ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

ANNUAL REPORT

2025

Rolls-Royce Holdings plc

Cover image: The Trent 1000 XE,

introduced in 2025

A force for progress; powering,

protecting and connecting people

everywhere

Use of underlying performance

measures in the Annual Report

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 this

reflects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, certain impairment charges

andexceptional items. A full definition of underlying

and the reconciliation to the statutoryfigures canbe

found on pages 208 to211. Allreferencesto organic

change are atconstanttranslational currency.

Forward-looking statements

This Annual Report contains forward-looking

statements. Any statements that express forecasts,

expectations and projections are not guarantees of

future performance and guidance may be updated

from time to time. This report is intended toprovide

information toshareholders and is not designed to

be relied upon by any other party or for any other

purpose. The Company and its Directors accept

noliability to any other person other thanthat

required under English law. Latest information

willbe made available on the Group’swebsite.

Bytheir nature, these statements involve risk

anduncertainty and a number of factors could

cause material differences to the actual results

ordevelopments.

Throughout this Annual Report, the information

wedisclose is in accordance with our reporting

obligations as a UK registered company listed

onthe London Stock Exchange.

STRATEGIC REPORT

Group at a glance 2

Chair’s statement 4

Chief Executive’s review 6

Our purpose, vision and behaviours 10

Our strategy 11

External environment 13

Business model 14

Key performance indicators 16

Financial review 19

Our divisions

– Civil Aerospace 25

– Defence 27

– Power Systems 29

People and culture 31

Ethics and compliance 37

Sustainability 38

– Non-financial and sustainability

information statement 38

– Energy transition and environment 39

Principal risks 48

Going concern and viability

statements 57

Section 172 statement 59

Stakeholder engagement 60

Contents

2025 in summary

Our transformation to

unlock our full potential is

progressing at pace as we

create a high-performing,

competitive, resilient and

growing business.

Our strategic highlights

from the past year are

summarised opposite.

CONTINUED STRATEGIC PROGRESS

Portfolio choices and partnerships Strategic initiatives

— Strategic investment by ČEZ Group

inRolls-Royce SMR

— MRO capacity expansion across

thenetwork

— New platforms in business aviation

— G800 and Falcon 10X

— Power Systems investment in

increasedcapacity and new

enginedevelopment

— Non-core asset disposals

— Growing Civil LTSA margins for

in-production engines

— Time on wing targets raised to >100%

with more than half delivered

— Further progress with shop visit

costreductions

— Major defence contract wins including

EJ200 and AE 2100

— Capturing strong growth in

powergeneration (data centres)

andgovernmental

Efficiency and simplification

Lower carbon and

digitally enabled businesses

— £0.6bn of efficiency and simplification

benefits delivered

— £1.2bnof third-party procurement

savings delivered

— Further improvement of TCC/GM

ratio to 0.36x

— Next phase of efficiencies driven by

digital, and Group Business Services

scale up, and zero-based budgeting

— Rolls-Royce SMR — continued

progressinthe UK and Czech Republic

— Strong battery energy storage

systems(BESS) growth with

breakevenperformance

— Successfully tested the first 100%

methanol high-speed marine engine

— New AI platform to support reduction

ofshop visit turnaround times and

shopvisitcosts

GOVERNANCE REPORT

Chair’s introduction 63

Board of Directors 64

Compliance with the Code 66

Corporate governance 67

Executive Team 74

Committee reports

– Nominations, Culture & Governance 76

– Audit 78

– Remuneration 82

• Remuneration policy 88

• Remuneration report 100

– Safety, Energy Transition & Tech 110

Responsibility statements 111

FINANCIAL STATEMENTS

Consolidated financial statements 113

Notes to the consolidated financial

statements 121

Company financial statements 182

Notes to the Company financial

statements 184

Subsidiaries 187

Joint ventures and associates 191

OTHER INFORMATION

Independent auditors’ report 193

Independent limited assurance report 202

Greenhouse gas emissions 204

Other financial information 206

Reconciliation of alternative

performance measures 208

Directors’ report 212

Shareholder information 215

Glossary 216

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

Civil Aerospace is a major manufacturer of

aeroengines forthe large commercial aircraft,

regional jets and business aviation markets.

Thedivision uses its engineering expertise,

in-depth knowledge and capabilities to provide

through-life service solutions for itscustomers.

See page 25 for the Civil Aerospace

divisionalreview

OUR DIVISIONS

CIVIL AEROSPACE

1 A reconciliation of alternative performance measures

to their statutory equivalent is provided on pages 208

to211

2 Total underlying cash costs as a proportion of

underlyinggross margin is defined on page 211 and

isabbreviated to TCC/GM

3 Adjusted return on capital is defined on page 211 and

is abbreviated to return on capital

4 Underlying profit after tax has been adjusted for the

one-off non-cash impact of £277m (2024: £346m) related

to the recognition of deferred tax assets on UK tax losses.

See note 5, on page 145 for further details

5 Liquidity is defined as cash and cash equivalents plus any

undrawn facilities, as listed on page 57

6 See note 2 on page 139

7 See note 3 on page 141 for a reconciliation of gross R&D

expenditure to total R&D expenditure

See note 2 on page 136 for a reconciliation

between underlying and statutory results

Group at a glance

Power Systems, with its product and

solutionsbrand mtu, is a global provider

ofhigh-performance energy and propulsion

solutions for a wide range of applications in the

power generation, governmental, maritime and

industrial sectors.

See page 29 for the Power Systems

divisionalreview

FINANCIAL HIGHLIGHTS

UNDERLYING REVENUE

STATUTORY REVENUE

£20,059m

2024: £17,848m

£21,207m

2024: £18,909m

FREE CASH FLOW

STAT U TO R Y C ASH F L O W S FROM

OPERATING ACTIVITIES

£3,270m

2024: £2,425m

£4,565m

2024: £3,782m

UNDERLYING OPERATING PROFIT

STATUTORY OPERATING PROFIT

£3,462m

2024: £2,464m

£4,468m

2024: £2,906m

UNDERLYING OPERATING MARGIN STATUTORY OPERATING MARGIN

17.3 %

2024: 13.8%

21.1%

2024: 15.4%

UNDERLYING PROFIT BEFORE TAX

STATUTORY PROFIT BEFORE TAX

£3,352m

2024: £2,293m

£6,935m

2024: £2,234m

TOTAL UNDERLYING CASH COSTS

AS A P R OP O R TION OF UNDERLYING

GROSS MARGIN

1, 2

RETURN ON CAPITAL

1, 3, 4

0.36

2024: 0.47

18.9%

2024: 13.8%

UNDERLYING EARNINGS

PER SHARE

1, 4

STAT U TO R Y E A R N I N G S

PERSHARE

29.55p

2024: 20.29p

69.41p

2024: 30.05p

NET CASH LIQUIDITY

£1,895m

2024: £475m

£8.7bn

2024: £8.1bn

ORDER BACKLOG ⁶ GROSS R&D EXPENDITURE ⁷

£88.1bn

2024: £82.1bn

£1.4bn

2024: £1.5bn

Defence is a market leader in aero engines

for military transport and patrol aircraft,

withstrong positions in combat applications.

Ithassignificant scale in naval and also

designs,supplies and supports the nuclear

propulsion plant for all of the UK Royal Navy’s

nuclearsubmarines.

See page 27 for the Defence

divisional review

DEFENCE

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

POWER SYSTEMS

UNDERLYING OPERATING PROFIT

£2,130m

2024: £1,505m

UNDERLYING OPERATING MARGIN

20.5%

2024: 16.6%

Large engines – 76%

Business aviation – 19%

Regional – 2%

V2500 – 3%

£10,382m

2024: £9,040m

CIVIL AEROSPACE

UNDERLYING REVENUE

1 On 18 September 2024, the Group signed a sale and

disposal agreement for its naval propulsors & handling

business with Fairbanks Morse Defense. On 1 July 2025

the sale of the naval propulsors business completed,

withthe sale of the naval handling business anticipated

in2026

GROUP AT A GLANCE

£4,892m

2024: £4,271m

UNDERLYING OPERATING PROFIT

£852m

2024: £560m

UNDERLYING OPERATING MARGIN

17.4 %

2024: 13.1%

POWER SYSTEMS

UNDERLYING REVENUE

Power generation – 54%

Governmental – 25%

Marine – 10%

Industrial – 9%

BESS – 2%

UNDERLYING OPERATING PROFIT

£689m

2024: £644m

UNDERLYING OPERATING MARGIN

14.4 %

2024: 14.2%

DEFENCE

UNDERLYING REVENUE

Transport – 31%

Combat – 30%

Submarines – 28%

Naval

– 7%

Helicopters – 4%

£4,772m

2024: £4,522m

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

It gives me great pleasure to introduce

ourAnnual Report. In my introduction

lastyear, I spoke about the major

transformation which Tufan and all our

colleagues at Rolls-Royce embarked upon

in2023. I said that while our transformation

journey is not complete, robust foundations

had been put in place to support sustainable

long-term growth. Our strong performance

in 2025, builds further confidence

inthosefoundations, in the power of

ourtransformation, the potential of our

strategyand the commitment of our people.

On behalf of the Board, I want to thank our

people worldwide for their passion, focus and

dedication toRolls-Royce.

During the year, I have had the opportunity

to engage with many of our stakeholders,

including institutional shareholders,

customers and governments and I thank

themfor their continued trust and support.

Our vision is to transform Rolls-Royce into a

high-performing, competitive, resilient and

growing business for the benefit of all our

stakeholders. My Board colleagues and I are

pleased with the strong progress we have

made in 2025 towards realising this ambition.

We recognise that ensuring sustainable

long-term growth is a multi-year journey and

Tufan sets out in more detail from page 6 our

levers of growth to fully realise the potential

of this great organisation.

Financial strength and shareholder

distributions

Last year, the Board was pleased to announce

a return to shareholder distributions in the

form of cash dividends and a £1bn share

buyback which was completed during 2025.

At the end of 2025, we announced an interim

share buyback of £200m which commenced

in January and concluded in February 2026.

Reflecting the growing strength of our

financial performance and balance sheet,

wehave announced a final cash dividend

for2025 of 5.0p per share to be paid in June

subject to shareholder approval at ourAGM

on 30 April 2026. This brings thefull year

dividend for 2025 to 9.5p per shareand is in

line with the payout ratio we announced as

part of our capital framework in 2024. We

have also announced a multi-year share

buyback programme across 2026to 2028 of

£7.0bn to £9.0bn. Of this,£2.5bn is expected

to be completed in 2026, including £200m

completed between 2January 2026 and the

date of this report.

In tandem with these shareholder

distributions, we continue to make significant

investments in our products, our operations

and our people. Tufan talks more about these

investments in his review from page 6.

Our strategy

Throughout 2025, the Board continued

tomonitor progress against our strategic

initiatives, as outlined at our Capital Markets

Day in November 2023. We are pleased that

the strength of our performance this year

inexecuting our strategy has allowed us to

provide 2026 guidance of £4.0bn to £4.2bn

underlying operating profit, and £3.6bn

to£3.8bn free cash flow. We have also

upgraded our mid-term targets to £4.9bn to

£5.2bn underlying operating profit, 18% to

20% operating margin, £5.0bn to £5.3bn free

cash flow, and 23% to 26% return on capital

based on a 2028 timeframe.

During the year, the Board held a

strategysession in which we looked at the

opportunities for, and drivers of, growth

inour current portfolio and market sectors

beyond the mid-term. As we continue

ourtransformation journey, the Board

isfocusedon ensuring that Rolls-Royce

iswell-positioned to fully exploit these

futureopportunities.

In addition to our regular updates on

strategic progress, the Board held a

deepdive session with our CivilAerospace

leadership team to learn howour strategic

initiatives are delivering value in this, our

largest business division. This session

enabled us to understand in more detail

howwe optimise our portfolio oflarge engine

programmes to meet growing demand in the

widebody aircraft market, and the steps we

are taking to deliver operational excellence

in our manufacturing and aftermarket

operations. We also focused onthe safety of

our people and products, andlearnt how we

are nurturing talent and developing future

leaders in the Civil Aerospace business.

On many of our site visitswe were also

abletosee for ourselves how our strategic

initiatives are cascaded through the

organisation right down to the shop floor.

Inthis way, our people can see how their

day-to-day efforts directly impact the

performance of Rolls-Royce.

Dame Anita Frew

Chair

The Board is pleased with the progress we

havemadein 2025 to transform Rolls-Royce into a

high-performing, competitive, resilient and growing

business for the benefit of all our stakeholders. We

recognise that ensuring the sustainable long-term

growth of this great organisation is a multi-year journey.

Chair’s statement

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

representatives of local governments and

authorities at all times, and particularly as

weplan capacity expansion to meet future

growth opportunities. Where we do not

interact directly with, for example, our

commercial customers and suppliers, we

hearregularly from Tufan and members of

the Executive Team about their engagement

withand feedback from these stakeholders.

In 2025 we were particularly pleased to

learnthat the actions which the management

team have taken to enhance durability in the

Trent 1000 fleet and to mitigate supply chain

challenges have been making a meaningful

difference to our customers, not least in the

reduction of our aircraft on ground number.

Please see Stakeholder engagement on

page60 for more information.

As you will read in our Remuneration

reportfrom page 82, my colleague

LordJitesh Gadhia, Chair of our

Remuneration Committee, engaged

extensively in the autumn with our major

institutional investors about proposed

changes to our remuneration policy. As a

Board we are committed to ensuring that

ourremuneration arrangements enable us

torecruit and retain the best talent over the

long-term, while also ensuring continued

alignment of management interests with

shareholder interests. The proposed changes

to our remuneration policy are outlined in

more detail from page83.

Engineering for the future

In my Chair’s statement last year, I talked

about building on the iconic strengths

ofourengineering heritage. In 2025, we

celebrated a number of milestones which

speak to the depth and breadth of our

engineering skill. The Trent 700 engine

marked 30 years since entry into service

withover 75 million flying hours since

itslaunch. Our Dahlewitz, Germany site

delivered its 9,000th jet engine for the

business aviation market and more than

20years since the Eurofighter Typhoon

aircraft was first flown, we continue to receive

orders for our EJ200 engine. Our expertise

in nuclear propulsion for the UK Royal Navy’s

nuclear submarines isthe foundation for

Rolls-Royce SMR’s smallmodular reactor

technology, which was selected by

GreatBritish Energy – Nuclear, following

acompetitive tender process. But, as

Tufanexplains in more detail in his Chief

Executive’s review, we continue to invest in

new technology, whether to enhance the

durability of our products, to reduce

theirimpact on the environment or to meet

theneeds of our customers and society as

theglobal demand for power, connection

andprotection increases (see the Chief

Executive’s review from page 6 and

Sustainability from page 38).

Board

During 2025, we initiated a process

toappoint successors to Bev Goulet and

NickLuff as they near the end of their terms

as Non-Executive Directors on our Board.

Our Nominations, Culture & Governance

Committee aims to conclude these searches

during the course of this year.

Once again, we conducted an internally

facilitated review of the effectiveness of our

Board and its Committees in 2025. These

reviews were positive while also identifying

areas for new or continued focus in 2026,

which are discussed further on page 73.

Looking forward

2025 marks a third successive year of

recordperformance. This demonstrates

thatour transformation programme,

focusonoperational excellence and the

enthusiasm of our people is starting to

generate sustained performance and is

leading to the transformation of Rolls-Royce

into a high-performing, competitive, resilient

and growing business.

While there are many challenges in

theexternal environment, there are

alsoopportunities. Through robust

operational execution of our strategy

byourthree divisions, Civil Aerospace,

Defence, and Power Systems together with

our joint venture for small modular reactors,

Rolls-Royce is well-positioned to seize the

opportunities for growth across our portfolio

and our geographies, in and beyond the

mid-term. Inspired by our purpose and

empowered by the cultural change that

isdriving our transformation, the Board is

confident that our leaders, and our people

worldwide, are well equipped to navigate

anyheadwinds while forging a path to

greater innovation, resilience and growth.

Dame Anita Frew

Chair

Embedding cultural change

During the year, my fellow Directors and

Iwere pleased to see how the organisation

isembracing the cultural change that is

attheheart of our transformation and

withoutwhich our strong financial

performance would not be possible.

Forme,cultural change means moving

withpace,a focus onoptimisation and a

mindsetof continuous improvement. These

behaviours are evident, for example, in our

improving safety metrics, in the remediation

of long-standing engineering challenges,

inbetter operational execution and in the

agility withwhich we assessed, and took steps

to mitigate, the potential impact oftariffs.

The Board recognises the paramount

importance of safety for our people and

allour stakeholders, and therefore, we are

particularly pleased to see the focus and

progress on our safety performance. I

knowmy colleagues on the Safety, Energy

Transition & Tech Committee were impressed

with the new Safety Experience initiative

which you can read more about onpage 35.

Through our site visits and Meet the Board

events my Board colleagues and I have

experienced for ourselves how the

transformation journey is energising our

people. In 2025, wehad theopportunity

toengage with employees during visits to

ourbusiness aviation facilities at Dahlewitz,

Germany; our Defence site inBristol, UK; and

at our Civil Aerospace facilities in Derby, UK.

In addition to oursitevisits, our Employee

Champions, BevGoulet and Wendy Mars,

shared insights and feedback with the Board

from their visits to our sites in Washington,

UK; Inchinnan inScotland, UK; and at our

Nuclear Skills Academy in Derby, UK.

As I reflect on 2025, it is clear that we are

building a culture of high performance and

resilience and that, year-on-year, it reaches

deeper into the organisation. You can read

more about our People and culture from

page 31.

Engaging with stakeholders

In addition to engaging with our people,

myBoard colleagues and I had opportunities

to engage with shareholders, institutional

investors and governments during the year.

In parts of our home countries, Rolls-Royce

isa major employer and contributor to the

local economy. Therefore, we value our

engagement with, and support from,

It is clear that we are building a culture

ofhigh performance and resilience and

that, year-on-year, it reaches deeper into

the organisation.”

CHAIR’S STATEMENT

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

Our delivery in 2025

Safety is the single most important priority

for everyone at Rolls-Royce, be it product,

people or process safety. In all aspects we

have continued to make strong progress.

Ourproduct safety risk is at the lowest level

for a generation, with all divisions resolving

issues and further enhancing our portfolio

tothe levels we and our customers expect.

During the year, we launched a facilitator-led

Safety Experience, available to all employees

in which we step through key aspects of our

safety system, the part we each play and

howwe are all responsible forsafety.

Over13,000 of our people had completed

this activity by the end of 2025 including

members of the Executive Team. The Safety,

Energy Transition & Tech Committee also

received a demonstration ofthis immersive

experience. A speak upculture is central to

safety, enabling proactive identification

andresolution of potential issues. We have

improved on all people safety measures

overthe last three years and are determined

tobuild on that in 2026. Our mission

neverchanges on safety. We will always

strivefor zero safety events and continue to

enhance the safety of our products, systems

and services.

In 2025, we had another strong year.

Operating profit of £3.5bn was 38% higher

than 2024, and free cash flow of £3.3bn

was35% above 2024. To all of our employees

around the world who made this happen

– thank you. Thanks to your efforts, we are

securing our position as a high-performing,

competitive, resilient and growing business.

The momentum we built in 2024 has

continued through 2025. We have

expandedthe potential of the existing

business while also seeking to assure

ourstrategic ambitions. Underpinning

oursignificantly improved performance is

our strong operational execution which has

increased operating margin and expanded

profit and cash generation. One year ago,

weset a mid-term operating margin target

of15% to 17%. We exceeded that range in

2025, three years earlier than planned. This,

combined with our distinctive performance

culture, is setting our business apart in terms

of safety and day-to-day delivery, allowing us

to exploit fully our advantaged technologies.

The external environment in which

weoperate has remained complex.

Alongsideindustry-wide supply chain

challenges there have been uncertainties

introduced by tariffs and other geopolitical

tensions. The resilience and agility we have

established inthe organisation has allowed

us to delivercontinued high-performance

despitethese headwinds.

I believe we have extensive growth

opportunities beyond the mid-term,

inourexisting businesses and via our

strategicinvestments as set out below.

Ourdisciplined performance culture is

ensuring astable foundation for our future

business performance.

Having reinstated dividends last year for

thefirst time since 2019, we are very pleased

to continue shareholder distributions with

afinal dividend of 5.0p per share in respect

ofthe 2025 full year. This brings the full

yeardividend for 2025 to 9.5p per share.

InNovember 2025, wecompleted the £1bn

share buyback announced with our 2024

results. We commenced an interim buyback

at the start of 2026 to the value of £200m,

which was completed in February 2026.

Given the strength of our balance sheet and

cash generation potential, we can commit to

amulti-year buyback in the range of £7.0bn

to £9.0bn over the next three years, with

£2.5bn (inclusive of the interim buyback

of£200m already completed) allocated

for2026. Thislonger-term commitment

isasign of ourbelief in the business and

ourconfidence is mirrored by the rating

agencies, with all three, Fitch, Moody’s and

S&P rating us at investment grade.

We expect 2026 to be another strong year.

Our 2026 guidance raises our operating

profit to £4.0bn to £4.2bn and our free

cashflow to £3.6bn to £3.8bn. This guidance

seesus delivering our previous mid-term

operating profit target two years earlier

thanplanned.

Tufan Erginbilgic

Chief Executive

This year, we have further embedded the

culturalchange that is driving our transformation,

with strong results produced across the Group.

Through our transformation activities we have

created unmatched growth and expanded the

potential of the business. Our people are aligned,

energised and mobilised. They are driven by a clear

purpose which is moving us to a place where we can

do things today that we could not previously do.

Chief Executive’s review

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

they believe has demonstrated one of our

behaviours. Since its launch in October, there

have been over 10,000 unique recognition

records from around the world. That so

manypeople see their colleagues making

adifference correlates with our overall

business performance. We now have

anorganisation that is driven by a clear

purpose,and which thrives on making a

difference. Further information on Power

ofYou and our approach to employee

recognition can be found in People

andculture from page 31.

Sustained transformation depends on leaders

who both run and evolve the business, not

asseparate roles, but as one integrated

responsibility. We have standardised and

embedded our leadership expectations

intothe systems that shape performance,

succession and everyday decision-making.

This performance framework ensures that

these expectations translate into consistent

behaviour and accountability. The impact of

our leaders is amplified through our Change

Maker network. This community continues to

grow across the whole Group, with more than

1,300 employees participating. They have

matured from advocacy to active facilitation,

working alongside people leaders to embed

behaviours into daily habits and tangible

outcomes. Active sponsorship from leaders

empowers Change Makers to remove

barriers, recognise progress and increase the

impact of our transformation on our culture.

As I visit our sites across the globe, it

isheartening to see this performance

framework forming the foundations of a

sustainable transformation.

Leadership changes

During the year, we created a new role on

theExecutive Team of Chief Procurement

and Supply Chain Officer. This role

recognises the importance of these

areasandthe need to continue driving

improvements in our supply chain. It

underscores our commitment to address

these issues for thebenefit of ourcustomers

and other stakeholders. I look forward to

working with Martin Thomsen when he takes

up this role inMarch. I also look forward to

welcoming Maria Varsellona who joins us as

Chief Legal Officer and I thank Mark Gregory

for his 20 years of service to Rolls-Royce, the

last ten of which as General Counsel, and wish

him well for thefuture.

Progress on our strategic framework

Portfolio choices and partnerships

We continue to invest heavily in our

products, infrastructure and capabilities.

Asignificant investment has been made

inour Civil Aerospace engine portfolio, with

£1bn allocated to enhance attributes and

increasetime on wing, on which we are

making good progress.

The Trent XWB engines remain incredibly

popular. As the most successful large

enginein our history, the Trent XWB-84’s

performance and time on wing continues

toimprove, with additional benefits being

delivered through 2026. Improving on

themost efficient large aero engine in

service, the Trent XWB-84 EP (Enhanced

Performance) entered service in 2025.

Operators of this engine have seen

improvements in fuel burn of over 1% in

service. In addition, we completed materials,

component and engine testing on the Trent

XWB-97 developments, progressing our

durability package on thatengine.

Additive manufacturing offers enormous

potential and is set to be used in many of

ourproducts across the portfolio. In an

important breakthrough, Power Systems has

redesigned, optimised, printed and tested

numerous highly stressed core components

in our Series 2000 engine. The team took

advantage of the design freedom and

newpossibilities offered by the additive

manufacturing techniques to deliver a lighter

component, with geometries that could not

be achieved with traditional manufacturing

processes. The potential for this technology

is vast, enabling faster manufacture for

development, production and spareparts.

Another sign of our differentiated

technologies aligning with our granular

strategy is the selection by Great British

Energy – Nuclear of Rolls-Royce SMR to

buildthree small modular reactor (SMR)

unitsin the UK following a competitive

tenderprocess. This is a boost to UK

economic growth and exports that will create

significant long-term value for Rolls-Royce.

The combination of these activities across

our divisions and strategic investments is

further evidence of our transformation into

ahigh-performing, competitive, resilient and

growing business that can invest in its future

growth for the benefit of all stakeholders.

Strategic Initiatives

Civil Aerospace

Our momentum in Civil Aerospace

continuedin 2025 with growth in orders

across our widebody portfolio. We received

multiple commitments for the Trent XWB-97

powered A350 freighter and we expect to

see continued momentum through 2026 with

this aircraft. The Trent XWB family and the

Trent 7000 remain popular choices, offering

airlines versatile solutions.

Our transformation

I am frequently asked to describe the

transformation we have undertaken at

Rolls-Royce. My first point is to reiterate

thatwe are not pursuing a turnaround

orrestructuring, rather a fundamental

transformation of the business. When people

think of aturnaround, the outcome is a return

to a point in the past and past performance.

Our transformation is about taking the

business from point A to point B, where at

point B the business is capable of things it

could not even conceive at point A. Because

of our differentiated mindset, capability

andfinancial strength we are well on the

waytopoint B. What we are learning is that

asweget closer, we see more opportunity,

expandfurther and point B evolves.

Ourtransformation is an overarching

programme that brings together our

strategy, our purpose and our behaviours

toalign delivery as One Rolls-Royce.

In our 2024 Annual Report, I said that 2025

would be a significant year in which we

secure the foundations that underpin

ourdistinctive performance culture. At

Rolls-Royce, culture is a product of how we

run thebusiness, it is not a separate agenda.

It isembedded in our systems, leadership and

daily decisions. We continue to pursue our

transformation supported by our four key

pillars: empowered leadership; granular

strategy; performance culture; and intensity,

pace and rigour. Our leaders are trusted and

grounded in belief, clarity of direction and

accountability. Our strategy is clear for all

employees, who know their role and the

critical contribution they make. Our strategic

initiatives advance the business through

clear expectations and targets, proactive

interventions and continuous feedback. Our

performance culture is rooted in developing

and attracting the best talent. Through the

year, there were many times where swift

action was required to respond to changing

context, dynamics and new constraints. Our

teams demonstrated a high level of maturity,

consistently operating with speed and depth

when it mattered most, proving that our

culture is supporting a completely different

level of resilience.

Our behaviours

In 2024, we introduced our new behaviours:

put safety first; do the right thing; keep it

simple; and make a difference. These have

galvanised our organisation and have swiftly

become our language. They are simple and

straightforward, with genuine substance,

andI believe they have been instrumental in

our success. As part of our engagement and

recognition activities, we launched a portal,

Power of You, that allows any employee to

directly recognise someone or a team that

CHIEF EXECUTIVE’S REVIEW

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

Rolls-Royce continues to set the standard

inthe business aviation market. In 2025,

wedelivered the 9,000th engine from

ourDahlewitz site in Germany. We saw

strongdemand for the Pearl 15-powered

Bombardier Global 5500 and 6500 as well as

for the Pearl 700-powered Gulfstream G700

and the G800, that also entered into service

last year. The Pearl 10X continues to make

strong progress towards engine certification.

Defence

Our Defence division had notable orders

andproduct development achievements in

2025. The EJ200 captured significant order

intake from the Typhoon partner nations and

secured major export success with Türkiye

with commitments for 20 Typhoon aircraft

with an option for more in the future. These

orders mean we have visibility of EJ200

production into the 2030s.

Our work continues with the Defence

Research and Development Organisation

(DRDO) in India on the UK-India Jet Engine

Advance Core Technologies (JEACT)

programme to advance an indigenous

combat engine design.

Over the past decade we have invested

morethan $1bn in technology enhancements,

facility upgrades and test capabilities at our

Indianapolis, US site. We have made excellent

progress with our F130 testing for the B52

re-engining programme. We started AE 1107

engine testing to support prototype delivery

for the U.S. Army MV-75 Future Long Range

Assault Aircraft (FLRAA) programme. Each

MV-75 FLRAA will be equipped with two

advanced Rolls-Royce AE 1107 engines,

featuring world-class power density,

cyber-compliant controls and

survivabilitytechnology.

Power Systems

Momentum in our Power Systems division

continued in 2025 with significant growth

inpower generation, where data centre

demand soared, as well as in governmental.

Consequently, we committed to significant

investment at both our Mankato, Minnesota

facility and ourAiken, South Carolina plant in

the US.

Another benefit of our granular strategy is

our focus on battery energy storage systems

(BESS), designed for grid-scale performance,

long term reliability and seamless integration

with renewable power. The business achieved

break-even in 2025. We have now delivered

battery storage solutions for over 200

projects worldwide.

Looking ahead

Mid-term growth

In our 2025 half year results, we upgraded

our 2025 guidance based on the strong

startto the year and confidence in

ourperformance. Planning completed

during2025 shows that we expect our

strongperformance to continue in the

mid-term. Accordingly, we have upgraded

our mid-term targets to £4.9bn to £5.2bn

underlying operating profit, 18% to 20%

operating margin, £5.0bn to £5.3bn free cash

flow, and 23% to 26% return on capital based

on a 2028 timeframe.

All our divisions are expected to

continuetocontribute in 2026 and beyond.

Operating profit growth in Civil Aerospace

will be driven by several factors, including

stronger aftermarket performance,

improvedwidebody OE profitability,

improved business aviation performance,

andhigher profitability on spare engines.

Bythe mid-term, we expectrising widebody

deliveries and TrentXWB installed engine

deliveries to bebreak-even or positive,

thanks to our commercial optimisation

andefficiency actions. Over the last three

years, we have captured more than 50% of

widebody deliveries. This has driven up our

share of theinstalled fleet from 34% to 38%.

The Trent 1000 is also a beneficiary of

continued investment. In 2025, the improved

Phase 1 High Pressure Turbine (HPT) blade

was fully certified for the Trent 1000 TEN,

and began to be incorporated into the

existing fleet at shop visits. The first new

production engines entered into service

withLufthansa. We took the opportunity

toacknowledge this major step forward

indurability and doubling of time on wing

byintroducing this enhanced engine as

theTrent 1000 XE. This recognises the

significant investment, reliability and

durability improvements andthe completely

refreshed standard our operators will

receive. The improvements arealso being

incorporated inshop visits. Wehave very

high confidence inthe benefits of these

improvements. In December, the Phase2 HPT

blade wascertified and, during 2026, will

befitted tonew engines and at shop visits,

further increasing the time onwing of

theengine.

A major focus through 2025 has been

operational execution, specifically improving

new engine production and aftermarket shop

visit output, for the benefit of our customers.

We were delighted to win a Supplier Award

from Airbus, recognising our actions on new

engine delivery and specifically for “Ramp

upand Operational Excellence”. This is the

first time an engine manufacturer has been

nominated for this award and is evidence of

our strategy and transformation in action.

We have improved performance in, and

continued to expand, our maintenance,

repair and overhaul (MRO) facilities including

in Derby, UK and Dahlewitz, Germany. In the

wider MRO network Beijing Aero Engine

Services Limited (BAESL), our joint-venture

facility with Air China opened on plan and

inducted its first Trent 700 engine. Air France

Industries KLM Engineering & Maintenance

centre inducted the first Trent XWB-84

engine, and we announced Turkish Technic

and Emirates as the newest members ofour

MRO network.

A significant milestone occurred in 2025 with

the marking of 30 years since the entry into

service of the Trent 700. Since launch, this

engine has completed over 75 million flying

hours. This is a significant achievement with

further potential as approximately 40% of

theprogramme’s total flight hours are still

tocome.

OUR STRATEGIC FRAMEWORK

Portfolio choices and

partnerships

The markets we have chosen to

operate in, businesses we want

toinvest in and the partnerships

thatwill help create truly

winningpositions.

Strategic initiatives

How we will create a competitive

business, expand our earnings

potential and sustainably improve

our performance.

Efficiency and simplification

The importance of a Group-wide

focus to drive synergies that will

enable us to be more competitive

and simplify the way we operate.

Lower carbon and digitally

enabled businesses

Our commitment to the energy

transition and capturing the benefits

of becoming digitally enabled.

CHIEF EXECUTIVE’S REVIEW

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

We see a growing trend toward autonomous

platforms in defence. This is a significant

market opportunity, which we are well

placedto capitalise on given our capabilities.

Rolls-Royce will power the U.S. Navy MQ 25A,

the first autonomous aerial refueller in aviation

history. We are investing further to position

Rolls-Royce for future autonomous

opportunities, including our Orpheus engine

demonstrator, an affordable, versatile small

engine architecture that can be adapted for

multiple applications.

Power Systems

In Power Systems, long-term growth is

expected to be driven primarily by power

generation and governmental. We anticipate

sustained power generation growth driven

by data centres. We are uniquely positioned

to help the hyperscalers with their future

data centre power demands, including

backup power, prime power and with SMRs.

Our next generation Series 4000 engine,

which will be released in 2028, targets the

ever-increasing power demands of AI data

centres with a 20% higher power density.

Ingovernmental markets, rising defence

spending supports both land and naval

applications, where we are the incumbent

supplier on the main European

NATOplatforms.

Taken together, our existing businesses are

well-positioned to deliver significant growth,

with rising operating margins and growing

cash flows well beyond the mid-term. This

growth will be driven by a combination of

market growth and self-help.

Long-term growth – new opportunities

We see the potential for long-term growth

arising from new opportunities, leveraging our

differentiated and advantaged technologies

and capabilities. For example, our unique

capability in nuclear positions us extremely

well in this fast-growing market. We are

already the leading SMR player in Europe,

following success in the UK and the Czech

Republic, and have started the regulatory

process in the US. We see a total addressable

market of more than 400 SMRs by 2050.

Inaddition to SMRs, we see an adjacent

opportunity in Advanced Modular Reactors

(AMRs); AMRs are smaller, more flexible

powerplants with potential applications in

defence and commercial power.

A further growth opportunity is in

narrowbody. Our UltraFan technology,

whichwe are developing for both

widebodyand narrowbody platforms,

positions us strongly for the next generation

of narrowbody aircraft. The market is large

and would offer meaningful synergies with

our existing widebody and business aviation

activities. To progress this opportunity,

weare building a narrowbody sized

demonstrator with up to 30,000 pounds

ofthrust, which is planned for ground testing

in 2028. Weexpect UltraFan technology

todeliver a significant improvement in

fuel-burnversus existing narrowbody

engines. We have already made significant

investments in UltraFan and will continue to

do so as we look to re-enter the narrowbody

market in partnership.

The business we are creating

We are delivering on our proposition

totransform Rolls-Royce into a high-

performing, competitive, resilient, and

growing business. We have achieved a

step-change in financial performance

overthe past three years and we expect

further strong progress in 2026. We have

setnew, upgraded mid-term targets for 2028.

We are transforming Rolls-Royce into a

sustainably distinctive company for the

benefit of all our stakeholders. We have

advantaged products and technologies,

significantly improved safety and operational

capabilities and excellence in customer

service. We have a differentiated mindset

and distinctive performance culture. These,

combined with a strong balance sheet and

best-in-class efficiency, will unlock significant

growth from our existing businesses, and

newopportunities. I am very proud of the

Rolls-Royce team and what we have delivered

so far, and I am even more excited about what

we will deliver together in the future.

Tufan Erginbilgic

Chief Executive

Power generation revenues are now resulting

in higher and improving margins, as we

continue to enhance the business model.

Data centre demand remains very strong

anda significant portion of our growth to

themid-term is already underpinned by firm

orders. In governmental, our strong market

positions and increased global defence

spending give us improved visibility of orders

in the mid-term. Marine, BESS and services

revenues are all expected to grow in

thisperiod.

In Defence, highly competitive

performancein themid-term will

bedrivenby our self-help measures,

coupledwith demand growth, productivity

improvements and capacityexpansions.

Wesee significant growth beyond the

mid-term as new programmes ramp up.

Long-term growth – existing business

Civil Aerospace

In Civil Aerospace, we hold leading positions

in widebody and business aviation. In

widebody, we see growth in deliveries to

themid-term and beyond. We are continuing

to improve our long-term service agreement

margins beyond the mid-term. This is a

sustainable benefit as more contracts come

in with higher margins. Our time on wing

initiatives are expected to result in a highly

competitive engine portfolio.

Our Pearl family of business aviation engines

leads the long range and ultra-long range

segment, with strong positions on the latest

large cabin jets. Deliveries of these platforms

are ramping up and will remain in production

for many years. Based on our actions, we

expect to generate positive OE margins

andas the fleet expands, we see potential to

generate growing aftermarket revenues with

increasing margins and cash flows.

Defence

Beyond the mid-term, growth opportunities

accelerate as several major programmes

ramp up. We hold a significant share in the

GCAP programme, which we believe will be

aleading combat aircraft programme with

significant export opportunity potentially

larger than Eurofighter. GCAP production is

expected to ramp up in the mid-2030s. The

MV-75 aircraft programme will also begin to

ramp up from 2028, with a life of more than

30 years including both OE and aftermarket.

CHIEF EXECUTIVE’S REVIEW

Safety is the single most important priority

for everyone at Rolls-Royce.”

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

We are proud tobe a business that has truly helped to shape the modern world

andour ambition is to continue in this role for the long term. Our purpose statement

encapsulates thatcommitment to the future and reflects why we exist as a business.

OUR BEHAVIOURS

Efficiency and

simplification

Strategic initiatives

Portfolio choices

and partnerships

Lower carbon and

digitally enabled

businesses

OUR PURPOSE

A force for progress; powering, protecting and connecting people everywhere

OUR VISION

Transforming Rolls-Royce into a high-performing, competitive, resilient and growing business

OUR STRATEGY

A strategic framework to build a sustainably distinctive and leading business

For more information, see the Chief Executive’s

review from page 6

For more information, see People and culture

from page 31

Put safety first

Prioritising the safety of

ourpeople and products

andsupporting each other

tospeak up

Do the right thing

Supporting a culture of caring

and belonging where we listen

first, embrace feedback and

actwith integrity

Keep it simple

Working together to share

andexecute ideas and

stayingadaptable to

newideasand solutions

Make a difference

Thinking about the business

impact of our choices and

thebusiness outcomes of

ourdecisions and challenging

ourselves to deliver excellence

and efficiency every day on the

things that matter

Our purpose, vision and behaviours

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

The Rolls-Royce proposition

1. Become a high-performing,

competitiveand resilient business.

2. Grow sustainable free cash flow.

3. Build a strong balance sheet and

growshareholder returns.

Delivering the Rolls-Royce proposition

ismaking us a stronger partner, to the

benefitof all our stakeholders, as they

facefuture challenges and opportunities.

Weare unlocking our full potential by

turningengineering excellence into

strongfinancial performance.

To implement our strategy, we are being

disciplined, agile and systematic. We will

continue to have a tight focus on priorities,

improve commercial discipline and

seekefficiency in every step, while never

compromising on integrity or safety. We

haveput the business on a stronger financial

footing with sustainable improvements in

working capital, higher operating margins

and improved operational performance.

Improving profitability will give us more

options to grow the business and enhance

shareholder returns. This performance shift

is also crucial to creating more opportunities

for our people to be part of an energising,

rewarding and world-leading company.

Rolls-Royce has been at the forefront of

innovation for over a century. We set the

standard for engineering excellence,

providing mission-critical products and

services to customers around the globe.

We have built a world-class product portfolio

and deep customer relationships in attractive

markets. Our focus now is to translate our

technical and market success into strong

financial results.

The strong progress made in 2025 gives us

confidence in the delivery of our strategy.

We are accelerating financial delivery and

are moving at pace to achieve our mid-term

targets, a key milestone towards unlocking

our growth potential. This has enabled us to

upgrade our mid-term targets to £4.9bn to

£5.2bn underlying operating profit, 18% to

20% operating margin, £5.0bn to £5.3bn free

cash flow, and 23% to 26% return on capital

based on a 2028 timeframe.

In 2025, significant progress was made in delivering our clear strategy.

Buildingahigh-performing, competitive, resilient and growing business is

underpinned by ourtransformation and a differentiated performance culture.

Our strategy

OUR TRANSFORMATION

A HIGH-PERFORMING, COMPETITIVE

ANDRESILIENT BUSINESS WITH

PROFITABLEGROWTH

GROWING SUSTAINABLE FREE CASH FLOW

STRONG BALANCE SHEET AND GROWING

SHAREHOLDER RETURNS

STRATEGIC FRAMEWORK

— Portfolio choices and partnerships

— Strategic initiatives

— Efficiency and simplification

— Lower carbon and digitally enabled businesses

DELIVER AS ONE ROLLS-ROYCE

— Embrace new ways of working and mindset

— Establish a differentiated performance culture

— Execute with strategic clarity

— Externally focused and benchmarking

— Simplified organisation and strengthened capabilities

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

Portfolio choices

andpartnerships

We have made choices about the markets in which we operate, where to invest and the partnerships that

willhelp create winning positions, based on clear criteria. We only invest where the market is attractive and

growing, where we can build an advantaged position, differentiated through strong customer relationships and

competitive technology, and where there are high barriers to entry. Thisallows us to allocate resources more

effectively and drive profitable growth.

In Civil Aerospace, we announced a partnership with Turkish Technic to establish a state of theartmaintenance,

repair and overhaul centre. In Defence, we announced an expansion of our partnership with Avio Aero (Italy)

and IHI (Japan) to accelerate the development of the power and propulsion system for the next-generation

fighter aircraft being developed through the Global Combat Air Programme (GCAP) and we completed the

saleof our naval propulsors business to Fairbanks Morse Defense. In nuclear, we are deepening our partnership

with ČEZ Group (ČEZ), now a shareholder in Rolls-Royce SMR.

Strategic initiatives

Enhancing our competitiveness, expanding our earnings potential and sustainably improving our performance

relies on the successful implementation of our strategic initiatives. The initiatives are owned by our teams and

the process we have put in place ensures that every employee knows their role in delivering against the targets,

creating complete alignment with the Rolls-Royce strategy.

In Civil Aerospace, we continue to make progress in improving time on wing, reducing operating costs and

improving asset utilisation. In Business Aviation, our Pearl 800 engine entered service with Gulfstream and

wecompleted certification testing on the Pearl 10X engine for Dassault. In Defence, we made significant

progress on ourstrategy to grow our combat business by securing new exports for the EJ200 with Türkiye

anddemonstrating next generation technologies ahead of detailed design and development of GCAP’s next

generation power and propulsion system. In Power Systems, we announced an investment in our Mankato,

Minnesota, US plant to increase the production capacity of back-up power generation systems for the rapidly

growing data centre market.

Efficiency and

simplification

Our Group-wide focus to drive synergies is making us more competitive by delivering significant andrecurring

operating cost reductions. Key levers include a more efficient and simplified operating model, a refreshed

organisational design, changed ways of working and improved investment discipline, as well as more focused

management of third-party costs. We have delivered cumulative savings of over £600m by the end of 2025,

achieving the target set out during our Strategic Review in 2023.

A significant achievement contributing to our efficiency and simplification agenda is the scaling upof benefits

in our Group Business Services function. We have expanded our Group Business Services operations in India

and opened a new centre in Poland. These centres will provide effective and efficient support, as well as an

improved customer experience.

Lower carbon and

digitally enabled

businesses

We are committed to reaching net zero by the end of 2050, with an interim target of reducing Scope1 + 2

emissions by 46% by the end of 2030 against a 2019 baseline. Our commitment tosustainability extends to

supporting our customers in realising their environmental goals throughimproving the efficiency of our

products – products that serve some of the hardest sectorsto decarbonise.

In Civil Aerospace, we are making progress on maturing our next-generation, high-efficiency engine architecture,

UltraFan, by preparing for ground testing of a demonstrator in the narrowbody thrust class. This initiative will

demonstrate the potential of UltraFan technologies within a new market segment and reduce risk ahead of future

flight testing of a larger, widebody engine .

Within our Defence division, we showcased the environmental and security of supply advantages through

aninnovative recycling initiative, Tornado 2 Tempest. This pioneering project demonstrated how retired

RAFTornado aircraft components can be turned into metal powder and subsequently reused to 3D print

newparts for the Orpheus small engine concept.

Our Power Systems division released a position paper with Microsoft highlighting the potential of

HydrotreatedVegetable Oil (HVO) as a sustainable transitional fuel for backup power in data centres.

TheuseofHVO can reduce lifecycle CO₂ emissions by up to 90% compared to fossil diesel and is compatible

withexisting generator infrastructure.

Rolls-Royce SMR made significant advances in 2025, having been chosen as the preferred technology in

theGreat British Energy – Nuclear small modular reactor competition. In Sweden, following a comprehensive

evaluation process, we are collaborating with Vattenfall as we move towards final technology selection of an

initialopportunity for three SMRs.

Link to KPIs

Order backlog

Underlying revenue

Underlying operating profit

Underlying operating margin

Free cash flow

TCC/GM

Return on capital

Gross R&D expenditure

Gross capital expenditure

Safety index

Total reportable injuries rate

Employee engagement

Sustainability

Link to risk

Safety

Compliance

Strategy

Execution

Business interruption

Energy transition

Information & data

Market & financial shock

Political

Talent & capability

Technology

For more information, see the

Chief Executive’s review from

page6

For more information, see

Ourdivisions from page 25

For more information, see

Sustainability from page 38

OUR STRATEGY

OUR STRATEGIC FRAMEWORK: DELIVERING SUSTAINABLE GROWTH THROUGH TRANSFORMATION

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

Geopolitical tension and protectionism Our response

Geopolitical tension and protectionism have risen sharply in the

pastyear, with US tariffs hitting their highest point in a century.

Countries have responded with new trade agreements or reciprocal

tariffs, reshaping global trade and slowing economic growth. This

uncertainty has increased supply chain pressures, commodity price

volatility, and delayed investment.

Rolls-Royce addresses geopolitical uncertainty by closely monitoring

trends and regularly reviewing risks to our strategy.

Our diversified portfolio and multiple revenue streams strengthen

ourresilience and minimise reliance on individual markets, while our

broad international presence enables us to respond effectively to

protectionist policies.

We were quick to respond to the impact of tariffs, where we were able

to fully mitigate their direct impact across the Group.

Continuing supply chain challenges Our response

In 2025, the global supply chain remained challenging: shortages

inrawmaterials, labour issues, geopolitical conflicts, and a complex

international climate, have contributed to uncertainty across various

industries resulting in increased costs, extended lead times, and shifts

in supply chain dynamics worldwide.

Strong growth in Civil Aerospace has strained an aviation supply

chain that has yet to fully recover from the pandemic, and the

pressure has been exacerbated by the introduction of tariffs. These

factors continue to pose challenges for aircraft deliveries and the

availability of spare parts.

Closer integration between procurement and supplier management,

upskilling procurement teams with advanced digital tools and

embedding employees in some of our key suppliers has enabled

improved supply chain management and efficiency.

The Executive Team has been enhanced by the addition of a Group

Chief Procurement and Supply Chain Officer. Commencing in March

and reporting directly to the Chief Executive, this appointment will

further enhance efforts to improve resilience and competitiveness.

A weakening consensus on environmental action Our response

Over the last few years, we have seen a move towards more flexible,

and sometimes weaker, environmental regulations. Reversals in

regulation in the US and concerns around competitiveness and

thecost of the energy transition in Europe, together with selective

policy easing in other regions, has created an uncertain and uneven

landscape that could slow progress on decarbonisation.

Disagreements over trade and energy at COP30 prevented the

translation of earlier pledges to phase out fossil fuels into concrete

actions, emphasising a shift towards voluntary national

implementation plans.

Ongoing energy security concerns will keep fossil fuel markets

volatile, while policy support, lower costs, and financial innovation

willboost clean energy. Geopolitical and technological shifts are

expected to channel investment towards assets that build supply

resilience and speed decarbonisation.

Minimising the environmental impact of our operations is essential,

and Rolls-Royce remains well positioned to sustain and selectively

advance our decarbonisation roadmap. As society’s need for

affordable, reliable, and sustainable energy continues to grow,

theevolving energy landscape creates substantial new business

opportunities across our portfolio.

The growing adoption of AI is contributing to increased data centre

size, capacity, and power requirements, resulting in robust demand

within our Power Systems business.

The SMR programme developed by Rolls-Royce SMR hasadvanced

from concept to preferred-bidder status in multiple jurisdictions,

providing our customers with a differentiated, capital-light route into

new nuclear capacity.

European calls for sovereign capability in defence Our response

Driven by the conflict in Ukraine, shifting US focus, and a growing

recognition of the need for strategic autonomy, Europe is increasing

investment in defence.

Europe enters 2026 with political will, financing capacity, and industrial

momentum to build sovereign, interoperable defence capabilities.

NATO’s updated guidelines call for members to invest a minimum of

3.5% of GDP to defence, with at least 20% dedicated to equipment

procurement. Frontline countries such as Poland already meet or

surpass this.

In 2025 the UK committed to a sustained uplift in defence spending

over the next decade. Germany plans to spend more than €150 billion

per year on defence by 2029 in order to meet its 3.5% target.

As the leading provider in Europe of defence power and propulsion

capability across land, sea and air, Rolls-Royce is well placed to

support Europe’s determination to secure sovereign capabilities

overthe coming decade and beyond.

The EJ200 is the leading European combat engine, in service

withtheUK, German, Italian and Spanish armed forces. Our Power

Systemsengines power Europe’s leading main battle tank and most

ofthe navies in Europe.

Higher utilisation and intensified readiness will drive increased

service revenues in the short term. New programme opportunities

willsupport investment in technology in the longer term.

External environment

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

OUR BUSINESS

MODEL DRIVERS

OUR UNIQUENESS

OUR COMMON DRIVERS

FOR SUCCESS

WHAT WE

WILL ACHIEVE

OUR DIVISIONS

OUR ROLE

IN SOCIETY

We work closely with our aircraft manufacturer and airline

customers to understand their needs and co-create solutions.

We have long-standing partnerships with airlines to support

their operations, including through joint maintenance, repair

and overhaul (MRO) facilities.

We partner with our supply chain to access specialised

capabilities, maximising market coverage and minimising

investment required, and share risk and reward.

IN PRODUCT I O N

WIDEBODY AIRCR AF T

WITH A ROLLS-ROYCE

ENGINE OPTION

4 out of 5

CIVIL AEROSPACE

We make it possible for people to travel safely, reliably,

efficiently, and affordably around the world.

We create social and economic value by enabling unique

experiences and in-person connections – bringing together

people and cultures, businesses and families.

Connect

PASSENGERS WHO FLE W

ON A ROLLS-ROYCE

POWERED AIRCRAFT

IN 2025

>390m

We design, develop, manufacture and support

high-performance gas turbines for commercial and

businessaviation.

We pioneered long-term service agreements, a model that

aligns our interests with those of our customers and rewards

us for improving reliability, availability and cost efficiency.

Through data-driven insights and focused customer support,

we deliver value to airlines and set the benchmark for

customer service in business aviation.

Differentiated services

Trusted partner

ONE ROLLS-ROYCE

A HIGH-PERFORMING, COMPETITIVE,

RESILIENT AND GROWING BUSINESS

NE W DELIVERY

BUSINESS

AV IATION E NGINE S

ENROLLED IN

CORPORATE

CARE ENHANCED

>70%

Safety

Information & data

Compliance

Market & financial shock

Strategy

Political

Execution

Talent & capability

Business interruption

Technology

Energy transition

Link to risk

Business model

Advantaged businesses with strong positions

in attractive and growing markets

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

OUR BUSINESS

MODEL DRIVERS

OUR UNIQUENESS

OUR COMMON DRIVERS

FOR SUCCESS

WHAT WE

WILL ACHIEVE

OUR DIVISIONS

OUR ROLE

IN SOCIETY

DEFENCE POWER SYSTEMS

We provide mission-critical power and propulsion

in the air, at sea and on land.

We enable operational independence and

strategic and tactical advantage, helping

nationskeep their citizens safe at home, protect

their interests abroad, and respond rapidly to

humanitarian emergencies.

Protect

Power

YE ARS OF

PROVIDING

NUCLEAR

PROPULSION

POWER TO THE

UK’S ROYAL NAVY

We provide solutions to the challenges created

bysociety’s rapidly growing demand for energy

andmobility.

We deliver high-performance, reliable and

sustainable power that supports economic

growthand development.

EXPECTED ANNUAL

GROWTH RATE

IN THE DATA

CENTREMARKET

>20%

We design, develop, manufacture and support

high-performance aero and naval gas turbines and

nuclear power and propulsion systems.

We turn technology into differentiated products

that give customers unique capabilities and remain

in service for decades.

We create value and resilience for the Group

bybalancing the volatility of commercial markets

and leveraging synergies across technology,

infrastructure, supply chain and product families.

We design, develop, manufacture and support

high-performance reciprocating engines and

integrated system solutions for use on land and

atsea.

We invent once and use many times, creating

product families that serve multiple applications

across diverse markets. This approach delivers

proven solutions for our customers and maximises

returns on investment for our shareholders.

Customer-funded growth

One core solution addressing multiple markets

We deliver unmatched power, reliability and

efficiency, providing premium performance and

value for our customers.

Recognised as the engine provider of choice

wherethe mission matters, we support critical

infrastructure with high-integrity back-up power

forhospitals, airports and data centres; and provide

high-performance power and propulsion for naval

vessels, military vehicles and yachts.

We proudly support over 160 customers in over

100 countries.

With full engine design capability in the UK, US

and available in Germany, we ensure sovereign

independence and freedom to operate.

We strengthen our global reach through close

partnerships with allied nations including Japan,

Italy, Australia, the Kingdom of Saudi Arabia, India,

the Republic of Korea, Spain, and France.

COUNTRIES WHERE

ROLLS-ROYCE H AS

SOVEREIGN WHOLE

ENGINE DESIGN

CAPABILITY

Global access, local presence

Structural advantage

DIFFERENT

APPLICATIONS

OFTHE AE ENGINE

FAMILY ACROS S

DEFENCE AND

CIVIL MARKETS

>15

ONE ROLLS-ROYCE

Differentiated by deep customer relationships; market leading

products and technology; engineering and commercial excellence

DRIVEN BY COMMITTED EMPOWERED PEOPLE

OPERATING IN A PERFORMANCE CULTURE

UNDERPINNED BY OUR

PURPOSE ANDBEHAVIOURS

NUMBER OF S4000

ENGINES SOLD

ACROSSDIVERSE

MARKETS

70,000

MARKET SHARE

IN NAVAL BUSINESS

>30%

Read more about our

principalrisks from page 48

BUSINESS MODEL

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

FINANCIAL PERFORMANCE INDICATORS

Order backlog (£bn)

88.1

82.1

68.5

232221

60.2

50.6

HOW WE DEFINE IT

Total value of firm orders placed by

customers for delivery of products

andservices where there is no right

tocancel. This KPI is the same as

thestatutory measure for order

backlog. See note 2 on page 139

formoreinformation.

WHY IT IS IMPORTANT

Order backlog provides visibility of

future business activity.

LINK TO REMUNERATION

Customer orders drive future revenue

growth which, in turn, enables profit

and cash flow growth. Profit and free

cash flow performance are key financial

metrics in the Annual Incentive Plan.

Underlying revenue (£m)

20,059

232221

17,848

15,409

12,691

10,947

HOW WE DEFINE IT

Revenue generated from operations

atthe average exchange rate achieved

on effective settled derivative contracts

in the period that the cash flow

occurs.See note 2 on page 134

formoreinformation.

WHY IT IS IMPORTANT

Underlying revenue provides

ameasure of business growth

andactivity.

LINK TO REMUNERATION

Underlying revenue growth enables

profit and cash flow growth, both of

which are key financial metrics in the

Annual Incentive Plan.

Underlying operating profit (£m)

3,462

2,464

1,590

232221

652

414

HOW WE DEFINE IT

Operating profit generated from

operations at the average exchange

rate achieved on effective settled

derivative contracts in the period that

the cash flow occurs. It excludes M&A,

exceptional items and certain other

items outside of normal operating

activities. See note 2 on page 134

formore information.

WHY IT IS IMPORTANT

Underlying operating profit indicates

how the effect of growing revenue

and control of our costs delivers value

for our shareholders.

LINK TO REMUNERATION

Profit is a key financial performance

measure for our Annual Incentive Plan.

Underlying operating margin (%)

17.3

13.8

232221

5.1

3.8

10.3

HOW WE DEFINE IT

Underlying operating profit (as

definedabove) as a percentage

ofunderlying revenue (as defined

above). It indicates how much profit

thebusiness makes for every one

poundsterling of revenue generated.

WHY IT IS IMPORTANT

Underlying operating margin

indicates how effective the business

isat converting revenue to profit.

Ahigher margin is an indicator of

increased value for our shareholders,

as it demonstrates a higher

conversion of revenue to profit.

LINK TO REMUNERATION

Profit is a key financial performance

measure for our Annual Incentive Plan

and LTIP.

Free cash flow (£m)

232221 24

2,425

1,285

505

(1,485)

3,270

HOW WE DEFINE IT

Free cash flow is cash flows from

operating activities, adjusted to include

capital expenditure and movements in

investments, capital elements of lease

payments, interest paid, cash received

onmaturity of share-based payment

schemes and amounts paid relating to

thesettlement of excess derivatives.

Itexcludes amounts spent/received

onbusiness acquisitions/disposals, and

other material exceptional or one-off cash

flows. Cash flows from operating activities

is our statutory equivalent. See note 30

on page 181 for more information.

WHY IT IS IMPORTANT

Free cash flow is a key metric used

tomeasure the performance of our

business and how effectively we are

creating value for our shareholders.

Itenables the business to fund

growth,reduce debt and make

shareholder distributions.

LINK TO REMUNERATION

Free cash flow is a key financial metric

in the Annual Incentive Plan and LTIP.

A reconciliation from the alternative performance measure to its

statutoryequivalent can be found from page 208

Key performance indicators

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

FINANCIAL PERFORMANCE INDICATORS CONTINUED

TCC/GM (ratio)

0.36

0.47

232221 2524

0.59

0.80

0.86

HOW WE DEFINE IT

TCC is defined as total underlying

cash costs during the year

(represented by underlying R&D

andunderlying C&A) as a proportion

of underlying gross profit.

WHY IT IS IMPORTANT

This measure provides an indicator

oftotal cash costs relative to gross

profit (the percentage of the Group’s

overheads that are covered by gross

profit). A reduction in total cash costs

relative to gross profit indicates how

effective the business is at managing

and/or reducing its costs.

LINK TO REMUNERATION

Profit is a key financial performance

measure for our Annual Incentive Plan.

Return on capital (%)

18.9

13.8

232221

11.3

4.9

3.2

HOW WE DEFINE IT

Return on capital is defined as

netoperating profit after tax

(NOPAT)asapercentage of average

investedcapital. NOPAT is defined

asunderlying net profitexcluding

netfinance costs andthetax shield

onnet finance costs. Invested capital

is defined as current and non-current

assets less current liabilities. Itexcludes

pension assets, cash and cash

equivalents andborrowings and lease

liabilities. See page 211 for more detail

onhowwe calculate return on capital.

WHY IT IS IMPORTANT

Return on capital assesses our

efficiency in allocating capital to

profitable investments. The more

efficient we are as a business in

allocating capital to profitable

investments, the more profitable

wewill be.

LINK TO REMUNERATION

Profit is a key financial performance

measure for our LTIP.

Gross R&D expenditure (£m) ²

1,417

232221

1,475

1,390

1,287

1,179

HOW WE DEFINE IT

In-year gross cash expenditure on

R&D excludes contributions and

fees,amortisation and impairment

ofcapitalised costs and amounts

capitalised during the year.

WHY IT IS IMPORTANT

This measure demonstrates the

balance between long-term strategic

investments and delivering short-term

shareholder returns.

LINK TO REMUNERATION

Disciplined control and allocation

ofR&D expenditure optimises in-year

profit and cash flow performance

without compromising long-term

growth through innovation. Both our

Annual Incentive Plan and our LTIP

reward strong financial performance,

with the LTIP incorporating a Total

Shareholder Return (TSR) metric,

whichis a holistic metric for assessing

performance, incorporating investor

expectations about the Company

performance and future value creation.

Gross capital expenditure (£m)

621

519

232221

429

345

304

HOW WE DEFINE IT

In-year gross cash expenditure

oncapital excluding depreciation,

impairments and write-offs during

theyear.

WHY IT IS IMPORTANT

This measure demonstrates the

balance between long-term strategic

investments and delivering short-term

shareholder returns.

LINK TO REMUNERATION

Disciplined control and allocation

ofcapital expenditure optimises

in-yearprofit and cash flow

performance without compromising

long-term capital requirements. Both

our Annual Incentive Plan and our LTIP

reward strong financial performance,

with the LTIP incorporating a Total

Shareholder Return (TSR) metric,

whichis a holistic metric for assessing

performance, incorporating investor

expectations about the Company

performance and future value creation.

1 Return on capital has been adjusted for the one-off non-cash impact of £277m

(2024:£346m) related to the recognition of deferred tax assets on UK tax losses.

Seenote5 on page 142 for more details

2 The £58m decrease in gross R&D in 2025 compared with 2024 is driven by the Group’s

exit of its advanced air mobility activities in 2024, and the deconsolidation of Rolls-Royce

SMR Limited in 2025, which contributed a £189m decrease. Adjusting for this, gross R&D

increased by £131m

A reconciliation from the alternative performance measure to its

statutoryequivalent can be found from page 208

KEY PERFORMANCE INDICATORS

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

NON-FINANCIAL PERFORMANCE INDICATORS

Safety index (%)

242321 25

HOW WE DEFINE IT

The safety index provides a composite

score of five leading indicators: senior

leadership safety walks; safety case

improvement activity; HSE alert

response, non-conformance close-out

and accountable person engagement.

Together, these measures reinforce

proactive safety behaviours that

improve the effectiveness of

ourcontrols.

WHY IT IS IMPORTANT

With measures that mature

year-on-year, the safety index

facilitates the continuous

improvement of our safety culture.

LINK TO REMUNERATION

This metric accounts for 2.5% of the

Group and division elements of the

Annual Incentive Plan.

Total reportable injuries rate

0.29

242321 25

0.29

0.32

0.43

0.41

HOW WE DEFINE IT

This is a measure of total reportable

injuries (TRI) rate per 100 employees.

WHY IT IS IMPORTANT

This is a standard measure of actual

safety experience which allows us to

benchmark our performance against

external peers and to measure

progress against our ambition to zero

harm. TRI events are shared widely to

strengthen controls and reinforce a

culture in which colleagues feel safe

to speak up.

LINK TO REMUNERATION

This metric accounts for 2.5% of the

Group and division elements of the

Annual Incentive Plan.

Employee engagement (%)

HOW WE DEFINE IT

Our Voices: Big Picture has evolved

over the past year and is now a core

source for listening to our colleagues

and taking action. Our Voices delivers

insights on engagement, inclusion and

employee experience relative to our

targeted behaviours.

WHY IT IS IMPORTANT

Our people are crucial to delivering

our strategy. Our Voices: Big Picture

is a key part of our listening strategy,

providing a clear picture of our

cultural progress, while also making

clear where we must act with urgency.

LINK TO REMUNERATION

This metric accounts for 5% of the

Annual Incentive Plan.

Scope 1 + 2 greenhouse gas emissions

206

19 25 30

131

133

236

146

TARGET

Operations

and facility

Product test

HOW WE DEFINE IT

Total Scope 1 + 2 greenhouse gas

emissions from facilities, operations

andtesting, measured in kilotonnes of

carbon dioxide equivalent (ktCO

e).

WHY IT IS IMPORTANT

The Group is committed to achieving

net zero by 2050 and we support our

customers to do the same. Playing

ourpart in the energy transition

means reducing energy consumption

and decarbonising operations and

product testing. This will help ensure

our facilities and internal supply

chains remain resilient in a changing

external environment.

LINK TO REMUNERATION

This metric accounts for 10% of the

2025 LTIP award, and is a cumulative

target which will measure the progress

made against our sustainability

commitments (to reduce Scope 1 + 2

emissions by 46% by the end of 2030,

against a 2019 baseline) over 2025,

2026 and 2027.

KEY PERFORMANCE INDICATORS

1 External assurance provided by DNV. Seefrom page 202 for their

assurancestatement

For more information

onScope1+ 2 emissions,

seefrom page 38

For more information on

ourstrategic framework,

seepage12

For more information on

theOurVoices survey,

seepage 32

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

Financial review

Helen McCabe

Chief Financial Officer

2025 was another strong year of delivery for

Rolls-Royce and marked the third successful

year of our transformation programme as

webecome a high-performing, competitive,

resilient and growing business.

2025 marked another strong year for

Rolls-Royce in both strategic andfinancial

delivery. Key strategic and financial metrics

improved significantly, asdid operational

execution. All three of ourdivisions, and our

growing nuclear business, contributed to the

Group’s continued progress.

Our strong performance, despite a challenging

environment, also enabled us to reward

shareholders with £1.9bn of distributions last

year, and at full year 2025 results, announce

our first multi-year share buyback.

We delivered all of this while continuing

toinvest in future growth for decades to

come. Key investments included: UltraFan

inCivil Aerospace, which will position us

forfuture success on both widebody and

narrowbody platforms; thenext-generation

engine in Power Systems, which will be

themost compact and powerful engine in

itscategory in the market; and in Defence,

continued investment across our many

multi-decade platforms.

The progress we have made is due to a

OneRolls-Royce mindset and team effort.

Itcould not have happened without the

expertise, commitment and hard work of

theteams across the Group. I continue

tobeimpressed by the commitment and

enthusiasm of our talented people. Having

visited many of our sites around the globe,

including in the UK, US, India, Poland, and

Germany, energy levels amongst our people

are higher than ever. Teams across the

organisation are delivering to an ever-

increasing standard as we transform

Rolls-Royce into a high-performing,

competitive, resilient and growing

business.Thank you to all colleagues.

Our transformation has already delivered

class-leading performance, and we know

there is more we need and want to do, to

enable us to unlock further potential across

the Group. That work is already underway.

I previously shared my four key areas

offocus: integrated performance

management, commercial and cost

optimisation, working capital optimisation,

and capital framework. We continue to make

good progressacross all four as part of our

transformation journey.

1. Integrated performance management

Our approach to integrated performance

management remains at the heartof what

wedo. It is distinctive and embedded

throughout all levels of the organisation.

Weaim for everyone in Rolls-Royce to

understand how they contribute to strategic

and financial delivery. Everyone has clear

targets, which are linked to our strategic

initiatives. Rigorous and dynamic

performance management ensures that the

delivery of these strategic initiatives drives

in-year, mid-term and longer-term delivery.

We continue to invest in and improve our

performance management processes. A

step-change improvement in management

information, supported by the use of

digitisation tools, such as dashboards used

throughout all levels of the organisation,

drives deeper analysis and insight into

keybusiness drivers. All of which help drive

pace, intensity and better insight for more

proactive and timely interventions.

2. Commercial and cost optimisation

As part of our transformation, we have

embedded a new commercial mindset

andcost-conscious culture across

theorganisation.

Commercial optimisation remains a key area

of focus as we adopt a value-based pricing

approach across the Group. This has been

asignificant driver of improved performance

in all three divisions. For example, in Civil

Aerospace where we are driving higher

aftermarket margins, we have now

renegotiated all ouroriginal equipment (OE)

contracts. Strong progress has also been

made with onerous aftermarket contracts,

the most significant of which have been

renegotiated with the balance to be

concluded in 2026.

Improved commercial acumen is also making

us more agile. For example, we were quick

torespond to the impact of tariffs, where we

were able to fully mitigate their direct impact.

We are transforming Rolls-Royce into a more

commercially proactive and agile business.

Our cost efficiency initiatives are also

continuing to deliver as we continue to

embed acost-conscious mindset across

theGroup. At the end of 2025, our total

cashcosts to gross margin ratio, a measure

ofoperational efficiency and resilience,

stood at 0.36x, abest-in-class ratio. Our

efficiency and simplification programme

hasdelivered benefits of £0.6bn, exceeding

our target of£0.5bn by the end of 2025.

Anumber of workstreams underpin our

activities in this area. For example, zero-

based budgeting which hasbeen rolled out

across the organisation, driving discipline in

spendingand providing efficiency benefits.

We have also expanded our Group Business

Services operations in India and opened

anew centre in Poland. These centres will

provide effective and efficient support, as

well as an improved customer experience.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

3. Working capital optimisation

Working capital optimisation remains

akeypriority as we focus on delivering

sustainable and growing free cash flow,

maintaining our resilience and increasing

ourreturn on capital.

In the three years of our transformation

wehave materially strengthened working

capital management, with significant

improvements across inventory days

anddays sales outstanding, as well as

overdue debt. All of this we have done in a

challenged supply chain environment, and

aswe supported business growth. Working

capital culture and discipline across the

Group is becoming much stronger.

We worked closely with key suppliers,

includingembedding Rolls-Royce employees

into their organisations, to support them

asthey navigated supply chain challenges.

We are also investing in improved sales,

inventory and operational planning

systemsand processes. A new material

Group-wide programme was launched

todrive further operational and working

capital improvements.

4. Capital framework

Significantly, 2025 was the first time in more

than five years that we paid a dividend and

the first time in ten yearsthat we executed

ashare buyback, returning a combined total

of £1.9bn to our shareholders in the year.

Ourapproach to dividends is to pay an

interim and a final cash dividend each year,

with full year dividends based on a pay-out

ratio of between 30% to 40% of underlying

profit after tax. The final dividend for 2025

of5.0p per share, will be paid subject to

shareholder approval at our Annual General

Meeting to be held on 30 April 2026. It takes

the total dividend for 2025 to 9.5p, which

represents a 32% payout ratio of underlying

profit after tax.

We further strengthened our balance sheet,

enabled by a growing cash delivery, and

ended 2025 with a net cash position. We also

repaid a $1bn bond that matured in October.

Our efforts continue to be recognised

bythecredit rating agencies, who now

allholdusatstrong investment grade. In

2025, both Fitch and S&P Global upgraded

Rolls-Royce to BBB+ and Moody’s upgraded

Rolls-Royce toBaa1.

We continued to make strategic, disciplined

investments in 2025, while staying focused

on the safety of our products, processes and

people. Our £1bn multi-year time on wing

investment is progressing to plan and will

help extend the time between shop visits for

our customers, as well as creating additional

capacity in our maintenance, repair and

overhaul (MRO) facilities.

Our strong progress and confidence in our

future plans enabled us to announce a £7.0bn

to £9.0bn share buyback across 2026 to

2028, with £2.5bn to be returned in 2026.

Taken together with our commitment to regular

and growing dividends, this represents a

return to shareholders of over 75% of free

cash flow between 2026 to 2028, based on

our upgraded mid-term targets. This is our

first multi-year share buyback. Another key

milestone in our transformation journey.

As our transformation programme continues,

I look forward to making further progress in

these four key priorities in 2026. We have so

much more potential, and I am excited about

the journey ahead.

2025 financial performance

2025 has been another year of strong

strategic and financial delivery with a

significant improvement across all financial

metrics. Over the past three years, our

transformation programme has delivered

astep-change in performance, with higher

operating profit and free cash flow delivered

alongside a doubling of capital expenditure,

as we continue to transform Rolls-Royce into

a high-performing, competitive, resilient, and

growing business. Our actions have driven

stronger financial performance despite

anexternal environment that remains

challenging, including supply chain

constraints which we are actively managing.

Significant operating profit and margin

growth: Underlying operating profit

increased to £3.5bn in 2025 compared with

£2.5bn in 2024, with an operating margin

of17.3% (2024: 13.8%). Civil Aerospace

delivered an underlying operating margin

of20.5% (2024: 16.6%), driven by stronger

large engine aftermarket performance,

contractual margin improvements and higher

spare engine profitability. Defence reported

an underlying operating margin of 14.4%

(2024: 14.2%), which reflects stronger

performance across transport and

combat,and the absence of a one-off

benefitin submarines in the prior year.

PowerSystems delivered an operating

margin of 17.4% (2024: 13.1%), driven by

powergeneration, where we continue to

capture profitable growth in data centres,

and governmental. Across the Group,

improved profitability wassupported

byourongoing efficiency and

simplificationprogramme.

Sustainable free cash flow growth: Free cash

flow of £3.3bn (2024: £2.4bn) was driven by

strong operating profit, continued long-term

service agreement (LTSA) balance growth, and

a strong working capital performance offset by

net investments. Civil Aerospace LTSA balance

growth net of risk and revenue sharing

arrangements (RRSAs) was £0.6bn (2024:

£0.7bn), this was supported by 8% growth

inlarge engine flying hours (EFH) andan

improved EFH rate, partly offset by ahigher

number of shop visits and supply chain costs.

Working capital was an inflow of£421m

(2024:£280m), reflecting the continued

benefits of our working capital initiatives.

Netinvestments of £257m (2024: £282m)

supported maintenance repair and overhaul

(MRO) capacity growth in Civil Aerospace

and additional capacity in PowerSystems.

Building resilience: Net cash stood at

£1.9bnat 31 December 2025 compared

with£475m at the end of 2024, supported

bycontinued strong cash flow delivery.

Grossdebt reduced to £2.8bn (2024: £3.6bn),

as we repaid a $1bn bond in October from

available cash, and lease liabilities stood at

£1.5bn (2024: £1.6bn). Liquidity remained

robust at£8.7bn (2024: £8.1bn), which

included cash and cash equivalents of £6.2bn

(2024:£5.6bn). Total underlying cash costs

asa proportion of underlying gross margin

(TCC/GM) further improved to 0.36x (2024:

0.47x), reflecting further cost discipline and

operational efficiency. We are building a

more resilient company with a less volatile

free cash flow.

Growing shareholder returns: Reflecting

strong strategic and financial progress and in

line with our capital framework, we reinstated

regular shareholder dividends in 2025

andcompleted a £1.0bn share buyback

programme. This represented the first

timethat Rolls-Royce has paid a dividend

inmorethan five years and the first buyback

for 10years. The final dividend for 2025 is

5.0p per share, taking the total dividend for

2025 to 9.5p, which represents a 32% payout

ratioof underlying profit after tax. The final

dividend will be paid subject to shareholder

approval at our Annual General Meeting on

30 April 2026

. Our strong balance sheet

position, alongside our upgraded mid-term

targets for operating profit and free cash

flow, gives us confidence to announce our

first multi-year buyback programme, totalling

£7.0bn–£9.0bn across 2026 to 2028, ofwhich

£2.5bn will be completed in 2026,which

includes the £200m that was completed

between 2 January and 20 February 2026.

2026 outlook

We expect significant further progress

in2026. Our forecast for 2026 underlying

operating profit is £4.0bn–£4.2bn and freecash

flow between £3.6bn–£3.8bn. Ourfree cash

flow guidance for full year 2026 includes a

£150m–£200m cash impact related to the

supply chain, and is based onCivil Aerospace

net LTSA balance growthbroadly similar to

the prior year (2025: £0.6bn).

Upgraded mid-term targets

Our strong delivery in 2025 and our actions

to expand earnings and free cash flow gives

us confidence to upgrade our mid-term

targets. The increase in our mid-term

operating profit and margin guidance is

primarily driven by higher LTSA and time

andmaterials profit in Civil Aerospace and

stronger performance in power generation

and governmental in Power Systems.

Underlying operating profit is expected

toincrease from £3.5bn in 2025 to

£4.9bn–£5.2bn in the mid-term and underlying

operating margin from 17.3% in2025 to

18%–20%; a strong delivery withhighly

competitive margins across alldivisions.

FINANCIAL REVIEW

1 The dividend will be paid on 3 June 2026 to ordinary

shareholders on the register on 24 April 2026. In addition

to the cash dividend, shareholders will be offered a

dividend reinvestment plan. For further details see

note7, page 146

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GROUP MID-TERM TARGETS

Operating profit (£bn)

0.65

4.9–5.2

3.5

2.5

24 2523

Mid-term

target

1.6

Operating margin (%)

5.1

17.3

13.8

24 2523

Mid-term

target

1.3

18–20

Free cash flow (£bn)

0.5

3.3

2.4

24 2523

Mid-term

target

1.3

5.0–5.3

Return on capital (%)

11.3

18.9

13.8

24 2523

Mid-term

target

4.9

23–26

Civil Aerospace: we now target a mid-term

margin of 21%–23% compared to 20.5% in

2025. We expect large EFH growth to be

130% to 140% of 2019 levels, alongside

650–750 total OE deliveries and 1,300–1,400

total shop visits in 2028. Higher operating

profit growth will be driven by:

— Stronger widebody aftermarket

performance across LTSA and time

andmaterials.

— Improved widebody OE profitability as

Trent XWB installed engine deliveries

become breakeven or positive by

themid-term due to commercial

optimisation and efficiency actions.

— A further increase in business

aviationperformance across both

OEandaftermarket.

— Higher spare engine profitability reflecting

commercial optimisation andmix.

— A reduced contribution from contractual

margin improvements.

Defence: we continue to target a 14%–16%

margin in the mid-term compared to 14.4%

in2025. Higher operating profit will be

primarily driven by:

— Stronger performance across all end

markets, with higher aftermarket profit

alongside increased OE volumes.

— Continued self-help actions.

— Productivity improvements due to

capacityexpansion.

Power Systems: we now target a mid-term

margin of 18%–20% compared to 17.4%

in2025. Higher operating profit will be

drivenby:

— Power generation OE revenue growth

ofaround 20% per annum driven by data

centres, with higher margins reflecting an

improved product mix andefficiencies.

— Governmental OE revenue growth

ofaround 20% per annum (previously

12–14%) reflecting increased global

defence spending.

— Marine OE revenue growth of 5–7%

perannum.

— BESS: double-digit OE revenue growth.

— Strong growth in service revenues

willsupport margin improvements

tothemid-term.

These targets are significantly underpinned

by our strategic initiatives and the actions

that we have taken across the Group, and

willbe supported by further efficiencies

todrive disciplined growth, including

expanding our digital and GBS capabilities,

as well as zero-based budgeting activities,

allof which will drive a further improvement

in our TCC/GM ratio.

Free cash flow of £5.0bn–£5.3bn in the

mid-term compares to £3.3bn in 2025.

Freecash flow will be driven by operating

profit alongside continued growth of the

CivilAerospace net LTSA balance in the

£0.8bn–£1.2bn range. LTSA balance growth

reflects large EFH growth to 130% to 140%

of2019 levels, a higher average normalised

EFH rate, the benefits of our time on wing

initiatives with shop visits falling to 1,300–

1,400 in the mid-term, alongside continued

business aviation growth. Our mid-term

targets assume a forecast achieved foreign

exchange rate of $1.33/£ and the absence of

a cash impact related to the supply chain.

Helen McCabe

Chief Financial Officer

FINANCIAL REVIEW

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

Statutory and underlying Group financial performance

2025 2024

£ million Statutory

Impact of

hedge

book

Impact of

acquisition

accounting

Impact of

other

non-

underlying

items Underlying Underlying

Revenue 21,207 (1,148) – – 20,059 17,848

Gross profit 6,175 (799) 14 (264) 5,126 4,091

Operating profit 4,468 (797) 16 (225) 3,462 2,464

Gain arising on disposal of businesses

809 – – (809) – –

Profit before financing and taxation 5,277 (797) 16 (1,034) 3,462 2,464

Net financing income/(costs) 1,658 (1,823) – 55 (110) (171)

Profit before taxation 6,935 (2,620) 16 (979) 3,352 2,293

Taxation

(1,099) 660 (3) (151) (593) (282)

Profit for the year 5,836 (1,960) 13 (1,130) 2,759 2,011

Basic earnings per share (pence)

69.41 29.55 20.29

1 Reflecting the impact of measuring revenue and costs at the average exchange rate during the year and the valuation of assets and liabilities using the year end exchange rate rather

than the rate achieved on settled foreign exchange contracts in the year or the rate expected to be achieved by the use of the hedge book

2 For further information, see note 29, page 180

3 In 2025, the underlying profit attributable to ordinary shareholders has been adjusted for the one-off non-cash impact of £277m related to the recognition of deferred tax assets on

UKtax losses (2024: £346m), see note 5, page 145 for further details

All underlying income statement commentary

is provided on an organic basis unless

otherwise stated.

Revenue: Underlying revenue of £20.1bn

washigher by 14%, with strong growth

acrossall divisions. Statutory revenue

of£21.2bn was 12% higher compared with

2024.The difference between statutory and

underlying revenue is driven by statutory

revenue being measured at average

prevailing exchange rates (2025: GBP:USD

1.32; 2024: GBP:USD 1.28) and underlying

revenue being measured at the hedge

bookachieved rate during the year (2025:

GBP:USD 1.44; 2024: GBP:USD 1.48).

Operating profit: Underlying operating profit

of £3.5bn (17.3% margin) compared to £2.5bn

(13.8% margin) in the prior year. Underlying

operating profit was higher in all three core

divisions, driven by our strategic initiatives,

including commercial optimisation and cost

efficiency benefits. The largest increase

inunderlying operating profit was in Civil

Aerospace, driven by stronger large engine

aftermarket performance, contractual margin

improvements and spare engine profitability.

Power Systems also delivered a significant

increase in underlying operating profit,

driven by continued profitable growth in

power generation, notably in data centres,

and governmental. Higher Defence profit

reflected stronger performance across

transport and combat, partly offset by the

absence of a one-off benefit in submarines.

Statutory operating profit of £4.5bn

compares to underlying profit of £3.5bn.

The£(1)bn difference between statutory

andunderlying operating profit comprises

a£(797)m negative impact from currency

hedges in the underlying results alongside

anet £(209)m of other adjustments to

underlying operating profit. The £(209)m is

made up of: impairment reversal of £(179)m

related to a Civil Aerospace programme

assetimpairment previously recorded,

£(83)m onerous provision release, £(6)m

pension past service credit, £(1)m other

credits, £44m of charges relating to

transformation and restructuring costs and

£16m amortisation ofintangible assets arising

onpreviousacquisitions.

Profit before taxation: Underlying profit

before taxation of £3.4bn included £(110)m

net financing costs comprising £265m

interest receivable, £(240)m interest payable

and £(135)m of other financing charges and

costs of undrawn facilities. Statutory profit

before tax of £6.9bn included £1.3bn net fair

value gains on derivative contracts, £(31)m

net interest payable, net foreign exchange

gains of £499m and £(134)m other financing

charges and costs of undrawn facilities.

Taxation: Underlying tax charge of £(593)m

(2024: £(282)m) reflects an overall tax charge

on profits of Group companies and includes

a£277m tax credit relating to the recognition

of previously unrecognised deferred tax

asset on underlying UK tax losses and a

£31mtax credit relating to the utilisation of

previously unrecognised UK tax loss deferred

tax asset against underlying profits in the

year. These are reflected in the statutory

taxcharge of £(1.1)bn (2024: tax credit of

£250m) which also includes a further £286m

tax credit on the recognition of previously

unrecognised deferred tax asset on

non-underlying UK tax losses, offset by a

taxcharge of £(660)m related to unrealised

gains on foreign exchange derivatives, a

£(44)m taxcharge related to programme

asset impairment reversals, a tax charge

of£(58)m relating to the reduction in the

substantively enacted tax rate in Germany

and a £(30)m taxcharge relating to other

non-underlyingitems.

FINANCIAL REVIEW

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

Free cash flow

2025 2024

£ million Cash flow

Impact of

hedge

book

Impact of

acquisition

accounting

Impact of

other non-

underlying

items Funds flow Funds flow

Operating profit 4,468 (797) 16 (225) 3,462 2,464

Depreciation, amortisation and impairment 737 – (16) 179 900 853

Movement in provisions (486) 78 – 118 (290) (167)

Movement in Civil Aerospace LTSA balance 123 378 – – 501 910

Movement in RRSA prepayments for parts 90 (19) – – 71 (219)

Movement in cost to obtain contracts (44) – – – (44) (18)

Settlement of excess derivatives (148) – – – (148) (146)

Interest received 270 – – – 270 269

Other operating cash flows

110 – – 5 115 43

Operating cash flow before working capital and income tax 5,120 (360) – 77 4,837 3,989

Working capital

613 (195) – 3 421 280

Cash flows on other financial assets and liabilities held

for operating purposes (578) 532 – – (46) (24)

Income tax (590) – – 35 (555) (381)

Cash from operating activities 4,565 (23) – 115 4,657 3,864

Capital element of lease payments (232) 23 – – (209) (275)

Capital expenditure (978) – – – (978) (876)

Cash received on maturity of share based payment schemes 40 – – – 40 –

Investments (7) – – 37 30 16

Interest paid (262) – – – (262) (298)

Other 144 – – (152) (8) (6)

Free cash flow 3,270 – – – 3,270 2,425

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

retirement schemes, and share based payments

2 Working capital includes inventory, trade and other receivables and payables, and contract assets and liabilities (excluding Civil Aerospace LTSA balances, prepayment to RRSAs and

costs to obtain contracts)

Free cash flow in the year was £3.3bn, £845m

higher than the prior year driven by:

Underlying operating profit of £3.5bn

was£1.0bn higher than the prior year.

Thisreflects higher underlying operating

profit and margins in all three core divisions,

notably Civil Aerospace.

Movement in provisions of £(290)m

wasprimarily driven by a net release of

onerousprovisions.

Movement in Civil Aerospace LTSA balance

was £501m (2024: £910m), driven by

continued EFH growth and a higher

normalised EFH rate due to our commercial

actions, offset by an increased number of

shop visits. Catch-ups were £(279)m in 2025

compared with £(311)m in the prior year.

Movement in RRSA prepayments for parts of

£71m (2024: £(219)m) is driven by growth in

income received from customers (based on

EFH flown) where the partner receives a

share in advance of them providing goods

and services to the Group.

Working capital inflow of £421m, compared

toan inflow of £280m in the prior year.

Thisreflected the continued benefits of our

working capital initiatives, partly offset by

investment to support growth across the

Group. A net £1.1bn inflow from receivables,

payables and contract liabilities, was partly

offset by a £(685)m increase in inventory.

Income tax of £(555)m was higher than the

prior year of £(381)m due to increased profits

and timing ofpayments.

Capital expenditure of £(978)m includes

£(621)m of property, plant and equipment

additions and £(364)m of intangibles

additions. The combined additions were

higher than the prior year as a result of

investment across the Group to support

strategic growth and safety.

FINANCIAL REVIEW

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

Balance sheet

£ million 2025 2024 Change

Intangible assets 4,598 4,402 196

Property, plant and equipment 4,013 3,724 289

Right-of-use assets 759 761 (2)

Joint ventures and associates 1,285 592 693

Civil Aerospace LTSA

(10,397) (10,184) (213)

RRSA prepayments for parts

1,771 1,668 103

Costs to obtain contracts

178 135 43

Working capital

(2,216) (1,731) (485)

Provisions (1,557) (1,994) 437

Net cash

1,895 475 1,420

Net financial assets and liabilities

(38) (1,980) 1,942

Net post-retirement scheme deficits (606) (191) (415)

Taxation 3,068 3,383 (315)

Assets and liabilities held for sale

(4) 53 (57)

Other net assets and liabilities 4 6 (2)

Net liabilities/(liabilities) 2,753 (881) 3,634

US$ hedge book (US$bn) 21 19

1 The total of these lines represent inventory, trade receivables and payables, contract assets and liabilities and other assets and liabilities in the statutory balance sheet

2 Net cash includes £(77)m (2024: £33m) of the fair value of derivatives included in fair value hedges and the element of fair value relating to exchange differences on the underlying

principal of derivatives in cash flow hedges

3 Assets and liabilities held for sale relate to the sale of the naval handling business. During the year, the Group disposed of the naval propulsors business to Fairbanks Morse Defence

(FMD) that was held for sale in 2024

Key drivers of balance sheet

movementswere:

Joint ventures and associates: The £693m

increase was largely a result of Rolls-Royce

SMR being recognised at its fair value as an

equity-accounted investment following the

strategic investment by ČEZ Group (ČEZ) in

Rolls-Royce SMR during the year.

Civil Aerospace LTSA: The £(213)m movement

in the net liability balance was mainly driven

by an increase in invoiced LTSA receipts

exceeding revenue recognised in the year.

This is especially prevalent on new contracts

where the first shop visits do not occur for

some time after the engine is delivered.

RRSA prepayments for parts: The £103m

increase corresponds to the increase seen

inthe Civil Aerospace LTSA balance above.

RRSA prepayments typically move in line

withthe Civil Aerospace LTSA balance as the

RRSA prepayment represents amounts that

we have paid to Risk and Revenue Share

Partners for the parts that they will ultimately

provide in support of our contracts.

Working capital: The £(2.2)bn net working

capital position increased by £(485)m

compared to the prior year. The movement

comprised an increase in net contract

liabilities of £(541)m and £(580)m increase

innet payables due to changes in operational

volumes and timing of supplier payments.

This was partly offset by a £636m increase

ininventory reflecting higher sales volumes.

Provisions: The £437m net reduction in

provisions was due to onerous provision

reversals and utilisation being greater

thanonerous provision charges in the

year,supported by continued efforts

torenegotiate our most significant

onerouscontracts.

Net cash: Increased to £1.9bn from

£475mdriven by a free cash inflow of

£3.3bn.Our liquidity position is strong

with£8.7bn of liquidity including cash and

cash equivalents of £6.2bn and undrawn

facilities of £2.5bn. During the year, the

Group repaid a $1.0bn bond in line with its

maturity date. Net cash included £(1.5)bn of

lease liabilities (2024: £(1.6)bn).

Net financial assets and liabilities: A £1.9bn

increase in the net financial assets primarily

driven by fair value gains on foreign

exchange and commodity contracts due

tothe impact on the movement in GBP:USD

exchange rates.

Net post-retirement scheme deficits:

Increased £415m largely due to the

Rolls-Royce UK Pension Fund entering into

aBuy-in transaction in 2025, the Buy-in was

done in anticipation of entering into a full

Buy-out during 2026.

Taxation: The net tax asset decrease of

£(315)m was driven by a £130m decrease

indeferred tax liabilities (primarily due

toareduction in the UK defined benefit

pension surplus) which was more than

offsetby a £(245)m increase in net current

taxliabilities (driven by timing of payments)

and anet reduction in the deferred tax asset

of £(200)m. The reduction in the deferred

taxasset was a result of a £(504)m reduction

indeferred tax related to foreign exchange

derivatives, which moved from a net financial

liability to a net financial asset position,

a£(178)m reduction in other deferred tax

assets driven by a reactivation of previously

disallowed interest in the UK and asset

impairment reversals, and other movements

on UK tax losses of £(81)m. These were

partlyoffset by the recognition of a £563m

deferred tax asset relating to UK tax losses

previously not recognised.

FINANCIAL REVIEW

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

Market overview

Civil Aerospace has two main areas of focus

– large engine production, based in Derby,

UK and business aviation, headquartered

inDahlewitz, Germany. We have 14,263

in-service engines and power four out of five

in-production widebody aircraft. A majority

of our engines are covered under long-term

service agreements, and are supported

byour global MRO network spanning

12locations in 10 countries.

In 2025, we saw a strong intake of orders

andassuch our large engine order book

increased by 20% to 2,207 engines at the end

of the year. A total of 638 large engines were

ordered with a gross book-to-bill ratio of

2.5x. Significant new orders included Riyadh

Air, IndiGo, and IAG. Deliveries of 259 large

engines during 2025 (2024: 278) were aligned

to airframer production schedules, reflecting

the impact of industry-wide supply chain

issues, and included a slightly lower number

of spare engine deliveries.

Our market share of the installed widebody

base has grown from 34% at the end of 2022

to 38% at the end of 2025, supported by

ourmarket share of more than 50% of new

engine deliveries over the past three years.

Business aviation engine deliveries were

224in 2025 (2024: 251), of which a majority

were Pearl engines, which saw a 26%

increase year-on-year, offset by lower

deliveries of legacy BR engines. At present,

there are over 7,500 in-service Rolls-Royce

business aviation engines across our Pearl,

Tay, BR710, BR725 and AE 3007 families,

which provide power to a range of platforms,

including theGulfstream and the Bombardier

aircraft. There are over 1,600 BR725 and

Pearl engines in service, which power the

Gulfstream G650/G650ER/G700 and the

Bombardier Global jets 5500/6500.

Large engine flying hours rose by 8%

compared to the prior year to 111% of 2019

levels, driven by continued strong demand

for travel and our growing installed large

engine fleet. Business aviation and regional

engine flying hours were broadly unchanged

compared to2024.

In 2025, we saw higher shop visit volumes,

asexpected, despite continued supply chain

challenges which we are actively managing.

These shop visits are required tomaintain

and repair our growing installed engine fleet.

We have invested to grow capacity in

Derby,UK, Dahlewitz, Germany, and

Singapore. This has allowed us to deliver

more new engines, and at the end of 2025,

support a more than 50% increase in large

engine shop visits over the past three years.

Financial performance

Underlying revenue of £10.4bn increased

15%, driven by a higher number of shop visits

and commercial optimisation. Underlying OE

revenue grew by 3% in the year to £3.2bn and

services revenue grew by 21% to £7.2bn. LTSA

revenue catch-ups were £279m (2024: £311m).

Underlying operating profit was £2.1bn

(20.5% margin) versus £1.5bn in 2024

(16.6%margin). The increase in operating

profit was driven by stronger large engine

aftermarket performance across LTSA and

time and materials, a larger contribution

fromcontractual margin improvements,

andimproved spare engine profitability.

Our work on commercial optimisation and

cost reduction across large engine and

business aviation contracts supported gross

contractual margin improvements of £553m

(2024: £617m). These were primarily driven

bythe continued successful renegotiation of

onerous contracts in the year, alongside the

achievement of key time on wing milestones

on the Trent XWB-84. These benefits were

partially offset by £161m (2024: £382m)

ofadditional charges associated with

theimpact of prolonged supply chain

challenges, which were booked across

onerous provisions and contract catch-ups.

Asaresult, net contractual margin

improvements were £392m (2024: £235m),

Civil Aerospace is a major manufacturer

ofaero engines for the large commercial

aircraft, regional jets and business aviation

markets. The division uses its engineering

expertise, in-depth knowledge and

capabilities to provide through-life

servicesolutions for its customers.

UNDERLYING REVENUE MIX BY SECTOR

Large engines – 76%

Business aviation – 19%

Regional – 2%

V2500 – 3%

UNDERLYING REVENUE MIX

OE – 31%

Services – 69%

UNDERLYING REVENUE

£10,382m

2024: £9,040m

UNDERLYING OPERATING PROFIT

£2,130m

2024: £1,505m

UNDERLYING OPERATING MARGIN

20.5%

2024: 16.6%

ORDER BACKLOG

£64.6bn

2024: £59.9bn

CIVIL AEROSPACE

Our divisions

PIONEERING

THE INTELLIGENT

ENGINE

With its market-leading technology and cutting-edge

connectivity, our Pearl family is the engine family of

choice in the very long-range and ultra long-range

business aviation market.

1 See note 2 on page 139

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

comprising contract catch-ups of £226m

(2024: £290m) and net onerous provision

releases of £166m (2024: charges of £55m).

Trading cash flow of £2.5bn was 24% higher

than the prior year (2024: £2.0bn). The

increase in trading cash flow was primarily

driven by higher operating profit, partly

offset by slightly lower year-on-year LTSA

balance growth. LTSA balance growth

netofRRSAs was £0.6bn (2024: £0.7bn),

supported by continued EFH growth, a

higher normalised EFH rate due to our

commercial actions, with LTSA invoiced

flyinghour receipts of £6.0bn (2024: £5.5bn),

offset by a higher number of shop visits.

Operational and strategic progress

We have made continued progress on our six

levers to unlock value within Civil Aerospace:

extend time on wing; lower shop visit costs;

reduce product costs; keep engines earning

for longer; implement value-based pricing;

and drive contractual rigour.

Our time on wing programme to improve

thedurability across our in-production

Trentengines now targets more than a

100%increase. More than half of this

improvement is now delivered. On the Trent

XWB-84, we have refined and accelerated

our programme to extend critical part lives.

For the Trent 1000 XE engine, the improved

phase one HPT blade was certified in June

and has been fitted to new production

engines and engines in shop visits. In

addition, the phase two HPT blade was

certified for the Trent 1000 XE and Trent

7000 engines in December and will be

incorporated into production engines

andexisting engines commencing in 2026.

We have continued to enact and embed a

value-based pricing framework and have made

further progress on re-structuring onerous

contracts, driving improvements inLTSA

margins. Alongside our time on wing

improvements and cost initiatives, our efforts

have significantly improved contract margins of

in-production engines over the past threeyears.

During 2025, we continued to make

progressinexpanding our MRO capacity

across the network. Wecelebrated the official

opening of BAESL, our MRO joint venture with

Air China in Beijing, China, to support up to

250shop visits per year by the mid-2030s.

Weannounced plans with Turkish Technic to

establish a world-leading aero engine facility

inİstanbul, Republic of Türkiye, targeted to be

operational by the end of 2027 to support up

to200 shop visits per year.

In business aviation, the first Pearl 700

powered Gulfstream G800 entered service

inAugust. Certification for the Pearl 10X

engine, which powers the Dassault Falcon 10X,

is underway, with all engine certification tests

successfully completed in 2025. The ongoing

finalisation of the certification reports for EASA

is progressing to plan.

We continue to progress our work

ontheUltraFan technology programme,

which spans the development of the

next-generation, ducted engine solution for

widebody and narrowbody aircraft. Where

applicable, we will utilise technologies and

learnings from the programme to enhance

existing Trent engines by improving time

onwing, increasing fuel efficiency, reducing

emissions and engine noise.

The transition to lower-carbon energy and

thereduction of emissions in our markets is

important. Ensuring the maximum efficiency

ofour current fleet is a vital first step, as

manyof these engines will remain in service for

decades to come. All of our in-production civil

aero engines have been proven to be 100%

compatible with sustainable aviation fuels.

InMay, the new Trent XWB-84EP engine

variant entered into service delivering a

1%fuelefficiency improvement, as well as

improved durability, reduced CO

emissions,

and further time on wing benefits.

Outlook

We expect 2026 large EFH will grow to

115%–120% of 2019 levels, alongside 550–600

total OE deliveries and 1,480–1,550 total shop

visits. We now target a mid-term margin of

21%–23% compared to 20.5% in 2025. We

expect large EFH growth to be 130%–140%

of2019 levels, alongside 650–750 total OE

deliveries and 1,300–1,400 total shop visits in

2028. Higher operating profit to the mid-term

will be driven by: stronger widebody aftermarket

performance; improved widebody OE

profitability as Trent XWB installed engine

deliveries become breakeven or positive;

afurther increase in business aviation

performance; higher spare engine profitability;

a reduced contribution from contractual

margin improvements.

Beyond the mid-term, we see continued

installed engine growth with our young and

growing widebody fleet. Higher LTSA margins

and continued LTSA balance growth will be

supported by the full benefit of our strategic

initiatives which drive a proportionately lower

number of shop visits, and a continued benefit

from contracts coming through on better

terms. We also expect improving OE profitability,

alongside further growth in business aviation.

Financial overview

£ million 2025

Organic

change

M&A FX 2024 Change

Organic

change

Underlying revenue 10,382 1,326 – 16 9,040 1,342 15%

Underlying OE revenue 3,217 101 – 11 3,105 112 3%

Underlying services revenue 7,165 1,225 – 5 5,935 1,230 21%

Underlying gross profit 2,675 679 – 6 1,990 685 34%

Gross margin % 25.8% 22.0% +3.7pt

Commercial and administrative costs (432) (37) – 1 (396) (36) 9%

Research and development costs (267) (15) – – (252) (15) 6%

Joint ventures and associates 154 (6) – (3) 163 (9) (4)%

Underlying operating profit 2,130 621 – 4 1,505 625 41%

Underlying operating margin % 20.5% 16.6% +3.9pt

2025 2024 Change

Trading cash flow 2,512 2,030 482

Key operational metrics 2025 2024 Change

Large engine deliveries 259 278 (7)%

Business aviation engine deliveries 224 251 (11)%

Total engine deliveries 483 529 (9)%

Large engine LTSA flying hours (million) 17.0 15.8 8%

Large engine LTSA major refurbs 517 430 20%

Large engine LTSA check & repair 562 473 19%

Total large engine LTSA shop visits 1,079 903 19%

1 Organic change is the measure of change at constant translational currency applying full year 2024 average rates to 2025 and excludes M&A and business closures. All underlying

income statement commentary is provided on an organic basis unless otherwise stated

OUR DIVISIONS

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

Market overview

Our Defence business supports five distinct

end markets: transport, where we are the

market leader; combat, where we have full

power and propulsion capability; submarines,

where we have unique nuclear propulsion

capability; naval, where our high power

density engines bring real advantage; and

helicopters, where we have accumulated

significant experience in military and

civilprogrammes.

Order intake in Defence was £5.5bn in

theyear with a book-to-bill ratio of 1.1x.

Ourorder backlog at the year end stood

at£17.4bn, equivalent to more than three

years of revenue, with order cover of around

90% for 2026.

In light of ongoing security concerns

aroundthe world, governments have

increased their commitment to defence

budgets. We have been selected as

long-term partners in thedevelopment,

manufacture and maintenance of defence

power for critical military missions to deter

threats, preserve life and maintain peace.

We provide power for our global defence

customers. We are a trusted supplier

chosenfor our unrivalled engineering and

technological capabilities, as we push the

boundaries of what is possible and provide

our customers with a strategic advantage.

Rolls-Royce does not provide or manufacture

weapons for our customers.

Our Defence market remains resilient

andourcustomers continue to invest in

capabilityin our core markets. £45bn of new

programmes will come online by 2050 within

the transport and patrol market, creating

substantial opportunities for us. We are well

positioned to capture a significant portion

ofthese emerging opportunities as well as

benefit from the growing combat market,

including autonomous platforms.

Financial performance

Underlying revenue grew by 8% to £4.8bn

(2024: £4.5bn), with 20% growth in transport,

7% growth in combat, and 11% growth in

naval, partly offset by 1% lower submarines

revenue. Total OErevenue growth was18%

and services revenue growth was 1%.

Excluding the impact of a one-off benefit in

submarines revenue in the prior year,

total

revenue growth was 14%, services revenue

growth was 11% and submarines revenue

growth was 17%.

Key milestones in the year included

theannouncement by the international

GCAP consortium of a major expansion

oftheir partnership to accelerate the

development of power and propulsion

systems, the first MV-75 engine entering

development testing, continued testing of

the F-130 engine for the B-52, and the first

engine delivery for the MQ-25 unmanned

refuelling aircraft programme.

Underlying operating profit was

£689m(14.4% margin) compared to

£644m(14.2% margin) in the prior year.

Theyear-on-year improvement reflected

stronger performance in transport OE,

driven by increased volumes and a more

favourable mix including improved margins

from international sales. Combat OE profit

was also higher. This was partly offset by the

absence of a one-off benefit in submarines

inthe prior year.

Trading cash flow was £745m compared to

£591m in the prior year, driven by higher

operating profit and a stronger working

capital performance.

Operational and strategic progress

In Defence, demand for our products

remainsrobust and we secured major

ordersthis year.

In the first half, we agreed key aftermarket

contracts worth more than £1.5bn with the

UK MoD and the US DoW for the EJ200 and

AE 2100 engines.

Defence is a market leader in aero engines

for military transport and patrol aircraft,

withstrong positions in combat applications.

It has significant scale in naval and also

designs, supplies and supports the nuclear

propulsion plant for all of the UK Royal Navy’s

nuclear submarines.

UNDERLYING REVENUE MIX BY SECTOR

Transport – 31%

Combat – 30%

Submarines – 28%

Naval – 7%

Helicopters – 4%

UNDERLYING REVENUE MIX

OE – 47%

Services – 53%

UNDERLYING REVENUE

£4,772m

2024: £4,522m

UNDERLYING OPERATING PROFIT

£689m

2024: £644m

UNDERLYING OPERATING MARGIN

14.4 %

2024: 14.2%

ORDER BACKLOG

£17.4bn

2024: £17.4bn

DEFENCE

OUR DIVISIONS

GCAP: SECURING SOVEREIGN

CAPABILIT Y AND DRIV ING

HIGH-VALUE INDUSTRIAL

GROWTH

As a lead partner in GCAP, Rolls-Royce is driving

thedevelopment of advanced power and propulsion

systems. This investment secures thousands of highly

skilled engineering roles and anchors a strong national

supply chain, ensuring long-term economic growth and

industrial resilience.

1 See note 2 on page 139

2 Defence revenues in 2024 included a c.£220m benefit of

a one-off capital and lease transaction.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

OUR DIVISIONS

In the second half of the year, the Republic

ofTürkiye and the UK signed an agreement

to export 20 British-built Eurofighter

Typhoon aircraft, with an option for more

inthe future.

Furthermore, Italy, Germany and Spain have

placed orders this year for EJ200 engines.

Coupled with the recent commitment from

the Republic of Türkiye, this now provides

visibility of our EJ200 original equipment

production into the 2030s.

During the year, we also made important

progress on the development of key future

programmes. On GCAP, the international

consortium announced a major expansion of

their partnership to accelerate development

of the power and propulsion system for the

next-generation fighter aircraft. As leaders of

the GCAP power and propulsion workstream,

we successfully tested a combustor

developed with enhanced additive layer

manufacturing techniques that will result in

an improved design and higher performance.

In addition, we began AE 1107 engine

testingto support the prototype delivery

forthe U.S. Army MV-75 Future Long Range

Assault Aircraft (FLRAA) programme. At the

heart of this next-generation platform are

Rolls-Royce engines, the latest evolution

ofapowerplant trusted by the U.S. military

for decades. Each MV-75 FLRAA will be

equipped with two advanced Rolls-Royce

AE 1107F engines, featuring world-class

power density, cyber-compliant controls

andsurvivability technology.

We also carried out altitude testing and

released controls software for the next

phaseof integration testing of our F130

engine for the B-52 re-engine programme.

The ramp-up of the MV-75 and B-52

programmes is supported by significant

investments that we have already made

inIndianapolis, US, where we have invested

around $1bn over the last decade to increase

our production capacity, modernising and

improving our facilities and supporting

thousands of local jobs. This investment

reflects our belief in American capability

andour commitment to being in the US for

thelong term.

During the year, Rolls-Royce submarines

alongside Assystem, AtkinsRéalis and

Frazer-Nash, formed the Capability Assured

Strategic Partnership, which brings together

nuclear capability in the UK to support the

Royal Navy’s submarines programme and

thewider Defence Nuclear Enterprise. We

also signed a memorandum ofunderstanding

with the State of Victoria, Australia, outlining

a commitment to collaborate on developing

their defence industry skills, supply chain,

and innovation ecosystem. This follows

similaragreements signed with Western

andSouth Australian governments in 2025

and highlights the unique nuclear expertise

Rolls-Royce brings to the AUKUS agreement.

Furthermore, to meet the growing demand

from the Royal Navy and as part of our

commitment to AUKUS, we announced our

fissile construction partner in the expansion

of our submarines site in Derby, UK.

As part of our continued transformation

programme, Rolls-Royce completed the

saleof our naval propulsors business to

Fairbanks Morse Defense in July.

Outlook

We continue to target a 14%–16% margin

inthemid-term compared to 14.4% in 2025.

Higher operating profit will be primarily

driven by:

— Stronger performance across all end

markets, with higher aftermarket profit

alongside increased OE volumes.

— Continued self-help actions.

— Productivity improvements due to

capacityexpansion.

Beyond the mid-term, we have growing

visibility of future demand, we anticipate

prolonged demand for our existing portfolio

of profitable products including EJ200 and

our AE engine family alongside the ramp up

of new platforms. These new platforms will

remain in service for decades to come and

include AUKUS, B-52, GCAP, MV-75, and

MQ-25, alongside a growing opportunity

from autonomous platforms.

Financial overview

£ million 2025

Organic

change

M&A

FX 2024 Change

Organic

change

Underlying revenue 4,772 369 (48) (71) 4,522 250 8%

Underlying OE revenue 2,228 336 (24) (27) 1,943 285 18%

Underlying services revenue 2,544 33 (24) (44) 2,579 (35) 1%

Underlying gross profit 933 40 (3) (12) 908 25 4%

Gross margin % 19.6% 20.1% (0.8)pt

Commercial and administrative costs (201) 10 (1) 2 (212) 11 (5)%

Research and development costs (45) 9 – 1 (55) 10 (16)%

Joint ventures and associates 2 (1) – – 3 (1) (33)%

Underlying operating profit 689 58 (4) (9) 644 45 9%

Underlying operating margin % 14.4% 14.2% 0.1pt

2025 2024 Change

Trading cash flow 745 591 154

1 Organic change is the measure of change at constant translational currency applying full year 2024 average rates to 2025 and excludes M&A and business closures. All underlying

income statement commentary is provided on an organic basis unless otherwise stated

2 On 1 July 2025 the sale of the naval propulsors business completed. As a result, organic change excludes the naval propulsors results from 2025 and 2024

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

Market overview

Our Power Systems business serves five

distinct end markets.

In power generation, we offer dependable

diesel and gas power solutions for mission-

critical to everyday back-up and continuous

power needs. We have a market share of

20%to 25% in our key markets of data

centres and mission-critical back-up systems.

Data centres now represent more than 80%

of power generation revenue.

In governmental, we provide peak-

performance diesel engines and propulsion

systems with outstanding power density and

power-to-weight ratios. We have a market

share of 30% in our key markets of land

defence and naval.

In marine, we deliver integrated diesel, gas

and hybrid propulsion systems, including

automation and control systems, which

arerenowned for their reliability and

performance. We have a market share of 15%

to 20% and our key markets are commercial

marine and yacht.

In industrial, we offer a broad range of highly

reliable industrial diesel and hybrid solutions

for a diverse range of requirements. We have

a market share of 15% to 20% and our key

markets are rail and mining.

Our fast-growing battery energy storage

systems business (BESS), which achieved a

breakeven performance in 2025, provides

grid stability toharness renewable power.

In 2025, order intake in Power Systems

was£6.1bn, up 21% versus the prior year,

witha book-to-bill ratio of 1.2x. OE order

coverage for 2026 is 79%. Order intake grew

31%year-on-year in power generation, and

ingovernmental order intake grew 15%.

Financial performance

Underlying revenue was £4.9bn, an

increaseof 19% versus the prior year.

Powergeneration revenue growth was

30%,including data centre revenue growth

of 35%. Governmental revenue growth was

14%, driven by both land and naval defence.

Underlying OE revenue grew by 23% to

£3.4bn. Underlying services revenue grew

by12% to £1.5bn.

Underlying operating profit grew by 60%

to£852m. Underlying operating margin rose

by 4.5pts to 17.4% (2024: 13.1%). The increase

in operating profit was driven by significant

profitable growth in power generation OE,

stronger governmental services growth

andour young and growing BESS business,

which is now breakeven. Power generation

growth was driven by data centres, where

wecontinued to capture the benefits of

volume,mix and commercial optimisation.

Trading cash flow was £658m compared to

£452m last year. The increase in trading cash

flow was mainly due to stronger operating

profit, partly offset by higher investments

and working capital to support disciplined

business growth.

Power Systems, with its product and

solutionsbrand mtu, is a global provider of

high-performance energy and propulsion

solutions for a wide range of applications

inthe power generation, governmental,

maritime and industrial sectors.

UNDERLYING REVENUE MIX BY SECTOR

Power generation – 54%

Governmental – 25%

Marine – 10%

Industrial – 9%

BESS – 2%

UNDERLYING REVENUE MIX

OE – 70%

Services – 30%

UNDERLYING REVENUE

£4,892m

2024: £4,271m

UNDERLYING OPERATING PROFIT

£852m

2024: £560m

UNDERLYING OPERATING MARGIN

17.4 %

2024: 13.1%

ORDER BACKLOG

£6.1bn

2024: £4.8bn

POWER SYSTEMS

OUR DIVISIONS

THE BACKBONE OF

THEDIGITAL WORLD

Power Systems delivers the trusted power infrastructure

of choice for hyperscale and high availability data centres

worldwide. Its advanced efficiency, connectivity and

rapid response capabilities ensure maximum uptime,

robust protection against grid instability and a secure

foundation for the world’s increasingly digital operations.

1 See note 2 on page 139

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

Operational and strategic progress

We have seen growing demand for our

back-up power solutions for data centres,

driven by global trends in cloud computing,

data processing and AI. Our order intake

inpower generation grew 31% in 2025

andweare now taking orders for 2027 and

2028.We have significantly expanded our

production capacity worldwide, including

inour US production network, in Aiken

andMankato, tosupport this growing data

centredemand.

In October, we announced a new product

tosupport the power generation market,

afast-start gas genset. This will offer prime

power to data centre customers who are

awaiting grid connection and can later

beswitched to back-up power generation

oncethe data centre is connected to the grid.

There has been strong interest in this product

from ourcustomers.

In governmental, we hold a market-leading

position and are well positioned to capture

increased defence spending by governments

through our propulsion systems placed into

military vehicle platforms and naval vessels.

InDecember, we received a major order to

supply more than 300 mtu engines to power

Leopard 2 tanks. We are also developing

new,8-, 10-, and 12-cylinder S199 engines.

Thedevelopment project is progressing to

planand we are planning to make the first

deliveries in 2026.

In BESS, we have seen strong growth with

improved profitability. We have won a large

order with the Ignitis Group in Lithuania.

In marine, we advanced our yacht

propulsionportfolio with the new mtu

12V2000Z engine delivering 2,222 hp,

representing the next development step in

our high-performance Series 2000 platform.

We continue to execute our integrated

‘Bridge to Propeller’ strategy, combining

propulsion, POD drives and mtu NautIQ

bridge systems into fully integrated

yachtsolutions from a single source.

Wehavesuccessfully tested the

world’sfirsthigh-speed marine engine

poweredexclusively by methanol in

Friedrichshafen,Germany.

The development of our next-generation

Series 4000 engine is progressing to plan,

with product launch on track for 2028. Our

first sample engine has been commissioned

inAiken, US. In product testing the engine has

delivered to all targeted technical parameters.

We have also conducted single-cylinder

testing of advanced and optimised

components for future generation engines.

These components are developed using

cutting-edge additive manufacturing

technology, a significant milestone in

ourtechnological innovation efforts.

Outlook

We now target a mid-term margin of

18%–20% compared to 17.4% in 2025. Higher

operating profit will be driven by:

— Power generation OE revenue growth

ofaround 20% per annum driven by data

centres, with higher margins reflecting

animproved product mix and efficiencies.

— Governmental OE revenue growth of

around 20% per annum (previously

12–14%)reflecting increased global

defence spending.

— Marine OE revenue growth of 5–7%

perannum.

— BESS: double-digit OE revenue growth.

— Strong growth in service revenues

willsupport margin improvements to

themid-term.

Beyond the mid-term, growth will

mainlybedriven by power generation

andgovernmental. We anticipate sustained

power generation growth driven by data

centres, where our strong market position

willbe supported by the introduction of our

more power-dense next generation engine.

Ingovernmental, rising defence spending

supports both land and naval applications,

where we are the incumbent supplier on

themain European NATO platforms, and we

remain well positioned to support US growth.

We also see opportunities for profitable

growth in marine, rail, mining, and BESS.

Financial overview

£ million 2025

Organic

change

M&A

FX 2024 Change

Organic

change

Underlying revenue 4,892 794 (113) (60) 4,271 621 19%

Underlying OE revenue 3,433 641 (104) (46) 2,942 491 23%

Underlying services revenue 1,459 153 (9) (14) 1,329 130 12%

Underlying gross profit 1,522 356 (23) (10) 1,199 323 30%

Gross margin % 31.1% 28.1% +2.6pt

Commercial and administrative costs (518) (38) 3 – (483) (35) 8%

Research and development costs (164) 3 – (2) (165) 1 (2)%

Joint ventures and associates 12 4 – (1) 9 3 44%

Underlying operating profit 852 325 (20) (13) 560 292 60%

Underlying operating margin % 17.4% 13.1% +4.5pt

2025 2024 Change

Trading cash flow 658 452 206

1 Organic change is the measure of change at constant translational currency applying full year 2024 average rates to 2025 and excludes M&A and business closures. All underlying

income statement commentary is provided on an organic basis unless otherwise stated

2 On 31 July 2024 the sale of the lower power range engines business completed. As a result, organic change excludes the power range engines results from 2024

OUR DIVISIONS

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

“The power lies in each person being clear on how they contribute, understanding

whatisexpected, and believing they can make a real difference. When we achieve this,

webecomeknownfor high-performing teams and a relentless pursuit of excellence –

whereeveryindividual’spotential is unlocked, safety and integrity are never compromised,

andour collectiveambition shapes the future of our industry and the world.”

Tufan Erginbilgic

Chief Executive

Advancing our transformation

throughpeople and culture

We want to win and achieve future

successthrough our interconnected

pillarsof transformation and laser

focusonperformance culture. This is

afundamental reset moment. We are

managing the business differently and

expectmore from our employees. Our

cultural transformation andfocus on

highperformance is not only enabling

ourimmediate transformation priorities

butalso strengthening the foundations for

long-term, sustainable success. We reinforce

our performance expectations every day

through our people and talent systems,

leadership and strategy.

It is critical that each person is clear on

howthey contribute, understanding what

isexpected, and believing they can make

areal difference. When we achieve this, we

become known for high-performing teams

and a relentless pursuit of excellence – where

safety and integrity are never compromised,

every individual’s potential is unlocked, and

our collective ambition shapes the future of

our industry and the world.

This year, we continued to build on the

foundations set in 2024 when we launched

our new purpose, vision andbehaviours,

increased employee ownershipin the

Company through YourShares: Gifted

andstrengthened how we listen and

respondtoemployee feedback through

OurVoices, which evolved our approach

tolistening to our employees.

In 2025, we launched our People Deal

(seebelow) to clarify our employee

proposition and drive cultural change.

Itclearly articulates what we promise to

employees, and what we expect in return,

linking our purpose, leadership expectations

and behaviours to the everyday experience

at work. For the first time, we have one

forward-looking narrative, helping us

changeour culture, further reinforcing

threeessential mindsetshifts:

— Performance culture: focusing on relative

strategic business impact and

differentiated outcomes

— Talent first: building strategic capability

and differentiated development

— Continuous learning: encouraging

curiosity to grow and adapt

Our People Deal

The People Deal will guide how we attract,

develop, support and reward our employees,

enabling sustained high performance and

supporting our vision for a high-performing,

competitive, resilient and growing business.

Engagement &

recognition

We are committed to engaging and

recognising our employees – placing

safetyat the centre of how we work.

Throughour listening channels, we regularly

listen and invite employees to have a voice

inshaping our culture, influencing decisions,

and driving meaningful change. This is

supporting us to build a workplace where

everyone can thrive and belong.

Our Change Maker network established

in2023 has matured and turned intention

into sustained action during 2025. The

network is made up of self-nominated

employees across the Group who help

embed, develop, showcase and sustain our

purpose and behaviours in their business

areas. Now more than 1,300 employees

strong, Change Makers have evolved from

advocacy to active facilitation, working

alongside people leaders to embed

behaviours into daily habits and deliver

tangible outcomes from Safety Experience

events to Winning Together (transformation)

sessions. Where leadersactively sponsor and

empower Change Makers, removing barriers,

and recognising progress, the cultural impact

issignificantly higher.

Our Employee Voice Network, an all-

employee network, launched in September

and is open to all employees globally. It

brings diverse perspectives into decision-

making, strengthens fair and equitable

change, and reinforces a shared culture.

Together with our other listening channels,

the Network forms a continuous listening

andresponse system that connects employee

insight to visible organisational change. It

isled by 12 senior leaders globally (UK, US,

Germany and India) and sponsored by three

executive leadership group members (UK,

USand Germany).

We know that employees who receive

meaningful recognition are five times more

likely to feel connected to their culture and

engaged in their work. The results of our

employee survey indicate that recognition

must improve, with just 67% feeling

appreciated for their contributions. We

launched our Group-wide recognition

strategy, Power of You, in October. Power

ofYou provides a consistent, high-impact

wayto reinforce our purpose and behaviours.

It is enabled through a world-class digital

andAI solution and launched simultaneously

ENGAGEMENT

& RECOGNITION

Our People Deal comprises six tenets

WE PROMISE

To listen, value your voice and

recognise your impact.

WE EXPECT

You engage respectfully, recognise

others and live our behaviours.

WE PROMISE

To support you to perform at your

best with regular feedback.

WE EXPECT

You strive for excellence and raise

the bar for yourself and others.

WE PROMISE

An opportunity rich climate with a

diverse range of career opportunities.

WE EXPECT

You’re the architect of your career

to unleash your potential.

WE PROMISE

Inspiring leaders who role-model

our Leadership Expectations.

WE EXPECT

You take ownership regardless of

where you sit in the organisation.

WE PROMISE

Continuous learning opportunities

to help future proof your skills.

WE EXPECT

Your curiosity and drive for new

learning opportunities.

WE PROMISE

An attractive total reward

package that goes beyond pay.

WE EXPECT

Focus on impact and finding

ways to make a difference.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

People and culture

across all 47 countries. We will now embed

recognition as an everyday leadership habit,

ensuring appreciation is timely, equitable

andclearly linked to strategic outcomes

mostimportant to us.

Our wellness programme, LiveWell, has

continued to empower employees to take

personal responsibility for their health and

wellbeing while supporting others to do the

same at a local level. In 2025, 51 sites moved

up an accreditation level, now representing

88 workplaces and 21 countries.

One year on, Our Voices, our approach

toemployee listening, has evolved from a

standalone survey into a core Group-wide

multi-channel mechanism for listening to

ouremployees and turning insight into

action. In our annual survey we had

participation from 32,862 employees

representing 79% of our global workforce.

This confirms strong momentum across

engagement, safety and trust, while also

highlighting where we must act with urgency.

Confidence in our strategy and leadership

communication continues to grow, with

82%saying our strategy is clear and 88%

confirming receipt of regular business

updates, representing significant year-on-

year improvements.

The survey also highlights critical gaps,

withonly 64% of employees feeling well

equipped with the tools they need to do

theirjobs, and just 51% are confident that

meaningful action will follow the survey,

bothare below external benchmarks.

To equip our people with the tools

theyneedtodo their jobs, over the

nextfiveyears,we willinvest in digital

capability tostrengthen how our

peoplework, collaborate and perform across

engineering,manufacturing, services, and

company systems.Workforce digitisation

isequippingemployees with refreshed

laptops,upgradedcollaboration tools, and

modernised shop-floor technology, removing

friction from daily work and enabling faster,

better decisions. AI workforce readiness

isalso underway, building confidence

indata-driven decision-making and

accelerating responsiveness across

thebusiness.

Belonging scores remain stable year-on-year

with 75% of colleagues feeling they belong

atwork. A further indicator of our cultural

transformation is the continued strength

ofour speak up culture (see Ethics and

compliance on page 37). While overall

content trends remain stable, the increase

ofspeak up reports has enabled earlier

identification of risk and more timely

intervention. This has prompted deeper

collaboration between HR and Compliance

Talent

As we enter a phase of accelerated growth

itis critical to have a strategic pipeline

oftalent with the right skills to enhance

business critical capabilities.

Our Emerging Talent portfolio, spans

apprenticeship and graduate schemes across

nuclear, procurement, commercial, project

management, digital and IT, finance, Global

Business Services, manufacturing operations

and software engineering. There are over

2,000 employees on the programme globally.

Significant investment continues in early-

career and apprenticeship pathways. In the

UK, our apprentices achieve results above

the industry benchmark at 92%.

Elevating our work experience offering has

been central to building early engagement

atthe start of our talent pipeline. Discover:

On Demand, our new, free virtual work

experience and careers platform launched

inOctober and was designed to open the

world ofscience, technology, engineering

and business to young people aged 14 to 18.

The target is to engage 8,000 students

inthefirst six months, so far we have

enrolled5,200 students, with 80%

startingan experience and 70% completing

anexperience. We have also seen 84%

engagewith Future Ready Skills modules.

The average time in a first engagement is

56minutes.

Graduate engagement has evolved this

year,with the launch of the Enterprise

SkillsAccelerator programme, designed for

early career professionals. The first cohort

welcomed 16 individuals and is designed to

accelerate the development of commercially

astute, generalist future leaders.

Together, targeted actions ensure we are

building a resilient, future-ready workforce

with depth of capability required to sustain

performance and execute our strategy

atpace.

To sustain a high-performance culture

overthe long term, we have continued to

strengthen the depth, quality and readiness

of our talent and capability. We remained

steadfast in removing bias from our Group-

wide talent system, ensuring a progressive

and standardised approach to how we

source, attract, develop and retain the very

best people. Our global belonging framework

embeds fairness, respect and meritocracy

across the entire talent system, from

onboarding through to exit. See our fair

working practices on page 36.

We have made substantial progress across

ourtalent and capability strategy. We

strengthened our workforce planning

capability through extensive forecasting

tomap critical skills, assess the impact of AI,

understand geographical talent supply and

TALENT

to ensure appropriate action and sustained

improvement. Examples of targeted

culturalinterventions include compliance-

led listening sessions, speak up process

refreshsessions within the HR community

and site-led communication and awareness

asrequired.

Beyond these formal measurements of

ourculture, we continue to draw insight

froma broader set of cultural indicators,

including retention data, belonging

metrics,and qualitative feedback through

our listening channels. These give us a richer,

more human picture of how employees are

experiencing the organisation and allow us

toidentify where alignment with our purpose,

vision and behaviours is strong, and where

additional focus is required.

Performance

A key lever for driving a high-performance

culture is our performance management

strategy which holistically integrates business

and employee performance. We know

thatcompanies that focus on their people’s

performance are 4.2 times more likely to

outperform their peers, realising an average

30% higher revenue growth, on top of reaping

dividends in culture, collaboration, innovation

and sustained competitive performance. Key

benefits include:

— improved employee performance and

discretionary effort;

— higher workforce performance and

engagement; and

— better perceptions of fairness and

decisionquality.

We have an established foundation and

rhythm of performance management

through the organisation, which we can

nowbuild on to unlock greater potential

andperformance in our teams. We support

employees to perform at their best and

create high impact through strategically

aligned goals, regular real-time feedback

andcoaching, and strong performance

differentiation to reflect business impact.

Wedrive strong differentiation across

theworkforce based on relative business

impact and achievement of strategic

businessoutcomes. Our focus is on

empowering employees to perform at their

best, upgrading people leader capability,

buildinga rhythm of regular, candid

feedback and continuing to optimise the

process so that itdrives high performance.

This is not about working harder, it is about

making a difference.

PERFORMANCE

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

PEOPLE AND CULTURE

shape future workforce requirements. This

enabled a targeted uplift in business-critical

capability through both external hires and

accelerated internal upskilling.

Our approach recognises that organisational

capability extends beyond technical skills; it

is the combination of knowledge, behaviours,

culture, mindset and leadership required to

turn strategy into results. Strategic workforce

capabilities are therefore defined, measured

and developed deliberately, with investment

focused on value-driving roles rather than

uniformly across the organisation.

Extensive research has been undertaken to

identify key skills across all critical capability

areas to better understand the impact of AI

on roles, as well as the geographical supply

of the best talent and to ensure a progressive,

consistent and aligned approach to strategic

workforce planning so that we are making

progress in shaping the workforce for

thefuture.

A high-potential development strategy is

inplace to ensure holistic development of

successors with strategic initiatives launched

tostrengthen our talent supply chain of

future-ready leaders:

— Rapid High Potential Programme: piloted

during 2024 targeted the development

ofsenior leadership successors. The initial

pilot proved highly successful, resulting in

leaders progressing into bigger and more

complex roles in 2025.

— Career Acceleration Programme (CAP):

launched this year, targeting mid-career

leaders viewed as having progression

capacity to grow into bigger and more

complex roles in the future. Executive

leaders are involved in co-facilitating

variouselements of the programme.

The Global Talent Exchange forum launched

this year and has proactively encouraged

internal talent mobility of high-potential

individuals, giving us better ability to implement

cross-divisional internal moves and promotions.

Internal mobility continues to be a powerful

driver oftransformation. 2,378 internal moves

were made in 2025 which is clear evidence of

our commitment to developing andadvancing

talent across the organisation.

In addition, 77% of the annual promotions

represented employees progressing to their

first leadership role, demonstrating strong

upward mobility at the early leadership stages

and reinforcing our focus on building future

leaders from within.

Our transition to a new talent acquisition

partner has delivered measurable results,

including material improvements in hiring

efficiency and annualised savings. For example,

offer acceptance time reduced from 87 to 68

days, with time-to-start improving across the

UK, US and Germany.

Capability & skills

We encourage our employees to keep learning

to future-proof their skills. Learning has been

transformed this year, through digital and

AI-enabled tools, delivering 991,196 learning

hours and embedding learning into the flow

ofwork. The expansion of MyLeatro, our

AIlearning platform, has reduced the cycle

timefrom identifying a skill gap to applying

newlearning from months to days, significantly

increasing responsiveness and agility.

Leadership capability continues to strengthen,

with 93% of leaders in our flagship programmes

assessed as high or strong performers. These

improvements are translating into materially

reduced capability risk across Finance,

Procurement & Supply Chain, Global Business

Services and Enterprise Leadership.

All employees complete annual mandatory

learning on topics that are fundamental to

howwe work and how we must live up to

ourCode of Conduct and Group policies.

In2025, mandatory learning was completed

byover 98% of our employees and 100% of

ourleaders.

Looking ahead, we will continue to build

future-critical skills through partnerships and

academies. We want to ensure our employees

keep learning new skills that remain relevant

forthe future. Pushing themselves out of

theircomfort zone and remaining open

tonewlearning and work experiences

acrossdifferent divisions and functions will

contribute to the organisation becoming

fullyconnected as One Rolls-Royce.

Extraordinary leadership

We want to inspire and provide stretch

opportunities for our employees with

extraordinary leaders who exemplify

ourLeadership Expectations (Perform &

Transform). Transformation depends on

leaders who both run and evolve the

business. Over the past year, we have

embedded our Leadership Expectations

intothe systems that shape performance,

succession, and everyday decision-making.

CAPABILITY

& SKILLS

Empowering colleague-led culture change

Change Makers were introduced in 2024

as part of our broader transformation

journey, activating the organisation

around our purpose, vision, strategy, and

behaviours. Now comprising more than

1,300 employees, the network has moved

fromadvocacy to active facilitation.

Progress and shifts in role over 12 months:

— Co-facilitated 80+ Safety Experience

events (over 13,000 employees).

— 250+ Winning Together sessions.

— 50+ habit-building tools created.

— 40+ wellbeing integration sessions.

— Direct support to the Transformation

Office on decision-making, behaviours

and habit formation.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

PEOPLE AND CULTURE

Spanning six domains, the Perform &

Transform framework anchors how leaders

show up and drive outcomes. It is now fully

integrated into performance assessment,

succession planning and leadership

storytelling, ensuring that expectations

translate into consistent behaviour

andaccountability.

The immediate data points indicate that

ourinvestments are driving tangible

improvements in leadership effectiveness.

Across our top leadership development

programmes, we are seeing some good

learning and business impact – over 90%

ofleaders confirmed that they are applying

their learning directly and delivering

visibleimpact.

Our coaching partnership with Better Up

continues to scale. This year leaders have

completed over 5,000 coaching hours;

90%of coaching participants report that

coaching has made them more effective

atwork, with the largest self-reported

improvements linked directly to our

leadership expectations.

This confirms that we are building a

leadership ecosystem that consistently

reinforces the behaviours and capabilities

required for sustained high performance.

Wealso expanded the use of short-term,

project-based opportunities (known as ‘gigs’)

to enhance capability and embed agile ways

of working. This resulted in over 2,000 gigs

created on our internal talent marketplace,

enabling mobility, stretch and career growth.

Reward

Our promise is to deliver an attractive

totalreward package that goes beyond pay.

We focus on impact, high performance,

anddelivery.

In 2025, we continued to connect business

success with reward, with differentiated

outcomes for those delivering the greatest

impact. Our global incentive arrangements

help us to drive alignment throughout the

organisation with a strong cascade of targets

throughout the Group from Executive to all

levels and ensure employees benefit from

ourperformance.

We continued to invest in developing

aculture of shared ownership. Building

ontheissue of the 150 free shares to all

employees in September 2024, we launched

a new share plan, Your Shares: Matched in all

major locations. 97% of our global population

are eligible to join, with an average take-up

rate globally of 66%. This is a real example of

howwe are Winning Together, and how our

transformation programme has enabled

thisinvestment in our people.

REWARD

Looking forward

Sustaining pace, intensity and

culturalreinforcement

Our priority is to sustain and deepen

ourcurrent momentum: strengthening

leadership accountability, building

future-critical skills through targeted

andpurposeful partnerships, accelerating

decision clarity, embedding performance

culture into every corner oftheorganisation

and leveraging digitalsystems to reinforce

simplicity andexecutionexcellence.

Together, these actions ensure that progress

is not only achieved but sustained.

Our People Deal will continue to guide how

we attract, develop, support and reward our

people, creating the conditions for consistent

high performance and enabling usto achieve

our vision of a high-performing, competitive,

resilient and growing company.

Since setting our ambitious 2025

representation targets in 2020, we have

delivered meaningful progress across

leadership and workforce representation.

Weachieved gender parity at Board level

andmade sustained improvements across

senior leadership and employee populations,

reflecting the impact of consistent focus

andtargeted action. While not all of our

ambitions were fully realised within the

original timeframe, the progress made

reinforces the long-term nature of building

diverse pipelines, particularly for senior and

specialist roles. We have more to do, and will

continue to leverage our enterprise talent

system to broaden access to opportunity,

ensure merit-based hiring and progression,

and remove barriers so that everyone has an

equal opportunity to participate and succeed.

Future approach to workforce

representation targets

We are shifting from fixed demographic

targets toward strengthened leadership

accountability, transparent pipelines,

objective assessment and measurable

cultural outcomes. We will:

— continue to meet recommended guidance

across all jurisdictions we operate within,

for example, FTSE Women Leaders and the

Parker Review;

— avoid fixed demographic and

representation targets;

— focus on pipeline strength, sponsorship,

succession transparency, and culture; and

— increase internal and external

transparency of progress and leadership

accountability.

For information about our people and

diversitysee page 36.

People, health and safety

We will continue to focus on people,

healthand safety in 2026, as set out on

page35.

OUR COMMITMENT TO STEM

ACROSS GLOBAL COMMUNITIES

We have maintained our commitment to

increasing access to quality education

and supporting young people in STEM,

helping them build the skills, confidence

and opportunities needed to realise

their aspirations and overcome barriers

to success.

Our commitment is to:

— increase opportunities for our

people to contribute their time,

skillsand expertise to social

impactinitiatives reinforcing our

commitment to making a difference

— cultivate robust partnerships in

ourcommunities to address shared

business and social challenges

— co-create impactful community

programmes, and partnerships

thatdeliver real shared value

— focus our charitable giving and

sponsorships on initiatives that

alignwith our purpose and drive

social progress

For detail on our contribution to social

impact initiatives see page 38.

This year, we intentionally refocused

our partnerships to deliver greater

impact through deeper STEM

engagement.As a result, 83% of our

total STEM reach actively engaged

participants (2024: 75%), reflecting an

increase in high-quality interactions.

While wecontinue to make progress

toward our target, our focus on

impact-driven programmes is

expectedto result in lower overall

reach numbers going forward. We

continue tomonitor and review our

metrics, andassociated targets to

ensure wemeasure real social impact

and maximise the value we create for

our business, and all our stakeholders.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

PEOPLE AND CULTURE

People, health and safety

As we continue to accelerate our

transformation, putting safety first remains

non-negotiable. Across all safety, health

and wellbeing activity, leadership visibility

and employee voice are central. Safety

walks, wellbeing conversations and local

interventions ensure concerns are heard

early, while our integrated systems provide

the tools and support needed to act

effectively. Together, these approaches

ensure our people remain safe, healthy

andready to perform, enabling our

organisation to sustain high-performance

over the long term.

Over 13,000 employees tookpart

inourSafety Experience events in 2025,

representing more thana quarter of the

Group. Endorsed andattended bythe

Executive Team, these two-hour, in-person

sessions reinforce the importance of

keeping our people, our products and the

peoplewho use them safe, strengthening

ownership of personal responsibility and

empowering employees to act and make

adifference.

Safety performance

Our safety index provides a composite

score of five leading safety indicators:

senior leadership safety walks, safety

caseimprovement activity, HSE alert

response, non-conformance close-out

andaccountable person engagement.

Together, these measures reinforce

proactive safety behaviours that improve

the effectiveness of our controls. The

measures mature year-on-year to facilitate

the continuous improvement of our safety

culture. As 2025 marks the final year of

ourfive-year safety index plan, we have

reviewed the metric to ensure it continues

to drive the right behaviours, supports our

journey towards zero harm and increases

the focus on proactive risk management

and process safety.

The proposed safety index for 2026

includes three existing measures; senior

leadership safety walks, HSE alert response

and non-conformance close-out, and three

new measures; completion of leadership

training, closure of process safety risk

assessment actions and closure of actions

from investigations. The introduction of the

new measures has required a re-baselining

of the safety index. The proposed Group

safety index target for 2026 is 87%. Had we

been operating these measures in 2025, we

would have scored 78%, hence this moves

us to a more robust scorecard and sets a

challenging requirement.

The full year Group safety index score for

2025 was 98%, slightly above the target

of97%.

In 2025, the Total Reportable Injury (TRI)

rate was 0.29, which is the same as in 2024.

There were 128 TRIs in 2025, this is an

increase from 126 in 2024. TRI events are

shared widely to strengthen controls and

reinforce a culture in which employees feel

safe to speak up. See page 18 for further

information on our safety index key

performance indicator.

TRI RATE (PER 100 EMPLOYEES)

0.29

24232220 25

0.29

0.32

0.41

0.43

21 25

0.35

0.25

TARGET

BASELINE

1 Our TRI rate shows the Group TRI performance

(absolute and rate). External assurance over the

TRIdata is provided by DNV (see page 202)

Health as safety

Health remains integral to both safety

andperformance. UK occupational

healthreferrals remained steady

thisyear,with mental health-related

absencerepresenting over 35% of cases.

Inresponse, we approved and updated

ourmid-term plan focused on mental

health interventions, improved access

tosupport and strengthened leader

capability – embedding health as safety

and health bydesign.

Prevention and early intervention

We continued to strengthen musculoskeletal

prevention and ‘health as safety’ practices.

In2025, almost 1,000 employees accessed

physiotherapy through an expanded

self-referral programme. Athletictrainers

in Indianapolis, USdelivered activities

including ergonomicscoaching and

warm-up programmes supporting

approximately 2,000 employees. ‘Health

bydesign’ interventions have been adopted,

reducing ergonomic risk at source.

In the UK, health surveillance compliance

(legally required medicals) improved by

63% in 2025, driven by better outreach,

increased onsite provision and closer

operational engagement.

Mental health as safety

Following an ISO 45003 gap analysis,

wecontinued to embed mental health

trainingwithin our safety-first strategy

andalign it with the People Deal.

Morethan 13,000 employees have now

completed the Brain as aSafety Tool

element of the Safety Experience and,

inthe six months since itslaunch, over

500people leaders havecompleted the

updated Mental HealthSafety for Leaders

programme. Additionally, we strengthened

our Global Mental Health Champion

network to 400 champions and launched

Mental Health Foundations for Everyone to

build organisation-wide literacy.

To shift from reactive response to proactive

prevention, we introduced new Group-

wide tools, focused on psychosocial risk.

Our first globally valid and reliable

psychological risk assessment tool will

launch with seven UK pilots in early 2026,

providing leaders with evidence-based

insight intopsychological risk. A peer-

support pilot and new internal resources

further strengthen early intervention and

employee connection.

Together, these actions strengthen our

alignment with ISO 45003 and emerging

global legal expectations, reduce risk

andensure mental health is designed into

the way work is planned and delivered.

Embedding mental health within safety

firstis now a core driver of performance

– supporting better judgement, reducing

error and sustaining high performance

operations, while ensuring our people

remain safe, healthy and ready to perform.

We put safety first to

helpus all avoid physical,

mental or workplace

health issues. Like physical

safety, our mental health

should be a priority every

day – it plays a vital role

inpeople, product,

andsafety and how we

perform andtransform.

Sarah Armstrong

Chief People Officer

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

PEOPLE AND CULTURE

Our diversity metrics at 31 December 2025

Female diversity percentage tracking and 2025 targets

2025 2024

2025

target

The Board

50% 50% 50%

Executive Team (ET) 30% 30% 33%

Enterprise Leadership Group (ELG) 31% 26% 35%

Senior leaders

31% 25% 30%

All employees 19% 19% 25%

Ethnic diversity percentage tracking and 2025 targets for UK and US

2025 2024

2025

target

UK ethnicity 13% 12% 14%

US ethnicity 18% 17% 20%

Gender diversity

Female Male Total Female %

The Board 6 6 12 50%

Executive Team (ET) 3 7 10 30%

ET, Chief Governance Officer and direct reports 25 58 83 30%

ELG 26 59 85 31%

Senior leaders

29 66 95 31%

All employees 8,235 34,927 43,162 19%

1 Segments are defined in note 2 on page 134

2 Employee headcount data represents permanent employees and excludes contractors

3 The data for diversity information is showing permanent employee year-end actuals

4 The Board Composition policy aims for gender parity

5 Senior leaders are defined in the Companies Act 2006 (those who have responsibility for planning and directing

orcontrolling the activities of the entity or a strategically significant part of it). We do not include all subsidiary

directors inthe definition of senior leaders as this would not accurately reflect the leadership pipeline. We have a

large number ofsmall and dormant subsidiaries and the composition of these boards reflects their level of activity.

Accordingly, senior leaders refers to the Executive Team and the ELG

6 For ethnicity information, we are only able to monitor and track this in the UK and US and, therefore, this only

includes businesses in these locations. The population is only those who have chosen to disclose this information

Throughout this Annual Report, the information we disclose is in accordance with our reporting obligations as a

UK-registered company listed on the London Stock Exchange. We continue to keep our policies, procedures and

targets underreview to ensure compliance with the laws and regulations of the jurisdictions in which we operate.

PEOPLE AND CULTURE

People metrics

42,600 EMPLOYEES TOTAL (MONTHLY AVERAGE)

Corporate

EMPLOYEES IN 47 COUNTRIES (MONTHLY AVERAGE)

UK – 22,100

Germany – 9,900

US & Canada – 6,000

Italy – 1,000

Singapore – 700

India – 700

Rest of world – 2,200

Civil Aerospace – 19,400

Defence – 12,800

Power Systems – 10,000

All Other Businesses – 200

Corporate – 200

Fair hiring and pay practices

We remain committed to fair hiring practicesand provide additional support to candidates who declare a disability or require

adjustments during the recruitment process. We actively support employees who become disabled while working with us, ensuring the

necessary adjustments are made to enable their continued contribution and success.

We remain committed to fair pay globally, conforming to all national pay laws and progressing our work on living wage standards in line

with the Corporate Sustainability Reporting Directive (CSRD). Inthe UK, we pay above Living Wage Foundation standards and require

suppliers to meet minimum/fair wage commitments via our Global Supplier Code of Conduct.

Gender pay reporting

In accordance with The Equality Act 2010 (Gender Pay Gap Information) Regulations 2017, we publish our UK gender pay gap on our

website at www.rolls-royce.com.

MEDIAN GENDER PAY GAP ACROSS ALL EMPLOYEES IN THE UK MEAN GENDER PAY GAP ACROSS ALL EMPLOYEES IN THE UK

2025

024

3.6%

4.4%

2025

024

2.3%

1.6%

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

We are committed to ensuring that all our employees

do the right thing and tocreating a working

environment where everyone can be at their best.

We are committed to upholding high ethical

standards to create a working environment

where everyone at Rolls-Royce and those we

work with can be at their best. Our code of

conduct (Our Code) and associated Group

policies guide our actions and decisions

toensure we can be proud of the way we

behave and the way we do business.

Progress in 2025

In 2025, we continued to embed our

purposeand behaviours which includes

thebehaviour, do the right thing. We are

engaging with our employees across our

global footprint on the important role they

play in maintaining our high standards of

ethics and compliance. In addition, as part

ofour 2025 annual mandatory learning

programme, our core compliance learnings

included our fraud, data privacy and export

control policies. We require all our leaders

tocertify annually their understanding

ofOurCode.

Speak up

We strive to create an environment

whereeveryone feels valued and actively

encouraged to speak up about questions

orconcerns without fear of negative

consequences. This is a vital part of

enhancing our culture of belonging.

Everyone can use our speak up channels,

whether or not they are an employee. We

provide multiple ways to raise a concern,

including the Rolls-Royce speak up line,

which enables concerns to be raised

anonymously and confidentially in multiple

languages. A speak up report highlighting

key statistics is made available to employees

at regular intervals to remind them of

theimportance of speaking up and our

annual speak up report is published on

www.rolls-royce.com

Enforcing Our Code

We do not tolerate misconduct of any

kindand will take disciplinary action, as

appropriate, including dismissal, in the

eventof a breach of Our Code. In 2025, 82

employees (2024: 132) left the business for

reasons related to breaches of Our Code.

While the number is lower than previous

years, which may be due to a number

offactors (including transformation and

increased compliance), we continue to

demonstrate ourcommitment to enforcement

of Our Code.

Supply chain due diligence

Our Supplier Code sets out the behaviours,

practices and standards we expect our

suppliers to demonstrate and comply with,

allof which are based on Our Code, policies

and standards. Selected suppliers are

contractually required to adhere to this or a

mutually agreed alternative. Partnering with

specialist third-party providers, we conduct

sustainability screening and assessments to

understand the inherent sustainability risks

within our supply chain and take appropriate

mitigating actions where required. Prioritised

suppliers are requested to complete a

comprehensive assessment of their

sustainability risk management.

Where risks are identified, suppliers are

asked to put in place improvement plans and

offered support and resources to help with

this, including via our third-party partners

where appropriate.

Anti-bribery and corruption

We do not tolerate bribery and

corruptioninany form. This is set out

inOurCode and associated anti-bribery

andcorruption policy. We routinely

checkand test the effectiveness of our

anti-bribery and corruption programme

tomanage proactively the associated risks

(see page 52). In 2025, we continued to

monitor our controls through compliance-

specific assurance activities, site visits and

reviews offinancial and operational data.

These activities are overseen by the

Nominations, Culture & Governance

Committee (see page76).

Remediations from the July 2024 Board

review of anti-bribery and corruption

risks(detailed in last year’s report) have

beencompleted. A holistic Group-wide

programme has commenced to cover

governance of remote sites and subsidiaries

with monthly reporting to the Chief

FinancialOfficer, General Counsel and

ChiefTransformationOfficer.

Human rights and anti-slavery

Rolls-Royce is committed to protecting and

preserving all recognised human rights of

our employees and contract workers; those

employed by our suppliers; and communities

affected by our operations and supply

chainoperations. This includes upholding

theprinciples set out in our global Human

RightsPolicy to ensure that we act in a

socially responsible manner, complying

withall applicable laws and regulations in

thecountries where we operate.

During 2025, we took steps to further

strengthen our human rights risk framework,

including by updating our global Human

Rights Policy and selecting a specialist

consultancy to refresh our assessment of

salient human rights issues and carry out a

benchmarking analysis of our human rights

processes and procedures, which will take

place in 2026. When that assessment has

concluded, we will implement recommended

changes with a view to further enhancing

ourrisk framework. We expect our suppliers,

contractors, joint ventures and other

partners to protect and preserve human

rights in their activities and operations,

andto always adhere to high standards

ofethically, environmentally and socially

responsible behaviour. In 2025, we had no

known, formally-reported events in our own

operations or our supply chain that would

qualify as severe human rights impacts. Any

potential human rights risks were identified,

escalated, addressed and mitigated in line

with our risk framework.

Our Modern Slavery Statement, which is

published annually, sets out the actions

wehave taken to review and strengthen

howmodern slavery-related risks, including

forced labour, child labour and human

trafficking, are identified, assessed and

mitigated in our own operations and in our

supply chain.

Find more information on our Human Rights

Policy and Modern Slavery Statement, see the

Sustainability page at www.rolls-royce.com

For more information on our ethics approach

view Sustaining our culture of integrity document

available at www.rolls-royce.com

OUR PROGRESS IN 2025

— Delivered senior leadership economic crime refresher learning in light of the introduction

of the new offence of failure to prevent fraud under the Economic Crime and Corporate

Transparency Act 2023

— Continued focus on economic crime risk assessment and incident management

— Launch of an improved, integrated third-party risk management system

Ethics and compliance

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

Rolls-Royce is a force for progress, committed to playing our part in the

energytransition for a more sustainable world.

Sustainability

ROLLS-ROYCE IS A FORCE FOR PROGRESS

WE ARE COMMITTED TO READ MORE UN SDG ALIGNMENT

Energy

transition and

environment

Helping the world do things tomorrow that cannot be done today and

playing our part in the energy transition for amore sustainable world.

Pages 39–40

People and

culture

Being socially and ethically responsible: creating lasting socialvalue

for our people and stakeholders.

Pages 31–36

NON-FINANCIAL AND SUSTAINABILITY INFORMATION STATEMENT

The following table summarises where you can find further information on each of the key areas of disclosure required by sections 414CA and

414CB of the Companies Act. The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 amend these sections

of the Companies Act 2006, placing requirements on the Group to incorporate climate disclosures in the Annual Report. We believe these

have been addressed within the climate-related disclosures from page 39 and as such we have referenced the location of these within our

statement on TCFD on page 40.

AREA OVERVIEW

RELATED GROUP

POLICIES & GUIDANCE

RELEVANT

PRINCIPAL RISKS PAGE

Environmental

matters and

climate-

disclosures

We have an important role to play in the global energy transition and itcontinues

to be a strategic priority. During 2025, we made progress againstourScope 1 + 2

targets as well as successfully achieving our 2025 environmental targets for

energy consumption, waste and recycling. Wecontinue to make preparations for

new incoming reporting standards intheUK and EU. We enhanced our climate

risk scenario analysis to cover thefull period to 2050.

1. Health, safety &

environment policy

— Safety

— Energy

transition

39–47

Employees

In 2025, we strengthened our people strategy to reinforce a high-performing

and resilient culture, embedding safety, wellbeing, leadership accountability

and capability development across the Group. Significant investment in

leadership, learning, workforce readiness and health by design initiatives

improved organisational effectiveness, reduced risk, and supported long-term

value creation. We continued to prioritise colleague voice, engagement

andrecognition while advancing people and culture across our operations.

Together, these actions ensure our workforce remains safe, skilled, motivated,

and aligned to delivering sustainable business performance.

1. Our Code

2. Security &

resilience policy

3. People policies

4. Speak up policy

5. Our life-saving

rules

6. Global Equal

Employment

Opportunity Policy

— Safety

— Talent &

capability

31–36

Social

matters

Our people remain at the heart of all our programmes and contributed 72,163

hours to community investment and education outreach programmes in 2025.

Our global charitable contributions and community investment totalled £5.4m,

including £600,000 from a share forfeiture programme carried out in earlier

years. We reached 823,797 people through STEM in 2025 and are now 49%

towards our goal of inspiring 25 million young innovators by 2030. In 2025,

weintentionally refocused partnerships to deliver impact-focused STEM

engagements, resulting in higher quality but lower overall reach as we

drivetowards programmes with greater value for business and society.

1. Charitable

contributions

andsocial

sponsorships

— Political

— Talent &

capability

Human

rights

We are committed to protecting and preserving all recognised human rights

of our employees and contract workers; those employed by our suppliers;

andcommunities affected by our operations and supply chain operations.

Thisincludes upholding the principles set out in our global Human Rights

Policy to ensure that we act in a socially responsible manner, complying

withall applicable laws and regulations in the countries where we operate.

In2025, we updated our global Human Rights Policy and took steps to further

strengthen our human rights risk management framework to ensure that we

take appropriate action to identify and mitigate human rights-related risks

and, where necessary, remedy human rights impacts.

1. People policies

2. Global Equal

Employment

Opportunity Policy

3. Human rights

policy

4. Data privacy policy

5. Modern Slavery

Statement

— Compliance

Anti-bribery

and

corruption

We do not tolerate bribery and corruption in any form, as set out in Our Code

and associated Anti-Bribery and Corruption Policy. We routinely check and

test the effectiveness of our anti-bribery and corruption programme to

manage proactively the associated risks (see page 52).

1. Anti-bribery and

corruption policy

— Compliance

Relevant information

For a description of our business

model, see pages 14 and 15

For a description of our

non-financial KPIs, see page 18

For details of the Group’s principal

risks, seepages 48 to 56

Further information on Group

policies can be found at

www.rolls-royce.com

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

AMBITION

To become a lower carbon and digitally enabled business we are embracing the energy transition, participating in growing markets

wherewe have capability to win and where our skills can make a genuine impact to the pursuit of a low-carbon world. We are committed

toreaching net zero by the end of 2050. We will measure our progress against the following interim and long-term targets:

— reduce Scope 1 + 2 emissions by 46% by the end of 2030 against a 2019 baseline;

— reduce Scope 1 + 2 emissions to net zero by the end of 2050;

— demonstrate that all our products are compatible with net zero operations by the end of 2050; and

— support the achievement of industry net zero (Rolls-Royce Scope 3, category 11 (use of sold products)) greenhouse gas emissions bythe

end of 2050 in line with a science-based trajectory.

Energy transition and environment

We are committed to reaching net zero by 2050

OPTIMISE OUR OPERATIONS ENABLE OUR CUSTOMERS ENGAGE AND COLLABORATE

Deliver low-carbon operations, improve

resource efficiency and drive value

Deliver innovative products and

solutions which accelerate the

energytransition

Partner with customers, suppliers,

industry and policymakers

RISKS

— Changes to our costs due to the

assumed application of carbon pricing

measures onour Scope 1 + 2 activities

and the application of carbon pricing

tothe activities of our suppliers that

arepassedthrough to us in the form of

higherpart costs.

— Changes to our commodity costs

duetovariation in market supply and

demand and/or costs passed through

from suppliers.

— Financial exposure resulting from a

temporary (up to 12 months) disruption

toa Rolls-Royce facility and/or our

supply chain due to a climate-related

event (for example, flood or fire).

— Financial impact from changes

torevenue and/or costs due to

customersresponding to changing

market conditions.

— Changes to investment required, for

example, R&D and capital expenditure

due toaneed to respond to changing

customer demand.

— Financial exposure resulting in

adeviation in expected product

performance.

— Failure to attract, retain and develop

the critical talent, skills and capabilities

required to deliver our strategic

priorities could threaten our ability

tobe a high-performing, competitive,

resilient and growing business.

— Changes to our costs due to the

assumed application of carbon pricing

measures onour Scope 1 + 2 activities

and the application of carbon pricing

tothe activities of our suppliers that

arepassedthrough to us in the form

ofhigherpart costs.

— Changes to our costs due to variation

inmarket supply and demand and/or

costs passed through from suppliers.

— Financial impact from changes

torevenue and/or costs due to

customers responding to changing

market conditions.

— Changes to investment required

duetoaneed to respond to changing

customer demand.

DEPENDENCIES

— Availability of low-carbon energy

infrastructure.

— Sustainable fuel infrastructure

andavailability to support our

producttesting.

— Sustainable fuel infrastructure

andavailability.

— Skills and capabilities (see People and

culture from page 31).

— Long-term government commitments

and timely government decisions.

— Availability of external funding.

— Long-term government commitments

and timely government decisions.

— Skills and capabilities (see People and

culture from page 31).

POLICIES

— Health, Safety and Environment Policy

— Procurement Policy

— Global Supplier Code of Conduct

— Health, Safety and Environment Policy

— Product Safety Policy

— Quality Policy

— Intellectual Property Policy

— Global Supplier Code of Conduct

— Anti-Bribery and Corruption Policy

— Competition and Anti-trust Policy

— Conflicts of Interest Policy

— Gifts and Hospitality Policy

— Political Activity and Trade

AssociationPolicy

— Sponsorships and Donations Policy

— Know Your Partner Policy

1 For further quantification of the risks and their relationship to dependencies, see the climate risk scenario analysis on page 47

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

SUSTAINABILITY

Greenhouse gas emission footprint

In 2025, our total emission footprint was

73.3MtCO

e; this was an overall reduction

against 2024 of 75.6 MtCO

e. This was driven

by areduction in our use of sold product

(Scope 3, category 11 emissions (see page 44

for further details).

Emissions associated with the use of

soldproducts (Scope 3, category 11), are

approximately 95.2% of our emissions and

dominate our emissions footprint. Therefore,

the biggest contribution that Rolls-Royce

can make to the global energy transition is

tosupport the sectors we operate in to be

compatible with net zero carbon emissions.

TOTAL EMISSIONS FOOTPRINT PERCENTAGE SPLIT

(%)

73.3

MtCO

Use of sold products on a fossil fuel-based

pathway (with weight-based adjustment) – 95.2%

Purchased goods and services – 3.7%

Operations, facility and test – <0.4%

Other

– <0.8%

1 Data has been reported in accordance with our basis of

reporting, available at www.rolls-royce.com/sustainability

2 Other emissions calculated based on Scope 3 estimations

from 2019

Task Force on Climate-related Financial Disclosures statement

We continue to build our understanding ofclimate-related risks and opportunities toensure we are strategically prepared for aclimate-impacted

future and are able to seize commercial opportunities that arise from the energy transition. These activities in turn help to support our Task Force

on Climate-related Financial Disclosures (TCFD) reporting. For 2025, we confirm a continued position of consistency with all 11recommendations.

The emissions in our supply chain (Scope 3,

category 1, purchased goods and services)

account for approximately 3.7% of our total

emissions and, as such, are our second

largest emission category. Therefore, we can

make a significant contribution by supporting

our supply chain to reduce their emissions.

As part of our ongoing activities to better

understand our total greenhouse gas (GHG)

footprint we plan to complete a review of

allour other Scope 3 emissions in 2026 to

enable us to update ourbaseline position

from 2019. We do not expect the review to

materially affect our understanding of our

GHG emissions. However, we see it as good

practice to keep our assumptions under

constant review and update them on a

periodic basis.

TCFD recommendations

RECOMMENDATION CONSISTENCY PAGE CA S414CB

Governance

Board oversight of climate-related risks and opportunities

2(a)

Management’s role in assessing and managing climate-related risks

and opportunities

2(a)

Strategy

The organisation’s identification of climate risks and opportunities

it faces over the short, medium and long term

2(d)

Consideration of the impact of climate risks and opportunities

on the organisation’s business, strategy and financial planning

2(e)

Resilience of the organisation’s strategy, taking into consideration

different climate-related scenarios

2(f)

Risk

management

Presence of the organisation’s processes for identifying

and assessing climate-related risks

46–47

2(b)

Processes for managing climate-related risks including

prioritisation methods

46–47

2(b)

Processes for identifying, assessing and managing climate-related

risks are integrated into overall risk management

46–47

2(c)

Metrics and

targets

Disclosure of metrics used to assess climate risks and opportunities

in line with strategy and risk management processes

2(h)

Disclosure of material greenhouse gas emissions and the

associated risks

39–40

–

Presence of targets used to manage climate-related risks

and opportunities and performance against such targets

2(g)

3 Companies Act 2006, s414CB(2a)-(2h)

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

SUSTAINABILITY

SHORT TERM MEDIUM TERM LONG TERM

2025–2029 2030–2034 2035–2040 2041–2045 2046–2050

Cut carbon

emissions and

improve resource

efficiency across

our operations

andfacilities

46% reduction in Scope 1 +2 emissions Net zero operations

Deliver innovative

products and

solutions to

accelerate the

global energy

transition

sustainably

All products are compatible with

net zero operation by 2050

Collaborate, engage

and partner with

policymakers and

industry to achieve

collective energy

transition and

environment goals

Continuous reduction of energy consumption

Continuous product efficiency improvements (new product development and existing product upgrades)

Continued use of sustainable fuels in our product testing

Continued product compatibility with sustainable fuels

Develop low/zero-carbon solutions such as battery storage systems, hydrogen reciprocating engines and microreactors

Engagement/advocacy with relevant governments, policymakers and stakeholders on the energy transition

Focus of decarbonising

electricity and heating

Further expansion of

sustainability topics

Decarbonisation of complex process heat, decarbonisation of generation

assets and securing long-term supply of zero-carbon electricity

2030 2050

2050

Rolls-Royce SMR design

manufacture and build first units

Rolls-Royce

SMR first orders

Rolls-Royce SMR ramp up volumes

New Power

Systems products

Next-gen Civil

Aerospace engines

New nuclear

products

New Defence

products

Transition plan

We support the increasing expectation for companies to develop and disclose a detailed transition plan outlining the steps they are taking

toalign with a low and net zero global economy. Below is a 2025 baselined plan aimed at achieving our net zero ambitions.

SUSTAINABILITY

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

Deliver low-carbon operations, improve

resource efficiency and drive value

Focus

Playing our part in the energy transition

means: decarbonising our operations and

product testing; reducing consumption and

reducing waste. This will help ensure our

facilities and internal supply chains remain

resilient in a changing external environment.

Metrics and targets

To track progress against these focus areas

we have the following targets:

— reduce Scope 1 + 2 emissions by 46% by

the end of 2030 against a 2019 baseline;

— reduce Scope 1 + 2 emissions to a net zero

position by the end of 2050;

— reduce total energy consumption,

normalised by revenue, by 50% by 2025

against a 2014 baseline;

— reduce total solid and liquid waste

production, normalised by revenue, by

25% by 2025 against a 2014 baseline; and

— increase the recycling and recovery rate to

56.4% by 2025.

For 2025 progress see below.

The targets above help us monitor our

exposure to risks identified in our climate risk

scenario analysis (see page 47). They allow

usto assess our exposure to carbon and

commodity pricing.

Safety is our number one priority. Product

testing is a critical part of our product safety

assurance approach as well as a core part

ofthe engine certification programmes that

help us to deliver more efficient and lower

emissions products. We recognise the

potential for these activities to increase our

emissions in the short term but they do not

affect our commitment and our ambition to

benet zero by 2050.

Plan

To achieve our aims, we have a costed plan

for the period to 2030 that includes:

— decarbonising electricity;

— decarbonising heating;

— improved operational efficiency;

— reducing test emissions; and

— decarbonising transport.

The largest contribution to our emissions

reduction will come through a move to

renewable and low-carbon electricity

sources. Our strategic priority in this area

isonsite generation, supplemented by a

multi-year Energy Attribute Certificate (EAC)

strategy. This strategy includes multi-year

options to secure compliant EACs including

private wire Power Purchase Agreements

(PPAs), Sleeved PPAs, Virtual Power Purchase

Agreements (VPPAs) and bundled contracts.

By 2030, we plan to be powered by 100%

renewable and low-carbon electricity sources

with a few geographical exclusions where this

is not technically feasible.

To help us meet our Scope 1 + 2 targets and

make the right investment decisions we will be

introducing a shadow carbon price as part of

our investment decisions from 2026 onwards.

To reduce test emissions we will continue to

use sustainable fuels and as greater volumes

become available we will gradually increase

the volume of the fuels used at a rate that

does not impact the validity of the testing.

We are always looking at ways to improve the

efficiency of testing through the deployment

of new technology and methods. We will

continue to do this to reduce the time on test,

thereby reducing fuel burn, while maintaining

the high standards and credibility of the

testing itself. The ancillary electricity

emissions allocated to testing will be

decarbonised in line with the electricity

strategy above.

The incentive for circularity is deeply

embedded in our business model given

thesignificant aftermarket and maintenance

requirements of our products. We are

focused on the remanufacturing and reuse

ofcomponents and pay particular attention

to the responsible use of chemicals, waste

and water. Our commitment to consume

responsibly is built on the principles of the

consumption and waste hierarchies.

2025 progress

We continue to make progress in

decarbonising our global operations.

Ourtotal annual Scope 1 + 2 GHG emissions

(market-based), those associated with our

operations, facilities, testing and business

activities, comprised 264 ktCO

e in 2025,

a34 ktCO

e decrease compared to 2024.

These emissions included 131 ktCO

e from

facilities and operations and 133 ktCO

e from

testing activity. We continued to reduce our

operational emissions by a further 12 ktCO

an 8% improvement compared with 2024.

The overall decrease in total Scope 1 + 2

emissions was driven by a planned decrease

in product development testing, 22 ktCO

OPER AT ION S, FACIL ITY, AND P RODUC T TEST

EMISSIONS(ktCO

1, 2

174

130

175

130

148

103

143

155

206

2319

21 22

25 30

131

133

236

146

TARGET

Operations and facility

Product test

1 External assurance over Scope 1 + 2 data is provided

byDNV. See page 202 for their sustainability

assurancestatement

2 Data has been reported in accordance with our basis of

reporting, available at www.rolls-royce.com/sustainability

3 Baseline year is 2019

To support our electricity decarbonisation,

Rolls-Royce has reached a long-term power

purchase agreement with Stadtwerke Ulm/

Neu-Ulm (SWU) for the annual purchase of

around 20,000 MWh of CO

e-free electrical

energy. This equates to a carbon emissions

reduction of around 7 ktCO

e every year.

We continue to use sustainable aviation fuel

(SAF) blends across our Civil Aerospace and

Defence testing activities to help mitigate

some of these emissions. Throughout 2025

genset testing in Power Systems used 14.9%

hydrotreated vegetable oil (HVO) fuel (2024:

3.4%). The increase was driven by the use of

HVO for the whole year rather than just the

last few months of the year.

In Friedrichshafen, Germany two bench

testsfor the engine Series 2000 and

Series4000 were equipped with power

recuperation technology replacing water

brakes, reducing water and fuel consumption.

Modernisation of further test benches is

planned for 2026.

To allow us to focus on our most

materialGHG emissions wefirststarted

reporting Scope 3, category1(goods and

services) in 2024. OurScope 3, category 1

emissions (the spend-based method) were

estimated as 2.69MtCO

e in 2025. This was

an increase of0.51MtCO

e with respect

toour 2024 emissions, 2.18MtCO

e. We

continue to usealargely spend-based

method for Scope 3, category 1emissions.

The increase was drivenby anincreased

spend, particularly inemissions-

intensivecommodities.

OPERATIONS, FACILITY AND TEST EMISSIONS REDUCTION PLAN TO2030 (ktCO

Reduce by 46%

251

206

298

304

305

264

382

BASELINE

TARGET

222119

24 25 30

BASELINE

TARGET

Decarbonising electricity

Decarbonising heating

Operational efficiency

Test emission reduction

Decarbonising transport

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

SUSTAINABILITY

SCOPE 3, CATEGORY 1: GOODS AND SERVICES (MTCO

2.18

2.69

1 Scope 3, category 1 calculated using the

spend-based method

Reducing our energy demand is integral to

our success in delivering our decarbonisation

goals and reducing our exposure to

energy-related risk. Our normalised energy

consumption in 2025 was 46 MWh/£m. The

total amount of facility energy consumed in

the year was 983,979 MWh. This represents a

reduction of 393,674 MWh (29%) since 2014.

Renewable energy sources provided 41% of

the energy, including 1% generated from our

own onsite clean energy installations.

ENERGY CONSUMPTION (MWH/£M)

23222114 2524

117

BASELINE

TARGET

In support of our continued energy

consumption reduction our German sites:

Augsburg, Dahlewitz, Friedrichshafen,

Oberursel and Ruhstorf achieved

certification for their energy management

systems (ISO 50001).

In 2025, our total normalised solid and

liquidwaste was 2.57 tonnes/£m, a 32%

reduction since 2014. The total amount

ofsolid and liquid waste generated in

operations was 54.7 kilotonnes, compared

to44.7

kilotonnes in 2014. This includes

21.9kilotonnes of hazardous, primarily

chemical, waste.

TOTAL SOLID AND LIQUID WASTE (T/£M)

3.11

2.91

2.57

2.83

3.29

3.69

3.78

BASELINE

TARGET

23222114 2524 25

2 Our 2014 waste data baseline has been restated following

the divestment of our US naval business

The overall increase in the volume of waste

produced has been driven by increases in

production and in liquid wastewater that

would normally be treated onsite. We

continue to pursue opportunities to prevent

or reduce waste.

In 2025, within logistics, our packaging

optimisation programme continued to focus

on opportunities to reduce cost, waste and

e emissions.

Our recycling and recovery rate for

2025was65.7%; this represents a 14.6%

improvement against the restated ³ 2019

baseline. Our Power Systems division

hasarecycling and recovery rate of

approximately 90%. We decreased the

amount of non-hazardous waste sent to

landfill by 86% since 2014, with324 tonnes

sent to landfill in 2025. This wasachieved

through the success of our previouszero

non-hazardous waste to landfill programmes

and subsequent improvements in local waste

treatment options.

In 2025, a number of innovations in

engineering have focused on reducing the

net shape of components to help reduce

waste as well as the carbon footprint of these

components. This included Metal Injection

Molding (MIM) as an alternative to casting

and Metal Binder Jetting (MJB) processing

inCivil Aerospace.

RECYCLING AND RECOVERY RATE (%)

56.4

65.7

51.1

BASELINE

TARGET

2519 25

3 Baseline and target restated to align with current

operation footprint and the sale of naval propulsors

&handling business. Our operational footprint has

changed significantly since 2019, most recently with the

sale of the naval propulsors & handling business in 2024.

This has had a significant impact on our baseline number

and so this and the related target have been recalculated

and restated to align with our current operation footprint.

The target has been restated as the equivalent recycling

and recovery rate (%) improvement as before

2025 marked an excellent milestone in

theGroup’s commitment to consume

moreresponsibly. We achievedall our

targetsset out for 2025 with respect to

energy, waste and recycling.

We met our energy consumption target

in2024 and continued to deliver further

savings in 2025 resulting in an overall

revenue normalised reduction of 61%

(target50%) against a 2014 baseline.

We managed to reduce total solid and liquid

waste production, normalised by revenue,

by32% (target 25%) against a 2014 baseline.

We increased our recycling and recovery

rate to 65.7% (target 56.4%).

We understand that although these are

important milestones and markers for

progress, they are not the endof the

journey.As such, we are currently

undergoing a strategic review of our

responsible consumption plans with the

aimto develop appropriate ambitions for

thecoming years.

Deliver innovative products

andsolutions which accelerate

theenergytransition

Focus

We are committed to working with our

customers to enable them to operate

theirproducts in a way that iscompatible

withnet zero emissions. Beyondmitigating

emissions associated withexisting products

and markets, we continue to develop

technologies that cansupport the acceleration

of the energytransition. Through the provision

oflow-carbon and net zero technologies,

wecan help support national and international

climate policy goals.

Targets

To track progress we have the following targets:

— to demonstrate that all our products are

compatible with net zero operations by

theend of 2050; and

— to support the achievement of industry

netzero Scope 3, category 11 (use of sold

products) GHG by the end of 2050 in line

with a science-based trajectory.

The targets above help us monitor our

exposure to risks identified in our climate risk

scenario analysis (see page 47). They allow

ustoassess our ability to manage changes in

customer demand and changing investment

need by demonstrating that our products are

aligned to the energy transition as well as our

ability to attract the right talent and capability

who want to help support the energy transition.

Plan

To enable our customers to operate their

current products in a low-carbon or net zero

way, we are focusing on improving product

efficiency to burn less fuel and continuing

toprove that our products are compatible with

sustainable fuels. Asaforce for progress we

areworking to accelerate the global energy

transition through the development of a future

product portfolio. The future portfolio will

maintain the current social value it provides

bypowering, connecting and protecting

peopleeverywhere while being consistent with

a net zero energy transition. UltraFan, Battery

Energy Storage Systems (BESS) and nuclear

technology are in-flight technology and

product programmes that will diversify our

portfolio and accelerate the global energy

transition. In addition to these programmes,

weare exploring alternative fuels, including

hydrogen and methanol, toexpand the

capabilities of existing combustion technology.

We continue to invest in novel technologies

and applications, such as microreactors, to

provide even greater social value to the world

while limiting the negative environmental

impacts. All new product decisions will be

subject to strategic fit and investment criteria.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

SUSTAINABILITY

2025 progress

We continue to see a reduction in Scope 3,

category 11 emissions intensity driven by

thesale of more efficient products and ashiftin

the Power Systems portfolio to lower-emission

applications. To deliver the sustainable fuels

pathway (shown below) it iscritical that the

availability of sustainable fuels significantly

increases between now and 2050.

USE OF SOL D PRODUCTS E MI SSIONS

INTENSITYWITHWEIGHT-BASED ADJUSTMENT

(ktCO

e/£M OEREVENUE)

1, 2, 3

8.3

9.1

6.8

7.9

5.8

19 24 2523

10.6

11.1

13.2

Scope 3, category 11 100% fossil fuel pathway

Scope 3, category 11 100% sustainable fuels

pathway

1 Absolute Scope 3, category 11 emissions are available

onpage 205

2 Data has been reported in accordance with our basis

ofreporting, available at www.rolls-royce.com/

sustainability

3 Data has been reset due to the divestment of the lower

power range engine business in2024

A significant step forward in Civil

Aerospacewas the entry into service of

theTrent XWB-84 EP with improved fuel

consumption of more than 1%. For Power

Systems a significant step was the successful

test of the world’s first high-speed marine

engine powered exclusively by methanol on

its test bench inFriedrichshafen, Germany.

Together with our partners in the meOHmare

research project, this is an important

milestone on the road to climate-neutral and

environmentally friendly propulsion solutions

for shipping.

Across Civil Aerospace we continued to look

at both complex and simple innovations and

improvements that help reduce our emissions

and wider environmental impact. In business

aviation a simple idea not to paint the bypass

duct on Pearl 15 engines resulted not only in

a cost saving but also about a 1.9 kg weight

saving. Phase 3 of the Trent XWB-97 testing

programme started to build on the previous

phases of time on wing improvements; and

wepublished a paper on better modelling of

aero engine soot formations that will improve

the way we predict and reduce overall engine

environmental impact.

Power Systems has developed and published

third-party verified Environmental Product

Declarations (EPD) for mtu emergency power

generator sets. These reports enable Power

Systems to demonstrate the environmental

footprint of mtu emergency power systems

ofthe mtu 16V4000 DS2500 type and of the

10V1600. The EPDs take into account the

entire life cycle of the product, from raw

material extraction and manufacturing to

useand end-of-life recycling.

As part of our portfolio transition, Rolls-Royce

has now delivered mtu battery storage

solutions for over 200 projects worldwide.

This year, Lithuanian energy supplier Ignitis

Group selected Rolls-Royce to supply

large-scale battery storage systems. The

order comprises systems with a total storage

capacity of 582 megawatt hours and a total

output of 291 megawatts. This is the largest

battery order ever received by Rolls-Royce

Power Systems.

Rolls-Royce and Duisburger Hafen AG

haveopened a CO

-neutral and self-

sufficient energy system for the new

Duisburg Gateway Terminal, located in the

Rhine-Ruhr industrial region of Germany.

The core components aretwo mtu combined

heat and power units designed for operation

with 100% hydrogen, which are being used

here for thefirst timeworldwide.

The new 67-metre German customs vessel,

Rügen, was officially put into operation. It

ispowered by four 16-cylinder mtu Series

4000 gas engines. Reliability and low

emissions were key factors in the choice

ofthe mtu engines.

We are enabling the energy transition

through our customers by providing

emergency power to Norfolk Offshore

WindFarm on the east coast of the UK that

will generate electricity to satisfy demand

from more than four million households.

Eureka Pumps AS has placed anorder for

four engines from the mtu Series 4000

toprovideemergency power for two

converterplatforms.

Rolls-Royce has been awarded a contract

byPolat Enerji, one of Türkiye’s leading

investors in the renewable energy sector, to

supply a large-scale battery energy storage

system with a capacity of 132 MWh. The mtu

QG EnergyPack will be integrated into the

Göktepe Wind Power Plant near Yalova in

northwestern Türkiye and will ensure that

electricity from renewable sources can be

fed into the grid without interruption.

Rolls-Royce SMR has been selected

byGreatBritish Energy - Nuclear (GBE-N)

tobuildthree SMR units in the UK. The

firstofthese was announced to be Wylfa

onYnys Môn (Anglesey), North Wales.

Inaddition, Rolls-Royce SMR has been

selected by Vattenfall as one of only

twocompanies to reach the final stage in

theprocess to identify Sweden’s nuclear

technology partner.

Partner with customers, suppliers,

industry and policymakers

Focus

Our ability to deliver our strategy and to

support our customers and government

partners to meet their own climate goals

ishighly dependent upon a supportive

external environment.

— availability of low-carbon energy

infrastructure

— sustainable fuel availability and

infrastructure

— availability of appropriate funding; and

— timely government decisions and

long-term commitments

Plan

We will actively engage policy makers,

regulators and others to advocate for the

necessary policy and economic support we

have identified. We are a member of trade

associations and industry bodies that

represent our sector and group interests and

we inform their work to help shape the most

attractive environment in which to operate

our business.

2025 progress

In 2025, we held over 200 trade association

and corporate memberships. Our memberships

are concentrated in the countries in which

we have a significant footprint and reflect the

range of business interests we are pursuing.

We will continue to review these memberships

to ensure we are maximising for best value and

strategic fit.

We supported activities across the aviation

sector, including updates to aviation

potential roadmaps to net zero through

ASD(Destination 2050) and ATAG (Waypoint

2050). Through membership of UK Jet Zero

Taskforce expert groups we co-authored a

number of reports. Rolls-Royce contributed

to shaping the future funding landscape in

Clean Aviation and as part of Project ARIS

and continued to share our expertise

through ICAO and CAEP forums.

Rolls-Royce has released a position paper

with Microsoft highlighting the potential

ofHVO as a sustainable fuel for back-up

power in data centres in Singapore. The

paper outlines the opportunities and

regulatory conditions necessary to

establishHVO and other low-carbon fuels

asalternatives to fossil diesel in critical

digitalinfrastructure.

In addition to supporting the shaping of

policy and sharing expertise, we continue

toengage in energy transition aligned

partnerships. This includes the launch

ofproject QRITOS: with funding from the

ATI,and in partnership with British Airways,

Imperial College London and Heathrow.

QRITOS will examine smarter ways of using

SAF with an aim to better understand how

best to target SAF towards the very small

proportion of flights that drive the majority

ofclimate impact. Rolls-Royce has been

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

SUSTAINABILITY

selected by the European Union’s

CleanAviation programme to lead the

UltraNoveland Innovative Fully Integrated

Engine Demonstrations (UNIFIED), one of

12ground-breaking new projects aiming

todecarbonise aviation. This project

containskey industrial, academic and

research partners across France, Germany,

the Netherlands, Norway, Spain and the

UK.Subject to successful completion

ofgrantpreparation, the project will enable

groundtesting of an UltraFan technology

demonstrator at a short to medium-range

thrust class for future narrowbody aircraft

and also enable the preparation of key

activities towards future flight test of the

UltraFan architecture.

Rolls-Royce, together with German energy

supplier Avacon, is driving forward the

integration of battery storage into the power

grid as part of a research project. Based on

afield test, the aim is to show how energy

communities, photovoltaic systems and mtu

battery storage can be intelligently linked to

contribute to an efficient energy supply and

to stabilise the energy system.

Rolls-Royce and the Singapore Institute of

Technology entered into a collaboration to

develop innovative technologies for hybrid

and autonomous ships and harbour crafts.

This will support future reductions of CO

emissions and support our customers

withdigital systems.

Power Systems successfully tested the first

high-speed single-fuel methanol engine

with2,000 kw, proving that CO

-neutral

marine propulsion with combustion engines

is possible. The engine is being developed

aspart of the meOHmare research project

funded by the German Federal Ministry

forEconomic Affairs and Energy. At Power

Systems, dual-fuel solutions are also being

tested as a useful bridging technology.

Rolls-Royce, Landmark and ASCO have

teamed up to commission a 10-megawatt

gasengine power plant with a carbon

capture system in the UK, ensuring stable

energy supply while reducing CO

emissions

through circularity, enabling captured

carbon use in food products, synthetic

fuelsand SAF.

Rolls-Royce and INERATEC, a leading

manufacturer of Power-to-X plants and

climate-neutral e-fuels, have formed a

strategic partnership to decarbonise back-up

power for data centres. The goal is to replace

fossil diesel in emergency power systems

with synthetic fuels produced from

renewable hydrogen and CO

Governance

Sustainability and climate are embedded

withinour Group governance framework,

riskmanagement system and operating model.

We monitor the reporting landscape that is

andwill be applicable to Rolls-Royce over

thecoming years and have identified the

UKdeployment ofInternational Sustainability

Standards Board(ISSB) Sustainability Reporting

Standards(SRS) S1 and S2 as applicable

toRolls-Royce andalsothe EU Corporate

Sustainability ReportingDirective (CSRD).

Wehave a programme ofwork to prepare

Rolls-Royce for these standards that we expect

to apply to our full year 2027 reporting.

In 2025, we enhanced our operational

programme governance and escalation

criteria for the delivery of our Scope 1 + 2

decarbonisation programme.

Board

The Board has oversight of sustainability,

including climate-related risks and

opportunities impacting the Group.

AllBoardCommittees include an aspect

ofsustainability within their remit. Some

specific elements of those oversight

responsibilities are delegated to Committees

of the Board. After each Committee meeting,

the Committee chair reports back to the

Board on topics discussed.

The Safety, Energy Transition & Tech (SETT)

Committee oversees the Group’s sustainability

strategy, priorities and progress and has

delegated responsibility toreview the

principal risk relating to energy transition.

Itreceives reports from the sustainability

team and is updated on the discussions held

at the executive-level energy transition &

technology committee.

In 2025, the SETTCommittee oversaw

thepreparations for incoming regulation

including the EU CSRD and the UK

deployment of ISSB standards as well as the

first Group Double Materiality Assessment

(DMA). The Committee reviewed progress

against the Scope 1 + 2 delivery plans and the

energy transition principal risk.

The Audit Committee is responsible for

reviewing and approving the content of our

TCFD recommendations and noted progress

as preparations were being made for the

disclosures in this report. The Committee

also ensures that, where material, the impact

of climate change is reflected in the financial

statements and disclosed appropriately.

In 2025, the Audit Committee reviewed TCFD

disclosures, the principal risk relating to

energy transition and preparations for CSRD.

The Remuneration Committee determines

our remuneration policy, and in 2025

reviewed progress against the 2025 LTIP

linked to delivering progress to the 2030

reduction target for Scope 1 + 2 emissions.

The Nominations, Culture & Governance

Committee reviews the Board’s skills and

oversees membership of each of the Board

Committees and terms of reference, ensuring

that the Board’s governance and oversight of

ESG matters, including climate, is appropriate.

Management

The Executive Team is responsible for the

delivery of our climate strategy, including

associated targets and transition plan,

andfor ensuring the assessment of and

appropriate response to climate-related risks

and opportunities throughout our business

model and activities.

The energy transition & tech committee,

which meets four times a year, is asub-

committee of the Executive Team and

isresponsible for formulating and overseeing

the Group’s response to climate change

andthe energy transition and its technology

portfolio. The committee also reviews

investment decisions and projects where

they relate to the energy transition or

havean impact on mitigating Scope 1 + 2 or

Scope 3 emissions. The committee is chaired

by the Chief Executive and all members of

the Executive Team are invited to participate.

Sustainability governance structure

Sustainability steering committee

Remuneration

Committee

Safety, Energy Transition

& Tech Committee

Energy transition & tech committee People committee Executive audit committee

Sustainability strategy and

implementation review

Sustainability data governance

andreporting review

Sustainability risk review

Board

oversight

Executive Team

governance

Operational and

programme

governance

Audit Committee

Nominations, Culture &

Governance Committee

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

SUSTAINABILITY

Thecommittee regularly reports to the

SETTCommittee. The energy transition &

tech committee receives regular updates

from oursustainability steering committee,

which specifically oversees progress against

our sustainability programme, including

climate targets.

In 2025, the energy transition & tech

committee reviewed investment decisions

and projects where they relate to the energy

transition or have an impact on mitigating

Scope 1 + 2 or Scope 3 emissions. The

committee reviewed and agreed the five-year

plan inputs required to deliver against the

2030 Scope 1 + 2 target. The outputs from

theenergy transition risk deep dive were also

reviewed by the committee.

The sustainability steering committee

comprises core functional and capability

representatives from the Executive Team,

including the Chief Transformation Officer,

General Counsel, Chief Financial Officer,

Chief People Officer and Group Director

ofEngineering, Technology and Safety.

Thecommittee meets quarterly as a

minimum, or more regularly to meet business

needs. It provides regular steering and

oversight of the sustainability strategy and

progress made against our sustainability

strategy implementation and goals. In 2025

the steering committee reviewed all of the

content that was submitted to the Board

andalso approved the implementation of

ashadow carbon price for 2026 onwards.

Assessing strategic resilience

We assess our resilience over three time

horizons: short term (less than five years),

medium term (five to ten years) and longer

term (ten years plus). In 2025, we focused on

developing a quantitative assessment for all

three time horizons includingthe long term,

which had previouslybeen qualitative.

We use climate scenarios to test our strategic

planning. We test against our business

planning baseline to assess potential risks

toour financial performance and to identify

ways to mitigate our exposure to these risks.

The output of these assessments helps inform

our wider business planning and decision-

making, including our technology portfolio

and investment decisions, as well as our

related engagement activities.

Three potential futures have been

considered,(see page 41), based on

independent external climate scenarios that

present plausible levels of global temperature

rise and associated policy responses. These

scenarios are not predictions or forecasts

butfuture possibilities which enable us to

explore the physical and transition risks and

opportunities associated with climate change

that may manifest over short, medium and

longer-term horizons.

The primary question our assessment

considers is to what extent do the climate

scenarios manifest as risks and opportunities

to the business? This includes assessment of

potential impacts on market dynamics and

demand; cost exposure, for instance carbon

pricing; and physical impact of climate

change on operations, including

site-based impacts.

From this primary question, the questions

assessed under each scenario include:

— how does the scenario impact the life

orrisk exposure of assets?

— how does the scenario impact future

revenue projections?

— how does the scenario impact future

profitability projections?

— what additional costs or revenues may

occur under each scenario?

The outputs of this exercise inform our

climate-related risk management process.

In 2025, we have followed a three-step

process:

1. identify, review and confirm key and

emerging risks and opportunities;

2. confirm key scenarios and assumptions;

and

3. model the potential impact of each risk.

Climate-related risks and opportunities

The identification, assessment and

management of climate-related risks and

opportunities is undertaken as part of our

enterprise risk management framework in

linewith the TCFD recommendations (see page

40). One of the ways climate-related risks and

opportunities are identified is through the

emerging risk process (see page 50). The

Group regulatory horizon scanning process

also helps us prepare to comply with

incoming changes in environmental, social

and corporate governance practices and

disclosure requirements.

Once a risk is identified, the framework

includes a requirement for risk owners to

decide on and document their response

toanidentified risk. Although there are some

examples where the risk can be transferred,

in most cases risks are accepted and require

mitigation, such as effective controls and/or

a plan of action. These are monitored through

our risk management effectiveness reviews

(see page 48) with a focus on control

effectiveness. The determination of risk

materiality is based on gross and current

(i.e.net) risk assessments, using Group-wide

scoring criteria for impact and likelihood.

These criteria are used for divisional and

functional key risks as well as principal risks,

with the expectation that the basis of the

estimate is clear, consistent and with key

assumptions documented.

Aligning with our overarching enterprise

riskframework and using common

assessment criteria for all risk categories

ensures that risks can be compared across

the Group, supporting prioritisation and

providing a mechanism for monitoring how

effectively we are managing these risks.

We have identified seven key climate-related

risks and opportunities that are relevant

toour business. These are consistent with

our2024 assessments. Of these, four are

transition risks and opportunities resulting

from the shift towards a low-carbon future

and three are physical risks relating to the

physical impact of climatic events.

Energy transition is our principal risk that

specifically refers to the potential impacts

onfuture revenues as a result of a potential

failure to transition to an inherently lower

carbon product portfolio (seepage 54).

Recognising climate change includes both

transition and physical risks; the physical

aspect of the risk is considered as part of

thebusiness interruption principal risk.

Thissplit reduces duplication and places risk

management in the appropriate responsible

business areas. We have explored a number

of climate-related opportunities. These

include the high demand for sustainable

fuel-compatible products across our sectors

and low-carbonenergy systems for local and

back-upapplications.

Climate scenarios assessment

1, 2

In 2025, we used the same updated climate

base case and three climate scenarios as in

2024. To bookend the base case we assess

ahigh andlow-temperature scenario and

weuse anadditional scenario to explore a

delayed disruptive transition. We extended

the range of our quantitative assessment

from 10 years to 25 years to cover the full

period to 2050 to align with our net zero

commitments. We updated our assessment to

align with the latest Group long-term plans.

The scenarios we use are based on

independent external climate scenarios

andare consistent with representative

concentration pathways (RCPs). We

useadditional supplementary data from

third-party sources, such as carbon pricing,

to support our modelling and financial

impact assessments.

Modelling the potential impact

Cross-functional teams within each business,

including representatives from strategy,

finance and risk, collectively assess the

potential impact of each key risk on the

business under each of these three

scenarios. This includes calculating a

revenue, cost and profit impact for each

scenario across the timescales defined. As

part of our 2025 activity, we have quantified

short (five years to 2030), medium-term (ten

years to 2035), and long-term (25 years to

2050) risks consistent with our five year-plan

and long term strategic planning. At this

timewe have not identified any impact on

demand, cost or competitive position that we

would not be able to detect and respond to.

1 Under each scenario our modelling considers both

physical and transition-related elements

2 Based on the Oxford Economics, Global Climate Service

and Databank and other external sources, including the

‘Working Together for Better Climate Action: Carbon

Pricing, Policy Spillovers, and Global Climate Goals’

report issued by the World Trade Organization,

International Monetary Fund, the Organisation for

Economic Co-operation and Development, United

Nations Trade and Development, and the World Bank

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

SUSTAINABILITY

CLIMATE RISK SCENARIO ANALYSIS

The following table summarises the potential net impact assessments of each of our identified climate-related risks under the three scenarios

(seeour basis of reporting available at www.rolls-royce.com). These are presented as potential ranges that depict an estimated financial impact

and timeframe. We have concluded that noneof these risks have a material financial impact in the short term. For more information about how

these have been considered in the financial statements, see note 1 of the Financial statements on pages 121 to 123.

PERCEN TAGE IMPAC T ON GROUP OP ER ATING PROFI T BY SCEN ARIO

(CUMULATIVE 2025 TO 2050)

TIMING OF

HIG HE ST

EXPOSURE

NET ZERO <1.5 ° C HIGH TEMP 4.6 °C DISRUPTIVE1.7 °C

CA D PS CA D PS CA D PS

Changing customer demand

(0.1) 0.6 (4.7) (1.7) (0.9) (3.6) (0.6) 0.1 (2.3)

10yrs+

Change in costs due to carbon pricing

(0.5) 1.5 (0.2) (0.1) 0.0 (0.1) (0.2) 1.2 (0.2)

5–10yrs

Change in costs due to commodity pricing

0.3 0.0 0.1 (0.1) 0.1 (1.4) 0.1 0.0 (1.5)

10yrs+

Changing investment requirement

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

10yrs+

Facility disruption

(0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1)

10yrs+

Supply chain disruption

(0.2) (0.1) (0.1) (0.2) (0.1) (0.1) (0.2) (0.1) (0.1)

10yrs+

Impact on product performance

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

10yrs+

Divisional totals

(0.6) 1.9 (5.0) (2.2) (1.0) (5.3) (1.0) 1.1 (4.2)

Key: Opportunity Risk CA = Civil Aerospace D = Defence PS = Power Systems

Transition risks and opportunities

Changing

customer

demand

In the long term, we see a deterioration in operating profit across all scenarios for our current portfolio in the markets

we serve. This is driven primarily by the impact of a slowing GDP growth rate in the medium-term compared to the

baseline and customer responses in some scenarios favouring a product mix with a lower overall profit margin. The

high-temperature scenario shows the greatest impact as GDP growth nears zero in the long-term. We expect demand

in Civil Aerospace to remain reasonably strong, driven by clear demographic trends and enabled by a continued

focuson efficiency and the introduction of sustainable fuels. We would expect climate stress in the high-temperature

scenario to create opportunities in Defence, both in security and humanitarian response; however this is tempered by

reduced customer demand for microreactors.

Change in

costs due to

carbon pricing

Guided by our Scope 1 + 2 targets based on science, we are taking steps to reduce our exposure to carbon pricing in

the long-term by decarbonising our own operations and encouraging our suppliers to do the same.

Change in

costs due

to commodity

pricing

Our markets can sustain the commodity price changes assumed in each scenario. There is long-term risk in the

high-temperature scenario, particularly in Power Systems where higher costs for key commodities such as industrial

metals slows the rate of customer pass through. Future contracts with both suppliers and customers need to minimise

and mitigate our potential exposure.

Changing

investment

requirement

Our investment strategies and plans are well aligned to the net zero scenario, and will continue to be robust across the

other scenarios. In both Defence and Civil Aerospace markets, new products are expected in the mid 2030s and early

2040s. High-carbon pricing could increase the level of technology required but would also delay new programme

launch, allowing resources to be reallocated and presenting an upside opportunity for current product lines. In Power

Systems the net zero and delayed transition scenarios would require an acceleration of investment in new technologies,

but the overall investment would remain consistent. Longer-term, we see demand continuing for fuel efficiencies,

compatibility with sustainable fuels and low and zero-emission solutions.

Physical risks

Facility

disruption

Quantification of potential impact is based on business continuity analysis. Future site strategy, investment in existing

facilities and development of new footprint options, need to continue considering climate risk. Longer term the

greatest risk is in the high-temperature scenario where climate adaptation could be required in some locations.

Ourbusiness resilience activity will consider physical climate risk as a driver.

Supply chain

disruption

Quantification of potential impact is based on business continuity analysis. Future supply chain decisions, including

theneed for dual sourcing, need to continue considering climate risk. Longer term, the greatest risk is in the high-

temperature scenario where climate adaptation could be required in some locations. Our supply chain resilience

activity will consider physical climate risk as a driver both directly to our suppliers’ facilities and key logistics routes.

Impact on

product

performance

Out to 2050 the risk is relatively stable in the net zero and disruptive scenarios. The greatest increase is in the high

temperature scenario with Civil Aerospace seeing a low percentage increase in shop visits and costs and Power

Systems seeing customer de-ratings and/or additional cooling needs across the portfolio.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

SUSTAINABILITY

Our approach to risk management and

theimprovements we have made during the

year are outlined below. We explain how we

identify principal and emerging risks, how

these are mitigated in line with our risk

appetite, and how they have changed

in2025.

Our approach relies on an organisation

andculture where individuals at all

levels(starting with the Executive Team)

demonstrate the principles of good risk

management and the capabilities to deliver

on these.

Our risk management and internal

control framework

We have an established framework, shown

inthe diagram below, to support the delivery

of effective risk management. It enables us to

manage risks in an integrated, consistent way

across the Group and is refreshed annually.

The framework aligns with international

standards for managing risk and sets out

requirements across the Group for all types

of risk, including climate, finance, legal,

operations, technical and programmes.

The Board is ultimately responsible for our

approach to risk management and internal

controls, from endorsing the framework each

year, to assessing:

— how effective the framework is at

managing the principal risks;

— the input from assurance providers listed

in the principal risk tables from page 51, as

well as the internal audit team. Risk-related

findings are taken into account when

considering how well risksare being

managed; and

— the Group’s internal financial controls

(bythe Audit Committee) with financial

reporting controls being subject toperiodic

review by the internal controlsteam.

The Board confirms that it has monitored

theeffectiveness of risk management and

internal controls throughout the year, in

accordance with the 2024 UK Corporate

Governance Code excluding provision 29

which is effective for Rolls-Royce from

1January 2026.

The risk management framework

Risk appetite

Risk oversight

Standard

Policy

Risk governance Risk process

Establish context and objectives

Design and deploy controls

Mitigating actions

Organisation and culture

Risk toolkit

Guidance

Identify

uantify

Evaluate

Training

Templates

Tools &

technology

Manage

incidents

Assure control

effectiveness

Monitor, review, report, escalate

Continuous improvement

hat and why How

Assess risk

Manage risk

Support

Risk management is increasingly an integral part of our ways of working, enhancing

our ability to successfully execute our strategy in a predictable, repeatable manner.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

Principal risks

How we use the framework to manage risk

Risk governance

Risk governance sets out the roles and responsibilities, as well as the what and the why, of risk management through the policy and standard.

The Board’s responsibilities relating to principal risks and risk management are primarily discharged by ensuring that we have an effective risk

management framework in place. In addition, the Board evaluates how well our principal risks are being managed as part of their review of:

— individual principal risk reports from the executive risk owner throughout the year at the Board or appropriate Board Committee (with a

focus on current risk status, controls in place to manage the risk, and mitigating actions). See from page 66 to 72 for a detailed list of reviews

that tookplace this year; and

— a portfolio principal risk report, shared with the Board by the Head of Enterprise Risk Management, summarising our overall risk position at

the end of the year. This report highlights changes in risk status and includes an effectiveness review of the risk management framework as

well as an assessment of risk maturity.

Risk appetite for principal risks is also included as part of the Board’s annual risk framework review. There are three possible threat risk appetite

levels – low, moderate and high. These statements are used as guidance to help risk owners determine an acceptable current risk position as

well as set a target position if they consider the risk to be out of appetite.

Below Board level, the Executive Team reviews portfolio and individual principal risk reports throughout the year, with divisional level risk

information also being considered at the executive audit committee and as an input into the five-year planning process. These reports

containthe risk status including whether this is within our risk appetite, control effectiveness and details of improvement actions to mitigate

anycontrol gaps.

Risk process

Risk owners are accountable for the execution of the risk process, to ensure that our threats and opportunities are identified, assessed,

managed and assured. It applies to all levels and types of risks.

Identify

Risks can be identified by anyone across the Group. The risk process focuses on scanning the internal and external

environment to monitor emerging trends (such as those identified as part of the emerging risks described on page 50),

toidentify and document what could hinder or accelerate the achievement of our strategic, operational and compliance

objectives, or impact the sustainability of our business model (described on pages 14 and 15).

Quantify and

evaluate

Risk owners quantify the likelihood of a risk materialising and the potential impact if it does, considering current effective

controls, and then deciding on a course of action to manage the risk.

Control and

assure

Most risks are managed through the implementation of controls designed to prevent, detect or react to either the causes

orimpacts of a risk, which are then anchored in our processes. Risk owners must satisfy themselves that the controls are

effective and that their opinion rests on assurance findings.

Act

Where a controls gap has been identified, or a risk is otherwise not currently within risk appetite, risk owners are responsible

for implementing remediating action plans to reduce the current risk level. Any costs of remediation plans should be

proportionate to the benefit provided.

Monitor,

review and

report

Risk owners report their assessment of current and target risk scores to local leadership as well as other review forums

(including the Board and its Committees and the Executive Team) as needed depending on the level of the risk, for support,

challenge, escalation and oversight.

Risk toolkit

The above are underpinned by a toolkit of guidance, templates, tools and training and an independent enterprise risk management team

supports the divisions and functions in their effective management of risk. Continuous improvement in 2025 has focused on streamlining the

supporting toolkit across the Group and moving everyone to one enterprise-wide risk tool.

For some principal risks, such as cyber-security, safety and compliance, there is mandatory training in place, linked to performance

management and remuneration, which all our people are required to complete and comply with. See page 33 for further details.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

PRINCIPAL RISKS

Emerging risks

We have processes in place to identify

emerging risks, which we define as

uncertainties that could become a principal risk

of the future. As part of this, we analyse external

data as well as horizon scan for changes in

the external environment relating to:

— resilience;

— regulatory and compliance; and

— disruptive new technologies.

Outputs are assessed by subject matter

experts and, where we identify any potential

new impacts on us, we take one of the

following actions:

— record a new risk;

— amend an existing risk and manage this

inaccordance with our framework as

described on page 48; or

— add the emerging risks to our watch list

forinvestigation and monitoring.

The Board considers a summary of emerging

risks and responses annually. This year it

concluded that many of the external areas of

focus (geopolitical tensions, extreme weather

events and supply chain disruption) are

already captured as causes in our existing

principal risks.

The remainder of our emerging risk watch list

is consistent with last year.

Of the three newly identified emerging

riskswe reported last year, one remains

anemerging risk (demands on fuel stocks)

and two are now being actively managed:

alternative fuel sources as an input into the

technology principal risk, and the impact of

societal polarisation as part of our business-

as-usual activities.

In 2025, timeframes for several emerging

risks shortened while others identified

through the year are now being actively

managed and are no longer considered to be

emerging risks, such as potential shortages

of raw materials (now part of business

interruption risk).

Principal risks

Each principal risk is owned by one or

moremembers of the Executive Team and

issubject to a review at the appropriate

executive committee at least once each

year,ahead of a review by the Board or

relevant Board Committee. Risks are

managed in relation to achieving our target

risk appetite or better. The actions needed to

achieve or maintain these target positions are

also monitored.

Changes to the principal risks profile

in2025

Throughout the year, we continued to

monitor our principal risks portfolio to

ensure that it remains current and dynamic.

The overall risk level within our portfolio has

remained stable in 2025, with an increase in

probability for both political and business

Interruption because of the increasing

volatility in the external environment.

However, we continue to develop controls

and mitigation programmes to keep pace.

Details of these changes can be found in the

tables starting on the following page, which

outline the current principal risks together

with how we manage and assure them

inaddition to internal audit and the oversight

provided by the Board and its Committees.

Board confirmation

The Board confirms that it has assessed

andmonitored the Group’s principal risks

throughout the year, in accordance with

the2024 UK Corporate Governance Code

excluding provision 29 which is effective for

Rolls-Royce from 1 January 2026.

PROVISION 29 OF THE 2024 UK CORPORATE GOVERNANCE CODE

Provision 29 of the 2024 Code, which

applies to Rolls-Royce for the financial year

beginning on1January 2026, requires an

explicit declaration by the Board as to the

effectiveness of material controls as at

thebalance sheet date.

While our risk management framework

already includes the requirement to deploy

and assure controls to manage risk, in 2025

we enhanced our framework by:

— defining the criteria for identifying

material controls, covering financial,

operational, reporting and

compliancerisks; and

— identifying our material controls and

ensuring that they are documented to

aspecified standard.

The material controls identified to date

primarily relate to our principal risks

described in the tables starting on page 51,

with additional material controls over

financial and non-financial reporting.

As part of this work and in line with

guidance relating to the 2024 Code, we

continue to challenge ourselves on both

our control materiality assessment and

thefitness for purpose of our assurance

processes. To prepare for the declaration

in the Annual Report 2026, we have:

— set out our approach to assurance

toconfirm the effectiveness of

materialcontrols;

— mapped the assurance process

(covering first, second and third line

accountabilities) which is already, or

willneed to be, in place for the Board

tohave confidence in effectiveness

conclusions and to support the

declaration; and

— identified any gaps arising or

enhancements needed to meet

therequirements of the Code.

We will continue to monitor progress

onadditional improvement actions, such

asthe development of new controls or

strengthening our assurance coverage

foraspecific risk throughout 2026 as

partof our existing executive, Board and/or

Board Committee risk agenda items.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

PRINCIPAL RISKS

Change in risk level: Increased Static Decreased

Safety

PRINCIPAL RISK DESCRIPTION CONTROLS

People and process: Failure to create a place to work

which minimises the risk of harm to our people, those

who work with us, and the environment, would adversely

affect our reputation and long-term sustainability.

Product: Failure to meet the expectations of our

customers to provide safe products which also meet

therelevant regulations.

People and process:

— Our HSE management and governance framework includes controls designed

to reduce our safety risks as far as is reasonably practicable and to meet or

exceed relevant Group, legal, regulatory and industry requirements

— We have nuclear site licensing

Product:

— Our product safety management system includes controls designed to

reduceour safety risks as far as is reasonably practicable and to meet or exceed

relevant Group, legal, regulatory and industry requirements. As part of this we:

• verify and approve product design;

• test adherence to quality standards during manufacturing;

• validate conformance to specification for our own products and those of

oursuppliers;

• mandate safety awareness training; and

• use engine health monitoring to provide early warning of product issues.

Our controls are underpinned by a strong safety culture, as detailed on page 35.

ASSURANCE ACTIVITIES AND PROVIDERS OVERSIGHT FORUM(S) BUSINESS MODEL

People and process

— Safety case interventions

— HSE audit team

Product

— Product safety assurance board

— Product safety assurance team

— Technical product lifecycle audits

— Safety, Energy Transition & Tech

Committee

— Executive Team

— Our role in society

— Our business model drivers

— Our uniqueness

WHAT HAS CHANGED IN 2025?

The level of safety risk has decreased during 2025, due to the strengthening of controls, with safety a focus for all colleagues, and

wecontinue to prioritise action plans to improve people, process and product safety. People safety metrics, including the reported

improvement in the safety index, along with further detail on the actions being taken to reduce these risks, can be found on page 35.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

PRINCIPAL RISKS

PRINCIPAL RISKS – CONTINUED

Change in risk level: Increased Static Decreased

Compliance

PRINCIPAL RISK DESCRIPTION CONTROLS

Failure to comply with legislation and/or other

regulatory requirements in the heavily regulated

environment in which we operate (e.g. export

controls;data privacy; use of controlled chemicals and

substances; anti-bribery and corruption; human rights;

and tax and customs legislation). This could affect our

ability to conduct business in certain jurisdictions and

would potentially expose us to: reputational damage;

financial penalties; debarment from government

contracts for a period of time; and/or suspension of

export privileges (including export credit financing),

each of which could have a material adverse effect.

— Compliance risk framework which comprises:

• a comprehensive suite of mandatory policies and processes and controls;

• third-party due diligence;

• investigations into potential regulatory matters;

• digital screening and IT compliance tools;

• data classification to meet internal and external requirements and

standards;and

• export control framework.

— Speak up line and investigation of speak up cases

ASSURANCE ACTIVITIES AND PROVIDERS OVERSIGHT FORUM(S) BUSINESS MODEL

— Compliance teams

— Financial controls team

— Audit Committee

— Board

— Nominations, Culture & Governance

Committee

— Executive audit committee

— Disclosure Committee

— Our business model drivers

WHAT HAS CHANGED IN 2025?

Our compliance risk has remained stable in 2025 due to the ongoing effectiveness of our controls to manage the risks as well as our agility

inresponding to a changing regulatory landscape. Mitigating actions focused on the overarching compliance framework as well as specific

key risk areas including, but not limited to, new export control requirements, failure to prevent fraud, human rights and modern slavery,

competition, money laundering and data privacy. Read more about ethics and compliance on page 37, which covers supply chain due

diligence, anti-bribery and corruption, and human rights and anti-slavery in more detail.

Strategy

PRINCIPAL RISK DESCRIPTION CONTROLS

Failure to develop an optimal strategy and continuously

evolve it, investing in key areas for performance

improvement and growth (taking into account risk

– reward), making difficult decisions for competitive

advantage and the right portfolio and partnership

choices, could result in us underperforming against

ourcompetitors and significantly reduce our ability

tobuild a high-performing, competitive, resilient and

growing business.

— Long-term planning including portfolio reviews

— Strategic performance reviews

— Integrated performance management

To support these controls, we benchmark our capabilities and performance

against our competitors, the market and other external metrics as well as horizon

scan for competitive threats and opportunities, including patent searches.

ASSURANCE ACTIVITIES AND PROVIDERS OVERSIGHT FORUM(S) BUSINESS MODEL

— Challenge from external advisers — Board

— Executive Team

— Investment committee

— Our role in society

— Our business model drivers

— Our uniqueness

WHAT HAS CHANGED IN 2025?

Overall, this risk remained stable in 2025. We continued to iterate detailed strategies, including for other principal risks, such as energy

transition and technology. Robust controls operate over our decision-making processes and integrated performance management also

drives strategic priorities (such as through the five-year planning process).

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

PRINCIPAL RISKS

PRINCIPAL RISKS – CONTINUED

Change in risk level: Increased Static Decreased

Execution

PRINCIPAL RISK DESCRIPTION CONTROLS

Failure to deliver as One Rolls-Royce on short to

medium-term financial plans, including efficient and

effective delivery of quality products, services and

programmes, and/or falling significantly short of

customer expectations.

— Strategic performance reviews

— Integrated performance management, including forecasting, budgeting,

financial planning, and monitoring performance against plans

— Investment committee

ASSURANCE ACTIVITIES AND PROVIDERS OVERSIGHT FORUM(S) BUSINESS MODEL

— Business reviews

— Programme introduction and lifecycle

management and the project assurance

review process

— Board

— Executive Team

— Investment committee

— Our role in society

— Our business model drivers

WHAT HAS CHANGED IN 2025?

Overall, this risk remained stable in 2025. The potential impact of this risk materialising is high with a complex and competitive operating

environment. However, we have focused on embedding strong performance management, including the effectiveness of our controls,

tomanage this risk, as well as robust Executive Team oversight. The outcome is reflected in our financial results (see pages 19 to 24),

aswellas enabling ongoing transformation and putting in place the foundations and sustainable change required to take advantage of

future opportunities.

Business interruption

PRINCIPAL RISK DESCRIPTION CONTROLS

Failure to prevent a major disruption of our operations

and ability to deliver our products, services and

programmes could have an adverse impact on our

people, internal facilities and/or external supply chain,

which could result in failure to meet agreed customer

commitments and damage our prospects of winning

future orders.

Disruption could be caused by a range of events,

forexample extreme weather or natural hazards

(suchasearthquakes or floods) which could increase

inseverity or frequency given the impact of climate

change; political events; financial insolvency of a critical

supplier; scarcity of materials; loss of data; fire; pandemic

or other infectious disease.

— Clarity of which products, services and/or customers to prioritise following

adisruption

— Strategic decision-making on product and suppliers, including:

• supplier due diligence;

• dual sourcing of critical suppliers;

• identification of alternate suppliers;

• investment in capacity, equipment and facilities and in researching alternative

materials; and

• holding surplus stock to offset future shortages.

— Investment committee

— Business continuity policy, including crisis management exercises

— Relevant and appropriate insurance in place

ASSURANCE ACTIVITIES AND PROVIDERS OVERSIGHT FORUM(S) BUSINESS MODEL

— Supplier monitoring tools

— Security and resilience team

— External property risk assessments

— Audit Committee

— Executive audit committee

— Our business model drivers

— Our uniqueness

WHAT HAS CHANGED IN 2025?

The probability of this risk materialising has increased in 2025 as the external environment remains uncertain, increasing the likelihood

ofexternal events which could disrupt our ability to deliver the business model. However, we continue to develop controls and mitigation

programmes to keep pace and manage any potential impacts.

Read more about how we are managing uncertainty in our supply chain on page 13.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

PRINCIPAL RISKS

PRINCIPAL RISKS – CONTINUED

Change in risk level: Increased Static Decreased

Energy transition

PRINCIPAL RISK DESCRIPTION CONTROLS

Failure to reach net zero by 2050, and failure to leverage

technology to transition from 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; and/or force government

intervention to limit emissions.

— Sustainability governance framework which encompasses:

• inclusion of sustainability criteria in our Investment committee decision-

making process to reduce the carbon impact of existing products; and

replace our existing products with zero-carbon technologies;

• energy transition & technology committee;

• sustainability steering committee which considers climate scenario modelling,

physical risk impact assessments and emerging risk identification;

• global supplier code of conduct; and

• commercial agreements.

ASSURANCE ACTIVITIES AND PROVIDERS OVERSIGHT FORUM(S) BUSINESS MODEL

— Sustainability team

— External verification of data and

calculations

— Board

— Audit Committee

— Safety, Energy Transition &

TechCommittee

— Executive audit committee

— Executive energy, transition & technology

committee

— Our role in society

— Our business model drivers

— Our uniqueness

WHAT HAS CHANGED IN 2025?

There has been no overall change in risk status. The likelihood of this risk materialising is driven by macro-economic, geopolitical and social

factors, with our controls focused on mitigating their impact. Our focus for 2026 will include continued review of our sustainability strategy,

the management of Scope 1 + 2 decarbonisation, a review of responsible consumption targets and product portfolio alignment. See pages

38 to 47 for more on sustainability and related key risks.

Information & data (including cyber-security)

PRINCIPAL RISK DESCRIPTION CONTROLS

Failure to protect the integrity, confidentiality and

availability of data, both physical and digital, systems,

services or products from attempts to cause us and/or

our customers harm, which could hinder data-driven

decision-making, disrupt internal business operations

andservices for customers, or result in a data breach or

non-compliance to regulatory requirements, all of which

could damage our reputation, reduce resilience, and

cause financial loss.

— The information security management system deploys multiple layers of

controls, such as web and email gateways, intrusion detection, behavioural

analytics and data loss prevention

— Extensive maintenance and testing of hardware and software and systems

— Access controls (employees and third parties) to our locations, infrastructure,

systems, software and data

— Control of the use of our systems

— Application of our incidence response framework to govern our response to

potential cyber-security incidents and significant IT disruption

ASSURANCE ACTIVITIES AND PROVIDERS OVERSIGHT FORUM(S) BUSINESS MODEL

— Cyber-security team

— Security and resilience team

— Safety, Energy Transition & Tech

Committee

— Executive audit committee

— Our business model drivers

— Our uniqueness

WHAT HAS CHANGED IN 2025?

The risk level has reduced in 2025 due to the progress of our mitigation programmes putting in place additional effective controls. For

example, we have put in place improvements in controls to address externally facing vulnerabilities and enhancements to other controls.

However, the risk remains high dueto external factors including the ongoing speed of evolution of cyber-security threats, with increasing

sophistication and technological advancement of the threat actor groups. We continue to monitor the evolving external threat landscape,

undertaking additional mitigating activities where needed.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

PRINCIPAL RISKS

PRINCIPAL RISKS – CONTINUED

Change in risk level: Increased Static Decreased

Market & financial shock

PRINCIPAL RISK DESCRIPTION CONTROLS

Failure to minimise our exposure to market and

financialrisks, some of which are of a macro-economic

nature (e.g. economic growth rates, foreign currency, oil

price, interest rates) and some of which are more specific

to us (e.g. cyclical aviation industry, reduction in air

travel or defence spending, disruption to other customer

operations, liquidity, and credit risks). This could affect

demand for our products and services.

Significant extraneous market events could also

materially damage our competitiveness and/or

creditworthiness and our ability to access funding.

Thiswould affect operational results or the outcomes

offinancial transactions.

— Monitoring of trends, market demand and future market forecasts,

adjustingbusiness plans accordingly

— Investment committee to ensure capital investments are in line with ourstrategy

— Diverse and balanced portfolio

— Financial risk committee which monitors financial risks and compliance with

relevant policies including:

• group liquidity policy;

• credit risk policy;

• policies designed to hedge residual risks using financial derivatives covering

foreign exchange, interest rates and commodity price risk; and

• maintaining strong access to debt and equity markets as a strategic lever to

manage financial risk and safeguard capital resilience.

— Treasury operates a system of confirmations, mandates, system access controls,

segregation of duties, dual controls and checks to prevent and detect fraud

anderrors

In addition, controls in place to manage business interruption and political risk,

also address market shock risk.

ASSURANCE ACTIVITIES AND PROVIDERS OVERSIGHT FORUM(S) BUSINESS MODEL

— Strategy reviews

— Group investments team

— Treasury team

— Board

— Audit Committee

— Executive audit committee

— Our business model drivers

WHAT HAS CHANGED IN 2025?

The robust control environment we have in place has kept this risk stable in 2025. Uncertainty around external market volatility and

significant shocks (such as global conflict or the repeat of a pandemic) is offset by our increasing ability to withstand these events through

our greater business resilience. The Board has continued to approve policies to manage financial risks, the Group’s £2.5bn revolving credit

facility was renewed in December 2025, and the control environment is underpinned by systemised segregation of duties and management

review of controls.

Political

PRINCIPAL RISK DESCRIPTION CONTROLS

Failure to respond strategically and tactically to

geopolitical developments andevents, such as

adversechanges in key political relationships,

tradeprotectionism and conflicts, deteriorating tax or

regulatory regimes, and armed conflict, would lead to an

unfavourable business climate which could impact our

short and/or long-term execution commitments.

— Geopolitical insights capability, which includes:

• development of Group and country strategies and maintaining our

understanding of associated dependencies;

• horizon scanning processes;

• Group crisis and incident management policy; and

• diversification considerations built into our investment and

procurementchoices.

ASSURANCE ACTIVITIES AND PROVIDERS OVERSIGHT FORUM(S) BUSINESS MODEL

— Government relations teams

— Country councils

— Input from external advisers

— Board

— Executive audit committee

— Our role in society

— Our business model drivers

WHAT HAS CHANGED IN 2025?

The probability of this risk arising has increased due to ongoing uncertainty in the external environment. The likelihood of emerging risks

now materialising due to political developments globally, such as intensifying trade conflict and rising protectionism (see page 13) is higher

thanbefore.

However, our ability to respond to geopolitical risks, such as tariffs, has kept pace with the external environment. We continue to build on

our insights capabilities to further improve our adaptability.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

PRINCIPAL RISKS

PRINCIPAL RISKS – CONTINUED

Change in risk level: Increased Static Decreased

Talent & capability

PRINCIPAL RISK DESCRIPTION CONTROLS

Failure to attract, retain and develop the critical talent,

skills and capabilities required to deliver our strategic

priorities could threaten our ability to be a high-

performing, competitive, resilient and growing business.

— The People System includes controls to:

• anticipate future requirements, strategically shaping future workforce

composition and a differentiated workforce strategy;

• attract and develop the best talent to increase talent density and bench strength;

• drive high performance through a culture of regular and candid feedback and

strong relative differentiation;

• operate a differentiated and fair reward proposition to reflect strategic

businessimpact and critical positions and difficult-to-hire capabilities;

• improve future readiness of workforce through targeted learning,

integratinglearning into the flow of work through digital including

deliveringmandatory learning;

• increase relevant talent supply through fit-for-purpose emerging talent

programmes; and

• embed and monitor a culture of belonging through defined standards,

leadership accountability, and regular employee listening, ensuring equitable

access to opportunity, equity in decision-making, and psychological safety.

ASSURANCE ACTIVITIES AND PROVIDERS OVERSIGHT FORUM(S) BUSINESS MODEL

— People leadership team

— Leaders across Rolls-Royce

— Employee opinion survey

— External remuneration audits

— Nominations, Culture & Governance

Committee

— People committee

— Our business model drivers

— Our uniqueness

WHAT HAS CHANGED IN 2025?

The level of risk has remained steady this year through controls operating as part of the People System launched in 2024, with a focus in 2025

on performance management, employee engagement, reward, capability and skills, talent management and development, which you can read

more about on pages 31 to 36, as well as more information on people-related initiatives, such as the People Deal and Change Makers.

Technology

PRINCIPAL RISK DESCRIPTION CONTROLS

Failure to ensure products and services are based

oncompetitive technology, leveraging substantial

engineering and scientific challenges, adopting digital

tools (such as AI) and/or new ways of working, could

hinder our ability to accelerate product design and

deliver a competitive offer that ensures superior

performance; enhances the customer experience; drives

the transition to lower carbon; improves productivity

and reduces costs. This will negatively impact our

competitiveness and market share.

— Horizon scanning process for emerging technology threats and opportunities,

which includes the identification of business opportunities, providing

technology intelligence, and performing early-stage technical assessments

— The outputs are used to inform strategy and technology roadmaps as well as

how we prioritise the research and technology portfolio

ASSURANCE ACTIVITIES AND PROVIDERS OVERSIGHT FORUM(S) BUSINESS MODEL

— Technical assurance team

— Programme introduction and

lifecyclemanagement to prioritise

investments anduphold uniform

projectmanagement standards

— Safety, Energy Transition & Tech

Committee

— Executive energy transition & tech

committee

— Our role in society

— Our business model drivers

— Our uniqueness

WHAT HAS CHANGED IN 2025?

This risk has remained stable in 2025 due to the ongoing mitigating actions to manage this risk, including detailed technology roadmaps,

robust horizon scanning and the work of the Group-wide research and technology organisation. New technologies are matured and vetted

for industrialisation and customer interest during development and before integration into our systems.

To further mitigate the impact of potential technological disruptions and align with broader strategy needs, we will continue to invest in

emerging technology evaluation, accelerate innovation through data-driven approaches, and prioritise technology integration.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

PRINCIPAL RISKS

Going concern statement

Overview

In accordance with the requirements of

the2024 UK Corporate Governance Code,

the Directors have assessed the prospects

ofthe Group, taking into account its current

position, the Group’s principal risks which

aredescribed on pages 51 to 56, and

theGroup’s mid-term forecasts together

withfactors that could affect its future

development, performance and position,

asset out in the Strategic report on

pages2to 61.

The Financial review on pages 19 to 24

setsout the financial position of the Group,

its cash flows, liquidity position and the

Group’s capital framework. The notes to the

accounts include the objectives, policies and

procedures over financial risk management

including financial instruments and hedging

activities, exposure to credit risk, liquidity

risk, interest rate risk and commodity

pricerisk.

In adopting the going concern basis for

preparing the consolidated and Company

financial statements, the Directors have

undertaken a review of the Group’s cash

flowforecasts and available liquidity, along

with consideration of possible risks and

uncertainties over an 18-month period from

the balance sheet date to June 2027. The

Directors have determined that the period to

June 2027 (‘the going concern period’) is an

appropriate timeframe over which to assess

going concern as it considers the Group’s

short to medium-term cash flow forecasts

and available liquidity.

Forecasts

Recognising the challenges of reliably

estimating and forecasting the impact

ofexternal factors on the Group, the

Directors have considered two forecasts

intheir assessment of going concern,

alongwith a likelihood assessment of

theseforecasts. Thebase case forecast

reflects theDirectors current expectations

offuture trading. A downside forecast has

also been modelled which envisages severe

but plausible downside risks. Both forecasts

havebeen modelled over the going

concernperiod.

The Group’s base case forecast reflects the

Directors’ best estimation of how the business

plans to perform over the going concern

period. Macro-economic assumptions have

been modelled using externally available

data based on the most likely forecasts with

general inflation at around 2%–3%, wage

inflation at an average of 3%–4%, interest

rates at around 2%–4% and GDP growth at

around 2%–4%.

The downside forecast assumes Civil

Aerospace large engine flying hours

remainat average fourth quarter 2025

levelsthroughout the going concern period,

reflecting slower GDP growth in this forecast

when compared with the base case. It also

assumes a more pessimistic view of general

inflation at around 2%–3% higher than

thebase case covering a broad range of

costs including product costs, energy,

commodities and jet fuel. Wage inflation in

the downside forecast is 1%–2% higher than

the base case and interest rates are 1%–2%

higher. These macro-economic pressures

have been modelled across the whole going

concern period. The downside forecast also

considers lower demand as a result of slower

market growth, and potential output risks

associated with increasing volumes and

possible ongoing supply chain challenges.

On 26 February 2026, the Group announced

a multi-year share buyback programme

across 2026–2028 of £7.0bn to £9.0bn.

Ofthis, £2.5bn is expected to be completed

in 2026, including the £200m completed

between 2 January 2026 and the date of this

report. The share buybacks expected to be

completed during the going concern period

have been included in the going concern

assessment in both the base case and

downside forecast.

In reviewing the Group’s cash flow

forecastsand available liquidity, the

Directorshave considered the current

volatility in macroeconomic variables

andanexternal environment that remains

challenging, including geopolitical tensions,

the uncertainty introduced by tariffs and

supply chain challenges. The Directors

continue to actively manage the potential

impact of these factors on the Group’s cash

flow forecasts and available liquidity.

In modelling both the base case and

downside forecast, the repayment of a

€750m bond that matured in February 2026

and a £375m bond that is due to mature in

June 2026 have been assumed to be repaid

from cash in both the base case and

downside forecast.

The future impact of climate change on the

Group has been considered through climate

scenarios. The climate scenarios modelled do

not have a material impact on either the base

case or downside forecast over the going

concern period. Further detail on these

climate scenarios is set out on page 47.

Liquidity and borrowings

During 2025, the Group repaid a $1bn

bondat its maturity in October. The Group

also repaid a €750m bond that matured

inFebruary 2026. The £2.5bn undrawn

revolving credit facility was refinanced in

December 2025, extending the revolving

credit facility maturity to December 2030.

At 31 December 2025, the Group had

liquidityof £8.7bn including cash and

cashequivalents of £6.2bn and undrawn

facilities of £2.5bn. The going concern period

includes the repayment of a €750m bond

that matured in February 2026 and a £375m

bond that is due to mature in June 2026.

Given the Group’s cash and liquidity position

over the going concern period, the bond

maturities in 2026 have been assumed to be

repaid from cash, should the Group wish to

not refinance.

Based on borrowing facilities available at

thedate of this report the Group’s committed

borrowing facilities at 31 December 2025

and30 June 2027 are set out below. None

ofthe facilities are subject to any financial

covenants or rating triggers which could

accelerate repayment.

£m

31 December

2025

30 June

2027

Issued bond notes

2,859 1,806

Revolving credit

facility (undrawn)

2,500 2,500

Total committed

borrowing facilities 5,359 4,306

1 The value of issued bond notes reflects the impact of

derivatives on repayments of the principal amount of

debt. The bonds mature by May 2028

2 The £2.5bn revolving credit facility matures in

December2030

Taking into account the maturity of these

borrowing facilities, the Group has committed

facilities of at least £4.3bn available throughout

the period to 30 June 2027.

Conclusion

After reviewing the current liquidity position

and the cash flows modelled under both

thebase case and downside forecasts, the

Directors consider that the Group has sufficient

liquidity to continue in operational existence

over the going concern period to 30 June 2027

and are therefore satisfied that it is appropriate

to adopt the going concern basis of accounting

in preparing the financialstatements.

Viability statement

The viability assessment considers liquidity

over a longer period than the going concern

assessment. Consistent with previous years,

we evaluate viability over a five-year period,

in line with the Group’s five-year planning

process. We continue to believe that

thisisthe most appropriate as, inevitably,

thedegree of certainty reduces over any

longertimespan.

We have created severe but plausible

scenarios that estimate the potential impact

from certain principal risks arising over

theassessment period. Descriptions of our

principal risks and the controls in place to

mitigate them can be found on pages 51 to 56.

Given our increased liquidity levels and

consistency in conclusions reached each

year, we targeted those principal risks

thatcould have the most material impact

onliquidity over the next five years and

confirmed these with relevant subject

matterexperts. The risks chosen and

scenarios used are as shown in the table

onthe following page.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

Going concern and viability statements

The cash flow impacts of these scenarios

were overlaid on the five-year plan toassess

how the Group’s liquidity would beaffected.

The scenarios assume an appropriate,

effective management response to the

specific event and also considered specific

activities to improve liquidity. These activities

include raising additional funds, reducing

expenditure and divesting parts of

ourbusiness.

Reverse stress testing was also performed

toassess the severity of scenarios that would

have to occur to exceed liquidity headroom.

The outcomes of the stress tests were not

considered plausible.

Based on their assessment of prospects and

viability above, the Board confirms that it has

a reasonable expectation that the Group will

be able to continue its operations and meet

its liabilities as they fall due over the next five

years. In making this statement, the Directors

have made the following key assumptions:

1. The Group is able to refinance maturing

debt facilities and draw down existing

available facilities as required. Debt

maturities over the assessment period are

£5.4bn (including the undrawn revolving

credit facility of £2.5bn maturing by

December 2030), with new bonds

assumed to be issued as planned;

2. The Group has access to global debt

markets and expects to be able to

refinance these debt facilities on

commercially acceptable terms;

3. That implausible scenarios do not occur.

Implausible scenarios include either

multiple risks impacting at the same time

or where management actions do not

mitigate an individual risk to the degree

assumed; and

4. That in the event of one or more risks

occurring which have a particularly

severe effect on the Group’s liquidity,

allpotential actions would be taken on

atimely basis. These include, but are not

limited to, restricting capital and other

expenditure to only committed and

essential levels, reducing or eliminating

discretionary spend, implementing pay

deferrals, raising additional funds through

debt or equity raises, executing disposals,

undertaking further restructuring and

pausing distributions.

The Group believes it has the early

warningmechanisms to identify the need

forsuch actions and, as demonstrated by

ourdecisive actions during and following

thepandemic, can implement them on a

timely basis if necessary.

PRINCIPAL RISK SCENARIO ASSUMPTIONS AND IMPACTS

Safety (product)

Civil Aerospace product safety event resulting in aircraft being grounded, lower engine flying hour (EFH) revenues,

commercial penalties and additional costs (for example, unplanned shop visits). The grounding time and number of

shopvisits required to exceed headroom are considered remote.

Compliance

A compliance breach, including non-compliance to sovereign state requirements, resulting in fines and loss of sales

with governments and state-owned companies. The probability of triggering the size of fine required to exceed

headroom is considered remote.

Business

interruption

a) The loss of a key element of our supply chain resulting in an inability to fulfil Civil Aerospace large engine orders

for12 months.

b) A test bed event that disrupts US Defence deliveries.

c) An event in our Power Systems business that results in no deliveries over a period of time.

The extent of time over which orders cannot be fulfilled that would breach headroom is not considered plausible.

Business

interruption

– pandemic

A pandemic with similar impact to the COVID-19 pandemic with significant engine flying hour reduction in Civil

Aerospace that require multiple years to recover to pre-pandemic levels and also impact on sales volumes especially

inCivil Aerospace and the Power Generation businesses. The extent of time over which orders cannot be fulfilled that

would breach headroom is not considered plausible.

Information &

data (cyber-

security)

A cyber-attack resulting in loss and corruption of data and resulting in business disruption, loss of EFHs, compliance

concerns due to disclosure of data and potentially triggering debarment from government contracts. Our mitigating

actions were found to be sufficient to prevent a breach of headroom.

Political

Sanctions imposed, for example as a result of conflict between major trading blocs, resulting in supply chain

disruptionand a loss of sales in impacted markets. Our mitigating actions were found to be sufficient to prevent a

breach of headroom.

GOING CONCERN AND VIABILITY STATEMENTS

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

SECTION 172 DUTY RELEVANT DISCLOSURE AND PAGE REFERENCE

The likely

consequences of

Board decision-

making in the

long-term

Any decisions taken by the Board are expected

toinfluence the Group’s long-term performance,

resilience and ability to create sustainable value

forshareholders and wider stakeholders.

Group at a glance 2

Chair’s statement 4

Chief Executive’s review 6

Our purpose, vision and behaviours 10

Our strategy 11

External environment 13

Business model 14

Key performance indicators 16

Financial review 19

Principal risks 48

Going concern and viability statements 57

Chair’s introduction 63

Remuneration Committee report 82

The interests of

ouremployees

The Directors recognise that the success of our

business depends on attracting, retaining and

motivating talented people. To that end, the

Directorsconsider and assess the implications of

decisions on our people where relevant and feasible.

Our people and product safety

performanceremains a high priority,

alongsideemployee engagement.

Group at a glance 2

Chair’s statement 4

Chief Executive’s review 6

Our purpose, vision and behaviours 10

Our strategy 11

Key performance indicators 16

People and culture 31

Stakeholder engagement 60

Chair’s introduction 63

Remuneration Committee report 82

Safety, Energy Transition &

Tech Committee report 110

The need to

fosterour business

relationships with

suppliers, customers

and others

Delivering our strategy requires a strong,

mutualand beneficial relationship with suppliers,

customers and governments.

Group at a glance 2

Chief Executive’s review 6

Our purpose, vision and behaviours 10

Our strategy 11

External environment 13

Business model 14

Key performance indicators 16

Financial review 19

Ethics and compliance 37

Sustainability 38

Principal risks 48

Going concern and viability statements 57

Stakeholder engagement 60

Chair’s introduction 63

Remuneration Committee report 82

Safety, Energy Transition &

Tech Committee report 110

Stakeholder considerations are integral to the Board’s discussions and our decisions

aim to promote our long-term success.

Our section 172(1) statement (s172 statement) below sets out how the Directors have had regard to stakeholders in discharging their s172 duty.

We recognise that consideration of the broad range of our stakeholders during decision-making is essential for the long-term success of our

business and we aim to create value for our stakeholders and wider society by maintaining levels of business conduct that are aligned to our

purpose, vision and behaviours. There may be situations in which the interests of certain stakeholders may be prioritised over others and we

acknowledge that not all decisions will result in a positive outcome for all stakeholders. By having a consistent and purposeful process in place

to consider a broad range of stakeholders, and the different interests and factors to be assessed, we aim to ensure that our decisions promote

our long-term success.

This section should be read in conjunction with our Stakeholder engagement section from page 60 and Board focus, which contains

information on the principal decisions made by the Board during 2025 and related outcomes, from page 71.

SECTION 172 DUTY RELEVANT DISCLOSURE AND PAGE REFERENCE

The impact of our

operations on the

community and the

environment

The Board recognises that any decisions taken must

give due consideration to how operations affect the

wider community and the environment.

Chief Executive’s review 6

Our purpose, vision and behaviours 10

Our strategy 11

External environment 13

Key performance indicators 16

People and culture 31

Sustainability 38

Principal risks 48

Safety, Energy Transition &

Tech Committee report 110

The desirability

ofmaintaining a

reputation for high

standards of business

conduct

The Group is committed to doing business in

theright way. When promoting the success of the

Group the Directors have regard to the desirability

of maintaining a reputation for high standards of

business conduct.

Our Code, Group policies and Supplier Code of

Conduct seek to ensure high standards are applied

across our own operations and supply chain, and

can be found at www.rolls-royce.com

Group at a glance 2

Chair’s statement 4

Chief Executive’s review 6

Our purpose, vision and behaviours 10

Our strategy 11

External environment 13

Business model 14

Key performance indicators 16

Ethics and compliance 37

Non-financial and sustainability

informationstatement 38

Principal risks 48

Going concern and viability statements 57

Stakeholder engagement 60

Chair’s introduction 63

Board of Directors 64

Corporate Governance 67

Nominations, Culture & Governance

Committeereport 76

Audit Committee report 78

Remuneration Committee report 82

The need to act

fairlybetween

shareholders

After weighing up all relevant factors, the

Directorsconsider which course of action

bestenables delivery of our strategy over the

longterm, taking into consideration the effect

onthe Group’s stakeholders.

Stakeholder engagement 60

Chair’s introduction 63

Audit Committee report 78

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

Section 172 statement

OUR PEOPLE

Why they matter

At the heart of our business is the unrivalled dedication and technical

expertiseof our people. With over 42,000 colleagues in varied roles worldwide,

engagement needs to be far reaching and accessible in order to ensure that our

purpose, vision and behaviours are embedded in our culture.

How we engaged

In 2025, employees were again given the opportunity to share their perspectives

on how the Group lives up to our behaviours, our strategy, performance and

leadership via our annual survey – Our Voices: Big Picture. The results are

anonymised to encourage an open conversation, and people leaders receive

team results to enable Winning Together conversations to make a difference.

A further pulse survey – Our Voices: In Focus, is used to check on how it feels to

work at Rolls-Royce and whether there is clarity to deliver the strategy. The output

of the survey supports the formation of focus groups to explore high-impact topics

and big themes, enabling a better understanding of perspectives.

Our Executive Team regularly host live events in the form of townhalls

and‘ETTeams Talks’ where all colleagues can hear about our progress and

haveopen, honest conversations about topics that matter most. This was

anopportunity to communicate directly with the Chief Executive and the

ExecutiveTeam, part of our commitment to engage, listen and act on feedback.

During 2025, our Employee Champions, Bev Goulet and Wendy Mars,

continuedto represent the voice of our people in the boardroom. The

EmployeeChampions, supported by our Employee Stakeholder Engagement

Group, provide regular feedback to the Board on topics of interest and/or

concern. This provides a valuable link between our people and our Directors.

Webelieve that these methods of engagement with our people are effective in

building and maintaining trust and communication while providing colleagues

with a forum to influence change in relation to matters that affect them.

Site visits remain an important opportunity for Board members to gain a deeper

understanding of how the different divisions operate, and to meet individuals

from those divisions. More information about the Board’s site visits can be found

on page 70.

Engagement outcomes

We believe that when we feel we belong, we are at our best for each other,our

business and our customers, and this starts with how we treat each other every

day. Building on the 2024 launch of our new purpose, vision and behaviours, in

2025, we introduced three new ways to make belonging a lived reality for our

employees. These include:

— a Global Equal Employment Opportunity Policy, which outlines how we expect

people to behave towards each other, how we make people decisions and

ourzero-tolerance approach to discrimination. The principles of our Policy

apply not only to employees, but also to our visitors, customers, suppliers and

former employees;

— the Global Belonging Forum is sponsored by our people committee and

chaired by our Chief People Officer. This senior leadership forum is dedicated

to embedding a culture of belonging across the Group; and

— the Employee Voice Network is open to all colleagues to bring individual

perspectives, passions and personalities together to connect, discuss and

problem solve.

Many of our people are also our shareholders and we encourage their

participation in a variety of share plans. Following the gift to all colleagues

of150Rolls-Royce shares (or cash equivalent where share allotment was not

permitted) in 2024, these gifted shares vested for colleagues in the Global

Employee Share Purchase Plan (GESPP) in September 2025. Additionally, we

successfully launched Your Shares: Matched in 2025, a new global all-employee

share purchase and match plan, where all participants receive a 1:1 match on their

investment up to a maximum of £50 per month.

See from page 6

Chief Executive’s review

See from page 31

People and culture

See from page 76

Nominations, Culture & Governance Committee report

See from page 82

Remuneration Committee report

CUSTOMERS

Why they matter

The quality of the Group’s customer relationships, based on mutual trust

aswellas our engineering expertise, are critical to the Group’s long-term

success.While our customers provide a sustainable revenue for the business,

they also support our journey to becoming a lower-carbon business which is

firmly embedded in our strategy. By using our unique skills and expertise to

develop innovative solutions we are helping the world do things tomorrow that

we cannot do today. We remain steadfast in delivering the technical solutions

required to reduce the carbon emissions of the air transportation sector

through our work in developing advanced aircraft and propulsion technologies

that enable net zero carbon emissions while maintaining the safety and quality

standards of our industry. This commitment underpins our strategy and ensures

that our innovation aligns with the evolving needs of the markets in which

weoperate.

How we engaged

Throughout the year, the Chief Executive and Executive Team continued to

engage directly with customers at major industry events and strategic forums,

including at the premier aerospace event of 2025, the Paris Air Show. These

discussions focused on opportunities to re-enter the narrowbody market,

improvements to time on wing and overall operational efficiency.

To ensure we deliver with urgency to armed forces around the world, our

Defence team engages regularly with our global Defence customers, including

at events like the Association of the United States Army (AUSA) Annual Meeting

& Exposition in North America and Defence and Security Equipment

International (DSEI) in the UK.

At every meeting, the Board receives operational updates, including feedback

on customer interactions, across all the divisions. This greatly influences the

Board’s deliberations and its support for the Executive Team when considering

opportunities and risks and our strategy.

Engagement outcomes

Customer insights and operational updates significantly influence the Chief

Executive and Executive Team’s deliberations on the execution of our strategy.

These engagements strengthen partnerships, guide investment priorities, and

ensure alignment with our sustainability and growth objectives.

See from page 6

Chief Executive’s review

See from page 25

Our divisions

SUPPLIERS

AND PARTNERS

Why they matter

Maintaining healthy, long-term relationships with our suppliers helps us to

protect business continuity and achieve our environmental ambitions. Strong

supplier relationships ensure sustainable high-quality delivery for the benefit

of all stakeholders.

How we engaged

The interests of both our suppliers and partners are a high priority for the

Group and inform discussions and decisions on our manufacturing strategy

and when reviewing specific projects. The Board supports our Executive

Team,who work collaboratively with our suppliers and partners, to continue

toimprove operational performance through various means.

Engagement outcomes

The Board received updates from the business on supplier performance and

continued supply chain challenges. During 2025, discussions took place on

how we are mitigating supply chain risks by helping our suppliers across the

aerospace supply chain.

We are supporting our partners in several ways, including with a dedicated and

resourced taskforce which is focused on supply chain challenges impacting the

Trent 1000 engine.

See from page 6

Chief Executive’s review

See from page 25

Our divisions

Consistent communication with stakeholders is a priority for the Board and the Executive Team, who maintain regular touchpoints with

stakeholdersto keep apprised of their views and interests. The matters identified through this engagement influence Board decision-making

inthe short and medium-term and our long-term strategy. This section should be considered together with the s172 statement onpage59

andBoard focus from page 71.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

Stakeholder engagement

COMMUNITIES

Why they matter

We believe that thriving communities are a foundation of our long-term

success. Our commitment goes beyond business. We are dedicated to forging

strong, progressive relationships with the communities where we operate.

Weunderstand that our success is closely linked to the economic prosperity

and wellbeing of our local communities. That is why we invest in powerful

partnerships and local initiatives that create meaningful, measurable impact

where it matters most.

How we engaged

We take a proactive approach to community engagement, driven by open

dialogue, active listening, and genuine collaboration. By working closely with

community leaders, social partners, and local organisations, we ensure our

efforts are aligned with the unique needs and aspirations of each location.

Ourinvestments in education and skills outreach, charitable sponsorships

anddonations, and encouragement of employee volunteering are designed

tocreate lasting value and promote sustainable development. We empower

ourpeople to make a difference, enabling them to share their expertise, learn

from others, and drive positive change both within our business and in the

communities around us. Together, we define objectives and develop initiatives

that deliver tangible benefits for both our communities and our Group.

Engagement outcomes

Our people are the driving force behind our community programmes,

contributing 72,163 hours (2024: 58,785) to community investment and

education outreach in 2025, a testament to our growing impact. Our global

STEM ambassador network continues to inspire the next generation, with

around 1,700 accredited ambassadors in the UK alone this year, igniting

curiosity and ambition in young people worldwide. We continue to expand

ourglobal STEM ambassador network.

See from page 31

People and culture

See from page 38

Sustainability

GOVERNING BODIES

AND REGULATORS

Why they matter

The Board recognises the importance of governments and regulators as key

stakeholders, customers, funders and supporters of our global trading activity.

How we engaged

During 2025, the Chair and Chief Executive held meetings with country

leaders, ministers and senior officials from governments around the world.

Areas of engagement included civil and defence nuclear via SMR and AUKUS,

civil and combat air capability including civil aero engine development and

exports, sales of the EJ200 engine and the Global Combat Air Programme

(GCAP), and our power-generation solutions for existing and fast-growing

markets including data centres. These engagements help strengthen our

relationships with key markets including but not limited to the UK, US, EU

andmember states, India, and the Kingdom of Saudi Arabia.

The General Counsel provides regular updates to the Board on

compliancewith regulation impacting our licence to operate. The

Boardisupdated on engagement with tax authorities and the related

regulatory landscape.

Engagement outcomes

Engagement has focused on delivering the Group priorities and strategic

initiatives, including growing our defence offer in and with countries around

the world, keeping our civil engines earning with existing and new customers,

strengthening our global MRO capability, and seeking to secure new markets

across all our core businesses and through Rolls-Royce SMR.

See from page 25

Our divisions

See page 37

Ethics and compliance

INVESTORS

Why they matter

A resilient investor base and ongoing access to capital are essential to the

Group’s long-term success. This relies on us providing existing and prospective

shareholders with a clear and comprehensive understanding of our business,

including our strategy, growth opportunities, risks and overall performance,

tosupport informed investment decisions.

How we engaged

The investor relations team is the key interface between the investment

community and the Board, providing frequent dialogue and feedback. The Chair

and members of the Board make themselves available to meet with institutional

investors and seek to understand the issues that matter most to them. In addition,

the Chief Executive and Chief Financial Officer, supported by members of the

Executive Team and the investor relations team, interact regularly with investors,

principally after our financial results, and at conferences.

Our engagement with institutional investors has continued throughout the

year, including meeting with investors on post-results roadshows across

London, UK and Boston, New York and Los Angeles, US. Key investor

conferences during the year included the Bank of America Global Industrials

Conference (UK), the Jefferies Industrials Conference (US) and the Goldman

Sachs Industrials Conference (UK).

The AGM held at the Rolls-Royce Learning and Development Centre in Derby,

UK, inMay provided retail shareholders with the opportunity to engage directly

with Board members.

During 2025, the Chair of the Remuneration Committee, members of

management and the Chief Governance Officer engaged with shareholders

and proxy advisers to seek support for our remuneration policy proposals.

Engagement outcomes

Our largest shareholders have remained broadly consistent over the past

year,reinforcing our view that our investors continue to be supportive of

ourtransformation programme and strategy. Furthermore, our strong growth

prospects to the mid-term and beyond continue to attract new investors.

See from page 11

Our strategy

See from page 82

Remuneration Committee report

Strategic Report signed on behalf of the Board

Tufan Erginbilgic

Chief Executive

26 February 2026

STAKEHOLDER ENGAGEMENT

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

STRATEGIC REPORT

GOVERNANCE

REPORT

Chair’s introduction 63

Board of Directors 64

Compliance with the Code 66

Corporate governance 67

Executive Team 74

Committee reports 76

• Nominations, Culture & Governance 76

• Audit 78

• Remuneration 82

• Remuneration policy 88

• Remuneration report 100

• Safety, Energy Transition & Tech 110

Responsibility statements 111

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

Dame Anita Frew

Chair

As Chair of the Board, I am pleased to

introduceour Governance report for 2025. At

Rolls-Royce, we believe that good governance

is the foundation of sustainable success.

As a Board, we are committed to ensuring that

our governance framework evolves to meet

theregulatory requirements and to uphold the

highest possible standards of transparency and

stewardship relevant to the Group.

Our focus in 2025

In 2025, the Safety, Energy Transition & Tech

(SETT) Committee expanded its remit to include

cyber-security and held a deep dive into our

cyber-security maturity and preparedness

which was attended by all Board members. A

full report of the SETT Committee’s activities

during the year is set out on page 110.

At the Nominations, Culture & Governance

Committee, we are regularly updated on

thesuccession pipeline and associated

development initiatives for our senior leaders. In

2025, this included insights from our enterprise-

wide talent and leadership system. A full report

of the Nominations, Culture & Governance

Committee can be found from page 76.

During the year, the Audit Committee

considered regular reports on our preparations

for the introduction of provision29 of the 2024

UK Corporate Governance Code. A full report

of the Audit Committee’s activities during the

year can be found from page 78.

The Remuneration Committee retained its

focus on ensuring that our remuneration

arrangements are appropriate in the context of

our business performance. A full report of the

Remuneration Committee’s activities during

the year can be found from page 82.

Board effectiveness

We have undertaken a review of the

performance of the Board and its Committees

in 2025 to enable us to continuously improve as

a Board. Areas for focus in 2026 were identified

for the Board and its Committees. You can read

about these on page 73 and in the individual

Committee reports.

Engaging with our stakeholders

We take every opportunity to engage

withour stakeholders where appropriate to

remain updated on their views and interests.

Once again, our engagement has influenced

the Board over the course of the year in our

discussions and decision-making. During

2025, there were many opportunities for my

Board colleagues to engage with our people

and our shareholders, which I have described

below. Our stakeholder engagement report

from page 60 provides more detail.

Our people

My fellow Directors and I particularly

enjoythe opportunities we have to visit our

facilities and to engage with and hear directly

from our people across the Group. We have

two dedicated initiatives which support the

Board’s understanding of the experience of

our employees:

— first, the Meet the Board events which, in

2025, were held in Derby, UK in May and

inDahlewitz, Germany in October. These

events allow our people across the business

to engage directly with the Board Directors,

encouraging open dialogue on issues

thatmatter to them. They also provide an

opportunity for my Board colleagues to

share their personal reflections with our

people and to recognise the commitment

and contribution which our people make

every day to the success of Rolls-Royce; and

— second, our Employee Champions, Bev

Goulet and Wendy Mars, play a critical role

in reaching out to our people. Through site

visits and engagement forums, they gather

feedback and ensure that any concerns

areraised with management and in the

boardroom. Read more about the work of

our Employee Champions on page 77.

Members of the SETT Committee also

engaged with our people on a visit to our

Defence site at Bristol, UK in September

(seepage 70 for more information).

In 2025, we introduced our new People Deal

which is described in more detail in People

and culture from page 31. During 2026, my

Board colleagues and I look forward to meeting

many more of our people and supporting

them in their understanding of how we

worktogether to enable a high-performance

culture which supports the delivery of our

strategy for all our stakeholders.

Our shareholders

During the year, I met with several of our

major institutional investors to understand

their views of Rolls-Royce.

In the autumn, Lord Jitesh, Chair of the

Remuneration Committee, engaged with

many of our major shareholders on the

changes proposed to our remuneration

policy. See page 88 for more information

about these proposals.

In May, we held our 2025 AGM. Our fully hybrid

format allowed shareholders to participate

virtually or in person. This approach reflects

our commitment to leverage technology

tostrengthen engagement and create

opportunities for shareholders to connect

directly with the Board. We will use this hybrid

format again for our 2026 AGM to be held on

30 April 2026. I look forward to engaging with

our shareholders at this time. Details of the

AGM will be available to our shareholders in

mid-March 2026.

Looking forward

The Board’s focus for 2026 will again include

succession planning for those Non-Executive

Directors who are due to retire in the nearterm.

We will also focus on talent anddevelopment

more broadly within the organisation in support

of our strategy.

I would like to thank my fellow Directors

fortheir strong commitment and thoughtful

counsel as we navigated the challenges and

opportunities of 2025, and I look forward to

working with them as the transformation of

Rolls-Royce continues in 2026.

Dame Anita Frew

Chair

In 2025, our governance framework, including our

approach to leadership, oversight and accountability,

enabled the Board to continue to guide the successful

transformation of the Group.

Chair’s introduction

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GOVERNANCE REPORT

Denotes Chair

Nominations, Culture & Governance

Audit

Remuneration

Safety, Energy Transition & Tech

Committee membership

Board of Directors

Position

Board skills and competencies

Key external appointments

DAME ANITA FREW

Chair of the Board

Dame Anita brings a wealth of extensive leadership

andglobal experience from more than two decades of

board appointments, both in the UK and internationally.

Together, with her skills and reputation with investors

and government institutions, her broad knowledge

ofstrategic management across a range of sectors

isinvaluable to the Board and the Group as a whole.

Past

— Industrial strategy advisory

council (UK Government),

member

— Croda International plc, Chair

Appointed to the Board

on 1July 2021 and as Chair

on 1October 2021

TUFAN ERGINBILGIC

Chief Executive

Tufan is a proven leader of winning teams within

complexmultinational organisations, with over six

yearsasCEO ofBP’s downstream business. He drives

ahigh-performance culture and delivers results for

investors. He has extensive strategic and operational

experience and a firm understanding of safety critical

industries as well as the challenges and commercial

opportunities presented by the drive for low-carbon

technologies. Tufan has a strong track record for

execution,delivery and the creation of significant

valueand an ambition to deliver the full potential of

ourmarket positions.

Current

—

Iveco Group NV, NED

Past

—

UK Prime Minister’s 2024

Business Council

—

Global Infrastructure Partners,

Partner & senior adviser

—

BP p.l.c., various executive roles

—

DCC plc, NED

—

Türkiye Petrol Rafinerileri A.S,

NED

—

GKN plc, NED

Appointed to the Board

on 1January 2023

HELEN MCCABE

Chief Financial Officer

Helen has a track record of promoting rigorous

financialdiscipline and her experience of delivering

effective performance management within complex

multinational engineering organisations is invaluable

asthe Group moves, at pace, to transform Rolls-Royce.

Helen brings extensive experience and in-depth financial

understanding to the Executive Team and the Board.

Past

—

BP p.l.c., various leadership

roles

Appointed to the Board

on 4August 2023

GEORGE CULMER

Senior Independent

Non-Executive Director

George has a strong track record as a senior finance

professional with significant experience gained in

large,international, highly regulated groups with high

cyber-threat profiles and has proven business leadership

credentials. With this experience, together with his

strengths in change leadership and transformation

gained from within complex groups, George makes

a significant contribution to the Board.

Current

—

Aviva plc, Chair

Past

—

Lloyds Banking Group plc,

Chief Financial Officer

—

RSA Insurance Group plc,

ChiefFinancial Officer

Appointed to the Board

on 2January 2020

BIRGIT BEHRENDT

Independent

Non-Executive Director

Birgit brings deep experience across global procurement

and supply chain management to the Board. Alongside

this, she has significant insight into the development and

management of international joint ventures (JVs), having

led Ford’s key European JVs. She also has a strong track

record and an ongoing interest in developing, mentoring

and coaching key talent and encouraging women in

particular to consider a career in STEM. She has worked

in the US and Germany and brings deep experience of

working with unions and works councils.

Current

—

Umicore SA, NED

—

Thyssenkrupp AG, NED

—

KION Group AG, NED

—

Infinium Holdings, Inc., NED

—

Stulz Verwaltungs-GmbH & Co.

KG, adviser

Past

—

Ford, various executive roles

—

Ford-Werke GmbH, NED

Appointed to the Board

on 11 May 2023

STUART BRADIE

Independent

Non-Executive Director

Stuart brings to the Board a reputation for

buildingstrong relationships and successfully

drivingcomprehensive organisational transformation.

Over the past 11 years, Stuart has guided KBR’s

evolution,prioritising a focus on people alongside

strongcommercial discipline. KBR delivers disruptive

technologies and digital solutions that address areas

ofglobal importance. Stuart has used a safety and ESG

focus to deliver cultural change and helped make KBR

the number one in its peer group in delivering against

itsESG agenda.

Current

—

KBR, Inc., Chair, President &

ChiefExecutive

Appointed to the Board

on 11May 2023

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

BOARD OF DIRECTORS

Position

Board skills and competencies

Key external appointments

LORD JITESH GADHIA

Independent

Non-Executive Director

Lord Jitesh brings a wealth of complex advisory and

transactional experience to the Board, having spent nearly

25 years in the banking and private equity sector. He has

extensive remuneration experience, earned from listed

companies, UK Government Investments and UKFinancial

Investments, where he played a key role incompensation

discussions about the Government’s investments in some

ofthe UK’s biggest companies. This,together with his

broad industry experience, isanasset to the Board and

itsCommittees.

Current

—

Taylor Wimpey plc, SID

—

Intas Pharmaceuticals, NED

—

Court of Directors of the

Bank of England, NED

Past

—

Compare the Market Limited,

NED

—

UK Government Investments,

NED

—

Blackstone Group,

Senior MD

Appointed to the Board

on 1 April 2022

BEVERLY GOULET

Independent

Non-Executive Director

Rolls-Royce North America

Holdings Inc., board member

Lead Employee Champion

Having spent many years in the airline industry, Bev brings

valuable knowledge and operational experience to the

Board. The Board benefits from her deep understanding

ofthe aerospace industry and strategic focus.

In addition, Bev’s position as a board member of

Rolls-Royce North America Holdings Inc., continues to

provide an invaluable link for the Board to our operations

in the US.

Current

—

Xenia Hotels & Resorts, Inc.,

NED

—

Answer ALS Foundation,

Foundation Board Chair

Past

—

American Airlines, Inc.,

various executive roles

—

American Airlines Federal

Credit Union, Chair

— Atlas Air Worldwide Holdings,

Inc., NED

Appointed to the Board

on 3 July 2017

NICK LUFF

Independent

Non-Executive Director

Nick is an experienced finance executive having been

chieffinancial officer of a number of listed companies

across a variety of industries. He has broad financial skills

and a track record of driving business performance. His

extensive non-executive and audit committee experience,

together with both financial and accounting expertise and

a passion for engineering, is crucial in his role as Chair of

the Audit Committee and is invaluable to the Board.

Current

—

RELX plc, Chief Financial

Officer

Past

—

Centrica plc, Chief Financial

Officer

—

Lloyds Banking Group plc,

NED

—

QinetiQ Group plc, NED

Appointed to the Board

on 3May 2018

WENDY MARS

Independent

Non-Executive Director

Employee Champion

As a leader, Wendy has overseen diverse teams across

sales,engineering and innovation in 123 countries. She brings

experience and insight across hardware, software and services

with a deep understanding of technological transformation

ofcomplex global organisations. Wendy’s knowledge of

boththe technical steps needed to foster innovation in a

technology company as well as the challenging realities of

itsimplementation in organisations at different stages of their

transformation journey is invaluable to the Board and the Group

as a whole. Technology can play a significant role in helping

businesses to achieve their sustainability objectives; Wendy

brings this experience to the Board.

Past

— Cisco Systems, Inc., President

Europe, Middle East and

Africa region

—

ThruPoint, Inc., various

executive roles

Appointed to the Board

on 8 December 2021

PAULO CESAR SILVA

Independent

Non-Executive Director

Paulo has deep expertise in the aerospace industry,

abroad international mindset and an appetite for growth,

change and innovation. Alongside this, he brings a wealth

of strategic, commercial and operational experience to

theBoard’s discussions. He also has considerable finance

experience having spent his early career in senior

financeroles.

Current

—

Electra.Aero, adviser

Past

—

Embraer S.A., President &

Chief Executive Officer

—

Cemig, NED

—

Grupo Aguia Branca SA,

Board member

—

Petrobas SA, NED

Appointed to the Board

on 1 September 2023

DAME ANGELA STRANK

Independent

Non-Executive Director

Dame Angela brings a wealth of corporate business

experience to the Board and a proven track record in

managing engineering operations and driving technology,

science and engineering research programmes. Having

actively worked in climate research, the low carbon transition,

and pioneering women in STEM careers, sustainability and

corporate ethics are key areas of interest.As a member of the

Safety, Energy Transition & Tech Committee, Dame Angela

brings invaluable expertise to the Group’s development of its

safety and sustainability strategy, drawing on her experience

from chairing the sustainability and safety committees of

three other FTSE 100 companies.

Current

—

Mondi plc, NED

—

SSE plc, NED

— Rio Tinto, innovation advisory

committee

Past

—

Severn Trent plc, NED

—

BP p.l.c., various executive

roles

Appointed to the Board

on 1May 2020

Denotes Chair

Nominations, Culture & Governance

Audit

Remuneration

Safety, Energy Transition & Tech

Committee membership

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GOVERNANCE REPORT

COMPLIANCE WITH THE UK CORPORATE GOVERNANCE CODE

The Company is subject to the principles and provisions of the 2024 UK Corporate Governance Code (excluding provision 29 which is

applicable for accounting periods beginning on or after 1 January 2026) (the Code), and provision 29 of the 2018 UK Corporate Governance

Code (the 2018 Code, together, the Codes). Copies of the Codes are available at www.frc.org.uk. For the year ended 31 December 2025, the

Board considers that it has applied the principles and complied in full with the provisions of the Codes applicable for 2025. Further information

on our preparation for the application of provision 29 of the 2024 UK Corporate Governance Code is available on page 50.

Board leadership

andcompany

purpose

— Our Board comprises a diverse group of skilled and experienced individuals who,

through a programme of regular meetings and site visits, promote the long-term

sustainable success of the Group through the decisions they take

— Our Governance report from page 63 provides examples of our leadership and our

stakeholder engagement report from page 60 sets out how we have engaged with our

key stakeholders

— Throughout the year, the Board has provided oversight of the ongoing Group-wide

transformation programme

See page 10

Our purpose,

vision and

behaviours

See from page 60

Stakeholder

engagement

See from page 64

Board of Directors

See from page 71

Board focus

Division of

responsibilities

— We clearly define the roles of the Chair and the Chief Executive and fully support the

separation of the two roles

— The Board believes it operates effectively with the appropriate balance of independent

Non-Executive Directors and Executive Directors

— The Board regularly considers the time commitments of our Non-Executive Directors

— Prior Board approval is required for any Director’s external appointments to ensure

there is no conflict or compromise on their time

— The quality of information and resources available to the Board has enabled us to

operate effectively and efficiently throughout the year

See from page 64

Board of Directors

See from page 76

Nominations,

Culture &

Governance

Committee report

Composition,

succession

andevaluation

— Our Board comprises a combination of broad skills, experience and knowledge

— We have a clear process when considering appointments to the Board and maintain

effective succession planning

— For 2025, we carried out an internal evaluation of the Board and its Committees,

supported by Independent Audit Ltd. The methodology and outcomes can be found

onpage 73

See from page 64

Board of Directors

See page 69

Composition of

theBoard

See page 73 Board

effectiveness

Audit, risk and

internal control

— We recognise the importance and benefits of ensuring the internal audit function and

the external auditors remain independent

— The Board presents a fair, balanced and understandable assessment of the Group’s

position and its prospects

— Our risk and control environment is reviewed by the Audit Committee. The Board

considered both emerging and principal risks during the year

— The Audit Committee looked at preparations for provision 29 of the 2024 UK Corporate

Governance Code

— The Safety, Energy Transition & Tech Committee considered the information and data

principal risk, which forms part of the Committee’s review of business interruption and

cyber-security

See from page 48

Principal risks

See from page 78

Audit Committee

report

See page 110

Safety, Energy

Transition & Tech

Committee report

See page 111

Responsibility

statements

Remuneration

— The Remuneration Committee, comprising only Non-Executive Directors, is responsible

for developing the remuneration policy and determining executive and senior

management remuneration

— The Remuneration Committee carried out a review in July 2025 of the performance of

WTW as the independent adviser to the Committee.

— No Director is involved in deciding their own remuneration outcome

— The Remuneration Committee Chair and members of management engaged with

investors in the autumn of 2025 on the new remuneration policy proposed in this

AnnualReport for approval by shareholders at the 2026 AGM

See from page 82

Remuneration

Committee report

Compliance with the Code

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

Board

Chair

Chief Executive

Safety, Energy Transition

& Tech Committee

Remuneration Committee

Audit Committee

Nominations, Culture &

Governance Committee

Executive Team

Roles and responsibilities

The roles of the Chair and Chief Executive are clearly defined

andtheBoard supports the separation of the two roles. The Chair

isresponsible for the leadership and effectiveness of the Board.

TheChief Executive is responsible for the day-to-day management

ofthe Group’s business and leads the Executive Team which comes

together to review, agree and communicate issues and actions of

Group-wide significance.

Non-Executive Directors support the Chair and provide objective

andconstructive challenge to management. The Senior Independent

Director (SID) provides a sounding board for the Chair and serves

asan intermediary for the Chief Executive, other Directors and

shareholders when required.

The Chief Governance Officer ensures that appropriate and timely

information is provided to the Board and its Committees and is

responsible for advising and supporting the Chair and the Board

onall governance matters. All Directors have access to the Chief

Governance Officer and may take independent professional advice

atthe Group’s expense in conducting their duties.

Director independence

Potential conflicts of interest that each Director may have are

monitored and assessed and recommendations made to the Board

asto whether these should be authorised and if any conditions should

be attached to such authorisations to consider whether each of them

continues to be independent. The Directors are regularly reminded

oftheir continuing obligations in relation to conflicts and are required

to review and confirm their external interests at least annually.

Following due consideration, the Board determined that all

Non-Executive Directors continued to be independent in both

character and judgement. In accordance with the Code, the Chair

wasdeemed to be independent on her appointment.

THE ROLE OF THE BOARD

The Board is ultimately responsible to shareholders for the

leadership, direction, performance and long-term sustainable

success of the Group. It sets the Group’s strategy and objectives

andoversees and monitors internal controls, risk management,

principal risks, governance and viability of the Group. In doing so,

the Directors discharge their duties under s172 of the Companies

Act 2006 (see page 59 for further information).

The Board has established certain principal Committees to assist

itin fulfilling its oversight responsibilities, providing dedicated

focuson particular areas (see page 68). The Chair of each

Committee reports to the Board on the Committee’s activities

aftereach meeting.

In addition to the Board’s principal Committees, it has established

asub-Committee of Directors who each hold an appropriate level

ofUK national security clearance for the purpose of receiving and

considering, on behalf of the Board, any UK classified information

relating to the Group’s programmes and activities.

Bev Goulet, an independent Non-Executive Director and a

USnational, also sits on the board of Rolls-Royce North America

Holdings Inc. to create a link between the Board and the Group’s

North American governance structure.

Disclosure Committee

The Board has established a Disclosure Committee to assist it with

implementing the procedures and controls for the disclosure of

information to meet the legal and regulatory requirements set out

inthe FCA’s Listing Rules and Disclosure Guidance & Transparency

Rules and the UK Market Abuse Regulation. The committee is

comprised of any two of the Chair, the Chief Executive, the Chief

Financial Officer, the General Counsel and the Chief Governance

Officer, with all members of the committee expected to attend

meetings wherever possible.

Key matters reserved for the Board

— The Group’s long-term objectives, strategy andriskappetite

— The Group’s organisation andcapability

— Overall corporate governance arrangements, including Board

andCommittee composition, Committee terms of reference,

Director independence andconflictsofinterest

— Internal controls, governance and risk management frameworks

— Changes to the corporate orcapital structure oftheCompany

— The Annual Report and financial and regulatory announcements

— Significant changes in accounting policies or practices

— Annual plan and financial expenditure and commitments above

levels set by the Board

— Overview of the speak up programme and cases reported through

the speak up line

— The Group’s digital, IT and AI strategy

Principal risks: strategy; execution; and political

Corporate governance

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GOVERNANCE REPORT

THE ROLE OF E ACH COMMITTEE

Nominations, Culture & Governance

Lead the process for appointments to the Board; ensure

plansareinplace for orderly succession to the Board and

seniorexecutive positions

Oversee the development of a diverse pipeline for succession

Ensure the composition of the Board is appropriate and relevant

so that the Board is in the best position to oversee financial and

operational performance and drive the Group’s strategy

Assess and monitor culture to ensure alignment with the Group’s

policies, practices and behaviours

Oversee the Group’s Global Equal Opportunity Policy and

its implementation

Keep the Board’s corporate governance arrangements under

reviewand ensure these are consistent with best corporate

governancestandards

Receive reports on issues raised through the speak up line and review

the results of investigations into ethical and/or compliance breaches

and allegations of misconduct

Principal risks: compliance; talent & capability

Audit

Assist the Board in monitoring the integrity of the Group and

Company financial statements and any formal announcements

relating to financial performance

Review the internal financial controls, the risk management and

internal control systems and review any concerns relating to

financial fraud

Review and provide recommendations to the Board regarding

financial reporting, focusing on accounting policies, judgements

andestimates; disclosures; compliance with regulations; and

recommendation to the Board that the Annual Report is fair,

balanced andunderstandable

Monitor and review the effectiveness of the internal audit function

and oversee the Company’s relations with the external auditor and

approve their terms of engagement and fees

Principal risks: compliance; business interruption; market &

financialshock

See from page 78 for the

Audit Committee report

See from page 76 for the Nominations,

Culture & Governance Committee report

Remuneration

Determine a policy for Executive Director remuneration capable of

attracting and retaining individuals necessary for business success

Set remuneration for the Chair of the Board, Executive Directors and

senior management

Determine the design, conditions and coverage of incentives for

senior executives and approve total and individual payments under

the plans

Determine targets for any performance-related pay plans and the

issue and terms of all-employee share plans

Oversee any major changes in remuneration

Review workforce remuneration and related policy and the alignment

of incentives and rewards with culture, taking these into account

when setting the policy for Executive Director remuneration

Safety, Energy Transition & Tech

Provide oversight of responsibilities in respect of product safety,

people safety (occupational health and safety, process safety, the

maintenance of facilities, asset integrity and personnel security),

environment and energy transition, including progress and delivery,

with measurements against agreed metrics, targets and objectives

and technology (including cyber-security)

Monitor the operation of the Group’s product safety governance

frameworks, scrutinising the development and implementation of

changes in process and practice

Review, challenge and support the Group’s energy transition

strategy, track progress and review the environmental impacts

ofproducts and operations. Provide oversight and assurance

oftheGroup’s scientific and technological strategy, processes

andinvestments

Principal risks: safety; energy transition; information & data including

cyber-security; technology

See from page 82 for the

Remuneration Committee report

See page 110 for the Safety, Energy

Transition & Tech Committee report

CORPORATE GOVERNANCE

Find more information on the Terms of Reference for each Board Committee at

www.rolls-royce.com

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

BALANCE OF THE BOARD NON-EXECUTIVE DIRECTORS’ TENURE BOARD MEMBERS BY GENDER

Non-Executive

Directors – 10

Executive

Directors – 2

0–3 years – 3

3–6 years – 4

6–9 years – 3

Male – 6

Female – 6

1 According to the Company’s Articles, more than

50% of our Directors must be British citizens

BOARD MEMBERS BY NATIONALITY

BOARD MEMBERS BY ETHNICITY

British – 9

American – 1

German – 1

Brazilian – 1

White – 11

British-Asian – 1

COMPOSITION OF THE BOARD AT 26 FEBRUARY 2026

Non-Executive Directors’ skills andexperience at 26February 2026

CORPORATE GOVERNANCE

Dame

Anita

Frew

Birgit

Behrendt

Stuart

Bradie

George

Culmer

Lord

Jitesh

Gadhia

Beverly

Goulet

Nick

Luff

Wendy

Mars

Paulo

Cesar

Silva

Dame

Angela

Strank

Business experience

People & product safety

Cyber & digital

Climate change & sustainability

Engineering, science & technology

Company leadership

Finance

Audit & risk management

Remuneration

Transformation

Legal & regulation

Sector specific

Geopolitics

Global experience

Europe

Americas

Asia, Middle East & Africa

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GOVERNANCE REPORT

Board and Committee attendance in 2025

Board

8 meetings

Nominations,

Culture &

Governance

3 meetings

Audit

5 meetings

Remuneration

4 meetings

Safety, Energy

Transition & Tech

3 meetings

Dame Anita Frew 8/8 3/3 – – –

Tufan Erginbilgic 8/8 – – – –

Helen McCabe 8/8 – – – –

Birgit Behrendt 8/8 3/3 – – 3/3

Stuart Bradie

7/8 3/3 – 0/1 3/3

George Culmer 7/8 3/3 5/5 4/4 –

Lord Jitesh Gadhia 8/8 3/3 5/5 4/4 –

Beverly Goulet 8/8 3/3 5/5 4/4 –

Nick Luff 8/8 3/3 5/5 – –

Wendy Mars

8/8 3/3 – 4/4 3/3

Paulo Cesar Silva

8/8 3/3 1/1 – 3/3

Dame Angela Strank 8/8 3/3 – – 3/3

1 Joined the Remuneration Committee on 1 August 2025

2 Joined the Audit Committee on 1 August 2025

Attendance

The table above sets out the Directors’

attendance at Board and Committee

meetings throughout 2025.

Board members’ attendance was once

againhigh in 2025. However, Directors are

sometimes unable to participate in certain

Board and Committee meetings. George

Culmer was not able to attend the February

2025 Board meeting and Stuart Bradie was

not able to attend the November Board

meeting or the December Remuneration

Committee meeting due to prior business

commitments. However, the Directors

provided feedback on the matters under

consideration to the Chair of the Board and

the Committee Chair, as appropriate.

Most scheduled meetings end with a

privatediscussion of the Non-Executive

Directors led by the Chair of the Board or

Committee, without the Executive Directors

or members of the Executive Team or

management present.

In support of the Board and Committees’

work, where there is a requirement for

greater, in-depth discussion, we hold deep

dives into specific areas of focus outside

themeeting schedule. In 2025, the Safety,

Energy Transition & Tech Committee held

adeep dive relating to cyber-security. All

members of the Board are invited to join

these sessions and all members of the Board

did join the cyber-security deep dive.

The Remuneration Committee held three

additional sessions during 2025 to consider

the proposal for changes to the remuneration

policy and to discuss shareholder feedback

on these proposals.

Where legislation and regulation has

changed that impacts directors’ duties,

weprovide in-depth training as part of

ourNominations, Culture & Governance

Committee programme. In addition, annually

we provide training on specific topics

capable of impacting the Group.

InDecember, our General Counsel and

members of the Legal, Ethics & Compliance

teams provided an overview of competition

and anti-trust law.

Site visits

To further support the work of the Board

andits Committees, we arrange site visits to

different areas of the business throughout

the year so that Board members are able

togain a deeper understanding of how the

different divisions operate. During such site

visits the Board meet our people including

key personnel within the divisions, receive

tours of facilities and attend meetings which

focus on specific areas of interest for each of

the businesses.

— In May, we held aMeet the Board event.

This took place at the Learning and

Development Centre in Derby, UK and

provided a number of our employees at

various levels of seniority the opportunity

to talk to the Board in an informal setting.

The afternoon consisted of breakout

sessions where Board members could

talkabout their experiences and career

progression, while the employees were

given the opportunity to ask the Board

members questions on a variety of topics

relating to Rolls-Royce.

— In September, the Safety, Energy Transition

& Tech Committee members met with the

Defence leadership team in Bristol, UK.

The site tour covered the Operations

Facility and Innovation Suite, and included

discussion on site safety, site improvement

and capacity expansion. The Committee

members interacted with and received

presentations from management and

engineers. There was also an opportunity

to meet with employees in a less formal

capacity over lunch.

— A second Meet the Board event took place

in Dahlewitz, Germany in October. The visit

included an extensive tour of the site and

was followed by a session with colleagues

who were given the opportunity to

askquestions directly to the Board.

Employees were able to gain insights from

Board members who reflected on their

impression of the facilities and the strong

culture of safety at the Dahlewitz site.

— Our Employee Champions, Bev Goulet and

Wendy Mars, visited our sites in Inchinnan

and Washington, UK. See page 77 of

theNominations, Culture & Governance

Committee report for more information

about these visits.

CORPORATE GOVERNANCE

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

Key stakeholders

People

Customers

Suppliers and partners

Communities

Governing bodies and regulators

Investors

CORPORATE GOVERNANCE

BOARD FOCUS

In 2025, the activities of the Board followed a detailed programme focused on priorities which support our vision of becoming a high-performing,

competitive, resilient and growing business. From considering the long-term strategy of the Group to shaping the culture, the Board ensures the

interests of our stakeholders are considered throughout the decision-making process.

This section should be read in conjunction with our s172 statement on page 59 and Stakeholder engagement section from page 60.

The Board considers a number of standing items at each meeting, including:

— a report on current operational matters from the Chief Executive;

— a report on year-to-date financial performance including budgets and financial plans from the Chief Financial Officer;

— reports from the Chairs of the Committees on matters considered at the respective Committee meetings; and

— reports on governance matters from the Chief Governance Officer and legal updates from the General Counsel.

The key matters, decisions considered and outcomes determined by the Board during the year are set out below. The Board recognises that

outcomes may not crystallise as expected, or may change over time. Not all decisions will have immediately observable outcomes.

Decisions Outcomes Stakeholders

Strategy and transformation

The Board has been focused on the delivery of the

initiativeswithin our strategic framework, namely:

portfoliochoices and partnerships; strategic initiatives;

efficiency and simplification, and lower-carbon and

digitallyenabled businesses.

The ongoing transformation programme has supported

ourstrong strategic delivery and underpinned our actions,

investments, and performance improvements across

theGroup.

This has delivered strong financial performance and

sustainable growth which has enabled the Board to look

ahead to the mid-term and beyond the mid-term.

See from page 11

Our strategy

— Continued to track progress made against our

strategicinitiatives

— Received a deep dive on the Civil Aerospace

divisiontoreview strategy beyond the mid-term and

implementation of the transformation programme

— Approved capital investment in Power Systems

— Considered aspects of a successful bid submission by

Rolls-Royce SMR to Great British Energy – Nuclear to

build three SMR units in the UK

— Considered the transaction between the trustee of the

Rolls-Royce UK Pension Fund and Pension Insurance

Corporation for a £4.3bn bulk annuity insurance ‘Buy-in’

for the scheme

Operational excellence

The success of our strategic delivery is predicated on our

commitment to operational excellence. The Board’s review

and decisions focused on the progress of our strategic

initiatives to drive a step-change in operational performance

and optimisation.

See from page 11

Our strategy

— Endorsed new Civil Aerospace value stream operating

model aligned to strategic KPIs

— Tracked growth in aftermarket operations and adoption

of MRO transformation framework

— Approved investment and deployment of a refreshed

Group Business Service (GBS) strategy, which involves

scaling up GBS operations and efficiencies. We have

opened a new GBS centre in Poland and are expanding

our centre in India

— Monitored technological updates throughout the

year,including initiatives to improve durability and time

on wing

— Endorsed implementation of governance and mitigation

strategies to enhance supply chain resilience

Financial

Financial performance is closely monitored by the Audit

Committee and the Board which consider the position and

prospects of Rolls-Royce.

See from page 19

Financial review

— Approved the 2025 annual budget and five-year plan

— Approved the 2024 full year results announcement,

2024 Annual Report and Accounts, 2025 half-year

results announcement and the trading updates issued

during the year

— Reviewed financial position, going concern and viability

of the Group

— Assessed the impact of announced tariffs and the

mitigating actions taken

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GOVERNANCE REPORT

Key stakeholders

People

Customers

Suppliers and partners

Communities

Governing bodies and regulators

Investors

CORPORATE GOVERNANCE

BOARD FOCUS CONTINUED

Decisions Outcomes Stakeholders

Shareholder distributions and capital framework

Rolls-Royce has achieved strong financial performance

in2025, with significant year-on-year improvement across

allkey financial metrics, due to another period of strong

strategic delivery.

The significant growth in operating profit and sustainable

free cash flow growth in 2024 strengthened the balance

sheet and enabled the Board to reinstate shareholder

distributions in 2025 and to reassess the Group’s

capitalframework.

See from page 19

Financial review

— Approved the reinstatement of shareholder dividends,

returning £0.9bn of dividends to shareholders in 2025

comprising a 6p dividend per share in respect of the

full year 2024 results and the interim dividend of 4.5p

pershare in respect of the 2025 half-year results

— Approved a £1bn share buyback programme through

2025 and a £200m interim share buyback programme

which ran from 2 January 2026 to the date of this report

— Repaid in cash a $1bn bond that matured in October and

renewed our revolving credit facility

People and culture

In 2024, Rolls-Royce launched its new purpose, vision

andbehaviours to align our culture with our strategy.

Ourbehaviours are: put safety first; do the right thing;

keepitsimple; and make a difference.

In 2025, the Board has been focused on oversight of

management initiatives to embed the desired culture

required to support the delivery of our strategy. Our

behaviours complement our strategic framework and are

keyto delivery of our transformation into a high-performing,

competitive, resilient and growing business.

See from page 31

People and culture

— Reviewed the implementation of our purpose, vision

andbehaviours and endorsed the launch of our new

leadership expectations to perform and transform

— Reviewed the results of the annual Our Voices employee

engagement survey

— Considered the results from our speak up line

programme

— Approved updates to Our Code and Group policies to

reflect our behaviours

— Endorsed key Group-wide HSE activities and

programmes including updates on our journey to

zeroharm

— Tracked key HSE performance KPIs to monitor progress

Risk and internal control

The approach to risk management and internal control

atRolls-Royce supports the delivery of our key strategic

objectives. The Board and its Committees consider the

nature and extent of the principal risks to Rolls-Royce,

which informs discussions ranging from strategic delivery

to financial performance.

See from page 48

Principal risks

— Approved compliance framework and endorsed

approach to compliance risk management

— Reviewed principal risks and approach to risk

management

— Considered our cyber-security framework and maturity

assessment

— Monitored preparedness for the changes to the 2024

Code effectivefrom 1 January 2026, related to the review

of the effectiveness of the Company’s risk management

and internal control framework

— Considered supply chain performance risks and

mitigations, including our business interruption

framework and emerging risks

Governance

Governance arrangements at Rolls-Royce provide the

overarching structure for accountability and decision-

making needed to achieve our strategic objectives.

See from page 67

Governance report

— Considered succession at the most senior levels of

thebusiness

— Appointed Paulo Cesar Silva as a member of the

AuditCommittee

— Appointed Stuart Bradie as a member of the

Remuneration Committee

— Reviewed and updated the Board governance

documents which included the terms of reference for

each Committee, and Matters Reserved for the Board

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

CORPORATE GOVERNANCE

AREAS OF FOCUS

2025 FOCUS PROGRESS IN 2025 FOCUS IN 2026

Board composition anddynamics

Succession planning for the Board

and Executive Team

The Nominations, Culture & Governance Committee and

theBoard considered succession at the most senior levels

ofthe business.

Paulo Cesar Silva was appointed to the Audit Committee

inAugust 2025. Paulo brings relevant financial and

sectorexperience to the Audit Committee. In addition,

StuartBradie joined the Remuneration Committee in

August2025. Stuart brings broad insights as a global

business leader. As amember of the Safety, Energy

Transition & Tech Committee (the SETT Committee),

Stuartprovides insight onournon-financial key

performance metrics.

Conclude succession planning for

Nick Luff and Beverly Goulet as

theyare due to retire from the Board

in 2027.

Continue to review our approach to

building talent and capability across

the organisation with a particular

focus on the development of, and

succession planning for, the senior

leadership population.

The Board’s role

Continued focus on strategic

progress, ambitions and future

growthopportunities

Focus on emerging technologies

including digital and AI and their

associated risks and opportunities

Continue to focus on areas of risk

andchallenge to the business,

forexample, supply chain and

cyber-security

The Board considered the long-term prospects of

theCompany’s business divisions beyond the mid-term of

2028. This included a deep dive session on Civil Aerospace.

There has been a continued focus on emerging

technologies, including digital and AI. In April, the

SETTCommittee considered theapproach to digital and

data assets, including AI. This was followed by a deep dive

session in December 2025, attendedby all members of the

Board, on our cyber-security risk and maturity.

In December, the Audit Committee considered business

interruption, with particular focus on incident management

and our supply chain, at which all members of the Board

werepresent.

Continued focus on strategic

progress, ambitions and future

growthopportunities

Focus on emerging technologies

including digital and AI and their

associated risks and opportunities

Continue to focus on areas of risk

andchallenge to the business,

forexample, supply chain and

cyber-security

The Board at work

Board site visits and deep dives for

opportunities to meet with our people

and observe how our new purpose

and behaviours are being received in

the business

The Board met with our people throughout the year.

Thisincluded site visits as a Board to Derby, UK and

Dahlewitz, Germany. Members of the Board visited sites

including Washington and Inchinnan, UK. The Board also

received reports from the Employee Champions who meet

with the employee stakeholder group. See page 70 for

further information.

The SETT Committee visited the Defence team in Bristol, UK.

More information on this can be found on page 70.

In addition to the areas set out

above, the Board, SETT Committee

and Employee Champions will

engage with our people on site visits.

In doing so, Board members will pay

particular attention to how our new

People Deal and continued focus

onour ‘safety first’ behaviour is

resonating with colleagues.

BOARD EFFECTIVENESS

Review of the Board and Committees

In January 2026, we carried out an internal review of our Board’s

effectiveness in 2025, supported by Independent Audit Ltd.

Thequestionnaire-based approach was wide-ranging and again

included a focus on Board composition and dynamics; the Board’s

role; and the Board at work.

The review took the form of an online questionnaire and the

scopewas agreed with the Chair and Chief Governance Officer in

advance. Independent Audit Ltd provided an anonymised report

and the Chair and Chief Governance Officer, in discussion with

theBoard, have agreed an action plan for 2026. Each Committee

chair considers feedback for the Committees for which they are

responsible. In addition to this review, during a private meeting of

the Non-Executive Directors, the Senior Independent Director led

areview of the Chair’s performance without the Chair present.

The Nominations, Culture & Governance Committee has an

itematthe end of each agenda without any management present

and,during these sessions, they discuss the performance of the

ChiefExecutive throughout the year. The Chair also conducted the

Chief Executive’s annual performance review having sought feedback

on his performance from the Board. These meetings concluded that

both the Chair and the Chief Executive were effective and feedback

was shared with each of them. In addition, the Chair met with each

ofthe Non-Executive Directors separately to discuss their individual

performance and gather feedback on the Board and Committee

evaluation. Having undertaken an externally facilitated Board

effectiveness review in 2023 and mindful of the Code’s provision,

theBoard intends to carry out an externally facilitated performance

review in 2026.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GOVERNANCE REPORT

6 7 10984 5 1 32

1. DR JÖRG STRATMANN

CEO – Rolls-Royce Power Systems AG

5. CHRIS CHOLERTON

Group President

9. ADAM RIDDLE

President – Defence

Chairman & CEO – Rolls-Royce North America

2. NICOLA GRADY-SMITH

Chief Transformation Officer

6. TUFAN ERGINBILGIC

Chief Executive

10. SIMON BURR MBE

Group Director of Engineering,

Technology&Safety

3. DR ROB WATSON

President – Civil Aerospace

7. SARAH ARMSTRONG

Chief People Officer

4. HELEN MCCABE

Chief Financial Officer

8. MARK GREGORY

General Counsel

On 1 March 2026, Maria Varsellona will join the Executive Team as Chief Legal Officer. Mark Gregory will leave the business on 31 March 2026.

On 9 March 2026, Martin Thomsen will join the Executive Team as Chief Procurement and Supply Chain Officer.

Appointment details and career highlights

of the members of the Executive Team are

available at www.rolls-royce.com

Executive Team

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

Energy transition

& tech committee

Executive audit

committee

People

committee

Operating

committee

Financial and

operating

drivers review

Business

review

Investment

committee

Executive Team

The Chief Executive is responsible for the day-to-day management of the Group. He leads the Executive Team, which comes together

toreview, agreeandcommunicate issues and actions of Group-wide significance and is supported by the governance framework and

shown above, in the delivery of its remit. A summary of responsibilities is set out below:

Executive audit committee People committee

— consider principal risks

— review delivery of the in-year internal audit plan and finalise

the internal audit plan for the forthcoming year ahead of

AuditCommittee approval

— ensure that Rolls-Royce has a Winning Team to deliver our

strategic priorities

— keep under review talent and succession, performance and

leadership, reward, purpose and experience

Energy transition & tech committee Operating committee

— ensure the Group is playing a winning role in energy transition

andfuture technologies

— consider the rationale for and progress of investments in

energytransition

— make capital allocation decisions on technologies that support

energy transition

— assess strategic opportunities for future technology investments

— improve Group-wide operational performance

— review supply chain performance

— oversee critical enablers of operational performance

Investment committee Financial and operating drivers review

— make capital allocation decisions for all investments, acquisitions

and divestments in line with our strategy

— review performance of in-flight investments

— review in-year financial performance and operational drivers

against plan

— agree interventions where required

Business review

— develop division pricing strategy and commercial capability

— identify and deliver pricing actions and capability improvements

toenable a step-change in performance

— review performance by division, focusing on in-year and

five-year horizons

— includes financial and operational performance, people and

talent,strategic initiatives, principal risks and engagement with

ourpeople

EXECUTIVE TEAM

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GOVERNANCE REPORT

KEY AREAS OF FOCUS IN 2025

— Succession planning for Non-Executive Directors

— Reviewed our new Belonging Framework

— Executive Team and key role succession planning

Members All Non-Executive

Directors are members

of the Committee

Remit See page 68

I am pleased to present the 2025 report

ofthe Nominations, Culture & Governance

Committee which provides an overview of

our key areas of focus during 2025.

Nominations

Composition of the Board and

itsCommittees

The Committee is responsible for keeping

thestructure, size and composition of the

Board and its Committees under review.

In2025, there were no changes to the

composition of the Board. During the

year,theCommittee considered the

re-appointment of Lord Jitesh, forathree-

year term. As all Non-Executive Directors are

appointed annually once they have served six

years on the Board, George Culmer, Nick Luff

and Bev Goulet were each re-appointed for a

further one-year term.

In anticipation of changes to the composition

of our Committees as Nick Luff and Bev

Goulet approach the end of their tenure on

the Board, Paulo Cesar Silva was appointed

to the Audit Committee and Stuart Bradie was

appointed to the Remuneration Committee

each from 1 August.

The role of each Committee is set

outonpage 68. The full terms of

referenceapplicable to allCommittees

canbe found atwww.rolls-royce.com.

Seepages 64 and 65 for ourcurrent

BoardCommittee membership. Directors

biographies are available from page 64.

Board appointment, induction and

development

During 2025, the Committee initiated a

process to find a successor for Nick Luff,

asChair of the Audit Committee, which is

ongoing. Nick is due to retire from the

Boardin 2027.

Prior to making any new appointments to

theBoard, the Committee considers the skills

and attributes required and agrees a profile.

The Committee also provides input into a

shortlist of candidates and is involved in the

interview process for all appointments. The

Committee recommends the appointments

tothe Board for approval. All Non-Executive

Directors are appointed to the Nominations,

Culture & Governance Committee and to

other Board Committees, depending on the

skills they bring.

The Chief Governance Officer arranges

acomprehensive, tailored induction

programme for newly appointed Non-

Executive Directors, which includes

dedicated time with the Executive Team

andsenior management and scheduled

tripsto business operations. The programme

is tailored based on the experience and

background of the individual and the

requirements of the role including the

rolethey will be taking up or the Board

Committees they will join. All Directors visit

the Group’s main operating sites as part of

their induction and are encouraged to make

at least one visit to other sites every year. Site

visits are an important part of the induction

process, as well as for continuing education.

They help Directors understand the Group’s

activities through the direct experience of

seeing our facilities and operations and by

having discussions with a diverse group of

our people. Information on our site visits

during the year can be found on page 70.

It is important that the Directors continue to

develop and refresh their understanding of

the Group’s activities and, where necessary,

they will deep dive into specific areas (see

page 70). Prior to joining their first Audit

andRemuneration Committee meetings,

Paulo and Stuart met with key management

personnel to deepen their understanding of

the matters considered by those Committees.

In addition to understanding the Group, it

isequally important that Directors continue

toupdate their skills and knowledge and

receive relevant training where necessary as

well as ensuring there is an appropriate focus

on the Group’s different stakeholders. The

Board’s engagement with its stakeholders is

set out on pages 60 to 61.

My fellow Directors and I also attend relevant

external seminars, conferences and training

events to keep up-to-date on developments

in key areas. In December, we received

training in relation to competition laws.

Welearnt about the areas of focus for our

competition law compliance activities across

our business divisions and the controls in

place to mitigate the risks associated with

abreach of these laws.

Directors’ conflicts of interest

As required under the Code, the Board

monitors and reviews any potential

conflictofinterest. Any additional external

appointments taken up by Directors during

the year are considered by the Committee

and approved by the Board prior to the

Directors accepting such appointments. The

Committee considers any conflicts that may

arise as a result of any external appointments

taken up by the Directors and the Board

monitors the extent of those interests

andthetime commitment required to fulfil

themto ensure that effectiveness is not

compromised. As part of the Committee’s

discussions, external appointments are

considered against the parameters set by ISS.

The Committee has found this to be a useful

gauge when discussing whether there is

potentially any impact on Directors’ time

commitments when taking on additional

external appointments. During 2025, none

ofthe Board members took on any additional

external appointments.

In 2025, the Directors demonstrated a strong

commitment to the Company, as shown by

their high levels of attendance at all our

meetings (see page 70).

Succession planning

The Committee considers the current skills,

experience and tenure of the Directors, both

Executive and Non-Executive, and assesses

future needs against the longer-term strategy

of the Group. The skills and experience

criteria for incoming directors is discussed

and agreed before the recruitment

processcommences.

In this way, the Committee plays a vital role

inpromoting effective Board and leadership

succession, making sure it is fully aligned to

the Group’s strategy. In July, the Committee

discussed Executive Team succession, which

included a review of our succession pool for

the most senior leaders.

Principal risk review

The Committee considers the principal risk

oftalent and capability as part of the regular

discussion on succession planning. In 2025,

we learnt about the key features of our

systemic approach to building business

capabilities to drive a high-performance

culture. The development of our leaders

iscritical to ensuring the right culture and

behaviours are embedded Group-wide. We

learnt about the many and varied strategic

programmes for building and developing our

leaders of the future.

Nominations, Culture & Governance Committeereport

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

Culture

People and culture

Our people and our culture are at the heart

of the transformation of Rolls-Royce. During

2025, the Committee received updates on

how our business management approach

isdriving cultural change and how we are

embedding our purpose and behaviours

intoeveryday work, particularly through

ourfocus on our leaders and Change Makers.

Creating a high-performing merit-based

organisation, where everyone, regardless of

their identity, feels able to thrive and belong

is a priority. The Board recognises that this

isan area subject to changing laws and

regulations and that the policies and

processes within Rolls-Royce must also

evolve and adapt. The Committee was

therefore pleased to consider our new

Group-wide Belonging framework. This

framework focuses on fairness, access and

meritocracy and includes the launch in 2025

of our Employee Voice Network and our new

Global Equal Employment Opportunities

Policy, which was approved by the

Committee. This new policy reaffirms our

commitment to non-discrimination and

merit-based work.

During 2025, we considered the results of the

Our Voices survey. The 2025 survey results

indicate strong performance relative to the

2024 baseline with increases in the overall

engagement index, and no change in the

inclusion metric ‘at work, I feel as if I belong’.

The Board composition policy aims to

maintain gender parity. As there were

nochanges to the Board during 2025, we

continued to meet the Board’s ambition in

this regard. With my position as Chair of the

Board and with Helen McCabe as our Chief

Financial Officer, we continue to exceed the

Board’s intention that at least one senior

Board member will be a woman. In addition,

one of our Board members, Lord Jitesh,

isfrom a non-white ethnic minority

background. The Board composition

policyisavailable at www.rolls-royce.com

Representation in our Executive Team

continues to stand at 30% female, 70% male.

Disclosures under UK Listing Rule 6.6.6

canbe found on page 214. Progress on

our2025 diversity targets can be found

onpage 36.

Employee voice

Our Employee Champions, Bev Goulet and

Wendy Mars, enjoyed a number of engagement

opportunities in 2025. In May, they visited

our Nuclear Skills Academy in Derby, UK

andmet with staff and apprentices there.

In July, they visited our compressor

manufacturing facilities in Washington and

Inchinnan, UK. At both sites, Bev and Wendy

met with staff at all levels from apprentices

tosite leadership, including trade union

representatives. They reported their

impressions of both sites to the Board, noting

in particular the pride that staff have in their

workplace and in Rolls-Royce.

Speak up programme

During the year, the Committee

receivedreports from our Chief

ComplianceOfficer– Group Strategy

andPolicy on the operation of the speak up

line. The Committee considered reporting

trends in 2025, and was pleased to note

thatour speak up rate is in line with external

benchmarks and to learn about a number of

improvement activities relating to the speak

up programme. Information on the speak up

line can be found on page 37.

For more information about People and

culture see from page 31.

During our visits to

Washington and Inchinnan

inthe UK, we were struck

bythe immense pride felt by

the staff for their workplace.

They shared their

enthusiasm and optimism

forthe future of their sites

and were excited by the

opportunity to play their

partin the ongoing

transformation of

Rolls‑Royce.”

Bev Goulet,

Independent Non-Executive

Director and LeadEmployee

Champion

NOMINATIONS, CULTURE & GOVERNANCE COMMITTEEREPORT

Governance

Human rights

The Committee reviewed and approved

changes to our Human Rights Policy. For

more information on human rights and

anti-slavery see page 37.

Corporate governance

During 2025, the Audit Committee took steps

to prepare for reporting under provision 29

of the 2024 UK Corporate Governance Code

against which we have to report next year.

We are pleased to report full compliance

withthe2024 Code as it applies to the 2025

financialyear.

Extracts from the Group’s governance

framework, which is also applied to our

subsidiary companies and is our response

tothe Wates principles, are available at

www.rolls-royce.com

Evaluating the work of the Committee

The work of the Committee in 2025 was

ratedhighly in our Committee evaluation

report and I would like to thank my Board

colleagues for their support and counsel

during 2025. For more information on the

Board evaluation see page 73.

Our focus in 2026

The evaluation clearly identified those

areasfor ongoing focus in 2026. In

particular,we will conclude our succession

planning for Bev Goulet and Nick Luff, who

will retire in2027. We will also maintain our

focus onlonger-term succession planning

formembers of the Executive Team and to

monitoring progress across the organisation

towards sustaining and embedding the

cultural change that will underpin our

transformation over the long term.

I look forward to working with my fellow

Directors in 2026 on these and other

important topics within the remit of

theCommittee.

Dame Anita Frew

Chair of the Nominations,

Culture & Governance Committee

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GOVERNANCE REPORT

Members Nick Luff (Chair)

George Culmer

Lord Jitesh Gadhia

Beverly Goulet

Paulo Cesar Silva

Remit See page 68

I am pleased to present the Audit Committee

report for the year ended 31 December 2025,

which provides an overview of our areas

offocus during the year, as well as the

Committee’s key activities and the

frameworkwithin which it operates.

George Culmer, Bev Goulet and I have recent

and relevant financial experience. This

iscomplemented by Lord Jitesh Gadhia’s

complex advisory and transactional

experience. The appointment of Paulo Cesar

Silva as a member of the Committee on

1August brings additional aerospace sector

knowledge to our deliberations. The Board

remains confident that the Committee

members have the appropriate knowledge,

skills and experience to fulfil the duties

delegated to the Committee and that

theCommittee, as a whole, has the

competence relevant to the sectors in

whichthe Group operates.

Our focus in 2025

This report sets out the work of the Committee

in 2025 with a focus on the issues relevant to

the Group’s financial reporting, considering

how business performance is reflected,

assessing keyaccounting judgements and

ensuring ongoing quality of the related

disclosures. Inour meetings, we continue

tohave robust conversations to ensure

management are challenged, to satisfy

ourselves that the judgements taken are

appropriate for theGroup and the disclosures

made are reflective of performance.

During the year the Committee undertook

deep dives of the principal risks we oversee,

including our supply chain performance and

mitigations, and a review of our incident

management framework, each an aspect of the

business interruption principal risk. We also

reviewed how we mitigate the risk of financial

shock under the financial & market shock

principal risk, and we considered financial

reporting risks and the management of tax and

customs risks. We approved our tax policy to

ensure it remains appropriate for the Group

and considered the Group’s position in respect

of its external tax disclosure obligations.

The Committee continues to oversee the

assurance activity conducted by internal

audit.The Committee monitored delivery

oftheir 2025 internal audit plan, considered

thefindings from internal audit reports and

reviewed the implementation of identified

actions. We also approved the 2026 internal

audit plan, confirming the focus on key risks

and adequate cover of all material operations

and appropriate geographical coverage.

During 2025, we have seen a material

strengthening of the Group’s balance sheet,

improving from a net liabilities position in

2024to a net assets position in 2025. This

strengthening has enabled the reinstatement

of shareholder distributions in 2025 through

both dividends and share buybacks, for which

the Committee supported the Boardinits

deliberations and confirmed thesufficiency

ofthe Company’s distributable reserves.

Financial reporting

The Group has complex long-term contract

accounting and, as in prior years,the Committee

spent much of its timereviewing the accounting

policies andjudgements implicit in the Group’s

financial results. In 2025, we considered

theimplications of our assumptions and

keyaccounting judgements on the financial

performance of the Group. We assessed the

implications of the renegotiation of the most

significant onerous aftermarket contracts in

Civil Aerospace on our long-term contract

accounting, as well as the impact of ongoing

supply chain challenges with a backdrop of

continuing geopolitical uncertainty.

Following an investment made by ČEZ Group

(ČEZ), the Group relinquished control of

Rolls-Royce SMR Limited (Rolls-Royce SMR)

in the first half of 2025. Alongside the

deconsolidation of Rolls-Royce SMR,

theCommittee determined that the

NewMarkets operating segment that was

previously reported at31December 2024

was no longer consideredto meet the

definition of an operating segment. The

Group’s share of thefinancial results of

Rolls-Royce SMR have been included in

‘AllOther Businesses’. For further information

on this change, see note 2 of the Consolidated

Financial Statements on page 134.

The Committee also considered changes

inthe global macro-economic and political

environment. Most notably the Committee

tested with management and supported the

conclusion that the Group expected to fully

offset the impact of announced direct tariffs

on the Group through the mitigating actions

that were taken.

We have ensured that the disclosures in

respect of all key areas of judgement are

appropriate and balanced. We assess and

consider the sensitivity of the estimates

tochanges in key assumptions which are

summarised in note 1 of the Consolidated

Financial Statements on page 124.

Climate change

We have continued to support the Board in

its considerations of climate change risks and

opportunities. The Committee has reviewed

and approved the TCFD recommendations

(see page 40) and noted the progress

duringthe year as the disclosures were

beingprepared for this Annual Report. The

Committee has ensured it understands and

challenged the assumptions in the climate

scenarios used by management including

theforecasts for the assessment of going

concern and viability, long-term contract

accounting, impairment testing and deferred

tax asset recognition. The impact of climate

change, where material, is reflected in

thefinancial statements and disclosed

accordingly. See note 1 in the Consolidated

Financial Statements from page 121.

The Committee has received updates on

thedevelopment of non-financial reporting

and assurance requirements in respect of

sustainability. This has included updates on

climate disclosures under the existing TCFD

recommendations, our preparedness for

newEU reporting requirements set out

intheCorporate Sustainability Reporting

Directive (CSRD), EU Taxonomy, Corporate

Sustainability Due Diligence Directive

(CSDDD) and new UK reporting requirements

in the International Sustainability Standards

Board (ISSB).

The Committee also received updates on

theimproving internal controls in relation to

process and data and considered progress

made with the Group’s reporting.

AREAS OF FOCUS IN 2025

— Assessed the impact on long-term contract accounting of contract renegotiations,

supplychain challenges and geopolitical uncertainty

— Assisted the Board in its decision to reinstate shareholder distributions in 2025 through

both dividends and share buybacks

— Considered the accounting impact of changes to the UK defined benefit pension

scheme,reviewed the changes in governance for Rolls-Royce SMR Limited leading to

itsdeconsolidation, and assessed the judgement to fully recognise the deferred tax asset

related to historical UK tax losses

Audit Committeereport

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

Fair, balanced and understandable assessment

As in prior years, at the request of the Board, the Committee considered whether the Annual Report, taken as a whole, is fair, balanced and

understandable and that it provides the information necessary for shareholders to assess the Company’s position, performance, business

model and strategy. In so doing, the Committee considered the financial reporting procedures and internal controls in place in preparing

thereport. The Committee is satisfied that there is a robust governance framework with well documented planning and procedures for the

preparation of the report and a collaborative approach across all those who contribute to the report. The Committee concluded that the basis

of preparation was consistent with financial reporting throughout the year and that all significant issues had been considered. The Committee

was satisfied that the process was effective and that the messaging was consistent, including the narrative reflecting the financials. It was

confirmed to the Board that, when taken as a whole, the Annual Report is fair, balanced and understandable. The Board’s confirmation is set out

on page 111.

Significant reporting matters relating to the 2025 financial statements:

A summary of the significant matters we considered in respect of the 2025 Consolidated Financial Statements is set out below.

AREA OF FOCUS CONSIDERATIONS

Long-term contract

accounting

The Committee considered the assessment of estimates of future revenue and costs on the Group’s

long-term contractual arrangements. This has continued to be a particular focus for the Committee due to

the complex nature of long-term contract accounting, ongoing geopolitical uncertainty and the potential

implications of this on future costs, as well as the ongoing supply chain challenges and the implications

ofthis on forecasting future costs and capacity output. Onerous contracts are particularly sensitive to

changes in revenue as well as cost assumptions, therefore we also focused on the impact of renegotiated

onerous aftermarket contracts. We reviewed contract catch-ups to understand the changes to revenue

and the cost assumptions driving them. Further, we reviewed the disclosures and concluded these,

together with the assessments, were appropriate. See note 1 in the Consolidated Financial Statements.

Tax accounting

The Committee discussed the recoverability of deferred tax assets and the forecasts, assumptions and

sensitivities applied in order to ascertain the recognition and recoverability of them. The Committee

discussed the basis for the recognition and considered the judgements and estimates necessary to assess

their recoverability. This was particularly important during the year as we moved back to full recognition

ofthe deferred tax asset related to UK tax losses. We considered the recognition of the UK deferred tax

assets in light of the requirements set out in IAS 12 Income Taxes to assess probable profits. We confirmed

the approach, which remained consistent with that taken in 2024, together with the disclosures set out in

notes 1 and 5 to the Consolidated Financial Statements on pages 121 and 142, respectively.

Deconsolidation of

Rolls-Royce SMR Limited

The Committee discussed the deconsolidation of Rolls-Royce SMR Limited (Rolls-Royce SMR) arising

fromthe new equity investment by ČEZ Group in March 2025 and reflecting the terms of the revised

shareholder agreement which resulted in the Group relinquishing control of Rolls-Royce SMR. The

Committee also considered the accounting treatment of the deconsolidation and recognition of its

investment in Rolls-Royce SMR at its fair value, and the resulting gain on disposal recognised in the year.

The Committee concluded that it was appropriate to deconsolidate Rolls-Royce SMR during 2025 and

recognise this gain on disposal. Further detail onthe deconsolidation and resulting gain on disposal can

be found in note 29 to the Consolidated Financial Statements on page 179.

Changes to the UK defined

benefit pension scheme

The Committee considered the impact of the trustee of the Rolls-Royce UK Pension Fund entering into

aBuy-in transaction with Pension Insurance Corporation plc. The Committee paid particular attention to

asset re-measurement loss that arose as a result of this transaction, and whether that asset re-measurement

loss should be recognised through the income statement or through other comprehensive income and

expenses. The Committee concluded that it was appropriate to recognise the asset remeasurement loss

through other comprehensive income and expenses. See note 24 to the Consolidated Financial Statements

on page 171.

Going concern and viability

As in previous years, the Committee reviewed the information, underlying assumptions and downside

risksmodelled and presented in support of the going concern and viability assessment. The Committee

concluded that the Group has a strong liquidity position over the going concern period and that there is a

reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they

fall due over the next five years. The Going concern and viability statements are set out from page 57.

Alternative performance

measures (APMs)

The Committee reviewed the clarity of the definitions and the reconciliation of each APM to its statutory

equivalent. The Committee concluded that there was no undue prominence of the APMs in the Annual

Report. See page 208 for a reconciliation of APMs to their statutory equivalents.

AUDIT COMMITTEEREPORT

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GOVERNANCE REPORT

— monitor assurance received from the

Executive Team regarding compliance

withrelevant policies;

— monitor assurance received on the

effectiveness of the Group’s internal

control environment;

— review reports from this Committee,

theinternal audit function and the

externalauditor;

— review the Group’s response to incidents

and threats, including those related to

cyber-security and safety; and

— review information gathered from

theGroup’s formal whistleblowing

processwhere issues relate to

financialmisconduct.

Where opportunities for improvement

wereidentified, action plans have been

putinplace and progress is monitored by

theCommittee.

UK Corporate Governance Code

– provision 29

Provision 29 of the 2024 UK Corporate

Governance Code, which applies to

Rolls-Royce for the financial year

beginningon 1January 2026, requires

anexplicit declaration by the Board as to

theeffectiveness of material controls as

atthebalance sheet date. During the year

andwitha view to making the required

declaration in the 2026 Annual Report,

wecontinued to focus on strengthening

ourrisk and control environment. We

received reports on the Group’s progress

inidentifying and documenting material

controls, and discussed the level of

preparedness of the assurance processes

forassessing their effectiveness. Further

information on our preparation for provision

29 can be found on page 50.

Going concern and viability statements

During 2025, there has been a material

strengthening of the Group’s balance

sheet,improving from a net liabilities

positionin 2024 to a net assets position

in2025. This strengthening enabled the

Board to reinstate shareholder distributions

through both dividends and share buybacks,

and to repay from cash a $1bn bond that

matured in October. Nevertheless, we

continued to payparticular attention to

thegoing concern and viability statement.

With consideration tothe available

information, the Committee confirms it

maintains a reasonable expectation that the

Group is able to continue to meet its liabilities

as these fall due, over the next five years.

Wereviewed the processes and assumptions

underlying the going concern and viability

statements set out from page 57, considering

inparticular:

— the Group’s forecast funding position over

the next five years;

— the forecasts for material subsidiaries

making up this position;

Risk management and the internal

control environment

Our risk management and internal control

framework is described in the Principal

riskssection on page 48. During 2025,

theCommittee reviewed the effectiveness

ofrisk controls and their assurance, ensuring

actions to mitigate where needed and to

manage risks in relation to our appetite for

taking risk as described from page 48.

We satisfied ourselves that the processes

foridentifying and managing risks remain

appropriate and that all principal risks and

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 meetings by divisional and

functional risk owners, the Board confirmed

that a robust assessment of the principal risks

and emerging risks facing the Group had

been undertaken. The Board has allocated

certain principal risks to the Committee and

we considered these in detail throughout

theyear, as described below. The Board

reallocated the oversight of the Information

& data principal risk, including cyber-

security, from the Committee to the Safety,

Energy Transition & Tech (SETT) Committee

in early 2025, reflecting the alignment with

its other principal responsibilities and its

members’ expertise. The SETT Committee

report can be found on page 110.

From our discussions, we are satisfied

thatthe principal risks that the Committee

oversees have received appropriate

management attention during 2025:

— Business interruption: the Committee

received updates on the status of the

Group’s supply chain management,

focused primarily on civil aerospace,

andconsidered our ability to react to, and

manage crises, under the Group’s incident

management framework.

— Financial shock: the Committee

considered the financial risks to which

theGroup is exposed including liquidity

risk, credit risk, foreign exchange and

commodity risk, interest rate risk and fraud

risk and the mitigations and controls that

we have in place.

The Committee specifically reviews the

Group’s internal controls over financial

reporting (see page 48). During 2025, we

received an update on the risk assessment

toidentify the controls considered to be

material and in-scope from a financial

reporting perspective. We monitored

progress against the 2025 financial controls

programme to strengthen the financial

reporting and compliance controls, and

weconfirmed completion of identified key

activities. We also considered the external

auditor’s observations on the financial

control environment.

Effectiveness of risk management

andinternal control systems

The Committee has conducted a review

ofthe effectiveness of the Group’s risk

management and internal control systems,

including those relating to the financial

reporting process. We consider that our

review of the risk management and internal

control systems, in place throughout 2025

and up to the date of this report, satisfies

therequirements of the Code, the DTR and

the FRC’s guidance on risk management.

Tosupport this:

— we monitor changes to regulatory

requirements with respect to risk

management on an ongoing basis;

— we review relevant policies and

proceduresand update where necessary,

in line with regulatory changes and our

perspective on effective approaches to

risk management;

— our risk management team and relevant

assurance functions, such as internal audit,

review key business processes, including

long-term contract pack reviews and

thebudgeting process with periodic

reforecasting, identifying key risks and

opportunities;

— we assess and monitor management

responses to key audit findings, including

the design of mitigations and

developments to existing controls;

— a defined anti-bribery and corruption

policy has been implemented; and

— where necessary, we report to the Board

and its Committees on key risk and

regulatory matters.

During the course of the financial year,

anycontrol weaknesses identified through

the operation of our risk management and

internal control processes were subject to

monitoring and resolution in line with our

normal business operations. In 2025, no

significant weaknesses were identified. To

further support the enhancement of the

existing internal control environment:

— risk management specialists have been

assigned to review and monitor the

implementation of actions, to ensure these

remain appropriate and aligned to the risks

to which they relate;

— policies and procedures are subject to

review and are updated to align with

changes in the underlying control

environment; and

— risk owners are accountable for managing

these risks.

In addition, and on an ongoing basis, the

Board reviews the effectiveness of the

Group’s risk management and internal

control system and continues to:

— monitor reports from the Executive Team,

relating to their assessment of risks and

internal control systems;

AUDIT COMMITTEEREPORT

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

Non-audit services

To safeguard the auditor’s independence and

objectivity, and in accordance with the FRC’s

ethical standard, we do not engage PwC for

any non-audit services, except where it is

work that they must, or are clearly best suited

to, perform. Accordingly, our policy for the

engagement of the auditor to undertake

non-audit services broadly limit these to

audit-related services such as reporting

tolenders and grant providers, where

thereis arequirement by law or regulation

for theauditors to perform the work. All

other non-audit services are considered

onacase-by-case basis in light of the

requirements of the FRC’s ethical standards

and in compliance with our own policy.

Fees paid to PwC are set out in note 8 to

theConsolidated Financial Statements on

page 147. All proposed services must be

pre-approved in accordance with the policy

which is reviewed and approved annually.

Above defined levels, my approval is also

required before PwC is engaged. We also

review the non-audit fees charged by PwC

ona quarterly basis. Our non-audit services

policy can be found at www.rolls-royce.com

Non-audit related fees paid to the auditor

during the year were £0.8m (2024: £0.8m),

representing 6% (2024: 6%) of the audit fee.

This included £0.7m (2024: £0.7m) relating to

the review of the half-year results. Our annual

review of the external auditor takes into

account the nature and level of all services

provided. Based on our review of the

services provided by PwC and discussion

with the lead audit partner, we concluded

that neither the nature nor the scale of

thenon-audit services gave any concerns

regarding the objectivity or independence

ofPwC.

Looking forward

This report provides an understanding of

theCommittee’s work over the past year

andIwould like to thank my fellow colleagues

on the Committee for their support during

the year. Our evaluation noted that the

Committee is operating well. In addition

tothe audit tender process, our focus in

2026 will continue to include oversight of

thereporting environment and monitoring

thecontrol framework to ensure compliance

withprovision 29 of the 2024 UK Corporate

Governance Code, applicable to the

Company from 1 January 2026. The

Committee will also monitor preparedness

forthe implementation of IFRS 18, which

provides a new presentation requirement

forthe statement of profit or loss, alongside

new definitions and disclosures related to

non-IFRS performance measures, effective

from 1 January 2027.

Nick Luff

Chair of the Audit Committee

— an analysis of impacts of severe but

plausible risk scenarios, ensuring that

these included relevant principal risks;

— the impact of multiple risks occurring

simultaneously;

— additional mitigating actions that could

betaken in extreme circumstances; and

— the current borrowing facilities in place

and the availability of future facilities.

As a result, we are satisfied that the going

concern and viability statements have been

prepared on an appropriate basis.

Internal audit

The head of internal audit regularly attends

and reports to the Committee on internal

audit matters including:

— identifying key trends and headline

findings from internal audit reports issued

in the period;

— details of any specific significant findings

raised by internal audit that warrant the

Committee’s attention;

— status of agreed actions arising from

internal audit work;

— progress against the current year’s internal

audit plan and any changes to the plan; and

— the plan of internal audit work for the

following year.

I meet with the head of internal audit on a

regular basis, to discuss the function and

understand its findings in more depth. We

continue to focus on the nature of issues

raised by internal audit and the timescales

tocomplete the related actions. The future

work plan is risk-based, including risks to

both short- and longer-term objectives while

balancing principal risk areas with business-

as-usual transactional activity where controls

are understood to be mature and established.

Internal audit also considers the activities

ofour second line assurance functions in

their approach. Annually, we review the

effectiveness of the Group’s internal

auditfunction. For 2025, this included

anassessment of the function’s resources,

methodologies, plans, performance,

reporting and quality assurance. Based on

the report received, we are satisfied that the

scope, extent and effectiveness of internal

audit are appropriate for the Group and that

there is a suitable plan in place to sustain this.

Specific actions for further improvement

were identified, the implementation of which

will be monitored during 2026.

External audit

PwC were appointed as the Group’s external

auditor for the financial year commencing

on1 January 2018, following a formal tender

process in 2016. As required by audit partner

rotation rules, Ian Morrison took over as lead

audit partner for the 2023 audit. Other thanthe

services detailed below, PwC haveno other

connection with the Group orits Directors.

Audit tender

In line with UK legal requirements

regardingauditor tenure and audit

tendering, in December the Committee

determined that the external audit contract

will be put out totender in 2026 for the

financial year commencing 1 January 2028.

The Committee will lead the tender process

and recommend its conclusions to the Board

by the end of 2026. We believe that this

timetable will provide sufficient time for

consideration ofalternative firms and, ifthere

is a change from PwC, allowing foraperiod

of transition for a new audit firmtobuild up

sufficient knowledge and understanding of

the Group. We will report the outcome of the

tender, anddetail on the process, in the 2026

AnnualReport.

During 2025, the Group complied with the

relevant provisions of The Statutory Audit

Services for Large Companies Market

Investigation (Mandatory Use of Competitive

Tender Processes and Audit Committee

Responsibilities) Order 2014, the FRC

guidance on ‘Audit Committees and the

External Audit: Minimum Standard’ and

the2024 UK Corporate Governance Code

andthe Committee intends for the tender

process to be carried out in line with those

obligations in 2026.

2025 audit

PwC presented its audit plan to the

Committee, providing its assessment of the

key audit risks and the proposed scope of

audit work. Reflecting on findings from the

half-year review and the developments in

theGroup, we agreed the approach and

scope of work to be undertaken. Key risks

and the audit approach to these risks are

discussed in the Independent Auditor’s

Report from pages 193 to 203, which also

highlights the other risks that PwC drew to

our attention. As part of the reporting of the

half-year and full year results, in July 2025

and February 2026 PwC reported to the

Committee on its assessment of the Group’s

judgements and estimates in respect of these

risks and the adequacy of the reporting.

Where effective to do so, PwC also reported

on its assessment of the Group’s controls.

Asin prior years, I meet with the lead audit

partner regularly and the Committee has a

private meeting with PwC at least once a

year. TheCommittee reviewed the quality of

theexternal audit throughout the year and

considered the performance of PwC. To

support this, the Committee members and

senior personnel who regularly interact with

the external auditors undertake annually an

internal evaluation, focusing on a range of

factors we consider relevant to audit quality.

The findings from the 2025 audit evaluation

and agreed actions were reviewed and

approved by the Committee in February

2026. Feedback was also received from the

auditors on their performance against their

own objectives.

Based on this, the Committee recommended

to the Board that PwC be reappointed as

external auditors at the 2026AGM.

AUDIT COMMITTEEREPORT

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GOVERNANCE REPORT

KEY AREAS OF FOCUS IN 2025

— Design of, and consultation with shareholders on, a new

remunerationpolicy

— Delivery of our new global share plan for the wider workforce

— Consideration of financial and non-financial performance metrics

to drive continued delivery of our transformation

Remuneration Committee report

Members Lord Jitesh Gadhia (Chair)

Stuart Bradie

George Culmer

Beverly Goulet

Wendy Mars

Remit See page 68

On behalf of the Remuneration Committee, Iam pleased to present

our Remuneration report for 2025. This letter outlines the key

decisions taken by the Committee during 2025 and new remuneration

policy proposals for which we are seeking shareholder approval at the

2026 AGM.

I am pleased to welcome Stuart Bradie, who joined the Committee

inAugust. Stuart is also a member of our Safety, Energy Transition &

Tech Committee and will provide insights into our non-financial key

performance metrics in addition to his broader insights as a global

business leader.

On behalf of the Committee, I would like to thank our shareholders for

the strong levels of support that we received at our 2025 AGM and for

the engagement received during our consultation in the year.

Business context for 2025

2025 marks a third successive record year of performance for

Rolls-Royce. Since Tufan Erginbilgic joined the organisation on

1January2023, over £88bn of shareholder value has been created

asat31 December 2025. Dividends have been reinstated, a £1bn share

buyback has been completed in the year, and investments within our

business have increased year-on-year. The exceptional share price return

of over 1,100% during this period far exceeds the relative performance

ofany of our industry peers and has been achieved despite a challenging

and uncertain external environment in most of our key markets.

Tufan and his leadership team have consistently exceeded the

expectations of our stakeholders with bold mid-term guidance issued

in2023 delivered two years early. Guidance has been beaten and

raised consistently and our ambitious upgraded mid-term targets

(based on a 2028 timeframe) are significantly underpinned by the

transformation actions that the leadership team are delivering.

Remuneration decisions related to 2025

The current remuneration policy was approved by shareholders

atour AGM in 2025. Key features of the policy and how it operated

during 2025 can be found on page 86.

Salary

As disclosed last year, base pay awards of 5% were delivered to

bothTufan Erginbilgic and Helen McCabe effective 1 March 2025.

Atthe time, this was below the median increase for the broader UK

population for 2025 of 5.5%.

The Committee undertook a benchmarking process during the

summer to inform our new policy proposals and this identified a

material gap between the current pay arrangements for Tufan and

Helen and competitive levels of pay prevalent within our peer group.

Consequently, the Committee decided to make further adjustments to

the base pay arrangements from 1 September as a proactive measure

to recognise the exceptional performance of the Executive Directors

and to mitigate the gap to market. Tufan’s base salary was increased

by 15.6% and Helen’s base salary was increased by 17.7%. These

adjustments result in base pay levels aligned to those typical in other

FTSE 10 companies. No further increases to base salaries are planned

until March 2027.

Annual incentive outturn in respect of2025

Unsurprisingly, given the strength of performance, the annual

incentive outturns for 2025 are significantly above target, aligning

with the wider shareholder experience. The performance measures

for 2025 were weighted 80% towards Group performance and

20%towards personal performance. At Group level, free cash

flowof£3,270m and operating profit of £3,462m werematerially

ahead of the original targets and maximum thresholdfor

performance, delivering maximum outturns for theseelements.

Thescorecard included two strategic measures to incentivise

qualityoffinancial performance and the importance of delivery to

ourcustomers. Underlying operating margin performance of 17.3%

wasahead of the level required to trigger maximum payout, reflecting

very significant year-on-year improvement. However, the customer

metric was behind target, primarily reflecting continued supply

chainchallenges which management continue to address. As aresult,

the customer metric vested at 22% of maximum. Other non-financial

performance metrics counted for 10% of the 2025 scorecard and

related to safety (5%) and people (5%). The safety metric measures

acombination of the total reportable injuries (TRI)rate and a safety

index, which places focus on proactive risk management and process

safety. The outturn was 39% of maximum, reflecting good progress on

the safety index scores, counterbalanced by the fact that the TRI rate

remained the same as 2024 performance, missing the limit set for

2025. The people outturn, which is linked to colleague engagement

assessed via the Our Voices survey, was 100% of maximum, reflecting

impressive year-on-year improvement in employee engagement.

Twenty percent of the overall weighting is linked to personal

performance of the Executive Directors. Page 102 sets out the

Committee’s assessment of this element of the incentive, which vested

above target at 100% of maximum for Tufan Erginbilgic and at 90% of

maximum for Helen McCabe.

PERFORMANCE OF ROLLS-ROYCE OVER THE PAST THREE YEARS (UNAUDITED)

200

400

600

800

1,000

Tufan Erginbilgic

appointed as

Chief Executive

Price: 1,150

GBp

31 Dec

2021

31 Dec

2022

31 Dec

2023

31 Dec

2024

31 Dec

2025

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

When required, it is important that the Board has the optionality

torecruit a sufficiently capable Chief Executive with experience

inthekey North American market, but this would likely come at a

significantly higher cost than our current policy permits. For example,

as at 1 January 2025, the total target direct compensation for Tufan

Erginbilgic was 5% lower than a division leader of General Electric.

Remuneration benchmarking peer group review

An updated peer group for remuneration purposes was developed

bythe Committee during the year and was approved in August based

upon market conditions and reported public information at that time.

It incorporates similarly complex global businesses which operate in

similar markets to those of Rolls-Royce today, and in markets which

represent our growth opportunities (i.e. narrowbody aerospace and

nuclear). It also includes key talent markets with both traditional and

emerging peers amongst UK-listed multinationals and international

engineering and industrial technology sectors. The companies

werescreened by a conventional market capitalisation size filter

(e.g.selecting companies between 0.5x – 2.0x of the Company’s

market capitalisation) with adjustments to ensure critical talent

peersabove and below this range were included to ensure the

outputresults in an appropriate forward-looking peer group.

Webelieve that the output of this benchmarking reflects our

businessreality with the resulting median well aligned to our

marketcapitalisation (see table below).

Comparison of Rolls-Royce market capitalisation to the

chosen peer group

Market capitalisation

Three-month

average share price

to 4 Aug 2025 (£m)

Closing share price

4 Aug 2025 (£m)

Rolls-Royce Holdings plc 76,168 91,680

Peer Group upper quartile 116,357 122,688

Peer Group median 80,253 90,159

Peer Group lower quartile 58,355 63,060

Further details of the methodology adopted to select the peer group

are included on page 88.

Proposed new remuneration policy

We have conducted a thorough review of pay competitiveness

(basesalary, target bonus, expected value of long-term incentives)

relative to our updated remuneration peer group and propose

aresetof total target direct compensation to better align to the

medianposition. Both our Chief Executive and Chief Financial

Officer’s current target remuneration is below the lower quartile

ofour peer group, and significantly below our main aerospace and

defence competitors. Consequently, subject to shareholder approval,

we propose increases to short and long-term incentive opportunities

from 1 January 2026 to better align with market median levels.

The following table summarises the current and proposed changes

toincentive arrangements for our Chief Executive and Chief Financial

Officer, which will ensure that total target direct compensation levels

are competitive.

Proposed changes to incentives

Chief Executive Chief Financial Officer

Current

Policy

Proposed

Policy

Current

Policy

Proposed

Policy

On-target annual incentive

% ofbase salary 100% 150% 100%

change

Maximum annual incentive

% ofbase salary 200% 300% 200%

change

LTIP grant level

% of base salary 375% 750% 275% 450%

The table overleaf sets out the impact of these changes relative to the

updated remuneration peer group.

In reviewing incentive outturns, the Committee considered the

experience of internal and external stakeholder groups, in particular

our employees and shareholders. Our global incentive arrangements

include a strong cascade of targets throughout the Group, which

means that our wider workforce also benefits from the excellent

performance achieved. The positive experience for our shareholders

has already been highlighted above. In this context, the Committee is

pleased to recognise this excellent performance in an overall outturn

of 94% of maximum for Tufan Erginbilgic and 92% of maximum

forHelen McCabe. In line with the current policy, as Tufan and Helen

already hold share interests in excess of twice their shareholding

requirements, all of the 2025 annual incentive will be paid in cash in

March 2026.

Long-term incentive plan (LTIP) outturn

Under the current remuneration policy, we reinstated an LTIP

forExecutive Directors in May 2024. The performance period for

theseawards will not conclude until 31 December 2026, when the

performance conditions will be assessed. Therefore, there are no

standard LTIP awards vesting for the performance period ended

31December 2025. However, under the terms of the buy-out

awardsagreed for Helen McCabe upon joining Rolls-Royce, some

performance shares were granted in place of performance shares

with equivalent vesting terms which were forfeited upon her

resignation from her previous employer. The performance

conditionsfor these shares will deliver a vesting level of 100%

basedupon financial performance over the period 1 January 2023

to31December 2025.

Background to the proposed new

remunerationpolicy

Our current remuneration policy was developed in 2023 and was

baselined to a median FTSE 50 position, reflecting the Company’s

sizeand context at that time. Minor amendments to the policy

wereapproved by shareholders in May 2025 relating to incentive

deferral and shareholding requirements. Following the success

ofthetransformation, as at 31 December 2025, Rolls-Royce had a

marketcapitalisation of £97bn and was the sixth largest company in

the FTSE. Our Chief Executive and leadership team have driven an

unprecedented step-change in performance, and we believe that

aligning our pay arrangements to reflect our current circumstances

isa strategic priority to enable continued business outperformance.

The following factors have influenced our proposals:

International competition for talent

Retention

The Executive Directors have rightly attracted global attention for the

pace and success of our ongoing transformation. Our executives are

highly sought after in the international talent market and competitive

reward arrangements are essential to retaining our key talent. For

theavoidance of any doubt, the proposed adjustments to future

remuneration arrangements are proactive measures initiated by the

Committee and are not reactive measures.

Attraction

A large proportion of our talent pool for succession is US-based

where the aerospace and defence sector is most heavily represented.

We are competing for talent at all levels with global industrial and

engineering peers and other major US employers.

Our international talent pool is reflected in our operations. While

weare listed in the UK, our businesses are global, with operations,

customers and suppliers present in all continents. Less than 15% of

our 2025 revenue was derived from customers based in the UK.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GOVERNANCE REPORT

REMUNERATION COMMITTEE REPORT

Alignment with shareholder interests

To ensure continued alignment of management interests with

shareholder interests, the shareholding requirement for the Chief

Executive will increase from 400% to 750% of base salary and for the

Chief Financial Officer from 300% to 450% of base salary. This aligns

the shareholding requirement with the new LTIP grant levels, and

increases the number of shares our Executive Directors will be

required to hold for two years following cessation of employment.

No further changes to the remuneration policy are proposed.

Consultation process and shareholder feedback

In September, we consulted with our 24 largest shareholders, who

collectively hold over 50% of our share capital. We subsequently

held12 shareholder meetings and received nine written responses.

We also met with three proxy advisers. We are pleased to confirm

thatthere was consistent and positive support from shareholders,

anda strong understanding of our rationale and approach from

proxyadvisers.

A key consistent theme which emerged from the consultation process

was investor expectation that the Committee maintains a disciplined

approach to target setting under the new policy. There was

widespread support for an increase in performance-related pay

opportunity for the executives, but on the basis that remuneration

outcomes continue to be underpinned by excellent performance

levels. Investors appreciated that the impact of the proposed

increases to incentive opportunity under the forward-looking policy

would only impact individuals if future performance conditions are

satisfied. The following quote from one of our shareholders was one

of many received along very similar lines:

“ Thank you very much for reaching out about this proposed change

in remuneration policy. I have reviewed the attached letter and we

are very supportive of the changes – we have been impressed by

theefforts Tufan and Helen have led in transforming the Company

and believe these remuneration changes continue to provide strong

incentive and alignment to continue to drive strategic progress at

the Company.” – Investor

We deeply appreciate the views of our shareholders and are pleased

with the time given and engagement received during this process.

Weare confident that we received a strong mandate to proceed

withthe proposed changes outlined above.

A small number of shareholders raised specific questions about

theapproach taken by the Committee in constructing the peer

group,which we have clarified in a written response and in this

Remuneration report. We also received questions from some

investors about the choice of performance metrics in the incentive

plans. We have reviewed the metrics to apply in 2026 onwards

andhave set out our rationale in this Remuneration report. We did

consider the choice of peer group to apply for the measurement of

relative total shareholder return (TSR), which is a key metric within

thelong-term incentive plan (LTIP). Specifically, we considered if it

would be appropriate to adopt the same remuneration peer group

forTSR purposes but have decided to treat these two peer groups

separately. The TSR peer group is made up of organisations with

whom Rolls-Royce competes for capital as opposed to talent. Also,

the indices used for TSR measurement benefit from being dynamic

toreflect regular movement of companies entering and leaving

theindices for a range of reasons, updated on a daily basis.

Thislevelofdynamism is less relevant when benchmarking

executiveremuneration.

CHIEF EXECUTIVE TOTAL TARGET DIRECT COMPENSATION (TTDC) RELATIVE TO PEER GROUP (UNAUDITED)

£30

Safran SA

Schneider Electric S.E.

ABB Ltd

Airbus SE

Siemens Aktiengesellschaft

BAE Systems plc

Unilever PLC

Rio Tinto Group

RELX PLC

BP p.l.c.

Shell plc

British American Tobacco p.l.c.

GSK plc

Rolls-Royce Holdings plc

Cummins Inc.

AstraZeneca PLC

RTX Corporation

3M Company

Emerson Electric Co.

Howmet Aerospace Inc.

TransDigm Group Incorporated

Eaton Corporation plc

Northrop Grumman Corporation

Lockheed Martin Corporation

The Boeing Company

General Dynamics Corporation

Caterpillar Inc.

General Electric Company

TTDC (£ millions)

£25

£20

£15

£10

£5

£0

Group Median TTDC

European industrial/aerospace and defence

£4.67m

Global-facing FTSEs

£7.89m

US Industrials

£14.1m

US Aerospace and Defence

£16.77m

Rolls-Royce Holdings plc Chief Executive TTDC

£5.8m

Rolls-Royce Holdings plc Chief Executive TTDC under proposed new policy £11.1m

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

REMUNERATION COMMITTEE REPORT

Looking ahead – summary implementation of the

remuneration policy in 2026

2026 Annual incentive targets

The 2026 annual incentive measures and weightings will be

consistentwith 2025 and continue to reflect our strategic priorities.

The measures are: free cash flow (40%); operating profit (30%);

strategic objectives of customer delivery (5%) and operating profit

margin (15%); people (5%) which includes engagement and colleague

experience supporting the behaviours that we are seeking to embed

in our organisation; and safety (5%) which is the number one priority

for all of our people.

2026 Long-term incentive plan (LTIP) targets

The targets underpinning the 2026 LTIP are included in the

Remuneration report. Subject to shareholder approval, the LTIP

award will be 750% of salary for the Chief Executive and 450%

ofsalary for the Chief Financial Officer. Following the three-year

performance period ending 31 December 2028, any vesting will be

subject to a mandatory two-year holding period. The LTIP measures

have been reviewed for 2026 and will be weighted equally between:

free cash flow (33.33%); operating profit margin (33.33%); and relative

TSR (33.33%) assessed in equal parts against the FTSE 100 and the

S&P Global Industrials index constituents.

The Committee is mindful that free cash flow and operating profit

margin metrics feature in both the annual incentive and the LTIP and

believes that this is appropriate to incentivise consistency and quality

of financial performance over the medium term.

The 2025 LTIP performance metrics included a 10% weighting

againstScope 1 + 2 emission targets and the performance conditions

of thatplan will mature on 31 December 2027. We remain sensitive

toour environmental sustainability responsibilities and may consider

reinstating an emissions target into the LTIP from that point to cover

the period from 1 January 2028 to 31 December 2030, aligned with

the timeframe of our commitment to reduce Scope 1 + 2 emissions by

46% (against a 2019 baseline).

Wider workforce context

In 2025, our new share plan offering to the wider workforce

vestedfora large proportion of our people. We awarded all global

colleagues 150 free shares on 12 September 2024 when our share

price was £4.93. These shares vested in all countries outside of

theUKon 12September 2025, having benefited from a return of

approximately 130%. For colleagues in the UK, these shares will vest

in2027.

Your Shares: Gifted has been followed by Your Shares: Matched, a

purchase plan where with every share purchased by the participant,

Rolls-Royce awards a matching share for free, up to a maximum

investment each month. This plan was launched in phases in 2025

inGermany, UK, US, Canada, China, Singapore, Italy and India,

enabling 97% of our global workforce to participate. We strongly

believe in the importance of employee share ownership and

ourcolleagues have experienced first-hand the benefits of the

significantshare price growth seen in recent years – driven by

ourtransformation. The launch of Your Shares: Matched has been

incredibly successful, with 67% of colleagues in Germany, 72% in

theUK, 50% in the US, 77% in China and 63% in Canada choosing

toparticipate. This level of take-up is very high by any external

standards. It is driven by our colleagues’ belief in our future,

andactive leadership engagement with colleagues and their

representatives on the value of employee share ownership.

In 2025, the median base pay increase in the UK was 5.5%. We

haveagreed a multi-year pay deal with our main UK trade union-

represented colleagues to cover the period up to 28 February 2027.

This includes an increase of 4.1% in 2026.

In 2025, incentive levels for all colleagues were reviewed to ensure

that they are attractive and competitive for our circumstances.

Positive changes to on-target and maximum incentive opportunities

are planned for the majority of the global workforce from 2026.

Chair and Non-Executive Director fees

In parallel with the benchmarking activity undertaken during the

yearfor the Executive Directors, the Committee reviewed the fees

paid to the Chair. The Chair, together with the Executive Directors,

also reviewed the fees paid to the Non-Executive Directors.

Recognising the material change in market position of Rolls-Royce,

itwas agreed to adjust fees to better align with levels typical of those

for a FTSE 10 organisation. The adjustments approved are set out

onpage 108 and took effect from 1 September 2025. A further

adjustment to NED fees was made to take effect from 1 March 2026.

Remuneration Committee advisers

During 2025, the Committee had access to advice from WTW. WTW

were appointed by the Committee following a formal tender process

in 2021. Total fees for the advice provided to the Committee during

the year by WTW were £238,243 (2024: £99,850). Fees are based

onatime and materials basis. WTW also provided human capital

andbenefits services to the Group. No Directors have a connection

toWTW.

The Committee requests that WTW attend meetings periodically

during the year. The Committee is exclusively responsible for

reviewing, selecting and appointing its advisers and is satisfied

thatthe advice it has received has been objective and independent

and that there is no conflict of interest associated with any advice

provided. WTW is a member of the remuneration consulting group

and, as such, voluntarily operates under the code of conduct in

relation to executive remuneration consulting in the UK.

In 2025, the Committee carried out a review of the performance

ofWTW. This focused on the strength of the WTW team, treatment

ofsensitive topics and their awareness of Rolls-Royce and its

stakeholders in the context of remuneration. The findings from

thisreview and agreed actions were approved by the Committee.

Evaluating the work of the Committee

The work of the Committee in 2025 was rated highly and I would

liketo thank my colleagues on the Committee for their support

during2025.

Summary

The Committee is delighted with the progress that has been made

onthe transformation programme and the impact that this is having

for shareholders and all stakeholders. We are particularly proud

ofthe level of alignment we have managed to achieve between

shareholders, management and the wider workforce through

ourshare plans and we are excited and determined to continue

toplay akey role in embedding a distinctive performance culture

within Rolls-Royce.

We welcome any feedback on this report and look forward to

receiving your support for our new Remuneration Policy and

Directors’ Remuneration report at our AGM on 30 April 2026.

Lord Jitesh Gadhia

Chair of the Remuneration Committee

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GOVERNANCE REPORT

REMUNERATION COMMITTEE REPORT

Executive Directors: Summary policy and implementation table 2025

Base salary

Purpose and link

to strategy

To attract and retain individuals of the right calibre to develop and execute the business strategy.

Key features of

current policy

Salaries are reviewed annually but not necessarily increased. Decisions on salary are informed but not led by

reference to companies of a similar size, complexity and international reach.

Implementation in 2025 A salary increase of 5% was awarded to Tufan Erginbilgic and to Helen McCabe effective 1 March 2025.

Thisincrease was below the median increase for the broader UK population for 2025 of 5.5%.

Following an updated benchmarking process to support the proposed new policy, a further adjustment was made

for both Tufan Erginbilgic (15.6%) and Helen McCabe (17.7%) on 1 September 2025. No further adjustments are

planned before 1 March 2027.

Benefits

Purpose and link

to strategy

To attract and retain individuals of the right calibre to develop and execute the business strategy.

Key features of

current policy

Benefits may include car allowance and related costs, financial planning assistance, private medical insurance,

lifeassurance and other appropriate benefits at the discretion of the Committee.

Implementation in 2025

No changes to benefits.

Remuneration at a glance

This section provides a summary of the current remuneration policy and its implementation that was approved by a binding shareholder

voteatthe AGM on 1 May 2025 (see page 109). The full policy can be found in the corporate governance section at www.rolls-royce.com

Fixed pay

Variable pay

1 Scope 1 + 2 greenhouse gas emission targets were included in the 2025 LTIP. The 2024 LTIP included 10% Return on Invested Capital

Shareholding requirement – in line with the Rolls-Royce shareholding requirements policy, Executive Directors

arerequired to establish and maintain a level of share ownership in proportion to a percentage of base salary. The

shareholding requirement is 400% for the Chief Executive and 300% for the Chief Financial Officer. Executive Directors

are also required to retain the lower of their shareholding requirement or their actual shareholding at the date of leaving

for 24 months after leaving. Subject to shareholder approval, this requirement will be further strengthened through the

changes proposed at the 2026 AGM.

Malus and clawback – LTIP awards and mandatory deferral arrangements 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, or are likely to materially damage, the

Group; acting in a way which has materially damaged the reputation of the Group or any member of the Group; a breach of

or inadequate response to a significant HSE or other environmental issue; failure to adequately manage/supervise others

which in turn led to one of the above triggers; and/or materially incorrect calculation of an award. The malus provisions

apply from the date of grant until the settlement date. The clawback period extends to six years from the date of grant.

Base salary

Benefits

Retirement

Annual Incentive

50% deferral for three years (unless shareholding

thresholds are achieved)

Long-term incentive plan

Three-year performance period plus

two-yearholdingperiod

30%

free

cash flow

30%

operating

margin

30%

relative

TSR

10%

Scope 1 + 2

GHG

emission

targets

80% Group

20% individual

performance performance

Financial

— Cash

— Profit

— Margin

Non-financial

— Safety

— Engagement

— Customer

Summary of our current remuneration policy

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

REMUNERATION COMMITTEE REPORT

Retirement

Purpose and link

to strategy

To attract and retain individuals of the right calibre to develop and execute the business strategy.

Key features of

current policy

Executive Directors are offered membership of a defined contribution plan. A cash allowance may be payable in

lieu of contributions to the defined contribution plan.

The maximum contribution is 12% of base salary, in line with the rate offered to the wider UK workforce.

Implementation in 2025

Allowance of 12% of base salary, in line with the rate for the wider UK workforce.

Annual incentive

Purpose and link

to strategy

We reward annual performance against stretching financial, strategic and individual targets aligned to delivery of

the Group’s strategy.

Key features of

current policy

An annual award which may be based on a combination of financial, operational and individual performance

measures aligned to the Group’s strategy. At least half the annual incentive awarded in any year will be deferred

into shares for Executive Directors who have not achieved the shareholding guideline. If the Executive Director

hasexceeded their in-employment shareholding guideline, but has not achieved a level of double the shareholding

guideline, the level of annual incentive deferral into shares reduces from 50% to 25% of salary. Should the

Executive Director achieve double the shareholding guideline then the annual incentive would pay out fully in

cash. The deferral period will normally be for a period of three years. The Committee may apply discretion to adjust

any formulaic outturn. Malus and clawback provisions apply.

Maximum annual opportunity: 200% of base salary.

Implementation in 2025

An outturn of 189% of target (94% of maximum) for Tufan Erginbilgic and 185% of target (92% of maximum) for

Helen McCabe.

Long-term incentive plan

Purpose and link

to strategy

We incentivise the execution of strategy, driving long-term value creation and sustainable long-term returns

toshareholders.

Key features of

current policy

Awards are subject to performance targets normally assessed over three financial years. The number of shares

willbe adjusted to reflect performance on the third anniversary of the grant. The shares will vest on the five-year

anniversary of the grant, after a two-year holding period.

The Committee may apply discretion to adjust any formulaic outturn. Malus and clawback provisions apply.

The maximum long-term incentive award for Executive Directors is 375% of base salary.

Implementation in 2025

Awards of 375% and 275% of base salary were made to the Chief Executive and Chief Financial Officer respectively,

on 26 March 2025 for the performance period ending 31 December 2027. If minimum performance levels are

achieved the LTIP will vest at 20%. Further details of the performance metrics can be found on page 100 of the

2024 Annual Report.

No standard LTIP awards vested during the year. However, 850,760 shares awarded to Helen McCabe under the

terms of the buyout of awards forfeited from her previous employer vested in 2025. Full details of the buyout were

included in the 2023 Annual Report.

Shareholding requirement

Purpose and link

to strategy

To align the interests of Executive Directors to those of shareholders by requiring Executive Directors to build a

high level of personal shareholding in the Company during their employment and for a specified post-employment

holding period.

Key features of

current policy

The shareholding requirement is 400% of base salary for Tufan Erginbilgic and 300% of base salary for

HelenMcCabe.

Executive Directors are required to retain the lower of their shareholding requirement or their actual shareholding

at the date of leaving for 24 months.

Implementation in 2025

Shareholdings as a percentage of salary as at 31 December 2025 of the Chief Executive and Chief Financial Officer

were 3,729% and 1,179% respectively.

The information above reflects the current policy and does not include the proposed changes to incentive levels and shareholding

requirements which will be subject to shareholder approval on 30 April 2026.

Alignment with shareholders

The policy ensures alignment with shareholders through a significant part of the overall reward package being delivered in shares with long

holding periods. This alignment will be further strengthened if shareholders approve the proposed amendments to the current policy at the

2026 AGM (see from page 88).

Executive Directors: Summary policy and implementation table 2025 continued

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GOVERNANCE REPORT

REMUNERATION COMMITTEE REPORT

Introduction

This policy will take effect immediately after the AGM to be held on 30 April 2026, subject to shareholder approval.

Background to the proposed new remuneration policy

The current policy was developed in 2023 and was baselined to a median FTSE 50 position, reflecting the Company’s size and context

atthattime. Minor amendments to the policy were approved by shareholders in May 2025 relating to incentive deferral and shareholding

requirements. Following the success of the ongoing transformation, as at 31 December 2025 Rolls-Royce had a market capitalisation of £97bn

and was the sixth largest company in the FTSE.

For the purpose of benchmarking remuneration, an updated peer group has been developed by the Committee and was approved in

August2025 based upon market conditions and reported public information at that time. It incorporates similarly complex global businesses

which operate in similar markets to those of Rolls-Royce, and in markets which represent our growth opportunities (e.g. narrowbody aerospace

and nuclear). It also includes key talent markets with both traditional and emerging peers amongst UK-listed multinationals and international

engineering and industrial technology sectors. The companies have been screened by a conventional market capitalisation size filter

(e.g.selecting companies between 0.5x – 2.0x of the market capitalisation of Rolls-Royce) with adjustments to ensure critical talent peers above

andbelow this range are included to ensure the output results in an appropriate forward-looking peer group. We believe that the output of this

benchmarking reflects our business reality, with the resulting total target direct compensation median well aligned to our market capitalisation.

1 At the time of assessment, General Electric was the only peer with a market capitalisation in excess of 2.0x that of Rolls-Royce. General Electric is a direct peer of our core

Aerospace&Defence activity and is highly relevant as a competitor for talent

2 At the time of assessment, Cummins’ market capitalisation was below 0.5x that of Rolls-Royce. Cummins is a relevant peer given the adjacency to our Power Systems business

andourgrowing market presence in the US industrial power sector

Peer group methodology in detail

Following this review, peers in each group are aggregated together into a combined peer group and then reviewed in totality to ensure no critical peers

are missing and that the Company’s size is comparable to that of the peer group. After this review, Cummins has been added to the peer group.

EMERGING PEERSTRADITIONAL PEERS

Resulting peer group

Aerospace & Defence

1. Companies screened to provide a

list of potential peers based on:

— Listing location (US or Europe)

— Classified as ‘Aerospace and

Defence’ under the broader

‘industrials’ category

— Within Rolls-Royce’s three-month

average market capitalisation of

0.5x–2.0x

2. Following stage 1 above, companies

that are above the 2.0x ceiling are

subject to a manual screen to assess

suitability for inclusion

There was one company (General

Electric Aerospace) above the 2.0x

market capitalisation ceiling that

could be considered for inclusion

inthe peer group

Global-facing FTSEs

Companies screened to provide a

listof potential peers based on:

— Within Rolls-Royce’s three-month

average market capitalisation of

0.5x–2.0x

— Financial Services companies

areexcluded

— Companies whose operations are

weighted towards the domestic

market are excluded (i.e. have

UKrevenues of 50% or more)

Best in class engineering/

industrial technology

1. Companies screened to provide

a list of potential peers based on:

— Listing location (US or Europe)

— Within Rolls-Royce’s three-month

average market capitalisation of

0.5x–2.0x

— Classified as ‘Industrials’ with

industry classification of ‘Electrical

Components and Equipment’

or‘Industrial Conglomerates’

or‘Construction Machinery and

Heavy Transportation Equipment’

or ‘Heavy Electrical Equipment’

2. Following stage 1 above,

companiesthat are above the 2.0x

market capitalisation ceiling are

subject to a manual screen to assess

suitability for inclusion

There were no companies above the

2.0x market capitalisation ceiling that

could be considered for inclusion in

the peer group

Rolls-Royce talent

flow cross check

— Consolidated

peer group cross

referenced against

companies from

which Rolls-Royce

isincreasingly

recruiting

seniortalent

— The review revealed

that there was

significant overlap,

and no additional

companies were

added

Aerospace & Defence Global-facing FTSEs Best-in-class engineering/

industrial technology

— Airbus

— BAE Systems

— Boeing

— General Dynamics

— General Electric

— Howmet Aerospace

— Lockheed Martin

— Northrop

Grumman

— RTX

— Safran

— TransDigm Group

— AstraZeneca

— BP

— British American

Tobacco

— GSK

— RELX

— Rio Tinto

— Shell

— Unilever

— 3M

— ABB

— Caterpillar

— Cummins

— Eaton

— Emerson Electric

— Schneider Electric

— Siemens

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

Remuneration policy

Proposed changes to policy design

1. Incentive on-target and maximum levels

The table below summarises the current and proposed changes to incentive arrangements for our Chief Executive and Chief Financial Officer

which will ensure that total target direct compensation levels are competitive relative to our chosen peer group.

Chief Executive Chief Financial Officer

Current Policy Proposed Policy Current Policy Proposed Policy

On-target annual incentive 100% of base salary 150% of base salary 100% of base salary No change

Maximum annual incentive 200% of base salary 300% of base salary 200% of base salary No change

Long-term incentive plan grant level 375% of base salary 750% of base salary 275% of base salary 450% of base salary

Chief Executive and Chief Financial Officer total target direct compensation relative to peer group

Rolls-Royce/Peer group

Base

salary

Target bonus

(% of base

salary)

Target

annual

compensation

Target LTI

(% of base

salary)

Total

target direct

compensation

Tufan

Erginbilgic

Rolls-Royce Chief Executive – before any changes

1,371,563 100% 2,743,126 225% 5,829,143

Compa-ratio versus median 99% 83% 50%

Peer group

Upper quartile 1,440,000 175% 3,805,000 950% 15,495,000

Median 1,385,000 150% 3,300,000 510% 11,730,000

Lower quartile 1,175,000 125% 3,090,000 285% 6,955,000

Proposals from 1 January 2026 – including base pay increase

1,586,000 150% 3,965,000 450% 11,102,000

Compa-ratio versus median 115% 120% 95%

Helen

McCabe

Rolls-Royce Chief Financial Officer – before any changes

795,506 100% 1,591,012 165%

2,903,597

Compa-Ratio versus median 99% 96% 63%

Peer group

Upper quartile 870,000 115% 1,870,000 515% 5,330,000

Median 805,000 100% 1,650,000 315% 4,615,000

Lower quartile 730,000 100% 1,525,000 240% 3,760,000

Proposals from 1 January 2026 – including base pay increase

936,000 100% 1,872,000 270% 4,399,200

Compa-ratio versus median 116% 113% 95%

1 Figures shown before changes are based on salaries in place as at 1 March 2025

2 Proposed changes include base pay adjustments effective from 1 September 2025

3 Long-term incentive awards are delivered as grants of performance shares, with three-year performance conditions plus a two-year deferral period (i.e. five years in total). The target

LTIpercentages shown in the tables above assume LTIP grants of performance shares vest at 60% of maximum

4 Target total direct compensation includes on-target levels of incentive payments. The Committee has also considered the relativity of the proposed changes assuming maximum potential

outturns and the relative positioning of the proposed changes to the peer group would be broadly consistent to the on-target compa-ratio

2. Shareholding requirement – aligning with shareholder interests

To ensure continued alignment of management interests with shareholder interests, the shareholding requirement for the Chief Executive will

increase from 400% to 750% of base salary and for the Chief Financial Officer from 300% to 450% of base salary. This aligns the shareholding

requirement with the new LTIP grant levels, and increases the number of shares our Executive Directors will be required to hold for two years

following cessation of employment.

There are no further changes proposed to the policy.

No Executive Director was present during discussion of their own remuneration package and they were not involved in the final approval of the

new remuneration policy design.

Consideration of shareholder feedback

During the policy review process we consulted with our 24 largest shareholders, who collectively hold over 50% of our share capital. We set

out our proposals in writing and subsequently held twelve shareholder meetings and received nine written responses. We also met with three

proxyadvisers. We are pleased to confirm that there was consistent and positive support from shareholders, and a strong understanding of

ourrationale and approach from proxy advisers.

The Committee wholly believes that effective shareholder alignment requires appropriately stretching targets. Performance targets are

setfollowing a rigorous process including several internal and external reference points, including the business plan and analyst consensus

estimates at the time the targets are set.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GOVERNANCE REPORT

REMUNERATION POLICY

Remuneration policy table

The table below sets out each element of the Executive Directors’ remuneration, which is subject to shareholder approval at the AGM to be held

in April 2026.

Base salary

Purpose and link

to strategy

We provide competitive salaries to attract and retain individuals of the highest calibre to develop and execute the

business strategy.

Operation Salaries are reviewed annually but not necessarily increased. Decisions on salary are informed, but not led, by

reference to:

— size and scope of the role;

— skills and experience of the individual;

— market competitiveness of the broader remuneration package;

— performance of the Group and individual;

— wider market and economic conditions; and

— increases made across the Group.

The Committee has the flexibility to set the salary of a new hire at a discount to the market and to realign it in

subsequent years as the individual gains experience in the role. In exceptional circumstances, the Committee may

agree to pay above market levels to secure or retain an individual who is considered by the Committee to possess

significant and relevant experience that is critical to the delivery of the Group’s strategy.

No recovery or withholding applies.

Maximum opportunity There is no formal maximum. Any salary increases will be assessed annually and will not normally exceed average

increases for employees in other appropriate parts of the Group. Where the Committee considers it necessary

orappropriate, larger increases may be awarded in individual circumstances, including but not limited to: where

there is a significant change in the scale, scope or responsibility of a role; where the organisation has undergone

significant change; development within a role; and/or significant market movement.

Performance measures Not applicable, although overall individual and business performance is considered when setting and reviewing

base salary.

Benefits

Purpose and link

to strategy

We provide competitive benefits suitable to attract and retain individuals of the right calibre to develop and

execute the business strategy and to support their wellbeing.

Operation A range of benefits may be provided including, but not limited to, provision of a company car or car allowance;

financial planning and tax 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 the Group’s all-employee share plans.

No recovery or withholding applies.

Maximum opportunity There is no formal maximum. The cost of benefits is not predetermined, reflecting the need to allow for increases

associated with the provision of benefits. Benefit costs are reviewed regularly to ensure they remain cost-effective.

Participation in any tax advantaged share schemes is capped at the same level as other participants, which is

determined by the Group within the bounds of any applicable legislation which may change from time to time.

Performance measures Not applicable.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

REMUNERATION POLICY

Remuneration policy table continued

Retirement

Purpose and link

to strategy

We provide a competitive retirement savings plan suitable to attract and retain individuals of the right calibre to

develop and execute the business strategy.

Operation Executive Directors are offered membership of a retirement savings plan. A cash allowance may be payable in lieu

of contributions to the plan.

In certain jurisdictions it may be more appropriate to offer more bespoke retirement arrangements. The

Committee will give due consideration to local employment legislation, market practices and the cost of the plan.

Maximum opportunity The maximum employer contribution for the Executive Directors is aligned with that made available to the wider

workforce, being 12% of base salary in the UK.

Performance measures Not applicable.

Annual incentive

Purpose and link

to strategy

We reward annual performance against stretching financial, strategic and individual targets aligned to delivery of

the Group’s strategy.

Deferral reinforces retention and enhances alignment with shareholders by encouraging longer-term focus and

sustainable performance.

Operation The Group operates an Annual Incentive Plan which may be based on a combination of financial, operational and

individual performance measures aligned to the Group’s strategy.

At least half the annual incentive awarded in any year will be deferred into shares for Executive Directors who

havenot achieved the shareholding guideline. If the Executive Director has exceeded their in-employment

shareholding guideline, but has not achieved a level of double the shareholding guideline, the level of annual

incentive deferral into shares reduces from 50% to 25% of salary. Should the Executive Director achieve double

the shareholding guideline then the annual incentive would pay out fully in cash. The deferral period will normally

be for a period of three years.

The Committee has discretion to permit a dividend equivalent amount to accrue on shares delivered under the

deferred annual incentive arrangement. Vesting of deferred shares is dependent on continued employment or

good leaver status, as described in the notes to the policy table from page 93.

The Committee retains the discretion, acting fairly and reasonably, to alter the annual incentive outcome in light of

the underlying performance of the Group, taking account of any factors it considers relevant.

Clawback will apply to any cash incentive paid for three years from the date of the cash payment being made, and

malus will apply to any deferred shares within the three year deferral period.

Maximum opportunity The maximum annual incentive opportunity for Executive Directors is 300% of base salary.

Performance measures The incentive may be based on a combination of financial, operational and individual measures which the

Committee will review on an annual basis. The precise allocation between financial and non-financial measures,

aswell as weightings within these measures, will depend on the strategic focus of the Group from year to year.

Atleast 50% of the performance measures will be financial.

Up to 25% of the maximum incentive opportunity is paid for achieving a threshold level of performance and the

maximum incentive is paid for delivering stretching levels of business performance and outstanding personal

performance. No incentive is payable if threshold levels of performance are not achieved.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GOVERNANCE REPORT

REMUNERATION POLICY

Remuneration policy table continued

Long-term incentive plan

Purpose and link

to strategy

We incentivise the execution of strategy and seek to drive long-term value creation and alignment with long-term

returns to shareholders.

Operation Awards under the LTIP are conditional rights to receive shares subject to continued employment or good leaver

status and the achievement of any relevant performance conditions.

Awards are subject to performance targets normally assessed over three financial years and subject to a two year

holding period. The Committee has discretion to set different performance periods if it considers appropriate.

The Committee shall determine the extent to which the performance measures have been met. The Committee

maymake adjustments to performance targets if an event occurs or circumstances arise which cause the

Committee to determine that performance conditions are no longer appropriate. The performance targets

willbeat least as challenging as the ones originally set.

The Committee has discretion to permit a dividend equivalent amount to accrue on shares during the holding

period under the LTIP.

The Committee has the ability to exercise discretion in adjusting the formulaic outcome of incentives to ensure the

outcome is reflective of the performance of the Group and the individual over the performance period.

Malus and clawback apply for six years from the date of grant (see page 94).

Maximum opportunity The maximum long-term incentive award for Executive Directors is 750% of base salary.

Performance measures The Committee determines performance measures and weightings each year and will ensure that the targets are

stretching and support value creation for shareholders while remaining motivational for management. The precise

measures and weightings will be determined by the Committee on an annual basis and will depend on the strategic

focus of the Group year-to-year. A minimum of 90% of measures will be financial.

Measures for the 2025 award included: free cash flow (30%); operating margin percentage (30%); relative total

shareholder return (30%); and Scope 1 + 2 greenhouse gas emission targets (10%). For 2026, the measures will

include a one-third weighting to each of: free cash flow, operating margin and relative total shareholder return.

For each performance element, achievement of the threshold performance level will result in no more than 20%

ofthe maximum award paying out. For achievement of the maximum performance level, 100% of the maximum

paysout. No amount is payable if threshold levels of performance are not achieved.

The Committee will review the measures each year, and will consider whether it is appropriate to change the

measures to ensure continued alignment to strategic priorities.

Share ownership

Purpose and link

to strategy

Ensures alignment with shareholders’ interests.

Operation Executive Directors are required to build a holding of share interests equivalent in value to a percentage of

theirbase salary within five years from the date they become subject to the Policy. From 2026, the shareholding

requirement will increase to reflect the LTIP grant level, which for the Chief Executive is 750% of base salary, and

for the Chief Financial Officer and any other Executive Director is 450% of base salary. Where requirements are

not met, Executive Directors must retain at least one half of after-tax shares released from the deferred bonus

arrangements and the LTIP until this requirement is met.

Post-cessation, Executive Directors are normally required to retain the lower of the shareholding requirement or

their actual shareholding at leaving date for 24 months.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

REMUNERATION POLICY

Remuneration policy – worked examples for 2026

The tables below provide an illustration of what could be received by each Executive Director for awards granted in, and remuneration for, the

2026 performance year, assuming minimum, on-target and maximum levels of performance. The maximum with share price increase scenario

shows the impact of 50% share price growth on the LTIP shares.

TUFAN ERGINBILGIC

CHIEF EXECUTIVE

HELEN MCCABE

CHIEF FINANCIAL OFFICER

100%

16% 21%

10% 26% 64%

7% 20% 49% 24%

63%

£1,806

£11,322

£18,459

£24,407

Minimum

On-target

Maximum

with share

price increase

£’000

100%

24%

15% 59%

12% 45% 23%

56%

£1,078

£4,542

£7,162

£9,268

Minimum

On-target

Maximum

20%

26%

20%

Maximum

with share

price increase

£’000

Fixed pay Annual incentive LTIP Share price increase

Minimum Fixed remuneration (salary, retirement, benefits)

On-target Fixed remuneration, on-target annual incentive (equivalent to 150% of salary for the Chief Executive and 100% of salary

fortheChief Financial Officer) and 60% vesting of the LTIP (equivalent to 450% for the Chief Executive and 270% for the

ChiefFinancial Officer)

Maximum Fixed remuneration, maximum annual incentive (equivalent to 300% of salary for the Chief Executive and 200% of salary

fortheChief Financial Officer) and 100% vesting of the LTIP (equivalent to 750% for the Chief Executive and 450% for the

ChiefFinancial Officer)

Maximum assuming 50%

increase in share price

All elements are the same as the maximum but assumes a 50% increase in the share price from the date that the shares

are granted

Alignment with shareholders

The table below illustrates how the policy aligns the interests of Executive Directors with the long-term interests of shareholders. A significant

portion of the total compensation package will be delivered in shares. 50% of the annual incentive will be deferred into shares for a period of

threeyears and the long-term incentive plan will have a three-year performance period followed by a two-year holding period.

Year 5Year 4Year 3Year 2Year 1

One-year performance

period (50% in cash)

50% in shares deferred for three years.

No further performance conditions attached to the award

Three-year performance period Two-year holding period

Annual incentive

LTIP

Fixed pay

(salary and benefits)

1 Deferral of 50% of the annual incentive will apply unless an Executive Director has satisfied at least their minimum shareholding requirement. Twenty-five percent of the annual incentive

will be deferred if the shareholding requirement is met in full. No deferral will apply where an Executive Director holds over 200% of their shareholding requirement. Information on the

current shareholding requirements for the Executive Directors can be found on page 105.

Notes to the Remuneration policy table

Performance measure selection and setting

The annual incentive measures are determined annually to reflect matters which the Committee considers to be areas of specific focus for the

Executive Directors over the short term. The Committee believes that using a number of measures provides a balanced incentive. The measures

themselves are aligned to, and are designed to support the delivery of, the Group’s strategic objectives.

The Committee sets performance conditions relating to the LTIP awards which are designed to align the interests of management and

shareholders, incentivise management to deliver the Group’s strategic objectives and reward performance over the longer term.

Targets for the annual incentive and performance measures for the LTIP awards are reviewed and set before the awards are made, based

onanumber of internal and external reference points, including strategic plans and analyst consensus to reflect market expectations where

available. TheCommittee intends that the targets will be stretching and will align management’s interests with those of shareholders. The

measurement ofperformance is at the Committee’s discretion, which may include appropriate adjustments to financial or non-financial

elements and/or consideration of overall performance in the round. Adjustments may be either upwards or downwards.

In exceptional circumstances, performance conditions may also be replaced or varied if an event occurs or circumstances arise which cause

the Committee to determine that the performance conditions have ceased to be appropriate.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GOVERNANCE REPORT

REMUNERATION POLICY

Malus and clawback provisions

Malus and clawback apply to the annual incentive and the LTIP. Malus allows the Committee, in its absolute discretion, to determine at any time

prior to the vesting of an award, to reduce or cancel the award. Clawback allows the Committee, in its absolute discretion, to claw back from

individuals some or all of the vested awards or paid annual incentives. Malus and clawback may apply in certain circumstances, including:

— 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, or are likely to materially damage, the Group;

— acting in a way which has materially damaged the reputation of the Group or any member of the Group;

— a breach of or inadequate response to a significant HSE or other environmental issue;

— materially incorrect calculation of an award; and/or

— failure to adequately manage/supervise others which in turn led to one of the above triggers and/or materially incorrect calculation of an award.

Policy on new appointments

The Board will appoint new Executive Directors with a reward package recommended by the Committee that is in line with the remuneration

policy. Base salary may be set at a higher or lower level than the previous incumbent. The maximum incentive opportunity on appointment

willbe no higher than the maximum of the shareholder approved remuneration policy, which is 300% for the annual incentive and 750% for

theLTIP.

Remuneration forfeited on resignation from a previous employer may be compensated. This will be considered on a case-by-case basis and may

comprise cash or shares. In general:

— if such remuneration was in the form of shares, compensation will be in the Company’s shares;

— if remuneration was subject to achievement of performance conditions, compensation will, where possible, be subject to performance

(eitherRolls-Royce performance conditions or actual/forecast performance outturns from the previous company); and

— the timing of any compensation will, where practicable, match the vesting schedule of the remuneration forfeited.

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.

Where an Executive Director is required to relocate from their home location to take up their role, the Committee may provide reasonable

relocation assistance and other allowances including expatriate assistance. Global relocation support and any associated costs or benefits

(including but not limited to housing, school fees, tax preparation and filing assistance and flights back to the home country) may also be

provided if business needs require it. Should the Executive’s employment be terminated without cause by the Group, repatriation costs may

bemet by the Group.

The Company may agree to pay the reasonable legal fees incurred by a new appointee for advice received in relation to their contract of

employment or service agreement.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

REMUNERATION POLICY

Wider workforce considerations

The Committee has responsibility for overseeing pay arrangements of all our people and reviews broader workforce policies and practices

inorder to support decisions on executive pay. When setting remuneration for Executive Directors and senior management, the Committee

carefully considers wider remuneration across the Group, including salary increases, annual incentive awards, share plan participation and

payratios between Executive Directors and employees.

Paying our people fairly relative to their role, skills, experience and contribution is central to our approach to remuneration. The Group’s

reward framework and policies fundamentally support this. The remuneration policy for senior executives and other employees is determined

based on similar principles to Executive Directors. For roles below the Board, the exact structure and balance are tailored based on various

factors including the scale, scope or responsibility of the role, development within the role and local market practice.

We drive alignment through the organisation with our incentives and our all-employee share plans. The Annual Incentive Plan performance

measures cascade from Executive Directors to the vast majority of our wider workforce and our LTIP plan cascades to over 5,000 global

leaders as well as our key talent groups, totalling approximately 14% of our global workforce. This drives alignment of organisational and

individual objectives, ensuring that the wider workforce is driving the key metrics which will help us to continue to deliver a step-change in

ourperformance and enable our strategy. Our reward arrangements are subject to regular consultation activity with leaders, employees and

their representatives.

The Committee is committed to driving a culture of employee share ownership, with 2025 being a pivotal year on this journey. The all-employee

share plan transitioned from a Save As You Earn plan, which was cash settled outside of the UK and share settled in the UK, and saw the launch

of a global purchase plan (Your Shares: Matched), where the Company matches personal investment up to a certain value each month, allowing

all colleagues to become shareholders. The Committee is pleased with the level of engagement with the new plan, with 66% of eligible

colleagues choosing to participate.

We awarded all global colleagues 150 free shares on 12 September 2024 when our share price was £4.93, making the entire workforce

shareholders. These shares vested in all countries outside of the UK on 12 September 2025, having benefited from a return of approximately

130%. For colleagues in the UK, these shares will vest in 2027. The Committee firmly believes that share ownership drives engagement with both

business and share price performance, and reinforces the message that we all benefit if the business succeeds. Not only does employee share

ownership ensure greater alignment of financial interests, it provides our people with additional voice in corporate matters as a result.

Share plans

The Committee retains a number of discretions consistent with the relevant share plan rules. For example, in the event of any variation in the

share capital of the Company, a demerger, special dividend, distribution or any other transaction which will materially affect the value of shares,

the Committee may make an adjustment to the number or class of shares subject to awards.

The treatment of leavers, including change of control provisions, in all of our share plans is covered by the respective plan rules.

Service contracts

A summary of the key elements of the Executive Directors’ service agreements as they relate to remuneration are as follows:

Contract duration No fixed term.

Notice period 12 months’ notice both to and from the Executive Director.

Payment in lieu of

notice (PILON)

Employment can be terminated with immediate effect by undertaking to make a PILON comprising base salary,

retirement contributions or allowance, car allowance and a sum representing the cost of private medical insurance.

The Company may elect to provide private medical insurance and/or to allow an Executive Director to retain their

company car through the notice period, or the balance of it, as an alternative to making cash payments.

The Company is entitled to make the PILON on a phased basis, subject to mitigation, so that any outstanding

payment(s) would be reduced or stopped if alternative employment is obtained.

Change of control The service agreements for Executive Directors do not contain change of control provisions. However, if

thereisachange of control of the Company or other specified Company events, the relevant plan rules contain

details onthe impact for awards. In most cases, this is likely to result in the awards vesting early but subject to

stillmeeting any applicable performance conditions, as decided by the Committee, which may have regard

toprojected performance over the whole period, and applying time prorating. Alternatively, awards may be

exchanged for newawards over shares in the acquiring company in some circumstances.

Other entitlements

on termination

There is no contractual entitlement to notice or any other payments in respect of the period after termination

ofemployment if the individual is summarily dismissed.

Please see payments for loss of office over the page for a summary of other entitlements which may be due upon

termination and which relate to remuneration.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GOVERNANCE REPORT

REMUNERATION POLICY

Payments for loss of office

The Company’s policy on payments for loss of office is as follows.

The relevant share plan rules govern the treatment of in-flight share awards when an Executive Director leaves. The table below summarises

leaver provisions for good leavers.

Good leavers are those who have left the Group due to: death; ill-health, injury or disability; redundancy; retirement with the agreement of

theGroup; the sale or transfer of the business in which the Executive Director is employed to a company which is not a member of the Group;

the participant’s employing company ceasing to be a member of the Group; and other such circumstances approved by the Committee.

All awards will normally lapse if an individual leaves the Company for any reason other than a good leaver reason. The Committee will not

exercise discretion where a participant is dismissed for gross misconduct.

The Company may agree to pay the reasonable legal fees for the advice received in relation to the termination of employment.

Component Approach

Annual incentive Individuals who are determined by the Committee to be good leavers may be considered for an annual incentive in

relation to the year in which their active employment ceases.

When deciding whether to exercise its discretion to allow a payment in respect of an annual incentive (and, if so,

itsamount and the terms on which it may be paid), the Committee will consider such factors as it considers to be

appropriate, including performance against targets, the performance of the individual and the Group in general

and the circumstances in which the individual is leaving office. Any payment to a good leaver in respect of

anannual incentive will typically be made at the same time as annual incentives are paid to other employees.

Clawbackwill continue to apply to the cash element of any payment made in respect of an annual incentive.

TheCommittee will determine if it is appropriate in the particular circumstances to apply incentive deferral.

Deferred shares allocated will vest in full on the vesting date if an individual is determined by the Committee to be a

good leaver unless the Committee, in its absolute discretion, determines that an award will vest on such earlier date

on or following the date of such cessation as it may specify. Otherwise, they will lapse on exit.

Long-term

incentive plan

If an individual is determined by the Committee to be a good leaver, LTIP awards will normally continue to vest on

the original vesting date and any holding period will normally still apply (subject to the satisfaction of performance

conditions and unless the Committee exercised its discretion to waive time prorating, which will apply to reflect

theperiod worked). If an individual leaves during the holding period for any reason (except summary dismissal)

theaward will not lapse or be prorated for time but the holding period will normally remain in force.

GESPP and SIP

schemes

Awards under all employee plans (Global Employee Share Purchase Plan and the Share Incentive Plan) are subject

to the same leaver provisions as all other participants, as prescribed by the rules of the relevant scheme or plan.

Legacy commitments

Any remuneration payments and/or payments for loss of office made under legacy arrangements prior to the approval of the remuneration

policy may be paid out subject to the terms of the remuneration policy in place at the time they were agreed. For these purposes, payments

include satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment will be agreed at the time

the award is granted. Unvested Annual Incentive Plan awards issued under the previous policies, along with any salary that was deferred into

shares, will vest on the usual vesting dates, consistent with the terms of that policy. LTIPs granted under previous policies remain in place,

consistent with the terms of those policies.

Minor amendments

The Committee may make minor amendments to the policy (for regulatory, exchange control, tax or administrative purposes or to take account

of a change in legislation) without obtaining shareholder approval.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

REMUNERATION POLICY

Non-Executive Directors’ remuneration

The table below sets out the main elements of Non-Executive Directors’ remuneration.

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 Chair’s remuneration. The Chair and the Executive

Directors determine the remuneration of the Non-Executive Directors.

The fees for Non-Executive Directors are set at a level which is considered appropriate to attract individuals

withthe necessary skills and experience. Fees are periodically reviewed to ensure they remain appropriate in

thecontext of: the role scope; company size; complexity and global breadth; and wider market conditions.

The Chair is normally paid a single fee which reflects the commitment, demands and responsibility of the role

andmay be paid in either cash or shares or a combination of both.

Other Non-Executive Directors are normally paid a base fee and additional fees for Board Committee chairmanship

and membership responsibilities. The Senior Independent Director, Employee Champions and the Rolls-Royce

North America Board director receive an additional fee for these additional duties. Non-Executive Director fees

may be paid in either cash or shares or a combination of both.

Non-Executive Directors are not eligible to participate in the annual incentive or LTIP.

Maximum opportunity The current limit on the aggregate fees is set out in the Articles of Association which may be amended by a

shareholder vote.

Performance measures Not applicable.

Benefits

Purpose and link

to strategy

To reimburse Non-Executive Directors for reasonable expenses incurred in fulfilling the duties of their role.

Operation Reimbursement for expenses that may include, but are not limited to, travel, hotel and subsistence incurred when

attending meetings. The Group may provide support with tax matters for Non-Executive Directors based outside

the UK. The Chair may have occasional use of chauffeur services. The Group may pay tax on benefits provided to

Non-Executive Directors.

Maximum opportunity Not applicable.

Performance measures Not applicable.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GOVERNANCE REPORT

REMUNERATION POLICY

Implementation of remuneration policy for 2026

Base salary

The salaries for the Chief Executive and the Chief Financial Officer were reviewed in September 2025. No increase

is proposed in 2026. Base salaries will next be reviewed in March 2027.

Benefits

There will be no change to our approach to benefits in 2026, which includes car allowance, financial planning

assistance, insurances and other benefits.

Retirement

The cash allowance for Tufan Erginbilgic and Helen McCabe is 12% of salary, in line with the rate made available to

the wider UK workforce.

Annual incentive

In line with the proposed policy, the annual incentive for 2026 will be based on 80% Group performance and 20%

individual performance, with a maximum opportunity for Tufan Erginbilgic of 300% of salary and Helen McCabe of

200% of salary. At least half of the annual incentive awarded in any year will be deferred into shares which will vest

after three years for Executive Directors who have not achieved the shareholding guideline.

The performance metrics continue to reflect the key strategic priorities for the Group, and remain unchanged for

2026, with an 85% weighting to financial metrics, and 15% to non-financial (customer; safety and people) metrics.

The metrics and associated weightings will be:

Metric Weighting Link to strategy

Free cash flow 40% A fundamental KPI which helps to measure the level of value we are creating

for our shareholders. It enables the business to fund growth, reduce debt

and make shareholder distributions.

Operating profit 30% Indicates how the effect of growing revenue and control of our costs

delivers value for shareholders.

Strategic objectives

(split 5% customer

and 15% operating

profit margin)

20% Incentivises the delivery of key annual objectives linked to the transformation.

Customer delivery and continuing focus on margin improvement are both

critical to increasing the quality and sustainability of financial returns.

Safety 5% Safety is the Group’s licence to operate and is the number one priority for

all of our people.

People 5% Our Voices survey is an objective way of assessing how engaged our

employees are with the business, its leaders and our transformation.

Where targets are set with a one-year performance period and are considered to be commercially sensitive, they

will be disclosed following the end of the performance period, along with performance against targets and the

details and context for the assessment of performance.

The Committee may make appropriate adjustments and use judgement in assessing performance outcomes.

Itretains its overriding ability to apply discretion to adjust any formulaic outcome to ensure that the final outcome

is fair and justified in the context of the overall performance of the business.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

REMUNERATION POLICY

Implementation of remuneration policy for 2026 continued

Long-term incentive plan

The long-term incentive has a three-year performance period and a two-year holding period, with a maximum

opportunity of 750% of salary for Tufan Erginbilgic and 450% for Helen McCabe.

For each performance element, achievement of threshold will result in no more than 20% of the maximum pay out

and no amount payable for an element if the threshold is not met. Achievement of the maximum performance would

result in 100% of the maximum award paying out.

Since we re-introduced a market-typical LTIP in 2024, the metrics have been updated each year to reflect our key

strategic priorities at the time. This is demonstrated in the table below. Cash, profit and relative share performance

remain consistent metrics. Return on Capital in the 2024 LTIP and a Scope 1 + 2 related metric in the 2025 LTIP

continue to drive long-term focus and action in these key areas. The Committee will continue to consider LTIP

metrics each year in light of our strategic priorities each year.

2024 LTIP

2025 LTIP

2026 LTIP

30% free cash flow

30% operating margin

30% relative TSR

10% return on capital

30% free cash flow

30% operating margin

30% relative TSR

10% Scope 1  2 emissions

33.3% free cash flow

33.3% operating margin

33.3% relative TSR

2024 2025 2026 2027 2028

2026 metrics

Metrics Weighting

Threshold

(20% vesting)

Maximum

(100% vesting) Link to strategy

Free cash flow (three-year cumulative) 33.3% £13.0bn £13.6bn A fundamental KPI which helps

tomeasure the level of value we

arecreating for our shareholders.

Itenables the business to fund

growth, reduce debt and make

shareholder distributions.

Operating margin % (average over

three-year performance period)

33.3% 18.7% 19.5% Reflects the quality of performance

and will encourage continued cost

focus across the Group.

Relative TSR (50% versus the

FTSE 100 constituents and 50%

versus the S&P global industrials

index constituents)

33.3% Median Upper

quartile

Closely aligns executive pay

outcomes with the shareholder

experience, a measure favoured

byalarge proportion of our

shareholder base.

1 Outturn between threshold and maximum will be calculated on a straight-line sliding scale

The Committee may make appropriate adjustments and use judgement in assessing performance outcomes.

Itretains its overriding ability to apply discretion to adjust any formulaic outcome to ensure that the final outcome

isfair and justified in the context of the overall performance of the business.

The long-term incentive opportunities and time horizons will operate in accordance with the remuneration policy.

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GOVERNANCE REPORT

REMUNERATION POLICY

Executive Directors’ remuneration

The following pages show how we have applied our remuneration policy during 2025 and disclose all elements of remuneration received by our

Executive Directors.

Executive Directors’ single figure of remuneration (audited)

Tufan Erginbilgic Helen McCabe

2025

£’000

2024

£’000

2025

£’000

2024

£’000

Salary (a) 1,432 1,136 836 690

Salary as deferred shares – 160 – 62

Benefits (b) 89 105 33 29

Annual Incentive Plan (c) 2,996 2,556 1,730 1,483

Long-Term Incentive Plan – – – –

Retirement allowance (d) 172 156 100 90

Previous employer buyouts (e) – – 1,104 888

Total remuneration 4,689 4,113 3,803 3,242

Total fixed remuneration 1,693 1,557 969 871

Total variable remuneration

2,996 2,556 2,834 2,371

a) Salary (audited)

The Company provides suitable competitive salaries to attract and retain individuals of the right calibre to develop and execute the

businessstrategy.

As disclosed last year, base pay awards of 5% were delivered to both Tufan Erginbilgic and Helen McCabe effective 1 March 2025. At

thetime,this was below the median increase for the broader UK population for 2025 of 5.5%. The Committee subsequently undertook a

benchmarking process during the summer to inform our new policy proposals and this identified a material gap between the current pay

arrangements for Tufan and Helen and competitive levels of pay prevalent within our peer group. Consequently, the Committee decided to

make further adjustments to the base pay from 1 September as a proactive measure to recognise the exceptional performance of the Executive

Directors andto mitigate the gap to market. Tufan’s base salary was increased by 15.6% and Helen’s base salary was increased by 17.7%. These

adjustments result in base pay levels aligned to those typical in other FTSE 10 companies. No further increases to base salaries are planned until

March 2027.

Base salary as at

1 March 2026 (£)

Base salary as at

1 March 2025 (£)

Tufan Erginbilgic 1,586,000 1,371,563

Helen McCabe 936,000 795,506

b) 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 value of all taxable benefits paid

to Executive Directors is shown below.

Car or car

allowance

£’000

Medical

insurance

£’000

Travel and

subsistence

£’000

Tax

benefit

£’000

Total

£’000

2025 2024 2025 2024 2025 2024 2025 2024 2025 2024

Tufan Erginbilgic 15 15 68 64 – 26 6 – 89 105

Helen McCabe 15 15 2 2 4 11 12 1 33 29

c) Annual Incentive Plan (audited)

The Annual Incentive Plan is designed to incentivise the execution of the business strategy, delivery of financial targets and the achievement

ofpersonal objectives. Awards are made in March each year, following the prior calendar year performance period. Half of the incentive is

deferred into shares for three years for Executive Directors who have not achieved their shareholding guideline. If the Executive Director has

exceeded their shareholding guideline but not achieved a level of double the shareholding guideline, the level of annual incentive deferral into

shares reduces from 50% to 25%. Should the Executive Director achieve double the shareholding guideline then the annual incentive would

fully pay out as cash. Any deferred shares include the right to receive an amount equal in value to any shareholder distributions issued during

the deferral period. The shares are conditional on continued employment but do not have further performance conditions. In 2025, the

maximum opportunity under the Annual Incentive Plan for the Chief Executive and the Chief Financial Officer was 200% of base salary.

— 80% of the award is based on Group performance; and

— 20% of the award is based on individual performance.

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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

Remuneration report

The Committee reviewed the 2025 outturn against the performance measures.

2025 Annual Incentive performance outturns

Weighting

Threshold

(50% outturn)

Target

(100%)

Maximum

(200%)

Performance

pre-adjustments

Performance

post-adjustments

% of

target

% of

maximum

Annual targets:

Free cash flow

40% £2,656m £2,856m £3,056 3,270 3,247 200% 100%

Actual £3,247m

Operating profit

30% 2,657 2,857 3,057 3,462 3,438 200% 100%

Actual £3,438m

People – Our Voices survey 5% 78% 79% 80% n/a n/a 200% 100%

Actual 81%

Safety 5%

– Safety index score 2.5% 95% 97% 99% n/a n/a 155% 77.5%

Actual 98.1%

– Total Reported Injuries 2.5% 0.275% 0.25% 0.2% n/a n/a 0% 0%

Actual 0.29%

Key strategic objectives

– Operating profit margin

15% 13.8% 14.2% 15.2% 17.3% 17.1% 200% 100%

Actual 17.1%

– Customer ⁴ 5% n/a n/a n/a n/a n/a 44.7% 22.3%

Actual 44.7%

Outcome 186.1% 93.1%

1 Payout between threshold and target and target and maximum is calculated on a straight line sliding scale

2 Free cash flow and operating profit have been adjusted to account for foreign exchange changes during 2025 in order to ensure that targets and assessments are measured on a

like-for-like basis

3 Key strategic objectives aligned to the broader transformation objectives were weighted 75% to operating profit margin and 25% to customer delivery metrics

4 Each Division had one clear, simple and easily measurable delivery metric that our customers would support. Group outturn is the average of the three Divisions. Civil Aerospace and

Defence missed their target, while Power Systems achieved 134%

85% of the 2025 annual incentive scorecard was weighted to financial metrics and 15% weighted to non-financial metrics. The Committee

considered adjustments to targets resulting from events which were not anticipated at the time the targets were set, to ensure that targets

andassessments are measured on a like-for-like basis. No further adjustments were made.

The incentive plan outturns are 186.1% of target and 93.1% of maximum.

Tufan Erginbilgic Helen McCabe

Group performance (% of maximum) – weighting 80% 93.1% 93.1%

Individual performance (% of maximum) – weighting 20% 100% 90%

Actual award (% of maximum) 94% 92%

Actual award (% of salary) 189% 185%

Actual award (£’000) £2,996 £1,730

As the Chief Executive and the Chief Financial Officer hold more than double their required shareholding, all of the 2025 Annual Incentive will

be paid as cash.

Definitions used for performance measures:

Operating profit – adjusted Group underlying operating profit before tax.

Free cash flow – adjusted Group free cash flow.

Operating profit margin – adjusted Group underlying operating profit margin.

People – based on the results of the Our Voices survey.

Safety – equally weighted between our two key internal safety measures (the safety index and total reported injury rates). The safety index is an

established internal KPI used by all divisions and was included for the first time as an incentive metric for 2023.

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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GOVERNANCE REPORT

REMUNERATION REPORT

Individual performance

Subject to achievement of a minimum financial threshold, 20% of the annual incentive opportunity for the Executive Directors is based on

theachievement of their personal objectives. The financial threshold for 2025 was to deliver a Group free cash flow of a minimum of £1,530m.

Personal performance objectives are set at the beginning of the year and are aligned with the Group’s priorities.

Chief Executive: Tufan Erginbilgic

Objective Measure Assessment against objective

Safety Demonstrate year-on-year progress to

reduce the number of Total Reported

Injuries (TRI). Embed process safety

reporting and performance management

across the Group.

Product safety risk reached its lowest level in a generation, with all

divisions resolving issues and enhancing portfolios.

Safety culture is consistently reinforced at every level in the

organisation and embedded in the new behaviours. More than

13,000employees completed the new facilitator-led

SafetyExperience, reinforcing understanding of safety systems

andpersonal accountability.

The Our Voices survey results demonstrated safety is understood

byall layers of the organisation as our number one priority.

TRI rate stable year-on-year at 0.29, which is the lowest level

onrecord.

Operational

effectiveness

Drive improvements in product

costwiththe aim of outperforming

industrybenchmarks.

Proactive steps taken across the Group to improve supply chain

efficiency and to continue to manage ongoing supply chain

challenges in the aviation supply chain. Engine production and

aftermarket throughput improved, which was recognised externally

by Airbus through its Operational Excellence Award. Global MRO

expansion is restoring fleet performance, with progress on reducing

aircraft on ground.

Excellent progress on all six levers to unlock value within Civil

Aerospace: extend time on wing, lower shop visits, reduce product

costs, keep engines earning for longer, value-based pricing and

contractual rigour to restructure onerous contracts.

Group Business Services (GBS) function scaled up with the

expansionof a Global Capability and Innovation Centre in India,

whichwill include engineering, people, finance and procurement

teams, as wellas digital and data innovation teams to help accelerate

digital transformation.

Performance

management

Deliver free cash flow of £2,800m; deliver

operating profit of £2,900m; and deliver

operating margin of 14.2%.

Significant outperformance across all financial KPIs enabling updated

mid-term guidance to be delivered.

2025 free cash flow of £3,270m; operating profit of £3,462m; and

operating margin of 17.3%.

The organisation has achieved its mid-term operating margin target

(15%–17%) three years early. Based on 2026 guidance, we expect to

deliver profit targets two years earlier than planned.

Strategic initiatives

delivery

Embed a multi-year transformation

programme that will eliminate aircraft

onground and deliver a step-change

inoriginal equipment performance

andcommercial capability across

theGroup.

Securestrategic partnership for

Rolls-Royce SMR.

The 17 strategic initiatives are all delivering and many over-achieving

the targets, including net efficiency targets over-delivered.

In Civil Aerospace, excellent progress has been made to improve time

on wing and in reducing aircraft on ground.

In Defence, significant progress has been made to grow our

combatbusiness.

In Power Systems, we are capturing profitable growth in the back-up

power generation systems for the rapidly growing data centre market.

Rolls-Royce SMR was selected by Great British Energy – Nuclear to

deploy three SMRs in theUK. We deepened our partnership with

ČEZGroup, now a shareholder in Rolls-Royce SMR.

Behaviours Maintain strong engagement scores

measured by OurVoices in 2025.

Strong year-on-year progress reported in the Our Voices survey,

demonstrating our transformation continues to be reinforced by the

four behaviours introduced in 2024: put safety first; do the right thing;

keep it simple; and make a difference. These behaviours have become

part of the organisation’s common language.

The Power of You recognition platform has generated over 10,000

recognitions since launch, with strong adoption across all regions.

Overall personal performance assessment: 200%

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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

REMUNERATION REPORT

Chief Financial Officer: Helen McCabe

Objective Measure Assessment against objective

Safety Continue to build a culture that puts

safetyat the heart of everything we

do.Ensure robust compliance and

controlsenvironment.

Consistent and effective advocate driving safety culture.

Internal controls and compliance processes and culture demonstrably

strengthened across the Group underpinned by greater use of digital

and automation.

Operational effectiveness Finalise and start to execute an IT & Digital

strategy; Execute GBS strategy in line

withplan; Execute new Sales, Inventory &

Operating Planning (SIOP) process.

Comprehensive IT & Digital strategy approved to address safety,

compliance and strategic delivery. Launch of AI platform, AiRR,

withAI capabilities being deployed across engineering, MRO and

supply chain.

Continued focus to maintain and strengthen cyber compliance

andsecurity.

Integrated performance management robustly embedded.

Excellent GBS progress: established new centre in Poland and

expanded centre in India, including approximately 200 colleague

transfers whilst maintaining ‘silent running’; accelerated business

cases approved and progressed; governance in place, with

highconfidence of achieving efficiency, effectiveness and

experience commitments.

New Group-wide SIOP process tracking very well with high visibility

and confidence of optimisation benefits with cycle times reduced,

processes being optimised and insights improved.

Performance management Deliver free cash flow of £2,800m; deliver

operating profit of £2,900m; and deliver

operating margin of 14.2%.

Significant outperformance across all financial KPIs enabling updated

mid-term guidance to be delivered.

2025 free cash flow of £3,270m; operating profit of £3,462m; and

operating margin of 17.3%. The organisation has achieved its mid-term

operating margin target (15%–17%) three years early. Based on 2026

guidance, we expect to deliver profit targets two years earlier

thanplanned.

Strategic initiatives

delivery

Execute the capital framework

strategically, commercially and

robustly.Deliver targeted investor

updatessuccessfully.

Balance sheet resilience restored.

Upgrades to strong investment grade ratings from all three credit

rating agencies.

Return to shareholder distributions in the form of first cash

dividendsin more than five years and first share buyback programme

in ten years.

Purposeful and effective investor engagement on capital frame.

Behaviours Implement new organisational design

across Finance, GBS, IT & Digital functions.

Strengthen talent pipeline for critical roles.

Drive engagement and our behaviours with

visible leadership.

Demonstrable progress in strengthening key talent areas.

Group-wide focus to achieve synergies and deliver significant and

recurring operating cost reductions.

More efficient and simplified operating model with greater investment

discipline and more focused management of third-party costs.

Cumulative efficiency and simplification savings of over £600m

delivered by the end of 2025, overachieving the targets set out in the

Strategic Review in 2023.

Strong year-on-year progress reported in the Our Voices survey.

Colleague engagement and impact of behaviours all above

Groupaverage.

Overall personal performance assessment: 180%

d) Retirement (audited)

Executive Directors are offered membership of a defined contribution plan with a maximum employer contribution of 12% of salary (or cash

allowance of equivalent value) in line with the rate available to the wider UK workforce.

In 2025, Tufan Erginbilgic and Helen McCabe received a cash allowance in lieu of employer contributions.

e) Compensation for remuneration forfeited from previous employment (audited)

Chief Financial Officer

Helen McCabe has been compensated for remuneration forfeited from previous employment which included shares. A number of these shares

were subject to performance conditions set for the wider Group in 2022 and 2023. Details of these awards, the performance conditions and

targets were first reported in the 2023 Annual Report.

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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GOVERNANCE REPORT

REMUNERATION REPORT

e) Compensation for remuneration forfeited from previous employment (audited) continued

The first tranche of performance shares vested in March 2025 and were subject to performance conditions set in 2022 covering the

performance period 1 January 2022 to 31 December 2024. The performance conditions included a free cash flow target (45% weighting,

threshold target of £874m and maximum target of £2,674m); a cumulative operating profit target (45% weighting, threshold target of £1,705m

and maximum target of £2,905m); and a CO

sustainability target (10% weighting, calculated as the average achievement of CO

sustainability

milestones across the divisions, subject mainly to product compatibility with sustainable fuels). This award vested at 98%, with free cash

flowand operating profit above the maximum target and the CO

sustainability milestone vested at 80%. The value of this award has been

calculatedand restated using the actual share price at vest of £7.67. The figure of £888,000 includes share price appreciation over the

performance periodof £705,000.

The second tranche of performance shares were subject to performance conditions set in 2023 covering the performance period 1January2023

to 31 December 2025, and will vest in March 2026. The performance conditions were equally weighted to operating profit (threshold target of

£4.4bn, maximum of £5.4bn) and free cash flow (threshold target of £4bn, maximum of £5.3bn). This award will vest at 100%, with free cash flow

and operating profit above the maximum target. The value of this award has been calculated using the average share price for the month ended

31 December 2025 of £11.13. The figure of £1,104,000 includes share price appreciation over the performance period of £951,000.

Payments to past Directors (audited)

Jasmin Staiblin stepped down as a Non-Executive Director from the Board on 13 May 2021. Jasmin was appointed as a member of the

supervisory board of Rolls-Royce Power Systems AG on 10 June 2021 and as chair of their supervisory board, executive committee, audit

committee and mediation committee on 11 June 2021. Payments of £275,636 have been made to Jasmin in 2025 in relation to her appointment

(2024: £259,905). No other payments have been made to past Directors during the year.

Payments for loss of office (audited)

There were no payments for loss of office in 2025.

Executive Directors’ shareholdings and share interests

2025 Annual Incentive Plan – Deferred shares

The following table summarises the Annual Incentive Plan awards made to Executive Directors in March 2025. Awards were made in the form

ofshares representing 50% of the annual incentive in respect of the 2024 financial year. These conditional awards are subject to continuous

employment. Further details about the 2024 Annual Incentive Plan can be found in the 2024 Annual Report.

Number of

shares granted

Value of award

at grant

£’000 Vesting date

Market price

at grant

GBp

Tufan Erginbilgic 161,710 1,278 26/03/2028 790.33

Helen McCabe 93,792 741 26/03/2028 790.33

2025 LTIP

The following table summarises the LTIP awards made to the Executive Directors on 26 March 2025 for the performance period ending

31December 2027. For further information see page 87.

Number of

shares granted

Value of award

at grant

£’000

End of

performance

period Vesting date

Market price

at grant

GBp

Tufan Erginbilgic 650,787 5,143 31/12/2027 26/03/2030 790.33

Helen McCabe 276,802 2,187 31/12/2027 26/03/2030 790.33

1 Based on 15-day average share price prior to the date of grant

Executive Directors’ share awards (audited)

The tables below provide details of the Executive Directors’ overall interests in ordinary shares under the Company’s share plans. TheExecutive

Directors do not have share options.

Award Type

Date of grant

Balance as of

31 December

2024

During the year

Balance as of

31 December

2025 Date of vestGranted Vested Lapsed

Tufan Erginbilgic

LTIP (Buyout)

08/03/2023 4,128,138 – – – 4,128,138 08/03/2027

08/03/2023 4,128,138 – – – 4,128,138 08/03/2028

LTIP

24/05/2024 1,129,193 – – – 1,129,193 24/05/2029

26/03/2025 – 650,787 – – 650,787 26/03/2030

Executive Incentive Plan

1, 3, 4

01/03/2024 511,390 – – – 511,390 01/03/2027

01/03/2024 767,086 – – – 767,086 01/03/2028

Annual Incentive Plan

1, 3

26/03/2025 – 161,710 – – 161,710 26/03/2028

Salary Deferred Shares

1, 3

27/01/2023 –

28/05/2024 259,584 – 217,547 – 42,037

27/01/2025 –

28/05/2026

Total 10,923,529 812,497 217,547 – 11,518,479

1 Shares are not subject to performance conditions

2 Shares are subject to performance conditions

3 Shares will accrue additional shares at vest as a result of the reinvestment of dividend equivalents during the vesting periods

4 These awards were issued under the legacy hybrid Executive Incentive Plan which operated over 1 January 2021 to 31 December 2023

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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

REMUNERATION REPORT

Award Type

Date of grant

Balance as of

31 December

2024

During the year

Balance as of

31 December

2025 Date of vestGranted Vested Lapsed

Helen McCabe

LTIP (Buyout) 29/11/2023 536,966

– 536,966 – – 08/03/2025

29/11/2023 198,002

– 198,002 – – 08/03/2025

29/11/2023 118,156

– 115,792 2,364 – 08/03/2025

29/11/2023 99,212

– – – 99,212 23/03/2026

29/11/2023 162,337

– – – 162 , 337 23/03/2026

LTIP

24/05/2024 480,284 – – – 480,284 24/05/2029

26/03/2025 – 276,802 – – 276,802 26/03/2030

Executive Incentive Plan

1, 3, 4

01/03/2024 99,175 – – – 99,175 01/03/2027

01/03/2024 148,763 – – – 148,763 01/03/2028

Annual Incentive Plan

1, 3

26/03/2025 – 93,792 – – 93,792 26/03/2028

Salary Deferred Shares

1, 3

26/08/2023 –

26/05/2024 42,801 26,548 – 16,253

26/08/2025 –

26/05/2026

Total 1, 885,696 370,594 877,308 2,364 1,376,618

1 Shares are not subject to performance conditions

2 Shares are subject to performance conditions

3 Shares will accrue additional shares at vest as a result of the reinvestment of dividend equivalents during the vesting periods

4 These awards were issued under the legacy hybrid Executive Incentive Plan which operated over 1 January 2021 to 31 December 2023

Executive Directors’ share interests as at 31 December 2025 (audited)

The table below provides details of the total shareholding and share interests of the Executive Directors (including the interests of their

connected persons) in ordinary shares as at 31 December 2025.

beneficially held

Scheme Interests

Shareholding

requirement (%)

% of 2025

basesalary ²

Conditional shares

not subject to

performance

conditions

Conditional shares

subject to

performance

conditions

Salary deferred

Total scheme

interests

Tufan Erginbilgic 115,883 9,696,462 1,779,980 42,037

11,518,479

400 3,729

Helen McCabe 709,248 ¹ 504,067 856,298 16,253

1,376,618

300 1,179

1 Shares beneficially held by Helen McCabe include 617 shares through the employee share purchase plan

2 Calculated by reference to the three-month average share price to 31 December 2025

3 Shares will accrue additional shares at vest as a result of the reinvestment of dividend equivalents during the vesting periods

During the period between 1 January 2026 to 26 February 2026, the following changes in interests have occurred:

— On 26 January 2026, 10,195 salary deferred shares vested for Tufan Erginbilgic and 3,942 salary deferred shares vested for Helen McCabe

— Helen McCabe acquired 15 shares on 7 January 2026 and 16 shares on 9 February 2026 under the Your Shares: Matched employee

sharescheme

No other changes in Executive Director share interests occurred in the period.

Executive Directors’ shareholding requirements (audited)

In line with our shareholding requirements policy, Executive Directors are required to establish and maintain a level of share ownership

inproportion to a percentage of base salary. The shareholding requirement is 400% for the Chief Executive and 300% for the Chief

FinancialOfficer. Share interests that are included in the shareholding requirements are as follows: shares vested from Company share

plans;shares heldin the individual’s own name or by a nominee; shares held by a person closely associated (PCA) (as defined by the UK Market

Abuse Regulation) where the PCA has given express permission; shares held as part of Your Shares: Matched; and, the estimated net-of-tax

sharesheld in trust as part of unvested awards under the incentive plans where the awards are not subject to any performance conditions.

Individuals are expected to meet the shareholding requirement within five years of being subject to the policy. Where the shareholding

requirements are not met, individuals may only dispose of shares in the following circumstances: to cover taxation and other costs associated

with the vesting or exercise of a share award; in connection with the operation of the malus and clawback policy; or where the Committee

determines there are exceptional circumstances.

At 31 December 2025, Tufan Erginbilgic’s shareholding represented 3,729% of his base salary and Helen McCabe’s shareholding represented

1,179% of her base salary. They have been subject to the policy since January and August 2023 respectively. These percentages have been

calculated by reference to the three-month average share price to 31 December 2025, being the last working day of the year.

The Executive Directors are required to retain the lower of their shareholding requirement or their actual shareholding at the date of leaving

for two years post-cessation of employment.

105

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GOVERNANCE REPORT

REMUNERATION REPORT

Executive Directors’ contractual arrangements

Each Executive Director has a service agreement that sets out their contract with the Company.

Effective date of contract Notice period from Company Notice period from individual

Tufan Erginbilgic 1 January 2023 12 months 12 months

Helen McCabe 4 August 2023 12 months 12 months

Pay across the organisation

This section of the report enables our remuneration arrangements to be seen in context by providing:

— a comparison of the percentage change in our Directors’ remuneration with the change in our UK employees’ average remuneration over twoyears;

— a ten-year history of our Chief Executive’s remuneration;

— our TSR performance over the same period;

— an indication of the ratio between our Chief Executive’s remuneration and the remuneration of employees; and

— a year-on-year comparison of the total amount spent on employment costs across the Group and shareholder payments.

Percentage change in Directors’ remuneration

The following table compares the percentage change in each of the Director’s salary/fees, benefits and annual incentive to the average

percentage change in salary, benefits and incentive for all UK employees for the past five years. This is reported only for Directors who

haveserved two full years. 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 50% of the total employee population and are employed

byRolls-Royce plc or its relevant subsidiaries. Rolls-Royce Holdings plc has no employees. Details of the adjustments made to Chair and

Non-Executive Director fees are set out on page 108.

2024–2025 2023–2024 2022–2023 2021–2022 2020–2021

Salary/

fees

Benefits

Annual

Incentive

award

Salary/

fees

Benefits

Annual

Incentive

award

Salary/

fees

Benefits

Annual

Incentive

award

Salary/

fees

Benefits

Annual

Incentive

award

Salary/

fees

Benefits

Annual

Incentive

award

Dame Anita Frew 22.80 46.24 n/a 16.73 40.00 n/a n/a (61.54) n/a n/a n/a n/a n/a n/a n/a

Tufan Erginbilgic

26.07 (14.90) 17.21 3.68 262.07 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Helen McCabe

21.16 13.37 16.66 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Birgit Behrendt

34.40 78.38 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Stuart Bradie

1, 2

45.12 (62.31) n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

George Culmer

41.96 (20.68) n/a 48.24 (60.00) n/a n/a 6.25 n/a 14.29 150 n/a n/a n/a n/a

Lord Jitesh Gadhia

34.59 19.08 n/a 32.22 – n/a 38.46 (50) n/a n/a n/a n/a n/a n/a n/a

Beverly Goulet

43.29 15. 47 n/a 48.24 (26.87) n/a 6.25 28.85 n/a 14.29 1,633.33 n/a 7.69 – n/a

Nick Luff

25.18 – n/a 18.95 – n/a n/a – n/a 5.56 – n/a 38.46 – n/a

Wendy Mars

38.44 20.55 n/a 54.22 (37.50) n/a 18.57 60 n/a n/a n/a n/a n/a n/a n/a

Paulo Cesar Silva

1, 8

45.12 147.24 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Dame Angela Strank

38.44 75.82 n/a 16.88 (50.00) n/a (14.44) (50) n/a 8.43 300 n/a n/a n/a n/a

UK employees average

10, 11

3.36 (0.31) 1.23 4.69 (9.80) (2.75) 5.77 (1.87) 25.42 5.71 3.80 3 1.03 (9.13) 1,435

Chief Executive pay

Year Chief Executive

Single figure of

total remuneration

£000

Incentive award as

a % of maximum

LTIP as a % of

maximum

2025 Tufan Erginbilgic 4,689 94 –

2024 Tufan Erginbilgic 4,113 97 –

2023 Tufan Erginbilgic 13,610 97 –

2022 Warren East 3,835 74 –

2021 Warren East 3,950 79.7 –

2020 Warren East 1,110 – –

2019 Warren East 2,528 52 53

2018 Warren East 4,075 60 100

2017 Warren East 2,331 68 –

2016 Warren East 2,089 55 –

Tufan Erginbilgic was appointed as Chief Executive on 1 January 2023 and received compensation for remuneration forfeited from previous

employment in 2023.

106

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

REMUNERATION REPORT

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 change

invalue of a hypothetical £100 holding in the Company’s ordinary shares over ten years (prior years adjusted for the rights issue), relative to

theFTSE 100 index.

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eighth year that we have published our Chief Executive pay ratio and we have continued to use option A. We believe that this is

themost accurate and robust methodology because it relies on calculating actual full time equivalent remuneration for all relevant employees

rather than rely on data collected for other purposes. We have used the full time equivalent total remuneration of all UK employees at

31December2025.

Year Method 25th percentile Median 75th percentile

2025 Option A 82:1 69:1 56:1

2024 Option A 74:1 64:1 54:1

2023

Option A 254:1 219:1 185:1

2022 Option A 75:1 64:1 55:1

2021 Option A 88.1 76.1 63.1

2020 Option A 26:1 22:1 19:1

2019 Option A 66:1 56:1 48:1

2018 Option A 92:1 77:1 66:1

For 2025, the salary and total remuneration for the three employees identified at the 25th, median and 75th percentiles are as follows:

Year 25th percentile Median 75th percentile

Salary

£46,577 £55,992 £66,828

Total remuneration £57,164 £67,584 £83,291

1 The 2023 pay ratio was elevated primarily by the award of shares valued at £7.5m at the time of grant to the Chief Executive as compensation for remuneration forfeited from previous

employment. If this value was removed from the calculation the median pay ratio would have been 98:1

2 Calculated using base pay as at 31 December 2025

There is strong alignment between the reward structure for the Chief Executive and that of the wider workforce, with the majority of

employeesparticipating in an incentive plan with aligned financial metrics. We also encourage all eligible employees to join our all-employee

share plans, with over 99% of our global population receiving an award of shares in 2024 under our Your Shares: Gifted plan. In 2025, we

launched YourShares: Matched, a global purchase plan structured to offer matching free shares for every share purchased up to a maximum

monthly limit. This aligns to our broader strategy to increase employee share ownership and links directly to the transformation programme.

Further information can be found in the strategy section on the transformation programme from page 11.

Relative importance of spend on pay

The following chart sets out the percentage change in shareholder distributions from dividends and share buybacks and overall expenditure

on pay across the Group.

SHAREHOLDER DISTRIBUTIONS (£M) GROUP EMPLOYMENT COSTS (£M)

(Consolidated cash flow statement)

2025

024

1,893 (100%)

0 (0%)

(Note 9, employee information – see page 147)

2025

024

4,051 (2.61%)

3,948 (4.78%)

100

200

300

400

500

600

700

FTSE 100 TSR

Rolls Royce TSR

Rolls-Royce

FTSE 100

2015 2017 2018 2019 2020 2021 2023 20252022

20242016

107

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GOVERNANCE REPORT

REMUNERATION REPORT

Non-Executive Directors’ remuneration

Non-Executive Directors’ single figure of remuneration (audited)

Fees

(£’000)

Benefits

(£’000)

Total remuneration

(£’000)

2025 2024 2025 2024 2025 2024

Dame Anita Frew 702 572 10 7 712 579

Birgit Behrendt 121 90 9 5 130 95

Stuart Bradie

131 90 1 3 132 93

George Culmer 179 126 2 2 181 128

Lord Jitesh Gadhia 160 119 1 1 161 120

Beverly Goulet 181 126 57 49 238 175

Nick Luff 141 113 – – 141 113

Wendy Mars 177 128 6 5 183 133

Paulo Cesar Silva

131 90 12 5 143 95

Dame Angela Strank

121 90 2 1 123 91

Total 2,044 1,544 100 78 2,144 1,622

1 Stuart Bradie was appointed as a member of the Remuneration Committee on 1 August 2025

2 Paulo Cesar Silva was appointed as a member of the Audit Committee on 1 August 2025

Non-Executive Directors’ fees

The Chair’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 reviewed by the Chair and Executive Directors. No individual may be involved in setting their own fee. Fees were reviewed in 2025

and changes were approved effective 1 March 2025, as set out below, representing a 5% increase in line with the awards to our Executive

Directors in March 2025 (see page 82).

In parallel with the benchmarking activity undertaken during the year for the Executive Directors, the Committee reviewed the fees paid

totheChair. The Chair, together with the Executive Directors, also reviewed the fees paid to the Non-Executive Directors. Recognising

thematerial change in market position of Rolls-Royce, it was agreed to apply an adjustment to fees to align with levels typical of those for a

FTSE10organisation, which took effect from 1 September 2025. A further adjustment of 4% to Non-Executive Director fees has been made

effective 1March 2026 to maintain a market competitive position.

1 March 2026

£’000

1 September 2025

£’000

1 March 2025

£’000

2024

£’000

Chair 832 800 662 630

Other Non-Executive Director base fee 125 120 95 90

Chair of the Audit Committee 47 45 37 35

Chair of the Remuneration Committee 47 45 37 35

Chair of the Safety, Energy Transition & Tech Committee 47 45 37 35

Committee member 26 25 16 15

Senior Independent Director 47 45 37 35

Lead Employee Champion 26 25 21 20

UK Employee Champion 21 20 16 15

North American board member 26 25 16 15

Non-Executive Directors’ benefits (audited)

The benefits for Non-Executive Directors relate predominantly to travel, hotel and subsistence incurred in attending meetings and site visits.

These figures have been grossed up for tax purposes where applicable.

For Non-Executive Directors based outside the UK, the Company may also pay towards tax advice and the cost of making tax filings.

108

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

REMUNERATION REPORT

TheRemuneration Report, comprising the Remuneration Committee

report, the remuneration policy and the 2025 Remuneration report,

has been approved by the Board and signed on its behalf by:

Lord Jitesh Gadhia

Chair of the Remuneration Committee

26 February 2026

Non-Executive Directors’ share interests (audited)

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. Wendy Mars and Birgit Behrendt

use this facility.

The Non-Executive Directors and their connected persons hold the following interests in the ordinary shares of the Company:

31 December 2025 31 December 2024

Dame Anita Frew 350,000 350,000

Birgit Behrendt 5,051 3,441

Stuart Bradie 95,437 95,437

George Culmer 37,960 37,960

Lord Jitesh Gadhia 50,000 50,000

Beverly Goulet 41,405 40,972

Nick Luff 120,000 120,000

Wendy Mars 51,049 48,318

Paulo Cesar Silva 41,780 –

Dame Angela Strank 85,506 70,653

During the period between 1 January 2026 to 26 February 2026, the following changes in interests have occurred:

— Birgit Behrendt acquired 88 shares on 7 January 2026 and 89 shares on 9 February 2026 under a share purchase plan for Non-Executive

Directors; and

— Wendy Mars acquired 146 shares on 7 January 2026 and 147 shares on 9 February 2026 under a share purchase plan for Non-Executive Directors.

No other changes in Non-Executive Directors’ share interests have occurred in the period.

Non-Executive Directors’ letters of appointment

Non-Executive Directors are subject to letters of appointment and are required to be re-elected at each AGM.

Shareholder voting

The remuneration policy and remuneration report were last approved by shareholders at our 2025 AGM held on 1 May 2025. Details of voting

are shown in the table below. Withheld votes are not counted towards the total percentage of votes cast.

For % For Against % Against Withheld

Approval of the remuneration policy 5,264,406,289 99.55 23,709,234 0.45 2,041,090

Approval of the remuneration report 5,263,080,768 99.53 25,023,003 0.47 2,046,299

Statutory requirements

The Committee’s composition, responsibilities and operation comply with the principles of good governance, as set out in the Code, the UK

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.

109

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GOVERNANCE REPORT

REMUNERATION REPORT

Members Wendy Mars (Chair)

Birgit Behrendt

Stuart Bradie

Paulo Cesar Silva

Dame Angela Strank

Remit See page 68

I am pleased to present the 2025 report

ofthe Safety, Energy Transition & Tech

Committee. The Committee focuses on

people and product safety and the energy

transition agenda. It also provides oversight

and assurance of the Group’s research

andtechnological strategy, processes

andinvestments. During the year, following

areallocation of accountabilities by the

Board,the Committee additionally took on

responsibility for cyber-security from the

Audit Committee.

The Committee comprises solely Non-

Executive Directors, and each member

bringsdeep experience in the Committee’s

areas of focus which they have gained

intheirvarious external executive roles.

OurCommittee evaluation noted that this

Committee is performing well and I would like

to thank my fellow Committee members for

their invaluable insights for the work of the

Committee during the year.

The Committee met three times in 2025,

withthe February meeting focused on

reporting only. After each meeting, the

Committee meets without management

present. A summary of the Committee’s

remitcan be found on page 68.

Safety

Safety, in respect of our people, processes

and products, remains the highest priority

for the Group and the Committee takes a

great interest in understanding the progress

of our improvement programmes and how

weare developing a safety-first culture.

Indepth updates were received at the

twomain meetings, including a summary

ofperformance in 2025 and the associated

action plans for 2026 across all programmes

to ensure continuous improvement towards

embedding Group-wide standards and

policies. Updates around people and

processsafety covered TRI rate reporting

and our progress against our safety index

scorecard, alongside initiatives that we

aretaking around occupational health.

Wereviewed and considered in detail

theproduct safety principal risk including

our performance against key safety metrics

and the enhancement of culture through

revised communications.

During the year, the Committee visited our

site in Bristol, UK, where we met with the

Defence leadership team. The visit provided

an opportunity for the Committee to learn

about the operations at the site and to

engage with local management, engineers

and high potential employees. During our

visit, we discussed both people and product

safety and experienced, at shop floor level,

how these two priorities are embedded in

theprocesses and practices of the site. In

addition, we heard about how productivity

and time gains had been achieved from

theadoption of an agile approach for key

technology advancement programmes,

andthe development of technology for

next-generation power and propulsion

products such as GCAP. The Committee

members were pleased to receive a

demonstration of the Safety Experience, an

impactful, interactive, facilitator-led event

which has been attendedface-to-face by

over 13,000 employees in 2025.

Energy Transition

An area of focus for the Committee is to

provide oversight of the Group’s energy

transition strategy and to receive progress

reports against policies, strategies, KPIs,

plans, capability, process and systems.

During the year, we reviewed progress made

in 2025 against our Scope 1 + 2 emissions

reduction plans and the Scope 3, category 11

(use of sold products) emissions reporting

(see page 42). The Committee reviewed the

progress against the sustainability strategy

which was approved in 2024 and, together

with the Audit Committee, assessed the

Group’s readiness for compliance reporting

with new regulations. At our meeting in

February 2026, as part of our year-end

reporting, the Committee reviewed the

Sustainability report set out on pages 38

to47 and recommended it to the Board

forapproval.

Technology

Technology is a principal risk for the Group,

but also an area of opportunity. Accordingly,

the Committee’s review of technology during

the year has focused on both understanding

the technology principal risk and how the

Group mitigates this, and how our strategic

decisions are translated into research

andtechnology (R&T) portfolio priorities.

TheCommittee received updates on the

technology and product roadmapping

process by which the Group manages

itsR&T.We considered how horizon

scanningoperates to help identify and

quantify emerging technology threats

andopportunities by ensuring that novel

technology pathways are recognised

early,their potential is explored, and

eventualrisks of disruption are mitigated.

TheCommittee also considered the

significant value opportunity for AI,

thesystematic approach to deliver that

opportunity and the guardrails and policies

in place to ensure responsible adoption.

Following the reallocation of cyber-

securityresponsibilities to the Committee,

wereceived a number of updates on

cyberandIT to understand our existing

approach and environment. At our

Decembermeeting, we undertook a

deepdive into cyber encompassing IT and

operational technology(OT) that the whole

Board attended. The meeting focused on our

programme of IT and OT maturity alongside

hearing about detection, defence, and

recovery response against cyber threats.

Looking forward

In 2026, the Committee will continue to

focuson its principal responsibilities with

aparticular focus on people and process

safety, our readiness for sustainability

reporting, and the risks and opportunities

related to AI and how theseimpact the future

of our technologies. We will continue to

monitor our response to the ever-evolving

cyber-security landscape.

Wendy Mars

Chair of the Safety, Energy Transition &

TechCommittee

KEY AREAS OF FOCUS IN 2025

— Review of Group-wide improvement programmes for people and product safety

— Principal risk reviews and a deep dive into cyber, including IT and operational technology

— Site visit to Bristol, UK, focused on people and product safety and technology

— Monitoring progress against our sustainability targets and review of the sustainability

report for recommendation to the Board

— Keeping a strong focus on technology including AI

Safety, Energy Transition & Tech Committee report

110

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

Statement of Directors’ responsibilities

in respect of the financial statements

The Directors are responsible for preparing

the Annual Report and the financial

statements in accordance with applicable

lawand regulation.

Company law requires the Directors

toprepare financial statements for

eachfinancial year. Under that law,

theDirectorshave prepared the Group

FinancialStatements in accordance with

UK-adopted international accounting

standards andtheCompany Financial

Statements inaccordance with United

Kingdom GenerallyAccepted Accounting

Practice (United Kingdom Accounting

Standards, comprising FRS 101 Reduced

Disclosure Framework and applicable law).

Under company law, Directors must not

approve the Financial Statements unless

theyare satisfied that they give a true and

fair view of the state of affairs of the Group

and Company and of the profit or loss of

theGroup for that period. In preparing

thefinancial statements, the Directors are

required to:

— select suitable accounting policies and

then apply them consistently;

— state whether applicable UK-adopted

international accounting standards

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;

— make judgements and accounting

estimates that are reasonable and

prudent;and

— prepare the financial statements on

thegoing concern basis unless it is

inappropriate to presume that the Group

and Company will continue in business.

The Directors are responsible for

safeguarding the assets of the Group

andtheCompany and hence for taking

reasonable steps for the prevention and

detection of fraud and other irregularities.

The Directors are also responsible for

keeping adequate accounting records that

are sufficient to show and explain the Group’s

and the Company’s transactions and disclose

with reasonable accuracy at any time the

financial position of the Group and the

Company and enable them to ensure that

thefinancial statements and the Directors’

Remuneration Report comply with the

Companies Act 2006.

The Directors are responsible for the

maintenance and integrity of the Company’s

website. Legislation in the United Kingdom

governing the preparation and dissemination

of financial statements may differ from

legislation in other jurisdictions.

Directors’ confirmations

The Directors consider that the Annual

Report and Accounts, taken as a whole, is fair,

balanced and understandable and provides

the information necessary for shareholders

to assess the Group’s and the Company’s

position and performance, business model

and strategy.

Each of the Directors, whose names and

functions are listed in the Directors’ Report

confirm that, to the best of their knowledge:

— the Group financial statements, which

havebeen prepared in accordance with

UK-adopted international accounting

standards, give a true and fair view of the

assets, liabilities, financial position and

profit of the Group;

— the Company financial statements, which

have been prepared in accordance with

United Kingdom Accounting Standards,

comprising FRS 101, give a true and fair

view of the assets, liabilities and financial

position of the Company; and

— the Strategic Report includes a fair review

of the development and performance

ofthe business and the position of the

Groupand the Company, together with

adescription of the principal risks and

uncertainties that it faces.

In the case of each Director in office at the

date the Directors’ Report is approved:

— so far as the Director is aware, there is

no relevant audit information of which the

Group’s and the Company’s auditors are

unaware; and

— they have taken all the steps that they

ought to have taken as a Director in order

to make themselves aware of any relevant

audit information and to establish that the

Group’s and the Company’s auditors are

aware of that information.

By order of the Board

Claire-Marie O’Grady

Chief Governance Officer

26 February 2026

Responsibility statements

111

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

GOVERNANCE REPORT

FINANCIAL

STATEMENTS

Consolidated Financial Statements

Primary statements

Consolidated income statement 113

Consolidated statement of

comprehensiveincome 114

Consolidated balance sheet 115

Consolidatedcashflowstatement 116

Consolidated statement of changes

inequity 119

Notes to the Consolidated Financial

Statements

1 Accountingpolicies 121

2 Segmentalanalysis 134

3 Researchanddevelopment 141

4 Netfinancing 141

5 Taxation 142

6 Earningsperordinaryshare 146

7 Dividends 146

8 Auditors’remuneration 147

9 Employeeinformation 147

10 Goodwill 148

11 Intangibleassets 149

12 Property,plantandequipment 151

13 Right-of-useassets 152

14 Investments 153

15 Inventories 155

16 Tradereceivablesandotherassets 155

17 Contractassetsandliabilities 156

18 Cashandcashequivalents 157

19 Borrowingsandleaseliabilities 157

20 Leases 158

21 Tradepayablesandotherliabilities 159

22 Financialinstruments 160

23Provisionsforliabilitiesand

charges 170

24 Post-retirementbenefits 171

25 Sharecapital 176

26 Share-basedpayments 177

27 Contingentliabilities 178

28 Relatedpartytransactions 179

29Businessdisposalsandbusinesses

heldforsale 179

30Derivationofsummaryfunds

flowstatement 181

Company Financial Statements

Primary statements

Companybalancesheet 182

Companystatementofchanges

inequity 183

Notes to the Company Financial

Statements

1 Accountingpolicies 184

2Investments–subsidiary

undertakings 185

3 Tradepayablesandotherliabilities 185

4 Financialliabilities 185

5 Sharecapital 186

6 Contingentliabilities 186

7 Otherinformation 186

Subsidiaries 187

Jointventuresandassociates 191

112

ROLLS-ROYCEHOLDINGSPLC ANNUALREPORT2025

Consolidated income statement

Yearended31December2025

		2025	2024
	Notes	£m	£m
Revenue	2	21 ,2 07	18 ,909
Cost of sales 1,2		(15 ,03 2)	(1 4, 68 8)
Gross profit	2	6,175	4,221
Commercialandadministrativecosts	2	(1 , 2 68)	(1 , 28 4)
Research and development costs 2	2,3	(4 9 5)	(203)
Shareofresultsofjointventuresandassociates	14	56	17 2
Operating profit		4,4 68	2,906
Gainarisingondisposalofbusinesses 3	29	8 09	16
Profit before financing and taxation		5, 27 7	2,922
Financingincome	4	2,137	536
Financingcosts	4	(479)	(1, 2 24)
Net financing income/(costs) 4		1,658	(6 8 8)
Profit before taxation		6,935	2,234
Taxation	5	(1 , 09 9)	250
Profit for the year		5,836	2,484
Attributable to:
Ordinaryshareholders		5, 841	2,521
Non-controllinginterests(NCI)		(5)	(37)
Profit for the year		5,836	2,484
Other comprehensive (expense)/income (OCI)		(54 5)	50
Total comprehensive income for the year		5, 291	2,534
Earnings per ordinary share attributable to ordinary shareholders:	6
Basic		69.41p	3 0.05p
Diluted		69.1 4p	29.87p

1 Costofsalesincludesanetchargeforexpectedcreditlosses(ECLs)of£28m(2024:£14m).Furtherdetailcanbefoundinnote16

2 Intheyearended31December2025,theimpactofanexceptionalimpairmentreversalwasincludedwithinbothcostofsales,£1 79m(2024:£1 32m),andresearchanddevelopment,£6m

(2024:£413m).Furtherdetailscanbefoundinnotes2,10and11

3 Intheyearended31December2025,theGroupcompletedthesaleofthenavalpropulsorsbusinessandalsorecognisedanexceptionalgainondisposalasaresultofthe

deconsolidationofRolls-RoyceSMRLimitedduringtheyear.Furtherdetailscanbefoundinnote29

4 Includedwithinnetfinancingarefairvaluechangesonderivativecontracts.Furtherdetailscanbefoundinnotes2,4and22

113

ROLLS-ROYCEHOLDINGSPLC ANNUALREPORT2025

FINANCIALSTATEMENTS

CONSOLIDATEDFINANCIALSTATEMENTS

Consolidated statement of comprehensive income

Yearended31December2025

		2025	2024
	Notes	£m	£m
Profit for the year		5,836	2,484
Other comprehensive (expense)/income (OCI)
Actuarialmovementsonpost-retirementschemes 1	24	(4 4 4)	22
Revaluationtofairvalueofotherinvestments	14	(1)	(2)
ShareofOCIofjointventuresandassociates		(1)	(1)
Related tax movements	5	115	61
Items that will not be reclassified to profit or loss		(331)	80
Foreignexchangetranslationdifferencesonforeignoperations		(16 9)	(29)
Foreignexchangetranslationdifferencesreclassifiedtoincomestatementondisposalofbusinesses		(18)	–
NCIdisposedthroughdisposalofbusiness	29	(2 3)	–
Movementonfairvalueschargedtocashflowhedgereserve		(38)	(17)
Reclassifiedtoincomestatementfromcashflowhedgereserve		2 7	22
ShareofOCIofjointventuresandassociates		2	(3)
Related tax movements	5	5	(3)
Items that will be reclassified to profit or loss		(214)	(30)
Total other comprehensive (expense)/income		(5 4 5)	50
Total comprehensive income for the year		5, 291	2,534
Attributable to:
Ordinaryshareholders		5,319	2,571
NCI		(28)	(37)
Total comprehensive income for the year		5, 291	2,534

1 Thismovementincludesachargeofaround£45 0masaresultoftheagreementtotransferthefuturepensionobligationsintheUKschemetoPensionInsuranceCorporationplc.

Seenote24forfurtherinformation

114

ROLLS-ROYCEHOLDINGSPLC ANNUALREPORT2025

CONSOLIDATEDFINANCIALSTATEMENTS

Consolidated balance sheet

At31December2025

		2025	2024
	Notes	£m	£m
ASSETS
Goodwill¹	10	1,028	1,009
Intangibleassets¹	11	3, 570	3,393
Property,plantandequipment	12	4 ,013	3, 724
Right-of-useassets	13	759	761
Investments 2	14	1,2 89	597
Otherfinancialassets	22	52 3	126
Deferredtaxassets	5	3,460	3,660
Post-retirementschemesurpluses	24	286	790
Non-current assets		14, 928	14,06 0
Inventories	15	5 ,728	5,092
Tradereceivablesandotherassets	16	8,9 46	8, 713
Contractassets	17	1, 897	1,813
Taxationrecoverable		75	71
Otherfinancialassets	22	282	209
Cashandcashequivalents	18	6, 24 4	5, 575
Current assets		23,1 72	21,4 73
Assets held for sale	29	15	15 3
TOTAL ASSETS		38,115	35,686
LIABILITIES
Borrowingsandleaseliabilities	19	(1 , 426)	(1,0 97)
Otherfinancialliabilities	22	(293)	(642)
Tradepayablesandotherliabilities	21	(8, 8 63)	(8 ,0 09)
Contractliabilities	17	(7 ,832)	(6, 30 9)
Currenttaxliabilities		(366)	(117)
Provisionsforliabilitiesandcharges	23	(507)	(589)
Current liabilities		(19, 28 7)	(16 ,763)
Borrowingsandleaseliabilities	19	(2 , 8 4 6)	(4 ,0 3 5)
Otherfinancialliabilities	22	(62 7)	(1, 64 0)
Tradepayablesandotherliabilities	21	(1 ,7 78)	(1, 9 6 5)
Contractliabilities	17	(8 ,762)	(9,4 47)
Deferredtaxliabilities	5	(1 01)	(231)
Provisionsforliabilitiesandcharges	23	(1 ,0 50)	(1, 4 0 5)
Post-retirementschemedeficits	24	(8 92)	(9 81)
Non-current liabilities		(16 ,0 56)	(19 ,704)
Liabilitiesassociatedwithassetsheldforsale	29	(19)	(10 0)
TOTAL LIABILITIES		(35, 3 62)	(36, 56 7)
NET ASSETS/(LIABILITIES)		2,753	(8 81)
EQUITY
Called-upsharecapital 3	25	1,6 89	1, 701
Sharepremium 3		–	1,01 2
Capitalredemptionreserve 3		5	168
Cashflowhedgereserve		7	13
Translationreserve		418	603
Retainedearnings/(Accumulatedlosses) 3		607	(4 , 4 0 9)
Equity attributable to ordinary shareholders		2,726	(912)
Non-controllinginterest(NCI)		27	31
TOTAL EQUITY		2,753	(8 81)

1 Goodwillhasbeendisclosedseparatelyfromotherintangibleassetsat31December2025(anditscomparativerepresented)assuchpresentationisdeemedrelevanttoanunderstanding

oftheGroup’sfinancialposition

2 Anequity-accountedinvestmentwasrecognisedatfairvalueonthebalancesheetasaresultofthedeconsolidationofRolls-RoyceSMRLimitedduringtheyear.Furtherdetailscanbe

foundinnote29

3 On1May2025Rolls-RoyceHoldingsplcperformedabonusissueofonesharefromitsmergerreservefor£6, 96 2m,themergerreserveiseliminatedwithintheconsolidatedbalance

sheetandthereforeisnotshownabove.TheCompanysubsequentlyperformedacapitalreductionagainstsharecapital,sharepremium,andcapitalredemptionreserve

The Financial Statements on pages 113 to 181 were approved by the Board on 26 February 2026 and signed on its behalf by:

Tufan Erginbilgic Helen McCabe

Chief Executive Chief Financial Officer

115

ROLLS-ROYCEHOLDINGSPLC ANNUALREPORT2025

FINANCIALSTATEMENTS

CONSOLIDATEDFINANCIALSTATEMENTS

Consolidated cash flow statement

Yearended31December2025

		2025	2024
	Notes	£m	£m
Reconciliation of cash flows from operating activities
Operatingprofit		4, 46 8	2,906
Lossondisposalofproperty,plantandequipment		18	32
(Profit)/lossondisposalofintangibleassets		(2)	6
Shareofresultsofjointventuresandassociates	14	(56)	(17 2)
Dividendsreceivedfromjointventuresandassociates	14	8 8	77
Impairmentofgoodwill	10	–	13
Amortisationandimpairmentofintangibleassets	11	241	(133)
Depreciationandimpairmentofproperty,plantandequipment	12	338	400
Depreciationandimpairmentofright-of-useassets	13	158	265
Adjustmentofamountspayableunderresidualvalueguaranteeswithinleaseliabilities		–	(6)
Impairmentofandothermovementsoninvestments		–	4
Decrease in provisions		(4 8 6)	(5 6)
Increaseininventories		(6 8 5)	(323)
Movementintradereceivables/payablesandotherassets/liabilities		763	83 3
Movementincontractassets/liabilities		704	752
Cashflowsonotherfinancialassetsandliabilitiesheldforoperatingpurposes 1		(578)	(6 76)
Cashflowsonsettlementofexcessderivativecontracts 2		(14 8)	(1 46)
Interest received		270	269
Netdefinedbenefitpost-retirementcostrecognisedinprofitbeforefinancing	24	42	56
Cashfundingofdefinedbenefitpost-retirementschemes	24	(84)	(7 4)
Share-basedpayments	26	104	136
Net cash inflow from operating activities before taxation		5,155	4, 163
Taxationpaid		(590)	(381)
Net cash inflow from operating activities		4, 565	3,78 2
Cash flows from investing activities
Additionsofintangibleassets	11	(3 64)	(367)
Disposals of intangible assets		5	5
Purchasesofproperty,plantandequipment		(62 1)	(519)
Disposalsofproperty,plantandequipment		2	5
Disposalofbusinesses(includingcashflowsondisposalsinpriorperiods)	29	80	62
Movementininvestmentsinjointventuresandassociates	14	(4 1)	(17)
Net cash outflow from investing activities		(939)	(8 31)
Cash flows from financing activities
Repaymentofloans		(92 7)	(4 75)
Settlementofswapshedgingfixedrateborrowings		93	(11)
Proceedsfromincreaseinloans		177	7
Capitalelementofleasepayments		(232)	(29 9)
Net cash flow from decrease in borrowings and lease liabilities		(889)	(778)
Interest paid		(18 0)	(2 00)
Interestelementofleasepayments		(7 4)	(83)
Feespaidonundrawnfacilities		(8)	(1 5)
Cashreceivedonmaturityofsharebasedpaymentschemes		40	–
TransactionswithNCI 3		34	33
DividendstoNCI		(1)	(3)
RedemptionofCShares		(2)	(1)
Sharebuyback		(1, 0 08)	–
Dividends paid	7	(8 85)	–
Net cash outflow from financing activities		(2 , 97 3)	(1,0 47)

116

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CONSOLIDATEDFINANCIALSTATEMENTS

Consolidated cash flow statement continued

Yearended31December2025

		2025	2024
	Notes	£m	£m
Change in cash and cash equivalents		6 53	1,904
Cash and cash equivalents at 1 January		5,573	3,73 1
Exchangegains/(losses)oncashandcashequivalents		15	(6 2)
Cash and cash equivalents at 31 December 4		6, 241	5, 573

1 Predominantlyrelatestocashsettledonderivativecontractsheldforoperatingpurposes

2 In2020,theGrouptookactiontoreducethesizeoftheUSDhedgebookby$11.8bnacross2020–2026toreflectthefactthatatthattime,futureoperatingcashflowswereno

longerforecasttomaterialise.Toachievethenecessaryreductioninthehedgebook,aseparateanddistinctsetofforeignexchangederivativeinstrumentswereenteredintotobuy

$11.8bnwhichhadtheimpactoffixingthefairvalueoftheover-hedgedpositionandprovidedcertaintyoverwhenthecashflowstosettlethepositionwouldoccurinfutureperiods.

Theassociatedcashoutflowofthesetransactionsis£1,674mandoccursovertheperiod2020–2026.Duringtheyear,theGroupincurredacashoutflowof£1 48m(2024:£146m)and

estimatesthatfuturecashoutflowsof£27mwillbeincurredduring2026

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

4 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,movementinbalancesheet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28.

	2025	2024
	£m	£m
Reconciliation of movements in cash and cash equivalents to movements in net cash
Change in cash and cash equivalents	653	1,904
Cash flow from decrease in borrowings and lease liabilities	889	778
Less: settlement of related derivatives included in fair value of swaps below	93	(11)
Change in net cash resulting from cash flows	1,635	2,671
Lease additions, modifications and other non-cash adjustments on borrowings and lease liabilities	(232)	(193)
Exchange gains/(losses) on net cash/(debt)	118	(50)
Net debt disposed of on disposal of businesses	1	–
Fair value adjustments	8	(11)
Movement in net cash	1,530	2,417
Net cash/(debt) at 1 January excluding the fair value of swaps	442	(1,975)
Net cash at 31 December excluding the fair value of swaps	1,972	442
Fair value of swaps hedging fixed rate borrowings	(77)	33
Net cash at 31 December	1,895	475 

117

ROLLS-ROYCEHOLDINGSPLC ANNUALREPORT2025

FINANCIALSTATEMENTS

CONSOLIDATEDFINANCIALSTATEMENTS

Consolidated cash flow statement continued

Year ended 31 December 2025

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

			Net funds on
		Funds	disposal of	Exchange	Fair value	Reclassi-	Other	At
	At 1 January	flow	business	differences	adjustments	fications	movements	31 December
	£m	£m	£m	£m	£m	£m	£m	£m
2025
Cash at bank and in hand	714	182	–	(7)	–	–	–	889
Money market funds	1,900	484	–	40	–	–	–	2,424
Short-term deposits	2,961	(12)	–	(18)	–	–	–	2,931
Cash and cash equivalents (per balance sheet)	5,575	654	–	15	–	–	–	6,244
Overdrafts	(2)	(1)	–	–	–	–	–	(3)
Cash and cash equivalents (per cash flow statement)	5,573	653	–	15	–	–	–	6,241
Other current borrowings	(799)	750	–	(32)	40	(988)	(2)	(1,031)
Non-current borrowings	(2,776)	–	–	54	(32)	988	(2)	(1,768)
Lease liabilities	(1,555)	232	–	81	–	–	(228)	(1,470)
Lease liabilities included within liabilities held for sale	(1)	–	1	–	–	–	–	–
Financial liabilities	(5,131)	982	1	103	8	–	(232)	(4,269)
Net cash/(debt) excluding the fair value of swaps	442	1,635	1	118	8	–	(232)	1,972
Fair value of swaps hedging fixed rate borrowings 1	33	(93)	–	(22)	5	–	–	(77)
Net cash/(debt)	475	1,542	1	96	13	–	(232)	1,895
2024
Cash at bank and in hand	739	(15)	–	(10)	–	–	–	714
Money market funds	1,077	841	–	(18)	–	–	–	1,900
Short-term deposits	1,968	1,027	–	(34)	–	–	–	2,961
Cash and cash equivalents (per balance sheet)	3,784	1,853	–	(62)	–	–	–	5,575
Overdrafts	(53)	51	–	–	–	–	–	(2)
Cash and cash equivalents (per cash flow statement)	3,731	1,904	–	(62)	–	–	–	5,573
Other current borrowings	(478)	471	–	–	(18)	(774)	–	(799)
Non-current borrowings	(3,568)	(3)	–	19	7	774	(5)	(2,776)
Borrowings included within liabilities held for sale	–	–	–	–	–	–	–	–
Lease liabilities	(1,660)	299	–	(7)	–	1	(188)	(1,555)
Lease liabilities included within liabilities held for sale	–	–	–	–	–	(1)	–	(1)
Financial liabilities	(5,706)	767	–	12	(11)	–	(193)	(5,131)
Net cash/(debt) excluding the fair value of swaps	(1,975)	2,671	–	(50)	(11)	–	(193)	442
Fair value of swaps hedging fixed rate borrowings 1	23	11	–	(18)	17	–	–	33
Net cash/(debt)	(1,952)	2,682	–	(68)	6	–	(193)	475

1 Fair value of swaps hedging fixed rate borrowings reflects the impact of derivatives on repayments of the principal amount of debt. Net cash/(debt) therefore includes the fair value of

derivatives included in fair value hedges (2025: £(26)m, 2024: £62m) and the element of fair value relating to exchange differences on the underlying principal of derivatives in cash flow

hedges (2025: £(51)m, 2024: £(29)m)

118

ROLLS-ROYCEHOLDINGSPLC ANNUALREPORT2025

CONSOLIDATEDFINANCIALSTATEMENTS

Consolidated statement of changes in equity

Yearended31December2025

Thefollowingdescribesthenatureandpurposeofeachreservewithinequity:

Share capital–Thenominalvalueofordinarysharesof20peachinissue.

Share premium–Proceedsreceivedinexcessofthenominalvalueofordinarysharesissued,lessthecostsofissue.

Capital redemption reserve–Amountstransferredfromaccumulatedlossesontherepurchaseofordinaryshares,theredemptionof

CSharesandthenominalvalueofordinarysharescancelledasapartofthesharebuybackprogramme.InRolls-RoyceHoldingsplc’s

ownFinancialStatements,CShareswereissuedfromthemergerreserve.Thisreservewascreatedbyaschemeofarrangementin2011.

AsthisreservewaseliminatedonconsolidationintheConsolidatedFinancialStatements,theCShareswereshownasbeingissuedfrom

thecapitalredemptionreserve.

Hedging reserves–Cumulativegainsandlossesonhedginginstrumentsdeemedeffectiveincashflowhedgesandcostofhedgingreserve.

Translation reserve–Gainsandlossesarisingonretranslatingthenetassetsofoverseasoperationsintosterling.

Retained earnings / accumulated losses–Allothernetgainsandlossesandtransactionswithownersnotrecognisedelsewhereandordinary

sharesheldforthepurposeofshare-basedpaymentplans.

Non-controlling interests–Theshareofnetassetsorliabilitiesofsubsidiariesheldbythirdparties.

						Attributable to ordinary shareholders
							Retained
				Capital	Cash flow		earnings /
		Share	Share	redemption	hedging	Translation	(accumulated			Total
		capital	premium	reserve	reserve	reserve	losses) 1	Total	NCI	equity
	Notes	£m	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January 2025		1,701	1,012	16 8	13	603	(4 , 4 0 9)	(912)	31	(88 1)
Profit/(loss)fortheyear		–	–	–	–	–	5 ,8 41	5, 8 41	(5)	5, 83 6
Foreignexchangetranslation
differencesonforeignoperations		–	–	–	–	(16 9)	–	(1 69)	–	(16 9)
Foreignexchangetranslation
differencesreclassifiedtoincome
statementondisposalofbusinesses	29	–	–	–	–	(18)	–	(18)	–	(18)
NCIdisposedofondisposalofbusiness	29	–	–	–	–	–	–	–	(2 3)	(2 3)
Actuarialmovementsonpost-retirement
schemes 2	24	–	–	–	–	–	(4 4 4)	(4 4 4)	–	(4 4 4)
Fairvaluemovementoncashflow
hedges		–	–	–	(38)	–	–	(38)	–	(38)
Reclassifiedtoincomestatementfrom
cashflowhedgereserve		–	–	–	27	–	–	2 7	–	27
Revaluationtofairvalueofother
investments	14	–	–	–	–	–	(1)	(1)	–	(1)
OCIofjointventuresandassociates	14	–	–	–	2	–	(1)	1	–	1
Related tax movements	5	–	–	–	3	2	11 5	12 0	–	120
Total comprehensive income/(expense) for the year		–	–	–	(6)	(1 85)	5, 510	5,319	(28)	5, 291
Bonusissue 3		6, 962	–	–	–	–	(6 , 9 62)	–	–	–
Capitalreduction 3		(6, 9 6 2)	(1 ,01 2)	(1 7 7)	–	–	8 ,151	–	–	–
Sharebuybackprogramme 4		(12)	–	12	–	–	(1 , 01 9)	(1 ,0 19)	–	(1, 01 9)
RedemptionofCShares	22	–	–	2	–	–	(2)	–	–	–
Share-basedpayments–
directtoequity 5		–	–	–	–	–	13 8	138	–	138
Dividends paid		–	–	–	–	–	(8 85)	(88 5)	–	(8 85)
DividendstoNCI		–	–	–	–	–	–	–	(1)	(1)
TransactionswithNCI		–	–	–	–	–	9	9	25	34
Related tax movements	5	–	–	–	–	–	76	76	–	76
Other changes in equity in the year		(12)	(1 ,0 12)	(16 3)	–	–	(49 4)	(1, 6 81)	24	(1 ,6 57)
At 31 December 2025		1,6 89	–	5	7	418	607	2, 726	27	2 ,753

119

ROLLS-ROYCEHOLDINGSPLC ANNUALREPORT2025

FINANCIALSTATEMENTS

CONSOLIDATEDFINANCIALSTATEMENTS

Consolidated statement of changes in equity continued

						Attributabletoordinaryshareholders
				Capital	Cashflow
		Share	Share	redemption	hedging	Translation	Accumulated			Total
		capital	premium	reserve	reserve	reserve	losses 1	Total	NCI	equity
	Notes	£m	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January 2024		1,684	1,0 12	167	12	634	(7 ,1 90)	(3 ,681)	52	(3 ,629)
Profit/(loss)fortheyear		–	–	–	–	–	2,521	2,521	(37)	2,484
Foreignexchangetranslation
differencesonforeignoperations		–	–	–	–	(2 9)	–	(2 9)	–	(29)
Actuarialmovementsonpost-retirement
schemes	24	–	–	–	–	–	22	22	–	22
Fairvaluemovementoncashflow
hedges		–	–	–	(1 7)	–	–	(17)	–	(17)
Reclassifiedtoincomestatementfrom
cashflowhedgereserve		–	–	–	22	–	–	22	–	22
Revaluationtofairvalueofother
investments	14	–	–	–	–	–	(2)	(2)	–	(2)
OCIofjointventuresandassociates	14	–	–	–	(3)	–	(1)	(4)	–	(4)
Related tax movements	5	–	–	–	(1)	(2)	61	58	–	58
Total comprehensive income/(expense) for the year		–	–	–	1	(3 1)	2,601	2,571	(37)	2,534
Issueofordinaryshares		17	–	–	–	–	–	17	–	1 7
RedemptionofCShares	22	–	–	1	–	–	(1)	–	–	–
Ordinarysharespurchased		–	–	–	–	–	–	–	–	–
Sharesissuedtoemployeesharetrust		–	–	–	–	–	(17)	(17)	–	(1 7)
Share-basedpayments–direct
toequity 5		–	–	–	–	–	95	95	–	95
DividendstoNCI		–	–	–	–	–	–	–	(3)	(3)
TransactionswithNCI		–	–	–	–	–	32	32	19	51
Related tax movements	5	–	–	–	–	–	7 1	7 1	–	71
Other changes in equity in the year		17	–	1	–	–	1 80	198	16	214
At 31 December 2024		1, 701	1,012	168	13	603	(4, 4 09)	(9 12)	31	(8 81)

1 At31December2025,69,290,662ordinaryshareswithanaggregatevalueof£503mwereheldforthepurposeofshare-basedpaymentplansandincludedinretainedearnings/

(accumulatedlosses)(2024:106,066,831ordinaryshareswithanaggregatevalueof£26m).Duringtheyear:

– 81,979,149ordinaryshareswithanaggregatevalueof£22mvestedinshare-basedpaymentplans(2024:35,117,065ordinaryshareswithanaggregatevalueof£14m);

– theCompanyissuednilnewordinarysharestotheGroup’ssharetrustforitsemployeeshare-basedpaymentplanswithanaggregatevalueof£nil(2024:88,200,000ordinaryshares

withanaggregatevalueof£17m);

– theCompany,throughtheEmployeeBenefitTrust,acquirednone(2024:none)ofitsordinarysharesviareinvestmentofdividendsreceivedonitsownsharesandpurchasednone

(2024:71,490)ofitsordinarysharesthroughpurchasesontheLondonStockExchange;and

– theEmployeeBenefitTrustpurchased3,719,489(2024:nil)ordinaryshareswithanaggregatevalueof£40mfromtheCompany,theCompanypurchasedthesesharesthroughthe

sharebuybackschemeandheldthemasTreasuryshares

2 Thismovementincludesachargeofaround£45 0masaresultoftheagreementtotransferthefuturepensionobligationsintheUKschemetoPensionInsuranceCorporationplc.

Seenote24forfurtherinformation

ofchangesinequityandthereforeisnotshowninthemovementtableabove.TheCompanysubsequentlyperformedacapitalreductionagainstsharecapital,sharepremium,andcapital

redemptionreserve

4Followingtheannouncementofthe£1bnsharebuybackon27February2025,duringtheyeartheCompanypurchasedwithcash106,291,417(2024:none)ofitsordinarysharesatacost

of£1bn.TheCompanyalsoseparatelypaidcostsof£8minrelationtotheprogramme.OftheseordinarysharespurchasedbytheCompany,61,088,437sharesatacostof£500mwere

cancelledduringtheyear.Asdetailedabove3,719,489sharesatacostof£40mweresoldtotheEmployeeBenefitTrustforconsiderationof£40mandinDecember2025theCompany

giftedtheremaining41,483,491ordinarysharesatacostof£460mtotheEmployeeBenefitTrust

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

share-based schemes

120

ROLLS-ROYCEHOLDINGSPLC ANNUALREPORT2025

CONSOLIDATEDFINANCIALSTATEMENTS

1 Accounting policies

The Company and the Group

Rolls-Royce Holdings plc (the ‘Company’) is a public company limited by shares incorporated under the Companies Act 2006 and domiciled

in England in the United Kingdom. The Consolidated Financial Statements of the Company for the year ended 31 December 2025 consist of

the audited consolidation of the Financial Statements of the Company and its subsidiaries (together referred to as the Group) together with

the Group’s interest in jointly controlled and associated entities.

Basis of preparation and statement of compliance

The Company has elected to prepare its individual Company Financial Statements under FRS 101 Reduced Disclosure Framework. They are set

out on pages 182 to 186 with the associated accounting policies from page 184.

The Consolidated Financial Statements have been prepared in accordance with UK adopted International Accounting Standards (IAS) in

conformity with the requirements of the Companies Act 2006 and interpretations issued by the IFRS Interpretations Committee applicable to

companies reporting under UK-adopted IFRS.

The Consolidated Financial Statements have been prepared on a going concern basis as described on page 57. The historical cost basis

has been used except where IFRS require 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.

The Consolidated Financial Statements are presented in sterling which is the Company’s functional currency.

The preparation of the Consolidated Financial Statements requires management to make judgements and estimates that affect the statutory

amounts of assets and liabilities at the date of the Consolidated Financial Statements and the statutory amounts of revenue and expenses

during the reporting period. Actual future outcomes could differ from those estimates.

Going concern

The Directors have undertaken a comprehensive going concern review. In adopting the going concern basis for preparing these Consolidated

and Company Financial Statements, the Directors have undertaken a review of the Group’s cash flow forecasts and available liquidity, along

with consideration of possible risks and uncertainties over an 18-month period from the balance sheet date to June 2027. The Directors have

determined that the period to 30 June 2027 (‘the going concern period’) is an appropriate timeframe over which to assess going concern as it

considers the Group’s short- to medium-term cash flow forecasts and available liquidity. Recognising the challenges of reliably estimating and

forecasting the impact of external factors on the Group, the Directors have considered two forecasts in the assessment of going concern, along

with a likelihood assessment of these forecasts, being:

— base case, which reflects the Directors’ current expectations of future trading; and

— a downside forecast, which envisages severe but plausible downside risks.

Further details are given in the going concern review on page 57. After reviewing the current liquidity position and the cash flow forecasts

modelled under both the base case and downside forecast, the Directors consider that the Group has sufficient liquidity to continue in

operational existence over the going concern period to 30 June 2027 and are therefore satisfied that it is appropriate to adopt the going

concern basis of accounting in preparing the Consolidated Financial Statements.

Climate change

In preparing the Consolidated Financial Statements the Directors have considered the potential impact of climate change, particularly

in the context of the disclosures included in the Strategic Report that set out climate-related commitments, targets and the pillars of the

Rolls-Royce energy transition strategy which are:

— optimising our operations, including decarbonising operations, facilities, product testing and business activities. This will be met through

a combination of procuring clean energy, reducing overall energy demand, and clean power generation. An estimate of the investment

required to meet Scope 1 + 2 emission improvements is included in the forecasts that support these Consolidated Financial Statements;

— enabling our customers, by delivering innovative products and solutions that can accelerate the global energy transition. This includes the

development and deployment of a future portfolio that includes the UltraFan engine in Civil Aerospace, Battery Energy Storage Systems in

Power Systems and small modular reactors. An estimate of the investment required to deliver these technologies is included in the forecasts

that support the Consolidated Financial Statements; and

— engaging and collaborating with customers, suppliers, industry and policymakers supporting the necessary enabling environment to achieve

collective energy transition and climate goals.

121

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

1 Accounting policies continued

Climate change continued

The climate change scenarios previously prepared to assess the viability of our business strategy, decarbonisation plans and approach

to managing climate-related risk have continued to develop over the last year as set out in the Strategic Report. The scenarios are used to help

assess the Group’s strategic resilience to climate change and the energy transition. Consideration is made of how each of them impacts: the life

of assets; future revenue projections; future profitability; and whether additional costs may occur. There remains inherent uncertainty around

how the scenarios will impact the Group. The Directors assess the assumptions on a regular basis to ensure that they are consistent with the risk

management activities and the commitments made to investors and other stakeholders.

Based on the Taskforce for Climate-related Financial Disclosures (TCFD) recommendations, the Group assesses the potential impact of

climate-related risks which cover transition and physical risks and opportunities. The Group has identified four key transition risks (relating to

changing customer demand, changes in cost due to carbon pricing, changes in cost due to commodity price changes and change in investment

requirements) and three key physical risks (relating to facility disruption, supply chain disruption and impact on product performance) which

may arise from the energy transition. The transition risks are the most likely to have an impact on the Consolidated Financial Statements, as

exposure to physical risks will be greater in the longer term.

The key sources of estimation uncertainty at the balance sheet date are set out on page 124 and the Directors have considered the impact

of climate change on those estimates. The key assumptions used in this assessment are consistent with those used in the climate scenarios

presented in the Strategic Review. A summary of the assessment is set out below.

Risk	How reflected in the Financial Statements	Impact on Civil Aerospace LTSAs
Changing	The most likely assumptions are used in the estimates	Forecast EFH are based on customer and market data
customer demand	implicit in the preparation of the Financial Statements.	and therefore already include the latest expectation of
	The use of sensitivity analysis ensures that any impact	the impact of climate change on demand. A sensitivity
	of climate change on demand is immaterial.	disclosing the impact of a 1% change in EFH forecasts
		over the remaining term of Civil LTSA contracts is
		disclosed on page 127.
Changes in costs	The potential impact of carbon pricing has been	The increase in the cost base of the current Civil LTSA
due to carbon	estimated by applying carbon prices to the forecast	contracts due to carbon and commodity prices
pricing 1 and	emissions generated by the Group and its supply	is estimated to be around 1% (2024: 1%) with the
commodity price	chain. This impact, together with that from estimated	incremental cost included in the cost to complete
changes 2	commodity prices under each scenario, have	estimates that drive revenue recognition. Changes in
	been added/deducted to forecast costs in the	estimates have not had a material impact on revenue
	base forecasts.	catch-ups or contract loss provisions in the year (2024:
	The analysis reflects that: decarbonisation activities	not material).
	will occur in both the Group and its supply chain;	A sensitivity disclosing the impact of a 2% change in
	and that some supplier contracts offer protection	shop visit costs over the remaining term of Civil LTSA
	from cost increases in the short to medium term where	contracts is disclosed on page 127.
	pricing is fixed or subject to capped escalation clauses.
Change in	Changing investment requirements may arise due to	No impact to existing LTSAs.
investment	the introduction/acceleration of new technologies.
required	Research is expensed and development costs
	capitalised as incurred.

1 Based on the Oxford Economic Global Climate Service and Databank, with rates of $145 per tonne of carbon in 2025 increasing to c. $300 in 2030. Beyond 2030, the Group has

considered a range of carbon pricing data sources with an assumed increase (in outturn economics) of c. 2% per annum to c. $475 per tonne by 2050

2 Commodity prices from the Oxford Economics, Global Climate Service and Databank

Items that may be impacted by climate-related risks, but which are not considered to be key areas of judgement or sources of estimation

uncertainty in the current financial year are outlined below.

Carrying value of goodwill – The recoverable amount used in impairment testing is based on the cash flow projections of the CGUs to which

the goodwill balances relate. The projections include assumptions that are based on past experience and external sources of information

in relation to sales volumes, product costs and the required level of investment that could all be impacted by climate change. The climate

scenarios prepared do not show a significant deterioration of demand for Civil Aerospace (including Rolls-Royce Deutschland) programmes

given that all commercial aero engines are compatible with sustainable fuels, similarly the majority of the portfolio in Power Systems is

compatible with alternative and more sustainable fuels. The scenarios reflect the impact of a broad range of potential costs imposed by policy

or regulatory interventions (through carbon pricing) and the investment required to ensure new products will be compatible with net zero

operation, and to achieve net zero Scope 1 + 2 GHG emission commitments. The scenarios do not indicate the need for an impairment charge

and the Directors do not consider that any reasonably possible changes in the climate related assumptions would cause the value in use of the

goodwill to fall below its carrying value.

Recoverability of programme intangible assets – The recoverable amount used in impairment testing is based on the cash flow projections

of the individual programmes. The projections include assumptions in relation to sales volumes and product costs that could be impacted

by climate change. Given the level of headroom in the programme intangible assets, with most engines being compatible with alternative or

more sustainable fuels, and with cost estimates including an allowance for the impact of carbon pricing, there is no indication of any potential

impairment as a result of climate change.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 Accounting policies continued

Useful lives of assets – The useful lives of property, plant and equipment and right-of-use assets could be reduced by climate-related

matters, for example, as a result of physical risks, obsolescence or legal restrictions. The change in useful lives would have a direct impact

on the amount of depreciation or amortisation recognised each year from the date of reassessment. The Directors’ review of useful lives has

taken into consideration the impacts of the Group’s decarbonisation strategy and has not had a material impact on the results for the year.

The Directors have also considered the remaining useful economic lives of material intangible assets, including the £1,993m and £814m

capitalised development spend associated with the Trent and business aviation programmes disclosed in note 11. Given the measures the

Group is taking, including demonstration that all the commercial aero-engines and majority of the portfolio in Power Systems are compatible

with alternative and sustainable fuels, the Directors judge that no adjustment is required to the useful economic lives.

Inventory valuation – Climate-related matters may affect the value of inventories as a result of a decline in selling prices or could become

obsolete due to a reduction in demand. After consideration of the typical stock-turns of the inventory in relation to the rate of change in the

market the Directors consider that inventory is appropriately valued.

Recoverability of trade receivables and contract assets – The impact of climate-related matters could have an impact on the Group’s customers

in the future, especially those customers in the Civil Aerospace business. No material climate-related issues have arisen during the year that

have impacted the assessment of the recoverability of receivables. The Group’s expected credit loss (ECL) provision uses credit ratings which

inherently will include the market’s assessment of the climate change impact on credit risk of the counter parties. Given the maturity time of

trade receivables and the majority of contract assets, climate change is unlikely to cause a material increase on counter party credit risk in

that time.

Recoverability of deferred tax assets on UK tax losses – Deferred tax assets are recognised to the extent it is probable that future taxable

profits will be available against which the assets can be utilised. The deferred tax asset on UK tax losses primarily arises in Rolls-Royce plc and

has been recognised based on the expectation that the business will generate taxable profits and tax liabilities in the future against which the

losses and deductible temporary differences can be utilised. Recognising the longer term over which these assets will be recovered, the Group

considers climate change scenarios that could impact future taxable profits through changes in demand for our products or their cost. The

variability in taxable profits that could arise from changes in such estimates is not considered to be of sufficient magnitude that it would impact

our judgement that there will be sufficient future taxable profits available against which the assets can be utilised.

Share-based payments – The Group is committed to achieving net zero by 2050. The Group has committed to reduce the total Scope 1 + 2

greenhouse gas emissions from its facilities, operations and testing by 46% by the end of 2030 (against a baseline of 2019). This metric accounts

for 10% of the long-term incentive plan for awards granted in 2025, with performance measured against three-year cumulative targets.

Defined benefit pension plans – Having assessed the risks and opportunities of climate change and considered the nature of the assets of

the fund, climate change is unlikely to have a material impact on the position in the Consolidated Financial Statements

Going concern – Given the short-term nature of the Group’s going concern assessment, the impact of climate change does not have a

significant impact. The Directors have considered the level of liquidity available, and the potential impact of the climate change risks,

in making their assessment.

Presentation of underlying results

The Group measures financial performance on an underlying basis and discloses this information as an alternative performance measure (APM).

This is consistent with the way that financial performance is measured by the Directors and reported to the Board in accordance with IFRS 8

Operating Segments. The Group believes this is the most appropriate basis to measure the in-year performance, as underlying results reflect

the substance of trading activity, including the impact of the Group’s foreign exchange forward contracts, which economically hedge net

foreign currency cash flows at predetermined exchange rates. In addition, underlying results exclude the accounting impact of acquisition

accounting and business disposals, impairment charges where the reasons are outside of normal operating activities, exceptional items, and

certain other items which are market driven and outside of the control of management. Further details are given in note 2. A reconciliation of

APMs to the statutory equivalent is provided on pages 208 to 211.

Revisions to IFRS applicable in 2025

There are no new standards or interpretations issued by the International Accounting Standards Board (IASB) that had a significant impact on

these Consolidated Financial Statements.

Revisions to IFRS not applicable in 2025

Standards and interpretations issued by the IASB are only applicable if endorsed by the UK. Other than IFRS 18 Presentation and Disclosure

in Financial Statements described below, the Group does not consider that any other standards, amendments or interpretations issued by the

IASB, but not yet applicable will have a significant impact on the Consolidated Financial Statements.

IFRS 18 Presentation and Disclosure in Financial Statements

The IASB issued a new Standard, IFRS 18 Presentation and Disclosure in Financial Statements, on 9 April 2025 that will replace IAS 1

Presentation of Financial Statements. The purpose of the new standard is to provide more consistent presentation of financial information

across preparers as it is acknowledged that existing standards have given flexibility to present information in different ways. IFRS 18

Presentation and Disclosure in Financial Statements will not impact the recognition or measurement of items in the financial statements.

Many of the existing presentation principles in IAS 1 Presentation of Financial Statements are retained, but there are some more specific

requirements that will require the Group to make some changes in its future Annual Reports and Interim Financial Statements.

The new Standard was endorsed by the UK Endorsement Board (UKEB) and will be applicable for reporting periods beginning on or after

1 January 2027. The Group does not anticipate its early adoption of the new Standard. Comparative information for 2026 will need to be

restated when subsequent financial statements are published. The Group has continued its implementation activities and expects the most

significant changes post 2027 to be in relation to the presentation of items within the Statutory Consolidated Income Statement. The changes are

expected to include: ‘share of results of joint ventures and associates’ being presented in the new investing category and included when arriving

at a new subtotal ‘operating profit including share of results of joint ventures and associates’; interest income will be reclassified from net

123

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

1 Accounting policies continued

financing into the new investing category; the majority of foreign exchange differences will be reclassified from net financing into the

operating category; and fair value gains/(losses) related to foreign currency contracts and commodity contracts will be reclassified from net

financing into the operating category. The process of assessing the financial impact on the Consolidated Financial Statements will continue

during 2026.

Key areas of judgement and sources of estimation uncertainty

The determination of the Group’s accounting policies requires judgement. The subsequent application of these policies requires estimates,

and the actual outcome may differ from that calculated. The key 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, together with sensitivities for key sources of estimation uncertainty where appropriate and practicable,

are included within the significant accounting policies section of this note.

Area	Key judgements	Key sources of estimation uncertainty	Page ref
Revenue	— Whether Civil Aerospace OE and aftermarket	— Estimates of future revenue, including customer	126
recognition and	contracts should be combined.	pricing, and costs of long-term contractual
contract assets	— How performance on long-term aftermarket contracts	arrangements, including the impact of
and liabilities	should be measured.	climate change.
	— Whether long-term aftermarket contracts contain a
	significant financing component.
	— Whether any costs should be treated as wastage.
	— Whether the Civil Aerospace LTSA contracts are
	warranty style contracts entered into in connection
	with OE sales and therefore can be accounted
	for under IFRS 15 Revenue from Contracts
	with Customers.
	— Whether sales of spare engines to joint ventures are
	at fair value.
	— When revenue should be recognised in relation to
	spare engine sales.
Risk and revenue sharing	— Determination of the nature of entry fees received.		127
arrangements
(RRSAs)
Research and	— Determination of the point in time where costs		130
development	incurred on an internal programme development meet
	the criteria for capitalisation.
	— Determination of the basis for amortising capitalised
	development costs.
Leases	— Determination of the lease term.		131
Impairment of	— Determination of cash-generating units for assessing		131
non-current	impairment of goodwill.
assets
Provisions	— Whether any costs should be treated as wastage.	— Estimates of the time and cost to incorporate	132
		required modified parts into the fleet to resolve
		technical issues on certain programmes (which
		could be exacerbated by prolonged supply chain
		challenges) and the implications of this on forecast
		future costs when assessing onerous contracts.
		— Estimates of the future revenues and costs to fulfil
		onerous contracts.
		— Assumptions implicit within the calculation of
		discount rate.
Post-retirement		— Estimates of the assumptions for valuing the net	133
benefits		defined benefit obligation.

Material accounting policies

The Group’s significant accounting policies are set out on pages 124 to 133. These accounting policies have been applied consistently to all

periods presented in these Consolidated Financial Statements.

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 of joint arrangements and associates 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. Subsidiaries

are consolidated in accordance with IFRS 10 Consolidated Financial Statements.

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 investors under a contractual arrangement. Joint arrangements may be either joint ventures or joint operations. Joint ventures are

accounted for using the equity method of accounting and joint operations are accounted for using proportionate accounting.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 Accounting policies continued

Basis of consolidation continued

An associate is an entity that is 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 associates are accounted for using the equity method of accounting.

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. Transactions with

non-controlling interests are recorded directly in equity.

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. Details of transactions in the year are set out in note 29.

Revenue recognition and contract assets and liabilities

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 that require the key estimates highlighted below to be made. 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. Consideration is received in the form of deposits and payments for completion of

milestones or performance obligations. LTSA cash receipts are typically received based on EFHs.

Sales of standard OE, spare parts and time and material (T&M) 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 OE and services that are 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 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. 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.

Key areas of the accounting policy are:

— 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. EFHs, 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 USD 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 LTSAs, 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 revenue recognised in meeting

performance obligations.

— Contract modifications of LTSAs can be accounted for as separate contracts, termination of the existing contract and the creation of a

new contract, or as part of the existing contract. The treatment is dependent on whether the change in scope is because of the addition

of promised goods or services that are distinct and whether the price increases by an amount that reflects their standalone selling prices.

— Where material, wastage costs (see key judgements on page 126) are recorded as an expense and excluded from the measure of progress

of LTSA contracts.

— The Group recognises a liability for their obligation to repurchase parts it has sold to the maintenance, repair and overhaul bases who

overhaul the Group’s customers’ engines.

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 engines are 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 (eight to 15 years).

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

1 Accounting policies continued

Key judgement – Whether Civil Aerospace OE and aftermarket contracts should be combined

In the Civil Aerospace business, OE contracts for the sale of engines to be installed on new aircraft are with the airframers, while

the contracts to provide spare engines and aftermarket goods and services 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 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. 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 to be performed.

Key judgement – Whether long-term aftermarket contracts contain a significant financing component

Long-term aftermarket contracts typically cover a period of eight to 15 years. Their pricing is the subject of negotiation with individual

customers under competitive circumstances. It is the Directors’ judgement that the consideration received approximates to the cash

selling price and any timing difference between consideration being received and the supply of goods and services is typical of the

industry and arises for reasons other than to provide financing. The customers typically pay on an ‘as used’ basis (e.g. USD/EFH) which

reflects the wear and tear of the engine as it flies and aligns to the customer’s own revenue streams. An adjustment to the transaction price

is therefore not required.

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 of a nature that the Group would not expect

to incur and hence is not reflected in the contract price. Examples include 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 wastage cost. Provision is made for any costs identified as wastage when the obligation to incur them arises

– see note 23.

Key judgement – Whether the Civil Aerospace LTSA contracts are warranty style contracts entered into in connection with OE sales and

therefore can be accounted for under IFRS 15 Revenue from Contracts with Customers

The Group has considered whether these arrangements are insurance contracts as defined in IFRS 17 Insurance Contracts. While they

may transfer an element of insurance risk, they relate to warranty and service type agreements that are entered into in connection with

the Group’s sales of its goods or services and therefore continue to be accounted for under the existing revenue and provisions standards.

The Directors have judged that such arrangements entered into after the original equipment sale remain sufficiently related to the sale of

the Group’s goods and services to allow the contracts to continue to be measured under IFRS 15 Revenue from Contracts with Customers

and IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

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 the terms and conditions of the sales, 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. See note 28 for the value of sales to joint ventures during the year.

Key judgement – When revenue should be recognised in relation to spare engine sales

Revenue is recognised at the point in time when a customer obtains control of a spare engine. The customer could be a related party,

an external operator or a spare engine service provider. Depending on the contractual arrangements, judgement is required on when

the Group relinquishes control of spare engines and, therefore, when the revenue is recognised. The point of control passing has been

concluded to correspond to the point of legal sale, even for instances where the customer is contracted to provide some future spare

engine capacity to the Group to support its installed engine base. In such cases, the customer has responsibility for generating revenue

from the engines and exposure to periods of non-utilisation; exposure to risk of damage or loss, risk from residual value movements, and

will determine if and when profits will be made from disposal. The spare engine capacity that will be made available to the Group in the

future does not consist of identified assets and the provider retains a substantive right to substitute the asset through the Group’s period

of use. It is, therefore, appropriate to recognise revenue from the sale of the spare engines at the point that title transfers. During 2025,

of the total 52 (2024: 57) large spare engine sales delivered, 5 (2024: 20) engines were sold to customers where contractual arrangement

allows for some future spare engine capacity to be used by the Group. These sales contributed £94m (2024: £399m) to revenue for

the year.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 Accounting policies continued

Key estimate – Estimates of future revenue, including customer pricing, and costs of long-term contractual arrangements, including the

impact of climate change

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 LTSAs in the Civil Aerospace business, with contracts typically covering a period of eight

to 15 years. The estimated revenue and costs are inherently imprecise and significant estimates are required to assess: EFHs, 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 (that includes the impact of inflation). 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

rate, based on historical trends and economic forecasts.

The impact of climate change on EFHs and costs is also considered when making these estimates. Industry and customer data on expected

levels of utilisation is included in the forecasts used. Across the length of the current Civil Aerospace LTSA contracts, allowance has been

made for around a 1% (2024:1%) projected cost increase resulting from carbon pricing and commodity price changes.

During the year, changes to the estimate in relation to the Civil Aerospace long term contracts resulted in favourable catch-up adjustments

to revenue of £253m (2024: favourable catch-up adjustments of £311m).

The sensitivities below demonstrate how changes in assumptions (including as a result of climate change) could impact the level of revenue

recognised were assumptions to change. The Directors believe that the estimates used to prepare the Consolidated Financial Statements

take account of the inherent uncertainties, constraining the expected level of revenue as appropriate. Based upon the stage of completion

of all LTSA contracts within Civil Aerospace as at 31 December 2025, the following reasonably possible changes in estimates would result in

catch-up adjustments being recognised in the period in which the estimates change (at underlying rates):

— A change in forecast EFHs of 1% over the remaining term of the contracts would impact LTSA income and to a lesser extent costs,

resulting in an in-year impact of around £20m. This would be expected to be seen as a catch-up change in revenue or, to the extent it

impacts onerous contracts, within cost of sales.

— A 2% increase or decrease in our pricing to customers over the life of the contracts would lead to a revenue catch-up adjustment in the

next 12 months of around £400m.

— A 2% increase or decrease in shop visit costs over the life of the contracts would lead to a revenue catch-up adjustment in the next

12 months of around £120m.

Risk and revenue sharing arrangements (RRSAs)

Cash entry fees received are initially deferred on the balance sheet as deferred receipts from RRSA workshare partners within trade payables

and other liabilities. The cash entry fee is a transaction with a supplier and is recognised as a reduction in cost of sales incurred. Individual

programme amounts are allocated pro rata to the estimated number of units to be produced. Amortisation commences as each unit is delivered

and then recognised on a 15-year straight-line basis.

The payments to suppliers of their shares of the programme cash flows for their production components are charged to cost of sales when

OE sales are recognised or as LTSA costs are incurred. These prepayments are initially recognised within trade receivables and other assets.

The Group also 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.

Key judgement – Determination of the nature of entry fees received

RRSAs with key suppliers (workshare partners) are a feature of the civil aviation industry. 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 the workshare partner 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 considered to be one element of a long-term supply agreement. These receipts are deferred on the

balance sheet and recognised against the cost of sales over the estimated number of units to be delivered on a similar basis to the

amortisation of development costs – see page 129.

Government grants

Government grants received are varied in nature and 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 as liabilities

within trade payables and other liabilities 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.

127

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

1 Accounting policies continued

Taxation

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; and

— 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, which include the reversal of taxable

temporary differences, will be available against which the assets can be utilised. Further details on the Group’s tax position can be found on

pages 142 to 145.

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 monetary 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 assets, and from the translation of the profits or losses at

average rates, are recognised in OCI.

Discontinued operations and business disposals

A discontinued operation is defined in IFRS 5 Non-current Assets Held for Sale and Discontinued Operations as a component of an entity that

has been disposed of or is classified as held for sale, represents a separate major line of business or geographical area of operations, is part

of a single co-ordinated plan to dispose of such a line of business or is a subsidiary acquired exclusively with a view to resale. The results of

discontinued operations are required to be presented separately in the income statement.

Assets and businesses are classified as held for sale when their carrying amounts will be recovered through sale rather than through

continuing use.

Financial instruments – Classification and measurement

Financial assets primarily include trade receivables and other non-derivative financial assets, cash and cash equivalents, short-term

investments, derivatives (foreign exchange, commodity and interest rate contracts), and listed and unlisted investments.

— Trade receivables and other assets are classified either as held to collect and measured at amortised cost, or as held to collect and sell and

measured at fair value, with movements in fair value recognised 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 and short-term deposits)

and short-term investments are subject to low market risk. Cash balances, short-term deposits (with a maturity of primarily three months or

less) and short-term investments are measured at amortised cost. Money market funds are measured at fair value, with movements in fair

value recognised in the income statement as a profit or loss (FVPL).

— Derivatives and unlisted investments are measured at FVPL. The Company has elected to measure its listed investments at FVOCI.

Financial liabilities primarily consist of trade payables and other non-derivative financial liabilities, 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.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 Accounting policies continued

Financial instruments – Impairment of financial assets and contract assets

IFRS 9 Financial Instruments sets out the basis for the accounting of ECLs on financial assets and contract assets resulting from transactions within

the scope of IFRS 15 Revenue from Contracts with Customers. 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. Derivative financial instruments qualify for hedge

accounting when: (i) there is a formal designation and documentation of the hedging relationship and the Group’s risk management objective

and strategy for undertaking the hedge at the inception of the hedge; and (ii) the hedge is expected to be effective. In general, the Group has

chosen to not apply hedge accounting in respect of these exposures.

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 or cash flow exposures of borrowings denominated in foreign currencies and are designated as fair value hedges or

cash flow hedges as appropriate. 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 or cash flow hedges as appropriate. If the swaps are not designated as fair value or cash flow hedges,

the economic effect is included in the underlying results – see note 22.

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 to the income statement in the same period or

periods during which the hedged cash flows affect profit or loss. Any ineffectiveness in the hedging relationship is included in the income statement.

Financial instruments – Hedge accounting continued

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 net cumulative gain or loss on the hedging

instrument recognised in the Statement of Changes in Equity (SOCIE) 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.

Business combinations and goodwill

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 UK-adopted International Accounting Standards 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. Individual programme assets are allocated pro rata to the

estimated number of units to be produced. Amortisation commences as each unit is delivered and then charged on a 15-year straight-line basis.

Research and development

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 the Directors). 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.

Individual programme assets are allocated pro rata to the estimated number of units to be produced. Amortisation commences as each unit is

delivered and then charged on a 15-year straight-line basis. In accordance with IAS 38 Intangible Assets, the basis on which programme assets

are amortised is assessed annually.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

1 Accounting policies continued

Key judgement – Determination of the point in time when costs incurred on an internal programme development meet the criteria

for capitalisation

The Group incurs significant research and development expenditure in respect of various development programmes. Determining when

capitalisation should commence and cease is a key judgement, as is the determination of when subsequent expenditure on the programme

assets should be capitalised. During the year, £222m (2024: £263m) of development expenditure was capitalised.

Within the Group there are established processes in place e.g., the Product Introduction and Lifecycle Management process (PILM), to

consider technical feasibility, commercial viability and financial assessment of the programme at certain milestones. When these are met,

development expenditure is capitalised. Prior to this, expenditure is expensed as incurred.

The Group continues to invest in new technologies as a result of its decarbonisation commitments. As these are new technologies there

is a higher level of uncertainty over potential outcomes and, therefore, this could impact the level of expenditure that is capitalised or

recognised in the income statement in future years.

Subsequent expenditure after entry into service which enhances the performance of the engine and the economic benefit 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 LTSAs, which are expected to be relatively

consistent for each engine within a programme. Amortisation of development costs is recognised on a straight-line basis over the

estimated period of operation of the engine by its initial operator.

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 ten years. The amortisation period of software assets is

reviewed annually. The cost of internally developed software includes direct labour and an appropriate proportion of overheads.

Other intangible assets

These include intangible assets arising on acquisition of businesses, such as technology which is amortised on a straight-line basis over a

maximum of 15 years and trademarks which are not amortised. They also include the costs incurred testing and analysing engines with the

longest time in service (fleet leader engines) to gather technical knowledge on engine endurance, which are amortised on a straight-line basis

over a maximum of 15 years.

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, 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 – three to 50 years; and

• no depreciation is provided on freehold land.

— Plant and equipment – two to 25 years.

— Aircraft and engines – five to 20 years.

Leases

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 commenced after the initial IFRS 16 Leases 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. Where

appropriate, lease liabilities are revalued at each reporting date using the spot exchange rate.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 Accounting policies continued

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.

Short-term leases are leases with a lease term of 12 months or less. Payments associated with short-term leases and low-value leases are

recognised on a straight-line basis as an expense in the income statement.

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 although none

due in the next 12 months would have a material impact. Other renewals are evenly spread between 2029 to 2033 and then post 2038.

The Group reviews its judgements on lease terms annually, including the operational significance of the site, especially where utilised for

manufacturing activities.

Impairment of non-current assets

Impairment of non-current assets is considered in accordance with IAS 36 Impairment of Assets. Where the asset does not generate cash

flows that are independent of other assets, impairment is considered for the cash-generating unit (CGU) 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, right-of-use assets 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 CGU) 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 of

disposal. 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 (or CGU). Fair value less costs of disposal (FVLCOD) reflects market inputs or inputs based on market evidence if

readily available. If these inputs are not readily available, the fair value is estimated by discounting future cash flows modified for market

participants’ views. The relevant local statutory tax rates have been applied in calculating post-tax to pre-tax discount rates.

Key judgement – Determination of CGUs for assessing impairment of goodwill

The Group conducts impairment reviews at the 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 main CGUs for which goodwill impairment reviews have been

performed are Rolls-Royce Deutschland Ltd & Co KG and at an aggregated Rolls-Royce Power Systems AG level.

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

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.

The Group’s suppliers have access to a supply chain financing (SCF) programme through partnership with banks. This is to enable smaller

suppliers, including joint ventures (90-day standard payment terms), who are on our standard 75 day or more payment terms to receive

their payment sooner. The election to utilise the programme is the sole decision of the supplier. As the Group continues to have a contractual

obligation to pay its suppliers under commercial terms, which are unaffected by any utilisation of the programme, and it does not retain any

ongoing involvement in the SCFs, the related payables are retained on the Group’s balance sheet and classified as trade payables. Further

details are disclosed in note 21.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

1 Accounting policies continued

Provisions

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. Provisions are discounted to present value where the effect is material.

The principal provisions are recognised as follows:

— onerous contracts based on an assessment of whether the direct costs to fulfil a contract are greater than the expected revenue;

— warranty 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

— transformation and restructuring when the Group has approved a detailed and formal restructuring plan, and the restructuring has either

commenced or has created a valid expectation to those affected.

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 of a nature that the Group would not expect

to incur. As the Group is an owner of an engine Type Certificate, it has a present obligation to develop appropriate design changes to

address certain engine conditions that have been noted in issued Airworthiness Directives. The Group is also required to ensure engine

operators can continue to safely operate engines within the terms of their LTSAs, and this requires the engines to be compliant with the

requirements of those issued Airworthiness Directives. Where Airworthiness Directives are issued, requirements cannot be met without

the Group incurring significant costs in the form of replacement parts and customer claims. Given the significant activities of the Group

in designing and overhauling aero engines it is very experienced in making the required estimates in relation to the number and timing of

shop visits, parts costs, overhaul labour costs and customer claims.

During the year, the Group has utilised the remaining £35m of the Trent 1000 wastage costs provision.

Key judgement – Estimates of the time to incorporate required modified parts into the fleet to resolve technical issues on the Trent 1000,

and the implications of this on forecast future costs when assessing onerous contracts

The Group considers that at 31 December 2025 the Trent 1000 onerous contract provisions are most sensitive to changes in estimates.

Our forecast increases in shop visit capacity could be impacted by several factors, including prolonged supply chain challenges.

If forecast increases in shop visit capacity are not achieved, this could have the impact of reducing planned output of engine overhauls.

A 20% reduction in Trent 1000 planned output during the first half of 2026 (and thus delayed incorporation of modified parts into the

fleet) could lead to around a £20m to £30m charge.

Key estimates – Estimates of the future revenues and costs to fulfil onerous contracts

The Group has provisions for onerous contracts at 31 December 2025 of £986m (2024: £1,433m). An increase in Civil Aerospace large

engine estimates of LTSA costs of 1% over the remaining term of the contracts could lead to around a £50m to £70m increase in the

onerous contract provisions across all programmes.

Key estimates – Assumptions implicit within the calculation of discount rates

The onerous contract provisions are sensitive to changes in the discount rate used to value the provisions. The rate used for each

contract is derived from bond yields (i.e. risk-free rates) with a similar duration and currency to the contract that they are applied to.

The rate is adjusted to reflect the specific inflation characteristics of the contracts. The forecast rates are determined from third-party

market analysis and average 5%. A 1% change in the discount rates used could lead to around a £20m to £30m change in the provision.

Customer financing support

In connection with the sale of its products, the Group will, on occasion, provide financing support for its customers. Credit-based guarantees

are disclosed as commitments or contingent liabilities dependent on whether aircraft have been delivered or not. As described on page 178,

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.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 Accounting policies continued

Post-retirement benefits

Pensions and similar benefits (principally healthcare) are accounted for under IAS 19 Employee Benefits.

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. Actuarial gains and losses are recognised immediately in OCI.

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.

UK pension obligations include the estimated impact of the obligation to equalise defined benefit pensions and transfer values for men

and women.

Payments to defined contribution schemes are charged as an expense as they fall due.

Key estimate – Estimates of the assumptions for valuing the net defined benefit obligation

The Group’s defined benefit pension schemes and similar arrangements are assessed annually in accordance with IAS 19 Employee

Benefits. The valuations, which are based on assumptions determined with independent actuarial advice, resulted in a net deficit of £606m

before deferred taxation being recognised on the balance sheet at 31 December 2025 (2024: deficit of £191m). The size of the net surplus/

deficit is sensitive to the actuarial assumptions which include the discount rate, price inflation, pension and salary increases, longevity and,

in the UK, the number of plan members who take the option to transfer their pension to a lump sum on retirement or who choose to take

the Bridging Pension Option. Following consultation, the UK scheme closed to future accrual on 31 December 2020.

A reduction in the discount rate of 0.25% from 5.60% could lead to an increase in the defined benefit obligations of the RR UK Pension

Fund (RRUKPF) of approximately £140m and an increase in the assumed rate of inflation of 0.25% (RPI of 3.05% and CPI of 2.70%) could

lead to an increase in the defined benefit obligations of the RRUKPF of approximately £55m. In August 2025 the scheme completed a

Buy-in, with the purchase of a bulk insurance annuity policy, with the effect that the majority of scheme liabilities, and therefore these

potential risks, are covered by this policy. See further details and overseas scheme sensitivities in note 24.

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 based on expected performance, except where additional shares vest as a result market-based performance conditions, such as

the total shareholder return (TSR) performance condition in the long-term incentive plan (LTIP), where no adjustment is required as allowance

for these performance conditions are included in the initial fair value.

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 are

expected to 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 26 for a further description of the share-based payment plans.

Post balance sheet events

Rolls-Royce plc and the Trustee of the UK pension scheme signed an agreement on 2 February 2026 triggering the wind up of the UK scheme.

The Group’s current expectation is that the residual surplus on the scheme will be shared between the Group and the scheme’s members,

and communications to this effect have been made to members. This is subject to a statutory consultation process between the Trustee

and the members, expected to be completed in 2026. Subject to the outcome of that process, it is currently expected that this will result in

a constructive obligation of around £100m being recognised as a past service charge in the income statement in 2026.

Following the completion in November 2025 of its £1 bn share buyback programme for 2025, the Group announced in December 2025 that it

was commencing a further share buyback programme of up to £200m in January 2026. This programme was completed in February 2026, with

the Group having purchased 15,971,931 shares for consideration of £200m. These shares have all been cancelled.

On 26 February 2026, the Group announced a multi-year share buyback programme (see page 57 for further details).

On 16 February 2026, the Group repaid €750m of borrowings on their contractual maturity date which, along with the associated cross

currency interest rate swaps, resulted in a cash outflow of £677m.

The Group has taken the latest legal position in relation to any ongoing legal proceedings and reflected these in the 2025 results

as appropriate.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

2 Segmental analysis

The analysis by segment is presented in accordance with IFRS 8 Operating Segments, on the basis of those segments whose operating results

are regularly reviewed by the Board (who acts as the Chief Operating Decision Maker as defined by IFRS 8 Operating Segments). The Group’s

three divisions are set out below.

Civil Aerospace development, manufacture, marketing and sales of commercial aero engines and aftermarket services

Defence development, manufacture, marketing and sales of military aero engines, naval engines, submarine nuclear power plants

and aftermarket services

Power Systems development, manufacture, marketing and sales of integrated solutions for onsite power and propulsors

On 4 March 2025, an investment was received by Rolls-Royce SMR Limited from ČEZ Group (CEZ), as a result the Group relinquished control of

Rolls-Royce SMR Limited and the subsidiary was deconsolidated (see note 29 for further details).

Following the decision in 2024 to exit the Group’s advanced air mobility activities and the deconsolidation of Rolls-Royce SMR Limited on

4 March 2025 (see note 29) the New Markets operating segment that was reported at 31 December 2024 is no longer regularly reviewed by

the Board as a basis for making decisions about the allocation of resources to the business or to assess its performance. In line with IFRS 8

Operating Segments, New Markets is no longer considered to meet the definition of an operating segment.

Revenue and expenses from new electrical power solutions and the Group’s share of the financial results of Rolls-Royce SMR Limited have been

included in ‘All Other Businesses’, which also includes the trading results of the UK Civil Nuclear business. The segmental analysis for 2024 has

been restated to reflect the 2025 assessment of operating segments.

Underlying results

The Group presents the financial performance of the businesses in accordance with IFRS 8 Operating Segments and consistently with the basis

on which performance is communicated to the Board each month.

Underlying results are presented by recording all relevant revenue and cost of sales transactions at the average exchange rate achieved on

effective settled derivative contracts for the Company and its subsidiaries in the period that the cash flow occurs. The impact of the revaluation

of monetary assets and liabilities (other than lease liabilities) using the exchange rate that is expected to be achieved by the use of the effective

hedge book is recorded within underlying cost of sales. Underlying financing excludes the impact of revaluing monetary assets and liabilities to

period end exchange rates. Lease liabilities are not revalued to reflect the expected exchange rates due to their multi-year remaining term, the

Directors believe that doing so would not be the most appropriate basis to measure the in-year performance. Transactions between segments

are presented on the same basis as underlying results and eliminated on consolidation. Unrealised fair value gains/(losses) on foreign exchange

contracts, which are recognised as they arise in the statutory results, are excluded from underlying results. To the extent that the previously

forecast transactions are no longer expected to occur, an appropriate portion of the unrealised fair value gain/(loss) on foreign exchange

contracts is recorded immediately in the underlying results.

Amounts receivable/(payable) on interest rate swaps which are not designated as hedge relationships for accounting purposes are

reclassified from fair value movement on a statutory basis to interest receivable/(payable) on an underlying basis, as if they were in an

effective hedge relationship.

In the year to 31 December 2025, the Group was a net seller of USD at an achieved exchange rate GBP:USD of 1.44 (2024: 1.48) based on

the USD hedge book.

In 2020, the Group experienced a significant decline in its medium-term outlook and consequently a significant deterioration to its forecast net

USD cash inflows. The Group took action to reduce the size of the USD hedge book by $11.8bn across 2020–2026 to reflect the fact that, at that

time, future operating cash flows were no longer forecast to materialise. An underlying charge of £1.7bn was recognised within the underlying

finance costs in 2020 and the associated cash settlement costs occur over the period 2020–2026. The derivatives relating to this underlying

charge have been subsequently excluded from the hedge book, and therefore are also excluded from the calculation of the average exchange

rate achieved in the current and future periods.

Underlying performance also excludes the following:

— the effect of acquisition accounting and business disposals;

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

— exceptional items; and

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

Subsequent changes in items excluded from underlying performance in a prior period will also be excluded from underlying performance.

All other changes will be recognised within underlying performance.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 Segmental analysis continued

Acquisition accounting, business disposals and impairment

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

Exceptional items

Items are classified as exceptional where the Directors believe that presentation of the results in this way is useful in providing an

understanding of the Group’s financial performance. Exceptional items are identified by virtue of their size, nature or incidence.

In determining whether an event or transaction is exceptional, the Directors consider quantitative as well as qualitative factors such as

the frequency or predictability of occurrence. Examples of exceptional items include one-time costs and charges in respect of aerospace

programmes, costs of exceptional restructuring and transformation programmes and one-time past service charges and credits on post-

retirement schemes.

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

Other items

The financing component of the defined benefit pension scheme cost is determined by market conditions and has therefore been excluded

from underlying performance.

The tax effects of adjustments above are excluded from the underlying tax charge. Changes in tax rates are excluded from the underlying tax

charge. In addition, changes in the amount of recoverable deferred tax recognised are excluded from the underlying results to the extent that

their recognition or derecognition was not originally recorded within the underlying results.

The following analysis sets out the results of the Group’s divisions on the basis described above and also includes a reconciliation of the

underlying results to those reported in the consolidated income statement.

				All Other	Corporate and	Total
	Civil Aerospace	Defence	Power Systems	Businesses 1	Inter-segment 2	Underlying
	£m	£m	£m	£m	£m	£m
Year ended 31 December 2025
Underlying revenue from sale of original equipment	3,217	2,228	3,433	13	–	8,891
Underlying revenue from aftermarket services	7,165	2,544	1,459	–	–	11,168
Total underlying revenue	10,382	4,772	4,892	13	–	20,059
Gross profit/(loss)	2,675	933	1,522	(2)	(2)	5,126
Commercial and administrative costs	(432)	(201)	(518)	(5)	(67)	(1,223)
Research and development costs	(267)	(45)	(164)	(21)	–	(497)
Share of results of joint ventures and associates	154	2	12	(112)	–	56
Underlying operating profit/(loss)	2,130	689	852	(140)	(69)	3,462
Year ended 31 December 2024
Underlying revenue from sale of original equipment	3,105	1,943	2,942	15	–	8,005
Underlying revenue from aftermarket services	5,935	2,579	1,329	–	–	9,843
Total underlying revenue	9,040	4,522	4,271	15	–	17,848
Gross profit/(loss)	1,990	908	1,199	(3)	(3)	4,091
Commercial and administrative costs	(396)	(212)	(483)	(41)	(65)	(1,197)
Research and development costs	(252)	(55)	(165)	(133)	–	(605)
Share of results of joint ventures and associates	163	3	9	–	–	175
Underlying operating profit/(loss)	1,505	644	560	(177)	(68)	2,464

1 Following the decision to exit the Group’s advanced air mobility activities in 2024 and the relinquishment of control of Rolls-Royce SMR Limited on 4 March 2025 (see note 29)

the results of those activities in both 2024 and 2025 have been reported within All Other Businesses. The Group’s income statement for 2025 includes two months of the results of

Rolls-Royce SMR Limited as a subsidiary and ten months of the Group’s share of the results of the equity-accounted investment

2 Corporate and Inter-segment consists of costs that are not attributable to a specific segment and consolidation adjustments

135

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

2 Segmental analysis continued

Reconciliation to statutory results

		Underlying
		adjustments and
		adjustments to	Group statutory
	Total underlying	foreign exchange	results
	£m	£m	£m
Year ended 31 December 2025
Revenue from sale of original equipment	8,891	212	9,103
Revenue from aftermarket services	11,168	936	12,104
Total revenue	20,059	1,148	21,207
Gross profit	5,126	1,049	6,175
Commercial and administrative costs	(1,223)	(45)	(1,268)
Research and development costs	(497)	2	(495)
Share of results of joint ventures and associates	56	–	56
Operating profit	3,462	1,006	4,468
Gain arising on the disposal of businesses	–	809	809
Profit before financing and taxation	3,462	1,815	5,277
Net financing	(110)	1,768	1,658
Profit before taxation	3,352	3,583	6,935
Taxation	(593)	(506)	(1,099)
Profit for the year	2,759	3,077	5,836
Attributable to:
Ordinary shareholders	2,764	3,077	5,841
NCI	(5)	–	(5)
Year ended 31 December 2024
Revenue from sale of original equipment	8,005	384	8,389
Revenue from aftermarket services	9,843	677	10,520
Total revenue	17,848	1,061	18,909
Gross profit	4,091	130	4,221
Commercial and administrative costs	(1,197)	(87)	(1,284)
Research and development costs	(605)	402	(203)
Share of results of joint ventures and associates	175	(3)	172
Operating profit	2,464	442	2,906
Gain arising on the disposal of business	–	16	16
Profit before financing and taxation	2,464	458	2,922
Net financing	(171)	(517)	(688)
Profit/(loss) before taxation	2,293	(59)	2,234
Taxation	(282)	532	250
Profit for the year	2,011	473	2,484
Attributable to:
Ordinary shareholders	2,048	473	2,521
NCI	(37)	–	(37)

136

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 Segmental analysis continued

Disaggregation of revenue from contracts with customers

Analysis by type and basis of recognition

				All Other	Corporate and	Total
	Civil Aerospace	Defence	Power Systems	Businesses	Inter-segment	Underlying
	£m	£m	£m	£m	£m	£m
Year ended 31 December 2025
Original equipment recognised at a point in time	3,217	409	3,368	–	–	6,994
Original equipment recognised over time	–	1,819	65	13	–	1,897
Aftermarket services recognised at a point in time	1,617	735	1,348	–	–	3,700
Aftermarket services recognised over time	5,469	1,809	111	–	–	7,389
Total underlying customer contract revenue	10,303	4,772	4,892	13	–	19,980
Other underlying revenue 1	79	–	–	–	–	79
Total underlying revenue 2	10,382	4,772	4,892	13	–	20,059
Year ended 31 December 2024
Original equipment recognised at a point in time	3,105	562	2,871	3	–	6,541
Original equipment recognised over time	–	1,381	71	12	–	1,464
Aftermarket services recognised at a point in time	1,258	918	1,231		–	3,407
Aftermarket services recognised over time	4,594	1,661	98	–	–	6,353
Total underlying customer contract revenue	8,957	4,522	4,271	15	–	17,765
Other underlying revenue 1	83	–	–	–	–	83
Total underlying revenue 2	9,040	4,522	4,271	15	–	17,848

1 Includes leasing revenue

2 Includes £259m of revenue recognised in the year relating to performance obligations satisfied in previous years, of which £253m related to Civil Aerospace long term contracts (2024:

£317m, of which £311m relates to Civil Aerospace long term contracts)

		Underlying
		adjustments and
		adjustments to	Group statutory
	Total underlying	foreign exchange	results 1
	£m	£m	£m
Year ended 31 December 2025
Original equipment recognised at a point in time	6,994	211	7,205
Original equipment recognised over time	1,897	1	1,898
Aftermarket services recognised at a point in time	3,700	123	3,823
Aftermarket services recognised over time	7,389	806	8,195
Total customer contract revenue	19,980	1,141	21,121
Other revenue	79	7	86
Total revenue	20,059	1,148	21,207
Year ended 31 December 2024
Original equipment recognised at a point in time	6,541	384	6,925
Original equipment recognised over time	1,464	–	1,464
Aftermarket services recognised at a point in time	3,407	163	3,570
Aftermarket services recognised over time	6,353	501	6,854
Total customer contract revenue	17,765	1,048	18,813
Other revenue	83	13	96
Total revenue	17,848	1,061	18,909

1 During the year to 31 December 2025, revenue recognised within Civil Aerospace, Defence and Power Systems of £2,034m (2024: £1,915m) was received from a single customer

137

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

2 Segmental analysis continued

Analysis by geographical destination

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

	2025	2024
	£m	£m
United Kingdom	3,103	2,642
Germany	1,225	1,048
Türkiye	442	307
Spain	410	282
Switzerland	362	440
Italy	357	318
France	327	332
Ireland	202	324
Netherlands	199	130
Israel	139	73
Norway	132	96
Poland	107	141
Sweden	95	28
Portugal	82	121
Latvia	54	16
Rest of Europe	192	273
Europe	7,428	6,571
United States	5,802	5,477
Canada	529	462
North America	6,331	5,939
South America	300	336
Central America	90	169
United Arab Emirates	543	255
Saudi Arabia	514	428
Qatar	374	196
Rest of Middle East	243	301
Middle East	1,674	1,180
China	1,500	1,400
Japan	733	634
Singapore	558	506
South Korea	404	359
Indonesia	199	125
Philippines	166	130
India	152	147
Taiwan	148	211
Thailand	140	138
Rest of Asia	380	243
Asia	4,380	3,893
Africa	587	406
Australasia	417	415
	21,207	18,909

138

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 Segmental analysis continued

Order backlog

Contracted consideration, translated at the estimated long-term exchange rates, that is expected to be recognised as revenue when

performance obligations are satisfied in the future (referred to as order backlog) is as follows:

		2025			2024
	Within five years	After five years	Total	Within five years	After five years	Total
	£bn	£bn	£bn	£bn	£bn	£bn
Civil Aerospace	29.2	35.4	64.6	29.7	30.2	59.9
Defence	14.1	3.3	17.4	14.0	3.4	17.4
Power Systems	5.9	0.2	6.1	4.7	0.1	4.8
All Other Businesses	–	–	–	–	–	–
	49.2	38.9	88.1	48.4	33.7	82.1

The parties to these contracts have approved the contract and customers do not have a unilateral enforceable right to terminate the contract

without compensation. The Group excludes Civil Aerospace OE orders (for deliveries beyond the next seven to 12 months) that customers have

placed where they retain a right to cancel. The Group’s expectation based on historical experience is that these orders will be fulfilled. Civil

Aerospace order backlog has increased by £4.7bn, this is due to new aftermarket contracts and contract extensions. Other drivers include

commercial optimisation and revenue escalation with major customers. The Civil order backlog will be recognised over the contract term.

The £1.3bn increase within Power Systems is mainly driven by orders for power generation (from the growth in data centres) and governmental,

which will be mainly recognised over the next three years.

Underlying adjustments

			2025				2024
							Profit
			Profit before	Net			before	Net
		Revenue	financing	financing	Taxation	Revenue	financing	financing	Taxation
		£m	£m	£m	£m	£m	£m	£m	£m
Underlying performance		20,059	3,462	(110)	(593)	17,848	2,464	(171)	(282)
Impact of foreign exchange differences
as a result of hedging activities on trading transactions 1	A	1,148	797	499	(328)	1,061	197	190	(97)
Unrealised fair value changes on derivative
contracts held for trading 2	A	–	–	1,328	(333)	–	(6)	(649)	164
Unrealised fair value changes on derivative
contracts held for financing 3	A	–	–	(4)	1	–	–	40	(10)
Exceptional programme credits 4	B	–	83	–	(21)	–	–	–	–
Exceptional transformation and restructuring charges 5	B	–	(44)	–	4	–	(234)	(11)	65
Impairment reversals 6	C	–	179	–	(44)	–	547	–	(157)
Effect of acquisition accounting 7	C	–	(16)	–	3	–	(45)	–	11
Other 8	D	–	7	(55)	12	–	(17)	(87)	27
Gains arising on the disposals of businesses 9	C	–	809	–	(28)	–	16	–	(6)
Impact of tax rate change 10	D	–	–	–	(58)	–	–	–	10
Recognition of deferred tax assets 11	D	–	–	–	286	–	–	–	525
Total underlying adjustments		1,148	1,815	1,768	(506)	1,061	458	(517)	532
Statutory performance per consolidated
income statement		21,207	5,277	1,658	(1,099)	18,909	2,922	(688)	250

A – FX, B – Exceptional, C – M&A and impairment, D – Other

1 The impact of measuring revenues and costs at the average exchange rate during the year and the impact of valuation of assets and liabilities using the year end exchange rate rather

than the achieved rate or the exchange rate that is expected to be achieved by the use of the hedge book increased statutory revenues by £1,148m (2024: £1,061m) and increased profit

before financing and taxation by £797m (2024: £197m). Underlying financing excludes the impact of revaluing monetary assets and liabilities at the year end exchange rate

2 The underlying results exclude the fair value changes on derivative contracts held for trading. These fair value changes are subsequently recognised in the underlying results when the

contracts are settled

3 Includes net fair value loss of £4m (2024: gain of £40m) on any interest rate swaps not designated into hedging relationships for accounting purposes

4 During 2025, contract loss provisions have reduced by £83m (2024: £nil) as a result of amounts released following contractual renegotiations where the original charge was treated as

non-underlying

5 In 2023, the Group announced a major multi-year transformation programme (set out in the 2022 Annual Report). During 2025, the Group incurred charges of £44m related to this

programme (2024: £234m). The charges comprise of advisory fees and transformation office costs £52m (2024: £37m) and severance costs £3m (2024: £68m). These were partly offset by

an £11m reversal of previously recognised costs for impairments, write-offs and closure costs related to the exit of the Group’s advanced air mobility activities (2024: £129m)

6 The Group has assessed the carrying value of its assets and reviewed them for potential impairment and impairment reversal triggers. During 2025, there was an impairment reversal

of intangible assets of £10m (2024 £413m), property, plant and equipment assets of £46m (2024: £nil), right of use assets of £129m (2024: £nil) and contract assets of £nil (2024: £132m).

See note 10, 11, 12 and 13 for further details. Of the £185m reversed, £179m (2024: £132m) was included within cost of sales, and £6m has been included with research and development

costs, see note 3 for further details

7 The effect of acquisition accounting includes the amortisation of intangible assets arising on previous acquisitions

8 Includes interest received of £52m (2024: £78m) on interest rate swaps which are not designated into hedge relationships for statutory purposes from interest payable on an underlying

basis to fair value movement and £6m (2024: charge of £13m) past-service credit on defined benefit schemes

9 An exceptional gain on disposal was recognised as a result of the deconsolidation of Rolls-Royce SMR Limited and the sale of the naval propulsors business during the year. Further

details can be found in note 29

10 Represents the impact to the income statement of the gradual reduction in the German Federal Corporate Income tax rate from 15% to 10%, in 2024 this represented the reduction in the

tax rate on authorised surplus pension charges from 35% to 25% in 2024

11 During 2025, the Group recognised deferred tax assets of £563m (2024: £1,033m) relating to UK tax losses of which £277m (2024: £508m) is included in underlying performance and

£286m (2024: £525m) in non-underlying

139

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

2 Segmental analysis continued

Balance sheet analysis

				Total
	Civil		Power	reportable
	Aerospace	Defence	Systems	segments
At 31 December 2025	£m	£m	£m	£m
Segment assets	20,754	3,582	4,691	29,027
Interests in joint ventures and associates	570	9	34	613
Segment liabilities	(25,932)	(3,523)	(2,404)	(31,859)
Net (liabilities)/assets	(4,608)	68	2,321	(2,219)
Investment in intangible assets, property, plant and equipment, right-of-use assets and joint ventures and associates	766	185	219	1,170
Depreciation, amortisation and impairment	493	73	167	733
At 31 December 2024
Segment assets	19,303	3,495	3,998	26,796
Interests in joint ventures and associates	550	9	33	592
Segment liabilities	(26,621)	(3,322)	(1,969)	(31,912)
Net (liabilities)/assets	(6,768)	182	2,062	(4,524)
Investment in intangible assets, property, plant and equipment, right-of-use assets and joint
ventures and associates	650	164	198	1,012
Depreciation, amortisation and impairment	210	85	199	494

Reconciliation to the balance sheet

	2025	2024
	£m	£m
Segment assets (excluding held for sale)	29,027	26,796
Interests in joint ventures and associates	613	592
All Other Businesses	681	122
Corporate and Inter-segment	(2,286)	(2,227)
Assets held for sale	15	153
Cash and cash equivalents	6,244	5,575
Fair value of swaps hedging fixed rate borrowings	–	154
Deferred and income tax assets	3,535	3,731
Post-retirement scheme surpluses	286	790
Total assets	38,115	35,686
Segment liabilities (excluding held for sale)	(31,859)	(31,912)
All Other Businesses	(62)	(200)
Corporate and Inter-segment	2,286	2,227
Liabilities associated with assets held for sale	(19)	(100)
Borrowings and lease liabilities	(4,272)	(5,132)
Fair value of swaps hedging fixed rate borrowings	(77)	(121)
Deferred and income tax liabilities	(467)	(348)
Post-retirement scheme deficits	(892)	(981)
Total liabilities	(35,362)	(36,567)
Net assets/(liabilities)	2,753	(881)

The carrying amounts of the Group’s non-current assets including investments but excluding financial instruments, deferred tax assets and

post-retirement scheme surpluses/(deficits), by the geographical area in which the assets are located, are as follows:

	2025	2024
	£m	£m
United Kingdom	5,833	4,968
Germany	2,613	2,326
United States	1,482	1,481
Other	731	709
	10,659	9,484

140

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3 Research and development

	2025	2024
	£m	£m
Gross research and development expenditure	(1,417)	(1,475)
Contributions and fees 1	814	700
Net expenditure	(603)	(775)
Capitalised as intangible assets ²	211	263
Amortisation and impairment of capitalised costs 3, 4	(103)	309
Net amount recognised in the income statement	(495)	(203)
Underlying adjustments 4	(2)	(402)
Net underlying cost recognised in the income statement	(497)	(605)

1 Includes £795m (2024: £667m) of government funding

2 R&D capitalised as intangibles is presented net of £11m (2024: £nil) Government funding received

3 See notes 2, 10 and 11 for analysis of amortisation and impairment

4 Underlying adjustments include impact of acquisition accounting, foreign exchange and an impairment reversal of £6m (2024: £413m). Further details can be found in notes 2 and 11

4 Net financing

	2025		2024
	Statutory	Underlying 1	Statutory	Underlying 1
	£m	£m	£m	£m
Interest receivable and similar income 2	271	265	269	266
Net fair value gains on foreign currency contracts	1,335	–	–	–
Net fair value gains on non-hedge accounted interest rate swaps 3	–	–	40	–
Financing on post-retirement scheme surpluses	32	–	37	–
Net foreign exchange gains	499	–	190	–
Financing income	2,137	265	536	266
Interest payable	(302)	(240)	(362)	(273)
Net fair value losses on foreign currency contracts	–	–	(631)	–
Net fair value losses on non-hedge accounted interest rate swaps 3	(4)	–	–	–
Net fair value losses on revaluation of other investments accounted for at FVTPL 4	–	–	(24)	(24)
Foreign exchange differences and changes in forecast payments relating to financial RRSAs	(4)	–	–	–
Net fair value losses on commodity contracts	(7)	–	(18)	–
Financing on post-retirement scheme deficits	(38)	–	(39)	–
Cost of undrawn facilities	(9)	(9)	(17)	(17)
Other financing charges	(115)	(126)	(133)	(123)
Financing costs	(479)	(375)	(1,224)	(437)
Net financing income/(costs)	1,658	(110)	(688)	(171)
Analysed as:
Net interest (payable)/receivable	(31)	25	(93)	(7)
Net fair value gains/(losses) on derivative contracts	1,324	–	(609)	–
Net post-retirement scheme financing	(6)	–	(2)	–
Net foreign exchange gains	499	–	190	–
Net other financing	(128)	(135)	(174)	(164)
Net financing income/(costs)	1,658	(110)	(688)	(171)

1 See note 2 for definition of underlying results

2 Includes interest income on cash balances and short-term deposits of £149m (2024: £188m) and similar income of £122m (2024: £81m) on money market funds

3 The consolidated income statement shows the net fair value loss on any interest rate swaps not designated into hedging relationships for accounting purposes. Underlying financing

reclassifies the realised fair value movements on these interest rate swaps to net interest payable

4 Included in the 2024 financing costs is a £24m charge in relation to the fair value write down of an unlisted investment recorded at fair value through profit or loss (FVTPL)

141

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

5 Taxation

	UK		Overseas		Total
	2025	2024	2025	2024	2025	2024
	£m	£m	£m	£m	£m	£m
Current tax charge for the year	39	30	730	379	769	409
Current tax charge in respect of Pillar Two income taxes	2	2	–	–	2	2
Adjustments in respect of prior years	(9)	–	79	(18)	70	(18)
Current tax	32	32	809	361	841	393
Deferred tax charge for the year	726	265	50	3	776	268
Adjustments in respect of prior years	12	17	(25)	(47)	(13)	(30)
Recognition of deferred tax	(563)	(1,033)	–	–	(563)	(1,033)
Derecognition of advance corporation tax	–	162	–	–	–	162
Deferred tax charge resulting from a decrease in the overseas tax rate	–	–	58	–	58	–
Deferred tax credit resulting from a decrease in the UK tax rate	–	(10)	–	–	–	(10)
Deferred tax	175	(599)	83	(44)	258	(643)
Charged/(credited) in the income statement	207	(567)	892	317	1,099	(250)

Other tax (charges)/credits

			OCI		Equity
		Items that will not be	Items that will be
	reclassified		reclassified
	2025	2024	2025	2024	2025	2024
	£m	£m	£m	£m	£m	£m
Deferred tax:
Movement in post-retirement schemes	115	61	–	–	–	–
Cash flow hedge	–	–	3	(1)	–	–
Net investment hedge	–	–	2	(2)	–	–
Share-based payments – direct to equity	–	–	–	–	76	71
Other tax credits/(charges)	115	61	5	(3)	76	71

Tax reconciliation

	2025	2024
	£m	£m
Profit before taxation	6,935	2,234
Less share of profits of joint ventures and associates (note 14)	(71)	(137)
Profit before taxation excluding joint ventures and associates	6,864	2,097
Nominal tax charge at UK corporation tax rate 25% (2024: 25%)	1,716	524
Overseas rate differences 1	40	27
US state taxes	18	23
Exempt gain on disposal of businesses 2	(185)	–
Tax de-grouping charge 3	–	102
Other permanent differences 4	5	12
Tax losses and other temporary differences not recognised in deferred tax 5	11	3
Derecognition of deferred tax	–	30
Benefit arising from previously unrecognised other temporary differences 6	(27)	(42)
Recognition of deferred tax 7	(563)	(1,033)
Utilisation of previously unrecognised UK tax losses	(31)	–
Adjustments in respect of prior years	57	(48)
Derecognition of advance corporation tax 8	–	162
Increase in deferred taxes resulting from a change in the overseas tax rate 9	58	–
Decrease in deferred taxes resulting from a change in the UK tax rate 10	–	(10)
	1,099	(250)
Underlying items (note 2)	593	282
Non-underlying items	506	(532)
	1,099	(250)

1 Overseas rate differences mainly relate to tax on profits or losses in countries such as Germany

2 Relates primarily to deconsolidation of Rolls-Royce SMR Limited

3 The tax de-grouping charge in 2024 arose on the dilution of the shareholding in Rolls-Royce SMR Limited to below 75%

4 Includes £2m (2024:£2m) relating to Pillar two income taxes

5 Relates to tax losses not recognised

6 Relates to foreign exchange derivatives

7 The recognition of deferred tax relates to UK tax losses

8 Advance corporation tax was de-recognised in 2024 on the basis that payment of cash dividends will prevent the utilisation

9 Represents the impact to the income statement of the gradual reduction in the German Federal corporate income tax rate from 15% to 10%

10 Represents the impact to the income statement of the reduction in the tax rate on authorised surplus pension charges from 35% to 25% in 2024

142

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

5 Taxation continued

Deferred taxation assets and liabilities

	2025	2024
	£m	£m
At 1 January	3,429	2,668
Amount (charged)/ credited to income statement	(258)	643
Amount credited to OCI	117	59
Amount credited/(charged) to hedging reserves	3	(1)
Amount credited to equity	76	71
Exchange differences	(8)	(11)
At 31 December	3,359	3,429
Deferred tax assets	3,460	3,660
Deferred tax liabilities	(101)	(231)
	3,359	3,429

The analysis of the deferred tax position is as follows:

		Recognised
		in income	Recognised	Recognised	Exchange	At
	At 1 January	statement	in OCI	in equity	differences	31 December
	£m	£m	£m	£m	£m	£m
2025
Intangible assets	(613)	(8)	–	–	(16)	(637)
Property, plant and equipment	142	(80)	–	–	8	70
Other temporary differences 1	874	(7)	5	13	(1)	884
Net contract liabilities	63	(3)	–	–	–	60
Pensions and other post-retirement scheme benefits	(54)	(23)	115	–	(2)	36
Foreign exchange and commodity financial assets
and liabilities	488	(506)	–	–	2	(16)
Losses	2,481	420	–	63	–	2,964
R&D credit	48	(51)	–	–	1	(2)
	3,429	(258)	120	76	(8)	3,359
2024
Intangible assets	(431)	(191)	–	–	9	(613)
Property, plant and equipment	229	(87)	–	–	–	142
Other temporary differences 1	752	77	(3)	62	(14)	874
Net contract liabilities	60	3	–	–	–	63
Pensions and other post-retirement scheme benefits	(123)	10	61	–	(2)	(54)
Foreign exchange and commodity financial assets and liabilities	451	40	–	–	(3)	488
Losses	1,489	984	–	9	(1)	2,481
R&D credit	79	(31)	–	–	–	48
Advance corporation tax 2	162	(162)	–	–	–	–
	2,668	643	58	71	(11)	3,429

1 Other temporary differences mainly relate to the deferral of relief for interest expenses and share based payments in the UK and revenue recognised earlier under local GAAP compared

to IFRS in Germany. The amount recognised in the income statement includes a £1m credit (2024: £8m credit) relating to share-based payments

2 Prior to 1999 advance corporation tax (“ACT”) was paid to the UK Tax Authority when cash dividends were paid by the Group. This was a payment on account which was available to offset

against UK corporation tax liabilities. Any unused balance remaining after 1999 can be carried forward indefinitely and utilised against future UK corporation tax liabilities. See page 144

for further details

143

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

5 Taxation continued

Unrecognised deferred tax assets

	2025	2024
	£m	£m
Advance corporation tax	181	181
UK losses	5	629
Foreign exchange and commodity financial assets and liabilities	–	27
Losses and other unrecognised deferred tax assets	54	47
Deferred tax not recognised on unused tax losses and other items on the basis that future economic benefit
is uncertain	240	884

Gross amount and expiry of losses and other deductible temporary differences for which no deferred tax asset has been recognised

			2025				2024
	Total gross losses		Foreign exchange		Total gross losses		Foreign exchange
	and deductible		and commodity		and deductible		and commodity
	temporary		financial assets		temporary		financial assets
	differences	UK losses	and liabilities	Other losses	differences	UK losses	and liabilities	Other losses
	£m	£m	£m	£m	£m	£m	£m	£m
Expiry within five years	178	–	–	178	75	–	–	75
Expiry within six to 30
years	512	–	–	512	218	–	–	218
No expiry	94	18	–	76	2,698	2,515	107	76
	784	18	–	766	2,991	2,515	107	369

Advance corporation tax was derecognised in 2024 following the Group’s announcement to reinstate shareholder distributions via cash

dividends. In addition to the gross balances shown above, advance corporation tax of £181m (2024: £181m) has not been recognised as a result of

the assessment performed considering the time period over which this could be recovered, when taking into account both shadow and surplus

advance corporation tax. Advance corporation tax has no expiry. See below for developments following the 2025 Autumn Budget.

Of the total deferred tax asset of £3,460m, £2,835m (2024: £3,099m) relates to the UK and is made up as follows:

— £2,954m (2024: £2,472m) relating to tax losses;

— £(40)m (2024: £425m) arising on unrealised losses on derivative contracts; and

— £(79)m (2024: £202m) relating to other deductible temporary differences, in particular tax depreciation and relief for interest expenses.

The UK deferred tax assets primarily arise in Rolls-Royce plc and have been recognised based on the expectation that the business will

generate taxable profits and tax liabilities in the future against which the losses and deductible temporary differences can be utilised.

Most of the UK tax losses relate to the Civil Aerospace large engine business which makes initial losses through the investment period of a

programme and then makes a profit through its contracts for services. The programme lifecycles are typically in excess of 30 years.

Deferred tax assets are recognised only to the extent it is probable that future taxable profits will be available against which the assets can be

utilised. Where necessary, this is based on management’s assumptions and probability assessments relating to the amounts and timing of future

taxable profits. The Directors continually reassess the appropriateness of recovering deferred tax assets, which includes a consideration of

the level of future profits and the time period over which they are recovered. 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 Civil Aerospace

large engine business, to assess the level of future taxable profits.

The recoverability of deferred tax assets has been assessed on the following basis:

— using the most recent UK profit forecasts, covering the next five years which are consistent with external sources on market conditions;

— the long-term forecast profit profile of existing large engine programmes which are typically in excess of 30 years from initial investment to

retirement of the fleet, including the aftermarket revenues earned from airline customers;

— the long-term forecast is adjusted to exclude engine programmes which are in the development stage with no confirmed orders;

— taking into account the risk that regulatory changes could materially impact demand for our products;

— consideration that although all Civil Aerospace large engines are compatible with sustainable fuels, there is a risk that in the longer term

demand will shift towards more sustainable products and solutions;

— the long-term forecast profit and cost profile of the other parts of the UK business;

— taking into consideration past performance and experience, including the fact that the UK business returned to profitability in 2023; and

— reflecting the sustained profitability and continued growing financial resilience of the Group, modelling is based on 100% probability of

a base case forecast (31 December 2024: 75% base case and 25% downside forecast). It also reflects the fact that the Group’s multi-year

transformation continues to deliver despite the current volatility in macro-economic variables and an external environment that remains

challenging, including geopolitical tensions, the uncertainty introduced by tariffs and supply chain challenges. Delivery against the Group’s

strategic initiatives continues to expand the earnings potential of the business.

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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

5 Taxation continued

The assessment takes into account UK tax laws that, in broad terms, restrict the offset of carried forward tax losses to 50% of current year

profits. In addition, the amounts and timing of future taxable profits incorporate:

— the impact of significant Civil Aerospace large engine orders in 2025 and improvements in large engine LTSA business plans;

— latest assessment of the time period over which future probable profits are expected to arise for Civil Aerospace large engine programmes;

— the outcomes of strategic initiatives, including contractual margin improvements and cost reduction;

— the continued growth in Civil Aerospace engine flying hours; and

— management’s assumptions on the impact of macro-economic factors and climate change on the UK business.

The climate change scenarios previously prepared to assess the viability of our business strategy, decarbonisation plans and approach to

managing climate-related risks remain consistent with those at 31 December 2024. The scale up of sustainable aviation fuel is expected to play

a crucial role in reaching net zero carbon emissions by 2050 and the Group has demonstrated that all the commercial aero engines it produces

are compatible for use with sustainable fuels. The impact that this could have on our costs and customer pricing is factored into the deferred tax

assessment. However, benefits that may arise in the future from the development of breakthrough new technologies are not taken into account.

Based on the assessment, the Group has recognised a total deferred tax asset relating to UK tax losses of £2,954m (2024: £2,472m), which

includes the recognition of a further £563m (2024: £1,033m) of previously unrecognised deferred tax asset relating to UK tax losses (of which

£286m is non-underlying and £277m is underlying). This reflects the conclusions that:

— based on current financial results and an improved outlook it is probable that the UK business will generate taxable income and tax

liabilities in the future against which these losses can be utilised; and

— using current forecasts and various scenarios these losses will be used in full within eight-15 years, which is within the expected

programme lifecycles.

As stated above, the ACT balance of £181m remains unrecognised at 31 December 2025. The Group is closely monitoring developments

following the announcement in the 2025 Autumn Budget that the shadow ACT regime will be repealed, effective from 1 April 2026. The

statutory instrument is not yet published so the legislation is not substantially enacted at the balance sheet date. This will be considered for

future accounting periods.

Any future changes in tax law or the structure of the Group could have a significant effect on the use of losses and other deductible temporary

differences, 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 Group is within the scope of the OECD Pillar Two (Global Minimum Tax) model rules, which came into effect from 1 January 2024. For the

period to 31 December 2025, the Group has continued to apply the mandatory exception to recognising and disclosing information about

deferred tax assets and liabilities related to Pillar Two income taxes.

The temporary differences associated with investments in subsidiaries, joint ventures and associates, for which a deferred tax liability has not

been recognised, aggregate to £2,825m (2024: £1,558m). 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.

Impact of recognition of UK deferred tax assets on underlying profit after tax

As outlined above, during the year the Group recognised a further £563m (2024: £1,033m) of previously unrecognised deferred tax asset

relating to UK tax losses (of which £286m (2024: £525m) is non-underlying and £277m (2024: £508m) is underlying). During 2024 the Group fully

derecognised £162m advance corporation tax balance (as an underlying charge). The £277m (2024: net £346m) credit to underlying profit after

tax has been adjusted in the calculation of earnings per share, the proposed dividend payout ratio, and return on capital. This one-off non-cash

adjustment has been made as it would otherwise cause a disproportionate impact on these metrics.

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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

6 Earnings per ordinary share

Basic earnings per ordinary share (EPS) is calculated by dividing the profit 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.

		2025			2024
		Potentially			Potentially
		dilutive share			dilutive share
	Basic	options	Diluted	Basic	options	Diluted
Profit attributable to ordinary shareholders (£m):	5,841		5,841	2,521		2,521
Weighted average number of ordinary shares
(millions)	8,415	33	8,448	8,388	51	8,439
EPS (pence):	69.41	(0.27)	69.14	30.05	(0.18)	29.87

The reconciliation between underlying EPS and basic EPS is as follows:

	2025		2024
	Pence	£m	Pence	£m
EPS/Profit attributable to ordinary shareholders	69.41	5,841	30.05	2,521
Total underlying adjustments to (loss)/profit before taxation (note 2)	(42.58)	(3,583)	0.70	59
Related tax effects	6.01	506	(6.34)	(532)
Adjustment for recognition of deferred tax assets 1	(3.29)	(277)	(4.12)	(346)
Underlying EPS/Underlying profit attributable to ordinary shareholders	29.55	2,487	20.29	1,702
Diluted underlying EPS attributable to ordinary shareholders	29.44		20.17

1 Underlying profit attributable to ordinary shareholders has been adjusted for the one-off non-cash impact of £277m (2024: £346m) related to the recognition of deferred tax assets on

UK tax losses, see note 5 for further details

7 Dividends

	2025	2024
	£m	£m
Dividends provided for or paid during the year	885	–

Ordinary dividends declared and paid in the year ended 31 December 2025 comprised of a final dividend for 2024 of 6.0p per ordinary share

and an interim cash dividend in respect of the first half of 2025 of 4.5p per ordinary share.

The Employee Benefit Trust has currently waived the right to receive dividends on Rolls-Royce Holdings plc shares. This waiver has been

applied to dividends paid in 2025.

The Directors have proposed a final dividend for 2025 of 5 .0p per share (2024: 6.0p), giving a total for the year of 9.5p (2024: 6.0p) including

the interim dividend paid during the year of 4.5p (2024: nil). The expected cost of servicing this final dividend is £419m, for which no liability

has been recognised at the balance sheet date. The final dividend will be paid on 3 June 2026 to shareholders on the register on 24 April 2026.

The election deadline for ordinary shareholders wishing to participate in the Dividend Reinvestment Programme (DRIP) is 15 May 2026, further

details can be obtained from the Company’s Registrar, Equiniti Limited.

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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

8 Auditors’ remuneration

	2025	2024
	£m	£m
Fees payable to the Company’s auditor for the audit of the Company’s annual Financial Statements	3.4	3.9
Fees payable to the Company’s auditor and its associates for the audit of the Company’s subsidiaries
pursuant to legislation	8.4	8.6
Total fees payable for audit services	11.8	12.5
Fees payable to the Company’s auditor and its associates for other services:
Audit related assurance services 1	0.7	0.7
Other assurance services 2	0.1	0.1
Total fees payable to the Company’s auditor and its associates 3	12.6	13.3
Fees payable in respect of the Group’s pension schemes:
Audit	0.1	0.1

1 This includes £0.7m (2024: £0.7m) for the review of the half-year report

2 This includes £0.1m (2024: £0.1m) in respect of agreed upon procedures in respect of levies payable

3 Audit fees for overseas entities are reported at the average exchange rate for the year

9 Employee information

	2025	2024
	Number 1	Number 1
United Kingdom	22,100	21,900
Germany	9,900	10,000
United States	5,300	5,300
Italy	1,000	900
Singapore	700	700
Canada	700	700
India	700	600
China	500	500
Israel	300	300
France	200	200
Rest of world	1,200	1,300
Monthly average number of employees	42,600	42,400
Civil Aerospace	19,400	18,700
Defence	12,800	12,500
Power Systems	10,000	9,900
All Other Businesses 2	200	1,200
Corporate 3	200	100
Monthly average number of employees	42,6 00	42,400

	2025	2024
	Total	Total
	£m	£m
Wages, salaries and benefits	3,107	3,056
Social security costs	437	369
Share-based payments (note 26)	104	136
Pensions and other post-retirement scheme benefits (note 24)	403	387
Group employment costs 4	4,051	3,948

1 Employee numbers are rounded to the nearest hundred

2 Following the decision to exit the Group’s advanced air mobility activities in 2024 and the relinquishment of control of Rolls-Royce SMR Limited on 4 March 2025 the results of those

activities in both 2024 and 2025 have been reported within All Other Business. The employee information above contains two months of Rolls-Royce SMR Limited employee information,

following the relinquishment of control of Rolls-Royce SMR Limited in March 2025 the employee information of Rolls-Royce SMR Limited was not included within the monthly average

number of employees for the Group

3 Corporate consists of employees who do not provide a shared service to the segments. Where corporate functions provide such a service, employees have been allocated to the

segments on an appropriate basis

4 Remuneration of key management personnel is shown in note 28

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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

10 Goodwill

In accordance with the requirements of IAS 36 Impairment of Assets, goodwill is allocated to the Group’s 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:

	Rolls-Royce	Rolls-Royce
	Power	Deutschland
	Systems AG	Ltd & Co KG	Other 1	Total
	£m	£m	£m	£m
Cost:
At 1 January 2024	798	240	63	1,101
Transferred to assets held for sale 2	–	–	(25)	(25)
Exchange differences	(19)	(11)	(1)	(31)
At 31 December 2024	779	229	37	1,045
Transferred from assets held for sale 2	–	–	2	2
Disposals of business	–	–	(2)	(2)
Disposals	–	–	(10)	(10)
Exchange differences	8	11	–	19
At 31 December 2025	787	240	27	1,054
Accumulated amortisation and impairment:
At 1 January 2024	–	3	32	35
Impairment 3	–	–	13	13
Transferred to assets held for sale 2	–	–	(12)	(12)
At 31 December 2024	–	3	33	36
Transferred from assets held for sale 2	–	–	2	2
Disposals of business	–	–	(2)	(2)
Disposals	–	–	(10)	(10)
At 31 December 2025	–	3	23	26
Net book value at:
At 31 December 2025	787	237	4	1,028
At 31 December 2024	779	226	4	1,009

1 Goodwill balances that are not considered to be individually significant were also tested for impairment

2 At 31 December 2024 the Group held for sale the goodwill allocated to the naval propulsors & handling business. During the year goodwill with a net book value of £nil was transferred

into and out of assets held for sale relating to the naval propulsors business and naval handling business respectively. The assets and liabilities of the naval propulsors business were

disposed of on 1 July 2025 and the assets of the naval handling business are held for sale at 31 December 2025, see note 29 for further details

3 During 2024 the Group impaired £13m of goodwill due to the closure of its electrical advanced air mobility activities

The Directors have reviewed the presentation of the Balance Sheet during the year and believe that presenting goodwill separately from the

remaining intangible assets is relevant to an understanding of the entity’s financial position and provides more useful information to the users

of the Annual Report and Financial Statements. The comparative balance at 31 December 2024 has also been represented for comparability.

The carrying amount of goodwill allocated across multiple CGUs is not significant in comparison with the Group’s total carrying amount

of goodwill.

Goodwill has been tested for impairment during 2025 on the following basis:

— the carrying values of goodwill have been assessed by reference to the value in use;

— these have been estimated using cash flows from the most recent forecasts prepared by the Directors, 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 growth rates of 2% which reflects the products, industries and countries in which

the relevant CGU or group of CGUs operate. Inflation has been included based on contractual commitments where relevant. Where general

inflation assumptions have been required, these have been estimated based on externally sourced data. General inflation assumptions of

2% to 3% have been included in the forecasts, depending on the nature and geography of the flows;

— the key forecast assumptions for the impairment tests are the discount rate and the cash flow projections, in particular the programme

assumptions (such as sales volumes and product costs), the impact of foreign exchange rates on the relationship between selling prices and

costs, and growth rates. Impairment tests are performed using prevailing exchange rates; and

— the Group believes there are significant business growth opportunities to come from Rolls-Royce playing a leading role in the transition to

net zero as we develop and deliver the products that will support our customers through the energy transition across multiple markets. At

the same time climate change poses potentially significant risks. The assumptions used by the Directors are based on past experience and

external sources of information. Based on the climate scenarios prepared, the forecasts do not assume a significant deterioration of demand

for Civil Aerospace (including Rolls-Royce Deutschland) programmes given that all commercial aero engines are compatible with sustainable

fuels. Similarly, the majority of the portfolio in Power Systems is now compatible with alternative and more sustainable fuels. The investment

required to ensure our new products will be compatible with net zero operation, and to achieve net zero Scope 1 + 2 GHG emission

commitments is reflected in the forecasts used.

148

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

10 Goodwill continued

A 1.5°C scenario has been prepared using key data points from external sources, including Oxford Economic Global Climate Service and

Databank. This scenario has been used as the basis of a sensitivity. It is assumed that governments adopt stricter product and behavioural

standards and measures that result in higher carbon pricing. Under these conditions, it is assumed that markets are willing to pay for low

carbon solutions and that there is an economic return from strategic investments in low carbon alternatives. The sensitivity has considered

the likelihood of demand changes for our products based on their relative fuel efficiency in the marketplace and the probability of alternatives

being introduced earlier than currently expected. The sensitivity also reflects the impact of a broad range of potential costs imposed by policy

or regulatory interventions (through carbon pricing). This sensitivity does not indicate the need for an impairment charge.

The principal assumptions for the impairment testing of goodwill balances that are considered to be individually significant are:

Cash-generating unit (CGU) or group of CGUs

							Downside scenario
	Primary operating			Nominal pre-tax discount rate	Growth rate 2		weighting 3
	segment	Key trading assumptions 1	2025	2024	2025	2024	2025	2024
Rolls-Royce Power	Power Systems	e.g. volume of equipment
Systems AG		deliveries; pricing
		achieved; cost escalation	10.7%	10.2%	2%	2%	25%	25%
Rolls-Royce	Civil Aerospace	e.g. volume of engine
Deutschland Ltd		deliveries, flying hours
& Co KG		of installed fleet,
		cost escalation	11.7%	12.6%	2%	2%	25%	25%

1 Trading assumptions are based on current and known future programmes, estimates of market share and long-term economic forecasts

2 Growth rate at which cash flows beyond the five-year forecasts are assumed to grow

3 Weighting of the plausible downside scenario in relation to macro-economic factors

The Directors do not consider that any reasonably possible changes in the key assumptions (including taking consideration of the climate-

related risks above) would cause the value in use of the goodwill to fall below its carrying value.

11 Intangible assets

	Certification	Development	Customer
	costs	expenditure	relationships	Software 1	Other 2	Total
	£m	£m	£m	£m	£m	£m
Cost:
At 1 January 2024	930	3,763	498	1,004	699	6,894
Additions	–	263	–	96	8	367
Transferred to assets held for sale 3	–	(4)	(4)	(1)	–	(9)
Disposals 4	–	(3)	(13)	(7 7)	(2)	(95)
Exchange differences	(1)	(63)	(12)	(4)	(17)	(97)
At 31 December 2024	929	3,956	469	1,018	688	7,060
Additions	31	222	–	105	6	364
Transferred from assets held for sale 3	–	3	4	–	(4)	3
Disposals 5	–	(422)	(415)	(26)	(122)	(985)
Exchange differences	2	62	2	–	16	82
At 31 December 2025	962	3,821	60	1,097	584	6,524
Accumulated amortisation and impairment:
At 1 January 2024	467	1,976	433	718	357	3,951
Charge for the year 6	27	96	35	78	19	255
Impairment 7	–	(405)	–	–	17	(388)
Transferred to assets held for sale 3	–	(4)	(4)	(1)	–	(9)
Disposals 4	–	–	(13)	(69)	(2)	(84)
Exchange differences	(1)	(37)	(10)	(3)	(7)	(58)
At 31 December 2024	493	1,626	441	723	384	3,667
Charge for the year 6	31	107	7	68	22	235
Impairment 8	(3)	(4)	–	–	13	6
Transferred from assets held for sale 3	–	3	4	–	(4)	3
Disposals 5	–	(422)	(415)	(23)	(122)	(982)
Exchange differences	1	18	–	–	6	25
At 31 December 2025	522	1,328	37	768	299	2,954
Net book value at:
At 31 December 2025	440	2,493	23	329	285	3,570
At 31 December 2024	436	2,330	28	295	304	3,393

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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

11 Intangible assets continued

1 Includes £160m (2024: £100m) of software under course of construction which is not amortised

2 Other intangible assets includes trademarks, brands and the costs incurred testing and analysing engines with the longest time in service (fleet leader engines) to gather technical

knowledge on engine endurance which will improve reliability and enable the Group to reduce the costs of meeting LTSA obligations

3 At 31 December 2024 the Group held for sale the assets and liabilities of the naval propulsors & handling business. During the year intangible assets with a net book value of £nil was

transferred into and out of assets held for sale relating to the naval propulsors business and naval handling business respectively. The assets and liabilities of the naval propulsors

business were disposed of on 1 July 2025 and the assets of the naval handling business are held for sale at 31 December 2025, see note 29 for further details

4 During 2024 the Group disposed of its lower power range engine business based in Power Systems

5 During 2025 the majority of disposals relate to the derecognition of assets that are fully amortised and where no future economic benefits are expected from their use or disposal

6 Charged to cost of sales and commercial and administrative costs except development costs, which are charged to research and development costs

7 The 2024 impairment charge included £17m of other impairment (related to IP) resulting from the closure of the Group’s electrical advanced air mobility activities. It also included

the reversal of a Civil Aerospace programme asset impairment recognised in 2020, with £413m credited to research and development within the non-underlying income statement

8 The 2025 impairment charge includes a partial impairment reversal of a Civil Aerospace – Trent programme asset that had been fully impaired by 30 June 2020. A reversal of £10m

has been credited, with £4m recognised in cost of sales and £6m in research and development within the non-underlying income statement. See further details below

At 31 December 2025, the Group had expenditure commitments for software of £24m (2024: £28m).

The carrying amount of intangible assets allocated across multiple CGUs is not significant in comparison with the Group’s total carrying amount

of goodwill or intangible assets with indefinite useful lives.

Material intangible assets

The carrying amount and the residual life of the material intangible assets for the Group is as follows:

		Net book value
		2025	2024
	Residual life 1	£m	£m
Trent programme intangible assets 2	1–15 years	1,993	2,001
Business aviation programme intangible assets 3	9–15 years	814	674
Intangible assets related to Power Systems 4		323	309
		3,130	2,984

1 Residual life reflects the remaining amortisation period of those assets where amortisation has commenced. As per page 129, the amortisation period of 15 years will commence on those

assets which are not being amortised as the units are delivered

2 Included within the Trent programmes are the Trent 1000, Trent 7000 and Trent XWB

3 Included within business aviation are the Pearl 700, Pearl 15 and Pearl 10X

4 Includes £112m (2024: £107m) in respect of a brand intangible asset which is not amortised. Remaining assets are amortised over a range of three to 15 years

Intangible assets (including programme intangible assets) have been reviewed for impairment in accordance with IAS 36 Impairment of Assets.

Assessments have considered potential triggers of impairment such as external factors including climate change, significant programme changes

and by analysing latest management forecasts against those prepared in 2024 to identify any change in performance. Where a trigger event has

been identified, an impairment test has been carried out. Where an impairment test was required, it was 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 the Directors, which are consistent with past experience and external sources of information on market conditions

over the lives of the respective programmes; and

— the key assumptions underpinning cash flow projections are based on estimates of product performance related estimates, future market

share and pricing and cost for uncontracted business. Climate-related risks are considered when making these estimates consistent with the

assumptions above.

An intangible asset impairment reversal of £10m was recognised together with a property, plant and equipment impairment reversal of £46m

(see note 12) and a lease right-of-use asset impairment reversal of £129m (see note 13) being recognised in cost of sales (£179m) and research and

development (£6m) in the year as follows:

			Impairment reversal
		Property, plant	Right-of-use		Pre-tax nominal
	Intangible assets	and equipment	assets	Total	discount rate at
	£m	£m	£m	£m	30 June 2025 1
Civil Aerospace – Trent programme assets	10	46	129	185	12.0%

1 The equivalent pre-tax nominal discount rate in 2020 when the impairment was recognised was 11.0%

The recoverable amount calculated includes passage of time benefits in addition to those from the impairment reversal trigger drivers

described above and has resulted in a partial impairment reversal. In making this assessment, the Directors have considered a range of

sensitivities in relation to the aftermarket returns, cost increases and discount rates.

There have been no other individually material impairment charges or reversals recognised during the year (2024: reversal of £413m).

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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

12 Property, plant and equipment

	Land and	Plant and	Aircraft and	In course of
	buildings	equipment	engines	construction	Total
	£m	£m	£m	£m	£m
Cost:
At 1 January 2024	1,883	4,962	1,006	412	8,263
Additions	21	129	108	245	503
Transferred to assets held for sale 1	(33)	(51)	–	(2)	(86)
Disposals/write-offs	(23)	(142)	(17)	(4)	(186)
Reclassifications within PPE 2	46	67	3	(116)	–
Reclassification from right-of-use assets	11	–	–	–	11
Exchange differences	(23)	(55)	(1)	–	(79)
At 31 December 2024	1,882	4,910	1,099	535	8,426
Additions	56	178	163	273	670
Disposal of businesses	–	(5)	–	–	(5)
Disposals/write-offs	(19)	(284)	(5)	(8)	(316)
Reclassifications within PPE 2	42	104	1	(147)	–
Exchange differences	–	1	(8)	(17)	(24)
At 31 December 2025	1,961	4,904	1,250	636	8,751
Accumulated depreciation and impairment:
At 1 January 2024	709	3,384	434	8	4,535
Charge for the year 3	77	249	49	–	375
Impairment	2	23	–	–	25
Transferred to assets held for sale 1	(11)	(24)	–	–	(35)
Disposals/write-offs	(16)	(123)	(10)	–	(149)
Reclassifications within PPE 2	16	(16)	–	–	–
Exchange differences	(9)	(39)	(1)	–	(49)
At 31 December 2024	768	3,454	472	8	4,702
Charge for the year 3	71	239	70	–	380
Impairment 4	–	2	(44)	–	(42)
Disposal of businesses	–	(2)	–	–	(2)
Disposals/write-offs	(14)	(278)	(4)	–	(296)
Exchange differences	(3)	2	(3)	–	(4)
At 31 December 2025	822	3,417	491	8	4,738
Net book value at:
At 31 December 2025	1,139	1,487	759	628	4,013
At 31 December 2024	1,114	1,456	627	527	3,724

1 At 31 December 2024 the Group held for sale the assets and liabilities of its naval propulsors & handling business. The assets and liabilities of the naval propulsors business were disposed

of during the year and the assets of the naval handling business are held for sale at 31 December 2025, see note 29 for further details

2 Includes reclassifications from assets under construction into the other categories of property, plant and equipment when the assets become available for use

3 Depreciation is charged to cost of sales and commercial and administrative costs or included in the cost of inventory as appropriate

4 The carrying values of property, plant and equipment have been assessed during the year in line with IAS 36 Impairment of Assets. Material items of plant and equipment and aircraft

and engines are assessed for impairment together with other assets used in individual programmes – see potential triggers considered in notes 10 and 11. Land and buildings are generally

used across multiple programmes and are considered based on future expectations of the use of the site, which includes any implications from climate-related risks. During the year, a

partial impairment reversal of £46m has been recognised within cost of sales (2024: £nil), as outlined within notes 2, 10 and 11

Property, plant and equipment includes:

		2025			2024
	Land and	Plant and	Aircraft and	Land and	Plant and	Aircraft and
	buildings	equipment	engines	buildings	equipment	engines
	£m	£m	£m	£m	£m	£m
Assets held for use in leases where the Group is the lessor:
Cost	6	36	1,018	6	36	861
Depreciation	(4)	(23)	(366)	(4)	(22)	(372)
Net book value	2	13	652	2	14	489

	2025	2024
	£m	£m
Capital expenditure commitments	252	177
Cost of fully depreciated assets	2,183	2,286

The Group’s share of equity accounted entities’ capital commitments is £100m (2024: £69m).

151

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

13 Right-of-use assets

	Land and	Plant and	Aircraft and
	buildings	equipment	engines	Total
	£m	£m	£m	£m
Cost:
At 1 January 2024	513	194	1,864	2,571
Additions/modification of leases	28	73	37	138
Transferred to assets held for sale 1	(2)	(1)	–	(3)
Disposals	(8)	(17)	–	(25)
Reclassifications to PPE	(11)	–	–	(11)
Exchange differences	(3)	(3)	(4)	(10)
At 31 December 2024	517	246	1,897	2,660
Additions/modification of leases	79	50	49	178
Disposal of businesses	(2)	–	–	(2)
Disposals	(11)	(49)	(54)	(114)
Exchange differences	(14)	1	3	(10)
At 31 December 2025	569	248	1,895	2,712
Accumulated depreciation and impairment:
At 1 January 2024	259	109	1,298	1,666
Charge for the year 2	42	43	172	257
Impairment 3	3	2	3	8
Transferred to assets held for sale 1	(2)	–	–	(2)
Disposals	(7)	(17)	–	(24)
Exchange differences	(1)	(2)	(3)	(6)
At 31 December 2024	294	135	1,470	1,899
Charge for the year 2	47	47	193	287
Impairment 3	–	–	(129)	(129)
Disposal of businesses	(1)	–	–	(1)
Disposals	(11)	(36)	(54)	(101)
Exchange differences	(6)	2	2	(2)
At 31 December 2025	323	148	1,482	1,953
Net book value:
At 31 December 2025	246	100	413	759
At 31 December 2024	223	111	427	761
Right-of-use assets held for use in operating leases where the Group is the lessor:
Cost	18	–	1,895	1,913
Depreciation	(9)	–	(1,482)	(1,491)
Net book value at 31 December 2025	9	–	413	422
Cost	18	–	1,897	1,915
Depreciation	(8)	–	(1,470)	(1,478)
Net book value at 31 December 2024	10	–	427	437

1 At 31 December 2024 the Group held for sale the assets and liabilities of the naval propulsors & handling business. The assets and liabilities of the naval propulsors business were

disposed of on 1 July 2025 and the assets of the naval handling business are held for sale at 31 December 2025, see note 29 for further detail

2 Depreciation is charged to cost of sales and commercial and administrative costs as appropriate

3 The carrying values of right-of-use assets have been assessed during the year in line with IAS 36 Impairment of Assets. Material items of plant and equipment and aircraft and engines are

assessed for impairment together with other assets used in individual programmes – see potential triggers considered in notes 10 and 11. Land and buildings are generally used across

multiple programmes and are considered based on future expectations of the use of the site (which includes any implications from climate-related risks). During the year, a partial

impairment reversal of £129m has been recognised within cost of sales (2024: charge of £8m) as outlined within notes 2, 10 and 11

152

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

14 Investments

Composition of the Group

The entities contributing to the Group’s financial results are listed on pages 187 to 190.

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.

The Group does not have any non-wholly owned subsidiaries that have a material non-controlling interest.

Equity accounted and other investments

	Equity accounted	Other 1	Total
	Joint ventures
	£m	£m	£m
At 1 January 2024	479	31	510
Additions 2	17	–	17
Impairment	(4)	–	(4)
Share of retained profit 3	95	–	95
Reclassification of deferred profit to deferred income 4	(2)	–	(2)
Revaluation of other investments accounted for as FVOCI	–	(2)	(2)
Revaluation of other investments accounted for as FVTPL 5	–	(24)	(24)
Exchange differences	11	–	11
Share of OCI	(4)	–	(4)
At 1 January 2025	592	5	597
Transfer from subsidiary to joint venture 6	732	–	732
Additions 2	56	–	56
Share of retained loss 3	(32)	–	(32)
Reclassification of deferred profit to deferred income 4	2	–	2
Revaluation of other investments accounted for as FVOCI	–	(1)	(1)
Exchange differences	(66)	–	(66)
Share of OCI	1	–	1
At 31 December 2025	1,285	4	1,289

1 Other investments includes unlisted investments of £nil (2024: £nil) and listed investments of £4m (2024: £5m)

2 Additions relates to investments of £52m (2024: £nil) related to Rolls-Royce SMR Limited following its deconsolidation in March 2025. Of this, £15m was recognised in July 2025 due to

a change in shareholding resulting from an additional equity investment made by ČEZ Group (ČEZ), a further £37m was recognised in December 2025 due to the purchase of shares by

Rolls-Royce Plc from an existing investor. Further details can be found in note 29. The remaining £4m (2024: £17m) of additions relates to the joint venture, Beijing Aero Engine Services

Company Limited

3 See table below

4 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

5 During 2024 the Group wrote down the value of an unlisted investment. This charge was recognised within net financing

6 In March 2025, an equity-accounted investment of £732m was recognised at fair value as a result of the deconsolidation of Rolls-Royce SMR Limited. See note 29 for further information

Reconciliation of share of retained (loss)/profit to the income statement and cash flow statement:

	2025	2024
	£m	£m
Share of results of joint ventures and associates ¹	71	137
Adjustments for intercompany trading 2	(15)	35
Share of results of joint ventures and associates to the Group	56	172
Dividends paid by joint ventures and associates to the Group (cash flow statement)	(88)	(7 7)
Share of retained (loss)/profit above	(32)	95

1 The results to 31 December 2025 include ten months of the Group’s share of the results of Rolls-Royce SMR Limited

2 During the year, the Group sold spare engines to Rolls-Royce & Partners Finance, a joint venture and subsidiary of Alpha Partners Leasing Limited. The Group’s share of the profit on

these sales is deferred and released to match the depreciation of the engines in the joint venture’s financial statements. In 2025 profit deferred on the sale of engines was higher than

(2024: lower than) the release of that deferred in prior years

153

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

14 Investments continued

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%
Rolls-Royce SMR Limited (SMR)	UK	Small modular reactors	57.8%

Summarised financial information of the Group’s individually material joint ventures is as follows:

	APL		HAESL		SAESL		SMR 1
	2025	2024	2025	2024	2025	2024
	£m	£m	£m	£m	£m	£m	2025
Revenue	518	400	3,674	4,017	3,505	2,469	2
Profit/(loss) and total comprehensive income/
(expense) for the year	168	114	93	70	48	46	(193)
Dividends paid during the year	(14)	(63)	(78)	(69)	–	–	–
Profit/(loss) for the year included the following:
Depreciation and amortisation	(154)	(150)	(13)	(11)	(16)	(18)	(2)
Interest income	13	12	–	–	5	8	6
Interest expense	(127)	(112)	(8)	(8)	(2)	(1)	–
Income tax (expense)/credit	(62)	(41)	(16)	(17)	(5)	(3)	12
Current assets	343	345	515	1,129	1,291	1,154	70
Non-current assets 2	3,776	3,506	97	100	152	133	1,032
Current liabilities	(242)	(360)	(331)	(895)	(1,019)	(950)	(57)
Non-current liabilities 2	(2,955)	(2,662)	(45)	(95)	(67)	(8)	(243)
Net assets	922	829	236	239	357	329	802
Included in the above:
Cash and cash equivalents	192	190	7	4	77	129	52
Current financial liabilities 3	(114)	(244)	(100)	(10)	–	–	–
Non-current financial liabilities 3	(2,371)	(2 ,134)	(37)	(86)	(67)	(8)	–
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%	57.8%
Group share of net assets above	461	415	118	120	179	165	463
Goodwill	–	–	35	37	10	11	209
Adjustments for intercompany trading	(404)	(386)	4	(7)	(3)	(4)	–
Included in the balance sheet	57	29	157	150	186	172	672

1 In March 2025, an equity-accounted investment of £732m was recognised at fair value as a result of the deconsolidation of Rolls-Royce SMR Limited. A notional purchase price allocation

(PPA) exercise has been undertaken that has identified and valued the assets and liabilities of the joint venture as if the Group had acquired a business. The majority of the value of

the investment has been attributed to development expenditure related to Rolls-Royce SMR Limited’s investment in its products. Goodwill, which has not been impaired, relates to the

expected future growth of the business

2 Non-current assets includes £1,006m of intangible assets identified on acquisition relating to development expenditure and non-current liabilities including £(239)m of associated

deferred tax liabilities

3 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		Total
		2025	2024	2025	2024	2025	2024
		£m	£m	£m	£m	£m	£m
Profit and total comprehensive income for the year		36	115	34	18	70	133
Assets:	Non-current assets	2,609	1,870	433	245	3,042	2,115
Liabilities: 1	Current assets	1,115	1,314	605	632	1,720	1,946
	Current liabilities	(829)	(1,102)	(703)	(536)	(1,532)	(1,638)
	Non-current liabilities	(1,674)	(1,382)	(98)	(86)	(1,772)	(1,468)
Group adjustment for goodwill		254	48	–	–	254	48
Adjustment for intercompany trading		(403)	(397)	(24)	(14)	(427)	(411)
Included in the balance sheet		1,072	351	213	241	1,285	592
1	Liabilities include borrowings of:	(1,345)	(1,241)	(267)	(113)	(1,612)	(1,354)

154

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

15 Inventories

	2025	2024
	£m	£m
Raw materials	699	544
Work in progress	1,932	1,715
Finished goods	3,097	2,833
	5,728	5,092
Inventories stated at net realisable value	236	232
Amount of inventory write-down	113	56
Reversal of inventory write-down	75	15

16 Trade receivables and other assets

	Current		Non-current 1		Total
	2025	2024	2025	2024	2025	2024
	£m	£m	£m	£m	£m	£m
Trade receivables	3,046	2,917	78	138	3,124	3,055
Prepayments	1,083	829	78	89	1,161	918
RRSA prepayment for parts 2	570	486	1,201	1,182	1,771	1,668
Receivables due on RRSAs	1,114	1,118	91	119	1,205	1,237
Amounts owed by joint ventures and associates	706	894	7	2	713	896
Other taxation and social security receivable	184	215	2	2	186	217
Costs to obtain contracts with customers 3	2	11	176	124	178	135
Other receivables and similar assets 4	532	529	76	58	608	587
	7,237	6,999	1,709	1,714	8,946	8,713
Trade receivables and other assets are analysed as follows:
Financial instruments (note 22):
Trade receivables and similar items					5,041	5,188
Other non-derivative financial assets					484	366
Non-financial instruments					3,421	3,159
					8,946	8,713

1 Trade receivables and other assets have been presented on the face of the balance sheet in line with the operating cycle of the business. Further disclosure is included in the table above

and relates to amounts not expected to be received in the next 12 months, in line with specific customer payment arrangements, including customers on payment plans

2 These amounts reflect the contractual share of EFH flows and original equipment deposits from customers paid to RRSA partners in return for the supply of parts in future periods under

long-term supply contracts. During the year £597m (2024: £262m) has been charged to cost of sales in relation to parts supplied and used in the year

3 These are amortised over the term of the related contract in line with engine deliveries, resulting in amortisation of £10m (2024: £8m) in the year. There were no impairment losses

4 Other receivables includes unbilled recoveries relating to completed overhaul activity where the right to consideration is unconditional

The Group has adopted the simplified approach to provide for expected credit losses (ECLs), measuring the loss allowance at a probability

weighted amount incorporated by using credit ratings which are publicly available, or through internal risk assessments derived using the

customer’s latest available financial information.

The ECLs for trade receivables and other financial assets has decreased by £7m to £232m (2024: decreased by £3m to £239m).

The assumptions and inputs used for the estimation of the ECLs are disclosed in the table below:

		2025			2024
	Trade receivables			Trade receivables
	and other			and other
	financial assets	Loss allowance	Average ECL rate	financial assets	Loss allowance	Average ECL rate
	£m	£m	%	£m	£m	%
Credit rating BBB- and above ¹	1,519	(24)	2%	2,179	(74)	3%
Credit rating below BBB- ¹	629	(72)	11%	28	(4)	14%
Without credit rating	3,609	(136)	4%	3,586	(161)	4%
	5,757	(232)	4%	5,793	(239)	4%

1 During the year, there has been a change to the classification used for investment gradings. In 2024, the ratings were reported using credit ratings C and above, credit ratings C and

below and without credit rating. In 2025, the ratings have been reported using credit rating BBB- and above, credit rating below BBB- and without credit rating

155

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

16 Trade receivables and other assets continued

The movements of the Group ECLs provision are as follows:

	2025	2024
	£m	£m
At 1 January	(239)	(242)
Increases in loss allowance recognised in the income statement during the year	(83)	(130)
Loss allowance utilised	18	11
Releases of loss allowance previously provided	55	116
Transferred to assets held for sale	–	1
Exchange differences	17	5
At 31 December	(232)	(239)

17 Contract assets and liabilities

	Current		Non-current 1		Total 2
	2025	2024	2025	2024	2025	2024
	£m	£m	£m	£m	£m	£m
Contract assets
Contract assets with customers	561	886	1,019	598	1,580	1,484
Participation fee contract assets	31	38	286	291	317	329
	592	924	1,305	889	1,897	1,813

1 Contract assets have been presented on the face of the balance sheet in line with the operating cycle of the business. Further disclosure of contract assets is provided in the table above,

which shows within current the element of consideration that will become unconditional in the next year

2 Contract assets are classified as non-financial instruments

The balance includes £973m (2024: £955m) Civil Aerospace LTSA assets and £477m (2024: £381m) Defence LTSA assets.

The increase in the Civil Aerospace balance is driven by revenue recognised (when performance obligations have been completed during

the year) being greater than the amount invoiced on those contracts that have a contract asset balance. Revenue recognised relating to

performance obligations satisfied in previous years was £36m which reduced the contract asset (2024: reduction of £42m) in Civil Aerospace.

No impairment losses in relation to these contract assets (2024: none) have arisen during the year.

Participation fee contract assets have decreased by £12m (2024: increased by £102m) primarily due to amortisation of £(20)m (2024: £(23)m)

and the Civil Aerospace programme asset impairment reversal of £nil (2024: £132m), offset by foreign exchange on consolidation of £8m

(2024: £(7)m).

The absolute value of ECLs for contract assets has increased by £1m to £12m (2024: increased by £5m to £11m).

	Current		Non-current ¹		Total
	2025	2024	2025	2024	2025	2024
	£m	£m	£m	£m	£m	£m
Contract liabilities	7,832	6,309	8,762	9,447	16,594	15,756
Contract liabilities are analysed as follows:
Financial instruments (note 22)					1,423	1,280
Non-financial instruments					15,171	14,476
					16,594	15,756

1 Contract liabilities have been presented on the face of the balance sheet in line with the operating cycle of the business. Contract liabilities are further split according to when the

related performance obligation is expected to be satisfied and, therefore, when revenue is estimated to be recognised in the income statement

During the year, £5,562m (2024: £5,048m) of the opening contract liability was recognised as revenue.

Contract liabilities have increased by £838m. The movement in the Group balance is primarily as a result of an increase in Civil Aerospace

of £576m. This is mainly a result of growth in LTSA liabilities of £231m (2025: £11,370m, 2024: £11,139m) driven almost wholly by large engines,

with customer invoicing in 2025 (based on EFH) being in advance of revenue recognised (based on costs incurred completing performance

obligations). The contract liability movement includes a decrease of £289m (2024: decrease of £354m) as a result of revenue being recognised

in relation to performance obligations satisfied in previous years. Contract liability increases in Defence of £180m and Power Systems of £90m

is from the receipt of deposits in advance of performance obligations being completed.

156

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

18 Cash and cash equivalents

	2025	2024
	£m	£m
Cash at bank and in hand	889	714
Money market funds	2,424	1,900
Short-term deposits	2,931	2,961
Cash and cash equivalents per the balance sheet	6,244	5,575
Overdrafts (note 19)	(3)	(2)
Cash and cash equivalents per cash flow statement (page 117)	6,241	5,573

Cash and cash equivalents at 31 December 2025 includes £210m (2024: £245m) that is not available for general use by the Group. This balance

includes £47m (2024: £40m) which is held in an account that is exclusively for the general use of Rolls-Royce Submarines Limited and £128m

(2024: £160m) which is held exclusively for the use of Rolls-Royce Saudi Arabia Limited. This cash is not available for use by other entities within

the Group. The remaining balance 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. There is no offsetting of financial instruments in the Group’s statement of financial position as at

31 December 2025 and 2024.

19 Borrowings and lease liabilities

	Current		Non-current		Total
	2025	2024	2025	2024	2025	2024
	£m	£m	£m	£m	£m	£m
Unsecured
Overdrafts	3	2	–	–	3	2
Bank loans	5	4	4	3	9	7
3.625% Notes 2025 $1,000m ¹	–	795	–	–	–	795
3.375% Notes 2026 £375m ²	372	–	–	364	372	364
4.625% Notes 2026 €750m ³	654	–	–	620	654	620
5.75% Notes 2027 $1,000m ³	–	–	741	795	741	795
5.75% Notes 2027 £545m	–	–	543	543	543	543
1.625% Notes 2028 €550m ¹	–	–	470	442	470	442
Other loans	–	–	10	9	10	9
Total unsecured	1,034	801	1,768	2,776	2,802	3,577
Lease liability – Land and buildings	45	44	456	405	501	449
Lease liability – Aircraft and engines	304	209	562	784	866	993
Lease liability – Plant and equipment	43	43	60	70	103	113
Total lease liabilities	392	296	1,078	1,259	1,470	1,555
Total borrowings and lease liabilities	1,426	1,097	2,846	4,035	4,272	5,132

All outstanding items described as loan notes above are listed on the London Stock Exchange

1 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

2 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

3 These notes are the subject of cross-currency interest rate swap agreements under which the Group has undertaken to pay fixed rates of GBP interest, which form a cash flow hedge

During the year to 31 December 2025, the Group repaid a loan note of $1bn in October 2025 in line with its maturity date.

The Group has access to the following undrawn committed borrowing facilities at the end of the year:

	Total
	2025	2024
	£m	£m
Expiring within one year	–	–
Expiring after one year	2,500	2,500
Total undrawn facilities	2,500	2,500

Further details can be found in the going concern statement on page 57.

In December 2025 the Group signed a new £2.5bn Revolving Credit Facility maturing December 2030 and cancelled the existing facility. These

facilities have not been drawn during the year and remain undrawn at 31 December 2025.

157

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

20 Leases

Leases as lessee

The net book value of right-of-use assets at 31 December 2025 was £759m (2024: £761m), with a lease liability of £1,470m (2024: £1,555m),

per notes 13 and 19, respectively. Leases that have not yet commenced to which the Group is committed have a future liability of £293m (2024:

£2m) and consist of mainly plant and equipment and properties. The consolidated income statement shows the following amounts relating

to leases:

	2025	2024
	£m	£m
Land and buildings depreciation and impairment 1	(47)	(45)
Plant and equipment depreciation and impairment 2	(47)	(45)
Aircraft and engines depreciation and impairment 3	(64)	(175)
Total depreciation and impairment charge for right-of-use assets	(158)	(265)
Adjustment of amounts payable under residual value guarantees within lease liabilities 3, 4	–	6
Expense relating to short-term leases of 12 months or less recognised as an expense on a straight line basis 2	(31)	(38)
Expense relating to variable lease payments not included in lease liabilities 3, 5	(8)	(8)
Total operating costs	(197)	(305)
Interest expense 6	(74)	(83)
Total lease expense	(271)	(3 88)
Income from sub-leasing right-of-use assets	30	29
Total amount recognised in the income statement	(241)	(359)

1 Included in cost of sales and commercial and administration costs depending on the nature and the 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 Where the cost of meeting residual value guarantees is less than that previously estimated, as costs have been mitigated or liabilities waived by the lessor, the lease liability has been

remeasured. Where the value of this remeasurement exceeds the value of the right-of use asset, the reduction in the lease liability is credited to cost of sales

5 Variable lease payments primarily arise on a small number of contracts where engine lease payments are dependent upon utilisation rather than a periodic charge

6 Included in financing costs

The total cash outflow for leases in 2025 was £345m (2024: £421m). Of this, £306m related to leases reflected in the lease liability, £31m

to short-term leases where lease payments are expensed on a straight-line basis and £8m for variable lease payments where obligations

are only due when the assets are used. The timing difference between income statement charge and cash flow relates to costs incurred at the

end of leases for residual value guarantees and restoration costs that are recognised within depreciation over the term of the lease, the most

significant amounts relate to engine leases.

Engine leases in the Civil Aerospace business often include clauses that require the engines to be returned to the lessor with specific levels of

usable 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. Amounts due can vary depending on the level of utilisation of the

engines, overhaul activity prior to the end of the contract, and decisions taken on whether ongoing access to the assets is required at the end

of the lease term. The lease liability at 31 December 2025 included £292m relating to the cost of meeting these residual value guarantees in the

Civil Aerospace business. Up to £127m is payable in the next 12 months and £165m is due over the following five years.

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 lessees provide protection over the 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 ongoing monitoring of airline credit rating and, where

applicable, 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

the Group confirm that appropriate insurance documentation is established that covers the engine assets to pre-agreed amounts. All such

contracts are operating leases. The Group also leases out a small number of properties, or parts of properties, where there is excess capacity

under operating leases.

	2025	2024
	£m	£m
Operating lease income 1, 2	91	99

1 Includes variable lease payments received of £73m (2024: £83m) 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 12

Total non-cancellable future operating lease rentals (undiscounted) are £63m (2024: £71m) with £11m (2024: £10m) due within one year, £39m

(2024: £38m) between one to five years and £13m (2024: £23m) after five years.

In a limited number of circumstances, the Group sublets properties that are treated as a finance lease when the arrangement transfers

substantially all the risks and rewards of ownership of the asset. At 31 December 2025, the total undiscounted lease payments receivable

is £32m (2024: £37m) on annual lease income of £5m (2024: £5m). The discounted finance lease receivable at 31 December 2025 is £25m

(2024: £29m).

158

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

21 Trade payables and other liabilities

	Current		Non-current		Total
	2025	2024	2025	2024	2025	2024
	£m	£m	£m	£m	£m	£m
Trade payables	2,167	1,526	40	–	2,207	1,526
Accrued liabilities	2,242	2,552	113	109	2,355	2,661
Customer discounts 1	1,113	1,035	631	866	1,744	1,901
Payables due on RRSAs	1,800	1,529	14	11	1,814	1,540
Deferred receipts from RRSA workshare partners	35	55	747	757	782	812
Amounts owed to joint ventures and associates	564	492	–	–	564	492
Government grants 2	42	26	33	24	75	50
Other taxation and social security	116	54	–	–	116	54
Other payables 3	784	740	200	198	984	938
	8,863	8,009	1,778	1,965	10,641	9,974
Trade payables and other liabilities are analysed as follows:
Financial instruments (note 22):
Trade payables and similar items					6,928	6,205
Other non-derivative financial liabilities					2,522	2,642
Non-financial instruments					1,191	1,127
					10,641	9,974

1 Customer discounts include customer concession credits. Revenue recognised comprises sales to the Group’s customers after such items. Customer concession credits are discounts

given to a customer upon the sale of goods or services. A liability is recognised to correspond with the recognition of revenue when the performance obligation is met, as set out on

page 125. The largest element of the balance, approximately £1.2bn (2024: £1.4bn) arises when the Civil business delivers its engines to an airframer. A concession is often payable to the

end customer (e.g. an airline) on delivery of the aircraft from the airframer. The concession amounts are known and the payment date is reasonably certain, hence there is no significant

judgement or uncertainty associated with the timing of these amounts

2 During the year, £5m (2024: £102m) of government grants were released to the income statement

3 Other payables includes payroll liabilities and HM Government UK levies

The Group’s payment terms with suppliers vary based on the products and services being sourced, the competitive global markets the Group

operates in and other commercial aspects of suppliers’ relationships. Industry average payment terms vary between 90 to 120 days. The Group

offers reduced payment terms to its smaller suppliers, who are typically on 75-day payment terms, so that they are paid in 30 days.

In line with civil aviation industry practice, the Group offers a SCF programme in partnership with banks to enable suppliers (including

joint ventures who are on 90-day standard payment terms) to receive their payments sooner. This SCF programme is available to suppliers at

their discretion and does not change the Group’s rights and obligations with the suppliers or the timing of payment by the Group to settle its

liabilities arising from transactions with these suppliers.

At 31 December 2025, £646m (2024: £594m) of trade payables and other liabilities were within the scope of SCF arrangements of which

suppliers had drawn £536m (2024: £506m), with £227m (2024: £243m) drawn by joint ventures. In some cases the Group settles the costs

incurred by joint ventures as a result of them utilising SCF arrangements and, during the year to 31 December 2025, the Group incurred costs

of £9m (2024: £9m). These costs were included within cost of sales.

159

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

22 Financial instruments

Carrying values and fair values of financial instruments

				Assets		Liabilities		Total
		Basis for			Amortised
		determining	FVPL	FVOCI	cost	FVPL	Other
	Notes	fair value	£m	£m	£m	£m	£m	£m
2025
Other non-current asset investments	14	A	–	4	–	–	–	4
Trade receivables and similar items	16	B/C	–	10	5,031	–	–	5,041
Other non-derivative financial assets	16	B	–	–	484	–	–	484
Other assets		D/F	18	–	14	–	–	32
Derivative financial assets 1		C	773	–	–	–	–	773
Cash and cash equivalents	18	B	2,424	–	3,820	–	–	6,244
Borrowings	19	E/F	–	–	–	–	(2,802)	(2,802)
Lease liabilities	19	G	–	–	–	–	(1,470)	(1,470)
Derivative financial liabilities 1		C	–	–	–	(680)	–	(680)
Financial RRSAs		H	–	–	–	–	(5)	(5)
Other liabilities		H	–	–	–	–	(214)	(214)
C Shares		B	–	–	–	–	(21)	(21)
Trade payables and similar items	21	B	–	–	–	–	(6,928)	(6,928)
Other non-derivative financial liabilities	21	B	–	–	–	–	(2,522)	(2,522)
Contract liabilities	17	B	–	–	–	–	(1,423)	(1,423)
			3,215	14	9,349	(680)	(15,385)	(3,487)
2024
Other non-current asset investments	14	A	–	5	–	–	–	5
Trade receivables and similar items	16	B/C	–	9	5,179	–	–	5,188
Other non-derivative financial assets	16	B	–	–	366	–	–	366
Other assets		D/F	21	–	16	–	–	37
Derivative financial assets 1		C	298	–	–	–	–	298
Cash and cash equivalents	18	B	1,900	–	3,675	–	–	5,575
Borrowings	19	E/F	–	–	–	–	(3,577)	(3,577)
Lease liabilities	19	G	–	–	–	–	(1,555)	(1,555)
Derivative financial liabilities 1		C	–	–	–	(2,054)	–	(2,054)
Financial RRSAs		H	–	–	–	–	(7)	(7)
Other liabilities		H	–	–	–	–	(198)	(198)
C Shares		B	–	–	–	–	(23)	(23)
Trade payables and similar items	21	B	–	–	–	–	(6,205)	(6,205)
Other non-derivative financial liabilities	21	B	–	–	–	–	(2,642)	(2,642)
Contract liabilities	17	B	–	–	–	–	(1,280)	(1,280)
			2,219	14	9,236	(2,054)	(15,487)	(6,072)

1 In the event of counterparty default relating to derivative financial assets and derivative financial 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 £343m (2024: £26m) and liabilities £250m (2024: £1,657m)

160

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

22 Financial instruments continued

Fair values equate to book values for both 2025 and 2024, with the following exceptions:

	Basis for	2025		2024
	determining	Book value	Fair value	Book value	Fair value
	fair value	£m	£m	£m	£m
Other assets	F	14	15	16	16
Borrowings	E	(2,780)	(2,778)	(3,559)	(3,540)
Borrowings	F	(22)	(23)	(18)	(21)
Financial RRSAs	H	(5)	(5)	(7)	(7)

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 arm’s-length transaction. There have been no transfers during the year from or to Level 3 valuation. Fair values have been

determined with reference to available market information at the balance sheet date, using the methodologies described below.

A These primarily comprise unconsolidated companies where fair value approximates to the book value. Listed investments are valued using Level 1 methodology

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. Money market funds are valued using Level 1 methodology

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. For commodity derivatives, forward commodity prices are used to determine expected future cash ﬂows. 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)

D Other assets are included on the balance sheet at fair value, derived from observable market prices or latest forecast (Level 2/Level 3). At 31 December 2025, Level 3 assets totalled £11m

(2024: £14m)

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)

F Other assets and 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)

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)

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)

IFRS 13 Fair Value Measurement 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
2025
Non-current assets	467	6	32	505	–	18	–	523
Current assets	257	6	5	268	–	14	–	282
Assets	724	12	37	773	–	32	–	805
Current liabilities	(193)	(19)	(24)	(236)	(1)	(35)	(21)	(293)
Non-current liabilities	(382)	(17)	(45)	(444)	(4)	(179)	–	(627)
Liabilities	(575)	(36)	(69)	(680)	(5)	(214)	(21)	(920)
	149	(24)	(32)	93	(5)	(182)	(21)	(115)
2024
Non-current assets	10	1	110	121	–	5	–	126
Current assets	25	4	148	177	–	32	–	209
Assets	35	5	258	298	–	37	–	335
Current liabilities	(539)	(18)	–	(557)	–	(62)	(23)	(642)
Non-current liabilities	(1,364)	(22)	(111)	(1,497)	(7)	(136)	–	(1,640)
Liabilities	(1,903)	(40)	(111)	(2,054)	(7)	(198)	(23)	(2,282)
	(1,868)	(35)	147	(1,756)	(7)	(161)	(23)	(1,947)

1 Includes the foreign exchange impact of cross-currency interest rate swaps

161

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

22 Financial instruments continued

Derivative financial instruments

The Group uses various financial instruments to manage its exposure to movements in foreign exchange rates. The Group uses commodity

swaps to manage its exposure to movements in the price of commodities (jet fuel, base metals, gas and power). 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 or cash

ﬂow 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 1		– non-hedge accounted	Total
	2025	2024	2025	2024	2025	2024	2025	2024	2025	2024
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January	(1,868)	(2,035)	(35)	(19)	54	45	93	131	(1,756)	(1,878)
Movements in fair value
hedges	–	–	–	–	(33)	(32)	–	–	(33)	(32)
Movements in cash ﬂow
hedges	–	–	–	–	(40)	(23)	–	–	(40)	(23)
Movements in other derivative contracts 2	1,335	(631)	(7)	(18)	–	–	(4)	40	1,324	(609)
Contracts settled	682	798	18	2	(50)	64	(52)	(78)	598	786
At 31 December	149	(1,868)	(24)	(35)	(69)	54	37	93	93	(1,756)

1 Includes the foreign exchange impact of cross-currency interest rate swaps

2 Included in net financing

Financial risk and revenue sharing arrangements (RRSAs) and other financial assets and liabilities

The Group has financial liabilities arising from financial RRSAs that 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 an appropriate discount rate. Other liabilities includes royalties payable to airframers where the present value of the liability is

calculated using the Group’s average borrowing rate as that reﬂects the nature of the balance in line with the effective interest method. In each

case below, the fair value of the assets and liabilities reﬂect a level 3 valuation.

Movements in the carrying values were as follows:

	Financial RRSAs		Other – assets		Other – liabilities
	2025	2024	2025	2024	2025	2024
	£m	£m	£m	£m	£m	£m
At 1 January	(7)	(17)	14	25	(198)	(163)
Exchange adjustments included in OCI	6	1	(3)	–	3	(5)
Additions	–	–	–	–	(29)	(34)
Financing charge 1	–	–	–	(11)	(16)	(9)
Excluded from underlying profit/(loss):
Changes in forecast payments 1	(4)	–	–	–	–	–
Cash paid	–	9	–	–	17	12
Other	–	–	–	–	9	1
At 31 December	(5)	(7)	11	14	(214)	(198)

1 Included in net financing

162

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

22 Financial instruments continued

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. The impact of fair value hedges on the financial position and performance of the Group is as follows:

		Hedged item 1						Hedging instrument 2
									Hedge
		FV	FV					FV	ineffect-
		adjustment	adjustment			Carrying	Carrying	movement	iveness		Weighted
		in the	since	Carrying		amount	amount	in the	in the	Weighted	average
	Nominal	period	inception	amount	Nominal	asset	liability	period	period 3	average	interest
	£m	£m	£m	£m	£m	£m	£m	£m	£m	FX rate	rate
At 31 December 2025
Sterling	(375)	(8)	3	(372)	375	–	(3)	9	–		1.00 SONIA +
											0.89
Euro	(484)	(28)	14	(470)	484	–	(23)	31	4		1.14 SONIA +
											1.09
At 31 December 2024
Sterling	(375)	(3)	11	(364)	375	–	(12)	3	–		1.00 SONIA +
											0.89
USD	(658)	(25)	(137)	(795)	658	128	–	25	–		1.52 SONIA +
											1.47
Euro	(484)	13	42	(442)	484	–	(54)	(11)	2		1.14 SONIA +
											1.09

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

To manage the foreign exchange rate risk in cash ﬂows on fixed rate non-GBP borrowings (the hedged items), the Group has entered into

fixed-to-fixed cross-currency interest rate swaps (the hedging instruments) to hedge the cash ﬂows into GBP, which, for accounting purposes,

are designated as cash ﬂow hedges.

The impact of cash ﬂow hedges on the financial position and performance of the Group is as follows:

	Hedged item					Hedging instrument 1			Hedging reserves
						Hedge
		FV		Carrying	FV	ineffect-					Closing
	movement			amount	movement	iveness		Weighted	Amount	Recycled	cash flow
		in the		asset/	in the	in the	Weighted	average	recognised	to net	hedge
	Nominal	period	Nominal	(liability)	period	period 2	average	interest	in OCI	financing	reserve
	£m	£m	£m	£m	£m	£m	FX rate	rate	£m	£m	£m
At 31 December 2025
USD	(772)	56	772	(22)	(59)	(2)	1.29	5.33	55	(53)	(7)
Euro	(677)	(23)	677	(21)	24	–	1.11	5.45	(17)	26	(1)
At 31 December 2024
USD	(772)	(15)	772	37	9	(6)	1.29	5.33	(19)	15	(9)
Euro	(677)	28	677	(45)	(28)	–	1.11	5.45	36	(38)	(10)

1 Hedging instruments are included in other financial assets or liabilities in the balance sheet

2 Hedge ineffectiveness is included in net financing in the income statement

163

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

22 Financial instruments continued

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 USD, 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. In addition, the Group enters into fixed-to-ﬂoating cross-currency interest rate swaps to

manage its exposure to changes in fair value as a result of foreign exchange risk. See below.

The Group economically hedges its GBP/USD exposure by forecasting highly probable net USD receipts up to five 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 five-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.

The Group also has exposures to cash ﬂows on EUR and USD denominated fixed rate borrowings. To manage its exposures to changes

in values of future foreign currency cash ﬂows, the Group has entered into fixed-to-fixed cross-currency interest rate swaps, which, for

accounting purposes, are designated as cash ﬂow hedges. The swaps have similar critical terms to the hedged items, such as the initial

exchange 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 cash ﬂow hedge relationship are changes in the credit risk of either party to the interest rate swap.

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 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; and

multiple smaller entities for Power Systems. 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 EUR, GBP and USD 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.

Commodity price risk – The Group has exposures to the price of jet fuel, base metals, gas and power arising from business operations. To

minimise its cash ﬂow exposures to changes in commodity prices, the Group enters into derivative commodity transactions. During 2025, the

Group entered into a Virtual Power Purchase Arrangement, which had a fair value of £3m at 31 December 2025. 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.

164

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

22 Financial instruments continued

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 2025
Foreign exchange contracts:
Non-hedge accounted	21,850	7,559	5,516	8,775	–	724	(575)
Interest rate contracts:
Fair value hedges	859	375	–	484	–	–	(26)
Cash ﬂow hedges	1,449	677	772	–	–	–	(43)
Non-hedge accounted	859	375	–	484	–	37	–
Commodity contracts:
Non-hedge accounted	392	146	110	126	10	12	(36)
	25,409	9,132	6,398	9,869	10	773	(680)
At 31 December 2024
Foreign exchange contracts:
Non-hedge accounted	20,728	8,018	5,781	6,929	–	35	(1,903)
Interest rate contracts:
Fair value hedges	1,517	658	375	484	–	128	(66)
Cash ﬂow hedges	1,449	–	677	772	–	37	(45)
Non-hedge accounted	1,517	658	375	484	–	93	–
Commodity contracts:
Non-hedge accounted	330	137	108	85	–	5	(40)
	25,541	9,471	7,316	8,754	–	298	(2,054)

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	USD	Euro	Other	Total
	£m	£m	£m	£m	£m
At 31 December 2025
Currencies sold forward:
Sterling	–	149	39	7	195
USD	16,118	–	4,541	371	21,030
Euro	10	317	–	107	434
Other At 31 December 2024	4	4	176	7	191
Currencies sold forward:
Sterling	–	882	41	59	982
USD	14,654	–	4,419	287	19,360
Euro	35	290	–	26	351
Other	3	1	31	–	35

The nominal value of interest rate and commodity contracts are denominated in the following currencies:

	2025	2024
	£m	£m
Sterling	1,304	1,915
USD	1,063	1,719
Euro	1,192	1,179

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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

22 Financial instruments continued

Non-derivative financial instruments are denominated in the following currencies:

	Sterling	USD	Euro	Other	Total
	£m	£m	£m	£m	£m
At 31 December 2025
Other non-current asset investments	–	4	–	–	4
Trade receivables and similar items	367	3,903	662	109	5,041
Other non-derivative financial assets	60	354	64	6	484
Other assets	–	18	14	–	32
Cash and cash equivalents	2,922	911	2,235	176	6,244
Assets	3,349	5,190	2,975	291	11,805
Borrowings	(918)	(746)	(1,133)	(5)	(2,802)
Lease liabilities	(251)	(976)	(45)	(198)	(1,470)
Financial RRSAs	–	(5)	–	–	(5)
Other liabilities	(31)	(183)	–	–	(214)
C Shares	(21)	–	–	–	(21)
Trade payables and similar items	(1,225)	(4,853)	(765)	(85)	(6,928)
Other non-derivative financial liabilities	(392)	(1,896)	(187)	(47)	(2,522)
Contract liabilities	–	(1,423)	–	–	(1,423)
Liabilities	(2,838)	(10,082)	(2,130)	(335)	(15,385)
	511	(4,892)	845	(44)	(3,580)
At 31 December 2024
Other non-current asset investments	–	5	–	–	5
Trade receivables and similar items	301	4,346	460	81	5,188
Other non-derivative financial assets	73	242	40	11	366
Other assets	–	21	16	–	37
Cash and cash equivalents	2,251	1,283	1,867	174	5,575
Assets	2,625	5,897	2,383	266	11,171
Borrowings	(908)	(1,594)	(1,072)	(3)	(3,577)
Lease liabilities	(237)	(1,074)	(49)	(195)	(1,555)
Financial RRSAs	–	(6)	(1)	–	(7)
Other liabilities	(39)	(159)	–	–	(198)
C Shares	(23)	–	–	–	(23)
Trade payables and similar items	(1,006)	(4,701)	(423)	(75)	(6,205)
Other non-derivative financial liabilities	(350)	(2,084)	(158)	(50)	(2,642)
Contract liabilities	–	(1,280)	–	–	(1,280)
Liabilities	(2,563)	(10,898)	(1,703)	(323)	(15,487)
	62	(5,001)	680	(57)	(4,316)

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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

22 Financial instruments continued

Currency exposures

The Group’s actual currency exposures on financial instruments after taking account of derivative foreign currency contracts, which are not

designated as hedging instruments for accounting purposes are as follows:

	Sterling	USD	Euro	Other	Total
Functional currency of Group operations	£m	£m	£m	£m	£m
At 31 December 2025
Sterling	–	–	1	3	4
USD	(7)	–	–	–	(7 )
Euro	2	4	–	(3)	3
Other At 31 December 2024	33	36	78	–	147
Sterling	–	–	–	1	1
USD	(11)	–	–	(2)	(13 )
Euro	–	7	–	15	22
Other	55	37	68	–	160

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 2025
Other non-current asset investments	4	–	–	–	4
Trade receivables and similar items	4,663	257	74	47	5,041
Other non-derivative financial assets	480	3	–	1	484
Other assets	25	–	7	–	32
Derivative financial assets	773	–	–	–	773
Cash and cash equivalents	6,244	–	–	–	6,244
	12,189	260	81	48	12,578
At 31 December 2024
Other non-current asset investments	5	–	–	–	5
Trade receivables and similar items	4,738	324	82	44	5,188
Other non-derivative financial assets	331	32	–	3	366
Other assets	28	9	–	–	37
Derivative financial assets	298	–	–	–	298
Cash and cash equivalents	5,575	–	–	–	5,575
	10,975	365	82	47	11,469

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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

22 Financial instruments continued

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 2025
Borrowings	(1,146)	(1,371)	(490)	(19)	(2,802)
Lease liabilities	(454)	(291)	(496)	(1,050)	(1,470)
Financial RRSAs	–	–	(1)	(3)	(5)
Other liabilities	(35)	(19)	(28)	(131)	(214)
C Shares	(21)	–	–	–	(21)
Trade payables and similar items	(6,745)	(71)	(56)	(56)	(6,928)
Other non-derivative financial liabilities	(1,806)	(131)	(294)	(291)	(2,522)
Contract liabilities	(1,423)	–	–	–	(1,423)
	(11,630)	(1,883)	(1,365)	(1,550)	(15,385)
At 31 December 2024
Borrowings	(961)	(1,109)	(1,893)	(16)	(3,577)
Lease liabilities	(365)	(324)	(533)	(1,189)	(1,555)
Financial RRSAs	(1)	–	(1)	(4)	(7)
Other liabilities	(61)	(11)	(25)	(101)	(198)
C Shares	(23)	–	–	–	(23)
Trade payables and similar items	(6,054)	(21)	(67)	(63)	(6,205)
Other non-derivative financial liabilities	(1,700)	(316)	(297)	(329)	(2,642)
Contract liabilities	(1,280)	–	–	–	(1,280)
	(10,445)	(1,781)	(2,816)	(1,702)	(15,487)

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 2025
Derivative financial assets:
Cash inﬂows	5,682	4,460	7,783	–
Cash outﬂows	(5,433)	(4,260)	(7,505)	–
Other net cash ﬂows 1	29	16	8	–
	278	216	286	–	773
Derivative financial liabilities:
Cash inﬂows	2,596	1,850	1,479	–
Cash outﬂows	(3,001)	(2,059)	(1,552)	–
Other net cash ﬂows 1	(24)	(11)	(6)	–
	(429)	(220)	(79)	–	(680)
At 31 December 2024
Derivative financial assets:
Cash inﬂows	1,940	605	1,089	–
Cash outﬂows	(1,780)	(592)	(1,054)	–
Other net cash ﬂows 1	66	25	24	–
	226	38	59	–	298
Derivative financial liabilities:
Cash inﬂows	6,988	5,866	7,154	–
Cash outﬂows	(7,959)	(6,524)	(7,850)	–
Other net cash ﬂows 1	(30)	(11)	(11)	–
	(1,001)	(669)	(707)	–	(2,054)

1 Derivative financial assets and liabilities that are settled on a net cash basis

168

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

22 Financial instruments continued

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.

		2025			2024
	Fixed rate	Floating rate	Total	Fixed rate	Floating rate	Total
	£m	£m	£m	£m	£m	£m
Cash and cash equivalents 1	–	6,244	6,244	–	5,575	5,575
Borrowings	(2,785)	(17)	(2,802)	(3,563)	(14)	(3,577)
Lease liabilities	(1,237)	(233)	(1,470)	(1,298)	(257)	(1,555)
Weighted average interest rates	(4,022)	5,994	1,972	(4,861)	5,304	443
Borrowings	4.4%	4.7%		4.0%	5.0%
Lease liabilities 2	4.8%	5.0%		4.9%	5.8%

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

None (2024: none) of the Group’s borrowings are subject to financial covenants and 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.

£99m (2024: £106m) of the Group’s lease liabilities include a customary loan-to-value covenant that is applicable if the credit rating of

Rolls-Royce Plc is sub-investment grade. The Group has several contractual cures available in the event the stipulated loan-to-value ratio

is exceeded. Failure by the Group to satisfy its contractual obligations under the covenant gives rights to the lessor to terminate its lease and

claim termination amounts for the outstanding lease balance. At 31 December 2025 none (2024: none) of these were in breach.

Sensitivity analysis

	2025	2024
Sensitivities at 31 December (all other variables held constant) – impact on profit after tax and equity	£m	£m
Sterling 10% weaker against the USD	(1,598)	(1,506)
Sterling 10% stronger against the USD	1,307	1,232
Euro 10% weaker against the USD	(318)	(358)
Euro 10% stronger against the USD	260	293
Sterling 10% weaker against the Euro	(27)	(27)
Sterling 10% stronger against the Euro	22	22
Commodity prices 10% lower	(26)	(20)
Commodity prices 10% higher	26	20
Interest rates 50 basis points lower	(24)	(40)
Interest rates 50 basis points higher	24	39

C Shares and payments to shareholders

The Company has previously made payments to shareholders by issuing non-cumulative redeemable preference shares (C Shares) as an

alternative to paying a cash dividend. As the C share reinvestment programme is no longer available, C shares can only be redeemed for cash.

Any C Shares retained attract a dividend of Bank of England base rate 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:

	2025	2024
	Millions	Millions
At 1 January	22,506	23,153
Redeemed	(1,199)	(647)
At 31 December	21,307	22,506

No distributions in the form of C shares have been made since 2019, payments to shareholders represent the value of C Shares redeemed within

the year.

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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

23 Provisions for liabilities and charges

		Charged to				At
	At 1 January	income			Exchange	31 December
	2025	statement 1	Reversed	Utilised	differences	2025
	£m	£m	£m	£m	£m	£m
Onerous contracts	1,433	433	(694)	(187)	1	986
Warranty and guarantees	354	179	(25)	(93)	7	422
Trent 1000 wastage costs	36	–	–	(35)	(1)	–
Employer liability claims	25	1	(4)	(2)	–	20
Transformation and restructuring	62	10	(16)	(35)	1	22
Tax related interest and penalties	16	2	(1)	–	–	17
Claims and litigation	25	30	(12)	(7)	–	36
Other	43	22	(3)	(7)	(1)	54
	1,994	677	(755)	(366)	7	1,557
Current liabilities	589					507
Non-current liabilities	1,405					1,050

1 The charge to the income statement within net financing includes £27m (2024: £47m) as a result of the unwinding of the discounting of provisions previously recognised and £16m (2024:

£36m) as a result of changes in discount rates during the year

Onerous contracts

Onerous contract provisions are recorded when the direct costs to fulfil a contract are assessed as being greater than the expected

recoverable amount. Onerous contract provisions are measured on a fully costed basis. During the year, additional contract losses for the

Group of £433m (2024: £558m) have been recognised. These are mainly a result of increases in the estimate of future LTSA costs due to

prolonged supply chain challenges and inﬂationary cost increases. Contract losses of £694m (2024: £374m) previously recognised have

been reversed following improvements to the forecast revenue, cost estimates and time on wing across various engine programmes as a

result of operational improvements, contractual renegotiations and extensions. During the year £187m (2024: £218m) of the provisions has been

utilised. The Group continues to monitor onerous contract provisions for changes in the market and revises the provision as required. The value

of the remaining onerous contract provisions reﬂect, in each case, the single most likely outcome. The provisions are expected to be utilised

over the term of the customer contracts, typically within eight to 15 years.

IAS 37 Provisions, Contingent Liabilities and Contingent Assets requires a company to recognise any impairment loss that has occurred on

assets used in fulfilling the contract before recognising a separate provision for an onerous contract. No impairments were required for any

of the assets solely used in the fulfilment of onerous contracts.

Warranty and guarantees

Provisions for warranty and guarantees relate to products sold and are calculated based on an assessment of the remediation costs related to

future claims based on past experience. The provision generally covers a period of up to three years.

Trent 1000 wastage costs

During the year, the Group has utilised the remaining £35m (2024: £82m) of the Trent 1000 wastage costs provision. This represents customer

disruption costs and remediation shop visit costs.

Employer liability claims

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.

Transformation and restructuring

The Group announced a major multi-year transformation programme in 2023. During the year £35m (2024: £35m) was utilised and £16m

reversed (2024: £12m). As part of these plans a further £3m (2024: £2m) has been charged directly to the income statement that had not been

provided for. The remaining provision is expected to be utilised by 31 December 2027.

Tax related interest and penalties

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 these matters with the relevant tax authorities.

Claims and litigation

Provisions for claims and litigation represent ongoing matters where the outcome for the Group may be unfavourable.

The balance also includes the best estimate of any retained exposure by the Group’s captive insurance company for any claims that have been

incurred but not yet reported to the Group, as that entity retains a portion of the exposures it insures on behalf of the remainder of the Group.

Such exposures include policies for aviation claims, employer liabilities and healthcare claims. Significant delays can 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 if the frequency or severity of claims differs from estimated.

Other

Other items are individually immaterial. The value of any remaining provisions reﬂects the single most likely outcome in each case.

There were no provisions held for customer financing at 31 December 2025 (2024: £nil). Provisions are held to cover potential calls on

guarantees provided over asset values and/or financing when it is considered probable by management that the exposure will crystallise.

The Group discloses contingent liabilities for customer financing arrangements where the payment is not probable. See note 27.

170

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

24 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 UK trust. The scheme closed to future accrual on 31 December 2020

for all active members and there are no new defined benefit accruals in the UK scheme. In August 2025 the scheme completed a Buy-in,

with the purchase of a bulk insurance annuity policy, with the effect that the majority of scheme liabilities are now covered by this policy.

See below for further details;

— the Group also operates a large trust-based defined contribution scheme for current employees in the UK (Rolls-Royce Retirement Savings

Trust). Pension contributions are generally paid as a salary sacrifice 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 £106m (2024: £88m) in the year; and

— 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 healthcare schemes are unfunded.

The valuations of the defined benefit schemes are based on the results of the most recent funding valuation from 31 March 2023, where

relevant, updated by the scheme actuaries to 31 December 2025.

Virgin Media

A UK High Court legal ruling that took place in June 2023 between Virgin Media Limited and NTL Pension Trustees II Limited, found that certain

historic rule amendments were invalid if they were not accompanied by actuarial certifications. The ruling was subject to an appeal with a judgment

delivered on 25 July 2024. The Court of Appeal unanimously upheld the decision of the High Court and concluded that the pre-April 2013 conditions

applied to amendments to both future and past service. Whilst this ruling was in respect of another scheme, its relevance and hence the

potential impact of this to the RRUKPF scheme, and other UK schemes was unclear.

On 5 June 2025 the Government announced that in light of this uncertainty, it would introduce legislation to give potentially affected pension

schemes the ability to retrospectively obtain written actuarial confirmation that historic rule amendments met the necessary standards. As a

result of this Government intervention the Group does not anticipate any scheme amendments or additional liabilities.

Buy-in of Rolls-Royce UK Pension Fund

In August 2025, the Trustee of the Rolls-Royce UK Pension Fund entered into a Buy-in transaction with Pension Insurance Corporation plc

(PIC), whereby the Fund purchased a bulk purchase annuity policy in exchange for consideration of £4.3bn. This was paid from the Fund’s

existing assets, with no additional funding required by the Group. This transaction resulted in substantially all the benefits and liabilities

under the Fund being insured. The Buy-in was undertaken in anticipation of entering into a Buy-out during 2026, upon which the liabilities and

management of bought out benefits will be transferred to PIC. A charge of £517m has been recognised within the line ‘Actuarial gains/(losses)

recognised in OCI’ in the Consolidated Statement of Comprehensive Income for the year ended 31 December 2025 comprising around £450m

relating to the impact of the Buy-in.

Following the transaction, the bulk purchase annuity policy has been treated as an asset of the Fund and has been valued on the same basis as

the liabilities to which it relates, as until a Buy-out takes place, the legal responsibility to pay benefits remains with the Trustee.

The Company and the Trustee of the UK pension scheme agreed on 2 February 2026 to terminate and wind up the UK scheme. See further

details in Note 1.

Overseas schemes

During the year, Rolls-Royce Deutschland replaced a number of their existing defined benefit schemes with a new company pension scheme

to offer payment options at time of retirement. The new system, which is similar in structure to the UK defined contribution scheme but with

a guarantee from the Company regarding investment returns in accordance with German legislation, significantly reduces interest risks and

longevity risks for the employer for future commitments. A past service credit of £10m has been recognised within non-underlying operating

profit in respect of these changes.

Amounts recognised in the income statement

		2025			2024
	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	6	42	48	5	37	42
Past-service cost/(credit) and settlement loss 1	4	(10)	(6)	14	–	14
	10	32	42	19	37	56
Defined contribution schemes	251	104	355	228	101	329
Operating cost	261	136	397	247	138	385
Net financing (credit)/charge in respect of defined benefit schemes	(32)	38	6	(35)	37	2
Total income statement charge	229	174	403	212	175	387

1 Following the signing of the framework agreement with PIC, adjustments have been made to align the methodology for the calculation of certain benefits with those required by the

insurer. These have resulted in an additional past service charge of £(4)m being recognised in the income statement in 2025. A past service credit of £10m has also been recognised in

the year in respect of the changes to the Rolls-Royce Deutschland schemes detailed above. In 2024 a past service charge of £14m was recognised in respect of the UK scheme as a result

of further work carried out by the pension scheme administrators and the Scheme Actuary in 2024 to review all relevant data points and make further changes to member records and

required payments under the Barber judgement which sought to equalise normal retirement ages between men and women

171

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

24 Post-retirement benefits continued

The operating cost is charged as follows:

	Defined benefit		Defined contribution		Total
	2025	2024	2025	2024	2025	2024
	£m	£m	£m	£m	£m	£m
Cost of sales	37	30	252	227	289	257
Commercial and administrative costs	(3)	20	50	51	47	71
Research and development costs	8	6	53	51	61	57
	42	56	355	329	397	385

Net financing comprises:

		2025			2024
	UK	Overseas		UK	Overseas
	schemes	schemes	Total	schemes	schemes	Total
	£m	£m	£m	£m	£m	£m
Financing on scheme obligations	214	64	278	200	61	261
Financing on scheme assets	(246)	(26)	(272)	(235)	(24)	(259)
Net financing (income)/charge in respect of defined benefit schemes	(32)	38	6	(35)	37	2
Financing income on scheme surpluses	(32)	–	(32)	(35)	(2)	(37)
Financing cost on scheme deficits	–	38	38	–	39	39

Amounts recognised in OCI in respect of defined benefit schemes

		2025			2024
	UK	Overseas		UK	Overseas
	schemes	schemes	Total	schemes	schemes	Total
	£m	£m	£m	£m	£m	£m
Actuarial gains and losses arising from:
Demographic assumptions 1	(121)	–	(121)	19	(10)	9
Financial assumptions 2	97	63	160	617	56	673
Experience adjustments 3	(9)	1	(8)	(8)	(14)	(22)
(Loss)/return on scheme assets excluding financing income 2, 4	(484)	9	(475)	(633)	(5)	(638)
	(517)	73	(444)	(5)	27	22

1 For the UK Scheme, this reﬂects latest available CMI mortality projections, and a charge of around £100m in relation to the Buy-in of the UK scheme due to updates to the assumptions

relating to transfer values, and alignments made to insurer factors post Buy-in

2 Actuarial gains and losses arising from financial assumptions arise primarily due to changes in discount rate and inﬂation

3 This reﬂects an experience loss as a result of realised inﬂation being higher than expected over the period meaning that actual and projected increases are now higher than

previously expected

4 Includes an asset re-measurement loss estimated at £350m recognised in respect of the Buy-in of the UK Scheme that took place in the year

Amounts recognised in the balance sheet in respect of defined benefit schemes

		2025			2024
	UK	Overseas		UK	Overseas
	schemes	schemes	Total	schemes	schemes	Total
	£m	£m	£m	£m	£m	£m
Present value of funded obligations	(4,040)	(987)	(5,027)	(3,958)	(986)	(4,944)
Fair value of scheme assets	4,324	560	4,884	4,737	531	5,268
Net asset/(liability) on funded schemes	284	(427)	(143)	779	(455)	324
Present value of unfunded obligations	–	(463)	(463)		(515)	(515)
Net asset/(liability) recognised in the balance sheet 1	284	(890)	(606)	779	(970)	(191)
Post-retirement scheme surpluses 2	284	2	286	779	11	790
Post-retirement scheme deficits	–	(892)	(892)	–	(981)	(981)

1 The surplus in the UK scheme is recognised as, on an ultimate wind-up when there are no longer any remaining members, the Group would be entitled to receive any surplus and, has the

power to determine how any remaining surplus is used

2 The decrease in the net asset in the UK Scheme is largely as a result of the Buy-in of the scheme in August 2025, which has resulted in a charge estimated at £450m being recognised

within the line ‘Actuarial gains/(losses) recognised in OCI’ in the Consolidated Statement of Comprehensive Income for the year ended 31 December 2025

172

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

24 Post-retirement benefits continued

Overseas schemes are located in the following countries:

		2025			2024
	Assets	Obligations	Net	Assets	Obligations	Net
	£m	£m	£m	£m	£m	£m
Canada	189	(215)	(26)	193	(225)	(32)
Germany	98	(651)	(553)	56	(664)	(608)
US pension schemes	273	(295)	(22)	282	(297)	(15)
US healthcare schemes	–	(284)	(284)	–	(312)	(312)
Other	–	(5)	(5)	–	(3)	(3)
Net asset/(liability) recognised in the balance sheet	560	(1,450)	(890)	531	(1,501)	(970)

Defined benefit schemes

Assumptions

Significant actuarial assumptions for UK schemes at the balance sheet date were as follows:

		2025	2024
Discount rate		5.60%	5.50%
Inﬂation assumption (RPI)		3.05%	3.30%
Inﬂation assumption (CPI)		2.70%	2.90%
Transfer take-up assumption (employed deferred/deferred)		20%/15%	20%/15%
Bridging Pension Option take-up assumption (employed deferred/deferred)		40%/25%	40%/25%
Life expectancy from age 65:	current male pensioner	21.1 years	20.8 years
	future male pensioner currently aged 45	21.8 years	21.5 years
	current female pensioner	23.0 years	22.8 years
	future female pensioner currently aged 45	24.2 years	24.1 years

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.

The mortality assumptions adopted for the UK pension schemes are derived from the SAPS S3 ‘All’ actuarial tables, with future improvements

in line with the CMI 2024 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.

The assumption for transfers and the BPO is based on actual experience, actuarial advice and updates required following the Buy-in of

the scheme.

Other assumptions have been set on advice from the actuary, having regard to the latest trends in scheme experience, the assumptions used in

the most recent funding valuation and any updates required to insurer factors. 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 based on advice from local actuaries. The principal assumptions are:

		2025	2024
Discount rate		4.70%	4.50%
Inﬂation assumption		2.00%	2.10%
Long-term healthcare cost trend rate		4.75%	4.75%
Male life expectancy from age 65:	current pensioner	20.8 years	20.5 years
	future pensioner currently aged 45	23.1 years	22.5 years

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

24 Post-retirement benefits continued

Changes in present value of defined benefit obligations

		2025			2024
	UK	Overseas		UK	Overseas
	schemes	schemes	Total	schemes	schemes	Total
	£m	£m	£m	£m	£m	£m
At 1 January	(3,958)	(1,501)	(5,459)	(4,537)	(1,540)	(6,077)
Exchange differences	–	13	13	–	38	38
Current service cost	–	(41)	(41)	–	(37)	(37)
Past-service (cost)/credit 1	(4)	10	6	(14)	–	(14)
Finance cost	(214)	(64)	(278)	(200)	(61)	(261)
Contributions by employees	–	(14)	(14)	–	(13)	(13)
Benefits paid out	169	83	252	165	80	245
Actuarial (losses)/gains 2	(33)	64	31	628	32	660
At 31 December	(4,040)	(1,450)	(5,490)	(3,958)	(1,501)	(5,459)
Funded schemes	(4,040)	(987)	(5,027)	(3,958)	(986)	(4,944)
Unfunded schemes	–	(463)	(463)	–	(515)	(515)

1 Following the signing of the framework agreement with the UK scheme’s trustee, which was signed alongside the Buy-in agreement, adjustments have been made to align the

methodology for the calculation of certain benefits with the pricing methodology used by the insurer. These have resulted in an additional past service charge of £4m being recognised

in the income statement in 2025. A past service credit of £10m has also been recognised in the year in respect of the changes to the Rolls-Royce Deutschland schemes detailed above.

In 2024 a past service charge of £14m was recognised in respect of the UK scheme as a result of further work carried out by the pension scheme administrators and the Scheme Actuary

in 2024 to review all relevant data points and make further changes to member records and required payments under the Barber judgement which sought to equalise normal retirement

ages between men and women

2 The actuarial loss of £(33)m relating to the UK schemes includes a charge of around £(100)m in respect of the Buy-in of the UK scheme detailed above

The defined benefit obligations are in respect of:
Active plan participants 1	(1,243)	(712)	(1,955)	(1,277)	(731)	(2,008)
Deferred plan participants	(1,067)	(95)	(1,162)	(1,064)	(98)	(1,162)
Pensioners	(1,730)	(643)	(2,373)	(1,617)	(672)	(2,289)
Weighted average duration of obligations (years)	13	12	13	14	12	13

1 Although the UK scheme closed to future accrual on 31 December 2020, members who became deferred as a result of the closure and remain employed by the Group retain some

additional benefits compared to other deferred members. The obligations for these members are shown as active plan participants

Changes in fair value of scheme assets

		2025			2024
	UK	Overseas		UK	Overseas
	schemes	schemes	Total	schemes	schemes	Total
	£m	£m	£m	£m	£m	£m
At 1 January	4,737	531	5,268	5,304	520	5,824
Exchange differences	–	(20)	(20)	–	(13)	(13)
Administrative expenses	(6)	(1)	(7)	(5)	(1)	(6)
Financing	246	26	272	235	24	259
(Loss)/return on plan assets excluding financing 1	(484)	9	(475)	(633)	(5)	(638)
Contributions by employer	–	84	84	1	73	74
Contributions by employees	–	14	14	–	13	13
Benefits paid out	(169)	(83)	(252)	(165)	(80)	(245)
At 31 December	4,324	560	4,884	4,737	531	5,268
Total (loss)/return on scheme assets	(238)	35	(203)	(398)	19	(379)

1 Includes an asset remeasurement net loss estimated at £350m recognised in respect of the Buy-in of the UK Scheme that took place in the year. For further details see page 171

174

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

24 Post-retirement benefits continued

Fair value of scheme assets at 31 December

		2025			2024
	UK	Overseas		UK	Overseas
	schemes 1	schemes	Total	schemes	schemes	Total
	£m	£m	£m	£m	£m	£m
Sovereign debt	–	143	143	3,335	140	3,475
Corporate debt instruments	–	237	237	1,860	248	2,108
Interest rate swaps	–	–	–	197	–	197
Inﬂation swaps	–	–	–	92	–	92
Cash and similar instruments 2	–	–	–	(1,176)	–	(1,176)
Liability driven investment (LDI) portfolios	–	380	380	4,308	388	4,696
Listed equities	–	52	52	–	54	54
Unlisted equities	4	1	5	25	–	25
Corporate debt instruments	–	–	–	379	–	379
Cash	280	8	288	25	11	36
Buy-in insurance policy 3	4,040	–	4,040	–	–	–
Other	–	119	119	–	78	78
At 31 December	4,324	560	4,884	4,737	531	5,268

1 Following the Buy-in in August 2025, described on page 171, the Group entered into a bulk purchase annuity policy with PIC for consideration of £4.3bn. The consideration was paid by

transferring certain existing RRUKPF’s assets and cash to PIC

2 UK cash and similar instruments include repurchase agreements on UK Government bonds amounting to £nil (2024: £(1,203)m)

3 Following the transaction, the bulk purchase annuity policy has been treated as an asset of the scheme and has been valued on the same basis as the liabilities to which it relates, as until a

Buy-out takes place, the legal responsibility to pay benefits remains with the Trustee

The investment strategy for the UK scheme is controlled by the Trustee in consultation with the Group. The scheme assets do not include any of

the Group’s own financial instruments, nor any property occupied by, or other assets used by, the Group (2024: none).

Future contributions

The Group expects to contribute approximately £81m to its overseas defined benefit schemes in 2026 (2025: £84m).

In the UK, any cash funding of RRUKPF is based on a statutory triennial funding valuation process. The Group and the Trustee negotiate

and agree the actuarial assumptions used to value the liabilities (Technical Provisions); assumptions which may differ from those used

for accounting set out above. Once each valuation is signed, a Schedule of Contributions (SoC) must be agreed which sets out the cash

contributions to be paid. The most recent valuation, as at 31 March 2023, agreed by the Trustee in October 2023, showed that the RRUKPF was

estimated to be 115% funded on the Technical Provisions basis. All cash due has been paid in full and the current SoC does not require any cash

contributions to be made by the Group. Following the Buy-in of the scheme in August 2025 substantially all the scheme liabilities have been

insured and it is expected that no further funding will be required by the Group: any further liabilities arising are expected to be funded from

the scheme’s existing assets.

Sensitivities

The calculations of the defined benefit obligations are sensitive to the assumptions set out above. A number of the overseas schemes are

unfunded. For the most significant funded schemes, the investment strategies hedge the risks from interest rates and inﬂation measured on a

proxy solvency basis.

UK Scheme

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 2025, 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.

The UK scheme previously hedged interest rate and inﬂation risk based on UK Government bond yields without any adjustment for any credit

spread, however as a result of the Buy-in that took place in August 2025, most of the scheme’s assets were either liquidated or transferred

to PIC during the year. The majority of the assets at 31 December 2025 represent the value of the bulk purchase annuity policy, which aligns

exactly to the liabilities to which it relates, hence any movement in the assets will result in an equal and opposite movement in the liabilities.

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.

175

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

24 Post-retirement benefits continued

		2025	2024
		£m	£m
Reduction in the discount rate of 0.25% 1	Obligations	(140)	(145)
	Plan assets (Buy-in policy)	140	–
	Plan assets (LDI portfolio)	–	179
Increase in inﬂation of 0.25% 1	Obligations	(55)	(55)
	Plan assets (Buy-in policy)	55	–
	Plan assets (LDI portfolio)	–	73
Increase of 1% in transfer value assumption	Obligations	(20)	(25)
	Plan assets (Buy-in policy)	20	–
One year increase in life expectancy	Obligations	(125)	(125)
	Plan assets (Buy-in policy)	125	–

1 The differences between the sensitivities on obligations and plan assets in 2024 arise largely due to differences in the methods used to value the obligations for accounting purposes and

the adopted proxy solvency basis

Overseas Schemes

		2025	2024
		£m	£m
Reduction in the discount rate of 0.25% ¹	Obligations	(40)	(46)
Increase in inﬂation of 0.25% ¹	Obligations	(9)	(10)

1 Unlike the UK scheme, the benefits for the majority of the overseas schemes are not linked to inﬂation, hence the impact of a change in the inﬂation rate has a less significant impact on

the defined benefit obligation than a change in the discount rate

25 Share capital

	Non-equity		Equity
	Special	Nominal	Ordinary shares	Nominal
	Share	value	of 20p each	value
	of £1	£m	Millions	£m
Issued and fully paid
At 1 January 2024	1	–	8,417	1,684
Shares issued to employee share trust	–	–	88	17
At 31 December 2024	1	–	8,505	1,701
Shares issued via a bonus issue 1	–	–	–	6,962
Capital reduction 1	–	–	–	(6,962)
Cancellation of shares 2	–	–	(61)	(12)
At 31 December 2025	1	–	8,444	1,689

1 On 1 May 2025 Rolls-Royce Holdings plc performed a bonus issue of one share from its merger reserve for £6,962m. The Company subsequently performed a capital reduction against

share capital, share premium, and capital redemption reserve

2 During the year the Company cancelled 61,088,437 (2024: none) of its ordinary shares with a total nominal value of £12m in relation to the share buyback programme. Further details can

be found within the Consolidated statement of changes in equity

The rights attaching to each class of share are set out on pages 212 to 213.

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 22. In addition, rights to C share holders are included

on page 212.

176

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

26 Share-based payments

Effect of share-based payment transactions on the Group’s results and financial position

	2025	2024
	£m	£m
Total expense recognised for equity-settled share-based payments transactions	98	95
Total cost recognised for cash-settled share-based payments transactions	6	41
Share-based payments recognised in the consolidated income statement	104	136
Liability for cash-settled share-based payment transactions	–	59

A description of the share-based payment plans is included in the Directors’ Remuneration Report on pages 82 to 109.

Movements in the Group’s share-based payment plans during the year

	ShareSave		Free Shares	LTIP	Incentive Plan	Matching Shares
		Weighted
		average exercise
	Number	price	Number	Number	Number	Number
	Millions	Pence	Millions	Millions	Millions	Millions
Outstanding at 1 January 2024	53.4	107	–	101.0	17.2	–
Granted	–	–	6.2	22.8	5.0	–
Forfeited	(2.3)	110	(0.2)	(5.7)	(0.5)	–
Exercised	(0.5)	104	–	(25.4)	(5.6)	–
Outstanding at 31 December 2024	50.6	107	6.0	92.7	16.1	–
Granted	–	–	–	10.6	0.5	0.6
Forfeited	(0.2)	118	(0.7)	(3.7)	–	–
Exercised	(50.3)	107	(2.3)	(35.3)	(5.6)	–
Outstanding at 31 December 2025	0.1	111	3.0	64.3	11.0	0.6
Exercisable at 31 December 2025	–	–	–	–	–	–
Exercisable at 31 December 2024	0.1	–	–	–	–	–

The weighted average share price at the date share options were exercised was 728p (2024: 420p). The closing price at 31 December 2025 was

1,150p (2024: 569p).

The weighted average remaining contractual life for the share options as at 31 December 2025 was six months (2024: one month) and all

outstanding share options have a maturity date in 2026.

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:

	2025	2024
Free Shares	n/a	494p
LTIP	759p	361p
Incentive Plan	802p	378p
Matching Shares	1,089p	n/a

Vesting period of share-based payment plans

The vesting period for the share-based payment plans are between 6 months to 63 months. See the details below.

	Vesting period
LTIP	6 to 59 months
Incentive Plan	7 to 47 months
Sharesave	39 or 63 months
Free shares	12 or 36 months
Matching shares	24 or 36 months

Long-term incentive plans (LTIP)

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 and S&P Global Industrials Index companies and which incorporates into the valuation the

interdependency between share price performance and TSR vesting where market-based conditions are applicable. This adjustment decreases

the fair value of the award relative to the share price at the date of grant.

177

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

26 Share-based payments continued

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 of the mid-point between the start of the exercise window and the date

of expiration.

Incentive Plan

The fair value of shares awarded is calculated as the share price on the date of the award, on the basis that awards are entitled to receive

dividends (or equivalents).

Free Shares

In 2024, every Rolls-Royce employee was gifted 150 shares. The awards were granted under two plans; the ‘Rolls-Royce Share Purchase Plan’

for UK employees and the ‘Rolls-Royce Global Employee Share Purchase Plan’ for non-UK employees; both being equity-settled schemes. The

fair value of shares awarded under the free shares scheme is calculated as the share price on the date of the award, on the basis that awards are

entitled to receive dividends (or equivalents).

Matching Shares

Rolls-Royce launched the ‘Your Shares: Matched’ plan during the year. Every participant receives the free matching shares with a value of up

to £50 each month based on the number of investment shares they purchase. There are no performance conditions attached to the shares.

The fair value of the free matching shares awarded under these plans is calculated using the share price on the date of the award. Non-vesting

conditions are taken into consideration with a percentage discount applied based on the assumption of the expected forfeiture rates of the

matching shares.

27 Contingent liabilities

In January 2017, after full cooperation, the Company concluded deferred prosecution agreements (DPA) with the Serious Fraud Office and

the US Department of Justice and a leniency agreement with the Ministério Público Federal, the Brazilian federal prosecutor. The terms of both

DPAs have now expired. The Company has also met all its obligations under a two-year leniency agreement with Brazil’s Comptroller General

(CGU), signed in October 2021, relating to the same historical matters. In April 2024, the CGU confirmed that the Company would no longer be

subject to compliance monitorship. Certain 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 Group or individuals. In

addition, the Group could still be affected by actions from other parties, including customers, customers’ financiers and the Company’s current

and former investors, including certain potential claims in respect of the Group’s historical ethics and compliance disclosures which have been

notified to the Group. 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.

The Group has, in the normal course of business, entered into arrangements in respect of export finance, performance bonds, grant

funding, countertrade obligations and minor miscellaneous items, which could result in potential outﬂows if the requirements related to those

arrangements are not met. Various Group undertakings are party to legal actions and claims (including with tax authorities) which arise in the

ordinary course of business, some of which are for substantial amounts.

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, they relate to a

number of customers, a broad product portfolio and are generally secured on the asset subject to the financing. These include commitments

of $339m (2024: $405m) (on a discounted basis) to provide facilities to enable customers to purchase aircraft (of which approximately $67m

could be called during 2026). 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. Significant events impacting the international aircraft financing market, the failure by customers to meet their

obligations under such financing agreements, or inadequate provisions for customer financing liabilities may adversely affect the Group’s

financial position.

Customer financing provisions would be made to cover guarantees provided for asset value and/or financing were it probable that a payment

would be made. These would be measured on a discounted basis at the Group’s borrowing rate to reﬂect the time span over which these

exposures could arise. The values of aircraft providing security are based on advice from a specialist aircraft appraiser. There were no

provisions for customer financing provisions at 31 December 2025 or 31 December 2024.

The Group has responded appropriately to the Russia-Ukraine conﬂict to comply with international sanctions and export control regime, and

to continue to implement the business decision to exit from Russia. The Group could be subject to action by impacted customers, suppliers and

other contract parties.

While the outcome of the above 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.

178

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

28 Related party transactions

	2025	2024
	£m	£m
Sales of goods and services 1	8,679	7,702
Purchases of goods and services 1	(9,141)	(8,725)
Lease payments to joint ventures and associates	(157)	(241)
Guarantees of non-wholly owned subsidiaries’ borrowings	3	4
Dividends received from joint ventures and associates	88	77
Other income received from joint ventures and associates	38	7

1 Sales of goods and services to related parties and purchases of goods and services from related parties, including joint ventures and associates, are included at the average exchange

rate, consistent with the statutory income statement

Included in sales of goods and services to related parties are sales of spare engines amounting to £153m (2024: £48m). Profit recognised in the

year on such sales amounted to £60m (2024: £62m), including profit on current year sales and recognition of profit deferred on similar sales in

previous years. Cash receipts relating to the sale of spare engines amounted to £134m (2024: £48m).

Included in cost of sales in the income statement are interest costs of £9m (2024: £9m) incurred during the year which have been settled by the

Group on behalf of joint ventures.

The aggregated balances with joint ventures are shown in notes 16 and 21. Transactions with Group pension schemes are shown in note 24.

Key management personnel are deemed to be the Directors (pages 64 to 65) and the members of the Executive Team (described on page 74).

Remuneration for key management personnel is shown below:

	2025	2024
	£m	£m
Salaries and benefits	35	29
Included in the above:
Post-retirement schemes	1	1
Share-based payments	12	13

More detailed information regarding the Directors’ remuneration, shareholdings, pension entitlements, share options and other long-term

incentive plans is shown in the Remuneration Report on pages 82 to 109. 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 Remuneration Report.

29 Business disposals and businesses held for sale

Disposals

Rolls-Royce SMR Limited

An investment from ČEZ Group (ČEZ) was received by Rolls-Royce SMR Limited on 4 March 2025 and Rolls-Royce Holdings plc’s indirect

shareholding in Rolls-Royce SMR Limited was diluted from 70.5% at 31 December 2024 to 61.7%. When the new investment was received the

Group relinquished control of Rolls-Royce SMR Limited, as a result of changes in shareholder matters, and the subsidiary was deconsolidated.

This followed detailed consideration of the criteria within IFRS 10 Consolidated Financial Statements in relation to the Group’s ability to take

decisions that affect the returns of the business without the support of other shareholders. The Group’s investment in Rolls-Royce SMR Limited

was recognised at its fair value of £732m on 4 March 2025 and a profit on disposal of £679m was recognised in the Group’s income statement.

In July 2025, Rolls-Royce Holdings plc’s indirect shareholding in Rolls-Royce SMR Limited was further diluted to 55.3%. This was due to a second

equity investment being made by ČEZ into Rolls-Royce SMR Limited which resulted in an additional £15m profit on disposal being recognised in

the year. In December 2025 the Group made a further investment into Rolls-Royce SMR Limited increasing Rolls-Royce Holdings plc’s indirect

shareholding to 57.8%.

Naval propulsors & handling business

On 18 September 2024, the Group signed a sale and disposal agreement for its naval propulsors & handling business with Fairbanks Morse

Defense. On 1 July 2025 the sale of the naval propulsors business completed with the sale of the naval handling business anticipated in 2026.

179

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

29 Business disposals and businesses held for sale continued

	Naval propulsors	Rolls-Royce SMR
	business	Limited	Total
	2025	2025	2025
	£m	£m	£m
Proceeds
Net cash consideration at prevailing exchange rate and at effective hedged rate	172	–	172
Cash and cash equivalents disposed	–	(81)	(81)
Net cash consideration	172	(81)	91
Disposal costs paid	(7)	(4)	(11)
Net cash inflow/(outflow) on disposal per cash flow statement	165	(85)	80
Goodwill	12	–	12
Property, plant and equipment	45	3	48
Right-of-use assets	1	1	2
Inventories	19	–	19
Trade receivables and other assets	62	47	109
Trade payables and other liabilities	(67)	(56)	(123)
Provisions for liabilities and charges	(3)	–	(3)
Borrowings and lease liabilities	(1)	–	(1)
Net assets/(liabilities) disposed	68	(5)	63
Profit/(loss) on disposal before disposal costs and accounting adjustments	104	(76)	28
Disposal costs	(7)	–	(7)
Derecognition of NCI	–	23	23
Accounting adjustment – recognition of Rolls-Royce SMR Limited at fair value	–	732	732
Accounting adjustment – dilution of the Group’s share of Rolls-Royce SMR Limited	–	15	15
Cumulative currency translation gain	18	–	18
Profit on disposal of businesses per income statement	115	694	809
Taxation on disposal 1	(28)	–	(28)

1 The deconsolidation of Rolls-Royce SMR Limited from the Group during 2025 is treated as non-taxable, following the tax de-grouping charge recognised in 2024 when the Group’s

shareholding fell below 75%. Taxation on disposal is included within taxation in the consolidated income statement

Businesses held for sale

At 31 December 2024, the Group had classified the assets and liabilities related to its naval propulsors & handling business as held for sale as,

in line with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, the business was available for sale in its current condition

and the sale was considered highly probable. On 18 September 2024, the Group and Fairbanks Morse Defense signed a sale and disposal

agreement. On 1 July 2025 the sale of the naval propulsors business to Fairbanks Morse Defense took place.

At 31 December 2025 the assets and liabilities of the naval handling business continued to be disclosed as held for sale. They were measured at

the lower of their carrying value or fair value less costs to sell as summarised below. The completion of the naval handling business disposal is

anticipated in 2026.

The table below summarises the categories of assets and liabilities of the naval handling business classified as held for sale at 31 December 2025.

	2025	2024
	£m	£m
Goodwill	–	13
Property, plant and equipment	3	51
Right-of-use assets	–	1
Inventories	1	24
Trade receivables and other assets	11	64
Assets held for sale	15	153
Trade payables and other liabilities	(19)	(96)
Provisions for liabilities and charges	–	(3)
Borrowings and lease liabilities	–	(1)
Liabilities associated with assets held for sale	(19)	(100)
Net (liabilities)/assets held for sale	(4)	53

180

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

30 Derivation of summary funds flow statement

			2025			2024
				Impact of
			Impact of	other non-
		Impact of	acquisition	underlying
	Cash flow	hedge book	accounting	items	Funds flow	Funds ﬂow
	£m	£m	£m	£m	£m	£m
Operating profit/(loss)	4,468	(797)	16	(225)	3,462	2,464
Loss on disposal of property, plant and equipment 1	18	–	–	–	18	32
(Profit)/loss on disposal of intangible assets 1	(2)	–	–	–	(2)	6
Joint venture trading 1	32	–	–	–	32	(95)
Depreciation, amortisation and impairment	737	–	(16)	179	900	853
Movement in provisions	(486)	78	–	118	(290)	(167)
Increase in inventories 2	(685)	–	–	–	(685)	(323)
Movement in prepayments to RRSAs for parts	90	(19)	–	–	71	(219)
Movement in cost to obtain contracts	(44)	–	–	–	(44)	(18)
Movement in trade receivables/payables and other assets/liabilities 2	(29)	(166)	–	3	(192)	166
Revaluation of trading assets 2	214	(18)	–	–	196	(14)
Realised derivatives in financing	532	–	–	–	532	652
Movement in Civil LTSA balance	123	378	–	–	501	910
Movement in contract assets/liabilities (excluding Civil LTSA) 2	581	(11)	–	–	570	(201)
Settlement of excess derivatives	(148)	–	–	–	(148)	(146)
Interest received	270	–	–	–	270	269
Contributions to defined benefit schemes in excess of underlying
operating profit charge 1	(42)	–	–	5	(37)	(31)
Cash ﬂows on other financial assets and liabilities held for operating purposes	(578)	532	–	–	(46)	(24)
Share-based payments 1	104	–	–	–	104	136
Other 1	–	–	–	–	–	(5)
Income tax	(590)	–	–	35	(555)	(381)
Cash from operating activities	4,565	(23)	–	115	4,657	3,864
Capital element of lease payments	(232)	23	–	–	(209)	(275)
Capital expenditure	(978)	–	–	–	(978)	(876)
Cash received on maturity of share-based payment schemes	40	–	–	–	40	–
Investments	(7)	–	–	37	30	16
Interest paid	(262)	–	–	–	(262)	(298)
Other ³	144	–	–	(152)	(8)	(6)
Free cash flow	3,270	–	–	–	3,270	2,425

1 Included in other operating cash ﬂows in the summarised free cash ﬂow on page 23

2 Included in working capital (excluding Civil LTSA balance) in the summarised free cash ﬂow on page 23

3 Other includes M&A related costs, exceptional transformation and restructuring costs

Free cash ﬂow is a measure of the financial performance of the businesses’ cash ﬂows which is consistent with the way in which performance is

communicated to the Board. Free cash ﬂow is cash ﬂows from operating activities, adjusted to include capital expenditure and movements in

investments, capital elements of lease payments, interest paid, cash received on maturity of share-based payment schemes and amounts paid

relating to the settlement of excess derivatives. It excludes amounts spent/received on business acquisitions/disposals, and other material

exceptional or one-off cash ﬂows. Cash ﬂows from operating activities is our statutory equivalent. The Board considers that free cash ﬂow

reﬂects cash generated from the Group’s underlying trading.

The reconciliation between free cash ﬂow and cash ﬂow from operating activities can be found on page 210.

181

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

Company balance sheet

At 31 December 2025

Notes

2025

£m

2024

£m

ASSETS

Investments – subsidiary undertakings 2 15,003 14,905

Non-current assets 15,003 14,905

Cash and cash equivalents – 1

Current assets – 1

TOTAL ASSETS 15,003 14,906

LIABILITIES

Trade payables and other liabilities 3 (2,201) (337)

Other financial liabilities 4 (21) (22)

Current liabilities (2,222) (359)

NET ASSETS 12,781 14,547

EQUITY

Called-up share capital 5 1,689 1,701

Share premium – 1,012

Merger reserve – 6,962

Capital redemption reserve 6 2,750

Other reserve 591 493

Retained earnings 10,495 1,629

TOTAL EQUITY 12,781 14,547

The Company has elected to take the exemption under section 408 of the Companies Act 2006 from presenting the parent company income

statement. The result for the Company for the year was nil (2024: nil).

The Financial Statements on pages 182 to 186 were approved by the Board on 26 February 2026 and signed on its behalf by:

Tufan Erginbilgic Helen McCabe

Chief Executive Chief Financial Officer

Company’s registered number: 7524813

182

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

COMPANY FINANCIAL STATEMENTS

Company statement of changes in equity

For the year ended 31 December 2025

Attributable to ordinary shareholders

capital

£m

premium

£m

Merger

reserve

£m

Capital

redemption

reserve

£m

Other

reserve

£m

Retained

earnings

£m

3, 4

Total

equity

£m

At 1 January 2024 1,684 1,012 6,962 2,749 397 1,647 14,451

Arising on issues of ordinary shares 17 – – – – (17) –

Redemption of C Shares – – – 1 – (1) –

Share-based payments –

directtoequity – – – – 96 – 96

At 1 January 2025 1,701 1,012 6,962 2,750 493 1,629 14,547

Bonus issue

6,962 – (6,962) – – – –

Capital Reduction

(6,962) (1,012) – (2,757) – 10,731 –

Share buyback programme

(12) – – 12 – (1,019) (1,019)

Redemption of C Shares – – – 1 – (1) –

Share-based payments –

directtoequity – – – – 98 – 98

ShareSave maturity – – – – – 40 40

Dividend paid – – – – – (885) (885)

At 31 December 2025 1,689 – – 6 591 10,495 12,781

1 The Company’s merger reserve was created as a result of a High Court approved scheme of arrangement in 2011, when the Company became the holding company for the

Rolls-Royce Group

2 Other reserve represents the value of the share-based payments in respect of employees of subsidiary undertakings for which payment has not been received

3 The reserves, which are distributable to the Company’s equity shareholders, are determined with reference to the Companies Act 2006 and requires judgement in determining the

amount available for distribution. Further guidance is given in the Institute of Chartered Accountants in England and Wales technical release 02/17BL in relation to what profits can be

treated as distributable. At 31 December 2025, £10,445m of the Company’s retained earnings are distributable, however, the available amount may be different at the point any future

distributions are made

4 At 31 December 2025, 69,290,662 ordinary shares with a net book value of £503m (2024: 106,066,831 ordinary shares with a net book value of £26m) were held for the purpose of

share-based payment plans and included in accumulated losses. During the year:

– 81,979,149 ordinary shares with a net book value of £22m (2024: 35,117,065 ordinary shares with a net book value of £14m) vested in share-based payment plans;

– the Company issued no (2024: 88,200,000) new ordinary shares to the Group’s share trust for its employee share-based payment plans with a net book value of£nilm (2024: £18m);

– the Company, through the Employee Benefit Trust, acquired none (2024: none) of its ordinary shares via reinvestment of dividends received on its own shares and purchased none

(2024: 71,490) of its ordinary shares through purchases on the London Stock Exchange

– the Employee Benefit Trust purchased 3,719,489 (2024: nil) ordinary shares with an aggregate value of £40m from the Company, the Company purchased these shares through the

share buyback scheme and held them as Treasury shares

– the Company gifted 41,483,491 (2024: nil) ordinary shares with an aggregate value of £460m to the Employee Benefit Trust, the Company having previously purchased these shares

through the share buyback scheme

5 On 1 May 2025 the Company performed a bonus issue of one share from its merger reserve for £6,962m. The Company subsequently performed a capital reduction against share capital,

share premium, and capital redemption reserve

6 Following the announcement of the £1bn share buyback on 27 February 2025, during the year the Company purchased with cash 106,291,417 (2024: none) of its ordinary shares at a

costof £1bn. The Company also separately paid costs of £8m in relation to the programme. Of these ordinary shares purchased by the Company 61,088,437 shares at a cost of £500m

were cancelled during the year. As detailed above, a further 3,719,489 shares at a cost of £40m were sold to the Employee Benefit Trust for consideration of £40m and in December 2025,

the Company gifted the remaining treasury shares of 41,483,491 at a cost of £460m to the Employee Benefit Trust. As at 31December 2025 the Company held nil (2024: nil) treasury shares

183

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

FINANCIAL STATEMENTS

COMPANY FINANCIAL STATEMENTS

1 Accounting policies

Basis of accounting

Rolls-Royce Holdings plc (the Company) is a public company limited by shares incorporated and domiciled in England in the United Kingdom.

These Financial Statements have been prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework on the

historical cost basis.

These Financial Statements have been prepared on a going concern basis. Further details are given in the Going Concern Statement on page

57. After due consideration, the Directors consider that the Company has sufficient liquidity headroom to continue in operational existence for

aperiod of at least 18 months from the balance sheet date and there are no material uncertainties that may cast doubt on the Company’s going

concern status, accordingly they are satisfied that it is appropriate to adopt the going concern basis of accounting in preparing the Company

Financial Statements.

In preparing these Financial Statements, the Company applies the recognition, measurement and disclosure requirements of International

Financial Reporting Standards (IFRS) as adopted by the UK (UK-adopted international accounting standards). The Company is included

withinthe Consolidated Financial Statements of Rolls-Royce Holdings plc. The Consolidated Financial Statements are prepared in accordance

with IFRS and are publicly available. In these Financial Statements, the Company is considered to be a qualifying entity and has applied the

exemptions available under FRS101 in respect of the following disclosures:

— a cash flow statement and related notes;

— comparative period reconciliation for investments and financial liabilities;

— comparative period reconciliation for share capital;

— the effects of new, but not yet effective accounting standards; and

— the requirements of IAS 24 Related Party Disclosures 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

FinancialStatements.

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.

Key areas of judgement and sources of estimation uncertainty

The preparation of financial statements requires the use of certain critical accounting estimates. It also requires the Directors to exercise

theirjudgement in the process of applying the accounting policies. The Directors have not identified any critical estimates or judgements at

31December 2025 where there is a significant risk of material change in the next 12 months.

Material accounting policies

Investments in subsidiary undertakings

Investments included in assets are investments in subsidiary companies, and these are held at historical cost less impairments which is

considered annually by the Directors.

Trade payables

Trade payables are recognised initially at the transaction price and subsequently measured at amortised cost using the effective

interestmethod.

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.

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. The cost of issuing ordinary shares are charged to the share premium account.

Share-based payments

As described in the Remuneration Report on pages 82 to 109, the Company grants awards of its own shares to employees of its subsidiary

undertakings (see note 26 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.

184

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE COMPANY FINANCIAL STATEMENTS

1 Accounting policies continued

Insurance contracts

The Company enters into: financial guarantees where the Company guarantees payment in case of its subsidiary defaulting on a debt; and

performance guarantees where the Company guarantees certain subsidiaries’ performance to a customer. The Company has reviewed and

concluded that its arrangements meet the accounting definition of an insurance contract under IFRS 17 Insurance Contracts. The Company

haselected to apply IFRS17 Insurance Contracts (rather than IFRS 9 Financial Instruments) to all currently issued financial guarantee contracts.

At 31 December 2025, financial guarantees of borrowings amounted to £5,298m (2024: £6,094m) of which the total amount of debt drawn is

£2,798m (2024: £3,594m). Under IFRS 17 Insurance Contracts, the Company must recognise any obligation at the inception of the contract

forthe expected fulfilment cash flows under the contract on a best estimate basis (liability for remaining coverage). The Company has assessed

the probability of losses on its financial and performance guarantees and has determined that the probability is remote after consideration

ofboth historical and forward-looking triggers and as such the estimated liability is immaterial. As the estimated liability is immaterial at

31December 2025, no liability has been recognised in the Company Financial Statements.

Post balance sheet events

As part of an internal legal entity review programme the Company took out a loan of £1.9bn from its direct subsidiary, Rolls-Royce plc,

on1January 2026. The funds were invested on the same day into a new direct subsidiary of the Company, Rolls-Royce US Holdings Limited,

inreturn for shares. The funds enabled Rolls-Royce US Holdings Limited to acquire entities from Rolls-Royce plc.

On 1 January 2026, the Company received the remaining 96.46% shares of Rolls-Royce plc by way of distribution from its direct subsidiary

Rolls-Royce Group Limited, bringing the Company’s direct holding to 100%. Following this, on 8 January 2026, the Company contributed its

100% direct holding in Rolls-Royce Group Limited to Rolls-Royce plc. The carrying value of investments held by the Company was unchanged

as a result of these transactions.

Following the completion in November 2025 of its £1bn share buyback programme for 2025, the Group announced in December 2025 that it

was commencing a further share buyback programme of up to £200m in January 2026. This programme was completed in February 2026, with

the Company having purchased 15,971,931 shares for consideration of £200m. These shares have all been cancelled.

On 26 February 2026, the Group announced a multi-year share buyback programme (see page 57 for further details).

2 Investments – subsidiary undertakings

£m

Cost:

At 1 January 2025 14,905

Cost of share-based payments in respect of employees of subsidiary undertakings less receipts from subsidiaries in respect

ofthose payments 98

At 31 December 2025 15,003

Details of the Company’s subsidiary undertakings and joint venture and associates undertakings are listed on pages 187 to 192.

The carrying value of the Company’s investments in subsidiary undertakings has been reviewed for impairment in accordance with IAS 36

Impairment of Assets. No indicators of impairment were identified at 31 December 2025.

3 Trade payables and other liabilities

2025

£m

2024

£m

Amounts owed to – subsidiary undertakings 2,191 337

Accruals

10 –

2,201 337

1 During the year, the Company recognised an accrual which represents an estimate of the amount it was committed to purchase under the terms of its Share Purchase Agreement but as

yet unpurchased at 31 December 2025

Amounts owed to subsidiary undertakings are interest free and repayable on demand.

4 Financial liabilities

C Shares

Movements during the year were as follows, please see note 22 within the notes to the consolidated financial statements for further details:

C Shares

of 0.1p

millions

Nominal

value

£m

At 1 January 2025 22,505 22

Redeemed (1,198) (1)

At 31 December 2025 21,307 21

The rights attaching to C Shares are set out on page 212.

185

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

FINANCIAL STATEMENTS

NOTES TO THE COMPANY FINANCIAL STATEMENTS

5 Share capital

Non-equity Equity

Special

of £1

Preference

shares of

£1 each

Nominal

value

£m

Ordinary

shares of

20p each

Millions

Nominal

value

£m

Issued and fully paid

At 1 January 2025 1 – – 8,505 1,701

Shares issued via a bonus issue

– – – – 6,962

Capital reduction

– – – – (6,962)

Cancellation of shares

– – – (61) (12)

At 31 December 2025 1 – – 8,444 1,689

1 On 1 May 2025 the Company performed a bonus issue of one share from its merger reserve for £6,962m. The Company subsequently performed a capital reduction against share capital,

share premium, and capital redemption reserve. Further details can be found within the Consolidated statement of changes in equity

2 During the year the Company cancelled 61,088,437 (2024: none) of its ordinary shares at a cost of £12m in relation to the share buyback programme. Further details can be found within

the Consolidated statement of changes in equity

The rights attaching to each class of share are set out on pages 212 to 213.

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 4.

6 Contingent liabilities

For further details on action related to historical matters that could have an impact on the Company, see page 178.

7 Other information

Employees

The Company had no employees in 2025 (2024: none).

Share-based payments

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 Remuneration Report on pages 82 to 109.

The total amount of remuneration paid to Directors for the year ended 31 December 2025 was £10,834,729 (2024: £7,670,542). £5,819,361 of this

was attributed to the highest paid Director (2024: £4,078,266). A cash allowance in lieu of company contributions to a pension scheme was also

paid to two Directors (2024: two), which totalled £272,182 (2024: £245,888).

186

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

NOTES TO THE COMPANY FINANCIAL STATEMENTS

				% of class
Company name	Address		Class of shares	held
Aerospace Transmission Technologies GmbH 1	Adelheidstrasse 40, D-88046, Friedrichshafen, Germany		Capital Stock	50
Amalgamated Power Engineering Limited 2	Kings Place, 90 York Way, London N1 9FX, United Kingdom		Deferred	100
			Ordinary	100
Bristol Siddeley Engines Limited 2	Kings Place, 90 York Way, London N1 9FX, United Kingdom		Ordinary	100
Brown Brothers & Company, Limited 3	Inchinnan Drive, Inchinnan, United Kingdom, PA4 9AF		Ordinary	100
C A Parsons & Company Limited 3	Kings Place, 90 York Way, London N1 9FX, United Kingdom		Ordinary	100
Derby Specialist Fabrications Limited 2	Kings Place, 90 York Way, London N1 9FX, United Kingdom		Ordinary	100
Europea Microfusioni Aerospaziali S.p.A.	Zona Industriale AS1, 83040 Morra de Sanctis, Avellino, Italy		Ordinary	100
Heaton Power Limited 2	Kings Place, 90 York Way, London N1 9FX, United Kingdom		Ordinary	100
John Thompson Cochran Limited 2	Inchinnan Drive, Inchinnan, United Kingdom, PA4 9AF		6% Cumulative	100
			Preference
			Ordinary	100
Karl Maybach-Hilfe GmbH i.l. 4	Maybachplatz 1, 88045, Friedrichshafen, Germany		Capital Stock	100
Kinolt Immo SA	Rue de l’Avenir 61, 4460, Grace-Hollogne, Belgium		Ordinary	100
Kinolt Sistemas de UPS SpA	Bucarest No 17 Oficina, No 33, Previdencia, Santiago, Chile		Ordinary	100
Kinolt UK Limited 2	Kings Place, 90 York Way, London N1 9FX, United Kingdom		Ordinary	100
LLC Rolls-Royce Solutions Rus 2	Shabolovka Street 2, 119049, Moscow, Russian Federation		Ordinary	100
MTU Cooltech Power Systems Co., Limited 1	Building No 2, No 1633 Tianchen Road, Quingpu District,		Equity	50
	Shanghai, China
MTU India Private Limited 5	6th Floor, RMZ Galleria, S/Y No. 144 Bengaluru, Bangalore,		Ordinary	100
	Kamataka 560,064,	India
MTU Polska Sp. z o.o.	ul. Hoża 86, lokal 410, 00-682 Warsaw, Poland		Ordinary	100
NEI International Combustion Limited 2	Kings Place, 90 York Way, London N1 9FX, United Kingdom		Ordinary	100
NEI Mining Equipment Limited 2	Kings Place, 90 York Way, London N1 9FX, United Kingdom		Ordinary	100
NEI Nuclear Systems Limited 2	Kings Place, 90 York Way, London N1 9FX, United Kingdom		Ordinary	100
NEI Parsons Limited 2	Kings Place, 90 York Way, London N1 9FX, United Kingdom		Ordinary	100
NEI Peebles Limited 2	Kings Place, 90 York Way, London N1 9FX, United Kingdom		Ordinary	100
NEI Power Projects Limited 4	Kings Place, 90 York Way, London N1 9FX, United Kingdom		Ordinary	100
Nightingale Insurance Limited	PO Box 33, Dorey Court, Admiral Park, St Peter Port GY1 4AT,		Ordinary	100
	Guernsey
No-Break Power Limited 4	Kings Place, 90 York Way, London N1 9FX, United Kingdom		Ordinary	100
Powerfield Limited	Moor Lane, Derby, Derbyshire DE24 8BJ, United Kingdom		Ordinary	100
PT Rolls-Royce	Secure Building Blok B, Jl. Raya Protokol Halim, Perdanakusuma,		Ordinary	100
	Jakarta, 13610,	Indonesia
PT Rolls Royce Solutions Indonesia	Secure Building Blok B, Jl. Raya Protokol Halim, Perdanakusuma,		Ordinary	100
	Jakarta, 13610,	Indonesia
Rolls-Royce (Ireland) Unlimited Company	Ulster International Finance, 1st Floor IFSC House, IFSC Dublin,		Ordinary	100
	Dublin, County Dublin, DO1R 2P9, Ireland
Rolls-Royce (Thailand) Company Limited	101	True Digital Park, Pegasus Building, 5th Floor, Unit 558	Ordinary	100
	Sukhumvit Road, Bangchak, Pharakhanong, Bangkok, 10260,
Rolls-Royce Aero Engine Services Limited 4	Thailand	Kings Place, 90 York Way, London N1 9FX, United Kingdom	Ordinary	100
Rolls-Royce Australia Pty Limited	Suite 14.03, Level 14, 130 Pitt St, Sydney NSW 2000, Australia		Ordinary	100
Rolls-Royce Australia Services Pty Limited	Suite 14.03, Level 14, 130 Pitt St, Sydney NSW 2000, Australia		Ordinary	100
Rolls-Royce Brasil Limitada	Bernando do Campo, São Paulo, CEP 09750-730, Brazil	Rua Jose Versolato, No. 111, Torre B, Sala 2502, Centro, São	Quotas	100
Rolls-Royce Canada Limited	9500	Côte de Liesse, Lachine, Québec H8T 1A2, Canada	Common	100
			Stock
Rolls-Royce Chile SpA	Rosario Norte #407 Depto. #1601 Comuna Las Condes Ciudad		Ordinary	100
	Santiago, Chile
Rolls-Royce China Holding Limited	305	Indigo Building 1, 20 Jiuxianqiao Road, Beijing, 100016, China	Ordinary	100
Rolls-Royce Commercial Aero Engines	Kings Place, 90 York Way, London N1 9FX, United Kingdom		Ordinary	100
Limited 4
Rolls-Royce Controls and Data Services	Kings Place, 90 York Way, London N1 9FX, United Kingdom		Ordinary	100
Limited 3
Rolls-Royce Corporation	Corporation Service Company, 251 Little Falls Drive, Wilmington,		Common	100
	Delaware 19808, United States		Stock
Rolls-Royce Crosspointe LLC	Corporation Service Company, 251 Little Falls Drive, Wilmington,		Partnership	100
	Delaware 19808, United States

As at 31 December 2025, the companies listed below and on the following pages were indirectly held by Rolls-Royce Holdings plc,

except Rolls-Royce Group Limited and Rolls-Royce US Holdings Limited, which were 100% directly owned by Rolls-Royce Holdings plc,

and Rolls-Royce plc in which Rolls-Royce Holdings plc directly owned 3.54%. The financial year end of each company is 31 December

unless otherwise indicated.

187

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

FINANCIAL STATEMENTS

Subsidiaries

						% of class
Company name	Address				Class of shares	held
Rolls-Royce Defense Products and	Corporation Service Company, 251 Little Falls Drive, Wilmington,				Common	100
Solutions Inc.	Delaware 19808, United States				Stock
Rolls-Royce Defense Services Inc.	Corporation Service Company, 251 Little Falls Drive, Wilmington,				Common	100
	Delaware 19808, United States				Stock
Rolls-Royce Deutschland Ltd & Co KG	Eschenweg 11, 15827			Blankenfelde-Mahlow OT Dahlewitz, Germany	Partnership	100
Rolls-Royce Electrical Norway AS	Jarleveien 8A, 7041, Trondheim, Norway				Ordinary	100
Rolls-Royce Energy Angola, Limitada	Casa no. 174, Largo Leite Duarte, Bairro Miramar, Luanda,				Quota	100
	Municipality of Ingombota, Angola
Rolls-Royce Energy Systems Inc. 2	Corporation Service Company, 251 Little Falls Drive, Wilmington,				Common	100
	Delaware 19808, United States				Stock
Rolls-Royce Engine Services Holdings Co.	Corporation Service Company, 251 Little Falls Drive, Wilmington,				Common	100
	Delaware 19808, United States				Stock
Rolls-Royce Engine Services Limitada Inc. 4	Bldg. 06 Berthaphil Compound, Jose Abad Santos Avenue,				Capital Stock	100
	Clark Special Economic Zone, Clark, Pampanga, Philippines
Rolls-Royce Erste Beteiligungs GmbH	Eschenweg	11,	15827	Blankenfelde-Mahlow OT Dahlewitz, Germany	Capital Stock	100
Rolls-Royce Finance Company Limited 4	Kings Place, 90 York Way, London N1 9FX, United Kingdom				Deferred	100
					Ordinary	100
Rolls-Royce Finance Holdings Co.	Corporation Service Company, 251 Little Falls Drive, Wilmington,				Common	100
	Delaware 19808, United States				Stock
Rolls-Royce Fuel Cell Systems Limited 3	Moor Lane, Derby, Derbyshire DE24 8BJ, United Kingdom				Ordinary	100
Rolls-Royce General Partner (Ireland)	29 Earlsfort Terrace, Dublin 2, Dublin D02 AY28, Ireland				Ordinary	100
Limited
Rolls-Royce General Partner Limited 2	Kings Place, 90 York Way, London N1 9FX, United Kingdom				Ordinary	100
Rolls-Royce Group Limited 3, 6	Kings Place, 90 York Way, London N1 9FX, United Kingdom				Ordinary	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. “v.a.” 4	Kacsa utca 15-23. 1. ép. Fsz., Budapest, 1027, Hungary				Cash shares	100
Rolls-Royce India Limited 5, 7	Moor Lane, Derby, Derbyshire DE24 8BJ, United Kingdom				Ordinary	100
Rolls-Royce India Private Limited 5	Birla Tower West, 2nd Floor 25, Barakhamba Road, New Delhi,				Equity	100
	110001	, India
Rolls-Royce Industrial & Marine Power	Kings Place, 90 York Way, London N1 9FX, United Kingdom				Ordinary	100
Limited 3
Rolls-Royce Industrial Power (India)	Moor Lane, Derby, Derbyshire DE24 8BJ, United Kingdom				Ordinary	100
Limited 5, 7
Rolls-Royce Industrial Power Engineering	Moor Lane, Derby, Derbyshire DE24 8BJ, United Kingdom				Ordinary	100
(Overseas Projects) Limited 3
Rolls-Royce Industries Limited 3	Moor Lane, Derby, Derbyshire DE24 8BJ, United Kingdom				Ordinary	100
Rolls-Royce International Limited	Moor Lane, Derby, Derbyshire DE24 8BJ, United Kingdom				Ordinary	100
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	Moor Lane, Derby, Derbyshire DE24 8BJ, United Kingdom				Ordinary	100
Rolls-Royce Malaysia Sdn. Bhd.	Unit A-3-6 TTDI Plaza, Jalan Wan Kadir 3, Taman Tun Dr Ismail,				Ordinary	100
	6000	Kuala Lumpur, Malaysia
Rolls-Royce Military Aero Engines	Kings Place, 90 York Way, London N1 9FX, United Kingdom				Ordinary	100
Limited 5, 7
Rolls-Royce New Zealand Limited	Deloitte Centre, Level 20, 1 Queen Street, Auckland, 10103,				Ordinary	100
	New Zealand
Rolls-Royce North America (USA)	Corporation Service Company, 251 Little Falls Drive, Wilmington,				Common	100
Holdings Co.	Delaware 19808, United States				Stock
Rolls-Royce North America Holdings Inc.	Corporation Service Company, 251 Little Falls Drive, Wilmington,				Common	100
	Delaware 19808, United States				Stock
Rolls-Royce North America Inc.	Corporation Service Company, 251 Little Falls Drive, Wilmington,				Common	100
	Delaware 19808, United States				Stock
Rolls-Royce North America Ventures Inc.	Corporation Service Company, 251 Little Falls Drive, Wilmington,				Common	100
	Delaware 19808, United States				Stock
Rolls-Royce North American	Corporation Service Company, 251 Little Falls Drive, Wilmington,				Common	100
Technologies Inc.	Delaware 19808, United States				Stock
Rolls-Royce Oman LLC	Bait Al Reem, Business Office #131, Building No 81, Way No 3409,	Block No 234, Al Thaqafa Street, Al Khuwair, PO Box 20,			Ordinary	100
	Postal Code 103, Oman
Rolls-Royce Operations (India)	Birla Tower West, 2nd Floor, 25 Barakhamba Road, New Delhi,				Ordinary	100
Private Limited 2, 5	110001	, India

188

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

SUBSIDIARIES

				% of class
Company name	Address		Class of shares	held
Rolls-Royce Overseas Holdings Limited 3	Moor Lane, Derby, Derbyshire DE24 8BJ, United Kingdom		Ordinary	100
			Ordinary A	100
Rolls-Royce Overseas Investments Limited 3	Moor Lane, Derby, Derbyshire DE24 8BJ, United Kingdom		Ordinary	100
Rolls-Royce Placements Limited 4	Kings Place, 90 York Way, London N1 9FX, United Kingdom		Ordinary	100
Rolls-Royce plc 8	Kings Place, 90 York Way, London N1 9FX, United Kingdom		Ordinary	100
Rolls-Royce Power Engineering Limited	Moor Lane, Derby, Derbyshire DE24 8BJ, United Kingdom		Ordinary	100
Rolls-Royce Power Systems AG	Maybachplatz 1, 88045, Friedrichshafen, Germany		Ordinary	100
Rolls-Royce Retirement Savings Trust	Moor Lane, Derby, Derbyshire DE24 8BJ, United Kingdom		Ordinary	100
Limited 2, 5
Rolls-Royce Saudi Arabia Limited	3010 – Al Arid, Riyadh 13332 – 7663, Saudi Arabia		Cash shares	100
Rolls-Royce Singapore Pte. Ltd.	6 Shenton Way, #33-00 OUE, Downtown Singapore 068809,		Ordinary	100
	Singapore
Rolls-Royce Solutions (Suzhou) Co. Ltd	9 Long Yun Road, Suzhou Industrial Park, Suzhou 215024,		Ordinary	100
	Jiang Su, China
Rolls-Royce Solutions Africa (Pty) Limited	36 Marconi Street, Montague Gardens, Cape Town, 7		441,	Capital Stock	100
	South Africa
Rolls-Royce Solutions America Inc.	100	West Tenth Street, Wilmington – Delaware DE 19808,	Ordinary	100
	United States
Rolls-Royce Solutions Asia Pte. Limited	10 Tukang Innovation Drive, Singapore 618302		Ordinary	100
Rolls-Royce Solutions Augsburg GmbH	Dasinger Strasse 11, 86165, Augsburg, Germany		Capital Stock	100
Rolls-Royce Solutions Benelux B.V.	Merwedestraat 86, 3313 CS, Dordrecht, Netherlands		Ordinary	100
Rolls-Royce Solutions Brasil Limitada	Via Anhanguera, KM 29203, 05276-000 São Paulo – SP, Brazil		Quotas	100
Rolls-Royce Solutions Enerji Deniz Ve	Hatira Sokak, No. 5, Ömerli Mahellesi, 34555 Arnavutköy,		Ordinary	100
Savunma Anonim Şirketi	Istanbul, Türkiye
Rolls-Royce Solutions France S.A.S.	des Bellevues 95610, Erangy-sur-Oise, France	Immeuble Colorado, 8/10 rue de Rosa Luxembourg-Parc	Ordinary	100
Rolls-Royce Solutions GmbH	Maybachplatz 1, 88045, Friedrichshafen, Germany		Capital Stock	100
Rolls-Royce Solutions Hong Kong Limited	14/F, Chinabest International Centre, 8 Kwai On Road, Kwai Chung,		Ordinary	100
	N.T., Hong Kong
Rolls-Royce Solutions Ibérica s.l.u.	Paseo de las Flores 46, 28823 Coslada, Madrid, Spain		Ordinary	100
Rolls-Royce Solutions Israel Limited	6 Meir Ariel St., Natanya, Israel		Ordinary	100
Rolls-Royce Solutions Italia S.r.l.	Via Aurelia Nord, 328, 19021 Arcola (SP), Italy		Capital Stock	100
Rolls-Royce Solutions Japan Co. Limited	14-3, Nishitenma 4-chome, Kita-ku, Osaka 530-0047, Japan		Ordinary	100
Rolls-Royce Solutions Korea Limited	Unit 301, The Square, 9 Mulgeum-ro, Mulgeum-eup, Yangsan-si,		Ordinary	100
	Gyeongsangnam-do 50657, Republic of Korea
Rolls-Royce Solutions Liège Holding S.A.	Rue de l’Avenir 61, 4460, Grace-Hollogne, Belgium		Ordinary	100
Rolls-Royce Solutions Liège S.A.	Rue de l’Avenir 61, 4460, Grace-Hollogne, Belgium		Ordinary	100
Rolls-Royce Solutions Magdeburg GmbH	Friedrich-List-Strasse 8, 39122 Magdeburg, Germany		Capital Stock	100
Rolls-Royce Solutions Malaysia Sdn. Bhd.	Level 3 Platinum Sentral, Jalan Stesen Sentral 2,	Office no. B329, Spaces Platinum Sentral, Lot G02-G07,	Ordinary	100
	50470	Kuala Lumpur, Malaysia
Rolls-Royce Solutions Mexico City S.A.	Xochicalco 620, Colonia Letran Valle, Delegacion Benito Juarez,		Common	100
de C.V. 2	Mexico City 03650, Mexico		Shares
Rolls-Royce Solutions Middle East FZE	S3B5SR06, Jebel Ali Free Zone, South P.O. Box 61141, Dubai,		Ordinary	100
	United Arab Emirates
Rolls-Royce Solutions Ruhstorf GmbH	Rotthofer Strasse 8, 94099 Ruhstorf a.d. Rott, Germany		Capital Stock	100
Rolls-Royce Solutions South Africa (Pty)	36 Marconi Street, Montague Gardens, Cape Town, 7441,		Ordinary	100
Limited	South Africa
Rolls-Royce Solutions Trading and	REGUS Service Office, Office No. 1034, Shoumoukh Tower,		Ordinary	49
Contracting LLC 9	10th Floor, Tower B, C-Ring Road, Al Sadd, PO Box 207207,
Rolls-Royce Solutions UK Limited	Doha, Qatar	Moor Lane, Derby, Derbyshire DE24 8BJ, United Kingdom	Ordinary	100
Rolls-Royce Solutions Willich GmbH	Konrad-Zuse-Str. 3, 47877, Willich, Germany		Capital Stock	100
Rolls-Royce Sp z.o.o.	Opolska 100 31-323, Krakow, Poland		Ordinary	100
Rolls-Royce Submarines Limited	Atlantic House, Raynesway, Derby, Derbyshire DE21 7BE,		Ordinary	100
	United Kingdom
Rolls-Royce Technical Support Sarl	Site Motoristes Vendor-Village, 46 avenue Jean Monnet,		Ordinary	100
	317	70, Colomiers, France
Rolls-Royce Total Care Services Limited 3	Moor Lane, Derby, Derbyshire DE24 8BJ, United Kingdom		Ordinary	100
Rolls Royce Turkey Güç Çözümleri San. ve	Cumhuriyet Mah. Yakacık D-100 Kuzey Yanyol Cad. No: 25 Kartal,		Cash shares	100
Tic.Ltd.Şti.	Istanbul, Türkiye
Rolls-Royce UK Pension Fund Trustees		Moor Lane, Derby, Derbyshire DE24 8BJ, United Kingdom	Ordinary	100
Limited 2

189

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

FINANCIAL STATEMENTS

SUBSIDIARIES

					% of class
Company name	Address			Class of shares	held
Rolls-Royce US Holdings Limited	Kings Place, 90 York Way, London, N1 9FX, United Kingdom			Ordinary	100
Rolls-Royce Zweite Beteiligungs GmbH	Eschenweg 11, 15827	Blankenfelde-Mahlow	OT Dahlewitz, Germany	Capital Stock	100
Ross Ceramics Limited 3	Moor Lane, Derby, Derbyshire DE24 8BJ, United Kingdom			Ordinary	100
Servowatch Systems Limited 4	Kings Place, 90 York Way, London N1 9FX, United Kingdom			Ordinary	100
Sharing in Growth UK Limited 10	Moor Lane, Allenton, Derby DE24 9HY, United Kingdom			Limited by	100
				guarantee
Spare IPG 20 Limited 3	Kings Place, 90 York Way, London N1 9FX, United Kingdom			Ordinary	100
Spare IPG 21 Limited 2	Kings Place, 90 York Way, London N1 9FX, United Kingdom			Ordinary	100
Spare IPG 24 Limited 3	Kings Place, 90 York Way, London N1 9FX, United Kingdom			Ordinary	100
Spare IPG 32 Limited 3	Kings Place, 90 York Way, London N1 9FX, United Kingdom			Ordinary	100
Spare IPG 4 Limited 2	Kings Place, 90 York Way, London N1 9FX, United Kingdom			Ordinary	100
Team Italia Marine S.R.L.	Italy		Kampanien, Via Luigi Einaudi 114/B, 61032 Fano, Pesaro and Urbino,	Ordinary	100
The Bushing Company Limited 3	Kings Place, 90 York Way, London N1 9FX, United Kingdom			Ordinary	100
Timec 1487 Limited 2	Kings Place, 90 York Way, London N1 9FX, United Kingdom			Ordinary	100
Turbine Surface Technologies Limited 1	Unit 13a, Little Oak Drive, Sherwood Park, Annesley,			Ordinary A	Nil
	Nottinghamshire NG15 0DR, United Kingdom			Ordinary B	100
Vessel Lifter Inc. 2	Corporation Service Company, 1201 Hays Street, Tallahassee,			Common	100
	Florida 32301, United States			Stock
Vinters Defence Systems Limited 2	Kings Place, 90 York Way, London N1 9FX, United Kingdom			Ordinary	100
Vinters Engineering Limited	Moor Lane, Derby, Derbyshire DE24 8BJ, United Kingdom			Ordinary	100
Vinters International Limited 3	Moor Lane, Derby, Derbyshire DE24 8BJ, United Kingdom			Ordinary	100
Vinters Limited 3	Moor Lane, Derby, Derbyshire DE24 8BJ, United Kingdom			Ordinary	100
Vinters-Armstrongs (Engineers) Limited 2	Kings Place, 90 York Way, London N1 9FX, United Kingdom			Ordinary	100
Vinters-Armstrongs Limited 3	Kings Place, 90 York Way, London N1 9FX, United Kingdom			Ordinary B	100
Yocova Private Ltd	Kings Place, 90 York Way, London N1 9FX, United Kingdom			Ordinary	100
Yocova PTE. Ltd. 2	6 Shenton Way, #33-00 OUE, Downtown Singapore 068809,			Ordinary	100
	Singapore

1 Although the interest held is 50%, the Company controls the entity (see note 1 to the Consolidated Financial Statements) and, as a result, consolidates the entity and records

a non-controlling interest

2 Dormant entity

3 Entity to take advantage of s479A Companies Act 2006 (s479A) audit exemption for the year ended 31 December 2025. The Company will issue a guarantee pursuant to s479A in relation

to the liabilities of the entity

4 Entity in liquidation

5 Reporting year end is 31 March 2026

6 On 8 January 2026, the Company contributed its 100% direct holding in Rolls-Royce Group Limited to Rolls-Royce plc

7 Entity to take advantage of s479A Companies Act 2006 (s479A) audit exemption for the year ending 31 March 2026. The Company will issue a guarantee pursuant to s479A in relation to

the liabilities of the entity

8 On 1 January 2026, the Company received the remaining 96.46% shares of Rolls-Royce plc by way of distribution from its direct subsidiary Rolls-Royce Group Limited, bringing the

Company’s direct holding to 100%

9 Although the interest held is 49%, the Company controls the entity (see note 1 to the Consolidated Financial Statements) and, as a result, consolidates the entity and records a

non-controlling interest

10 The entity is not included in the consolidation, as the Company does not have a beneficial interest in the net assets of the entity

11 The entity is accounted for as a joint operation (see note 1 to the Consolidated Financial Statements)

12 Reporting year end is 30 June 2026

13 Entity is accounted for as a joint venture as approval is required from the other shareholder for operationally running the affairs of the entity

190

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

SUBSIDIARIES

					Group
					interest
				% of class	held
Company name	Address		Class of shares	held	%
Aero Gearbox International SAS 11	18 Boulevard Louis Sequin, 92700 Colombes, France		Ordinary	50	50
Airtanker Services Limited	Airtanker Hub, RAF Brize Norton, Carterton,		Ordinary	23.5	23.5
	Oxfordshire OX18 3LX, United Kingdom
Alpha Leasing (US) (No.2) LLC	Corporation Service Company, 251 Little Falls Drive,		Partnership	–	50
	Wilmington, Delaware 19808, United States
Alpha Leasing (US) (No.4) LLC	Corporation Service Company, 251 Little Falls Drive,		Partnership	–	50
	Wilmington, Delaware 19808, United States
Alpha Leasing (US) (No.5) LLC	Corporation Service Company, 251 Little Falls Drive,		Partnership	–	50
	Wilmington, Delaware 19808, United States
Alpha Leasing (US) (No.6) LLC	Corporation Service Company, 251 Little Falls Drive,		Partnership	–	50
	Wilmington, Delaware 19808, United States
Alpha Leasing (US) (No.7) LLC	Corporation Service Company, 251 Little Falls Drive,		Partnership	–	50
	Wilmington, Delaware 19808, United States
Alpha Leasing (US) (No.8) LLC	Corporation Service Company, 251 Little Falls Drive,		Partnership	–	50
	Wilmington, Delaware 19808, United States
Alpha Leasing (US) LLC	Corporation Service Company, 251 Little Falls Drive,		Partnership	–	50
	Wilmington, Delaware 19808, United States
Alpha Partners Leasing Limited	1 Brewer’s Green, London SW1H 0RH, United Kingdom		Ordinary A	100	50
			Ordinary B	Nil
Beijing Aero Engine Services Company	No. 12 Jinhang Middle Road, Shunyi District, (Tianzhu		Capital	50	50
Limited	Comprehensive Bonded Zone Bonded Function Zone 2),
	Beijing, China
CFMS Limited	43 Queen Square, Bristol BS1 4QP, United Kingdom		Limited by	–	33.3
			guarantee
Clarke Chapman Portia Port Services	Maritime Centre, Port of Liverpool, Liverpool L21 1LA,		Ordinary A	100	50
Limited 2	United Kingdom		Ordinary B	Nil
Egypt Aero Management Services 4	Maintenance and Technical Works Company Building,		Ordinary	50	50
	Room No. 204, Second Floor, Airport Road, El Nozha,
	Cairo
EPI Europrop International GmbH	Pelkovenstr. 147, 80992 München, Germany		Capital Stock	28	28
Eurojet Turbo GmbH	Lilienthalstrasse 2b, 85399 Halbergmoos, Germany		Ordinary	33	33
Force MTU Power Systems Private Limited	Mumbai Pune Road, Akurdi, Pune, Maharashtra 411035,		Capital Stock	49	49
	India
Genistics Holdings Limited 12	Moor Lane, Derby, Derbyshire DE24 8BJ, United Kingdom		Ordinary A	100	50
			Ordinary B	Nil
Glacier L.P.	66 Wellington Street West, Toronto Dominion, Bank		Partnership	49.9	49.9
	Tower, Suite 300, Toronto, ON M5K 1E6, Canada
Global Aerospace Centre for Icing and	1000	Marie-Victorin Boulevard, Longueuil Québec	Ordinary	50	50
Environmental Research Inc. 11	J4G 1A1, Canada
Hoeller Electrolyzer GmbH 4, 13	Alter Holzhafen, 23966 Wismar, Germany		Ordinary	54.2	54.2
Hong Kong Aero Engine Services Limited	33rd Floor, One Pacific Place, 88 Queensway, Hong Kong		Ordinary	50	50
International Aerospace Manufacturing	Survey No. 3 Kempapura Village, Varthur Hobli,		Ordinary	50	50
Private Limited 5, 11	Bangalore, KA 560037, India
ITP Next Generation Turbines SL	Parque Tecnologico Edificio 300, 48170, Zamudio,		Ordinary A	Nil	25
	Vizcaya, Spain		Ordinary B	100
Light Helicopter Turbine Engine Company	Suite 119, 9238	Madison Boulevard, Madison,	Partnership	–	50
(unincorporated partnership)	Alabama 35758, United States
Manse Opus Management Company	Third Floor Queensberry House, 3 Old Burlington Street,		Limited by	33.3	33.3
Limited 5	London W1S 3AE, United Kingdom		guarantee
MEST Co., Limited	97 Bukjeonggongdan 2-gil, Yangsan-si,		Normal	46.8	46.8
	Gyeongsangnam-do, 50571, Republic of Korea
MTU Power Systems Sdn. Bhd.	32 Floor, UBN Tower 20 Jalan P Ramlee,		Ordinary A	100	49
	50250	Kuala Lumpur, Malaysia	Ordinary B	Nil
MTU Turbomeca Rolls-Royce ITP GmbH	Am Söldnermoos 17, 85399 Hallbergmoos, Germany		Capital Stock	25	25
MTU Turbomeca Rolls-Royce GmbH	Am Söldnermoos 17, 85399 Hallbergmoos, Germany		Capital Stock	33.3	33.3
MTU Yuchai Power Company Limited	No 7 Danan Road, Yuzhou, Yulin, Guangxi, China, 537005,		Capital Stock	50	50
	China
N3 Engine Overhaul Services GmbH	Gerhard-Höltje-Strasse 1, D-99310, Arnstadt, Germany		Capital Stock	50	50
& Co KG
N3 Engine Overhaul Services	Gerhard-Höltje-Strasse 1, D-99310, Arnstadt, Germany		Capital Stock	50	50
Verwaltungsgesellschaft Mbh
Rolls Laval Heat Exchangers Limited 2	Moor Lane, Derby, Derbyshire DE24 8BJ, United Kingdom		Ordinary	50	50
Rolls-Royce & Partners Finance (US)	66 Wellington Street West, Toronto Dominion, Bank		Partnership	–	50
(No 2) LLC	Tower, Suite 300, Toronto, ON M5K 1E6, Canada

191

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

FINANCIAL STATEMENTS

Joint ventures and associates

1 Although the interest held is 50%, the Company controls the entity (see note 1 to the Consolidated Financial Statements) and, as a result, consolidates the entity and records

anon-controlling interest

2 Dormant entity

3 Entity to take advantage of s479A Companies Act 2006 (s479A) audit exemption for the year ended 31 December 2025. The Company will issue a guarantee pursuant to s479A in relation

to the liabilities of the entity

4 Entity in liquidation

5 Reporting year end is 31 March 2026

6 On 8 January 2026, the Company contributed its 100% direct holding in Rolls-Royce Group Limited to Rolls-Royce plc

7 Entity to take advantage of s479A Companies Act 2006 (s479A) audit exemption for the year ending 31 March 2026. The Company will issue a guarantee pursuant to s479A in relation to

the liabilities of the entity

8 On 1 January 2026, the Company received the remaining 96.46% shares of Rolls-Royce plc by way of distribution from its direct subsidiary Rolls-Royce Group Limited, bringing the

Company’s direct holding to 100%

9 Although the interest held is 49%, the Company controls the entity (see note 1 to the Consolidated Financial Statements) and, as a result, consolidates the entity and records a

non-controlling interest

10 The entity is not included in the consolidation, as the Company does not have a beneficial interest in the net assets of the entity

11 The entity is accounted for as a joint operation (see note 1 to the Consolidated Financial Statements)

12 Reporting year end is 30 June 2026

13 Entity is accounted for as a joint venture as approval is required from the other shareholder for operationally running the affairs of the entity

				Group
				interest
			% of class	held
Company name	Address	Class of shares	held	%
Rolls-Royce & Partners Finance (US) LLC	66 Wellington Street West, Toronto Dominion, Bank	Partnership	–	50
	Tower, Suite 300, Toronto, ON M5K 1E6, Canada
Rolls-Royce SMR Limited 13	Moor Lane, Derby, Derbyshire DE24 8BJ, United Kingdom	Ordinary	57.8	57.8
SAFYRR Propulsion Limited 2	Moor Lane, Derby, Derbyshire DE24 8BJ, United Kingdom	A Shares	Nil	50
		B Shares	100
Singapore Aero Engine Services	11 Calshot Road, 509932, Singapore	Ordinary	50	50
Private Limited
Techjet Aerofoils Limited 11	Tefen Industrial Zone, PO Box 16, 24959, Israel	Ordinary A	50	50
		Ordinary B	50
TRT Limited	2 Bramble Way, Clover Nook Industrial Estate,	Ordinary A	Nil	50
	Somercotes, Derbyshire, DE55 4RH, United Kingdom	Ordinary B	100
		1C	Nil
Turbo-Union GmbH	Lilienthalstrasse 2b, 85399 Halbergmoos, Germany	Capital Stock	40	40
X R Aero Components Limited 11	Xujiawan, Beijiao, Xian 710021, Shaanxi, China	Ordinary	49	49

192

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

JOINT VENTURES AND ASSOCIATES

Report on the audit of the financialstatements

Opinion

In our opinion:

— Rolls-Royce Holdings plc’s group financial statements and company

financial statements (the “financial statements”) give a true and fair

view of the state of the group’s and of the company’s affairs as at

31 December 2025 and of the group’s profit and the group’s cash

flows for the year then ended;

— the group financial statements have been properly prepared

in accordance with UK-adopted international accounting

standards as applied in accordance with the provisions of the

Companies Act 2006;

— the company financial statements have been properly prepared in

accordance with United Kingdom Generally Accepted Accounting

Practice (United Kingdom Accounting Standards, including FRS 101

“Reduced Disclosure Framework”, and applicable law); and

— the financial statements have been prepared in accordance with

the requirements of the Companies Act 2006.

We have audited the financial statements,included within the

AnnualReport, which comprise:

— the consolidated and company balance sheets as at

31December2025;

— the consolidated income statement, the consolidated statement

ofcomprehensive income, the consolidated cash flow statement,

the consolidated and company statements of changes in equity

forthe year then ended; and

— the notes to the financial statements, comprising material

accounting policy information and other explanatory information.

Our opinion is consistent with our reporting to the Audit Committee.

Basis for opinion

We conducted our audit in accordance with International Standards

on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities

under ISAs (UK) are further described in the Auditors’ responsibilities

forthe audit of the financial statements section of our report. We

believe that theaudit evidence we have obtained is sufficient and

appropriate to provide a basisfor our opinion.

Independence

We remained independent of the group inaccordance with the

ethical requirements that are relevant to our audit of the financial

statements in the UK, which includes the FRC’s Ethical Standard, as

applicable to listedpublic interest entities, and we have fulfilled our

other ethical responsibilities in accordance with these requirements.

To the best of our knowledge and belief, wedeclare that non-audit

services prohibitedby the FRC’s Ethical Standard were not provided.

Other than those disclosed in note 8, we haveprovided no non-audit

services to the company or its controlled undertakings in the period

under audit.

Our audit approach

Overview

Audit scope

— Following our assessment of the risks ofmaterial misstatement

ofthe financial statements, including the impact of climate

change,we subjected 31 individualcomponents (including three

joint ventures) to full scope audits for group reporting purposes,

which, with an element of sub-consolidation, equates to 14 group

reporting opinions. In addition, nine components performed

targeted specified audit procedures contributing to

auditcoverage.

— The group engagement team audited the company and other

centralised functions and balances, including those relating

togroup treasury operations, corporate taxation, post-retirement

benefits, and certain goodwill and intangible asset impairment

assessments. The group engagement team also performed audit

procedures over the group consolidation and the financial

statements disclosures.

— The components on which we performed full scope audit

procedures, together withthe work performed by the group

engagement team as identified above, accounted for 93% of

revenue and 79% ofprofit before taxation.

— For non–full scope components that were not considered

inconsequential, we either performed audit procedures over

specific account balances or targeted risk assessment procedures.

— Some centralised audit testing was performed for certain reporting

components that are supported by GroupBusiness Services (GBS).

— As part of the group audit supervision process, the group

engagement team metwith the component teams to discuss the

approach and results of their audit procedures and reviewed their

audit files and final deliverables. In person site visits to components

in the UK, Germany and the US were also performed.

Key audit matters

— Long-term contract accounting and associated provisions (group)

— Translation of foreign currency denominated transactions and

balances (group)

— Presentation and accuracy of underlying results and disclosure of

other one-off items (including exceptional items) (group)

— Recoverability of the company’s investments in subsidiary

undertakings (company)

Materiality

— Overall group materiality: £200m (2024: £178m) based on

approximately 1.0% of underlying revenue.

— Overall company materiality: £150m (2024: £149m) based on

approximately 1.0% of total assets.

— Performance materiality: £150m (2024: £110m) (group) and £112m

(2024: £111m) (company).

The scope of our audit

As part of designing our audit, we determined materiality and

assessed therisksof material misstatement in the financialstatements.

Key audit matters

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

assessed risks of material misstatement (whether or not due to fraud)

identified by the auditors, including those which had the greatest

effect on: the overall audit strategy; the allocation of resources

intheaudit; and directing the efforts of the engagement team. These

matters, and any comments we make on the results of our procedures

thereon, were addressed in thecontext of our audit of the financial

statements as a whole, and in forming our opinion thereon, and we

donot provide a separate opinion on these matters.

This is not a complete list of all risks identified by our audit.

Deferred tax asset recognition and recoverability (group), which

wasakeyauditmatter last year, is no longer includedbecause of

thefullrecognition of thedeferred tax asset relating to UK tax losses in

Rolls-Royce plc reflecting the sustained profitability of the group and

an improved outlook. Accordingly, the recognition and recoverability

of the deferred tax asset isnolonger considered a significant risk.

Otherwise, the key audit matters below areconsistent with last year.

193

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

OTHER INFORMATION

Independent auditors’ report

Independent auditors’ report to the members of Rolls-Royce Holdings plc

Key audit matter

How our audit addressed the key audit matter

Long-term contract accounting and associated provisions

(group)

Audit Committee report and note 1 to the consolidated financial

statements – Accounting policies – Revenue recognition and

contract assets and liabilities , note 17 to the consolidated

financial statements – Contract assets and liabilities and note 23

to the consolidated financial statements – Provisions for liabilities

and charges

The Civil Aerospace and Defence businesses operate primarily

with long-term customer contracts that span multiple periods.

These long-term contracts require a number of assumptions to

bemade in order to determine the expected lifetime revenue and

costs of the contract and the amounts of revenue and profit/loss

that are recognised in each reporting period.

Small adjustments in assumptions can have a significant impact

onthe results of an individual financial year. Changes to the

profile of shop visits or operating conditions of engines can

resultin different performance assumptions and hence cost

profiles. Some contracts include inflation linked price escalations

which require judgement to determine the extent to which future

price increases are highly probable not to reverse and therefore

can be recognised. These changes to forecasts can result in

revisions to the revenue previously recognised.

For Defence, long-term contracts tend to be for a fixed price or

based on a cost plus or target cost reimbursement for qualifying

costs and there are also some flying hours arrangements.

ForCivilAerospace aftermarket contracts, income is earned

based onengine flying hours (EFH). Management is required to

estimatethis to determine the total revenue expected over the life

of a contract.

In addition, the profitability of Civil Aerospace aftermarket

contracts typically assumes that there will be lifecycle cost

improvements over the term of the contracts. Significant

assumptions need to be made in determining time-on-wing,

whether incremental costs should be treated as wastage or are

part of the ongoing cost of servicing a contract, future exchange

rates used to translate foreign currency income and costs and

other operating parameters used to calculate the projected

lifecycle. These future costs are also risk adjusted to take

intoaccount forecasting accuracy which represents an

additionaljudgement.

At the development stage of a programme, agreements are

entered into with certain Civil Aerospace suppliers to share in

therisk and rewards of the contracts (Risk and Revenue Sharing

Agreements – ‘RRSA’). This can involve upfront participation fees

from the RRSA that are amortised over the engine production

phase. In addition, certain revenue and costs are recorded in the

consolidated income statement net of the amounts received from

the RRSA.

The nature of the Civil Aerospace business gives rise to a

numberof contractual guarantees, warranties and potential

claims, including the in-service issues of the Trent 1000

programme. The accounting for these can be complex and

judgemental and may impact the consolidated income statement

immediately or over the life of the contract. The valuation of

provisions for the associated amounts are judgemental and

needto be considered on a contract by contract basis.

We focused our work on a number of contracts where we consider

there to be the highest degree of management judgement or

estimation and designed specific procedures over the long-term

contract accounting targeted at the associated risks. We also

sample tested the remaining population of contracts. The audit

procedures performed included:

— We attended meetings with Civil Aerospace and Defence

engine programme and customer contract managers in order to

understand the operational matters impacting the performance

of specific contracts and any amendments to contractual

arrangements that could have an impact on performance;

— We obtained and read the relevant sections of a sample of

contracts to understand the key terms including performance

obligations and pricing structures;

— We assessed how management had forecast engine flying hours

including by considering the downside scenarios modelled and

comparing the assumptions to industry data;

— We challenged management’s judgments and associated risk

adjustments relating to the risk of engine flying hours, costs and

technical items;

— We re-performed the calculations used to determine the

degree of completion for a sample of contracts and this wasalso

used in assessing the magnitude of any catch-up adjustments;

— We compared the previously forecast results of a sample of

contracts with the actual results to assess the performance of

the contract and the historical accuracy of forecasting;

— We verified a sample of costs incurred to third party

documentation to assess the validity of the forecast costs

tocomplete;

— We assessed the assumptions relating to life cycle cost

reductions to determine the likelihood of realisation and where

relevant the speed at which they would be achieved, including

the impact on the number of shop visits, validating these

assumptions directly with the senior programme engineers;

— We obtained support for the risk adjustments made in respect

of future costs and challenged management’s assumptions

through assessment against historical performance, known

technical issues and the stage of completion of the programme;

— We recalculated the price escalation included within

thecontracts;

— We challenged the assessment of provisions for onerous

contracts to determine the completeness of the unavoidable

costs to fulfil the contractual obligations. We also validated

therates used to discount the future cash flows;

— We assessed the sensitivity of the Trent 1000 programme to

reasonable changes in estimates, particularly in respect of the

repair and overhaul facility capacity, technical cost creep on

the known issues and cost outturns against previous similar

matters, including whether any costs should be treated

aswastage, in determining whether the judgements

weresupportable;

— We read and understood the key terms of a sample of RRSA

contracts to assess whether revenue and costs had been

appropriately reflected, net of the share attributable to the

RRSA in the consolidated income statement;

194

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INDEPENDENT AUDITORS’ REPORT

Key audit matter

How our audit addressed the key audit matter

Long-term contract accounting and associated

provisions(group) continued

Management have modelled the potential impact of climate

change on its forecasts and has incorporated these estimates

intothe long-term contracts for Civil Aerospace, which is the

business with the highest expected exposure to the impact

ofclimate change. This included incorporating the potential

impactof carbon prices on the group’s direct emissions

includingengine testing and those of its suppliers and the

potential impact of climate change on commodity prices in cost

estimates. Theimpact of climate change on long-term contracts

ishighly uncertain andrequires estimates on carbon prices,

thecost and speed of decarbonisation, the ability of the group

and itssuppliers to pass on incremental costs and assessing the

associated impact on aviation demand.

— We considered the appropriateness of the key assumptions

used by management to model the impact of climate change,

including assessing the reasonableness of the carbon and

commodity price forecasts utilised through sensitivity analysis.

We validated management’s assertions on the ability of suppliers

and the group to pass on incremental costs by reviewing supplier

and customer contracts for price change mechanisms. Where

appropriate we performed independent sensitivity analysis to

determine to what extent reasonably possible changes in these

assumptions could result in material changes to the revenue

recorded in the year and assessed the appropriateness of the

associated disclosures;

— We read and challenged management’s accounting papers that

were prepared to explain the positions taken in respect of their

key contract judgements;

— We considered whether there were any indicators of

management bias in arriving at their reported position; and

— We assessed the adequacy of disclosures in note 1 of

thekeyjudgements and estimates involved in long-term

contractaccounting.

Based on the work performed, we concur that management’s

estimates for long-term contract accounting and associated

provisions are materially appropriate, in the context of the

financial statements taken as a whole.

Translation of foreign currency denominated transactions

and balances (group)

Note 1 to the consolidated financial statements – Accounting

policies – Foreign currency translation

Foreign exchange rate movements influence the reported

consolidated income statement, the consolidated cash flow

statement and consolidated balance sheet. One of the group’s

primary accounting systems that is used by a number of their

subsidiaries translates transactions and balances denominated

inforeign currencies at a fixed budget rate for management

information purposes. Foreign currency denominated

transactions and balances are then re-translated to actual average

and closing spot rates through manual adjustments. Due to the

manual nature of the process and significance of the recurring

adjustments needed there is a risk that transactions and balances

denominated in foreign currencies are incorrectly translated in

the consolidated financial statements.

We performed the following specific audit procedures over

thisarea:

— Obtained an understanding of the process employed by

management to correctly record the translation of foreign

currency balances and transactions;

— Obtained an understanding of the process employed by

management at a group level to identity any unusual

movements orbalances;

— Tested the reports identifying transactions and balances in

transaction currency by agreeing these to general ledger

balances;

— Tested, on a sample basis, the manual calculations of the

adjustment needed to correctly record the translation of the

foreign currency denominated transactions and balances;

— Sampled balances and transactions requiring adjustment by

transaction currency and tested to source data and assessed

the completeness of these balances and transactions; and

— Agreed the exchange rates used in management’s translation

adjustments to an independent source.

There were no material uncorrected errors from our audit work.

195

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OTHER INFORMATION

INDEPENDENT AUDITORS’ REPORT

Key audit matter

How our audit addressed the key audit matter

Presentation and accuracy of underlying results and

disclosure of other one-off items (including exceptional

items) (group)

Note 1 to the consolidated financial statements – Accounting

policies – Presentation of underlying results, note 2 to the

consolidated financial statements – Segmental analysis and

note30 to the consolidated financial statements – Derivation

ofsummary funds flow statement

In addition to the performance measures prescribed by

International Financial Reporting Standards, the group also

presents their results on an underlying basis, as the Directors

believe this better reflects the performance of the group during

the year. The group also presents a free cash flow metric which

the Directors believe reflects the cash generated from underlying

trading. This differs from the cash flows presented in the

consolidated cash flow statement.

The underlying results differ significantly from the

reportedstatutory results and are used extensively to explain

performance toshareholders. Alternative performance

measurescan provideinvestors with additional understanding of

the group’s performance if consistently calculated, properly used

and presented. However, when improperly used and presented,

these non-GAAP measures can mislead investors and may mask

the real financial performance and position. There is judgement

indetermining whether items should be excluded from underlying

profit or free cash flow.

A key adjustment between the statutory results and the

underlying results relates to the foreign exchange rates used

totranslate foreign currency transactions and balances. The

underlying results reflect the achieved rate on foreign currency

derivative contracts settled in the period and retranslates assets

and liabilities at the foreign currency rates at which they are

expected to be realised or settled in the future. As the group can

influence which derivative contracts are settled in each reporting

period it has the ability to influence the achieved rate and hence

the underlying results.

One of the items excluded from underlying profit is exceptional

restructuring costs associated with the transformationprogramme.

Judgement is required to determine what costs are related to this

programme to warrant exclusion from underlying profit.

We have considered the judgements taken by management to

determine what should be treated as an exceptional item and the

translation of foreign currency amounts and obtained

corroborative evidence for these.

We also considered whether there were items that were recorded

within underlying profit that are exceptional in nature and should

be reported as an exceptional item. No such material items were

identified. As part of this assessment we challenged management’s

rationale for the designation of certain items as exceptional or

one-off and assessed such items against the group’s accounting

policy, considering the nature and value of those items.

Within underlying results, foreign currency transactions are

presented at rates achieved on derivative contracts hedging the

net operating cash flows of the group and monetary assets and

liabilities are retranslated at rates forecast to be achieved on

derivative contracts when the associated cash flows occur. We

have agreed these forecast rates to the profile of the derivatives

that are expected to mature in the future and tested their

application to the relevant monetary assets and liabilities.

We tested the reconciling items between the operating profit and

free cash flow disclosed in note 30 including verifying that the

items adjusted for are consistent with the prior year. This included

validating a sample of restructuring costs andverifying that the

costs were sufficiently related to the transformation programme.

We also considered whether freecashflow contains material

one-off items which require further disclosure.

We assessed the appropriateness and completeness of disclosures

of the impact of one-off or non-underlying items primarily in notes

1, 2 and 30 to the consolidated financial statements and found

them to be appropriate. This included assessing the explanations

management provided on the reconciling items between

underlying performance and statutory performance in note 2.

Overall we found that the classification judgements made

bymanagement were in line with their policy for underlying

results and exceptional items, had been consistently applied and

there are no material uncorrected misstatements resulting from

our testing.

Recoverability of the company’s investments in subsidiary

undertakings (company)

Note 2 to the company financial statements – Investments

– subsidiary undertakings

Investments in subsidiary undertakings of £15,003m (2024:

£14,905m) are accounted for at cost less provision for impairment

in the company balance sheet at 31 December 2025.

Investments are tested for impairment if impairment indicators

exist. If such indicators exist, the recoverable amounts of the

investments in subsidiaries are estimated in order to determine

the extent of the impairment loss, if any. Any such impairment loss

is recognised in the income statement.

A review of potential indicators of impairment was performed

bymanagement focusing on the developments in the year,

concluding that no such indicators were present and therefore

that the investments’ carrying values remain recoverable.

We have evaluated management’s assessment around

recoverability of the investment in subsidiary undertakings.

Indoing so we have considered whether any potential indicators

of impairment existed at 31 December 2025. In doing this,

weconsidered the market capitalisation of the company at

31December 2025, which exceeded the carrying value of

investments in subsidiary undertakings. We have compared

theperformance of the group against the 2024 forecasts.

Overall, we found that management’s judgement that there has

been no indicator of potential impairment to be appropriate.

196

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INDEPENDENT AUDITORS’ REPORT

How we tailored the audit scope

We tailored the scope of our audit to ensure that we performed

enough work to be able to give an opinion on the financial statements

as a whole, taking into account the structure of the group and the

company, the accounting processes and controls, and the industry

inwhich they operate.

Our scoping is based on the group’s consolidation structure. We

define a component as a single reporting unit whichfeeds into the

group consolidation. Ofthegroup’s approximately 350 reporting

components, 31 individual components (including three joint

ventures) were subjectto full scope audits which, with anelement

ofsub-consolidation, equates to14groupreporting opinions.

Afurther ninecomponents performed targeted specifiedaudit

procedures contributing toaudit coverage.

Under our audit methodology, we test boththe design and operating

effectiveness of relevant business process controls over significant

risks and perform substantive testing over each financial statement

lineitem.

The group operates Group Business Services (GBS) to bulk

processfinancial transactions inDerby (UK), Indianapolis (US),

Bengaluru (India) and Krakow (Poland). Based on our assessment it is

not possible to fully test revenue and profit centrally as certain key

processes, such as long-term contracting, remain within the business

due to their natureand are not handled by GBS.

Further specific audit procedures over central functions, the group

consolidation and areas of significant judgement, including group

treasury operations, corporate taxation, post-retirement benefits,

andcertain goodwill balances and intangible assets impairment

assessments, were performed by the group engagement team.

This scope of work, together with the additional procedures

performed at a group level as identified above, covered 93% of

revenue and 79% of profit before taxation.

Where work was performed by component auditors, we determined

the level of involvement required in the audit work atthose reporting

units to enable us to conclude whether sufficient appropriate

auditevidence had been obtained as a basisfor our opinion on

theconsolidated financial statements.

We issued formal written instructions to all component auditors

setting out the audit work to be performed by each of them and

maintained regular communication with the component auditors

throughout the audit cycle. These interactions included attending

certain component clearance meetings and holding regular

conference calls, as well asreviewing and assessing any matters

reported. The group engagement team also reviewed selected

auditworking papers for certain component teams to evaluate the

sufficiency of audit evidence obtained and to fully understand the

matters arising from the component audits.

In addition, senior members of the group engagement team have

visited component teams across all the group’s major segments

intheUK, Germany and the US. They included meetings with the

component auditor and with local management.

Reflective of its nature, our audit of the company financial statements

focused ontheinvestments in subsidiary undertakingsand validating

amounts owedtosubsidiary undertakings.

The impact of climate risk on our audit

As part of our audit we made enquiries of management to understand

the process they adopted to assess the extent of the potential impact

of climate risk on the group’s and thecompany’s financial statements

and to support the disclosures made within the Sustainability section

of the Strategic report.In addition to our enquiries with management,

we understood the governance processes in place to assess climate

risk, reviewed the group’s assessment of climate-related risk including

both physical and transition risks and read additional reporting

madeon climate related matters, including the group’s disclosures

inlinewith the Task Force on Climate-related Financial Disclosures

(TCFD)framework.

We held meetings with management, including the group’s

sustainability team, to consider the completeness of management’s

climate risk assessment and its consistency with internal climate plans

and board minutes, including whether the time horizons used by

management take account of all relevant aspects of climate change,

such astransition risks. We also considered the consistency of this

assessment with the group’s communications on climate-related

impacts. We challenged management on the carbon prices used

within their modelling and how these have been applied, as well

asonthe alignment of the longer-term forecast period to 2050 with

thecompany’s transition plan and its associated metrics and targets.

We considered the following areas, which depend on medium to

long-term profit orcash flow forecasts to be potentially materially

impacted by climate risk and consequently we focused our audit

workin these areas: long-term contract accounting in the UK Civil

business (including contract loss provisions); the recoverability of

deferred tax assets in the UK and the recoverability of the carrying

value of goodwill and certain intangible assets. Ourfindings

werereported to and discussed with the Audit Committee and

management. Where significant, further details of how climate

change has been considered in these areas and our audit response

isgiven in the key audit matters above.

To respond to the audit risks identified in these areas we tailored our

audit approach to address these, in particular, we:

— Validated the carbon prices used by management by benchmarking

them against external forecasts and performed sensitivity analysis

over their application. The carbon prices have been incorporated

by management in their forecasts of the group’s future cost base

for long-term contract accounting and associated provisions as

well as scenarios utilised in assessing the recoverability of deferred

taxassets, goodwill and other assets;

— Considered the reasonableness of management’s assertion that

climate change is unlikely to have a material impacton aviation

demand by comparing management’s EFH forecasts against

otherindustry benchmarks and by considering the sensitivity

ofEFH to different GDP growth rates expected under differing

climate scenarios;

— Verified that estimates of capital and cashcosts from reductions to

the group’s scope 1 and scope 2 emissions have been incorporated

in the group’s forecasts including those used for going concern

and the disclosures around the viability ofthe group that are

included in the Strategic Report;

— Validated management’s judgement thatclimate change is unlikely

to have amaterial impact on other estimates at31December 2025,

including the recoverability of inventory or the expectedcredit

lossprovision associated with trade receivables and contract

assets, byconsidering the short timeframe these assets are

expected to beutilised in compared to the period over which

transition and physical risks are expected to arise; and

— Where appropriate, performed independent sensitivity analysis

todetermine to what extent reasonably possible changes

intheclimate related assumptions in the group’s forecasts

couldresult in material changes to the impacted balances and

assessed the appropriateness of the associated disclosures.

197

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OTHER INFORMATION

INDEPENDENT AUDITORS’ REPORT

We also considered the consistency of the disclosures in relation toclimate change (including the disclosures in the Sustainability

sectionoftheStrategic Report) within the Annual Report and our knowledge obtained from our audit. This included considering the models

management used in the TCFD scenario analysis and if the assumptions in those models are consistent with the assumptions used elsewhere in

the financial statements.

As disclosed within the Sustainability section of the Strategic Report, the achievement of net zero by 2050 will require significant change

across the aviation sector, including widespread adoption of Sustainable Aviation Fuels or other alternative fuel sources.

Our procedures did not identify any material impact in the context of our audit of the financial statements as a whole for the year ended

31December 2025. The future estimated financial impacts of climate risk are inherently uncertain given the medium to long-term time frames

involved and their dependency on how governments, global markets, corporations and society respond to climate change, as well as the speed of

technological advancements that may be required. Accordingly, financial statements cannot capture all possible future outcomes as these are not

yet known.

Materiality

The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together

with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the

individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the

financial statements as a whole.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

Financial statements – group

Financial statements – company

Overall materiality

£200m (2024: £178m). £150m (2024: £149m).

How we determined it

Approximately 1.0% of underlying revenue Approximately 1.0% of total assets

Rationale for

benchmark applied

We have consistently used underlying revenue to

determine materiality as opposed to a profit-based

benchmark. This is because there is considerable

volatility in profit before tax as a result of revenue

recognition under IFRS 15 and from the fair value

movement in the group’s derivatives. Underlying

revenue continues to be a key performance metric

forthe group and is more stable than the profit

metric. We have applied a 1.0% revenue benchmark,

consistent with prior year. This is also a commonly

used benchmark for revenue based materiality.

We determined our materiality based on total assets,

which is more applicable than a performance-related

measure as the company is an investment holding

company for the group.

For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. The range of

materiality allocated across components was between £8m and £110m. Certain components were audited to a local statutory audit materiality

that was also less than our overall group materiality.

We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected

misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our audit and the

natureand extent of our testing of account balances, classes of transactions and disclosures, for example in determining sample sizes.

Ourperformance materiality was 75% (2024: 62.5%) of overall materiality, amounting to £150m (2024: £110m) for the group financial statements

and £112m (2024: £111m) for the company financial statements.

In determining the performance materiality, we considered a number of factors – the history of misstatements, risk assessment and aggregation

risk and the effectiveness of controls – and concluded that an amount at the upper end of our normal range was appropriate.

We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £8m (group audit)

(2024:£7m) and £8m (company audit) (2024: £7m) as well as misstatements below those amounts that, in our view, warranted reporting for

qualitative reasons.

198

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INDEPENDENT AUDITORS’ REPORT

Conclusions relating to going concern

Our evaluation of the directors’ assessment ofthe group’s and the

company’s ability to continue to adopt the going concern basis

ofaccounting included:

— Testing the model used for management’s going concern

assessment which is primarily a liquidity assessment given

thereareno significant financial covenants in its committed debt

facilities. Management’s assessment covered the 18 months from

the balance sheet date to 30 June 2027. We focused on this period

and also considered the subsequent six months to the end of 2027;

— Management’s base case forecasts are prepared through its

normalbudget andforecasting process for each of its businesses

over the next five years. We understood and assessed this process

including the assumptions used for 2026 and 2027 and assessed

whether there was adequate support for these assumptions.

Asimilar assessment was performed onthedownside cash flows,

including gainingan understanding of the scenarios modelled by

management and how they were quantified in the downside cash

flowforecast;

— We have read and understood the key terms of all committed debt

facilities to understand any terms, covenants or undertakings that

may impact the availability of the facility;

— We considered the potential mitigating actions available to

management to reduce costs, manage cash flows, limit share

buybacks or raise additional financing andassessed whether these

were within management’s control and feasible within the period of

the assessment; and

— We assessed the adequacy of disclosures in the Going concern

statement and statements in note 1 of the consolidated and

company financial statements and found these appropriately

reflect the key areas of uncertainty identified.

Based on the work we have performed, wehave not identified

anymaterial uncertainties relating to events or conditionsthat,

individually or collectively, may cast significant doubt on the group’s

andthe company’s ability to continue as a going concern for a period

of at least twelve months from when the financial statements are

authorised for issue.

In auditing the financial statements, we haveconcluded that the

directors’ use of thegoing concern basis of accounting in

thepreparation of the financial statements isappropriate.

However, because not all future events orconditions can be

predicted, this conclusion is not a guarantee as to the group’s

andthecompany’s ability to continueas a going concern.

In relation to the directors’ reporting on howthey have applied the

UK Corporate Governance Code, we have nothing material to add or

draw attention to in relation to thedirectors’ statement in the financial

statements about whether the directors considered it appropriate to

adopt the going concern basis of accounting.

Our responsibilities and the responsibilities of the directors with

respect to going concern are described in the relevant sections of

this report.

Reporting on other information

The other information comprises all of the information in the

AnnualReport other than the financial statements and our

auditors’report thereon. The directors are responsible for the other

information. Our opinion on thefinancial statements does not cover

the other information and, accordingly, we do not express an audit

opinion or, except to theextent otherwise explicitly stated in this

report, any form of assurance thereon.

In connection with our audit of the financial statements, our

responsibility is to read the other information and, in doing so,

consider whether the other information is materially inconsistent

withthe financial statements orour knowledge obtained in the

audit,orotherwise appears to be materially misstated. If we identify

an apparent materialinconsistency or material misstatement, we

arerequired to perform procedures to conclude whether there

isamaterial misstatement of the financial statements or a material

misstatement of the other information. If, based on the work we have

performed, we conclude that there isamaterial misstatement of this

other information, we are required to report that fact. We have

nothing to report based on these responsibilities.

With respect to the Strategic report and Directors’ report, we also

considered whether the disclosures required by the UK Companies

Act 2006 have been included.

Based on our work undertaken in the courseof the audit, the

Companies Act 2006 requires us also to report certain opinions and

matters as described below.

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 2025 is consistent with the

financial statements and has been prepared in accordance with

applicable legal requirements.

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.

Directors’ Remuneration

In our opinion, the part of the Remuneration Committee report

tobeaudited has been properly prepared in accordance with the

Companies Act 2006.

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OTHER INFORMATION

INDEPENDENT AUDITORS’ REPORT

Corporate governance statement

The Listing Rules require us to review the directors’ statements in

relation to going concern, longer-term viability and that partof

thecorporate governance statement relating to the company’s

compliance withthe provisions of the UK Corporate Governance

Code specified for our review. Our additional responsibilities

withrespect to the corporate governance statement as other

information are described in the Reporting on other information

section of this report.

Based on the work undertaken as part of ouraudit, we have

concluded that each of the following elements of the corporate

governance statement, included within the Governance report is

materially consistent with the financial statements and our knowledge

obtained during the audit, and wehave nothing material to add or

draw attention to in relation to:

— The directors’ confirmation that they havecarried out a robust

assessment of the emerging and principal risks;

— The disclosures in the Annual Report thatdescribe those principal

risks, what procedures are in place to identify emerging risks and

an explanation of how these are being managed or mitigated;

— The directors’ statement in the financial statements about whether

they considered it appropriate to adopt the going concern basis

ofaccounting in preparing them, andtheir identification of any

material uncertainties to the group’s and company’s ability to

continue to do so over a period ofat least twelve months from the

date of approval of the financial statements;

— The directors’ explanation as to their assessment of the group’s and

company’s prospects, the period this assessment covers and why

the period is appropriate;and

— The directors’ statement as to whether they have a reasonable

expectation that the company will be able to continue in operation

and meet its liabilities as they falldue over the period of its

assessment, including any related disclosures drawing attention to

any necessary qualifications orassumptions.

Our review of the directors’ statement regarding the longer-term

viability of the group and company was substantially less inscope

than an audit and only consisted ofmaking inquiries and considering

thedirectors’ process supporting their statement; checking that

thestatement is inalignment with the relevant provisions ofthe UK

Corporate Governance Code; andconsidering whether the statement

is consistent with the financial statements and our knowledge and

understanding of the group and company and their environment

obtained in the course of the audit.

In addition, based on the work undertaken aspart of our audit, we

have concluded thateach of the following elements of the corporate

governance statement is materially consistent with the financial

statements and our knowledge obtained during the audit:

— The directors’ statement that they considerthe Annual Report,

taken asa whole, is fair, balanced and understandable, and

providesthe information necessary for the members to assess

thegroup’s and company’s position, performance, business model

and strategy;

— The section of the Annual Report that describes the review of

effectiveness of risk management and internal control systems; and

— The section of the Annual Report describing the work of the

AuditCommittee.

We have nothing to report in respect ofourresponsibility to report

when 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.

Responsibilities for the financial statements and the audit

Responsibilities of the directors for thefinancial statements

As explained more fully in the Statement ofDirectors’ responsibilities

in respect ofthefinancial statements, the directors areresponsible

for the preparation of the financial statements in accordance with the

applicable framework and for being satisfied that they give a true and

fair view. The directors are also responsible for such internal control

as they determine is necessary to enable the preparation of financial

statements that are free from material misstatement, whether due to

fraudor error.

In preparing the financial statements, the directors are responsible

for assessing the group’s and the company’s ability to continue as

agoing concern, disclosing, as applicable, matters related to going

concern and using the going concern basis of accounting unless

thedirectors either intend to liquidatethe group or the company

ortocease operations, or have no realistic alternative but to do so.

Auditors’ responsibilities for the audit ofthe financial

statements

Our objectives are to obtain reasonable assurance about whether

thefinancial statements as a whole are free from material misstatement,

whether due to fraud or error, and to issue an auditors’ report that

includes our opinion. Reasonable assurance is a high level of

assurance, but is not a guarantee that an audit conducted in

accordance with ISAs (UK) will always detectamaterial misstatement

when it exists. Misstatements can arise from fraud or 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.

Irregularities, including fraud, are instancesof non-compliance

withlaws and regulations. We design procedures in line with

ourresponsibilities, outlined above, todetectmaterial misstatements

in respect ofirregularities, including fraud. The extent to which our

procedures are capable of detecting irregularities, including fraud,

isdetailed below.

Based on our understanding of the group and industry, we identified

that the principal risks of non-compliance with laws and regulations

related to the regulations of country aviation authorities such as

theCivilAviation Authority, import and export restrictions including

sanctions, and the UKBribery Act, and we 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 financial statements such as the Listing Rules of

the UK Financial Conduct Authority, the Companies Act 2006 and tax

legislation. Weevaluated management’s incentives and opportunities

for fraudulent manipulation of the financial statements (including the

risk of override of controls), and determined that the principal risks

were related to (1) posting inappropriate journal entries to manipulate

financial results; (2) management bias in significant accounting

estimates such aslong-term contract accounting and associated

provisions; (3) the sale of Civilengines to joint ventures for

noclearcommercial purpose or above market prices;and

(4)inappropriately including or excluding transactions from the

group’s underlying or free cash flow alternative performance metrics.

The group engagement team shared this risk assessment with the

component auditors so that they could include appropriate audit

procedures in response to such risks in their work. Auditprocedures

performed by the group engagement team and/or component

auditors included:

— Discussions throughout the year with management, internal audit,

the group’s legal counsel, and the head of ethics and compliance,

including consideration of known or suspected instances of

non-compliance with laws and regulation andfraud;

— Reading the minutes of the group’s Safety, Energy Transition & Tech

Committee and assessment of ‘speak-up’ matters reported through the

group’s Speak Up Line and the results of management’s investigation

of such matters;

200

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

INDEPENDENT AUDITORS’ REPORT

— Verifying sales of spare engines to joint ventures are in line

withthe approved timetable and are at a price supported by

external valuation;

— Reading the minutes of Board meetings toidentify any

inconsistencies with other information provided by management;

— Reviewing legal expense accounts to identify significant legal

spend that may beindicative of non-compliance with laws

andregulations;

— Challenging assumptions and judgements made by management in

determining significant accounting estimates (because of the risk

of management bias), in particular in relation to long-term contract

accounting and associated provisions;

— Identifying and testing unusual journal entries, in particular

journal entries postedwith unusual account combinations, and

testing all material consolidation journals; and

— Challenging why certain items areexcluded or included from

underlyingprofit or free cash flow and review of disclosures

included in the Annual Report explaining and reconciling

alternative performance measures to statutory metrics.

There are inherent limitations in the audit procedures described

above. We are less likely to become aware of instances of non-

compliance with laws and regulations that are not closely related to

events and transactions reflected in the financial statements. Also,

the risk of not detecting a material misstatement due to fraud is

higher than the risk of not detecting one resulting from error, as

fraud may involve deliberate concealment by, for example, forgery

orintentional misrepresentations, or throughcollusion.

Our audit testing might include testing complete populations of

certain transactions and balances, possibly using data auditing

techniques. However, it typically involves selecting a limited number

of items for testing, rather than testing complete populations. We

will often seek to target particular items for testing based on their

size or risk characteristics. In other cases, we will use audit sampling

to enable us to draw a conclusion about the population from which

the sample is selected.

A further description of our responsibilities for the audit of

thefinancial statements islocated on the FRC’s website at:

www.frc.org.uk/auditorsresponsibilities. This description forms

partof our auditors’ report.

Use of this report

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.

Other required reporting

Companies Act 2006 exception reporting

Under the Companies Act 2006 we are required to report to you if,

inour opinion:

— we have not obtained all the information and explanations we

require for our audit;or

— adequate accounting records have not been kept by the company,

or returns adequate for our audit have not been received from

branches not visited by us;or

— certain disclosures of directors’ remuneration specified by law are

notmade; or

— the company financial statements and thepart of the Remuneration

Committee report to be audited are not in agreement with the

accounting records and returns.

We have no exceptions to report arising from this responsibility.

Appointment

We were first appointed by the company for the financial year ended

31 December 2018. Our uninterrupted engagement covers eight

financial years.

Other matter

The company is required by the Financial Conduct Authority

Disclosure Guidance and Transparency Rules to include these

financial statements in an annual financial report prepared under

thestructured digital format required by DTR 4.1.15R – 4.1.18R and

filed onthe National Storage Mechanism of the Financial Conduct

Authority. This auditors’ report provides no assurance over whether

the structured digital format annual financial report has been

prepared in accordance with those requirements.

Ian Morrison (Senior Statutory Auditor)

for and on behalf of

PricewaterhouseCoopers LLP

Chartered Accountants and Statutory Auditors

London

26 February 2026

201

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

OTHER INFORMATION

INDEPENDENT AUDITORS’ REPORT

DNV Business Assurance Services UK Limited (‘DNV’, ‘us’ or ‘we’)

werecommissioned by Rolls-Royce plc to provide limited assurance

to Rolls-Royce Holdings plc (‘Rolls-Royce’) over Selected Information

presented in theAnnual Report 2025 (the ‘Report’) for the reporting

year ended 31December 2025.

Our conclusion: On the basis of the work undertaken, nothing

cameto our attention to suggest that the Selected Information is

notfairly stated and has not been prepared, in all material respects,

inaccordance with the Criteria.

This conclusion relates only to the Selected Information, and is to

beread in the context of this Independent limited assurance report,

inparticular the inherent limitations explained below.

Selected Information

The scope and boundary of our work are restricted to the key

performance indicators (KPIs) included within pages 18, 35, 38to47,

204 and 205 of the Report for the year ended 31December 2025

(the‘Selected Information’), listed below.

Key performance indicators Reported value Unit

Total group energy consumption

(includingproduct testing activities) 1,592,613,547 kWh

Total Scope 1 + 2 greenhouse gas (GHG)

emissions) (market-based): operations

andfacility emissions (including product

testing activities) 264,199 tCO

Total solid and liquid waste generated

54.7 kt

Recycling and recovery rate 65.7 %

Total reportable injuries (TRI) 128 Number

Total reportable injuries (TRI) rate

0.29

Number per

100 employees

Number of people reached through

the Science, Technology, Engineering

and Mathematics (STEM) outreach

programmes 823,797 Number

Employee engagement 81 %

To assess the Selected Information, which includes an assessment

ofthe risk of material misstatement in the Report, we have used

Rolls-Royce’s Basis of Reporting: Sustainability (the ‘Criteria’) available

at www.rolls-royce.com

We have not performed any work, and do not express any conclusion,

on any other information that may be published in the Report or

onRolls-Royce’s website for the current reporting period or for

previousperiods.

Standard and level of assurance

We performed a limited assurance engagement of specified

dataandinformation using the ‘Greenhouse Protocol –

ACorporateAccounting and Reporting Standard’ (revised

2015)andinternational assurance best practice including the

InternationalStandard on Assurance Engagements (ISAE) 3000

– ‘Assurance Engagements other than Audits and Reviews of

Historical Financial Information’ (revised) issued by the International

Auditing and Assurance Standards Board. To ensure consistency

inour assurance process, weconducted our work in accordance

withDNV’s assurance methodology, Verisustain

, applying only

thepertinent sections ofthe protocol relevant to the specific

purposeof the activity. This methodology ensures compliance with

ethical requirements and mandates planning and execution of the

assurance engagement to obtain the desired level of assurance.

DNV applies its own management standards and compliance policies

for quality control, which are based on the principles enclosed within

ISO IEC 17029:2019 – Conformity Assessment – General principles and

requirements for validation and verification bodies, and accordingly

maintains a comprehensive system of quality control including

documented policies and procedures regarding compliance with

ethical requirements, professional standards, and applicable legal

andregulatory requirements.

The procedures performed in a limited assurance engagement vary

innature and are shorter in extent than for a reasonable assurance

engagement. Consequently, the level of assurance obtained in

alimited assurance engagement is substantially lower than the

assurance that would have been obtained if a reasonable assurance

engagement had been performed.

Disclaimers

The assurance provided by DNV is limited to the selected indicators

and information specified in the scope of the engagement. DNV has

not conducted an assessment of the reporting organisation’s overall

adherence to reporting principles or the preparation of the Report.

Therefore, no conclusions should be drawn regarding the reporting

organization’s compliance with reporting principles or the quality of

the overall Report. The assurance provided by DNV is based on the

selected indicators and information made available to us at the time

ofthe engagement. DNV assumes no responsibility for any changes or

updates made to the indicators or information after the completion of

the assurance engagement.

Our competence, independence and quality control

DNV established policies and procedures are designed

toensure that DNV, its personnel and, where applicable,

othersare subject to independence requirements (including

personnel of other entities of DNV) and maintain independence

where required by relevant ethical requirements. This

engagement work was carried out by an independent team of

sustainability assurance professionals. DNV holds other audit

and assurance contracts with Rolls-Royce, none of which, in

our opinion, conflict with the scope of this work. Our multi-

disciplinary team consisted of professionals with a combination

of environmental and sustainability assurance experience.

Inherent limitations

DNV’s assurance engagements are based on the assumption

that the data and information provided by Rolls-Royce to us as

part of our review have been provided in good faith, are true,

and are free from material misstatements. Because of the

selected nature (sampling) and other inherent limitation

ofbothprocedures and systems of internal control, there

remainsthe unavoidable risk that errors or irregularities,

possibly significant, may not have been detected. The

engagement excludes the sustainability management,

performance, and reporting practices of Rolls-Royce’s

suppliers, contractors, and any third parties mentioned in the

Report. We did not interview external stakeholders as part of

this assurance engagement. We understand that the reported

financial data, governance and related information are based

on statutory disclosures and audited financial statements,

which are subject to a separate independent statutory audit

process. We did not review financial disclosures and data as

they are not within the scope of our assurance engagement.

The assessment is limited to data and information in scope

within the defined reporting period. Any data outside this

period is not considered within the scope of assurance.

DNVexpressly disclaims any liability or co-responsibility for

anydecision a person or an entity may make based on this

Independent limited assurance report.

Independent limited assurance report to the Management of Rolls-Royce Holdings plc

Independent limited assurance report

202

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

Basis of our conclusion

We are required to plan and perform our work in order to consider

the risk of material misstatement of the Selected Information; our work

included, but was not restricted to:

— conducting interviews with Rolls-Royce management to obtain an

understanding of the key processes, systems and controls in place

to generate, aggregate and report the Selected Information;

— site visits to Dahlewitz (Germany), Derby Fuel Farm (UK) and

Mankato (US) to review process and systems for preparing site level

data consolidated centrally. DNV were free to choose the sites on

the basis of materiality to the company data;

— performing limited substantive testing on a selective basis of the

Selected Information to check that data had been appropriately

measured, recorded, collated and reported;

— reviewing that the evidence, measurements and their scope

provided to us by Rolls-Royce for the Selected Information is

prepared in line with the Criteria;

— assessing the appropriateness of the Criteria for the Selected

Information; and

— reading the Report and narrative accompanying the Selected

Information within it with regard to the Criteria.

In performing these activities, we did not come across limitations to

the scope of the agreed assurance engagement.

We found a limited number of non-material errors and these were

corrected prior to inclusion in the Report.

For and on behalf of DNV Business Assurance

Services UK Limited

London, UK

26 February 2026

Shuhaib Maudarbaccus

Lead Verifier

DNV Business Assurance Services UK Limited

Paul O’Hanlon

Technical Reviewer

DNV Business Assurance Services UK Limited

DNV-2026-ASN-C772267

Responsibilities of the Management of Rolls-Royce

and DNV

The Management of Rolls-Royce have sole responsibility for:

— preparing and presenting the Selected Information in

accordance with the Criteria;

— designing, implementing and maintaining effective internal

controls over the information and data, resulting in the

preparation of the Selected Information that is free from

material misstatements;

— measuring and reporting the Selected Information based on

their established Criteria; and

— contents and statements contained within the Report and

the Criteria.

Our responsibility is to plan and perform our work to obtain

limited assurance about whether the Selected Information has

been prepared in accordance with the Criteria and to report

toRolls-Royce in the form of an independent limited assurance

conclusion, based on the work performed and the evidence

obtained. Our Independent limited assurance report

represents our independent conclusion and is intended

toinform all stakeholders. DNV was not involved in the

preparation of any statements or data included in the

Reportexcept for this Independent limited assurance report.

DNV Business Assurance Services UK Limited

DNV Business Assurance Services UK Limited is part of DNV

– DNV is an independent assurance and risk management

provider, operating in more than 100 countries, with the

purpose of safeguarding life, property, and the environment.

As a trusted voice for many of the world’s most successful

organisations, we help seize opportunities and tackle

therisksarising from global transformations. We use our

broadexperience and deep expertise to advance safety and

sustainable performance, set industry standards, and inspire

and invent solutions.

INDEPENDENT LIMITED ASSURANCE REPORT

203

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

OTHER INFORMATION

In 2025, our total gross Scope 1 + 2 greenhouse gas (GHG) (location-based) emissions were 359,132 tonnes of carbon dioxide equivalent (tCO

e).

This represents a reduction of 6% compared with 382,155 tCO

e in 2024.

Aspect tCO

e 2019 2021 2022 2023 2024 2025

Emissions from activities

forwhich the Company

ownor control including

thecombustion of fuel and

operation of facilities. [Direct

GHG emissions (Scope 1)]

Global

(excluding UK)

137,504 139,360 123,807 106,275 96,937 101,212

UK 90,522 72,279 101,987 72,238 135,524 110,012

Total 228,027 211,639 225,794 178,513 232,460 211,224

Emissions from the purchase

of electricity, heat, steam and

cooling purchased for our own

use. [Indirect GHG emissions

(Scope 2) location-based]

Global

(excluding UK)

170,526 115,421 97,612 91,176 90,312 89,036

UK 80,023 53,210 52,762 58,185 59,383 58,872

Total 250,549 168,631 150,374 149,361 149,695 147,908

Total gross GHG emissions

(Scope 1 + Scope 2 location-

based)

Global

(excluding UK)

308,031 254,781 221,420 197,451 187,249 190,248

UK 170,545 125,489 154,749 130,424 194,906 168,884

Total 478,576 380,270 376,168 327,875 382,155 359,132

Energy consumption used to

calculate above emissions –

kWh

Global

(excluding UK)

1,084,719,815 954,056,653 856,063,249 781,982,344 750,082,091 787,204,764

UK 738,001,393 590,689,817 732,077,990 648,552,229 879,615,727 805,408,783

Total 1,822,721,208 1,544,746,470 1,588,141,239 1,430,534,573 1,629,697,818 1,592,613,547

Intensity ratio (total GHG

emissions per £m revenue)

Total 29.9 33.9 27.9 19.9 20.2 16.9

Emissions from the purchase

of electricity, heat, steam and

cooling purchased for our own

use. [Indirect GHG emissions

(Scope 2) market-based]

Global

(excluding UK)

132,030 90,871 77,578 70,598 41,323 36,928

UK 21,594 1,484 1,293 1,365 24,631 16,047

Total 153,624 92,355 78,871 71,963 65,954 52,975

Total gross GHG emissions

(Scope 1 + Scope 2 market-

based)

Global

(excluding UK)

269,535 230,232 201,386 176,872 138,259 138,140

UK 112,116 73,763 103,280 73,603 160,155 126,059

Total 381,651 303,995 304,665 250,476 298,414 264,199

Outside of Scopes Global

(excluding UK)

4,329 – 1,350 42 2,799 5,944.06

UK – – – 7,712 997 6,121.65

Total 4,329 – 1,350 7,754 3,795 12,065.71

Additional supporting

information, electricity

purchased from renewable

sources – kWh

Global

(including UK)

321,775,488 303,672,640 301,419,960 315,822,645 286,074,507 407,196,198

Energy generated onsite from

renewable sources – kWh

Global

(including UK)

6,791,044 8,237,037 8,120,644 6,313,137 9,524,077 9,980,271

The above figures include 407,196,198 kWh of renewable energy purchases either backed by the Renewable Energy Guarantees of Origin

(REGO) scheme in the UK or the Guarantees of Origin (GoO) from a relevant EU Member State. This energy is used by the majority of our

facilities in the UK, US and Germany. Our EACs have been sourced mainly from solar and wind with some hydro included for EUlocations.

Inaddition, the above figures include 9,980,271 kWh ofelectricity and heat generated onsite from renewable energy sources, including

solarpanels and ground source heat pumps.

We include the reporting of fugitive emissions of hydrofluorocarbons (HFCs), associated with air conditioning equipment, into our

GHGemissions figures. These emissions have been include from our global portfolio.

With the exceptions noted above, we have reported on the underlying energy use and emission sources required under the Companies

(Directors’ report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018.

We have used the GHG Protocol Corporate Accounting and Reporting Standard (revised edition) as of 31 December 2014 utilising the

operational control approach, supplemented by the GHG Reporting Guidance for the Aerospace Industry (version 3) and emission factors

fromthe UK Government’s GHG Conversion Factors for Company Reporting 2024. We report our emissions of carbon dioxide, methane,

nitrous oxide, hydrofluorocarbons and perfluorocarbons on a carbon dioxide equivalent basis. We have no emissions of sulphur hexafluoride

or nitrogen trioxide.

Further details on our methodology for reporting and the criteria used can be found within our basis of reporting, available at

www.rolls-royce.com

204

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

Greenhouse gas emissions

Aspect MtCO

e 2019 2021 2022 2023 2024 2025

Emissions from purchased

goods and services, by spend

(Scope 3, category 1)

Total – – – – 2.18 2.69

Use of sold products on a

fossil fuel-based pathway with

weight-based adjustment

(Scope 3, category 11)

Total 93.9 – – 75.9 72.5 69.8

Use of sold products on a

fossil fuel-based pathway

without weight-based

adjustment (Scope 3,

category 11)

Total 531.0 – – 284.7 287.7 272.7

Use of sold products of

asustainable fuel-based

pathway with weight-based

adjustment (Scope 3,

category 11)

Total 79.1 – – 59.3 54.7 51.8

Use of sold products of

asustainable fuel-based

pathway without weight-

based adjustment (Scope 3,

category 11)

Total 430.3 – – 203.4 198.5 180.9

GREENHOUSE GAS EMISSIONS

205

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

OTHER INFORMATION

Other financial information

Foreign exchange

Foreign exchange rate movements influence the reported income

statement, the cash flow and closing net cash/(debt) balance. The

average and spot rates for the principal trading currencies of the

Group are shown in the table below:

2025 2024 Change

USD per GBP Year-end spot rate 1.35 1.25 +8%

Average spot rate 1.32 1.28 +3%

EUR per GBP Year-end spot rate 1.15 1.21 -5%

Average spot rate 1.17 1.18 -1%

The Group’s global corporate income tax contribution

The Group’s total corporation tax payments in 2025 were £590m.

Around 96% of this was paid in the US, Germany, UK, Singapore

andCanada. The balance of tax payments were made in around

40other countries.

In common with most multinational groups, the total profits for

corporate income tax purposes are not the same as the consolidated

profit before taxation reported on page 113.

The main reasons for this are:

(i) the consolidated income statement is prepared under IFRS,

whereas the corporate income tax profits and losses for each

company are determined by local tax accounting rules;

(ii) accounting rules require certain income and costs relating to

ourcommercial activities to be eliminated from, or added to,

theaggregate of all the profits of the Group companies when

preparing the consolidated income statement (consolidation

adjustments); and

(iii) specific tax rules including exemptions or incentives as

determined by the tax laws in each country.

In most cases, paragraphs (i) and (ii) above are only a matter of timing

and therefore tax will be paid in an earlier or later year. The impact

ofthe paragraph above will often be permanent, depending on the

relevant tax law. Further information on the tax position of the Group

can be found as follows:

— Audit Committee Report (page 78) – updates given to the Audit

Committee during the year;

— note 5 to the Consolidated Financial Statements (pages 142 to 145);

and

— details of the tax balances in the Consolidated Financial Statements

together with a tax reconciliation. This explains the main drivers of

the tax rate and the impact of our assessment on the recovery of UK

deferred tax assets.

Information on the approach to managing the Group’s tax affairs can

be found at www.rolls-royce.com

Investments and capital expenditure

The Group subjects all major investments and capital expenditure

toarigorous examination of risks and future cash flows. Investments

and capital expenditure must align to the Group’s strategy and create

shareholder value. All major investments, including the launch of

major programmes, require Board approval.

The Group has a portfolio of projects at different stages of their

lifecycles. All of our major investments and projects are assessed

using a range of financial metrics, including discounted cash flow

andreturn on investment.

Financial risk management

The Board has established a structured approach to financial risk

management. The Financial risk committee (Frc) is accountable for

managing, reporting and mitigating the Group’s financial risks and

exposures. These risks include the Group’s principal counterparty,

currency, interest rate, commodity price, liquidity and credit rating

risks outlined in more depth in note 22. The Frc is chaired by the

ChiefFinancial Officer. The Group has a comprehensive financial

riskpolicy that advocates the use of financial instruments to manage

and hedge business operations risks that arise from movements in

financial, commodities, credit or money markets. The Group’s policy

isnot to engage in speculative financial transactions. The Frc sits

quarterly to review and assess the key risks and agree any mitigating

actions required.

Capital structure

£m 2025 2024

Total equity 2,753 (881)

Cash flow hedges (7) (13)

Group capital 2,746 (894)

Net cash 1,895 475

Operations are funded through various shareholders’ funds, bank

borrowings, bonds and notes. The capital structure of the Group

reflects the judgement of the Board as to the appropriate balance

offunding required. Funding is secured by the Group’s continued

access to the global debt markets. Borrowings are funded in various

currencies using derivatives where appropriate to achieve a required

currency and interest rate profile. The Board’s objective is to retain

sufficient financial investments and undrawn facilities to ensure that

the Group can both meet its medium-term operational commitments

and cope with unforeseen obligations and opportunities.

The Group holds cash and short-term investments which, together

with the undrawn committed facilities, enable it to manage its

liquidityrisk.

206

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

OTHER FINANCIAL INFORMATION

During the year to 31 December 2025, the Group repaid a $1bn bond

at its maturity and cancelled its undrawn £2.5bn revolving credit

facility, which was due to mature in November 2027. This facility had

remained undrawn during the year. The Group replaced this facility

with a new £2.5bn revolving credit facility, maturing December 2030.

At the year end, the Group retained aggregate liquidity of £8.7bn,

including cash and cash equivalents of £6.2bn and undrawn

borrowing facilities of £2.5bn.

The Group has two material debt maturities in February and

June2026. 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 any borrowing facility that would

require the facility to be accelerated or repaid due to an adverse

movement in the Group’s credit rating. The Group conducts some

ofits business through a number of joint ventures. A major proportion

of the debt of these joint ventures is secured on the assets of the

respective companies and is non-recourse to the Group. This debt is

further outlined in note 19.

Credit rating

£m Rating Outlook

Moody’s Investors Service Baa1 Positive

Standard & Poor’s BBB+ Stable

Fitch BBB+ Positive

The Group subscribes to Moody’s, Standard & Poor’s and Fitch for

independent long-term credit ratings, with the ratings in the table

above being applicable at the date of this report.

207

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

OTHER INFORMATION

Reconciliation of alternative performance measures

Alternative performance measures (APMs)

Business performance is reviewed and managed on an underlying basis. These alternative performance measures reflect the economic

substance of trading in the year. In addition, a number of other APMs are utilised to measure and monitor the Group’s performance.

Definitions and reconciliations to the relevant statutory measure are included below. All comparative periods relate to 31 December 2024.

Underlying results

Underlying results are presented by recording all relevant revenue and cost of sales transactions at the average exchange rate achieved

oneffective settled derivative contracts in the period that the cash flow occurs. Underlying results also exclude: the effect of acquisition

accounting and business disposals, impairment of goodwill and other non-current assets where the reasons for the impairment are outside

ofnormal operating activities, exceptional items and certain other items which are market driven and outside of management’s control.

Furtherdetail can be found in note 2.

2025

£m

2024

£m

Revenue

Statutory revenue 21,207 18,909

Derivative and FX adjustments (1,148) (1,061)

Underlying revenue 20,059 17,848

Gross profit

Statutory gross profit 6,175 4,221

Derivative and FX adjustments (799) (186)

Programme exceptional credits (83) –

Exceptional transformation and restructuring (credits)/charges (9) 147

Acquisition accounting and M&A 14 43

Impairment charge/(reversal) 6 (2)

Civil Aerospace programme asset impairment reversal (179) (132)

Other underlying adjustments 1 –

Underlying gross profit 5,126 4,091

Commercial and administrative costs

Statutory commercial and administrative (C&A) costs (1,268) (1,284)

Exceptional transformation and restructuring charges 53 70

Other underlying adjustments (8) 17

Underlying C&A costs (1,223) (1,197)

Research and development costs

Statutory research and development (R&D) costs (495) (203)

Derivative and FX adjustments 2 (8)

Exceptional transformation and restructuring charges – 17

Acquisition accounting 2 2

Civil Aerospace programme asset impairment reversal (6) (413)

Underlying R&D costs (497) (605)

Operating profit

Statutory operating profit 4,468 2,906

Derivative and FX adjustments (797) (191)

Programme exceptional credits (83) –

Exceptional transformation and restructuring charges 44 234

Acquisition accounting and M&A 16 45

Civil Aerospace programme asset impairment reversal (185) (545)

Impairment charge/(reversal) 6 (2)

Other underlying adjustments (7) 17

Underlying operating profit 3,462 2,464

Underlying operating margin 17.3% 13.8%

208

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

Underlying results continued

2025

pence

2024

pence

Basic EPS

Statutory basic EPS 69.41 30.05

Effect of underlying adjustments to profit/(loss) before tax (42.58) 0.70

Related tax effects 6.01 (6.34)

Adjustment for recognition of deferred tax assets

(3.29) (4.12)

Basic underlying EPS 29.55 20.29

1 Underlying profit attributable to ordinary shareholders has been adjusted for the one-off non-cash impact of £277m (2024: 346m) related to the recognition of deferred tax assets on UK

tax losses, see note 5 of the consolidated financial statements for further details

Organic change

Organic change is the measure of change at constant translational currency applying full year 2024 average rates to 2025 and excludes M&A

changes and business disposals. The movement in underlying change to organic change is reconciled below and on page 210.

All amounts below are shown on an underlying basis and reconciled to the nearest statutory measure above and on page 208. All comparative

periods relate to the year ended 31 December 2024.

Total Group income statement

2025

£m

2024

£m

Change

£m

M&A ¹

£m

Organic

Change

£m

Organic

Change

Underlying revenue 20,059 17,848 2,211 (115) (164) 2,490 14%

Underlying gross profit 5,126 4,091 1,035 (16) (22) 1,073 26%

Underlying operating profit 3,462 2,464 998 (21) 14 1,005 38%

Net financing costs (110) (171) 61 2 – 59 (35%)

Underlying profit before taxation 3,352 2,293 1,059 (19) 14 1,064 44%

Taxation (593) (282) (311) (5) 24 (330) 128%

Underlying profit for the year 2,759 2,011 748 (24) 38 734 34%

1 During 2025, the sale of the naval propulsors business completed and the Group relinquished control of Rolls-Royce SMR Limited. As a result, organic change excludes these results

from2025 and 2024. During 2024, the sale of the lower power range engines business completed and the Group exited the advanced air mobility activities. As a result, organic change

excludes these results from 2024

Civil Aerospace

2025

£m

2024

£m

Change

£m

M&A

£m

Organic

Change

£m

Organic

Change

Underlying revenue 10,382 9,040 1,342 16 – 1,326 15%

Underlying OE revenue 3,217 3,105 112 11 – 101 3%

Underlying services revenue 7,165 5,935 1,230 5 – 1,225 21%

Underlying gross profit 2,675 1,990 685 6 – 679 34%

Commercial and administrative costs (432) (396) (36) 1 – (37) 9%

Research and development costs (267) (252) (15) – – (15) 6%

Joint ventures and associates 154 163 (9) (3) – (6) (4%)

Underlying operating profit 2,130 1,505 625 4 – 621 41%

Defence

2025

£m

2024

£m

Change

£m

M&A ¹

£m

Organic

Change

£m

Organic

Change

Underlying revenue 4,772 4,522 250 (71) (48) 369 8%

Underlying OE revenue 2,228 1,943 285 (27) (24) 336 18%

Underlying services revenue 2,544 2,579 (35) (44) (24) 33 1%

Underlying gross profit 933 908 25 (12) (3) 40 4%

Commercial and administrative costs (201) (212) 11 2 (1) 10 (5%)

Research and development costs (45) (55) 10 1 – 9 (16%)

Joint ventures and associates 2 3 (1) – – (1) 33%

Underlying operating profit 689 644 45 (9) (4) 58 9%

1 On 1 July 2025 the sale of the naval propulsors business completed. As a result, organic change excludes the naval propulsors results from 2025 and 2024

209

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

OTHER INFORMATION

RECONCILIATION OF ALTERNATIVE PERFORMANCE MEASURES

Power Systems

2025

£m

2024

£m

Change

£m

M&A ¹

£m

Organic

Change

£m

Organic

Change

Underlying revenue 4,892 4,271 621 (60) (113) 794 19%

Underlying OE revenue 3,433 2,942 491 (46) (104) 641 23%

Underlying services revenue 1,459 1,329 130 (14) (9) 153 12%

Underlying gross profit 1,522 1,199 323 (10) (23) 356 30%

Commercial and administrative costs (518) (483) (35) – 3 (38) 8%

Research and development costs (164) (165) 1 (2) – 3 (2%)

Joint ventures and associates 12 9 3 (1) – 4 44%

Underlying operating profit 852 560 292 (13) (20) 325 60%

1 On 31 July 2024 the sale of the lower power range engines business completed. As a result, organic change excludes the lower power range engines results from 2024

Trading cash flow

Trading cash flow is defined as free cash flow (as defined below) before the deduction of recurring tax and post-employment benefit expenses.

Trading cash flow per segment is used as a measure of business performance for the relevant segments.

2025

£m

2024

£m

Civil Aerospace 2,512 2,030

Defence 745 591

Power Systems 658 452

Total reportable segments trading cash flow 3,915 3,073

All Other Businesses

9 (176)

Corporate and Inter-segment (62) (60)

Trading cash flow 3,862 2,837

Underlying operating profit charge exceeded by contributions to defined benefit schemes (37) (31)

Tax

(555) (381)

Free cash flow 3,270 2,425

1 All Other Businesses include the financial results of small modular reactors, electrical power solutions and the UK Civil Nuclear business (see note 2 for further details)

2 See page 181 for tax paid in the derivation of summary funds flow statement

Free cash flow

Free cash flow is a measure of the financial performance of the businesses’ cash flows which is consistent with the way in which performance is

communicated to the Board. Free cash flow is cash flows from operating activities, adjusted to include capital expenditure and movements in

investments, capital elements of lease payments, interest paid, cash received on maturity of share-based payment schemes and amounts paid

relating to the settlement of excess derivatives. It excludes amounts spent/received on business acquisitions/disposals, and other material

exceptional or one-off cash flows. Cash flows from operating activities is our statutory equivalent.

2025

£m

2024

£m

Statutory cash flows from operating activities 4,565 3,782

Capital expenditure (978) (876)

Cash received on maturity of share-based payment schemes 40 –

Investment (including investment from NCI and movement in joint ventures, associates and other investments) (7) 16

Capital element of lease payments (232) (299)

Interest paid (262) (298)

Exceptional transformation and restructuring costs 78 104

M&A costs 70 1

Other (4) (5)

Free cash flow 3,270 2,425

Group R&D expenditure

In year gross cash expenditure on R&D excludes contributions and fees, amortisation and impairment of capitalised costs and amounts

capitalised during the year. For further detail, see note 3.

Gross capital expenditure

Gross capital expenditure during the year. All proposed investments are subject to rigorous review to ensure that they are consistent with

forecast activity and provide value for money. The Group measures annual capital expenditure as the cash purchases of PPE acquired during

the year.

2025

£m

2024

£m

Purchases of PPE (cash flow statement) 621 519

210

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

RECONCILIATION OF ALTERNATIVE PERFORMANCE MEASURES

Key performance indicators

The following measures are key performance indicators and are calculated using alternative performance measures or statutory results.

Seebelow for calculation of these amounts.

Order backlog

Total value of firm orders placed by customers for delivery of products and services where there is no right to cancel. Further details are

included in note 2 of the Consolidated Financial Statements.

Adjusted return on capital (abbreviated to return on capital)

Return on capital is defined as net operating profit after tax (NOPAT) as a percentage of average invested capital. NOPAT is defined as

underlying net profit excluding net finance costs and the tax shield on net finance costs. Invested capital is defined as current and non-current

assets less current liabilities. It excludes pension assets, cash and cash equivalents, and borrowings and lease liabilities. Return on capital

assesses the efficiency in allocating capital to profitable investments.

2025

£m

2024

£m

Underlying operating profit 3,462 2,464

Less: taxation

(889) (649)

Underlying operating profit (post-taxation) 2,573 1,815

Total assets 38,115 35,686

Less: post-retirement scheme surpluses (286) (790)

Less: cash and cash equivalents (6,244) (5,575)

Current liabilities (19,287) (16,763)

Liabilities held for sale (19) (100)

Less: borrowings and lease liabilities 1,426 1,097

Invested capital (closing) 13,705 13,555

Invested capital (average) 13,630 13,166

Return on capital 18.9% 13.8%

1 Excluding underlying taxation on underlying finance income of £19m (2024: £21m) and adjusted for the one-off non-cash impact of £277m in the year (2024: £346m) related to the

recognition of deferred tax assets on UK tax losses, see note 5, page 145 for further details

Total underlying cash costs as a proportion of underlying gross margin (abbreviated to TCC/GM)

Total underlying cash costs during the year (represented by underlying research and development (R&D) expenditure and underlying

commercial and administrative (C&A) costs) as a proportion of underlying gross profit. This measure provides an indicator of total cash costs

relative to gross profit. A reduction in total cash costs relative to gross profit indicates how effective the business is at managing and/or

reducing its costs.

2025

£m

2024

£m

Underlying R&D expenditure

598 745

Underlying C&A 1,223 1,197

Total cash costs 1,821 1,942

Underlying gross profit 5,126 4,091

Total cash costs as a proportion of underlying gross profit 0.36 0.47

1 Excludes £4m derivatives and FX (2024: £30m impact of acquisition accounting, exceptional transformation costs, derivatives and FX)

211

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

OTHER INFORMATION

RECONCILIATION OF ALTERNATIVE PERFORMANCE MEASURES

Board of Directors

The Directors of the Company who were in office during the year

andup to the date of signing the financial statements are set out on

pages 64 and 65.

Directors’ indemnities

The Directors benefit from an indemnity provision contained in the

Articles. In addition, the Directors have been granted a qualifying

third-party indemnity which was in force throughout the financial year

and remains in force. The Company maintained directors’ and officers’

liability insurance in respect of the Company and its subsidiaries.

Share capital

On 31 December 2025, the Company’s issued share capital comprised:

8,443,808,552 Ordinary shares 20p each

21,306,466,168 C shares 0.1p each

1 Special share £1

No shares are held in treasury. The ordinary shares are listed on

theLondon Stock Exchange. TheCompany has previously issued

non-cumulative redeemable preference shares (C shares) as an

alternative to paying a cash dividend. Since the reintroduction of

dividends on ordinary sharesasannounced on 27 February 2025,

theCompany no longer makes payments to shareholders in the form

of C shares. Holders of Csharescan either:

— redeem C shares for cash at their nominal value; or

— retain C shares and receive a coupon payment twice a year.

Further information on C shares can be found at

www.rolls-royce.com

Share buyback programmes

During the year, 106,291,417 ordinary shares of 20p each (representing

1.26% of the ordinary shares in issue at 31 December 2025) were

purchased by the Company for a total consideration of £1bn. A further

15,971,931 shares were purchased between 2 January 2026 and the

dateof this report. The purpose of the programmes was to reduce

theCompany’s share capital and to meet obligations arising from its

employee share plans. Shares purchased under the programmes

wereeither cancelled, held in treasury or transferred to the Company’s

Employee Benefit Trust (EBT) for the purpose of satisfying awards under

the Company’s employee share plans.

On 6 November 2025, the Company transferred 3,719,489 ordinary

shares held in treasury to the EBT and on 18 December 2025, gifted

41,483,491 ordinary shares held in treasury to the EBT. As at the date of

this report, there are no shares held in treasury.

Dividends

A final dividend of 6p per share for the year ended 31 December 2024

was paid on 16 June 2025. An interim dividend of 4.5p per share

waspaidon 18 September 2025. The Directors have recommended

afinaldividend of 5.0p per share for the financial year ended

31December 2025. This gives a total dividend of 9.5p per share

forthefinancial year ending 31 December 2025 (2024: 6p).

Payment of this dividend is subject to shareholder approval at

the2026 AGM. TheTrustees of the EBT have waived their right to

receivedividends.

Further information on the Company’s approach to dividends can

befoundon page 20 and the key dates for the final dividend can

befound on page 215.

Changes to the Articles of Association

The Articles may be amended or new articles may be adopted by

aspecial resolution of the Company’s shareholders, subject to the

provisions of the Companies Act 2006. The current Articles of the

Company were adopted by special resolution on 23 May 2024.

Share class rights

The full share class rights are set out in the Company’s Articles,

whichare available at www.rolls-royce.com. The rights are

summarised below.

Ordinary shares

Each member has one vote for each ordinary share held. Holders of

ordinary shares are entitled to: receive the Company’s Annual Report;

attend and speak at general meetings of the Company; appoint one or

more proxies or, if they are corporations, corporate representatives;

and exercise voting rights. Holders of ordinary shares may receive a

dividend and on liquidation may share in the assets of the Company.

C shares

Since the reintroduction of dividends on ordinary shares

asannounced on 27 February 2025, the Company no longer makes

payments to shareholders in the form of C shares. C shares have

limited voting rights and attract a preferential dividend, paid on a

twice-yearly basis. On a return of capital on a winding-up, the holders

of C shares shall be entitled, in priority to any payment to the holders

of ordinary shares, to the repayment of the nominal capital paid-up or

credited aspaid-up on the C shares held by them, together with a sum

equal tothe outstanding preferential dividend which will have 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 at a general

meeting if a resolution to wind up the Company is to be considered,

inwhich case they may vote only on that resolution. The Company

may elect, at its own discretion (and whether or not with the consent

of the holders of C shares), to redeem all of the C shares then in issue

at their nominal value each together with any accrued but unpaid

Cpreferential dividend on such shares as at the day of redemption.

Special share

Certain rights attach to the special rights non-voting share (Special

Share) issued to the UK Secretary of State for the Department of

Business and Trade (Special Shareholder). Subject to the provisions

ofthe Companies Act 2006, the Treasury Solicitor may redeem the

Special Share at par value at any time. The Special Share confers no

rights to dividends but, in the event of a winding-up, it shall be repaid

at its nominal value in priority to any other shares.

212

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

Directors’ report

For the purposes of the Companies Act 2006, the following are

incorporated by reference and shall be deemed to form part of

this Directors’ report:

— Strategic report 2

— Corporate Governance section, which includes the

BoardofDirectors, the Governance report and the

Directors’remuneration report 62

— Directors’ responsibility statement 111

— Note 1 to the Consolidated Financial Statements

(Accountingpolicies) 121

— Note 1 to the Consolidated Financial Statements

(Post-balance sheet events) 133

— Note 22 to the Consolidated Financial Statements

(Financial instruments) 160

— Note 28 to the Consolidated Financial Statements

(Related-party transactions) 179

— Subsidiaries, joint ventures and associates 187

— Greenhouse gas emissions disclosure 204

— Shareholder information 215

Certain provisions of the Articles (in particular those relating to

theforeign shareholding limit, disposals and the nationality of

theCompany’s Directors) that relate to the rights attached to

theSpecial Share may only be altered with the consent of the

SpecialShareholder. The Special Shareholder is not entitled to

voteatany general meeting or any other meeting of any class

ofshareholders.

Restrictions on transfer of shares and limitations on holdings

There are no restrictions on transfer or limitations on the holding of the

ordinary shares or C shares other than under the Articles (as described

here) or, under restrictions imposed by law or regulation. The Articles

provide that the Company should be and remain under UK control.

Assuch, an individual foreign shareholding limit is set at 15% of the

aggregate votes attaching 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 determine are to be included in the calculation of

that holding. The Special Share may only be issued to, held by and

transferred to the Special Shareholder or their successor or nominee.

Shareholder agreements and consent requirements

No disposal may be made to a non-Group member which, alone

orwhen aggregated with the same or a connected transaction,

constitutes a disposal of the whole or a material part of either the

nuclear propulsion business or the assets of the Group as a whole,

without the consent of the Special Shareholder.

Authority to issue shares

At the 2025 AGM, an ordinary resolution was passed authorising

theDirectors to allot new ordinary shares up to a nominal value of

£566,993,133, equivalent to one-third of the issued share capital of

the Company as at 22 February 2025. This resolution also authorised

the Directors to allot up to a further one-third of the total issued share

capital of the Company, although only in the case of a rights issue

ona pre-emptive basis. A further special resolution was passed to

authorise the disapplication of pre-emption rights in respect of an

issue (or transfer out of treasury) of equity securities up to a nominal

value of £85,048,970, equivalent to 5% of the issued share capital of

the Company. These authorities are valid until the end of the 2026

AGM or30June 2026, whichever is sooner. The Directors propose

torenew each of these authorities at the 2026 AGM to be held on

30April 2026. In addition to these authorities, and to align with

broader market practice, at the 2026 AGM the Company is seeking

authority to disapply pre-emption rights in respect of an issue (or

transfer out of treasury) of equity securities up to an aggregate

nominal value representing an additional 5% of the issued share

capital of the Company, which is only to be used for the purposes

ofan acquisition or specified capital investment. The Board believes

that these authorities will allow the Company to retain flexibility

torespond to circumstances and opportunities as they arise. The

Directors have no present intention of using the authorities being

sought for the disapplication of pre-emption rights.

Authority to purchase own shares

At the 2025 AGM, the Company was authorised by shareholders

topurchase up to 850,489,698 ordinary shares representing 10% of

its issued ordinary share capital as at 22 February 2025. The authority

for the Company to purchase its own shares expires at the conclusion

of the 2026 AGM or 30 June 2026, whichever is sooner. A resolution to

renew this authority will be proposed at the 2026 AGM.

Deadlines for exercising voting rights

Electronic and paper proxy appointments, together with voting

instructions, must be received by our Registrar, Equiniti Limited,

notless than 48 hours before a general meeting.

Voting rights for employee share plan shares

Shares are held in an employee benefit trust for the purpose of

satisfying awards made under the Company’s various employee

shareplans. For shares held in a nominee capacity or if plan/trust

rulesprovide the participant with the right to vote in respect of

specifically allocated shares, the trustee votes in line with participant

instructions. For shares that are not held absolutely on behalf of

specific individuals, the general policy of the trustees, in accordance

with investor protection guidelines, is to abstain from voting in respect

of those shares.

Change of control

Contracts and joint venture agreements

There are a number of contracts and joint venture agreements

whichwould allow the counterparties to terminate or alter those

arrangements in the event of a change of control of the Company.

These arrangements are considered commercially confidential

astheir disclosure could be seriously prejudicial to the Company

(orthe Group).

Borrowings and other financial instruments

The Group has outstanding bonds, as well as a revolving credit

facilityprovided by various banks. These generally include provisions

which may require any outstanding borrowings to be repaid or the

alteration or termination of the facility upon the occurrence of a

change of control of the Company. At 31 December 2025, these

facilities totalled £4.4bn, of which 44% was drawn (2024: 4.5bn,

44%drawn).

The Group has entered into a series of financial instruments to hedge

its currency, interest rate and commodity exposures. These contracts

provide for termination or alteration in the event that a change of

control of the Company materially weakens the creditworthiness of

theGroup.

Major shareholdings

At 31 December 2025, the following shareholders had notified an interest in the issued ordinary share capital of the Company in accordance

with section 5.1.2 of the Disclosure and Transparency Rules. No notifications have been received from 1 January 2026 to the date of this report.

Shareholder

Date of notification of

change of interest

Number of

ordinary shares

% of issued ordinary

share capital as at

date of disclosure

% of issued ordinary

share capital as at

23 February 2026

Blackrock, Inc. 19 December 2023 476,330,141 5.65 5.65

Capital Group Companies Inc 9 April 2024 427,042,722 5.07 5.07

213

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

OTHER INFORMATION

DIRECTORS’ REPORT

Employee share plans

In the event of a change of control of the Company, the effect on the

employee share plans would be as follows:

— Annual Incentive Plan: deferred share awards will normally vest

immediately, and may be time prorated. The new controlling

company might offer an award in exchange instead (normally on

substantially equivalent terms to the existing award). Awards with

performance conditions would normally vest on the change of

control subject to the Remuneration Committee’s judgement of

performance and may be reduced pro rata to service in the

vestingperiod;

— ShareSave: options would become exercisable immediately and

canbe exercised within six months following the change of control.

The new controlling company might offer an equivalent option in

exchange for cancellation of the existing option;

— SharePurchase Plan (SPP): consideration received as shares would

be held within the SPP, if possible, otherwise the consideration

would be treated as a disposal from the SPP;

— LTIP: awards would vest on the change of control, subject to the

Remuneration Committee’s judgement of performance and may

bereduced pro rata to service in the vesting period. Any applicable

holding period will cease in the event of a change of control; and

— Global Employee SharePurchase Plan (GESPP): matching share

awards would vest on the date of the change of control; free

shareawards would vest if and to the extent that the Remuneration

Committee decides, and rights to purchase investment shares

willlapse.

Political donations

The Company’s policy is that it does not, directly or through any

subsidiary, make what are commonly regarded as donations to any

political party. However, the Companies Act 2006 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, which might not be thought of as political expenditure in the

usual sense, could be captured. Activities of this nature would not be

thought of as political donations in the ordinary sense of those words.

The resolution to be proposed at the 2026 AGM, authorising political

donations and expenditure, is to ensure that the Group does not

commit any technical breach of the Act.

In accordance with the Federal Election Campaign Act in the

US,eligible employees are able to make personal contributions to

aUS Political Action Committee (PAC). The PAC is not funded by

Rolls-Royce Holdings plc and this separate fund is managed by a

board of directors of participating employees from the Company’s

USoperating company (Rolls-Royce North America Holdings Inc.)

andmakes contributions in connection with Federal elections.

In2025, a total of $94,844.01 was donated to political organisations

by the PAC. PAC contributions do not count towards the limits for

political donations and expenditure for which shareholder approval

will be sought at the 2026 AGM to renew the authority given at the

2025 AGM.

Disclosures in the Strategic report

The Board has taken advantage of section 414C(11) of the Act to

include disclosures in the Strategic report including:

— employee involvement;

— the employment of disabled people;

— the future development, performance and position of the Group; and

— research and development activities.

Information required by UK Listing Rule (UKLR) 6.6.1

There are no disclosures to be made under UKLR 6.6.1.

Management report

The Strategic report and the Directors’ report together form

themanagement report for the purposes of compliance with the

Disclosure Guidance and Transparency Rules 4.1.5R(2) and 4.1.8R.

Disclosures required under UK Listing Rule 6.6.6 as at 31 December 2025

Gender identity

Number of

Board members

Percentage

of the Board

Number of senior

positionson the Board

Number in executive

management

Percentage of executive

management

Men 6 50% Chief Executive, SID 7 70%

Women 6 50% Chair, Chief Financial

Officer

3 30%

Other categories – – – – –

Not specified/prefer not to say – – – – –

Ethnic background

Number of

Board members

Percentage

of the Board

Number of senior

positionson the Board

Number in executive

management

Percentage of executive

management

White British or other White

(including minority-white groups)

11 92% Chair, Chief Executive,

Chief Financial Officer,

SID

10 100%

Mixed/multiple ethnic groups – – – – –

Asian/Asian British 1 8% – – –

Black/African/Caribbean/Black British – – – – –

Other ethnic group, including Arab – – – – –

Not specified/prefer not to say – – – – –

By order of the Board

Claire-Marie O’Grady

Chief Governance Officer

26 February 2026

214

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

DIRECTORS’ REPORT

Managing your shareholding

Your shareholding is managed by Equiniti Limited (the Registrar).

When making contact with the Registrar, please quote your

shareholder reference number (SRN). This is an 11-digit number

thatcan be found on your share certificate or on any other

shareholder correspondence. You can manage your shareholding at

www.shareview.co.uk, speak to the Registrar on +44 (0)371 384 2637

(8.30am to 5.30pm, Monday to Friday) or you can write to the Registrar

at Equiniti Limited, Aspect House, Spencer Road, Lancing, West

Sussex BN99 6DA. If you hold your shares in a share dealing account

(sometimes referred to as a nominee account) then you mustcontact

your account provider with any questions about yourshareholding.

Payments to shareholders

As announced on 26 February 2026, the Directors have

recommended a final dividend of 5.0p per share, for the financial year

ended 31 December 2025. Payment of this dividend is subject to

approval at the 2026 AGM. Key dates relating to the final dividend are:

Ex-dividend date 23 April 2026

Record date 24 April 2026

Last day for DRIP elections 15 May 2026

AGM 30 April 2026

Payment date 3 June 2026

For further dividend information, please go to

www.rolls-royce.com/investors

The Company has previously made payments to shareholders by

issuing redeemable C shares of 0.1p each. No distributions in the

formof C shares have been made since 2019. C shareholders wishing

to redeem their existing C shares must lodge instructions with the

Registrar to arrive no later than 5.00pm on 16 June 2026 (CREST

holders must submit their election in CREST by 2.55pm). The payment

of C share redemption monies will be made on 16 July 2026. Any

entitlement to interest payments by C shareholders will also be

paidon 1 July 2026 in accordance with the Company’s Articles.

For the avoidance of doubt, the C share reinvestment programme

isno longer available; C shares can only be redeemed for cash at their

nominal value of 0.1p each.

Dividend reinvestment plan (DRIP)

The Company has a DRIP provided by Equiniti Financial Services

Limited (Equiniti FS), which is a convenient, easy and cost-effective

way to build a shareholding by using cash dividends to buy additional

shares. Rather than having a bank account credited with a cash

dividend, Equiniti FS will use the dividends payable to DRIP

participants to purchase shares on your behalf in the market.

Pleasego to www.shareview.co.uk for further information.

Analysis of ordinary shareholders at 31 December 2025

Type of holder

Number of

share-

holders

% of total

share-

holders

Number of

% of

total shares

Individuals 140,782 98.70 155,299,638 1.84

Institutional and

other investors 1,852 1.30 8,288,508,914 98.16

Total 142,634 100.00 8,443,808,552 100.00

Size of holding (number

of ordinary shares)

1 – 150 44,794 31.40 3,842,620 0.04

151 – 500 50,163 35.17 13,416,742 0.16

501 – 10,000 43,779 30.69 81,779,412 0.97

10,001 – 100,000 2,882 2.02 73,466,682 0.87

100,001 –

1,000,000 587 0.42 213,508,110 2.53

1,000,001

andover 429 0.30 8,057,794,986 95.43

Total 142,634 100.00 8,443,808,552 100.00

American Depositary Receipts (ADR)

ADR holders should contact the depositary, J.P. Morgan, by calling

+1(800) 990 1135 (toll free within the US) or +1(651) 453 2128 (outside

the US) or via www.adr.com/contact/jpmorgan

Warning to shareholders – investment scams

We are aware that some of our shareholders have received

unsolicited telephone calls or correspondence, offering to buy or

selltheir shares at very favourable terms. The callers can be very

persuasive and extremely persistent and often have professional

websites and telephone numbers to support their activities. They

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.

Remember: if it sounds too good to be true, it probably is. 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/scamsmart, or by calling the

FCA’s consumer helpline on 0800 111 6768 (overseas callers dial

+44207 066 1000). If you have already paid money to share fraudsters,

contact Action Fraud immediately on 0300 123 2040, whose website

is www.actionfraud.police.uk

Visit Rolls-Royce online

Visit www.rolls-royce.com to find out more about the latest financial

results, the share price, payments to shareholders, the financial

calendar and shareholder services.

Communication preferences

You can sign up to receive the latest news updates to your phone or

email by visiting www.rolls-royce.com and registering for our alert

service. If you do not wish to receive a hard copy Annual Report in

future, you can notify us online at www.shareview.co.uk

Annual General Meeting

The 2026 AGM will be held on30 April 2026, as a hybrid meeting.

Fulldetails will be set out in our Notice of Meeting which will be

available at www.rolls-royce.com in mid-March 2026.

215

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

OTHER INFORMATION

Shareholder information

Trade marks

The following trade marks which appear throughout this Annual Report are trade

marks registered and owned by companies within the Rolls-Royce Group:

CorporateCare

mtu

Pearl

TotalCare

Trent

UltraFan

AGM annual general meeting

AI artificial intelligence

APAC Asia-Pacific

APM alternative performance measure

Articles Articles of Association of Rolls-Royce Holdings plc

AUKUS Australia, United Kingdom, United States

BESS battery energy storage system

C&A commercial and administrative

CDP Carbon Disclosure Project

C shares non-cumulative redeemable preference shares

Our Code Global Code of Conduct

Company Rolls-Royce Holdings plc

DPAs deferred prosecution agreements

DTR the FCA’s Disclosure Guidance and Transparency

Rules

EFH engine flying hours

ELG Enterprise Leadership Group

EPS earnings per share

ESG environment, social, governance

ET&S engineering, technology and safety

EU European Union

EUR euro

FCA Financial Conduct Authority

FLRAA Future Long Range Assault Aircraft

FPVL fair value recognised in the income statement as a

profit or loss

FRC Financial Reporting Council

FTE full time equivalent

FVOCI fair value recognised through other

comprehensiveincome

FX foreign exchange

GBP Great British pound or pound sterling

GCAP Global Combat Air Programme

GDP gross domestic product

GESPP Global Employee Share Purchase Plan

GHG greenhouse gas

Group Rolls-Royce Holdings plc and its subsidiaries

GW gigawatt

HPT high-pressure turbine

HSE health, safety and environment

HVO hydrotreated vegetable oil

IASB International Accounting Standards Board

ICAO International Civil Aviation Organization

IFRS International Financial Reporting Standards

ISS Institutional Shareholder Services group

ofcompanies

KPIs key performance indicators

ktCO

e kilotonnes of carbon dioxide equivalent

kW kilowatts

LTIP long-term incentive plan

LTSA long-term service agreement

M&A mergers and acquisitions

MoU memorandum of understanding

MRO maintenance repair and overhaul

MtCO

e million tonnes of carbon dioxide equivalent

MWh megawatt-hour

NCI non-controlling interest

NED Non-Executive Director

net zero

company

net zero carbon emissions from our operations and

facilities and our products are compatible with net

zero operations by 2050

NOPAT net operating profit after tax

OCI other comprehensive income

OE original equipment

OECD Organisation for Economic Co-operation and

Development

P&L profit and loss

PBT profit before tax

PPE property, plant and equipment

R&D research and development

Registrar Equiniti Limited

RMS risk management system

Rolls-Royce

SMR

Rolls-Royce SMR Limited

RRSAs risk and revenue sharing arrangements

SAF sustainable aviation fuel

SBTs Science-Based Targets

Scope 1 + 2

emissions

Group Scope 1 + 2 greenhouse gas emissions

SETT Safety, Energy Transition & Tech Committee

SID Senior Independent Director

SMRs small modular reactors

STEM science, technology, engineering and mathematics

TCC total cash costs

TCC/GM total underlying cash costs as a proportion of

underlying gross margin

TCFD Task Force on Climate-related Financial Disclosures

TRI total reportable injuries

TSR total shareholder return

UKEF UK Export Finance

UNSDG United Nations Sustainable Development Goals

USD/US$ United States dollar

216

ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2025

Glossary

Credits

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This report is recyclable and biodegradable.

Rolls-Royce Holdings plc

Registered office:

Kings Place, 90 York Way,

London N1 9FX

www.rolls-royce.com

Company number: 7524813