Rolls-Royce has suffered the biggest loss in its history due to the cost of settling corruption charges and the impact of Brexit on the value of sterling.



The engine-maker reported a £4.6bn statutory pre-tax loss for 2016, one of the biggest corporate losses in British history.

It included a £4.4bn writedown on the value of financial hedges Rolls uses to protect itself against currency fluctuations and a £671m charge for the penalties the company has agreed to pay to settle bribery and corruption charges with the Serious Fraud Office (SFO), the US Department of Justice, and Brazilian authorities.

The biggest loss in British history is the £24bn recorded by Royal Bank of Scotland for 2008.

Warren East, chief executive of Rolls-Royce, insisted the loss did not reflect the underlying health of the business. “This has no impact on what is really going on in the business and cash, it is just an accounting measure,” he said of the biggest loss for the company since Henry Royce established an electrical and mechanical business in 1884.

Accounting rules mean Rolls was forced to write down the value of its currency hedges – which are worth more than £30bn – to reflect sterling’s slump. The pound has lost almost a fifth of its value against the dollar since Britain voted to leave the EU last June. Rolls hedges billions of pounds of cash to protect itself against currency fluctuations because deals in the aerospace industry are conducted in dollars.

East said he hoped the Brexit negotiations would result in “as close as possible to the status quo”. East and the Rolls management team backed the UK remaining in the EU in last June’s referendum. “Our main reason for being on the remain side was uncertainty. The very fact you are asking the question shows there is uncertainty,” he added.

The charge for settling the corruption allegations comes after Rolls agreed to pay £671m of penalties plus interest to the UK, US and Brazil.

Sir Brian Leveson, who approved the so-called deferred prosecution in court, said the SFO’s investigation into Rolls had revealed “the most serious breaches of the criminal law in the areas of bribery and corruption” and that some of the charges “implicated senior management and, on the face of it, controlling minds of the company”.

However, the judge praised the cooperation of the firm’s existing management, which allowed Rolls to settle with the SFO rather than face a damaging trial.

The penalties related to charges that Rolls bribed middlemen around the world between 1989 and 2013 to win contracts.

Although Rolls will make the payments over five years – with £293m expected to be paid in the first year – it has recognised the full cost in the latest accounts.

The SFO is continuing its investigation into individuals involved in the scandal and has said it will announce in the next few months whether or not it will bring charges.

However, East, who has apologised for the “unacceptable” behaviour, said the settlement and the financial results allowed the company to draw a line under the scandal.

“We are continuing to cooperate with the SFO with any inquiries they want to do, but as far as the SFO is concerned that is it – as far as the Department of Justice is concerned that is it,” he said.

The Rolls boss indicated he was hopeful that the damage to the company’s reputation would not lead to it losing lucrative contracts.

“If you think about it in abstract, that is a risk,” he said. “But we have interacted with our customer base and generally there is an understanding that we are a very different business today.”

Excluding the bribery penalties and the impact of currency fluctuations, Rolls reported that underlying revenues fell 2% in 2016 to £13.8bn and that underlying pre-tax profits fell 49% to £813m. This performance was ahead of forecasts in the City.

Nonetheless, Rolls said it would hold the final payment to shareholders at the same level as last year – 7.1p per share – given the company’s financial commitments and the investments it is making. Rolls cut its dividend last year for the first time in 24 years.

On the back of holding the dividend and a strong run for the share price in recent weeks, shares fell by 2.7% to 720.50p.

East said it has been an “important year” for Rolls and the management team has “accelerated the transformation of the business”.



The Rolls boss has been trying to overhaul and modernise the company since taking control in 2015, inheriting a business that is struggling for the first time in a decade. Rolls, which makes engines for Boeing’s 787 Dreamliners and Airbus’s A380 superjumbos among others, has been affected by lower-than expected demand for the wide-bodied airliners to which it supplies engines.



It has also been hurt by cuts to defence spending and the decline in the oil price, which has lowered demand from the offshore oil and gas industry for its marine products.

In response, East has focused on making Rolls more efficient and accelerating the pace at which it builds engines. He has cut hundreds of middle and senior managers and by the end of 2017 wants to have cut £200m of annual costs. At the same time, however, he has backed the quality of the technology that the company is developing and resisted pressure to sell off underperforming businesses.

“I don’t have a concern about orders coming in through the door,” he said. “I have confidence in our technology.”

However, East is reviewing Rolls operations and said that underperforming divisions could be sold off.

“80% of our activities are in areas where we are competitive,” he said. “We are concerned with some of the areas where we are less competitive – can we change that and are we the best owner of those businesses. These tend to be in areas associated with older and more backward-looking technology. But you shouldn’t read into this that 20% of our business is up for sale.”

Sandy Morris, analyst at Jefferies, said: “The question is whether a corner has been turned. The turn may be slow in financial terms, but operationally and fundamentally it is faster, in our view.”