Rolls-Royce plc Annual Report 2017 Company number 1003142 FCXGroupXatXaXGlanceX_v5.indd 1 28/03/2018 11:34 FCXGroupXatXaXGlanceX_v5.indd 2 28/03/2018 11:34 Rolls-Royce plc Annual Report 2017 Strategic Report Financial Highlights and Contents 01 Pioneering the REPORT STRATEGIC power that matters Rolls-Royce pioneers cutting-edge Contents technologies that deliver the cleanest, Strategic Report Group at a Glance 02 safest and most competitive solutions Chief Executive’s Review 04 The Trends Shaping our Markets 08 to meet our planet’s vital power needs. Our Vision and Strategy 09 Business Model 10 Key Performance Indicators 12 *†‡ Financial Review 14 Financial Highlights Business Review 18 Civil Aerospace 18 Free cash flow Order book Defence Aerospace 24 Power Systems 28 £276m £78,476m Marine 32 Nuclear 36 2016: £120m 2016: £80,910m Technology 40 Sustainability 42 Underlying revenue Reported revenue Environment 42 People 44 £15,090m £16,307m STEM 46 Ethics 47 2016: £13,783m 2016: £14,955m Additional Financial Review 48 IFRS 15 53 Underlying operating profit Reported operating profit 2018 Outlook 56 Principal Risks 57 £1,175m £1,287m Directors’ Report 2016: £915m 2016: £44m Board of Directors 61 Internal Control and Risk Management 64 Underlying profit before tax Reported profit/(loss) before tax Share Capital 65 Other Statutory Information 66 £1,071m £4,897m Directors’ Report and Financial Statements 67 2016: £813m 2016: £(4,636)m Financial Statements Financial Statements Contents 69 Group Financial Statements 70 Net debt Company Financial Statements 126 Subsidiaries 147 £(523)m Joint Ventures and Associates 153 2016: £(225)m Other Information Independent Auditor’s Report 155 Other Financial Information 166 Glossary 168 * All figures in the narrative of the Strategic Report are underlying unless otherwise stated. Underlying explanation is in note 2 to the Financial Statements on page 86. † Unless otherwise stated, all underlying financial data excludes the impact of the acquisition of ITP Aero, completed on 19 December 2017. ‡ All references to organic change are at constant translational currency, excluding M&A. Forward-looking statements This Annual Report contains forward-looking statements. Any statements that express forecasts, expectations and projections are not guarantees of future performance and guidance may be updated from time to time. This report is intended to provide information to shareholders, and is not designed to be relied upon by any other party or for any other purpose, and the Company and its Directors accept no liability to any other person other than that required under English law. Latest information will be made available on the Group’s website. By their nature, these statements involve risk and uncertainty, and a number of factors could cause material differences to the actual results or developments. FCXGroupXatXaXGlanceX_v5.indd 1 28/03/2018 11:34 Strategic Report Rolls-Royce plc Annual Report 2017 02 Group at a Glance Group at a Glance We are one of Underlying revenue mix in 2017 the world’s leading Nuclear 5% industrial technology Marine companies, creating 7% power and propulsion systems for use on land, at sea and in the air. Power Civil Systems Aerospace 20% 53% Defence Aerospace 15% Underlying revenue £15,090m Underlying operating profit £1,175m Free cash flow Gross R&D expenditure £276m £1.4bn Patents approved for filing Countries 704 50 Read more in our Engineers (year end) Employees (year average) Business Review on pages 18 to 39 18,245 50,000 FCXGroupXatXaXGlanceX_v5.indd 2 28/03/2018 11:34 Rolls-Royce plc Annual Report 2017 Strategic Report Group at a Glance 03 Our five businesses in 2017 STRATEGIC REPORT STRATEGIC Civil Aerospace is a major Underlying revenue Underlying revenue mix Civil manufacturer of aero engines Aerospace for the large commercial £8,023m V2500 aircraft, regional jet and Business 12% business aviation markets. aviation Large The business uses its 14% engine 70% engineering expertise, Regional Underlying 4% in-depth knowledge and operating profit capabilities to provide through-life support See page 18 solutions for its customers. £520m Defence Aerospace is a Underlying revenue Underlying revenue mix Defence market leader in defence aero engines for military Aerospace £2,275m transport and patrol aircraft Other 17% and has strong positions Combat in other sectors, including 30% combat, training aircraft Underlying and helicopters. operating profit Transport See page 24 £374m and patrol 53% Power Power Systems is a leading Underlying revenue Underlying revenue mix provider of high-speed and Defence Systems medium-speed reciprocating and other £2,923m engines, complete propulsion 12% systems and distributed Marine energy solutions. The business Industrial 30% serves the marine, defence, Underlying 25% power generation and operating profit industrial markets. Power generation See page 28 £330m 33% Marine manufactures and Underlying revenue Underlying revenue mix Marine services propulsion and handling solutions for the £1,077m maritime offshore, merchant Naval and naval markets, ranging 31% from standalone products to complex integrated systems. Underlying operating loss Commercial 69% See page 32 £(25)m Nuclear is the technical Underlying revenue Underlying revenue mix Nuclear authority for the UK nuclear steam raising plant that £818m Civil powers the Royal Navy’s nuclear submarine fleet; nuclear 23% managing plant design, safety, manufacture and Underlying service support. Our civil operating profit Submarines nuclear operation supplies 77% safety-critical systems to about half the world’s £38m See page 36 nuclear power plants. * From January 2018, Rolls-Royce will be reporting as three new core business units. See page 6 for more information. FCXGroupXatXaXGlanceX_v5.indd 3 28/03/2018 11:34 Strategic Report Rolls-Royce plc Annual Report 2017 04 Chief Executive’s Review Chief Executive’s Review Underlying revenue (£m) Warren East Chief Executive £15,090m 2017 15,090 2016 13,783 Underlying operating profit (£m) £1,175m 2017 1,175 2016 915 Free cash flow (£m) £276m 2017 276 2016 120 Review of 2017 Overview Rolls-Royce made good progress in 2017, achieving a number of important operational and technological milestones. Results were ahead of our expectations as we delivered growth in underlying revenue, underlying operating profit and free cash flow. This was achieved while focusing on managing the well-publicised in-service fleet issues on the Trent 1000 and Trent 900 engines that led to increased costs as efforts were made to minimise the disruptive impact on our customers and to develop longer-term solutions. There was better understanding Rolls-Royce made good progress in 2017, achieving across the business of the need for cultural change and tangible progress in our efforts a number of important operational and technological to increase openness and transparency with investors. We strengthened the executive milestones, while focusing on managing significant leadership team (ELT) as we continued to in-service engine issues in Civil Aerospace. Looking drive cultural change across the Group. We completed our strategic update and forward, sustaining this improvement and delivering are ready to move forward in our drive for pace and simplicity, restructuring from increasing cash flow generation will strengthen our five to three businesses, with a review position as one of the world’s leading industrial of strategic options for our commercial marine operation. technology companies. Civil Aerospace had some notable successes in 2017 with record levels of large engine deliveries, further expanding the installed fleet and generating service revenue growth. We made good progress with our new large engine programmes, achieving the first flight of three new engine designs within a 12-month period. Power Systems delivered a strong performance in its first year with new leadership, streamlining the product portfolio and ChiefXExecutivesXreview_v3.indd 4 28/03/2018 11:34 Rolls-Royce plc Annual Report 2017 Strategic Report Chief Executive’s Review 05 making new inroads into the Chinese market. Defence Aerospace had another solid 2017 priorities REPORT STRATEGIC year as we renewed a number of core US contracts and further developed our service Strengthen Sustain Rebuild Develop delivery capability. We delivered operational our focus on the strong trust and our long-term improvements in Nuclear, while in Marine we engineering, start to our confidence vision and established leadership in ship intelligence operational and transformation in our long-term strategy and autonomous shipping. We also received aftermarket programme growth prospects regulatory approval for the acquisition of ITP excellence Aero which was completed on 19 December 2017 – see page 7. The Group faced several challenges in the year. These are not unusual given the nature 2017 priorities Operational excellence – a new operating of the industries in which we operate. In Civil strategy was developed and we invested Aerospace, production milestones were At the beginning of the year we set out a further £764m in capital expenditure achieved against a backdrop of capacity four key priorities: in 2017. Capitalising on the rapidly constraints, primarily blade manufacturing advancing digital techniques, our aim is and test bed availability, driven by the Priority 1: Strengthen our focus to create an agile, highly productive and in-service fleet issues on the Trent 1000 on engineering, operational and cost-competitive