Final Results
Rotork PLC
28 February 2007
28 February 2007
Rotork p.l.c.
Preliminary Announcement
Double digit growth in revenue and operating profit in each division
2006 2005 % change % change
(constant
currency)
Revenue £206.7m £174.8m +18.2% +19.9%
Operating profit £45.1m £36.5m +23.4% +25.7%
Profit before tax £46.1m £36.7m +25.7% +27.9%
Earnings per share 36.4 p 28.6 p +27.3% +30.0%
Financial Highlights
• Order intake up 19% at £223m
• Recommended final dividend of 11.65p, up 18%
• £8m additional interim dividends during 2007
Operational Review
• Continued strong growth achieved by Rotork Fluid System
• Chinese market still buoyant
• New Shanghai manufacturing plant commenced production on schedule in
the year
• Increased focus on Service and Support with new management structure
Chief Executive Bill Whiteley, commenting on the results said:
'Active end user markets, a world beating product portfolio and sales and
marketing organisation resulted in a particularly strong financial performance
for 2006. There were high levels of investment in oil and gas facilities around
the world due to the sustained high demand for crude oil, natural gas and
refined products.
'Order intake has started strongly in 2007. Furthermore, there appears to be an
active project workload in most of our geographic and end user markets, which
should ensure that we make further revenue and earnings progress in the current
year. This is despite the negative drag that currencies will have if the US
dollar and euro exchange rates to sterling are maintained at around current
levels.'
For further information, please contact:
Rotork p.l.c. Tel: 01225 733200
Bill Whiteley, Chief Executive
Bob Slater, Finance Director
Financial Dynamics Tel: 020 7269 7291
Susanne Walker / James Ottignon
Chairman's statement
Financial highlights
In 2006 Rotork saw further strong growth in its main end user markets - oil &
gas, power and water - and across all geographical areas with each of our
divisions delivering record sales, profits and order intake. Overall sales
revenue was up 18.2% to £206.7m, and profit before tax increased by 25.7% to
£46.1m.
The impact of currency movements had been to flatter profit by nearly £1m in the
first half of the year. The rapidly weakening US dollar from May onwards meant
that the second half suffered a £1.8m negative currency movement with the
overall annual result being a charge of £0.8m. However, net margin was 22.3% in
both halves of the year compared with 21.0% for 2005, demonstrating the
resilience of our business model as we improve our design processes and supply
chain. The year end order book - itself negatively impacted by adverse currency
movements of £4.8m - closed up 19.2% at £76.0m.
We continue to increase investment in the development of our products and
services which, together with the addition of new production facilities and
improved operational efficiencies, provides us with an expanding platform upon
which to fully capitalise on future growth opportunities.
Divisional highlights
The Electric actuator business had another good year achieving a 19.8% year on
year increase in operating profit. Our US businesses traded well and most of the
Europe, Middle East and Asia sales operations met or exceeded our expectations.
The main Bath assembly plant performed well meeting higher than anticipated
demand levels whilst reducing delivery lead times. The new Shanghai production
facility commenced shipping product to customers in China during the second half
of the year as planned.
Rotork Fluid System continued to build on the high growth rates achieved in the
preceding two years by recording a 25.3% increase in sales to £40.5m. With a
further improvement in the year to 13.3%, operating margin moved closer to our
15% target. We are now recognised as a major force in the industry with a
developed management structure, good product offering, efficient production
facilities and a strong customer oriented ethos.
Rotork Gears produced a robust 2006 performance increasing sales and operating
profit by 27.4% and 21.3% respectively. We are encouraged by the performance of
our Milan operation, acquired at the beginning of the year, and the success with
which the management has integrated quickly into the wider Group. The Shanghai
gearbox facility, established primarily for export out of China, has been
shipping increasing quantities throughout the year.
Performance measurement
Management have a structured and well established approach to performance
measurement as defined by a series of financial and other indicators. The Board
reviews this information to assess the effectiveness of our operations and to
consider its response to specific issues as they arise. In light of an
increasing external interest in this subject we now show the key performance
measures, used by the Group, in the Business Review.
Dividend
The Board reviews dividend policy regularly and acknowledges a correlation
between improvements in earnings and dividend increases. Recognising the very
strong earnings growth in the year, and that cash generation has been good, the
Board is recommending both an increase in the final dividend for the year and
the payment of an additional dividend. It is proposing that the final dividend,
payable on 11 May to shareholders on the register on 20 April 2007, will
increase by 17.7% to 11.65p, making a total increase in core dividend of 14.9%
for the year. In addition, a further £8 million will be paid by way of a one-off
additional dividend of 9.30p on 22 June 2007.
50th Anniversary
Rotork will celebrate its 50th anniversary in 2007. From the beginning under the
inspiration of founder Jeremy Fry the Company has, through a strong and
consistent commitment to innovation and customer focus, grown to occupy its
current enviable position as both world leader in valve actuation and a highly
rated constituent of the FTSE 250. None of this would have been achieved without
the year by year dedication of Rotork employees worldwide to whom the Board
extends its appreciation and gratitude.
Outlook
Order intake has started strongly in 2007. Furthermore, there appears to be an
active project workload in most of our geographic and end user markets, which
should ensure that we make further revenue and earnings progress in the current
year. This is despite the negative drag that currencies will have if the US
dollar and euro exchange rates to sterling are maintained at around current
levels.
Roger Lockwood
Chairman
27 February 2007
Business review
Business overview
Rotork is the world leader in valve actuation solutions which are used
extensively in oil and gas, power and water and waste water treatment
applications. Beyond these important industries, our products are also used in
a broad range of sectors including shipboard control, ventilation and damper
control. We are structured around three valve actuation divisions:
• Rotork Electric, the original and largest activity supplying high quality,
state of the art products for controlling a wide variety of pipeline
and industrial valves;
• Rotork Fluid System, which supplies heavy-duty pneumatic and hydraulic
valve actuators for operation in emergency shut down and other critical
applications, primarily for the oil and gas sectors;
• Rotork Gears, involved in the supply of gearboxes, adaptors and
ancillaries for the valve industry.
Rotork supports customers across the world mainly through direct operations. We
have 13 production plants internationally and multiple direct sales and support
operations in 22 countries. This together with an extensive network of indirect
sales offices gives coverage of all our customers and markets globally. We have
around 15,000 active customers in total.
The key drivers for the Group's businesses relate to global investment in oil
and gas, water and waste water and power generation installations with demand
being generated by new and expanded capacity, upgrades to existing facilities
and replacements. This is often linked to projects which are aimed at improving
the efficiency, safety and environmental performance of plants. Valve actuators
are critical components and their long-term reliability and performance is
extremely important to users. They also act as a key interface between plant
control systems and related hardware. Rotork's reputation for quality,
worldwide support and technical innovation is crucial to its leadership position
in the field. We have a large number of repeat customers around the world but
the broad geographic spread of our operations and applications means that no one
customer accounts for more than 5% of our revenue in any year.
Business Strategy
The objective of Rotork p.l.c. is to increase shareholder value by developing
its leadership position in worldwide valve actuator activities. The Group's
activities are focused on the specialist area of valve automation. Over the
years Rotork has continued to build on its reputation as an innovator of new
concepts in this field and has provided users with increasing levels of
functionality, performance and assurance.
Recent strategy has focused on opportunities to leverage our leadership position
in heavy duty electric actuation into other closely associated areas of valve
automation. Key programmes relate to the development of new products and
control systems, marketing initiatives, creating service revenue opportunities
and driving cost reductions relating to these businesses. The most important
current product initiative relates to the development of our range of actuators
aimed at the process control market, which is referred to further in the R&D
section.
Year under review
Active end user markets, a world beating product portfolio and sales and
marketing organisation resulted in a particularly strong financial performance
for 2006. In a year during which many organisations in our industry struggled
with rising raw material costs and capacity constraints I am pleased to report
that our flexible 'assembly only' philosophy of manufacture, coupled with
procurement initiatives, allowed us to handle increased levels of business and
kept cost increases to a minimum. The main assembly plant in Bath performed
particularly well, not only producing a record number of electric actuators but
also allowing us to meet our objective of reducing lead times for much of the
electric product range.
Whilst our world wide sourcing and assembly operations act to mitigate currency
risks, Rotork is still exposed to transaction as well as translation currency
impacts. In currency terms 2006 turned out to be a year of two halves, with the
benefits of a strong dollar on our earnings in the first half being more than
offset by the impact of a deteriorating dollar in the latter part of the year.
The impact of the level of the US dollar against sterling is high due not only
to our important North American business but also our large Asian markets in
countries where currencies closely follow the US dollar.
All of our operating divisions, namely Electrics, Fluid System and Gears,
achieved increased levels of order intake, sales revenue and operating profits.
Overall order intake was up 19.0%, and sales output was up 18.2%. The order
book increased to £76.0m which is 19.2% up on the start of the year. Profit
before tax was up 25.7%. Return on sales, a key performance indicator of the
business, increased to 22.3%.
Electric Actuators
Order intake for the electric business was up 14.7%, sales revenue up 15.0% and
operating profit up 19.8%. As a percentage of unit actuator order input the
principal markets for electric actuators were; oil and gas 40% (37%); water 19%
(24%); power 32% (31%) and miscellaneous 9% (8%) with the prior year's figures
in brackets. There were high levels of investment in oil and gas facilities
around the world due to the sustained high demand for crude oil, natural gas and
refined products. In addition to upstream investment there was also an increase
in units going into downstream facilities. It is in these areas, i.e. refinery
offsites, storage and distribution, that the majority of our electric actuators
are used within this sector. Particularly high levels of activity were seen in
the Middle East. The construction of new LNG (Liquefied Natural Gas) facilities
has also led to increased demand for our products in recent years. Within the
power sector, our actuators are used extensively in coal, oil, combined cycle
gas and nuclear generation. China and India again dominated the demand within
this sector with the increase in business in India being particularly evident.
The water market, where we supply actuators for both potable and waste water
treatment plants, was also active with increased levels of business in the
important North American and UK markets. However the total number of actuators
going into this market was down due to an unusually large Asian order won in
2005.
UK Operations
We saw a good performance from the UK market which accounted for 9% of electric
actuators unit input for the year up from 8% in 2005. Strong demand from the
water companies who were focused on achieving their AMP 4 targets was coupled
with high levels of investment from existing coal fired power plants which
required actuators to assist in reducing emissions and increasing the efficiency
of their generation.
The Bath plant, which is our main electric actuator assembly unit, responded to
the challenge of demand levels which were well above forecast levels. It was of
considerable credit to production management and our supply chain that we were
able to reduce delivery times in this environment. The year was also notable
for steep increases in the price of some important raw materials, such as
aluminium, copper and zinc. I am pleased to report that the impact of these
increases was, to a large extent, offset by savings coming online during the
year due to either sourcing initiatives or value engineering exercises.
Indications at the start of the current year are that prices of many materials
are softening, which should release pressure on some components. In addition
further cost saving measures are planned to come on stream during 2007.
Europe
Most of our European sales companies had reported improving activity levels in
late 2005, which led us to higher expectations for 2006. These expectations
were largely met with higher sales and profits being generated in most companies
with particularly strong results from Italy. Input accounted for 13% of the
total electric actuator unit input by destination compared with 15% in 2005.
There were two different elements to their growth. European valvemakers were
active in worldwide energy projects, in particular Italian valvemakers had very
high levels of business from the Middle East. In addition to this there was an
increase in motorisation projects on existing refineries, tank farms and other
oil and gas installations within their domestic markets.
Our new Russian company had a successful first year's trading. After a slow
start to the year a number of projects were won in the second half.
The Americas
Rotork Controls Inc, which is based in Rochester, N.Y., continued to build its
successful business with sales and profits well up on the prior year, despite
the weakening US dollar. Again the main driver for the business was its success
in the municipal market. However there was an increased level of business
activity in the oil and gas market, in particular in the second half of the
year. The company put additional resources into positioning itself for new
investment in power generation. The improving power market has also helped our
Milwaukee based operation, which manufactures modulating actuators, to increase
sales. A new sales operation is being set up in Brazil to complement existing
sales channels. Order input in units destined for the Americas was 17% (19%) of
the total. The number of units destined for Latin America was down on the prior
year.
The Far East and The Rest of the World
A traditional strength of Rotork is its reputation in and coverage of Asia and
in the year under review the Far East accounted for 49% by destination of our
electric actuators against 50% in the prior year. The Group has been a
beneficiary of the growth in the region which has required very substantial
infrastructure investment in power generation, oil & gas production, processing
and distribution and water and waste water plants and facilities. Business in
China continued to be very buoyant and even exceeded the exceptional levels
recorded in 2005. Demand for actuators for power plant applications remains the
dominant driver but increasingly we are involved in oil and gas projects
throughout the country. A major milestone in the year was the opening of our
new assembly plant in Shanghai at which we commenced production of electric
actuators on schedule in the third quarter of the year.
The Indian market is also a very important one for the company and one in which
we have well established assembly plants in Chennai and Bangalore. High levels
of demand from both the power market and new oil and gas investments led to
large increases in both our direct Indian business and business won through
international OEMs.
Our other Asian companies performed well with further good progress from our
Malaysian manufacturing plant. Elsewhere our Australian business had a
particularly strong performance while our South Africa company made a loss due
to problems encountered in the prior year. The second half of the year gave
encouragement that these issues are behind us.
The Middle East was a very active region in 2006 due to the momentum of large
oil and gas investments. Actuators destined for the Middle East and Africa
increased to 12% from 8% of the total.
Service and Support
Although our actuators have a deserved reputation for reliability we have always
recognised the value of having a worldwide service and support organisation.
Having sold product into the field for 50 years there is a large population of
actuators, some of which have been in operation for decades. A key strategy of
the company in recent years has been to develop a more comprehensive service and
through life support capability. Revenues from these activities have increased
significantly in recent years to a point where we felt it was appropriate to
bring these activities under the leadership of a new Service, Projects and
Retrofit director. 2006 was particularly active for our UK service operations
based in Bath and Leeds. Water and power companies were increasing their spend
on efficiency and pollution and emissions' control programmes, which involve the
design and installation of actuation systems.
Rotork Fluid System Division
Rotork Fluid System design, assemble and market heavy-duty fluid power valve
actuators which are operated either pneumatically or hydraulically. The main
markets served by our product ranges are oil and gas related and unlike the
electric actuators the bulk of these products are destined for upstream
applications, transmission and LNG plants and terminals. These areas are
benefiting from increased investment by most of the international oil and gas
companies. The principal assembly plant is based in Lucca, Italy, with product
also assembled in Rochester N.Y. and at Melle in Germany.
This business is closing in on its objective of accounting for 20% of total
group turnover reaching 19.6% up from 18.5% in 2005. Order input was £46.1m
which was up 26.2%, while output increased by 25.3%. Operating profit was up
46.5% which meant return on sales increased from 11.4% to 13.3%. This
represents good progress towards meeting the objective of a 15% return on sales,
especially in a year in which movement of the euro/dollar exchange rate reduced
the profitability of goods with a euro cost sold in US dollars.
Further development of the management structure of this business has been
completed, providing a platform for further growth. Growth was achieved in 2006
without the assistance of any dominant project. Instead the business focused on
the large number of substantial opportunities in oil and gas production and
transmission particularly in the Middle East.
The main plant in Lucca in Italy again performed very well. The division was
also assisted by improved performances from the German and US production
facilities. This business relies on the sales and packaging of its products
through our own 'centres of excellence' (CoE). We are expanding the number of
these facilities, mainly based upon our overseas sales and support companies.
Good first time performances were seen from Korea, Japan and Venezuela, in
addition to enhanced growth in France, Spain, Canada and Singapore. Only the
Australian CoE had a disappointing year.
Rotork Gears Division
Rotork Gears manufactures gearboxes, adaptors and other ancillary devices for
industrial valvemakers worldwide. It depends upon similar dynamics as the
electrics and fluid power businesses but serves a wider variety of end user
industries through its valvemaker customers.
We benefited from an active market and an expanding infrastructure which allowed
Gears to win some significant new business. Order intake for the year was up
40.1% (20.6%) while output was up 27.4% (14.6%) and operating profit up 21.3%
(12.9%). The figures in brackets exclude the acquisition of Omag Srl which
became Rotork Gears Srl after purchase at the start of the year.
2006 was an important year for Gears during which we achieved a smooth
management transition following the retirement of the divisional managing
director, the successful integration of the Italian acquisition and the
commencement of Chinese assembly of gearboxes in the new Shanghai plant. Rotork
Gears Srl exceeded our expectations and had a successful year serving an active
valve market in Italy. It not only helped embed us in this important market,
but extended our product range and capabilities especially for very large
valves.
The Leeds and Dutch plants both performed well while further progress was made
in expanding the sales base in the US where a number of important new contracts
were won. The loss incurred at the Shanghai plant was due to start up costs but
the benefits of this initiative should be evident in 2007 and beyond. During
the year Gears strengthened their engineering capability in order to develop new
product ranges and focus on cost reduction exercises and niche market
opportunities such as subsea gearboxes where we have seen increased demand.
Dividends
Rotork is cash generative, and aims to return funds to shareholders where they
are not required for reinvesting in the business in the immediately foreseeable
future. The Board aims for total dividend distribution to be generally in line
with increases in earnings per share. In recent years cash generation has been
strong and it has therefore been possible to make dividend increases
significantly beyond increases in earnings per share. We have referred to 'core'
and 'additional' dividend to address the concept of a growing basic annual
dividend stream that could be considered supportable in the medium term as a
base for future increases, and then further 'additional' dividend that
represents the distribution of excess cash.
For the current year the directors propose a final dividend of 11.65p payable on
11 May to shareholders on the register on 20 April. This represents an increase
of 17.7% over the prior year final dividend and brings the total core dividend
for 2006 to 18.15p, 14.9% increase year on year. Furthermore, recognising the
strong cash balances at the year end, we are proposing an additional dividend of
9.30p (£8 million in total) to be paid on 22 June to shareholders on the
register on 1 June 2007.
Treasury
We have seen the overall level of working capital increase as the business has
grown in the year. In relative terms our receivables' management has been good
and inventory management is generally improving, with the increased level of
work in progress reflecting the order book at the end of the year and
anticipating shipments in early 2007. Cash generation has been very positive in
the year with 102% of operating profits converted into cash.
Rotork is affected by movements in world currencies as can be seen by the
profile of our income streams, but our increased focus on worldwide procurement,
to support our historic success at worldwide marketing, has enabled us to
deflect some of the more punitive impacts of currency swings. The deterioration
in our main non sterling traded currencies - the US dollar and the euro - in the
second half of the year undoubtedly impacted profits as UK produced goods became
more expensive for overseas customers to buy, and also in terms of translation
of foreign earned profits into sterling. Currently we estimate that 30% of our
income streams are denominated in US dollar and dollar influenced currencies,
and 30% in euro. The impact of currency in the two halves, and the year as a
whole, can best be seen by converting the results back to constant currency:
adjusting the 2006 results to the effective rates that we had in 2005.
H1 H2 2006 2005
total
£m £m £m £m
Operating profit as reported 22.0 23.1 45.1 36.5
Translation impact (0.4) 0.8 0.4
Transaction impact (0.6) 1.0 0.4
Operating profit at 2005 rates 21.0 24.9 45.9 36.5
So overall we believe that profit for the year would have been approximately
£0.8m higher if 2005 exchange rates had prevailed. The increase in operating
profit, reported as 23.6%, would have shown an increase of 25.7% at constant
currency. The biggest mover in the period was the US$. The average rate for the
first half of 2006 was $1.80 and for the second half $1.89. As we go into 2007,
the dollar rate seems settled at a rate weaker than the second half average,
meaning that the currency backdrop overall is likely to be less benign in 2007
than 2006.
Over the last few years, our weighted average rates for translation of our two
main trading currencies have been:
US dollar Euro
2002 1.52 1.58
2003 1.66 1.44
2004 1.83 1.46
2005 1.80 1.46
2006 1.84 1.47
Research & Development
Work has continued through 2006 on our flagship IQ series of products. The
increased flexibility of the new series controller has enabled us to roll out
updates that have both extended the functionality and at the same time
facilitated yet more cost reductions. Further updates are planned for the
coming year. The quarter turn derivative, IQT, has undergone some preliminary
development to enhance its suitability for naval applications which are
considered a potential growth area for the product. We are also in the final
stages of development of more options to qualify the product for use within
safety instrumented systems. This latter development will assist our end users
in meeting increased regulatory and safety requirements.
Extensive efforts have been focused on the proprietary Pakscan networking system
with the development of a new master station product. This product was launched
at the end of 2006 and first shipments are expected in early 2007. In addition
to being compatible with the earlier series, the integration of embedded web
server technology will enable remote monitoring and diagnosis. Work will take
place in 2007 to extend the scope of this new platform including assessment of
other network and wireless technology.
During 2006 we have also concentrated on refining and evaluating proposals for
the process control market. In what is a major programme for the company these
concepts will be developed further with the intention of bringing a product
range to market in 2008. Additionally the Jordan product, which is aimed at
positioning duty applications, was enhanced with new communication capabilities
and the development of 'smart' actuators for specific customers.
RFS has continued to enhance and broaden its extensive product ranges. During
the year it introduced new high pressure technology to its gas pipeline products
and also added new products for niche applications.
Rotork was the winner of a prestigious 2006 Innovation and Design Excellence
Award, a competition for UK companies organised by Cranfield University School
of Management and Findlay Publications Ltd. in association with Scientific
Generics which recognises 'creativity and design innovation'.
Quality
Throughout its 50 year history, Rotork has prized and cultivated its reputation
in the market place for product quality and reliability. When Lloyds Register
Quality Assurance conducted their regular surveillance visit in August 2006,
they audited Rotork's UK site service operation against the requirements of
ISO9001:2000. This included a customer site visit and the auditor subsequently
wrote in his formal visit report; 'The customer representative on site reported
high levels of satisfaction with the quality and reliability of Rotork
actuators, and the standard of installation and maintenance services provided'.
This was a very welcome confirmation of Rotork's commitment to meeting
customers' expectations.
Other external quality assurance auditors visiting the main manufacturing site
in Bath have also been complimentary about Rotork's understanding and commitment
to product excellence. One noted that: 'Suppliers appear to be subject to a
particularly good level of monitoring and control'. This confirmed another key
aspect of Rotork's strategy; Quality Assured component supply chains. The
Supplier Quality Assurance (SQA) Team works closely with suppliers across the
globe, from product inception onwards, to ensure that components meet Rotork's
stringent requirements.
As Rotork expands its global operations, great emphasis is placed on the rapid
transfer of knowledge and core principles to the new manufacturing sites. SQA
and systems specialists from the Bath QA Team, alongside key staff from other
departments, visit periodically to guide their implementation of World Class
methods and processes. A key ingredient in this approach is establishing
overseas supply chains, providing components to the local Rotork sites and
offering the additional benefit of cost effective component supplies to the Bath
factory.
Environment
The Environment Management System (EMS) at the main Bath site is independently
verified as compliant with ISO14001:2004. The EMS was developed to identify,
manage and reduce operational impacts on the environment as well as maintaining
compliance with new and existing environmental legislation. The Environment
Agency audited the waste management systems and pollution prevention procedures
in operation at the Bath site in September 2006 and no improvements notes or
recommendations were raised.
The achievements made and knowledge gained in developing the EMS at the Bath
site is being used to bring all of Rotork manufacturing sites' environmental
systems in line with Bath. Initial results are very encouraging showing an
increase in waste recycled as a proportion of total waste to 46% from 38% in
2005. The key items recycled are wood, cardboard and plastics. Waste reduction
has been improved through a policy of working with suppliers to ensure only
recyclable or reusable packaging materials are used in component shipments.
Waste recycling is one of the company's key objectives.
While exempt from the specific provisions of the WEEE and RoHS directives,
Rotork is making every effort to reduce the environmental impact of its
products. Wherever possible new product components are marked with the
appropriate standard EU recycling marks or labels. Information has also been
included in product handbooks regarding the materials the units contain and any
specific advice relating to their disposal.
Rotork remains committed to meeting the requirements for continued inclusion in
the FTSE4Good Index and is very conscious of the need for improved awareness of
environmental issues and the need to minimise the Group's environmental impact.
Our 2006 Environmental Report published on the Rotork web site shows the
improvements made in the Group's reporting of environmental performance data.
In that report the number of subsidiaries reporting their environmental data
increased from 7 to 29. The next report will include data from sites included
in recent acquisitions. Details of Rotork's global environmental performance
are published in the Rotork Environmental Report on the Rotork web site at
www.rotork.com.
Rotork community
As we enter our 50th year since the Company was first incorporated it is
important to thank not only our existing employees, who have been instrumental
in achieving such strong growth in recent years, but to also acknowledge the
huge debt Rotork has to everyone who has been associated with it and who has
made such an impact on the organisation since its inception. When I joined
Rotork over 30 years ago from a leading British manufacturer I was immediately
aware of a special culture our founder Jeremy Fry had instilled in the Company
which has driven the Company to become the world leader it is today. It is now
our task to make sure that as we further develop the business we retain the
customer focus, the drive for innovation and the commitment to emerging markets
that have been the hallmark of our success.
Bill Whiteley
Chief Executive
27 February 2007
Consolidated Income Statement
for the year ended 31 December 2006
Notes 2006 2005
£000 £000
Revenue 2 206,709 174,839
Cost of sales (115,603) (95,358)
______ ______
Gross profit 91,106 79,481
Other income 98 79
Distribution costs (2,287) (1,959)
Administrative expenses (43,735) (41,002)
Other expenses (93) (69)
______ ______
Operating profit 2 45,089 36,530
Financial income 5,568 4,479
Financial expenses (4,596) (4,352)
______ ______
Profit before tax 46,061 36,657
Tax expense 3 (14,728) (12,043)
______ ______
Profit for the year 31,333 24,614
===== =====
Pence Pence
Basic earnings per share 5 36.4 28.6
Diluted earnings per share 5 36.1 28.4
Consolidated Balance Sheet
at 31 December 2006
Notes 2006 2005
£000 £000
Assets
Property, plant and equipment 16,616 17,214
Intangible assets 22,225 22,038
Deferred tax assets 5,739 9,115
Other receivables 735 633
______ ______
Total non-current assets 45,315 49,000
Inventories 29,027 26,697
Trade receivables 37,385 36,492
Current tax 1,219 2,225
Other receivables 4,104 2,560
Cash and cash equivalents 28,460 27,878
______ ______
Total current assets 100,195 95,852
______ ______
Total assets 145,510 144,852
===== =====
Equity
Issued equity capital 4,314 4,310
Share premium 5,857 5,609
Reserves (1,421) 2,405
Retained earnings 80,386 68,241
______ ______
Total equity 4 89,136 80,565
===== =====
Liabilities
Interest-bearing loans and borrowings 180 236
Employee benefits 6 8,186 21,736
Deferred tax liabilities 1,225 1,164
Provisions 941 654
______ ______
Total non-current liabilities 10,532 23,790
Bank overdraft 62 698
Interest-bearing loans and borrowings 526 1,016
Trade payables 16,835 14,937
Employee benefits 6 3,941 3,342
Current tax 6,236 5,620
Other payables 15,923 13,129
Provisions 2,319 1,755
______ ______
Total current liabilities 45,842 40,497
Total liabilities 56,374 64,287
______ ______
Total equity and liabilities 145,510 144,852
===== =====
These financial statements were approved by the Board of Directors on 27
February 2007 and were signed on its behalf by WH Whiteley and RE Slater,
Directors.
Consolidated Statement of Cash Flows
for the year ended 31 December 2006
2006 2006 2005 2005
£000 £000 £000 £000
Cash flows from operating activities
Profit for the year 31,333 24,614
Adjustments for:
Amortisation of intangibles 98 179
Amortisation of development costs 259 293
Depreciation 2,554 2,671
Equity settled share based payment expense 496 312
(Profit) / loss on sale of fixed assets (33) 22
Financial income (5,568) (4,479)
Financial expenses 4,596 4,352
Income tax expense 14,728 12,043
______ ______
48,463 40,007
Increase in inventories (3,610) (3,359)
Increase in trade and other receivables (3,786) (685)
Increase in trade and other payables 6,691 1,325
Difference between pension charge and cash (6,801) (3,243)
contribution
Increase in provisions 731 709
Increase in other employee benefits 776 1,509
______ ______
42,464 36,263
Income taxes paid (11,247) (11,296)
______ ______
Cash flows from operating activities 31,217 24,967
Investing activities
Purchase of tangible fixed assets (2,425) (1,396)
Development costs capitalised (372) (291)
Sale of tangible fixed assets 116 94
Acquisition of subsidiary net of cash acquired (1,589) (7,227)
Interest received 876 776
______ ______
Cash flows from investing activities (3,394) (8,044)
Financing activities
Issue of ordinary share capital 252 626
Purchase of ordinary share capital (2,047) (2,236)
Purchase of preference shares treated as debt (4) -
Interest paid (147) (232)
New loans - 1,515
Repayment of amounts borrowed (467) (838)
Repayment of finance lease liabilities (212) (100)
Dividends paid on ordinary shares (24,140) (13,437)
______ ______
Cash flows from financing activities (26,765) (14,702)
______ ______
Net increase in cash and cash equivalents 1,058 2,221
Cash and cash equivalents at 1 January 27,180 24,825
Effect of exchange rate fluctuations on cash 160 134
held
______ ______
Cash and cash equivalents at 31 December 28,398 27,180
===== =====
Consolidated Statement of Recognised Income and Expense
For the year ended 31 December 2006
2006 2005
£000 £000
Foreign exchange translation differences (3,748) 2,190
Actuarial gain / (loss) in pension scheme 6,743 (3,452)
Movement on deferred tax relating to actuarial (gain) / loss (2,023) 2,552
Effective portion of changes in fair value of cash flow hedges (80) (487)
______ ______
Income and expenses recognised directly in equity 892 803
Profit for the year 31,333 24,614
______ ______
Total recognised income and expense 32,225 25,417
===== =====
Notes to the Financial Statements
for the year ended 31 December 2006
Except where indicated, values in these notes are in £'000
Rotork p.l.c. is a Company domiciled in England. The consolidated financial
statements of the Company for the year ended 31 December 2006 comprise the
Company and its subsidiaries (together referred to as the Group). The accounting
policies contained below in note 1 and all the notes relate to the Group
statements.
1. Accounting policies
Basis of preparation
The Group financial statements have been prepared and approved by the directors
in accordance with International Financial Reporting Standards as adopted by the
EU ('Adopted IFRSs').
IFRS7 Financial Instruments: disclosures and IFRIC 8 Scope of IFRS2 which are
adopted but not effective as at 31 December 2006 will be applied in the next
financial year. They are not expected to have a material effect on the reported
results.
Basis of accounting
The consolidated financial statements have been prepared under the historical
cost convention subject to the items referred to in the derivative financial
instruments. The accounting policies set out below have been consistently
applied in preparing the 2005 and 2006 financial information within its
consolidated financial statements for the year ended 31 December 2006. The
accounting policies have been applied consistently in respect of Group entities.
The preparation of consolidated financial statements in conformity with IFRSs
requires the directors to make judgements, estimates and assumptions that affect
the application of policies and reported amounts of assets and liabilities,
income and expenses. The estimates and associated assumptions are based on
historical experience and various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis of
making the judgements about carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period, or in the period
of the revision and future periods if the revision affects both current and
future periods. The key areas where estimates have been used and the assumption
applied are in the impairment testing of goodwill and in assessing the defined
benefit pension scheme liabilities.
Consolidation
The consolidated financial statements incorporate the financial statements of
the Company and its subsidiaries for the year to 31 December 2006. The financial
statements of subsidiaries are included in the consolidated financial statements
from the date that control commences until the date control ceases. Intragroup
balances and any unrealised gains or losses or income and expenses arising from
intragroup transactions, are eliminated in preparing the consolidated financial
statements.
Status of this preliminary announcement
The financial information contained in this preliminary announcement does not
constitute the Company's statutory accounts for the years ended 31 December 2006
or 2005. Statutory accounts for 2005, which were prepared under International
Financial Reporting Standards as adopted by the EU, have been delivered to the
registrar of companies, and those for 2006 will be delivered in due course. The
auditors have reported on these accounts, their reports were unqualified and did
not contain statements under section 237 (2) or (3) of the Companies Act 1985.
Full financial statements for the year ended 31 December 2006, will shortly be
posted to shareholders, and after adoption at the Annual General Meeting on 20
April 2007 will be delivered to the registrar.
2. Analysis of revenue, profit and net assets
The primary format used for segmental reporting is by business segment as this
reflects the internal management structure and reporting of the Group. Segment
results, assets and liabilities include items directly attributable to a segment
as well as those that can be allocated on a reasonable basis. Unallocated
expenses comprise corporate expenses and unallocated assets and liabilities
comprise cash, borrowings, tax assets and liabilities respectively. Inter group
trading is determined on an arm's length basis.
Business segments
The Group comprises the following business segments:
Electrics - the design, manufacture and sale of electric valve actuators
Fluid system - the design, manufacture and sale of heavy duty pneumatic and
hydraulic valve actuators
Gears - the design, manufacture and sale of gearboxes, adaption and ancillaries
for the valve industry
Geographic segments
Rotork has a worldwide presence in all three business segments through its
subsidiary selling offices and through an agency network. A full list of
locations can be found at www.rotork.com.
Analysis by operation:
Electrics Fluid system Gears Eliminations Consolidated
2006 2006 2006 2006 2006
Revenue from external customers 147,795 40,504 18,410 - 206,709
Inter-segment revenue - - 5,872 (5,872) -
______ ______ ______ ______ ______
Total revenue 147,795 40,504 24,282 (5,872) 206,709
===== ===== ===== ===== =====
Segment result 37,024 5,374 4,638 - 47,036
===== ===== ===== =====
Unallocated expenses (1,947)
______
Operating profit 45,089
Net financing income 972
Income tax expense (14,728)
______
Profit for the year 31,333
=====
Electrics Fluid system Gears Eliminations Consolidated
2005 2005 2005 2005 2005
Revenue from external customers 128,535 32,321 13,983 - 174,839
Inter-segment revenue - - 5,080 (5,080) -
______ ______ ______ ______ ______
Total revenue 128,535 32,321 19,063 (5,080) 174,839
===== ===== ===== ===== =====
Segment result 30,912 3,669 3,825 - 38,406
===== ===== ===== =====
Unallocated expenses (1,876)
______
Operating profit 36,530
Net financing income 127
Income tax expense (12,043)
______
Profit for the year 24,614
=====
Electrics Fluid system Gears Unallocated Consolidated
2006 2006 2006 2006 2006
Segment assets 67,969 29,796 12,325 35,420 145,510
Segment liabilities 34,557 9,442 4,146 8,229 56,374
Depreciation 1,776 563 313 - 2,652
Non-cash items 625 85 87 56 853
Capital expenditure 1,949 496 161 - 2,606
Electrics Fluid system Gears Unallocated Consolidated
2005 2005 2005 2005 2005
Segment assets 63,973 28,691 12,964 39,224 144,852
Segment liabilities 44,666 8,145 2,743 8,733 64,287
Depreciation 2,228 696 219 - 3,143
Non-cash items 527 213 12 32 784
Capital expenditure 1,024 480 128 - 1,632
Analysis by Geographical segment Europe Americas Rest of the Unallocated Consolidated
World
2006 2006 2006 2006 2006
Revenue from external customers by 89,992 58,398 58,319 - 206,709
location of customer
Segment assets by location of assets 72,810 21,849 15,431 35,420 145,510
Capital expenditure by location of 1,500 268 838 - 2,606
assets
Europe Americas Rest of the Unallocated Consolidated
World
2005 2005 2005 2005 2005
Revenue from external customers by 73,967 50,544 50,328 - 174,839
location of customer
Segment assets by location of assets 67,102 23,578 14,948 39,224 144,852
Capital expenditure by location of 1,288 168 176 - 1,632
assets
All of the activities of the Group in the year arise from continuing operations.
3. Income tax expense
Recognised in the income statement
2006 2006 2005 2005
Current tax:
UK Corporation tax on profits for the year 10,486 8,976
Double tax relief (6,023) (5,441)
Adjustment in respect of prior years (182) 70
______ ______
4,281 3,605
Overseas tax on profits for the year 8,787 7,470
Adjustment in respect of prior years 41 22
______ ______
8,828 7,492
______ ______
Total current tax 13,109 11,097
Deferred tax:
Origination and reversal of other temporary 1,585 1,089
differences
Adjustment to estimated recoverable amounts of 34 (143)
deferred tax assets arising in previous periods
______ ______
Total deferred tax 1,619 946
_____ _____
Tax charge on profit on ordinary activities 14,728 12,043
===== =====
Effective tax rate (based on profit before tax) 32.0% 32.9%
Profit before tax 46,061 36,657
Profit before tax multiplied by standard rate of 13,818 10,997
corporation tax in the UK of 30%
Effects of:
Non deductible expenses 267 577
Unrelieved losses (45) (38)
Higher tax rates on overseas earnings 795 558
Adjustments to tax charge in respect of prior (107) (51)
periods
______ ______
Total tax charge for period 14,728 12,043
===== =====
A deferred tax credit of £551,000 (2005: £342,000) in respect of share based
payments has been recognised directly in equity in the period.
The Group continues to expect its effective rate of corporation tax to be
slightly higher than the standard UK rate due to higher rates of tax in the US,
Canada, France, Germany, Italy and India.
There is an unrecognised deferred tax liability for temporary differences
associated with investments in subsidiaries. Rotork p.l.c. controls the dividend
policies of its subsidiaries and subsequently the timing of the reversal of the
temporary differences. It is not practical to quantify the unprovided temporary
differences as acknowledged within paragraph 40 of IAS 12.
4. Capital and reserves
Issued Share Translation Capital Hedging Retained Total
equity premium reserve redemption reserve earnings
capital reserve
Balance at 1 January 4,300 4,993 (1,212) 1,637 277 58,489 68,484
2005
Profit for the financial - - - - - 24,614 24,614
year
Other items in the - - 2,190 - (487) (900) 803
statement of recognised
income and expense
Equity settled - - - - - 562 562
transactions net of tax
Share options exercised 10 616 - - - - 626
by employees
Own ordinary shares - - - - - (2,236) (2,236)
acquired
Own ordinary shares - - - - - 1,149 1,149
awarded under share
schemes
Dividends to - - - - - (13,437) (13,437)
shareholders
_____ _____ _____ _____ _____ _____ _____
Balance at 31 December 4,310 5,609 978 1,637 (210) 68,241 80,565
2005
Profit for the financial - - - - - 31,333 31,333
year
Other items in the - - (3,748) - (80) 4,720 892
statement of recognised
income and expense
Equity settled - - - - - 915 915
transactions net of tax
Share options exercised 4 248 - - - - 252
by employees
Own ordinary shares - - - - - (2,047) (2,047)
acquired
Own ordinary shares - - - - - 1,368 1,368
awarded under share
schemes
Purchase of preference - - - 2 - (4) (2)
shares
Dividends to - - - - - (24,140) (24,140)
shareholders
_____ _____ _____ _____ _____ _____ _____
Balance at 31 December 4,314 5,857 (2,770) 1,639 (290) 80,386 89,136
2006
===== ===== ===== ===== ===== ===== =====
Share capital and share premium
5p Ordinary 5p Ordinary £1 5p Ordinary 5p Ordinary £1
shares shares Non-redeemable shares shares Non-redeemable
preference Issued preference
Authorised Issued and shares Authorised and fully shares
fully paid up paid up
2006 2006 2006 2005 2005 2005
On issue at 1 January 5,449 4,310 47 5,449 4,300 47
Purchased for cash and - - (2) - - -
cancelled
Issued under employee - 4 - - 10 -
share schemes
_____ _____ _____ _____ _____ _____
On issue at 31 December 5,449 4,314 45 5,449 4,310 47
===== ===== ===== ===== ===== =====
Number of shares (000) 108,990 86,282 108,990 86,192
===== ===== ===== =====
The ordinary shareholders are entitled to receive dividends as declared and are
entitled to vote at meetings of the Company. The preference shareholders take
priority over the ordinary shareholders when there is a distribution upon
winding-up the Company or on a reduction of equity involving a return of
capital. The holders of preference shares are entitled to vote at a general
meeting of the Company if a preference dividend is in arrears for six months or
the business of the meeting includes the consideration of a resolution for
winding-up the Company or the alteration of the preference shareholders' rights
Ordinary shares issued during the year were 89,726 (2005: 198,634) under The
Rotork Employee Share Option Schemes, at prices between 278p and 298p (2005:
192p and 372p) and 1,465 (2005: nil) under The Rotork Sharesave Plan at 320p.
No shares were issued under The Rotork Share Incentive Plan or under The
Overseas Profit-Linked Share Scheme during 2006 or 2005.
No new options were issued under The Rotork Employee Share Option Scheme (1995)
during 2006 or 2005. On 6 October 2006 options over 58,025 (2005: 46,553) shares
were granted under the Rotork Sharesave Scheme at 592p (2005: 462p). Of these
options, 21,402 (2005: 19,113) were exercisable after 3 years and 36,623 (2005:
27,440) after 5 years.
There were 200,973 (2005: 314,926) outstanding options under The Rotork Employee
Share Option Schemes at 31 December, exercisable at various prices between 278p
and 387p per ordinary share between 2007 and 2014.
Within the retained earnings reserve are own shares held. The investment in own
shares represents 283,045 (2005: 240,460) ordinary shares of the Company held in
trust for the benefit of directors and employees for future payments under the
Share Incentive Plan and Long-term incentive plan. The dividends on these shares
have been waived.
Dividends
The following dividends were paid in the year:
2006 2005
9.9p final dividend (2005: 9.7p) per qualifying ordinary share 8,537 8,342
6.5p interim dividend (2005: 5.9p) per qualifying ordinary share 5,601 5,095
2006 first additional interim dividend 5.8p per qualifying ordinary share 5,004 -
2006 second additional interim dividend 5.8p per qualifying ordinary share 4,998 -
______ ______
24,140 13,437
===== =====
After the balance sheet date the following dividends were proposed by the
directors. The dividends have not been provided for and there are no corporation
tax consequences.
2006 2005
Final proposed dividend
11.65p per qualifying ordinary share 10,019
=====
9.9p per qualifying ordinary share 8,521
=====
Additional interim dividends proposed for 2007
9.3p per qualifying ordinary share 8,000
=====
5. Earnings per share
Basic earnings per share
Earnings per share is calculated for both the current and previous years using
the profit attributable to the ordinary shareholders for the year. The earnings
per share calculation is based on 86.1 million shares (2005: 86.1 million
shares) being the weighted average number of ordinary shares in issue for the
year.
2006 2005
Net profit attributable to ordinary shareholders 31,333 24,614
===== =====
Weighted average number of ordinary shares
Issued ordinary shares at 1 January 85,952 85,867
Effect of own shares held 91 62
Effect of shares issued under options 58 130
______ ______
Weighted average number of ordinary shares for the year ended 31 December 86,101 86,059
===== =====
Diluted earnings per share
Diluted earnings per share is based on the profit for the year attributable to
the ordinary shareholders and 86.9 million shares (2005: 86.8 million shares).
The number of shares is equal to the weighted average number of ordinary shares
in issue adjusted to assume conversion of all dilutive potential ordinary
shares. The Company has two categories of dilutive potential ordinary shares:
those share options granted to employees where the exercise price is less than
the average market price of the Company's ordinary shares during the year and
contingently issuable shares awarded under the Long-term incentive plan.
2006 2005
Net profit attributable to ordinary shareholders (diluted) 31,333 24,614
===== =====
Weighted average number of ordinary shares (diluted)
Weighted average number of ordinary shares for the year ended 31 December 86,101 86,059
Effect of share options on issue 102 108
Effect of Sharesave options on issue 111 40
Effect of LTIP shares on issue 552 545
______ ______
Weighted average number of ordinary shares (diluted) for the year ended 31 86,866 86,752
December
===== =====
6. Employee benefits
2006 2005
Recognised liability for defined benefit obligations:
Present value of funded obligations 87,394 89,501
Fair value of plan assets (80,745) (69,125)
_____ _____
6,649 20,376
Defined contribution scheme liabilities 507 543
Employee bonus and incentive plan 2,744 2,113
Long-term incentive plan (cash settled) 1,868 1,542
Employee indemnity provision 196 357
Liability for long-service leave 163 147
_____ _____
12,127 25,078
===== =====
Non-current 8,186 21,736
Current 3,941 3,342
_____ _____
12,127 25,078
===== =====
Defined benefit pension liabilities
The Group makes a contribution to three defined benefit plans to provide
benefits for employees in the UK, USA and Holland upon retirement.
Movements in the present value of defined benefit obligations
2006 2005
Liabilities at 1 January 89,501 74,486
Current service costs 1,817 1,378
Member contributions 484 506
Interest cost 4,309 4,048
Benefits paid (1,691) (1,339)
Past service costs 300 -
Actuarial (gains) / losses (6,729) 9,930
Currency (gains) / losses (597) 492
_____ _____
Liabilities at 31 December 87,394 89,501
===== =====
Movements in fair value of plan assets
2006 2005
Assets at 1 January 69,125 54,650
Expected return on scheme assets 4,518 3,770
Employer contributions 8,892 4,568
Member contributions 484 506
Benefits paid (1,691) (1,339)
Actuarial (losses) / gains (199) 6,693
Currency (losses) / gains (384) 277
_____ _____
Assets at 31 December 80,745 69,125
===== =====
Expense recognised in the income statement
2006 2005
Current service costs 1,817 1,378
Past service costs 300 -
Interest on obligation 4,309 4,048
Expected return on plan assets (4,518) (3,770)
_____ _____
1,908 1,656
===== =====
The expense is recognised in the following line items in the income statement
2006 2005
Cost of sales 663 351
Administrative expenses 1,454 1,027
Net financing (income) / expense (209) 278
_____ _____
1,908 1,656
===== =====
Actuarial (losses) / gains on plan assets (199) 6,693
Actuarial gains / (losses) from liabilities 6,729 (9,930)
Currency gains / (losses) 213 (215)
_____ _____
Net actuarial gains / (losses) recognised in Consolidated Statement of Recognised 6,743 (3,452)
Income and Expense
===== =====
Cumulative actuarial losses recognised in Consolidated Statement of Recognised (2,501) (9,244)
Income and Expense
===== =====
2006 2005 2004 2003 2002
Defined benefit obligation (87,394) (89,501) (74,486) (64,203) (54,400)
Scheme assets 80,745 69,125 54,650 44,700 37,800
_____ _____ _____ _____ _____
Deficit (6,649) (20,376) (19,836) (19,503) (16,600)
Experience adjustments on 6,729 (9,930) (6,783) (6,750) (1,100)
liabilities
Experience adjustments on assets (199) 6,693 884 3,700 (10,300)
Experience adjustments on currency 213 (215) 107 50 100
Liability for defined benefit obligations
The principal actuarial assumptions at the balance sheet date (expressed as
weighted averages)
UK scheme US scheme Average
(% per annum) (% per annum) (% per annum)
2006 2005 2004 2006 2005 2004 2006 2005 2004
Discount rate 5.10 4.70 5.30 5.72 5.40 5.66 5.13 4.74 5.32
Rate of increase in 4.0 4.0 3.9 4.5 4.5 4.5 4.02 4.03 3.93
salaries
Rate of increase in 3.0 3.0 2.9 0.0 0.0 0.0 2.85 2.85 2.78
pensions (post May
2000)
Rate of increase in 4.5 4.5 4.5 0.0 0.0 0.0 4.28 4.27 4.31
pensions (pre May
2000)
Rate of price 3.0 3.0 2.9 3.5 3.5 3.5 3.02 3.03 2.93
inflation
The expected rates of return were: Expected rate of return
%
2006 2005 2004
Equities 7.80 7.40 7.90
Bonds 4.80 4.40 4.90
Property 7.50 5.50 6.00
Cash 3.40 3.00 4.40
Total Expected Return on UK Assets 6.81 6.20 6.81
US deposit administration contract 6.00 6.00 6.00
Split of the Schemes Assets
2006 2005
Equities 42,973 39,995
Bonds 23,639 22,030
Property 7,767 2,478
Cash 3,588 2,030
US deposit administration contract 2,778 2,592
_____ _____
Total 80,745 69,125
===== =====
Actual return on the scheme's assets 3,935 10,740
===== =====
The mortality assumption used is PA92 c2004 with an adjustment to the discount
rate of -0.1% per annum to allow for future improvements in mortality. The
individual return assumptions for each asset class are based on market
conditions at the 31 December 2006 and represent a best estimate of future
returns for that class allowing for risk premiums where appropriate. The Group
estimates that contributions to the defined benefit pension schemes payable
during 2007 will be around £2,600,000.
Defined contribution pension liabilities
The Group makes a contribution to a number of defined contribution plans around
the world to provide benefits for employees upon retirement. Total expense
relating to these plans in the year was £1,135,000 (2005: £519,000).
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