Rotork Regulatory News (ROR)

3 Mar 2008 07:00

Rotork PLC03 March 2008 3 March 2008 Rotork p.l.c. Preliminary Announcement Double digit growth in revenue and operating profit in each division 2007 2006 % change % change (constant currency) Revenue £235.7m £206.7m +14.0% +17.5%Operating profit £55.4m £45.1m +22.8% +29.1%Profit before tax £57.3m £46.1m +24.3% +30.5%Earnings per share 45.6 p 36.4 p +25.3% +31.5% Financial Highlights • Record performances in revenue and profits in all three divisions • Record order book up 29% at £98m • Recommended final dividend of 14.0p, up 20% • £10m additional interim dividend during 2008 Operational Review • Rotork Controls operating profit up 18% • Rotork Fluid Systems achieved 15% return on sales and 33% growth in operating profit • Strong growth achieved by Rotork Gears - operating profit up 57% • Margin improvement across all divisions • Chinese market still buoyant Chief Executive Bill Whiteley, commenting on the results said: "In 2007, Rotork celebrated its 50th Anniversary in style with end user andgeographic markets very active throughout the year. The rate of investment ininfrastructure in energy and water projects continued to increase, whichbenefited all three of our operating divisions." "Projects across nearly all of our geographic and end user markets remainactive. Order intake at the start of the year has been particularly buoyant,including a strong start from our North American and Chinese operations. Incontrast with recent years, it would appear that our trading results are likelyto be enhanced by a more favourable currency environment in 2008." For further information, please contact: Rotork p.l.c. Tel: 01225 733200Bill Whiteley, Chief ExecutiveBob Slater, Finance Director Financial Dynamics Tel: 020 7831 3113Sophie Kernon / Jon SimmonsChairman's statement Financial highlights The past year has seen Rotork celebrate its 50th anniversary in a period whenstrong trading in each of our underlying markets has enabled us to achieverecord results and a sound position from which to enter 2008. We have passed anumber of milestones including record performances in terms of revenue andprofits from each of the three operating divisions and finished the year withour highest ever reported order book, up 29% at £98m. Total sales revenue was£236m, up 14% on 2006, and profit before tax increased by 24% to £57.3m. Thetrading figures are after the negative impact of currency in a year where theweakening US dollar reduced the value of part of our earnings. However, in spiteof this currency headwind, we were still able to improve operating profit marginfrom 21.8% to 23.5% due to operational gearing and the robustness of Rotork'sbusiness model. At constant currency, sales revenue and profit before taxincreased by 18% and 31% respectively. Divisional highlights Rotork Controls The oil & gas, power and water markets, which the Controls Division serves,continued to be active in the year particularly in Asia and Europe. The newproduction facility in Shanghai had a successful first full year in operationand met all of its goals. This facility will be of increasing significance insupporting the important Chinese market in the future. The division increased revenue to £164m, up 11% on the prior year with operatingprofit at £44m, up 18%.We now believe that the mix of facilities that we have inthe Controls Division across the world gives us the capacity to support ourcustomer base in each of our markets for the foreseeable future. New marketinginitiatives took place in the year and we opened our first direct presence inBrazil. Rotork Fluid Systems Rotork Fluid Systems continued its pattern of strong growth established over thelast few years, and expanded its share of the available market as well ascapitalising on the significant investment currently being seen worldwide in themarkets for its products. Sales revenue grew 18% to £48m and operating marginachieved our 15% target. We are increasingly being seen as providing theactuator of choice by leading industry participants. This has been helped by ourexacting approach to product quality, constant investment in facilities andproducts, and our drive to bring technology originally developed for ourelectric actuator products into our Fluid Systems product offering. Rotork Gears Rotork Gears produced strong results in the year, with sales revenue up 31% at£32m and operating profit up 57% to £7m. We are now the largest manufacturer ofproducts of our type, and have production facilities in five countries inEurope, the US and Asia. We can effectively offer a local service to customerswherever they are based from our global facilities. We are continually improvingproducts and services, and developing new products for use on standard andspecialist applications. The net margins in this business have increased as wecontinue to improve efficiency and reduce costs. Cash Cash generation in the year has been strong due to the buoyant trading positionand good control of working capital. In addition, except for a £2m additionalcontribution to the UK final salary pension scheme, there have been no unusualcash outflows in the year with the result that cash balances increased at theyear end to over £38m. Subsequent to the year end, we announced twoacquisitions. The acquisition of Remote Controls Sweden was completed on 30January 2008 for a consideration of £13m. Much smaller, but strategicallyimportant, was the acquisition of the intellectual property and business of theDrallim SVM product on 13 February 2008, for £630,000. Both of thesetransactions were settled for cash. Dividend The Board is recommending an increase in the final dividend for 2007 and thepayment of an additional interim dividend for 2008. The final dividend for 2007of 14.0p per share (an increase of 20% year on year) will be paid on 9 May 2008to shareholders on the register on 18 April 2008. A one off additional dividendof £10m (11.5p per share) will be paid on 18 July 2008 to shareholders on theregister on 27 June 2008. Performance and risk In his Business Review, the Chief Executive discusses the application of theGroup's approach to performance measurement through KPIs, our approach to theassessment and mitigation of risk, and how we ensure that we have correct health& safety procedures, and environmental policies. We take great care to deal withthese matters responsibly, ensuring that controls and processes are embedded inworking practices where possible and that reporting is prompt and transparent.Our increased disclosure this year underscores the importance which we attach tothese matters. Board Changes John Matthews has been Senior Independent Director since joining the Board in1998 and for much of this time has chaired both Audit and Remunerationcommittees. Having now completed nine years on the Board, John will retire atthe forthcoming AGM. He leaves with our best wishes and appreciation for hismuch valued advice and support. I am pleased to welcome John Nicholas to the Board as a non-executive Director.John is currently Group Finance Director of Tate & Lyle plc prior to which heheld the same position at Kidde plc. He will chair the Audit Committee and be amember of both the Nomination and Remuneration committees. Bill Whiteley Bill Whiteley, who will retire at this year's AGM, has been a director of Rotorkp.l.c. for twenty-four years, the last twelve of which he has served as ChiefExecutive. During his tenure as Chief Executive, Bill has led the Group tooutstanding success and, consequently, its world leadership position in itsspecialised sector and its position as a highly rated constituent of the FTSE250. He leaves a strong and experienced executive team who under the leadershipof his successor, Peter France, are well placed to deliver further growth. Onbehalf of the Board I extend to Bill our appreciation and gratitude for hisenormous contribution and wish him well for the future. Outlook Projects across nearly all of our geographic and end user markets remain active.Order intake at the start of the year has been particularly buoyant including astrong start from our North American and Chinese operations. In contrast withrecent years it would appear that our trading results are likely to be enhancedby a more favourable currency environment in 2008. Roger LockwoodChairman29 February 2008 Business review Business Overview For over 10 years Rotork has been the world leader in actuation solutions forthe oil & gas, power and water & waste water treatment sectors of the capitalgoods market. Our products are also used in a wide range of applications in avariety of industries, including shipboard control systems, ventilation and airhandling control. Rotork is a genuinely global business, with both marketing andproduction operations across the world. We are known for our ability to supportcustomers in the field at very short notice from our own resources. Rotork has areputation for innovative solutions to complex problems and our productdevelopment history has shown a pattern of improving the efficiency, quality andcost effectiveness of the product through the application of technology. This,and a constant drive to improve customer support, has lead to us being thenumber one heavy duty actuator group in the world. We are structured aroundthree divisions: • Rotork Controls, the original and largest division supplying high quality, state of the art electric actuator products for controlling industrial valves; • Rotork Fluid Systems, which supplies heavy duty pneumatic and hydraulic valve actuators for operation in plant control, emergency shut down and other critical applications, primarily for the oil & gas sector; • Rotork Gears, a world leader in the supply of gearboxes, adaptors and ancillaries for the valve industry. Rotork supports customers across the world mainly through directly ownedoperations. We have 14 production plants internationally and multiple directsales and support operations in 22 countries. This, together with an extensivenetwork of indirect sales offices, gives total coverage of our customers andmarkets globally. We have around 12,000 active customers. The key drivers for the Group's businesses relate to investment in oil & gas,power generation and water & waste water installations around the world withdemand being generated by new and expanded capacity, upgrades to existingfacilities and replacements. This is often linked to projects which are aimed atimproving the efficiency, safety and environmental performance of plants. Valveactuators are critical components and their long-term reliability andperformance is extremely important to users. They also act as a key interfacebetween plant control systems and related hardware. Rotork's reputation forquality, worldwide support and technical innovation is crucial to its leadershipposition in the field. The broad geographic spread of our operations andapplications means that we have a large number of repeat customers around theworld and no one customer accounts for more than 5% of our revenue in any year. Business Strategy The objective of Rotork p.l.c. is to increase shareholder value by developingits leadership position in worldwide valve actuator activities. The Group'sbusinesses are focused on the specialist area of valve automation. The originsof the Company go back to the 1950s and over its 50 years in this businessRotork has continued to build on its reputation as an innovator of new conceptsin this field and has provided users with increasing levels of functionality,performance and assurance. Our strategy of providing modern innovative productsthat leverage technology, while remaining focussed on the technical applicationsthat our customers need, has enabled us to provide quality solutions to theindustries that we serve. We have been able to do this partly as a result of ourmethodology of selling directly to our end user customers and their technicaladvisers. This ensures that, where possible, plant specifications have thecorrect products for the application and support the customer's need for plantefficiency and control. The Group's recent strategy has focused on opportunities to leverage ourleadership position in heavy duty electric actuation into other closelyassociated areas of valve automation. Key programmes relate to the developmentof products and control systems, marketing initiatives, creating service revenueopportunities and driving cost reductions relating to these businesses. The mostimportant current product initiative relates to the development of our range ofactuators aimed at the process control market. Year Under Review In 2007, Rotork celebrated its 50th Anniversary in style with end user andgeographic markets very active throughout the year. The rate of investment ininfrastructure in energy and water projects continued to increase whichbenefited all three of our operating divisions. Overall order intake was up12.6% and revenue up 14.0%. The order book increased to £97.6m which is 28.5% upon the start of 2007. Profit before tax was up 24.3%. Return on sales, a keyperformance indicator of the business, increased to 24.3% from 22.3% last year. Rotork Controls Revenue from our electric actuator division, Rotork Controls, increased by 11.1%to £164.2m while operating profit rose by 17.6% to £43.5m. At constantcurrencies these increases would have been 15.4% and 23.7% respectively. As apercentage of unit actuator order input, the principal markets for electricactuators were: oil & gas 39% (2006: 40%); water 22% (19%); power 31% (32%) andmiscellaneous 8% (9%). As can be seen the end user markets were similar to theprior year but with an above average increase in the number of actuators goinginto the water market. This was driven by growth in the markets worldwide andimproved penetration in some key markets. UK Operations We continued to see good levels of business emanate from the UK, with the watermarket benefiting from AMP4 investment requirements laid down by the regulatorand the power market from the large Combustion Plant Directive. There was a strong sales and profit performance from the main electric actuatorassembly plant in Bath, which was assisted by continuing sourcing initiativeslimiting the cost of component increases. We are looking for additionalinitiatives in 2008 to continue to mitigate cost pressures. Europe The European sales and support companies all increased profits from the prioryear, with particularly strong performances in Italy and Germany. Europeaccounted for 16% of the total input units against 13% in 2006. Work on existingoil & gas installations was active throughout the region; in particular webenefited from increased investment in oil and product storage facilities. Ourbusiness in the water market in continental Europe also continued to grow, withour French subsidiary making encouraging progress. Elsewhere our relatively newRussian sales company continued to develop its business while the Dutch companydoubled the size of its facility to enable it to expand its factory fit and siteservice capabilities. The European businesses also benefited from increasedbusiness from valvemakers in their territories. The Italian valvemakers, inparticular, had extensive order books built on the high level of worldwideenergy projects, particularly those being built in the Middle East. The Americas Rotork Controls Inc had a number of challenges entering 2007, which included ahigh hurdle set by its prior year profit performance, a softening US$ and aneconomy which was displaying weaknesses in some areas. Against this background,the company performed well and continued to benefit from investment in water &waste water treatment facilities. It also benefited from the US valve industry'scompetitiveness on international projects. US Process Controls saw a goodrecovery of its business, mainly based on improved sales to the power companies. The Canadian company had a disappointing year, due to slower than expectedproject activity, especially in the West. The Venezuelan subsidiary continued toface difficult challenges in what is potentially a promising market for ourproducts. For the Americas, order input in units increased in total but reduced to 16%from 17% of the Group. Asia Pacific and the Rest of the World Asia continued to be a major engine for growth for the business. Asia Pacificaccounted for 50% of the input of electric actuators up from 49% last year.China continued to be the most important contributor with increased levels ofbusiness. The Indian market maintained the high levels of business seen in 2006,driven by investment in power generation and large refinery projects. Ourelectric actuator manufacturing plants in Kuala Lumpur, Shanghai, Chennai andBangalore all performed well and achieved increases in profits. Elsewhere, the Singaporean, Malaysian and Thai sales companies all saw increasedlevels of business as did those in Japan and Korea. The latter did well toovercome some local difficulties and ended the year with a stronger operation. The Australian operation continued to perform well while the turnaround in thefortunes of our South African company, which made a loss in the prior year, wasalso most encouraging. Rotork Fluid Systems Rotork Fluid Systems, which designs, assembles and markets pneumatic andhydraulic valve actuators continued to achieve exceptional growth. The mainmarkets served by our products are oil & gas related and unlike electricactuators the majority are used on upstream applications, transmission and LNGplants and terminals. These markets continue to benefit from high levels ofinvestment. A notable success was winning substantial orders on the very largeShell GTL (Gas to Liquids) Pearl project in Qatar. The principal assembly plantis based in Lucca, Italy, with products also assembled in Rochester, N.Y. andMelle in Germany. The division had two long-term key performance goals. Firstlyto achieve 20% of Group revenue and secondly a 15% return on sales. It justachieved both of these objectives this year, having narrowly missed the revenuetarget in 2006 (19%) and increased return on sales from 13.3% to 15.0% in 2007.This is despite its main cost base being in euros and the euro/dollar ratehaving averaged $1.38 against a prior year of $1.26. Order input was 34.6% up on the prior year, while revenue increased by 18.3% to£47.9m and operating profit was up 33.3% to £7.2m. The Italian operation performed very well and we increased our investment in thefacility, improving the office area and installing an upgraded ERP system boththere and in the plant in Melle. The product range was extended and improved, while further progress was made ingaining additional customer and market approvals. The division had increasingsuccess on projects requiring engineered solutions particularly in theelectro-hydraulic (EH), gas over oil, linear and subsea product areas. A notablesuccess was the large EH order for the Aramco Khurais project in Saudi Arabia.The US operation also benefited from the upsurge in engineered solutionsbusiness. The division's global capabilities continued to be enhanced, mainly through thedevelopment of the Group's worldwide sales companies and offices. Among these,the UK based operation in Leeds and the Spanish office had excellent results. The acquisition of Remote Controls Sweden was completed on 30 January 2008 for aconsideration of £13m. This company, which is based in Falun, Sweden, wasestablished in 1961 and has a worldwide reputation for supplying high qualitylower torque actuators to a wide array of markets. These products complement themainly heavy duty products of the existing RFS ranges and will be sold throughRotork's worldwide network of sales offices. The acquisition of the Drallim SVM partial stroke and valve monitoring patentedproduct for £630k on 13 February 2008 provides the division with a platform tofurther develop products for safety critical applications. Rotork has sold theSVM product for some years and sees the demand for this type of diagnosticsystem increasing due to its ability to improve plant safety and productivitywhile also reducing plant capital costs. Rotork Gears Rotork Gears manufactures gearboxes, adaptors and other ancillary devices forindustrial valvemakers worldwide. Through these valvemakers it serves a widevariety of end user industries. Rotork Gears achieved growth well above our plans and benefited from an activeworldwide valve market, especially in Europe and America, and investment in itsworldwide operations and supply chain. Revenue was up 31.3% to £31.9m andoperating profit was up 56.5% to £7.3m. The star performers were the two mainplants in Leeds and Losser in The Netherlands. Both achieved significant growthin revenue and profits. Much work and investment was centred on the new Chinese facility which met anambitious production target and achieved a number of important milestones,including the assembly of the updated 232 aluminium range of units and furtherprogress was made in opening up the Asian market. The engineering team was re-organised to create a dedicated R&D resource andprogress was made with a number of important product initiatives. New orimproved product ranges will be launched in 2008. One of the key objectives for the coming year will be to develop the existingoperations, those already mentioned plus the operation in Italy; firstly toensure that the business continues to increase capacity to improve servicelevels to our customers; secondly to make sure that opportunities to rationaliseproduction and reduce costs are delivered. Key Performance Indicators ('KPIs') Rotork has a culture of customer service and support and this ethos is reflectedin the way that the business is controlled on a day to day basis. We manage theoperations through targets primarily related to trading activities and have wellestablished systems and procedures to support this. KPIs have long been used toaid management in monitoring progress in achieving its objectives. Most targetsare financial KPIs but more recently we have developed a similar approach to nonfinancial issues connected with areas such as environmental matters and health &safety. Rotork's philosophy of product assembly only, using sub contractors tomanufacture components, gives significant flexibility in the production modeland KPIs assist in monitoring the efficiency of this model. Management's focusis on what we regard as the high added value activities of design, marketing andmanagement control. This means that our approach to measuring performance isoriented towards success in penetrating the markets in which we operate, thedevelopment and profitability of our products, a desire for a high return oncapital, and strong cash generation. We have produced consistent improvement inperformance in these measures through the year under review. The Group use a range of indicators to assess performance at individual company,divisional and Group level. The following are the main key performanceindicators at Group level showing four years performance and explanation whereappropriate of issues underlying some of the measures. Financial KPIs Growth of the business, market penetration and quality of earnings are crucialtarget areas for Rotork and we have a number of measures of performance usedthroughout the Rotork organisation. Revenue growth is a simple but effectivemeasure of our performance against our objectives in this area and, supported bythe relationship of our net profit to sales and the growth in earnings pershare, provides a small but powerful range of ratios that enable management toquickly view the performance of the business and drill down to divisional leveland below to view returns. With an asset light business model, we have a targetof growth in return on capital which provides an effective view of balance sheetperformance and each of the divisional businesses review this. Conversion ofprofit into cash has a high priority within the Group and is embedded withinreward schemes at divisional management as well as Group level. Sales revenue growth This is reported in detail for all operating businesses and is a key driver inthe business. These measures enable us to track our success in specific projectactivity and our progress in increasing our market share by products and region.This also is an important driver in our product development programme. 2007: 14.0%, 2006: 18.2%, 2005: 19.0%, 2004: 8.0%. Return on sales This is calculated as profit before tax (after financing and interest) shown asa percentage of sales revenue. This measure brings together the combined effectsof procurement costs and pricing as well as the leverage of our operatingassets. Our overall aim is for continuous improvement over time, notwithstandingthe impact of currency. 2007: 24.3%, 2006: 22.3%, 2005: 21.0%, 2004: 21.4%. Cash generation The conversion of profit into cash is an important measure for Rotork. This iscalculated as the ratio of operating cash flow to operating profit. Operatingcash flow is defined as the movement in cash and cash equivalents, adjusted toadd back cash flows from financing activities, the acquisition of subsidiaries,income taxes paid, exceptional cash outflows and less interest received. It isused internally as a measure of performance where a target of 85% is regarded asa base level of achievement. This also forms one of the constituent parts of thereward system where management is incentivised to achieve a performance beyondthis level. 2007: 99%, 2006: 102%, 2005: 101%, 2004: 86%. Return on capital employed Rotork has an asset light business model by design, and reporting this ratiointernally helps management at Group level to monitor our adherence to thisphilosophy. The calculation shows profit before tax as a percentage of capitalemployed. Capital employed is defined as shareholders' funds less net cash held,and the pension deficit net of related deferred tax is added back. 2007: 79%, 2006: 69%, 2005: 54%. 2004: 53%. EPS growth The measurement of earnings per share reflects all aspects of the incomestatement including management of the Group's tax rate. We aim to increase EPSeach year. 2007: 25.3%, 2006: 27.3%, 2005: 16.7%, 2004: 5.2%. Non-financial KPIs We monitor non-financial areas in our businesses particularly in theenvironmental, health & safety and quality control areas and put strong emphasiswithin our organisation on improving our performance here. Waste recycling This KPI measures the proportion of total waste produced which is recycled. Wehave an active programme aimed at reducing our environmental footprintthroughout the organisation. We collect this information through regularsubmissions through our extranet site. 2007: 57%, 2006: 46%, 2005: 38%. Dividends Rotork is a cash generative business and has a policy of returning funds toshareholders where they are not required for reinvestment in the business in theforeseeable future. The Board's policy is one of increasing dividends generallyin line with earnings. In recent years where there has been excess cash in thebusiness this has been distributed back to shareholders in the form ofadditional dividends. In the year under review cash generation has been good andthe Board is recommending to shareholders that the final dividend for 2007 be14.0p per share which is an increase of 20% over the prior year. In addition,the Board is intending to pay an additional interim dividend for 2008 of 11.5pper share, representing the distribution of £10m of excess cash. This will bepaid to shareholders on 18 July 2008, to shareholders on the register on 27 June2008. Treasury The Group's treasury function in Bath manages financial risk relating to foreigncurrency exposure, debtor risk and cash movements within the Group. Rotork is affected by movements in world currencies and aims to mitigate theeffect of this through the diversity of location of production units as well astaking action through derivative instruments. The main currency exposure resultsfrom trading transactions between our production plants and trading companiesand customers around the world. This exposure is covered by simple forward coverderivative instruments aimed at protecting known income streams: no speculativeor non trading hedging takes place within the Group. The impact of currency on the results of the Group can best be seen byconverting the 2007 results to the effective exchange rates for 2006, socomparing results at constant currency. This would have produced the following: 2007 2006 £m £mOperating profit as reported 55.4 45.1Translation impact 0.5 -Transaction impact 2.3 -Operating profit at 2006 rates 58.2 45.1 Overall we believe that profit for the year would have been approximately £2.8mhigher if the 2006 exchange rates had prevailed. The increase in operatingprofit, reported as 22.8%, would have shown an increase of 29.0% at constantcurrency. Weighted average rates for translation of our two main tradingcurrencies for the last few years have been: US dollar Euro • 2002 1.52 1.58 • 2003 1.66 1.44 • 2004 1.83 1.46 • 2005 1.80 1.46 • 2006 1.84 1.47 • 2007 2.01 1.45 Receivables management is done at each operating business unit but controlledcentrally in Bath. There is commonality in our customer base across many of thegeographic units and debts outside the UK are insured centrally on a limit percustomer basis, and this operates across the operating divisions. Overall webelieve a level of 65 days sales outstanding for receivables is appropriate forour mix of business. At the year end this figure was 60 days, an improvement of2 days compared with 2006. Pension schemes Over the last few years there has been a lot of focus on pension schemes,particularly company liabilities relating to under funded legacy defined benefitschemes. Rotork's UK final salary scheme was closed to new entrants in 2002,when a defined contribution scheme was opened for employees joining from thebeginning of 2003. The Group has made additional contributions into the UK finalsalary scheme between 2004 and 2007 and the scheme had its latest actuarialvaluation review during 2007. The results of this showed it was 98% funded on anactuarial basis, which is precisely the position that the additionalcontributions were aiming to achieve, and it is now felt that the scheme is backin equilibrium. The main issue for schemes of this type in recent years has beenthe effect of longer life expectancy, the fact that pensions in payment willhave to be paid for longer as people expect to live longer. This issue couldcontinue to affect schemes as mortality assumptions evolve further over the nextfew years. However, management and the pension scheme trustees, with the adviceof the scheme actuary, consider that the potential for adverse mortalityassumptions to impact the scheme further is controllable within the currentrange of contributions. The impact of improved mortality is not presently anticipated to have an impacton cash contributions beyond normally expected funding levels. In terms of thecharge to the income statement under IFRS these assumptions will have an impactas a result of the last actuarial valuation by increasing the charge againstprofit. The charge against profit before tax will increase to around £1.6m in2008, compared with the charge of £0.7m in 2007 Rotork Community Rotork celebrated its 50th year of incorporation with a number of marvellousevents which were attended by both past and present employees as well as otherswho have had much to do with the Group's success. We also celebrated thismilestone with a publication which drew very positive comments from a wide groupof stakeholders. The events demonstrated the commitment and affection thateveryone has for the organisation which makes it such a formidable presence inits field. I have enormously enjoyed every aspect of my involvement with Rotork over thepast thirty-four years and feel very privileged to have led it over the pasttwelve. Rotork has always had a unique spirit which I feel confident under thetalented leadership of Peter France will propel it to even greater success. Iwould like to thank all of our employees around the world for their dedication,skill, good humour and friendship and it is them that I will miss most when Iretire on May 2nd. Rotork Site Services Rotork has been a leading actuator manufacturer for over 50 years and its valveactuators and gearboxes are designed to provide a significant service life,often in arduous conditions. Long-term cost of ownership is an important factorto our customers along with reliability, and these issues drive the choice ofRotork over any alternative. With Rotork providing the after sales support,customers know that the equipment will be maintained to its originalspecification and operational efficiency, which is particularly beneficial wherethe product is certified. Rotork Site Services (RSS), the new projects, service and retrofit arm of theGroup which supports all three divisions, is active in 47 service centres inover 20 countries around the world, with agents providing support services inanother 55 countries. This brings the total number of expert technicianssupporting Rotork customers to well over 1,000. RSS provides support at plant level on all applications where our products areused. Embedded within the site structure, and often within the customer'soperating team, our engineers can provide total support to ensure that the plantoperator gets maximum advantage from its investment. In addition, we are able toaid the customer when investment programmes are being considered by providingtechnical input to the expansion and upgrading of equipment and to ensure thatthe correct equipment is considered and commissioned appropriately. Within RSS, our aim is to make the application and utilisation of our productsand services easy whether it is by: • Delivering small turnkey projects to actuate existing manual valves for customers. • Refurbishing aging actuators (typically 25+ years old) to give them another lifetime of utility. • Project managing the upgrading of sites entire actuation assets and associated equipment. • Connecting actuators to valves for new build projects for valve makers and end customers to facilitate easier installation on site. • Delivering preventative maintenance programmes. • Availability of our engineers on a call out basis to support the customer's own maintenance programme Through delivering added value services across the world we continue todifferentiate our business, strengthen relationships with our customers andcontribute to the growth in the Group's revenue and profits. One significant area of growth in 2007 has been the uptake of multi-yearpreventative maintenance contracts - particularly by the petrochemical sectorwhere uptime is of critical importance. We now have over 100 maintenancecontracts covering over 50,000 actuators worldwide. Through combining technologybuilt into our actuators, expert service engineers and data evaluationprocesses, we are able to identify deterioration within a valve early. Thisenables unnecessary outages to be minimised whilst focusing maintenanceexpenditure where it is needed. 2008 will see RSS grow further in terms of the service centres we operate from,the scope of the services we provide and the value we bring our customers. Research & Development With a significant proportion of our income derived from products introducedwithin the last five years, investment in our product portfolio is an importantpart of Rotork's success. In addition to continuous improvement of our mainelectric and fluid power actuator ranges we have continued to invest in ourproprietary Pakscan networking system with further development of the masterstation to extend its functionality and enable it to be installed outside theprotected environment of the control room. Development of a mesh based wirelesssystem has now reached a stage where the initial technical hurdles have beenovercome and field trials are anticipated during 2008. This is an importantdevelopment, which will enable our customers to extend their plant visibilityand control systems at very reasonable cost and with minimal disruption. Thecontinued development of and improvement to plant control and monitoring systemsis an important part of the drive towards more energy efficient intelligentplant processes and Rotork has established a market leadership role in valveactuator control systems. The release of an optional module that enables the IQ series of products to beused within safety instrumented systems signalled the successful conclusion ofthis development. Initial market response indicates that the addition has beenwell received and will assist users in complying with regulatory requirements.Other IQ related research has focused on the use of alternate materials as ameans of reducing costs. Work continues on the development of a variant of the IQT product for navalapplications with first shipments expected during the last quarter of 2008. Following the extensive feasibility exercise reported last year, work commencedat the beginning of 2007 on the detailed design of a family of actuators for theprocess control market. This is an important area of development for Rotork. Itis expected that initial sizes of this product will commence production in thesecond half of 2008. A marketing structure has been defined and is being builtup. Test products have been giving excellent performances at a number of Betasites and the launch of this new product line for Rotork is eagerly awaited. The Fluid System division has continued to work closely with its key customersresulting in the approval of fast acting spring return actuators suitable foruse within high integrity pressure protection systems ('HIPPS'). Such actuatorsare an essential component of the safety instrumented systems required tomitigate over pressure events. The HIPPS approach can provide environmentalbenefits in the form of reduced venting to atmosphere and in some cases mayeliminate the need for flaring. Other developments have included increasing thetorque capability of the pipeline solutions to enable their use in severeservice mining applications, where the latest autoclave valves require in excessof 5 million Nm. Development work has also been undertaken in a combined effort between the FluidSystem and Gears divisions to provide a sea bed solution for the hydraulicautomation of subsea valves with independent manual override. Within the Gears division a project commenced to develop a new range of manualquarter-turn gearboxes for valve operation. The aim is to increase flexibilityas well as performance, making the product suitable for stocking andmodification at customisation centres around the world. This project is expectedto continue throughout 2008 with design and testing of a number of prototypeunits already well underway. Statement of principal risks and uncertainties The Group has an established risk management process which works within thecorporate governance framework set out in our corporate governance statement.The major risks affecting the Group are identified by senior management inassociation with the Board and with the support of the external auditor. Thisinvolves regular risk assessment and a process for ensuring that the Group'sapproach to dealing with individual risks is robust and timely. These risks arecategorised by likely impact on the business and the likelihood of the eventoccurring. They can be seen to fall into three main risk areas: • Risks affecting the strategic aims of the business, or those issuesthat affect the strategic objectives faced by the Group • Financial risks - issues that could affect the finances of thebusiness both externally and from a perspective of internal controls • Operational risks - matters arising out of the operational activitiesof the Group relating to areas such as procurement, product development andinteraction with commercial partners. Principal strategic risks As an international business, Rotork operates in all markets across the worldmainly through a direct presence but in the smaller territories through agents.Implicit in this is the benevolent trading environment that comes with stableregimes across the globe, and disruptions to this stability regionally couldaffect our ability to trade effectively. It is not possible to fully mitigatethis as a risk but our truly global spread of business and visibility ofpotential risk areas enables us to contain our exposure. Product and control systems development which threatens our market leadershipposition is a significant risk. This is an important factor driving us tomaintain technological leadership with our actuator and systems. We aim to givecustomers increasingly greater control over their applications and value formoney as we enhance diagnostics, functionality and control. We also recognisethe need for global manufacturing by sourcing components across the world andhave created production facilities in lower cost areas which are often closer toend user markets. Our successful expansion into Asia has been as a result ofrecognising this. Our business model is less vertically integrated than ourcompetitors and we are able to take strategic sourcing and build decisionsquickly. Principal financial risks Foreign currency management is an important area for Rotork and the potentialfor significant movements in world markets for the currencies in which weoperate present significant risks for us. There are a number of ways in which wecan approach these risks. Short-term movements are addressed using forwardexchange contracts to ensure that when we have contractual liabilities we caneffectively mitigate and fix the exposure. This does not of itself avoid theimpact of long-term trends, which are ultimately best handled through a spreadof vendor programmes across the geographical areas over which we operate. This,plus the development of local production facilities provides natural hedgingwhere it is needed. Internal control within the businesses is supported by a strong ethos offinancial internal audit which Rotork has developed over a number of yearsutilising the skills of accountants from across the businesses. This methodologyensures that we have auditors who are aware of the business issues and risksinvolved in them. Independence is maintained by ensuring that any auditor withdivisional responsibility only audits companies outside their own division. Further financial risk areas have been identified in cash control and creditmanagement. Both functions are centrally controlled within the Group and aremonitored through the audit process for compliance, and are reported on to theAudit Committee. While these are the principal risks, the risk assessment process goes far beyondthis to identify medium grade and relatively minor risks and provide a processfor their regular review aiming to give action plans to create whereverpossible, an embedded approach to the containment and management of risks in thebusinesses. Principal operational risks Having the right people in the right place, at the right time is key for abusiness like Rotork. We devote a lot of effort to developing our employees andgiving opportunities for those who want to, to develop their skills andexperience across our operational landscape. This approach to successionplanning has enabled us to identify candidates for promotion within thebusinesses, ensure that the necessary training and career development programmesare open to them and to secure a good flow of potential future management as theGroup develops. In our risk assessment and review programme the issue of quality is a constanttheme. Quality in design, quality in component supply, and quality in productionare all under continual review. The need to maintain our deserved reputation forthe highest quality standards and customer facing approach to our markets isfundamental to Rotork. Quality is a core part of the Rotork culture, and qualitymanagement programmes are embedded within all of our operating procedures. Wehave an active quality management function which includes regular suppliervisits and audits. This process is connected to our product developmentprogramme for existing and proposed products ensuring that all areas ofoperational experience are fed back into the design process. As the manufacture of our components is outsourced, the relationship and supportfrom vendors is crucial to our business. Design of components is donerecognising the manufacturing issues involved and our vendor involvement in thedesign and quality processes is an important part of how the product comes intoproduction and maintains its integrity. There are a number of inherent risks innot managing these processes properly and significant effort is expended in theGroup in ensuring that this is done well. The current dual sourcing programmefor key components is an example of how we have responded to these matters andwe have introduced this seamlessly and with the support of our suppliers. Quality & Environmental Quality Rotork's active quality management programme is centred on process control.Throughout each product's life cycle, from initial concept to volume production,every business and production process is subject to robust scrutiny. The threekey processes are product development, component procurement and final assembly. As customer sites become more sophisticated, their plant automation requirementschange. Rotork's Research & Development teams seek innovative means of offeringcustomers the enhancements they demand. Representatives from all departmentsexamine new designs at every stage and from every perspective; compliance withcustomer requirements, ease of assembly and cost optimisation. Control of the component procurement process is crucial. Rotork purchasescomplex components to exacting quality standards, through global supply chains.The purchasing and Supplier Quality Assurance ('SQA') functions are increasinglyinternational in makeup, sourcing products in the country most appropriate foreach particular commodity. A mutually supportive worldwide supply network isbeing established, with local purchasing and SQA teams representing the wholeGroup for component supply. SQA teams work closely with suppliers from productinception onwards, to ensure suppliers' processes are properly controlled,resulting in consistent and compliant parts. The assembly process is the culmination of all the development and suppliercontrols. Operator training programmes, 'mistake-proof' assembly methods, clearinstructions and world class performance monitoring tools combine to control thebuild process. These controls are well established at the main manufacturingsites and are now being rolled out to newer divisions and more recentacquisitions. Environment The principal manufacturing site in Bath maintains an Environment ManagementSystem ('EMS'), which is independently verified as compliant with therequirements of ISO14001: 2004. The EMS was developed to identify, manage andreduce the significant environmental aspects and ensure compliance withenvironmental legislation. The Bath site is now assisting subsidiaries inraising awareness of environmental issues and implementation of essentialcontrols. During 2007, Rotork Gears in Leeds implemented an EMS in accordancewith the requirements of ISO14001. Due to the nature of the Rotork business, one of the most significant aspects ispackaging waste. To address the impact and to minimise waste to landfill, Rotorkmade recycling a reportable KPI in 2006. The last year has shown continualimprovement: Group recycling totals increased to 57% in 2007 from 46% in 2006and 38% in 2005. Rotork sites that generate high levels of waste are being targeted forimprovement. In the second half of 2007, Rotork Gears installed recyclingsystems for cardboard, wood and plastic and expect to recycle 75% of total wastegenerated in 2008. Work is also in progress to reduce the waste generated at thefactory in Rochester USA, in conjunction with initiatives to increase re-use andrecycling. These two sites each generate over 200 tonnes of packaging waste perannum. Rotork remains committed to meeting the requirements for continued inclusion inthe FTSE4Good Index. Rotork is very conscious of the need for improvedenvironmental awareness and the need to minimise the Group's environmentalimpacts. In 2006, Rotork reported environmental KPI data for 29 subsidiaries.The 2007 environmental report will include KPI data from 33 subsidiaries. Environmental reports can be found on the Rotork web site www.rotork.com Bill WhiteleyChief Executive29 February 2008 Growth opportunities Rotork is a collection of strong businesses organised within a divisionalstructure to provide the best line of support to our customers. We havepro-active management teams following common goals, allowing independent butco-ordinated product development programmes to give the best solutions to ourcustomers' problems. We help guide customers through the technologicaladvancements that we offer to improve their processes, enhance efficiency andreduce the environmental impact of their operations. Our products have differingtechnical issues to overcome in achieving the required functionality. However,through co-ordinating our collective offering to the industries that we serve,we are able to provide an homogenous integrated set of solutions that makeRotork the provider of choice for the world leaders in the oil & gas, power andwater & waste water markets. We have begun the process of refining the divisional structure and are nowrefocusing our efforts to maximise penetration of our markets, and to developofferings for newer markets and those where we are not traditionally strong.This involves re-examining parts of our product portfolio and how it integrates,where and how we produce our products and importantly how we offer ongoingsupport to customers after the initial sale is completed. Rotork has long-termrelationships with its customer base and this is a key feature of our businessmodel. It is the trust built up within these relationships that is fundamentalto the successful development of new and existing products. We have for some time strengthened our offering to customers by enhancing therange with niche products through business acquisitions. These have then beenbrought into mainstream use through our product development and marketingprogrammes. This has been a successful strategy for Rotork and there are clearbenefits in pursuing this where we are able to find quality businesses that fitRotork's product philosophy and where we can bring added value. Our underlying markets, oil & gas, the power industry and water & waste water,are all looking positive at the moment and we have confidence in our prospectsfor growth in all of these areas during the coming year and beyond. Investmentin infrastructure development across the world in pipelines, new refineries,liquefied natural gas and the constant need for improvements in energy supply,water availability and the need generally to move product through valves, willcontinue to demand high quality valve actuators. Our drive for improvements intechnology in our approach to processes and systems, make us well placed to takeadvantage of these developments. Peter France29 February 2008 Consolidated Income Statementfor the year ended 31 December 2007 Notes 2007 2006 £'000 £'000 Revenue 2 235,688 206,709Cost of sales (127,748) (115,603) ________ ________Gross profit 107,940 91,106Other income 227 98Distribution costs (2,954) (2,287)Administrative expenses (49,811) (43,735)Other expenses (15) (93) ________ ________Operating profit 2 55,387 45,089 Financial income 3 6,607 5,568Financial expenses 3 (4,741) (4,596) ________ ________Profit before tax 57,253 46,061Income tax expense 4 (17,957) (14,728) ________ ________Profit for the year 39,296 31,333 ======== ======== Pence PenceBasic earnings per share 6 45.6 36.4Diluted earnings per share 6 45.2 36.1 Consolidated Balance Sheetat 31 December 2007 Notes 2007 2006 £'000 £'000AssetsProperty, plant and equipment 17,549 16,616Intangible assets 23,141 22,225Deferred tax assets 6,614 5,739Other receivables 850 735 ________ ________Total non-current assets 48,154 45,315 Inventories 35,993 29,027Trade receivables 44,262 37,385Current tax 1,330 1,219Other receivables 4,745 4,104Cash and cash equivalents 38,253 28,460 ________ ________Total current assets 124,583 100,195 ________ ________Total assets 172,737 145,510 ======== ======== EquityIssued equity capital 4,323 4,314Share premium 6,519 5,857Reserves 2,180 (1,421)Retained earnings 89,430 80,386 ________ ________Total equity 5 102,452 89,136 ======== ========LiabilitiesInterest bearing loans and borrowings 209 180Employee benefits 11,047 8,186Deferred tax liabilities 906 1,225Provisions 1,157 941 ________ ________Total non-current liabilities 13,319 10,532 Bank overdraft - 62Interest bearing loans and borrowings 118 526Trade payables 21,567 16,835Employee benefits 4,890 3,941Current tax 8,791 6,236Other payables 19,138 15,923Provisions 2,462 2,319 ________ ________Total current liabilities 56,966 45,842 Total liabilities 70,285 56,374 ________ ________Total equity and liabilities 172,737 145,510 ======== ======== Consolidated Statement of Cash Flowsfor the year ended 31 December 2007 2007 2007 2006 2006 £'000 £'000 £'000 £'000Cash flows from operating activitiesProfit for the year 39,296 31,333Adjustments for:Amortisation of intangibles 74 98Amortisation of development costs 309 259Depreciation 2,630 2,554Equity settled share based payment expense 680 496Profit on sale of property, plant and equipment (159) (33)Financial income (6,607) (5,568)Financial expenses 4,741 4,596Income tax expense 17,957 14,728 ________ ________ 58,921 48,463Increase in inventories (5,580) (3,610)Increase in trade and other receivables (4,873) (3,786)Increase in trade and other payables 7,001 6,691Difference between pension charge and cash contribution (2,938) (6,801)Increase in provisions 713 731Increase in other employee benefits 2,875 776 ________ ________ 56,119 42,464Income taxes paid (15,071) (11,247) ________ ________ Cash flows from operating activities 41,048 31,217 Investing activitiesPurchase of property, plant and equipment (2,762) (2,425)Development costs capitalised (687) (372)Sale of property, plant and equipment 228 116Acquisition of subsidiary net of cash acquired (8) (1,589)Interest received 932 876 ________ ________Cash flows from investing activities (2,297) (3,394) Financing activitiesIssue of ordinary share capital 671 252Purchase of ordinary share capital (4,249) (2,047)Purchase of preference shares treated as debt - (4)Interest paid (112) (147)Repayment of amounts borrowed (456) (467)Repayment of finance lease liabilities (95) (212)Dividends paid on ordinary shares (24,732) (24,140) ________ ________ Cash flows from financing activities (28,973) (26,765) ________ ________ Net increase in cash and cash equivalents 9,778 1,058Cash and cash equivalents at 1 January 28,398 27,180Effect of exchange rate fluctuations on cash 77 160held ________ ________Cash and cash equivalents at 31 December 38,253 28,398 ======== ======== Consolidated Statement of Recognised Income and Expensefor the year ended 31 December 2007 2007 2006 £'000 £'000 Foreign exchange translation differences 3,855 (3,748)Actuarial (loss) / gain in pension scheme (4,883) 6,743Movement on deferred tax relating to actuarial loss / (gain) 1,241 (2,023)Effective portion of changes in fair value of cash flow hedges (254) (80) ______ ______ Income and expenses recognised directly in equity (41) 892 Profit for the year 39,296 31,333 ______ ______ Total recognised income for the year 39,255 32,225 ====== ====== Notes to the Financial Statementsfor the year ended 31 December 2007 Except where indicated, values in these notes are in £'000 Rotork p.l.c. is a Company domiciled in England. The consolidated financialstatements of the Company for the year ended 31 December 2007 comprise theCompany and its subsidiaries (together referred to as the Group). 1. Accounting policies Basis of preparation The consolidated financial statements have been prepared and approved by thedirectors in accordance with International Financial Reporting Standards asadopted by the EU ('Adopted IFRSs'). IFRS 8 - Operating Segments, IFRIC 9 - Reassessment of Embedded Derivatives,IFRIC 10 - Interim Reporting and Impairment, IFRIC 11 - IFRS2: Group andTreasury Share Transactions, IFRIC 12 - Service concession Arrangements, IFRIC13 - Customer loyalty programmes and IFRIC 14 - Recognition of a Defined BenefitPension Scheme Surplus, together with the amendments to IAS 23, IAS 27, IFRS 2and IFRS 3 which are adopted by the European Union but not effective as at 31December 2007 will be applied in 2008, 2009 or 2010 as applicable. They are notexpected to have a material effect on the reported results or financial positionof the Group. Basis of accounting The consolidated financial statements have been prepared under the historicalcost convention subject to the items referred to in the derivative financialinstruments accounting policy below. The accounting policies set out below havebeen consistently applied by the Group in preparing the 2006 and 2007 financialinformation within its consolidated financial statements except for the firsttime application of IFRS 7 - Financial Instruments: disclosures, thecomplementary amendment to IAS 1 - Presentation and Financial Statements andIFRIC 8 - Scope of IFRS2. They have not had a material effect on the reportedresults or financial position of the Group for 2007 or 2006. The accountingpolicies have been applied consistently in respect of Group entities. Consolidation The consolidated financial statements incorporate the financial statements ofthe Company and its subsidiaries for the year to 31 December 2007. The financialstatements of subsidiaries are included in the consolidated financial statementsfrom the date that control commences until the date control ceases. Intragroupbalances and any unrealised gains or losses or income and expenses arising fromintragroup transactions, are eliminated in preparing the consolidated financialstatements. Status of this preliminary announcement The financial information contained in this preliminary announcement does notconstitute the Company's statutory accounts for the years ended 31 December 2007or 2006. Statutory accounts for 2006, which were prepared under InternationalFinancial Reporting Standards as adopted by the EU, have been delivered to theregistrar of companies, and those for 2007 will be delivered in due course. Theauditors have reported on these accounts, their reports were unqualified and didnot contain statements under section 237 (2) or (3) of the Companies Act 1985.Full financial statements for the year ended 31 December 2007, will shortly beposted to shareholders, and after adoption at the Annual General Meeting on 2May 2008 will be delivered to the registrar. 2. Analysis of revenue, profit and net assets The primary format used for segmental reporting is by business segment as thisreflects the internal management structure and reporting of the Group. Segmentresults, assets and liabilities include items directly attributable to a segmentas well as those that can be allocated on a reasonable basis. Unallocatedexpenses comprise corporate expenses and unallocated assets and liabilitiescomprise cash, borrowings, tax assets and liabilities respectively. Intra grouptrading is determined on an arm's length basis. Business segments The Group comprises the following business segments: Controls - the design, manufacture and sale of electric valve actuators Fluid Systems - the design, manufacture and sale of heavy duty pneumatic andhydraulic valve actuators Gears - the design, manufacture and sale of gearboxes, adaption and ancillariesfor the valve industry Geographic segments Rotork has a worldwide presence in all three business segments through itssubsidiary selling offices and through an agency network. A full list oflocations can be found at www.rotork.com. Analysis by operation: Controls Fluid Systems Gears Eliminations Consolidated 2007 2007 2007 2007 2007 Revenue from external customers 164,226 47,919 23,543 - 235,688Inter segment revenue - - 8,347 (8,347) - ________ ________ ________ ________ ________Total revenue 164,226 47,919 31,890 (8,347) 235,688 ======== ======== ======== ======== ======== Segment result 43,536 7,164 7,259 - 57,959 ======== ======== ======== ======== Unallocated expenses (2,572) ________Operating profit 55,387Net financing income 1,866Income tax expense (17,957) ________Profit for the year 39,296 ======== Controls Fluid Systems Gears Eliminations Consolidated 2006 2006 2006 2006 2006 Revenue from external customers 147,795 40,504 18,410 - 206,709Inter segment revenue - - 5,872 (5,872) - ________ ________ ________ ________ ________Total revenue 147,795 40,504 24,282 (5,872) 206,709 ======== ======== ======== ======== ======== Segment result 37,024 5,374 4,638 - 47,036 ======== ======== ======== ======== Unallocated expenses (1,947) ________Operating profit 45,089Net financing income 972Income tax expense (14,728) ________Profit for the year 31,333 ======== Controls Fluid Systems Gears Unallocated Consolidated 2007 2007 2007 2007 2007 Segment assets 72,937 37,420 16,183 46,197 172,737 Segment liabilities 40,728 14,002 5,322 10,233 70,285 Depreciation 1,839 553 238 - 2,630Amortisation 309 27 47 - 383Non-cash items : Equity settled 378 45 25 232 680share based paymentsCapital expenditure 2,052 689 253 - 2,994 Controls Fluid Systems Gears Unallocated Consolidated 2006 2006 2006 2006 2006 Segment assets 67,969 29,796 12,325 35,420 145,510 Segment liabilities 34,557 9,442 4,146 8,229 56,374 Depreciation 1,776 536 242 - 2,554Amortisation 259 27 71 - 357Non-cash items : Equity settled Share 366 58 16 56 496based paymentsCapital expenditure 1,949 496 161 - 2,606 Analysis by Geographical segment: Europe Americas Rest of the Unallocated Consolidated World 2007 2007 2007 2007 2007 Revenue from external customers by 110,679 56,298 68,711 - 235,688location of customer Segment assets by location of assets 86,538 22,307 17,695 46,197 172,737 Capital expenditure by location of 2,197 275 522 - 2,994assets Europe Americas Rest of the Unallocated Consolidated World 2006 2006 2006 2006 2006 Revenue from external customers by 89,992 58,398 58,319 - 206,709location of customer Segment assets by location of assets 72,810 21,849 15,431 35,420 145,510 Capital expenditure by location of 1,500 268 838 - 2,606assets All of the activities of the Group in the year arise from continuing operations. 3. Net financing income Recognised in the income statement 2007 2006 Interest income 958 982Expected return on assets in the pension schemes 5,574 4,518Foreign exchange gains 75 68 ______ ______ 6,607 5,568 ====== ====== Interest expense 112 121Interest charge on pension scheme liabilities 4,541 4,309Foreign exchange losses 88 166 ______ ______ 4,741 4,596 ====== ====== Recognised in equity Effective portion of changes in fair value of cash flow hedges (544) (290)Fair value of cash flow hedges transferred to profit or loss 290 210Foreign currency translation differences for foreign operations 3,855 (3,748) ______ ______ 3,601 (3,828) ====== ======Recognised in:Hedging reserve (254) (80)Translation reserve 3,855 (3,748) ______ ______ 3,601 (3,828) ====== ====== 4. Income tax expense 2007 2007 2006 2006Current tax:UK Corporation tax on profits for the year 12,670 10,486Double tax relief (5,122) (6,023)Adjustment in respect of prior years (187) (182) ______ ______ 7,361 4,281 Overseas tax on profits for the year 10,487 8,787Adjustment in respect of prior years (24) 41 ______ ______ 10,463 8,828 ______ ______Total current tax 17,824 13,109 Deferred tax:Origination and reversal of other temporary differences 115 1,585Adjustment in respect of prior years 18 34 ______ ______ Total deferred tax 133 1,619 ______ ______Total tax charge for year 17,957 14,728 ====== ====== Effective tax rate (based on profit before tax) 31.4% 32.0% Profit before tax 57,253 46,061 Profit before tax multiplied by standard rate of 17,176 13,818corporation tax in the UK of 30% Effects of:Non deductible expenses 349 267Unrelieved losses - (45)Higher tax rates on overseas earnings 625 795Adjustments to tax charge in respect of prior years (193) (107) ______ ______Total tax charge for year 17,957 14,728 ====== ====== A tax credit of £577,000 (2006: £551,000) in respect of share based payments hasbeen recognised directly in equity in the year. The Group continues to expect its effective rate of corporation tax to beslightly higher than the standard UK rate due to higher rates of tax in the US,Canada, France, Germany, Italy, Japan and India. There is an unrecognised deferred tax liability for temporary differencesassociated with investments in subsidiaries. Rotork p.l.c. controls the dividendpolicies of its subsidiaries and subsequently the timing of the reversal of thetemporary differences. It is not practical to quantify the unprovided temporarydifferences as acknowledged within paragraph 40 of IAS 12. 5. Capital and reserves Issued Share Translation Capital Hedging Retained Total equity premium reserve redemption reserve earnings capital reserve Balance at 31 December 4,310 5,609 978 1,637 (210) 68,241 80,5652005 Profit for the year - - - - - 31,333 31,333Other items in the - - (3,748) - (80) 4,720 892statement of recognisedincome and expenseEquity settled - - - - - 915 915transactions net of taxShare options exercised 4 248 - - - - 252by employeesOwn ordinary shares - - - - - (2,047) (2,047)acquiredOwn ordinary shares - - - - - 1,368 1,368awarded under shareschemesPurchase of preference - - - 2 - (4) (2)sharesDividends - - - - - (24,140) (24,140) _____ _____ _____ _____ _____ _____ _____Balance at 31 December 4,314 5,857 (2,770) 1,639 (290) 80,386 89,1362006Profit for the year - - - - - 39,296 39,296Other items in the - - 3,855 - (254) (3,642) (41)statement of recognisedincome and expenseEquity settled - - - - - 364 364transactions net of taxShare options exercised 9 662 - - - - 671by employeesOwn ordinary shares - - - - - (4,249) (4,249)acquiredOwn ordinary shares - - - - - 2,007 2,007awarded under shareschemesDividends - - - - - (24,732) (24,732) _____ _____ _____ _____ _____ _____ _____Balance at 31 December 4,323 6,519 1,085 1,639 (544) 89,430 102,4522007 ===== ===== ===== ===== ===== ===== ===== Share capital and share premium 5p Ordinary 5p Ordinary £1 5p Ordinary 5p Ordinary £1 shares shares Non-redeemable shares shares Non-redeemable Authorised Issued and preference Authorised Issued and preference fully paid up shares fully paid up shares 2007 2007 2007 2006 2006 2006 At 1 January 5,449 4,314 45 5,449 4,310 47Purchased for cash and - - - - - (2)cancelledIssued under employee - 9 - - 4 -share schemes _______ _______ _______ _______ _______ _____At 31 December 5,449 4,323 45 5,449 4,314 45 ======= ======= ======= ======= ======= ===== Number of shares (000) 108,990 86,469 108,990 86,282 ======= ======= ======= ======= The ordinary shareholders are entitled to receive dividends as declared and areentitled to vote at meetings of the Company. The preference shareholders takepriority over the ordinary shareholders when there is a distribution uponwinding up the Company or on a reduction of equity involving a return ofcapital. The holders of preference shares are entitled to vote at a generalmeeting of the Company if a preference dividend is in arrears for six months orthe business of the meeting includes the consideration of a resolution forwinding up the Company or the alteration of the preference shareholders' rights Ordinary shares issued during the year were 142,173 (2006: 88,261) under theShare option scheme, at prices between 285p and 387p (2006: 278p and 298p) and44,905 (2006: 1,465) under the Sharesave plan at 320p (2006: 320p). No newshares were issued under the Share Incentive Plan or under The Overseas ProfitLinked Share Scheme during 2007 or 2006. No new options were issued under the Share option scheme during 2007 or 2006. On1 December 2007 (2006: 6 October 2006) options over 42,405 (2006: 58,025) shareswere granted under the Sharesave plan at 811p (2006: 592p). Of these options,28,499 (2006: 21,402) were exercisable after 3 years and 13,906 (2006: 36,623)after 5 years. There were 46,557 (2006: 200,973) outstanding options under the Share optionscheme at 31 December, exercisable at various prices between 278p and 387p perordinary share between 2008 and 2014. There were 241,487 (2006: 250,452)outstanding options under the Sharesave plan at 31 December, exercisable atvarious prices between 320p and 811p per ordinary share between 2008 and 2012. Within the retained earnings reserve are own shares held. The investment in ownshares represents 445,396 (2006: 283,045) ordinary shares of the Company held intrust for the benefit of directors and employees for future payments under theShare Incentive Plan and Long-term incentive plan. The dividends on these shareshave been waived. Translation reserve The translation reserve comprises all foreign exchange differences arising fromthe translation of the financial statements of foreign operations. Capital redemption reserve The capital redemption reserve arises when the Company redeems shares wholly outof distributable profits. Hedging reserve The hedging reserve comprises the effective portion of the cumulative net changein the fair value of cash flow hedging instruments that are determined to be aneffective hedge. Dividends The following dividends were paid in the year per qualifying ordinary share: 2007 2006 11.65p final dividend (2006: 9.9p) 10,051 8,5377.7p interim dividend (2006: 6.5p) 6,645 5,6012007 additional interim dividend 9.3p 8,036 -2006 first additional interim dividend 5.8p - 5,0042006 second additional interim dividend 5.8p - 4,998 ______ ______ 24,732 24,140 ====== ====== After the balance sheet date the following dividends per qualifying ordinaryshare were proposed by the directors. The dividends have not been provided forand there are no corporation tax consequences. 2007 2006Final proposed dividend per qualifying ordinary share14.00p 12,116 ======11.65p 10,019 ====== Additional interim dividends per qualifying ordinary share proposed for 2008 11.5p 10,000 ======9.3p 8,000 ===== 6. Earnings per share Basic earnings per share Earnings per share is calculated for both the current and previous years usingthe profit attributable to the ordinary shareholders for the year. The earningsper share calculation is based on 86.1m shares (2006: 86.1m shares) being theweighted average number of ordinary shares in issue (net of own ordinary sharesheld) for the year. 2007 2006 Net profit attributable to ordinary shareholders 39,296 31,333 ====== ====== Weighted average number of ordinary shares Issued ordinary shares at 1 January 85,999 85,952Effect of own shares held 54 91Effect of shares issued under Share option schemes / Sharesave plans 93 58 ______ ______Weighted average number of ordinary shares for the year ended 31 December 86,146 86,101 ====== ====== Diluted earnings per share Diluted earnings per share is based on the profit for the year attributable tothe ordinary shareholders and 86.9mshares (2006: 86.9m shares). The number ofshares is equal to the weighted average number of ordinary shares in issue (netof own ordinary shares held) adjusted to assume conversion of all dilutivepotential ordinary shares. The Company has three categories of dilutivepotential ordinary shares: those share options granted to employees under theShare option scheme and Sharesave plan where the exercise price is less than theaverage market price of the Company's ordinary shares during the year andcontingently issuable shares awarded under the Long-term incentive plan. 2007 2006 Net profit attributable to ordinary shareholders 39,296 31,333 ====== ====== Weighted average number of ordinary shares (diluted) Weighted average number of ordinary shares for the year ended 31 December 86,146 86,101Effect of share options in issue 30 102Effect of Sharesave options in issue 113 111Effect of LTIP shares in issue 604 552 ______ ______Weighted average number of ordinary shares (diluted) for the year ended 31 86,893 86,866December ====== ====== This information is provided by RNS The company news service from the London Stock Exchange