Rolls-Royce Regulatory News (RR.)

12 February 2016

ROLLS-ROYCE HOLDINGS PLC

2015 FULL YEAR RESULTS

Warren East, Chief Executive, said: "In the context of challenging trading conditions our overall performance for the year was in line with the expectations we set out in July 2015. It was a year of considerable change for Rolls-Royce: in our management, in some market conditions and in our near-term outlook. At the same time, there were some important constants: the underlying growth of our long-term markets, the quality of our mission critical technology and services, and strength of customer demand for these, which are reflected in our growing order book."

Key financials

· Underlying revenue £13.4bn (FY 2014: £13.9bn), down 1% at constant exchange rates

· Underlying profit before tax £1,432m (FY 2014: £1,620m), down 12% at constant exchange rates

o £1,355m before one-off items (see page 4) in line with lower half of 2015 guidance range

· Restructuring programmes started prior to November 2015 continue to make good progress:

o £145m of annualised cost savings expected by end 2017

· Final payment to shareholders reduced by 50% to 7.1 pence per share (2014 final: 14.1 pence)

· Trading outlook for 2016 unchanged

· 4% growth in order book underpins confidence in strong market share growth for Civil Aerospace

Underlying: for definition, see note 2 on page 24; * From continuing operations (re-presented to exclude Energy as a discontinued operation); ** At constant exchange rates. *** Free cash flow defined as operating cash after capital expenditure, pensions and taxes, before payments to shareholders, foreign exchange and acquisitions & disposals

New transformation programme launched in November 2015

· Set up a transformation team to focus activities, add pace and simplicity to the business and drive cost reductions of between £150m and £200m per annum:

o 20% reduction in top two layers of senior management; further reductions planned

o Roughly 50% of targeted cost savings already identified

o Initial exceptional restructuring charge of £75-100m in 2016

o Further actions underway to generate additional savings in 2017

· Increased disclosure and transparency included in this full year results statement

Commenting on the outlook, Warren East, Chief Executive, added: "Our outlook for 2016 is unchanged; despite steady market conditions for most of our businesses it will be a challenging year as we start to transition products and sustain investment in Civil Aerospace and tackle weak offshore markets in Marine.

"The pace of investment required to transform the business creates near-term pressure on free cash flow. At the same time, we need to sustain a healthy balance sheet to ensure we have the financial flexibility to maintain a strong investment grade credit rating. As a result, the Board is recommending that the payment to shareholders is halved in cash terms at the full year and the next half year. We recognise the importance of a healthy 'dividend' to our shareholders. Subject to short-term cash needs, we intend to review the payment so that it will be rebuilt over time to an appropriate level. This reflects the Board's long-standing confidence in the strong future cash generation of the business.

"Our strong order book continues to grow, built around market-leading products and services. This provides us with an outstanding opportunity to deliver long-term profitable growth and capture significant incremental market share. The transformation programme is now well underway. This will add pace and simplify our business, making us a more resilient company. Overall, we have made a good start to the journey that will return the company to profitable growth."

Enquiries

Investors:

John Dawson +44 20 7227 9087

Helen Harman +44 20 7227 9339

Ross Hawley +44 20 7227 9282

Media:

Richard Wray +44 20 7227 9163

Photographs and broadcast-standard video are available at www.rolls-royce.com.

A PDF copy of this report can be downloaded from www.rolls-royce.com/investors.

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

Results Presentation

A presentation will be held at 09:00 (GMT) today. Details of how to join the event online are provided below. Downloadable materials will be available on the Rolls-Royce website from the start of the event.

Online webcast registration details for 12 February presentation

To register for the live webcast (including Q&A participation) please visit this link:

http://edge.media-server.com/m/p/cddndf3y

Please use this same link to access the webcast replay after the event.

2015 Business Highlights

All percentage or absolute change figures in this document are on a constant translational currency basis unless otherwise stated

* Based on gross revenues prior to intra-group eliminations

Civil Aerospace

· Underlying revenue up 3%; solid growth in aftermarket revenues offset lower new engine sales

· Underlying profit before financing 14% lower than 2014; largely reflecting lower gross margins, due to adverse mix effects and higher R&D charges, partially offset by the impact of life-cycle cost improvements, retrospective long-term contract accounting benefits, a reversal of impairment of Contractual Aftermarket Rights and lower restructuring costs

· £3.8bn order book growth; led by Trent 900 and XWB orders - XWB now nearly 50% of order book

· New Trent engines, 1000 TEN, XWB-97 and 7000, on track for entry into service in 2017 and 2018

· Good progress modernising supply chain to reduce costs and increase capacity for Trent XWB ramp up over next four years

Defence

· Underlying revenue 5% lower; revenues impacted by weaker helicopter and trainer volumes, partially offset by higher combat original equipment sales

· Underlying profit before financing up 4%; steady gross margin and lower restructuring costs offset higher R&D charges

· Strong positions in transport & patrol and combat underpin outlook for a steady performance in 2016

· Major five year $600m investment in Indianapolis to improve cost base and benefit long-term growth

Power Systems

· Underlying revenue 3% lower; weaker original equipment partially offset by good growth in services

· Underlying profit before financing 15% lower; led by lower gross margin

· Positive outlook for 2016; healthy closing order book with good positions in key market segments

· Long-term R&D investments to increase cost competitiveness in higher volume engine applications

Marine

· Underlying revenue down 16%; weak offshore markets impacting both OE and aftermarket revenues

· Underlying profit before financing down 94%; significant reduction in gross margin, led by lower volumes, and higher restructuring costs only partially offset by reduced commercial and administration cost

· Challenging outlook for 2016; led by reduced demand in offshore oil and gas markets

· Launched two restructuring programmes in 2015 focused on manufacturing footprint and back-office functions; expected benefits to start to accrue from 2016 onwards

Nuclear

· Underlying revenue 9% higher; strong service revenues led by increased submarine work

· Underlying profit before financing unchanged, excluding the benefit from a £19m R&D credit; volume benefit offset by lower margins

· 2016 outlook steady - focus on improving delivery performance and developing civil nuclear opportunities

· Investing in the business to extend systems offering and increase service scope

Other

· Includes the residual retained assets relating to the Energy business which were not included in the sale to Siemens in 2014 and a gain on a one-off intellectual property settlement

Chief Executive's Review

Introduction

In the context of challenging trading conditions our overall performance for the year was in line with the expectations we set out in July 2015. It was a year of considerable change for Rolls-Royce: in our management, in some market conditions and in our near-term outlook. At the same time, there were some important constants: the underlying growth of our long-term markets, the quality of our mission critical technology and services, and strength of customer demand for these, which are reflected in our growing order book. While we have some near-term challenges, these constants provide us with confidence in a strong, profitable, cash-generative future.

Performance in 2015

Our performance in 2015 was broadly in line with our early expectations, with Marine markets causing most of the weakness. At the same time we have continued to invest in products and services to support our customers and reinforce the long-term strength of our order book, valued at £76.4bn at the year end, up 4% on 2014.

Group revenue was broadly unchanged on a constant currency basis with good growth in Civil Aerospace offsetting weaknesses in Marine. The combination of some difficult market conditions, sustained engineering investment and high fixed costs led to underlying profit before finance charges and tax 11% lower at £1,492m.

Civil Aerospace delivered an underlying profit before finance charges and tax of £812m (2014: £942m). Defence delivered £393m (2014: £366m), Power Systems £194m (2014: £253m) and Marine £15m (2014: £138m). Nuclear delivered £70m (2014: £50m). More detail on each business is included in the Operational Review.

After underlying financing costs of £60m (2014: £61m), underlying profit before tax was £1,432m (2014: £1,620m). Excluding the benefit of a one-off intellectual property settlement of £58m, triggered by the third-party acquisition of a former business partner, and a favourable £19m R&D credit benefiting our Nuclear business, underlying profit before tax would have been £1,355m, in line with the lower half of the 2015 guidance range set out in July last year.

After an underlying tax charge of £351m (2014: £388m) and adjusting for minority interests, underlying profit for the year was £1,080m (2014: £1,226m). With an average 1,839m shares in issue, underlying earnings per share were 58.7p (2014: 65.4p).

Reported profit before tax was £160m (2014: £67m), compared to an underlying profit before tax of £1,432m (2014: £1,620m). A full reconciliation of headline to underlying profit can be found on page 21.

Free cash flow of £179m was materially higher than our Q3 expectations, reflecting strong cash collections at the end of the year from a number of key customers, a better than expected overall working capital performance and the non-recurring cash settlement arising from the intellectual property agreement mentioned above. Some of this positive variance is likely to reverse early in 2016.

A more detailed review of financial performance is included in the Group Trading Summary and the Financial Review.

Positive market developments continue to drive long-term growth

The long-term positive market trends for our leading power systems remain unchanged despite some near-term uncertainties that are expected to impact small aerospace engine production volumes and service activity on older widebody engines over the next couple of years. The trends driving demand for growth in large passenger aircraft, corporate jets and maritime activity remain strong; in particular a growing aspirational and mobile middle-class, particularly in Asia, and globalisation in business, trade and tourism. In addition, capacity constraints at the airframe manufacturers and a strong underlying demand for newer, more fuel efficient aircraft, should provide resilience to manufacturing schedules over the next few years as the industry transitions to new airframes during a strong replacement cycle.

The most significant short-term challenge that has emerged in 2015 relates to the changing demand for our Trent 700 engine as Airbus transitions production from old to new airframes. This has had a knock on effect on both demand for and pricing of the remaining engines to be delivered. Once completed, we will benefit from an exclusive position with the new Trent 7000 on the A330neo. In the near-term the profit impact of this transition is negative; the impact of lower pricing and gross margin is exacerbated by the accounting effects of changes within our large engine aerospace product mix as we transition to a portfolio increasingly comprising "unlinked" platform positions. However, the roll-out of new engines will significantly grow our market share and the installed base of new engines that will deliver strong aftermarket revenues for decades to come.

We recognise that these changes have been exacerbated by market uncertainty as to the impact of TotalCare accounting on our financial statements. As a result, we are increasing our financial disclosure to present a simpler narrative that will more clearly describe how the key drivers of performance translate into our financial results and aid transparency and understanding. These are included in the Trading Summary.

Announced initial findings of a detailed operational review

Our strategic priorities for 2015 remained largely consistent throughout the year, with a clear focus on the customer, innovation, and on driving long-term profitable growth. However, with short-term market conditions around us changing, it has been appropriate to review these priorities as we look to the next three or four years.

Since July, we have been conducting a review of operations and presented the initial conclusions in November. As part of this we shared our views on the strengths and weaknesses of our business portfolio and updated management's future focus and priorities around delivery and transformation.

Clear areas for business improvement

The review of operations also highlighted a number of opportunities to drive further performance improvements over and above the extensive restructuring programmes already underway. As we grew as an organisation we embedded costs and complexity in the business which, in periods of significant investment and product transition like now, is impacting our performance. But the higher costs also present a significant opportunity; to simplify what we do and sustainably reduce the cost of management, creating a more streamlined, resilient and sustainable business.

Strategic focus going forward

The review has led us to recast our priorities for 2016 onwards. As before, the overarching theme continues to be developing our products, services and order book to drive long-term profitable growth. We will do this by focusing on three common themes across all our businesses:

· investing in and developing engineering excellence

· driving a manufacturing and supply chain transformation which will embed operational excellence in lean, lower-cost facilities and processes and, finally,

· leveraging our installed base, product knowledge and engineering capabilities to provide customers with outstanding service through which we can capture aftermarket value long into the future.

Our ability to deliver these priorities will be enhanced by a major transformation of our organisation; to simplify our processes and management structure, to add pace to our decision making and execution, and to provide space to develop our people and create a stronger, high performance culture.

These themes will become the cornerstones of our operational priorities going forward.

Major new transformation programme creating meaningful cost savings

The objective of our new transformation programme is to simplify the organisation, streamline senior management, reduce fixed costs and add greater pace and accountability to decision making. Our target is to deliver incremental gross cost savings of between £150m and £200m per annum, with the full benefits accruing from the end of 2017 onwards.

In the last two months we have already announced a 20% reduction in top two layers of senior management and further reductions planned for 2016 and onwards. This has included removal of the divisional structure. To date we have already identified around 50%, or £75-100m, of targeted cost savings with a related exceptional restructuring charge of £75-100m which will be taken in 2016. Around £30-50m of the initial savings should be achieved in 2016 with the full run rate benefiting 2017. Further actions are underway to quantify the additional savings needed to reach our goals, together with the related costs which we expect to take in 2017.

To ensure we remain focused, we have set up a transformation team who will drive change to simplify processes and activities across the company to deliver sustainable performance improvements. The new team will ensure other restructuring programmes maintain progress. They will also help develop the comprehensive range of key performance indicators needed to support the changes we are looking to make inside the business. Several measures around site level productivity and aerospace engine unit costs have already being adopted within the business. These and other measures will be important indicators of the changing culture around productivity, cost reduction, investment efficiency and process waste. Details on new measures will be set out in further announcements.

Restructuring initiatives started prior to November continue to make good progress

During 2014 and 2015 restructuring initiatives were started, largely focused on our operational footprint within Aerospace and Marine.

In 2015, we consolidated our Civil Aerospace repair and overhaul activities, enabling the closure of sites in Brazil and the UK, along with further rationalisation of our UK manufacturing footprint. To date, nearly 80% of the targeted 2,600 Civil and Defence Aerospace headcount reductions have been completed with an 11% reduction in our 2013 operational footprint.

In May 2015, we announced a Marine restructuring programme to make significant reductions in both manufacturing footprint and headcount (by 600) and generate £25m in annual savings from 2016 onwards. This included work to consolidate our footprint and increase lower-cost country sourcing. At the start of October, we announced an additional programme of restructuring, focused largely on back-office administrative functions. This will lead to a further 400 reduction in headcount.

Good progress has been made overall, with related headcount reductions across Aerospace and Marine totalling 2,500 by the end of the year.

Update on regulatory investigations

We previously reported that the Serious Fraud Office had begun a formal investigation. The Group is continuing to cooperate with the authorities in the UK, US and elsewhere. As the investigations are still ongoing we are unable to give any further details or a timescale for when they will conclude.

Shareholder payments

The pace of investment required to transform the business creates near-term pressure on free cash flow. At the same time, we need to sustain a healthy balance sheet to ensure we have the financial flexibility to maintain a strong investment grade credit rating. As a result, the Board is recommending that the payment to shareholders is halved in cash terms at the full year and the next half year. We recognise the importance of a healthy 'dividend' to our shareholders. Subject to short-term cash needs, we intend to review the payment so that it will be rebuilt over time to an appropriate level. This reflects the Board's long-standing confidence in the strong future cash generation of the business.

As a result, the proposed final payment for 2015 is 7.1 pence per share, 50% of the final payment made for full year 2014. It is further proposed that the interim payment for 2016 will also be reduced to 50% of the prior year, in line with the long-term recommendation. As in past payments, the distribution will be in the form of C shares. Further details are included at the end of this statement.

Outlook for 2016

Our outlook for 2016 is unchanged from that set out in November 2015. On a constant currency basis Group revenue for 2016 is expected to be marginally lower than that achieved in 2015, partially reflecting the pricing and volume effects in Civil Aerospace and the continued weakness in offshore marine markets. Overall, the net profit trading headwinds discussed in previous announcements are unchanged at around £650m compared to our underlying profit before financing, excluding the £58m intellectual property settlement included in 'Other' and the £19m R&D credit which benefited Nuclear.

Individual outlooks are provided for each business in the operating review.

Looking further ahead

The successful roll-out of new engines, led in particular by the Trent XWB, 1000 and 7000, together with a growing aftermarket, is expected to drive significant revenue growth over the next ten years as we build toward a 50% plus share of the installed wide-body passenger market. While the impact of the transition to the Trent 7000 has reduced Trent 700 deliveries, and will hold back Civil Aerospace profit in the near term, we are confident that the important investments we are making to transition our production will create a strong platform to drive customer service, improved margins and strong cash flows.

Our 2014 and 2015 initiatives to reduce manufacturing and back office costs within Aerospace and Marine are on track to reduce costs by £145m by the end of 2017.

In addition, we have made a good start to the transformation programme that will add pace and simplify our business, and create incremental enduring cost savings of between £150m and £200m per annum from end 2017 onwards. These initiatives will make us a more efficient and resilient company. At the same time, we will continue to invest appropriately to strengthen our engineering and operational excellence and aftermarket products and services. We have started the journey that will return the company to its long-term trend of profitable growth.

Board update

During the year there have been a number of important changes to the Board. On 22 April we announced that John Rishton had decided to retire as Chief Executive on 2 July, to be succeeded by Warren East. At the AGM on 8 May James Guyette, President and Chief Executive Officer of Rolls-Royce North America, retired and stepped down from the Board. John Neill also stood down at the AGM after six years as a Non-Executive Director.

Irene Dorner, formerly CEO and President of HSBC USA, joined the Board in July. Alan Davies, Chief Executive of Rio Tinto's Diamonds and Minerals division, and Sir Kevin Smith, the former Chief Executive of GKN, the multinational automotive and aerospace business, both joined the Board from 1 November. In February 2016, Sir Kevin assumed Chairmanship of the Science and Technology Committee.

Irene brings a wealth of international expertise, particularly in risk management and operational performance. Alan, as well as having a strong financial background, brings relevant experience in transforming operational performance and driving cultural change through a complex global organisation, together with a deep knowledge of China and other key emerging markets. Sir Kevin also brings recent Asian experience together with significant aerospace industry knowledge, with engineering and manufacturing experience, after a long career at GKN and BAE Systems.

Lewis Booth, a US resident and an independent Non-Executive Director since 2011 has indicated his intention to relinquish his responsibility as Senior Independent Director once a successor has been appointed. He will continue as Chairman of the Audit Committee.

Dame Helen Alexander, an independent Non-Executive Director since 2007, will be stepping down from the Board after the AGM in May 2016 having completed her nine-year term. At that time she will be succeeded as Chairman of the Remuneration Committee by Ruth Cairnie, who joined the Board in September 2014.

Commenting on Dame Helen's contribution, Ian Davis, Chairman, said: "On behalf of the Board I would like to thank Dame Helen for her dedicated service to the Company. She has been a wise and insightful member of the Board and her well-judged advice and leadership of our Remuneration Committee have been highly valued by her colleagues."

Group Trading Summary

Order book and order intake

During the year our order book increased by £2.7bn to £76.4bn. Key orders included our record single order from Emirates for 200 Trent 900 engines which contributed $6.1bn to the order book. Throughout the year new order intake in our Marine business was very weak, driven by significant market deterioration in offshore. Overall, orders were lower in Defence and Nuclear, although we view the prospects for these businesses as unchanged, reflecting long-term orders won in previous years.

Underlying trading

Underlying group revenue declined 1% in 2015 compared to 2014 on a constant currency basis. This reflects a 5% decline in revenue from original equipment, partially offset by a 4% increase in services revenue, led by Civil Aerospace. By business on a constant currency basis, Civil Aerospace revenue increased 3%, Defence Aerospace revenue decreased 5%, Power Systems revenue decreased 3%, Marine revenue decreased 16% and Nuclear revenue increased 9%.

Underlying profit before financing of £1,492m (2014: £1,681m) was 11% lower on a constant currency basis, led by a significant reduction in Marine profit, driven by weak off-shore markets in particular. Civil Aerospace was down year on year, although performance was helped by around £222m of retrospective benefits (2014: £150m) led by refining the basis of taking account of risk in our forecasts of future revenue on long-term contracts, and the reversal of previously recognised impairment on contractual aftermarket rights (CARs) and release of a related provision. Defence Aerospace delivered an improved year-on-year profit which included one-time contract benefits, led by contract extensions and reduced long-term costs. Power Systems was down year-on-year in line with our expectations on a constant currency basis as the business managed well with a number of weaker markets. Marine, as expected, was sharply lower, reflecting the weak oil and gas offshore sector and Nuclear was in line, after excluding the positive R&D credit.

R&D charge increased 11% over 2014 on a constant currency basis, largely reflecting ongoing investments in Civil Aerospace for the Trent 1000 TEN and Trent XWB-97, together with higher spending on the Trent 7000 and corporate jet programmes. In addition, we increased investment in future technology demonstrator programmes and improved emissions solutions for Power Systems applications. In addition, capitalisation of R&D declined significantly largely due to the entry into service of the Trent XWB-84 in January 2015 and increased recognition of entry fees.

Underlying financing charges were £60m (2014: £61m). Underlying profit before tax was £1,432m (2014: £1,620m). The underlying tax charge was £351m, with an effective tax rate of 24.5% (2014: 24.0%).

Free Cash Flow

Cash capital expenditure in 2015 reduced to £479m (2014: £616m), largely reflecting lower spend on new aerospace facilities. Cash taxes were £160m (2014: £265m exc. Energy). The cash cost of defined benefit pension schemes in excess of the earnings charge was £46m (2014: £154m exc. Energy).

Overall, the free cash inflow for the year was £179m (2014: inflow of £447m, adjusted for Energy). The significant decline from 2014 primarily reflects lower trading margins, and adverse working capital movements. The TotalCare® net asset movement year-on-year was slightly higher than expectations.

Net debt, TotalCare net assets and Contractual Aftermarket Rights

The Group is committed to maintaining a robust balance sheet and a strong, investment-grade credit rating, which it believes are important when selling products which will be in service for decades. Standard & Poor's updated its rating in January 2016 to A/negative outlook and Moody's maintained a rating of A3/stable.

At the end of 2015, the Group's net cash balance reduced from £666m to a net debt position of £111m, reflecting the £179m positive free cash inflow, share repurchases totalling £414m and shareholder payments of £421m. Other items include residual payments related to the divestment of the Energy business and non-cash foreign exchange movements. On 6 July we announced that we had curtailed the share buyback associated with the Energy business sale at the to-date total of £500m, including the shares purchased in 2014. During the year we refinanced our revolving credit facility, increasing it to £1.5bn, and issued two new US bonds, totalling $1.5bn.

The Group hedges transactional foreign exchange exposures to reduce volatility. The most significant exposure is the net US dollar income of approximately $5bn per year which is converted into GBP. The hedge book was approximately $29bn at the year end, which represents around five years of cover. The average achieved rate in our hedge book at year end was $/£1.59.

TotalCare® net assets increased in 2015 by £406m (2014: £463m) to £2.2bn (2014: £1.8bn), reflecting accounting for new 'linked' engines of £521m (2014: £588m) and the retrospective TotalCare accounting adjustments of £222m (2014: £150m) taken in the year, offset by the cash inflows and net other items of £337m (2014: £275m). The CARs balance increased by £156m to £405m (2014 £249m). The increase included £50m arising from the decision to reverse the impairment of prior year CARs.

Group technical factors for 2016

All figures are at constant currencies unless otherwise stated.

Overall finance charges in 2016 are expected to be in the region of £90-110m, reflecting current bank rates and the higher level of net debt, including additional committed facilities and cash balances maintained for liquidity purposes. The increase reflects the fact that the underlying gain of £34m taken in 2015, on realised foreign exchange contracts settled to convert significant overseas dividends from group companies, is not expected to recur.

The effective tax rate for 2016 is expected to be around 26% reflecting the greater proportion of taxable profit expected to be generated in higher tax rate regions in 2016 compared to 2015.

Capital expenditure for 2016 is expected to be around £500-550m (2015: £494m).

Net R&D spend is expected to be again over £800m in 2016 reflecting the steady investment in new development programmes and expenses related to the completion of important new product launches in Civil Aerospace. The net R&D P&L charge is expected to be broadly unchanged at around £750-800m.

After a strong finish to 2015, led by strong cash receipts and good management of year end inventories, free cash flow for the year was £179m, around £250m ahead of expectations. As a result, free cash flow in 2016 is likely to be at best in line with previous expectations for a modest overall out flow of between £100-300m.

Operational Review

Consistent with the plans we laid out in November 2015, we have enhanced the financial disclosures for all our reporting segments to include gross margin, R&D and other costs below gross margin, as well as restructuring charges. In addition, within Civil Aerospace we have provided additional revenue segmentation and a trading cash flow breakdown. These disclosures apply to both 2014 and 2015 and should help further analysis of trading performance.

We have also included an 'Other' category. This includes the residual retained assets relating to the Energy business which were not included in the sale to Siemens in 2014 and the one-off intellectual property settlement. The value of these is not material to the Group.

Operational Review: Civil Aerospace

* The methodology basis for the allocation of Civil Aerospace revenues on linked TotalCare contracts between original equipment and aftermarket has been reviewed and amendments made to reflect better the commercial substance of the combined contracts. Historically, the allocation has resulted in original equipment revenue and aftermarket revenue reflecting the contractual terms rather than the commercial substance of the contracts. The 2014 figures have been restated on the same basis; the impact was an increase in original equipment revenue of £198m and an equal decrease in aftermarket revenue.

Financial overview

Overall, underlying revenue for Civil Aerospace grew 3% on a constant currency basis (up 1% at actual rates) with steady growth in services (up 9% at constant rates, including a £189m one-off benefit discussed below) which more than offset the reduction in original equipment (down 3% at constant rates). Second half growth was particularly strong as the business improved original equipment delivery performance on a number of programmes, notably in corporate jets.

Original equipment revenues from widebody engines: linked and other reduced 11% reflecting a slow-down in linked Trent 700 deliveries for the Airbus A330 ahead of the introduction of the Trent 7000 for the A330neo together with reduced sales of linked Trent 900 engines for the A380, partly offset by increased linked Trent 1000 engine sales for the Boeing 787 Dreamliner. In addition, sales of spare engines to joint ventures generated revenue of £189m (2014: £138m).

Original equipment revenues from unlinked widebody engines increased by 29% largely a result of an increase in unlinked Trent XWB and other Trent engine deliveries.

The 17% increase in widebody service revenue was mainly driven by increased flying hours from our growing fleet of installed Trent 700, Trent 900 and Trent 1000 engines and a £189m one-off benefit resulting from refining the basis of taking account of risk in our forecasts of future revenue on long-term contracts. This was partially offset by lower utilisation of some of our more mature engine types, notably the Trent 500 and Trent 800.

Within our corporate engine business we had good revenue growth from our BR725 engine which powers the Gulfstream G650 and G650ER. This was offset by lower volumes for our other products due to weaker demand from Chinese, Russian and Brazilian customers. As a result, corporate original equipment revenues declined 1%. Despite a reduction in new corporate engine deliveries our installed base of corporate jet engines continued to grow, contributing to a 13% increase in service revenues from these products.

Services revenues from our regional jet engines declined 14%, reflecting retirements and reduced utilisation of relevant fleets by North American operators.

On the V2500 programme, original equipment revenues declined 9% due to reduced demand from IAE for V2500 modules to power the Airbus A320ceo, reflecting a mix change in engine types powering the aircraft ahead of the introduction of the A320neo. Despite continued growth in the installed base of engines, service revenues on the V2500 were down 1% overall reflecting a combination of fewer overhauls, lower spare parts sales and reduced engine flying hours.

Overall gross margins for Civil Aerospace were 22.0% (2014: 24.5%). The year-on-year reduction in margin of £139m reflected the lower proportion of linked Trent 700 engine sales, weaker corporate jet engine volumes and a declining regional aftermarket, partially offset by an £16m higher gross margin contribution from sales of spare engines to joint ventures (£67m in 2015 compared to £51m in 2014).

In addition, these factors were partially offset by a number of contract accounting adjustments and reversals of impairments and provisions.

The in-year benefit of retrospective long-term contract accounting adjustments as expected was a net positive £222m (2014: total benefit of £150m). Of this, £189m was a one-off benefit resulting from refining the basis of taking account of risk in our forecasts of future revenue. In 2012 it was agreed with the Group Audit Committee that a comprehensive review would be completed during 2015. The new enhanced methodology should better reflect risk, current experience and expected long-term performance. Other long-term contract accounting adjustments totalled a net benefit of £33m (2014: total benefit of £150m). This comprised a retrospective charge of £107m (2014: benefit of £90m), reflecting reduced customer fleet utilisation, including Trent 500 and Trent 800 powered airframes, other commercial changes and technical risks, offset by the benefit of £140m (2014: benefit of £60m) from life-cycle cost improvements.

Full year performance also benefited from the reversal of previously recognised impairment on Contractual Aftermarket Rights (CARs) and release of a related provision with a profit of £65 million being recognised (2014: impairment charge of £19 million). This reflected a significantly more positive outlook for future maintenance costs for a Trent 1000 launch customer which enabled the reversal of a previous impairment. This also resulted in the capitalisation of £22m of 2015 CARs that would otherwise have been impaired.

Costs below gross margin were £5m lower than the previous year. Within this, R&D charges were £64m higher, reflecting increased spend on key programmes, particularly in respect of the Trent 1000 TEN, the Trent 7000 and the Trent XWB-97. These engines, now in their final stages of preparation before flight testing, are due to enter service in 2017 and 2018. They represent a significant advance on previous Trent designs, providing substantial fuel burn improvements. The Trent 7000 and Trent XWB-97 programmes have yet to reach a point at which their costs can be capitalised. In addition, following its successful entry into service, continuing investment in the Trent XWB-84 engine can no longer be capitalised. Investment also increased to develop future corporate jet engine technology. The R&D charge was reduced by £94m (2014: £71m) by the recognition of entry fees receivable from risk and revenue sharing partners.

Underlying corporate, administration and other costs were £14m higher. Restructuring costs were £75m lower reflecting the significant charges taken in 2014.

As a result, profit before financing and tax was 14% down, reflecting a combination of lower overall gross margins, increased R&D and reduced restructuring costs. Taking account of foreign exchange effects, underlying profit before financing and tax was £812m (2014: £942m).

New disclosure on trading cash flow provides additional clarity on performance

* Includes timing differences between underlying profit before financing and cash associated with: joint venture profits less dividends received; provision charges higher /(lower) than cash payments; non-underlying cash and profit timing differences (including restructuring); and, financial assets and liabilities movements.

** Trading cash flow is cash flow before: deficit contributions to the pension fund; taxes; payments to shareholders; foreign exchange on cash balances; and, acquisitions and disposals.

Trading cash flow before working capital movements improved year-on-year by £48m, despite the headline drop in underlying profit before financing of £130m and the higher level of CARs additions. This is largely due to a reduced level of property, plant and equipment additions and a lower spend on certification costs and participation fees. The £286m year-on-year difference in working capital movements was largely due to differences in the timing of payments to suppliers and increased draw down of deposits in 2015.

Investment and business development

Order intake of £12.8bn in 2015 for Civil Aerospace was £1.1bn up on the previous year. As a result, the order book closed at £67.0bn, up £3.8bn or 6% on the previous year.

Significant orders during the year included our largest ever order by value to provide Trent 900 engines and TotalCare® service support for 50 Airbus A380s for Emirates worth $9.2bn of which $6.1bn is recognised within the order book. Other major orders included Trent 1000 engines to power 21 Boeing 787 Dreamliner aircraft and long-term TotalCare® support for Air China and Ethiopian Airlines, and a $2.4bn order for engines and services with HNA Group.

Engineering excellence remains the cornerstone of our value to Civil Aerospace customers

Several important engineering milestones were achieved during 2015. For widebody engines, the focus has been on completing the development and testing of the new Trent 1000 TEN and the Trent XWB-97. The results of initial tests on both engines are broadly in line with expectations. In December, the Trent XWB-97 flew for the first time and has since undergone rigorous testing in a number of conditions. The Trent 1000 TEN has also completed several major milestones. In addition, a hybrid Trent 7000, produced to de-risk the development programme, ran for the first time and is now being put through its paces with a series of rigorous tests.

For corporate jets, developments in the year were more modest. Strong orders for the BR725 have sustained steady original equipment volumes as the new Gulfstream G650ER entered service, despite a weakening market. Failure in past years to secure new positions on some important new corporate jet platforms contributed to a weak order intake in the year which will impact future volumes and revenues adversely. As part of Rolls-Royce's technology strategy, investments are being made to secure future opportunities and regain its position as the leading provider to the important market of large cabin, long-range corporate jets.

Investing in new aerospace supply chain capabilities to help drive operational excellence

As part of the supply chain transformation underway in the business, several important new facilities were completed during the year. These included the opening of our Advanced Blade Casting Facility in Rotherham, UK, which will halve the time it takes to manufacture turbine blades and an expansion of our Trent XWB production centre in Derby. We also announced plans to invest in our facility in Inchinnan to create a new Centre of Competence for the manufacture of aerofoils and established a joint venture with Liebherr to develop manufacturing capability and capacity for the power gearbox for our Ultrafan demonstrator programme.

Strengthening our aerospace aftermarket service offering

During 2015 we broadened our service offering and strengthened our support network to provide customers with greater choice, flexibility and capability at all stages of the engine lifecycle, supporting a growing installed base.

This included making improvements to our Trent Service Network which will result in increased competition among our Approved Maintenance Centres (AMCs) and the announcement of our first independent AMC, Delta TechOps. We have also set up a global network of Customer Service Centres, bringing us closer to our customers, working in their time-zone.

We launched a new service, SelectCare™, which fits between Rolls-Royce's comprehensive TotalCare® and general maintenance, repair and overhaul services, where customers contract for individual shop visit support. At the same time, we announced American Airlines as the launch customer. We also announced our first customers for TotalCare Flex®, a new service targeting owners and operators of more mature engines. Cathay Pacific, AerCap, South African Airways and BMI Regional chose the service for Trent 800, Trent 500 and AE3007 engines respectively.

Civil Aerospace outlook

As we set out in November 2015, we believe the long-term outlook for Civil Aerospace remains very good, led by a strong widebody order book for Rolls-Royce's fuel efficient engines. Key to the long-term success of the business is converting this exceptional order book into a large installed base of engines that meet customer demands for safe, reliable, efficient operation while driving profitable engine flying hour revenues. The next few years will be very important as we ramp up production of new engines - in new, efficient facilities - and invest in the development of future engine platforms that will benefit the order book from 2020 onwards. As a result, until we gain additional aftermarket scale, or complete our industrial transformation and improve unit costs and cash margins, the business will continue to be a net investor of cash.

Over the next few years the transition from 'linked' to 'unlinked' contracts creates a headwind to reported profit but no change to cash flows

In the future, an increasing proportion of our new engines will be sold to the airframer on a sole-source basis, in particular the new Trent XWB and Trent 7000 for use on the A350 and A330neo respectively. As a result, a significantly larger proportion of our sales in the future will be accounted for on an "unlinked" basis. While this does not change cash flows, it does change the timing of when profit is recognised across the OE and aftermarket contracts. Under "unlinked" accounting, the engine sale and aftermarket contracts are accounted for separately. This typically results in lower upfront profit recognition on engine delivery, with significantly higher proportion of profit in the aftermarket period. This is in comparison to "linked" accounting, where a blended margin is applied across the engine sale and aftermarket contracts.

Near-term conditions in some segments remain challenging

We continue to expect our Civil Aerospace business to underperform 2015 underlying profit before finance and tax by around £550m. The significant headwind related to Trent 700 volume reductions and the non-recurrence of a number of one-off benefits seen in 2015 remains broadly unchanged. In addition, we still expect to see weaker demand for new corporate jets and declines in demand within our regional jet aftermarket. The aftermarket benefit of higher levels of engine deliveries and increased installed thrust is expected to be largely offset by the underutilisation of older large engines. However, the business will benefit from reduced costs from the restructuring initiatives started in 2014.

We now expect the TotalCare net asset to grow from £2.2bn and peak at around £2.5bn, allowing for a more positive demand outlook for our 'linked' accounted engines and the benefit of further life-cycle cost improvements now being seen in engine performance.

Operational Review: Defence Aerospace

Financial overview

Underlying revenue at £2,035m was 5% lower on a constant currency basis (down 2% at actual exchange rates). Lower original equipment volumes for helicopters and trainers were partially offset by growth in LiftSystem volumes. Aftermarket revenues reflected lower volumes on helicopter spares partially offset by higher revenues related to long term service agreements for UK combat aircraft.

Despite the reduced revenues, gross margin improved to 28.5%. Lower helicopter volumes and lower margins on some transport contract extensions were offset by higher LiftSystem volumes and increased retrospective margin improvements of £101m (2014: £53m) on existing long term contracts. These relate to various combat platforms, where overall profitability has been improved by changed flying patterns and lower service costs, including approximately £40m (2014: nil) due to one-off contract and scope variations.

Overall R&D costs were £20m higher in 2015 reflecting increased investment in new programmes. Restructuring costs were lower due to reduced level of severance costs and lower costs related to changing our operational footprint.

Underlying profit before financing of £393m was 4% up on the prior year on a constant currency basis, reflecting the lower volumes, the one-off margin improvements, increased R&D charges and lower restructuring charges. As a result, operating margin improved by 160 basis points to 19.3%.

Investments and business development

Overall, the Defence order book declined 5%, in large part reflecting the 2014 benefit of the significant multi-year order for engines to power C130-J aircraft. With a major focus within defence budgets on cost control, 2015 saw significant interest in availability based service contracts and also on offering efficiency upgrades. New contracts included an extension of the UK's Hercules Integrated Operational Support contract and commitment to the UK's Future Combat Air System (FCAS) programme. After successful first flights on US 'Hurricane Hunter' P-3 aircraft in May, we received strong international interest including an initial USAAF order for the T56 3.5 technology insertion kit upgrade delivering both fuel saving and performance benefits for an engine programme which has been in existence for over 50 years.

Outside the UK and US markets, our particular focus has been on positioning ourselves to be competitive for forthcoming combat programmes. We had success in South Korea in conjunction with Airbus, with the contract being awarded to power the A330 tanker fleet with Trent 700 engines, as well as agreeing an order for our largest ever number of engines - a ten year order with Robinson to supply at least 1,000 RR300 engines.

Long-term, it remains essential that we have a cost efficient supply chain to support the profitable growth of our business in a competitive market. To support future business competitiveness we initiated a major $600m investment in the upgrading of our Indianapolis facility, which will bring a combination of cost reductions, operational efficiencies and greater development capabilities for defence technologies. This investment recognises the importance of the US market and our strong position there.

Defence Aerospace outlook

The long-term outlook for Defence Aerospace remains positive with good opportunities to capitalise on its strong positions in transport and patrol and combat. Investment in developing new advanced technologies will be a feature of R&D for the next few years as the business ensures it can compete for new opportunities.

The outlook for revenues in 2016 remains steady. Operating profit will be adversely impacted by the lower level of expected long-term contract benefits in 2016, together with higher R&D and operational restructuring costs.

Free cash flow from Defence Aerospace is expected to remain strong in the longer term, reflecting the high proportion of aftermarket revenues. However, in the coming year free cash flow is expected to be lower reflecting the increased cost of investment and the run out of costs on key UK programmes where deposits have been received in advance of delivery.

Operational Review: Power Systems

Financial overview

Underlying revenue of £2,385m was 3% lower on a constant currency basis (12% lower at actual rates). Original Equipment revenue was 5% lower, reflecting weaker oil & gas markets and weaker governmental demand which peaked in 2014. This was partially offset by an improved luxury yacht demand and some recovery in our sections of the construction and agriculture market where new emissions regulations increased demand. Underlying service revenues were up 3% despite some weakness in spare parts sales in North America and Europe.

Gross margins were slightly lower at 26.6% (2014: 27.3%) reflecting a change in product mix and lower overall volumes as expected.

Underlying profit declined 15% as a result of the lower gross margins. On a constant currency basis costs below gross margin were unchanged.

Investment and business development

Our Power Systems business serves a variety of markets ranging from marine, industrial, construction & agriculture to defence and power generation. This diversity enabled the business to mitigate some of the weak environment, particularly that linked to oil and commodities.

2015 order intake was £2.5bn (2014: £2.6bn) with the closing order book broadly unchanged at £1.9bn. Within this, the defence sector demonstrated greater resilience with a combination of a higher proportion of long term service contracts together with the winning of the first order worth approximately €80m from the British Army for 589 MTU Diesel engines for the new Scout Specialist Vehicle.

Within the broad range of Industrial applications, while a number of markets deteriorated through the year, there was positive news. This included contract wins from a Chinese company for 232 MTU Series 4000 engines for freight locomotives bound for South Africa, and further orders for luxury yacht engines. An extension to our longstanding co-operation with Daimler was also agreed for the development of new range of industrial engines, which comply with new EU off-highway regulations for reduced soot emissions.

The energy segment generated an increased order intake in 2015 reflecting good growth in 'gas gensets', particularly in Asia. In addition, the easing of the trading embargo with Iran is enabling the business to secure a good foothold in the country. As a result, we enjoy a strong market position within backup power, particularly for larger mission-critical applications, which is a growing market. Recent notable orders came from Kuwait, Turkey and Bangladesh for the provision of backup power (for hospital modernisations) and continuous power (for a steel mill).

Power Systems outlook

The outlook for Power Systems remains steady. The business finished the year with a healthy order book for many of its key markets. As a result, while some markets remain difficult, we continue to expect the business to deliver modest growth in revenue and profit in 2016.

Operational Review: Marine

Financial overview

Underlying revenue of £1,324m was 16% lower on a constant currency basis (down 23% at actual rates). Within this, original equipment revenues were 19% down at £773m. Service revenues were more robust, although still declined 10%. This reflected weaknesses in offshore and merchant, as ship owners deferred overhaul and maintenance on the back of reduced utilisation of their vessels.

As a result of the revenue weaknesses, price pressure and cost under-recovery, gross margins declined 500 basis points to 20% and overall gross margin was £260m, £139m lower than in 2014. As a result, with only modest reductions to date being achieved in corporate, administration and other costs, underlying profit was £15m, 94% down on a constant currency basis.

Around £15m of restructuring charges were incurred in 2015 and excluding these, underlying profit declined 83%. In the first half we took a non-underlying charge of £69m for the impairment of goodwill on two of our businesses owing to a less favourable business outlook, partly driven by the impact of market deteriorations on our offshore businesses.

Investment and business development

The focus in 2015 has been on repositioning the marine business to reflect the very challenging market environment and outlook. During the year we also announced a number of restructuring programmes that will in total lead to the loss of around 1,000 employees in operations and back-office functions as we shrink our Northern European footprint, reduce indirect headcount, and consolidate manufacturing activity. This will deliver projected cost savings of £65m per annum from 2017 onwards and create a business better able to compete in an increasingly cost-conscious market place which is geographically shifting towards Asia.

Overall, the Marine order book declined 32% during the year, mainly reflecting a very weak offshore market, particularly in Northern Europe. Orders for new vessels, projects and services were all sharply lower than 2014 and as a result order intake was only £997m, 45% down on the previous year.

The offshore market was extremely weak reflecting a low oil price and reduced capital expenditure within the upstream oil exploration and related services sectors. Targeted investment in R&D and improving our Asian position saw progress later in the year with two major orders from China. These comprised an equipment contract for nine tug supply vessels and a package of advanced ship equipment for a dive support vessel. We also saw demand from non-oil related sectors such as wind farm support and fishing trawlers.

Activity within our target merchant sectors was subdued, but we made progress in our strategy of developing markets for offshore derived technologies within specialist areas such as azimuth propulsion systems for double-ended ferries. We also delivered Asia's first LNG-powered tug and the first of two all-gas powered cargo vessels for a Norwegian transport company.

The naval business was focused on further development work and deliveries against contracts in both the UK and US. These included the first DDG 1000 multi-mission destroyer class for the US Navy and the world's largest gas turbine engines, the MT30 for the UKs two new aircraft carriers. We also signed a contract to supply MT30s for operation on the first three of the Royal Navy's new Type 26 Global Combat Ship.

Product development work within the business included expanding the range of permanent magnet-based propulsion systems, as well as spearheading research into our pioneering Ship Intelligence technology focused on data-driven value-added services.

Marine outlook

Overall the outlook for marine remains cautious. We expect that the market will continue to be hit by low oil prices and the impact on demand for our products and services. As a result we will sustain our cost reduction programmes, focusing on manufacturing facilities, supply chain and overhead costs, in order to drive a more competitive business while also adapting to volume risks.

As set out in November 2015, we expect the net impact of weak trading conditions and cost saving initiatives to result in 2016 profits being between £75m and £100m lower than those achieved in 2015. As a result, the business is expected to be significantly loss making in 2016.

Operational Review: Nuclear (excludes Energy business)

Financial overview

Underlying revenue increased 9% on a constant currency basis, led by growth in both original equipment and services. In particular, growth in submarine activities was strong. Revenue growth for our instrumentation and controls businesses was also good, particularly in Europe.

Despite the growth in revenue, gross margin declined by around 240 basis points to 16.2% or £111m. This was largely due to increased costs on a number of projects with lower margin. Gross margin was also impacted by a reclassification of site costs from commercial, administration and other of around £7m. This favourably benefited costs below gross margin which also benefited from lower R&D charges as a result of an R&D credit of £19m which covered the current and the two previous years. Excluding this, underlying profit before tax was £50m, in line with the prior year. After the release, underlying profit of £70m is 40% up on the prior year.

Investment and business developments

The order book rose 13% with positive momentum within long-term contracts across both submarines and civil nuclear businesses, as well as new contracts particularly in the second half of the year which reflect the expansion of our business reach and capabilities.

Our civil nuclear business focuses on multi-year projects and specialist services for what is a growing global industry. We were selected as preferred bidder by EDF to work on heat exchangers and waste treatment for the Hinkley Point C project in the UK and we were selected by Hitachi to be part of the Wylfa power station delivery team, the second nuclear power station scheduled in the UK's new-build programme. We also won a contract to supply safety measurement systems for the entire French fleet of 900MW reactors. These mandates help to further consolidate our significant position in the European marketplace and position us well to seek further opportunities for partnerships in growing nuclear markets. In the US our acquisition of ROV Technologies Inc. in March expanded our nuclear services portfolio, bringing complementary Boiling Water Reactor expertise and broadening our existing Pressurised Water Reactor remote inspection capability.

Our submarine activities have concentrated on delivering against long-term contracts for the UK Royal Navy's nuclear submarine fleet, including delivery of the nuclear propulsion system to power HMS Artful, the third Astute-class submarine, which was launched in August. Our work on the Vanguard-class included work on a refueling programme and also the first successful upgrade to the reactor control and instrumentation update for HMS Vengeance. At the Naval Reactor Test Establishment, HMS Vulcan, the PWR2 test facility reactor was safely shut down having completed its prototyping role. Development work on the new PWR3 power plant for Successor continues with contract extensions agreed in preparation ahead of the government final investment decision.

Nuclear outlook

The outlook for Nuclear remains steady. Both submarines and civil nuclear enjoy long-term secure aftermarket revenues. While business development opportunities remain modest in the near-term, new power plants for the Successor submarine fleet together with long-term opportunities to develop relevant products for civil nuclear applications should provide incremental growth.

Financial review

Underlying income statement

Segmental analysis

The 'Other' category in the segmental analysis includes residual retained assets relating to the Energy business which were not included in the sale to Siemens in 2014 and a one-off intellectual property settlement of £58m. The value of these is not material to the Group.

Underlying profit before financing and taxation is discussed in the trading summary and the business review.

Underlying financing costs were stable versus 2014. An increase in net interest of £13m was offset by changes in other underlying financing costs. An underlying foreign exchange gain of £34m is included, arising from realised gains on foreign exchange contracts settled to translate overseas dividends into sterling. 

Underlying taxation was £351 million, an underlying tax rate of 24.5% compared with 24.0% in 2014.

Underlying EPS was lower reflecting the reduction in underlying profit after tax, partially offset by a reduction in the average number of shares as a result of the share buyback.

At the Annual General Meeting on 5 May 2016, the directors will recommend an issue of 70.5 C Shares with a total nominal value of 7.10 pence for each ordinary share. Together with the interim issue on 4 January 2016 of 92.7 C Shares for each ordinary share with a total nominal value of 9.27 pence, this is the equivalent of a total annual payment to ordinary shareholders of 16.37 pence for each ordinary share. Further details are included at the back of this statement.

Reported results

Consistent with past practice and IFRS accounting standards, the Group provides both reported and underlying figures. We believe underlying figures are more representative of the trading performance, by excluding the impact of year-end mark-to-market adjustments, principally the GBP:USD hedge book. In addition, financing of post-retirement benefits, effects of acquisition accounting and impairment of goodwill are also excluded. Adjustments between underlying profit and reported profit in the income statement are set out in more detail in note 2 to the financial statements. This basis of presentation has been applied consistently.

Mark-to-market adjustments are principally driven by movements in the GBP:USD exchange rate which moved from 1.56 to 1.48 during 2015.

Movements in other financial instruments relate entirely to financial risk and revenue sharing arrangements. The put option on the non-controlling interest in Power Systems was exercised in 2014, so this had no impact in 2015.

The effects of acquisition accounting in accordance with IFRS 3 are excluded from underlying profit so that all businesses are measured on an equivalent basis. Impairment of goodwill principally relates to the Marine business.

Costs associated with the substantial closure or exit of a site, facility or activity are classified as exceptional restructuring and excluded.

Profits and losses arising on acquisitions and disposals during the year are excluded.

Net financing on post-retirement schemes is excluded from underlying profit.

Appropriate tax rates are applied to these adjustments, the net effect of which was an increase of £275m in the reported tax charge (2014 £237m increase, including a £64m reduction in the amount of recoverable advance corporation tax recognised).

The 2014 reported results also included £142m relating to discontinued operations.

Summary balance sheet

Intangible assets (note 8) represent long‑term assets of the Group. These assets decreased by £159m in the year, with additions of £408m being more than offset by amortisation of £407m, impairments to goodwill of £75m (including £69m Marine impairment reported in the first half) and exchange losses of £134m (largely relating to euro denominated intangibles assets arising from the acquisition of Rolls‑Royce Power Systems AG).

The contractual aftermarket rights (CARs) balance increased by £156m to £405m. The increase included £50m arising from the reversal of previously recognised impairments. During the year, following analysis of the first major overhauls of Trent 1000 engines, the recoverable amount of certain contractual aftermarket rights has been reassessed. This demonstrated that aftermarket cash flows from these engines are better than originally assumed, arising from both operational and contractual performance improvements. Accordingly, cumulative impairments prior to 2015 of £50m have been reversed. This has resulted in the capitalisation of £22m of CARs in 2015 that would otherwise have been impaired, including £16m recognised in the interim results.

Carrying values of intangible assets are assessed for impairment against the present value of forecast cash flows generated by the intangible asset. The principal risks remain: reductions in assumed market share; programme timings; increases in unit cost assumptions; and adverse movements in discount rates. Other than noted above, there have been no significant impairments in 2015.

Property, plant and equipment (note 9) increased by £44m. Capital expenditure of £494m was largely offset by depreciation of £373m, disposals of £34m and foreign exchange movements of £32m.

Investments in joint ventures and associates increased modestly, principally as the share of retained profit exceeded dividends received.

Net post-retirement scheme (deficits)/surpluses (note 12) decreased by £632m, comprising a reduction of £692m in the UK and an increase of £60m overseas. 

The reduction in UK schemes is principally due to relative movements in assumptions used to value the underlying assets and liabilities in the UK schemes in accordance with IAS 19. While the corporate bond yields used to measure the liabilities remained broadly stable, gilt yields which are the principal driver of asset valuations increased, reducing the value of the assets. The schemes adopt a low risk investment strategy that reduces funding volatility (for which both assets and liabilities are measured on a gilt basis); interest rate and inflation risks are largely hedged and the exposure to equities is around 9% of scheme assets.

The increase in overseas schemes arose largely due to higher discount rates in Germany and the US.

Provisions largely relate to warranties and guarantees provided to secure the sale of OE and services. The decrease is largely a result of the utilisation of warranty and restructuring provisions.

Net financial assets and liabilities (note 10) include the fair value of derivatives, financial RRSAs and C Shares. The increase in liabilities primarily reflects the impact on the US$ hedge book of the GBP:USD exchange rate falling to 1.48 from 1.56 at the beginning of the year.

The Group hedges transactional foreign exchange exposures to reduce volatility. The most significant exposure is net US$ income. The US$ hedge book increased by 12.5% to US$28.8bn, which represents around five years of net exposure and has an average book rate of £1 to US$1.59.

Net TotalCare® assets relate to long-term service agreement (LTSA) contracts in the Civil Aerospace business, including the flagship services product TotalCare. These assets represent the timing difference between the recognition of income and costs in the income statement and cash receipts and payments.

The net asset increased in 2015 by £406m (2014 £463m), reflecting accounting for new 'linked' engines of £521m (2014 £588m) and retrospective TotalCare accounting adjustments of £222m (2014 £150m) taken in the year, offset by cash flows and other items of £337m (2014 £275m).

Customer financing facilitates the sale of OE and services by providing financing support to certain customers. Where such support is provided by the Group, it is almost exclusively to customers of the Civil Aerospace business and takes the form of various types of credit and asset value guarantees. These exposures produce contingent liabilities that are outlined in note 13. Contingent liabilities represent the maximum aggregate discounted gross and net exposure in respect of delivered aircraft, regardless of the point in time at which such exposures may arise. During 2015, the Group's gross exposure on delivered aircraft reduced by £119m, mainly due to guarantees expiring.

Summary funds flow

Movement in working capital includes an increase in the net TotalCare asset of £406m and a reduction in the amount of net customer deposits of £143m. The reduction in customer deposits is largely in the Marine business as a result of lower order intake in the offshore market and lower government spend. 

Expenditure on property, plant and equipment and intangibles - the decrease reflects reductions in additions to property, plant and equipment (£174m), participation fees and certification costs (£86m) and capitalised development costs (£45m), offset by increased expenditure on contractual aftermarket rights (£68m) and foreign exchange movements of £51m.

Pensions - contributions to defined benefit pension schemes in 2015 reduced by £63m, which included a reduction in the UK deficit funding payments of £36m and the non-recurrence of discretionary increase contributions of £33m. The total operating charge increased by £43m largely due to past-service credits of £8m in 2015 compared to £31m in 2014. Funding of defined benefit schemes is expected to be similar in 2016.

Shareholder payments - the reduction reflects the fact that no dividend was paid by Power Systems to Daimler AG (2014 £76m), offset by an increase in the redemption of C Shares of £15m.

Discontinued operations in 2015 reflect a sales price adjustment of £42m paid in 2015 on the 2014 disposal of the Energy business and wind-down costs.

Condensed consolidated income statement

For the year ended 31 December 2015

Condensed consolidated statement of comprehensive income

For the year ended 31 December 2014

Condensed consolidated balance sheet

At 31 December 2015

Condensed consolidated cash flow statement

For the year ended 31 December 2015