YEARS OF PROGRESS
ANNUAL REPORT 2016
60 YEARS OF
RELIABILITY
Rotork is a market-leading actuator
manufacturer and flow control company,
with over 3,750 talented employees who
work across a global network of local
offices and established manufacturing
facilities to provide a world-class service.
Strategic Report
Directors
Governance
Financial Statements
Financial Statements
Company Information
2016 SUMMARY
Revenue
£590.1m
+8.0%
Operating profit*
£120.6m
-3.7%
Profit before tax
£91.1m
-10.6%
Earnings per share
10.0p
-3.8%
è Stabilising trading environment
è 10% currency tailwind
è Successful cost management
programme
è Continued expansion of
product portfolio
è Acquisition of Mastergear
è Strong cash generation
è Full year dividend of 5.1p
Strategic Report
02 60 years of innovation
04 2016 at a glance
06 Chairman's statement
08 Our investment case
10 Where we operate
12 Market overview
14 Our business model
16 Business model in action
– Global expertise, local support
– Asset-light model
– Winning culture
– Innovative products
24 Strategic framework
26 Strategic priorities
28 How we manage risk
32 Principal risks and uncertainties
36 Chief Executive’s statement
38 Business review
– Rotork Controls
– Rotork Fluid Systems
– Rotork Gears
– Rotork Instruments
42 Financial review
46 Key performance indicators
48 Corporate social responsibility
Financial Statements
97
Independent auditor's report to the
members of Rotork plc
– Ethics and values
– Community involvement
– Helping the environment
– Health and safety
Directors
60 Board of directors
Governance
62 Corporate Governance Report
70 Audit Committee Report
74 Nomination Committee Report
76 Directors’ Remuneration Report
94 Report of the Directors
104 Consolidated income statement
104 Consolidated statement of
comprehensive income
105 Consolidated balance sheet
106 Consolidated statement of
changes in equity
107 Consolidated statement of
cash flows
108 Notes to the Group financial
statements
140 Rotork plc Company balance sheet
141 Rotork plc Company statement
of changes in equity
142 Notes to the Company financial
statements
Company Information
149 Ten year trading history
150 Share register information
151 Corporate directory
* References to adjusted profit throughout this document are defined as the IFRS profit, whether operating profit or profit before tax, with £26.8m (2015:
£20.9m) of amortisation of acquired intangibles added back.
References to organic constant currency (OCC) or underlying results throughout this document are the 2016 figures restated at 2015 exchange rates and
with the incremental contribution from acquisitions removed.
Rotork Annual Report 2016
01
60 YEARS OF
INNOVATION
1970
Double-sealing
introduced
1971
NA Range
Specially developed
nuclear actuator range
1983
A Range 1600 Series
First actuator with
electronic circuitry
1979
P and H Range
Range of heavy-duty
fluid power actuators
1986
Pakscan
First digital bus control
system
1990
Pakscan II
Second generation
digital control system
Q Range
Small quarter-turn
actuator, compatible
with A Range and AQ
1993
IQ Range
The first non-intrusive,
intelligent electric
actuator which enabled
commissioning without
removing electrical
covers
1957
Rotork Engineering
Company Ltd begins
trading
1960
A Range
Syncropak with integral
starter and standard
control circuitry
1959
A Range
Syncroset switch
mechanism launched,
becoming generic name
for A Range actuator
1963
A Range
A Range with o-ring
sealing introduced
1965
HG and P Range
Fluid power actuators
2000
IQ Range
IQ mk2 non-intrusive
multi-turn actuator
Skilmatic Range
Electro-hydraulic
failsafe actuator for
remotely operated
shut-off valves (ROSoV)
2002
CP Range
Small quarter-turn
pneumatic actuators
2003
IQT Range
Part-turn IQ mk2
actuator
1950s
1960s
1970s
1980s
1990s
2000s
02
Rotork Annual Report 2016
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2012
IQ3 Range
Third generation
multi-turn intelligent
actuator
CMA Range
Compact modulating
electric actuator
DSIR Range
Speeds up the operation
of manual valves
242 Range
Robust and compact
manual gear operator for
quarter-turn valves
GO Range
The next generation of
gas-over-oil pipeline
valve actuators
2006
IQ Pro Range
Further advancement of
the IQ and IQT actuator
2008
CVA Range
Electrically powered
failsafe modulating
actuator for the process
industry
2009
ROMpak Range
Lightweight and
compact solution for
the marine industry
manPOWER Range
A manually energised
spring-return actuator
2013
ExReg Range
Explosion proof
controller for
decentralised HVAC
control
2010
Pakscan
Wireless version of
Pakscan
HPP Range
Compact leak-free high
pressure regulators
HPD Range
High performance
polymer pressure
regulator
2014
Skilmatic Range
Third generation
skilmatic self-contained
electric fail-safe
actuators
Remote Hand Station
Safe and secure local
monitoring and control
of Rotork IQ3 actuators
installed in inaccessible
locations
2010s
2015
CQ Range
Compact range of
heavy-duty concentric
pneumatic and hydraulic
actuators
2016
Pakscan P4
Master Station
Flexible ultra-fast
network control for valve
actuators
IQT Range
Third generation
part-turn intelligent
electric actuator
CK Range
Stockable modular
electric valve actuators
Electronic Line Break
(ELB)
Intelligent pipeline
pressure monitoring with
valve control
HOS/MPR Range
Hand operated spur
gearbox
Fugitive Emissions
Detector Gearbox
(FEDG)
Detects leakage within
the cavity between the
valve and valve operator
HOB/MPR Range
Hand operated bevel
gearbox
IB AWWA Range
Bevel gearboxes
AB550M Range
Gearbox for motorised
quarter-turn applications
LSB Range
Limit switchbox for high
temperature applications
Easy Switch
Hazardous area limit
switchbox for manual
valves
PICØ
Zero bleed pneumatic
positioner for valve
control
RI Wireless
Wireless valve
monitoring
Rotork Annual Report 2016
03
2016 AT A
GLANCE
For 60 years, our customers have relied upon
Rotork for innovative and reliable solutions
to manage the flow of liquids and gases.
Rotork comprises four actuation and flow
control divisions. In addition, Rotork Site
Services works across all four divisions,
providing worldwide planned and
emergency services for all our flow
control products.
04
Rotork Annual Report 2016
Our divisions:
Rotork Controls
Rotork Controls' products include the Group’s
electric valve actuator ranges and network
control systems for all applications, and it is the
largest independent manufacturer in its sector.
It has manufacturing facilities in UK, USA,
China, Malaysia, India, Germany and Spain.
Revenue
£298.4m
+4.1%
Operating profit
£87.3m
+2.1%
Business review on page 38
Strategic Report
Directors
Governance
Financial Statements
Company Information
End user markets
When you turn on a tap or a gas hob, switch on a light, or put fuel in
your car, a flow control product is being used somewhere in the process
of delivering that service.
Our flow control products are used extensively in the oil and gas, power
and water markets, and the development of our product portfolio
allows expansion into new and diverse markets.
Oil and gas
Rotork products are used on applications
for upstream, midstream and downstream
activities including offshore and onshore
production facilities, refining, processing,
transportation, storage and distribution.
Power
Rotork products are found in conventional
power stations, emission reduction plants,
such as flue gas desulphurisation, and
renewable energy plants such as solar
collecting power stations. Rotork products
are also certified for use on nuclear power
stations, both inside and outside
containment.
Water
Water treatment and distribution offers
significant opportunities for Rotork
through modern state-of-the-art processes
which maximise existing resources, such as
desalination plants and water re-use
projects, together with conventional water
and wastewater plants.
Industrial and other
Other industries served by Rotork include
mining and marine and any other industry
where you are trying to control flow or
measure flow or pressure, for example food
and beverage.
Rotork Fluid Systems
Rotork Fluid Systems manufactures and
supplies a comprehensive range of pneumatic,
hydraulic and electro-hydraulic actuators and
control systems that are used in a wide range
of applications. It has manufacturing facilities
located in UK, Germany, Italy, Sweden and USA.
Rotork Gears
Rotork Gears is a specialist manufacturer and
supplier of gearboxes, adaptations and
accessories to the international valve and
actuator industry. It has manufacturing facilities
located in UK, Netherlands, Italy, India, China
and USA.
Rotork Instruments
Rotork Instruments manufactures and supplies
instrumentation and control products for flow,
pressure, temperature and position
measurement applications for a wide range of
industries. It has manufacturing facilities
located in UK, Korea, Italy and USA.
Revenue
£145.3m
-2.6%
Operating profit
£6.2m
-59.4%
Revenue
£72.4m
+23.4%
Operating profit
£14.1m
+17.2%
Revenue
£91.2m
+35.4%
Operating profit
£20.1m
+10.0%
Business review on page 39
Business review on page 40
Business review on page 41
Rotork Annual Report 2016
05
Our divisions:
CHAIRMAN'S
STATEMENT
Our business has proved to be resilient in
the current market environment and we
continue to focus on our strategy for
long-term growth.
Looking back on 2016, I am able to report a
return to a more stable trading environment for
Rotork following the sharp downturn in oil and
gas markets in the second half of 2015. Whilst
there has been some improvement in market
sentiment following a modest recovery in the
oil price, activity levels in the Group’s oil and
gas markets remain below those seen before
the downturn.
Against this backdrop, Rotork has delivered
a solid set of full year results, with adjusted
operating margin lower than in 2015,
as anticipated, but in excess of 20% – a key
achievement for the Group. This performance
resulted from a combination of focusing on
end markets and geographies showing the
greatest resilience, and a concerted effort in
driving cost efficiencies throughout all areas
of our business.
Whilst Rotork's trading environment was more
stable during 2016, it was a year that brought
increased geopolitical uncertainty, notably in
Europe and the USA following the outcome
of the EU referendum in the UK and the
US Presidential elections. We will continue
to closely monitor these developments and
evaluate their potential impact, but the Board
remains confident that Rotork's diverse end
market, geographic spread and highly flexible
operating base leaves it well placed to optimise
its performance under a range of potential
future scenarios.
Martin Lamb
Chairman
06
Rotork Annual Report 2016
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Directors
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Financial Statements
Company Information
Financial highlights
Order intake increased 9.6% on the prior year
as a result of contributions from acquisitions
and currency tailwinds. On an organic constant
currency (OCC) basis, order intake reduced by
6.1%, reflecting the current market conditions.
Revenue increased by 8.0% (-8.0% OCC) to
£590.1m on a reported basis, also supported
by acquisitions and currency tailwinds.
Adjusted operating profit reduced £4.7m
to £120.6m (£102.3m OCC), with adjusted
operating margin 250 basis points lower
at 20.4%. This reflected the mix effect of
newly acquired businesses at slightly lower
margins and the impact of lower volumes,
partially offset by £9.2m of material cost and
overhead savings from our cost reduction
programme, and effective control over material
and labour costs.
Acquisitions
Our principal focus was on the integration
of the six businesses acquired in 2015,
and in particular on delivering their anticipated
synergies. We completed one acquisition
during the year, acquiring Mastergear in June
for £16.3m. The Mastergear business operates
from bases in USA, Italy and China and sits
within the Gears division.
Board composition
and performance
As announced last April, Bob Arnold retired
in August 2016 as President of Rotork Controls
Inc. and a member of the Board after a long
career at Rotork.
I would like to thank Bob and John on behalf of
the Board for their excellent contributions.
Sally James has replaced John as the Senior
Independent Director and Lucinda Bell has
replaced Sally as the Chair of the Audit
Committee. We are currently in the process
of recruiting a non-executive director to fill
the vacancy that John’s departure has created.
Dividend
The Board recommends a final dividend of
3.15p per share, a 1.6% increase over the 2015
final dividend. Taken with the 2016 interim
dividend, the total dividend is 5.10p per share
(2015: 5.05p), representing a 1.0% increase in
the total dividend on 2015. The final dividend
will be payable on 15 May 2017 to shareholders
on the register on 7 April 2017.
The Board now comprises two executive directors,
three independent non-executive directors and
myself as Chairman, which is in compliance with
the UK Corporate Governance Code (the Code).
In addition, more than 25% of the Board are
women which exceeds our stated aim that at least
25% of our independent non-executive directors
are women.
Outlook
We anticipate that any near-term growth in
energy markets will remain modest. Our focus
will remain on providing our customers with
innovative, high quality products and services,
reducing their cost of ownership and improving
plant efficiency.
The annual performance review of the Board
took place during February and March 2016,
see page 62 of the Corporate Governance
Report for further details.
Corporate governance
The Board continues to be committed to the
highest standards of governance which we
see as essential to the delivery of increasing
long-term shareholder value. During the year,
the Board and Audit Committee were involved
in work related to risk appetite and monitoring
and disclosure of risk, building on the work
that was done during 2015.
Cost management will remain a priority in
the current year as we look to mitigate any
inflationary pressures through our highly
flexible operating base.
We continue to target growth through organic
development and acquisition that will enhance
our broad product portfolio, diverse end market
exposure and wide geographic presence.
Whilst mindful of continued macroeconomic
uncertainties, at this stage of the year the
Board believes Rotork is well placed to make
progress in 2017.
Further details of this work and its outputs,
our approach to governance and our compliance
with the Code are contained in the Corporate
Governance Report on pages 62 to 69.
Martin Lamb
Chairman
27 February 2017
We are also announcing that John Nicholas
retired from the Board on 24 February 2017.
John has served on the Board for nine years,
latterly as the Senior Independent Director.
Employees
I would like to thank all of our employees for
their continued high level of commitment and
professionalism during 2016.
Rotork Annual Report 2016
07
OUR
INVESTMENT
CASE
Competitive
position in
our chosen
markets
Electric
actuators
No.1
Pneumatic and
hydraulic actuators
Gears
No.2
No.1
Instrumentation
and controls
No.1-51
Diverse end
markets
Revenue by end user market
Oil and gas revenue by sub-sector
4.6%
Other
12.8%
Water
14.7%
Industrial
15.5%
Power
Americas
30%
Europe
30%
Rest of world
40%
Oil and gas
Industrial
Power
Water
Group revenue £m
Other
30%
30%
40%
600
500
Americas
Europe
Rest of world
Track
record for
sustainable
growth
16.0%
Upstream
23.3%
Downstream
52.4%
52.4%
Oil and gas
52.4%
[XX.X]%
[XX.X]%
Oil and gas
52.4%
Industrial
14.7%
Power
15.5%
Water
12.8%
Other
4.6%
Upstream
Midstream
Downstream
52.4%
14.7%
15.5%
12.8%
4.6%
Upstream
16.0%
Midstream
13.2%
Downstream
23.3%
13.2%
Midstream
16.0%
13.2%
23.3%
[XX.X]%
[XX.X]%
400
[XX.X]%
[XX.X]%
[XX.X]%
[XX.X]%
300
200
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
1 There are multiple markets for instrumentation and control products.
08
Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
Our investment case is underpinned by
our strategy of delivering a high return
on capital and strong sustainable margins
from our diverse end markets and wide
geographic spread.
High margins
Adjusted operating margin
20.4%
High return on
capital
employed
(ROCE)
ROCE
23.4%
Strong balance
sheet
Cash conversion
130.1%
Debt/equity
11.3%
Wide
international
coverage
Revenue by end
destination
Investment in
innovation
R&D spend
£10.2m
40%
Rest of
World
30%
Americas
Increased spend in
2016
52.4%
+5.9%
[XX.X]%
30%
Europe
Americas
Europe
Rest of world
30%
30%
40%
Oil and gas
Industrial
Power
Water
Other
52.4%
14.7%
15.5%
12.8%
4.6%
Upstream
Midstream
Downstream
16.0%
13.2%
23.3%
Strong culture
where
sustainability
matters
[XX.X]%
[XX.X]%
[XX.X]%
See how our business model works on page 14
Rotork Annual Report 2016
09
WHERE
WE OPERATE
6
5
2
For 60 years Rotork has developed ways
of working across borders and time zones
to maximise local skills and links, whilst
leveraging Group resources and expertise.
Our global presence is key to supporting
new customer growth and supporting our
existing customers.
Rotork’s 27 manufacturing facilities, global network of 69 offices
and local agents allows customers to locally source Rotork products.
The products are supported by 430 engineers who provide
life-of-plant maintenance, repair and upgrade services.
Rotork has more than 3,750 employees globally and they
are fundamental to maintaining our reputation for excellence
in innovation and the quality of our products and services.
10
Rotork Annual Report 2016
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Company Information
Americas
Europe, Middle East and Africa
Asia and Australia
Manufacturing facilities
Manufacturing facilities
Manufacturing facilities
7
Offices
12
Employees
744
15
Offices
27
Employees
2,142
Three of our businesses were merged to
form Rotork Tulsa Inc. and the merged
business moved into a new shared
facility in Tulsa (USA). We also combined
our Rio office with our São Paulo office
in Brazil and Bifold (USA) relocated their
office to the Rotork Houston office.
In 2017, we are planning to relocate
and expand our service centre in
West Canada.
We added an additional manufacturing
facility in Legnano (Italy) with the
acquisition of Mastergear. The
consolidation of a number of
manufacturing facilities and offices in
Italy was completed, reducing the total
number. A manufacturing facility in
Germany became a Centre of Excellence
and sales office.
In 2017 we are planning the
development of a new manufacturing
facility and global headquarters in Bath
(UK), due to be completed in 2018, and
the relocation and expansion of service
centres in France and Saudi Arabia.
5
Offices
30
Employees
868
There were no changes to the number
of manufacturing facilities and offices
in the region during the year. Rotork’s
office in Ghangzhou (China) relocated
to new premises.
6
5
2
Manufacturing facilities
Rotork Annual Report 2016
11
MARKET
OVERVIEW
Market drivers
Our products are used in
essential infrastructure for the
global economy where there is
an increasing demand arising
from urbanisation and growing
populations that require water,
food and energy.
Trends for greater automation
and new technology also drive
growth in our markets.
Urbanisation
More people live in cities than rural areas around the world and that
number is climbing. This trend towards urbanisation, particularly in
emerging markets, is increasing demand for water and energy.
Investment in private and public sector infrastructure such as power
stations, electricity grids, water supply and water treatment plants is
required to meet this growth in demand.
Automation
Businesses and organisations around the world continue to require
greater automation in their operations to reduce costs, improve
efficiencies and safety, and increase precision in production. Real-time
monitoring of plant allows problems to be fixed before they escalate,
improving safety and optimising asset life.
Population growth
The growing global population is driving increased demand for land,
food, energy and water, against a backdrop of dwindling resources.
Investment in new power and water facilities and the refurbishment
of existing facilities is necessary to respond to this need.
New technologies
There is growing global demand for innovative products offering
improved performance, lower power, increased reliability and reduced
environmental impact. New technological advances enable companies
to improve the data being sent to the plant control centre, improving
asset management and plant performance.
12
Rotork Annual Report 2016
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Directors
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Financial Statements
Company Information
Total flow control market
Rotork addressable market
£40.0bn
£3.8bn
15.4%
Group market share
Group revenue by end user market
Group market share
4.6%
Other
12.8%
Water
XX%
XX%
XX%
XX%
XX%
XX%
15.4%
XX%
XX%
XX%
14.7%
Industrial
XX%
15.5%
Power
52.4%
Oil and Gas
XX%
XX%
XX%
XX%
Addressable market share by division
Controls
Fluid Systems
Gears
Instruments
£1,552m
£785m
£275m
£1,227m
4.5%
Market share by division
4.5%
[XX.X]%
Controls
[XX.X]%
19.2%
[XX.X]%
Fluid Systems
18.5%
[XX.X]%
Gears
[XX.X]%
22.1%
15.4%
Market share based on competitors' revenue, published market reports and Rotork internal data.
Instruments
7.0%
[XX.X]%
15.4%
Rotork Annual Report 2016
13
OUR
BUSINESS
MODEL
What we do
How we do it
We provide high quality,
technically advanced and
innovative industrial valve
actuation and flow control
equipment, and a superior
level of service to support our
customers’ activities wherever
they are in the world. We do
this in a sustainable way with
corporate social responsibility
(CSR) values being entrenched
in our business processes.
Global expertise, local support
We meet our customers’ needs through global expertise delivered locally.
Asset-light model
Most of our sites receive finished components and assemble to order.
Winning culture
Our values of respect, excellence and integrity ensure consistency for
our customers and make us an employer of choice.
Innovative products
We innovate our products to reduce power consumption, improve their
efficiency and minimise their environmental impact in response to our
customers’ requirements.
14
Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
Our asset-light model, combining the
benefits of global expertise and local
service, makes us well placed to
generate sustainable value for our
stakeholders.
Competitive strengths
Technological leadership
Our understanding of our customers and the markets we serve allows us to continue
to develop new products and lead the evolution of actuator and flow control products.
Reputation for quality
Rotork products have a reputation for technological excellence, quality and reliability;
meeting or exceeding international technical and performance standards.
How we create value
for stakeholders
Employees
We provide development opportunities and a rewarding
place to work and create a safe working environment for
our employees. See page 50 for more details.
Suppliers
Our suppliers are supported by the procurement of goods
and services that we require.
Talented people
Attracting, developing and retaining outstanding talented people has been a key part of
our success. Continued investment in our employees and their development is a key part
of our strategy, and is essential to ensure that we remain competitive.
Customers
We provide innovative solutions in response to our
customer’s requirements and aftermarket service support.
Diverse end market exposure
Our actuators and flow control products are used most intensively in the oil and gas,
power and water markets, but our products are also used in many other markets.
Wherever fluids or gases are being moved and the process requires automation,
or to contain failsafe controls, actuators and flow control products are required.
Communities
We support local jobs and skills and contribute to, and
engage positively with, the communities in which we
operate. See pages 52 to 53 for more details.
Global footprint
Rotork’s worldwide geographic base provides a resilient business portfolio.
Local relationships with customers not only means that Rotork has clear sight of
value generation in the long term, but also the ability to recognise customers’
evolving requirements.
Breadth of product portfolio
We have the broadest range of actuators on the market and a growing range of
complementary flow control instruments. The breadth of our offering ensures we
have the appropriate product for the widest range of applications within a site or
a project and can access increased cross-selling opportunities.
We maximise value by focusing on our strategic priorities. See pages 26 to 27
Governments
Through paying taxes in the jurisdictions in which we
operate, we support the development of public
infrastructure and public services.
Shareholders
We return money to our shareholders through dividends
and, through the execution of our strategy, we grow the
value of their investment over time.
Rotork Annual Report 2016
15
BUSINESS MODEL IN ACTION
GLOBAL
EXPERTISE,
LOCAL
SUPPORT
Our global geographic footprint
is key to our continued business
success. Local relationships with
customers allow Rotork to
understand long-term value
generation opportunities and
ensure that our innovation is
relevant to our customers’
evolving requirements.
Our worldwide presence allows us to manage complex global
projects and to support customers in the field. Rotork Site
Services work with our customers by installing and
commissioning our actuators, and by meeting our customers’
service requirements. Our strategic manufacturing locations
optimise supply chain management and productivity.
16
Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
Justin Cooper
Inside Sales Engineer
for Rotork Gears, USA
Justin has worked for Rotork’s Tulsa office in the USA for over
three years. His role involves valve adaptation sales, both
intercompany and to third party customers directly.
“My role is dealing with sales. It can be something simple
like a limit switch bracket, which is an off the shelf product,
to more complex extensions for different applications. Often
I speak directly with the end user to determine what the
requirement is to mount and automate the valve.
As Rotork Tulsa designs, engineers, and manufactures
custom solutions, it is imperative that I understand the
customers’ needs as I am the first point of contact
and the arbiter of information to design, purchasing,
production, and even shipping to some degree. I
understand the customers’ needs by diligently asking
questions and requesting all pertinent documentation to
support our design staff. Sometimes understanding the
customers’ needs goes as far as having valves requiring
more complex solutions for automation sent to our facility
for reverse engineering.
As well as working with many external customers, a
number of the requests I field come from other Rotork
offices in USA, as well as Canada and Mexico. I regularly
work with all North American locations and I try to support
our offices by turning quotes around within
24 hours when all information is available. Other Rotork
offices have been very supportive when working with third
party customers who do not have all the details needed for
mounting items from the Rotork portfolio of products.”
Rotork Annual Report 2016
17
BUSINESS MODEL IN ACTION continued
ASSET-LIGHT
MODEL
Our asset-light business model
allows us to focus on our core
strengths. Over 90% of our
products are built using an
outsourced manufacturing model,
with our workforce assembling
components and configuring
products to match customer orders.
Our model provides considerable flexibility in prioritising
resource according to the greatest need or opportunity,
whilst preserving capital for investment in technology and
innovation. We have developed a global network of
suppliers who manufacture the components to our designs
and who use our tooling. Leveraging our international supply
chain allows us to achieve and maintain profitable growth
while supporting new market entry.
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Company Information
Nigel Cox
Contracts and Material
Control Manager, UK
Nigel works for Rotork’s Fluid Systems division based in Leeds
(UK) and is responsible for reviewing contracts, managing
materials, scheduling the contracts into production and
dealing with suppliers.
“I’ve been at Rotork for over 23 years, I had a short break
in 2012 for six months but came back. I currently work on
our Skilmatic product range, and have close relationships
with our suppliers to make sure our products are delivered
on time, every time.
Having suppliers that are flexible, competitive, have
accurate delivery schedules and provide good quality
products enables Rotork to offer reliable products.
There are approximately 2,000 parts in the range so having
suppliers that have our tooling is advantageous.
Each order is configured to match a customer order. Once
we receive an order, the basic builds are added to our
internal system, and this ensures that if any of the products
are on a long lead time, they are ordered immediately.
Next a contract review takes place and our application
engineers check the order and add in any additional
components to the build, and our purchasing department
order the additional components.”
Rotork Annual Report 2016
19
BUSINESS MODEL IN ACTION continued
WINNING
CULTURE
We cultivate a working environment
which is collegiate, aspirational,
performance orientated and non-
hierarchical with an open door policy.
This supports our open and
transparent culture where every
member of staff respects the views
and opinions of their colleagues in a
non-judgmental and supportive way.
Our employees, regardless of
seniority, are prepared to roll up
their sleeves to get the job done.
Our business around the world is structured
as a number of smaller business units led by a general
manager. As a result, employees act and behave as
smaller family units whilst still part of the larger Rotork
family. Our matrix management structure supports our
employees to work collaboratively with other Rotork
business units often across multiple jurisdictions and as
one big team. Competition between Rotork businesses
is not acceptable.
We encourage the development of our employees by
providing training and career growth opportunities. This
encourages loyalty and we have a large number of
employees who have been at Rotork for a long time.
We expect all our employees around the world to act in
good faith, with fair dealing and integrity as outlined in
our ethics and values statement and with accountability
both on a personal and collective basis.
Our winning culture is shared with new offices and
businesses, who are expected to adopt it, to ensure that
our customers receive a consistently high quality service
throughout the world.
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Financial Statements
Company Information
SoonOk Lee
Senior Office Administrator
and HR Manager, Korea
SoonOk works for YTC based in Gimpo City, Republic
of Korea. YTC manufactures smart positioners and was
acquired by Rotork in 2014.
“I have worked at YTC for over 16 years, and during my
time here I have had a number of roles. When Rotork
acquired us I had mixed feelings about it, but once the
integration process began I experienced the Rotork culture
of being part of a family and working as one team. We share
information with one another, debate and execute the
outcome which makes us stronger. We’re not part of a
team, we are one team.
We can have open discussions whenever we want and with
whoever we want without any barriers. I don’t think this is
just at our office, it’s common in Rotork.
Feeling secure and appreciated makes me feel motivated
and the Company always supports employees to help them
improve and progress. If I want to upgrade any
of my skills in the workplace, the Company provides that
training, internally or externally.”
Rotork Annual Report 2016
21
BUSINESS MODEL IN ACTION continued
INNOVATIVE
PRODUCTS
Innovation continues to be a core part of
our strategy and business model as we work with our
customers to find ways to reduce power consumption,
increase efficiency, lower the costs of asset ownership
and minimise carbon footprint.
We have a history of innovation and
introducing game changing,
technological advances over the last
60 years. We capitalise on our
industry knowledge to develop and
introduce tailored solutions to our
customers’ problems. Research and
development occurs in all our facilities
around the world and is continuous
across the whole Group to ensure
that we have the best technology
and remain competitive.
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Jose Perez
CK Engineering Manager,
Spain
Jose works for Rotork’s Controls division in San Sebastian
(Spain). He is the Engineering Manager for the CK range as
well as other local products.
“I worked on designing the CK actuator during the early
stages. My background is electronics so I helped design the
core electronics in the actuator. During the later stage, I
supported the mechanics design authority, testing and
assessment processes for the design of new variants and
modules.
This project involved several Rotork factories and
engineering offices around the world - UK, Spain, China
and the Rotork Innovation Design and Engineering Centre
(RIDEC) in India. The project team worked well together
with each individual having their own tasks but with the
advantage of the synergies between the different
locations.”
The actuator is a modular design so can be configured to
suit the end users’ application. CK actuators can be
adapted to meet a specification quickly and efficiently to
achieve fast turnarounds and quick delivery.
Rotork Annual Report 2016
23
STRATEGIC
FRAMEWORK
Our strategic vision is to be the leader
in our targeted segments of the global
flow control market.
1 Providing high quality and innovative
products and services to control the
flow of fluids and gases.
2 Meeting customer needs through global
expertise delivered locally.
3 Achieving consistent and sustainable
profitable growth.
4 Being an employer of choice.
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Company Information
Our aim is to deliver a high
return on capital with strong
and sustainable margins and
consistent year-on-year
growth in revenues and profit
which, combined with our
asset-light model, will deliver
strong cash generation.
T
H
A S S E T- L I G
S
H
G
I
H
N
I
G
R
A
M
I N NOVATION
LO
U
C
A
L B
U
G ROWTH
F LOW
CUSTOMER
N
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T
S
I
N
S
E
S
S
D
I
V
M
E
R
S
E
A
R
K
E
T
S
E
N
D
N
O
UISITI
A C Q
T
C
U
D
LIO
O
R
O
D P
F
O
R
G
A
N
I
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P
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O
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T
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CONTR O L
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SERVICE O P E R A T O R P ORT
RLD-CLASS G L O B A L B R O A
O
W
See pages 26 to 27 for more details on strategic priorities
Rotork Annual Report 2016
25
STRATEGIC
PRIORITIES
To provide short-term focus, we agree an annual set of key objectives. The progress against these during the year and
objectives for the coming year are shown below.
INNOVATION
Strategic objectives
Innovation
Develop and introduce new products in each of the
divisions and research new technologies to improve
the way flow control is delivered.
OPERATIONAL EXCELLENCE
Strategic objectives
Manufacturing excellence
Consolidate and continue to develop world-class
manufacturing facilities.
Global business systems
Develop and rollout our global business systems.
Cost management
Continued cost management, reflecting current
market conditions, and development of the global
supply chain.
GROWTH
Strategic objectives
Sales growth
Deliver profitable sales growth by strengthening
international coverage, broadening end markets
and leveraging the expanding product portfolio.
Progress in 2016
Focus for 2017
There were a number of product launches,
expansion of product ranges and certifications
during the year in all divisions. See the business
reviews on pages 38 to 41 for further details.
Spend on R&D increased 5.9% in the year to
£10.2m.
Launch new products in accordance with divisional
product road maps. Leverage technology within the
Group through cross divisional collaboration.
Progress in 2016
Focus for 2017
The move into the new Lucca (Italy) factory was
completed. There were a number of consolidations
during the year: three businesses in Tulsa (USA) were
merged together with the merged business moving
into a new factory; and in Northern Italy completed
the consolidation of a number of facilities.
The rollout of RQM (quotation system) was almost
completed. There was a delay in the rollout of the
manufacturing solution due to the consolidation of
facilities in Italy.
We achieved cost savings of £9.2m in 2016.
This included £6.6m from sourcing initiatives.
Complete further consolidation of facilities.
Implement the new manufacturing version of our
global business system. Progress the development
of a new manufacturing facility and global
headquarters in Bath (UK).
Complete the rollout of RQM in the two remaining
sales locations. Complete the successful 'go live' of
the first manufacturing site in Bergamo (Italy) and
then commence rollout of manufacturing global
business system in other locations.
Continue to execute the cost management
programme. Further develop and leverage the
global supply chain for all parts of the Group,
including newly acquired companies.
Progress in 2016
Focus for 2017
Delivery of consistent year-on-year growth in
revenues and profits was challenging in 2016.
There were a number of further changes to the
regional management structure following its initial
implementation, this included the introduction of
regional finance and service managers.
Sales channels and teams have been strengthened,
partly assisted by recent acquisitions. Revenue
synergies were achieved from acquisitions.
There were a number of large project wins.
Further strengthen sales channels and teams to
develop international coverage, broaden end
markets and leverage product portfolio.
Continue to realise revenue synergies from
acquisitions.
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Company Information
GROWTH
Strategic objectives
Acquisitions
Continue to pursue suitable acquisitions. An
acquisition will only be considered if it will deliver a
new product, geographic market, market sector or
a combination of these.
Progress in 2016
Focus for 2017
Acquired the business and assets of Mastergear
which sits within the Gears division.
Execute acquisition plan of identified opportunities.
Service growth
Further develop aftermarket services capability
including the Client Support Programme (CSP).
We increased the number of service engineers by
7%. Our service coverage was increased in Brazil
and France (following the integration of SMS).
Positive customer experience
Enhance our customer facing processes to reflect
current market requirements.
We maintained our focus on our customers having
a positive experience, investing in our customer
facing processes.
Continue to work with customers to develop the
delivery of aftermarket services and leverage our
capabilities to capture data that can be used in
asset management to build a broader relationship
with our customers.
Relocation and expansion of service centres in
France, Canada and Saudi Arabia.
Continued focus on our customer experience.
Enhance and achieve a high level of customer
awareness and support to differentiate us from
our competitors.
SUSTAINABILITY
Strategic objectives
Employee development
Invest to support our growth strategy and promote
diversity and inclusion throughout the Group.
Progress in 2016
Focus for 2017
We expanded the online training courses delivered
throughout the Group. This included training on
new markets, products and refresher training on
anti-bribery and corruption awareness. Our Group
training department was restructured to co-ordinate
courses and improve coverage across the Group.
Corporate social responsibility (CSR)
Communicate best practice throughout the Group,
training those responsible and, where appropriate,
verifying adoption in each subsidiary.
Our CSR sub-committees continued to promote
improvements in health and safety, monitor
initiatives to reduce CO2 emissions, provide training
on ethical behaviour and our employees gave their
time and money to many charities around the world.
Further expand the training opportunities
throughout the Group. Continue to promote
diversity throughout the Group and, in the UK,
work with training colleges to recruit female
apprentices. Identify career growth opportunities
and development needs in connection with
succession planning.
Continue to drive safety improvement and deliver
the CSR strategy. The CSR report is on pages 48 to
59 of this report.
Rotork Annual Report 2016
27
HOW WE
MANAGE
RISK
Managing business risks
As with all businesses, there are certain risks
and uncertainties that may impact Rotork’s
ability to achieve its objectives. This is why
Rotork operates a risk management process
which is fully integrated with its day to
day business.
The assessment and management of risk
is the responsibility of the Board and the
continuous improvement and execution of
a comprehensive and robust system of risk
management is a high priority for us. Managing
the risks of our business is essential to the
long-term success and sustainability of the
Group and our approach to risk is intended
to protect the interests of shareholders and
other stakeholders. The risk management
process is an established way of identifying
and managing risk, first at divisional board
level, and then for the Group as a whole and
works within our governance framework as set
out in our Corporate Governance Report, see
page 62.
The Board’s role in risk management involves
promoting a culture that emphasises integrity
at all levels of business operations. This includes
ensuring that risk management is embedded
within the core processes of the Group,
determining the principal risks, communicating
these effectively across the business and
setting the overall policies for risk management
and control. The geographic spread of our
activities makes communication of these
policies and standards a key part of ensuring
consistency across the whole Group.
2016 has seen the continued development of
the risk management process, including the
first full year of implementing the risk appetite
framework (RAF). The Group’s risk
management and internal controls framework
was enhanced during the year with the
appointment of an experienced Head of Risk
and Internal Audit. This has led to a number of
improvements to the risk management process
as detailed below.
Risk appetite framework
The Board is responsible for determining the
nature and extent of the risks it is willing to take
in achieving its strategic objectives. During 2015,
we implemented a more structured approach to
determine and document the Board’s risk appetite
and created a RAF. The RAF consists of a set of
risk appetite dimensions against which there is a
statement defining our risk appetite. Each risk
appetite dimension is monitored against key risk
indicators (KRIs) (see table overleaf). In addition,
Rotork has the following risk appetite statement
that is designed to set the right tone from the
top for Rotork and support decision making
both at a strategic level, for the Board and
divisional management, and at a tactical level
throughout the wider business:
Risk appetite statement
Rotork is a growth company and will continue
to pursue both organic and acquisition led
initiatives to drive future growth. Growth will
lead to greater diversification in our product
portfolio, geographic coverage and end market
exposure. However, in pursuing growth our
preference will be to maintain the current levels
of operational risk and our existing business
model and not to dilute the core values
associated with the Rotork brand. We will also
not risk the financial stability of the Company
through the pursuit of development
opportunities.
We have applied the RAF throughout 2016,
incorporating this into Board decision making
and measuring business decision making
against this appetite through a quarterly
executive risk summary. The approach taken
by the Board is summarised opposite.
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Risk appetite framework approach
IDENTIFY KEY
DECISIONS AND
UNDERLYING
PARAMETERS
EVALUATE POTENTIAL
DECISIONS AGAINST
GROUP RISK APPETITE
STATEMENT
EVALUATE SPECIFIC
RISK APPETITE
DIMENSIONS
ASSESS AND REFINE
RISK APPETITE
FRAMEWORK
For a given Board decision,
underlying parameters are
identified and considered
alongside the likely impacts
of the decision:
Potential decisions are
evaluated against the
over-arching principles
contained in the Group risk
appetite statement:
Potential decisions are
evaluated against the specific
risk appetite dimensions,
statements and KRIs.
We consider:
The RAF is continuously
refined in light of the
decisions made. We then
use the RAF to determine:
• Potential decision points
• Do the forecast returns
• The key risk appetite
and outcomes; and
• Impact types (e.g. financial,
reputational).
justify the additional risk
taken on.
dimensions related to the
decision;
• How the KRIs are likely to
be impacted by the
decision; and
• Whether the impact
supports our desired
appetite for the given
risk(s).
Finance Director
and Head of Risk and
Internal Audit
Board
Board
• Where we are willing to take
on additional risk;
• Where further action is
needed to manage risk
within our appetite;
• Whether decisions expose us
to additional risk dimensions
not currently identified; and
• How the RAF could better
support the Board’s
decision-making process in
the future.
Finance
Director with
Board sign-off
Rotork Annual Report 2016
29
HOW WE MANAGE RISK continued
This framework has driven further improvements to risk management at Rotork. Our risk appetite statement and reporting ensure that our risk
management processes support our strategic objectives. Rotork has better visibility of which risks need additional mitigation, which risks are
managed and where we have the appetite to accept additional risk.
We continue to develop the framework and integrate this with other elements of Rotork’s risk management and assurance processes.
In 2017 the further development of the KRIs will be a focus.
Risk appetite framework
Risk appetite dimension
Statement
Key risk indicators (KRI)
Acquisitions
We will pursue acquisition opportunities.
Control environment
We will continue to further strengthen the control
environment of the business, including in second and third
lines of defence.
Control environment –
cyber
We will ensure that the business is well protected from
external cyber threats and ensure that we have adequate
processes in place to respond to a cyber attack.
Earnings volatility
Geopolitical
We have limited appetite for volatility in earnings at
present, but would consider opportunities that would
prove higher risk than our overall business, if the upside
opportunity could be proven.
We will continue to operate a geographically diverse
business and we want to be as geographically diverse as
possible in the future.
Total value and number of acquisitions within the
last 12 months, both in terms of turnover and
employees.
Significant control breaches identified by internal
audit.
Successful cyber-attacks or high risk information
losses.
Critical system uptime %.
Level of hedging cover for currency exposures.
Forecast revenue growth and comparison of forecast
revenue to actuals.
% of Group revenue from higher risk countries by:
• Subsidiary location (actual and forecast);
• Customer location; and
• End destination location.
Risky countries are defined in the AON Political Risk
Map 2016.
Health and safety
We are fully committed to ensuring the safety of all our
employees.
Monitor AFR and LTI measures to assess level and
severity of accidents.
Market/industry
concentration
Operational
Operational – project
Operational – IT systems
People – succession
planning
Product
We will, in the long-term, move to greater diversification
in the end-markets we serve.
We will continue to have a preference for an asset-light
business model and will evaluate dual supply for critical
long lead-time items.
We will take on projects, including long-term maintenance
contracts, but will only do so on commercially acceptable
terms and under strict terms and conditions.
We will invest in our IT systems and infrastructure in order
to ensure that we are resilient to external and internal
threats, including cyber.
Health and Safety audit scores.
% of Group revenue by industry.
Critical components which are single sourced.
Major contract approvals summary.
Progress reporting for IT system implementation and
investment.
We want to maintain appropriate succession plans for our
key people at a Board and divisional management level.
Quality and coverage of succession and talent plans
in place for identified key individuals.
We will invest in R&D in order to retain a differentiated
product portfolio and will support this by providing a
leading service element to our offering.
Actual and forecast R&D investment.
Market conditions and size of market opportunities.
Quality
We will maintain robust quality control procedures over
components purchased and over our finished product in all
of our manufacturing locations.
Competitor actions.
Warranty costs.
Product failure events.
Legal and regulatory
We have zero tolerance for non-compliance with relevant
laws and regulations in the markets in which we operate.
Legal/regulatory breaches.
Tax
We are risk averse with regards to tax.
Monitoring of Group effective tax rates.
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Risk management process
The risk management process continued to mature in 2016 and is summarised as follows:
Stage 6
Monitor, assure and report on
robustness of risks and risk
assessment processes
Updated risk
register
presented to
Audit
Committee
and Board
twice a year
Stage 5
Review and moderation by Rotork
Management Board
Report to Audit Committee
and Board
Stage 4
Quantify the net risk
Stage 3
Identify risk mitigation
and controls
Stage 2
Quantify the gross risk
Increased consistency of risk
descriptions, valuation and approach
to mitigation
Stage 1
Identification of risk within
Rotork divisions
Top down
risk
assessment
Ongoing
risk
mitigation
reviews and
controls
testing.
Bottom
up risk
assessment
The risk assessment process is consistent across all divisions.
The major risks affecting the Group are first identified (stage 1)
and considered by the divisional boards during their regular
meetings. Each division also performs a full risk assessment
workshop annually (which is formally updated at half year).
Each division values the gross likelihood and impact of each
risk (stage 2) on their divisional business, assuming no specific
mitigations or controls. Divisions then consider the strength of
mitigations and controls in place for each key risk (stage 3) before
giving a net likelihood and impact score (stage 4). The Head of
Risk and Internal Audit facilitates risk assessment workshops with
each division to promote improved consistency and to challenge
the completeness of the output.
There are a range of potential impacts including financial,
reputational and health and safety. For financial impacts,
valuation limits are tailored to each division so that each division
has an appropriate benchmark. Once the risk assessment
workshops are completed by each division, the risks are then
consolidated at a Group level using an appropriate Group impact
scale. This consolidation process is subject to top down input and
challenge from the Rotork Management Board, Audit Committee
and Board (stage 5).
The consolidated risk scores are used to determine which risks are
most important at a Group level and these are defined as our
principal risks. Each principal risk is ultimately owned by a member
of the Rotork Management Board. Risks which, upon
consolidation, are not considered to be principal risks, are owned
and managed by members of the divisional or Plc Boards.
These continue to be monitored and if consolidated risk scores
increase, these risks will be escalated into the Group principal risk
register. The principal risks are set out on pages 32 to 35.
Our risk assessment includes consideration of risks which threaten
many aspects of the business, including but not limited to
business model, future performance, solvency or liquidity.
Risks are monitored, assured and reported in a number of ways
(stage 6). An example of each is below:
• Monitoring – Divisional management and the Board
continuously monitor, manage and reassess risk, maintaining
risk registers as live documents.
• Assurance – In 2017 our internal audit plans will be directly
linked to the risks within the Group principal risk register in
order to test the effectiveness of mitigations and controls,
providing assurance over net risk scores.
• Reporting – The quarterly executive risk summary reports KRIs
giving an indication of how Rotork is being affected by these
risks. The Board and divisional management meet twice a year
to formally review risk and consider progress made and
changes in the previous six months.
Identified risks are discussed and the progress reviewed at both
Rotork Management Board and divisional board meetings during
the year. Senior management, in association with the Board,
meets twice a year to consider the Group risk register and
progress with mitigating actions. The external auditor is invited to
attend one of the meetings each year.
Rotork Annual Report 2016
31
PRINCIPAL RISKS AND UNCERTAINTIES
The following are considered the principal risks facing the Group and are the result of the robust, top down and bottom up risk assessment
process previously described. It includes those risks that would threaten the Group's business model, future performance, solvency or liquidity.
Description and
importance to Rotork
Summary of
mitigation and controls
Link to
strategic objectives
Economic and market conditions
A decline in government and private sector confidence
and spending will lead to cancellations of expected
projects or delays to existing expenditure commitments.
This lower investment in Rotork’s traditional market
sectors would result in a smaller addressable market,
which in turn could lead to a reduction in revenue from
that sector.
Increased competition on price or product offering
leading to a loss of sales globally or market share.
• Product development and innovation to address new markets and
• Sales growth
new applications in existing markets.
• Geographic and end market diversification provides resilience to a
reduction in any one area or market but, as we have seen this year,
may not fully mitigate a change in the larger end markets.
• Accelerated cost saving management as required to maintain
profitability of regions and relevant businesses.
• Service growth
• Cost management
• Rotork already has production or sales and service operations in many
• Sales growth
low cost countries.
• Global strategic sourcing team secure lower prices for components.
• R&D investment and organic product development, or acquisition of
companies with new products, to maintain differentiation from the
competition both in terms of the quality of our products and the
services we provide.
• Continue to focus on an improved customer experience to ensure
that price is not the only means of gaining a competitive advantage.
• Service growth
• Cost management
• Innovation
Increasing social and political instability results in both
disruption and increased protectionism in key geographic
markets. This includes the risks posed by Brexit.
• Regular review of global markets considering social and political risks,
including the risk of greater protectionism, and develop contingency
plans and market exit strategies to implement as appropriate.
• Sales growth
• Service growth
Business disruption would impact our sales and might
ultimately lead to loss of assets located in the affected
region.
• Key risk indicator monitoring % of revenue from high risk markets
reported quarterly to the Board.
• The increasing geographic spread of Rotork’s operations and
customers diminishes the impact of any one market on the results of
the Group as a whole.
• Cost management
Financial
UK defined benefit pension scheme deficit continues to
increase due to a number of factors including investment
returns, long-term interest rates, price inflation and
members’ longevity. This in turn might lead to a
requirement for the Company to increase cash
contributions to the schemes.
• Both defined benefit schemes are closed to new members.
• Cost management
• The Group and trustees monitor the performance of the scheme.
• Actuarial and investment advice is taken with a view to reducing
volatility and the overall cost of the provision of this employee
benefit.
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Financial Statements
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Description and
importance to Rotork
Financial
Volatility of exchange rates would impact Rotork’s
reported results and competitive position.
Summary of
mitigation and controls
Link to
strategic objectives
• Rotork’s Treasury Hedging Policy addresses short-term risk and this
• Cost management
works together with the natural hedging provided by the
geographical spread of operations, sourcing and customers.
• The Hedging Policy continues to be reviewed annually to ensure it
remains fit for purpose.
Health and safety
The nature of Rotork’s core business and geographical
locations involves potential risks to the health and safety
of our employees and other stakeholders.
Product quality and reliability
Major in-field failure of a new or existing Rotork product
potentially leading to a product recall, major on-site
warranty programme or the loss of an existing or
potential customer.
• Manufacturing
excellence
• Corporate social
responsibility
• Compliance with relevant legislation and codes of best practice.
• Robust health and safety policy and training included in all staff
inductions, in addition to regular refresher training.
• Regular health and safety audits, site checks and reporting.
• Regular communications about accidents at work and visible key
performance indicators (KPIs).
• Appropriate training is provided for known safety risks.
• Third party provider of international support and travel advice in all
markets and regions.
• See health and safety report on pages 58 to 59 for further details.
• Extensive product design review process pre-launch reduces the risk
• Sales growth
of product failures occurring in the field.
• Rotork has experience of launching many products and has enhanced
the process based on this experience.
• Comprehensive set of quality control procedures over suppliers. These
include supplier visits, audits and a scorecard system to measure their
performance.
• Our global service coverage ensures that any product failure issues
should be dealt with quickly and efficiently to minimise any
reputational impact.
• Fitting and commissioning products wherever possible by Rotork
engineers to ensure current operations.
• Service growth
• Manufacturing
excellence
• Corporate social
responsibility
• Innovation
Risk trend
Increasing
Stable
Decreasing
Rotork Annual Report 2016
33
PRINCIPAL RISKS AND UNCERTAINTIES continued
Description and
importance to Rotork
Summary of
mitigation and controls
Link to
strategic objectives
Product quality and reliability
Failure of a key supplier or tooling failure at a supplier
causing disruption to manufacturing at a Rotork factory.
• Dual sourcing for key components wherever possible provides the
• Manufacturing
best mitigation for key suppliers.
excellence
• Regular KPI monitoring of the supply chain throughout the
• Cost management
organisation, including a key risk indicator (KRI) measuring dual
sourcing of critical components reported quarterly to the Board.
• Comprehensive set of quality control procedures over suppliers. These
include supplier visits, audits and a scorecard system to measure their
performance.
• Maintaining safety stock levels sufficient to protect against short-term
disruption.
• Regular monitoring and replacement of our tooling at all suppliers
reduces the risk of a tooling failure.
Acquisition risk
Failure of an acquisition to deliver the growth or
synergies anticipated, either due to unforeseen changes
in market conditions, or failure to integrate an acquisition
effectively.
• Forecast market conditions are considered during the acquisition
• Sales growth
process.
• During the due diligence process a 100 day plan is prepared to
manage the important initial stages of integration.
• Service growth
• Acquisitions
Significant financial underperformance could lead to an
impairment write down of the associated intangible
assets.
• Consideration is given to the composition and skills of the
management team with the necessary training and support provided
by a variety of Rotork personnel.
• Business development directors provide greater support and
co-ordination.
• Effective integration and communication of Rotork’s policies and
procedures.
IT security, continuity
and system implementation
Failure to provide, maintain and update the systems and
infrastructure required by the Rotork business.
Failure to protect Rotork operations, sensitive or
commercial data, technical specifications and financial
information from cybercrime.
• Thorough business process reviews and use of flexible testing
• Global business systems
environments to address functional issues.
• Post-system implementation, each business is monitored.
• Dedicated implementation resource provided by experienced Rotork
team.
• Robust security systems are in place to monitor and protect the
Rotork network.
• We continually review the effectiveness of our key IT security
controls, including a KRI to monitor the number of successful cyber
breaches reported quarterly to the Board.
• Regular cyber security and cyber fraud awareness training and
guidance.
34
Rotork Annual Report 2016
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Description and
importance to Rotork
Summary of
mitigation and controls
Link to
strategic objectives
Compliance with law,
regulation or ethical standards
Failure of our staff or third parties with whom we do
business to comply with law or regulation or to uphold
our high ethical standards and values.
• Tone from the top, a 'no tolerance' culture to reinforce our high
ethical standards and values.
• Corporate social
responsibility
• Commitment to compliance embodied in Rotork culture.
• Anti-bribery and corruption training is provided to all relevant staff.
• Continued communication and education of agents.
• Use of WorldCheck for agents and acquisition targets before
engaging in business relationships.
• Availability and promotion of the whistleblowing policy and hotline.
• Ethical and quality control procedures over suppliers. These include
supplier visits, audits and a scorecard system to measure their
performance.
Viability statement
The directors have assessed the viability of the Group over a three year
period taking account of the Group’s current position and the potential
impact of the principal risks as documented above. A robust assessment
of the principal risks facing the business was conducted through the
year with the review of the risk appetite framework and executive risk
summaries contributing to a fuller consideration of those risks which
might impact the business model or future performance. The Board
believes that the three year period is an appropriate period over which
a reasonable expectation of the Group’s longer-term viability can be
evaluated and is aligned with our planning horizon at both Group and
divisional level.
In coming to this view, the Board has considered the inherent volatility
in exchange rates and oil prices, the nature of the industry and the
planning cycles involved. The Group works closely with its customers
on projects ranging from several weeks to several years, discussing
operational plans and longer-term capital expenditure programmes.
In making this statement, the directors have considered each of the
principal risks, individually and some in combination, and the potential
impact they could have in severe but plausible scenarios. Financial
sensitivity modelling was carried out to assess the impact of these risks
on the Group’s three year plan. Assumptions were made concerning
market activity levels, the impact of the scenarios on working capital
cycles and the mitigating actions that could be taken to reduce the
impact of the stress-test scenarios. Given the current position of the
Group and the likely effectiveness of mitigating actions, the Board has
assessed the impact these would have on the business model, future
performance, solvency and liquidity over the period and have a
reasonable expectation that the Company will be able to continue in
operation and meet its liabilities as they fall due over a three year period.
Risk trend
Increasing
Stable
Decreasing
Rotork Annual Report 2016
35
CHIEF
EXECUTIVE’S
STATEMENT
Our continued investment in new products,
new markets and acquisitions provides us
with a strong platform for growth, albeit in
continuing challenging market conditions.
Peter France
Chief Executive
36
Rotork Annual Report 2016
The Group’s trading environment became more
stable during the year, although we continued
to see caution from our customers in terms of
large-scale investments in projects. Geopolitical
tensions also affected certain key markets. Our
reported numbers benefited from a contribution
from acquisitions and currency movements. We
continued to invest in infrastructure, including IT,
which will improve our operational performance,
and we made good progress on our previously
announced cost reduction programme,
exceeding our initial target.
Full year order intake was up 9.6% on a
reported basis, but 6.1% lower on an OCC basis.
Whilst reported revenue increased 8.0% to
£590.1m, underlying revenue decreased 8.0%
to £502.6m which was the main driver of
the reduction in adjusted operating profit to
£120.6m (£102.3m OCC). Our accelerated cost
management programme delivered savings of
£6.6m in respect of material costs, which was
more than sufficient to mitigate the impact of
any pricing pressure, which we continue to
carefully monitor and manage. A further £2.6m
of savings was found in other areas including
overhead savings.
In 2016, we continued to implement our
long-term strategy for growth by introducing
new products and investing in new and existing
markets through developing our sales channels.
Our focus on selling additional products and
services to our existing customer base through
cross-divisional initiatives, and new product
training for our sales force, had a positive impact.
We also introduced a Group-wide initiative to
improve our success rate on sales quotes.
During the year, oil and gas represented 52.4%
of revenue, a decline of 70 basis points on the
previous year, with an increase in the percentage
of our sales to upstream and midstream but
a decrease in downstream. In the water and
industrial markets, underlying revenue increased
over the prior year by 10.0% and 5.3%
respectively, demonstrating that our strategy of
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diversifying our end markets continues to
make progress. Our sales in the power market,
down 6.4%, continued to be affected by
China’s economy, although we saw an increase
in activity levels in China in the second half of
2016. USA revenues increased year-on-year,
with growth in the water market but weakness
in oil and gas. The Latin American market
remained difficult due to our exposure to oil
and gas in that region. However, the Middle
East and Africa had positive sales momentum
and we saw an increase in activity in certain
territories in Asia.
Cost saving initiatives included the consolidation
of facilities in the USA and Italy, resulting in a
reduction in the number of our manufacturing
facilities and offices. We now have 27
manufacturing sites, 69 national offices, and 84
regional locations in 38 countries. In total, we
have over 860 sales channels in 101 countries.
Our strong global presence remains a core part
of our strategy. As well as consolidation of sites,
we have focused on the rollout of a global value
engineering programme in support of increased
customer demand for 'smarter' lower cost
solutions and measures to rationalise our supply
chain and better leverage our global purchasing
spend. We also accelerated the rollout of our
global business system to improve operational
effectiveness and facilitate future scaleability.
We welcomed Mastergear into the Rotork
family in June 2016 which expanded our
Gears portfolio with new products in
motorised and manual gears as we continued
to consolidate our market leadership in this
segment. Our focus during the year was on
integrating Mastergear and the six
acquisitions that we completed in 2015 and
leveraging their product portfolios to drive
growth.
The long-term drivers of our markets remain
positive with population growth, urbanisation
and automation continuing to drive increased
demand for flow control products and services.
Our customers are also increasingly focused on
reducing power consumption, increasing
efficiency, maximising cost reduction, improved
safety and minimising their carbon footprints,
which will drive long-term growth in our
markets.
The broadening of our product portfolio,
developing our geographic reach and
expanding our end markets remain the
key elements of our strategy. Our sales
proposition of providing innovative
market-leading products and services locally
to our customers continues to serve us well.
Customers have always been at the heart of
what we do and in 2017 we are introducing a
number of measures that will further enhance
our customer-facing processes to reflect
market requirements and to ensure that we
remain competitive. This includes the
introduction of a Group-wide initiative,
Project Energise (2017), focused on improving
the customer experience.
Rotork Site Services (RSS)
Our global service network is a key
differentiator for us in our industry. Our
highly trained service team provide service
and support to our customers around the
world through preventative maintenance
contracts, onsite and workshop service, retrofit
solutions and through the Client Support
Programme which offers maintenance
contracts tailored to our customers’ specific
needs. In 2016, we continued to invest in our
aftermarket business with 430 directly employed
service engineers and other service technicians
employed by our agents around the world, an
increase of 7% on the previous year (2015: 402).
Research and development
In 2016, we accelerated a number of product
introductions as we continued to widen our
product range and improve our existing
products to remain competitive. Our
investment in research and development
(R&D) is led by Gary Jacobson, who was
appointed as Group Innovation Director
following the acquisition of Bifold in 2015,
and during the year this increased by 5.9% to
£10.2m. The increase is partly attributable to
the pipeline of Bifold, whose strong history of
product development was a key rationale for
its acquisition. In addition, we are making a
major investment in Bath to replace our
mature factory and corporate headquarters
and develop a state-of-the-art R&D centre, to
be completed by the end of 2018. Innovation
and organic product development remains a
key part of our strategy for growth. See the
business review on pages 38 to 41 for more
details on product launches.
Corporate social responsibility
Corporate social responsibility (CSR) values
continue to be an integral part of our business
model. We take our responsibilities to our
stakeholders very seriously and continuously
look for ways to improve our performance.
The work in this area is led by our CSR
committee and sub-committees who met
throughout the year.
We supported WaterAid and Sightsavers again
in 2016 and also Seva Bharathi (an NGO in
India) and The Forever Friends Appeal (Royal
United Hospitals Bath, UK), donating a total of
£102,000. Our employees also gave support to
their local communities with the Group
contributing a further £157,000 to support
these causes. This brought the total Group
contributions in the year to £259,000 (2015:
£297,000).
For more information about the CSR
committee and sub-committees and the work
they carry out see pages 48 to 59.
Our people
Our culture and values are key to Rotork’s
success. See pages 20 to 21 for further
information on our winning culture.
Rotork aims to be an employer of choice and
our annual employee satisfaction survey is
used to improve employee engagement and
guide changes in how we work. Our annual
survey for 2016 was completed by over 2,300
employees, with the response rate being
slightly down (67% compared to 71% last
year), and the overall satisfaction score
remaining the same as last year at 3.6 out of 5.
The global results showed that on average
people are most satisfied with Rotork’s
products and services, our approach to health
and safety, and our values and ethics, and
that Rotork is considered a great place to
work by the majority of our employees. One
clear message that came out of the survey
related to employee involvement and
understanding of the Group strategy. I am
currently looking at the ways we share the
Group strategy with all employees and how
we might more fully engage employees in a
dialogue on strategy in response to this.
We increased our training activities for
employees during the year, including the
introduction of new training materials for our
sales engineers and the rollout of new
e-learning modules throughout the business.
Rotork’s total employee numbers in 2016
were 3,754, broadly in line with the previous
year. This included 55 employees who joined
following the Mastergear acquisition.
Excluding this, the total number of employees
decreased by 59 as a result of the cost
management initiatives that were
implemented during the year.
Rotork’s success is due to the dedication and
hard work of our employees. I would like to
personally thank them all for making Rotork
the industry-leading business that it is today.
Peter France
Chief Executive
27 February 2017
Rotork Annual Report 2016
37
BUSINESS REVIEW
ROTORK
CONTROLS
Our business has remained resilient in the face
of difficult market conditions.
Revenue
£298.4m
+4.1%
Adjusted operating profit
£87.3m
+2.1%
Opportunities
è Centork CK
(power and water)
è IQ3/IQT3 extensions
è Develop sales channels
è Service growth
Order intake was £295.2m, a 6.6%
increase compared with the prior year,
with revenue up 4.1% to £298.4m,
reflecting benefits from currency
tailwinds. On an OCC basis order
intake and revenue decreased by
4.3% and 6.5% respectively.
and most of Europe, Middle East and Africa had
positive sales momentum, with an increase in
activity levels seen in South East Asia. Whilst the
USA benefited from growth in the water market,
overall we saw a decline in this region due to
continued challenging conditions in the oil and
gas market. Latin America also had its challenges
due to our exposure to the oil and gas markets in
that region.
Adjusted operating profit of £87.3m was up
2.1% with an adjusted operating margin of
29.3%, 50 basis points with 2015, by 8.4% and
60 basis points respectively, reflecting the effect
of lower volumes but partly offset by continued
resilience in our pricing and control
of costs.
Our exposure to oil and gas reduced again in
2016, with the proportion of revenue down from
48% to 45% with reductions in midstream and
downstream. The power market remained slow
and although our market exposure declined
slightly year-on-year we will continue to focus on
expanding in this area. Incremental gains were
seen in all the other end markets, including
water. Our newer developing territories (Turkey,
Poland and Chile) all delivered growth in 2016
In 2016, we launched further extensions to our
IQ3 range, enabling us to offer more cost
effective solutions. We also replaced a number
of the original IQT3 variants with improved
designs. Single phase and modulating variants
of our Centork range were launched in Europe
and China and will be sold outside these
territories once the required electrical
certification has been obtained. We are
developing an intelligent asset management
system that will collect and analyse field data
from our installed actuators to ensure that our
preventative service activities are optimised.
Pakscan
control system
Rotork’s Pakscan is a two-wire digital
control system for valve actuators and it
has recently been improved with the
introduction of a new P4 Master Station
which has the capability of running the
new Pakscan Plus ultra-fast control loop.
Grant Wood
Managing Director – Rotork Controls
38
Rotork Annual Report 2016
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ROTORK
FLUID SYSTEMS
Fluid Systems has the largest exposure to
oil and gas and continued to be affected
by weak project activity in this market.
Revenue
£145.3m
-2.6%
Adjusted operating profit
£6.2m
-59.4%
Opportunities
è Oil and gas market
è Developing broader
end markets
è Collaboration with
other divisions
è Site consolidation
Order intake was down 4.8% on a
reported basis to £134.7m and down
14.2% to £121.4m on an OCC basis,
with revenue down 2.6% to £145.3m
(-12.4% to £130.7m OCC). Adjusted
operating profit was down 59.4% to
£6.2m and adjusted operating margin
decreased 590 basis points (-64.1%
to £5.5m OCC).
Despite actions to consolidate facilities, a
redundancy programme in one location and
material cost saving initiatives, these were unable
to fully cover the fall in volume and the impact of
mix and pricing which were most pronounced in
Fluid Systems.
The division’s exposure to oil and gas remained
broadly similar to 2015 at 69%. There was some
positive Liquefied Natural Gas (LNG) activity and
an increase in projects in Saudi Arabia helped
offset overall lower activity elsewhere in this
sector. Exposure to each of the other markets
also remained broadly similar to the previous year.
Our North American market saw a small increase,
with a strong performance by our Gulf Coast
subsidiary as a result of good LNG activity
offsetting a general decline in other markets in
this region. Europe remained broadly similar to
the previous year, with the modest increase in the
Eastern European market offsetting the decrease
in Western Europe. Latin America was a weak
performer, largely due to significant project
delays as a result of both market and political
instability that continues to impact business levels
in Venezuela, Mexico and Brazil. Our Malaysia,
India and Middle East subsidiaries performed well
but the Far East, including China, reported lower
activity overall, mainly due to ongoing project
delays within oil and gas.
2016 saw significant value engineering efforts
on our core products that we expect to
continue to benefit the division during 2017.
This will be supported by our ongoing low cost
country sourcing programme that will benefit
both our European manufacturing facilities
and enable our regional China and India
manufacturing operations to better address
their regional markets.
Product development continued to be a focus
for Fluid Systems in 2016. We expanded our SI3
range (our 3rd Generation Skilmatic electric
failsafe actuator) with the launch of quarter-turn
and linear variants. We introduced a stainless
steel option in our GT range (pneumatic rack
and pinion actuators). A new electronic line
break detection system designed to detect and
isolate leaks in major pipeline infrastructure was
also launched.
Electronic Line Break
(ELB)
The ELB continuously monitors
upstream and downstream pipeline
pressure dynamics to provide early
detection of pipeline breaks and
initiate automatic valve actuator
movement. It is shown (on the left
side of the picture) attached to a
Rotork Gas-over-Oil pipeline actuator.
David Littlejohns
Managing Director – Rotork Fluid Systems
Rotork Annual Report 2016
39
BUSINESS REVIEW continued
ROTORK
GEARS
The recent acquisitions, Roto Hammer and
Mastergear, have broadened our product offering,
making our gears product range one of the most
complete in the industry.
Revenue
£72.4m
+23.4%
Adjusted operating profit
£14.1m
+17.2%
Opportunities
è Mastergear integration
è Product range expansion
è Market expansion
è New Tulsa facility
well regarded product portfolio of manual and
motorised gearboxes and will enable us to offer
our customers a more comprehensive range of
products and services.
In 2016, we introduced new products across
many of our gearbox ranges: a quarter-turn
gearbox for use with motorised applications
(ABM range); a bronze worm gearbox for steam
distribution applications in manholes and vaults
(BR range); a hand operated quarter-turn
worm gearbox for use in the water and pipeline
markets (QTW150 range); and a hand operated
bevel gearbox for use on gate valves, globe
valves and penstocks (HOB range). We also
unveiled a fugitive emission detector gearbox
which is a new smart gearbox designed for leak
detection and which will be launched in 2017.
We changed the standard baseplates on all our
gearboxes in the IW range to a new improved
flat design. We also launched a new Smart
Position Indicator which mechanically displays
the position of the valve for in-field notification
and digitally signals its open/closed position,
helping to create a safer working environment.
Gears performed well over the period,
with order intake increasing 22.7%,
including contributions from the
recent acquisitions, Roto Hammer
and Mastergear. On an OCC basis,
order intake declined by 4.8% relative
to a strong comparable year.
Revenue grew 23.4% including contributions
from the acquisitions and currency tailwinds.
On an OCC basis, revenue fell by 4.0%, primarily
due to the impact of the slowdown in oil and
gas. Adjusted operating profit increased 17.2%
to £14.1m but fell 14.1% excluding the effects of
acquisitions and currency as the lower volumes
reduced OCC adjusted operating margin by
220 basis points.
Oil and gas accounted for 54% of revenue,
assisted by the contribution from the recent
acquisitions. Upstream remained flat, but
midstream and downstream both grew. Water
grew 16% over the prior year. North America
experienced good sales growth, mainly in the
Gulf Coast and we saw an increase in activity
in China.
The acquisition of Mastergear was completed in
June 2016 for £16.3m. Mastergear has its main
centres of operations in Italy and the USA, with
a further operational presence in China. It has a
Fugitive Emission
Detector Gearbox
Shown in prototype form, the Fugitive
Emission Detector Gearbox surpasses
existing technology as it forms an integral
part of the valve operator and is not an
external measurement device. It accurately
detects leakage within the cavity formed
between the valve and valve operator.
40
Rotork Annual Report 2016
Pamela Bingham
Managing Director – Rotork Gears
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ROTORK
INSTRUMENTS
The acquisitions we made in the prior year
are delivering significant growth in both
revenue and profits.
Revenue
£91.2m
+35.4%
Adjusted operating profit
£20.1m
+10.0%
Opportunities
è Product range expansion
è Sales channel development
è Rotork synergies
è Bifold – R&D catalyst
Instruments benefited both from the
acquisitions completed in the prior year
and favourable exchange rates, with
order intake increasing 42.3% or 5.7%
on an OCC basis. The closing order
book increased by 22.8% during the
year to £9.3m before a £0.5m increase
due to currency is included.
Revenue increased by 35.4% with contributions
from acquisitions and currency tailwinds.
On an OCC basis, revenue declined by 3.9% as
a result of the challenging conditions in the oil
and gas market and ongoing tight conditions
in the tyre market. Instruments supplies
a number of components to Fluid Systems,
and the weak revenue growth in that division
also affected Instruments as a result.
As anticipated, the 2015 acquisitions were
dilutive to the division's margins in 2016.
Adjusted operating profit grew by 10% (-16.6%
OCC) but adjusted operating margins decreased
510 basis points to 22.1% (-360 basis points to
23.6% OCC). We made additional investment in
the division’s engineering resource, although the
overall margin at Instruments remains above
that of the Group as a whole.
Instruments’ exposure to the oil and gas market
increased from 44% to 50% in 2016 following
the acquisition in 2015 of Bifold, which
increased the level of business derived from the
upstream market. There was some softness in
the North American market and continuing
delays in large rail projects. However, the other
markets we are now serving include a wide
variety of geographies and end markets,
including industrial automation, commercial
vehicles, rail and life sciences.
In 2016, we continued to develop our product
range by updating existing products and
introducing new variants. Bifold launched a
digital filter booster which integrates a complete
control panel into a single unit and a new range
of pressure transmitters specifically tailored to
the oil and gas market; Rotork Fairchild launched
a new PAX1 linear actuator which can be used
by itself or paired with a variety of pressure
regulators enabling remote control of pneumatic
pressure for a variety of applications, and a
new range of low pressure transducers for
use in the medical and precision test rig markets;
YTC Positioners were re-engineered and
certified for hazardous area use in North
America and Canada; Rotork Midland launched
a redesigned stainless steel filter regulator;
and RI Wireless, a device which provides
wireless valve monitoring in the process
industry, was re-engineered.
PICØ
Bifold has developed a new zero bleed
pneumatic positioner without any of
the performance degradation usually
associated with low bleed. It will transform
pneumatic/gas actuation, not just in on/off
and ESD valves, but also in modulating
and control valves, by providing zero bleed
without any loss of performance.
Alan Paine
Managing Director – Rotork Instruments
Rotork Annual Report 2016
41
FINANCIAL
REVIEW
Strong cash generation and a focus on
integrating acquisitions and accelerating cost
reductions has partially mitigated the impact
of the current market environment.
Jonathan Davis
Finance Director
42
Rotork Annual Report 2016
In challenging market conditions, the Group has
demonstrated the resilience of our business
model. Our recent acquisitions have delivered
significant revenue growth and broadened our
product offering, building on the solid
foundations laid by the investments we have
made in innovation. Strong operating cash flow,
demonstrating the robust financial disciplines
embedded in the business, resulted in a reduction
in net debt of £16.2m after spending £16.3m on
the acquisition of Mastergear. We also continued
our accelerated cost management programme,
delivering cost savings of £9.2m.
The second half of the year saw an increase in
order intake compared with the first half of the
year on a reported basis, remaining broadly
consistent on an organic constant currency (OCC)
basis. Revenue in the second half of the year
increased on both a reported and OCC basis, by
23.6% and 16.5% respectively. Full year order
intake of £576.6m was 9.6% above 2015
although on an OCC basis this was a reduction of
6.1% after excluding the currency tailwind and
the contribution from acquisitions. Revenue of
£590.1m was 8.0% higher than the prior year
(-8.0% OCC) with an increase in the closing order
book of 8.7% to £180.7m.
Gross margins reduced from 45.7% to 44.3%,
although the key elements within cost of sales
were managed closely to mitigate the effect of the
adverse conditions during the year. Material costs
are the largest element of cost of sales and are an
area where sourcing initiatives have consistently
driven savings. This year these initiatives were
accelerated and as a result the material cost
percentage decreased by 180 basis points. Our
diverse product portfolio means that breaking this
down into cost, sales price and mix impacts is
particularly challenging but this does illustrate that
the impact of pricing pressure was mitigated.
While labour costs decreased in absolute terms,
they increased slightly as a percentage of sales in
2016 as the actions to reduce variable spend such
as reducing overtime were all taken in 2015. The
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Revenue
£590.1m
+8.0%
Adjusted* operating profit
£120.6m
-3.7%
largely fixed cost associated with our factories and
service facilities accounted for the remaining
reduction in gross margins.
Adjusted operating profit was £120.6m, 3.7%
lower than the prior year and the corresponding
margin reduced by 250 basis points to 20.4%.
On an OCC basis adjusted operating profit
reduced 18.4% to £102.3m, a margin of 20.3%.
The increase in reported gross profit was offset
by an increase in overheads of 13.6%, mainly as a
result of currency and acquisitions. On an OCC
basis the increase in overheads was 2.6% with
employee bonuses and benefits increasing from
last year’s low point and a general rise in salary
costs. Average salary per head increased by 1.9%
at constant exchange rates. Net finance costs
rose £0.2m to £2.7m with lower currency losses
(£0.7m) and a lower interest charge in respect of
the pension schemes (£0.4m) offset by higher net
bank interest payable (£1.3m). This resulted in
adjusted profit before tax of £117.9m, a 4.0%
reduction on the prior year, however, a 30 basis
point reduction in the effective tax rate offset
some of this movement so that adjusted
earnings per share was 3.8% lower than
2015 at 10.0 pence.
Acquisitions
In June we completed the acquisition of
Mastergear, a leading manufacturer of manual
and motorised gearboxes focused on the oil and
gas, water and distribution, chemical processing
and wider industrial markets, for £16.3m.
Along with the prior year acquisition of Roto
Hammer, this makes our Gears product range
one of the most complete in the industry.
£6.8m of the consideration for Mastergear was
attributed to intangible assets which will be
amortised and £5.3m is goodwill which will be
subject to an annual impairment review.
The increased value of acquisitions over the last
three years led to a rise in the amortisation
charge related to acquired intangible assets to
£26.8m (2015: £20.9m). In order to adjust the
income statement to show a like-for-like period
for each acquisition, 2016 revenue has to be
reduced by £32.6m and adjusted operating profit
by £5.4m. The profit margins of the acquired
businesses were slightly dilutive in aggregate,
at 16.7%.
During 2015, we completed a total of six
acquisitions, the most significant of which was
Bifold. Each provided access to a new product
range, end user market or new geographic
market in line with our stated acquisition strategy.
We are pleased to report that the integration of
these businesses is progressing well and once
fully assimilated into the Rotork global sales
portfolio, we expect their overall adjusted
operating margins to improve.
Accelerated cost management
programme
In 2015 we announced an accelerated cost
management programme as part of our response
to the changing market environment which
identified £8m of annualised savings, split equally
between material costs and overheads. The 2016
benefit of these initiatives was £2.8m of material
cost savings and a £2.1m saving in overheads in
addition to the £5.4m benefit already delivered
in 2015.
In 2016 new initiatives were identified targeting a
further £7.0m of annualised savings. These have
so far delivered material cost savings of £3.8m
and £0.5m in relation to other costs, bringing the
total benefit in 2016 to £9.2m.
The material cost savings resulted in a decrease in
the material cost percentage of 180 basis points
net of the impacts of pricing and mix. The
initiatives to reduce overheads delivered greater
savings than anticipated. The consolidation of our
facilities along with our headcount reduction
initiatives were the largest contributors to the
annualised savings. Not replacing leavers and
consolidating roles led to a net headcount
reduction of 59 people, including some senior
posts, before the 55 people added with
acquisitions are reflected.
A further £4.2m of savings are anticipated from
these actions in 2017. We are also targeting a
further £4m of annualised savings from new
initiatives to be identified.
Currency
The progressive strengthening of the US dollar
and euro during the year gave the Group a
foreign exchange translation tailwind. The US$/£
average rate was $1.36 (2015: $1.53), a 17 cent
tailwind. The €/£ average rate was €1.22 (2015:
€1.38), a 16 cent tailwind. This, along with
movements amongst the other 16 currencies that
are home to one or more of our subsidiaries,
benefited reported revenue by £54.9m, or 10%.
The impact of currency on the Group is both
translational and transactional. Given the
locations in which we have operations and the
international nature of our supply base and sales
currencies, the impact of transaction differences
can be very different from the translation impact.
We are able to partially mitigate the transaction
impact through matching supply currency with
sales currency, but ultimately we are still net
sellers of both US dollars and euros. It is the net
sale of these currencies which we principally
address through our hedging policy, covering up
to 75% of trading transactions in the next 12
months and up to 50% between 12 and 24
months. Net of these mitigating actions
adjusted* operating profit was £12.9m (10.3%)
lower than it would have been at 2015 rates.
In order to estimate the impact of currency, at the
current exchange rates we consider the effect of
a 1 cent movement versus sterling. A 1 euro cent
movement now results in approximately a
£250,000 (2015: £235,000) adjustment to profit
and for US dollar, and dollar related currencies, a
1 cent movement equates to approximately a
£450,000 (2015: £400,000) adjustment.
Rotork Annual Report 2016
43
FINANCIAL
REVIEW
CONTINUED
Organic business growth
2016 as
reported
590.1
(328.4)
261.7
(141.1)
Constant
currency
adjustment
(54.9)
33.7
(21.2)
8.3
2016 at 2015
exchange
rates
Remove
acquisitions
535.2
(294.7)
240.5
(132.8)
(32.6)
21.9
(10.7)
5.3
44.9%
24.8%
45.7%
25.4%
44.3%
23.9%
Organic
business at
2015
exchange
rates
502.6
(272.8)
229.8
(127.5)
2015 as
reported
546.5
(297.0)
249.5
(124.2)
45.7%
22.7%
£m
Revenue
Cost of sales
Gross profit
Overheads
Adjusted operating
profit*
20.4%
120.6
(12.9)
20.1%
107.7
(5.4)
20.3%
102.3
22.9%
125.3
* Adjusted is before the amortisation of acquired intangible assets.
Return on capital employed (ROCE)
Our asset-light business model and strong profit
margins mean Rotork generates a high ROCE.
Our definition of ROCE is based on adjusted*
operating profit as a return on the average net
assets excluding net debt and the pension
scheme liability net of the related deferred tax.
This means that as we make acquisitions our
capital base grows when the associated
intangible assets and goodwill are recognised.
The average capital employed increased
year-on-year by 17.8% to £516m as a result of
the full year impact of the additional
intangibles and goodwill acquired in the last
two years. This, combined with the lower
adjusted operating profit resulted in a
reduction in ROCE to 23.4% (2015: 28.6%).
Taxation
The Group’s effective tax rate reduced slightly
from 26.5% to 26.2%. The Group continues to
operate in many jurisdictions where local profits
are taxed at their national statutory rates, ranging
from nil to over 35%, compared to a UK statutory
rate of 20.0% for the year. In the year, the
reduction in the effective rate resulted from the 25
basis points decrease in the UK statutory tax rate
and the change in profit mix across the Group. In
addition, the Group continues to benefit from the
UK patent box regime and R&D tax relief.
The Group’s approach to tax continues to be
to operate on the basis of full disclosure and
co-operation with all tax authorities and, where
possible, to mitigate the burden of tax within the
local legislation.
reducing by 1 to 61 days, however, in the cash
flow receivables generated a £2.5m inflow. In
total, net working capital decreased to 30.2%
of revenue compared with 31.0% in December
2015 and generated an £18.2m inflow in the
cash flow statement.
Cash generation
Our strong cash generation and disciplined
working capital management resulted in a
reduction in net debt of £16.2m to £55.0m at
the end of the year. Our cash generation KPI
shows a conversion of 130.1% of operating profit
into operating cash. This allowed us to invest
£17.6m in capital expenditure and £16.3m on the
Mastergear acquisition, pay dividends of £43.9m
and after currency movements and tax payments
of £32.9m, we reduced net bank borrowings used
to fund the prior year acquisitions.
Control of working capital as defined in the cash
flow statement, using average exchange rates
and excluding acquisitions, is key to achieving our
cash generation KPI. Inventory reduced by £14.4m
in the cash flow but currency and acquisitions
reduced the impact to a £1.4m reduction
between balance sheets. As a function of
revenue, reported inventory reduced from 16.0%
to 14.5%. Trade receivables increased by £13.1m
as reported, with debtor days outstanding
Credit management
The Group’s credit risk is primarily attributable
to trade receivables, with the risk spread over a
large number of countries and customers, and no
significant concentration of risk. Creditworthiness
checks are undertaken before entering into
contracts or commencing trade with new
customers and in companies where insurance
cover operates, the authorisation process works
in conjunction with the insurer, taking advantage
of their market intelligence. We actively expanded
the coverage of the credit insurance policy during
the year and have cover in place for 83% of
receivables in those companies now using the
policy. Where appropriate, we use trade finance
instruments such as letters of credit to mitigate
any identified risk.
44
Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
The accounting deficit is higher than the actuarial
deficit as on an accounting basis we are required
to use AA corporate bond rates to value the
liabilities. The actuarial valuation uses gilt yields
since this most closely matches the investment
strategy which is designed in part to hedge the
interest rate and inflation risks borne by the
scheme. Cash contributions are driven by the
actuarial valuation.
Dividends
The Board is proposing a 1.6% increase in the
final dividend to 3.15p per share. When taken
together with the 1.95p interim dividend paid in
September, the 5.10p represents a 1.0% increase
in dividends over the prior year. This gives dividend
cover of 1.5 times (2015: 1.7 times). Our dividend
policy is to grow core dividends in line with
earnings and supplement core dividends with
additional dividends when the Board considers it
appropriate to do so having considered the near-
term expected cash requirements of the Group.
Treasury
The Group operates a centralised treasury function
managed by a Treasury Committee chaired by
the Finance Director and also comprising the
Chief Executive, Group Financial Controller and
Group Treasurer. The Committee meets regularly
to consider foreign currency exposure, control
over deposits, funding requirements and cash
management. The Group Treasurer monitors
compliance with the treasury policies and is
responsible for overseeing all the Group’s banking
relationships. A Subsidiary Treasury Policy restricts
the actions subsidiaries can take and the Group
Treasury Policy and Terms of Reference define
the responsibilities of the Group Treasurer and
Treasury Committee.
The Group uses financial instruments where
appropriate to hedge significant currency
transactions, principally forward exchange
contracts and swaps. These financial instruments
are used to reduce volatility which might affect
the Group’s cash or income statement. In
assessing the level of cash flows to hedge with
forward exchange contracts, the maximum cover
taken is 75% of forecast flows. The Board receives
monthly treasury reports which summarise the
Group’s foreign currency hedging position,
distribution of cash balances and any significant
changes to banking relationships.
The Group has three committed facilities with
two different lenders comprising a one year £20m
facility, which was extended during the year and
now expires in August 2017, a £90m three year
facility expiring in August 2018 and a five year
£60m facility expiring in August 2020. At year
end £155.5m of the committed facilities were
drawn resulting in £54.5m being available.
Retirement benefits
The Group accounts for post-retirement benefits
in accordance with IAS 19, Employee Benefits.
The balance sheet reflects the net deficit of these
schemes at 31 December 2016 based on the
market value of the assets at that date, and the
valuation of liabilities using year end AA corporate
bond yields. We have closed both the main
defined benefit pension schemes to new entrants;
the UK scheme in 2003 and the US one in 2009,
in order to reduce the risk of volatility of the
Group’s liabilities.
The most recent triennial valuation for the
UK scheme took place as at 31 March 2016
and showed a decrease in the actuarial
deficit of £1.5m to £32.5m and an increase
in the funding level from 78% to 82% as
investment outperformance, favourable changes
in assumptions and additional Company
contributions offset the negative impact of the
continued reduction in gilt yields, which is the key
driver behind the value of the scheme’s liabilities.
A recovery plan has been agreed with the Trustees
resulting in required annual contributions from the
Company of £5.5m during 2016, 2017 and 2018,
at which time the next valuation will take place.
On an accounting basis the deficit on the schemes
increased from £23.3m to £58.5m during the
year and the funding level decreased from 87%
to 75%. The Company paid total contributions
of £8.5m in the year and the scheme assets
increased slightly in value. This was offset,
however, by the largest drivers of the increased
deficit which were the lower discount rate due to
the fall in AA corporate bond rates and increased
inflation rates.
Rotork Annual Report 2016
45
KEY PERFORMANCE INDICATORS
Financial KPIs
Growth of the business, quality of earnings and efficient use of
resources are crucial target areas for Rotork and we employ a
number of performance measures throughout Rotork to monitor
them. The KPIs used to monitor the financial performance of the
business are set out below.
Sales revenue growth
Return on sales
Cash generation
Return on capital employed
Earnings per share growth
Lost time injury rates (LTIR)
Carbon emissions
Employee satisfaction
Accident frequency rate (AFR)/
8.0%
20.0% 130.1% 23.4%
-3.8% 0.26 / 0.36 25.0%
3.6
2016
8.0
-8.1
2015
2014
2.8
2013
2012
13.0
14.3
2016
2015
2014
2013
2012
20.0
22.5
26.2
26.0
25.7
2016
2015
2014
2013
2012
23.4
28.6
130.1
115.4
97.4
99.6
95.4
2016
2015
2014
2013
2012
47.6
59.1
61.9
AFR
LTIR
Reasons for choice
This is reported in detail for
operating segments and is a key
driver for the business. This
measure enables us to track our
overall success in specific project
activity and our progress in
increasing our market share by
product and by region.
How we calculate
This measure brings together the
combined effects of procurement
costs and pricing as well as the
leveraging of our operating
assets. It is also a check on the
quality of revenue growth but is
heavily influenced by divisional
mix.
This is used as a measure of
performance where a target of
85% is regarded as a base level
of achievement. Cash generation
is also one of the constituent
parts of the senior management
reward system.
Rotork has an asset-light business
model by design and reporting this
ratio internally helps management
at Group level monitor our
adherence to this philosophy.
The measurement of earnings
The AFR is used as one measure
This KPI compares this year’s
The survey as a whole enabled
per share (EPS) reflects all
of the effectiveness of our health
carbon emissions stated as a
and safety procedures. As we
function of revenue with last
the Group to get feedback from
across the businesses on how we
improve our safety performance,
year’s and is a broad measure of
relate to our employees and what
management of the Group’s
in future years we will measure all
our impact on the environment.
we can do better.
aspects of the income
statement including
tax rate.
LTIR instead of those resulting in
over three days’ lost time.
Increase in sales revenue
year-on-year divided by prior year
sales revenue.
Adjusted profit before tax (after
financing and interest) shown as a
percentage of sales revenue.
Cash flow from operating
activities before tax outflows and
the pension charge to cash
adjustment as a percentage of
adjusted operating profit.
Adjusted operating profit as a
percentage of average capital
employed. Capital employed is
defined as shareholders’ funds
less net cash held, with the
pension fund deficit net of
related deferred tax asset added
back. The calculation is shown on
page 138.
Increase in adjusted basic EPS
The formula we have used for
Energy usage data (scope 1
Employees scored their responses
(based on adjusted profit
calculating our AFR is the number
and 2) is collected and converted
directly into a prepared survey
after tax) year-on-year divided
of reportable injuries resulting in
by the prior year adjusted
over three days’ lost time divided
to equivalent tonnes of CO2 and
then reported as a function of
with 1 being very dissatisfied and
5 being very satisfied.
basic EPS.
by the number of hours worked
revenue. Further details are
multiplied by 100,000. LTIR will
contained in the corporate social
be calculated on the same basis
responsibility report on page 57.
but using the total number of
reportable injuries.
Comments on results
The recent acquisitions made a
significant contribution to the
results of the Group, also aided by
the impact of currency tailwinds.
The market environment remained
tough, and whilst our diversified
end market and geographic
exposure enabled us to deliver a
solid set of results, underlying
divisional revenues were affected
by these headwinds.
The margin was impacted by the
mix effect of the recent
acquisitions and the impact of
lower volumes, partially offset by
material cost and overhead
savings from our cost reduction
programme, reflecting effective
control over material and labour
costs.
46
Rotork Annual Report 2016
Disciplined working capital
management generated a net cash
inflow of £18.2m, excluding that
added through acquisitions and
impact of exchange rates, which is
reflected in this KPI.
The main driver of the reduction in
this measure was the increase in
capital employed as a result of the
acquisitions in each of the last two
years.
The reduction in the Group’s
effective tax rate, the result of
the change in profit mix and
the reduction in the UK
Whilst the AFR has increased
slightly the overall number of
days lost due to workplace
The full year impact of the
The number of employees
acquisitions has resulted in an
completing the survey was over
increase in the Group energy usage.
2,300, a 67% response rate (4%
injuries has decreased by 25% on
However, on a comparable basis the
down on the previous year). The
Corporation tax rate, partially
the previous year due to our
usage has remained broadly
mitigated the decrease in profit
investment in health and safety
consistent.
before tax.
training, audits to monitor
compliance with procedures and
initiatives to embed safe working
practices.
highest scoring questions were
those on being proud of the
products and services we provide
our customers, our approach to
health and safety and our values
and ethics.
Strategic Report
Directors
Governance
Financial Statements
Company Information
Non-financial KPIs
We monitor non-financial areas in our businesses, particularly in
the environmental, health and safety and quality control areas,
and we place strong emphasis within our organisation on
improving our performance here.
Sales revenue growth
Return on sales
Cash generation
Return on capital employed
Earnings per share growth
Accident frequency rate (AFR)/
Lost time injury rates (LTIR)
Carbon emissions
Employee satisfaction
8.0%
20.0% 130.1% 23.4%
-3.8% 0.26 / 0.36 25.0%
3.6
-21.0
-3.8
2016
2015
2014
5.4
2013
2012
14.3
13.6
AFR
2016
2015
2014
2013
2012
LTIR
2016
2015
2014
0.26
0.25
0.31
0.33
0.36
0.42
0.46
0.62
2016
2015
2014
2013
2012
25.0
22.8
19.2
17.9
19.2
2016
2015
2014
2013
2012
3.6
3.6
3.6
3.6
3.6
Reasons for choice
This is reported in detail for
This measure brings together the
This is used as a measure of
Rotork has an asset-light business
operating segments and is a key
combined effects of procurement
performance where a target of
model by design and reporting this
driver for the business. This
costs and pricing as well as the
85% is regarded as a base level
ratio internally helps management
measure enables us to track our
leveraging of our operating
of achievement. Cash generation
at Group level monitor our
overall success in specific project
assets. It is also a check on the
is also one of the constituent
adherence to this philosophy.
activity and our progress in
quality of revenue growth but is
parts of the senior management
increasing our market share by
heavily influenced by divisional
reward system.
The measurement of earnings
per share (EPS) reflects all
aspects of the income
statement including
management of the Group’s
tax rate.
The AFR is used as one measure
of the effectiveness of our health
and safety procedures. As we
improve our safety performance,
in future years we will measure all
LTIR instead of those resulting in
over three days’ lost time.
This KPI compares this year’s
carbon emissions stated as a
function of revenue with last
year’s and is a broad measure of
our impact on the environment.
The survey as a whole enabled
the Group to get feedback from
across the businesses on how we
relate to our employees and what
we can do better.
product and by region.
mix.
How we calculate
Increase in sales revenue
Adjusted profit before tax (after
Cash flow from operating
Adjusted operating profit as a
year-on-year divided by prior year
financing and interest) shown as a
activities before tax outflows and
percentage of average capital
sales revenue.
percentage of sales revenue.
the pension charge to cash
adjustment as a percentage of
adjusted operating profit.
employed. Capital employed is
defined as shareholders’ funds
less net cash held, with the
pension fund deficit net of
related deferred tax asset added
back. The calculation is shown on
page 138.
Comments on results
The recent acquisitions made a
significant contribution to the
The margin was impacted by the
Disciplined working capital
The main driver of the reduction in
mix effect of the recent
management generated a net cash
this measure was the increase in
results of the Group, also aided by
acquisitions and the impact of
inflow of £18.2m, excluding that
capital employed as a result of the
the impact of currency tailwinds.
lower volumes, partially offset by
added through acquisitions and
acquisitions in each of the last two
The market environment remained
material cost and overhead
impact of exchange rates, which is
years.
tough, and whilst our diversified
savings from our cost reduction
reflected in this KPI.
end market and geographic
programme, reflecting effective
exposure enabled us to deliver a
control over material and labour
solid set of results, underlying
costs.
divisional revenues were affected
by these headwinds.
Increase in adjusted basic EPS
(based on adjusted profit
after tax) year-on-year divided
by the prior year adjusted
basic EPS.
The reduction in the Group’s
effective tax rate, the result of
the change in profit mix and
the reduction in the UK
Corporation tax rate, partially
mitigated the decrease in profit
before tax.
The formula we have used for
calculating our AFR is the number
of reportable injuries resulting in
over three days’ lost time divided
by the number of hours worked
multiplied by 100,000. LTIR will
be calculated on the same basis
but using the total number of
reportable injuries.
Whilst the AFR has increased
slightly the overall number of
days lost due to workplace
injuries has decreased by 25% on
the previous year due to our
investment in health and safety
training, audits to monitor
compliance with procedures and
initiatives to embed safe working
practices.
Energy usage data (scope 1
and 2) is collected and converted
to equivalent tonnes of CO2 and
then reported as a function of
revenue. Further details are
contained in the corporate social
responsibility report on page 57.
Employees scored their responses
directly into a prepared survey
with 1 being very dissatisfied and
5 being very satisfied.
The full year impact of the
acquisitions has resulted in an
increase in the Group energy usage.
However, on a comparable basis the
usage has remained broadly
consistent.
The number of employees
completing the survey was over
2,300, a 67% response rate (4%
down on the previous year). The
highest scoring questions were
those on being proud of the
products and services we provide
our customers, our approach to
health and safety and our values
and ethics.
Rotork Annual Report 2016
47
CORPORATE
SOCIAL
RESPONSIBILITY
We believe that being a responsible business by the
effective management of social, ethical, health and
safety and environmental matters is key to our
success. It benefits our operational effectiveness,
builds on the trust of our stakeholders and protects
our reputation.
Sustainability is an integral part of our business model and
strategy. Achieving a positive impact around the world lies
at the heart of our commitment to corporate social
committee (CSR) and it represents a valuable opportunity to
ensure that Rotork continues to be successful in the
long-term. We are committed to embedding CSR values
across all our processes and ways of working.
CORPORATE SOCIAL
RESPONSIBILITY COMMITTEE
ETHICS COMMITTEE
SOCIAL ISSUES COMMITTEE
ENVIRONMENTAL COMMITTEE
HEALTH AND SAFETY COMMITTEE
Employees worldwide
3,754
Countries with a direct presence
38
Rotork has been a member of the UN Global Compact since
2003 and continues to be included in the FTSE4Good index
where we maintain an above average score in the global
rankings, UK rankings and industry sector rankings.
We believe that the approach that we take to CSR helps to
meet the expectations of our stakeholders and contributes
to the success of our corporate strategy by promoting an
effective and sustainable business.
Our Chief Executive chairs the CSR Committee and reports
on progress to the Board. The CSR Committee is a
management committee which has four sub-committees
with each representing one of the areas of CSR described
opposite. Presentations are given by the chairs of the four
sub-committees to the Board on activity and progress in
their areas of CSR during the year.
The diagram above sets out our CSR Committee structure.
48
Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
Rotork Singapore employees support the Singapore Red Cross R.I.C.E. Project.
The Group’s approach is focused around four main areas:
Ethics and values
Ethics and values are fundamental to the way in which
we do business. Respecting internationally proclaimed
human rights, promoting an open and honest culture,
having a zero tolerance to bribery and corruption
worldwide, and selecting suppliers with sound
reputations in the marketplace are important
principles for the Group to adhere to. More details of
the Group’s ethics and values can be found on pages
50 to 51.
Community involvement
We consider it important to contribute to and engage
positively in the communities in which we operate,
and to be a good community neighbour around the
world. One of our corporate values is to produce a
positive and beneficial impact in the areas in which we
operate. Further details on community involvement can
be found on pages 52 to 53.
Helping the environment
Rotork is fully committed to reducing its impact on the
environment by preventing pollution in all countries in
which it operates, and to make sure it is compliant
with any legal and regulatory requirements.
Our compliance contributes to sustaining the
environment and brings cost savings by reducing the
consumption of energy, water and waste and
recycling. The environmental programme is described
in more detail on pages 54 to 57.
Health and safety
The health and safety of all employees and contractors
is of paramount importance in providing a safe
working environment. Our fundamental principle,
‘if you cannot do a job safely, we will not do the job’,
is actively promoted to everyone. This ensures that our
people remain safe, and we enhance the effectiveness
of our workforce by reducing the risk of injury and
costs associated with injury or illness. The Group’s
approach to health and safety can be found on pages
58 to 59.
Rotork Annual Report 2016
49
CORPORATE SOCIAL RESPONSIBILITY continued
ETHICS AND
VALUES
Our ethics and values are central to
the way we do business. These are
set out in Rotork’s Ethics and
Values Statement that can be
viewed on our website, in a
number of languages. Our ethics
and values can be split into four
strands:
Human rights and ethical business
Rotork is fully committed to respecting
internationally proclaimed human rights as
defined in the International Declaration of
Human Rights and the International Labour
Organisation’s standards. We do not accept any
form of child or forced labour and embracing
the UN Global Compact principles throughout
the business is a demonstration of this
commitment. In line with the intent of the UK
Modern Slavery Act, we are continuing to
review the processes used with suppliers to
address human rights risks in our supply chain.
Further details will be contained in our first
Modern Slavery Act statement which will be
published during 2017.
We recognise that an open and honest culture is
key to understanding concerns within the
business and will investigate any potential
wrongdoing. Rotork has a whistleblowing policy
(which can be found on Rotork’s website), with
an independent external whistleblowing hotline,
to assist in facilitating the reporting of any
concerns of wrongdoing confidentially.
Employees
Rotork has a firm commitment to all its
employees regarding wellbeing and development.
Many of our offices provide health checks for
their employees, as well as encouraging
participation in sports teams or one-off charitable
events. More details regarding charitable activities
can be found in the community involvement
section (see pages 52 to 53).
We have an objective and fair recruitment
process which promotes equal opportunities
across the Group in line with the ‘Respect at
Work and Equality of Opportunity’ policy. We are
committed to the principle of equal opportunities
in employment to ensure that no employee or job
applicant receives less favourable treatment
because of their age, race, nationality, ethnic
origin, disability, sex, sexual orientation, religion,
belief or marital status. All employees have a
responsibility to ensure that the policy is
successfully implemented. This includes ensuring
that work allocation and selection for hiring,
promotion and training is carried out in a
non-discriminatory manner.
Employee views and direct communication are
part of our values and we run employee
suggestion schemes, an annual Group-wide
Employee Satisfaction Survey (ESS) and several
locations have employee forums where
employees can raise issues to be further
considered by management.
Employees are briefed by management on
various matters, including the Group’s
performance, at regular intervals as well as the
employee bonus performance which is profit
related. Most locations participate in an
employee profit linked share scheme.
We have has built a strong partnership with the
Institution of Mechanical Engineers (IMechE) to
support its engineers in gaining Incorporated and
Chartered accreditation. We continue to work
with IMechE in Leeds, which has an IMechE
Industrial Liaison team who support members of
the Institution and help to promote it internally
and to the wider engineering community.
Rotork supports apprenticeship schemes for
young men and women which helps to increase
access into all aspects of Rotork’s business.
Rotork belongs to a Standardisation Committee
called the Manufacturers Standardization
Society (MSS) that offers undergraduate and
graduate scholarships.
We are committed to improving diversity across
the Group. As at 31 December 2016, we had
seven Board directors of which five are male and
two are female. As at 31 December 2016, we
had a total of 3,754 employees of which 3,015
were male and 739 were female. We also had
91 senior managers (excluding Board directors),
87 of which were male and four were female. Full
details of Rotork’s diversity policy and targets can
be found in the Nomination Committee Report
on page 74.
Bribery and corruption
We have a zero tolerance policy on bribery and
corruption worldwide, irrespective of country or
business culture. Rotork’s Ethics and Values
Statement makes it clear that our employees will
never offer, pay or solicit bribes in any form.
Rotork does not make political contributions in
cash or kind anywhere in the world.
The whistleblowing policy gives whistleblowers
various ways to alert senior management,
anonymously if required, to any suspected bribery
or corruption. All whistleblowing concerns,
however received, are investigated and reported
to the Audit Committee. During 2016 the
whistleblowing hotline received seven calls
covering issues related to human resources,
employment and dishonest behaviour. All were
resolved satisfactorily. The Employee Satisfaction
Survey for 2016 continued to show a relatively
high level of understanding of how to raise a
wrongdoing concern using the whistleblowing
hotline. During the year further steps were taken
to publicise and promote the hotline. To raise
awareness further, we are developing a new
online training module that will be rolled out
to all employees across the Group in the first
half of 2017.
See more at www.rotork.com/en/investors/index/corporatesocialresponsibility
50
Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
Progress
• All new suppliers to Rotork’s Bath manufacturing facility
2017 targets
• Continue to make progress in increasing diversity across
were assessed and passed the approval system satisfactorily.
Rotork.
• Membership of FTSE4Good and UN Global Compact was
• Ensure Rotork’s diversity policy is communicated across the
maintained.
Group.
• Presentations relating to bribery and corruption were given
by Rotork’s legal department to general managers and sales
managers.
• The whistleblowing policy was communicated to all
employees in each edition of the internal Rotork
e-newsletter and on the Rotork intranet.
• Bribery and corruption refresher training was provided to
employees who had received online bribery and corruption
training over 12 months ago, in 13 languages.
• Information was circulated to agents on bribery and
corruption issues in the form of a tailored booklet and
compliance declarations were received from agents.
• A comprehensive bribery risk assessment was commenced.
• Continue to communicate the whistleblowing policy
regularly through the Rotork e-newsletter.
• Continue to provide a refresher course in 2016 to all
employees who have received online bribery and corruption
training over 12 months ago.
• Ensure that all agents confirm in writing they have read and
understand the information in the bribery and corruption
booklet tailored for agents.
• Ensure the Group-wide bribery and corruption risk
assessment exercise is completed by the end of 2017.
• Publish a Modern Slavery Act Statement on the Rotork
website.
• Develop and rollout a whistleblowing online training module
to all employees in the Group.
The supplier assessment programme includes CSR
themed questions associated with equal rights
and equal pay, anti-bribery and corruption
policies, charitable giving, environmental impact
and anti-compulsory or child labour practices.
These surveys consider current and prospective
suppliers. The assessments are discussed directly
with the suppliers and any corrective action plan is
agreed between the Company and the supplier.
Rotork Controls Limited and Rotork UK Limited,
the Group’s main UK trading companies, and
Rotork plc, are signatories to the Prompt Payment
Code. This ensures suppliers are paid according to
the terms agreed and this encourages good
practice to be passed down supply chains.
We frequently make use of detailed background
checks provided by specialist bribery and
corruption due diligence consultants before
dealing with unknown third parties (including
agents and on prospective acquisitions)
particularly where they are operating in higher
risk jurisdictions or market sectors. We also make
use of objective guidance on country risk, such as
the Corruption Perception Index by Transparency
International. When working with unknown third
parties, after the initial detailed background
checks, we continue to screen these third parties
via a large number of international sources, which
can detect unethical behaviour including
watchlists, sanctions lists and the media, using its
due diligence consultants’ proprietary databases.
We are in the process of carrying out a
comprehensive bribery risk assessment.
As part of this process general managers across
the Group have responded to a questionnaire
covering bribery and corruption risk issues.
The intention is to analyse the results and plot
each business unit against the five main risk areas
identified by Ministry of Justice Guidance to the
Bribery Act 2010. The Audit Committee will
consider the results and recommendations of
the assessment.
We have developed and delivered anti-bribery
and corruption training, including an assessment,
to all employees working in sales and purchasing
roles, as well as to senior accountants, all
managers and directors (including executive and
non-executive directors). The anti-bribery and
corruption training is delivered as an e-learning
module. During 2016, those employees who had
completed the course over 12 months ago
received a refresher course. Both courses have
been made available in numerous languages and
almost 100% of employees required to complete
a course have done so within the required period,
including new employees from acquisitions.
All the Company’s agents have received a bribery
and corruption booklet which is required to be read
by all employees of the agent working on the
Rotork account. The relevant manager for the agent
was required to sign off that this has been done.
Suppliers
Rotork operates an outsourced manufacturing
model, selecting suppliers with sound reputations
in the marketplace. Many of the suppliers have a
long-term working relationship with the Group,
ensuring ingrained product knowledge within the
supply chain.
Suppliers are subject to continuous automated
online monitoring against sanctions lists,
watchlists, regulatory and court records and a
large number of national and international media
sources and the Group is alerted where any
information is uncovered.
Rotork Annual Report 2016
51
CORPORATE SOCIAL RESPONSIBILITY continued
COMMUNITY
INVOLVEMENT
Furthermore, cataract treatment is provided
to patients who are identified, and they are
treated at the base hospital. For example, after
hearing about an eye screening camp being
conducted by Nayonika Eye Care Charitable
Trust under Amrita Drishti in her area, Mallika
Prabhavati (56) went for a free eye check-up.
She was diagnosed with a cataract in her right
eye and later received surgery free of charge in
hospital. Rotork is proud to continue
supporting this great cause.
A contribution of £3,454 was made to Seva
Bharathi, a non-governmental organisation
that focuses its work on the economically
weaker sections of Indian society. Rotork’s
donation has gone towards setting up the
tuition centre for Kids AT Chennai. In addition,
£12,000 was donated to The Forever Friends
Appeal. This is the charity for The Royal United
Hospitals, Bath UK (RUH) that funds projects
for the hospitals, for example, assistance with
the purchase of additional equipment and
funding for research projects.
Rotork considers it important to
contribute to and engage positively
with stakeholders in the
communities in which we operate,
and to be a good community
neighbour around the world.
We regard this as part of our ongoing
responsibilities as a good corporate citizen. This
links into our ethics and values which include
producing a positive and beneficial impact in
the areas in which we operate. One of the
ways Rotork does this is by having local charity
committees at each of our sites which donate
to local charitable causes. This empowers local
employees to decide how to distribute the
funds in their local communities. Rotork aims
to contribute 0.1% of profits to local charitable
causes.
Local community involvement highlights from
the year include:
• Bath (UK) employees donated an impressive
amount of Easter gifts to the children’s ward
of the local Royal United Hospital;
• Rochester (USA) organised an employee
fundraiser for Red Nose Day, which raised
almost $500 from employees and was
matched by the Charity Committee for a
total contribution of nearly $1,000;
• Gimpo (Korea) donated to a number of local
charities that focus on supporting
community members with disabilities;
• Rotterdam (Netherlands) employees
volunteered for a day out at the zoo with
disabled children from a local school.
A €250 donation was also made to help
build playing material in the school
playground; and
• Winston-Salem (USA) employees supported
The Salvation Army’s Angel Tree Programme
by donating new clothing, shoes, and toys
for around 30 less fortunate children in the
local community.
In addition to local charitable and educational
activities, Rotork has supported two major
charities in 2016, WaterAid and Sightsavers.
The selected WaterAid project is situated in the
South East Asian state of Timor-Leste. It began
in 2015, and is scheduled to be completed by
2018. It aims to improve the lives of families
living in 12 communities in rural Timor-Leste.
Rotork’s support so far has helped the
construction of four gravity flow systems,
which has delivered clean, safe water to four
local communities. Community members have
been trained to fully own and understand their
water systems to help maintain the taps and
even carry out minor repairs.
Our donation has also helped 594 people
benefit from the newly constructed toilets and
handwashing stations. This has helped stop the
spread of disease and ensured that the
community stays healthy. Education sessions
about the importance of handwashing with
soap, good kitchen hygiene and the need to
make toilets accessible for disabled members of
the community, have been held. The project
has also had a continued focus on empowering
women and girls within the communities.
Following gender equality sessions, men and
women are now sharing the responsibility of
household tasks, and women are playing a
larger role in community decision-making.
Sightsavers is an international charity that
works with partners in the developing world
to combat avoidable blindness. In 2016, Rotork
supported their Urban Eye Project in Bangalore,
India which caters to the eye health needs of
poor communities living in the local slums.
Under the project, vision centres have been
setup to provide eye screening services to poor
people residing in the area. The centres are run
by health workers and community volunteers
who make the community aware when the
screenings are taking place and the benefits of
good eye health.
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Financial Statements
Company Information
Progress
• £50,000 contributed to WaterAid.
• £36,354 contributed to Sightsavers.
• £3,454 contributed to NGO Seva
Bharathi.
• £12,000 contributed to The Forever
Friends Appeal (RUH) Bath, UK.
• Variety of donations made to charitable
causes relevant to the local communities
of Rotork’s operating sites.
2017 targets
To increase donations to charitable causes.
The Group will:
• Donate 0.1% of Group profits to Rotork’s
nominated international charity;
• Donate 0.1% of Group profits to
charitable causes local to Rotork’s
operating sites;
• Continue to support WaterAid and in
particular the Timor-Leste Project; and
• Continue to support Sightsavers,
specifically urban-based projects in India.
Credit: WaterAid/Tom Greenwood
Sightsavers
Rotork Annual Report 2016
53
CORPORATE SOCIAL RESPONSIBILITY continued
HELPING
THE
ENVIRONMENT
Rotork is fully committed to the
prevention of pollution, to comply
with all legal and regulatory
requirements and to reduce our
environmental impact by targeting
key areas such as energy
consumption, water consumption
and waste.
We continue with our assembly only
philosophy in the majority of our business units
where we utilise specialist suppliers for most of
our manufactured components and assemblies.
This philosophy has resulted in the majority of
our energy being used on lighting, heating and
cooling and IT systems. The acquisitions that
occurred in 2015 have increased the amount of
machining that we do and this is reflected in
the energy profiles of these businesses. As a
responsible global entity, we continue to
influence the environmental performance of
our supply chain through our supplier
assessment programme.
Strategy
• We will improve our operational efficiency
and enhance our environmental performance
in order to secure the continued
sustainability of the Group.
• We will work as a business, and in the local
communities where we operate, to ensure
that the environment on which we depend is
maintained for future generations.
• We will encourage all employees to behave
in an environmentally responsible manner by
supporting the businesses in reducing waste,
saving energy and water and using
technology to reduce travel.
• We will continue to work in partnership with
our regulatory bodies and respect the
regulatory framework in which we work.
• As an environmentally responsible business,
we will be open and transparent and report
regularly to all relevant stakeholders on our
environmental performance.
Corporate objectives
Progress has been made against the previous
year’s objectives. All large facilities have a full
energy balance in place, easy wins are being
identified at a local level and controls are being
implemented to help reduce consumption and
control energy costs. Large energy saving
projects are being assessed on a case-by-case
basis and where viable are being implemented.
Organisational boundaries
The environmental report covers all operations
and processes within the physical boundaries
of the facilities and business transportation by
company cars or vans or any private cars and
hire cars used for business purposes only.
Transportation of products by third parties are
not covered by the report.
Where energy consumption cannot be verified,
normally due to the size of the facility, then an
estimation on the energy use per square metre
of floor space occupied will be made. This
estimation is based on The Chartered
Institution of Building Services Engineers
(CIBSE) Guide F – Energy Efficiency in Buildings.
This estimation equates to 0.78% of total
emissions declared.
Unique items
Due to the growth through acquisition of the
Group during 2015 and 2016, and the
upgrading of the Lucca (Italy) facility, overall
energy consumption has increased. Exceptional
items that have caused this increase are:
• Full year reporting of Bifold Group (UK) and
M&M (Italy);
• New facility and paint plant installation at
Lucca (Italy); and
• Acquisition of Mastergear (Italy).
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Rotork Annual Report 2016
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Directors
Governance
Financial Statements
Company Information
Electricity (MWH)
(Absolute)
Electricity (MWH)
(Exc. unique items)
2016
2015
2014
2013
2012
16,514
13,992
12,605
11,184
11,193
2016
2015
2014
2013
2012
12,824
13,992
12,605
11,184
11,193
Gas (1,000m3)
(Absolute)
Gas (1,000m3)
(Exc. unique items)
2016
2015
2014
2013
2012
1,177
885
769
761
594
2016
2015
2014
2013
2012
924
885
769
761
594
LPG (1,000 litres)
(Absolute)
LPG (1,000 litres)
(Exc. unique items)
2016
2015
2014
2013
2012
355
338
282
300
279
2016
2015
2014
2013
2012
355
338
280
300
279
Progress
The baseline year remains at 2012. A number
of acquisitions have occurred since 2012 that
have affected the overall energy consumption.
We also show figures after the removal of
unique items to show the underlying trends in
the organisation.
A number of key activities have occurred
during the year that have impacted on our
emissions. The new facility and installation of
the painting plant at Lucca (Italy) has increased
our direct emissions, though this has been
offset by removing approximately 63 tonnes of
carbon from the transportation of products
and has removed approximately 500 road
journeys from our supply chain. The energy
consumption for the Lucca (Italy) subsidiary is
in line with expectations.
The consolidation of some of our facilities in
Italy and the USA have started to impact on the
electricity consumption. The consolidation in
Italy has resulted in approximately 18%
reduction in electricity consumed on those
sites. Further energy savings will occur when
other consolidation activities are completed
and full year figures are available. We continue
to target electricity as part of our energy
efficiency programme with 12 sites reducing
electricity consumption by more than 5%.
Energy consumption
Overall electricity consumption has increased by
18% on the previous year and by 47.5% on the
baseline of 2012. The increase is based on the full
year reporting of Bifold Group (UK) and M&M
(Italy), changes at Lucca (Italy) and the acquisition
of Mastergear. Excluding these unique items, the
electricity consumption has decreased by 8.3% on
the previous year but increased by 14.6% on the
baseline of 2012.
Rotork Annual Report 2016
55
CORPORATE SOCIAL RESPONSIBILITY continued
HELPING
THE
ENVIRONMENT
Absolute gas consumption increased by 32.9%
on the previous year and 98.1% on the baseline
year of 2012. The increase is due to the
acquisition of Mastergear, full year reporting
from Bifold Group (UK) and M&M (Italy) and
the installation of the paint plant at Lucca
(Italy). Excluding these unique items, gas
consumption has increased by 4.4% on the
previous year and increased by 55.5% on the
baseline year of 2012. This is mainly due to
colder weather conditions in 2016 than in 2015
and therefore increased use of heating.
In 2016, Liquid Petroleum Gas (LPG) consumption
decreased by 20% on the previous year and
increased 1% on the baseline of 2012. This
significant change on the previous year is related
to the consolidation activities in Italy and
upgrading of equipment in Lucca (Italy).
Overall oil consumption has decreased on the
previous year by 34% and also decreased on the
baseline year of 2012 by 30%. Excluding unique
items, oil consumption has decreased by 48% on
the previous year and decreased by 64% on the
baseline year of 2012. The main reasons for this
reduction are the removal of the generator and
upgrading of the electrical system at Bifold
Marshalsea (UK) and more secure energy supply in
India where generator use has reduced by
approximately 20%.
To support the continued focus on energy
management, our UK businesses continue to be
certified to ISO50001 with the exception of the
Bifold Group which will come under the
certification during 2017. Surveillance audits were
conducted through 2016 with no major
non-conformances identified. The internal audit
process ensures that those sites that are not
certified to ISO50001 are managing their energy
and looking at ways to reduce their consumption.
As we develop new sites or upgrade our
existing sites, we will be introducing energy
efficient solutions into the building design.
Where viable we will also look at the
generation of power from renewable sources,
which will help to reduce the environmental
impact of our business going forward.
Water consumption
Absolute water consumption has increased by
30.6% on the previous year and by 65.7% on the
baseline year. This is mainly due to the acquisition
of Mastergear, full year reporting of Bifold Group
(UK) and M&M (Italy) and the introduction of
process related water at Lucca (Italy).
Consumption, excluding unique items, has
decreased by 13.6% on the previous year but
increased by 8.6% on the baseline year.
Waste and recycling
There are a number of local programmes in
place to promote recycling and reduce waste
across the Group. This has resulted in a
reduction of waste generated by 59 tonnes in
absolute terms but recycling has dropped to
76%. Further work will be done during 2017
to increase our recycling rates and reduce
waste further.
Environmental incidents
There have been no reportable environmental
incidents during 2016. Systems are in place to
address any environmental incident that occurs
at our subsidiaries and the robustness of these
emergency systems are included as part of our
internal audit system.
Greenhouse gas reporting
In January 2017, EEF undertook an assurance
audit of the Greenhouse Gas Emissions (GHG)
report. The business reports on GHG Emission
are in line with the GHG Emissions Protocol
developed jointly by the World Business
Council for Sustainable Development and the
World Resource Institute. No significant issues
were identified during the assurance audit.
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Directors
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Financial Statements
Company Information
Oil (1,000 litres)
(Absolute)
Oil (1,000 litres)
(Exc. unique items)
2016
2015
2014
2013
2012
10,445
20,315
30,893
23,470
29,305
2016
2015
2014
2013
2012
10,290
10,445
19,657
23,070
29,305
Water (1,000m3)
(Absolute)
Water (1,000m3)
(Exc. unique items)
2016
2015
2014
2013
2012
58
44
40
36
35
2016
2015
2014
2013
2012
Waste generated (Tonnes)
(Absolute)
Recycle rate (%)
2016
2015
2014
2013
2012
2,723
2,782
2,801
2,435
2,579
2016
2015
2014
2013
2012
38
44
40
36
35
76
79
76
71
74
Absolute scope 1 and scope 2 emissions have
increased by 18.5% from 2015 and by 50%
from 2012. Excluding unique items, scope 1
and 2 emissions have increased by 2% on 2015
and increased by 29.1% from 2012. Emissions
per £million turnover has increased from
22.8 TnCO2e to 25.0 TnCO2e.
Conclusions
Overall emissions have increased due to the
unique items identified, and whilst the
underlying trend is a reduction in consumption
due to the consolidation of sites and energy
reduction programmes, the emissions have
increased slightly due to the emissions factors
of each country in which we operate.
2017 targets
To support the increase in the number
of energy related projects that are
occurring across our business, the
following targets have been set:
• Project that delivers a 2% electricity
saving on a 2016 baseline; and
• Project that delivers a 3% gas
consumption for heating normalised
on degree days.
More local stringent targets can be set
where needed to support the energy
reduction programme of the Group.
Greenhouse gas is measured across three
different scopes:
Scope 1: Emissions that are direct GHG emissions
from sources that are owned or controlled by
Rotork. These include emissions from fossil fuels
burned on site, emissions from owned or leased
vehicles, and other direct sources.
Scope 2: Emissions that are indirect GHG
emissions resulting from the generation of
electricity, heating and cooling, or steam
generated off-site but purchased for heating.
Scope 3: Emissions that are indirect GHG
emissions from sources not owned or directly
controlled by the entity but related to the
entity’s activities. Scope 3 GHG emission
sources currently required for GHG reporting
include transmission and distribution, losses
associated with purchased electricity and
steam, and well-to-tank emissions for all
energy, business travel and transport.
Scope 1 and 2 emissions (TnCO2e)
(Absolute)
Scope 1 and 2 emissions (TnCO2e)
(Exc. unique items)
2016
2015
2014
2013
2012
6,973
7,802
5,725
5,231
5,024
4,448
6,741
6,182
5,317
5,396
2016
2015
2014
2013
2012
6,429
5,725
5,231
5,024
4,448
6,281
6,741
6,182
5,317
5,396
■ Scope 1
■ Scope 2
■ Scope 1
■ Scope 2
Rotork Annual Report 2016
57
CORPORATE SOCIAL RESPONSIBILITY continued
HEALTH AND
SAFETY
Rotork is fully committed to the
health, safety and wellbeing of its
employees and contractors. We
ensure compliance with all relevant
legal and regulatory requirements
and strive to continuously improve
our health and safety performance.
Policies, procedures and systems of safe
working are in place, supported with training
to ensure the health, safety and wellbeing of
our employees during their working day.
years LTIR has been shown in the opposite
graph to give a comparison against the AFR.
The current LTIR is 0.36 which is a 7%
reduction on the previous year.
Fundamental principles
As the business continues to grow, both
organically and through acquisition, the
fundamental principle of ‘If we cannot do a job
safely, we will not do the job’ is maintained
and communicated to all those who work for
or on behalf of Rotork.
Progress
The objective for 2016 was to have an accident
frequency rate (AFR) below a target of 0.30.
The actual AFR for 2016 is 0.26 which is below
target and a decrease of 43% since 2012.
The AFR is a calculation of accidents resulting
in over three days' lost time, divided by the
average hours worked, multiplied by 100,000.
As we improve our safety performance, and
following review, in the future lost time injury
rates (LTIR) will be measured instead of AFR.
The LTIR is a calculation of number of lost time
incidents instead of only those resulting in
three days’ lost time. This will require the
business to focus on further improvements in
our safety performance. The previous three
Whilst the AFR has increased slightly on the
previous year, the overall number of days lost
due to workplace injuries has decreased by
25% on the previous year.
The number of minor injuries has increased by
10% and reported near misses have increased by
75%. These increases are due to better reporting
mechanisms and the promotion of reporting
minor injuries and near misses rather than a
decrease in health and safety performance.
Occupational health
There have been no occupational diseases
reported during 2016. Rotork continues to
promote the wellbeing of its employees.
This includes both physical health and
mental wellbeing.
Awards and recognition
To ensure high standards of health and safety
performance, a number of businesses within
the Group have gained or have maintained
certification to OHSAS18001. These include
facilities in Bergamo (Italy), Leeds (UK),
Wolverhampton (UK) and Singapore.
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Rotork Annual Report 2016
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Financial Statements
Company Information
Conclusions
Throughout the year, health and safety
continued to be a priority for employees and
contractors. This can be seen by the
improvements in the audit scores; reduction in
lost time; and increase in ‘near miss’ reporting.
We continue to learn from events, audits and
inspections which enables us to continually
improve our health and safety performance. As
we move forward, we will be looking at
innovative practices to improve our health and
safety performance.
Targets
The method adopted to set the LTIR target is
the calculated average of the previous three
years LTIR results. This sets the LTIR target for
2017 at below 0.47.
Assurance activities
After the rebalancing of the audit standard last
year, our subsidiaries have embraced the
challenge for the continuous improvement of
our health and safety standards. This year we
increased our assurance audits compared to
2015, with a total of 85 audits being
conducted. The increase was to support
certification but also to support the
maintenance of high standards of health and
safety performance. Manufacturing facilities
have increased their audit scores from 78% to
88%; sales and service divisions have increased
their scores from 81% to 84%; and on site RSS
audits saw their scores increase from 78% to
91%. The overall average audit score has
increased from 78% to 86%.
No immediate actions were identified at any
of the audits that were conducted. Corrective
action plans are in place to ensure that issues
raised during the internal audit process are
tracked to closure.
Employee satisfaction survey
During 2016, 67% of the workforce completed
an employee satisfaction survey. For the
question, “I believe that Rotork cares about my
health and safety” overall satisfaction was at
80%, this was a decrease of 1% on the
previous year but the same as for 2014.
We shall be reviewing the responses during
2017 to see where improvements can be made.
3
1
2
Accident frequency rate and lost time
incident rate
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
2012
2013
2014
2015
2016
AFR Actual
LTIR Actual
AFR Target
[XX.X]%
Americas
Asia Pacific/Far East 28%
East Europe
West Europe
Latin America
Middle East/Africa
UK
26%
6%
18%
4%
12%
6%
Rotork Annual Report 2016
59
BOARD OF DIRECTORS
4.
5.
7.
6.
2.
1.
3.
EXPERIENCE
APPOINTED
TO THE BOARD
EXTERNAL
APPOINTMENTS
1. Martin Lamb
Chairman
2. Peter France
Chief Executive
3. Jonathan Davis
Finance Director
4. Lucinda Bell
Non-Executive
Director
Martin has extensive experience
in the global engineering
sector. He worked for IMI plc
for over 33 years in a number
of senior management roles,
joining the board in 1996, and
served as Chief Executive from
2001 to 2013. He has served
on the boards of a number of
engineering businesses in a
non-executive capacity, both
in the public and private
equity arena.
Peter was appointed as Chief
Executive of Rotork plc in 2008.
He joined Rotork in 1989 as an
Inside Sales Engineer. In 1998,
he was appointed director and
General Manager at Rotork
Singapore before becoming
Managing Director of the Fluid
Systems Division and then Chief
Operating Officer.
Jonathan joined Rotork in 2002
after holding a number of
finance positions in listed
companies. He gained
experience of the Rotork
business, initially as Group
Financial Controller, and then as
Finance Director of the Rotork
Controls division, and in 2010
was appointed Group Finance
Director.
Lucinda is Chief Financial
Officer of the British Land
Company plc. She has served
on the board of British Land
since 2011 and has held a range
of finance roles in the real
estate industry.
2014
2006
2010
2014
Chairman of Evoqua Water
Technologies LLC
Non-executive director of
Mercia Technologies plc
Member of the European
Advisory Board of AEA
Investors (UK) Ltd
Chief Financial Officer of
The British Land Company plc
COMMITTEE
MEMBERSHIP
60
Rotork Annual Report 2016
Strategic Report
Strategic Report
Directors
Directors
Governance
Financial Statements
Company Information
Nomination
Audit
Remuneration
Denotes Chair of Committee
5. Gary Bullard
Non-Executive
Director
6. Sally James
Non-Executive
Director
7. John Nicholas
Senior Independent
Director
Gary previously held senior
management positions,
including sales and marketing
roles, at IBM and BT Group plc
and was a non-executive
director of Chloride Group plc.
Gary most recently held the
position of President Logica UK
until October 2012 and was a
member of the Executive
Committee of Logica plc.
Sally previously held senior legal
roles in investment banking in
London and Chicago including,
Managing Director and EMEA
General Counsel for UBS
Investment Bank. She has also
held the position of Bursar of
Corpus Christi College,
Cambridge.
John was appointed as
Senior Independent
Director of Rotork plc on
20 June 2014. Formerly,
John was Group Finance
Director of Tate & Lyle plc
and Kidde plc.
2010
2012
2008
Founder and CEO of
Catquin Ltd
Chairman of
New Model Identity Ltd
Non-executive director of
Spirent Communications plc
Non-executive director of
Moneysupermarket.com
Group PLC
Non-executive director of
Abdi Limited
Trustee of Legal Education
Foundation
Non-executive director of
Mondi plc
Non-executive director of
Hunting plc
Chairman of Diploma plc
Rotork Annual Report 2016
61
CORPORATE
GOVERNANCE
REPORT
Statement from the Chairman
I am pleased to set out our Corporate Governance Report on pages
62 to 69. The aim of this report is to provide a clear and comprehensive
explanation of Rotork‘s governance framework and how it is applied
day-to-day. Whilst ensuring that we provide detailed reporting in our
Corporate Governance Report, we have sought to place emphasis on
explaining how the principles of the UK Corporate Governance Code
(the Code) are applied across our Group.
I believe that strong corporate governance has a key role to play in
protecting our business and its long-term success, especially in
challenging market conditions. It is important for good governance to
resonate throughout our entire organisation and at Rotork we seek to
apply it across all our activities around the world in a consistent and
unified way to create and maintain the right culture throughout
the Group.
The current environment has driven an emphasis on continuous strategy
evaluation and refinement throughout the year, to ensure that the
Group responds dynamically to changing market, economic and
political situations.
Execution of the Group‘s strategy has been aided by the risk processes
that were introduced during 2015. These included a new risk appetite
framework, improved risk reporting procedures and an augmented risk
assessment process. These were reviewed and further refined in 2016.
Our robust risk processes ensure that not only do we as a Board
accurately identify and quantify the risks faced by the Group, but that
the Board‘s appetite for risk informs decision making throughout the
Group, so we can prudently take advantage of the opportunities that
changing markets inevitably present. The Board is pleased by the
manner in which the foundations laid last year successfully informed
these strategic debates.
As highlighted in last year‘s Annual Report and Accounts, the Board
delayed its 2015 annual performance review until early 2016, to enable
an enhanced review to be conducted in conjunction with an external
facilitator that included one-on-one interviews with the directors and
completion of a questionnaire. This process, and the outputs from it,
are discussed in more detail overleaf.
Martin Lamb
Chairman
62
Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
Dates of 2016 Board meetings
Jan
Feb
✔
Mar
✔
Apr
May
✔✔ ✔✔
Jun
Jul
✔
Aug
Sept
✔
Oct
Nov
✔✔
Dec
✔
During the year the Board has examined the role that the Group's
culture plays in the development of the business and considered the
Financial Reporting Council's (FRC) Report on Corporate Culture and the
Role of Boards that was published in July. The Board recognises that a
good corporate culture is essential to the creation of long-term value.
It has sought to distil the essence of that culture so that it can be clearly
communicated with the business as it continues to grow and enter new
markets both by organic growth and acquisition. Our culture is
described in more detail on pages 20 and 21.
Rotork is subject to the Code, and I am happy to report that throughout
2016 Rotork has complied with the revised Code in all respects.
Finally, the reports of the Board's principal Committees are set out on
pages 70 to 93. I would like to thank John Nicholas for his long-standing
service to each of these Committees, as a previous Chair of the Audit
Committee and as the Senior Independent Director. Following John's
retirement in February 2017, Sally James has been appointed Senior
Independent Director and Lucinda Bell has been appointed Chair of the
Audit Committee to replace Sally James.
A summary of the business the Board considered during 2016 is set
out on page 64. However, I firmly believe that corporate governance
does not stop at the boardroom door. It is important that the strong
governance principles demonstrated by the Board are carried on
throughout the Group at every level and in every location.
Rotork Annual Report 2016
63
CORPORATE GOVERNANCE REPORT continued
Board activity 2016
Financial performance
• Received regular financial performance updates from
the Finance Director.
• Approval of 2017 budget.
• Consideration of 2015 financial statements.
• Approval of 2015 final dividend recommendation and
2016 interim dividend declaration.
Governance and stakeholders
• Series of meetings undertaken between the Chair of
the Remuneration Committee and key shareholders.
• Approval of 2015 Annual Report and Accounts and
Annual General Meeting (AGM) business.
• Approval of interim report and trading updates.
• Consideration of FRC report on corporate culture.
• Regular review of feedback from institutional
shareholders.
• Adoption of revised schedule of matters reserved for
the Board.
e
c
a
n
G
d
o
a n
Fina n cia l
erfor m
p
s
t
r
a
B
t
e
u
s
g
i
y
n
e
a
s
n
s
v
e
s
t
a
r
k
n
e
a
h
n
o
c
l
e
d
e
r
s
nt
e
m
al c ontrols
k m a nage
e r n
t
d r i s
n
I
a n
Internal controls and risk management
• Approval of appointment of new Head of Risk and
Internal Audit.
• Received regular reports on risk including, quarterly
executive risk summary.
• Received regular reports on litigation and regulatory
matters.
• Received a presentation on IT and cyber security.
• Review of effectiveness of risk management and
internal control systems.
• Established Disclosure Committee and implemented
new internal procedures to reflect the introduction of
the EU Market Abuse Regulation.
d
r
e
a
c
vie
q
w,
uisitions
Business review, strategy and acquisitions
• Received regular performance and business updates
from the Chief Executive.
• Set the Group‘s strategy and vision, with an emphasis
on addressing the challenges facing the Group as a
result of continuing challenges in its markets during
the year.
• Received presentations from divisional and Group
business function managers to consolidate
understanding and awareness of activities and
performance within the relevant divisions and business
functions.
• Consideration and approval of Mastergear acquisition.
• Received regular briefings on potential acquisition
targets from the Chief Executive.
64
Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
UK Corporate Governance Code compliance statement
The following section on pages 65 to 69 is a summary of the system of
corporate governance adopted by Rotork. Throughout the year ended
31 December 2016, Rotork plc fully complied with the Code. The Code
is available to download at www.frc.org.uk.
The Board
The Board has a duty to promote the long-term success of Rotork for its
shareholders; accomplished by entrepreneurial leadership within a
framework of prudent and effective controls. Its role therefore includes
approval of strategy, risk reviews, finance matters and internal control
and risk management including major contract approvals.
The terms and conditions of appointment of directors are available for
inspection during business hours at the registered office of Rotork plc
and at the AGM.
Length of tenure of independent non-executive
directors as at 31 December 2016
Board composition
Rotork is led by an effective Board which currently consists of six
members (seven as at 31 December 2016 prior to the retirement of
John Nicholas): the Chairman, three independent non-executive directors
and two executive directors. Apart from the Chairman, all non-executive
directors are considered to be independent from Rotork and are
appointed for an initial term of three years. Upon the completion of this
term, the appointment is reviewed and, if appropriate, extended.
Rotork is compliant with the recommendations of Lord Davies’ 'Women
on Boards' initiative, with female representation on the Board standing at
29% as at 31 December 2016.
The biographies of the directors and details of Board committee
membership are set out on pages 60 to 61.
All directors are subject to annual re-election at the AGM in line with
the Code.
Directors’ attendance at Board and Committee meetings
during 2016
6-9 years
0-3 years
3-6 years
No. of meetings
Board
Audit
Committee
Remuneration
Committee
Nomination
Committee
7(ii)
11
11
11
11
11
11
10
3(i)
5
5
5(i)
5(i)
5
5(i)
4
0
4
4
1(i)
4(i)
4
4(i)
4
0
3
3
1(i)
3
3
3
3
Bob Arnold
Lucinda Bell
Gary Bullard
Jonathan Davis
Peter France
Sally James
Martin Lamb
John Nicholas
Balance of independent non-executive directors and
executive directors as at 31 December 2016
[XX.X]%
(i) By invitation.
(ii) Bob Arnold retired from the Board on 31 August 2016.
Roles and responsibilities
There is a documented clear division of responsibilities between the
Chairman and the Chief Executive to ensure that there is a balance of
power and authority between leadership of the Board and
executive leadership.
All directors are entitled to seek independent, professional advice at the
Company‘s expense, and arranged by the Company Secretary, in order to
discharge their responsibilities as directors. Rotork maintains appropriate
directors’ and officers’ insurance cover.
Americas
26%
[XX.X]%
Asia Pacific/Far East 28%
[XX.X]%
6%
East Europe
Americas
26%
18%
West Europe
Asia Pacific/Far East 28%
4%
Latin America
26%
Americas
6%
East Europe
Middle East/Africa
12%
Asia Pacific/Far East 28%
18%
West Europe
6%
UK
6%
East Europe
4%
Latin America
18%
West Europe
12%
Middle East/Africa
4%
Latin America
6%
UK
12%
Middle East/Africa
6%
UK
Executive
directors
Non-executive
Chairman
Non-executive
directors
Balance between male and female directors on
the Board as at 31 December 2016
Female
Male
Rotork Annual Report 2016
65
CORPORATE GOVERNANCE REPORT continued
How the Board operates effectively
Board activities
As part of Rotork‘s Board effectiveness, day-to-day responsibility for
the running of the Company is delegated to executive management.
However, there are a number of matters where, because of their
importance to the Group, it is not considered appropriate to do this.
The Board therefore has a formal and documented schedule of matters
reserved for its decision. This schedule was updated during the course of
2016 and can be found on the Company‘s website at
www.rotork.com/en/investors/index/theboard.
In 2016, there were 11 Board meetings in total. The Chairman, through
the Company Secretary, ensures that the Board agenda and all relevant
information is circulated to the Board members sufficiently in advance
of the meeting. Following feedback from the Board‘s 2016 performance
review, the Board held a workshop to consider changes to the
management reporting packs circulated to the Board to further ensure
that the non-executive directors receive focused, concise and relevant
information from the executive management team. Further work will be
done on this in 2017. The Chairman and the Company Secretary discuss
the agenda in detail ahead of every meeting and the Chairman and
Chief Executive hold a review meeting ahead of each Board meeting.
At least once annually, the Board travels to and meets at one of Rotork‘s
locations other than its head office in Bath. This allows the Board, and,
in particular, the non-executive directors, the opportunity to gain a
deeper understanding of overseas businesses and their markets and to
interact with local management and staff, as well as to view new capital
investments and acquisitions. In 2016, the Board visited Rotork‘s
newly-completed manufacturing facility in Lucca (Italy) and met with,
and received presentations from, local management.
Board meetings held outside the UK in past five years:
Location of Board meetings
■ 2016 – Lucca, Italy
■ 2015 – Shanghai, China
■ 2014 – Winston-Salem, USA
■ 2013 – Lucca, Italy
■ 2012 – Chennai, India
66
Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
All non-executive directors constructively challenge executive
management at Board meetings and are entitled to unfettered access
to information and management across the Group. Rotork‘s executive
directors understand the distinction between their roles as executive
managers and as Board directors. Rotork Board members come from
a variety of professional backgrounds including engineering, legal,
accountancy and international sales and collectively possess significant
managerial experience, as well as experience of being company directors
of other public limited companies.
As in previous years, the evaluation was externally facilitated by
Vivienne Cassley of Useful Thinking, an independent external
consultancy, and took the form of structured, one-on-one, interviews
with each Board member and a written questionnaire. The facilitators
noted a culture of rigorous and constructive challenge. The Board is
self-critical, and is continuously looking to improve its performance. In
this respect, the appointment of new members to the Board in recent
years has provided a valuable opportunity to review and refresh the
approach to achieving best practice.
Key areas identified by the evaluation process as requiring focus
included: the structure and content of Board reports; the Group
management structure; information on the competitive environment
and Rotork‘s relative position; the acquisition process, integration and
post-acquisition reviews; and succession planning and recruitment.
Board workshops were held in 2016 to consider the structure and
content of board reports and the management structure. These will be
given further consideration by the Board in 2017. At the December
Board meeting, there was a presentation to the Board on the
competitive landscape and further presentations are planned for 2017.
Further Board workshops are due to be held in March and April 2017
to consider the acquisition process and succession planning
and recruitment.
All Board members were mindful of the changing external environment
and the challenges this presents to the business. During the year there
had been a strong focus on the Group‘s culture and on its internal
controls to ensure that these are keeping pace with Rotork‘s commercial
development. In reviewing performance during the year, the directors
particularly noted the success of work undertaken around risk appetite
and the way in which this informs strategic debate.
The Senior Independent Director annually arranges a meeting of the
non-executive directors to appraise the Chairman‘s performance.
This feedback is used by the Senior Independent Director to discuss with
the Chairman his performance.
At each Board meeting, the Board receives presentations from senior
management (including all divisional managing directors during the year)
regarding that senior manager‘s area of responsibility. The principal purpose
of the presentations is to consolidate the Board‘s understanding of the
Group‘s operations, and in particular current strategic and operational issues
facing divisional and business functional management. The presentations are
structured so that the Board has the opportunity to ask questions and
constructively challenge senior management at their presentations.
Management presentations normally take place at the start of the meeting
so that any issues raised in them can be considered in wider Board
discussions, particularly around strategy and risk.
The Chief Executive and Finance Director present to the Board the
content of preliminary and half year results announcements and the
Board also considers trading updates.
Induction and development
New Board members receive a suitable and tailored induction. This is
facilitated by the Company Secretary. No new director appointments
were made in 2016.
Directors are encouraged to continually update their professional skills
and knowledge. During 2016, development activities for the directors
included participation in external training seminars. All the non-executive
directors are members of the Deloitte Academy which provides a wide
range of training opportunities for FTSE 350 board directors.
The Chairman is responsible for reviewing the level and nature of
training given to the Board at least annually.
Performance evaluations
The formal performance evaluation of the Board in accordance with
Code Provision B.6 took place in February and March 2016. As discussed
in last year‘s Annual Report and Accounts, the Board‘s evaluation of its
performance in 2015 was delayed until the first quarter of 2016 to allow
the Chairman time to form a view of the dynamics of the Board under
his chairmanship.
Rotork Annual Report 2016
67
CORPORATE GOVERNANCE REPORT continued
Internal controls and risk management
The Board is responsible for Rotork’s system of internal control and risk
management and the review of the system’s effectiveness is done with
the assistance of the Audit Committee.
During 2016, the Board regularly reviewed the effectiveness of the Group’s
risk management and internal control systems. The systems which were in
place for the year under review, and up to the date of approval of the report,
are in accordance with the Code and the FRC Guidance on Risk
Management, Internal Control and Related Financial and Business Reporting.
No significant failings or weaknesses were identified.
Risk appetite framework and monitoring of risk
management and internal controls
The Group has adopted a risk review process at a divisional level for
many years, resulting in a 'bottom up' assessment and consolidation of
the risks facing the Group before the “top down” review is performed.
To complement this review process, the risk appetite framework (RAF)
was introduced in 2015. This has:
• Enhanced the incorporation of risk into strategic decision making at
Board and divisional management levels;
• Improved quantitative and qualitative insight into principal risks and
associated trends;
• Enabled the Board to lead by example in creating a risk aware culture
and ensured consistency in decision making; and
• Facilitated proactive risk mitigation.
A quarterly executive risk summary was also introduced in 2015 to
ensure ongoing oversight of the Group‘s risk management and internal
controls, with quarterly reporting being supplemented as necessary by
monthly reporting to the Board by the executive management team on
new or evolving risks.
The effectiveness of the new processes were reviewed during the course
of the year, and were found to have resulted in improvements in the
Board‘s decision making. Refinements to both the processes and
analytical metrics used by the Board to assess and quantify risk to reflect
best practice were made following the appointment of the Head of Risk
and Internal Audit in April 2016.
In addition to the reporting framework described above, all members
of the Board receive full Audit Committee papers and prior meeting
minutes, which contain the Audit Committee‘s assessment of the
effectiveness of the Group‘s risk management and internal control
systems. All non-executive directors are members of the Audit
Committee and the executive directors and the Chairman also attend
Audit Committee meetings.
In the course of its activities during the year the internal audit team identified
improvement recommendations at all locations visited. These were discussed
with local management at the end of the audit and they are charged with
implementing the agreed improvement actions.
Main features of the Group‘s risk management and
internal control systems
Risk management and internal control can only provide reasonable,
not absolute, assurance against material misstatement or loss, as it is
designed to manage the risks rather than remove them altogether.
The systems cover controls which enable Rotork to respond
appropriately to financial, operational, compliance and any other risks.
Key elements include:
• Robust assurance processes and controls over financial reporting
procedures;
• A formal schedule of reserved matters for the Board including
responsibility for reviewing Group strategy;
• Clearly defined levels of authority and a division of responsibilities
throughout the Group;
• Formal documentation procedures;
• A formal whistleblowing policy with an external whistleblowing
hotline; and
• An internal audit function made up of accountants from head office
and across subsidiaries, managed by an experienced Head of Risk and
Internal Audit and supported by internal audit training, best practice
and control procedures to monitor and identify weaknesses in
internal controls.
Further details of the Group’s internal control and risk management
systems and the process for identifying, evaluating and managing the
principal risks faced by the Group during 2016, including the Board’s
approach to the principal risks the Group is willing to take in achieving
its objectives (its ‘risk appetite’), are contained on pages 28 to 35.
Relations with shareholders
Communication with shareholders is a priority for Rotork and the
Company maintains a regular dialogue with its major shareholders.
In 2016, the Board, and in particular the Chief Executive and Finance
Director, have engaged with shareholders in a number of
ways including:
• Hosting conference calls;
• Hosting webcasts;
• Attending shareholder events;
• Hosting investor site visits;
• Attending conferences;
• Hosting and participating in roadshows; and
• Arranging ad hoc meetings with shareholders.
A Director of Strategy and Investor Relations was appointed in
January 2017 to increase the resources available to support existing
and potential shareholders and enhance our reporting to shareholders.
68
Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
the Disclosure Committee currently comprises the Chief Executive, the
Finance Director and the Company Secretary and operates under formal,
written terms of reference.
The Committees have authority to take external, independent
professional advice at Rotork‘s expense for matters relating to the
discharge of their duties.
Chairman of the Board and Chairs of the Committees
as at 31 December 2016
PLC Board
Martin Lamb
Audit
Committee
Sally James*
Nomination
Committee
Martin Lamb
Remuneration
Committee
Gary Bullard
*Sally James was replaced by Lucinda Bell on 27 February 2017.
Martin Lamb
Chairman
27 February 2017
The Chairman ensures that all directors are made aware of major
shareholder issues and concerns by ensuring the Board receives reports
from the Chief Executive on meetings with analysts and fund managers
as well as shareholders. In addition, the Board receives reports from its
brokers which give anonymised feedback from investors.
Rotork makes constructive use of its AGM as an opportunity for the
Board to communicate with and answer questions from shareholders
who attend in person. The entire Board is normally available during the
meeting, and for lunch following the meeting, to allow direct interaction
between the directors and the shareholders. This year, Rotork will adopt
automatic poll voting at its AGM in order to better reflect the views of
shareholders; previously voting on resolutions was generally undertaken
on a show of hands at the AGM itself. Automatic poll voting ensures
that all votes cast in person or by proxy are taken into account on a
particular resolution.
Rotork also maintains a comprehensive investor relations section on its
website which provides a variety of resources for investors including current
webcasts, presentations and press releases as well as annual interim reports.
The website can be accessed at www.rotork.com/en/investors.
Electronic communications are also used by Rotork to communicate with
its shareholders. All shareholders have been asked whether they would
like to receive the Annual Report and Accounts in electronic form rather
than in hard copy form. Any shareholders wishing to receive corporate
documents electronically can do this by registering for the service at
www.shareview.co.uk and clicking on ‘Register’ under the ‘Shareview
Portfolio’ section. Rotork also make available electronic proxy
appointments for shareholders who wish to appoint a proxy online to
vote at the Company‘s AGM.
Board Committees
The Board has Audit, Nomination and Remuneration Committees.
Each Committee has formal, written terms of reference which are
available to download from the Rotork website at
www.rotork.com/en/investors/index/committees. All Committees
have at least three independent non-executive directors within their
composition. The Company Secretary advises and acts as secretary to
the Committees.
During the course of the year, the Board also established a Disclosure
Committee to ensure that Rotork complies with its obligations in relation
to the control and disclosure of inside information under the EU Market
Abuse Regulation which was introduced in July 2016. Membership of
Rotork Annual Report 2016
69
AUDIT
COMMITTEE
REPORT
During 2016, in addition to its usual schedule of work, the Audit
Committee focused on two key elements:
• The effectiveness of the Group‘s internal audit processes; and
• A review of the effectiveness of changes made to the Group‘s risk
management and internal controls during 2015.
The membership of the Audit Committee was unchanged during the
year ended 31 December 2016, but John Nicholas retired from the
Audit Committee on his retirement from the Board on 24 February 2017
and Lucinda Bell replaced Sally James as Chair of the Audit Committee
on 27 February 2017.
All Audit Committee members are independent non-executive
directors. Lucinda Bell and John Nicholas hold professional accounting
qualifications and the Board considers both to have recent and relevant
financial experience. Biographies of each member of the Audit
Committee can be found on pages 60 to 61. The Head of Risk and
Internal Audit, the Risk and Audit Manager, the Chairman, the Chief
Executive, the Finance Director, the Group Financial Controller, and
representatives of the external auditor (including the principal audit
partner) also regularly attend meetings by invitation.
The Audit Committee operates under formal terms of reference which
are reviewed annually. A copy of the terms of reference is available on
the Rotork website at www.rotork.com/en/investors/index/committees.
Principal responsibilities are to review and report to the Board on:
• The integrity of financial reporting;
• Significant accounting policies and judgments;
• Internal control and risk management systems including monitoring
the effectiveness of internal audit;
• The appointment, independence and effectiveness of the external
auditor, including the policy relating to non-audit work and policy
relating to employment of former staff of the external auditor;
• The external auditor‘s remuneration; and
• Whistleblowing and other Group policies as relevant.
Sally James
Chair of the Audit Committee
Activities of the Audit Committee during
the year
The Audit Committee maintains an annual schedule of work
which is kept under review and forms the basis of its
principal meetings throughout the year. The annual
schedule is supplemented by consideration of specific issues
as and when they arise. The Audit Committee met five
times during the year. Meetings of the Audit Committee are
arranged to co-ordinate with the Group‘s financial reporting
timetable to ensure appropriate scrutiny by the Audit
Committee of such announcements, including, in particular,
review of year end and interim financial reports, in addition
to other trading updates made during the year. A summary
of its principal activities is set out opposite.
70
Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
Dates of 2016 Audit committee meetings
Jan
Feb
✔
Mar
Apr
✔
May
Jun
Jul
✔
Aug
Sept
Oct
Nov
✔✔
Dec
Members1: Lucinda Bell, Gary Bullard and John Nicholas
Audit Committee activity 2016
A summary of its principal activities is set out below:
Financial reporting
• Review of the Annual Report and Accounts including
material judgments and estimates, and the governance
reports and draft results announcements.
• Review of the going concern assumption and the viability
statement in the Annual Report and Accounts.
• Review of half year accounts including material judgments,
estimates and draft half year results announcements.
• Review of external auditor‘s report on the half year
accounts and the proposed full year external audit scope,
key risks, materiality and year end issues.
• Review of trading updates.
Internal controls and risk management
• Internal controls and risk management review including,
consideration of processes and procedures for risk
management, effectiveness of internal controls and fraud risk.
• Review of internal audit reports, the internal audit programme,
its remit, resourcing and effectiveness.
• Appointment of Head of Risk and Internal Audit.
• Meetings with the Head of Risk and Internal Audit without
management present.
• Review of anti-bribery and corruption policy and procedures
including training and communication.
• Review of whistleblowing policy, the whistleblowing hotline
and procedures including training and communication, and
received reports on whistleblowing matters.
g
Fina n cia l
reportin
E
x
t
e
r
n
a
l
a
u
dit
External audit
• Consideration of and reporting to the Board on the
external auditor‘s independence, objectivity and
effectiveness including the annual audit.
• Review of management's representation letter to the
auditor, views on the control environment and fraud risk
management.
• Meeting with the external auditor without the presence of
management.
• Review of non-audit services undertaken by the external
auditor and consideration of policy on non-audit work.
• Consideration of audit fees, engagement terms and risk of
external auditor leaving the market.
• Consideration of re-tendering the external audit contract.
• Review of policies on the employment of ex-employees of
the external auditor.
1 As at 31 December 2016.
a
n
In
t
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Other work
• Assessing implementation by the Group of recent changes to the
Code and related guidance for audit committees.
• Consideration of accounting and corporate governance
developments.
• Review of Audit Committee effectiveness and Terms of
Reference.
Rotork Annual Report 2016
71
AUDIT COMMITTEE REPORT continued
Financial reporting
A key role of the Audit Committee in relation to financial reporting is
to review the quality and appropriateness of the half year and year end
financial statements with a particular focus on:
• Accounting policies and practices;
• The clarity of disclosures and compliance with International Financial
Reporting Standards, UK company law and the Code;
• Material areas in which significant judgments have been applied
or where there has been discussion with the external auditor; and
• Upon request of the Board, advising the Board on whether the
Annual Report and Accounts are fair, balanced and understandable
and provide the information necessary for shareholders to assess the
Company‘s performance as a whole.
To assist the Audit Committee, the Finance Director and the Group
Financial Controller present a detailed report at each meeting outlining
significant matters and the external auditor presents a report on the
work they have undertaken on the half year and year end financial
statements. They also present on the scope for the next full year audit
for consideration by the Audit Committee.
The principal matters of judgment considered by the Audit Committee
in relation to the 2016 accounts and how they were addressed were:
• Goodwill impairment testing. The year end balance sheet includes
goodwill of £251.4m, which represents approximately 32.4% of the
Group‘s assets. The Audit Committee reviewed the carrying value
of goodwill by examining a report from the Group Financial Controller
which set out the values attributable to each cash generating unit,
the expected value in use, based on projected cash flows and the key
economic assumptions related to growth and discount rates.
The report included a detailed impairment review paper for Bifold as
this was the cash-generating unit identified as being most sensitive
to changes in the key assumptions. This paper was reviewed by the
Board in December 2016 and finalised in January 2017 after being
updated for the Board‘s comments. The Audit Committee discussed
the appropriateness of the assumptions used, compared expected
growth rates to historical averages and relevant market data and
compared the discount rates to the Group weighted average cost of
capital and appropriate risk premiums. The Audit Committee also
considered whether it was possible that a reasonable change in
assumptions might indicate impairment. Following discussion, the
Audit Committee were satisfied that the approach taken by
management was appropriate, that there was no requirement to
record any impairments in the accounts and that the sensitivity
analysis in relation to Bifold as disclosed in note 10 is also appropriate;
• Retirement benefit schemes. The Group operates two defined benefit
retirement plans which are still open to future accrual. The valuations
are prepared by an independent qualified actuary. The Audit Committee
considered the report from the Group Financial Controller and were
satisfied the assumptions used were appropriate. The detailed disclosure
for these schemes under IAS 19 are shown in note 24 and the Audit
Committee is satisfied they are complete and accurate; and
• Valuation of inventory. The Group has £85.8m of inventory which is
spread across the Group‘s global locations. The provisions made to
write down slow-moving and obsolete inventory are based on an
assessment of market developments and on an analysis of historic and
projected usage. The calculation of the provisions requires application
of judgment by management. Management confirmed to the Audit
Committee that there have been no significant changes to the
approach used to estimate inventory provisions compared with the
prior year. Following discussion, the Audit Committee was satisfied
that the judgments that had been exercised and valuation
methodology were appropriate and that the provisions were
appropriately stated at year end.
External auditor
The year under review marks the third year during which Deloitte LLP
has been the Group‘s external auditor. The Audit Committee assesses
the effectiveness of the external audit process, the scope of the Group
audit and the quality of the audit work throughout the year.
The assessment considers:
• Any issues arising from the prior year audit;
• The proposed audit plan including identification of risks specific to
Rotork;
• Audit scope and materiality thresholds;
• Staffing continuity and experience;
• The delivery of the audit in line with the plan;
• Matters arising during the audit and the communication of these to
the Audit Committee;
• Feedback from executive management;
• Private meetings with the auditor and the Head of Risk and Internal
Audit without management being present;
• The independence, objectivity and scepticism of the auditor; and
• The FRC audit quality review report on selected audits undertaken
by Deloitte.
Having completed this review, the Audit Committee agreed that the
audit process, independence and quality of the external audit
were satisfactory.
Consideration was given to the possibility of re-tendering the external
work during the course of the year. The Audit Committee has
recommended that Deloitte LLP be re-appointed auditors for the 2017
financial year and Deloitte‘s continuing appointment will be subject to
shareholder approval at the 2017 AGM.
Statement of compliance
The Company confirms that it has complied with terms of The Statutory
Audit Services for Large Companies Market Investigation (Mandatory
Use of Competitive Tender Processes and Audit Committee
Responsibilities) Order 2014 (the Order) throughout the year.
In addition to requiring mandatory audit re-tendering at least every 10
years for FTSE 350 companies, the Order provides that only the Audit
Committee, acting collectively or through its Chair, and for and on
behalf of the Board, is permitted:
• To the extent permissible by law and regulations, to negotiate and
agree the statutory audit fee and the scope of the statutory audit;
• To initiate and supervise a competitive tender process;
• To make recommendations to the directors as to the auditor
appointment pursuant to a competitive tender process;
• To influence the appointment of the audit engagement partner; and
• To authorise an auditor to provide any non-audit services to the
Group, prior to the commencement of those non-audit services.
Non-audit services
In order to safeguard the independence and objectivity of the external
auditor, the Board has adopted a policy on non-audit services which
restricts the work and fees available to the external audit firm, and the
policy is reviewed by the Audit Committee annually to ensure it remains
appropriate and in line with applicable requirements.
The policy specifies certain activities which the external auditor may not
undertake such as tax services and services related to the internal
audit function.
72
Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
The policy has been recently amended in response to EU legislation on
permitted non-audit fee services which came into effect on 17 June
2016. The changes include: further restrictions on the scope of
permissible non-audit work; and a cap on fees for permissible non-audit
work (which may not exceed 70% of the average audit fees paid in the
last three consecutive years).
For work that is permitted under the policy, authority has been
delegated to the Finance Director to approve. This is for fees of up to
£10,000 per project or £40,000 in aggregate for general work, and
£10,000 for acquisition related work that is permitted under the policy.
Non-audit work above these levels requires the prior approval of the
Chair of the Audit Committee or the Audit Committee as a whole.
At each Audit Committee meeting, a summary is provided of all
non-audit services awarded to the external auditor during the year.
An analysis of fees paid to Deloitte, including the split between audit and
non-audit is included in note 8 of the Group financial statements. The total
non-audit fees for 2016 represent 8.4% of the total Deloitte audit fee.
Risk management
The Audit Committee has responsibility for reviewing and monitoring the
effectiveness of the Group’s control environment, internal audit and risk
management process. This year has seen continued focus on the Group’s
approach to risk and its internal control environment. This included a review
by the Audit Committee, of the effectiveness of the new risk appetite
framework and reporting procedures which are summarised on page 29.
The Audit Committee makes a recommendation to the Board for the Board
to consider when forming its own view on the effectiveness of the risk
management and internal control systems.
The Audit Committee also oversaw the appointment of a Head of Risk
and Internal Audit. After a thorough recruitment process, using an
external internal audit recruitment specialist, the Board was pleased to
recruit a senior and experienced Head of Risk and Internal Audit in April
2016. The new role reports directly to the Finance Director and the Chair
of the Audit Committee. A Risk and Internal Audit Manager with
relevant experience was also recruited during the year.
Internal controls
A continued area of focus was to build on improvements to the quality
of the Group's internal control procedures made in the preceding year
and to oversee the revised internal audit approach adopted in 2016.
The Audit Committee's work on this was assisted by the Head of Risk
and Internal Audit, who has implemented new, more formalised,
reporting procedures and supervised operational improvements in
locations where issues were identified. Audit scoping for 2017 has been
improved to be further ‘risk based’ with the plan being driven by the
scoring of a number of relevant risk factors at our global locations
including financial, location risk and key events such as site relocations
and restructuring. Sites specifically not included in this scoping exercise
will then be visited on a three year rolling basis.
Other means of assessing the internal control systems include
competency assessments of key site staff, annual letters of assurance
from the leadership team, key control monitors within each business,
the risk assessment process and risk practitioners improving controls in
each business, partly through site reviews.
During the year, the Audit Committee considered reports on internal
control from the Finance Director and Head of Risk and Internal Audit,
as well as reports on procedures to prevent bribery and corruption and
whistleblowing events from the Group Legal Director.
Internal audit
Internal audit has made significant progress in the year following the
recommendations made by PwC in their 2015 Independent Quality
Assessment into the Group‘s internal audit function and the arrival of
the Head of Risk and Internal Audit. During 2016, the internal audit
team took a more risk based approach to the internal control
environment. The Group continues to use staff from one division to
undertake audits in a different division, and this arrangement
encourages the sharing of best practice and provides career
development for the staff involved. However, all reports are now
reviewed by the Head of Risk and Internal Audit to ensure consistency
both in terms of audit approach and remedial actions. Feedback is given
to all internal auditors on their findings and the audit programme has
been continuously updated to ensure it reflects the current risks being
identified in the business. Furthermore, where issues of concern are
identified that require more management time the Head of Risk and
Internal Audit will perform the follow up visit to ensure a level of
independence from the business.
Whilst the Audit Committee are satisfied that this 'peer review' model
remains appropriate for the Group‘s current internal audit objectives, it
has noted PwC‘s observations that an independent function may be
warranted in the future. The Audit Committee has noted an increase in
independence and strategic direction since the appointment of the Head
of Risk and Internal Audit.
Alongside the oversight of the implementation of PwC‘s
recommendations, the Audit Committee continued to receive a report
at each meeting on internal audit activity, any significant matters arising
and the management response. For 2017, the Audit Committee has
reviewed an internal audit plan that aligns with Rotork‘s identification
of risks and mitigating controls, and also assesses adherence to the
Group‘s compliance and policy initiatives.
Other matters
In accordance with its terms of reference, the Audit Committee, led by
the Chair, carried out a review of its effectiveness by way of a
questionnaire, including how it discharged its responsibilities and the
Terms of Reference. The areas for improvement identified by the review
were all addressed prior to the end of the financial year.
The Audit Committee‘s activities were also reviewed as part of the
Board evaluation process referred to on page 67.
Throughout the year, the Audit Committee also considered relevant
accounting and corporate governance developments, in addition to
those in relation to risk and internal controls discussed above.
Areas of focus for 2017
Following some significant changes to the risk management processes
and internal control environment, in 2017 we will focus on a degree of
stability and consistency of the new processes that have been
implemented as well as risk based testing of key controls. This will
include planned improvements in the risk appetite framework,
development of the associated key performance indicators and a further
extension of the risk based audit programme which will ensure
continued development.
Sally James
Chair of the Audit Committee
27 February 2017
Rotork Annual Report 2016
73
NOMINATION
COMMITTEE
REPORT
Activities of the Nomination Committee during the year
The Committee met three times during the year. A summary of principal
activities is set out opposite:
During the year, the Nomination Committee was responsible for
commencing the process to identify and recommend the appointment of
an additional non-executive director following the retirement of John
Nicholas in February 2017. An external consultant has been appointed to
assist with this process which is currently ongoing. In formulating the
candidate profile for the appointment, the Nomination Committee had
particular regard to the need to ensure a continuing balance of skills on the
Board, given the comparatively large number of director retirements in
recent years.
Diversity policy
The Board seeks to attain a diverse mix of skills, experience, knowledge
and background. In considering diversity, gender will play an important
role but the Board will take account of ethnicity, nationality,
background, profession and personality.
The Board has formally adopted a diversity policy to encourage diversity
at all levels within the Group. At Board level, this includes a number of
voluntary actions to improve diversity, including only using external
search consultants that have signed up to the Voluntary Code of
Conduct for Executive Search Firms.
The diversity policy also sets out other actions that will be taken to
contribute to a more diverse pool of employees throughout the Group.
During 2017, the Nomination Committee when conducting its review of
the diversity policy, will take account of the Hampton Alexander Review,
which builds on the Davies Review, to increase the number of women
on FTSE boards, and to improve women‘s representation in senior
leadership positions. It will also take account of the Parker Review‘s
recommendations to increase ethnic diversity on FTSE boards.
Details of the proportion of women on the Board, in senior leadership
positions and within the Group can be found on page 50 of the
corporate social responsibility report.
Martin Lamb
Chair of the Nomination Committee
27 February 2017
Martin Lamb
Chair of the Nomination Committee
The Nomination Committee is responsible for leading the
process for Board appointments and making
recommendations to the Board; ensuring succession
planning is in place; regularly reviewing the structure, size
and composition of the Board, including its balance of skills,
knowledge and experience, and making recommendations
as appropriate.
The membership of the Nomination Committee was
unchanged during the year ended 31 December 2016,
but John Nicholas retired from the Nomination Committee
on his retirement from the Board on 24 February 2017.
Succession planning, and its interaction with the Board‘s
continuing focus on strategy and culture, was a focus for
the Nomination Committee during the course of the year.
These discussions were informed by consideration of the
FRC‘s feedback paper on board succession planning, and
attendance by the Chair at external seminars on the future
role of the Nomination Committee.
74
Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
Dates of 2016 Nomination Committee meetings
Jan
Feb
✔
Mar
✔
Apr
May
Jun
Jul
Aug
Oct
Nov
Dec
Sept
✔
Members1: Lucinda Bell, Gary Bullard, Peter France, Sally James and John Nicholas
Nomination Committee activity 2016
Appointment process
• Approval of a revised policy on
non-executive director
appointments.
• Approval of external search
consultants for a replacement
non-executive director.
• Consideration of the candidate
profile for an additional
non-executive director.
Succession planning
• Consideration of FRC feedback
paper on board succession
planning.
• Discussion of diversity at Board
level, including on the basis of
ethnicity, disability and awareness
and experience of global business
cultures.
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1 As at 31 December 2016.
Rotork Annual Report 2016
75
DIRECTORS’
REMUNERATION
REPORT
Activities of the Remuneration Committee during the year
The Remuneration Committee maintains a rolling programme of activities
which forms the basis of its scheduled meetings throughout the year. This
rolling programme is supplemented by consideration of specific issues as and
when they arise. The Remuneration Committee met four times during the
year. A summary of its principal activities is set out below:
Remuneration Committee activity 2016
Other
• Consideration of current investor guidance from
institutional investors on remuneration.
• Consideration of legal and corporate governance
developments.
• Consideration of remuneration market trends.
• Approval of the Committee’s schedule of work
for 2017.
Remuneration policy
• Review of remuneration policy.
• Preparing 2017-2019 remuneration policy.
• Consultation with major shareholders on
proposed changes to remuneration policy.
Reporting
• Approval of the Remuneration Report 2015.
Gary Bullard
Chair of the Remuneration Committee
Statement from the Chair of the
Remuneration Committee
The Directors’ Remuneration Report is split into two parts:
• The Policy Report, which sets out the Company‘s policy
on directors’ remuneration for the three year period
(2017-2019); and
• The Annual Report on Remuneration which discloses the
payments and awards made to the directors under the
previously approved policy, shows the link between
remuneration and the Group‘s performance, and sets out
how the remuneration policy will be applied for the
forthcoming year.
The Policy Report will be subject to shareholder approval in
a binding vote at the forthcoming annual general meeting
(AGM). The Annual Report on Remuneration, together with
this introductory statement, will be subject to an advisory
shareholder vote at the AGM.
76
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Strategic Report
Directors
Governance
Financial Statements
Company Information
Dates of 2016 Remuneration Committee meetings
Jan
Feb
✔
Mar
Apr
May
Jun
Jul
✔
Aug
Oct
Sept
✔
Nov
✔
Dec
Members1: Lucinda Bell, Sally James and John Nicholas
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Setting executive salary
• Setting of basic salary for executive directors
for 2017.
• Consideration of report from New Bridge Street
on executive remuneration.
Setting long term incentive plan (LTIP)
and bonus opportunities
• Approval of LTIP award levels and bonus
opportunity for 2017 for executive directors and
other members of senior management.
• Setting of financial and non-financial
bonus targets.
• Review of LTIP performance during the year.
Pension
• Review of executive pension benefit.
1 As at 31 December 2016. John Nicholas retired from the Remuneration Committee on his retirement from the Board on 24 February 2017.
Rotork Annual Report 2016
77
DIRECTORS’ REMUNERATION REPORT continued
Remuneration for 2016
Bonuses for 2016 were based on annual profit, cash generation,
accident frequency rate and individual strategic targets. In line with our
pay for performance philosophy, we set ambitious targets for the annual
bonus, particularly in relation to profitability. The challenging trading
environment meant that, whilst we performed in line with external
expectations, this was at the lower end of the target range set for the
bonus. However, cash generation remained strong and our continued
focus on safety and operational performance has positioned the Group
well for the future. Overall the bonus payments ranged from 40.7% to
56.8% of salary. Full details of the bonus targets and performance
against them is set out on pages 85 to 86.
The 2014 LTIP awards (which were based on earnings per share (EPS)
and total shareholder return (TSR) performance over the three years to
31 December 2016) failed to meet the threshold level of performance
required and the awards will lapse in March 2017.
Remuneration for 2017
Since I became Chair of the Remuneration Committee in 2010, we have
made a number of changes to the way the executive directors at Rotork
are remunerated. These have been designed to ensure that there is a
clear and strong link between performance and reward and to meet
best practice requirements. During the year, the Remuneration
Committee undertook a comprehensive review of the remuneration
policy for the executive directors to ensure that the policy remained fit
for purpose and continued to meet the needs of the business and our
shareholders. The latest review is the culmination of this process.
The principal changes to the Policy Report, from that previously
approved by shareholders, are:
• Replacing the legacy defined benefit pension scheme with a cash
allowance in lieu of pension;
• The introduction of deferral of bonus into shares;
• The addition of a capital return measure to the LTIP (to operate
alongside EPS and TSR);
• The introduction of a two year post-vesting holding period for the
LTIP awards; and
• An increase to the shareholding guidelines for the executive directors
to 400% of salary for Peter France (Chief Executive) and 250% of
salary for Jonathan Davis (Finance Director).
There are no changes to the maximum annual bonus and LTIP award
opportunity and award levels for 2017 remain the same as 2016.
In terms of the implementation of the policy for 2017, we are mindful of
the views expressed by our shareholders and the sensitivity of executive
remuneration. However, we are also conscious that the policy must
motivate, retain and attract executives of the right level of skill and
experience to run the Company. Peter France and Jonathan Davis were
both appointed to their roles following internal promotions (in 2008 and
2010 respectively). Their initial salaries were comparatively low at the
time, reflecting their relative lack of experience in their new roles. Rotork
has grown significantly under their tenure, increasing revenues from
£320m in 2008 to £590.1m in 2016, the number of employees from
1,663 to 3,754 and more than doubling the Company's market
capitalisation from £830m to £2.26bn. The two executive directors have
been central to this growth.
Whilst we are cautious about the use of external data, it has been evident to
the Remuneration Committee for some time that their salaries were
increasingly uncompetitive, had not kept pace with the scope and demands
of their roles, nor did they adequately reflect their skills and experience. This
was impacting the effectiveness of the overall remuneration policy and
causing compression on salary levels further down the organisation. We
believe strongly in pay for performance and aim for restraint on fixed
compensation. However, to ensure that the policy can operate effectively
and to retain and motivate the directors, we need to ensure that the fixed
pay element is not so far adrift from the appropriate level.
Following discussions with our major shareholders, we have
repositioned the base salaries for the executive directors to £525,000
and £335,000 for Peter France and Jonathan Davis respectively. We gave
extensive consideration to phasing the increase, but given the time in
their roles and the size of the gap, we believe it necessary to correct this
imbalance now. Whilst this is a substantial increase on their current
salaries, this still positions their packages towards the lower end of the
range for companies of our size and in our sector. The executive
directors will also, for the duration of the policy period, invest the
increase above the normal workforce increase in Rotork shares and
retain those shares for two years. Future increases for the executive
directors under the Policy Report will be limited to the average increase
for the rest of the workforce.
The Remuneration Committee sought extensive feedback from major
shareholders, and those shareholders who were consulted were broadly
supportive of the increases. The salary increases were permitted under
the existing Policy Report and therefore, following the consultation
exercise, the Remuneration Committee agreed to make the changes
effective from 1 January 2017.
The other changes to the Policy Report have been designed to ensure
that the Policy Report continues to meet the needs of the business for
the next three year period, supports sustainable long-term growth and
provides a strong alignment with shareholders. With the executive
directors committing to invest part of their salary in shares, introducing
deferral of bonus into shares, applying a post-vesting holding period to
the LTIP awards and by significantly enhancing the share ownership
requirements, we believe that we have reached a suitable balance –
ensuring that the remuneration policy remains attractive whilst
promoting strong alignment with shareholders. A summary of the
revised policy is set out in the 'at a glance' section overleaf.
When conducting its business, the Remuneration Committee is mindful of
the views of all of our stakeholders. During the course of the autumn, I
consulted with more than 20 of Rotork’s largest shareholders to take them
through our outline proposals and listen to their feedback. A number of
changes were incorporated into the proposal as a result including a change
to how we measure safety performance for the annual bonus and the
greater focus on the use of share-based remuneration.
Throughout this process, we have also been alive to the internal
sensitivities of changing the executive salaries. In particular we have
given careful consideration to the conditions of the wider workforce, as
Rotork’s success is dependent on the dedication and commitment of all
our employees.
I am pleased to report that the average salary increase for all employees
in 2017 is 3.4%, up from 2.8% last year. We will also continue to
monitor internal relativities and pay ratios to ensure that they remain
appropriate. I plan to meet with employee representatives during the
course of 2017 to discuss the remuneration philosophy at Rotork,
including the approach to executive reward.
I hope that you are able to support the changes to the Policy Report and
its implementation.
Gary Bullard
Chair of the Remuneration Committee
27 February 2017
78
Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
Remuneration at a glance
Approach for 2017
Change from 2016
Salary
Benefits
Pension
£525,000 for the Chief Executive and £335,000 for the
Finance Director, effective from 1 January 2017. The
executives have committed to invest the uplift, above the
normal workforce increase, in Rotork shares and to retain
the shares for two years. Subsequent increases during
the policy period will be no higher than the average
increase for other employees.
Represents a one-off adjustment to align salaries closer
to the appropriate level.
Car and fuel (or car and fuel allowance), personal
accident and private medical insurance and life
assurance.
No change.
Cash allowance in lieu of pension set at 25% of salary for
the Chief Executive and 20% of salary for the Finance
Director.
Previously the directors participated in a defined benefit
pension plan (based on capped salaries) with a cash
allowance provided on salary above the cap. The revised
rates are lower than the cost to the Company of the
previous pension benefits.
No change to award levels. Policy maximum aligned at
125% of salary.
Annual bonus
Maximum opportunity of 125% of salary for the Chief
Executive and 100% of salary for the Finance Director,
within an overall policy maximum of 125% of salary.
Based on profit, cash generation, safety and strategic
and personal targets.
No change.
Any bonus above target performance (60% of maximum)
will be deferred in shares for three years.
Bonus deferral introduced for 2017 onwards to provide a
longer-term focus to the annual plan and greater
alignment with shareholders.
LTIP
Award levels of 150% of salary for the Chief Executive
and 125% of salary for the Finance Director, within an
overall policy maximum of 150% of salary.
No change.
Based one third on TSR, one third on EPS and one third
on return on capital (economic profit).
The introduction of a new return on capital (economic
profit) target for part of the award is new and reflects
Rotork’s aim to deliver a high return on capital with
strong and sustainable margins and consistent year-on-
year growth in profit.
For the 2017 grants onwards, the executive directors will
be required to retain any shares (net of tax) vesting under
the plan until the fifth anniversary of grant.
Post-vesting holding period introduced for 2017 awards
onwards to provide a long-term focus to the share
awards.
Shareholding guidelines
400% of salary for Peter France and 250% of salary for
Jonathan Davis.
Increased from 150% of salary.
Other
There are no other substantive changes to the Policy Report or its implementation.
Rotork Annual Report 2016
79
DIRECTORS’ REMUNERATION REPORT continued
Policy Report
This report sets out the policy of the Company on the remuneration of the directors. The Policy Report will be put to shareholders for approval at
the AGM of the Company to be held on 28 April 2017 and, subject to approval, will take effect from that date. The current policy, approved by
shareholders in 2014 and set out in last year‘s remuneration report will continue to apply until the revised policy is approved.
Role of the Remuneration Committee
The principal role of the Remuneration Committee is to determine the framework and policy for remuneration of the executive directors and the
Chairman, ensuring that remuneration levels are sufficient but not excessive in order to attract, retain and motivate directors of the quality required
to successfully run the Company. The full terms of reference of the Committee can be found on the Company‘s website at www.rotork.com/en/
investors/index/committees.
Key responsibilities include:
• Within the approved policy, determining individual remuneration packages for the Chairman and executive directors, including the terms of any
discretionary share schemes in which executive directors may be invited to participate, taking account of the level of remuneration for other
Rotork Management Board members and being aware of remuneration conditions throughout the Group;
• Agreeing the terms and conditions to be included in service agreements for executive directors, including termination payments; and
• Selecting, appointing and setting terms of reference with any remuneration consultants who may advise the Committee.
Consideration of conditions elsewhere in the Company
The Remuneration Committee is sensitive to employee remuneration conditions in the Group and in determining remuneration takes account of
Group remuneration conditions. The Remuneration Committee invites the Group Human Resources Director to its meetings to provide, amongst
other things, details of employee remuneration conditions and metrics, such as pay rises awarded to employees to inform the Remuneration
Committee‘s decision making. During 2017, the Chair of the Remuneration Committee intends to meet with employee representatives to discuss
the remuneration philosophy at Rotork, including the approach to executive reward. The Remuneration Committee also monitors internal relativities
and pay ratios to ensure that they remain appropriate.
Consideration of shareholder views
In formulating the Policy Report, the Remuneration Committee takes into account guidance issued by shareholders, their representative bodies and proxy
agencies (including the Investment Association and ISS). The Remuneration Committee also takes into consideration any views expressed by shareholders
during the year (including at the AGM) and encourages an open dialogue with its largest shareholders. Major shareholders are consulted in advance about
changes to the Policy Report or any significant proposed changes to the way in which it is implemented. A detailed consultation exercise was undertaken in
2016 with more than 20 of Rotork‘s largest shareholders to seek feedback on the proposed changes to the Policy Report.
Overview of the Policy Report
Directors’ future policy table
Element of
remuneration
Base salary
Purpose and how it
supports the strategy
To attract and retain
executive directors
of the right calibre
and provide a core
level of reward for
the role.
How the element operates
Maximum amounts payable
Framework used to assess performance
Salary levels (and subsequent salary
increases) are set after taking into
account the responsibilities of the
role, the value of the individual in
terms of skills, experience and
personal contribution, company
performance, internal relativities and
pay conditions, and external market
data (benchmarked against
companies of a similar size and
complexity and other companies in
the same industry sector). The
Remuneration Committee also
considers the impact of any increase
to salaries on the total remuneration
package.
Salaries are paid monthly and
reviewed annually (salaries are
normally reviewed in December,
with any changes effective from
1 January)1.
Details of the current salaries of
the executive directors are set
out in the Annual Report on
Remuneration.
N/A
For Peter France and Jonathan
Davis, future salary increases will
be no higher than the average
increase (as a percentage of
salary) applied to the UK
workforce.
For other executive directors (if
appointed), the Remuneration
Committee retains the discretion
to award higher increases if
appropriate. For example, to
reflect progression in the role or
to the increased experience of
the individual.
1 Peter France and Jonathan Davis have agreed to invest a proportion of their salary (net of tax) in Rotork shares and to retain those shares for two years. This commitment is
expected to last for three years.
80
Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
Element of
remuneration
Purpose and how it
supports the strategy
How the element operates
Maximum amounts payable
Framework used to assess performance
Benefits
To attract and retain
executive directors
of the right calibre
by providing a
market competitive
level of benefit
provision.
Pension
Annual bonus
To provide a market
competitive
remuneration
package to enable
the recruitment and
retention of
executive directors.
Drives and rewards
performance
against annual
financial and
operational goals
which are consistent
with the medium-to
long-term strategic
needs of the
business.
The range of benefits that may be
provided is set by the Remuneration
Committee after taking into account
local market practice in the country
where the executive is based.
The executive directors’ benefits
currently comprise a car and fuel (or
car and fuel allowance), personal
accident insurance, private medical
insurance and life assurance.
Additional benefits may be provided,
as appropriate.
Executive directors are also entitled
to membership of the all-employee
Rotork share incentive plan (SIP), or
overseas profit linked share scheme
(OPLSS), within the maximum limits
as set by HMRC.
Any reasonable business-related
expenses may be reimbursed
(including any tax if determined to
be a taxable benefit).
The Company may fund
contributions to a director‘s pension
as appropriate. This may include
contributions to a money purchase
scheme and/or payment of a cash
allowance where appropriate.
Bonus up to 60% of the maximum
are paid in cash. Any bonus awarded
in excess of 60% of the maximum is
deferred into shares for three years.
Dividend equivalents may be paid on
the deferred shares on vesting. The
Remuneration Committee retains
discretion to adjust the number of
deferred shares in the event of a
variation in the capital of the
Company and/or to settle the award
in cash.
N/A
There is no prescribed maximum
level, but the Remuneration
Committee monitors the overall
cost of the benefit provision to
ensure that it remains
appropriately proportionate.
Up to 25% of salary.
N/A
The maximum annual bonus
potential is 125% of salary.
Details of the current annual
opportunity are set out in the
Annual Report on Remuneration.
For each measure, normally a
sliding scale of stretching targets
is set by the Remuneration
Committee. The threshold level
of bonus under each financial
measure varies but accounts for
no more than one third of the
maximum bonus opportunity
under any single measure.
The annual bonus is focused on
the delivery of strategically
important performance
measures. These include
demanding financial and
non-financial measures.
Financial measures will account
for the majority.
Under the terms of the bonus
plan, the Remuneration
Committee has the discretion, in
exceptional circumstances, to
amend previously set targets or
to adjust the proposed pay-out
to ensure a fair and appropriate
outcome.
Rotork Annual Report 2016
81
DIRECTORS’ REMUNERATION REPORT continued
Element of
remuneration
Purpose and how it
supports the strategy
LTIP
To incentivise
long-term value
creation and
alignment with
shareholder
interests.
How the element operates
Maximum amounts payable
Framework used to assess performance
The grant level is 150% of salary
per annum.
Details of the current award
levels are set out in the Annual
Report on Remuneration.
The LTIP permits an award of shares
to be granted which vest subject to
performance and continued
employment. The LTIP awards will be
granted in accordance with the rules
of the plan, which were approved by
shareholders in 2010, and the
discretions contained therein. A copy
of the rules is available on request
from the Company Secretary.
Awards under the LTIP may be
granted in the form of conditional
shares, forfeitable shares, nil-cost
options or cash (where the award
cannot be settled in shares). Awards
are currently structured as nil-cost
options.
For awards granted in 2017
onwards, the directors must retain
any shares vesting (net of tax) until
the fifth anniversary of grant.
Awards under the LTIP are
currently subject to performance
conditions, measured over three
financial years.
The awards for 2017 are based
on a mix of EPS, return on
capital (economic profit) and
TSR. Different measures may be
used for future award cycles.
A sliding scale of targets is set
for each measure with no more
than 25% of the award (under
each measure) vesting for
achieving the threshold
performance hurdle.
The performance targets are set
prior to the grant of each award.
Different measures, targets and/
or weightings between
measures may be set for future
award cycles.
Under the LTIP rules approved
by shareholders, the
Remuneration Committee has
the discretion to amend the
targets applying to existing
awards in exceptional
circumstances providing the new
targets are no less challenging
than originally envisaged. The
Remuneration Committee also
has the power to adjust the
number of shares subject to an
award in the event of a variation
in the capital of the Company.
Shareholding
guideline
To provide
alignment with
shareholders by
requiring executives
to build and
maintain a
meaningful
shareholding in
Rotork.
The executive directors are also
subject to a shareholding
requirement to build and maintain a
shareholding in Rotork equivalent to
250% of salary (400% of salary for
Peter France).
N/A
N/A
82
Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
Element of
remuneration
Purpose and how it
supports the strategy
Chairman and
non-executive
directors’ fees
To attract and retain
non-executive
directors of the
right calibre
How the element operates
Maximum amounts payable
Framework used to assess performance
The maximum aggregate fee
level is £700,000.
N/A
The fee levels set are set by
reference to rates in companies
of comparable size and
complexity. The fee levels are
reviewed periodically taking into
account the responsibilities of
the role and the time
commitment of the individual.
Fees for the Chairman and non-
executive directors are reviewed
periodically.
Non-executive director fees are
determined by the Chairman and
Chief Executive. The fees for the
Chairman are determined by the
Remuneration Committee taking
into account views of the Chief
Executive. The Chairman excludes
himself from such discussions.
The fees for the non-executive
directors normally comprise a basic
Board fee, with additional fees paid
to the Senior Independent Director
and for chairing a Committee.
Any reasonable business-related
expenses may be reimbursed
(including tax thereon if determined
to be a taxable benefit).
Differences between the above Policy Report and that previously approved by shareholders are summarised on page 79.
Performance measures
Performance measures are used to determine the extent of any awards made under the variable elements of the executive directors’ remuneration
mix, being the annual bonus and the LTIP. The performance measures used are set out in the Annual Report on Remuneration. The performance
measures are selected because of their use as key performance indicators (KPIs) to assess Company performance and to align the interests of the
directors to those of the shareholders. Non-financial KPIs constitute part of the annual bonus award and these are selected to ensure that
performance measured by financial KPIs is not delivered at the expense of important non-financial considerations.
Clawback and malus
The payment of any bonus is at the ultimate discretion of the Committee and the Committee also retains an absolute discretion to reclaim or
withhold some, or all, of any annual bonus paid in exceptional circumstances, such as misstatement of results, an error in the calculation of the
performance targets and/or award size and gross misconduct.
In terms of the LTIP, the Committee has the discretion to reclaim some, or all, of a vested LTIP award in exceptional circumstances (the categories for
clawback being the same as for the annual bonus plan). In addition, the Committee may lapse or reduce an award prior to vesting where the
participant is found to be guilty of serious misconduct.
Differences between the Policy Report and the policy on employee remuneration
The Board recognises that it is appropriate for a significant proportion of executive directors’ remuneration to be contingent on the performance of
the Company, and that such remuneration is at risk subject to the satisfaction of stretching performance conditions. Consequently, executive
directors and other senior managers are invited to participate in the LTIP where shares awarded will vest contingent upon performance conditions
over a three year period. Executive directors and other senior managers are also invited to participate in the annual bonus scheme which will result
in a bonus payment being made if targets are achieved, part of which may be deferred in shares.
For employee remuneration, the Board considers it more appropriate that employees share in the success of the Company through a profit based
bonus plan which is based on the performance of their business unit. This is coupled with the opportunity, for eligible employees, to receive free
shares from the Company, paid from the Company‘s profits.
Rotork Annual Report 2016
83
DIRECTORS’ REMUNERATION REPORT continued
Approach to recruitment remuneration
Base salary levels will be set in accordance with Rotork‘s remuneration policy, taking into account the experience and calibre of the individual and
their existing remuneration package. Where it is appropriate to offer a lower salary initially, a series of increases to salary may be given over
subsequent years subject to individual performance. Benefits will generally be provided in accordance with the approved policy, with relocation
expenses/an expatriate allowance paid for, if necessary.
The structure of the variable pay element will be in accordance with Rotork‘s approved policy detailed above. The maximum aggregate variable pay
opportunity under the policy is up to 275% of salary. Different performance measures may be set initially for the annual bonus, taking into account
the responsibilities of the individual, and the point in the financial year that the executive joined.
In the case of an external hire, it may be necessary to buy-out incentive pay or benefit arrangements (which would be forfeited on leaving the
previous employer). This would be provided for taking into account the form (cash or shares) and timing and expected value (i.e. likelihood of
meeting any existing performance criteria) of the remuneration being forfeited. Replacement share awards, if used, may be granted using Rotork‘s
existing share plans to the extent possible, although awards may also be granted outside of these schemes if necessary and as permitted under the
Listing Rules.
In the case of an internal hire, any outstanding variable pay awarded in relation to the previous role will be allowed to pay out according to its terms
of grant.
Fees for a new Chairman or non-executive director will be set in line with the approved policy.
Service contracts and policy on payments for loss of office
Under the executive directors’ service contracts, up to 12 months’ notice of termination of employment is required by either party. Should notice be
served, the executive directors can continue to receive basic salary, benefits and pension for the duration of their notice period during which time
the Company may require the individual to continue to fulfil their current duties or may assign a period of garden leave. The Company applies a
general principle of mitigation in relation to termination payments and the service contracts expressly include the use of monthly phased payments
following termination in lieu of notice which can be reduced to the extent that alternative remunerated employment is found.
The service contracts also enable the Company to elect to make a payment in lieu of notice equivalent in value to 12 months’ base salary only.
In the event of cessation of employment, the executive directors may still be eligible for a bonus at the discretion of the Committee, on a pro-rata
basis for the period of time served from the start of the financial year to the date of termination and not for any period in lieu of notice. Different
performance measures (to the other executive directors) may be set for the bonus for the period up until departure, as appropriate, to reflect
changes in responsibility.
Any unvested shares held under the deferred annual bonus plan will ordinarily vest on the normal vesting date, save where the departure is as a
result of summary dismissal, in which case the awards will lapse on cessation of employment. The Remuneration Committee may also determine
that the shares shall vest on an earlier date (including the date of cessation) if the Remuneration Committee, in its discretion, considers that the
circumstances of the cessation merit early vesting of the awards.
The rules of the LTIP set out what happens to awards if a participant leaves employment before the end of the vesting period. Generally, any
unvested LTIP awards will lapse when an executive director leaves employment except in certain circumstances. If the executive director ceases to be
employed as a result of death, injury, retirement, transfer of employment or any other reason at the discretion of the Committee, then they will be
treated as a ‘good leaver’ under the plan rules. The shares for a good leaver will vest subject to an assessment of performance, with a pro-rata
reduction to reflect the proportion of the vesting period served. Awards for a good leaver will vest on the normal vesting date, unless the
Committee determines that they should vest early (for example, following the death of the participant). In determining whether an executive
director should be treated as a good leaver and the extent to which their award may vest (up to the pro-rated amount), the Committee will take
into account the circumstances of an individual‘s departure.
Outplacement services and reimbursement of legal costs may be provided where appropriate. Any statutory entitlements or sums to settle or
compromise claims in connection with a termination would be paid as necessary.
Any legacy benefits under the Company‘s defined benefit pension schemes will be allowed to be paid under the terms of those schemes and as set
out in the previously approved Policy Report.
Outstanding share awards would ordinarily vest early on a change of control of the Company. In the case of unvested awards under the LTIP,
performance would be measured to the date of the change of control with a pro-rata reduction to reflect the proportion of the vesting period served.
The Chairman and non-executive directors do not have service contracts, they serve under letters of appointment and are subject to annual
re-election by shareholders at the AGM. The term of appointment for non-executive directors and the Chairman is three years and their
appointments’ are subject to termination on three months’ notice (12 months for the Chairman). In the event of the termination of their position,
they are entitled to reimbursement of any outstanding fees and expenses due.
84
Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
Illustration of the application of the Policy Report
The charts below illustrate how the remuneration policy would function for minimum, on target and maximum performance for 2017 for each
executive director.
Chief Executive (Peter France)
£2,118,000
33%
33%
£1,225,500
13%
31%
£674,250
100%
56%
34%
Minimum
On target
Maximum
Finance Director (Jonathan Davis)
£
2,250,000
1,800,000
1,350,000
900,000
450,000
0
£
2,250,000
1,800,000
1,350,000
900,000
£1,173,750
30%
30%
40%
£704,750
11%
28%
61%
450,000
£420,000
100%
0
Minimum
On target
Maximum
Fixed pay
(salary, benefits, pension)
Annual Bonus
LTIP
Salary levels (and consequently the other elements of the remuneration package which are calculated as a percentage of salary) are based on those applying in 2017. Taxable
benefits are shown as the cost to the Company of supplying those benefits for the year ending 31 December 2016. On target performance, for illustrative purposes, assumes
achievement of 60% of the maximum available bonus and threshold LTIP vesting (20% of the maximum). Maximum performance assumes achievement of the maximum bonus and
full vesting of the LTIP shares. The LTIP grant level is 150% for the Chief Executive and 125% for the Finance Director. No share price growth has been assumed and for simplicity,
the benefit derived from participating in the Company‘s all employee SIP or OPLSS have been excluded.
Rotork Annual Report 2016
85
DIRECTORS’ REMUNERATION REPORT continued
Annual Report on Remuneration
Single figure of remuneration (£000s) (audited)
Executive directors
Salary
Benefits(i)
Annual
cash bonus
Name
Bob Arnold(iii)
Jonathan Davis
Peter France
2016
212
295
434
2015
264
292
430
2016
2015
13
18
18
18
18
18
2016
86
128
247
2015
50
55
101
LTIP(ii)
2016
2015
–
–
–
–
–
–
Pension and
related benefits
Total
remuneration
2016
481
92
154
2015
413
88
147
2016
792
533
853
2015
745
453
696
(i) The benefit value consists of a car and fuel (or a car and fuel allowance), private medical insurance (executive director only) and the cash value on allocation of SIP and OPLSS
share awards as appropriate.
(ii) The 2016 figures relate to the vesting of the 2014 LTIP award. The threshold performance targets for the award (which were based on performance over the three financial
years to 31 December 2016) were not achieved and the award will lapse in March 2017.
(iii) Bob Arnold retired from the Board on 31 August 2016. He is paid in US dollars.
Directors not performing an executive function (£000s)
Name
Lucinda Bell
Gary Bullard
Sally James
Martin Lamb1
John Nicholas
1 Martin Lamb became Chairman on 24 April 2015.
Base fees
Additional fees
Total remuneration
2016
47
47
47
180
47
2015
43
43
43
137
43
2016
2015
–
8
10
–
8
–
7
8
–
8
2016
47
55
57
180
55
2015
43
50
51
137
51
Additional fees relate to the supplementary fee paid to the Chairs of the Audit and Remuneration Committees and the Senior Independent Director.
All directors have confirmed that, save as disclosed in the tables above, they have not received any other items in the nature of remuneration.
Annual cash bonus for 2016
Bonuses in 2016 were based 60% on annual profit, 15% on cash generation and 5% on accident frequency rate. For Peter France and Jonathan
Davis, the remaining 20% was based on personal strategic objectives. For Bob Arnold, the remaining 20% was based on specific objectives relating
to levels of confirmed orders and inventory management. Details of performance achieved and the targets set are shown below:
Annual profit target
Cash generation
Accident frequency rate
Total
* % of maximum bonus
Performance
required to
trigger
bonus
payment
Performance
required at
maximum
% payable*
at maximum
performance
Performance
outcome
% bonus
awarded*
£113.7
85%
<0.30
£147.2
100%
<0.30
60%
£120.6
15% 130.1%
0.26
5%
80%
12%
15%
5%
32%
Strategic objectives, which accounted for 20% of the bonus opportunity for Peter France and Jonathan Davis, were set at the start of the year.
Detailed targets were set relating to their area of responsibility and delivery of the business strategy. Performance against the objectives was
monitored and assessed by the Chairman, with input from the other non-executive directors and, where appropriate, the Chief Executive. Details of
the objectives and performance against them are summarised in the table below:
Peter France
Jonathan Davis
* % of maximum bonus
Objectives related to risk management, integration and delivery against Bifold acquisition targets,
succession planning, the development of comprehensive scenario planning analysis and new
product development.
Objectives related to internal audit and risk management, inventory management, development of
the finance team and specific implementation and performance targets relating to the rollout of
AX (new enterprise management system).
% payable*
at maximum
% bonus
awarded*
20%
13.5%
20%
11.4%
86
Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
For Bob Arnold, 20% was based on specific objectives relating to levels of confirmed orders and inventory management:
Bob Arnold
Targets set relating to levels of confirmed orders and inventory management**
* % of maximum bonus.
** Targets aligned with those set for other members of the Rotork Management Board.
Overall performance resulted in the following bonus payments:
• Bob Arnold – £86,000 (40.7% of salary) based on pro-rata payment following his retirement on 31 August 2016.
• Peter France – £247,000 (56.8% of salary).
• Jonathan Davis – £128,000 (43.4% of salary).
% payable* at
maximum
20%
% bonus
awarded*
8.8%
The maximum bonus opportunity was 125% of salary for Peter France and 100% of salary for the other directors (pro-rated in the case of
Bob Arnold). Bonuses were paid solely in cash.
LTIP
The Company’s LTIP rewards the creation of shareholder value which is a strategic priority. Performance is measured over a three year period using
a combination of EPS and TSR compared to a comparator group. The performance measures and weightings are summarised in the table below
along with the awards granted and vesting under this plan to the executive directors.
Bob Arnold(v)
Jonathan Davis
Peter France
Note
Year of grant
(i)
(ii)
(iii)
(iv)
(i)
(ii)
(iii)
(iv)
(i)
(ii)
(iii)
(iv)
2013
2014
2015
2016
2013
2014
2015
2016
2013
2014
2015
2016
Awards at
1 January
2016
83,620
83,080
100,840
–
Awards
granted
during
the year
–
–
–
169,612
267,540
169,612
92,920
103,560
117,120
–
–
–
–
226,122
313,600
226,122
141,820
153,440
215,500
–
–
–
–
399,416
510,760
399,416
Awards
vesting
during
the year
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Awards
lapsed
during
the year
(83,620)
–
–
–
Awards at
31 December
2016
Vesting date
– 3 March 2016
83,080 7 March 2017
100,840 6 March 2018
169,612 6 March 2019
(83,620)
353,532
(92,920)
–
–
–
– 3 March 2016
103,560 7 March 2017
117,120 6 March 2018
226,122 6 March 2019
(92,920)
446,802
(141,820)
–
–
–
– 3 March 2016
153,440 7 March 2017
215,500 6 March 2018
399,416 6 March 2019
(141,820)
768,356
(i) The 2013 awards were based on TSR and EPS performance to 31 December 2015 (each condition accounting for 50% of the award). TSR was measured relative to the FTSE 250
index (excluding all financial services, insurance companies and investment trusts). For the EPS condition, EPS growth must be at least RPI +10% for 15% vesting, increasing on
a straight-line basis to full vesting for EPS growth of RPI +25% and above. Rotork’s actual TSR performance was -20% and Rotork’s EPS performance was -16.4% resulting in
the minimum performance criteria not being met. Therefore the awards lapsed on 3 March 2016.
(ii) The performance conditions for the 2014 awards are based on performance to 31 December 2016. The targets are the same as for the 2013 awards. Rotork’s actual TSR
performance was negative at -15% over the performance period and the EPS performance was -33% resulting in the minimum performance criteria not being achieved. The
awards will lapse on 7 March 2017.
(iii) The 2015 awards were granted on 6 March 2015 and are subject to the same performance targets as the 2013 and 2014 awards (albeit based on performance to
31 December 2017).
(iv) The 2016 awards were granted on 12 April 2016 and are subject to the same performance measures as at the 2013, 2014 and 2015 awards (albeit based on performance to
31 December 2018 and the EPS growth range is 9% to 35%).
(v) Bob Arnold retired from the Board on 31 August 2016. He had been treated as a good leaver in respect of his outstanding LTIP awards (see page 88). The awards will continue
to vest subject to performance and a time pro-rata reduction.
Rotork Annual Report 2016
87
DIRECTORS’ REMUNERATION REPORT continued
LTIP awards made during the year (audited)
Bob Arnold(ii)
Jonathan Davis
Peter France
Share awards
made during
2016
169,612
226,122
399,416
Basis on which
award made
Face value of
award (£)
Number of
shares vesting
for minimum
performance(i)
Number of
shares vesting
for maximum
performance
100% of salary
125% of salary
150% of salary
277,000
369,000
651,000
55,000
74,000
130,000
169,912
226,122
399,416
End of
performance period
31 December 2018
31 December 2018
31 December 2018
(i) Vesting if the minimum performance EPS and TSR conditions are achieved (20% of the maximum award). The share price used to determine the number of shares under the
award was £1.63 being the share price immediately prior to the date of the award.
(ii) Bob Arnold retired from the Board on 31 August 2016. His award will vest subject to performance and a time pro-rata reduction to reflect the proportion of the performance
period served.
Free SIP and OPLSS share awards (audited)
In common with all eligible employees, UK based executive directors receive an entitlement to ordinary shares under the SIP which is approved by
Her Majesty‘s Revenue and Customs (HMRC). Under the SIP and the OPLSS, an aggregate total of up to 5% of profits are distributed to employees
each year in the form of ordinary shares. The distribution is calculated by reference to years of service and basic salary. Details of free share awards
under the SIP and OPLSS made to executive directors in 2016 are set out below. Free shares awarded to the two UK executive directors under the
SIP are subject to the HMRC upper limit of £3,600 by value. This limit also applies to the OPLSS for the year under review.
Bob Arnold(i)
Jonathan Davis
Peter France
Date of Grant
06 April 2016
06 April 2016
06 April 2016
Free share
awards made
during the year
2014
2014
2014
Basis on which award made
Non-performance based
Non-performance based
Non-performance based
Face value
of award
£3,600
£3,600
£3,600
(i) Bob Arnold, in common with other eligible overseas employees, participates in the OPLSS. The scheme trustee is based in Jersey, Channel Islands. The figure shown for
Bob Arnold relates solely to OPLSS.
Partnership SIP share awards (audited)
In line with all eligible UK based employees, UK based directors are entitled to purchase monthly partnership shares under the SIP to a maximum of
£150 per month. Interests in partnership shares as at 31 December 2016 are shown in the table below:
Jonathan Davis
Peter France
Partnership
share interest
as at
31 December
2016
9,239
4,385
Sharesave options granted to executive directors (audited)
In common with all eligible UK employees, UK based executive directors are entitled to participate in the HMRC approved Rotork sharesave scheme.
Under the sharesave scheme, employees are permitted to save up to £500 per month for a term of three or five years, after which the employee is
allowed to exercise the share option. The option price is determined in accordance with the HMRC approved sharesave scheme rules and is
calculated by taking an average of the share price over the five days preceding the invitation date.
The option exercise period is six months duration after which the options lapse.
Jonathan Davis
Peter France
Shares under
option
12,162
20,270
Basis on which award made
Option price
Duration
Date of grant
Date of vesting
Non-performance based
Non-performance based
£1.48
£1.48
3 years
5 years
13 October 2015
13 October 2015
1 December 2018
1 December 2020
88
Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
Statement of directors’ shareholding and share interests (audited)
The table below shows total shareholdings of the directors as at 31 December 2016.
Bob Arnold(iii)
Jonathan Davis
Peter France
Lucinda Bell
Gary Bullard
Sally James
Martin Lamb
John Nicholas
Interests in
shares
2016(i)
Outstanding
LTIP awards
2016
Outstanding
options
2016
416,542
206,913
625,149
7,150
45,870
10,500
70,000
5,000
353,532
446,802
768,356
–
–
–
–
–
–
12,162
20,270
–
–
–
–
–
%
Shareholding
of salary
achieved(ii)
2016
–
169%
347%
N/A
N/A
N/A
N/A
N/A
Includes shares held by connected persons.
(i)
(ii) The share price used to determine the percentage of the shareholding of salary achieved is 241.20p being the share price as at 31 December 2016.
(iii) Bob Arnold retired as a director of the Company on 31 August 2016.
In 2016, all executive directors were required to maintain a shareholding of at least 150% of basic salary.
There has been no change in the directors’ interests in the ordinary share capital of the Company between 31 December 2016 and 27 February 2017,
except for purchases of monthly partnership shares under the Partnership SIP share scheme.
Total pension entitlements (audited)
Total accrued
pension
in the defined
benefit
scheme as at
31 December
2016 (£ per
annum)
Normal
retirement age
65
65
60
175,007
34,533
70,699
Value of pension related benefits (£) during Company financial year to:
31 December 2015
31 December 2016
Defined
benefit
scheme
412,800
61,960
82,880
Cash in
lieu of
pension
–
26,339
63,945
Total
412,800
88,299
146,825
Defined
benefit
scheme
481,460
66,140
90,280
Cash in
lieu of
pension
–
26,216
64,103
Total
481,800
92,356
154,383
Director
Bob Arnold
Jonathan Davis
Peter France
Notes:
1 The amounts above have been calculated in accordance with Statutory Instrument 2013 No 1981 – The Large and Medium-sized Companies and Groups (Account and Reports)
(Amendment) Regulations 2013.
2 The total accrued pension in the defined benefit scheme as at 31 December 2016 is that which would be paid annually on retirement from normal pension age, based on
service to 31 December 2016, except for Bob Arnold who retired on 31 August 2016.
3 The value of benefits in the defined benefit pension scheme is based on the increase in accrued pension over the year incorporating an increase for Consumer Prices Index (CPI)
inflation.
4 The pensionable salary used to calculate benefits in the defined benefit scheme for Peter France and Jonathan Davis is restricted to a scheme-specific earnings cap which was
£149,400 for 2016. In lieu of this limitation on their benefits under the scheme, they receive a monthly cash sum equal to 22.5% and 18% respectively of their basic salary
above the scheme-specific earnings cap. During 2016, this resulted in additional cash allowances of £64,103 and £26,216 respectively.
5 The figures shown for Bob Arnold are in respect of his membership of the Rotork Controls Inc. pension plan and a supplemental executive retirement plan. The valuations of
the benefits are affected by movements in the US dollar relative to sterling (which is the main cause of the large increase in value over 2016) and are therefore not directly
comparable with the executive directors in the UK scheme. The exchange rate used is that applicable at 1 September 2016. With no currency movements the value of pension
benefits accrued over 2016 would be £133,080.
6 The accrued pension figures for Peter France include a fixed transfer-in pension amount of £5,123 which is payable from his normal retirement date at age 60.
Rotork Annual Report 2016
89
DIRECTORS’ REMUNERATION REPORT continued
TSR performance graph
Rotork plc Total Return Index vs the Total Return Index of the FTSE Industrial Engineering Sector for the eight financial years ending 31 December
2016 (rebased at 100 as at 1 January 2009).
700
600
500
400
300
200
100
Rotork plc
FTSE Industrial
Engineering Sector
Jan 09
Dec 09
Dec 10
Dec 11
Dec 12
Dec 13
Dec 14
Dec 15
Dec 16
Historic Chief Executive remuneration table
Year
2016
2015
2014
2013
2012
2011
2010
2009
Chief Executive
single figure
remuneration
(£000s)
Annual cash
bonus as a
percentage of
maximum
opportunity
LTIP vesting rate
as a percentage
of maximum
opportunity
835
696
1,092
1,452
1,539
1,182
1,288
1,062
45.5%
23.4%
66.0%
94.4%
91.3%
88.9%
91.9%
99.5%
0%
0%
37.0%
67.0%
75.5%
30.0%
94.4%
100.0%
Chief Executive
Peter France
Peter France
Peter France
Peter France
Peter France
Peter France
Peter France
Peter France
Percentage change in remuneration of director undertaking the role of Chief Executive
This shows the percentage change in remuneration (salary, benefits and bonus) between 2015 and 2016 of the Chief Executive, Peter France,
compared to percentage change for UK employees, being the group against which salary increases are compared, calculated on a per head basis.
The remuneration breakdown varies from country to country, so the best comparison is obtained by looking at total remuneration. Total
remuneration per employee has increased year-on-year by 18.9%. However, this comparison is distorted by currency movements as the average
salary increase between 2015 and 2016 for overseas employees was 3.2%.
Peter France
Chief Executive
Average per
UK employee
2016
% change
from 2015
1.0%
0.0%
144.6%
2016
% change
from 2015
1.0%
(6.8%)
3.5%
Base salary
Benefits
Bonus
90
Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
Relative importance of spend on pay
The following table shows actual expenditure of the Company and change in spend between current and prior financial periods on remuneration
paid to all employees against distributions to shareholders. The employee remuneration increase is 31% if the impact of currency and acquisitions
is removed.
Employee remuneration (£000s)
Dividends (£000s)(i)
(i) Dividends paid were the only distributions to shareholders during the year.
2016
2015
136,557
43,876
114,806
43,765
Percentage
change
18.9%
0.3%
Remuneration arrangements for former directors
Bob Arnold retired from the Company on 31 August 2016. He did not receive any compensation for loss of office. He received a pro-rated annual
cash bonus for 2016 as set out in the single total figure of remuneration table. The Remuneration Committee has exercised its discretion in relation
to his outstanding LTIP awards for them not to lapse on his retirement in line with the relevant scheme rules applicable for each award. The
Remuneration Committee considered that the use of its discretion in this way was justified given Bob Arnold‘s length of service as an employee and
overall contribution to the Group. The awards remain eligible for vesting, on the normal vesting date, subject to performance and a time pro-rated
reduction to reflect the proportion of the performance period served.
Graham Ogden retired from the Board on 31 March 2015. As disclosed in last year‘s report, he had been treated as a good leaver in respect of his
outstanding 2013 and 2014 LTIP awards. For the 2013 LTIP award, performance was measured to the date of cessation of employment and vested
in 2015 (as disclosed in last year's report). His 2014 award will lapse in March 2017.
Rotork Annual Report 2016
91
DIRECTORS’ REMUNERATION REPORT continued
Statement of implementation of the policy report in 2017
Salary
As noted in the Chair‘s letter, the salaries for the executive directors have been reviewed during the year and will be re-based
as follows:
• Peter France – £525,000 (£445,000 to be taken in cash and £80,000 (net of tax) to be invested in Rotork shares and held
for two years); and
• Jonathan Davis – £335,000 (£302,500 to be taken in cash and £32,500 (net of tax) to be invested in Rotork shares and
held for two years).
Benefits
No change to 2016 – benefits will comprise car and fuel (or car and fuel allowance), personal accident and private medical
insurance and life assurance.
Pension
Cash allowance in lieu of pension set at 25% of salary for Peter France and 20% of salary for Jonathan Davis.
Annual bonus
Maximum award levels of 125% of salary for Peter France and 100% of salary for Jonathan Davis (unchanged from 2016). For the
2017 bonus onwards, any bonus above target performance (60% of maximum) will be deferred in shares for three years.
Bonuses will be based on annual profit (60%), cash generation (15%), lost time incident rate (5%) and personal strategic
objectives (20%). The specific targets relating to the bonus have not been disclosed as they are considered by the Remuneration
Committee to be commercially sensitive but full details will be given on a retrospective basis in next year‘s report.
LTIP
The LTIP award levels for 2017 will be 150% of salary for the Chief Executive, 125% of salary for the Finance Director
(unchanged from 2016). The awards will be subject to the following performance conditions:
• 33% will be based on relative TSR performance with 25% vesting at median increasing to full vesting for upper quartile
performance or above;
• 33% will be based on EPS. EPS growth must be at least 9% for 15% vesting, increasing on a straight-line basis to full
vesting for EPS growth of 35% and above. The comparator group for the 2017 awards will be the constituents of the
FTSE 350 Industrial Goods and Services Sector. Awards in 2016 are based on the constituents of the FTSE 250 Index
(excluding financial companies). The comparator group for the 2017 awards has been changed to more closely reflect the
nature and business cycle of Rotork, providing a better benchmark to assess relative performance; and
• 33% will be based on a capital return measure (economic profit). This new measure will reward management for growing
profits whilst retaining a disciplined approach to the management of the balance sheet. Economic profit is the extent to
which a post-tax return in excess of the weighted average cost of capital (WACC) is created. This will reward management
for increasing levels of economic profit, on a cumulative basis, over the three year performance period. Under this
measure, no pay-out will be received for a negative economic profit and challenging targets have been set for the 2017
award. The threshold target will require the average economic profit over the three year period to exceed that generated
in 2016 and the maximum target has been set such that it will require double digit growth in post-tax profits alongside
improved balance sheet efficiencies. Details of the exact targets are considered by the Committee to be commercially
sensitive at the current time. However, full details of the targets and how economic profit has been calculated will be
disclosed on vesting.
For the 2017 awards onwards, the executive directors will be required to retain any shares vesting under the awards
(net of tax) until the fifth anniversary of grant.
The executive directors will be required to build and maintain a shareholding equivalent to 400% of salary for Peter France
and 250% of salary for Jonathan Davis (increased from 150% of salary in 2016).
A change was made to the fee policy on 27 February 2017. The fee policy is:
• Chairman: £180,000;
• Base Board fee: £47,000;
• Additional fee for chairing the Audit Committee £10,000;
• Additional fee for chairing the Remuneration Committee £8,000; and
• Additional fee for the role of Senior Independent Director £10,000 (increased from £8,000).
Shareholding
guidelines
Non-executive
director fees
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Strategic Report
Directors
Governance
Financial Statements
Company Information
Consideration by the directors of matters relating to directors’ remuneration
The members of the Remuneration Committee as at 31 December 2016 were Gary Bullard (Chair), Lucinda Bell, Sally James and John Nicholas.
John Nicholas ceased to be a member on his retirement from the Board in February 2017. The Remuneration Committee invites the Group Human
Resources Director to inform the Remuneration Committee of pay awards throughout the Group when setting executive director remuneration.
The Chairman and Chief Executive are also invited to attend meetings except when their own remuneration is considered. The Company Secretary
acts as secretary to the Remuneration Committee.
New Bridge Street is remuneration adviser to the Remuneration Committee and was appointed by the Remuneration Committee in September 2013
following a re-tendering process. New Bridge Street is a trading name of Aon plc and a signatory to the Remuneration Consultants’ Group Code of
Conduct. A subsidiary of Aon plc is also the scheme actuary for the Group’s USA pension plan. The Remuneration Committee is satisfied that New
Bridge Street is sufficiently independent to act as remuneration adviser to the Remuneration Committee.
In 2016, the Company paid £60,731 (2015: £54,926) to New Bridge Street for services to the Remuneration Committee. Figures exclude VAT
and disbursements.
Statement of voting at general meeting
At the 2016 AGM of the Company, the percentages of votes cast ‘for‘, ‘against’ and ‘withheld’ in respect of the Annual Report on Remuneration
were as follows:
Resolution
To approve the Annual Report on Remuneration
Votes cast
‘for‘
Votes cast
‘against‘
Votes
‘withheld‘
98.52%
1.43%
0%
‘Against’ votes cast at the AGM were a very small proportion of the overall votes and accordingly the directors did not deem it necessary to take
any remedial action regarding these votes.
Rotork Annual Report 2016
93
REPORT
OF THE
DIRECTORS
The directors submit their report which incorporates the management
report required under the Disclosure Guidance and Transparency Rules
for listed companies and the audited accounts for the year ended
31 December 2016 as set out on pages 104 to 148. In compiling
this report, the directors have consulted with the management
of the Group.
Dividend
The directors recommend a final dividend of 3.15p per ordinary share
(2015: 3.1p) for the year, payable on 15 May 2017 to shareholders on
the register on 7 April 2017. An interim dividend for 2016 of 1.95p per
ordinary share (2015: 1.95p) was paid on 23 September 2016.
Directors
The names of the directors in office during the year still in office at the
year end and their biographies and other details are set out on pages 60
to 61. Bob Arnold and John Nicholas were directors during the year and
resigned from the Board on 31 August 2016 and 24 February 2017
respectively.
Directors’ indemnification and insurance
The Company‘s articles of association provide for the directors and
officers of the Company to be appropriately indemnified, subject to the
provisions of the Companies Act 2006. The Company purchases and
maintains insurance for the directors and officers of the Company in
performing their duties, as permitted by section 233 Companies
Act 2006.
Powers of the directors
As set out in the Company‘s articles of association, the business of the
Company is managed by the Board who may exercise all the powers of
the Company.
Appointment and removal of directors
The Board may appoint a director, either to fill a vacancy or as an
additional director. Any director appointed by the Board must retire at
the next AGM of the Company and put themselves forward for
re-appointment by the shareholders. In accordance with the
recommendations of the Code, each member of the Board submits
themself for re-election on an annual basis.
In addition to any power of removal conferred by the Companies Act
2006, the Company may by ordinary resolution remove any director
before the expiration of their period of office and may, subject to the
articles of association, by ordinary resolution appoint another person
who is willing to act as a director in their place.
Political donations
No political donations were made during the year. The Group has a
policy of not making political donations in any part of the world.
Information required in the Report of the Directors’ set
out in the Strategic Report
Information relating to likely future developments of the Company and
its subsidiaries and information relating to research and development
activities of the Company and its subsidiaries is set out in the Strategic
Report on pages 2 to 59.
Use of financial instruments
An explanation of the Group policies on the use of financial instruments
and financial risk management objectives are contained in note 26 to
the accounts.
Post-balance sheet events
There have been no important post-balance sheet events.
Existence of branches outside the UK
The Company has no branches outside of the UK.
Share capital
Details of the Company‘s share capital including the rights and
obligations attached to each class of shares and the ordinary shares
issued during 2016 are summarised in note 17 of the financial
statements. 0.5p ordinary shares represent over 99.9% of the
Company‘s total share capital and £1 9.5% cumulative preference shares
represent less than 0.1% of the Company‘s total share capital.
There are no securities of the Company carrying special rights with
regard to the control of the Company.
At the Company‘s last AGM held on 29 April 2016, the shareholders
authorised the Company to make market purchases of ordinary shares
limited to just under approximately 10% of its issued ordinary share
capital at that time and of certain issued preference shares, and to allot
shares within certain limits approved by shareholders. These authorities
expire at the 2017 AGM and appropriate renewals will be sought.
The Company did not acquire any of its own shares in 2016.
94
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Strategic Report
Directors
Governance
Financial Statements
Company Information
The Company‘s articles of association contain customary restrictions on
the transfer of shares as applicable only in certain limited circumstances
(e.g. in relation to transfers to a minor). Save for those provisions, there
are no restrictions on the transfer of ordinary shares in the capital of the
Company other than certain restrictions which may be required from
time to time by law, for example, insider trading law. In accordance with
the Company‘s share dealing code, directors and certain employees are
required to seek the prior approval of the Company to deal in its shares.
The Company is not aware of any agreements between shareholders
that may result in restrictions on the transfer of securities and/or voting
rights. The Company‘s articles of association contain limited restrictions
on the exercise of voting rights (e.g. in relation to disenfranchised shares
following the issue of a notice to shareholders under section 793
Companies Act 2006).
The Company‘s share schemes each contain provisions providing voting
rights to the scheme trustee.
Amendments to the Company‘s articles of association
The Company‘s articles of association may only be amended by special
resolution at a general meeting of the shareholders.
Significant agreements – change of control
The Company is not aware of any significant agreements to which it is party
that take effect, alter or terminate upon a change of control of the Company
following a takeover. There are no agreements between the Company and
its directors or employees that provide for compensation for loss of office
or employment that occurs because of a takeover bid.
Greenhouse gas emissions
The disclosures concerning greenhouse gas emissions required by law
are set out in the corporate social responsibility report on page 56.
Disabled persons and employee involvement
The disclosures concerning the Group‘s policies on the employment of
disabled persons and employee involvement are set out in the corporate
social responsibility report on page 50.
Substantial shareholders
As at 31 December 2016, the following notifiable interests in issued
share capital had been received by the Company under the Disclosure
Guidance and Transparency Rules (DTR 5) of the UK Listing Authority.
It should be noted that these holdings are likely to have changed since
notified to the Company. However, notification of any change is not
required until an applicable threshold is crossed.
Identity
Aberdeen Asset Managers Limited
AXA Investment Managers S.A.
APG Asset Management NV
Blackrock Inc
Fiera Capital Corporation
Mondrian Investment Partners Limited
T. Rowe Price Associates, Inc.
Size of
holding
Nature of
holding
4.99%
4.99%
5.01%
4.86%
4.23%
4.91%
5.30%(i)
Indirect
Indirect
Direct
Indirect
Indirect
Indirect
Indirect
(i) The Company was informed on 23 February 2017 that T. Rowe Price Associates, Inc.
had decreased the size of its holding to 4.97% of the voting capital. No other
changes to the above have been disclosed to the Company in accordance with DTR
5 between the end of the financial year and 27 February 2017.
Corporate governance
The Company‘s Corporate Governance Report can be found on pages
62 to 69.
Disclosure of information to auditors
The directors who held office at the date of approval of this Report of
the Directors confirm that, so far as they are each aware, there is no
relevant audit information of which the Company‘s auditors are
unaware; and each director has taken all the steps that they ought to
have taken as a director to make themselves aware of any relevant audit
information and to establish that the Company‘s auditor is aware of
that information.
‘Going concern’ basis of preparation
After making enquiries, the directors have a reasonable expectation that
the Group has adequate resources to continue in operational existence
for the foreseeable future. For this reason, they continue to adopt the
going concern basis in preparing the financial statements. In forming
this view, the directors have considered trading and cash flow forecasts,
financial commitments, the significant order book with customers
spread across different geographic areas and industries and the
significant net cash position.
Rotork Annual Report 2016
95
Directors’ statement pursuant to the Disclosure Guidance and
Transparency Rules
Each of the directors, whose names and functions are listed on pages 60
to 61 confirm that, to the best of each person‘s knowledge and belief:
• The financial statements, prepared in accordance with the applicable
set of accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit of the Group and Company;
• The Report of the Directors includes a fair review of the development
and performance of the business and the position of the Group and
Company, together with a description of the principal risks and
uncertainties that they face; and
• Having taken advice from the Audit Committee, the Annual Report
and financial statements, taken as a whole, are fair, balanced and
understandable and provide the information necessary for
shareholders to assess the Company‘s performance, business model
and strategies.
The directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company‘s website.
Legislation in the UK governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
External auditor
Upon the recommendation of the Audit Committee and approval of the
Board, a resolution to appoint Deloitte LLP as auditor, and to authorise
the directors to determine their remuneration are to be proposed at the
forthcoming AGM.
On behalf of the Board
Stephen Rhys Jones
Company Secretary
27 February 2017
REPORT OF THE DIRECTORS continued
Statement of directors’ responsibility for preparing the
Annual Report and financial statements
Directors’ responsibilities
The directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare such financial statements
for each financial year. Under that law the directors are required to
prepare the Group financial statements in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the European Union
and Article 4 of the IAS Regulation and have also chosen to prepare the
parent company financial statements under IFRSs as adopted by the
European Union. Under company law, the directors must not approve
the financial statements unless they are satisfied that they give a true
and fair view of the state of affairs of the Company and of the profit or
loss of the Company for that period. In preparing these financial
statements, IAS 1 requires that directors:
• Properly select and apply accounting policies;
• Present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable
information;
• Provide additional disclosures when compliance with the specific
requirements in IFRSs are insufficient to enable users to understand
the impact of particular transactions, other events and conditions on
the entity‘s financial position and financial performance; and
• Make an assessment of the Company‘s ability to continue as a
going concern.
The directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the Company‘s transactions and
disclose with reasonable accuracy at any time the financial position of
the Company and enable them to ensure that the financial statements
comply with the Companies Act 2006. They are also responsible for
safeguarding the assets of the Company and hence for taking
reasonable steps for the prevention and detection of fraud and
other irregularities.
The directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company‘s website.
Legislation in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation in
other jurisdictions.
Directors’ responsibility statement
We confirm that to the best of our knowledge:
• The financial statements, prepared in accordance with IFRSs as
adopted by the EU, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company and the
undertakings included in the consolidation taken as a whole;
• The Strategic Report includes a fair review of the development and
performance of the business and the position of the Company and
the undertakings included in the consolidation taken as a whole,
together with a description of the principal risks and uncertainties
that they face; and
• The Annual Report and financial statements, taken as a whole,
are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company‘s performance,
business model and strategy.
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Financial Statements
Company Information
INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF ROTORK PLC
Opinion on financial statements of Rotork plc
In our opinion:
• The financial statements give a true and fair view of the state of the Group's and of the parent company's affairs as at 31 December 2016
and of the Group's profit for the year then ended;
• The Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs)
as adopted by the European Union;
• The Parent Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted
Accounting Practice, including FRS 101 'Reduced Disclosure Framework'; and
• The financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the
Group financial statements, Article 4 of the IAS Regulation.
The financial statements that we have audited comprise:
• The Group Income Statement;
• The Group Statement of Comprehensive Income;
• The Group and Parent Company Balance Sheets;
• The Group Cash Flow Statement;
• The Group and Parent Company Statements of Changes in Equity;
• The Statement of Accounting Policies; and
• The related notes 1 to 30 and a) to i).
The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and IFRSs as
adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial
statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice),
including FRS 101 'Reduced Disclosure Framework'.
Summary of our audit approach
Key risks
Materiality
Scoping
The key risks that we identified for reporting in the current year were:
• Discount factors and growth rates utilised in management's assessment of impairment of goodwill,
specifically in relation to the Bifold cash-generating unit (CGU);
• Manual adjustments to inventory provisions and profit in inventory adjustment; and
• Inflation and discount rate assumptions used in the valuation of the defined benefit pension
scheme liabilities.
No new key risk areas have been identified in the current year.
The materiality that we used in the current year was £4.6m (2015: £5.3m) which was determined based
on 5% of profit before tax.
Our Group audit was scoped by obtaining an understanding of the Group and its environment, including
Group-wide controls, and assessing the risks of material misstatement at a Group level. Based on that
assessment, we identified 26 components which, in our view, required a full scope audit of their financial
information in order to ensure that sufficient appropriate audit evidence was obtained, with Europe,
North America and China being the largest regions. 24 were subject to full scope audit and audit
procedures were performed on key balances at the other two locations.
Significant changes
in our approach
Last year our report included a risk in respect of the accounting for acquired intangibles on acquisition,
which is not included in our report this year, given the reduction in acquisition activity. In the current
year the risk of impairment of goodwill is specific to the Bifold entity.
Rotork Annual Report 2016
97
INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF ROTORK PLC continued
Going concern and the directors' assessment of the principal risks that would threaten the solvency or liquidity of
the Group
We confirm that we have nothing material to add or draw
attention to in respect of these matters.
We agreed with the directors' adoption of the going
concern basis of accounting and we did not identify any
such material uncertainties. However, because not all
future events or conditions can be predicted, this statement
is not a guarantee as to the Group's ability to continue as a
going concern.
As required by the Listing Rules we have reviewed the directors' statement
regarding the appropriateness of the going concern basis of accounting
contained within note 1 to the financial statements and the directors'
statement on the longer-term viability of the Group contained within the
Strategic Report on page 35.
We are required to state whether we have anything material to add or draw
attention to in relation to:
• The directors' confirmation on page 35 that they have carried out a robust
assessment of the principal risks facing the Group, including those that
would threaten its business model, future performance, solvency or liquidity;
• The disclosures on pages 32 to 35 that describe those risks and explain how
they are being managed or mitigated;
• The directors' statement in note 1 to the financial statements about whether
they considered it appropriate to adopt the going concern basis of
accounting in preparing them and their identification of any material
uncertainties to the Group's ability to continue to do so over a period of at
least twelve months from the date of approval of the financial statements;
and
• The directors' explanation on page 35 as to how they have assessed the
prospects of the Group, over what period they have done so and why they
consider that period to be appropriate, and their statement as to whether
they have a reasonable expectation that the Group will be able to continue
in operation and meet its liabilities as they fall due over the period of their
assessment, including any related disclosures drawing attention to any
necessary qualifications or assumptions.
Independence
We are required to comply with the Financial Reporting Council's Ethical
Standards for Auditors and confirm that we are independent of the Group
and we have fulfilled our other ethical responsibilities in accordance with
those standards.
We confirm that we are independent of
the Group and we have fulfilled our other ethical
responsibilities in accordance with those standards.
We also confirm we have not provided any of the
prohibited non-audit services referred to
in those standards.
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Financial Statements
Company Information
Our assessment of risks of material misstatement
The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources
in the audit and directing the efforts of the engagement team.
Risk title
Risk description
Discount factors and growth rates utilised in management's assessment of impairment of
goodwill, specifically in relation to the Bifold CGU
Refer to pages 70 to 73 (Audit Committee Report), note 1 (Accounting policies), note 10 (Goodwill) and note 11
(Intangible assets).
The Group holds goodwill and acquired intangibles of £351.7m at 31 December 2016.
Management is required to assess the carrying value of goodwill and acquired intangibles, and perform an impairment
review under IAS 36 'Impairment of Assets' on an annual basis and whenever an indication of impairment exists.
The key audit risk identified in relation to the impairment review is focused on the discount factors and future growth
rate assumptions used to support the carrying value of goodwill in the Bifold CGU. As disclosed in note 10 the
goodwill associated with the Bifold CGU of £67.2m is material, the level of headroom has reduced from the prior year
and the model is sensitive to changes in both the discount rate and growth rates.
How the scope of our
audit responded to
the risk
• We challenged the reasonableness of forecast growth with reference to recent performance, trend analysis and
external market data and confirmed that the forecast for 2017 was consistent with the Board approved budget.
• We visited the Bifold operations and made enquiries of Bifold management in relation to the current performance of
the business and the growth assumptions in the forecasts.
• We obtained and reviewed a detailed Management impairment paper which had been considered and approved by
the Board.
• We performed a specific review and challenge, involving our own internal valuations specialists, of the discount
rate applied.
• We recalculated management's sensitivity analysis on key assumptions and replaced key assumptions with
alternative scenarios e.g. an increase to the discount and a reduction in future growth rates.
• We considered the adequacy of the Group's disclosures in respect of the sensitivity of the Bifold CGU to changes in
these key assumptions.
Key observations
We noted the significant short-term growth rates in respect of the Bifold CGU are a key source of estimation
uncertainty. From our work performed, we concluded that the assumptions adopted by management were reasonable
and no impairments were identified from the work performed.
Rotork Annual Report 2016
99
INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF ROTORK PLC continued
Risk title
Manual adjustments to inventory provision and profit in inventory adjustment
Risk description
Refer to pages 70 to 73 (Audit Committee Report), note 1 (Accounting policies) and note 14 (Inventories).
The Group had inventory of £85.8m as at 31 December 2016 (£87.2m as at 31 December 2015) held in numerous
global locations across several product lines.
We consider the risk in the valuation of inventory to be the manual override of inventory balances by management,
which specifically occurs in two areas:
• Obsolescence provisions: local management apply judgement when deciding on levels of provisioning, overriding
the automatic output from the Group's provisioning policy to reflect niche markets and industries where customer
demand fluctuates over periods;
• Profit in inventory adjustment: there is management judgement required to arrive at the adjustment, specifically
in relation to the average margin made on intercompany sales.
How the scope of our
audit responded to
the risk
Our component teams performed procedures to challenge local management to ensure the provisions were calculated
in line with the Group's inventory provisioning policy. Procedures included recalculating the provisions, testing and
verifying usage data and investigation of any manual override to the mechanical application of the provision, on a
sample basis.
We challenged management's assumptions in relation to the profit in stock consolidation adjustment and corroborated
the margin data utilised in this calculation to supporting evidence.
Key observations
We noted no material inconsistencies through our testing. We concur that the level of inventory provisions
is appropriate.
Risk title
Inflation and discount rate assumptions used in defined benefit pension liability valuation
Risk description
Refer to pages 70 to 73 (Audit Committee Report), note 1 (Accounting policies) and note 24 (Pension Schemes).
The Group has a net defined benefit pension liability of £58.5m (gross liabilities of £236.5m) at 31 December 2016
(31 December 2015: £23.3m net liability and £180.4m gross liabilities).
There is a risk relating to judgements made by management in valuing the defined benefit pension scheme liabilities
as small changes in the key model input assumptions such as the discount rate and inflation rate, can have a significant
impact on the valuation of the liability.
How the scope of our
audit responded to
the risk
We used our internal actuarial experts to assess the key assumptions for the schemes in both the UK and US. Our
assessment included reviewing available yield curves and inflation data to recalculate a reasonable range for the
key assumptions.
We challenged management to understand the sensitivity of changes in assumptions and quantify a range of
reasonable rates that could be used in their calculation. Additionally, we benchmarked key assumptions against other
listed companies to identify any outliers in the data used.
We also considered the adequacy of the Group's disclosures in respect of the sensitivity of the deficit to changes in
these key assumptions.
Key observations
From the work performed we are satisfied that the key assumptions applied in respect of the valuation of the defined
benefit pension scheme liabilities are within a reasonable range.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do
not provide a separate opinion on these matters.
100 Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
Our application of materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a
reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in
evaluating the results of our work.
Based on our professional judgement we determined materiality for the Group to be £4.6m (2015: £5.3m), which is 5% of pre-tax profit.
The decrease in materiality is a result of the reduction in profit before tax compared to the prior year.
PBT £91.1m
PBT
Group materiality
Group materiality £4.6m
Component materiality range £1.8m to £2.5m
Audit committee reporting threshold £0.2m
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £229,000 (2015: £106,000),
as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee
on disclosure matters that we identified when assessing the overall presentation of the financial statements.
An overview of the scope of our audit
Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the
risks of material misstatement at a Group level. Our approach was consistent with that adopted in the prior year. Based on that assessment,
we focused our Group audit scope primarily on the audit work at 26 components. 24 components were subject to a full scope audit and audit
procedures were performed on key account balances at the other two locations where the extent of our testing was based on our assessment
of the risks of material misstatement and of the materiality of the Group's operations at those locations.
Revenue
24%
Review at
Group
level
2%
Specified
audit
procedures
Profit before tax
13%
Review at
Group
level
2%
Specified
audit
procedures
74%
Full audit
scope
85%
Full audit
scope
Rotork Annual Report 2016
101
INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF ROTORK PLC continued
The 26 locations represent the principal business units within the Group's four reportable segments across 15 countries and account for 76% of the
Group's revenues (2015: 85%), 87% of profit before tax (2015: 95%). They were also selected to provide an appropriate basis for undertaking audit
work to address the risks of material misstatement identified above. Our audit work at these locations was executed at levels of materiality
applicable to each individual entity which were lower than Group materiality ranging from £1.8m to £2.5m.
Due to the significance to the Group audit of the 24 components' operations subject to full scope audits, a programme has been designed and
implemented for senior members of the Group audit team to visit the key components where the Group audit scope was focused at least once
every three years. As part of the 2016 audit, senior members of the Group audit team visited key components in the United Kingdom, United States
of America, Italy, Spain and India.
For each of the businesses included within the programme of planned visits, the Group audit team also discusses audit findings with the relevant
component audit team throughout the audit engagement and reviews relevant audit working papers. For the remaining locations where full audits
were completed, we discuss audit findings with the relevant component audit team, review audit working papers in relation to key issues and
discuss key matters with divisional management where considered necessary in forming our Group audit opinion. In relation to the locations which
were subject to an audit of key account balances, we discuss the results of these businesses and accounting matters arising through our
involvement in close meetings with management.
At the parent entity level, we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that there were
no significant risks of material misstatement of the aggregated financial information of the remaining 34 components not subject to audit or audit
of specified account balances. None of these components represented more than 2% of revenue or profit before taxation individually.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of the audit:
• The part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006;
• The information given in the Strategic Report and the Directors' Report for the financial year for which the financial statements are prepared is
consistent with the financial statements; and
• The Strategic Report and the Directors' Report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we have not identified
any material misstatements in the Strategic Report and the Directors' Report.
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• We have not received all the information and explanations we require for our audit; or
• Adequate accounting records have not been kept by the parent company, or returns adequate for our audit
have not been received from branches not visited by us; or
• The parent company financial statements are not in agreement with the accounting records and returns.
Directors' remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors'
remuneration have not been made or the part of the Directors' Remuneration Report to be audited is not in
agreement with the accounting records and returns.
Corporate Governance statement
Under the Listing Rules we are also required to review part of the Corporate Governance Statement relating to
the Company's compliance with certain provisions of the UK Corporate Governance Code.
We have nothing to
report in respect of these
matters.
We have nothing to
report arising from
these matters.
We have nothing to
report arising from
our review.
Our duty to read other information in the Annual Report
Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion,
information in the Annual Report is:
• Materially inconsistent with the information in the audited financial statements; or
• Apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group
We confirm that we have
not identified any such
inconsistencies or
misleading statements.
acquired in the course of performing our audit; or
• Otherwise misleading.
In particular, we are required to consider whether we have identified any inconsistencies between our knowledge
acquired during the audit and the directors' statement that they consider the Annual Report is fair, balanced and
understandable and whether the Annual Report appropriately discloses those matters that we communicated to
the audit committee which we consider should have been disclosed.
102 Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
Respective responsibilities of directors and auditor
As explained more fully in the Directors' Responsibilities Statement, the directors are responsible for the preparation of the financial statements and
for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance
with applicable law and International Standards on Auditing (UK and Ireland). We also comply with International Standard on Quality Control 1 (UK
and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our quality
controls and systems include our dedicated professional standards review team and independent partner reviews.
This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit
work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report
and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and
the Company's members as a body, for our audit work, for this report, or for the opinions we have formed.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the
financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting
policies are appropriate to the Group's and the parent company's circumstances and have been consistently applied and adequately disclosed; the
reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read
all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to
identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of
performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Nicola Mitchell FCA
(Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London, United Kingdom
27 February 2017
Rotork Annual Report 2016
103
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2016
Revenue
Cost of sales
Gross profit
Other income
Distribution costs
Administrative expenses
Other expenses
Operating profit before the amortisation of acquired intangible assets
Amortisation of acquired intangible assets
Operating profit
Finance income
Finance expense
Profit before tax
Income tax expense
Profit for the year
Basic earnings per share
Adjusted basic earnings per share
Diluted earnings per share
Adjusted diluted earnings per share
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2016
Profit for the year
Other comprehensive income
Items that may be subsequently reclassified to the income statement:
Foreign exchange translation differences
Effective portion of changes in fair value of cash flow hedges net of tax
Items that are not subsequently reclassified to the income statement:
Actuarial (loss)/gain in pension scheme net of tax
Income and expenses recognised directly in equity
Total comprehensive income for the year
Notes
2
4
5
2
7
7
8
9
18
18
18
18
2016
£000
590,078
(328,410)
261,668
629
(5,138)
(163,165)
(217)
120,588
(26,811)
2015
£000
546,459
(296,944)
249,515
427
(4,613)
(140,877)
(66)
125,272
(20,886)
93,777
104,386
1,744
(4,451)
91,070
(23,897)
1,740
(4,257)
101,869
(27,012)
67,173
74,857
7.7p
10.0p
7.7p
10.0p
8.6p
10.4p
8.6p
10.4p
2016
£000
2015
£000
67,173
74,857
36,854
(6,414)
30,440
(30,732)
(292)
(6,511)
(1,448)
(7,959)
8,049
90
66,881
74,947
104 Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
CONSOLIDATED BALANCE SHEET
At 31 December 2016
Non-current assets
Goodwill
Intangible assets
Property, plant and equipment
Deferred tax assets
Other receivables
Total non-current assets
Current assets
Inventories
Trade receivables
Current tax
Derivative financial instruments
Other receivables
Cash and cash equivalents
Total current assets
Total assets
Equity
Issued equity capital
Share premium
Reserves
Retained earnings
Total equity
Non-current liabilities
Interest bearing loans and borrowings
Employee benefits
Deferred tax liabilities
Derivative financial instruments
Provisions
Total non-current liabilities
Current liabilities
Interest bearing loans and borrowings
Trade payables
Employee benefits
Current tax
Derivative financial instruments
Other payables
Provisions
Total current liabilities
Total liabilities
Total equity and liabilities
Notes
2016
£000
2015
£000
10
11
12
13
15
14
15
15
23
15
16
17
19
20
13
23
21
19
22
20
22
23
22
21
251,407
109,019
83,766
25,259
146
222,086
118,555
72,008
13,698
2,234
469,597
428,581
85,772
131,891
4,349
–
22,341
61,423
87,210
118,801
4,458
25
13,225
48,968
305,776
272,687
775,373
701,268
4,350
10,482
26,451
392,803
4,349
10,018
(3,989)
397,424
434,086
407,802
51,303
62,593
24,848
2,483
11,947
153,174
65,108
39,652
14,256
13,352
8,143
41,999
5,603
69,756
26,320
28,973
431
11,990
137,470
50,352
36,724
11,118
14,276
3,601
34,612
5,313
188,113
155,996
341,287
293,466
775,373
701,268
These financial statements were approved by the Board of Directors on 27 February 2017 and were signed on its behalf by:
PI France and JM Davis, Directors.
Rotork Annual Report 2016
105
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2016
Balance at 31 December 2014
Profit for the year
Other comprehensive income
Foreign exchange translation differences
Effective portion of changes in fair value of
cash flow hedges
Actuarial gain on defined benefit
pension plans
Tax on other comprehensive income
Total other comprehensive income
Total comprehensive income
Transactions with owners, recorded
directly in equity
Equity settled share-based payments
transactions
Tax on equity settled share-based
payment transactions
Share options exercised by employees
Own ordinary shares acquired
Own ordinary shares awarded under
share schemes
Dividends
Issued
equity
capital
4,346
–
Share
premium
9,422
–
–
–
–
–
–
–
–
–
3
–
–
–
–
–
–
–
–
–
–
–
596
–
–
–
Translation
reserve
1,799
–
(6,511)
–
–
–
(6,511)
(6,511)
–
–
–
–
–
–
Capital
redemption
reserve
1,644
–
–
–
–
–
–
–
–
–
–
–
–
–
Hedging
reserve
527
–
–
(1,790)
–
342
(1,448)
(1,448)
Retained
earnings
359,057
74,857
–
–
9,704
(1,655)
8,049
Total
376,795
74,857
(6,511)
(1,790)
9,704
(1,313)
90
82,906
74,947
–
–
–
–
–
–
(1,447)
(1,447)
(799)
–
(2,785)
(799)
599
(2,785)
4,257
(43,765)
4,257
(43,765)
Balance at 31 December 2015
4,349
10,018
(4,712)
1,644
(921)
397,424
407,802
Profit for the year
Other comprehensive income
Foreign exchange translation differences
Effective portion of changes in fair value of
cash flow hedges
Actuarial loss on defined benefit
pension plans
Tax on other comprehensive income
Total other comprehensive income
Total comprehensive income
Transactions with owners, recorded
directly in equity
Equity settled share-based payments
transactions
Tax on equity settled share-based
payment transactions
Share options exercised by employees
Own ordinary shares acquired
Own ordinary shares awarded under
share schemes
Dividends
–
–
–
–
–
–
–
–
–
1
–
–
–
–
–
–
–
–
–
–
–
–
464
–
–
–
–
36,854
–
–
–
36,854
36,854
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(7,822)
–
1,408
(6,414)
(6,414)
67,173
67,173
–
–
(37,923)
7,191
(30,732)
36,441
36,854
(7,822)
(37,923)
8,599
(292)
66,881
–
–
–
–
–
–
1,557
1,557
74
–
(1,019)
74
465
(1,019)
2,202
(43,876)
2,202
(43,876)
Balance at 31 December 2016
4,350
10,482
32,142
1,644
(7,335)
392,803
434,086
Detailed explanations for equity capital, the translation reserve, capital redemption reserve and hedging reserve can be seen in note 17.
106 Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 31 December 2016
Notes
2016
£000
2016
£000
2015
£000
2015
£000
Cash flows from operating activities
Profit for the year
Adjustments for:
Amortisation of intangibles
Amortisation of development costs
Depreciation
Equity settled share-based payment expense
Profit on sale of property, plant and equipment
Finance income
Finance expense
Income tax expense
Decrease in inventories
Decrease in trade and other receivables
Increase/(decrease) in trade and other payables
Difference between pension charge and cash contribution
Decrease in provisions
Increase/(decrease) in employee benefits
Income taxes paid
Cash flows from operating activities
Investing activities
Purchase of property, plant and equipment
Development costs capitalised
Sale of property, plant and equipment
Acquisition of businesses, net of cash acquired
Contingent consideration paid
Settlement of hedging derivatives
Interest received
Cash flows from investing activities
Financing activities
Issue of ordinary share capital
Own ordinary shares acquired
Interest paid
(Decrease)/increase in bank loans
Repayment of finance lease liabilities
Dividends paid on ordinary shares
Cash flows from financing activities
Increase in cash and cash equivalents
Cash and cash equivalents at 1 January
Effect of exchange rate fluctuations on cash held
67,173
26,811
2,226
11,759
3,759
(254)
(1,744)
4,451
23,897
138,078
14,416
2,511
1,309
(5,297)
(496)
1,047
151,568
(32,876)
(14,692)
(2,957)
648
(16,109)
(257)
(25,867)
180
466
(1,019)
(2,649)
(3,619)
(253)
(43,876)
3
Cash and cash equivalents at 31 December
16
74,857
20,886
1,814
9,759
2,810
(280)
(1,740)
4,257
27,012
139,375
731
15,664
(6,931)
(5,051)
(56)
(4,226)
139,506
(35,716)
118,692
103,790
(11,762)
(3,063)
1,508
(133,857)
(4,536)
1,949
1,103
(59,054)
(148,658)
599
(2,785)
(1,759)
98,326
(100)
(43,765)
(50,950)
8,688
48,968
3,767
61,423
50,516
5,648
46,816
(3,496)
48,968
Rotork Annual Report 2016
107
NOTES TO THE GROUP FINANCIAL STATEMENTS
For the year ended 31 December 2016
Except where indicated, values in these notes are in £000.
Rotork plc is a company domiciled in England. The consolidated financial statements of the Company for the year ended 31 December 2016
comprise the Company and its subsidiaries (together referred to as the Group). The accounting policies contained below in note 1 and the
disclosures in notes 2 to 30 all relate to the Group financial statements. The Company balance sheet, accounting policies and applicable notes
can be found following note 30.
1. Accounting policies
The accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been
consistently applied to the years presented, unless otherwise stated.
Basis of preparation
The consolidated financial statements of Rotork plc have been prepared and approved by the directors in accordance with International Financial
Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU), IFRIC Interpretations and the Companies Act 2006 applicable
to companies reporting under IFRS.
The consolidated financial statements have been prepared under the historical cost convention subject to the items referred to in the derivative
financial instruments accounting policy below.
New accounting standards and interpretations
The following narrow scope amendments which were issued as part of the IFRS Annual improvement cycles have been applied from 1 January 2016:
• Amendments to IAS 1, 'Disclosure Initiative'
• Amendments to IFRS 10, IFRS 12 and IAS 28, 'Applying the Consolidation Exemption'
• Amendments to IFRS 11, 'Accounting for Acquisition Interests in Joint Operations'
• Amendments to IAS 16 and IAS 38, 'Clarification of Acceptable Methods of Depreciation and Amortisation'
• Amendments to IAS 27, 'Equity Method in Separate Financial Statements'
• Amendments to IFRS 5, 'Changes in Methods of Disposal'
• Amendments to IFRS 7, 'Servicing Contracts'
• Amendments to IAS 19, 'Regional Market Issue'
Application of these standards and amendments has not had any material impact on the disclosures or on the amounts recognised in the Group's
consolidated financial statements.
Recent accounting developments
IFRS 15, 'Revenue from contracts with customers' has been issued but is not yet effective and has not been adopted as application was not
mandatory for the year. The new standard requires the separation of performance obligations within contracts with customers and the contractual
value to be allocated to the performance obligations. Once a performance obligation is satisfied revenue should be recognised on that element of
the contract. The introduction of the standard is likely to have some impact on Rotork but this is unlikely to be material due to the relatively
straightforward contractual terms and conditions with customers. An exercise is in process to confirm the impact of this standard before it becomes
effective in January 2018.
IFRS 9, 'Financial Instruments' has been issued but is not yet effective and has not been adopted as application was not mandatory for the year.
The directors anticipate that the adoption of this standard will not have a material impact on the disclosures, net assets or results of the Group.
IFRS 16, 'Leases' has been issued but is not yet effective and has not been adopted as application was not mandatory for the year. The new standard will
eliminate the classification of leases as either operating or finance leases and result in operating leases being treated as finance leases. This will result in
previously recognised operating leases being treated as property, plant and equipment and a finance lease creditor. The introduction of the standard will
increase the value of property, plant and equipment and the finance lease liability on the balance sheet but it is unlikely to have a material impact on profit in
any year. An assessment will be carried out to understand the full impact of the standard before it becomes effective in January 2019.
Going concern
After carrying out a detailed review of the viability of the business, the directors have a reasonable expectation that the Group has adequate
resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in
preparing the financial statements. In forming this view, the directors have considered trading and cash flow forecasts, financial commitments,
the significant order book with customers spread across different geographic areas and industries and the net debt position.
Consolidation
The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries for the year to 31 December 2016.
The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date
control ceases. Intra-group balances and any unrealised gains or losses or income and expenses arising from intra-group transactions are eliminated
in preparing the consolidated financial statements.
108 Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
Foreign currencies
The individual financial statements of each Group company are presented in the currency of the primary economic environment in which it operates
(its functional currency). For the purposes of the consolidated financial statements, the results and financial position of each Group company is
expressed in sterling, which is the functional currency of the Company, and the presentational currency for the consolidated financial statements.
Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies at the balance sheet date are translated to sterling at the foreign exchange rate ruling at that date. Foreign
exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities that are measured in
terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and
liabilities denominated in foreign currencies that are stated at fair value are translated to sterling at foreign exchange rates at the dates the values
were determined.
Assets and liabilities of foreign subsidiaries, including goodwill and fair value adjustments arising on consolidation, are translated into sterling at
rates of exchange ruling at the balance sheet date. The revenues and expenses of foreign subsidiaries are translated to sterling at rates
approximating those ruling at the date of the transactions. Differences on exchange arising from the retranslation of the opening net investment
in subsidiaries, and from the translation of the results of those subsidiaries at average rate, are reported as an item of other comprehensive income
and accumulated in the translation reserve.
Any differences that have arisen since 1 January 2004, the date of transition to IFRS, are presented as a separate component of equity. Translation
differences that arose before the date of transition to IFRS in respect of all foreign entities are not presented as a separate component.
Revenue
Revenue comprises the fair value of the consideration received or receivable for the sale of goods or services. Revenue is shown net of value-added
tax, returns, rebates and discounts and after eliminating sales within the Group. The Group recognises revenue when the amount of revenue can
be reliably measured, it is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of the
Group's activities.
Revenue from the sale of actuators, gearboxes and flow control products is recognised in the income statement when the significant risks and
rewards of ownership have been transferred to the buyer in accordance with the contracted shipping terms.
Revenue from service work is recognised in the income statement in proportion to the stage of completion of the transaction at the balance sheet
date. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due, associated completion costs,
the possible return of goods or continuing management involvement with the goods.
Business combinations
Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred
to the Group.
For acquisitions on or after 1 January 2010, the Group measures goodwill at the acquisition date as:
• The fair value of the consideration transferred; plus
• The recognised amount of any non-controlling interests in the acquiree; plus
• The fair value of the existing equity interest in the acquiree; less
• The net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed.
When the excess is negative, a bargain purchase gain is recognised immediately in the income statement. The fair value of the assets and liabilities
assumed are provisional for a 12 month period. Costs related to the acquisition, other than those associated with the issue of debt or equity
securities, are expensed as incurred.
Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity,
it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration
are recognised in profit or loss.
Goodwill is stated at cost or deemed cost less any impairment losses. Goodwill is not amortised but is reviewed for impairment annually.
For the purposes of impairment testing, goodwill is allocated to each of the Group's cash-generating units expected to benefit from the synergies
of the combination. An impairment loss is recognised whenever the carrying value of an asset or its CGU exceeds its recoverable amount.
Impairment losses are recognised in the income statement.
Rotork Annual Report 2016
109
NOTES TO THE GROUP FINANCIAL STATEMENTS continued
For the year ended 31 December 2016
1. Accounting policies continued
Intangible assets
i) Research and development
Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised
in the income statement in the period in which it is incurred. Development costs incurred after the point at which the commercial and technical
feasibility of the product have been proven, and the decision to complete the development has been taken and resources made available, are
capitalised. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. Capitalised
development expenditure is stated at cost less accumulated amortisation and impairment losses. Development expenditure has an estimated useful
life of up to five years and is written off on a straight-line basis.
ii) Other intangible assets
Other intangible assets that are acquired by the Group as part of a business combination are stated at cost less accumulated amortisation and
impairment losses. The useful life of each of these assets is assessed based on discussions with the management of the acquired business and takes
account of the differing natures of each of the intangibles acquired. The assessed useful lives of intangibles acquired are as follows:
Brands and trademarks
Customer relationships
Product design patents
Order backlog
4 to 10 years
2 to 8 years
4 to 8 years
3 months to 1 year
Amortisation is charged on a straight-line basis over the estimated useful life of the assets.
Property, plant and equipment
Freehold land is not depreciated. Long leasehold buildings are amortised over 50 years or the expected useful life of the building where less than
50 years. Other assets are depreciated in equal annual instalments by reference to their estimated useful lives and residual values at the following
annual rates:
Freehold buildings
Short leasehold buildings
Plant and equipment
2% to 4%
period of lease
10% to 33%
Items of property, plant and equipment are stated at cost or deemed cost less accumulated depreciation.
Leases
Where fixed assets are financed by leasing agreements, which give rights approximating to ownership, the assets are treated as if they had been
purchased and the capital element of the leasing commitments are shown as obligations under finance leases. Assets acquired under finance leases are
initially recognised at the present value of the minimum lease payments. The rentals payable are apportioned between interest, which is charged to the
income statement, and liability, which reduces the outstanding obligation so as to give a constant rate of charge on the outstanding lease obligations.
Costs in respect of operating leases are charged on a straight-line basis over the term of the lease in arriving at the operating profit.
Interest-bearing loans and borrowings
Obligations for loans and borrowings are recognised when the Group becomes party to the related contracts and are measured initially at fair value
less directly attributable transaction costs. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised
cost. Amortised cost is calculated by taking into account any issue costs and any discount or premium on settlement. Borrowings are classified as
current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.
Taxation
Income tax on the profit for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent
that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable
income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of
previous years.
Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for:
goodwill, not deductible for tax purposes, and the initial recognition of assets or liabilities that affect neither accounting nor taxable profits. The
amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using
tax rates enacted or substantively enacted at the balance sheet date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be
utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
110
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Inventory and work in progress
Inventory and work in progress is valued at the lower of cost and net realisable value. In respect of work in progress and finished goods, cost
includes all production overheads and the attributable proportion of indirect overhead expenses which are required to bring inventories to their
present location and condition. The net realisable value in respect of old and slow-moving inventory is assessed by reference to historic usage
patterns and forecast future usage.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances and short-term (with an original maturity less than three months) deposits. Bank overdrafts that
are repayable on demand form part of cash and cash equivalents for the purpose of the consolidated statement of cash flows.
Equity
Equity comprises issued equity capital, share premium, reserves and retained earnings.
When issued equity capital is repurchased, the amount paid, including directly attributable costs, is recognised as a change in equity. Repurchased
shares are debited directly to equity and shown as a deduction from retained earnings.
Provisions
i) Warranties
A provision for warranties is recognised when the underlying products or services are sold. The provision is based on historical warranty cost data,
known issues and management expectations of future costs.
ii) Contingent consideration
The terms of an acquisition may provide that the value of the purchase consideration, which may be payable in cash at a future date, depends on
uncertain future events. The amounts recognised in the financial statements represent a fair value estimate at the balance sheet date of the
amounts expected to be paid.
Employee benefits
i) Pension plans
Where the Group operates a defined benefit pension scheme, contributions are made in accordance with the schedule of contributions agreed with
the Trustees. In respect of all actuarial gains and losses that arise in calculating the Group's obligation in respect of the plans, these are recognised
in equity. The retirement benefit obligation recognised in the consolidated balance sheet represents the deficit in the Group's defined benefit
pension schemes. Interest on pension scheme liabilities has been recognised within financing expenses.
The Group also operates defined contribution pension schemes. The costs for these schemes are recognised in the income statement as incurred.
ii) Share-based payment transactions
The Rotork UK Sharesave scheme, introduced in 2004, offers certain employees the opportunity to purchase shares in Rotork plc at a discounted
price compared with the market price at the time of grant. Details of the scheme are given in note 25. The fair value of the right/option is
recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period
between grant and maturity. The right/option reaches maturity when the employee becomes unconditionally entitled. The fair value of the grant is
measured using a Black-Scholes model, taking into account the terms and conditions upon which the rights were granted. The amount recognised
as an expense is adjusted to reflect the actual number of share options that vest except where forfeiture is due only to share prices not achieving
the threshold for vesting.
The Rotork long term incentive plan (LTIP) grants awards of shares to executive directors and senior managers. These awards may vest after a period
of three years dependent upon both market and non-market performance conditions being met. Details of the grants are given in note 25. The fair
value of the award is measured at grant date, using a Monte Carlo simulation model which takes into account the market-based performance
criteria, and spread over the vesting period. The fair value of the award is recognised as an employee expense with a corresponding increase in
equity for the share settled award. The amount recognised as an expense is adjusted to exclude options that do not vest as a result of non-market
performance conditions not being met.
The overseas profit linked share plan (OPLSS) and the share incentive plan (SIP) are discretionary profit linked share schemes based on the prior year
profit of the participating Rotork companies. The value of the award to each employee is based on salary and the length of service, the value of the
awards can be up to £3,600. Shares awarded under these schemes are issued by the trustee at the cost of purchase. The costs of providing these
plans are recognised in the consolidated income statement over the period to which the employee has earned the award.
iii) Long-term service leave
The Group's net obligation in respect of long-term service leave is the amount of future benefit that employees have earned in return for their
service in the current and prior periods.
iv) Other employee benefits
The Group offers a number of discretionary bonus schemes to employees around the world. The costs of these schemes are recognised in the
income statement as incurred.
Rotork Annual Report 2016
111
NOTES TO THE GROUP FINANCIAL STATEMENTS continued
For the year ended 31 December 2016
1. Accounting policies continued
Derivative financial instruments
The Group uses forward exchange contracts and swaps to hedge its exposure to foreign exchange risk arising from operational and financing
activities. These are the only derivative financial instruments used by the Group. In accordance with its Treasury Policy, the Group does not
hold or issue contracts for trading purposes. Forward exchange contracts that do not qualify for hedge accounting are accounted for as
trading instruments.
Forward exchange contracts are recognised initially at fair value. Where a forward exchange contract is designated as a hedge of the variability in
cash flows of a recognised liability, a firm commitment or a highly probable forecasted transaction, the effective part of any gain or loss on the
forward contract is recognised directly in equity. Any effective cumulative gain or loss is removed from equity and recognised in the income
statement at the same time as the hedged transaction. The ineffective part of any gain or loss is recognised in the income statement immediately.
When a hedging instrument or hedge relationship is terminated but the hedged transaction is still expected to occur, the cumulative gain or loss at
that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no
longer expected to take place, the cumulative unrealised gain or loss held in equity is recognised in the income statement immediately.
Dividends
Interim dividends are recorded in the financial statements when they are paid. Final dividends are recorded in the financial statements in the period
in which they are approved by the Company's shareholders.
Critical accounting estimates and judgements
Estimates and judgements are regularly evaluated and are based on historical experience and other factors, including expectations of future events
that are believed to be reasonable under the circumstances.
The Group makes estimates and assumptions concerning the future. The resulting estimates will, by definition, seldom equal the actual results.
The estimates and assumptions that have a risk of causing a material adjustment to the carrying amount of assets and liabilities in the next financial
year are listed below.
Impairment of intangible assets
Intangible assets (other than goodwill) are amortised over their useful lives which are based on management's estimates of the period over which
the assets will generate revenue. The useful lives are periodically reviewed to ensure they continue to be appropriate. Changes to the estimates
used can result in significant variations in the carrying value.
The Group assesses the impairment of intangible assets subject to amortisation whenever events or changes in circumstances indicate that the
carrying value might not be recoverable. Additionally, goodwill arising on acquisitions and indefinite lived assets are subject to impairment review.
The Group undertakes an impairment review annually or more frequently if events or changes in circumstances indicate that the carrying value may
not be recoverable.
Factors considered important that could trigger an impairment review of intangible assets include the following:
• Significant underperformance relative to historical or projected future operating results;
• Significant changes in the use of the acquired assets or the strategy for the overall business; or
• Significant negative industry or economic trends.
The key assumptions in the value in use calculations are the discount rate and growth rates. Explanations of the estimates, judgements and
sensitivities in respect of the current year impairment review are detailed in note 10.
Retirement benefits
The Group's financial statements include costs in relation to, and provisions for, retirement benefit obligations. The costs and the present value of
any defined benefit pension related assets and liabilities depend on such factors as life expectancy of the members, salary increases, inflation,
the returns that the plan assets will generate and the discount rate to calculate the present value of the liabilities. Retirement benefits are inherently
long-term and the calculation of any charge relating to retirement benefit obligations is dependent on the assumptions used, which reflects the
exercise of judgement. The assumptions adopted are based on prior experience, market conditions and the advice of qualified actuaries.
Sensitivities to changes in key assumptions affecting the pension schemes' liabilities are shown in note 24.
112 Rotork Annual Report 2016
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Directors
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Company Information
2. Operating segments
The Group has chosen to organise the management and financial structure by the grouping of related products. The four identifiable operating
segments where the financial and operating performance is reviewed monthly by the chief operating decision maker are as follows:
• Controls – the design, manufacture and sale of electric actuators;
• Fluid Systems – the design, manufacture and sale of pneumatic and hydraulic actuators;
• Gears – the design, manufacture and sale of gearboxes, adaption and ancillaries for the valve industry; and
• Instruments – the manufacture of high precision pneumatic controls and power transmission products for a wide range of industries.
Unallocated expenses comprise corporate expenses.
Transfer prices between business segments are set on an arm's length basis in a manner similar to transactions with third parties.
Geographic analysis
Rotork has a worldwide presence in all four operating 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 operating segment:
Revenue from external customers
Inter segment revenue
Total revenue
Adjusted operating profit*
Amortisation of acquired intangible assets
Operating profit
Net finance expense
Income tax expense
Profit for the year
Revenue from external customers
Inter segment revenue
Total revenue
Adjusted operating profit*
Amortisation of acquired intangible assets
Operating profit
Net finance expense
Income tax expense
Profit for the year
Controls
2016
298,381
–
298,381
87,293
(3,860)
83,433
Controls
2015
286,708
–
286,708
85,479
(3,326)
82,153
Fluid
Systems
2016
145,317
–
145,317
6,181
(1,582)
4,599
Fluid
Systems
2015
149,228
–
149,228
15,215
(2,300)
12,915
Gears
2016
Instruments
2016
Elimination
2016
Unallocated
2016
60,802
11,577
72,379
14,051
(1,698)
12,353
85,578
5,592
91,170
20,130
(19,671)
459
–
(17,169)
(17,169)
–
–
–
–
–
–
(7,067)
–
(7,067)
Gears
2015
Instruments
2015
Elimination
2015
Unallocated
2015
46,072
12,562
58,634
11,991
(990)
11,001
64,451
2,875
67,326
18,306
(14,270)
4,036
–
(15,437)
(15,437)
–
–
–
–
–
–
(5,719)
–
(5,719)
Group
2016
590,078
–
590,078
120,588
(26,811)
93,777
(2,707)
(23,897)
67,173
Group
2015
546,459
–
546,459
125,272
(20,886)
104,386
(2,517)
(27,012)
74,857
* Adjusted operating profit is operating profit before the amortisation of acquired intangible assets.
Rotork Annual Report 2016
113
NOTES TO THE GROUP FINANCIAL STATEMENTS continued
For the year ended 31 December 2016
2. Operating segments continued
Depreciation
Amortisation:
– Acquired intangible assets
– Development costs
Non-cash items: equity settled share-based payments
Net financing expense
Acquired as part of business combinations:
– Goodwill
– Intangible assets
Capital expenditure
Depreciation
Amortisation:
– Acquired intangible assets
– Development costs
Non-cash items: equity settled share-based payments
Net financing expense
Acquired as part of business combinations:
– Goodwill
– Intangible assets
Capital expenditure
Controls
2016
5,429
3,860
1,628
1,709
–
–
–
6,975
Controls
2015
4,585
3,326
1,514
1,911
–
1,321
3,048
5,093
Fluid
Systems
2016
2,571
1,582
211
680
–
–
–
4,575
Fluid
Systems
2015
2,560
2,300
148
549
–
–
–
4,970
Gears
2016
1,546
1,698
281
480
–
5,317
6,816
1,741
Gears
2015
1,194
990
67
351
–
3,933
4,951
811
Instruments
2016
Unallocated
2016
Group
2016
43
11,759
2,170
19,671
106
473
–
–
–
1,357
–
–
417
(2,707)
–
–
13
Instruments
2015
1,369
Unallocated
2015
51
14,270
85
103
–
69,206
58,685
818
–
–
(104)
(2,517)
–
–
46
26,811
2,226
3,759
(2,707)
5,317
6,816
14,661
Group
2015
9,759
20,886
1,814
2,810
(2,517)
74,460
66,684
11,738
Balance sheets are reviewed by subsidiary and operating segment balance sheets are not prepared, as such no further analysis of operating
segments assets and liabilities is presented.
2016
2015
74,144
63,040
112,759
145,473
27,365
167,297
64,415
57,254
92,908
137,898
30,698
163,286
590,078
546,459
Rest of
World
2016
41,624
18,612
16,980
Rest of
World
2015
37,556
19,978
15,519
Group
2016
251,407
109,019
83,766
Group
2015
222,086
118,555
72,008
UK
2016
Europe
2016
USA
2016
81,329
52,138
26,099
64,984
17,595
29,812
62,730
20,674
10,348
UK
2015
Europe
2015
USA
2015
81,328
60,917
25,675
53,645
20,833
22,362
48,817
16,827
7,834
Other
Americas
2016
740
–
527
Other
Americas
2015
740
–
618
Geographical analysis:
Revenue by location of subsidiary
UK
Italy
Rest of Europe
USA
Other Americas
Rest of the World
Non-current assets:
– Goodwill
– Intangible assets
– Property, plant and equipment
Non-current assets:
– Goodwill
– Intangible assets
– Property, plant and equipment
114
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Company Information
3. Acquisitions
i) Mastergear
On 2 June 2016 the Group completed the acquisition of the Mastergear business based in the US and Italy for £16,278,000, which was paid in
cash. Mastergear is a leading manufacturer of manual and motorised gearboxes focused on the oil and gas, water and distribution, chemical
processing and wider industrial markets. The Mastergear business is reported within the Gears division. In the seven months to 31 December 2016
Mastergear contributed £7,761,000 to Group revenue and £990,000 to consolidated operating profit before amortisation. The amortisation charge
in the seven month period from the acquired intangible assets was £897,000.
If the acquisition had occurred on 1 January 2016 the business would have contributed £13,641,000 to Group revenue, £1,473,000 to Group
operating profit and £944,000 to profit attributable to equity shareholders.
The acquisition had the following effect on the Group's assets and liabilities.
Non-current assets
Property, plant and equipment
Intangible assets
Deferred tax asset
Current assets
Inventory
Trade and other receivables
Corporation tax
Cash
Current liabilities
Trade and other payables
Employee benefits
Warranty provision
Total net assets
Goodwill
Purchase consideration – paid in cash
Cash held in acquired subsidiary
Net cash outflow arising on acquisition
Book value
Adjustments
Provisional fair
value
1,393
–
–
3,326
2,801
377
169
(1,662)
(805)
–
5,599
–
6,816
530
(1,601)
(160)
–
–
(127)
–
(96)
5,362
1,393
6,816
530
1,725
2,641
377
169
(1,789)
(805)
(96)
10,961
5,317
16,278
(169)
16,109
The adjustments shown in the table represent the alignment of accounting policies of the acquired business to Rotork Group policies and the fair
value adjustments of the assets and liabilities at the acquisition date.
Due to their contractual dates, the fair value of receivables (shown above) approximate to the gross contractual amounts receivable. The amount of
gross contractual receivables not expected to be recovered is immaterial.
The goodwill arising from this acquisition represents the opportunity to grow by exploiting new routes to market via the Rotork sales network and
the technical expertise of the acquired workforce. Goodwill of £5,012,000 in respect of the asset purchase is deductible for income tax purposes.
The intangible assets identified comprise customer relationships, brands, intellectual property, product design patents and acquired order books.
ii) Acquisition costs
Acquisition costs of £84,000 have been expensed in administration expenses in the income statement (2015: £1,321,000).
Rotork Annual Report 2016
115
NOTES TO THE GROUP FINANCIAL STATEMENTS continued
For the year ended 31 December 2016
4. Other income
Gain on disposal of property, plant and equipment
Other
5. Other expenses
Loss on disposal of property, plant and equipment
Other
6. Personnel expenses
Wages and salaries (including bonus and incentive plans)
Social security costs
Pension costs (note 24)
Share-based payments (note 25)
Increase/(decrease) in liability for long-term service leave
During the year, the average monthly number of employees, analysed by business segment was:
Controls
Fluid Systems
Gears
Instruments
UK
Overseas
2016
462
167
629
2016
208
9
217
2015
325
102
427
2015
45
21
66
2016
2015
136,557
18,032
7,799
3,759
49
166,196
2016
Number
1,781
860
414
664
3,719
1,028
2,691
3,719
114,806
14,596
7,056
2,810
(132)
139,136
2015
Number
1,787
865
365
390
3,407
847
2,560
3,407
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Financial Statements
Company Information
7. Finance income and expense
Recognised in the income statement
Interest income
Foreign exchange gains
Finance income
Interest expense
Interest charge on pension scheme liabilities (note 24)
Foreign exchange losses
Finance expense
Recognised in equity
Effective portion of changes in fair value of cash flow hedges
Fair value of cash flow hedges transferred to income statement
Foreign currency translation differences for foreign operations
Recognised in:
Hedging reserve
Translation reserve
2016
934
810
1,744
2016
(2,970)
(767)
(714)
(4,451)
2015
1,119
621
1,740
2015
(1,811)
(1,181)
(1,265)
(4,257)
2016
2015
(8,772)
950
36,854
29,032
(7,822)
36,854
29,032
(1,123)
(667)
(6,511)
(8,301)
(1,790)
(6,511)
(8,301)
Rotork Annual Report 2016
117
NOTES TO THE GROUP FINANCIAL STATEMENTS continued
For the year ended 31 December 2016
8. Profit before tax
Profit before tax is stated after charging the following:
Depreciation of property, plant and equipment:
– Owned assets
– Assets held under finance lease contracts
Amortisation:
– Other intangibles
– Development costs
Inventory write downs recognised in the year
Hire of plant and machinery
Other operating lease rentals
Research and development expenditure
Exchange differences realised
Audit fees and expenses paid to Deloitte:
– Audit of the Group financial statements
– Audit of financial statements of subsidiaries of the Company
Other auditors of financial statements of subsidiaries of the Company
Total audit fees and expenses
Amounts paid to Deloitte and its associates in respect of:
– Taxation compliance services
– Taxation advisory services
– Half year review
– Corporate finance services
– Other assurance services
These costs can be found under the following headings in the income statement:
i) Both within cost of sales and administrative expenses;
ii) Within cost of sales;
iii) Within administrative expenses; and
iv) Within finance income and expenses.
Notes
2016
2015
i
i
i
i
ii
i
i
iii
iv
11,700
59
26,811
2,226
6,632
1,986
3,969
7,245
(96)
800
158
958
34
992
12
23
42
–
6
83
9,714
45
20,886
1,814
3,547
2,264
4,033
6,588
644
953
90
1,043
7
1,050
19
10
40
–
24
93
118
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Directors
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Financial Statements
Company Information
9. Income tax expense
Current tax:
UK corporation tax on profits for the year
Adjustment in respect of prior years
Overseas tax on profits for the year
Adjustment in respect of prior years
Total current tax
Deferred tax:
Origination and reversal of other temporary differences
Impact of rate change
Adjustment in respect of prior years
Total deferred tax
Total tax charge for year
Effective tax rate (based on profit before tax)
Profit before tax
Profit before tax multiplied by the blended standard rate of corporation tax in
the UK of 20.0% (2015: 20.25%)
Effects of:
Different tax rates on overseas earnings
Permanent differences
Losses not recognised
Research and development credits
Impact of rate change
Adjustments to tax charge in respect of prior years
Total tax charge for year
2016
2016
2015
2015
3,671
4
28,487
(413)
(7,937)
(127)
212
3,154
(668)
28,995
(232)
(3,540)
(732)
35
2,486
28,763
31,249
(4,237)
27,012
26.5%
101,869
20,629
7,910
1,331
463
(1,724)
(732)
(865)
27,012
3,675
28,074
31,749
(7,852)
23,897
26.2%
91,070
18,214
6,381
301
224
(899)
(127)
(197)
23,897
A tax credit of £74,000 (2015: £799,000 expense) in respect of share-based payments has been recognised directly in equity in the year.
The reduction in the effective tax rate from 26.5% to 26.2% is primarily due the mix of where profits are generated. The Group continues to
expect its effective rate of corporation tax to be higher than the standard UK rate due to higher rates of tax in the USA, China, Canada, France,
Germany, Italy, Japan and India.
There is an unrecognised deferred tax liability for temporary differences associated with investments in subsidiaries. Rotork plc controls the dividend
policies of its subsidiaries and the timing of the reversal of the temporary differences. The value of temporary differences associated with
unremitted earnings of subsidiaries for which deferred tax has not been recognised is £282,541,000 (2015: £307,714,000).
Rotork Annual Report 2016
119
NOTES TO THE GROUP FINANCIAL STATEMENTS continued
For the year ended 31 December 2016
10. Goodwill
Cost
At 1 January
Acquisition through business combinations (note 3)
Other movements
Exchange adjustments
At 31 December
Provision for impairment
At 1 January and 31 December
Carrying amounts
2016
2015
222,086
5,317
–
24,004
149,679
74,460
(743)
(1,310)
251,407
222,086
–
–
251,407
222,086
Cash-generating units
Goodwill acquired through business combinations has been allocated to the lowest level of cash-generating unit (CGU) and to the division in which
it is reported. Where the acquired entity's growth into new markets is through the Group's existing sales network and/or where manufacturing of
certain products is transferred to other businesses within a division the lowest level of CGU is considered to be at a divisional sub-group level.
Cash-generating unit
Controls
Schischek
Other cash-generating units
Fluid Systems
Rotork Fluid Systems
Rotork Sweden
Other cash-generating units
Gears
Other cash-generating units
Instruments
Bifold
Instruments sub-group
Other cash-generating units
Total Group
2016
2015
19,498
11,515
31,013
7,792
6,440
16,498
30,730
20,759
20,759
67,221
101,684
–
16,835
10,723
27,558
6,728
5,818
13,717
26,263
12,963
12,963
67,221
86,016
2,065
168,905
155,302
251,407
222,086
Impairment testing
Goodwill is not amortised but is tested annually for impairment.
The key assumptions in the annual impairment review which are common to all CGUs are set out below:
i) Discount rates
The discount rates used in the impairment review are pre-tax nominal weighted average cost of capital (WACC) for each of the CGUs. The WACC is
the weighted average of the pre-tax cost of debt financing and the pre-tax cost of equity finance. The discount rates used in the impairment test
ranged from 12.4% to 14.9% (2015: 12.5% to 16.7%). The discount rates of the significant CGU's, which represent more than 10% of the total
goodwill balance, are 12.6% for the instruments sub-group (2015: 12.5%) and 12.4% for Bifold (2015: 12.5%).
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Company Information
ii) Growth rates
Value in use calculations are used to determine the recoverable amount of goodwill allocated to each of the CGUs. These calculations use cash flow
projections from management forecasts which are based on the budget and the three year plan. The three year plan is a bottom up process which takes
place as part of the annual budget process. Once the budget for the next financial year is finalised, years two and three of the three year plan are prepared
by each reporting entity's management reflecting their view of the local market, known projects and experience of past performance. The forecast
compound annual growth rate for the instruments sub-group for years one to three is 11.2%. For Bifold the forecast compound annual growth rate for
revenue is 23.7% which generates annual growth of 50.9% in operating profit. The Bifold growth reflects the significant opportunities in the market
following recent product development, growth in the underlying markets Bifold serves and expansion of sales opportunities through the Rotork network.
The Group annual budget and the three year plan are reviewed and approved by the Board each year.
In the period after the three year plan growth rates are forecast at 5% per annum for the next two years and at 2% for the long-term growth rate. The 5%
rate reflects a realistic market forecast for the flow control market up until 2021. The continued need for our customers to improve their infrastructure by
automating valves gives confidence that the growth rate of our market will exceed the long-term growth rate of 2% used in the impairment calculations.
Sensitivity analysis
Sensitivity analysis has been undertaken for each CGU to assess the impact of any reasonably possible change in assumptions. Using the key assumptions
above and applying sensitivities to these assumptions below, Bifold would be the first CGU to trigger a potential impairment. Apart from this there is no
reasonably possible change that would cause the carrying amount of any other CGU goodwill to exceed the recoverable amount.
Bifold downside sensitivities have been assessed. A reduction in the long-term growth rate from 2% to 1% would result in a reduction of the
headroom from £21,500,000 in the base case to £10,300,000. An increase in the discount rate by 1% would result in a reduction of the headroom
from £21,500,000 to £6,800,000. A decrease in the forecast operating profit growth rate by 9 percentage points in each of years one, two and
three would reduce the headroom to zero and this is considered to be a reasonably possible change. It is anticipated that with forecast underlying
market growth, sales channel expansion and new product sales growth, the growth rates will exceed the long-term growth rate of 2% used in the
impairment review but this has not been taken in either the base case or the sensitised scenarios.
11. Intangible assets
Cost
1 January 2015
Acquisition through business combinations
Internally developed
Exchange adjustments
31 December 2015
Acquisition through business combinations
Internally developed
Exchange adjustments
31 December 2016
Amortisation
1 January 2015
Charge for the year
Exchange adjustments
31 December 2015
Charge for the year
Exchange adjustments
31 December 2016
Net Book Value
31 December 2015
31 December 2016
Research &
development
costs
Acquired intangible assets
Brands
Customer
relationships
Other
Total
14,084
–
3,050
13
17,147
–
2,958
290
20,395
7,526
1,814
1
9,341
2,226
72
34,353
11,004
–
(25)
45,332
1,644
–
6,130
53,106
11,875
4,974
196
17,045
5,788
3,105
61,097
45,414
–
(364)
106,147
4,674
–
11,296
122,117
23,154
12,014
74
35,242
17,631
5,713
11,639
25,938
58,586
12,428
10,266
–
(134)
22,560
498
–
2,357
25,415
7,137
3,898
(32)
11,003
3,392
1,456
15,851
121,962
66,684
3,050
(510)
191,186
6,816
2,958
20,073
221,033
49,692
22,700
239
72,631
29,037
10,346
112,014
7,806
8,756
28,287
27,168
70,905
63,531
11,557
9,564
118,555
109,019
Other acquired intangible assets represent order books and intellectual property.
The amortisation charge is recognised within administrative expenses in the income statement.
Rotork Annual Report 2016
121
NOTES TO THE GROUP FINANCIAL STATEMENTS continued
For the year ended 31 December 2016
12. Property, plant and equipment
Cost
1 January 2015
Additions
Disposals
Acquisition through business combinations
Exchange adjustments
31 December 2015
Additions
Disposals
Acquisition through business combinations
Exchange adjustments
31 December 2016
Depreciation
1 January 2015
Charge for the year
Disposals
Exchange adjustments
31 December 2015
Charge for the year
Disposals
Exchange adjustments
31 December 2016
Net Book Value
31 December 2015
31 December 2016
Land and
buildings
Plant and
equipment
44,877
2,292
(1,332)
5,597
(602)
50,832
4,511
(101)
–
6,410
70,786
9,446
(1,174)
2,410
(874)
80,594
10,150
(2,288)
1,393
10,824
Total
115,663
11,738
(2,506)
8,007
(1,476)
131,426
14,661
(2,389)
1,393
17,234
61,652
100,673
162,325
9,277
1,324
(320)
(117)
10,164
1,892
(76)
1,504
13,484
40,668
48,168
42,336
8,435
(933)
(584)
49,254
9,867
(1,953)
7,907
65,075
31,340
35,598
51,613
9,759
(1,253)
(701)
59,418
11,759
(2,029)
9,411
78,559
72,008
83,766
The net book value of the Group's plant and equipment includes £410,000 (2015: £325,000) in respect of assets held under finance leases.
Net book value of land and buildings can be analysed between:
Land
Buildings
Net book value at 31 December
2016
7,107
41,061
48,168
2015
6,310
34,358
40,668
It is the Group's policy to test assets for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be
recoverable. No impairment was identified in the year.
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Financial Statements
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13. Deferred tax assets and liabilities
Property, plant and equipment
Intangible assets
Employee benefits
Inventory
Other items
Net tax assets/(liabilities)
Set off of tax
Assets
2016
435
74
13,952
7,712
6,211
28,384
(3,125)
Liabilities
2016
(985)
(23,829)
(48)
–
(3,111)
(27,973)
3,125
25,259
(24,848)
Net
2016
(550)
(23,755)
13,904
7,712
3,100
411
–
411
Assets
2015
111
307
6,876
4,885
4,607
16,786
(3,088)
13,698
Liabilities
2015
(1,645)
(27,086)
(461)
–
(2,869)
(32,061)
3,088
(28,973)
Net
2015
(1,534)
(26,779)
6,415
4,885
1,738
(15,275)
–
(15,275)
Movements in the net deferred tax balance during the year are as follows:
Balance at 1 January
Credited to the income statement
Credited/(charged) directly to equity in respect of share-based payments
Acquired as part of business combinations
Credited/(charged) directly to equity in respect of pension schemes
Credited directly to hedging reserves in respect of cash flow hedges
Exchange differences
Balance at 31 December
2016
2015
(15,275)
7,852
74
530
7,191
1,408
(1,369)
411
(4,655)
4,237
(139)
(13,895)
(1,655)
342
490
(15,275)
A deferred tax asset of £25,259,000 (2015: £13,698,000) has been recognised at 31 December 2016. The directors are of the opinion, based on
recent and forecast trading, that the level of profits in the current and future years make it more likely than not that these assets will be recovered.
A deferred tax asset of £1,302,000 (2015: £1,302,000) has not been recognised in relation to capital losses. This asset may be recovered if sufficient
capital profits are made in future in the companies concerned. There is no expiry date in relation to this asset.
14. Inventories
Raw materials and consumables
Work in progress
Finished goods
2016
59,398
10,211
16,163
85,772
2015
60,604
8,890
17,716
87,210
Included in cost of sales was £204,729,000 (2015: £196,826,000) in respect of inventories consumed in the year.
Rotork Annual Report 2016
123
NOTES TO THE GROUP FINANCIAL STATEMENTS continued
For the year ended 31 December 2016
15. Trade and other receivables
Non-current assets:
Other non-trade receivables
Other receivables
Current assets:
Trade receivables
Less provision for impairment of receivables
Trade receivables – net
Corporation tax
Current tax
Other non-trade receivables
Other taxes and social security
Prepayments
Other receivables
2016
146
146
2015
2,234
2,234
139,108
(7,217)
124,285
(5,484)
131,891
118,801
4,349
4,349
7,600
7,333
7,408
4,458
4,458
2,025
6,002
5,198
22,341
13,225
Included with non-trade receivables is £2,334,000 (2015: £nil) which relate to collateral held by a third party in respect of the Group's outstanding
forward exchange contracts.
16. Cash and cash equivalents
Bank balances
Cash in hand
Short-term deposits
Cash and cash equivalents
Bank overdraft
Cash and cash equivalents in the consolidated statement of cash flows
2016
50,110
65
11,248
61,423
–
61,423
2015
35,013
63
13,892
48,968
–
48,968
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Financial Statements
Company Information
17. Capital and reserves
At 1 January
Issued under employee share schemes
At 31 December
Number of shares (000)
0.5p ordinary
shares
issued
and fully
paid up
2016
4,349
1
4,350
870,051
£1 non-
redeemable
preference
shares
2016
40
–
40
0.5p ordinary
shares
issued
and fully
paid up
2015
4,346
3
4,349
869,738
£1 non-
redeemable
preference
shares
2015
40
–
40
The ordinary shareholders are entitled to receive dividends as declared and are entitled to vote at meetings of the Company.
The Group received proceeds of £465,000 (2015: £599,000) in respect of the 312,540 (2015: 458,990) ordinary shares issued during the year:
£1,000 (2015: £3,000) was credited to share capital and £464,000 (2015: £596,000) to share premium. Further details of the share awards are
shown in note 25.
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.
Within the retained earnings reserve are own shares held. The investment in own shares held is £2,738,000 (2015: £3,920,000) and represents
963,000 (2015: 1,406,000) 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.
Translation reserve
The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations.
Capital redemption reserve
The capital redemption reserve arises when the Company redeems shares wholly out of distributable profits.
Hedging reserve
The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments that are
determined to be an effective hedge.
Dividends
The following dividends were paid in the year per qualifying ordinary share:
3.10p final dividend (2015: 3.09p)
1.95p interim dividend (2015: 1.95p)
2016
payment date
16 May
23 September
2016
26,933
16,943
43,876
2015
26,835
16,930
43,765
After the balance sheet date the following dividends per qualifying ordinary share were proposed by the directors. The dividends have not been
provided for and there are no corporation tax consequences.
Final proposed dividend per qualifying ordinary share
3.15p
3.10p
2016
2015
27,407
26,962
Rotork Annual Report 2016
125
NOTES TO THE GROUP FINANCIAL STATEMENTS continued
For the year ended 31 December 2016
18. 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 868.7m shares (2015: 867.8m shares) being the weighted average number of ordinary shares in issue (net
of own ordinary shares held) for the year.
Net profit attributable to ordinary shareholders
Weighted average number of ordinary shares
Issued ordinary shares at 1 January
Effect of own shares held
Effect of shares issued under sharesave schemes
Weighted average number of ordinary shares during the year
Basic earnings per share
2016
67,173
2015
74,857
868,332
273
61
868,666
867,258
428
131
867,817
7.7p
8.6p
Adjusted basic earnings per share
Adjusted basic earnings per share is calculated for both the current and previous years using the profit attributable to the ordinary shareholders for
the year after adding back the after tax amortisation charge.
Net profit attributable to ordinary shareholders
Amortisation
Tax effect on amortisation at effective rate
Adjusted net profit attributable to ordinary shareholders
Weighted average number of ordinary shares during the year
Adjusted basic earnings per share
2016
2015
67,173
26,811
(7,035)
86,949
74,857
20,886
(5,538)
90,205
868,666
867,817
10.0p
10.4p
Diluted earnings per share
Diluted earnings per share is based on the profit for the year attributable to the ordinary shareholders and 872.0m shares (2015: 869.3m shares).
The number of shares is equal to the weighted average number of ordinary shares in issue (net of own ordinary shares held) adjusted to assume
conversion of all potentially dilutive ordinary shares. The Company has two categories of potentially dilutive ordinary shares: those share options
granted to employees under the Sharesave plan 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 (LTIP).
Net profit attributable to ordinary shareholders
Weighted average number of ordinary shares (diluted)
Weighted average number of ordinary shares for the year
Effect of sharesave options
Effect of LTIP share awards
Weighted average number of ordinary shares (diluted) during the year
Diluted earnings per share
Adjusted diluted earnings per share
Net profit attributable to ordinary shareholders
Amortisation
Tax effect on amortisation at effective rate
Adjusted net profit attributable to ordinary shareholders
Weighted average number of ordinary shares (diluted) during the year
Adjusted diluted earnings per share
126
Rotork Annual Report 2016
2016
67,173
868,666
870
2,498
2015
74,857
867,817
1,214
300
872,034
869,331
7.7p
8.6p
2016
2015
67,173
26,811
(7,035)
86,949
74,857
20,886
(5,538)
90,205
872,034
869,331
10.0p
10.4p
Strategic Report
Directors
Governance
Financial Statements
Company Information
19. Interest bearing loans and borrowings
This note provides information about the contractual terms of the Group's interest bearing loans and borrowings. For more information about the
Group's exposure to interest rate, liquidity and currency risks, see note 26.
Non-current liabilities
Preference shares classified as debt
Bank loans
Finance lease liabilities
Current liabilities
Bank loans
Finance lease liabilities
2016
2015
40
51,260
3
51,303
65,039
69
65,108
40
69,645
71
69,756
50,098
254
50,352
Terms and debt repayment schedule
The terms and conditions of outstanding loans were as follows:
Non-redeemable preference shares
Bank loans and overdrafts
Bank loans and overdrafts
Finance lease liabilities
Repayment profile
Finance leases and bank loans are payable as follows:
Bank loans less than one year
Bank loans more than one and less than five years
Bank loans more than five years
Finance leases less than one year
Finance leases more than one and less than five years
Currency
Sterling
Sterling
Euro
Sterling
Interest rates
Year of maturity
2016
2015
9.5%
0.6%-1.1%
1.4%-4.5%
1.9%-10.6%
–
2018-20
2017-32
2017-19
40
115,180
1,119
72
116,411
40
118,560
1,183
325
120,108
Principal
2016
65,039
50,565
695
69
3
116,371
Interest
2016
310
81
101
2
0
494
Minimum
payments
2016
65,349
50,646
796
71
3
Principal
2015
50,098
68,987
658
254
71
116,865
120,068
Interest
2015
386
73
99
7
2
567
Minimum
payments
2015
50,484
69,060
757
261
73
120,635
Rotork Annual Report 2016
127
NOTES TO THE GROUP FINANCIAL STATEMENTS continued
For the year ended 31 December 2016
20. Employee benefits
Recognised liability for defined benefit obligations:
– Present value of funded obligations
– Fair value of plan assets
Other pension scheme liabilities
Employee bonuses
Long term incentive plan
Employee indemnity provision
Other employee benefits
Non-current
Current
Defined benefit pension scheme disclosures are detailed in note 24.
21. Provisions
Balance at 1 January 2016
Exchange differences
Increase as a result of business combinations
Provisions utilised during the year
Charged to the income statement
Balance at 31 December 2016
Maturity at 31 December 2016
Non-current
Current
Maturity at 31 December 2015
Non-current
Current
2016
2015
236,543
(178,045)
180,406
(157,131)
58,498
356
10,824
216
3,359
3,596
76,849
62,593
14,256
76,849
Warranty
provision
5,528
713
96
(1,707)
1,212
5,842
1,947
3,895
5,842
1,843
3,685
5,528
23,275
239
8,601
80
2,495
2,748
37,438
26,320
11,118
37,438
Total
17,303
903
96
(1,964)
1,212
17,550
11,947
5,603
17,550
11,990
5,313
17,303
Contingent
consideration
11,775
190
–
(257)
–
11,708
10,000
1,708
11,708
10,147
1,628
11,775
The warranty provision is based on estimates made from historical warranty data associated with similar products and services. The provision relates
mainly to products sold during the last 12 months and the typical warranty period is 18 months.
Contingent consideration relating to the Bifold acquisition is £10,500,000. £10,000,000 will become payable in 2018 if an EBITDA target is
achieved in respect of the 2017 financial year. Other contingent consideration relates to amounts outstanding in respect of the GTA Group, Masso
and Servo Moteurs Service acquisitions.
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Financial Statements
Company Information
22. Trade and other payables
Trade payables
Corporation tax
Current tax
Other taxes and social security
Payments on account
Other payables and accrued expenses
Other payables
23. Derivative financial instruments
Forward foreign exchange contracts – cash flow hedges
Foreign exchange swaps – cash flow hedges
Total
Less non-current portion:
Forward foreign exchange contracts – cash flow hedges
Current portion
2016
2015
39,652
36,724
13,352
13,352
10,806
7,053
24,140
41,999
2015
Assets
25
–
25
–
25
14,276
14,276
8,592
6,674
19,346
34,612
2015
Liabilities
975
3,057
4,032
431
3,601
2016
Assets
–
–
–
–
–
2016
Liabilities
8,945
1,681
10,626
2,483
8,143
The full fair value of a hedging derivative is classified as a non-current asset or liability if the remaining maturity of the hedged item is more than
12 months and, as a current asset or liability, if the maturity of the hedged item is less than 12 months.
There was no ineffectiveness to be recorded from the use of foreign exchange contracts.
The hedged forecast transactions denominated in foreign currency are expected to occur at various dates. Gains and losses in respect of these
derivatives recognised in the hedging reserve in equity at 31 December 2016 are recognised in the income statement in the period or periods
during which the hedged forecast transaction affects the income statement.
Rotork Annual Report 2016
129
NOTES TO THE GROUP FINANCIAL STATEMENTS continued
For the year ended 31 December 2016
24. Pension schemes
i) Defined benefit pension schemes
The Group operates two defined benefit pension arrangements, the Rotork Pension and Life Assurance UK Scheme (UK Scheme) and the Rotork
Controls Inc. Pension Plan (US Pension Plan). On retirement, leaving service or death the Schemes provide benefits based on final salary and length
of service.
The UK Scheme is subject to the Statutory Funding Objective under the Pensions Act 2004. A valuation of the UK Scheme is carried out at least
once every three years to determine whether the Statutory Funding Objective is met. As part of the process the Company must agree with the
trustees of the UK Scheme the contributions to be paid to address any shortfall against the Statutory Funding Objective and contributions to pay for
future accrual of benefits.
The UK Scheme is managed by a Trustee, with directors appointed in part by the Group and part from elections by members of the UK Scheme.
The Trustee has responsibility for obtaining valuations of the fund, administering benefit payments and investing the UK Scheme's assets.
The Trustee delegates some of these functions to its professional advisers where appropriate.
The US Pension Plan is subject to the ERISA funding requirements. A valuation of the US Pension Plan is carried out annually to ensure the Funding
Objective is met under ERISA by contributing at least the Minimum Required Contribution. As part of this process the Company must contribute to
the US Pension Plan enough contributions to ensure at least the Minimum Contribution is deposited in the Trust to pay for the accrual of benefits.
The two defined benefit pension arrangements expose the Group to a number of risks:
• Investment risk. The Schemes hold investments in asset classes, such as equities, which have volatile market values and while these assets are
expected to provide real returns over the long-term, the short-term volatility can cause additional funding to be required if a deficit emerges;
• Interest rate risk. The Schemes' liabilities are assessed using market yields on high quality corporate bonds to discount the liabilities. As the
Schemes hold assets such as equities the value of the assets and liabilities may not move in the same way;
• Inflation risk. A significant proportion of the benefits under the Schemes are linked to inflation. Although the Schemes' assets are expected
to provide a good hedge against inflation over the long-term, movements over the short-term could lead to deficits emerging; and
• Mortality risk. In the event that members live longer than assumed a deficit will emerge in the Schemes.
There were no plan amendments, curtailments or settlements during the period.
Movements in the present value of defined benefit obligations
2016
2015
180,406
2,983
252
601
6,999
(6,880)
48,041
4,141
187,918
3,353
128
499
6,836
(5,956)
(13,449)
1,077
236,543
180,406
2016
2015
157,131
6,232
8,511
601
(6,880)
10,118
2,332
151,786
5,655
8,297
499
(5,956)
(3,745)
595
178,045
157,131
Liabilities at 1 January
Current service costs
Administration costs
Member contributions
Interest cost
Benefits paid
Actuarial loss/(gain)
Currency loss
Liabilities at 31 December
Movements in fair value of plan assets
Assets at 1 January
Interest income on plan assets
Employer contributions
Member contributions
Benefits paid
Return on plan assets, excluding interest income on plan assets
Currency gain
Assets at 31 December
130
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Strategic Report
Directors
Governance
Financial Statements
Company Information
Expense recognised in the income statement
Current service costs
Administration costs
Net interest cost
The expense is recognised in the following line items in the income statement.
Cost of sales
Administrative expenses
Net finance expense
Remeasurements over the year
Experience adjustments on plan assets
Experience adjustments on plan liabilities
Actuarial (loss)/gain from changes to financial assumptions
Actuarial gain from changes to demographic assumptions
Experience adjustments on currency
Reconciliation of net defined benefit obligation
Net defined benefit obligation at the beginning of the year
Current service costs
Administration costs
Net financing expense
Remeasurements over the year
Employer contributions
2016
2,983
252
767
4,002
2016
1,083
2,152
767
4,002
2016
10,118
3,167
(55,104)
3,896
(1,809)
(39,732)
2015
3,353
128
1,181
4,662
2015
1,193
2,288
1,181
4,662
2015
(3,745)
1,669
7,970
3,810
(482)
9,222
2016
2015
23,275
2,983
252
767
39,732
(8,511)
36,132
3,353
128
1,181
(9,222)
(8,297)
58,498
23,275
Liability for defined benefit obligations
The principal actuarial assumptions at 31 December 2016 (expressed as weighted averages):
Discount rate
Rate of increase in salaries
Rate of increase in pensions (post May 2000)
Rate of increase in pensions (pre May 2000)
Rate of inflation
UK Scheme
(% per annum)
US Scheme
(% per annum)
Weighted average
(% per annum)
2016
2.6
3.9
3.3
4.6
3.4
2015
3.8
3.7
3.1
4.6
3.2
2016
4.4
3.0
0.0
0.0
3.0
2015
4.8
3.0
0.0
0.0
3.0
2016
2.8
3.8
2.9
4.1
3.4
2015
3.9
3.6
2.7
4.1
3.2
In the UK the Retail Price Index is used as the rate of inflation as it is a requirement of the UK Scheme's rules.
Rotork Annual Report 2016
131
NOTES TO THE GROUP FINANCIAL STATEMENTS continued
For the year ended 31 December 2016
24. Pension schemes continued
The split of the Schemes' assets were as follows:
Equities
Bonds
Property
Cash
US deposit administration contract
Total
Actual return on the Schemes' assets
2016
Fair value
83,099
70,805
9,534
179
14,428
2015
Fair value
75,550
60,111
9,687
137
11,646
178,045
157,131
16,350
1,910
The demographic assumptions are the same as used for the most recent valuations of the Schemes, except for mortality. The mortality assumptions
used for the UK Scheme are the S2NXA year of birth tables (2015: S1NXA) with future improvements in mortality based on the CMI_2015
projections (2015: CMI_2015 projections) with a long-term rate of improvement of 1.25% per annum (2015: 1.25%).
By way of example the respective mortality tables indicate the following life expectancy:
Current age
65
45
Sensitivity analysis on the Schemes' liabilities
Adjustments to assumptions
Discount rate
Plus 0.5% p.a.
Minus 0.5% p.a.
Inflation
Plus 0.5% p.a.
Minus 0.5% p.a.
Salary increase
Plus 0.5% p.a.
Minus 0.5% p.a.
Life expectancy
Decrease mortality rates by a factor of 10%
Increase mortality rates by a factor of 10%
2016
Life expectancy at age 65
2015
Life expectancy at age 65
Male
22.3
24.0
Female
24.4
26.3
Male
22.0
23.7
Female
24.4
26.4
Approximate
effect on
liabilities
(24,000)
26,800
12,600
(11,900)
5,200
(4,900)
7,000
(6,400)
The above sensitivities are approximate and only show the likely effect of an assumption being adjusted whilst all other assumptions remain the same.
For the life expectancy sensitivity we have increased/decreased the mortality rates by a factor of 10%. Broadly speaking this decreases/increases the
assumed life expectancy by slightly less than one year.
The sensitivity analysis shown above was determined using the same method as per the calculation of liabilities for the balance sheet disclosures,
but using assumptions adjusted as detailed above.
Effect of the Schemes on the Group's future cash flows
The Group is required to agree a Schedule of Contributions with the Trustees of the UK Scheme following a valuation which must be carried out at
least once every three years. Following the valuation of the UK Scheme as at 31 March 2016, the Group is continuing to pay deficit contributions of
£5,500,000 a year.
The Group estimates that cash contributions to the Group's defined benefit pension schemes during 2017 will be £3,590,000 for regular payments
(2016: £3,000,000) and £5,500,000 of additional payments in relation to past service (2016: £5,500,000).
The weighted average duration of the defined benefit obligation is 22 years.
ii) Other pension plans
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 £4,816,000 (2015: £3,703,000).
132
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Strategic Report
Directors
Governance
Financial Statements
Company Information
25. Share-based payments
The Group awards shares under the long term incentive plan (LTIP), the Sharesave scheme, the overseas profit linked share plan (OPLSS) and the
share incentive plan (SIP). The equity settled share-based payment expense included in the income statement for each of the plans can be analysed
as follows:
Sharesave scheme (a)
LTIP (b)
OPLSS/SIP profit linked share scheme (c)
Total expense recognised as employee costs (note 6)
2016
592
1,302
1,865
3,759
2015
1,093
(445)
2,162
2,810
Volatility assumptions for equity-based payments
The expected volatility of all equity compensation benefits is based on the historic volatility (calculated based on the weighted average remaining
life of each benefit), adjusted for any expected changes to future volatility due to publicly available information.
a) Sharesave scheme
UK employees are invited to join the sharesave scheme when an offer is made each year. All the offers to date were made at a 20% discount to market price
at the time. There are no performance criteria for the sharesave scheme. Employees are given the option of joining either the 3 year or the 5 year scheme.
Grant date
Share price at grant date
Exercise price
Shares granted under scheme
Vesting period
Expected volatility
Risk free rate
Expected dividends expressed as a dividend yield
Probability of ceasing employment before vesting
Fair value
3 year scheme
5 year scheme
2016
2015
2016
2015
3 October
215p
168p
612,593
3 years
29.4%
0.09%
2.4%
2%
56p
13 October
180p
148p
1,777,023
3 years
24.6%
0.82%
2.8%
6%
38p
3 October
215p
168p
391,454
5 years
27.7%
0.25%
2.4%
2%
57p
13 October
180p
148p
1,415,398
5 years
25.5%
1.24%
2.8%
10%
42p
Movements in the number of share options outstanding and their weighted average prices are as follows:
At 1 January
Granted
Exercised
Forfeited
At 31 December
2016
2015
Average
option price
per share
159p
168p
149p
171p
160p
Options
4,367,367
1,004,047
(285,323)
(544,176)
4,541,915
Average
option price
per share
192p
148p
122p
213p
159p
Options
2,864,430
3,192,421
(458,990)
(1,230,494)
4,367,367
Of the 4,541,915 outstanding options (2015: 4,367,367), 132,000 are exercisable (2015: 169,000).
The Group received proceeds of £465,000 in respect of the 312,540 options exercised during the year: £1,000 was credited to share capital and
£464,000 to share premium. The weighted average share price at date of exercise was 231p (2015: 201p).
The weighted average remaining life of 2,389,686 (2015: 2,137,864) awards outstanding under the 3 year plan is 2.1 years. The weighted average
remaining life of 2,152,229 (2015: 2,229,503) awards outstanding under the 5 year plan is 3.6 years.
b) LTIP
LTIP is a performance share plan under which shares are conditionally allocated to selected members of senior management at the discretion of the
Remuneration Committee on an annual basis. Following shareholder approval of the LTIP at the Company's AGM on 18 May 2000, awards over
shares are made to executive directors and senior managers each year.
Rotork Annual Report 2016
133
NOTES TO THE GROUP FINANCIAL STATEMENTS continued
For the year ended 31 December 2016
25. Share-based payments continued
2010 LTIP plan
Following shareholder approval of the 2010 LTIP plan at the Company's AGM on 23 April 2010, awards of shares have been made annually to
executive and senior managers. Half of these awards vest under a TSR performance condition and half under an EPS performance condition.
TSR measures the change in value of a share and reinvested dividends over the period of measurement. The actual number of shares transferred will
be determined by the number of shares initially allocated multiplied by a vesting percentage. The actual number of shares transferred will be 25%
at the 50th percentile rising to 100% at the 75th percentile.
For the 2014 and 2015 awards, the EPS performance condition is satisfied with 15% of the awards vesting if the EPS growth is RPI +10% over the
vesting period up to a maximum of 100% vesting if EPS growth exceeds RPI +25%. For the 2016 awards, the EPS performance condition is satisfied
with 15% of the awards vesting if the EPS growth is 9% over the vesting period up to a maximum of 100% vesting if EPS growth exceeds 35%.
The performance period for the 2013 awards ended on 31 December 2015. The TSR element of the award did not vest as the Company was
in the 13th percentile relative to the comparator group. The EPS element also did not vest as the growth in EPS did not exceed RPI +10% over
the vesting period.
The performance period for the 2014 awards ended on 31 December 2016. The TSR element of the award did not vest as the Company was in the
28th percentile relative to the comparator group. The EPS element also did not vest as the growth in EPS did not exceed RPI +10% over the
vesting period.
Grant date
Share price at grant date
Shares granted under scheme
Vesting period
Expected volatility
Risk free rate
Expected dividends expressed as a dividend yield
Probability of ceasing employment before vesting
Fair value of awards under TSR performance conditions
Fair value of awards under EPS performance conditions
2013 Award
2014 Award
2015 Award
2016 Award
2016
2015
12 April 2016 6 March 2015
249p
1,198,890
3 years
22.6%
0.9%
2.0%
5% p.a.
111p
236p
163p
2,105,244
3 years
28.4%
0.4%
3.1%
5% p.a.
85p
150p
Outstanding
at start
of year
919,380
1,020,500
1,198,900
–
Granted
during year
–
–
–
2,105,244
3,138,780
2,105,244
Vested
during year
–
–
–
–
–
Outstanding
at end
of year
–
1,020,500
1,184,060
2,105,244
Lapsed
(919,380)
–
(14,840)
–
(934,220)
4,309,804
The weighted average remaining life of awards outstanding is one year.
c) Overseas profit linked share plan (OPLSS) and the share incentive plan (SIP)
These discretionary profit linked shares schemes are annual schemes based on the prior year profit of participating Rotork companies. The value of
the award to each employee is based on salary and length of service, the value of the award can be up to £3,600.
134
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Strategic Report
Directors
Governance
Financial Statements
Company Information
26. Financial instruments
Financial risk and treasury policies
The Treasury department maintains liquidity, identifies and manages foreign exchange risk, manages relations with the Group's bankers and
provides a treasury service to the Group's businesses. Treasury dealings such as investments, borrowings and foreign exchange are conducted only
to support underlying business transactions.
The Group has clearly defined policies for the management of credit, foreign exchange and interest rate risk. The Group Treasury department is not
a profit centre and, therefore, does not undertake speculative foreign exchange dealings for which there is no underlying exposure. Exposures
resulting from sales and purchases in foreign currency are matched where possible and the net exposure may be hedged.
a) Credit risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations,
and arises principally from the Group's receivables from customers and cash on deposit with financial institutions.
Management has a credit policy in place and exposure to credit risk is both monitored on an ongoing basis and reduced through the use of credit
insurance covering over 80% of trade receivables at any time. Credit evaluations are carried out on all customers requiring credit above a certain
threshold, with varying approval levels set around this depending on the value of the sale. At the balance sheet date there were no significant
concentrations of credit risk.
Goods are sold subject to retention of title clauses, so that in the event of non-payment the Group may have a secured claim.
The Group maintains an allowance for impairment in respect of non-insured receivables where recoverability is considered doubtful.
The Group Treasury Committee meets regularly and reviews the credit risk associated with institutions that hold a material cash balance. As well as
credit ratings, counterparties and instruments are assessed for credit default swap pricing and liquidity of funds.
Exposure to credit risk
The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:
Trade receivables
Other receivables
Cash and cash equivalents
Foreign exchange contracts
Carrying amount
2016
2015
131,891
22,487
61,423
–
118,801
15,459
48,968
25
215,801
183,253
Other receivables consist principally of tax receivables and prepayments. These items do not give rise to significant credit risk.
The maximum exposure to credit risk for trade receivables at the reporting date by currency was:
Sterling
US dollar
Euro
Other
Provisions against trade receivables
The aging of trade receivables and the associated provision for impairment at the reporting date was:
Carrying amount
2016
17,488
35,089
53,092
26,222
2015
17,591
32,800
44,579
23,831
131,891
118,801
Not past due
Past due 0–30 days
Past due 31–60 days
Past due 61–90 days
Past due more than 91 days
Gross
2016
90,259
19,575
11,480
5,259
12,535
Provision
2016
(30)
(85)
(58)
(180)
(6,864)
Gross
2015
81,557
18,186
10,428
3,197
10,917
Provision
2015
(11)
(96)
(38)
(208)
(5,131)
139,108
(7,217)
124,285
(5,484)
Rotork Annual Report 2016
135
NOTES TO THE GROUP FINANCIAL STATEMENTS continued
For the year ended 31 December 2016
26. Financial instruments continued
b) Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group's approach to managing liquidity
is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions,
without incurring unacceptable losses or risking damage to the Group's reputation.
The Group is highly cash generative, and uses monthly cash flow forecasts to monitor cash requirements and to optimise its return on investments.
Typically the Group ensures that it has sufficient cash on hand to meet foreseeable operational expenses; it also maintains a £7m overdraft facility
(2015: £7m) on which interest would be payable at base rate plus 1.5%.
During 2016 the Group extended its £20,000,000 committed 364 day facility to August 2017 at LIBOR +0.35%. In addition to this facility the
Group also has a £90,000,000 term facility which matures in August 2018 and a £60,000,000 Revolving Credit Facility which matures in August
2020. At year end £115,500,000 of the committed facilities were drawn, resulting in £54,500,000 being available.
The following are the contractual maturities of financial liabilities, including interest payments and excluding the impact of netting agreements:
31 December 2016
Bank loans and overdrafts
Finance lease liabilities
Trade and other payables
Contingent consideration
Foreign exchange contracts
Non-redeemable preference shares
31 December 2015
Bank loans and overdrafts
Finance lease liabilities
Trade and other payables
Contingent consideration
Forward exchange contracts
Non-redeemable preference shares
Carrying
amount
Contractual
cash flows
Less than
12 months
1–2 years
2–5 years
More than
5 years
Analysis of contractual cash flow maturities
116,299
72
81,651
11,708
10,626
40
116,792
74
81,651
11,708
10,626
40
65,349
71
81,651
1,708
8,143
–
220,396
220,891
156,922
44,989
3
–
10,000
2,483
–
57,475
5,657
–
–
–
–
–
5,657
Analysis of contractual cash flow maturities
Carrying
amount
Contractual
cash flows
Less than
12 months
119,743
325
71,336
11,775
4,032
40
120,301
334
71,336
11,775
4,032
40
50,483
262
71,336
1,628
3,601
–
207,251
207,818
127,310
1–2 years
30,037
70
–
10,147
431
–
40,685
2–5 years
39,023
2
–
–
–
–
39,025
797
–
–
–
–
40
837
More than
5 years
758
–
–
–
–
40
798
Where a counterparty experiences credit stress then the foreign exchange contracts may be settled on a net basis but standard practice is to settle
on a gross basis and the undiscounted gross outflow in respect of these contracts is £242,288,000 (2015: £175,777,000) and the gross inflow is
£231,888,000 (2015: £172,144,000).
c) Market risk
Market risk arises from changes in market prices, such as currency rates and interest rates, and may affect the Group's results. The objective of
market risk management is to manage and control market risk within suitable parameters.
i) Currency risk
The Group is exposed to foreign currency risk on sales and purchases that are denominated in a currency other than the business unit's functional
currency. The currencies primarily giving rise to this risk are the US dollar and related currencies and the euro. The Group hedges up to 75% of
forecast US dollar or euro foreign currency exposures using forward exchange contracts. In respect of other non-sterling monetary assets and
liabilities the exposures may also be hedged up to 75% where this is deemed appropriate.
As part of the Group's cash management some of the overseas subsidiaries have loan and deposit balances where their intra-group counterparty is
in the UK. The balances are typically in local currency for the subsidiary so the UK holds a foreign currency current asset or liability which is usually
hedged through the use of foreign exchange swaps. At the balance sheet date only the 'forward' part of the swap remains and this is designated
as a cash flow hedge to match the currency exposure of the intercompany loan asset.
The Group classifies its forward exchange contracts (that hedge both the forecast sale and purchase transactions and the intercompany loan and
deposit balances) as cash flow hedges and states them at fair value. The net fair value of foreign exchange contracts used as hedges at 31
December 2016 was a £10,626,000 liability (2015: £4,007,000 liability) comprising an asset of £nil (2015: £25,000) and a liability of £10,626,000
(2015: £4,032,000). Forward exchange contracts in place at 31 December 2016 mature in 2017 and 2018.
Changes in the fair value of foreign exchange contracts that economically hedge monetary assets and liabilities in foreign currencies, and for which
no hedge accounting is applied, are recognised in the income statement.
136
Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
Sensitivity analysis
It is estimated that, with all other variables held equal (in particular other exchange rates), a general change of one cent in the value of euro against
sterling would have had an impact on the Group's operating profit for the year ended 31 December 2016 of £250,000 (2015: £235,000) and a
change of one cent in the value of US dollar against sterling would have had an impact on the Group's operating profit for the year ended 31
December 2016 of £450,000 (2015: £400,000). The method of estimation, which has been applied consistently, involves assessing the transaction
impact of US dollar and euro cash flows and the translation impact of US dollar and euro profits.
The following significant exchange rates applied during the year:
US dollar
Euro
Average rate
Closing rate
2016
1.36
1.22
2015
1.53
1.38
2016
1.24
1.17
2015
1.47
1.36
ii) Interest rate risk
The Group does not undertake any hedging activity in this area. All cash deposits are made at prevailing interest rates and the majority is available
with same day notice, though deposits are sometimes made with a maturity of no more than three months. The main element of interest rate risk
concerns sterling, US dollar, euro and renminbi deposits, all of which are on a floating rate basis.
The interest rate profile of the Group's financial liabilities at 31 December was as follows:
Fixed rate financial liabilities
Floating rate financial liabilities
2016
2015
203
116,208
116,411
604
119,504
120,108
The fixed and floating rate financial liabilities comprise finance leases, preference shares and bank loans. The floating rate obligations bear interest
at rates determined by reference to the relevant LIBOR or equivalent rate.
The weighted average interest rate of the fixed rate financial liabilities is 2.08% (2015: 1.98%). The weighted average period for which interest rates
on the fixed rate financial liabilities are fixed is 0.8 years.
The maturity profile of the Group's financial liabilities at 31 December was as follows:
In one year or less
In more than one year but not more than two years
In more than two years but not more than five years
In more than five years
Total
2016
65,108
44,968
5,600
735
2015
50,352
30,084
38,975
697
116,411
120,108
d) Capital risk management
The primary objective of the Group's capital management is to ensure it maintains sufficient capital in order to support its business and
maximise shareholder value. The Group has an asset-light business model and uses cash generated from operations to either invest organically
or by acquisition. The Group manages its capital structure and makes adjustments to it in light of changes in economic and market conditions.
To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders or issue new shares.
The Group defines capital as net debt plus equity attributable to shareholders. There are no externally imposed restrictions on the Group's capital structure.
The Group monitors capital using the following indicators:
i) Group net debt
Total borrowings
Cash and cash equivalents (note 16)
Group net debt
2016
2015
(116,411)
61,423
(120,108)
48,968
(54,988)
(71,140)
Rotork Annual Report 2016
137
NOTES TO THE GROUP FINANCIAL STATEMENTS continued
For the year ended 31 December 2016
26. Financial instruments continued
ii) Return on capital employed
Adjusted operating profit
Operating profit
Amortisation of acquired intangible assets
Capital employed
Shareholders' funds
Cash and cash equivalents (note 16)
Interest bearing loans and borrowings
Net debt
Pension deficit net of deferred tax
Average capital employed
Return on capital employed
2016
2015
93,777
26,811
104,386
20,886
120,588
125,272
434,086
(61,423)
116,411
54,988
46,469
535,543
516,009
23.4%
407,802
(48,968)
120,108
71,140
17,532
496,474
437,990
28.6%
e) Fair values
The fair values of financial assets and liabilities, together with the carrying amounts shown in the balance sheet, were as follows:
Loans and receivables
Trade receivables
Other receivables
Financial assets
Cash and cash equivalents
Designated cash flow hedges
Foreign exchange contracts:
Financial assets
Financial liabilities
Financial liabilities at amortised cost
Bank loans
Trade and other payables
Contingent consideration
Preference shares
Finance lease liabilities
Carrying
amount
2016
Fair value
2016
Carrying
amount
2015
Fair value
2015
131,891
22,487
131,891
22,487
118,801
15,459
118,801
15,459
61,423
61,423
48,968
48,968
–
(10,626)
–
(10,626)
25
(4,032)
25
(4,032)
(116,299)
(81,651)
(11,708)
(40)
(72)
(116,299)
(81,651)
(11,708)
(40)
(72)
(119,743)
(71,336)
(11,775)
(40)
(325)
(119,743)
(71,336)
(11,775)
(40)
(325)
(4,595)
(4,595)
(23,998)
(23,998)
Fair value hierarchy
The fair value of the Group's outstanding derivative financial assets and liabilities consisted of foreign exchange contracts and swaps and were
estimated using year end spot rates adjusted for the forward points to the appropriate value dates, and gains and losses are taken to equity
estimated using market foreign exchange rates at the balance sheet date. All derivative financial instruments are categorised at level 2 of the
fair value hierarchy.
The other financial instruments are classified as level 3 in the fair value hierarchy and are valued as follows:
i) Trade and other receivables/payables
As the majority of receivables/payables have a remaining life of less than one year, the notional amount is deemed to reflect the fair value.
ii) Contingent consideration
As all the contingent consideration is contractually due for payment within 14 months (2015: 14 months), the carrying amount is equal to the
fair value. Further information on the contingent consideration is shown in note 21.
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Financial Statements
Company Information
27. Operating leases
Non-cancellable operating lease rentals are payable as follows:
Less than one year
Between one and five years
More than five years
2016
4,775
10,351
1,801
16,927
2015
4,232
9,281
386
13,899
Of the £16,927,000 (2015: £13,899,000), £13,279,000 (2015: £10,361,000) relates to property and the balance to plant and equipment.
28. Capital commitments
Capital commitments at 31 December for which no provision has been made in these accounts were:
Contracted
29. Contingencies
Performance guarantees and indemnities
2016
884
2015
2,813
2016
7,034
2015
7,534
The performance guarantees and indemnities have been entered into in the normal course of business. A liability would only arise in the event of
the Group failing to fulfil its contractual obligations.
30. Related parties
The Group has a related party relationship with its subsidiaries and with its directors and key management. A list of subsidiaries is shown on
pages 144 to 147 of these financial statements. Transactions between two subsidiaries for the sale and purchase of products or the subsidiary
and parent company for management charges are priced on an arm's length basis.
Severn Trent plc was a related party of Rotork plc by virtue of M Lamb's non-executive directorship which ended on 20 July 2016. Sales to
subsidiaries and associates of Severn Trent plc totalled £504,000 during the period to 20 July 2016 (2015: £1,229,000 during the year).
Key management emoluments
The emoluments of those members of the management team, including directors, who are responsible for planning, directing and controlling
the activities of the Group were:
Emoluments including social security costs
Post-employment benefits
Pension supplement
Share-based payments
2016
3,370
229
202
848
4,649
2015
2,972
269
208
(309)
3,140
Rotork Annual Report 2016
139
ROTORK PLC COMPANY BALANCE SHEET
At 31 December 2016
Non-current assets
Property, plant and equipment
Investments
Deferred tax assets
Current assets
Amounts owed by Group undertakings
Other receivables
Cash and cash equivalents
Total assets
Equity
Share capital
Share premium
Capital redemption reserve
Retained earnings
Non-current liabilities
Preference share capital
Current liabilities
Trade payables
Amounts owed to Group undertakings
Other payables
Notes
2016
£000
2015
£000
c
d
e
f
i
g
72
43,205
145
43,422
150,327
743
1,234
152,304
195,726
4,350
10,482
1,644
175,495
191,971
40
40
15
1,051
2,649
3,715
115
43,205
51
43,371
129,974
203
1,680
131,857
175,228
4,349
10,018
1,644
155,031
171,042
40
40
232
1,051
2,863
4,146
Total equity and liabilities
195,726
175,228
The Company reported a profit for the financial year of £61,600,000 (2015: £95,905,000).
These Company financial statements were approved by the Board of Directors on 27 February 2017 and were signed on its behalf by:
PI France and JM Davis, Directors.
140
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Strategic Report
Directors
Governance
Financial Statements
Company Information
ROTORK PLC COMPANY STATEMENT OF CHANGES IN EQUITY
At 31 December 2016
Balance at 31 December 2014
Profit for the year
Equity settled share-based payment transactions net of tax
Share options exercised by employees
Own ordinary shares acquired
Own ordinary shares awarded under share schemes
Dividends
Share
capital
£000
4,346
–
–
3
–
–
–
Share
premium
£000
9,422
–
–
596
–
–
–
Capital
redemption
reserve
£000
Retained
earnings
£000
Total equity
£000
1,644
102,883
118,295
–
–
–
–
–
–
95,905
(1,464)
–
(2,785)
4,257
(43,765)
95,905
(1,464)
599
(2,785)
4,257
(43,765)
Balance at 31 December 2015
4,349
10,018
1,644
155,031
171,042
Profit for the year
Equity settled share-based payment transactions net of tax
Share options exercised by employees
Own ordinary shares acquired
Own ordinary shares awarded under share schemes
Dividends
–
–
1
–
–
–
–
–
464
–
–
–
–
–
–
–
–
–
61,600
1,557
–
(1,019)
2,202
(43,876)
61,600
1,557
465
(1,019)
2,202
(43,876)
Balance at 31 December 2016
4,350
10,482
1,644
175,495
191,971
Rotork Annual Report 2016
141
NOTES TO THE COMPANY FINANCIAL STATEMENTS
For the year ended 31 December 2016
a) Accounting policies
The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the financial
statements. Notes a) to i) relate to the Company rather than the Group.
Basis of preparation
The financial statements have been prepared under the historical cost convention. The financial statements are prepared in accordance with
Financial Reporting Standard 101 Reduced Disclosure Framework ('FRS 101'). The amendments to FRS 101 (2013/14 Cycle) issued in July 2014
and the amendments issued in July 2015 (2014/15 Cycle and minor amendments) have been applied.
The Company has applied Financial Reporting Standard 101 'Reduced Disclosure Framework' (FRS 101) issued by the Financial Reporting Council
(FRC) incorporating the Amendments to FRS 101 issued by the FRC in July 2015, and the amendments to Company law made by The Companies,
Partnerships and Groups (Accounts and Reports) Regulations 2015. In these financial statements, the Company has applied the exemptions
available under FRS 101 in respect of the following disclosures:
• A cash flow statement and related notes;
• Comparative period reconciliations for share capital and tangible fixed assets;
• Disclosures in respect of transactions with wholly owned subsidiaries;
• Disclosures in respect of capital management;
• The effects of new but not yet effective IFRSs; and
• Disclosures in respect of the compensation of key management personnel.
The Company produces consolidated financial statements which are prepared in accordance with International Financial Reporting Standards.
As the consolidated financial statements of the Company include the equivalent disclosures, the Company has also taken the exemptions under FRS
101 available in respect of the following disclosures:
• IFRS 2 Share-Based Payments in respect of group settled share-based payments; and
• The disclosures required by IFRS 7 and IFRS 13 regarding financial instrument disclosures have not been provided.
Where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within the Group, the Company
considers these to be insurance arrangements, and accounts for them as such. In this respect, the Company treats the guarantee contract as a
contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee.
The Company accounts for intra-group cross guarantees under IAS 37.
As permitted by s408 of the Companies Act 2006 the Company has elected not to present its own profit and loss account or statement of
comprehensive income for the year. The profit attributable to the Company is disclosed in the footnote to the Company's balance sheet.
Foreign currencies
Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are translated using the rate of exchange at the balance sheet date and the gains or losses on translation are
included in the profit and loss account.
Investments in subsidiaries
Investments are measured at cost less any provision for impairment and comprise investments in subsidiary companies.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses.
Plant and machinery is depreciated by equal annual instalments by reference to their estimated useful lives and residual values at annual rates
of between 10% and 33%. Depreciation methods, useful lives and residual values are reviewed at each balance sheet date.
Post-retirement benefits
The Company participates in a UK Group pension scheme providing benefits based on final pensionable salary. The assets of the scheme are held separately
from those of the Company. The sponsoring employer for the Group pension scheme is Rotork Controls Ltd. No contractual agreement or policy is in place
for charging to individual Group entities the net defined benefit cost for the plan as a whole. As a result, in accordance with IAS 19, the amount charged to
the profit and loss account represents the contributions payable to the UK Scheme in respect of the accounting period.
Classification of preference shares
In line with the requirements of IAS 32, Financial Instruments, the cumulative redeemable preference shares issued by the Company are classified as
long-term debt. The preference dividends are charged within interest payable.
142
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Strategic Report
Directors
Governance
Financial Statements
Company Information
Share-based payments
The Company has adopted IFRS 2 and its policy in respect of share-based payment transactions is consistent with the Group policy shown in
note 1 to the Group financial statements. Costs in relation to share-based awards made to other Group employees are recharged to each
subsidiary company.
Deferred taxation
Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill; the initial
recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination, and differences relating to
investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based
on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively
enacted at the balance sheet date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary
difference can be utilised.
Dividends
Interim dividends are recorded in the financial statements when they are paid. Final dividends are recorded in the financial statements in the period
in which they are approved by the Company's shareholders.
b) Personnel expenses in the Company profit and loss account
Wages and salaries (including bonus and incentive plans)
Social security costs
Pension costs
Share-based payments/(credit)
2016
3,028
334
251
452
4,065
2015
2,221
134
233
(237)
2,351
During the year there were 17 (2015: 15) employees of Rotork plc plus the three (2015: three) executive directors. The personnel costs accounted
for within the Company include the full costs of the employees, the Finance Director, the Chief Executive, but the full costs of the other executive
director is reported within the subsidiary where he is based.
Disclosures required by paragraph 1 of schedule 5 of SI2008/410 are set out in the Director's Remuneration Report on pages 76 to 93.
Share-based payments
The share-based payment charge relates to employees of the Company participating in the long term incentive plan (LTIP). The disclosures required
under IFRS 2 can be found in note 25 to the Group financial statements. The table below sets out the movement of share options under the LTIP
for employees of the Company.
2013 Award
2014 Award
2015 Award
2016 Award
Outstanding
at start
of year
289,820
316,920
400,940
–
Granted during
year
–
–
–
804,898
1,007,680
804,898
Vested
during
year
Lapsed
during
year
Outstanding
at end
of year
–
–
–
–
–
(289,820)
–
–
–
–
316,920
400,940
804,898
(289,820)
1,522,758
The weighted average remaining life of awards outstanding at the year end is one year.
Rotork Annual Report 2016
143
NOTES TO THE COMPANY FINANCIAL STATEMENTS continued
For the year ended 31 December 2016
c) Property, plant and equipment in the Company balance sheet
Cost
At 1 January 2016
Additions
At 31 December 2016
Depreciation
At 1 January 2016
Charge for year
At 31 December 2016
Net book value
At 31 December 2016
At 31 December 2015
d) Investments in the Company balance sheet
Shares in Group companies
At 1 January and 31 December
The Company has the following investments in wholly owned subsidiaries:
Subsidiary
Incorporated in
Registered address
100% owned by Rotork plc
GH Chaplain & Co (Engineers) Limited
Rotork Analysis Limited
Rotork Cleaners Limited
Rotork Control and Safety Limited
Rotork Instruments Limited
Rotork Nominees Limited
Widcombe (Developments) Limited
Rotork Controls Limited
Rotork Overseas Limited
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
Rotork House, Brassmill Lane, Bath BA1 3JQ
Rotork House, Brassmill Lane, Bath BA1 3JQ
Rotork House, Brassmill Lane, Bath BA1 3JQ
Rotork House, Brassmill Lane, Bath BA1 3JQ
Rotork House, Brassmill Lane, Bath BA1 3JQ
Rotork House, Brassmill Lane, Bath BA1 3JQ
Rotork House, Brassmill Lane, Bath BA1 3JQ
Rotork House, Brassmill Lane, Bath BA1 3JQ
Rotork House, Brassmill Lane, Bath BA1 3JQ
Plant and
equipment
221
–
221
106
43
149
72
115
Total
221
–
221
106
43
149
72
115
2016
2015
43,205
43,205
100% owned by Rotork Controls Limited
Rotork Actuation (Shanghai) Co Limited
Rotork Trading (Shanghai) Co Limited
Rotork Controls (India) Private Limited
China
China
India
Rotork UK Limited
Valvekits Limited
England and Wales
England and Wales
100% owned by Rotork Overseas Limited
Rotork Australia Pty Limited
Rotork Controls Comercio De Atuadores LTDA
Australia
Brazil
Rotork Controls (Canada) Limited
Rotork Chile SpA
Bifold Group Limited
Rotork Midland Limited
Rotork Motorisation SAS
Rotork Controls (Deutschland) GmbH
Rotork Germany Holdings GmbH
Rotork Limited
Eltav Wireless Monitoring Limited
Rotork Italy Holdings Srl
Canada
Chile
England and Wales
England and Wales
France
Germany
Germany
Hong Kong
Israel
Italy
Building G, No.260 Liancao Road, Minhang District, Shanghai,
PRC 201108
Room 1177, No.400, Middle Zhejiang Road, HuangPu District, Shanghai,
China
28B, Ambattur Industrial Estate (North Phase), Ambattur,
Chennai 600 098, India
Rotork House, Brassmill Lane, Bath BA1 3JQ
Rotork House, Brassmill Lane, Bath BA1 3JQ
Level 26, 181 William Street, Melbourne, VIC, 3000, Australia
Rodovia SP 73, 4509 – Armazem Modulo 14 – NR Cond.,
Indaiatuba – SP, Brazil
#4-2850 Argentia Road, Mississauga, Ontario, L5N-8G4, Canada
Rotork Es Presidente Kennedy 4700, Oficina 1001, Vitacura, Chile
Rotork House, Brassmill Lane, Bath BA1 3JQ
Rotork House, Brassmill Lane, Bath BA1 3JQ
75, Rue Rateau 93126 La Courneuve Cedex, France
Siemensstr. 33, 40721 Hilden, Germany
Mühlsteig 45, 90579 Langenzenn, Germany
Level 54, Hopewell Centre, 183 Queen's Road East, Hong Kong
15 Hata'asia St. Ra'anana, Israel 4365408
Corso di Porta Vittoria 9 (Milano) Italy
144
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Strategic Report
Directors
Governance
Financial Statements
Company Information
Subsidiary
Rotork Japan Co Limited
Rotork Middle East FZE
Rotork (Malaysia) Sdn Bhd
Rotork Actuation Sdn Bhd
Rotork BV
Rotork Gears Holding BV
Robusta Miry Brook BV
Rotork Norge AS
Rotork Polska zoo
Rotork Rus Limited
Rotork Controls (Singapore) Pte Limited
Rotork Africa (Pty) Limited
Rotork Controls (Korea) Co Limited
Young Tech Co Limited
Rotork Controls (Iberia) SL
Rotork Sweden AB
Rotork AG
Rotork Inc.
Incorporated in
Registered address
Japan
Jebel Ali Free Zone
Malaysia
Malaysia
Netherlands
Netherlands
Netherlands
Norway
Poland
Russia
Singapore
South Africa
South Korea
South Korea
Spain
Sweden
Switzerland
USA
2-2-24 Sengoku, Koto-ku, Tokyo, 135-0015 Japan
PUB-LC 07, near R/A 08, PO Box 262903, Jebel Ali Free Zone, Dubai,
United Arab Emirates
1-17-1, Menara Bangkok Bank, Berjaya Central Park, No 105, Jalan
Ampang, 50450 Kuala Lumpur, Malaysia
No 32, Jln Anggerik Mokara 31/47, Kota Kemuning, 40460 Shah Alam,
Malaysia
Mandenmakerstraat 45, 3194 DA Hoogvliet, The Netherlands
Nijverheidstraat 25, 7581 PV Losser, The Netherlands
Strawinskylaan 3127, 8th Floor, 1077 ZX Amsterdam, The Netherlands
Ormahaugvegen 3, 5347 Ågotnes, Norway
Tarnogórska 241, 44-100 Gliwice, Poland
Offices 203-205, ul. Otradnaya 2B, bld. 3, 127273 Moscow, Russia
426 Tagore Industrial Ave, Singapore 787808
136 Kuschke Street, Meadowdale Ext3, Germiston, 1601 South Africa
509, 5th Floor Leader's Bldg 342-1, Yatap-Dong, Bundang-gu,
Seong-nam Si, Gyeonggi-do, South Korea 463-828
81, Hwanggeum-ro, 89beon-gil, Yangchon-eup, Gimpo-si,
Gyeonggi-do, Korea 10048
Larrondo Beheko Etorbidea, Edificio 2 – 48180 Loiu (Bizkaia) Spain
Box 80, 791 22 Falun, Sweden
Fuchsacker 678, 9426 Lutzenberg, Switzerland
The Corporation Trust Company, Corporation Trust Center, 1209 Orange
St., Wilmington, DE 19801 USA
Av. Casanova Torre Banco Plaza, Piso 3 Ofic. 3D. Sabana Grande.
Caracas – Venezuela
Aydinli Mahallesi Melodi Sok. Bilmo Küçük Sanayi Sitesi no:35/2 Tuzla,
Turkey
Rotork Controls de Venezuela SA
Venezuela
Rotork Turkey Akı¸s Kontrol Sistemleri Ticaret
Limited ¸Sirketi
Turkey
100% owned by Valvekits Limited
Circa Engineering Limited
England and Wales
Rotork House, Brassmill Lane, Bath BA1 3JQ
100% owned by Rotork Trading (Shanghai) Co Limited
Centork Trading (Shanghai) Co. Ltd
China
Rotork Instruments Chengdu Co. Ltd
China
Room C-02, 1/F, West Area No. 2 Building, No. 29 Jiatai Road, Free Trade
Zone, Shanghai, China
Room 1201, 12/F, Unit no.1, Building No. 1, Building I, 88 Shenghe No.1
Road, High Tech Zone, Chengdu, Sichuan, China 610041
100% owned by Rotork UK Limited
Prokits Limited
Flowco Limited
100% owned by Rotork Motorisation SAS
Servo Moteurs Service SARL
England and Wales
England and Wales
Rotork House, Brassmill Lane, Bath BA1 3JQ
Rotork House, Brassmill Lane, Bath BA1 3JQ
France
210 Chemin du Guigonnet 13270 Fos-sur-Mer, France
100% owned by Rotork Italy Holdings Srl
Rotork Controls Italia Srl
Rotork Instruments Italy Srl
GT Attuatori Srl
Rotork Fluid Systems Srl
Costruzioni Meccaniche Legnanesi Srl
100% owned by Rotork Controls Italia Srl
Rotork Gears Srl
Italy
Italy
Italy
Italy
Italy
Italy
Viale Europa n.17 – 20090 Cusago (Milano) Italy
Viale Europa n.17 – 20090 Cusago (Milano) Italy
Viale Europa n.17 – 20090 Cusago (Milano) Italy
Via Padre Jacques Hamel, 138/B – 55016 Porcari (Lucca) Italy
Via del Brugo, 5 20025 Legnano (Milano) Italy
Viale Europa n.17 – 20090 Cusago (Milano) Italy
100% owned by Rotork Gears Holding BV
Rotork Gears BV
Netherlands
Nijverheidstraat 25, 7581 PV, Overijssel, The Netherlands
100% owned by Rotork Inc
Rotork (Thailand) Limited
Rotork Controls Inc.
Thailand
USA
35/8 Soi Ladprao124 (Sawasdikarn) Ladprao Road, Plubpla,
Wangtonglang, Bangkok 10310 Thailand
675 Mile Crossing Blvd., Rochester, NY 14624, USA
Rotork Annual Report 2016
145
NOTES TO THE COMPANY FINANCIAL STATEMENTS continued
For the year ended 31 December 2016
d) Investments in the Company balance sheet continued
Incorporated in
Registered address
Subsidiary
Ralph A.Hiller Company
Remote Control Inc.
Ranger Acquisition Corp
100% owned by Ranger Acquisition Corp
K-Tork International Inc.
Fairchild Industrial Products Company
Rotork Tulsa Inc.
100% owned by K-Tork International Inc
Rotork Dallas Inc.
USA
USA
USA
USA
USA
USA
USA
100% owned by Fairchild Industrial Products Company
Fairchild Industrial Products (Sichuan)
Company Limited
Fairchild India Private Limited
China
India
6005 Enterpirise Drive, Export, PA 15632, USA
77 Circuit Dr. North Kingstown, RI 02852, USA
The Corporation Trust Company, Corporation Trust Center, 1209 Orange
St., Wilmington, DE 19801 USA
C T Corporation System, 1999 Bryan St., Suite 900, Dallas, TX 75201
USA
3920 West Point Blvd, Winston-Salem, NC 27103, USA
4433 W 49th Suite D, Tulsa, OK 74017, USA
10410 Vista Park Rd; Dallas, TX; 75238
Room 1201, Complex Square, No.88 West Shenghe No.1 Road, High
Tech Zone, Chengdu, Sichuan, China. 610041
56-C/Bb , Janakpuri, New Delhi-110058
100% owned by Bifold Group Limited
Bifold Fluidpower (Holdings) Limited
England and Wales
Rotork House, Brassmill Lane, Bath BA1 3JQ
100% owned by Bifold Fluidpower (Holdings) Limited
Bifold Fluidpower Limited
MTS Precision Limited
Marshalsea Hydraulics Limited
Bifold Company (Manufacturing) Limited
England and Wales
England and Wales
England and Wales
England and Wales
Rotork House, Brassmill Lane, Bath BA1 3JQ
Rotork House, Brassmill Lane, Bath BA1 3JQ
Rotork House, Brassmill Lane, Bath BA1 3JQ
Rotork House, Brassmill Lane, Bath BA1 3JQ
100% owned by Bifold Fluidpower Limited
Fluidpower (Stainless Steel) Limited
England and Wales
Rotork House, Brassmill Lane, Bath BA1 3JQ
100% owned by Rotork Germany Holdings GmbH
Germany
Max Process GmbH
Schischek GmbH
Germany
Schischek Produktion Technischer Gerate GmbH Germany
Germany
Rotork GmbH
Rastenweg 10, 53489 Sinzig
Mühlsteig 45, 90579 Langenzenn
Mühlsteig 45, 90579 Langenzenn
Mühlsteig 45, 90579 Langenzenn
100% owned by Rotork AG
Schischek Limited
Schischek EURL
Schischek Srl
England and Wales
France
Italy
Rotork House, Brassmill Lane, Bath BA1 3JQ
49 Avenue du Président Salvador Allende, 77100 Meaux, France
Ranica (BG) – Via Adelasio 22, Italy
60% owned by Max Process GmbH
GT Attuatori Europe GmbH
Germany
Rastenweg 10, 53489 Sinzig
40% owned by Rotork Germany Holdings GmbH
GT Attuatori Europe GmbH
Germany
Rastenweg 10, 53489 Sinzig
100% owned by Schischek GmbH
Schischek Sales Europe Ltd
England and Wales
Mühlsteig 45, 90579 Langenzenn
100% owned by Robusta Miry Brook BV
Rotork Servo Controles de Mexico S.A de C.V
Mexico
Centeotl 223, Col. Industrial San Antonio, C.P. 02760, Azcapotzalco,
Ciudad de Mexico, Mexico
100% owned by Rotork Controls (Iberia) SL
Actuation Iberia S.L
Spain
C/Ercilla, 21., 48009, Bilbao (Vizcaya), Spain
146
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Strategic Report
Directors
Governance
Financial Statements
Company Information
Subsidiary
Incorporated in
Registered address
Centork Valve Control S.L
Spain
Pol. Ind. Ipintza 110, Txatxamendi 24-26 – 20100 Lezo (Gipuzkoa) –
Spain
100% owned by Rotork Instruments Italy Srl
Soldo Controls USA Inc.
USA
FBT Ohio, Inc., 3300 Great American Tower, 301 E. Fourth Street,
Cincinnati, OH 45202 USA
e) Deferred tax assets and liabilities in the Company balance sheet
Recognised deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
Tangible fixed assets
Provisions
Share-based payments
Assets
2016
£000
4
141
–
145
Liabilities
2016
£000
–
–
–
–
Net
2016
£000
4
141
–
145
Assets
2015
£000
1
50
–
51
Movements in the net deferred tax balance during the year are as follows:
Balance at 1 January
Credited/(charged) to the income statement
Charged directly to equity in respect of share-based payments
Liabilities
2015
£000
–
–
–
–
2016
£000
51
94
–
145
Net
2015
£000
1
50
–
51
2015
£000
239
(171)
(17)
51
There is an unrecognised deferred tax liability for temporary differences associated with investments in subsidiaries. Rotork plc controls the dividend
policies of its subsidiaries and subsequently the timing of the reversal of the temporary differences. The value of temporary differences associated
with unremitted earnings of subsidiaries for which deferred tax has not been recognised is £282,541,000 (2015: £307,714,000).
f) Other receivables in the Company balance sheet
Prepayments and accrued income
Corporation tax
Other receivables
2016
485
172
86
743
2015
118
–
85
203
Rotork Annual Report 2016
147
NOTES TO THE COMPANY FINANCIAL STATEMENTS continued
For the year ended 31 December 2016
g) Other payables in the Company balance sheet
Other taxes and social security
Corporation tax
Other payables
Accruals and deferred income
2016
52
–
1,455
1,142
2,649
2015
42
447
973
1,401
2,863
The Company has a £25,000,000 gross overdraft facility (2015: £25,000,000) and is part of a UK banking arrangement, see note h.
h) Contingencies in the Company
The UK banking arrangements are subject to cross-guarantees between the Company and its UK subsidiaries. These accounts are subject to a right
of set-off. The performance guarantees and indemnities have been entered into in the normal course of business. A liability would only arise in the
event of the Group failing to fulfil its contractual obligations.
During 2016 the Company extended its £20,000,000 committed 364 day facility to August 2017 at LIBOR +0.35%. In addition to this facility the
Company also has a £90,000,000 term facility which matures in August 2018 and a £60,000,000 Revolving Credit Facility which matures in August
2020. These facilities are available to the Company, Rotork Controls Limited and Rotork Overseas Limited. At year end £115,500,000 of the
committed facilities were drawn, resulting in £54,500,000 being available.
i) Capital and reserves in the Company balance sheet
Details of the number of ordinary shares in issue and dividends paid in the year are given in note 17 to the Group financial statements.
148
Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
TEN YEAR TRADING HISTORY
Revenue
590,078
546,459
594,739
578,440
511,747
447,833
380,560
353,521
320,207
235,688
2016
£000
2015
£000
2014
£000
2013
£000
2012
£000
2011
£000
2010
£000
2009
£000
2008
£000
2007
£000
Cost of sales
Gross profit
(328,410)
(296,944)
(309,280)
(304,066)
(272,199)
(236,359)
(199,742)
(187,600)
(176,046)
(127,748)
261,668
249,515
285,459
274,374
239,548
211,474
180,818
165,921
144,161
107,940
Overheads
(167,891)
(145,129)
(143,232)
(135,109)
(115,081)
(99,474)
(83,094)
(74,384)
(69,272)
(52,553)
Operating profit
93,777
104,386
142,227
139,265
124,467
112,000
97,724
91,537
74,889
55,387
Adjusted* operating
profit
120,588
125,272
157,167
151,412
131,866
115,921
99,442
92,103
76,014
55,461
Amortisation of
acquired intangible
assets
Disposal of property
(26,811)
–
(20,886)
–
(14,940)
–
(12,147)
–
(7,399)
–
(3,921)
–
(1,718)
–
(1,153)
587
(1,125)
–
(74)
–
Operating profit
93,777
104,386
142,227
139,265
124,467
112,000
97,724
91,537
74,889
55,387
Net interest
(2,707)
(2,517)
(1,062)
(1,268)
(273)
550
131
(621)
862
1,866
Profit before taxation
Tax expense
91,070
(23,897)
101,869
(27,012)
141,165
(37,963)
137,997
(38,488)
124,194
(34,879)
112,550
(32,149)
97,855
(28,334)
90,916
(26,884)
75,751
(22,331)
57,253
(17,957)
Profit for the year
67,173
74,857
103,202
99,509
89,315
80,401
69,521
64,032
53,420
39,296
Dividends
43,876
43,765
42,702
38,735
33,924
49,534
35,912
24,102
29,970
24,732
Basic EPS
Adjusted* EPS
Diluted EPS
7.7p
10.0p
7.7p
8.6p
10.4p
8.6p
11.9p
13.2p
11.9p
11.5p
12.5p
11.4p
10.3p
10.9p
10.3p
9.3p
9.6p
9.3p
8.1p
8.2p
8.0p
7.4p
7.5p
7.4p
6.2p
6.3p
6.2p
4.6p
4.6p
4.5p
* Adjusted is before the amortisation of acquired intangible assets and the disposal of property.
Rotork Annual Report 2016
149
SHARE REGISTER INFORMATION
The tables below show the split of shareholder and size of shareholding in Rotork plc.
Ordinary shareholder by type
Individuals
Bank or nominees
Other company
Other corporate body
Range
1-1,000
1,001-2,000
2,001-5,000
5,001-10,000
10,001-50,000
50,001-100,000
100,001 +
Source: Equiniti
Number of
holdings
%
Number of
shares
2,363
772
35
24
3,194
Number of
holdings
727
356
630
401
600
130
350
25,096,671
74.0
24.2 833,358,986
807,256
10,800,217
1.1
0.7
%
2.9
95.8
0.1
1.2
100.0 870,063,130
100.0
%
Number of
shares
22.8
11.2
19.7
12.5
18.8
4.1
354,125
528,763
2,086,439
2,947,107
13,636,134
9,333,716
10.9 841,176,846
%
0.1
0.1
0.2
0.3
1.5
1.1
96.7
3,194
100.0 870,063,130
100.0
Dividend information
The table below details the amounts of interim, final and additional dividends declared in respect of each of the last five years.
Interim
dividend
(p)
1.95
1.95
1.92
1.81
1.64
Final
dividend
(p)
3.15
3.10
3.09
3.00
2.66
Total
dividends
(p)
5.10
5.05
5.01
4.81
4.30
2016
2015
2014*
2013*
2012*
* Restated to reflect subdivision of 5p ordinary shares into 0.5p ordinary shares.
Financial calendar
27 February 2017
6 April 2017
7 April 2017
28 April 2017
28 April 2017
8 August 2017
23 November 2017
Preliminary announcement of annual results for 2016
Ex-dividend date for final proposed 2016 dividend
Record date for final proposed 2016 dividend
Announcement of trading update
Annual General Meeting held at Rotork House, Brassmill Lane, Bath, BA1 3JQ
Announcement of interim financial results for 2017
Announcement of trading update
150
Rotork Annual Report 2016
Strategic Report
Directors
Governance
Financial Statements
Company Information
CORPORATE DIRECTORY
Company Secretary
Stephen Rhys Jones
Registered Office
Rotork plc
Rotork House
Brassmill Lane
Bath BA1 3JQ
Company Number
00578327
Registrars
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
Stockbrokers
UBS Investment Bank
1 Finsbury Avenue
London EC2M 2PP
Citigroup Global Markets Ltd
Citigroup Centre
33 Canada Square
London E14 5LB
Financial Advisers
UBS Investment Bank
1 Finsbury Avenue
London EC2M 2PP
Citigroup Global Markets Ltd
Citigroup Centre
33 Canada Square
London E14 5LB
Auditors
Deloitte LLP
2 New Street Square
London EC4A 3BZ
Financial Public Relations
FTI Consulting
200 Aldersgate
Aldersgate Street
London EC1A 4HD
Solicitors
Messrs. Osborne Clarke
No.2 Temple Back East
Temple Quay
Bristol BS1 6EG
Rotork Annual Report 2016
151
Brassmill Lane, Bath BA1 3JQ, UK
T: +44 1225 733200 F: +44 1225 333467
E: mail@rotork.com
www.rotork.com