2019 Full Annual Report PDF

2019
ANNUAL
REPORT
Rolls-Royce Holdings plc
PIONEERS OF POWER
Rolls-Royce pioneers cutting-edge
technologies that deliver clean, safe
and competitive solutions to meet
our planet’s vital power needs.
Rolls-Royce Holdings plc Annual Report 2019 Strategic Report
Financial Highlights and Contents 01
Group Financial Highlights Contents
STRATEGIC REPORT
Free cash flow Full year payment to shareholders Strategic Report
Group at a Glance 02
£873m 11.7p
Chairman’s Statement 04
Chief Executive’s Review 06
Purpose, Vision and Strategy 10
2018: £568m 2018: 11.7p Business Model 12
Key Performance Indicators 14
Financial Review 16
Underlying revenue Reported revenue
Business Review 24
£15,450m £16,587m
Civil Aerospace 24
Power Systems 29
Defence 33
ITP Aero 37
2018: £15,067m 2018: £15,729m
Sustainability 40
Non-Financial Information Statement 40
Underlying operating profit Reported operating (loss) Climate Change 41
Technology 42
£808m
2018: £616m
£(852)m
2018: £(1,161)m
Impacts from Operations
People and Culture
Ethics and Compliance
Principal Risks
44
45
49
50
Going Concern and Viability Statements 55
Underlying profit before tax Reported (loss) before tax s172 Statement 56
£583m
2018: £466m
£(891)m
2018: £(2,947)m
Directors’ Report
Compliance with the Code
Chairman’s Introduction
Board of Directors
58
59
62
Corporate Governance 65
Underlying earnings per share Reported earnings per share Committee Reports 75
Nominations & Governance 75
15.9p (69.1)p
Audit 79
Remuneration 85
Remuneration Policy from 2020 88
Safety, Ethics & Sustainability 105
2018: 16.0p 2018: (129.2)p
Science & Technology 111
Responsibility Statements 114
Net funds ø
£1,361m
Financial Statements
Financial Statements Contents 115
Consolidated Financial Statements 116
Company Financial Statements 183
2018: £840m Subsidiaries 187
Joint Ventures and Associates 192
Free cash flow is defined in note 28 on page 180.
ø Net funds (excluding lease liabilities) is defined on page 121.
Other Information
Independent Auditors’ Report 194
Sustainability Assurance Statement 203
Other Financial Information 204
Use of underlying performance measures in the Annual Report Other Statutory Information 206
All figures in the narrative of the Strategic Report are underlying unless otherwise stated. We believe
this is the most appropriate basis to measure our in-year performance as underlying results reflect the Shareholder Information 210
substance of trading activity, including the impact of the Group’s foreign exchange forward contracts, Glossary 212
which lock in transactions at predetermined exchange rates. In addition, underlying results exclude
the accounting impact of business acquisitions and disposals, impairment charges and exceptional
items. A full definition of underlying and the reconciliation to the reported figures are in note 2 of the
Consolidated Financial Statements on page 134. All references to organic change are at constant
translational currency and exclude M&A.
Front Cover:
The Rolls-Royce ionBird: a test airframe
for our ACCEL project, which is developing
Forward-looking statements the world’s fastest all-electric aircraft.
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 Our Spirit of Innovation aircraft, developed
from time to time. This report is intended to provide information to shareholders, and is not designed with YASA and Electroflight and partly
to be relied upon by any other party or for any other purpose, and the Company and its Directors accept
funded by Aerospace Technology Institute
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, (ATI), will be powered by the world’s most
and a number of factors could cause material differences to the actual results or developments. power-dense flying battery pack, with the
aim of reaching speeds of over 300mph.
02 Strategic Report
Group at a Glance
Rolls-Royce Holdings plc Annual Report 2019
GROUP AT A GLANCE
At Rolls-Royce, we pioneer the power that matters
to connect, power and protect society.
Free cash flow Underlying revenue by business in 2019
£873m ITP Aero

6%
Non-core businesses
1%
Underlying revenue
£15,450m Defence
20%
Underlying operating profit
£808m Civil
Aerospace
51%
Reported revenue
£16,587m Power
Systems
Reported operating (loss) 22%
£(852)m
See note 2 on page 139
for a reconciliation between
underlying and reported results.
Order backlog Patents approved Gross R&D Countries with Employees

for filing expenditure Rolls-Royce (monthly average)
presence
£60.9bn 830 £1.46bn 50 51,700

Group at a Glance 03
Our core businesses in 2019
STRATEGIC REPORT
CIVIL £8,107m
Civil Aerospace is a major Underlying revenue mix
manufacturer of aero engines for 4
AEROSPACE the large commercial aircraft,

regional jet and business aviation
Underlying revenue
2
3
markets. The business uses

engineering expertise, in-depth
knowledge and capabilities to
provide through-life support
£44m 1
solutions for its customers.
1. Large Engines.........................71%
2. Business Aviation.................. 14%
3. Regional..................................... 4%
4. V2500......................................... 11%
See page 24
POWER £3,545m
Power Systems is a leading provider Underlying revenue mix
of high-speed and medium-speed 5
4
SYSTEMS reciprocating engines, and complete

propulsion and power generation
Underlying revenue
1
systems. It serves the marine,

defence, power generation and
industrial markets and includes
civil nuclear operations that supply
£357m 3
Underlying operating profit 2

safety-critical systems.
1. Marine.......................................28%
2. Industrial..................................25%
3. Power Generation................35%
See page 29 4. Defence......................................9%
5. Civil Nuclear............................. 3%
DEFENCE £3,250m
Defence is a market leader in Underlying revenue mix
aero engines for military transport 5
and patrol aircraft with strong
Underlying revenue 4 1
positions in combat and helicopter
applications. It has significant scale
in naval and is the technical authority
for through-life support of the
nuclear power plant for the
£415m 3

2
Royal Navy’s submarine fleet.
1. Transport................................. 36%
See page 33 2. Combat.....................................23%
3. Submarines............................. 19%
4. Naval..........................................10%
5. Other..........................................12%
ITP AERO £936m

ITP Aero is a global leader in Underlying revenue mix
aero-engine design, manufacture 3
and maintenance. Alongside the
Underlying revenue 2
development, manufacturing,
assembly and testing of engines,
it provides MRO services for
regional airlines, business aviation,
industrial and defence applications.
£111m 1
1. Civil.............................................77%
2. Defence.....................................13%
See page 37 3. In-Service Support..............10%
04 Strategic Report
Chairman’s Statement
CHAIRMAN’S STATEMENT
SIR IAN DAVIS, CHAIRMAN
This was a year of progress across the Group, despite Our Defence business performed strongly,
achieving a record level of new orders, with
the technical and operational challenge of the particular strength in the US where we see
significant future opportunities. I would like
Trent 1000. Strategically, good progress is being made to single out the greatly improved customer
service and delivery performance in our
on new low carbon technologies and capabilities. submarines propulsion unit.
Consistent with the long-term needs and
nature of the business, we have sustained
This was a year of progress across the Group, 2019 Review
despite the challenges we experienced with technology and R&D investments. The focus
the Trent 1000 engine. We took further We delivered a record number of widebody of these investments has been on new
significant strategic steps towards realising engines in 2019, almost double the number technologies and capabilities that will
our long-term goal to be the world’s leading delivered five years ago. This has enabled improve engine efficiency, significantly
industrial technology company while the continuous growth of our installed reduce carbon emissions and minimise
continuing our cultural transformation. engine base in the civil aerospace market adverse environmental impacts – including
which, because of the nature of our service noise. I would highlight, as examples, the
In our Civil Aerospace business, the technical contracts and business model, is the acquisition of Siemens’ eAircraft business
and operational challenge of fixing the bedrock of our long-term future profits and our investments in electric propulsion
Trent 1000 has been both costly and and cash flow. We are very encouraged more broadly. These include the pioneering
resource intensive. Most importantly, it by the sustained successful introduction development of an all-electric aircraft, the
has led to significant and deeply regrettable and reliable performance of our crucial testing of a new hybrid-electric propulsion
disruption for our customers. But we have Trent XWB engine. system, as well as microgrid technologies
made progress and are taking further for power generation.
proactive steps to improve the situation in Our Power Systems business is performing
2020. Ensuring engine availability and the well despite challenging external market We are investing heavily in digital and
service levels our customers expect are our conditions. In line with strategy, it continues artificial intelligence (AI) technologies.
highest short-term priorities. to increase revenues and market share as The industries we operate in are, and will
it moves towards integrated systems and increasingly be, at the centre of the data
Our Power Systems and Defence businesses solutions and to new, more environmentally revolution and the integration of complex
sustained the financial and strategic sustainable technologies. We are particularly systems and technologies.
momentum of previous years. Strategically, pleased with the strong progress in China
good progress is being made in the made by Power Systems and proud of the During the year, we faced unprecedented
development of new technologies and development of pioneering new hybrid- challenges with our Trent 1000 engine.
capabilities with the focus on more efficient electric engines for the rail market. We are working tirelessly to fix the problems
and environmentally friendly engines and and improve the engine’s underlying
propulsion systems.
Chairman’s Statement 05
durability. We have seen signs of progress governments, suppliers, customers, rebuild distributions to shareholders while
STRATEGIC REPORT
with the roll-out of fixes and have a detailed technology providers, fuel companies, investing for the long-term.
operational plan to mitigate the disruption non-governmental organisations (NGOs)
to our customers. As a result of the cost of and civil society. We cannot do it alone. Board developments
the programme, however, we recognised a Climate change is a risk to our business – During the year, we announced the
significant exceptional charge in the year. indeed a principal risk – but more appointment of George Culmer as a
importantly, it is a real opportunity which Non-Executive Director. He joined at the
Despite progress on our restructuring and start of 2020 and is a member of the
could see us create disruptive new
transformation programme, there remains a lot Nominations & Governance Committee,
technologies and solutions.
more to be done to reduce the cost base the Audit Committee and the Safety, Ethics
of the business, to simplify our processes We have continued to develop the & Sustainability Committee. A chartered
and to provide a more agile culture. This governance innovations highlighted in accountant, George was until recently
is a competitive and investor necessity. previous reports. Irene Dorner, our Employee chief financial officer at Lloyds Banking
It is essential to generate the cash flow, Champion on the Board, continued her Group and is also the senior independent
shareholder returns and investment funds sterling efforts during the year, while director at Aviva.
required for the long-term health of the Beverly Goulet visited a number of our
business. It is also a huge opportunity, and smaller sites as our North American We were really sorry to see the departure
consistent with our long-term aspiration Employee Champion and Lee Hsien Yang of Ruth Cairnie as a Non-Executive
to be the world leading industrial held a series of town hall meetings with Director at the end of the year following
technology company. employees and partners in China. We held her appointment as chair of Babcock
further Meet the Board events and continued International Group. Ruth made extraordinary
At the time of writing, there are macro risks contributions to the Board and to the
our Board apprentice programme. We have
to navigate in the coming year, notably the Group, not least in her role as Chairman
introduced a new tool to track employee
outbreak of the COVID-19 virus which is of the Remuneration Committee.
engagement with increased focus on key
currently having an effect on world trade,
topics such as engagement with our purpose Brad Singer, a partner and chief operating
travel, and supply chains. We are actively
and strategy. Statistically and culturally officer of ValueAct Capital, stepped down
monitoring the situation, following
we still have a way to go on diversity, as a Non-Executive Director in December.
international health advice and giving our
particularly at the most senior levels. But Since joining us in 2016, Brad has been an
people as much support as they need.
we are making good progress elsewhere active member of the Board, offering a
Purpose, strategy and governance from a talent pipeline perspective and I valued external perspective and helping us
Purpose has been, and always will be, believe we are on the right path. to drive progress in our efforts to transform
fundamental to any company with Finally, we continue to focus attention and Rolls-Royce. My colleagues and I have
long-term aspirations or enduring ambition. oversight on ethical compliance and, above greatly appreciated Brad’s insight and
We have spent significant time refining all, on safety. This is an ongoing challenge, commitment to the Company and it has
our purpose to ensure it is relevant to our particularly at times of disruption and stress, been a pleasure to work alongside him.
stakeholders, not least our employees. for all companies in our industries. We have recently announced the
At its core, our purpose is to connect, power
appointment of Dame Angela Strank as a
and protect society. We will do this while Shareholder payments
Non-Executive Director. She will join the
minimising our impact on the environment. During the year, further steps were taken
Board on 1 May 2020 and will be a member
to simplify the portfolio and improve our
Purpose manifests itself in strategy and of the Nominations & Governance
net funds position. We completed the sale
behaviour. I hope this report will clarify our Committee, the Safety, Ethics & Sustainability
of our Commercial Marine business and
strategic intent and the actions we are taking Committee and the Science & Technology
finalised the transfer of a significant portion
to make our purpose real, and measurable, Committee. Dame Angela is currently chief
of our pension liabilities to Legal & General
to all our stakeholders. Technology and scientist and head of downstream
Assurance Society. This move will increase
capital allocation will be at its heart. We technology at BP and a member of their
overall security for Rolls-Royce pensioners
have to be at the forefront of technologies Executive Management Team. I am
and reduce risk to our business.
such as electrification, hybrid propulsion delighted to welcome her to our Board.
systems and microgrids that can dramatically Strengthening the balance sheet
reduce emissions. Long haul aviation is understandably remains a priority. The Looking forward
technologically challenging from a carbon costs associated with the Trent 1000 have
Our Group continues to operate in markets
emissions perspective. Improved engine impacted investor confidence. Our firm
where the long-term trajectory is one of
efficiency will continue to play a very intent is to turn this around. While we have
growing demand for power and the services
important role in emissions reduction made progress in delivering the sustainable
that will support it. To capitalise on the
as will alternative non-fossil fuels. free cash flow from our business that would
opportunities, however, we must continue to
be the foundation for increased shareholder
We are committed to reducing greenhouse focus on improving our cost competitiveness;
payments, there is more to be done. As a
gas emissions from our operations and pursue purposeful, disciplined capital
consequence, we are not proposing an
facilities to zero by 2030. Beyond that, we allocation; and drive innovation in
increase in the final shareholder payment
are working hard to determine how we can sustainable, lower carbon power solutions.
for 2019. This will be held flat at 7.1p per
mitigate the emissions impact of our product We must also continue on the cultural
share. Taken together with the interim
portfolio and product testing in order to transformation journey that helps
payment, this brings the full payment to 11.7p
get the whole of Rolls-Royce to a net zero accelerate our trajectory and attract and
per share. Despite the challenges of 2019,
emissions position by 2050. Large scale retain the talent on which we will depend.
our underlying financial performance has
aviation is a potentially very challenging
shown improvement over the last few years. Sir Ian Davis
sector and to achieve this, we will have to
It remains our objective to progressively Chairman
continue to work in partnership with
06 Strategic Report
Chief Executive’s Review
CHIEF EXECUTIVE’S REVIEW
WARREN EAST, CHIEF EXECUTIVE
Despite the challenges of the Trent 1000, the progress of the financial cost of returning the fleet
to the levels of service our customers expect
seen across the Group in the year gives me increased and dealing with the unacceptable disruption
we have caused them. As a result of the
confidence that the changes we are implementing are Trent 1000 and as announced in November,
we are recognising a net exceptional
creating a tangible and sustainable cultural and charge of £1,361m within our financials,
performance shift within our business. contributing to a reported operating loss
of £(852)m.
We have fixes designed for all but one of
the issues identified and are well advanced
Progress in 2019 improvement in Civil Aerospace. This
contributed to strong Group free cash flow on certification and rolling them out into
To draw an analogy to describe the year of £873m, another significant step towards the fleet. As the year drew to a close, we
that might be familiar to many of our achieving at least £1bn in 2020. We also carried out a detailed technical re-evaluation
aerospace customers: the journey is continued to invest in the new technologies of our progress on the final fix, a new
sometimes more important than the which are so vital to remaining competitive. high pressure turbine blade for the
destination. In 2019, how we got to our This was all achieved despite the in-service Trent 1000 TEN. Based upon that work and
destination – strong progress across the challenges with the Trent 1000, which test activity, we reset our financial and
Group – gives me increased confidence could have derailed our progress. The fact operational expectations for the engine in
that the changes we have been implementing that they did not is thanks to the focus of November, based on a revised estimate of
over the past two years are creating a our people on their roles in delivering for final blade durability, in order to provide
tangible and sustainable cultural and the business. certainty for customers and greater clarity
performance shift within our business. for investors. Since then, we have made
I spoke last year of needing to build beyond good progress on the design of this blade,
We had a good end to the year including the breakthrough we could see occurring and continue to expect certification of this
strong Civil Aerospace aftermarket as we launched our restructuring and component in the first half of 2021.
performance, record widebody engine adopted our new operating structure.
deliveries, and better trading in
Power Systems despite tough market
We have generated real momentum during Lower carbon power
2019, not least in respect to costs, as we
conditions. Defence performed well scrutinised our spending with intense rigour We believe in the positive transforming
throughout the year with a record order and really challenged ourselves to act potential of technology and have a passion
intake and healthy cash performance. As a differently. There is, however, no denying for solving difficult problems. Today, one
result, we delivered improved financial results the fact that the durability issues with the of our society’s greatest technological
including a 25% increase in underlying Trent 1000 weighed heavily on 2019, in terms challenges is the need for lower carbon
operating profit and further strong power and we have a crucial role to play
Delivery on 2019 priorities
STRATEGIC REPORT
We set out four key priorities for the year:
2019 priorities
Customers
During the year, we delivered a record
510 widebody engines from Civil Aerospace,
Customers People and culture increasing our installed base by 6% to more
–– Increase production volume –– Build a resilient business than 5,000 engines and growing engine
–– Expand service network –– Continue restructuring flying hours by 7%. The Trent XWB became
programme our second-largest Trent programme by
–– Mitigate disruption from
in-service issues –– Further simplify processes volume, with the fleet having amassed more
than five million flying hours and its leading
–– Diversity & inclusion
engines already achieving our expectations
for time-on-wing (see page 26). We revamped
our Civil Aerospace services business and
undertook a record number of scheduled
Technology Financial major overhauls, in spite of increased check
and repair visits driven by the Trent 1000.
–– Revitalise service –– Continue improving
free cash flow During the year, we took the decision to
–– Develop new engine
architecture –– Further strengthen accelerate the installation of fixes within
balance sheet a small proportion of the Trent 1000 fleet
–– Advance electrification
following an incident. As a result, we
projects –– Enhance capital
allocation discipline revised our target to reduce aircraft on
ground (AOG) to single digits from the end
of 2019 to the end of the second quarter of
2020. To help alleviate disruption, we took
further action to increase our maintenance,
repair and overhaul (MRO) capabilities and
increased our pool of spare engines to get
our customers flying again.
in decarbonising the sectors in which we opportunity to become a disrupter.
operate. Firstly, we are committed to further Inaction is not an option. Our Power Systems business continued to
reducing the environmental impacts of our capitalise on its extensive installed base of
products and services. We are following up Progress on restructuring engines by increasing revenues from services,
our success as the developer of the world’s including through the introduction of digital
In 2019, we made further progress on our monitoring tools, initially targeting the
most efficient civil large engine in service
restructuring programme. Since it was mining industry.
today, the Trent XWB, with our next
announced in mid-2018, we have
generation UltraFan. We are also heavily Defence had a very successful year, securing
implemented productivity improvements
involved in the drive for sustainable a record order intake of £5.3bn boosted by
enabling us to achieve 2,900 of the planned
alternative fuels. Secondly, we are services. Notable wins included a five-year
4,600 indirect headcount reduction and
committed to developing new low emission contract worth over $1bn with the
we remain on track to realise the full
technologies. During 2019, we made US Marine Corps to maintain the AE1107
benefits of the programme by the end of
significant progress, including the acquisition engines that power the Bell Boeing V-22
2020. Reducing our workforce is not a
of Siemens’ eAircraft business and ground Osprey. We delivered just under 500 aero
decision we take lightly, but we must
tests of our megawatt generator for the engines and now have over 16,000 in
fundamentally change the way we operate.
E-Fan X demonstrator with Airbus. Thirdly, service across more than 100 countries.
we are working to reduce the greenhouse We have completed the majority of the We also made good progress on developing
gas emissions from our own operations and changes within Civil Aerospace and new technologies ahead of a number of
facilities to zero by 2030. Defence, including unwinding an overly attractive opportunities in coming years.
complex corporate structure and
Our ability to pioneer the decarbonisation Technology
introducing new automated tools and
of aviation builds upon the experience of Technology is the lifeblood of our business
methods which have helped streamline
our Power Systems business in hybrid and and, during the year, we passed a number
processes. Progress within Power Systems
electrical power across a range of sectors. of significant milestones on our new engine
was more limited as we completed planned
During the year, we signed customer programmes. We successfully tested all the
strategic investments. Our Group Business
contracts and framework agreements for composite elements of our advanced low
Services operation, meanwhile, is now
hybrid solutions for the rail and yacht pressure system (ALPS) – including fan
providing more effective and efficient
markets. In early 2020, we further enhanced blades and fan cases – which is a key
transactional processing across the Group.
our capabilities with the acquisition of a component of our UltraFan engine design.
majority holding in power storage specialist We have focused on driving value through
In Defence, our work as part of Team
Qinous, which will enhance our microgrid reducing other indirect spend beyond salary
Tempest in the UK continued. In the US,
development activities. costs and on improving the effectiveness
our dedicated defence development team,
of our cash management processes. These
Climate change is a risk for our business LibertyWorks, demonstrated an integrated
foundations will be developed further in
and playing a pivotal role in combating power and thermal management system for
2020 to provide additional productivity
it presents us with a very significant high-power directed energy applications
improvements in the future.
08 Strategic Report
Chief Executive’s Review
and we refined our F130 engine for the

competition to re-engine the US Air Force’s
(USAF) Boeing B-52s. Our efforts in
electrification included the introduction of
microgrids from Power Systems (see page 30)
and breakthroughs in aviation including the
roll-out of the all-electric plane we hope will
set new speed records (see page 42).
People and culture

We have continued to embed our values
and behaviours across the Group (see
page 45). Improving diversity & inclusion
remains a priority for us and during the
year we refreshed our strategy and looked
to accelerate its implementation. We have
a lot of work to do if we are to hit our gender
diversity target of 23% for our Executive
Team. During the year, we reviewed our
succession plans and increased the
proportion of females from 35% to 44%.
Financial
We delivered significant financial progress
with a strong level of free cash flow, despite
£578m of in-service costs from the
Trent 1000 which were partially offset
by £173m of related insurance receipts.
In Civil Aerospace, we reduced widebody
FIXING THE TRENT 1000 OE losses and generated a healthy increase
in the net cash flow driven by our widebody
in-service fleet. We also saw an increase
Returning the Trent 1000 fleet to the level of service which our customers in margins in Power Systems, although
expect is the top priority of senior management and the Board. We believe Defence was lower as we had signalled,
2019 was a pivotal year. We have now designed fixes for all but one of the reflecting its OE product mix. After a poor
significant technical challenges we have faced and have a clear path first half performance, we delivered a
to resolving the final issue. We have announced actions to boost our material reduction in inventory as the year
maintenance capacity and add additional spare engines to reduce progressed, although further work is
customer disruption. We also carried out an extensive review that resulted required here in 2020. We focused hard
in greater certainty for customers and clarity for investors. Our focus on costs, with good progress achieved in
is now on executing this clear plan. the second half of the year. We still have
We have been dealing with three significant technical issues affecting work to do in 2020, however, to further grow
each of the three variants of the Trent 1000 (Package B, Package C and the quality and scale of our cash flow.
TEN). Of the nine fixes required, we have so far designed eight and certified
seven which are now being incorporated into the fleet. A new high 2020 priorities and
pressure turbine (HPT) blade for the Trent 1000 TEN variant is the final longer-term outlook
modification required. During the year, we carried out a detailed technical
Building on the strength of our performance
re-evaluation of our progress. Based upon that work and test activity, we
in 2019, we enter 2020 with conviction and
reset our financial and operational expectations for the Trent 1000 TEN
confidence. The momentum we saw as the
based on a revised estimate of final blade durability. This allowed us to be
year progressed must be maintained in 2020
clearer with customers on the engine’s long-term servicing requirements,
in order to achieve at least £1bn in free
giving them greater certainty when planning schedules. It also enabled
cash flow. The fact that we have remained
us to assess the associated exceptional cost and provide investors with
on course for this target despite the
a clearer view of future costs (see page 19).
Trent 1000 situation is due to the
The Board continued to scrutinise the issue, receiving regular updates on determination, drive and resolve of our
progress. The Audit Committee reviewed the accounting treatment of people. In the coming year, we will push
the cost (see page 82) and the Board carried out a full technical review for further improvements in execution,
(see page 68). To underpin our target to reduce AOG to less than ten delivery and overall business performance.
by mid-2020, we are increasing our stock of spare engines and
accelerating growth in our MRO network. This comes on top of a
tripling of MRO capacity over the past three years, the introduction
of new servicing techniques and a 50% increase in our turbine blade
manufacturing capacity.
STRATEGIC REPORT
25 YEARS CONNECTING THE WORLD
In 2020, our family of Trent engines will pass a major milestone:
a quarter of a century powering commercial airlines around the world,
connecting people and cultures and delivering goods and services.
Having completed more than 145 million engine flying hours since
the very first engine, a Trent 700, went into service in 1995, our Trent
engines are the bedrock of Rolls-Royce. We have been celebrating
the vital role that these engines play in our growth and our future
with our #poweroftrent campaign across all our digital channels.
More than a year since it entered service in November 2018, the
latest member of the family, the Trent 7000, has performed well.
This follows the smoothest entry into service of any widebody engine,
the Trent XWB, which became our second largest Trent programme
by volume during the year. The Trent XWB fleet has now flown more
than five million flying hours since it took to the skies in early 2015.
It remains the world’s most efficient large aero engine in service
today. In 2019, we won 64% of all new widebody engine orders
and now hold 55% of the widebody industry order backlog.
Now that we are two years into our new push for even greater pace and simplicity. most obviously within our installed base of
simplified structure of business units Thirdly, our financial target as a Group is widebody engines and order book, must
– operating within a clear framework and clear: to generate at least £1bn of free cash be fully unlocked. Our sights are firmly set
supported by a lean centre – it is appropriate flow in 2020. Sustainable and growing cash upon a mid-term ambition to exceed £1 of
to set priorities which are solely Group level, flow is the foundation upon which our free cash flow per share, which translates
from which we determine the priorities for long-term future, and returns to investors, to at least £1.9bn of free cash flow. To
our businesses and functions. will be built. Finally, our most important secure this in a sustainable way means
differentiator is our people and we must reinforcing behavioural change across
Our first priority is to deliver on our
continue to embed the behaviours we need our business, driving pace and simplicity,
commitments to customers. Secondly,
from everyone who works at Rolls-Royce developing a thirst for continuous
we must deliver the full benefit of our
in order to create the culture we need improvement and ensuring disciplined
transformation by constantly seeking simpler,
to continue to win. investment in the new technologies we
more efficient ways of working across the
require to exploit the opportunities that
Group. While headcount reduction is a I believe the coming year will mark another
we can see across all our markets. We will
consequence, our transformation must important step towards generating significant
push harder and further in 2020, towards
primarily be about changing the way we returns from the market positions
becoming the world’s leading industrial
operate. We have made good progress in Rolls-Royce has spent many years securing.
technology company.
2018 and 2019, and during 2020 we must The value embedded within our business,
2020 priorities
Customers Operations Financial People and culture

Exceed customer Annual efficiency Free cash flow Improved employee
priorities
Group
commitment metrics improvements of over of at least £1bn engagement as measured

£400m (from launch through Gallup Q12
of restructuring)
Safety Operate safely

values
Core
Quality Trusted to deliver excellence

Ethics Act with integrity
10 Strategic Report
Purpose, Vision and Strategy
PURPOSE, VISION AND STRATEGY

We are one of the world’s leading industrial technology companies. We pioneer
the power that matters to connect, power and protect society. This requires us
to anticipate the opportunities and challenges our customers will face.
OUR VISION OUR STRATEGY
Pioneering Our strategy reflects

three horizons:
Transform our business
the power Horizon 1 Maintain and
that matters defend core businesses Champion

electrification
Horizon 2 Nurture
Rolls-Royce pioneers emerging businesses
cutting-edge technologies
that deliver clean, safe and Horizon 3 Create genuinely
competitive solutions to meet new businesses
our planet’s vital power needs. At the same time we need Vitalise Reinvent
to manage the transition existing with
of technologies, capabilities, capabilities digital
resources and value across
business horizons.
Build a balanced portfolio
Trends shaping our markets service without requiring shop visits. The of technologies being developed in parallel
Trent 700, a leading member of the Trent with Project Tempest. In the US, our
We believe three key trends will define the family for almost 25 years, continued to LibertyWorks team saw the culmination
world’s future power needs: the growing perform well and received certification to of ten years of research and development
demand for cleaner, more sustainable power; power a small fleet of new Airbus BelugaXL by demonstrating an integrated power and
electrification; and digitalisation. As we move aircraft. Our ambitions for the UltraFan thermal management system for defensive
to a low carbon global economy, our engines demonstrator programme remain strong as high-power directed energy applications.
will become part of broader, hybrid-electrical we target engine maturity towards the end During the year, both our AE1107 engines
systems with lower emissions and of the 2020s. During 2019, we successfully on the Bell Boeing V-22 Osprey and RR300
environmental impact. tested the composite elements of the ALPS, engines on the Robinson R66 helicopter
including fan blades and fan cases. In exceeded one million engine flying hours.
Our progress in 2O19 business aviation, we unveiled the Pearl 700
for the new Gulfstream G700 and the first Horizon 2
Horizon 1 member of the Pearl family, the Pearl 15,
entered into service (see page 28). Champion electrification
Vitalise existing capabilities We are investing in new power solutions
In Power Systems, we secured an innovative for our long-term success, building on
We are developing next-generation ten-year service agreement with Svitzer that
technologies to sustain and grow our current our strong heritage in thermo-mechanical
connects maintenance services to engine engineering to produce state-of-the-art
competitiveness; investing in our existing availability; and signed a new agreement
thermo-mechanical products to ensure that electro-mechanical and hybrid power
for the supply of MTU engines with British systems. It is just one of the steps we are
they provide clean, safe and competitive luxury yacht manufacturer Sunseeker.
solutions for our customers. taking towards the provision of lower
In Defence, we successfully completed early carbon power (see page 42).
Our installed base of Civil Aerospace engine tests of the F130 which we are
widebody engines exceeded 5,000 in the During the year, we secured orders from
offering as a new engine for the USAF’s Irish Rail and Porterbrook, the UK’s largest
year, up more than 50% over the past Boeing B-52. We were also awarded a
decade. The Trent XWB is meeting our rolling stock leasing company, for our
contract, alongside industry partners, to hybrid powerpacks. We also signed a
expectations, with the first Trent XWB-84 develop hypersonic propulsion by the
engines now entering their fifth year in global microgrid partnership to offer
UK’s Ministry of Defence as part of a suite
Purpose, Vision and Strategy 11
energy-efficient solutions for utility and Reinvent with digital for the Group in the future. We have
STRATEGIC REPORT
industrial companies, and opened a We are using digital technologies across received initial match funding from the
microgrid validation centre (see page 30). our activities to generate new insights, UK government to progress a new type of
new solutions and new opportunities; compact smart nuclear power station based
In aviation, we completed the acquisition of
increasingly partnering with start-ups and around our Small Modular Reactor (SMR)
Siemen’s eAircraft business (see below) and
established players. We expanded the digital concept (see page 43). Power Systems
carried out successful ground tests of a
solutions team within Power Systems and signed a letter of intent for the construction
hybrid system using our M250 gas turbine,
set up a new data and analytics competence of a demonstration plant that uses electric
paving the way for test flights in 2021.
centre in the year. We announced that ferry power generated in photovoltaic and wind
We gained support for our hybrid-electric
company Förde Reederei Seetouristik will power plants for the production of synthetic
ambitions from the German State of
test a new electronic monitoring system fuels. We also set up a power-to-x
Brandenburg and announced plans to work
that collects and analyses data from our competence centre at the Brandenburg
with partners, including the Brandenburg
engines and other systems at sea. We also University of Technology, Germany, to
University of Technology to develop a
unveiled plans to develop an autonomous explore the potential of synthetic fuels.
hybrid-electric flight demonstrator based
on the M250 system. machinery control system for naval vessels.
Build a balanced portfolio
In the UK, where the government is R2 Data Labs continued to build its digital
already supporting the E-Fan X and ACCEL ecosystem through a tie-up with venture We actively manage our portfolio of
programmes (see page 42), it is also capital fund, BrightCap Ventures, to attract activities to focus on key activities that
supporting us on Project Fresson, which start-ups to work with us on solving industrial are aligned with our strategy and business
plans to design, manufacture and integrate challenges using digital technologies. We model. As a result, during the year, we
a hybrid-electric propulsion system into a also launched our first collaborative digital completed the sale of our Commercial
small aircraft for island-hopping routes. technology project with Singapore’s Defence Marine business and, in January 2020,
Science and Technology Agency (DSTA). completed the sale of our Civil Nuclear
We also launched a joint programme to North America Services business.
research zero-emissions aviation with Horizon 3
Widerøe, the largest regional airline in
Scandinavia, which plans to replace and Transform our business
electrify its regional fleet by 2030. We are advancing new opportunities that
could capture substantial growth and value
ACCELERATING OUR
ELECTRICAL STRATEGY
During the year, we took a significant
stride towards meeting our strategic
ambition to champion electrification
with the completion of the acquisition
of Siemens’ eAircraft business.
This business has been developing
a range of all-electric and hybrid-electric
propulsion solutions. Around 180 specialist
electrical designers and engineers based
in Germany and Hungary, have now
joined us.
Electrification is set to have as dramatic an
impact on aviation as the replacement of
piston engines by gas turbines. We are
at the dawn of the third era of aviation,
which will bring a new class of quieter
and cleaner air transport to the skies.
The acquisition of eAircraft accelerates
our ambitions in aerospace by adding vital
skills and technology to our portfolio.
It brings us increased scale and additional
expertise as we develop a product range
of hybrid power and propulsion systems.
12 Strategic Report
Business Model
BUSINESS MODEL
Our competitive advantage comes from:
Cutting-edge
technologies System solutions System life
We apply cutting-edge technologies We package technologies into systems We care about the performance of
to provide clean, safe and competitive that provide complete solutions for our our solutions throughout their lives.
solutions. Our technologies ensure that customers. Our solutions mean that our Our through-life capabilities maximise
our customers have the vital power that customers have power from a single, availability and enable us to meet
meets their emerging needs. trusted partner. changing customer needs.
Anticipate the
needs of our
customers
7 Generate 2
Link to risks Develop
stakeholder C D H I J cutting-edge
value technologies
Link to risks Link to risks
A B C D
A C D E
E F H I
F I K
DISCIPLINED
Capture through- CAPITAL Design
life value of solutions
in-service products ALLOCATION
Link to risks
6 Link to risks A C D E 3
A B D F
F G K
Grow installed Develop world-

original class production
equipment base capability
Link to risks Link to risks
A B C D A B C D E
E G J F G J K
5 4
Principal risks
A Safety E Compliance H Market and financial shock Principal Risks

B Business continuity F Cyber threat I Political risk page 50.
C Climate change G Major product J Strategic transformation
D Competitive environment programme delivery K Talent and capability
Business Model 13
STRATEGIC REPORT
We believe we have a sustainable business model which Value creation for
will create value for all our stakeholders over the long our stakeholders
term. See our viability statement on page 55.
Customers
We develop product solutions that
1 Anticipate the needs 5 Grow installed original improve the competitiveness of
of our customers equipment base our customers.
We maintain a high degree of customer Increasing our installed base of products Gross R&D expenditure
intimacy in order to anticipate and generates both in-year growth and the
understand the future power needs of
our customers, building on our years of
experience in delivering for our markets.
potential for our business to capture
long-term service revenue. To give our
business access to these growth
£1.46bn
Our strategic planning processes match opportunities, we strive to deliver new See Technology page 42.
customer expectations with market insight product introductions on time and on budget.
to forecast trends, opportunities and In line with our strategic aim to vitalise
threats which we must adapt to meet. existing capabilities, we also continually
Investors
look for ways to reduce the time and resource
expended on producing existing products, We generate attractive returns for
investors over the long term.
2 Develop cutting-edge and roll-back new technologies from new
technologies programmes into legacy products as Three-year total shareholder return
appropriate. Operational excellence is
11%
We act as a global technology sponsor, key throughout.
drawing upon expertise inside and outside
our organisation. In 2019, we invested £1.46bn In our Civil Aerospace business, we have
in gross R&D, supported by governments been growing our in-service fleet for over See Remuneration Committee
around the world, enabling our engineers two decades and, towards the end of 2019,
Report page 102.
to generate cutting-edge technologies, we had over 5,000 widebody engines
vital intellectual property, and 830 new in service, more than a 50% increase
in a decade.
patents approved for filing. We draw upon Employees
the skills of our 29 University Technology We create an environment where our
Centres and utilise the expertise of our employees are able to be at their best.
partners, with over 500 companies within 6 Capture through-life value
our digital ecosystem. of in-service products Invested in training and development
£28.7m
Our customer relationships are our greatest
strength. We offer our customers a
3 Design combination of advanced technologies,
solutions in a complete systems solution, optimised See People and Culture
We harness the potential of digital throughout its life. page 45 and Non-Financial
technologies and design thinking to create The service innovation we introduced with
KPIs page 15.
solutions that generate the greatest value TotalCare into the Civil Aerospace widebody
from our cutting-edge technologies. This market gave us expertise which we drew upon
activity is supported by the team within to create innovative aftermarket solutions Partners
our data innovation catalyst R2 Data Labs. in other parts of the Group, generating We create partnerships based on
We produce digital twins in order to test returns over many years. These include collaboration where each partner
our hypotheses and then validate our CorporateCare in business aviation and benefits from the relationship.
results through a rigorous physical testing MissionCare in Defence. Power Systems
regime. Dynamic technology management Spend with external suppliers
is now also leveraging the aftermarket
enables us to leverage, attract and recycle
£8.3bn
potential of its installed base. In legacy
capital for innovation. products, we also offer more traditional
aftermarket services, such as spare parts.
4 Develop world-class
production capability Generate Communities
7
stakeholder value We improve the communities that we
We generate value from our cutting-edge
impact locally, nationally and globally.
technologies and innovative solution designs Our activities are global, complex and touch
through effective and efficient delivery of upon a wide variety of stakeholders. From Hours of employee time volunteered
final products. We use our production
96,000
investors, employees, customers, suppliers
expertise and network of seven Advanced and partners, to communities, local and
Manufacturing Research Centres, alongside national authorities, regulatory bodies and
our supply chain partners, to harness new armed forces, we aim to create trusted
manufacturing techniques and technologies. See People and Culture
relationships. We must understand the needs
page 45.
of all our stakeholders and continue to deliver
value, to build a resilient business.
See Stakeholder Engagement
page 70.
14 Strategic Report
Key Performance Indicators
KEY PERFORMANCE INDICATORS

Financial key performance indicators *,†
See Other Financial Information page 205 for additional
commentary on our financial KPIs.
Order backlog Underlying revenue Underlying operating profit
£60.9bn
2019 60.9
£15,450m £808m
2019 808
2019 15,450
2018 63.1 2018 15,067 2018 616
2017 55.0 2017 13,671 2017 306
2016 80.9 2016 13,783 2016 915
2015 76.4 2015 13,354 2015 1,492
How we define it How we define it How we define it

Total value of firm orders placed by customers Revenue generated from operations at Profit generated from operations at actual
for delivery of products and services. This actual rates of foreign exchange including rates of foreign exchange including achieved
KPI is the same as the statutory measure for achieved hedge rates in the year. See note 2 hedge rates in the year. It excludes exceptional
order backlog. on page 139 for a reconciliation to statutory and one-off items. See note 2 on page 139 for
reported revenue. a reconciliation to statutory reported
Why it is important
operating profit.
Order backlog provides visibility of future Why it is important
business activity. Underlying revenue provides a measure of Why it is important
business growth and activity. Underlying operating profit indicates how the
Link to remuneration
effect of growing revenue and control of our
Customer orders drive future revenue growth Link to remuneration
costs delivers value for our shareholders.
which in turn, enables profit and cash flow Underlying revenue growth maximises the
growth. Profit and free cash flow performance opportunity to improve profit and free cash Link to remuneration
are the key financial metrics in both the annual flow performance in the year, both of which Profit and EPS are key financial performance
bonus plan and long-term incentive plan (LTIP). are key financial metrics in the annual bonus measures for our annual bonus plan and LTIP.
plan and LTIP.
Capital expenditure as a proportion Self-funded R&D as a proportion

of underlying revenue of underlying revenue Free cash flow
5.0% 7.2% £873m

2019 5.0 2019 7.2 2019 873
2018 6.0 2018 7.6 2018 568
2017 5.3 2017 7.6 2017 259
2016 4.2 2016 6.8 2016 100
2015 3.6 2015 6.2 2015 179
How we define it How we define it How we define it

Cash purchases of property, plant and In-year self-funded cash expenditure on R&D Cash flow generated from our business
equipment in the year relative to underlying before any capitalisation or amortisation activities in the year before M&A, SFO
revenue. There is no statutory equivalent relative to underlying revenue. There is no payments, foreign exchange and payments
to this KPI. statutory equivalent to this KPI. to shareholders. Cash flow is our statutory
equivalent, see note 28 on page 179.
Why it is important Why it is important
This measure demonstrates the balance This measure demonstrates the balance Why it is important
between essential investments in infrastructure between long-term strategic investments and Free cash flow is the principal metric to
and delivering short-term shareholder returns. delivering short-term shareholder returns. measure the performance of our business
and how effectively we are creating value
Link to remuneration Link to remuneration
for our shareholders. It enables the business
Disciplined allocation of capital expenditure Disciplined control and allocation of R&D
to fund growth, reduce debt and make
optimises in-year profit and cash flow expenditure optimises in-year profit and cash
shareholder payments.
performance without compromising flow performance without compromising
longer-term growth. Metrics in our LTIP reward long-term growth through innovation. There Link to remuneration
strong financial performance through EPS, is a balance of metrics in our LTIP which reward Free cash flow is our key financial metric in
CPS and TSR over the three-year life strong financial performance through EPS, CPS the annual bonus plan, accounting for 50%
of the plan. and also relative returns to our shareholders of the overall targets. CPS is a key driver for
through TSR over the three-year life of the plan. our LTIP.
* Following the adoption of IFRS 15 Revenue from Contracts with Customers in 2018, the 2017 figures have been restated. Dotted lines separate pre and post IFRS 15 figures
on all affected KPIs.
† The adoption of IFRS 16 Leases in 2019 had no material impact on our financial KPIs, see page 181 for more information.
Key Performance Indicators 15
STRATEGIC REPORT
Free cash flow per share Cash return on invested capital (CROIC)
45.9p 12%
2019 45.9 2019 12%
2018 30.6 2018 12%
2017 14.1 2017 13%
How we define it How we define it

Free cash flow in the year divided by the CROIC is calculated as free cash flow divided
average number of shares in issue in the year. by invested capital in the year. See page 205
This measure was introduced in 2018. There is for a full definition of invested capital. This
no statutory equivalent to this KPI. measure was introduced in 2018. There is no
statutory equivalent to this KPI.
Why it is important
Cash flow per share ensures alignment with Why it is important
shareholder interests and is a key measure of CROIC ensures we invest in programmes and
the economic performance of our business. projects which optimise returns for our
shareholders with the correct balance
between long-term and short-term value.
CPS is the largest driver of the LTIP at
60% of the total. Link to remuneration
A key driver of CROIC is free cash flow, which
is also an important financial performance
measure for our annual bonus plan and LTIP.
Non-financial key performance indicators
Customer metric Employee engagement
38% * 3.53
How we define it How we define it
In 2019, we introduced a new balanced In 2019, we introduced a new survey, Gallup
scorecard of metrics for each business. The Q12. Responses are scored on a scale of one
scorecard includes on-time delivery, aircraft to five. The employee engagement score
on ground and engine availability amongst averages the responses to all 12 questions
other indicators. The aggregate outturn is in the survey. See page 46 for more on our
used to determine the customer element change of approach this year.
of our bonus plan. See page 96 for
Why is it important
more information.
Our people are crucial to delivering future
Why it is important business success. This is an objective way to
Customer satisfaction demonstrates whether assess how engaged our employees are with
we are meeting our commitments to our the business and its leaders.
customers across our businesses. This,
in turn, drives our cash and profitability.
Employee engagement performance against
Link to remuneration our target accounts for 12.5% of our annual
The customer metric accounts for 12.5% of bonus plan.
the target bonus in our annual bonus plan.
* Metric is 38% of target (100%), 19% of maximum (200%).
16 Strategic Report
Financial Review
FINANCIAL REVIEW
STEPHEN DAINTITH, CHIEF FINANCIAL OFFICER
Although much remains to be done on our journey to We achieved further progress on our
restructuring plan, with a further 1,600 net
transform and improve the Group, 2019 was a year of reduction in headcount in 2019 across a
variety of overhead functions. Our
good progress and a critical step towards our 2020 and cumulative headcount reduction since the
start of the programme has now reached
mid-term ambitions. 2,900 and we remain committed to our
ambition of a total 4,600 reduction by the
end of 2020.
Overview 2019 Although progress on inventory reduction
Finance has embraced its own role in the
fell short of our ambitions, we delivered
After a challenging first half of the year, we drive to transform our organisation; we
further improvements on the fundamental
had a good end to the year and generated have rolled out new, more agile forecasting
drivers that underpin our improving cash
a strong level of free cash flow of £873m, tools across our businesses, improved the
flows and returns:
delivered on our restructuring plan and made quality of our finance data and management
good progress on the key value drivers in —— in Civil Aerospace further steps were made information and improved a number of key
Civil Aerospace. These achievements were in reducing OE unit losses on widebody processes. An area of particular focus is
made despite the ongoing operational and engines, which fell by 14% to £1.2m, simplifying the structure of our underlying
financial headwinds caused by in-service led by 22% progress on Trent XWB-84 systems and improving our data flow to
issues with the Trent 1000. unit losses; enable better management information.
We still have much to do and I am determined
Overall, Group revenue rose by 7% with —— our large engine aftermarket cash
that we will build further on this in 2020.
Group operating profit of £808m, an margin improved by £0.3bn, led by the
increase of £192m versus 2018. We achieved 7% growth in large engine flying hours We delivered another step in 2019 to
or exceeded our revenue growth and profit allied to the strength in spare parts sales, improve the Group’s net funds position,
margin guidance for each of our core which more than outstripped higher which reached £1.4bn (excluding lease
businesses. Civil Aerospace achieved shop visit volumes; and liabilities), up from £0.8bn in 2018. We made
a record number of widebody engine further progress on refining our portfolio,
—— we delivered a 4% reduction in
deliveries and returned to profitability. completing the disposal of Commercial
commercial and administrative (C&A)
Power Systems demonstrated resilient Marine, with net proceeds of £350m, and
costs and we maintained disciplined
revenue growth and good margin expansion Power Development. We also announced
capital allocation with combined R&D
despite certain end-market challenges. the sale of two further small businesses.
and capital expenditure 11% lower at
Defence achieved an impressive 1.6x We completed the acquisition of Siemens’
£1.9bn reflecting lower capital spend
book-to-bill ratio and healthy cash eAircraft business in October and since
due to completion of several facility
performance while ITP Aero achieved the year-end we have announced the
modernisation projects.
good progress. acquisition of a majority stake in Qinous.
Financial Review 17
Both of these deals are helping us to
STRATEGIC REPORT
Progress on restructuring
accelerate our electrification and
FY20
hybrid capabilities. Headcount FY17 FY18 FY19 (programme
(# FTEs) actual actual actual total)
Although our credit rating currently sits
Indirect & engineering 29,529 28,147 26,606 <25,000
below our aspiration of single A, we have
strong levels of liquidity and, led by Net cumulative reduction ~1,300 ~2,900 ~4,600
improving cash generation, we are confident Run-rate savings at period end £81m £269m £400m
in our ability to strengthen our rating over
the coming 12 to 18 months. Our ambition
monitoring the situation and taking aftermarket cash margin; and ongoing
is to return shareholder payments to a
appropriate actions. Our guidance growth in Power Systems and Defence.
more appropriate level over time.
excludes any material impact from
Improved returns must be achieved despite
COVID-19 as the situation is still evolving.
2020 outlook our ongoing investment in new, more
efficient aero engines in Civil Aerospace
Building on the strength of our performance Longer-term outlook and the pursuit of programme and market
in 2019, we are well positioned to deliver
We remain committed to delivering opportunities in Power Systems and Defence.
further progress in 2020. We expect
significantly higher levels of returns in
around 15% growth in operating profit with After our strong 2019 performance, we
terms of operating profit margin, free cash
at least £1bn of free cash flow. There are remain confident in our mid-term ambition
flow and cash flow return on invested capital
macro risks to navigate in 2020, notably the to deliver free cash flow per share of over
(CROIC). Key drivers of this remain: further
outbreak of the COVID-19 virus which is £1, more than £1.9bn, and to generate
reduction in widebody OE engine losses
currently having an effect on world trade, annual CROIC of 15% through the cycle.
in Civil Aerospace; future increases in our
travel, and supply chains. We are actively
DEFINING OUR ALTERNATIVE Revenue

£m 2019 2018
PERFORMANCE MEASURES Reported measure

Reported revenue 16,587 15,729
Business performance is reviewed and managed on an Underlying performance measure

underlying basis. These alternative performance measures Reported revenue 16,587 15,729
reflect the economic substance of trading in the year, Derivative and FX adjustments (1,137) (781)
including the impact of the Group’s foreign exchange
Other underlying adjustments – 119
activities. The tables to the right summarise the adjustments
Underlying revenue 15,450 15,067
between reported and underlying results for revenue and
operating profit. For more information on these
reconciliations, see note 2 on page 139. Profit
£m 2019 2018
Similarly, you can find reconciliations to statutory measures
for free cash flow in note 28 on page 179 and underlying EPS Reported measure
in note 26 on page 144. Reported operating (loss) (852) (1,161)
Free cash flow Underlying performance measure

Cash flow generated from our business activities in the year Reported operating (loss) (852) (1,161)
before M&A, SFO payments, foreign exchange and payments Business disposals 139 358
to shareholders. (Loss) before financing & taxation (713) (803)
Derivative & FX adjustments (144) 24
Underlying EPS Programme exceptional charges 1,409 976
Underlying profit after tax in the year divided by the average Restructuring exceptional charges 136 317
number of shares in issue in the year.
Acquisition accounting & M&A 24 (183)
Impairments & asset write-offs 84 155
Other underlying adjustments 12 130
Underlying operating profit 808 616
18 Strategic Report
Financial Review
Core trading summary

The income statement table below and all commentary relate to the underlying performance of our core business and percentage or
absolute change figures in this document are on an organic basis, unless otherwise stated.
Summary income statement – Core businesses 1

Organic
£m 2019 2 2018 2,3 Change change ⁴
Underlying revenue 15,261 14,286 +7% +6%
Underlying OE revenue 7,373 7,172 +3% +3%
Underlying services revenue 7,888 7,114 +11% +10%
Underlying gross profit 2,342 2,240 +5% +4%
Gross margin % 15.3% 15.7% -40bps -40bps
Commercial and administration costs (938) (977) -4% -4%
Restructuring (15) (14) +7% +7%
Research and development charge (688) (650) +6% +5%
Joint ventures and associates 109 32 +241% +222%
Underlying operating profit 810 631 +28% +25%
Underlying operating margin 5.3% 4.4% +90bps +80bps
Financing costs (223) (148) +51% +49%
Underlying profit before tax 587 483 +22% +17%
Tax (281) (153) +84% –
Underlying effective tax rate 47.9% 31.7% – –
Underlying profit 306 330 -7% -12%
Underlying earnings per share 15.9 17.3 -1.4p -2.4p
1
Core includes Civil Aerospace, Power Systems, Defence and ITP Aero.
2
Underlying: for definition see note 2 on page 134.
3
The financial information for the prior period has been restated to reflect the treatment of our North America Civil Nuclear business as non-core. See note 1 on page 125 for
more details.
4
Organic change at constant translational currency (constant currency) by applying FY 2018 average rates to 2019 and 2018 numbers excluding M&A. All commentary is provided
on an organic basis unless otherwise stated.
Revenue up 6% —— modestly lower LTSA underlying gross Self-funded R&D cash spend up
Revenue increased by 6% to £15,261m margins, reflecting shop visit mix, and modestly; charge to profit 5% higher
reflecting growth in both OE and services, around £70m of FX related headwind Gross R&D spend was up £70m. After funding
led by Civil Aerospace and Power Systems. principally reflecting the revaluation of from customers and other third parties,
Civil Aerospace delivered OE revenue growth USD creditors and deposits. core self-funded cash spend was £3m higher
of 4% reflecting higher widebody engine Power Systems generated a 6% gross profit at £1,108m. Investment in Civil Aerospace
volumes. Services revenue in Civil Aerospace improvement with a gross margin of 26% widebody and new business aviation
rose 14% with increased shop visit volumes driven by volume growth and improvements programmes was lower following the recent
and higher sales of spare parts. Power in product mix. As expected, Defence gross entry into service of several new engine
Systems achieved 4% OE revenue growth profit reduced by 6% with margins 160bps programmes. New technology investment
due to strength in power generation markets, lower, reflecting product mix. ITP Aero increased by 9%, to develop technologies
notably for data centres, and 4% services gross profit increased by 33% with margin that underpin UltraFan in Civil Aerospace,
growth including increased long-term improvement of 200bps, driven by higher a range of new programmes in Defence
service agreement (LTSA) penetration. OE volumes, improved pricing and a and electrification in Power Systems. R&D
Defence revenue was 1% higher led by 4% circa £25m benefit from the impact of a capitalisation of £468m was £28m lower.
growth in services driven by increased change made to simplify ITP Aero’s trading Capitalisation remains at a significant level
activity in transport and combat. ITP Aero relationship and contractual terms with due to the current development stage of
revenue increased 21% reflecting volume Civil Aerospace. This was net neutral at several Civil Aerospace programmes but is
growth largely across its civil programmes. the Group level, with a corresponding expected to reduce in 2020 and over the
increase in eliminations. coming years. The net charge to profit
Gross profit up 4% increased by £35m reflecting higher
Gross profit was £2,342m, up 4%. Civil C&A costs down 4% spend and the reduction in capitalisation.
Aerospace gross profit improved by 25% C&A costs reduced by 4% to £938m.
reflecting several key factors: This reduction was driven by restructuring Profit from joint ventures
—— increased sales of spare parts and higher programme headcount savings and and associates
LTSA servicing activity; management actions to reduce discretionary Our share of results from joint ventures
spend, partly offset by cost escalation was £109m, £71m higher than the prior year.
—— a material improvement in the net impact
and higher sales-related activities in This was driven by increased servicing
of contract catch-ups to LTSA profits at
Power Systems. activity in overhaul bases and higher profit
£33m in 2019 (2018: £(276)m), driven
primarily by lower servicing costs in on disposal of engines in Rolls-Royce &
business aviation; and Partners Finance (our engine financing
joint venture).
Financial Review 19
Operating profit up 25% In November, we announced the outcome business. Bergen formed part of
STRATEGIC REPORT
Operating profit improved by £157m on of recent testing and a thorough technical Power Systems during 2019, but from
the prior year to £810m, led by the £85m and financial review of the Trent 1000 TEN 2020 (as a result of this review) it will be
increase in gross profit, higher joint venture programme following the issues identified reclassified as non-core. Additionally,
profit and a £37m reduction in C&A costs, during 2019. This resulted in a revised following a reassessment of the order book,
partially offset by the higher R&D charge timeline and durability estimate for the an impairment review has been completed
outlined above. improved TEN HPT blade. As a result we in the second half of the year and a charge
expect total in-service cash costs across all of £58m has been recorded outside
Financing costs Trent 1000 variants of around £2.4bn underlying results in 2019. In 2019, Bergen
Financing costs increased from £(148)m in across 2017–2023, consistent with the trading generated sales of £239m and an underlying
2018 to £(223)m in 2019. Within financing update in November. In 2019, £578m of cash operating loss of £(18)m.
costs, net interest payable of £(132)m costs were incurred, partly offset by a £173m
increased by £60m largely due to the insurance receipt. We continue to expect A380 cessation costs
adoption of IFRS 16. Other financing costs cash costs of £450–£550m in 2020 and In our full year 2018 results, we took a
were £(91)m in 2019, modestly higher than a similar level in 2021, before declining preliminary view of costs relating to Airbus’
the previous year (2018: £(76)m). Other significantly thereafter. These primarily decision to close the A380 production line.
financing costs include charges relating comprise the cost of replacing affected During the first half of 2019, we had the
to the factoring of receivables and the parts as well as customer disruption opportunity to update our impact assessment
discounting of prior year provisions. related compensation. and as a result recorded an additional
exceptional charge of £59m. This charge
Outside of these in-service costs, we are
Taxation has been reduced to £48m at the year-end
also investing in our engineering function, following the release of £11m relating to
The core underlying tax charge was £281m
further expansion of our MRO capacity and supplier amounts recorded in 2018.
(2018: £153m), an underlying tax rate of
our pool of Trent 1000 spare engines.
47.9% compared with 31.7% in 2018. This
Additionally, the increased costs associated IFRS 16 Leases
increase in rate was primarily driven by
with our revised estimate for HPT blade IFRS 16 is effective for the year beginning
the non-recognition of a deferred tax asset
durability on the TEN has impacted the 1 January 2019. Commitments for operating
on UK losses arising in 2019.
future margins on our Trent 1000 contracts, as well as finance leases are now recognised
Trent 1000 including a small number of contracts now on the balance sheet. The impact of the
The Trent 1000 is 13% of our widebody becoming loss making (see below). standard is as follows:
engine fleet. We made good progress As guided in November, an exceptional —— on 1 January 2019 an additional lease
on resolving the technical issues in 2019; charge of £1,361m at underlying FX rates liability of £2,248m and lease assets
we have now designed eight of the nine was recorded in 2019 on the Trent 1000 of £2,213m were recorded on the
component fixes required, seven of which (net of £173m insurance receipts). Within balance sheet;
have been certified. The intermediate this charge, £703m is due to the additional
pressure turbine fix is now fitted to almost cash costs associated with customer —— in the income statement rental payments
100% of the in-service fleet across all disruption and remediation shop visits. (previously included within operating
engine variants. The revised intermediate The remaining £658m relates to the margin costs) are now replaced with a
compressor has now been fitted to over impact of our updated HPT blade durability depreciation charge on the leased assets.
50% of Package C engine variants and has expectations on the TEN, primarily the Underlying financing costs on lease
now been certified for the TEN variant with up-front recognition of future losses on the liabilities increased from £5m in 2018
the Package B planned for the second half small number of contracts which are now to £77m in 2019 due to the new liability;
of 2020. Roll-out of the revised high pressure loss making, as well as related contract —— there is no impact on free cash flow
turbine blade has been embodied into accounting adjustments. resulting from the implementation of
almost 50% of Package B and C engine
IFRS 16; and
variants and design work for the TEN high Exceptional restructuring
pressure turbine (HPT) blade continues to programme —— we estimate the overall impact of
progress well with certification expected Progress was made in 2019 on our the adoption of IFRS 16 in 2019 was
in the first half of 2021. restructuring plan. To date we have achieved approximately a 2p reduction in
a net headcount reduction of around 2,900 underlying EPS.
We continue to regret the disruption caused
to our customers from these issues. We are with run-rate savings of £269m. Cash costs
taking further positive steps in 2020 to of £216m were incurred during the year to Group trading summary
increase availability of spare engines and deliver this plan, which are reported outside Group results include core and non-core
further expand maintenance capacity to of free cash flow. We continue to expect businesses. Group underlying revenue rose
reduce the number of aircraft on the ground run-rate savings of circa £400m by the end 7% to £15,450m, primarily driven by growth
(AOG) to below ten by the end of the second of 2020 and a net headcount reduction in Civil Aerospace, offsetting a (76)% decline
quarter 2020. We have seen positive results of 4,600. in non-core revenue. Group underlying
from our actions in the first two months of operating profit improved by 25% to £808m
2020 with AOG reduced to the mid-30s from
Strategic review of Bergen as a result of improved gross profit, lower
As part of our ongoing efforts to evaluate
the elevated level of 42 in the second half C&A costs and higher profit from joint
our portfolio and create a simpler, more
of 2019, which had resulted from the ventures offsetting an increased R&D charge.
efficient Group, on 28 February 2020
proactive actions taken in autumn to retrofit
we announced the decision to carry
the small number of remaining Package B
out a strategic review of Bergen, our
intermediate pressure turbine modules.
medium-speed gas and diesel engine
20 Strategic Report
Financial Review
Group funds flow

Summary funds flow statement 1
£m 2019 2018 Change
Underlying operating profit 808 616 192
Depreciation and amortisation 1,068 756 312
Lease payments (capital plus interest) (319) – (319)
Expenditure on intangible assets (591) (680) 89
Capital expenditure (property, plant and equipment) (747) (905) 158
Change in inventory (43) (616) 573
Change in receivables/payables 574 1,197 (623)
Civil Aerospace net LTSA balance change 754 679 75
Of which: underlying change 654 376 278
Of which: impact of contract catch-ups 100 303 (203)
Movement on provisions (506) (242) (264)
Net interest received and paid (73) (70) (3)
Trent 1000 insurance receipt 173 – 173
Other (41) 22 (63)
Trading cash flow 1,057 757 300
Contributions to defined benefit pensions in excess of underlying PBT charge (9) 59 (68)
Taxation paid (175) (248) 73
Group free cash flow 873 568 305
Of which: Disposed entities 2 (41) (78) 37
Group free cash flow (pre disposed entities) 914 646 268
Of which: Non-core businesses 3 3 (2) 5
Core free cash flow 911 648 263
Shareholder payments (224) (219) (5)
Disposals and acquisitions 410 573 (163)
Exceptional group restructuring (216) (70) (146)
Payment of financial penalties (102) – (102)
Foreign exchange (98) 54 (152)
Pension fund contribution (35) – (35)
Other (87) 10 (97)
Change in net funds/(debt) excluding lease liabilities 521 916 (395)
The derivation of the summary funds flow statement above from the reported cash flow statement is included on note 28 on page 179.
1
Disposed entities include Commercial Marine and Power Development in 2019 and both of these plus L’Orange in 2018.
2
Non-core businesses include the former Energy businesses not sold to Siemens and North America Civil Nuclear business.
3
Free cash flow This was partly offset by a £(43)m increase Given the one-off nature of the restructuring
Group free cash flow of £873m improved in inventory (2018: £(616)m). announced in 2018, the £(216)m cash costs
materially from £568m in 2018. This was relating to this restructuring programme
We continue to strive to increase
driven by strong profit growth across most (2018: £(70)m) are reported outside of
transparency around our financial
of our core businesses, increased engine Group free cash flow.
performance and reported results. As part
flying hour receipts and spare parts sales in of this effort, additional information is now
Civil Aerospace, as well as reduced capital Depreciation and amortisation
provided in note 14 on the sale of trade The £312m increase in depreciation and
expenditure on several capacity and facility receivables. For many years, the Group has
modernisation projects which had neared amortisation to £1,068m was largely due
undertaken the sale of trade receivables, to an additional circa £340m charge relating
completion in 2018. Trent 1000 in-service without recourse, to help normalise Group
cash costs were £578m (2018: £431m), to right-of-use assets following the adoption
cash flows in line with physical delivery of IFRS 16 from 1 January 2019.
partially offset by receipt of £173m of related volumes. This practice is commonplace in
insurance proceeds. R&D investments the aerospace industry. Over the last three Lease payments
increased modestly. years, this has averaged around £1,037m at Lease payments of £(319)m reflect the cash
In 2019, there was an inflow of £574m the year-end. At 31 December 2019, £1,117m cost of leases in 2019. In 2018, prior to the
(2018: £1,197m) from the movement in had been drawn under factoring facilities, adoption of IFRS 16, the equivalent lease
receivables and payables, reflecting higher £95m higher than December 2018, which payments were reflected within underlying
trade payables due to increased trading is reflected within working capital. operating profit. Under IFRS 16 the
activity, actions taken to improve overdue depreciation charge is recorded in
debt collection, together with a number underlying operating profit.
of customer deposits notably in Defence.
Financial Review 21
Expenditure on intangible assets Change in receivables/payables Pensions
STRATEGIC REPORT
Intangible asset expenditure of £(591)m was The change in receivables/payables of Cash contributions were in line with the
incurred in 2019. This included £(481)m of £574m in 2019 was significantly reduced profit and loss charge in 2019. There was a
R&D capitalisation (2018: £498m) largely year-on-year, and reflected: £(68)m year-on-year movement, reflecting
reflecting ongoing investment in Civil the non-recurrence of a 2018 benefit from
—— higher trade and other payables due
Aerospace programmes including the changing to quarterly payments.
to increased trading activity led by
Trent 7000, Trent XWB and Pearl
Civil Aerospace; Taxation
engine programmes.
—— a number of customer deposits, notably in The decrease in cash tax in 2019 from
Capital expenditure on property, Defence driven by strong order intake; and £(248)m to £(175)m reflected lower
plant and equipment payments in Germany compared to
—— an increase in trade and other receivables, 2018, largely due to timing.
Investment of £(747)m in 2019 reduced
which reflected volume-related growth
by £158m (2018: (£905m)) due to several
capacity and modernisation programmes
partially offset by actions taken to reduce Shareholder payments
overdue customer receivables. Payments to shareholders of £224m in
nearing completion in 2018. Spend in 2019
2019 remained in line with the prior year.
reflects our ongoing investment in Movement in underlying Civil
manufacturing capability, projects to Acquisitions and disposals
modernise our facilities, and spare engines
Aerospace net LTSA balance
The net LTSA balance represents deferred In 2019, we completed the disposals of
to support our growing in-service fleet in Commercial Marine and Power Development
revenue and is a core part of our business
Civil Aerospace. with combined net proceeds of £453m.
model where we receive payments from our
customers in respect of our long-term The £573m cash inflow in 2018 related
Change in inventory
service and overhaul agreements. In 2019, to the disposal of the L’Orange business,
Inventory increased by £(43)m
the LTSA net balance increased by £754m. previously within Power Systems. Costs of
(2018: £(616)m) in 2019 due to volume
This movement included a £100m increase £43m were incurred in 2019 relating to the
growth in Civil Aerospace and Power
driven by negative contract catch-ups to acquisition of Siemens’ eAircraft business.
Systems, with a significant improvement
in the second half following a £(433)m revenue (2018: £303m). The underlying
change, net of these catch-ups, was £654m. Payment of financial penalties
increase in the first half. This inventory
This reflected invoiced engine flying hour Following the agreements reached with
position was driven by a high level of
receipts in excess of revenue traded together investigating authorities in January 2017,
assembled engines and aftermarket parts
with customer deposits received in the year. a payment schedule was established.
held in Civil Aerospace, as well as growth
No payments were due in 2018 and a
in Power Systems due to programme delays,
production relocation projects, and product
Movement in provisions payment of £102m was made in 2019.
The movement in provisions of £(506)m In 2020 and 2021, £130m and £148m
mix. Higher delivery volumes and greater
in 2019 largely included utilisation of the (plus interest) are due respectively.
focus on supply chain management in the
Trent 1000 exceptional provision. The Consistent with prior years this payment
second half of the year drove a significant
remainder primarily covered cash costs from is reported outside of free cash flow.
reduction in inventory, with a strong
onerous contracts and restructuring activity.
improvement in Civil Aerospace in particular.
22 Strategic Report
Financial Review
Balance sheet
Summary balance sheet
31 December 2018
Change
31 Dec Excluding Civil excluding
£m 2019 Civil Nuclear Nuclear Total Civil Nuclear
Intangible assets 5,442 5,278 17 5,295 164
Property, plant and equipment 4,803 4,919 10 4,929 (116)
Right-of-use assets 2,009 – – – 2,009
Joint ventures and associates 402 412 – 412 (10)
Contract assets and liabilities (8,745) (7,074) 1 (7,073) (1,671)
Working capital 1 (1,136) (1,263) 8 (1,255) 127
Provisions (2,804) (1,916) (1) (1,917) (888)
Net funds 2 (993) 631 (20) 611 (1,624)
Net financial assets and liabilities 2 (3,277) (4,117) – (4,117) 840
Net post-retirement scheme (deficit)/ surplus (208) 641 – 641 (849)
Tax 1,136 1,024 2 1,026 112
Held for sale 3 391 (17) 374 (388)
Other net assets and liabilities 14 22 – 22 (8)
Net liabilities (3,354) (1,052) – (1,052) (2,302)
Other items
US$ hedge book (US$bn) 37 37 37 –
Civil Aerospace LTSA asset 1,086 1,097 1,097 (11)
Civil Aerospace LTSA liability (6,784) (5,584) (5,584) (1,200)
Civil Aerospace net LTSA liability (5,698) (4,487) (4,487) (1,211)
Net working capital includes inventory, trade receivables and payables and similar assets and liabilities.
1
Net funds includes £243m (2018: £293m) of the fair value of financial instruments which are held to hedge the fair value of borrowings.
2
Intangible assets Investments in joint ventures consideration for the acquisition of

The net increase of £164m includes R&D and associates ITP Aero. These factors offset the reduction
additions of £481m, primarily related to There was no material change in our in working capital seen in the funds flow.
engine programmes in Civil Aerospace investment in joint ventures and associates
£(426)m, together with further investment Provisions
year-on-year.
in software applications of £101m. These Provisions increased by £888m largely
were offset by impairment charges of £54m Contract assets and liabilities driven by the incremental exceptional
following the announcement of the strategic This represents deferred revenue and is a charge related to Trent 1000 disruption
review of the Bergen business and the core part of our business model where we and related onerous contract losses,
sale of the North America Civil Nuclear receive payments from our customers in partly offset by utilisation.
business in Power Systems. Amortisation respect of our long-term service and Net funds
for the period was £(318)m. overhaul agreements. In 2019, this increased Net funds have moved from a net cash
by £(1,671)m, of which £(1,211)m related position of £611m in at 31 December 2018
Property, plant and equipment to the Civil Aerospace LTSA balance. to a net debt position of £(993)m. This was
Following the adoption of IFRS 16, finance The remainder largely covered advance driven by the adoption of IFRS 16, which
leased assets previously held in PPE have payments in several businesses. The increased lease liabilities by £(2,248)m.
been transferred to right-of-use assets. movement in the Civil Aerospace LTSA Excluding lease liabilities, net cash stood
Capital additions of £767m related to balance of £(1,211)m included non-cash items at £1,361m at 31 December 2019. For other
investments in MRO capacity in Civil of £557m, primarily related to foreign movements see funds flow commentary
Aerospace and the modernisation of exchange and the cumulative negative in note 28.
facilities including our Defence facility in impact of contract catch-ups to LTSA
Indianapolis. We also expanded our spare revenue. The change, net of these items, Net financial assets and liabilities
engine lease pool to support our growing of £(654m) reflected invoiced engine flying These items principally relate to the fair
in-service widebody engine fleet. These hour receipts and customer deposits in value of foreign exchange, commodity and
were offset by depreciation of £(491)m. excess of underlying revenue traded in interest rate contracts. The reduction in
the income statement. the net liability of £840m largely reflected
Right-of-use assets
settlement of derivative contracts in 2019.
IFRS 16 was adopted effective 1 January 2019 Working capital
resulting in the recognition of leased assets Working capital increased by £127m. This
with a value of £2.2bn. See notes 1 and 29 in reflected a financial penalty payment of
the Consolidated Financial Statements for £102m related to agreements reached with
more information. investigating authorities in January 2017,
and a £245m reduction in working capital
from the settlement of deferred
Financial Review 23
Net post-retirement scheme deficits resulted in a decrease in the surplus of USD hedge book
STRATEGIC REPORT
The £(849)m movement was primarily driven the UK pension plan of around £(600)m. The US hedge book at 31 December 2019
by the buy-in agreement with Legal & There were also changes in financial and was $37bn. It extends to 2028 on a declining
General Assurance Society Limited, which demographic assumptions. basis and remains sufficient to cover our
medium-term requirements.
Group Reported Results

The changes resulting from underlying with IFRS 9 Financial Instruments, we believe rose from 1.28 to 1.32 while the GBP:EUR rose
trading are described in the trading underlying figures are more representative from 1.12 to 1.18. The adjustments between
summary below. of the trading performance by excluding the underlying income statement and the
the impact of period-end mark-to-market reported income statement are set out
Consistent with past practice, we provide
adjustments. In particular, the USD:GBP in note 2 to the Consolidated Financial
both reported and underlying figures. As
hedge book has a significant impact on the Statements. This basis of presentation
the Group does not generally hedge account
reported results. In 2019, the GBP:USD rate has been applied consistently.
for forecast transactions in accordance
Reconciliation between underlying and reported results

Revenue Profit before financing Financing Profit/(loss) before tax
£m 2019 2018 2019 2018 2019 2018 2019 2018
Underlying * 15,450 15,067 808 616 (225) (150) 583 466
1 Foreign exchange and derivatives 1,137 781 144 (24) 75 (1,984) 219 (2,008)
2 Exceptional programme charges – (119) (1,409) (976) – (15) (1,409) (991)
3 Impact of discount rate charges – – – – (40) – (40) –
4 Exceptional restructuring charges – – (136) (317) – – (136) (317)
5 M&A gains & effects
of acquisition accounting – – (24) 183 (8) (8) (32) 175
6 Impairments and asset write-offs – – (84) (155) – – (84) (155)
7 Net post-retirement scheme financing,
pension equalisation & other – – (12) (130) 20 13 8 (117)
Reported 16,587 15,729 (713) (803) (178) (2,144) (891) (2,947)
* See note 2 on page 139 for further details.
The most significant items included in the 4. Exceptional restructuring costs of £136m 6. On 26 September 2019, the Group
reported income statement, but not in (2018: £317m). These are costs associated announced the sale of the North
underlying are summarised below. with the substantial closure or exit of a America Civil Nuclear business and
site, facility or activity related to the recognised an impairment charge and
1. Foreign exchange and derivatives
significant transformation project that asset write offs of £26m. Following a
included the impact of the following:
the business is currently undertaking. reassessment of the Bergen order book
—— the impact of measuring revenue and A number of the projects within the and subsequent impairment review, we
profit before financing at spot rates transformation programme are for multiple have recorded a charge of £58m in 2019.
rather than achieved hedge rates years. Of the 2019 costs, £88m Further details can be found in note 2.
(2018: £223m) relate to the Group In our 2018 financial statements, we
—— mark-to-market adjustments on the restructuring programme announced reported an impairment charge of £155m
Group’s net hedge book of £(7)m in June 2018. in relation to the Commercial Marine
(2018: £(2,145)m). At each period end, business being disclosed as held for sale.
our foreign exchange hedge book is 5. The loss before tax of £(32)m
included in the balance sheet at fair (2018: £175m profit) relates to the 7. Following a High Court judgement in
value (mark-to-market) and the effects of acquisition accounting £171m October 2018, the estimated costs of
movement in the year included in (2018: £183m) that principally relate to equalising UK pension benefits for men and
reported financing costs; and the amortisation of intangible assets women was recognised as a past-service
arising on the acquisition of Power charge. There is no equivalent charge
—— losses on derivatives settled during the Systems in 2013 and ITP Aero in 2017. in 2019.
period and the impact of valuation of The Group completed the sale of the
assets and liabilities using the spot Tax affecting these adjustments resulted in
Commercial Marine business to
exchange rate rather than the exchange a tax charge of £143m (2018: tax credit of
KONGSBERG on 1 April 2019 and
rate that is expected to be achieved by £715m). The charge in 2019 is due to the
recognised a profit of £106m in 2019.
the use of the hedge book non-recognition of deferred tax in respect
Rolls Royce Power Development Limited
of UK losses in the year. The 2019 charge
2. Exceptional programme charges relating was sold on 15 April 2019 with a gain
also includes £86m relating to the
to the Trent 1000 of £1,361m and Trent arising on disposal of £33m. In 2018,
derecognition of UK deferred tax assets on
900 of £48m are excluded from the we recognised a gain on the sale of
foreign exchange and commodity financial
underlying results. These have been L’Orange of £358m. Together with the
assets and liabilities. In 2018, deferred tax
explained in note 2. £183m acquisition accounting effect
was recognised on UK losses resulting in an
relating to ITP Aero, this resulted in the
3. Included in discount rate changes is overall credit in that year.
£175m profit before tax in 2018. Further
£30m relating to Trent 900 and £10m details can be found in note 27.
relating to Trent 1000
24 Strategic Report
Business Review – Civil Aerospace
BUSINESS REVIEW
Civil Aerospace Underlying revenue mix
Civil Aerospace is a major manufacturer of aero 1
engines for the large commercial aircraft, regional

jets and business aviation markets. The business 2
uses its engineering expertise, in-depth knowledge

and capabilities to provide through-life support 1. OE..................................................................40%
solutions for its customers. 2. Services.......................................................60%
4
3
Progress against our 2019 Group priorities
Customers People and Culture 1
Delivered 510 widebody engines Launched Civil Aerospace women’s

to customers (up from 469 in 2018). leadership programme targeting 1. Large Engines.............................................71%
leaders who are in their early careers 2. Business Aviation.......................................14%
Accelerated efforts to return 3. Regional.........................................................4%
to help them build confidence and
Trent 1000 fleet to full health, 4. V2500............................................................11%
capability to succeed.
investing in additional spare engines
and MRO capacity expansion. Improvements to tools, methods and
processes are delivering sustainable
Successful transition to Trent 7000,
engineering efficiencies. Underlying revenue
smooth EIS and production ramp-up
on plan. Restructuring programme on track.
Launched the Pearl 700 engine on
Gulfstream G700. Pearl 15 entered
service on Bombardier Global 6500.
£8,107m
2018: £7,378m
Technology Financial
UltraFan design freeze and successful Delivered operating profit of £44m. Underlying operating profit
tests of the composite fan system.
£44m
Reduced large engine OE unit loss
Continued testing of the Advance3 by 14%, including Trent XWB-84
demonstrator. improvement of 22%.
Completed acquisition of Siemens’ Increased large engine flying hours 2018: £(162)m
eAircraft business. by 7%, despite in-service issues on
Trent 1000.
Announced partnership with Widerøe Order backlog
to further zero carbon aviation. Provided investors with greater
£48.5bn
clarity on the Trent 1000 programme
Invested in a new flying testbed
after detailed engineering and
for next-generation widebody
financial review.
and business jet engines.
Growth in UltraFan and new technology 2018: £52.3bn
investment.
Business Review – Civil Aerospace 25
Civil Aerospace overview 2019 Financial overview
STRATEGIC REPORT
Organic
Civil Aerospace delivered a record 510 £m 2019 2018 Change change
widebody engines in 2019. We have
Engine deliveries 729 686 +6% +6%
continued to make progress reducing
widebody average OE losses, down by 14% Underlying revenue 8,107 7,378 +10% +10%
year-on-year to £1.2m. Our large engine Underlying OE revenue 3,246 3,119 +4% +4%
installed fleet increased to over 5,000 Underlying services revenue 4,861 4,259 +14% +14%
engines in service, driving a 7% growth Underlying gross profit 622 493 +26% +25%
in widebody engine flying hours and an Gross margin % 7.7% 6.7% +100bps +90bps
increase in aftermarket cash margin of Commercial and administrative (299) (336) -11% -11%
£0.3bn. 2019 saw strong revenue growth of
Restructuring (7) (8) -13% -13%
10% and further significant improvement in
underlying operating profit for the business. Research and development cost (374) (332) +13% +13%
Joint ventures and associates 102 21 +81 +78
Financial overview Underlying operating result 44 (162) +206 +195
Underlying operating margin % 0.5% -2.2% +270bps +260bps
Underlying revenue
Underlying revenue increased 10%, reflecting
Underlying revenue
good growth in OE, up 4% to £3,246m and
strong growth in services, up 14% to £4,861m. Organic
Large engine OE growth of 8% was driven £m 2019 2018 Change change
by an increase of 41 in widebody engine Original Equipment 3,246 3,119 +4% +4%
delivery volumes to 510. This reflected Large engine 2,568 2,373 +8% +8%
strong growth in Trent 7000 engines for Business aviation 643 620 +4% +5%
the Airbus A330neo production ramp-up. V2500 35 126 -72% -72%
Large engine service revenue increased Services 4,861 4,259 +14% +14%
20% to £3,205m (2018: £2,666m), driven by Large engine 3,205 2,666 +20% +20%
higher servicing volumes. Major LTSA shop Business aviation 477 464 +3% +2%
visits rose 7% to 306 and check and repair Regional 355 292 +22% +19%
visits, led by Trent 1000 activity, increased
V2500 824 837 -2% -2%
16% to 660. Sales of spare parts not
covered by LTSAs increased year-on-year.
There was also a material reduction in Metrics
negative contract catch-ups to revenues. 2019 2018
In business aviation, OE sales were 5% higher Widebody engine deliveries 510 469
with deliveries broadly stable at 219 engines Average loss per widebody OE (£m) 1.2 1.4
(2018: 217 engines) reflecting improved Large engine in-service fleet 5,029 4,757
mix, while service revenue increased 2%.
Large engine invoiced flying hours 15.3m 14.3m
Regional aviation service revenue increased
19%, driven by the AE3007 and Tay-powered Large engine LTSA major refurbs 306 286
fleets. V2500 OE revenue was down 72%, Large engine LTSA check & repair 660 569
due to end-of-life production on the Airbus
A320ceo. The 2% reduction in V2500 service
revenue reflected a modest reduction in This was driven by improvements in business aviation development programme
spare parts sales, with the payment from servicing costs in business aviation, which maturity. Overall, the R&D charge to profit
Pratt & Whitney Aero Engines International was partly offset by a reassessment of costs increased to £(374)m from £(332)m in 2018.
relating to engine flying hours and utilisation across various widebody
Underlying C&A costs were 11% lower
remaining stable. programmes. Gross profit was negatively
year-on-year. Joint venture profit of £102m
affected by a modestly lower LTSA underlying
(2018: £21m) reflected increased servicing
Underlying operating result margin due to the mix of shop visits, circa
activity in overhaul bases and higher
The underlying operating profit of £44m was £70m of FX related headwind principally
profit on disposal of engines in
an improvement of £195m, reflecting higher relating to the revaluation of USD creditors
Rolls-Royce & Partners Finance Limited
gross profit, increased profit from joint and deposits, and a modest impact from
(our engine financing joint venture).
ventures and lower C&A costs more than higher customer charges. The profit
offsetting a 13% higher R&D charge. contribution from spare engine sales was
relatively stable year-on-year.
Gross profit improved by £121m and gross
margin by 90bps. This was driven by Self-funded R&D cash spend reduced by
increased servicing activity, higher spare £18m to £(767)m reflecting lower investment
parts sales, and a material improvement in in existing widebody and business aviation
the net impact of contract catch-ups to programmes and an increase in next
LTSA profits. In 2019, catch-ups had a £33m generation technology, including the
positive impact on profit (2018: £(276)m). UltraFan demonstrator. Net R&D capitalisation
was £60m lower, driven by widebody and
26 Strategic Report
TESTING FOR THE FUTURE

Work continued during the year on our UltraFan
demonstrator; a world-beating suite of technologies
that will redefine the Rolls-Royce jet engine, delivering
significant reductions in fuel burn, emissions and noise.
Successful worldwide tests of key technologies have
already been completed, ready for flight and ground
testing over the coming years.
Next generation engines require next generation testbeds.
Testbed 80, the largest testbed in the world, is currently
taking shape in Derby, UK. Equipped with precision
x-ray equipment, state-of-the-art data systems and the
ability to test engines using sustainable aviation fuels,
it will allow us to monitor and validate our engines better
than ever before. Testbed 80 will be commissioned
in 2020.
We are also bolstering our test capabilities in the sky,
with the addition of a new flying testbed. In October, we
took delivery of a Boeing 747-400 from Qantas, which
will now be transformed from a passenger aircraft into
an airborne laboratory, capable of testing both widebody
and business jet engines. It joins our existing flying
testbed, a Boeing 747-200 based in Tucson, Arizona.
Trading cash flow In 2019, we delivered 510 widebody engines, and a dispatch reliability of 99.9%. The
Civil Aerospace trading cash flow improved in line with guidance and a record figure for Trent 1000 is 13% of our widebody fleet and
£201m to £419m, driven by increased flying Rolls-Royce. This included the successful we continue to work to improve durability and
hour receipts from our growing in-service ramp-up of the Trent 7000, with 106 engines reduce customer disruption. To this end, we
engine fleet, increased spare parts sales and delivered compared with just eight engines announced actions to boost our maintenance
lower capital expenditure. Cash costs on in 2018. We continued to make progress in capacity and add additional spare engines,
Trent 1000 in-service issues of £578m reducing our large engine average OE unit with a significant investment in 2020 set to
(2018: £431m) were partly offset by losses, which fell by 14% to £1.2m during the drive around 50% increase in our Trent
insurance receipts of £173m. year, helped by a 22% improvement on the 1000 spare engine pool. We also gave
Trent XWB-84. We continue to expect to greater certainty to customers and clarity
Cash inflow from working capital was deliver our first breakeven Trent XWB-84 to investors following an extensive review
significantly lower in 2019 notably due by the end of 2020. Thanks to these record of the programme. Our focus is now on
to the non-recurrence of a circa £400m engine deliveries, our large engine installed executing the clear plan we have to reduce
benefit from standardisation of supplier base grew by 6% in 2019 and crossed the AOG and return the fleet to the level of
payments in 2018. Year-on-year growth 5,000 mark to 5,029 engines. service which our customers expect.
in inventory was significantly lower.
Overall, the performance of our fleet In business aviation, 2019 was a year of
Operational and strategic review continues to be very strong, with invoiced milestones. The Bombardier Global 5500
engine flying hours increasing by 7% to and Global 6500, both powered by our
Our top priority in 2019 remained securing
15.3 million. The Trent 700, the largest part Pearl 15 engine, received EASA and FAA
the return of the Trent 1000 fleet to full
of our installed base at 32%, has crossed certification. In November, we also
health. We made major steps forward in
55 million flying hours and continues to announced the new Pearl 700 to power
rolling out fixes, expanding maintenance
deliver excellent performance in fuel burn, the upcoming Gulfstream G700. The Pearl
capacity and providing additional clarity
reliability and durability. The Trent XWB family now powers two airframer platforms,
to our customers. Much more work remains
became our second largest Trent programme bolstering our position as the leader in the
to be done in 2020. Importantly, we did not
by volume in 2019, and has now flown over large cabin, long-range market.
allow the Trent 1000 challenge to derail the
5 million hours. As we highlighted in
much needed transformation of our business. Our transformation and cost reduction
November, fleet-leading Trent XWB-84
Significant progress was also made on efforts accelerated during the year, and Civil
engines have reached our original
near-term operational improvement and we Aerospace made the largest contribution
expectations for time-on-wing. The
achieved a number of milestones in our towards the Group’s 1,600 net headcount
Trent 7000 has made an excellent entry
longer term strategy to become a leader reduction in 2019. The removal of roles
into service, with 80 engines now flying
in the lower carbon future of aviation. was enabled by increased use of digital
Business Review – Civil Aerospace 27
technologies, largely in engineering, the largest hybrid aircraft demonstrator Although currently subdued, we expect
STRATEGIC REPORT
simplification of processes and removal in the world; an improvement in widebody orders driven
of duplication. by a replacement cycle in the coming years
—— in November, we announced a flight
as a growing number of aircraft reach
We are determined to seize the opportunity demonstrator based on our hybrid M250
retirement age, including Boeing 777s,
to become a leader in the provision of propulsion system with APUS and the
Boeing 767s and older Airbus A330s. We
lower carbon air power. This means not Brandenburg University of Technology,
believe we are well positioned to continue
only improving our existing gas turbine paving the way for experimental flights
to win a large share of these orders, having
technology to be more fuel efficient with after 2021; and
captured 64% of gross order intake and
lower carbon emissions, but also pioneering
—— in December, we unveiled the plane 52% of net orders for widebody engines in
future technologies that will enable a low
which will seek to break the speed 2019. The increase in retirements in the
carbon future for aviation. We reached an
record for an all-electric aircraft in 2020 coming years represents a challenge for the
important milestone with a design freeze
as part of our ACCEL programme (see industry, but we are favourably positioned
on UltraFan, which will be 25% more
page 42). due to the younger age distribution of our
efficient than original Trent engines and
fleet relative to our competitors. The average
10% more efficient than the Trent XWB, the
world’s most efficient large engine in service
Civil Aerospace outlook age of our widebody in-service fleet is less
than eight years, compared to the industry
today. We also carried out successful tests During the year, we booked a net widebody
average of 13 years, excluding Rolls-Royce.
of the composite fan system, a key order intake of 213 engines. As a result, our
As a result, we continue to expect strong
technology enabler for UltraFan to reduce widebody backlog at the end of 2019 was
growth in our installed base in the coming
weight and increase fuel efficiency. 1,978 engines, providing good visibility on
years, which supports growth in our engine
our deliveries in the coming years and
On future technologies, we have taken flying hours and the widebody aftermarket
driving continued growth in our installed
significant steps towards increasing our cash margin.
base. The long-term trends supporting air
capabilities in hybrid electric propulsion.
traffic growth remain intact, though the In 2020, we expect stable to low-single-
During the year we acquired Siemens’
outbreak of COVID-19 represents a near-term digit sales growth in Civil Aerospace and
eAircraft business and achieved major
macro risk. In 2019, approximately 20% of our operating margins 50–100bps higher
milestones in three of our key electric
invoiced engine flying hours were derived year-on-year, despite a £100–150m
demonstrator programmes:
from the greater China region. We have a reduction in the level of R&D capitalisation.
—— in August, we began ground tests of our small number of tier one suppliers in the
2.5MW generator in Norway. This forms Greater China region, all of whom have
part of our E-Fan X project with Airbus, resumed operations at the time of writing.
DELIVERING
INTELLIGENT CARE
Our IntelligentEngine vision of a civil aerospace
world in which our products and services are
increasingly bound together by data, is spurring
us on to develop new service innovations that
harness digital capabilities to deliver intelligent
care to our customers.
At the heart of this work is our aircraft availability
centre, which proudly celebrated 15 years of providing
24-hour care during the year. We have evolved the
capability of this centre during that period, further
improving our ability to provide proactive support
through advanced analytics and inspection techniques
that help us ensure every Rolls-Royce powered
engine takes off on time, every time.
In 2019, we announced further global expansion of
our CareNetwork. This included the development of
an additional network of overhaul bases and in-field
maintenance, alongside the introduction of innovative
repair providers who use new tooling and technology
to provide more responsive services closer to
customer operations.
28 Strategic Report
PEARL TAKES TO THE SKY

The Pearl 15, the first member of the state-of-
the-art Pearl engine family for business jets,
officially entered service in September.
The engine, which was developed at our facility
in Dahlewitz, Germany, is the exclusive engine
option for the newest members of Bombardier’s
Global business jet family, the Global 5500 and
the Global 6500.
Operating environment
Rolls-Royce key differentiators —— We expect strong growth in our installed base leading to
Our continued development of advanced growth in services and widebody aftermarket cash margin.
90% of the current Rolls-Royce widebody fleet is covered
world-leading technology, culture of partnership by TotalCare service agreements.
with customers, and innovation in services are
—— The Pearl family of engines won its second application
attributes that Civil Aerospace customers value
with Gulfstream and, alongside the Bombardier aircraft,
and are difficult to imitate. These differentiators will reinforces and secures our long-term position in the
maintain our position at the forefront of the civil business aviation sector.
aerospace industry.
—— China’s COMAC and Russia’s UAC joint venture, the China
Russia Commercial Aircraft International Corporate (CRAIC)
has been formally incorporated. CRAIC plans to develop
Market dynamics the CR929, a long-haul widebody aircraft. Rolls-Royce is
—— Following a period of historically high growth rates, passenger actively exploring this opportunity.
air traffic reverted in 2019 to the long-run average of 4–5%
growth per annum. This level is supportive of continued
strong engine flying hour growth with utilisation across the
Trent fleet remaining high during the year.
Business risks
—— If our products do not achieve their required technical
—— Although currently subdued, we expect an improvement attributes and maturity, then customer satisfaction, unit
in widebody orders driven by a replacement cycle in the costs and aftermarket costs may be impacted and could
coming years. result in financial and reputational damage.
—— In business aviation, the long-term fundamental drivers of —— If a major product failure in service is experienced, then
the large-class business aircraft market are good and will this could result in loss of life and significant financial and
be sustained. In the short term, demand has softened in reputational damage.
anticipation of customers awaiting new aircraft derivatives,
—— If an external event or severe economic downturn significantly
and our airframers’ current focus on ramping up deliveries
reduces air travel, then financial performance may
of non-Rolls-Royce powered aircraft.
be impacted.
—— 2019 has seen an increased focus on climate change across
—— If aircraft manufacturers significantly reduce production
the world and within the airline industry. We are working
rates or delay increases, or we cannot ramp up capacity
with industry bodies towards more sustainable aviation
to deliver planned production and services, then financial
through a number of initiatives.
performance may be impacted.
—— If our internal or external supply chain is not sufficiently
Opportunities resilient to events that affect our operations, then this could
—— The business has a strong and growing market share on result in significant financial and reputational damage.
widebody aircraft produced by the world’s two major aircraft
—— If the business experiences significant pricing pressure in
manufacturers: Airbus and Boeing. We believe we are well
key markets, then financial performance may be impacted.
placed to win a large share of these orders. Our current
share of the widebody engine market is 38% of the —— If there are significant changes to the regulatory environment
in-service passenger fleet and is expected to approach for the airline industry, then the market position of the
50% by the mid-2020s. Civil Aerospace business may be impacted.
Business Review – Power Systems 29
BUSINESS REVIEW
STRATEGIC REPORT
Power Systems Underlying revenue mix
Power Systems is a leading provider of high-speed 2
and medium-speed reciprocating engines and

complete propulsion and power generation systems.
It serves the marine, defence, power generation 1
and industrial markets, and includes civil nuclear 1. OE..................................................................67%

operations that supply safety-critical systems. 2. Services....................................................... 33%
5
4
1

3
Customers People and Culture

2
Increased engine production by 8%. Increased diversity in Power Systems
senior leadership. Women now 1. Marine.......................................................... 28%
Continued uptake of long-term 2. Industrial..................................................... 25%
account for 30% of the senior
service agreements; LTSA revenue 3. Power Generation.................................... 35%
management team.
grew by 6%. 4. Defence......................................................... 9%
Launched our Pioneer Academy to 5. Civil Nuclear.................................................3%
Opened four new customer care centres
build electrical engineering skills.
and expanded digital service capability.
A first cohort of 100 engineers have
Established a dedicated support started a two-year training programme.
centre for yacht customers.
Underlying revenue
Opened a new vocational training
centre in Friedrichshafen and
celebrated 100 years of Power
Systems apprenticeships.
£3,545m
2018: £3,434m *
First off-grid microgrid OE revenue growth of 4% driven by Underlying operating profit
contract secured. strong demand in power generation.
Strategic cooperation agreements
signed with GETEC and ABB.
First orders for hybrid-rail
Services revenue growth of 4%
reflecting growth in both spare parts
and LTSAs.
£357m
2018: £315m *
PowerPacks from Iarnród Éireann Book-to-bill of 1.0x despite
(Irish Rail) and Porterbrook. challenging market conditions.
Order backlog
Partnership with Sunseeker 90bps improvement in operating
£2.9bn
International to introduce hybrid profit margins to 10.1%.
technology to the yacht market.
Increased spend on hybrid, gas, and
Announced a cooperation with hydrogen technology development.
Mercedes Benz innovation lab 2018: £3.1bn
to pilot fuel cell solutions.
* 2018 figure restated to exclude the
North America Civil Nuclear business
30 Strategic Report
Business Review – Power Systems
Power Systems overview 2019 Financial overview ^

Organic
Power Systems made good progress in 2019, £m 2019 2018 Change change
with sales continuing to outgrow global
GDP and gross margins improving due to
Underlying OE revenue 2,386 2,310 +3% +4%
operating leverage and a better product
mix. We continued to advance our services Underlying services revenue 1,159 1,124 +3% +4%
strategy, with strong growth in LTSA sales Underlying gross profit 909 866 +5% +6%
a particular highlight. Order intake was Gross margin % 25.6% 25.2% +40bps +50bps
good at £3,415m, a book-to-bill ratio of 1.0x. Commercial and administrative (374) (363) +3% +4%
Restructuring – (1) – –
Financial overview Research and development cost (176) (188) -6% -6%
Joint ventures and associates (2) 1 – –
Underlying revenue
Underlying revenue of £3,545 increased by
4%, OE revenue was up 4% driven by strong Underlying operating margin % 10.1% 9.2% +90bps +90bps
demand for mission critical power generation ^ Commentary and figures exclude the Civil Nuclear North America Services business which has been treated
products, notably to serve the data centre as non-core following its disposal in February 2020.
market. This growth more than offset an
expected reduction in demand from the spare parts sales and a greater emphasis were 4% higher year-on-year reflecting
construction and agriculture sectors, on LTSA sales which now account for circa cost escalation, additional spend on digital
following the non-recurrence of the 12% of total service revenues. solutions, and higher sales-related activities.
emissions-led pre-buy effect seen in 2018. The R&D charge reduced by £11m reflecting
Underlying operating profit the timing of key projects, with cash spend
Services revenue rose 4%, reflecting higher
Underlying operating profit rose by 15% to modestly higher. In the coming years we
spare parts sales and 6% growth in LTSAs.
£357m, led by revenue growth. Gross profit expect R&D spend in Power Systems to
We continue our focus on generating greater
was 6% higher at £909m, helped by a 50bps increase as we ramp up activity on new
value from our large installed base, both
increase in gross margins to 25.6%, due to programme investment and our
through a more proactive approach to
better product mix. C&A costs of £(374)m electrification strategy.
PLUGGING INTO MICROGRIDS

Microgrids have a vital role to play in assisting
the world’s transition to lower carbon power,
by providing security of supply from power
generation systems that use renewable energy
sources that can be intermittent.
Microgrids are small-scale local power networks in
which various energy sources and storage systems
– from solar cells, wind turbines and batteries
to diesel or gas-powered generator sets – are
integrated by means of a smart master controller.
To expand our knowledge of how microgrids
function in power generation, during the year
we commissioned a microgrid validation centre
in Friedrichshafen, Germany, to carry out
close-to-reality simulations of a variety of
possible configurations.
We are already running our own microgrid
at Plant 1 in Friedrichshafen. It consists of
photovoltaic panels with 500 kW peak power
capacity as well as gas-powered and diesel-
powered gensets and an MTU battery container
with 2 MWh capacity. It currently delivers 30%
of the energy needed at Plant 1 during normal
working hours and full coverage at weekends.
Business Review – Power Systems 31
STRATEGIC REPORT
MILESTONE FOR INDIAN
JOINT VENTURE
Force MTU Power Systems, the joint-venture
between India’s Force Motors Limited and
Rolls-Royce, delivered its first Series 1600
genset to customer Perennial Technologies
in 2019.
We have partnered with Force Motors to
move the manufacturing of the entire line of
MTU Series 1600 engines from Germany to
a new manufacturing facility at Chakan, near
Pune, India.
The construction of the facility is nearing
completion and the first locally made engine
is expected to be manufactured by mid-2020.
On completion, the facility will produce
MTU 10 and 12-cylinder Series 1600 units.
These engines are already well-established
in the market for power generation and
rail applications.
Operational and strategic review first to market, and the yacht market, building agreement with Svitzer, a global towage
on our leadership position with the MTU and marine services operator.
Conditions across our markets were Series engines.
challenging in 2019. Despite this, our Expanding our geographic footprint is a key
financial performance remained robust, Since October, Power Systems has driver of our ability to outgrow underlying
supported by a strong order book. A been operating its own microgrid in markets. In 2019, we strengthened our
combination of rising energy demand in Friedrichshafen, which provides over position in China, signing agreements for
developing countries and the expansion 30% of the energy required for the weekly the delivery of more than 700 MTU
of renewable energy sources drove orders running of the plant. We successfully engines. These included the largest ever
for flexible power solutions and products received the first orders for our new single order of MTU gas gensets to supply
such as microgrids, hybrid and gas engines, battery container and microgrid solutions, over 200 MTU Series 4000s to China’s
electrification and energy storage. delivering cleaner and decentralised VPower. In India, our Force MTU Power
energy. Together with Lab1886, an Systems joint venture will begin local
In 2019, we delivered 6,580 engines, innovation lab within the Daimler Group, we assembly of Series 1600 engines in the first
excluding smaller off-highway engines. started a pilot project to test the use of half of 2020. This enables us to be closer to
This compares to 5,976 deliveries in 2018. Mercedes-Benz fuel cell technology for our customers and to reduce operating
Our installed base increased to approximately backup power and the supply of energy to costs. In anticipation of this move, we have
146,000 engines (from approximately data centres. This technology will provide ceased assembly of MTU Series 1600 engines
142,000 in 2018) which will continue to safe, sustainable and emission free energy in Überlingen, Germany.
support replacement demand and drive to one of the world’s most significant power
our growing services revenue. Investing in our people is vital if we are to
consuming industries. Power Systems is
continue to position ourselves for growth
Power Systems has a key role to play in our also researching more sustainable fuels.
in new markets including hybrid power.
drive towards low carbon power across the During the year, we signed an agreement to
To meet our need for increased electrical
Group. A number of technologies that will construct a demonstration plant to produce
engineering capability, 100 mechanical
have applications in civil aerospace markets, synthetic fuels in Brandenburg, Germany.
engineers undertook a course in electrical
notably hybrid, electric, and fuel cells, are Continuing our push into life-cycle services, engineering as part of a new project at
already being developed and adopted in we are placing increased focus on digital Karlsruhe University, Germany.
Power Systems. Significantly, 2019 marked services and predictive maintenance. Our
the last year in which Power Systems sold digital solutions team was expanded during Power Systems outlook
only fossil fuel based power solutions as the year and we established a data and
we reached several important strategic As we enter 2020, the early indication is
analytics competence centre in Munich,
milestones on this journey, including the that conditions in a number of our end
Germany. We also expanded our service
signing of customer contracts and framework markets will remain challenging. However,
network for yachts in La Spezia, Italy. These
agreements to implement hybrid engine we aim to out-perform our markets, driven
actions have helped to drive a steady increase
solutions for the rail sector, where we are by our strategy to increase services sales
in LTSAs, including the signing of a ten-year
and the shift towards new technologies and
32 Strategic Report
Business Review – Power Systems
integrated solutions. We are also continuing medium-term target of mid-teens. The to carry out a strategic review of Bergen,
our efforts to gain market share in Asia, outbreak of COVID-19 represents a near our medium-speed gas and diesel engine
where Power Systems has previously been term macro risk. In 2019, approximately 10% business. In 2019, Bergen generated
underexposed. As a result, we expect to of Power Systems revenues were derived revenues of £239m with an operating loss
deliver low-single-digit organic revenue from the greater China region. of £(18)m. From 2020, Bergen will be
growth in 2020 despite this challenging reported within non-core businesses
As part of our ongoing efforts to evaluate
backdrop. We expect margins to improve and has therefore been excluded from
our portfolio and create a simpler, more
again in 2020, increasing by 0–100bps as our guidance.
efficient Group, we have taken the decision
we take another step towards our
Rolls-Royce key differentiators low-emission gas reciprocating engines. Increasing interest

Power Systems will retain its strong position in flexible local energy solutions to reduce carbon emissions
also presents significant new opportunities for adjacent
through technology leadership and a reputation growth in areas such as energy storage and microgrids.
for market-leading product performance and
—— As digital information becomes essential to many economies,
innovation; combined with a systems approach
the data centre market is witnessing strong growth. Due to
that allows high levels of customisation, its reliability, Power Systems back-up solutions are highly
supplemented by full lifecycle solutions. regarded and the opportunity to integrate new product
and service offerings into this market is significant.
—— Power Systems is well placed to respond to increasing
Market dynamics
customer demand for new service offerings and propositions
—— Power Systems’ presence in a diversity of end markets
such as ValueCare agreements supported by decades of
has helped the business navigate successfully against the
experience in service model innovation.
backdrop of an increasingly challenging macroeconomic
environment; negatively influenced by political developments —— Nuclear energy demand remains significant but large-scale
leading to deferment in investment. projects are proving problematic to finance and construct.
Industry interest in new nuclear technology is increasing
—— Uncertainty in the resource markets, especially US fracking,
and we are well placed to respond to this trend.
after a strong 2018 dampened the opportunity for new
equipment sales, however high utilisation continued to drive
aftermarket service opportunities.
Business risks
—— Government regulations with regard to diesel engine —— If the macroeconomic environment worsens (for example
emissions in most markets are driving the industry towards a trade war between the US and China), then this could
innovation. The focus is shifting towards hybrid, hydrogen have a material impact on the business.
and electric power solutions as well as renewable
energy solutions. —— If requirements on export licenses and/or local content
increase, then this may affect our ability to export to
—— The civil nuclear market continues to have mixed fortunes, certain markets.
strengthening in areas with set energy policy and financing
mechanisms but weakening in other areas where greenhouse —— If other players in the industry consolidate, then they may
gas reductions or security of supply are not being prioritised. generate synergies or capabilities that outpace the ability
of the business to get new products and services to market.
—— If the CO2 price rises above our expectations and/or the
Opportunities demand for fossil-free power develops faster than anticipated,
—— Rising energy demand in emerging economies, particularly then this may affect demand for Power Systems products
India and China (both large markets despite some recent and/or affect margins.
softening) continue to grow and present significant
opportunities for Power Systems. —— If new technologies or alternative propulsion concepts
emerge, then this may lead to partial substitution or
—— Tightening emission regulations in several regions are downsizing of diesel engines in certain applications.
beneficial to the competitive position of Power Systems’
high-end products, such as our Series 4000. —— If there is not clarity on UK energy policy and the willingness
of UK Government to continue support of SMR development,
—— The trend towards intermittent renewables such as solar and then continued investment may be called into question.
wind as part of a ‘green grid’ is creating demand for flexible,
Business Review – Defence 33
BUSINESS REVIEW
STRATEGIC REPORT
Defence Underlying revenue mix
Defence is a market leader in aero engines for

military transport and patrol aircraft with strong 1
positions in combat and helicopter applications. 2
It has significant scale in naval and is the technical

authority for through-life support of the nuclear 1. OE..................................................................45%
power plant for the Royal Navy’s submarine fleet. 2. Services....................................................... 55%
4 1
3
Ramped up LiftSystem production Launch of Defence diversity & 2
to meet Lookheed Martin F-35B inclusion charter. 1. Transport.....................................................36%
programme demand. 2. Combat........................................................ 23%
Signed up to the UK’s Women
3. Submarines..................................................19%
Increased output from our submarines in Defence Charter. 4. Naval............................................................ 10%
primary components operations by 5. Other.............................................................12%
UK Armed Services Covenant
300% since 2015; zero arrears in 2018
Gold Award.
and 2019.
Approximately 1,400 employees
Maiden flight of Boeing MQ-25 Underlying revenue
involved in social projects as part of
unmanned tanker, powered by the
£3,250m
Indianapolis community care week.
AE 3007.
Developing cyber and digital solutions
for Boeing B-52 re-engining competition.
2018: £3,124m
Launch of a new foreign object Record order intake, with book-to-bill Underlying operating profit
debris recording app for NAVAIR ratio of 1.6x, including propulsion
and the US Marine Corps.
Development of aerothermal and
electrical power take-off capability
system contract for the Royal Navy’s
four Dreadnought class submarines.
Revitalisation of Indianapolis, US
£415m
2018: £427m
in support of Tempest, the UK-led facilities nearing completion, on-time
next-generation fighter programme. and on-budget.
MAPS (Military High Mach Advanced Continued footprint optimisation Order backlog
£8.6bn
Propulsion System) contract signed with closure of Oakland, US facility.
with the UK MOD.
R&D investment increased by 5% to
Development of an integrated power support future growth opportunities.
and thermal management system for 2018: £6.8bn
defensive directed energy applications.
34 Strategic Report
Business Review – Defence
Defence overview 2019 Financial overview

Organic
Defence had an excellent year for both order £m 2019 2018 Change change
intake and cash flows. Record order intake
and a 1.6x book-to-bill ratio helped to drive
Underlying OE revenue 1,461 1,452 +1% -2%
strong cash flow performance and 26%
growth in the order book in 2019. Sales were Underlying services revenue 1,789 1,672 +7% +4%
broadly stable and operating profit margins Underlying gross profit 669 690 -3% -6%
declined by 110bps, as expected, driven Gross margin % 20.6% 22.1% -150bps -160bps
largely by a less profitable OE mix and Commercial and administrative (151) (170) -11% -13%
increased investment in R&D to support Restructuring (7) (3) +133% +133%
a number of major new programme
Research and development cost (105) (100) +5% +4%
opportunities in the coming years.
Joint ventures and associates 9 10 -10% -10%
Financial overview Underlying operating profit 415 427 -3% -7%
Underlying operating margin % 12.8% 13.7% -90bps -110bps
Underlying revenue
Underlying revenue of £3,250m was up 1%
on an organic basis. OE revenue was 2% lower
Underlying operating profit Operational and strategic review
Underlying operating profit of £415m was
year-on-year driven by fewer deliveries of 2019 was a very successful year for Defence,
£28m lower than the prior year, in line with
transport engines due to the phasing of with record order intake, strong operational
expectations. Gross profit of £669m fell 6%,
orders, including lower volumes of execution, and the achievement of
driven by the lower OE volumes in transport,
Trent 700s for multi-role tanker transport significant milestones in our ongoing R&D
particularly on the Trent 700 MRTTs, and
(MRTT) aircraft and AE series engines for projects, which will position the business to
lower LTSA margins due to the non-repeat
the C-130J and V-22. These were partly grow in the coming years in both transport
of one-off customer settlements in the
offset by increased volumes for LiftSystem and combat markets.
prior year.
hardware for the F-35B. Service revenue
Our markets remained stable in 2019. The
was up 4%, driven by higher LTSA volume A modest increase in R&D spend of £4m
US continues to represent nearly half of the
for the AE1107 and AE2100 transport reflected ongoing investment to support
addressable defence spend globally, while
engines, together with increased time and future programmes across our Defence
the UK and Europe also remain key markets.
materials revenue from EJ200 services. portfolio, with a number of attractive growth
We expect higher growth in Asia and the
opportunities in the coming years. C&A costs
Middle East, driven by regional tensions.
were £22m lower year-on-year at £(151)m.
While the budget backdrop in our markets
TEMPEST GAINING STRENGTH

Rolls-Royce is playing an integral role in
Team Tempest following its launch at the
Farnborough Air Show in 2018, with international
momentum gathering in 2019 as both Sweden and
Italy signed agreements with the UK Government
to partner on future combat air requirements.
The programme enables us to continue as pioneers
in the combat market, building on technology
developments already being demonstrated
through successful tests and trials. As part of
Tempest, we will deliver a power and propulsion
system capability which will provide fully
integrated power and thermal management
capabilities. The gas turbine remains at the
forefront of our contribution and the use of
advanced composite materials, additive layer
manufacturing techniques and new technologies
will deliver a lightweight, more power dense
configuration capable of operating at higher
temperatures. This enhanced integrated system
will result in a more intelligent, more powerful and
more electric system, capable of delivering the
future power needs of the air vehicle.
Business Review – Defence 35
STRATEGIC REPORT
CALMER SEAS FOR SUBMARINES
Our submarines business has surfaced into calmer
waters after several years of intense work to
improve performance.
The submarines primary components operations is
responsible for manufacturing key reactor components
to support the Astute and Dreadnought nuclear
submarine build. In 2015, its delivery performance
was impacting the overall programme with around
250 arrears and zero products delivered on time to
the boatyard in Barrow-in-Furness, UK, change had
to happen.
In 2016, a three-year fundamental improvement
programme was launched with three main focus areas:
creating additional capacity by repurposing existing
factory space; creating an efficient value chain, fully
aligned with the in-week delivery plan; and creating an
operational engagement activity to drive incremental
improvement at a local level.
In 2019, after three years of sustained improvement, the
primary components operation celebrated increasing
production output to the customer by over 300%
compared with 2015. It has also achieved the targeted
level of on-the-day delivery with zero arrears. The year
saw much needed stability driven back into both the
Astute and Dreadnought submarine programmes.
is relatively stable, we see a number of currently have the Series 3.5 upgrade kit opportunities. We made good progress
exciting programme opportunities in the fitted, presenting a significant opportunity as part of Team Tempest, for which we are
coming years, notably in the Tempest combat for future orders. developing a power and propulsion system
programme in the UK and in multiple which will provide fully integrated power
We delivered 499 aero engines in 2019.
upcoming campaigns in the US market. and thermal management. We were also
In aerospace, three Bombardier Global
awarded a two-year contract by the UK
Defence had a record order intake of 6000s, powered by our BR710 engines,
MOD to develop hypersonic propulsion
£5.3bn, driving 26% growth in the order were delivered to the German Special Air
systems. LibertyWorks, our dedicated US
book. Book-to-bill in 2019 was 1.6x, taking Mission Wing and German Air Force.
defence development unit, successfully
the cumulative book-to-bill ratio over the LiftSystem production ramped up to meet
demonstrated an integrated power and
last five years to 1.2x. The strength in 2019 F-35B programme demand and the
thermal management system for high-power
was led by services, highlighting the Boeing MQ-25 unmanned aerial refuelling
directed energy applications. We announced
demand driven by our installed base of tanker, powered by the AE 3007, completed
an agreement with Bell Helicopter to
over 16,000 engines. Key highlights its maiden flight. In maritime, our 50th
exclusively develop an optimised propulsion
included a five-year contract worth over MT30 gas turbine came off the production
system for the V280 Valor. Over 50,000
$1bn to maintain AE1107 engines for the US line and we delivered key early components
hours of engineering analysis, including
Marine Corps, which have now reached the for the first Dreadnought submarine.
digital engineering, were devoted to
service milestone of over one million flying
Operationally, our submarines business refine our offering for the Boeing B-52
hours. Two UK MOD support contracts
implemented a management restructure, re-engining competition and early engine
were signed; one for Spey naval engines,
reducing complexity and aligning to the tests were successfully completed in
and one for the maintenance of the EJ200.
needs of the customer. We continued to Indianapolis, US.
A multi-year spare parts order was
invest in US facilities; the revitalisation of
additionally confirmed for our Adour
engines in India. OE orders grew, including
our Indianapolis site is nearing completion Defence outlook
while a new 24,000 sqft facility in Walpole, We expect Defence to deliver stable to
four Dreadnought powerplants in
Massachusetts is due to be commissioned low-single-digit sales growth in 2020, with
submarines and a LiftFan OE order
in late 2020. These actions to improve stable operating margins. Longer term,
for LRIP 12 of the F-35 programme. We
efficiency are helping us meet customer supported by the order intake in 2019 and
continued to leverage our existing installed
demand for cost-effective solutions while the pipeline of upcoming new programme
base with the Series 3.5 upgrade kit for the
minimising the impact on our margins. opportunities, we expect Defence growth
T56 engine, which secured further orders
from the USAF. Fewer than 5% of the C-130 R&D investment stepped up in 2019 ahead to accelerate.
aircraft in service with the US Air Force of a period of important upcoming
36 Strategic Report
Business Review – Defence
NO PILOT, NO PROBLEM
Boeing and the US Navy successfully
completed the first test flight of the
Boeing MQ-25 Stingray unmanned
aerial refueler in 2019.
The MQ-25 is powered by a single
Rolls-Royce AE 3007N engine and flew
under the direction of Boeing test pilots
operating from a ground control station
in the US. The MQ-25 will provide the
Navy with a carrier-based, unmanned,
aerial refueling capability.
Rolls-Royce key differentiators —— In transport, Defence is well positioned for various next
Advanced technology, innovation, and collaboration generation opportunities, including with Bell on the V-280
Valor for the US Army’s Future Vertical Lift programme.
with partners and customers are unique hallmarks
of Defence. These differentiators enable successful —— Building on our success as the preferred gas turbine provider
on Australian SEA 5000 and Canadian frigate programmes,
delivery of products and services tailored to our
Defence is well positioned to capture other large maritime
customers’ evolving needs. opportunities with the MT30.
—— There continues to be strong service growth potential via
Market dynamics technology insertion and emerging service opportunities
—— Long-term defence investment is tied to economic growth using digital technology and data analytics to generate
while threat levels and politics drive near-term spend; the new solutions.
business expects to see modest growth across the globe
in the coming years.
Business risks
—— While higher growth areas exist in Asia and the Middle —— If a major product failure in service is experienced, then
East, driven by indigenisation and regional threats, the US this may result in loss of life and significant financial and
represents nearly half of addressable defence spend globally. reputational damage.
—— Programme wins are generally long-term and as a —— If global defence spending experiences a significant
result barriers to entry are high, which leads to downturn, then financial performance would be impacted.
entrenched competitors and aggressive competition
for new opportunities. —— If we do not continue to invest in improving the performance
and cost of Rolls-Royce products, then market share may
be lost.
Opportunities —— If the business suffers a major disruption in its supply chain,
—— There is strong interest in electrification across land, sea, then delivery schedules would be delayed, damaging
and air platforms; the business is exploring more electric financial performance and reputation.
and hybrid-electric propulsion technologies as well as power
generation and thermal management for the growing —— If new applications are not secured, then the business may
directed energy systems market. have to increase investment or accept erosion in capabilities.
—— Combat propulsion remains the largest market segment, with —— If electrification and digitalisation technology proceeds
opportunities for current products (LiftSystem and EJ200), at a faster rate than expected, then the business may not
UK investment in future combat air technologies (Combat be positioned to fully capitalise on this potential growth.
Air Acquisition Programme), and a large US opportunity in
—— If geopolitical issues arise impacting
the Boeing B-52 re-engining competition.
government-to-government relations or export controls,
then our routes to market and regional sales may be impacted.
Business Review – ITP Aero 37
BUSINESS REVIEW
STRATEGIC REPORT
ITP Aero Underlying revenue mix
ITP Aero is a global leader in aero‑engine design,

manufacture and maintenance. Alongside the
development, manufacturing, assembly and testing
of engines, it provides MRO services for regional 1
airlines, business aviation, industrial and 1. OE..................................................................84%
defence applications. 2. Services........................................................16%

1
Increased civil aviation module delivery: Launched transformation project
to drive continued improvement 1. Civil............................................................... 77%
–– 20% for Rolls-Royce 2. Defence........................................................13%
of our operating model:
–– 40% for other customers 3. In-Service Support................................... 10%
–– increased standardisation across
Invested in a new facility to offer more the organisation
complex engine externals product
–– simplified processes to
capability to customers.
increase efficiency
Certified as only the second company Underlying revenue
Held CEO engagement sessions at
worldwide capable of providing
£936m
every ITP Aero site around the globe.
support to the MTR390-E engine.
2018: £779m
Completed aerodynamic testing OE sales up 19% led by higher volumes Underlying operating profit
of the multi-stage intermediate on civil aerospace programmes.
pressure turbine for UltraFan.
Demonstrated enhanced additive
manufacturing capability:
Operating margin grew to 11.9%.
Investing in capacity expansion
in Queretaro, Mexico.
£111m
2018: £67m
–– delivery of shroud segments
Actions to improve manufacturing
for the Trent XWB-84K
efficiency, including roll-out of Order backlog
–– design of the TP400 rear additive layer manufacturing
£0.9bn
structure vanes capability at Zamudio, Spain.
–– potential for component weight
reduction of up to 40% and
significant cost savings. 2018: £0.9bn
38 Strategic Report
Business Review – ITP Aero
ITP Aero overview 2019 Financial overview

Organic
ITP Aero had a strong year. Underlying £m 2019 2018 Change change
revenue grew 21% year-on-year, driven by
Underlying revenue 936 779 +20% +21%
increases in both aftermarket and OE sales
Underlying OE revenue 782 666 +17% +19%
for civil aerospace, both on Trent and
non-Rolls-Royce engine programmes. Underlying services revenue 154 113 +36% +37%
Operating profit increased materially to £111m, Underlying gross profit 206 156 +32% +33%
reflecting revenue growth and improved Gross margin % 22.0% 20.0% +200bps +200bps
pricing. ITP Aero’s 2019 performance also Commercial and administration (61) (57) +7% +9%
benefitted from a change made to simplify Restructuring (1) (2) -50% -50%
its trading relationship and contractual terms
Research and development costs (33) (30) +10% +10%
with Civil Aerospace. This change was net
neutral at Group level.
Underlying operating margin 11.9% 8.6% +330bps +330bps
Financial overview
with Civil Aerospace. This was net neutral at Operational and strategic review
Underlying revenue Group level.
Underlying revenue was £936m, an increase In November, ITP Aero celebrated its 30th
of 21% over 2018. OE growth of 19% was Underlying operating profit anniversary. The business continued to grow,
driven by higher engine volumes on civil Operating profit increased materially, by 67% underpinned by strong positions across a
programmes, with ITP Aero module deliveries to £111m, led by higher gross profit. This range of large commercial aircraft and
up 20% on Trent engine programmes and increase was driven by higher OE volumes business jet platforms. In large commercial,
40% higher for non-Rolls-Royce programmes. and improved pricing. Profit also benefitted we delivered a 20% increase in engine
This was partially offset by a reduction in by circa £25m from the change in ITP Aero’s module deliveries for Rolls-Royce widebody
defence sales. Aftermarket revenue increased trading terms with Civil Aerospace, with a programmes and a 40% increase in deliveries
by 37% due to higher spare parts sales, largely corresponding negative impact in Group to other customers. In business aviation,
from Rolls-Royce engine programmes. eliminations. C&A costs increased by 9% we continued to see growth through our
Revenues also benefitted by circa £50m to £(61)m, and R&D rose by 10% to £(33)m positions on engine programmes including
from a change made to simplify ITP Aero’s reflecting ongoing investment in the PW800 and HTF700.
trading relationship and contractual terms aerospace programmes.
LOSING WEIGHT WITH

ADDITIVE LAYER TECHNOLOGY
During the year, we completed the design process
and began production of the first components
manufactured by ITP Aero using additive
technology – often referred to as 3D printing.
The first parts to emerge are low pressure turbine
seal segments for the Trent XWB-84 engine for the
Airbus A350 XWB aircraft, and non-structural
vanes for the TP400 engine that powers the
Airbus A400M military transport aircraft.
ITP Aero has an additive layer manufacturing cell
and a team of professionals dedicated exclusively
to this technology at our facility at Zamudio, Spain.
Thanks to investment in collaborative technology
development projects, ITP Aero is able to apply
in-house standards and specifications to the
application of this technology in aircraft engine
components that are subjected to high temperatures
in-service. The proprietary design criteria used by
ITP Aero is expected to result in a component
weight reduction of up to 40% as well as
generating significant cost savings.
Business Review – ITP Aero 39
Good progress was made during the year Other significant milestones in 2019 widebody aircraft. We are well placed with
STRATEGIC REPORT
in the expansion of production facilities to included producing the first components strong positions on newer Rolls-Royce
meet rising demand for ITP Aero products. designed and manufactured using additive Trent engines, as well as the Pratt & Whitney
Investment included a new externals facility technology. Our new additive layer 1000G engines and other non-Rolls-Royce
in Biscay, Spain, focusing on high technology manufacturing cell in Zamudio, Spain, programmes. Longer term, we have secured
products, and the extension of the externals manufactured both the low pressure participation in technology projects that
facility in Queretaro, Mexico. Both sites are turbine seal segments for the Trent XWB-84 will contribute significantly to sustainable
now open and fully operational. In addition engine and non-structural vanes for the aviation and efficient digital transformation
to adding new capacity, these facilities TP400 engine. Additionally, earlier in the of production processes. These include the
will further improve our manufacturing year we were certified as only the second investigation and maturation of technologies
efficiency, driving cost reduction across provider of servicing globally for the for hybrid electric propulsion (IMOTHEP),
civil and defence engine programmes. MTR390-E engine for the Tiger helicopter. within the EU’s Horizon 2020 framework,
which is focused on assessing the potential
We also achieved important technology At the end of the year, we strengthened
of hybrid-electric propulsion.
milestones in 2019. In June, the first our board and management, including the
aerodynamic tests of the intermediate promotion of Carlos Alzola to CEO and Following the very strong performance in
pressure turbine for UltraFan were ITP Aero board member. 2019, we expect to deliver stable sales and
successfully carried out. UltraFan will be margin improvement of 50–100bps in 2020.
25% more efficient than the first generation ITP Aero outlook Longer term the trends outlined above will
of Rolls-Royce Trent engines and 10% more drive further good growth in profitability
We expect continued demand growth
efficient than the Trent XWB, the most and cash flow.
on newer, more fuel-efficient engine
efficient civil large engine in service globally.
programmes in both narrowbody and
Rolls-Royce key differentiators —— With defence budgets rising and the emergence of a
ITP Aero will sustain its strong position through the number of new programmes, there is potential for growth
in the sector.
development of advanced, world-leading technology,
a culture of partnership with customers and suppliers,
our broad programme portfolio and market access, Opportunities
and well-invested global facilities with advanced —— Expected growth in widebody installed base driven by
and efficient manufacturing. Trent engine deliveries.
—— Expected growth in single aisle installed based on PW1000G
engine deliveries.
Market dynamics
—— The long-term trends driving demand growth in passenger —— Expected participation in the next generation European
aircraft remain strong. Growth in air travel is expected Fighter (FCAS) following Spain joining France and Germany
to stabilise close to the long-term average of 4–5%. on the programme.
—— Through 2019, the market has seen short-term downward

pressure on widebody aircraft but the longer-term outlook Business risks
remains positive. —— If our products do not achieve their required technical
—— The short-term prospects in the narrowbody and regional attributes and maturity, then product performance, customer
markets accessed through involvement in the PW1000G satisfaction, unit costs and aftermarket costs may be impacted
programme are positive. Growth in those markets is driven and could result in financial and reputational damage.
by the Airbus A320neo ramp up, a trend towards airlines —— If a product failed in service, then this could result in loss
using the longer range A321 on routes previously served of life and significant financial and reputational damage.
by widebody aircraft and the introduction of new regional
aircraft products including Airbus A220 and the Embraer —— If the business suffered a major disruption in its supply chain,
E2 family. then delivery schedules would be delayed, damaging
financial performance and reputation.
—— In business aviation, ITP Aero enjoys a route to market as
a partner on a number of engine programmes, including —— If customer programmes were to be delayed into service
the PW800 which powers the Gulfstream G500/600 and or experience a cut to production rates, then our financial
Dassault Falcon 6X and the HTF7000 which now also powers performance might be negatively impacted.
the Embraer Praetor 500/600 and Cessna Longitude.
—— If global defence spending experiences a significant
Short-term demand in the business aviation sector has
downturn, then our financial performance would
softened with the uncertain macro-economic environment
be impacted.
but the long-term fundamental drivers are strong.
40 Strategic Report
Sustainability – Non-Financial Information Statement
SUSTAINABILITY
As a leading industrial technology company, our activities have a significant
impact on society and the environment. We understand this impact and use
that understanding to inform our strategy and decision making.
We believe in the positive power of

technology: the products and services
we provide play a vital role in connecting,
protecting and powering society.
The most significant contribution we can
make to a more sustainable society is to
reduce the environmental impacts of our
product portfolio and accelerate the
decarbonisation of the sectors in which
we operate, in line with global ambitions
to mitigate climate change. This is an
integral part of our business strategy.
Our sustainability approach focuses also
on the wider impacts we have on society,
including environmental, social, ethical
and cultural factors. We know we cannot
consider these in isolation of each other.
We seek to understand and prioritise
the issues that matter most to us and
our stakeholders, including employees,
investors, and broader society. We identify
and prioritise topics in terms of potential
impact and also take into consideration
our ability to influence the issue.
Non-financial information statement

The following chart summarises where you can find further information on each of the key areas of disclosure required by the
EU Non-Financial Reporting Directive.
Related Group policies Related principal risks

Environmental matters —— Health, Safety & —— Climate Change
See pages 41 to 44 Environment —— Safety
Employees —— Security —— Talent and Capability
See pages 45 to 48 —— People —— Safety
Social matters —— Charitable Contributions & —— Political Risk
See page 46 Social Sponsorships
Human rights —— People
See page 49 —— Human Rights
Anti-bribery and corruption —— Anti-Bribery & —— Compliance
See page 49 Corruption
—— Our business model provides an insight into the key resources and relationships that support the generation and preservation
of value within Rolls-Royce. See pages 12 and 13.
—— Non-financial key performance indicators allow us to assess progress against objectives and monitor the development
and performance of specific areas of the business. These are set out on page 15.
—— Further information on Group policies can be found on www.rolls-royce.com.
—— Full details of the Group’s principal risks can be found on pages 50 to 54.
—— Disclosures in line with the Taskforce on Climate Related Financial Disclosures (TCFD) are detailed on page 41.
Sustainability – Climate Change 41
POSITION ON CLIMATE CHANGE

We have an irrefutable role to play in enabling the transition towards a low
STRATEGIC REPORT
carbon economy. Successful and just transition will require technological
solutions that we are well placed to provide.
We have always pursued clean, safe and Our independent environmental advisory Managing risk and opportunity
competitive solutions to deliver society’s committee, comprising leading academics
vital power needs. Rising global population from the environmental, materials and We recognise the substantial potential
and increased wealth is driving further climate-related fields, complements our risks and opportunities presented by
demand for power and mobility. Coupled in-house expertise. climate change. These include risks and
with increased understanding of the potential opportunities associated with both the
impacts of climate change, we recognise Strategy physical impact of global temperature
that future power must be low carbon. rises and the transition to a low carbon
Climate change and its associated impacts global economy.
will play a pivotal role in determining the
Governance long-term success of our organisation: it The assessment and management of
Our framework sets out how we govern our presents a variety of opportunities and risks climate-related risk and opportunity
business, manage risk and maintain consistent that drive our strategic decisions. Our ability is an integral part of our enterprise risk
operating standards across the Group. to develop technological solutions will management process (see Principal Risks,
Sustainability and the consideration of deliver future competitive advantage over pages 50 to 54). During 2019, we continued
climate change is a core component of this. the longer-term (see pages 42 and 43). to review our exposure to climate-related
risk, including considering the growing
The Safety, Ethics & Sustainability Committee We have a three-part approach to reducing scientific understanding of the potential
oversees our approach (see pages 105 to our environmental impacts, embedded impacts of climate change, coupled with our
110). Our executive-level environment & within our business strategy: continuing to position as a manufacturer of complex
sustainability committee, chaired by the pursue incremental improvements of existing equipment that is currently heavily
Chief Technology Officer, is responsible for products and services; developing novel dependent on fossil fuels. In light of these
environmental and climate-related policy, low carbon technologies, including changes, we have included the risk of
strategy and co-ordinating related activities. electrification; and minimising the impacts climate change to future revenue growth
of our operations and facilities. as an additional principal risk.
PREPARING FOR
THE FUTURE
Understanding how the business
may be impacted by climate change
is a key component of mitigating
longer-term risk.
We have used scenario planning
techniques to explore the resilience
of our business model and strategy
in the context of future climate
change and the transition to a
low carbon global economy.
Three scenarios were developed
based on varying global temperature
increases and societal responses
– one of which aligned to the
temperature rise limit of 1.5oC set
out by the Intergovernmental Panel
on Climate Change (IPCC). The
outputs from this have been used
to inform strategic decision making
and risk management.
42 Strategic Report
Sustainability – Technology
POWERING THE LOW CARBON TRANSITION

We are pioneering sustainable power through technology. We continue to
invest in improving performance and reducing the impacts of our products
and services, as well as developing low carbon technologies for the future.
The transition to a low carbon global economy During the year, we invested £1.46bn Engineering and
will be dependent on the development of in gross R&D expenditure, with a total of 830
technological solutions that Rolls-Royce patents approved for filing. Over two-thirds
technology capabilities
is well positioned to provide. We have a of this R&D expenditure is dedicated to Our global engineering population
long-standing history of pioneering products improving the environmental performance of supports our research and technology
and services that deliver society’s power and our products and services. programmes. During the year, we have
propulsion needs. taken steps to simplify our approach to
Decarbonising aviation in particular will
engineering competencies, enabling more
In 2019, our technology priorities have require cross-sector collaboration: our
flexibility in skills development and increasing
included: supporting the operation of today’s technologies operate as part of a wider
our engineers’ capabilities in systems
products through revitalising our service system. During 2019, our Chief Technology
thinking, electrification and digital.
capabilities; continuing the development of Officer brought together counterparts
a new aero engine architecture to deliver from seven major aerospace companies Our global network of 29 University
further emissions reductions into the next to announce a joint statement on the Technology Centres (UTCs) and seven
decade; and continuing to advance our future sustainability of aviation, including Advanced Manufacturing Research Centres
electrification strategy. This balance between a commitment to work together (AMRCs) continue to develop advanced
continuous efficiency gains and the pre-competitively to meet industry-level research that can be applied in our
introduction of novel technologies will targets for reducing the sector’s CO2 technology portfolio and across our
help ensure a structured transition to impacts and support the commercialisation manufacturing operations.
a low carbon global economy. of sustainable alternative fuels.
830
Patents approved
A RECORD BREAKER
for filing TAKES TO THE SKIES
£1.46bn
Gross R&D
Inside an airport hanger in
Gloucestershire, UK a team of
engineers, designers and data
expenditure specialists recruited from inside
and outside Rolls-Royce are
setting out to make history.
During 2019, we began the design
and build of a high-speed, fully
2019 Gross R&D electric aeroplane unlike any seen
expenditure (£m) before. Scheduled to fly in 2020,
the aircraft will reach speeds of
6 over 300mph, making it the fastest
5
3
4 all-electric plane in history.
This Rolls-Royce project is called
2 1
ACCEL, Accelerating the
Electrification of Flight, and is
intended to pioneer a third era
of aviation and support our
electrification strategy.
1. Rolls-Royce............................................1,118
2. UK government.....................................253 Through the project we are
3. EU funding...................................................21
4. US government.........................................37
developing new skills and
5. German government...............................12 capabilities in electrical aviation.
6. Other............................................................ 18
Sustainability – Technology 43
STRATEGIC REPORT
SMALL REACTOR,
BIG POTENTIAL
Rolls-Royce is leading a consortium
of world-class companies in
designing an affordable, compact
nuclear power station to meet
increasing demands for low
carbon electricity.
We believe our compact power
station design can make a significant
contribution to the UK and other
nations’ ambitions to reach net zero
carbon emissions by 2050.
The UK government’s Research
and Innovation agency has granted
£18m initial funding, matched by
the consortium, to complete vital
elements of the preliminary design
concept. A full UK programme
could create 40,000 UK jobs and
generate £52bn value for the
economy, with tremendous
commercial potential and an
estimated global export market
worth £250bn by 2050.
Revitalising service capabilities Developing new Our self-contained business unit,

Rolls-Royce Electrical, has celebrated
Our services packages help our customers engine architecture a number of successes during the year,
to maximise the availability of their engines. Looking forward, we continue to take big including: ground testing of our M250-
With growth of our in-service fleet of strides towards maturing a new aero engine based hybrid electric system for urban
engines and power systems, our services architecture and related technologies. Our air mobility and eVTOL applications; full
innovations have provided significant UltraFan design will deliver a 25% reduction speed testing of the 2.5 MW generator
additional capacity to maintain their operation in emissions relative to the first generation that, coupled with our AE2100 aero gas
in field and increase throughput in repair of Trent engines; an unprecedented turbine, will power the E-Fan X hybrid
and overhauls. This is particularly important efficiency leap. flight demonstrator in 2021; and making
as we continue to work through in-service significant progress with the development
issues with the Trent 1000. In 2019, we made good progress on
of all-electric flight technologies within
a series of important sub-system validations,
We are increasing the use of digital tools our ACCEL programme.
including testing our advanced organic
to enhance our service offerings, including matrix composite fan system and the world’s The acquisition of the eAircraft business,
using imaging technologies to automate most high power aero gearbox, validating from Siemens, has given us a leading position
the assessment of the condition of critical operability and thermal efficiency. in electrical technologies for aero
engine parts whilst the engine remains applications and provides a basis for
on-wing, extending engine availability. Advancing electrification increasing the delivery of advanced electrical
This year, we introduced rapid new near-wing Rolls-Royce is leading the transition components to a range of customers.
component swap procedures, avoiding towards electrification in all our markets. Within Power Systems, we are increasing
the need to bring engines into repair and The application of hybrid and electric the production of mobile hybrid power
overhaul centres. These new methods were technologies has the potential to systems for rail and marine applications.
validated and introduced 90% faster than decarbonise our technology portfolio We are also applying our electrical
traditional procedure changes. Used engines over the longer term, particularly in competencies within our microgrid
and parts are collected at each of our centres ground-based transportation and power, solutions, which are supporting the
worldwide. Up to 90% of a used aero engine and regional aviation. accelerated uptake of renewable energy
can now be recycled, reducing our demand as well as providing vital back-up power
for resource intensive, virgin materials. and storage.
44 Strategic Report
Sustainability – Impacts from Operations
IMPACTS FROM OPERATIONS AND FACILITIES

Understanding and managing the environmental impact of our operations
is a key part of being a responsible and resilient business. We seek to
consider and mitigate the environmental impact of our activities and major
business decisions.
During the year, we have taken steps to

strengthen our understanding of materials
consumption across our operations,
identifying opportunities to optimise use
CLEANING UP
and avoid wastage. Half of our top 20
waste-producing sites have completed
ON COOLANT
waste-mapping reviews, identifying and
prioritising areas for improvement with an We continue to strengthen our
estimated cost saving of approximately waste management processes,
£1.6m identified to date. with a particular focus this year
on alternative treatments for liquid
We continue to invest in installing low carbon
waste. Almost all our manufacturing
and renewable energy sources across our
sites rely on using coolant as a vital
global estates, including completing a solar
part of our machining processes.
PV installation in Friedrichshafen, Germany.
Coupled with a Rolls-Royce microgrid to During 2019, we worked with one
provide stability of supply, this installation of our AMRCs to introduce novel
will deliver 30% of the site’s energy demand, technologies to clean and filter
as well as acting as a showcase for our ‘used’ coolant, doubling its useable
microgrid technology. life. This reduces our coolant waste
by 50%, contributing to our waste
During 2019, we made significant progress
reduction target, as well as
towards our long-term zero carbon operations
decreasing cutting fluid spend.
target, entering into a green power purchase
agreement (PPA) part way through the These technologies and improved
year for all our UK purchased electricity, working practices developed in the
decreasing our scope 1 & 2 emissions by 21%. UK trial are now being rolled out
At the same time, we have continued to worldwide. We intend to share this
invest in energy efficiency opportunities to capability with our supply chain.
reduce our overall power demand, including
upgrading lighting and heating systems.
Absolute GHG Energy consumption Total solid and Waste to landfill

emissions (ktCO2e) (MWh/£m) liquid waste (t/£m) (000 tonnes)
285 ktCO2e 89 MWh/£m 4.22 t/£m 2.3 kilotonnes

2030 TARGET 0 2025 TARGET 63 2025 TARGET 3.44 2020 TARGET 0
2019 285 2019 89 2019 4.22 2019 2.3
2018 360 2018 93 2018 4.79 2018 2.7
2017 377 2017 97 2017 4.60 2017 3.6
2016 395 2016 98 2016 3.99 2016 4.5
2015 420 2015 110 2015 4.04 2015 6.6
2014 BASELINE 472 2014 BASELINE 126 2014 BASELINE 4.59 2014 BASELINE 7.8
Target: Achieve zero scope 1 + 2 Target: Reduce energy Target: Reduce solid and liquid Target: Achieve zero waste to
GHG emissions by 2030 1,2,3 consumption by 50% by 2025 1,2,3 waste by 25% by 2025 1,2,3 landfill by 2020 1,2
The emissions associated with our Our energy consumption has Total waste generated in our The amount of waste sent to landfill
operations has reduced by 40% reduced by 26% since 2014 as we operations has reduced by 13% has reduced by 71% since 2014.
since 2014. This has been achieved continue to invest in improving the since 2014. We continue to focus on This has been achieved through
through continued decarbonising energy efficiency of our offices and identifying opportunities to prevent continued investment in waste
of our energy systems and manufacturing facilities. This includes the creation of waste at source in management improvements and
increased use of generated or heating and lighting upgrades. our manufacturing processes. the use of alternative recovery
purchased renewable energy. and recycling options.
1
External assurance over the STEM, energy, GHG, waste and TRI rate data provided by Bureau Veritas. See page 203 for their sustainability assurance statement.
2
Data has been reported in accordance with our basis of reporting, available at www.rolls-royce.com/sustainability. Data for prior years has been restated to reflect the disposal
of the Commercial Marine business. Data associated with ITP Aero is included in the GHG, energy and total waste targets from 2017 only.
3
Emissions associated with product test and development, critical to ensuring product safety, and power generation are excluded from our GHG target. Statutory GHG emissions
data, including emissions from these sources, are detailed on page 209. Our energy and total waste reduction targets are normalised by revenue.
Sustainability – People and Culture 45
PEOPLE AND CULTURE

It is through our people that we fulfil our potential, achieve our vision
STRATEGIC REPORT
and deliver our strategy.
We continue to focus on driving the right Enhancing our leadership 51,700 employees total (monthly average) *
culture through embedding our values and
behaviours. We are committed to creating In 2018, we refreshed our enterprise 4 56
the right working environment where each leadership group (ELG) through restructuring,
of us is able to be at our best. This continues and we continue to refresh the whole 3
to be a critical lever in all we do. leadership population through internal 1

movements and external hiring.
Progressing our transformation During 2019, we introduced our leadership 2
From the outset our transformation expectations, an extension of our people 1. Civil Aerospace...................................................26,100
programme has been designed as more framework, which provide clear indicators 2. Power Systems.................................................... 10,400
of success for our leaders to live up to our 3. Defence...................................................................9,900
than a headcount reduction exercise (see
values and behaviours. 4 ITP Aero................................................................... 3,900
page 17). It is a strategic change in our 5. Head office ................................................................. 100
culture, our people, and our ways of working. We continue to refresh our leadership 6. Non-core businesses........................................... 1,300
Embedding our people framework is a core learning and development programmes.
element in achieving this. This includes updating our core leadership Employees in 50 countries (monthly average) *
During 2019, our efforts have focused in learning programmes, including a licence
three areas: enhancing leadership capability; to operate curriculum, and building key 6
embedding our values and behaviours; capabilities in coaching, driving performance 5

and eradicating bullying and harassment. and being inclusive. This is a critical 4 1
We have made progress on embedding our investment in ensuring our leadership

3
values and behaviours through actions like remains fit for the future.
a robust communications campaign, leading
activities to engage our population and Capabilities and skills 2
1. UK.............................................................................23,300
hosting ‘let’s talk’ sessions (see page 46). We work hard to ensure we have the right 2. Germany.................................................................. 9,800
Our values and behaviours are now skills and capabilities in place to execute 3. USA & Canada........................................................7,000
integrated into our processes and systems, our strategy. During 2019, we invested £28.7m 4 Nordics..................................................................... 1,300
including performance management, 5. Spain..........................................................................3,200
in employee learning and development 6. Rest of World..........................................................7,100
reward and employee learning. (2018: £27.1m), delivering 1.4m hours of
Embedding our people framework
Our people framework provides the backbone of our employee development and engagement activities. This is particularly
important as we progress our restructuring programme and continue to embed and evolve our culture to support our purpose,
vision and strategy.
Care Creating a working environment where each of us is able to be at our best.
Growing Key capabilities needed to secure Growing Key behaviours needed to secure
emerging opportunities:
emerging opportunities:
capabilities behaviours —— embrace agility
—— systems integration
—— electrical engineering —— be bold
—— data sciences —— pursue collaboration
—— seek simplicity
Core Key competencies needed to

safeguard our competitiveness:
Core Key values needed to safeguard
our competitiveness:
competencies —— engineering pre-eminence
values —— operate safely
—— programme management —— trusted to deliver excellence
—— business acumen —— act with integrity
* Employee headcount data is calculated as the average number of full time equivalents throughout the year.
46 Strategic Report
Sustainability – People and Culture
LET’S TALK
Between May and September our enterprise
leadership group hosted over 110 engagement
sessions with small groups of employees
selected through a ballot process.
These ‘let’s talk’ sessions were introduced to
create opportunities for meaningful dialogue
with our leadership group. The informal
format and small group size allowed people
to be seen, heard and understood. These
sessions generated valuable insights into
how our restructuring and cultural change
programmes are landing and how employees
see the future.
In total, more than 3,000 people took part
across 17 sites.
training (2018: 1m hours). We have focused and to better support their teams. This We also monitor feedback from current and
on developing skills in business acumen, encourages individuals to take more past employees through Glassdoor, who
digital and data sciences, and programme ownership of their personal development. awarded us #30 on their ‘Best Places to
management. Interactive learning We have also introduced training and Work in the UK’. Our Chief Executive also
opportunities, forums and online platforms tools to enable leaders to have career ranks #9 on their ‘Top CEOs in the UK’, with
have been utilised to develop these conversations that offer broader and more an 85% approval rating.
capabilities throughout the organisation. agile career development options for all.
We are investing circa £4m in a new learning STEM and communities
proposition that brings together all our Employee engagement Our ability to attract and recruit the right
learning offerings in one place.
We believe that positive engagement is people with the right skills in the future is
We continue to acquire talent to support a result of our leadership and working dependent on there being a pipeline of
our electrical strategy, including through environment. Our approach to engagement available talent. To support this we focus
the acquisition of Siemens’ eAircraft is founded on the premise that engagement on building awareness and engagement
business and the introduction of a specialist happens locally and should be owned and in science, technology, engineering and
learning offering within our Power Systems driven by local teams and leaders. maths (STEM) with young people from an
business. early age, as well as those who may have
We provide a variety of channels to
influence over their future career choices
communicate and engage with our
Talent management employees and their representatives. This
such as teachers, parents and carers.
Developing our talent strategy and future includes employee newsletters, magazines We are now 27% towards our 2030 target
pipelines continues to be a core focus. and team briefings, as well as our digital to reach 25 million of tomorrow’s pioneers
We have considerably improved succession communication channels. We work closely through our STEM programmes, with 1.25m
planning through the implementation of with elected employee representatives people engaged in STEM activities during
a new talent review process. This has through well-established frameworks, 2019 1 . These activities vary from individual
standardised our approach to assessing including our European Works Council. classroom activities and community group
potential and managing development Our employee forums ensure everyone has workshops, to flagship initiatives such as
needs, as well as proactive engagement of the opportunity to contribute their views. the Rolls-Royce science prize.
external talent, to improve the quality and
This year, we introduced a new employee Our broader community investment activities
diversity of our succession planning.
opinion survey, in partnership with Gallup. are intended to build positive relationships
In 2018, we began work to launch our career This survey is more streamlined, moving and engagement opportunities in
framework, a refreshed approach to the from 64 questions to 12, encouraging communities local to our operations, with
way we manage careers and talent. Our participation by removing the burden of a focus on environment, education, arts
management job levels have been broadened responding. We ran two surveys during the and culture. During 2019, we invested £7m
to remove complexity and enable greater year as we embedded this new approach in supporting local communities, including
movement between roles. In 2019, 1,150 and increased our focus on measuring and £3.4m in cash contributions and sponsorships.
managers were promoted internally (2018: actioning the results; 58% of employees Over 96,000 hours of employee time
1,340) and our employee turnover rate completed the survey in April, and 72% was committed to community and STEM
remained stable at 7.5% (2018: 7.6%). in November. The results from the surveys projects as part of our wider employee
are a key measure in our annual bonus plan, engagement approach.
We have introduced practical tools for
see page 15 and 89.
managers to help drive their own careers
External assurance over the STEM, energy, GHG, waste and TRI rate data provided by Bureau Veritas. See page 203 for their sustainability assurance statement.
1
Sustainability – People and Culture 47
STRATEGIC REPORT
UK PENSIONS REVIEW
During 2019, we undertook two actions to manage our
pension obligations for current and former UK employees.
The Group carries significant post-retirement liabilities
on our balance sheet. During the year, we supported the
Trustee of the UK pension plan to fully insure liabilities for
around 33,000 former employees with Legal & General
Assurance Society. This removes future risk for the Group
whilst providing former employees with greater certainty
over the delivery of their benefits.
Our UK pension plan closed to new hires in 2007. In 2019
we consulted on changes to the plan, impacting 2,700
managers. This was undertaken in consideration of
increasing future service costs, the balance sheet risk of
future pension liabilities, as well as the increasing
imbalance of overall reward for UK employees who joined
the Company before or after 2007. The proposed changes
have been agreed and will take effect from 1 March 2020.
The Board supported each of these actions after
considering in detail the impact on current and former
employees and the financial impact on the Group.
Health, safety and wellbeing the workplace. More than 44,000 employees participation in the Women in Aviation and
worldwide have benefited from these Aerospace Charter; National Action Council
Ensuring the wellbeing of our people and workplace interventions. for Minority Engineers; and the General
those who work with us through providing Counsel Diversity Charter.
a safe place of work and minimising potential Mental wellbeing continues to receive a
exposure to harm is a key component of our high public profile and our analysis confirms Our Executive Team currently comprises
care promise. This year we introduced this is a significant source of concern for nine members, all of whom are male.
mandatory HSE training for all managers. our employees and a cost to the business. The Group has a 2020 gender diversity
Additional leadership training has been In 2019, we introduced a new toolkit to enable target for the Executive Team of 23%.
conducted for the Executive Team. teams to assess their workplace mental health The detailed succession plan for the
and develop action plans to address any Executive Team currently comprises 44%
In 2018, we initiated a programme of concerns. Our mental health champions females (2018: 35%). The Executive Team,
comprehensive safety reviews following a programme continues to grow and we Company Secretary and their direct reports
series of major and high potential incidents, now have over 580 trained mental health comprise 82 individuals, 21 (26%) of whom
including two fatalities in 2017. The first aiders. are female. Currently 20% of our ELG
programme remains on track, with 88% of are female (2018: 14.7%), as are half our
sites in scope having been reviewed and a For more information on our Board apprentices.
systematic approach to managing identified safety performance, including
areas for improvement implemented. The In 2019, we revised our diversity & inclusion
TRI rates, see the Safety, Ethics
objectives of this programme are to identify and anti-bullying and harassment policies
& Sustainability Committee
latent risks across our operations and to to align to our strategy and values and
Report, pages 105 to 110.
assess individual sites’ HSE maturity, providing behaviours. Our policies ensure that all
site based leadership with greater visibility employees, regardless of gender, race,
and understanding of hazards, controls Accelerating diversity religion, physical abilities or any other
and residual risks. & inclusion characteristics, are treated with dignity and
respect, and feel safe and empowered to
LiveWell is our internal global accreditation Improving diversity & inclusion remains work without fear of bullying and harassment.
scheme for site-based wellbeing provisions; a strategic priority for the Group. During
this acts as a framework for sites to identify 2019, we have refreshed our strategy and We give full and fair consideration to all
specific health and wellbeing requirements associated policies and sought to accelerate employment applications from people with
in their workplace, and implement progress in its implementation. Our approach disabilities and support disabled employees
improvements. At the end of 2019, 86% focuses on four key areas: leadership and in the workplace, helping them to make best
of our sites have achieved LiveWell governance; attraction and recruitment; use of their skills and expertise to reach
accreditation, recognising the steps they retention; and development. their full potential.
have taken to support employees in making For more information on the
We continue to leverage external partners
healthy and sustainable lifestyle choices in Board diversity policy, see
to substantiate our approach, including
Nominations & Governance
Committee Report, page 78.
48 Strategic Report
Sustainability – People and Culture
Progress against our 2020 targets

We are taking deliberate action to create a Female employee population 1 Female senior manager population 2
more balanced and representative employee
population, in which everyone can be at their 2020 TARGET 17% 2020 TARGET 25%
best. We have targets in place to increase 2019 16% (8,300) 2019 20% (19)
the representation of women at all levels by 2018 15.5% (8,300) 2018 14.7% (13)
the end of 2020. These are supported by
2017 15.1% (7,400) 2017 13.6% (18)
additional local and business targets to
address local diversity challenges. We are 2016 14.8% (7,400) 2016 11.4% (16)
currently working towards developing a 2015 15.2% (7,700) 2015 7.3% (14)
new set of diversity targets out to 2025, 2014 14.8% (8,000) 2014 6.7% (12)
to be published during 2020.
Female graduate population 3 Female high potentials population 3
Due to the introduction of the new employee
engagement survey, Gallup Q12, we no longer 2020 TARGET 30% 2020 TARGET 30%
measure a separate inclusiveness score. 2019 30% 2019 30%
This is now embedded within our broader 2018 26% 2018 26%
measures of employee engagement, linked
2017 23% 2017 25%
to our remuneration approach.
2016 24% 2016 25%
For more information on our
2015 26% 2015 25%
employee engagement measure,
see KPIs on page 15. 2014 25% 2014 24%
1
Employee headcount data is calculated as the average number of full time equivalents throughout the year. Certain joint ventures are classified as joint operations, 1,300
employees associated with joint operations are not included within our overall headcount or diversity data.
2
Senior manager population for 2018 and 2019 is calculated as Executive Team and ELG population (2019 total: 94, 2018 total: 88), prior years data refers to the senior leadership
team that was replaced by the ELG through restructuring in 2018.
3
The graduate and high potentials targets refer to the percentage of employees on these development programmes as at 31 December each year.
BUILDING A
DIVERSE TALENT
PIPELINE
We continue to focus on
early careers recruitment
as an opportunity to bring
more diverse talent into
the organisation.
In 2019, 184 graduates and
353 apprentices joined
Rolls-Royce on early career
development programmes.
These provide a vital
pipeline of talent into
engineering and other
functions, including
finance, procurement and
project management.
Our graduate intake was
32% female (2018: 32%).
Apprentice starters were
16% female (2018: 21%), this
decline was driven in part
by the fact we only
recruited engineering
apprentices this year.
Sustainability – Ethics and Compliance 49
ETHICS AND COMPLIANCE

Maintaining high standards of ethics and compliance are fundamental to
STRATEGIC REPORT
our continued success. We work hard to create a working environment
where everyone at Rolls-Royce and everyone we work with can be at
their best.
We are committed to maintaining the highest disciplinary action, up to and including Human rights and anti-slavery
ethical standards and have a suite of global dismissal, in the event of a breach of Our
policies and processes in place to avoid any Code. In 2019, 85 employees (2018: 59) left Our commitment to protecting and
potential complicity in misconduct. the business for reasons related to breaches preserving the human rights of our
of Our Code. employees, and those whom may be
Our Code of Conduct (Our Code) and impacted by our business operations or
associated policies set out the values and supply chain, is embedded within Our
behaviours we expect everyone to
Anti-bribery and corruption
Code, our Human Rights policy and our
demonstrate. They also provide guidance Our Code and associated policies clearly Supplier Code of Conduct.
on how to apply these principles in our daily set out our commitment not to tolerate
decisions. In 2019, 99% of managers certified bribery or corruption of any form. In 2019, Our approach to identifying and assessing
their commitment to adhere to the principles our ongoing anti-corruption programme modern slavery risk is embedded within
set out in Our Code (2018: 99%). We flow focused particularly on managing conflicts our broader risk management approach.
these principles to our suppliers through of interest and confidential information. Due diligence is embedded within our
our Supplier Code of Conduct. All suppliers This has targeted training for higher-risk operating systems and processes, including
are contractually required to adhere to this, teams and individuals. recruitment and procurement processes.
or a mutually agreed alternative.
In addition, we have continued to strengthen
More information on our approach
We encourage speaking up in the event of our anti-bribery due diligence approach.
can be found in our anti-slavery
a question or concern and provide a variety The level of due diligence activity carried
and human trafficking statement,
of channels through which to do so. For out is dependent on the level of risk that
available at www.rolls-royce.com.
example, we now have 150 employees a particular third party provides and may
trained as local ethics advisors who can include in-person interviews and site visits,
act as first point of call. During the year, we as well as external due diligence reports For more information on our ethics
have focused on supporting our leadership from specialist corporate intelligence approach see the Safety, Ethics &
population in how to listen to someone providers. We also conduct extensive due Sustainability Committee Report,
raising a concern and how to follow up. diligence into potential joint ventures as pages 105 to 110.
well as supporting existing joint ventures
We have a zero tolerance approach to in their ethics and compliance programmes.
misconduct of any kind and will take
TREATING OTHERS WITH

DIGNITY AND RESPECT
This year’s mandatory ethics training
focused on treating others with dignity
and respect, linked to our anti-bullying
and harassment campaign.
This comprised individual study and
team discussions on real-life cases of
bullying and harassment experienced
in the Group. 97% of in-scope
employees completed the training
(2018: 98%).
We have strengthened our
investigation process for allegations
related to bullying and harrassment.
During the year, five employees
left the organisation as a result of
these investigations.
50 Strategic Report
Principal Risks
PRINCIPAL RISKS
Our risk and internal into account the effectiveness of current in nature except for the elevation of the
mitigating control activities in their risk of climate change as described below.
control system assessment, supported by different assurance A description of all of the principal risks,
The Board has established procedures providers including internal audit. These how we manage them, the main mitigating
to manage risk and oversee the risk considerations are recorded using a variety control activities, the change in status and
management system (RMS). The Board has of systems and tools depending on the risk how these underpin our priorities is set
also established procedures to determine area. Risk owners bring the results of their out on pages 51 to 54.
the nature and extent of the principal assessment, current risk status and action
and emerging risks the Group is willing to plans to business, function and other Emerging risks
take in order to optimise its commercial management review forums as often
Our emerging risks are also identified and
opportunities and achieve its long-term as is required depending on the nature
managed this way. As we committed last year,
strategic objectives. The Audit Committee of the risk, for support, challenge and
given the additional focus on emerging risks
reviews the Group’s internal financial controls oversight. These forums include the monthly
this year, we have introduced additional
which form a subset of the broader set of Executive Team and regular Board and
activities to identify emerging risks. These
controls, and also reviews the RMS and its Board committee meetings.
include workshops, facilitated together with
effectiveness. During the year, the Board
During the year, we continued to refine the central strategy team, and the use of an
completed a robust assessment of both
our risk appetite metrics and to use these app, developed with digital support by
our principal and emerging risks.
more systematically in concluding on the R² Data Labs, to collect insight from diverse
Our RMS is designed to identify and manage, effectiveness of mitigating activities. We stakeholder groups across the organisation.
rather than eliminate, the risk of failure to also continued to strengthen the controls Questions were posed to identify items that
achieve business objectives and to provide in place over risks at remote sites. Our could translate into longer-term issues or
reasonable, but not absolute, assurance plans for 2020 include simplification of our opportunities, beyond the period considered
against material misstatement or loss. risk policies and guidance and additional for viability, that could significantly impact
support for risk owners in assessing the or challenge our current strategy and
How we manage risk effectiveness of mitigating control activities. business model.
Risks are identified by individuals across all Any risks identified have been recorded
businesses and functions and at many layers Principal risks in RMS and are being managed and
of the organisation by considering what could Our principal risks are identified and monitored alongside our existing risks.
stop us achieving our strategic, operational managed in the same way. Principal risks
Following the UK’s exit from the European
or compliance objectives or impact the are owned by at least one member of the
Union on 31 January 2020, we continue to
sustainability of our business model. Risk Executive Team and subject to a deep dive
monitor the potential outcomes for the UK’s
owners assess the risks, likelihood and impact, at an Executive Team meeting at least once
future relationship with the EU through our
taking into account current mitigating each year, before a review by the Board
steering group which has remained active
control activities, identifying where additional or a Board committee. The Board has
during 2019 and will remain active until the
activities may be needed to bring the risk completed a review of the principal risks
outcome is clear and any necessary mitigation
within our risk appetite. Risk owners take and concluded that there are no changes
plans are in place. We model potential impacts
and include these in our assessment of
strategic, operational and compliance risks,
adjusting mitigation plans where necessary
Our risk and internal control system including where we build or hold inventory,
testing additional logistics options and
reviewing supplier readiness. We ensure
regular dialogue takes place with all
Risk Risks facing the business are identified and stakeholders including customers, suppliers,
Management assessed on a regular basis. employees, governments and regulatory
agencies. The Board is regularly updated
on the latest risk assessment and
mitigating activities.
Growing appreciation of the potential impact
of climate change on the environment
Internal Internal controls are designed and deployed
combined with our position as a global leader
control to mitigate these risks to an accepted level.
in the manufacture, service and operation
of assets that are dependent on the use of
fossil fuels, has increased our exposure to a
wide variety of climate-related risks. In light
of this, we have included the risk of climate
change to future revenue growth as an
Assurance Assurance activities assess whether the
additional principal risk. More detail on
controls are effective and risks are mitigated
how we manage this, the main mitigating
to an acceptable level in practice.
control activities and how these underpin
our priorities is set out on page 52.
Principal Risks 51
STRATEGIC REPORT
2019 Group priorities Change in risk level in 2019
1 Customers 2 Technology Increased Decreased
3 People and culture 4 Financial progress Static New risk
PRINCIPAL RISK OR UNCERTAINTY HOW WE MANAGE IT KEY CONTROLS CHANGE PRIORITY
SAFETY We manage product safety by:

—— Ensuring clear accountability for safety and a culture
For the safety
of our products:
1
Failure to meet the expectations of: that puts safety first. —— Company product 2
i) our customers to provide safe products; —— Applying our engineering design and validation process safety assurance
or ii) the people who work for or with from initial design, through production and into service committee 3
us to provide a safe and healthy place to reduce the safety risks so far as is reasonably —— Business product
of work which minimises the impact on practicable; always ensuring that we meet or safety committee
the environment; would adversely exceed the relevant company, legal, regulatory —— Quality compliance
affect our reputation and long-term and industry requirements. audit
sustainability. —— Operating a safety management system, governed —— Engineering
by the product safety assurance board, and subject technical audit
to continual improvement based on review of existing
—— Crisis management
and emerging threats, experience, and industry
team
best practice.
—— Ensuring that our products and those of our suppliers For people’s safety
conform to their specifications. and wellbeing:
—— HSE management
—— Ensuring that everyone receives appropriate product
system
safety awareness training.
—— HSE accountability
We manage people’s safety and wellbeing by: framework
—— Ensuring clear accountability for HSE and a culture
—— HSE committee
that puts operating safely first.
—— Refreshing our global HSE policy and introducing
team
our Zero Harm programme.
—— Environment &
—— Operating an HSE management system, including
sustainability
reporting, investigating and learning lessons
committee
from incidents.
—— Driving sustainable use of resources.
This principal is subject to review by the Safety,
Ethics & Sustainability Committee.
BUSINESS —— Sustaining investment in adequate capacity, modern

equipment and facilities, dual sources of supply and
—— Incident
management
1
CONTINUITY researching alternative materials.

—— Promoting and developing resilience within our
framework
—— Business
3
The major disruption of the Group’s external supplier partners.
4
continuity
operations, which results in our failure readiness
—— Providing a supplier finance programme in partnership
to meet agreed customer commitments assessment
with banks to enable our suppliers to benefit from
and damages our prospects of winning
the Rolls-Royce credit rating and access funds at low —— External supplier
future orders. Disruption could be
interest rates. audits and robust
caused by a range of events, for example:
—— Building a resilient culture through flexible and contractual
extreme weather or natural hazards (for
collaborative working, using our single Group-wide agreements
example, earthquakes, floods); political
events; financial insolvency of a critical incident management framework. —— Training and
supplier; scarcity of materials; loss of —— Developing, maintaining and regularly exercising exercising in
data; fire; or infectious disease. The effective business continuity and crisis management incident response
consequences of these events could plans to prepare our people to respond quickly and and recovery
have adverse impact on our people, confidently to any business disruption. —— Environment &
our internal facilities or our external —— Sharing lessons learned identified through exercises sustainability
supply chain. or incidents. committee
—— Scanning the horizon to provide awareness of
emerging risks/potential incidents.
This principal risk is subject to review by the
Audit Committee.
52 Strategic Report
Principal Risks
—— Strategic reviews
CLIMATE CHANGE —— Investment in our existing product range to reduce its
carbon impact, and in zero carbon technologies to —— Science &
1
Understanding the impact of climate replace our existing products. Technology 2
change and our products increases our —— Partnering programme to introduce the skills, capability Committee
susceptibility to physical and transitional
3
and hunger to rapidly develop class-leading solutions. —— Environment and
climate-related risks. We will need to —— Seeking a balanced portfolio of products, customers sustainability 4
transition our products and services to and revenue streams to reduce our dependence on any committee
a lower carbon economy. Failure to one product, customer or carbon emitting fuel source.
consider changes in atmospheric
—— Clear communication and acknowledgment of our role
conditions could result in changes in
in the problem and the solution, and the actions we are
maintenance and overhaul requirements,
taking to enact a credible plan of action in line with
affecting revenues generated by our
societal expectations.
in-service fleet and jeopardising the
viability of a services-based business This principal risk is subject to review by the Board and
model. Failure to transition from the Safety, Ethics & Sustainability Committee.
carbon-intensive products and services
at pace could impact our ability to win
future business; achieve operating results;
attract and retain talent; secure access
to funding; realise future growth
opportunities; or force government
intervention to limit emissions.
COMPETITIVE —— Horizon scanning for emerging technology and other

competitive threats, including patent searches.
—— Financial
performance
1
ENVIRONMENT —— Establishing our Innovation Hub to invest in innovation,

manufacturing and production, and ensure continuing
review
—— Strategic planning
2
The presence of competitors in the governance of technology programmes.
4
process
majority of our markets means that
—— Enhancing our capabilities to access, invest in and —— Investment review
the Group is susceptible to significant
develop key technologies and innovative service committee
price pressure for original equipment
offerings which differentiate us competitively. —— Science &
or services. Our main competitors
have access to significant government —— Improving the quality, delivery and durability of our Technology
funding programmes as well as the products and services through investment in innovation, Committee
ability to invest heavily in technology manufacturing and production capabilities. —— Data Security
and industrial capability. Disruptive —— Forming strategic partnerships and conducting joint Committee
technologies or new entrants with research programmes with our partners.
alternative business models could —— Driving down cost to improve margins.
also reduce our ability to sustainably
—— Protecting credit lines.
win future business, achieve operating
results and realise future growth —— Strengthening our balance sheet to enable access
opportunities. to cost-effective sources of third party funding.
This principal risk is subject to review by the Board.
COMPLIANCE —— Taking an uncompromising approach to compliance.

—— Operating an extensive compliance programme.
—— Governance model
—— Compliance
3
Non-compliance by the Group with Global mandatory policies, processes and training are and export 4
legislation, the terms of the DPAs or disseminated throughout the Group and are updated control teams
other regulatory requirements in the from time to time to ensure their continued relevance, —— Governance team
heavily regulated environment in and to ensure that they are complied with, both in
—— Legal team
which we operate (for example, export spirit and to the letter.
controls; use of controlled chemicals —— Regular reviews of the strength of relevant teams
and substances; anti-bribery and including the ethics, anti-bribery and corruption,
corruption; and tax and customs compliance, tax, sustainability and export control teams.
legislation). This could affect our
—— A legal team is in place to manage any ongoing
ability to conduct business in certain
regulatory investigations.
jurisdictions and would potentially
expose the Group to: reputational —— Engaging with all relevant external regulatory authorities.
damage; financial penalties; debarment —— Implementing a comprehensive REACH compliance
from government contracts for a period programme. This includes ensuring that we and our
of time; and suspension of export supply chain are covered by REACH authorisations
privileges (including export credit for a number of chemicals needed for our products,
financing), each of which could have establishing appropriate data systems and processes
a material adverse effect. and working with our suppliers, customers and
trade associations.
This principal risk is subject to review by the Safety,
Ethics & Sustainability Committee.
Principal Risks 53
STRATEGIC REPORT
CYBER THREAT —— Implementing defence in depth through deployment

of multiple layers of software and processes including
—— Data Security
Committee
1
An attempt to cause harm to the web gateways, filtering, firewalls, intrusion, advanced —— IT executive 2
Group, its customers, suppliers and persistent threat detectors and integrated reporting.
—— Product cyber 3
partners through the unauthorised —— Running security and network operations centres. security working
access, manipulation, corruption, —— Actively sharing cyber security information through groups in high
or destruction of data, systems or industry, government and security forums. risk areas
products through cyberspace.
—— Information and product assurance processes. —— Information
—— Training and awareness to improve cyber assurance and
security culture. engineering
processes
Audit Committee through its Data Security Committee.
team
MAJOR PRODUCT —— Major programmes are subject to Board approval.

—— Reviewing major programmes at levels and frequencies
—— Rolls-Royce
management
1
PROGRAMME appropriate to their criticality and performance, against

key financial and non-financial deliverables and
system
—— Operational
2
DELIVERY potential risks throughout the programmes lifecycle. performance

4
Failure to deliver a major programme —— Investing in facilities and people to manage the level review
on time, within budget, to technical of disruption to our customers from Trent 1000 in-service —— Project audit and
specification or falling significantly issues and developing longer-term solutions to risk assurance
short of customer expectations, or these issues. reviews
not delivering the planned business —— Conducting technical audits at pre-defined points —— Gated business
benefits, would have potentially which are performed by a team that is independent and technical
significant adverse financial and from the programme. reviews
reputational consequences, including —— Requiring programmes to address the actions arising —— Quality compliance
the risk of impairment of the carrying from reviews and audits and monitoring and controlling audit
value of the Group’s intangible assets progress through to closure. —— Quality committee
and the impact of potential litigation.
—— Applying knowledge management principles to
provide benefit to current and future programmes.
This principal risk is subject to review by the Board.
MARKET AND —— Maintaining a strong balance sheet, through managing

cash balances and debt levels.
—— Financial
performance
4
FINANCIAL SHOCK —— Providing financial flexibility by maintaining high levels

of liquidity and an investment grade credit rating.
review
—— Financial risk
The Group is exposed to a number of committee
—— Sustaining a balanced portfolio through earning
market risks, some of which are of a
revenue both from the sale of original equipment and —— Operational
macro-economic nature (for example,
aftermarket services, providing a broad product range performance
foreign currency, oil price, interest
and addressing diverse markets that have differing review
rates) and some of which are more
business cycles. —— Group finance,
specific to the Group (for example,
liquidity and credit risks, reduction in —— Deciding where and what currencies to source in, and treasury and
air travel or disruption to other customer where and how much credit risk is extended or taken. tax teams
operations). Significant extraneous The Group has a number of treasury policies that are
market events could also materially designed to hedge residual risks using financial
damage the Group’s competitiveness derivatives (foreign exchange, interest rates and
and/or creditworthiness. This would commodity price risk).
affect operational results or the —— Review debt financing and hedging in light of volatility
outcomes of financial transactions. in external financial markets caused by external events,
such as Brexit or other geopolitical changes.
Audit Committee.
54 Strategic Report
Principal Risks
POLITICAL RISK —— Where possible, diversifying our global operations to

avoid excessive concentration of risks in particular areas.
—— Global government
relations network
1
Geopolitical factors that lead to an —— The Group’s businesses, strategic marketing network —— Group tax and 2
unfavourable business climate and and global government relations teams proactively export control
significant tensions between major monitoring local situations. teams
3
trading parties or blocs which could —— We develop and maintain relationships with governments —— Strategic planning 4
impact the Group’s operations. and stakeholders and proactively influence policy, process
Examples include: changes in key regulation and legislation where it affects us. —— Brexit steering
political relationships; explicit trade
—— Steering committee to co-ordinate activities across committee
protectionism, differing tax or
the Group and minimise the impact of Brexit.
regulatory regimes, potential for
conflict or broader political issues; This principal risk is subject to review by the Board.
and heightened political tensions.
STRATEGIC —— Implementing a new organisational operating model.

—— Focusing on behaviours to drive cultural change.
—— Executive Team
—— Gated reviews
1
TRANSFORMATION —— Simplifying the processes in our Rolls-Royce

management system, whilst ensuring we comply with
2
Failure to deliver our strategic 3
our legal, contractual and regulatory requirements.
transformation, including changing
our behaviours could result in: missed —— Horizon scanning and scenario planning. 4
opportunities; dissatisfied customers; —— Investing in products with lower emissions, reducing
disengaged employees; ineffective use our impact on climate change.
of our scarce resources; and increasing —— Employee innovation portal.
the likelihood of other principal risks
occurring. This could lead to a business This principal risk is subject to review by the Board and
that is overly dependent on a small the Safety, Ethics & Sustainability Committee.
number of products and customers;
failure to achieve our vision; non-
delivery of financial targets; and
not meeting investor expectations.
TALENT AND —— Attracting, rewarding and retaining the right people

with the right skills globally and locally in a planned
—— Remuneration
Committee
1
CAPABILITY and targeted way, including regular benchmarking

of remuneration.
—— Executive Team
—— ELG
2
Inability to identify, attract, retain and —— Developing and enhancing organisational, leadership,
3
apply the critical capabilities and skills —— People leadership
technical and functional capability to deliver 4
needed in appropriate numbers to team
global programmes.
effectively organise, deploy and
—— Continuing a strong focus on individual development
incentivise our people would threaten
and succession planning, recognising the changing
the delivery of our strategies, business
nature of careers and expectations of work.
plans and projects.
—— 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
where everyone can be at their best that tightly aligns
Group strategy with individual and team objectives.
—— Incentivising and effectively deploying the critical
capabilities, skills and people needed to deliver our
strategic priorities, plans and projects whilst
implementing the Group’s major programme
to transform its business, to be resilient and to act
with pace and simplicity.
—— Tracking engagement through regular employee
opinion surveys and a commitment to drive
year-on-year improvement to employee engagement.
Nominations & Governance Committee.
Going Concern and Viability Statements 55
GOING CONCERN AND

VIABILITY STATEMENTS
STRATEGIC REPORT
Introduction Viability —— the Group’s medium and long-term
financing plans are designed to allow for
Rolls-Royce operates an annual planning The viability assessment considers solvency periods of adverse conditions in world
process. Our plans and risks to their and liquidity over a longer period than the capital markets but not a prolonged period
achievement are reviewed by the Board and, going concern assessment. Consistent with (say 12 months) where debt markets were
once approved, are cascaded throughout previous years, we have assessed our viability effectively closed to the Group and the
the Group and are used as the basis for over a five-year period which is in line with RCF not available;
monitoring our performance, incentivising our five-year medium-term planning process.
employees and providing external guidance Inevitably, the degree of certainty reduces —— that in the event of one or more risks
to our shareholders. over this longer period. occurring, which has a particularly severe
effect on the Group, all potential actions,
In making the assessment, severe but such as constraining capital spending
The processes for identifying and managing
plausible scenarios have been considered and reducing or suspending payments to
risk are described on pages 50 to 54. As
that estimate the potential impact of principal shareholders, would be taken on a timely
described on these pages, the risk
risks arising over the assessment period, for basis. The Group believes it has the early
management process, and the going
example: the loss of a key element of the warning mechanisms to identify the
concern and viability statements, are
supply chain, the impact on aircraft travel need for such actions and the ability
designed to provide reasonable but not
of a global pandemic, a trade war between to implement them on a timely basis
absolute assurance.
major trading blocs or worsening or new if necessary; and
in-service issues on Civil Aerospace
Going concern programmes. —— that implausible scenarios, whether
involving multiple risks occurring at the
The going concern assessment considers The scenarios assume an appropriate same time or the impact of individual
whether it is appropriate to prepare the management response to the specific event, risks occurring that cannot be mitigated
financial statements on a going concern but not broader mitigating actions which by management actions to the degree
basis. The Board has also considered the could be undertaken, which have been assumed, do not occur.
net liability position at 31 December 2019 considered separately. The cash flow
and the going concern status of the Group’s impacts of these scenarios were overlaid
material subsidiaries. on the five-year forecast to assess how the
As described on page 204, the Group meets Group’s liquidity and solvency would be
its funding requirements through a mixture affected. Reverse stress testing has also
of shareholders’ funds, bank borrowings, been performed to assess the severity of
bonds and notes. At 31 December 2019, the scenario that would have to occur to
Group had borrowing facilities of £5.6bn exceed headroom, including a scenario
(excluding lease liabilities of £2.4bn) and total where existing borrowing facilities could
liquidity of £6.9bn, including cash and cash not be refinanced as they mature.
equivalents of £4.4bn and undrawn facilities The assessment took account of the Group’s
of £2.5bn. £435m of the facilities mature in current funding, forecast requirements and
2020 (excluding lease liabilities of £340m). existing committed borrowing facilities.
The Group’s forecasts and projections, taking On the basis described above, the Board
into account reasonably possible changes confirms that it has a reasonable expectation
in trading performance, show that the Group that the Company will be able to continue
has sufficient financial resources. The in operation and meet its liabilities as they
Directors have reasonable expectations that fall due over the next five years.
the Company and the Group are well placed
to manage business risks and to continue In making this statement, the Directors have
in operational existence for the foreseeable made the following key assumptions:
future (which accounting standards require —— that maturing facilities, including the
to be at least a year from the date of this Group’s revolving credit facility (RCF),
report) and have not identified any material will be refinanced and the Group is
uncertainties to the Company’s and the able to drawdown its existing facilities
Group’s ability to do so. as required;
On the basis described above, the Directors —— the Group currently has access to global
consider it appropriate to adopt the going debt markets and expects to be able to
concern basis in preparing the Consolidated refinance these facilities on commercially
Financial Statements (in accordance with acceptable terms;
the Guidance on Risk Management, Internal
Control and Related Financial and Business
Reporting published by the FRC in
September 2014).
56 Strategic report
s172 Statement
s172 STATEMENT
The Board believes that, individually
and together, they have acted in the
way they consider, in good faith, would
be most likely to promote the success
of the Company for the benefit of its The Board’s approach
members as a whole, having regard to We remain a particularly active Board, seeking
opportunities outside the boardroom to find out what is
the stakeholders and matters set out in happening across the organisation
s172(1)(a–f) of the Companies Act 2006

in the decisions taken during the year
ended 31 December 2019.
Purpose, vision and strategy (see page 10)
—— clearly articulated purpose recognising our role in society
This illustration sets out the Board’s —— corporate narrative aligned with both vision and strategy
approach to decision making, its

Group policies (see page 40)
stakeholder engagement, why its —— annual review of Group policies
stakeholders matter and some key —— new mandatory training introduced in 2019 (see page 1110)
decisions made during 2019. To give

greater understanding to this, we have Culture and people (see page 45)
—— review of the culture change agenda (see page 67)
provided clear cross-referencing to —— Code of Conduct clearly communicated and enforced
(see page 49)
where more detailed information can —— continued support for the people framework
(see page 45)
be found in this Annual Report.
Board’s structure (see page 65)
—— role of the Board and its matters reserved,
reviewed annually
—— clear focus of the Board’s committees, annual review
of terms of reference
—— clearly defined roles and responsibilities for Board
members and the Company Secretary
‘freedom within a framework’ (see page 61)

—— communication of freedom within a framework culture
—— Rolls-Royce management system simplification
—— new decision rights model
Risk and internal control framework – see page 50

—— all risks and mitigating actions subject to a detailed annual
review at Board level (see pages 68 and 80)
—— reviewed process for the preparation of both going
concern and viability statements (see page 55)
s172 Statement 57
STRATEGIC REPORT
OUR PURPOSE DELIVERED WITH INTEGRITY
At Rolls-Royce we pioneer the power that matters to connect, power We discuss how we maintain high standards of ethics and compliance
and protect society and their fundamental importance to our continued success on page 49
Our stakeholder engagement Our principal decisions during 2019

Our activities are global and complex. Touching upon a wide More discussion on these decisions can be found in the Board
variety of stakeholders, we aim to create trusted relationships focus on page 67
to understand the needs of all our stakeholders so we can
continue to deliver value and build a resilient business
See page 70 for the Board’s engagement with our stakeholders.
See page 12 for our business model
Customers UK pensions review (see pages 47 and 67)

Focusing on the needs of our customers is critical to the success —— transfer of certain pension risk liability and balance
of our business. We maintain a high degree of customer intimacy sheet impact
in order to anticipate and understand the future power needs of —— changes to the defined benefit pension scheme for
our customers, building on our years of experience in delivering UK managers
for our markets. We collaborate and innovate with our customers
to improve product performance and value
Climate change impact (see pages 52 and 68)
—— elevation of risk of climate change to future revenue growth
Investors
Continued access to capital is vital to the long-term performance
of our business. We work to ensure that our investors and
New midsize airplane platform (NMA)
investment analysts have a strong understanding of our strategy,
performance, ambition and culture —— withdrawal from engine competition to power Boeing’s NMA
platform (see page 67)
—— continue to focus on our UltraFan demonstrator programme
(see page 26)
Employees
Employee engagement is critical to our success. We work to
create a diverse and inclusive workplace where every employee
can reach their full potential and be at their best. We engage with
Trent 1000 mitigation actions (see pages 8 and 68)
our people to ensure we are delivering to their expectations, —— strong focus on customer and accounting impact of technical
supporting wellbeing and making the right business decisions. and operational challenges including risks to the programme
This ensures we can retain and develop the best talent —— increased stock of spare engines and accelerated growth in the
MRO network to meet long-term servicing demands
Partners
Enhanced capital allocation discipline
Our external supply chain and our suppliers are vital to our
performance. We engage with them to build trusting relationships —— set as a 2019 priority (see page 7)
from which we can mutually benefit and to ensure they are —— agreed approach and overview of capital allocation as part
performing to our standards and conducting business to of our freedom within a framework culture (see page 61)
our expectations —— strengthening the balance sheet and monitoring our credit
rating risk (see page 17)
Communities
Payments to shareholders
We are committed to building positive relations with the
communities in which we operate. We support communities —— continued policy and recommendation to shareholders of final
and groups, local and relevant to our operations, particularly shareholder payment (see page 5)
educational outreach
Governing bodies and regulators

Strategic Report
We engage with national governments, national/transnational
agencies and key politicians and regulators to ensure that we
signed on behalf of the Board
can help shape policy, have licence to operate, attract funding, Warren East
enable markets and ultimately win business. We work with Chief Executive
governments globally where we have operations or future
business opportunities 28 February 2020
58 Directors’ Report
Compliance with the Code
DIRECTORS’ REPORT
Our focus on the UK Corporate Governance Code 2018
Compliance with the Board Leadership and Division of Responsibilities

UK Corporate Governance Company Purpose —— We clearly define the roles of the
Code 2018 —— We believe our Board is Chairman and the Chief Executive
The Company is subject to the particularly active. Our Directors’ and fully support the separation of
principles and provisions of the UK report provides examples of our the two roles.
Corporate Governance Code 2018 leadership and engagement with —— The Board believes it operates
(the Code), a copy of which is our stakeholders (see page 70). effectively with the appropriate
available at www.frc.org.uk. For the —— We developed the corporate balance of independent Non-
year ended 31 December 2019, the narrative during the year to Executive Directors (NEDs) and
Board considers that it has complied further define and articulate the executive directors (see pages
in full with the provisions of the Code Group’s purpose (see page 67). 62 to 64).
with the exception of provision 32
regarding Irene Dorner’s appointment —— Our transformation programme is —— When considering external
as Chairman of the Remuneration designed to ensure we have the appointments for our NEDs, prior
Committee. An explanation of this right resources and skills to Board approval is required to
can be found on page 59. execute our strategy (see pages ensure there is no compromise on
45 and 67). time commitment (see page 77).
—— Our Code and associated policies —— Our Board evaluation highlighted

ensure our workforce can meet the quality of the information
our expected values and provided to the Board (see
behaviours. We encourage page 74).
speaking up through our Ethics
Line (see page 49).
Composition, Succession Remuneration Audit, Risk and

and Evaluation —— Our remuneration policy has been Internal Control
—— We have a clear process when revised this year and will be put to —— We recognise the importance
considering appointments to the the shareholders for approval at and benefits of ensuring both
Board (see page 77). our 2020 AGM. Key changes are the internal audit function and
set out on page 89 and clear links the external auditors remain
—— As part of our focus on succession to our KPIs can be found on independent. See pages 83 to 84.
planning, we review the skills and page 14.
attributes required. —— The Board presents a fair,
—— The Remuneration Committee, balanced and understandable
—— Our Board biographies and related comprising only NEDs, is (FBU) assessment of the
charts demonstrate the skills, responsible for developing Company’s position and prospects.
experience and knowledge of our the policy and determining To enable us to do so, the Audit
Directors (see pages 62 to 64). executive and senior management Committee review the processes
—— In 2019, Belinda Hudson Limited remuneration. This is discussed used to prepare and verify the
carried out an annual evaluation of in the Remuneration Report on FBU statement (see page 81).
the Board. The methodology and page 85.
—— Our risk and control environment
progress can be found on page 74. —— No Director is involved when is reviewed by the Audit Committee.
deciding their own The Board considered both
remuneration outcome. emerging and principal risks
during the year (see page 68).
Rolls-Royce Holdings plc Annual Report 2019 Directors’ Report
Chairman’s Introduction 59
CHAIRMAN’S INTRODUCTION
TO DIRECTORS’ REPORT
This means that all our employees are enabled
to act with integrity and are able to speak
up via our Ethics Line and to call on the
support of their local ethics advisers. The
Board reviewed the speak-up cases reported
through the Ethics Line twice during the
year. These are the subject of prior review
by the Safety, Ethics & Sustainability
Committee, who support the Board in our
deliberations in this area. You can read
more about this on pages 67 and 1110.
HSE, occupational safety and wellbeing
DIRECTORS’ REPORT
remain priorities for the Group. Whist there
was improvement in some areas of the
business, we were disappointed that the
overall total reportable injury (TRI) rate
remained flat year-on-year. This will be
an area of particular focus in 2020.
SIR IAN DAVIS Product safety has been an important issue
Chairman
for our industry this year. We have focused
on our product safety training and on how
safety risk is managed through a time of
Introduction We remain a particularly active Board. transformation. We continue to pursue
We seek opportunities outside the our goal of continuous product safety
In early 2019, we considered the key trends boardroom to find out what is happening
in UK governance and this created a improvement – this is fundamental to our
across the organisation and gain assurance licence to operate and to the sustainability
background for our discussions throughout that the Group is operating responsibly and
the year. We recognised the increasing of our business.
effectively. You will see examples of this as
emphasis on corporate purpose, culture, you read through the Directors’ Report. For more information on D&I
risk and the scrutiny of financial, audit and employee engagement see
and ethical integrity. Environmental, social Corporate culture People and Culture on page 45.
and governance (ESG) issues are areas
of increasing importance to investors We continue to create a working environment
and society. There are more calls for where every employee at Rolls-Royce is Board developments
democratisation of companies and boards able to be at their best. As a Board, we take We are very sorry that Ruth Cairnie stepped
particularly through emphasis on worker every opportunity to assess progress and down from the Board at the end of 2019 to
engagement and transparency of everything. impacts on culture and behaviour. This has allow her more time to focus on her other
We have responded by clearly articulating included how we look at talent and succession commitments, following her appointment as
our purpose, with supporting communications (see page 77), governance initiatives chair of Babcock International Group PLC.
to all key stakeholders. We have reviewed (page 78), diversity and inclusion, employee Following Ruth’s departure, Irene Dorner was
our plans to manage and mitigate our engagement and our career framework appointed as Chairman of the Remuneration
risks and we have found ways of assessing (pages 67 and 71) in the Directors’ Report and Committee, with effect from 1 January 2020.
and calibrating culture and behaviours, the People and Culture report on page 45. While we note the Code requirement that
maintaining focus through a period We rolled out anti-bullying and harassment remuneration committee chairs should have
of transformation and restructuring. training across the Group in reaction to a served on a remuneration committee for at
We have also spent time ensuring that our trend that was beginning to emerge from least 12 months prior to their appointment,
accountabilities and expectations are clearly feedback to our Ethics Line in 2018 (see we have every confidence that Irene has the
articulated internally under our ‘freedom page 49). appropriate experience and skills to carry out
within a framework’ concept (see page 61). the role. She formally joined the
Lord Gold presented his final report to the Remuneration Committee on 1 August 2019.
Diversity & inclusion (D&I) remain a priority. Serious Fraud Office in August 2019, in which Irene is Employee Champion on the Board,
We have high ambitions but also clear he noted the exemplary progress made in a role she has held for three years. Her role
targets which are tracked by the Board to improving the Company’s approach to ethics on the Audit Committee over the last four
ensure they are achieved. Each member of and anti-bribery and corruption compliance. years gives her excellent insights into the
the Executive Team has personal This concludes Lord Gold’s work with us and financial performance measures and targets
accountability for diversity in their own area. I would like to thank him for his diligence and for the long and short-term incentive
The Board is temporarily not meeting our commitment which has helped us shape our schemes. She has also attended six
stated Board diversity policy objective but ethics and compliance programmes. We are Remuneration Committee meetings since
we have a very clear aim to rectify this. committed to continuing our communication joining the Board and is therefore familiar
and training to employees as well as our with the discussions and workings of the
monitoring and assurance work. Committee. Irene also has experience of HR
Chairman’s Introduction
in her executive career having spent two visibly supporting management’s goals in
years as general manager, human resources these areas. Our purpose clearly reflects
for a UK unionised workforce of 55,000 at the important role we play in society with
HSBC. Irene joined Ruth to consult with pioneering sustainable power (see page 10).
shareholders on the remuneration policy
that will be voted on by shareholders at the Governance
2020 AGM and both attended the joint
While the Directors have always engaged
briefing during the year on wider workforce
with and had the best interests of all our
engagement (see page 86). Irene stepped
stakeholders at the centre of our discussions,
down from the Audit Committee in
the revisions to the Code in 2018 have
December 2019.
brought the reporting into more focus
Ruth’s unexpected departure from the and our activities as a Board are reported
Board temporarily left us short of our own on page 67. In addition, each of our
Board diversity targets. However, I am Non-Executive Directors does much to
pleased that we have recently announced contribute and represent Rolls-Royce as
the appointment of Dame Angela Strank, they go around the world.
currently chief scientist and head of
We have continued with our governance
downstream technology at BP and a
agenda and gave particular focus in 2019
member of their executive management
to our internal governance, developing and
team. Dame Angela will join our Board
articulating our freedom within a framework
on 1 May 2020.
concept. This defines the framework in
Brad Singer also stepped down from the which the businesses have the maximum
Board in December 2019. As a partner and freedom, responsibility and accountability
chief operating officer of ValueAct Capital, for their performance. Within this are a set
he offered a valued external perspective of core non-negotiables including common
during his time as a Director. safety standards, Our Code and mandatory
Group policies as well as our common
We have continued to push for increased
approach to talent and performance
financial and accounting transparency and
management and processes, reward and
the reports that follow demonstrate this.
career development. A key element of our
We have enhanced our Board expertise on
transformation programme has been the
finance and accounting with the appointment
simplification of the Rolls-Royce management
of George Culmer in January 2020.
system and the Board’s focus has been to
Nick Luff will take over as Chairman of the ensure that the key principles which keep
Audit Committee following the 2020 AGM our products safe are retained.
The Audit Committee looks at our principal
The framework supports the management
risk regarding cyber threat and has formed
focus on culture and behaviours by
a sub-committee focused on data security,
reinforcing the need for simplification and
on which both Nick and George sit. The
stripping out unnecessary duplication and
sub-committee met for the first time in
bureaucracy, making accountabilities and
January 2020 and the Audit Committee
expectations clear. You can read more
look forward to hearing their insights during
about our framework on pages 61 and 78.
the course of the coming year.
We have decided to retain both Lewis Looking forward
Booth and Sir Frank Chapman for a further
We will continue to focus on culture and
period. This is discussed on page 77.
behaviour as we look to stabilise the
operational performance of the business
ESG and our cost base. While we pride ourselves
We have raised the profile of environmental on innovative governance, what drives us is
and sustainability issues and aligned the the need for governance to fit the needs of
transparency on these issues across the the business and to ensure we add value in
Safety, Ethics & Sustainability Committee all that we do. We will continue to do this
and the Science & Technology Committee, throughout 2020.
as we said we would do last year. We also
held our first ESG event in April with Sir Ian Davis
investors, on which you can read more on Chairman
page 78. Sir Frank Chapman and I also
attended executive-level committee meetings
on the environment and sustainability,
enabling us to gain deeper insights while
Chairman’s Introduction 61
FREEDOM WITHIN Board

A FRAMEWORK
The Executive Team has defined the
Executive Team
framework in which the Businesses have
the maximum freedom, responsibility and Head Of�ce
accountability for their performance.
The framework sets out how we are
organised as a Group. Having the framework
DIRECTORS’ REPORT
in place enables us to manage risk, drive Civil
critical business decisions and maintain Aerospace
standards across the Group. It means we can
act with pace and confidence in a way that
meets the expectations of our stakeholders. ITP
Aero
The framework sets out the roles of the
businesses, the Head Office, Group
Businesses Services and the Innovation
Power
Hub and defines what we mean by Defence
empowered businesses. Systems
Our people section sets out the capabilities,
behaviours, competencies and values which
enable us to deliver our strategy.
The governance model clarifies
decision-making rights and points of
Group Business Services Innovation Hub
accountability and includes a tool for all
key decision-makers to access, to support
them in their decision-making. It includes
details of all governance bodies and Our Purpose
decision-making committees within the
Group that they may need to consult or seek
approval from. It also provides access and an
overview of our mandatory Group policies
which define the requirements for all our
people when they are carrying out their Our Vision
and Strategy
day-to-day activities, and sets out our risk
management and internal control systems
and assurance activities.
The Rolls-Royce management system
(RRMS) promotes end-to-end value stream Role of the Group
processes that standardise and simplify the and the Business
way we deliver products and services across
the Group – and it is an important strand in
our governance of product safety.
Together, these are set within the context of Governance
our vision and strategy and also link to our Business Model Our People Model
business model. All our people can see how
everything joins together and how they are Decision Group
contributing to one of the world’s leading Rights Policies
industrial technology companies, connecting,
powering and protecting society. Rolls-Royce
management
You can read more about our system
framework on pages 60 and 78. (RRMS)
Board of Directors
BOARD OF DIRECTORS
1 2 3
1. SIR IAN DAVIS NG 2. WARREN EAST CBE 3. STEPHEN DAINTITH

Chairman of the Board Chief Executive Chief Financial Officer
Chairman, Nominations & Governance Committee
Appointed to the Board in January 2014 Appointed in April 2017.
Appointed to the Board in March 2013 and as Chief Executive in July 2015.
and as Chairman in May 2013. Career Stephen is a chartered accountant.
Career Warren is an engineer and joined His previous roles include CFO of Daily Mail
Career Sir Ian was a partner at McKinsey for ARM Holdings plc in 1994 where he was and General Trust plc from 2011 to 2017. He was
31 years and, during his time, served as chairman CEO from 2001 until 2013. He is a fellow of CFO and COO of Dow Jones in New York and CFO
and worldwide managing director. Sir Ian was the Institute of Engineering and Technology; of News International in London, both part of
knighted in 2019 for services to business. the Royal Academy of Engineering; the Royal News Corporation. Prior to this, he held executive
Society; and the Royal Aeronautical Society. positions at British American Tobacco p.l.c.
Board skills and experience Sir Ian brings He was awarded a CBE in 2014 for services
significant financial and strategic experience and to the technology industry. Board skills and experience Stephen has a
has worked with and advised global organisations strong understanding of international business
and companies. This enables him to draw on Board skills and experience Warren brings and an appreciation for looking beyond numbers
knowledge of diverse issues and outcomes to a deep understanding of technology and to help improve performance. His change
assist the Board. developing long-term partnerships. He also management experience allows him to make
has proven strategic and leadership skills a significant contribution to the long-term
Other principal roles BP p.l.c., senior within a global business and a strong record growth of the business.
independent director; Johnson & Johnson Inc., of value creation.
non-executive director; McKinsey & Company, Other principal roles 3i Group plc,
senior partner emeritus Other principal roles ASML Holdings NV, non‑executive director
member of the supervisory board (with effect
from 22 April 2020)
Composition of the Board (at 28 February 2020)
Board skills and experience Board members by gender Balance of the Board
Executive
Directors
Female
2
3
11
8 11
88
6 8
66
Male
Non-Executive
3 6 9
Directors
10
3
Number of Directors with:
Number
■ of Directors with:experience
Chairman/CEO/CFO Board members by nationality * Non-Executive Directors’ tenure
■ Related
■ industry/operational
Chairman/CEO/CFO experience German
■ Financial
Related industry/operational 1
■ Engineering/technology
Financial Singaporean
■ Safety/regulatory/risk
Engineering/technology 1 0–3 years
Safety/regulatory/risk
■ Remuneration/HR 3
■ Remuneration/HR American
1
6–9 years
5
British 3–6 years

* According to the Company’s Articles, at least 9 2
50% of our Directors must be British citizens.
Board of Directors 63
4 5 6
DIRECTORS’ REPORT
7 8 9
4. LEWIS BOOTH CBE NG A R 5. SIR FRANK CHAPMAN NG SES ST 6. GEORGE CULMER NG A SES
Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director
Chairman, Audit Committee Chairman, Safety, Ethics & Sustainability
Committee Appointed in January 2020.
Appointed in May 2011.
Appointed in November 2011. Career George is a chartered accountant.
Career After gaining a bachelor of engineering Having started his career with Coopers &
degree with honours in mechanical engineering, Career Sir Frank is a chartered engineer. With Lybrand, he has held senior financial positions
Lewis began his career with British Leyland. more than 40 years spent in the oil & gas sector, with Prudential, Zurich Financial Services and
He spent 34 years at Ford Motor Company he was chief executive of BG Group plc for 12 years RSA Insurance Group where he was chief
including as executive vice president and CFO. and chairman of Golar LNG Limited. He is a financial officer. Until August 2019, George was
He was awarded a CBE in 2012 for services to the fellow of the Royal Academy of Engineering, the CFO at Lloyds Banking Group, a position he held
UK automotive and manufacturing industries. Institute of Mechanical Engineers and the Energy for 7 years.
Institute. He was knighted in 2011 for services
Board skills and experience Lewis has to the oil & gas industry. Board skills and experience George has
considerable financial expertise and experience, significant experience gained in large,
of great benefit to both the Board and in his role Board skills and experience Sir Frank has an international, highly regulated groups and
as Chairman of the Audit Committee. He brings a outstanding record of business achievement, a has proven business leadership credentials.
global perspective and is recognised as one life-long passion for engineering and innovation Together with this, he brings to the Board
of the strongest and most experienced and a deep understanding of technology. His and its committees change leadership and
international leaders in his sector. significant industrial and safety experience are transformation experience gained from within
invaluable to the Board and its committees. complex groups.
Other principal roles Mondelez International
Inc., director Other principal roles NextDecade Corporation, Other principal roles Aviva plc, senior
non-executive director; Myeloma UK, vice chairman independent non-executive director
7. IRENE DORNER NG R SES 8. BEVERLY GOULET NG A R 9. LEE HSIEN YANG NG A SES

Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director
Chairman, Remuneration Committee Employee Champion, North America
Employee Champion Appointed in January 2014.
Appointed in July 2017.
Appointed in July 2015. Career A Singaporean, Hsien Yang was chief
Career Beverly, a US national, started her career executive of Singapore Telecommunications
Career Irene was CEO and president of HSBC, US as a securities and M&A lawyer and has spent a Limited for 12 years. He was a former member of
until retiring in 2014. During her 30-year career considerable amount of her career in the airline the Rolls-Royce International Advisory Board, he
with HSBC, she held a number of international industry. From 1993, Beverly was a key member served as chairman and non-executive director
roles including CEO of HSBC in Malaysia. Irene is of the executive team of American Airlines where of Fraser and Neave Limited from 2007 to 2013
an honorary fellow of St Anne’s College Oxford. she served in a number of senior roles. and Chairman of the Civil Aviation Authority
She qualified as a barrister-at-law in London and of Singapore.
from 2015 to 2016, was a consultant at PwC. Board skills and experience Beverly brings
valuable knowledge and operational experience Board skills and experience Hsien Yang combines
Board skills and experience With a strong gained from within the airline sector. Together a strong background in engineering with
background in risk management, gained from with her expertise in finance, treasury, strategy, extensive international business and management
the financial sector, Irene brings valuable insight legal and governance matters, she actively takes experience in a key market for the Company.
as part of her role on our Board committees. As a part in the development and strengthening of His significant industrial and financial skills prove
passionate advocate of diversity & inclusion, she our business. valuable in his committee memberships.
has embraced the role of Employee Champion
and ensures the views of the workforce are Other principal roles Xenia Hotels and Resorts Other principal roles INSEAD South East Asia
properly reflected in the Board’s discussions. Inc., non-executive director; Texas Women’s Council, president
Foundation, board member; American Airlines
Other principal roles Taylor Wimpey, chair; AXA Federal Credit Union, board chair; Rolls-Royce
SA, director; Control Risks Group, chair North America Holdings, Inc., board member
Board of Directors
10 11 12
Key
NG Nominations & Governance Committee

A Audit Committee
R Remuneration Committee
SES Safety, Ethics & Sustainability Committee
ST Science & Technology Committee
13 14
10. NICK LUFF 11. SIR KEVIN SMITH CBE 12. PAMELA COLES
NG A SES NG R ST
Independent Non-Executive Director Senior Independent Director Company Secretary
Chairman, Science & Technology Committee Chief Governance Officer
Appointed in May 2018.
Appointed in November 2015. Appointed in October 2014.
Career Nick is a chartered accountant. He is
chief financial officer of RELX plc, playing a key Career Sir Kevin was group chief executive of GKN Career Pamela is a fellow of The Chartered
role in driving shareholder returns as the plc for nine years. Before GKN, he spent nearly Governance Institute. She joined Rolls-Royce
company transforms its business and simplifies 20 years with BAE Systems in a number of senior from Centrica plc, where she was head of
its corporate structure. Nick was previously CFO executive positions. He has an honorary fellowship secretariat. Pamela’s previous roles also include
of Centrica plc for seven years and, prior to that, doctorate from Cranfield University and is an group company secretary and a member of the
P&O Group. Nick has formerly been audit honorary fellow of the University of Central executive committee at The Rank Group plc and
committee chairman and a non-executive Lancashire. He was awarded a CBE in 1997 and company secretary and head of legal at RAC plc.
director of both Lloyds Banking Group plc and knighted in 2006 for services to industry. Skills and experience Pamela is an expert in
QinetiQ Group plc. corporate governance and company law. With
Board skills and experience Sir Kevin has extensive
Boards skills and experience Nick has broad industrial leadership experience and a deep a pragmatic approach to how the Governance
financial skills and a track record of driving knowledge of engineering and manufacturing Team supports the business, she has been
business performance. In addition, he has businesses, as well as the aerospace industry. instrumental in supporting the Chairman and
extensive non-executive experience. This He makes a significant contribution to the growth the Non-Executive Directors to build strong
exposure together with both financial and and development of our key strategies, both as a relationships with the management team and has
accounting expertise and a passion for member of the Board and as Chairman of the been able to offer advice and guidance on a wide
engineering is invaluable to the Board. Science & Technology Committee. range of topics.
Other principal roles RELX plc, chief Other principal roles L.E.K. Consulting, European Other principal roles E-ACT,
financial officer advisory board member non-executive director
13. JASMIN STAIBLIN NG ST 14. DAME ANGELA STRANK

NG SES ST
Independent Non-Executive Director Independent Non-Executive Director Board committee membership *
NG A R SES ST
Appointed in May 2012. To join the Board in May 2020.
Career A German national, Jasmin was the CEO Career Dame Angela is a chartered engineer Sir Ian Davis C
of Alpiq Holding AG from 2013 to 2018. Prior to and is currently chief scientist and head of Lewis Booth C
this, she held a number of senior positions in the downstream technology at BP and a member
ABB Group working in Switzerland, Sweden and of their executive management team. She joined Sir Frank Chapman C
Australia, becoming CEO of ABB Switzerland BP in 1982 and has held a number of senior
from 2006 until 2012. executive roles. She is a fellow of the UK Energy George Culmer
Institute, the Institute of Chemical Engineers, Irene Dorner C
Board skills and experience Jasmin combines the Royal Academy of Engineers and the Royal
a strong background in advanced engineering Society. Dame Angela received a DBE in 2017 Beverly Goulet
and deep technology knowledge with extensive for services to the oil & gas industry and for
international business experience in the industrial encouraging women into STEM careers. Lee Hsien Yang
sector. With a background dominated by science
and technology, she makes a significant Skills and experience Dame Angela brings a Nick Luff
contribution both to the Board and as a member proven track record in managing engineering Sir Kevin Smith C
of the Science & Technology Committee. operations and technology and digital research
and development programmes. She is a recognised Jasmin Staiblin
Other principal roles Zurich Insurance Group, role model for women in both the energy industry
non-executive director; NXP Semiconductors and STEM careers in business and industry. C Chairman
N.V., non-executive director; Georg Fischer * at 28 February 2020
AG, non-executive director Other principal roles Severn Trent plc,
non-executive director
Full Directors’ biographies can be
found at www.rolls-royce.com
CORPORATE GOVERNANCE
The Board
The role of the Board Key matters reserved to the Board
The Board is ultimately responsible to shareholders for the The Group’s long-term objectives, strategy
direction, management, performance and long-term and risk appetite
sustainable success of the Company. It sets the Group’s
The Group’s organisation and capability
strategy and objectives and oversees and monitors
internal controls, risk management, principal risks, Stakeholder engagement
governance and viability of the Company. In doing so,
the Directors comply with their duties under section 172 Overall corporate governance arrangements
DIRECTORS’ REPORT
of the Companies Act 2006 (see page 56). including Board and committee composition,
committee terms of reference, Directors’
The Board has established certain principal committees to independence and conflicts of interest
assist it in fulfilling its oversight responsibilities, providing
dedicated focus on particular areas, as set out below. Internal controls, governance and risk
Each committee chairman reports to the Board on the management frameworks
committee’s activities after each meeting. Changes to the corporate or capital structure
In addition to the Board’s principal committees, it has of the Company
established a sub-committee of Directors who each hold Annual Report and financial and regulatory
an appropriate level of UK national security clearance for announcements
the purpose of receiving and considering, on behalf of
the Board, any UK classified information relating to the Significant changes in accounting policies
Group’s programmes and activities. Beverly Goulet, or practices
a US national and independent Non-Executive Director,
Annual budgets and financial expenditure and
also sits on the board of Rolls-Royce North America
commitments above levels set by the Board
Holdings, Inc. to create a link between the Board and
the Group’s North American governance structure. Overview of speak up cases reported through
the Ethics Line
The Board committees
Nominations & Audit Remuneration Safety, Ethics & Sustainability Science & Technology
Governance Committee Committee Committee Committee Committee
Board and committee composition Financial reporting Remuneration policy Product safety Technology strategy
Board nominations Internal controls and Incentive design and setting HSE Cross-sector technology
risk management of targets
Succession planning for Directors Sustainability Technology capabilities and skills
and senior management Internal audit Executive and senior management
remuneration review Ethics and compliance Technology trends and risks
Corporate governance External audit
Workforce remuneration review Oversight of principal risks –
Oversight of principal risk – Oversight of principal risks – and related policies safety, compliance, climate change,
talent and capability business continuity, market and strategic transformation
financial shock, cyber threat
Roles and responsibilities

The roles of the Chairman and Chief Executive are clearly defined and the Board supports the separation of the two roles. The Chairman
is responsible for the leadership and effectiveness of the Board. The Chief Executive is responsible for the running of the Group’s
business and leads the Executive Team which comes together to communicate, review and agree on issues and actions of Group-wide
significance. Non-Executive Directors support the Chairman and provide objective and constructive challenge to management. The Senior
Independent Director (SID) provides a sounding board for the Chairman and serves as an intermediary for the Chief Executive, other
Directors and shareholders when required. The Company Secretary makes sure that appropriate and timely information is provided to the
Board and its committees and is responsible for advising and supporting the Chairman and Board on all governance matters. All Directors
have access to the Company Secretary and may take independent professional advice at the Company’s expense in conducting their duties.
Corporate Governance
Board and committee meetings held in 2019
ST
SE
R ST SE
A ST R R
A ST SE R A A
R NG B R A A R NG NG NG NG
B B B NG B B A B B B B B
January February March April May June July August September October November December
Key
B Board
Denotes unscheduled meeting
R Remuneration Committee R B
NG Nominations & Governance Committee SE Safety, Ethics & Sustainability Committee

A Audit Committee ST Science & Technology Committee
At the end of most scheduled meetings, the Chairman holds The Remuneration Committee also held an unscheduled meeting
meetings with the Non-Executive Directors without the Executive in February to follow up on discussions at the January meeting
Directors or management present. regarding executive reward.
Two additional scheduled meetings of the Audit Committee were Non-attendance
added to the 2019 calendar, one additional meeting ahead of both Board members are sometimes unable to participate in certain
the 2018 preliminary and 2019 interim results, to ensure the Board and committee meetings due to other business commitments.
Committee was appropriately briefed ahead of time. For 2019, attendance was 100% for all directors. However, if any
The Board held an unscheduled meeting in March to review the Directors were unable to attend a meeting, they would communicate
future opportunities for ITP Aero and in October to follow up their opinions and comments on the matters to be considered via
on discussions raised at the meeting in September. the Chairman of the Board or the relevant committee chairman.
Board and committee members and attendance at scheduled meetings in 2019
Nominations & Safety, Ethics & Science &

Board Governance Audit Remuneration Sustainability Technology
(9 meetings) (6 meetings) (7 meetings) (7 meetings) (3 meetings) (4 meetings)
Sir Ian Davis 9/9 6/6
Warren East 9/9
Stephen Daintith 9/9
Lewis Booth 9/9 6/6 7/7 7/7
Ruth Cairnie (stepped down 31 December 2019) 9/9 6/6 7/7 4/4
Sir Frank Chapman 9/9 6/6 3/3 4/4
Irene Dorner 9/9 6/6 7/7 3/3 ¹ 3/3
Beverly Goulet 9/9 6/6 7/7 7/7
Lee Hsien Yang 9/9 6/6 7/7 3/3
Nick Luff 9/9 6/6 7/7 3/3
Brad Singer (stepped down 9 December 2019) 8/8 4/4
Sir Kevin Smith 9/9 6/6 7/7 4/4
Jasmin Staiblin 9/9 6/6 4/4
1 Irene Dorner was appointed to the Remuneration Committee in August 2019. She stepped down from the Audit Committee at the end of 2019.
Board’s focus during the year
Area of focus Key matters considered Outcome
Group purpose Corporate narrative During the year, the Executive Team developed the corporate narrative to further define
and articulate the Group’s purpose – to connect, power and protect society (see page 10).
The corporate narrative aligned with the Group’s vision and strategy and with the Board’s
engagement and focus on ESG issues, as demonstrated through the ESG shareholder event
(see page 78).
Strategy Review of the The Board received regular updates on strategy throughout the year and, in September,
Group’s strategy held a two-day meeting with the Executive Team focused on operational and financial
and acquisition of progress against the Group’s short and long-term plans. The Board received detailed
Siemens’ eAircraft updates on progress with the execution of the transformation programme, particularly with
business the simplification initiatives, cost reduction, skills alignment to future requirements and the
cultural agenda.
DIRECTORS’ REPORT
In May, the Board held its meetings in Bristol, UK at our main UK-based Defence site
and received an update on the Defence business strategy. At that meeting, the Board also
received an update on the Group’s Services strategy across both the Defence and Civil
Aerospace businesses.
The agreement to acquire Siemens’ eAircraft business in June accelerated the delivery
of the Group’s electrification strategy.
Withdrawal from In February, the Board confirmed the decision to withdraw from the competition to power
engine competition Boeing’s proposed middle of the market, or NMA, platform. We were unable to commit to the
for new midsize proposed timetable to ensure we had a sufficiently mature product which would support
airplane platform Boeing’s ambition for the aircraft and which would satisfy our own internal requirements for
(NMA) technical maturity at entry into service. The Board agreed it was important to deliver on the
current engine programmes and focus on the development of new technologies such as our
next generation UltraFan.
Culture Review of the culture The transformation programme has a cultural change agenda at its core and the Board has
change agenda sought ways to track progress and seek feedback on how the behaviours articulated in the
people framework (see page 45) are embedding. This included:
—— presentations from the Group People Director on diversity & inclusion, talent and
succession and the leadership learning, performance management and career
frameworks;
—— feedback from the Employee Champions, much of which was focused on simplification
and leadership of culture change;
—— progress report on the anti-bullying and harassment campaign and training (see page 49);
—— updates on engagement with the UK Trade Unions and European Works Council and their
reactions to restructuring proposals;
—— delivery of the safety agenda;
—— noting of Lord Gold’s final report on the Group’s approach to ethics and anti-bribery
and corruption (see page 109);
—— progress report on the simplification processes (for example, RRMS, finance transformation,
Civil Aerospace transformation);
—— reviews from the Ethics Line;
—— outcome from the employee surveys;
—— feedback from the ‘let’s talk’ engagement sessions led by the Executive Team
(see page 46); and
—— interaction from the Meet the Board, site visits and other engagement sessions
(see page 71).
UK pensions The Board considered the transfer of certain pension risk liabilities to Legal & General
Assurance Society Ltd by the Group’s UK pension trustees which would reduce the Group’s
post-retirement obligations by around £4.1bn (see page 47). In order to complete the
transaction, which the Board agreed was in the best interests of former and current
employees, as well as for the financial strength of the Group, the Board agreed to make
an exceptional cash contribution of around £30m.
The Board also noted the changes to the defined benefit pension scheme for UK managers.
More details of this review can also be found on page 47. The Board also considered issues
that were raised in respect of this review through the Ethics Line (see page 110).
Risk Review of risk The Board reviewed and approved the effectiveness of the Group’s risk management
appetite and principal system and carried out a robust assessment of the principal risks facing the Company, set
risks, with a focus on out on pages 50 to 54, including those that would threaten its business model, future
major product performance, solvency or liquidity. The Board received an update on the effectiveness of
programme delivery. risk management from the Audit Committee in December and agreed with the inclusion of
the risk of climate change to future revenue growth as an additional principal risk. The
During the year
implications of Brexit were kept under review throughout the year. For more information
the Board:
on our approach to emerging risks, including Brexit, see page 50.
—— reviewed
emerging and The Trent 1000 programme was the subject of discussion at each Board meeting
principal risks throughout the year and the risks to the programme and impact on customers were
—— added climate considered at each meeting.
change as a
The Board completed a robust assessment of the Company’s emerging and principal risks
stand-alone
(see page 50).
principal risk
—— set up a It was agreed that it was appropriate to elevate the executive committee looking at data
Board-level data security to a Board-level committee, and this committee, which is a sub-committee of the
security committee Audit Committee, held its first meeting in January 2020.
Operational Civil Aerospace The Business President for Civil Aerospace attended each Board meeting to provide a
performance/ operational delivery business review including progress against key operational milestones. The operations
challenges
programme ramp-up director attended the September meeting to present an in-depth review of the operations
improvement programmes.
Civil Aerospace The Board maintained a strong focus on the operational and technical challenges within the
programme Trent 1000 fleet and worked closely with the Civil Aerospace team to develop a dashboard
challenges of key metrics for review at each Board meeting. A detailed technical update was presented
by the engineering & technology director in December.
Financial Balance sheet review The Board has been focusing on strengthening the balance sheet, retaining the proceeds
Performance from the sale of Commercial Marine and Power Developments; and also from two further
small disposals (see page 16) and on improving the quality and sustainability of our cash
flow, keeping a close watch on our credit ratings.
Payment to The Board is not proposing an increase in the final dividend payment for 2019. This will be
shareholders held flat at 7.1p per share and brings the full payment for the year to 11.7p per share.
Capital allocation The Board also reviewed and agreed its approach and overview of capital allocation which
had been refined as part of the governance model.
Introduction of The Board was assured that the judgements and estimates made in preparation for the
new accounting financial statements were consistent with the new requirements.
standard IFRS 16
Finance Updates were received on progress with: the drive to transform and simplify the reporting
transformation and forecasting processes; and the introduction of Group Business Services, the new
shared services environment that went live from January 2019.
Governance Stakeholder The Board considered how it engaged with all its stakeholders and continued with its own
engagement and programmes, such as the ESG shareholder event, Meet the Board, Employee Champion
governance schedules and individual Non-Executive Director site visits and town hall meetings. Details
can be found in our s172 statement on page 56 and our stakeholder engagement report on
pages 70 to 72.
The Board also reviewed investor feedback following our full and half-year financial results,
feedback from the Ethics Line in August and December, payment practices for the Group’s
subsidiaries, gender pay gap reporting and the Group’s modern slavery statement.
Non-financial The Board considered an updated framework, including core decision rights and the
controls simplification of the RRMS – articulating our freedom within a framework culture (see page 61).
Succession and Succession planning During the course of the year, the Board considered the principal risk relating to talent and
leadership capability and reviewed succession at the most senior levels of the business (see page 77).
Effectiveness of the A light touch external evaluation was undertaken, following on from the comprehensive
Board, Chairman and evaluation in 2018, and it concluded that the Board continued to operate effectively in
Chief Executive 2019 (see page 74). The Chairman and Chief Executive received constructive feedback
on their respective performance.
The Board’s area of focus in 2020 are expected to include:

continued monitoring of financial and operational performance
the safety agenda
the Group’s culture through continued transformation
DIRECTORS’ REPORT
execution of strategic priorities
principal risk reviews
Our Board apprentice programme defined
Participant programme induction
Board member briefing
Assigned to core committee

Board
experience
Audit Safety, Ethics & Science &

Executive Committee Sustainability Technology
leadership
development
Supplementary rotations
Wider learning
opportunities
Employee Environment &

Remuneration Data Security
Stakeholder Sustainability
Committee Committee
Committee Committee
Networking
& mentoring
Additional elements
Two Board mentors and Executive Team sponsor
AGM and Meet the Board event
You can read more about our

Board apprentice programme Masterclasses and networking opportunities
on pages 71 and 77.
Stakeholder engagement
At Rolls-Royce, we understand that who we are and how we behave The table below identifies some of our stakeholders and how both
matters not only to our people but to the many stakeholders who the Company and the Board engage with them. More details can be
have an interest in our business. We believe that stakeholder found on www.rolls-royce.com. The Board considers the different
engagement remains vital to building a sustainable business and stakeholder groups and our engagement programmes and
we interact with many stakeholders at different levels of the identifies opportunities for strengthening both its relationships and
organisation. Engagement is carried out by those most relevant understanding to facilitate the decisions and contributions made
to the stakeholder group or issue. by the Board to the success of the business.
Customers The Board recognises that the quality of the Group’s customer relationships is based on mutual trust as well as its
engineering expertise. In April, Sir Ian Davis and Lee Hsien Yang travelled to China for meetings with customers,
both existing and prospective. In October, Sir Frank Chapman and Irene Dorner met with customers during their
visit to Singapore. Sir Ian Davis also met with Airbus in both November and January 2020 to support the Executive
Team in their dialogue with them. The sale of the Group’s Commercial Marine business to KONGSBERG, completed
on 1 April 2019, and the importance of maintaining strong relationships with them was noted and discussed by the
Board as KONGSBERG became the largest customer of the Power Systems business. The Board regularly receives
operational updates, including customer metrics and feedback, from each of the businesses at every meeting with
the Business Presidents regularly presenting to the Board. During the operational challenges experienced by our
affected airline customers as a result of the in-service issues with the Trent 1000, the Board has kept very close to
our customer engagement throughout the year and received specific feedback from the Civil Aerospace Business
President on the issues and mitigation plans and their impacts on our customers, which greatly influenced the
Board’s deliberations and support for the Executive Team when considering:
our strategy and the transition of technologies, capabilities, resources and value to meet our business horizons
(see page 10)
increasing our stock of spare engines and accelerating growth in our MRO network (see page 8)
future technologies, specifically our withdrawal from the competition to power Boeing’s NMA platform,
enabling us to focus on the development of innovating new technologies, such as UltraFan (see page 26)
and accelerating our electrical strategy (see page 11)
product safety and asset integrity throughout the transformation (see page 107)
the introduction of a new balanced scorecard of metrics for each business which would demonstrate whether
we are meeting our commitments to our customers across our businesses (see page 15)
key auditing judgements and estimates in respect of customer loss-making contracts and restructuring costs
as a result of the Trent 1000 in-service issues (see page 82)
Investors The Investor Relations team is in constant dialogue with investors and reports regularly to the Board on
shareholder feedback, especially post results. The Chief Executive and Chief Financial Officer, supported by
members of the Executive Team, meet with investors, following both the preliminary and interim results, as well
as at various times throughout the year. We held an event in April for our institutional investors focused on
environmental, social and governance (ESG) matters which was very well received. The Chairman, together with
the relevant committee chairmen, the Company Secretary and one of our Board apprentices, provided insights
into our ESG initiatives which were followed by engaging and interactive sessions in smaller groups. In addition,
Ruth Cairnie and Irene Dorner met with a number of shareholders as part of the consultation on our remuneration
policy. The Chairman, Senior Independent Director and members of the Board make themselves available to meet
with institutional investors when requested and the Board hold our AGM in different locations in order to reach a
wider shareholder base. We recognise the importance of our investors as a key stakeholder in our discussions and
ensure that we are able to create confidence in our Company through:
financial performance and the economic impact of our decisions
robust governance and transparency of reporting
delivering a sustainable, stable and predictable performance
OUR BOARD
APPRENTICES
Our current Board apprentice
cohort comprises six individuals
from different parts of the Group
including Civil Aerospace,
Defence, corporate functions
and one of our joint ventures.
They are based in France,
Singapore, US and UK and have
DIRECTORS’ REPORT
been selected through our talent
and succession process. We
intend to extend this successful
programme to a third cohort
which will start during the
course of 2020. You can read
more about how the programme
operates on pages 69 and 77.
Employees The Board recognises that it is through our people that we fulfil our potential, achieve our vision and execute our
strategy. For this reason, we take the role of Employee Champion very seriously to ensure there is a voice of the
employees in the boardroom. Irene Dorner has continued in her role as Employee Champion for a third year and
meets with employee groups and attends employee stakeholder engagement meetings. Irene has a programme
of events which, during the year, included attendance at: the launch of EAST, our Asian employee resource group;
two UK Council meetings; a meeting of our local ethics advisers; a meeting with the ethics and compliance and
case management teams; the diversity & inclusion and sustainability focus groups in Singapore; and an event
hosted by PRISM, our LBGT+ employee resource group on how to make the workplace more inclusive. Irene also
has regular dialogue with the Group People Director and together they review the outcomes from the employee
surveys and Ethics Line reports. Irene can be contacted by any employee by email. Beverley Goulet also
continued in her role as the Board’s Employee Champion for our North American employees, this year
concentrating on our smaller sites, holding roundtables with groups of employees at each one. The Board
Champions are supported by an employee stakeholder engagement group where we discuss what we have learnt
and plan future schedules. Having now run this programme for a few years, we are considering ways to develop it
further. This will include a three-year programme of meetings and events to reach across all our employee groups
and to engage with more employees in planning how the programme is structured.
Irene and Beverly regularly provide feedback to the Board on employee topics of interest and/or concern.
The direct link that they provide between the employees and the Directors is proving to be extremely valuable,
particularly through this period of extensive change. The main themes that they reported this year were on
transformation and culture; the importance of the relationship with the UK unions; progress with the anti-bullying
and harassment campaign; leadership capability; communications; and stress and mental wellbeing. Irene and
Sir Frank Chapman also requested a report from the head of ethics and compliance on the proposed changes
to the UK defined benefit pension scheme (see page 110).
During the year, our now regular Meet the Board event was held in Bristol, UK and smaller town hall events were
held in Singapore, Hong Kong, Beijing and Xi’an, China. We also held a ‘Yammer’ session with Lewis Booth and
Stephen Daintith during which any employee could ask questions live, online. The Directors take every
opportunity to meet with local employees when visiting different business locations. For example, when visiting
Dahlewitz, Germany three of our Non-Executive Directors took the opportunity to have lunch with a group of our
high-potentials and young engineers.
The Board discusses employee relations regularly and this year, particularly, in relation to transformation and
the culture agenda. As can be read in the People and Culture report (pages 45 to 48) and the committee reports,
the Board reviews both the behaviours and statistics on safety and diversity & inclusion as well as the talent
management agenda at all levels across the Group. Finally, when considering M&A activity, the Board always
remains mindful of any impacts on employees.
Partners The Group’s global supply chain is a vital contribution to its performance, with significant investment in resources to
ensure the complex global supply chain is resilient and efficient. Suppliers’ interests are considered as part of the
Board’s discussions on manufacturing strategy and when reviewing specific projects. Critical suppliers are, of course,
considered as part of the assessment of the business continuity risks. The Board supports our Executive Team who
work collaboratively with our suppliers to continue to improve operational performance through various means:
Sir Kevin Smith’s ongoing meetings with companies in our supply chain to hear their views first hand
the Board’s assessment of the business continuity risk including critical suppliers (see pages 51 and 80)
a full review of the Group’s supplier payment terms as part of the decision to withdraw from the UK
Government’s prompt payment code following a change in the assessment approach. This in no way changes
the Group’s demonstrable commitment to the fair and appropriate treatment of all our suppliers
endorsement of our global supplier code of conduct which sets out the behaviours, practices and standards
we expect to see demonstrated and complied with, together with our associated certification and risk
monitoring processes (see page 49)
availability of our value chain competitiveness improvement framework to our industry partners, providing a
suite of lean, best practice principles and tools required to operate and improve manufacturing value chains
(see www.rolls-royce.com)
Communities On their site visits, Directors will meet with relevant community groups whenever possible and will engage with
certain community programmes should they be requested to do so. Irene Dorner and Beverly Goulet will always
take the opportunity to meet with relevant community groups as part of their roles as Employee Champions.
Details of the Group’s outreach in 2019 are set out on page 46 and include:
STEM activities, including the Rolls-Royce Schools Prize for Science & Technology at the Science Museum
in London, UK, attended by both Sir Ian Davis and Irene Dorner
investments, both time and money, in communities local to our operations, with all employees encouraged
to commit Company time to community and STEM projects
Governing bodies The Board recognise the importance of governments and regulators as stakeholders. Not only are governments
and regulators across the world customers but they also support the Group’s investment in infrastructure and technology.
The focus on regulators benefits from the previous experience of Lee Hsien Yang, having been chairman of the
Singapore CAA. The General Counsel provides regular updates to the Board on compliance with regulators and
the Safety, Ethics & Sustainability Committee discusses how the business engages with airworthiness regulators
as well as receiving updates on the continuing dialogue and co-operation with prosecutors, regulators and
government agencies. The Board is updated on the Group’s engagement with the tax authorities and the related
regulatory landscape is discussed by both the Board and the Audit Committee. In addition, meetings with
ministers and senior officials are held as relevant throughout the year, with the Chairman supporting the
Chief Executive’s engagement programme at various airshows. Of particular note during 2019:
Lewis Booth and Pamela Coles met with Sir Donald Brydon to discuss his independent review on the quality and
effectiveness of audit in the UK market
Irene Dorner and Pamela Coles met with the Trades Union Congress, ‘the voice of Britain at work’, to share ideas
on employee engagement initiatives in large corporates
Sir Ian Davis and Lee Hsien Yang held meetings with HM Ambassador to the People’s Republic of China (PRC)
and the Ministry of Industry and Information Technology of PRC to gain a perspective on relations between
the UK and China and to discuss the Group’s strategic direction
both Sir Frank Chapman and Irene Dorner travelled to Singapore in September and met, amongst others,
with the Economic Development Board and the British Chamber of Commerce
the creation of a government relations centre of excellence, as part of the transformation programme, to bring
together the global government relations team into a community to shape how government relations are
delivered and how it adds value for the Group
Board induction and development George Culmer was appointed to the Board in January 2020 and
at that time joined the Nominations & Governance, Audit, and Safety,
The Chairman and Company Secretary arrange a comprehensive, Ethics & Sustainability Committees. Since his appointment, he has
tailored induction programme for newly-appointed Non-Executive embarked on his induction programme and met with members of the
Directors, which includes dedicated time with the Executive Team Executive Team. George has visited Civil Aerospace in Derby, UK and
and senior management and scheduled trips to business operations. will be visiting both Defence in Bristol, UK and Rolls-Royce Power
The programme is tailored based on experience and background Systems in Friedrichshafen, Germany in early April 2020.
and the requirements of the role.
It is important that the Directors continue to develop and refresh
All Directors visit the Group’s main operating sites as part of their their understanding of the Group’s activities. To facilitate this, the
induction and are encouraged to make at least one visit to other sites Board met local management at its meeting in May in Bristol, UK.
each year throughout their tenure. In 2019, Board members visited More detail of the Board’s engagement with its stakeholders is set
locations including: Dahlewitz and Friedrichshafen, Germany; Derby out on pages 70 to 72.
and Bristol, UK; Pascagoula, Novi and Mankato, US; Beijing, Xi’an
and Shanghai, China; Hong Kong and Singapore. We regard these It is also important that the Directors regularly refresh and update
site visits as an important part of continuing education as well their skills and knowledge and receive relevant training when
DIRECTORS’ REPORT
as an essential part of the induction process. They help Directors necessary. Members of the Board also attend relevant seminars,
understand the Group’s activities through direct experience of conferences and training events to keep up-to-date on developments
seeing processes in operation and by having discussions with a in key areas.
range of employees.
Board induction programme for George Culmer
Timing People to meet Key topics covered
Within first Chairman Overview of the Board

three months Nominations & Governance Committee
Committee chairmen Overview of committees
Plan of work for the year
Current issues
Chief Executive Business model
Current strategic priorities
Opportunities/risks
Current issues
Chief Financial Officer Finance, treasury, M&A and tax overviews
Budget
Accounting issues
Company Secretary UK Corporate Governance Code and directors’ duties
UK listed company requirements
Rolls-Royce framework
Board arrangements and meeting dates
Executive Team members and senior Overview of each area of responsibility, including:
management —— markets and competition
—— operational and financial performance including KPIs
—— functional responsibility
—— current issues
Internal and external auditors Audit report and findings
Financial and non-financial controls
Accounting judgements
Board effectiveness
Stages of the Board and committee
Board and committee review effectiveness review
In 2018, having undertaken both benchmarking and tender
exercises, Belinda Hudson Limited (BHL), expert in enhancing July
Briefing and
board effectiveness, was appointed for a three-year term to
areas of focus
undertake our externally-facilitated effectiveness reviews. BHL’s identified
appointment was based on cultural fit, the research that BHL had December July to
undertaken which highlighted the areas that needed addressing, Priorities and
action plans
1 September
Review of
and commercial competitiveness. BHL had no other connection
agreed for Board and
with the Company nor its Directors. the Board
and each
6 2 committee
papers and
Following a comprehensive review in 2018, a slightly less in-depth committee attendance
review was conducted in 2019. As in 2018, it covered Board at meetings
composition and dynamics, the Board’s role and the Board at work
but with particular focus on those areas identified as requiring
further development during the previous year’s review. December
Board
5 3 September
One-to-one
The effectiveness of each of the Board’s committees was taken into discussion discussions
account as part of the evaluation. with BHL
4 with Board
members
This review took the form of: confidential one-to-one discussions and senior
October management
between BHL and members of the Board and several senior Results evaluated
management executives; and BHL’s attendance at the Board’s and report
two-day meeting in September to review the Group’s operational compiled
and financial performance. The Board discussed the findings of the
report at its meeting in December which BHL attended. BHL has
reviewed and agreed this disclosure of Board effectiveness.
any management present to discuss the performance of the Chief
At a private meeting of the Non-Executive Directors, Executive. The meetings concluded that both the Chairman and
Sir Kevin Smith, Senior Independent Director, led a review the Chief Executive continued to be effective and constructive
of the Chairman’s performance without the Chairman present. feedback was shared with each of them.
The Nominations & Governance Committee also met without
Progress on key areas
Areas of focus Focus for 2019 Progress in 2019 Focus for 2020
Board composition Continued focus on the Board The 2019 evaluation concluded that The Board could be clearer in
and dynamics succession programme and skills one of the Chairman’s strengths is the communication of their
matrix together with a review of his approach to Board composition priorities and expectations with
the composition of the Board’s and succession planning and that the Executive Team.
committees to maximise co-ordination Rolls-Royce has the ability to
across their respective duties and attract very strong candidates
to prepare for future Board changes. as Non-Executive Directors.
The Board’s role With engagement from different The evaluation showed that the Continued close scrutiny of the
parts of the business, a agendas have been well structured plans and risks relating to the
restructuring update to be throughout 2019 and the focus transformation programme. There
provided at each Board meeting has shifted to the necessary issues. is scope for the Board to add more
with a watchful eye on the cultural value as the focus is increased on
impact as the transformation strategic issues and opportunities.
programme continues to be
embedded across the Group.
The Board at work Emphasis on the co-ordination The quality of the information Continued support and linkage
of agendas and papers between provided to the Board has between the work of the
the Board and its committees and improved during 2019, particularly Executive Team and the Board
the Executive Team to strengthen for the operational and financial to ensure they are aligned
further the linkage and review day in September and on for success.
feedback mechanisms. the competitive environment.
The evaluation also identified that
the work of each of the committees
remained effective.
Nominations & Governance Committee Report 75
NOMINATIONS & GOVERNANCE

Other attendees
In addition to the members of the Committee, the Chief Executive
attends when it is considered appropriate.
Committee evaluation review
Belinda Hudson Limited (BHL) was appointed for a second year
to undertake a light touch review of the Board and committees,
following a full review in 2018. The effectiveness review process of
the Board and its committees is discussed in greater detail on page
74 together with overall findings.
Principal responsibilities
SIR IAN DAVIS
Chairman of the Board and committee composition
Nominations &
Review the structure, size and composition of the Board and
Governance Committee
its committees regularly.
DIRECTORS’ REPORT
Evaluate and consider the Directors’ conflicts of interest.
Key highlights
Re-appointment of Sir Ian Davis and Lee Hsien Yang, each Board nominations
for a further three-year term Recommend new appointments to the Board.
Appointments of George Culmer and Dame Angela Strank Oversee the induction plans, training and site visits for
as Non-Executive Directors the Directors.
Updated framework Succession planning
Diversity & inclusion and career framework reviewed Consider succession plans for Directors and senior management.
Oversee the development of a diverse pipeline for succession.
Review implementation of diversity & inclusion policy.
Introduction
The Committee ensures that the composition of the Board is
Evaluation of Chairman, Chief Executive and
appropriate and relevant so that the Board is in the best position Non-Executive Directors
to oversee operational performance and to drive the Group’s Evaluate annually the Chairman and Chief Executive.
strategy. We have considerably improved Executive Team succession Review the independence of the Non-Executive Directors.
with a broader list of credible successors with improved diversity.
Corporate governance
The Committee also keeps the Group’s corporate governance Review the Group’s global governance framework.
arrangements under review. We strive to take an innovative approach
Keep up-to-date with the changing governance landscape
in all that we do and that includes our approach to governance.
and report on the Group’s corporate governance practices.
During the year, we updated our framework expanding it to include
our core decision rights and the restructuring of our RRMS, aligning Principal risk
and simplifying them as part of the Group’s transformation programme Talent and capability.
and the articulation of our freedom within a framework culture. We
have continued with our Meet the Board events, with a very well
Areas of focus for 2020
attended meeting in May following our AGM as well as smaller events
scheduled for when the Non-Executive Directors are visiting our Culture and behaviour
sites. Our Board apprentice programme has matured and we have Internal governance – embedding the changes
just completed our third year since the introduction of our Board
Board succession
Employee Champion role. In April, we held a very well attended
ESG event for our investors. Diversity & inclusion
Membership and operation of the Committee

All members of the Committee are independent Non-Executive
Directors. Our biographies are on pages 62 to 64 and meeting
attendance is on page 66. No Director attends discussions relating
to their own appointment.
The Committee’s responsibilities are outlined in its terms of
reference which can be found at www.rolls-royce.com. We review
these annually and refer them to the Board for approval. No
changes have been made in 2019. This follows a detailed review
in 2018 to ensure alignment with the principles of the Code.
Nominations & Governance Committee Report
Nominations & Governance Committee focus during 2019

Area of focus Matters considered Outcome
Culture and Employee champion update. Irene Dorner, in her role as Employee Champion, reported
behaviour and on her meetings with the UK Council and on the relationships
employee
engagement
with the UK Unions as well as the views across the middle
management population on simplification and restructuring.
Beverly Goulet also reported on her increasing activities
across North America.
Career and governance framework reviews. When reviewing the work in these areas the Committee
particularly considered the impact of the changes on
culture and behaviours.
Diversity & Update on diversity & inclusion (D&I). The Committee received a detailed update on the work on
inclusion our D&I agenda across the Group. You can read more about
our diversity & inclusion programmes on pages 47 and 48.
Oversight of The principal risk is considered when discussing The Board met in full to review talent and capability as
principal risk – talent talent and capability. development of our leaders is critical to ensuring the right
and capability
culture and behaviours are embedded; and to ensure we
maintain the right skills and capability for future growth.
Board and Reviews of the composition of the Board and The Committee considers the current skills, experience and
committee committee membership. tenure of the Directors and assesses future needs against
composition
the longer-term strategy of the Group and recommended
the re-appointment of Lewis Booth for a further year to
provide continuity of support to the Audit Committee,
as set out on page 77.
Board Re-appointment of the Chairman for a further Following individual reviews of the Chairman and
nominations three-year term. Lee Hsien Yang the Committee satisfied itself that both
continued to be committed and effective.
Re-appointment of Lee Hsien Yang as a
Non-Executive Director. The Committee gave particular consideration to the
appointment of Irene Dorner as Chairman of the
The appointment of Irene Dorner as Chairman of
Remuneration Committee (see pages 59 and 60).
the Remuneration Committee.
Members of the Committee were involved in the interview
The appointments of George Culmer and Dame
process for the two new Non-Executive Directors and
Angela Strank as Non-Executive Directors.
the Committee recommended the appointments of both
George Culmer and Dame Angela Strank to the Board.
More detail can be found on page 77.
Succession Progress on succession planning. The Committee focused primarily on the approach to
planning Executive Team succession and also received a detailed
presentation on the people framework. (See page 45).
Consideration of the Board composition. The Committee gave particular consideration to the
composition of the Board through to the AGM in 2021.
(See page 77).
Evaluation of Annual review of the effectiveness of the Feedback from the evaluations was shared directly with the
Chairman, Chief Chairman and the Chief Executive, led by Chairman and Chief Executive and the Chief Executive’s
Executive and
Non-Executive
the Senior Independent Director and the objectives for 2019 were agreed.
Directors Chairman respectively.
The review concluded that all Non-Executive Directors
Annual review of whether the Non-Executive remained independent.
Directors remained independent, in accordance
with the Code.
Corporate The Committee approved the updated The Committee approved amendments to the Group’s
Governance governance framework and Group policies. governance framework which had been enhanced
considerably to articulate the freedom within a
framework culture (see page 61).
The Committee considered the key trends in UK governance
and the appropriate responses to them for Rolls-Royce.
Nominations & Governance Committee Report 77
Board and committee composition Committee and approved by the Board in advance. For instance,
during the year consideration was given to the appointment of
Both Brad Singer and Ruth Cairnie stepped down from the Board in Irene Dorner as chair-designate of Taylor Wimpey. As part of the
December 2019. Since Ruth’s departure, this temporarily reduced the Board’s discussions, we considered all of Irene’s appointments and
number of women on the Board to three. However, we have recently ensured they were not outside the parameters set by ISS, which the
announced that Dame Angela Strank will join the Board from 1 May Board has found to be a useful gauge when discussing whether there
2020. We currently have one person of colour on our Board. is potentially any impact on Directors’ time commitment when taking
Irene Dorner was appointed as Chairman of the Remuneration on additional external appointments. It was noted that Irene had
Committee with effect from 1 January 2020, having joined that always maintained an excellent level of attendance at both Board and
committee in August 2019. You can read more about our committee meetings during her tenure as well as embracing fully her
rationale for that appointment on page 59. role as Employee Champion. The Board concluded that Irene would
be able to continue to allocate sufficient time to Rolls-Royce. They
Lewis Booth will have completed nine years on the Board in therefore approved the appointment.
May 2020 and will step down as Audit Committee Chairman at
that time. However, the Committee recommended to the Board The Company Secretary ensures that new Directors have a
thorough and appropriate induction programme. More detail about
DIRECTORS’ REPORT
that he remain as an independent member of the Board and as
an Audit Committee member. He will provide continuity of support inductions and continuing development can be found on page 73.
to Nick Luff as he takes over as Chairman of the Audit Committee
following the 2020 AGM, particularly at a time of continuing
Succession planning
transformation in the finance function. The Committee regularly reviews succession planning at Board,
Executive Team and senior management levels. The Committee
The Committee also agreed to recommend to the Board that
plays a vital role in promoting effective Board and leadership
Sir Frank Chapman remains as a Director and Chairman of our
succession, making sure it is fully aligned to the Group’s strategy.
Safety, Ethics & Sustainability Committee, noting that his nine-year
term is currently due to end in November 2020. We consider that This year, the Board considered the principal risk relating to talent
he will remain independent and we value his significant support for and capability and reviewed succession at the most senior levels
our safety, ethics and sustainability agenda. of the business including a number of business-critical roles. The
talent process emphasises the need for individuals to have a
Subject to shareholder approval at the 2020 AGM, both Lewis and
balance of judgement, drive and influence and the importance
Sir Frank will step down from the Board no later than the 2021 AGM.
of ensuring that the desired culture and behaviours continues
Board nominations to be embedded. We were pleased to note the considerable
improvement in succession plans, following the increased focus on
In February 2019, the Committee recommended to the Board the leadership talent and the succession pipeline in 2018. The Board
re-appointment of Sir Ian Davis as Chairman for a further three-year also recognised the importance of maintaining the right skills and
term. This followed the annual evaluation that was carried out by capability for future growth.
Sir Kevin Smith, Senior Independent Director, and was the subject of
a thorough review as it is Sir Ian’s third three-year term. In December
Board apprentice programme
Our Board apprentice programme is now in its third year. Six
2019, following a detailed review, the Committee also recommended
individuals from different areas of the Group were selected for the
to the Board the re-appointment of Lee Hsien Yang for a third
18-month programme via the talent and succession process. The
three-year term.
purpose of the programme is to provide these individuals with
Prior to making any new appointments to the Board, the Committee leadership development experience and demonstrate our
considers the skills and attributes required and, together with the commitment to their career progression and development as
Chairman, agrees a Non-Executive Director profile. The Committee leaders in the organisation.
also provides input into a shortlist of candidates for the role.
Each apprentice joins two Board committees, attending each one
As announced in November 2019, George Culmer was appointed as for nine months. In addition to this, they are able to participate in
a Non-Executive Director with effect from January 2020. George is supplementary committees to broaden their experience, attend
a member of the Nominations & Governance Committee, Audit masterclasses on a variety of board-relevant topics and take
Committee, its Data Security Committee and the Safety, Ethics advantage of frequent networking opportunities. Throughout the
& Sustainability Committee. programme, each apprentice is mentored by two Board members
and sponsored by an Executive Team member as well as attending
We have also recently announced the appointment of
one-to-one sessions with the Chief People Officer. At the end of the
Dame Angela Strank who will join the Board on 1 May 2020 as
programme, they will have an opportunity to provide feedback in
a Non-Executive Director and a member of the Nominations &
a reverse-mentoring session with the Board (see page 69).
Governance Committee, the Safety, Ethics & Sustainability
Committee and the Science & Technology Committee. Diversity & inclusion
Both George and Dame Angela met with the Chairman and a number D&I continues to be an area of focus for the Board and for the
of other Non-Executive Directors as well as the Chief Executive and Group as a whole. We support and monitor Group activities to
the Chief Financial Officer. You can read the full biographies for increase the percentage of senior management roles held by
George and Dame Angela at www.rolls-royce.com. women and other under-represented groups across the
For both appointments, the Committee appointed MWM Consulting. organisation. In April, the Committee was updated on the Group’s
MWM Consulting has signed up to the voluntary code of conduct approach to D&I.
for executive search firms and had no other connection to the We fully recognise that diversity in our Executive Team needs to
Company or its Directors during the year. be improved. However, we are pleased to see that we have a broader
As required under the Code, any additional external appointments list of credible successors with improved diversity for this team
taken up by Directors during the year were considered by the
Nominations & Governance Committee Report
Board diversity policy

Objective Progress
All Board appointments will be made in the context of the skills The Committee regularly reviews the composition of the Board.
and experience that are needed for the Board to be effective.
Maintain a balance so that, as a minimum, one third of the The chart on page 62 shows that the current percentage of women
Directors are women. on the Board is 25%. Following the appointment of Dame Angela
Strank, effective from 1 May 2020, the percentage of women on our
Board will be 31%. Our long-term aspiration is to meet and exceed
the recommended voluntary target of 33%.
Support and monitor Group activities to increase the percentage Improving D&I remains a priority. We tracked progress
of senior manager population * roles held by women and other against four areas: leadership and governance; attraction and
under-represented groups to 25% by 2020. (See our current recruitment; retention; and development. We were particularly
statistics on page 48). pleased to note the strong progress made in attracting and
recruiting more diverse people and the increase
in the number of females in the ELG year-on-year.
Monitor, challenge and support internally-set targets for The charts on page 62 provide a clear picture of our Board
D&I at all levels across the organisation. diversity. Progress against our 2020 diversity targets across the
Group are set out on page 48. We will set new targets out to
2025 during the course of 2020.
* Senior manager population is calculated as Executive Team and ELG. This population comprises 94 individuals, 19 (20%) are female. Senior management is described in the Code
as the Executive Team, the Company Secretary and their direct reports. This population comprises 82 individuals, 21 (26%) are female. We have excluded administrative personnel
and technical assistants from these numbers.
You can find the full policy at www.rolls-royce.com
(see page 47). More on our D&I strategy can be found on page 47 parameters within which our businesses are expected to operate.
and progress against our 2020 targets on page 48. Our original governance framework has now been incorporated
within the framework and is part of the way the whole Group operates.
Our Board diversity policy remains unchanged and we continue to
This includes the introduction of a decision rights model, moving
ensure it remains in line with best practice. We continue to promote
decisions as close to activity as possible.
an inclusive and diverse culture and the Committee reaffirmed our
aspiration to meet and exceed the recommended voluntary target The framework is also the governance mechanism for our
of 33% of Board positions being held by women, while recognising subsidiary companies and our response to the Wates principles.
that we will fall short of this target for a temporary period. We have Extracts from the framework are available on the website at
always recognised that there may be periods of change on the www.rolls-royce.com.
Board where we may fall short of our stated aim for periods of time
You can read more about our framework on pages 60 and 61.
while the Board is refreshed.
Governance Conflicts of interest and independence

We continue to monitor and note potential conflicts of interest that
We have kept under review the enhancements put in place in 2018 to
each Director may have and recommend to the Board whether these
ensure we meet both the regulation and the spirit of the new Code.
should be authorised and whether any conditions should be attached
In 2019, we held another successful Meet the Board event, this time to such authorisations. The Directors are regularly reminded of their
in Bristol, UK and the Non-Executive Directors held town hall sessions continuing obligations in relation to conflicts and are required to
while on site visits in China, Hong Kong, US and Singapore. Irene review and confirm their external interests at least annually. This
Dorner and Beverly Goulet continued in their roles as Employee helps us to determine whether each of them continues to be
Champions. More can be read about their activities on page 71. considered independent.
We also held our first ESG-focused event with presentations to During the year, no additional conflicts of interest were identified
investors and their governance teams from the Chairman, chairmen and the Committee advised the Board that it considered each of the
of each of our Board committees, the Company Secretary, Chief Non-Executive Directors to be independent.
Technology Officer, Chief People Officer and one of our Board
apprentices. Subjects covered included: the environmental impact Looking forward
of our products; electrification; sustainability; D&I; the Board
The Committee has made strong progress in a number of areas,
apprentice programme; culture; and employee engagement. This
particularly improving our internal governance and in ensuring
was followed by Q&A sessions in smaller groups on ESG issues.
our activities align with our ambitions for our desired culture and
Feedback from those who attended was very positive.
behaviours. We have made good progress on our D&I agenda but
The Committee spent some time during the year considering the still have further to go. We will continue to work to ensure our
improvements being made to the Group’s internal governance governance initiatives aspire to be best in class and use our
arrangements. The framework has been expanded into a number innovation in this area to align our governance with the best
of areas since first being introduced in 2016 and the RRMS has been interests of the Group as a whole, while remaining thoughtful and
the subject of significant review and simplification, while ensuring appropriate for all our stakeholders.
our critical processes are safeguarded. We have an internal
Sir Ian Davis
concept of freedom within a framework, an articulation of the
Chairman of the Nominations & Governance Committee
Audit Committee Report 79
AUDIT
Directors. For the purposes of the Code and DTR 7.1, George Culmer,
Beverly Goulet, Nick Luff and I have recent and relevant financial
experience. The Board has confirmed that it believes the Committee
as a whole has competence relevant to the Company’s sector. Our
biographies are on pages 62 to 64 and our meeting attendance
is shown on page 66.
The Committee’s responsibilities are outlined in its terms of reference
which can be found at www.rolls-royce.com. We review these annually
and refer them to the Board for approval. No changes have been made
in 2019. This follows a detailed review in 2018 to ensure alignment
with the principles of the Code.
LEWIS BOOTH Other attendees

Chairman of the In addition to the members of the Committee, the Chairman,
Audit Committee
Chief Executive, Chief Financial Officer and any of the Non-Executive
DIRECTORS’ REPORT
Directors may attend one or more meetings at the Committee
Key highlights Chairman’s invitation. The Committee is supported by the General
Counsel, the corporate governance director, the group controller,
IFRS 16 embedded
the head of group reporting, the director of risk and internal audit
Trent 1000 exceptional charges and the external auditors.
Focus on assessment of onerous contracts
Recognition and recoverability of deferred tax assets Belinda Hudson Limited (BHL) was appointed to undertake a light
Focus on risk management and internal control systems, touch review of the Board and committees for a second year,
including cyber security following a full review in 2018. The effectiveness review process of
the Board and its committees is discussed in greater detail on page
74 together with the overall findings.
Introduction Principal responsibilities
I am pleased to present the 2019 report of the Audit Committee
which describes how the Committee has carried out its Financial reporting
responsibilities during the year. This will be my last report as the Financial announcements, focusing on: accounting policies,
Chair of the Audit Committee and I know I will be leaving the judgements and estimates; inclusion of appropriate disclosures;
Committee in Nick Luff’s good hands. I would like to thank the compliance with relevant regulations; and whether the Annual
members of the Committee, the executive management team and Report is fair, balanced and understandable.
the external auditors for the open discussions that take place at our
meetings and the importance they all attach to its work. Risk and control environment
Monitor the effectiveness of the risk management and internal
We have had a number of key issues to consider in 2019, control systems.
most significantly: Review concerns of financial fraud.
—— key judgements and estimates in accounting for the Trent 1000
in-service issues and provisions made in respect of customer loss Principal risks
making contracts and restructuring costs; Business continuity, market and financial shock and
IT vulnerability.
—— assessment of the recognition of UK deferred tax assets;
Internal audit
—— the balance sheet position of the Group and enhanced cash Scope, resources, results and effectiveness.
disclosures;
—— presentation of the impact of the pension buy-out in the UK;
External audit
Relationship with, and effectiveness of, the external auditor.
—— judgements in respect of various M&A activity in the year; Approve the external auditor’s terms of engagement and fees.
—— the carrying value of investments, tangible and intangible assets;
and Areas for focus in 2020
—— the adoption of the new leasing standard, IFRS 16. continuing oversight of the risk management and internal
control environment
The Audit Committee also participated in a number of deep dives
focused on long-term contract accounting judgements and through our Data Security Committee, reviewing our principal
finance transformation. risk: cyber threat
supporting risk owners to assess the effectiveness of mitigating
Membership and operation of the Committee controls
In addition to myself, members of the Committee are George Culmer, assessing the impact of changing regulation on our risk
Beverly Goulet, Lee Hsien Yang and Nick Luff. Irene Dorner served management plans
as a member of the Committee during the year, stepping down in keeping appraised of any developments with the audit reforms
December 2019. George Culmer joined the Committee on 1 January in the UK
2020. All members of the Committee are independent Non-Executive
Audit Committee Report
Audit Committee focus during 2019
Financial The appropriateness and disclosure of accounting policies, The accounting policies, judgements and estimates
reporting key judgements and key estimates with a focus on: are appropriate and balanced.
—— the methodology for the identification of abnormal Agreed the judgements and estimates to adopt
costs on the Trent 1000 programme; IFRS 16 and the assessment of the impact included
—— assessment of the costs to be included in the on page 82.
assessment of customer contract losses, in particular
Confirmed the accounting policies, judgements
the determination of which costs are incremental to
and estimates are appropriate and balanced. As
the customer;
part of enhancing our disclosures we have provided
—— recognition and disclosure of restructuring costs; additional information with regard to the sensitivity
—— judgements and estimates necessary to assess the of the estimates to changes in key assumptions.
recoverability of the UK deferred tax assets; These are summarised in note 1 to the Consolidated
—— the accounting for M&A activity in the year including Financial Statements.
the disposal of Commercial Marine, North America
Reconciliations of APMs to their statutory equivalents
Civil Nuclear business and the acquisition of
are set out in notes 2 and 28 to the Consolidated
Siemens’ eAircraft business;
Financial Statements.
—— accounting for the pension buy-in/buy-out in the UK;
—— assessing the recoverability of tangible and intangible Reviewed the additional information that has been
assets with a specific focus on programme intangible made in respect of our assessment of the carrying
assets in Civil Aerospace and the carrying value of the value of the Company’s investment in its subsidiaries.
investments the Company holds in the underlying Group; Satisfied ourselves with the adequacy of disclosures in
—— assessing the balance sheet position of the Group respect of cash generation. See notes 1, 14 and 18
and the transparency of our disclosures in respect to the Consolidated Financial Statements.
of cash generation; and
—— adopting IFRS 16 Leases. Reported to the Board that the Annual Report, taken
as a whole, is fair, balanced and understandable.
The implementation project for IFRS 16. In particular,
the preparation of the restated information on an
IFRS 16 basis which is included in note 1 to the
Consolidated Financial Statements.
The form and content of the Annual Report with a
specific focus on APMs and their reconciliation to
statutory numbers.
Risk and control Improvements in the approach to risk management Recognised improvements in the analysis of risk
environment and internal control systems, including in relation to appetite, risks at remote sites and increased focus
financial reporting controls. on emerging risks, and identified areas for future
improvements, including in relation to financial
The processes for identifying and managing risks.
reporting controls.
The effectiveness of the Group’s risk management and
Satisfied ourselves that the processes for identifying
internal control systems.
and managing risks are appropriate and that all
The progress against the commitments under the DPAs principal risks and mitigating actions had been subject
as they relate to financial reporting. to a detailed review by the Board or a Board committee
during the year.
The process and assumptions underlying the going
concern and viability statements. Reported to the Board that an appropriate process
is in place to make the going concern and viability
statements. Particular attention was given to the going
concern status of the Group’s material subsidiaries.
2019 Principal risks Management’s assessment of the risk of, and activities Processes and plans are in place to manage the risks
to manage, a business continuity event. associated with business continuity, cyber and market
or financial shock.
The activities in place or required to prevent, detect
and recover from any breaches due to cyber threats.
The Group’s policies, procedures and controls for
identifying, managing and mitigating a market or
financial shock.
Internal audit The effectiveness of the internal audit function, matters The scope, extent and effectiveness of internal audit
and themes arising as a result of the audit work and are appropriate and there is a plan to sustain this.
resolution of any associated actions.
Audit Committee focus during 2019 continued
External audit The approach, scope and risk assessments of external No concerns over the nature and amount of the
audit and the effectiveness and independence of the non-audit services provided by PwC.
external auditor.
Recommended that PwC be re-appointed as the
The extent of non-audit services provided by the Group’s auditor at the 2020 AGM.
external auditors.
Business audit committees Financial reporting

Each of the Group’s businesses has its own risk and audit As I have previously noted, the Group has complex long-term
committee. These committees continue to be chaired by the accounting and every year we spend much of our time reviewing the
DIRECTORS’ REPORT
respective business president or functional leader and comprise accounting policies and accounting judgements implicit in our
business leadership and functional team members, senior finance financial results. For 2019, we have focused on the key judgements
personnel and PwC. They meet at least twice a year and: and estimates underpinning the financial performance of the
business and the adequacy of disclosures in respect of the balance
—— review the effectiveness of business and functional risk
sheet and cash generation (see page 82).
management activities including the identification, ownership
and assessment of significant risks; The Group has an established process for preparing the
—— consider the existence and appropriateness of associated Consolidated Financial Statements, including:
mitigating controls;
—— maintenance of internal financial controls – see page 83;
—— consider the effectiveness of mitigating controls including with
—— monitoring of developments in financial reporting;
reference to assurance findings or any relevant incidents arising;
—— review of financial statements by local management prior to
—— review the application of accounting policies, judgements and
submission to group finance for further review and explanations;
estimates; and
—— certification by management of each business unit;
—— inform areas for further consideration at our meetings.
—— preparation and review of consolidation adjustments;
Members of the Committee are invited to attend the business risk —— review of the draft Consolidated Financial Statements prior to
and audit committee meetings and routinely receive reports on submission to the Committee and the Board; and
themes and any significant matters arising. During 2019, the —— review of the Consolidated Financial Statements by the Committee
business risk and audit committees focused on clarification of risk and the Board together with reports from management and the
and control ownership in the empowered business structure and auditors on significant judgements, estimates, changes in
assessing the appropriateness of assurance while also undertaking accounting policies and any other relevant matters.
deep dives of specific risks in certain businesses.
The scope of the external audit is set out in PwC’s report on page 194.
Business and function presentations A summary of the principal matters we considered in respect of the
In addition to reports from the business risk and audit committees, 2019 Consolidated Financial Statements is set out in the table on
the businesses and functions attend the Audit Committee to provide page 82.
a more in-depth view of relevant matters. During 2019, we considered:
Fair, balanced and understandable
—— Defence – the current business environment, the status of the
business internal financial control framework, the effectiveness of Since the year end, we have reviewed the form and content of the
business risk management, the status of internal audit findings and Company’s 2019 Annual Report, together with the processes used
other control-related incidents, accounting for long-term contracts; to prepare and verify it. We have reported to the Board that, taken
—— Power Systems – the status of internal audit findings, changes in as a whole, we consider the Annual Report to be fair, balanced and
the levels of the most significant business risks, the effectiveness understandable. We further believe the Annual Report provides the
of business risk management, key accounting estimates (including necessary information for shareholders to adequately assess the
in respect of litigation and claims); and Company’s position and performance, business model and strategy.
—— Group Tax – the main drivers of the Group’s tax position, key In making this assessment, we considered:
judgements and estimates, the main areas of tax risk including
consideration of tax audits and disputes and emerging risks —— the process for preparing the Annual Report, including a steering
including those associated with digitalised businesses, key sources committee, the core team, and instructions to contributors;
of estimation uncertainty (in particular the recognition of deferred —— written representations from management in respect of the business
tax assets). reviews, sustainability, principal risks and Financial Statements;
—— the completion of a regulatory compliance checklist;
We also received regular updates on the finance transformation
—— all reviews performed (including the Board, the Executive Team
programme and the current status of certain Civil Aerospace risk
and PwC) and ensured that all feedback was appropriately
mitigation plans, accounting judgements and financial reporting
reflected; and
matters including in respect of Trent 1000.
—— the presentation and discussion in the Strategic Report of: the
underlying as well as reported results; the in-service issues on the
Trent 1000 programme; and trends, in particular, the impact of
individually significant items.
Areas of focus for the 2019 Financial Statements
Key issue Matters considered Outcome
Adoption of IFRS 16 Final judgements on the implementation of IFRS 16 We were satisfied that the judgements and estimates
and the appropriateness of the disclosures made in made are appropriate and consistent with the new
respect of key accounting policies and judgements. requirements; that the disclosures of the impact in the
Consolidated Financial Statements are appropriate; and
that the Group has systems and processes in place
to report on the new basis in 2019 (see note 1 to the
Consolidated Financial Statements).
Alternative Performance The clarity of the definitions and the reconciliations Definitions refined and full reconciliations
Measures (APMs) of the APM to its statutory equivalent. provided (see notes 1, 2 and 28 to the Consolidated
Financial Statements).
Accounting for Trent 1000 Refined the methodology for identifying abnormal We were satisfied with the judgements taken in respect
in-service issues costs of wasted material, labour and other resources of which costs were included in the exceptional
and the application of this to the Trent 1000 wastage charge and that these were abnormal costs
in-service issues (see note 1 to the Consolidated that should be excluded from underlying performance
Financial Statements). (see notes 2 and 20 to the Consolidated Financial
Statements).
Consideration of onerous Review of the nature of costs included in the We paid particular attention to those contract losses
contracts assessment of onerous contracts, the discount that were included in the Trent 1000 exceptional
rates applied in calculating the charge and the charge and the adequacy of the disclosures which
sensitivity analysis performed and appropriateness are included in notes 2 and 20 to the Consolidated
of disclosures. Financial Statements.
Disclosure of invoice The nature of the arrangements and the disclosures In line with the Group’s commitment to transparency,
discounting and included in the Consolidated Financial Statements. additional disclosures have been included in note 14
supply chain financing and note 18 to the Consolidated Financial Statements.
arrangements
Deferred tax assets Basis for the recognition of further UK deferred tax We confirmed the approach adopted and the
assets and the assessment of the recoverability of additional disclosures included in note 5 to the
the asset and associated disclosures. Consolidated Financial Statements.
R&D capitalisation policy In 2017, the Group refreshed the application of its We concluded that there were no matters that
and application R&D capitalisation policy. This year, we focused on required additional disclosure in the Consolidated
the application of the policy and the consistency Financial Statements.
of approach across the businesses.
Carrying value of intangible The basis on which management assesses the risk Confirmed the appropriateness of the conclusions
and tangible assets of impairment, the methodology for calculating including the sensitivity analysis confirmed.
the recoverable amount, including the basis for
the key assumptions, the discount rates and
long-term growth rates. We also reviewed the
sensitivity disclosures made in respect of
goodwill and programme intangible assets.
Going concern and viability The basis for assessing the going concern We agreed with the basis of the assessments and the
statement disclosures assumption for the business and the principal risks disclosures included on page 55.
for the Group and how these were modelled as
viability scenarios.
Risk and control environment In managing the identified risks, judgement is necessary to:
—— evaluate the risks facing the Group in achieving its objectives;
Assessment of principal risks
All risks are managed through the risk management and internal control —— determine the risks that are considered acceptable;
framework (the RMS described on page 50) in accordance with policies —— determine the likelihood of those risks materialising;
and guidance approved by the Board. On behalf of the Board, the —— assess the Group’s ability to reduce the impact of risks that do
Committee monitors the RMS, including continued developments materialise; and
and improvements. We continue to pay particular attention to the —— ensure the costs of operating particular controls are proportionate
assessment and management of risks at remote sites and increased to the benefit provided.
our focus on the identification and monitoring of emerging risks. We satisfied ourselves that the processes for identifying and
The processes are designed to identify and manage, rather than managing the principal risks are appropriate and that all risks and
eliminate, the risk of failure to achieve our business objectives. mitigating actions had been subject, during the year, to a detailed
review by the Board or an appropriate Board committee. Based on
this and on our other activities, including consideration of the work
of internal and external audit and attendance at the Committee by As a result, we were satisfied that the going concern and viability
business and functional risk owners, we reported to the Board that statements have been prepared on an appropriate basis.
a robust assessment of the principal risks facing the Group had
been undertaken. 2019 Principal risks
The principal risks arising are described on pages 51 to 54. These As set out on page 65, the Board allocated certain principal risks to
formed a key element of our assessment of the going concern and the Committee and we considered these in detail throughout the
viability statements, described further below. year. From our discussions, we are satisfied that all of the principal
risks that we oversee have received significant management
Internal control attention during the year. We reviewed:
The Board has overall responsibility to shareholders for the Group’s
system of internal control over its business and risk management Business continuity
processes and the risks identified through the risk management In February, the head of risk shared lessons learned from a recent
process. The Committee has responsibility for reviewing the continuity related crisis management exercise. Following regular
system’s operation and effectiveness. The system is based on updates on the status of the mitigation plans in respect of the
business best practice and comprises: business continuity risk in Civil Aerospace, the director of risk
DIRECTORS’ REPORT
and internal audit updated the Committee on business continuity
—— entity-level controls covering leadership and direction from risks related to external suppliers and internal facilities across all
the top; and of the businesses in December.
—— specific control activities, covering detailed process controls,
and internal and external assurance activities.
Cyber
In May, the chief information officer and the cyber security director
We have reviewed controls over the Group’s principal risks and the updated the Committee on cyber risks including the level of threat
key risks and critical processes in each of the Group’s businesses. and nature of incidents arising, key risk mitigation and related
In addition, both the business audit committees and this Committee assurance findings, and the status of IT infrastructure. The cyber
consider the external auditor’s observations on the control environment. security strategy was also reviewed. Cyber risk was considered by
the Data Security Committee in January 2020.
During 2019, we reviewed the results of attestation and testing
performed by the internal control and internal audit teams to
Market and financial shock
confirm the effective operation of key financial controls across the
In July, we considered risks associated with liquidity and our credit
Group. We also reviewed the progress of the programme to
ratings focusing on our risk appetite, the nature of the current risks
strengthen financial reporting and compliance controls to meet our
and their associated mitigating activities. Other risks reviewed at
DPA commitments, including the work to document and assess the
the Group’s financial risk committee were also reported. Separately,
process risks and design of controls in our key finance processes.
we have incorporated any market or financial shock that could
We have made further progress in embedding a financial controls
result from Brexit in the scenario analysis on which the viability
awareness and culture with additional training and guidance provided
statement is based.
to our finance teams. We have strengthened our supervisory review
and oversight controls with a specific focus on balance sheet Our risk management system
integrity, including the development of IT systems to improve the We satisfied ourselves that improvements have been made in the
consistency and rigour of manual processes and controls. This will approach to risk management including further refining of our risk
continue to be an area of focus throughout 2020 alongside our appetite metrics and strengthening of our controls over risks at
broader finance transformation initiatives. remote sites as described on page 50. Future improvements should
focus on simplification of our risk policies and guidance and
We have conducted a review of the effectiveness of the Group’s
additional support for risk owners in assessing the effectiveness
risk management and internal control systems, including those
of mitigating control activities.
relating to the financial reporting process, in accordance with the
Code. Where opportunities for improvement were identified, action
Internal audit
plans have been put in place and progress is monitored by the
Committee. We consider that our review of the risk management The director of risk and internal audit regularly attends and reports
and internal control systems, in place throughout 2019 and up to to the Committee on risk and internal audit matters including:
the date of this report, meets the requirements of the Code, the
—— quarterly – a dashboard identifying key trends and headline
DTR and the FRC’s guidance on risk management.
findings from internal audit reports issued in the period and the
Going concern and viability statements status of related agreed actions; any key themes from internal
Having regard to the net liabilities of £3,354m on the Group’s 2019 audit’s work and details of any specific significant findings raised
balance sheet, we paid particular attention to these assessments. that warrant the Committee’s attention, including in respect of
We reviewed the processes and assumptions underlying the audits conducted as part of the Group’s response to the DPAs;
statements set out on page 55, considering in particular: and
—— the Group’s forecast funding position over the next five years; —— annually – compliance with expenses policies for the Directors
and the Executive Team; and an internal audit work plan for the
—— the forecasts for material subsidiaries making up this position;
following year.
—— an analysis of impacts of severe but plausible risk scenarios,
ensuring that these were consistent with the risks reviewed I meet the director of risk and internal audit before each meeting
by the Board as part of its strategy review; and on an adhoc basis throughout the year, as do other members
—— the impact of multiple risks occurring simultaneously; of the Committee, to discuss risk matters and the nature of internal
—— additional mitigating actions that could be taken in extreme audit findings in more depth. We continue to focus on the nature
circumstances; and and number of issues raised by internal audit and the time to
complete the related actions which continues to improve. However,
—— the current borrowing facilities in place and the availability
the underlying root causes remain largely unchanged and form a
of future facilities.
critical part of our restructuring plans. The future work plan is
risk-based, balancing focus on principal risk areas and on business the AQRT provided their final report and I, as Chairman, have
as usual transactional activity where controls are understood to be discussed the findings with both the FRC and the audit partner.
mature and established. Internal audit also provides assurance to Whilst there were no significant findings, some matters were
our transformation programmes and restructuring activities and identified as requiring improvement. PwC have reported to the
incorporate the activities of our second line assurance functions Audit Committee their response to the findings and how the
in their approach. We monitor changes to their plan during the suggested improvements have been incorporated into the current
course of the year. audit along with continuation of the areas identified as being
of a high standard.
We considered and reviewed the effectiveness of the Group’s
internal audit function, including resources, plans and performance
Non-audit services
as well as the function’s interaction with management. Based on the
In order to safeguard the auditor’s independence and objectivity,
reports and discussion, we are satisfied that the scope, extent and
and in accordance with the FRC’s ethical standard, we do not
effectiveness of internal audit work are appropriate for the Group
engage PwC for any non-audit services except where it is work that
and that there is an appropriate plan in place to sustain this.
they must, or are clearly best-suited to, perform. Accordingly, our
policies for the engagement of the auditor to undertake non-audit
External audit services broadly limit these to audit-related services such as
PwC were appointed as the Group’s external auditor for the financial reporting to lenders and grant providers.
year commencing on 1 January 2018 following a formal tender
Fees paid to PwC are set out in note 7 to the Consolidated Financial
process in 2016. The external audit contract will be put out to
Statements. All proposed services must be pre-approved in
tender at least every ten years. The lead audit partner, Ian Chambers,
accordance with the policy which is reviewed and approved
has been in post since PwC were appointed and he will be required
annually. Above defined levels, my approval is also required before
to rotate after five years. Other key audit partners will also be
PwC is engaged. Quarterly, we also review the non-audit fees
required to rotate every five years. Any future audit tenders will be
charged by PwC.
carried out in line with the FRC’s practice aid for audit committees.
Non-audit related fees paid to the auditor during the year were
Other than the services detailed below, PwC have no other
£1.1m (including £0.4m relating to the review of the half-year results)
connection with the Company nor its Directors.
representing 13% (2018: 10%) of the audit fee. Our annual review of
the external auditor takes into account the nature and level of all
2019 audit services provided.
The Committee reviewed the quality of the external audit
throughout the year and considered the performance of PwC, Non-audit services are provided by PwC where the auditor is
taking into account the Committee’s own assessment and feedback, required by law or regulation to perform the work. All other
the results of a survey of senior finance personnel across the non-audit services are considered on a case-by-case basis in light
Group focusing on a range of factors we considered relevant to of the requirements of the ethical standards and our own policy.
audit quality, feedback from the auditors on their performance
Based on our review of the services provided by PwC and
against their own performance objectives and the firm-wide audit
discussion with the lead audit partner, we concluded that neither
quality inspection report issued by the FRC in June 2018.
the nature nor the scale of these services gave any concerns
Based on these reviews, the Committee concluded that there had regarding the objectivity or independence of PwC.
been appropriate focus and challenge by PwC on the primary
areas of the audit and that they had applied robust challenge Compliance
and scepticism throughout the audit. Consequently, as noted During 2019, the Company complied with the relevant provisions of
on page 81, the Committee has recommended to the Board that The Statutory Audit Services for Large Companies Market Investigation
they be reappointed at the 2020 AGM. (Mandatory Use of Competitive Tender Processes and Audit
Committee Responsibilities) Order 2014, as disclosed within the
In May 2019, PwC presented its audit plan, which identified its
external audit section.
assessment of the key audit risks and the proposed scope of audit
work. We agreed the approach and scope to be undertaken.
Subsequently, an updated plan was agreed in November 2019,
Looking forward
building on the work undertaken at the half-year. We will continue to monitor our accounting policies whilst also
focusing on:
Key risks and the audit approach to these risks are discussed
in the Independent Auditor’s Report (pages 194 to 202), which —— the risk management and internal control environment in relation
also highlights the other risks that PwC drew to our attention. to the transformation programme;
As part of the reporting of the half-year and full-year results, —— the continuing finance transformation programme; and
in July and February 2020, PwC reported to the Committee on its
—— developments with the audit reforms in the UK following the
assessment of the Group’s judgements and estimates in respect of
publication of Sir Donald Brydon’s review into the quality and
these risks and the adequacy of the reporting. Where effective to
effectiveness of audit in the UK.
do so, PwC also reported on its assessment of the Group’s controls.
As I previously mentioned, this is my last report as Chairman of the
I meet with the lead partner prior to each Committee meeting
Audit Committee. I am pleased to be staying on as a member of the
and the whole Committee has a private meeting with PwC at least
Committee and supporting Nick Luff as he takes over the reins
once a year.
during this ongoing period of transformation, particularly in the
During 2019, the Audit Quality Review Team (AQRT) of the FRC finance function.
conducted a review of PwC’s audit of the Group's Financial
Lewis Booth
Statements for the year ended 31 December 2018. In January 2020,
Chairman of the Audit Committee
Remuneration Committee Report 85
REMUNERATION
executives and are introducing a requirement to maintain a significant
shareholding for two years post-employment. In addition, coincident
with changes being implemented for managers who are participants
in our UK defined benefit pension plan, Warren East and
Stephen Daintith have agreed to reduce their pension allowances
over the next three years to align with the wider UK workforce.
These policy changes have been supported by the shareholders
with whom we have consulted.
2019 outturns
2019 has been a challenging year, particularly in respect of the
continuing Trent 1000 issues. However, while supporting our
IRENE DORNER customers and responding to the Trent 1000 issues, Civil Aerospace
Chairman of the
Remuneration Committee
improved its underlying profit significantly, with above target levels
of free cash flow and profit. We have delivered a record number of
DIRECTORS’ REPORT
widebody engines, introduced new engines into the business jet
Key highlights market and progressed a wide-ranging restructuring programme.
New remuneration policy Defence delivered strong financial performance and has positioned
itself well for future opportunities. Power Systems revenue and
Outturns for 2019
profit continued to grow.
Wider workforce remuneration
In determining the outcomes for bonus purposes, the Committee
continues to take a rigorous approach to ensuring that executives
Introduction are being rewarded for sustainable operational improvements in
transforming the business and delivering a step change in
I am pleased to present my first report as Chairman of the Remuneration operational cash flow. Whilst the Committee reviews in detail the
Committee, outlining what we have achieved in the year. I would like underlying performance which underpins the bonus metric outturns,
to take the opportunity to thank Ruth Cairnie for her commitment we also consider the outturn in the round. Turning to the metrics
during her time as Chairman of the Committee. Having joined the first, our key financial metrics are profit and cash, both achieved
Committee last August, I was able to accompany Ruth during our above target levels due to the hard work and commitment of our
consultation meetings with shareholders on the remuneration policy. people. We delivered a strong free cash flow performance and a
significant improvement in profitability, in challenging circumstances.
Our remuneration policy
We undertook a review of our current policy this year, focusing on Our non-financial metrics are customer satisfaction and employee
three key themes: alignment to vision and strategy; supporting the engagement. For bonus purposes, whilst our financial metrics
talent agenda; and alignment with the Code. delivered good progress, the non-financial elements were not
where we would have liked them to be. We adopted a broader
This review built upon the significant changes implemented in
scorecard of customer metrics for the first time in 2019 and the
2017, which were strongly supported by shareholders (96% vote
below-target outturn reflected the challenges we experienced in
in favour). We concluded that limited changes are required to our
Civil Aerospace, particularly on the Trent 1000, and the impact of
existing policy; the substantive changes we made three years ago
supply chain challenges in Defence. In terms of our people measure,
continue to support the delivery of our vision and business strategy.
we continue to recognise the importance of transforming our business
We remain in a period of unprecedented business transformation
and culture. In 2019, we introduced a new survey provided by Gallup
with a clear focus on increased cash flow generation, so the drivers
and were very pleased to see a record level of participation (72%).
behind the design of the current policy remain very relevant. We
However, against a backdrop of transformation and operational
believe that there is strong alignment in our incentive plans
headwinds, employee engagement fell short of our targets.
between executives and the interests of our shareholders, with the
primary focus on improving free cash flow. This is a key performance In assessing the final bonus awards, the Committee has also
metric in our incentives and so we have no current plans to change considered a number of factors including in particular Trent 1000,
their design. However, as we continue to be at the forefront of as well as HSE performance, quality of financial performance and
developing cleaner power solutions, we expect that future the experience of our customers and shareholders. Whilst the Trent
incentive metrics will include environmental aspects and potentially 1000 disruption already impacts the calculated bonus within the
other sustainability measures, subject to such metrics being customer metric, the Committee felt that the calculated outturn did
robustly quantifiable and fully aligned with our business strategy. not sufficiently reflect the continuing disruption for our customers
and financial impact on our shareholders. As a result, we exercised
In terms of our talent agenda, we have always taken a modest
our discretion to reduce the overall bonus outturn for the Group
approach to executive reward and for the third year running are
metrics from 61% to 52.5% of maximum. The Committee felt that this
not proposing any changes in quantum for existing Executive
was an appropriate adjustment to balance the experience of our
Directors. However, we are mindful of the challenge of recruiting
customers and shareholders with a year of strong cash generation
senior individuals from an increasingly global and diverse talent
and effective management action to progress business
pool and are proposing a small amount of increased flexibility within
transformation and address the in-service issues.
the bonus quantum in case this is required for any future hire.
Our targets for the 2017 long-term incentive plan achieved 53% of
As part of our review, we have also taken on board the revised
maximum. This outcome reflects strong cash performance versus
requirements of the Code. We have focused in particular on executive
targets for the period, but less progress in terms of profit delivery
pensions and post-employment shareholding requirements. We
and a disappointing overall total shareholder return.
have reduced the pension contribution rate for newly appointed
Remuneration Committee Report
Our reflection is that this is an appropriate outturn in the context of Advisers

positive actions taken by Warren and his team to tackle our During the year, the Committee had access to advice from
business challenges, whilst recognising the further progress Deloitte LLP’s executive compensation advisory practice. Total fees
needed to enhance the quality of our underlying financial results. for advice provided to the Committee during the year by Deloitte
were £96,025 (2018: £73,415). Fees are based on a time and materials
2020 salary review and incentives basis. Deloitte also advised the Company on tax, corporate
The Committee has reviewed the salary levels of the Executive compliance, employee global mobility, assurance and corporate
Directors and has concluded that there will be no increases in 2020 finance and Deloitte MCS Limited provided consulting services.
in line with most of the Group’s management. This will be the third They also provided personal tax advice to both Sir Ian Davis and
year of zero increases for Executive Directors. Lewis Booth. In addition, Stephen Daintith’s son is employed by
Wider workforce Deloitte. The Committee is exclusively responsible for reviewing,
The Committee has always had a good appreciation of the Group’s selecting and appointing its advisers.
reward practices, including bonus plan design, gender pay and pay Deloitte is a founding member of the Remuneration Consultants
practices. During 2019, the Committee held an additional session to Group and adheres to its code in relation to executive remuneration
focus on reward approaches across the wider workforce, to gain a consulting. The Committee requests Deloitte attend meetings
deeper understanding of the broader context against which we make periodically during the year and is satisfied that the advice it has
decisions on total reward for senior management. The Committee received has been objective and independent.
will continue to review key metrics on the wider workforce to
provide insight and context for our activity. This is the third year Shareholder voting
that we have reported on our CEO pay ratio. Our reward strategy
for the Group’s management population is currently focused on The remuneration policy was last approved by shareholders at
driving performance and behaviours consistent with our values. our 2017 AGM. The remuneration report was last approved by
Incentives and performance enablement activities are structured to shareholders at our 2019 AGM. Details of voting are shown in
reward business and personal objectives, as well as behaviours. the table below.
We hope shareholders will continue to support our policy and Principal responsibilities
implementation.
Determine the remuneration policy for the Executive Directors
Membership and operation of the Committee and set the remuneration for the Chairman, the Executive
Directors and senior management.
In 2019, members of the Committee were Ruth Cairnie, Lewis Booth,
Review workforce remuneration and related policies and the
Beverly Goulet, Sir Kevin Smith and myself. I joined the Committee
alignment of incentives and rewards with our culture.
in August and Ruth Cairnie stepped down as Chairman at the end
of 2019. All members of the Committee are independent Determine the design, conditions and coverage of annual
Non-Executive Directors. Our biographies are on pages 62 and 64 incentives and LTIPs for senior executives and approve total and
and our meeting attendance is shown on page 66. individual payments under the plans.
Determine targets for any performance-related pay plans.
The Committee’s responsibilities are outlined in its terms of reference
which can be found at www.rolls-royce.com. We review these Determine the issue and terms of all-employee share plans.
annually and refer them to the Board for approval. No changes have Oversee any major changes in remuneration.
been made in 2019. This follows a detailed review in 2018 to ensure
alignment with the principles of the Code. Areas of focus for 2020
Other attendees Continue to review incentive measures and targets to ensure that
In addition to the members of the Committee, the Chairman, they remain aligned with performance and strategy, including
Chief Executive, Chief Financial Officer and any of the Non-Executive ongoing consideration of sustainability measures
Directors may attend one or more meetings at the Committee Implement the new remuneration policy, subject to
Chairman’s invitation, although none were present during shareholder approval
discussion of his or her own remuneration package. The Committee
Gain further insights into the remuneration of the workforce
is supported by the Company Secretary, the Chief People Officer
to further inform decisions on senior management reward
and the people director, performance and reward.
Irene Dorner
Chairman of the Remuneration Committee
For Against Withheld 1

Number Number Number
of votes % of votes % of votes
Approval of the Directors’ remuneration policy (4 May 2017) 1,357,109,903 95.79 59,613,198 4.21 2,505,008
Approval of the Directors’ remuneration report (2 May 2019) 1,347,237,842 96.80 44,467,914 3.20 5,452,732
1 Withheld votes are not counted towards the total percentage of votes cast.
Remuneration Committee focus during 2019
Policy review Review of remuneration policy The Committee reviewed the current remuneration policy and concluded that
and shareholder to ensure alignment with it remained aligned to the business strategy and continued to support the
consultation
business strategy and transformation programme and focus on increasing free cash flow generation.
corporate governance A number of incremental changes were proposed and discussed with shareholders
requirements. and their feedback was incorporated into the final policy design.
The proposed changes are as follows:
Consultation with shareholders
—— Pensions – the pension contributions for existing Executive Directors will be
on proposed policy changes.
reduced over the next three years to align with the average wider workforce
rate for existing UK employees at 17% of salary. For any newly appointed
Executive Directors, the pensions contribution will be 12%, in line with the new
hire rate for the wider UK workforce.
DIRECTORS’ REPORT
—— Shareholding requirements – a post-employment shareholding requirement
will be introduced to retain the lower of the shareholding requirement and
actual shareholding at leaving date (based on shares vesting following the
introduction of the new policy) at 100% in year one and 50% in year two.
—— Malus and clawback – additional triggers added.
—— Recruitment – flexibility to increase the maximum bonus to 200% (from 180%)
for newly appointed Executive Directors where required to secure the
right talent.
Whilst no changes are proposed to the current incentive metrics, the Committee
consulted with shareholders on the possibility of introducing a metric based
on environmental performance and other sustainability measures in the future,
as this continues to be an important focus of future Group performance.
In developing the policy, the Committee also reviewed remuneration across
the wider workforce as context for any proposed changes.
Base salaries Review of base salaries The Committee reviewed the salary levels of the Executive Directors and
in accordance with the concluded that no increases would be made in 2020.
remuneration policy and the
broader employee context.
Annual bonus 2019 bonus – review of Warren East and Stephen Daintith received a bonus of 52.5% of maximum.
performance against the 40% of the awards were deferred into shares.
2019 bonus targets. The Committee agreed that for the 2020 bonus plan the same measures would
2020 bonus – review of apply as in 2019:
measures and targets to —— Profit – 25%
ensure continued alignment —— Cash – 50%
to strategy. —— Customer satisfaction – 12.5%
—— Employee engagement – 12.5%
Awards will be based 80% on Group performance and 20% on individual
performance. The maximum opportunities remain at 180% of salary for the
Chief Executive and 150% for other Executive Directors.
Long-term 2017 LTIP – review The 2017 LTIP will mature in March 2020 at 53% of maximum.
incentive plan of achievement of
For 2020 grants, targets will continue to be based on CPS (60%), EPS (20%) and
performance measures.
TSR (20%).
2020 LTIP – setting targets
The maximum opportunities remain at 250% of salary for the Chief Executive and
that ensure significant stretch.
225% of salary for other Executive Directors.
REMUNERATION POLICY FROM 2020

Introduction Pensions
We will reduce the pension contribution for newly appointed
The policy will take effect from 7 May 2020, subject to shareholder Executive Directors from a maximum of 25% to 12% of salary to
approval at the AGM. align with the new hire rate for the wider UK workforce.
Key policy themes The pension contributions for existing Executive Directors will be
reduced over the period to 2022 to align with the average wider
In 2016, the Committee undertook a wide-ranging review of the workforce rate for existing UK employees of 17% of salary.
remuneration policy, resulting in a number of changes under the
themes of supporting transformation, talent, simplicity and Shareholding requirements
stewardship. The Committee believes that these changes have been We will introduce a requirement for Executive Directors to retain
working well for the Company and remain relevant given that we the lower of their shareholding requirement or their actual holding
are still in a period of transformation. As a result, the Committee has at leaving date in full for 12 months from that date, based on shares
focused on three key themes for this review, evolving the existing vesting following the introduction of the new policy. The requirement
policy with limited changes. will be 50% of this level in the second year.
Alignment to vision and strategy Malus and clawback

There is a continued focus on delivering an unprecedented level of We are adding further malus and clawback triggers to our
transformation: reducing costs, delivering operational excellence, requirements, to ensure that we have a robust set of triggers that
innovating new products and meeting customer expectations, are relevant and appropriate to our business.
including dealing with legacy engine issues. The Committee
considered a number of alternative incentive measures such as Consideration of shareholder feedback
CROIC and new technology milestones. However our main priority
continues to be to significantly increase our cash flow generation During the policy review we have engaged in constructive
to ensure that we can deliver sustainable value to our shareholders consultation with our largest shareholders which has reinforced
and invest in new technologies to drive our long-term success. It is our view that the current policy is working and is well supported.
therefore important that our incentive measures continue to reflect The overall feedback from this consultation was:
the significance of cash flow generation. Looking further ahead, the —— recognition that business transformation continues to be the
Committee recognises the importance of environmental performance critical focus for the Group;
and other sustainability measures and may consider this as a metric —— agreement that cash generation remains the key financial driver;
at some point in the future, as a key driver to business success. —— acknowledgement that environmental measures are becoming a
key metric both internally and externally and that quantitative
Supporting the talent agenda measures that are important to the business strategy might be an
We must continue to be able to attract and retain the individuals appropriate non-financial incentive measure in the future;
who can drive our long-term business success across an —— understanding of the rationale for increasing the maximum bonus
increasingly global and diverse talent pool. The changes we made for new hires to support future talent needs if required; and
in the 2017 policy, which were cascaded further down the
—— support for changes to pensions, post-employment shareholding
organisation, have helped with the recruitment of executive talent.
requirements and malus and clawback triggers.
However, we are increasingly experiencing a challenge in recruiting
key talent from outside the UK at senior levels and need to ensure These views have been reflected in the final policy design for 2020.
that we have as much flexibility as possible to make sure we can
secure a talented and diverse workforce for the future.
Alignment with the Code

We recognise the importance of strong corporate governance
around executive compensation and are proposing further changes
to align with the Code around executive pensions, post-
employment shareholding requirements and malus and clawback
provisions.
Changes to policy design

Whilst the existing policy is working well for us, a small number of
changes are proposed to our policy for 2020:
Recruitment
We are not proposing any changes to quantum for existing
Executive Directors. Our current policy contains flexibility for a
higher LTIP maximum of 300% of salary for new hires and we plan
to retain this. In addition, for new hires, given the increasingly
global, diverse executive talent pool we propose to increase the
maximum bonus to 200% of salary (currently 180% for the Chief
Executive and 150% for other Executive Directors) to give us
additional flexibility to secure executive talent in the future. This
will not be applied for current incumbents and will only be used
for recruitment if needed.
Summary of our revised remuneration policy
Fixed pay Variable pay
Base salary Annual bonus Long-term incentive plan
80% Group 20% individual

Bene�ts +
performance performance
Pension 60% 20% 20%

Financial Non-�nancial CPS EPS TSR
• Pro�t • Customer
• Cash • Employee engagement
DIRECTORS’ REPORT
40% deferral for 2 years 3-year performance period plus 2-year holding period
Malus and clawback – LTIP awards are subject to malus and clawback provisions where there has been a material
misstatement of audited results; serious �nancial irregularity; material �nancial downturn or an event causing a material
negative impact on the value of the Group; material failure of risk management; a serious breach of Our Code; individual
misconduct or actions that materially damage the Group; a breach of or inadequate response to a signi�cant HSE or
other environmental issue; and/or materially incorrect calculation of an award. These provisions apply from the date
of grant for six years. The same provisions apply to awards of deferred shares for three years from the date of grant.
Shareholding requirement – Executive Directors are required to work towards holding bene�cially-owned
shares equivalent in value to a percentage of their salary by retaining at least one half of after-tax shares released
from the LTIP until this requirement is met. For the Chief Executive this requirement is 250% of salary and for other
Executive Directors this requirement is 200% of salary. In addition, the lower of their shareholding requirement or
their actual shareholding at leaving date must normally be retained by Executive Directors for 12 months
following leaving date and then 50% of that amount for the following 12 months.
Element Commentary
Fixed pay No changes are proposed to the salary or benefits elements of the remuneration policy approved by
shareholders at the 2017 AGM. Pension contributions will be reduced to align with the average of the wider
UK workforce.
Annual bonus Performance measures remain appropriate following the introduction of customer and employee metrics in
2016. Bonuses are determined primarily by Group financial performance but the Committee may apply
non-financial metrics that support the underlying strategic priorities for the forthcoming year.
Executive Director bonuses will continue to be awarded using a simple additive approach:
—— 80% of the award will be based on Group performance
—— 20% of the award will be based on individual performance
The maximum for existing Executive Directors will be maintained at 180% of salary. The new remuneration policy
includes the flexibility for a potential maximum of up to 200% of salary for newly hired Executive Directors. The
intention is that this flexibility will only be used for recruitment to secure talent across a global and diverse pool.
40% of any bonus will be deferred into shares for two years.
Long-term CPS, EPS and TSR remain our long-term measures of success and reflect the strategic focus on profitable
incentive plan growth, the quality of profit, and returns to shareholders. During shareholder consultations, we received strong
support for the continued use of cash flow as the central measure of long-term performance.
The two-year holding period following the three-year performance period continues. This includes a
requirement to continue to hold shares after participants have left the Group.
20% of the maximum award will vest for threshold performance.
The remuneration policy continues to include an overall maximum of up to 300% of salary for the
Chief Executive and 250% for other Executive Directors. This flexibility will only be used for recruitment
to secure talent across a global and diverse talent pool.
The intended operational maximum for the three-year period of this policy will continue to be 250% of salary
for the Chief Executive and 225% of salary for other Executive Directors.
Remuneration policy table

The table below sets out each element of Executive Directors’ remuneration.
Pay element – fixed pay

Base salary
Purpose and The Company provides competitive salaries suitable to attract and retain individuals of the right calibre
link to strategy to develop and execute the business strategy.
Operation Salaries are reviewed, but not necessarily increased, annually. Decisions on salary are informed but not
led by reference to companies of a similar size, complexity and international reach.
Maximum opportunity Any salary increases will be assessed annually and will not normally exceed average increases for employees
in other appropriate parts of the Group. The Committee may exercise discretion to make larger increases in
circumstances where it is necessary to address particular issues or risks, including growth in the role for
new appointments.
Benefits
Purpose and The Company provides competitive benefits suitable to attract and retain individuals of the right calibre
link to strategy to develop and execute the business strategy.
Operation Benefits may include car or car allowance and related costs, financial planning assistance, private medical
insurance, life assurance and other appropriate benefits at the discretion of the Committee.
Relocation support or support for accommodation and travel may be offered to executives where
necessary. Executive Directors may participate in all-employee share plans including ShareSave and the
Share Incentive Plan.
Maximum opportunity Benefits excluding all employee share plans, and any accommodation, relocation and associated tax costs
will not exceed £100,000 per annum.
Pension
Purpose and The Company provides competitive pension schemes suitable to attract and retain individuals of the right
link to strategy calibre to develop and execute the business strategy.
Operation Executive Directors are offered membership of a defined contribution pension plan. A cash allowance may
be payable in lieu of pension contributions.
Maximum opportunity For incumbent Executive Directors, the maximum employer contribution to a defined contribution plan (or
to be taken as a cash allowance) is currently 25% of salary. This will reduce to 17% of salary, the current
average of the wider UK workforce, by March 2022. For newly appointed Executive Directors, the rate will
be 12% of salary.
Pensions contributions are based on base salary only.
Pay element – variable pay

Annual bonus
Purpose and To incentivise the execution of the business strategy, delivery of financial targets, and the achievement of
link to strategy personal objectives.
Operation Bonuses are determined primarily by Group financial performance, but the Committee may apply
non-financial metrics that support the underlying strategic priorities for the forthcoming year and/or
adjust the payout level to ensure the outturns reflect performance. The bonuses payable are also linked
to personal performance of the Executive Directors. 25% of the maximum opportunity is payable if base
performance is achieved and 50% of maximum for target performance.
The financial and non-financial metrics are set with reference to the prior year and to the budgets and
business plans for the coming year, ensuring the levels to achieve base, on-target and maximum payout are
appropriately stretching. At least 40% of the bonus is compulsorily deferred into shares for a further two
years, and released subject to continued employment. Deferred shares may attract an issue of C Shares or
DIRECTORS’ REPORT
equivalent during the deferral period.
Awards are subject to malus and clawback provisions where there has been a material misstatement of
audited results; serious financial irregularity; material financial downturn or an event causing a material
negative impact on the value of the Group; material failure of risk management; a serious breach of Our
Code; individual misconduct or actions that materially damage the Group; a breach of or inadequate
response to a significant HSE or other environmental issue; and/or a materially incorrect calculation of an
award. These provisions apply from the date of grant for three years. For awards granted prior to the
adoption of this policy, legacy malus and clawback provisions may apply.
The Committee has discretion to adjust the formulaic outcome (including down to zero) to ensure alignment
of pay with performance and fairness for shareholders and participants.
Maximum opportunity The normal annual maximum for the Chief Executive is 180% of salary and 150% for other Executive
Directors. A maximum of 200% may be applied for recruitment where it is required to secure individuals
with the right skills and experience. This flexibility would not be used for existing Executive Directors.
Performance measures The bonus is weighted 80% on Group metrics, and 20% on individual performance. Within the Group metrics:
—— at least 60% is based on Group financial targets (for example profit and free cash flow)
—— up to 40% of the bonus is based on non-financial metrics such as employee engagement and customer
—— individual objectives are set and agreed with the Remuneration Committee at the start of each year, to
reflect the prevailing business context
—— the Committee may, in the context of the underlying business strategy, use different performance measures
Long-term incentive plan (LTIP)
Purpose and link To reward the development and execution of the business strategy over a multi-year period.
to strategy
Operation Executive Directors are granted awards over shares annually with a three-year performance period.
The number of shares relative to the proportion of the award that vests is determined at the end of the
performance period according to the achievement against the performance measures. The resultant shares
are then held for a further two-year period. 20% of the maximum award will vest for threshold performance.
The Committee has discretion to adjust the formulaic outcome (including down to zero) to ensure alignment
of pay with performance and fairness for shareholders and participants.
Executive Directors are expected to work towards holding beneficially-owned shares equivalent in value to
a percentage of their salary by retaining at least one half of after-tax shares released from the LTIP until this
requirement is met (see page 100).
Awards are subject to malus and clawback provisions where there has been a material misstatement of
audited results; serious financial irregularity; material financial downturn or an event causing a material
negative impact on the value of the Group; material failure of risk management; a serious breach of our
Code; individual misconduct or actions that materially damage the Group; a breach of or inadequate
response to a significant HSE or other environmental issue; and/or a materially incorrect calculation
of an award. These provisions apply from the date of the award for six years. For awards granted prior
to the adoption of this policy, legacy malus and clawback provisions may apply.
Pay element – variable pay

Long-term incentive plan (LTIP) continued
Maximum opportunity Normal annual awards:

—— Chief Executive – 250% of salary
—— other Executive Directors – 225% of salary
The maximum face value of annual awards is 300% of salary for the Chief Executive and 250% for other
Executive Directors. This flexibility would only be used for recruitment to secure individuals with the
required skills and experience. This flexibility would not be used in the normal course of business.
Performance measures Performance measures may include CPS, EPS, TSR and/or sustainability measures, for example
environmental performance measures and other similar measures that are important to the success
of the business strategy.
For 2020 awards, the measures will be weighted 60% CPS, 20% EPS and 20% TSR. No more than 20%
of awards will vest for threshold performance.
The Committee may, in the context of the underlying business strategy, use different performance
measures and/or vary the weightings of the measures.
The table below sets out the main elements of Non-Executive Directors’ remuneration.
Pay element
Fees
Purpose and link to strategy To reward individuals for fulfilling their role and attract individuals of the skills and calibre required.
Operation The Committee makes recommendations to the Board on the Chairman’s remuneration. The
Chairman and the Executive Directors determine the remuneration of the Non-Executive Directors.
Levels take into account fees paid by other companies of a similar size and complexity.
The Chairman is paid a single fee. Other Non-Executive Directors are paid a base fee covering
Board and Board committee membership, with committee chairmen, the Senior Independent
Director and the Employee Champion receiving an additional fee.
Maximum opportunity The maximum total remuneration payable to Non-Executive Directors, including the Chairman, is
£1,600,000 per annum.
Benefits
Purpose and To devote maximum time and attention to the requirements of the role.
link to strategy
Operation The Chairman has occasional use of chauffeur services. Travel, hotel and subsistence incurred in
attending meetings are reimbursed by the Company. The Group may pay tax on such benefits. It
may provide support with tax matters for Non-Executive Directors based outside the UK.
Maximum opportunity Maximum value for chauffeur services will not exceed £15,000 per annum.
£5,000 maximum towards tax advice and filing per annum.
Remuneration policy – worked examples for 2020

Chief Executive £000 Chief Financial Of�cer £000
Minimum 100% £1,181 Minimum 100% £844

On-target 37% 26% 37% £3,209 On-target 40% 24% 36% £2,119
Maximum 23% 32% 45% £5,237 Maximum 25% 30% 45% £3,394
■ Fixed remuneration (including salary, bene�ts and pension)

■ Annual bonus
■ LTIP (this does not include share price growth)
Minimum – fixed remuneration (salary, pension, benefits), no bonus award or LTIP vesting.
On-target – fixed remuneration, 50% of maximum bonus award, 50% of LTIP vesting.
Maximum – fixed remuneration, 100% of maximum bonus award, 100% of LTIP vesting.
Maximum assuming 50% growth in share price would be £6,417k for the Chief Executive and £4,159k for the Chief Financial Officer.
Performance measures and targets Wider workforce considerations

The Committee will set Group financial targets for annual When setting remuneration for Executive Directors and the senior
bonus and LTIP awards with reference to the prior year and management team, the Committee carefully considers wider
to forward-looking business forecasts, ensuring the levels of remuneration across the Group, including salary increases, bonus
performance required to achieve base, on-target and maximum awards, share plan participation and pay ratios between Executive
bonus awards are appropriately challenging. Directors and other employees.
The Committee may, in the context of the underlying business During 2019, the Committee held an additional in-depth review
strategy, use different performance measures for incentives and/or session to develop a deeper understanding of demographics
vary the weightings of the measures. For example, looking ahead across the organisation, the differences in total reward across
the Committee recognises the importance of environmental various employee groups and geographies and key areas of focus
performance and other sustainability measures to the success of on culture and reward. As a result, the Committee will continue to
the business strategy and may wish to include such quantitative review this information on a more regular basis to help inform its
measures in the incentive plans. Feedback would be sought from decisions on executive pay.
shareholders if the Committee wished to apply this to the LTIP
DIRECTORS’ REPORT
At more senior levels, remuneration is increasingly long-term
within the three-year period of this policy.
and larger proportions are dependent on Group and business
The measurement of performance against performance targets performance, as well as individual performance and a larger
is at the Committee’s discretion, which may include appropriate proportion is delivered in the form of shares. In terms of the
adjustments to financial or non-financial elements and/or management population generally, the direction of travel is to
consideration of overall performance in the round. Adjustments re-balance the total reward package from fixed elements to variable
may be either upwards or downwards. performance-related elements.
Performance conditions may also be replaced or varied if an event We are committed to sharing business success across the
occurs or circumstances arise which cause the Committee to organisation, with all employees participating in a short-term
determine that the performance conditions have ceased to be incentive plan. There is strong alignment of business metrics
appropriate. If the performance conditions are varied or replaced, between the Executive Directors bonus plan and those in which the
the amended conditions must, in the opinion of the Committee, be majority of the workforce participate. In addition, the Group offers
fair, reasonable and materially no less difficult than the original an all-employee sharesave plan to eligible employees globally
conditions when set. every two years which aligns employee interests with those of our
shareholders. This continues to be a popular benefit with over 40%
Policy on new appointments of employees joining the most recent plan.
The Committee will appoint new Executive Directors with a package The broader workforce has not had direct input into the proposed
that is in line with the remuneration policy. Base salary may be set policy but its application is strongly influenced by remuneration
at a higher or lower level than the previous incumbent. The Committee arrangements for all employees. Irene Dorner, who has designated
may use its discretion to make individual incentive awards up to the responsibility for engaging with employees and bringing their
maximum policy headroom limits outlined in the policy table. voice into the boardroom, is now the Chairman of the
Remuneration Committee, which further strengthens the link
Remuneration forfeited on resignation from a previous employer
between employees and executive remuneration.
may be compensated. This will be considered on a case-by-case
basis and may comprise cash or shares. In general:
Share plans
—— if such remuneration was in the form of shares, compensation will
The Committee retains a number of discretions consistent with the
be in the Company’s shares.
relevant share plan rules. In the event of any variation in the share
—— if remuneration was subject to achievement of performance capital of the Company, a demerger, special dividend, distribution
conditions, compensation will be normally be subject to or any other transaction which will materially affect the value of
performance (either Rolls-Royce performance conditions or shares, the Committee may make an adjustment to the number or
actual/forecast performance outturns from the previous class of shares subject to award.
company); and
—— the timing of any compensation will, where practicable, match The treatment of leavers in our ShareSave and the Share Incentive Plan
the vesting schedule of the remuneration forfeited. is covered by the respective plan rules. Change of control provisions
in respect of employee share plans are set out on page 207.
Legacy terms for internal appointments may be honoured,
including any outstanding incentive awards. If an Executive
Director is appointed following a merger or an acquisition
of a company by Rolls-Royce, legacy terms and conditions
may be honoured.
Termination introduction of the new policy) for one year after leaving, and 50%
of this level for a second year. The Committee can waive or modify
The Company is required to give Executive Directors 12 months’ this requirement (for example in compassionate circumstances).
notice under their service contracts. Payment in lieu of notice will
not exceed the value of 12 months’ salary, benefits and pension Service contracts
contributions. Both mitigation and the timing of payments through
the notice period will be considered by the Committee where The service contract for Warren East, includes 12 months’ notice of
appropriate, as will the funding of reasonable outplacement and termination from the Company and six months’ notice from the
other professional fees. There is no automatic entitlement to an Executive Director. The service contracts of Stephen Daintith, and
annual bonus. Taking into account the circumstances, the Committee any new appointee, will include 12 months’ notice from the Company
has discretion to award a bonus in respect of performance in the and 12 months’ notice from the Executive Director. All contracts
financial year with appropriate consideration of time pro-rating. include the entitlement to paid holidays, sick pay, and other standard
employment terms including reimbursement of reasonable
Deferred shares will generally be released in cases such as business expenses.
retirement, death, injury, ill-health, redundancy or any other reason
at the discretion of the Committee. In these cases any annual bonus The Chairman and Non-Executive Directors have letters of
awarded immediately prior to leaving may be delivered in cash appointment. No compensation is payable to the Chairman or to
rather than deferred shares. any Non-Executive Director if the appointment is terminated early
or if they fail to be re-elected at an AGM.
For the LTIP, the rules state that unvested awards may be preserved
at the Committee’s discretion according to the circumstances. In Legacy commitments
such cases vesting will be at the normal date, subject to the
established performance conditions, and pro-rated to employment Any remuneration payments and/or payments for loss of office
in the performance period. In cases such as death and terminal made under legacy arrangements prior to the approval of the
illness, the Committee also has the discretion to vest the awards Company’s remuneration policy may be paid out subject to the
immediately using an estimate of future outturn. If an individual terms of the remuneration policy in place at the time they were
leaves after the LTIP shares have vested but during the holding agreed. For these purposes, ‘payments’ include the Company
period, shares will not be forfeited but the holding period will satisfying awards of variable remuneration and, in relation to an
remain in force. The Committee also has the discretion to mitigate award over shares, the terms of the payment are agreed at the time
or clawback awards where an Executive Director retires and then the award is granted.
becomes employed or engaged by another business in a non-
voluntary capacity within 12 months. Minor amendments
The Committee may make minor amendments to the policy (for
Post-employment regulatory, exchange control, tax or administrative purposes or to
Post-employment, an Executive Director will normally be required take account of a change in legislation) without obtaining
to retain the lower of their shareholding requirement or their actual shareholder approval.
shareholding at leaving date (based on shares vesting following the
Section 40 disclosures
When developing the proposed remuneration policy and considering its implementation for 2020, the Committee was mindful of the Code
and considers that the executive remuneration framework appropriately addresses the following factors:
Clarity We provide open and transparent disclosures regarding our executive remuneration arrangements. We have
explained the changes to our proposed remuneration policy in a way that highlights their alignment to both
our vision and strategy as well as the provisions of the Code.
Simplicity Remuneration arrangements for our Executives and our wider workforce are simple in nature and well
understood by both participants and shareholders.
Predictability Our remuneration policy contains details of maximum opportunity levels for each component of pay, with actual
incentive outcomes varying depending on the level of performance achieved against specific measures.
Proportionality, risk, The metrics used to measure performance for annual bonus and LTIP awards drive behaviours that are closely
and alignment to aligned to our vision and strategy. In particular our variable pay arrangements continue to focus on delivering
culture an unprecedented level of transformation.
The Committee considers that our variable pay structures do not encourage inappropriate risk-taking.
The annual bonus and the LTIP are subject to the achievement of stretching performance targets, and
the Committee’s holistic assessment of performance that can result in the application of discretion.
The use of annual bonus deferral, LTIP holding periods and our shareholding requirements (including after
leaving employment with Rolls-Royce) provide a clear link to the ongoing performance of the business and
therefore alignment with shareholders.
Malus and clawback provisions also apply for both the annual bonus and LTIP.
Executive Directors’ remuneration

The following pages show how we have applied our remuneration policy during 2019 and disclose all elements of remuneration received
by our Executive Directors. Details of remuneration received by our Non-Executive Directors during 2019 can be found on pages 103
and 104.
Executive Directors’ single figure of remuneration (audited)
Long-term
Salary (a) ¹ Benefits (b) Bonus (c) incentives (d) ²,³ Pension (e) Total remuneration
£000 £000 £000 £000 £000 £000
2018
2019 2018 2019 2018 2019 2018 2019 restated 2019 2018 2019 2018
Executive Directors
Warren East 944 944 17 17 883 1,012 1,079 1,866 236 236 3,159 4,075
DIRECTORS’ REPORT
Stephen Daintith 680 680 20 19 530 608 714 1,770 150 150 2,094 3,227
1 Neither Warren East nor Stephen Daintith received a salary increase in 2019. The last increase made to Warren East was in September 2017.
2 The average share price for the three months to 31 December 2019 of 722p has been used to calculate the LTIP value (as the actual value is not known at the date of signing this
report). The 2018 long-term incentive value has been updated from the 2018 Annual Report. This value is now based on the share price on vesting on 1 March 2019 of 909p.
3 There is no share appreciation reflected in the 2018 LTIP values as the share price has reduced since the grant date.
a) Salary
The Company provides suitable competitive salaries to attract and retain individuals of the right calibre to develop and execute the
business strategy. The Committee reviewed the salaries of Warren East and Stephen Daintith in early 2020 and agreed there would
be no increases for 2020.
Base salary as at Base salary as at

Executive Director 1 March 2020 1 March 2019
Warren East £943,500 £943,500
Stephen Daintith £680,000 £680,000
b) Executive Directors’ benefits (audited)

Benefits are provided to ensure that remuneration packages remain sufficiently competitive to attract and retain individuals of the
right calibre to develop and execute the business strategy and to enable them to devote themselves fully to their roles. The taxable value
of all benefits paid to Executive Directors during 2019 is shown below.
Car or car
allowance inc. Medical Travel and
fuel allowance insurance subsistence Total
£000 £000 £000 £000
Executive Directors 2019 2018 2019 2018 2019 2018 2019 2018
Warren East 15 15 1 2 1 – 17 17
Stephen Daintith 17 17 2 2 1 – 20 19
c) Annual bonus outturn (audited)

The Company’s annual bonus scheme is designed to incentivise the execution of the business strategy, delivery of financial targets and the
achievement of personal objectives. Executive Directors receive any annual bonus awarded in March following the performance period.
60% of the bonus is paid in cash with the remaining 40% awarded in deferred shares. Deferred shares are held in trust for two years
before being released, subject to the recipient still being employed by the Group and include the right to receive an amount equal in
value to the C Shares issued during the deferral period. The annual maximum for the Chief Executive is 180% of salary and 150% for the
other Executive Director(s):
—— 80% of the award is based on Group performance
—— 20% of the award is based on individual performance
c) Annual bonus outturn (audited) continued

The Committee reviewed the 2019 outturn against the performance measures; 80% of annual bonus is based on Group performance and
20% is based on individual performance. The Group performance measures are shown below:
Employee
Profit Cash Customer metric 1 engagement 2 Total
Weighting 25% 50% 12.5% 12.5% 100%
Base (25%) £334m £610m measured as the
3.59/3.58
Target (50%) £434m £760m average of the business 3.68/3.61
scorecards (see below)
Maximum (100%) £634m £1,060m 3.91/3.65
2019 performance 3 £628m £866m 38% 3.56/3.52
% of maximum 98% 68% 19% 0% 61%
Adjusted % of maximum 52.5%
1 Customer metric is measured on the average of the business scorecards (see below).
2 In2019, a new survey, Gallup Q12, was introduced to measure employee engagement. There were two surveys in 2019, the first weighted at 25% and the second at 75% of the overall
metric. Power Systems employees only participated in the second survey.
3 Adjusted to exclude ITP Aero, non-core businesses, FX, exceptional items, the impact of accounting effects and unbudgeted items.
The Committee retains overriding discretion on the outturns of the annual bonus and chose to apply that discretion to reduce the
2019 outturns. In assessing the final bonus awards, the Committee considered a number of factors, particularly Trent 1000, as well as HSE
performance, quality of financial performance and the experience of customers and shareholders. The Committee exercised discretion to
reduce the overall bonus outturn from 61% to 52.5%.
Definitions used for performance measures:
Profit – adjusted underlying profit before tax for 2019.
Cash – free cash flow which is cash flow before acquisitions and disposals, shareholder payments and foreign exchange.
Customer metric – Group performance is assessed using an index score based on the average outcome of bespoke customer metrics for
each of Civil, Power Systems and Defence. This approach means that each business focuses on the most meaningful customer metrics. See
page 15 for more information. The customer metrics for each business are below:
Civil Aerospace – OE delivery to purchase order, TotalCare engine availability, CorporateCare engine availability, Trent 1000 aircraft on
ground (AOG).
Power Systems – OE delivery to purchase order, spares delivery to purchase order, claims per unit, time to solve.
Defence – OE delivery to purchase order, spares delivery to purchase order, engine availability, submarines composite delivery.
The specific business targets are commercially sensitive.
Employee engagement – Is measured through our annual engagement survey. In 2019, we introduced a new employee opinion survey,
in partnership with Gallup. We ran two surveys this year to embed the new approach and weighted the first survey at 25% of the bonus
metric and the second at 75%. 58% of employees completed the first survey and 72% completed the second survey. We achieved a Group
score of 3.56 for the first survey and 3.52 for the second resulting in a weighted average of 3.53.
Individual performance
Executive Directors have 20% of their bonus based on achievement of their personal objectives. Personal performance objectives are set at
the beginning of the year and are aligned with the Group’s internal strategic priorities.
For Executive Directors, these have included:
—— deliver Group revenue, profit and cash, in line with the budget, with specific focus on cash costs and free cash flow;
—— accelerate progress on diversity and HSE against agreed objectives and metrics;
—— drive M&A disposals, in particular ensuring a successful completion of the Commercial Marine disposal;
—— continue to drive the Group restructuring programme, delivering a further 1,500 in headcount reductions and a run rate of £300m by
the end of 2019;
—— drive performance through our values and behaviours, leading by example with a strong focus on safety, diversity & inclusion and the
highest ethical and professional standards; and
—— fix the fleet – manage the legacy engine issues effectively to rebuild trust and confidence with our customers.
The Committee assesses performance against the objectives. The overall assessed percentage is based on the Committee’s judgement and
may include other factors and achievements in the year.
The following provides an overview of key achievements during the year for each Executive Director:
Warren East Stephen Daintith
Delivered business performance ahead of budget on profit and Delivered on all areas of financial guidance for 2020; revenues,
cash with enhanced quality of cash driven by cost control and margins, profit and cash flow.
operational improvements. Healthy growth in Power Systems
revenue against a weak market and Defence record backlog.
64% new widebody orders achieved in Civil Aerospace. Increased
profitability in all businesses.
Majority of Trent 1000 issues addressed and roll out into the fleet Fundamental improvement in cash flow with strong free cash flows
in progress. Doubled MRO output in 2019, with further capacity delivered in 2019 and a clear roadmap to at least £1bn in 2020.
increase in progress.
Further management change across all businesses and functions. Successful disposals of non-core assets (Commercial Marine,
Group Business Services function established delivering 9% cost North America Civil Nuclear business) with proceeds retained
reduction in year one. On track to meet targets announced in to strengthen the balance sheet. Average net debt has reduced
DIRECTORS’ REPORT
June 2018. from £1.3bn in 2018 to circa £0.7bn in 2019.
TRI improvement in Civil Aerospace, Power Systems and Defence. Finance systems and management information transformation
Gender diversity strongly improving amongst senior management continued with the introduction of an integrated driver-based
and in succession plans at most levels. ELG moving from 15% female budgeting and forecasting tool to improve planning.
in 2018 to 20% in 2019.
Further balance sheet improvements through completion of Restructuring programme progressed in line with expectations
non-core asset sales. Improved free cash flow, continuing to with circa 2,900 cumulative headcount reduction and run-rate
drive down net debt. savings so far of £269m, C&A costs reduced 5% year-on-year,
capital expenditure reduced year-on-year by more than £200m.
Within flat overall R&D cost, shifting the balance towards
future-looking, zero carbon technologies, alongside progress on
next generation gas turbines. Acquisition of Siemens’ eAircraft
business and investment in microgrids to accelerate electrical
capability. Establishing industry leadership position in lower
carbon technologies.
2019 annual bonus outturn (to be paid in March 2020)

Group Individual
performance performance Total bonus Total bonus
(% of maximum) (% of maximum) (% of maximum) (% of salary)
Warren East 53% 50% 52% 94%
Stephen Daintith 53% 50% 52% 78%
d) Long-term incentives (audited)

Conditional share awards are made to Executive Directors under the LTIP to reward the execution and development of the business strategy
over a multi-year period. The conditional shares are then subject to a further two-year holding period.
LTIP awards made in March 2019

The performance targets for awards made in March 2019 are shown below. Performance will be measured over three years to
31 December 2021.
CPS (60%) EPS (20%) Relative TSR (20%)

Threshold (20% vesting) 112p 81p Median
Mid (50% vesting) 150p 95p Between median and upper quartile
Maximum (100% vesting) 187p 109p Upper quartile
Face value
Number of award ¹ Performance
of shares % of salary £000 period end date
Warren East 264,532 250 2,359 31 December 2021
Stephen Daintith 171,589 225 1,530 31 December 2021
1 Calculated as 250% of salary for Warren East and 225% of salary for Stephen Daintith, divided by share price at date of grant of 891.57p per share.
2017 LTIP awards

The following sets out details in respect of the May 2017 LTIP award for which the final year of performance was the 2019 financial year.
The performance conditions were assessed to the end of 2019 and the shares are then subject to a two-year holding period.
Threshold Mid Maximum Performance Vesting as a % of
Weighting (20% vesting) (50% vesting) (100% vesting) achieved maximum
CPS 1 60% 57p 76p 104p 87p 69.6%
EPS 2 20% 3p 23p 48p 26p 56.0%
Relative TSR 10% Median Upper quartile Below median 0%
v FTSE 100
constituents
Relative TSR v 10% Median Upper quartile Below median 0%
constituents of
the S&P Global
Industrials index
Total vesting of
53%
1 CPSranges were adjusted to reflect M&A activity in line with the plan definition. The original targets were minimum 60p; mid 80p; maximum 110p.
2 Overthe performance period of the LTIP award the Company was required to change from accounting under IAS 18 to IFRS 15. This had a significant effect on reported profit and EPS.
The targets were set on the basis of IAS 18 and, as communicated at the time of the grant, these targets have been restated so that they can be measured on an IFRS 15 basis. The
translation has been on a like-for-like basis, applying the absolute cumulative profit growth in the original IAS 18 targets to the restated 2017 IFRS 15 target.
e) Pension entitlements (audited)

Executive Directors are offered membership of a defined contribution plan. A cash allowance may be payable in lieu of pension
contributions.
From 2020, any newly appointed Executive Directors will be offered an employer contribution of 12% of salary into the defined
contribution pension plan (or cash allowance of equivalent value). This aligns to the new hire rate for the UK workforce.
In terms of existing Executive Directors, Warren East receives a cash allowance of 25% of salary and Stephen Daintith 22% of salary. During
2019 the Company embarked on a consultation exercise with UK managers in its legacy defined benefit plan (which has been closed to
new members since 2007), to reduce future benefits from that plan. In the context of the reductions in pension benefits for that
population, both Stephen and Warren have agreed that their cash allowances should also reduce. The following reductions have therefore
been agreed with the Committee to a rate of 17% in 2022:
Current pension allowance 25% 22%
Proposed change from 1 March 2020 23% 21%
Proposed change from 1 March 2021 20% 19%
Target level by 1 March 2022 17% 17%
In arriving at the 17% contribution rate for existing Executive Directors we have considered our UK population, which represents the
largest employee group. Currently almost half of our UK workforce (45%) are active members of our defined benefit plan with a funding
cost in excess of 30% of salary (based on the most recent funding valuation in March 2017). Given current financial market conditions, we
would expect that cost to increase by the time of the next valuation in March 2020. Our defined contribution employer contribution rate is
12%, which we now offer to all new hires in the UK.
As we have such a significant proportion of our UK workforce in a defined benefit plan, we have reviewed the average blended
contribution rate across all UK employees, which currently gives an average of 17% of salary. We believe that this is currently a fair
reflection of the pension arrangements of the wider workforce. However, to reflect funding costs of defined benefit pensions and the
proportion of employees in the defined benefit and defined contribution plans, we plan to keep this rate under review.
Other (audited)
Payments to past directors
An agreement was put in place between the Company and Colin Smith in 2017, for Colin to represent the Company in an ambassadorial
capacity. The agreement was for up to 21.5 days for the latter part of 2017, 35 days for 2018 and 2019. This agreement has been extended
for 2020 for up to 20 days. Total payments of £159,360 have been made under this agreement, of which £45,360 was paid in 2019.
Implementation of remuneration policy in 2020 *
Base salary There will be no change to base salary for 2020; base salaries remain as:
Warren East – £943,500
Stephen Daintith – £680,000
Benefits There will be no change to our approach to benefits in 2020, which includes car or car allowance, financial
planning assistance, insurances and other benefits.
Pensions Pension cash allowances for existing Executive Directors will be reduced as follows from 1 March 2020:
—— Warren East – 23% (reduced from 25%) of salary
—— Stephen Daintith – 21% (reduced from 22%) of salary
Further reductions will be made in 2021 and 2022 to bring both allowances to 17%.
DIRECTORS’ REPORT
Annual bonus For 2020, bonuses will continue to be awarded using a simple additive approach:
—— 80% of the award will be based on Group performance
—— 20% of the award will be based on individual performance
For 2020, the Group measures and weightings will be unchanged: profit (25%); free cash flow (50%); customer
(12.5%); and employee engagement (12.5%).
Operating profit will however be used as the profit measure rather than profit before tax, to better align our
incentive targets with underlying business performance and to maintain consistency with external guidance.
Targets are commercially sensitive and will be disclosed following assessment of performance.
Maximum opportunities will remain unchanged:
—— Chief Executive – 180% of salary
—— Other Executive Directors – 150% of salary
LTIP awards For awards to be granted in 2020 performance measures will be weighted:
—— 60% on CPS
—— 20% on EPS
—— 20% on relative TSR (versus FTSE 100 and Global S&P Index, to recognise that Rolls-Royce is a global company)
Performance will be measured over three years to 31 December 2022. Performance targets will be:
EPS
CPS IFRS 15 basis Relative TSR
Threshold (20% vesting) 162p 85p Median
Mid (50% vesting) 203p 106p Between median and upper quartile
Maximum (100% vesting) 244p 127p Upper quartile
Performance below threshold will result in that element lapsing in full.

The above targets are not an indication of forecast numbers for the three-year period.
Methodologies
CPS –C alculated as reported cash flow before the cost of business acquisitions or proceeds of
disposals, foreign exchange translation effects, special payments into pension schemes and
payments to shareholders, divided by the weighted average number of shares in issue. CPS is
cumulative over a three-year period. The Committee will review CPS performance to ensure
that it is a fair reflection of achievements over the period.
EPS – Calculated as cumulative absolute underlying EPS over the three-year performance period on
an IFRS 15 basis.
Relative TSR – M easured 50% against the constituents of the FTSE 100 and 50% against the constituents of
the S&P Global Industrials index.
Award sizes for maximum performance

—— Chief Executive: 250% of salary
—— Other Executive Directors: 225% of salary
Threshold vesting at 20% equates to 50% of salary for the Chief Executive and 45% of salary for other
Executive Directors. LTIP awards will be subject to an additional holding period of two years following the
three-year performance period.
* Subject to approval by shareholders at the 2020 AGM.

Other information
Executive Directors’ share interests (audited)

The Directors and their connected persons hold the following interests in the ordinary shares of the Company:
Conditional shares
not subject to Conditional Conditional Options over
performance shares subject to shares subject to shares subject to
conditions performance performance savings contract
Ordinary shares (deferred share bonus) conditions (PSP) conditions (LTIP) (ShareSave)
31 December 2019 27 February 2020 31 December 2019 31 December 2019 31 December 2019 31 December 2019
Warren East 185,208 185,208 99,697 – 821,569 1,264
Stephen Daintith 189,068 189,068 53,961 – 536,568 925
Executive Directors’ interests in vested and unvested share awards (audited)

Granted Market price
31 December during the Vested Lapsed 31 December at date of Date Vesting date/ Market price
Warren East 2018 year awards awards 2019 award (p) of grant lapse date at vesting (p)
PSP 2016 1 164,202 – 205,253 – – 676.00 01/03/16 01/03/19 909.00
Total 164,202 – 205,253 – –
LTIP 2017 281,954 – – – 281,954 820.17 05/05/17 05/05/20 –
LTIP 2018 275,083 – – – 275,083 857.47 08/03/18 08/03/21
LTIP 2019 – 264,532 – – 264,532 891.67 15/03/19 15/03/22 –
Total 557,037 264,532 – 821,569
Deferred share bonus (2016) 47,398 – 47,398 – – 772.83 01/03/17 01/03/19 –
Deferred share bonus (2017) 53,641 – – – 53,641 857.47 08/03/18 01/03/20 –
Deferred share bonus (2018) – 45,376 – – 45,376 891.67 15/03/19 01/03/21 –
Total 101,039 45,376 47,398 – 99,017
ShareSave (options) 2 1,264 – – – 1,264 616.80 12/10/15 01/02/21 –
Granted Market price

31 December during the Vested Lapsed 31 December at date of Date Vesting date/ Market price
Stephen Daintith 2018 year awards awards 2019 award (p) of grant lapse date at vesting (p)
PSP 2017 (buy-out award) 1,3 70,027 – 91,036 – – 754.70 05/05/17 01/03/19 909.00
PSP 2017 (buy-out award) 1,3 79,726 – 103,644 – – 754.70 05/05/17 31/10/19 711.00
Total 149,753 – 194,680 – –
LTIP 2017 186,547 – – – 186,547 820.17 05/05/17 05/05/20 –
LTIP 2018 178,432 – – – 178,432 857.47 08/03/18 08/03/21 –
LTIP 2019 – 171,589 – – 171,589 891.67 15/03/19 15/03/22 –
Total 364,979 171,589 – – 536,568
Deferred share bonus (2017) 26,374 – – – 26,374 857.47 08/03/18 01/03/20 –
Deferred share bonus (2018) – 27,253 – – 27,253 891.67 15/03/19 01/03/21 –
Total 26,374 27,253 – – 53,627
ShareSave (options) 2 925 – – – 925 758.40 13/10/17 01/02/21 –
ShareSave (options) 2 – 292 – – 292 676.50 16/10/19 01/02/23 –
1 The 2016 PSP (which vested in March 2019) included a kicker for above median TSR performance, which generated a multiplier of 1.4 x the original grant value. As disclosed at the time,
this multiplier was capped for the 2016 grants, the awards vested at 150% of salary for Warren East and 130% of salary for Stephen Daintith’s buy-out awards that were tied to this plan.
2 For ShareSave, the price shown is the exercise price which was 85% of the market price at the date of the award.
3 The grant price for PSP awards made to Stephen Daintith was the average closing mid-market price calculated over one month, up to 22 September 2016 (the date that his
appointment to Rolls-Royce was announced).
Shareholding requirement (audited)

Executive Directors are required to work towards holding beneficially-owned shares equivalent in value to a percentage of their salary
by retaining at least one half of after-tax shares released from the LTIP until this requirement is met. For the Chief Executive this
requirement is 250% of salary and for other Executive Directors this requirement is 200% of salary. The current shareholdings, as a
percentage of salary, for Warren East and Stephen Daintith are 183% and 232% respectively *.
As a result of the policy review, an additional requirement has been added to the shareholding policy which requires Executive Directors
to retain the lower of their shareholding requirement (based on shares vesting following the introduction of the new policy) at the date of
leaving for one year after leaving and 50% of this level for a second year *.
* The percentage of the requirement was calculated by reference to the average share price, over the three months to 31 December 2019, and salary as at the date of the last grant on
15 March 2019. Unvested LTIP awards and ShareSave options are not included in this calculation.
Pay across the organisation

This section of the report enables our remuneration arrangements to be seen in context by providing:
—— a comparison of the year-on-year percentage change in our Chief Executive’s remuneration with the change in average remuneration
across the UK;
—— a year-on-year comparison of the total amount spent on employment costs across the Group and shareholder payments;
—— a ten-year history of our Chief Executive’s remuneration;
—— our TSR performance over the same period; and
—— an indication of the ratio between our Chief Executive’s remuneration and the remuneration of employees.
Percentage change in Chief Executive remuneration

The following table compares the percentage change in the Chief Executive’s salary, bonus and benefits (excluding LTIP) to the average
percentage change in salary, bonus and benefits for all UK employees from 2018 to 2019.
DIRECTORS’ REPORT
Change in remuneration
Salary Benefits Annual bonus
Chief Executive 0% 0% (13)%
UK employees average 1 3.38% 18.74% 14.83%
1 UK employees were chosen as a comparator group in order to avoid the impact of exchange rate movements over the year. UK employees including apprentices, graduates and
interns, make up 45% of the total employee population. The increase in benefits in the year is due to implementation of a standardised career framework across our management
population. The increase in bonus is due to a higher bonus level particularly in Civil Aerospace which accounts for a large proportion of the UK workforce.
Chief Executive pay ratio

The Committee is mindful of the relationship between the remuneration of the Chief Executive and the wider employee population. This is
the third year that we have published our CEO pay ratio and we have continued to use method A, as we believe that this is the most
accurate and robust methodology. We have used the full time equivalent total remuneration of all UK employees at 31 December 2019.
Year Method 25th percentile Median 75th percentile
Total Remuneration ¹
2019 Option A 66:1 56:1 48:1
2018 Option A 92:1 77.1 72:1
2017 ² n/a n/a 41:1 n/a
1 In 2018, we also calculated the ratio based on average salary at 21:1. Using the same basis in 2019, this increased to 22:1.
2 The 2017 ratio was calculated prior to the regulations being issued and so was not fully aligned to the current approach.
The elements used to calculate the ratio comprise pay, benefits, pensions, bonuses and long term incentives. The numbers used in the
calculations are as follows:
Year 25th percentile Median 75th percentile
Salary £36k £44k £53k

Total Remuneration £48k £56k £65k
The pay ratio has reduced this year due to incentive outcomes for Warren East being lower in 2019 than in 2018. 2019 is also the first year
that the new LTIP plan introduced in 2017 vested. The majority of other participants in this plan had a mixture of conditional shares with no
performance conditions and performance shares. The vesting level for that population is therefore higher.
As outlined on page 93, the Committee has considered the wider workforce context in terms of alignment of total reward or the Executive
Directors, with the pension changes being one such example from 2019.
All employees participate in a bonus plan, with a good degree of alignment of financial measures with the executives’ bonus plan. We also
encourage all eligible employees to join our ShareSave plan. For our most recent launch in 2019 approximately 40% of our global
population joined the plan, sharing in approximately 14 million shares and stock appreciation rights.
Relative importance of spend on pay

The following chart sets out the percentage change in payments to shareholders and overall expenditure on pay across the Group.
Payment to shareholders (£m) * Group employment costs (£m)
(Consolidated Cash Flow statement) (Note 8 – employee information)
2019
2019 -29%
-29% 220
220 0.2%
0.2% 2019
2019 3,934
3,934 -6.2%
-6.2%
2018
2018 216
216 2018
2018 4,192
4,192
* Value of C Shares redeemed during the year

Chief Executive pay

Single figure
of total Annual bonus LTIP
remuneration as a % of as a % of
Year Chief Executive 1 £000 maximum maximum
2019 Warren East 3,159 52 53
2018 Warren East 4,075 60 100
2017 Warren East 2,331 68 –
2016 Warren East 2,089 55 –
2015 Warren East 543 – –
2015 John Rishton 754 – –
2014 John Rishton 2,596 – 45
2013 John Rishton 2 6,228 55 100
2012 John Rishton 2 4,577 85 –
2011 John Rishton 3,677 63 –
2011 Sir John Rose 3 3,832 – 75
2010 Sir John Rose 3 3,914 100 100
1 On 31 March 2011, Sir John Rose retired and John Rishton was appointed. John Rishton retired on 2 July 2015 and Warren East was appointed as Chief Executive on 3 July 2015.
2 John Rishton received a special grant of shares on joining the Company on 1 March 2011 to mirror the shares he forfeited on resigning from his previous employer.
The share price had increased from 483.50p at the time this grant was made to 870p at the end of 2014. These are the main reasons why John Rishton’s remuneration in 2012
and 2013 exceeded that of his predecessor.
3 The remuneration for Sir John Rose does not include any pension accrual or contribution as he received his pension from 1 February 2008.
TSR performance
The Company’s TSR performance over the previous ten years compared to a broad equity market index is shown in the graph below.
The FTSE 100 has been chosen as the comparator because it contains a broad range of other UK-listed companies. The graph shows
the growth in value of a hypothetical £100 holding in the Company’s ordinary shares over ten years, relative to the FTSE 100 index.
500 Rolls-Royce
FTSE 100
400
300
£
200
100
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Year
Gender pay reporting

The Company is committed to creating a diverse and inclusive place to work where our people can be themselves and be at their best.
More information about this can be found on pages 45 to 48. We published our UK gender pay gap in December 2019, which showed:
Median gender pay gap across all Rolls-Royce Mean gender pay gap across all Rolls-Royce
employees in the UK employees in the UK
2019
2019 8.4%
8.4% 2019
2019 7.1%
7.1%
2018
2018 8.1%
8.1% 2018
2018 6.6%
6.6%
Overall women currently represent 16% of our workforce. However, we continue to make progress in recruiting more women into
senior positions, where 20% is now female. See pages 47 and 48 for further information on what we are doing to address diversity
across the organisation.
Contractual arrangements
Each Executive Director has a service agreement that sets out the contract between that Executive Director and the Company.
Executive Directors’ service contracts

Date of contract Notice period from Company Notice period from individual
Warren East 21 April 2015 12 months 6 months
Stephen Daintith 21 September 2016 12 months 12 months
Payments received for serving on external boards

Executive Directors retain payments received from serving on the boards of external companies, the details of which are given below:
Payments received and retained
Directorships held £000
Warren East – –
Stephen Daintith 3i Group plc 81
DIRECTORS’ REPORT
Non-Executive Directors’ remuneration
Single figure of remuneration (audited)
Fees Benefits Total remuneration

(£000) (£000) (£000)
Chairman and Non-Executive Directors 2019 2018 2019 2018 2019 2018
Sir Ian Davis 425 425 3 2 428 427
Lewis Booth 95 95 40 29 135 124
Ruth Cairnie (stepped down 31 December 2019) 90 90 3 3 93 93
Sir Frank Chapman 90 90 3 5 93 95
Irene Dorner 85 76 1 1 86 77
Beverly Goulet 70 70 11 7 81 77
Lee Hsien Yang 70 70 40 4 110 74
Nick Luff 70 46 – – 70 46
Brad Singer (stepped down 9 December 2019) 66 70 21 6 87 76
Sir Kevin Smith 105 105 2 2 107 107
Jasmin Staiblin 70 70 14 10 84 80
Total 1,236 1,207 138 69 1,374 1,276
Non-Executive Directors’ fees

The Chairman’s fee is reviewed by the Board as a whole on the recommendation of the Committee. The review of the other Non-Executive
Directors’ base fees is reserved to the Executive Directors, who consider recommendations from the Chairman. No individual may be
involved in setting his or her own fee. The Chairman and the Non-Executive Directors are not eligible to participate in any of the Group’s
share schemes, incentive arrangements or pension schemes. A facility is in place which enables Non-Executive Directors (who reside in a
permitted dealing territory) to use some or all of their fees, after the appropriate statutory deductions, to make market purchases of shares
in the Company on a monthly basis. Sir Ian Davis and Lee Hsien Yang use this facility.
Non-Executive Directors’ fees

2019 2018
£000 £000
Chairman 425 425
Other Non-Executive Directors base fee 70 70
Chairman of the Audit Committee 25 25
Chairman of the Remuneration Committee 20 20
Chairman of the Safety, Ethics & Sustainability Committee 20 20
Chairman of the Science & Technology Committee 20 20
Senior Independent Director 15 15
Employee Champion 15 15
Non-Executive Directors’ benefits (audited)

The benefits for Non-Executive Directors relate predominantly to travel, hotel and subsistence incurred in attending meetings.
For Non-Executive Directors based outside the UK, the Company may also pay towards tax advice and the cost of making tax filings.
Non-Executive Directors’ share interests (audited)

The Non-Executive Directors and their connected persons hold the following interests in the ordinary shares of the Company:
Chairman and Non-Executive Directors 31 December 2019 27 February 2020

Sir Ian Davis 79,453 79,453
Lewis Booth 70,000 70,000
Ruth Cairnie (stepped down 31 December 2019) 19,927 n/a
Sir Frank Chapman 33,269 33,269
George Culmer (appointed 2 January 2020) n/a –
Irene Dorner 12,510 12,510
Beverly Goulet 9,360 9,360
Lee Hsien Yang 8,397 8,397
Nick Luff 10,000 10,000
Sir Kevin Smith 26,894 26,894
Jasmin Staiblin – –
Non-Executive Directors’ letters of appointment

Our Non-Executive Directors serve a maximum of three, three-year terms (nine years in total).
Current letter of
Chairman and Non-Executive Directors Original appointment date appointment end date
Sir Ian Davis 1 March 2013 28 February 2022
Lewis Booth 1 25 May 2011 24 May 2020
Sir Frank Chapman 1 10 November 2011 9 November 2020
George Culmer 2 January 2020 1 January 2023
Irene Dorner 27 July 2015 26 July 2021
Beverly Goulet 3 July 2017 2 July 2020
Lee Hsien Yang 1 January 2014 31 December 2022
Nick Luff 3 May 2018 2 May 2021
Sir Kevin Smith 1 November 2015 31 October 2021
Jasmin Staiblin 21 May 2012 20 May 2021
1 Subject to shareholder approval, the Board have recommended that both Lewis Booth and Sir Frank Chapman serve as independent Non-Executive Directors and they will step down
from the Board no later than the 2021 AGM (see page 77 for further details).
Statutory requirements
The Committee’s composition, responsibilities and operation comply with the principles of good governance, as set out in the Code, the
Listing Rules (of the Financial Conduct Authority) and the Companies Act 2006. The Directors’ remuneration report has been prepared on
the basis prescribed in the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013.
Safety, Ethics & Sustainability Committee Report 105
SAFETY, ETHICS & SUSTAINABILITY

Membership and operation of the Committee
In addition to myself, members of the Committee during 2019 were
Irene Dorner, Nick Luff and Lee Hsien Yang. George Culmer joined
the Committee in January 2020. All members of the Committee are
independent Non-Executive Directors. Our biographies are on
pages 62 to 64 and our meeting attendance is on page 66.
The Committee’s responsibilities are outlined in its terms of
reference which can be found at www.rolls-royce.com. We review
these annually and refer them to the Board for approval. No
changes have been made in 2019. This follows a detailed review
SIR FRANK CHAPMAN in 2018 to ensure alignment with the principles of the Code.
Chairman of the
Safety, Ethics &
Sustainability Committee Committee evaluation review
Belinda Hudson Limited (BHL) was appointed for a second year, this
DIRECTORS’ REPORT
time to undertake a light touch review of the Board and committees,
Key highlights following a full review in 2018. The effectiveness review process
Supporting management with embedding a safety culture of the Board and its committees is discussed in greater detail on
Review of product safety management with a particular page 74 together with overall findings.
focus on Civil Aerospace and Power Systems
Maintaining focus on product safety and HSE during the
period of organisational change Product safety
Monitoring of compliance with obligations under the SFO Maintain an understanding of and keep under review the
and DoJ DPAs and maintaining oversight of the Group’s framework for effective governance of product safety.
implementation of Lord Gold’s recommendations Monitor product safety performance, the response to product
Overseeing deployment of revised mandatory training with in-service issues and lessons learned.
a focus on anti-bullying and harrassment
HSE
Oversee HSE governance, review performance, incidents and
monitor improvement projects.
Introduction
Guide and support management in the promotion of committed
The Committee has continued to support management’s efforts to HSE leadership as part of our culture.
embed core values and progress further towards a self-sustaining
safety culture. We have sought to assure the safeguarding of these Sustainability
goals against a backdrop of ongoing Group transformation and the Oversee the Group’s approach to sustainability, and related
operational and financial challenges presented by the in-service reporting, including monitoring of progress towards
issues with the Trent 1000. sustainability targets.
At the beginning of the year, we re-named the Committee the Safety, Understanding the environmental impacts of products and
Ethics & Sustainability Committee (previously the Safety & Ethics operations.
Committee). Although our remit has always been to cover
sustainability issues, we wished to highlight our Board oversight
Ethics & compliance
Review the Group’s compliance with relevant legislation.
role in this area. Key sustainability workstreams such as scientific,
technological and engineering innovation fall within the remit of Keep Our Code and anti-bribery and corruption policies
the Science & Technology Committee. However, the impact of this under review.
work on the Group’s aggregate sustainability strategy is drawn Support the Board with its review of issues raised through the
together by this Committee. Ethics Line and other channels including reviewing the results
of any investigations into ethical or compliance breaches or
We seek to balance scrutiny with support to the management
allegations of misconduct.
team. I am encouraged by the progress we are making with the
simplification and strengthening of our product safety processes; Principal risks
initiatives within HSE to protect the integrity of our assets through Safety, compliance and climate change.
a safety case programme; and progress with our anti-bullying and
harassment campaign. Areas of focus for 2020
Site visits were made during the year to Friedrichshafen, Germany; Continued product safety overview including progress to
Bristol and Derby, UK; and Singapore to observe first-hand how our closure of issues in the large engine portfolio
safety and ethics ethos is being translated into front-line
Oversight of management’s leadership of HSE performance
operations. It was positive to see the impact the safety case
programme is having on employee engagement and HSE practices. Continued focus on product safety governance as our
transformation and simplification programmes progress
In-depth review of climate change principal risk
Oversight of the sustainability strategic review and launch of
the new sustainability targets
Safety, Ethics & Sustainability Committee Report
Safety, Ethics & Sustainability Committee focus during 2019
Product safety Maintaining safety during organisational change. The Committee was satisfied that product safety
governance remained robust during transformation.
Product safety policy and processes, training,
safety assurance framework and competence The safety assurance framework is a sound
in manufacturing. incremental development.
Product safety performance and in-service issues. Safety performance remained at expected levels,
with safety aspects of in-service issues handled
Product safety management systems.
competently and appropriately.
Product safety in Civil Aerospace with periodic
The product safety management system in
review and scrutiny of potential Trent 1000 safety
Civil Aerospace is effective and well-operated.
matters and their management.
HSE Detailed reviews of serious injury and high potential Despite some improvement across particular areas
incidents. of our business, overall Group TRI performance
has remained flat. A series of directed campaigns
Events, key findings, shared learning and actions.
and specialist support for identified areas will be
HSE ambition, strategy and plans for continuous introduced in 2020. HSE continues to be a key
improvement. leadership priority for Rolls-Royce and our efforts
are focused on driving self-sustaining improvement
HSE performance including incidents, injuries, waste, through embedding a safety culture, where everyone
energy use and GHG emissions metrics. understands their role in our Zero Harm programme.
HSE programmes: LiveWell, asset care, waste action. Strengthening of HSE leadership, strategies, plans
and communications as part of a structured approach
to achieve continuous improvement.
HSE programmes are at varying maturity levels and
improvement trends reflect this. Efforts continue to
strengthen programmes with focus on key themes.
Sustainability Review of the Group’s approach to sustainability and The purpose and approach to reviewing and revising
governance and endorsement of ongoing strategic our sustainability strategy was endorsed by the
review to strengthen consideration of social and Committee.
environmental factors in Company policy and
Considered and endorsed the introduction of a new
decision-making, including development of
sustainability framework.
longer-term targets.
The Committee supported the ESG event in response
Company positioning on sustainability, including
to increasing investor interest in sustainability approach.
external reporting and communications.
Ethics & Compliance with continuing obligations under the DPAs Reviewed detailed plans for, and progress on,
compliance and implementation of Lord Gold’s recommendations. compliance. Reviewed the draft final report to DoJ.
Deployment of Our Code and Group policies. Group policies reviewed and new mandatory training
introduced in 2019.
Resourcing of the ethics and compliance team and
effectiveness of compliance officers. The ethics and compliance team is effective.
Embedding of ethics and compliance culture and Bullying and harassment were prevalent themes
behaviours. Review of number and nature of concerns and we will be monitoring the effectiveness of
raised through the Ethics Line. management’s campaigns to address this.
Management of intermediaries including screening, The intermediary processes are effective to manage
appointments, payments, termination and settlements. the risks.
Review of pension consultation. Review of the speak up cases relating to the proposed
changes to the UK defined benefit pension scheme.
Progress with data privacy binding corporate
rules application.
Oversight of 2018 Principal risks of compliance and safety reviewed. These principal risks are reviewed and discussed at
principal risks every meeting of the Committee and both continue
to be managed effectively.
Product safety
We aim to go beyond compliance with regulatory product safety
standards, setting a goal of continuous product safety improvement,
in common with industry best practice in the markets in which we
operate. This is regarded as fundamental to the Group’s licence to
operate and to the sustainability of our business. Product safety
encompasses the design, manufacture, assembly, installation,
in-service operation, maintenance and repair of products, across all
of our businesses and regions where we operate. It is critical that
product safety processes develop continuously to underpin the
science and technological innovation that enables product designs
to evolve and extend operational boundaries.
We continued to maintain a focus throughout the year on how
safety risk was being managed through the Group’s transformation
DIRECTORS’ REPORT
programme. It was also noted that the electrical business was an
area of high activity and innovation in the Company, which was
progressing at pace with the acquisition of Siemens’ eAircraft business.
A particular degree of focus on product safety was warranted to
ensure consistency with the standards across other parts of the
POWER SYSTEMS PRODUCT
organisation. This will be a priority for the Committee in 2020. SAFETY WORKSHOP
We were briefed in February on the progress of the implementation
of the product safety training programme. The Committee noted the In order to provide effective oversight of product safety
continuing commitment to ensuring that all employees are regularly risk, the Committee remains conversant with the Group’s
reminded about the importance of product safety and their PSMS. In March 2019, we focused our attention on
responsibility to influence it. The new course for senior managers, product safety in Power Systems with a visit to the
which the Committee completed in 2018, has continued into 2019 Group’s facilities in Friedrichshafen, Germany.
and the target audience was extended. A new classroom-based
awareness training was launched in February 2019 with the aim We were briefed by the product safety leadership team
of helping our engineers to understand how their contribution can on the wide variety of markets and applications which
prevent unsafe products through a series of case studies and their product range addresses. This, together with a
discussion. Over 5,000 engineers completed this training in 2019 description of the regulatory landscape, set the scene
and feedback from delegates has been very positive. In addition, the for our review of the approach to product safety.
approach to our all-employee online training has been completely We learned how accountability for product safety is
refreshed and now provides a shorter, more impactful reminder assigned and were briefed on the governance of product
of the importance of product safety and that it is everyone’s safety within Power Systems. Key product safety roles
responsibility. In all aspects of the training, which forms part of the were described, together with how these roles interacted
2019 mandatory requirement, there has been a focus on giving our with project teams to ensure the safety of the products
people the confidence to speak up if they have any concerns as they are developed.
regarding safety in any area of the business. The Committee believes
that this is a positive step in driving a culture where safety is We gained an understanding of the PSMS used within
considered to be of utmost importance and concerns can be openly the business and were satisfied that this was appropriate
raised and addressed appropriately. for the range of products and applications and we saw
how the PSMS was applied throughout the lifecycle
In February 2019, we also reviewed the overall product safety of products.
performance metrics which are used as an indicator of the
performance of our product safety management system (PSMS). We were briefed on how the business approaches
The metrics gave no indication of any trends of decline in the the evaluation of a product safety risk and saw their
performance of our products and therefore demonstrate that the approach to the reporting of safety concerns and to
businesses continue to manage identified safety issues, with notable identifying and resolving unsafe conditions.
improvements in the age of open issues in various parts of the
We reviewed high-level product safety performance
business. The Committee did, however, note a deterioration over the
measures and lastly, we examined in detail a recent
preceding 12 months in the age profile of open safety issues in the
product safety event to see how in practice this issue
large engine portfolio within Civil Aerospace. Whilst it was noted that
had been evaluated and contained until the point when
containment actions against each issue were in place, the Committee
corrective action could be applied in the field.
sought, and received further insight, into the reasons behind this
trend. We reviewed the actions being taken by Civil Aerospace to Overall, the workshop provided a good level of confidence
reverse the trend. This was the subject of review by the Board in that the PSMS, as operated in Power Systems, was
December. Further follow-up is planned in 2020. effective, robust and competently operated.
Each year, the Committee reviews particular aspects of the Group’s The scope and format of the balanced scorecard was also
PSMS to ensure we maintain a good working knowledge of it and presented to the Committee in February. It includes five leading
understand the continuous improvements that are being introduced. indicators, which cover critical activities such as accountability,
At our meeting in February, we discussed a report on product training and visibility of management and is balanced by two
safety assurance which outlined the key initiatives that had been lagging indicators. The emphasis was on ensuring that data could
delivered in 2018 and the current drive to embed the use of the be easily collected, inform performance, drive improvement and
safety assurance framework and further improve safety awareness. align to the Zero Harm strategy. The Committee was pleased to
A significant element of the Group transformation is the simplification hear that as it matures, the data can be automated and shared with
of the RRMS. This represents an opportunity to emphasise the key the businesses as a way of driving awareness, improvement and
principles which keep our products safe, at the same time assuring efficiency across the Group.
that valuable lessons embedded in existing processes are retained.
The Group HSE risk profile was discussed at our meeting in July
The Committee will keep this under review during 2020 as it is
and it was encouraging to hear that all risks are showing an
imperative that our approach to product safety is appropriately
improving or stable control trend. One additional risk, off-site
defined within the system and our ability to manage it efficiently
working, has been added to the Group risk profile on the basis that
and effectively is maintained throughout.
all three businesses have identified it on their individual risk
In July, the Committee undertook its annual review of the product registers. Ensuring that these risks are monitored and managed
safety policy, which sets out the guiding principles by which we appropriately continues to be a priority for the Committee.
assure product safety and with which all employees must comply.
At each of our meetings, we review the Group’s key HSE activities,
In advance of the Committee meeting, the policy was reviewed at
performance metrics, insights and learning, including the TRI rate.
the Company product safety assurance board (CPSAB) and it was
Our TRI rate in 2018 was 0.55 per 100 employees ¹ and we remain
deemed to be an accurate and concise summary of our commitment
committed to achieving the 2020 group target of 0.30. There were
to, and management of, product safety. Following the recommendation
a total of 298 TRIs in 2019 which equates to an injury rate of 0.55.
from the CPSAB, the Committee concluded that the policy was still
Of these, 15 resulted in major injuries. We did, however, see an 18%
fit for purpose and should therefore remain unchanged.
decrease in the overall number of major and high-potential incidents
We also reviewed the product safety principal risk and were and a 1% increase in the overall severity index. Analysis of these
satisfied this was being managed effectively and within the events has identified that two keys areas will require the businesses’
boundaries of the agreed risk appetite. At each meeting, the focus in 2020: slips, trips and falls and hand injuries, as these two
Committee received an update on in-service incidents and, as part classes of injury account for more than half of our reportable injuries.
of these reviews, discussed any emerging product safety risks and Although there has been a decrease in the number of electrical
how these were being identified and managed as part of the PSMS. incidents following a focused campaign on this particular issue in
Following on from the Committee’s deep-dive reviews in 2018, these 2018, we were concerned to hear that near misses and high-potential
updates had a particular focus on Trent 1000 issues, and an incidents continue to occur. ITP Aero has had a particularly challenging
additional review was held in August to review the response to a year with injuries and they have initiated a five-part improvement
Trent 1000 in-flight shutdown on a Norwegian Airlines Boeing 787 plan to address their HSE performance, which will continue into
on departure from Rome Airport. We were particularly pleased to 2020 and beyond.
hear that safety processes are being updated, where appropriate,
to reflect any lessons learnt from each root cause analysis. Total reportable injury (TRI) rate (per 100 employees) 1,2
2020 0.3
HSE TARGET
2019 0.55
The Committee and management’s objective remains to drive 2018 0.55
continuous improvement in HSE performance. HSE matters have
2017 0.61
been discussed at all our meetings during the year and we have
paid particular attention to the levels of maturity in HSE leadership 2016 0.68
across the businesses of the Group. 2015 0.91
At the end of 2018, and following a review of the HSE improvement 2014 BASELINE 0.74
programme, the Committee recommended that governance and 1 Our TRI rate for prior years has been restated to reflect the disposal of Commercial
reporting on this activity should be strengthened in order to give Marine business on 1 April 2019. ITP Aero data is included for years 2017, 2018 and
2019 only.
business leaders and governance committees greater visibility of 2 External assurance over STEM, energy, GHG and TRI rate data provided by Bureau
the Group’s improvement trajectory. At our meeting in February, Veritas. See page 203 for the sustainability assurance statement.
the Committee heard that significant progress had been made in
this area, including: the introduction of an HSE balanced scorecard
reported quarterly; mandatory training on our Life Saving Rules
including observation-intervention; and a monthly HSE update
for the ELG to keep leaders informed and engaged.
A head of HSE compliance role has been created to provide
support in four key areas: how we define our Zero Harm
improvement journey and critical milestones; how we plan more
effectively and measure improvement; how we communicate to our
stakeholders; and how we help others to understand and embrace
their role in the improvement programme. Furthermore, several
other new appointments have been made, strengthening both
regional and specialist HSE capability.
We were updated on the Zero Harm safety case programme which As an example, the Committee received an update on the
was launched in 2018, with the aim of gaining a better understanding Company-wide waste action programme and the significant
of the latent HSE risks within our operations. In total, 42 safety cases achievements that have been made in 2019. This programme is
have been completed and a range of improvement activities have designed to help deliver our global waste reduction targets (see
been initiated at site level to close identified gaps. Of our high page 44). A waste reduction of 29% was achieved across our top
consequence hazards, it is clear that the level of control is improving ten UK sites, a campaign to remove single-use plastics from our
in areas that have been the focus of recent improvement programmes. office and catering facilities was introduced and alternative
However over 74% of our sites are still classed as reactive on the technologies have helped to extend liquid coolant life that would
five-step maturity model. The programme and associated otherwise have to be treated as waste (see page 44).
improvement activity will remain an area of focus for the
As a Committee, we were delighted to support the ESG event
Committee in 2020.
in April. This was the first time we had organised a specific ESG
Communication was a priority for the HSE function in 2019 and event, in response to increased investor interest in our sustainability
some significant progress has been made in developing our approach. Members of the Executive Team joined us in a series of
employees’ awareness of HSE. Interaction with our leadership presentations and roundtable discussions and gained valuable
population has become more regular, through bulletins and online insights from the questions and opinions voiced by those in
DIRECTORS’ REPORT
webinars, and this is imperative given the importance of the attendance.
leadership shadow when it comes to embedding a safety culture.
We are pleased that the Company has maintained its listing in the
Furthermore, in June the Group introduced the Zero Harm award
Dow Jones Sustainability Index (DJSI) for the sixteenth consecutive
at the annual excellence awards as a way of highlighting some of
year. We continue to be one of only five aerospace and defence
the excellent HSE improvement activity being undertaken across
companies listed in the world index out of 38 invitees. Overall,
the businesses.
our score improved slightly from 2018 and we achieved
industry-leading scores in the risk and crisis management
Sustainability and environmental reporting sections.
With its broader remit of sustainability the Committee received a
detailed overview of the Group’s approach to sustainability and its
ambition to be a leading responsible business. We considered and
endorsed the role of the Committee in providing Board-level
oversight of the sustainability approach and priorities, considering You can read more about the Group’s sustainability activities on
the interface between the Science & Technology Committee and pages 40 to 44 and at www.rolls-royce.com.
the executive-level environment & sustainability committee.
In July, we were briefed on work underway to review and revise the Ethics and compliance
Group’s sustainability strategy, including the development of new
The Committee’s focus in the year has been on overseeing the
longer-term targets. The purpose of this comprehensive review is
Group’s ethics and compliance work plans. More details can be
to identify key decision points across the business where the
found in the Ethics and Compliance report on page 49. This included
consideration of social, ethical and environmental factors can be
obligations to the prosecutors with whom the Company agreed DPAs
improved, with the aim of embedding sustainability into local
in January 2017 and ensuring that recommendations put forward by
decision-making and policies. The Committee endorsed this approach.
Lord Gold (the Company’s independent compliance adviser) had
We recognise that the most significant contribution that Rolls-Royce been implemented. Lord Gold attended the meeting in February to
can make to a more sustainable society is to accelerate the feed back on how he had been overseeing and supporting this work,
decarbonisation of its business activities and the sectors in which as well as to report on key activities and areas of focus. He reported
it operates. The Group has a long-standing three-pronged approach that, on recent site visits, he had been able to see how the ethics and
to minimising its environmental impacts: continually improving the compliance programme was working in practice, the right behaviours
efficiency of its products and services; developing novel lower and attitudes were becoming embedded in the organisation and
carbon technologies such as electrification and the application of considerable improvement was evident amongst the teams. Focus
alternative fuel sources; and reducing the impacts of our operations remained on ensuring the right level of resource was in place to
and facilities. As a Committee, we appreciate success is only continue to drive the programme moving forward. In July, Lord Gold
achievable in the context of the wider impacts of the Group, presented his draft report to the Committee which was later
including issues such as human rights; ethics and compliance; and submitted to the SFO in line with the August deadline. The report
safety and wellbeing. The premise of our sustainability approach is noted the exemplary progress made in improving the Company’s
to understand the impacts of the Group’s activities on society, and approach to ethics and anti-bribery and corruption compliance.
to use that understanding to inform business decision-making to
At an ethics deep dive session in April, the three-year ethics and
create shared value for us and our stakeholders.
compliance workplan from 2019 to 2021 was presented to the
At our December meeting, we considered and endorsed a Committee. We noted the progress made in enhancing the ethics
proposal to put in place a sustainability framework, focused on and compliance teams in each of the businesses and their improved
areas of impact and influence, to help articulate this approach. accountability for ethics and compliance as a result.
The framework will act as a means of guiding decision-making.
At each of our meetings during the year, we received an update from
It builds on our purpose, vision and strategy to bring all elements
the General Counsel on the Group’s continuing dialogue and
of our broad sustainability approach together into a single
co-operation with prosecutors, regulators and government agencies.
framework for the first time. In implementing this framework,
We also received regular reports and briefings from the head of
we will review sustainability-related policies and identify
ethics and compliance.
opportunities to improve further business practices through
focused improvement programmes.
The Committee reviews the operation of the speak up procedures at Looking forward
each meeting; this includes statistics, types of cases raised, and the
average completion time. In 2018, we observed that bullying and In the year ahead, we will continue to monitor developments with the
harassment were prevalent themes and in March this year, the Civil Aerospace large engine in-service issues with a particular focus
Group-wide anti-bullying and harassment campaign was launched on the age profile of open safety issues. We will provide appropriate
as part of the wider care initiative in respect of our people, with the oversight to ensure the integrity of product safety governance is
aim of creating an environment where everyone can be at their best. maintained as the transformation programme continues and the
This included mandatory scenario-based training for all employees RRMS is reviewed.
and leaders, as well as specific training for our people team and We will continue to monitor and support progress and performance
trade union employee representatives, as well as regular updates to as the Zero Harm and LiveWell programmes are further embedded,
the Executive Team and ELG. In July, the Committee also undertook a with a particular interest in seeing injury rates and high-potential
light version of this training so that we could get a better understanding incidents reduce so that we can achieve our stated 2020 targets.
of the impact and benefit it would have on employees. Focus has
also been given to the speed at which a resolution is reached once The Board has included the risk of climate change to future revenue
a bullying and harassment case has been raised and, on average, the growth as an additional principal risk and we will undertake an
time taken to close an investigation is 25 days. in-depth review of this risk during the course of 2020 on behalf of
the Board. We will also provide oversight as the Group carries out
Following on from the roll-out in 2018 of Our Code and simplified a sustainability strategic review and agree a new set of sustainability
Group policies, revised mandatory training requirements were targets, including environmental targets, over the next decade.
launched in 2019 with a completion deadline of the end of October.
New modules covering conflicts of interest and binding corporate We will continue to monitor progress of our ethics and compliance
rules were added to the anti-bullying and harassment and simplified programmes as well as the outcomes from our bullying and
product safety training. harassment campaign and reports to our Ethics Line. We will
continue to oversee the Company’s compliance with the DPA in the
A refresher on Zero Harm life-saving rules was also included as was UK and will commission an external assessment of our compliance
an annual requirement for all managers globally to certify to Our Code. programme during 2020 to ensure that we have maintained
Our Code, which sets out the principles that underpin our values compliance with all of Lord Gold’s recommendations.
and the way we do business, was developed as a mobile-enabled app We look forward to seeing continued tangible progress from the
and launched at the beginning of the year. It allows our employees efforts by management to drive the desired behaviours and mindset,
and suppliers to access it from wherever they are in the world and reinforcing an ethical, safety-focused and sustainability culture
it has received positive feedback both internally and externally. across the organisation.
We received a report from the head of ethics and compliance who Sir Frank Chapman
carried out an independent review of the speak up cases which had Chairman of the Safety, Ethics & Sustainability Committee
been received on the proposed changes to the UK defined benefit
pension scheme. The Committee received the report and noted the
conclusions, which would be shared with elected representatives of
the affected employees and all decision makers. While the report found
that there had clearly been some room for improvement, particularly
in the way the changes had been communicated, the majority of the
concerns raised via the speak up channels were not founded.
We also monitored our ongoing compliance with the General Data
Privacy Regulations and the application for the EU regime of Data
Privacy Binding Corporate Rules.
Science & Technology Committee Report 111
SCIENCE & TECHNOLOGY

Other attendees
In addition to the members of the Committee, the Chairman, Chief
Executive, Chief Financial Officer and any of the Non-Executive
Directors may attend one or more meetings at the Committee
chairman’s invitation. The Committee is supported by the corporate
governance director and the Chief Technology Officer.

Belinda Hudson Limited (BHL) was appointed for a second year, this
time to undertake a light touch review of the Board and committees,
following a full review in 2018. The effectiveness review process
of the Board and its committees is discussed in greater detail on
SIR KEVIN SMITH page 74 together with overall findings.
Chairman of the Science
& Technology Committee
DIRECTORS’ REPORT
Key highlights Technology strategy
Technology strategy, investment and programmes review Review the strategic direction of the Group’s research,
technology and development activities, with consideration to
Review electrical systems strategy their environmental impact amongst other matters, and ensure
Review of UltraFan demonstrator, Advance3 and investment is allocated appropriately.
power gearbox Keep under review the key technology programmes.
Services strategy review Assist the Board in its oversight of major R&D investment and
Review of digital strategy and capability provide assurance on its competitiveness and the adequacy
of technology investment, with thorough consideration to the
environmental impact of new products and technology.
Introduction
Cross-sector technology
In 2019, the Committee continued to provide dedicated focus to the Oversee the effectiveness of key engineering and technology
research and technology part of the Group’s R&D investment that processes and operations, including delivery of major product
enables the Group to conceive, design and deliver world-class development and technology programmes.
technology that meets our customers’ current and future needs.
We provide directional input and oversight of the Group’s scientific Technology capabilities and skills
and technological strategy, processes and related investments. Oversee processes for ensuring effective resourcing and
development of required technological capability and skills.
In addition to our scheduled meetings, we visited the power gearbox
(PGB) facility and Civil Aerospace engine assembly and test facility in Conduct visits to R&D facilities.
Germany and the Defence operations and engine test beds in the UK.
Technology trends and risks
Provide assurance on the identification and management
Membership and operation of the Committee of key technological risks.
In addition to myself, members of the Committee during 2019 were Review and consider any other topics or risks appropriate
Ruth Cairnie, Sir Frank Chapman, Brad Singer and Jasmin Staiblin, all to the overall remit of the Committee as delegated by the Board.
Non-Executive Directors. Our biographies are on pages 62 to 64 and
meeting attendance is on page 66. Brad Singer stepped down as a Principal risk
member of the Committee in December. Ruth also stepped down Disruptive technologies and business model, a subset of
at the end of the year. I would like to take this opportunity to thank competitive environment.
the Committee for their unstinting enthusiasm and engagement
during the year. Areas of focus for 2020
The Committee’s responsibilities are outlined in its terms of reference, Oversight of the Group’s technology programme with focus
available at www.rolls-royce.com. We review these annually and refer on technologies supporting the Group’s approach to low
them to the Board for approval. No changes have been made in carbon power
2019. This follows a detailed review in 2018 to ensure alignment with Reviews of key programmes and business cases including SMRs,
the principles of the Code. UltraFan and hybrid-electric regional aviation
Review of digital, electrical and hybrid-electrical and hydrogen
fuel based technologies
Continued review of efficiency and effectiveness of technology
development, assessment of skills and capability development
and alignment with the technology strategy
Science & Technology Committee Report
Science & Technology Committee focus during 2019
Technology The Group’s technology strategy. The strategic objectives and associated investment funding allocations were
strategy confirmed to be appropriate.
Investment allocation.
The review of key technology programmes helped shape the Board’s
Review of key technology
discussions during the year. An in-depth review of the Defence aerospace
programmes.
technology programmes was presented and endorsed by the Committee.
Efficiency and effectiveness review.
The Committee made a number of recommendations to management to
improve the efficiency and effectiveness of the Group’s future research and
technology programmes.
Cross-sector UltraFan demonstrator. Oversight of the UltraFan demonstrator programme maintained throughout
technology the year and advised the Board on progress.
The Group’s electrical
systems strategy. Direction of the Group electrical systems technology development supported.
Technology Engineering capabilities of Reviewed the engineering resource prioritisation across the Group.
capabilities the future.
and skills Visits provided a good opportunity to evidence physical progress on key
Visits to large engine assembly and technology programmes, together with an invaluable opportunity to meet
test bed sites. the local teams.
Technology trends Artificial intelligence and internet Endorsement of both the artificial intelligence and internet of things
and risks of things. programmes and their part in the Group’s future technology strategy.
Oversight of Disruptive technologies and A subset of the principal risk, competitive environment, the review confirmed
principal risk business model. that the identification of disruptive technology threats and ongoing mitigation
activities continued to support the direction for future key activities.
2019 overview visited the PGB test facility and dedicated team area in Dahlewitz,
Germany and met with key staff. We also undertook a tour of the
In 2019, the Committee continued with our work from the previous Civil Aerospace engine assembly and test facility located on the
year in overseeing the technology strategy, the prioritisation of same site. The Committee advised the Board on progress and
resources towards technology development and acquisition, and funding continuation of the programme.
assessing competitiveness in key technology and product areas.
In doing this, we place importance on ensuring active dialogue with The Committee also reviewed progress on development and
engineering and technology leaders and experts, inviting relevant maturing key high-temperature gas turbine technology which has
employees to Committee meetings, meeting with employees during applicability across all aero-engine programmes. We received a
site visits and developing future leaders through the Board presentation on the Group’s strategy and competitive position on
apprentice programme. propulsion for business aviation to understand how the technology
was being developed.
At the first meeting of the year in February, we reviewed the 2019
technology programme and the investment funding allocation. We In September, the Committee was updated on the development of
also received an update on the progress made on technology plans the Group’s technology strategy which includes a growing level of
for each business and also in the Innovation Hub. investment in new capability in electrical and digital technologies,
and the launch of the study phase of the small modular reactor
As reported in previous years, significant investment is directed (SMR) programme, all of which will play a part in the Group’s
towards aerospace technology demonstrators to validate new approach to lower carbon power and the shift to low carbon
architectures and gas turbine technologies vital to supporting technologies for the future.
future competitiveness and delivering a step change improvement
in environmental impact. We conducted several reviews of the We were encouraged to hear that electrical systems technology
UltraFan demonstrator programme over the year, noting progress development is increasingly becoming central to delivering the
in its design and testing, and understanding the plans and choices businesses’ future product plans. In aerospace applications, a
on competitive differentiating technologies which would enable a number of demonstrator programmes are taking shape, including
step change in efficiency. We discussed the UltraFan business case the E-Fan X megawatt hybrid-electric propulsion programme with
and options for meeting potential customer requirements, the Airbus for which a new megawatt generator is being developed,
phased investments proposed to deliver the programme and the and kilowatt hybrid-electric aero propulsion research and
approach to managing risks and programme dependencies. application demonstrators that were announced in the UK and
During the year, we received regular progress updates on key Germany. We were briefed on the acquisition of the aerospace
technologies, particularly the PGB, which is a critical component electrical components business from Siemens and its fit to the
connecting the Advance3 core to the composite front fan system, Group’s electrical technology roadmap. Further electrical
and is undergoing design maturity testing ahead of the first technology development will be a focus area for the Committee
UltraFan demonstrator engine run in 2021. In April, the Committee in the coming year.
Science & Technology Committee Report 113
The Committee received a presentation on the digital strategy We also gave our support to further development of the approach
and five-year roadmap for digital capability and the digital thread to strategic management of technology acquisition and the Company’s
across engineering design, manufacturing and services, and approach to technology partnering as a means of obtaining access
reviewed the current status of transitioning away from legacy systems. to co-investment, skilled resources and accelerating technology
We were updated regarding the progress with how the IT and development. We discussed the risks and opportunities arising
engineering systems were supporting the transformation from protection/exploitation of intellectual property and have
programme for engineering. We received specific presentations further encouraged increased attention in this area.
on the Company’s strategy on artificial intelligence (AI) and the
We further received an update on the Group’s risk appetite and
internet of things (IoT). We were taken through how specialists from
assessment of technologies that enable disruption with regard to
the R² Data Labs team facilitate the application of AI and IoT and
the Group’s 2019 principal risk related to the competitive
were briefed on the broad training provided to enhance the
environment. This will remain a live process to ensure awareness
workforce’s skills through the Digital Academy. We also discussed
of potential shifts.
the Group’s approach to an ecosystem to access these rapidly
advancing technologies and how the strategy of in-house skills and
capabilities would affect competitiveness. Looking forward
DIRECTORS’ REPORT
The Committee reviewed the proposal to develop a new generation The focus for the Committee in 2020 will be on low carbon
of SMRs that would leverage the Company’s advanced technologies that are vital to innovation and future products and
manufacturing capabilities as well as its nuclear power design services and underpin the Group’s sustainability strategy. We will
expertise to develop a near-zero carbon source of power continue to monitor the UltraFan demonstrator and associated
generation by the early 2030s at a competitive levelised cost of technology programmes and progress on the first phase of SMRs
electricity. We were given an overview of potential for a very large for low carbon power generation and review the business case for
market demand including the potential for future net-zero carbon making use of SMRs to produce sustainable fuels.
fuel production at scale. We received a briefing on consortium The continuing development of the Group’s capabilities and
partnerships, potential business models and the business case, technologies in electrical and digital will also feature strongly in
to understand the opportunity which has now been launched our agenda, including the case for hybrid-electrical propulsion for
in a first phase with UK Government funding support. regional aviation as well as the future of reciprocating engines and
We reviewed the technology across the Defence business and alternative sustainable fuels.
received a presentation on opportunities and programmes in the These are exciting times for technologists and engineers in
US and the UK. We also visited the Company’s operations and engine Rolls-Royce as the Company accelerates its drive for sustainable
test beds in Bristol, UK where, among other things, integrated propulsion providing opportunity to acquire new skills, work on
electrical systems are validated. We discussed near-term defence new products and to play a full part in securing a low carbon world.
market opportunities and how our core gas turbine technologies I admire their dedication to achieving that goal and cannot help
and digital engineering design systems and approach could enhance but be a little envious of the opportunities it provides.
our position to win competitive contracts. The requirements for
future defence systems and solutions are driving development of In closing this year’s report, I would like to pay tribute to the work
a combination of technologies, such as electrical, power and thermal of our global network of 29 University Technology Centres and
management and advanced specialised combat propulsion seven Advanced Manufacturing Research Centres who play a vital
technologies which are being developed under the UK Tempest role in the development of our core technology and science base.
advanced combat fighter programme. We were also briefed on The 1,300 people, including 500 PHDs, in those institutions who
the progress on the integrated power systems for directed energy work in partnership with our employees are a crucial part of the
systems, which have growth potential for land, sea and airborne extended Rolls-Royce family and I thank them on behalf of the
applications. Finally, we reviewed the planned investment and Board for the major contribution they make to building the future
resourcing roadmap that will enable the business to continue to of Rolls-Royce.
pursue, develop and grow its defence markets. Sir Kevin Smith
Further, the Committee received an update on the Group’s services Chairman of the Science & Technology Committee
strategy and associated technology development plans. We were
pleased to see real progress and significant value delivered by
application of digital, inspection and repair technologies. We
encouraged management to continue to pursue new technology
and ways of working in these areas, noting that this is critical in
addition to the product investments to improve engine durability
in service.
To get an understanding of the investment choices across all
engineering activities and related skill sets, the Committee
undertook a detailed review of the full engineering investment and
resource prioritisation across the Group. We were briefed on spend
and resourcing relating to new product development, technology
development and in-service product support needs. The Committee
supports the changes that have been introduced to improve the
visibility of investment choices and how they relate to the application
of key skilled resources. This provided a better understanding of
the overall technology investments and technology choices.
Responsibility Statements
RESPONSIBILITY STATEMENTS
Statement of Directors’ responsibilities in respect Directors’ confirmations
of the Financial Statements The Directors consider that the Annual Report, taken as a whole,
The Directors are responsible for preparing the Annual Report is fair, balanced and understandable and provides the information
and the Financial Statements in accordance with applicable law necessary for shareholders to assess the Group and parent
and regulation. company’s position and performance, business model and strategy.
Company law requires the Directors to prepare financial statements Each of the Directors, whose names and functions are listed in the
for each financial year. Under that law the Directors have prepared Directors’ Report, confirm that to the best of his or her knowledge:
the Group Financial Statements in accordance with International —— the Group Financial Statements, which have been prepared in
Financial Reporting Standards (IFRSs) as adopted by the European accordance with IFRSs as adopted by the European Union, give
Union and the parent company Financial Statements in accordance a true and fair view of the assets, liabilities, financial position and
with United Kingdom Generally Accepted Accounting Practice loss of the Group;
(United Kingdom Accounting Standards, comprising FRS 101
Reduced Disclosure Framework, and applicable law). —— the parent company Financial Statements, which have been
prepared in accordance with United Kingdom Generally
Under company law, the Directors must not approve the Financial Accepted Accounting Practice (United Kingdom Accounting
Statements unless they are satisfied that they give a true and fair Standards, comprising FRS 101 Reduced Disclosure Framework,
view of the state of affairs of the Group and parent company and of and applicable law), give a true and fair view of the assets,
the profit or loss of the Group and parent company for that period. liabilities, financial position and result of the Company; and
In preparing the Financial Statements, the Directors are required to: —— the Strategic Report includes a fair review of the development
—— select suitable accounting policies and then apply and performance of the business and the position of the Group
them consistently; and parent company, together with a description of the principal
risks and uncertainties that it faces.
—— state whether applicable IFRSs, as adopted by the European
Union, have been followed for the Group Financial Statements
and United Kingdom Accounting Standards comprising FRS 101,
have been followed for the Company Financial Statements, subject
to any material departures disclosed and explained in the
Financial Statements;
By order of the Board
—— make judgements and accounting estimates that are reasonable
Pamela Coles
and prudent; and
Company Secretary
—— prepare the Financial Statements on the going concern basis 28 February 2020
unless it is inappropriate to presume that the Group and parent
company will continue in business.
The Directors are also responsible for safeguarding the assets
of the Group and parent company and hence for taking reasonable
steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group and
parent company’s transactions and disclose with reasonable
accuracy at any time the financial position of the Group and parent
company. This enables them to ensure that the Financial Statements
and the Directors’ Remuneration Report comply with the
Companies Act 2006 and, as regards the Group’s Consolidated
Financial Statements, Article 4 of the IAS Regulation.
The Directors are responsible for the maintenance and integrity of
the parent company’s website. Legislation in the United Kingdom
governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Rolls-Royce Holdings plc Annual Report 2019 Financial Statements
115
FINANCIAL STATEMENTS
Consolidated Financial Statements Company Financial Statements

Consolidated Income Statement 116 Company Balance Sheet 183
Consolidated Statement Company Statement
of Comprehensive Income 117 of Changes in Equity 183
Consolidated Balance Sheet 118
Consolidated Cash Flow Statement 119
Consolidated Statement Notes to the Company
of Changes in Equity 122 Financial Statements
1 Accounting policies 184
2 Investments – subsidiary undertakings 184
Notes to the Consolidated 3 Trade receivables and other assets 185
Financial Statements 4 Trade payables and other liabilities 185
1 Accounting policies 123 5 Financial liabilities 185
2 Segmental analysis 134 6 Share capital 185
3 Research and development 140 7 Reconciliation of net assets between
4 Net financing 141 Rolls-Royce Holdings plc Group and
5 Taxation 141 Company 186
6 Earnings per ordinary share 144 8 Contingent liabilities 186
7 Auditors’ remuneration 145 9 Other information 186
8 Employee information 145
9 Intangible assets 146
10 Property, plant and equipment 149 Subsidiaries 187
11 Right-of-use assets 150 Joint Ventures and Associates 192
12 Investments 151
13 Inventories 153
14 Trade receivables and other assets 153
15 Contract assets and liabilities 154
16 Cash and cash equivalents 155
17 Borrowings and lease liabilities 155
18 Trade payables and other liabilities 156
19 Financial instruments 157
20 Provisions for liabilities and charges 166
21 Post-retirement benefits 168
22 Share capital 172
23 Share-based payments 173
24 Leases 174
25 Contingent liabilities 176
26 Related party transactions 176
27 Acquisitions and disposals 177
28 Derivation of summary funds
flow statement 179
29 Impact of adopting IFRS 16 Leases 181
116 Financial Statements
Consolidated Income Statement
CONSOLIDATED INCOME STATEMENT

For the year ended 31 December 2019
2019 2018
Notes £m £m
Revenue 1 2 16,587 15,729
Cost of sales 1 (15,645) (14,531)
Gross profit 942 1,198
Commercial and administrative costs 1 (1,128) (1,595)
Research and development costs 3 (770) (768)
Share of results of joint ventures and associates 12 104 4
Operating loss (852) (1,161)
Gain arising on disposal of businesses 2 27 139 358
Loss before financing and taxation 2 (713) (803)
Financing income 4 252 271

Financing costs 4 (430) (2,415)
Net financing costs (178) (2,144)
Loss before taxation 3 (891) (2,947)

Taxation 5 (420) 554
Loss for the year (1,311) (2,393)
Attributable to:
Ordinary shareholders (1,315) (2,401)
Non-controlling interests 4 8
Other comprehensive (expense)/income (1,013) 182
Total comprehensive expense for the year (2,324) (2,211)
Loss per ordinary share attributable to ordinary shareholders: 6

Basic (69.07)p (129.15)p
Diluted (69.07)p (129.15)p
Payments to ordinary shareholders in respect of the year: 19

Pence per share 11.7p 11.7p
Total 224 220
Underlying profit before taxation 3 2 583 466

1 Included within revenue, cost of sales and commercial and administrative costs are exceptional charges relating to Civil Aerospace programmes, impairment charges and restructuring
costs. Further details can be found in note 2.
2 Commercial Marine was disposed of on 1 April 2019 and Rolls-Royce Power Development Limited was disposed of on 15 April 2019. L’Orange was disposed of on 1 June 2018.
3 (Loss)/profit before taxation disclosed on a statutory and underlying basis.
Consolidated Statement of Comprehensive Income 117
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

2019 2018
Notes £m £m
Other comprehensive (expense)/income (OCI)
Actuarial movements on post-retirement schemes 1 21 (934) 27
Share of OCI of joint ventures and associates 12 (1) (1)
Related tax movements 5 324 (2)
Items that will not be reclassified to profit or loss (611) 24
Foreign exchange translation differences on foreign operations (313) 171

Reclassified to income statement on disposal of businesses 27 (98) (19)
Cash flow hedge reserve movements 22 (17)
Share of OCI of joint ventures and associates 12 (7) 18
Related tax movements 5 (6) 5
Items that may be reclassified to profit or loss (402) 158
Total other comprehensive (expense)/income (1,013) 182
Attributable to:
Ordinary shareholders (2,328) (2,219)
1 Includes
an asset re-measurement net loss estimated at £600m following the agreement to transfer the future pension obligations of circa 33,000 pensions in the UK scheme to Legal
& General Assurance Society Limited. See note 21 for further information.
Consolidated Balance Sheet
CONSOLIDATED BALANCE SHEET

At 31 December 2019
2019 2018
Notes £m £m
ASSETS
Intangible assets 9 5,442 5,295
Property, plant and equipment 10 4,803 4,929
Right-of-use assets 1 11 2,009 –
Investments – joint ventures and associates 12 402 412
Investments – other 12 14 22
Other financial assets 19 467 343
Deferred tax assets 5 1,887 2,092
Post-retirement scheme surpluses 21 1,170 1,944
Non-current assets 16,194 15,037
Inventories 13 4,320 4,287
Trade receivables and other assets 14 5,065 4,690
Contract assets 15 2,095 2,057
Taxation recoverable 39 34
Other financial assets 19 86 22
Short-term investments 19 6 6
Cash and cash equivalents 16 4,443 4,974
Current assets 16,054 16,070
Assets held for sale 27 18 750
TOTAL ASSETS 32,266 31,857
LIABILITIES
Borrowings and lease liabilities 17 (775) (858)
Other financial liabilities 19 (493) (647)
Trade payables and other liabilities 18 (8,450) (8,292)
Contract liabilities 15 (4,228) (3,794)
Current tax liabilities (172) (138)
Provisions for liabilities and charges 20 (858) (1,122)
Current liabilities (14,976) (14,851)
Borrowings and lease liabilities 17 (4,910) (3,804)
Other financial liabilities 19 (3,094) (3,542)
Contract liabilities 15 (6,612) (5,336)
Deferred tax liabilities 5 (618) (962)
Provisions for liabilities and charges 20 (1,946) (795)
Post-retirement scheme deficits 21 (1,378) (1,303)
Non-current liabilities (20,629) (17,682)
Liabilities associated with assets held for sale 27 (15) (376)
TOTAL LIABILITIES (35,620) (32,909)
NET LIABILITIES (3,354) (1,052)
EQUITY
Called-up share capital 22 386 379
Share premium account 319 268
Capital redemption reserve 159 161
Cash flow hedging reserve (96) (106)
Merger reserve 650 406
Translation reserve 397 809
Accumulated losses (5,191) (2,991)
Equity attributable to ordinary shareholders (3,376) (1,074)
TOTAL EQUITY (3,354) (1,052)
1 IFRS16 Leases has been adopted from 1 January 2019 and under the transitional arrangements the Group has adopted IFRS 16 on a modified retrospective basis. There has been no
restatement of 2018 comparatives. See notes 1 and 29 for more details.
The financial statements on pages 116 to 182 were approved by the Board on 28 February 2020 and signed on its behalf by:
Chief Executive Chief Financial Officer
CONSOLIDATED CASH FLOW STATEMENT

2019 2018
Notes £m £m
Reconciliation of cash flows from operating activities
Operating loss (852) (1,161)
(Profit)/loss on disposal of property, plant and equipment (13) 11
Share of results of joint ventures and associates 12 (104) (4)
Dividends received from joint ventures and associates 12 92 105
Amortisation and impairment of intangible assets 1 9 372 565
Depreciation and impairment of property, plant and equipment 1 10 532 521
Depreciation and impairment of right-of-use assets 11 411 –
Impairment of and other movements on investments 12 1 6
Increase in provisions 1,108 1,003
Increase in inventories (43) (616)
Increase in trade receivables and other assets (610) (469)
Increase in contract assets (41) (112)
Penalties paid on agreements with investigating bodies (102) –
Increase in trade payables and other liabilities 683 1,732
Increase in contract liabilities 1,778 1,419
Cash flows on other financial assets and liabilities held for operating purposes (757) (732)
Interest received 31 –
Net defined benefit post-retirement cost recognised in loss before financing 21 222 352
Cash funding of defined benefit post-retirement schemes 21 (266) (181)
Share-based payments 23 30 35
Net cash inflow from operating activities before taxation 2,472 2,474
Taxation paid (175) (248)
Net cash inflow from operating activities 2 2,297 2,226
Cash flows from investing activities
Net movement in unlisted investments 12 3 (6)
Additions of intangible assets 9 (640) (680)
Disposals of intangible assets 9 13 13
Purchases of property, plant and equipment (747) (905)
Disposals of property, plant and equipment 50 43
Acquisitions of businesses 27 (43) –
Disposal of businesses 27 453 573
Movement in investments in joint ventures and associates and other movements on investments 12 (8) (13)
Disposals of joint ventures 1 –
Net cash outflow from investing activities (918) (975)
Cash flows from financing activities
Repayment of loans (1,136) (37)
Proceeds from increase in loans 22 1,054
Capital element of lease payments (2018: Capital element of finance lease payments) (271) (23)
Net cash flow from (decrease)/increase in borrowings and leases (1,385) 994
Interest received – 27
Interest paid (104) (92)
Interest element of lease payments (2018: Interest element of finance lease payments) (88) (5)
Increase in short-term investments – (3)
Issue of ordinary shares (net of expenses) 24 1
Purchase of ordinary shares (15) (1)
Dividends to NCI (4) (3)
Redemption of C Shares (220) (216)
Net cash (outflow)/inflow from financing activities (1,792) 702
Change in cash and cash equivalents (413) 1,953
Cash and cash equivalents at 1 January 4,952 2,933
Exchange (losses)/gains on cash and cash equivalents (104) 66
Cash and cash equivalents at 31 December 3 4,435 4,952
1 In 2019, an impairment of £58m in respect of Bergen Engines AS was included in these lines (2018: £160m in respect of Commercial Marine).
2 Operating cash flow includes Trent 1000 insurance receipts of £173m.
3 The Group considers overdrafts (repayable on demand) 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 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 26.
Consolidated Cash Flow Statement
CONSOLIDATED CASH FLOW STATEMENT CONTINUED

2019 2018
£m £m
Reconciliation of movements in cash and cash equivalents to movements in net funds/(debt)
Change in cash and cash equivalents (413) 1,953
Cash flow from decrease/(increase) in borrowings and leases 1,385 (994)
Cash flow from increase in short-term investments – 3
Change in net funds resulting from cash flows 972 962
New leases in the year (2018: new finance leases in the year) (217) (97)
Net debt (excluding cash and cash equivalents) of previously unconsolidated subsidiary (1) –
Exchange (losses)/gains on net funds (32) 54
Fair value adjustments 48 (69)
Transferred to liabilities associated with assets held for sale 3 –
Movement in net funds 773 850
Net funds/(debt) at 1 January excluding the fair value of swaps 318 (532)
Reclassifications 1 (79) –
Adoption of IFRS 16 (see note 29) (2,248) –
Net debt at 1 January restated (2,009) (532)
Net (debt)/funds at 31 December excluding the fair value of swaps (1,236) 318
Fair value of swaps hedging fixed rate borrowings 243 293
Net (debt)/funds at 31 December (993) 611
1 In 2019, the Group has reclassified £79m as borrowings previously included in other financial liabilities. These borrowings mature between 2019 and 2029 – see note 17.
CONSOLIDATED CASH FLOW STATEMENT CONTINUED

The movement in net funds/(debt) (defined by the Group as including the items shown below) is as follows:
Transition
to IFRS 16
At 31 and Net funds on Other
December reclassi- At Funds acquisition/ Exchange Fair value Reclassi- movements At 31
2018 fications 1 1 January flow disposal differences adjustments fications on leases December
£m £m £m £m £m £m £m £m £m £m
2019
Cash at bank and in hand 1,023 – 1,023 (179) – (19) – – – 825
Money market funds 1,222 – 1,222 (124) – (3) – – – 1,095
Short-term deposits 2,729 – 2,729 (124) – (82) – – – 2,523
Cash and cash equivalents 2
(per balance sheet) 4,974 – 4,974 (427) – (104) – – – 4,443
Overdrafts (22) – (22) 14 – – – – – (8)
Cash and cash equivalents
(per cash flow statement) 4,952 – 4,952 (413) – (104) – – – 4,435
Short-term investments 6 – 6 – – – – – – 6
Other current borrowings (802) (14) (816) 799 – 2 5 (417) – (427)
Non-current borrowings (3,609) (65) (3,674) 315 (1) 4 43 417 – (2,896)
Finance leases (229) 229 – – – – – – – –
Lease liabilities – (2,477) (2,477) 271 – 66 – 3 (217) (2,354)
Financial liabilities (4,640) (2,327) (6,967) 1,385 (1) 72 48 3 (217) (5,677)
Net funds/(debt) excluding fair
value swaps 318 (2,327) (2,009) 972 (1) (32) 48 3 (217) (1,236)
Fair value of swaps hedging fixed
rate borrowings 3 293 – 293 – – – (50) – – 243
Net funds/(debt) 611 (2,327) (1,716) 972 (1) (32) (2) 3 (217) (993)
Net funds (excluding lease liabilities) 840 (79) 761 1,361
2018
Cash at bank and in hand 838 170 – 15 – – – 1,023
Money market funds 589 630 – 3 – – – 1,222
Short-term deposits 1,526 1,155 – 48 – – – 2,729
(per balance sheet) 2,953 1,955 – 66 – – – 4,974
Overdrafts (20) (2) – – – – – (22)
(per cash flow statement) 2,933 1,953 – 66 – – – 4,952
Short-term investments 3 3 – – – – – 6
Other current borrowings (39) (38) – (1) 15 (739) – (802)
Non-current borrowings (3,292) (972) – – (84) 739 – (3,609)
Finance leases (137) (81) – (11) – – – (229)
Financial liabilities (3,468) (1,091) – (12) (69) – – (4,640)
Net (debt)/funds excluding fair
value swaps (532) 865 – 54 (69) – – 318
Fair value of swaps hedging fixed
rate borrowings 3 227 – – – 66 – – 293
Net (debt)/funds (305) 865 – 54 (3) – – 611
1 In 2019, the Group has reclassified £79m as borrowings previously included in other financial liabilities. These borrowings mature between 2019 and 2029 – see note 17.
2 Includes Trent 1000 insurance receipts of £173m.
3 All interest rate swaps are entered into for risk management purposes, although these may not be designated into hedging relationships for accounting purposes – see note 19.
Consolidated Statement of Changes in Equity
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Attributable to ordinary shareholders

Non-
Capital Cash flow Accum- controlling
Share Share redemption hedging Merger Translation ulated interests Total
capital premium reserve 1
reserve reserve reserve losses 2 Total (NCI) equity
Notes £m £m £m £m £m £m £m £m £m £m
At 31 December 2017 368 195 162 (112) 3 657 (343) 930 3 933
Impact of adopting IFRS 9 – – – – – – (15) (15) – (15)
At 1 January 2018 368 195 162 (112) 3 657 (358) 915 3 918
(Loss)/profit for the year – – – – – – (2,401) (2,401) 8 (2,393)
Foreign exchange translation differences
on foreign operations – – – – – 171 – 171 – 171
Reclassified to income statement
on disposal of L’Orange – – – – – (19) – (19) – (19)
Movements on post-retirement schemes 21 – – – – – – 27 27 – 27
Debited to cash flow hedge reserve – – – (17) – – – (17) – (17)
OCI of joint ventures and associates 12 – – – 18 – – (1) 17 – 17
Related tax movements 5 – – – 5 – – (2) 3 – 3
Total comprehensive income/(expense)
for the year – – – 6 – 152 (2,377) (2,219) 8 (2,211)
Shares issued in respect of acquisition of
ITP Aero 10 – – – 403 – – 413 – 413
Other issues of ordinary shares 22 1 73 – – – – – 74 – 74
Issue of C Shares 3 – – (217) – – – 1 (216) – (216)
Redemption of C Shares – – 216 – – – (216) – – –
Shares issued to employee share trust – – – – – – (75) (75) – (75)
Share-based payments – direct to equity 4 – – – – – – 32 32 – 32
Transfer of joint operations to subsidiaries – – – – – – – – 15 15
Transactions with NCI – – – – – – – – (4) (4)
Related tax movements 5 – – – – – – 2 2 – 2
Other changes in equity in the year 11 73 (1) – 403 – (256) 230 11 241
At 31 December 2018 379 268 161 (106) 406 809 (2,991) (1,074) 22 (1,052)
Impact of adopting IFRS 16 – – – – – – (40) (40) – (40)
At 1 January 2019 379 268 161 (106) 406 809 (3,031) (1,114) 22 (1,092)
(Loss)/profit for the year – – – – – – (1,315) (1,315) 4 (1,311)
Foreign exchange translation differences
on foreign operations – – – – – (313) – (313) – (313)
Reclassified to income statement on
disposal of Commercial Marine – – – – – (98) – (98) – (98)
Movements on post-retirement schemes 21 – – – – – – (934) (934) – (934)
Credited to cash flow hedge reserve – – 22 – – – 22 – 22
OCI of joint ventures and associates 12 – – – (7) – – (1) (8) – (8)
Related tax movements 5 – – – (5) – (1) 324 318 – 318
Total comprehensive income/(expense) for
the year – – – 10 – (412) (1,926) (2,328) 4 (2,324)
Arising on issues of ordinary shares 22 1 51 – – – – – 52 – 52
Shares issued in respect of acquisition of
ITP Aero 6 – – – 244 – – 250 – 250
Issue of C Shares 3 – – (222) – – – 1 (221) – (221)
Redemption of C Shares – – 220 – – – (220) – – –
Ordinary shares purchased – – – – – – (15) (15) – (15)
Shares issued to employee share trust – – – – – – (51) (51) – (51)
Share-based payments – direct to equity 4 – – – – – – 50 50 – 50
Transactions with NCI – – – – – – – – (4) (4)
Related tax movements 5 – – – – – – 1 1 – 1
Other changes in equity in the year 7 51 (2) – 244 – (234) 66 (4) 62
At 31 December 2019 386 319 159 (96) 650 397 (5,191) (3,376) 22 (3,354)
1 See accounting policies note 1.
2 At 31 December 2019, 12,476,576 ordinary shares with a net book value of £108m (2018: 13,538,921, 2017: 6,466,153 ordinary shares with net book values of £123m and £52m respectively)
were held for the purpose of share-based payment plans and included in accumulated losses. During the year, 8,984,219 ordinary shares with a net book value of £82m (2018: 468,165
shares with a net book value of £4m) vested in share-based payment plans. During the year, the Company acquired 118,831 (2018: 80,810) of its ordinary shares via reinvestment of
dividends received on its own shares and purchased 1,673,143 (2018: nil) of its ordinary shares through purchases on the London Stock Exchange. During the year, the Company issued
28,973,262 new ordinary shares relating to the remaining three instalments for the acquisition of ITP Aero (2018: 47,556,914 new ordinary shares relating to the first five installments)
and 7,803,043 new ordinary shares (2018: 7,460,173) to the Group’s share trust for its employee share-based payment plans with a net book value of £66m (2018: £74m).
3 In Rolls-Royce Holdings plc’s Company Financial Statements, C Shares are issued from the merger reserve, this reserve was created by a scheme of arrangement in 2011. As this reserve
is eliminated on consolidation, in the Consolidated Financial Statements, the C Shares are shown as being issued from the capital redemption reserve.
4 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.

Notes to the Consolidated Financial Statements 123
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 Accounting policies
The Company
Rolls-Royce Holdings plc (the ‘Company’) is a public company incorporated under the Companies Act 2006 and domiciled in the United
Kingdom. The Consolidated Financial Statements of the Company for the year ended 31 December 2019 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.
Basis of preparation and statement of compliance

In accordance with the Companies Act 2006 and European Union (EU) regulations, these Consolidated Financial Statements have been
prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board
(IASB) and interpretations issued by the IFRS Interpretations Committee (IFRIC), as adopted for use in the EU effective at 31 December
2019 (Adopted IFRS).
The Company has elected to prepare its individual Company Financial Statements under FRS 101 Reduced Disclosure Framework. They are
set out on pages 183 to 186 and the accounting policies in respect of its individual Company Financial Statements are set out on page 184.
The Consolidated Financial Statements have been prepared on the historical cost basis except where Adopted IFRS requires the revaluation
of financial instruments to fair value and certain other assets and liabilities on an alternative basis – most significantly post-retirement
scheme obligations are valued on the basis required by IAS 19 Employee Benefits – and on a going concern basis as described on page 55.
The Consolidated Financial Statements are presented in sterling which is the Company’s functional currency.
The preparation of Consolidated Financial Statements in conformity with Adopted IFRS requires management to make judgements and
estimates that affect the reported amounts of assets and liabilities at the date of the Consolidated Financial Statements and the reported
amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Revisions to Adopted IFRS in 2019

IFRS 16 Leases
The Group adopted IFRS 16 on 1 January 2019 using the modified retrospective approach. Under the specific transitional provisions in the
standard, comparative information has not been restated. The reclassifications and the adjustments arising from the new leasing rules have
been recognised in the opening balance sheet on 1 January 2019 (see note 29).
Until 31 December 2018, leases of aircraft and engines, plant and equipment and land and buildings were classified as either finance or
operating leases. Payments made under operating leases were charged to profit or loss on a straight-line basis over the period of the
lease. From 1 January 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset
is available for use by the Group. Each lease payment is allocated between reducing the liability and a finance cost. The finance cost is
charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of
the liability for each period.
On adoption of IFRS 16, the Group recognised additional lease liabilities in relation to leases which had previously been classified as
operating leases under the previous principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease
payments, discounted using the Group’s incremental borrowing rate as of 1 January 2019. The weighted average incremental borrowing
rate applied by the Group to the lease liabilities on 1 January 2019 was 3.7%.
The associated right-of-use assets for certain high value property leases are measured on a retrospective basis as if the new rules had
always been applied. As above, the Group’s incremental borrowing rate has been used. Other right-of-use assets are measured at the
amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in
the balance sheet as at 1 January 2019. In applying IFRS 16 for the first time, the Group has used the following practical expedients
permitted by the standard:
–– on initial application, IFRS 16 was only applied to contracts that were previously classified as leases, the Group has elected not to
reassess whether a contract is, or contains, a lease at the date of initial application. Instead, for contracts entered into before the
transition date the Group has relied on its assessment made applying IAS 17 and IFRIC 4 Determining whether an Arrangement contains
a Lease;
–– lease contracts with a duration of less than 12 months will continue to be expensed to the income statement on a straight-line basis over
the lease term;
–– the lease term has been determined with the use of hindsight where the contract contains options to extend the lease; and
–– reliance on previous assessments on whether or not leases are onerous.
Note 29 sets out the adjustments made on transition to IFRS 16 on 1 January 2019. The most significant changes are where the Group is a
lessee as the standard has not significantly changed the accounting where the Group is a lessor in a lease arrangement.
IFRIC 23 Uncertainty over Income Tax Treatment
The Group adopted IFRIC 23 on 1 January 2019. The interpretation clarifies how to apply the recognition and measurement requirements
in IAS 12 Income Taxes when there is uncertainty over income tax treatments. Adoption of this interpretation did not have a material impact
on the Group’s financial statements.
Amendments to IFRS 9, IAS 39 and IFRS 7 Interest Rate Benchmark Reform
The Group has elected to early adopt the amendments in accordance with the transition provisions. Details of the impact to the Group are
given on page 129.
Notes to the Consolidated Financial Statements
1 Accounting policies continued

Key areas of judgement and sources of estimation uncertainty
The determination of the Group’s accounting policies requires judgement. The subsequent application of these policies requires estimates;
the actual outcome may differ from that calculated. The key judgements and key sources of estimation uncertainty at the balance sheet
date, that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial
year, are summarised below. Further details are included within the significant accounting policies as indicated.
Area Key judgements Key sources of estimation uncertainty Page
Revenue recognition –– Whether Civil Aerospace OE and aftermarket Estimates of future revenue and costs of 125
contracts should be combined long-term contractual arrangements
–– 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
Risk and revenue sharing Determination of the nature of entry fees received 127
arrangements
Taxation Whether deferred tax assets should Estimates necessary to assess whether it is 127
be recognised probable that sufficient suitable taxable profits
will arise in the UK to utilise the deferred tax
assets
Financial instruments Application of the business model and ‘solely 128
principal and interest’ test
Business combinations Identification of acquired assets and liabilities 129
Research and development –– Determination of the point in time where costs 130
incurred on an internal programme
development meet the criteria for capitalisation
or ceasing capitalisation
–– Determination of the basis for amortising
capitalised development costs
Leases Determination of lease term Estimates of the payments required to meet 131
residual value guarantees at the end of engine
leases
Impairment of goodwill Determination of cash-generating units for 131
assessing impairment of goodwill
Impairment of intangible Estimates of cash flow forecasts and discount 131
assets (including rates to support the carrying value of intangible
programme-related assets (including programme-related intangible
intangible assets) assets)
Provisions Assessment of satisfying the criteria for the Estimates of expenditure required to settle the 132
recognition and measurement of provisions obligation relating to Trent 1000 claims and to
settle long-term contracts assessed as onerous
Post-retirement benefits Estimates of the assumptions applied for valuing 133
the defined benefit obligation
Sensitivities for key sources of estimation risk are disclosed in the relevant notes where this is appropriate and practicable.
Significant accounting policies

The Group’s significant accounting policies are set out below. With the exception of IFRS 16 and IFRIC 23, which have been adopted
with effect from 1 January 2019, these accounting policies have been applied consistently to all periods presented in these Consolidated
Presentation of underlying results
We measure financial performance on an underlying basis. We believe this is the most appropriate basis to measure our in-year
performance as underlying results reflect the substance of trading activity, including the impact of the Group’s foreign exchange forward
contracts, which lock in transactions at predetermined exchange rates. In addition, underlying results exclude the accounting impact of
business acquisitions and disposals, impairment charges and exceptional items. It is also consistent with the way that financial performance
is measured by management and reported to the Board in accordance with IFRS 8 Operating Segments. Further details are given in note 2.
Basis of consolidation
The Consolidated Financial Statements include the Company Financial Statements and its subsidiary undertakings together with the
Group’s share of the results in joint arrangements and associates made up to 31 December.
A subsidiary is an entity controlled by the Company. Control exists when the Company has power over an entity, exposure to variable
returns from its involvement with an entity and the ability to use its power over an entity so as to affect the Company’s returns.

A joint arrangement is an entity in which the Group holds a long-term interest and which is jointly controlled by the Group and one or
more other venturers under a contractual arrangement. Joint arrangements may be either joint ventures or joint operations. An associate
is an entity, being neither a subsidiary nor a joint arrangement, in which the Group holds a long-term interest and where the Group has a
significant influence. The results of joint ventures and associates are accounted for using the equity method of accounting. Joint
operations are accounted for using proportionate accounting.
Any subsidiary undertaking, joint arrangement or associate sold or acquired during the year are included up to, or from, the date of
change of control. Transactions with non-controlling interests are recorded directly in equity.
The Commercial Marine business was disposed of on 1 April 2019 and Rolls-Royce Power Development Limited was disposed of on 15 April
2019. We announced the proposed disposal of the North America Civil Nuclear business on 26 September 2019, and the Knowledge
Management System business on 17 December 2019. Both North America Civil Nuclear and Knowledge Management System have been
treated as a disposal group held for sale at 31 December 2019, with their assets and liabilities presented separately in the balance sheet.
These disposals were completed on 31 January 2020 and 3 February 2020 respectively. In 2018, L’Orange was disposed of on 1 June and
Commercial Marine was treated as a disposal group and held for sale (see note 27).
On 30 September 2019, we acquired Siemens’ eAircraft business and in accordance with IFRS 3 Business Combinations, the fair value
of the assets and liabilities acquired have been consolidated in the Group’s results from the date of acquisition (see note 27).
All intra-group transactions, balances, income and expenses are eliminated on consolidation. Adjustments are made to eliminate the
profit or loss arising on transactions with joint arrangements and associates to the extent of the Group’s interest in the entity.
Revenue recognition
Key judgement – Whether Civil Aerospace OE and aftermarket contracts should be combined
In the Civil Aerospace business, OE contracts are with the airframers (except for spare engines), while the aftermarket contracts are
with the aircraft operators, although there may be interdependencies between them. IFRS 15 Revenue from Contracts with Customers
includes guidance on the combination of contracts, in particular that contracts with unrelated parties should not be combined.
Notwithstanding the interdependencies, the Directors consider that, as the operators are ultimately purchasing an aircraft from the
airframer, of which the engines are part, the engine contract should be considered separately from the aftermarket contract. In
making this judgement, they also took account of industry practice.
Key judgement – How performance on long-term aftermarket contracts should be measured
The Group generates a significant proportion of its revenue from aftermarket arrangements. These aftermarket contracts, such as
TotalCare and CorporateCare agreements in the Civil Aerospace business, cover a range of services and generally have contractual
terms covering more than one year. Under these contracts, the Group’s primary obligation is to maintain customers’ engines in an
operational condition and this is achieved by undertaking various activities, such as maintenance, repair and overhaul, and engine
monitoring over the period of the contract. Revenue on these contracts is recognised over the period of the contract and the basis
for measuring progress is a matter of judgement. The Directors consider that the stage of completion of the contract is best measured
by using the actual costs incurred to date compared to the estimated costs to complete the performance obligations, as this reflects
the extent of completion of the activities performed.
Key judgement – Whether any costs should be treated as wastage
In rare circumstances, the Group may incur costs of wasted material, labour or other resources to fulfil a contract where the level of
cost was not reflected in the contract price. The identification of such costs is a matter of judgement and would only be expected to
arise where there has been a series of abnormal events which give rise to a significant level of cost which is also of a nature that the
Group would not expect to incur and hence is not reflected in the contract price. For example: where there are technical issues that
require resolution to meet regulatory requirements; have a wide-ranging impact across a product type; and cause significant
operational disruption to customers. Similarly, in these rare circumstances, significant disruption costs to support customers resulting
from the actual performance of a delivered good or service may be treated as a cost in the period. Any costs identified as wastage are
expensed when the obligation to incur them arises – see note 2.
Key judgement – Whether sales of spare engines to joint ventures are at fair value
The Civil Aerospace business maintains a pool of spare engines to support its customers. Some of these engines are sold to, and held
by, joint venture companies. The assessment of whether the sales price reflects fair value is a key judgement. The Group considers
that based upon its assessment, and by comparison to the sales price of spare engines to other third parties, the sales made to joint
ventures reflect the fair value of the goods sold.
Key estimate – Estimates of future revenue and costs on long-term contractual arrangements
The Group has long-term contracts that fall into different accounting periods and which can extend over significant periods
(generally up to 25 years) – the most significant of these are long-term service arrangements (LTSAs) in the Civil Aerospace business.
The estimated revenue and costs are inherently imprecise and significant estimates are required to assess: engine flying hours,
time-on-wing and other operating parameters; the pattern of future maintenance activity and the costs to be incurred; lifecycle
cost improvements over the term of the contracts; and escalation of revenue and costs. The estimates take account of the inherent
uncertainties, constraining the expected level of revenue as appropriate. In addition, many of the revenues and costs are
denominated in currencies other than that of the relevant Group undertaking. These are translated at an estimated long-term
exchange rates, based on historical trends and economic forecasts.
Key estimate – Estimates of future revenue and costs on long-term contractual arrangements (continued)
As previously explained, under IFRS 15 the Group, most significantly in Civil Aerospace, experiences volatility in revenue recognition
and contract accounting adjustments of £33m have been recognised in 2019 (2018: £(276)m). Based upon the stage of completion of
all widebody programmes as at 31 December 2019 within Civil Aerospace, the following changes in key estimates would result in the
following catch-up adjustments recognised in 2020 (at underlying rates):
–– 5% increase/decrease in shop visit costs over the life of the programmes – £142m impact
–– 2% increase/decrease in revenue over the life of the programmes – £200m impact
Revenue recognised comprises sales to the Group’s customers after discounts and amounts payable to customers. Revenue excludes value
added taxes. The transaction price of a contract is typically clearly stated within the contract, although the absolute amount may be
dependent on escalation indices and long-term contracts require the key estimates highlighted above. Refund liabilities where sales are
made with a right of return are not typical in the Group’s contracts. Where they do exist, and consideration has been received, a portion,
based on an assessment of the expected refund liability is recognised within other payables. The Group has elected to use the practical
expedient not to adjust revenue for the effect of financing components, where the expectation is that the period between the transfer of
goods and services to customers and the receipt of payment is less than a year.
Sales of standard OE, spare parts and time and material overhaul services are generally recognised on transfer of control to the customer.
This is generally on delivery to the customer, unless the specific contractual terms indicate a different point. The Directors consider
whether there is a need to constrain the amount of revenue to be recognised on delivery based on the contractual position and any
relevant facts, however, this is not typically required.
Sales of services and OE specifically designed for the contract (most significantly in the Defence business) are recognised by
reference to the progress towards completion of the performance obligation, using the cost method described in the key judgements,
provided the outcome of contracts can be assessed with reasonable certainty.
The Group generates a significant portion of its revenue and profit on aftermarket arrangements arising from the installed OE fleet. As a
consequence, in particular in the Civil Aerospace large engine business, the Group will often agree contractual prices for OE deliveries
that take into account the anticipated aftermarket arrangements and therefore sometimes this may result in losses being incurred on OE.
As described in the key judgements, these contracts are not combined. The consideration in the OE contract is therefore allocated to OE
performance obligations and the consideration in the aftermarket contract to aftermarket performance obligations.
–– Future variable revenue from long-term contracts is constrained to take account of the risk of non-recovery of resulting contract
balances from reduced utilisation e.g. engine flying hours, based on historical forecasting experience and the risk of aircraft being
parked by the customer.
–– A significant amount of revenue and cost related to long-term contract accounting is denominated in currencies other than that of the
relevant Group undertaking, most significantly US dollar transactions in sterling and euro denominated undertakings. These are
translated at estimated long-term exchange rates.
–– The assessment of stage of completion is generally measured for each contract. However, in certain cases, such as for CorporateCare
agreements where there are many contracts covering aftermarket services, each for a small number of engines, the Group accounts for
a portfolio of contracts together as the effect on the Consolidated Financial Statements would not differ materially from applying the
standard to the individual contracts in the portfolio. When accounting for a portfolio of long-term service arrangements the Group uses
estimates and assumptions that reflect the size and composition of the portfolio.
–– A contract asset/liability is recognised where payment is received in arrears/advance of the costs incurred to meet performance obligations.
–– Where material, wastage costs (see key judgements on page 125) are recorded as an exceptional non-underlying expense.
If the expected costs to fulfil a contract exceed the expected revenue, a contract loss provision is recognised for the excess costs.
The Group pays participation fees to airframe manufacturers, its customers for OE, on certain programmes. Amounts paid are initially
treated as contract assets and subsequently charged as a reduction to the OE revenue when the engine is transferred to the customer.
The Group has elected to use the practical expedient to expense as incurred any incremental costs of obtaining or fulfilling a contract
if the amortisation period of an asset created would have been one year or less. Where costs to obtain a contract are recognised in the
balance sheet they are amortised over the performance of the related contract (average of three years).

Risk and revenue sharing arrangements (RRSAs)
Key judgement – Determination of the nature of entry fees received

RRSAs with key suppliers (workshare partners) are a feature of the Civil Aerospace business. Under these contractual arrangements,
the key commercial objectives are that: (i) during the development phase the workshare partner shares in the risks of developing an
engine by performing its own development work, providing development parts and paying a non-refundable cash entry fee; and
(ii) during the production phase it supplies components in return for a share of the programme cash flows as a ‘life of type’ supplier
(i.e. as long as the engine remains in service).
The non-refundable cash entry fee is judged by the Group to be a contribution towards the development expenditure incurred.
These receipts are deferred on the balance sheet and recognised against the cost of sales over the estimated number of units
to be delivered.
The payments to suppliers of their shares of the programme cash flows for their production components are charged to cost of sales as
programme revenue arises. Cash entry fees received are initially deferred on the balance sheet and recognised as a reduction in cost of
sales incurred, on a 15-year straight-line basis pro rata over the estimated number of units produced.
The Group has arrangements with third parties who invest in a programme and receive a return based on its performance, but do
not undertake development work or supply parts. Such arrangements (financial RRSAs) are financial instruments as defined by
IAS 32 Financial Instruments: Presentation and are accounted for using the amortised cost method.
Royalty payments
Where a government or similar body has previously acquired an interest in the intellectual property of a programme, royalty payments are
matched to the related sales.
Government grants
Government grants are recognised in the income statement so as to match them with the related expenses that they are intended to
compensate. Where grants are received in advance of the related expenses, they are initially recognised in the balance sheet and released
to match the related expenditure. Non-monetary grants are recognised at fair value.
Interest
Interest receivable/payable is credited/charged to the income statement using the effective interest method. Where borrowing costs are
attributable to the acquisition, construction or production of a qualifying asset, such costs are capitalised as part of the specific asset.
Taxation
Key judgement – Whether deferred tax assets should be recognised

Deferred tax assets are recognised to the extent it is probable that future taxable profits will be available, against which the deductible
temporary difference can be utilised, based on management’s assumptions relating to the quantum of future taxable profits.
Key estimate – Estimates necessary to assess whether it is probable that sufficient suitable taxable profits will arise in the UK to utilise
the deferred tax assets
Future taxable profits require significant estimates to be made, including: the pattern of future maintenance activity and the costs to
be incurred; lifecycle cost improvements over the term of the contracts; and escalation of revenue and costs. The estimates take
account of the inherent uncertainties, constraining the expected level of profit as appropriate. Changes in these estimates will affect
future profits and therefore the recoverability of the deferred tax assets. Further details can be found in note 5.
A 5% change in margin in the main Civil Aerospace widebody programmes would result in an increase/decrease in profits by circa
£2bn (increase/decrease the deferred tax asset by £170m).
The tax charge/credit on the profit or loss for the year comprises current and deferred tax:
–– Current tax is the expected tax payable for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any
adjustment to tax payable in respect of previous years.
–– Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of
the assets and liabilities for financial reporting purposes and the amounts used for tax purposes and is calculated using the enacted or
substantively enacted rates that are expected to apply when the asset or liability is settled. In the UK, the deferred tax liability on the pension
scheme surplus is recognised consistently with the basis for recognising the surplus, i.e. at the rate applicable to refunds from a trust.
Tax is charged or credited to the income statement or OCI as appropriate, except when it relates to items credited or charged directly to
equity in which case the tax is also dealt with in equity.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and joint arrangements,
except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will
not reverse in the foreseeable future. Deferred tax is not recognised on taxable temporary differences arising on the initial recognition
of goodwill or for temporary differences arising from the initial recognition of assets and liabilities in a transaction that is not a business
combination and that affects neither accounting nor taxable profit.

Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the assets
can be utilised. Further details on the Group’s tax position can be found on page 204.
Foreign currency translation
Transactions denominated in currencies other than the functional currency of the transacting Group undertaking are translated into the
functional currency at the average monthly exchange rate when the transaction occurs. Monetary assets and liabilities denominated in
foreign currencies are translated into the relevant functional currency at the rate prevailing at the year end. Exchange differences arising
on foreign exchange transactions and the retranslation of assets and liabilities into functional currencies at the rate prevailing at the year
end are included in profit/(loss) before taxation.
The trading results of Group undertakings are translated into sterling at the average exchange rates for the year. The assets and liabilities
of overseas undertakings, including goodwill and fair value adjustments arising on acquisition, are translated at the exchange rates prevailing
at the year end. Exchange adjustments arising from the retranslation of the opening net investments, and from the translation of the profits
or losses at average rates, are recognised in OCI. The cumulative amount of exchange adjustments was, on transition to IFRS in 2004,
deemed to be nil.
Financial instruments
Key judgement – Application of the business model and ‘solely payments of principal and interest’ test
The Group’s customer invoices have relatively short payment terms and the related contracts are exposed to basic credit risk and time
value of money and therefore the associated financial assets are held as payments of principal and interest.
The Group’s customer invoices are ordinarily settled at their due date, in accordance with the contractual payment terms. For certain
customers, the Group has the right to discount invoices before their due date to accelerate payment. Where this occurs, customer
balances are classified as ‘held to collect and sell’. Fair value movements are recognised in OCI, if material (see note 14).
Financial instruments – Classification and measurement

Financial assets
Financial assets primarily include trade receivables, cash and cash equivalents (comprising cash at bank, money market funds and short-term
deposits), short-term investments, derivatives (foreign exchange, commodity and interest rate contracts), and unlisted investments.
–– Trade receivables are classified either as held to collect and measured at amortised cost or as held to collect and sell and measured at
fair value through other comprehensive income (FVOCI). The Group may sell trade receivables due from certain customers before the
due date. Any trade receivables from such customers that are not sold at the reporting date are classified as ‘held to collect and sell’.
–– Cash and cash equivalents (consisting of balances with banks and other financial institutions, money-market funds, short-term deposits)
and short-term investments are subject to low market risk. Cash balances and short-term investments are measured at fair value through
profit and loss (FVPL). Money market funds and short-term deposits are measured at FVOCI.
–– Derivatives and unlisted investments are measured at FVPL.
Financial liabilities
Financial liabilities primarily consist of trade payables, borrowings, derivatives, financial RRSAs and C Shares.
–– Derivatives are classified and measured at FVPL.
–– All other financial liabilities are classified and measured at amortised cost.
Financial instruments – Impairment of financial assets and contract assets
IFRS 9 Financial Instruments sets out the basis for the accounting of expected credit losses (ECLs) on financial assets and contract assets
resulting from transactions within the scope of IFRS 15. The Group has adopted the simplified approach to provide for ECLs, measuring
the loss allowance at a probability weighted amount that considers reasonable and supportable information about past events, current
conditions and forecasts of future economic conditions of customers. These are incorporated in the simplified model adopted by using
credit ratings which are publicly available or through internal risk assessments derived using the customer’s latest available financial
information. The ECLs are updated at each reporting date to reflect changes in credit risk since initial recognition. ECLs are calculated
for all financial assets in scope, regardless of whether or not they are overdue.
Financial instruments – Hedge accounting
Forward foreign exchange contracts and commodity swaps (derivative financial instruments) are held to manage the cash flow exposures
of forecast transactions denominated in foreign currencies or in commodities respectively. In general, the Group has chosen to not apply
hedge accounting in respect of these exposures. Prior to its acquisition in 2017, ITP Aero adopted hedge accounting for its equivalent
exposures. It has continued to do so, although the value of the derivatives is not material, relative to those held by the rest of the Group.
The Group economically hedges the fair value and cash flow exposures of its borrowings. Cross-currency interest rate swaps are held to
manage the fair value exposures of borrowings denominated in foreign currencies and are designated as fair value hedges. Interest rate
swaps are held to manage the interest rate exposures of fixed and floating rate borrowings and may be designated as fair value hedges,
cash flow hedges or FVPL as appropriate.

Derivative financial instruments qualify for hedge accounting when: (i) there is a formal designation and documentation at inception of the
hedge of the hedging relationship and the Group’s risk management objective and strategy for undertaking the hedge; and (ii) the hedge
is expected to be effective.
Changes in the fair values of derivatives that are designated as fair value hedges are recognised directly in the income statement. The fair
value changes of effective cash flow hedge derivatives are recognised in OCI and subsequently recycled in the income statement to
match the recognition of the hedged item. Any ineffectiveness in the hedging relationships is included in the income statement.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, exercised, or no longer qualifies for hedge
accounting. At that time, for cash flow hedges and if the forecast transaction remains probable, any cumulative gain or loss on the hedging
instrument recognised in OCI is retained until the forecast transaction occurs. If a hedged transaction is no longer expected to occur, the
net cumulative gain or loss is recycled to the income statement.
Financial instruments – Replacement of benchmark interest rates
Following the financial crisis, the reform and replacement of benchmark interest rates such as GBP LIBOR and other interbank offered
rates (IBORs) has become a priority for global regulators. There is currently uncertainty around the timing and precise nature of these
changes. The Group’s risk exposure that is directly affected by the interest rate benchmark reform is its portfolio of long-term borrowings
of £3.0bn. These borrowings are hedged, using interest rate swaps and cross-currency interest rate swaps, for changes in fair value
attributable to the relevant benchmark interest rate. However, as part of the reforms noted above, the UK Financial Conduct Authority
has decided to no longer compel panel banks to participate in the IBOR submission process after the end of 2021 and to cease
oversight of these benchmark interest rates. Regulatory authorities and private sector working groups have been discussing alternative
benchmark rates for IBOR. It is currently anticipated that IBOR rates will be replaced with a backward looking risk-free rate based
on actual transactions.
Management is in the process of establishing a committee to oversee the Group’s IBOR transition plan. This transition project will include
changes to systems, processes, risk and valuation models, as well as managing related tax and accounting implications. The Group
currently anticipates that the areas of greatest change will be amendments to the contractual terms of IBOR-referenced floating-rate debt
and swaps, and updating hedge designations.
Due to the uncertainty around these changes the Group has elected to early adopt the Amendments to IFRS 9, IAS 39 and IFRS 7 Interest
Rate Benchmark Reform issued in September 2019. In accordance with the transition provisions, the amendments have been adopted
retrospectively to hedging relationships that existed at the start of the reporting period or were designated thereafter. The amendments
provide temporary relief from applying specific hedge accounting requirements to hedging relationships directly affected by IBOR reform.
The reliefs have the effect that IBOR reform should not generally cause hedge accounting to terminate. However, any hedge
ineffectiveness should continue to be recorded in the income statement. Furthermore, the amendments set out triggers for when the
reliefs will end, which include the uncertainty arising from interest rate benchmark reform no longer being present.
In summary, the reliefs provided by the amendments that apply to the Group are:
–– In assessing whether the hedge is expected to be highly effective on a forward-looking basis, the Group has assumed that the relevant
IBOR interest rate on which the cash flows of the interest rate swap that hedges fixed-rate borrowings is not altered by IBOR reform.
–– The Group has assessed whether the hedged IBOR risk component is a separately identifiable risk only when it first designates a
borrowing as included in a hedging relationship and not on an ongoing basis. Any hedge ineffectiveness relating to fair value hedges
is recognised immediately in the income statement.
Business combinations and goodwill
Key judgement – Identification of acquired assets and liabilities

In allocating the purchase price to the acquired assets and liabilities, such as technology, patents and licences, customer
relationships, trademarks and in-process development, judgement is required. The allocations based on the Group’s industry
experience and the advice of third party valuers, if required.
Goodwill recognised represents the excess of the fair value of the purchase consideration over the fair value to the Group of the net
of the identifiable assets acquired and the liabilities assumed. On transition to IFRS on 1 January 2004, business combinations were not
retrospectively adjusted to comply with Adopted IFRS and goodwill was recognised based on the carrying value under the previous
accounting policies. Goodwill in respect of the acquisition of a subsidiary is recognised as an intangible asset. Goodwill arising on the
acquisition of joint arrangements and associates is included in the carrying value of the investment.
Customer relationships
The fair value of customer relationships recognised as a result of a business combination relate to the acquired company’s established
relationships with its existing customers that result in repeat purchases and customer loyalty. Amortisation is charged on a straight-line
basis over its useful economic life, up to a maximum of 15 years.
Certification costs
Costs incurred in respect of meeting regulatory certification requirements for new Civil Aerospace aero engine/aircraft combinations
including payments made to airframe manufacturers for this are recognised as intangible assets to the extent that they can be recovered
out of future sales. They are charged to the income statement over the programme life on a 15-year straight-line basis pro rata over the
estimated number of units produced.

Research and development
Key judgement – Determination of the point in time where costs incurred on an internal programme development meet the criteria
for capitalisation or ceasing capitalisation
The Group incurs significant research and development expenditure in respect of various development programmes. Determining
when capitalisation should commence and cease is a critical judgement, as is the determination of when subsequent expenditure on
the programme assets should be capitalised.
Within the Group there is an established Product Introduction and Lifecycle Management process (PILM) in place. Within this
process, the technical feasibility, the commercial viability and financial assessment of the programme is assessed at certain milestones.
When these are met, development expenditure is capitalised. Prior to this, expenditure is expensed as incurred.
Subsequent expenditure after entry into service which enhances the performance of the engine and the economic benefits to the
Group is capitalised. This expenditure is referred to as enhanced performance and is governed by the PILM process referred to
above. All other development costs are expensed as incurred.
Key judgement – Determination of the basis for amortising capitalised development costs
The economic benefits of the development costs are primarily those cash inflows arising from long-term service agreements, which
are expected to be relatively consistent for each engine. Amortisation of development costs is recognised on a straight-line basis over
15 years on a proportional basis to aircraft delivery.
Expenditure incurred on research and development is distinguished as relating either to a research phase or to a development phase.
All research phase expenditure is charged to the income statement. Development expenditure is recognised as an internally generated
intangible asset (programme asset) only if it meets strict criteria, relating in particular to technical feasibility and generation of future
economic benefits.
More specifically, development costs are capitalised from the point at which the following conditions have been met:
–– the technical feasibility of completing the programme and the intention and ability (availability of technical, financial and other
resources) to complete the programme asset and use or sell it;
–– the probability that future economic benefits will flow from the programme asset; and
–– the ability to measure reliably the expenditure attributable to the programme asset during its development.
Capitalisation continues until the point at which the programme asset meets its originally contracted technical specification (defined
internally as the point at which the asset is capable of operating in the manner intended by management).
Subsequent expenditure is capitalised where it enhances the functionality of the programme asset and demonstrably generates an
enhanced economic benefit to the Group. All other subsequent expenditure on programme assets is expensed as incurred.
The development costs associated with each engine are amortised on a straight-line basis, over a 15-year period from its delivery. The
period of 15 years is an estimate of the period of operation of the engine by its initial operator. In accordance with IAS 38, the basis on
which programme assets are amortised is assessed annually.
Software
Software that is not specific to an item of property, plant and equipment is classified as an intangible asset, recognised at its acquisition
cost and amortised on a straight-line basis over its useful economic life, up to a maximum of five years. The cost of internally developed
software includes direct labour and an appropriate proportion of overheads.
Other intangible assets
These principally include intangible assets arising on acquisition of businesses, such as technology, patents and licences which are
amortised on a straight-line basis over a maximum of 15 years and trademarks which are not amortised.
Property, plant and equipment
Property, plant and equipment are stated at acquisition cost less accumulated depreciation and any provision for impairment in value.
The cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of overheads and, where
appropriate, interest.
Depreciation is provided on a straight-line basis to write off the cost, less the estimated residual value, of property, plant and equipment
over their estimated useful lives. No depreciation is recorded on assets in the course of construction. Estimated useful lives are reassessed
annually and are as follows:
–– Land and buildings, as advised by the Group’s professional advisers:
–– freehold buildings – five to 45 years (average 25 years);
–– leasehold buildings – lower of adviser’s estimates or period of lease; and
–– no depreciation is provided on freehold land.
–– Plant and equipment – five to 25 years (average 12 years).
–– Aircraft and engines – five to 20 years (average 14 years).

Leases
Key judgement – Determination of lease term

In determining the lease term, the Group considers all facts and circumstances that create an economic incentive to exercise an
extension option, or not exercise a termination option. Extension options (or periods after termination) are only included in the lease
term if the lease is reasonably certain to be extended (or not terminated). Certain land and building leases have renewal options with
renewal dates for the most significant property leases evenly spread between 2022–2028 and in 2041. The Group reviews its judgements
on lease terms annually, including the operational significance of the site, especially where utilised for manufacturing activities.
Key estimates – Estimates of the payments required to meet residual value guarantees at the end of engine leases
Engine leases in the Civil Aerospace segment often include clauses that require the engines to be returned to the lessor with specific
levels of useable life remaining or cash payments to the lessor. The costs of meeting these requirements are included in the lease
payments. The amounts payable are calculated based upon an estimate of the utilisation of the engines over the lease term, whether
the engine is restored to the required condition by performing an overhaul at our own cost or through the payments of amounts
specified in the contract and any new contractual arrangements arising when the current lease contracts end. At 31 December 2019,
the lease liability included £401m relating to the cost of meeting these residual value guarantees, with up to £80m in 2020 and £112m
due over the following four years. Where estimates of payments change, an adjustment is made to the lease liability and the
right-of-use asset.
Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of
the following lease payments:
–– fixed payments less any lease incentive receivable;
–– variable lease payments that are based on an index or a rate;
–– amounts expected to be payable by the Group under residual value guarantees;
–– the exercise price of a purchase option if the Group is reasonably certain to exercise that option; and
–– payments of penalties for termination of the lease, if the lease term reflects the Group exercising that option.
Where leases commence after the initial transition date, the lease payments are discounted using the interest rate implicit in the lease.
If that rate cannot be determined, the Group’s incremental borrowing rate is used, being the rate that the Group would have to pay to
borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. Lease
liabilities are revalued at each reporting date using the spot exchange rate.
Right-of-use assets are measured at cost comprising the following:
–– the amount of the initial measurement of lease liability or a revaluation of the liability;
–– any lease payments made at or before the commencement date less any lease incentives received;
–– any initial direct costs; and
–– restoration costs.
Each right-of-use asset is depreciated over the shorter of its useful economic life and the lease term on a straight-line basis unless the
lease is expected to transfer ownership of the underlying asset to the Group, in which case the asset is depreciated to the end of the
useful life of the asset.
Payments associated with the short-term leases are recognised on a straight-line basis as an expense in the income statement. Short-term
leases are leases with a lease term of 12 months or less.
Impairment of non-current assets
Key judgement – Determination of cash-generating units for assessing impairment of goodwill

The Group conducts impairment reviews at the cash generating unit (CGU) level. As permitted by IAS 36 Impairment of assets,
impairment reviews for goodwill are performed at the groups of CGUs level, representing the lowest level at which the Group monitors
goodwill for internal management purposes and no higher than the Group’s operating segments. The level at which goodwill impairment
reviews was performed was at the Rolls-Royce Deutschland Ltd & Co KG and Rolls-Royce Power Systems AG aggregated level.
Key estimate – Estimates of cash flow forecasts and discount rates to support the carrying value of intangible assets (including
programme related intangible assets)
The carrying value of intangible assets on the balance sheet is dependent on the estimates of future cash flows arising from the
Group’s operations, in particular:
–– The assessment as to whether there are any indications of impairment of development expenditure, certification costs, and
customer relationships recognised as intangible assets (31 December 2019: £3,612m, 31 December 2018: £3,427m) is dependent on
estimates of cash flows generated by the relevant programme, the discount rate used to calculate a present value and assumptions
on foreign exchange rates.
–– In addition, in relation to programme intangible assets, estimates comprise: product performance related estimates (including flying
hours and time-on-wing); and estimates for future market share, pricing and cost for uncontracted business. Sensitivities have been
disclosed in note 9.

Impairment of non-current assets is considered in accordance with IAS 36. Where the asset does not generate cash flows that are
independent of other assets, impairment is considered for the cash-generating unit to which the asset belongs. Goodwill, indefinite life
intangible assets and intangible assets not yet available for use are tested for impairment annually. Other intangible assets (including
programme related intangible assets), property, plant and equipment and investments are assessed for any indications of impairment
annually. If any indication of impairment is identified, an impairment test is performed to estimate the recoverable amount.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be below the carrying value, the carrying value is reduced
to the recoverable amount and the impairment loss is recognised as an expense. The recoverable amount is the higher of value in use or
fair value less costs to dispose, if this is readily available. The value in use is the present value of future cash flows using a pre-tax discount
rate that reflects the time value of money and the risk specific to the asset.
Inventories
Inventories are valued on a first-in, first-out basis, at the lower of cost and net realisable value. Cost comprises direct materials and, where
applicable, direct labour costs and those direct and indirect overheads, including depreciation of property, plant and equipment, that have
been incurred in bringing the inventories to their present location and condition. Net realisable value represents the estimated selling
prices less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. All inventories are classified as
current as it is expected that they will be used in the Group’s operating cycle, regardless of whether this is expected to be within 12 months
of the balance sheet date.
Cash and cash equivalents include cash at bank and in hand, investments in money-market funds and short-term deposits with a maturity
of three months or less on inception. The Group considers overdrafts (repayable on demand) 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. Where the Group operates
pooled banking arrangements across multiple accounts, these are presented on a net basis when it has both a legal right and intention
to settle the balances on a net basis.
Invoice discounting – The Group on a periodic basis undertakes the sale of certain trade receivables to banks. These trade receivables are
factored on a non-recourse basis and therefore are derecognised from the Group’s balance sheet at the point of sale to the bank. Further
details are disclosed in note 14.
Supply chain financing (SCF) – The Group offers a SCF programme in partnership with banks to enable suppliers who are on our standard
75 day or more payment terms to receive their payment sooner. As the Group continues to have a contractual obligation to pay its
suppliers and it does not retain any ongoing involvement in the SCF, the related payables are retained on the Group’s balance sheet and
classified as trade payables. Further details are disclosed in note 18.
Provisions
Key judgement – Assessment of satisfying the criteria for the recognition and measurement of provisions
Judgement is required to determine whether a valid expectation has been created and what costs are allowable to be provided for
(especially when measuring contract loss provisions).
Key estimate – Estimates of expenditure required to settle the obligation relating to Trent 1000 claims and to settle long-term
contracts assessed as onerous
The Group has provisions at 31 December 2019 of £2,804m (31 December 2018: £1,917m). These represent the Directors’ best estimate
of the expenditure required to settle the obligations at the balance sheet date. These estimates take account of information available
and different possible outcomes. The Group considers that at 31 December 2019, the contract loss provision and the Trent 1000
exceptional cost provision are most sensitive to changes in estimates.
The Group has considered two sensitivities which are the impact of a three-month delay on achieving single digit AOGs and a
12-month delay in the availability of the final HPT blade. If either of these two sensitivities materialised the financial impact could
be in the range of £60m–£100m.
Provisions are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will be
required to settle that obligation and are discounted to present value where the effect is material.

The principal provisions are recognised as follows:
–– Trent 1000 in-service issues – when wastage costs are identified as described on page 125;
–– contract losses – based on an assessment of whether the direct costs to fulfil a contract are greater than the expected revenue;
–– warranties and guarantees – based on an assessment of future claims with reference to past experience and recognised at the earlier
of when the underlying products and services are sold and when the likelihood of a future cost is identified; and
–– restructuring – when the Group has approved a detailed and formal restructuring plan, and the restructuring has either commenced
or has been publicly announced.
Post-retirement benefits
Key estimate – Estimates of the assumptions for valuing the defined benefit obligation
The Group’s defined benefit pension schemes and similar arrangements are assessed annually in accordance with IAS 19 Employee
Benefits. The valuation, which is based on assumptions determined with independent actuarial advice, resulted in a net deficit of
£208m before deferred taxation being recognised on the balance sheet at 31 December 2019 (31 December 2018: surplus of £641m).
The size of the net surplus/deficit is sensitive to the actuarial assumptions, which include the discount rate, price inflation, pension
and salary increases, transfers, mortality and other demographic assumptions and the levels of contributions. Further details and
sensitivities are included in note 21.
Pensions and similar benefits (principally healthcare) are accounted for under IAS 19.
For defined benefit plans, obligations are measured at discounted present value, using a discount rate derived from high-quality corporate
bonds denominated in the currency of the plan, whilst plan assets are recorded at fair value. Surpluses in schemes are recognised as
assets only if they represent economic benefits available to the Group in the future.
The service and financing costs of such plans are recognised separately in the income statement:
–– current service costs are spread systematically over the lives of employees;
–– past-service costs and settlements are recognised immediately; and
–– financing costs are recognised in the periods in which they arise.
Actuarial gains and losses are recognised immediately in OCI.
In 2018, following clarification provided by the High Court judgement on the Lloyds Banking Group on 26 October 2018, in the UK, the
Group recognised the estimated impact of the obligation to equalise pensions for men and women as a past-service cost – see note 21.
Payments to defined contribution schemes are charged as an expense as they fall due.
Share-based payments
The Group provides share-based payment arrangements to certain employees. These are principally equity-settled arrangements and are
measured at fair value (excluding the effect of non-market based vesting conditions) at the date of grant. The fair value is expensed on a
straight-line basis over the vesting period. The amount recognised as an expense is adjusted to reflect the actual number of shares or
options that will vest, except where additional shares vest as a result of the total shareholder return (TSR) performance condition in the
long-term incentive plan (LTIP).
Cash-settled share options (grants in the International ShareSave plan) are measured at fair value at the balance sheet date. The Group
recognises a liability at the balance sheet date based on these fair values, taking into account the estimated number of options that will
actually vest and the relative completion of the vesting period. Changes in the value of this liability are recognised in the income
statement for the year.
The cost of shares of Rolls-Royce Holdings plc held by the Group for the purpose of fulfilling obligations in respect of employee share
plans is deducted from equity in the consolidated balance sheet. See note 23 for a further description of the share-based payment plans.
Customer financing support
In connection with the sale of its products, the Group will, on occasion, provide financing support for its customers. These arrangements
fall into two categories: credit-based guarantees and asset-value guarantees. In accordance with the requirements of IFRS 9 and IFRS 4
Insurance Contracts, credit-based guarantees are treated as insurance contracts. The Group considers asset-value guarantees to be
non-financial liabilities and accordingly these are also treated as insurance contracts. As described on page 167, the Directors consider
the likelihood of crystallisation in assessing whether provision is required for any contingent liabilities.
The Group’s contingent liabilities relating to financing arrangements are spread over many years and relate to a number of customers and
a broad product portfolio, and are reported on a discounted basis.
Post balance sheet events
Non-adjusting post balance sheet events in relation to pensions and mergers and acquisitions activity are disclosed in notes 21 and 27
respectively.

Revisions to IFRS not applicable in 2019
Standards and interpretations issued by the IASB are only applicable if endorsed by the EU. Other than IFRS 17 Insurance Contracts
described below, the Group does not consider that any standards, amendments or interpretations issued by the IASB, but not yet
applicable will have a significant impact on the Consolidated Financial Statements.
IFRS 17 Insurance Contracts
IFRS 17 is effective from the beginning of 1 January 2021 (although the IASB proposed to delay the effective date by one year to 1 January
2022). IFRS 17 establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts within the scope
of the Standard. The objective of IFRS 17 is to ensure that an entity provides relevant information that faithfully represents those contracts.
The Group is in the process of assessing whether the new standard will impact on the Consolidated Financial Statements.
2 Segmental analysis
The analysis by divisions (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 (which acts as the Chief Operating Decision Maker as defined by IFRS 8).
Our four divisions are set out below and referred to collectively as the core businesses.
Civil Aerospace – development, manufacture, marketing and sales of commercial aero engines and aftermarket services
Power Systems – development, manufacture, marketing and sales of reciprocating engines, power systems and nuclear systems for civil
power generation
Defence – development, manufacture, marketing and sales of military aero engines, naval engines, submarine nuclear power plants and
aftermarket services
ITP Aero – design, research and development, manufacture and casting, assembly and testing of aeronautical engines and gas turbines,
and MRO services
Non-core businesses include the trading results of the North America Civil Nuclear business and the Knowledge Management System
business which have been treated as a disposal group held for sale at 31 December 2019, the Commercial Marine business until the date of
disposal on 1 April 2019, Rolls-Royce Power Development Limited (RRPD) until the date of disposal on 15 April 2019, L’Orange until the date
of disposal on 1 June 2018 and other smaller businesses including former Energy businesses not included in the disposal to Siemens in
2014 (Retained Energy). Segmental analysis for 2018 has been restated to reflect the 2019 definition of non-core.
Underlying results
We present the financial performance of our 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 to reflect the economic impact of the Group’s foreign
exchange and interest rate risk management activities with interest receivable/(payable) on interest rate swaps not designated into
hedging relationships for accounting purposes reclassified from fair value movement on a reported basis to interest receivable/(payable)
on an underlying basis – see note 4.
Underlying performance excludes the following:
–– the effect of acquisition accounting and business disposals;
–– impairment of goodwill and other non-current assets where the reasons for impairment are outside of normal operating activities;
–– exceptional items; and
–– other items which are market driven and outside the control of management.
Acquisition accounting, business disposals and impairment

We exclude these so that the current year and comparative results are directly comparable.
Exceptional items
We classify items as exceptional where the Directors believe that presentation of our results in this way is more relevant to an
understanding of our financial performance, as exceptional items are identified by virtue of their size, nature or incidence.
In determining whether an event or transaction is exceptional, management considers 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 our post-retirement schemes.
In 2019, the risk-free discount rate we applied to exceptional onerous contract provisions reduced from between 4%–5% to 2%–3%. This
was largely driven by movements in US bonds in the last quarter of 2019. The change in the risk-free rate (US bonds) is market driven
and the impact of the reduction in the rate has been included as a reconciling difference between underlying performance and
reported performance.
Exceptional items are not allocated to segments and may not be comparable to similarly titled measures used by other companies.
2 Segmental analysis continued

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 performance and reported performance.
Penalties paid on agreements with investigating bodies are considered to be one-off in nature and are therefore excluded from underlying
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 advance corporation tax recognised are also excluded.
See page 139 for the reconciliation between underlying performance and reported performance.
The following analysis sets out the results of the core businesses on the basis described above and also includes a reconciliation of the
underlying results to those reported in the consolidated income statement.
Corporate
Civil Power and Core
Aerospace Systems 1 Defence ITP Aero inter-segment businesses
£m £m £m £m £m £m
Year ended 31 December 2019
Underlying revenue from sale of original equipment 3,246 2,386 1,461 782 (502) 7,373
Underlying revenue from aftermarket services 4,861 1,159 1,789 154 (75) 7,888
Total underlying revenue 8,107 3,545 3,250 936 (577) 15,261
Gross profit/(loss) 622 909 669 206 (64) 2,342
Commercial and administrative costs (299) (374) (151) (61) (53) (938)
Restructuring (7) – (7) (1) – (15)
Research and development costs (374) (176) (105) (33) – (688)
Share of results of joint ventures and associates 102 (2) 9 – – 109
Underlying operating profit/(loss) 44 357 415 111 (117) 810
Segment assets 17,954 3,587 2,743 2,160 (2,476) 23,968
Interests in joint ventures and associates 365 18 19 – – 402
Segment liabilities (24,819) (1,450) (2,950) (1,129) 2,645 (27,703)
Net (liabilities)/assets (6,500) 2,155 (188) 1,031 169 (3,333)
Investment in intangible assets, property, plant and equipment,
right-of-use assets and joint ventures and associates 1,274 197 110 53 – 1,634
Depreciation, amortisation and impairment 807 278 109 88 – 1,282

Underlying revenue from sale of original equipment 3,119 2,310 1,452 666 (375) 7,172
Underlying revenue from aftermarket services 4,259 1,124 1,672 113 (54) 7,114
Gross profit 493 866 690 156 35 2,240
Commercial and administrative costs (336) (363) (170) (57) (51) (977)
Restructuring (8) (1) (3) (2) – (14)
Research and development costs (332) (188) (100) (30) – (650)
Share of results of joint ventures and associates 21 1 10 – – 32
Underlying operating (loss)/profit (162) 315 427 67 (16) 631
Segment assets 14,271 3,692 2,612 2,210 (1,621) 21,164

Interests in joint ventures and associates 380 14 16 – – 410
Segment liabilities (21,309) (1,651) (2,924) (1,168) 1,743 (25,309)
Net (liabilities)/assets (6,658) 2,055 (296) 1,042 122 (3,735)
Investment in intangible assets, property, plant and equipment
and joint ventures and associates 1,283 119 151 74 – 1,627
Depreciation, amortisation and impairment 500 234 92 87 – 913
1 The underlying results for Power Systems for 31 December 2018 have been restated to reclassify the North America Civil Nuclear business as non-core.

Reconciliation to reported results 
Underlying
adjustments and Group at
adjustments actual
Core Non-core Total to foreign exchange
businesses businesses 1,2 underlying exchange rates
£m £m £m £m £m
Revenue from sale of original equipment 7,373 83 7,456 596 8,052
Revenue from aftermarket services 7,888 106 7,994 541 8,535
Total revenue 15,261 189 15,450 1,137 16,587
Gross profit/(loss) 2,342 45 2,387 (1,445) 942
Commercial and administrative costs (938) (41) (979) (149) (1,128)
Restructuring (15) 1 (14) 14 –
Research and development costs (688) (8) (696) (74) (770)
Share of results of joint ventures and associates 109 1 110 (6) 104
Operating profit/(loss) 810 (2) 808 (1,660) (852)
Gain arising on disposal of businesses – – – 139 139
Profit/(loss) before financing and taxation 810 (2) 808 (1,521) (713)
Net financing (223) (2) (225) 47 (178)
Profit/(loss) before taxation 587 (4) 583 (1,474) (891)
Taxation (281) 4 (277) (143) (420)
Profit/(loss) for the year 306 – 306 (1,617) (1,311)
Attributable to:
Ordinary shareholders 302 (1,617) (1,315)
Non-controlling interests 4 – 4

Revenue from sale of original equipment 7,172 358 7,530 285 7,815
Revenue from aftermarket services 7,114 423 7,537 377 7,914
Total revenue 14,286 781 15,067 662 15,729
Gross profit/(loss) 2,240 210 2,450 (1,252) 1,198
Commercial and administrative costs (977) (184) (1,161) (434) (1,595)
Restructuring (14) (2) (16) 16 –
Research and development costs (650) (39) (689) (79) (768)
Share of results of joint ventures and associates 32 – 32 (28) 4
Operating profit/(loss) 631 (15) 616 (1,777) (1,161)
Gain arising on the disposal of L’Orange – – – 358 358
Profit/(loss) before financing and taxation 631 (15) 616 (1,419) (803)
Net financing (148) (2) (150) (1,994) (2,144)
Profit/(loss) before taxation 483 (17) 466 (3,413) (2,947)
Taxation (153) (8) (161) 715 554
Profit/(loss) for the year 330 (25) 305 (2,698) (2,393)
Attributable to:
Ordinary shareholders 297 (2,698) (2,401)
Non-controlling interests 8 – 8
1 Includesthe North America Civil Nuclear business and the Knowledge Management System business which have been treated as a disposal group held for sale at 31 December 2019,
the Commercial Marine business disposed of on the 1 April 2019, RRPD disposed of on the 15 April 2019, L’Orange until the date of disposal on 1 June 2018 and other smaller non-core
businesses including former Energy businesses not included in the disposal to Siemens in 2014 (Retained Energy). See note 27 for more details.
2 Non-core businesses for 31 December 2018 has been restated to include the North America Civil Nuclear business.

Disaggregation of revenue from contracts with customers
Analysis by type and basis of recognition
Civil Power Corporate and Core
Aerospace Systems 1 Defence ITP Aero 2 inter-segment businesses
£m £m £m £m £m £m
Original equipment recognised at a point in time 3,246 2,285 567 702 (478) 6,322
Original equipment recognised over time – 101 894 80 (24) 1,051
Aftermarket services recognised at a point in time 1,599 1,026 696 48 (32) 3,337
Aftermarket services recognised over time 3,138 133 1,093 106 (43) 4,427
Total underlying customer contract revenue 3 7,983 3,545 3,250 936 (577) 15,137
Other underlying revenue 124 – – – – 124

Original equipment recognised at a point in time 3,119 2,257 694 585 (355) 6,300
Original equipment recognised over time – 53 758 81 (20) 872
Aftermarket services recognised at a point in time 1,575 996 718 (4) 21 3,306
Aftermarket services recognised over time 2,630 128 954 117 (75) 3,754
Total underlying customer contract revenue 3 7,324 3,434 3,124 779 (429) 14,232
Other underlying revenue 54 – – – – 54
1 The underlying revenue for Power Systems for 31 December 2018 has been re-presented to reclassify the North America Civil Nuclear business as non-core.
2 ITP Aero prior year disaggregation of revenue has been restated to be consistent with current year presentation.
3 Includes £(93)m (2018: £(196)m) of revenue recognised in the year relating to performance obligations satisfied in previous years.
Underlying
adjustments and Group at
adjustments actual
Core Non-core Total to foreign exchange
businesses businesses 1,2 underlying exchange 3 rates
£m £m £m £m £m
Original equipment recognised at a point in time 6,322 40 6,362 596 6,958
Original equipment recognised over time 1,051 43 1,094 – 1,094
Aftermarket services recognised at a point in time 3,337 94 3,431 313 3,744
Aftermarket services recognised over time 4,427 12 4,439 228 4,667
Total customer contract revenue 15,137 189 15,326 1,137 16,463
Other revenue 124 – 124 – 124
Total revenue 15,261 189 15,450 1,137 16,587

Original equipment recognised at a point in time 6,300 64 6,364 283 6,647
Original equipment recognised over time 872 294 1,166 2 1,168
Aftermarket services recognised at a point in time 3,306 388 3,694 148 3,842
Aftermarket services recognised over time 3,754 35 3,789 229 4,018
Total customer contract revenue 14,232 781 15,013 662 15,675
Other revenue 54 – 54 – 54
Total revenue 14,286 781 15,067 662 15,729
1 Includes the North America Civil Nuclear business and the Knowledge Management System business which have been treated as a disposal group held for sale at 31 December 2019,
the Commercial Marine business disposed of on the 1 April 2019, RRPD disposed of on 15 April 2019, L’Orange until the date of disposal on 1 June 2018 and other smaller non-core
businesses including former Energy businesses not included in the disposal to Siemens in 2014 (Retained Energy). See note 27 for more details.
2 Non-core businesses for 31 December 2018 has been restated to include North America Civil Nuclear business.
3 Includes £(187)m (2018: £nil) of revenue recognised relating to performance obligations satisfied in previous years over and above that in underlying revenue.

Analysis by geographical destination
The Group’s revenue by destination of the ultimate operator is as follows:

2019 2018
£m £m
United Kingdom 1,805 1,505
Germany 961 1,177
Switzerland 520 675
Spain 375 343
France 284 251
Italy 235 304
Russia 106 79
Norway 87 246
Rest of Europe 979 815
Europe 5,352 5,395
United States 4,720 5,041
Canada 298 366
North America 5,018 5,407
South America 377 351
United Arab Emirates 438 105
Rest of Middle East 714 584
Middle East 1,152 689
China 1,698 1,483
Singapore 702 452
Japan 607 365
South Korea 252 334
India 82 82
Malaysia 32 111
Rest of Asia 590 588
Asia 3,963 3,415
Africa 246 152
Australasia 361 229
Other 118 91
16,587 15,729
Order backlog
Contracted consideration that is expected to be recognised as revenue when performance obligations are satisfied in the future (referred
to as order backlog) is as follows:
2019 2018
Within After Within After
five years five years Total five years five years Total
£bn £bn £bn £bn £bn £bn
Civil Aerospace 22.9 25.6 48.5 22.1 30.2 52.3
Power Systems 2.6 0.3 2.9 2.9 0.2 3.1
Defence 7.7 0.9 8.6 6.3 0.5 6.8
ITP Aero 0.7 0.2 0.9 0.8 0.1 0.9
33.9 27.0 60.9 32.1 31.0 63.1
The parties to these contracts have approved the contract and our customers do not have a unilateral enforceable right to terminate the
contract without compensation. We exclude Civil Aerospace OE orders (for deliveries beyond the next 7–12 months) that our customers
have placed where they retain a right to cancel. Our expectation based on historical experience is that these orders will be fulfilled.
Within the 0–5 years category, contracted revenue in: Defence will largely be recognised in the next three years; Power Systems will be
recognised over the next two years as it is a short cycle business; and ITP Aero (where internal Group revenues have been eliminated)
evenly spread over the next five years.

Underlying adjustments
2019 2018
Profit before Net Profit before Net
Revenue financing financing Revenue financing financing
£m £m £m £m £m £m
Underlying performance 15,450 808 (225) 15,067 616 (150)
Transactions recognised at exchange rate on date of cash
flow and revaluation of trading assets/liabilities 1 1,137 145 80 781 (23) 163
Impact of unrealised fair value changes to derivative
contracts held for trading 2 – (1) (6) – (1) (2,144)
Impact of unrealised fair value changes to derivative
contracts held for financing 3 – – 1 – – (3)
Exceptional programme charges 4,5 – (1,409) – (119) (976) (15)
Impact of discount rate changes 6 – – (40) – – –
Exceptional restructuring charges 4,7 – (136) – – (317) –
(Loss)/gains arising on the acquisitions and disposals 8 – (24) (8) – 183 (8)
Impairments and asset write-offs 9 – (84) – – (155) –
Other 10 – (12) 20 – (130) 13
Total underlying adjustments 1,137 (1,521) 47 662 (1,419) (1,994)
Reported per consolidated income statement 16,587 (713) (178) 15,729 (803) (2,144)
1 The adjustments for realised gains/(losses) on settled derivative contracts include adjustments to reflect the gains/(losses) in the same period as the related trading cash flows.
2 The adjustments for unrealised fair value changes to derivative contracts contain those included in equity accounted joint ventures and exclude those for which the related trading
contracts have been cancelled when the fair value changes are recognised immediately in underlying profit before taxation.
3 Includes the losses on hedge ineffectiveness in the period of £13m (2018: losses £3m).
4 The table below summarises the exceptional items recorded in 2019 and 2018.
Year to 31 December
2019 2018
£m £m
Programme charges and associated contract losses 5 1,409 976
Related foreign exchange impact 5 171 147
Restructuring charges 7 136 317
Pension charges 10 – 121
1,716 1,561
5 Included within programme exceptional items is £1,361m (2018: £790m), £1,531m (2018: £905m) at prevailing exchange rates, in respect of the abnormal wastage costs on the
Trent 1000. This includes £0.2bn of insurance receipts in respect of the Trent 1000 in-service issues. In addition, there is an exceptional item of £48m (2018: 186m), £49m (2018: £218m)
at prevailing exchange rates that relates to the decision by Airbus to cease A380 deliveries in 2021. For information on the associated provisions – see note 20.
6 Included within discount rate changes is £30m relating to Trent 900 and £10m relating to Trent 1000 for the impact from the change in discount rates on contract losses recorded
in exceptional items in prior years as a result of the fall in US bonds, which drives the calculation of the risk-free rate.
7 The Group recorded an exceptional restructuring charge of £136m (2018: £317m) in the year. The costs include: £88m (2018: £223m) in respect of the Group-wide restructuring
programme announced on 14 June 2018; costs relating to ongoing multi-year significant restructuring programmes including restructuring at Power Systems and in respect of Defence,
reflecting actions to remove cost and improve operational efficiency.
8 (Loss)/gains arising on the acquisitions and disposals of businesses. See note 27 for more details (also including the amortisation of intangible assets arising on previous acquisitions).
9 In 2019, there has been an impairment of £58m relating to Bergen Engines AS, and impairment charge and asset write offs of £26m following the announcement to sell the North
America Civil Nuclear business within the Power Systems business segment. The impairment charge in 2018 of £155m related to Commercial Marine.
10 Other includes the 2018 cost of equalisation of pension benefits between men and women – see note 21.
Appropriate rates of tax have been applied to adjustments made to profit before tax in the table above. Adjustments in 2019 which impact
the UK tax loss have an effective tax rate of zero. See note 5 for more details. The total underlying adjustments to profit before tax in 2019
are a charge of £143m (2018: credit £715m). The charge in 2019 was £57m plus an additional charge of £86m relating to the derecognition
of UK deferred tax assets on foreign exchange and commodity financial assets and liabilities. The credit in 2018 was £672m plus an
additional credit of £43m relating to the reduction in the Spanish Basque region tax rate.

Reconciliation to the balance sheet
2019 2018
£m £m
Reportable segment assets 23,968 21,164
Interests in joint ventures and associates 402 412
Non-core businesses 84 188
Assets held for sale 18 750
Cash and cash equivalents and short-term investments 4,449 4,980
Fair value of swaps hedging fixed rate borrowings 249 293
Deferred and income tax assets 1,926 2,126
Post-retirement scheme surpluses 1,170 1,944
Total assets 32,266 31,857
Reportable segment liabilities (27,703) (25,309)
Non-core businesses (43) (159)
Liabilities associated with assets held for sale (15) (376)
Borrowings and lease liabilities (5,685) (4,662)
Fair value of swaps hedging fixed rate borrowings (6) –
Deferred and income tax liabilities (790) (1,100)
Post-retirement scheme deficits (1,378) (1,303)
Total liabilities (35,620) (32,909)
Net liabilities (3,354) (1,052)
The carrying amounts of the Group’s non-current assets including investments but excluding financial instruments, deferred tax assets
and post-employment benefit surpluses, by the geographical area in which the assets are located, are as follows:
2019 2018
£m £m
Germany 2,568 2,604
Spain 1,324 1,380
Other 826 710
12,670 10,658
3 Research and development

2019 2018
£m £m
Expenditure in the year (1,118) (1,145)
Capitalised as intangible assets 481 498
Amortisation and impairment of capitalised costs 1 (133) (121)
Net cost recognised in the income statement (770) (768)
Underlying adjustments relating to effects of acquisition accounting and foreign exchange 74 79
Net underlying cost recognised in the income statement (696) (689)
1 See note 9 for analysis of amortisation and impairment.
4 Net financing
2019 2018
Per Per
consolidated consolidated
income Underlying income Underlying
statement financing 1 statement financing 1
Note £m £m £m £m
Interest receivable 31 31 27 27
Net fair value gains on non-hedge accounted interest rate swaps 2 19 14 – – –
Financial RRSAs – foreign exchange differences and changes
in forecast payments 19 11 – 25 –
Net fair value gains on commodity contracts 19 36 – – –
Financing on post-retirement scheme surpluses 21 60 – 56 –
Net foreign exchange gains 100 – 163 –
Financing income 252 31 271 27
Interest payable (182) (163) (107) (99)

Net fair value losses on foreign currency contracts 19 (43) – (2,122) –
Financial RRSAs – foreign exchange differences and changes
in forecast payments 19 (10) – (27) –
Financial charge relating to financial RRSAs 19 (3) (3) (8) (8)
Net fair value losses on commodity contracts 19 – – (22) –
Financing on post-retirement scheme deficits 21 (37) – (33) –
Other financing charges (155) (90) (96) (70)
Financing costs (430) (256) (2,415) (177)
Net financing costs (178) (225) (2,144) (150)
Analysed as:
Net interest payable (151) (132) (80) (72)
Net fair value gains/(losses) on derivative contracts 7 – (2,144) –
Net post-retirement scheme financing 23 – 23 –
Net other financing (57) (93) 57 (78)
Net financing costs (178) (225) (2,144) (150)
1 Seenote 2 for definition of underlying results.
2 Theconsolidated income statement shows the net fair value gain on any interest rate swaps not designated into hedging relationships for accounting purposes. Underlying financing
reclassifies the interest receivable on these interest rates swaps from fair value movement to interest payable.
5 Taxation
UK Overseas Total
2019 2018 2019 2018 2019 2018
£m £m £m £m £m £m
Current tax charge for the year 15 13 228 167 243 180
Adjustments in respect of prior years (4) (13) (3) 15 (7) 2
Current tax 11 – 225 182 236 182
Deferred tax charge/(credit) for the year 117 (630) (24) (43) 93 (673)
Adjustments in respect of prior years 20 22 (15) (42) 5 (20)
Derecognition of deferred tax 86 – – – 86 –
Deferred tax credit resulting from reduction
in tax rates – – – (43) – (43)
Deferred tax 223 (608) (39) (128) 184 (736)
Charged/(credited) in the income statement 234 (608) 186 54 420 (554)

5 Taxation continued
Other tax credits/(charges)
OCI Equity
Items that will not Items that may
be reclassified be reclassified
2019 2018 2019 2018 2019 2018
£m £m £m £m £m £m
Deferred tax:
Movement in post-retirement schemes 324 (2) – – – –
Share-based payments – direct to equity – – – – 1 2
Cash flow hedge – – (5) 5 – –
Net investment hedge – – (1) – – –
Other tax credits/(charges) 324 (2) (6) 5 1 2
Tax reconciliation
2019 2018
£m £m
Loss before taxation (891) (2,947)
Less share of results of joint ventures and associates (note 12) (141) (114)
Loss before taxation excluding joint ventures and associates (1,032) (3,061)
Nominal tax credit at UK corporation tax rate 19% (2018: 19%) (196) (582)
UK tax rate differential 1 56 51
Overseas rate differences 2 58 91
Impairment of goodwill 1 29
Exempt gain on the disposal of Commercial Marine (20) –
Exempt gain on the disposal of L’Orange – (117)
R&D credits (34) (23)
Other permanent differences 8 36
Tax losses in year not recognised in deferred tax 3 463 22
Derecognition of deferred tax 4 86 –
Adjustments in respect of prior years (2) (18)
Reduction in closing deferred taxes resulting from decrease in tax rate in the Spanish Basque region – (43)
420 (554)
Underlying items (note 2) 277 161
Non-underlying items 143 (715)
420 (554)
1 The UK tax rate differential arises on the difference between the deferred tax rate and the UK statutory tax rate.
2 Overseas rate differences mainly relate to tax on profits in countries, such as the US and Germany, which have higher tax rates than the UK.
3 Tax losses not recognised mainly relate to the UK in 2019 – see pages 143 to 144.
4 Derecognition of deferred tax assets relating to foreign exchange and commodity financial assets and liabilities – see page 144.
Deferred taxation assets and liabilities

2019 2018
£m £m
At 1 January 1,130 380
Impact of adopting IFRS 16 (2018: Impact of adopting IFRS 9) 8 2
Amount (charged)/credited to income statement (184) 736
Amount credited/(charged) to other comprehensive income 323 (2)
Amount (charged)/credited to cash flow hedge reserve (5) 5
Amount credited to equity 1 2
On disposal/acquisition of businesses 1 (3) 6
Transferred to assets held for sale 2 (2) (4)
Exchange differences 1 5
At 31 December 1,269 1,130
Deferred tax assets 1,887 2,092
Deferred tax liabilities (618) (962)
1,269 1,130
1 The 2019 deferred tax on disposal of businesses relates to Commercial Marine. The 2018 comparative relates to the disposal of L’Orange.
2 The 2019 deferred tax transferred to assets held for sale relates to the North America Civil Nuclear business. The 2018 comparative relates to Commercial Marine.
The analysis of the deferred tax position is as follows:
Merger and
Impact of At Recognised acquisition
At adopting 1 January in income Recognised Recognised related Exchange At 31
1 January IFRS 16 restated statement in OCI in equity activity differences December
£m £m £m £m £m £m £m £m £m
2019
Intangible assets (620) – (620) (135) – – (2) 31 (726)
Property, plant and equipment (85) (74) (159) 10 – – (1) 12 (138)
Other temporary differences 164 82 246 147 (6) 1 2 (16) 374
Net contract liabilities 57 – 57 (2) – – – – 55
Pensions and other post-retirement
scheme benefits (461) – (461) (1) 324 – (3) (13) (154)
Foreign exchange and commodity
financial assets and liabilities 625 – 625 (200) – – – – 425
Losses 1,010 – 1,010 9 – – (1) (1) 1,017
R&D credit 277 – 277 (12) – – – (12) 253
Advance corporation tax 163 – 163 – – – – – 163
1,130 8 1,138 (184) 318 1 (5) 1 1,269
Merger and
Impact of At Recognised acquisition
At adopting 1 January in income Recognised Recognised related Exchange At 31
1 January IFRS 9 restated statement in OCI in equity activity differences December
£m £m £m £m £m £m £m £m £m
2018
Intangible assets (419) – (419) (203) – – 5 (3) (620)
Property, plant and equipment (158) – (158) 77 – – 1 (5) (85)
Other temporary differences 258 2 260 (106) 5 2 (1) 4 164
Net contract liabilities 63 – 63 (6) – – – – 57
Pensions and other post-retirement
scheme benefits (482) – (482) 19 (2) – (3) 7 (461)
Foreign exchange and commodity
financial assets and liabilities 381 – 381 244 – – – – 625
Losses 306 – 306 704 – – – – 1,010
R&D credit 268 – 268 7 – – – 2 277
Advance corporation tax 163 – 163 – – – – – 163
380 2 382 736 3 2 2 5 1,130
Unrecognised deferred tax assets

2019 2018
£m £m
Advance corporation tax 19 19
UK losses 438 –
Foreign exchange and commodity financial assets and liabilities 86 –
Losses and other unrecognised deferred tax assets 68 111
Deferred tax not recognised on unused tax losses and other items on the basis that future economic
benefit is uncertain 611 130
Deferred tax assets of £1,887m include £1,010m (2018: £998m) relating to tax losses in the UK and £163m (2018: £163m) relating to Advance
Corporation Tax (ACT). These assets have been recognised based on the expectation that the UK business will generate taxable profits and
tax liabilities in the future against which the losses and ACT can be utilised.
Most of the tax losses relate to the Group’s Civil Aerospace widebody business in the UK which makes initial losses through the investment
period of a programme and then makes a profit through its contracts for services. The programme lifecycles typically range between
30 and 55 years with more of the widebody engine programmes forecast at the upper end of that range. In the past few years there have
been four new engines that have entered into service (Trent 1000 TEN, Trent 7000, Trent XWB-84 and Trent XWB-97), all of which are still
in the investment stage.
Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the assets
can be utilised. A recoverability assessment has been undertaken, taking account of deferred tax liabilities against which the reversal can
be offset and using latest UK forecasts, which are mainly driven by the Group’s Civil Aerospace widebody business, to assess the level of
future taxable profits.
The recoverability of UK deferred tax assets relating to UK tax losses and ACT has been assessed in 2019 on the following basis:
–– using the most recent UK profit forecasts prepared by management, which are consistent with past experience and external sources on
market conditions. These forecasts cover the next five years;
–– the long-term forecast profit profile of certain of the major widebody engine programmes which is typically between 30 and 55 years
from initial investment to retirement of the fleet, including the aftermarket revenue earned from airline customers; and
–– the long-term forecast profit and cost profile of the other parts of the Group’s UK business.
The assessment takes into account UK tax laws that, in broad terms, restrict the offset of the carried forward tax losses to 50% of current
year profits. Based on this assessment, the Group has recognised a deferred tax asset of £1,010m relating to losses and £163m relating to
ACT. This reflects the Group’s conclusions that:
–– It is probable that the UK business will generate taxable income and tax liabilities in the future against which these losses and the ACT
can be utilised.
–– Based on current forecasts and using various scenarios these losses and the ACT will be used in full within the next 20 to 30 years which
is within the expected widebody engine programme lifecycles.
A deferred tax asset of £438m has not been recognised. This is based on management’s assumptions relating to the amounts and timing of
future taxable profits and takes into account that higher losses were incurred in 2019 than expected, primarily due to the recognition of a
£1.4bn exceptional charge in respect of the Trent 1000.
Changes in future profits will impact the recoverability of the deferred tax assets, and as explained in note 1, the key assumptions impact
contract margins. A 5% change in such margins would result in around a £2bn change in UK profits over the remaining life of the
programmes against which the recovery of the tax losses and ACT would be assessed. Such a variance could result in a change of up to
£170m in the related deferred tax balances recorded on the Group balance sheet, assuming a 17% tax rate and the 50% loss offset
restriction mentioned above.
The Group has also reassessed the recovery of other deferred tax assets, including those arising on unrealised losses on derivative contracts.
Whilst the deferred tax asset has reduced anyway as a result of the reduction in the unrealised losses in 2019, the Group has also derecognised
£86m in line with the approach outlined above. The impact of this is non-underlying.
Any future changes in tax law or the structure of the Group could have a significant effect on the use of losses and ACT, including the
period over which they can be used. In view of this and the significant judgement involved, the Board continuously reassesses this area.
The 2016 Budget announced that the UK tax rate will reduce to 17% with effect from 1 April 2020. The rate reduction to 17% has been
substantively enacted on 6 September 2016. The deferred tax assets and liabilities of UK companies within the Group have therefore been
calculated at 17%.
The temporary differences associated with investments in subsidiaries, joint ventures and associates, for which a deferred tax liability has
not been recognised, aggregate to £108m (2018: £99m). No deferred tax liability has been recognised on the potential withholding tax due
on the remittance of undistributed profits as the Group is able to control the timing of such remittances and it is probable that consent will
not be given in the foreseeable future.
6 Earnings per ordinary share

Basic earnings per ordinary share (EPS) is calculated by dividing the loss attributable to ordinary shareholders by the weighted average number
of ordinary shares in issue during the year, excluding ordinary shares held under trust, which have been treated as if they had been cancelled.
Diluted EPS is calculated by adjusting the weighted average number of ordinary shares in issue during the year for the bonus element of
share options.
2019 2018
Potentially Potentially
dilutive dilutive
Basic share options 1 Diluted Basic share options 1 Diluted
Loss attributable to ordinary shareholders (£m) (1,315) (1,315) (2,401) (2,401)
Weighted average number of ordinary shares (millions) 1,904 − 1,904 1,859 – 1,859
EPS (pence) (69.07p) − (69.07p) (129.15p) – (129.15p)
1 As there is a loss, the effect of potentially dilutive ordinary shares is antidilutive.
The reconciliation between underlying EPS and basic EPS is as follows:

2019 2018
Pence £m Pence £m
Underlying EPS/underlying profit attributable to ordinary shareholders 15.86 302 15.98 297
Total underlying adjustments to loss before tax (note 2) (77.42) (1,474) (183.59) (3,413)
Related tax effects (7.51) (143) 38.46 715
EPS/loss attributable to ordinary shareholders (69.07) (1,315) (129.15) (2,401)
Diluted underlying EPS 15.86 15.98
7 Auditors’ remuneration
2019 2018
£m £m
Fees payable to the Company’s auditors and its associates for the audit of the Parent Company and
Consolidated Financial Statements 2.8 1.8
Fees payable to the Company’s auditor and its associates for the audit of the Company’s subsidiaries
pursuant to legislation 1 7.0 7.3
Total fees payable for audit services 9.8 9.1
Fees payable to the Company’s auditor and its associates for other services:
Audit related assurance services 2 0.5 0.5
Other assurance services 3 0.6 0.4
Total fees payable to the Company’s auditor and its associates 4 10.9 10.0
Fees payable in respect of the Group’s pension schemes:
Audit 0.1 0.1
1 The level of fees payable to the Company’s auditor for the audit of the Company’s Financial Statements reflects the fact that limited incremental work is required in respect of the audit
of these financial statements. Rolls-Royce plc, a subsidiary of the Company, is also required to prepare Consolidated Financial Statements and the fees payable to the Company’s
auditor for the audit of those financial statements, including the audit of the sub-consolidation, is included in the audit of the Company’s subsidiaries pursuant to legislation.
2 This includes £0.5m (2018: £0.5m) for the review of the half-year report.
3 This relates to the audit of grant claims.
4 Audit fees for overseas entities are reported at the average exchange rate for the year.
8 Employee information
2019 2018
Number Number
Germany 9,800 10,000
Spain 3,200 2,800
Nordics 1,300 3,000
Singapore 1,300 1,400
Canada 1,000 1,000
India 1,000 1,000
Italy 900 800
France 700 700
Rest of world 3,200 4,100
Monthly average number of employees 51,700 54,500
Civil Aerospace 26,100 25,500

Power Systems 10,400 10,500
Defence 9,900 10,500
ITP Aero 3,900 3,700
Corporate 1 100 100
Core businesses 50,400 50,300
Non-core businesses 2 1,300 4,200
Monthly average number of employees 51,700 54,500
2019 2018
£m £m
Wages, salaries and benefits 3,075 3,208
Social security costs 473 479
Share-based payments (note 23) 30 35
Pensions and other post-retirement scheme benefits (note 21) 356 470
Group employment costs 3 3,934 4,192
1 Corporate consists of employees who do not provide a shared service to the business segments. Where corporate functions provide such a service, employees have been allocated to
the business segments on an appropriate basis.
2 Includes the North America Civil Nuclear business (disposal group held for sale), Commercial Marine (disposed of on 1 April 2019), RRPD (disposed of on 15 April 2019), L’Orange
(disposed of on 1 June 2018) and Retained Energy. See note 27 for more details.
3 Remuneration of key management personnel is shown in note 26.
9 Intangible assets
Certification Development Customer
Goodwill costs expenditure relationships Software Other Total
£m £m £m £m £m £m £m
Cost
At 1 January 2018 1,869 917 2,459 1,432 869 794 8,340
Additions – 35 498 – 110 37 680
Transferred to assets held for sale 1 (666) – (38) (26) (6) (12) (748)
Disposal of L’Orange 2 (136) – (48) (40) – (11) (235)
Disposals – (4) (1) – (16) – (21)
Reclassifications 5 – – – 3 (3) 5
Exchange differences 15 – 13 18 4 6 56
At 31 December 2018 1,087 948 2,883 1,384 964 811 8,077
Additions – 15 481 – 101 43 640
Acquisition of businesses 11 – – – 4 23 38
Disposals – – (8) (1) (111) (19) (139)
Reclassifications from PPE – – 17 – 19 (18) 18
Exchange differences (40) (1) (68) (64) (7) (26) (206)
At 31 December 2019 1,024 962 3,294 1,303 967 803 8,353
Accumulated amortisation and impairment

At 1 January 2018 324 339 1,045 256 488 323 2,775
Charge for the year 3 – 35 114 90 103 39 381
Impairment 155 – 7 – 22 – 184
Disposal of L’Orange 2 – – (31) (27) – (8) (66)
Disposals – – – – (8) – (8)
Reclassifications 5 (1) – – 1 – 5
Exchange differences (3) – 5 6 2 3 13
At 31 December 2018 42 373 1,111 304 607 345 2,782
Charge for the year 3 – 19 113 72 88 26 318
Impairment 18 – 20 9 7 – 54
Disposals – – (7) (1) (99) (19) (126)
Reclassifications from PPE – – – – 10 (1) 9
Exchange differences 4 – (25) (14) (5) (11) (51)
At 31 December 2019 30 392 1,201 354 605 329 2,911
Net book value

At 31 December 2019 994 570 2,093 949 362 474 5,442
At 31 December 2018 1,045 575 1,772 1,080 357 466 5,295
1 The North America Civil Nuclear business was classified as a disposal group held for sale on 26 September 2019, prior to this an impairment of goodwill of £15m was recognised. The
Commercial Marine business was classified as a disposal group held for sale on 30 June 2018 – see note 27.
2 The disposal of the L’Orange business to Woodward Inc. was completed on 1 June 2018 – see note 27.
3 Charged to cost of sales and commercial and administrative costs except development costs, which are charged to research and development costs.
9 Intangible assets continued

Goodwill
In accordance with the requirements of IAS 36 Impairment of Assets, goodwill is allocated to the Group’s cash-generating units (CGUs), or
groups of CGUs, that are expected to benefit from the synergies of the business combination that gave rise to the goodwill as follows:
Primary reporting 2019 2018
segment £m £m
Rolls-Royce Power Systems AG Power Systems 718 750
Rolls-Royce Deutschland Ltd & Co KG Civil Aerospace 234 246
Other Various 42 49
994 1,045
Goodwill has been tested for impairment during 2019 on the following basis:
–– The carrying values of goodwill have been assessed by reference to value in use. These have been estimated using cash flows from the
most recent forecasts prepared by management, which are consistent with past experience and external sources of information on market
conditions. These forecasts generally cover the next five years. Growth rates for the period not covered by the forecasts are based on a
range of growth rates between 1.0%–2.5% that reflect the products, industries and countries in which the relevant CGU or group of
CGUs operate.
–– The key assumptions for the impairment tests are the discount rate and, in the cash flow projections, the programme assumptions,
the growth rates and the impact of foreign exchange rates on the relationship between selling prices and costs. Impairment tests are
performed using prevailing exchange rates.
The principal value in use assumptions for goodwill balances considered to be individually significant are:
Rolls-Royce Power Systems AG
–– trading assumptions (e.g. volume of equipment deliveries, pricing achieved and cost escalation) are based on current and known future
programmes, estimates of capture of market share and long-term economic forecasts;
–– cash flows beyond the five-year forecasts are assumed to grow at 1.0% (2018: 1.8%); and
–– pre-tax discount rate 12% (2018: 12%).
The Directors do not consider that any reasonably possible changes in the key assumptions would cause the value in use of the goodwill
to fall below its carrying value.
Rolls-Royce Deutschland Ltd & Co KG
–– trading assumptions (e.g. volume of engine deliveries, flying hours of installed fleet and cost escalation) are based on current and
known future programmes, estimates of customers’ fleet requirements and long-term economic forecasts;
–– cash flows beyond the five-year forecasts are assumed to grow at 2.5% (2018: 2.5%); and
–– pre-tax discount rate 14% (2018: 13%).
The Directors do not consider that any reasonably possible changes in the key assumptions would cause the value in use of the goodwill
to fall below its carrying value.
Commercial Marine
On 6 July 2018, the Group announced the sale of Commercial Marine to KONGSBERG. The disposal met the criteria of IFRS 5 Non-current
Assets Held for Sale and Discontinued Operations that where the carrying value of a disposal group is expected to be recovered through
a sale transaction, the disposal group should be treated as held for sale, with assets and liabilities presented separately on the balance
sheet measured at the lower of carrying value or fair value less costs to sell.
As a result of the classification of the Commercial Marine business as a disposal group, its carrying value was assessed against the
anticipated proceeds and the disposal costs. An impairment charge of £155m for the related goodwill (with an additional £5m impairment
charge to property, plant and equipment) was recognised in the income statement at 31 December 2018 and the remaining net balance of
£227m transferred to assets held for sale and associated liabilities.
The Commercial Marine business was disposed of on 1 April 2019 – see note 27.
9 Intangible assets continued

Other intangible assets (including programme-related intangible assets)
Other intangible assets have been reviewed for impairment in accordance with the requirements of IAS 36 Impairment of Assets. Where an
impairment test was considered necessary, it has been performed on the following basis:
–– The carrying values have been assessed by reference to value in use. These have been estimated using cash flows from the most recent
forecasts prepared by management, which are consistent with past experience and external sources of information on market conditions
over the lives of the respective programmes.
–– The key assumptions underlying cash flow projections are assumed market share, programme timings, unit cost assumptions, discount
rates, and foreign exchange rates.
–– The pre-tax cash flow projections have been discounted at 7%–15% (2018: 7%–13%), based on the Group’s weighted average cost of
capital, adjusted for the estimated programme risk, for example taking account of whether or not the forecast cash flows arise from
contracted business.
In addition, for programme-related intangible assets, these have been reviewed for impairment in accordance with the requirements of
IAS 36. Where there is a triggering event, an impairment test has been performed on the following basis:
–– The programme related intangible asset’s carrying value as at 31 December is compared to the asset’s recoverable amount. The Group
has determined that the recoverable amount of the asset should be calculated on a value in use basis as this represents the highest
value to the Group in terms of the future cash flows that it can generate.
–– Future cash flows used in the value in use calculations are based on our most recent forecasts prepared by management and are
discounted using a pre-tax discount rate that reflects current market assessment of the time value of money. These forecasts include
contracted business together with management’s expectation of speculative business over the life of the programme together with cash
outflows that are necessary to maintain the current level of economic benefit expected to arise from the asset in its current condition.
–– The key programme assumptions underlying cash flow projections are forecast market share and pricing, engine flying hours, number of
shop visits/cost of shop visits, R&D, capital investment and foreign exchange rates.
–– The pre-tax cash flow projections have been discounted at 7%–15% (2018: 7%–13%).
No impairment was identified (2018: no impairment). For programmes where the headroom could be significantly reduced over the next 12
months any of the following changes in assumptions, in isolation, would cause the recoverable amount of the programme assets to equal
its carrying value:
–– an increase in discount rates by 36%
–– an increase in costs of 10%
The carrying amount and the residual life of the material intangible assets (excluding goodwill) for the Group is as follows:
Residual life Net book value
2019 2018
£m £m
Trent programme intangible assets 1 7–15 years 1,720 1,524
Business Aviation programme intangible assets 2 15 years 587 393
typically
Customer relationship assets on acquisition of ITP Aero 13–35 years 676 740
Intangible assets from acquisition of Power Systems 3 489 578
3,472 3,235
1 Included within the Trent programmes are the Trent 1000, Trent 7000 and Trent XWB.
2 Included within Business Aviation are the Pearl 700 and Pearl 15.
3 Includes £109m in respect of a brand intangible asset which is not amortised. Remaining assets are amortised over a range of 2–10 years.
The carrying amount of goodwill or intangible assets allocated across multiple cash-generating units is not significant in comparison with
the Group’s total carrying amount of goodwill or intangible assets with indefinite useful lives.
10 Property, plant and equipment

Land and Plant and Aircraft In course of
buildings equipment and engines construction Total
£m £m £m £m £m
Cost
At 1 January 2018 1,842 5,022 734 773 8,371
Additions 54 273 251 396 974
Transferred to assets held for sale 1 (91) (138) – (30) (259)
Disposal of L’Orange 2 (23) (72) – (4) (99)
Disposals/write-offs (29) (140) (19) – (188)
Reclassifications 140 287 (3) (424) –
Exchange differences 23 64 4 11 102
At 31 December 2018 1,916 5,296 967 722 8,901
Impact of adopting IFRS 16 (note 29) (12) (11) (205) (29) (257)
At 1 January 2019 1,904 5,285 762 693 8,644
Additions 27 286 126 328 767
Acquisition of businesses – 3 – – 3
Disposal of businesses (4) (168) – – (172)
Disposals/write-offs (54) (187) (17) (4) (262)
Reclassifications 3 186 390 11 (605) (18)
Reclassification of joint venture to joint operations 5 3 – – 8
Exchange differences (39) (106) (6) (9) (160)
At 31 December 2019 2,020 5,497 876 401 8,794
Accumulated depreciation
At 1 January 2018 554 2,984 173 2 3,713
Charge for the year 4 67 376 80 – 523
Impairment – 2 – 5 7
Transferred to assets held for sale 1 (26) (96) – – (122)
Disposal of L’Orange 2 (4) (34) – – (38)
Disposals/write-offs (19) (123) (9) – (151)
Exchange differences 7 33 – – 40
At 31 December 2018 579 3,142 244 7 3,972
Impact of adopting of IFRS 16 (note 29) (7) (13) (40) – (60)
At 1 January 2019 572 3,129 204 7 3,912
Charge for the year 4 67 381 43 – 491
Impairment 1 29 – 11 41
Disposal of businesses – (165) – – (165)
Disposals/write-offs (45) (150) (5) (1) (201)
Reclassifications 3 9 6 (19) (5) (9)
Reclassification of joint venture to joint operations 1 3 – – 4
Exchange differences (10) (57) – – (67)
At 31 December 2019 590 3,167 223 11 3,991
Net book value

At 31 December 2019 1,430 2,330 653 390 4,803
At 1 January 2019 1,332 2,156 558 686 4,732
At 31 December 2018 1,337 2,154 723 715 4,929
1 The North America Civil Nuclear business was classified as a disposal group held for sale on 26 September 2019. The Commercial Marine business was classified as a disposal group
held for sale on 30 June 2018 – see note 27.

2 The disposal of the L’Orange business to Woodward Inc. was completed on 1 June 2018 – see note 27.
3 Includes reclassifications for assets under construction and to intangible assets.
4 Depreciation charged during the year is presented in the income statement or included in the cost of inventory as appropriate.
10 Property, plant and equipment continued

Property, plant and equipment includes:
2019 2018
£m £m
Assets held for use in operating leases
Cost 720 813
Depreciation (214) (192)
Net book value 506 621
Capital expenditure commitments 317 362

Cost of fully depreciated assets 1,666 1,498
Cost of fully depreciated assets included in assets held for sale 2 75
The Group’s share of equity accounted entities’ capital commitments is £30m (2018: £9m).
11 Right-of-use assets

Land and Plant and Aircraft
buildings equipment and engines Total
£m £m £m £m
Cost
At 31 December 2018 – – – –
Impact of adopting IFRS 16 (see note 29) 493 107 1,654 2,254
Transferred to assets held for sale 1 (40) (1) – (41)
At 1 January 2019 453 106 1,654 2,213
Additions/modifications of leases 70 28 129 227
Transferred to assets held for sale 1 (4) – – (4)
Disposals (2) (4) (13) (19)
Exchange differences (13) (2) (3) (18)
At 31 December 2019 504 128 1,767 2,399
Accumulated depreciation and impairment

At 1 January 2019 – – – –
Charge for the year 58 32 309 399
Impairment 1 1 10 12
Transferred to assets held for sale 1 (1) – – (1)
Disposals (2) (4) (13) (19)
Exchange differences (1) – – (1)
At 31 December 2019 55 29 306 390
Net book value

At 31 December 2019 449 99 1,461 2,009
At 1 January 2019 453 106 1,654 2,213
At 31 December 2018 – – – –
Right-of-use assets held for use in operating leases

Cost 4 2 1,767 1,773
Depreciation (2) (1) (306) (309)
Net book value at 31 December 2019 2 1 1,461 1,464
1 The North America Civil Nuclear business was classified as a disposal group held for sale on 26 September 2019. The Commercial Marine business was classified as a disposal group
held for sale on 30 June 2018 – see note 27.

12 Investments
Composition of the Group
The entities contributing to the Group’s financial results are listed on pages 187 to 193.
Where the Group does not own 100% of the shares of a Group undertaking, there are a number of arrangements with the other
shareholder(s) that give the Group the option or potential obligation to acquire the third parties’ shares. These arrangements have been
assessed and are not considered to have a significant value, individually or in aggregate.
Non-controlling interests
The Group does not have any material non-wholly owned subsidiaries.
Equity accounted and other investments

Equity accounted Other
Joint ventures Associates Total Unlisted
£m £m £m £m
At 1 January 2018 375 – 375 26
Additions 17 – 17 6
Disposals – – – (3)
Impairment (7) – (7) (2)
Consolidation of previously non-consolidated subsidiary – – – (5)
Share of retained loss 1 (101) – (101) –
Reclassification of deferred profit to deferred income 2 70 – 70 –
Exchange differences 41 – 41 –
Share of OCI 17 – 17 –
At 1 January 2019 412 – 412 22
Additions 8 – 8 2
Disposals (4) – (4) (6)
Transfer from joint venture to joint operation (3) – (3) –
Impairment – – – (1)
Consolidation of previously non-consolidated subsidiary – – – (4)
Share of retained profit 1 12 – 12 –
Reclassification of deferred profit to deferred income 2 4 – 4 –
Exchange differences (19) – (19) 1
Share of OCI (8) – (8) –
At 31 December 2019 402 – 402 14
1 See table below.
2 The Group’s share of unrealised profit on sales to joint ventures is eliminated against the carrying value of the investment in the entity. Any excess amount, once the carrying value is
reduced to nil, is recorded as deferred income.
Reconciliation of share of retained profit/(loss) to the income statement and cash flow statement:
2019 2018
£m £m
Share of results of joint ventures and associates 141 114
Adjustments for intercompany trading (37) (110)
Share of results of joint ventures and associates to the Group (income statement) 104 4
Dividends paid by joint ventures and associates to the Group (cash flow statement) (92) (105)
Share of retained profit/(loss) above 1 12 (101)
1 During the year, we sold spare engines to Rolls-Royce & Partners Finance, a joint venture company.
The following joint ventures are considered to be individually material to the Group:
Principal location Activity Ownership interest
Alpha Partners Leasing Limited (APL) UK Aero engine leasing 50.0%
Hong Kong Aero Engine Services Limited (HAESL) Hong Kong Aero engine repair and overhaul 50.0%
Singapore Aero Engine Services Pte Limited (SAESL) Singapore Aero engine repair and overhaul 50.0%
12 Investments continued

Summarised financial information of the Group’s individually material joint ventures is as follows:
APL HAESL SAESL
2019 2018 2019 2018 2019 2018
£m £m £m £m £m £m
Revenue 322 254 1,907 1,497 1,529 1,141
Profit and total comprehensive income for the year 107 61 81 72 47 41
Dividends paid during the year (29) (47) (76) (65) (42) (43)
Profit for the year included the following:
Depreciation and amortisation (146) (110) (15) (13) (16) (12)
Interest income 4 1 – – – –
Interest expense (89) (58) (3) (2) (6) (3)
Income tax expense (22) (14) (16) (14) (3) (4)
Current assets 119 355 453 421 433 379

Non-current assets 3,319 2,759 113 124 172 161
Current liabilities (230) (755) (269) (248) (264) (207)
Non-current liabilities (2,617) (1,825) (103) (101) (163) (164)
Net assets 591 534 194 196 178 169
Included in the above:
Cash and cash equivalents 25 103 4 46 14 17
Current financial liabilities 1 (182) (702) – – – –
Non-current financial liabilities 1 (2,364) (1,603) (89) (88) (163) (164)
Reconciliation to the carrying amount recognised in the

Consolidated Financial Statements
Ownership interest 50.0% 50.0% 50.0% 50.0% 50.0% 50.0%
Group share of net assets above 296 267 97 98 89 85
Goodwill – – 35 36 94 97
Adjustments for intercompany trading (296) (267) (7) (3) (1) –
Included in the balance sheet – – 125 131 182 182
1 Excluding trade payables and other liabilities.
The summarised aggregated results of the Group’s share of equity accounted investments is as follows:
Individually material joint
ventures (above) Other joint ventures Associates Total
2019 2018 * 2019 2018 * 2019 2018 2019 2018 *
£m £m £m £m £m £m £m £m
Assets:
Non-current assets 1,802 1,522 745 911 – – 2,547 2,433
Current assets 503 578 456 467 – – 959 1,045
Liabilities: 1
Current liabilities (382) (605) (322) (262) – – (704) (867)
Non-current liabilities (1,441) (1,045) (703) (802) – – (2,144) (1,847)
Group adjustment for
goodwill 129 133 – – – – 129 133
Adjustment for
intercompany trading (304) (270) (81) (215) – – (385) (485)
307 313 95 99 – – 402 412
1 Liabilities include borrowings of (1,399) (1,278) (627) (650) – – (2,026) (1,928)
* The summarised results for 2018 have been re-presented to include the Group’s share of all its individually material joint ventures on a gross basis. Previously, the assets
and liabilities of certain joint ventures were shown on a net basis. Disclosure of Group adjustments for intercompany trading and goodwill upon consolidation have been
disclosed separately to provide greater transparency. The carrying amounts at 31 December 2018 remain the same as previously reported. This enhanced presentation
does not impact the Group consolidated results or financial position previously reported.
13 Inventories
2019 2018
£m £m
Raw materials 522 553
Work in progress 1,652 1,551
Finished goods 2,119 2,168
Payments on account 27 15
4,320 4,287
Inventories stated at net realisable value 227 223
Amount of inventory write-down 69 69
Reversal of inventory write-down 12 21
14 Trade receivables and other assets

Current Non-current Total
2019 2018 * 2019 2018 * 2019 2018 *
£m £m £m £m £m £m
Trade receivables 1 2,538 2,680 – – 2,538 2,680
Amounts owed by joint ventures and associates 1 197 229 12 – 209 229
Costs to obtain contracts with customers 2 10 8 33 34 43 42
Other receivables 3 1,490 1,218 181 145 1,671 1,363
Prepayments 356 367 248 9 604 376
4,591 4,502 474 188 5,065 4,690
Trade receivables and other assets are analysed as follows:

Financial instruments (note 19):
Trade receivables and similar items 3,477 3,578
Other non-derivative financial assets 726 489
Non-financial instruments 862 623
5,065 4,690
* Balances at 31 December 2018 have been re-presented to move £217m from prepayments to other receivables to better reflect the nature of these balances.
1 Includes £267m (2018: £146m) of trade receivables held to collect or sell and £76m (2018: nil) receivables from joint ventures and associates held to collect or sell.
2 These are amortised over the term of the related contract, resulting in amortisation of £8m (2018: £13m) in the year. There were no impairment losses recognised in either year.
3 Other receivables includes the RRSA component of the LTSA which is held separately on the basis of differing counterparties, together with receivables arising from overhaul activity
outside of LTSA coverage.
The expected credit losses for trade receivables and other assets has increased by £12m to £138m (2018: £126m). Amounts included are
considered as current so no ageing of expected credit losses is disclosed.
For many years the Group has undertaken the sale of trade receivables, without recourse, to banks. This is commonly known as invoice
discounting or factoring, and is common place in the aerospace industry. The absolute amount carried out in any given year depends on
specific engine delivery volumes and phasing. This activity has been used to normalise customer receipts as certain aerospace customers
have extended their payment terms. This in turn has helped to normalise our Group cash flows in line with physical delivery volumes. Over
the last three years the sale of trade receivables has averaged £1,037m at the year end. Trade receivables factored are generally due within
the following quarter.
At 31 December 2019 £1,117m was drawn under factoring facilities, an increase of £95m compared to December 2018, representing cash
collected before it was contractually due from the customer.
In exceptional circumstances, the sale of trade receivables has taken place where amounts contractually due from aerospace customers
before the period end have been deferred into the following period. There was £504m relating to this activity at the 2018 year end. There
were no equivalent amounts in 2019.
The assumption and inputs used for the estimation of the expected credit losses are disclosed in the table below:
2019 2018
Trade receivables Range of Trade receivables Range of
and other Loss expected credit and other expected credit
financial assets allowance loss rate financial assets Loss allowance loss rate
£m £m % £m £m %
Investment grade 1,230 (40) 0%–2.45% 976 (34) 0%–2.06%
Non-investment grade 271 (2) 0%–2.51% 348 (5) 0%–2.06%
Without credit rating 2,636 (96) 0%–54% 2,653 (87) 0%–47%
4,137 (138) 3% 3,977 (126) 3%
14 Trade receivables and other assets continued

The movements of the Group expected credit losses provision are as follows:
2019 2018
£m £m
At 1 January (126) (95)
Increases in loss allowance recognised in the income statement during the year (27) (15)
Other net movements 14 (16)
At 31 December (139) (126)
15 Contract assets and liabilities

2019 2018 2019 2018 2019 2018
£m £m £m £m £m £m
Contract assets
Contract assets with operators 404 295 1,092 1,108 1,496 1,403
Participation fee contract assets 57 49 542 605 599 654
461 344 1,634 1,713 2,095 2,057
Contract assets are analysed as follows:

Financial instruments (note 19) – –
Non-financial instruments 2,095 2,057
2,095 2,057
Contract assets include £1,086m (2018: £1,097m) of Civil Aerospace LTSA assets, with most of the remainder relating to Defence. The main
driver of the increase is driven by Defence which increased by £90m due to the timing differences between revenue being recognised on
a stage of completion basis and when customers are billed, as well as the timing of the flow down of amounts received in prior years from
programme partners. Revenue from performance obligations satisfied in previous years has been adjusted by £(166)m.
Participation fee contract assets have reduced by £(55)m due to amortisation exceeding additions by £(35)m and FX on consolidation of
overseas entities of £(20)m. No impairment losses (2018: none) of contract assets have arisen during the year.
The expected credit losses for contract assets has decreased by £9m in relation to normal business cycle to £13m (2018: £22m).
2019 2018 2019 2018 2019 2018
£m £m £m £m £m £m
Contract liabilities 4,228 3,794 6,612 5,336 10,840 9,130
Contract liabilities are analysed as follows:

Financial instruments (note 19) 131 –
10,840 9,130
During the year, £3,491m (2018: £2,823m) of the opening contract liability was recognised as revenue and contract liabilities have increased
by £1,710m. The main reasons for the increase being a £1,199m growth in Civil Aerospace LTSA liabilities to £6,783m (2018: £5,584m) driven
by an overall growth in engine flying hour receipts. Our installed base increased by 6% in 2019 compared with 2018. In addition, engine
flying hours increased by 7% year-on-year. Revenue from performance obligations satisfied in previous years has been adjusted by £(114)m.
16 Cash and cash equivalents

2019 2018
£m £m
Cash at bank and in hand 825 1,023
Money-market funds 1,095 1,222
Short-term deposits 2,523 2,729
Cash and cash equivalents per the balance sheet 4,443 4,974
Overdrafts (note 17) (8) (22)
Cash and cash equivalents per cash flow statement (page 119) 4,435 4,952
Cash held as collateral against third party obligations (note 20) – 4
Cash and cash equivalents at 31 December 2019 includes £34m (2018: £31m) that is not available for general use by the Group. This balance
predominantly relates to cash held in non-wholly owned subsidiaries and joint arrangements.
Balances are presented on a net basis when the Group has both a legal right of offset and the intention to either settle on a net basis or
realise the asset and settle the liability simultaneously.
17 Borrowings and lease liabilities

2019 2018 2019 2018 2019 2018
£m £m £m £m £m £m
Unsecured
Overdrafts 8 22 – – 8 22
Bank loans 27 298 16 354 43 652
6.75% Notes 2019 £500m 1 – 504 – – – 504
2.375% Notes 2020 US$500m 2 378 – – 383 378 383
2.125% Notes 2021 €750m 2 – – 655 699 655 699
0.875% Notes 2024 €550m 3 – – 481 498 481 498
3.625% Notes 2025 US$1,000m 3 – – 781 765 781 765
3.375% Notes 2026 £375m 4 – – 410 403 410 403
1.625% Notes 2028 €550m 3 – – 501 502 501 502
Other loans 5 22 – 52 5 74 5
Total unsecured 435 824 2,896 3,609 3,331 4,433
Secured 6
Lease liabilities – property 50 – 473 – 523 –
Lease liabilities – aero engines 261 – 1,463 – 1,724 –
Lease liabilities – equipment 29 – 78 – 107 –
Obligations under finance leases – 34 – 195 – 229
Total secured 340 34 2,014 195 2,354 229
Total borrowings and lease liabilities 775 858 4,910 3,804 5,685 4,662
1 These notes are the subject of interest rate swap agreements under which the Group has undertaken to pay floating rates of interest, which form a fair value hedge.
2 These notes are the subject of cross-currency interest rate swap agreements under which the Group has undertaken to pay floating rates of GBP interest, which form a fair value hedge.
3 These notes are the subject of cross-currency interest rate swap agreements under which the Group has undertaken to pay floating rates of GBP interest, which form a fair value
hedge. They are also subject to interest rate swap agreements under which the Group has undertaken to pay fixed rates of interest, which are classified as fair value through profit
and loss.
4 These notes are the subject of interest rate swap agreements under which the Group has undertaken to pay floating rates of interest, which form a fair value hedge. They are also
subject to interest rate swap agreements under which the Group has undertaken to pay fixed rates of interest, which are classified as fair value through profit and loss.
5 In 2019, the Group reclassified £79m as borrowings previously included in other financial liabilities. Other loans of £8m (2018: £5m) are held by entities classified as joint operations.
The loans are disclosed after adjustments have been made on consolidation to eliminate the extent of the Group’s interest in the entity.
6 Obligations under leases are secured by related leased assets.
18 Trade payables and other liabilities

2019 2018 2019 2018 2019 2018
£m £m £m £m £m £m
Trade payables 2,300 2,520 – – 2,300 2,520
Amounts owed to joint ventures and associates 798 635 36 18 834 653
Accruals 1,751 1,673 89 109 1,840 1,782
Deferred receipts from RRSA workshare partners 17 9 516 520 533 529
Government grants 1 12 14 71 85 83 99
Other taxation and social security 128 125 – – 128 125
Other payables 2 3,444 3,316 1,359 1,208 4,803 4,524
8,450 8,292 2,071 1,940 10,521 10,232
Trade payables and other liabilities are analysed as follows:

Financial instruments (note 19):
Trade payables and similar items 5,849 5,659
Other non-derivative financial liabilities 1,541 1,754
10,521 10,232
1 During the year £12m (2018: £8m) of government grants were released to the income statement.
2 Other payables include £280m (2018: £378m) for financial penalties from agreements with investigating bodies and £nil (2018: £245m) for deferred consideration in relation to the
acquisition of ITP Aero. In addition, other payables includes amounts due to RRSA concessions, warranty credits and other sundry payables.
Our payment terms with suppliers vary on the products and services being sourced, the competitive global markets we operate in and other
commercial aspects of suppliers’ relationships. Industry average payment terms vary between 90–120 days. We offer reduced payment terms
for smaller suppliers, so that they are paid in 30 days. In line with aerospace industry practice, we offer a SCF programme in partnership with
banks to enable suppliers who are on our standard 75-day payment terms to receive their payment sooner. The SCF programme is available
to suppliers at their discretion and does not change our rights and obligations with suppliers nor the timing of our payment to suppliers.
At 31 December 2019, suppliers had drawn £859m under the SCF scheme (31 December 2018: £817m).
19 Financial instruments

Carrying values and fair values of financial instruments
Assets Liabilities Total
Fair value Fair value Fair value
Basis for through through Amortised through
determining profit or loss OCI cost profit or loss Other
Notes fair value £m £m £m £m £m £m
2019
Unlisted non-current asset investments 12 A 14 – – – – 14
Trade receivables and similar items 14 B/C – 344 3,133 – – 3,477
Other non-derivative financial assets 14 B – – 726 – – 726
Other assets D 28 – – – – 28
Derivative financial assets 1 C 525 – – – – 525
Short-term investments B – – 6 – – 6
Cash and cash equivalents 16 B 1,095 – 3,348 – – 4,443
Borrowings 17 E/F – – – – (3,331) (3,331)
Lease liabilities 17 G – – – – (2,354) (2,354)
Derivative financial liabilities 1 C – – – (3,374) – (3,374)
Financial RRSAs H – – – – (110) (110)
Other liabilities H – – – – (72) (72)
C Shares B – – – – (31) (31)
Trade payables and similar items 18 B – – – – (5,849) (5,849)
Other non-derivative financial liabilities 18 B – – – – (1,541) (1,541)
Contract liabilities 15 B – – – – (131) (131)
1,662 344 7,213 (3,374) (13,419) (7,574)
2018 *
Unlisted non-current asset investments 12 A 22 – – – – 22
Trade receivables and similar items 14 B/C – 146 3,432 – – 3,578
Other non-derivative financial assets 14 B – – 489 – – 489
Derivative financial assets 1 C 365 – – – – 365
Short-term investments B – – 6 – – 6
Cash and cash equivalents 16 B 1,222 – 3,752 – – 4,974
Borrowings 17 E/F – – – – (4,662) (4,662)
Derivative financial liabilities 1 C – – – (3,871) – (3,871)
Financial RRSAs H – – – – (227) (227)
Other liabilities H – – – – (62) (62)
C Shares B – – – – (29) (29)
Trade payables and similar items 18 B – – – – (5,659) (5,659)
Other non-derivative financial liabilities 18 B – – – – (1,754) (1,754)
1,609 146 7,679 (3,871) (12,393) (6,830)
* Disclosures relating to 31 December 2018 have been re-presented in this table and the other related tables in this note to reflect the changes explained in note 14.
1 In
the event of counterparty default relating to derivative financial assets and liabilities, offsetting would apply and financial assets and liabilities held with the same counterparty
would net off. If this occurred with every counterparty, total financial assets would be £13m (2018: £11m) and liabilities £2,862m (2018: £3,517m).
Fair values equate to book values for both 2019 and 2018, with the following exceptions:
2019 2018
Basis for
determining Book value Fair value Book value Fair value
fair value £m £m £m £m
Borrowings E (3,206) (3,147) (3,754) (3,634)
Borrowings F (125) (130) (908) (887)
Financial RRSAs H (110) (112) (227) (235)
The fair value of a financial instrument is the price at which an asset could be exchanged, or a liability settled, between knowledgeable,
willing parties in an arms-length transaction. Fair values have been determined with reference to available market information at the
balance sheet date, using the methodologies described on page 158.
19 Financial instruments continued

A These primarily comprise unconsolidated companies where fair value approximates to the book value.
B Fair values are assumed to approximate to cost either due to the short-term maturity of the instruments or because the interest rate of the investments is reset after periods not
exceeding six months.
C Fair values of derivative financial assets and liabilities and trade receivables held to collect or sell are estimated by discounting expected future contractual cash flows using
prevailing interest rate curves. Amounts denominated in foreign currencies are valued at the exchange rate prevailing at the balance sheet date. These financial instruments are
included on the balance sheet at fair value, derived from observable market prices (Level 2 as defined by IFRS 13 Fair Value Measurement).
D Other assets are included on the balance sheet at fair value, derived from observable market prices or latest forecast (Level 2/Level 3 as defined by IFRS 13).
E Borrowings are carried at amortised cost. Amounts denominated in foreign currencies are valued at the exchange rate prevailing at the balance sheet date. The fair value of
borrowings is estimated using quoted prices. (Level 1 as defined by IFRS 13).
F Borrowings are carried at amortised cost. Amounts denominated in foreign currencies are valued at the exchange rate prevailing at the balance sheet date. The fair value of
borrowings is estimated by discounting contractual future cash flows. (Level 2 as defined by IFRS 13).
G The fair value of lease liabilities are estimated by discounting future contractual cash flows using either the interest rate implicit in the lease or the Group’s incremental cost of
borrowing (Level 2 as defined by IFRS 13).
H The fair value of RRSAs and other liabilities are estimated by discounting expected future cash flows. The contractual cash flows are based on future trading activity, which is
estimated based on latest forecasts (Level 3 as defined by IFRS 13).
IFRS 13 defines a three level valuation hierarchy:

Level 1 – quoted prices for similar instruments
Level 2 – directly observable market inputs other than Level 1 inputs
Level 3 – inputs not based on observable market data
Carrying values of other financial assets and liabilities

Foreign
exchange Commodity Interest rate Total Financial
contracts contracts contracts 1 derivatives RRSAs Other C Shares Total
£m £m £m £m £m £m £m £m
2019
Non-current assets 234 14 203 451 – 16 – 467
Current assets 16 9 49 74 – 12 – 86
Assets 250 23 252 525 – 28 – 553
Current liabilities (394) (5) – (399) (31) (32) (31) (493)
Non-current liabilities (2,960) (6) (9) (2,975) (79) (40) – (3,094)
Liabilities (3,354) (11) (9) (3,374) (110) (72) (31) (3,587)
(3,104) 12 243 (2,849) (110) (44) (31) (3,034)
2018
Non-current assets 47 4 292 343 – – – 343
Current assets 16 2 4 22 – – – 22
Assets 63 6 296 365 – – – 365
Current liabilities (523) (15) – (538) (52) (28) (29) (647)
Non-current liabilities (3,304) (25) (4) (3,333) (175) (34) – (3,542)
Liabilities (3,827) (40) (4) (3,871) (227) (62) (29) (4,189)
(3,764) (34) 292 (3,506) (227) (62) (29) (3,824)
1 Includes the foreign exchange impact of cross-currency interest rate swaps.
Derivative financial instruments

The Group uses various financial instruments to manage its exposure to movements in foreign exchange rates. Where the effectiveness of
a hedging relationship in a cash flow hedge is demonstrated, changes in the fair value that are deemed effective are included in the cash
flow hedge reserve and released to match actual payments on the hedged item. The Group uses commodity swaps to manage its exposure
to movements in the price of commodities (jet fuel and base metals). To hedge the currency risk associated with a borrowing denominated
in a foreign currency, the Group has currency derivatives designated as part of fair value hedges. The Group uses interest rate swaps and
forward rate agreements to manage its exposure to movements in interest rates.
Movements in the fair values of derivative financial assets and liabilities were as follows:
Foreign exchange Interest rate instruments Interest rate instruments
instruments Commodity instruments – hedge accounted – non-hedge accounted Total
2019 2018 2019 2018 2019 2018 * 2019 2018 2019 2018
£m £m £m £m £m £m £m £m £m £m
At 1 January (3,764) (2,312) (34) 1 292 227 – – (3,506) (2,084)
Movements in fair
value hedges – – – – (27) 101 – – (27) 101
Movements in
cash flow hedges (4) (14) 13 (9) – (1) – – 9 (24)
Movements in other
derivative contracts 1 (43) (2,122) 36 (22) – – 14 – 7 (2,144)
Contracts settled 707 684 (3) (4) (36) (35) – – 668 645
At 31 December (3,104) (3,764) 12 (34) 229 292 14 – (2,849) (3,506)
* Prior year balances have been re-presented in order to give a more accurate reflection of the cash flows associated with interest rate instruments.
1 Included in financing.

Financial risk and revenue sharing arrangements (RRSAs) and other financial liabilities
The Group has financial liabilities arising from financial RRSAs. These financial liabilities are valued at each reporting date using the
amortised cost method. This involves calculating the present value of the forecast cash flows of the arrangements using the internal rate
of return at the inception of the arrangements as the discount rate.
Movements in the carrying values were as follows:
Financial RRSAs Other liabilities Other assets
2019 2018 2019 2018 2019 2018
£m £m £m £m £m £m
At 1 January as previously reported (227) (247) (62) (57) – –
Reclassification to borrowings 1 79 – – – – –
At 1 January restated (148) (247) (62) (57) – –
Exchange adjustments included in OCI 10 (3) 1 (1) – –
Additions (4) (3) (37) (25) – –
Financing charge 2 (3) (8) (3) (1) – –
Excluded from underlying profit:
Changes in forecast payments 2 1 (2) – – – –
Exchange adjustments 2 6 – – – – –
Cash paid 28 36 29 22 – –
Reclassification from trade receivables – – – – 16 –
At 31 December (110) (227) (72) (62) 16 –
1 In 2019, the Group reclassified £79m as borrowings previously included in other financial liabilities.
2 Included in financing.
Effect of hedging instruments on the financial position and performance

To manage the risk of changes in the fair values of fixed rate borrowings (the hedged items) the Group has entered into fixed-to-floating
interest rate swaps and cross-currency interest rate swaps (the hedging instruments) which for accounting purposes are designated as fair value
hedges. Although the hedging instruments have similar critical terms to the hedged item, some ineffectiveness, predominantly due to cross
currency basis, will still remain. The impact of any hedge ineffectiveness on the financial position and performance of the Group is as follows:
Hedged item 1 Hedging instrument 2
FV FV FV Hedge
adjustment adjustment Carrying Carrying movement ineffect- Weighted
in the since Carrying amount amount in the iveness in Weighted average
Nominal period inception amount Nominal asset liability period the period 3 average FX interest
£m £m £m £m £m £m £m £m £m rate rate
At 31 December 2019
GBP LIBOR
Sterling (375) (3) (36) (410) 375 36 – 3 – 1.00 + 0.893
GBP LIBOR
US Dollar (987) (10) (175) (1,159) 987 172 – 2 (8) 1.52 + 1.2575
GBP LIBOR
Euro (1,607) 63 (34) (1,637) 1,607 27 (6) (69) (6) 1.15 + 0.8301
At 31 December 2018
GBP LIBOR
Sterling (875) 25 (34) (907) 875 34 – (25) – 1.00 + 2.0867
GBP LIBOR
US Dollar (987) (61) (165) (1,148) 987 169 – 65 4 1.52 + 1.2575
GBP LIBOR
Euro (1,607) (33) (97) (1,699) 1,607 90 – 26 (7) 1.15 + 0.8301
1 Hedged items are included in borrowings in the balance sheet.

2 Hedging instruments are included in other financial assets or liabilities in the balance sheet.
3 Hedge ineffectiveness is included in net financing in the income statement.
The Group has elected to early adopt the amendments to IFRS 9, IAS 39 and IFRS 7 Interest Rate Benchmark Reform issued in September
2019. In calculating the change in fair value attributable to the hedged risk for the fixed-rate borrowings, the Group has made the
following assumptions that reflect its current expectations:
–– t he Group has assumed that pre-existing fallback provisions in the borrowings do not apply to IBOR reform;
–– borrowings move to a risk-free rate during 2022, and the spread will be similar to the spread included in the interest rate swaps used as
hedging instruments; and
–– no other changes to the terms of the hedged borrowings are anticipated.

Risk management policies and hedging activities
The principal financial risks to which the Group is exposed are: foreign currency exchange rate risk; liquidity risk; credit risk; interest rate
risk; and commodity price risk. The Board has approved policies for the management of these risks.
Foreign currency exchange rate risk – The Group has significant cash flows (most significantly US dollars, followed by the euro)
denominated in currencies other than the functional currency of the relevant trading entity. To manage its exposures to changes in values
of future foreign currency cash flows, so as to maintain relatively stable long-term foreign exchange rates on settled transactions, the
Group enters into derivative forward foreign currency transactions.
The Group economically hedges its GBP/USD exposure by forecasting highly probable net USD receipts up to ten years forward. Hedges
are taken out within prescribed maximum and minimum hedge positions set out in the Group FX policy. The maximum and minimum policy
bands decline gradually over the ten-year horizon and are calculated as a percentage of forecast net income. A similar policy is operated
for the Group’s EUR/USD exposure. For accounting purposes, these derivative contracts are not designated in hedging relationships with
the exception of those taken out by the Group’s Spanish subsidiary, ITP Aero, where they are designated in cash flow hedges. ITP Aero is
exposed predominantly to net USD receipts that it hedges against EUR using foreign exchange forward contracts.
The Group regards its interests in overseas subsidiary companies as long-term investments. The Group aims to match its translational
exposures by matching the currencies of assets and liabilities.
Liquidity risk – The Group’s policy is to hold financial investments and maintain undrawn committed facilities at a level sufficient to ensure
that the Group has available funds to meet its medium-term capital and funding obligations and to meet any unforeseen obligations and
opportunities. The Group holds cash and short-term investments, which together with the undrawn committed facilities, enable the Group
to manage its liquidity risk.
Credit risk – The Group is exposed to credit risk to the extent of non-payment by either its customers or the counterparties of its financial
instruments. The effective monitoring and controlling of credit risk is a key component of the Group’s risk management activities. The
Group has credit policies covering both trading and financial exposures. Credit risks arising from treasury activities are managed by a
central treasury function in accordance with the Group credit policy. The objective of the policy is to diversify and minimise the Group’s
exposure to credit risk from its treasury activities by ensuring the Group transacts strictly with ‘BBB’ or higher rated financial institutions
based on pre-established limits per financial institution. At the balance sheet date, there were no significant concentrations of credit risk
to individual customers or counterparties. The Group’s revenue is generated from customers located across multiple geographical
locations (see note 2), these customers are typically: airframers and airline operators relating to Civil Aerospace; government defence
departments for the UK and US; multiple smaller entities for Power Systems; and aero engine manufacturers for ITP Aero. Whilst there are
a limited number of customers related to Civil Aerospace and Defence, they are spread across various geographical locations. The
maximum exposure to credit risk at the balance sheet date is represented by the carrying value of each financial asset, including derivative
financial instruments.
Interest rate risk – The Group’s interest rate risk is primarily in relation to its fixed rate borrowings (fair value risk), floating rate borrowings
and cash and cash equivalents (cash flow risk). Interest rate derivatives are used to manage the overall interest rate profile of the Group.
The fixed or floating rate interest rate decision on long-term borrowings is determined for each new agreement at the point it is entered
into. The aggregate interest rate position of the Group is reviewed regularly and can be revised at any time in order to react to changes in
market conditions or circumstances.
The Group also has exposures to the fair values of non-derivative financial instruments such as USD, EUR and GBP and fixed rate
borrowings. To manage the risk of changes in these fair values, the Group has entered into fixed-to-floating interest rate swaps and
cross-currency interest rate swaps which for accounting purposes are designated as fair value hedges. The swaps have similar critical
terms to the hedged items, such as the reference rate, reset dates, notional amounts, payment dates and maturities. Therefore there is an
economic relationship and the hedge ratio is established as 1:1. Possible sources of ineffectiveness in the fair value hedge relationship are
changes in the credit risk of either party to the interest rate swap and, for cross-currency interest rate swaps, the cross-currency basis risk
as this risk is present in the hedging instrument only. Another possible source of ineffectiveness would be if the notional of the borrowings
is less than the notional of the derivative, for example in the event of a partial repayment of hedged debt prior to its maturity.
The Group has exposure to changes in cash flows due to changes in interest rates. To manage this risk the Group has entered into
floating-to-fixed interest rate swaps to hedge a proportion of its floating rate exposure to fixed rates. The swaps have similar critical terms
to the floating leg of swaps that form part of the fair value hedges, such as the reference rate, reset dates, notional amounts, payment
dates and maturities. For accounting purposes, these derivative contracts are generally not designated as hedging instruments.
The Group’s Spanish subsidiary, ITP Aero, has also entered into a floating-to-fixed interest rate swap to hedge the cash flow risk on a
floating rate borrowing which for accounting purposes is designated as a cash flow hedge.
Commodity risk – The Group has exposures to the price of jet fuel and base metals arising from business operations. To minimise its cash
flow exposures to changes in commodity prices, the Group enters into derivative commodity transactions. The commodity hedging policy
is similar to the Group FX policy, in that the Group forecasts highly probable exposures to commodities, and takes out hedges within
prescribed maximum and minimum levels as set out in the policy. The maximum and minimum policy bands decline gradually over time.
For accounting purposes, these derivative contracts are generally not designated in hedging relationships.
Other price risk – The Group’s cash equivalent balances represent investments in money-market instruments, with a term of up to three
months. The Group does not consider that these are subject to significant price risk.

Derivative financial instruments
The nominal amounts, analysed by year of expected maturity, and fair values of derivative financial instruments are as follows:
Expected maturity Fair value
Between Between
Nominal Within one and two and After
amount one year two years five years five years Assets Liabilities
£m £m £m £m £m £m £m
At 31 December 2019
Foreign exchange contracts:
Cash flow hedges 646 266 206 174 – 13 (17)
Non-hedge accounted 29,878 5,151 4,704 13,300 6,723 237 (3,337)
Interest rate contracts:
Fair value hedges 2,969 329 639 484 1,517 235 (6)
Cash flow hedges 15 4 4 7 – – –
Non-hedge accounted 2,001 – – 484 1,517 17 (3)
Commodity contracts:
Cash flow hedges 54 11 9 21 13 8 (1)
Non-hedge accounted 342 125 101 116 – 15 (10)
35,905 5,886 5,663 14,586 9,770 525 (3,374)
At 31 December 2018
Foreign exchange contracts:
Cash flow hedges 335 162 120 53 – 4 (11)
Non-hedge accounted 29,080 5,528 5,113 14,808 3,631 59 (3,816)
Interest rate contracts:
Fair value hedges 3,469 500 329 639 2,001 293 –
Cash flow hedges 19 4 4 11 – – (1)
Non-hedge accounted – – – – – 3 (3)
Commodity contracts:
Cash flow hedges 6 2 1 1 2 1 (8)
Non-hedge accounted 250 92 79 77 2 5 (32)
33,159 6,288 5,646 15,589 5,636 365 (3,871)
As described above, all derivative financial instruments are entered into for risk management purposes, although these may not be
designated into hedging relationships for accounting purposes.
Currency analysis
Foreign exchange contracts are denominated in the following currencies:
Nominal amount of currencies purchased forward
Sterling US dollar Euro Other Total
£m £m £m £m £m
At 31 December 2019
Currencies sold forward:
Sterling – 4 – 221 225
US dollar 24,411 – 4,468 581 29,460
Euro 21 297 – 264 582
Other 8 91 152 6 257
At 31 December 2018
Currencies sold forward:
Sterling – – 63 230 293
US dollar 24,376 – 3,280 753 28,409
Euro 84 119 – 274 477
Other 87 39 94 16 236

The nominal value of interest rate and commodity contracts are denominated in the following currencies:
2019 2018
£m £m
Sterling 2,376 875
US dollar 1,370 1,233
Euro 1,635 1,636
Non-derivative financial instruments are denominated in the following currencies:

£m £m £m £m £m
At 31 December 2019
Unlisted non-current investments 4 8 2 – 14
Trade receivables and similar items 139 2,735 541 62 3,477
Other non-derivative financial assets 33 649 23 21 726
Other assets – 28 – – 28
Short-term investments – – 6 – 6
Cash and cash equivalents 2,269 853 1,224 97 4,443
Assets 2,445 4,273 1,796 180 8,694
Borrowings (416) (1,172) (1,739) (4) (3,331)
Lease liabilities (225) (1,784) (76) (269) (2,354)
Financial RRSAs – (25) (85) – (110)
Other liabilities (29) (43) – – (72)
C Shares (31) – – – (31)
Trade payables and similar items (1,802) (3,244) (730) (73) (5,849)
Other non-derivative financial liabilities (758) (576) (136) (71) (1,541)
Contract liabilities – (131) – – (131)
Liabilities (3,261) (6,975) (2,766) (417) (13,419)
(816) (2,702) (970) (237) (4,725)
At 31 December 2018
Unlisted non-current investments 2 7 13 – 22
Trade receivables and similar items 376 2,463 687 52 3,578
Short-term investments – – – 6 6
Cash and cash equivalents 2,008 928 1,792 246 4,974
Assets 2,458 3,739 2,539 333 9,069
Borrowings (1,441) (1,435) (1,753) (33) (4,662)
Financial RRSAs – (47) (180) – (227)
Other liabilities (24) (38) – – (62)
C Shares (29) – – – (29)
Trade payables and similar items (2,099) (2,600) (860) (100) (5,659)
Other non-derivative financial liabilities (854) (421) (379) (100) (1,754)
Liabilities (4,447) (4,541) (3,172) (233) (12,393)
(1,989) (802) (633) 100 (3,324)

Currency exposures
The Group’s actual currency exposure on financial instruments after taking account of derivative foreign currency contracts, which are not
designated as hedging instruments for accounting purposes are as follows:
Functional currency of Group operations £m £m £m £m £m
At 31 December 2019
Sterling – 2 2 (4) –
US dollar – – (1) – (1)
Euro 1 (3) – (1) (3)
Other 70 12 69 4 155
At 31 December 2018
Sterling 1 – 3 (237) 6 (228)
US dollar (2) – (5) 5 (2)
Euro 2 (14) – 12 –
Other – 10 13 – 23
1 Theeuro exposure primarily relates to deferred consideration on the acquisition of ITP Aero. Movements in this balance in relation to foreign exchange (recognised through the
consolidated income statement) are partially matched by the related foreign exchange movement in the subsidiary’s net assets, recognised through the consolidated statement
of other comprehensive income.
Ageing beyond contractual due date of financial assets

Between
Up to three
three months and More than
Within months one year one year
terms overdue overdue overdue Total
£m £m £m £m £m
At 31 December 2019
Unlisted non-current asset investments 14 – – – 14
Trade receivables and similar items 3,102 210 92 73 3,477
Other assets 28 – – – 28
Derivative financial assets 525 – – – 525
Short-term investments 6 – – – 6
Cash and cash equivalents 4,443 – – – 4,443
8,840 212 93 74 9,219
At 31 December 2018
Unlisted non-current asset investments 22 – – – 22
Trade receivables and similar items 3,108 265 132 73 3,578
Other non-derivative financial assets 489 – – – 489
Derivative financial assets 365 – – – 365
Short-term investments 6 – – – 6
Cash and cash equivalents 4,974 – – – 4,974
8,964 265 132 73 9,434

Contractual maturity analysis of non-derivative financial liabilities
Gross values
Between Between
Within one and two and After Carrying
one year two years five years five years value
£m £m £m £m £m
At 31 December 2019
Borrowings (511) (722) (662) (1,704) (3,331)
Lease liabilities (425) (306) (872) (1,258) (2,354)
Financial RRSAs (35) (7) (14) (63) (110)
Other liabilities (34) (23) (10) (5) (72)
C Shares (31) – – – (31)
Trade payables and similar items (5,677) (62) (20) (90) (5,849)
Other non-derivative financial liabilities (1,162) (308) (35) (36) (1,541)
Contract liabilities (131) – – – (131)
(8,006) (1,428) (1,613) (3,156) (13,419)
At 31 December 2018
Borrowings (983) (520) (1,014) (2,699) (4,662)
Financial RRSAs (48) (62) (59) (73) (227)
Other liabilities (27) (3) (25) (7) (62)
C Shares (29) – – – (29)
Trade payables and similar items (5,542) (51) (40) (26) (5,659)
Other non-derivative financial liabilities (1,273) (150) (259) (72) (1,754)
(7,902) (786) (1,397) (2,877) (12,393)
Expected maturity analysis of derivative financial instruments

Gross values
Between Between
Within one and two and After Carrying
one year two years five years five years value
£m £m £m £m £m
At 31 December 2019
Derivative financial assets:
Cash inflows 1,475 1,487 2,072 3,202
Cash outflows (1,376) (1,448) (2,035) (3,085)
Other net cash flows 1 17 12 34 24
116 51 71 141 525
Derivative financial liabilities:
Cash inflows 4,383 4,113 11,987 4,804
Cash outflows (4,960) (4,737) (13,872) (6,186)
Other net cash flows 1 (5) (5) (4) –
(582) (629) (1,889) (1,382) (3,374)
At 31 December 2018
Derivative financial assets:
Cash inflows 1,001 934 2,187 2,061
Cash outflows (979) (869) (2,185) (1,934)
Other net cash flows 1 24 7 15 16
46 72 17 143 365
Derivative financial liabilities:
Cash inflows 4,753 4,753 13,481 3,437
Cash outflows (5,531) (5,656) (16,298) (4,257)
Other net cash flows 1 (14) (12) (12) –
(792) (915) (2,829) (820) (3,871)
1 Derivative financial assets and liabilities settled on a net cash basis.
The Group regularly renegotiates the contractual maturities of its foreign exchange contracts. In general, the effect of such negotiations is
the settlement of derivative financial liabilities somewhat earlier than the contractual maturity date.

Interest rate risk
In respect of income-earning financial assets and interest-bearing financial liabilities, the following table indicates their effective interest
rates. The value shown is the carrying amount, before taking account of swaps.
2019 2018
Fixed rate Floating rate Total Fixed rate Floating rate Total
£m £m £m £m £m £m
Short-term investments – 6 6 – 6 6
Cash and cash equivalents 1 – 4,443 4,443 – 4,974 4,974
Borrowings (2,252) (1,079) (3,331) (99) (4,334) (4,433)
Lease liabilities (2018: finance lease liabilities) (1,578) (776) (2,354) (229) – (229)
(3,830) 2,594 (1,236) (328) 646 318
Weighted average interest rates
Borrowings 1.9% 1.6% 1.5% 2.1%
Lease liabilities 2 3.6% 3.1% 4.1%
1 Cash and cash equivalents comprises bank balances and term deposits and earn interest based on short-term floating market interest rates.
2 Interest rates for lease liabilities are considered to be the discount rates at the balance sheet date.
Some of the Group’s borrowings are subject to the Group meeting certain obligations, including customary financial covenants. If the
Group fails to meet its obligations these arrangements give rights to the lenders, upon agreement, to accelerate repayment of the
facilities. At 31 December 2019, none of these were in breach (2018: none). There are no rating triggers contained in any of the Group’s
facilities that could require the Group to accelerate or repay any facility for a given movement in the Group’s credit rating.
In addition, the Group has £2,500m (2018: £2,500m) of undrawn committed borrowing facilities which are available for at least the next
four years.
Sensitivity analysis
2019 2018
Sensitivities at 31 December (all other variables held constant) – impact on profit after tax and equity £m £m
Sterling 10% weaker against the US dollar (2,557) (2,401)
Sterling 10% stronger against the US dollar 2,105 1,998
Euro 10% weaker against the US dollar (376) (268)
Euro 10% stronger against the US dollar 307 219
Sterling 10% weaker against the Euro (32) (32)
Sterling 10% stronger against the Euro 26 26
Commodity prices 10% lower (32) (21)
Commodity prices 10% higher 32 21
Interest rates 50 basis points lower (82) –
Interest rates 50 basis points higher 85 –

C Shares and payments to shareholders
The Company issues non-cumulative redeemable preference shares (C Shares) as an alternative to paying a cash dividend. C Shares in
respect of a year are issued in the following year. Shareholders are able to redeem any number of their C Shares for cash. Any C Shares
retained attract a dividend of 75% of LIBOR on the 0.1p nominal value of each share, paid on a twice-yearly basis, and have limited voting
rights. The Company has the option to compulsorily redeem the C Shares, at any time, if the aggregate number of C Shares in issue is less
than 10% of the aggregate number of C Shares issued, or on the acquisition or capital restructuring of the Company.
Movements in issued and fully paid C Shares during the year were as follows:
2019 2018
Nominal Nominal
value value
Millions £m Millions £m
At 1 January 29,071 29 28,429 28
Issued 221,954 222 216,717 217
Redeemed (220,417) (220) (216,075) (216)
At 31 December 30,608 31 29,071 29
Payments to shareholders in respect of the year represent the value of C Shares to be issued in respect of the results for the year. Issues of
C Shares were declared as follows:
2019 2018
Pence Pence
per share £m per share £m
Interim 4.60 87 4.60 86
Final 7.10 137 7.10 135
11.70 224 11.70 221
20 Provisions for liabilities and charges

At Reclassified to Charged to At
1 January lease liabilities income Exchange 31 December
2019 (IFRS 16) statement Reversed Utilised Transfers differences 2019
£m £m £m £m £m £m £m £m
Trent 1000 exceptional costs 1 779 – 1,275 – (672) – – 1,382
Contract losses 2 206 – 592 (4) (78) 62 (5) 773
Warranties and guarantees 373 – 129 (19) (123) – (15) 345
Customer financing 17 – 12 – (7) – – 22
Restructuring 204 (8) 49 (48) (128) – (1) 68
Insurance 87 – 25 (17) (25) – – 70
Tax related interest and penalties 62 – 14 (19) (1) – (1) 55
Employer liability claims 48 – 4 – (3) – – 49
Other 141 (67) 33 (34) (21) (9) (3) 40
1,917 (75) 2,133 (141) (1,058) 53 (25) 2,804
Current liabilities 1,122 858
Non-current liabilities 795 1,946
1 The
charge to the income statement for Trent 1000 includes £15m as a result of discount unwind.
2 The
charge to the income statement for contract losses includes a £40m impact from the change in discount rates on contract losses recorded in prior years as a result of the fall in US
bonds, which drives the calculation of the risk-free discount rate.
In November, we announced the outcome of recent testing and a thorough technical and financial review of the Trent 1000 TEN
programme, following technical issues which were identified in 2019. This resulted in a revised timeline and a more conservative estimate
of durability for the improved HP turbine blade for the TEN variant. An exceptional charge of £1,361m (at underlying exchange rates) has
been recorded in the income statement. The charge is £1,531m at prevailing exchange rates and net of £203m reflecting insurance receipts
and contract accounting adjustments. Of the charge, £1,275m has been recorded in relation to Trent 1000 exceptional costs, and a further
£459m in relation to contract losses (see below). See note 2 for further details.
During 2019, we have utilised £672m of the Trent 1000 exceptional costs provision. This represents customer disruption costs settled in
cash and credit notes, and remediation shop visit costs. We expect to use this provision over the period 2020 to 2023.
Provisions for contract losses are recorded when the direct costs to fulfil a contract are assessed as being greater than the expected
revenue. Included within the provision charged of £592m, is £459m (at prevailing exchange rates) relating to the upfront recognition of
future losses on a small number of contracts which are now loss making as a result of the margin impact of our updated HP turbine
durability expectations on the Trent 1000 TEN. Provisions for contract losses are expected to be utilised over the term of the customer
contracts, typically within 10–15 years.
Provisions for warranties and guarantees primarily relate to products sold and generally cover a period of up to three years.
20 Provisions for liabilities and charges continued

Customer financing provisions cover guarantees provided for asset value and/or financing.
In connection with the sale of its products the Group will, on some occasions, provide financing support for its customers – generally in
respect of civil aircraft. The Group’s commitments relating to these financing arrangements are spread over many years, relate to a number
of customers and a broad product portfolio and are generally secured on the asset subject to the financing. These include commitments
of US$2.8bn (2018: US$2.3bn) (on a discounted basis) to provide facilities to enable customers to purchase aircraft (of which approximately
US$656m could be called during 2020). These facilities may only be used if the customer is unable to obtain financing elsewhere and are
priced at a premium to the market rate. Consequently, the Directors do not consider that there is a significant exposure arising from the
provision of these facilities.
Commitments on delivered aircraft in excess of the amounts provided are shown in the table below. These are reported on a discounted basis
at the Group’s borrowing rate to reflect better the time span over which these exposures could arise. These amounts do not represent values
that are expected to crystallise. The commitments are denominated in US dollars. As the Group does not generally adopt cash flow hedge
accounting for future foreign exchange transactions, this amount is reported, together with the sterling equivalent at the reporting date spot
rate. The values of aircraft providing security are based on advice from a specialist aircraft appraiser.
2019 2018
£m $m £m $m
Gross commitments 60 79 93 119
Value of security 1 (9) (11) (24) (30)
Indemnities (8) (11) (19) (24)
Net commitments 43 57 50 65
Net commitments with security reduced by 20% 2 43 57 60 77
1 Security includes unrestricted cash collateral of: – – 4 6
2 Although sensitivity calculations are complex, the reduction of relevant security by 20% illustrates the sensitivity to changes in this assumption.
Restructuring provisions are made for Group approved, formal restructuring programmes where the restructuring has either commenced
or has been publicly announced. Included is the Group-wide restructuring programme announced on 14 June 2018, which is an on-going
multi-year restructuring programme across the business and reflects the severance costs as well as the consultancy costs that will help
deliver the planned reductions. The majority of the provision is expected to be utilised over the next two years.
The Group’s captive insurance company retains a portion of the exposures it insures on behalf of the remainder of the Group. Significant
delays occur in the notification and settlement of claims and judgement is involved in assessing outstanding liabilities, the ultimate cost
and timing of which cannot be known with certainty at the balance sheet date. The insurance provisions are based on information
currently available, however it is inherent in the nature of the business that ultimate liabilities may vary. Provisions for outstanding claims
are established to cover the outstanding expected liability as well as claims incurred but not yet reported.
Provisions for tax related interest and penalties relate to uncertain tax positions in some of the jurisdictions in which the Group operates.
Utilisation of the provisions will depend on the timing of resolution of the issues with the relevant tax authorities.
The provision relating to employer healthcare liability claims is as a result of an historical insolvency of the previous provider and is
expected to be utilised over the next 30 years.
Other provisions comprise a number of liabilities with varying expected utilisation rates.
21 Post-retirement benefits

The Group operates a number of defined benefit and defined contribution schemes:
–– The UK defined benefit scheme is funded, with the assets held in a separate trustee administered fund. Employees are entitled
to retirement benefits based on either their final or career average salaries and length of service.
–– Overseas defined benefit schemes are a mixture of funded and unfunded plans and provide benefits in line with local practice.
Additionally in the US, and to a lesser extent in some other countries, the Group’s employment practices include the provision
of healthcare and life insurance benefits for retired employees. These schemes are unfunded.
The valuations of the defined benefit schemes are based on the most recent funding valuations, where relevant, updated by the scheme
actuaries to 31 December 2019.
The defined benefit schemes expose the Group to actuarial risks such as longevity, interest rate, inflation and investment risks. In the UK,
and in the principal US and Canadian pension schemes, the Group has adopted investment policies to mitigate some of these risks. This
involves investing a significant proportion of the schemes’ assets in liability driven investment (LDI) portfolios, which hold investments
designed to offset interest rate and inflation rate risks. In addition, during the year, the scheme has completed a buy-in/buy-out of UK
pensioner liabilities – see page 169.
Amounts recognised in the income statement

2019 2018
UK Overseas UK Overseas
schemes schemes Total schemes schemes Total
£m £m £m £m £m £m
Defined benefit schemes:
Current service cost and administrative expenses 164 52 216 183 58 241
Past-service cost in respect of equalisation 1 – – – 121 – 121
Other past-service cost/(credit) 2 – 6 6 (9) (1) (10)
164 58 222 295 57 352
Defined contribution schemes 66 91 157 41 100 141
Operating cost 230 149 379 336 157 493
Net financing (credit)/charge in respect of defined
benefit schemes (59) 36 (23) (55) 32 (23)
Total income statement charge 171 185 356 281 189 470
1 In the UK in 2018, past-service costs of £121m were recognised relating to the estimated cost of equalising benefits earned after May 1990 between men and women. The UK scheme
(Rolls-Royce UK Pension Fund) has to provide Guaranteed Minimum Pensions (GMPs) which, as a result of statutory rules, have been calculated differently for men and women.
Although equal treatment in pension provision for males and females has been required since 1990, there has been uncertainty on whether and how pension schemes are required to
equalise GMPs. A High Court judgement on the Lloyds Banking Group hearing was published on 26 October 2018. The judgement confirmed that GMPs earned from 1990 must be
equalised and highlighted an acceptable range of methods. The estimated cost of this equalisation was £97m. In addition, a cost of £24m was recognised in relation to obligations to
equalise certain other post-1990 benefits between men and women. The total cost of £121m represents the Directors’ best estimate of the cost, based on actuarial advice. However, the
final cost will differ from this amount when the final method of equalisation is agreed with the Trustee and subsequently implemented.
2 In addition in 2018, a past-service credit of £9m arose related to the restructuring activities. This credit was offset against the restructuring costs. All amounts were excluded from the
underlying results.
The operating cost is charged as follows:

Defined benefit Defined contribution Total
2019 2018 2019 2018 2019 2018
£m £m £m £m £m £m
Cost of sales 158 176 113 104 271 280
Commercial and administrative costs 40 148 26 21 66 169
Research and development costs 24 28 18 16 42 44
222 352 157 141 379 493
Pension contributions to UK pension arrangements are generally paid via a salary sacrifice scheme under which employees agree to a
reduction in gross contractual pay in return for the Group making additional pension contributions on their behalf. As a result, there is a
decrease in wages and salaries and a corresponding increase in pension costs of £47m (2018: £31m) in the year.
21 Post-retirement benefits continued

Net financing comprises:
2019 2018
£m £m £m £m £m £m
Financing on scheme obligations 303 66 369 286 59 345
Financing on scheme assets (362) (30) (392) (341) (27) (368)
Net financing (income)/charge in respect of defined
benefit schemes (59) 36 (23) (55) 32 (23)
Financing income on scheme surpluses (59) (1) (60) (55) (1) (56)
Financing cost on scheme deficits – 37 37 – 33 33
Amounts recognised in OCI in respect of defined benefit schemes

2019 2018
£m £m £m £m £m £m
Actuarial gains and losses arising from:
Demographic assumptions 309 38 347 (130) (4) (134)
Financial assumptions (1,723) (228) (1,951) 782 134 916
Experience adjustments 79 29 108 (6) 9 3
Return on scheme assets excluding financing income 456 106 562 (705) (53) (758)
(879) (55) (934) (59) 86 27
On 5 June 2019, the Group entered into a partial buy-in with Legal & General Assurance Society Limited covering the benefits of circa
33,000 in-payment pensioners. As a result of the transaction, an asset re-measurement net loss estimated at £600m has been recognised
within the line ‘Actuarial gains/(losses) recognised in OCI’. The buy-in was in anticipation of a buy-out. On 1 December 2019, 90% of the
buy-in liabilities (covering 29,614 pensioners) were transferred, resulting in pension assets and pension liabilities of £3.6bn being
derecognised from the Group’s balance sheet. The remaining 10% of the buy-in liabilities (covering 2,261 pensioners) was concluded in
January 2020 with the final balancing payment made on 1 February 2020. Pension assets and liabilities of £408m will be derecognised in
2020. There is no impact upon the income statement arising from this transaction.
Amounts recognised in the balance sheet in respect of defined benefit schemes

2019 2018
£m £m £m £m £m £m
Present value of funded obligations (8,499) (842) (9,341) (10,847) (758) (11,605)
Fair value of scheme assets 9,640 845 10,485 12,773 735 13,508
Net asset/(liability) on funded schemes 1,141 3 1,144 1,926 (23) 1,903
Present value of unfunded obligations – (1,352) (1,352) – (1,289) (1,289)
Net asset/(liability) recognised in the balance sheet 1,141 (1,349) (208) 1,926 (1,312) 614
Post-retirement scheme surpluses ¹ 1,141 29 1,170 1,926 18 1,944
Post-retirement scheme deficits – (1,378) (1,378) – (1,303) (1,303)
Included in liabilities associated with assets held for sale – – – – (27) (27)
1 The
surplus in the UK scheme is recognised as, on ultimate wind-up when there are no longer any remaining members, any surplus would be returned to the Group, which has the
power to prevent the surplus being used for other purposes in advance of this event.
Overseas schemes are located in the following countries:

2019 2018
Assets Obligations Net Assets Obligations Net
£m £m £m £m £m £m
Canada 227 (275) (48) 186 (227) (41)
Germany 2 (853) (851) – (749) (749)
US pension schemes 616 (635) (19) 549 (596) (47)
US healthcare schemes – (420) (420) – (446) (446)
Other – (11) (11) – (29) (29)
Net asset/(liability) recognised in the balance sheet 845 (2,194) (1,349) 735 (2,047) (1,312)

Defined benefit schemes
Assumptions
Significant actuarial assumptions for the UK scheme at the balance sheet date were as follows:
2019 2018
Discount rate 2.15% 2.95%
Inflation assumption (RPI) 1 3.15% 3.40%
Rate of increase in salaries 3.15% 3.65%
Transfer assumption (active/deferred) 45%/35% 40%/32.5%
Life expectancy from age 65: current male pensioner 21.8 years 22.1 years
future male pensioner currently aged 45 23.1 years 23.4 years
current female pensioner 23.1 years 23.4 years
future female pensioner currently aged 45 25.0 years 25.2 years
1 This is the assumption for the Retail Price Index. The Consumer Price Index is assumed to be 1.0% lower (2018: 1.1% lower).
Discount rates are determined by reference to the market yields on AA rated corporate bonds. The rate is determined by using the profile
of forecast benefit payments to derive a weighted average discount rate from the yield curve.
The inflation assumption is determined by the market-implied assumption based on the yields on long-term index-linked government
securities and increases in salaries are based on actual experience, allowing for promotion, of the real increase above inflation.
The mortality assumptions adopted for the UK pension schemes are derived from the SAPS S2 ‘All’ actuarial tables, with future improvements
in line with the CMI 2018 core projections updated to reflect use of an ‘A’ parameter of 0.25% for future improvements and long-term
improvements of 1.25%. Where appropriate, these are adjusted to take account of the scheme’s actual experience.
Other assumptions have been set on advice from the actuary, having regard to the latest trends in scheme experience and the
assumptions used in the most recent funding valuation. The rate of increase of pensions in payment is based on the rules of the scheme,
combined with the inflation assumption where the increase is capped.
Assumptions for overseas schemes are less significant and are based on advice from local actuaries. The principal assumptions are:
2019 2018
Discount rate 2.40% 3.40%
Inflation assumption 1.90% 2.90%
Long-term healthcare cost trend rate 4.80% 4.80%
Male life expectancy from age 65: current pensioner 21.4 years 21.1 years
future pensioner currently aged 45 21.7 years 23.1 years
Changes in present value of defined benefit obligations

2019 2018
£m £m £m £m £m £m
At 1 January (10,847) (2,047) (12,894) (11,499) (2,120) (13,619)
Exchange differences – 71 71 – (56) (56)
Current service cost (158) (50) (208) (179) (56) (235)
Past-service cost – – – (112) – (112)
Finance cost (303) (65) (368) (286) (59) (345)
Contributions by employees (2) (3) (5) (2) (3) (5)
Benefits paid out 571 79 650 585 78 663
Acquisition of businesses – (2) (2) – – –
Disposal of businesses – 28 28 – 31 31
Actuarial (losses)/gains (1,335) (168) (1,503) 646 140 786
Transfers – (37) (37) – (2) (2)
Settlement 3,575 – 3,575 – – –
At 31 December (8,499) (2,194) (10,693) (10,847) (2,047) (12,894)
Funded schemes (8,499) (842) (9,341) (10,847) (758) (11,605)
Unfunded schemes – (1,352) (1,352) – (1,289) (1,289)
The defined benefit obligations are in respect of:

Active plan participants (4,751) (1,185) (5,936) (4,229) (1,088) (5,317)
Deferred plan participants (2,154) (171) (2,325) (1,975) (157) (2,132)
Pensioners (1,594) (838) (2,432) (4,643) (802) (5,445)
Weighted average duration of obligations (years) 23 16 22 19 15 18

Changes in fair value of scheme assets
2019 2018
£m £m £m £m £m £m
At 1 January 12,773 735 13,508 13,607 750 14,357
Exchange differences – (17) (17) – 24 24
Administrative expenses (6) (2) (8) (4) (2) (6)
Financing 362 30 392 341 27 368
Return on plan assets excluding financing 456 106 562 (705) (53) (758)
Contributions by employer 199 67 266 117 64 181
Contributions by employees 2 3 5 2 3 5
Benefits paid out (571) (79) (650) (585) (78) (663)
Acquisition of businesses – 2 2 – – –
Settlement (3,575) – (3,575) – – –
At 31 December 9,640 845 10,485 12,773 735 13,508
Total return on scheme assets 818 136 954 (364) (26) (390)
Fair value of scheme assets at 31 December

2019 2018
£m £m £m £m £m £m
Sovereign debt 5,799 277 6,076 9,388 315 9,703
Corporate debt instruments 3,135 467 3,602 3,447 356 3,803
Interest rate swaps 14 – 14 1,342 – 1,342
Inflation swaps (18) – (18) (375) – (375)
Cash and similar instruments 1 (784) 13 (771) (1,991) 22 (1,969)
Liability driven investment (LDI) portfolios 2 8,146 757 8,903 11,811 693 12,504
Longevity swap 3 – – – (292) – (292)
Listed equities 323 76 399 592 39 631
Unlisted equities 95 – 95 128 – 128
Synthetic equities 4 3 5 8 (13) (4) (17)
Sovereign debt – – – – 5 5
Corporate debt instruments 662 4 666 548 – 548
Cash – 4 4 – 2 2
Partial buy-in insurance policy 408 – 408 – – –
Other 3 (1) 2 (1) – (1)
At 31 December 9,640 845 10,485 12,773 735 13,508
1 Cash and similar instruments include repurchase agreements on UK Government bonds amounting to £(1,308)m (2018: £(1,991)m). The latest maturity date for these short-term
borrowings is 12 October 2020.
2 A portfolio of gilt and swap contracts, backed by investment-grade credit instruments and LIBOR generating assets, that is designed to hedge the majority of the interest rate and
inflation risks associated with the schemes’ obligations.
3 The longevity swap was transferred to Legal & General Assurance Society Limited as part of the partial buy-in described on page 169.
4 A portfolio of swap contracts designed to provide investment returns in line with global equity markets. The maximum exposure (notional value and accrued returns) on the portfolios
was £328m (2018: £281m).
The investment strategy for the UK scheme is controlled by the Trustee in consultation with the Group. The scheme assets do not directly
include any of the Group’s own financial instruments, nor any property occupied by, or other assets used by, the Group. At 31 December
2019, there was an indirect holding of £0.1m of the Group’s financial instruments (2018: £0.3m).
Future contributions
The Group expects to contribute approximately £170m to its defined benefit schemes in 2020 (2019: £220m): UK: £100m, Overseas: £70m
(2019: UK: £140m, Overseas: £80m).
In the UK, the funding is based on a statutory triennial funding valuation process. This includes a negotiation between the Group and the
Trustee on actuarial assumptions used to value obligations (Technical Provisions) which may differ from those used for accounting set out
above. The assumptions used to value Technical Provisions must be prudent rather than a best estimate of the liability. Most notably, the
Technical Provision discount rate is currently based upon UK Government yields plus 0.5% rather than being based on yields of AA
corporate bonds. Following the triennial valuation process, a Schedule of Contributions (SoC) must be agreed which sets out the required
contribution for current service cost and any contributions from the employer to eliminate a deficit. The most recent valuation, as at
31 March 2017, agreed by the Trustee in December 2017, showed that the UK scheme was estimated to be 112% funded on the Technical

Provisions basis. Employer contributions (inclusive of employee contributions paid by a salary sacrifice arrangement) will subsequently be
paid at a rate of 28.5% during 2020 until a new SoC is agreed (2019: 27%). The current SoC includes an arrangement for a potential
increase in contributions during 2021 to 2023 (capped at £48.3m a year) if the Technical Provisions funding position is below 107% at
31 March 2020. As at 31 December 2019, the Technical Provisions funding position was estimated to be 112% (2018: 111%).
Changes to UK defined benefit scheme

A consultation with active managers in the UK scheme was concluded in January 2020. The consultation process agreed certain changes
for future accrual for the relevant manager group which will mitigate future funding cost increases. The accounting impact of this change
will occur in 2020 rather than 2019. The change is expected to be immaterial to these accounts. The triennial valuation due at 31 March
2020 for the UK scheme will take these changes into account.
Sensitivities
The calculations of the defined benefit obligations are sensitive to the assumptions set out above. The following table summarises how
the estimated impact of a change in a significant assumption would affect the UK defined benefit obligation at 31 December 2019, while
holding all other assumptions constant. This sensitivity analysis may not be representative of the actual change in the defined benefit
obligation as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may
be correlated.
For the most significant funded schemes, the investment strategies hedge the risks from interest rates and inflation measured on a proxy
solvency basis. For the UK scheme, the interest rate and inflation hedging is currently based on UK Government bond yields without any
adjustment for any credit spread.
The sensitivity analysis set out below has been determined based on a method that estimates the impact on the defined benefit obligation
as a result of reasonable changes in key assumptions occurring at the end of the reporting period.
2019 2018
£m £m
Reduction in the discount rate of 0.25% 1 Obligation (495) (510)
Plan assets (LDI portfolio) 502 624
Increase in inflation of 0.25% 1 Obligation (290) (275)
Plan assets (LDI portfolio) 235 272
Real increase in salaries of 0.25% Obligations (80) (90)
Increase of 1% in transfer value assumption Obligations (64) (56)
One year increase in life expectancy Obligations (408) (465)
1 The
differences between the sensitivities on obligations and plan assets arise largely due to differences in the methods used to value the obligations for accounting purposes and the
adopted proxy solvency basis.
22 Share capital

Non-equity Equity
Ordinary
Special Nominal shares Nominal
Share value of 20p each value
of £1 £m Millions £m
Issued and fully paid
At 1 January 2018 1 – 1,840 368
Shares issued to employee share trust – – 8 2
Shares issued in relation to the acquisition of ITP Aero – – 48 9
At 31 December 2018 1 – 1,896 379
Shares issued to employee share trust – – 6 1
Shares issued in relation to the acquisition of ITP Aero – – 29 6
At 31 December 2019 1 – 1,931 386
The rights attaching to each class of share are set out on page 206.
In accordance with IAS 32 Financial Instruments: Presentation, the Company’s non-cumulative redeemable preference shares (C Shares)
are classified as financial liabilities. Accordingly, movements in C Shares are included in note 19.
23 Share-based payments

Effect of share-based payment transactions on the Group’s results and financial position
2019 2018
£m £m
Total expense recognised for equity-settled share-based payment transactions 30 32
Total expense recognised for cash-settled share-based payment transactions – 3
Share-based payments recognised in the consolidated income statement 30 35
Liability for cash-settled share-based payment transactions 1 6
A description of the share-based payment plans is included in the Directors’ Remuneration Report on pages 95 to 104.
Movements in the Group’s share-based payment plans during the year

ShareSave LTIP and PSP APRA
Weighted
average
Number exercise price Number Number
Millions Pence Millions Millions
Outstanding at 1 January 2018 27.5 714 13.0 0.2
Granted – – 5.7 0.2
Forfeited (1.3) 738 (4.4) –
Exercised (0.1) 656 (0.4) –
Outstanding at 1 January 2019 26.1 713 13.9 0.4
Granted 16.6 677 5.3 0.2
Forfeited (5.1) 814 (0.9) –
Exercised (5.7) 627 (5.1) (0.2)
Outstanding at 31 December 2019 31.9 693 13.2 0.4
Exercisable at 31 December 2019 – – – –
Exercisable at 31 December 2018 – – – –
The weighted average share price at the date share options were exercised was 906p (2018: 883p). The closing price at 31 December 2019
was 683p (2018: 830p).
The weighted average remaining contractual life for the cash settled options at 31 December 2019 was one year (2018: two years).
Fair values of share-based payment plans

The weighted average fair value per share of equity-settled share-based payment plans granted during the year, estimated at the date of
grant, are as follows:
2019 2018
LTIP 851p 815p
LTIP (ELT & Board) 774p 739p
ShareSave – three year grant 165p n/a
ShareSave – five year grant 176p n/a
APRA 892p 858p
LTIP and PSP

The fair value of shares awarded is calculated using a pricing model that takes account of the non-entitlement to dividends (or equivalent)
during the vesting period and the market-based performance condition based on expectations about volatility and the correlation of
share price returns in the group of FTSE 100 companies and which incorporates into the valuation the interdependency between share
price performance and TSR vesting. This adjustment decreases the fair value of the award relative to the share price at the date of grant.
ShareSave
The fair value of the options granted is calculated using a pricing model that assumes that participants will exercise their options at the
beginning of the six-month window if the share price is greater than the exercise price. Otherwise it assumes that options are held until the
expiration of their contractual term. This results in an expected life that falls somewhere between the start and end of the exercise window.
APRA
The fair value of shares awarded under APRA is calculated as the share price on the date of the award, excluding expected dividends
(or equivalent).
24 Leases
Leases as lessee
The net book value of right-of-use assets at 31 December 2019 was £2,009m (see note 11) with a lease liability of £2,354m (as per note 17).
Leases that have not yet commenced to which the Group is committed have a future liability of £5m and consists of factory equipment and
a single property. The consolidated income statement shows the following amounts relating to leases:
2019
£m
Land and buildings depreciation and impairment 1 (59)
Plant and equipment depreciation 2 (33)
Aircraft and engines depreciation and impairment 3 (319)
Total depreciation and impairment charge for right-of-use assets (411)
Interest expense 4 (88)
Expense relating to short-term leases of 12 months or less recognised as an expense on a straight-line basis 2 (23)
Expense relating to variable lease payments not included in lease liabilities 3,5 (1)
Total lease expense (523)
Income from sub-leasing right-of-use assets 79
Total amount recognised in the income statement (444)
1 Included in cost of sales and commercial and administration costs depending on the nature and use of the right-of-use asset.
2 Included in cost of sales, commercial and administration costs, or research and development depending on the nature and use of the right-of-use asset.
3 Included in cost of sales.
4 Included in financing costs.
5 Variable lease payments primarily arise on a small number of contracts where engine lease payments are solely dependent upon utilisation rather than a periodic charge.
The total cash outflow for leases in 2019 was £383m. Of this: £359m related to leases reflected in the lease liability; £23m to short-term
leases where lease payments are expensed on a straight-line basis; and £1m for variable lease payments where obligations are only due
when the right-of-use assets are used. The timing difference between the income statement charge and cash flow relates to costs incurred
at the end of leases for residual value guarantees that are recognised within depreciation over the term of the lease, the most significant
amounts relate to engine leases.
The Group’s leasing activities as a lessee and how they are accounted for
The Group leases aero engines that are used to support customers’ aircraft fleets; land and buildings used for production, administration
or training purposes; and equipment used in the manufacturing process and to support commercial and administrative activities. Lease
terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease arrangements do not
impose any covenants, but leased assets may not be used as security for borrowing purposes.
Until 31 December 2018, leases were classified as either finance or operating leases. Payments made under operating leases and residual
value guarantees were charged to the income statement on a straight-line basis over the period of the lease. From 1 January 2019, leases
are recognised as a right-of-use asset and a corresponding lease liability at the date at which the leased asset is available for use by the
Group. Each lease payment is allocated between reducing the liability and a finance cost. The finance cost is charged to the income
statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each
period.
Right-of-use assets and lease liabilities arising over the lease term are now initially measured on a present value basis. The lease term
represented is the non-cancellable period of the lease together with periods covered by an option to extend the lease where the Group is
reasonably certain to extend. Lease liabilities include the net present value of the following lease payments where such flows exist:
–– fixed payments less any lease incentive;
–– variable lease payments that are based on an index or a rate;
–– amounts expected to be payable by the Group under residual value guarantees;
–– the exercise price of a purchase option if the Group is reasonably certain to exercise that option; and
–– payments of penalties for terminating the lease, if the lease term reflects the Group exercising that option.
Leases for engines typically contain no specific contractual right to renew. Certain land and building leases have renewal options with
renewal dates for the most significant property leases evenly spread over 2022–2028 and in 2041. Such judgements on lease terms are
made each period end and consider the specific terms of the lease and the operational significance of the site, especially where utilised
for manufacturing activities. Lease obligations beyond the renewal dates are included in the lease liability where we are reasonably certain
to extend the lease.
Engine leases in the Civil Aerospace business often include clauses that require the engines to be returned to the lessor with specific
levels of useable life remaining. The cost of meeting these requirements are included in the estimate of the lease payments set out above.
The amount payable is dependent upon the utilisation of the engines over the lease term, whether the engine is restored to the required
condition by performing an overhaul at our own cost or through the payment of amounts specified in the contract and any new
contractual arrangements arising when the current lease contracts end. Where estimates of payments change, an adjustment is made to
the lease liability and the right-of-use asset. Liabilities in USD and other non-functional currencies are reported at the closing spot rates
with changes arising from a change in exchange rates reported within financing.
24 Leases continued

On transition to IFRS 16 on 1 January 2019, finance leases continued to be recognised at their 2018 closing value and operating leases
were measured at the present value of the remaining lease payments discounted using an incremental borrowing rate appropriate to the
lease. For new leases, the lease payments are discounted using the interest rate implicit in the lease or if that rate cannot be readily
determined, which is generally the case for leases in the Group, the incremental borrowing rate, being the rate required to pay to borrow
the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms,
security and conditions.
To determine the incremental borrowing rate, the Group uses a build-up approach that starts with the risk-free interest rate which is then
adjusted for credit risk to reflect the nature of the borrowing based on empirical evidence of similar external borrowings undertaken by
the Group. The rate used reflects the term and currency of the lease.
The Group is exposed to potential future increases or reductions in lease payments where the amount paid is based on an index (such as
LIBOR) or rate, which are not included in the lease liability until it takes effect. When adjustments to lease payments based on an index or
rate take effect, the lease liability is remeasured and an equivalent adjustment is made to the right-of-use asset except where the change
results from a change in floating interest rates when a revised discount rate is used that reflects changes in the interest rate.
Right-of-use assets are measured at cost comprising the following:
–– the amount of the initial measurement of the lease liability or a revaluation of the liability;
–– any lease payments made at or before the commencement date less any lease incentives received;
–– any initial direct costs; and
–– restoration costs.
Each right-of-use asset is depreciated over the shorter of its useful life and the lease term on a straight-line basis unless the lease is
expected to transfer ownership of the underlying asset to the Group, in which case the asset is depreciated to the end of the useful life of
the asset.
There was a single onerous lease contract where as a permitted practical expedient the Group has adjusted the right-of-use asset at the
date of initial application by the amount of the provision on the balance sheet at 31 December 2018.
Income from sub-leasing right-of-use assets is primarily generated from the use of engines by our Civil Aerospace customers. In a small
number of circumstances current excess property capacity is sub-let at market rates.
Leases as lessor
The Group acts as lessor for engines to Civil Aerospace customers when they require engines to support their fleets. Lease agreements
with the lessee provide protection over our assets. Usage in excess of specified limits and damage to the engine while on lease are
covered by variable lease payment structures. Lessee bankruptcy risk is managed through the Cape Town Convention on International
Interests in Mobile Equipment (including a specific protocol relating to aircraft equipment); an international treaty that creates common
standards for the registration of lease contracts and establishes various legal remedies for default in financing agreements, including
repossession and the effect of particular states’ bankruptcy laws. Engines are only leased once we confirm that appropriate insurance
documentation is established that covers the engine assets to pre-agreed amounts. The Group also leases out a small number of
properties, or parts of properties, where there is excess capacity. All contracts where we are lessor are operating leases.
2019 2018
£m £m
Operating lease income – credited within revenue from aftermarket services 1, 2 127 64
1 Includes variable lease payments of £97m that do not depend on an index or a rate.
2 Items of property, plant and equipment subject to an operating lease are disclosed in note 10.
Non-cancellable undiscounted operating lease rentals are receivable as follows:

2019 2018
£m £m
Within one year 13 23
Between one and two years 14 22
Between two and three years 12 22
Between three and four years 8 21
Between four and five years 5 17
After five years 17 55
69 160
25 Contingent liabilities

Contingent liabilities in respect of customer financing commitments are described in note 20.
In January 2017, after full cooperation, the Company concluded deferred prosecution agreements with the SFO and the US Department
of Justice and a leniency agreement with the MPF, the Brazilian federal prosecutors. Other authorities are investigating members of the
Group for matters relating to misconduct in relation to historical matters. The Group is responding appropriately. Action may be taken by
further authorities against the Company or individuals. In addition, we could still be affected by actions from customers and customers’
financiers. The Directors are not currently aware of any matters that are likely to lead to a material financial loss over and above the
penalties imposed to date, but cannot anticipate all the possible actions that may be taken or their potential consequences.
Contingent liabilities exist in respect of guarantees provided by the Group in the ordinary course of business for product delivery,
performance and reliability. The Group has, in the normal course of business, entered into arrangements in respect of export finance,
performance bonds, countertrade obligations and minor miscellaneous items. Various Group undertakings are parties to legal actions and
claims which arise in the ordinary course of business, some of which are for substantial amounts. As a consequence of the insolvency of an
insurer as previously reported, the Group is no longer fully insured against known and potential claims from employees who worked for
certain of the Group’s UK based businesses for a period prior to the acquisition of those businesses by the Group. While the outcome of
some of these matters cannot precisely be foreseen, the Directors do not expect any of these arrangements, legal actions or claims, after
allowing for provisions already made, to result in significant loss to the Group.
The Group’s share of equity accounted entities’ contingent liabilities is nil (2018: nil).
26 Related party transactions

2019 2018
£m £m
Sales of goods and services to joint ventures and associates 3,776 3,237
Purchases of goods and services from joint ventures and associates (3,685) (2,957)
Lease payments to joint ventures and associates (210) (189)
Guarantees of joint arrangements’ and associates’ borrowings 1 –
Guarantees of non-wholly owned subsidiaries’ borrowings 3 3
Dividends received from joint ventures and associates 92 105
Other income received from joint ventures and associates 1 2
Included in sales of goods and services to joint ventures and associates are sales of spare engines amounting to £277m (2018: £563m).
Profit recognised in the year on such sales amounted to £93m (2018: £157m), including profit on current year sales and recognition of
profit deferred on sales in previous years. On an underlying basis (at actual achieved rates on settled derivative transactions), the amounts
were £78m (2018: £132m). Cash receipts relating to the sale of spare engines amounted to £414m (2018: £563m).
The aggregated balances with joint ventures are shown in notes 14 and 18. Transactions with Group pension schemes are shown in note 21.
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 (pages 62 to 64) and the members of the Executive Team (described on
page 65). Remuneration for key management personnel is shown below:
2019 2018
£m £m
Salaries and short-term benefits 9 19
Post-retirement schemes – –
Share-based payments 5 5
14 24
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 95 to 104. 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.
27 Acquisitions and disposals

Acquisitions
Siemens’ eAircraft business
On the 30 September 2019, the Group completed the acquisition of the electric and hybrid-electric aerospace propulsion activities of
Siemens. On acquisition the book value of assets acquired consisted of £2.8m of property, plant and equipment and £0.2m of other assets
and liabilities. Of the £43m (€48.5m) acquisition cost, which was settled in cash, £38m has been allocated to identifiable intangible assets
and £5m to other assets and liabilities. Goodwill of £11m was recognised on the transaction.
The Group increased its shareholding in the Berlin-based electricity storage specialist, Qinous GmbH from 19.9% to 73.1% on
15 January 2020 for a consideration of €10m. The acquisition will be incorporated within our Power Systems business.
Disposals
Commercial Marine and Rolls-Royce Power Development Limited
On the 1 April 2019, the Group completed the sale of its Commercial Marine business to KONGSBERG for £547m. The business was
disclosed as a disposal group held for sale from 30 June 2018. In our 2018 half-year financial statements, we reported an impairment
charge of £160m as a result of the decision to classify Commercial Marine as a business held for sale. Upon the disposal of Commercial
Marine on 1 April 2019, and in accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates we have recycled the cumulative
currency translation reserve through the income statement in 2019. This has resulted in a cumulative currency translation gain of £98m.
On the 15 April 2019, the Group sold its shareholding in Rolls-Royce Power Development Limited to Rockland Capital Partners for £46m.
The principal activity of this company was to operate a fleet of six industrial Trent power stations in the UK.
Commercial Rolls-Royce Power
Marine Development Limited Total
£m £m £m
Proceeds
Cash consideration 547 46 593
Cash and cash equivalents disposed (118) – (118)
Net cash consideration 429 46 475
Disposal costs paid (21) (1) (22)
Cash inflow per cash flow statement 408 45 453
Assets and liabilities disposed

Intangible assets 236 – 236
Property, plant and equipment 139 7 146
Right-of-use assets 40 – 40
Deferred tax assets 7 – 7
Inventory 207 4 211
Trade receivables and other assets 210 4 214
Current tax assets 1 – 1
Lease liabilities (39) – (39)
Trade payables and other liabilities (274) (5) (279)
Deposits (payments received on account) (74) – (74)
Provisions for liabilities and charges (27) – (27)
Post-retirement scheme deficits (28) – (28)
Net assets disposed 398 10 408
The gain on disposal of businesses totalled £139m.

Commercial Rolls-Royce Power
Marine Development Limited Total
£m £m £m
Income statement
Net cash consideration 429 46 475
Less: carrying amount of net assets sold (398) (10) (408)
Profit on disposal before disposal costs 31 36 67
Disposal costs (23) (3) (26)
Profit on disposal on business before tax 8 33 41
Tax on disposal – – –
Profit on disposal of business after tax 8 33 41
Cumulative currency translation gain recycled from other
comprehensive income 98 – 98
Gain recognised in the income statement 106 33 139
27 Acquisitions and disposals continued

Disposals continued
Trigno Energy S.r.l.
On 29 January 2020, the Group exercised its put option to sell 100% of the shares held in Trigno Energy S.r.l. The transaction is expected
to complete in the first quarter of 2020. The shares will be transferred to Pilkington Italia S.r.l. for an estimated consideration of €5.6m.
Businesses held for sale

On 26 September 2019, the Group signed an agreement for the sale of the North America Civil Nuclear business to Westinghouse Electric
Company LLC. for a cash consideration of approximately $18m. The sale was completed on 31 January 2020.
As a result of the decision to classify the business as a disposal group held for sale, in accordance with IFRS 5 Non-current Assets Held for
Sale and Discontinued Operations, its carrying value was assessed against the anticipated proceeds and the disposal costs. An impairment
charge of £25m has been recognised in the income statement, of which £15m relates to goodwill and an additional £10m impairment
charge to property, plant and equipment and intangible assets. The impairment charge was allocated to the non-core businesses. The
remaining assets of £17m have been transferred to assets held for sale, together with associated liabilities of £14m at 31 December 2019.
On 17 December 2019, the Group signed a share purchase agreement with Valsoft Corp. for the sale of the Knowledge Management
System business. The consideration for the disposal is expected to be $2.6m. The sale was completed on 3 February 2020.
Disposal – 2018
L’Orange
On 1 June 2018, the Group sold its L’Orange business, part of Rolls-Royce Power Systems, to Woodward Inc. for €673m. Under the sale
agreement, the cash consideration may be adjusted by up to +/-€44m, based on L’Orange aftermarket sales over the five-year period to
31 May 2023 and this will be reviewed at each reporting date over the adjustment period, based on actual sales. No significant change has
been identified to the cash consideration at 31 December 2019. Profit on disposal of the business (net of disposal costs) was £358m.
28 Derivation of summary funds flow statement

The table below shows the derivation of the summary funds flow statement (lines marked *) on page 20 from the cash flow statement
(CFS) on page 119.
2019 2018 †
£m £m £m £m
* Underlying operating profit (see note 2) 808 616
Depreciation and impairment of property, plant and equipment 532 521
Amortisation and impairment of intangible assets 372 565
Depreciation and impairment of right-of-use assets 411 –
Impairment of goodwill (84) (155)
Acquisition accounting (163) (175)
* Depreciation and amortisation 1,068 756
* Lease payments (capital plus interest) (319) –
* Additions of intangible assets (591) (680)
* Purchases of property, plant and equipment (747) (905)
* Increase in inventories (43) (616)
Movement in receivables/payables 77 1,129
Movement in contract balances 526 363
Realised derivatives in financing (187) (465)
Revaluation of trading assets (excluding exceptional items) 158 170
* Movement on receivables/payables/contract balances (excluding Civil LTSA) 574 1,197
* Underlying Civil Aerospace LTSA contract balances 754 679
* Movement on provisions (506) (242)
* Trent 1000 insurance 173 –
* Net interest received and paid (73) (70)
* Other (41) 22
* Trading cash flow 1,057 757
* Contributions to defined benefit schemes in excess of underlying PBT charge (9) 59
* Tax (175) (248)
* Group free cash flow 873 568
Of which: Disposed entities (41) (78)
Group free cash flow (pre disposed entities) 914 646
Of which: Non-core businesses 3 (2)
Core free cash flow 911 648
* Shareholder payments (224) (219)
* Acquisition of eAircraft (43) –
* Disposal of Commercial Marine and RRPD
(2018: Disposal of L’Orange) 453 573
* Exceptional restructuring costs (216) (70)
* DPA payments (102) –
* Pension fund contribution (35) –
* IFRS 16 123 –
* Other (8) 10
* Foreign exchange (98) 54
* Change in net funds 723 916
Change in net funds 723 916

IFRS 16 impact (non cash) (123) –
Reclassification of other financial liabilities to borrowings (79) –
Change in net funds excluding IFRS 16 521 916
† The comparative information for the year ended 31 December 2018 has been re-presented to be on a comparable basis with the presentation adopted for the year
ended 31 December 2019. There is no change to trading or group free cash flow. In summary, items previously included in ‘other’ within ‘trading cash flow’, which related
to ‘movements in receivables/payables’ or movements in ‘contract balances’ have been included within those items.
During the year ended 31 December 2019, the Group received insurance receipts of £173m relating to the Trent 1000 in-service issues.
This amount has been recognised within the Group’s underlying results – see note 2.
28 Derivation of summary funds flow statement continued

Free cash flow is a measure of financial performance of the business’ cash flow to see what is available for distribution among those
stakeholders funding the business (including debt holders and shareholders). Free cash flow is calculated as trading cash flow less
recurring tax and post-employment benefit expenses. It excludes payments made to shareholders, amounts spent (or received) on business
acquisitions, SFO payments and foreign exchange changes on net funds. The Board considers that free cash flow reflects cash generated
from the Group’s underlying trading.
The table below shows a reconciliation of free cash flow to the change in cash and cash equivalents presented in the cash flow statement
on page 119.
2019 2018
£m £m £m £m Source
Change in cash and cash equivalents (413) 1,953 A
Returns to shareholders 224 219 A
Net cash flow from changes in borrowings and lease liabilities
(2018: finance leases) 1,385 (1,091) A
Increase in short-term investments – 3 A
Acquisition of Siemens’ eAircraft business 43 – A
Disposal of Commercial Marine and RRPD
(2018: Disposal of L’Orange) (453) (573) A
Other acquisitions and disposals 1 (10) B
Changes in group structure (409) (583)
Payments of financial penalties from agreements with investigating
bodies 102 – A
Exceptional restructuring expenditure 216 70 B
Pension fund contribution 35 – B
Other 4 (3) B
Capital element of lease repayments 1 (271) – A
Free cash flow 873 568
1 As IFRS 16 has been adopted with effect from 1 January 2019, no adjustments have been made to present the comparative period on a consistent basis.
Sources:
A Cash flow statement
B Cash flow statement adjusted for non-underlying items including exchange differences
29 Impact of adopting IFRS 16 Leases

For leases previously classified as finance leases, the Group recognised the carrying amount of the lease asset and lease liability
immediately before transition as the carrying amount of the right-of-use asset and the lease liability at the date of initial application.
The measurement principles of IFRS 16 are only applied after that date.
The following table reconciles the operating lease obligations under the previous accounting standard, IAS 17 Leases, to the lease liability
recorded under IFRS 16 on transition:
£m
Operating lease commitments as reported at 31 December 2018 2,343
Lease commitments at end of aero engines lease contracts previously reflected in provisions and other liabilities 515
Discounted using the incremental borrowing rate at the date of initial application (749)
Additional commitments recognised during final data review 1 180
Impact of adopting IFRS 16 2,289
Commitments relating to disposal groups (41)
At 1 January 2019 2,248
Finance lease liabilities recognised as at 31 December 2018 229
Lease liability recognised as at 1 January 2019 2,477
Of which are:
Current lease liabilities 322
Non-current lease liabilities 2,155
1 These have been offset by right-of-use assets with an equivalent value.
The recognised right-of-use assets relate to the following types of asset:

1 January
2019
£m
Land and buildings 453
Plant and equipment 106
Aircraft and engines 1,654
Total right-of-use assets 2,213
29 Impact of adopting IFRS 16 Leases continued

Condensed consolidated balance sheet
The change in accounting policy affected the following items in the balance sheet on 1 January 2019:
Previous
accounting
as at Transferred As at
31 December IFRS 16 to assets held 1 January
2018 impact for sale 1 2019
£m £m £m £m
ASSETS
Property, plant and equipment 2 4,929 (197) – 4,732
Right-of-use assets 3 – 2,254 (41) 2,213
Deferred tax assets 4 2,092 2 – 2,094
Other non-current assets 8,016 – – 8,016
Non-current assets 15,037 2,059 (41) 17,055
Current assets 16,070 – – 16,070
Assets held for sale 750 – 41 791
TOTAL ASSETS 31,857 2,059 – 33,916
LIABILITIES
Borrowings and lease liabilities (858) (295) 7 (1,146)
Trade payables and other liabilities 5 (8,292) 49 – (8,243)
Provisions for liabilities and charges 6 (1,122) 30 – (1,092)
Other current liabilities (4,579) – – (4,579)
Current liabilities (14,851) (216) 7 (15,060)
Borrowings and lease liabilities (3,804) (1,994) 34 (5,764)
Trade payables and other liabilities 5 (1,940) 60 – (1,880)
Deferred tax liabilities 4 (962) 6 – (956)
Provisions for liabilities and charges 6 (795) 45 – (750)
Other non-current liabilities (10,181) – – (10,181)
Non-current liabilities (17,682) (1,883) 34 (19,531)
Liabilities associated with assets held for sale (376) – (41) (417)
TOTAL LIABILITIES (32,909) (2,099) – (35,008)
NET LIABILITIES (1,052) (40) – (1,092)
EQUITY
Accumulated losses 7 (2,991) (40) – (3,031)
Other equity attributable to ordinary shareholders 1,917 – – 1,917
Equity attributable to ordinary shareholders (1,074) (40) – (1,114)
Non-controlling interests 22 – – 22
TOTAL EQUITY (1,052) (40) – (1,092)
1 Relates to the Commercial Marine business which was classified as held for sale at 31 December 2018. See note 27 for more details.
2 Transfer of net book value of finance leased assets to right-of-use assets.
3 Initial recognition of right-of-use assets accounted for under IFRS 16.
4 Deferred tax on the difference between the right-of-use assets measured on a retrospective basis at the Group’s incremental borrowing rate and the lease liabilities at transition date.
5 Lease-related creditors reclassified against the IFRS 16 right-of-use assets on transition.
6 Provisions related to engine residual value guarantees reclassified against IFRS 16 right-of-use assets.
7 Post-tax difference between right-of-use assets measured on a retrospective basis and the lease liabilities at the transition date.
Rolls-Royce Holdings plc Annual Report 2019 Financial statements
Company Balance Sheet
Company Statement of Changes in Equity
183
COMPANY BALANCE SHEET

At 31 December 2019
2019 2018
Notes £m £m
ASSETS
Investments – subsidiary undertakings 2 12,801 12,521
Trade receivables and other assets 3 1,870 371

Cash and cash equivalents 9 –
Current assets 1,879 371
TOTAL ASSETS 14,680 12,892
LIABILITIES
Other financial liabilities 5 (31) (29)
Current liabilities (2,259) (2,037)
NET ASSETS 12,421 10,855
EQUITY
Called-up share capital 6 386 379
Share premium account 319 268
Merger reserve 7,051 7,029
Capital redemption reserve 2,652 2,432
Other reserve 248 218
Retained earnings 1,765 529
TOTAL EQUITY 12,421 10,855
The Company has elected to take the exemption under section 408 of the Companies Act 2006 from presenting the parent company
income statement. The profit for the Company for the year was £1,498m (2018: £nil).
The Financial Statements on pages 183 to 186 were approved by the Board on 28 February 2020 and signed on its behalf by
Chief Executive Chief Financial Officer
Company’s registered number: 7524813
COMPANY STATEMENT OF CHANGES IN EQUITY

Attributable to ordinary shareholders

Capital
Share Share Merger redemption Other Retained Total
capital premium reserve reserve reserve 1 earnings 2 equity
£m £m £m £m £m £m £m
At 1 January 2019 379 268 7,029 2,432 218 529 10,855
Profit for the year ³ – – – – – 1,498 1,498
Arising on issues of ordinary shares ⁴ 7 51 244 – – – 302
Issue of C Shares – – (222) – – – (222)
Redemption of C Shares – – – 220 – (220) –
Share-based payments – direct to equity – – – – 30 (42) (12)
At 31 December 2019 386 319 7,051 2,652 248 1,765 12,421
1 Other reserve represents the value of the share-based payments in respect of employees of subsidiary undertakings for which payment has not been received.
2 Retained earnings represents the Company’s distributable reserves as defined under the Companies Act 2006.
3 During the year, the Company received an interim dividend of £1,500m (2018: nil) from its subsidiary undertaking.
4 During the year, the Company issued 28,973,262 new ordinary shares relating to the remaining three instalments for the acquisition of ITP Aero (2018: 47,556,914 new ordinary shares
relating to the first five instalments) and 7,803,043 new ordinary shares (2018: 7,460,173) to the Group’s share trust for its employee share-based payment plans with a net book value
of £66m (2018: £74m).
184 Financial statements
Notes to the Company Financial Statements
NOTES TO THE COMPANY FINANCIAL STATEMENTS
1 Accounting policies
Basis of accounting
Rolls-Royce Holdings plc (the Company) is a company incorporated and domiciled in the United Kingdom. These Financial Statements have
been prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (FRS 101) on the historical cost basis.
In preparing these Financial Statements, the Company applied the recognition, measurement and disclosure requirements of International
Financial Reporting Standards as adopted by the EU (Adopted IFRS), but makes amendments where necessary in order to comply with
the Companies Act 2006.
In these Financial Statements the Company has applied the exemptions available under FRS 101 in respect of the following disclosures:
–– a cash flow statement and related notes;
–– comparative period reconciliations for share capital;
–– the effects of new, but not yet effective accounting standards; and
–– the requirements of IAS 24 Related Party Transactions and has, therefore, not disclosed transactions between the Company and
its wholly-owned subsidiaries.
The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these
There were no changes to accounting standards that had a material impact on these Financial Statements.
The Company’s Financial Statements are presented in sterling, which is the Company’s functional currency.
As permitted by section 408 of the Companies Act 2006, a separate income statement for the Company has not been included in these
Financial Statements. As permitted by the audit fee disclosure regulations, disclosure of non-audit fees information is not included in
respect of the Company.
Investments in subsidiary undertakings

Investments included in fixed assets are investments in subsidiary companies and these are held at historical cost less provision for
impairment which is considered annually by the Directors.
Trade receivables
Trade receivables are recognised initially at the transaction price. They are subsequently measured at amortised cost using the effective
interest method, less provision for impairment. A provision for the impairment of trade receivables is established when there is objective
evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables. The Company
applies the IFRS 9 Financial Instruments simplified approach to measuring expected credit losses which uses a lifetime expected loss
allowance for all trade receivables.
Trade payables
Trade payables are recognised initially at the transaction price and subsequently measured at amortised cost using the effective
interest method.
Equity
Ordinary shares are classified as equity. Equity instruments are measured at the fair value of the cash or other resources received or
receivable, net of the direct costs of issuing the equity instruments.
As described in the Directors’ Remuneration Report on pages 95 to 104, the Company grants awards of its own shares to employees of its
subsidiary undertakings (see note 23 of the Consolidated Financial Statements). The costs of share-based payments in respect of these
awards are accounted for, by the Company, as an additional investment in its subsidiary undertakings. The costs are determined in
accordance with IFRS 2 Share-based Payment. Any payments made by the subsidiary undertakings in respect of these arrangements
are treated as a return of this investment.
Financial instruments
In accordance with IAS 32 Financial Instruments: Presentation, the Company’s C Shares are classified as financial liabilities and held
at amortised cost from the date of issue until redeemed.
2 Investments – subsidiary undertakings

£m
Cost:
At 1 January 2019 12,521
Additions 1 250
Cost of share-based payments in respect of employees of subsidiary undertakings less receipts from subsidiaries in
respect of those payments 30
At 31 December 2019 12,801
1 Additions relate to investments in Rolls-Royce plc, relating to the remaining three instalments for the Group’s acquisition of ITP Aero.
Details of the Company’s subsidiary undertakings and joint venture and associates undertakings are listed on pages 187 to 193.
Rolls-Royce Holdings plc Annual Report 2019 Financial statements
Notes to the Company Financial Statements 185
2 Investments – subsidiary undertakings continued

The carrying value of the Company’s investments in subsidiary undertakings has been tested for impairment in accordance with IAS 36
Impairment of Assets. The carrying value is compared to the asset’s recoverable amount and has been assessed by reference to value in
use. The value in use has been calculated based upon a discounted cash flow methodology using the most recent forecast prepared by
management of the Rolls-Royce Holdings plc group. Cash flows beyond the five-year period have been assumed to grow at 2.0% and
discounted using a pre-tax discount rate of 12.6%. The key underlying assumptions in the cash flow projections are assumed market share,
programme timings, unit cost assumptions, discount rates and foreign exchange rates. No impairment was identified.
The Directors do not consider that any reasonably possible changes in the key assumptions would cause the value in use of the investment
in subsidiary undertakings to fall below its carrying value.
3 Trade receivables and other assets

2019 2018
£m £m
Amounts owed by – subsidiary undertakings 1,870 371
Amounts owed by subsidiary undertakings are related to dividends receivable from Rolls-Royce Group Limited (formerly Rolls-Royce
Group plc). The balance is short term in nature and Rolls-Royce Group Limited is the immediate parent undertaking of the Rolls-Royce plc
group. In accordance with IFRS 9, a provision for impairment of £1m has been recognised as at 31 December 2019 (2018: £nil) in respect of
this balance.
4 Trade payables and other liabilities

2019 2018
£m £m
Amounts owed to – subsidiary undertakings 2,228 2,008
Amounts owed to subsidiary undertakings are interest-free and repayable on demand.
5 Financial liabilities
C Shares
Movements during the year were as follows:
C Shares Nominal
of 0.1p value
millions £m
At 1 January 2019 29,071 29
Issued 221,954 222
Redeemed (220,417) (220)
At 31 December 2019 30,608 31
The rights attaching to C Shares are set out on page 206.
6 Share capital
Non-equity Equity
Ordinary
Special Preference Nominal shares of Nominal
Share shares of value 20p each value
of £1 £1 each £m Millions £m
Issued and fully paid
At 1 January 2019 1 – – 1,896 379
Shares issued to employee share trust – – – 6 1
Shares issued in relation to the acquisition of ITP Aero – – – 29 6
At 31 December 2019 1 – – 1,931 386
The rights attaching to each class of share are set out on page 206.
In accordance with IAS 32, the Company’s non-cumulative redeemable preference shares (C Shares) are classified as financial liabilities.
Accordingly, movements in C Shares are included in note 5.
186 Financial statements
Notes to the Company Financial Statements
7 Reconciliation of net assets between Rolls-Royce Holdings plc Group and Company
At 31 December 2019, the Rolls-Royce Holdings plc consolidated group had net liabilities of £3.4bn (2018: £1.1bn) compared to £12.4bn
(2018: £10.9bn) of net assets of the Company. The Company is a holding company and does not trade in its own right. As set out in note 2
we have assessed the carrying value of the Company’s investment in subsidiaries, which supports the recovery of those investments.
The key drivers of the difference between the Company and consolidated group net balance sheet positions are as follows:
–– The Company was created through a Scheme of Arrangement and incorporated in 2011. On incorporation, the value of the Company’s
investment in subsidiaries was based on the market capitalisation of the Rolls-Royce group. The Group’s consolidated financial
statements are prepared on a historical cost basis except where Adopted IFRS requires a valuation basis to be applied. See page 123
for further details.
–– The adoption of IFRS 15 at 1 January 2017 reduced the Group’s net balance sheet position by £5.3bn and the pension buy-in (see note 21
in the Consolidated Financial Statements) reduced the Group’s net balance sheet position by circa £600m in 2019. Neither of these
impacted the Company; and
–– The mark-to-market loss on the foreign exchange hedge book of £3.1bn is recorded in a subsidiary of the Company and not in the
Company itself.
8 Contingent liabilities
Where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within its group,
the Company considers these to be insurance arrangements, and accounts for them as such. In this respect, the Company treats the
guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment
under the guarantee.
At 31 December 2019, these guarantees amounted to £3,085m (2018: £3,982m).
9 Other information
Employees
The Company had no employees in 2019 (2018: none).
Shares in the Company have been granted to employees of the Group as part of share-based payment plans, and are charged in the
employing company.
Emoluments of Directors
The remuneration of the Directors of the Company is shown below, further information is in the Directors’ Remuneration Report on pages
95 to 104.
2019 2018
Highest paid Other Highest paid Other
director directors Total director directors Total
£000 £000 £000 £000 £000 £000
Remuneration 2,080 2,754 4,834 2,209 2,733 4,942
Gains made on share options 1,079 714 1,793 1,734 1,644 3,378
Company contributions to pension schemes – – – – – –
3,159 3,468 6,627 3,943 4,377 8,320
No Director accrued any retirement benefits in the year (2018: nil).
Subsidiaries 187
SUBSIDIARIES
As at 31 December 2019, the companies listed below and on the following pages are indirectly held by Rolls-Royce Holdings plc except
Rolls-Royce Group Limited # which is 100% directly owned by Rolls-Royce Holdings plc. The financial year end of each company is
31 December unless otherwise indicated.
% of
Class class
Company name Address of shares held
Aeromaritime America, Inc. M&H Agent Services, Inc., 1850 North Central Avenue, Suite 2100, Common 100
Phoenix, Arizona 85004, United States
Aeromaritime Mediterranean Limited 7 Industrial Estate, Hal Far, Birzebbuga, BBG 3000, Malta Ordinary 100
Aerospace Transmission Technologies GmbH ** Adelheidstrasse 40, D-88046, Friedrichshafen, Germany Capital Stock 50
Amalgamated Power Engineering Limited * Derby 1 Deferred 100
Ordinary 100
Bergen Engines AS Hordvikneset 125, N-5108, Hordvik, Bergen 1201, Norway Ordinary 100
Bergen Engines Bangladesh Private Limited Green Grandeur, 6th Floor, Plot no.58 E, Kamal Ataturk Avenue Ordinary 100
Banani, C/A Dhaka, 1213, Bangladesh
Bergen Engines BV Werfdijk 2, 3195HV Pernis, Rotterdam, Netherlands Ordinary 100
Bergen Engines Denmark A/S Østre Havnepromenade 34 9000 Ålborg, Denmark Ordinary 100
Bergen Engines India Private Limited 3 52-b, 2nd Floor, Okhla Industrial Estate, Phase III, Ordinary 100
New Delhi 110020, India
Bergen Engines Limited Derby 1 Ordinary 100
Bergen Engines PropertyCo AS Hordvikneset 125, N-5108, Hordvik, Bergen 1201, Norway Ordinary 100
Bergen Engines S.L. Calle Dinamarca s/n (esquina Calle Alemania), Poligono Social 100
Industrial de Constanti, 43120 Constanti, Tarragona, Spain Participation
Bergen Engines S.r.l. Via Castel Morrone 13, 16161, Genoa, Italy Social Capital 100
Bristol Siddeley Engines Limited * Derby 1 Ordinary 100
Brown Brothers & Company Limited Taxiway, Hillend Industrial Estate, Dalgety Bay, Dunfermline, Ordinary 100
Fife, KY11 9JT, Scotland
C.A. Parsons & Company Limited * Derby 1 Ordinary 100
Data Systems & Solutions, LLC 4 Wilmington 2 Partnership 100
(no equity)
Derby Specialist Fabrications Limited * Derby 1 Ordinary 100
Europea Microfusioni Aerospaziali S.p.A. Zona Industriale AS1, 83040 Morra de Sanctis, Avellino, Italy Ordinary 100
Heaton Power Limited * Derby 1 Ordinary 100
Industria de Tuberías Aeronáuticas Acceso IV, No.6B, Zona Industrial Benito Juárez, Querétaro, Class A 100
México S.A. de C.V. 76120, Mexico
Industria de Tuberías Aeronáuticas S.A.U. Pabellón Industrial, Torrelarrgoiti, Parcela 5H, Naves 7 a 10, Ordinary 100
Zamudia, Vizcaya, Spain
Industria de Turbo Propulsores S.A. Parque Technológico Edificio 300, 48170 Zamudio, Vizcaya, Spain Ordinary 100
ITP Engines UK Limited The Whittle Estate, Cambridge Road, Whetstone, Leicester, Ordinary 100
LE8 6LH, England
ITP Externals India Private Ltd Plot 60/A, IDA Gandhi Nagar, Hyderabad, 500037, India Ordinary 100
ITP Externals S.L.U. Pabellón Industrial, Polígono Ugaldeguren I, PIIIA, Ordinary 100
Pab 1–2 Zamudio, Vizcaya, Spain
ITP Ingeniería y Fabricación S.A. de C.V. Acceso IV, No.6D, Zona Industrial Benito Juárez, Querétaro, Class A 100
76120, Mexico Class B 100
ITP México Fabricación S.A. de C.V. Acceso IV, No.6, Zona Industrial Benito Juárez, Querétaro, Class A 100
76120, Mexico
ITP México S.A. de C.V. Acceso IV, No.6, Zona Industrial Benito Juárez, Querétaro, Fixed capital B 100
76120, Mexico Variable capital 100
B
ITP Next Generation Turbines S.L.U. Parque Technológico Edificio 300, 48170 Zamudio, Vizcaya, Spain Ordinary 100
John Thompson Cochran Limited * Taxiway, Hillend Industrial Estate, Dalgety Bay, Dunfermline, Fife, 6% Cumulative 100
KY11 9JT, Scotland Preference
Ordinary 100
Kamewa AB * (in liquidation) Box 1010, S-68129, Kristinehamn, Sweden Ordinary 100
Kamewa Holding AB * (in liquidation) Box 1010, S-68129, Kristinehamn, Sweden Ordinary 100
# Re-registered as a private company on 5 December 2019.
* Dormant entity.
** Though the interest held is 50%, the Company controls the entity (see note 1 accounting policies) and, as a result, consolidates the entity and records a non-controlling interest.
1 Moor Lane, Derby, DE24 8BJ, England.
2 Corporation Service Company, 251 Little Falls Drive, Wilmington, Delaware 19808, United States.
3 Reporting year end is 31 March.
4 Sold to Westinghouse with effect from 31 January 2020 (see page 178).
Subsidiaries
% of
Class class
Karl Maybach-Hilfe GmbH Maybachplatz 1, 88045, Friedrichshafen, Germany Capital Stock 100
MTU Africa (Proprietary) Limited 36 Marconi Street, Montague Gardens, Cape Town, 7441, Capital Stock 100
South Africa
MTU America Inc. Wilmington 2 Ordinary 100
MTU Asia PTE Limited 10 Tukang Innovation Drive, Singapore 618302 Ordinary 100
MTU Benelux B.V. Merwedestraat 86, 3313 CS, Dordrecht, Netherlands Ordinary 100
MTU China Company Limited Room 1803 18/F Ascendas Plaza, No.333 Tian Yao Qiao Road, Xuhai Ordinary 100
Distrcit, Shanghai, 200030, China
MTU do Brasil Limitada Via Anhanguera, KM 29203, 05276-000 Sao Paulo – SP, Brazil Ordinary 100
MTU Engineering (Suzhou) Company Limited 9 Long Yun Road, Suzhou Industrial Park, Suzhou 215024, Ordinary 100
Jiang Su, China
MTU France S.A.S. Immeuble Colorado, 8/10 rue de Rosa Luxembourg-Parc des Ordinary 100
Bellevues 95610, Erangy-sur-Oise, France
MTU Friedrichshafen GmbH Maybachplatz 1, 88045, Friedrichshafen, Germany Capital Stock 100
MTU Hong Kong Limited Room 1006, 10/F, Hang Seng Tsimshatsui Building, 18 Carnarvon Ordinary 100
Road, Tsimshatsui, Kowloon, Hong Kong
MTU Ibérica Propulsión y Energia S.L. Calle Copérnico 26–28, 28823 Coslada, Madrid, Spain Ordinary 100
MTU India Private Limited 3 6th Floor, RMZ Galleria, S/Y No. 144 Bengaluru, Bangalore, Ordinary 100
Kamataka 560,064, India
MTU Israel Limited 4 Ha’Alon Street, South Building, Third Floor, Ordinary 100
4059300 Kfar Neter, Israel
MTU Italia S.r.l. Via Aurelia Nord, 328, 19021 Arcola (SP), Italy Capital Stock 100
MTU Japan Co. Limited Resorttrust Building 4-14-3, Nishitenma Kita-ku, Ordinary 100
Osaka 530-0047, Japan
MTU Korea Limited 22nd Floor, Olive Tower, 41 Sejongdaero 9 gil, Junggu, Ordinary 100
100-737 Seoul, Republic of Korea
MTU Middle East FZE S3B5SR06, Jebel Ali Free Zone, South P.O. Box 61141, Dubai, Ordinary 100
United Arab Emirates
MTU Motor Türbin Sanayi ve Ticaret. A.Ş. Hatira Sokak, No. 5, Ömerli Mahellesi, 34555 Arnavutköy, Ordinary 100
Istanbul, Turkey
MTU Onsite Energy GmbH Dasinger Strasse 11, 86165, Augsburg, Germany Capital Stock 100
MTU Onsite Energy Systems GmbH Rotthofer Strasse 8, 94099 Ruhstorf a.d. Rott, Germany Capital Stock 100
MTU Polska Sp. z o.o. Ul. Śląska, Nr 9. Raum, Ort: Stargard Szczeciński, Plz: 73–110, Poland Ordinary 100
MTU Power Systems Sdn. Bhd Level 10 Menara LGB, 1 Jalan Wan Kadir Taman Tun Dr Ismail, Ordinary 100
6000 Kuala Lumpur, Malaysia
MTU Reman Technologies GmbH Friedrich-List-Strasse 8, 39122 Magdeburg, Germany Capital Stock 100
MTU Rus Limited Liability Company Shabolovka Street 2, 119049, Moscow, Russian Federation Ordinary 100
MTU South Africa (Proprietary) Limited 36 Marconi Street, Montague Gardens, Cape Town, 7441, South Ordinary 100
Africa
MTU UK Limited Derby 1 Ordinary 100
NEI International Combustion Limited * Derby 1 Ordinary 100
NEI Mining Equipment Limited * Derby 1 Ordinary 100
NEI Nuclear Systems Limited * Derby 1 Ordinary 100
NEI Parsons Limited * Derby 1 Ordinary 100
NEI Peebles Limited * Derby 1 Ordinary 100
NEI Power Projects Limited * Derby 1 Ordinary 100
Nightingale Insurance Limited Maison Trinity, Trinity Square, St. Peter Port, GY1 4AT, Guernsey Ordinary 100
PKMJ Technical Services, Inc. 4 Wilmington 2 Ordinary 100
Power Jets (Research and The Whittle Estate, Cambridge Road, Whetstone, Leicester, Ordinary 100
Development) Limited * LE8 6LH, England
Powerfield Limited Derby 1 Ordinary 100
Precision Casting Bilbao S.A.U. Calle El Barracón 1, Baracaldo, Vizcaya, 48910 Spain Ordinary 100
* Dormant entity.
Subsidiaries 189
% of
Class class
PT MTU Indonesia Secure Building Blok B, Jl. Raya Protokol Halim, Ordinary 100
Perdanakusuma, Jakarta, 13610, Indonesia
PT Rolls-Royce Secure Building Blok B, Jl. Raya Protokol Halim, Ordinary 100
Perdanakusuma, Jakarta, 13610, Indonesia
Rolls-Royce (Ireland) Unlimited Company * Ulster International Finance, 1st Floor IFSC House, IFSC, Ordinary 100
Dublin 1, Ireland
Rolls-Royce (Thailand) Limited 4, 4.5 Level 12, Suite 1299, Rajdamri Road, Pathumwan, Bangkok, Ordinary 100
10330, Thailand
Rolls-Royce Aero Engine Services Limited * Derby 1 Ordinary 100
Rolls-Royce Australia Pty Limited Suite 102, 2–4 Lyonpark Road, Macquarie Park, NSW 2113, Australia Ordinary 100
Rolls-Royce Australia Services Pty Limited Suite 102, 2–4 Lyonpark Road, Macquarie Park, NSW 2113, Australia Ordinary 100
Rolls-Royce Brasil Limitada Rua drive Cincinato Braga No. 47, Planalto District, São Bernando Quotas 100
do Campo, SP, 09890-900, Brazil
Rolls-Royce Canada Limited 9500 Côte de Liesse, Lachine, Québec H8T 1A2, Canada Common Stock 100
Rolls-Royce Chile SpA Alcantra 200 office 601, Piso 6, C.O, 7550159 Las Condes, Ordinary 100
Santiago, Chile
Rolls-Royce China Holding Limited 305–306 Indigo Building 1, 20 Jiuxianqiao Road, Beijing, Registered 100
100016, China Capital
Rolls-Royce Civil Nuclear Canada Limited 4 597 The Queensway, Peterborough Ontario K9J 7J6, Canada Common Shares 100
Rolls-Royce Civil Nuclear S.A.S. 23 chemin du Vieux Chêne, 38240, Meylan, France Ordinary 100
Rolls-Royce Commercial Aero Derby 1 Ordinary 100
Engines Limited *
Rolls-Royce Control Systems Holdings Co Wilmington 2 Common Stock 100
Rolls-Royce Controls and Data Services c/o Deloitte, 80 Queen Street, Auckland Central, Auckland 1010, Ordinary 100
(NZ) Limited New Zealand
Rolls-Royce Controls and Data Services Derby 1 Ordinary 100
(UK) Limited
Rolls-Royce Controls and Data Services, Inc. 5 Wilmington 2 Common Stock 100
Rolls-Royce Controls and Data Derby 1 Ordinary 100
Services Limited*
Rolls-Royce Corporation Wilmington 2 Common Stock 100
Rolls-Royce Crosspointe LLC Wilmington 2 Partnership 100
(no equity)
Rolls-Royce Defense Products Wilmington 2 Common Stock 100
and Solutions, Inc.
Rolls-Royce Defense Services, Inc. Wilmington 2 Common Stock 100
Rolls-Royce Deutschland Ltd & Co KG Eschenweg 11, 15827 Blankenfelde-Mahlow, Germany Capital Stock 100
Rolls-Royce Electrical Norway AS Jarleveien 8A, 7041, Trondheim 500, Norway Ordinary 100
Rolls-Royce Energy Angola, Limitada * Rua Rei Katyavala, Edificio Rei Katyavala, Entrada B, Piso 8, Quota 100
Luanda, Angola
Rolls-Royce Energy Systems Inc. Wilmington 2 Common Stock 100
Rolls-Royce Engine Services Holdings Co. Wilmington 2 Common Stock 100
Rolls-Royce Engine Services Limitada Inc. Bldg. 06 Berthaphil Compound, Jose Abad Santos Avenue, Capital Stock 100
(in liquidation) Clark Special Economic Zone, Clark, Pampanga, Philippines
Rolls-Royce Erste Beteiligungs GmbH Eschenweg 11, 15827 Blankenfelde-Mahlow, Germany Capital Stock 100
Rolls-Royce Finance Company Limited Derby 1 Deferred 100
Ordinary 100
Rolls-Royce Finance Holdings Co. Wilmington 2 Common Stock 100
Rolls-Royce Fuel Cell Systems Limited Derby 1 Ordinary 100
Rolls-Royce General Partner Limited * Derby 1 Ordinary 100
Rolls-Royce General Partner (Ireland) Limited 29 Earlshot Terrace, Dublin 2, Ireland Ordinary 100
* Dormant entity.
5 Sold to Valsoft Corporation Inc on 3 February 2020.
Subsidiaries
% of
Class class
Rolls-Royce Group Limited # Kings Place, 90 York Way, London, N1 9FX, England Ordinary 100
Ordinary A 100
Rolls-Royce High Temperature Corporation Service Company, 2710 Gateway Oaks Drive, Ordinary 100
Composites, Inc. Suite 150N, Sacramento, California 95833, United States
Rolls-Royce Holdings Canada Inc. 9500 Côte de Liesse, Lachine, Québec H8T 1A2, Canada Common C 100
Rolls-Royce Hungary Kft Gizella U. 51–57, 1143 Budapest, Hungary Cash shares 100
Rolls-Royce India Limited *,3 Derby 1 Ordinary 100
Rolls-Royce India Private Limited 3 Birla Tower West, 2nd Floor 25, Barakhamba Road, New Delhi, Equity 100
110001, India
Rolls-Royce Industrial & Marine Derby 1 Ordinary 100
Power Limited *
Rolls-Royce Industrial Power (India) Limited *,3 Derby 1 Ordinary 100
Rolls-Royce Industrial Power Engineering Derby 1 Ordinary 100
(Overseas Projects) Limited
Rolls-Royce Industries Limited * Derby 1 Ordinary 100
Rolls-Royce International Limited Derby 1 Ordinary 100
Rolls-Royce International s.r.o. Pobřežní 620/3, Postal code 186 00, Karlin – Prague 8, Ordinary 100
Czech Republic
Rolls-Royce Japan Co., Limited 31st Floor, Kasumigaseki Building, 3-2-5 Kasumigaseki, Ordinary 100
Chiyoda-Ku, Tokyo, 100-6031, Japan
Rolls-Royce Leasing Limited Derby 1 Ordinary 100
Rolls-Royce Malaysia Sdn. Bhd. C-2-3A TTDI Plaza, Jalan Wan Kadir 3, Taman Tun Dr Ismail, 6000 Ordinary 100
Kuala Lumpur, Malaysia
Rolls-Royce Marine North America, Inc. Wilmington 2 Common Stock 100
Rolls-Royce Mexico Administration S. de R.L. Boulevard Adolfo Ruiz Cortinez 3642-403, Fracc Costa de Oro, Ordinary 100
de C.V. Verzcruz CP 94299 6, Mexico
Rolls-Royce Mexico S. de R.L. de C.V. Boulevard Adolfo Ruiz Cortinez 3642-403, Fracc Costa de Oro, Ordinary 100
Verzcruz CP 94299 6, Mexico
Rolls-Royce Military Aero Engines Limited *,3 Derby 1 Ordinary 100
Rolls-Royce New Zealand Limited c/o Deloitte, 80 Queen Street, Auckland Central, Auckland 1010, Ordinary 100
New Zealand
Rolls-Royce North America (USA) Holdings Co. Wilmington 2 Common Stock 100
Rolls-Royce North America Holdings, Inc. Wilmington 2 Common Stock 100
Rolls-Royce North America, Inc. Wilmington 2 Common Stock 100
Rolls-Royce North America Ventures, Inc. Wilmington 2 Common Stock 100
Rolls-Royce North American Technologies, Inc. Wilmington 2 Common Stock 100
Rolls-Royce Nuclear Field Services ZA Notre-Dame, 84430, Mondragon, France Ordinary 100
France S.A.S. 4
Rolls-Royce Nuclear Field Services, Inc. 4 Corporation Service Company, 80 State Street, Albany, New York Common Stock 100
12207, United States
Rolls-Royce Oman LLC Bait Al Reem, Business Office #131, Building No 81, Way No 3409, Ordinary 100
Block No 234, Al Thaqafa Street, Al Khuwair, PO Box 20,
Postal Code 103, Oman
Rolls-Royce Operations (India) Private Limited Birla Tower West, 2nd Floor, 25 Barakhamba Road, New Delhi, Ordinary 100
110001, India
Rolls-Royce Overseas Holdings Limited Derby 1 Ordinary 100
Ordinary A 100
Rolls-Royce Overseas Investments Limited Derby 1 Ordinary 100
Rolls-Royce Placements Limited Derby 1 Ordinary 100
Rolls-Royce plc Kings Place, 90 York Way, London, N1 9FX, England Ordinary 100
Rolls-Royce Power Engineering plc Derby 1 Ordinary 100
Rolls-Royce Power Systems AG Maybachplatz 1, 88045, Friedrichshafen, Germany Ordinary 100
# Re-registered as a private company on 5 December 2019.
* Dormant entity.
Subsidiaries 191
% of
Class class
Rolls-Royce Saudi Arabia Limited PO Box 88545, Riyadh, 11672, Saudi Arabia Cash shares 100
Rolls-Royce Retirement Savings Derby 1 Ordinary 100
Trust Limited *,3
Rolls-Royce Singapore Pte. Limited 6 Shenton Way, #33-00 OUE, Downtown Singapore 068809, Ordinary 100
Singapore
Rolls-Royce Sp z.o.o. Opolska 100 31-323, Krakow, Poland Ordinary 100
Rolls-Royce Submarines Limited Atlantic House, Raynesway, Derby, DE21 7BE, Derbyshire, England Ordinary 100
Rolls-Royce Technical Support Sarl Centreda I, Avenue Didier Daurat, 31700 Blagnac, Ordinary 100
Toulouse, France
Rolls-Royce Total Care Services Limited Derby 1 Ordinary 100
Rolls-Royce Turkey Power Solutions Industry Levazim Mahellesi, Koru Sokagi, Zorlu Center, No. 2 Teras Evler T2 Cash shares 100
and Trade Limited D:204, Zincirlikuyu, Besiktas, Istanbul 34340, Turkey
Rolls-Royce UK Pension Fund Derby 1 Ordinary 100
Trustees Limited *
Rolls-Royce Zweite Beteiligungs GmbH Eschenweg 11, 15827 Blankenfelde-Mahlow, Germany Capital Stock 100
Ross Ceramics Limited Derby 1 Ordinary 100
Sharing in Growth UK Limited ** Derby 1 Limited by 100
guarantee
Spare IPG 20 Limited * Derby 1 Ordinary 100
Spare IPG 32 Limited * Derby 1 7.25% 100
Cumulative
Preference
Ordinary 100
The Bushing Company Limited * Derby 1 Ordinary 100
Timec 1487 Limited * Derby 1 Ordinary 100
Trigno Energy S.R.L. Zona Industriale, San Salvo, 66050, Italy Ordinary 100
Turbine Surface Technologies Limited ** Derby 1 Ordinary A Nil
Ordinary B 100
Turborreactores S.A. de C.V. Acceso IV, No.6C, Zona Industrial Benito Juárez, Querétaro, Class A 100
76120, Mexico Class B 100
Vessel Lifter, Inc. * Corporation Service Company, 1201 Hays Street, Tallahassee, Common Stock 100
Florida 32301, United States
Vinters Defence Systems Limited * Derby 1 Ordinary 100
Vinters Engineering Limited Derby 1 Ordinary 100
Vinters International Limited Derby 1 Ordinary 100
Vinters Limited Derby 1 Ordinary 100
Vinters-Armstrongs (Engineers) Limited * Derby 1 Ordinary 100
Vinters-Armstrongs Limited * Derby 1 Ordinary B 100
* Dormant entity.
** The entity is not included in the consolidation as Rolls-Royce plc does not have a beneficial interest in the net assets of the entity.
Joint Ventures and Associates
JOINT VENTURES AND ASSOCIATES

Group
Class % of interest
Company name Address of shares class held held %
Aero Gearbox International SAS ** 18 Boulevard Louis Sequin, 92700 Colombes, France Ordinary 50 50
Airtanker Holdings Limited Airtanker Hub, RAF Brize Norton, Carterton, Oxfordshire, Ordinary 20 20
OX18 3LX, England
Airtanker Services Limited Airtanker Hub, RAF Brize Norton, Carterton, Oxfordshire, Ordinary 22 22
OX18 3LX, England
Alpha Leasing (US) (No.2) LLC Wilmington 2 Partnership – 50
(no equity held)
(no equity held)
(no equity held)
(no equity held)
(no equity held)
(no equity held)
Alpha Leasing (US) LLC Wilmington 2 Partnership – 50
(no equity held)
Alpha Partners Leasing Limited 1 Brewer’s Green, London, SW1H 0RH, England Ordinary A 100 50
CFMS Limited 43 Queen Street, Bristol, BS1 4QP, England Limited by – 50
guarantee
Clarke Chapman Portia Port Services Maritime Centre, Port of Liverpool, Liverpool, L21 1LA, Ordinary A 100 50
Limited England
Consorcio Español para el Avda. de Aragón 404, 28022 Madrid, Spain Partnership – 50
Desarrollo Industrial del Helicóptero de (no equity held)
Ataque Tigre, A.I.E.
Consorcio Español para el Paseo de John Lennon, s/n, edificio T22, 2ª planta, Partnership – 50
Desarrollo Industrial del Programa Getafe, Madrid, Spain (no equity held)
Eurofighter, A.I.E.
Egypt Aero Management Services EgyptAir Engine Workshop, Cairo International Airport, Ordinary 50 50
(in liquidation) Cairo, Egypt
EPI Europrop International GmbH Dachauer Strasse 655, 80995, Munich, Germany Capital Stock 44 44
EPIX Power Systems, LLC The Corporation Trust Company, 1209 Orange Street, Partnership – 50
Wilmington, Delaware 19801, United States (no equity held)
Eurojet Turbo GmbH Lilienthalstrasse 2b, 85399 Halbergmoos, Germany Capital Stock 46 46
Force MTU Power Systems Private Mumbai Pune Road, Akurdi, Pune, Maharashtra 411035, Capital Stock 49 49
Limited India
Genistics Holdings Limited Derby 1 Ordinary A 100 50
Global Aerospace Centre for Icing 1000 Marie-Victorin Boulevard, Longueuil Québec Ordinary 50 50
and Environmental Research Inc. ** J4G 1A1, Canada
Hong Kong Aero Engine 33rd Floor, One Pacific Place, 88 Queensway, Ordinary 50 50
Services Limited Hong Kong
International Aerospace Survey No. 3 Kempapura Village, Varthur Hobli, Ordinary 50 50
Manufacturing Private Limited **,3 Bangalore, KA 560037, India
Light Helicopter Turbine Suite 119, 9238 Madison Boulevard, Madison, Alabama Partnership – 50
Engine Company 35758, United States (no equity held)
(unincorporated partnership)
MEST Co., Limited 97 Bukjeonggongdan 2-gil, Yangsan-si, Normal 46.8 46.8
Gyeongsangnam-do, 50571, Republic of Korea
Metlase Limited Unipart House, Garsington Road, Cowley, Oxford, Ordinary B 100 20
OX4 2PG, England
MTU Power Systems Sdn. Bhd. Level 10 Menara LGB, 1 Jalan Wan Kadir Taman Tun Dr Ordinary A 100 49
Ismail 6000 Kuala Lumpur, Malaysia
MTU Turbomeca Rolls-Royce GmbH Am Söldnermoos 17, 85399 Hallbergmoos, Germany Capital Stock 33.3 33.3
** These
entities are accounted for as joint operations (see note 1 accounting policies).
1 Moor Lane, Derby, Derbyshire DE24 8BJ, England.
Joint Ventures and Associates 193
Group
Class % of interest
Company name Address of shares class held held %
MTU Turbomeca Rolls-Royce Am Söldnermoos 17, 85399 Hallbergmoos, Germany Capital Stock 50 50
ITP GmbH
MTU Yuchai Power Company Limited No 7 Danan Road, Yuzhou, Yulin, Guangxi, China, Capital Stock 50 50
537005, China
N3 Engine Overhaul Services Gerhard-Höltje-Strasse 1, D-99310, Arnstadt, Germany Capital Stock 50 50
GmbH & Co KG
N3 Engine Overhaul Services Gerhard-Höltje-Strasse 1, D-99310, Arnstadt, Germany Capital Stock 50 50
Verwaltungsgesellschaft Mbh
Qinous GmbH Villa Rathenau, Wilhelminenhofstrasse 75, Preference 22 22
12459 Berlin, Germany
Rolls Laval Heat Exchangers Limited * Derby 1 Ordinary 50 50
Rolls-Royce & Partners Finance (US) Wilmington 2 Partnership – 50
(No 2) LLC (no equity held)
Rolls-Royce & Partners Finance (US) Wilmington 2 Partnership – 50
LLC (no equity held)
SAFYRR Propulsion Limited Derby 1 B Shares 100 50
Shanxi North MTU Diesel Co. Limited No.97 Daqing West Road, Datong City, Ordinary 49 49
Shanxi Province, China
Singapore Aero Engine Services 11 Calshot Road, 509932, Singapore Ordinary 50 50
Private Limited
Taec Ucak Motor Sanayi AS Buyukdere Caddesi, Prof. Ahmet Kemal Aru, Sokagi Cash Shares 49 49
Kaleseramik, Binasi Levent No. 4, Besiktas, Istanbul,
Turkey
Techjet Aerofoils Limited ** Tefen Industrial Zone, PO Box 16, 24959, Israel Ordinary A 50
50
Ordinary B 50
Texas Aero Engine Services LLC The Corporation Trust Company, 1209, Orange Street, Partnership – 50
Wilmington, Delaware 19801, United States (no equity held)
TRT Limited Derby 1 Ordinary B 100 49.9
Turbo-Union GmbH Lilienthalstrasse 2b, 85399 Hallbergmoos, Munich, Capital Stock 40 40
Germany
UK Nuclear Restoration Limited * Booths Park, Chelford Road, Knutsford, Cheshire, Ordinary 20 20
WA16 8QZ, England
Xian XR Aero Components Co., Xujiawan, Beijiao, Po Box 13, Xian 710021, Shaanxi, Ordinary 49 49
Limited ** China
* Dormant company.
** These
entities are accounted for as joint operations (see note 1 accounting policies).
194 Other Information
Independent Auditors’ Report
INDEPENDENT AUDITORS’ REPORT

to the members of Rolls-Royce Holdings plc
Report on the audit of the financial statements Consolidated and Company Statements of Changes in Equity for
the year then ended; and the notes to the Consolidated and
Company Financial Statements, which include a description of the
Opinion significant accounting policies.
In our opinion:
Our opinion is consistent with our reporting to the Audit Committee.
–– Rolls-Royce Holdings plc’s Consolidated Financial Statements
and Company Financial Statements (the “financial statements”) Basis for opinion
give a true and fair view of the state of the Group’s and of the We conducted our audit in accordance with International Standards
Company’s affairs as at 31 December 2019 and of the Group’s loss on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities
and cash flows for the year then ended; under ISAs (UK) are further described in the Auditors’ responsibilities
–– the Consolidated Financial Statements have been properly for the audit of the financial statements section of our report. We
prepared in accordance with International Financial Reporting believe that the audit evidence we have obtained is sufficient and
Standards (IFRSs) as adopted by the European Union; appropriate to provide a basis for our opinion.
–– the Company Financial Statements have been properly prepared Independence

in accordance with United Kingdom Generally Accepted We remained independent of the Group in accordance with the
Accounting Practice (United Kingdom Accounting Standards, ethical requirements that are relevant to our audit of the financial
comprising FRS 101 “Reduced Disclosure Framework”, and statements in the UK, which includes the FRC’s Ethical Standard, as
applicable law); and applicable to listed public interest entities, and we have fulfilled our
other ethical responsibilities in accordance with these requirements.
–– the financial statements have been prepared in accordance with
the requirements of the Companies Act 2006 and, as regards the To the best of our knowledge and belief, we declare that non-audit
Group financial statements, Article 4 of the IAS Regulation. services prohibited by the FRC’s Ethical Standard were not provided
to the Group or the Company.
We have audited the financial statements, included within the
Annual Report, which comprise: the Consolidated and Company Other than those disclosed in note 7 on page 145, we have provided
Balance Sheets at 31 December 2019; the Consolidated Income no non-audit services to the Group or the Company in the period
Statement and Consolidated Statement of Comprehensive Income; from 1 January 2019 to 31 December 2019.
the Consolidated Cash Flow Statement for the year then ended; the
Our audit approach

Overview
—— Overall Group materiality: £75 million (2018: £56 million), based on 0.5% of total underlying revenue.
—— Overall Company materiality: £126 million (2018: £128 million), based on 1.0% of total assets. This exceeds
Materiality Group materiality as it is determined on a different basis given the nature of the Company’s operations.
For the purposes of the audit of the Consolidated Financial Statements, our procedures, including those
on balances in the Company, are undertaken with reference to Group materiality.
—— Following our assessment of the risks of material misstatement of the Consolidated Financial Statements
we subjected 30 individual components (including three joint ventures) to full scope audits for Group
Audit Scope purposes, which following an element of consolidation, equates to 14 Group reporting opinions. In
addition seven components performed targeted specified procedures.
—— In addition, the Group engagement team audited the Company and other centralised functions including
those covering the Group treasury operations, corporate costs, corporate taxation, post-retirement
benefits and goodwill and intangible asset impairment assessments.
Key Audit —— The components on which full scope audits, targeted specified procedures and centralised work was
Matters performed accounted for 90% of revenue, 86% of loss before tax and 85% of total assets.
—— Central audit testing was performed where appropriate for reporting components in Group audit scope
supported by the Group’s Finance Service Centres (FSCs).
—— As part of the supervision process, the Group engagement team has visited 14 components as well as the
FSCs. Interactions with component auditors also included formal written instructions, meetings and
reviewing selected audit papers.
Our assessment of the risk of material misstatement also informed our views of the areas of particular
focus of our work which are listed below:
—— Long-term contract accounting and associated provisions (Group);
—— The recognition of deferred tax assets (Group);
—— The translation of foreign-currency denominated transactions and balances (Group);
—— The presentation and accuracy of underlying results and disclosure of other one-off items (including
exceptional items) (Group);
—— Implementation of IFRS 16: Leases (Group);
—— Response to deferred prosecution and leniency agreements in connection with alleged bribery and
corruption in overseas markets (Group); and
—— Recoverability of the Company’s investment in subsidiary undertakings (Company).
Rolls-Royce Holdings plc Annual Report 2019 Other Information
The scope of our audit assessed risks of material misstatement (whether or not due to
As part of designing our audit, we determined materiality and fraud) identified by the auditors, including those which had the
assessed the risks of material misstatement in the financial greatest effect on: the overall audit strategy; the allocation of
statements. In particular, we looked at where the Directors made resources in the audit; and directing the efforts of the engagement
subjective judgements, for example in respect of significant team. These matters, and any comments we make on the results of
accounting estimates that involved making assumptions and our procedures thereon, were addressed in the context of our audit
considering future events that are inherently uncertain. of the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters.
Capability of the audit in detecting irregularities, including fraud
We have presented the key audit matters and the other risks subject
Based on our understanding of the Group and industries in which it
to audit focus in the graph and table below. This is not a complete
operates, we identified that the principal risks of non-compliance
list of all risks identified by our audit.
with laws and regulations related to international tax legislation, Civil
Aviation Authority regulations, import and export restrictions (including
International Traffic in Arms Regulations), UK Bribery Act, US Foreign
Corrupt Practices Act and the requirements of the deferred prosecution C
1
and leniency agreements the Group previously entered into and we
Likelihood of potential misstatement

considered the extent to which non-compliance might have a material
effect on the financial statements. We also considered those laws
and regulations that have a direct impact on the preparation of the
financial statements such as the Companies Act 2006. We evaluated 4 2
management’s incentives and opportunities for fraudulent manipulation
3 12
of the financial statements (including the risk of override of controls) 7
5 F
and determined that the principal risks were related to posting journal
entries to increase profits or reclassify costs, management bias in 9 8
accounting estimates especially long-term contract accounting and
associated provisions, sale of engines to joint ventures for no clear 10
commercial purpose or above market prices and inappropriately
6
including or excluding transactions from underlying or free cash flow
11
metrics. The Group engagement team shared this risk assessment
with the component auditors so that they could include appropriate
Potential magnitude of misstatement
audit procedures in response to such risks in their work. Audit
procedures performed by the Group engagement team and/or
component auditors included: ■ Key audit matters – Group
■ Other audit risks – Group
–– Discussions with management, internal audit and the Group’s ■ Key audit matters – Company
internal and external legal counsel, including consideration of
known or suspected instances of non-compliance with laws and
regulation and fraud; Change
from
–– Assessment of matters reported on the Group’s whistle-blowing Risks prior year
helpline and the results of management’s investigation of Key audit matters – Group
such matters; 1 Long-term contract accounting and associated provisions
–– Challenging assumptions and judgements made by management
in determining significant accounting estimates, in particular in 2 The recognition of deferred tax assets
relation to long-term contract accounting and associated 3 Presentation of underlying results and disclosure
OTHER INFORMATION
provisions (see related key audit matters below); of other one-off items (including exceptional items)
4 Translation of foreign currency denominated transactions
–– Identifying and testing journal entries, in particular journal and balances
entries posted with unusual account combinations; and 5 Response of the Group to the deferred prosecution and
leniency agreements in connection with alleged bribery
–– Challenging why certain items are excluded or included from
and corruption in overseas markets
underlying profit or free cash flow and review of disclosures
6 Implementation of IFRS 16 new
included in the Annual Report explaining and reconciling
alternative performance measures to statutory metrics. Other audit risks – Group
7 Accounting for complex treasury instruments
There are inherent limitations in the audit procedures described
above and the further removed non-compliance with laws and 8 Measurement of post-retirement benefits
regulations is from the events and transactions reflected in the 9 Recoverability of programme assets
financial statements, the less likely we would become aware of it.
Also, the risk of not detecting a material misstatement due to fraud 10 Consolidation process and joint venture accounting
is higher than the risk of not detecting one resulting from error, as 11 Uncertain tax positions
fraud may involve deliberate concealment by, for example, forgery
or intentional misrepresentations, or through collusion. Key audit matters – Company
12 Recoverability of the Company’s investments new
Key audit matters in subsidiary undertakings
Key audit matters are those matters that, in the auditors’ professional
judgement, were of most significance in the audit of the financial
statements of the current period and include the most significant
Key changes in the assessment of audit risks for the current period IFRS 16: Leases which was adopted on 1 January 2019 and
compared to the prior period are: resulted in material right-of-use assets and lease liabilities being
–– Capitalisation and amortisation of development costs is no longer recognised on the Consolidated Balance Sheet;
considered a key audit matter after no material issues were –– The valuation of ITP Aero is no longer considered a key audit
identified in the 2018 audit following changes in methodology for matter after the finalisation of the purchase price allocation in
starting and subsequently ceasing the capitalisation of development 2018; and
costs which became effective on 1 January 2018; –– A new key audit matter has been included for the recoverability
–– Implementation of IFRS 15: Revenue from Contracts with of the Company’s investments in subsidiary undertakings
Customers is no longer considered a key audit matter as 2019 is reflecting the decline in the market capitalisation of the Group
the second year that the accounting standard has been applied and the net liability position of the Consolidated Balance Sheet,
by the Group. A new key audit matter has been included for which represent potential indicators of impairment.
Key audit matter How our audit addressed the key audit matter
Long-term contract accounting and associated provisions Our procedures over the long-term contract accounting applied
(relevant to the Consolidated Financial Statements) in the Civil Aerospace and Defence businesses are largely
substantive in nature and included:
Page 82 (Audit Committee report) and page 125 (note 1 to the
Consolidated Financial Statements – Accounting policies – –– We attended meetings with Civil Aerospace and Defence
Revenue recognition) programme and contract managers in order to understand the
operational matters impacting the performance of specific
The Civil Aerospace and Defence businesses operate primarily contracts and any amendments to contractual arrangements;
with long-term customer contracts that span multiple periods. required by changes to underlying expectations of the
These long-term contracts require a number of assumptions to be contract performance;
made in order to determine the level of revenue and profit that is –– We obtained and read the relevant sections of a sample of
recognised in each period. contracts to understand the key terms including performance
obligations and pricing structures;
For Civil Aerospace aftermarket contracts, the profitability typically –– We re-performed the calculations used to determine the degree
assumes that there will be significant cost improvements over the of completion for a sample of contracts and this was also used
lifetime (15–25 years) of the contracts. Significant judgement needs in assessing the magnitude of any catch-up adjustments;
to be applied in determining the engine flying hours, time-on-wing,
–– We compared the previously forecast results of a sample of
whether incremental costs should be treated as wastage or are
contracts with the actual results to assess the performance of
part of the ongoing cost of servicing a contract, and other
the contract and the historical accuracy of forecasting;
operating parameters used to calculate the projected life cycle.
These future costs are also risk adjusted to take into account –– We verified a sample of costs incurred to third party
forecasting accuracy which represents an additional judgement. documentation in order to assess the validity of the forecast
costs to complete;
Small adjustments can have a significant impact on the results of –– We challenged management’s judgement around whether
an individual financial year. In addition, changes to the operating incremental contract costs arising from in-service issues should
condition of engines such as changes in route structure can be accounted for over the expected duration of the underlying
result in different performance assumptions and hence cost contract or recognised immediately;
profiles which impact the profitability of a contract. –– Where the disruption has resulted in payments to customers
The Group continues to experience significant in-service issues we have validated the settlement to contractual agreements,
on the Trent 1000 programme with an additional exceptional considered the terms of previous settlements, correspondence
charge booked in the year. The assessment of the total cost of with customers, the forecast period of further aircraft being on
delivering this programme, the cost of the proposed engineering the ground and the completeness of the liability;
solutions, changes in the shop visit profile, speed of implementation –– We assessed the assumptions relating to life cycle cost
of design, manufacture and installation of improved parts and reductions to determine the likelihood of realisation and where
the level of customer disruption which was not expected at the relevant the speed at which they would be achieved, including
inception of the contract are all significant judgements which the impact on the number of shop visits, validating these
impact the value and timing of revenue and profit recognition. assumptions directly with the senior programme engineers;
In addition, certain contracts may become onerous as a result –– Where the revision of assumptions has resulted in catch-up
and require immediate recognition of the loss. adjustments we have understood the driver of the adjustments
and validated the impact to appropriate source information;
At the development stage of a programme, agreements are entered
into with certain suppliers to share in the risk and rewards of the –– We obtained support for the risk adjustments made in respect
contracts (Risk and Revenue Sharing Partners – ‘RRSP’). This can of future costs and challenged management’s assumptions
involve upfront participation fees from the RRSP that are amortised through assessment against historical performance, known
over the engine production phase. In addition, specified revenue and technical issues and the stage of completion of the programme;
costs are recorded in the Consolidated Income Statement net of the –– We challenged the assessment of provisions for loss making or
RRSP’s share. onerous contracts to determine the completeness of the
unavoidable costs to fulfil the contractual obligations;
The nature of the Civil Aerospace business gives rise to a number
–– We assessed the sensitivity of the Trent 1000 provision to
of contractual guarantees, warranties and potential claims. The
reasonable changes in estimates, particularly in respect of the
accounting for these can be complex and judgemental and may
repair and overhaul facility capacity, technical cost creep on
impact the Consolidated Income Statement immediately or over
the known issues and cost outturns against previous provisions,
the life of the contract.
in determining whether the provision was sufficient;
Long-term contract accounting and associated provisions continued –– We reviewed a sample of RRSP contracts to assess whether
The valuation of associated amounts may be highly judgemental revenue and costs had been appropriately reflected, net
and needs to be considered on a contract by contract basis. of the share attributable to the RRSP in the Consolidated
Income Statement;
–– We considered whether there were any indicators of
management override of controls or bias in arriving at their
reported position; and
–– We also assessed the adequacy of disclosures in note 1 of
the key judgements and estimates involved in long-term
contract accounting.
Overall we concluded that the key estimates and judgements
used by management in the long-term contract accounting were
supportable and the balances recorded in the financial
statements to be materially correct.
The recognition of deferred tax assets We evaluated management’s assessment as to the availability of
(relevant to the Consolidated Financial Statements) sufficient taxable profits in future periods to support the recognition
Page 82 (Audit Committee report), page 127 (note 1 to the of deferred tax assets, taking into account both business model and
Consolidated Financial Statements – Accounting policies – the tax jurisdiction. We assessed the future profit forecasts and the
Taxation), and pages 141 to 144 (note 5 to the Consolidated underpinning assumptions including management’s risk weighting of
Financial Statements – Taxation) particular profit streams in the UK where the largest deferred tax
asset is recognised. The right of offset of certain deferred tax
The recognition and recoverability of deferred tax assets is a
liabilities and deferred tax assets was also assessed.
significant judgement. The Group has recognised significant
deferred tax assets on the basis of future levels of profitability in Where applicable we reconciled the forecasts used to justify
the relevant tax jurisdiction. The magnitude of the assets recognised the recognition of deferred tax assets to those used elsewhere
necessitates the need for significant judgement in assessing the in the business including for long-term contract accounting,
future levels of profitability over an extended period. impairment assessments, or for the Directors’ viability and
going concern statements.
The loss reported for 2019 in the UK presents a heightened risk
that deferred tax assets are recognised inappropriately. Further We also assessed the adequacy of disclosures over this area,
there is an inherent increased level of uncertainty in the level of particularly the impact of changes in key estimates of the asset
forecast profits over an extended period. recognised and this has been disclosed in note 1.
We did not identify any material uncorrected exceptions from our
audit work.
The translation of foreign-currency denominated transactions In addition to our testing in other areas of the various financial
and balances statement line items, we performed the following specific audit
(relevant to the Consolidated Financial Statements) procedures over this area:
Page 128 (note 1 to the Consolidated Financial Statements –
–– Obtained an understanding of the process employed by
Accounting policies – Foreign currency translation)
management to correctly report the translation of foreign
OTHER INFORMATION
Foreign exchange rate movements influence the reported currency balances and transactions;
Consolidated Income Statement, the Consolidated Cash Flow
–– Tested system reports identifying transactions and balances in
Statement and closing net funds balance. One of the Group’s
source currency by agreeing these to general ledger balances;
primary accounting systems translates transactions denominated
in foreign currencies at a fixed rate. –– Reperformed manual calculations of the adjustment needed to
correctly report the translation of the foreign currency
Foreign currency denominated transactions and balances are
denominated transactions and balances;
then re-translated to actual average and spot rates through
manual adjustments. Due to the manual nature of the process and –– We reconciled the balances and transactions requiring adjustment
significance of the recurring adjustment there is a risk that by source currency to source data and assessed the
transactions and balances denominated in foreign currencies are completeness of these balances and transactions;
inappropriately translated in the Consolidated Financial
Statements. –– For exchange rates used in management’s calculations for the
translation adjustments we agreed these to an independent
source; and
–– For each adjustment sampled we assessed whether the foreign
currency denominated balance or transaction was translated at
the appropriate exchange rate depending on its nature.
We did not identify any material uncorrected exceptions from
our audit work.
Presentation of underlying results and disclosure of other one-off We considered the judgements taken by management to determine
items (including exceptional items) what should be treated as a one-off or exceptional item and the
(relevant to the Consolidated Financial Statements) translation of foreign currency amounts and obtained corroborative
Page 124 (note 1 to the Consolidated Financial Statements – evidence for these.
Accounting policies – Presentation of underlying results), page We also considered whether there were items that were recorded
134 (Note 2 to the Consolidated Financial Statements – Segmental within underlying profit that we consider are exceptional in
analysis) and page 179 (note 28 to the Consolidated Financial nature and should be reported as an exceptional item. No such
Statements – Derivation of summary of funds flow statement. material items were identified. As part of this assessment we
In addition to the performance measures prescribed by challenged management’s rationale for the designation of certain
International Financial Reporting Standards, the Group also items as exceptional or one-off and assessed such items against
presents the results on an “underlying” basis, as the Directors the Group’s accounting policy considering the nature and value
believe this better reflects the performance of the Group during of those items.
the year. The Group also presents a free cash flow metric which We tested management’s calculation to translate foreign currency
the Directors believe reflects the cash generated from underlying transactions to reflect the achieved foreign exchange rates based
trading, which differs from the cash flows presented in the on foreign currency contracts settled in the year, and to translate
Consolidated Cash Flow Statement. year end assets and liabilities at foreign currency rates that are
A key adjustment between the statutory results and the underlying expected to be achieved in the future. We corroborated these
results relates to the foreign exchange rates used to translate rates to the Group’s hedging contracts. We also assessed whether
foreign currency transactions. The underlying results reflect the the discretion used by management over the date on which
achieved rate on foreign currency contracts settled in the period forward foreign exchange contracts are settled indicated any
and retranslates assets and liabilities at the foreign currency rates evidence of bias.
expected to be achieved in the future. As the Group can We audited the reconciling items between the underlying profit
influence which contracts are settled in each reporting period it before tax and free cash flow disclosed in note 28 including
has the ability to influence the achieved rate and hence the verifying that the items adjusted for are consistent with the prior
underlying result. period. We also considered whether free cash flow contains
The underlying results differ significantly from the reported material one-off items which require further disclosure.
statutory results and are used extensively to explain performance We also assessed the appropriateness and completeness of the
to the shareholders. Alternative performance measures can provide disclosures of the impact of one-off or non-underlying items in
investors with a better understanding of the Group’s performance note 1 and note 2 and other related notes to the Consolidated
if properly used and presented. However, when improperly used Financial Statements and found them to be appropriate.
and presented, these kinds of measures can mislead investors by
Overall we found that the classification judgements made by
masking the real financial performance and position.
management were in line with their policy for underlying results
and exceptional items, had been consistently applied and found
no material exceptions from our testing.
Implementation of IFRS 16: Leases For a sample of leases, we recalculated the right-of-use asset and
(relevant to the Consolidated Financial Statements) associated lease liability and validated the characteristics that
Page 181 to 182 (note 29 to the Consolidated determine these to the underlying lease agreements.
Financial Statements) Our internal experts compared the rate used to discount future
At 1 January 2019, the Group adopted IFRS 16: Leases. This lease payments against corporate bond yields, adjusted property
accounting standard required operating leases to be brought yields and borrowing costs and found that the rate was a reasonable
onto the Consolidated Balance Sheet for the first time and approximation of the incremental borrowing rate of the lessee.
resulted in right-of-use assets of £2,254 million and lease liabilities We tested management’s reconciliation between the operating
of £2,289 million being recognised on adoption. lease commitments at 31 December 2018 and the lease liability
The right-of-use assets and lease liabilities are estimated based recognised on adoption disclosed in note 29 and compared lease
on the discounted future lease payments. There is judgement expenses for the year ended 31 December 2018 to leases included
over the period that the balances are calculated where lease in management’s calculations for IFRS 16 adoption to validate that
agreements contain options for the contract to be extended or management’s list of leases was complete.
terminated early. Furthermore, there is judgement over the Where leases contained an option for early termination or
discount rate applied to the forecast cash flows, determining the extension, we considered how likely it was to be exercised, based
lease term and where lease agreements contain residual value on the nature of the assets and the terms including charges in the
guarantees, the refurbishment costs that will be required to period under option. Certain engine leases also contain clauses
settle these. that guarantee the value of the engine when it is returned to the
There is also a risk that the lease liabilities or right-of-use asset lessor. This charge is included in lease liabilities. We validated
balances do not include all of the lease arrangements that the management’s estimate of this charge based on the flying hours
Group is party to. and forecast shop visit costs, including comparing these costs to
historical charges.
We also considered the adequacy of the Group’s disclosure of the
impacting on the adoption of IFRS 16 as set out in notes 1 and 29
which we found to be appropriate.
As a result of our work, we did not identify any material differences
in the adjustments recorded on the implementation of IFRS 16.
Response to deferred prosecution and leniency agreements in We planned and designed our audit approach to this area in
connection with alleged bribery and corruption in overseas markets conjunction with our in-house forensic specialists and after
(relevant to the Consolidated Financial Statements) reading the Agreements and compliance reports made to the SFO
Page 176 (note 25 to the Consolidated Financial Statements and DoJ during the year. Where applicable we vouched the
– Contingent Liabilities) assertions made by management to objective evidence.
In January 2017, the Group became party to deferred prosecution We assessed the overall control environment and ‘tone at the top’,
agreements with the UK Serious Fraud Office (“SFO”) and the US including understanding and assessing the Group’s internal
Department of Justice (“DoJ”), and a leniency agreement with the investigations processes which identify and assess possible
Brazilian Federal Prosecution Service (“MPF”) (collectively the non-compliance, such as whistle-blowing hotlines. We evaluated
“Agreements”) as a consequence of allegations of fraudulent key controls over the appointment, monitoring and payments
payments to overseas intermediaries. Prosecution was deferred made to intermediaries.
provided that the Group fulfils certain requirements, including
We independently circularised and spoke with the Group’s external
the settlement of a financial penalty.
legal counsel to obtain their views about the status of the Agreements
The Group operates in industries which are characterised by and to test management’s assertions of the likely outcome.
competition for individually significant contracts with customers
Together with our forensic specialists, we designed questionnaires
which are often directly or indirectly associated with governments,
to be performed in certain markets not otherwise included in Group
and in a number of territories where the use of intermediaries is
audit scope to assess the risk of arrangements being in place in those
viewed as normal practice. This means the risk of future instances
markets which may require follow-up procedures to be performed.
of corruption remains present.
Taking into account the findings from our audit procedures, we
The possible implications of these high profile and sensitive
assessed the appropriateness of the contingent liability disclosure
Agreements on the future business if the terms are not met,
in note 25 of the Consolidated Financial Statements and found it
including additional fines and prosecution, are significant. There
to be reasonable and consistent with the information we obtained
is also the risk that historical activities could result in allegations
during the course of our audit.
and penalties in other territories not subject to the Agreements.
Recoverability of the Company’s investments in We evaluated management’s assessment whether any indicators
subsidiary undertakings of impairment existed by comparing the carrying value of
(relevant to the Company Financial Statements) investments in subsidiary undertakings to the market capitalisation
Page 184 to 186 (note 2 to the Company Financial Statements – of the Group at 31 December 2019 and post year-end.
Investments – Subsidiary Undertakings)
To determine the recoverable value, management prepared a
Investments in subsidiaries of £12,801 million (2018: £12,521 million) valuation based on the discounted future cash flows of the Group.
are accounted for at cost less provision for impairment in the We have tested the reasonableness of key assumptions, including
Company Balance Sheet at 31 December 2019. revenue, profit and cash flow growth rates, terminal growth rates
and the discount rate management has applied.
Investments are tested for impairment if impairment indicators
exist. If such indicators exist, the recoverable amounts of the Deploying our valuations experts, we assessed the terminal
investments in subsidiaries are estimated in order to determine growth rate and discount rate applied to the cash flow investment
the extent of the impairment loss, if any. Any such impairment loss compared with third party information, past performance, the
is recognised in the income statement. Group’s cost of capital and relevant risk factors. We also
compared the valuation implied by the discounted cash flow
At certain points following 31 December 2019, the market
model to third party analyst reports.
OTHER INFORMATION
capitalisation of the Group fell to below the carrying value of the

Company’s investment in subsidiary undertakings. This and the We performed our own independent sensitivity analysis to
consolidated net liability position of the Consolidated Balance understand if reasonably possible changes in management’s
Sheet represent potential indicators of impairment and assumptions would result in an impairment.
necessitated an impairment review to be performed.
As a result of our work, we did not identify any material impairments
Management judgement is required in the area of impairment and consider the carrying value of the investments in subsidiary
testing, particularly in assessing: (1) whether an event has undertakings to be supportable in the context of the Company
occurred that may indicate that the related asset values may not Financial Statements taken as a whole.
be recoverable; (2) whether the carrying value of an asset can be
supported by the recoverable value, being the higher of fair value
less cost of disposal or the net present value of future cash flows
which are estimated based on the continued use of the asset in
the business; and (3) key assumptions to be applied in preparing
cash flow projections including whether these cash flow projections
are discounted using an appropriate rate. Changing the assumptions
selected by management to determine the level of any impairment,
including the discount rates or the growth rate assumptions in the
cash flow projections, could materially affect the recoverable
value determined by the impairment test and as a result affect the
Company’s financial condition and results of operations.
How we tailored the audit scope Where work was performed by component auditors, we determined
We tailored the scope of our audit to ensure that we performed the level of involvement we needed to have in the audit work at
enough work to be able to give an opinion on the financial those reporting units to be able to conclude whether sufficient
statements as a whole, taking into account the structure of the appropriate audit evidence had been obtained as a basis for our
Group and the Company, the accounting processes and controls, opinion on the Consolidated Financial Statements.
and the industry in which they operate.
We issued formal written instructions to all component auditors
Our scoping is based on the Group’s consolidation structure. We setting out the audit work to be performed by each of them and
define a component as a single reporting unit which feeds into the maintained regular communication with the component auditors
Group consolidation. Of the Group’s 437 reporting components, 30 throughout the audit cycle. These interactions included attending
individual components (including three joint ventures) were subject certain component clearance meetings and holding regular
to full scope audits for Group purposes, which following an element conference calls, as well as reviewing and assessing any matters
of consolidation, equates to 14 Group reporting opinions; and reported. The Group engagement team also reviewed selected
seven components performed targeted specified procedures. audit working papers for certain component teams.
In order to achieve audit coverage over the financial statements, In addition, senior members of the Group engagement team visited
under our audit methodology, we test both the design and component teams across all group segments in the United Kingdom,
operation of relevant business process controls and perform United States of America, Germany, Spain, Hong Kong and
substantive testing over each financial statement line item. Singapore. These visits included meetings with local management
and with the component auditors.
The Group operates Finance Service Centres (FSCs) to bulk
process financial transactions in Derby (UK), Indianapolis (US) and Materiality
Bangalore (India). Based on our assessment with management it is The scope of our audit was influenced by our application of materiality.
not possible to fully test revenue and profit centrally as certain key We set certain quantitative thresholds for materiality. These, together
processes, such as long-term contracting, remain within the with qualitative considerations, helped us to determine the scope of
business due to their nature. our audit and the nature, timing and extent of our audit procedures on
the individual financial statement line items and disclosures and in
Our audit covered 90% of revenue, 86% of loss before tax and 85%
evaluating the effect of misstatements, both individually and in
of total assets. All entities that contribute in excess of 4% of the
aggregate on the financial statements as a whole.
Group’s revenue were included in full scope.
Further specific audit procedures over central functions, the Group
consolidation and areas of significant judgement (including corporate
costs, taxation, goodwill, intangible assets, treasury and post-retirement
benefits) were directly led by the Group audit team.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group Financial Statements Company Financial Statements
Overall materiality £75 million (2018: £56 million). £126 million (2018: £128 million).
How we determined it 0.5% of total underlying revenue. 1% of total assets.
Rationale for We have consistently used underlying revenue to We determined our materiality based on total
benchmark applied determine materiality as opposed to a profit based assets, which is more applicable than a
benchmark. This is because there is considerable performance-related measure as the Company is
volatility in profit before tax as a result of revenue an investment holding company for Group.
recognition under IFRS 15 and from the fair value
Where there were balances and transactions
movement in the Group’s derivatives. Underlying
within the Company accounts that were within
revenue continues to be a key performance metric
the scope of the audit of the Group financial
for the Group and is much less volatile than the
statements, our procedures were undertaken
profit metric.
using the lower materiality level applying to the
Group audit.
For each component in the scope of our Group audit, we allocated We agreed with the Audit Committee that we would report to them
a materiality that is less than our overall Group materiality. The range misstatements identified during our audit above £3 million (Group
of materiality allocated across components was between £5 million audit) (2018: £2 million) and £6 million (Company audit) (2018: £2
and £67.5 million. Certain components were audited to a local million) as well as misstatements below those amounts that, in our
statutory audit materiality that was also less than our overall view, warranted reporting for qualitative reasons.
Group materiality.
Going concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation Outcome
We are required to report if we have anything material to add or We have nothing material to add or to draw attention to.
draw attention to in respect of the Directors’ statement in the
However, because not all future events or conditions can be
financial statements about whether the Directors considered it
predicted, this statement is not a guarantee as to the Group’s and
appropriate to adopt the going concern basis of accounting in
Company’s ability to continue as a going concern. For example, the
preparing the financial statements and the Directors’ identification
terms of the United Kingdom’s withdrawal from the European Union
of any material uncertainties to the Group’s and the Company’s
are not clear, and it is difficult to evaluate all of the potential
ability to continue as a going concern over a period of at least
implications on the Group’s and Company’s trade, customers,
twelve months from the date of approval of the financial statements.
suppliers and the wider economy.
We are required to report if the Directors’ statement relating to We have nothing to report.
Going Concern in accordance with Listing Rule 9.8.6R(3) is
materially inconsistent with our knowledge obtained in the audit.
Reporting on other information required to perform procedures to conclude whether there is a

The other information comprises all of the information in the Annual material misstatement of the financial statements or a material
Report other than the financial statements and our auditors’ report misstatement of the other information. If, based on the work we
thereon. The Directors are responsible for the other information. have performed, we conclude that there is a material misstatement
Our opinion on the financial statements does not cover the other of this other information, we are required to report that fact. We
information and, accordingly, we do not express an audit opinion or, have nothing to report based on these responsibilities.
except to the extent otherwise explicitly stated in this report, any With respect to the Strategic Report and Directors’ Report, we also
form of assurance thereon. considered whether the disclosures required by the UK Companies
In connection with our audit of the financial statements, our Act 2006 have been included.
responsibility is to read the other information and, in doing so, Based on the responsibilities described above and our work
consider whether the other information is materially inconsistent undertaken in the course of the audit, the Companies Act 2006
with the financial statements or our knowledge obtained in the (CA06), ISAs (UK) and the Listing Rules of the Financial Conduct
audit, or otherwise appears to be materially misstated. If we identify Authority (FCA) require us also to report certain opinions and matters
an apparent material inconsistency or material misstatement, we are as described below (required by ISAs (UK) unless otherwise stated).
Strategic Report and Directors’ Report

In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors’
Report for the year ended 31 December 2019 is consistent with the financial statements and has been prepared in accordance with
applicable legal requirements. (CA06)
In light of the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit, we
did not identify any material misstatements in the Strategic Report and Directors’ Report. (CA06)
OTHER INFORMATION
The Directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the Group
We have nothing material to add or draw attention to regarding:
–– The Directors’ confirmation on page 68 of the Annual Report that they have carried out a robust assessment of the principal risks
facing the Group, including those that would threaten its business model, future performance, solvency or liquidity.
–– The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
–– The Directors’ explanation on page 55 of the Annual Report as to how they have assessed the prospects of the Group, over what
period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a
reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of
their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
We have nothing to report having performed a review of the Directors’ statement that they have carried out a robust assessment of the
principal risks facing the Group and statement in relation to the longer-term viability of the Group. Our review was substantially less in
scope than an audit and only consisted of making inquiries and considering the Directors’ process supporting their statements; checking
that the statements are in alignment with the relevant provisions of the UK Corporate Governance Code (the “Code”); and considering
whether the statements are consistent with the knowledge and understanding of the Group and Company and their environment
obtained in the course of the audit. (Listing Rules)
Other Code Provisions

We have nothing to report in respect of our responsibility to report when:
–– The statement given by the Directors, on page 114, that they consider the Annual Report taken as a whole to be fair, balanced and
understandable, and provides the information necessary for the members to assess the Group’s and Company’s position and
performance, business model and strategy is materially inconsistent with our knowledge of the Group and Company obtained in the
course of performing our audit.
–– The section of the Annual Report on pages 79 to 84 describing the work of the Audit Committee does not appropriately address
matters communicated by us to the Audit Committee.
–– The Directors’ statement relating to the Company’s compliance with the Code does not properly disclose a departure from a relevant
provision of the Code specified, under the Listing Rules, for review by the auditors.
Directors’ Remuneration
In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the
Companies Act 2006. (CA06)
Responsibilities for the financial statements and Other required reporting

the audit
Responsibilities of the directors for the financial statements Companies Act 2006 exception reporting
As explained more fully in the Statement of Directors’ responsibilities Under the Companies Act 2006 we are required to report to you if,
set out on page 114, the Directors are responsible for the preparation in our opinion:
of the financial statements in accordance with the applicable –– we have not received all the information and explanations we
framework and for being satisfied that they give a true and fair require for our audit; or
view. The Directors are also responsible for such internal control as
they determine is necessary to enable the preparation of financial –– adequate accounting records have not been kept by the
statements that are free from material misstatement, whether due Company, or returns adequate for our audit have not been
to fraud or error. received from branches not visited by us; or
In preparing the financial statements, the Directors are responsible –– certain disclosures of Directors’ remuneration specified by law
for assessing the Group’s and the Company’s ability to continue as are not made; or
a going concern, disclosing, as applicable, matters related to going –– the Company financial statements and the part of the Directors’
concern and using the going concern basis of accounting unless Remuneration Report to be audited are not in agreement with
the Directors either intend to liquidate the Group or the Company the accounting records and returns.
or to cease operations, or have no realistic alternative but to do so.
We have no exceptions to report arising from this responsibility.
Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether Appointment
the financial statements as a whole are free from material Following the recommendation of the Audit Committee, we were
misstatement, whether due to fraud or error, and to issue an appointed by the members on 3 May 2018 to audit the financial
auditors’ report that includes our opinion. Reasonable assurance is statements for the year ended 31 December 2018 and subsequent
a high level of assurance, but is not a guarantee that an audit financial periods. The period of total uninterrupted engagement is
conducted in accordance with ISAs (UK) will always detect a material two years, covering the years ended 31 December 2018 to 31
misstatement when it exists. Misstatements can arise from fraud or December 2019.
error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the
financial statements is located on the FRC’s website at: www.frc.org. Ian Chambers (Senior Statutory Auditor)
uk/auditorsresponsibilities. This description forms part of our for and on behalf of PricewaterhouseCoopers LLP
auditors’ report. Chartered Accountants and Statutory Auditors
London
Use of this report 28 February 2020
This report, including the opinions, has been prepared for and only
for the Company’s members as a body in accordance with Chapter
3 of Part 16 of the Companies Act 2006 and for no other purpose.
We do not, in giving these opinions, accept or assume
responsibility for any other purpose or to any other person to
whom this report is shown or into whose hands it may come save
where expressly agreed by our prior consent in writing.
Sustainability Assurance Statement 203
SUSTAINABILITY ASSURANCE STATEMENT

To the stakeholders of Rolls-Royce Holdings plc
Independent limited assurance statement Summary of work performed

As part of its independent verification, Bureau Veritas undertook
Introduction and objectives of work the following activities:
Bureau Veritas UK Limited (Bureau Veritas) has been engaged by –– assessed the appropriateness of the reporting criteria for the
Rolls-Royce Holdings plc (Rolls-Royce) to provide limited assurance Selected Information;
over selected sustainability performance indicators for inclusion in
its 2019 Annual Report and website. This assurance statement –– conducted interviews with relevant personnel of Rolls-Royce;
applies to the related information included within the scope of –– carried out nine site visits, selected employing a risk-based
work described below. approach, in the UK, US, Canada, France, Germany and Spain;
Scope of work –– reviewed the data collection and consolidation processes used
The scope of our work was limited to assurance over the following to compile the Selected Information, including assessing
information included within Rolls-Royce’s 2019 Annual Report assumptions made, the data scope and reporting boundaries;
(the Report) for the period 1 January to the 31 December 2019
–– reviewed documentary evidence produced by Rolls-Royce;
(the Selected Information):
–– agreed a sample of the Selected Information to the corresponding
–– energy consumption;
source documentation; and
–– scope 1 & 2 greenhouse gases (GHG) emissions;
–– total solid and liquid waste; –– re-performed aggregation calculations of the Selected Information.
–– total reportable injury; and
–– the number of people reached through the science, Conclusion
technology, engineering and mathematics (STEM) education On the basis of our methodology and the activities described above,
outreach programmes. nothing has come to our attention to indicate that the Selected
Information has not been properly prepared, in all material respects,
Reporting criteria in accordance with the reporting criteria.
The Selected Information is reported according to the
Rolls-Royce ‘Basis of Reporting’, a copy of which is available Further detailed recommendations are provided in the form of an
from www.rolls-royce.com/sustainability. internal management report to be issued to Rolls-Royce.
Limitations and exclusions Statement of independence, integrity and competence

Excluded from the scope of our work is verification of any Bureau Veritas is an independent professional services company
information relating to: that specialises in quality, environmental, health, safety and social
accountability with over 185 years of history. Its assurance team
–– activities outside the defined verification period; and has extensive experience in conducting verification over
–– other information included in the Report. environmental, social, ethical and health and safety information,
This limited assurance engagement relies on a risk-based selected systems and processes.
sample of sustainability data and the associated limitations that this Bureau Veritas operates a certified 1 quality management system
entails. This independent statement should not be relied upon to which complies with the requirements of ISO 9001:2015, and
detect all errors, omissions or misstatements that may exist. accordingly maintains a comprehensive system of quality control
including documented policies and procedures regarding compliance
Responsibilities with ethical requirements, professional standards and applicable
This preparation and presentation of the Selected Information legal and regulatory requirements.
in the Report are the sole responsibility of the management
of Rolls-Royce. Bureau Veritas has implemented and applies a code of ethics, which
meets the requirements of the International Federation of Inspections
Bureau Veritas was not involved in the drafting of the Report
OTHER INFORMATION
Agencies (IFIA) 2 across the business to ensure that its employees

or of the reporting criteria. Our responsibilities were to: maintain integrity, objectivity, professional competence and due
–– obtain limited assurance about whether the Selected Information care, confidentiality, professional behaviour and high ethical
has been prepared in accordance with the reporting criteria; standards in their day-to-day business activities.
–– form an independent conclusion based on the assurance The assurance team for this work does not have any involvement
procedures performed and evidence obtained; and in any other Bureau Veritas projects with Rolls-Royce.
–– report our conclusions to the management of Rolls-Royce.
Bureau Veritas UK Limited
Assessment standard London
We performed our work to a limited level of assurance in accordance 26 February 2020
with the International Standard on Assurance Engagements (ISAE)
3000 Revised, Assurance Engagements Other than Audits or Reviews
of Historical Financial Information (effective for assurance reports
dated on or after 15 December 2015), and in accordance with the main
requirements of ISO 14064:2006 Part 3 – Specification with Guidance
for the Validation and Verification of Greenhouse Gas Assertions.
1 Certificate of registration can be provided on request.

2 International Federation of Inspection Agencies – compliance code – third edition.
Other Financial Information
OTHER FINANCIAL INFORMATION

Foreign exchange At this stage we expect these items to continue to influence the
underlying tax rate. The reported tax rate is more difficult to
Foreign exchange rate movements influence the reported income forecast due to the impact of significant adjustments to reported
statement, the cash flow and closing net funds balance. The average profits, in particular the net unrealised fair value changes to
and spot rates for the principal trading currencies of the Group are derivative contracts and the recognition of losses and advance
shown in the table below: corporation tax.
2019 2018 Change Information on the Group’s approach to managing its tax affairs can
USD per GBP Year-end spot rate 1.32 1.28 +3% be found at www.rolls-royce.com.
Average spot rate 1.28 1.33 -4%
EUR per GBP Year-end spot rate 1.18 1.12 +5%
Average spot rate 1.14 1.13 +1%
Investments and capital expenditure
The Group subjects all major investments and capital expenditure
to a rigorous examination of risks and future cash flows to ensure
The Group’s global corporate income that they create shareholder value. All major investments, including
tax contribution the launch of major programmes, require Board approval.
The Group’s total corporation tax payments in 2019 were £175m. The Group has a portfolio of projects at different stages of their
Around 85% of this was paid in the US, Germany, UK and Singapore lifecycles. All of our major investments and projects are assessed
which reflects the fact that the majority of the Group’s business is using a range of financial metrics, including discounted cash flow
undertaken, and employees are based, in these countries. The and return on investment.
balance was paid in around 40 other countries.
In common with most multinational groups, the total of all profits in Financial risk management
respect of which corporate income tax is paid is not the same as
The Board has established a structured approach to financial risk
the consolidated loss before tax reported on page 116. The main
management. The Financial risk committee (Frc) is accountable for
reasons for this are:
managing, reporting and mitigating the Group’s financial risks and
(i) the consolidated income statement is prepared under Adopted exposures. These risks include the Group’s principal counterparty,
IFRS, whereas tax is paid on the profits of each Group company, currency, interest rate, commodity price, liquidity and credit rating
which are determined by local accounting rules; risks outlined in more depth in note 19. The Frc is chaired by the
Chief Financial Officer or group controller. The Group has a
(ii) accounting rules require certain income and costs relating to comprehensive financial risk policy that advocates the use of
our commercial activities to be eliminated from, or added to, financial instruments to manage and hedge business operations
the aggregate of all the profits of the Group companies when risks that arise from movements in financial, commodities, credit or
preparing the consolidated income statement (consolidation money markets. The Group’s policy is not to engage in speculative
adjustments); and financial transactions. The Frc sits quarterly to review and assess
(iii) specific tax rules including exemptions or incentives as the key risks and agree any mitigating actions required.
determined by the tax laws in each country.
The level of tax paid in each country is impacted by the above. In Capital structure
most cases, (i) and (ii) are only a matter of timing and therefore tax
will be paid in an earlier or later year. As a result they only have a
£m 2019 2018
negligible impact on the Group’s underlying tax rate. The core
underlying tax rate can be found on page 19. This is due to Total equity (3,354) (1,052)
deferred tax accounting, details of which can be found in note 5 to Cash flow hedges 96 106
the Consolidated Financial Statements. The impact of (iii) will often Group capital (3,258) (946)
be permanent depending on the relevant tax law. Net funds (excluding lease liabilities) 1,361 840
Further information on the tax position of the Group can be found
Operations are funded through various shareholders’ funds, bank
as follows:
borrowings, bonds and notes. The capital structure of the Group
–– Audit Committee Report (page 81) – The group tax director gave reflects the judgement of the Board as to the appropriate balance of
a presentation to the Audit Committee during the year which funding required. Funding is secured by the Group’s continued
covered various matters including tax risks and how they are access to the global debt markets. Borrowings are funded in various
managed and key sources of estimation uncertainty (in particular currencies using derivatives where appropriate to achieve a required
the recognition of deferred tax assets); currency and interest rate profile. The Board’s objective is to retain
sufficient financial investments and undrawn facilities to ensure that
–– note 1 to the Consolidated Financial Statements (page 127) – the Group can both meet its medium-term operational commitments
Details of key areas of uncertainty and accounting policies and cope with unforeseen obligations and opportunities.
for tax; and
The Group holds cash and short-term investments which, together
–– note 5 to the Consolidated Financial Statements (pages 141 to with the undrawn committed facilities, enable it to manage its
144) – Details of the tax balances in the Consolidated Financial liquidity risk.
Statements together with a tax reconciliation. This explains the
main drivers of the tax rate and the impact of our assessment on During the year, the Group extended the maturity of the £2,500m
the recovery of UK deferred tax assets. committed bank borrowing facility from 2023 to 2024. This facility
was undrawn at the period end. The Group also repaid £1.1bn of
Other Financial Information 205
borrowings during the year. At the year end, the Group retained The Group subscribes to Moody’s, Standard & Poor’s and Fitch for
aggregate liquidity of £6.9bn, including cash and cash equivalents of independent long-term credit ratings. At the date of this report, the
£4.4bn and undrawn borrowing facilities of £2.5bn. Group maintained investment-grade rating from all three agencies.
Circa £435m of drawn borrowings mature in 2020 (£775m including As a capital-intensive business making long-term commitments
lease liabilities). to its customers, the Group attaches significant importance to
maintaining or improving the current investment-grade credit ratings.
The maturity profile of the borrowing facilities is regularly reviewed
to ensure that refinancing levels are manageable in the context of
the business and market conditions. There are no rating triggers in Accounting
any borrowing facility that would require the facility to be The Consolidated Financial Statements have been prepared in
accelerated or repaid due to an adverse movement in the Group’s accordance with International Financial Reporting Standards
credit rating. The Group conducts some of its business through a (IFRS), as adopted by the EU.
number of joint ventures. A major proportion of the debt of these
joint ventures is secured on the assets of the respective companies IFRS 16 Leases was adopted from 1 January 2019 and the impact
and is non-recourse to the Group. This debt is further outlined in is described in notes 1 and 29 of the Consolidated Financial
note 12. Statements. The adoption of IFRS 16 has resulted in the
recognition of additional lease liabilities in relation to leases
Credit rating which had previously been classified as operating leases under
the principles of IAS 17 Leases, with the associated right-of-use
assets recognised in non-current assets. The net impact on
Rating Outlook Grade
adoption of IFRS 16 was a £40m reduction in total equity.
Moody’s Investors Service Baa2 Negative Investment
Standard & Poor’s BBB- Stable Investment
Fitch BBB+ Stable Investment
Additional commentary on key performance indicators
Order backlog, also known as unrecognised revenue, is the Underlying operating profit includes: (a) revenue and costs
amount of revenue on current contracts that is expected to be denominated in US dollars and euros on the basis of the
recognised in future periods. Civil Aerospace OE orders where exchange rates achieved based on our FX hedge book; (b)
the customer has retained the right to cancel (for deliveries in similar adjustments in respect of commodity derivatives; (c)
the next 7-12 months) are excluded. Further details are consequential adjustments to reflect the impact of exchange
included in note 2 on page 138. rates on trading assets and liabilities, and long-term contracts,
on a consistent basis; and (d) items of a one-off nature. Further
Underlying revenue is used as it reflects the impact of our
details and reconciliation to reported operating profit are
foreign exchange (FX) hedging policy by valuing foreign
included in note 2 on page 139.
currency revenue at the actual exchange rates achieved as a
result of settling FX contracts in the year. This provides a Free cash flow is the movement in net funds excluding lease
clearer measure of our year-on-year performance. Further liabilities during the year, before movements arising from
details and reconciliation to reported revenue are included in payments to shareholders, acquisitions and disposals, and FX.
note 2 on page 139. It excludes the cash cost of the restructuring plan and SFO
payments. Further details and reconciliation to reported cash
OTHER INFORMATION
Self-funded R&D as a proportion of underlying revenue –

flow are included in note 28 on page 179.
We expect to spend approximately 5% of underlying revenue
on R&D although this proportion will fluctuate depending on Cash flow per share is calculated using free cash flow (as
the stage of development of current programmes. We expect defined above) and the average number of shares in issue
this proportion will reduce modestly over the medium term. during the year, consistent with the EPS calculations in note 6
Further details are included in note 3 on page 140. on page 144.
Capital expenditure as a proportion of underlying revenue – Cash return on invested capital (CROIC) is calculated as cash
All proposed investments are subject to rigorous review to flow divided by invested capital. Cash flow is the free cash flow
ensure that they are consistent with forecast activity and will (as defined above), adjusted to remove R&D, PPE and software
provide value for money. We measure annual capital capital expenditure, certification costs, other intangibles, and
expenditure as the cash purchases of property, plant and working capital (excluding change in the net LTSA balance in
equipment acquired during the period; over the medium-term Civil Aerospace). Invested capital is defined as the sum of 15
we expect a proportion of around 4%. Further details are years net R&D investment, PPE and software at cost,
included in note 10 on page 149. certification costs, other intangibles (excluding M&A and
goodwill), and working capital (excluding net LTSA balance in
Civil Aerospace) and ten times current year lease payments.
Other Statutory Information
OTHER STATUTORY INFORMATION

Share price C Shares
C Shares have limited voting rights and attract a preferential
During the year, the share price reduced by 18% from 830p to 683p, dividend of 75% of LIBOR on the 0.1p nominal value of each share,
compared to a 14% increase in the FTSE aerospace and defence paid on a twice-yearly basis. The Company has the option to
sector and a 12% increase in the FTSE 100. The Company’s share price redeem the C Shares compulsorily, at any time if: the aggregate
ranged from 680p in December 2019 to 1004p in February 2019. number of C Shares in issue is less than 10% of the aggregate
number of all C Shares issued on or prior to that time or the event
Share capital of a capital restructuring of the Company; the introduction of a new
holding company; the acquisition of the Company by another
On 31 December 2019, the Company’s issued share capital
company; or a demerger from the Group.
comprised of:
On a return of capital on a winding-up, the holders of C Shares
1,930,995,313 Ordinary shares 20p each
shall be entitled, in priority to any payment to the holders of
30,607,559,470 C Shares 0.1p each ordinary shares, to the repayment of the nominal capital paid-up or
1 Special Share £1 credited as paid-up on the C Shares held by them, together with a
sum equal to the outstanding preferential dividend which will have
The ordinary shares are listed on the London Stock Exchange. been accrued but not paid until the date of return of capital.
The holders of C Shares are only entitled to attend, speak and vote
Payment to shareholders at a general meeting if a resolution to wind up the Company is to
The Company issues non-cumulative redeemable preference shares be considered, in which case they may vote only on that resolution.
(C Shares) as an alternative to paying a cash dividend.
Special Share
Shareholders can choose to: Certain rights attach to the special rights non-voting share
–– redeem all C Shares for cash; (Special Share) issued to the UK Secretary of State for Business,
–– redeem all C Shares for cash and reinvest the proceeds in the Energy & Industrial Strategy (Special Shareholder). These rights are
C Share Reinvestment Plan (CRIP); or set out in the Articles. Subject to the provisions of the Companies
–– keep the C Shares. Act 2006 (the Act), the Treasury Solicitor may redeem the Special
Share at par value at any time. The Special Share confers no rights
The CRIP is operated by Computershare Investor Services PLC to dividends but in the event of a winding-up it shall be repaid at
(the Registrar). The Registrar will purchase ordinary shares in the its nominal value in priority to any other shares.
market for shareholders electing to reinvest their C Share proceeds.
Shareholders wishing to participate in the CRIP or redeem their Certain provisions of the Articles (in particular those relating to the
C Shares in July 2020 must ensure that their instructions are lodged foreign shareholding limit, disposals and the nationality of the
with the Registrar no later than 5.00pm on 1 June 2020 (CREST Company’s Directors) that relate to the rights attached to the
holders must submit their election in CREST in sufficient time for Special Share may only be altered with the consent of the Special
it to settle before 2.55pm on 1 June 2020). Redemption will take Shareholder. The Special Shareholder is not entitled to vote at any
place on 3 July 2020. general meeting or any other meeting of any class of shareholders.
At the 2020 AGM, the Directors will recommend an issue of Restrictions on transfer of shares and limitations
71 C Shares with a total nominal value of 7.1p for each ordinary share. on holdings
The C Shares will be issued on 1 July 2020 to shareholders on the There are no restrictions on transfer or limitations on the holding
register on 24 April 2020 and the final day of trading with of the ordinary shares or C Shares other than under the Articles
entitlement to C Shares is 23 April 2020. Together with the interim (as described here), under restrictions imposed by law or regulation
issue on 3 January 2020 of 46 C Shares for each ordinary share with (for example, insider trading laws) or pursuant to the Company’s
a total nominal value of 4.6p, this is the equivalent of a total annual share dealing code. The Articles provide that the Company should
payment to ordinary shareholders of 11.7p for each ordinary share. be and remain under UK control. As such, an individual foreign
shareholding limit is set at 15% of the aggregate votes attaching
Further information for shareholders is on pages 210 and 211.
to the share capital of all classes (taken as a whole) and capable
of being cast on a poll and to all other shares that the Directors
Share class rights determine are to be included in the calculation of that holding.
The full share class rights are set out in the Company’s Article, which The Special Share may only be issued to, held by and transferred
are available at www.rolls-royce.com. The rights are summarised below. to the Special Shareholder or his successor or nominee.
Ordinary shares Shareholder agreements and consent requirements

Each member has one vote for each ordinary share held. Holders No disposal may be made to a non-Group member which, alone
of ordinary shares are entitled to: receive the Company’s Annual or when aggregated with the same or a connected transaction,
Report; attend and speak at general meetings of the Company; constitutes a disposal of the whole or a material part of either the
appoint one or more proxies or, if they are corporations, corporate nuclear propulsion business or the assets of the Group as a whole,
representatives; and exercise voting rights. Holders of ordinary without the consent of the Special Shareholder.
shares may receive a bonus issue of C Shares or a dividend and
on liquidation may share in the assets of the Company.
Other Statutory Information 207
Changes to the Articles of Association Deadlines for exercising voting rights

The Articles may be altered or added to or new articles may be Electronic and paper proxy appointments, and voting instructions,
adopted by a special resolution of the shareholders of the must be received by the Registrar not less than 48 hours before a
Company, subject to the provisions of the Act. general meeting.
Authority to issue shares Voting rights for employee share plan shares
At the 2019 AGM, authority was given to the Directors to allot new Shares are held in an employee benefit trust for the purpose of
C Shares up to a nominal value of £500m as an alternative to satisfying awards made under the various employee share plans.
a cash dividend. For shares held in a nominee capacity or if plan/trust rules provide
the participant with the right to vote in respect of specifically
In addition, an ordinary resolution was passed authorising the
allocated shares, the trustee votes in line with the participants’
Directors to allot new ordinary shares up to a nominal value
instructions. For shares that are not held absolutely on behalf
of £126,387,015 equivalent to one-third of the issued share capital
of specific individuals, the general policy of the trustees, in
of the Company. This resolution also authorised the Directors
accordance with investor protection guidelines, is to abstain
to allot up to two-thirds of the total issued share capital of the
from voting in respect of those shares.
Company, but only in the case of a rights issue.
A further special resolution was passed to effect a disapplication Change of control
of pre-emption rights for a maximum of 5% of the issued share
capital of the Company. Contracts and joint venture agreements
There are a number of contracts and joint venture agreements
These authorities are valid until the 2020 AGM or 30 June 2020,
which would allow the counterparties to terminate or alter those
whichever is earlier, and the Directors propose to renew each of
arrangements in the event of a change of control of the Company.
them at the 2020 AGM. The Board believes that these authorities
These arrangements are commercially confidential and their
will allow the Company to retain flexibility to respond to
disclosure could be seriously prejudicial to the Company.
circumstances and opportunities as they arise.
Borrowings and other financial instruments
ITP Aero The Group has a number of borrowing facilities provided by
Following approval from the relevant authorities in Spain, on
various banks. These facilities generally include provisions which
19 December 2017 the Group acquired a 53.1% shareholding in
may require any outstanding borrowings to be repaid or the
ITP Aero from SENER resulting in ITP Aero becoming a wholly‑owned
alteration or termination of the facility upon the occurrence
subsidiary of the Company. The consideration of €718m was settled
of a change of control of the Company. At 31 December 2019,
over a two-year payment period, payable in eight equal instalments,
these facilities were less than 2% drawn (2018: 19%).
and the agreement with SENER allowed the Company flexibility to
settle up to 100% of the consideration in the form of ordinary The Group has entered into a series of financial instruments
shares. Three payments were settled in 2019 all in the form of to hedge its currency, interest rate and commodity exposures.
ordinary shares, as follows: These contracts provide for termination or alteration in the event
No. of
that a change of control of the Company materially weakens the
Instalment ordinary shares Date creditworthiness of the Group.
6th 8,681,110 19 March 2019 Employee share plans
7th 9,301,958 19 June 2019 In the event of a change of control of the Company, the effect
8th 10,990,194 19 September 2019 on the employee share plans would be as follows:
–– Deferred share bonus – the shares would be released from
Authority to purchase own shares
OTHER INFORMATION
trust immediately.
At the 2019 AGM, the Company was authorised by shareholders to –– S
hareSave – options would become exercisable immediately.
purchase up to 189,580,523 of its own ordinary shares representing The new controlling company might offer an equivalent option
10% of its issued ordinary share capital. in exchange for cancellation of the existing option.
The authority for the Company to purchase its own shares expires –– S
hare Incentive Plan (SIP) – consideration received as shares
at the conclusion of the 2020 AGM or 30 June 2020, whichever is would be held within the SIP, if possible, otherwise the
the earlier. A resolution to renew the authority will be proposed at consideration would be treated as a disposal from the SIP.
the 2020 meeting.
–– LTIP – awards would vest on the change of control, subject to
The Company did not purchase any of its own ordinary shares the Remuneration Committee’s judgement of performance
during 2019. and may be reduced pro rata to service in the vesting period.
Any applicable holding period will cease in the event of a
change in control.
Other Statutory Information
Accounting policies, financial instruments which might not be thought of as political expenditure in the usual
sense, could be captured. Activities of this nature would not be
and risk thought of as political donations in the ordinary sense of those
Details of the Group’s accounting policies, together with details of words. The resolution to be proposed at the 2020 AGM, authorising
financial instruments and risk, are provided in notes 1 and 19 to the political donations and expenditure, is to ensure that the Group does
Consolidated Financial Statements on pages 123 and 157. not commit any technical breach of the Act.
During the year, expenses incurred by Rolls-Royce North America,
Major shareholdings Inc. in providing administrative support for the Rolls-Royce
At 31 December 2019, the following shareholders had notified North America political action committee (PAC) was US$81,866
an interest in the issued ordinary share capital of the Company (2018: US$111,961). PACs are a common feature of the US political
in accordance with section 5.1.2 of the Disclosure and system and are governed by the Federal Election Campaign Act.
Transparency Rules: The PAC is independent of the Group and independent of any
% of issued ordinary
Shareholder Date notified share capital *
political party. The PAC funds are contributed voluntarily by
employees and the Group cannot affect how they are applied,
Blackrock, Inc. 5 November 2019 below 5
although under US law, the business expenses are paid by the
Harris Associates L.P. 21 October 2019 5.01 employee’s company. Such contributions do not count towards the
ValueAct Indirect Holdings 22 March 2019 9.48 limits for political donations and expenditure for which shareholder
The Capital Group approval will be sought at this year’s AGM to renew the authority
Companies, Inc 12 October 2017 5.07 given at the 2019 AGM.
* Percentages are shown as a percentage of the Company’s issued share capital when the
Company was notified of the change in holding. Branches
As at 27 February 2020, no further changes had been notified. Rolls-Royce is a global company and our activities and interests
are operated through subsidiaries, branches of subsidiaries,
Directors joint ventures and associates which are subject to the laws
and regulations of many different jurisdictions. Our subsidiaries,
The names of the Directors who held office during the year are
joint ventures and associates are listed on pages 187 to 193.
set out on pages 62 to 64. In addition, Brad Singer and Ruth
Cairnie were directors during the year. They stepped down
on 9 December and 31 December respectively. Financial instruments
Details of the Group’s financial instruments are set out in note 19
Directors’ Indemnities to the Consolidated Financial Statements.
The Directors have the benefit of an indemnity provision contained
in the Articles. In addition, the Directors have been granted a Related party transactions
qualifying third party indemnity provision which was in force Related party transactions are set out in note 26 to the
throughout the financial year and remains in force. Also, Consolidated Financial Statements.
throughout the year, the Company purchased and maintained
Directors’ and Officers’ liability insurance in respect of itself and for
its Directors and Officers. Information required by UK Listing Rule (LR) 9.8.4
There are no disclosures to be made under LR 9.8.4.
Disclosures in the Strategic Report
The Board has taken advantage of section 414C(11) of the Act Management report
to include disclosures in the Strategic Report including: The Strategic Report and the Directors’ Report together are the
–– employee involvement; management report for the purposes of Rule 4.1.8R of the DTR.
–– the employment of disabled people;
–– information about charitable donations; Disclosure of information to auditors
–– the future development, performance and position of the Group;
Each of the persons who is a Director at the date of approval of
–– the financial position of the Group;
this report confirms that so far as the Director is aware, there is
–– R&D activities;
no relevant audit information of which the Company’s auditor is
–– the principal risks and uncertainties; and
unaware. The Director has taken all steps that he or she ought to
–– particulars of important events affecting the Company since the
have taken as a director in order to make himself or herself aware
financial year end.
of any relevant audit information and to establish that the
Company’s auditor is aware of that information.
Political donations
This confirmation is given, and should be interpreted, in accordance
The Company’s policy is that it does not, directly or through any with the provisions of section 418 of the Act.
subsidiary, make what are commonly regarded as donations to any
political party. However, the Act defines political donations very
broadly and so it is possible that normal business activities, such as
sponsorship, subscriptions, payment of expenses, paid leave for
employees fulfilling certain public duties and support for bodies
representing the business community in policy review or reform,
Other Statutory Information 209
Greenhouse gas emissions

In 2019, our total net greenhouse gas (GHG) emissions were 586 kilotonnes carbon dioxide equivalent (ktCO2e). This represents a decrease
of 3% compared with 602 ktCO2e in 2018.
Aspect Tonnes CO2e 2015 2016 2017 2018 2019
Emissions from activities for which the Global 209,302 229,691 254,032 250,237 247,159
Company owns or controls including the (excluding UK)
combustion of fuel and operation of
facilities. Direct GHG emissions (Scope 1)
UK 108,325 103,581 99,918 85,120 91,396
Emissions from the purchase of Global 170,276 168,849 161,115 166,199 161,035
electricity, heat, steam and cooling (excluding UK)
purchased for our use. Indirect
GHG Emissions (Scope 2) location-based
UK 173,535 144,334 122,657 100,827 86,548
Total gross GHG emissions Global 379,578 398,540 415,147 416,436 408,193
(excluding UK)
UK 281,861 247,915 222,575 185,947 177,944
Energy consumption used to calculate Global 1,538,198,000 1,639,939,000 1,694,823,000 1,707,642,000 1,648,572,000
above emissions – kWh (excluding UK)
UK 885,952,000 832,549,000 811,948,000 762,917,000 767,701,000
Intensity Ratio (total GHG emissions Total 0.054 0.047 0.046 0.040 0.038
per £m revenue)
Emissions from the purchase of Global – – – – –
electricity, heat, steam and cooling (excluding UK)
purchased for our use. Indirect
GHG emissions (Scope 2) market-based]
UK – – – – 874
Outside of Scopes Global – – – – –
(excluding UK)
UK – – – – 19,336
The above figures include 230,972,000 kWh of renewable energy With the exceptions noted above, we have reported on the
purchased via a long-term Power Purchase Agreement (PPA) for underlying energy use and emission sources required under the
use by our facilities based in the UK, supplied through a third party. Companies (Directors’ Report) and Limited Liability Partnerships
The source includes a proportion of electricity that was generated (Energy and Carbon Report) Regulations 2018. All these sources fall
by the combustion of biofuel. The associated emissions are included within the scope of our Consolidated Financial Statements.
above under the location-based Scope 2 emissions (using grid
We have used the GHG Protocol Corporate Accounting and
average emission factors). They are also reported separately as
Reporting Standard (revised edition) as of 31 December 2014
market-based Scope 2 emissions (covering the emissions of nitrous
utilising the operational control approach and emission factors
oxide and methane) and Outside of Scopes (covering the emissions
from the UK Government’s GHG Conversion Factors for Company
of carbon dioxide). This has resulted in a net reduction of
Reporting 2019. We report our emissions of: carbon dioxide;
39 kilotonnes from our total GHG emissions.
OTHER INFORMATION
methane; nitrous oxide; hydrofluorocarbons; and perfluorocarbons

In addition, the above figures include 7,354,000 kWh of electricity on a carbon dioxide equivalent basis. We have no emissions of
generated on-site from renewable energy sources. sulphur hexafluoride or nitrogen trifluoride.
The figures for 2015 through to 2018 inclusive have been restated Further details on our methodology for reporting and the criteria
to remove emissions associated with the Commercial Marine used can be found within our basis of reporting, available to
business sold on 1 April 2019. Figures for 2015 exclude emissions download at www.rolls-royce.com.
associated with ITP Aero (which became a wholly owned subsidiary
on 19 December 2017). We have included the reporting of fugitive
emissions of hydrofluorocarbons (HFCs), associated with air
conditioning equipment, into our GHG emissions figures from 2016.
These include emissions from our facilities in the UK, US, Canada
and France only. We do not anticipate that emissions from other
facilities will have a material impact.
Shareholder Information
SHAREHOLDER INFORMATION
Financial calendar 2020–2021
7 MAY 11.00AM 1 JULY 1 DECEMBER 5 JANUARY

AGM Allotment of C Shares Record date for Allotment of C Shares
Kings Place cash dividend on
90 York Way 2 JULY C Shares 5 JANUARY
London Payment of cash dividend on C Shares Payment of cash dividend on C Shares
N1 9FX
3 JULY 6 JANUARY
Payment of C Share redemption monies Payment of C Share redemption
monies
22 JULY
New share certificates issued (at the latest) 20 JANUARY
New share certificates issued
6 AUGUST (at the latest)
Announcement of half-year results
APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR
2020 2020 2020 2020 2020 2020 2020 2020 2020 2021 2021 2021
23 APRIL 1 JUNE 5.00PM 29 OCTOBER 1 DECEMBER FEBRUARY/

Ex-entitlement Deadline for receipt Ex-entitlement 5.00PM MARCH
to C Shares by Registrar of C Share to C Shares Deadline for receipt Announcement
instructions (2:55pm by Registrar of C Share of full-year results
24 APRIL for CREST holders) 30 OCTOBER instructions (2:55pm and Annual Report
Record date for Record date for
for CREST holders) published
entitlement to 3 JUNE entitlement to
C Shares Record date for cash C Shares 31 DECEMBER
dividend on C Shares Financial year end
Managing your shareholding Share dealing

Your shareholding is managed by Computershare Investor Services The Registrar offers shareholders an internet dealing service
PLC (the Registrar). When making contact with the Registrar please at www.computershare.co.uk and a telephone dealing service
quote your Shareholder Reference Number (SRN). This is a (+44 (0)370 703 0084). Real-time dealing is available during market
10-digit number prefixed with the letter ‘C’ that can be found hours, 8.00am to 4.30pm, Monday to Friday excluding bank
on the right-hand side of your share certificate or in any other holidays. Orders can still be placed outside of market hours. The
shareholder correspondence. fee for internet dealing is 1% of the transaction value subject to
a minimum fee of £30. The fee for telephone dealing is 1% of the
You can manage your shareholding at www.investorcentre.co.uk,
transaction value plus £50. Stamp duty of 0.5% is payable on all
speak to the Registrar on +44 (0)370 703 0162 (8.30am to 5.30pm
purchases. This service is only available to shareholders resident
Monday to Friday) or you can write to the Registrar at
in certain jurisdictions. Before you can trade you must register
Computershare Investor Services PLC, The Pavilions, Bridgwater
to use the service. Other share dealing facilities are available
Road, Bristol BS13 8AE.
but you should always use a firm regulated by the FCA
If you hold your shares in a share dealing account (sometimes (see www.fca.org.uk/register).
referred to as a nominee account) then you must contact your
account provider with any questions about your shareholding.
Your share certificate
Your share certificate is an important document. If you sell or
Payments to shareholders transfer your shares you must make sure that you have a valid share
The Company makes payments to shareholders by issuing certificate in the name of Rolls-Royce Holdings plc. If you place
redeemable C Shares of 0.1p each. You can redeem C Shares for an instruction to sell your shares and cannot provide a valid share
cash and either take the cash or reinvest the cash to purchase certificate, the transaction cannot be completed and you may be
additional ordinary shares providing you complete a payment liable for any costs incurred by the broker. If you are unable to
instruction form, which is available from the Registrar. Once you find your share certificate please inform the Registrar immediately.
have submitted your payment instruction form, you will receive cash
or additional ordinary shares each time the Company issues
C Shares. If you choose to receive cash we strongly recommend that American Depositary Receipts (ADR)
you include your bank details on the payment instruction form and ADR holders should contact the depositary, JP Morgan, by calling
have payments credited directly to your bank account. This removes +1 (800) 990 1135 (toll free within the US) or +1 (651) 453 2128
the risk of a cheque going astray and means that cleared payments (outside the US) or emailing [email protected].
will be credited to your bank account on the payment date.
Shareholder Information 211
Warning to shareholders – investment scams Visit Rolls-Royce online

We are aware that some of our shareholders have received Visit www.rolls-royce.com to find out more about the latest financial
unsolicited telephone calls or correspondence, offering to buy results, the share price, payments to shareholders, the financial
or sell their shares at very favourable terms. The callers can be very calendar and shareholder services.
persuasive and extremely persistent and often have professional
websites and telephone numbers to support their activities.
These callers will sometimes imply a connection to Rolls-Royce
and provide incorrect or misleading information. This type of call
should be treated as an investment scam – the safest thing to do
is hang up.
You should always check that any firm contacting you about
potential investment opportunities is properly authorised by
the FCA. If you deal with an unauthorised firm you will not
be eligible for compensation under the Financial Services
Compensation Scheme. You can find out more about protecting
yourself from investment scams by visiting the FCA’s website at
www.fca.org.uk/consumers, or by calling the FCA’s consumer
helpline on 0800 111 6768 (overseas callers dial +44 20 7066 1000).
If you have already paid money to share fraudsters contact
Action Fraud immediately on 0300 123 2040, whose website is Keeping up to date
www.actionfraud.police.uk. You can sign up to receive the latest news updates to your phone
Remember: if it sounds too good to be true it probably is. or email address by visiting www.rolls-royce.com and registering
for our alert service.
Dividends paid on C Shares held

Record date for
C Share calculation period C Share dividend rate (%) C Share dividend Payment date
1 July 2019 – 31 December 2019 0.32 15 November 2019 6 January 2020
1 January 2019 – 30 June 2019 0.39 3 June 2019 2 July 2019
Previous C Share issues

Apportionment values CGT apportionment
Latest date Price of
No. of C for receipt ordinary Value of
Shares Record of payment shares on C Share
issued per date for instruction first day issues per Date of CRIP CRIP
ordinary entitlement forms by of trading ordinary Ordinary redemption purchase purchase
Issue date share to C Shares Registrar (p) shares (p) shares (%) C Shares (%) of C Shares date price (p)
3 January 25 October 2 December 6 January 6 January
2020 46 2019 2019 677.80 4.6 99.33 0.67 2020 2020 673.203
1 July 26 April 3 June 4 July 4 July OTHER INFORMATION
2019 71 2019 2019 857.40 7.1 99.18 0.82 2019 2019 871.5668
For information on earlier C Share issues, please refer to www.rolls-royce.com.
Analysis of ordinary shareholders at 31 December 2019
Number of % of total Number % of total

Type of holder shareholders shareholders of shares shares
Individuals 167,391 97.90 85,147,751 4.41
Institutional and other investors 3,592 2.10 1,845,807,562 95.59
Total 170,983 100.00 1,930,955,313 100.00
Size of holding (number of ordinary shares)
1 – 150 55,622 32.53 5,034,073 0.26
151 – 500 82,144 48.04 23,191,006 1.20
501 – 10,000 31,642 18.51 48,086,670 2.49
10,001 – 100,000 1,078 0.63 29,912,513 1.55
100,001 – 1,000,000 320 0.19 105,498,096 5.46
1,000,001 and over 177 0.10 1,719,272,955 89.04
Total 170,983 100.00 1,930,995,313 100.00
Glossary
GLOSSARY
ABC anti-bribery and corruption HPT high pressure turbine
ACARE Advisory Council for Aviation Research HSE health, safety and environment
and Innovation in Europe IASB International Accounting Standards Board
AGM annual general meeting IFRS International financial reporting standards
ALPS Advanced Low Pressure System KPIs key performance indicators
AMRCs Advanced Manufacturing Research Centres ktCO2e kilotonnes carbon dioxide equivalent
AOG aircraft on ground kW kilowatts
APM alternative performance measure LGBT+ lesbian, gay, bisexual and transgender
Articles Articles of Association of Rolls-Royce Holdings plc LIBOR London inter-bank offered rate
bps basis points LRIP low rate initial production
Brexit UK exit from the European Union LTIP long-term incentive plan
C Shares non-cumulative redeemable preference shares LTPR long-term planning exchange rate
C&A commercial and administrative LTSA long-term service agreement
CARs contractual aftermarket rights M&A mergers & acquisitions
CEO chief executive officer MoU memorandum of understanding
CFO chief financial officer MRO maintenance repair and overhaul
CGT capital gains tax MW megawatts
Our Code Global Code of Conduct NCI non-controlling interest
the Code UK Corporate Governance Code 2018 NOx nitrogen oxide
Company Rolls-Royce Holdings plc OCI other comprehensive income
CPS cash flow per share OE original equipment
CRIP C Share reinvestment plan OECD Organisation for Economic Co-operation
CROIC cash return on invested capital and Development
D&I diversity & inclusion OEM original equipment manufacturer
DJSI Dow Jones Sustainability Index P&L profit and loss
DoJ US Department of Justice PBT profit before tax
DPAs deferred prosecution agreements PPE property, plant and equipment
DTR the FCA’s Disclosure Guidance and PSMS product safety management system
Transparency Rules PSP performance share plan
EASA European Aviation Safety Agency R&D research and development
EIS entry into service R&T research and technology
ELG Enterprise Leadership Group REACH registration, evaluation, authorisation and restriction
EPS earnings per share of chemicals
ERG employee resource group Registrar Computershare Investor Services PLC
ESG environment, social and governance RMS risk management system
EU European Union RRMS Rolls-Royce management system
EUR euro RRSAs risk and revenue sharing arrangements
EVTOL electric vertical take-off and landing SFO UK Serious Fraud Office
FCA Financial Conduct Authority SMR small modular reactors
FCF free cash flow STEM science, technology, engineering and mathematics
FRC Financial Reporting Council TCFD Taskforce on Climate-related Financial Disclosures
FTE full time equivalent TRI total reportable injuries
FX foreign exchange TSR total shareholder return
GBP Great British pound or pound sterling USAF United States Air Force
GHG greenhouse gas USD/US$ United States dollar
Group Rolls-Royce Holdings plc and its subsidiaries UTCs University Technology Centres
Trade marks Credits

The following trade marks which appear throughout this Annual Report are trade Designed and produced by CONRAN DESIGN GROUP
marks registered and owned by companies within the Rolls-Royce Group:
Printed on Innovation Premium which is an FSC® certified paper. The pulps used
BR710® Pioneering the power that matters™ are Totally Chlorine Free (TCF), and the manufacturing mill has ISO 14001
CorporateCare® Pioneers of Power® environmental management certification. The mill’s energy is produced from 100%
Gnome® RB211® biomass fuels sourced from local forestry and no fossil fuels are used. The carbon
emissions have been measured and offset using the World Land Trust’s Carbon
LiftSystem™ Reman®
Balanced scheme.
MTU® TotalCare®
MTU PowerPacks® Trent® Printed in the UK by using their
environmental printing technology, using vegetable
Pearl® UltraFan®
inks throughout. is a CarbonNeutral®
company. Both the paper manufacturing mill and
Photograph credits the printer are registered to the Environmental
Management System ISO 14001 and are
The Tempest aircraft image shown on page 34 is reproduced courtesy Forest Stewardship Council® (FSC®)
of BAE Systems. chain-of-custody certified.
The Astute submarine image shown on page 35 is under Crown copyright.

It contains public sector information licensed under the Open Government CBP000256
Licence v.3.0.
© Rolls-Royce plc 2020
Rolls-Royce Holdings plc
Registered office:
Kings Place
90 York Way
London
N1 9FX
T +44 (0)20 7222 9020
www.rolls-royce.com
Company number 7524813

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2019

Group Financial Highlights Contents

Free cash flow Underlying revenue by business in 2019

£873m ITP Aero

Underlying operating profit

Order backlog Patents approved Gross R&D Countries with Employees

£60.9bn 830 £1.46bn 50 51,700

Our core businesses in 2019

AEROSPACE the large commercial aircraft,

markets. The business uses

SYSTEMS reciprocating engines, and complete

systems. It serves the marine,

Underlying operating profit 2

Underlying operating profit

ITP AERO £936m

SIR IAN DAVIS, CHAIRMAN

CHIEF EXECUTIVE’S REVIEW

WARREN EAST, CHIEF EXECUTIVE

Delivery on 2019 priorities

and we refined our F130 engine for the

People and culture

Customers Operations Financial People and culture

commitment metrics improvements of over of at least £1bn engagement as measured

Safety Operate safely

Quality Trusted to deliver excellence

PURPOSE, VISION AND STRATEGY

OUR VISION OUR STRATEGY

Pioneering Our strategy reflects

the power Horizon 1 Maintain and

that matters defend core businesses Champion

Build a balanced portfolio

Grow installed Develop world-

A Safety E Compliance H Market and financial shock Principal Risks

KEY PERFORMANCE INDICATORS

Order backlog Underlying revenue Underlying operating profit

How we define it How we define it How we define it

Capital expenditure as a proportion Self-funded R&D as a proportion

5.0% 7.2% £873m

How we define it How we define it How we define it

How we define it How we define it

Non-financial key performance indicators

Customer metric Employee engagement

STEPHEN DAINTITH, CHIEF FINANCIAL OFFICER

Both of these deals are helping us to

DEFINING OUR ALTERNATIVE Revenue

PERFORMANCE MEASURES Reported measure

Business performance is reviewed and managed on an Underlying performance measure

Free cash flow Underlying performance measure

Core trading summary

Summary income statement – Core businesses 1

Group funds flow

Expenditure on intangible assets Change in receivables/payables Pensions

Intangible assets Investments in joint ventures consideration for the acquisition of

Group Reported Results

Reconciliation between underlying and reported results

Civil Aerospace is a major manufacturer of aero 1

engines for the large commercial aircraft, regional

uses its engineering expertise, in-depth knowledge

Progress against our 2019 Group priorities

A Safety E Compliance H Market and financial shock Principal Risks

5.0% 7.2% £873m