited by shares
incorporated under the Companies Act 2006 and domiciled in the UK. These
Condensed Consolidated Financial Statements of the Company as at and for the
year ended 31 December 2023 consist of the consolidation of the financial
statements of the Company and its subsidiaries (together referred to as the
'Group') and include the Group's interest in jointly controlled and associated
entities.
The Consolidated Financial Statements of the Group as at and for the year
ended 31 December 2023 (2023 Annual Report) are available upon request from
the Company Secretary, Rolls-Royce Holdings plc, Kings Place, 90 York Way,
London, N1 9FX.
Statement of compliance
These Condensed Consolidated Financial Statements have been prepared in
accordance with UK adopted International Accounting Standards (IAS) and
interpretations issued by the IFRS Interpretations Committee applicable to
companies reporting under UK adopted IFRS. They do not include all the
information required for full annual statements and should be read in
conjunction with the 2023 Annual Report.
The Board of Directors approved the Condensed Consolidated Financial
Statements on 22 February 2024. They are not statutory accounts within the
meaning of section 435 of the Companies Act 2006.
The Group's Financial Statements for the year ended 31 December 2023 were
approved by the Board on 22 February 2024. They have been reported on by the
Group's auditors and will be delivered to the registrar of companies in due
course. The report of the auditors was (i) unqualified, (ii) did not include a
reference to any matters to which the auditors drew attention by way of
emphasis without qualifying their report, and (iii) did not contain a
statement under section 498(2) or (3) of the Companies Act 2006.
The comparative figures for the financial year 31 December 2022 have been
extracted from the Group's statutory accounts for that financial year. The
Board of Directors approved the Group financial statements on 23 February
2023. The report of the auditors was (i) unqualified, (ii) did not include a
reference to any matters to which the auditors drew attention by way of
emphasis without qualifying their report, and (iii) did not contain a
statement under section 498(2) or (3) of the Companies Act 2006.
Revisions to IFRS applicable in 2023
IFRS 17 Insurance Contracts
IFRS 17, issued in May 2018, establishes the principles for the recognition,
measurement, presentation and disclosure of insurance contracts within the
scope of the Standard. The Standard is effective for years beginning on or
after 1 January 2023 with a requirement to restate comparatives.
The Group has reviewed whether its arrangements meet the accounting definition
of an insurance contract. While some contracts, including Civil Aerospace
LTSAs, may transfer an element of insurance risk, they relate to warranty and
service type agreements that are issued in connection with the Group's sales
of its goods or services and therefore will remain accounted for under the
existing revenue and provisions standards. The Directors have judged that such
arrangements entered into after the original equipment sale remain
sufficiently related to the sale of the Group's goods and services to allow
the contracts to continue to be measured under IFRS 15 Revenue from Contracts
with Customers and
IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
The Group has identified that the Standard will impact the results of its
captive insurance company as it issues insurance contracts, however, since the
contracts insure other group companies, there is no impact on the Condensed
Consolidated Financial Statements.
The Group has assessed that its parent company guarantee arrangements in the
form of financial or performance guarantees, that meet the IFRS 17 definition
of insurance contracts, have no impact on the Consolidated Financial
Statements of the Group for the year to 31 December 2023, however there could
be an impact on individual sets of financial statements of companies within
the Group.
The Directors are not aware of any other contracts where IFRS 17 would have an
impact on the Condensed Consolidated Financial Statements.
Other
IAS 12 Income Taxes has been amended to incorporate the following revisions
for 'Deferred Tax related to Assets and Liabilities arising from a Single
Transaction' and 'International Tax Reform: Pillar Two Model Rules'. There is
no material impact on the Group as a result of the amendments relating to
Deferred Tax related to Assets and Liabilities arising from a Single
Transaction.
The Group is within the scope of the OECD Pillar Two (Global Minimum Tax)
model rules. The legislation has been substantively enacted in some of the
material jurisdictions in which the Group operates, including the UK and
Germany, where the rules will be effective from 1 January 2024. Further
information can be found in note 5.
There are no other new standards or interpretations issued by the IASB that
had a significant impact on the Condensed Consolidated Financial Statements.
Standards and interpretations issued by the IASB are only applicable if
endorsed by the UK.
1 Basis of preparation and accounting policies continued
Change in accounting policy
At 31 December 2023, cash flows on settlement of excess derivatives have been
reclassified from cash flows from financing activities to cash flows from
operating activities in the cash flow statement as a result of a change in
accounting policy. In line with IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors, a change in accounting policy can be made
either where it is required by an IFRS or results in the financial statements
providing reliable and more relevant information about the effects of
transactions, other events or conditions on the entity's financial position,
performance or cash flows.
The previous classification as cash flows from financing activities was based
on the Directors' judgement of the economic nature of the activities as the
cash flows relate to cash payments deferred in connection with the Group's
action taken in 2020 to reduce the size of the USD hedge book by $11.8bn
across 2020 to 2026. The Directors have reassessed their judgement in line
with IAS 7 Statement of Cash Flows and have concluded that it would be more
appropriate to classify these cash flows as cash flows from operating
activities.
As a result of the above, cash flows from operating activities during the year
to 31 December 2022 have reduced by £(326)m to £1,524m with a corresponding
decrease in cash outflow from financing activities from £(2,866)m to
£(2,540)m. There is no impact to the total change in cash and cash
equivalents or to any alternative performance measures.
The above change resulted from a review which was prompted by an enquiry
arising from a review of the Group's 2022 Annual Report and Accounts by the
Corporate Reporting Review team of the Financial Reporting Council (FRC). The
FRC review was part of a regular review and assessment of the quality of
corporate reporting in the UK undertaken by the FRC. Further information
regarding the review of the Group's 2022 Annual Report and Accounts is set out
in the Audit Committee report in the 2023 Annual Report. The Group agreed to
make the above change within its 2023 Annual Report and Accounts. The FRC
review was limited to the published 2022 Annual Report; it did not benefit
from a detailed understanding of underlying transactions and provides no
assurance that the 2022 Annual Report is correct in all material respects.
Post balance sheet events
The Group has taken the latest legal position in relation to any ongoing legal
proceedings and reflected these in the 31 December 2023 results as
appropriate.
Climate change
In preparing the Condensed Consolidated Financial Statements, the Directors
have continued to consider the impact of climate change, particularly in the
context of the disclosures made in the Strategic Report within the 2023 Annual
Report. The following specific points were considered:
- The Group continues to invest in: onsite renewable energy
installations; the procurement of green energy for its facilities; and in
energy efficiency improvements to reduce its overall energy demands and
operating costs. An estimate of the investment required to meet these scope 1
and 2 emission improvements is included in the forecasts that support the
Condensed Consolidated Financial Statements;
- The Group is enabling its customers to operate their products in
a way that is compatible with low or net zero carbon emissions and has
demonstrated that all the commercial aero engines it produces, and the most
popular reciprocating engines (that represent 80% of the Power Systems product
portfolio) are compatible for use on sustainable fuels;
- The Group has invested in delivering new products and solutions
that can accelerate the global energy transition, including in battery energy
storage solutions in Power Systems, and in small modular reactors (SMRs).
Future investment required to deliver these technologies is included in the
forecasts that support the Consolidated Financial Statements.
The Directors have considered the impact of climate change on a number of key
estimates within the financial statements. The climate-related estimates and
assumptions that have been considered to be key areas of judgement or sources
of estimation uncertainty for the year ended
31 December 2023 are those relating to:
- long-term service agreement revenue recognition and onerous
contract provision assumptions, such as the level of EFHs which recognises the
future expectations of consumer and airline customer behaviour, and changes in
costs due to carbon pricing and commodity price changes;
- the estimates of future cash flows considered for trigger
assessments or used in impairment assessments, where applicable, of the
carrying value of non-current assets (such as programme intangible assets and
goodwill); and
- the estimates of future profitability used in assessing the
recoverability of deferred tax assets in the UK (see note 5).
As details of what specific future intervention measures will be taken by
governments are not yet available, carbon pricing has been used to quantify
the potential impact of future policy changes on the Group. The approach is
consistent with that disclosed in note 1 in the 2023 Annual Report.
There have been no significant changes to assumptions, including the potential
impact of carbon prices on the Group's cost base, since the year ended 31
December 2022. This is consistent with the assessment that climate change is
not expected to have a significant impact on the Group's going concern
assessment to August 2025, nor on the viability of the Group over the next
five years.
1 Basis of preparation and accounting policies continued
Going concern
Overview
In accordance with the requirements of the 2018 UK Corporate Governance Code,
the Directors have assessed the prospects of the Group, taking into account
its current position, the Group's principal risks and the Group's mid-term
forecasts that considered a range of internal and external factors as part of
the strategic review to support setting the Group's new mid-term targets which
are set out on pages 10 to 12 of the 2023 Annual Report.
The Strategic Report in the 2023 Annual Report on pages 10 to 12 sets out the
activities of the Group and the factors likely to impact its future
development, performance and position.
The Financial Review on pages 19 to 23 of the 2023 Annual Report sets out the
financial position of the Group, its cash flows, liquidity position and the
Group's capital framework. The notes to the accounts include the objectives,
policies and procedures over financial risk management including financial
instruments and hedging activities, exposure to credit risk, liquidity risk,
interest rate risk and commodity price risk.
In adopting the going concern basis for preparing the Consolidated and Company
Financial Statements, the Directors have undertaken a review of the Group's
cash flow forecasts and available liquidity, along with consideration of
possible risks and uncertainties over an 18-month period from the date of this
report to August 2025. The Directors have determined that an 18-month period
is an appropriate timeframe over which to assess going concern as it considers
the Group's short to medium-term cash flow forecasts and available liquidity.
Forecasts
Recognising the challenges of reliably estimating and forecasting the impact
of external factors on the Group, the Directors have considered two forecasts
in their assessment of going concern, along with a likelihood assessment of
these forecasts. The base case forecast reflects the Directors current
expectations of future trading. A stressed downside forecast has also been
modelled which envisages a 'stressed' or 'downside' situation that is
considered severe but plausible. Both forecasts have been modelled over an
18-month period.
Industry forecasts predict a return to 2019 large engine flying levels in
2024, which is reflected in the Group's base case forecast. Macro-economic
assumptions have been modelled using externally available data based on the
most likely forecasts with general inflation at around 2%-3%, wage inflation
at an average of 3%-5%, interest rates at around 3%-4% and GDP growth at
around 2%-3%.
The stressed downside forecast assumes Civil Aerospace large engine flying
hours remain at average fourth quarter 2023 levels throughout the 18-month
period to August 2025, reflecting slower GDP growth in this forecast when
compared with the base case. It also assumes a more pessimistic view of
general inflation at around 1%-2% higher than the base case covering a broad
range of costs including energy, commodities and jet fuel. Wage inflation in
the stressed downside is 1%-5% higher than the base case and interest rates in
the stressed downside are 1%-2% higher than the base case. These
macro-economic pressures have been modelled across the whole going concern
period. The stressed downside also considers lower demand as a result of
slower market growth and potential output risks associated with increasing
volumes and possible ongoing supply chain challenges.
The future impact of climate change on the Group has been considered through
climate scenarios. The climate scenarios modelled do not have a material
impact on either the base case or stressed downside forecast over the 18-month
period to August 2025.
Liquidity and borrowings
During 2023, the Group cancelled a £1bn undrawn UKEF-supported loan facility
that was due to mature in March 2026 and a £1bn undrawn bank loan facility
due to mature in January 2024. The £2.5bn undrawn revolving credit facility
that was due to mature in April 2025 was refinanced in November 2023 with the
new facility having a term of three years with the banks having the option
to extend with two one-year extension options (3+1+1).
At 31 December 2023, the Group had liquidity of £7.2bn including cash and
cash equivalents of £3.7bn and undrawn facilities of £3.5bn. The
18-month going concern period includes the maturity of a €550m bond
repayable in May 2024 which the Group does not intend to refinance given the
Group's cash and liquidity position, our assessment of the Group's cash flow
forecasts and available liquidity over the 18-month period.
Based on borrowing facilities available at the date of this report the Group's
committed borrowing facilities at 31 December 2023 and 31 August 2025 are set
out below. None of the facilities are subject to any financial covenants or
rating triggers which could accelerate repayment.
£m 31 December 2023 31 August 2025
Issued bond notes (1) 3,995 3,511
UKEF £1bn loan (undrawn) (2) 1,000 1,000
Revolving credit facility (undrawn) (3) 2,500 2,500
Total committed borrowing facilities 7,495 7,011
(1) The value of issued bond notes reflects the impact of derivatives on
repayments of the principal amount of debt. The bonds mature by May 2028
(2) The £1bn UKEF sustainability-linked loan matures in September 2027
(currently undrawn)
(3) The refinanced £2.5bn revolving credit facility matures in November 2026
(currently undrawn)
Taking into account the maturity of these borrowing facilities, the Group has
committed facilities of at least £7bn available throughout the period to 31
August 2025. The next debt maturity is a $1bn bond that is due to be repaid in
October 2025, which is outside the 18-month going concern period.
Conclusion
After reviewing the current liquidity position and the cash flow forecasts
modelled under both the base case and stressed downside, the Directors
consider that the Group has sufficient liquidity to continue in operational
existence for a period of at least 18 months from the date of this report and
are therefore satisfied that it is appropriate to adopt the going concern
basis of accounting in preparing the Consolidated and Company financial
statements.
1 Basis of preparation and accounting policies continued
Key areas of judgement and sources of estimation uncertainty
The determination of the Group's accounting policies requires judgement. The
subsequent application of these policies requires estimates and the actual
outcome may differ from that calculated. The key areas of judgement and
sources of estimation uncertainty as at 31 December 2023, that were assessed
as having a significant risk of causing material adjustments to the carrying
amount of assets and liabilities, are set out in
note 1 to the Consolidated Financial Statements in the 2023 Annual Report and
are summarised below. Sensitivities for key sources of estimation uncertainty
are disclosed where this is appropriate and practical.
Area Key judgements Key sources of estimation uncertainty Sensitivities performed
Revenue recognition and contract assets and liabilities Whether Civil Aerospace OE and aftermarket contracts should be combined. 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 2023, the following changes in estimate
How performance on long-term aftermarket contracts should be measured. would result in catch-up adjustments being recognised in the period in which
the estimates change (at underlying FX rates):
Whether long-term aftermarket contracts contain a significant financing
component. - 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 any costs should be treated as wastage. of around £20m.
Whether the Civil Aerospace LTSA contracts are warranty style contacts entered - A 2% increase or decrease in our pricing to customers over the life of the
into in connection with OE sales and therefore can be accounted for under IFRS contracts would lead to a revenue
15.
catch-up adjustment in the next 12 months of around £280m.
Whether sales of spare engines to joint ventures are at fair value. - 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
When revenue should be recognised in relation to spare engine sales. around
£80m.
Risk and revenue sharing arrangements (RRSAs) Determination of the nature of entry fees received.
Taxation Estimates necessary to assess whether it is probable that sufficient suitable 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 £90m.
If only 90% of assumed future cost increases from climate change are passed on
to customers, this would result in a decrease in the deferred tax asset of
around £10m, and if the potential impact of carbon prices on the Group's cost
base was to double, the recoverable value of deferred tax assets would
decrease by around £50m.
Research and development Determination of the point in time where costs incurred on an internal
programme development meet the criteria for capitalisation.
Determination of the basis for amortising capitalised development costs.
Leases Determination of the lease term.
Impairment of non-current assets Determination of cash-generating units for assessing impairment of goodwill.
Whether there are indicators of potential reversal of previous impairments of
programme-related intangible assets
Provisions Whether any costs should be treated as wastage. Estimates of the time to incorporate a modified and certified high-pressure A 12-month delay in the availability of the modified HPT blade could lead to a
turbine (HPT) blade into the fleet to resolve technical issues on the Trent
£30-50m charge in relation to the Trent 1000 programme.
Whether the criteria to recognise a transformation and restructuring 1000, and the implications of this on forecast future costs when assessing
provisions have been met onerous contracts. An increase in Civil Aerospace large engines estimates of LTSA costs of 1%
over the remaining term of the contracts could lead to a £90-120m increase in
Estimates of the future revenues and costs to fulfil onerous contracts. 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 £70-80m change
in the onerous contract provision.
Post-retirement benefits Estimates of the assumptions for valuing the net defined benefit obligation. A reduction in the discount rate of 0.25% from 4.50% could lead to an increase
in the defined benefit obligations of the RR UK Pension Fund (RRUKPF) of
approximately £185m. This would be expected to be broadly offset by changes
in the value of scheme assets, as the scheme's investment policies are
designed to mitigate this risk.
An increase in the assumed rate of inflation of 0.25% (RPI of 3.30% and CPI of
2.85%) could lead to an increase in the defined benefit obligations of the
RRUKPF of approximately £75m.
A one-year increase in life expectancy from 20.8 years (male aged 65) and from
21.5 years (male aged 45) would increase the defined benefit obligations of
the RRUKPF by approximately £155m.
2 Segmental analysis
The analysis by segment is presented in accordance with IFRS 8 Operating
Segments, on the basis of those segments whose operating results are regularly
reviewed by the Board (who acts as the Chief Operating Decision Maker as
defined by IFRS 8). The Group's four divisions are set out below.
Civil Aerospace - development, manufacture, marketing and sales of commercial aero engines
and aftermarket services
Defence - development, manufacture, marketing and sales of military aero engines,
naval engines, submarine nuclear power plants and aftermarket services
Power Systems - development, manufacture, marketing and sales of integrated solutions
for onsite power and propulsion
New Markets - development, manufacture and sales of small modular reactor (SMR) and
new electrical power solutions
Other businesses include the trading results of the UK Civil Nuclear business.
Underlying results
The Group presents the financial performance of the divisions in accordance
with IFRS 8 and consistently with the basis on which performance is
communicated to the Board each month.
Underlying results are presented by recording all relevant revenue and cost of
sales transactions at the average exchange rate achieved on effective settled
derivative contracts in the period that the cash flow occurs. The impact of
the revaluation of monetary assets and liabilities (other than lease
liabilities) using the exchange rate that is expected to be achieved by the
use of the effective hedge book is recorded within underlying cost of sales.
Underlying financing excludes the impact of revaluing monetary assets and
liabilities to period end exchange rates. Lease liabilities are not revalued
to reflect the expected exchange rates due to their multi-year remaining term,
the Directors believe that doing so would not be the most appropriate basis to
measure the in-year performance. Transactions between segments are presented
on the same basis as underlying results and eliminated on consolidation.
Unrealised fair value gains/(losses) on foreign exchange contracts, which are
recognised as they arise in the statutory results, are excluded from
underlying results. To the extent that the previously forecast transactions
are no longer expected to occur, an appropriate portion of the unrealised fair
value gain/(loss) on foreign exchange contracts is recorded immediately in the
underlying results.
Amounts receivable/(payable) on interest rate swaps which are not designated
as hedge relationships for accounting purposes are reclassified from fair
value movement on a statutory basis to interest receivable/(payable) on an
underlying basis, as if they were in an effective hedge relationship.
In the year to 31 December 2023, the Group was a net seller of USD at an
achieved exchange rate of GBP:USD 1.50 (2022: 1.50) based on the USD hedge
book.
In 2020, the Group experienced a significant decline in its medium-term
outlook and consequently a significant deterioration to its forecast net USD
cash inflows. The Group took action to reduce the size of the USD hedge book
by $11.8bn across 2020-2026 to reflect the fact that, at that time, future
operating cash flows were no longer forecast to materialise. An underlying
charge of £1.7bn was recognised within the underlying finance costs in 2020
and the associated cash settlement costs occur over the period 2020-2026. The
derivatives relating to this underlying charge have been subsequently excluded
from the hedge book, and therefore are also excluded from the calculation of
the average exchange rate achieved in the current and future periods.
Underlying performance also excludes the following:
- the effect of acquisition accounting and business disposals;
- impairment of goodwill and other non-current and current assets
where the reasons for the impairment are outside of normal operating
activities;
- exceptional items; and
- certain other items which are market driven and outside of the
control of management.
Subsequent changes in items excluded from underlying performance recognised in
a prior period will also be excluded from underlying performance. All other
changes will be recognised within underlying performance.
Acquisition accounting, business disposals and impairment
The Group exclude these from underlying results so that the current period and
comparative results are directly comparable.
Exceptional items
Items are classified as exceptional where the Directors believe that
presentation of the results in this way is useful in providing an
understanding of the Group's financial performance. Exceptional items are
identified by virtue of their size, nature or incidence.
In determining whether an event or transaction is exceptional, the Directors
consider quantitative as well as qualitative factors such as the frequency or
predictability of occurrence. Examples of exceptional items include one-time
costs and charges in respect of aerospace programmes, costs of exceptional
transformation and restructuring programmes and one-time past service charges
and credits on post-retirement schemes.
Exceptional items are not allocated to segments and may not be comparable to
similarly titled measures used by other companies.
Other items
The financing component of the defined benefit pension scheme cost is
determined by market conditions and has therefore been included as a
reconciling difference between underlying and statutory performance.
The tax effects of adjustments above are excluded from the underlying tax
charge. Changes in tax rates are excluded from the underlying tax charge. In
addition, changes in the amount of recoverable deferred tax recognised are
excluded from the underlying results to the extent that their recognition or
derecognition was not originally recorded within the underlying results.
2 Segmental analysis continued
The following analysis sets out the results of the Group's businesses on the
basis described above and also includes a reconciliation of the underlying
results to those reported in the Condensed Consolidated Income Statement.
- Civil Aerospace Defence Power Systems New Markets Other businesses Corporate and Inter-segment (1) Total underlying
£m £m £m £m £m £m £m
Year ended 31 December 2023
Underlying revenue from sale of original equipment 2,703 1,766 2,661 2 12 - 7,144
Underlying revenue from aftermarket services 4,645 2,311 1,307 2 - - 8,265
Total underlying revenue 7,348 4,077 3,968 4 12 - 15,409
Gross profit/(loss) 1,394 804 1,050 1 (15) (3) 3,231
Commercial and administrative costs (354) (173) (456) (24) - (57) (1,064)
Research and development costs (343) (72) (187) (137) - - (739)
Share of results of joint ventures and associates 153 3 6 - - - 162
Underlying operating profit/(loss) 850 562 413 (160) (15) (60) 1,590
Year ended 31 December 2022
Underlying revenue from sale of original equipment 1,982 1,634 2,187 1 - (5) 5,799
Underlying revenue from aftermarket services 3,704 2,026 1,160 2 - - 6,892
Total underlying revenue 5,686 3,660 3,347 3 - (5) 12,691
Gross profit/(loss) 853 726 918 (1) (29) 10 2,477
Commercial and administrative costs (371) (174) (441) (23) (2) (51) (1,062)
Research and development costs (452) (122) (204) (108) - - (886)
Share of results of joint ventures and associates 113 2 8 - - - 123
Underlying operating profit/(loss) 143 432 281 (132) (31) (41) 652
(1) Corporate and Inter-segment consists of costs that are not attributable
to a specific segment and consolidation adjustments
2 Segmental analysis continued
Reconciliation to statutory results
Total underlying Underlying adjustments and adjustments to Group statutory results
foreign exchange
£m £m £m
Year ended 31 December 2023
Continuing operations
Revenue from sale of original equipment 7,144 491 7,635
Revenue from aftermarket services 8,265 586 8,851
Total revenue 15,409 1,077 16,486
Gross profit 3,231 389 3,620
Commercial and administrative costs (1,064) (46) (1,110)
Research and development costs (739) - (739)
Share of results of joint ventures and associates 162 11 173
Operating profit 1,590 354 1,944
Gain arising on the disposal of businesses - 1 1
Profit before financing and taxation 1,590 355 1,945
Net financing (328) 810 482
Profit before taxation 1,262 1,165 2,427
Taxation (120) 97 (23)
Profit for the year 1,142 1,262 2,404
Attributable to:
Ordinary shareholders 1,150 1,262 2,412
NCI (8) - (8)
Year ended 31 December 2022
Continuing operations
Revenue from sale of original equipment 5,799 474 6,273
Revenue from aftermarket services 6,892 355 7,247
Total revenue 12,691 829 13,520
Gross profit 2,477 280 2,757
Commercial and administrative costs (1,062) (15) (1,077)
Research and development costs (886) (5) (891)
Share of results of joint ventures and associates 123 (75) 48
Operating profit 652 185 837
Gain arising on the disposal of businesses - 81 81
Profit before financing and taxation 652 266 918
Net financing (446) (1,974) (2,420)
Profit/(loss) before taxation 206 (1,708) (1,502)
Taxation (48) 356 308
Profit/(loss) for the year from continuing operations 158 (1,352) (1,194)
Discontinued operations (1) 67 (147) (80)
Profit/(loss) for the year 225 (1,499) (1,274)
Attributable to:
Ordinary shareholders 230 (1,499) (1,269)
NCI (5) - (5)
(1)( ) Discontinued operations relate to the results of ITP Aero and are
presented net of intercompany trading eliminations and related consolidation
adjustments
( )
2 Segmental analysis continued
Disaggregation of revenue from contracts with customers
Analysis by type and basis of recognition Civil Aerospace Defence Power Systems New Markets Other businesses Corporate and Inter-segment Total underlying
£m £m £m £m £m £m £m
Year ended 31 December 2023
Original equipment recognised at a point in time 2,703 632 2,611 2 - - 5,948
Original equipment recognised over time - 1,134 50 - 12 - 1,196
Aftermarket services recognised at a point in time 1,227 854 1,206 2 - - 3,289
Aftermarket services recognised over time 3,335 1,457 101 - - - 4,893
Total underlying customer contract revenue 7,265 4,077 3,968 4 12 - 15,326
Other underlying revenue (1) 83 - - - - - 83
Total underlying revenue (2) 7,348 4,077 3,968 4 12 - 15,409
Year ended 31 December 2022
Original equipment recognised at a point in time 1,982 689 2,155 1 - (5) 4,822
Original equipment recognised over time - 945 32 - - - 977
Aftermarket services recognised at a point in time 865 769 1,076 2 - - 2,712
Aftermarket services recognised over time 2,772 1,257 84 - - - 4,113
Total underlying customer contract revenue 5,619 3,660 3,347 3 - (5) 12,624
Other underlying revenue (1) 67 - - - - - 67
Total underlying revenue (2) 5,686 3,660 3,347 3 - (5) 12,691
(1 ) Includes leasing revenue
(2) Includes £(136)m, of which £(104)m relates to Civil LTSA contracts,
(2022: £367m, of which £360m relates to Civil LTSA contracts) of revenue
recognised in the year relating to performance obligations satisfied in
previous years
Total underlying Underlying adjustments and adjustments to foreign exchange Group statutory results (1)
£m £m £m
Year ended 31 December 2023
Original equipment recognised at a point in time 5,948 491 6,439
Original equipment recognised over time 1,196 - 1,196
Aftermarket services recognised at a point in time 3,289 186 3,475
Aftermarket services recognised over time 4,893 382 5,275
Total customer contract revenue 15,326 1,059 16,385
Other revenue 83 18 101
Total revenue 15,409 1,077 16,486
Year ended 31 December 2022
Original equipment recognised at a point in time 4,822 474 5,296
Original equipment recognised over time 977 - 977
Aftermarket services recognised at a point in time 2,712 164 2,876
Aftermarket services recognised over time 4,113 176 4,289
Total customer contract revenue 12,624 814 13,438
Other revenue 67 15 82
Total revenue 12,691 829 13,520
(1 ) During the year to 31 December 2023, revenue recognised within Civil
Aerospace, Defence and Power Systems of £1,766m (2022: £1,788m) was received
from a single customer
2 Segmental analysis continued
Underlying adjustments 2022
2023
Revenue Profit before financing Net financing Revenue Profit before financing Net financing
£m £m £m £m £m £m
Taxation Taxation
£m £m
Underlying performance 15,409 1,590 (328) (120) 12,691 652 (446) (48)
Impact of foreign exchange differences as a result of hedging activities on A 1,077 469 394 (210) 829 267 (358) (81)
trading transactions (1)
Unrealised fair value changes on derivative contracts held for trading (2) A - 6 514 (130) - (3) (1,768) 451
Unrealised fair value change to derivative contracts held for financing (3) A - - 7 (2) - - 191 (47)
Exceptional programme credits/(charges) (4) B - 21 - (5) - 69 (3) -
Exceptional transformation and restructuring charges/(credits) (5) B - (102) - 25 - (47) - 4
Impairment reversals/(charges) (6) C - 8 - (2) - (65) - -
Effect of acquisition accounting (7) C - (50) - 12 - (58) - 9
Other (8) D - 2 (105) 24 - 22 (36) (71)
Gains arising on the disposals of businesses C - 1 - - - 81 - (2)
Recognition of deferred tax assets (9) D - - - 385 - - - 93
Total underlying adjustments 1,077 355 810 97 829 266 (1,974) 356
Statutory performance per condensed consolidated income statement 16,486 1,945 482 (23) 13,520 918 (2,420) 308
A - FX and derivatives, B - Exceptional, C - M&A and impairment, D - Other
(1)( ) The impact of measuring revenues and costs at the average exchange
rate during the year and the impact of valuation of assets and liabilities
using the year end exchange rate rather than the achieved rate or the exchange
rate that is expected to be achieved by the use of the hedge book increased
statutory revenues by £1,077m (2022: £829m) and increased profit before
financing and taxation by £469m (2022: £267m). Underlying financing excludes
the impact of revaluing monetary assets and liabilities at the year end
exchange rate
(2) The underlying results exclude the fair value changes on derivative
contracts held for trading. These fair value changes are subsequently
recognised in the underlying results when the contracts are settled
(3) Includes net fair value gain of £1m (2022: gains of £190m) on any
interest rate swaps not designated into hedging relationships for accounting
purposes
(4) During the year to 31 December 2023, £21m of Trent 1000 wastage costs
provision previously recognised in respect of estimated costs to settle
obligations have been reversed to reflect the current status of claims in
respect of the Trent 1000 technical issues which were identified in 2019
(5) During the year to 31 December 2023, the Group incurred total
transformation and restructuring related charges of £102m (2022: £47m). In
2023, the Group announced a major multi-year transformation programme which
consists of seven workstreams that are set out in the 2022 Annual Report.
During the year, £88m was incurred in relation to this multi-year programme,
comprising £45m for advisory fees and transformation office costs, £37m
related to impairments and
write-offs and £6m related to severance costs. In the year to 31 December
2023, a £14m (2022: £47m) charge related to initiatives to enable
restructuring under a previous programme
(6)( ) The Group has assessed the carrying value of its assets. Further
details are provided in notes 7,8 and 9
(7) The effect of acquisition accounting includes the amortisation of
intangible assets arising on previous acquisitions
(8) Includes interest received of £83m (2022: interest received of £14m)
on interest rate swaps which are not designated into hedge relationships for
statutory purposes from interest payable on an underlying basis to fair value
movement and £2m (2022: credit of £22m) of past-service credit on defined
benefit schemes
(9) Relates to the recognition of deferred tax assets on UK tax losses of
£328m and foreign exchange derivatives of £57m. The £93m recognised in 2022
relates to foreign exchange derivatives
2 Segmental analysis continued
Balance sheet analysis
( ) Civil Aerospace Defence Power Systems New Markets Total reportable segments
£m £m £m £m £m
At 31 December 2023
Segment assets 17,718 3,517 3,814 115 25,164
Interests in joint ventures and associates 444 7 28 - 479
Segment liabilities (24,447) (3,376) (1,765) (88) (29,676)
Net (liabilities)/assets (6,285) 148 2,077 27 (4,033)
At 31 December 2022
Segment assets 17,537 3,430 4,084 135 25,186
Interests in joint ventures and associates 387 4 31 - 422
Segment liabilities (25,357) (3,146) (1,802) (97) (30,402)
Net (liabilities)/assets (7,433) 288 2,313 38 (4,794)
Reconciliation to the balance sheet
2023 2022
£m £m
Total reportable segment assets (excluding assets held for sale) 25,164 25,186
Other businesses 8 19
Corporate and Inter-segment (2,010) (2,460)
Interests in joint ventures and associates 479 422
Assets held for sale 109 -
Cash and cash equivalents and short-term investments 3,784 2,618
Fair value of swaps hedging fixed rate borrowings 118 194
Deferred and income tax assets 3,078 2,858
Post-retirement scheme surpluses 782 613
Total assets 31,512 29,450
Total reportable segment liabilities (excluding liabilities held for sale) (29,676) (30,402)
Other businesses (58) (34)
Corporate and Inter-segment 2,010 2,456
Liabilities associated with assets held for sale (55) -
Borrowings and lease liabilities (5,759) (5,955)
Fair value of swaps hedging fixed rate borrowings (95) (108)
Deferred and income tax liabilities (473) (390)
Post-retirement scheme deficits (1,035) (1,033)
Total liabilities (35,141) (35,466)
Net liabilities (3,629) (6,016)
3 Research and development
2023 2022
£m £m
Gross research and development costs (1,390) (1,287)
Contributions and fees (1) 548 359
Expenditure in the year (842) (928)
Capitalised as intangible assets 192 131
Amortisation and impairment of capitalised costs (89) (94)
Net cost recognised in the income statement (739) (891)
Underlying adjustments relating to the effects of acquisition accounting and - 5
foreign exchange
Net underlying cost recognised in the income statement (739) (886)
(1) ( ) Includes £531m (2022: £350m) of government funding
4 Net financing
2023 2022
Statutory Underlying (1) Statutory Underlying (1)
£m £m £m £m
Interest receivable and similar income (2) 164 164 35 35
Net fair value gains on foreign currency contracts 574 - - -
Net fair value gains on non-hedge accounted interest rate swaps (3) 1 - 190 -
Net fair value gains on commodity contracts - - 106 -
Financing on post-retirement scheme surpluses 30 - 24 -
Net foreign exchange gains 394 - - -
Financing income 1,163 164 355 35
Interest payable (369) (275) (343) (320)
Net fair value losses on foreign currency contracts - - (1,875) -
Foreign exchange differences and changes in forecast payments relating to (1) - (7) -
financial RRSAs
Net fair value losses on commodity contracts (60) - - -
Financing on post-retirement scheme deficits (42) - (26) -
Net foreign exchange losses - - (358) -
Cost of undrawn facilities (57) (57) (61) (61)
Other financing charges (152) (160) (105) (100)
Financing costs (681) (492) (2,775) (481)
Net financing income/(costs) 482 (328) (2,420) (446)
Analysed as:
Net interest payable (205) (111) (308) (285)
Net fair value gains/(losses) on derivative contracts 515 - (1,579) -
Net post-retirement scheme financing (12) - (2) -
Net foreign exchange gains/(losses) 394 - (358) -
Net other financing (210) (217) (173) (161)
Net financing income/(costs) 482 (328) (2,420) (446)
(1) See note 2 for definition of underlying results
(2 ) Includes interest income on cash balances and short-term deposits of
£117m (2022: £28m) and similar income of £47m (2022: £7m) on money market
funds
(3)( ) The condensed consolidated income statement shows the net fair value
gains/(losses) on any interest rate swaps not designated into hedging
relationships for accounting purposes. Underlying financing reclassifies the
realised fair value movements on these interest rate swaps to net interest
payable
5 Taxation
UK Overseas Total
2023 2022 2023 2022 2023 2022
£m £m £m £m £m £m
Current tax charge for the year 19 18 256 159 275 177
Adjustments in respect of prior years - (5) 2 (8) 2 (13)
Current tax 19 13 258 151 277 164
Deferred tax credit for the year 224 (427) (69) (61) 155 (488)
Adjustments in respect of prior years (5) 4 2 12 (3) 16
Recognition of deferred tax (406) - - - (406) -
Deferred tax (187) (423) (67) (49) (254) (472)
(Credited)/charged in the income statement (168) (410) 191 102 23 (308)
Deferred taxation assets and liabilities
2023 2022
£m £m
At 1 January 2,445 1,792
Amount credited to income statement 254 495
Amount credited/(charged) to OCI (44) 91
Amount credited/(charged) to hedging reserves 5 12
Amount credited to equity 22 1
On disposal of businesses (1) (1) 28
Exchange differences (13) 26
At 31 December 2,668 2,445
Deferred tax assets 2,998 2,731
Deferred tax liabilities (330) (286)
2,668 2,445
(1) The 2023 deferred tax relates to the acquisition of Team Italia Marine
S.R.L. The 2022 deferred tax relates to the disposal of ITP Aero
Of the total deferred tax asset of £2,998m, £2,399m (2022: £2,183m) relates
to the UK and is made up as follows:
- £1,476m (2022: £1,054m) relating to tax losses;
- £412m (2022: £668m) arising on unrealised losses on derivative
contracts;
- £162m (2022: £162m) of advance corporation tax; and
- £349m (2022: £299m) relating to other deductible temporary
differences, in particular tax depreciation and relief for interest expenses.
The UK deferred tax assets primarily arise in Rolls-Royce plc and have been
recognised based on the expectation that the business will generate taxable
profits and tax liabilities in the future against which the losses and
deductible temporary differences can be utilised.
Most of the UK tax losses relate to the Civil Aerospace large engine business
which makes initial losses through the investment period of a programme and
then makes a profit through its contracts for services. The programme
lifecycles are typically in excess of 30 years.
Deferred tax assets are recognised only to the extent it is probable that
future taxable profits will be available against which the assets can be
utilised. A recoverability assessment has been undertaken, taking account of
deferred tax liabilities against which the reversal can be offset and using
latest UK forecasts, which are mainly driven by the Civil Aerospace large
engine business, to assess the level of future taxable profits.
The recoverability of deferred tax assets has been assessed on the following
basis:
- using the most recent UK profit forecasts, covering the next
five years which are consistent with external sources on market conditions;
- the long-term forecast profit profile of existing large engine
programmes which are typically in excess of 30 years from initial investment
to retirement of the fleet, including the aftermarket revenues earned from
airline customers;
- the long-term forecast is adjusted to exclude engine programmes
which are in the development stage with no confirmed orders;
- taking into account the risk that regulatory changes could
materially impact demand for our products;
- consideration that although all Civil Aerospace large engines
are now compatible with sustainable fuels, there is a risk that in the longer
term demand will shift towards more sustainable products and solutions;
- the long-term forecast profit and cost profile of the other
parts of the UK business;
- taking into consideration past performance and experience as
well as a 25% probability of a severe but plausible downside forecast
materialising in relation to the civil aviation industry; and
- consideration that, whilst profitable in 2023, the UK business
has historically been loss making.
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, the amounts and timing of future taxable profits incorporate:
- the impact of new contracts signed in 2023. These include the
trilateral AUKUS agreement involving the UK Defence business;
- the outcomes of strategic initiatives including cost and
commercial optimisation;
- the growth in Civil Aerospace engine flying hours; and
- management's assumptions on the impact of macroeconomic factors
and climate change on the UK business.
The climate change scenarios previously prepared to assess the viability of
our business strategy, decarbonisation plans and approach to managing
climate-related risks have continued to develop over the last year. The scale
up of sustainable aviation fuel is expected to play a crucial role in reaching
net zero carbon emissions by 2050 and the Group has demonstrated that all
Civil Aerospace production engines are compatible with sustainable aviation
fuels. The impact that this could have on our costs and customer pricing is
factored into the deferred tax assessment. However, benefits that may arise in
the future from the development of breakthrough new technologies are not taken
into account.
Based on the assessment, the Group has recognised a total UK deferred tax
asset of £2,399m, which includes the re-recognition of a £57m deferred tax
asset on unrealised losses on foreign exchange derivative contracts and
recognition of a further £406m (of which £328m is non-underlying and £78m
is underlying) deferred tax asset relating to UK tax losses. This reflects the
conclusions that:
- Based on current financial results and an improved outlook it is
probable that the UK business will generate taxable income and tax liabilities
in the future against which these losses can be utilised.
- Using current forecasts and various scenarios these losses and
other deductible temporary differences will be used in full within 30-40
years, which is within the expected programme lifecycles. An explanation of
the potential impact of climate change on forecast profits and sensitivity
analysis can be found in note 1.
- Any future changes in tax law or the structure of the Group
could have a significant effect on the use of losses and other deductible
temporary differences, including the period over which they can be used. In
view of this and the significant judgement involved the Board continuously
reassesses this area.
The other significant deferred tax asset arises in Rolls-Royce Deutschland Ltd
& Co KG, where the main activity is business aviation. The total net
deferred tax asset is £328m (2022: £284m), which has been recognised in
full. The deferred tax asset relates to revenue being recognised and taxed
earlier under local tax rules resulting in a benefit when revenue is
recognised in the accounts.
The Group is within the scope of the OECD Pillar Two (Global Minimum Tax)
model rules. The legislation has been substantively enacted in some of the
main jurisdictions in which the Group operates including the UK and Germany
where the rules will be effective from 1 January 2024. Initial assessments
indicate that Pillar Two income taxes will not be material to the Group and a
majority of the jurisdictions in which the Group operates will meet one of the
transitional safe harbours. For those jurisdictions which are material or
where the statutory tax rate is close to 15%, the assessment is based on 2023
data. Elsewhere prior year data has been used.
For the year to 31 December 2023, the Group has applied the mandatory
exception to recognising and disclosing information about deferred tax assets
and liabilities related to Pillar Two income taxes.
The temporary differences associated with investments in subsidiaries, joint
ventures and associates, for which a deferred tax liability has not been
recognised, aggregate to £1,230m (2022: £1,062m). No deferred tax liability
has been recognised on the potential withholding tax due on the remittance of
undistributed profits as the Group is able to control the timing of such
remittances and it is probable that consent will not be given in the
foreseeable future.
6 Earnings per ordinary share
Basic earnings per share (EPS) is calculated by dividing the profit/(loss)
attributable to ordinary shareholders by the weighted average number of
ordinary shares in issue during the year, excluding ordinary shares held under
trust, which have been treated as if they had been cancelled.
Where there is a continuing loss during the year, the effect of potentially
dilutive ordinary shares is anti-dilutive.
2023 2022
Basic Potentially dilutive share options Diluted Basic Potentially dilutive share options Diluted
Profit/(loss) attributable to ordinary shareholders (£m):
Continuing operations 2,412 2,412 (1,189) (1,189)
Discontinued operations - - (80) (80)
2,412 2,412 (1,269) (1,269)
Weighted average number of ordinary shares (millions) 8,361 44 8,405 8,349 - 8,349
EPS (pence):
Continuing operations 28.85 (0.15) 28.70 (14.24) - (14.24)
Discontinued operations - - - (0.96) - (0.96)
28.85 (0.15) 28.70 (15.20) - (15.20)
The reconciliation between underlying EPS and basic EPS is as follows:
2023 2022
Pence £m Pence £m
Underlying EPS / Underlying profit from continuing operations attributable to 13.75 1,150 1.95 163
ordinary shareholders
Total underlying adjustments to profit/(loss) before tax (note 2) 13.94 1,165 (20.45) (1,708)
Related tax effects 1.16 97 4.26 356
EPS / Profit/(loss) from continuing operations attributable to ordinary 28.85 2,412 (14.24) (1,189)
shareholders
Diluted underlying EPS from continuing operations attributable to ordinary 13.68 1.95
shareholders
7 Intangible assets
Goodwill Certification costs Development expenditure Customer relationships Software (1) Other (2) Total
£m £m £m £m £m £m £m
Cost:
At 1 January 2023 1,135 935 3,604 512 978 886 8,050
Additions - - 192 - 79 13 284
Acquisition of businesses (see note 23) 8 - - 2 - - 10
Transferred to assets held for sale (3) (10) - - - - (185) (195)
Transferred to current assets (4) - - - - (23) - (23)
Disposals - (4) - - (27) (2) (33)
Reclassifications (5) - - (1) - 3 (1) 1
Exchange differences (32) (1) (32) (16) (6) (12) (99)
At 31 December 2023 1,101 930 3,763 498 1,004 699 7,995
Accumulated amortisation and impairment:
At 1 January 2023 36 447 1,912 406 675 476 3,952
Charge for the year (6) - 24 89 41 84 41 279
Impairment - - - - - (7) (7)
Transferred to assets held for sale (3) - - - - - (144) (144)
Transferred to current assets (4) - - - - (14) - (14)
Disposals - (4) - - (23) (2) (29)
Reclassifications (5) - - - - 1 (1) -
Exchange differences (1) - (25) (14) (5) (6) (51)
At 31 December 2023 35 467 1,976 433 718 357 3,986
Net book value at:
31 December 2023 1,066 463 1,787 65 286 342 4,009
1 January 2023 1,099 488 1,692 106 303 410 4,098
(1)( ) Includes £97m (2022: £93m) of software under course of
construction which is not amortised
(2 ) Other intangibles includes trademarks, brands and the costs incurred
testing and analysing engines with the longest time in service (fleet leader
engines) to gather technical knowledge on engine endurance which will improve
reliability and enable us to reduce the costs of meeting our LTSA obligations
(3 ) At 31 December 2023, the Group held for sale the assets and
liabilities of the off-highway engines business in the lower power range based
in Power Systems. See note 23 for further detail
(4 ) During the year, the Group signed a service concession arrangement
with a customer effective from 1 January 2024. Accordingly, assets that will
be derecognised have been transferred to trade receivables and other assets to
reflect the nature of these assets as current assets
(5 ) Includes reclassifications within intangible assets or from property,
plant and equipment when available for use
(6) ( ) Charged to cost of sales and commercial and administrative costs
except development costs, which are charged to research and development costs
The carrying amount of goodwill or intangible assets allocated across multiple
CGUs is not significant in comparison with the Group's total carrying amount
of goodwill or intangible assets with indefinite useful lives.
Goodwill has been tested for impairment during 2023 on the following basis:
- The carrying values of goodwill have been assessed by reference
to the recoverable amount, being the higher of value in use or fair value less
costs of disposal (FVLCOD).
- The recoverable amount has been estimated using cash flows from
the most recent forecasts prepared by the Directors, which are consistent with
past experience and external sources of information on market conditions.
These forecasts generally cover the next five years. Growth rates for the
period not covered by the forecasts are based on growth rates of 2% which
reflects the products, industries and countries in which the relevant CGU or
group of CGUs operate. Inflation has been included based on contractual
commitments where relevant. Where general inflation assumptions have been
required, these have been estimated based on externally sourced data. General
inflation assumptions of 2% to 4% have been included in the forecasts,
depending on the nature and geography of the flows.
- The key forecast assumptions for the impairment tests are the
discount rate and the cash flow projections, in particular the programme
assumptions (such as sales volumes and product costs), the impact of foreign
exchange rates on the relationship between selling prices and costs, and
growth rates. Impairment tests are performed using prevailing exchange rates.
- The Group believes there are significant business growth
opportunities to come from Rolls-Royce playing a leading role in the
transition to net zero, whilst at the same time climate change poses
potentially significant risks. The assumptions used by the Directors are based
on past experience and external sources of information. Based on the climate
scenarios prepared, the forecasts do not assume a significant deterioration of
demand for Civil Aerospace (including Rolls-Royce Deutschland) programmes
given that all commercial aero-engines were compatible with sustainable fuels
by the end of 2023. Similarly, 80% of the engines in Power Systems are
compatible with sustainable fuels. The investment required to ensure our new
products will be compatible with net zero operation, and to achieve net zero
scope 1 and 2 GHG emissions is reflected in the forecasts used.
7 Intangible assets continued
A 1.5°C scenario has been prepared using key data points from external
sources, including Oxford Economics, Global Climate Service and Databank and
the International Energy Agency. This scenario has been used as the basis of a
sensitivity. It is assumed that governments adopt stricter product and
behavioural standards and measures that result in higher carbon pricing. Under
these conditions, it is assumed that markets are willing to pay for low carbon
solutions and that there is an economic return from strategic investments in
low carbon alternatives. The sensitivity has considered the likelihood of
demand changes for our products based on their relative fuel efficiency in the
marketplace and the probability of alternatives being introduced earlier than
currently expected. The sensitivity also reflects the impact of a broad range
of potential costs imposed by policy or regulatory interventions (through
carbon pricing). This sensitivity does not indicate the need for an impairment
charge.
The principal assumptions for goodwill balances considered to be individually
significant are:
Rolls-Royce Power Systems AG
- Recoverable amount represents FVLCOD to reflect the future
strategy of the business. The Directors consider that disclosing information
prepared on a FVLCOD basis here is a more useful representation of the
recoverable amount when considering the future strategy of the business,
including the impact of climate-related risks and opportunities. Due to the
unavailability of observable market inputs or inputs based on market evidence,
the fair value is estimated by discounting future cash flows (Level 3 as
defined by IFRS 13 Fair Value Measurement) modified for market participants
views;
- Trading assumptions (e.g. volume of equipment deliveries,
pricing achieved and cost escalation) that are based on current and known
future programmes, estimates of market share and long-term economic forecasts;
- Plausible downside scenario in relation to macro-economic
factors included with a 25% weighting;
- Cash flows beyond the five-year forecasts are assumed to grow at
2.0% (2022: 1.0%); and
- Nominal post-tax discount rate 9.2% (2022: 10.0%).
The Directors do not consider that any reasonably possible changes in the key
assumptions (including taking consideration of the climate-related risks
above) would cause the FVLCOD of the business to fall below its carrying value
of goodwill.
Rolls-Royce Deutschland Ltd & Co KG
- Recoverable amount represents the value in use of the assets in
their current condition;
- Trading assumptions (e.g. volume of engine deliveries, flying
hours of installed fleet, including assumptions on the recovery of the
aerospace industry, and cost escalation) that are based on current and known
future programmes, estimates of market share and long-term economic forecasts;
- Plausible downside scenario in relation to macro-economic
factors included with a 25% weighting;
- Cash flows beyond the five-year forecasts are assumed to grow at
2.0% (2022: 2.0%); and
- Nominal pre-tax discount rate 14.4% (2022: 13.2%).
The Directors do not consider that any reasonably possible changes in the key
assumptions (including taking consideration of the climate-related risks
above) would cause the value in use of the goodwill to fall below its carrying
value.
Other cash generating units
Goodwill balances across the Group that are not considered to be individually
significant were also tested for impairment, resulting in no impairment charge
(2022: £nil) being recognised at 31 December 2023.
Material intangible assets (excluding goodwill)
The carrying amount and the residual life of the material intangible assets
(excluding goodwill) for the Group are as follows:
Residual life (1) 2023 2022
£m £m
Trent programme intangible assets (2) 2-15 years 1,920 1,826
Business aviation programme intangible assets (3) 11-15 years 238 250
Intangible assets related to Power Systems (4) 370 466
2,528 2,542
(1 ) Residual life reflects the remaining amortisation period of those
assets where amortisation has commenced. The amortisation period of 15 years
will commence on those assets which are not being amortised as the units are
delivered
(2) Included within the Trent programmes are the Trent 1000, Trent 7000 and
Trent XWB
(3 ) Included within business aviation are the Pearl 700 and Pearl 15
(4 ) Includes £112m (2022: £114m) in respect of a brand intangible asset
which is not amortised. Remaining assets are amortised over a range of three
to 15 years
Intangible assets (including programme intangible assets) have been reviewed
for impairment in accordance with IAS 36 Impairment of Assets. Assessments
have considered potential triggers of impairment such as external factors
including climate change, significant changes with an adverse effect on a
programme and by analysing latest management forecasts against those prepared
in 2022 to identify any deterioration in performance. Where a trigger event
has been identified, an impairment test has been carried out. Where an
impairment was required the test was performed on the following basis:
- The carrying values have been assessed by reference to value in
use. These have been estimated using cash flows from the most recent forecasts
prepared by the Directors, which are consistent with past experience and
external sources of information on market conditions over the lives of the
respective programmes; and
- The key assumptions underpinning cash flow projections are based
on estimates of product performance related estimates, future market share and
pricing and cost for uncontracted business. Climate-related risks are
considered when making these estimates consistent with the assumptions above.
There have been no (2022: none) individually material impairment charges or
reversals recognised during the year.
8 Property, plant and equipment
Land and buildings Plant and equipment Aircraft and engines In course of construction Total
£m £m £m £m £m
Cost:
At 1 January 2023 1,936 5,225 999 400 8,560
Additions 19 147 34 223 423
Transferred to current assets (1) (90) (93) - (43) (226)
Disposals/write-offs (19) (309) (33) (9) (370)
Reclassifications (2) 69 78 13 (146) 14
Exchange differences (32) (86) (7) (13) (138)
At 31 December 2023 1,883 4,962 1,006 412 8,263
Accumulated depreciation and impairment:
At 1 January 2023 695 3,507 413 9 4,624
Charge for the year (3) 70 296 40 - 406
Impairment (4) 4 6 1 6 17
Transferred to current assets (48) (61) - - (109)
Disposals/write-offs (18) (299) (25) - (342)
Reclassifications (2) 17 (9) 8 (7) 9
Exchange differences (11) (56) (3) - (70)
At 31 December 2023 709 3,384 434 8 4,535
Net book value at:
31 December 2023 1,174 1,578 572 404 3,728
1 January 2023 1,241 1,718 586 391 3,936
(1 ) During the year, the Group signed a service concession arrangement
with a customer effective from 1 January 2024. Accordingly, assets that will
be derecognised have been transferred to trade receivables and other assets to
reflect the nature of these assets as current assets
(2 ) Includes reclassifications of assets under construction to the
relevant classification in property, plant and equipment, right-of-use assets
or intangible assets when available for use
(3 ) Depreciation is charged to cost of sales and commercial and
administrative costs or included in the cost of inventory as appropriate
(4 ) The carrying values of property, plant and equipment have been
assessed during the year in line with IAS 36. Material items of plant and
equipment and aircraft and engines are assessed for impairment together with
other assets used in individual programmes - see potential triggers considered
in note 7. Land and buildings are generally used across multiple programmes
and are considered based on future expectations of the use of the site, which
includes any implications from
climate-related risks. As a result of this assessment, there are no (2022:
none) individually material impairment charges or reversals in the year
9 Right-of-use assets
Land and buildings Plant and equipment Aircraft and engines Total
£m £m £m £m
Cost:
At 1 January 2023 506 162 1,827 2,495
Additions/modification of leases 38 56 104 198
Acquisition of businesses (See note 23) 2 - - 2
Disposals (6) (22) (54) (82)
Transferred to current assets (1) (4) - - (4)
Reclassifications to PPE (5) - (10) (15)
Exchange differences (18) (2) (3) (23)
At 31 December 2023 513 194 1,864 2,571
Accumulated depreciation and impairment:
At 1 January 2023 230 84 1,120 1,434
Charge for the year (2) 42 42 179 263
Impairment (3) 3 6 62 71
Disposals (6) (22) (54) (82)
Reclassifications to PPE (1) - (8) (9)
Exchange differences (9) (1) (1) (11)
At 31 December 2023 259 109 1,298 1,666
Net book value at:
31 December 2023 254 85 566 905
1 January 2023 276 78 707 1,061
(1)( ) During the year, the Group signed a service concession arrangement
with a customer effective from 1 January 2024. Accordingly, assets that will
be derecognised have been transferred to trade receivables and other assets to
reflect the nature of these assets as current assets
(2 ) Depreciation is charged to cost of sales and commercial and
administrative costs as appropriate
(3 ) The carrying values of right-of-use assets have been assessed during
the year in line with IAS 36. Material items of plant and equipment and
aircraft and engines are assessed for impairment together with other assets
used in individual programmes - see potential triggers considered in note 7.
Land and buildings are generally used across multiple programmes and are
considered based on future expectations of the use of the site (which includes
any implications from climate-related risks). As a result of this assessment,
the carrying values of assets, where a trigger was identified, have been
assessed by reference to value in use considering assumptions such as
estimated future cash flows, product performance related estimates and
climate-related risks. An impairment charge of £71m has been recognised,
which includes £27m in relation to lease engines that have been returned
following the termination of the lease by the lessee. In addition, during the
year, a number of existing leases were extended as a result of renegotiations.
An assessment was performed in reference to value in use to support the
increase in asset value over the extended lease term, and as a result, an
impairment of £26m has been recognised in Civil Aerospace (2022: no
individually material impairment charges or reversals)
10 Investments
Equity accounted and other investments
Equity accounted Other (1)
Joint ventures Associates Total £m
£m £m £m
At 1 January 2023 422 − 422 36
Additions (2) 9 - 9 -
Disposals (5) - (5) (1)
Share of retained profit (3) 119 - 119 -
Reclassification of deferred profit to deferred income (4) (18) - (18) -
Revaluation of other investments accounted for at FVOCI - - - (4)
Exchange differences (50) - (50) -
Share of OCI 2 - 2 -
At 31 December 2023 479 - 479 31
(1) Other investments includes unlisted investments of £24m (2022: £26m) and
listed investments of £7m (2022: £10m)
(2 ) During the year, additions to investments of £9m includes the second
instalment of investment related to the joint venture, Beijing Aero Engine
Services Company Limited of £6m
(3) See table below
(4) The Group's share of unrealised profit on sales to joint ventures is
eliminated against the carrying value of the investment in the entity. Any
excess amount, once the carrying value is reduced to £nil, is recorded as
deferred income
Reconciliation of share of retained profit/(loss) to the income statement and
cash flow statement:
2023 2022
£m £m
Share of results of joint ventures and associates 139 9
Adjustments for intercompany trading (1) 34 39
Share of results of joint venture and associates to the Group 173 48
Dividends paid by joint ventures and associates to the Group (cash flow (54) (73)
statement)
Share of retained (loss)/profit attributable to continuing operations (above) 119 (25)
(1) During the year, the Group sold spare engines to Rolls-Royce &
Partners Finance, a joint venture and subsidiary of Alpha Partners Leasing
Limited. The Group's share of the profit on these sales is deferred and
released to match the depreciation of the engines in the joint venture's
financial statements. In 2023 and 2022, profit deferred on the sale of engines
was lower than the release of that deferred in prior years
11 Inventories
2023 2022
£m £m
Raw materials 516 479
Work in progress 1,679 1,633
Finished goods 2,653 2,593
Payments on account - 3
4,848 4,708
12 Trade receivables and other assets
Current Non-current (1) Total
2023 2022 2023 2022 2023 2022
£m £m £m £m £m £m
Trade receivables 2,724 2,376 40 43 2,764 2,419
Prepayments (2) 1,032 737 102 37 1,134 774
RRSA prepayment for LTSA parts (2) 236 149 1,084 856 1,320 1,005
Receivables due on RRSAs 1,159 928 193 255 1,352 1,183
Amounts owed by joint ventures and associates 731 632 10 16 741 648
Other taxation and social security receivable 160 147 13 9 173 156
Costs to obtain contracts with customers (3) 7 12 109 67 116 79
Other receivables and similar assets (4) 478 617 45 55 523 672
6,527 5,598 1,596 1,338 8,123 6,936
(1) Trade receivables and other assets have been presented on the face of
the balance sheet in line with the operating cycle of the business. Further
disclosure is included in the table above and relate to amounts not expected
to be received in the next 12 months in line with specific customer payment
arrangements, including customers on payment plans
(2 ) At 31 December 2023, prepayments to RRSA partners for LTSA parts have
been shown separately to provide additional detail for the reader. These
amounts reflect the contractual share of EFH flows from customers paid to RRSA
partners in return for the supply of parts in future periods under long-term
supply contracts. In the prior year, these amounts were included within
prepayments. There is no change to the total amount of trade receivables and
other assets
(3 ) These are amortised over the term of the related contract in line with
engine deliveries, resulting in amortisation of £9m (2022: £11m) in the
year. There were no impairment losses
(4) Other receivables includes unbilled recoveries relating to completed
overhaul activity where the right to consideration is unconditional
The Group has adopted the simplified approach to provide for expected credit
losses (ECLs), measuring the loss allowance at a probability weighted amount
incorporated by using credit ratings which are publicly available, or through
internal risk assessments derived using the customer's latest available
financial information.
The ECLs for trade receivables and other assets has decreased by £104m to
£242m (2022: increased by £87m to £346m). This movement is mainly driven by
the Civil Aerospace business of £(100)m, of which £(82)m relates to specific
customers and £(18)m relates to updates to the recoverability of other
receivables.
The movements of the Group's ECLs provision are as follows:
2023 2022
£m £m
At 1 January (346) (259)
Increases in loss allowance recognised in the income statement during the year (80) (118)
Loss allowance utilised 34 22
Releases of loss allowance previously provided 128 45
Exchange differences 22 (36)
At 31 December (242) (346)
13 Contract assets and liabilities
Current Non-current (1) Total
2023 2022 2023 2022 2023 2022
£m £m £m £m £m £m
Contract assets
Contract assets with customers 534 621 481 617 1,015 1,238
Participation fee contract assets 26 28 201 215 227 243
560 649 682 832 1,242 1,481
(1) Contract assets and contract liabilities have been presented on the face
of the balance sheet in line with the operating cycle of the business.
Contract liabilities are further split according to when the related
performance obligation is expected to be satisfied and therefore when revenue
is estimated to be recognised in the income statement. Further disclosure of
contract assets is provided in the table above, which shows within current the
element of consideration that will become unconditional in the next year
The balance includes £494m (2022: £885m) of Civil Aerospace LTSA assets and
£410m (2022: £263m) Defence LTSA assets.
The decrease in the Civil Aerospace balance is due to higher invoicing than
revenue recognised in relation to the completion of performance obligations on
those contracts with a contract asset balance. Revenue recognised relating to
performance obligations satisfied in previous years was £64m (2022: £26m) in
Civil Aerospace.
The increase in the Defence balance is due to revenue recognition in relation
to performance obligations completed being higher than the payments received
from the customer.
No impairment losses in relation to these contract assets (2022: none) have
arisen during the year.
Participation fee contract assets have reduced by £16m (2022: £3m) due to
amortisation of £15m and foreign exchange on consolidation of £1m.
The absolute value of ECLs for contract assets has decreased by £15m to £6m
(2022: £21m).
13 Contract assets and liabilities continued
Current Non-current Total
2023 2022 2023 2022 2023 2022
£m £m £m £m £m £m
Contract liabilities 6,098 4,825 8,438 7,337 14,536 12,162
During the year £3,813m (2022: £3,321m) of the opening contract liability
was recognised as revenue.
Contract liabilities have increased by £2,374m. The movement in the Group
balance is primarily as a result of increases in Civil Aerospace of £1,865m
and Defence of £381m. The Civil Aerospace increase is primarily a result of
growth in LTSA liabilities of £1,317m to £9,574m (2022: £8,257m) driven by
price escalation, the continued rise in EFHs and the associated customer
receipts, as well as commercial discipline driving more timely invoicing and
recovery of contractual fees. In 2023 contract liabilities increased by £168m
as a result of revenue recognised in relation to performance obligations
satisfied in previous years (2022: £334m decrease). The increase in Defence
is from the receipt of deposits in advance of performance obligations being
completed.
14 Cash and cash equivalents
2023 2022
£m £m
Cash at bank and in hand 739 847
Money-market funds 1,077 34
Short-term deposits 1,968 1,726
Cash and cash equivalents per the balance sheet 3,784 2,607
Overdrafts (note 15) (53) (2)
Cash and cash equivalents per cash flow statement (page 14) 3,731 2,605
Cash and cash equivalents at 31 December 2023 includes £279m (2022: £235m)
that is not available for general use by the Group. This balance includes
£40m (2022: £40m) which is held in an account that is exclusively for the
general use of Rolls-Royce Submarines Limited and £195m (2022: £138m) which
is held exclusively for the use of Rolls-Royce Saudi Arabia Limited. This cash
is not available for use by other entities within the Group. The remaining
balance relates to cash held in non-wholly owned subsidiaries and joint
arrangements.
Balances are presented on a net basis when the Group has both a legal right of
offset and the intention to either settle on a net basis or realise the asset
and settle the liability simultaneously.
15 Borrowings and lease liabilities
Current Non-current Total
2023 2022 2023 2022 2023 2022
£m £m £m £m £m £m
Unsecured
Overdrafts 53 2 - - 53 2
Bank loans 3 1 - - 3 1
Loan notes 475 - 3,559 4,095 4,034 4,095
Other loans - - 9 10 9 10
Total unsecured 531 3 3,568 4,105 4,099 4,108
Lease liabilities 278 355 1,382 1,492 1,660 1,847
Total borrowings and lease liabilities 809 358 4,950 5,597 5,759 5,955
All outstanding items described as loan notes above are listed on the London
Stock Exchange
15 Borrowings and lease liabilities continued
The Group has access to the following undrawn committed borrowing facilities
at the end of the year:
2023 2022
£m £m
Expiring within one year - −
Expiring after one year 3,500 5,500
Total undrawn facilities 3,500 5,500
Further details can be found in the going concern statement on page 19
During the year to 31 December 2023, the Group cancelled its undrawn £1bn
bank loan facility which was due to mature in January 2024 and its undrawn UK
Export Finance (UKEF) £1bn facility which was due to mature in March 2026.
These facilities had remained undrawn during the year. In addition, the Group
replaced the £2,500m committed bank borrowing facility with a new £2,500m
facility with a maturity date of November 2026 with the banks having the
option to extend with two one-year extension options (3+1+1).
Under the terms of the £1bn UKEF loan facility, the Company is restricted
from declaring, making or paying distributions to shareholders unless certain
conditions are satisfied. The conditions are linked to free cash flow
performance in the prior year, and actual and forecast minimum liquidity
levels. At 31 December 2023, these conditions were met but the Group is not
making shareholder distributions. Once the Group is comfortably within an
investment grade profile and the strength of the balance sheet is assured, the
Group is committed to reinstating and growing shareholder distributions. This
loan facility expires in 2027. The restrictions on distributions do not
prevent the Company from redeeming any unredeemed C Shares issued prior to
March 2021.
16 Leases
Leases as lessee
The net book value of right-of-use assets at 31 December 2023 was £905m
(2022: £1,061m), with a lease liability of £1,660m (2022: £1,847m), per
notes 9 and 15 respectively. Leases that have not yet commenced to which the
Group is committed have a future liability of £5m and consist of mainly plant
and equipment and properties. The consolidated income statement shows the
following amounts relating to leases:
2023 2022
£m £m
Land and buildings depreciation and impairment (1) (45) (41)
Plant and equipment depreciation and impairment (2) (48) (36)
Aircraft and engines depreciation and impairment (3) (241) (210)
Total depreciation and impairment charge for right-of-use assets (334) (287)
Adjustment of amounts payable under residual value guarantees within lease 10 3
liabilities (3, 4)
Expense relating to short-term leases of 12 months or less recognised as an (49) (28)
expense on a straight-line basis (2)
Expense relating to variable lease payments not included in lease liabilities (5) (2)
(3,5)
Total operating costs (378) (314)
Interest expense (6) (85) (68)
Total lease expense (463) (382)
Income from sub-leasing right-of-use assets 31 32
Total amount recognised in income statement (432) (350)
(1) Included in cost of sales and commercial and administration costs
depending on the nature and use of the right-of-use asset
(2) Included in cost of sales, commercial and administration costs, or
research and development depending on the nature and use of the right-of-use
asset
(3) Included in cost of sales
(4) Where the cost of meeting residual value guarantees is less than that
previously estimated, as costs have been mitigated or liabilities waived by
the lessor, the lease liability has been remeasured. To the extent that the
value of this remeasurement exceeds the value of the right-of use asset, the
reduction in the lease liability is credited to cost of sales
(5) Variable lease payments primarily arise on a small number of contracts
where engine lease payments are solely dependent upon utilisation rather than
a periodic charge
(6) Included in financing costs
The total cash outflow for leases in 2023 was £429m (2022: £316m). Of this,
£375m related to leases reflected in the lease liability, £49m to short-term
leases where lease payments are expensed on a straight-line basis and £5m for
variable lease payments where obligations are only due when the assets are
used. The timing difference between income statement charge and cash flow
relates to costs incurred at the end of leases for residual value guarantees
and restoration costs that are recognised within depreciation over the term of
the lease, the most significant amounts relate to engine leases.
Engine leases in the Civil Aerospace business often include clauses that
require the engines to be returned to the lessor with specific levels of
usable life remaining or cash payments to the lessor. The costs of meeting
these requirements are included in the lease payments. The amounts payable are
calculated based upon an estimate of the utilisation of the engines over the
lease term, whether the engine is restored to the required condition by
performing an overhaul at our own cost or through the payments of amounts
specified in the contract and any new contractual arrangements arising when
the current lease contracts end. Amounts due can vary depending on the level
of utilisation of the engines, overhaul activity prior to the end of the
contract, and decisions taken on whether ongoing access to the assets is
required at the end of the lease term. During the year, adjustments to return
conditions at the end of leases resulted in a credit of £10m to the income
statement. The lease liability at 31 December 2023 included £354m relating to
the cost of meeting these residual value guarantees in the Civil Aerospace
business. Up to £76m is payable in the next 12 months, £185m is due over the
following four years and the remaining balance after five years.
17 Trade payables and other liabilities
Current Non-current Total
2023 2022 2023 2022 2023 2022
£m £m £m £m £m £m
Trade payables 1,608 1,735 - - 1,608 1,735
Accruals 1,134 1,477 96 199 1,230 1,676
Customer discounts (1) 1,018 828 773 1,016 1,791 1,844
Payables due on RRSAs 1,713 1,392 - - 1,713 1,392
Deferred receipts from RRSA workshare partners 56 32 774 829 830 861
Amounts owed to joint ventures and associates 542 567 - - 542 567
Government grants (2) 30 21 54 41 84 62
Other taxation and social security 92 88 - - 92 88
Other payables (3) 703 843 230 279 933 1,122
6,896 6,983 1,927 2,364 8,823 9,347
(1)( ) Customer discounts include customer concession credits. Revenue
recognised comprises sales to the Group's customers after such items. Customer
concession credits are discounts given to a customer upon the sale of goods or
services. A liability is recognised to correspond with the recognition of
revenue when the performance obligation is met. The largest element of the
balance, approximately £1.2bn arises when the Civil business delivers its
engines to an airframer. A concession is often payable to the end customer
(e.g. an airline) on delivery of the aircraft from the airframer. The
concession amounts are known and the payment date is reasonably certain, hence
there is no significant judgement or uncertainty associated with the timing of
these amounts. Warranty credits of £364m and customer concessions of £1,480m
have been represented at 31 December 2023 to be included within customer
discounts to better reflect the nature of these balances
(2 ) During the year, £74m, (2022: £20m) of government grants were
released to the income statement
(3)( ) Other payables includes payroll liabilities and HM Government UK
levies
The Group's payment terms with suppliers vary on the products and services
being sourced, the competitive global markets the Group operates in and other
commercial aspects of suppliers' relationships. Industry average payment terms
vary between 90 to 120 days. The Group offers reduced payment terms for
smaller suppliers, who are typically on 75-day payment terms, so that they are
paid in 30 days. In line with civil aviation industry practice, the Group
offers a supply chain financing (SCF) programme in partnership with banks to
enable suppliers, including joint ventures who are on 90-day standard payment
terms, to receive their payments sooner. The SCF programme is available to
suppliers at their discretion and does not change rights and obligations with
suppliers nor the timing of payment of suppliers. At 31 December 2023,
suppliers had drawn £418m under the SCF scheme (2022: £422m) of which
£154m (2022: £180m) is drawn by joint ventures. The Group, in some cases,
settles the costs incurred by joint venture as a result of them utilising
either the Group offered SCF arrangement, or an alternative SCF arrangement.
During the year to 31 December 2023, the Group incurred costs of £28m (2022:
£12m) to settle the costs incurred by joint ventures as a result of them
utilising the Group offered SCF arrangement. These costs are included within
other financing charges.
18 Financial assets and liabilities
Carrying value of other financial assets and liabilities
Derivatives
Foreign exchange contracts 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 2023
Non-current assets 72 - 254 326 - 34 - 360
Current assets 10 6 8 24 - 10 - 34
Assets 82 6 262 350 - 44 - 394
Current liabilities (351) (10) (13) (374) (10) (41) (23) (448)
Non-current liabilities (1,766) (15) (73) (1,854) (7) (122) - (1,983)
Liabilities (2,117) (25) (86) (2,228) (17) (163) (23) (2,431)
(2,035) (19) 176 (1,878) (17) (119) (23) (2,037)
At 31 December 2022
Non-current assets 58 25 436 519 - 23 - 542
Current assets 87 40 2 129 - 12 - 141
Assets 145 65 438 648 - 35 - 683
Current liabilities (966) (1) (2) (969) (8) (15) (24) (1,016)
Non-current liabilities (3,030) (2) (98) (3,130) (14) (86) - (3,230)
Liabilities (3,996) (3) (100) (4,099) (22) (101) (24) (4,246)
(3,851) 62 338 (3,451) (22) (66) (24) (3,563)
(1)( ) Includes the foreign exchange impact of cross-currency interest rate
swaps
18 Financial assets and liabilities continued
Derivative financial instruments
Movements in fair value of derivative financial assets and liabilities were as
follows:
Year ended 31 December 2023 Year ended
£m 31 December 2022
£m
Foreign exchange instruments Commodity instruments Interest rate instruments - hedge accounted (1) Interest rate instruments - non-hedge accounted Total Total
£m £m £m £m
At 1 January (3,851) 62 125 213 (3,451) (2,913)
Movements in fair value hedges - - (71) - (71) (74)
Movements in cash flow hedges - - (78) - (78) 86
Movements in other derivative contracts (2) 574 (60) - 1 515 (1,579)
Contracts settled 1,242 (21) 69 (83) 1,207 1,029
At 31 December (2,035) (19) 45 131 (1,878) (3,451)
(1) Includes the foreign exchange impact of cross-currency interest rate
swaps
(2) Included in net financing
Financial risk and revenue sharing arrangements (RRSAs) and other financial
assets and liabilities
Movements in the carrying values were as follows:
Financial RRSAs Other - assets Other - liabilities
2023 2022 2023 2022 2023 2022
£m £m £m £m £m £m
At 1 January (22) (12) 25 15 (101) (75)
Exchange adjustments included in OCI 1 (2) - 2 2 (4)
Additions - (6) - 11 (80) (35)
Financing charge (1) - - - - (8) (4)
Excluded from underlying profit:
Changes in forecast payments (1) (1) (7) - - - -
Cash paid 5 5 - (3) 11 8
Other - - - - 13 9
At 31 December (17) (22) 25 25 (163) (101)
(1 ) Included in net financing
18 Financial assets and liabilities continued
Fair values of financial instruments equate to book values with the following
exceptions:
2023 2022
Book value Fair value Book value Fair value
£m £m £m £m
Other assets - Level 2 12 12 - -
Borrowings - Level 1 (4,034) (3,977) (4,095) (3,812)
Borrowings - Level 2 (65) (67) (13) (15)
Financial RRSAs - Level 3 (17) (16) (22) (22)
The fair value of a financial instrument is the price at which an asset could
be exchanged, or a liability settled, between knowledgeable, willing parties
in an arms-length transaction. There have been no transfers during the year
from or to Level 3 valuation. Fair values have been determined with reference
to available market information at the balance sheet date, using the
methodologies described below.
- Non-current investments primarily comprise unconsolidated
companies where fair value approximates to the book value. Listed investments
are valued using Level 1 methodology.
- Money market funds, included within cash and cash equivalents,
are valued using Level 1 methodology. Fair values are assumed to approximately
equal cost either due to the short-term maturity of the instruments or because
the interest rate of the investments is reset after periods not exceeding six
months.
- The fair values of held to collect trade receivables and
similar items, trade payables and other similar items, other
non-derivative financial assets and liabilities, short-term investments and
cash and cash equivalents are assumed to approximate to cost either due to the
short-term maturity of the instruments or because the interest rate of the
investments is reset after periods not exceeding six months.
- Fair values of derivative financial assets and liabilities and
trade receivable held to collect or sell are estimated by discounting expected
future contractual cash flows using prevailing interest rate curves or cost of
borrowing, as appropriate. Amounts denominated in foreign currencies are
valued at the exchange rate prevailing at the balance sheet date. These
financial instruments are included on the balance sheet at fair value, derived
from observable market prices (Level 2 as defined by IFRS 13 Fair Value
Measurement).
- Borrowings are carried at amortised cost. Amounts denominated
in foreign currencies are valued at the exchange rate prevailing at the
balance sheet date. The fair value of borrowings is estimated using quoted
prices (Level 1 as defined by IFRS 13) or by discounting contractual future
cash flows (Level 2 as defined by IFRS 13).
- The fair values of RRSAs and other liabilities, which
primarily includes royalties to be paid to airframers, are estimated by
discounting expected future cash flows. The contractual cash flows are based
on future trading activity, which is estimated based on latest forecasts
(Level 3 as defined by IFRS 13).
- Other assets and borrowings are carried at amortised cost.
Amounts denominated in foreign currencies are valued at the exchange rate
prevailing at the balance sheet date. The fair value of borrowings is
estimated by discounting contractual future cash flows (Level 2).
- In addition, other assets can be included on the balance sheet
at fair value, derived from observable market prices or latest forecast (Level
2/3 as defined by IFRS 13). At 31 December 2023, Level 3 assets totalled £25m
(31 December 2022: £25m).
- The fair value of lease liabilities are estimated by
discounting future contractual cash flows using either the interest rate
implicit in the lease or the Group's incremental cost of borrowing (Level 2 as
defined by IFRS 13).
19 Provisions for liabilities and charges
At Charged to income statement (1) Reversed Utilised Transfer to held for sale Exchange differences At 31 December 2023
1 January 2023
£m £m £m £m £m £m £m
Contract losses 1,592 500 (433) (185) - (2) 1,472
Warranty and guarantees 317 112 (14) (91) (8) (10) 306
Trent 1000 wastage costs 179 45 (29) (79) - - 116
Employer liability claims 33 1 (7) (3) - - 24
Tax related interest and penalties 16 9 - (2) - (1) 22
Claims and litigation 122 71 (39) (111) - - 43
Other 74 26 (18) (35) - (1) 46
2,333 764 (540) (506) (8) (14) 2,029
Current liabilities 632 532
Non-current liabilities 1,701 1,497
(1)( ) The charge to the income statement within net financing
includes £59m (2022: £33m) as a result of the unwinding of the discounting
of provisions previously recognised
Contract losses
Provisions for contract losses are recorded when the direct costs to fulfil a
contract are assessed as being greater than the expected recoverable amount.
Provisions for contract losses are measured on a fully costed basis and during
the year, £185m of the provision has been utilised. Additional contract
losses for the Group of £500m have been recognised as a result of increases
in the estimates of future LTSA costs, due to inflationary increases and costs
associated with supply chain challenges. Contract losses of £433m previously
recognised have been reversed following the renegotiation of some major
contracts resulting in contract extensions and improved margins. The Group
continues to monitor the contract loss provision for changes in the market and
revises the provision as required. The value of the remaining contract loss
provisions reflect, in each case, the single most likely outcome. The
provisions are expected to be utilised over the term of the customer
contracts, typically within eight to 16 years.
IAS 37 requires a company to recognise any impairment loss that has occurred
on assets used in fulfilling the contract before recognising a separate
provision for an onerous contract. No impairments were required for any of the
assets used solely for the fulfilment of onerous contracts. However, as per
note 9, a number of aero engine lease right-of-use assets were impaired during
the year and these will be used on a range of contracts some of which are
onerous.
The Trent 1000 intangible assets (certification costs and development costs)
and Trent 1000 spare engines (right of use and owned) are tested for
impairment as part of the Trent 1000 Cash generating unit (CGU) and no
impairment was required.
Warranty and guarantees
Provisions for warranty and guarantees relate to products sold and are
calculated based on an assessment of the remediation costs related to future
claims based on past experience. During the year, £112m of additional
provision has been recognised representing the single best estimate of
warranty and guarantee costs to be incurred on relevant sales and £91m of
previously recognised costs have been utilised. The provision generally covers
a period of up to three years.
Trent 1000 wastage costs
In November 2019, the Group announced the outcome of testing and a thorough
technical and financial review of the Trent 1000 TEN programme, following
technical issues which were identified in 2019, resulting in a revised
timeline and a more conservative estimate of durability for the improved HP
turbine blade for the TEN variant. During the year, the Group has utilised
£79m of the Trent 1000 wastage costs provision. This represents customer
disruption costs and remediation shop visit costs attributable to the wastage
costs provision. During the year, a net charge to the provision of £16m has
been recognised reflecting the discount unwind and updates to forecasted costs
based on the latest available information. The value of the remaining
provision reflects the single most likely outcome and is expected to be
utilised in 2024.
Employer liability claims
The provision relating to employer healthcare liability claims is as a result
of an historical insolvency of the previous provider and is expected to be
utilised over the next 30 years.
19 Provisions for liabilities and charges continued
Claims and litigation
Provisions for claims and litigation represent ongoing matters where the
outcome for the Group may be unfavourable. On
3 July 2023, judgement in respect of a legal claim was rendered by the High
Court, resulting in a charge to the income statement of £34m. The judgment
was satisfied in August 2023 resulting in a £92m utilisation. The value of
any remaining provisions reflects the single most likely outcome in each
case.
The balance also includes the best estimate of any retained exposure by the
Group's captive insurance company for any claims that have been incurred but
not yet reported to the Group as that entity retains a portion of the
exposures it insures on behalf of the remainder of the Group. Such exposures
include policies for aviation claims, employer liabilities and healthcare
claims. Significant delays can occur in the notification and settlement of
claims and judgement is involved in assessing outstanding liabilities, the
ultimate cost and timing of which cannot be known with certainty at the
balance sheet date. The insurance provisions are based on information
currently available, however it is inherent in the nature of the business that
ultimate liabilities may vary if the frequency or severity of claims differs
from estimated.
Other
Other items are individually immaterial. The value of any remaining provisions
reflects the single most likely outcome in each case.
20 Post-retirement benefits
The net post-retirement deficit as at 31 December 2023 is calculated on a year
to date basis, using the latest valuation as at 31 March 2023 for the UK
scheme, updated to 31 December 2023 for the principal schemes.
Amounts recognised in the balance sheet in respect of defined benefit schemes
UK schemes Overseas schemes Total
£m £m £m
At 1 January 2023 594 (1,014) (420)
Exchange adjustments - 33 33
Current service cost and administrative expenses (8) (33) (41)
Past service cost - 2 2
Financing recognised in the income statement 29 (41) (12)
Contributions by employer - 69 69
Actuarial gains/(losses) recognised in OCI (1) 164 (62) 102
Returns on plan assets excluding financing recognised in OCI (1) (12) 26 14
Transfers - (2) (2)
Transfer to held for sale - 2 2
At 31 December 2023 767 (1,020) (253)
Post-retirement scheme surpluses - included in non-current assets (2) 767 15 782
Post-retirement scheme deficits - included in non-current liabilities - (1,035) (1,035)
(1 ) Actuarial gains and losses arising from financial assumptions arise
primarily due to changes in discount rate and inflation
(2 ) The surplus in the Rolls-Royce UK Pension Fund (RRUKPF) is recognised
as, on ultimate wind-up when there are no longer any remaining members, any
surplus would be returned to the Group, which has the power to prevent the
surplus being used for other purposes in advance of this event
Changes to defined benefit schemes
During the year, Power Systems continued to replace a number of their existing
defined benefit schemes with a new company pension scheme to offer payment
options at time of retirement for other employee populations not included in
2022. The new system, which is similar in structure to a defined contribution
scheme with a guarantee from the company in accordance with German
legislation, significantly reduces interest risks and longevity risks for the
employer for future commitments. A past service cost of £3m has been
recognised within non-underlying operating profit in relation to this new
scheme.
In addition, Rolls-Royce Power Systems concluded a works agreement resulting
in a change to jubilee benefits offered to employees based in Friedrichshafen.
A past service credit of £5m has been recognised within non-underlying
operating profit.
Other
The Group is aware of a UK High Court legal ruling in June 2023 between Virgin
Media Limited and NTL Pension Trustees II Limited, which decided that certain
historic rule amendments were invalid if they were not accompanied by the
actuarial certifications. The ruling is subject to appeal and the Group is
monitoring developments. Whilst this ruling was in respect of another scheme,
any final judgment would need to be reviewed for its relevance to the RRUKPF
scheme. As yet the RRUKPF pension advisers have not completed any analysis
and, as the outcome of the appeal is still unknown, no adjustments have been
made to the Condensed Consolidated Financial Statements at 31 December 2023.
20 Post-retirement benefits continued
Contributions
The Group expects to contribute approximately £73m to its overseas defined
benefit schemes in 2024 (2023: £70m).
In the UK, any cash funding of RRUKPF is based on a statutory triennial
funding valuation process. The Group and the Trustee negotiate and agree the
actuarial assumptions used to value the liabilities (Technical Provisions);
assumptions which may differ from those used for accounting are set out
above. The assumptions used to value Technical Provisions must be prudent
rather than a best estimate of the liability. Most notably, the Technical
Provisions discount rate is currently based upon UK Government bond yields
plus a margin (0.5% at the 31 March 2023 valuation) rather than being based on
yields of AA corporate bonds. Once each valuation is signed, a Schedule of
Contributions (SoC) must be agreed which sets out the cash contributions to be
paid. The most recent valuation, as at 31 March 2023, agreed by the Trustee in
October 2023, showed that the RRUKPF was estimated to be 115% funded on the
Technical Provisions basis (estimated to be 113% at 31 December 2023). All
cash due has been paid in full and the current SoC does not currently require
any cash contributions to be made by the Group.
21 Contingent liabilities and commitments
In January 2017, after full cooperation, the Company concluded deferred
prosecution agreements (DPA) with the SFO and the US Department of Justice
(DoJ) and a leniency agreement with the MPF, the Brazilian federal
prosecutors. The terms of both DPAs have now expired. The Company has
submitted a final report to the Controller General, Brazil (CGU) under the
terms of a two-year leniency agreement signed in October 2021 relating to the
same historical matters. Certain authorities are investigating members of the
Group for matters relating to misconduct in relation to historical matters.
The Group is responding appropriately. Action may be taken by further
authorities against the Group or individuals. In addition, the Group could
still be affected by actions from other parties, including customers,
customers' financiers and the Company's current and former investors,
including certain potential claims in respect of the Group's historical ethics
and compliance disclosures which have been notified to the Group. The
Directors are not currently aware of any matters that are likely to lead to a
material financial loss over and above the penalties imposed to date, but
cannot anticipate all the possible actions that may be taken or their
potential consequences.
The Group has, in the normal course of business, entered into arrangements in
respect of export finance, performance bonds, grant funding, countertrade
obligations and minor miscellaneous items, which could result in potential
outflows if the requirements related to those arrangements are not met.
Various Group undertakings are party to legal actions and claims (including
with tax authorities) which arise in the ordinary course of business, some of
which are for substantial amounts.
In connection with the sale of its products, the Group will, on some
occasions, provide financing support for its customers, generally in respect
of civil aircraft. The Group's commitments relating to these financing
arrangements are spread over many years, relate to a number of customers and a
broad product portfolio and are generally secured on the asset subject to the
financing. These include commitments of $0.9bn (2022: $1.2bn) (on a discounted
basis) to provide facilities to enable customers to purchase aircraft (of
which approximately $0.7bn could be called during 2024). These facilities may
only be used if the customer is unable to obtain financing elsewhere and are
priced at a premium to the market rate. Significant events impacting the
international aircraft financing market, the failure by customers to meet
their obligations under such financing agreements, or inadequate provisions
for customer financing liabilities may adversely affect the Group's financial
position.
Customer financing provisions are made to cover guarantees provided for asset
value and/or financing where it is probable that a payment will be made. These
are reported on a discounted basis at the Group's borrowing rate to better
reflect the time span over which these exposures could arise. The values of
aircraft providing security are based on advice from a specialist aircraft
appraiser. There were no provisions for customer financing provisions at 31
December 2023 or 31 December 2022.
The Group has responded appropriately to the Russia-Ukraine conflict to comply
with international sanctions and export control regime, and to continue to
implement the business decision to exit from Russia. The Group could be
subject to action by impacted customers, suppliers and other contract parties.
While the outcome of the above matters cannot precisely be foreseen, the
Directors do not expect any of these arrangements, legal actions or claims,
after allowing for provisions already made, to result in significant loss to
the Group.
22 Related party transactions
2023 2022
£m £m
Sale of goods and services 6,700 5,074
Purchases of goods and services (1) (7,471) (5,577)
Lease payments to joint ventures and associates (244) (163)
Guarantees of joint arrangements' and associates' borrowings 2 3
Guarantees of non-wholly owned subsidiaries' borrowings 3 3
Dividends received from joint ventures and associates 54 73
Other income received from joint ventures and associates 6 2
(1) The Group has both sales and purchasing arrangements with its maintenance,
repair and overhaul joint ventures. As part of this arrangement, the Group
issues and receives credit notes usable against amounts receivable and payable
to these related parties. Purchases of goods and services from related
parties are presented to be shown gross of these concessions. This is
consistent with the presentation of sales to related parties. Purchases from
related parties incurred during the year to 31 December 2022 have been
represented on this basis resulting in an increase to this balance of £662m
Included in sales of goods and services to related parties are sales of spare
engines amounting to £48m (2022: £19m). Profit recognised in the year on
such sales amounted to £88m (2022: £50m), including profit on current year
sales and recognition of profit deferred on similar sales in previous years.
Cash receipts relating to the sale of spare engines amounted to £73m (2022:
£40m).
Included in other financing charges in the income statement are interest costs
of £34m (2022: £17m) incurred during the year which have been settled by the
Group on behalf of joint ventures, including the £28m of costs incurred of
using the Group offered SCF arrangement set out in note 17.
23 Acquisitions, disposals, held for sale and discontinued operations
Acquisitions
On 30 June 2023, the Group completed its acquisition of Team Italia/Onyx
Marine SRL for a cash consideration of £14m. Team Italia specialises in yacht
bridges and marine navigation and automation systems. The acquisition will
provide key technology for marine automation systems and will strengthen Power
Systems' position as a yacht market leader. The acquisition price of £14m has
been allocated to £8m of goodwill, £2m of customer relationships, £2m to
right-of-use assets and £2m to other current assets and liabilities.
Disposals
During the year, the Group divested their 49% shareholding in joint venture,
Shanxi North MTU Diesel Co. Limited to the current JV partner for proceeds of
£5m. The carrying value of the Group's investment that was disposed was £5m.
This has been derecognised on the disposal resulting in nil profit on
disposal.
Reconciliation of profit on disposal of businesses in continuing operations to Total
the income statement:
£m
Profit before taxation on disposal -
Cumulative currency translation loss on liquidation of joint venture (1)
Adjustment to consideration on disposals completed in prior periods 2
Profit on disposal of businesses per income statement 1
Reconciliation of cash flow on acquisition and disposal of businesses to the Total
cash flow statement:
£m
Proceeds on disposal (see above) 5
Cash outflow on acquisitions (14)
Cash outflow on disposals completed in prior periods (9)
Cash flow on acquisition and disposal of businesses per cash flow statement (18)
Businesses held for sale
At 31 December 2023, the Group was in positive discussions with Deutz AG for
the sale of the off-highway engines business in the lower power range based in
Power Systems. The business is available for sale in its current condition and
the sale is considered highly probable based on the agreement-in-principle
reached as at 31 December 2023. In line with IFRS 5, the assets and
liabilities related to the business have been classified as held for sale and
measured at the lower of their carrying value or fair value less costs to
sell, resulting in a £7m impairment reversal.
The table below summarises the categories of assets and liabilities classified
as held for sale at 31 December 2023. There were no assets or liabilities held
for sale at 31 December 2022.
2023
£m
Intangible assets 51
Inventory 11
Trade receivables and other assets 47
Assets held for sale 109
Trade payables and other liabilities (41)
Contract liabilities (4)
Provisions for liabilities and charges (8)
Post-retirement scheme deficits (2)
Liabilities associated with assets held for sale (55)
Net assets held for sale 54
23 Acquisitions, disposals, held for sale and discontinued operations
continued
Discontinued operations
ITP Aero represented a separate major line of business and was classified as a
disposal group held for sale up to the date of disposal. Therefore the results
up to 15 September 2022, in line with IFRS 5, were presented as discontinued
operations.
The financial performance and cash flow information presented reflects the
operations for the year that have been classified as discontinued operations.
2023 2022
£m £m
Revenue − 275
Operating profit (1) − 86
Profit before taxation (1) − 78
Income tax charge (1) − (10)
Profit for the year from discontinued operations on ordinary activities − 68
Costs on disposal of discontinued operations (2) − −
Loss on disposal of discontinued operations − (148)
Profit for the year from discontinued operations − (80)
Net cash inflow from operating activities (2) − 85
Net cash outflow from investing activities (2) − (67)
Net cash outflow from financing activities − (25)
Exchange gains − −
Net change in cash and cash equivalents − (7)
(1 ) Profit/(loss) from discontinued operations on ordinary activities is
presented net of intercompany trading eliminations and related consolidation
adjustments
(2 ) Cash flows from investing activities include £nil (2022: £42m) costs
of disposal paid during the year that are not a movement in the cash balance
of the disposal group as they were borne centrally
24 Derivation of summary funds flow statement
2023 2022
Cash flow Impact of hedge book Impact of acquisition accounting Impact of other non-underlying items Funds flow Funds flow
£m £m £m £m £m £m
Operating profit 1,944 (475) 50 71 1,590 652
Operating profit from discontinued operations − − − − − 86
Depreciation, amortisation and impairment 1,019 − (50) 9 978 953
Movement in provisions (325) 46 − 21 (258) (23)
Movement in Civil LTSA balance 1,708 (377) − − 1,331 792
Movement in prepayments to RRSAs for LTSA parts (315) 63 − − (252) (8)
Settlement of excess derivatives (389) − − − (389) (326)
(Profit)/loss on disposal of property, plant and equipment (1) 18 − − − 18 18
Joint venture trading (1) (119) − − − (119) 25
Interest received 159 − − − 159 36
Contributions to defined benefit schemes in excess of underlying operating (28) − − 2 (26) (32)
profit charge (1)
Share-based payments (1) 66 − − − 66 47
Other (1) − (8) − 1 (7) (53)
Operating cash flow before working capital and taxation (2) 3,738 (751) − 104 3,091 2,167
Increase in inventories (200) − − − (200) (887)
Movement in trade receivables/payables and other assets/liabilities (excluding (2,090) (164) − (37) (2,291) (745)
prepayments to RRSAs for LTSA parts) (3)
Movement in contract assets/liabilities 995 51 − − 1,046 892
(excluding Civil LTSA) (3)
Revaluation of trading assets 206 (10) − − 196 (521)
(excluding exceptional items) (3)
Realised derivatives in financing (3) 853 − − − 853 737
Cash flows on other financial assets and liabilities held for operating (845) 853 − − 8 77
purposes
Income tax (172) − − − (172) (174)
Cash from operating activities (2) 2,485 (21) − 67 2,531 1,546
Capital element of lease payments (291) 21 − − (270) (198)
Capital expenditure (699) − − 4 (695) (504)
Investment 69 − − − 69 28
Interest paid (333) − − − (333) (352)
Other (M&A, restructuring and exceptional transformation costs) 54 − − (71) (17) (29)
Free cash flow 1,285 − − − 1,285 491
Of which is continuing operations 1,285 1,285 505
(1) Included in other operating cash flows in the summarised free cash flow
on page 8
(2 ) The funds flow to 31 December 2022 has been represented to disclose
cash flows on settlement of excess derivative contracts as cash flows from
operating activities. As a result, operating cash flows before working capital
and income tax during the year to 31 December 2022 have reduced by £(326)m to
£2,167m. Cash flows on settlement of excess derivative contracts were
previously shown after cash from operating activities in arriving at free cash
flow. There is no impact to free cash flow
(3) Included in working capital (excluding Civil LTSA balance) in the
summarised free cash flow on page 8
The comparative information to 31 December 2023 has been presented in a
different format to align to the current year presentation. In some instances,
the groupings of items may have changed.
Free cash flow is a measure of the financial performance of the businesses'
cash flows which is consistent with the way in which performance is
communicated with the Board. Free cash flow is defined as cash flows from
operating activities including capital expenditure and movements in
investments, capital elements of lease payments, interest paid, amounts paid
relating to the settlement of excess derivatives and excluding amounts spent
or received on activity related to business acquisitions or disposals and
other material exceptional or one-off cash flows. The Board considers that
free cash flow reflects cash generated from the Group's underlying trading.
Cash flow from operating activities is determined to be the nearest statutory
measure to free cash flow. The reconciliation between free cash flow and cash
flow from operating activities can be found on page 51.
Reconciliation of Alternative Performance Measures (APMs) to their statutory
equivalent
Alternative Performance Measures (APMs)
Business performance is reviewed and managed on an underlying basis. These
alternative performance measures reflect the economic substance of trading in
the year. In addition, a number of other APMs are utilised to measure and
monitor the Group's performance.
Definitions and reconciliations to the relevant statutory measure are included
below. All comparative periods relate to 31 December 2022.
Underlying results from continuing operations
Underlying results are presented by recording all relevant revenue and cost of
sales transactions at the average exchange rate achieved on effective settled
derivative contracts in the period that the cash flow occurs. Underlying
results also exclude: the effect of acquisition accounting and business
disposals, impairment of goodwill and other non-current assets where the
reasons for the impairment are outside of normal operating activities,
exceptional items and certain other items which are market driven and outside
of managements control. Statutory results have been adjusted for discontinued
operations and underlying results from continuing operations have been
presented on the same basis. Further detail can be found in note 2 and note
23.
2023 2022
£m £m
Revenue from continuing operations
Statutory revenue 16,486 13,520
Derivative and FX adjustments (1,077) (829)
Underlying revenue 15,409 12,691
Gross profit from continuing operations
Statutory gross profit 3,620 2,757
Derivative and FX adjustments (461) (262)
Programme exceptional credits (21) (69)
Exceptional transformation and restructuring charges 55 8
Acquisition accounting and M&A 46 53
Impairments (8) (10)
Underlying gross profit 3,231 2,477
Commercial and administrative costs from continuing operations
Statutory commercial and administrative (C&A) costs (1,110) (1,077)
Derivative and FX adjustments 1 (2)
Exceptional transformation and restructuring charges 47 39
Other underlying adjustments (2) (22)
Underlying C&A Costs (1,064) (1,062)
Research and development costs from continuing operations
Statutory research and development (R&D) costs (739) (891)
Derivative and FX adjustments (4) -
Acquisition accounting 4 5
Underlying R&D costs (739) (886)
Operating profit from continuing operations
Statutory operating profit 1,944 837
Derivative and FX adjustments (475) (264)
Programme exceptional credits (21) (69)
Exceptional transformation and restructuring charges 102 47
Acquisition accounting and M&A 50 58
Impairments (8) 65
Other underlying adjustments (2) (22)
Underlying operating profit 1,590 652
Underlying operating profit margin 10.3% 5.1%
2023 2022
pence pence
Basic EPS from continuing operations
Statutory basic EPS 28.85 (14.24)
Effect of underlying adjustments to profit/(loss) before tax (13.94) 20.45
Related tax effects (1.16) (4.26)
Basic underlying EPS 13.75 1.95
Reconciliation of Alternative Performance Measures (APMs) to their statutory
equivalent continued
Underlying results from discontinued operations
2023 2022
£m £m
Results from discontinued operations
Profit for the year on ordinary activities − 68
Loss on disposal of discontinued operations − (148)
Statutory operating profit − (80)
Acquisition accounting and M&A − 179
Derivative and FX adjustments − (1)
Related tax effects − (31)
Underlying operating profit − 67
Organic change
Organic change is the measure of change at constant translational currency
applying full year 2022 average rates to 2023. The movement in underlying
change to organic change is reconciled below.
All amounts below are shown on an underlying basis and reconciled to the
nearest statutory measure above.
Total Group income statement 2023 2022 Change FX Organic Change Organic Change
£m £m £m £m £m %
Underlying revenue 15,409 12,691 2,718 88 2,630 21%
Underlying gross profit 3,231 2,477 754 22 732 30%
Underlying operating profit 1,590 652 938 5 933 143%
Net financing costs (328) (446) 118 - 118 (26)%
Underlying profit before taxation 1,262 206 1,056 5 1,051 -
Taxation (120) (48) (72) (1) (71) -
Underlying profit for the year (continuing operations) 1,142 158 984 4 980 -
Civil Aerospace 2023 2022 Change FX Organic Change Organic Change
£m £m £m £m £m %
Underlying revenue 7,348 5,686 1,662 17 1,645 29%
Underlying OE revenue 2,703 1,982 721 15 706 36%
Underlying services revenue 4,645 3,704 941 2 939 25%
Underlying gross profit 1,394 853 541 1 540 63%
Commercial and administrative costs (354) (371) 17 (1) 18 (5)%
Research and development costs (343) (452) 109 (3) 112 (25)%
Joint ventures and associates 153 113 40 - 40 35%
Underlying operating profit 850 143 707 (3) 710 -
Defence 2023 2022 Change FX Organic Change Organic Change
£m £m £m £m £m %
Underlying revenue 4,077 3,660 417 (11) 428 12%
Underlying OE revenue 1,766 1,634 132 (4) 136 8%
Underlying services revenue 2,311 2,026 285 (7) 292 14%
Underlying gross profit 804 726 78 - 78 11%
Commercial and administrative costs (173) (174) 1 (1) 2 (1)%
Research and development costs (72) (122) 50 1 49 (40)%
Joint ventures and associates 3 2 1 - 1 50%
Underlying operating profit 562 432 130 - 130 30%
Power Systems 2023 2022 Change FX Organic Change Organic Change
£m £m £m £m £m %
Underlying revenue 3,968 3,347 621 82 539 16%
Underlying OE revenue 2,661 2,187 474 55 419 19%
Underlying services revenue 1,307 1,160 147 27 120 10%
Underlying gross profit 1,050 918 132 21 111 12%
Commercial and administrative costs (456) (441) (15) (8) (7) 2%
Research and development costs (187) (204) 17 (4) 21 (10)%
Joint ventures and associates 6 8 (2) - (2) (25)%
Underlying operating profit 413 281 132 9 123 44%
Reconciliation of Alternative Performance Measures (APMs) to their statutory
equivalent continued
New Markets 2023 2022 Change FX Organic Change Organic Change
£m £m £m £m £m %
Underlying revenue 4 3 1 - 1 33%
Underlying OE revenue 2 1 1 - 1 100%
Underlying services revenue 2 2 - - - -
Underlying gross profit/(loss) 1 (1) 2 - 2 -
Commercial and administrative costs (24) (23) (1) - (1) 4%
Research and development costs (137) (108) (29) (2) (27) 25%
Underlying operating loss (160) (132) (28) (2) (26) 20%
Trading cash flow
Trading cash flow is defined as free cash flow (as defined below) before the
deduction of recurring tax and post-employment benefit expenses. Trading cash
flow per segment is used as a measure of business performance for the relevant
segments.
2023 2022
£m £m
Civil Aerospace 626 226
Defence 511 426
Power Systems 461 158
New Markets (63) (57)
Total reportable segments trading cash flow 1,535 753
Other businesses 5 5
Central and inter-segment (57) (49)
Trading cash flow from continuing operations 1,483 709
Discontinued operations - (12)
Trading cash flow 1,483 697
Underlying operating profit charge exceeded by contributions to defined (26) (32)
benefit schemes
Tax (1) (172) (174)
Free cash flow 1,285 491
(1) See page 14 for tax paid in the statutory cash flow statement
Free cash flow
Free cash flow is a measure of the financial performance of the businesses'
cash flows which is consistent with the way in which performance is
communicated with the Board. Free cash flow is defined as cash flows from
operating activities including capital expenditure and movements in
investments, capital elements of lease payments, interest paid, amounts paid
relating to the settlement of excess derivatives and excluding amounts spent
or received on activity related to business acquisitions or disposals and
other material exceptional or one-off cash flows. Free cash flow from
continuing operations has been presented to remove free cash flow from
discontinued operations as defined in note 23. For further detail, see note
24.
2023 2022
£m £m
Statutory cash flows from operating activities (1) 2,485 1,524
Capital expenditure (699) (540)
Investment (including investment from NCI and movement in joint ventures, 69 28
associates and other investments)
Capital element of lease payments (291) (218)
Interest paid (333) (352)
Exceptional transformation and restructuring costs 69 76
M&A costs 2 2
Other (17) (29)
Free cash flow 1,285 491
Discontinued operations free cash flow (2) - 14
Free cash flow from continuing operations 1,285 505
(1 ) Statutory cash flows from operating activities at 31 December 2022 have
been represented. See note 1.
(2 ) Discontinued operations free cash flow excludes: transactions with
parent company of £nil (2022: £(65)m), movements in borrowings of £nil
(2022: £22m), exceptional restructuring costs of £nil (2022: £nil), M&A
costs of £nil (2022: £44m) and other of £nil (2022: £(6)m)
Gross R&D expenditure
In year gross cash expenditure on R&D excludes contributions and fees,
amortisation and impairment of capitalised costs and amounts capitalised
during the year. For further detail, see note 3.
Gross capital expenditure
Gross capital expenditure during the year excluding capital expenditure from
discontinued operations. All proposed investments are subject to rigorous
review to ensure that they are consistent with forecast activity and provide
value for money. The Group measures annual capital expenditure as the cash
purchases of PPE acquired during the year.
2023 2022
£m £m
Purchases of PPE (cash flow statement) 429 359
Less: capital expenditure from discontinued operations - (14)
Net capital expenditure 429 345
Reconciliation of Alternative Performance Measures (APMs) to their statutory
equivalent continued
Key performance indicators
The following measures are key performance indicators and are calculated using
APMs or statutory results. See below for calculation of these key performance
indicators. All comparative periods relate to 31 December 2022, unless
otherwise stated.
Order backlog
Order backlog, also known as unrecognised revenue, is the amount of revenue on
current contracts that is expected to be recognised in future periods. Civil
Aerospace OE orders where the customer has retained the right to cancel (for
deliveries in the next seven to 12 months) are excluded.
Adjusted return on capital (abbreviated to return on capital)
Return on capital is defined as net operating profit after tax ('NOPAT') as a
percentage of average invested capital. NOPAT is defined as underlying net
profit excluding net finance costs and the tax shield on net finance costs.
Invested capital is defined as current and non-current assets less current
liabilities. It excludes pension assets, cash and cash equivalents, and
borrowings and lease liabilities. Return on capital assesses the efficiency in
allocating capital to profitable investments.
2023 2022
£m £m
Underlying operating profit 1,590 652
Less: taxation (1) (151) (48)
Underlying operating profit (post-taxation) 1,439 604
Total assets 31,512 29,450
Less: post-retirement scheme surpluses (782) (613)
Less: cash and cash equivalents (3,784) (2,607)
Current liabilities (14,926) (13,918)
Liabilities held for sale (55) −
Less: borrowings and lease liabilities 809 358
Invested capital (closing) 12,774 12,670
Invested capital (average) 12,722 12,334
% %
Return on invested capital 11.3 4.9
(1 ) Excluding underlying taxation on underlying finance income/(costs) of
£31m (2022: £nil)
Total underlying cash costs as a proportion of underlying gross margin
(abbreviated to TCC/GM)
Total underlying cash costs during the year (represented by underlying
research and development (R&D) expenditure and underlying commercial and
administrative (C&A) costs) as a proportion of underlying gross profit.
This measure provides an indicator of total cash costs relative to gross
profit. A reduction in total cash costs relative to gross profit indicates how
effective the business is at managing and/or reducing its costs.
2023 2022
£m £m
Underlying R&D expenditure (1) 836 928
Underlying C&A 1,064 1,062
Total cash costs 1,900 1,990
Underlying gross profit 3,231 2,477
Total cash costs as a proportion of underlying gross profit 0.59 0.80
(1 ) Excludes £6m (2022: £nil) impact of derivative and FX adjustments
Principal risks and uncertainties
Our risk management system is described on pages 50 to 57 of our 2023 Annual
Report. It sets out requirements for managing risk across the organisation, in
a continuous process where risk owners define, quantify, control, assure and
respond to risks, including ongoing monitoring and oversight.
In November 2023, we refreshed the risk profile to reflect where risks could
impact the organisation in light of the strategy review. As a result, elements
of the previous competitive environment risk are now captured in the strategy,
execution and technology risks, with strategy risk also replacing some
elements of the previous transformation risk. Information and data includes
cyber risk and has been expanded to include physical data. In addition,
business continuity which was previously a standalone risk has now been
captured within business interruption. As part of this, we also looked at risk
interdependencies, categorising principal risks as either a 'pillar' or a
'driver', with drivers being those risks that could cause one or more risk
pillars to happen and/or make them worse if they do. All principal risks
facing the Group are summarised below and reported in detail on pages 52 to 57
of our 2023 Annual Report.
Principal risk pillars
Safety
Failure to: i) provide safe products; or ii) create a place to work which
minimises the risk of harm to our people, those who work with us, and the
environment, would adversely affect our reputation and long-term
sustainability.
Compliance
Non-compliance by the Group with legislation or other regulatory requirements
in the heavily regulated environment in which we operate (e.g. export
controls; data privacy; use of controlled chemicals and substances;
anti-bribery and corruption; human rights; and tax and customs legislation).
This could affect our ability to conduct business in certain jurisdictions and
would potentially expose us to: reputational damage; financial penalties;
debarment from government contracts for a period of time; and suspension of
export privileges (including export credit financing), each of which could
have a material adverse effect.
Strategy
Failure to develop an optimal strategy and continuously evolve it, investing
in key areas for performance improvement and growth (taking into account risk
reward), making difficult decisions for competitive advantage and the right
portfolio and partnership choices, could result in us underperforming against
our competitors and significantly reduce our ability to build a high
performing, competitive, resilient and growing company.
Execution
Failure to deliver as One Rolls-Royce on short- to medium-term financial
plans, including efficient and effective delivery of quality products,
services and programmes, or falling significantly short of customer
expectations, would reduce our resilience and have potentially significant
adverse financial and reputational consequences, including the risk
of impairment of the carrying value of the Group's intangible assets and the
impact of potential litigation.
Business interruption
A major disruption of our operations and ability to deliver our products,
services and programmes could have an adverse impact on our people, internal
facilities or external supply chain which could result in failure to meet
agreed customer commitments and damage our prospects of winning future orders.
Disruption could be caused by a range of events, e.g. extreme weather or
natural hazards (e.g. earthquakes or floods) which could increase in severity
or frequency given the impact of climate change; political events; financial
insolvency of a critical supplier; scarcity of materials; loss of data; fire;
pandemic or other infectious disease.
Principal risk drivers
Climate change
Failure to become a net zero company by 2050, leveraging technology to
transition from carbon intensive products and services at pace could impact
our ability to win future business; achieve operating results; attract and
retain talent; secure access to funding; realise future growth opportunities;
or force government intervention to limit emissions.
In addition, physical risks from extreme weather events (and/or natural
hazards) could potentially materialise, which may result in disruption.
Information and data
Failure to protect the integrity and availability of data, both physical and
digital, from attempts to cause us harm, such as through a cyber attack.
Potential impacts include hindering data driven decision making, disrupting
internal business operations and services for customers, or a data breach,
all of which could damage our reputation, reduce resilience, and cause
financial loss.
Causes include ransomware threats, unauthorised access to property or systems
for the extraction, corruption, destruction of data, or availability of access
to critical data and intellectual property.
Market and Financial shock
The Group is exposed to market and financial risks, some of which are of a
macroeconomic nature (e.g. economic growth rates, foreign currency, oil price,
interest rates) and some of which are more specific to us (e.g. reduction in
air travel or defence spending, disruption to other customer operations,
liquidity and credit risks).
Significant extraneous market events could also materially damage our
competitiveness and/or creditworthiness and our ability to access funding.
This would affect operational results or the outcomes of financial
transactions.
Demand for our products and services could be adversely affected by factors
such as current and predicted air traffic, fuel prices and age/replacement
rates of customer fleets. A large proportion of our business is reliant on the
civil aviation industry, which is cyclical in nature.
Political risk
Geopolitical factors leading to an unfavourable business climate and
significant tensions between major trading parties or blocs could impact our
strategy, execution, resilience, safety and compliance. Examples include:
changes in key political relationships, explicit trade protectionism,
differing tax or regulatory regimes, potential for conflict or broader
political issues, and heightened political tensions.
Talent and capability
Failure to create a company where our people can build a successful career
with better choices for development and personal growth will hinder our
ability to identify, attract, retain and apply the critical capabilities and
skills needed in appropriate numbers for the successful execution of our
business strategy.
Payments to shareholders
Our capital framework is focused on three clear priorities: a strong balance
sheet with an investment grade profile; a commitment to reinstating and
growing shareholder returns; and a disciplined approach to investments.
Strengthening the balance sheet is a clear priority. We are positioning
Rolls-Royce to withstand better volatility and external shocks and to give us
financial flexibility for the future. When the Board is confident that the
strength of the balance sheet is assured and we are comfortably within an
investment grade profile, we are committed to reinstating and growing
shareholder distributions.
Shareholders wishing to redeem their existing C Shares, or participate in the
CRIP must lodge instructions with the Registrar to arrive no later than 5.00pm
on 31 May 2024 (CREST holders must submit their election in CREST by 2.55pm).
The payment of C Share redemption monies will be made on 4 July 2024 and the
CRIP purchase will begin as soon as practicable after 5 July 2024.
Statement of Directors' responsibilities
The statements below have been prepared in connection with the Company's full
Annual Report for the year ended 31 December 2023. Certain parts are not
included in this announcement.
The Directors consider that the Annual Report, taken as a whole, is fair,
balanced and understandable and provides the information necessary for
shareholders to assess the Group's and Company position and performance,
business model and strategy.
Each of the Directors, whose names and functions are listed in the Directors'
Report, confirm that to the best of their knowledge:
- the Group Financial Statements, which have been prepared in
accordance with UK-adopted international accounting standards, give a true and
fair view of the assets, liabilities, financial position and loss of the
Group;
- the Company Financial Statements, which have been prepared in
accordance with United Kingdom Accounting Standards, comprising FRS 101, give
a true and fair view of the assets, liabilities, financial position of the
Company;
- the Strategic Report includes a fair review of the development and
performance of the business and the position of the Group and Company,
together with a description of the principal risks and uncertainties that it
faces; and
In the case of each Director in office at the date the Directors' Report is
approved:
- so far as the Director is aware, there is no relevant audit
information of which the Group's and Company's auditors are unaware; and
- they have taken all steps that they ought to have taken as a
Director in order to make themselves aware of any relevant audit information
and to establish that the Group's or Company's auditor are aware of that
information.
By order of the Board
Tufan Erginbilgic Helen McCabe
Chief Executive Chief Financial Officer
22 February 2024 22 February 2024
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