Rotork plc Annual Report 2017

FY2017 Annual Report · Rotork plc

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BUILDING A
BOLD AND
SUSTAINABLE
FUTURE

A N N UA L REP ORT 2017

WELCOME TO ROTORK

Rotork is a market-leading solution provider for the
actuation, flow control and industrial markets. We have
over 3,800 talented employees who work across a global
network of local offices and established manufacturing
facilities to provide a world-class service to our customers.

Our flow control products are used extensively in the oil and gas, water, power
and industrial markets, amongst others. Our customers rely on us for innovative,
high quality engineered products and services, many of which are used in
mission-critical applications.

The Group comprises four actuation and flow control divisions along with our
cross-divisional Site Services team. We deliver a high return on capital and strong
sustainable margins from our diverse end markets and wide geographic spread.

Why invest in us
We are taking steps to return the Group to the
higher levels of organic growth and margins
previously delivered.

See our investment case

on page 6

Our strategy
We deliver a high return on capital with strong
and sustainable margins, consistent growth in
revenues and profits and strong cash generation.

See our strategy

on page 14

Our business model
Our capital efficient model, combining the
benefits of global expertise and local service,
positions us well to generate sustainable value
for our stakeholders.

See our business model

on page 16

2017 HIGHLIGHTS

OUR PERFORMANCE

Revenue

Profit before tax

Adjusted profit before tax*

£642.2m

+8.8%

£80.6m

-11.5%

£124.8m

+5.8%

£642.2m

£590.1m

£80.6m

£91.1m

£124.8m

£117.9m

Adjusted operating profit*

£130.2m

+7.9%

Earnings per share

6.4p

-16.9%

Adjusted earnings per share*

10.6p

+6.0%

£130.2m

£120.6m

6.4p

7.7p

10.6p

10.0p

• Market outlook improving
• Increasing order book
• Growing contribution from new products

and service

• New Chief Executive appointed
• Growth acceleration programme initiated
• Initial opportunities actioned
• Balance sheet strengthened, with cash

conversion of 109.1%

* References to adjusted performance measures throughout this

document relate to statutory results adjusted to exclude
amortisation of acquired intangibles and other adjustments (see
note 2).

References to organic constant currency (OCC) or underlying
results throughout this document are the 2017 figures restated
at 2016 exchange rates, excluding the incremental contribution
from acquisitions.

CONTENTS

OVERVIEW
2017 highlights
At a glance
Executive Chairman’s statement
Our investment case

STRATEGIC REPORT
Our strategic framework
Our market environment
Our strategy
Our business model
How we manage risk
Principal risks and uncertainties
Viability statement
Operating review
– Operational performance
– Rotork Controls
– Rotork Fluid Systems
– Rotork Gears
– Rotork Instruments
Financial review
Key performance indicators
Corporate social responsibility
– Our people
– Corporate social responsibility
– Ethics and values
– Community involvement
– Helping the environment
– Health and safety

01
02
04
06

10
12
14
16
18
22
25
26

32
36
38

GOVERNANCE
Board of Directors
Corporate Governance Report
Audit Committee Report
Nomination Committee Report
Directors’ Remuneration Report
Report of the Directors

FINANCIAL STATEMENTS
Independent auditor’s report
to the members of Rotork plc
Consolidated income statement
Consolidated statement
of comprehensive income
Consolidated balance sheet
Consolidated statement
of changes in equity
Consolidated statement
of cash flows
Notes to the Group
financial statements
Rotork plc Company
balance sheet
Rotork plc Company
statement of changes
in equity
Notes to the Company
financial statements

COMPANY INFORMATION
Ten year trading history
Share register information
Corporate directory

54
56
62
66
68
84

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132

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ROTORK ANNUAL REPORT 2017
ROTORK ANNUAL REPORT 2017

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AT A GLANCE

Our customers rely upon Rotork for innovative, reliable
solutions to manage the flow of liquids and gases.

OUR DIVISIONS

We have four product divisions and a service group, Rotork Site Services, which works across all four
divisions, providing planned and emergency services for all of our flow control products worldwide.

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 offers
electric solutions for on/off and
process applications where a high
degree of accuracy is required.

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,
including emergency shutdown
and protective service.

ROTORK GEARS
Rotork Gears is a specialist
manufacturer and supplier of
gearboxes, adaptations and
accessories to the international
valve and actuator industry. Its
products offer solutions for light
duty industrial applications
through to the harshest
environments, including subsea.

ROTORK INSTRUMENTS
Rotork Instruments manufactures
and supplies instrumentation and
control products for flow,
pressure, temperature and
position measurement
applications. Its diverse portfolio
provides many different solutions
across a wide range of industries.

Revenue

£325.2m

£150.1m

£83.9m

£100.6m

+9.0%
17

+3.3%
17

+15.9%
17

+10.4%
17

£325.2m

£150.1m

£83.9m

£298.4m

£145.3m

£72.4m

Adjusted operating profit

£92.9m

+6.4%
17

£92.9m

£9.0m

+45.9%
17

£9.0m

£15.7m

£20.5m

+11.9%
17

+1.6%
17

£15.7m

£87.3m

£6.2m

£14.1m

Revenue by
division

n Controls
n Fluid Systems
n Gears
n Instruments

49%
23%
13%
15%

£100.6m

£91.2m

£20.5m

£20.1m

02 ROTORK ANNUAL REPORT 2017
02 ROTORK ANNUAL REPORT 2017

See the divisional reviews

on pages 28-31

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OUR END USER MARKETS

OUR GLOBAL PRESENCE

Our products and services are used extensively in the
oil and gas, power, water and industrial markets
around the world to improve efficiency, assure safety
and protect the environment. The development of our
product portfolio allows expansion into new and
diverse markets.

A global business with over 3,800 employees, we serve
customers in more than 168 countries through our
network of 65 offices, 25 manufacturing facilities and
our relationships with local agents. Our 480 service
engineers are based throughout our network providing
maintenance, repair and upgrade services.

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.

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.

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.

INDUSTRIAL AND OTHER
Other industries served by
Rotork include mining, HVAC
and marine and any other
industry where you are trying
to control flow, for example,
food and beverage.

Our global footprint allows us to capitalise on our investment in
technical and sales support at a local level, close to the customer,
while leveraging Group wide resources and expertise in fostering
our reputation for excellence in innovation and the quality of our
products and services.

We are currently reviewing our manufacturing footprint to ensure
we make the most efficient use of our resources.

Manufacturing
facilities

UK x6

Italy x3

Americas

Europe, Middle
East and Africa

Asia and
Australia

manufacturing
facilities

offices

employees

721

2,159

955

Revenue by
end user market

n Oil and gas
n Water
n Power
n Industrial and other

50%
13%
15%
22%

Revenue by
end destination

n Americas
n Europe
n Rest of World

25%
31%
44%

See our operating review

on pages 26-31

See our operating review

on pages 26-31

ROTORK ANNUAL REPORT 2017 03
03
ROTORK ANNUAL REPORT 2017

EXECUTIVE CHAIRMAN’S STATEMENT

We are committed to building a bold and sustainable future for
Rotork, returning the business to higher growth and margin levels,
despite a lower growth market environment.

I am pleased to report that, in a period of change
for the Group, Rotork has delivered another solid
set of full year results with growth in order intake,
revenue and adjusted operating profit. Despite
inflationary pressures the adjusted operating
margin has been maintained above 20%,
demonstrating the resilience of our business.

Revenue

£642.2m

+8.8%

Adjusted operating profit*

£130.2m

+7.9%

04 ROTORK ANNUAL REPORT 2017
04 ROTORK ANNUAL REPORT 2017

We have seen a return to more favourable
market conditions following a stabilisation of the
oil price and improving macroeconomic trends in
a number of our geographic markets. Within the
Group’s oil and gas markets, representing around
half of the Group’s revenues, customers’
investment in existing facilities, both in respect of
maintenance and upgrades, has returned to
more normal levels, providing more consistency
to order input. Investments in major new projects
remains patchy and although still below historic
highs, increased levels of quotation activity point
to a generally improving position as the
break-even point for new well construction
continues to reduce.

Notwithstanding this generally lower
investment climate for our oil and gas markets,
we are committed, over time, to returning the
business to the higher growth and margin
levels previously delivered by the Group. The
lower oil price has focused our customers on
the need to embrace smarter, more efficient
technologies in driving down the cost of
production, and encouraged the use of the
latest predictive maintenance tools in
minimising process downtime. Rotork is
exceptionally well placed to capitalise on these
trends, and we plan to increase significantly our
investment in innovative new technologies,

and expand our service capabilities. This
additional investment will be

funded by a reshaping of our
sales and operating
infrastructure, concentrating
resources to drive critical mass
and upgrading our
management systems.

Working in partnership with a
number of external
consultants, we are engaged
in a series of reviews to fully
understand the impact of the
changing market dynamics on
our innovation funnel, and to
examine ways to better align
our commercial infrastructure
to our customers’ needs and
routes to market. In addition we
are also undertaking a detailed
review of our operating footprint,
global supply chain, IT

infrastructure and talent base.
Outputs to date already provide
considerable assurance around our
long-term growth and margin
ambitions. These ongoing reviews are
expected to contribute significantly to

the growth acceleration plans being developed
by our newly appointed Chief Executive, Kevin
Hostetler. Initial opportunities arising from the
early analysis are already being actioned, with
consolidation of operations in Germany and
Italy presently underway.

Financial highlights
Order intake increased by 15.6% on the prior
year, or 8.2% on an OCC basis*, reflecting an
improvement in several of our end markets,
with increased activity in upstream oil and gas
and power and good progress in water and
industrial processes. Midstream oil and gas
remained challenging while downstream started
to improve in the second half of the year.

Revenue increased by 8.8% to £642.2m with
currency contributing 5.6% and the
contribution from acquisitions being 0.9%. On
an OCC basis, revenue increased by 2.3%,
reflecting the traditional lag in order activity
flowing through to revenue.

Adjusted operating profit increased by £9.6m
to £130.2m (OCC: up £3.0m) with adjusted
operating margin 10 basis points lower at
20.3%. Although our gross margins held up
well, the increase in revenue was offset by
inflationary cost increases.

Board composition and performance
On 28 July 2017 we announced the resignation
of Peter France as Chief Executive. The Board
asked me to assume the role of full time
Executive Chairman on an interim basis until a
successor could be appointed.

The announcement followed a period of
reflection by the Board, together with Peter, on
the steps required to foster a return to higher
growth and margin levels in what is likely to be
a generally lower growth macro environment.
The Board thanks Peter for all his efforts and
achievements throughout a long and
successful career with the Company and
wishes him every success in the future.

We were delighted to announce in January the
appointment of Kevin Hostetler as Chief
Executive. Kevin joined the Board on
12 February 2018 and will assume the role of
Chief Executive from 12 March 2018, when I will
revert to my role as Non-Executive Chairman.

Kevin has an impressive track record of
delivering profitable growth in a number of
highly respected and innovative global
engineering businesses, with significant
experience in the flow control sector. He
adopts leading edge practices and processes
honed at Ingersoll Rand, and has delivered
transformational growth for shareholders at
IDEX Corp, a flow control business with highly
engineered products and strong customer
service requirements serving similar end
markets to Rotork. Kevin has recently
concluded a successful exit after leading a
three year turnaround at FDH Velocitel, a
private equity backed telecoms business in the
USA, and is in the process of relocating from
Chicago to Bath, where he has received a
warm welcome from the whole Rotork team.

We also announced the appointment of Peter
Dilnot to the Board as a non-executive director
with effect from 1 September 2017. He is a
member of the Audit, Nomination and
Remuneration Committees of the Board. Peter is
Chief Executive Officer of Renewi plc, the
international waste-to-product company
created in 2017 by the merger of Shanks Group
plc and Van Gansewinkel Groep B.V.. We are
delighted to welcome Peter to the Board.

The Board currently comprises two executive
directors, four independent non-executive
directors and myself as Executive Chairman.
Rotork has complied with the UK Corporate
Governance Code (the Code) in all respects, save
that, following Peter France’s resignation as Chief
Executive in July 2017, I have acted as Executive
Chairman. We are in compliance with our stated
aim that at least 25% of our independent
non-executive directors are women.

The annual performance review of the Board
took place during February and March 2017;
see page 60 of the Corporate Governance
Report for further details.

Corporate governance
The Board continues to be committed to the
highest standards of governance. 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 2016.

We expect the cost environment to be generally
more inflationary with pressure on wages and
commodities. The pricing environment appears to
have stabilised in most end markets albeit pockets
of intense competition exist in more
commoditised product areas. Together with
significant value engineering activities and a more
integrated approach to procurement, we would
expect to maintain the status quo.

Adjusted operating margins are expected to be
similar, with contributions from higher volumes
offset by increased investments in new products,
expansion of our service infrastructure, and
accelerated investment in our systems and IT
capabilities. These investments represent the first
steps in our ambition to return the business to
higher levels of underlying growth, with priority
areas emanating from the strategic reviews
undertaken to date.

One off costs associated with the ongoing
strategic reviews, and any initial rationalisation
opportunities arising from those reviews, are likely
to be at similar levels in H1 to H2 last year. We will
update the market on likely costs for H2 in August
alongside more detail around our plans for
growth acceleration and business transformation.

We expect 2018 to be a busy year for Rotork,
following the appointment of our new Chief
Executive, as we embark on our ambition to
return the Group to its former growth and
margin trajectory.

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 56 to 61.

MARTIN LAMB
Executive Chairman
5 March 2018

Employees
I would like to thank all of our employees for
their continued high level of commitment and
professionalism during 2017, particularly during
this period of change. I have been impressed
by their ability to deal with the different
demands placed on them as we undertake this
series of reviews of different areas of our
business, while still delivering the high levels of
quality and service that our customers expect.

Dividend
The Board recommends a final dividend of
3.35p per share, a 6.3% increase over the 2016
final dividend. Taken with the 2017 interim
dividend, the total dividend is 5.40p per share
(2016: 5.10p), representing a 5.9% increase in
the total dividend on 2016. The final dividend
will be payable on 23 May 2018 to shareholders
on the register on 6 April 2018.

Outlook
Our revenue forecasts for 2018 currently reflect
improving order momentum, pointing to mid
to high single digit organic revenue growth
year-on-year. However reported results will be
impacted by currency movements. Based on
current rates we can expect a 4-5% headwind
on both revenues and profits compared with
last year.

* References to adjusted performance measures

throughout this document relate to statutory results
adjusted to exclude amortisation of acquired
intangibles and other adjustments (see note 2).

References to organic constant currency (OCC) or
underlying results throughout this document are the
2017 figures restated at 2016 exchange rates,
excluding the incremental contribution from
acquisitions.

Order intake represents the value of orders received
during the year.

OUR PEOPLE

We aim to be a ‘great place to work’ with
strong, consistent values across all of our
business units.

We invest in our people and encourage
internal development. We are currently
engaged in a talent development
programme to assess the needs of our
people and ensure we are providing the
best career enhancement and support.

See our ethics and values

on page 42

ROTORK ANNUAL REPORT 2017 05
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ROTORK ANNUAL REPORT 2017

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OUR INVESTMENT CASE

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.

ACCELER ATED GROW TH

STRONG MARGINS

TRACK RECORD OF GROWTH

HIGH MARGINS

Adjusted operating margin

20.3%

20.4%

Group revenue £m
800

700

600

500

400

300

200

100

578

595

546

590

642

512

448

2011

2012

2013

2014

2015

2016

2017

See our strategic objectives

on pages 14-15

HIGH RETURN ON CAPITAL
EMPLOYED (ROCE) FROM OUR
ASSET-LIGHT MODEL
ROCE*

24.9%

INVESTMENT IN
INNOVATION

R&D spend

£14.0m

24.9%

23.4%

£14.0m

£11.8m

Increased spend in 2017

18.9%

5.9%

18.9%

See our financial review

on pages 32-35

* KPIs are defined on pages 36-37

06 ROTORK ANNUAL REPORT 2017
06 ROTORK ANNUAL REPORT 2017

“We plan to significantly increase our
investment in innovation and our service
infrastructure, funded by reshaping our
sales and operating infrastructure.”

MARTIN LAMB
Executive Chairman

SUSTAINABILIT Y

DIVERSE END MARKETS

Revenue by
end user market

n Oil and gas
n Water
n Power
n Industrial
n Other

50%
13%
15%
17%
5%

Oil and gas revenue by
sub-sector
n Upstream
n Midstream
n Downstream

34%
19%
47%

See our markets

on page 3

GLOBAL REACH, LOCAL PRESENCE

STRONG BALANCE SHEET

Revenue by
end destination

n Americas
n Europe
n Rest of World

25%
31%
44%

Cash conversion*

109.1%

Net debt reduced by

£42.4m

£12.6m

109.1%

130.1%

£55.0m

STRONG CULTURE WHERE SUSTAINABILITY MATTERS

See our corporate social responsibility

on pages 38-51

ROTORK ANNUAL REPORT 2017 07
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STRATEGIC REPORT

10 Strategic review
26 Operating review
32 Financial review
38 Corporate social responsibility

08 ROTORK ANNUAL REPORT 2017

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OPPORTUNITIES AND CHALLENGES
12

Market environment

HOW WE CREATE AND SHARE VALUE
16

Business model

HOW WE MA XIMISE VALUE
14

Our strategy
Our risk management

HOW WE MEASURE VALUE
36

Our key performance indicators

HOW WE DELIVER VALUE
Corporate social responsibility
38
Our values

HOW WE PERFORMED
Operating review
26
Divisional reviews
Financial review

INNOVATION CENTRE
We are investing in our Bath facility to develop
new innovation labs, a purpose-built factory and
head office. In order to stay at the forefront of
product development it is important that we
create the right environment to allow us to attract
and retain the best talent, allowing creative and
technical skills to be developed.

Revenue

£642.2m

+8.8%

ROTORK ANNUAL REPORT 2017

Strategic review
OUR STRATEGIC FRAMEWORK

Our aim is to deliver a high return on capital with strong and sustainable
margins and accelerated growth in revenues and profits which will deliver
strong cash generation. The customer experience is at the heart of everything
we do. We use our resources and relationships and competitive advantage to
create value for all stakeholders.

OUR VISION

STR ATEGIC
OBJEC TIVES

RESOURCES AND
VALUE CREATION

To be the leading solution provider
of innovative, high quality engineered
products and services in our targeted
segments of the global flow control and
automation markets across diverse
industries and geographies, meeting
customer needs through global expertise
delivered locally.

Our aim is to deliver a high return on
capital with strong and sustainable
margins and accelerated growth in
revenues and profits which will deliver
strong cash generation.

The customer experience is at the heart of
everything we do. We use our resources
and relationships and competitive
advantage to create value for all
stakeholders.

See our strategy

on page 14

See our strategy

on page 14

See our business model

on page 16

ROTORK ANNUAL REPORT 2017

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OUR STR ATEGIC
FR AMEWORK

Our aim is to deliver a high
return on capital with strong
and sustainable margins and
accelerated growth in revenue
and profits which will deliver
strong cash generation.

OUR VISION

leading provider of
high quality engineered
products and services in the
global flow control and
automation markets

STRATEGIC OBJECTIVES

Accelerated
growth

Strong
margins

Sustainability

We use our resources,
relationships and
competitive advantage
to create sustainable
value for stakeholders.

Expertise

RESOURCES

Innovation

Brand

Leading quality and
reliability

Skilled employees,
winning culture

Strong balance
sheet

UISITIO

CQ
A

Broad product
portfolio

Independent
solutions
provider

Capital
efficiency

Global
operations

Global reach,
local presence

Diverse end
markets

Geographic
spread

VALUE CREATION

BUSINESS SYSTEMS

CUSTOMER EXPERIENCE

The customer experience is at
the heart of everything we do.

n Strategy
n Business model

ROTORK ANNUAL REPORT 2017

Strategic review
OUR MARKET ENVIRONMENT

Our products and solutions play a critical role in ensuring the safe and
efficient operation of global infrastructure in energy, power, water and
industrial markets. Increased demand for our products arises from
population growth and greater urbanisation supported by pressure for
greater automation, improved information using digital technology and
greater efficiency and effectiveness.

DRIVERS

OIL AND GAS

WATER

Demand for oil and gas remains strong,
particularly in faster growing emerging
markets. Shifts in energy mix will dampen
growth for oil and gas in the longer term.

In emerging markets, the population
growth and trend towards urbanisation
is driving investment in the water
infrastructure.

In developed markets, capacity
expansion and scarcity of conventional
water sources requires investment in
new technology.

The oil price appears to have stabilised
around the $50-$60 per barrel range but is
still considered likely to remain ‘lower for
longer’ as lower cost US onshore
production places a ceiling on price.

Water markets are typically highly
regulated with pressure to limit price
increases to end customers providing
good opportunities where we can provide
more cost effective solutions.

Oil price reduction and continued pressure
on refining margins has placed cash cost
reduction at the top of the agenda across the
value chain. Many operators are becoming
more willing to adopt new technology as a
result. We differentiate by engineering cost
out of the system and providing innovative,
efficient solutions and aftermarket packages.

Many players across the value chain
have developed ambitious digital agendas
in order to reduce cost and improve
productivity. The data gathering and
analysis capabilities of our solutions and
service offerings enable us to respond well
to this growing requirement, particularly
regarding predictive maintenance,
assisting customers to minimise downtime
and improve process optimisation.

Operators are aiming to reduce energy
consumption and methane emissions. We
are developing a number of new solutions
that will lower energy consumption. We
have recently launched new fugitive
emissions monitoring technology as part
of our solutions portfolio.

Ageing water infrastructure is driving
spend on maintenance and replacement.

Technology development is currently
focused on monitoring leakages,
however, water shortages are driving
continued evolution in smart grids with
automated valves, which will stimulate
increased demand for our solutions, and
investment in water reuse and
desalination technology.

Regulation is evolving on a number of
fronts across different geographies
regarding reuse, sludge treatment and
water quality, requiring more processing
and additional capital expenditure.

POPUL ATION
GROW TH, ONGOING
URBANISATION

LOWER COST, GREATER
EFFICIENCY

REAL TIME DATA AND
FAST RESPONSE

REGUL ATORY OR
ENVIRONMENTAL
CHANGE AND
STRUCTUR AL CHANGE

ROTORK ANNUAL REPORT 2017

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POWER

INDUSTRIAL AND OTHER

Population growth and the trend towards
urbanisation is driving global growth in
power demand. The shift from coal and
gas to renewable energy sources drives
the requirement to supplement
intermittent renewable sources with
responsive gas generation. This requires
higher quality, more responsive actuation.

There is continual cost pressure between
competing generating technologies. This
gives rise to a focus on lower operating
expenses and continuous improvement
in efficiency which provides further
opportunities for new, more
efficient technology.

Organisations continue to seek greater
automation to respond to the lack of
availability of labour, reduce costs and
improve efficiencies and safety. Greater
automation drives demand for flow control
and measurement.

Inflationary pressures on labour and other
operating costs are driving manufacturers to
invest in process improvements, maximising
production efficiency and plant uptime. Our
solutions can play an important part in this.

Adjusted operating profit*

£130.2m

+7.9%

Operating profit

£86.0m

-11.5%

Adjusted earnings per share*

10.6p

+6.0%

To date the digitalisation in the power
industry has been largely focused on the
power block but it is likely this will extend
to the remainder of the power plant to
drive maintenance efficiency gains and
improve the ability to respond quickly to
peaks in energy requirements which
requires more sophisticated actuation.

Digital automation is underway across the value
chain and is at a more advanced stage of
development and acceptance than in our other
markets. Real-time monitoring of plant allows
problems to be fixed before they escalate,
improving safety, productivity and performance
and optimising asset life. Wireless control and
predictive maintenance are growing trends to
which we are responding.

Environmental regulation encourages the
shift to renewables and an increased
requirement for desulphurisation plants
which are actuator intensive.

Key regulatory changes are largely around
the use of power and emissions. Our
innovation funnel includes solutions to lower
energy consumption and reduce leak rates.

ROTORK ANNUAL REPORT 2017

Strategic review
OUR STRATEGY

In order to accelerate growth and return to higher margin levels we are engaged in a
strategy review of our routes to market, innovation funnel, operations footprint, supply
chain, talent development and IT systems.

STRATEGIC OBJECTIVES

STRATEGIC INITIATIVES

PROGRESS IN 2017

HOW WE MEASURE PROGRESS

FOCUS FOR 2018

LINK TO RISKS

ACCELER ATED GROW TH
• Deliver accelerated year-on-year growth in

revenues and profits through a
combination of organic growth and
acquisition.

• Maximise our return on capital through
optimising manufacturing and supply
chain processes.

• Sales growth – Deliver profitable sales
growth by leveraging our product
portfolio, reputation for reliability and
our customer relationships.

• Innovation – Invest in the development of

new technologies that enhance performance
for our customers.

• Service growth – Further develop our
aftermarket service capability and
coverage including the Client Support
Programme (CSP).

• Acquisitions – Consider growth by

acquisition to expand into new geographic
markets, market sectors or new products.

• We delivered revenue growth of 8.8% and
have seen a gradual increase in the level of
project activity.

• We have introduced a number of new,

intelligent products such as a smart position
indicator and fugitive emissions monitoring.

• We increased the number of service engineers
by 10% and the number of actuators under a
maintenance agreement increased by 8%.

• We continued to pursue a number of

acquisition opportunities, however none were
considered appropriate.

STRONG MARGINS
• Maintain strong and sustainable margins
through our market-leading position and
innovative products and services.

• Manufacturing excellence – Consolidate

• We consolidated two sites into one in Italy.

operations and develop efficient, effective
world-class manufacturing facilities.

• Cost management – Continued cost

management, reflecting current market
condition and development of the global
supply chain.

• Global business systems – Develop and rollout
our global business systems to enable more
efficient operations.

We have developed plans for a new
manufacturing facility and global
headquarters in Bath, UK.

• We delivered annualised cost savings of
£5.2m in 2017 from sourcing initiatives.

• We completed the successful ‘go live’ of the
first Microsoft Dynamics AX manufacturing
site in Bergamo, Italy.

SUSTAINABILIT Y
• Maintain our track record of strong cash

generation to strengthen our balance sheet
and ensure we have sufficient resources for
investment in innovation and acquisitions.

• Be the supplier of choice for our customers,

sustaining our revenue streams.

• Be the employer of choice, developing and

retaining our talented employees.

• Corporate Social Responsibility (CSR).

• Positive customer experience – Enhance our
customer facing processes to reflect current
market requirements.

• Employee development – Invest to support
our growth strategy and promote diversity
and inclusion throughout the Group.

• CSR – Communicate best practice throughout
the Group, training those responsible and,
where appropriate, verifying adoption in
each subsidiary.

• We maintained our focus on our customers
having a positive experience, focusing on
response times and providing the appropriate
level of support. Our aftermarket service team
assists customers in resolving any issues as
they arise.

• In addition to continuing to develop our

global sales training programmes, we initiated
a gender diversity project during the year and
commenced implementation of a new global
HR information system. We are in the process
of recruiting a new Group HR director.

• 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.

ROTORK ANNUAL REPORT 2017

• The Board has ambitions to return the

• Increased competition on price or product

business to higher growth and margin levels.

offering leading to a loss of sales globally or

• We are currently reviewing our routes to

market share.

market, including our sales channels and

• A decline in government and private sector

sales coverage.

• We are also reviewing our innovation

funnel and the need for additional

confidence and spending will lead to

cancellations of expected projects or delays

to existing expenditure commitments.

investment in new product development

• Increasing social and political instability

in response to changing market drivers and

results in both disruption and increased

customer needs.

protectionism in key geographic markets.

• We expect to expand our service activity

• Major in field failure of a new or existing

both in terms of coverage and capability.

• Acquisitions will be considered where

appropriate to supplement our capability

and support the above plans for growth.

Rotork product potentially leading to a

product recall, major on-site warranty

programme or the loss of an existing or

potential customer.

• 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.

• Continue to develop high added value,

differentiated products for mission

• Volatility of exchange rates would impact

Rotork’s reported results and competitive

critical applications.

position.

• We are currently carrying out a review of

• Failure of a key supplier or tooling failure at a

our operations. We aim to optimise the

manufacturing footprint, better leverage

our global supply chain, simplify the

organisational structure and accelerate

the introduction of new systems.

• We have paused the rollout of our global

business system while this exercise is

underway, however we expect this to be

a key enabler of future growth once the

review is finalised.

supplier causing disruption to manufacturing

at a Rotork factory.

• 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 cyber-crime.

• As noted above, we are engaged in a review

• The nature of Rotork’s core business and

of our routes to market which will include

our approach to key account management

and how we best service our customers’

geographical locations involves potential

risks to the health and safety of our

employees and other stakeholders.

requirements.

• Failure of our staff or third parties who we

• As one of the enablers of our programme for

accelerating growth we have commenced a

do business with to comply with law or

regulation or to uphold our high ethical

talent development review to assist us in

formulating personal development plans.

We are also reviewing current and future

Group training needs.

• We will continue to drive safety improvement

and deliver the CSR strategy. The CSR Report

is on pages 38 to 51 of this report.

standards and values.

• Failure to recruit and retain the talented

staff needed to deliver to our core

strategic challenges.

• UK defined benefit pension scheme deficit

can be volatile due to changes in financial

assumptions which might lead to a

requirement for the Company to increase

cash contributions to the schemes.

STRATEGIC OBJECTIVES

STRATEGIC INITIATIVES

PROGRESS IN 2017

HOW WE MEASURE PROGRESS

FOCUS FOR 2018

LINK TO RISKS

ACCELER ATED GROW TH

• Deliver accelerated year-on-year growth in

revenues and profits through a

combination of organic growth and

acquisition.

• Maximise our return on capital through

optimising manufacturing and supply

chain processes.

• Sales growth – Deliver profitable sales

growth by leveraging our product

portfolio, reputation for reliability and

our customer relationships.

• We delivered revenue growth of 8.8% and

have seen a gradual increase in the level of

project activity.

• We have introduced a number of new,

• Innovation – Invest in the development of

new technologies that enhance performance

intelligent products such as a smart position

indicator and fugitive emissions monitoring.

for our customers.

• Service growth – Further develop our

aftermarket service capability and

coverage including the Client Support

Programme (CSP).

• We increased the number of service engineers

by 10% and the number of actuators under a

maintenance agreement increased by 8%.

• We continued to pursue a number of

acquisition opportunities, however none were

• Acquisitions – Consider growth by

considered appropriate.

acquisition to expand into new geographic

markets, market sectors or new products.

STRONG MARGINS

• Maintain strong and sustainable margins

through our market-leading position and

innovative products and services.

• Manufacturing excellence – Consolidate

• We consolidated two sites into one in Italy.

operations and develop efficient, effective

world-class manufacturing facilities.

• Cost management – Continued cost

management, reflecting current market

condition and development of the global

supply chain.

We have developed plans for a new

manufacturing facility and global

headquarters in Bath, UK.

• We delivered annualised cost savings of

£5.2m in 2017 from sourcing initiatives.

• We completed the successful ‘go live’ of the

• Global business systems – Develop and rollout

first Microsoft Dynamics AX manufacturing

our global business systems to enable more

site in Bergamo, Italy.

efficient operations.

• Positive customer experience – Enhance our

• We maintained our focus on our customers

customer facing processes to reflect current

having a positive experience, focusing on

SUSTAINABILIT Y

• Maintain our track record of strong cash

generation to strengthen our balance sheet

and ensure we have sufficient resources for

investment in innovation and acquisitions.

• Be the supplier of choice for our customers,

sustaining our revenue streams.

• Be the employer of choice, developing and

retaining our talented employees.

• Corporate Social Responsibility (CSR).

market requirements.

• Employee development – Invest to support

our growth strategy and promote diversity

and inclusion throughout the Group.

• CSR – Communicate best practice throughout

the Group, training those responsible and,

where appropriate, verifying adoption in

each subsidiary.

response times and providing the appropriate

level of support. Our aftermarket service team

assists customers in resolving any issues as

they arise.

• In addition to continuing to develop our

global sales training programmes, we initiated

a gender diversity project during the year and

commenced implementation of a new global

HR information system. We are in the process

of recruiting a new Group HR director.

• 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.

Sales revenue growth

8.8%

8.0%

Return on capital employed

24.9%

23.4%

Return on sales

19.4%

20.0%

Earnings per share growth

6.0%

-3.8%

• The Board has ambitions to return the

• Increased competition on price or product

business to higher growth and margin levels.

• We are currently reviewing our routes to
market, including our sales channels and
sales coverage.

• We are also reviewing our innovation
funnel and the need for additional
investment in new product development
in response to changing market drivers and
customer needs.

• We expect to expand our service activity
both in terms of coverage and capability.

• Acquisitions will be considered where

appropriate to supplement our capability
and support the above plans for growth.

• Continue to develop high added value,
differentiated products for mission
critical applications.

• We are currently carrying out a review of
our operations. We aim to optimise the
manufacturing footprint, better leverage
our global supply chain, simplify the
organisational structure and accelerate
the introduction of new systems.

• We have paused the rollout of our global
business system while this exercise is
underway, however we expect this to be
a key enabler of future growth once the
review is finalised.

offering leading to a loss of sales globally or
market share.

• A decline in government and private sector

confidence and spending will lead to
cancellations of expected projects or delays
to existing expenditure commitments.

• Increasing social and political instability
results in both disruption and increased
protectionism in key geographic markets.

• 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.

• 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.

• Volatility of exchange rates would impact
Rotork’s reported results and competitive
position.

• Failure of a key supplier or tooling failure at a
supplier causing disruption to manufacturing
at a Rotork factory.

• 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 cyber-crime.

Cash conversion

Employee satisfaction

109.1%

N/A

109.1%

130.1%

n/a

3.6

Lost time injury rate

Carbon emissions

0.24

-23.3%

0.24

0.36

19.2 tnco2e

25.0 tnco2e

• As noted above, we are engaged in a review
of our routes to market which will include
our approach to key account management
and how we best service our customers’
requirements.

• As one of the enablers of our programme for
accelerating growth we have commenced a
talent development review to assist us in
formulating personal development plans.
We are also reviewing current and future
Group training needs.

• We will continue to drive safety improvement
and deliver the CSR strategy. The CSR Report
is on pages 38 to 51 of this report.

• The nature of Rotork’s core business and
geographical locations involves potential
risks to the health and safety of our
employees and other stakeholders.

• Failure of our staff or third parties who we
do business with to comply with law or
regulation or to uphold our high ethical
standards and values.

• Failure to recruit and retain the talented

staff needed to deliver to our core
strategic challenges.

• UK defined benefit pension scheme deficit
can be volatile due to changes in financial
assumptions which might lead to a
requirement for the Company to increase
cash contributions to the schemes.

See full key performance indicators and definitions

on pages 36-37

See full risks and uncertainties

on pages 22-25

ROTORK ANNUAL REPORT 2017

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Strategic review
OUR BUSINESS MODEL
Our business model, combining the benefits of
global expertise and local service, positions us well
to generate sustainable value for our stakeholders.

HOW WE CREATE VALUE

We use our unique resources and relationships
that form our competitive advantage

in our chosen flow control
and automation applications

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.

WE COMPETE in targeted
segments of the global flow
control and automation markets
across a variety of industries
and geographies where we can
command above average margins.
Many of our products are used in
critical applications in challenging
environments and involve the
supply of fundamental resources
such as energy, water and power.

OUR RESOURCES AND RELATIONSHIPS

Expertise
With a 60 year history and a wealth of
long-standing, experienced employees, we offer
our customers a superior level of service.

Innovation
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. We are focused on
solutions to reduce the power consumption of our
products, improve their efficiency and minimise
their environmental impact in response to our
customers’ requirements.

Brand
Rotork products have a reputation for
technological excellence.

Leading quality and reliability
Our products meet or exceed international
technical and performance standards and have a
reputation for quality and reliability.

Skilled employees, winning culture
Attracting, developing and retaining outstanding
talented people, many of whom have been with
the business for a long time, is key to our success
as we aspire to be the employer of choice. Our
open and transparent culture and our values of
respect, integrity and focus on the customer are
embedded throughout our business units to
ensure that our customers receive a consistently
high quality service throughout the world.

See our people
on page 38

Strong balance sheet
Our strong net asset position and our ability to
convert our profits into cash allows us significant
scope for investment in innovation and
acquisitions to deliver consistent growth and
returns for shareholders.

SOURCES OF COMPETITIVE ADVANTAGE

Broad 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.

Independent solutions provider
Our products sit between the pipeline valve and
the distributed control system (DCS). We offer
best in class solutions that are independent of
the ‘one stop shop’ providers with whom our
customers are often in competition.

Capital efficiency
Most of our factories receive finished
components and assemble to order allowing us
flexibility to react to changing market conditions
and improving our return on capital.

Global operations
Rotork’s worldwide geographic base provides a
resilient business portfolio. Local relationships
with customers not only means that we have
clear sight of value generation in the long term,
but also the ability to recognise customers’
evolving requirements.

Global reach, local presence
We are able to use our global expertise and
resources to meet our customers’ needs,
delivered through local offices offering local
technical support and dedicated 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.

Geographic spread
The broad geographic spread of our end users
reduces the risk of exposure to any particular
location or economic area.

ROTORK ANNUAL REPORT 2017

HOW WE MA XIMISE
VALUE

to create value for stakeholders

Our strategic objectives

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.

Employees
We provide development opportunities and
a rewarding place to work and create a safe
working environment for our employees.

For more details
see page 38

Suppliers
Our suppliers are supported by the
procurement of goods and services that
we require.

Customers
We provide innovative solutions in response
to our customers’ requirements and
aftermarket service support.

Communities
We support local jobs and skills and
contribute to, and engage positively with,
the communities in which we operate.

For more details
see pages 44-45

Governments
Through paying taxes in the jurisdictions in
which we operate, we support the
development of public infrastructure and
public services.

WE SELL through a network
of 65 regional offices around
the world supplying the full
range of our products. These
offices are supported by our
four divisions which are
responsible for product
management, innovation
and manufacturing.

Revenue by
division

n Controls
n Fluid Systems
n Gears
n Instruments

49%
23%
13%
15%

See our divisional reviews

on pages 28-31

Reinvestment in organic growth and acquisitions

ACCELER ATED
GROW TH

STRONG
MARGINS

SUSTAINABILIT Y

See our strategy
on pages 14-15

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Strategic review
HOW WE MANAGE RISK

Managing the risks of our business is essential to our long-term success and
sustainability of the Group. Our approach to risk is intended to protect the
interests of our shareholders and other stakeholders. Consideration of execution
risk will be a key part of our growth acceleration programme.

ESSENTIAL TO LONG-TERM SUCCESS

Managing business risks
As with all businesses, there are certain risks
and uncertainties that may impact Rotork’s
ability to achieve its objectives.

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 Rotork.
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 all
stakeholders. The risk management process is
an established way of identifying and
managing risk and is part of our governance
framework as set out in our Corporate
Governance Statement, see page 56.

The Board’s role in risk management involves
promoting a risk-aware culture that emphasises
integrity at all levels of business operations.
This includes:
• Setting the Group’s risk appetite in
accordance with the Risk Appetite
Framework (RAF), as set out below;

• Determining the principal risks;
• Setting, maintaining and communicating the
overall policies for risk management; and

• Ensuring that risk management is

embedded within the core processes of
the Group.

Effective communication of policies and
standards across our global locations is crucial
to ensuring a consistent risk management
approach across the Group.

2017 has seen the continued development of
the risk management framework, including
investment in technology to support further
improvement in the Group’s risk management
approach.

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. Our
Group Risk Appetite Statement is designed to
set the right tone from the top and support
decision making:

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.

The RAF provides qualitative and quantitative
insight on key risks and supports proactive
mitigation planning. The RAF consists of:
1. Risk Appetite Dimensions
2. Risk Appetite Statements
3. Risk Appetite Preferences
4. Key Risk Indicators (KRIs)

During 2017, we revised the RAF to reflect
changes to the nature of Rotork’s business and
its operating environment. We updated the
Board’s risk appetite dimensions, statements
and preferences, which inform the KRIs
monitored by the Board.

The risk appetite statements provide guiding
principles to support decision-making at both a
Board level and throughout the wider Group.
The Board sets the Group’s risk appetite
preference for each dimension, stating
whether we are tolerant, neutral or averse to a
particular risk dimension. These preferences
guide the Group’s approach to managing risk.

RISK APPETITE
FRAMEWORK APPROACH

IDENTIFY KEY
DECISIONS AND
UNDERLYING
PARAMETERS

EVALUATE POTENTIAL
DECISIONS AGAINST
GROUP RISK APPETITE

EVALUATE SPECIFIC
RISK APPETITE
DIMENSIONS

ASSESS AND REFINE
RISK APPETITE
FRAMEWORK

ROTORK ANNUAL REPORT 2017

For a given Board decision, underlying parameters are identified and

Who: Group Finance Director and

considered alongside the likely impacts of the decision:

Head of Risk & Internal Audit

• Potential decision points and outcomes; and

•

Impact types (e.g. financial, reputational).

Potential decisions are evaluated against the over-arching principles

Who: Board

articulated through the Group Risk Appetite Statement.

Potential decisions are assessed against the detailed Group risk

appetite metrics, for example:

• Do the forecast returns justify the additional risk taken on?

Potential decisions are evaluated against the specific risk appetite

Who: Board

dimensions, statements and KRIs, considering:

• The key risk appetite dimensions related to the decision;

• How the KRIs are expected to be impacted by the decision; and

• Whether the impact supports our desired appetite for the

given risk(s).

The RAF is continuously refined in light of the decisions made.

We then use the RAF to determine:

• 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.

Who: Group Finance Director and

Head of Risk & Internal Audit, with

Board sign-off

IDENTIFY KEY

DECISIONS AND

UNDERLYING

PARAMETERS

EVALUATE POTENTIAL

DECISIONS AGAINST

GROUP RISK APPETITE

EVALUATE SPECIFIC

RISK APPETITE

DIMENSIONS

ASSESS AND REFINE

RISK APPETITE

FRAMEWORK

We have applied the RAF throughout 2017, incorporating this into Board decision making and measuring business decisions
against our appetites through a quarterly Executive Risk Summary. The approach taken by the Board is summarised below:

For a given Board decision, underlying parameters are identified and
considered alongside the likely impacts of the decision:

Who: Group Finance Director and
Head of Risk & Internal Audit

• Potential decision points and outcomes; and
Impact types (e.g. financial, reputational).
•

See principal risks and uncertainties

on pages 22-25

Potential decisions are evaluated against the over-arching principles
articulated through the Group Risk Appetite Statement.

Who: Board

Potential decisions are assessed against the detailed Group risk
appetite metrics, for example:

• Do the forecast returns justify the additional risk taken on?

See principal risks and uncertainties

on pages 22-25

Potential decisions are evaluated against the specific risk appetite
dimensions, statements and KRIs, considering:

Who: Board

• The key risk appetite dimensions related to the decision;
• How the KRIs are expected to be impacted by the decision; and
• Whether the impact supports our desired appetite for the

given risk(s).

The RAF is continuously refined in light of the decisions made.
We then use the RAF to determine:

• 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.

See principal risks and uncertainties

on pages 22-25

Who: Group Finance Director and
Head of Risk & Internal Audit, with
Board sign-off

See principal risks and uncertainties

on pages 22-25

ROTORK ANNUAL REPORT 2017

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Strategic review
HOW WE MANAGE RISK CONTINUED

Risk appetite dimension

Statement

KRIs

Acquisitions

We will pursue suitable acquisition opportunities and
review each on its individual merits.

Total value, size and number of acquisitions within the
last 12 months.

Control environment

Control environment –
cyber

Earnings volatility

We will invest in order to further strengthen the control
environment of the business, including in second and third
lines of defence.

We will continue to review current external and internal
cyber threats so that the business is protected from these
threats and ensure that we have appropriate processes in
place to respond to a successful cyber-attack.

Number of significant control breaches identified by
internal audit.

Number of successful cyber-events.

Critical system uptime %.

We have limited appetite for volatility in earnings in
the long term, but would consider opportunities that
would increase the risk of earnings volatility, if the upside
opportunity could be proven.

Level of hedging cover for currency exposures.

Current year adjusted operating profit.

Order book coverage of in year revenue forecasts.

Geopolitical

We will continue to operate a geographically diverse
business and we want to be as geographically diverse as
possible in the future.

% of Group revenue from risky countries by:

• Subsidiary location – forecast;

• End destination location – actual.

Risky countries are defined in the AON Political Risk
Map 2017.

Health and safety

We are fully committed to ensuring the safety of all our
employees.

LTIR incidents leading to absence.

Health and safety audit scores.

Promotion of open health and safety culture.

Market /
industry concentration

We will, in the long term, move to greater diversification in
the end markets we serve.

% of Group revenue by industry.

Operational

We will continue to have a preference for an asset-light
business model and will evaluate dual supply for critical
long lead-time items.

Number of critical components which are
single sourced.

Operating model,
culture and behaviours

We will have a strong regard to our culture when
considering the evolution of the organisation or its
management structure or the integration of acquisitions.

Consideration of our culture and our talent
development is a key part of the strategic review.

Operational –
sales projects

We will take on sales projects, including complex,
extended scope and long-term maintenance contracts,
but will only do so on commercially acceptable terms and
under strict terms and conditions.

Major contracts approved.

Operational –
IT systems

We will invest in our IT systems and infrastructure in order
to ensure that we operate consistently and efficiently.

Progress reporting for IT system implementation and
investment.

People –
succession planning

We want to maintain appropriate succession plans for our
key people at a Board and divisional management level.

We are reviewing our talent development. Succession
planning will be a key consideration of this workstream.

Product

Quality

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.

We will maintain robust quality control procedures over
components purchased and over our finished product in
all of our manufacturing locations.

Actual R&D investment.

Market opportunities and competitor actions.

Cost of significant product recalls.

Legal and regulatory
compliance

We have zero tolerance for non-compliance with relevant
laws and regulations in the markets in which we operate.

Number of confirmed significant regulatory
breaches/external investigations/notification or
approach from a regulator.

Tax

We do not pursue aggressive tax planning schemes.

Monitoring of Group effective tax rates.

Number of tax audits carried out against the Group.

This framework enables Rotork to have better visibility of which risks potentially need additional mitigation, which risks are potentially over
managed, and where we have appetite to accept additional risk.

20 ROTORK ANNUAL REPORT 2017

RISK MANAGEMENT PROCESS
The risk management process is summarised as follows:

STAGE 6
Monitor, assure and report on robustness of risks and risk assessment processes

Ongoing –
divisions and
businesses
manage and
monitor risks

STAGE 5
Top down risk assessment

STAGE 4
Quantify the net risk

STAGE 3
Identify risk mitigations and controls

STAGE 2
Quantify the gross risk

Top down risk
assessment

Ongoing risk
mitigation reviews
and controls testing

STAGE 1
Risk identification, bottom up risk assessment

Bottom up risk
assessment

Major risks are first identified (Stage 1) and considered by the Divisional
and Group Executives during their regular meetings. 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 risk
(Stage 3) before giving a net likelihood and impact score (Stage 4). There
are a range of potential impacts including financial, reputational and
health and safety. For financial impacts, valuation limits are tailored so
that each division has an appropriate benchmark.

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 monitor,
manage and reassess risk, maintaining risk registers as live
documents.

• Assurance – The work of internal audit and others tests the

effectiveness of mitigations and controls in relation to Rotork’s risks.

• Reporting – The quarterly Executive Risk Summary reports KRIs
giving an indication of how Rotork is being affected by risks.

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.

Consolidated Group risks are formally updated and presented to the
Board at half year. An annual Risk Assessment Workshop is then
facilitated by the risk function for each division and the plc, to promote
consistency and challenge to the bottom up process. Once the Risk
Assessment Workshops are completed by each division, the risks are
then consolidated at a Group level. 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 are not considered to be principal risks,
are owned and managed by members of the Divisional or plc Boards.
The principal risks are set out on pages 22 to 25.

ROTORK ANNUAL REPORT 2017

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Strategic review
PRINCIPAL RISKS AND UNCERTAINTIES

A) GROWTH ACCELERATION PROGRAMME

As detailed in the Strategic Report on pages 10 to 51, we are assessing options for a growth acceleration programme which will aim to return
Rotork to the higher growth and margin levels previously delivered by the Group. We have initiated a programme of work to assess our sales and
operating infrastructure (including our supply chain) and the readiness of our people and systems. The present activities, which are being driven by
appropriate steering groups and working teams, are focused on analysing the current state and options and so do not present a significant risk to
ongoing business activities.

Implementing such a programme will present a variety of challenges and risks, but will ensure that Rotork continues to thrive in a rapidly changing
market environment. We will only pursue change where the level of risk exposure is consistent with our risk appetite and we will invest in mitigations
and controls to ensure net risk levels are managed appropriately.

Our risk management processes are dynamic and will continue to assess and prioritise the risks related to growth acceleration and their impact on
the principal Group risks which are detailed below. These risks are the result of the robust, top down and bottom up risk assessment process
previously described. These risks include those that would threaten the Group’s business model, future performance, solvency or liquidity.

B) PRINCIPAL GROUP RISKS

Risk description and
importance to Rotork

Summary of
mitigation and controls

Strategic
priority

Risk
trend

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

• Accelerated

new applications in existing markets.

growth

• Geographic and end market diversification provides resilience to a

• Strong margins

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.

• Increased focus on service offerings, to capitalise on increased

demand for product maintenance.

• Rotork already has production or sales and service operations in many

• Accelerated

low cost countries.

growth

• Global strategic sourcing team secure lower prices for components.

• Strong margins

• 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.

• A Group wide project has been established to focus on an improved

customer experience and delivering the required market driven
specifications to the end user.

Increasing social and political
instability results in both
disruption and increased
protectionism in key
geographic markets.

This includes the risks posed
by Brexit.

Business disruption would impact
our sales and might ultimately
lead to loss of assets located in
the affected region.

• Regular review of global markets considering social and political risks
and contingency plans and market exit strategies developed and
implemented as appropriate.

• Accelerated

growth

• Strong margins

• Key Risk Indicator monitoring % of revenue from high risk markets

reported quarterly to the Board.

• The geographic spread of Rotork’s operations and customers limits

the impact of any one market on the results of the Group as a whole.

• Group Treasury policy sets cash limits for overseas businesses,

restricting our exposure to any one market. The Treasury Committee
assesses compliance with these limits.

22 ROTORK ANNUAL REPORT 2017

Risk trend

Increasing

No change

Decreasing

Risk description and
importance to Rotork

Summary of
mitigation and controls

Strategic
priority

Risk
trend

Financial

UK defined benefit pension
scheme deficit can be volatile 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. In 2018,

• Sustainability

the UK defined benefit scheme will be closed to future benefit
accruals and all members of this scheme are being offered alternative
pension arrangements.

• 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 provision of this employee benefit.

Volatility of exchange rates
would impact Rotork’s reported
results and competitive position.

• Rotork’s Treasury Hedging Policy addresses short term risk and
this works together with the natural hedging provided by the
geographical spread of operations, sourcing and customers.

• Strong margins

• 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.

Failure of a key supplier or
tooling failure at a supplier
causing disruption to
manufacturing at a
Rotork factory.

• Compliance with relevant legislation and codes of best practice.

• Accelerated

• 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 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 50 to 51.

growth

• Sustainability

• Extensive product design review process pre-launch reduces the risk

• Accelerated

of product failures occurring in the field.

growth

• Rotork has experience of launching many products and enhanced the

• Strong margins

process based on this experience.

• Sustainability

• 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.

• Dual sourcing for key components wherever possible provides

• Strong margins

mitigation for key suppliers.

• A Key Risk Indicator measures single sourced critical components and

is reported quarterly to the Board.

• 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.

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Strategic review
PRINCIPAL RISKS AND UNCERTAINTIES CONTINUED

Risk description and
importance to Rotork

Summary of
mitigation and controls

Strategic
priority

Risk
trend

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. Significant financial
underperformance could lead to
an impairment write down of the
associated intangible assets.

• Forecast market conditions are considered during the due

diligence process.

• Accelerated

growth

• Due diligence processes will provide information to assist

management and minimise likelihood of unknown surprises.

• During the due diligence process a 100 day plan is prepared to

manage the important initial stages of integration.

• Effective integration and communication of Rotork’s policies and

procedures.

• Careful consideration and negotiation of acquisitions by senior
management to ensure the purchase price represents value
for money.

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 cyber-crime.

• Thorough business process reviews and use of flexible testing

• Strong margins

• Sustainability

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 Key Risk Indicator to monitor the number of successful
cyber breaches reported quarterly to the Board.

• Regular cyber-security and cyber-fraud awareness training

and guidance.

• A disaster recovery solution (supported by third party service level
agreements where applicable) is in place for all critical systems.

Compliance with law, regulation or ethical standards

Failure of our staff or third
parties who we do business with
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

• Sustainability

ethical standards and values.

• Commitment to compliance embodied in Rotork culture.

• Anti-bribery and corruption training is provided to all relevant staff.

• We continue our programme of communication to, and education

of, agents.

• We are currently undertaking a Group wide review of our

arrangements with all agents and distributors.

• Use of WorldCheck for agents and acquisition targets before

engaging in business relationships.

• Availability and promotion of the Whistleblowing Policy and Hotline.

• We are fully committed to reduce our environmental impact and

comply with all legal and regulatory requirements.

People

Failure to recruit and retain the
talented staff needed to deliver
to our core strategic challenges.

• Benchmarking of salaries to ensure they remain competitive.

• Sustainability

• Continued focus on employee performance management.

• Identification and motivation of existing talent.

• We are aware of human rights and act in accordance with them.

24 ROTORK ANNUAL REPORT 2017

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. Whilst the Board has no reason to believe the Group will not be viable over a longer period, three years is
considered 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. The Board has considered whether it is aware of any specific relevant factors beyond the three
year horizon and confirmed that there are none. The growth acceleration programme which has been initiated during the year is expected to further
strengthen the Group’s longer-term performance and financial position.

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 business
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. The scenarios contained significant one off financial shocks and significant profit erosion as a result
of external actions impacting the Group’s revenue.

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
cash and financial 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.

ROTORK ANNUAL REPORT 2017 25

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Operating review
OPERATIONAL PERFORMANCE

We are undertaking a detailed review of our cost base and the shape
of our sales and operating infrastructure to ensure we are well
positioned to respond to customer needs and accelerate growth.

During the year, the market environment started to improve. We saw
modest recovery in certain markets and geographies in the first half of the
year with a continued improvement during the second half. The oil industry
appears to be stabilising around a lower oil price, with a return to more
normal levels of project activity (albeit that projects are generally smaller in
scale). We saw steady progress across the water and industrial process
markets with power remaining flat. Geographically we saw growth in the
Middle East, parts of Asia, North America and Europe while Latin America
remained subdued.

Full year order intake increased by 15.6% and by 8.2% on an organic
constant currency (OCC)* basis, while revenue increased by 8.8%, (+2.3%
OCC), reflecting the improvement in the market environment. Adjusted
operating profit* increased by 7.9% to £130.2m (+2.5% OCC). The
improvement in revenue and our material cost saving initiatives offset the
impact of inflationary pressures, with adjusted operating margins remaining
constant at 20.3% (2016: 20.4%).

share across our customer base requires a fresh perspective on our
approach to our business. Such an approach will include increased
investment in new product development and a significant enhancement of
our service offering. Both represent fertile territory, with oil and gas
customers, for example, demanding much greater innovation from their
supply chain as they seek to regroup around a lower oil price; while service
represents an area of competitive advantage for the Group, being a reliable
and profitable growth engine even in a downturn.

The investment in new product development and our service offering will
be funded by a reshaping of our sales and operating infrastructure. We are
re-examining our cost base, which has grown in scale and complexity over
the years, a natural consequence of sustained growth, extensive product
and geographic diversification and an active acquisition programme over a
long period. We are engaged in a series of reviews across all aspects of our
business to examine our routes to market, innovation funnel, operations
footprint, supply chain, talent development and IT systems.

Our initial hypothesis, that we can accelerate growth through investing in
innovation, service and routes to market, funded by savings generated from
rationalisation of our cost base, has been validated by the work completed
to date.

The order book at 31 December 2017 was £192.5m, 6.5% (9.5% OCC)
higher than at 31 December 2016, giving good visibility into 2018.

Overall, oil and gas represented 50.5% (2016: 52.4%) of revenue with an
increase in the percentage of upstream and downstream sales but a
decrease in midstream. In upstream, which accounted for 17.0% of
revenue, positive sentiment in the USA and the Middle East has provided
support for new onshore drilling activity. Midstream remained challenging,
although we saw benefits from an increase in gas pipeline activity and the
extension of some LNG projects. During the second half of the year we
started to see an improvement in activity in downstream and we are well
positioned to take advantage of any recovery in this market which we
expect to be driven by emerging markets, low raw material costs and new
environmental legislation.

In the water, power and industrial markets, revenue increased over the prior
period by 10.9%, 5.0% and 25.4% respectively, reflecting improving
macroeconomic conditions. This illustrates the growth opportunities across
our other end markets.

The Middle East and Africa showed good growth across all our end markets
while we saw positive sales momentum in North America in oil and gas,
industrial and water, although the power market remained subdued in the
USA. In Europe, growth in the upstream oil and gas and industrial process
markets was strong, while the Latin American market remained difficult.
We remain well positioned internationally to benefit from opportunities in
all our key markets.

Strategic progress
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 across all our end markets. Evolving
regulations regarding safety improvements and emissions reduction will
also drive growth. The changing oil and gas environment has driven a much
greater focus by our customers on cost and margins, giving rise to
opportunities for those solution providers who can respond to these needs
and we are focused on assisting our customers to increase efficiency,
reduce power consumption and maximise cost reduction through
innovation in new solutions and enhancements to our service offering.

Delivering high quality, innovative engineered solutions and services to our
customers across diverse end markets and geographies remains the key
element of our strategy. Our commitment to ensure we are well placed to
accelerate growth in revenues and margins and to increase our market

26 ROTORK ANNUAL REPORT 2017

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We commenced the data capture and analysis phase of these reviews in
2017 and have made good progress across each workstream. The changes
to our market drivers have been assessed and validated along with the
implications for the Group. See pages 12 to 13 for further details.

industry on cost reduction and efficiency and the drive across all end
markets to increase connectivity and digital automation and reduce power
consumption. We are developing solutions that have a number of
applications across our end markets, using several common technologies.

We have completed a high level review of our innovation funnel, having
developed a framework for analysing opportunities against changing
market drivers and are now examining the areas of most interest
more closely.

As already announced, we are making a major investment in Bath to
replace our factory and corporate headquarters and develop a state-of-the-
art R&D centre, to be completed by 2020. Innovation and organic product
development remains a key part of our strategy for growth.

The workstream to review the operating footprint and supply chain is well
underway, with phase one (data capture and consideration of first steps
and early opportunities) having been completed. We have already
implemented a number of these first steps, including the closure of our
Melle factory and relocation of three businesses in Italy. Actions in early
2018 are likely to be procurement related. Investigation of strategic options
for the longer term has commenced.

We have completed the first wave of our talent development programme
with our senior team and are now widening this to include a broader group
of people.

The review of our routes to market has also now commenced. We will use
the output from the route to market work and the review of our operations
to assess the impact on our business systems and ensure these are able to
support the business in the future.

The outcome of the analysis will contribute significantly to the growth
acceleration programme being formulated by our incoming Chief Executive,
Kevin Hostetler and the management team and we expect to be in a
position to give further details of our plans with the announcement of our
half year results.

We will keep stakeholders informed as our programme progresses and
once we are in a position to lay out the detailed plan we will also set
out key metrics. We will be very transparent around our achievements,
splitting out the underlying trading performance from the restructuring
costs, the investment in the customer offering and how these are
funded by cost savings.

Rotork Site Services (RSS)
Our global service network is a key differentiator for us. Our highly trained
service team provides 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
2017, we continued to invest in our aftermarket business with 480 directly
employed service engineers, an increase of 10% on the previous year
(2016: 430). In future we expect to continue to accelerate this growth and
expand and enhance our service offering, both in terms of geographic
spread and number of service engineers and also in terms of additional
services to assist our customers in reducing costs and maximising uptime.

Corporate social responsibility (CSR)
Corporate social responsibility 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 2017 and The Forever
Friends Appeal (Royal United Hospitals Bath, UK), donating a total of
£90,000. Our employees also gave support to their local communities with
the Group contributing a further £175,000 to support these causes. This
brought the total Group contributions in the year to £265,000 (2016:
£259,000).

For more information about the CSR Committee and sub-committees and
the work they carry out see pages 40 to 51.

Our people
Our culture and values are key to Rotork’s success. See pages 38 to 39 for
further information.

We are delighted that Kevin Hostetler is joining us as Chief Executive
and look forward to the fresh insight and leadership skills he will bring
to the Group.

We recognise that to implement our business strategy we need highly
trained and motivated staff. We invest in our people and encourage internal
development and operate a recruitment policy that supports our future
growth plans. As noted above, we are currently engaged in a talent
development programme to assess the needs of our people and ensure we
are providing the best career enhancement and support.

We aim to be a ‘great place to work’ with strong, consistent values across
all of our business units and clear adherence to our published Group
ethics policies. Our entrepreneurial, open culture is an enabler to getting
the job done.

Rotork’s total employee number in 2017 was 3,835, broadly in line with the
previous year.

Rotork’s success is due to the dedication and hard work of our employees. I
am sure they will rise to the challenges ahead as we embark on our growth
acceleration programme.

Research and development (R&D)
In 2017 our R&D spend increased by 18.9% to £14.0m and focused on
enhancements to our existing product range. As noted above, we are
currently carrying out a review of our innovation funnel and in future expect
to concentrate on responding more rapidly to changing customer
requirements, particularly given the increased emphasis in the oil and gas

MARTIN LAMB
Executive Chairman
5 March 2018

* Definitions are shown on page 5.

ROTORK ANNUAL REPORT 2017 27

Operating review
BUSINESS REVIEW – ROTORK CONTROLS

Enhancing the resilience of our supply
chain has strengthened our business.

Revenue

£325.2m

+9.0%

Adjusted operating profit*

£92.9m

+6.4%

Order intake was £333.0m, a 12.8% increase
compared with the prior year, with revenue up
9.0% to £325.2m. On an OCC basis order
intake and revenue increased by 6.9% and
3.3% respectively. Adjusted operating profit of
£92.9m was up 6.4% with an adjusted
operating margin of 28.6%, down 70 basis
points on the prior year, with gross margin
maintained but overheads impacted by
inflationary increases.

geographies and although our market
exposure declined slightly year-on-year we will
continue to focus on expanding in certain
sectors of this market. Positive growth was also
delivered from service activities.

We saw positive sales momentum across North
America, Europe and the Middle East and Africa.
Latin America had its challenges although power
and industrial grew in that region.

Oil and gas revenues remained stable in 2017
and represented 44% of divisional revenues.
Whilst both upstream and midstream revenues
declined this was offset by an increase in
downstream business. Increased revenues were
delivered from water, wastewater and
industrial process markets which are seen as
being steady growth sectors. The power
market remained slow across a number of

In 2017 we enhanced the resilience of our
supply chain by working with a number of our
suppliers to improve the reliability of their
manufacturing processes. We continued to
invest in additional tooling to reduce
manufacturing bottlenecks, improving delivery
performance. We have also been developing
new products which will be launched through
2018.

IQ3

With the revolutionary dual-stacked
display, the IQ3 allows unparalleled
data analysis of the condition and
operational status of the valve; data
analysis that enables accurate asset
management of the plant.

28 ROTORK ANNUAL REPORT 2017

GRANT WOOD
Managing Director – Rotork Controls

BUSINESS REVIEW – ROTORK FLUID SYSTEMS

Fluid Systems has benefited from material cost savings and
operational gearing as volumes have started to increase.

Order intake was up 18.9% to £160.1m (up
11.7% OCC), with revenue up 3.3% to
£150.1m (-2.8% OCC). Adjusted operating
profit was up 45.9% to £9.0m (+33.0% OCC)
and adjusted operating margin increased by
170 basis points.

Fluid Systems is the division with the highest
proportion of oil and gas sales, at 67%.
Upstream increased significantly due to an
increase in project activity in Eastern Europe
and the Middle East. However, this was offset
by a reduction in midstream, predominantly in
North America, in relation to both Liquefied
Natural Gas (LNG) activity, as we completed
projects started in 2016, and pipeline projects,
which were generally smaller in size than those
in 2016. Downstream was mixed, with
increases arising from new builds in China,
India and Korea offset by a reduction in

revenues from the Middle East. We saw
growth across the water and industrial process
markets, with industrial particularly strong in
Europe. Exposure to power reduced slightly
due to lower activity in North America,
partially offset by an increase in the Middle
East. Overall, the reduction in activity in North
America was offset by increases in Europe,
Latin America and the Middle East and Africa.

Fluid Systems delivered significant material cost
savings, benefiting from value engineering efforts
on our core products, supported by our ongoing
low cost country sourcing programme which have
benefited both our European manufacturing
facilities and also enabled our regional China and
India manufacturing operations to better address
their regional markets.

SKILMATIC

Skilmatic actuators offer a unique,
reliable solution for quarter-turn and
linear valves and dampers. The actuator
combines all-electric simplicity with the
precision of hydraulic actuation and the
reliability of mechanical failsafe
operation.

Revenue

£150.1m

+3.3%

Adjusted operating profit*

£9.0m

+45.9%

DAVID LITTLEJOHNS
Managing Director – Rotork Fluid Systems

ROTORK ANNUAL REPORT 2017 29

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Operating review
BUSINESS REVIEW – ROTORK GEARS

The integration of Mastergear into our existing
operations positions us well for the future.

Revenue

£83.9m

+15.9%

Adjusted operating profit*

£15.7m

+11.9%

Gears performed well over the period, with
order intake increasing 22.1%, including
contributions from the recent acquisition,
Mastergear. Revenue grew 15.9% including
contributions from Mastergear and currency
tailwinds. On an OCC basis, order intake and
revenue increased by 6.1% and 3.3%
respectively. Adjusted operating profit
increased 11.9% to £15.7m (OCC +6.5%) with
an adjusted operating margin of 18.7%, down
70 basis points due to a change in the
geographic mix following expansion of our
Chinese activity and integration costs in
relation to Mastergear.

In the division’s largest market, oil and gas,
upstream remained flat, but midstream and
downstream both grew, mainly in Asia and
also North America, benefiting from the
acquisition of Mastergear.

We saw growth across water, power and
industrial process markets with particularly
strong growth in industrial in North America.
Asia grew overall, mainly due to an increase in
activity in China across all end markets, while
Europe and North America also experienced
good sales growth.

The acquisition of Mastergear was completed
in June 2016 for £16.3m and, with a well
regarded portfolio of manual and motorised
gearboxes, enables us to offer our customers a
more comprehensive range of products and
services. During 2017, we moved the
Mastergear Italy operation into our existing
Cusago site and also brought the North
American operation into our Houston facility.
This proved to be a longer and more complex
process than originally envisaged but the
Houston team, under our new general
manager, have worked through the issues and
made a number of process improvements.

SMART POSITION INDICATOR

In a typical refinery, 90% of valves
are manually operated, a potentially
dangerous problem if the valves’
real time positions are not known.
Our Smart Position Indicator displays
the valve position locally and signals
it to the control room.

PAMELA BINGHAM
Managing Director – Rotork Gears

30 ROTORK ANNUAL REPORT 2017

BUSINESS REVIEW – ROTORK INSTRUMENTS

The successful consolidation of businesses and implementation of our new ERP
system into our Bergamo, Italy site provides a blueprint for further consolidation.

Order intake increased 13.0% to £104.5m,
with revenue up 10.4% to £100.6m. Excluding
currency tailwinds, OCC increases were 8.8%
and 6.1% respectively. Adjusted operating
profit increased by 1.6% to £20.5m (OCC
-4.4%) while the adjusted operating margin
decreased by 180 basis points to 20.3% due to
a change in the mix of products sold with
operating margins further affected by
inflationary cost increases.

The overall mix of Instruments sales shifted
towards industrial process markets. In oil and
gas, upstream was strong in North America,
however growth in this market was offset by
softness in Europe. Midstream held up well
and downstream grew in North America and
Asia. The division recorded double digit
growth in the water, power and industrial
process markets across Asia and Europe. 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.

During 2017 we consolidated our M&M and
Soldo businesses into one site in Bergamo,
Italy. This integrated site was also the first
manufacturing facility to which we rolled out
our new ERP system, which continues to drive
a number of operational improvements in both
processes and reporting. While the rollout to
further sites has been paused pending our
operations footprint review, we learned a
number of valuable lessons through this
implementation. We continued to leverage our
product range, with good growth in sales of
our positioners product range and other new
products developed by our Bifold business.

YTC POSITIONER

Our YTC Smart Positioners,
designed for extreme temperatures,
hazardous areas and high vibration
conditions, enable technicians to use
autocalibration and simple
diagnostics to commission and
monitor entire systems at the push
of a button.

Revenue

£100.6m

+10.4%

Adjusted operating profit*

£20.5m

+1.6%

ALAN PAINE
Managing Director – Rotork Instruments

ROTORK ANNUAL REPORT 2017

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Financial review
FINANCIAL REVIEW
In 2017 we saw a return to growth in revenue and
adjusted operating profit and further strengthened
our balance sheet through strong cash generation.

On an underlying basis, order intake increased in the second half of the
year, although was broadly consistent with the first half on a reported
basis due to the way the exchange rates moved. Full year order intake of
£666.5m was up 15.6% on a reported basis and 8.2% on an OCC basis.
Although second-half weighted, full year revenue of £642.2m was 8.8%
higher than the prior year (+2.3% OCC) with an increase in the closing
order book of 6.5% to £192.5m.

Underlying gross margins increased 60 basis points to 44.9% (remaining
broadly flat at 44.2% on a reported basis once currency and the
Mastergear acquisition is included). The cost of components used in our
products was the largest element of cost of sales and once again this
improved, this year by 130 basis points. Material cost savings initiatives
delivered annualised savings of £5.5m, comfortably ahead of the £4m
savings targeted at the start of the year. However these savings were
partly offset by inflationary increases within labour and factory costs
which grew faster than the rate of revenue growth.

The Group delivered strong revenue
and profit growth supported by an
improvement in the market
environment. Strong operating
cash flow resulted in a reduction
in net debt of £42.4m to £12.6m.

Revenue

£642.2m

+8.8%

Operating profit

£86.0m

-11.5%

Adjusted* operating profit

£130.2m

+7.9%

32 ROTORK ANNUAL REPORT 2017

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Adjusted operating profit was £130.2m, an increase of 7.9% over the prior year, with the adjusted operating margin maintained at 20.3%
(2016: 20.4%). On an OCC basis adjusted operating profit increased 2.5% to £123.6m, a margin of 20.5%. The increase in reported gross profit
was partially offset by an increase in overheads of 9.1% (+4.3% OCC) with a general increase in salary costs and an increase in employee bonuses
and benefits following the improvement in results. Average salary per head increased by 3% at constant exchange rates.

Net finance costs rose £2.7m to £5.4m with higher currency losses (£1.8m) and a higher interest charge in respect of the pension schemes (£0.8m).
This resulted in adjusted profit before tax of £124.8m, a 5.8% increase on the prior year, and a 6.0% increase in adjusted earnings per share to 10.6p.

Adjusted items
Adjusted profit measures are presented alongside statutory results as the Directors believe they provide a useful comparison of business trends and
performance from one period to the next.

The statutory profit measures are adjusted to exclude amortisation of acquired intangibles and other adjustments, comprising the release of
contingent consideration, goodwill impairment and restructuring costs.

Adjusted earnings reconciliation

£m

Operating profit
Profit before tax
Tax
Profit after tax

Statutory
results

Amortisation

Acquisition-
related

Restructuring
costs

Adjusted
results

86.0
80.6
(25.0)
55.6

27.2
27.2
(6.7)
20.5

11.6
11.6
–
11.6

5.4
5.4
(1.2)
4.2

130.2
124.8
(32.9)
91.9

Further details of the adjustments are provided in note 4. The acquisitions charge comprises a £21.6m impairment charge, largely related to Bifold,
and a £10.0m release of contingent consideration also in relation to Bifold.

Organic business growth
We also present organic constant currency (OCC) figures to exclude the impacts of currency and acquisitions.

£m

Revenue
Cost of sales
Gross profit
Overheads

44.2%
23.9%

Adjusted operating profit*

20.3%

2017 as
reported

642.2
(358.1)
284.1
(153.9)

130.2

Constant
currency
adjustment

(33.4)
20.9
(12.5)
5.9

44.6%
24.3%

(6.6)

20.3%

2017 at 2016
exchange
rates

Remove
acquisitions

608.8
(337.2)
271.6
(148.0)

123.6

(5.4)
4.6
(0.8)
0.8

–

44.9%
24.4%

20.5%

* Adjusted is before the amortisation of acquired intangible assets and other adjustments (see note 4).

Organic
business at
2016
exchange
rates

603.4
(332.6)
270.8
(147.2)

2016 as
reported

590.1
(328.4)
261.7
(141.1)

44.3%
23.9%

123.6

20.4%

120.6

ROTORK ANNUAL REPORT 2017 33

Financial review
FINANCIAL REVIEW CONTINUED

Acquisitions
The Mastergear acquisition, completed in June 2016 for £16.3m, expanded
our Gears portfolio, making our gears product range one of the most
comprehensive in the industry. The integration of the business into existing
Rotork facilities in China, Italy and the USA is now complete.

The increased value of acquisitions over the last three years led to a rise
in the amortisation charge related to acquired intangible assets to
£27.2m (2016: £26.8m). In order to adjust the income statement to
show a like-for-like period for each acquisition, 2017 revenue has been
reduced by £5.4m. There is no adjustment at the operating profit level.

The acquisition of Bifold in 2015 included a stretching £10.0m earn-out
which did not become payable therefore the related provision has been
released in the year. In addition, following our annual goodwill
impairment review and changes in our assumptions regarding the likely
speed of recovery of some of Bifold’s traditional markets, we have
written down the related goodwill by £19.8m.

We continue to seek acquisitions that meet our stated acquisition criteria
and support the diversification of our portfolio.

Currency
The income statement once again benefited from a significant currency
tailwind in 2017. The major currencies impacting the income statement
were universally stronger against Sterling. The US$/£ average rate of
$1.29 (2016: $1.36) was a 7 cent tailwind whilst the euro/£ average rate
was €1.14 (2016: €1.22), an 8 cent tailwind. These were the main
contributors to the £33.4m or 5.7% benefit reported in revenue.

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.

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 £300,000
(2016: £250,000) adjustment to profit and for US dollar, and dollar
related currencies, a 1 cent movement equates to approximately a
£400,000 (2016: £450,000) adjustment.

Towards the end of 2017 we saw a reversal in currency movements as
the US dollar weakened in the fourth quarter. The rates used to translate
the balance sheet are therefore different, with the US$/£ closing rate of
$1.35 (December 2016: $1.24), 11 cents (8.7%) weaker than the start of
the year. This reduces the closing balance sheet values in US dollar
denominated assets but it also results in a currency headwind as we
start 2018.

Return on capital employed (ROCE)
Our capital-efficient 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
1.2% to £522m as there were no acquisitions during 2017. This,
combined with the higher adjusted operating profit, resulted in an
increase in ROCE to 24.9% (2016: 23.4%).

Taxation
The Group’s effective tax rate was impacted this year by changes in US
corporate tax rates and the adjustments to operating profit. The headline
rate therefore increased from 26.2% in 2016 to 31.0% in 2017. Removing
the impact of the non-recurring adjustments to profit that weren’t present
in 2016, the effective tax rate returns to 26.3%. Were it not for the changes
in US corporate tax rates, this would have been 90 basis points lower at
25.4%, as the change in rates triggered a reassessment of the US deferred
tax assets and a £1.2m tax charge in the year. This deferred tax charge will
not repeat in 2018. The benefit arising from the lower US corporate tax rate
is likely to generate an approximate 100 basis point reduction in the 2018
adjusted effective tax rate.

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.

Cash generation
Our strong cash generation resulted in a reduction in net debt of
£42.4m to £12.6m at the end of the year. Our cash conversion KPI
shows a conversion of 109.1% of adjusted operating profit into cash.
This allowed us to invest £12.5m in capital expenditure although this
was lower than anticipated as having originally expected to start
redevelopment of the Bath factory site during 2017, we are now looking
at options for further expansion of this facility. We also realised £2.5m
from the sale of assets including vacated sites in Italy and the USA.
Dividends of £45.2m and tax payments of £28.2m were the two other
major outflows.

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. The high levels of revenue in the last quarter
saw trade receivables grow £13.2m and when measured as days sales
outstanding1 increased from 61 to 63 days. Inventory also rose, by
£7.4m, but trade payables grew by £6.9m offsetting the other
movements. In total, net working capital in the balance sheet decreased
to 29.3% of revenue2 compared with 30.2% in December 2016 but was
a £11.0m outflow in the cash flow statement.

1. Days sales outstanding is calculated on a count back method. The sales value including local sales taxes is deducted from the year end trade receivables to calculate the number

of days sales outstanding.

2. Working capital as a percentage of revenue is calculated as inventory plus trade receivables, less trade payables, divided by revenue.

34 ROTORK ANNUAL REPORT 2017

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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 88% 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.

Treasury
The Group operates a centralised treasury function managed by a
Treasury Committee chaired by the Finance Director and also comprising
the 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 most recent triennial valuation for the UK scheme took place as at
31 March 2016 and showed an actuarial deficit of £32.5m and a funding
level of 82%. The update to this actuarial valuation at 31 March 2017
showed the deficit had grown to £44.4m and funding level decreased to
79%. A continued reduction in gilt yields, which is the key driver behind
the value of the scheme’s liabilities and higher inflation expectations
were the main changes since the 2016 valuation. A recovery plan was
agreed with the Trustees following the 2016 valuation 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 decreased from
£58.5m to £48.2m during the year and the funding level increased from
75% to 80%. The Company paid total contributions of £9.0m in the
year and the scheme assets increased by roughly this value whilst
liabilities remained broadly unchanged over the year.

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 6.3% increase in the final dividend to 3.35p
per share (2016: 3.15p). When taken together with the 2.05p interim
dividend paid in September, the 5.40p represents a 5.9% increase in
dividends over the prior year. This gives dividend cover of 1.2 times
(2016: 1.5 times) using statutory earnings per share or when using
adjusted earnings per share 2.0 times (2016: 2.0 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.

The Group now has two committed facilities with two different lenders
comprising a £75m three year facility which has been extended to expire
in August 2019 and a five year £60m facility expiring in August 2020. A
£20m facility expired in August 2017 and the three year facility was
reduced by £15m during the year. At year end £75m of the committed
facilities were drawn, resulting in £60m being available.

JONATHAN DAVIS
Finance Director
5 March 2018

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 2017 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 scheme in
2009, in order to reduce the risk of volatility of the Group’s liabilities.
During 2017 we completed a consultation process with members of the
UK scheme and will be closing this scheme to future accrual of benefit
from April 2018. The active members of the scheme will be offered
membership of the UK defined contribution plan.

ROTORK ANNUAL REPORT 2017 35

Financial review
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.

Revenue

8.8%

Return on sales

19.4%

Cash conversion

109.1%

Return on capital employed

24.9%

-8.1

8.8

8.0

2.8

13.0

19.4

20.0

22.5

26.2

26.0

109.1

130.1

115.4

97.4

99.6

24.9

23.4

28.6

47.6

59.1

-3.8

-21.0

6.0

0.24

5.4

14.3

0.36

0.42

0.62

n/a

3.6

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.

We aim to use our capital
efficiently and reporting this ratio
internally helps management at
Group level monitor our
adherence to this philosophy.

The measurement of earnings per

LTIR is used as one measure of the

This KPI compares this year’s

share (EPS) reflects all aspects of

effectiveness of our health and

the income statement including

safety procedures.

carbon emissions stated as a

function of revenue with last

We have historically performed

an annual employee satisfaction

survey to enabled the Group to

management of the Group’s

tax rate.

year’s and is a broad measure of

obtain feedback from across the

our impact on the environment.

businesses on how we relate to

our employees and what we

can do better.

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,
payments of restructuring charges
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 34.

Increase in adjusted basic EPS

The formula we have used for

Energy usage data (scope 1 and 2)

Employees scored their

(based on adjusted profit after

calculating our LTIR is the number

is collected and converted to

responses directly into a

tax) year-on-year divided by the

of reportable injuries resulting in

prior year adjusted basic EPS.

lost time divided by the number

equivalent tonnes of CO2 and then

reported as a function of revenue.

prepared survey with 1 being

very dissatisfied and 5 being

of hours worked multiplied

Further details are contained in

very satisfied.

by 100,000.

the Corporate Social Responsibility

Report on page 48.

COMMENTS ON RESULTS

An improved backdrop in some of
our key end markets, aided by a
currency tailwind, resulted in sales
growth in the year. Growth was not
consistent across all markets but our
geographic spread and diverse end
market exposure allowed us to
focus on growth areas.

36 ROTORK ANNUAL REPORT 2017

Whilst adjusted operating profit
margins were held close to prior
year levels, an increase in finance
charges, principally related to
increased foreign exchange losses,
resulted in a 60 basis point
reduction in this KPI.

Overall cash generation remained
strong and the reduction in net
debt in the year was £42.4m. The
weighting of sales to the fourth
quarter meant net working capital
grew but despite this cash
conversion remained above 100%.

With no acquisitions in 2017, an
increased dividend payment and
growth in adjusted operating profit
this has resulted in an improved
return on capital employed.

A small increase in the adjusted

Our investment in health and

The consolidation of sites and

As we are currently carrying

effective tax rate and an increase

safety combined with training and

upgrades in some of our facilities

out a review of a number of

in finance expenses have diluted

auditing of our sites to monitor

have resulted in the overall

different aspects of our

the increase in adjusted operating

compliance with procedures has

reduction of our Scope 1 and

business, including our talent

profit of 7.9%.

resulted in a further reduction in

Scope 2 emissions.

LTIR in 2017.

development, we did not

perform the survey this year. We

will redesign the survey for 2018

to reflect our revised ambitions

and implement a number of

other initiatives to obtain

employee feedback and buy-in.

-8.1

8.8

8.0

2.8

13.0

19.4

20.0

22.5

26.2

26.0

109.1

130.1

115.4

97.4

99.6

24.9

23.4

28.6

47.6

59.1

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.

Earnings per share growth

Lost time injury rates (LTIR)

Carbon emissions

Employee satisfaction

6.0%

0.24

-23.3%

N/A

-3.8

-21.0

6.0

5.4

14.3

0.24

0.36

0.42

0.62

19.2

n/a

25.0

22.8

19.2

17.9

3.6

This is reported in detail for

This measure brings together the

This is used as a measure of

We aim to use our capital

operating segments and is a key

combined effects of procurement

performance where a target of

efficiently and reporting this ratio

driver for the business. This

costs and pricing as well as the

85% is regarded as a base level of

internally helps management at

measure enables us to track our

leveraging of our operating assets.

achievement. Cash generation is

Group level monitor our

overall success in specific project

It is also a check on the quality of

also one of the constituent parts

adherence to this philosophy.

The measurement of earnings per
share (EPS) reflects all aspects of
the income statement including
management of the Group’s
tax rate.

LTIR is used as one measure of the
effectiveness of our health and
safety procedures.

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.

activity and our progress in

revenue growth but is heavily

of the senior management

increasing our market share by

influenced by divisional mix.

reward system.

product and by region.

We have historically performed
an annual employee satisfaction
survey to enabled the Group to
obtain feedback from across the
businesses on how we relate to
our employees and what we
can do better.

Increase in sales revenue

Adjusted profit before tax (after

Cash flow from operating

year-on-year divided by prior year

financing and interest) shown as a

activities before tax outflows,

Adjusted operating profit as a

percentage of average capital

sales revenue.

percentage of sales revenue.

payments of restructuring charges

employed. Capital employed is

and the pension charge to cash

defined as shareholders’ funds less

adjustment as a percentage of

net cash held, with the pension

adjusted operating profit.

fund deficit net of related deferred

tax asset added back. The

calculation is shown on page 34.

Increase in adjusted basic EPS
(based on adjusted profit after
tax) year-on-year divided by the
prior year adjusted basic EPS.

The formula we have used for
calculating our LTIR is the number
of reportable injuries resulting in
lost time divided by the number
of hours worked multiplied
by 100,000.

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 48.

Employees scored their
responses directly into a
prepared survey with 1 being
very dissatisfied and 5 being
very satisfied.

An improved backdrop in some of

Whilst adjusted operating profit

Overall cash generation remained

With no acquisitions in 2017, an

our key end markets, aided by a

margins were held close to prior

strong and the reduction in net

increased dividend payment and

currency tailwind, resulted in sales

year levels, an increase in finance

debt in the year was £42.4m. The

growth in adjusted operating profit

growth in the year. Growth was not

charges, principally related to

weighting of sales to the fourth

this has resulted in an improved

consistent across all markets but our

increased foreign exchange losses,

quarter meant net working capital

return on capital employed.

geographic spread and diverse end

resulted in a 60 basis point

grew but despite this cash

market exposure allowed us to

reduction in this KPI.

conversion remained above 100%.

focus on growth areas.

A small increase in the adjusted
effective tax rate and an increase
in finance expenses have diluted
the increase in adjusted operating
profit of 7.9%.

Our investment in health and
safety combined with training and
auditing of our sites to monitor
compliance with procedures has
resulted in a further reduction in
LTIR in 2017.

The consolidation of sites and
upgrades in some of our facilities
have resulted in the overall
reduction of our Scope 1 and
Scope 2 emissions.

As we are currently carrying
out a review of a number of
different aspects of our
business, including our talent
development, we did not
perform the survey this year. We
will redesign the survey for 2018
to reflect our revised ambitions
and implement a number of
other initiatives to obtain
employee feedback and buy-in.

ROTORK ANNUAL REPORT 2017 37

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Corporate social responsibility
OUR PEOPLE
Rotork aims to be a ‘great place to work’ with strong core
values in all of our business units and clear adherence to our
published Group ethics policies. Our entrepreneurial, open
culture is an enabler to getting the job done.

MEET K ATIA

Divisional Training and NPI Manager, Lucca, Italy
I love the practical and hands-on aspect of engineering
and having achieved a PhD in Chemical Engineering I
joined Rotork in 2004 as an Inside Sales Engineer then
moved to the technical training department to manage
product training, allowing me to fully use my technical
background and travel all over the world. I currently
also manage new product introduction for the Fluid
Systems division, working closely with the divisional
R&D department. I remember that when I was at
university, the slogan was ‘Join engineering, you will
be a technician and travel the world.’ This truly applies
to me and I enjoy every single day of my job.

We recognise that to implement our business
strategy we need highly trained and motivated
staff. We are investing in our people and
encouraging internal development. We are also
working to enhance employee engagement to
enable our people to reach their full potential,
so they can do their best work with us. Our
recruitment policy supports our future
growth plans.

We are currently reviewing our talent
development programme to assess the needs
of our people and ensure we are providing the
best career enhancement and support.

Developing and supporting our people
We are committed to supporting our people’s
wellbeing and development. Many of our
offices provide health checks for our
employees, we also encourage participation in
sports teams and our people are enthusiastic
participants in charitable events. More details
regarding charitable activities can be found in
the Community Involvement section (see
pages 44 to 45).

We are committed to the development of
our employees. We recognise that for the
Group to be successful, we need highly trained
and motivated employees and also to
encourage internal development. We are
reviewing how we invest in the skills and
career progression of our staff, from
operational upskilling programmes to
management development.

Rewarding and retaining employees
Our reward and benefits arrangements are
benchmarked in each country in which we
operate, taking into account cost

ROTORK ANNUAL REPORT 2017

considerations. All locations participate in
employee bonus schemes and many in profit
linked share ownership schemes which give
staff a financial interest in the Group and
stimulate their performance. We also provide
various pension arrangements, designed to
provide retirement benefits, based on local
laws and practices.

Attracting and recruiting talent
We want to be the first choice for potential
recruits with skills that match the needs of
our business.

We support apprenticeship schemes for young
people which helps to increase access into all
aspects of our business. We also belong to the
Manufacturers Standardization Society (MSS),
a committee that offers undergraduate and
graduate scholarships.

We have 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 and their Industrial
Liaison team which supports members of the
Institution, helping to promote it internally and
to the wider engineering community.

We are also reviewing our recruitment policies,
processes and approach to ensure we create a
diverse and inclusive workforce.

We regularly feature in Management Today’s
top ten Most Admired Companies in Britain,
winning the ‘Quality Goods and Services’
category in 2017.

Employee engagement
We believe that motivated and engaged
people value their own health and safety
and that of their colleagues, drive greater
productivity and aspire to deliver higher
levels of customer satisfaction.

To seek employee views, we run employee
suggestion schemes and several locations have
employee forums where employees can raise
issues to be further considered by management.
We have historically performed an annual
employee satisfaction survey to obtain feedback
from across the businesses on how we relate to
our employees and what we can do better. As we
are currently carrying out a review of a number of
different aspects of our business, including our
talent development, we did not perform the
survey this year. We will redesign the survey for
2018 to reflect our revised ambitions and
implement a number of other initiatives to obtain
employee feedback and buy-in.

Employees are briefed by management on various
matters, including the Group’s performance and
the employee bonus performance, at regular
intervals. This communication takes place either
through team briefings, our intranet, Konnect,
our newsletters or employee forums.

Diversity and equal opportunities
We are committed to creating a diverse and
inclusive workforce, where people from all
backgrounds and genders are welcomed,
respected and thrive in our Company. We know
that a diverse workforce will improve our
innovation, our customer alignment and our
ability to attract and retain talent.

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. We work wherever
possible to overcome any obstacles for employees
with disabilities by, for example, improving access
or restructuring responsibilities.

Board of Directors
by gender

n Male
n Female

4
2

Total employees
by gender

n Male
n Female

3,052
788

Gender reporting
The table below shows the gender breakdown
of the Group’s directors and employees as at
31 December 2017.

Board directors
Senior managers
Other employees
Total

Male

Female

4
102
2,946
3,052

2
16
770
788

Overall women currently represent 20% of our
employees. Increasing the number of women in
our business and moving towards a more even
distribution of men and women at all levels is a
key goal. We are making progress on this in
various ways, such as increasing our intake of
female apprentices and implementing actions as
described below to address the imbalance.

As required by UK legislation we share the
gender pay gap data for our two reportable
entities that have more than 250 employees.
We have also reported the total UK workforce
because from our perspective it is every
employee that we should count and every
person, male or female, that will benefit from
the actions we take today. We fully embrace
the challenge to create a better gender
balanced workforce.

The table opposite shows our gender pay gap.
This is a snapshot taken as of 5 April 2017 to
show the difference between the average hourly
pay levels of all females and males in our
organisation. This is shown as a percentage
figure of men’s average salary, irrespective of role
or level in the organisation. Our figures show
that the mean pay of all of our women across
the whole of the UK organisation is 7.4% lower
than that of men and the median pay is 5.6%
lower than men’s pay. To put this into context
the UK national pay gender pay gap in 2017
stands at 18.0% for all employees whether part
or full time.

The ‘gender pay gap’ is an average figure and is
distinct from ‘equal pay’, which looks at the
individual level of pay to ensure that men and
women are paid the same for carrying out the
same work. The evaluation of our gender pay
data indicates that the difference in average pay
is due to proportionately more men being in
senior higher paid roles. At Rotork we are
confident that men and women are paid equally
for doing equivalent jobs across our business and
we actively review decisions around annual
performance, pay and bonus to help ensure this
fairness and parity continues.

GENDER PAY GAP

MEET NA ZRI

Mean gender pay gap across
all Rotork employees in the UK

7.4%

Median gender pay gap across
all Rotork employees in the UK

5.6%

UK’s national gender pay gap
for all employees

18.0%

We fully accept the challenge to improve the
number of women across the business. We have
prioritised a number of actions to tackle this
challenge head-on and make us an employer of
choice for women:
•

Introducing checks and balances on
pay decisions;

• Training all supervisors and managers to

•

be alert to ‘unconscious bias’;
Implementing more family friendly and
flexible working arrangements;
• Building our talent pipeline through

supporting STEM initiatives, promoting our
apprentice programmes to woman and
building a ‘return to work’ programme for
mid-career female engineers;

• Reviewing our recruitment policies, processes

and approach;

• Setting up internal mentoring programmes
to support and nurture women in their
careers; and

• Measuring and reporting the impact of this

action plan on our gender balance.

Area Sales Manager, Malaysia
I started my career in Rotork Site Services
in Malaysia in June 2003, maintaining oil
& gas plant onshore and offshore facilities
throughout the Peninsular and West
Coast sea of Malaysia. I later became a
sales engineer, receiving great support
and exceptional mentoring from
management, before being promoted to
Area Sales Manager in 2010.

My team and I support each other to secure
major projects, including some international
projects with the assistance of our
colleagues overseas. With a truly global
market presence, Rotork people speak to
each other all the time and I feel as if I have
friends everywhere in the world!

The experience that I have gained during
my career with Rotork has been priceless,
helping me to build confidence and
develop my skills and make new friends
around the world.

ROTORK ANNUAL REPORT 2017 39

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Corporate social responsibility
CORPORATE SOCIAL RESPONSIBILITY
We believe that being a responsible business through 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 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.

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 Executive Chairman 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 or reports 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 opposite sets out our CSR Committee structure.

CORP OR ATE SOC IAL RESP ONSIB IL IT Y
COMMIT TEE

E THICS COMMIT TEE

SOC IAL ISSUES COMMIT TEE

ENVI RONMENTAL COMMIT TEE

HE ALTH AND SAFE T Y COMMIT TEE

Employees worldwide

3,835

Countries with a direct presence

ROTORK ANNUAL REPORT 2017

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OUR GROUP’S APPROACH IS FOCUSED AROUND FOUR MAIN AREAS:

ETHICS AND VALUES
Ethics and values are fundamental to the way we in which we do business.
Respecting internationally proclaimed human rights, promoting an open an
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 42 to 43.

COMMUNITY INVOLVEMENT
We consider it important to contribute 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
44 to 45.

Completed E-Learning courses

5,998

See our ethics and values
on page 42

Donations to charity

£265,000

See our community involvement
on page 44

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 46 to 49.

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 50 to 51.

Carbon emissions

-16.6%

Lost time injury rate

0.24

See our environmental programme
on page 46

See our approach to health and safety
on page 50

ROTORK ANNUAL REPORT 2017

Corporate social responsibility
ETHICS AND VALUES
Our ethics and values are central to the way we do
business. They are set out in Rotork’s Ethics and
Values Statement which was updated in 2017
and can be viewed on our website.

The whistleblowing reports received covered a
broad range of potential issues related to
human resources, employment and dishonest
behaviour. Rotork continues to take steps to
publicise and promote the hotline and the
Whistleblowing Policy.

Bribery and corruption
Rotork has 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. The updates to the statement include
additional wording on bribery and corruption.
A new Group Gifts and Hospitality Policy was
approved by the Board at the end of 2017 and
was published in 2018.

Rotork makes 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. Rotork also
makes 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, Rotork continues
to screen these third parties via a large number
of international sources, which can detect
unethical behaviour, using its due diligence
consultants’ proprietary databases.

In 2017, Rotork completed a comprehensive
bribery risk assessment. As part of this process
general managers across the Group responded
to a questionnaire covering bribery and
corruption risk issues. The results of the
questionnaires were analysed and the results
of each business unit plotted against the five
main risk areas identified by Ministry of Justice
Guidance to the Bribery Act 2010. The risk
assessment identified agents as a principal risk
for Rotork. As a result, our internal audit team
produced a paper on agents, investigating how
to mitigate against the risk agents present
from a bribery risk perspective. In addition, we
are currently conducting a review of our third
party selling arrangements which will be
completed in the first half of 2018. The final
report will contain recommendations to further
mitigate the risks that our agents present.

At the end of 2017, the Audit Committee
received a full report on all 2017 activity for
anti-bribery and corruption, both
developments and improvements.

Overview
It is essential to us that our business is run in an
ethical way, with fair dealing and the highest
standards of integrity. Rotork has high ethical
standards and expects all employees and those
with whom it does business, including suppliers,
to meet the same standards.

Human rights and ethical business
Rotork is fully committed to supporting and
respecting human rights as defined in the
Universal Declaration of Human Rights and the
International Labour Organisation’s standards.
Rotork does not accept any form of child or
forced labour and embracing the UN Global
Compact principles in our updated Ethics and
Values Statement and throughout the business,
is a demonstration of this commitment.

Rotork has published its Modern Slavery Act
Statement for the 2017 financial year, which
can be found on the Rotork website at
www.rotork.com/en/investors/index/
modernslaverystatement. Rotork’s 2017
Modern Slavery Statement sets out steps
Rotork has taken during the 2017 financial year
to ensure slavery and human trafficking are not
taking place in its business or supply chains

and proposed steps for 2018. Rotork’s
commitments in 2018 include rolling out an
online training module for modern slavery.

Whistleblowing Policy
Rotork recognises that an open and honest
culture is key to understanding concerns within
the business and will investigate any potential
wrongdoing. Rotork recently updated its
Whistleblowing Policy and process. The Policy
can be found on the Rotork website
(www.rotork.com/en/master-record/6675). The
Policy encourages the reporting of any potential
wrongdoing, anonymously if required, by all
individuals working within, for, or with Rotork.
The Whistleblowing Policy gives whistleblowers
various ways to alert senior management to any
suspected wrongdoing, including an
independent external whistleblowing hotline to
assist in facilitating the reporting of any
concerns confidentially.

All whistleblowing concerns, however received,
are investigated thoroughly and reported to the
Audit Committee. During 2017, the
whistleblowing hotline received eight calls and
five concerns were raised through other channels.

ROTORK ANNUAL REPORT 2017

Rotork has developed and delivered anti-bribery
and corruption training to all employees
working in sales and purchasing roles, as well
as to senior accountants, all managers and
directors (including the Board). The training is
delivered as an e-learning module. All
employees who completed the course over
12 months ago are also required to do a
refresher course. Both courses have been made
available in numerous languages. Rotork agents
receive a bribery and corruption booklet which is
required to be read by all employees of the agent
working on the Rotork account, and signed to
confirm the booklet has been read and
understood by their manager.

Suppliers
We have a global supply chain for goods and
services that supports our businesses around
the world. This includes the suppliers that
produce the components for our products.
Many of our suppliers have a long-term
working relationship with the Company.

We expect our suppliers to meet our high
ethical standards and in 2017 we published a
Supplier Code of Conduct which sets out our
expectations. This can be found on the Rotork
website at: http://www.rotork.com/en/
about-us/index/codeofconduct. Our suppliers
must adhere to the core values contained in
the code and require their own supply chain to
adhere to them too.

We undertook a supplier assessment survey in
2017, which included CSR themed questions
associated with modern slavery, equal rights
and equal pay, anti-bribery and corruption
policies, charitable giving, environmental
impact and child labour practices. Further
details are contained in our 2017 Modern
Slavery Statement.

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 encourages good
practice to be passed down our supply chains.
Rotork is preparing for compliance with the new
Prompt Payment Regulations which were
introduced in the UK in April 2017. Under these,
Rotork Controls Limited and Rotork UK Limited
will be required to report on their supplier
payment practices.

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PROGRESS

• Membership of FTSE4Good and UN Global

Compact was maintained.

• An updated Whistleblowing Policy was published.
• A Supplier Code of Conduct was published.
• A comprehensive bribery risk assessment was

completed.

• An updated Group Ethics and Values Statement

was published.

• 2017 Modern Slavery Act Statement was

published.

2018 TARGETS

• Implement updated Whistleblowing Policy and
process and continue to promote the Policy.

• Complete third party selling arrangements review

and commence implementation of the
recommendations.

• Publish and implement Group Gifts and Hospitality

Policy.

• Continue to ensure online bribery and corruption

training is provided for employees.

ROTORK ANNUAL REPORT 2017 43

Corporate social responsibility
COMMUNITY INVOLVEMENT
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.

• Our business in South Africa has made

donations to The Hope Factory, a charity
that utilises enterprise development to
dramatically impact and improve the lives of
previously disadvantaged unemployed
South Africans, by providing them with an
opportunity to be trained and empowered
and thus become financially productive.

In addition to these local charitable and
community activities, Rotork has supported
two major charities in 2017, Sightsavers and
WaterAid. We have been supporting both
these charities for a number of years.

Teachers to receive additional training

550+

Sightsavers is an international charity that
works with partners in the developing world to
combat avoidable blindness. In 2017, we
focused our support on the Education for All
project in the Bombali district in northern
Sierra Leone. This five year project supports
children with disabilities, with a particular
focus on girls, to access education. Under the
project, 45 schools will be made more inclusive
and accessible for children with disabilities and
more than 550 teachers and 750 trainee
teachers will receive additional training in
inclusive education.

Rotork’s donations to WaterAid have been
used to support a project in Ethiopia which will
reach people in three wards of the Oromia
Region in Central Ethiopia, who have the
poorest rates of access to water and sanitation.
As well as delivering access to water, sanitation
and hygiene this project will improve water
source protection, food production and
income generation. This in turn will contribute
to poverty reduction and the sustainable
development of the communities.

Additionally, we have agreed a three year
donation programme with the Royal United
Hospitals, Bath, UK, to support their building of a
new Cancer Unit via their Forever Friends Appeal
(the hospitals’ fundraising charity). To date,
Rotork has donated £24,000 as part of our three
year commitment to donate £50,000.

Overview
We regard this as part of our ongoing
responsibilities as a good corporate citizen.
This links into our corporate 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. As a global
organisation Rotork also commits to annually
supporting global charities from head office
funds of 0.1% of profits.

In addition, our employees around the world
have been generous in their support of local
causes with volunteer work, fundraising and
making donations. Rotork is encouraging of
these efforts. Local community involvement
highlights from the year include:
•

•

In Bath, UK, employees were involved in
volunteer work with a local community
special needs school to clear an overgrown
area of their gardens to make way for an
interactive sculpture for the students.
In the USA, employees have supported the
North Carolina Fire Relief efforts, various
children’s charities and the Salvation Army.
They also volunteer tutored at risk children
and assisted with food banks.
In Germany, employees have volunteered as
members of the official examination board
of the Chamber of Industry and Commerce
in the field of industrial mechanics and
industrial clerks giving volunteer days
during the year to help support
examinations of official German
apprenticeship schemes.
In The Netherlands, an employee
participated in a two day cycle ride to raise
money, supported by Rotork, for children
with drug addictions.
In Russia, employees donated to an
orphanage in the South of Russia and
bought and shipped various items such as
tables and benches for the children’s
playground, an air conditioning system and
two printers with toners.

• Our Singapore employees have supported
local cancer charities by raising money
through sponsored runs and making food
bag donations.

ROTORK ANNUAL REPORT 2017

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PROGRESS

• £46,000 contributed to WaterAid.
• £35,000 contributed to Sightsavers.
• £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.

2018 TARGETS

To continue donations to charitable causes.
Rotork will:

• Donate 0.1% of Group profits to Rotork’s

nominated international charities.

• Donate 0.1% of Group profits to charitable causes

local to Rotork’s operating sites.

• Review our charitable contributions and align
these with our organisational culture and aims.
• Review our community involvement to identify

ways of working more closely with the
communities we operate within to become better
corporate social partners.

Sightsavers

ROTORK ANNUAL REPORT 2017 45

Corporate social responsibility
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.

Introduction
We continue with our assembly only
philosophy in the majority of our business units
where we use 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. 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
A number of improvement activities through
the year have helped reduce the energy
consumed at our subsidiaries. Upgrades to
equipment and infrastructure have contributed
to a reduction in our overall consumption.

The significant reduction in our emissions has
come from the overall site consolidation
strategy that has occurred through the year
across the Group.

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 has been made. This
estimation is based on The Chartered
Institution of Building Services Engineers
(CIBSE) Guide F – Energy Efficiency in Buildings.
This estimation equates to 0.56% of total
emissions declared.

The baseline year remains at 2012.

ROTORK ANNUAL REPORT 2017

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PERFORMANCE AND OBJECTIVES

PROGRESS

A number of key activities have occurred during the
year that have impacted on our emissions:

• The consolidation of our sites within the

Instruments division in Italy has delivered a saving
of 113 tonnes of CO2.

• The installation of solar panels in our Chennai

factory has generated approximately 13% of the
site’s electricity consumption, whilst stabilising the
supply and reducing the need for back-up
generators to run. This improvement has delivered
a saving of 62 tonnes of CO2.

We continue to target electricity as part of our
energy efficiency programme with 12 sites reducing
electricity consumption by more than 5%.

2018 TARGETS

To support the increase in the number of energy
related projects that are occurring across our
business, the following targets have been set for all
of our large energy consuming sites:

• Promote energy efficiency throughout the business
with focus on high impact projects to deliver a 2%
saving on electricity.

• Further reduce gas consumption on heating

normalised on degree days by 2%.

More stringent local targets can be set where needed
to support the energy reduction programme of
the Group.

ROTORK ANNUAL REPORT 2017 47

Corporate social responsibility
HELPING THE ENVIRONMENT CONTINUED

Water consumption
Absolute water consumption has decreased by
22.1% on the previous year and has increased
by 27.7% on the baseline year of 2012. This is
mainly due to the site consolidation activities
that have occurred in Italy and in the USA.

Waste and recycling
The amount of waste that our sites generate
has increase don the previous year by 9% and
the amount of hazardous waste generated has
increased by 3% on the previous year. When
normalised with turnover, waste has increased
by 0.2% on the previous year. Recycling has
increased from 76% to 77%.

Environmental incidents
There have been no reportable environmental
incidents during 2017. Systems are in place to
address any environmental incident that occurs
at our subsidiaries and the robustness of these
emergency systems are reviewed as part of our
internal audit programme.

Extreme weather events did impact on the
business on a number of occasions during
2017. The site in Bergamo, Italy, flooded due
to high rainfall. The flooding incident did not
impact on production as emergency plans
were immediately activated. Actions have been
taken to reduce the risk of the site flooding in
the future.

Hurricane Harvey impacted on our operations
in Houston, USA, which forced the closure of
the site for a period of three days. The site
itself was unharmed by the flooding that
occurred in the greater Houston area, however,
there were restrictions on travel due to roads
being flooded and a number of employees
being land locked.

Greenhouse Gas Emissions (GHG)
reporting
In January 2018, EEF (the UK manufacturers’
organisation) undertook an assurance audit of
the Greenhouse Gas Emissions Report. The
business reports on GHG emissions 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.

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 offsite 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.

Absolute scope 1 and scope 2 emissions have
decreased by 16.6% on 2016 and increased on
the baseline year of 2012 by 25.2%. Emissions
per £million turnover has decreased from
25.0TnCO2e to 19.2TnCO2e, a decrease
of 23.3%.

Conclusion
We continue to focus on reduction in
electricity consumption across the business
that have provided greater energy efficiency.
The consolidation of the sites and upgrades in
some of our facilities have resulted in the
overall reduction of our scope 1 and scope 2
emissions by almost 17%.

Energy consumption
Overall electricity consumption has decreased
by 0.5% on the previous year and increased by
46.9% on the baseline of 2012.

Absolute gas consumption decreased by 4.1%
on the previous year but increased by 26.7%
on the baseline year of 2012. The decrease is
based on managing heating and the
consolidation of businesses around the Group.
When considering gas consumption for only
the heating of buildings normalised on degree
days, the overall consumption of gas has
reduced by 4.2%.

In 2017, Liquid Petroleum Gas (LPG)
consumption increased by 1.9% on the
previous year and increased 1% on the
baseline of 2012. The increase in LPG is in line
with expected consumption rates.

Overall oil consumption has decreased on the
previous year by 21.7% and also decreased on
the baseline year of 2012 of 45.7%. The main
reasons for this reduction are the removal of
the generator and upgrading of the electrical
system at Bifold Marshalsea (UK) and the use
of solar power in Chennai which has further
reduced the use of the back-up generator.

To support the continued focus on energy
management, our UK businesses continue to
be certified to ISO50001. During the year we
are pleased to report that the Bifold
Marshalsea site in Taunton and the Bifold
Chadderton site were certified to ISO50001.
Surveillance audits were conducted through
2017 with no major instances of non-
conformance identified. The internal audit
process ensures that those sites that are not
certified to ISO50001 are managing their
energy and are looking at ways to increase
their energy efficiency.

As we develop new sites or upgrade our
existing sites, we will continue to build energy
efficient solutions into the 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.

ROTORK ANNUAL REPORT 2017

Water usage

-22.4%

Carbon emissions

-16.6%

Water (1,000 m3)

Oil (litres)

10,445

15,902

20,315

30,893

23,470

29,305

Electricity (MWh)

Waste generated (tonnes)

16,438

16,514

13,992

12,605

11,184

11,193

Gas (1,000 m3)

Waste recycled (%)

1,135

1,177

885

769

761

594

2,972

2,723

2,782

2,801

2,435

2,579

LPG (1,000 litres)

Scope 1 and 2 emissions (TnCO2e)

287

282

300

279

355

338

5,645

6,973

6,683

7,802

5,725

5,231

5,024

4,448

6,741

6,182

5,317

5,396

Scope 1

Scope 2

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ROTORK ANNUAL REPORT 2017 49

Corporate social responsibility
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.

Lost Time Injury Rate (LTIR)

0.24

Overview
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.
Health and safety training for all employees
who join Rotork is included in their induction
programme. Additional training is conducted
that focuses on hazard identification and
mitigation, risk assessment and action planning
and is refreshed when applicable.

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.

Across the Group, HS&E teams are engaging in
continuous improvement activities to improve
our safety performance. This includes
obtaining a greater understanding of the root
cause of incidents. Following a lost time injury
or a near miss that had a potential high
consequence, a safety alert is issued to all
subsidiaries so they can learn from the events
and avoid a repeat of the event occurring.

Progress
The objective for 2017 was to have a Lost Time
Injury Rate (LTIR) below a target of 0.47. The LTIR
for 2017 was 0.24 which is a decrease on the
previous year and significantly below the target.

The LTIR is a calculation of accidents resulting
in one day lost time, divided by the average
hours worked, multiplied by 100,000.

Our proactive approach is aimed at
continuously identifying weaknesses in our
safety processes and removing or mitigating
risks when they are identified. This drive for
continuous improvement and the openness of
the culture has shown a further 40% increase
in near miss reporting across the organisation.

Occupational health
There have been no occupational diseases
reported during 2017. Rotork continues to
promote the wellbeing of its employees.
This includes both physical health and
mental wellbeing.

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PERFORMANCE AND OBJECTIVES

PROGRESS

• The 2017 LTIR of 0.24 represented a decrease
on the prior year and was significantly below
the target.

• A number of other sites have gained or maintained

certification to OHSAS18001.

2018 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 2018 at
below 0.34.

The strategic report was approved by the Board and signed on its
behalf by

STEPHEN RHYS JONES
Company Secretary
5 March 2018

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.

Assurance activities
Our subsidiaries continue to embrace the
challenge for the continuous improvement of
our health and safety standards. The assurance
process continues to develop to highlight and
mitigate significant risks in the business. The
assessment looks at significant risk areas and
identifies gaps in our processes or
improvements that can be made. Whilst there
has been a slight decline in the overall score
across the manufacturing sites this year (83%
down from 88% in 2016), this is predominantly
due to the restructuring of our sites that
occurred during the year. Additional support
has been given to these sites to improve their
safety performance. Our sales and service
subsidiaries continue to show improved
performance, from 84% to 88%, which has
resulted in the overall audit score equalling last
year’s score of 87%.

Conclusion
Throughout the year, health and safety
continued to be a priority for employees and
contractors. This can be seen by the significant
reduction in lost time injuries that have
occurred across the business 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.

Lost Time Injury Rate
0.7

0.6

0.5

0.4

0.3

0.2

0.1

0.0

2014

2015

2016

2017

LTIR Actual

ROTORK ANNUAL REPORT 2017

GOVERNANCE

52 ROTORK ANNUAL REPORT 2017

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CONTENTS
Governance

Board of Directors
Corporate Governance Report
Audit Committee Report
Nomination Committee Report
Directors’ Remuneration Report
Report of the Directors

ROTORK ANNUAL REPORT 2017

BOARD OF DIRECTORS

EXPERIENCE

1. Martin Lamb

Executive Chairman

2. Jonathan Davis
Finance Director

3. 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
serving 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.

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 was Chief Financial
Officer of the British Land
Company PLC until January
2018. She served on the board
of British Land from 2011 and
has held a range of finance roles
in the real estate industry.

APPOINTED
TO THE BOARD

EXTERNAL
APPOINTMENTS

2014

2010

2014

Chairman of Evoqua Water
Technologies Corp

Member of the European
Advisory Board of AEA Investors
(UK) Ltd

COMMITTEE
MEMBERSHIP

Nomination

Audit

Remuneration

Denotes Chair of Committee

ROTORK ANNUAL REPORT 2017

4. Gary Bullard

5. Peter Dilnot

6. Sally James

7. Kevin Hostetler

Non-Executive Director

Senior Independent Director

Executive 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 held
the position of President Logica
UK until October 2012 and
was a member of the Executive
Committee of Logica plc.

Peter is the Chief Executive Officer
of international waste-to-product
company Renewi plc (formerly
Shanks Group plc). Peter has an
engineering background and
before joining Shanks Group, he
was a senior executive at Danaher
Corporation, a leading global
industrial business listed on the
NYSE. Prior to Danaher, Peter
spent seven years at the Boston
Consulting Group (BCG) based
in both London and Chicago,
working primarily with industrial
and pharmaceutical clients.

Sally was appointed as Senior
Independent Director of Rotork
plc on 27 February 2017. 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.

Most recently Kevin was the CEO
of FDH Velocitel, a private equity
backed telecommunications and
engineering consulting business in
the USA. Prior to this, Kevin was
an executive advisor to private
equity firms. His roles included
CEO of a speciality private valve
manufacturer and executive
chairman of an engineered high-
pressure vessel company. From
2005 to 2012, Kevin was in various
senior executive roles at IDEX
Corporation, including leading
their Asia and Emerging Markets
businesses. From 1997 to 2004,
he held a number of leadership
positions and senior strategic and
business development roles at
Ingersoll Rand.

2010

2017

2012

2018

Founder and CEO of Catquin Ltd

CEO of Renewi plc

Chairman of New Model
Identity Ltd

Non-executive director of
Spirent Communications plc

Non-Executive Chairman of
Gooch & Housego PLC

Non-executive director of
Moneysupermarket.com
Group PLC

Non-executive director of Bank of
America Merrill Lynch International

Non-executive director of Hermes
Investment Management

Trustee of Legal Education
Foundation

ROTORK ANNUAL REPORT 2017 55

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CORPORATE GOVERNANCE REPORT

Introduction from the Executive Chairman
On behalf of the Board, I am pleased to introduce Rotork’s Corporate
Governance Report for 2017. The aim of this report is to provide a clear
and comprehensive explanation of Rotork’s governance framework and
how it was applied day-to-day during the year under review, with
particular emphasis on explaining how the principles of the UK
Corporate Governance Code have been applied across our Group.

As I highlighted earlier in my report on pages 4 to 5, 2017 was a period
of change for the Group with further changes expected in 2018, with
the appointment of a new Chief Executive, and as we commence
implementation of our plans to accelerate growth. I believe that strong
corporate governance has a key role to play in protecting our business
and its long-term success, particularly during periods of change. 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.

As previously reported, there has been a strong focus by the Board on
broader strategic issues this year as we consider ways to accelerate our
revenue growth and return to higher margins. The Board has overseen
the strategic reviews of our routes to market, innovation funnel,
operations footprint, supply chain, talent development and IT systems
and will continue to do so in 2018.

Our robust risk management processes, which were further enhanced in
2017, ensure that the Board’s risk assessment and risk appetite are fully
considered, both in the development of strategy, and in action plans in
furtherance of new business opportunities.

The Board received a number of presentations on improving diversity
across the Group during the year. These have followed on from the
publication of the Hampton Alexander review in November 2016, and
follow up review in November 2017, which focused on gender diversity
at Board and senior management level for FTSE 350 companies. There
was also the Parker report, which was published in November 2016,
which focused on the ethnic diversity of Boards. We provided our
gender data for the Hampton Alexander follow up review. We have also
recently published our gender pay report. The Board is committed to
fostering greater diversity at Board and all other levels of Rotork and this
will remain a focus for the coming year.

The Board has regard to the interests of other stakeholders of the
Company in its decision making, in addition to its shareholders. Details
of how we have considered the interests of our employees during the
year are set out on page 38. In addition, the Chair of our Remuneration
Committee met with employee representatives in 2017 to discuss
executive pay and remuneration more broadly across the Group. Details
of how we interact with the communities in which we operate, and our
environmental impact, are set out in our Corporate Social Responsibility
Report (see pages 44 to 45 and 46 to 49). In addition, details of our
relationships with our suppliers are set out on page 43.

As reported last year, John Nicholas retired from the Board in February
2017. Following this, Sally James was appointed Senior Independent
Director and Lucinda Bell was appointed Chair of the Audit Committee
to replace Sally James. Peter Dilnot joined the Board on 1 September
2017 as our fourth independent non-executive director and has joined
each of the three principal Committees. Finally, Kevin Hostetler joined
the Board as an executive director on 12 February 2018 and became a
member of the Nomination Committee on 1 March 2018. Kevin will
assume the role of Chief Executive on 12 March 2018.

As a Board we regularly review and discuss our ways of working and our
effectiveness. Useful Thinking Limited facilitated a Board effectiveness
review in early 2017, following on from the comprehensive review that
was conducted in the previous year. Further details are set out on
page 60.

Rotork is subject to the 2016 UK Corporate Governance Code, and I am
happy to report that throughout 2017 Rotork has complied with the
Code in all respects, save that, following Peter France’s resignation as
Chief Executive in July 2017, I have acted as Executive Chairman. Details
of the changes made to the governance structures of the Board in
response to my temporary change in role are set on page 58.

MARTIN LAMB
Executive Chairman
5 March 2018

ROTORK ANNUAL REPORT 2017

Dates of Board meetings

Jan

Feb
✔

Mar
✔

Apr
✔✔

May

Jun
✔✔

Jul
✔

Aug
✔

Sept
✔

Oct

Nov
✔✔

Dec
✔

BUSINESS REVIEW AND STRATEGY

FINANCIAL

• Received regular performance and business updates from the executive

• Received regular financial performance updates from the Finance Director.

directors.

• Set the Group’s strategy and vision.

• Approved 2016 Annual Report and Accounts and Annual General Meeting

(AGM) business.

• Received presentations from divisional and Group business function

• Approved 2017 interim report and trading updates.

managers to consolidate understanding and awareness of activities and
performance within the relevant divisions and business functions.

• Received a presentation in relation to the competitive landscape.

• Approved 2016 final dividend recommendation and 2017 interim dividend

declaration.

• Approved 2018 budget.

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Internal con t r o l s
and risk mana g e m e n t

OTHER

INTERNAL CONTROLS AND RISK
MANAGEMENT

GOVERNANCE AND STAKEHOLDERS

• Approved appointment of Martin Lamb as

• Approved entry into an internal audit and risk

• Series of meetings undertaken between the

Executive Chairman.

partnership with PwC.

• Approved appointment of Peter Dilnot on

• Received regular reports on risk including

recommendation of the Nomination Committee
and Sally James as Senior Independent Director
and Lucinda Bell as Chair of the Audit
Committee.

• Approved closure of UK defined benefit scheme

to future accrual.

• Received a presentation from the Chief

Information Officer on a major review of the IT
systems, including cyber-security.

• Received presentations on diversity and gender

pay gap reporting.

quarterly Executive Risk Summary.

• Received regular reports on litigation and

regulatory matters.

• Received regular financial controls self-

assessment confirmations from global locations.

• Reviewed effectiveness of risk management and

internal control systems.

• Risk appetite workshop.

• Received reports on a third party selling

arrangement review and agreed a process to
rationalise this sales channel.

• Approved revised Ethics and Values Statement,
updated Whistleblowing Policy and new Gifts
and Hospitality Policy.

Executive Chairman, Finance Director and key
shareholders following Board changes.

• Received regular updates from the Director of
Strategy and Investor Relations on investor
relations.

• Adopted revised board protocols following the
appointment of Martin Lamb as Executive
Chairman.

• Reviewed feedback from institutional

shareholders.

• Approved 2016 and 2017 Modern Slavery

Statements.

• Reviewed and discussed the ICSA and

Investment Association paper on the proper
consideration of stakeholder interests in the
boardroom.

• Received regular updates on health and safety.

ROTORK ANNUAL REPORT 2017 57

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CORPORATE GOVERNANCE REPORT CONTINUED

Following a rigorous review, the Board considers all non-executive
directors to be independent in character and judgement from Rotork.
Details of the length of tenure of the independent non-executive
directors is set out below. Gary Bullard is the longest serving non-
executive director and as he will have been in office for nine years in
2019, the Nomination Committee have started to plan for the
appointment of a replacement non-executive director and Chair of the
Remuneration Committee.

Rotork’s female representation on the Board was 33% as at 31
December 2017. With the appointment of Kevin Hostetler, female
representation now stands at 29%. The Board is cognisant of the
updated Hampton-Alexander Review target of 33% female
representation on the Board by 2020.

The biographies of the directors and details of Board committee
membership are set out on pages 54 to 55.

All directors are subject to annual re-election at the AGM in line with
the Code.

Length of tenure of
independent non-executive
directors as at
31 December 2017
n 0-3 Years
n 3-6 Years

n 6-9 Years

Balance of independent
non-executive directors
and executive directors
as at 31 December 2017
n Non-executives
n Executives

Balance between male
and female directors
on the Board as at
31 December 2017
n Male
n Female

UK Corporate Governance Code compliance statement
The UK Corporate Governance Code 2016 (the Code) is the standard
against which we measured ourselves in 2017. The Code is available to
download at www.frc.org.uk.

Throughout the year ended 31 December 2017, Rotork plc fully complied
with the Code, save that from 28 July 2017 it was not in compliance with
Code Provision A.2.1, which provides that the roles of the Chairman and
Chief Executive should not be performed by the same person.

Martin Lamb assumed the full time role of Executive Chairman on an
interim basis following the announcement of the resignation of Peter
France on 28 July 2017. Following Martin Lamb’s appointment, Sally
James, the Senior Independent Director, has taken an increased role at
Board level, including chairing the majority of discussions at meetings, in
particular those aspects relating to direct review and constructive
challenge of the work of the executive directors. Sally James has also
taken greater responsibility for the setting of Board meeting agendas, as
described below.

The Nomination Committee commenced work in August 2017, with the
appointment of external executive recruitment consultants, to identify
and recruit a new Chief Executive. The appointment of Kevin Hostetler
as Chief Executive was announced on 4 January 2018. Kevin joined the
Board on 12 February 2018 and the Nomination Committee on 1 March
2018, and will assume the role of Chief Executive from 12 March 2018.
Martin Lamb will revert to his role as non-executive Chairman from this
date and Sally James’ additional responsibilities will also cease.

The following section on pages 58 to 61 contains a summary of the
system of corporate governance adopted by Rotork.

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 and with proper
consideration of wider stakeholder interests. Its role therefore includes
approval of strategy, risk reviews, finance matters and internal control
and risk management.

The terms of appointment of the Directors are available for inspection
during business hours at the registered office of Rotork plc and will also
be available at the AGM.

Board composition
Rotork is led by an effective Board which currently consists of seven
members: the Executive Chairman, the Finance Director, Kevin Hostetler
(who will become Chief Executive on 12 March 2017) and four
independent non-executive directors. The non-executive directors are
appointed for an initial term of three years. Upon the completion of this
term, the appointment is reviewed and, if appropriate, extended.

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. The appointment of Peter Dilnot as a non-executive director
in September 2017 has further strengthened the mix of skills on the
Board, in particular given his background in engineering and extensive
international business experience.

ROTORK ANNUAL REPORT 2017

Directors’ attendance at Board and Committee meetings
during 2017

Lucinda Bell(i)
Gary Bullard
Jonathan Davis
Peter Dilnot(ii)
Peter France(iii)
Sally James
Martin Lamb
John Nicholas(iv)

Maximum number
of meetings

No. of meetings

Audit
Committee

Remuneration
Committee

Nomination
Committee

Board

11/12
12/12
12/12
4/12
6/12
12/12
12/12
1/12

5/6
6/6
6/6
3/6
2/6(v)
6/6
5/6(v)
1/6

3/5
5/5
0
3/5
2/5
5/5
5/5(v)
1/5

3/5
5/5
0
3/5
1/5
5/5
5/5
0

(i) Lucinda Bell missed the meetings of Board, Audit Committee, Remuneration
Committee and Nomination Committee in December for medical reasons.
(ii) Peter Dilnot was appointed to the Board with effect from 1 September 2017.
(iii) Peter France resigned from the Board on 27 July 2017.
(iv) John Nicholas retired from the Board on 24 February 2017.
(v) By invitation.

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. As set out on page 58, Martin Lamb has been carrying out
the Chief Executive role on a temporary basis following the resignation
of Peter France in July 2017. He will resume his role as non-executive
Chairman when Kevin Hostetler becomes Chief Executive on 12 March
2018. Sally James, the Senior Independent Director, has taken on
additional responsibilities during this period.

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.

Board meetings held outside the UK in past five years

Location of Board meetings

■ 2017 – Rotterdam, The Netherlands
■ 2016 – Lucca, Italy
■ 2015 – Shanghai, China
■ 2014 – Winston-Salem, USA
■ 2013 – Lucca, Italy

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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 can be found on the Company’s
website at www.rotork.com/en/investors/index/theboard.

In 2017, there were nine main Board meetings and three other meetings.
The Chairman (and the Senior Independent Director, following Martin
Lamb’s appointment as Executive Chairman), through the Company
Secretary, ensure that the Board agenda and all relevant information is
circulated to the Board members sufficiently in advance of the meeting.
The format and content of management reporting packs are kept under
review to ensure that the non-executive directors receive focused,
concise and timely information from executive management. The
Chairman (together with, following Martin Lamb’s appointment as
Executive Chairman, the Senior Independent Director) and the Company
Secretary discuss the agenda in detail ahead of every meeting and 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 other Rotork businesses and their markets and
to interact with local management and staff, as well as to view new
capital investments and acquisitions. In June 2017, the Board visited
Rotork’s operations in Rotterdam, The Netherlands, and met with, and
received presentations from, local management. Whilst there, they
visited a large oil tank terminal in the Rotterdam Europort area, which
has about 700 Rotork units installed, to see Rotork actuators in
operation. In September 2017, the Board met at Bifold’s office in
Manchester, UK, where they received a tour of the site and local
management presentations.

ROTORK ANNUAL REPORT 2017 59

CORPORATE GOVERNANCE REPORT CONTINUED
CORPORATE GOVERNANCE REPORT CONTINUED

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.

At Board meetings, 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 executive directors 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 tailored induction, facilitated by
the Company Secretary. This includes a combination of reading
materials, external and internal training, meetings with senior
management and site visits.

Directors are encouraged to continually update their professional skills and
knowledge. During 2017, 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 level and nature of training given to the Board is considered at least
annually by the Chairman.

Performance evaluations
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.

The formal performance evaluation of the Board in accordance with Code
Provision B.6 took place in early 2017. Following the full, interview-based
Board performance evaluation in 2016, the Executive Chairman asked
Useful Thinking Limited, an independent external consultancy, to facilitate a
review in 2017 focusing on the key points previously raised and assessing
the Board’s satisfaction with the follow up to the 2016 Board evaluation.
This was done by way of written questionnaire.

Building on specific feedback from the Board’s 2016 effectiveness review,
Board workshops were held in March 2017 to consider the acquisition
process and the Group’s Risk Appetite Framework and in June 2017 on
succession planning, personal development and recruitment.

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. This review took place in December 2017 and
related to Martin Lamb’s performance as Chairman not Executive Chairman.

Risk management and internal controls
The Board is responsible for Rotork’s system of risk management and
internal control and the Board’s review of the system’s effectiveness is
completed with the assistance of the Audit Committee.

During 2017, the Board regularly reviewed the effectiveness of the
Group’s risk management and internal control systems and can confirm
that no significant failings or weakness were identified in relation to
these reviews. 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.

Main features of the Group’s risk management process
An established risk review process at a divisional level results in a
‘bottom up’ assessment of the risks facing the Group. These are
consolidated before the ‘top down’ review is performed by
management and then by the Board to ensure the risk population is
complete and adequately assessed.

An Executive Risk Summary is presented to the Board on a quarterly
basis. This includes a set of Key Risk Indicators which provide a means of
monitoring the Group’s risk exposures and focusses the Board on risks
where the Group exceeds, or will potentially exceed, risk appetite.
Quarterly reporting is supplemented as necessary by more detailed
monthly reporting to the Board by the executive management team on
new or evolving risks, the effectiveness of existing mitigations and plans
to further strengthen mitigations.

Main features of the Group’s internal control systems
All members of the Board receive 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 attend Audit Committee meetings.

Key elements of the framework which enables Rotork to respond
appropriately to financial, operational, compliance and any other risks,
include:
• Group wide policies and procedures, including authority levels and

division of responsibilities;

• Training of staff on policies and procedures relevant to their roles;
• Ongoing monitoring of business performance, Key Risk Indicators

and levels of compliance with procedures;

• A formal schedule of reserved matters for the Board, including

responsibility for reviewing Group strategy;

• A formal whistleblowing policy (revised in 2017) with an external

whistleblowing hotline;

• Robust assurance processes and controls over financial reporting and

health and safety procedures; and

• Regular controls confirmations from the business.

At the start of 2017, Rotork’s internal audit function comprised a
dedicated central team supported by a team of in-house accountants
and Head Office staff. Unfortunately both members of the central team
resigned during the year as they wanted to relocate with their families.
As a result, PwC have been retained to cover these roles. The function is
now led by an experienced Head of Risk and Internal Audit from PwC.
Staffing of the central risk and internal audit team will be kept under
review during 2018.

During the year, the internal audit team identified improvement
recommendations as a result of their work. Management are charged
with implementing the required improvements to controls. The status
and effectiveness of actions are monitored by internal audit and
regularly reported to the Audit Committee.

ROTORK ANNUAL REPORT 2017

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 makes available electronic proxy
appointment 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.

In addition to the principal Committees outlined above, the Board also
maintains 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. Membership of the
Disclosure Committee currently comprises the Executive Chairman, the
Finance Director and the Company Secretary and it 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 2017

PLC Board
Martin Lamb

Audit
Committee
Lucinda Bell

Remuneration
Committee
Gary Bullard

Nomination
Committee
Martin Lamb

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 2017, including the Board’s risk
appetite, are contained on pages 18 to 24.

Relations with shareholders
Communication with shareholders is a priority for Rotork and the
Company openly engages in a regular dialogue with its major
shareholders. In 2017, the Board, and in particular the Executive
Chairman and Finance Director, have engaged with shareholders in a
number of ways including:
• Hosting and participating in roadshows, both in the UK and

internationally;
• Hosting webcasts;
• Attending shareholder events;
• Hosting investor site visits;
• Attending conferences;
• Hosting conference calls; and
• Arranging ad hoc one to one and group meetings and calls

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.

During the year we have reviewed our programme of events and expanded
our investor communications programme to include greater participation
with a wider range of shareholders, hosting additional site visits and
roadshows, and attending additional conferences. We have communicated
with all major shareholders regarding the change of Chief Executive and
progress regarding our growth acceleration plans, and will keep
shareholders updated on a regular basis as this develops.

In January 2018, MiFID II (made up of the Markets in Financial
Instruments Directive (2014/65/EU) and the Markets in Financial
Instruments Regulation (2014/600/EU) became effective which impacts
how investment fund managers receive research from analysts and how
they arrange access to corporates. We have assessed the likely
implications for our wider communications with shareholders and will
keep this under review as the investment industry’s response evolves.

The Chairman ensures that all directors are made aware of major
shareholder issues and concerns by ensuring the Board receives reports
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 again
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.

ROTORK ANNUAL REPORT 2017

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AUDIT COMMITTEE REPORT

I am pleased to present the report of the Audit Committee for the year
ended 31 December 2017. This year the key areas of focus for the Audit
Committee have been:
• Appointing the new Head of Risk and Internal Audit via the

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 six times during the year. There were four
main Audit Committee meetings and two other meetings to approve the
trading statements in April and November. Details of attendance are set
out on page 59. 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 review of year end and interim financial reports, in addition to
other trading updates made during the year.

The Chief Executive, Chairman, Finance Director, Group Financial
Controller, Head of Risk and Internal Audit and representatives of the
external auditor (including the principal audit partner) also regularly
attend meetings by invitation.

As Chair of the Committee, I additionally hold regular meetings with the
Finance Director and other members of the management team. These
meetings provide me with a better understanding of key issues and
identify those matters which require meaningful discussion at Audit
Committee meetings. I also meet with the Head of Risk and Internal
Audit and the external audit partner to discuss any matters of concern
that they may have.

During the year, the Audit Committee received reports from
management, the Head of Risk and Internal Audit and the external
auditors. These reports have allowed the Audit Committee to scrutinise
and ask questions where further clarification or discussion was required.
Further details of the work undertaken by the Audit Committee during
2017 is set out opposite.

cosourcing arrangement with PwC;

• Reviewing the activities of internal audit and the effectiveness of risk

mitigating controls for principal risks;

• Scrutinising the carrying value of intangible assets, including the

goodwill on acquisition of Bifold; and

• Monitoring the quality, consistency and integrity of the Company’s
financial reporting, including assessment of whether the Annual
Report and Accounts is fair, balanced and understandable.

Committee composition and governance
All Audit Committee members are independent non-executive directors.
John Nicholas retired from the Audit Committee on his retirement from
the Board on 24 February 2017. On 27 February 2017, I was appointed
Chair of the Audit Committee, replacing Sally James who became the
Senior Independent Director. I would like to thank Sally for her thorough
chairing of the Audit Committee. Peter Dilnot joined the Committee on
his appointment as a Director on 1 September 2017.

I hold professional accounting qualifications and am deemed to have
recent and relevant financial experience. Biographies of each member of
the Audit Committee can be found on pages 54 to 55.

The Audit Committee operates under formal terms of reference which
are reviewed annually and were last updated in December 2017. A copy
of the terms of reference is available on the Rotork website at
www.rotork.com/en/investors/index/committees.

The principal responsibilities of the Audit Committee are to review and
report to the Board on:
• The integrity of financial reporting;
• Significant accounting policies and judgements;
•

Internal control and risk management systems including monitoring
the effectiveness of internal audit;

• The appointment, independence and effectiveness of the

external auditor;

• The external auditor’s remuneration; and
• Whistleblowing and other Group policies as relevant.

ROTORK ANNUAL REPORT 2017

Dates of Audit Committee meetings:

Jan

Feb
✔

Mar

Apr
✔

May

Jun

Jul

Members1: Lucinda Bell, Sally James, Gary Bullard and Peter Dilnot

Sept

Oct

Aug
✔

Nov
✔✔
1 As at 31 December 2017

Dec
✔

FINANCIAL REPORTING

INTERNAL CONTROLS AND RISK MANAGEMENT

• Reviewed the Annual Report and
Accounts including whether they
are fair, balanced and
understandable and the governance
report and draft results
announcements.

• Reviewed the material judgments
and estimates and going concern
assumption and the viability
statement in the Annual Report and
Accounts.

• Reviewed the half year accounts
including material judgments,
estimates and draft half year results
announcement.

• Reviewed the external auditor’s
report on the year end accounts
and the proposed full year external
audit scope, key risks, materiality
and year end issues.

• Reviewed internal controls and risk

management, including
consideration of processes and
procedures for risk management,
effectiveness of internal controls
and fraud risk.

• Reviewed significant internal
control reports, findings and
management responses.

• Reviewed trading updates.

• Reviewed internal audit

programme, its remit, resourcing
and effectiveness.

• Meetings with the Head of Risk
and Internal Audit without
management present.

• Reviewed anti-bribery and

corruption procedures, including
training and communication, and
recommendation of a new gifts
and hospitality policy to the Board.

• Reviewed Whistleblowing Policy,
the Whistleblowing Hotline and
procedures including training and
communication, and received
reports on whistleblowing matters.

Fina n cia l
reportin

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In
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AUDIT COMMITTEE

ACTIVITY 2017

n
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O t h er w ork

EXTERNAL AUDIT

OTHER WORK

• Considered and reported to the
Board on the external auditor’s
independence, objectivity and
effectiveness including the annual
audit.

• Reviewed the external auditor’s

representation letter, views on the
control environment and fraud risk
management.

• Meetings with the external auditor
without management present.

• Reviewed non-audit services

• Considered accounting and

undertaken by the external auditor
and considered of policy on
non-audit work.

• Considered audit fees, engagement
terms and risk of external auditor
leaving the market.

• Considered re-tendering the

external audit contract.

• Reviewed policies on the

employment of ex-employees of
the external auditor.

corporate governance
developments.

• Reviewed Audit Committee
effectiveness and Terms of
Reference.

• Received presentations from the

Group Tax Manager and
Group Treasurer.

• Reviewed revised Ethics and Values
Statement and recommendation of
statement to the Board for
approval.

• Considered resourcing required for

Risk and Internal Audit team,
including the appointment of PwC
following departure of the central
team.

ROTORK ANNUAL REPORT 2017 63

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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 yearend
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 judgements 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.

The assessment considers:
• Any issues arising from the prior year external audit;
• The proposed external audit plan, including identification of risks

specific to Rotork;

• External audit scope and materiality thresholds;
• Staffing continuity and experience;
• The delivery of the external audit in line with the plan;
• Matters arising during the external audit and the communication of

these to the Audit Committee;

• Feedback from executive management;
• Private meetings with the external auditor and the Head of Risk and

Internal Audit without management being present;

• The independence, objectivity and scepticism of the external

To assist the Audit Committee, the Finance Director and the Group Financial
Controller present a detailed report outlining significant matters on the half
year and yearend financial statements and the external auditor presents a
report on the work they have undertaken. 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 2017 accounts and how they were addressed were:
• Goodwill impairment testing. The year end balance sheet includes
goodwill of £228.0m, this represents approximately 30.9% 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. The Bifold paper was reviewed by the Board in
December 2017 and finalised in February 2018. 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. Following the discussion, the
Audit Committee were satisfied with the approach taken by
management which resulted in the impairment of the Bifold (£19.8m)
and Tulsa (£1.6m) cash generating units. The Audit Committee also
considered the impact of any reasonable change in assumptions that
might further increase or reduce the impairments recorded and whether
any reasonable change would result in any other cash generating unit
requiring to be impaired. The Audit Committee reviewed the sensitivities
and impairment disclosures in note 10 and were satisfied these are
balanced and fair.

• Retirement benefit schemes. The Group operates two defined benefit
retirement plans which were still open to future accrual at the balance
sheet date. The UK scheme is in the process of being closed 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 IAS19 are
shown in note 24 and the Audit Committee is satisfied they are
complete and accurate.

External auditor
The year under review marks the fourth year during which Deloitte LLP
has been the Group’s external auditor following a formal tender process
in 2014. Nigel Thomas is the lead audit partner, taking over from Nicola
Mitchell during 2017. Nigel has been on the audit team since Deloitte’s
appointment as auditor and therefore the transition between lead audit
partners has been very smooth. 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.

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 but given it is only the fourth year the
decision was made not to re-tender. The Audit Committee has
recommended that Deloitte LLP be re-appointed auditors for the 2018
financial year and Deloitte’s continuing appointment will be subject to
shareholder approval at the 2018 AGM.

The 2018 year end audit will be the last year under the Financial
Reporting Council’s APB Ethical Standards that Nigel Thomas will be able
to hold the role of Senior Statutory auditor. We will therefore be
considering a transition plan during the coming year.

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.

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 work related to the internal audit function and,
from January 2017, work related to certain tax activities.

The policy is compliant with EU legislation on permitted non-audit fee
services which came into effect on 17 June 2016. The policy contains
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.

An analysis of fees paid to Deloitte, including the split between audit
and non-audit is included in note 8 of the report and accounts. The
statutory auditor’s non-audit related fees reduced from £41,000 in 2016
to nil in 2017.

ROTORK ANNUAL REPORT 2017

Risk management
The Audit Committee has responsibility for reviewing and monitoring
the effectiveness of the Group’s control environment, risk management
and internal audit process. During 2017, the Key Risk Indicators have
been updated and enhanced, technology has been introduced to
support the facilitation of the risk management process and there has
been increased focus on divisional risk mitigations.

Following the resignation of the Head of Risk and Internal Audit in July
2017, the Audit Committee oversaw the appointment of PwC to provide
external support and specialist skills to the internal audit and risk
function including the provision of a Head of Risk and Internal Audit.
PwC are currently undertaking a risk maturity assessment, looking at all
aspects of the Groups risk management processes and the connections
between those various processes and the day to day operations of the
Group. Any recommendations arising from this review will be considered
during the coming year and be used to enhance the current risk
management framework.

Internal controls
The Audit Committee has continued to monitor the effectiveness of
internal controls, supported by internal audit. The internal audit team
report and follow up on controls weaknesses, providing support to
management in making operational improvements where needed.

Other means of assessing the internal control systems include annual
letters of assurance from the divisional leadership team, a regular
process of collating controls confirmations from operating sites and the
risk assessment process. These controls sit alongside our effective
system of governance, including key committees that monitor our
processes and controls, such as the Audit Committee and CSR
Committee and its sub-committees.

The 2018 audit programme has been scoped to include a number of risk
based audits related to the Group’s Principal Risks as well as financial
audits across a wide range of locations. Sites to be audited are selected
based on a thorough assessment using a number of relevant risk factors.
The Audit Committee reviewed the programme at its December 2017
meeting. The PwC team are also in the process of reviewing the
development of the internal audit function, an update of work they first
performed in 2015. This exercise will not only note areas of progress
since the first report but identify the appropriate next steps as the
internal audit function continues to mature.

Other matters
In accordance with its terms of reference, the Audit Committee carried
out a review of its effectiveness by way of a questionnaire and
discussion facilitated by the Head of Risk and Internal Audit, including
how it discharged its responsibilities. There were two main areas for
improvement identified by the review: Audit Committee induction and
on-boarding for new members; and Audit Committee meeting agendas
and papers management. These will be addressed in 2018.

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 2018
Key areas of focus for the coming year are:
• External audit partner transition in preparation for 2019; and
• A core plan of financial and risk-based internal audits. The teams will
focus on embedding improved working practices across risk and
internal audit.

There will also be flexibility in the use of internal audit resource during
the year as business transformation activities are expected to impact the
Group’s risk profile.

During the year, the Audit Committee considered reports on internal
control from the 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.

LUCINDA BELL
Chair of the Audit Committee
5 March 2018

Internal audit
The Group continues to use Rotork staff to undertake audits, and this
arrangement encourages the sharing of best practice and provides
career development for the staff involved. Quality assurance procedures
ensure consistency both in terms of audit approach and remedial
actions. The Rotork internal audit team is now led by PwC internal
auditors, as part of a co-source arrangement, which will bring an
independent perspective to our audits and methodology. Where an
audit raises a number of higher risk recommendations which require
significant management action, internal audit will perform a follow up
audit to ensure actions taken are effectively mitigating the risks.

During 2017, the scope of internal audit was expanded to cover some
risk based audit areas as well as the financial audits. The risk based
audits focused on the controls which are in place to mitigate some of
the principal risks identified during the Group risk review process, as
well as areas where an independent review of operational processes and
procedures was considered beneficial. The areas reviewed during 2017
under the risk based audits included aspects of health and safety,
business continuity planning and third party sales channels including
agents and commission. In 2017, a key controls confirmation process
was also introduced which is now completed monthly in the larger
manufacturing sites and quarterly in the smaller locations.

The Audit Committee continues to receive reports at the main meetings
on internal audit activity, any significant matters arising and the
management response.

ROTORK ANNUAL REPORT 2017 65

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NOMINATION COMMITTEE REPORT

The Nomination Committee is responsible for:
• Leading the process for Board appointments and making

recommendations to the Board;

• Ensuring succession planning is in place for appointments to the

Board and senior management;

• Reviewing the structure, size and composition of the Board, including
its balance of skills, diversity, knowledge and experience and making
recommendations as appropriate; and

• Making recommendations concerning the membership of the Audit
and Remuneration Committees (in consultation with the Chairs of
those Committees).

A copy of the Nomination Committee terms of reference is available on
the Rotork website at www.rotork.com/en/investors/index/committees.

John Nicholas retired from the Nomination Committee on his retirement
from the Board on 24 February 2017, Peter Dilnot joined the Nomination
Committee on 1 September 2017 and Kevin Hostetler joined on 1 March
2018. A majority of the Nomination Committee members are
independent non-executive directors. Biographies of each member of
the Nomination Committee are set out on pages 54 to 55.

Activities of the Nomination Committee during the year
There were five formal Nomination Committee meetings during the
year. The Nomination Committee also met at other times during 2017 in
connection with the recruitment of Kevin Hostetler as Chief Executive
and Peter Dilnot as a non-executive director. A summary of principal
activities is set out opposite.

Board appointments
Following the resignation of Peter France as Chief Executive in July 2017,
the Nomination Committee commenced work on the recruitment of a
new Chief Executive. This process was led by Sally James (Senior
Independent Director). A structured timetable was adopted for the
process and regular Nomination Committee discussions and updates
held throughout.

ROTORK ANNUAL REPORT 2017

The Nomination Committee appointed Spencer Stuart as external search
consultants (with which the Company has no other connection) to assist
with this process. In formulating the candidate profile for the
appointment, the Nomination Committee had particular regard to the
need for a growth orientated Chief Executive with an engineering
background and a strong technical appreciation and international
experience. They also looked for a diverse gender and ethnic list of
potential candidates.

The Nomination Committee received a long list of potential candidates from
Spencer Stuart. Following review and discussion, prioritised candidates were
identified for interview. The Nomination Committee were unanimous in
their recommendation of the preferred candidate to the Board for
approval. Kevin Hostetler’s appointment as executive director, from
12 February 2018, and Chief Executive, from 12 March 2018, was
announced on 4 January 2018.

During the year, the Nomination Committee was also responsible for
recommending Peter Dilnot as a new non-executive director and member
of the Audit, Remuneration and Nomination Committees following a search
for a replacement non-executive director which was commenced in 2016.

Succession planning
Succession planning for the Board is continuous and the Nomination
Committee considered during the year the need to maintain an
appropriate balance of skills and experience within the Company and on
the Board and to ensure progressive refreshing of the Board. As Gary
Bullard will have been in office for nine years in 2019 the Nomination
Committee have started to plan for the appointment of a replacement
non-executive director and Chair of the Remuneration Committee. This
will be progressed during 2018.

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 (where such consultants are engaged to make an
appointment) which have signed up to the Voluntary Code of Conduct
for Executive Search Firms on gender diversity and best practice. The
diversity policy also sets out other actions that will be taken to
contribute to a more diverse pool of employees throughout the Group.
Details of further actions to improve diversity are set out on page 38.

The Nomination Committee received a presentation from the Group HR
Director on improving diversity across the Group during the year. This
followed on from the publication of the Hampton Alexander review (on
gender diversity) and Parker review (on ethnic diversity) in November
2016. This will remain a focus for the coming year.

Details of the proportion of women on the Board, in senior leadership
positions and within the Group can be found on page 39. We also
provided our gender data for the Hampton Alexander follow up review
which was published in November 2017.

MARTIN LAMB
Chair of the Nomination Committee
5 March 2018

Dates of Nomination Committee meetings:

Jan

Feb

Mar
✔

Apr

May

Jun

Jul

Aug
✔

Sept
✔

Oct

Nov

Dec
✔✔

Members1: Martin Lamb, Lucinda Bell, Gary Bullard, Sally James and Peter Dilnot

1 As at 31 December 2017

APPOINTMENT PROCESS

SUCCESSION PLANNING

• Approved the appointment of external search consultants for new Chief

Executive search.

• Discussed Board composition and succession planning, including
consideration of balance of skills and experience and diversity.

• Considered the candidate profile for the Chief Executive role.

• Approved offer to new Chief Executive.

• Recommended Peter Dilnot for appointment as a non-executive director and

member of Audit, Remuneration and Nomination Committees.

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ACTIVITY 2017

Other wo r k

OTHER WORK

• Discussed gender pay gap reporting requirements.

• Discussed diversity following presentation from Group HR Director and

consideration of the Hampton Alexander Report on gender diversity and
Parker review on ethnic diversity.

ROTORK ANNUAL REPORT 2017 67

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Martin Lamb assumed the full time role of Executive Chairman on an
interim basis from 28 July 2017 until the new Chief Executive assumes
the role and has received additional remuneration (structured as a fixed
allowance) to reflect the increased time commitment involved. He has
not received any additional benefits or participated in the executive
bonus or LTIP during this period. Martin elected to invest the additional
net remuneration that he receives in Rotork shares and to hold them for
a minimum of two years following purchase. Sally James, Senior
Independent Director, also assumed additional responsibilities during
this period and has received an additional fee for her services. She also
elected to invest the additional net fees in Rotork shares and to hold
them for a minimum of two years. Full details are set out on page 77.

Variable remuneration in 2017
Bonuses for 2017 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 Group has made good
progress in 2017 and as a result, the bonus for Jonathan Davis for 2017
paid out at 71.6% of salary. Full details of the bonus targets and
performance against them are set out on pages 77 to 78.

However, despite the strong progress in 2017, the 2015 LTIP awards
(which were based on earnings per share (EPS) and total shareholder
return (TSR) performance over the three years to 31 December 2017)
failed to meet the threshold levels of performance required and the
awards will lapse on 6 March 2018.

Variable remuneration for 2018
The variable pay arrangements for 2018 are unchanged from those
operating in 2017. Bonuses will continue to be based on profit, cash
generation, safety and strategic targets. The 2018 LTIP grants will be
based on TSR, EPS and a return on capital measure. Challenging
performance targets have been set for the variable pay elements in line
with the business strategy and growth expectations and no changes
have been made to the award levels for executive directors.

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 five times during
the year. Details of attendance at meetings is set out on page 59. A
summary of its principal activities is set out opposite.

The purpose of this report is to communicate details of our
remuneration policy and its application during the year. The Annual
Report on Remuneration, together with this introductory statement, will
be subject to an advisory shareholder vote at the 2018 AGM. The Policy
Report, which sets out the Company’s current policy on director’s
remuneration, will not be subject to a shareholder vote this year. I hope
that you will support the resolution to approve the Annual Report on
Remuneration at the forthcoming AGM.

GARY BULLARD
Chair of the Remuneration Committee
5 March 2018

DIRECTORS’ REMUNERATION REPORT

Statement from the Chair of the Remuneration Committee
2017 has been a year of considerable change for Rotork. Peter France left
the business in July and Martin Lamb, our Chairman, assumed the role of
Executive Chairman whilst the search for a new Chief Executive took place.
In December 2017, the Board were delighted to announce we had recruited
Kevin Hostetler to lead the business as it embarks on its accelerated growth
plans. Kevin is a US citizen and has relocated from Chicago for the role. His
remuneration arrangements, which are in line with the remuneration policy
approved by shareholders at the 2017 AGM, are summarised below and set
out later in this report; so too are the interim arrangements for Martin Lamb
and the departure arrangements for Peter France.

Our remuneration philosophy
The principal role of the Remuneration Committee is to determine the
framework and policy for remuneration of the executive directors and
the Chairman. The policy for the executive directors is aligned with
Rotork’s overall philosophy on remuneration and operates as an
extension of the broader reward framework. The Remuneration
Committee is kept informed of any material changes to the benefit or
reward arrangements for Rotork’s employees and during the course of
the year, I met with employee representatives to discuss the approach
to remuneration at Rotork.

Board changes during 2017 and 2018
Peter France stood down from the Board and resigned as Chief
Executive on 27 July 2017. Under the terms of his leaving arrangements,
he was entitled to a payment in lieu of the salary, benefits and pension
allowance for the unexpired portion of his notice period. He was also
eligible to receive a pro-rata bonus for 2017 (in respect of the period
worked). Peter was treated as a good leaver in relation to the LTIP
awards granted in 2015 and 2016. The awards will continue to vest on
the normal vesting date, subject to the achievement of the applicable
performance targets and a pro-rata reduction to reflect the period for
which he was employed. The 2015 LTIP award will lapse on 6 March
2018 as the minimum performance hurdles were not satisfied. The LTIP
award granted to him in 2017 also lapsed following his departure.
Details of the final settlement terms are set out on page 81.

Kevin Hostetler was appointed as an executive director on 12 February
2018 and will resume the role of Chief Executive from 12 March 2018.
Details of his remuneration package are set out overleaf and in more
detail on page 82. His remuneration package has been set in accordance
with the existing approved policy. The Company was not required to pay
any buy-out awards in connection with his appointment.

ROTORK ANNUAL REPORT 2017

Dates of Remuneration Committee meetings:

Jan

Jun
✔
Members1: Gary Bullard, Lucinda Bell, Sally James and Peter Dilnot

Feb
✔

May

Mar

Apr

Jul

Aug
✔

Sept

Oct

Nov

Dec
✔ ✔
1 As at 31 December 2017

SETTING EXECUTIVE SALARY

REVIEW OF BONUS AND LTIP

• Set basic salary for Jonathan Davis for 2018.

• Reviewed LTIP performance against targets.

• Considered a report from New Bridge Street on executive remuneration.

• Reviewed bonus performance against targets and approved 2016 bonus

payments.

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ACTIVITY 2017

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REMUNERATION REPORTING

SETTING LONG TERM INCENTIVE PLAN
(LTIP) AND BONUS OPPORTUNITIES

• Considered corporate governance

developments, guidance from institutional
investors and general remuneration.

• Considered and approved of remuneration
arrangements for departure of the Chief
Executive.

• Approved new Chief Executive remuneration

and relocation package and service agreement.

• Approved the Remuneration Committee’s

schedule of work for 2018.

• Approved the Directors Remuneration Report

2016.

• Consulted with shareholders and approved of

• Set LTIP performance targets and award levels
for executive directors and other members of
senior management for the 2017 LTIP.

the 2017 Remuneration Policy.

• Set executive directors’ personal performance

bonus targets for 2017
and 2018.

• Set financial and non-financial bonus targets for
executive directors and other members of senior
management’s bonus scheme for 2018.

ROTORK ANNUAL REPORT 2017 69

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DIRECTORS’ REMUNERATION REPORT CONTINUED

Remuneration at a glance for 2018

Salary

Benefits

Pension

Kevin Hostetler (Chief Executive)

Jonathan Davis (Finance Director)

£600,000
(set on appointment)

£346,000 (+3.2%)1

Standard benefits plus relocation arrangements agreed in
connection with his appointment

Standard benefits

25% of salary

20% of salary

Annual bonus

125% of salary maximum (75% salary target)

100% of salary maximum (60% salary target)

Based on profit, cash generation, safety, strategic and personal targets. Any bonus above target is deferred in
shares for three years

Long-term incentive

150% salary performance share award

125% of salary performance share award

Based on earnings per share (EPS), relative total shareholder return (TSR) and a return on capital measure assessed over a
three year performance period (a two year post-vesting holding period also applies)

Shareholding guideline

250% of salary

1 As disclosed in last year’s report, Jonathan Davis elected to invest a proportion of his salary in shares on a monthly basis.

How our remuneration policy supports Rotork’s strategy
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, deliver strong cash generation. Our reward structure supports and reflects this strategy.

Innovation

Operational excellence

Growth

Sustainability

OUR STRATEGIC PRIORITIES

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Annual
bonus

Strategic targets

Cash generation measure
Personal performance targets

Profit measure

Long-term
incentive

Return on capital measure
Total shareholder return
measure

Earnings per share measure

Safety measures
Deferral into shares
Clawback and malus provisions

Five year time horizon
(three year performance period
and two year holding period)
Clawback and malus provisions

Aligning pay with Rotork performance

ANNUAL BONUS
(2017)

LTIP
(1.1.2015 to 31.12.2017)

Performance

Outcome

Performance

Outcome

£130m profit
109% cash generation
0.24 LTIR

71.6% of
maximum pay-out

-46% basic earnings
per share growth
17% total shareholder return

Nil% vesting

ROTORK ANNUAL REPORT 2017

policy report
This report sets out the policy of the Company on the remuneration of the directors. The policy was approved by shareholders at our AGM on
28 April 2017 and is intended to remain in place for three years. Shown below is the policy in full, as approved by shareholders, updated where
appropriate to reference how the policy will be applied in 2018.

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 Remuneration 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 Remuneration 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 HR 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 met with employee representatives to discuss the approach to remuneration at
Rotork. 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 Institutional Shareholder Services). 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 Autumn 2016.

Overview of the Policy Report
Directors’ 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

Details of the current salaries of
the executive directors are set out
in the Annual Report on
Remuneration.

N/A

For 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, 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.

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 monthly1 and
reviewed annually (salaries are
normally reviewed in December,
with any changes effective from
1 January).

Jonathan Davis has elected to invest a proportion of his salary (net of tax) in Rotork shares and to retain them for two years.

ROTORK ANNUAL REPORT 2017

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DIRECTORS’ REMUNERATION REPORT CONTINUED

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.

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.

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.

N/A

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.

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.

ROTORK ANNUAL REPORT 2017

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.

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 from 2017
onwards, the directors must retain
any shares vesting (net of tax)
until the fifth anniversary of grant.

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.

N/A

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Awards under the LTIP are
currently subject to performance
conditions, measured over three
financial years.

The awards from 2017 onwards
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.

N/A

ROTORK ANNUAL REPORT 2017 73

DIRECTORS’ REMUNERATION REPORT CONTINUED

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).

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 Remuneration Committee and the Remuneration 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 Remuneration 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 Remuneration 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 Group, 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 for executive directors may be deferred in shares.

For employee remuneration, the Board considers it more appropriate that employees share in the success of the Group through a profit based bonus
plan which is based on the performance of their business unit and Group performance. 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 2017

Approach to recruitment remuneration
Base salary levels will be set in accordance with the Policy Report, 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 Policy Report, with relocation expenses/an expatriate
allowance paid for if necessary.

The structure of the variable pay element will be in accordance with the Policy Report. 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 Policy Report.

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 analogous reason, they may 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 may then vest on the normal vesting date, unless the Remuneration 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 Remuneration 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 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 date of control with a pro-rata reduction to reflect the proportion of the vesting period served.

The Executive 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 Executive Chairman is three years and
their appointments are subject to termination on three months’ notice (12 months for the Executive Chairman). In the event of the termination of
their position, they are entitled to reimbursement of any outstanding fees and expenses due.

ROTORK ANNUAL REPORT 2017 75

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DIRECTORS’ REMUNERATION REPORT CONTINUED

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 2018 for each
executive director.

£
2,500,000

2,250,000

2,000,000

1,750,000

1,500,000

1,250,000

1,000,000

750,000

500,000

250,000

2,500,000

2,250,000

2,000,000

1,750,000

1,500,000

1,250,000

1,000,000

750,000

500,000

250,000

Chief Executive (Kevin Hostetler)

£2,418,000

32%

31%

£1,398,000

13%

32%

£768,000

100%

55%

37%

Minimum

On target

Maximum

Finance Director (Jonathan Davis)

£433,200

£727,300
12%

28%

100%

60%

£1,211,700

36%

28%

36%

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 2018 and, in the case
of Kevin Hostetler, are based on a full year equivalent package. Taxable benefits are shown as the cost to the Company of supplying those benefits for the year ending 31 December
2017 (or estimated cost in the case of Kevin Hostetler). 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 Kevin Hostetler and 125% for Jonathan Davis. No share price growth has been assumed and for simplicity, the benefit derived from participating in the Company’s SIP or OPLSS
have been excluded.

ROTORK ANNUAL REPORT 2017

annUal report on remUneration

Single figure of remuneration (£000s) (audited)
Executive directors

Salary

Benefits(i)

Annual cash
bonus

LTIP(iii)

Pension and
related benefits(iv)

Payment for
loss of office

Total
remuneration

Name

Jonathan Davis
Peter France(vi)

2017

335(v)
306

2016

295
434

2017

2016

2017

18
15

18
18

240(ii)
271

2016

128
247

2017

2016

2017

2016

2017

2016

2017

–
–

83
89

92
154

–
767(vii)

–
–

676
1,448

2016

533
853

(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) Paid up to 60% of the maximum in shares with the remainder deferred into shares for three years.
(iii) The 2017 figures relate to the vesting of the 2015 LTIP award. The threshold performance targets for the award (which were based on performance over the three financial years

to 31 December 2017) were not achieved and the award will lapse.

(iv) See page 80 for further details.
(v) Jonathan Davis has elected to invest a proportion of his salary (net of tax) in Rotork shares and to retain them for two years.
(vi) Peter France resigned from the Board and as Chief Executive on 27 July 2017.
(vii) See page 81 for further details.

Other Directors (£000s)

Name

Lucinda Bell
Gary Bullard
Sally James
Martin Lamb
John Nicholas(i)
Peter Dilnot(ii)

Base fees

Additional
fees/remuneration

Total remuneration

2017

47
47
47
180
7
16

2016

47
47
47
180
47
–

2017

8
8
18
282
1
–

2016

–
8
10
–
8
–

2017

55
55
65
462
8
16

2016

47
55
57
180
55
–

(i) John Nicholas stood down from the Board on 24 February 2017.
(ii) Peter Dilnot joined the Board on 1 September 2017.

The additional remuneration for Martin Lamb relates to the remuneration received whilst fulfilling the role of Executive Chairman. this comprised a
fixed allowance only and he did not participate in any variable pay arrangements. Other additional fees are the supplementary fees paid to the
Chairs of the Audit and Remuneration Committees and the Senior Independent Director. For Sally James this also includes an additional fee of
£20,000 p.a. payable from 28 July 2017 for her increased responsibilities whilst the Chairman is fulfilling the role of Executive Chairman. Martin
Lamb elected to invest the additional net remuneration that he receives in Rotork shares and to hold them for a minimum of two years following
purchase. Sally James also elected to invest the additional net fees in Rotork shares and to hold them for a minimum of two years. All directors have
confirmed that, save as disclosed in the single figures of remuneration table above, they have not received any other items in the nature of
remuneration.

Annual cash bonus for 2017
Bonuses in 2017 were based 60% on annual profit, 15% on cash generation, 5% on lost time incident rate and 20% on personal strategic
objectives. Details of performance achieved and the targets set are shown below:

Annual profit target
Cash generation
Lost time incident rate

Total

* % of maximum bonus.

Performance
required to
trigger bonus
payment

Performance
required at
maximum

% payable*
at maximum
performance

Performance
outcome

% bonus
awarded*

£110m
85%
N/A

£142m
100%
<0.46

£130m
109%
0.24

60%
15%
5%

80%

37.1%
15.0%
5.0%

57.1%

ROTORK ANNUAL REPORT 2017 77

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DIRECTORS’ REMUNERATION REPORT CONTINUED

Personal strategic objectives, which accounted for 20% of the bonus opportunity, were set at the start of the year. Details of the objectives for the
Finance Director and performance against them are summarised in the table below:

Jonathan Davis

Specific personal objectives related to:
• Financial performance of Bifold;
•
• Development of the finance team;
•

Improvements in inventory management performance;

Improvements in the presentation of the financial performance
to the Board;

• Development of a strong control environment;
• Managing the risk profile of the Company’s ongoing liabilities;

and

• Providing operational assistance to the Executive Chairman in

the second half of the year.

The Remuneration Committee used its discretion to amend certain
of the objectives during the year following the departure of the
former Chief Executive which reflects the changes in strategic and
operational emphasis.

* % of maximum bonus.

% payable*
at maximum Performance summary

% bonus
awarded*

20% Performance against the objectives was monitored and

14.5%

assessed by the Executive Chairman, with input from
the non-executive directors and, in particular, the Chair
of the Audit Committee. The individual objectives were
reviewed and scored against the criteria set out. Strong
performance was achieved in relation to a number of
measures, in particular in relation to inventory
management. However the financial targets in relation
to Bifold were not achieved. Taking into account
performance against the individual objectives, the
Remuneration Committee elected to award a bonus of
14.5% of salary.

Overall this resulted in a bonus award to Jonathan Davis of £240,000 (71.6% salary). In accordance with the remuneration policy approved by
shareholders in 2017, part of the bonus will be deferred in shares for three years.

Peter France was entitled to a pro-rata bonus for the proportion of the performance period worked, see page 81 for further details. Martin Lamb
was not eligible for a bonus.

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, TSR compared to a comparator group, and a capital return measure for the 2017 LTIP awards onwards. Details of the awards
lapsing based on performance to 31 December 2017 and granted in the year are set out below.

LTIP awards lapsing based on performance to 31 December 2017 (audited)
The LTIP awards granted on 6 March 2015 were based on performance to 31 December 2017 and were subject to the following
performance targets:

Measure

Earnings per share

Weighting

Performance period

Threshold target1

Stretch target2

Performance outcome

50% 01/01/2015
– 31/12/17

RPI + 10%
(15% vesting)

RPI + 25%
(100% vesting)

EPS performance
(-46.2%) was below
the threshold target
resulting in nil vesting
for this part of the
award.

TSR growth of 17%
was below the
threshold target
resulting in nil vesting
for this part of the
award.

TSR relative to the constituents of the
FTSE 250 Index2

50% 01/01/2015
– 31/12/17

Median ranking

Upper quartile
ranking or above

1 For performance between threshold and stretch, awards vest on a pro-rata basis.
2 Excluding all financial services companies, insurance companies and investment trusts.

Performance was below the minimum performance thresholds resulting in the following awards lapsing.

Grant
date

Number of
shares under award

Number of
shares vesting

Number of
shares lapsing

Vesting
date

6 March 2015

117,120

215,500

–

117,120

6 March 2018

215,500

6 March 2018

Jonathan Davis

Peter France(i)

(i) See page 81 for further details.

ROTORK ANNUAL REPORT 2017

LTIP awards granted in 2017 (audited)

Share awards
made during
2017

Basis on which
award made

Face value of
award (£)(i)

Number of
shares vesting
for minimum
performance(ii)

Number of
shares vesting
for maximum
performance

End of
performance period

Vesting date

Jonathan Davis
Peter France(iii)

175,135
329,360

125% of salary
150% of salary

419,000
788,000

23,351
43,914

175,135 31 December 2019
329,360 31 December 2019

6 March 2020
6 March 2020

(i) The share price used to determine the number of shares under the award was £2.39 being the share price immediately prior to the date of the award.
(ii) Vesting if the minimum performance EPS, TSR and capital return (economic profit) conditions are achieved (13.3% of the maximum award). The three equally weighted

performance measures are:
a.
b.

Earnings per share – 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;
Total shareholder return – measured relative to the constituents of the FTSE 350 Industrial Goods and Services Sector, 25% vesting for median performance, increasing on a
straight line basis to full vesting for upper quartile performance and above; and
Capital return (economic profit) – measures the extent to which a post-tax return in excess of the weighted average cost of capital (WACC) is created, rewarding
management for increasing levels of economic profit, on a cumulative basis, over the three year performance period. No pay-out will be received for a negative economic
profit. The threshold target requires 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 Remuneration
Committee to be commercially sensitive. However, full details of the targets and how economic profit has been calculated will be disclosed on vesting.

(iii) The award to Peter France has since lapsed following his resignation as Chief Executive and director on 27 July 2017. See page 81 for further details.

Free SIP 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, 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
made to executive directors in 2017 are set out below.

Jonathan Davis
Peter France(i)

(i) See page 81 for further details.

Free share
awards
made during
the year

Basis on which
award made

2015 Non–performance based
2015 Non–performance based

Face value
of award

£3,600
£3,600

Date of grant

6 April 2017
6 April 2017

The executive directors are also eligible to purchase monthly partnership shares under the SIP to a maximum of £150 per month.

Statement of directors’ shareholding and share interests (audited)
The table below shows total shareholdings of the current directors and former directors as at 31 December 2017.

Current Directors
Jonathan Davis
Lucinda Bell
Gary Bullard
Sally James
Martin Lamb
Peter Dilnot(v)

Former Directors
Peter France(vi)
John Nicholas(vii)

Interests in
shares
2017(i)

Outstanding
LTIP awards
2017

Outstanding
options
2017

216,172
7,150
46,842
12,306
129,190
–

518,377(iii)
–
–
–
–
–

12,162(iv)
–
–
–
–
–

491,440
–

393,618
–

–
–

%
Shareholding
of salary
achieved(ii)
2017

172%
N/A
N/A
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 266.9p being the share price as at 31 December 2017.
(iii) During the year, an award over 175,135 shares was granted (on 8 May 2017) and the award granted on 6 March 2014, over 103,560 shares lapsed. No awards vested during

the year.

(iv) This relates to outstanding options held under the Rotork Sharesave scheme. No options were granted, vested or exercised during the year.
(v) Joined the Board on 1 September 2017.
(vi) Left the Board on 27 July 2017. See page 81 for details on the treatment of outstanding incentive awards.
(vii) Left the Board on 24 February 2017.

ROTORK ANNUAL REPORT 2017 79

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DIRECTORS’ REMUNERATION REPORT CONTINUED

In 2017, the shareholding guideline for Jonathan Davis was increased from 150% to 250% of salary.

There has been no change in the directors’ interests in the ordinary share capital of the Company between 31 December 2017 and 5 March 2018,
except, in the case of Jonathan Davis, for purchases of monthly partnership shares under the SIP and in the case of Jonathan Davis, Martin Lamb and
Sally James under the monthly rolling share purchase arrangements.

Total pension entitlements (audited)

Value of pension related benefits (£) during Company financial year to:

31 December 2016

31 December 2017

Total accrued pension
in the defined benefit
scheme as at
31 December 2017
(£ per annum)

36,324
73,025

Normal
retirement
age

65
60

Defined
benefit
scheme

66,140
90,280

Cash in
lieu of
pension

Total

26,216
64,103

92,356
154,383

Defined
benefit
scheme

29,600
33,800

Cash in
lieu of
pension

53,800
54,900

Total

83,400
88,700

Director

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 2017 is that which would be paid annually on retirement from normal pension age, based on service
to 31 December 2017. Both Jonathan Davis and Peter France opted out of the defined benefit scheme with effect from 30 April 2017, so the amount shown is their accrued
pension at this date. This amount will revalue up to normal pension age in line with the scheme’s rules.

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
£150,600 for 2017. In lieu of this limitation on their benefits under the scheme they received a monthly cash sum equal to 22.5% and 18% respectively of their basic salary
above the scheme-specific earnings cap, until they opted out on 30 April 2017. From 1 May 2017, they received a monthly cash sum equal to 25% and 20% respectively of their
total basic salary.

5. The cash in lieu of pension amount for Peter France is the amount paid up until he left the Company on 27 July 2017. He also received a payment in respect of his pension

allowance as part of his leaving arrangements. Details of this are set out on opposite.

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.
7.

Jonathan Davis was subject to an annual allowance tax charge in 2017. He opted to use ‘scheme pays’ to settle this, and as such his annual pension was reduced by £809 p.a.
This amount is not allowed for in the figures shown in the table above.

TSR performance graph

900

800

700

600

500

400

300

200

100

Jan 09

Dec 09

Dec 10

Dec 11

Dec 12

Dec 13

Dec 14

Dec 15

Dec 16

Dec 17

ROTORK ANNUAL REPORT 2017

Rotork plc

FTSE Industrial
Engineering Sector

Historic Chief Executive remuneration table

Year

2017
2017
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

282
681
835
696
1,092
1,452
1,539
1,182
1,288
1,062

N/A
72%
45.5%
23.4%
66.0%
94.4%
91.3%
88.9%
91.9%
99.5%

N/A
0%
0%
0%
37.0%
67.0%
75.5%
30.0%
94.4%
100.0%

Chief Executive

Martin Lamb(i)
Peter France(ii)
Peter France
Peter France
Peter France
Peter France
Peter France
Peter France
Peter France
Peter France

(i) Martin Lamb assumed the role of Executive Chairman on 28 July 2017 and received an additional fixed remuneration of £55,000 per month on top of his annual Chairman’s fee

during this period.

(ii) Peter France resigned as Chief Executive and stood down from the Board on 27 July 2017.

Percentage change in remuneration of director undertaking the role of Chief Executive
The table below shows the percentage change in remuneration (based on salary, benefits and bonus) between 2016 and 2017.

Base Salary
Benefits
Bonus

Chief
Executive

2017
% Change from
2016

Average per
UK employee

2017
% Change from
2016

N/A
N/A
N/A

3.9%
3.8%
68.8%

Peter France stepped down from the Board on 27 July 2017 and, Martin Lamb, assumed the role of Executive Chairman until a new Chief Executive
could be appointed. Consequently, full year comparable data is not available.

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.

Percentage

Employee remuneration (£000s)
Dividends (£000s)(i)

(i) Dividends paid were the only distributions to shareholders during the year.

2017

147,637
45,218

2016

136,557
43,876

change

6.6%
3.1%

Departure arrangements for Peter France
Peter France stood down from the Board and as Chief Executive on 27 July 2017. Under the terms of his leaving arrangements, he was entitled to:
• £525,000 as payment in lieu of his salary for his notice period;
• £18,000 in respect of certain benefit entitlements during the notice period and continuation of private medical and life insurance cover during

this period; and

• £131,000 in respect of pension allowance during the notice period.

The Company also made a payment of £93,000 as liquidated damages for any claims that Peter France may have against the Company.

Peter France also received a pro-rated, performance related annual bonus in respect of the period up to the termination of his employment. The
assessment of the bonus was based on performance to the cessation of employment against the corporate and individual strategic measures set and
resulted in a payment of £271,000 (out of a maximum pro-rata entitlement of £382,000).

He was treated as a good leaver in relation to the LTIP awards granted in 2015 and 2016. The awards will continue to vest on the normal vesting
date, subject to the achievement of the applicable performance targets and a pro-rata reduction to reflect the period for which he was employed.
The 2015 LTIP award will lapse on 6 March 2018 as the minimum performance hurdles were not satisfied. The LTIP award granted to him in 2017 has
lapsed. Outstanding awards under the SIP and Sharesave vested in accordance with the terms of the relevant plan.

In addition, the Company paid for outplacement services and legal advice provided to Peter France.

ROTORK ANNUAL REPORT 2017

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DIRECTORS’ REMUNERATION REPORT CONTINUED

Recruitment of Kevin Hostetler
Kevin Hostetler joined the Board on 12 February 2018 and will assume the role of Chief Executive from 12 March 2018. Martin Lamb, current
Executive Chairman, will then revert to his role as Non-Executive Chairman. The remuneration arrangements for Kevin Hostetler are consistent with
the terms of the Directors’ Remuneration Policy approved by shareholders at the AGM in April 2017.

Kevin Hostetler will receive an annual salary of £600,000 and a pension allowance of 25% of base salary. He will also be able to participate in the
annual bonus plan up to a maximum of 125% of salary and the LTIP up to 150% of salary. Benefits will be provided in accordance with the standard
policy. In addition, to facilitate his move to the United Kingdom relocation assistance will be provided.

Rotork was not required to compensate Kevin Hostetler for any remuneration foregone at his previous employer.

Statement of implementation of the Policy Report in 2018

Salary

Benefits

Pension

Annual
bonus

LTIP

Shareholding
guidelines

Non-executive
director fees

• Kevin Hostetler – £600,000 (set on appointment).
• Jonathan Davis – £346,000 (an increase of 3.2%, in line with the average increase for the rest of the UK workforce).

Jonathan Davis continues to invest a proportion of his monthly salary in Rotork shares.

No change to 2017 – benefits will comprise car and fuel (or car and fuel allowance), personal accident and private medical
insurance and life assurance. In addition, Kevin Hostetler is entitled to the reimbursement of certain relocation expenses
incurred in connection with his appointment and move to Bath (including tax).

Cash allowance in lieu of pension set at 25% of salary for Kevin Hostetler and 20% of salary for Jonathan Davis.

Maximum award levels of 125% of salary for Kevin Hostetler and 100% of salary for Jonathan Davis, 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.

The LTIP award levels for 2018 will be 150% of salary for Kevin Hostetler and 125% of salary for Jonathan Davis. 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 targets will be based on adjusted/underlying EPS (i.e. excluding the
impact of any material restructuring costs). However, the Remuneration Committee will use its discretion to increase the
targets as appropriate, to take into account the Board’s expected return on any restructuring investment during the
period.

• 33% will be based on a capital return measure (economic profit). No pay-out will be received for a negative economic

profit. The threshold target will require the average economic profit over the three year period to exceed that generated
in 2017 and the maximum target has been set such that it will require double digit growth in post-tax profits alongside
improved balance sheet efficiencies. Similar to EPS targets, these targets may be adjusted upwards to take into account
the Board’s expected return on any restructuring investment during the period. 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.

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 250% of salary.

There are no changes to the fee policy. The fees remain:
• 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.
Martin Lamb and Sally James will continue to receive additional remuneration in connection with their enhanced
responsibilities as Executive Chairman and Senior Independent Director until Kevin Hostetler assumes the role of Chief
Executive on 12 March 2018, when such arrangements will cease.

ROTORK ANNUAL REPORT 2017

Consideration by the directors of matters relating to directors’ remuneration
The members of the Remuneration Committee as at 31 December 2017 were Gary Bullard (Chair), Lucinda Bell, Sally James and Peter Dilnot. John
Nicholas ceased to be a member on his retirement from the Board in February 2017. The Remuneration Committee invites the Group HR 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 advisor 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 advisor to the Remuneration Committee.

In 2017, the Company paid £59,000 (2016: £61,000) to New Bridge Street for services to the Remuneration Committee. Figures exclude VAT and
disbursements.

Statement of voting at general meeting
At the 2017 AGM of the Company, the percentages of votes cast ‘for’, ‘against’ and ‘withheld’ in respect of the remuneration policy and the Annual
Report on Remuneration were as follows:

Resolution

To approve the remuneration policy

To approve the Annual Report on Remuneration

Votes cast
‘for’

Votes cast
‘against’

Votes
‘withheld’

99.1%

67.8%

0.9%

32.2%

The Annual Report on Remuneration, received a sizeable against vote in 2017. This related to changes to the executive salary levels which were
made as part of a package of changes to the remuneration policy and followed an extensive consultation exercise with major shareholders. The
remainder of the changes, which were set out in the remuneration policy, were very positively received (99% support). In consultation, the majority
of shareholders were broadly comfortable with the combined impact of the changes. The new policy has the strong support of shareholders and the
Remuneration Committee will continue to engage with the Company’s largest shareholders on matters of significance.

ROTORK ANNUAL REPORT 2017 83

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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 2017 as set out on pages 94 to 139. In compiling this
report, the directors have consulted with the management of the Group.

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
54 to 55. John Nicholas and Peter France were directors during the year
and resigned on 24 February 2017 and 27 July 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
them self 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.

Dividend
The directors recommend a final dividend of 3.35p per ordinary share
(2016: 3.15p) for the year, payable on 23 May 2018 to shareholders on
the register on 6 April 2018. An interim dividend for 2017 of 2.05p per
ordinary share (2016: 1.95p) was paid on 22 September 2017.

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 51.

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 2017 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 28 April 2017, 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 2018 AGM and appropriate renewals will be sought.

The Company did not acquire any of its own shares in 2017.

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 48.

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.

Disabled persons and employee involvement
The disclosures concerning the Group’s policies on the employment
of disabled persons and employee involvement are set out on page 38.

Post-balance sheet events
There have been no important post-balance sheet events.

Substantial shareholders
As at 31 December 2017, 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.

ROTORK ANNUAL REPORT 2017

Identity (i)

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

4.99%
4.99%
5.01%
4.86%
3.92%
4.91%
4.97%

Nature of
holding

Indirect
Indirect
Direct
Indirect
Direct
Indirect
Indirect

(i) No changes to the below have been disclosed to the Company in accordance with

DTR 5 between the end of the financial year and 5 March 2017.

Corporate Governance
The Company’s Corporate Governance Report can be found on
pages 56 to 60.

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.

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, International Accounting Standard 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.

Directors’ statement pursuant to the Disclosure Guidance and
Transparency Rules
Each of the directors, whose names and functions are listed on pages 54
to 55 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
5 March 2018

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FINANCIAL STATEMENTS

ROTORK ANNUAL REPORT 2017

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CONTENTS

Financial statements

Independent auditor’s report
to the members of Rotork
plc

Consolidated income

statement

Consolidated statement of
comprehensive income

Consolidated balance sheet

Consolidated statement of

changes in equity

Consolidated statement

of cash flows

Notes to the Group
financial statements

132

Rotork plc Company

balance sheet

133

Rotork plc Company

statement of changes
in equity

134

Notes to the Company
financial statements

Company information

140

141

142

Ten year trading history

Share register information

Corporate directory

ROTORK ANNUAL REPORT 2017 87

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF ROTORK PLC

Report on the audit of the financial statements
Opinion
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 2017 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 Financial Reporting Standard 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.

We have audited the financial statements of Rotork plc (the ‘Parent Company’) and its subsidiaries (the ‘Group’) which comprise:
• The consolidated income statement;
• The consolidated statement of comprehensive income;
• The consolidated and Parent Company balance sheets;
• The consolidated and Parent Company statements of changes in equity;
• The consolidated statement of cash flows;
• 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, including FRS 101 “Reduced Disclosure Framework” (United Kingdom Generally
Accepted Accounting Practice).

Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those
standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report.

We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the
financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements. We confirm that the non-audit services prohibited by the FRC’s Ethical Standard were not
provided to the Group or the Parent Company.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Summary of our audit approach

Key audit matters

The key audit matters that we identified in the current year were:
• Discount factors and growth rates utilised in management’s assessment of impairment of goodwill and

intangibles, specifically in relation to Bifold; and
Inflation and discount rate assumptions used in defined benefit pension scheme valuations.

•

Materiality

Scoping

These key audit matters are consistent with the prior year.

The materiality that we used for the Group financial statements was £5m which was determined on the basis of
adjusted profit before tax.

Based on our assessment, we identified 19 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. Our full scope covered 72% of the Group’s revenues
(2016: 76%) and 86% of profit before tax (2016: 87%).

Significant changes in our
approach

Last year our report included a key audit matter in respect of manual adjustments to inventory provisions and
profit in inventory, which is not included in our report this year. We concluded that these areas did not represent a
significant risk of material misstatement in the current year based on the work performed in prior periods, the
consistent approach to accounting for these items, and the fact that the manual adjustments to provisions and
the profit in inventory adjustment have been stable year on year.

No new key audit matters have been identified in the current year.

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Conclusions relating to going concern, principal risks and viability statement

Going concern
We have reviewed 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 and Company’s ability to continue to do so over a period of at least twelve
months from the date of approval of the financial statements.

We confirm that we have
nothing material to report,
add or draw attention to in
respect of these matters.

We are required to state whether we have anything material to add or draw attention to in relation to that
statement required by Listing Rule 9.8.6R(3) and report if the statement is materially inconsistent with our
knowledge obtained in the audit.

Principal risks and viability statement
Based solely on reading the directors’ statements and considering whether they were consistent with the
knowledge we obtained in the course of the audit, including the knowledge obtained in the evaluation of the
directors’ assessment of the Group’s and the Company’s ability to continue as a going concern, we are required to
state whether we have anything material to add or draw attention to in relation to:
• The disclosures on pages 22 to 25 that describe the principal risks and explain how they are being managed or

We confirm that we have
nothing material to report,
add or draw attention to in
respect of these matters.

mitigated;

• The directors’ confirmation on page 25 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; or

• The directors’ explanation on page 25 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.

We are also required to report whether the directors’ statement relating to the prospects of the Group required
by Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit.

Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the
current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These
matters included those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts
of the engagement team.

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ROTORK ANNUAL REPORT 2017 89

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INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF ROTORK PLC CONTINUED

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.

Discount factors and growth rates utilised in management’s assessment of impairment of goodwill and intangibles, specifically in
relation to the Bifold CGU

Key audit matter
description

Refer to the Audit Committee Report, note 1 (Accounting policies), note 10 (Goodwill) and note 11 (Intangible
assets).

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 matter 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 carrying value of goodwill in relation to Bifold is £47.5m (2016: £67.2m) which reflects a goodwill
impairment charge of £19.7m.

Due to the high level of judgement involved, we have determined that there was a potential for fraud through
possible manipulation of this balance.

How the scope of our audit
responded to the key audit
matter

We performed the following procedures to address this risk. We have:
• Challenged the reasonableness of forecast growth with reference to recent performance and external market

data and checked that the forecast for 2018 was consistent with the Board approved budget;

• 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;

• Obtained and reviewed a detailed Management impairment paper which had been considered and approved

by the Board;

• Performed a specific review and challenge, involving our own internal valuations specialists, of the discount

rate applied with reference to market data;

• Recalculated management’s sensitivity analysis on key assumptions and replaced key assumptions with

alternative scenarios e.g. future growth rates based on external market data; and

• Considered the adequacy of the Group’s disclosures in respect of the impairment recognised and sensitivity of

the Bifold CGU to changes in the key assumptions.

Key observations

From the work performed, we are satisfied that the impairment charge is based on a reasonable and balanced
assessment of the range of possible outcomes for the future growth, profitability and cash generation of the
Bifold business.

Inflation and discount rate assumptions used in defined benefit pension liability valuation

Key audit matter
description

Refer to the Audit Committee Report, note 1 (Accounting policies) and note 24 (Pension schemes).

The Group has a net defined benefit pension liability of £48.2m (gross liabilities of £237.1m) at
31 December 2017 (31 December 2016: £58.5m net liability and £236.5m gross liabilities).

How the scope of our audit
responded to the key audit
matter

There is a risk of material misstatement relating to judgements made 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.

We performed the following procedures to address this risk. We have:
• Utilised our Pensions Analytic tool to challenge the appropriateness of the inflation and discount rate

assumptions used in respect of the UK scheme and engaged Deloitte actuarial specialists to consider and
challenge the assumptions in respect of the US scheme;

• Challenged management to understand the sensitivity of changes in assumptions and quantify a range of
reasonable rates that could be used in their calculation with reference to comparator company and market
data as at 31 December 2017; and

• 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 inflation and discount rate assumptions applied in respect
of the valuation of the defined benefit pension scheme liability are within a reasonable range.

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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 financial statements as a whole as follows:

Materiality

£5.0m (2016: £4.6m)

£2.8m (2016: £3.6m)

Group financial statements

Parent company financial statements

Basis for determining
materiality

Materiality was determined as 5.3% of adjusted profit
before tax which was determined on the basis of profit
before tax adjusted to exclude the impact of the Bifold
goodwill impairment charge, release of contingent
consideration and restructuring costs (2016: 5% of
statutory profit before tax).

2% of net assets, capped at component materiality.

Rationale for the
benchmark applied

Adjusted profit before tax reflects the manner in which
business performance is reported and assessed by
external users of the financial statements. We have
adopted this measure in the current year as it provides a
consistent year on year basis for determining materiality.

Net assets are considered to be an appropriate
benchmark for the Company given that it is mainly a
holding company. A set percentage of Group materiality
was applied to the Company based upon the scoping of
components, assessing the risk within the Company
compared to others within the Group.

PBT adjusted for
material non-recurring
items £93.9m

PBT adjusted for
material non-recurring
items
Group materiality

Group materiality £5m

Component materiality range £2m to £2.8m

Audit committee reporting threshold £0.25m

We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £250,000 (2016: £229,000) for the
Group and £100,000 (2016: £182,000) for the Parent Company, 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 19 components, which were subject to a full scope audit.

Revenue

28%

Profit before tax

14%

72%

86%

Full audit scope
Review at group level

The 19 locations represent the principal business units within the Group’s four reportable segments across 11 countries and account for 72% of the
Group’s revenues (2016: 76%), 86% of profit before tax (2016: 87%). 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 £2.0m to £2.8m. The Parent Company is located in Bath
and audited directly by the group audit team.

ROTORK ANNUAL REPORT 2017
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INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF ROTORK PLC CONTINUED

Five components that were in full scope audit and two components that were subject to specified audit procedures in 2016, have been subject to
review at the Group level in the current year, which is consistent with the remaining entities in the Group.

Due to the significance to the group audit of the 19 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 2017 audit, senior members of the group audit team visited key components in the UK, USA, China, Italy and Spain.

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 scope
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 component management where considered necessary in forming our group audit opinion.

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 46 components not subject to full scope audit.
None of these components represented more than 3% of revenue or profit before taxation individually.

Other information

The directors are responsible for the other information. The other information comprises the information included
in the Annual Report, other than the financial statements and our auditor’s report thereon.

We have nothing to report
in respect of these matters.

Our opinion on the financial statements does not cover the other information and, except to the extent otherwise
explicitly stated in our report, we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in
doing so, consider whether the other information is materially inconsistent with the financial statements or our
knowledge obtained in the audit or otherwise appears to be materially misstated.

If we identify such material inconsistencies or apparent material misstatements, we are required to determine
whether there is a material misstatement in the financial statements or a material misstatement of the other
information. If, based on the work we have performed, we conclude that there is a material misstatement of this
other information, we are required to report that fact.

In this context, matters that we are specifically required to report to you as uncorrected material misstatements of
the other information include where we conclude that:
• Fair, balanced and understandable – the statement given by the directors that they consider the Annual Report
and financial statements taken as a whole is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Group’s position and performance, business model and strategy, is
materially inconsistent with our knowledge obtained in the audit; or

• Audit committee reporting – the section describing the work of the Audit Committee does not appropriately

address matters communicated by us to the Audit Committee; or

• Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the Directors’ statement
required under the Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code
containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly
disclose a departure from a relevant provision of the UK Corporate Governance Code.

Responsibilities of directors
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, and for such internal control as the directors determine is necessary to enable the preparation
of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the Group’s and the Parent Company’s ability to continue as a going
concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either
intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether
due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise
from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial statements.

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.

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Use of our report
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.

Report on other legal and regulatory requirements
Opinions on other matters prescribed by the Companies Act 2006
In our opinion the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.

In our opinion, based on the work undertaken in the course of the audit:
• 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 Group and of the Parent Company and their environment obtained in the course of the
audit, we have not identified any material misstatements in the Strategic Report or 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.

We have nothing to report
in respect of these matters.

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.

We have nothing to report
in respect of these matters.

Other matters
Auditor tenure
Following the recommendation of the Audit Committee, we were appointed by the Board of Directors on 2 June 2014 to audit the financial
statements for the year ending 31 December 2014 and subsequent financial periods. The period of total uninterrupted engagement including
previous renewals and reappointments of the firm is four years, covering the years ending 31 December 2014 to 31 December 2017.

Consistency of the audit report with the additional report to the Audit Committee
Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance with ISAs (UK).

NIGEL THOMAS (SENIOR STATUTORY AUDITOR)
For and on behalf of Deloitte LLP
Statutory Auditor
London
5 March 2018

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CONSOLIDATED INCOME STATEMENT
For tHe year enDeD 31 DecemBer 2017

Revenue
Cost of sales

Gross profit
Other income
Distribution costs
Administrative expenses
Other expenses

Adjusted operating profit
Adjustments
– Amortisation of acquired intangible assets
– Other adjustments

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 2017

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 gain/(loss) in pension scheme net of tax

Income and expenses recognised directly in equity

Total comprehensive income for the year

Notes

2017
£000

2016
£000

642,229
(358,090)

590,078
(328,410)

284,139
10,651
(6,271)
(202,233)
(314)

261,668
629
(5,138)
(163,165)
(217)

2,3

130,162

120,588

3
4

(27,183)
(17,007)

(26,811)
–

2,3

85,972

93,777

7
7

8
9

18
18
18
18

1,381
(6,767)

1,744
(4,451)

80,586
(24,973)

91,070
(23,897)

55,613

67,173

6.4p
10.6p
6.4p
10.5p

7.7p
10.0p
7.7p
10.0p

2017
£000

2016
£000

55,613

67,173

(376)
6,188

36,854
(6,414)

5,812

30,440

3,709

9,521

(30,732)

(292)

65,134

66,881

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ROTORK ANNUAL REPORT 2017

CONSOLIDATED BALANCE SHEET
at 31 DecemBer 2017

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

2017
£000

2016
£000

10
11
12
13
15

14
15
15
23
15
16

19
20
13
23
21

19
22
20
22
23
22
21

228,028
81,456
81,725
21,218
142

251,407
109,019
83,766
25,259
146

412,569

469,597

91,908
145,529
2,726
3,468
19,202
63,192

85,772
131,891
4,349
–
22,341
61,423

326,025

305,776

738,594

775,373

4,352
11,193
32,263
409,392

4,350
10,482
26,451
392,803

457,200

434,086

45,879
52,293
19,379
245
1,929

51,303
62,593
24,848
2,483
11,947

119,725

153,174

29,928
49,183
21,464
13,093
1,521
42,165
4,315

65,108
39,652
14,256
13,352
8,143
41,999
5,603

161,669

188,113

281,394

341,287

738,594

775,373

These financial statements were approved by the Board of Directors on 5 March 2018 and were signed on its behalf by:

MJ Lamb and JM Davis, Directors.

ROTORK ANNUAL REPORT 2017 95
ROTORK ANNUAL REPORT 2017 95

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CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Balance at 31 December 2015
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

Issued
equity
capital

4,349
–

Share
premium

10,018
–

–

–
–
–

–

–
–
1
–
–
–

–

–
–
–

–

–
–
464
–
–
–

Translation
reserve

(4,712)
–

36,854

–
–
–

36,854

–
–
–
–
–
–

Capital
redemption
reserve

1,644
–

Hedging
reserve

Retained
earnings

Total

(921)
–

397,424
67,173

407,802
67,173

–

–
–
–

–

–
–
–
–
–
–

–

36,854

(7,822)
–
1,408

–
(37,923)
7,191

(7,822)
(37,923)
8,599

(6,414)

(30,732)

(292)

(6,414)

36,441

66,881

–
–
–
–
–
–

1,557
74
–
(1,019)
2,202
(43,876)

1,557
74
465
(1,019)
2,202
(43,876)

Balance at 31 December 2016

4,350

10,482

32,142

1,644

(7,335)

392,803

434,086

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

–

–
–
–

–

–
–
2
–
–
–

–

–
–
–

–

–
–
711
–
–
–

–

(376)

–
–
–

(376)

–
–
–
–
–
–

–

–
–
–

–

–
–
–
–
–
–

–

55,613

–

(376)

7,546
–
(1,358)

6,188

–
5,849
(2,140)

3,709

7,546
5,849
(3,498)

9,521

59,322

65,134

–
–
–
–
–
–

1,089
252
–
(1,157)
2,301
(45,218)

1,089
252
713
(1,157)
2,301
(45,218)

Balance at 31 December 2017

4,352

11,193

31,766

1,644

(1,147)

409,392

457,200

Detailed explanations for equity capital, the translation reserve, capital redemption reserve and hedging reserve can be seen in note 17.

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CONSOLIDATED STATEMENT OF CASH FLOWS
For tHe year enDeD 31 DecemBer 2017

Cash flows from operating activities
Profit for the year
Adjustments for:
Amortisation of intangibles
Other adjustments
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

(Increase)/decrease in inventories
(Increase)/decrease in trade and other receivables
Increase in trade and other payables
Restructuring costs paid
Difference between pension charge and cash contribution
Increase/(decrease) in provisions
Increase 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 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

Cash and cash equivalents at 31 December

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Notes

2017
£000

2016
£000

55,613

27,183
17,007
2,699
12,232
3,390
(147)
(1,381)
6,767
24,973

148,336
(7,390)
(13,172)
6,926
(2,775)
(4,782)
147
7,158

134,448
(28,243)

(12,457)
(3,356)
2,450
–
(1,347)
662
1,191

713
(1,157)
(2,975)
(40,579)
(68)
(45,218)

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)

106,205

118,692

(14,692)
(2,957)
648
(16,109)
(257)
(25,867)
180

(12,857)

(59,054)

466
(1,019)
(2,649)
(3,619)
(253)
(43,876)

(89,284)

4,064
61,423
(2,295)

63,192

(50,950)

8,688
48,968
3,767

61,423

ROTORK ANNUAL REPORT 2017 97
ROTORK ANNUAL REPORT 2017 97

NOTES TO THE GROUP FINANCIAL STATEMENTS
For tHe year enDeD 31 DecemBer 2017

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 2017
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
In the current year, the Group has applied a number of amendments to IFRSs issued by the International Accounting Standards Board (IASB) that are
mandatorily effective for an accounting period that begins on or after 1 January 2017:
• Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12).
• Disclosure Initiative (Amendments to IAS 7).
• Annual Improvements to IFRS Standards 2014-2016 Cycle – Amendments to IFRS 12.

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.

New standards and interpretations not yet adopted
Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2017 reporting periods and
have not been early adopted by the Group. An assessment of the impact of these new standards and interpretations is set out below.

i. IFRS 9 Financial Instruments
In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments that replaces IAS 39 Financial Instruments: Recognition and
Measurement and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for financial instruments project:
classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with
early application permitted. Except for hedge accounting, retrospective application is required but providing comparative information is not
compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions.

The Group plans to adopt the new standard on the required effective date and will not restate comparative information. The directors do not
anticipate that the adoption of this standard will have a material impact on the Group’s consolidated financial statements.

ii. IFRS 15 Revenue from Contracts with Customers
IFRS 15 was issued in May 2014 and amended in April 2016, and establishes a five-step model to account for revenue arising from contracts with
customers. IFRS 15 is effective for annual periods beginning on or after 1 January 2018. Under IFRS 15, revenue is recognised at an amount that
reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The new revenue
standard will supersede all current revenue recognition requirements under IFRS.

During 2017, the Group performed a detailed analysis of significant revenue streams in 2016, communicated to key stakeholders within the business the
key aspects of the accounting change and had specific targeted training for key finance employees. In early 2018, further work targeted service revenue
in 2017 to assess the impact of the change over the transition date. This analysis has enabled management to assess the impact of the new standard on
the 2016 and 2017 balance sheets and the 2017 income statement. An explanation of the impact on the key revenue streams is set out below.

Contracts for the sale of products are generally expected to have only one performance obligation and adoption of IFRS 15 is not expected to have
any impact on the Group’s revenue and profit or loss. The Group expects the revenue recognition to occur at a point in time when control of the
asset is transferred to the customer, generally on delivery of the goods.

The Group provides service and support through preventative maintenance contracts, on-site and workshop service, retrofit solutions and the Client
Support Programme. The Group’s current accounting treatment under IAS 18 is that revenue on long-term service contracts is recognised by
reference to the stage of completion. Under IFRS 15, management have concluded that the long-term service contracts are satisfied over time given
that the customer simultaneously receives and consumes the benefits provided by the Group. For other service work revenue will be recognised on
completion of the work and after all performance obligations have been completed. Adoption of IFRS 15 is not expected to have a material impact
on service revenue in the income statement or the balance sheet.

The Group has adopted IFRS 15 on 1 January 2018 and the impact of the changes set out above are not expected to require any restatement of the
2017 balance sheet and income statement.

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iii. IFRS 16 Leases
IFRS 16 introduces a comprehensive model for the identification of lease arrangements and accounting treatments for both lessors and lessees. IFRS
16 will supersede the current lease guidance including IAS 17 Leases and the related interpretations when it becomes effective for annual periods
beginning on or after 1 January 2019.

IFRS 16 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer. Distinctions of operating
leases (off balance sheet) and finance leases (on balance sheet) are removed for lessee accounting, and are replaced by a model where a right-of-use
asset and a corresponding liability have to be recognised for all leases by lessees (i.e. all on balance sheet) except for short-term leases and leases of
low value assets.

The right-of-use asset is initially measured at cost and subsequently measured at cost (subject to certain exceptions) less accumulated depreciation
and impairment losses, adjusted for any remeasurement of the lease liability. The lease liability is initially measured at the present value of the lease
payments that are not paid at that date. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease
modifications, amongst others. Furthermore, the classification of cash flows will also be affected as operating lease payments under IAS 17 are
presented as operating cash flows; whereas under the IFRS 16 model, the lease payments will be split into a principal and an interest portion which
will be presented as financing and operating cash flows respectively. Extensive disclosures are required by IFRS 16.

As at 31 December 2017, the Group has non-cancellable operating lease commitments of £19,268,000. IAS 17 does not require the recognition of
any right-of-use asset or liability for future payments for these leases; instead, certain information is disclosed as operating lease commitments in
note 27. A preliminary assessment indicates that these arrangements will meet the definition of a lease under IFRS 16, and hence the Group will
recognise a right-of-use asset and a corresponding liability in respect of all these leases unless they qualify for low value or short-term leases upon
the application of IFRS 16. The new requirement to recognise a right-of-use asset and a related lease liability is expected to have an impact on the
amounts recognised in the Group’s consolidated financial statements and management are currently assessing its potential impact. It is not
practicable to provide a reasonable estimate of the financial effect until this review is completed.

In contrast, for finance leases where the Group is a lessee, as the Group has already recognised an asset and a related finance lease liability for the
lease arrangement, management do not anticipate that the application of IFRS 16 will have an impact on the amounts recognised in the Group’s
consolidated financial statements.

Adjustments to profit
Adjustments to profit are items of income and expense which, because of the nature, size and/or infrequency of the events giving rise to them, merit
separate presentation. These specific items are presented on the face of the income statement to provide greater clarity and a better understanding
of the impact of these items on the Group’s financial performance. In doing so, it also facilitates greater comparison of the Group’s underlying
results with prior periods and assessment of trends in financial performance. This split is consistent with how underlying business performance is
measured internally.

Adjustments to profit items may include but are not restricted to: costs of significant business restructuring, significant impairments of intangible or
tangible assets, adjustments to the fair value of acquisition related items such as contingent consideration, acquired intangible asset amortisation
and other items due to their significance, size or nature, and the related taxation.

Acquired intangible asset amortisation has been shown separately to provide visibility over the ongoing impact on the Group’s income statement of
prior and current year period investment activities.

Further analysis of the adjustments to profit are provided in note 4 to the financial statements.

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 2017.
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.

ROTORK ANNUAL REPORT 2017 99
ROTORK ANNUAL REPORT 2017 99

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NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For tHe year enDeD 31 DecemBer 2017

1. Accounting policies continued
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 (CGUs) 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.

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.

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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.

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.

ROTORK ANNUAL REPORT 2017 101
ROTORK ANNUAL REPORT 2017 101

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NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For tHe year enDeD 31 DecemBer 2017

1. Accounting policies continued
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 Sharesave Plan, 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 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 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.

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.

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ROTORK ANNUAL REPORT 2017

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.

i) Critical accounting judgements
Impairment of intangible assets
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.

Impairment testing requires management to judge whether the carrying value of assets can be supported by the net present value of future cash
flows that they generate. Calculating the net present value of the future cash flows requires estimates to be made in respect of uncertain matters,
including management’s expectations of growth in operating profit, long-term growth rates and appropriate discount rates to reflect the risks
involved. Further explanations and sensitivities in respect of the current year impairment review are detailed in note 10.

ii) Key sources of estimation uncertainty
Retirement benefits
The Group’s financial statements include costs in relation to, and provisions for, retirement benefit obligations. Management is required to estimate
the future rates of inflation, salary increases, discount rates and longevity of members, each of which may have a material impact on the defined
benefit obligations that are recorded. Sensitivities to changes in key estimates affecting the pension schemes’ liabilities are shown in note 24.

ROTORK ANNUAL REPORT 2017 103
ROTORK ANNUAL REPORT 2017 103

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NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For tHe year enDeD 31 DecemBer 2017

2. Alternative performance measures
The Group uses adjusted figures as key performance measures in addition to those reported under adopted IFRS, as management believe these
measures facilitate greater comparison of the Group’s underlying results with prior periods and assessment of trends in financial performance.

The key alternative performance measures that the Group use include adjusted profit measures and organic constant currency (OCC). Explanations
of how they are calculated and how they are reconciled to IFRS statutory results are set out below.

a. Adjusted operating profit
Adjusted operating profit is the Group’s operating profit excluding the amortisation of acquired intangible assets and other items that are
considered to be significant and where treatment as an adjusted item provides stakeholders with additional useful information to assess the trading
performance of the Group on a consistent basis. In 2017, other items excluded are the release of contingent consideration, impairment of goodwill
and restructuring costs to arrive at adjusted operating profit. Further details on these adjustments are given in note 4.

b. Adjusted profit before tax
The adjustments in calculating adjusted profit before tax are consistent with those in calculating adjusted operating profit above.

Profit before tax
Adjustments:
Amortisation of acquired intangible assets
Impairment of goodwill
Release of contingent consideration
Restructuring costs

Adjusted profit before tax

2017

2016

80,586

91,070

27,183
21,594
(10,000)
5,413

26,811
–
–
–

124,776

117,881

c. Adjusted basic and diluted earnings per share
Adjusted basic earnings per share is calculated using the adjusted net profit attributable to the ordinary shareholders and dividing it by the weighted
average ordinary shares in issue (see note 18). Adjusted net profit attributable to ordinary shareholders is calculated as follows:

Net profit attributable to ordinary shareholders
Adjustments:
Amortisation of acquired intangible assets
Impairment of goodwill
Release of contingent consideration
Restructuring costs
Tax effect on adjusted items

Adjusted net profit attributable to ordinary shareholders

2017

2016

55,613

67,173

27,183
21,594
(10,000)
5,413
(7,879)

26,811
–
–
–
(7,035)

91,924

86,949

Diluted earnings per share is calculated by using the adjusted net profit attributable to ordinary shareholders and dividing it by the weighted average
ordinary shares in issue adjusted to assume conversion of all potentially dilutive ordinary shares (see note 18).

d. Organic constant currency (OCC)
OCC results exclude the incremental impact of acquisitions and adjusted items and are restated at 2016 exchange rates. Key headings in the income
statement are reconciled to OCC as follows:

31 December
2017

Currency
adjustment

Impact of
acquisitions

OCC
31 December
2017

642,229
(358,090)

284,139
(153,977)

130,162
(5,386)

124,776
(32,852)

91,924

(33,387)
20,813

(12,574)
5,989

(6,585)
30

(6,555)
1,476

(5,079)

(5,438)
4,647

603,404
(332,630)

(791)
779

270,774
(147,209)

(12)
–

(12)
(31)

(43)

123,565
(5,356)

118,209
(31,407)

86,802

Revenue
Cost of sales

Gross margin
Overheads

Adjusted operating profit
Interest

Adjusted profit before tax
Taxation

Adjusted profit after tax

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ROTORK ANNUAL REPORT 2017

3. Operating segments
The Group has chosen to organise the management and financial structure by the grouping of related products. The four identifiable operating
segments for which 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.
•

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

Segment result before adjustments
Adjustments

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

Segment result before adjustments
Adjustments

Operating profit
Net finance expense
Income tax expense

Profit for the year

Controls
2017

325,174
–

Fluid
Systems
2017

150,117
–

Gears
2017

Instruments
2017

Elimination
2017

Unallocated
2017

Group
2017

72,814
11,086

94,124
6,498

–
(17,584)

325,174

150,117

83,900

100,622

(17,584)

92,903
(2,888)

9,019
(1,409)

15,724
(2,021)

20,457
(20,865)

90,015

7,610

13,703

(408)

–
–

–

(7,941)
–

(7,941)

–
–

–

642,229
–

642,229

130,162
(27,183)

102,979
(17,007)

85,972
(5,386)
(24,973)

55,613

Controls
2016

Fluid
Systems
2016

Gears
2016

Instruments
2016

Elimination
2016

Unallocated
2016

Group
2016

298,381
–

145,317
–

60,802
11,577

85,578
5,592

–
(17,169)

298,381

145,317

72,379

91,170

(17,169)

–
–

–

87,293
(3,860)

6,181
(1,582)

14,051
(1,698)

20,130
(19,671)

83,433

4,599

12,353

459

–
–

–

(7,067)
–

(7,067)

590,078
–

590,078

120,588
(26,811)

93,777
–

93,777
(2,707)
(23,897)

67,173

* Adjusted operating profit is operating profit before the amortisation of acquired intangible assets and other adjustments, comprising goodwill impairment, release of contingent

consideration and restructuring costs (see note 4)

ROTORK ANNUAL REPORT 2017 105
ROTORK ANNUAL REPORT 2017 105

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NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For tHe year enDeD 31 DecemBer 2017

3. Operating segments continued

Depreciation
Amortisation:
– Acquired intangible assets
– Development costs
Impairment of goodwill
Release of contingent consideration
Non-cash items: equity settled share-based payments
Net financing expense
Acquired as part of business combinations:
– Goodwill
– Intangible assets
Capital expenditure

Controls
2017

5,622

Fluid
Systems
2017

2,801

2,888
1,670
–
–
1,515
–

–
–
7,355

Controls
2016

5,429

3,860
1,628
–
–
1,709
–

–
–
6,975

1,409
469
–
–
652
–

–
–
1,495

Fluid
Systems
2016

2,571

1,582
211
–
–
680
–

–
–
4,575

Gears
2017

Instruments
2017

Unallocated
2017

Group
2017

1,813

1,951

12,232

2,021
259
1,840
–
418
–

–
–
1,622

20,865
301
19,754
(10,000)
545
–

–
–
1,933

–
–
–
–
260
(5,386)

27,183
2,699
21,594
(10,000)
3,390
(5,386)

–
–
–

–
–
12,405

Gears
2016

Instruments
2016

Unallocated
2016

Group
2016

1,546

2,170

11,759

1,698
281
–
–
480
–

5,317
6,816
1,741

19,671
106
–
–
473
–

–
–
1,357

–
–
–
–
417
(2,707)

–
–
13

26,811
2,226
–
–
3,759
(2,707)

5,317
6,816
14,661

Balance sheets are reviewed by subsidiary and operating segment balance sheets are not prepared, therefore no further analysis of operating
segments assets and liabilities is presented.

Geographical analysis:

Revenue by location of subsidiary

UK
Italy
Rest of Europe
USA
Other Americas
Rest of World

Non-current assets:
– Goodwill
– Intangible assets
– Property, plant and equipment

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ROTORK ANNUAL REPORT 2017

2017

2016

76,281
82,165
113,822
149,526
31,549
188,886

74,144
63,040
112,759
145,473
27,365
167,297

642,229

590,078

UK
2017

Europe
2017

USA
2017

Other
Americas
2017

Rest of
World
2017

Group
2017

61,342
43,226
26,441

67,119
12,215
29,054

55,996
12,886
8,612

733
–
767

42,838
13,129
16,851

228,028
81,456
81,725

UK
2016

Europe
2016

USA
2016

Other
Americas
2016

Rest of
World
2016

Group
2016

81,329
52,138
26,099

64,984
17,595
29,812

62,730
20,674
10,348

740
–
527

41,624
18,612
16,980

251,407
109,019
83,766

4. Adjustments to profit
Adjustments are those items that management consider to be significant and where separate disclosure enables stakeholders to assess the trading
performance of the Group on a consistent basis.

The adjustments to profit included in statutory profit are as follows:

Release of contingent consideration
Goodwill impairment

Restructuring costs

2017

2016

10,000
(21,594)

(11,594)
(5,413)

(17,007)

–
–

–

Bifold was acquired in 2015 and £10,000,000 of the consideration was contingent on a 2017 EBITDA performance target. Given the target has not
been met the contingent consideration has been released to the income statement.

As a result of the annual impairment review the goodwill associated with the Bifold and Tulsa CGUs has been impaired by £19,754,000 and
£1,607,000 respectively. Bifold has been impacted as a result of the downturn in its main oil and gas market and trading not recovering as quickly as
anticipated. The Tulsa CGU has also been impacted by depressed activity in the markets it serves. Further details of the annual impairment review
and the key assumptions is provided in note 10.

The restructuring costs include:
i. Consultancy costs associated with the strategic review.
ii. Redundancy costs which have arisen following the reorganisation of operations in Italy and Germany.
iii. Executive termination and associated recruitment costs.

Within the income statement the goodwill impairment and restructuring costs are included in administrative expenses and the release of contingent
consideration is included in other income.

The goodwill impairment is not tax deductible and the release of the contingent consideration is not taxable. The restructuring costs are tax
deductible in the country in which the expense is incurred.

5. Other income and expense

Release of contingent consideration
Gain on disposal of property, plant and equipment
Other

Other income

Loss on disposal of property, plant and equipment
Other

Other expense

2017

10,000
420
231

10,651

2017

273
41

314

2016

–
462
167

629

2016

208
9

217

ROTORK ANNUAL REPORT 2017 107
ROTORK ANNUAL REPORT 2017 107

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NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For tHe year enDeD 31 DecemBer 2017

6. Personnel expenses

Wages and salaries (including bonus and incentive plans)
Social security costs
Pension costs (note 24)
Share-based payments (note 25)
Increase 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

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

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ROTORK ANNUAL REPORT 2017

2017

2016

147,637
20,486
8,951
3,390
539

136,557
18,032
7,799
3,759
49

181,003

166,196

2017
Number

2016
Number

1,814
807
466
651

3,738

1,012
2,726

3,738

2017

1,206
175

1,381

1,781
860
414
664

3,719

1,028
2,691

3,719

2016

934
810

1,744

2017

2016

(3,184)
(1,607)
(1,976)

(6,767)

(2,970)
(767)
(714)

(4,451)

2017

2016

(1,399)
8,945
(376)

(8,772)
950
36,854

7,170

29,032

7,546
(376)

(7,822)
36,854

7,170

29,032

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
Rental of land and buildings under operating leases
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.

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Notes

2017

2016

i
i

iii
iii
ii
i
i
iii
iv

11,922
310

27,183
2,699
4,144
2,560
3,874
10,678
1,801

821
237

1,058
11

1,069

–
–
44
–
–

11,700
59

26,811
2,226
6,632
1,986
3,969
8,841
(96)

800
158

958
34

992

12
23
42
–
6

ROTORK ANNUAL REPORT 2017 109
ROTORK ANNUAL REPORT 2017 109

NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For tHe year enDeD 31 DecemBer 2017

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

Profit before tax
Profit before tax multiplied by the blended standard rate of corporation tax in
the UK of 19.25% (2016: 20.00%)

Effects of:
Different tax rates on overseas earnings
Permanent differences
Losses not recognised
Tax incentives
Impact of rate change
Non-taxable contingent consideration
Non-deductible goodwill written off
Adjustments to tax charge in respect of prior years

Total tax charge for year

Effective tax rate

Adjusted profit before tax (note 2b)

Total tax charge for the year
Amortisation of acquired intangible assets
Other adjustments – restructuring

Adjusted total tax charge for the year

Adjusted effective tax rate

2017

2016

3,407
(974)

27,386
343

(6,711)
1,162
360

3,671
4

2,433

3,675

28,487
(413)

27,729

30,162

28,074

31,749

(7,937)
(127)
212

(5,189)

24,973

80,586

15,513

6,571
138
768
(1,140)
1,162
(1,925)
4,157
(271)

24,973

31.0%

(7,852)

23,897

91,070

18,214

6,381
301
224
(899)
(127)
–
–
(197)

23,897

26.2%

124,776

117,881

24,973
6,664
1,215

32,852

26.3%

23,897
7,035
–

30,932

26.2%

A tax credit of £252,000 (2016: £74,000) in respect of share-based payments has been recognised directly in equity in the year.

The effective tax rate for the year is 31.0% (2016: 26.2%). The adjusted effective tax rate is 26.3% (2016: 26.2%) and is lower than the effective tax
rate for the year principally because both the goodwill adjustments and the release of the contingent consideration are non-deductible for
tax purposes. The US Tax Cuts and Jobs Act, which was signed into law on 22 December 2017, has resulted in a one off charge to tax of £1,162,000
arising on the revaluation of the Group’s net US deferred tax assets at 31 December 2017. Excluding the effect of this charge, the 2017 adjusted
effective tax rate would be 25.4%.

The movement on the adjusted effective tax rate arising from the one off revaluation of the US net deferred tax asset has been offset by the change
in the geographic mix of where profits are generated, resulting in a small increase in the adjusted effective tax rate from 26.2% to 26.3% in 2017.
The Group expects its adjusted effective tax rate to further fall next year as a result of the reduction in the US corporate tax rate, which comes into
effect from 1 January 2018. However, the adjusted effective tax rate will still remain higher than the standard UK rate due to higher rates of tax in
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 £305,277,000 (2016: £282,541,000).

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10. Goodwill

Cost
At 1 January
Acquisition through business combinations
Other movements
Exchange adjustments

At 31 December

Provision for impairment
At 1 January
Impairment charge

At 31 December

Net book value

2017

2016

251,407
–
255
(2,040)

222,086
5,317
–
24,004

249,622

251,407

–
21,594

21,594

–
–

–

228,028

251,407

Cash generating units
Goodwill acquired through business combinations has been allocated to the lowest level of cash generating unit (CGU). 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. During the year, following the merger of
businesses in Italy, the CGUs of Masso and GTA were consolidated with the Rotork Fluid Systems CGU as this is the lowest level at which the
goodwill is monitored for internal management purposes.

Cash generating unit

Schischek
Rotork Fluid Systems
Rotork Sweden
Rotork Controls Inc
Tulsa
Bifold
Instruments sub-group
Other cash generating units

Total Group

Discount rate

2017

2016

12.6% (2016: 14.9%)
12.3% (2016: 14.4%)
11.5% (2016: 13.5%)
10.2% (2016: 13.6%)
10.2% (2016: 13.5%)
11.0% (2016: 12.4%)
10.5% (2016: 12.6%)

20,275
15,604
6,527
11,464
7,023
47,467
100,485
19,183

19,498
7,792
6,440
12,218
9,448
67,221
101,684
27,106

228,028

251,407

Impairment testing
The Group is required to test, on an annual basis, whether goodwill has suffered any impairment.

The fall in oil price since 2015 has led to a sustained period of lower investment in the traditional HP upstream supply market which has had a
substantial impact on the short to medium term forecasts for Bifold. Given this uncertainty we have used an expected cash flow approach to
determine the value in use of Bifold which has resulted in an impairment to Bifold’s goodwill of £19,754,000.

In addition to the Bifold impairment, a further impairment charge of £1,607,000 has been recorded against the Tulsa CGU which has also been
adversely affected by depressed activity in the oil and gas markets it serves.

The key assumptions used in the annual impairment review which are common to all other CGUs are set out below:

i) Discount rates
The discount rates for the significant CGUs presented above 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.

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 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 2022. 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.

ROTORK ANNUAL REPORT 2017 111
ROTORK ANNUAL REPORT 2017 111

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NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For tHe year enDeD 31 DecemBer 2017

10. Goodwill continued
Sensitivity analysis
At the balance sheet date, the estimated recoverable amount of the Bifold CGU is equal to its carrying value following the impairment charge noted
above. The key assumptions underpinning the estimate of the recoverable amount for the Bifold CGU are the discount rate and the forecast revenue
growth rate for the next three years. Considering each assumption change in isolation, an increase in the Bifold CGU discount rate by 1% would
result in a further impairment of £10,400,000 and a decrease in the discount rate by 1% would result in a £13,600,000 lower impairment charge.
The weighted average revenue growth rate used in the Bifold impairment review is 11%. If the forecast revenue growth in each of years one, two
and three was reduced to 6%, this would result in a further impairment of £13,800,000. If the forecast revenue growth in each of years one, two
and three was increased to 16%, this would result in a reduction in the impairment charge of £15,100,000. Each of these sensitivities are considered
to be a reasonably possible change.

Sensitivity analysis has been undertaken for the remaining CGUs to assess the impact of any reasonably possible change in assumptions. Using the
key assumptions above and applying sensitivities to these assumptions, there is no reasonably possible change that would cause the carrying
amount of any other CGU goodwill to exceed the recoverable amount.

11. Intangible assets

Cost
1 January 2016
Acquisition through business combinations
Internally developed
Exchange adjustments

31 December 2016
Acquisition through business combinations
Internally developed
Exchange adjustments

31 December 2017

Amortisation
1 January 2016
Charge for the year
Exchange adjustments

31 December 2016
Charge for the year
Exchange adjustments

31 December 2017

Net book value
31 December 2016

31 December 2017

Acquired intangible assets

Research and
development
costs

Brands

Customer
relationships

Other

Total

17,147
–
2,958
290

20,395
–
3,357
(47)

45,332
1,644
–
6,130

53,106
–
–
(1,036)

106,147
4,674
–
11,296

122,117
–
–
(1,637)

22,560
498
–
2,357

25,415
–
–
(481)

191,186
6,816
2,958
20,073

221,033
–
3,357
(3,201)

23,705

52,070

120,480

24,934

221,189

9,341
2,226
72

11,639
2,699
(14)

17,045
5,788
3,105

25,938
6,436
(822)

35,242
17,631
5,713

58,586
17,459
(1,324)

11,003
3,392
1,456

15,851
3,287
(2)

72,631
29,037
10,346

112,014
29,881
(2,162)

14,324

31,552

74,721

19,136

139,733

8,756

9,381

27,168

63,531

9,564

109,019

20,518

45,759

5,798

81,456

Other acquired intangible assets represent order books and intellectual property.

The amortisation charge is recognised within administrative expenses in the income statement.

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12. Property, plant and equipment

Cost
1 January 2016
Additions
Disposals
Acquisition through business combinations
Exchange adjustments

31 December 2016
Additions
Disposals
Exchange adjustments

31 December 2017

Depreciation
1 January 2016
Charge for the year
Disposals
Exchange adjustments

31 December 2016
Charge for the year
Disposals
Exchange adjustments

31 December 2017

Net book value
31 December 2016

31 December 2017

Land and
buildings

Plant and
equipment

Total

50,832
4,511
(101)
–
6,410

61,652
3,008
(1,874)
868

80,594
10,150
(2,288)
1,393
10,824

100,673
9,397
(911)
(1,475)

131,426
14,661
(2,389)
1,393
17,234

162,325
12,405
(2,785)
(607)

63,654

107,684

171,338

10,164
1,892
(76)
1,504

13,484
2,007
(195)
8

49,254
9,867
(1,953)
7,907

65,075
10,225
(356)
(635)

59,418
11,759
(2,029)
9,411

78,559
12,232
(551)
(627)

15,304

74,309

89,613

48,168

35,598

83,766

48,350

33,375

81,725

The net book value of the Group’s plant and equipment includes £4,000 (2016: £410,000) 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

2017

2016

7,360
40,990

7,107
41,061

48,350

48,168

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.

ROTORK ANNUAL REPORT 2017 113
ROTORK ANNUAL REPORT 2017 113

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NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For tHe year enDeD 31 DecemBer 2017

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
2017

Liabilities
2017

Net
2017

495
21
11,428
6,276
4,398

22,618
(1,400)

(1,263)
(16,502)
–
–
(3,014)

(20,779)
1,400

21,218

(19,379)

(768)
(16,481)
11,428
6,276
1,384

1,839
–

1,839

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

Movements in the net deferred tax balance during the year are as follows:

Balance at 1 January
Credited to the income statement
Credited directly to equity in respect of share-based payments
Acquired as part of business combinations
(Charged)/credited directly to equity in respect of pension schemes
(Charged)/credited directly to hedging reserves in respect of cash flow hedges
Exchange differences

Balance at 31 December

2017

2016

411
5,189
213
–
(2,140)
(1,358)
(476)

1,839

(15,275)
7,852
74
530
7,191
1,408
(1,369)

411

A deferred tax asset of £21,218,000 (2016: £25,259,000) has been recognised at 31 December 2017. 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 £1,306,000 (2016: £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

2017

2016

67,758
8,135
16,015

59,398
10,211
16,163

91,908

85,772

Included in cost of sales was £216,711,000 (2016: £204,729,000) in respect of inventories consumed in the year.

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ROTORK ANNUAL REPORT 2017

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

2017

2016

142

146

152,163
(6,634)

139,108
(7,217)

145,529

131,891

2,726

2,896
9,039
7,267

4,349

7,600
7,333
7,408

19,202

22,341

Included within non-trade receivables is £nil (2016: £2,334,000) 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

2017

2016

56,912
60
6,220

63,192
–

63,192

50,110
65
11,248

61,423
–

61,423

ROTORK ANNUAL REPORT 2017 115
ROTORK ANNUAL REPORT 2017 115

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NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For tHe year enDeD 31 DecemBer 2017

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
2017

4,350
2

4,352

870,429

£1 Non-
redeemable
preference
shares
2017

40
–

0.5p Ordinary
shares
issued
and fully
paid up
2016

4,349
1

4,350

870,051

£1 Non-
redeemable
preference
shares
2016

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 £713,000 (2016: £465,000) in respect of the 378,520 (2016: 312,540) ordinary shares issued during the year:
£2,000 (2016: £1,000) was credited to share capital and £711,000 (2016: £464,000) 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 £1,594,000 (2016: £2,738,000) and represents
566,000 (2016: 963,000) 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:

3.15p final dividend (2016: 3.10p)
2.05p interim dividend (2016: 1.95p)

2017
Payment date

15 May
22 September

2017

2016

27,391
17,827

45,218

26,933
16,943

43,876

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
3.35p

3.15p

2017

2016

29,159

27,407

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ROTORK ANNUAL REPORT 2017

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 869.4m shares (2016: 868.7m 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 plans

Weighted average number of ordinary shares during the year

Basic earnings per share

2017

2016

55,613

67,173

869,087
252
95

868,332
273
61

869,434

868,666

6.4p

7.7p

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 impact of the adjustments. The reconciliation showing how adjusted net profit attributable to ordinary
shareholders is derived is shown in note 2.

Adjusted net profit attributable to ordinary shareholders

Weighted average number of ordinary shares during the year

Adjusted basic earnings per share

2017

2016

91,924

86,949

869,434

868,666

10.6p

10.0p

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 (2016: 872.0m 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

Adjusted net profit attributable to ordinary shareholders

Weighted average number of ordinary shares (diluted) during the year

Adjusted diluted earnings per share

2017

2016

55,613

67,173

869,434
1,583
993

868,666
870
2,498

872,010

872,034

6.4p

7.7p

2017

2016

91,924

86,949

872,010

872,034

10.5p

10.0p

ROTORK ANNUAL REPORT 2017 117
ROTORK ANNUAL REPORT 2017 117

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NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For tHe year enDeD 31 DecemBer 2017

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.

2017

2016

40
45,837
2

45,879

29,925
3

29,928

40
51,260
3

51,303

65,039
69

65,108

2017

2016

40
74,746
1,016
5

40
115,180
1,119
72

75,807

116,411

Currency

Sterling
Sterling
Euro
Sterling

Interest rates

Year of
maturity

9.5%

–
1.32%-1.34% 2018-19
2022
2019

2.35%
8.77%

Principal
2017

29,925
45,837
–
3
2

75,767

Interest
2017

225
77
–
–
–

302

Minimum
payments
2017

30,150
45,914
–
3
2

Principal
2016

65,039
50,565
695
69
3

76,069

116,371

Interest
2016

310
81
101
2
–

494

Minimum
payments
2016

65,349
50,646
796
71
3

116,865

Non-current liabilities
Preference shares classified as debt
Bank loans
Finance lease liabilities

Current liabilities
Bank loans
Finance lease liabilities

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

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ROTORK ANNUAL REPORT 2017

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 2017
Exchange differences
Provisions utilised during the year
(Credit)/charge to the income statement

Balance at 31 December 2017

Maturity at 31 December 2017
Non-current
Current

Maturity at 31 December 2016
Non-current
Current

2017

2016

237,054
(188,844)

236,543
(178,045)

48,210
344
17,512
331
2,823
4,537

58,498
356
10,824
216
3,359
3,596

73,757

76,849

52,293
21,464

62,593
14,256

73,757

76,849

Contingent
consideration

11,708
36
(1,347)
(10,000)

Warranty
provision

5,842
(178)
(1,804)
1,987

Total

17,550
(142)
(3,151)
(8,013)

397

5,847

6,244

–
397

397

10,000
1,708

11,708

1,929
3,918

5,847

1,947
3,895

5,842

1,929
4,315

6,244

11,947
5,603

17,550

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 of £10,000,000 was released to the income statement after an EBITDA target was not
met. Other contingent consideration relates to amounts outstanding in respect of the GTA Group and Masso acquisitions.

ROTORK ANNUAL REPORT 2017 119
ROTORK ANNUAL REPORT 2017 119

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For tHe year enDeD 31 DecemBer 2017

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

2017

2016

49,183

39,652

13,093

11,281
6,667
24,217

13,352

10,806
7,053
24,140

42,165

41,999

2017
Liabilities

2016
Assets

2017
Assets

367
3,101

3,468

1,766
–

1,766

–

245

1,521

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 2017 are recognised in the income statement in the period or periods during
which the hedged forecast transaction affects the income statement.

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24. Pension schemes
i) Defined benefit pension schemes
The Group operates two defined benefit pension arrangements – the Rotork Pension and Life Assurance 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 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 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 Scheme. The
Trustee has responsibility for obtaining valuations of the fund, administering benefit payments and investing the Scheme’s assets. The Trustee
delegates some of these functions to its professional advisers where appropriate. The UK Scheme which was closed to new entrants in 2003 will be
closed to future accrual from 1 April 2018.

The US Pension Plan is subject to the ERISA funding requirements. A valuation of the 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 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. The
Schemes have a relatively balanced investment in equities, debt instruments and property. Due to the long-term nature of the plan liabilities, the
Trustees of the pension funds consider it appropriate that a reasonable portion of the plan assets should be invested in equities and in property
to leverage the return generated by the funds.
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. A decrease in the bond interest rate
will increase the Schemes’ liabilities but this will be partially offset by an increase in the return of the Schemes’ debt investments.
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.

•

• 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

Liabilities at 1 January
Current service costs
Administration costs
Member contributions
Interest cost
Benefits paid
Actuarial (gain)/loss
Currency (gain)/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 (loss)/gain

Assets at 31 December

2017

2016

236,543
3,846
178
621
6,531
(7,441)
(842)
(2,382)

180,406
2,983
252
601
6,999
(6,880)
48,041
4,141

237,054

236,543

2017

2016

178,045
4,924
8,971
621
(7,441)
5,007
(1,283)

157,131
6,232
8,511
601
(6,880)
10,118
2,332

188,844

178,045

ROTORK ANNUAL REPORT 2017 121
ROTORK ANNUAL REPORT 2017 121

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NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For tHe year enDeD 31 DecemBer 2017

24. Pension schemes continued
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 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

2017

3,846
178
1,607

5,631

2017

1,443
2,581
1,607

5,631

2016

2,983
252
767

4,002

2016

1,083
2,152
767

4,002

2017

2016

5,007
2,601
(7,392)
5,633
1,099

10,118
3,167
(55,104)
3,896
(1,809)

6,948

(39,732)

2017

2016

58,498
3,846
178
1,607
(6,948)
(8,971)

23,275
2,983
252
767
39,732
(8,511)

48,210

58,498

Liability for defined benefit obligations
The principal actuarial assumptions at 31 December 2017 (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)

2017

2.4
3.7
3.1
4.6
3.2

2016

2.6
3.9
3.3
4.6
3.4

2017

3.8
3.0
0.0
0.0
3.0

2016

4.4
3.0
0.0
0.0
3.0

2017

2.5
3.6
2.8
4.1
3.2

2016

2.8
3.8
2.9
4.1
3.4

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.

The split of the Schemes’ quoted assets were as follows:

Equities
Bonds/LDI
Property
Cash
US deposit administration contract

Total

Actual return on the Schemes’ assets

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2017
Fair value

82,999
75,146
16,527
635
13,537

2016
Fair value

83,099
70,805
9,534
179
14,428

188,844

178,045

9,931

16,350

The demographic assumptions are the same as used for the most recent valuations of the Schemes, except for cash commutation and mortality. For
cash commutation, an allowance has been made for 90% of UK Scheme members who have yet to retire to take maximum cash at retirement. The
mortality assumptions used for the UK Scheme are the S2NXA year of birth tables (2016: S2NXA) with future improvements in mortality based on
the CMI_2016 projections (2016: CMI_2015 projections) with a long-term rate of improvement of 1.25% per annum (2016: 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% pa
Minus 0.5% pa
Inflation
Plus 0.5% pa
Minus 0.5% pa
Salary increase
Plus 0.5% pa
Minus 0.5% pa
Life expectancy
Decrease mortality rates by a factor of 10%
Increase mortality rates by a factor of 10%

2017
Life expectancy at age 65

2016
Life expectancy at age 65

Male

22.2
23.6

Female

24.2
25.7

Male

22.3
24.0

Female

24.4
26.3

Approximate effect on liabilities

(24,000)
26,800

12,700
(11,900)

4,700
(4,400)

7,300
(6,600)

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 2018 will be £3,120,000 for regular payments
(2017: £3,590,000) and £5,500,000 of additional payments in relation to past service (2017: £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 £5,105,000 (2016: £4,816,000).

ROTORK ANNUAL REPORT 2017 123
ROTORK ANNUAL REPORT 2017 123

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NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For tHe year enDeD 31 DecemBer 2017

25. Share-based payments
The Group awards shares under the Long Term Incentive Plan (LTIP), the Save As You Earn scheme (Sharesave plan), 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 plan (a)
Long Term Incentive Plan (b)
OPLSS/SIP profit linked share scheme (c)

Total expense recognised as employee costs (note 6)

2017

566
789
2,035

3,390

2016

592
1,302
1,865

3,759

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 plan
UK employees are invited to join the Sharesave plan 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 plan. Employees are given the option of joining either the three year or the five
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

2017

2016

2017

2016

2 October
262p
189p
555,917
3 years
30.7%
0.53%
1.98%
2%
82p

3 October
215p
168p
612,593
3 years
29.4%
0.09%
2.4%
2%
56p

2 October
262p
189p
264,906
5 years
27.3%
0.78%
1.98%
2%
83p

3 October
215p
168p
391,454
5 years
27.7%
0.25%
2.4%
2%
57p

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

2017

2016

Average
option price
per share

160p
189p
188p
160p

Options

4,541,915
820,823
(378,520)
(437,017)

163p

4,547,201

Average
option price
per share

159p
168p
149p
171p

160p

Options

4,367,367
1,004,047
(285,323)
(544,176)

4,541,915

Of the 4,547,201 outstanding options (2016: 4,541,915), 46,000 are exercisable (2016: 132,000).

The Group received proceeds of £713,000 in respect of the 378,520 options exercised during the year: £2,000 was credited to share capital and
£711,000 to share premium. The weighted average share price at date of exercise was 257p (2016: 231p).

The weighted average remaining life of 2,561,903 (2016: 2,389,686) awards outstanding under the 3 year plan is 1.5 years. The weighted average
remaining life of 1,985,298 (2016: 2,152,229) awards outstanding under the 5 year plan is 3.2 years.

b) Long Term Incentive Plan
The Long Term Incentive Plan (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.

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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. For the 2015 and 2016 awards, half of these awards vest under a TSR performance condition and half under an EPS
performance condition. A Return on Invested Capital (ROIC) performance condition has been introduced in the 2017 LTIP award, details of which are
shown in the 2016 Annual Report & Accounts. A third of the awards vest under each 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 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 and 2017 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%.

Vesting of awards under the ROIC condition will be determined by calculating the growth in ROIC, on a cumulative basis, over the performance
period. For the 2017 awards, the awards will vest by comparing the average ROIC over the performance period against a set of pre-defined targets.

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.

The performance period for the 2015 awards ended on 31 December 2017. The TSR element of the award did not vest as the Company was in
the 17th 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

2014 Award
2015 Award
2016 Award
2017 Award

Outstanding
at start
of year

1,020,500
1,184,060
2,105,244
–

Granted
during year

Vested
during year

–
–
–
1,416,628

4,309,804

1,416,628

2017

2016

8 May 2017 6 April 2016
163p
2,105,244
3 years
28.4%
0.4%
3.1%
5% p.a.
85p
150p

239p
1,416,628
3 years
32.0%
0.2%
2.1%
5% p.a.
114p
226p

Lapsed

(1,020,500)
(223,210)
(576,857)
(428,193)

Outstanding
at end
of year

–
960,850
1,528,387
988,435

(2,248,760)

3,477,672

–
–
–
–

–

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 and can be up to £3,600.

ROTORK ANNUAL REPORT 2017 125
ROTORK ANNUAL REPORT 2017 125

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NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For tHe year enDeD 31 DecemBer 2017

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

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

2017

2016

145,529
19,344
63,192
–

131,891
22,487
61,423
–

228,065

215,801

Carrying amount

2017

2016

19,646
39,841
54,476
31,566

17,488
35,089
53,092
26,222

145,529

131,891

Not past due
Past due 0–30 days
Past due 31–60 days
Past due 61–90 days
Past due more than 91 days

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Gross
2017

Provision
2017

100,640
25,951
10,012
4,263
11,297

(10)
(6)
(81)
(87)
(6,450)

Gross
2016

90,259
19,575
11,480
5,259
12,535

152,163

(6,634)

139,108

Provision
2016

(30)
(85)
(58)
(180)
(6,864)

(7,217)

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 (2016: £7m) on which interest would be payable at base
rate plus 1.5%.

During 2017 the Group repaid its £20,000,000 committed 364 day facility that matured in August 2017. In addition, the Group repaid £15,000,000
of its £90,000,000 term facility and negotiated to extend the remaining facility to August 2019. The Group has a £60,000,000 Revolving Credit
Facility which matures in August 2020. At year end £75,000,000 of the committed facilities were drawn, resulting in £60,000,000 being available.

The following are the contractual maturities of financial liabilities, including interest payments and excluding the impact of netting agreements:

31 December 2017

Bank loans and overdrafts
Finance lease liabilities
Trade and other payables
Contingent consideration
Foreign exchange contracts
Non-redeemable preference shares

31 December 2016

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

75,762
5
91,348
397
1,766
40

76,064
5
91,348
397
1,766
40

30,151
3
91,348
397
1,521
–

44,948
2
–
–
245
–

169,318

169,620

123,420

45,195

965
–
–
–
–
–

965

–
–
–
–
–
40

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
–

44,989
3
–
10,000
2,483
–

220,396

220,891

156,922

57,475

5,657
–
–
–
–
–

5,657

797
–
–
–
–
40

837

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 £190,786,000 (2016: £242,288,000) and the gross inflow is
£189,127,000 (2016: £231,888,000).

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 2017 was a £1,702,000 asset (2016: £10,626,000 liability) comprising an asset of £3,468,000 (2016: £nil) and a liability of
£1,766,000 (2016: £10,626,000). Forward exchange contracts in place at 31 December 2017 mature in 2018 and 2019.

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.

ROTORK ANNUAL REPORT 2017 127
ROTORK ANNUAL REPORT 2017 127

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NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For tHe year enDeD 31 DecemBer 2017

26. Financial instruments continued
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 2017 of £300,000 (2016: £250,000) 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 2017 of £400,000 (2016: £450,000). 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

2017

1.29
1.14

2016

1.36
1.22

2017

1.35
1.13

2016

1.24
1.17

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

2017

2016

1,061
74,746

203
116,208

75,807

116,411

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 2.38% (2016: 2.08%). The weighted average period for which interest rates
on the fixed rate financial liabilities are fixed is 1.8 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

2017

2016

29,928
44,928
911
40

65,108
44,968
5,600
735

75,807

116,411

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128 ROTORK ANNUAL REPORT 2017
ROTORK ANNUAL REPORT 2017

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

Group net debt

Reconciliation of changes in cash and cash equivalents to movements in net debt
Net increase in cash and cash equivalents
Repayment of borrowings
Repayment of finance lease liabilities
Effect of exchange rate fluctuations

Movement in net debt
Net debt at start of year

Net debt at end of year

ii) Return on capital employed

Adjusted operating profit
Operating profit
Amortisation of acquired intangible assets
Other adjustments

Capital employed
Shareholders’ funds
Cash and cash equivalents
Interest bearing loans and borrowings

Net debt
Pension deficit net of deferred tax

Average capital employed
Return on capital employed

Notes

2017

2016

19
16

(75,807)
63,192

(116,411)
61,423

(12,615)

(54,988)

4,064
40,579
68
(2,338)

8,688
3,619
253
3,592

42,373
(54,988)

16,152
(71,140)

(12,615)

(54,988)

Notes

2017

2016

4
4

16
19

85,972
27,183
17,007

93,777
26,811
–

130,162

120,588

457,200
(63,192)
75,807

434,086
(61,423)
116,411

12,615
38,924

54,988
46,469

508,739

535,543

522,141
24.9%

516,009
23.4%

ROTORK ANNUAL REPORT 2017 129
ROTORK ANNUAL REPORT 2017 129

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NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For tHe year enDeD 31 DecemBer 2017

26. Financial instruments continued
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
2017

Fair value
2017

Carrying
amount
2016

Fair value
2016

145,529
19,344

131,891
22,487

63,192

61,423

3,468
(1,766)

–
(10,626)

(75,762)
(91,348)
(397)
(40)
(5)

(116,299)
(81,651)
(11,708)
(40)
(72)

62,215

(4,595)

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 12 months (2016: 14 months), the carrying amount is equal to the fair
value. Further information on the contingent consideration is shown in note 21.

130
130 ROTORK ANNUAL REPORT 2017
ROTORK ANNUAL REPORT 2017

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

2017

2016

5,359
12,730
1,179

19,268

4,775
10,351
1,801

16,927

Of the £19,268,000 (2016: £16,927,000), £13,996,000 (2016: £13,279,000) 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

2017

1,238

2016

884

2017

8,375

2016

7,034

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
136 to 138 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.

Evoqua Water Technologies LLC is a related party of Rotork plc by virtue of M Lamb’s non-executive chairmanship. Sales to subsidiaries and
associates of Evoqua Water Technologies LLC totalled £78,000 during the year and £8,000 was outstanding at 31 December 2017.

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

2017

3,401
45
285
418

4,149

2016

3,370
229
202
848

4,649

ROTORK ANNUAL REPORT 2017 131
ROTORK ANNUAL REPORT 2017 131

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ROTORK PLC COMPANY BALANCE SHEET
at 31 DecemBer 2017

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

Total equity and liabilities

Notes

2017
£000

2016
£000

c
d
e

30
43,205
150

72
43,205
145

43,385

43,422

178,116
158
1,977

150,327
743
1,234

180,251

152,304

223,636

195,726

4,352
11,193
1,644
199,949

4,350
10,482
1,644
175,495

217,138

191,971

178
1,063
5,217

6,458

15
1,051
2,649

3,715

223,636

195,726

The Company reported a total comprehensive income for the financial year of £67,439,000 (2016: £61,600,000).

These Company financial statements, company number 00578327, were approved by the Board of Directors on 5 March 2018 and were signed on
its behalf by:

MJ Lamb and JM Davis, Directors.

132
132 ROTORK ANNUAL REPORT 2017
ROTORK ANNUAL REPORT 2017

ROTORK PLC COMPANY STATEMENT OF CHANGES IN EQUITY
at 31 DecemBer 2017

Balance at 31 December 2015

Total comprehensive income for the year
Equity settled share-based payment transactions
Share options exercised by employees
Own ordinary shares acquired
Own ordinary shares awarded under share schemes
Dividends

Balance at 31 December 2016

Balance at 31 December 2017

Share
capital
£000

Share
premium
£000

Capital
redemption
reserve
£000

Retained
earnings
£000

Total equity
£000

4,349

10,018

1,644

155,031

171,042

–
–
1
–
–
–

–
–
464
–
–
–

–
–
–
–
–
–

61,600
1,557
–
(1,019)
2,202
(43,876)

61,600
1,557
465
(1,019)
2,202
(43,876)

4,350

10,482

1,644

175,495

191,971

–
–
2
–
–
–

–
–
711
–
–
–

–
–
–
–
–
–

67,439
1,089
–
(1,157)
2,301
(45,218)

67,439
1,089
713
(1,157)
2,301
(45,218)

4,352

11,193

1,644

199,949

217,138

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ROTORK ANNUAL REPORT 2017 133
ROTORK ANNUAL REPORT 2017 133

NOTES TO THE COMPANY FINANCIAL STATEMENTS
For tHe year enDeD 31 DecemBer 2017

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. Except where indicated, values in these notes are in £000.

Basis of preparation
The financial statements have been prepared under the historical cost convention.

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:
•
• The disclosures required by IFRS 7 and IFRS 13 regarding financial instrument disclosures have not been provided.

IFRS 2 Share Based Payments in respect of group settled share based payments; and

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 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.

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 company employees are recharged to each
subsidiary company.

134
134 ROTORK ANNUAL REPORT 2017
ROTORK ANNUAL REPORT 2017

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.

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 payment charge

2017

3,739
506
185
255

4,685

2016

3,028
334
251
452

4,065

During the year there were 21 (2016: 17) employees of Rotork plc plus the two (2016: three) executive directors.

Disclosures required by paragraph 1 of schedule 5 of SI2008/410 are set out in the Director’s Remuneration Report on pages 68 to 83.

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.

2014 Award
2015 Award
2016 Award
2017 Award

Outstanding
at start
of year

316,920
400,940
804,898
–

–
–
–
600,162

Granted
during year

Vested
during year

The weighted average remaining life of awards outstanding at the year end is one year.

c) Property, plant and equipment in the Company balance sheet

1,522,758

600,162

Cost
At 1 January 2017
Additions

At 31 December 2017

Depreciation
At 1 January 2017
Charge for year

At 31 December 2017

Net book value
At 31 December 2017

At 31 December 2016

–
–
–
–

–

Outstanding
at end
of year

–
370,040
614,491
270,802

Lapsed

(316,920)
(30,900)
(190,407)
(329,360)

(867,587) 1,255,333

Plant and
equipment

221
–

221

149
42

191

Total

221
–

221

149
42

191

ROTORK ANNUAL REPORT 2017 135
ROTORK ANNUAL REPORT 2017 135

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NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED
For tHe year enDeD 31 DecemBer 2017

d) Investments in the Company balance sheet
Shares in Group companies

At 1 January and 31 December

2017

2016

43,205

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

100% owned by Rotork Controls Limited
Rotork Actuation (Shanghai) Co Limited

Rotork Trading (Shanghai) Co Limited

Rotork Controls (India) Private Limited

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
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

136
136 ROTORK ANNUAL REPORT 2017
ROTORK ANNUAL REPORT 2017

Canada
Chile
England and Wales
England and Wales
France
Germany
Germany
Hong Kong
Israel
Italy
Japan
Jebel Ali Free Zone

Malaysia

The Netherlands
The Netherlands
The Netherlands
Norway
Poland
Russia
Singapore
South Africa
South Korea

South Korea

Spain
Sweden

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
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

Subsidiary

Rotork AG
Rotork Inc

Rotork Controls de Venezuela SA

Rotork Turkey Akıs¸ Kontrol Sistemleri Ticaret
Limited ¸S irketi

100% owned by Valvekits Limited
Circa Engineering Limited

100% owned by Rotork Trading
(Shanghai) Co Limited
Centork Trading (Shanghai) Co. Ltd

Rotork Instruments Chengdu Co. Ltd

100% owned by Rotork UK Limited
Prokits Limited
Flowco Limited

Incorporated in

Registered address

Switzerland
USA

Venezuela

Turkey

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

England and Wales

Rotork House, Brassmill Lane, Bath BA1 3JQ

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

England and Wales
England and Wales

Rotork House, Brassmill Lane, Bath BA1 3JQ
Rotork House, Brassmill Lane, Bath BA1 3JQ

100% owned by Rotork Italy Holdings Srl
Rotork Controls Italia Srl
Rotork Instruments Italy Srl
Rotork Fluid Systems Srl
Rotork Gears Srl

Italy
Italy
Italy
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
Viale Europa n.17 – 20090 Cusago (Milano) Italy

100% owned by Rotork Gears Holding BV
Rotork Gears BV

The Netherlands

Nijverheidstraat 25, 7581 PV, Overijssel, The Netherlands

100% owned by Rotork Inc
Rotork (Thailand) Limited

Rotork Controls Inc
Ralph A Hiller Company
Remote Control Inc
Ranger Acquisition Corporation

100% owned by Ranger Acquisition Corp
Fairchild Industrial Products Company
Rotork Tulsa Inc

Thailand

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

35/8 Soi Ladprao124 (Sawasdikarn) Ladprao Road, Plubpla,
Wangtonglang, Bangkok 10310 Thailand
675 Mile Crossing Blvd., Rochester, NY 14624, USA
6005 Enterprise Drive, Export, PA 15632, USA
77 Circuit Drive, North Kingstown, RI 02852, USA
The Corporation Trust Company, Corporation Trust Center, 1209 Orange
St., Wilmington, DE 19801 USA

3920 West Point Blvd, Winston-Salem, NC 27103, USA
4433 W 49th Suite D, Tulsa, OK 74017, USA

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

100% owned by Bifold Fluidpower (Holdings)
Limited
Bifold Fluidpower Limited
MTS Precision Limited
Marshalsea Hydraulics Limited
Bifold Company (Manufacturing) Limited

England and Wales

Rotork House, Brassmill Lane, Bath BA1 3JQ

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 ANNUAL REPORT 2017 137
ROTORK ANNUAL REPORT 2017 137

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NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED
For tHe year enDeD 31 DecemBer 2017

d) Investments in the Company balance sheet continued
Subsidiary

Incorporated in

Registered address

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
Max Process GmbH
Schischek GmbH
Schischek Produktion Technischer Gerate GmbH
Rotork GmbH

Germany
Germany
Germany
Germany

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

60% owned by Max Process GmbH
GT Attuatori Europe GmbH

40% owned by Rotork Germany Holdings
GmbH
GT Attuatori Europe GmbH

100% owned by Schischek Produktion
Technischer Geräte GmbH (Germany)
Schischek Sales Europe Ltd

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

Germany

Rastenweg 10, 53489 Sinzig

Germany

Rastenweg 10, 53489 Sinzig

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

100% owned by Rotork Controls (Iberia) SL
Actuation Iberia S.L
Centork Valve Control S.L

Spain
Spain

100% owned by Rotork Instruments Italy Srl
Soldo Controls USA Inc

USA

Centeotl 223, Col. Industrial San Antonio, C.P. 02760, Azcapotzalco,
Ciudad de Mexico, Mexico

C/ Ercilla, 21. , 48009 , Bilbao (Vizcaya), Spain
Pol. Ind. Ipintza 110, Txatxamendi 24-26 – 20100 Lezo (Gipuzkoa) – Spain

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
Deferred tax assets and liabilities are attributable to the following:

Tangible fixed assets
Provisions
Share-based payments

Movements in the net deferred tax balance during the year are as follows:

Balance at 1 January
Credited to the income statement
Charged directly to equity in respect of share-based payments

Assets
2017

Liabilities
2017

8
142
–

150

–
–
–

–

Net
2017

8
142
–

150

Assets
2016

4
141
–

145

Liabilities
2016

–
–
–

–

2017

145
5
–

150

Net
2016

4
141
–

145

2016

51
94
–

145

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 £305,277,000 (2016: £282,541,000).

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ROTORK ANNUAL REPORT 2017

f) Other receivables in the Company balance sheet

Prepayments
Corporation tax
Other receivables

g) Other payables in the Company balance sheet

Other taxes and social security
Corporation tax
Other payables
Accruals

2017

153
–
5

158

2017

47
1,319
1,673
2,178

5,217

2016

485
172
86

743

2016

52
–
1,455
1,142

2,649

The Company has a £17,000,000 gross overdraft facility (2016: £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.

The £20,000,000 committed 364 day facility matured in August 2017. The Company negotiated to extend the term facility of £75,000,000
(2016: £90,000,000) to August 2019. The Company has a £60,000,000 Revolving Credit Facility (2016: £60,000,000) which matures in August
2020. The facilities are available to the Company, Rotork Controls Limited and Rotork Overseas Limited. At year end £75,000,000 of the committed
facilities were drawn, resulting in £60,000,000 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.

ROTORK ANNUAL REPORT 2017 139
ROTORK ANNUAL REPORT 2017 139

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TEN YEAR TRADING HISTORY

Revenue

642,229

590,078

546,459

594,739

578,440

511,747

447,833

380,560

353,521

320,207

2017
£000

2016
£000

2015
£000

2014
£000

2013
£000

2012
£000

2011
£000

2010
£000

2009
£000

2008
£000

Cost of sales

Gross profit

(358,090)

(328,410)

(296,944)

(309,280)

(304,066)

(272,199)

(236,359)

(199,742)

(187,600)

(176,046)

284,139

261,668

249,515

285,459

274,374

239,548

211,474

180,818

165,921

144,161

Overheads

(198,167)

(167,891)

(145,129)

(143,232)

(135,109)

(115,081)

(99,474)

(83,094)

(74,384)

(69,272)

Operating profit

85,972

93,777

104,386

142,227

139,265

124,467

112,000

97,724

91,537

74,889

Adjusted* operating

profit

Amortisation of

acquired intangible
assets

Disposal of property
Other adjustments

130,162

120,588

125,272

157,167

151,412

131,866

115,921

99,442

92,103

76,014

(27,183)
–
(17,007)

(26,811)
–
_

(20,886)
–
_

(14,940)
–
_

(12,147)
–
_

(7,399)
–
_

(3,921)
–
_

(1,718)
–
_

(1,153)
587
_

(1,125)
–
_

Operating profit

85,972

93,777

104,386

142,227

139,265

124,467

112,000

97,724

91,537

74,889

Net interest

(5,386)

(2,707)

(2,517)

(1,062)

(1,268)

(273)

550

131

(621)

862

Profit before taxation
Tax expense

80,586
(24,973)

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)

Profit for the year

55,613

67,173

74,857

103,202

99,509

89,315

80,401

69,521

64,032

53,420

Dividends

45,218

43,876

43,765

42,702

38,735

33,924

49,534

35,912

24,102

29,970

Basic EPS
Adjusted* EPS
Diluted EPS

6.4p
10.6p
6.4p

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

* Adjusted is before the amortisation of acquired intangible assets, the disposal of property, and other adjustments, comprising goodwill impairment, release of contingent consideration

and restructuring costs.

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ROTORK ANNUAL REPORT 2017

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

2,404
768
37
25

3,234

74.3
23.8
1.1
0.8

24,024,490
842,050,898
1,404,877
2,961,385

2.8
96.7
0.2
0.3

100.0

870,441,650

100.0

Number of holdings

% Number of shares

711
417
611
411
606
122
356

22.0
12.9
18.9
12.7
18.7
3.8
11.0

354,623
624,989
2,068,613
3,017,669
13,596,310
8,805,116
841,974,330

0.1
0.1
0.2
0.3
1.6
1.0
96.7

3,234

100.0

870,441,650

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.

2017
2016
2015
2014*
2013*

Interim
dividend
(p)

2.05
1.95
1.95
1.92
1.81

Final

dividend
(p)

3.35
3.15
3.10
3.09
3.00

Total
dividends
(p)

5.40
5.10
5.05
5.01
4.81

* Restated to reflect subdivision of 5p ordinary shares into 0.5p ordinary shares.

Financial calendar
6 March 2018
5 April 2018
6 April 2018
27 April 2018
27 April 2018
7 August 2018

Preliminary announcement of annual results for 2017
Ex-dividend date for final proposed 2017 dividend
Record date for final proposed 2017 dividend
Announcement of trading update
Annual General Meeting held at Rotork House, Brassmill Lane, Bath, BA1 3JQ
Announcement of interim financial results for 2018

ROTORK ANNUAL REPORT 2017 141
ROTORK ANNUAL REPORT 2017 141

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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

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ROTORK ANNUAL REPORT 2017

Brassmill Lane, Bath BA1 3JQ, UK
T: +44 1225 733200 F: +44 1225 333467
E: mail@rotork.com