23 February 2023

 

ROLLS-ROYCE HOLDINGS PLC - 2022 Full Year Results

Improved profit and cash in 2022; transformation programme underway to create a high-performing, growing and competitive business

·          Improved orders, revenue, profit and cash flow in 2022

-  Strong new order wins in Civil Aerospace and Defence and a record order book in Power Systems

-  Underlying operating profit of £652m, £238m higher than the prior year, with the increase driven by Civil Aerospace and Power Systems

-  Free cash flow from continuing operations of £505m, £2.0bn higher than the prior year, led by engine flying hour recovery

-  Net debt of £3.3bn, down from £5.2bn at end 2021, due to disposals and improved cash flow

·          Focused on delivering significant performance improvement in 2023 and beyond

-  Transformation programme in place to deliver further performance improvements from 2023, informed by rigorous benchmarking

-  Underlying operating profit guidance of £0.8-£1.0bn and free cash flow of £0.6-£0.8bn in 2023; includes early benefits from transformation

-  Strategic review underway to identify investment priorities; medium-term financial targets to be set in the second half of 2023

 

Tufan Erginbilgic, CEO said: "It is an honour to lead Rolls-Royce, one of the world's most trusted brands and a business with strong positions in growing markets. Our people take tremendous pride in our innovation and engineering solutions. Together, we must now move at pace and harness that pride to create a high-performing, growing and competitive business.

While our performance improved in 2022, we are capable of much more. Our transformation programme will improve our efficiency and commercial outcomes, and deliver a sustainable reduction in working capital. This will require a winning culture, underpinned by more effective performance management and a shared determination to deliver cash and reduce debt. Our success will enable us to reward investors for their support and invest in future growth.

Our transformation programme is already underway and is moving at pace. It will include a strategic review so that we can prioritise our investment towards the most profitable opportunities. We will report the findings together with our medium-term goals in the second half of this year."

Full Year 2022 Group continuing operations

	Underlying 2022	Underlying 2021	Statutory  2022	Statutory 2021
£ million
Revenue	12,691	10,947	13,520	11,218
Operating profit	652	414	837	513
Operating margin (%)	5.1%	3.8%	6.2%	4.6%
Profit/(loss) before taxation	206	36	(1,502)	(294)
Earnings/(loss) per share (pence)	1.95	0.11	(14.24)	1.48
Free cash flow	505	(1,485)
Net cash flow from operating activities 1			1,850	(259)
Net debt 1			(3,251)	(5,157)

¹   Includes discontinued operations

A reconciliation of alternative performance measures to their statutory equivalent is provided on pages 48 to 51

 

2022 performance summary

·  Recovering demand. Large engine flying hours (EFH) in Civil Aerospace grew by 35% year on year as recovery in international travel continued. New large engine orders were received from Malaysia Aviation Group, Norse Atlantic Airways and Qantas. The Bell V-280 Valor, powered by our AE1107F engines, was selected by the US Army for the Future Long Range Assault Aircraft programme. Order intake in Power Systems grew 29% to £4.3bn.

·    Higher profit and margins. The year on year increase in Group operating profit was driven by higher profits in Civil Aerospace and Power Systems, partly offset by lower profit in Defence and increased investment in New Markets. The higher Group margin versus the prior year was driven by improvements in long-term service agreement (LTSA) contract margins and increased spare engines profit in Civil Aerospace. This was partly offset by the non-repeat of a foreign exchange revaluation credit in Civil Aerospace and legacy spare parts sales in Defence in 2021, and lower margins in Power Systems due to cost increases.

·   Stronger cash flows. Free cash flow from continuing operations improved from an outflow of £1.5bn in 2021 to an inflow of £0.5bn, driven by 35% growth in large engine flying hours, comparatively lower growth in large engine major shop visits at 19%, and higher Defence cash flow. Higher inventory in Power Systems saw its cash conversion ratio fall. Free cash flow benefitted from higher Civil Aerospace LTSA invoiced flying hour receipts of £3,564m (2021: £2,289m), the collection of overdue balances in Civil Aerospace (c£180), and a customer advance in Defence (£63m) and Power Systems (year on year increase of c£150m).

·    Lower net debt. Net debt was reduced from £5.2bn to £3.3bn, as we completed our disposal programme. We have £4.1bn of drawn debt, of which £0.5bn matures in 2024, £0.8bn in 2025 and £2.8bn in 2026-2028, and £1.8bn of lease liabilities. We have £2.6bn cash and £5.5bn undrawn facilities.

·   Shareholder payments will not be made for 2022. We are committed to returning to an investment grade credit rating through performance improvement, and to resuming shareholder payments.

Transformation programme and strategic review

We have carried out extensive work to benchmark our performance against that of our peers. This work shows that there is significant scope for us to deliver materially higher profit, cash flows and returns. We will create a stronger, growing business with a clear proposition for investors based upon delivering:

·      a high quality and competitive business, focused on profitable performance and operational efficiency;

·      growing sustainable cash flows, generated from operations and disciplined capital investment; and

·      a strong balance sheet and growing shareholder returns.

We have already begun an ambitious transformation programme to deliver a step-change in our performance. It consists of seven workstreams, each led by a senior executive:

Efficiency and simplification - delivering sustainable cost efficiencies. 

Commercial optimisation - getting the right reward for the risks we take and the value we create for customers.

Working capital - delivering a significant and structural reduction across the Group.

Business improvement - each business unit building and delivering plans to address performance gaps to realise its potential.

Strategic review - enabling prioritisation of investment opportunities.

Performance management - delivering on our expectations of high performance from all businesses and employees.

Purpose and culture - instilling our people with the right mindset to be confident, proactive and timely in our actions.

The outcomes of these workstreams will drive a clear and granular plan. We will communicate this to you alongside medium-term financial targets in the second half of the year.

Outlook and 2023 Guidance

A continued recovery in our end markets and the actions we are taking give us confidence in delivering higher profit and cash flows in 2023.

Underlying 2023 financial guidance
Operating profit	£0.8bn-£1.0bn
Free cash flow	£0.6bn-£0.8bn

Our 2023 operating profit guidance of £0.8-1.0bn assumes £100-200m of targeted contract improvements (2022: £319m).

Our 2023 free cash flow guidance of £0.6-0.8bn is based on c£500-700m growth in the Civil LTSA Creditor
(2022: £792m), a year on year headwind of approximately £200m associated with legacy Boeing OE concessions and a c£100m adverse impact in 2023 due to fires at two suppliers' premises in late 2022 and early 2023. This cash impact will reverse in 2024.

In 2023, we assume large engine flying hours at 80-90% of 2019's level and 1,200-1,300 total shop visits.

Additional detail is included in the results presentation and supplementary data slides.

Underlying financial performance by business

£ million	Underlying revenue	Organic Change 1	Underlying operating profit/(loss)	Organic change 1	Underlying operating margin	Margin change (pts)
Civil Aerospace	5,686	25%	143	nm	2.5%	6.3pt
Defence	3,660	2%	432	(10)%	11.8%	(1.8)pt
Power Systems	3,347	23%	281	17%	8.4%	(0.4)pt
New Markets	3	nm	(132)	nm	nm	nm
Other businesses	−	nm	(31)	nm	nm	nm
Corporate/eliminations	(5)	nm	(41)	nm	nm	nm
Total (continuing operations)	12,691	14%	652	48%	5.1%	1.3pt

¹   Organic change is the measure of change at constant translational currency applying full year 2021 average rates to 2022. All underlying income statement commentary is provided on an organic basis unless otherwise stated

All results are shown for Group continuing operations, on an underlying basis, excluding discontinued operations (ITP Aero). For more details, see note 2 of the Condensed Consolidated Financial Statements (page 22).

nm is defined as not measurable.

Trading cash flow

£ million	2022	2021
Civil Aerospace	226	(1,670)
Defence	426	377
Power Systems	158	219
New Markets	(57)	(56)
Other businesses	5	(43)
Corporate/eliminations	(49)	(38)
Total trading cash flow (continuing operations)	709	(1,211)
Taxation	(172)	(182)
Underlying operating profit charge exceeded by contributions to defined benefit schemes	(32)	(92)
Total free cash flow (continuing operations)	505	(1,485)

 

Civil Aerospace

2022 key Civil operational metrics:	Large engine	Business aviation/ Regional	Total	Change
OE deliveries	190	165	355	15%
LTSA engine flying hours (millions)	10.0	3.2	13.2	29%
Total LTSA shop visits	703	341	1,044	10%
…of which major shop visits	248	328	576	8%

 

Our Civil Aerospace business continues to recover from the impact of COVID-19. Large engine flying hours were up 35% year on year at 65% of 2019 levels, with an improvement at the end of the year as travel restrictions in China eased. We expect large EFH at 80-90% of 2019 levels in 2023. Business aviation demand continues to remain above 2019 levels.

We saw new large engine orders from Malaysia Aviation Group, Norse Atlantic Airways and Qantas in 2022 and we welcomed the launch of the new A350 freighter. In February 2023, we received an order from Air India for 68 Trent XWB-97 engines, plus options for 20 more, and 12 Trent XWB-84 engines.

OE deliveries rose by 15% year on year, with 165 business aviation deliveries (2021: 114) and 190 total large engine deliveries (2021: 195). In 2022, we delivered 44 large spare engines (2021: 36), which represented 23% of total large engine deliveries (2021: 18%). This is above the typical range of 10-15% of total engine deliveries, as we grow the pool of spare engines to underpin fleet health and improve resilience. We expect this elevated level of spare engine deliveries to continue in 2023 and 2024.

Total shop visits were 1,044 versus 953 in 2021. There were 248 large engine major shop visits in 2022 versus 208 in 2021. In 2022, we agreed with Air China to create a joint venture overhaul facility that will eventually support up to 250 shop visits per year.

Underlying revenue of £5.7bn was up 25%. OE revenue of £2.0bn was up 23% reflecting higher spare engine deliveries. Services revenue of £3.7bn was up 26% on the prior year, reflecting higher large engine shop visits, aftermarket revenue growth from business aviation, regional and V2500, and positive LTSA catch-ups £360m, (2021: £214m).

Underlying operating profit was £143m (a 2.5% margin) versus a loss of £(172)m in 2021. The year on year increase was driven by improvements in LTSA contract margins, with an onerous provision credit of £51m
(2021: a £122m charge) and £319m of positive LTSA catch-ups (2021: £256m), a higher volume and different mix of large spare engine sales with more third party sales to capacity providers than in the prior year, increased aftermarket profit, and reduced losses on installed large engine OE deliveries. This was partly offset by the
non-repeat of a foreign exchange revaluation credit of c£140m in 2021.

Trading cash flow was £226m versus £(1,670)m in the prior year. The improvement was due to higher engine flying hour receipts reflecting the growth in LTSA flying hours, which grew at a materially faster rate than shop visits in 2022. Cash flows in 2022 benefited from the recovery of overdue balances from airlines incurred during the pandemic of c£180m.

Improvements in underlying operating profit and cash flows were delivered despite the challenges associated with inflation and the supply chain, which are expected to persist in 2023.

Defence

Order intake in our Defence business was £5.4bn in 2022 versus £2.3bn in 2021, with a book-to-bill of 1.5x versus 0.7x last year. The Bell V-280 Valor, powered by our AE1107F engines, was selected by the US Army for the Future Long Range Assault Aircraft programme. Major contract awards included the renewal of $1.8bn of services contracts in the U.S. for trainer and transport aircraft over the next five years. These awards, combined with increased military activity and spending underpin the long-term outlook for the business. Our order backlog at the year end was £8.5bn, with 86% order cover in 2023 and a high degree of cover in 2024 and beyond.

Revenue increased 2% to £3.7bn. OE revenue was up 10% year on year, with strong growth in Submarines along with new programmes (including B-52 and UK Combat). This more than offset reductions in services revenue, down 3% due to the non-repeat of legacy spare parts sales made in 2021.

Operating profit was £432m (11.8% margin) versus £457m (13.6% margin) in the prior year, reflecting the non-repeat of £45m of high margin one time legacy spare parts sales in the prior year and the changing mix of the business. Self-funded R&D and investment levels were elevated, as we support growth across the portfolio including the UK Future Combat programme and opportunities in North America. 

Trading cash flow of £426m improved versus £377m last year, despite slightly lower underlying profit and increased inventory, due to an advance payment from one of our customers of £63m.

 

Power Systems

Order intake in our Power Systems business was £4.3bn, 29% higher than the prior year, a record level for the business. We saw strong demand in many of our end markets, notably Power Generation including mission critical backup power, and for our engine systems and services. As a result, we now have 76% order cover for 2023.

Underlying revenue was £3.3bn, up 23% and above the previous peak in 2019. Services revenues grew 16% as product utilisation increased in our end markets, and OE revenue rose by 26%. Sales were strongest in the industrial and power generation end markets, partly offset by lower activity in China.

Operating profit was £281m (8.4% margin) versus £242m (8.8% margin) in the prior year. The lower margin versus the prior year reflects higher costs associated with inflation and supply chain disruption, increased
self-funded R&D, one-off charges including intangible asset impairments and write-downs of assets due to the Russia-Ukraine conflict, partly offset by the benefit of higher volumes.

Trading cash flow was £158m, a conversion ratio of 56% versus 90% last year. The lower conversion year on year reflects a higher level of inventories due to supply chain disruption and the pace of revenue growth, partly offset by increased customer advance payments.

New Markets

Investment increased in both Electrical and Small Modular Reactors (SMR), which resulted in an increased operating loss of £132m versus £70m last year. In 2022, Rolls-Royce Electrical entered into an agreement with Hyundai Motor Group to bring all-electric propulsion and hydrogen fuel cell technology for the Advanced Air Mobility market. We also entered into partnership with Embraer EVE to develop propulsion systems for their platform. Technologies developed in our Electrical business can be leveraged across the Group.

We have shortlisted three possible sites which will be home to one of our major factories in the production of our SMRs, whilst we await our first order in the UK or abroad. This supports our ambitions to manufacture the first fully operational SMR before 2030.

 

Statutory and underlying Group financial performance from continuing operations

	2022					2021
£ million	Statutory	Impact of hedge book 1	Impact of acquisition accounting	Impact of non-underlying items	Underlying	Underlying
Revenue	13,520	(829)	−	−	12,691	10,947
Gross profit	2,757	(264)	58	(74)	2,477	1,996
Operating profit	837	(264)	58	21	652	414
Gain arising on disposal of businesses	81	−	−	(81)	−	−
Profit before financing and taxation	918	(264)	58	(60)	652	414
Net financing costs	(2,420)	1,935	−	39	(446)	(378)
(Loss)/profit before taxation	(1,502)	1,671	58	(21)	206	36
Taxation	308	(416)	(9)	69	(48)	(26)
(Loss)/profit for the year from continuing operations	(1,194)	1,255	49	48	158	10
Basic (loss)/earnings per share (pence)	(14.24)				1.95	0.11

¹   Reflecting the impact of measuring revenue and costs at the average exchange rate during the year and the valuation of assets and liabilities using the year end exchange rate rather than the rate achieved on settled foreign exchange contracts in the year or the rate expected to be achieved by the use of the hedge book

-  Revenue: Underlying revenue of £12.7bn was up 14%, largely driven by underlying revenue increases across Civil Aerospace, Defence and Power Systems. Statutory revenue of £13.5bn was 21% higher compared with 2021. The difference between statutory and underlying revenue is driven by statutory revenue being measured at average prevailing exchange rates (2022: GBP:USD 1.24; 2021: GBP:USD 1.38) and underlying revenue being measured at the hedge book achieved rate during the year (2022 GBP:USD 1.50; H1 2021: GBP:USD 1.39; H2 2021: GBP:USD 1.59).

-  Operating profit: Underlying operating profit of £652m (5.1% margin) versus £414m (3.8% margin) in the prior year. The year-on-year growth was led by Civil Aerospace and Power Systems, partly offset by marginally lower year-on-year profits in Defence and increased investment in New Markets. Statutory operating profit was £837m, higher than the £652m underlying operating profit largely due to the £264m negative impact from currency hedges in the underlying results. Net charges of £21m were excluded from the underlying results as these related to non-underlying items comprising: net restructuring charges of £47m; net impairments of £65m, partly offset by the write back of exceptional Trent 1000 programme credits of £69m; and a £22m pension past service credit.

-  Profit before taxation: Underlying profit before tax of £206m included £(446)m net financing costs primarily related to net interest payable. Statutory loss before tax of £(1,502)m included £(1,579)m net fair value losses on derivative contracts, £(308)m net interest payable and a net £81m profit from disposals of businesses from continuing operations.

-  Taxation: Underlying taxation charge of £(48)m (2021: £(26)m). This reflects a tax charge on overseas profits of £(175)m and a tax credit due to increases in certain UK deferred tax assets of £127m. Deferred tax has not been recognised on current year UK tax losses. The tax charge in 2021 was driven by similar factors.

 

Free cash flow

	2022					2021
£ million	Cash flow	Impact of hedge book	Impact of acquisition accounting	Impact of other non-underlying items	Funds flow	Funds flow
Operating profit	837	(264)	58	21	652	414
Operating profit/(loss) from discontinued operations	86	−	−	−	86	(43)
Depreciation, amortisation and impairment	1,076	−	(58)	(65)	953	971
Movement in provisions	(197)	91	−	83	(23)	(136)
Movement in Civil LTSA balance	1,158	(366)	−	−	792	66
Other operating cash flows 1	72	(53)	−	22	41	(90)
Operating cash flow before working capital and income tax	3,032	(592)	−	61	2,501	1,182
Working capital (excluding Civil LTSA balance) 2	(348)	(165)	−	(19)	(532)	(810)
Cash flows on other financial assets and liabilities held for operating purposes	(660)	737	−	−	77	(85)
Income tax	(174)	−	−	−	(174)	(185)
Cash from operating activities	1,850	(20)	−	42	1,872	102
Capital element of lease payments	(218)	20	−	−	(198)	(374)
Capital expenditure and investment	(512)	−	−	36	(476)	(426)
Interest paid	(352)	−	−	−	(352)	(331)
Settlement of excess derivatives	(326)	−	−	−	(326)	(452)
Other	49	−	−	(78)	(29)	39
Free cash flow	491	−	−	−	491	(1,442)
- of which is continuing operations	505				505	(1,485)

¹   Other operating cash flows includes profit/(loss) on disposal, share of results and dividends received from joint ventures and associates, interest received, flows relating to our defined benefit post-retirement schemes, and share based payments

²   Working capital includes inventory, trade and other receivables and payables, and contract assets and liabilities (excluding Civil LTSA balances)

Free cash flow in the year was £0.5bn, an improvement of £2.0bn compared with the prior year driven by:

-  Operating cash flow before working capital and income tax of £2.5bn, £1.3bn higher year on year. The improvement at the Group level was principally due to higher flying hours in Civil Aerospace. Large engine flying hours increased by 35%, driving a £1.3bn increase in invoiced EFH receipts (from £2.3bn in 2021 to £3.6bn in 2022). Large engine major shop visit volumes of 248 were 19% higher than in the prior year (2021: 208). The movement in provisions of £(23)m largely related to utilisation of the Trent 1000 provision and movements in the contract loss provisions. Other operating cash flow movement of £41m included £36m interest received, the £131m improvement year on year was mainly due to lower pension contributions and higher dividends received from joint ventures.

-  Working capital £(0.5)bn, £0.3bn better year on year. Supply chain disruption resulted in an increase in inventories through 2022, notably in Civil Aerospace and Power Systems, which partly unwound at the end of the year. This was partly offset by a net inflow across payables and receivables reflecting collections of overdue debts in Civil Aerospace (c£180m in 2022), increased advance payment receipts in Power Systems (a c£150m year on year benefit) and a £63m advance payment received in Defence.

-  Income tax of £(174)m, net cash tax payments in 2022 were £(174)m (2021: £(185)m).

-  The capital element of lease payments was £(198)m, £(176)m lower than 2021 (£(374)m). In the prior year the elevated cost was driven by end of lease payments made on a small number of engines, as well as timing impacts on lease payments, with 2022 returning to more typical levels.

-  Capital expenditure and investments of £(476)m, comprising £(302)m PPE additions net of disposals, £(202)m intangibles additions, partly offset by a net movement in investments of £28m. The combined additions were similar to last year.

-  Interest paid of £(352)m, including lease interest payments, similar to the £(331)m in 2021. Following the repayment of the £2bn UK Export Finance backed loan in September 2022, we would expect interest paid to fall in 2023.

-  Settlement of excess derivative contracts of £(326)m, down from £(452)m in 2021. The decrease was in line with previously communicated guidance and reflects the profile of derivative contracts taken out to reduce the size of the hedge book. In total £710m of excess derivative settlements are left to be settled between 2023 and 2026.

Balance Sheet 

£ million	2022	2021	Change
Intangible assets	4,098	4,041	57
Property, plant and equipment	3,936	3,917	19
Right of use assets	1,061	1,203	(142)
Joint ventures and associates	422	404	18
Contract assets and liabilities	(10,681)	(8,836)	(1,845)
Working capital 1	2,297	1,458	839
Provisions	(2,333)	(1,582)	(751)
Net debt 2	(3,251)	(5,110)	1,859
Net financial assets and liabilities	(3,649)	(3,034)	(615)
Net post-retirement scheme deficits	(420)	(225)	(195)
Taxation	2,468	1,787	681
Held for sale 3	−	1,305	(1,305)
Other net assets and liabilities	36	36	−
Net liabilities	(6,016)	(4,636)	(1,380)
Other items
USD hedge book (US$bn)	19	22
Civil LTSA asset	885	915
Civil LTSA liability	(8,257)	(7,129)
Civil net LTSA liability	(7,372)	(6,214)

¹   Net working capital includes inventory, trade receivables and payables and similar assets and liabilities

²   Net debt (adjusted by £0.1bn to exclude net debt held for sale in 2021) includes £86m (2021: £37m) of the fair value of derivatives included in fair value hedges and the element of fair value relating to exchange differences on the underlying principal of derivatives in cash flow hedges

³   Held for sale in 2021 mainly related to ITP Aero which was disposed of on 15 September 2022

Key drivers of balance sheet movements were:

Contract assets and liabilities: The £(1,845)m movement in the net liability balance was mainly driven by an increase in deposits, foreign exchange movements and invoiced LTSA receipts in Civil Aerospace exceeding revenue recognised in the year, partly offset by £360m positive LTSA catch-ups.

Working capital: The £2.3bn net current asset position was £0.8bn higher than prior year, due to increased inventory of £1.0bn mostly in Civil Aerospace due to delayed outputs and supply chain disruption and Power Systems to support sales. Receivables increased by £1.6bn and payables increased by £(1.8)bn primarily driven by ITP Aero being external to the Group at year-end. Other drivers included higher trading volumes resulting in higher payables and receivables.

Provisions: The £(751)m increase primarily reflected the adoption of the amendment to IAS 37 for Onerous Contracts - Cost of Fulfilling a Contract which increased contract loss provisions by £(723)m on 1 January 2022. The amendment clarifies that the direct cost of fulfilling a contract comprises the incremental costs of fulfilling that contract and also an allocation of other costs that relate directly to fulfilling contracts.

Net debt: Decreased from £(5.1)bn to £(3.3)bn driven by the completion of the disposal programme and free cash inflow of £0.5bn. Our liquidity position is strong with £8.1bn of liquidity including cash and cash equivalents of £2.6bn and undrawn facilities of £5.5bn. Net debt included £(1.8)bn of lease liabilities (2021: £(1.7)bn).

Net financial assets and liabilities: A £(615)m increase in the net financial liabilities driven by a change in fair value of derivative contracts largely due to the impact of the movement in GBP:USD exchange rates, partly offset by deals that matured in the year.

Net post-retirement scheme deficits: A £(195)m increase in the net deficit driven by an increase in bond yields and inflation impacting both plan assets and obligations.

Taxation: The net tax asset increased by £681m, most of which related to an increase in the deferred tax asset on unrealised losses on derivatives of £329m and certain other UK deferred tax assets of £118m reflecting tax relief that will be taken in the future, based on profit forecasts. There has also been a £165m decrease in deferred tax liabilities, the majority of which related to a reduction in the UK pension surplus.

 

Results meeting and conference call

Our results presentation will be held at the London Stock Exchange and webcast live at 08:30 (GMT) today. Downloadable materials will also be available on the Investor Relations section of the Rolls-Royce website. https://www.rolls-royce.com/investors/results-and-events.aspx

To register for the webcast, including Q&A participation, please visit the following link:  https://app.webinar.net/0LPb3yGpVaO 

Please use this same link to access the webcast replay which will be made available shortly after the event concludes. Photographs and broadcast-standard video are available at www.rolls-royce.com

Enquiries:

Investors:			Media:
Isabel Green	+44 7880 160976		Richard Wray	+44 7810 850055

 

This results announcement contains forward-looking statements. Any statements that express forecasts, expectations and projections are not guarantees of future performance and will not be updated. By their nature, these statements involve risk and uncertainty, and a number of factors could cause material differences to the actual results or developments. This report is intended to provide information to shareholders, is not designed to be relied upon by any other party, or for any other purpose and Rolls-Royce Holdings plc and its directors accept no liability to any other person other than under English law.

LSE: RR.; ADR: RYCEY; LEI: 213800EC7997ZBLZJH69

 

Notes:

Statutory results were referred to as "reported" results in the 2021 full year results statement.

 

Condensed Consolidated Financial Statements

Condensed consolidated income statement

Year ended 31 December 2022

				2022			2021
			Notes		£m		£m
Continuing operations
Revenue			2		13,520		11,218
Cost of sales 1					(10,763)		(9,082)
Gross profit			2		2,757		2,136
Commercial and administrative costs			2		(1,077)		(890)
Research and development costs			2, 3		(891)		(778)
Share of results of joint ventures and associates			10		48		45
Operating profit					837		513
Gain arising on disposal of businesses			23		81		56
Profit before financing and taxation					918		569
Financing income			4		355		229
Financing costs 2			4		(2,775)		(1,092)
Net financing costs					(2,420)		(863)
Loss before taxation					(1,502)		(294)
Taxation			5		308		418
(Loss)/profit for the year from continuing operations					(1,194)		124
Discontinued operations
Profit for the year from ordinary activities			23		68		36
Costs of disposal of discontinued operations prior to disposal			23		-		(39)
Loss on disposal of discontinued operations			23		(148)		-
Loss for the year from discontinued operations					(80)		(3)
(Loss)/profit for the year					(1,274)		121
Attributable to:
Ordinary shareholders					(1,269)		120
Non-controlling interests (NCI)					(5)		1
(Loss)/profit for the year					(1,274)		121
Other comprehensive income					522		41
Total comprehensive (expense)/income for the year					(752)		162
(Loss)/earnings per ordinary share attributable to ordinary shareholders:			6
From continuing operations:
Basic					(14.24)p		1.48p
Diluted					(14.24)p		1.47p
From continuing and discontinued operations:
Basic					(15.20)p		1.44p
Diluted					(15.20)p		1.43p
Underlying earnings per ordinary share are shown in note 6.

¹   Cost of sales includes a net charge for expected credit losses of £73m (2021: £78m). Further details can be found in note 12

²  Included within financing are fair value changes on derivative contracts. Further details can be found in notes 2, 4 and 18

 

Condensed consolidated statement of comprehensive income

Year ended 31 December 2022

		2022	2021
	Notes	£m	£m
(Loss)/profit for the year		(1,274)	121
Other comprehensive income/(expense) (OCI)
Actuarial movements on post-retirement schemes	20	(156)	254
Revaluation to fair value of other investments	10	(4)	(2)
Share of OCI of joint ventures and associates	10	2	1
Related tax movements		89	(79)
Items that will not be reclassified to profit or loss		(69)	174
Foreign exchange translation differences on foreign operations		452	(178)
Foreign exchange translation differences reclassified to income statement on disposal of businesses	23	65	(1)
Hedging reserves reclassified to income statement on disposal of businesses	23	111	-
NCI disposed of on disposal of businesses	23	1	-
Movement on fair values charged to cash flow hedge reserve		(7)	(32)
Reclassified to income statement from cash flow hedge reserve 1		(55)	39
Costs of hedging		10	-
Share of OCI of joint ventures and associates	10	-	44
Related tax movements		14	(5)
Items that will be reclassified to profit or loss		591	(133)
Total other comprehensive income		522	41
Total comprehensive (expense)/income for the year		(752)	162
Attributable to:
Ordinary shareholders		(748)	161
NCI		(4)	1
Total comprehensive (expense)/income for the year		(752)	162
Total comprehensive (expense)/income for the year attributable to ordinary shareholders arises from:
Continuing operations		(673)	278
Discontinued operations		(75)	(117)
Total comprehensive (expense)/income for the year attributable to ordinary shareholders		(748)	161

¹   Includes £(52)m loss on the deal contingent forward reclassified to loss on disposal in the same period as the hedged cash flow proceeds. See note 18 and 23 for further detail

Condensed consolidated balance sheet

At 31 December 2022

		2022	2021
	Notes	£m	£m
ASSETS
Intangible assets	7	4,098	4,041
Property, plant and equipment	8	3,936	3,917
Right-of-use assets	9	1,061	1,203
Investments - joint ventures and associates	10	422	404
Investments - other	10	36	36
Other financial assets	18	542	361
Deferred tax assets		2,731	2,249
Post-retirement scheme surpluses	20	613	1,148
Non-current assets		13,439	13,359
Inventories	11	4,708	3,666
Trade receivables and other assets	12	6,936	5,383
Contract assets	13	1,481	1,473
Taxation recoverable		127	90
Other financial assets	18	141	46
Short-term investments		11	8
Cash and cash equivalents	14	2,607	2,621
Current assets		16,011	13,287
Assets held for sale	23	-	2,028
TOTAL ASSETS		29,450	28,674
LIABILITIES
Borrowings and lease liabilities	15	(358)	(279)
Other financial liabilities	18	(1,016)	(689)
Trade payables and other liabilities	19	(6,983)	(6,016)
Contract liabilities	13	(4,825)	(3,599)
Current tax liabilities		(104)	(101)
Provisions for liabilities and charges	19	(632)	(475)
Current liabilities		(13,918)	(11,159)
Borrowings and lease liabilities	15	(5,597)	(7,497)
Other financial liabilities	18	(3,230)	(2,715)
Trade payables and other liabilities	17	(2,364)	(1,575)
Contract liabilities	13	(7,337)	(6,710)
Deferred tax liabilities		(286)	(451)
Provisions for liabilities and charges	19	(1,701)	(1,107)
Post-retirement scheme deficits	20	(1,033)	(1,373)
Non-current liabilities		(21,548)	(21,428)
Liabilities associated with assets held for sale	23	-	(723)
TOTAL LIABILITIES		(35,466)	(33,310)
NET LIABILITIES		(6,016)	(4,636)
EQUITY
Called-up share capital		1,674	1,674
Share premium		1,012	1,012
Capital redemption reserve		166	165
Hedging reserves		26	(45)
Merger reserve		-	650
Translation reserve		861	342
Accumulated losses		(9,789)	(8,460)
Equity attributable to ordinary shareholders		(6,050)	(4,662)
NCI		34	26
TOTAL EQUITY		(6,016)	(4,636)

 

Condensed consolidated cash flow statement

Year ended 31 December 2022

	Notes	2022 £m	2021 £m
Reconciliation of cash flows from operating activities
Operating profit from continuing operations		837	513
Operating profit/(loss) from discontinued operations	23	86	(43)
Operating profit		923	470
Loss on disposal of property, plant and equipment		18	9
Share of results of joint ventures and associates	10	(48)	(45)
Dividends received from joint ventures and associates	10	73	27
Amortisation and impairment of intangible assets		287	290
Depreciation and impairment of property, plant and equipment		430	462
Depreciation and impairment of right-of-use assets		287	257
Adjustment of amounts payable under residual value guarantees within lease liabilities 1	16	(3)	(4)
Impairment of and other movements on investments	10	75	7
Decrease in provisions		(197)	(394)
Increase in inventories		(887)	(169)
Movement in trade receivables/payables and other assets/liabilities		(56)	(507)
Movement in contract assets/liabilities		1,753	(134)
Financial penalties paid 2		-	(156)
Cash flows on other financial assets and liabilities held for operating purposes 3		(660)	(85)
Interest received		36	9
Net defined benefit post-retirement cost recognised in profit before financing	20	27	23
Cash funding of defined benefit post-retirement schemes	20	(81)	(162)
Share-based payments		47	28
Net cash inflow/(outflow) from operating activities before taxation		2,024	(74)
Taxation paid		(174)	(185)
Net cash inflow/(outflow) from operating activities		1,850	(259)
Cash flows from investing activities
Movement in other investments	10	(5)	(26)
Additions of intangible assets		(237)	(231)
Disposals of intangible assets	7	8	5
Purchases of property, plant and equipment		(359)	(328)
Disposals of property, plant and equipment		48	61
Disposal of businesses	23	1,398	99
Movement in investments in joint ventures and associates	10	(24)	-
Movement in short-term investments		(3)	(8)
Net cash inflow/(outflow) from investing activities		826	(428)
Cash flows from financing activities
Repayment of loans 4		(2,024)	(965)
Proceeds from increase in loans		1	2,005
Capital element of lease payments		(218)	(374)
Net cash flow from (decrease)/increase in borrowings and leases		(2,241)	666
Interest paid		(235)	(206)
Interest element of lease payments		(68)	(63)
Fees paid on undrawn facilities		(49)	(62)
Cash flows on settlement of excess derivative contracts 5	4	(326)	(452)
Transactions with NCI 6		57	30
NCI on formation of subsidiary		-	3
Dividends to NCI		(3)	(1)
Redemption of C Shares		(1)	(3)
Net cash outflow from financing activities		(2,866)	(88)
Change in cash and cash equivalents		(190)	(775)
Cash and cash equivalents at 1 January		2,639	3,496
Exchange gains/(losses) on cash and cash equivalents		156	(82)
Cash and cash equivalents at 31 December 7		2,605	2,639

 

Condensed consolidated cash flow statement continued

Year ended 31 December 2022

 

¹  Where the cost of meeting residual value guarantees is less than that previously estimated, as costs have been mitigated or liabilities waived by the lessor, the lease liability has been remeasured. To the extent that the value of this remeasurement exceeds the value of the right-of-use asset, the reduction in the lease liability is credited to cost of sales

² Relates to penalties paid on agreements with investigating bodies

³   Predominately relates to cash settled on derivative contracts held for operating purposes

⁴  Repayment of loans includes repayments of £2,000m relating to the loan supported by an 80% guarantee from UK Export Finance. Further details are provided in note 15

⁵  During the year, the Group incurred a cash outflow of £326m (2021: £452m) as a result of settling foreign exchange contracts that were originally in place to sell $2,200m (2021: $3,184m) receipts. Further detail is provided in note 4

⁶   Relates to NCI investment received in the year, in respect of Rolls-Royce SMR Limited

⁷   The Group considers overdrafts (repayable on demand) and cash held for sale to be an integral part of its cash management activities and these are included in cash and cash equivalents for the purposes of the cash flow statement

In deriving the condensed consolidated cash flow statement, movements in balance sheet line items have been adjusted for non-cash items. The cash flow in the year includes the sale of goods and services to joint ventures and associates - see note 22.

 

	2022 £m	2021 £m
Reconciliation of movements in cash and cash equivalents to movements in net debt
Change in cash and cash equivalents	(190)	(775)
Cash flow from decrease/(increase) in borrowings and lease liabilities	2,241	(666)
Less: settlement of related derivatives included in fair value of swaps below	-	6
Cash flow from increase in short-term investments	3	8
Change in net debt resulting from cash flows	2,054	(1,427)
New leases and other non-cash adjustments on borrowings and lease liabilities	(170)	(86)
Exchange losses on net debt	(150)	(51)
Fair value adjustments	70	170
Debt disposed of on disposal of business	53	8
Reclassifications	-	19
Movement in net debt	1,857	(1,367)
Net debt at 1 January	(5,194)	(3,827)
Net debt at 31 December excluding the fair value of swaps	(3,337)	(5,194)
Fair value of swaps hedging fixed rate borrowings	86	37
Net debt at 31 December	(3,251)	(5,157)

Condensed consolidated cash flow statement continued

Year ended 31 December 2022

The movement in net debt (defined by the Group as including the items shown below) is as follows:

	At 1 January	Funds flow	Net debt on disposal	Exchange differences	Fair value adjustments	Reclassifi-cations 1	Other movements	At 31 December
	£m	£m	£m	£m	£m	£m	£m	£m
2022
Cash at bank and in hand	795	17	-	35	-	-	-	847
Money market funds	49	(15)	-	-	-	-	-	34
Short-term deposits	1,777	(171)	-	120	-	-	-	1,726
Cash and cash equivalents (per balance sheet)	2,621	(169)	-	155	-	-	-	2,607
Cash and cash equivalents included within assets held for sale	25	(26)		1	-	-	-	-
Overdrafts	(7)	5	-	-	-	-	-	(2)
Cash and cash equivalents (per cash flow statement)	2,639	(190)	-	156	-	-	-	2,605
Short-term investments	8	3	-	-	-	-	-	11
Other current borrowings	(2)	2	-	(1)	-	-	-	(1)
Non-current borrowings	(6,023)	2,000	-	(125)	72	-	(29)	(4,105)
Borrowings included within liabilities held for sale	(59)	21	40	-	(2)	-	-	-
Lease liabilities	(1,744)	217	-	(179)	-	-	(141)	(1,847)
Lease liabilities included within liabilities held for sale	(13)	1	13	(1)	-	-	-	-
Financial liabilities	(7,841)	2,241	53	(306)	70	-	(170)	(5,953)
Net debt excluding fair value of swaps	(5,194)	2,054	53	(150)	70	-	(170)	(3,337)
Fair value of swaps hedging fixed rate borrowings 2	37	-	-	125	(76)	-	-	86
Net debt	(5,157)	2,054	53	(25)	(6)	-	(170)	(3,251)
2021
Cash at bank and in hand	940	(87)	-	(20)	-	(38)	-	795
Money market funds	669	(620)	-	-	-	-	-	49
Short-term deposits	1,843	-	-	(66)	-	-	-	1,777
Cash and cash equivalents (per balance sheet)	3,452	(707)	-	(86)	-	(38)	-	2,621
Cash and cash equivalents included within assets held for sale	51	(68)	-	4	-	38	-	25
Overdrafts	(7)	-	-	-	-	-	-	(7)
Cash and cash equivalents (per cash flow statement)	3,496	(775)	-	(82)	-	-	-	2,639
Short-term investments	−	8	-	-	-	-	-	8
Other current borrowings	(1,006)	950	-	1	35	18	-	(2)
Non-current borrowings	(4,274)	(2,002)	-	38	136	88	(9)	(6,023)
Borrowings included within liabilities held for sale	−	18	-	1	(1)	(77)	-	(59)
Lease liabilities	(2,043)	370	-	(9)	-	15	(77)	(1,744)
Lease liabilities included within liabilities held for sale	−	4	8	-	-	(25)	-	(13)
Financial liabilities	(7,323)	(660)	8	31	170	19	(86)	(7,841)
Net debt excluding fair value of swaps	(3,827)	(1,427)	8	(51)	170	19	(86)	(5,194)
Fair value of swaps hedging fixed rate borrowings 2	251	(6)	-	(35)	(173)	-	-	37
Net debt	(3,576)	(1,433)	8	(86)	(3)	19	(86)	(5,157)

¹  Reclassifications during the year to 31 December 2021 included the transfer of ITP Aero to held for sale and fees of £29m paid in previous periods for the £2,000m loan (supported by an 80% guarantee from UK Export Finance) that have been reclassified to borrowings on the draw down of the facility during the prior period

²   Fair value of swaps hedging fixed rate borrowings reflects the impact of derivatives on repayments of the principal amount of debt. Net debt therefore includes the fair value of derivatives included in fair value hedges (2022: £38m, 2021: £114m) and the element of fair value relating to exchange differences on the underlying principal of derivatives in cash flow hedges (2022: £48m, 2021: £(77)m)

Condensed consolidated statement of changes in equity

Year ended 31 December 2022

		Attributable to ordinary shareholders
	Notes	share capital	Share premium	Capital redemption reserve	Hedging reserves 1	Merger reserve	Translation reserve	Accumulated losses 2	Total	NCI	Total equity
		£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
At 31 December 2021 as previously reported		1,674	1,012	165	(45)	650	342	(8,460)	(4,662)	26	(4,636)
Adoption of amendment to IAS 37 (post-tax)	1	-	-	-	-	-	-	(729)	(729)	-	(729)
At 1 January 2022		1,674	1,012	165	(45)	650	342	(9,189)	(5,391)	26	(5,365)
Loss for the year		-	-	-	-	-	-	(1,269)	(1,269)	(5)	(1,274)
Foreign exchange translation differences on foreign operations		-	-	-	-	-	452	-	452	-	452
Hedging reserves reclassified to income statement on disposal of businesses	23	-	-	-	111	-	-	-	111	-	111
Foreign exchange translation differences reclassified to income statement on disposal of businesses	23	-	-	-	-	-	65	-	65	-	65
NCI disposed of on disposal of businesses	23	-	-	-	-	-	-	-	-	1	1
Movement on post-retirement schemes	20	-	-	-	-	-	-	(156)	(156)	-	(156)
Fair value movement on cash flow hedges		-	-	-	(7)	-	-	-	(7)	-	(7)
Reclassified to income statement from cash flow hedge reserve		-	-	-	(55)	-	-	-	(55)	-	(55)
Costs of hedging		-	-	-	10	-	-	-	10	-	10
Revaluation to fair value of other investments	10	-	-	-	-	-	-	(4)	(4)	-	(4)
OCI of joint ventures and associates	10	-	-	-	-	-	-	2	2	-	2
Related tax movements		-	-	-	12	-	2	89	103	-	103
Total comprehensive income/(expense) for the year		-	-	-	71	-	519	(1,338)	(748)	(4)	(752)
Redemption of C Shares		-	-	1	-	-	-	(1)	-	-	-
Share-based payments - direct to equity 3		-	-	-	-	-	-	46	46	-	46
Dividends to NCI		-	-	-	-	-	-	-	-	(3)	(3)
Transactions with NCI 4		-	-	-	-	-	-	42	42	15	57
Transfer to realised profit 5		-	-	-	-	(650)	-	650	-	-	-
Related tax movements		-	-	-	-	-	-	1	1	-	1
Other changes in equity in the year		-	-	1	-	(650)	-	738	89	12	101
At 31 December 2022		1,674	1,012	166	26	-	861	(9,789)	(6,050)	34	(6,016)
At 1 January 2021		1,674	1,012	162	(94)	650	524	(8,825)	(4,897)	22	(4,875)
Loss for the year		-	-	-	-	-	-	120	120	1	121
Foreign exchange translation differences on foreign operations		-	-	-	-	-	(178)	-	(178)	-	(178)
Foreign exchange translation differences classified to income statement on disposal of businesses		-	-	-	-	-	(1)	-	(1)	-	(1)
Movement on post-retirement schemes	20	-	-	-	-	-	-	254	254	-	254
Fair value movement on cash flow hedges		-	-	-	(32)	-	-	-	(32)	-	(32)
Reclassified to income statement from cash flow hedge reserve		-	-	-	39	-	-	-	39	-	39
Revaluation to fair value of other investments	10	-	-	-	-	-	-	(2)	(2)	-	(2)
OCI of joint ventures and associates	10	-	-	-	44	-	-	1	45	-	45
Related tax movements		-	-	-	(2)	-	(3)	(79)	(84)	-	(84)
Total comprehensive income/(expense) for the year		-	-	-	49	-	(182)	294	161	1	162
Redemption of C Shares		-	-	3	-	-	-	(3)	-	-	-
Share-based payments - direct to equity 3		-	-	-	-	-	-	28	28	-	28
Dividends to NCI		-	-	-	-	-	-	-	-	(1)	(1)
Transactions with NCI 4		-	-	-	-	-	-	29	29	1	30
NCI on formation of subsidiary		-	-	-	-	-	-	-	-	3	3
Related tax movements		-	-	-	-	-	-	17	17	-	17
Other changes in equity in the year		-	-	3	-	-	-	71	74	3	77
At 31 December 2021		1,674	1,012	165	(45)	650	342	(8,460)	(4,662)	26	(4,636)

¹   Hedging reserves include the cash flow hedge reserve of £26m and the cost of hedging reserve of £nil. During the year, costs of hedging of £10m were recognised and reclassified to the income statement

²   At 31 December 2022, 11,402,796 ordinary shares with a net book value of £27m (2021: 29,405,191 ordinary shares with a net book value of £65m) were held for the purpose of share-based payment plans and included in accumulated losses. During the year:

- 18,488,558 ordinary shares with a net book value of £39m (2021: 10,667,095 ordinary shares with a net book value of £24m) vested in share-based payment plans; and

- the Company acquired none (2021: none) of its ordinary shares via reinvestment of dividends received on its own shares and purchased 486,163 (2021: none) of its ordinary shares through purchases on the London Stock Exchange

³   Share-based payments - direct to equity is the share-based payment charge for the year less the actual cost of vesting excluding those vesting from own shares and cash received on share-based schemes vesting

⁴  Relates to NCI investment received in the year in respect of Rolls-Royce SMR Limited

⁵  On disposal of ITP Aero on 15 September 2022, the premium recognised on issue of shares for the previous acquisition became realised on receipt of qualifying consideration. As such, the total merger reserve has been transferred to accumulated losses

Notes to the year-end financial statements

 

Reporting entity

Rolls-Royce Holdings plc (the 'Company') is a public company limited by shares incorporated under the Companies Act 2006 and domiciled in the UK. These Condensed Consolidated Financial Statements of the Company as at and for the year ended 31 December 2022 consist of the consolidation of the financial statements of the Company and its subsidiaries (together referred to as the 'Group') and include the Group's interest in jointly controlled and associated entities.

The Consolidated Financial Statements of the Group as at and for the year ended 31 December 2022 (2022 Annual Report) are available upon request from the Company Secretary, Rolls-Royce Holdings plc, Kings Place, 90 York Way, London, N1 9FX. 

Statement of compliance

These Condensed Consolidated Financial Statements have been prepared in accordance with UK adopted International Accounting Standards (IAS) and interpretations issued by the IFRS Interpretations Committee applicable to companies reporting under UK adopted IFRS. They do not include all the information required for full annual statements and should be read in conjunction with the 2022 Annual Report.

The Board of Directors approved the Condensed Consolidated Financial Statements on 23 February 2023. They are not statutory accounts within the meaning of section 435 of the Companies Act 2006.

The Group's financial statements for the year ended 31 December 2022 were approved by the Board on 23 February 2023. They have been reported on by the Group's auditors and will be delivered to the registrar of companies in due course. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

The comparative figures for the financial year 31 December 2021 have been extracted from the Group's statutory accounts for that financial year. The Board of Directors approved the Group financial statements on 24 February 2022. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

Changes to accounting policies

IAS 37 Provisions, Contingent Liabilities and Contingent Assets

The Group adopted the amendment to IAS 37 Provisions, Contingent Liabilities and Contingent Assets for Onerous Contracts - Cost of Fulfilling a Contract on 1 January 2022. The amendment clarifies the meaning of 'costs to fulfil a contract', explaining that the direct cost of fulfilling a contract comprises the incremental costs of fulfilling that contract (for example, direct labour and materials) and also an allocation of other costs that relate directly to fulfilling contracts. As a result of the amendment, the Group now includes additional allocated costs when determining whether a contract is onerous and in the quantification of the provision recognised in the event of a contract being onerous. These additional allocated costs primarily relate to (a) fixed overheads in our operational areas that are incurred irrespective of manufacturing load, (b) fixed overheads of providing services, including engine health monitoring and IT costs, and (c) depreciation of spare engines that the Group owns are used to support the delivery of our contractual commitments to customers under long-term service agreements (LTSAs). The Group has assessed the impact of this amendment on its contracts and has included additional allocated costs that increased the total contract loss provision by £723m, as at 1 January 2022 (see note 19). All material elements impact Civil Aerospace contracts. Of this increase, £38m relates to current provisions and £685m to non-current provisions. A tax credit has not been recognised on the increase in the provision relating to the UK (see note 5 for details). As required by the transition arrangement in relation to the amendment, comparative information has not been restated. The cumulative effect of initially applying the amendment has been recognised as an adjustment to the opening balance of retained earnings as at 1 January 2022. It is estimated that the impact of the IAS 37 amendment has had a favourable immaterial impact on the 2022 income statement.

Revision to IFRS not applicable in 2022

IFRS 17 Insurance Contracts

IFRS 17 issued in May 2018, establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts within the scope of the Standard. The Standard is effective for years beginning on or after 1 January 2023 with a requirement to restate comparatives.

The Group has reviewed whether its arrangements meet the accounting definition of an insurance contract. While some contracts, including Civil LTSAs, may transfer an element of insurance risk, they relate to warranty and service type agreements that are issued in connection with the Group's sales of goods or services and therefore will remain accounted for under the existing revenue and provision standards. The Directors have judged that such arrangements entered into after the original equipment sale remain sufficiently related to the sale of the Group's goods and services.

The Group has identified that the Standard will impact the results of its captive insurance company as it issues insurance contracts, however, the impact is expected to largely consolidate out in the Condensed Consolidated Financial Statements. The Standard includes a simplified approach and modifications to its general measurement model that can be applied in certain circumstances. Given the coverage period of these insurance policies within the captive insurance company are 12 months or less, it is intended to make use of the 'premium allocation approach' for the recognition of premiums. The confidence level and risk adjustments have been calculated using a weighted average cost of capital calculation with discount rates based on the European Insurance and Occupational Pension Authority (EIOPA) risk-free interest rates. The opening balances on 1 January 2022, as well as the results for 2022, have been run under IFRS 17, and the expected impact on accumulated losses is less than £1m.

The Group is in the process of concluding its analysis of whether there is any further impact as a result of adopting the new Standard. This will conclude in the first half of 2023. At this time there is no further known or reasonably estimatable information to disclose that is relevant to assessing the possible impact that application of the new IFRS will have on the Condensed Consolidated Financial Statements.

Other

IBOR reform transition

A number of the Group's lease liabilities are based on a LIBOR index. These are predominantly referencing USD LIBOR, which is not expected to cease until 2023, hence the change in relation to these contracts has not impacted the 2022 financial statements. Amendments to these contracts is in progress at the balance sheet date.

Post balance sheet events

The Group has taken the latest legal position in relation to any ongoing legal proceedings and reflected these in the 2022 results as appropriate.

Going concern

Overview

In adopting the going concern basis for preparing these Condensed Consolidated Financial Statements, the Directors have undertaken a review of the Group's cash flow forecasts and available liquidity, along with consideration of the principal risks and uncertainties over an 18-month period to August 2024. The Directors consider an 18-month period to be appropriate as it includes the maturity of £1bn of the Group's £5.5bn undrawn borrowing facilities in January 2024 and the repayment at maturity of a €550m (£484m) bond in May 2024.

The approved plans are used as the basis for monitoring the Group's performance, incentivising employees, and providing external guidance to shareholders. 

The processes for identifying and managing risk are described on pages 42 to 49 of the 2022 Annual Report. As described on those pages, the risk management process and the going concern and viability statements are designed to provide reasonable but not absolute assurance.

Forecasts

Recognising the challenges of reliably estimating and forecasting the impact of external factors on the Group, the Directors have considered two forecasts in the assessment of going concern, along with a likelihood assessment of these forecasts. The base case forecast reflects the Directors current expectations of future trading. A stressed downside forecast has also been modelled which envisages a 'stress' or 'downside' situation that is considered severe but plausible.

The Group's base case forecast reflects a steady and ongoing recovery of trading towards pre-pandemic levels. Macro-economic assumptions have been modelled using externally available data based on the most likely forecasts with inflation at 3% - 4%, interest rates at 4% - 6% and GDP growth at around 2%. In the base case forecast Civil large engine EFHs are expected to recover to pre-pandemic levels by the end of 2024.

The stressed downside forecast assumes no further recovery in Civil large engines, with EFHs modelled at the average fourth quarter 2022 levels throughout the 18-month period to August 2024, reflecting slower GDP growth in this forecast when compared with the base case. It also assumes a more pessimistic view of inflation at around 6% higher than the base case covering a broad range of costs including energy, commodities, and jet fuel. Interest rates in the stressed downside are 1% - 2% higher than the base case. The stressed downside also considers lower demand and load reduction through our factories, and possible ongoing supply chain challenges.

The future impact of climate change on the Group has been considered through climate scenarios. Key variables include carbon prices based on the IEA Net Zero scenario, which assumes an increase from $46 per tonne of carbon in 2022 to $250 per tonne in 2050, commodity price trends, temperature rises and GCP information Oxford Economics Global Climate Service Net Zero scenario aligned to IPCC SSP1-19. The climate scenarios modelled do not have a material impact on either the base case or downside forecast over the 18-month period to August 2024.

Liquidity and borrowings

The proceeds from the disposal of ITP Aero, which completed in September 2022, were used towards the repayment of a drawn £2bn UKEF loan which was due to mature in August 2025. A new £1bn UKEF facility was entered into in September 2022, this remains undrawn. 

At 31 December 2022, the Group had liquidity of £8.1bn including cash and cash equivalents of £2.6bn and undrawn facilities of £5.5bn.

The Group's committed borrowing facilities at 31 December 2022 and 31 August 2024 are set out below. None of the facilities are subject to any financial covenants or rating triggers which could accelerate repayment.

(£m)	31 December 2022	31 August 2024
Issued Bond Notes 1	3,995	3,511
UKEF £1bn loan (undrawn) 2	1,000	1,000
UKEF £1bn loan (undrawn) 3	1,000	1,000
Revolving Credit Facility (undrawn) 4	2,500	2,500
Bank Loan Facility (undrawn) 5	1,000	−
Total committed borrowing facilities	9,495	8,011

¹ The value of Issued Bond Notes reflects the impact of derivatives on repayments of the principal amount of debt. The bonds mature by May 2028

² The £1,000m UKEF loan matures in March 2026 (currently undrawn)

³ The £1,000m UKEF loan matures in September 2027 (currently undrawn)

⁴ The £2,500m Revolving Credit Facility matures in April 2025 (currently undrawn)

⁵ The £1,000m Bank Loan Facility matures in January 2024 (currently undrawn)

Taking into account the maturity of these borrowing facilities, the Group has committed facilities of at least £8.0bn available throughout the period to 31 August 2024.

Conclusion

After reviewing the current liquidity position and the cash flow forecasts modelled under both the base case and stressed downside, the Directors consider that the Group has sufficient liquidity to continue in operational existence for a period of at least 18 months from the date of this report and are therefore satisfied that it is appropriate to adopt the going concern basis of accounting in preparing the financial statements.

 

Climate change

In preparing the Condensed Consolidated Financial Statements the Directors have considered the potential impact of climate change, particularly in the context of the disclosures included in the Strategic Report and Climate Review this year and the stated decarbonisation strategy. Based on the Taskforce for Climate-related Financial Disclosures (TCFD) recommendations, the Group assesses the potential impact of climate-related risks which cover both transition risks and physical risks. The eight key risks and the opportunities considered in the climate scenarios prepared include extensive policy, legal, technological, and market changes and physical risks which could include direct damage to assets and supply chain disruption. Two of the assessed key transition risks have been identified as potentially having a high impact on the Group. These relate to the risk that regulatory changes could materially impact demand for our products and that addressing climate change will require shifting investment focus towards more sustainable products and solutions. Both of these risks are being actively addressed through the Group's decarbonisation strategy and the financial implications, as reflected in the quantified climate scenarios, have been considered when preparing the financial statements.

The Group has set its decarbonisation strategy and identified longer-term considerations in response to the climate challenge and is engaging proactively with external stakeholders to advocate for the conditions that society needs to achieve its net zero target. The Group's main short- and longer-term priorities include:

-           achieving net zero greenhouse gas (GHG) emissions by 2030 from all energy purchased and consumed in the Group's offices, manufacturing and production activities (with the exception of product testing and development). This will be met through continued investment in onsite renewable energy installations; the procurement of renewable energy; and continued investment in energy efficiency improvements to reduce the Group's overall energy demands and operating costs. An estimate of the investment required to meet these scope 1 and 2 emission improvements is included in the forecasts that support these Condensed Consolidated Financial Statements;

-           the scale up of sustainable fuels that will play a crucial role in reaching net zero carbon. To accelerate this, the Group are working to demonstrate that all the commercial aero engines produced, and the most popular reciprocating engines, representing 80% of the product portfolio, are compatible with sustainable fuels by the end of 2023 and working with our armed forces customers to achieve the same goals for the Rolls-Royce engines they use; and

-           developing breakthrough new technologies, including investment in hybrid-electric solutions in Power Systems, continued development of the more efficient UltraFan aero engine, testing of sustainable aviation fuels, small modular reactors (SMRs) and hybrid and fully electric propulsion. New products will be compatible with net zero operation by 2030 and all products will be compatible with net zero operation by 2050. In the year, R&D costs of £(108)m (2021: £(68)m) within New Markets included design development to ready the SMRs to progress through the UK generic design assessment (GDA) process and investment in electrical propulsion technology. Future investment required to deliver these technologies is included in the forecasts that support the Condensed Consolidated Financial Statements.

The climate change scenarios previously prepared to assess the viability of our business strategy, decarbonisation plans and approach to managing climate-related risk have continued to develop over the last year as set out in our Climate Review. There remains inherent uncertainty over the assumptions used within these and how they will impact the Group's business operations, cash flows and profit projections. The Directors assess the assumptions on a regular basis to ensure that they are consistent with the risk management activities and the commitments made to investors and other stakeholders.

Assumptions used within the Condensed Consolidated Financial Statements in relation to areas such as revenue recognition for long-term contracts, impairment reviews of non-current assets and the carrying amount of deferred tax assets consider the findings from the climate scenarios prepared. Key variables include carbon pricing based on the International Energy Agency (IEA) Net Zero scenario, which assumes an increase from $46 per tonne of carbon in 2022 to $250 per tonne in 2050, and commodity price, temperature rise and GDP information from the Oxford Economics Global Climate Service Net Zero scenario aligned to IPCC SSP1-19.

As details of what incremental specific future intervention measures will be taken by governments are not yet available, carbon pricing has been used to quantify the potential impact of future policy changes on the Group. To ensure revenue recognition or the carrying value of assets is not overstated it has been assumed that carbon pricing falls on our own manufacturing facilities and those of our supply chain. The Group will be able to mitigate an element of the financial impact as it reduces the scope 1 and 2 emissions from its offices, manufacturing and production activities, the costs of which have been incorporated into forecasts. The Group has made estimates in relation to decarbonisation in its external supply chain and the impact this may have on the Group's costs, whilst acknowledging in its financial modelling that this is complex and will therefore take some time. The financial modelling performed recognises the extent to which the Group's current supplier contracts offer protection from cost increases in the short to medium term where pricing is fixed or subject to capped escalation clauses. The Group has made a cautious assessment of whether higher costs would be passed on to customers in the short and medium term that considers the markets operated in and the pricing mechanisms in place. For example, in Civil Aerospace it is recognised that escalation caps within a number of its LTSA contracts would be triggered, meaning additional costs could remain within the business under current commercial arrangements until the end of existing contract periods.

When determining the amount of cumulative revenue recognised on long-term contracts, and the obligation in relation to onerous contracts, the assumptions above have been used to reflect the climate uncertainties. Changes in estimates have not had a significant impact on revenue catch-ups in the year (2021: £(17)m) or on contract loss provisions (2021: £(20)m). Increases in carbon and commodity price estimates over the term of the current contracts are estimated to be around 1% (2021: 1%). A sensitivity is presented within the key sources of estimation uncertainty (page 20) to disclose the impact of a further 1% cost increase that might arise from further unmitigated increases in carbon and/or commodity pricing.

Impairment testing of non-current assets including goodwill and programme assets has considered the above risks as well as assessing how the Group's 1.5^oC and 3.6^oC scenarios may change the demand for products over the medium and longer term. Given the headroom, the climate scenarios modelled do not indicate any potential impairment. Further information is provided in note 7.

Deferred tax assets are recognised to the extent it is probable that future taxable profits will be available, against which the unused tax losses and deductible temporary difference can be utilised. The weighted downside forecast includes the climate-related estimates and assumptions. Whilst carbon pricing illustrates pressure on costs, decarbonisation and new supplier and customer contracts offer the opportunity to receive value for more efficient and sustainable products. Further details are included in note 5 together with sensitivity analysis in the key sources of estimation uncertainty section below.

The climate-related estimates and assumptions that have been considered to be key areas of judgement or sources of estimation uncertainty for the year ended 31 December 2022 are those relating to the recoverable amount of non-current assets including goodwill, capitalised development costs, recovery of deferred tax assets, recognition and measurement of provisions and recognition of revenue on long-term contracts. These items are included within the key areas of judgement and key sources of estimation uncertainty summarised on page 20.

Further detail is set out in note 1 to the Financial Statements in the 2022 Annual Report.

  

Key areas of judgement and sources of estimation uncertainty

The determination of the Group's accounting policies requires judgement. The subsequent application of these policies requires estimates and the actual outcome may differ from that calculated. The key areas of judgement and sources of estimation uncertainty as at 31 December 2022, that were assessed as having a significant risk of causing material adjustments to the carrying amount of assets and liabilities, are set out in
note 1 to the financial statements in the 2022 Annual Report and are summarised below.

Area	Key judgements	Key sources of estimation uncertainty	Sensitivities performed
Revenue recognition and contract assets and liabilities	Whether Civil Aerospace OE and aftermarket contracts should be combined. How performance on long-term aftermarket contracts should be measured. Whether any costs should be treated as wastage. Whether sales of spare engines to joint ventures are at fair value. When revenue should be recognised in relation to spare engine sales.	Estimates of future revenue, including customer pricing, and costs of long-term contractual arrangements including the impact of climate change.	Based upon the stage of completion of all large engine LTSA contracts within Civil Aerospace as at 31 December 2022, the following changes in estimate would result in catch-up adjustments being recognised in the period in which the estimates change (at underlying rates): -  A change in forecast EFHs of 1% over the remaining term of the contracts would impact LTSA income and to a lesser extent costs, resulting in an impact of around £20m. -  A 2% increase or decrease in our pricing to customers over the life of the contracts would lead to a revenue catch-up adjustment in the next 12 months of around £260m. -  A 2% increase or decrease in shop visit costs over the life of the contracts would lead to a revenue catch-up adjustment in the next 12 months of around £100m.
Risk and revenue sharing arrangements (RRSAs)	Determination of the nature of entry fees received.
Taxation		Estimates necessary to assess whether it is probable that sufficient suitable taxable profits will arise in the UK to utilise the deferred tax assets recognised.	A 5% change in margin or shop visits (which could be driven by fewer EFHs as a result of climate change) would result in an increase/decrease in the deferred tax asset in respect of UK losses of around £130m. If only 90% of assumed future cost increases are passed on to customers, this would result in a decrease in the deferred tax asset of around £50m, and if the potential impact of carbon prices on the Group's cost base was to double, this would be around £80m.
Discontinued operations and business disposals	The assets, liabilities and associated consolidation adjustments of the ITP Aero business recognised on disposal.
Research and development	Determination of the point in time where costs incurred on an internal programme development meet the criteria for capitalisation or ceasing capitalisation. Determination of the basis for amortising capitalised development costs.
Impairment of non-current assets	Determination of cash-generating units for assessing impairment of goodwill.
Leases	Determination of the lease term.	Estimates of the payments required to meet residual value guarantees at the end of engine leases.	The lease liability at 31 December 2022 included £434m relating to the cost of meeting these residual value guarantees in the Civil Aerospace business. Up to £114m is payable in the next 12 months, £175m is due over the following four years and the remaining balance after five years.
Provisions	Whether any costs should be treated as wastage.	Estimates of the time to resolve the technical issues on the Trent 1000, including the development of the modified high-pressure turbine (HPT) blade and estimates of the expenditure required to settle the obligation relating to Trent 1000 long-term contracts assessed as onerous. Estimates of the future revenues and costs to fulfil onerous contracts. Assumptions implicit within the calculation of discount rates.	A 12-month delay in the availability of the modified HPT blade could lead to a £40-70m increase in the Trent 1000 wastage costs provision. An increase in Civil Aerospace large engines estimates of LTSA costs of 1% over the remaining term of the contracts could lead to a £100-125m increase in the provision for contract losses across all programmes. A 1% change in the discount rates used could lead to around a £80-100m change in the provision.
Post-retirement benefits		Estimates of the assumptions for valuing the net defined benefit obligation.	A reduction in the discount rate of 0.25% from 4.80% could lead to an increase in the defined benefit obligations of the RR UK Pension Fund (RRUKPF) of approximately £205m. This would be expected to be broadly offset by changes in the value of scheme assets, as the scheme's investment policies are designed to mitigate this risk. An increase in the assumed rate of inflation of 0.25% (RPI of 3.50% and CPI of 2.95%) could lead to an increase in the defined benefit obligations of the RRUKPF of approximately £70m. A one-year increase in life expectancy from 21.9 years (male aged 65) and from 23.2 years (male aged 45) would increase the defined benefit obligations of the RRUKPF by approximately £165m.

 

The analysis by business segment is presented in accordance with IFRS 8 Operating Segments, on the basis of those segments whose operating results are regularly reviewed by the Board (who acts as the Chief Operating Decision Maker as defined by IFRS 8). The Group's four businesses are set out below. 

Civil Aerospace	-   development, manufacture, marketing and sales of commercial aero engines and aftermarket services
Defence	-   development, manufacture, marketing and sales of military aero engines, naval engines, submarine nuclear power plants and aftermarket services
Power Systems	-   development, manufacture, marketing and sales of integrated solutions for onsite power and propulsion
New Markets	-   development, manufacture and sales of small modular reactor (SMR) and new electrical power solutions

Other businesses include the trading results of the Bergen Engines AS business until the date of disposal on 31 December 2021 and the results of the Civil Nuclear Instrumentation & Control business until the date of disposal on 5 November 2021 and the trading results of the UK Civil Nuclear business.

Underlying results 

The Group presents the financial performance of the businesses in accordance with IFRS 8 and consistently with the basis on which performance is communicated to the Board each month.

Underlying results are presented by recording all relevant revenue and cost of sales transactions at the average exchange rate achieved on effective settled derivative contracts in the period that the cash flow occurs. The impact of the revaluation of monetary assets and liabilities using the exchange rate that is expected to be achieved by the use of the effective hedge book is recorded within underlying cost of sales. Underlying financing excludes the impact of revaluing monetary assets and liabilities to period end exchange rates. Transactions between segments are presented on the same basis as underlying results and eliminated on consolidation. Unrealised fair value gains/(losses) on foreign exchange contracts, which are recognised as they arise in the statutory results, are excluded from underlying results. To the extent that the previously forecast transactions are no longer expected to occur, an appropriate portion of the unrealised fair value gain/(loss) on foreign exchange contracts is recorded immediately in the underlying results.

Amounts receivable/(payable) on interest rate swaps which are not designated as hedge relationships for accounting purposes are reclassified from fair value movement on a statutory basis to interest receivable/(payable) on an underlying basis, as if they were in an effective hedge relationship.

In the year to 31 December 2022, the Group was a net seller of USD at an achieved exchange rate GBP:USD of 1.50 (2021: In the first half of the year, the Group was a net purchaser of USD at an achieved exchange rate of 1.39. In the second half of 2021, the Group was a net seller of USD at an achieved exchange rate of 1.59) based on the USD hedge book.

Estimates of future USD cash flows have been determined using the Group's base-case forecast. These USD cash flows have been used to establish the extent of future USD hedge requirements. In 2020, the Group took action to reduce the size of the USD hedge book by $11.8bn across 2020-2026, resulting in an underlying charge of £1.7bn being recognised within underlying finance costs and the associated cash settlement costs occurring over the period 2020-2026. The derivatives relating to this underlying charge have been subsequently excluded from the hedge book, and therefore are also excluded from the calculation of the average exchange rate achieved in the current and future periods. This charge was reversed in arriving at the 2020 statutory performance on the basis that the cumulative fair value changes on these derivative contracts are recognised as they arise. 

Underlying performance excludes the following:

- the effect of acquisition accounting and business disposals;

- impairment of goodwill and other non-current and current assets where the reasons for the impairment are outside of normal operating activities;

- exceptional items; and

- certain other items which are market driven and outside of the control of management.

Acquisition accounting, business disposals and impairment

The Group exclude these from underlying results so that the current year and comparative results are directly comparable.

Exceptional items

Items are classified as exceptional where the Directors believe that presentation of the results in this way is useful in providing an understanding of the Group's financial performance. Exceptional items are identified by virtue of their size, nature or incidence.

In determining whether an event or transaction is exceptional, the Directors consider quantitative as well as qualitative factors such as the frequency or predictability of occurrence. Examples of exceptional items include one-time costs and charges in respect of aerospace programmes, costs of restructuring programmes and one-time past service charges and credits on post-retirement schemes.

Subsequent changes in exceptional items recognised in a prior period will also be recognised as exceptional. All other changes will be recognised within underlying performance.

Exceptional items are not allocated to segments and may not be comparable to similarly titled measures used by other companies.

Other items

The financing component of the defined benefit pension scheme cost is determined by market conditions and has therefore been included as a reconciling difference between underlying and statutory performance.

The tax effects of the adjustments above are excluded from the underlying tax charge. In addition, changes in tax rates or changes in the amount of recoverable deferred tax or advance corporation tax recognised are also excluded.

The following analysis sets out the results of the Group's businesses on the basis described above and also includes a reconciliation of the underlying results to those reported in the condensed consolidated income statement.

-	Civil Aerospace	Defence	Power Systems	New Markets	Other businesses	Corporate and Inter-segment	Total underlying
	£m	£m	£m	£m	£m	£m	£m
Year ended 31 December 2022
Underlying revenue from sale of original equipment	1,982	1,634	2,187	1	-	(5)	5,799
Underlying revenue from aftermarket services	3,704	2,026	1,160	2	-	-	6,892
Total underlying revenue	5,686	3,660	3,347	3	-	(5)	12,691
Gross profit/(loss)	853	726	918	(1)	(29)	10	2,477
Commercial and administrative costs	(371)	(174)	(441)	(23)	(2)	(51)	(1,062)
Research and development costs	(452)	(122)	(204)	(108)	-	-	(886)
Share of results of joint ventures and associates	113	2	8	-	-	-	123
Underlying operating profit/(loss)	143	432	281	(132)	(31)	(41)	652
Year ended 31 December 2021
Underlying revenue from sale of original equipment	1,612	1,411	1,744	-	155	(11)	4,911
Underlying revenue from aftermarket services	2,924	1,957	1,005	2	148	-	6,036
Total underlying revenue	4,536	3,368	2,749	2	303	(11)	10,947
Gross profit/(loss)	474	721	778	1	32	(10)	1,996
Commercial and administrative costs	(297)	(161)	(383)	(3)	(20)	(35)	(899)
Research and development costs	(434)	(105)	(157)	(68)	(10)	-	(774)
Share of results of joint ventures and associates	85	2	4	-	-	-	91
Underlying operating (loss)/profit	(172)	457	242	(70)	2	(45)	414