28th Feb 2007 07:01
Rotork PLC28 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 andmarketing organisation resulted in a particularly strong financial performancefor 2006. There were high levels of investment in oil and gas facilities aroundthe world due to the sustained high demand for crude oil, natural gas andrefined products. "Order intake has started strongly in 2007. Furthermore, there appears to be anactive project workload in most of our geographic and end user markets, whichshould ensure that we make further revenue and earnings progress in the currentyear. This is despite the negative drag that currencies will have if the USdollar and euro exchange rates to sterling are maintained at around currentlevels." For further information, please contact: Rotork p.l.c. Tel: 01225 733200Bill Whiteley, Chief ExecutiveBob Slater, Finance Director Financial Dynamics Tel: 020 7269 7291Susanne 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 ourdivisions delivering record sales, profits and order intake. Overall salesrevenue 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 thefirst half of the year. The rapidly weakening US dollar from May onwards meantthat the second half suffered a £1.8m negative currency movement with theoverall annual result being a charge of £0.8m. However, net margin was 22.3% inboth halves of the year compared with 21.0% for 2005, demonstrating theresilience of our business model as we improve our design processes and supplychain. The year end order book - itself negatively impacted by adverse currencymovements of £4.8m - closed up 19.2% at £76.0m. We continue to increase investment in the development of our products andservices which, together with the addition of new production facilities andimproved operational efficiencies, provides us with an expanding platform uponwhich to fully capitalise on future growth opportunities. Divisional highlights The Electric actuator business had another good year achieving a 19.8% year onyear increase in operating profit. Our US businesses traded well and most of theEurope, Middle East and Asia sales operations met or exceeded our expectations.The main Bath assembly plant performed well meeting higher than anticipateddemand levels whilst reducing delivery lead times. The new Shanghai productionfacility commenced shipping product to customers in China during the second halfof the year as planned. Rotork Fluid System continued to build on the high growth rates achieved in thepreceding two years by recording a 25.3% increase in sales to £40.5m. With afurther improvement in the year to 13.3%, operating margin moved closer to our15% target. We are now recognised as a major force in the industry with adeveloped management structure, good product offering, efficient productionfacilities and a strong customer oriented ethos. Rotork Gears produced a robust 2006 performance increasing sales and operatingprofit by 27.4% and 21.3% respectively. We are encouraged by the performance ofour Milan operation, acquired at the beginning of the year, and the success withwhich the management has integrated quickly into the wider Group. The Shanghaigearbox facility, established primarily for export out of China, has beenshipping increasing quantities throughout the year. Performance measurement Management have a structured and well established approach to performancemeasurement as defined by a series of financial and other indicators. The Boardreviews this information to assess the effectiveness of our operations and toconsider its response to specific issues as they arise. In light of anincreasing external interest in this subject we now show the key performancemeasures, used by the Group, in the Business Review. Dividend The Board reviews dividend policy regularly and acknowledges a correlationbetween improvements in earnings and dividend increases. Recognising the verystrong earnings growth in the year, and that cash generation has been good, theBoard is recommending both an increase in the final dividend for the year andthe 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, willincrease 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-offadditional dividend of 9.30p on 22 June 2007. 50th Anniversary Rotork will celebrate its 50th anniversary in 2007. From the beginning under theinspiration of founder Jeremy Fry the Company has, through a strong andconsistent commitment to innovation and customer focus, grown to occupy itscurrent enviable position as both world leader in valve actuation and a highlyrated constituent of the FTSE 250. None of this would have been achieved withoutthe year by year dedication of Rotork employees worldwide to whom the Boardextends its appreciation and gratitude. Outlook Order intake has started strongly in 2007. Furthermore, there appears to be anactive project workload in most of our geographic and end user markets, whichshould ensure that we make further revenue and earnings progress in the currentyear. This is despite the negative drag that currencies will have if the USdollar and euro exchange rates to sterling are maintained at around currentlevels. Roger LockwoodChairman27 February 2007 Business review Business overview Rotork is the world leader in valve actuation solutions which are usedextensively in oil and gas, power and water and waste water treatmentapplications. Beyond these important industries, our products are also used ina broad range of sectors including shipboard control, ventilation and dampercontrol. 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. Wehave 13 production plants internationally and multiple direct sales and supportoperations in 22 countries. This together with an extensive network of indirectsales offices gives coverage of all our customers and markets globally. We havearound 15,000 active customers in total. The key drivers for the Group's businesses relate to global investment in oiland gas, water and waste water and power generation installations with demandbeing generated by new and expanded capacity, upgrades to existing facilitiesand replacements. This is often linked to projects which are aimed at improvingthe efficiency, safety and environmental performance of plants. Valve actuatorsare critical components and their long-term reliability and performance isextremely important to users. They also act as a key interface between plantcontrol systems and related hardware. Rotork's reputation for quality,worldwide support and technical innovation is crucial to its leadership positionin the field. We have a large number of repeat customers around the world butthe broad geographic spread of our operations and applications means that no onecustomer 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 developingits leadership position in worldwide valve actuator activities. The Group'sactivities are focused on the specialist area of valve automation. Over theyears Rotork has continued to build on its reputation as an innovator of newconcepts in this field and has provided users with increasing levels offunctionality, performance and assurance. Recent strategy has focused on opportunities to leverage our leadership positionin heavy duty electric actuation into other closely associated areas of valveautomation. Key programmes relate to the development of new products andcontrol systems, marketing initiatives, creating service revenue opportunitiesand driving cost reductions relating to these businesses. The most importantcurrent product initiative relates to the development of our range of actuatorsaimed at the process control market, which is referred to further in the R&Dsection. Year under review Active end user markets, a world beating product portfolio and sales andmarketing organisation resulted in a particularly strong financial performancefor 2006. In a year during which many organisations in our industry struggledwith rising raw material costs and capacity constraints I am pleased to reportthat our flexible 'assembly only' philosophy of manufacture, coupled withprocurement initiatives, allowed us to handle increased levels of business andkept cost increases to a minimum. The main assembly plant in Bath performedparticularly well, not only producing a record number of electric actuators butalso allowing us to meet our objective of reducing lead times for much of theelectric product range. Whilst our world wide sourcing and assembly operations act to mitigate currencyrisks, Rotork is still exposed to transaction as well as translation currencyimpacts. In currency terms 2006 turned out to be a year of two halves, with thebenefits of a strong dollar on our earnings in the first half being more thanoffset 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 onlyto our important North American business but also our large Asian markets incountries 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 orderbook increased to £76.0m which is 19.2% up on the start of the year. Profitbefore tax was up 25.7%. Return on sales, a key performance indicator of thebusiness, increased to 22.3%. Electric Actuators Order intake for the electric business was up 14.7%, sales revenue up 15.0% andoperating profit up 19.8%. As a percentage of unit actuator order input theprincipal 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 figuresin brackets. There were high levels of investment in oil and gas facilitiesaround the world due to the sustained high demand for crude oil, natural gas andrefined products. In addition to upstream investment there was also an increasein units going into downstream facilities. It is in these areas, i.e. refineryoffsites, storage and distribution, that the majority of our electric actuatorsare used within this sector. Particularly high levels of activity were seen inthe Middle East. The construction of new LNG (Liquefied Natural Gas) facilitieshas also led to increased demand for our products in recent years. Within thepower sector, our actuators are used extensively in coal, oil, combined cyclegas and nuclear generation. China and India again dominated the demand withinthis sector with the increase in business in India being particularly evident.The water market, where we supply actuators for both potable and waste watertreatment plants, was also active with increased levels of business in theimportant North American and UK markets. However the total number of actuatorsgoing into this market was down due to an unusually large Asian order won in2005. UK Operations We saw a good performance from the UK market which accounted for 9% of electricactuators unit input for the year up from 8% in 2005. Strong demand from thewater companies who were focused on achieving their AMP 4 targets was coupledwith high levels of investment from existing coal fired power plants whichrequired actuators to assist in reducing emissions and increasing the efficiencyof their generation. The Bath plant, which is our main electric actuator assembly unit, responded tothe challenge of demand levels which were well above forecast levels. It was ofconsiderable credit to production management and our supply chain that we wereable to reduce delivery times in this environment. The year was also notablefor steep increases in the price of some important raw materials, such asaluminium, copper and zinc. I am pleased to report that the impact of theseincreases was, to a large extent, offset by savings coming online during theyear due to either sourcing initiatives or value engineering exercises.Indications at the start of the current year are that prices of many materialsare softening, which should release pressure on some components. In additionfurther cost saving measures are planned to come on stream during 2007. Europe Most of our European sales companies had reported improving activity levels inlate 2005, which led us to higher expectations for 2006. These expectationswere largely met with higher sales and profits being generated in most companieswith particularly strong results from Italy. Input accounted for 13% of thetotal electric actuator unit input by destination compared with 15% in 2005.There were two different elements to their growth. European valvemakers wereactive in worldwide energy projects, in particular Italian valvemakers had veryhigh levels of business from the Middle East. In addition to this there was anincrease in motorisation projects on existing refineries, tank farms and otheroil and gas installations within their domestic markets. Our new Russian company had a successful first year's trading. After a slowstart 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 itssuccessful business with sales and profits well up on the prior year, despitethe weakening US dollar. Again the main driver for the business was its successin the municipal market. However there was an increased level of businessactivity in the oil and gas market, in particular in the second half of theyear. The company put additional resources into positioning itself for newinvestment in power generation. The improving power market has also helped ourMilwaukee based operation, which manufactures modulating actuators, to increasesales. A new sales operation is being set up in Brazil to complement existingsales channels. Order input in units destined for the Americas was 17% (19%) ofthe total. The number of units destined for Latin America was down on the prioryear. The Far East and The Rest of the World A traditional strength of Rotork is its reputation in and coverage of Asia andin the year under review the Far East accounted for 49% by destination of ourelectric actuators against 50% in the prior year. The Group has been abeneficiary of the growth in the region which has required very substantialinfrastructure investment in power generation, oil & gas production, processingand distribution and water and waste water plants and facilities. Business inChina continued to be very buoyant and even exceeded the exceptional levelsrecorded in 2005. Demand for actuators for power plant applications remains thedominant driver but increasingly we are involved in oil and gas projectsthroughout the country. A major milestone in the year was the opening of ournew assembly plant in Shanghai at which we commenced production of electricactuators on schedule in the third quarter of the year. The Indian market is also a very important one for the company and one in whichwe have well established assembly plants in Chennai and Bangalore. High levelsof demand from both the power market and new oil and gas investments led tolarge increases in both our direct Indian business and business won throughinternational OEMs. Our other Asian companies performed well with further good progress from ourMalaysian manufacturing plant. Elsewhere our Australian business had aparticularly strong performance while our South Africa company made a loss dueto problems encountered in the prior year. The second half of the year gaveencouragement that these issues are behind us. The Middle East was a very active region in 2006 due to the momentum of largeoil and gas investments. Actuators destined for the Middle East and Africaincreased to 12% from 8% of the total. Service and Support Although our actuators have a deserved reputation for reliability we have alwaysrecognised the value of having a worldwide service and support organisation. Having sold product into the field for 50 years there is a large population ofactuators, some of which have been in operation for decades. A key strategy ofthe company in recent years has been to develop a more comprehensive service andthrough life support capability. Revenues from these activities have increasedsignificantly in recent years to a point where we felt it was appropriate tobring these activities under the leadership of a new Service, Projects andRetrofit director. 2006 was particularly active for our UK service operationsbased in Bath and Leeds. Water and power companies were increasing their spendon efficiency and pollution and emissions' control programmes, which involve thedesign and installation of actuation systems. Rotork Fluid System Division Rotork Fluid System design, assemble and market heavy-duty fluid power valveactuators which are operated either pneumatically or hydraulically. The mainmarkets served by our product ranges are oil and gas related and unlike theelectric actuators the bulk of these products are destined for upstreamapplications, transmission and LNG plants and terminals. These areas arebenefiting from increased investment by most of the international oil and gascompanies. The principal assembly plant is based in Lucca, Italy, with productalso assembled in Rochester N.Y. and at Melle in Germany. This business is closing in on its objective of accounting for 20% of totalgroup turnover reaching 19.6% up from 18.5% in 2005. Order input was £46.1mwhich was up 26.2%, while output increased by 25.3%. Operating profit was up46.5% which meant return on sales increased from 11.4% to 13.3%. Thisrepresents 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 reducedthe profitability of goods with a euro cost sold in US dollars. Further development of the management structure of this business has beencompleted, providing a platform for further growth. Growth was achieved in 2006without the assistance of any dominant project. Instead the business focused onthe large number of substantial opportunities in oil and gas production andtransmission particularly in the Middle East. The main plant in Lucca in Italy again performed very well. The division wasalso assisted by improved performances from the German and US productionfacilities. This business relies on the sales and packaging of its productsthrough our own 'centres of excellence' (CoE). We are expanding the number ofthese facilities, mainly based upon our overseas sales and support companies.Good first time performances were seen from Korea, Japan and Venezuela, inaddition to enhanced growth in France, Spain, Canada and Singapore. Only theAustralian CoE had a disappointing year. Rotork Gears Division Rotork Gears manufactures gearboxes, adaptors and other ancillary devices forindustrial valvemakers worldwide. It depends upon similar dynamics as theelectrics and fluid power businesses but serves a wider variety of end userindustries through its valvemaker customers. We benefited from an active market and an expanding infrastructure which allowedGears to win some significant new business. Order intake for the year was up40.1% (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 whichbecame Rotork Gears Srl after purchase at the start of the year. 2006 was an important year for Gears during which we achieved a smoothmanagement transition following the retirement of the divisional managingdirector, the successful integration of the Italian acquisition and thecommencement of Chinese assembly of gearboxes in the new Shanghai plant. RotorkGears Srl exceeded our expectations and had a successful year serving an activevalve market in Italy. It not only helped embed us in this important market,but extended our product range and capabilities especially for very largevalves. The Leeds and Dutch plants both performed well while further progress was madein expanding the sales base in the US where a number of important new contractswere won. The loss incurred at the Shanghai plant was due to start up costs butthe benefits of this initiative should be evident in 2007 and beyond. Duringthe year Gears strengthened their engineering capability in order to develop newproduct ranges and focus on cost reduction exercises and niche marketopportunities such as subsea gearboxes where we have seen increased demand. Dividends Rotork is cash generative, and aims to return funds to shareholders where theyare not required for reinvesting in the business in the immediately foreseeablefuture. The Board aims for total dividend distribution to be generally in linewith increases in earnings per share. In recent years cash generation has beenstrong and it has therefore been possible to make dividend increasessignificantly beyond increases in earnings per share. We have referred to "core"and "additional" dividend to address the concept of a growing basic annualdividend stream that could be considered supportable in the medium term as abase for future increases, and then further "additional" dividend thatrepresents the distribution of excess cash. For the current year the directors propose a final dividend of 11.65p payable on11 May to shareholders on the register on 20 April. This represents an increaseof 17.7% over the prior year final dividend and brings the total core dividendfor 2006 to 18.15p, 14.9% increase year on year. Furthermore, recognising thestrong cash balances at the year end, we are proposing an additional dividend of9.30p (£8 million in total) to be paid on 22 June to shareholders on theregister on 1 June 2007. Treasury We have seen the overall level of working capital increase as the business hasgrown in the year. In relative terms our receivables' management has been goodand inventory management is generally improving, with the increased level ofwork in progress reflecting the order book at the end of the year andanticipating shipments in early 2007. Cash generation has been very positive inthe year with 102% of operating profits converted into cash. Rotork is affected by movements in world currencies as can be seen by theprofile of our income streams, but our increased focus on worldwide procurement,to support our historic success at worldwide marketing, has enabled us todeflect some of the more punitive impacts of currency swings. The deteriorationin our main non sterling traded currencies - the US dollar and the euro - in thesecond half of the year undoubtedly impacted profits as UK produced goods becamemore expensive for overseas customers to buy, and also in terms of translationof foreign earned profits into sterling. Currently we estimate that 30% of ourincome 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 awhole, 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 36.5Translation impact (0.4) 0.8 0.4Transaction 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 operatingprofit, reported as 23.6%, would have shown an increase of 25.7% at constantcurrency. The biggest mover in the period was the US$. The average rate for thefirst 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 2007than 2006. Over the last few years, our weighted average rates for translation of our twomain 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. Theincreased flexibility of the new series controller has enabled us to roll outupdates that have both extended the functionality and at the same timefacilitated yet more cost reductions. Further updates are planned for thecoming year. The quarter turn derivative, IQT, has undergone some preliminarydevelopment to enhance its suitability for naval applications which areconsidered a potential growth area for the product. We are also in the finalstages of development of more options to qualify the product for use withinsafety instrumented systems. This latter development will assist our end usersin meeting increased regulatory and safety requirements. Extensive efforts have been focused on the proprietary Pakscan networking systemwith the development of a new master station product. This product was launchedat the end of 2006 and first shipments are expected in early 2007. In additionto being compatible with the earlier series, the integration of embedded webserver technology will enable remote monitoring and diagnosis. Work will takeplace in 2007 to extend the scope of this new platform including assessment ofother network and wireless technology. During 2006 we have also concentrated on refining and evaluating proposals forthe process control market. In what is a major programme for the company theseconcepts will be developed further with the intention of bringing a productrange to market in 2008. Additionally the Jordan product, which is aimed atpositioning duty applications, was enhanced with new communication capabilitiesand the development of 'smart' actuators for specific customers. RFS has continued to enhance and broaden its extensive product ranges. Duringthe year it introduced new high pressure technology to its gas pipeline productsand also added new products for niche applications. Rotork was the winner of a prestigious 2006 Innovation and Design ExcellenceAward, a competition for UK companies organised by Cranfield University Schoolof Management and Findlay Publications Ltd. in association with ScientificGenerics which recognises "creativity and design innovation". Quality Throughout its 50 year history, Rotork has prized and cultivated its reputationin the market place for product quality and reliability. When Lloyds RegisterQuality Assurance conducted their regular surveillance visit in August 2006,they audited Rotork's UK site service operation against the requirements ofISO9001:2000. This included a customer site visit and the auditor subsequentlywrote in his formal visit report; 'The customer representative on site reportedhigh levels of satisfaction with the quality and reliability of Rotorkactuators, and the standard of installation and maintenance services provided'.This was a very welcome confirmation of Rotork's commitment to meetingcustomers' expectations. Other external quality assurance auditors visiting the main manufacturing sitein Bath have also been complimentary about Rotork's understanding and commitmentto product excellence. One noted that: 'Suppliers appear to be subject to aparticularly good level of monitoring and control'. This confirmed another keyaspect of Rotork's strategy; Quality Assured component supply chains. TheSupplier Quality Assurance (SQA) Team works closely with suppliers across theglobe, from product inception onwards, to ensure that components meet Rotork'sstringent requirements. As Rotork expands its global operations, great emphasis is placed on the rapidtransfer of knowledge and core principles to the new manufacturing sites. SQAand systems specialists from the Bath QA Team, alongside key staff from otherdepartments, visit periodically to guide their implementation of World Classmethods and processes. A key ingredient in this approach is establishingoverseas supply chains, providing components to the local Rotork sites andoffering the additional benefit of cost effective component supplies to the Bathfactory. Environment The Environment Management System (EMS) at the main Bath site is independentlyverified as compliant with ISO14001:2004. The EMS was developed to identify,manage and reduce operational impacts on the environment as well as maintainingcompliance with new and existing environmental legislation. The EnvironmentAgency audited the waste management systems and pollution prevention proceduresin operation at the Bath site in September 2006 and no improvements notes orrecommendations were raised. The achievements made and knowledge gained in developing the EMS at the Bathsite is being used to bring all of Rotork manufacturing sites' environmentalsystems in line with Bath. Initial results are very encouraging showing anincrease in waste recycled as a proportion of total waste to 46% from 38% in2005. The key items recycled are wood, cardboard and plastics. Waste reductionhas been improved through a policy of working with suppliers to ensure onlyrecyclable 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 itsproducts. Wherever possible new product components are marked with theappropriate standard EU recycling marks or labels. Information has also beenincluded in product handbooks regarding the materials the units contain and anyspecific advice relating to their disposal. Rotork remains committed to meeting the requirements for continued inclusion inthe FTSE4Good Index and is very conscious of the need for improved awareness ofenvironmental issues and the need to minimise the Group's environmental impact.Our 2006 Environmental Report published on the Rotork web site shows theimprovements made in the Group's reporting of environmental performance data.In that report the number of subsidiaries reporting their environmental dataincreased from 7 to 29. The next report will include data from sites includedin recent acquisitions. Details of Rotork's global environmental performanceare published in the Rotork Environmental Report on the Rotork web site atwww.rotork.com. Rotork community As we enter our 50th year since the Company was first incorporated it isimportant to thank not only our existing employees, who have been instrumentalin achieving such strong growth in recent years, but to also acknowledge thehuge debt Rotork has to everyone who has been associated with it and who hasmade such an impact on the organisation since its inception. When I joinedRotork over 30 years ago from a leading British manufacturer I was immediatelyaware of a special culture our founder Jeremy Fry had instilled in the Companywhich has driven the Company to become the world leader it is today. It is nowour task to make sure that as we further develop the business we retain thecustomer focus, the drive for innovation and the commitment to emerging marketsthat have been the hallmark of our success. Bill WhiteleyChief Executive27 February 2007 Consolidated Income Statementfor the year ended 31 December 2006 Notes 2006 2005 £000 £000 Revenue 2 206,709 174,839Cost of sales (115,603) (95,358) ______ ______ Gross profit 91,106 79,481Other income 98 79Distribution 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 4,479Financial expenses (4,596) (4,352) ______ ______ Profit before tax 46,061 36,657Tax expense 3 (14,728) (12,043) ______ ______ Profit for the year 31,333 24,614 ===== ===== Pence Pence Basic earnings per share 5 36.4 28.6Diluted earnings per share 5 36.1 28.4 Consolidated Balance Sheetat 31 December 2006 Notes 2006 2005 £000 £000 Assets Property, plant and equipment 16,616 17,214Intangible assets 22,225 22,038Deferred tax assets 5,739 9,115Other receivables 735 633 ______ ______ Total non-current assets 45,315 49,000 Inventories 29,027 26,697Trade receivables 37,385 36,492Current tax 1,219 2,225Other receivables 4,104 2,560Cash and cash equivalents 28,460 27,878 ______ ______ Total current assets 100,195 95,852 ______ ______Total assets 145,510 144,852 ===== ===== EquityIssued equity capital 4,314 4,310Share premium 5,857 5,609Reserves (1,421) 2,405Retained earnings 80,386 68,241 ______ ______ Total equity 4 89,136 80,565 ===== =====LiabilitiesInterest-bearing loans and borrowings 180 236Employee benefits 6 8,186 21,736Deferred tax liabilities 1,225 1,164Provisions 941 654 ______ ______ Total non-current liabilities 10,532 23,790 Bank overdraft 62 698Interest-bearing loans and borrowings 526 1,016Trade payables 16,835 14,937Employee benefits 6 3,941 3,342Current tax 6,236 5,620Other payables 15,923 13,129Provisions 2,319 1,755 ______ ______ Total current liabilities 45,842 40,497Total liabilities 56,374 64,287 ______ ______ Total equity and liabilities 145,510 144,852 ===== ===== These financial statements were approved by the Board of Directors on 27February 2007 and were signed on its behalf by WH Whiteley and RE Slater,Directors. Consolidated Statement of Cash Flowsfor the year ended 31 December 2006 2006 2006 2005 2005 £000 £000 £000 £000 Cash flows from operating activitiesProfit for the year 31,333 24,614Adjustments for:Amortisation of intangibles 98 179Amortisation of development costs 259 293Depreciation 2,554 2,671Equity settled share based payment expense 496 312(Profit) / loss on sale of fixed assets (33) 22Financial income (5,568) (4,479)Financial expenses 4,596 4,352Income tax expense 14,728 12,043 ______ ______ 48,463 40,007Increase in inventories (3,610) (3,359)Increase in trade and other receivables (3,786) (685)Increase in trade and other payables 6,691 1,325Difference between pension charge and cash (6,801) (3,243)contributionIncrease in provisions 731 709Increase in other employee benefits 776 1,509 ______ ______ 42,464 36,263Income taxes paid (11,247) (11,296) ______ ______ Cash flows from operating activities 31,217 24,967 Investing activitiesPurchase of tangible fixed assets (2,425) (1,396)Development costs capitalised (372) (291)Sale of tangible fixed assets 116 94Acquisition of subsidiary net of cash acquired (1,589) (7,227)Interest received 876 776 ______ ______Cash flows from investing activities (3,394) (8,044) Financing activitiesIssue of ordinary share capital 252 626Purchase of ordinary share capital (2,047) (2,236)Purchase of preference shares treated as debt (4) -Interest paid (147) (232)New loans - 1,515Repayment 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 2,221Cash and cash equivalents at 1 January 27,180 24,825Effect of exchange rate fluctuations on cash 160 134held ______ ______ Cash and cash equivalents at 31 December 28,398 27,180 ===== ===== Consolidated Statement of Recognised Income and ExpenseFor the year ended 31 December 2006 2006 2005 £000 £000 Foreign exchange translation differences (3,748) 2,190Actuarial gain / (loss) in pension scheme 6,743 (3,452)Movement on deferred tax relating to actuarial (gain) / loss (2,023) 2,552Effective 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 Statementsfor 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 financialstatements of the Company for the year ended 31 December 2006 comprise theCompany and its subsidiaries (together referred to as the Group). The accountingpolicies contained below in note 1 and all the notes relate to the Groupstatements. 1. Accounting policies Basis of preparation The Group financial statements have been prepared and approved by the directorsin accordance with International Financial Reporting Standards as adopted by theEU ("Adopted IFRSs"). IFRS7 Financial Instruments: disclosures and IFRIC 8 Scope of IFRS2 which areadopted but not effective as at 31 December 2006 will be applied in the nextfinancial year. They are not expected to have a material effect on the reportedresults. Basis of accounting The consolidated financial statements have been prepared under the historicalcost convention subject to the items referred to in the derivative financialinstruments. The accounting policies set out below have been consistentlyapplied in preparing the 2005 and 2006 financial information within itsconsolidated financial statements for the year ended 31 December 2006. Theaccounting policies have been applied consistently in respect of Group entities. The preparation of consolidated financial statements in conformity with IFRSsrequires the directors to make judgements, estimates and assumptions that affectthe application of policies and reported amounts of assets and liabilities,income and expenses. The estimates and associated assumptions are based onhistorical experience and various other factors that are believed to bereasonable under the circumstances, the results of which form the basis ofmaking the judgements about carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates. The estimates and underlying assumptions are reviewed on an ongoing basis.Revisions to accounting estimates are recognised in the period in which theestimate is revised if the revision affects only that period, or in the periodof the revision and future periods if the revision affects both current andfuture periods. The key areas where estimates have been used and the assumptionapplied are in the impairment testing of goodwill and in assessing the definedbenefit pension scheme liabilities. Consolidation The consolidated financial statements incorporate the financial statements ofthe Company and its subsidiaries for the year to 31 December 2006. The financialstatements of subsidiaries are included in the consolidated financial statementsfrom the date that control commences until the date control ceases. Intragroupbalances and any unrealised gains or losses or income and expenses arising fromintragroup transactions, are eliminated in preparing the consolidated financialstatements. Status of this preliminary announcement The financial information contained in this preliminary announcement does notconstitute the Company's statutory accounts for the years ended 31 December 2006or 2005. Statutory accounts for 2005, which were prepared under InternationalFinancial Reporting Standards as adopted by the EU, have been delivered to theregistrar of companies, and those for 2006 will be delivered in due course. Theauditors have reported on these accounts, their reports were unqualified and didnot 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 beposted to shareholders, and after adoption at the Annual General Meeting on 20April 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 thisreflects the internal management structure and reporting of the Group. Segmentresults, assets and liabilities include items directly attributable to a segmentas well as those that can be allocated on a reasonable basis. Unallocatedexpenses comprise corporate expenses and unallocated assets and liabilitiescomprise cash, borrowings, tax assets and liabilities respectively. Inter grouptrading 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 andhydraulic valve actuators Gears - the design, manufacture and sale of gearboxes, adaption and ancillariesfor the valve industry Geographic segments Rotork has a worldwide presence in all three business segments through itssubsidiary selling offices and through an agency network. A full list oflocations 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 - 206,709Inter-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 45,089Net financing income 972Income 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 - 174,839Inter-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 36,530Net financing income 127Income 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 - 2,652Non-cash items 625 85 87 56 853Capital 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 - 3,143Non-cash items 527 213 12 32 784Capital 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 - 206,709location 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 - 2,606assets Europe Americas Rest of the Unallocated Consolidated World 2005 2005 2005 2005 2005 Revenue from external customers by 73,967 50,544 50,328 - 174,839location 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 - 1,632assets 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 2005Current tax:UK Corporation tax on profits for the year 10,486 8,976Double 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 7,470Adjustment 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 1,089differencesAdjustment 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 10,997corporation tax in the UK of 30% Effects of:Non deductible expenses 267 577Unrelieved losses (45) (38)Higher tax rates on overseas earnings 795 558Adjustments 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 basedpayments has been recognised directly in equity in the period. The Group continues to expect its effective rate of corporation tax to beslightly 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 differencesassociated with investments in subsidiaries. Rotork p.l.c. controls the dividendpolicies of its subsidiaries and subsequently the timing of the reversal of thetemporary differences. It is not practical to quantify the unprovided temporarydifferences 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 68,4842005Profit for the financial - - - - - 24,614 24,614yearOther items in the - - 2,190 - (487) (900) 803statement of recognisedincome and expenseEquity settled - - - - - 562 562transactions net of taxShare options exercised 10 616 - - - - 626by employeesOwn ordinary shares - - - - - (2,236) (2,236)acquiredOwn ordinary shares - - - - - 1,149 1,149awarded under shareschemesDividends to - - - - - (13,437) (13,437)shareholders _____ _____ _____ _____ _____ _____ _____ Balance at 31 December 4,310 5,609 978 1,637 (210) 68,241 80,5652005 Profit for the financial - - - - - 31,333 31,333yearOther items in the - - (3,748) - (80) 4,720 892statement of recognisedincome and expenseEquity settled - - - - - 915 915transactions net of taxShare options exercised 4 248 - - - - 252by employeesOwn ordinary shares - - - - - (2,047) (2,047)acquiredOwn ordinary shares - - - - - 1,368 1,368awarded under shareschemesPurchase of preference - - - 2 - (4) (2)sharesDividends to - - - - - (24,140) (24,140)shareholders _____ _____ _____ _____ _____ _____ _____ Balance at 31 December 4,314 5,857 (2,770) 1,639 (290) 80,386 89,1362006 ===== ===== ===== ===== ===== ===== ===== 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 47Purchased for cash and - - (2) - - -cancelledIssued 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 areentitled to vote at meetings of the Company. The preference shareholders takepriority over the ordinary shareholders when there is a distribution uponwinding-up the Company or on a reduction of equity involving a return ofcapital. The holders of preference shares are entitled to vote at a generalmeeting of the Company if a preference dividend is in arrears for six months orthe business of the meeting includes the consideration of a resolution forwinding-up the Company or the alteration of the preference shareholders' rights Ordinary shares issued during the year were 89,726 (2005: 198,634) under TheRotork 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 TheOverseas 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) shareswere granted under the Rotork Sharesave Scheme at 592p (2005: 462p). Of theseoptions, 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 EmployeeShare Option Schemes at 31 December, exercisable at various prices between 278pand 387p per ordinary share between 2007 and 2014. Within the retained earnings reserve are own shares held. The investment in ownshares represents 283,045 (2005: 240,460) ordinary shares of the Company held intrust for the benefit of directors and employees for future payments under theShare Incentive Plan and Long-term incentive plan. The dividends on these shareshave 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 8,3426.5p interim dividend (2005: 5.9p) per qualifying ordinary share 5,601 5,0952006 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 thedirectors. The dividends have not been provided for and there are no corporationtax consequences. 2006 2005Final proposed dividend 11.65p per qualifying ordinary share 10,019 =====9.9p per qualifying ordinary share 8,521 =====Additional interim dividends proposed for 20079.3p 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 usingthe profit attributable to the ordinary shareholders for the year. The earningsper share calculation is based on 86.1 million shares (2005: 86.1 millionshares) being the weighted average number of ordinary shares in issue for theyear. 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 85,867Effect of own shares held 91 62Effect 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 tothe 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 sharesin issue adjusted to assume conversion of all dilutive potential ordinaryshares. The Company has two categories of dilutive potential ordinary shares:those share options granted to employees where the exercise price is less thanthe average market price of the Company's ordinary shares during the year andcontingently 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 86,059Effect of share options on issue 102 108Effect of Sharesave options on issue 111 40Effect of LTIP shares on issue 552 545 ______ ______Weighted average number of ordinary shares (diluted) for the year ended 31 86,866 86,752December ===== ===== 6. Employee benefits 2006 2005Recognised 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 543Employee bonus and incentive plan 2,744 2,113Long-term incentive plan (cash settled) 1,868 1,542Employee indemnity provision 196 357Liability for long-service leave 163 147 _____ _____ 12,127 25,078 ===== ===== Non-current 8,186 21,736Current 3,941 3,342 _____ _____ 12,127 25,078 ===== ===== Defined benefit pension liabilities The Group makes a contribution to three defined benefit plans to providebenefits 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 74,486Current service costs 1,817 1,378Member contributions 484 506Interest cost 4,309 4,048Benefits paid (1,691) (1,339)Past service costs 300 -Actuarial (gains) / losses (6,729) 9,930Currency (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 54,650Expected return on scheme assets 4,518 3,770Employer contributions 8,892 4,568Member contributions 484 506Benefits paid (1,691) (1,339)Actuarial (losses) / gains (199) 6,693Currency (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 1,378Past service costs 300 -Interest on obligation 4,309 4,048Expected 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 351Administrative expenses 1,454 1,027Net financing (income) / expense (209) 278 _____ _____ 1,908 1,656 ===== ===== Actuarial (losses) / gains on plan assets (199) 6,693Actuarial 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)liabilitiesExperience 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 asweighted averages) UK scheme US scheme Average (% per annum) (% per annum) (% per annum) 2006 2005 2004 2006 2005 2004 2006 2005 2004Discount rate 5.10 4.70 5.30 5.72 5.40 5.66 5.13 4.74 5.32Rate of increase in 4.0 4.0 3.9 4.5 4.5 4.5 4.02 4.03 3.93salariesRate of increase in 3.0 3.0 2.9 0.0 0.0 0.0 2.85 2.85 2.78pensions (post May2000)Rate of increase in 4.5 4.5 4.5 0.0 0.0 0.0 4.28 4.27 4.31pensions (pre May2000)Rate of price 3.0 3.0 2.9 3.5 3.5 3.5 3.02 3.03 2.93inflation The expected rates of return were: Expected rate of return % 2006 2005 2004Equities 7.80 7.40 7.90Bonds 4.80 4.40 4.90Property 7.50 5.50 6.00Cash 3.40 3.00 4.40Total Expected Return on UK Assets 6.81 6.20 6.81US deposit administration contract 6.00 6.00 6.00 Split of the Schemes Assets 2006 2005Equities 42,973 39,995Bonds 23,639 22,030Property 7,767 2,478Cash 3,588 2,030US 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 discountrate of -0.1% per annum to allow for future improvements in mortality. Theindividual return assumptions for each asset class are based on marketconditions at the 31 December 2006 and represent a best estimate of futurereturns for that class allowing for risk premiums where appropriate. The Groupestimates that contributions to the defined benefit pension schemes payableduring 2007 will be around £2,600,000. Defined contribution pension liabilities The Group makes a contribution to a number of defined contribution plans aroundthe world to provide benefits for employees upon retirement. Total expenserelating to these plans in the year was £1,135,000 (2005: £519,000). This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Rotork