TIDMRR.
RNS Number : 3768G
Rolls-Royce Holdings plc
03 March 2015
3 March 2015
Rolls-Royce Holdings plc
Publication of the Annual Report 2014
Rolls-Royce Holdings plc announces that its Annual Report for
the year ended
31 December 2014 is now available on the Group's website at
www.rolls-royce.com
Printed copies of this document will be posted to shareholders
on or around 18 March 2015. A copy of the above document has been
submitted to the National Storage Mechanism and will shortly be
available for inspection at www.morningstar.co.uk/uk/NSM
In accordance with paragraph 6.3.5 of the Disclosure and
Transparency Rules we set out below a management report extracted
from the annual report in unedited full text. Accordingly, page
references in the text below refer to page numbers in the annual
report. Our final results announcement issued on 13 February 2015
contained a condensed set of financial statements.
The Annual General Meeting (AGM) of the Company will take place
at 11.00am on Friday 8 May 2015 at the Queen Elizabeth II Centre,
Broad Sanctuary, Westminster, London SW1P 3EE.
The financial calendar for the next 12 months is set out
below:
Financial calendar 2014-2016
Ex-entitlement to C Shares 23 April 2015
Record date for entitlement to C Shares 24 April 2015
AGM, Queen Elizabeth II Centre, London 11.00am 8 May 2015
Record date for C Share dividend 29 May 2015
Deadline for receipt of C Share elections 5.00pm 1 June 2015
Allotment of C Shares 1 July 2015
Payment of C Share dividend 1 July 2015
Payment of C Share redemption monies 3 July 2015
Purchase of ordinary shares for CRIP participants By 10 July 2015
Announcement of interim results 31 July 2015
Ex-entitlement to C Shares 22 October 2015
Record date for entitlement to C Shares 23 October 2015
Record date for C Share dividend 13 November 2015
5.00pm 1 December
Deadline for receipt of C Share elections 2015
2015 Financial year end 31 December 2015
Allotment of C Shares 4 January 2015
Payment of C Share dividend 4 January 2015
Payment of C Share redemption monies 6 January 2015
Purchase of ordinary shares for CRIP participants 13 January 2015
Preliminary announcement - 2015 full year
results February 2015
2015 Annual Report published March 2015
Enquiries:
Investor relations:
Jilinda Crowley, Acting Director - Investor Relations
Rolls-Royce plc
Tel: +44 (0)207 227 9282 jilinda.crowley@rolls-royce.com
Rolls-Royce designs, develops, manufactures and services
integrated power systems for use in the air, on land and at
sea.
We are one of the world's leading producers of aero engines for
large civil aircraft and corporate
jets. We are the second largest provider of defence aero engines
and services in the world.
For land and sea markets, reciprocating engines and systems from
Rolls-Royce are in marine,
distributed energy, oil & gas, rail and off-highway vehicle
applications. In nuclear, we have a strong
instrumentation, product and service capability in both civil
power and submarine propulsion
Financial Highlights
How did we perform in 2014?
2014 2013 Change
Order book GBPm 73,674 71,612 +3%
------- ------- -------
Underlying* revenue GBPm 14,588 15,505 - 6%
------- ------- -------
Underlying* profit before tax GBPm 1,617 1,759 - 8%
------- ------- -------
Underlying* earnings per share 65.3p 65.6p -0.3p
------- ------- -------
Full year payment to shareholders (excluding
buyback) 23.1p 22.0p +5%
------- ------- -------
Reported revenue GBPm 13,736 14,642 - 6%
------- ------- -------
Reported profit before tax GBPm 67 1,700 - 96%
------- ------- -------
Reported earnings per share 3.7p 73.3p -69.6p
------- ------- -------
Net cash GBPm 666 1,939 - 66%
------- ------- -------
Free cash flow GBPm 254 781 - 67%
------- ------- -------
* Underlying explanation is in note 2 on page 110.
2013 re-presented to reflect Energy as discontinued
operation.
All figures in the narrative of the Strategic Report are
underlying unless otherwise stated.
Group at a glance
The Group is organised into two Divisions: Aerospace and Land
& Sea.
Our vision is to create better power for a changing world.
We do this by developing world-leading technology, producing
highly efficient products and providing through-life services in
each of our chosen markets.
Employees (year average) Engineers (year
end)
54,100 15,500
Order book Countries
GBP73.7bn 50+
-----------------
Invested in R&D Patents applied
GBP1.2bn for
600
-----------------
Underlying Group Underlying Group
revenue profit before
GBP14,588 tax
GBP1,617m
-----------------
Aerospace
The Aerospace Division is a leading producer of aero engines for
large civil aircraft and corporate jets.
We are the second largest provider of defence aero engines and
services in the world.
We power more than 50 types of aircraft across civil and defence
markets and have over 29,000
engines in service.
Civil Aerospace Defence Aerospace
Underlying Revenue GBP6,837m Underlying Revenue GBP2,069m
Underlying Profit GBP942m Underlying Profit GBP366m
Land & Sea
The Land & Sea Division comprises Power Systems, Marine and
Nuclear.
Our Power Systems business includes the world-renowned MTU range
of reciprocating
engines. Marine has equipment installed on over 25,000
vessels.
We have a growing civil nuclear business and have 55 years of
experience in nuclear submarine
Propulsion.
Power Systems Marine
Underlying Revenue GBP2,720m Underlying Revenue GBP1,709m
Underlying Profit GBP253m Underlying Profit GBP138m
Nuclear Energy
Underlying Revenue GBP684m Underlying Revenue GBP724m
Underlying Profit GBP48m Underlying Profit GBP(3)m
Better power for a changing world
Our world is changing, the climate is altering and populations
are increasing. We need more power but not at any cost to society.
The world needs better power.
Rolls-Royce is committed to research and technology in order to
develop innovative and advanced power systems that can help.
Our vision is to deliver better power for a changing world. The
following pages illustrate how we are doing this in the air, on
land and at sea.
Better power in the air
World's most efficient large aero engine
Launch customer Qatar Airways took delivery of the first Trent
XWB-powered Airbus A350 XWB at the end of 2014. The Trent XWB is
the world's most efficient large aero engine and is 10% more fuel
efficient than the legacy engines it is designed to replace.
This first delivery signifies the start of a major engine
production programme for the Group. Customers have ordered over
1,500 Trent XWB engines, representing 49% of the Civil aerospace
order book.
Further and faster on less fuel
Rolls-Royce continues to be a market leader in powering large
corporate jets. The latest version of Cessna's flagship aircraft,
the Citation X+, entered service in June 2014, further cementing
our position in this important market sector. The improved version
of our AE 3007 engines on the Citation X+ delivers an increase in
thrust at take-off, coupled with a reduction in fuel burn - helping
people to fly further and faster but using less fuel to do it.
In addition, we strengthened our long-standing relationship with
Gulfstream when we were selected in 2014 to power its new G650ER
corporate jet.
Leading in latest transporter power
Rolls-Royce is the market leader in powering military transport
aircraft with 8,000 engines in service. The new Airbus A400M
transporter continued to enter service successfully during 2014.
The A400M is powered by the TP400 turboprop engine in which
Rolls-Royce is a major partner. We also secured a landmark
agreement during the year with Lockheed Martin for up to 600
engines to power its C-130J transporter.
Our fleet of T56 engines has accumulated over 200 million
operating hours having first entered service in 1954. We recently
introduced an upgrade for the T56 that a US Air Force study
predicts could deliver US$240 million in fuel savings for its fleet
through to 2040.
BETTER POWER ON LAND AND AT SEA
Local energy - naturally
Efficient, low-emission power systems are in demand across the
world for effective solutions to local energy needs. Through MTU
Onsite Energy, Rolls-Royce is providing reliable power for
applications such as healthcare, data centres, airports, farms and
independent power stations.
In Chile for example, two MTU Onsite Energy units powered by
Series 4000 engines are now generating 6,400MWh of electricity a
year from biogas produced by a local pig farm. These units are the
first in the country to generate electricity from a biogas plant.
For our customer they provide
eco-friendly and profitable power to 2,500 families in the
area.
Powerpacked on the railways
Power Systems is a major player in engines for the rail
industry. To date, over 20,000 MTU engines have been sold for use
in drive systems and electrical generation in this global market.
2014 marked the 90th year of MTU engines being supplied for rail
traction.
As well as the anniversary, this year also saw an agreement
reached with Polish rail vehicle manufacturer PESA for the supply
of up to 940MTU PowerPacks(R) to be used in railcars operated by
Deutsche Bahn. These PowerPacks are among the most advanced in the
industry, meeting all the latest European Union requirements on
emissions.
40 years of offshore flagships
The UT-Design series from Rolls-Royce is recognised worldwide as
the benchmark for the offshore industry. Today's vessels employ our
wave-piercing hull which improves efficiency and reduces fuel
consumption. All major propulsion systems are fully integrated with
the hull design to give optimum performance.
Rolls-Royce UT-Design vessels have been helping pioneer oil and
gas exploration and providing offshore support for 40 years. So
far, more than 800 have been built or are currently under
construction.
CHAIRMAN'S REVIEW
After a decade of strong performance and growth, 2014 was a year
of mixed fortunes for our Company.
There have been some real pluses and achievements alongside a
number of challenges that held back the Company's financial
performance.
During the course of the year, our order book reached its
highest ever level. We also celebrated the delivery of the first
Airbus A350 XWB to our launch customer Qatar Airways, powered by
Rolls-Royce Trent XWB engines. Our record of customer service
continues to improve, in Civil aerospace for example, we have
maintained a record of 100% on-time delivery to Airbus for the past
two years. In the same period our Marine business improved original
equipment on-time delivery by 11%, while spares delivery improved
across the Group. We still have more to do here and we are totally
committed to enhancing customer satisfaction with our products and
services. However, progress is encouraging and bodes well for the
future. Happy customers are a precondition for a successful,
long-term business.
Set against these achievements, 2014 was the first year in a
decade in which revenue and underlying profits, on a like-for-like
basis, did not grow. The Defence business was hit hard by
constraints in government expenditure. In our Land & Sea
Division, we faced tough market conditions, characterised by
pricing pressure and deferred or cancelled orders by customers,
particularly in the oil & gas, construction and mining
industries.
In addition to some difficult trading conditions, we did not
make as much progress as planned on improving our cost and cash
performance. We fully recognise this is a priority if we are to
provide attractive returns to shareholders as well as to fund the
investment requirements that will underpin long-term growth. Ours
is a business that requires significant up-front cash investment to
generate
long-term cash flow.
SHAREHOLDER DISTRIBUTIONS
Despite the short-term challenges, the fundamentals of the
business remain strong. Rolls-Royce is a growth company, well
positioned in long-term growth markets that offer the prospect of
attractive returns.
We know that shareholders do not invest in growth alone, they
invest for growth that's profitable. Our payment to shareholders of
23.1p reflects the confidence the Board has in the Company's
profitability and cash generation prospects. At the same time we
are committed to retaining a strong balance sheet. Civil aerospace
in particular, although an attractive long-term business, can still
be prone to external market shocks. Our customers, who depend on
our service support for periods of up to 25 years, both expect and
demand a financially resilient supplier.
STRATEGY
Rolls-Royce is intrinsically a long-term business and has to be
directed and managed as such. In Civil aerospace for example,
products take many years to develop, test and bring to market, and
are quite rightly subject to strict regulatory process. Revenue
from the sale of original equipment and subsequent aftermarket
services generate cash flows for decades.
The Board reviewed the Group's product portfolio and corporate
structure in light of these financial and investment
characteristics. This review led to the decision to divest our
Energy business and we completed its sale to Siemens in December.
At the same time we strengthened our position in the core division
of Land & Sea by completing the acquisition of the shares held
by Daimler in Power Systems. We are focused on the twin pillars of
Aerospace and Land & Sea because of their technology and
service model synergies and their combined ability to create shared
competitive advantage.
Our strong belief is that shareholders, as well as customers and
employees, will be best served if the Company continues to focus on
expanding its position in the highly attractive global markets for
power and propulsion. We have long-established and competitive
technology platforms, as well as customer relationships, in gas
turbines, reciprocating engines, nuclear services and controls. We
see substantial long-term value creation and growth potential from
these products, not least from aftermarket services where
Rolls-Royce has been a pioneer. There will be cyclicality and
volatility - external and internal risks are not insignificant -
however, our long-term aspiration is to build on our position as a
leading global provider of complex integrated power systems for use
in the air, on land and at sea.
INNOVATION
Innovation has been, and is, critical to the long-term success
of Rolls-Royce. We cannot depend on size and scale alone for
competitive advantage. We invest more than GBP1 billion a year in
research and
development (R&D) to ensure that we conceive, design and
deliver world-class technology that meets our customers' current
and future requirements.
Innovation is not just about R&D numbers and not just about
product technology. An increasing focus, for example, is on data
analytics and on control systems to reflect our customers'
increasing requirements for integrated solutions. Rolls-Royce has
long been an innovator in services and we will be looking to build
on this. I am especially proud of our collaborative approach to
innovation, particularly our work with leading universities across
the world on designated topics and technologies. We are quite clear
that we must improve our capital efficiency, our cost
competitiveness and our cash generation. However this will not be
at the expense of our strategic commitment to innovation and
development. These will be the drivers of long-term profitable
growth and value creation.
TALENT AND CAPABILITIES
I would like to touch on some of the key enablers that will be
required to deliver our strategy and our operational plans. In
particular, we need to attract, develop and retain outstanding
talent everywhere we operate, commercial and functional talent as
much as engineering talent. In the past year we recruited 354
graduates from 112 universities in 11 countries and we recruited
357 apprentices across the world. I am pleased that 26% of our
graduate recruits and 10% of our UK apprentices are female - not
good enough but progress. Our community programmes remain directed
towards encouraging young people, particularly females, to choose
science, technology, engineering and maths (STEM) subjects. We are
in the process of reviewing our training and leadership development
programmes, particularly for middle managers. We are also exploring
ways of accelerating and broadening career paths for our highest
potential talent across the world and for further increasing
diversity as an important element of changing and strengthening our
culture.
CORPORATE GOVERNANCE
The Board recognises that strong governance is a hallmark of
excellent companies. We remain committed to being a leader in
ethical behaviour and in environmental and social responsibility.
We are updating and upgrading our governance structures and
controls, with a particular focus on risk and compliance
procedures. The concerns about bribery and corruption involving
intermediaries in overseas markets, and the subsequent SFO enquiry,
together with wider speculation, have been a body blow to the
Company and we have responded accordingly. We have expanded
significantly our compliance team, invested heavily in training and
awareness building across the Group and strengthened our internal
controls. Our staff have received a new Global Code of Conduct,
together with mandatory training. We have established or expanded
our own offices in many international markets and reduced
dramatically the number of external intermediaries. Further details
are contained in the Safety and Ethics Committee Report on page 66.
We are grateful to Lord Gold who continues to advise us on
compliance and ethics best practice.
BOARD APPOINTMENTS AND CHANGES
Ruth Cairnie, formerly an executive vice president with Royal
Dutch Shell, joined the Board in September. In addition, Pamela
Coles, previously at Centrica, has joined Rolls-Royce as Company
Secretary. We are lucky to have both of them.
I was also very pleased to welcome David Smith to the Board.
David was appointed Chief Financial Officer (CFO) in November,
replacing Mark Morris who left the Company. David joined
Rolls-Royce at
the beginning of 2014 as the CFO of the Aerospace Division.
Prior to that, he had extensive international experience in
engineering and technology companies. A particular focus for David
will be to strengthen further our financial controls and management
information systems as well as improving our communications with
the investment community.
I would like to thank Mark Morris for his years of service and
contributions to the Company and to the Board. I would also like to
thank Iain Conn who stood down from the Board after nine years of
dedicated and exemplary service. He was succeeded as Senior
Independent Director by Lewis Booth.
After a successful career spanning 17 years with Rolls-Royce,
James Guyette will step down from the Board at the conclusion of
the 2015 Annual General Meeting (AGM) and retire from his role as
President and Chief Executive Officer of Rolls-Royce North America
on 31 May 2015. James has made a tremendous contribution to the
Company over many years. He has helped guide the business through a
period of significant expansion, especially in the North American
market. His energy, good humour and commitment to our customers
will be missed by us all.
John Neill has also indicated that he will step down from the
Board after just over six years as a Non-Executive Director and
will not therefore put himself forward for re-election at the 2015
AGM. I would like to thank John for his tremendous contribution to
the Board and his exemplary commitment to Rolls-Royce over the last
six years. He will be missed and we wish him well for the
future.
I am pleased to announce that Irene Dorner will be joining the
Board as a Non-Executive Director with effect from 27 July 2015.
She will also become a member of the Nominations and Governance
Committee and the Safety and Ethics Committee from the date of her
appointment. She brings a wealth of experience from international
banking along with a passion for driving culture change in large
organisations. Irene was CEO and president of HSBC USA until
December 2014 where she was responsible for all of HSBC's
operations in the US and played a key role in strengthening their
risk processes. During her 29-year career at HSBC, she held a
number of international roles. She was the first woman to lead HSBC
in Malaysia and launched its Islamic banking unit. She is a
passionate advocate of diversity and inclusion.
There have been some adjustments to the committee structure of
the Board, explained in more detail in my introduction to the
Directors' Report on page 56. Safety and Ethics have been combined
into one
committee under the chairmanship of Sir Frank Chapman, formerly
CEO of BG Group. I have also established a Science and Technology
Committee, under the chairmanship of Warren East, formerly CEO of
ARM Holdings. Science and technology are critical to the Company's
success and warrant the attention of a focused committee, in
addition to general board oversight.
We have benefited again from the insight and experience of our
International Advisory Board (IAB) the composition of which is
described on page 57. The role of the IAB is to provide contextual
understanding of international economic and political developments,
and to help management and the Board better understand long-term
geographical opportunities and risks. Members of the IAB are also
available to our senior management on specific issues and areas of
expertise. We are fortunate to have such a wealth of experience and
knowledge at our disposal. I am very grateful to them and in
particular to Lord Powell for his exemplary chairmanship of the
IAB.
I would like to thank my fellow board members for their
diligence and outstanding commitment to Rolls-Royce. I would also
like to thank John Rishton, his management team and all our
employees for their hard work and exceptional dedication in a
demanding year.
I hope this review demonstrates our understanding of the
concerns about Rolls-Royce's financial performance in 2014 and the
2015 outlook. We are totally focused on returning the Company to
its long-term trajectory of profitable growth and of superior
shareholder returns. We will continue to focus on the 4Cs of
Customer, Concentration, Cost and Cash to improve performance, and
we will strengthen our financial controls and communications. We
will sustain our commitment to innovation
and development.
The fundamentals of the business remain strong. They are
underpinned by our record order book and our expanding installed
equipment base that will generate value for years ahead. This is a
sound business with continued growth potential
Ian Davis
Chairman
12 February 2015
CHIEF EXECUTIVE'S REVIEW
Rolls-Royce is in business to deliver better power for a
changing world. The integrated power
systems that we develop, build and maintain, address the
increasing global demand for transport and energy.
As society becomes more integrated, population expands and the
world becomes more affluent, the requirement for the type of
advanced engineering solutions we provide will grow. These are
long-term
trends that require long-term investment and present us with the
opportunity for long-term profitable growth.
The path to growth will not always be smooth. For Rolls-Royce,
2014 has proved a challenging year for reasons that I will explain
in some detail. During 2014, Group underlying revenue was 6% lower
than in
2013 and underlying profit before tax declined by 8%. However,
the Group order book grew to a new record of GBP73.7 billion,
demonstrating the confidence our customers continue to place in our
technology and the growth that lies ahead. It is encouraging that
the Defence aerospace order book increased for the first time since
2010, with continued growth in the order books of Civil aerospace
and Power Systems.
In this review I will explain why we believe our business model
is robust, I will describe the transformation we are driving
through the Group and the reasons for our confidence in the future.
I will also outline the challenges we face and the decisive action
we are taking to accelerate a return to our long-term trend of
profitable growth.
So let me start with our business model. We invest in technology
in order to meet our customers' current and future needs. Through
constant innovation we create the opportunity to grow sales and
expand our market share. We earn revenue both from the sale of
original equipment and from servicing the power systems we produce.
We continually seek to reduce cost to remain competitive and to
generate the funds we need to invest in future growth.
We have evolved and simplified our strategy to focus on the core
areas of: customer, innovation and profitable growth.
Customer: we put customers at the heart of the organisation. We
understand their needs and then focus relentlessly on delivery.
Innovation: is at the core of Rolls-Royce and drives a culture
of continuous improvement. Delivering relevant innovation is
critical to meeting our customers' current and future needs.
Profitable growth: by focusing on our customers and presenting
them with a competitive portfolio of innovative products and
services, we create the opportunity for long-term profitable
growth.
This sharper focus enables us to drive our business model harder
and will, over time, deliver improving financial returns.
From its earliest days Rolls-Royce has addressed a range of
markets where demand exists for advanced engineering solutions. Our
1906 articles of association describe the business as producing
technology for use in the air, on land and at sea. More than a
century later this approach remains relevant and we run our
business through the two Divisions of Aerospace and Land & Sea
that you will see described in the pages of this Annual Report.
There is an industrial, commercial and strategic logic that ties
these two Divisions together and generates value for the Group.
Industrially, our knowledge of advanced engineering applies
across both our Divisions. World-class technology is required by
all of our customers and as the power systems we produce become
more sophisticated, a deep understanding of materials science,
electronics, data management and aftermarket services are
increasingly important in every part of the Group.
Commercially, we and our competitors recognise the requirement
of a broad portfolio and exposure to differing business and
investment cycles. It is not a coincidence that there is no pure
aerospace power system company in the world.
The scale represented by our two Divisions is important in
maintaining a strong balance sheet and protecting our investment
grade rating. Scale has also enabled us to maintain a global
R&D network comprising 31 University Technology Centres and
seven Advanced Manufacturing Research Centres. These facilities
envisage, develop and test emerging technologies that have
applications across our portfolio. Our breadth increases market
access and generates opportunity. For example, our Nuclear business
is relatively small but extends our influence and gives us access
to the highest levels of government internationally.
Strategically, our two Divisions address markets where long-term
growth is assured and where increasingly sophisticated engineering
solutions will be required. We believe both aerospace and land
& sea markets offer attractive returns and play to our
strengths.
The future growth of air travel is widely understood and
reflected in our GBP63 billion Civil aerospace order book. To give
this some perspective, in the past decade we have delivered 1,600
Trent engines. In the decade ahead we expect to deliver 4,000. All
of the engines in this expanding fleet will produce service
revenues that will extend for decades to come. Our Land & Sea
Division is well positioned to meet the requirements for cleaner
power that will be driven by future growth in world trade (90% of
which is carried by sea), urbanisation, population growth and
tighter environmental regulations.
Across the Group, we invest in technology that is continually
setting new standards in power efficiency and environmental
performance. The complexity of what we do creates barriers to entry
and generates new market opportunities. Put simply, there will be
significant long-term growth in demand for the complex integrated
power systems we deliver, and there are not many companies with the
ability to do what we can do.
Despite these fundamental strengths, in 2014 our short-term
performance has been negatively affected by a number of factors. In
Aerospace our Defence revenues fell by 20%, reflecting reduced
government defence spending in our main markets of North America
and Europe. In Land & Sea, slowing growth in a number of our
major markets including Continental Europe, South America and China
has caused some customers to delay or cancel orders. At the same
time, sharp declines in the price of oil and other commodities have
led customers to reduce or defer expenditure, especially in the oil
& gas, mining and construction industries.
In response to these adverse conditions, we have accelerated
progress on the 4Cs of Customer, Concentration, Cost and Cash -
with a particular emphasis on cost. This decisive action is driving
a transformation of the business that will, in time, make us a
stronger Group and hasten our return
to profitable growth.
On Customer: we continue to make good progress improving
quality, delivery, reliability and responsiveness; the
characteristics our customers tell us they value most. The results
can be seen across a wide range of programmes. At Group level there
has been a further improvement in delivery times - particularly for
spare parts. In Aerospace, the Trent 1000 that powers the Boeing
787 Dreamliner has achieved an industry-leading 99.9% engine
dispatch reliability after completing over 500,000 flying hours in
service. Since launch, we have doubled the time on wing for both
our Trent 700 and Trent 800 fleets. In our Civil Small and Medium
Engines business, we achieved a 57 percentage points improvement in
restoring operational availability for business jets in the past
year.
Recognising the progress we have made, Airbus has presented us
with its Supply Chain and Quality Improvement Award. The US
Government's Defense Logistics Agency recognised Rolls-Royce as a
'first tier supplier' from among 153 companies and we were awarded
joint first place by Aviation International News for the quality of
our business aircraft support.
In Land & Sea, our delivery on time to Marine customers has
improved by 33 percentage points since 2012. Marine also signed its
first commercial long-term service agreement. As the power systems
we deliver in Land & Sea become more complex, we see further
opportunities to expand our aftermarket activities, building on the
data and service capabilities we have developed in Aerospace. In
Power Systems, we opened an additional logistics centre in
Singapore, enabling a 5% improvement in the availability of spare
parts and setting a new standard for customer service.
Improving performance in this way strengthens the relationship
we have with our customers, and generates opportunities for us to
secure additional business.
Concentration: means deciding where we want to invest and where
not to.
In August, we were pleased to acquire Daimler's 50% shareholding
in Rolls-Royce Power Systems for GBP1.94 billion. Power Systems
adds scale and capability to our reciprocating engines portfolio.
It has outstanding technology, operates in long-term growth markets
and has proved a valuable addition to our Land & Sea
Division.
We also divested a significant business in December, completing
the sale of our Energy gas turbines and compressor business to
Siemens. This is a business that has excellent technology and a
talented workforce, but it lacks the scale required to prosper as
part of Rolls-Royce. Siemens has a far bigger power generation
business and is a more suitable owner. The sale generated proceeds
of around GBP1 billion. We are returning this to shareholders by
way of a share buyback that started in December 2014.
Turning to Cost: we have taken action to improve cost
performance in every part of the business and in every cost
category. We have made good progress in some areas and as a result,
Group gross margins improved by 1.7 percentage points in 2014. In
Defence, we have improved margins despite declining revenue. In
Land & Sea, we closed five plants and are rationalising other
parts of the business. For example, we are consolidating production
of steering gear in Norway and waterjets into Finland. We are
driving down cost by improving quality, simplifying logistics,
reducing waste, and adopting processes that allow us to make things
better and faster.
In November, we announced a restructuring programme in our
Aerospace Division and central functions, which is expected to
reduce headcount by 2,600. By the end of 2014, 545 people had left
the business, with the majority of the reductions expected in 2015.
This programme is expected to result in restructuring charges of
around GBP120 million, of which GBP56 million was recognised in our
2014 results.
We anticipate annualised cost benefits of around GBP80 million
from 2016 onwards, with GBP50 million in benefits expected in 2015.
Our total Aerospace 2014 restructuring activities cost GBP164
million (of which GBP139 million was underlying).
However, in a complex and highly-regulated business, we
recognise that it will take some time for the full benefit of our
cost programmes to feed through. There are also a number of
headwinds in our Civil
aerospace business associated with our future growth. For
example, we have invested in the capacity required to deliver our
record order book, but delay in a number of our customers' major
programmes has meant some of this new capacity has come on stream
before it is needed, leaving us with under-utilised production
facilities. We have also constructed a number of new world-class
facilities to replace older, less productive plants. For a period
of transition we are carrying the cost of both the old
and new facilities.
Group restructuring costs in 2014 were GBP188 million, of which
GBP149 million was underlying. Over the past two years, the Group
has reduced indirect headcount by 18%. We expect Group underlying
restructuring costs to be between GBP90 and GBP100 million in
2015.
Cost performance will continue to be a major focus, and as we
rationalise and transform the Group, we have targeted a 20%
reduction in our footprint and a doubling of our lower-cost country
sourcing by 2020. We are now accelerating progress towards these
targets.
Cash: we continue to focus on improving our free cash flow,
particularly in the face of near-term headwinds. Our programmes to
reduce product and aftermarket costs, lower our headcount and to
reduce our footprint all require upfront investment but will
deliver cost and cash benefits in the medium term. As revenue
increases, we expect to reduce our capital expenditure and R&D
as a percentage of sales. The customer progress highlighted earlier
is improving our operational performance.
Combined with increasing volumes, this will enable us to reduce
our inventory buffers. While a great deal of attention has been
focused, quite rightly, on the financial performance of the Group,
it is important to recognise significant achievements in 2014 that
will support the Group's future profitable growth.
OUR FIVE PRIORITIES FOR THE GROUP
DURING 2014 WE OUTLINED THE PRIORITIES FOR THE BUSINESS GOING
FORWARD.
FIX THE BASICS (THE 4Cs)
This is about improving the bedrock of the organisation:
focusing on our customers and their needs; concentrating on what we
are good at; attacking cost across the Group and managing our cash
position effectively.
CULTURE
We want a business-orientated, innovative and cost-conscious
culture, one that understands our customers and delivers on their
behalf. We must have a culture where ethical behaviour is fully
embedded, so that we don't just win but win right.
CIVIL WIDEBODY
We are building on success. In the last decade we delivered
1,600 Trents and in the next we will deliver 4,000. We power over
50% of new widebody aircraft. Our next generation engines, Advance
and UltraFan(TM), will help maintain our leading market
position.
CIVIL NARROWBODY
Narrowbodies represent 70% of the civil aircraft market by
volume and 50% by value. We have the requisite skills and
technology to return to this market and are determined to do so
when the opportunity arises. This is important in the longer term,
not just because of the scale this market segment offers but also
because of the chance it presents to develop greater customer
intimacy.
MEDIUM-SPEED RECIPROCATING ENGINES
Medium-speed reciprocating engines power the vast majority of
the marine vessels that we design and equip. We have world-class
technology, but it is characteristic of this industry that the
engine supplier is particularly well placed to pull through other
technologies, so our lack of scale in medium-speed engines confers
a disadvantage we need to address.
In Aerospace in December, we were delighted to celebrate the
first delivery of the Trent XWB, powering the new Airbus A350 XWB
for launch customer Qatar Airways. The Trent XWB is the most fuel
efficient large aero engine operating in the world today. I would
like to congratulate everyone at Rolls-Royce who has worked so hard
over many years to support the successful delivery of this
exceptional aircraft, for which Rolls-Royce is the sole engine
provider.
At the Farnborough International Airshow in July, we announced
the seventh member of the Trent engine family, the Trent 7000, that
will power the new Airbus A330neo. This new engine will incorporate
technology from our most recent Trents and will deliver a 10%
improvement in specific fuel consumption and halve the noise energy
output compared to the current engine on the A330. Rolls-Royce will
be the exclusive engine supplier on the A330neo, due to enter
service in 2017.
We have continued to bring new world-class facilities on stream
in 2014. These include the opening of our new advanced disc
manufacturing facility at Washington in the UK and the first
production aerofoil from our new Advanced Aerofoil Manufacturing
Facility at Crosspointe, Virginia in the US. 2014 saw the
inauguration of our new large engine test bed in Dahlewitz, Germany
and the opening of a new marine customer training centre outside
Rio de Janeiro in Brazil.
We marked a major milestone in the development of carbon
titanium (CTi) fan blades with the launch of a test flight
programme on board a Boeing 747 flying test bed. CTi technology
delivers lighter fan blades that will be incorporated into future
aero engines. Combined with a composite fan casing, it forms a
system that can reduce weight by up to 1,500lb per aircraft, the
equivalent of seven passengers.
In Land & Sea we have also continued to strengthen our
portfolio, bringing new technology to market across the Division.
In September, we unveiled the first of a new family of medium-speed
reciprocating engines for use on land and at sea. The new Bergen
B33:45 offers a 20% increase in power per cylinder, while reducing
fuel consumption, emissions and operating costs. It is our first
new product to combine the engineering strengths of our traditional
Bergen engines operation and our new Power Systems business.
Because of its greater power range, the new engine increases our
addressable market in medium-speed engines by 20%.
In the naval market two important new ships powered by our MT30
gas turbines were officially named: the multi-mission destroyer USS
Zumwalt and the Royal Navy aircraft carrier Queen Elizabeth.
In the rail sector, Power Systems has developed an MTU hybrid
PowerPack that generates additional power through the braking
control system. This technology offers a fuel saving of up to 25%
with a
proportional reduction in emissions.
For off-highway vehicles, MTU's latest Series 4000 engine has
improved fuel consumption by 5%. For a typical application this can
represent a saving of up to 100,000 litres of fuel and reduction of
350 tonnes of CO(2) emissions each year.
In our Nuclear business, we were encouraged that, in October,
the European Commission approved the construction of the first new
commercial nuclear power station to be built for a generation in
the UK, at Hinkley Point in Somerset. The Commission concluded that
new nuclear power is vital for Britain's energy security and will
be key to reducing carbon emissions from the UK's electricity
industry. Hinkley Point C is the first of at least 11 new reactors
planned for the UK, for which Rolls-Royce is well positioned to
supply components, systems and engineering services.
As the Chairman said, we continued to strengthen the governance
of the Group. We expect the highest standards of behaviour from our
employees and we have been explicit that we will not tolerate
business misconduct of any sort. The Serious Fraud Office
investigation into concerns about bribery and corruption involving
intermediaries in overseas markets continues and we are cooperating
fully with the investigating authorities. Lord Gold is heading a
review of our process and procedures regarding compliance and
business ethics.
This year our Global Code of Conduct has been ranked by the Red
Flag Group as third among those within the FTSE 100 companies that
were assessed. Following the roll-out of our Global Code,
dilemma-based ethics training has been deployed to all our
employees to ensure continuing attention on this important topic.
Training in ethics and compliance will continue in 2015. All
employees will be required to certify annually that they have
completed their training. We will be setting similar standards for
our supply chain through the publication of our Supplier Code of
Conduct.
Responding to the difficult circumstances of 2014 has required
fortitude and resilience from the talented men and women who work
for Rolls-Royce. I would like to thank them for their hard work and
for the enthusiasm I encounter wherever in the Company I travel. I
am grateful to our suppliers and partners who make such an
important contribution to Rolls-Royce and share our commitment to
continuous improvement. I would like to thank our customers who
continue to place their faith in our technology. Meeting their
current and future needs is our highest priority.
This year we held our inaugural Trusted to Deliver Excellence
Awards to recognise Rolls-Royce teams who have achieved outstanding
results for their customers. The imagination, passion and ability
to execute demonstrated by all the finalists is inspiring. You can
read more about these awards on pages 42 to 43.
Returning our Group to profitable growth will demand firm
resolve and commitment and will take some time. However, as I have
described in this review, the business fundamentals of Rolls-Royce
remain sound, we have the right strategy and we are clear about the
action that is required. Everything I know about this great Company
makes me confident that the team will rise to
the challenge.
John Rishton
Chief Executive
12 February 2015
INNOVATION AND TECHNOLOGY
Technology and innovation are at the heart of Rolls-Royce. We
anticipate technology then
create products and services that our customers need ahead of
market requirements.
In 2014, we spent GBP1.2 billion gross in R&D and filed for
600 patents.
ENGINEERING STRENGTH
Our 15,500* engineers, along with our supply chain,
commercialise and deploy the continuous stream of science developed
by our university partners into technology then products.
Competitive technology
comes from combining great people, tools and processes. These
fundamental building blocks are used across our two Divisions,
Aerospace and Land & Sea. We also continually invest in new
talent and in 2014 we recruited 354 graduates (254 of which went
into engineering) and 357 apprentices. Technical people are the
lifeblood of the Company. Our investment in technical and
leadership training allows us to continuously develop world-class
professionals.
INNOVATION
We have a track record over many years of creating new products
and services and we continue to strive to be leading edge in
everything we do. Innovation cannot be left to chance. It needs to
be encouraged, managed, selected and pulled through into products
and services. Harnessing the total intellectual power of our people
takes enthusiasm and effort. Our new Innovation Portal, Big Ideas
Forums and Open Innovation challenge have been successful and each
year we reward the most innovative ideas at our Sir Henry Royce
Technology Awards. We look at innovation in terms of technology and
services and also in the way we conduct engineering and
manufacturing. This ensures that we continuously simplify and
improve processes in order to be efficient and remove waste.
RESEARCH AND DEVELOPMENT
The strength of our current product portfolio results from
consistent and long-term investment in R&D and our ability to
bring technology to industrial applications. In addition to our
extensive in-house technology capability, we have partnerships with
world-leading universities in order to create new technology. We
continuously invest in our global network of 31 world-class
University Technology Centres (UTCs) where we build the foundation
for the next generation of products. These technologies feed into
our demonstration programmes, where robust validation takes place
before proceeding in a structured and controlled way into new
production.
DEMONSTRATOR PROGRAMMES
During 2014, progress was made on our many new technologies, for
example, the carbon titanium fan has flown for the first time this
year in the advanced low-pressure systems (ALPS) demonstrator, a
modified Trent. The composite fan system has been developed with
the help of four UTCs and five AMRCs and will offer over 750lbs of
weight saving on our future large engines. We have demonstrated a
new mobile MTU gas engine which has been in development since 2013.
This high-speed gas engine offers a fuel alternative whilst
maintaining the level of performance expected from our high-speed
diesel engines. At our Dahlewitz site in Germany, we are building a
new test facility for power gearboxes. These gearboxes will be used
on the next generation UltraFan engine and should offer a 25%
improvement in fuel efficiency when compared to the Trent 700.
OUR 'VISION' APPROACH
WE LOOK AT TECHNOLOGY ACQUISITION OVER A 5, 10 AND 20-YEAR
HORIZON.
VISION 5
Vision 5 describes near-term technologies that are ready to
introduce into our products. For instance, this year we have
successfully demonstrated our low observability propulsion and
exhaust system integration capability on the BAE Systems Taranis
unmanned aerial vehicle. On reciprocating engines our dual-fuel
injector design enables pre-mixed high pressure gas combustion and
allows the operator to switch from gas to liquid fuel during
operation.
VISION 10
Vision 10 describes leading-edge, validated technologies for
application in the 'medium term'. Most of these are at
demonstration level today and will feature in the next generation
of products. For example, the lean burn combustion system for aero
gas turbines has been in development for some years and offers a
60% reduction in the pollutant NOx and particulate matter (smoke)
compared to year 2000 levels. It will reach flight test in 2015 and
is supported by the European Clean Sky Programme.
VISION 20
Vision 20 describes emerging, or as yet unproven, technologies
which may be applied across our product range in both Aerospace and
Land & Sea. For example, we are developing concepts for
autonomous ships to reduce operating costs and radically simplify
onboard facilities.
MARKET OUTLOOK
The Group has identified markets where our skills and technology
add value for our customers and deliver value for shareholders. As
a long-term business we assess the market potential over a 20-year
horizon.
Through the customer-facing businesses that make up our two
Divisions, we are delivering better
power in the air, on land and at sea.
Our technology, skills and customer insight position us to have
the right products and services today and for the future.
AEROSPACE DIVISION
CIVIL AEROSPACE
We estimate that the global civil engine market will be worth
approximately US$1,900 billion over the next 20 years, with
US$1,250 billion being for original equipment (OE) and US$650
billion for aftermarket services. Over half of this value comprises
engines for twin-aisle airliners and large business jets.
DEFENCE AEROSPACE
The defence market opportunity over the next 20 years is
US$125-150 billion in OE and US$225-250 billion in services.
LAND & SEA DIVISION
POWER SYSTEMS
We estimate the off-highway reciprocating engine markets we
address offer an opportunity of GBP500 billion over the next 20
years for OE. The total service-related market will offer a
potential of around a third of that OE value, or GBP150
billion.
MARINE
We forecast a business opportunity (excluding reciprocating
engines) across the offshore, merchant and naval market segments
over the next 20 years of GBP170 billion for OE and GBP80 billion
for associated services.
NUCLEAR
The demand for mission-critical equipment, systems and
engineering services for civil nuclear could reach GBP220 billion
over the next 20 years, while the demand for associated reactor
support services could amount to GBP140 billion over the same
period.
STRATEGY
We are a power systems company competing globally. We win in our
chosen markets by focusing on, and connecting, three powerful
themes: customer, innovation and profitable growth.
CUSTOMER
Placing the customer at the heart of our organisation is key. We
listen to our customers, share ideas, really understand their needs
and then relentlessly focus on delivering our promises.
INNOVATION
This is our lifeblood. We continually innovate to remain
competitive. To drive innovation, we create the right environment -
curious, challenging, unafraid of failure, disciplined, openminded
and able to change with pace. Most importantly, we ensure our
innovation is relevant to our customers' needs.
PROFITABLE GROWTH
By focusing on our customers and offering them a competitive
portfolio of products and services, we create the opportunity to
grow our market share. We have to make sure that we are not just
growing, but growing profitably. That means ensuring our costs are
competitive. We look after our cash and we win right.
PEOPLE
Our people are the key enabler of our strategy. We are committed
to recruiting, developing and retaining the best and to creating a
climate for success. We are building a business-orientated,
innovative and cost-conscious culture, where our people feel
connected to the needs of our customers, the needs of our
shareholders and the needs of our broader communities.
BUSINESS MODEL
We bring advanced technology to market through integrated power
and propulsion systems and services for use in the air, on land and
at sea.
Engineering excellence is a fundamental source of competitive
advantage across the Group. Our methods, processes and experience
enable us to deliver complex, high-value programmes. Our ability to
optimise and integrate entire systems is a core competence informed
by a close understanding of customer needs and decades of domain
knowledge.
Addressing complementary markets from a shared capability and
technology base brings breadth and scale, diversity and balance,
enabling us to invest efficiently, and providing the resilience
required to offset new project risk. Our manufacturing model is
consistent across the Group; we only produce parts ourselves where
we can create and sustain a competitive advantage.
The balance of our supply chain is built around close and
long-standing relationships with key partners and suppliers, a
model that provides flexibility of capacity and secures access to
world-class capability. Some partners, as well as supplying parts,
share in the risks and rewards of the whole programme from research
and development to manufacture, through risk and revenue sharing
arrangements.
Services are an essential part of our business, building
customer relationships and providing revenue stability by
moderating the effects of new equipment order cycles. Services
offer strong growth potential and the opportunity to align
incentives through long-term service contracts, providing
visibility of costs to our customers and helping us secure future
revenues. This is particularly the case in Civil aerospace where
contractual and air safety considerations mean that we have rights
that secure a large part of the aftermarket spare parts business
even where we do not have a TotalCare(R) agreement.
The operation of our business model over decades has resulted in
a substantial and growing installed base of engines at all stages
of the product life cycle. Cash flows today from investments made,
in some cases many years ago, support investment for the future. We
are focused on making this proven business model more effective
through relentless focus on costs to generate the funds to sustain
the investment necessary to remain competitive.
CONNECT TECHNOLOGY TO CUSTOMER NEEDS
Our deep understanding of customer needs drives the development
of new technologies and products.
ALLOCATE CAPITAL TO NEW GROWTH
We operate a disciplined capital allocation process across the
Group. We invest only where we believe we can create and sustain a
competitive advantage and achieve a good return for
shareholders.
INVEST IN R&D AND SKILLED PEOPLE
Developing and protecting leading-edge technology and deploying
it across our businesses allows us to compete on a global basis and
creates high barriers to entry.
DESIGN AND MAKE WORLD-CLASS PRODUCTS
We differentiate on performance. We win and retain customers by
developing and delivering products that provide more capability and
offer better through-life value than those of our competitors.
SECURE AND MAXIMISE SERVICE OPPORTUNITY
Our equipment is in service for decades. Our deep design
knowledge and in-service experience ensures that we are best placed
to optimise product performance and availability.
GROW MARKET SHARE AND INSTALLED BASE
Our substantial order book for both original equipment and
services provides good visibility of future revenues and provides a
firm foundation to invest with confidence.
CHIEF FINANCIAL OFFICER'S REVIEW
As I reflect on my new role as Chief Financial Officer at
Rolls-Royce, I would like to underline the progress we've made in
2014 and outline my priorities for 2015 and beyond.
This has clearly not been an easy year. However, the Group is
fundamentally strong. We are in the enviable position of having a
GBP74 billion order book of products and services that will deliver
revenue for decades to come. We operate in markets with excellent
long-term growth dynamics and high barriers to entry. We are valued
by our customers. Our innovative team is creating products at the
forefront of technology. We have set out firmly on the path to
transform our industrial structure. Our objective now is to
translate these product successes, growth markets and internal
transformation into attractive returns and cash flow in the medium
term.
In 2014, we made good progress on our business transformation,
delivering both in-year improvements on our 4Cs such as customer
delivery performance and creating the medium-term platform for
improving margins and cash flow.
For example, in Aerospace we have reduced our aftermarket costs
for our volume engine, the Trent 700, and also made good progress
on our corporate jet and defence contracts. Over the past two
years, the Group has reduced indirect headcount by 18%. We also
sold our Energy gas turbines and compressor business to Siemens on
1 December 2014.
Summary
2014 2013 Change
Order book GBPm 73,674 71,612 +3%
Underlying revenue* GBPm 14,588 15,505 - 6%
Underlying profit before tax* GBPm 1,617 1,759 - 8%
Return on sales 11.5% 11.8% - 0.3pp
Underlying* earnings per share 65.3p 65.6p - 0.3p
Full year payment to shareholders 23.1p 22.0p +5%
Reported revenue GBPm 13,736 14,642 - 6%
Reported profit before tax GBPm 67 1,700 - 96%
Reported earnings per share 3.7p 73.3p - 69.6p
Net cash GBPm 666 1,939 - 66%
Free cash flow GBPm 254 781 - 67%
* Underlying explanation is in note 2 on page 110
2013 re-presented to reflect Energy as a discontinued
operation.
All figures in the narrative of the Strategic Report are
underlying unless otherwise stated.
We know we need to accelerate our efforts on cost and cash. In
November, we announced a restructuring and cost reduction plan that
will deliver GBP80 million in annualised savings and we will make
further announcements at the appropriate time. We will also look to
reduce our facilities' footprint, increase our activities in
lower-cost countries, pursue further aftermarket cost reductions
and continue to make progress on inventory, investment efficiency
and cash management.
A personal priority is strengthening and streamlining our
financial controls and business information. We have excellent
accounting and technical skills, which are critical in our complex
business. I will be working to deliver financial and nonfinancial
KPIs that are more forward-looking and have a greater focus on the
business fundamentals which are driving our cash and profit
performance.
I will also be working to ensure that our communications with
shareholders are clear, consistent and helpful. As part of this, we
have started to provide a medium-term outlook and will continue to
look at additional ways to communicate more clearly. Our share
buyback programme is already and will return to shareholders GBP1
billion in proceeds from the sale of our Energy gas turbines and
compressor business.
Amid these changes there are certain fundamentals that we will
continue to support. These include:
-- maintaining a strong balance sheet that gives confidence to
our customers and enables our business to invest in future
programmes;
-- continuing to refine our capital allocation processes and
invest in R&D to develop the next generation of products;
and
-- managing risk prudently including hedging our foreign
currency exposures to reduce volatility.
There's no doubt that the recent changes in oil and commodity
prices, currencies and geopolitical strains have increased
uncertainty. We therefore need to plan cautiously while
accelerating our business improvement activity. In 2015, we expect
underlying revenue to be flat overall and underlying profit before
tax to be down somewhat, reflecting the present phase of our
business transformation. We also expect free cash flow to be lower
given our restructuring spend.
Looking ahead, our product portfolio transition will see rising
deliveries of new civil engines that will significantly increase
our installed base. We will also continue to grow our Land &
Sea businesses. This and our investment in new technology and
industrial transformation will constrain near-term margins and cash
generation. However, as we move towards the medium term and this
growth and investment phase moderates, we expect both margins and
cash conversion to improve in line with our
medium-term guidance.
FINANCIAL REVIEW
2014 has been a mixed year during which underlying Revenue fell
for the first time in a decade, Reflecting reduced spending by our
defence customers, macro-economic uncertainty and falling commodity
prices.
GROUP UNDERLYING INCOME STATEMENT
GBP million
2014 2013 Change
-------------------------- ------- ------- -------
Revenue 14,588 15,505 (917)
-------------------------- ------- ------- -------
Profit before financing 1,678 1,831 (153)
-------------------------- ------- ------- -------
Net financing (61) (72) 11
-------------------------- ------- ------- -------
Profit before taxation 1,617 1,759 (142)
-------------------------- ------- ------- -------
Taxation (387) (434) 47
-------------------------- ------- ------- -------
Profit for the year 1,230 1,325 (95)
-------------------------- ------- ------- -------
Earnings per share (EPS) 65.31p 65.59p (0.28)
-------------------------- ------- ------- -------
Payments to shareholders 23.1p 22.0p 1.1p
-------------------------- ------- ------- -------
Gross R&D investment 1,249 1,118 131
-------------------------- ------- ------- -------
Net R&D charge 755 624 131
-------------------------- ------- ------- -------
Revenue Profit before financing
-------------------------------- ------------------------- ----------------------------
GBPmillion 2014 2013 change 2014 2013 change
-------------------------------- ------- ------- ------- -------- -------- --------
Civil 6,837 6,655 182 942 844 98
-------------------------------- ------- ------- ------- -------- -------- --------
Defence 2,069 2,591 (522) 366 438 (72)
-------------------------------- ------- ------- ------- -------- -------- --------
Aerospace Division 8,906 9,246 (340) 1,308 1,282 26
-------------------------------- ------- ------- ------- -------- -------- --------
Power Systems 2,720 2,831 (111) 253 294 (41)
-------------------------------- ------- ------- ------- -------- -------- --------
Marine 1,709 2,037 (328) 138 233 (95)
-------------------------------- ------- ------- ------- -------- -------- --------
Nuclear 684 667 17 48 10 38
-------------------------------- ------- ------- ------- -------- -------- --------
Intra-segment (155) (147) (8) (13) 2 (15)
-------------------------------- ------- ------- ------- -------- -------- --------
Land & Sea Division (excluding
Energy) 4,958 5,388 (430) 426 539 (113)
-------------------------------- ------- ------- ------- -------- -------- --------
Energy 724 871 (147) (3) 64 (67)
-------------------------------- ------- ------- ------- -------- -------- --------
Land & Sea Division 5,682 6,259 (577) 423 603 (180)
-------------------------------- ------- ------- ------- -------- -------- --------
Central costs (53) (54) 1
-------------------------------- ------- ------- ------- -------- -------- --------
Group (excluding Energy) 13,864 14,634 (770) 1,681 1,767 (86)
-------------------------------- ------- ------- ------- -------- -------- --------
Group 14,588 15,505 (917) 1,678 1,831 (153)
-------------------------------- ------- ------- ------- -------- -------- --------
Underlying revenue reduced GBP0.9 billion to GBP14.6 billion, a
reduction of 6%, of which 3% is due to adverse year-on-year foreign
exchange (FX) rate movements. The remaining reduction reflects a 5%
decline in original equipment (OE) revenue and a 1% decline in
services revenue. Underlying services revenue continues to
represent around half (48%) of the Group's underlying revenue.
Group services revenue included increases in Defence aerospace and
Power Systems partially offset by reductions in our Marine, Nuclear
and Energy businesses.
Underlying profit before financing and taxation reduced 8% to
GBP1.7 billion. We saw a negative impact from lower volumes,
especially in Defence and Land & Sea, increased R&D
investment (GBP140 million) and higher restructuring charges
(GBP100 million), a one-off Marine charge (GBP30 million), and
adverse FX (GBP49 million). These factors were offset by an
improved trading margin which included approximately GBP150 million
benefit from improved retrospective TotalCare contract
profitability (GBP110 million deterioration in 2013), reflecting
lower cost, changing operating patterns and reduced contract risk.
Trading margins in Defence also improved, driven by both cost
reduction action and an improved mix. In Land & Sea we incurred
a loss at our Bergen subsidiary (GBP33 million), reflecting weaker
trading performance. Lower bonus and share incentive costs resulted
in a saving of GBP178 million.
Further discussion of trading is included in the business
reviews on pages 32 to 41.
Underlying financing costs reduced by 15% to GBP61 million
reflecting reduced financial risk and revenue sharing arrangements
(RRSAs) liabilities and other improvements.
Underlying taxation of GBP387 million represents an underlying
tax rate of 23.9%, compared with 24.7% in 2013.
Underlying EPS was marginally lower at 65.31p, with the impact
of the lower underlying profit after tax largely offset by the
improvement in the underlying tax rate and a lower non-controlling
interest in Power Systems, following Daimler's exercise of the put
option in April 2014.
At the Annual General Meeting on 8 May 2015, the directors will
recommend an issue of 141 C Shares with a total nominal value of
14.1 pence for each ordinary share. Together with the interim issue
on 2 January 2015 of 90 C Shares for each ordinary share with a
total nominal value of 9.0 pence, this is the equivalent of a total
annual payment to ordinary shareholders of 23.1 pence for each
ordinary share. Further details are on page 162.
Net underlying R&D charged to the income statement increased
by 21% to GBP755 million, reflecting a combination of increased net
investment of GBP98 million and lower net capitalisation of GBP21
million (due to the phasing of major new programmes, in particular
the certification of the Trent XWB-84) and GBP12 million lower net
deferral of RRSA entry fees - see page 115. The net investment
spend represents 5.8% of Group underlying revenue, although it is
expected that this will reduce slightly in the future towards the
longer-term target of around 5%. Our gross R&D expenditure of
GBP1.2 billion includes funded programmes.
PROFIT BEFORE TAXATION
GBPmillion 2014 2013
------------------------------------------------- -------- ------
Underlying 1,617 1,759
------------------------------------------------- -------- ------
Mark-to-market adjustments on derivatives (1,254) 217
------------------------------------------------- -------- ------
Movements on other financial instruments (87) (251)
------------------------------------------------- -------- ------
Effect of acquisition accounting (142) (265)
------------------------------------------------- -------- ------
Exceptional restructuring (39) -
------------------------------------------------- -------- ------
Acquisitions and disposals 8 335
------------------------------------------------- -------- ------
Post-retirement schemes (29) (90)
------------------------------------------------- -------- ------
Other (including discontinued operations) (7) (5)
------------------------------------------------- -------- ------
Reported (2013 restated to exclude discontinued
operations) 67 1,700
------------------------------------------------- -------- ------
REPORTED PROFIT BEFORE TAX
Consistent with IFRS and past practice, the Group provides both
reported and underlying figures. We believe underlying figures are
more representative of the trading performance, by excluding the
impact of year-end mark-to-market adjustments, principally the
GBP:USD hedge book. In addition, post-retirement financing and the
effects of acquisition accounting are excluded. The adjustments
between the underlying income statement and the reported income
statement are set out in more detail in note 2 to the Financial
Statements. This basis of presentation has been applied
consistently.
The mark-to-market adjustments are principally driven by
movements in the GBP:USD exchange rate which moved from 1.65 to
1.56 during 2014.
Movement on other financial instruments primarily relate to the
change in value of the put option on the Power Systems
non-controlling interest, which has now been exercised.
The effects of acquisition accounting in accordance with IFRS 3
are excluded from underlying profit so that all businesses are
measured on an equivalent basis.
Costs associated with the substantial closure or exit of a site,
facility or activity are classified as exceptional restructuring
and excluded.
Profits and losses arising on acquisitions and disposals during
the year are excluded.
Net financing on post-retirement schemes is excluded from
underlying profit and, in 2013, the cost of providing a
discretionary increase to pensions was also excluded.
Appropriate tax rates are applied to these adjustments, the net
effect of which was a GBP239 million reduction in the reported tax
charge (2013 GBP54 million reduction). The adjustment includes a
GBP64 million reduction in the value of recoverable advance
corporation tax recognised. A reconciliation of the tax charge is
included in note 5.
SUMMARY BALANCE SHEET
GBPmillion 2014 Other changes Energy disposal 2013
(note 25)
-------------------------------------- -------- -------------- ---------------- --------
Intangible assets 4,804 (77) (106) 4,987
-------------------------------------- -------- -------------- ---------------- --------
Property, plant and equipment 3,446 241 (187) 3,392
-------------------------------------- -------- -------------- ---------------- --------
Joint ventures and associates 539 (6) (56) 601
-------------------------------------- -------- -------------- ---------------- --------
Net working capital (1,134) 229 (393) (970)
-------------------------------------- -------- -------------- ---------------- --------
Net funds 666 (1,269) (4) 1,939
-------------------------------------- -------- -------------- ---------------- --------
Provisions (807) (108) 34 (733)
-------------------------------------- -------- -------------- ---------------- --------
Net post-retirement scheme
surpluses/(deficits) 555 1,348 - (793)
-------------------------------------- -------- -------------- ---------------- --------
Net financial assets and liabilities (855) 732 - (1,587)
-------------------------------------- -------- -------------- ---------------- --------
Other net assets and liabilities (827) (294) - (533)
-------------------------------------- -------- -------------- ---------------- --------
Net assets 6,387 796 (712) 6,303
-------------------------------------- -------- -------------- ---------------- --------
Other items
-------------------------------------- -------- -------------- ---------------- --------
USD hedge book US$ billion 25.6 24.7
-------------------------------------- -------- -------------- ---------------- --------
TotalCare assets 2,492 1,901
-------------------------------------- -------- -------------- ---------------- --------
TotalCare liabilities (2013
includes GBP245m not previously
included) (687) (559)
-------------------------------------- -------- -------------- ---------------- --------
Net TotalCare assets 1,805 1,342
-------------------------------------- -------- -------------- ---------------- --------
Customer financing contingent
commitments:
-------------------------------------- -------- -------------- ---------------- --------
Gross 388 356
-------------------------------------- -------- -------------- ---------------- --------
Net 59 59
-------------------------------------- -------- -------------- ---------------- --------
BALANCE SHEET
Intangible assets (note 9) represent long--term assets of the
Group. These assets decreased by GBP77 million with additional
development, contractual aftermarket rights, certification and
software costs being more than offset by annual amortisation
charges.
The carrying values of the intangible assets are assessed for
impairment against the present value of forecast cash flows
generated by the intangible asset. The principal risks remain:
reductions in assumed market share; programme timings; increases in
unit cost assumptions; and adverse movements in discount rates.
There have been no significant impairments in 2014.
Property, plant and equipment (note 10) increased by GBP241
million due to the ongoing development and refreshment of
facilities and tooling as the Group prepares for increased
production volumes.
Investments in joint ventures and associates (note 11) remain
stable as the share of retained profit was offset by dividends
received.
Provisions (note 18) largely relate to warranties and guarantees
provided to secure the sale of OE and services. The increase is
largely a result of the recognition of restructuring costs.
Net post-retirement scheme surpluses/(deficits)(note 19)
increased by GBP1,348 million, principally due to relative
movements in the yield curves used to value the underlying assets
and liabilities in accordance with IAS 19. In addition, the scheme
rules on the largest UK scheme were amended during the year,
resulting in the surplus being recognised (GBP544 million
impact).
The Group's principal pension schemes adopt a low risk
investment strategy that reduces volatility going forward and
enables the funding position to remain stable: interest rate and
inflation risks are largely hedged and the exposure to equities is
around 8% of scheme assets.
Net financial assets and liabilities (note 17) include the fair
value of derivatives, financial RRSAs, the put option on the
non-controlling interest of Power Systems and C Shares. The
reduction primarily reflects the settlement of the put option
(GBP1,937 million) offset by a reduction in value of the foreign
exchange derivatives (GBP1,137 million) due to the strengthening of
the US dollar.
The USD hedge book increased by 4% to US$25.6 billion. This
represents around four and a half years of net exposure and has an
average book rate of GBP1 to US$1.61.
Net TotalCare assets relate to long-term service agreement
(LTSA) contracts (and where appropriate the linked OE contract) in
the Civil aerospace business, including the flagship services
product TotalCare. These assets represent the timing difference
between the recognition of income and costs in the income statement
and cash receipts and payments. The increase largely reflects high
levels of linked Trent 700 and increasing Trent 1000 engine sales
in the year.
Customer financing facilitates the sale of OE and services by
providing financing support to certain customers. Where such
support is provided by the Group, it is almost exclusively to
customers of the Civil aerospace business and takes the form of
various types of credit and asset value guarantees. These exposures
produce contingent liabilities that are outlined in note 18. The
contingent liabilities represent the maximum aggregate discounted
gross and net exposure in respect of delivered aircraft, regardless
of the point in time at which such exposures may arise.
During 2014, the Group's gross exposure on delivered aircraft
increased by GBP32 million, due largely to the strengthening of the
US dollar. On a net basis, exposures remained unchanged with a
small reduction being offset by the exchange rate movement.
FUNDS FLOW
Movement in working capital - the increase reflects the growth
of the net TotalCare asset offset by a reduction in the amount of
customer deposits. This increase compares to a modest decrease in
the previous year which is primarily a result of the phasing of
customer deposit utilisation.
Expenditure on property, plant and equipment and intangibles-
the decrease reflects a reduction in additions to property,plant
and equipment (GBP32 million), participation fees and certification
costs
(GBP26 million) and software and other intangible assets (GBP41
million), offset by increased expenditure on contractual
aftermarket rights (GBP41 million).
Pensions - contributions to defined benefit pension schemes in
2014 included GBP33 million to UK schemes to fund the discretionary
increases agreed in 2013. The service cost included a past-service
credit of GBP31 million - largely relating to restructuring (2013
past-service cost GBP71 million - largely relating to the
discretionary increases above), which is the main reason for the
GBP116 million increase in the cash contributions in excess of the
PBT charge.
The Group's funding of its defined benefit schemes is expected
to reduce by around 30% in 2015, as a result of deficit funding
requirements ending and the non--recurrence of the payment for
discretionary increases.
Shareholder payments - the increase reflects the C Share issues
in 2014 (GBP51 million increase) and the Power Systems dividend to
Daimler (GBP14 million increase).
Acquisitions and disposals include the payment of GBP2,013
million (including the fair value of derivatives held to hedge the
cost) for the additional 50% of Power Systems offset by GBP1,027
million of
net proceeds from the disposal of the Energy business.
SUMMARY FUNDS FLOW
GBPmillion 2014 2013 Change
-------------------------------------------------- -------- -------- --------
Opening net funds 1,939 1,317
-------------------------------------------------- -------- -------- --------
Closing net funds 666 1,939
-------------------------------------------------- -------- -------- --------
Change in net funds (1,273) 622
-------------------------------------------------- -------- -------- --------
Underlying profit before tax 1,617 1,759 (142)
-------------------------------------------------- -------- -------- --------
Depreciation and amortisation 600 608 (8)
-------------------------------------------------- -------- -------- --------
Movement in net working capital (509) 91 (600)
-------------------------------------------------- -------- -------- --------
Expenditure on property, plant and equipment
and intangible assets (1,114) (1,172) 58
-------------------------------------------------- -------- -------- --------
Other 88 (231) 319
-------------------------------------------------- -------- -------- --------
Trading cash flow 682 1,055 (373)
-------------------------------------------------- -------- -------- --------
Contributions to defined benefit post-retirement
schemes in excess of PBT charge (152) (360 (116)
-------------------------------------------------- -------- -------- --------
Tax (276) (238) (38)
-------------------------------------------------- -------- -------- --------
Free cash flow 254 781 (527)
-------------------------------------------------- -------- -------- --------
Shareholder payments (482) (417) (65)
-------------------------------------------------- -------- -------- --------
Share buyback (69) - (69)
-------------------------------------------------- -------- -------- --------
Acquisitions and disposals -965 265 (1,230)
-------------------------------------------------- -------- -------- --------
Net funds of businesses acquired (30) 36 (66)
-------------------------------------------------- -------- -------- --------
Foreign exchange 19 (43) 62
-------------------------------------------------- -------- -------- --------
Change in net funds (1,273) 622
-------------------------------------------------- -------- -------- --------
Average net funds (38) 350 (388)
-------------------------------------------------- -------- -------- --------
BUSINESS REVIEW - AEROSPACE
CIVIL AEROSPACE
KEY HIGHLIGHTS
-- First Trent XWB delivered and Trent XWB-97 version on
test
-- Trent 7000 chosen to power new Airbus A330neo
-- Latest Trent 1000 entered service on Boeing 787-9 and Trent
1000-TEN on test
-- BR725 selected for Gulfstream G650ER and AE 3007C2 entered
service on Cessna Citation X+
DEFENCE AEROSPACE
KEY HIGHLIGHTS
-- Lockheed Martin agreement signed for 600 AE 2100 engines
-- A330 MRTT now fully operational in UK and selected by France
and Singapore
-- A400M transporter deliveries continue
-- Business resizing to reduce costs and improve competitiveness
is progressing
As a leading manufacturer of aero engines for the civil large
aircraft, corporate jet and defence markets, the growing global
requirement for cleaner, more efficient, better power, continues to
create opportunities for our Aerospace Division.
Within the civil market we continue to see increasing numbers of
people travelling by air. The International Air Transport
Association (IATA) reported that available seat kilometres (a
measure of civil air traffic) grew by nearly 6% in 2014 and the
long-term growth outlook remains at around 5% per annum for the
foreseeable future.
In the defence market, despite ongoing pressure on budgets,
aviation remains a vital component of defence forces around the
world and we secured several important new orders during the year.
In 2014, our engines powered the first deliveries of two new
airliners; one for each of our major airframe customers, Airbus and
Boeing. We launched the seventh member of our Trent engine family,
achieved major milestones for existing Trent engine programmes and
made important announcements about civil engine technologies for
the future.
Business jet owners and operators continue to seek greater
speed, range and the highest levels of service. 2014 saw
Rolls-Royce selected by Gulfstream for a new ultra-long range
business jet and we powered a new version of the fastest civilian
aircraft in the world into service for Cessna. We continue to
invest for the next generation of large business jet engines.
Our defence customers are focused on extending the lives and
improving the efficiency of their in-service aircraft. Rolls-Royce
is helping air forces to do more with less by delivering new or
improved engines and services. Looking to the future, we see
opportunities to power new programmes, such as the Korean K-FX
combat aircraft and the Anglo-French Future Combat Air System.
We continue to focus on reducing costs to support our strategy
of customer, innovation and profitable growth. The investments we
have made in new technology and capacity will enable us to increase
output and improve efficiency. Delay in a number of customer
programmes did result in some capacity being ready earlier than
needed, however these programmes are now coming on stream. In June,
we opened a new facility in Washington, UK, specialising in
advanced manufacturing techniques and robotics which will halve the
time to manufacture fan and turbine discs. We are accelerating our
plans to consolidate older facilities and transition to newer ones.
Towards the end of the year we announced a programme to further
improve operational efficiency and reduce costs across the
Aerospace Division
over the next 18 months.
Although revenue remained broadly flat through 2014 due to
current market conditions and lower defence spending, our cost
reduction actions have yielded benefits during the year and laid
the foundations required to support mid-term margin improvement for
the Division.
CIVIL AEROSPACE
PERFORMANCE REVIEW
WHO WE ARE
The Civil aerospace business is a major manufacturer of aero
engines for the commercial large aircraft and corporate jet
markets. We power 35 types of commercial aircraft and have more
than 13,000 engines in service around the world.
FINANCIAL REVIEW
The Civil order book increased 5%. Our net order intake was
GBP11.7 billion. Aftermarket services now constitute 31% of the
Civil order book.
Underlying revenue grew 3% (up 4% at constant foreign exchange),
on 8% growth in OE that was partially offset by a 1% decline in
services. OE growth was primarily driven by a ramp up in Trent 1000
engine production. This was partially offset by a 9% reduction in
business jet engine deliveries. The decline in services reflects
the expected 24% decline in the RB211 programme. Aftermarket
revenue from our Trent fleet increased 6%.
Underlying profit improved by 12% driven by higher volumes and
improved aftermarket margins. Profit benefited from approximately
GBP150 million in improved retrospective TotalCare contract
profitability, reflecting lower cost, changing operating patterns
and reduced contract risk. Profit also benefited from lower
commercial and administrative (C&A) and bonus costs. This was
partially offset by GBP63 million in higher restructuring costs and
GBP151 million in higher R&D costs.
CIVIL AEROSPACE - KEY FINANCIAL DATA
2010 2011 2012 2013 2014
------------------------------------ ------- ------- ------- ------- -------
Order book GBPm* 48,490 51,942 49,608 60,296 63,229
------------------------------------ ------- ------- ------- ------- -------
+3% +7% -4% +22% +5%
------------------------------------ ------- ------- ------- ------- -------
Engine deliveries* 846 962 668 753 739
------------------------------------ ------- ------- ------- ------- -------
Underlying revenue GBPm 4,919 5,572 6,437 6,655 6,837
------------------------------------ ------- ------- ------- ------- -------
+10% +13% +16% +3% +3%
------------------------------------ ------- ------- ------- ------- -------
Underlying OE revenue GBPm 1,892 2,232 2,934 3,035 3,265
------------------------------------ ------- ------- ------- ------- -------
Underlying service revenue GBPm 3,027 3,340 3,503 3,620 3,572
------------------------------------ ------- ------- ------- ------- -------
Underlying profit before financing
GBPm 392 499 743 844 942
------------------------------------ ------- ------- ------- ------- -------
-20% +27% +49% +14% +12%
------------------------------------ ------- ------- ------- ------- -------
* all years before 2012 include IAE order book and engine
deliveries include IAE V2500.
The investments we are making in R&D and restructuring will
support future profitable growth.
In 2015, we expect revenue between GBP7.0 and GBP7.3 billion,
with continued growth in Trent XWB and Trent 1000 OE sales and good
growth in aftermarket revenue. We expect this to be partially
offset by fewer Trent 900 and Trent 700 sales. We expect profit to
be between GBP800 and GBP900 million, as the retrospective
TotalCare accounting adjustments do not repeat at similar levels.
This guidance is based on 2014 average exchange rates.
OUR YEAR
We have over 50% of the engines on order for the widebody
airliner market. A number of developments during 2014 helped to
consolidate our position as the leading supplier in this
sector.
The first Airbus A350 XWB aircraft, powered by our Trent XWB
engines, was delivered to launch customer Qatar Airways at the end
of the year, marking the start of our largest production programme.
Earlier, in July we ran the more powerful 97,000lb thrust version
of the Trent XWB for the first time. This version will power the
larger Airbus A350-1000 due to enter into service in 2017. In June,
Emirates announced the cancellation of its order for 70 A350 XWB
aircraft. This was partially offset by new orders and at the end of
the year the Trent XWB order book stood at more than 1,500
engines.
The latest version of the Trent 1000 entered into service in
July, powering Boeing 787-9 Dreamliners for Air New Zealand and
ANA.
Work progressed on the Trent 1000-TEN which will be available
from 2016 and will be capable of powering all variants of the
Dreamliner.
Airbus received the 1,500th Trent 700 in August, 20 years after
the first engine was delivered. Rolls-Royce powers 58% of the
Airbus A330s currently in service or on order. A new more
fuel-efficient version, the A330neo, will be exclusively powered by
our new Trent 7000 engine. By the end of the year we had received
commitments for Trent 7000 engines to power 120 A330neo aircraft.
This included an order from the major US airline Delta for 25 Trent
7000-powered A330neos together with 25 Trent XWB-powered
A350-900s.
Throughout 2014 we have been engaged in Trent 900 sales
campaigns to power new orders for Airbus A380s. Decisions on engine
choice have yet to be made in these ongoing campaigns. We continue
to work closely with Airbus to support the future of this important
programme.
We took significant steps in the development of our future
engine programmes. In February, we announced two innovative new
engine designs; the Advance turbofan and UltraFan which will
feature a power gearbox. These will be available from 2020 and 2025
respectively. A new test bed for power gearboxes is to be built at
our site in Dahlewitz, Germany, representing an investment of EUR65
million. An additional test bed for future extra-large engines of
up to 150,000lbs thrust was also opened in Dahlewitz in November.
We maintained our leading position in the business jet market. Our
BR725 was selected to power Gulfstream's new ultra-long-range
business jet, the G650ER. The year also saw the entry into service
of the world's fastest civilian aircraft, the AE 3007C2-powered
Citation X+.
To support operators of Rolls-Royce powered business jets we
continued to expand our global network of authorised service
centres. The number of engines powering corporate aircraft covered
by our
CorporateCare(R) programme reached more than 1,600. The level of
TotalCare coverage in the commercial transport installed engine
base increased to 83% this year and 210 incremental corporate jets
were signed up to our CorporateCare programme.
LOOKING AHEAD
In support of our future growth strategy, we will make
investments that enable us to deliver our significant order book
and develop the next generation of civil engines with new
technologies, advanced manufacturing techniques and more efficient
processes.
We will develop TotalCare in line with changing market
requirements for services. We will leverage our world-class data
management capability through our newly created Controls and Data
Services business. We will remain focused on the 4Cs and will embed
a modern, dynamic and ethical culture across all areas of the
business.
DEFENCE AEROSPACE
PERFORMANCE REVIEW
WHO WE ARE
We are the leading engine maker for the military transport
market and the second largest provider of defence aero-engine
products and services globally. Defence has 16,000 engines in
service with
160 customers in over 100 countries.
FINANCIAL REVIEW
The Defence order book grew 12% in 2014, the first increase
since 2010. Total order intake increased 55% to GBP2.54 billion,
from GBP1.64 billion in 2013.
Underlying revenue fell 20% (down 18% at constant foreign
exchange), reflecting a 41% decline in OE partially offset by 4%
growth in aftermarket services. OE reductions were due to lower
volumes across several programmes, including major deliveries in
2013 of two export contracts that were nearing completion: EJ200 to
Saudi Arabia and Adour to India. Services revenue grew modestly, as
LiftSystem(TM) and TP400 maintenance started to ramp up.
A smaller decline in underlying profit of 16% (down 14% at
constant foreign exchange) reflects significant cost reduction
actions and the favourable mix shift towards aftermarket, which
represented 61% of Defence revenue. Profit also benefited from
lower C&A and bonus costs.
In 2015, we expect revenue of between GBP1.9 and GBP2.1 billion
and profits of between GBP360 and GBP410 million, based on average
2014 exchange rates. Cost reduction activity will continue across
our supply chain, operational footprint, headcount and service
provision.
OUR YEAR
Customers in our principal markets of North America and Europe
face continued pressure from constraints on government defence
spending. As a consequence, pricing and innovation have become even
more important as our customers look for ways to do more with
less.
In order to be closer to our customers whilst reducing cost, we
have concentrated our UK maintenance, repair and overhaul activity
into one site in Bristol. We also moved support for the Rolls-Royce
LiftSystem(R) to Indianapolis to support the F-35B Lightning II
aircraft programme as it progresses to Initial Operating Capability
with the US Marine Corps in 2015. The F-35 programme continues to
ramp up, with orders received for production and support of the
LiftSystem in 2014 totalling US$548 million.
We secured a major long-term agreement with Lockheed Martin
worth up to US$1 billion to supply up to 600 AE 2100 engines for
the C-130J aircraft, in addition to over US$200 million in support
contracts for AE 2100 engines. Deliveries were made to Turkey,
France, Germany and the UK of the TP400-powered Airbus A400M
transport aircraft. The 100th TP400 production engine was delivered
in November and in the same month, we announced an GBP18 million
investment in facilities at Bristol to support this programme. 2014
saw good progress in the tanker aircraft market where we are a
shareholder in AirTanker which operates the A330 Multi Role Tanker
Transport (MRTT) on behalf of the Royal Air Force. In 2014, the
A330 MRTT was also selected by the defence forces of France and the
Republic of Singapore.
There was a softening of demand in the civil helicopter market
and this impacted our engine manufacturing load. However, a
long-term agreement was signed to install upgraded M250 engines in
future Bell 407GX helicopters. The M250 turboprop variant was also
selected by Jiangsu A-Star
of China to power its Extra EA500 aircraft in a deal worth over
US$50 million.
Service delivery contracts worth US$1,843 million were secured
with defence customers globally, many of which will provide our
popular MissionCare(R) level of engine support. We have further
improved the time on wing for our V-22 Osprey customers, delivering
a 30% reduction in support costs. The T56 engine enhancement kit,
aimed at legacy C-130 Hercules and P-3 customers, was certified by
the US Air Force and has exceeded fuel efficiency targets. The US
Navy declared Initial Operational Capability for the new
T56-powered E-2D Advanced Hawkeye Airborne Early Warning
Aircraft.
In the unmanned aircraft market our stealthy, integrated,
propulsion system successfully demonstrated its capability in the
second round of flight trials of the UK's Taranis demonstrator. Our
AE 3007 engine also powered the US Navy's Triton unmanned aerial
system on its first trans-America flight. We were named a 'superior
supplier' by both the US Navy and US Defense Logistics Agency in
2014 and recognised by Northrop Grumman for our support of its
Global Hawk unmanned aerial vehicle programme.
Together with Snecma, we signed an Anglo-French agreement for
further funded studies as part of the Future Combat Air System.
LOOKING AHEAD
We are focused on maintaining our leading position in the
transport and patrol markets and will continue to invest in the
industrial and technological capability to support future growth in
this area. We are actively engaged in offering propulsion solutions
to customers in India, Turkey and Korea as they pursue ambitions
for indigenous combat aircraft programmes.
We anticipate continued pressure on defence budgets and remain
committed to improving both the service lives of products and our
cost performance. Cost reduction activity will continue across our
supply chain, operational footprint, and service provision,
ensuring our business is well placed for the future in the defence
sector.
DEFENCE - KEY FINANCIAL DATA
2010 2011 2012 2013 2014
------------------------------------ ------ ------ ------ ------ ------
Order book GBPm* 6,506 6,035 5,157 4,071 4,564
------------------------------------ ------ ------ ------ ------ ------
+1% -7% -15% -21% +12%
------------------------------------ ------ ------ ------ ------ ------
Engine deliveries* 710 814 864 893 744
------------------------------------ ------ ------ ------ ------ ------
Underlying revenue GBPm 2,123 2,235 2,417 2,591 2,069
------------------------------------ ------ ------ ------ ------ ------
+6% +5% +8% +7% -20%
------------------------------------ ------ ------ ------ ------ ------
Underlying OE revenue GBPm 1,020 1,102 1,231 1,385 816
------------------------------------ ------ ------ ------ ------ ------
Underlying service revenue GBPm 1,103 1,133 1,186 1,206 1,253
------------------------------------ ------ ------ ------ ------ ------
Underlying profit before financing
GBPm 309 376 395 438 366
------------------------------------ ------ ------ ------ ------ ------
+22% +22% +5% +11% -16%
------------------------------------ ------ ------ ------ ------ ------
BUSINESS REVIEW - LAND & SEA
POWER SYSTEMS
KEY HIGHLIGHTS
-- Nearly 1,000 MTU rail PowerPacks contracted by PESA
-- Launch of new efficient Bergen B33:45 medium-speed engine
-- New MTU Onsite Energy 4000 natural gas engine
-- MTU and Weir agree to develop power systems for hydraulic
fracking industry
MARINE
KEY HIGHLIGHTS
-- Largest ever UT vessel designed
-- 40 years of leadership in offshore vessels celebrated
-- Naming of HMS Queen Elizabeth and launch of USS Zumwalt
-- Service network further expanded
NUCLEAR
KEY HIGHLIGHTS
-- New propulsion plant design submitted for Vanguard class
replacement submarine
-- US regulatory approval granted for Spinline(TM) I&C
technology
-- Business developed across US, Europe (including UK programme)
and Asia
As the world's population expands and becomes more affluent, as
trade increases and we travel
more, the requirement for the technology produced by our Land
& Sea Division will grow.
According to the World Bank, approximately 200 million people
per year will join the middle classes in the decades ahead,
requiring the type of power that we deliver to support their rising
living standards
and to transport the goods they will buy. Our Land & Sea
Division provides power for a wide range of vehicles and vessels.
On land we supply engines to power vehicles as varied as
locomotives, battle tanks and mining trucks, applying world-leading
technology to set new standards of fuel efficiency. We also deliver
distributed power generation and support the world's civil nuclear
power industry. At sea we supply engines, propulsion and advanced
engineering products for craft ranging from submarines to complex
anchor handlers and seismic vessels used in the offshore oil &
gas industry. This broad portfolio of products and services has
direct relevance to the long-term demand for better power in
our
fast-changing world.
Whereas the power supplied from our Aerospace Division is based
on gas turbine technology, our Land & Sea Division is to a
large degree focused on reciprocating engines. Our high-speed
reciprocating engines go to market under the MTU brand and
medium-speed engines are from Bergen.
Although the long-term requirement for our technology is
certain, a number of the markets that we address are volatile.
During 2014, sharp falls in oil and other commodity prices caused a
number of our customers to delay or cancel orders. In particular
this has affected parts of our Power Systems and
Marine businesses. Power Systems was also affected by the trade
sanctions imposed by the European Union on Russia.
On land, business has grown across our defence, power generation
and services markets and we have had success in launching
innovative products in our MTU Onsite Energy range to provide
secure, clean power for industrial applications. We continue to
invest in skills and capability in our Civil Nuclear business ahead
of significant growth in the world's nuclear power capacity.
Although this business is currently relatively small for
Rolls-Royce, we already provide components, systems or services to
more than half the world's 435 operating reactors, enabling safe
and efficient power generation.
At sea, our Naval business has done well despite continued
pressure on defence budgets. Nuclear reactors designed and
manufactured by us have been powering the Royal Navy's nuclear
submarine fleet for the last 55 years and our engineers are
currently designing the next generation for the fleet of the
future.
The Division is firmly focused on cost reduction and the
management of cash in all areas. We have rationalised a number of
our Marine facilities and this work will continue in the year
ahead. We will also drive improvement in cost through better supply
chain management and continuing to move more of our production to
lower-cost countries. We will see further benefits from this during
the coming year.
During 2014, we acquired the remaining interest in Rolls-Royce
Power Systems from Daimler. Power Systems extends our portfolio and
adds deep technical knowledge of high-speed engines and fuel
injection systems. It also extends the scale and scope of our
market presence.
We have strong long-term relationships with customers, deep
product knowledge, powerful and clean engines, efficient propulsion
system designs and an established global network. These linked to a
truly experienced workforce provide remarkably strong roots, from
which the Land & Sea Division can grow.
POWER SYSTEMS - KEY FINANCIAL DATA
2013 2014 Change
------------------------------------ ------ ------ -------
Order book GBPm 1,927 1,971 2%
--------------------------------------- ------ ------ -------
Underlying revenue GBPm 2,831 2,720 -4%
--------------------------------------- ------ ------ -------
Underlying OE revenue GBPm 2,004 1,893 -6%
--------------------------------------- ------ ------ -------
Underlying service revenue GBPm 827 827 -
--------------------------------------- ------ ------ -------
Underlying profit before financing
GBPm 294 253 -14%
--------------------------------------- ------ ------ -------
Following the creation of the Land & Sea Division in 2014,
information on a comparable basis is not available prior to
2013.
POWER SYSTEMS
BUSINESS PERFORMANCE REVIEW
WHO WE ARE
The business consists of the MTU, MTU Onsite Energy, Bergen and
L'Orange product ranges. MTU high-speed engines and propulsion
systems power ships, railway locomotives, defence and heavy
off-highway vehicles. They are also used for applications in the
oil & gas industries. Diesel and gas genset systems from MTU
Onsite Energy deliver heat and power. Bergen medium-speed engines
are used in both marine and land-based power generation
applications. L'Orange is a world-leading specialist company that
designs and manufactures complex fuel injection systems for large
engines.
FINANCIAL REVIEW
The Power Systems order book grew 2%. Order intake was GBP2.6
billion.
Underlying revenue declined 4% mainly due to adverse foreign
exchange effects. Growth in defence and power generation was offset
by substantially lower sales to European construction, industrial
and agricultural customers. Marine revenue also declined, driven by
weaker yacht markets. As in previous years, revenue was biased
towards the second half.
Underlying profit declined 14% due to adverse foreign currency
effects and losses in the Bergen business. Profit benefited from
lower C&A and bonus costs.
In 2015, we expect revenue between GBP2.5 and GBP2.75 billion
and profit between GBP200 and GBP250 million. We expect growth in
the industrial, power generation and commercial marine end markets,
offset by
lower revenue from defence customers, particularly naval marine.
We expect profit headwinds from a deteriorating mix. We are taking
actions to improve the operating performance and cost controls at
Bergen. Our guidance is based on 2014 average exchange rates.
OUR YEAR
Slower growth in Eurozone countries and emerging economies
presented challenges to our business in 2014. However, the breadth
of our portfolio presented opportunities for growth in some
parts
of the business.
Our Naval marine business benefited from stronger defence
budgets in Asia and an increased demand for security at sea in the
region; this resulted in orders to power several types of military
vessels.
The market for the commercial marine application of both our
medium and high-speed diesel engines recovered in 2014. The demand
for mega-yachts weakened in 2014 due to fewer vessels being
built,
particularly in Europe.
2014 saw the launch of a new family of medium-speed engines for
the marine market, with future variants for land-based power
generation. The Bergen B33:45 uses diesel or gas fuel and features
a new modular design that can be developed to suit a wide range of
ship types. It uses less fuel, has lower emissions and produces 20%
more power per cylinder than the previous Bergen range. Together
with our Marine colleagues, we secured orders for it to power two
ships, with the first entering operation in 2015, there is also
strong interest from the merchant vessel market.
Two projects further highlighted the synergies between our
Marine and Power Systems businesses: as part of a Rolls-Royce UT
ship design, we supplied MTU diesel-electric propulsion systems and
onboard power generators for two platform supply vessels for
Chinese shipbuilder COSCO; and, in Brazil, MTU engines were
specified for Rolls-Royce UT 535E oil-spill response vessels.
Sales in the European construction, industrial and agriculture
sectors were substantially lower in 2014 compared with the high
volumes ordered in 2013. Sharp falls in commodity prices led
customers
in the mining and oil & gas industries to delay or cancel
orders for OE.
The Energy business for high-speed engines showed stronger
growth in the higher power ranges and in the market for packaged
MTU Onsite Energy power systems, for example in data centres and
other industrial applications. We introduced an upgraded Series
4000 L64 natural gas engine with improved efficiency.
In the medium-speed market served by the Bergen range, sales
decreased. Nevertheless we see an ongoing trend towards gas fuel.
One example is a 100MW power plant in Mozambique where Bergen will
deliver gas-driven B35:40 generating sets.
2014 saw an improvement in our land defence business. This was
helped by a production increase for the German infantry fighting
vehicle, the MTU-powered Puma.
Growth in the market for injection systems made by L'Orange
continued in 2014, driven by increased demand for injection systems
used by dual-fuel engines.
LOOKING AHEAD
We will invest in future technologies such as gas engines for
commercial marine applications and are configuring our different
engine series to meet tougher emissions standards in Europe and
North
America. At the same time, we will continue to improve
efficiency and maintain our focus on costs and cash in all
areas.
MARINE - KEY FINANCIAL DATA
2013* 2014 Change
------------------------------------ ------ ------ -------
Order book GBPm 1,622 1,567 -3%
--------------------------------------- ------ ------ -------
Underlying revenue GBPm 2,037 1,709 -16%
--------------------------------------- ------ ------ -------
Underlying OE revenue GBPm 1,288 1,070 -17%
--------------------------------------- ------ ------ -------
Underlying service revenue GBPm 749 639 -15%
--------------------------------------- ------ ------ -------
Underlying profit before financing
GBPm 233 138 -41%
--------------------------------------- ------ ------ -------
*2013 figures restated due to transfer of Submarines to Nuclear
business.
MARINE
BUSINESS PERFORMANCE REVIEW
WHO WE ARE
Marine supplies complex propulsion and handling systems to the
maritime market, across three distinct sectors: Offshore, Merchant
and Naval. We have more than 4,000 customers, and our equipment
is
installed on around 25,000 vessels.
We have an extensive range of technology for propulsion and
cargo handling that allows us to provide fully integrated systems
for a variety of ship types.
Our capability in ship design means we can also combine our
technology into complex vessels, where Rolls-Royce technology can
account for around 40% of the total value of a typical offshore
vessel and up to 10% of a high specification naval combatant.
As part of the Land & Sea Division, we now also offer MTU
high-speed diesel engines as part of our propulsion systems,
particularly for naval craft, ferries and offshore vessels.
FINANCIAL REVIEW
The Marine order book declined 3% in 2014, with a 1% reduction
in order intake to GBP1.82 billion. At constant exchange rates, the
order book increased 6%.
Underlying revenue decreased 16% (down 9% at constant foreign
exchange), reflecting a 17% decline in OE and a 15% decline in
services. OE reduction was driven by a combination of pricing and
the expected decline in Offshore, driven by 2013's weak order
intake. Service revenue declined in Offshore and Merchant, as ship
owners deferred overhaul and maintenance.
Underlying profit fell 41%. Excluding foreign exchange
translation and a one-off charge of GBP30 million to cover the
resolution of a quality issue, profit declined 25% as a result of
lower revenue and an adverse mix, reflecting pricing pressure and
lower services revenue. The business also incurred restructuring
costs as it continued to streamline its global footprint, reduce
indirect headcount, and consolidate manufacturing activity. Profit
benefited from lower C&A and bonus costs.
In 2015, we expect revenue between GBP1.45 and GBP1.65 billion
and profit between GBP90 and GBP120 million. We anticipate that the
market will remain challenging in the short term, reflecting
external factors, particularly in Offshore. We will accelerate our
cost reduction focus on our footprint, our supply chain, and our
overhead costs in order to drive a more competitive business while
also adapting to volume risks. Our guidance is based on 2014
average exchange rates.
OUR YEAR
2014 saw continuing challenges in the global maritime market,
and there is a mixed picture across the market segments in which we
operate. In the offshore support sector, demand was encouraging for
sophisticated anchor handling vessels, including our own UT ship
designs, which incorporate a wide range of Rolls-Royce technology.
However, the rapid decline in the price of oil in the second half
of the year dented confidence in the oil & gas industry, slowed
demand and order intake as we approached year end, a trend we
expect to continue into 2015. In merchant shipping, many owners
continued to delay investment in new ships and equipment, or are
extending maintenance intervals.
Improving competitiveness remains a key priority for the Marine
business and we took important steps in the year, including the
announcements of facility restructuring or closures in South Korea,
US, UK, Norway and Sweden to consolidate our manufacturing
activities at fewer locations. We made strong progress in improving
the external supply chain management and reducing our indirect
headcount.
We are narrowing our product portfolio by focusing on the
products that provide the most return to the business and add most
value to our customers. We have exited non-core product lines such
as well
intervention equipment used for extracting oil from mature
wells.
We continue to focus on efficiency and cost reduction,
addressing areas including our supply chain, operational footprint
and indirect headcount. We have reduced the number of suppliers to
Marine by almost 40% in the last four years (half of that in 2014)
and reduced indirect headcount by more than 500 people over the
past two years.
We are streamlining our global footprint and have consolidated
manufacturing of some key products either into fewer locations or
into the external supply chain.
Our programmes to improve competitiveness will continue
throughout 2015 and beyond, as we aim to manage the impact of a
slowdown in the oil & gas sector. Further changes to the
structure of the business are planned.
In the commercial market, our UT-Design celebrated its 40th
successful year - it is the benchmark ship design for the offshore
oil & gas industry, with almost 800 now in service or on order.
We continue to lead ship innovation in this sector and this year we
contracted to supply the largest ever vessel, the UT 777 for Island
Offshore. This vessel is being built in Japan to a high
specification and will be deployed on drilling operations in the
Arctic.
Naval continued to perform well. We are contracted to a number
of key international programmes which to date have been largely
unaffected by defence budget cuts. These include the UK Type 26
frigates and the US Navy's Littoral Combat Ship and
ship-to-shore-connector hovercraft programmes. We also delivered
the first MT30 to the Republic of Korea Navy for the first of its
eight new frigates. Other highlights were the naming of the US
Navy's sophisticated multi-mission destroyer USS Zumwalt and launch
of the Royal Navy's aircraft carrier HMS Queen Elizabeth, both of
which are powered by our MT30 gas turbine.
Our services business continues to adapt to support our
customers' needs and this year we expanded our global workshop
network with a new facility in Bergen, Norway.
LOOKING AHEAD
Ship efficiency, and ship intelligence, where the smart use of
data in more complex ships will improve efficiency, will be key
market drivers in the future, as will the demand for more
environmentally-friendly power and propulsion systems to drive down
the costs of operating ships.
We are strongly positioned to provide efficient solutions and
have the necessary integration
capability as ships become more complex in the future.
Our unified bridge, which entered service recently, is one
example of the type of intelligent control system that we believe
will become commonplace on new vessels over the next five
years.
In the near term, we expect the market to remain challenging
especially in the Offshore sector where we may see project
deferrals and temporary lay-ups of vessels as they come
off-charter.
We have begun to transform our business to improve our
competitiveness in all areas and this programme will continue,
again focusing on consolidation of manufacturing, our external
supply chain and reducing our overhead costs. We will adapt to the
market conditions in our biggest market sector, Offshore, which
accounts for around two-thirds of our business, responding to the
uncertainties caused by the significant decrease in oil prices over
recent months.
NUCLEAR
BUSINESS PERFORMANCE REVIEW
WHO WE ARE
Rolls-Royce manages all aspects of nuclear plant design, safety,
manufacture, performance and through-life support for the UK
Submarine Programme.
In the civil nuclear market, we provide nuclear reactor vendors
and utility operators with integrated, long-term support services
and solutions spanning the whole reactor life cycle, from concept
design through to obsolescence management and plant-life
extension.
We have been a key player in the nuclear industry for over 50
years, with expertise in component manufacturing, licensing,
project and supply chain management, as well as world-class
engineering.
FINANCIAL REVIEW
The order book for the continuing business declined 4%,
reflecting lower order intake following the receipt of a multi-year
submarines contract in 2013.
Underlying revenue increased 3%, driven by good growth in the
Civil Nuclear services business, which has been the focus of recent
acquisitions. Our services capabilities include remote inspection,
plant-life
extension and obsolescence management and these performed well
in 2014.
Underlying profit increased GBP38 million, including GBP20
million from better operating performance, lower C&A and bonus
costs and a non-repeat of 2013 one-time charges.
In 2015, we expect revenue between GBP670 and GBP730 million and
profit between GBP40 and GBP50 million. This is based on 2014
average exchange rates.
NUCLEAR - KEY FINANCIAL DATA
2013* 2014 Change
------------------------------------ ------ ------ -------
Order book GBPm 2,617 2,499 -4%
--------------------------------------- ------ ------ -------
Underlying revenue GBPm 667 684 3%
--------------------------------------- ------ ------ -------
Underlying OE revenue GBPm 236 254 8%
--------------------------------------- ------ ------ -------
Underlying service revenue GBPm 431 430 0%
--------------------------------------- ------ ------ -------
Underlying profit before financing
GBPm 10 48 380%
--------------------------------------- ------ ------ -------
OUR YEAR
In 2014, we made progress on our long-term projects for the UK
Submarine Programme. We submitted the design of the new propulsion
plant for the Vanguard class replacement submarine for customer
approval. Construction of the Core Manufacturing Facility in
Derby, UK, has progressed well and we successfully introduced
several innovations to the programme which brought cost savings for
our customer (as part of the foundation contract designed to
deliver savings of GBP200 million over ten years). Our support to
the Royal Navy submarine flotilla is mission critical and
contributes to maintaining the UK's continuous at sea
deterrent.
During 2014, we performed well against our strategic intent of
growing a global civil nuclear business as a technology-
independent partner to the industry.
Civil nuclear power is increasingly important to the energy
policy of a growing number of countries and regions such as China,
India, Middle Eastern countries and Central and Eastern Europe.
Increased focus on low-carbon electricity generation and security
of energy supply, continued to drive demand for the upgrade,
plant-life extension and replacement of nuclear capacity. More
countries are considering adopting nuclear power for the first
time, with governments seeking to develop a nuclear industrial and
supply chain strategy designed to benefit local economies and
capability (Turkey and
Poland being examples).
For the UK civil nuclear new build programme, we continued to
carry out early works to support developers and operators and we
continue to recruit and develop capability in line with market
growth projections for future years. The UK has one of the largest
new build programmes in the western world with 11 reactors expected
to be built by 2030. European Union Commission approval in 2014 of
the investment contract for the first new reactor to be built at
Hinkley Point C in Somerset was a significant milestone.
During the year we were awarded a contract by Fortum, the owner
and operator of the Loviisa nuclear power plant in Finland, to
modernise the safety and non-safety instrumentation and control
(I&C) systems. We also received US Nuclear Regulatory
Commission licensing of Spinline, our safety-critical I&C
technology, and this will help us access new markets.
We won a contract to supply and commission pressure transmitter
technology for the Flamanville 3 reactor in France and continued to
deliver against our customer commitments on the world's largest
I&C upgrade of the 20-strong French fleet of reactors. We
continued to be successful in China, as an important supplier to
the world's largest nuclear programme.
We introduced equipment obsolescence services and engineering
support to new customers in the UK, France, Belgium, and South
Africa. We also provided reactor inspection services to EDF
Energy's UK
operations.
LOOKING AHEAD
Our priorities will be focus on customers, winning new orders
and high-quality delivery. A key feature will be continuously
improving operational efficiency and performance as we expand our
products and services, and the markets in which we operate. We will
build on our manufacturing capability, engineering excellence and
supply chain relationships to ensure that we contribute positively
to new build programmes in the UK and other international
markets.
We will focus on further extending the suite of products and
services that we offer to operational reactor utilities to enable
them to achieve safe, efficient and reliable lifetime operations
while enabling us to further grow our nuclear services
presence.
ENERGY BUSINESS
PERFORMANCE REVIEW
On 1 December, we concluded the sale of our Energy gas turbines
and compressor business to Siemens for a GBP785 million cash
consideration, and a further GBP200 million for a 25-year licensing
agreement.
ENERGY - KEY FINANCIAL DATA
2013 2014
------------------------------------ ------ -----
Order book GBPm 1,226 --
------------------------------------ ------ -----
Underlying revenue GBPm 871 724
--------------------------------------- ------ -----
Underlying OE revenue GBPm 329 302
--------------------------------------- ------ -----
Underlying service revenue GBPm 542 422
--------------------------------------- ------ -----
Underlying profit before financing
GBPm 64 (3)
--------------------------------------- ------ -----
SUSTAINABILITY
Our strategy focuses on customer, innovation and profitable
growth to ensure a sustainable business.
OUR APPROACH
Sustainability is inherent to our strategy. For Rolls-Royce that
means driving profitable growth whilst
achieving a positive economic, social and environmental
impact.
BETTER POWER
HELPING OUR CUSTOMERS DO MORE, USING LESS
We use our engineering expertise to develop and deliver
integrated power systems for our customers, helping them to do more
using less. Our commitment is to continuously improve the
environmental performance of our products and services.
IMPROVING ENVIRONMENTAL PERFORMANCE
Our environmental strategy reflects the main focus of our
investment and effort, concentrating on three areas: supporting our
customers by further reducing the environmental impact of our
products and services; developing new technology for future
low-emission products; and maintaining our drive to reduce the
environmental impact of our business activities.
PRODUCT SAFETY
Our products are often deployed in mission critical
environments. We are committed to delivering products and services
that achieve the highest standards of product safety. We have a
consistent approach to safety across the Group and systematically
pursue proactive opportunities for improvement. More details can be
found in the Safety and Ethics Committee report on page 66.
BETTER FUTURE
COMMITTED TO INNOVATION, POWERING BETTER, CLEANER ECONOMIC
GROWTH
This year, we invested over GBP1.2 billion in gross R&D. As
a result of engineering expertise and our strong tradition of
innovation, many of our products are currently market-leaders in
terms of environmental performance. Innovation is embedded in all
our products and services and is key to our competitive edge.
OUR PEOPLE
The Group employed a total of 54,100* people in 2014. We know
that our future depends on the skills, knowledge and passion of all
of our people and work to create an environment where all
employees
can reach their full potential.
We encourage diversity, engagement and development. We give full
and fair consideration to all employment applications from people
with disabilities, and support disabled employees helping them to
make the best use of their skills and potential.
A diverse workforce will help ensure our continued success as a
global business and contribute towards a better future. More
information on our approach to diversity and gender distribution
can be found in the Nominations and Governance Committee report, on
page 65.
Average number of employees by region* 2013 2014
----------------------------------------------- ------- -------
UK 24,800 24,500
----------------------------------------------- ------- -------
USA 8,500 7,900
----------------------------------------------- ------- -------
Canada 1,600 1,500
----------------------------------------------- ------- -------
Germany 10,500 10,500
----------------------------------------------- ------- -------
Nordics 4,100 4,000
----------------------------------------------- ------- -------
Rest of world 5,700 5,700
----------------------------------------------- ------- -------
Average number of employees by business unit*
----------------------------------------------- ------- -------
Civil aerospace 23,400 23,900
----------------------------------------------- ------- -------
Defence aerospace 7,900 7,000
----------------------------------------------- ------- -------
Marine 6,900 6,400
----------------------------------------------- ------- -------
Power Systems 10,700 10,700
----------------------------------------------- ------- -------
Nuclear 3,900 3,900
----------------------------------------------- ------- -------
Energy 2,400 2,200
----------------------------------------------- ------- -------
Total* 55,200 54,100
----------------------------------------------- ------- -------
* Headcount data is calculated in terms of average full time
employees (FTEs) for 2014. Therefore, this includes FTEs associated
with our Energy gas turbines and compressor business disposed of in
December 2014. The transfer of this business unit has had minimal
impact on the average headcount numbers for the year. Marine and
Nuclear data for 2013 has been restated to reflect the transfer of
our Submarines business from Marine to Nuclear.
EMPLOYEE INVOLVEMENT
We use a variety of channels to communicate with our employees,
including face-to-face and online communications. We encourage
collaboration, employee suggestions and feedback through these
systems. In addition we have mechanisms in place for employees to
be able to raise concerns both formally and anonymously, including
through the Rolls-Royce Ethics Line.
We have established frameworks for managing employee, trade
union and representative participation, including formal
information and consultations. Our incentive schemes and
all-employee share plans enable every employee to have the
opportunity to share in our success.
EARLY CAREER DEVELOPMENT PROGRAMMES
We continue to attract large numbers of high quality graduates
and apprentices, and have well-established early career programmes
in 11 countries worldwide.
In 2014, we introduced non-engineering graduate and
apprenticeship programmes in Germany. We continue to focus on
expanding our offerings beyond the UK, particularly in India and
Germany.
We have won a number of awards this year, including TargetJobs
Winner of 'The most popular graduate recruiter - engineering,
design and manufacture' in the UK, for the fifth year running.
HUMAN RIGHTS
Our human rights approach is aligned with our Global Code of
Conduct. It draws together relevant internal controls that oversee
the range of issues encompassed by human rights. Our policy sets
out our commitment to respect the human rights of our employees
through core labour standards. This covers employee involvement,
diversity and equality, pay and benefits, working hours, forced
labour and child labour.
We comply with the local laws of the countries where we operate.
In the event that our Human Rights policy imposes higher
requirements than local law, we adhere to that higher requirement.
We set equivalent standards for our supply chain through our Global
Supplier Code of Conduct. This is part of our broader aim to align
the standards of our suppliers to those of the Group.
EMPLOYEE WELLBEING
We work to enhance the personal wellbeing of our people to help
them reach their full potential. We are committed to empowering and
enabling employees to lead a healthy lifestyle at work.
We launched new wellbeing initiatives across our global
locations this year. These include physiotherapy and employee
assistance programmes in the UK, employee sports days in China and
Germany, and a Wellbeing Month across our US facilities. Over 4,000
employees worldwide participated in the Global Corporate Challenge,
amassing a combined total of over five billion steps.
COMMUNITIES
Our community investment and education outreach programmes
support our Group strategy. We recognise that talented engineers
are the key to our future and work actively to increase interest
and encourage diversity amongst those taking science, technology,
engineering and mathematics
(STEM) subjects.
GLOBAL PARTNERSHIPS
We engage in dialogue and partnerships with governments and
industry bodies aligned to our business needs. This year we have
worked with the UK Government on the implementation of the
Aerospace Growth Partnership. In the EU, we have focused on
preventing unintended consequences of the inclusion of aviation in
the European Union Emissions Trading Scheme. In North America, we
continue to engage with a range of political stakeholders on issues
including defence appropriations, aviation policy, Federal Aviation
Administration approval of our products, and trade proposals.
Our joint venture in India has now reached full production and
exports to our other locations around the world. Through our
subcontractors TCS and Quest we have over 1,000 engineers serving
the Group's needs globally. In China we are present in more than 30
locations including joint ventures. Our manufacturing and services
centres in Singapore are the heart of a multi-business and
multi-function regional hub, where our first major Customer Service
Centre opened in early 2015.
BETTER BUSINESS
INVESTING IN TECHNOLOGY, PEOPLE AND IDEAS TO IMPROVE ALL ASPECTS
OF OUR PERFORMANCE AND TO DRIVE PROFITABLE GROWTH
ETHICS
High ethical standards, supported by good governance, are
fundamental to how we run our business. We have a strong focus on
ethics that helps ensure we win right every time. This year our
Global Code of Conduct has been ranked by the Red Flag Group as
third among those within the FTSE 100 companies that were assessed.
Rolls-Royce does not make any corporate contributions or donations
to political parties or causes, as outlined in our Global Code of
Conduct. More information on our approach to ethics can be found in
the Safety and Ethics Committee report on page 68.
HEALTH, SAFETY AND ENVIRONMENT
We regard the health and safety of our employees at work as
paramount. It is therefore with particular regret that we report
the death of four employees in a single drowning incident which
occurred in 2014. This tragic incident took place outside work
whilst deployed at a customer location. This incident is not
reported in our annual data because it occurred outside working
hours. We have sought to learn from this incident in terms of
managing remote field-service activities.
We continue to monitor safety performance in the workplace and
are continuing with the process of integrating our Power Systems
business into our HS&E management system. At present, Power
Systems does not collect its HS&E data in a manner consistent
with the Group and therefore this data has been excluded from our
2013 and 2014 HS&E figures.
In 2014, our total reportable injury (TRI) rate fell by 16% to
0.37 TRIs per 100 employees, compared to 0.44 in 2013*. In the UK
we were fined GBP200,000 and GBP176,000 in costs for a source
radiography event that occurred in 2011. We improve the performance
of our operations by reducing energy, greenhouse gas emissions and
waste. We support our external suppliers to do the same.
* The TRI rate excludes Power Systems, and has been adjusted to
reflect the disposal of our Energy gas turbines and compressor
business in December 2014. Entities that were part of the Energy
business that were not part of the disposal have been included. See
note at the bottom of page 46.
ACCELERATING PROGRESS
Our goal is to be recognised as a leading sustainable business.
To achieve this we have established a dashboard of higher
stretching targets, showing progress towards improved
sustainability performance.
These targets are baselined on our 2014 performance data, with
the exception of the ACARE Flightpath 2050 goals. Our 2014
sustainability performance and targets are detailed overleaf.
KEY PERFORMANCE INDICATORS
We continue to build strong foundations for future growth in
challenging economic conditions.
Financial performance indicators are shown below. The key
objectives of the Board and its committees are described on pages
59 to 75, non-financial performance indicators are shown in the
Sustainability section on pages 44 to 47.
CUSTOMER
ORDER BOOK WHY WE MEASURE IT HOW WE HAVE
+3% The order book provides PERFORMED
+5% excluding an indicator of future The order book grew
Energy business. We in all
measure it at constant businesses except Marine
exchange rates and list and Nuclear.
prices and include
both firm and announced The disposal of the
orders. In Civil aerospace, Energy
it is common business in 2014 reduced
for a customer to take the order book by GBP0.9bn
options for future orders
in addition to firm
orders placed. Such options
are excluded from the
order book. In
Defence aerospace, long-term
programmes are often
ordered for
only one year at a time.
In such circumstances,
even though there
may be no alternative
engine choice available
to the customer,
only the contracted business
is included in the order
book.
Conservatively, we only
include the first seven
years' revenue
of long-term aftermarket
contracts.
----------------------------------- ----------------------------------------
ORDER INTAKE Order intake is a measure The reduction mainly
-28% of new business secured reflects
during the lower order intake
year and represents new in Civil
firm orders, net of the aerospace from a high
movement in the in
announced order book 2013 and includes the
between the start and cancellation of Emirates'
end of the period. A350 XWB order.
Any orders which were Defence aerospace order
recorded in previous intake increased by
periods and which 55%.
are subsequently cancelled,
reducing the order book,
are included as a reduction
to intake. We measure
order intake at constant
exchange rates and list
prices and, consistent
with the order book policy
of recording the first
seven years' revenue
of long-term aftermarket
contracts, include the
addition of the following
year of revenue on long-term
aftermarket contracts.
----------------------------------- ----------------------------------------
UNDERLYING Monitoring of revenues The reduction reflects
REVENUE provides a measure of an 8% fall in OE revenue
-6% business growth. and a 3% decline in
-3% excluding FX Underlying revenue is services revenue.
used as it reflects the
impact of our
FX hedging policy by
valuing foreign currency
revenue at
the actual exchange rates
achieved as a result
of settling FX
contracts. This provides
a clearer measure of
the year-on-year
trend.
----------------------------------- ----------------------------------------
INNOVATION
----------------------------------- ----------------------------------------
NET R&D WHY WE MEASURE IT HOW WE HAVE PERFORMED
EXPENDITURE This measure reflects The increase reflects
AS A PROPORTION the need to generate increased investment
OF UNDERLYING current returns due
REVENUE as well as to invest to the phasing of major
5.8% for the future. We measure new programmes.
R&D as the
self-funded expenditure
before both amounts capitalised
in
the year and amortisation
of previously-capitalised
balances.
We expect to spend approximately
5% of underlying revenues
on R&D although this
proportion will fluctuate
depending on
the stage of development
of current programmes.
We expect
this proportion will
reduce modestly over
the medium term.
----------------------------------- ----------------------------------------
CAPITAL To deliver on its commitments The level of expenditure
EXPENDITURE to customers, the Group reflects the ongoing
AS A PROPORTION invests investment in facilities
OF UNDERLYING significant amounts in and tooling as the
REVENUE its infrastructure. All Group
4.6% proposed prepares for increased
investments are subject production volumes.
to rigorous review to
ensure that they
are consistent with forecast
activity and will provide
value for
money. We measure annual
capital expenditure as
the cost of
property, plant and equipment
acquired during the period
and,
over the medium term,
expect a proportion of
around 4%.
----------------------------------- ----------------------------------------
PROFITABLE GROWTH
----------------------------------- ----------------------------------------
UNDERLYING WHY WE MEASURE IT HOW WE HAVE PERFORMED
PROFIT BEFORE We measure underlying The reduction reflects
FINANCING profit before financing FX changes, restructuring
-8% on a basis that costs, a one-off product
-5% excluding FX shows the economic substance rectification charge
of the Group's hedging and
strategies higher R&D, partially
in respect of the transactional offset
exchange rate and commodity by benefits on TotalCare
price movements. In particular: contracts and lower
(a) revenues and costs bonus costs.
denominated in US dollars
and euros are presented
on the basis
of the exchange rates
achieved during the year;
(b) similar
adjustments are made
in respect of commodity
derivatives; and
(c) consequential adjustments
are made to reflect the
impact
of exchange rates on
trading assets and liabilities
and long-term
contracts on a consistent
basis.
----------------------------------- ----------------------------------------
AVERAGE We measure average cash The reduction reflects
CASH/DEBT based on the weekly balance the
-GBP38m of net impact of the purchase
funds/debt. These balances of
are reported at prevailing the remaining 50% of
exchange Power
rates and in recent periods, Systems in August.
year-on-year movements The sale of the Energy
in average business in December
cash balances reflect had a minimal impact
the significant acquisitions
and disposals
which have taken place,
most notably RRPS in
2011, IAE
restructuring in 2012,
the purchase of the remaining
50% of RRPS
and the disposal of our
Energy gas turbines and
compressor
business in 2014. The
impact on average cash
balances will
depend on when these
transactions took place
during the year.
----------------------------------- ----------------------------------------
FREE CASH FLOW In a business requiring The reduction mainly
GBP254m significant investment, reflects
we monitor cash lower profits and movements
flow to ensure that profitability in customer deposits.
is converted into cash
generation,
both for future investment
and as a return to shareholders.
We measure free cash
flow as the movement
in net funds/debt
during the year, before
movements arising from
payments
to shareholders, acquisitions
and disposals and FX.
----------------------------------- ----------------------------------------
During 2015 we intend to re-consider the dashboard of financial
and non-financial KPIs against which we believe the Group should be
measured.
ADDITIONAL FINANCIAL INFORMATION
FOREIGN EXCHANGE
Foreign exchange rate movements influence the reported income
statement, the cash flow and closing net cash balance. The average
and spot rates for the principal trading currencies of the Group
are
shown in the table below:
2014 2013 Change
Year end spot
USD per GBP rate 1.56 1.65 -5%
--------------- ----- ----- -------
Average spot
rate 1.56 1.56 +6%
----------------------------- ----- ----- -------
Year end spot
EUR per GBP rate 1.28 1.20 +7%
--------------- ----- ----- -------
Average spot
rate 1.18 1.18 +5%
----------------------------- ----- ----- -------
THE GROUP'S APPROACH TO MANAGING ITS TAX AFFAIRS
The Board is involved in setting the Group's tax policies which
govern the way its tax affairs are managed. In summary, this
means:
i) the Group manages its tax costs through maximising the tax
efficiency of business transactions. This includes taking advantage
of available tax incentives and exemptions;
ii) this must be done in a way which is aligned with the Group's
commercial objectives and meets its legal obligations and ethical
standards;
iii) the Group also has regard for the intention of the
legislation concerned rather than just the wording itself;
iv) the Group is committed to building constructive working
relationships with tax authorities based on a policy of full
disclosure in order to remove uncertainty in its business
transactions and to allow the authorities to review possible
risks;
v) where appropriate and possible, the Group enters into
consultation with tax authorities to help shape proposed
legislation and future tax policy; and
vi) the Group seeks to price transactions between Group
companies as if they were between unrelated parties, in compliance
with the OECD Transfer Pricing Guidelines and the laws of the
relevant jurisdictions.
THE GROUP'S GLOBAL CORPORATE INCOME TAX CONTRIBUTION
Around 95% of the Group's underlying profit before tax
(excluding joint ventures) is generated in the UK, US, Germany,
Norway, Finland and Singapore. The remaining profits are generated
across more than 40 other countries. This reflects the fact that
the majority of the Group's business is undertaken, and employees
are based, in the above countries.
In common with most multinational groups, the total of all
profits in respect of which corporate tax is paid is not the same
as the consolidated profit before tax reported on page 95. The main
reasons for this are:
i) the consolidated income statement is prepared under Adopted
IFRS whereas tax is paid on the profits of each Group company,
which are determined by local accounting rules;
ii) accounting rules require certain income and costs relating
to our commercial activities to be eliminated from, or added to,
the aggregate of all the profits of the Group companies when
preparing the consolidated income statement ('consolidation
adjustments'); and
iii) specific tax rules including exemptions or incentives as
determined by the tax laws in each country.
The Group's total corporation tax payments in 2014 were GBP276
million. The level of tax paid in each country is impacted by the
above. In most cases, (i) and (ii) are only a matter of timing and
therefore tax will be paid in an earlier or later year. As a result
they only have a negligible impact on the Group's underlying tax
rate which, excluding joint ventures, would be 25.5% (the
underlying tax rate including joint ventures can be found on page
29). This is due to deferred tax accounting, details of which can
be found in note 5 to the Financial Statements. The impact of (iii)
will often be permanent depending on the relevant tax law.
INVESTMENTS AND CAPITAL EXPENDITURE
The Group subjects all major investments and capital expenditure
to a rigorous examination of risks and future cash flows to ensure
that they create shareholder value. All major investments require
Board approval.
The Group has a portfolio of projects at different stages of
their life cycles. Discounted cash flow analysis of the remaining
life of projects is performed on a regular basis.
Sales of engines in production are assessed against criteria in
the original development programme to ensure that overall value is
enhanced.
FINANCIAL RISK MANAGEMENT
The Board has established a structured approach to financial
risk management. The Financial risk committee (Frc) is accountable
for managing, reporting and mitigating the Group's financial risks
and exposures. These risks include the Group's principal
counterparty, currency, interest rate, commodity price, liquidity
and credit rating risks outlined in more depth in note 17. The Frc
is chaired by the Chief Financial Officer. The Group has a
comprehensive financial risk policy that advocates the use of
financial instruments to manage and hedge business operations risks
that arise from movements in financial, commodities, credit or
money markets. The Group's policy is not to engage in speculative
financial transactions. The Frc sits quarterly to review and assess
the key risks and agree any mitigating actions required.
CAPITAL STRUCTURE
GBPmillion 2014 2013
------------------ ------ ------
Total equity 6,387 6,303
------------------ ------ ------
Cash flow hedges 81 68
------------------ ------ ------
Group capital 6,468 6,371
------------------ ------ ------
Net funds 666 1,939
------------------ ------ ------
Operations are funded through various shareholders' funds, bank
borrowings, bonds and notes. The capital structure of the Group
reflects the judgement of the Board as to the appropriate balance
of funding required.
Funding is secured by the Group's continued access to the global
debt markets. Borrowings are funded in various currencies using
derivatives where appropriate to achieve a required currency and
interest rate profile. The Board's objective is to retain
sufficient financial investments and undrawn facilities to ensure
that the Group can both meet its medium-term operational
commitments and cope with unforeseen obligations and
opportunities.
The Group holds cash and short-term investments which, together
with the undrawn committed facilities, enable it to manage its
liquidity risk.
During the year, the Group repaid a GBP200 million EIB loan.
At year end, the Group retained aggregate liquidity of GBP4.1
billion. This liquidity included net funds of GBP666 million and
aggregate borrowing facilities of GBP3.5 billion, of which GBP1.3
billion remained undrawn.
The maturity profile of the borrowing facilities is regularly
reviewed to ensure that refinancing levels are manageable in the
context of the business and market conditions. The only facility to
mature in 2015 is a US$83 million note. There are no rating
triggers in any borrowing facility that would require the facility
to be accelerated or repaid due to an adverse movement in the
Group's credit rating.
The Group conducts some of its business through a number of
joint ventures. A major proportion of the debt of these joint
ventures is secured on the assets of the respective companies and
is nonrecourse
to the Group. This debt is further outlined in note 11.
CREDIT RATING
Rating Outlook Grade
------------------ ------- -------- -----------
Moody's Investors A3 Stable Investment
Service
------------------ ------- -------- -----------
Standard & Poor's A Stable Investment
------------------ ------- -------- -----------
The Group subscribes to both Moody's Investors Service and
Standard & Poor's for independent long-term credit ratings. At
31 December 2014, the Group maintained investment grade ratings
from both agencies.
As a capital-intensive business making long-term commitments to
our customers, the Group attaches significant importance to
maintaining or improving the current investment grade credit
ratings.
ACCOUNTING
The consolidated Financial Statements have been prepared in
accordance with International Financial Reporting Standards (IFRS),
as adopted by the EU. With effect from 1 January 2014, the Group
has adopted IFRS 10 Consolidated Financial Statements, IFRS 11
Joint Arrangements and IFRS 12 Disclosure of Interests in Other
Entities. The impact of these and other changes to IFRS which have
not been adopted in 2014 is included within the accounting policies
in note 1.
SHARE PRICE
During the year, the share price decreased by 32% from 1275
pence to 870 pence, compared to a 12% decrease in the FTSE
aerospace and defence sector and 3% decrease in the FTSE 100. The
Company's share price ranged from 1289 pence in January to 779.5
pence in October.
Principal risks
Managing our risks to deliver better power for a changing
world.
Rolls-Royce benefits from operating a risk management framework
within a risk-conscious
organisation. Risk management is built into our day-to-day
activities and forms an integral part of how we work. From our
engineering design, through to engine production, servicing and how
we run our operations, risk management is a key enabler for
delivering our brand promise: 'trusted to deliver excellence'.
Given the rapid growth of the business over the past few years
and the changing risk
environment that we work in, we have been reviewing how far the
risk management
framework continues to meet our needs across the Group. This
work is now largely
complete and we will be rolling out some improvements across the
organisation to help ensure greater consistency across the
different parts of our operations. Part of this review has looked
at risk governance and how the Board assesses our principal risks
and satisfies itself that these are being managed
appropriately.
RISK GOVERNANCE
The review of our risk management framework has been conducted
alongside the governance review described on page 56. The Board has
decided that, from January 2015, the principal risks will be
reviewed by the Board or the most appropriate board committees to
make sure that there is sufficient focus and independent oversight
on the risks. During the year, the relevant committees will carry
out 'deep dives' to review their allocated risks in detail and then
report to the Board. This will ensure that we are in a good
position to assess how far
controls and actions are effective.
The Executive Leadership Team (ELT) assists the Board in
determining the nature and
extent of the principal risks it is willing to take in achieving
its strategic objectives. During 2014, as part of the full and
half-year results process, the ELT reviewed key risks which had
been reported by the Divisions and functions. These were
cross-checked with the risks that the ELT had identified from its
own assessments, from which it developed a list of principal
risks.
When the ELT reviews the principal risks it takes into account
changes in external strategic factors such as the competitive
environment, technology, cyber security and macro-economic
developments as well as potential operational, financial and
compliance risks. Changes in our risk profile are highlighted to
the Board. The Board can regularly review and challenge whether the
Group's principal risks are the right ones to focus on and have an
opportunity to discuss with senior management how they are being
managed. The Board is very conscious of the need to both keep the
list of principal risks under active review and to consider
potential risks as an explicit part of its discussions.
OUR RISK MANAGEMENT ACTIVITIES
The Board is responsible for the Group's system of internal
control and for maintaining and reviewing its effectiveness from a
financial, operational and compliance perspective. This system of
internal control is designed to identify and manage, rather than
eliminate, the risk of failure to achieve business objectives and
to provide reasonable but not absolute assurance against material
misstatement or loss. Our risk management process is a key element
of the Group's internal control system and will develop in line
with our activities, and in response to the risks and uncertainties
that arise.
Risk management is implemented using a Group-wide framework and
software tool and a network of trained experts.
Divisions and their business units and functions are accountable
for identifying and managing risk in line with Group requirements
and they formally review risks at least twice yearly. Business
continuity plans are put in place by the businesses to mitigate
continuity risks.
Risk thresholds are set at each level across the Group and any
risks identified that meet the
agreed threshold are captured in the Group risk software tool
and escalated to Group level as part of a well structured reporting
and review system.
This framework benefits from overall coordination by the Group's
enterprise risk team, led by the director of risk, which is
responsible for disseminating risk policy and processes. To help
ensure full coverage and efficiency we are currently conducting a
risk, control and assurance mapping exercise to give the Board and
committees that have oversight responsibility a clearer picture of
how the internal control and risk management framework is working
in practice.
Joint ventures constitute an increasingly large part of the
Group's activities. Responsibility for
internal control procedures in joint ventures lies with the
managers of those operations.
We seek to exert influence over such joint ventures through
board representation.
Management and internal audit regularly review the activities of
these joint ventures and the director of internal audit and the
Audit Committee have been taking a close look at audit coverage in
this area.
The Board is very aware that the effectiveness of risk
management is highly dependent on behaviours, as a good process
does not automatically lead to a good outcome. Our ethics and
compliance improvement programme, aimed at securing compliance with
our ethical
standards, will help. The launch of the new Global Code of
Conduct is reinforcing the values and behaviours required, which in
turn will strengthen our risk culture.
PRINCIPAL RISKS
During the year, the ELT and Board focused on the principal
risks and the actions being
taken to manage them. This involved: discussing changes to the
risk register; considering key risk thresholds and agreeing changes
to limits; reviewing the risk indicators for principal risks; and,
hearing from management how risks that exceed the revised
thresholds will be managed.
The following table describes the principal risks facing the
Group notwithstanding that there are other risks that may occur and
may impact the achievement of the Group's objectives.
Risk or uncertainty and potential
impact How we manage it
* Operating a safety first culture
Product failure
----------------------------------------------------------------
Product not meeting safety expectations,
or causing significant impact * Applying our engineering design and validation
to customers or the environment process from initial design, through production and
through failure in quality control. into service
----------------------------------------------------------------
* The Safety and Ethics Committee reviewing the scope
and effectiveness of the Group's product safety
policies to ensure that they operate to the highest
industry standards (see Safety and Ethics Committee
on page 66)
----------------------------------------------------------------
* Operating a safety management system (SMS), governed
by the product safety review board, and subject to
continual improvement based on experience and
industry best practice. Product safety training is an
integral part of our SMS
----------------------------------------------------------------
* Improving our supply chain quality
----------------------------------------------------------------
* Crisis management team chaired by Director of
Engineering and Technology or General Counsel as
appropriate
This principal risk is subject to
review by the Safety and Ethics
Committee
----------------------------------------------------------------
Business continuity
----------------------------------------------------------------
Breakdown of external supply
chain or internal * Continuing investment in adequate capacity, and
facilities that could be caused modern equipment and facilities (see Aerospace
by destruction of Business review on page 33)
key facilities, natural disaster,
regional conflict,
financial insolvency of a critical * Identifying and assessing points of weakness in our
supplier or scarcity of materials internal and external supply chain, our IT systems
which would reduce the ability and our people skills
to meet customer commitments,
win future
business or achieve operational
results.
----------------------------------------------------------------
* Selecting and developing stronger suppliers
----------------------------------------------------------------
* Developing dual sources or dual capability
----------------------------------------------------------------
* Developing and testing incident management and
business continuity plans
----------------------------------------------------------------
* Crisis management team chaired by Director -
Engineering and Technology or General Counsel as
appropriate
----------------------------------------------------------------
* Customer excellence centres providing improved
response to supply chain disruption
----------------------------------------------------------------
This principal risk is subject to
review by the Audit Committee
----------------------------------------------------------------
Competitor action
----------------------------------------------------------------
The presence of large, financially
strong * Accessing and developing key technologies and service
competitors in the majority offerings which differentiate us competitively (see
of our markets means Innovation and Technology on page 21) Focusing on our
that the Group is susceptible customers and partnering with others effectively
to significant price
pressure for original equipment
or services even * Focusing on being responsive to our customers and
where our markets are mature improving the quality, delivery and reliability of
or the competitors are few. our products and services
Our main competitors have access
to significant government funding
programmes as well as the ability * Partnering with others effectively
to invest heavily in technology
and industrial capability.
* Driving down cost and improving margins (see Chief
Executive's review on page 17 and Chief Financial
Officer's review on pages 26 and 27)
* Protecting credit lines
* Investing in innovation, manufacturing and production,
and continuing governance of technology programmes
* Understanding our competitors
This principal risk is subject to
review by the Board
----------------------------------------------------------------
Political risk
----------------------------------------------------------------
Geopolitical factors that lead
to an unfavourable * Where possible, locating our domestic facilities and
business climate and significant supply chain in countries with a low level of
tensions between political risk and/or ensuring that we maintain dual
major trading parties or blocs capability
which could impact
the Group's operations. For
example: explicit trade * Diversifying global operations to avoid excessive
protectionism, differing tax concentration of risks in particular areas
or regulatory regimes, potential
for conflict, or broader political
issues. * The international network of Rolls-Royce and its
business units proactively monitoring local
situations
* Maintaining a balanced business portfolio with high
barriers to entry and a diverse customer base (see
Chief Executive's review on pages 15 and 16 and
Business Model on pages 24 and 25)
* Proactively influencing regulation where it affects
us (see Sustainability on page 45)
This principal risk is subject to
review by the Board
----------------------------------------------------------------
Major programme delivery
----------------------------------------------------------------
Failure to deliver a major programme
on time, * Major programmes are subject to Board approval (see
within budget to specification Additional financial information on page 160)
or technical
performance falling significantly
short of * Reviewing major programmes at levels and frequencies
customer expectations, or not appropriate to their performance against key
delivering the financial and non-financial deliverables and
planned business benefits, would potential risks throughout the programme's life cycle
have potentially significant (see Additional financial information on page 160)
adverse financial and reputational
consequences, including the
risk of impairment of the carrying * Conducting technical audits at pre-defined points and
value of the Group's intangible performed by a team that is independent from the
assets and the impact of potential programme
litigation.
* Requiring programmes to address the actions arising
from reviews and audits and monitoring and
controlling progress through to closure
* Applying knowledge management principles to provide
benefit to current and future programmes
This principal risk is subject to
review by the Board
----------------------------------------------------------------
Compliance
----------------------------------------------------------------
Non-compliance by the Group
with legislation * Taking an uncompromising approach to compliance
or other regulatory requirements
in the heavily
regulated environment in which * Operating an extensive compliance programme. This
it operates programme and the Global Code of Conduct are
(for example: export controls, disseminated throughout the Group and are updated and
use of controlled reinforced from time-to-time to ensure their
chemicals and substances, and continued relevance, and to ensure that they are
anti-bribery and complied with both in spirit and to the letter. The
corruption legislation) compromising Global Code of Conduct and the Group's compliance
the ability programme are supported by appropriate training (see
to conduct business in certain Safety and Ethics Committee on page 67)
jurisdictions and
exposing the Group to potential
reputational
damage, financial penalties,
debarment from
government contracts for a period
of time, and/or
suspension of export privileges
or export credit
financing, any of which could
have a material
adverse effect.
----------------------------------------------------------------
* A legal and compliance team is in place to manage our
compliance programme and any ongoing regulatory
investigations (see Safety and Ethics Committee on
page 68)
----------------------------------------------------------------
* Lord Gold has reviewed the Group's current compliance
procedures and the Group has continued to implement
an improvement plan
----------------------------------------------------------------
* Implementing a comprehensive REACH compliance
programme. This includes establishing appropriate
data systems and processes, working with our
suppliers, customers and trade associations and
conducting research on alternative materials
This principal risk is subject to
review by the Safety and Ethics
Committee
----------------------------------------------------------------
Market shock
----------------------------------------------------------------
The Group is exposed to a number
of market risks, some of which * Maintaining a strong balance sheet, through healthy
are of a macro-economic nature. cash balances and a continuing low level of debt
For example, oil price or foreign
currency exchange rates, and
some which are more specific * Providing financial flexibility by maintaining high
to the Group, such as liquidity levels of liquidity and an investment grade 'A'
and credit risks, reduction credit rating (see Additional financial information
in air travel or disruption on page 161)
to other customer operations.
Significant extraneous market
events could also materially * Sustaining a balanced portfolio through earning
damage the Group's competitiveness revenue both from the sale of original equipment and
and/or creditworthiness. This aftermarket services, providing a broad product range
would affect operational results and addressing diverse markets that have differing
or the outcomes of financial business cycles
transactions
* Deciding where and what currencies to source in, and
where and how much credit risk is extended or taken.
The Group has a number of treasury policies that are
designed to hedge residual risks using financial
derivatives (foreign exchange, interest rate and
commodity price risk - see Additional financial
information on page 160 and note 17)
----------------------------------------------------------------
IT vulnerability
----------------------------------------------------------------
Breach of IT security causing
controlled or critical data * Establishing 'defence in depth' through deployment of
to be lost, made inaccessible, multiple layers of software protection and processes
corrupted or accessed by unauthorised including web gateways, filtering, firewalls,
users impacting the Group's intrusion, and advanced persistent threat detectors
operations or reputation and integrated reporting (see Audit Committee report
on pages 71 and 72)
----------------------------------------------------------------
* Running security and network operations centres
----------------------------------------------------------------
* Active sharing IT security information through
industry, government and security forums
This principal risk is subject to
review by the Audit Committee
----------------------------------------------------------------
Going concern
As described on page 161, the Group meets its funding
requirements through a mixture of shareholders' funds, bank
borrowings, bonds and notes. At 31 December 2014, the Group had
borrowing facilities of GBP3.5 billion and total liquidity of
GBP4.1 billion, including: cash and cash equivalents of GBP2.9
billion and undrawn facilities of GBP1.3 billion. GBP67 million of
the facilities mature in 2015.
The Group's forecasts and projections, taking into account
reasonably possible changes in trading performance, show that the
Group has sufficient financial resources. The directors have
reasonable expectation that the Company and the Group are well
placed to manage their business risks and to continue in
operational existence for the foreseeable future, despite the
current uncertain global economic outlook.
Accordingly, the directors continue to adopt the going concern
basis (in accordance with the guidance 'Going Concern and Liquidity
Risk: Guidance for Directors of UK Companies 2009' issued by the
FRC) in preparing the consolidated financial statements.
Responsibility statement
The Responsibility Statement below has been extracted in
unedited text from the Company's full Annual Report for the year
ended 31 December 2014. Certain parts of the annual report are not
included within this announcement.
Each of the persons who is a director at the date of approval of
this report confirms that to the best of his or her knowledge:
i) each of the Group and parent company financial statements,
prepared in accordance with IFRS and UK Accounting Standards
respectively, gives a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company
and the undertakings included in the consolidation taken as a
whole; and
ii) the Strategic Report on pages 1 to 53 and Directors' Report
on pages 54 to 92 and pages 162 to 165 includes a fair review of
the development and performance of the business and the position of
the Company and the undertakings included in the consolidation
taken as a whole, together with a description of the principal
risks and uncertainties that they face.
By order of the Board
Pamela Coles
Company Secretary
12 February 2015
Cautionary statement regarding forward-looking statements
This 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 the Company and its
directors accept no liability to any other person other than under
English law.
This announcement contains non-statutory accounts within the
meaning of section 435 of the Companies Act 2006. The statutory
accounts for the year ended 31 December 2014, upon which an
unqualified audit opinion has been given and which did not contain
a statement under Section 498(2) or 498(3) of the Companies Act
2006, will be filed in due course with the Registrar of
Companies.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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