Annual Financial Report

RNS Number : 9660Q

Rolls-Royce Holdings plc

03 March 2016

 

3 March 2016

Rolls-Royce Holdings plc

Publication of the Annual Report 2015

Rolls-Royce Holdings plc announces that its Annual Report for the year ended 

31 December 2015 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 29 March 2016. 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 rule 6.3.5 of the Disclosure and Transparency Rules, we set out below the following extracts from the Annual Report in unedited text. It should be read in conjunction with the Company's preliminary announcement issued on 12 February 2016. Page and note references in the text below refer to page numbers and note numbers in the Annual Report 2015.

Principal Risk and Uncertainties

Related Party Transactions

Statement of Directors Responsibilities

The Annual General Meeting (AGM) of the Company will take place at 11.00am on Thursday 5 May 2016 at the East Midlands Conference Centre, Beeston Lane, The University of Nottingham, Nottingham NG7 2RJ.

Enquiries:

Investor relations:

John Dawson, Director - Investor Relations

Rolls-Royce plc

Tel: [phone] [e-mail]

Principal risks and uncertainties

Product failure Product not meeting safety expectations, or causing significant impact to customers or the environment through failure in quality control.	·      Embedding and operating a safety-first culture. ·      Applying our engineering design and validation process from initial design through production and into service. ·      The Safety & 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 & Ethics Committee report on page 99) ·      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. (see Safety & Ethics Committee report on page 100 for details of the SMS). ·      Improving our supply chain quality. ·      Crisis management team jointly chaired by the Group President and General Counsel. This principal risk is subject to review by the Safety & Ethics Committee
Business continuity Breakdown of external supply chain or internal facilities that could be caused by destruction of key facilities, natural disaster, regional conflict, insolvency of a critical supplier or scarcity of materials which would reduce the ability to meet customer commitments, win future business or achieve operational results.	·      Continued investment in adequate capacity and modern equipment and facilities ·      Identifying and assessing points of weakness in our internal and external supply chain, our IT systems and our people skills. ·      Selecting and developing stronger supplier. ·      Developing dual sources or dual capability. ·      Developing and testing incident management and business continuity plans. ·      Crisis Management Team jointly chaired by the Group President and General Counsel. ·      Customer excellence centres providing improved response to supply chain disruption. This principal risk is subject to review by the Audit Committee
Competitive position The presence of large, financially strong competitors in the majority of our markets means that the Group is susceptible to significant price pressure for original equipment or services even where our markets are mature or the competitors few. Our main competitors have access to significant government funding programmes as well as the ability to invest heavily in technology and industrial capability.	·      Accessing and developing key technologies and service offerings which differentiate us competitively (see Engineering and innovation on page 18). ·      Focusing on being responsive to our customers and improving the quality, delivery and reliability of our products and services. ·      Partnering with others effectively. ·      Driving down cost and improving margins (see Chief Executive's review on page 12) ·      Protecting credit lines. ·      Investing in innovation, manufacturing and production, and continuing governance of technology programmes. (see Engineering and innovation on page 18 and Science & Technology Committee report on page 103). ·      Maintaining a strong balance sheet to enable access to cost effective sources of third party funding. ·      Understanding our competitors. This principal risk is subject to review by the Board
Political risk Geopolitical factors that lead to an unfavourable business climate and significant tensions between major trading parties or blocs which could impact the Group's operations. For example: explicit trade protectionism, differing tax or regulatory regimes, potential for conflict, or broader political issues.	·      Where possible, locating our domestic facilities and supply chain in countries with a low level of political risk and/or ensuring that we maintain dual capability. ·      Diversifying global operations to avoid excessive concentration of risks in particular areas. ·      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 page 8). ·      Proactively influencing regulation where it affects us. This principal risk is subject to review by the Board
Major programme delivery Failure to deliver a major programme on time, within budget, to specification or technical performance falling significantly short of customer expectations or not delivering the planned business benefits would have potentially significant adverse financial and reputational consequences, including the risk of impairment of the carrying value of the Group's intangible assets and the impact of potential litigation.	·      Major programmes are subject to Board approval (see Additional Financial information on page 176). ·      Reviewing major programmes at levels and frequencies appropriate to their criticality and performance, against key financial and non-financial deliverables and potential risks throughout the programme's life cycle. (see Additional Financial information on page 176). ·      Conducting technical audits at pre-defined points which are performed by a team that is independent from the programme. ·      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 or other regulatory requirements in the regulated environment in which it operates (eg. export controls; offset; use of controlled chemicals and substances; and anti-bribery and corruption legislation) compromising our ability to conduct business in certain 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.	·      Taking an uncompromising approach to compliance. ·      Operating an extensive compliance programme. This programme and the Global Code of Conduct are disseminated throughout the Group and are updated from time-to-time to ensure their continued relevance, and to ensure that they are complied with both in spirit and to the letter. The Global Code of Conduct and the Group's compliance programme are supported by appropriate training. (see Safety & Ethics Committee report on page 102). ·      Strengthening of the ethics, anti-bribery and corruption, compliance and export control teams. ·      A legal team is in place to manage any ongoing regulatory investigations. ·      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 & Ethics Committee
Market and financial shock The Group is exposed to a number of market risks, some of which are of a macro-economic nature eg. foreign currency, oil price, exchange rates and some of which are more specific to the Group eg. liquidity and credit risks, reduction in air travel or disruption to other customer operations. Significant extraneous market events could also materially damage the Group's competitiveness and/or creditworthiness. This would affect operational results or the outcomes of financial transactions.	·      Maintain a strong balance sheet, through managing cash balances and debt levels (see Financial review on page 42). ·      Providing financial flexibility by maintaining high levels of liquidity and an investment grade credit rating. ·      Sustaining a balanced portfolio through earning revenue both from the sale of original equipment and aftermarket services, providing a broad product range and addressing diverse markets that have differing business cycles. (see Chief Executive's review on page 8). ·      Deciding where and what currencies to source in, 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 rates and commodity price risk). The principal risk is subject to review by the Audit Committee
IT vulnerability Breach of IT security causing controlled or critical data to be lost, made inaccessible, corrupted or accessed by unauthorised users.	·      Implementing 'defence in depth' through deployment of multiple layers of software and processes including web gateways, filtering, firewalls, intrusion, advanced persistent threat detectors and integrated reporting (see Audit Committee report on page 95.) ·      Running security and network operations centres. ·      Actively sharing IT security information through industry, government and security forums. This principal risk is subject to review by the Audit Committee.
Talent and capability Inability to attract and retain the critical capabilities and skills needed in sufficient numbers and to effectively organise, deploy and incentivise its people to deliver our strategy, business plan and projects.	·      Attracting, rewarding and retaining the right people with the right skills globally in a planned and targeted way, including regular benchmarking of remuneration. ·      Developing and enhancing organisational, leadership, technical and functional capability to deliver global programmes. ·      Continuing a strong focus on individual development and succession planning. ·      Proactively monitoring retirement in key areas and actively managing the development and career paths of our people with a special focus on employees with the highest potential. ·      Embedding a lean, agile high performance culture that tightly aligns Group strategy with individual and team objectives. ·      Retaining, incentivising and effectively deploying the critical capabilities, skills and people needed to deliver our strategic priorities, plans and projects whilst implementing the Company's major programme to transform its business, to be resilient and to act with pace and simplicity. ·      Tracking engagement through our annual employee opinion survey and a commitment to drive year-on-year improvement to the employee experience and communications. (see Sustainability on page 50). This principal risk is subject to review by the Nominations & Governance Committee.

Related party transactions
2015			2014
£m			£m
Sales of goods and services to joint ventures and associates		1,896	2,138
Purchases of goods and services from joint ventures and associates		(2,266)	(2,544)
Operating lease payments to joint ventures and associates		(88)	(81)
Guarantees of joint ventures' and associates' borrowings		9	9
Dividends received from joint ventures and associates		63	73
RRSA receipts from joint ventures and associates		16	2
Other income received from joint ventures and associates		2	2
Included in sales of goods and services to joint ventures and associates are sales of spare engines amounting to £189m (2014: £138m). Profit recognised in the year on such sales amounted to £71m (2014: £54m), including profit on current year sales and recognition of profit deferred on sales in previous years. The aggregated balances with joint ventures are shown in notes 13 and 16. Transactions with Group pension schemes are shown in note 19. In the course of normal operations, related party transactions entered into by the Group have been contracted on an arms-length basis. Key management personnel are deemed to be the Directors and the members of the ELT as set out on pages 58 to 61. Remuneration for key management personnel is shown below:
2015			2014
£m			£m
Salaries and short-term benefits	8		9
Post-retirement schemes	-		1
Share-based payments	-		4
8			14
More detailed information regarding the Directors' remuneration, shareholdings, pension entitlements, share options and other long-term incentive plans is shown in the Directors' Remuneration Report on pages 77 to 89. The charge for share-based payments above is based on when the award is charged to the income statement in accordance with IFRS 2 Share-Based Payments, rather than when the shares vest, which is the basis used in the Directors' Remuneration Report.

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 2015. 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 2 to 57 and Directors' Report on pages 58 to 104 and pages 178 to 181 include 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.

iii)         the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's performance, business model and strategy.

By order of the Board

Pamela Coles

Company Secretary

11 February 2016

 

END

 

 

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