Rotork plc Annual Report 2018

FY2018 Annual Report · Rotork plc

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BUILDING
A PLATFORM
FOR GROWTH

AN N UAL REPORT 2018

ANNUAL REPORT 2018Rotork 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 and instrumentation
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.

A YEAR
OF FOCUS,
DIRECTION AND
GROWTH

DISCOVER MORE ON PAGE 14

ANNUAL REPORT 2018
Our performance

Contents

Revenue

Adjusted operating profit*

£695.7m

+8.3%

£146.0m

+12.2%

£695.7m

£642.2m

£146.0m

£130.2m

Profit before tax

Adjusted profit before tax*

£120.7m

+49.8%

£143.8m

+15.3%

£80.6m

£120.7m

£143.8m

£124.8m

Earnings per share

10.5p

+64.1%

Adjusted earnings per share*

12.6p

+18.9%

6.4p

10.5p

12.6p

10.6p

• Strong OCC revenue growth, up 11.3%
• Adjusted operating margin improves to 21.0%
• ROCE increased 430bps to 29.2%
• Cash conversion of 110.7%
• Net cash of £43.6m at year end
• Growth Acceleration Programme proceeding at

pace in H2:
– 160bps improvement in working capital to sales
– Revenue per head up 7.5%; adjusted operating

profits per head up 11.3%

– Supply chain improvements yielding benefits
– Centralised new product development structure

View the latest results online at
www.rotork.com

* 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 2018 figures restated at 2017 exchange rates, excluding the results of businesses
acquired or disposed of during the period.

Overview
Our performance
At a glance
Chairman’s statement

Strategic Report
Chief Executive’s statement
Our market
Our business model
Strategic framework
Our strategy
Our Growth Acceleration Programme
How we manage risk
Risk appetite framework
Principal risks and uncertainties
Viability statement
Key performance indicators
Operating review
– Rotork Controls
– Rotork Fluid Systems
– Rotork Gears
– Rotork Instruments
Financial review
Our people
Corporate social responsibility
– Ethics and values
– Community involvement
– Health and safety
– Helping the environment

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

1
2
4

6
10
12
14
16
18
22
24
26
29
30

32
33
34
35
36
40

42
44
46
48

52
54
60
64
66
84

86
92

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
94
of changes in equity
Consolidated statement of cash flows
95
Notes to the Group financial statements 96
Rotork plc Company balance sheet
128
Rotork plc Company statement
of changes in equity
Notes to the Company
financial statements

92
93

129

130

Company Information
Ten year trading history
Share register information
Corporate directory

ROTORK ANNUAL REPORT 2018

136
137
138

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STRATEGIC REPORT

AT A GLANCE

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

Manufacturing facilities

UK x 5

Italy x 3

India x 3

Our global presence
A global business with over 3,800
employees, we serve customers in
more than 173 countries through
our network of 65 offices, 24
manufacturing facilities and our
relationships with local agents.
Our 520 service engineers are
based throughout our network
providing maintenance, repair
and upgrade services.

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.

As part of the Growth Acceleration
Programme we are reviewing our
manufacturing footprint to ensure
we make the most efficient use of
our resources.

Manufacturing
facilities

Offices

Employees

671

2,161

1,034

Americas

Europe, Middle East and Africa

Asia and Australia

ROTORK ANNUAL REPORT 2018

Revenue by end destination

Revenue by end user market

[HeadingHeadingHeading]

Revenue by division

Controls

Fluid Systems

Gears

Intruments

51%

24%

10%

15%

Americas
Europe
Rest of World

27%
29%
44%

Oil and gas

Power

Water

Industrial

Other

55%

12%

18%

Oil and gas

Water

Power

Industrial and other

XX%

Our end user markets
Our products and services are used extensively in the oil &
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.

Oil & 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.

Controls
Fluid Systems
Gears
Intruments

Revenue by division

Power
Rotork products are found in conventional
power stations, emission reduction plants,
such as flue gas desulphurisation, and
renewable energy plants, such as solar
51%
collecting power stations.
24%
10%
15%

Industrial
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.

See our markets
on pages 10-11

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.

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Revenue by end user market

[HeadingHeadingHeading]

Oil and gas
Power
Water
Industrial
Other

55%
12%
12%
18%
3%

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Oil and gas

Water

Power

Industrial and other

XX%

[HeadingHeadingHeading]

Oil and gas

Water

Power

Industrial and other

XX%

Revenue by division

Controls
Fluid Systems
Gears
Intruments

51%
24%
10%
15%

See the divisional reviews

on pages 32-35

Rotork Controls
Revenue

Rotork Fluid Systems
Revenue by end user market
Revenue

£351.9m
+8.2%

£166.3m
+10.8%

Rotork Gears
Revenue

£85.6m
+2.0%

Rotork Instruments
Revenue

£107.2m
+6.5%

Oil and gas
Power
Water
Industrial
Other

55%
12%
12%
18%
3%

ROTORK ANNUAL REPORT 2018

Revenue by end destination

Americas

Europe

Rest of World

27%

29%

44%

Revenue by end destination

Americas

Europe

Rest of World

27%

29%

44%

STRATEGIC REPORT

CHAIRMAN’S
STATEMENT

The Group delivered a strong financial performance and
made significant progress in implementing an ambitious
plan to deliver higher growth and margins on a long term
and sustainable basis.

2018 was a busy and productive year for
Rotork. The Group delivered a strong
financial performance, despite an
increasingly challenging political and
macroeconomic environment, and made
significant progress with a number of key
strategic initiatives.

As previously reported, towards the end of
2017 we began a series of detailed business
reviews examining our routes to market,
innovation funnel, operations footprint,
global supply chain, IT infrastructure and our
talent base. Following the appointment in
March of Kevin Hostetler as Chief Executive,
and the subsequent completion of those

reviews, we formulated a detailed business
plan, the objective of which is to return
Rotork to the higher levels of organic
growth and operating margins previously
experienced by the business. It is an
ambitious plan to be implemented at pace,
and we have termed it our Growth
Acceleration Programme.

While there has been a great deal of activity
across the business, this is not about
transforming Rotork, but rather refining
how we do things, building on our strong
foundations. Kevin has assembled a strong
team, with a wealth of experience in
managing such programmes. Early results in
this first phase of the multi-year programme
are encouraging, with strong support for all
initiatives across the business. Kevin provides
a review of the progress made in the
Growth Acceleration Programme in
his report.

Financial highlights
Order intake increased 2.3% on the prior
year, or 5.4% on an OCC basis*. The strong
order intake in the first quarter was partially
offset by lower order intake in the second
half reflecting the variation in the timing of
project orders and deliveries compared with
2017. Revenue increased by 8.3% to
£695.7m (OCC +11.3%) with the strongest
revenue growth coming from the
downstream oil and gas and industrial
markets. Upstream and midstream oil and
gas and water grew more modestly whilst
sales to power declined. Geographically, the
strongest growth was in the Far East, with
all regions apart from the Middle East
growing. The Middle East had seen a very
active upstream oil and gas market in the
prior year and these projects were not
repeated in 2018.

Statutory operating profit increased by
43.0% to £122.9m, adjusted operating
profit increased 12.2%, or £15.8m, to
£146.0m (OCC +14.8%) with an adjusted
operating margin 70 basis points higher at
21.0% (OCC up 60 basis points at 21.1%).
An improved gross margin, increasing 60
basis points to 44.8%, and net overhead
increases below the rate of revenue growth,
both contributed to the improved adjusted
operating margin. Furthermore, initiatives to
reduce working capital saw a reduction
from 29.3% of revenue in the prior year to
27.7% and the balance sheet returned to a
net cash position, with net cash of £43.6m
at the year end. These movements
combined to produce an improved return on
capital employed of 29.2% (2017: 24.9%).

Growth Acceleration Programme
We expect the cash costs of restructuring to
be largely self-financed through working
capital improvements over the course of the
Growth Acceleration Programme.
Investment will be focused on market and
product segments offering the greatest
scope for growth and margin improvement,
with increased investment in our front-end
commercial activities (in particular key
account management), new product
development, and site services/aftermarket.
Much of the funding required for this we
again expect to be self-generated through
cost efficiencies and benefits arising from
the Growth Acceleration Programme. The
Board receives regular updates from
management on progress with the Growth
Acceleration Programme initiatives.

Employees and culture
Rotork’s culture is widely recognised as
having been a key contributor to our
success. We continue to build on our culture
and values, capitalising on our strengths,
whilst identifying additional core beliefs
required in support of the next phase of the
Growth Acceleration Programme. Our
existing culture is characterised by a
supportive and co-operative approach,
teamwork, a strong sense of brand loyalty,
and a hard-working, can-do mentality.
Building on these positive characteristics and
defined by our employees, we will
supplement them with an increased appetite
for external perspective, a greater
appreciation of process excellence and by
acting in a way that capitalises on our scale
as a business. In addition, we look to
embrace further innovative working policies
and practices to attract, retain and develop
talent. As an example, we recently pledged
our commitment to the 30% Club in
support of greater gender balance at all
levels of Rotork. Our culture and values
guiding the next stage of our journey have
been placed under an overarching banner
called ‘One Rotork’. There is more
information about this on page 40.

We have a committed workforce who are
proud to be Rotork employees and
determined to deliver on our ambitious
goals. It is to that committed workforce I
offer my warmest thanks and appreciation
for all their efforts throughout 2018.

Board changes
We were delighted to welcome Kevin
Hostetler to the Board on 12 February 2018
and as Chief Executive from 12 March 2018.
Following Kevin’s appointment as Chief
Executive, I resumed my role as
Non-Executive Chairman.

Tim Cobbold is an experienced former CEO
with a strong background in Rotork’s
end markets.

In line with best governance practice, Gary
Bullard, non-executive director and Chair of
the Remuneration Committee, who has
been a director for almost nine years, will
not stand for re-appointment at the AGM
on 26 April 2019. On behalf of the Board, I
would like to thank Gary for his invaluable
contribution to Rotork over the last nine
years, in particular as Chair of the
Remuneration Committee during a period of
significant change for the Group. Tim
Cobbold will assume the Chair of the
Remuneration Committee following Gary
Bullard’s retirement.

We have also recently welcomed Helen
Barrett-Hague as our new Group General
Counsel and Company Secretary following
Stephen Jones’ retirement in August 2018.
Helen joins us from Pennon Group where
she was Group General Counsel and
Company Secretary. Prior to this she has
held a number of senior legal and company
secretary roles and brings a wealth of
experience from a number of sectors.

Corporate governance
The Board continues to be committed to the
highest standards of governance. During
the year, the Board played a vital role in
evaluating and helping to shape the Growth
Acceleration Programme. In the second
half of 2018, the Board focused on the
governance changes under the new
Corporate Governance Code following
its publication in July 2018.

Further details of this work, our approach
to governance and our compliance with
the 2016 Corporate Governance Code are
contained in the Corporate Governance
Report on pages 54 to 59.

Dividend
Rotork is a strong cash generator, recognises
the importance of a growing dividend to
its shareholders, and is committed to a
progressive dividend policy, subject to
satisfying cash demands which can vary
significantly from year to year. This year the
Board recommends a final dividend of 3.7p
per share, an increase of 10.4% from the
2017 final dividend. With the 2018 interim
dividend of 2.2p, the total dividend for the
year is 5.9p (2017: 5.4p), a 9.3% increase on
2017. This is equivalent to 2.1 times cover
based on adjusted earnings per share
(2017: 2.0 times). The final dividend will be
payable on 22 May 2019 to shareholders on
the register on 12 April 2019.

Towards the end of the year as part of our
Board succession planning, we also
appointed two new non-executive directors.
Ann Christin Andersen brings extensive
knowledge of the oil and gas industry and
the application of new technology, most
recently in the digital space, a key focus area
for Rotork.

Outlook
This is a very exciting period for Rotork. We
have mapped out and are now executing a
comprehensive plan to return Rotork to the
levels of growth and margin performance
previously experienced by the Group, and to
do this on a sustainable basis throughout
the cycle.

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We have assembled a capable management
team, comprising new and existing talent.
We have a strong balance sheet, with
opportunities to improve on an already
strong record of cash generation, providing
scope to further accelerate progress
including through M&A.

Following double-digit OCC revenue growth
in 2018, and mindful of macroeconomic
uncertainty, we are planning for slower
growth in 2019. Based on our current
assessment of project phasing, we expect to
deliver modest sales growth on an OCC
basis in 2019, with lower year on year sales
in H1 reflecting the strong comparator
period. Margins will benefit from the
restructuring plans under our Growth
Acceleration Programme and the
implementation of additional cost saving
initiatives. Overall, we expect full year
margins to show progress on 2018.

Martin Lamb
Chairman
4 March 2019

*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)
results are the 2018 figures restated at 2017 exchange rates,
excluding the results of businesses acquired or disposed of
during the period.

Investment case

Track record of growth
Three year revenue growth 8.4%

Investment in innovation
R&D spend £15.5m (2017: £14.0m)

High margins
Adjusted operating margin 21.0%
(2017: 20.3%)

Diverse end markets
Our products and services are used
extensively in the oil and gas, power,
water and industrial markets around
the world

Global reach, local presence
A global business serving
customers in over 173 countries

Strong balance sheet
Cash conversion 110.7%
(2017: 109.1%)

Strong culture where
sustainability matters

ROTORK ANNUAL REPORT 2018

STRATEGIC REPORT

CHIEF EXECUTIVE’S
STATEMENT

Our Growth Acceleration Programme is
on track and already delivering results.

It gives me great pleasure to write my first
annual review as Chief Executive of Rotork
and to report on a strong set of full year
results in a year of significant development
for the Group.

Having spent time getting to know the
business after joining in February, I was
struck by Rotork’s exceptional reputation for
quality, reliability and service, the depth of
expertise and dedication of our employees,
and their willingness to drive improvements
throughout the organisation. Feedback from
customers was also very positive, but
identified scope to refine how we do things
to make us easier to do business with and to
maximise the value we create for all of our
stakeholders.

Following a thorough review of our routes
to market, innovation funnel, operations
footprint, supply chain, talent development
and IT systems, we identified scope for
improvement, validating our five-year
ambition to deliver sustainable mid-to-high
single digit revenue growth while also
returning to operating margins in the
mid-20s.

We began the implementation phase of
the Growth Acceleration Programme in the
second half of the year. This is the first
phase of a multi-year process, but already
the results have been very encouraging,
and are testament to the calibre of our
people and their ability to execute
day-to-day operations while implementing
the initiatives identified in our
workstreams. Our progress and results are
especially pleasing in the context of an
increasingly challenging macroeconomic
and political backdrop and with
considerable volatility in oil prices.

Financial performance
Revenue grew 8.3%, 11.3% on an organic
constant currency basis. Growth in Group
order intake was 2.3% or 5.4% on an
organic constant currency basis, reflecting
the variation in the timing of project orders
and deliveries compared with 2017.

Despite inflationary cost pressures,
adjusted operating margins improved
70bps to 21.0%, with new products and a
greater emphasis on cost management and
productivity contributing to this.

The strength of our return on capital
employed and cash flow provides further
evidence that our Growth Acceleration
Programme is beginning to yield results.
Our balance sheet is strong, with a net
cash position of £43.6m at the year end,
which will provide firepower for our
organic investment plans and flexibility to
pursue targeted M&A.

Key external drivers
2018 began with a rising oil price,
leading to greater stability and increased
confidence in the oil and gas sector,
which represents just over half of our
revenues. As a result, we saw a return to
more normal buying behaviour in the
maintenance and upgrade markets, and
some recovery in larger projects as
breakeven costs – which continue to fall
as the industry adopts newer and more
efficient technologies – became more
closely aligned to the oil price.

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PMI (Purchasing Managers’ Index) and
GDP economic indicators were largely
supportive of steady growth in our water
and industrial markets, while our power
markets continued to be challenging,
particularly in high carbon sectors such as
coal fired power applications.

Towards the end of the year the PMI/GDP
data pointed to a weakening in business
sentiment and confidence and the oil price
declined. We continue to monitor
developments closely.

Operating profit

£122.9m

+43.0%

Adjusted operating profit*

£146.0m

+12.2%

Growth Acceleration Programme
Our Growth Acceleration Programme, while wide-ranging,
is not about the fundamental reinvention of Rotork but rather
about refinements that build upon the Group’s strong
foundations, through people, processes and systems. More
detail may be found on pages 18 to 21, but an overview of
our progress is outlined below.

The themes of the programme include:
• Reinvesting in our customer focus and intimacy;
• Driving operational and supply chain efficiencies;
•

Improving our processes and focus within our Innovation
and New Product Development activities;

• Enhancing our talent acquisition and development

•

programmes;
Increasing the alignment between our long-term strategy,
our near-term goals and our desired behaviours and our
rewards systems;

• A renewed emphasis on headcount productivity; and
• A critical review of our strategy, portfolio and current

product lines.

We identified 12 distinct initiatives and grouped these within
four pillars, with an underlying drive to simplify our business
and to improve the quality of our portfolio through an
evaluation of our strategy, portfolio and product lines. The
four pillars are defined as Commercial Excellence, Operational
Excellence, Talent Acquisition & Development, and IT & Core
Business Processes.

We have made very good progress, and are on track with all
of the initiatives and plans announced at our half year results.
Having previously recorded a seven year decline in revenue
and profit per employee, our productivity has now begun to
recover. We added a net 31 to our headcount in the last year
(equating to a 0.8% growth) yet grew the revenue by 8.3%.
Revenue per head has therefore improved 7.5% to £180k per
head and adjusted operating profit per head 11.3% to £38k
per head.

Commercial Excellence
• Channel optimisation –
shifting to end-market
orientation

• Key account and
end-user focus
•
Innovation & NPD
• Services expansion

Operational Excellence
• Targeted manufacturing

improvements
• Supply chain
globalisation

• Footprint optimisation

Talent Acquisition &
Development
•

Internalising our talent
review process

• Aligning our strategy,

behaviours and
rewards systems
• Redefining our
Rotork culture

IT & Core
Business Process
Improving and
•
standardising core
business processes
enabling back
office leverage
IT/Systems enhancements

•
• Emphasising operating

efficiencies

Strategy, Portfolio and Product Line Assessment
Simplifying our core business and preparing for acceleration

Growth

Margin enhancement

Key enablers

ROTORK ANNUAL REPORT 2018

STRATEGIC REPORT

CHIEF EXECUTIVE’S
STATEMENT
CONTINUED

End market focus
Our strategy continues to focus on critical
applications and higher value fluids and
gases, where the Rotork brand is strongest
and most differentiated. Although there is
a long, ongoing trend towards
decarbonisation, oil & gas will continue to
be our largest and most profitable sector
for the foreseeable future, due to the
complexity, critical nature of our
application set and high value of the fluids
and gases. As operators seek to drive down
their costs, our product and service
solutions can play a key role in helping
them to generate operating efficiencies.

With the hiring of our new Group Director
of Strategy and M&A, we will further refine
Rotork’s strategy and will take our time to
make sure we understand where Rotork
has its most attractive opportunities for
growth before pursuing acquisitions. We
have enough medium to low hanging fruit
to keep the team focused on delivering in
the near term, such as supply chain and
operational improvements, facility
consolidations and pivoting our commercial
organisation. There’s a lot of work to be
done, and we intend to stay focused on the
Growth Acceleration Programme initiatives
whilst we evaluate M&A targets.

We have renewed our focus on industrial
applications by realigning our approach,
putting in place dedicated salespeople and
hiring distribution partners to focus on
those markets. Part of our extensive review
of the business was an analysis of how we
go to market for our different types of
products, and this exercise yielded a
significant number of opportunities to
pursue in the industrial market sector.
Food, pharma, petrochemical and HVAC
are the largest areas in which we’re gaining
traction within the industrial sector, largely
to do with our more focused and
accelerated new product development
efforts targeted at these markets. These
efforts have been reflected in a 14%
revenue growth in industrial applications.

Capital deployment strategy
We remain a highly cash generative
business and have returned to a net cash
position. The priorities for use of our cash
continue to be investing in organic growth
(new markets, new product development
or capital expenditure), then a progressive
dividend policy, followed by M&A.
Thereafter, if we decide at any point we
have excess cash, we would look to return
it to shareholders. We have a strong
balance sheet which provides the Group
with considerable optionality in uncertain
market conditions.

Stakeholder engagement
People and culture
We recognise that there are several factors
critical to the success of our Growth
Acceleration Programme and internal
communication is one of these. In order to
ensure that we manage our programme
effectively, we have hired a Director of
Internal Communications and focused on
communication throughout the
organisation to ensure that we bring our
team along. We’ve created new messaging
for the company consistent with our areas
of focus: six key themes for the business,
our vision, mission, and what we define as
a good company. We have also produced
several internal CEO videos to communicate
where we’re going and what we need. Our
new One Rotork theme is about working
collaboratively and behaving as a single
collective company.

In addition to tackling structural
inefficiencies, there was a need to build
upon Rotork’s strong culture by introducing
more of an operational performance
mindset. Our training and development
work, changes to the performance
management system, our business
intelligence dashboards and the external
operating talent we have brought in have
all contributed to a renewed focus on
operational metrics.

We did not undertake a formal employee
engagement survey in 2018 as we wanted
to allow time for the changes to bed in.
Feedback from our town halls, dedicated
email address for people to ask me
questions, and my lunches with colleagues
of differing seniority throughout Rotork
demonstrate a real sense of excitement,
optimism and renewed energy around the
business. More information about our
people may be found on page 40.

Customer satisfaction
We have acted upon the feedback from the
c. 200 customer interviews and first net
promoter score assessment we undertook
last year, seeking to build on our strengths
and address the areas where our
performance fell short of expectations.
Both our lead times and quote turn-around
times have improved significantly over the
last year.

Our communities
Corporate social responsibility remains core
to our business model. Our CSR Committee
considers the impact of our business on all
our stakeholders and ways to improve our
performance. This year we reviewed the
charities we have been supporting and
have now chosen areas that are more
aligned to our business focus. We continue
to work with Water Aid, but are pleased to
have added Engineers Without Borders,
Pump Aid and Renewable World to the
causes we support with fundraising and
volunteer resource. There is more
information about this and all aspects of
our CSR work on page 44.

Summary
We have made significant progress with
our Growth Acceleration Programme, but
this is only the beginning of a multi-year
initiative.

Under the commercial excellence pillar, we
are focused on creating a more customer-
oriented structure, which is ongoing and
will take a year to execute, since we are
taking great care to implement this in a
measured, considered way.

ROTORK ANNUAL REPORT 2018

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ROTORK ANNUAL REPORT 2018

Under the operational excellence pillar of
our Growth Acceleration Programme, our
facility rationalisations are underway and
on track. We have identified a specific set
of initiatives to be driven by our nine
largest facilities, and our largest subsidiary
locations have teams focused on driving
tangible operational improvements,
including inventory optimisation to improve
our cash generation.

We will begin rolling out elements of our
new IT platform within the next six months.

Essentially, our current focus is on
advancing the initiatives we have already
started to implement.

Whilst the macroeconomic outlook is
difficult to predict, we are proactively
planning for different scenarios and have
a very good understanding of what we
would do under different circumstances.
After a very good performance in 2018
which exceeded our expectations, aided by
a reduction in lead times, we expect
revenues for 2019 to deliver modest OCC
growth on 2018. However our self-help
initiatives should mean that we see
progress on margins in 2019. Whatever
unfolds, the initiatives we are pursuing will
strengthen Rotork’s cyclical resilience and
position the Group to compete effectively
in all economic contexts.

I am confident that we can continue to
build upon what is a strong foundation.
I see clear opportunities and potential for
Rotork. It is an honour to be steering the
Group through the next stage of its
development as a leading global flow
control and instrumentation company,
capitalising on Rotork’s proud history while
positioning the organisation for sustainable
growth. I would like to thank my colleagues
throughout the Group for their drive and
enthusiasm in embracing the Growth
Acceleration Programme. There is a lot to
do, and we have a great team in place to
achieve our goals.

Kevin Hostetler
Chief Executive
4 March 2019

STRATEGIC REPORT

OUR MARKET

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.

Oil & gas
Demand for oil and gas remains strong,
particularly in faster growing emerging
markets. Growing gas reserves are generating
high interest in LNG related projects. Shifts in
energy mix will dampen growth for oil
and gas in the longer term.

Water
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.

We have seen significant volatility in the price of
oil with double-digit declines in the second half
of 2018. Oil spot and futures appear to be in 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.

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.

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.

Ageing water infrastructure is driving spend on
maintenance and replacement. However we are
observing some municipal water projects being
postponed due to uncertainty in interest rates
and the bond markets.

An ageing workforce and knowledge
management has also been cited as a
challenge in this industry, implying that there
is opportunity to deploy more automation and
monitoring.

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. Virtual
reality applications are further enhancing field
service productivity.

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.

Wireless technologies are highly prevalent in
the water distribution network and will be
adopted in the rest of the network upstream
as the roll-out of 5G networks gains traction.

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.

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. We anticipate positive impact
from the America’s Water Infrastructure Act of
2018 signed into law in October 2018.

Population
growth, ongoing
urbanisation

Lower cost,
greater efficiency

Real time data
and fast response

Regulatory or
environmental
change and
structural change

ROTORK ANNUAL REPORT 2018

Power
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.

Chemical, process & industrial
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 instrumentation.

Revenue

+8.3%

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.

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.

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. Proliferating Distributed
Energy Resources (DER) feeding power into
the grids requires power plants to improve
the ability to respond quickly to manage the
stress on the power grids 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 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.

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ROTORK ANNUAL REPORT 2018

STRATEGIC REPORT

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

Resources, relationships and
sources of competitive advantage

Reputation for technical expertise
and innovation
Our well-recognised, global brand is
built on our 60-year history and deep
understanding of our customers’
evolving needs and the markets we
serve, which allows us to lead the
evolution of best-in-class actuator and
flow control products to better meet
customer needs to reduce power
consumption, improve efficiency and
minimise their environmental impact.

Strong balance sheet
Our high cash conversion allows us to
invest to deliver further growth and
value creation, and our model of
assembling to order improves our
return on capital. Most of our factories
receive finished components to our
exacting standards from our supply
chain for assemble to order. This
enables asset-light operations and gives
us the flexibility and speed to react to
changing market conditions.

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

Skilled people and winning culture
Key to our success is our ability to
attract, develop and retain talented
people, who thrive in our open culture
that is built on values of respect,
integrity and customer focus.

Broad portfolio and diverse
applications
The unparalleled breadth of our
actuator range and growing portfolio
of complementary flow control
instruments allow us to meet customer
needs in diverse applications, and
benefit from cross-selling opportunities.

Global reach, local presence
We are able to provide best-in-class
solutions to customers and have deep
insights into their evolving needs,
through leveraging our global expertise
and resources, while offering technical
support and aftermarket services
through our network of local offices.

in our chosen flow control
and instrumentation
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, automation
and instrumentation 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.

ROTORK ANNUAL REPORT 2018

Revenue by end destination

Americas

Europe

Rest of World

27%

29%

44%

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.

to create value for stakeholders

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.

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

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

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

Revenue by division

Controls

Fluid Systems

Gears

Intruments

51%

24%

10%

15%

Revenue by end user market

For more details
see page 40
[HeadingHeadingHeading]

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

For more details
see page 44

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

Oil and gas
Power
Water
Industrial
Other

55%
12%
12%
18%
3%

See our divisional

reviews on pages 32-35

Oil and gas
Water
Power
Industrial and other

XX%
XX%
XX%
XX%

Reinvestment in organic growth and acquisitions

ROTORK ANNUAL REPORT 2018

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STRATEGIC REPORT

STRATEGIC
FRAMEWORK

OUR
VISION

To be the industry leader that is respected and
admired by our customers and competitors
for its people, performance and products.

OUR
STRATEGY

GROWTH
ACCELERATION
PROGRAMME

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.
Page 16

Our Growth Acceleration Programme is
being developed to form a new operating
environment comprising four pillars:
Commercial Excellence; Operational
Excellence; Talent Acquisition & Development;
and IT & Core Business Processes.
Page 18

ROTORK ANNUAL REPORT 2018

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Our vision will be achieved by

Direction
Strategic clarity; including strong
portfolio management and
acquisitions that add value to the
Group

Results
Exceeding shareholder and
customer expectations; consistent
and predictable top and bottom line
results irrespective of the cycle

For more details
see page 16

People
A true high performance culture;
selecting the best people; investing
in and engaging them, recognising
and rewarding their achievements

Execution
Continuous improvement mindset
leading to world class processes; lean
thinking, efficient capital and plant
deployment, service delivery excellence,
outstanding procurement and inventory
management, all measured through KPIs

For more details
see page 40

For more details
see page 16

Global
Leveraging the organisation globally;
sharing best practices; strong
environmental and health and safety
culture

Innovation
Engineering excellence; investing
in and focusing on new product
and services development and the
digitisation of our portfolio

For more details

see page 2

For more details
see page 16

Turn over to see our strategic objectives and initiatives

ROTORK ANNUAL REPORT 2018

STRATEGIC REPORT

OUR STRATEGY

We are currently in the execution phase of
the detailed review conducted in 2018 of our
routes to market, innovation funnel, operations
footprint, supply chain, talent development
and IT systems. The review included feedback
from our business partners. The full impact will
be seen in the longer term and our progress in
the past few months is on plan.

Strategic objectives

Strategic initiatives

Progress in 2018

ACCELERATED
GROWTH

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.

STRONG
MARGINS

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

SUSTAINABILITY

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).

ROTORK ANNUAL REPORT 2018

Sales growth – Penetrate
underserved markets and
geographies with focused
commercial activities.

• We delivered revenue growth of

8.3%. While some project activity has
slowed, our sales pipeline has seen an
uplift from greater interest in US
Shale.

Innovation – Accelerate new product
development and launches with
increased rigour in processes and
lean development philosophies.

• We have introduced a number of

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

Service growth – Continue to
leverage our growing installed base
in aftermarket parts and services as
well as Integrated Asset
Management solutions.

Acquisitions – Growth to expand into
adjacent markets, new geographies,
new platforms and segments, new
offerings and technologies.

• We increased the number of service
engineers by 9% and the number of
actuators under a maintenance
agreement increased by 10%.

• Our M&A pipeline is healthy and we

have continued to have conversations
and cultivation meetings with a
number of potential targets.

Manufacturing excellence –
Consolidate 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 consolidated two sites into one in

the US. Our plans for a new
manufacturing facility and global
headquarters in Bath, UK continue to
be developed.

• We delivered annualised cost savings

of £1.7m in 2018 from sourcing
initiatives.

• We initiated the roll out of our new

ERP system.

• We have divested two non-core, low
margin businesses and closed a small
engineering office.

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.

• We recruited a new Global HR

Director and conducted a global
training audit to help us understand
further the key global capability builds
to focus on.

• 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.

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How we measure performance

Focus for 2019

Link to risks

• The Board has ambitions to return the

• A decline in government and private sector

business to higher growth and
margin levels.

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

• We have centralised our innovation team
and will accelerate our new product
development cycle.

• We’ll leverage our installed base through
lifetime management and intelligent asset
management.

• Acquisitions will be considered where

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

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

• Increasing social and political instability,

including Brexit, results in both disruption and
increased protectionism in key geographic
markets.

• The Growth Acceleration Programme and
other change projects lead to business
disruption or have a negative effect on
day-to-day operations.

• 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.

• We’re simplifying business processes, exiting
or rationalising underperforming business
lines, and reviewing our channel partners.

• Increased competition on price or product

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

• We are reviewing our operations, optimising
our manufacturing footprint, reducing the
complexity of our global supply chain,
simplifying our organisational structure
and accelerating the introduction of
new systems.

• 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.

• 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.

• The key enablers of the programme are
information technology and systems,
leveraging economies of scale across Rotork
and talent management and development.

• We will continue to drive safety

improvement and deliver the CSR strategy.

• 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.

Sales revenue growth

8.3%

Return on capital employed

29.2%

Adjusted operating margin

21.0%

Adjusted EPS growth

18.9%

Cash conversion

110.7%

Carbon emissions

17.0TnCO2e

Lost time injury rate

0.32

See full key performance indicators
and definitions on pages 30-31

See full risks and uncertainties

on pages 26-28

ROTORK ANNUAL REPORT 2018

STRATEGIC REPORT

OUR GROWTH
ACCELERATION
PROGRAMME

We are committed to returning Rotork
over five years to the higher level of
growth and margins previously
delivered by the Group. We have
confirmed our initial hypothesis set out
in 2017 that we can accelerate growth
through investing in innovation and
service and re-orientating our routes to
market and that this can be funded by
savings generated from restructuring
our operational footprint and supply
chain. Commercial excellence and
Operational excellence are the first two
pillars of our Growth Acceleration
Programme and capture these aspects
of our work.

The other two pillars of the Growth Acceleration
Programme address the key enablers of the strategy,
namely people and systems. The talent acquisition &
development pillar covers all aspects of our human
capital from the assessment, development and
training of our current people to the recruitment of
new talent. Aligning behaviours with strategy and
with our culture forms part of the work here. We are
also developing our IT systems and core business
processes to provide an improved common platform
and way of working across the Group. This will in turn
increase efficiency throughout our businesses.

ROTORK ANNUAL REPORT 2018

Commercial
Excellence

Operational
Excellence

Page 20

Talent Acquisition
& Development

Page 20

IT & Core
Business Processes

Page 21

01 Commercial
excellence

We now have a consolidated database of
all ongoing programmes, and are able to
concentrate our resources on the most
promising and profitable areas. We have also
changed our approach to accelerate our new
product development cycle.

In addition, we evaluated our engineering
capabilities against those required for our
future success and put in place a plan to
strengthen those required competencies
through building, partnering or acquiring
them where we identified gaps. Our
intention in the short term is to keep
investment in innovation and R&D to around
2018 levels, but to use our expenditure
more efficiently, by:
•

improving our process for project
selection;

• accelerating our process cycle times; and
increasing our hit rate through improved
•
customer and supplier input early in
the process.

All of these activities are supported by a
robust set of management KPIs to monitor
and drive improvements in our ongoing new
product development effectiveness. Once
improved processes and tighter focus have
been embedded, we will re-evaluate the
quality of projects in our innovation funnel
and assess our levels of investment
accordingly.

Focus on providing our customers
with the products and services they
want whilst at the same time making
it simple for them to buy from
Rotork wherever they are in the
world. While happy with many
aspects of Rotork’s performance,
customers singled out in their
feedback to us three areas for
improvement, which we have
worked hard to address: quote
turnaround times, on-time delivery
and client communications.

Route to market

One of the most significant conclusions
from the programme has been a
recognition of the need to migrate from
Rotork’s product-based structure to an
organisation that is more closely
aligned to market segments and
customer needs.

Several of our fastest growing geographical
markets already work partially in this way,
and in 2019 we will begin a phased, region
by region roll out, which we expect to have
completed in 2020. The approach, whereby
team members are tasked with providing
solutions to customers, irrespective of the
historical division responsible for that
product, will be supported by a greater
emphasis on key account management
and end user engagement, and a renewed
drive to be easier for customers to do
business with.

Our key account managers currently focus
on 15 of our largest oil and gas end users
and the most active international
engineering contractors. The key account
team has been able to adapt to the end
users’ business requirements and improve
relationships with key influencers and
decisions makers in customers’
procurement, operations and
projects departments.

Development of
service offering

A core element of our commercial
excellence pillar relates to site services,
identified in our customer research as
a key differentiator for the Group.

This is an area we intend to expand as we
continue our migration from a reactive
service model to proactive preventative
maintenance, and ultimately to the
utilisation of real-time data analytics to
predict failures and prevent them from
occurring in the first place. We have
recruited a new Global Director of Site
Services, who has a depth of experience
in running major service networks, and
bolstered the team through the addition
of 45 customer-facing service technicians.

Innovation and new
product development

Work under the commercial excellence
pillar also included a detailed review
of our structure and processes for
innovation and new product
development.

Previously, each division was responsible for its
new product development and had its own
budget. We now have a central structure, led
by our Group Director of Innovation and
Engineering, with areas of expertise including
electrical engineering, software engineering
and data analytics. The introduction of a
revised framework for assessing new product
development efforts led to the elimination of
35% of in-flight product development
programmes that were not deemed to be
sufficiently value-enhancing to Rotork.

ROTORK ANNUAL REPORT 2018

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STRATEGIC REPORT

02 Operational
excellence

Improve our operational
efficiency through the use of
mixed-model lean techniques,
improved inventory management
and footprint optimisation with
supply chain globalisation
delivering cost savings and whilst
maintaining our reputation for
high-quality products and
services.

Operational improvements

Supply chain improvements

Performance improvement reviews
have now been carried out at the
largest nine sites covering over 70% of
our factory output and improvement
plans developed for each. These plans
have already delivered improvements
in productivity, quality and lead times.

Initially facilitated by external support, the
review process has now been internalised
and in 2019 will be extended to drive further
improvement initiatives and sharing of best
practices. The Rotork lean model is another
improvement initiative which has now been
launched and the training materials
deployed. Work to embed this commenced
at the end of 2018. In parallel the Rotork
inventory management module was
launched in the last quarter of the year.
Plans have been created for every site and
targets set. A set of operational KPIs has
been developed to track all these initiatives.

The review of our supply chain carried
out last year indicated that through
centralisation of what was a
fragmented and locally managed
supply base there was significant
potential for savings.

We have now created the central team that
will lead this work and have been very
pleased with the progress so far. Wave 1
focused on travel, insurance and certain
product components and was completed
last year. Wave 2 is focused on more
significant component categories and
commenced in the final quarter of 2018.
The new agreements will gradually be
phased in during 2019 and are expected to
yield a benefit of around £5m in 2019.

03 Talent acquisition
& development

Having the right team in place is
crucial to achieving our aspirations.
Through a combination of targeted
development of existing employees,
recruitment of world-class external
talent and a re-alignment between
our strategy, behaviours, results and
rewards systems, we have already
delivered promising results in driving
towards our ambitions and have a
clear roadmap to make further
progress.

Global talent development

Performance management

Following assessment of our senior
leaders we were prompted to fill skill
gaps, through internal training or
externally through hiring, improving
our capabilities particularly in
operations and procurement.

A performance management and
objective setting approach has been
launched which will be applied
globally, providing total alignment to
our vision and setting the standard for
what high performance looks like.

Leaders have now been hired for our
General Counsel, Procurement,
Communications, Talent, Strategy & M&A
and Site Service functions. The talent
review and succession planning processes
initially provided by consultants have now
been internalised to enable us to deliver
them ourselves as we move forward.

With our new performance approach as a
foundation we have been able to adjust our
variable and fixed compensation
programmes to include differentiation
between high and lower performers and
have announced a new annual cycle for
compensation.

20 ROTORK ANNUAL REPORT 2018

04 IT & core business

processes

IT systems
development

IT team
development

Dashboards

At the end of 2018 we appointed our
partner to work with us on the design
and development of our new core
IT systems.

These will go beyond the ERP system and
will incorporate CRM, project tracking and
global HR systems. This integrated
development has now started and will be
deployed in phases with some aspects
going live in 2019, although ultimately this
is a multi-year programme before all sites
are operating on a common platform.

The system development programme
of work is significant and it is vital
we have the right people with
the appropriate skills to lead the
programme.

In recognition of this, the IT team has been
strengthened with additional enterprise
architecture and project management
resources particularly. The training and
development of the wider team has also
been increased, focused on the skills that
will be most relevant to the system
development programme.

In order to support the business through
a period of change, we need to be able
to track and measure the improvements.

To deliver a consistent and visible set of
KPIs we have developed dashboards for
some of our key focus areas. Dashboards
for Rotork Site Services, Global Operations
and Customer Quote Responsiveness were
launched in 2018. These dashboards
operate independently from our underlying
systems and will provide us with a
consistent set of data as we roll out our
new core ERP system.

Strategy, portfolio and
product line assessment

The four pillars outlined above are supported
by our strategy, portfolio and product line
assessment activities. The initial assessment of our
portfolio identified three business areas that were
candidates for immediate exit, given that they
were dilutive to Group margins, yet accounted
for only 1% of Group revenue. These were exited
in 2018.

An extensive product review identified more than
28 product lines with low sales volumes, dilutive
margins or both. These added a great deal of
complexity to the business, and will be withdrawn
from production over the course of 2019. Sales
from these are being transferred to alternative
products, in most cases to newer generations,
within the core portfolio.

ROTORK ANNUAL REPORT 2018

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STRATEGIC REPORT

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.

Risk management process
The risk management process is summarised as follows:

Ongoing –
divisions and
businesses
manage and
monitor risks

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

Top down risk assessment

Quantify the net risk

Identify risk mitigations
and controls

Quantify the gross risk

Risk identification,
bottom up risk
assessment

HOW WE
MANAGE RISK

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 54.

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.

2018 has seen the continued development
of the risk management framework,
including further embedding of the risk
appetite framework and technology to
support the process.

22 ROTORK ANNUAL REPORT 2018

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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.

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 26 to 28.

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. A further session is planned for
2019, to consider emerging risks and their
impact on Group strategy.

Top down risk
assessment

Ongoing risk
mitigation reviews
and controls testing

Bottom up risk
assessment

ROTORK ANNUAL REPORT 2018

STRATEGIC REPORT

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. We are
embarking on a Growth Acceleration
Programme, investing in technology, new
products and new service infrastructure that
are relevant in a rapidly changing market, but
only where there is evidence of market
opportunity. We will not dilute the core values
associated with the Rotork brand. We will
maintain the current level of operational risk
and will 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:

Risk Appetite Dimensions

Risk Appetite Statements

Risk Appetite Preferences

Key Risk Indicators (KRIs)

During 2018, 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, and enhanced
the analysis and reporting of those risks
which exceed appetite.

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
We have applied the RAF throughout 2018, incorporating this into Board decision
making. The approach taken by the Board is summarised below:

Identify key decisions and underlying parameters

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

Potential decision points
and outcomes.

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

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

Evaluate potential decisions against Group risk appetite

Potential decisions are evaluated against the
over-arching principles 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?

Who: Board

Evaluate specific risk appetite dimensions

Potential decisions are evaluated against the specific risk appetite
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.

Whether the impact
supports our desired appetite
for the given risk(s).

Who: Board

Assess and refine Risk Appetite Framework

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.

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

See principal risks and uncertainties

on pages 26-28

24 ROTORK ANNUAL REPORT 2018

Risk appetite dimension Statement

Acquisitions

We will pursue acquisition opportunities that are in line with
our growth agenda and review each on its individual merits
and expected benefits.

KRIs

None.

Control environment

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

Number of control breaches identified by internal
audit in the highest two categories.

Control environment –
cyber

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.

PC system security compliance.
Server system security compliance.
% of staff who are up to date with security
requirements.

Culture and
behaviours

Earnings volatility

Geopolitical

We will have a regard to our culture in considering strategic
decisions and recognise some change in culture may be
required to deliver our objectives. We will seek opportunities
to maximise on the benefits of our culture and ensure that our
culture supports the needs of our strategy.

None.

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

We will continue to operate a geographically diverse business
and actively pursue opportunities to maximise upon greater
critical mass and increased efficiency of global supply chains.

Health and safety

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

Legal and regulatory
compliance

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

Level of hedging cover for currency exposures.
Current year adjusted operating profit.
Order book coverage of in year revenue forecasts.

% of Group revenue from risky countries by:
Subsidiary location – forecast;
End destination location – actual.
Risky countries are defined in the AON Political Risk
Map 2018.

LTIR incidents leading to absence.
Health and safety audit scores.
Number of near misses reported.

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

Market and industry

We will, in the long term, move to increase the size of the
addressable markets which we serve.

% of Group revenue by industry.

Operational –
supply chain

Operational –
sales projects

Operational footprint

People –
talent management

We will use our purchasing power to optimise our vendor
base, ensure value for money and reduce lead times whilst
maintaining quality.

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

We want to optimise our operational infrastructure to ensure
we make the most of our resources and facilities, processes
and core competencies, and ensure it meets the future needs
of the business.

We will invest in ensuring that we have the right people, with
the right skills to deliver our strategy. This will include ensuring
that we maintain appropriate succession plans, develop and
attract the right talent.

People –
management capacity

We will ensure that management capacity is sufficient to
implement our strategy and that business decisions do not
negatively influence our day to day business.

Number of critical components which are single
sourced.

Major contracts approved.

None.

Product

Quality

Tax

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 invest in new
products and technologies where there is evidence of market
opportunity.

Actual R&D investment.
Market opportunities and competitor actions.

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

% of service labour used on warranty activity.
Number of significant warranty incidents.
Number of significant safety incidents.

We do not pursue aggressive tax planning schemes, and
consider the tax impact in making business decisions.

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.

ROTORK ANNUAL REPORT 2018

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STRATEGIC REPORT

PRINCIPAL RISKS
AND UNCERTAINTIES

Our risk management processes are dynamic and will continue to assess and prioritise
the risks related to accelerated growth 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.

Link to strategy

Risk trend

Accelerated
growth

Strong
margins

Increasing

No change

Sustainability

Decreasing

PRINCIPAL GROUP RISKS

Risk description and
importance to Rotork

Strategic
priority

Summary of
mitigation and controls

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.

Increasing social and political
instability, including Brexit,
results in both disruption and
increased protectionism in key
geographic markets.
Business disruption would impact
our sales and might ultimately lead
to loss of assets located in
the affected region.

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.

26 ROTORK ANNUAL REPORT 2018

• Product development and innovation to address new markets and new

applications in existing markets.

• Geographic and end market diversification provides resilience to a

reduction in any one area or market but 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

low cost countries.

• Global strategic sourcing team secure lower prices for components.

• R&D investment and organic product development, or acquisition of
companies with new products, to maintain differentiation from the
competition both in terms of the quality of our products and the services
we provide.

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

• 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.

• A Brexit Committee has been set up and external support has been

sought to consider the necessary response to Brexit risks and actions are
underway.

• Forecast market conditions are considered during the due diligence

process.

• 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.

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Risk description and
importance to Rotork

Strategic
priority

Summary of
mitigation and controls

Risk trend

Corporate social responsibility

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.

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.

• 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 46-47.

• Tone from the top, a ‘no tolerance’ culture to reinforce our high 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 have undertaken 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.

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

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

product failures occurring in the field.

• Rotork has experience of launching many products and enhanced the

process based on this experience.

• Comprehensive set of quality control procedures over suppliers. These
include supplier visits, audits and a scorecard system to measure their
performance.

• Our global service coverage ensures that any product failure issues should
be dealt with quickly and efficiently to minimise any reputational impact.

• Fitting and commissioning products wherever possible by Rotork

engineers to ensure current operations.

• Dual sourcing for key components wherever possible provides 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.

ROTORK ANNUAL REPORT 2018

STRATEGIC REPORT

PRINCIPAL RISKS
AND UNCERTAINTIES
CONTINUED

Risk description and
importance to Rotork

Strategic
priority

Summary of
mitigation and controls

IT security, continuity and system implementation

Risk trend

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.

Change management

The Growth Acceleration Programme
and other change projects lead
to business disruption or have
a negative effect on day-to-day
operations.

• Thorough business process reviews and use of flexible testing

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 Key Risk Indicators to monitor security compliance of PCs and
servers.

• 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.

• Growth Acceleration Programme workstreams are being managed

by a dedicated PMO, with a mix of Rotork and project management
experience.

• There is a defined benefits tracking process to monitor outcomes against
the initial objectives of projects, including monitoring any impact on day-
to-day operations.

28 ROTORK ANNUAL REPORT 2018

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 progressed well during the year, is
expected to reduce the Group’s cost base and improve the
Group’s longer-term operational and financial 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 impacting the Group’s revenue.
In particular, the scenarios cover different potential impacts
associated with Brexit, the increasing political protectionism
in respect of trade tariffs, failure of the Growth Acceleration
Programme and lower investment in the oil and gas markets.
The potential impact to Rotork from a no deal Brexit could be
a loss of revenue due to logistic issues, supply chain disruption
or permanent cost increases as a result of increased tariffs.
These events occurring individually or at once have been
considered in the modelling of the different scenarios.

Financial sensitivity modelling was carried out to assess the impact
of these risks on the Group’s three year plan. Assumptions were
made concerning market activity levels, the impact of the scenarios
on working capital cycles and the mitigating actions that could be
taken to reduce the 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.

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ROTORK ANNUAL REPORT 2018

STRATEGIC REPORT

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 growth

8.3%

Adjusted operating margin

Cash conversion

Return on capital employed

21.0%

110.7%

29.2%

21.0

20.3

20.4

22.9

26.4

110.7

109.1

130.1

115.4

97.4

29.2

24.9

23.4

28.6

47.6

This measure brings together
the combined effects of
procurement, sales and pricing
as well as the leveraging of
our operating assets. It is also
a check on the quality of
revenue growth.

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 share (EPS) reflects

all aspects of the income

statement including

management of the

Group’s tax rate.

LTIR is used as one measure of

This KPI compares this year’s

the effectiveness of our health

carbon emissions stated as

and safety procedures.

a function of revenue with

last year’s and is a broad

measure of our impact on

the environment.

Adjusted operating profit
shown as a percentage of
sales revenue. We use
adjusted operating profit as
this gives a more consistent
year on year comparison.

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.

Operational gearing benefit
from revenue growth, a
continued focus on cost
management and a greater
emphasis on productivity
contributed to an
improvement in this KPI.

Our continued focus on
working capital management
has contributed to strong
operating cash flows which
resulted in a movement from
net debt of £12.6m at the
start of 2018 to net cash of
£43.6m at the end of the year.

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 102.

With no acquisitions in 2018,
an increased dividend payment
and growth in adjusted
operating profit this has
resulted in an improved
return on capital employed.

Increase in adjusted basic EPS

(based on adjusted profit after

tax) year-on-year divided by the

prior year adjusted basic EPS.

A small decrease in the

adjusted effective tax rate

and a decrease in finance

expenses saw earnings

per share grow ahead of

the increase in adjusted

operating profit of 12.2%.

LTIR is the number of

Energy usage data (scope 1

reportable injuries resulting in

and 2) is collected and

lost time divided by the

number of hours worked

multiplied by 100,000.

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.

Our proactive approach

is aimed at continuously

identifying weaknesses in

our safety processes and

Further consolidation of sites

and upgrades in some of our

facilities have resulted in the

overall reduction of our Scope

removing or mitigating risks

1 and Scope 2 emissions.

when they are identified.

8.3

8.8

8.0

-8.1

2.8

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

Increase in sales revenue
year-on-year divided by prior
year sales revenue.

Comments on results

The strongest revenue growth
was seen in the downstream oil
and gas and industrial markets,
whilst upstream and midstream
oil and gas and water markets
grew more modestly.

30 ROTORK ANNUAL REPORT 2018

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.

Lost time injury rates (LTIR)

Carbon emissions

0.32

0.24

0.36

0.42

17.0TnCO2e

0.62

17.0

19.2

25.0

22.8

19.2

Adjusted EPS growth

18.9%

18.9

6.0

-3.8

-21.0

5.4

Reasons for choice

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

Increase in sales revenue

year-on-year divided by prior

year sales revenue.

This is reported in detail for

operating segments and is

This measure brings together

This is used as a measure of

the combined effects of

performance where a target

a key driver for the business.

procurement, sales and pricing

of 85% is regarded as a base

We aim to use our capital

efficiently and reporting

this ratio internally helps

as well as the leveraging of

level of achievement. Cash

management at Group level

our operating assets. It is also

generation is also one of the

monitor our adherence to

a check on the quality of

constituent parts of the senior

this philosophy.

revenue growth.

management reward system.

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.

Adjusted operating profit

shown as a percentage of

sales revenue. We use

adjusted operating profit as

this gives a more consistent

year on year comparison.

Cash flow from operating

Adjusted operating profit as a

activities before tax outflows,

percentage of average capital

payments of restructuring

charges and the pension

charge to cash adjustment

as a percentage of adjusted

operating profit.

employed. Capital employed

is defined as shareholders’

funds less net cash held, with

the pension fund deficit net

of related deferred tax asset

added back. The calculation

is shown on page 102.

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

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.

The strongest revenue growth

Operational gearing benefit

Our continued focus on

With no acquisitions in 2018,

working capital management

an increased dividend payment

Comments on results

was seen in the downstream oil

from revenue growth, a

and gas and industrial markets,

continued focus on cost

whilst upstream and midstream

management and a greater

oil and gas and water markets

emphasis on productivity

grew more modestly.

contributed to an

improvement in this KPI.

has contributed to strong

operating cash flows which

resulted in a movement from

net debt of £12.6m at the

start of 2018 to net cash of

£43.6m at the end of the year.

and growth in adjusted

operating profit this has

resulted in an improved

return on capital employed.

A small decrease in the
adjusted effective tax rate
and a decrease in finance
expenses saw earnings
per share grow ahead of
the increase in adjusted
operating profit of 12.2%.

Our proactive approach
is aimed at continuously
identifying weaknesses in
our safety processes and
removing or mitigating risks
when they are identified.

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

ROTORK ANNUAL REPORT 2018

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STRATEGIC REPORT

OPERATING
REVIEW

Revenue

£351.9m

+8.2%

Rotork
Controls

Market drivers

The investment in downstream oil and
gas in the Far East is being driven by the
rising demand in that region for refined
product which has outstripped capacity.
The investment is across all aspects of
downstream: refining, storage and
petrochemical.

Growth Acceleration
Programme

The revised IQ3 flowline in Bath now
incorporates all the lessons learnt from
introducing mixed-model lean
techniques during the year. This yielded
quality and efficiency improvements and
once we implement these changes
through the other IQ lines in Bath, in
Rochester and China further benefits
will be delivered.

regions, with North American power and
Latin American water providing the two
best performances within these end
markets. Service activities continued to
perform well.

We saw the most positive growth from the
Far East which, even without the benefit of
the large downstream projects, would have
been the fastest growing region. North
America, Western Europe and Latin America
also made progress. The UK and Eastern
Europe were broadly flat whilst the Middle
East and Africa saw a decline against their
2017 comparator, which benefited from
a number of upstream oil and gas and
power projects.

During 2018 we led initiatives focused on
lean manufacturing, product line
rationalisation and supply chain
consolidation. We implemented a new lean
assembly methodology in part of our Bath
plant which has already delivered quality
and efficiency improvements in the year –
and which, once fully established, will be
rolled out across our other plants. We have
reviewed our product ranges and notified
customers of 12 product lines which have
now been discontinued, with a further three
to follow in 2019. In most cases these
customers have been successfully migrated
to newer product ranges. The new
procurement team has been working on
both our direct and indirect cost base.
Whilst the impact on our 2018 costs is not
significant, they have been laying the
groundwork for delivery of savings in 2019.

Grant Wood
Managing Director Rotork Controls

Order intake grew 4.9% to
£349.2m (up 8.0% on an OCC
basis) and revenue was 8.2%
higher at £351.9m (OCC +11.6%).

This resulted in a 1.5% reduction in the
order book to £93.6m over the course of
the year. Adjusted operating profit was
£101.3m which was an 9.1% increase,
giving an adjusted operating margin of
28.8%, 20 basis points higher than the prior
year. On an OCC basis adjusted operating
margin is the same as the prior year. Gross
margin improved 30 basis points to 52.2%
largely due to operational gearing.

Oil and gas revenues grew strongly in the
year driven by the large downstream
projects in the Far East which we highlighted
at the half year results. In total, oil and gas
increased from 44% of divisional revenues
to 50%, with downstream increasing from
29% of divisional sales to 36%. Industrial
process was the only other end market to
grow and did so both in value terms (+17%)
and as a percentage of the division’s sales
(up 1% to 17%). Power and water sales
both declined overall but increased in some

32 ROTORK ANNUAL REPORT 2018

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F
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C
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N
F
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A
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Revenue

£166.3m

+10.8%

Rotork
Fluid Systems

East offset by a decline in the Middle East.
Downstream grew 34% led by activity in
the Middle East. Water and industrial
process both showed modest progress but
power declined, partly due the sale of Hiller.

The Far East grew in nearly all end markets
and was the best performing region
although is still smaller than North America
and the Middle East and Africa overall.
North America, Western Europe and
Eastern Europe all made progress in the
year with Western Europe’s performance
strongest in industrial process. The Middle
East and Africa and UK markets, both
declined in the year, largely as a result of
lower upstream business.

Operational improvement initiatives focused
on Lucca, Italy during the year. Introduction
of lean techniques, consistent with the
overall methodology being deployed across
the Group, were supplemented by a drive
to reduce inventory. From a product
perspective there has been a balance
between new and expanded product lines,
notably the electro-hydraulic SI range, and
a rationalisation of the existing product
ranges with eight low volume ranges
being phased out.

Peter Matton
Managing Director Rotork Fluid Systems

Market drivers

Given the project nature of Fluid
Systems, spend tends to move from
market to market within a region. In the
Far East spend increased in all areas of
oil and gas; in North America midstream
declined but other areas were up; and in
the Middle East upstream projects
completed last year, with downstream
projects the focus in 2018.

Growth Acceleration
Programme

The largest Fluid Systems factory is
based in Lucca, Italy, and this was the
prime focus for operational
improvement activities. Initiatives to
improve on-time delivery, recognising
the very different types of product
going through one factory, to reduce
inventory and to introduce more visual
management tools as part of the lean
programme all yielded benefits. These
will be developed in 2019 and carried to
the other Fluid Systems factories.

ROTORK ANNUAL REPORT 2018

Fluid Systems saw strong project
activity early in the year and as a
result was able to convert a
large part of this to revenue.

Order intake of £154.7m was 0.9% higher
on an OCC basis than the prior year but a
currency headwind and the sale of the
Hiller nuclear actuator business meant
reported order intake was 3.3% lower.
Revenue was 10.8% higher (+14.2% OCC)
and as a result adjusted operating profit
increased 78.9% (OCC +85.6%) to £16.1m.
Adjusted operating margin increased 370
basis points to 9.7% (OCC +380bps). Gross
margin improved 280 basis points to
31.7% as the higher revenue was delivered
from a lower direct cost base, as well as
benefiting from a small improvement in
material costs.

Oil and gas was the fastest growing end
market and is now 68% of Fluid System’s
sales compared with 67% last year. Within
this, midstream was broadly flat and
upstream, the largest element, grew 7%
with progress in North America and the Far

STRATEGIC REPORT

OPERATING REVIEW
CONTINUED

Revenue

£85.6m

+2.0%

Rotork
Gears

Order intake increased 0.9%
(OCC +3.8%) to £86.8m whilst
revenue of £85.6m was 2.0%
ahead of last year (OCC +4.7%).

Adjusted operating profit was £15.3m,
2.7% lower than the prior year but was
+1.3% on an OCC basis. Adjusted
operating margins were 17.9%, 80 basis
points lower than 2017. Gross margin
reduced 160 basis points to 32.2% driven
by higher material costs which were the
result of higher warranty costs and material
write offs. These adverse impacts were
partially offset by reductions in overheads
through the year.

Oil and gas sales grew the fastest and
increased from 52% of divisional sales last
year to 54%. The growth was in midstream
in the Middle East and downstream in
North America and the Far East whilst
Western Europe was lower in both the end

34 ROTORK ANNUAL REPORT 2018

markets. Upstream activity was lower in
most regions. Industrial process was the
other growth market, led by North
America, with water and power broadly
flat. The Middle East and Africa and Far
East were the two regions which grew
sales whilst Western Europe reported the
largest decline. All other regions reported
similar activity levels to the prior year.

Early in the year we undertook a review of
the division’s products and took the
decision to rationalise the product range in
a number of areas. The closure of our
Valvekits business mid-year was the most
visible result of this but a number of low
volume product lines with obvious
replacements were also phased out. This
exercise continues and we expect to
consolidate more ranges in 2019 which will
deliver further inventory reductions and
simplify our product portfolio. At the same
time the reorganisation of R&D and
coordination at a Group level is allowing us
to focus on development of gearboxes that
primarily sell to Controls and Fluid Systems
to improve the efficiency of the product
pairing and competitiveness of the
solution.

David Littlejohns
Managing Director Rotork Gears

Market drivers

Increasingly our customers are looking
for shorter delivery lead times and this is
reflected in many of the activities being
undertaken on lean and inventory as
part of our Growth Acceleration
Programme. Our review of the sales
organisation will also reflect the
different nature of these customers’
requirements and how best to serve
them globally.

Growth Acceleration
Programme

As part of the Group lean programme,
a Gears assembly blueprint has been
designed and once fine-tuned in Leeds
will be implemented across the other
Gears factories.

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Revenue

£107.2m

+6.5%

Rotork
Instruments

from 12% to 10% of revenue. Water and
power delivered modest growth and whilst
Industrial sales grew, they declined as a
percentage of sales from 19% to 18%.
Geographically most regions maintained
their share of divisional revenue, growing in
line with the overall division. The only
exception was the UK which grew faster,
benefiting from upstream oil and gas sales.

Our focus on driving efficiency
improvements included product
rationalisation, where we have withdrawn
over 2,500 SKUs covering more than 20
product ranges. At the same time new
product development plays a major role as
we look to match our customers’ changing
needs. Our new chemical pump range for
the oil and gas market offers major
efficiency savings, with reduced power
requirements which is ideal for growing
solar applications. With the reshaped
Group engineering structure, we were able
to close a small remote engineering centre,
driving cost savings without impacting our
ability to innovate.

Kiet Huynh
Managing Director Rotork Instruments

Market drivers

In oil and gas we have seen a moderate
recovery within the subsea business as
activity for exploration and drilling has
increased. Downstream, we have also
seen the recommencement of projects
that were on hold through 2017. The
industrial process market remained
strong in 2018 especially in the Far East
where we were able to capitalise on our
strong product portfolio.

Growth Acceleration
Programme

A number of lean initiatives were
implemented in our key factories
throughout 2018, allowing us to deliver
higher revenues whilst keeping direct
costs flat. Lead times and on-time
delivery were also improved as a result
of the efficiency gains.

Order intake was £105.5m,
0.9% higher than last year (OCC
+1.9%) and revenue of £107.2m
was 6.5% higher (OCC +7.5%).

The additional revenue combined with
tight control of costs ensured adjusted
operating profit grew 17.7% (OCC +17.5%)
to £24.1m with adjusted operating margins
increasing 220 basis points (OCC +190 bps)
to 22.5%. Gross margin improved 110
basis points to 44.3% with the positive
impact of operational gearing combined
with holding direct costs at the prior year
level more than offsetting a small rise in
material costs.

Oil and gas remains the largest end market
and increased from 46% to 48% of
revenue this year. This growth comes from
upstream and midstream oil and gas sales
as downstream reduced in the year, falling

ROTORK ANNUAL REPORT 2018

STRATEGIC REPORT

FINANCIAL
REVIEW

In 2018 we saw strong growth in revenue and adjusted
operating profit and further strengthened our balance sheet
through strong cash generation. Cash conversion of 110.7%
resulted in a movement from net debt of £12.6m to net cash
of £43.6m.

The year started strongly with order intake
in the first half continuing the trend from
the second half of 2017, with order intake
up 9.7% from the previous six month
period. As the year progressed the impact
of a variation in the timing of project
orders and deliveries compared to 2017
resulted in full year order intake growth
reducing to 2.3% (5.4% OCC), with
full year order intake of £681.7m
(2017: £666.5m). Revenue was £695.6m,
8.3% higher than the prior year (+10.9%
OCC) which resulted in a book to bill ratio
of 0.98 and a closing order book of
£179.2m (2017: £192.5m).

Gross margin increased 60 basis points to
44.8% (OCC gross margin +30 basis points
to 44.6%) aided by the strong revenue
growth. A 50 basis point increase in
material costs was offset by improved
labour productivity, helped by the
introduction of new lean processes in some
locations. The operational gearing benefit
of the partly fixed factory costs had an
additional positive impact.

Adjusted operating profit was £146.0m, an
increase of 12.2% over the prior year, with
the adjusted operating margin increasing to
21.0% (2017: 20.3%). On an OCC basis,
adjusted operating profit increased 21.0%
to £149.7m, a margin of 21.1%. 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 reflecting
the improvement in results. Average salary
per head increased 3% at constant
exchange rates.

Net finance costs reduced by £3.2m to
£2.2m as a result of more favourable
exchange rates (£1.8m), a lower pension
interest charge and lower bank interest on
loans due to lower external borrowing
during the year (£0.6m). The reduction in
net finance costs resulted in an increase in
adjusted profit before tax of 15% to
£143.5m.

The continued worldwide trend towards
lower corporate tax rates resulted in the
adjusted effective tax rate reducing to
23.7% giving adjusted earnings per share
of 12.6p, an increase of 18.9%. Statutory
earnings per share were 10.5p, an increase
of 64.1%. The statutory increase is larger
than the adjusted percentage increase due
to the lower level of adjusted items in
2018, which are set out below.

Growth Acceleration Programme
During the year there have been three
areas of work within the Growth
Acceleration Programme which were
identified as likely to have an immediate
impact and which have already benefited
the reported results. These were the
closure or sale of three businesses, the
establishment of a central procurement
team and the development of site specific
improvement plans at our largest factories
as part of the introduction of a mixed-
model lean methodology and continuous
improvement programme.

The sale of the Hiller nuclear actuator
business, closure of the Valvekits business
and the engineering office resulted in a
£0.7m loss. This has been reported as a
restructuring cost within other adjustments
(see note 4) and is excluded from adjusted
operating profit. During 2018 these
businesses contributed £3.1m of revenue
and operating profit of £0.1m and their
disposal generated proceeds of £4.3m.

The central procurement team was
established in the middle of last year and
added to through the second half of 2018.
Work started on wave 1 (insurance, travel
and certain components) early in the year
but then towards the end of the year focus
moved to wave 2 (larger component
categories) that would bring benefits in
2019. In total this team has achieved £1.7m
of in-year savings which benefited the 2018
results. The impact of these savings in 2019
plus the impact of wave 2 will generate an
incremental £5m of savings in 2019.

The implementation of a mixed-model
lean programme and focus on continuous
improvement was led initially by
consultants. Gradually through the year
we have built the in-house expertise in
these areas and are now able to run the
site assessment process and drive further
improvements led by our own people.
Of the £4.1m consultancy costs incurred
in 2018, which are reported within ‘Other
adjustments’ and excluded from adjusted
operating profit, the majority were incurred
in the first half of the year and relate to the
information gathering and analysis phase
of the Growth Acceleration Programme.
However £0.7m related to site
improvement activities and the benefits
arising from these activities in 2018 have
been in two main areas. Firstly the
identification and use of slow moving
inventory, which has generated £0.7m
of additional profit, and secondly the
efficiency gains from process changes the
most significant part of which are reflected
in improved labour utilisation. The efficiency
gains, which totalled circa £0.4m in 2018,
are recurring benefits and will continue to
build as these programmes gain momentum.

The other costs incurred in 2018 as part of
the Growth Acceleration Programme are
redundancy and executive change costs
(£2.9m) and restructuring costs (£2.9m).
These include the write off of capitalised
R&D following the decision to end
development of certain product lines and
assets written off as part of the global
footprint review. There is no direct payback
in respect of these costs.

Our intention when establishing the
Growth Acceleration Programme was to
fund the programme through working
capital improvements. During the year we
have begun to see some of those
improvements with net working capital
reducing from 29.3% to 27.7% of revenue.
Inventory is the component of working
capital which has received the most focus
and an improvement in stock turns has

generated £16.3m this year. Looking at the
other elements of working capital on a
constant currency basis, trade receivables
have improved and generated £5.4m whilst
trade payables have deteriorated slightly
resulting in an outflow of £8.9m. As the
central procurement team start to work
through the wave 2 categories we expect
to see this metric start to improve. The
total cash generated from improved
working capital in the year is £12.9m.

Brexit and geopolitical risk
Following the referendum in June 2016 and
the subsequent triggering of Article 50 in
March 2017, the UK is scheduled to leave the
European Union (EU) on 29th March 2019
(‘Brexit’). The decision has led to a higher
level of uncertainty surrounding trading
conditions, particularly between the UK and
the EU. In the year ended 31 December
2018, 9% of Group revenue resulted from
trading between the UK and EU.

Rotork has a Brexit steering group which
assesses and monitors the potential impact
on the Group and which manages the
implementation of mitigation plans. To
date, the following Brexit risks have been
identified as having an actual and/or
potential impact on our business:
• Economic conditions: Increased

uncertainty including the specific
impacts on growth, inflation, interest
and currency rates.

• Laws and regulations: Potential changes
to UK and EU-based law and regulation
including product approvals, patents
and import/export tariffs.

• Short term supply chain disruption:

Potential changes in customer buying
patterns, delays in customs for products
shipped to and from the EU and the rest
of the world and border clearances and
uncertainty over UK and EU product
approvals.

With a strong direct presence in the EU,
the Board believes that Rotork is well
placed to respond to changes to future
trading arrangements between the EU and
the UK. Inventory holdings of certain
components and finished goods are being
increased above standard levels in the UK
to mitigate the risk of delays in customs
and border clearances.

Revenue

£695.7m

+8.3%

Operating profit

£123.2m

+43.2%

The Group has also considered the potential
cost impact of World Trade Organisation
tariffs coming into force for exports from the
UK and imports into the UK. The resultant
cost of these potential tariffs is not expected
to be material to the Group’s results.

We continue to monitor the trade position
between China and the US and have
considered the potential impact of additional
trade tariffs between these countries. We
currently believe that if tariff changes are
implemented as suggested in 2018 they will
not materially impact the Group’s results.

We have included scenarios in the viability
assessment which models the impact of
both of these current geopolitical
uncertainties. The viability statement can
be found on page 29.

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 items, comprising
the net pension gains in respect of the
defined benefit pension schemes and the
restructuring costs as a result of the
Growth Acceleration Programme.

Adjusted earnings reconciliation

£m

Operating profit
Profit before tax
Tax

Profit after tax

Statutory
results

122.9
120.7
(29.0)

91.7

Amortisation

Net pension
gain

Restructuring
costs

20.3
20.3
(4.5)

15.8

(7.7)
(7.7)
1.3

(6.4)

10.5
10.5
(1.8)

8.7

Adjusted
results

146.0
143.8
(34.0)

109.8

The table above adjusts the statutory results for the significant non-cash and other
adjustments to give adjusted results. Note 2 sets out the alternative performance measures
used by the Group and how these reconcile to the statutory results. Further details of the net
pension gain and the restructuring costs are provided in note 4.

ROTORK ANNUAL REPORT 2018

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STRATEGIC REPORT

FINANCIAL REVIEW
CONTINUED

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

£m

Revenue
Cost of sales

Gross profit
Overheads

2018 as
reported

695.7
(384.2)

44.8%
311.5
23.8% (165.5)

Constant
currency
adjustment

16.4
(10.3)

6.1
(2.4)

2018 at 2017
exchange
rates

Remove
closed/
disposed
businesses

712.1
(394.5)

317.6
(167.9)

(3.1)
1.9

(1.2)
1.1

44.6%
23.6%

Organic
business at
2017
exchange
rates

709.0
(392.6)

44.6%
316.4
23.5% (166.8)

44.3%
23.8%

20172

636.9
(354.8)

282.1
(151.8)

Adjusted operating profit1

21.0%

146.0

3.7

21.0%

149.7

(0.1)

21.1%

149.6

20.5%

130.3

1 Adjusted is before the amortisation of acquired intangible assets and other items (see note 4).
2 As a result of business disposals and closures the 2017 comparatives have been restated to enable the OCC business growth to be calculated, this reconciliation is shown in

note 2.

Acquisitions, disposals and
impairment review
In the year as part of the Growth
Acceleration Programme three businesses
were closed or sold. Hiller which primarily
produced products for the nuclear industry
was disposed on 5 August 2018 for £3.0m
and realised a loss on disposal of £0.5m.
Valvekits, a valve adaption business, was
closed resulting in the redundancy of 32
employees. The gain on disposal of the
Valvekits property offset the cost of closure
and redundancy costs to realise a profit on
disposal of £0.1m. The disposal of the
above two businesses, together with the
loss on the closure of a small engineering
office, resulted in a total loss on disposal
of £0.7m. This is shown as part of the
restructuring costs adjustment to profit.
The contribution to revenue and adjusted
operating profit in 2018 of these businesses
was £3.1m and £0.1m, respectively.
Restating the 2018 adjusted operating
margin for the removal of these businesses
improves the adjusted operating margin by
10 basis points.

With the Group’s most recent acquisition
being in 2016, the amortisation charge in
2018 related to acquired intangible assets
reduced £6.9m to £20.7m.

In 2017 the impairment review of
acquisition-related goodwill resulted in
a £21.6m write-down, of which £19.8m
related to Bifold. In 2018 Bifold performed
ahead of the expectations included in the
2017 impairment review and in the 2018
impairment review the Bifold cash
generating unit has positive headroom
on the base case forecast.

Currency
After several years of experiencing a
currency tailwind we felt a headwind in
2018. The major currencies impacting the
income statement are the US$ and the
euro. The US$/£ average rate of $1.34
(2017: $1.29) was a 4 cent headwind
whilst the euro/£ average rate was
€1.13 (2017: €1.14), a 1 cent tailwind. With
the average sterling rate across the basket

38 ROTORK ANNUAL REPORT 2018

of currencies being stronger than 2017 this
has resulted in a £16.4m or 2.4%
headwind 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 partially to 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 £400,000
(2017: £300,000) adjustment to profit and
for US dollar, and dollar related currencies,
a 1 cent movement equates to approximately
a £600,000 (2017: £400,000) adjustment.

We saw a reversal in currency movements
towards the end of 2018 as sterling
weakened. The rates used to translate
the balance sheet are therefore different,
with the US$/£ closing rate of $1.28
(December 2017: $1.35), 7 cents (5.2%)
stronger than the start of the year.

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 cash 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
decreased 4.3% over the year to £500m as

there were no acquisitions during 2018 and
we moved from a net debt to a net cash
position. This, combined with the higher
adjusted operating profit, resulted in an
increase in ROCE to 29.2% (2017: 24.9%).

Taxation
The Group’s effective tax rate was mainly
impacted this year by the reduction in US
corporate tax rates. The headline rate
decreased from 31.0% to 24.0% in 2018
as a result of non-taxable charges in 2017
not repeated in 2018. Removing the impact
of the non-recurring adjustments provides
a more reliable measure and on this basis
the adjusted effective tax rate is 23.7%
(2017: 26.3%). The Group expects its
adjusted effective tax rate to continue to
fall in line with the current trend in
corporate tax rates where Rotork operates.
This will still be higher than the standard
UK rate due to higher rates of tax in China,
the US, Canada, France, Germany, Italy,
Japan and India.

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
movement from net debt of £12.6m to net
cash of £43.6m at the end of the year. Our
cash conversion KPI shows a conversion of
110.7% of adjusted operating profit into
cash. The Group invested £10.4m in capital
expenditure in 2018 although this was
lower than anticipated due to our decision
to defer plans for the redevelopment of the
Bath factory site whilst options were
considered. We continue to look at options
for further expansion of this facility as part
of the Growth Acceleration Programme.

We have continued to invest in our
engineering capability with our Research
and Development (R&D) cash spend
increasing 10.8% to £15.5m. This
represents 2.2% of revenue (2017: £14.0m
and 2.2%). The most significant spend was

associated with the development of
Pakscan 4 which contributed a third of the
£3.8m of capitalised R&D in the year. Cash
of £4.3m has been realised from the
disposal of the Hiller business and the
Valvekits assets. Dividends of £48.3m and
tax payments of £30.1m 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 increased levels of revenue in the last
quarter saw trade receivables grow £2.3m
and when measured as days’ sales
outstanding1 improved from 63 to 62 days.

Net working capital in the balance sheet
decreased to 27.7% of revenue compared
with 29.3% in December 2017 but was a
£9.0m outflow in the cash flow statement.

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 virtually all of our companies at an
aggregate of 88% of receivables. 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.

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.

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 treasury reports which summarise
the Group’s foreign currency hedging
position, distribution of cash balances and
any significant changes to banking
relationships.

The Group now has two committed
facilities with two different lenders,
comprising a £60m three year facility which
has been extended to August 2020 and a
five year, £60m facility expiring in August
2020. At year end £60m of the committed
facilities were drawn, resulting in £60m
being available.

Retirement benefits
The Group accounts for post-retirement
benefits in accordance with IAS 19,
Employee Benefits. The balance sheet
reflects the net deficit of these schemes at
31 December 2018 based on the market
value of the assets at that date, and the
valuation of liabilities using year end AA
corporate bond yields. We 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 2018 we further reduced
the risk of volatility when we completed
the closure to future accrual of both the UK
and US schemes. Members of the defined
benefit schemes have been transferred
onto the relevant defined contribution plan
operating in their country. The closure of
both of these schemes has resulted in a
curtailment gain in other income of £8.6m
and is an adjusting item in the adjusted
profit measure.

The High Court judgement in the case of
Lloyds Banking Group in October 2018
clarified that pension benefits under the
UK Scheme need to be equalised for the
effects of unequal guaranteed minimum
pensions (GMP). The impact of GMP
equalisation is a £0.9m cost and is shown
as a past service cost in the income
statement and is an adjusting item in the
adjusted profit measure.

The most recent triennial valuation of 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 2018
showed the deficit had grown to £41.5m
and funding level decreased slightly to
81%. 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. The next
triennial valuation will be prepared as at
31 March 2019.

On an accounting basis the deficit on the
schemes decreased from £48.2m to
£27.3m during the year and the funding
level increased from 80% to 87%. In
addition to the curtailment gains, GMP cost
and contributions of £7.2m, the increase in
the discount rate from 2.5% to 3.0% also
contributed to the £20.9m reduction in the
pension deficit.

The accounting deficit is different to 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 10.4% increase
in the final dividend to 3.7p per share
(2017: 3.35p). When taken together with
the 2.2p interim dividend paid in
September, the 5.9p represents a 9.3%
increase in dividends over the prior year.
This gives dividend cover of 1.8 times
(2017: 1.2 times) using statutory earnings
per share or when using adjusted earnings
per share 2.1 times (2017: 2.0 times).

Jonathan Davis
Finance Director
4 March 2019

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ROTORK ANNUAL REPORT 2018

STRATEGIC REPORT

OUR PEOPLE

Rotork aims to be a ‘great place to
work’ with strong core values globally.
Our people are key to our success and
to delivering our initiatives and Growth
Acceleration Programme.

Our people
& culture

40 ROTORK ANNUAL REPORT 2018

We have recently introduced a One Rotork
set of values, building on our strengths to
date and defining what it means to behave
as One Rotork to achieve our Vision. This
includes how we work together and act as
one globally.

We aim to link our workforce planning with
our strategy, values and behaviours and our
people activities such as our reward systems.
We believe that one of the outcomes of
achieving our Vision is that Rotork will be the
best place for our staff to build their career.

Talent attraction and development
We want to be the first choice for the talent
who match the needs of our business.

We conducted an external assessment of
our senior leaders and this provided the data
to prompt action to fill some skill gaps. In
particular we have improved our capabilities
in Operations, Procurement and Site Services.

We have also now internalised our Talent
process following our hire of a Talent
Acquisition and Development Director.

A global training audit helped us understand
further the key global capability builds to
focus on and our senior leaders have already
undertaken Change Management training
with the Center for Creative Leadership.
Training and development in our key
capability build areas supports the future
needs of our business and invests in
our people. We are committed to the
development of our people through training
and development but also through social,
sports, wellbeing and charitable activities.

We are committed to our early careers
programme with apprenticeship schemes for
young people into different aspects of our
business. We also continue our membership
of the Manufacturers Standardization Society
(MSS), who offer undergraduate and
graduate scholarships in relevant disciplines.

Rewarding and retaining our people
In 2018 we have focused on introducing a
more performance-orientated approach at
Rotork. A revised Performance Management
Approach enables consistency globally and
ensures total organisation alignment to our
Vision and sets the standard on what high
performance looks like at Rotork.

Board of directors by gender
(Non-executive and
Board of Directors by Gender
Board of Directors by Gender
executive directors)
(Non Executive and Executive Directors)
(Non Executive and Executive Directors)
as at 31 December 2018
as at 31st December 2018
as at 31st December 2018

Total global employees
by gender
Total Global Employees
Total Global Employees
as at 30 April 2018
by Gender
by Gender
as at 31st December 2018
as at 31st December 2018

Male
Female

6
3

Male
Female

78.6%
21.4%

Using this as a foundation we have
adjusted our compensation arrangements
to include differentiation between higher
and lower performance and announced
a new annual cycle for compensation.
We actively review decisions around
performance, talent and compensation to
ensure fairness between genders.

Our reward and benefits arrangements
are benchmarked in each country we
operate, taking into account
cost considerations. All employed staff
participate in the Rotork bonus scheme
globally and many staff participate in profit
linked share ownership schemes which give
staff a financial interest in the Group. We
also provide various pension arrangements,
designed to provide retirement benefits,
based on local laws and practices.

Employee engagement
We believe that motivated and engaged
people are good for our business and this is
also key for their own health and wellbeing.

We did not undertake an annual survey this
year; this has been a more manual process
previously and we are moving to a ‘pulse’
online approach in order to more frequently
and easily gain feedback from our people.

We have appointed a Communications
Director so we can ensure that our people are
regularly kept up to date on various employee
matters, including our financial and bonus
scheme performance and our Growth
Acceleration Programme progress. We use
team briefings, our intranet: Konnect, all
hands town halls as well as WebEx and video
films which we have successfully used across
the world by translating into local languages.
We believe that communication is key
during periods of change in particular and
are overinvesting during this time.

Diversity and inclusion
We are committed to creating a diverse
workforce and inclusive culture, where
everyone is respected, can be themselves
at work and thrive in our Company.

Our Respect at Work and Equal
Opportunities Policies ensure fair and
objective treatment is promoted across
recruitment and employment relating to age,
race nationality, ethnic origin, disability, sex,
sexual orientation, religious belief or marital
status. All employees have a responsibility to
ensure the policy is successfully implemented.
We work wherever possible and with
occupational health experts to overcome
any obstacles for employees including
those with disabilities by making
appropriate adjustments.

Rotork has not yet published its 2018
Gender Pay Report for our two reportable
UK entities with more than 250 employees.
We also report on our total UK workforce
as we believe that every employee should
count, male or female and will benefit from
the actions we take.

Globally, women currently represent 21.4%
of our people, an increase from 20% in
2017. Moving towards a more even
distribution of men and women at all levels
is a key goal.

We published our figures to the Hampton
Alexander Review.

2018
(as at
30 June
2018)

2017

33.3% 28.6%

Women on Board
Executive Committee
and Direct Reports

Whilst our percentage of women on the
Board was viewed as on target in both years,
our Board structure changed during 2018 a
number of times and by 31 December 2018
was again 33.3% with three women on the
Rotork Board out of nine.

Whilst we have made progress in our
Executive Committee and their direct
reports in relation to gender in 2018 we
still have work to do and have brought a
number of women into our business in the
latter part of the year. We embrace the
challenge to create a better gender
balanced workforce. This is reviewed as
part of our talent process and is a standing
item on our Board agenda.

We have prioritised a number of new
activities:
• Demonstrating our commitment to
gender diversity by pledging our
support to the 30% Club.

• Participating in 2018 in the Hampton

Alexander Review pilot buddy
programme between FTSE 100 and
FTSE 250 organisations.

• Continuing to update our family friendly
and flexible working arrangements.

• Reviewing further our policies and

processes to ensure they are inclusive
for all.

• Communicating more frequently

internally on the subject of gender
balance, our approach and progress.

• Aiming for 30% of our apprentice

intake to be female.

•

Interviewing at least one female for all
senior roles that go to search.

• Updating our Code of Conduct.

14% 17.4%

• Tracking diversity through our talent

reviews and Board meetings.

ROTORK ANNUAL REPORT 2018

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STRATEGIC REPORT

CORPORATE SOCIAL
RESPONSIBILITY

Committed to the highest standards
of ethical behaviour.

Ethics
and values

42 ROTORK ANNUAL REPORT 2018

High ethical standards are fundamental
to the way in which we do business.
Respecting internationally proclaimed
human rights, promoting an open and
honest culture, having a zero tolerance to
bribery and corruption worldwide, and
selecting suppliers with sound reputations
in the marketplace are important principles
for the Group to adhere to.

Ethics policies
Our Ethics and Values Statement sets out
the standards of behaviour that Rotork
expects from anyone acting on Rotork’s
behalf. It can be viewed on our website at
http://www.rotork.com/en/documents/
publication/4433 and is available in eight
different languages.

We are a signatory to the UN Global
Compact and the UN Global Compact
principles are set out in our Ethics and
Values Statement demonstrating our
commitment to supporting and respecting
human rights.

In 2019, we will be launching a new Code
of Conduct which will replace our Ethics
and Values Statement. This will provide a
clear framework for decision making by our
people in line with our core values, and set
out details of how we expect our people to
conduct themselves on a day to day basis.

Benchmarking
Rotork plc is a constituent of the FTSE4Good
equity index series which is designed to
facilitate investment in companies that
meet globally recognised corporate social
responsibility standards. We continue to
meet the standards set by FTSE4Good.

Whistleblowing
Rotork encourages the reporting of any
suspected wrongdoing through its
Whistleblowing Policy which can be found
on the Rotork website http://www.rotork.
com/en/documents/publication/6675. 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.

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All whistleblowing concerns, however
received, are investigated thoroughly and the
Board receives summary reports on a regular
basis. During 2018, the whistleblowing
hotline received nine calls and 18 concerns
were raised through other channels.
The whistleblowing reports received
covered a broad range of potential issues
related to breach of Rotork policies, human
resources issues and dishonest behaviour.

Anti-bribery and corruption
Rotork has a zero tolerance policy to
bribery and corruption worldwide,
irrespective of country or business culture.
Our Ethics and Values Statement makes it
clear that our employees will never offer,
pay or solicit bribes in any form. In 2019,
we will be publishing a new Anti-Bribery
and Corruption Policy. Our Group Gifts
and Hospitality Policy, which was updated
in July 2018, clarifies where gifts and
hospitality are acceptable and the actions
that our staff are required to take when
they intend to give or receive them.

In 2018, we completed a comprehensive
review of our third party selling
arrangements. The final report contained
recommendations to further mitigate
the risks that our agent networks present.
These recommendations are now being put
into effect and include a reduction in the
number of agents that we engage, a more
thorough process for their appointment and
stringent ongoing monitoring requirements.

Also during the year, our internal audit
team completed the first phase of their
review of our anti-bribery and corruption
policies and procedures and reported their
findings to the Audit Committee, giving
further assurance as to the proportionality
of our policies and procedures. The second
phase will be completed in 2019.

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.

At the end of 2018, the Audit Committee
received a full report on all 2018 activity
for anti-bribery and corruption, both
developments and improvements.

Modern Slavery Act
Rotork has published its Modern Slavery
Act Statement for the 2019 financial year,
which can be found on the Rotork website
at www.rotork.com/en/investors/index/
modernslaverystatement. Rotork’s 2018
Modern Slavery Statement sets out steps
Rotork has taken during the 2018 financial
year to ensure slavery and human trafficking
are not taking place in its business or supply
chains and proposed steps for 2019.

Suppliers
We have a global supply chain for goods
and services that supports our businesses
around the world and recognise that we
have suppliers in countries that are identified
in the Global Slavery Index as high risk.

As reported in our Modern Slavery
Statement, we have a new supply chain
strategy as part of our Growth Acceleration
Programme. This includes a comprehensive
review of our supply chains, with a focus on
significant supply base consolidation. Our
new central strategic sourcing team, led
by a new Procurement Director, will be
responsible for ensuring that our suppliers
act in accordance with our ethical principles.

We expect our suppliers to meet our high
ethical standards and comply with our
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.

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.
In addition, Rotork Controls Limited and
Rotork UK Limited report on their supplier
payment practices in accordance with the
Prompt Payment Regulations.

Progress

• Membership of FTSE4Good and UN
Global Compact was maintained.
• A review of our third party selling
arrangements was completed.
• A review of our anti-bribery and

corruption policies and procedures
was completed.

• Modern Slavery training course was

launched.

• 2018 Modern Slavery Act Statement

was published.

2019 targets

• Roll out a new staff code of conduct

across the Group.

• Complete implementation of the
recommendations from the third
party selling arrangements review.
• Complete a further comprehensive

bribery risk assessment.

• Update and relaunch the anti-bribery

and corruption training for all
employees to include an introduction
from the CEO and launch a short
training course on gifts and
hospitality.

• Take further opportunities to

establish tone from the top and
embed ethics policies.

ROTORK ANNUAL REPORT 2018

STRATEGIC REPORT

CORPORATE SOCIAL
RESPONSIBILITY
CONTINUED

Rotork considers it important to
contribute to and engage positively in
the communities in which we operate,
and to be a good community
neighbour around the world.

Community
involvement

•

In Winston-Salem, USA, employees
donated food to victims of Hurricane
Florence, which hit the North Carolina
coast, and to the local food bank, as
well as donating Christmas gifts for
children through the Salvation Army
Angel Tree programme.
In Tulsa, USA, employees donated more
than 420 pounds of food to the Eastern
Oklahoma Food Bank.
In Bath, UK, our apprentices raised £650
through various different fundraising
activities for the Royal Brompton and
Harefield Hospital and Cry – Cardiac
Risk in the Young, preventing young
sudden cardiac deaths through
awareness, screening and research,
and supporting affected families.

• Our team in Wolverhampton, UK,

collected and donated Easter eggs and
cash for the Acorns Children’s Hospice.
• Our Leeds, UK, team collected 85 Toys
for the Mission Christmas Appeal.

In addition to these local charitable and
community activities, Rotork has reviewed
its support to major charities this year to
ensure these are closely aligned to our own
business activities. We have supported
three major charities in 2018; Engineers
Without Borders, Pump Aid and
Renewable World.

Overview
We regard this as part of our ongoing
responsibilities as a good corporate citizen.
This links to our values which include
producing a positive and beneficial impact
in the communities in which we operate.
Rotork contributes 0.1% of profits to
nominated international charities and a
further 0.1% of profits to local charitable
causes around the world.

Local charity committees at each of our sites
support charitable causes that are important
to them locally with volunteer work,
fundraising and making donations. This
empowers local employees to decide how
to distribute funds and support their local
communities. Rotork encourages these
efforts. Local community involvement
highlights from the year include:

• Our India team provided support
following the Gaja Cyclone which
affected most parts of South India in
2018. Our employees donated relief
items such as water bottles, milk
powder, biscuits, candles & matches,
sanitary napkins, mosquito coils,
blankets and medicines. Members of
the corporate social responsibility team
visited the affected areas in person and
donated the relief items themselves.
• Our China team donated the cost of an
operation to Heart 2 Heart, a charity that
provides lifesaving heart operations to
children of families unable to afford them,
and who would otherwise not survive.
The team also donated to Shanghai
Sunrise, a charity that provides high
school education to underprivileged
children by sponsoring one student
through three years of high school.
In Houston, USA, employees raised
money and participated in the MS150,
a two-day 150 mile bike ride to raise
awareness for Multiple Sclerosis.

•

44 ROTORK ANNUAL REPORT 2018

Pump Aid’s mission is to achieve lasting
positive change in poor and rural
communities by improving the quality,
availability and use of water through
training local entrepreneurs. They use
simple but effective pumps to provide
access to safe water, child-friendly toilets
and handwashing stations. They ensure
sustainability by supporting and training
communities so that they can maintain
their new facilities ongoing.

Rotork’s contributions will help to install
more pumps and enable a number of
mechanics to benefit from training in
how to maintain a wider range of pump

technologies, meaning that communities
no longer go without convenient access to
water when their pump breaks down.

Pump Aid also support subsistence farming
through irrigation; low cost access to
effective irrigation is key to building
resilience. They also help in improvement
of waste management in urban poor
settlements.

Contributed to Pump Aid

£21,000

Engineers Without Borders inspires
and supports people to respond to global
challenges using science, technology and
engineering and showcases the important
role engineering plays around the world
with the aim to ignite passion for
engineering and increase enrolment
in engineering education. Rotork is
supporting ambassadors to deliver
workshops in primary and secondary
schools to encourage young people
to explore the most pressing human
development issues and inspire them to
reflect, discuss and realise how they can
be part of the solution by becoming
engineers. With Rotork’s support, in 2019
they will focus specifically on workshops
that focus on access to water and power.

We are also exploring not just inspiring
the next generation of engineers through
Rotork staff becoming ambassadors
themselves and delivering workshops but
also volunteering through collaborative
engineering projects in alignment with our
own objectives.

Contributed to Engineers
Without Borders

£42,000

Renewable World alleviates poverty
in the developing world through the
installation of community-owned
renewable energy systems. Projects
provide clean energy to improve crop
yields, enable communication and
trade and support the growth of
new businesses. Education is improved as
children can study in the evenings, and
schools can open later for adult education.
Affordable energy improves health through
the use of clean lighting and cooking
sources, and because clean water can
be pumped direct to households.

A sustainable supply of energy means
that healthcare is more accessible because
clinics can keep vaccines, HIV tests and
snakebite anti-venom in fridges.

Contributed to Renewable World

£21,000

Additionally, we continue to support the Royal United Hospitals, Bath, UK in their building
of a new Cancer Unit via their Forever Friends Appeal. To date we have donated £36,000
as part of our commitment to donate £50,000.

Progress

• A new set of core principles

guiding the charities supported
at Group level.

• £42,000 contributed to Engineers

Without Borders.

• £21,000 contributed to Pump Aid.
• £21,000 contributed to Renewable

World.

• £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.

2019 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.

• Continue to align donations and

objectives closely with our
organisational culture and aims.
• Review our involvement to identify

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

ROTORK ANNUAL REPORT 2018

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STRATEGIC REPORT

CORPORATE SOCIAL
RESPONSIBILITY
CONTINUED

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.

Health
and safety

46 ROTORK ANNUAL REPORT 2018

Overview
Policies, procedures and systems of safe
working are in place, supported by 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, health safety &
environment 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 target for 2018 was to have a Lost
Time Injury Rate (LTIR) below 0.34.
The LTIR for 2018 was 0.32 which,
although a slight increase on the
previous year, was below target.

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

Lost Time Incident Rate

1
6
.
0

1
4
.
0

6
3
.
0

2
3
.
0

4
2
.
0

’14

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’16

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’18

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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
driven a further 18% increase in near miss
reporting across the organisation. We
continue to link health and safety with
our continuous improvement activities
where improvement events have to identify
and resolve health and safety issues.

Occupational health
There have been no occupational
diseases reported during 2018. Rotork
continues to promote the wellbeing
of its employees. This includes both
physical health and mental wellbeing.

Awards and recognition
To ensure high standards of health
and safety performance, a number
of businesses within the Group have
gained or have maintained certification
to OHSAS18001. These include
facilities in Bergamo (Italy), Leeds (UK),
Wolverhampton (UK), and Singapore.

Assurance activities
Our businesses continue to embrace the
challenge for continuous improvement
of our health and safety standards. The
assurance process continues to develop
and 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 drop from 87% to 85%,
manufacturing sites have returned back
to 86% and overall the service division
has dropped from 88% to 83%. This
change has occurred due to more detailed
audits in the Asia Pacific Region.

Conclusion
Whilst there was a small increase in
lost time injuries compared with the
previous year, the overall long term
trend is downwards. Increased reporting
of near misses and prompt actioning
of issues raised across our sites is an
area where we can make significant
improvement in the coming year.

Progress

• The 2018 LTIR rate was below the

target set for the year.

• A number of sites have gained or

maintained certification to
OHSAS18001.

2019 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 2019 at
below 0.30.

The fundamental principle of “if we
cannot do a job safely, we will not do the
job” is maintained and communicated

ROTORK ANNUAL REPORT 2018

STRATEGIC REPORT

CORPORATE SOCIAL
RESPONSIBILITY
CONTINUED

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.

Helping the
environment

48 ROTORK ANNUAL REPORT 2018

Introduction
We have a number of policies in place to
help us to reduce our environmental impact
with a particular focus on energy reduction
and managing environmental emissions.

We continue to operate an assembly only
philosophy in the majority of our business
units where we utilise specialist suppliers
for most of our manufactured components
and assemblies. This philosophy has
resulted in the majority of our energy use
being on lighting, heating, cooling and IT
systems.

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 our
factories and offices in reducing waste,
saving energy and water and using
technology to reduce travel.

• We will continue to work in partnership
with 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.

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.

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Emissions per £m of revenue have
decreased from 19.2 TnCO2e to
17.0 TnCO2e

Energy consumption
Overall electricity consumption has
decreased by 1.5% on the previous year
although it has increased 45% compared
with the baseline of 2012. The current
programme of consolidating sites has
started to show an impact on electricity
consumption but this has been offset by
some operational changes such as installing
a new paint plant in Bangalore (India) and
increased production at our Lucca site
which increased operational hours
during 2018.

Absolute gas consumption increased by
2.6% compared with the previous year and
increased by 96% compared with the
baseline year of 2012. The increase is
mainly due to colder weather in North
America during early 2018 and increased
gas consumption by the paint plant in
Lucca due to the site working increased
hours. When considering only gas
consumption used for heating buildings,
normalised on degree days, the overall
consumption of gas has reduced by 19%.
This change has been driven by the
consolidations that have been occurring
in the last quarter of the year.

In 2018, Liquid Petroleum Gas (LPG)
consumption decreased by 9.8% on the
previous year and decreased 7.2%
compared with the baseline of 2012. The
decrease in consumption has been driven
by efficiency in the paint plant in Shanghai
(China) and sites moving away from LPG
forklift trucks to electric forklift trucks.

Where energy consumption cannot be
verified, normally due to the size of the
facility, then an estimation of 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 0.9% of total
emissions declared.

The baseline year remains at 2012.

Progress
A number of improvement activities through
the year have helped reduce the energy
consumed at our sites. The site consolidation
and upgrades to equipment and
infrastructure have contributed to a 4%
reduction in our overall emissions during
the year. When normalising emissions for
the increased turnover, there is an 11%
reduction in emissions on the previous year
and a 5% reduction on the baseline
of 2012.

Lighting upgrades have been completed
across a number of our facilities, most
noticeably the completion of LED lighting
installation in Lucca (Italy) with an
estimated energy saving of 35,000 kWh of
electricity per year. Some of the smaller
subsidiaries have also installed LED lighting
during the year such as Mississauga
(Canada) and Mexico. Further investment is
planned during 2019 to install LED lighting
at some of our smaller locations to help in
the reduction of emissions.

Work continues to reduce emissions from
paint plants in both Leeds (UK) and Lucca
(Italy). Leeds have changed the treatment
chemicals which is estimated to save 75%
of emissions. Lucca have an on-going
project to move completely away from
solvent based paints.

Progress

• Site consolidations and upgrades to
equipment and infrastructure have
contributed to a 4% reduction in our
overall emissions.

• Lighting upgrades have also
contributed to a reduction in
electricity useage.

2019 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; and

• Further reduce gas consumption on
heating normalised on degree days
by 2%.

ROTORK ANNUAL REPORT 2018

STRATEGIC REPORT

CORPORATE SOCIAL
RESPONSIBILITY
CONTINUED

Helping the
environment
continued

Overall oil consumption has increased
compared with the previous year by 20%
but decreased 34% compared with the
baseline year of 2012. The main reason for
this increase is heating oil that has been
purchased for the Taunton (UK) facility. Our
sites in India which were previously high oil
users continue to reduce consumption with
improved consistency of the electrical
supply and solar power which minimises
the use of back-up generators.

To support the continued focus on energy
management, our UK businesses were
recommended for recertification to
ISO50001. 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.

Water conservation
We continue to look for measures which
will reduce our water usage and during
2018, we managed to reduce our water
consumption from 45,315m3 to 44,380m3,
a reduction of 2%. When normalised for
increased turnover, this equates to a 9.6%
reduction on the previous year.

Waste and recycling
We have continued to examine our value
chain this year to understand how our waste
is treated after it leaves our sites. This
investigation found that some of our waste
that was previously described as recycling by
our waste management companies was
actually used in energy recovery. Whilst the
proportion of waste that is going to landfill
has remained static, the amount recycled
dropped to 69% as 8% of waste generated
by the business goes to energy recovery
facilities.

50 ROTORK ANNUAL REPORT 2018

The amount of hazardous waste produced
has increased from 374 tons to 496 tons
mainly due to the increased production in
Lucca (Italy). The amount of hazardous waste
going to landfill decreased from 374 tons to
361 tons as the remainder of the hazardous
waste was used in waste to energy plants.

Overall waste has increased by 21% on the
previous year and by 24% when normalised
for the higher turnover. This increase has
been driven by increased production in Lucca
(Italy) and the consolidation of sites which
has generated increased waste as sites are
closed. No hazardous waste is generated
from our continued support of the nuclear
industry; before any actuators are returned to
site for repair or overhaul the customer must
provide a decontamination certificate prior
to shipping the unit.

Awards and recognition
To ensure high standards of environmental
performance, a number of businesses
within the Group have gained or have
maintained certification to ISO14001.
These include facilities in Bergamo (Italy),
Wolverhampton (UK), Bilbao (Spain) and
Falun (Sweden). Additionally we are looking
to certify more of our manufacturing sites
during 2019, including Bath (UK), Lucca
(Italy) and Shanghai (China).

Internal audit
The management system that sites have to
comply with has been designed to allow
certification to ISO14001. This ensures that
key environmental risks such as emissions
to air, water and ground, waste control
and minimisation activities and energy
reduction are managed both at a corporate
level and also locally. Whilst there are
always areas in which we can improve our
environmental performance, no major
issues were identified from the internal

audit programme during 2018. The internal
audit ensures that all manufacturing sites
are either internally or externally audited
annually and that lower risk sites are
audited at least twice every three years.

Environmental incidents
There have been no reportable
environmental incidents during 2018.
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 process.
The suitability of emergency
response systems are also
included in the internal audit.

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Greenhouse Gas Emissions (GHG) Reporting
In January 2019, 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 off-site
but purchased for heating.

Scope 3
Emissions that are indirect GHG
emissions from sources not owned or
directly controlled by the entity but
related to the entity’s activities.
Scope 3 GHG emission sources
currently required for GHG reporting
include transmission and distribution,
losses associated with purchased
electricity and steam, and well-to-
tank emissions for all energy,
business travel and transport.

Absolute scope 1 and scope 2 emissions have decreased by 3.9% compared with 2018 and increased compared with the baseline year
of 2012 by 20.2%. Emissions per £million of turnover have decreased 11.3% compared with the previous year from 19.2 TnCO2e to
17.0 TnCO2e and decreased 4.8% compared with the baseline of 2012.

Conclusions
We continue to focus on reduction in electricity consumption across the business and upgrading equipment to provide greater energy
efficiency. The consolidation of sites and upgrades in some of our facilities has resulted in the overall reduction of our Scope 1 and
Scope 2 emissions by almost 4%. Whilst there has been an increase in waste, there was an expectation that this would occur when the
consolidation of sites occurred.

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

Helen Barrett-Hague
Group General Counsel and Company Secretary
4 March 2019

ROTORK ANNUAL REPORT 2018

STRATEGIC REPORT

BOARD OF DIRECTORS

1. Martin Lamb
Non-Executive
Chairman

Experience
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 IMI 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.

2. Kevin Hostetler
Chief Executive

3. Jonathan Davis
Finance Director

4. Lucinda Bell
Non-Executive Director

5. Gary Bullard
Non-Executive Director

6. Peter Dilnot

7. Sally James

8. Tim Cobbold

9. Ann Christin

Non-Executive Director

Senior Independent

Non-Executive Director

Andersen

Director

Non-Executive Director

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 now holds a
number of non-executive
directorships.

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.

From April 2019, Peter will

be Chief Operating Officer

Sally James was appointed

as Senior Independent

of Melrose plc, the FTSE 100

Director of Rotork plc on

Tim Cobbold has extensive

experience in leading large,

complex international listed

Ann Christin is currently

Chief Digital Officer of

TechnipFMC plc, a global

27 February 2017. She was

businesses having previously

company that provides

industrial business that

recently acquired GKN.

Prior to this, Peter spent

seven years as Chief

Executive Officer of

international recycling

companies Renewi plc and

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. Before

Danaher, Peter was at the

Boston Consulting Group

(BCG) based in both London

and Chicago.

Managing Director and

General Counsel of UBS

Investment Bank EMEA

from 2001 to 2008, and

previously held a number

of senior legal roles in

non-executive director of

Moneysupermarket.com

Group PLC since April 2013,

non-executive director of

Rotork plc since May 2012,

and non-executive director

of Bank of America Merrill

Lynch International Limited

DAC since December 2018.

investment banks in London

Smiths Group/TI Group

and Chicago. She has been

where he worked for

been the Chief Executive

Officer of Chloride Group

projects and services for the

energy industry. She brings

plc, De La Rue plc and most

30 years of experience from

recently, UBM plc. Prior

to this he held senior

management positions at

18 years. He has been a

non-executive director at

Drax plc for the past eight

years. Tim qualified as a

chartered accountant at

Price Waterhouse.

the oil and gas industry,

where she has served

in a variety of senior

management positions.

In addition, Ann Christin has

served as a non-executive

director of Veidekke ASA

and currently holds a

director position with

Glitre Energi, a renewable

energy company.

Prior to joining Rotork in
February of 2018, Kevin
served as the CEO of FDH
Velocitel, a private equity
backed real-estate,
engineering and
construction business serving
the telecommunications and
infrastructure industries in
North America. Prior to this,
Kevin was an executive
advisor to several private
equity firms. His roles
included CEO of a speciality
valve manufacturer and
executive chairman of an
engineered high-pressure
vessel company serving the
cryogenics and LNG
industries. From 2005 to
2012, Kevin was in various
senior executive roles at
the publicly traded IDEX
Corporation, including
serving as an officer of the
company where he led
the Fluid and Metering
Technologies Segment.
Kevin also had responsibility
for leading their Asia and
Emerging Markets
businesses. From 1997 to
2004, he held a number of
business leadership positions
and senior strategic and
business development roles
at Ingersoll Rand.

Appointment
2014

External appointments
Chairman of Evoqua Water
Technologies Corp

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

2018

N/A

2010

N/A

2014

2010

2017

2012

2018

Non-executive director of
Derwent London plc

Founder and CEO of Catquin
Ltd

Non-executive director of
Crest Nicholson Holdings plc

Chairman of New Model
Identity Ltd

Treasurer and National
Trustee at Citizens Advice

Non-executive director and
Remuneration Committee
Chair of Spirent
Communications plc

Non-executive chairman of
Gooch & Housego plc

CEO of Renewi plc

Non-executive director,

Drax plc

Chief Digital Officer of

TechnipFMC plc

Director, Glitre Energi

Non-executive director of

Moneysupermarket.com

Group plc

Non-executive director of

Abdi Limited

Non-executive director of

Hermes

Investment Management

Trustee of Legal Education

Foundation

N A R

N R A

52 ROTORK ANNUAL REPORT 2018

2. Kevin Hostetler

Chief Executive

3. Jonathan Davis

Finance Director

4. Lucinda Bell

5. Gary Bullard

Non-Executive Director

6. Peter Dilnot
Non-Executive Director

7. Sally James
Senior Independent
Director

8. Tim Cobbold
Non-Executive Director

9. Ann Christin
Andersen
Non-Executive Director

Committee membership

From April 2019, Peter will
be Chief Operating Officer
of Melrose plc, the FTSE 100
industrial business that
recently acquired GKN.
Prior to this, Peter spent
seven years as Chief
Executive Officer of
international recycling
companies Renewi plc and
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. Before
Danaher, Peter was at the
Boston Consulting Group
(BCG) based in both London
and Chicago.

Sally James was appointed
as Senior Independent
Director of Rotork plc on
27 February 2017. She was
Managing Director and
General Counsel of UBS
Investment Bank EMEA
from 2001 to 2008, and
previously held a number
of senior legal roles in
investment banks in London
and Chicago. She has been
non-executive director of
Moneysupermarket.com
Group PLC since April 2013,
non-executive director of
Rotork plc since May 2012,
and non-executive director
of Bank of America Merrill
Lynch International Limited
DAC since December 2018.

Nomination
Committee

Remuneration
Committee

Audit
Committee

Denotes
Chair

Tim Cobbold has extensive
experience in leading large,
complex international listed
businesses having previously
been the Chief Executive
Officer of Chloride Group
plc, De La Rue plc and most
recently, UBM plc. Prior
to this he held senior
management positions at
Smiths Group/TI Group
where he worked for
18 years. He has been a
non-executive director at
Drax plc for the past eight
years. Tim qualified as a
chartered accountant at
Price Waterhouse.

Ann Christin is currently
Chief Digital Officer of
TechnipFMC plc, a global
company that provides
projects and services for the
energy industry. She brings
30 years of experience from
the oil and gas industry,
where she has served
in a variety of senior
management positions.
In addition, Ann Christin has
served as a non-executive
director of Veidekke ASA
and currently holds a
director position with
Glitre Energi, a renewable
energy company.

1. Martin Lamb

Non-Executive

Chairman

Experience

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 IMI board in

boards of a number of

engineering businesses in a

non-executive capacity,

both in the public and

private equity arena.

1996, and serving as Chief

the telecommunications and

then as Finance Director of

directorships.

construction business serving

Financial Controller, and

Executive from 2001 to

infrastructure industries in

2013. He has served on the

North America. Prior to this,

the Rotork Controls division,

and in 2010 was appointed

Group Finance Director.

Jonathan joined Rotork in

Lucinda was Chief Financial

Gary previously held senior

2002 after holding a number

Officer of the British Land

management positions,

of finance positions in listed

Company plc until January

including sales and

companies. He gained

experience of the Rotork

business initially as Group

2018. She served on the

board of British Land from

2011 and now holds a

number of non-executive

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.

Prior to joining Rotork in

February of 2018, Kevin

served as the CEO of FDH

Velocitel, a private equity

backed real-estate,

engineering and

Kevin was an executive

advisor to several private

equity firms. His roles

included CEO of a speciality

valve manufacturer and

executive chairman of an

engineered high-pressure

vessel company serving the

cryogenics and LNG

industries. From 2005 to

2012, Kevin was in various

senior executive roles at

the publicly traded IDEX

Corporation, including

serving as an officer of the

company where he led

the Fluid and Metering

Technologies Segment.

Kevin also had responsibility

for leading their Asia and

Emerging Markets

businesses. From 1997 to

2004, he held a number of

business leadership positions

and senior strategic and

business development roles

at Ingersoll Rand.

Appointment

2014

2018

External appointments

Chairman of Evoqua Water

N/A

Technologies Corp

Member of the European

Advisory Board of AEA

Investors (UK) Ltd

2010

N/A

2014

2010

2017

2012

2018

Non-executive director of

Founder and CEO of Catquin

Derwent London plc

Ltd

Non-executive director of

Chairman of New Model

Crest Nicholson Holdings plc

Identity Ltd

Treasurer and National

Trustee at Citizens Advice

Non-executive director and

Remuneration Committee

Chair of Spirent

Communications plc

Non-executive chairman of

Gooch & Housego plc

CEO of Renewi plc

Non-executive director of
Moneysupermarket.com
Group plc

Non-executive director of
Abdi Limited

Non-executive director of
Hermes

Investment Management

Trustee of Legal Education
Foundation

Non-executive director,
Drax plc

Chief Digital Officer of
TechnipFMC plc

Director, Glitre Energi

N A R

N R A

ROTORK ANNUAL REPORT 2018

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CORPORATE GOVERNANCE REPORT

Dates of Board meetings

JAN

FEB

MAR

APR

MAY

JUN

JUL

AUG

SEP

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DEC

54 ROTORK ANNUAL REPORT 2018

Introduction from the Chairman
On behalf of the Board, I am pleased to introduce Rotork’s
Corporate Governance Report for 2018. 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 (the 'Code')
have been applied across our Group.

As a Board, we have continued to focus strongly on broader
strategic issues this year. In this respect we have reviewed and
supported the completion of the Group-wide business reviews
and the subsequent implementation of the Growth Acceleration
Programme, including the approval of major capital investment
and restructuring programmes. We have received regular in-depth
progress reports and presentations from the Chief Executive and
from those executives responsible for leading the various elements
of the Growth Acceleration Programme during 2018 and this will
continue throughout 2019. During this period of change, strong
corporate governance is vital to ensure our business is protected in
the long term and the interests of all stakeholders are properly
taken into account.

The Board also continued to work on ensuring that the Group’s
risk management processes remain robust and continue to develop
in response to Rotork’s strategy and the wider market and
regulatory environment. The Board held a risk appetite workshop
in April 2018 and have taken an active approach to ensuring that
the Board’s risk appetite is fully reflected in the Group’s policies
and procedures and in its practices.

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 interact with the wider communities in which
we operate, and our environmental impact, are set out in our
Corporate Social Responsibility Report (see pages 44 to 45 and 48
to 51). In addition, details of our relationships with our suppliers are
set out on page 43. The Board has approved the appointment of
Tim Cobbold as a designated Non-Executive Director to support
increased engagement with employees under the recommendations
of the updated Corporate Governance Code. This will complement
the widespread employee engagement forums that have been
established over the last year to support the roll out of our Growth
Acceleration Programme and to solicit feedback and input from
employee groups. An Internal Communications Director has also
been appointed to support this.

In respect of Rotork’s employees, we have supported a full review
in 2018 of Rotork’s culture, talent development, succession
planning, performance approach and diversity and have had a
number of presentations on this topic from the Chief Executive
and the Group HR Director. Further details of actions arising out
of this review and of how we have considered the interests of
our employees during the year are set out on page 40. Greater
workplace diversity, has been a particular area of focus for the
Board. As a result, diversity has been made a standing item on
the Board agenda and in December the Board approved a new
Diversity Plan for the Group, with clear actions and supporting
key performance indicators.

As previously reported, Kevin Hostetler joined the Board on
12 February 2018, becoming Chief Executive on 12 March 2018,
and I reverted to my previous role as Non-Executive Chairman.
On 1 December 2018, we welcomed Tim Cobbold and
Ann Christin Andersen to the Board as non-executive directors
and also to each of the three principal Committees. Gary Bullard
will not be seeking re-election at the Annual General Meeting to
be held on 26 April 2019 and Tim Cobbold will succeed Gary as
the Chair of the Remuneration Committee from that date.

As a Board we regularly review and discuss our ways of working
and our effectiveness. In 2018, we performed a review of our
effectiveness via a Board questionnaire facilitated by the Company
Secretary. Further details are set out at page 58.

In 2018, Rotork was subject to the 2016 UK Corporate Governance
Code and I am happy to report that Rotork complied with the Code
in all respects, save that, following Peter France’s resignation as
Chief Executive in July 2017, I acted as Executive Chairman until
Kevin Hostetler became Chief Executive on 12 March 2018, following
which I resumed my previous role as Non-Executive Chairman.

We note that from 1 January 2019 an updated version of UK
Corporate Governance Code applies to Rotork. Whilst we have
reported against the 2016 version of the Code in this report,
during the year the Board and Committees have taken into
consideration the updates made to the Code and have taken
appropriate action to ensure Rotork’s readiness to comply with
the updated Code during 2019.

Business review
and strategy

Financial

Other work

Board
activity
2018

Governance
and
stakeholders

Internal
controls and risk
management

Business review and strategy
• Received regular performance and business updates from the

Chief Executive.

• Set the Group’s strategy and vision.
• Received regular updates on the Growth Acceleration

Programme.

• Received presentations from divisional and Group business
functions to consolidate understanding and awareness
of activities and performance within the relevant divisions and
business functions.

Martin Lamb
Chairman
4 March 2019

Financial
• Received regular financial performance updates from the

Finance Director.

• Approved 2019 budget.
• Approved 2017 Annual Report & Accounts and Annual

General Meeting (AGM) business.

• Approved 2018 interim report and trading updates.
• Approved 2017 final dividend recommendation and 2018

interim dividend declaration.

• Received a presentation from the Group Treasurer.

Other
• Recruited and embedded Kevin Hostetler as Chief Executive.
• Approved appointment of Ann Christin Andersen and Tim

Cobbold on recommendation of the Nomination Committee.
• Reviewed plans to redevelop the Group’s Bath headquarters,

engineering centre of excellence and factory.

• Reviewed and received presentations from the Group HR

Director on the Group’s diversity plan and established diversity
as a standing Board agenda item.

• Received regular briefings on the Group’s readiness for Brexit.

Internal controls and risk management
• Received regular reports on risk including quarterly executive

risk summary.

• Received regular reports on litigation and regulatory matters.
• Held a risk appetite workshop and reviewed the Group’s risk

• Received updates on the Group’s third party selling

arrangements review.

• Received updates on Whistleblowing reports.

Governance and stakeholders
• Reviewed feedback from institutional shareholders.
• Approved updated schedule of matters reserved for Board and
terms of reference for Board Committees for new Corporate
Governance Code.

• Approved the 2018 Modern Slavery Statement.
• Received regular updates on health and safety matters across

the Group.

• Received papers and updates on the Group’s readiness to
comply with the EU General Data Protection Regulation
(GDPR).

ROTORK ANNUAL REPORT 2018

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Rotork’s female representation on the Board was 33% as at
31 December 2018. Once Gary Bullard steps down after the
Annual General Meeting, female representation will rise to 38%.
This exceeds the updated Hampton-Alexander Review target of
33% female representation on the Board by 2020.

The biographies of the directors and details of the membership of
the Board committee are set out on pages 52 to 53.

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 2018

0-3 years
3-6 years
6-9 years

Balance of independent and
non-executive directors as
at 31 December 2018

Non-executive directors
Executive directors
Non-executive chairman

Balance between male and
female directors on the Board
as at 31 December 2018

Male
Female

CORPORATE GOVERNANCE REPORT
CONTINUED

UK Corporate Governance Code compliance statement
The UK Corporate Governance Code 2016 (the 'Code') is the
standard against which we measured ourselves in 2018. The Code
is available to download at www.frc.org.uk. In 2018 an updated
version of the Code was published and applied to Rotork plc from
1 January 2019. We will report on our compliance with the
updated 2018 version of the Code in our 2019 Annual Report.

Throughout the year ended 31 December 2018, Rotork plc fully
complied with the Code, save that up to 12 March 2018 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.
On 12 March 2018 Kevin Hostetler took up the post of Chief
Executive and Martin Lamb reverted to his previous role as
Non-Executive Chairman.

The following section on pages 56 to 59 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
generating value for its shareholders and contributing to wider
society. This is 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,
employee 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 nine
members: the Chairman, the Chief Executive, the Finance Director
and six 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, information technology, legal,
finance 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 Ann Christin Andersen and Tim Cobbold as non-executive
directors in December 2018 has further strengthened the mix of
skills on the Board.

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 opposite. Gary Bullard is the
longest serving non-executive director and, as he will have been in
office for nine years in June 2019, he will not seek re-election at
the Annual General Meeting to be held on 26 April 2019.

56 ROTORK ANNUAL REPORT 2018

Directors’ attendance at Board and Committee meetings
during 2018

No. of meetings

Board

Audit
Committee

Remuneration
Committee

Nomination
Committee

Lucinda Bell
Gary Bullard
Jonathan Davis
Peter Dilnot
Kevin Hostetler
Sally James
Martin Lamb
Ann Cristin Andersen(i)
Tim Cobbold(i)

Maximum number of

meetings

8
8
8
8
8
8
8
1
1

6
6
6(ii)
6
6(ii)
6
6(ii)
1
1

4
4
2(ii)
4
4(ii)
4
4(ii)
1
1

2
2
2(ii)
2
2
2
2
0
0

(i) Appointed to the Board with effect from 1 December 2018.
(ii) Attending 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 55, Martin Lamb
carried out the Chief Executive role on a temporary basis following
the resignation of Peter France in July 2017. He resumed his role as
Non-Executive Chairman on 12 March 2018 when Kevin Hostetler
became Chief Executive.

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

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. This was updated
for the updated Code in December 2018.

In 2018, the number of formal Board meetings were reduced from
nine to six. These meetings are supplemented with five Board
update calls. There were also two short Board meetings during the
year to approve the Group’s April and November trading
statements. The Chairman, through the Company Secretary,
ensures that the Board agenda and all relevant information is
circulated to the Board members sufficiently in advance of the
meeting. 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 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 2018, the Board visited Rotork’s
operations in Houston, USA.

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.

Location of Board meetings

■ 2018 – Houston, USA
■ 2017 – Rotterdam, The Netherlands
■ 2016 – Lucca, Italy
■ 2015 – Shanghai, China
■ 2014 – Winston-Salem, USA

ROTORK ANNUAL REPORT 2018

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CORPORATE GOVERNANCE REPORT
CONTINUED

At Board meetings, the Board receives presentations from senior
management. The principal purpose of the presentations is to
consolidate the Board’s understanding of the Group’s plans and
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 can be
considered in wider Board discussions, particularly around strategy
and risk. In June 2018, the Board dedicated an extra day before
the June Board meeting to receive presentations from senior
management on each of the Growth Acceleration Programme
workstreams.

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 2018, development activities for the
directors included the 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. Having carried out externally facilitated Board
evaluations in 2016 and 2017, the formal evaluation of the Board’s
and Committees’ performance was carried out in late 2018 by
means of a detailed questionnaire created internally by the
Company Secretary in consultation with the Chairman and Chairs
of the Committees. This was completed by all directors.

The results of this questionnaire showed broad and material
improvements made in those areas for development identified in
the Board’s 2017 effectiveness review, including in particular in the
quality of executive reporting to the Board and the enhancement
of the Group’s risk management framework. Areas identified for
additional focus include talent and succession planning and further
development of the Group’s long-term strategy. Actions will be
taken to address these areas throughout 2019.

The Chairman’s performance was also assessed using a
questionnaire, with a follow up meeting with the Non-Executive
Directors led by the Senior Independent Director. This feedback
was used by the Senior Independent Director to discuss with the
Chairman his performance in December 2018.

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 2018, the Board regularly reviewed the effectiveness of the
Group’s risk management and internal control systems. Further
details of reports undertaken and reviewed are set out in the
Audit Committee report on pages 62 and 63.

58 ROTORK ANNUAL REPORT 2018

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
focuses 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.

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 22 to 28.

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 with an external whistleblowing

hotline.

• Robust assurance processes and controls over financial

reporting and health and safety procedures.

• Regular controls confirmations from the business.

Throughout 2018, the arrangement with PwC to provide internal
audit services has continued, with the function being led by an
experienced Head of Risk and Internal Audit from PwC.

As set out in Strategic Report, the continuous improvement and
execution of a comprehensive and robust system of risk
management is a high priority for Rotork. Many of the principal
risks are aligned with areas of accelerated growth and in a number
of areas the risk trend is increasing. In that context, the Audit
Committee has sought information and insight over the quality of
the control environment and three lines of defence, together with
recommendations for improvements to controls from both internal
and external audit. In response, a series of measures and actions
have been agreed by management to further enhance the control
environment including improvements to accountability, consistency
and the development of a stronger second line of defence. This
work will be a mix of immediate actions mitigating identified risks
as well as longer term improvements aligned to the investment in

the new Enterprise Resource Planning (ERP) system. In addition,
the process for the follow up of recommendations for
improvement to controls which management are charged with
implementing has been strengthened.

In November 2018, a new in-house Risk and Internal Audit
Manager was recruited who has brought some excellent
experience to the team, working alongside the PwC team to
support ongoing delivery and planned developments in risk
management and internal audit. Staffing of the central risk and
internal audit team will be kept under review during 2019.

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.

As part of the Finance team’s response to support the Growth
Acceleration Programme, and in light of the above, the
organisational structure and reporting lines are being revised to
bring greater accountability and clarity.

Whistleblowing
All whistleblowing concerns reported through Rotork’s
whistleblowing policy and procedures (which are described on
page 42) are investigated thoroughly following the initial
assessment process and reported to the Board. The Board reviews
the volume and nature of the cases reported, the manner in which
these have been investigated and the actions arising from any
investigation.

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 2018, the Board, and in particular the Chief
Executive 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 and conference calls.
• Attending shareholder events.
• Hosting investor site visits.
• Attending conferences.
• Arranging ad hoc one to one and group meetings and calls

with shareholders.

A new Investor Relations Director joined Rotork in February 2019
to increase the resources available to support existing and
potential shareholders and enhance our reporting to shareholders.

During the year we maintained an expanded investor
communications programme. Shortly after Rotork’s 2017 results
announcement, Kevin Hostetler embarked on a shareholder
roadshow, meeting all Rotork’s top investors to explain his
background and plans for the Group. Subsequently and
throughout the year, Kevin Hostetler and Jonathan Davis have
carried out a number of further roadshows, meetings and calls,
updating both current and potential investors on the progress of
our Growth Acceleration Programme. Finally, the Board engaged
an external consultant to conduct research with Rotork top
shareholders, to better understand perceptions of Rotork and any
potential room for improvement. The results of this review were
presented to the Board in October and key recommendations will
be followed up on throughout 2019.

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 shareholders. In addition,
the Board receives reports from its brokers which give anonymised
feedback from investors.

Rotork also maintains a comprehensive investor relations section
on its website which provides a variety of resources for investors
including current webcasts, presentations and press releases as
well as annual interim reports. The website can be accessed at
www.rotork.com/en/investors.

Electronic communications are also used by Rotork to
communicate with its shareholders. All shareholders can request
to receive the Annual Report & 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 Chief Executive, 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 2018

Plc Board
Martin Lamb

Audit
Committee
Lucinda Bell

Remuneration
Committee
Gary Bullard

Nomination
Committee
Martin Lamb

ROTORK ANNUAL REPORT 2018

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AUDIT COMMITTEE REPORT

Committee members1
Lucinda Bell
Sally James
Gary Bullard
Peter Dilnot
Ann Christin Andersen
Tim Cobbold

1 As at 31 December 2018

Dates of Audit Committee meetings

JAN

FEB

MAR

I am pleased to present the report of the Audit Committee for the
year ended 31 December 2018. This year the key areas of focus for
the Audit Committee, in addition to its usual schedule of work,
have been:
• Receiving reports from Internal Audit on Rotork’s control

•

framework and recommendations for upgrading it.
Identifying a successor audit partner to Nigel Thomas at
Deloitte and supporting the transition to the new audit partner.
• Strengthening the connection between internal audit work and

the controls relied on to mitigate principal risks.

Committee composition and governance
All Audit Committee members are independent non-executive
directors. On 1 December 2018, Ann Christin Andersen and
Tim Cobbold joined the Audit Committee, further strengthening it.
As mentioned on pages 55, Gary Bullard will not seek re-election at
the Annual General Meeting to be held on 26 April 2019 and will
therefore step down as a member of this Committee from that date.

I hold professional accounting qualifications and am deemed to
have recent and relevant financial experience. Tim Cobbold also
holds professional accounting qualifications. Biographies of each
member of the Audit Committee can be found on pages 52 to 53.

The Audit Committee operates under formal terms of reference
which are reviewed annually and were last updated in December
2018. A copy of the terms of reference is available on the Rotork
website at www.rotork.com/en/investors/index/committees.

Integrity of financial reporting.

The principal responsibilities of the Audit Committee are to review
and report to the Board on the:
•
• Application of significant accounting policies and judgements.
•

Internal audit programme, its remit, resourcing and
effectiveness.

APR

MAY

JUN

and risk management systems.

• Adequacy and effectiveness of the Company’s internal controls

JUL

AUG

SEP

OCT

NOV

DEC

60 ROTORK ANNUAL REPORT 2018

• Appointment, independence and remuneration of the external

auditor.

• Effectiveness of the external audit process.

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 57. 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 2018 is set out opposite.

Financial reporting
A key role of the Audit Committee in relation to financial reporting
is to review the quality and appropriateness of the half year and
year end financial statements with a particular focus on:
• Accounting policies and practices.
• The clarity of disclosures and compliance with International
Financial Reporting Standards, UK company law and the UK
Corporate Governance Code.

• Material areas in which significant judgements have been

applied or where there has been discussion with the external
auditor.

• Upon request of the Board, advising the Board on whether

the Annual Report & Accounts are fair, balanced and
understandable and provide the information necessary for
shareholders to assess the Company’s performance as a
whole.

To assist the Audit Committee, the Finance Director and the
Group Financial Controller present a detailed report outlining
significant matters on the half year and year end 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.

Financial
reporting

Internal
controls and risk
management

External
audit

Other
work

Activity
2018

Internal
audit

Financial reporting
• Reviewed the Annual Report & Accounts (including whether
they are fair, balanced and understandable), the Corporate
Governance Report and draft results announcements.
• Reviewed the material judgements and estimates, going

concern assumption and viability statement in the Annual
Report & Accounts.

• Reviewed the half year accounts including material
judgements, 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 April and November trading updates.
• Reviewed and approved response to FRC letter on certain

aspects of Annual Report & Accounts 2017.

Internal controls and risk management
• Reviewed internal controls and risk management, including

consideration of processes and procedures for risk
management and the effectiveness of the internal controls
framework.

• Reviewed significant internal control reports, findings and

management responses.

• Reviewed internal audit programme, its remit, resourcing and

effectiveness.

• Received reports on the implementation of process

improvements recommended for action following internal
audit reviews.

• Reviewed anti-bribery and corruption procedures and the

recommendations for further work in 2019.

External audit
• 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 undertaken by the external

auditor and the policy on non-audit work.

• Considered audit fees, engagement terms and risk of external

auditor leaving the market.

• Considered appointment of the external auditor.

Internal audit
• Considered resourcing required for Risk and Internal Audit

team, including the appointment of a new in-house Risk and
Internal Audit Manager to work alongside the PwC team.
• Reviewed internal audit programme, its remit, resourcing and

effectiveness.

• Meetings with the Head of Risk and Internal Audit without

management present.

Other work
• Considered accounting and corporate governance

developments including the changes under the 2018
Corporate Governance Code.

• Reviewed Audit Committee effectiveness and terms of

reference.

• Reviewed updated whistleblowing policy and gifts and

hospitality policy.

• Approved the Audit Committee's schedule of work for 2019.

ROTORK ANNUAL REPORT 2018

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STRATEGIC REPORT

AUDIT COMMITTEE REPORT
CONTINUED

The principal matters of judgement and estimation considered by
the Audit Committee in relation to the 2018 accounts and how
they were addressed were:
• Goodwill impairment testing. The year end balance sheet

includes goodwill of £230.2m, this represents 30.4% of the
Group’s assets. The Audit Committee reviewed the carrying
value of goodwill by examining a report from the Group
Financial Controller which sets 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 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 no impairment being made in 2018. The Audit
Committee also considered whether any reasonable change
would result in an impairment in any cash generating unit. The
Audit Committee reviewed the sensitivities and impairment
disclosures in note 10 and were satisfied these are balanced
and fair.

• Retirement benefit schemes. At 31 December 2018, the Group
operates two defined benefit retirement plans, both of which
are now 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.

The last review by the FRC Corporate Reporting Review team of
the Rotork plc Annual Report & Accounts was for the year ended
31 December 2017. Following their review and responses from
Rotork, the FRC advised in November 2018 they had closed their
enquiries.

External auditor
The year under review marks the fifth year during which Deloitte
LLP has been the Group’s external auditor following a formal
tender process in 2014. 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. As a result, in 2019 Nigel Thomas will hand over
to Dave Griffin as Deloitte LLP’s lead audit partner for Rotork.

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.

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 as the Committee
are satisfied with the work of Deloitte during the year, the decision
was made not to re-tender. The Audit Committee has
recommended that Deloitte LLP be re-appointed auditors for the
2019 financial year and Deloitte’s continuing appointment will be
subject to shareholder approval at the 2019 AGM.

Statement of compliance
The Company confirms that it has complied with terms of The
Statutory Audit Services for Large Companies Market Investigation
(Mandatory Use of Competitive Tender Processes and Audit
Committee Responsibilities) Order 2014 (the 'Order') throughout
the year.

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 is compliant with EU legislation
on permitted non-audit fee services.

The policy specifies certain activities which the external auditor may
not undertake such as work related to the internal audit function and
work related to certain tax activities. It also 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 &
Accounts.

Internal controls, internal audit and 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.

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

During 2018, the arrangement with PwC to provide internal audit
services has continued, with the function being led by an
experienced Head of Risk and Internal Audit from PwC. In
November 2018, a new in-house Risk and Internal Audit Manager
has been recruited and will bring some excellent experience to the
team, working alongside the PwC team which bring an
independent perspective to our audits and methodology. The
Group continues to use Rotork staff to undertake internal 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. Staffing of the central risk and
internal audit team will be kept under review during 2019.

auditor.

• The FRC audit quality review report on selected audits

undertaken by Deloitte.

62 ROTORK ANNUAL REPORT 2018

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.

PwC has now been internal auditor for over a year and as they
have gained an understanding of the Group their insights have
provided the Audit Committee with more information to further
improve the quality of the control environment and the three lines
of defence.

Internal audit has delivered financial audit reports for 32 of our
global locations during 2018. Guidance is provided to auditors
about the nature and extent of testing to be undertaken and to
ensure auditors focus their efforts in key areas of risk, tailored by
site. Investment has also been made to improve the quality and
consistency of reporting of issues.

Furthermore, they have undertaken seven risk-based internal audit
reviews during 2018, covering the following areas:
•
IT disaster recovery.
• Treasury management.
• Anti-bribery and corruptions measures.
• Product non-conformity reporting.
• Major contract approvals.
• Staff training and induction (safety related).
• Single-sourced components.

The internal audit team continue to administer the process for sites to
confirm the operation of key financial controls on at least a quarterly
basis. This process provides good insight into key areas of risk.

The Audit Committee continues to receive reports at the main
meetings on internal audit activity, any significant matters arising
and the management response. During the year, the internal audit
team made recommendations for improvement to controls, which
management are charged with implementing. The status and
effectiveness of actions are monitored by internal audit and regularly
reported to the Audit Committee. During 2018, the process for
internal audit ‘follow up’ of agreed management actions arising
from internal audit reviews has been revised to bring additional
rigour and consistency to the process. This has led to a greater focus
on where control gaps remain and the actions outstanding.

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

During the year, the Audit Committee also considered reports on
anti-bribery and corruption procedures.

work will be a mix of immediate actions mitigating identified risks
as well as longer term improvements aligned to the investment in
the new Enterprise Resource Planning (ERP) system.

During 2018, PwC have undertaken a risk maturity assessment,
looking at all aspects of the Group’s risk management processes
and the connections between those various processes and the
day-to-day operations of the Group. A number of enhancements
have been made in the year to improve the connections between
the key aspects of the risk management framework in line with
this assessment and further work is planned for the coming year.
The Key Risk Indicators have been updated and enhanced,
technology has been embedded to support the facilitation of the
risk management process and there has been increased focus on
reporting of risks which exceed the Board’s risk appetite.

PwC completed a review of the effectiveness of the internal audit
function in early 2018 comparing against industry best practice
and standards. The Audit Committee reviewed the progress made
against the resultant action plan in December 2018. Improvements
introduced include an Internal Audit Charter, enhancements to
Internal Audit methodology and guidance, and delivery of a
programme of risk-based internal audits, alongside financial audits.

The 2019 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
and approved the 2019 programme at its December 2018 meeting.

Whistleblowing
At the December meeting, the Committee reviewed Rotork’s
whistleblowing policy and procedures. It was not considered
necessary to make any changes to these following the last update
at the end of 2017. From 2019, review of the whistleblowing policy
and procedures will be the responsibility of the Board in
accordance with the 2018 Corporate Governance Code.

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 Company Secretary, including
how it discharged its responsibilities.

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 2019
Key areas of focus for the coming year are:
• To review progress and the impact of the programme to

enhance the internal control framework, through improved
accountability, segregation of duties, consistency and a
stronger second line of defence. This work will focus on certain
immediate action areas as well as continuing as a component of
the development of the new ERP system.

• Continue to support the transition of the new external audit

partner and Risk and Internal Audit Manager.

Lucinda Bell
Chair of the Audit Committee
4 March 2019

ROTORK ANNUAL REPORT 2018

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STRATEGIC REPORT

NOMINATION COMMITTEE REPORT

Committee members1
Martin Lamb
Lucinda Bell
Gary Bullard
Sally James
Peter Dilnot
Ann Christin Andersen
Tim Cobbold
Kevin Hostetler

1 As at 31 December 2018

Dates of Nomination Committee meetings

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APR

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JUN

JUL

AUG

SEP

OCT

NOV

DEC

64 ROTORK ANNUAL REPORT 2018

During the year, the Nomination Committee was 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.
• Making recommendations concerning the membership of the
Audit and Remuneration Committees (in consultation with the
Chairs of those Committees).

The terms of reference of the Nomination Committee were
reviewed in October 2018 following the publication of the
updated Code. A copy of the updated Nomination Committee
terms of reference is available on the Rotork website at
www.rotork.com/en/investors/index/committees.

Kevin Hostetler joined the Nomination Committee on
1 March 2018 and Ann Christin Andersen and Tim Cobbold joined
on 1 December 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 52 to 53.

Activities of the Nomination Committee during the year
There were two formal Nomination Committee meetings during
the year. A summary of activities is set out opposite.

The principal activity of the Nomination Committee during the
year concerned the successful search for two new non-executive
Directors to join the Board.

Board appointments
As Gary Bullard will have been in office for nine years in June
2019, the Nomination Committee began a search process for a
non-executive director who would have the requisite experience
on a remuneration committee in order to perform the role of Chair
of the Remuneration Committee. They also considered that there
would be benefit in appointing an additional non-executive
director to further enhance the capacity of the Board and provide
a broader skills and experience base.

The Nomination Committee therefore appointed Egon Zehnder as
external search consultants (with which the Company has no other
connection) to assist with this process of recruiting two new
non-executive directors. In formulating the candidate profiles for
the appointments, in addition to the requirement for a candidate
with a least a year’s experience on a remuneration committee, the
Nomination Committee also had particular regard to the need for
candidates with a growth mindset, a background in international
industry and previous Board experience. They also looked for a
diverse gender and ethnic list of potential candidates and a
candidate with strong background in information technology.

The Nomination Committee received a long list of potential
candidates from Egon Zehnder. Following review and discussion,
prioritised candidates were identified for interview. The shortlisted
candidates were interviewed by Martin Lamb and Sally James. The
Nomination Committee were unanimous in their recommendation
of the appointment of Ann Christin Andersen and Tim Cobbold to
the Board for approval.

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 reported on page 54, the Board has formally adopted a new
diversity plan for the Group with clear actions and supporting
key performance indicators. Kevin Hostetler and I have also
joined the 30% Club as a public and personal commitment of
our support for increasing the number of women at senior levels
in the corporate world.

Board evaluation
In 2018, the Board performed an internal review of its
effectiveness via a board effectiveness questionnaire facilitated by
the Company Secretary. Further details on the results of this review
and any resulting actions can be found at page 58. The review
included an assessment of the effectiveness of the Committee
including how it discharged its responsibilities.

Diversity plan
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.

Last year we committed to 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.
Egon Zehnder, who were engaged in the search for two new
non-executive directors, fulfilled this criteria.

Details of the percentage of women on the Board, in senior
leadership positions and within the Group can be found on page 41.

Martin Lamb
Chair of the Nomination Committee
4 March 2019

Appointment
process

Activity
2018

Succession
planning

Other
work

Appointment process
• Recommended Tim Cobbold and Ann Christin Andersen
for appointment as non-executive directors and members
of the Audit and Remuneration Committees.

Succession planning
• Discussed Board composition and succession planning,

including consideration of balance of skills and experience
and diversity.

Other work
• Considered the requirements of the new Corporate
Governance Code 2018 and its impact on the work
of the Committee.

• Reviewed the Nomination Committee's effectiveness

and terms of reference.

• Approved the Nomination Committee's schedule of work

for 2019.

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ROTORK ANNUAL REPORT 2018

STRATEGIC REPORT

DIRECTORS’ REMUNERATION REPORT

Committee members
Gary Bullard
Lucinda Bell
Ann Christin Andersen1
Tim Cobbold1
Sally James
Peter Dilnot

1 Ann Christin Andersen and Tim Cobbold were
appointed to the Board in December 2018 and
attended the December Committee meeting only.

Dates of Remuneration Committee meetings

JAN

FEB

MAR

APR

MAY

JUN

JUL

AUG

SEP

OCT

NOV

DEC

66 ROTORK ANNUAL REPORT 2018

Statement from the Chair of the
Remuneration Committee
In March 2018, we welcomed Kevin Hostetler as our new Chief
Executive and as a Board we are very pleased with the progress
that Rotork has made under his leadership. 2018 has delivered
robust financial performance, with growth in both order intake
and revenues and our Growth Acceleration Programme is
performing well. As our strategy has evolved, so too has our
remuneration policy, enabling us to drive a stronger focus on
performance and to better align with the market. In addition to
the appointment of Kevin, this has also enabled us to attract and
retain talented individuals throughout the organisation.

We consulted widely on the changes that we made to executive
remuneration in 2017 and 2018. Whilst the majority of
shareholders remain supportive, we are aware that not all of the
Company’s shareholders were in favour of all of our proposals.
After the 2018 AGM result, we embarked upon a further
engagement exercise and Sally James, the Senior Independent
Director, and I had meetings with a number of shareholders to
fully explain the rationale of the decisions taken in 2017 and our
intended approach for 2018 and 2019 (including the review of the
Chairman’s fee and the proposed changes to the LTIP rules). These
meetings also afforded our shareholders the opportunity to raise
any other concerns they had, and following these useful
discussions we have further committed to:
•

Improve the level of disclosure provided in the remuneration
report.

• Show restraint in relation to executive salary increases.
• Continue to set robust and stretching targets for our incentive

plans and provide full and transparent disclosure on the
out-turn under such plans.

• Adopt other areas of good governance, a number of aspects of
which are reflected in the new long-term incentive plan rules
that will be put to shareholders for approval at the AGM.

We will continue to maintain an open and transparent dialogue with
shareholders and welcome any feedback they may wish to provide.

Remuneration in 2018
Bonuses for 2018 were based on annual profit, cash generation,
lost time incident 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 2018 and as a result, the bonus for
Kevin Hostetler and Jonathan Davis for 2018 paid out at 113.6%
and 90.4% of salary respectively, of which part will be paid in
deferred shares. Full details of the bonus targets and performance
against them are set out on pages 76 to 77.

The 2016 LTIP awards (which were based on earnings per share
(EPS) and total shareholder return (TSR) performance over the
three years to 31 December 2018) exceeded the threshold
performance targets resulting in 79.2% of shares vesting to
Jonathan Davis and other members of the senior management
team. Kevin Hostetler, having joined Rotork in 2018, was not a
participant in this award cycle.

The Committee values executive share ownership and believes that
it ensures a high level of alignment with shareholders’ interests.
The Company operates a share ownership guideline whereby
executive directors are required to maintain a shareholding at least
equal to 250% of their base salary. Details of executive directors’
shareholdings are set out on page 80.

In order that executive directors remain interested in the Company
post-cessation, outstanding deferred bonus awards continue to
vest on their original vesting date and the post-vesting holding
period continues to apply to any vested LTIP awards. The
Committee is aware that post-cessation share ownership is a
developing issue and intends to review the Company’s approach
further in the coming year as part of the 2020 policy review.

The fees payable to the other non-executive directors were
reviewed at the same time and a Board committee approved
an increase to the base Board fee to £56,000 (effective from
1 January 2019). No increases were made to the supplementary
fees payable for additional responsibilities. Future increases for the
Chairman and non-executive directors will generally be aligned
with salary increases offered to the wider workforce.

During 2018, the Committee reviewed the fee payable to the
Chairman following the resumption of his Non-Executive Chairman
role. The fee level had not been reviewed since it was set on
appointment in April 2015. The business and its strategy have seen
significant development in recent years, and the fee level did not
appropriately reflect the time commitment involved given the size
and international nature of the Company. Taking this into account,
as well as Martin’s strong performance in the role and his
importance to the continued success of the business, the
Committee approved an increase to the Chairman’s fee to
£234,000. In making this decision we consulted with our major
shareholders, and bearing their views in mind, elected to set the
fee level closer to, but still below, the median fee level for
comparable companies.

Remuneration for 2019
The operation of our variable pay arrangements for 2019 is
unchanged from 2018. Bonuses will continue to be based on
profit, cash generation, safety and strategic targets. The 2019 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. The Committee has elected not to increase
the salaries of the executive directors at the current time.

Salaries
and fees

Review
of bonus
and LTIP

Activity
2018

Other work

Setting long
term incentive
plan (LTIP)
and bonus
opportunities

Remuneration
reporting

Salaries and fees
• Set basic salary for Kevin Hostetler and Jonathan Davis for 2019.

• Considered a report from New Bridge Street on non-executive

remuneration.

• Reviewed the fee payable to the Chairman and approved fee

increase.

Review of bonus and LTIP
• Reviewed LTIP performance against targets.

• Reviewed bonus performance against targets and approved 2017

bonus payments.

• Reviewed the terms of both bonus and LTIP plans to ensure they
remain fit-for-purpose and in line with developing best practice.

Setting Long Term Incentive Plan (LTIP) and
bonus opportunities
• Set LTIP performance targets and award levels for executive
directors and other members of senior management for the
2018 LTIP.

• Set executive directors’ personal performance bonus targets

for 2018.

• Set bonus targets for executive directors and other members of

senior management’s bonus scheme for 2018.

Remuneration reporting
• Approved the Directors Remuneration Report 2017.

Other work
• Approved the Directors Remuneration Report 2017.

• Consulted with shareholders on multiple occasions on a range of

remuneration issues.

• Considered corporate governance developments, guidance from
institutional investors and general remuneration trends both
within the Company and externally.

• Approved the Remuneration Committee’s schedule of work

for 2019.

• Reviewed Remuneration Committee’s effectiveness and terms of

reference.

ROTORK ANNUAL REPORT 2018

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STRATEGIC REPORT

DIRECTORS’ REMUNERATION REPORT
CONTINUED

2019 Long Term Incentive Plan
The rules of our LTIP were first approved by shareholders in April
2010 and as such are due to expire in April 2020. Given that we
are required to make certain changes to the LTIP with effect from
2019 in light of the updated Code, we are seeking shareholder
approval for a revised set of LTIP rules at this year’s AGM. We are
not proposing any material changes to the terms of the LTIP, but
have made some minor amendments, including:
• Reflecting the requirements in the updated Code, we have
introduced discretion for the Committee (in exceptional
circumstances) to scale-back the extent to which an LTIP award
would otherwise vest on a formulaic basis if appropriate to do
so (for example, to reflect underlying individual or corporate
performance).

• We have reviewed the malus and clawback provisions such that
the Committee is now able to recover or withhold payments or
awards in a broader set of circumstances, including cases of
corporate failure or significant reputational damage.

• The leaver provisions described within the plan have been

brought closer in line with typical market practice.

• We have introduced flexibility to pay dividend equivalents on
share awards (although as this is not currently allowed for
under the remuneration policy, there are no plans to use this
flexibility at present).

The Remuneration Committee maintains a rolling programme
of activities which forms the basis of its scheduled meetings
throughout the year. This rolling programme is supplemented by
consideration of specific issues as and when they arise. The
Remuneration Committee met four times during the year. Details
of attendance at meetings are set out on page 57. A summary
of its principal activities is set out opposite.

2019 AGM
The Annual Report on Remuneration, together with this
introductory statement, will be subject to an advisory shareholder
vote at the 2019 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.

This will be my final report as Chair of the Remuneration
Committee as, having held the role for almost nine years, I will
be stepping down from my role as non-executive director of the
Company at the 2019 AGM. Tim Cobbold will assume the role of
Chair at this date. I hope that you will support the resolutions to
approve the Annual Report on Remuneration and revised LTIP rules
at the forthcoming AGM and Tim and I welcome any feedback
that you may wish to provide.

Shareholders will be asked to approve the new LTIP rules at this
year’s AGM. A summary of the principal terms of the new LTIP will
be included in the Notice of AGM circulated to shareholders in
advance of the meeting.

Gary Bullard
Chair of the Remuneration Committee
4 March 2019

The role of the Committee and the Company’s remuneration
philosophy
The policy for the executive directors, which is described later in
this report, 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 pay
conditions across the Company, as well as any material changes to
pay policies and practices that have been made or are proposed,
and takes this into account when setting executive directors’ pay.

In line with the guidance set out in the updated Code, the
Committee has reviewed its terms of reference during the year to
ensure that they are compliant with governance standards going
forward. The Committee’s remit, therefore, has been expanded
such that, from 2019, it is responsible for setting pay for all
members of the Rotork management board as well as the
Chairman and executive directors. In addition, the Committee will
oversee remuneration policies and practices across the workforce,
which will be facilitated through regular updates from the Group
HR Director.

68 ROTORK ANNUAL REPORT 2018

REMUNERATION AT A GLANCE

Implementation of our remuneration policy in 2019
Our remuneration policy allows us to provide a competitive level of remuneration in order to attract and retain the right directors for the
business, with a large portion of pay linked directly to the performance of the business and the individual to ensure alignment with the
interests of our shareholders and other stakeholders.

Element

Salary

Benefits

Pension

Annual
bonus

Long term
incentive
plan

Purpose

Kevin Hostetler (Chief Executive)

Jonathan Davis (Finance Director)

£600,000

£346,000

Attract and retain high-
calibre executive directors

Standard benefits plus relocation arrangements
agreed in connection with his appointment

Standard benefits

Drive and reward short-term
performance

25% of salary

20% of salary

125% of salary maximum
(75% salary on-target)

100% of salary maximum
(60% salary on-target)

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

Incentivise long term value
creation and provide
alignment with shareholders

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 guidelines

Provide alignment with
shareholders

250% of salary

Total remuneration opportunity
at on-target performance (£’000)

Actual remuneration for 2018 (£’000)

£1,338

£1,307

250% of salary

£698

£1,243

How our remuneration policy supports Rotork’s strategy
Our aim is to deliver strong and sustainable margins, consistent year-on-year growth in revenues and profit and a high return on capital
which, combined with our asset-light model, delivers strong cash generation. Our reward structure supports and reflects this strategy,
providing a direct link between pay and our financial and strategic objectives.

Strategic priorities

Bonus

Long term incentive plan

Innovation

Strategic targets

Return on capital measure

Operational excellence

Growth

Sustainability

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Cash generation measure
Personal performance targets

Total Shareholder Return measure
Earnings per share measure

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

Profit measure

Safety measures
Deferral into shares
Clawback and malus provisions

Performance outcomes for the 2018 financial year

2018
annual
bonus

2016 LTIP
award

Profit (60%)

52.4% achieved

Cash generation (15%)

15.0% achieved

LTIR (5%)

5.0% achieved

Personal and strategic (20%)

KH: 18.5% achieved

JD: 18.0% achieved

EPS growth (50%)

58.4% of maximum

TSR (50%)

100% of maximum

Kevin Hostetler

Jonathan Davis

90.9% of
maximum
awarded

90.4% of
maximum
awarded

79.2% of
maximum
vesting

ROTORK ANNUAL REPORT 2018

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STRATEGIC REPORT

DIRECTORS’ REMUNERATION REPORT
CONTINUED

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 2019.

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.
• 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. 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.

Overview of the Policy Report
Directors’ policy table

Element of
remuneration

Purpose and how it
supports the strategy

Base salary

To attract and retain
executive directors of the
right calibre and provide a
core level of reward for
the role.

70 ROTORK ANNUAL REPORT 2018

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).

Element of
remuneration

Purpose and how it
supports the strategy

Benefits

To attract and retain
executive directors of the
right calibre by providing a
market competitive level of
benefit provision.

Framework used to
assess performance

N/A

How the element operates

Maximum amounts payable

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 director
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.

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

To provide a market
competitive remuneration
package to enable the
recruitment and retention of
executive directors.

Annual bonus Drives and rewards

performance against annual
financial and operational
goals which are consistent
with the medium to long
term strategic needs of the
business.

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.

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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

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.

Framework used to
assess performance

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.

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

72 ROTORK ANNUAL REPORT 2018

DIRECTORS’ REMUNERATION REPORT CONTINUEDElement of
remuneration

Purpose and how it
supports the strategy

How the element operates

Maximum amounts payable

Framework used to
assess performance

Chairman and
non-executive
directors’ fees

To attract and retain
non-executive directors of
the right calibre.

Fees for the Chairman and
non-executive directors are
reviewed periodically.

The maximum aggregate
fee level is £700,000.

N/A

The fee levels 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.

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).

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

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, employees share in the success of the Group through a profit based bonus plan which is inked to the
performance of their business unit, Group performance and their own individual performance. This is coupled with the opportunity,
for eligible employees, to receive free shares from the Company, paid from the Company’s profits.

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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 control with a pro-rata reduction to reflect the proportion of the vesting period
served.

The Chairman and non-executive directors do not have service contracts, they serve under letters of appointment and are subject to
annual re-election by shareholders at the AGM. The term of appointment for non-executive directors and the Chairman is three years
and their appointments are subject to termination on three months’ notice (12 months for the Chairman). In the event of the termination
of their position, they are entitled to reimbursement of any outstanding fees and expenses due.

ROTORK ANNUAL REPORT 2018

DIRECTORS’ REMUNERATION REPORT CONTINUEDIllustration 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 2019 for
each executive director. In addition, the fourth bar illustrates the value of total remuneration should both the annual bonus and LTIP pay
out in full, and if LTIP awards are subject to 50% share price appreciation over the relevant period.

3,000

2,500

2,000

1,500

1,000

500

Chief Executive

Finance Director

£2,868

3,000

£2,418

36%

47%

36%

26%

£1,338
9%

34%

£768

100%

57%

28%

27%

2,500

2,000

1,500

1,000

500

£1,212

27%

41%

32%

£1,428

47%

26%

27%

£698

30%

62%

£433

100%

Fixed pay
Annual Bonus
LTIP

Minimum

On target

Maximum

Maximum
+ 50% share
price growth

Minimum

On target

Maximum

Maximum
+ 50% share
price growth

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 2019. Taxable benefits are shown as the cost to the Company of supplying those benefits for the year ending
31 December 2018. On-target performance, for illustrative purposes, assumes achievement of 60% of the maximum available bonus and
threshold LTIP vesting (13.3% 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
(other than for the fourth scenario, as described above), and for simplicity, the benefit derived from participating in the Company’s SIP
has been excluded.

O
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G
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ROTORK ANNUAL REPORT 2018

STRATEGIC REPORT

ANNUAL REPORT ON REMUNERATION

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

Salary

Benefits(i)

Annual bonus(ii)

LTIP(iii)

Pension and
related benefits(iv)

Total
remuneration

Name

Kevin Hostetler(v)
Jonathan Davis(vi)

2018

530
346

2017

–
335

2018

2017

41
15

–
18

2018

603
313

2017

–
240

2018

–
500

2017

–
–

2018

133
69

2017

2018

–
83

1,307
1,243

2017

–
676

(i) The benefit value consists of a car and fuel (or a car and fuel allowance), private medical insurance and the cash value on allocation of SIP and OPLSS share awards as

appropriate. Kevin Hostetler also received reimbursement of certain costs relating to his relocation, to the value of £99,000.

(ii) Paid up to 60% of the maximum bonus opportunity in cash with the remainder deferred into shares for three years.
(iii) The 2018 figures relate to the vesting of the 2016 LTIP award based on performance to 31 December 2018. These awards are not eligible to vest until March 2019 and as
such an indicative share price of 279p (being the average closing share price over the three-month period to 31 December 2018) has been used for the purpose of valuing
these awards. This value will be restated in next year’s report. Of the £500,000, 42% relates to an increase in the value of the underlying shares over the period.

(iv) See page 80 for further details.
(v) Kevin Hostetler was appointed to the Board on 12 February 2018 and became Chief Executive on 12 March 2018.
(vi) Jonathan Davis has agreed to invest a proportion of his salary (net of tax) in Rotork shares and to retain them for two years.

Other directors (£000s)

Name

Lucinda Bell
Gary Bullard
Ann Christin Andersen(i)
Tim Cobbold(i)
Peter Dilnot
Sally James
Martin Lamb

Base fees

Additional
fees/remuneration

Total remuneration

2018

47
47
4
4
47
47
224(ii)

2017

47
47
–
–
16
47
180

2018

10
10
–
–
–
14
129

2017

8
8
–
–
–
18
282

2018

57
57
4
4
47
61
353

2017

55
55
–
–
16
65
462

(i) Joined the Board on 1 December 2018.
(ii) The base fee for Martin Lamb was increased to £234,000 with effect from 12 March 2018.

The additional remuneration for Martin Lamb relates to the remuneration received whilst fulfilling the role of Executive Chairman from
28 July 2017 to 12 March 2018. This comprised a fixed allowance only and he did not participate in any variable pay arrangements.
Additional remuneration for Sally James includes an additional fee of £20,000 p.a. payable over the period from 28 July 2017 to
12 March 2018 for her increased responsibilities whilst Martin Lamb fulfilled the role of Executive Chairman. Both Martin Lamb and
Sally James elected to invest the additional net fees in Rotork shares and to hold them for a minimum of two years.

Other additional fees are the supplementary fees paid to the Chairs of the Audit and Remuneration Committees and the normal
supplementary fee paid to the Senior Independent Director. 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 bonus for 2018
Bonuses in 2018 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:

Performance
required to
trigger bonus
payment

£117m
85%
N/A

Performance
required at
maximum

% payable*
at maximum
performance

Performance
outcome

£151m
100%
<0.34

60% £146m
15% 110.7%
0.32

80%

% bonus
awarded*

52.4%
15%
5%

72.4%

Annual profit target
Cash generation
Lost time incident rate

Total

* % of maximum bonus.

ROTORK ANNUAL REPORT 2018

DIRECTORS’ REMUNERATION REPORT CONTINUEDPersonal strategic objectives, which accounted for 20% of the bonus opportunity, were set at the start of the year (or on appointment in
the case of Kevin Hostetler). The Committee set specific and measurable targets covering a range of the Company’s strategic priorities
and assigned each an individual weighting. Performance against each of the defined targets was assessed by the Committee with input
from the Chairman and other non-executive directors. The objectives for both executive directors and performance against them are
summarised in the table below:

% payable* at

Kevin Hostetler

maximum Performance summary

% bonus
awarded*

Business simplification – drive product line
rationalisation plan for 2018

Investor relations – maintain strong relations with
existing shareholders and drive interest in the Company

Growth Acceleration Programme:
• Talent management.
• Go-forward organisation design/structure.
•
• Operational improvement plan.
• Route-to-market.

Innovation, R&D and sustaining engineering.

2% All objectives were met in relation to this measure,
including the discontinuation of a number of
product lines.

2% All objectives were met in relation to this measure.

16% Strong performance was achieved in relation to this

14.5%

measure. Good progress has been made with the
Growth Acceleration Programme and the Group is on
track with initiatives and plans.

Total

Jonathan Davis

20%

% payable* at

maximum Performance summary

Business simplification – define and roll out a revised
budget process which is fit for Rotork’s developing
business model

Development of GAP reporting structure and process

4% All objectives were met in relation to this measure, with
a revised budget process rolled out across the Group.

3% Strong performance was achieved in relation to this
measure, with a reporting structure defined. Some
reporting processes are still being developed.

18.5%

% bonus
awarded*

Growth Acceleration Programme:
• Talent management.
• Supply chain.
• PMO office support.
•

IT infrastructure and systems.

Total

* % of maximum bonus.

13% Strong performance was achieved in relation to this

12%

measure. Good progress has been made with the
Growth Acceleration Programme and the Group is on
track with initiatives and plans.

20%

18.0%

Overall this resulted in a bonus award to Kevin Hostetler of £603,000 (113.6% of salary), after pro-rating for the portion of the year
served, and to Jonathan Davis of £313,000 (90.4% salary). In accordance with the remuneration policy approved by shareholders in
2017, part of the bonus will be deferred in shares for three years. This deferred element equates to £205,000 for Kevin Hostetler and
£105,000 for Jonathan Davis with the balance paid in cash.

Martin Lamb was not eligible for a bonus in relation to his service as Executive Chairman.

LTIP awards vesting based on performance to 31 December 2018 (audited)
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. The LTIP awards granted on 6 March 2016 were based on performance to 31 December 2018 and were subject to the
following performance targets:

Measure

Weighting

Performance period

Threshold target1

Stretch target2

Performance outcome

Earnings per share

50%

01/01/2016
– 31/12/18

9%
(15% vesting)

35%
(100% vesting)

TSR relative to the
constituents of the
FTSE 250 Index2

50%

01/01/2016
– 31/12/18

Median ranking Upper quartile

ranking or
above

EPS performance of 22.3% was above the
threshold target resulting in 58.4% vesting for
this part of the award.

TSR growth of 85% was above the stretch
target resulting in 100% vesting for this part
of the award.

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.

As shown above, performance was above the minimum performance thresholds resulting in 79.2% of the total number of shares
vesting, as follows:

Grant
date

Number of
shares under
award

Number of
shares vesting

Number of
shares lapsing

Vesting
date

Jonathan Davis

6 March 2016

226,122

179,088

47,034 6 March 2019

ROTORK ANNUAL REPORT 2018

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C
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N
F
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A
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N

STRATEGIC REPORT

Share awards granted in 2018 (audited)
LTIP awards (audited)
The following LTIP awards were made to the executive directors on 7 March 2018:

Kevin Hostetler
Jonathan Davis

Share awards
made during
2018

340,393
163,461

Basis on which
awards made

Face value
of award (£)(i)

Percentage
vesting
for minimum
performance(ii)

End of performance
period

150% of salary
125% of salary

899,659
432,107

13.3% 31 December 2020
13.3% 31 December 2020

Vesting date

7 March 2021
7 March 2021

(i) The share price used to determine the number of shares under the award was £264.3p 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. The three equally-weighted performance measures are:
a. 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;
b. 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

c. 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 payout 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 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. 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.

Deferred Share Bonus Plan (DSBP) awards (audited)
Any bonus earned above a threshold of 60% of the maximum is deferred into share awards under the Deferred Share Bonus Plan,
vesting on the third anniversary of grant. No further performance conditions apply; DSBP awards are subject to continued employment
only and dividend equivalents may be paid on the deferred shares on vesting.

The following DSBP awards were made on 7 March 2018 (based on performance in relation to the 2017 financial year):

Jonathan Davis

Share awards
granted

Basis on which
awards made

Face value of
awards (£)(i)

Vesting
date

14,697

11.6% of salary

38,844

7 March 2021

(i) The share price used to determine the number of shares under the award was £264.3p being the share price immediately prior to the date of the award.

Free SIP share awards (audited)
In common with all eligible employees, UK based executive directors receive an entitlement to ordinary shares under the SIP. 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 2018
are set out below.

Kevin Hostetler
Jonathan Davis

Free share
awards
made during
the year

–
1,274

Date of grant

6 April 2018
6 April 2018

Basis on which
award made

Face value
of award

Non-performance based
Non–performance based

–
3,600

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

78 ROTORK ANNUAL REPORT 2018

DIRECTORS’ REMUNERATION REPORT CONTINUEDSummary of outstanding share awards held by executive directors (audited)

Awards held
at 31
December
2017

Granted in
the year

Lapsed in the
year

Option
awards
exercised in
the year

Awards held
at 31
December
2018

Performance period

Exercise
price

Date of grant

Vesting date/end
of holding period

Kevin Hostetler

LTIP

Total

Jonathan Davis

LTIP

DSBP

SIP

–

340,393

–

117,120

226,122

175,135

–

163,461

14,697

–

1,420

2,014

1,440

–

1,274

117,120

–

12,162(iv)

1,420

–

340,393

1 Jan 2018 –

–

31 Dec 2020(iii)

7 March
2018

7 March
2021

340,393

–

226,122

175,135

163,461

14,697

–

2,014

1,440

1,274

1 Jan 2015 –
31 Dec 2017(i)

1 Jan 2016 –

31 Dec 2018(ii)

1 Jan 2017 –

31 Dec 2019(iii)

1 Jan 2018 –

31 Dec 2020(iii)

N/A

–

6 March
2015

6 March
2016

6 March
2017

7 March
2018

6 March
2018

6 March
2019

6 March
2020

7 March
2021

N/A 148p 13 October
2015

1 December
2018

N/A

–

8 April
2015

6 April
2016

6 April
2017

6 April
2018

8 April
2018

6 April
2019

6 April
2020

6 April
2021

Sharesave

12,162

Total

535,413

179,432

117,120

13,582

583,143

(i) Subject equally to EPS performance (RPI + 10% to RPI + 25% growth) and TSR performance relative to the FTSE 250 (excluding financial services, insurance and investment
trusts) (median to upper quartile) over the three-year performance period. As described in last year’s report, these targets were not met and this award lapsed in full.
(ii) Subject equally to EPS performance (RPI + 9% to RPI + 35% growth) and TSR performance relative to the FTSE 250 (excluding financial services, insurance and investment

trusts) (median to upper quartile) over the three-year performance period. As described above, the TSR target was achieved, while the EPS target was partially met.
Accordingly, 179,088 shares will become eligible to vest in March 2019.

(iii) Subject equally to EPS performance (9% to 35% growth), TSR performance relative to the FTSE 350 Industrial Goods and Services Sector (median to upper quartile) and
capital return (economic profit) performance over the three-year performance period. Any vesting awards will also be subject to a two-year post-vesting holding period
during which time they may not be sold.

(iv) Sharesave options were exercised on 3 December 2018 on which date the closing market price was 263.8p.

ROTORK ANNUAL REPORT 2018

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N
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A
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N

STRATEGIC REPORT

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 2018.

Executive directors
Kevin Hostetler
Jonathan Davis

Non-executive directors
Lucinda Bell
Gary Bullard
Ann Christin Andersen(v)
Tim Cobbold(v)
Peter Dilnot
Sally James
Martin Lamb

Interests in
shares(i)

Unvested
LTIP awards

Unvested
DSBP awards

Unvested
options

161 340,393(iii)
262,871 564,718(iv)

–
14,697

7,150
51,593
–
–
–
13,031
152,414

–
–
–
–
–
–
–

–
–

–
–
–
–
–
–
–

SIP awards in
holding
period

%
of salary
shareholding
achieved(ii)

–
4,728

0%
202%

–
–
–
–
–
–
–

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 247.6p, being the share price as at 31 December 2018. The guideline

shareholding for the executive directors is 250% of salary.

(iii) An LTIP award over 340,393 shares was granted to Kevin Hostetler on 7 March 2018.
(iv) An LTIP award over 163,461 shares was granted to Jonathan Davis on 7 March 2018.
(v) Joined the Board on 1 December 2018.

There has been no change in the directors’ interests in the ordinary share capital of the Company between 31 December 2018 and
4 March 2019, except in the case of Jonathan Davis’s and Kevin Hostetler's monthly purchases of partnership shares under the SIP and,
for Jonathan Davis, under the monthly rolling share purchase arrangement.

Total pension entitlements (audited)

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

31 December 2017

31 December 2018

Normal
retirement
age

65
65

Total accrued pension
in the defined benefit
scheme as at
31 December 2018
(£ per annum)

–
37,717

Defined
benefit
scheme

–
29,600

Cash in
lieu of
pension

–
53,800

Total

–
83,400

Defined
benefit
scheme

Cash in
lieu of
pension

Total

–
–

132,500
69,200

Director

Kevin Hostetler
Jonathan Davis

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 2018 is that which would be paid annually on retirement from normal pension age. Jonathan

Davis opted out of the defined benefit scheme with effect from 30 April 2017, so the amount shown is his accrued pension at that date, less a ‘scheme pays’ deduction for
an annual allowance tax charge and revalued up to 31 December 2018. This amount will revalue up to normal pension age in line with the scheme’s rules.

3. Jonathan Davis receives a cash allowance in lieu of pension contributions of 20% of base salary.
4. Kevin Hostetler receives a cash allowance in lieu of pension contributions of 25% of base salary.

Payments to former directors and for loss of office
Peter France stood down from the Board and as Chief Executive on 27 July 2017. As described in last year’s report, he was treated as a
good leaver in relation to LTIP awards granted in 2015 and 2016. Performance conditions for the 2015 award were not met and this
award lapsed in full in 2018. Performance conditions for the 2016 award were partially met, as described above, and accordingly 165,534
shares will vest in March 2019 (after pro-rating for time served).

Bob Arnold, who retired from the Company in August 2016, was treated as a good leaver under the terms of the LTIP and so retained a
pro-rated number of share awards granted in 2016. As above, performance targets were partially met and accordingly 29,810 shares will
vest in March 2019.

Save as previously disclosed, no further payments were made to former directors or for loss of office during the year.

80 ROTORK ANNUAL REPORT 2018

DIRECTORS’ REMUNERATION REPORT CONTINUEDTSR performance graph
This graph shows the value, by 31 December 2018, of £100 invested in Rotork plc on 31 December 2008, compared with the value of
£100 invested in the FTSE 350 Industrial Engineering Sector on the same date. This index has been chosen as a comparator as it
represents companies with similar business operations to the Company, and is an index of which Rotork is a constituent.

900

800

700

600

500

400

300

200

100

Rotork plc

FTSE 350 Industrial
Engineering

Dec 08

Dec 09

Dec 10

Dec 11

Dec 12

Dec 13

Dec 14

Dec 15

Dec 16

Dec 17

Dec 18

Historic Chief Executive remuneration table

Year

2018
2018
2017
2017
2016
2015
2014
2013
2012
2011
2010
2009

Chief Executive

Kevin Hostetler(i)
Martin Lamb(ii)
Martin Lamb(ii)
Peter France(iii)
Peter France
Peter France
Peter France
Peter France
Peter France
Peter France
Peter France
Peter France

Chief Executive
single figure
remuneration
(£000s)

Annual cash bonus
as a percentage of
maximum
opportunity

LTIP vesting rate
as a percentage of
maximum
opportunity

1,193
353
282
681
835
696
1,092
1,452
1,539
1,182
1,288
1,062

90.9%
N/A
N/A
72%
45.5%
23.4%
66.0%
94.4%
91.3%
88.9%
91.9%
99.5%

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

(i) Kevin Hostetler was appointed to the role of Chief Executive on 12 March 2018.
(i) Martin Lamb held the role of Executive Chairman from 28 July 2017 to 12 March 2018 and received an additional fixed remuneration of £55,000 per month on top of his

annual Chairman’s fee during this period.

(iii) 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 2017 and 2018.

Base salary
Benefits
Bonus

Chief
Executive
2018 %
Change from
2017

Average per
UK employee
2018 %
Change from
2017

N/A
N/A
N/A

3.0%
2.9%
-1.9%

Peter France stepped down from the Board on 27 July 2017 and Martin Lamb assumed the role of Executive Chairman until Kevin
Hostetler was appointed as Chief Executive from 12 March 2018. Consequently, full-year comparable data is not available.

ROTORK ANNUAL REPORT 2018

O
V
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V
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W

G
O
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N
A
N
C
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F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S

C
O
M
P
A
N
Y

N
F
O
R
M
A
T
I
O
N

STRATEGIC REPORT

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.

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

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

2018

2017

159,914
48,288

147,637
45,218

Percentage
change

8.3%
6.8%

CEO pay ratio disclosure
Although it is not compulsory to include a CEO pay ratio in the annual report on directors’ remuneration, now that the statutory
calculation method has been set out in legislation, we include this below.

Year

2018

Method

25th percentile pay ratio

Median pay ratio

75th percentile pay ratio

Option B

49:1

45:1

33:1

Option B has been used for the calculation of the pay ratio. Under this method, the latest gender pay gap data has been used to identify
on an indicative basis three UK employees at 25th, median and 75th percentile. This methodology has been chosen as the data is readily
available and avoids the challenge in collecting and verifying accurately the variable pay elements for all UK employees across many
subsidiaries in the short period of time available.

To provide further context, the table below shows the CEO and the employee percentile pay used to determine the 2018 pay ratios.

Year

Total salary1

Total remuneration (single figure)1

Full time equivalent

CEO £000

25th percentile £000

Median £000

75th percentile £000

600

1,473

Statement of implementation of the Policy Report in 2019

Salary

No changes have been made to the executive directors’ salaries at the current time and they remain:
• Kevin Hostetler – £600,000
• Jonathan Davis – £346,000. Jonathan Davis continues to invest a proportion of his monthly salary in Rotork

shares.

Benefits

Pension

LTIP

The average budgeted increase for the UK workforce in 2019 is 1.4%. Should the executive directors subsequently
receive an increase in 2019, any such increase will be capped at this amount.

No change from 2018 – benefits will comprise car and fuel (or car and fuel allowance), personal accident and private
medical insurance and life assurance. In addition, Kevin Hostetler remains entitled to the reimbursement of certain
outstanding 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.

The LTIP award levels for 2019 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 payout 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 2018 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.

82 ROTORK ANNUAL REPORT 2018

DIRECTORS’ REMUNERATION REPORT CONTINUEDAnnual bonus

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.

Shareholding
guidelines

Non-executive
director fees

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 executive directors will be required to build and maintain a shareholding equivalent to 250% of salary.

As described in the Chair’s statement, an increase to the Chairman’s and base Board fee levels has been approved
as follows:
• Chairman: £234,000, effective 12 March 2018;
• Base Board fee: £56,000, effective 1 January 2019.

Supplementary fees are also payable to those directors with additional responsibilities:
• Additional fee for chairing the Audit Committee £10,000;
• Additional fee for chairing the Remuneration Committee £10,000; and
• Additional fee for the role of Senior Independent Director £10,000.

It is currently intended that any future increases will be made in line with any increases offered to the wider
workforce.

Consideration by the directors of matters relating to directors’ remuneration
The members of the Remuneration Committee as at 31 December 2018 were Gary Bullard (Chair), Lucinda Bell, Ann Christin Andersen,
Tim Cobbold, Sally James and Peter Dilnot. 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, Chief Executive and
Finance Director are also invited to attend meetings except when their own remuneration is considered. The Company Secretary acts as
secretary to the Remuneration Committee.

The Executive Compensation practice of Aon plc acts as advisor to the Remuneration Committee having been appointed by the
Committee in September 2013 following a competitive tender process. Aon is a member of the Remuneration Consultants’ Group and a
signatory to its 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 Aon is sufficiently independent to act as remuneration advisor to the Remuneration
Committee.

In 2018, the Company paid £91,540 (2017: £59,000) to Aon for services to the Remuneration Committee. Figures exclude VAT and
disbursements.

Statement of voting at general meeting
The percentages of votes cast ‘for’, ‘against’ and ‘withheld’ in respect of the Remuneration Policy and last Annual Report on
Remuneration are as follows:

Resolution (AGM date)

To approve the Remuneration Policy (April 2017)

To approve the Annual Report on Remuneration (April 2018)

Votes cast
‘for’

99.1%

71.7%

Votes cast
‘against’

0.9%

28.3%

Votes
‘withheld’

The Annual Report on Remuneration received a sizeable against vote at our 2018 AGM, similar to the voting result received in 2017,
primarily in relation to the new CEO’s remuneration arrangements. As described in more detail in the Chair’s letter earlier in this report,
the Committee has consulted with the Company’s major shareholders and investor bodies on multiple occasions during the year and
remains confident that our remuneration policy and its implementation remain appropriate and fit-for-purpose.

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ROTORK ANNUAL REPORT 2018

STRATEGIC REPORT

REPORT OF THE DIRECTORS

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 2018 as set out on pages 92 to
135. In compiling this report, the directors have consulted with the
management of the Group.

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 2018 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.

Directors
The directors in office at the date of this report (all of who served
during the year) and their biographies and other details, are set
out on pages 52 to 53.

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 3.70p per ordinary
share (2017: 3.35p) for the year, payable on 22 May 2019 to
shareholders on the register on 12 April 2019. An interim dividend
for 2018 of 2.20p per ordinary share (2017: 2.05p) was paid on
21 September 2018.

Information required in the Report of the Directors set
out in the Strategic Report
Information relating to the likely future developments of the
Company and its subsidiaries, and information relating to the
research and development activities of the Company and its
subsidiaries, is set out in the Strategic Report on pages 2 to 51.

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 27 April 2018, 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 2019
AGM and appropriate renewals will be sought.

The Company did not acquire any of its own shares in 2018.

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 51.

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 41.

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

Existence of branches outside the UK
The Company has no branches outside of the UK.

84 ROTORK ANNUAL REPORT 2018

Substantial shareholders
As at 31 December 2018, the following notifiable interests in issued
share capital had been received by the Company under the Disclosure
Guidance and Transparency Rules (DTR 5) of the UK Listing Authority.
It should be noted that these holdings are likely to have changed since
notified to the Company. However, notification of any change is not
required until an applicable threshold is crossed.

Identity

Liontrust Investment Partners LLP
Standard Life Aberdeen plc
Blackrock Inc
Fiera Capital Corporation
T. Rowe Price Associates, Inc
Aberdeen Asset Managers Limited
AXA Investment Managers
Mondrian Investment Partners Ltd
APG Asset Management N.V.

Number of voting
rights (direct and
indirect)

% of voting
rights

870,576,249
870,535,628
870,471,954
34,102,377
43,259,363
43,432,258
43,395,000
42,677,169
4,350,000

5.02
4.93
6.30
3.92
4.97
4.99
4.99
4.91
5.01

Corporate governance
The Company’s Corporate Governance Report can be found on
pages 54 to 59.

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:
1. 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;

2. 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

3. 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 52 to 53 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

Helen Barrett-Hague
Group General Counsel and Company Secretary
4 March 2019

ROTORK ANNUAL REPORT 2018

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STRATEGIC REPORT

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 of Rotork plc (the ‘parent company’) and its subsidiaries (the ‘group’) give a true and fair view of the state of

the group’s and of the parent company’s affairs as at 31 December 2018 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 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 related notes 1 to 30 to the group financial statements; and
• the related notes a) to i) to the company financial statements.

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 Financial Reporting Council’s (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:
•
• revenue recognition in respect of significant new contracts or orders with non-standard or unusual

inflation and discount rate assumptions used in the UK defined benefit pension scheme valuation; and

terms.

Materiality

Scoping

Within this report, any new key audit matters are identified with
the same as the prior year identified with

and any key audit matters which are

The materiality that we used for the group financial statements was £6.0 million which was determined on
the basis of a percentage of profit before tax after certain adjusted items. The percentage based on final
reported results was 4.9% of the base profit number.

Based on our assessment we identified 16 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. We
identified a further two components on which we perform specified audit procedures. Based on the work
performed at these 18 components, our scope covered 73% of group revenue and 85% of group profit
before tax.

Significant changes
in our approach

Our approach to materiality and scoping is consistent with last year.

We have included a key audit matter in the year in respect of revenue recognition on significant new
contracts with non-standard or unusual terms reflecting the additional focus on this risk area of the first
time application of IFRS 15 Revenue from Contracts with Customers.

Last year our report included a key audit matter in respect of the impairment of goodwill and intangibles in
the Bifold cash generating unit (‘CGU'), which is not included in our report this year. We concluded that this
area did not represent a key audit matter in the current year following the impairment recognised in the
prior year, the consistent approach to assessing goodwill for impairment, and the financial performance of
the Bifold CGU in the current year.

ROTORK ANNUAL REPORT 2018

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
12 months from the date of approval of the financial statements.

We considered as part of our risk assessment the nature of the group, its business model and related risks
including where relevant the impact of Brexit, the requirements of the applicable financial reporting framework
and the system of internal control. We evaluated the directors’ assessment of the group’s ability to continue as a
going concern, including challenging the underlying data and key assumptions used to make the assessment,
and evaluated the directors’ plans for future actions in relation to their going concern assessment.

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 26-29 that describe the principal risks and explain how they are being managed

or mitigated;

• the directors’ confirmation on page 29 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 29 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.

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

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. 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.

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

Key audit matter
description

The Group had a net defined benefit pension liability of £27.3m and gross defined benefit pension liabilities of
£207.0m at 31 December 2018 (2017: £48.2m net; £237.1m gross). The UK defined benefit scheme accounts for
a significant majority of these balances and so this scheme is the focus of our key audit matter.

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

There is a risk of material misstatement relating to judgements made by management and their actuaries in
valuing the defined benefit pension scheme liabilities. Small changes in the key input assumptions can have
a significant impact on the valuation of the liability and resultant gains or losses recognised in the year.

Sensitivities to key inputs are explained by management in note 24 Pension Schemes. Given these sensitivities
we consider the key audit matter to be focused on the discount and inflation rate assumptions.

Refer to further detail provided in the Audit Committee report on page 62 and the disclosures regarding key
sources of estimation uncertainty in note 1 to the financial statements.

In order to address this risk we have performed the following procedures:
• assessed the design and implementation of key controls performed by management in considering the key

inputs to the pension liability valuation model;

• utilised our benchmarking tools with the support of our internal specialists to establish a reasonable range

for the key assumptions in order to challenge the appropriateness of the inflation and discount rate
assumptions used in respect of the UK scheme;

• assessed the work of management’s experts by considering their scope of work, objectivity, and capability

as well as assessing the output of their work;

• considered the adequacy of the Group’s disclosures in respect of the sensitivity of the deficit to changes in

these key assumptions.

We have engaged internal actuarial specialists to assist in evaluating the key assumptions used in the valuation
of liabilities. Our audit response to this key audit matter does not rely on controls and therefore we have not
tested the operating effectiveness of relevant controls.

ROTORK ANNUAL REPORT 2018 87

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STRATEGIC REPORT

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

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

continued

Key observations

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

Revenue recognition in respect of significant new contracts or orders with non-standard or unusual terms

Key audit matter
description

Revenue is a key metric for the group and there can be judgement in the determination of how to apply
accounting policies in respect of contracts or orders with non-standard or unusual terms. The group has applied
IFRS 15 Revenue from Contracts with Customers for the first time in the year having initially concluded in 2017
that it would not have a material impact. Refer to note 1 to the financial statements for an explanation of the
transition exercise as well as the revised revenue accounting policy.

Our key audit matter focuses on the risk that incorrect judgements, arising through fraud or error, are made in
applying IFRS 15 to significant contracts or orders with non-standard or unusual terms such as non-standard
warranties or multiple and varied performance obligations.

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

In order to address this risk we have performed the following procedures:
• assessed the design and implementation of key group-wide controls in place to address the judgements

made in applying the group’s revenue recognition policy to significant new contracts;

• reviewed the amendments to the revenue recognition policy of the group resulting from the transition to IFRS 15;
• on a sample basis inspected the underlying contracts or orders and other source documentation for new

significant arrangements entered into in the year; and

• where multiple performance obligations are identified within a contract we recalculated a reasonable allocation of

the total transaction price in order to assess whether revenue has been recognised accurately in the year.

Our audit response to this key audit matter does not rely on controls and therefore we have not tested the
operating effectiveness of relevant controls.

Key observations

We are satisfied that the revenue is accurately recorded on the significant contracts of the group, in line with
IFRS 15.

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:

Group financial statements

Parent company financial statements

Materiality

£6.0m (2017: £5.0m)

£3.6m (2017: £2.8m)

Basis for
determining
materiality

Materiality was determined as 4.9% of profit before tax
excluding the impact of certain adjusting items (2017:
5.3% profit before tax excluding certain adjusting items).
These items are disclosed as adjusting in note 4 to the
financial statements but we don’t adjust for the items
that occur every year (being amortisation of acquired
intangible assets). In the year ended 31 December 2018
the adjustments we make to profit before tax represent
a charge of £2.8m (2017: charge of £17.0m).

Parent company materiality equates to 1.5% of net
assets (2017: 2.0% of net assets), which is capped at
60% of group 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. Consistent
with last year we have adopted this measure, as defined
above, as it provides a consistent year on year basis for
determining materiality.

Net assets are considered to be an appropriate
benchmark for the parent 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.

ROTORK ANNUAL REPORT 2018

PBT adjusted for
certain items £123.6m

PBT adjusted for
certain items
Group materiality

Group materiality £6.0m

Component materiality range £2.4m to £3.6m

Audit committee reporting threshold £0.3m

We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £300,000 (2017:
£250,000), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to
the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.

An overview of the scope of our audit
Our group audit was scoped by obtaining an understanding of the Group and its environment, including group-wide controls, and
assessing the risks of material misstatement at a group level. Our approach was consistent with that adopted in the prior year. Based on
that assessment, we focused our group audit scope primarily on the audit work at 16 components which were subject to a full scope
audit and on a further two components which were subject to specified audit procedures.

The 18 locations (2017: 19 locations) represent the principal business units within the Group’s four reportable segments across 11
countries and account for 73% of the Group’s revenues (2017: 72%) and 85% of profit before tax (2017: 86%). 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 £2.4m to £3.6m (2017: £2.0m to £2.8m).

Revenue

27%

Profit before tax

15%

66%

78%

Full audit scope
Specialised audit procedures
Review at group level

Due to the significance to the group audit of the 16 components’ operations subject to full scope audits, a programme has been designed
and implemented for senior members of the group audit team to periodically visit the most significant components. As part of the 2018
audit, senior members of the group audit team visited key components in the United Kingdom, United States of America and Italy.

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

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ROTORK ANNUAL REPORT 2018

STRATEGIC REPORT

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

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.

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.

We have nothing
to report in respect
of these matters.

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.

Details of the extent to which the audit was considered capable of detecting irregularities, including fraud are set out below.

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

Extent to which the audit was considered capable of detecting irregularities, including fraud
We identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and then design and
perform audit procedures responsive to those risks, including obtaining audit evidence that is sufficient and appropriate to provide a
basis for our opinion.

Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and
regulations, our procedures included the following:
• enquiring of management, internal audit, in-house legal counsel and the audit committee, including obtaining and reviewing

supporting documentation, concerning the group’s policies and procedures relating to:
– identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance;
– detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud;
– the internal controls established to mitigate risks related to fraud or non-compliance with laws and regulations;

• discussing among the engagement team including significant component audit teams and involving relevant internal specialists,

including tax, valuations, pensions and IT specialists regarding how and where fraud might occur in the financial statements and any
potential indicators of fraud. As part of this discussion, we identified potential for fraud in revenue recognition on non-standard
contracts as a result of the potential for significant judgements to be made in the determination of revenue; and

• obtaining an understanding of the legal and regulatory framework that the group operates in, focusing on those laws and regulations
that had a direct effect on the financial statements or that had a fundamental effect on the operations of the group. The key laws
and regulations we considered in this context included the UK Companies Act, Listing Rules, pensions and tax legislation.

90 ROTORK ANNUAL REPORT 2018

Audit response to risks identified
As a result of performing the above, we identified revenue recognition in respect of significant new contracts or orders with non-
standard or unusual terms as a fraud risk and a key audit matter. The key audit matters section of our report explains the matter in more
detail and also describes the specific procedures we performed in response to that key audit matter.

In addition to the above, our procedures to respond to risks identified included the following:
• reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with relevant laws and

regulations discussed above;

• enquiring of management, the audit committee and in-house legal counsel concerning actual and potential litigation and claims;
• performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement

due to fraud;

• reading minutes of meetings of those charged with governance and reviewing internal audit reports; and
•

in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other
adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and
evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business.

We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including
internal specialists and significant component audit teams, and remained alert to any indications of fraud or non-compliance with laws
and regulations throughout the audit.

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

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

We have nothing to
report in respect of
these matters.

have not been received from branches not visited by us; or

• the parent company financial statements are not in agreement with the accounting records and returns.

Directors’ remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’
remuneration have not been made or the part of the directors’ remuneration report to be audited is not in
agreement with the accounting records and returns.

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 Audit Committee 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 five years, covering the years ending 31 December 2014 to 31 December 2018.

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).

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.

Nigel Thomas (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London
4 March 2019

ROTORK ANNUAL REPORT 2018

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STRATEGIC REPORT

CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2018

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 2018

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 in pension scheme net of tax

Income and expenses recognised directly in equity

Total comprehensive income for the year

Notes

2018
£000

2017
£000

695,713
(384,253)

642,229
(358,090)

311,460
8,990
(7,260)
(189,474)
(798)

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

2,3

146,015

130,162

3
4

(20,284)
(2,813)

(27,183)
(17,007)

2,3

122,918

85,972

7
7

8
9

18
18
18
18

2,278
(4,448)

1,381
(6,767)

120,748
(29,004)

80,586
(24,973)

91,744

55,613

10.5p
12.6p
10.5p
12.6p

6.4p
10.6p
6.4p
10.5p

2018
£000

2017
£000

91,744

55,613

3,164
(6)

3,158

8,055

11,213

(376)
6,188

5,812

3,709

9,521

102,957

65,134

92 ROTORK ANNUAL REPORT 2018

CONSOLIDATED BALANCE SHEET
At 31 December 2018

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

2018
£000

2017
£000

10
11
12
13
15

14
15
15
23
15
16

19
20
13
23
21

19
22
20
22
23
22
21

230,157
61,517
79,338
17,337
352

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

388,701

412,569

94,739
145,509
1,429
308
23,161
104,489

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

369,635

326,025

758,336 738,594

4,358
13,024
35,421
460,825

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

513,628

457,200

30,871
31,274
15,722
–
2,149

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

80,016

119,725

30,010
47,332
26,489
11,792
2,682
40,150
6,237

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

164,692

161,669

244,708

281,394

758,336

738,594

These financial statements were approved by the Board of Directors on 4 March 2019 and were signed on its behalf by:

KG Hostetler and JM Davis, Directors.

ROTORK ANNUAL REPORT 2018

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STRATEGIC REPORT

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Balance at 31 December 2016
Profit for the year
Other comprehensive income

Foreign exchange translation differences
Effective portion of changes in fair value of cash

flow hedges

Actuarial gain on defined benefit pension plans
Tax on other comprehensive income

Total other comprehensive income

Total comprehensive income
Transactions with owners, recorded directly in equity
Equity settled share-based payment 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
£000

4,350
–

Share
premium
£000

10,482
–

Translation
reserve
£000

32,142
–

Capital
redemption

reserve
£000

Hedging
reserve
£000

Retained
earnings
£000

Total
£000

1,644
–

(7,335) 392,803
55,613

–

434,086
55,613

–

–
–
–

–

–
–
2
–
–
–

–

–
–
–

–

–
–
711
–
–
–

(376)

–
–
–

(376)

–
–
–
–
–
–

–

–
–
–

–

–
–
–
–
–
–

–

(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

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

–

–
–
–

–

–
–
6
–
–
–

–

–
–
–

–

–
–
1,831
–
–
–

–

3,164

–
–
–

3,164

–
–
–
–
–
–

–

–
–
–

–

–
–
–
–
–
–

–

(24)
–
18

(6)

–
–
–
–
–
–

91,744

–

3,164

–
9,501
(1,446)

(24)
9,501
(1,428)

8,055

11,213

99,799

102,957

2,457
98
–
(4,850)
2,217
(48,288)

2,457
98
1,837
(4,850)
2,217
(48,288)

Balance at 31 December 2018

4,358

13,024

34,930

1,644

(1,153) 460,825

513,628

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

94 ROTORK ANNUAL REPORT 2018

CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 31 December 2018

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 in inventories
Increase in trade and other receivables
(Decrease)/increase in trade and other payables
Restructuring costs paid
Difference between pension charge and cash contribution
Increase 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
Disposal of businesses
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

2018
£000

2017
£000

91,744

20,284
2,813
2,575
11,642
4,674
(134)
(2,278)
4,448
29,004

164,772
(2,140)
(2,322)
(5,761)
(7,795)
(5,809)
2,333
4,690

147,968
(30,084)

(10,430)
(3,831)
201
4,340
(10)
(815)
1,309

1,837
(4,850)
(2,837)
(14,934)
(3)
(48,288)

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)

117,884

106,205

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

(9,236)

(12,857)

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

(69,075)

39,573
63,192
1,724

104,489

(89,284)

4,064
61,423
(2,295)

63,192

ROTORK ANNUAL REPORT 2018

STRATEGIC REPORT

NOTES TO THE GROUP FINANCIAL STATEMENTS
For the year ended 31 December 2018

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 2018
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
i. 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. 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 Group has adopted IFRS 15 from 1 January 2018, using
the modified retrospective method (retrospectively with the cumulative effect at the date of initial application).

During 2017, the Group performed a detailed analysis of significant revenue streams, 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 to assess the impact of the change over the transition date. The adoption of IFRS 15 had no material
impact on the recognition and measurement of the Group’s revenue and no adjustments to equity have been made.

ii. 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 introduced a new model for classification and
measurement of financial assets and financial liabilities, a single, forward-looking ‘expected loss’ model for measuring impairment of
financial assets (including trade receivables) and a new approach to hedge accounting that is more closely aligned with an entity’s risk
management activities.

The Group has adopted IFRS 9 from 1 January 2018 and there has been no material impact on the Group’s results or financial position.

iii. Other amendments
A number of amended standards became applicable for the current reporting period. The application of these amendments has not had
any material impact on the disclosures, net assets or results of the Group.

New standards and interpretations not yet adopted
Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2018 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 16 Leases
IFRS 16 was issued in January 2016 and 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.

96 ROTORK ANNUAL REPORT 2018

As at 31 December 2018, the Group had non-cancellable operating lease commitments of £17,789,000. Of these commitments,
approximately £4,800,000 relate to short-term leases and low value leases which will both be recognised on a straight-line basis as an
expense in the income statement, consistent with current accounting. For the remaining lease commitments the Group expects to
recognise right-of-use assets of approximately £12,000,000 and lease liabilities of approximately £12,100,000 on 1 January 2019.

The Group expects that the impact on profit after tax will not be material as a result of adopting the new rules.

Operating cash flows will increase and financing cash flows decrease by approximately £4,000,000 as repayment of the principal portion
of the lease liabilities will be classified as cash flows from financing activities.

The Board has decided to apply the modified retrospective method when the standard is first adopted in its financial statements for the
year ended 31 December 2019. Therefore, there will be no impact on any comparative accounting period, with any leases recognised on
balance sheet on the adoption date of 1 January 2019.

ii. Other
There are no other standards that are not yet effective and that would be expected to have a material impact on the entity in the current
or future reporting periods and on foreseeable future transactions.

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.

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
cash position.

Consolidation
The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries for the year to
31 December 2018. 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.

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.

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STRATEGIC REPORT

NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For the year ended 31 December 2018

1. Accounting policies continued
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 is measured based on the consideration specified in a contract with a customer. The Group recognises revenue when it transfers
control of a product or service to a customer and is shown net of value-added tax, returns, rebates and discounts and after eliminating
sales within the Group. Revenue from the sale of actuators, gearboxes and flow control products is recognised in the income statement
when control of the goods has transferred, being when the goods have been shipped to the customer in accordance with the contracted
shipping terms.

The Group provides service and support through preventative maintenance contracts, on-site and workshop service, retrofit solutions
and the client support programme. Revenue in respect of workshop service and retrofit solutions is recognised on completion of the
work and after all performance obligations have been completed. Revenue in respect of preventative maintenance contracts and the
client support programme is recognised as the services are performed in line with the contractual terms. The directors have assessed that
these contracts are satisfied over time given that the customer simultaneously receives and consumes the benefits provided by the
Group.

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.

The Group has applied the practical expedient in IFRS 15.121 and therefore not disclosed the information in IFRS 15.120 regarding
unsatisfied (or partially unsatisfied) performance obligations on contracts with a duration of one year or less

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.

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
Customer relationships
Other – product design patents
Other – 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.

98 ROTORK ANNUAL REPORT 2018

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. Cost is calculated either on a ‘first in, first out’ or
an average cost basis. In respect of work in progress and finished goods, cost includes all production overheads and the attributable
proportion of indirect overhead expenses which are required to bring inventories to their present location and condition. The net
realisable value in respect of old and slow moving inventory is assessed by reference to historic usage patterns and forecast future usage.

Cash and cash equivalents
Cash and cash equivalents comprise cash balances and short term (with an original maturity less than three months) deposits. Bank
overdrafts that are repayable on demand form part of cash and cash equivalents for the purpose of the consolidated statement of
cash flows.

Equity
Equity comprises issued equity capital, share premium, reserves and retained earnings.

When issued equity capital is repurchased, the amount paid, including directly attributable costs, is recognised as a change in equity.
Repurchased shares are debited directly to equity and shown as a deduction from retained earnings.

Provisions
i) Warranties
A provision for warranties is recognised when the underlying products or services are sold. The provision is based on historical warranty
cost data, known issues and management expectations of future costs.

ii) Contingent consideration
The terms of an acquisition may provide that the value of the purchase consideration, which may be payable in cash at a future date,
depends on uncertain future events. The amounts recognised in the financial statements represent a fair value estimate at the balance
sheet date of the amounts expected to be paid.

ROTORK ANNUAL REPORT 2018

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STRATEGIC REPORT

NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For the year ended 31 December 2018

1. Accounting policies continued
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 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 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.

At inception of designated hedging relationships, the Group documents the risk management objective and strategy for undertaking the
hedge. The Group also documents the economic relationship between the hedged item and the hedging instrument, including whether
the changes in cash flows of the hedged item and hedging instrument are expected to offset each other.

Forward exchange contracts are recognised initially at fair value. Where a forward exchange contract is designated as a hedge of the
variability in cash flows of a recognised liability, a firm commitment or a highly probable forecasted transaction, the effective part of any
gain or loss on the forward contract is recognised directly in equity. Any effective cumulative gain or loss is removed from equity and
recognised in the income statement at the same time as the hedged transaction. The ineffective part of any gain or loss is recognised in
the income statement immediately.

When a hedging instrument or hedge relationship is terminated but the hedged transaction is still expected to occur, the cumulative gain
or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged
transaction is no longer expected to take place, the cumulative unrealised gain or loss held in equity is recognised in the income
statement immediately.

Dividends
Interim dividends are recorded in the financial statements when they are paid. Final dividends are recorded in the financial statements in
the period in which they are approved by the Company’s shareholders.

100 ROTORK ANNUAL REPORT 2018

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
There are no critical accounting judgements requiring evaluation.

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.

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 adjustments
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. 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
Curtailment gain from the closure of defined benefit pension schemes to future accrual
Guaranteed Minimum Pension equalisation expense
Release of contingent consideration
Impairment of goodwill
Consultancy costs associated with the Growth Acceleration Programme
Loss on disposal of businesses
Redundancy and executive change costs
Other restructuring costs

Adjusted profit before tax

2018

2017

120,748

80,586

20,284
(8,575)
920
–
–
4,052
658
2,896
2,862

27,183
–
–
(10,000)
21,594
1,630
–
1,980
1,803

143,845

124,776

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ROTORK ANNUAL REPORT 2018

101

STRATEGIC REPORT

NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For the year ended 31 December 2018

2. Alternative performance measures continued
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
Curtailment gain from the closure of defined benefit pension schemes to future accrual
Guaranteed Minimum Pension equalisation expense
Release of contingent consideration
Impairment of goodwill
Consultancy costs associated with the Growth Acceleration Programme
Loss on disposal of businesses
Redundancy and executive change costs
Other restructuring costs
Tax effect on adjusted items

Adjusted net profit attributable to ordinary shareholders

2018

2017

91,744

55,613

20,284
(8,575)
920
–
–
4,052
658
2,896
2,862
(5,025)

27,183
–
–
(10,000)
21,594
1,630
–
1,980
1,803
(7,879)

109,816

91,924

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. Adjusted dividend cover
Dividend cover is calculated as earnings per share divided by dividends per share. Adjusted dividend cover is calculated as adjusted
earnings per share as defined in note 2c above divided by dividends per share.

e. Return on capital employed
The return on capital employed ratio is used by management to help ensure that capital is used efficiently.

Adjusted operating profit

Total equity
Cash and cash equivalents
Interest bearing loans and borrowings
Pension deficit net of deferred tax

Capital employed

Average capital employed

Return on capital employed

2018

2017

146,015

130,162

513,628
(104,489)
60,881
22,001

457,200
(63,192)
75,807
38,924

492,021

508,739

500,380

522,141

29.2%

24.9%

Average capital employed is defined as the average of the capital employed at the start and end of the relevant year.

f. Working capital as a percentage of revenue
Working capital as a percentage of revenue is monitored as control of working capital is key to achieving our cash generation targets. It
is calculated as inventory plus trade receivables, less trade payables, divided by revenue.

102 ROTORK ANNUAL REPORT 2018

g. Organic constant currency (OCC)
OCC results remove the results of businesses acquired or disposed of during the period that are not consistently presented in both
periods’ results. The 2018 results are restated at 2017 exchange rates.

For businesses acquired, the full results are removed from the year of acquisition. In the following year, the results for the number of
months equivalent to the pre-acquisition period in the prior year are removed. For disposals and closure of businesses, the results are
removed from the current and prior periods.

Key headings in the income statement are reconciled to OCC as follows:

Revenue
Cost of sales

Gross margin
Overheads

Adjusted operating profit
Interest

Adjusted profit before tax
Adjusted taxation

Adjusted profit after tax

Revenue
Cost of sales

Gross margin
Overheads

Adjusted operating profit
Interest

Adjusted profit before tax
Taxation

Adjusted profit after tax

31 December
2018

Currency
adjustment

Impact of
disposals

OCC
31 December
2018

695,713
(384,203)

311,510
(165,495)

146,015
(2,170)

143,845
(34,029)

109,816

16,436
(10,361)

6,075
(2,404)

3,671
(136)

3,535
(838)

2,697

(3,145) 709,004
1,943 (392,621)

(1,202) 316,383
1,141 (166,758)

(61) 149,625
(2,310)
(4)

(65)
40

147,315
(34,827)

(25) 112,488

31 December
2017

Currency
adjustment

Impact of
disposals

31 December
2017

642,229
(358,090)

284,139
(153,977)

130,162
(5,386)

124,776
(32,852)

91,924

–
–

–

(5,319)
636,910
3,290 (354,800)

(2,029)
2,213

282,110
(151,764)

184
(8)

130,346
(5,394)

176
11

187

124,952
(32,841)

92,111

ROTORK ANNUAL REPORT 2018

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STRATEGIC REPORT

NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For the year ended 31 December 2018

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

Controls
2018

Fluid
Systems
2018

Gears
2018

Instruments
2018

Elimination
2018

Unallocated
2018

Group
2018

351,858
–

166,328
–

76,260
9,352

101,267
5,887

–
(15,239)

351,858

166,328

85,612

107,154

(15,239)

–
–

–

695,713
–

695,713

Adjusted operating profit*
Amortisation of acquired intangible assets

101,344
(2,851)

16,135
(779)

15,307
(2,082)

24,085
(14,572)

98,493

15,356

13,225

9,513

–
–

–

(10,856) 146,015
(20,284)

–

(10,856) 125,731
(2,813)

122,918
(2,170)
(29,004)

91,744

Segment result before adjustments
Other 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
Other adjustments

Operating profit
Net finance expense
Income tax expense

Profit for the year

Controls
2017

Fluid
Systems
2017

Gears
2017

Instruments
2017

Elimination
2017

Unallocated
2017

Group
2017

325,174
–

150,117
–

72,814
11,086

94,124
6,498

–
(17,584)

325,174

150,117

83,900

100,622

(17,584)

–
–

–

92,903
(2,888)

90,015

9,019
(1,409)

15,724
(2,021)

20,457
(20,865)

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

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

104 ROTORK ANNUAL REPORT 2018

Depreciation
Amortisation:
– Acquired intangible assets
– Development costs
Impairment of goodwill
Release of contingent consideration
Impairment of development cost assets
Impairment of property, plant and equipment
Non-cash items: equity settled share-based payments
Net financing expense
Capital expenditure

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
Capital expenditure

Controls
2018

5,113

2,851
1,463
–
–
143
1,350
2,107
–
5,201

Controls
2017

5,622

2,888
1,670
–
–
1,515
–
7,355

Fluid
Systems
2018

2,507

779
216
–
–
162
–
925
–
1,598

Fluid
Systems
2017

2,801

1,409
469
–
–
652
–
1,495

Gears
2018

Instruments
2018

Unallocated
2018

Group
2018

2,374

1,616

11,642

2,082
242
–
–
216
–
532
–
2,023

14,572
654
–
–
178
–
522
–
1,606

–
–
–
–
–
–
588
(2,170)
–

20,284
2,575
–
–
699
1,350
4,674
(2,170)
10,428

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

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

2018

2017

71,458
80,772
127,960
149,180
42,235
224,108

76,281
82,165
113,822
149,526
31,549
188,886

695,713

642,229

UK
2018

Europe
2018

USA
2018

Other
Americas
2018

Rest of
World
2018

Group
2018

61,342
36,154
23,651

67,424
7,380
28,762

57,040
8,761
8,596

742
–
969

43,609
9,222
17,360

230,157
61,517
79,338

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

ROTORK ANNUAL REPORT 2018

105

O
V
E
R
V
I
E
W

G
O
V
E
R
N
A
N
C
E

F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S

C
O
M
P
A
N
Y

N
F
O
R
M
A
T
I
O
N

STRATEGIC REPORT

NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For the year ended 31 December 2018

4. Other adjustments
The other adjustments are adjustments that management consider to be significant and where separate disclosure enables stakeholders
to assess the underlying trading performance of the Group on a consistent basis.

The other adjustments to profit included in statutory profit are as follows:

Curtailment gain from the closure of defined benefit pension schemes to future accrual
Guaranteed Minimum Pension (GMP) equalisation expense
Release of contingent consideration
Goodwill impairment

Consultancy costs associated with the Growth Acceleration Programme
Loss on disposal of businesses
Redundancy and executive change costs
Other restructuring costs

2018

2017

8,575
(920)
–
–

–
–
10,000
(21,594)

7,655

(11,594)

(4,052)
(658)
(2,896)
(2,862)

(1,630)
–
(1,980)
(1,803)

(10,468)

(5,413)

(2,813)

(17,007)

After the completion of consultation processes with members of the UK and US defined benefit pension schemes both schemes were
closed to future accrual on 31 March 2018 and 31 December 2018, respectively. The closure to future accrual of the two schemes
resulted in a one off, non-cash curtailment gain which reduced the defined benefit obligation by £8,575,000 (2017: £nil).

In October 2018 the High Court judgement in the case of Lloyds Banking Group clarified that pension benefits under the UK scheme
need to be equalised for the effects of unequal GMPs. An allowance of £920,000 (2017: £nil) has been included as a past service cost
within the UK scheme’s 2018 defined benefit pension expense for all such arrears.

Consultancy costs of £4,052,000 (2017: £1,630,000) were incurred on developing the Growth Acceleration Programme. The consultancy
costs in the second half of the year reduced to £752,000.

The loss on disposal of £658,000 (2017: £nil) relates to the sale of the Hiller business, closure of an engineering office and the closure of
the Valvekits business. The assets of £3,831,000 disposed of included goodwill (£2,239,000), inventory (£1,541,000) and a building
(£474,000). Redundancy costs (£704,000) and asset write-downs specific to the disposals (£464,000) contributed to the other costs of
exiting the businesses. Proceeds of £3,010,000 were received in respect of the Hiller business and £1,330,000 in respect of the assets of
the Valvekits business. The impact of these disposals on revenue and profit in 2018 and the prior year is shown in note 2.

The £2,896,000 (2017: £1,980,000) redundancy and executive change costs have been incurred as a result of the progress made with
the Growth Acceleration Programme.

Other restructuring costs include £700,000 (2017: £nil) related to ending development and sales of products for the containment area of
nuclear power plants and a £1,350,000 (2017: £nil) impairment charge resulting from the ongoing review of the global footprint.

The £8,575,000 credit relating to the closure of the UK and US defined benefit pension schemes is included in other income. All other
adjustments are included in administrative expenses, with the exception of the loss on the disposal of businesses which is included in
other expenses. The asset write-downs relating to property, and certain of the costs relating to the closure and disposal of businesses are
not tax-deductible. The remaining adjustments are taxable or tax-deductible in the country in which the expense is incurred.

106 ROTORK ANNUAL REPORT 2018

5. Other income and expense

Release of contingent consideration
Curtailment gain from the closure of defined benefit pension schemes to future accrual (note 4)
Gain on disposal of property, plant and equipment
Other

Other income

Loss on disposal of business
Loss on disposal of property, plant and equipment
Other

Other expense

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

2018

2017

–
8,575
120
205

8,990

10,000
–
420
231

10,651

2018

658
58
82

798

2017

–
273
41

314

2018

2017

159,914
21,747
7,882
4,674
95

147,637
20,486
8,951
3,390
539

194,312

181,003

2018
Number

2017
Number

1,953
766
470
664

3,853

1,033
2,820

3,853

1,814
807
466
651

3,738

1,012
2,726

3,738

O
V
E
R
V
I
E
W

G
O
V
E
R
N
A
N
C
E

F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S

C
O
M
P
A
N
Y

N
F
O
R
M
A
T
I
O
N

ROTORK ANNUAL REPORT 2018

107

STRATEGIC REPORT

NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For the year ended 31 December 2018

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

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
Impairment of development cost assets
Impairment of property, plant and equipment
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:
– Half year review
– 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;
iv) Within finance income and expenses.

108 ROTORK ANNUAL REPORT 2018

2018

1,618
660

2,278

2017

1,206
175

1,381

2018

2017

(3,072)
(1,055)
(321)

(3,184)
(1,607)
(1,976)

(4,448)

(6,767)

2018

2017

(1,423)
1,399
3,164

(1,399)
8,945
(376)

3,140

7,170

(24)
3,164

3,140

7,546
(376)

7,170

Notes

2018

2017

i
i

iii
iii
iii
iii
ii
i
i
iii
iv

11,148
494

20,284
2,575
699
1,350
3,483
2,634
3,734
11,715
(339)

869
231

1,100
22

1,122

46
3

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
3

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 19.0% (2017: 19.25%)

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

2018

2017

3,476
(851)

27,646
(223)

(1,307)
30
233

3,407
(974)

2,625

2,433

27,386
343

27,423

30,048

27,729

30,162

(6,711)
1,162
360

(1,044)

29,004

120,748

22,942

7,107
1,015
(90)
(1,159)
30
–
–
(841)

29,004

24.0%

(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%

Adjusted profit before tax (note 2b)

143,845

124,776

Total tax charge for the year
Amortisation of acquired intangible assets
Defined benefit pension schemes (note 4)
Restructuring costs (note 4)

Adjusted total tax charge for the year

Adjusted effective tax rate

29,004
4,499
(1,301)
1,827

34,029

23.7%

24,973
6,664
–
1,215

32,852

26.3%

A tax credit of £98,000 (2017: £252,000) in respect of share-based payments has been recognised directly in equity in the year.

The effective tax rate for the year is 24.0% (2017: 31.0%). The adjusted effective tax rate is 23.7% (2017: 26.3%) and is lower than the
effective tax rate for the year principally because of the geographic mix of those countries where certain of the adjusting items were
incurred.

The adjusted effective tax rate has fallen from 26.3% in 2017 to 23.7% in 2018, principally because of the reduction in the US corporate
tax rate from 35% to 21%, which came into effect on 1 January 2018. In 2017 this resulted in a one-off charge to tax of £1,162,000 on
the revaluation of the US net deferred tax asset, and in 2018 this has resulted in a reduction in the US tax charge because of the lower
rate of tax. The Group expects its adjusted effective tax rate to continue to fall in line with the current trend in corporate tax rates where
Rotork operates. However the adjusted effective tax rate will still be higher than the standard UK rate due to higher rates of tax in China,
the US, 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 £321,281,000
(2017: £305,277,000).

ROTORK ANNUAL REPORT 2018

109

O
V
E
R
V
I
E
W

G
O
V
E
R
N
A
N
C
E

F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S

C
O
M
P
A
N
Y

N
F
O
R
M
A
T
I
O
N

STRATEGIC REPORT

NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For the year ended 31 December 2018

10. Goodwill

Cost
At 1 January
Derecognised on disposal of business
Other movements
Exchange adjustments

At 31 December

Provision for impairment
At 1 January
Impairment charge
Exchange adjustments

At 31 December

Net book value

2018

2017

249,622
(2,239)
–
4,465

251,407
–
255
(2,040)

251,848

249,622

21,594
–
97

21,691

–
21,594
–

21,594

230,157

228,028

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, the Mastergear Italy CGU was consolidated with the Gears Italy CGU and the Dallas
CGU was consolidated with the Rotork Controls Inc CGU. In each case this is the lowest level at which the goodwill is monitored for
internal management purposes. The disposal relates to the goodwill attributable to the Hiller nuclear business which was sold during
the year.

Cash generating unit

Schischek
Rotork Fluid Systems
Rotork Controls Inc
Bifold
Instruments sub-group
Other cash generating units

Total Group

Discount rate

2018

2017

20,506
13.3% (2017: 12.6%)
15,782
12.9% (2017: 12.3%)
14,527
10.7% (2017: 10.2%)
11.6% (2017: 11.0%)
47,467
11.2% (2017: 10.5%) 103,454
28,421

20,275
15,604
11,464
47,467
100,485
32,733

230,157

228,028

Impairment testing
The Group is required to test, on an annual basis, whether goodwill has suffered any impairment. In 2017 an impairment of £21,594,000
was charged, including £19,754,000 relating to the Bifold CGU.

The key assumptions used in the annual impairment review which are common to all CGUs are set out below:

i) Discount rates
The discount rates for the significant CGUs presented above are pre-tax rates that reflect current market assessments of the time value of
money and the risks specific to the CGU for which the future cash flows have not been adjusted. Discount rates are based on estimations
that market participants operating in similar sectors to Rotork would make, using the Group’s economic profile as a starting point. For
each CGU we adjusted the risk premium on a weighted average basis to reflect the region in which the CGU carries out the majority of
its business, applied a premium based on the size of the CGU and applied a market participant tax rate in the region the CGU operates.
In calculating the discount rates, consideration was given to exclude risks that were not relevant or which had already been reflected in
the cash flows.

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. The compound annual revenue growth forecast for the Group during years one to three, used within the
impairment models, is 7.5%.

In the period after the three year plan growth rates are forecast at 5.0% (2017: 5.0%) per annum for the next two years and at 2.0%
(2017: 2.0%) for the long-term growth rate. The 5.0% rate reflects a realistic market forecast for the flow control market up until 2023.
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 2.0% used in the impairment calculations.

110 ROTORK ANNUAL REPORT 2018

Sensitivity analysis
The Group has conducted an analysis of the sensitivity of the impairment test to changes in the key assumptions used to determine the
recoverable amount for each of the CGUs to which goodwill is allocated.

For all CGUs the sensitivity analysis shows that if pre-tax discount rates are raised by 1%; short term growth rates are lowered by 10% in
years one to three; or long term growth rates are lowered by 1% then no impairment would arise. Each of these sensitivities are
considered to be a reasonably possible change.

Bifold is the CGU which has a recoverable amount closest to its carrying value after applying the sensitivities above. The sensitivity results
for Bifold are summarised below.

Recoverable amount less carrying value (headroom)

11. Intangible assets

Cost
31 December 2016
Internally developed
Exchange adjustments

31 December 2017
Internally developed
Disposal of business
Disposals
Exchange adjustments

31 December 2018

Amortisation
31 December 2016
Charge for the year
Exchange adjustments

31 December 2017
Charge for the year
Impairment charge
Disposal of business
Disposals
Exchange adjustments

31 December 2018

Net book value
31 December 2017

31 December 2018

Base case

Discount rate
+1%

Short term
growth rate
-10%

Long term
growth rate
-1%

24,073

12,461

1,801

15,082

Acquired intangible assets

Research and
development
costs

Brands

Customer
relationships

Other

Total

20,395
3,357
(47)

23,705
3,831
(1,434)
(4,447)
52

53,106
–
(1,036)

52,070
–
(775)
–
1,304

122,117
–
(1,637)

120,480
–
(2,471)
–
2,182

25,415
–
(481)

24,934
–
(2,733)
–
312

221,033
3,357
(3,201)

221,189
3,831
(7,413)
(4,447)
3,850

21,707

52,599

120,191

22,513

217,010

11,639
2,699
(14)

14,324
2,575
699
(568)
(4,455)
23

25,938
6,436
(822)

31,552
5,753
–
(775)
–
1,061

58,586
17,459
(1,324)

74,721
12,636
–
(2,471)
–
1,826

15,851
3,287
(2)

19,136
1,895
–
(2,733)
–
294

112,014
29,881
(2,162)

139,733
22,859
699
(6,547)
(4,455)
3,204

12,598

37,591

86,712

18,592

155,493

9,381

9,109

20,518

45,759

15,008

33,479

5,798

3,921

81,456

61,517

Other acquired intangible assets represent order books and intellectual property.

The amortisation charge is recognised within administrative expenses in the income statement. The impairment charge relates to the cost
of ending development and sales of products for the containment area of nuclear power plants.

The disposal of business relates to the sale of the Hiller business, the closure of an engineering business and the closure of the Valvekits
business (note 4).

O
V
E
R
V
I
E
W

G
O
V
E
R
N
A
N
C
E

F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S

C
O
M
P
A
N
Y

N
F
O
R
M
A
T
I
O
N

ROTORK ANNUAL REPORT 2018

111

STRATEGIC REPORT

NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For the year ended 31 December 2018

12. Property, plant and equipment

Cost
31 December 2016
Additions
Disposals
Exchange adjustments

31 December 2017
Additions
Disposals
Exchange adjustments

31 December 2018

Depreciation
31 December 2016
Charge for the year
Disposals
Exchange adjustments

31 December 2017
Charge for the year
Disposals
Impairment charge
Exchange adjustments

31 December 2018

Net book value
31 December 2017

31 December 2018

Land and
buildings

Plant and
equipment

Total

61,652
3,008
(1,874)
868

63,654
772
(464)
962

100,673
9,397
(911)
(1,475)

107,684
9,656
(5,035)
1,535

162,325
12,405
(2,785)
(607)

171,338
10,428
(5,499)
2,497

64,924

113,840

178,764

13,484
2,007
(195)
8

15,304
2,030
(8)
1,312
461

65,075
10,225
(356)
(635)

74,309
9,612
(4,768)
38
1,136

78,559
12,232
(551)
(627)

89,613
11,642
(4,776)
1,350
1,597

19,099

80,327

99,426

48,350

33,375

81,725

45,825

33,513

79,338

The net book value of the Group’s plant and equipment includes £2,000 (2017: £4,000) 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

2018

2017

7,385
38,440

7,360
40,990

45,825

48,350

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. The impairment charge of £1,350,000 arose as a result of the ongoing review of the global footprint (note 4).

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
2018

450
4
7,481
5,896
5,231

19,062
(1,725)

Liabilities
2018

(1,346)
(12,530)
–
–
(3,571)

(17,447)
1,725

17,337

(15,722)

Net
2018

(896)
(12,526)
7,481
5,896
1,660

1,615
–

1,615

Assets
2017

495
21
11,428
6,276
4,398

22,618
(1,400)

Liabilities
2017

(1,263)
(16,502)
–
–
(3,014)

(20,779)
1,400

21,218

(19,379)

Net
2017

(768)
(16,481)
11,428
6,276
1,384

1,839
–

1,839

112 ROTORK ANNUAL REPORT 2018

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
Charged directly to equity in respect of pension schemes
Credited/(charged) directly to hedging reserves in respect of cash flow hedges
Exchange differences

Balance at 31 December

2018

2017

1,839
1,044
98
(1,446)
18
62

1,615

411
5,189
213
(2,140)
(1,358)
(476)

1,839

A deferred tax asset of £17,337,000 (2017: £21,218,000) has been recognised at 31 December 2018. 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 £1,179,000 (2017: £1,306,000) 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

Included in cost of sales was £235,708,000 (2017: £216,711,000) in respect of inventories consumed in the year.

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

2018

2017

70,866
6,897
16,976

67,758
8,135
16,015

94,739

91,908

2018

2017

352

142

152,089
(6,580)

152,163
(6,634)

145,509

145,529

1,429

3,299
11,747
8,115

2,726

2,896
9,039
7,267

23,161

19,202

Included within non-trade receivables is £89,000 (2017: £nil) which relates 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

2018

2017

73,136
56
31,297

104,489
–

104,489

56,912
60
6,220

63,192
–

63,192

ROTORK ANNUAL REPORT 2018

113

O
V
E
R
V
I
E
W

G
O
V
E
R
N
A
N
C
E

F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S

C
O
M
P
A
N
Y

N
F
O
R
M
A
T
I
O
N

STRATEGIC REPORT

NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For the year ended 31 December 2018

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
2018

£1 Non-
redeemable
preference
shares
2018

0.5p Ordinary
shares
issued
and fully
paid up
2017

£1 Non-
redeemable
preference
shares
2017

4,352
6

4,358

40
–

4,350
2

4,352

871,625

870,429

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 £1,837,000 (2017: £713,000) in respect of the 1,197,838 (2017: 378,540) ordinary shares issued during
the year: £6,000 (2017: £2,000) was credited to share capital and £1,831,000 (2017: £711,000) 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 £4,227,000 (2017: £1,594,000) and
represents 1,387,000 (2017: 566,000) 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:

3.35p final dividend (2017: 3.15p)
2.20p interim dividend (2017: 2.05p)

2018
Payment date

2018

2017

23 May
21 September

29,154
19,134

27,391
17,827

48,288

45,218

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
3.70p

3.35p

2018

2017

32,250

29,159

114 ROTORK ANNUAL REPORT 2018

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 869.9m shares (2017: 869.4m 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

2018

2017

91,744

55,613

869,863
(115)
123

869,087
252
95

869,871

869,434

10.5p

6.4p

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

2018

2017

109,816

91,924

869,871

869,434

12.6p

10.6p

Diluted earnings per share
Diluted earnings per share is based on the profit for the year attributable to the ordinary shareholders and 874.0m shares (2017: 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

2018

2017

91,744

55,613

869,871
1,583
2,514

869,434
1,583
993

873,968

872,010

10.5p

6.4p

2018

2017

109,816

91,924

873,969

872,010

12.6p

10.5p

ROTORK ANNUAL REPORT 2018

115

O
V
E
R
V
I
E
W

G
O
V
E
R
N
A
N
C
E

F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S

C
O
M
P
A
N
Y

N
F
O
R
M
A
T
I
O
N

STRATEGIC REPORT

NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For the year ended 31 December 2018

19. Interest bearing loans and borrowings
This note provides information about the contractual terms of the Group’s interest bearing loans and borrowings. For more information
about the Group’s exposure to interest rate, liquidity and currency risks, see note 26.

Non-current liabilities
Preference shares classified as debt
Bank loans
Finance lease liabilities

Current liabilities
Bank loans
Finance lease liabilities

2018

2017

40
30,831
–

40
45,837
2

30,871

45,879

30,008
2

29,925
3

30,010

29,928

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

Currency

Sterling
Sterling
Euro
Sterling

Interest rates Year of maturity

2018

2017

9.5%
1.50% – 1.55%
2.35%
8.77%

–
2019-20
2032
2019

40
59,899
940
2

40
74,746
1,016
5

60,881

75,807

Principal
2018

30,008
30,831
–
2
–

60,841

Interest
2018

275
131
–
–
–

406

Minimum
payments
2018

30,283
30,962
–
2
–

Principal
2017

29,925
45,837
–
3
2

61,247

75,767

Interest
2017

225
77
–
–
–

302

Minimum
payments
2017

30,150
45,914
–
3
2

76,069

2018

2017

207,021
(179,728)

237,054
(188,844)

27,293
409
21,703
641
2,677
5,040

48,210
344
17,512
331
2,823
4,537

57,763

73,757

31,274
26,489

52,293
21,464

57,763

73,757

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

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.

116 ROTORK ANNUAL REPORT 2018

21. Provisions

Balance at 1 January 2018
Exchange differences
(Credit)/charge to the income statement
Provisions utilised during the year
Disposal of business

Balance at 31 December 2018

Maturity at 31 December 2018
Non-current
Current

Maturity at 31 December 2017
Non-current
Current

Contingent
consideration

Warranty
provision

Restructuring
provision

397
3
(91)
(10)
–

299

–
299

299

–
397

397

5,847
148
3,641
(2,766)
(359)

6,511

2,149
4,362

6,511

1,929
3,918

5,847

–
27
2,674
(1,125)
–

1,576

–
1,576

1,576

–
–

–

Total

6,244
178
6,224
(3,901)
(359)

8,386

2,149
6,237

8,386

1,929
4,315

6,244

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.

The restructuring provision relates to amounts outstanding in respect of redundancy and other restructuring costs associated with the
Growth Acceleration Programme.

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

2018
Assets

2018
Liabilities

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

–
308

308

–

308

1,407
1,275

2,682

2018

2017

47,332

49,183

11,792

13,093

11,792

13,093

10,600
6,586
22,964

40,150

11,281
6,667
24,217

42,165

2017
Assets

367
3,101

3,468

2017
Liabilities

1,766
–

1,766

–

2,682

3,468

245

1,521

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 2018 are recognised in the income statement in the period
or periods during which the hedged forecast transaction affects the income statement.

ROTORK ANNUAL REPORT 2018

117

O
V
E
R
V
I
E
W

G
O
V
E
R
N
A
N
C
E

F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S

C
O
M
P
A
N
Y

N
F
O
R
M
A
T
I
O
N

STRATEGIC REPORT

NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For the year ended 31 December 2018

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 was 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 US Pension Plan which was closed to new entrants in 2009 was closed to future accrual on 31 December 2018.

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.

Upon the closure to future accrual of the UK and US defined benefit pension scheme the members were invited to join the defined
contribution scheme. The total gain of £8,575,000 from the two curtailments is disclosed in other income in the income statement. The
High Court judgement in the case of Lloyds Banking Group on 26 October 2018 clarified that pension benefits under the UK Scheme
need to be equalised for the effects of unequal GMPs. The impact of GMP equalisation is £920,000 and is shown as a past service cost
in the income statement.

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
Curtailment gain from scheme closures to future accrual
Past service cost – Guaranteed minimum pension equalisation
Currency loss/(gain)

Liabilities at 31 December

Movements in fair value of plan assets

Assets at 1 January
Interest income on plan assets
Employer contributions
Member contributions
Benefits paid
Return on plan assets, excluding interest income on plan assets
Currency gain/(loss)

Assets at 31 December

118 ROTORK ANNUAL REPORT 2018

2018

2017

237,054
1,427
208
152
5,864
(10,818)
(20,795)
(8,575)
920
1,584

236,543
3,846
178
621
6,531
(7,441)
(842)
–
–
(2,382)

207,021

237,054

2018

2017

188,844
4,809
7,187
152
(10,818)
(11,294)
848

178,045
4,924
8,971
621
(7,441)
5,007
(1,283)

179,728

188,844

Expense recognised in the income statement

Current service costs
Administration costs
Curtailment gain from scheme closures to future accrual
Past service cost – Guaranteed minimum pension adjustment
Net interest cost

The expense is recognised in the following line items in the income statement

Cost of sales
Administrative expenses
Other income
Net finance expense

Remeasurements over the year

Experience adjustments on plan assets
Experience adjustments on plan liabilities
Actuarial gain/(loss) from changes to financial assumptions
Actuarial gain from changes to demographic assumptions
Curtailment gain from scheme closures to future accrual
Past service cost – Guaranteed minimum pension adjustment
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

2018

2017

1,427
208
(8,575)
920
1,055

(4,965)

2018

571
1,984
(8,575)
1,055

(4,965)

3,846
178
–
–
1,607

5,631

2017

1,443
2,581
–
1,607

5,631

2018

2017

(11,294)
(451)
19,781
1,465
8,575
(920)
(736)

16,420

5,007
2,601
(7,392)
5,633
–
–
1,099

6,948

2018

2017

48,210
1,427
208
1,055
(16,420)
(7,187)

58,498
3,846
178
1,607
(6,948)
(8,971)

27,293

48,210

Liability for defined benefit obligations
The principal actuarial assumptions at 31 December 2018 (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)

2018

2.8
n/a
3.1
4.6
3.2

2017

2.4
3.7
3.1
4.6
3.2

2018

4.4
n/a
0.0
0.0
n/a

2017

3.8
3.0
0.0
0.0
n/a

2018

3.0
n/a
2.8
4.1
3.2

2017

2.5
3.6
2.8
4.1
3.2

In the UK the Retail Price Index is used as the rate of inflation as it is a requirement of the UK Scheme’s rules.

O
V
E
R
V
I
E
W

G
O
V
E
R
N
A
N
C
E

F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S

C
O
M
P
A
N
Y

N
F
O
R
M
A
T
I
O
N

ROTORK ANNUAL REPORT 2018

119

STRATEGIC REPORT

NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For the year ended 31 December 2018

24. Pension schemes continued
The split of the Schemes’ quoted assets were as follows:

Equities
Targeted return
Property
Corporate bonds
LDI/absolute return bonds
Cash
US deposit administration contract

Total

Actual return on the Schemes’ assets

2018
Fair value

30,581
45,243
17,326
41,740
29,892
–
14,946

2017
Fair value

34,537
48,463
16,527
42,977
32,169
635
13,537

179,728

188,844

(6,485)

9,931

The UK Scheme has a strategic asset allocation which was agreed after considering its liability profile, funding position, expected return
of the various asset classes and the need for diversification. The level of interest rate and inflation hedging is being gradually increased by
the use of LDI funds. Currently the Scheme has hedged around 24% of its liabilities, as measured on a low risk gilts basis, and this will
automatically increase by 3% each year. A series of triggers have also been agreed so that, if/when gilt yields rise, the pace of hedging
will be accelerated.

The demographic assumptions are the same as used for the 2017 year end, except for mortality. The mortality assumptions used for the
UK Scheme are the S2NXA year of birth tables (2017: S2NXA) with future changes in mortality based on the CMI_2017 projections
(2017: CMI_2016 projections) with a long-term rate of improvement of 1.25% per annum (2017: 1.25%).

By way of example the respective mortality tables indicate the following life expectancy:

Current age

65
45

Sensitivity analysis on the Schemes’ liabilities

Adjustments to assumptions

Discount rate
Plus 0.5% p.a.
Minus 0.5% p.a.
Inflation
Plus 0.5% p.a.
Minus 0.5% p.a.
Life expectancy
Decrease mortality rates by a factor of 10%
Increase mortality rates by a factor of 10%

2018
Life expectancy at age 65

2017
Life expectancy at age 65

Male

22.1
23.5

Female

24.1
25.6

Male

22.2
23.6

Female

24.2
25.7

Approximate effect on liabilities

(20,800)
23,300

14,800
(13,700)

7,200
(6,400)

The above sensitivities are approximate and only show the likely effect of an assumption being adjusted whilst all other assumptions
remain the same.

For the life expectancy sensitivity we have increased/decreased the mortality rates by a factor of 10%. Broadly speaking this decreases/
increases the assumed life expectancy by slightly less than one year.

The sensitivity analysis shown above was determined using the same method as per the calculation of liabilities for the balance sheet
disclosures, but using assumptions adjusted as detailed above.

Effect of the Schemes on the Group’s future cash flows
The Group is required to agree a Schedule of Contributions with the Trustees of the UK Scheme following a valuation which must be
carried out at least once every three years. Following the valuation of the UK Scheme as at 31 March 2016, the Group is continuing to
pay deficit contributions of £5,500,000 a year. The next valuation will be carried out on 31 March 2019.

The Group estimates that cash contributions to the Group’s defined benefit pension schemes during 2019 will be nil for regular payments
(2018: £1,687,000) and £5,500,000 of additional payments in relation to past service (2018: £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 £6,455,000 (2017: £5,105,000).

120 ROTORK ANNUAL REPORT 2018

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)

2018

2017

637
1,385
2,652

4,674

566
789
2,035

3,390

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 3 year or the 5 year scheme.

Grant date
Share price at grant date
Exercise price
Shares granted under scheme
Vesting period
Expected volatility
Risk free rate
Expected dividends expressed as a dividend yield
Probability of ceasing employment before vesting
Fair value

3 year scheme

5 year scheme

2018

2017

2018

2017

1 October
333p
272p
711,745
3 years
30.2%
0.95%
1.67%
2%
91p

2 October 1 October
333p
272p
178,422
5 years
27.8%
1.17%
1.67%
2%
97p

262p
189p
555,917
3 years
30.7%
0.53%
1.98%
2%
82p

2 October
262p
189p
264,906
5 years
27.3%
0.78%
1.98%
2%
83p

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

2018

2017

Average
option price
per share

Options

163p 4,547,201
272p
890,167
154p (1,197,838)
(156,568)
172p

160p
189p
188p
160p

Options

4,541,915
820,823
(378,520)
(437,017)

189p 4,082,962

163p

4,547,201

Of the 4,082,962 outstanding options (2017: 4,547,201), 380,000 are exercisable (2017: 46,000).

The Group received proceeds of £1,837,000 in respect of the 1,197,838 options exercised during the year: £6,000 was credited to share
capital and £1,831,000 to share premium. The weighted average share price at date of exercise was 269p (2017: 257p).

The weighted average remaining life of 2,036,424 (2017: 2,561,903) awards outstanding under the 3 year plan is 1.7 years. The weighted
average remaining life of 2,046,538 (2017: 1,985,298) awards outstanding under the 5 year plan is 2.5 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.

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 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 was introduced in the 2017 and 2018 LTIP awards,
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.

ROTORK ANNUAL REPORT 2018

121

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V
E
R
V
I
E
W

G
O
V
E
R
N
A
N
C
E

F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S

C
O
M
P
A
N
Y

N
F
O
R
M
A
T
I
O
N

STRATEGIC REPORT

NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For the year ended 31 December 2018

25. Share-based payments continued
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 and 2018 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 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.

The performance period for the 2016 awards ended on 31 December 2018. Messrs. PricewaterhouseCoopers LLP as independent
actuaries certified to the Remuneration Committee that there was a 79.2% vesting of this award as the Company was in the 85th
percentile relative to the comparator group and the Group’s EPS growth was 22.3% over the performance period. These awards will vest
during 2019.

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 and ROIC performance conditions

2015 Award
2016 Award
2017 Award
2018 Award

Outstanding
at start
of year

960,850
1,528,387
988,435
–

2018

2017

7 Mar 2018 8 May 2017
239p
1,416,628
3 years
32.0%
0.2%
2.1%
5% p.a.
114p
226p

264p
1,301,159
3 years
30.9%
0.8%
2.0%
5% p.a.
149p
250p

Granted
during year

Vested
during year

Lapsed

Outstanding
at end
of year

–
–
–
1,301,159

3,477,672

1,301,159

–
–
–
–

–

(960,850)
(176,919)
(246,951)
(249,403)

–
1,351,468
741,484
1,051,756

(1,634,123)

3,144,708

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.

122 ROTORK ANNUAL REPORT 2018

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

Carrying amount

2018

2017

145,509
23,513
104,489

145,529
19,344
63,192

273,511

228,065

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

Carrying amount

2018

2017

18,964
36,617
54,236
35,692

19,646
39,841
54,476
31,566

145,509

145,529

Provisions against trade receivables
The aging of trade receivables and the associated provision for impairment at the reporting date was:

Not past due
Past due 0–30 days
Past due 31–60 days
Past due 61–90 days
Past due more than 91 days

Gross
2018

Provision
2018

Gross
2017

96,719
27,425
10,629
5,050
12,266

(26) 100,640
25,951
10,012
4,263
11,297

–
(38)
(93)
(6,423)

152,089

(6,580)

152,163

Provision
2017

(10)
(6)
(81)
(87)
(6,450)

(6,634)

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.

ROTORK ANNUAL REPORT 2018

123

O
V
E
R
V
I
E
W

G
O
V
E
R
N
A
N
C
E

F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S

C
O
M
P
A
N
Y

N
F
O
R
M
A
T
I
O
N

STRATEGIC REPORT

NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For the year ended 31 December 2018

26. Financial instruments continued
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 (2017: £7m) on which interest would be payable at base rate plus 1.5% and a €5m overdraft facility (2017: €5m) on
which interest would be payable at base rate plus 1.1%.

During 2018 the Group repaid a further £15,000,000 of its £90,000,000 term facility and renegotiated to extend the remaining facility
to August 2020. The Group has a £60,000,000 Revolving Credit Facility which matures in August 2020. At year end £60,000,000 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 2018

Bank loans and overdrafts
Finance lease liabilities
Trade and other payables
Contingent consideration
Foreign exchange contracts
Non-redeemable preference shares

31 December 2017

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

60,840
2
87,482
299
1,407
40

61,245
2
87,482
299
1,407
40

30,284
2
87,482
299
1,407
–

30,049
–
–
–
–
–

150,070

150,475

119,474

30,049

912
–
–
–
–
–

912

–
–
–
–
–
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

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

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 £182,855,000 (2017: £190,786,000) and
the gross inflow is £180,480,000 (2017: £189,127,000).

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 2018 was a £2,375,000 liability (2017: £1,702,000 asset) comprising an asset of £nil (2017: £3,468,000) and a
liability of £2,374,000 (2017: £1,766,000). Forward exchange contracts in place at 31 December 2018 mature in 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.

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 2018 of £400,000
(2017: £300,000) 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 2018 of £600,000 (2017: £400,000). The method of estimation, which has been applied consistently,
involves assessing the transaction impact of US dollar and euro cash flows and the translation impact of US dollar and euro profits.

124 ROTORK ANNUAL REPORT 2018

The following significant exchange rates applied during the year:

US dollar
Euro

ii) Interest rate risk
The Group does not undertake any hedging activity in this area.

Average rate

Closing rate

2018

1.34
1.13

2017

1.29
1.14

2018

1.28
1.11

2017

1.35
1.13

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

2018

2017

42
60,839

1,061
74,746

60,881

75,807

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 9.47% (2017: 2.38%).The weighted average period for which
interest rates on the fixed rate financial liabilities are fixed is 0.5 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

2018

2017

30,010
30,030
209
632

29,928
44,928
911
40

60,881

75,807

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 reconciliation of the Group’s definition of capital employed is shown in note 2. The Group’s reconciliation
of net debt to net cash is shown below.

Total borrowings
Total cash and cash equivalents

Group net cash/(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 cash/(debt) at end of year

Notes

2018

2017

19
16

(60,881)
104,489

(75,807)
63,192

43,608

(12,615)

39,573
15,087
66
1,497

4,064
40,579
68
(2,338)

56,223
(12,615)

42,373
(54,988)

43,608

(12,615)

ROTORK ANNUAL REPORT 2018

125

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V
E
R
V
I
E
W

G
O
V
E
R
N
A
N
C
E

F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S

C
O
M
P
A
N
Y

N
F
O
R
M
A
T
I
O
N

STRATEGIC REPORT

NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
For the year ended 31 December 2018

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
2018

Fair value
2018

Carrying
amount
2017

Fair value
2017

145,509
23,513

145,529
19,344

104,489

63,192

12
(2,387)

3,468
(1,766)

(60,840)
(87,482)
(299)
(40)
(2)

(75,762)
(91,348)
(397)
(40)
(5)

122,473

62,215

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 (2017: 12 months), the carrying amount is equal to
the fair value. Further information on the contingent consideration is shown in note 21.

126 ROTORK ANNUAL REPORT 2018

27. Operating leases
Total future minimum lease payments under non-cancellable operating leases are as follows:

Less than one year
Between one and five years
More than five years

2018

2017

5,964
10,938
887

5,359
12,730
1,179

17,789

19,268

Of the £17,789,000 (2017: £19,268,000), £12,864,000 (2017: £13,996,000) 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

2018

2,313

2017

1,238

2018

9,138

2017

8,375

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 page 132 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 £80,000 during the year and £18,000 was outstanding at 31 December 2018.

Drax Group plc is a related party of Rotork plc by virtue of T Cobbold’s non-executive directorship. Sales to subsidiaries and associates of
Drax Group plc totalled £475,000 during the year and £143,000 was outstanding at 31 December 2018.

TechnipFMC plc is a related party of Rotork plc by virtue of A Andersen’s employment with the company. Sales to subsidiaries and
associates of TechnipFMC plc totalled £690,000 during the year and £289,000 was outstanding at 31 December 2018.

All the transactions above are on an arm’s length basis and on standard business terms

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

2018

2017

4,199
73
294
788

5,354

3,401
45
285
418

4,149

O
V
E
R
V
I
E
W

G
O
V
E
R
N
A
N
C
E

F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S

C
O
M
P
A
N
Y

N
F
O
R
M
A
T
I
O
N

ROTORK ANNUAL REPORT 2018

127

STRATEGIC REPORT

ROTORK PLC COMPANY BALANCE SHEET
At 31 December 2018

Non-current assets
Property, plant and equipment
Investments
Deferred tax assets

Current assets
Trade receivables
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

2018
£000

2017
£000

c
d
e

–
43,205
293

30
43,205
150

43,498

43,385

54
199,990
718
4,366

–
178,116
158
1,977

205,128

180,251

248,626

223,636

4,358
13,024
1,644
222,737

4,352
11,193
1,644
199,949

241,763

217,138

267
1,052
5,504

6,823

178
1,063
5,217

6,458

248,626

223,636

The Company reported a total comprehensive income for the financial year of £71,252,000 (2017: £67,439,000).

These Company financial statements, company number 00578327, were approved by the Board of Directors on 4 March 2019 and were
signed on its behalf by:

KG Hostetler and JM Davis, Directors.

128 ROTORK ANNUAL REPORT 2018

ROTORK PLC COMPANY STATEMENT OF CHANGES IN EQUITY
At 31 December 2018

Balance at 31 December 2016
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 2017

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

Share
capital
£000

4,350
–
–
2
–
–
–

4,352

–
–
6
–
–
–

Share
premium
£000

10,482
–
–
711
–
–
–

11,193

–
–
1,831
–
–
–

Capital
redemption
reserve
£000

1,644
–
–
–
–
–
–

Retained
earnings
£000

175,495
67,439
1,089
–
(1,157)
2,301
(45,218)

Total equity
£000

191,971
67,439
1,089
713
(1,157)
2,301
(45,218)

1,644

199,949

217,138

–
–
–
–
–
–

71,252
2,457
–
(4,850)
2,217
(48,288)

71,252
2,457
1,837
(4,850)
2,217
(48,288)

Balance at 31 December 2018

4,358

13,024

1,644

222,737

241,763

O
V
E
R
V
I
E
W

G
O
V
E
R
N
A
N
C
E

F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S

C
O
M
P
A
N
Y

N
F
O
R
M
A
T
I
O
N

ROTORK ANNUAL REPORT 2018

129

STRATEGIC REPORT

NOTES TO THE COMPANY FINANCIAL STATEMENTS

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.

130 ROTORK ANNUAL REPORT 2018

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.

The Company 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.

There are no critical accounting estimates or judgements requiring evaluation.

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

2018

2017

4,449
708
100
656

5,913

3,739
506
185
255

4,685

During the year there were 19 (2017: 21) employees of Rotork plc plus the two (2017: two) executive directors.

Disclosures required by paragraph 1 of schedule 5 of SI2008/410 are set out in the director’s remuneration report on pages 66 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.

2015 Award
2016 Award
2017 Award
2018 Award

Outstanding
at start
of year

370,040
614,491
270,802
–

–
–
–
604,342

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

1,255,333

604,342

Cost
At 1 January 2018

At 31 December 2018

Depreciation
At 1 January 2018
Charge for year

At 31 December 2018

Net book value
At 31 December 2018

At 31 December 2017

–
–
–
–

–

Outstanding
at end
of year

–
541,741
232,404
540,421

Lapsed

(370,040)
(72,750)
(38,398)
(63,921)

(545,109) 1,314,566

Plant and
equipment

221

191
30

221

–

Total

221

191
30

221

–

ROTORK ANNUAL REPORT 2018

131

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STRATEGIC REPORT

NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED

d) Investments in the Company balance sheet
Shares in Group companies

At 1 January and 31 December

2018

2017

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

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

Australia
Brazil

Canada

Chile

England and Wales
England and Wales
France
Germany
Germany
Hong Kong
Israel
Italy
Japan
Jebel Ali Free Zone

Malaysia

Netherlands
Netherlands
Netherlands

Norway
Poland
Russia

Rotork Controls (Singapore) Pte Limited
Rotork Africa (Pty) Limited

Singapore
South Africa

Rotork Controls (Korea) Co Limited

South Korea

Young Tech Co Limited

South Korea

132 ROTORK ANNUAL REPORT 2018

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

Subsidiary

Rotork Controls (Iberia) SL

Rotork Sweden AB
Rotork AG
Rotork Inc

Rotork Controls de Venezuela SA

Venezuela

Rotork Turkey Akıs¸ Kontrol Sistemleri Ticaret
Limited S¸irketi

Turkey

Incorporated in

Registered address

Spain

Sweden
Switzerland
USA

Larrondo Beheko Etorbidea, Edificio 2 – 48180 Loiu (Bizkaia)
Spain
Box 80, 791 22 Falun, Sweden
Fuchsacker 678, 9426 Lutzenberg, Switzerland
The Corporation Trust Company, Corporation Trust Center, 1209
Orange St., Wilmington, DE 19801 USA
Av. Casanova Torre banco plaza, piso 3 Ofic. 3D. Sabana
Grande. Caracas – Venezuela
Aydinli Mahallesi Melodi Sok. Bilmo Küçük Sanayi Sitesi No:35/2
Tuzla, Turkey

100% owned by Valvekits Limited
Circa Engineering Limited

England and Wales

Rotork House, Brassmill Lane, Bath BA1 3JQ

100% owned by Rotork Trading (Shanghai)
Co Limited
Centork Trading (Shanghai) Co. Ltd

Rotork Instruments Chengdu Co. Ltd

China

Room C-02, 1/F, West Area No. 2 Building, No. 29 Jiatai Road,
Free Trade Zone, Shanghai, China
Room 1201, 12/F, Unit no.1, Building No. 1, Building I, 88
Shenghe No.1 Road, High Tech Zone, Chengdu, Sichuan, China
610041

100% owned by Rotork UK Limited
Prokits Limited
Flowco Limited

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

Netherlands

Nijverheidstraat 25, 7581 PV, Overijssel, The Netherlands

100% owned by Rotork Inc
Rotork (Thailand) Limited

Rotork Controls Inc
Remote Control Inc
Ranger Acquisition Corporation

100% owned by Rotork Controls Inc
Rotork Pittsburgh LLC
6005 Enterprise Drive LLC

100% owned by Ranger Acquisition Corp
Fairchild Industrial Products Company
Rotork Tulsa Inc

Thailand

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
77 Circuit Dr. North Kingstown, RI 02852, USA
The Corporation Trust Company, Corporation Trust Center, 1209
Orange St., Wilmington, DE 19801 USA

6005 Enterpirise Drive, Export, PA 15632, USA
6005 Enterpirise Drive, Export, PA 15632, 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 2018

133

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STRATEGIC REPORT

NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED

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
Rotork GmbH

Germany
Germany
Germany

Rastenweg 10, 53489 Sinzig
Mühlsteig 45, 90579 Langenzenn
Mühlsteig 45, 90579 Langenzenn

100% owned by Rotork AG
Schischek Limited
Schischek EURL
Schischek Srl

England and Wales
France
Italy

Rotork House, Brassmill Lane, Bath BA1 3JQ
49 avenue du Président Salvador Allende, 77100 Meaux, France
Ranica (BG) – Via Adelasio 22, Italy

100% owned by Schischek GmbH (Germany)
Schischek Sales Europe Ltd

England and Wales Mühlsteig 45, 90579 Langenzenn

100% owned by Robusta Miry Brook BV
Rotork Servo Controles de Mexico S.A de C.V

Mexico

100% owned by Rotork Controls (Iberia) SL
Actuation Iberia S.L
Centork Valve Control S.L

Spain
Spain

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

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

Assets
2018

Liabilities
2018

11
282

293

–
–

–

Net
2018

11
282

293

Assets
2017

8
142

150

Liabilities
2017

–
–

–

Movements in the net deferred tax balance during the year are as follows:

Balance at 1 January
Credited to the income statement

2018

150
143

293

Net
2017

8
142

150

2017

145
5

150

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 £321,281,000
(2017: £305,277,000).

134 ROTORK ANNUAL REPORT 2018

f) Other receivables in the Company balance sheet

Prepayments
Other receivables

g) Other payables in the Company balance sheet

Other taxes and social security
Corporation tax
Other payables
Accruals

2018

210
508

718

2018

44
835
3,218
1,407

5,504

2017

153
5

158

2017

47
1,319
1,673
2,178

5,217

The Company has a £17,000,000 gross overdraft facility (2017: £17,000,000) 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 Company negotiated to extend the term facility of £60,000,000 (2017: £75,000,000) to August 2020. The Company has a
£60,000,000 Revolving Credit Facility (2017: £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 £60,000,000 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.

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ROTORK ANNUAL REPORT 2018

135

STRATEGIC REPORT

TEN YEAR TRADING HISTORY

2018
£000

2017
£000

2016
£000

2015
£000

2014
£000

2013
£000

2012
£000

2011
£000

2010
£000

2009
£000

Revenue
Cost of sales

Gross profit
Overheads

695,713
(384,253)

642,229
(358,090)

590,078
(328,410)

546,459
(296,944)

594,739
(309,280)

578,440
(304,066)

511,747
(272,199)

447,833
(236,359)

380,560
(199,742)

353,521
(187,600)

311,460
(188,542)

284,139
(198,167)

261,668
(167,891)

249,515
(145,129)

285,459
(143,232)

274,374
(135,109)

239,548
(115,081)

211,474
(99,474)

180,818
(83,094)

165,921
(74,384)

Operating profit

122,918

85,972

93,777

104,386

142,227

139,265

124,467

112,000

97,724

91,537

Adjusted*

operating profit

146,015

130,162

120,588

125,272

157,167

151,412

131,866

115,921

99,442

92,103

Amortisation of

acquired
intangible assets
Disposal of property
Other adjustments

(20,284)
–
(2,813)

(27,183)
–
(17,007)

(26,811)
–
–

(20,886)
–
–

(14,940)
–
–

(12,147)
–
–

(7,399)
–
–

(3,921)
–
–

(1,718)
–
–

(1,153)
587
–

Operating profit

122,918

85,972

93,777

104,386

142,227

139,265

124,467

112,000

97,724

91,537

Net interest

Profit before
taxation
Tax expense

(2,170)

(5,386)

(2,707)

(2,517)

(1,062)

(1,268)

(273)

550

131

(621)

120,748
(29,004)

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)

Profit for the year

91,744

55,613

67,173

74,857

103,202

99,509

89,315

80,401

69,521

64,032

Dividends
Basic EPS
Adjusted* EPS
Diluted EPS

48,288
10.5p
12.6p
10.5p

45,218
6.4p
10.6p
6.4p

43,876
7.7p
10.0p
7.7p

43,765
8.6p
10.4p
8.6p

42,702
11.9p
13.2p
11.9p

38,735
11.5p
12.5p
11.4p

33,924
10.3p
10.9p
10.3p

49,534
9.3p
9.6p
9.3p

35,912
8.1p
8.2p
8.0p

24,102
7.4p
7.5p
7.4p

* Adjusted is before the amortisation of acquired intangible assets, the disposal of property and other adjustments.

136 ROTORK ANNUAL REPORT 2018

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

2,627
781
35
18

3,461

Number of holdings

858
451
653
439
606
123
331

75.9
22.6
1.0
0.5

Number of shares

23,304,830
844,915,223
632,705
2,784,730

2.7
96.9
0.1
0.3

100.0

871,637,488

100.0

24.8
13.0
18.9
12.7
17.5
3.5
9.6

Number of shares

378,339
672,682
2,204,368
3,209,069
13,398,659
8,777,359
842,997,012

0.1
0.1
0.2
0.4
1.5
1.0
96.7

3,461

100.0

871,637,488

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.

2018
2017
2016
2015
2014*

Interim
dividend
(p)

Final
dividend
(p)

Total
dividends
(p)

2.20
2.05
1.95
1.95
1.92

3.70
3.35
3.15
3.10
3.09

5.90
5.40
5.10
5.05
5.01

* Restated to reflect subdivision of 5p ordinary shares into 0.5p ordinary shares.

Financial calendar
4 March 2019
11 April 2019
12 April 2019
26 April 2019
26 April 2019
6 August 2019

Preliminary announcement of annual results for 2018
Ex-dividend date for final proposed 2018 dividend
Record date for final proposed 2018 dividend
Announcement of trading update
Annual General Meeting held at Bailbrook House Hotel, Eveleigh Avenue, London Road, Bath, BA1 7JD
Announcement of interim financial results for 2019

O
V
E
R
V
I
E
W

G
O
V
E
R
N
A
N
C
E

F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S

C
O
M
P
A
N
Y

N
F
O
R
M
A
T
I
O
N

ROTORK ANNUAL REPORT 2018

137

STRATEGIC REPORT

CORPORATE DIRECTORY

Company Secretary
Helen Barrett-Hague

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 AG
5 Broadgate
London EC2M 2QS

Citigroup Global Markets Ltd
Citigroup Centre
33 Canada Square
London E14 5LB

Financial Advisers
UBS AG
5 Broadgate
London EC2M 2QS

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

138 ROTORK ANNUAL REPORT 2018

NOTES

O
V
E
R
V
I
E
W

G
O
V
E
R
N
A
N
C
E

F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S

C
O
M
P
A
N
Y

N
F
O
R
M
A
T
I
O
N

ROTORK ANNUAL REPORT 2018

139

STRATEGIC REPORT

NOTES

140 ROTORK ANNUAL REPORT 2018

ANNUAL REPORT 2018Brassmill Lane,
Bath BA1 3JQ, UK
T: +44 1225 733200
E: mail@rotork.com

www.rotork.com

ANNUAL REPORT 2018