Rotork Regulatory News (ROR)

2 Mar 2005 07:01

Rotork PLC02 March 2005 PART 1 2 March 2005 Rotork p.l.c. Preliminary Announcement Excellent growth in all three divisions with strong closing order book. Financial Highlights • Turnover up 8% to £146.9m (12.6% at constant currency) • EBIT before goodwill up 9.6% to £31.1m (19.6% at constant currency) • Year end order book up 11.5% year on year • Dividend for the year including special dividend up 42% Operational review • Excellent growth in all three divisions • Good business levels in most markets • Strong take up of new IQT product line • Continued high levels of growth achieved by Rotork Fluid System Chief Executive Bill Whiteley, commenting on the results said: "2004 was characterised by a strengthening demand for our products in keymarkets which allowed us to make good progress in spite of a strong currencyheadwind. The principal highlights were the excellent take up of our new IQTactuator..... and the continued exceptional growth of our Fluid System division." For further information, please contact: Rotork p.l.c. Tel: 01225 733200Bill Whiteley, Chief ExecutiveBob Slater, Finance Director Financial Dynamics Tel: 020 7269 7224Sally Lewis Chairman's Statement Introduction Growth in all of Rotork's main business areas combined to achieve furthersignificant advances in overall sales, operating profit and earnings per share.Despite a weak US dollar, Group turnover increased by 8.0% (12.6% at constantcurrency) to £146.9m with operating profit before goodwill ahead 9.6% (19.6% atconstant currency) at £31.1m. The year end order book increased by 11.5% withRotork Fluid System now accounting for 20.0% of the total. Business review Order intake which started the year well continued on an upward trend andresulted in an increased order book by the year end. These improved businesslevels were evident throughout most of our geographic markets but were mostnoticeable in the Far East and the USA where the latter recorded a 26% increasein order intake in US dollars. The IQT actuator, released at the end of 2003, has surpassed our expectationsalthough this success itself contributed to component availability issues asvendors struggled to keep pace with demand. The Malaysian assembly facilitymoved into profit in the second half. It is now a contributor to our Electricsbusiness and is seeing a widening interest in its product offering. Both ofthese products assisted our strategy of increasing our penetration of theworldwide water and power generation markets. Our Fluid System business rewarded the confidence that we have placed in it. Itsturnover growth of 26% in the year (30% at constant currency) equated to 16% ofthe Group's output and we predict further development of this increasinglyimportant business. The Deanquip business in Australia purchased in January hastraded well in the year and the management has successfully integrated it intothe division. Most of our overseas sales subsidiaries are now making ameaningful contribution to Fluid System's performance. Rotork Gears continued to perform well recording a 10% increase in operatingprofit. It had a number of successes in the year including the establishment ofa small Far Eastern assembly facility to supply some product for this region. Corporate governance We continue to address the various corporate governance and corporate socialresponsibility issues that are receiving increasing attention throughoutindustry and beyond. The Rotork Board regularly reviews these matters,collectively and through committees, and the Directors' report covers a numberof issues on these and related topics. We maintain strong internal controlsacross the Group and support the work of our external auditors with an activeprogramme of internal audit visits to all business locations on a regular basis. Directors George Malcolm retires on 8 April, and I would like to thank him personally forhis considerable contribution to the business over the 21 years he has been withRotork and for the support and commitment he has given to the Board since hejoined it in 1997. It is however with pleasure that we welcome Graham Ogden tothe Board from 1 January 2005. Since joining Rotork in 1985 Graham has beenclosely involved in our product development programmes including the awardwinning IQ series. I am also pleased to welcome Ian King who joined the Board as our fourthnon-executive director in February 2005. He is a qualified accountant and iscurrently Group Managing Director, Customer Solutions and Support, BAe Systemsplc and is a member of that company's Executive Committee. Dividend Rotork has increased its dividend consistently throughout the last 30 years andin the current year will distribute 90% of profit after taxation in the form ofdividend to shareholders. The directors propose a final dividend of 9.70p whichwill be payable on 27 May to shareholders on the register on 6 May 2005. This,taken with the core interim dividend and additional interim dividend alreadypaid for the year, gives a total dividend per share for 2004 of 20.90p, anincrease of 42% over 2003. Outlook Order intake in the first two months of the current year continued the positivetrend we experienced throughout 2004. That combined with the favourablereception of our new products and the targeted growth opportunities for ourbusiness gives us the confidence to look forward to further progress in 2005 inspite of the difficulties caused by the current level of the US dollar. Roger Lockwood Chairman 1 March 2005 Operating and Financial Review Business Strategy The objective of Rotork p.l.c. is to increase shareholder value by developingour leadership position in worldwide valve actuator activities All of theGroup's activities are focused on the specialist area of valve automation. Theorigins of the company lie with the founder, Jeremy Fry, who developed anelectric valve actuator in 1952. Over the years Rotork continued to build onits reputation as an innovator of new concepts in this field and has providedusers with increasing levels of functionality, performance and assurance. Recent strategy directions have focused on opportunities to leverage ourleadership position in heavy-duty electric actuation into other closelyassociated areas of valve automation. Today Rotork's business is split intothree actuation divisions; Rotork Electric, the original and largest activitysupplying high quality, state of the art products for controlling pipeline andother valves; Rotork Fluid System, which supplies heavy-duty pneumatic andhydraulic valve actuators for operation in emergency shut down and othercritical applications; Rotork Gears, involved in the supply of gearboxes,adaptors and ancillaries for the valve industry. Key strategies relate to thedevelopment of products, marketing initiatives, service revenue opportunitiesand cost reduction initiatives relating to these businesses. Year under review 2004 was characterised by a strengthening demand for our products in key marketswhich allowed us to make good progress in spite of a strong currency headwind.Order intake was up 11% in sterling terms and 16% on a like for like basis,resulting in the order book ending 11% higher than the start of the year.Turnover was up 8%, 13% on a like for like currency basis and pre-tax profitsbefore goodwill and the 2003 exceptional (which relates to the gain on the saleof a building) were up 9.6%, 19.6% on a like for like currency basis. The principal highlights were the excellent take up of our new IQT actuator, aquarter turn variant of our world leading IQII flagship product line; thestrength of our Asian and Far Eastern operations, which allowed us to capitaliseon the region's growth opportunities; the growth of sales of the AWT productmanufactured in our new Malaysian plant, which opened up new non-hazardousmarket opportunities for Rotork; and the continued exceptional growth of ourFluid System division which is benefiting from its enhanced product ranges,worldwide marketing and strong demand from its oil and gas customers at theirupstream and transmission operations. The key drivers for the Group's businesses relate to investment in oil and gas,water and waste water and power generation 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 aimedat improving the efficiency, safety and environmental performance of plants.Valve actuators 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 turnover in any year. All three divisions increased their order input, sales output and operatingprofits in 2004. Electric Actuators The main markets for electric actuators are oil and gas, water and waste watertreatment, and power generation installations. Of these the oil and gascompanies are Rotork's major end users. It should be noted that the majority ofthe actuators we sell into this sector go into downstream operations such asrefinery offsites, storage and distribution facilities. Although capitalexpenditure by the oil and gas companies remained at high levels the emphasis ofthis expenditure has in the recent past been on upstream activities such asexploration, production and transmission. Hence, although the activity fromthis sector was reasonably strong we would only expect to be a modestbeneficiary of this investment. One of our key strategies is to expand our business in the worldwide water andwaste water markets as we consider that global demand for potable water andimproved waste water treatment provides a good growth opportunity. New productsand marketing outlets have been developed in recent years to realise thisambition. In 2004 we saw a healthy increase in the number of actuators we soldinto this market despite a static UK market. The new IQT and the AWT actuatorswere instrumental in achieving this gain. We have also targeted the powergeneration market as a key area in which to increase our market share. Althoughthe North American and European markets remained subdued in terms of investmentlevels we saw a big increase in the sale of units into this sector due to thestrength of the Asian and Far East markets and the attractiveness of our newproducts. UK Operations There was a welcome, although modest, improvement in the UK domestic market in2004, which was coupled with additional orders coming through UK valve makersfor overseas destinations. AMP 4 was released towards the year end. It isdifficult to predict the impact this will have on our UK business, however somecontractors are upbeat about its opportunities. Rotork adheres to an in-house assembly only philosophy of manufacturing in whichwe rely on high quality vendors for all of our components. The main electricactuator assembly plant is in the UK in Bath with satellite assembly plants inRochester N.Y., India and Malaysia. The Bath plant achieved a good increase inits sales and profits in spite of some difficulties with its supply chain. Anumber of suppliers experienced difficulties resulting either from re-locatingfacilities or gearing up production. Fortunately these problems abated allowingus to achieve historically high output levels in the final two months of theyear. The large increase in the price of some raw materials was mitigated byour policy of developing more Far Eastern sources. The IQT actuator launched inthe second half of 2003 sold well above our expectations in 2004 and meant thatwe had to add additional component supply capacity during the year to keep upwith demand. Europe Our European sales subsidiaries performed well. They were, in most cases,boosted by the success of their local valve makers winning business outsidetheir territories rather than demand for actuators within Europe. The demandfrom Eastern Europe and Russia was lower than the very high prior year figures.The French, Spanish and Dutch companies all comfortably exceeded expectationsand prior year profits. The German subsidiary's profits were down on a verystrong 2003 performance due to reduced levels of Russian business, but metexpectations, while in Italy the results were below the prior year figure. Thestrength of the euro is of assistance to all of our European sales subsidiariesas the majority of their purchases are from the UK plant. The Americas The US subsidiary based in Rochester, N.Y. saw strong growth in its orderintake, sales output and operating profit. Of course the US dollar rate, movingfrom an average of $1.66 in 2003 to an average of $1.83 in 2004, took a toll onthese numbers when converted into sterling. However there was still respectablegrowth in sterling terms. The company saw increased sales into all of its enduser markets, and it was particularly pleasing to see the strong rebound in ourmunicipal business, which we experienced in the second half of 2003, continuethroughout the year. The weak dollar benefited the US valve makers and otherO.E.M.s in terms of their competitiveness on international business whichassisted our US business. The results of our Canadian subsidiary and JordanControls, based in Milwaukee, were disappointing. Jordan Controls continued tosuffer from a weak domestic power market and reduced sales into Venezuela. Itdid however benefit from improved sales in the Far East and from a number ofbreakthrough orders in the UK and Europe. The Venezuelan subsidiary performedwell in a market that continues to be difficult. The Far East and the Rest of the World Rotork has a particularly strong sales infrastructure in Asia and the Far East.This meant that we were able to capitalise on the good growth opportunitieswhich were present in many of these markets. In particular we saw high levelsof activity in the Chinese and Indian economies. However, our subsidiaries inSingapore, Malaysia, Thailand, Korea, Japan and in particular Australia, allalso performed well. The Malaysian manufacturing plant continued to increase its output in its secondyear of operation. By the second half of the year it was running profitablycreating a small profit for the year as a whole which was ahead of target. Theplant manufactures the AWT range which sells through our worldwide salesoutlets. Once the profitability of the sales of the equipment through thesechannels is taken into account the output of the Malaysian plant made a goodcontribution to overall profits and was in line with our general margins forelectric actuators. Rotork Fluid System Rotork Fluid System design, assemble and market heavy-duty fluid power valveactuators, which are operated either pneumatically or hydraulically. Themarkets for these products are, in the main, oil and gas related and unlikeelectric actuators the bulk of these products are destined either for upstreamapplications of production or transmission. These areas are benefiting fromincreased investment by most of the international oil and gas companies. Theprincipal assembly plant is based in Lucca, Italy with product also assembled inRochester N.Y. The product is sold either direct to Italian valve makers orthrough the Rotork worldwide sales outlets. A number of these have specialistpackaging expertise and mount controls and other devices on actuators suppliedfrom the assembly plants. A key strategy of the Group is to grow this activitywhich is expected to reach 20% of Rotork's total turnover within two years. Themargins from this business are less than those achieved by the remainder of thebusiness but continue to improve year on year. This activity saw very goodgrowth levels in 2004. Order intake was up 25%, sales output 26% and operatingprofits 50%. This result was particularly creditable as it was achieved withoutthe benefit of any one very large project as in the prior year and was achievedin spite of the bulk of the cost being euro based. The Lucca plant had another successful year and was supported by good growth atthe Leeds and Singaporean packaging centres. The US operation achieved aturnaround profit in spite of difficult currency issues due to the euro costbase. Deanquip Valve Automation Pty Ltd, a Melbourne based distributor of fluidpower actuators and control systems, which was acquired at the beginning of 2004for A$2m made a good profit contribution in its first year ahead of our modestexpectations. It has completed a name change to Rotork Fluid System Pty Ltd.Recently developed new product ranges sold well and added to the attractivenessof Rotork Fluid System's portfolio of products. In addition to in-housedevelopments, acquisitions of companies with complementary products are beingpursued. Rotork Gears Rotork Gears saw healthy levels of demand for their products from most of theirmarkets. Order intake recorded a 6% increase while sales output was up 9%.Operating profits were up by 10%. This division felt the impact of increasingsteel and iron prices more than the rest of the Group and it was also affectedby the currency transaction impact on its sales of gearboxes to the US market.The benefits of work to improve its cost base through Far Eastern sourcinghelped control costs in the second half of the year. Further initiatives toreduce the cost base by design and sourcing are underway. In addition torevamped products a new range of sub-sea gearboxes was launched during the yearand has gained rapid acceptance amongst its specialist customer base. Thepurchase of the portion of the premises in Leeds which we did not own hasallowed the Gears operation to improve its workflow. Research & Development The R & D programme was directed towards the completion of the IQT range, whichhas significantly added to the attractiveness of our quarter turn actuatorproduct offerings. Additionally the launch of the Skilmatic SI range ofactuators brings sophisticated IQ technology to the operation ofelectro-hydraulic actuators for the first time, and we have updated all of ouropen system digital control offerings and developed Ethernet and web basedoptions to our proprietary Pakscan control system. The main focus of R & D expenditure in the current year will be the enhancementof the electronics package in the flagship IQII product range which will furtherincrease the flexibility of the product for our customer base; the developmentof a new generation of our proprietary actuation control system, which even inthe era of open systems, remains the most cost effective and robust means ofmonitoring and controlling actuators in the field; and work on a major new rangeof actuators which will extend the capabilities of our products into newbusiness areas. Our Innovation Programme has provided us with a number of interesting approachesto the development of our products and services which are being pursued aseither stand alone developments or as part of existing development programmes. Quality The main Bath site underwent a very successful LRQA re-certification auditagainst ISO9001:2000 in February 2004. The scope of approval was amended tounderscore the suitability of Rotork products for use in potentially hazardousenvironments. LRQA noted 'an evident commitment to improvement'. Numerouscustomer audits, often geared to specific product or end-user requirements, havealso noted the effectiveness of Rotork's well-established Quality ManagementSystem. The non-intrusive quarter turn product, IQT, is an excellent testimony toRotork's Quality philosophy. Demand for the product has exceeded even the mostoptimistic expectations. The 'concept-to-market' time cycle was expedited bydeploying innovative techniques including analytical solid modelling, rapidprototyping and concurrent engineering. These state of the art techniquesenabled Key Design For Manufacture and Design For Assembly features to beincorporated from the outset. Casting design was optimized using leading edgeprocess simulation to predict potential trouble spots, resulting in very highcasting yields from the start. Build statistics demonstrate clearly that IQTassembly is highly intuitive and this, coupled with automated testing, makes foran exceptionally consistent and accurate process. Treasury The Group's treasury function, based in Bath, manages financial risks to theGroup, as a result of our wide geographical spread, and maximises interestincome from cash deposits in all our subsidiary companies. The main exposure isthe currency risk from trading transactions undertaken by Rotork operationsaround the world. With 30% of our income streams in US dollar and relatedcurrencies this has a material effect on the Group in translation of our localcurrency profits into sterling. In addition, the effect of transaction costs forour customers, and our own companies in US dollar driven economies around theworld buying from the UK factory, is to dilute margins in territories where wehave to maintain a local currency price for the product. Our weighted average rates for translation of the dollar over the last threeyears have been: 2004 - $1.83 2003 - $1.66 2002 - $1.52 The euro - representing around 20% of our income streams in the year - has had amitigating effect overall. Our euro rates for translation comparable with theabove were: 2004 - €1.46 2003 - €1.44 2002 - €1.58 As a guide, a one cent average annual appreciation or depreciation of the US$can have around a £140k effect on operating profit over a year and one centmovement in the euro can have a £120k effect on profit over a year on the samebasis. These figures are based on the current geographic spread of the businessand will vary from year to year depending on the dynamics of business around theworld. An increasingly important relationship to us is the euro-dollar due to theincreased amount of Rotork Fluid System product shipped from our factory inLucca, Italy to the US. We have mitigated this to some extent by increasing thenumber of Fluid System products assembled in the US. Purchase of components into the UK from overseas has increased over the last fewyears and now over 25% of our components are sourced this way. The productionunits outside the UK are sourced primarily in their own currencies. Thisprovides some natural hedging of our currency exposure, and the trend toward FarEast sourcing of appropriate components is continuing. The main productionfacility in the US sources from the UK and these transactions are hedged. Ouractive policy of currency management has helped defer the effects of currencymovements in the year. Only underlying trading transactions are covered,normally using simple forward contract or option instruments. The treasurypolicy in operation within the Group requires the hedging of a proportion of allactual and reasonably expected transaction exposures. The Group treasuryfunction does not operate as a profit centre. The impact of IAS 39 is expectedto be negligible for Rotork. At constant currency the Group turnover would have shown a figure of £153.0m,which is an increase of 13% over the 2003 comparative, rather than the 8% shownby the results. Similarly operating profit would have shown an improvement of20% over the prior year in constant currency terms. Cash Rotork is a cash generative Group, and converts a large part of its operatingprofit into cash. There have however been a number of issues in the past yearwhich have led to an increase in working capital. Shipments in the last twomonths were very strong which led to the year closing with high receivables,despite a further reduction in days sales outstanding from 67 days last year toa very creditable 58 days. Inventory has increased in the year due in part tothe effect of legacy products in the transition period while introducing theIQT. In addition supply shortages disrupted production, increasing our inventoryholdings. The growing Fluid System business has had a need for higher workingcapital. There have also been two large outflows of cash, both in the first half of theyear. An extra dividend payment was made in May, costing £5 million. Total cashdistributed to shareholders in dividend was £17.8 million in the year. Anadditional contribution to the UK defined benefit pension fund of £5 million wasmade in March. The Deanquip acquisition at the beginning of the year alsoconsumed a modest amount of cash. Pensions The triennial actuarial valuation of the UK defined benefit pension scheme wasundertaken in 2004, and approved by the trustee in September. This is thelargest scheme funded by the Group, and has been closed to new entrants since 1January 2003. In addition to being closed to new members, existing members havegenerally increased their rate of contribution to the scheme from 5% of salaryin 2003, to 6.5% from January 2004, and to 8% from January 2005. There is adefined contribution scheme in place for people joining after January 2003 butthis is not managed within the existing scheme trustee structure. The actuary states in his triennial report that the funding level for the UKdefined benefit scheme, which had been 97% at March 2001, had deteriorated to84% at March 2004. The company contribution has therefore been increased from 1October 2004, and the actuary expects this to extinguish the past servicedeficit in 9 years. The main reason for the increased deficit is stated in thereport as being due to investment returns being "significantly below thoseassumed in the 2001 valuation". The MFR funding level at the 2004 valuation datewas 107%. As a result of the timing of the actuarial valuation, the Board has decided toadopt the accounting provisions of FRS17 for 2004 onwards. The 2003 comparativeshave been restated which has increased profit before taxation for that year by£97k. The size of the deficit under FRS17 has however increased in the year dueprincipally to the effect of the movement in bond rates on the scheme'sliabilities. The accounting provisions of FRS17 take a fundamentally different view ofliabilities than the actuarial valuation. The absolute calculation of the schemeliabilities under this standard, being dependant on average AA bond rates, willshow more volatility than would be seen in the actuarial valuation, or underSSAP24. AA bond discount rates used for this calculation are shown in note 23and have fallen by 0.15% over the last year. This alone is estimated to haveadded £2.8m to the theoretical calculation of the scheme deficit under FRS17since the last annual report. The charge to the accounts for all pensionschemes in the Group for the year was £2.0m (2003: restated £1.9m). Tax The effective tax rate on profit before goodwill amortisation was 33.3% (2003:32.1%). The prior year benefited from the gain on disposal of the property inLuton (£597k) which was effectively tax free due to capital losses broughtforward. Overall 55% of the Group's profits are earned outside the UK and anumber of these jurisdictions have higher corporate tax rates than the UK. Wehave benefited from increasing profits from some lower tax areas in the FarEast. We anticipate the rate of tax in 2005 to be broadly similar to 2004. Dividend Shareholders on the register during the whole period of eligibility for the yearwill receive a total of three dividends. On May 28, 2004 a special interimdividend of 5.85p was paid. On 27 September an interim dividend of 5.35p waspaid, which, taken with the final of 9.70p to be paid on 27 May 2005 makes anincrease of 2% over the dividend paid in 2003 excluding the special dividend.With the special payment added, the 2004 dividend at 20.9p represents anincrease of 42% over 2003. International accounting standards We have in place procedures to enable us - as required - to adopt internationalaccounting standards for the interim results 2005. We do not anticipate therebeing significant adjustments as a result of this, but areas that may have someimpact and record changes to comparative numbers are: • Pension accounting (note FRS 17 adopted this year) • Restatement of 2004 acquisition • Goodwill amortisation • Share based payments The Interim 2005 results will record the transition to International AccountingStandards. Environment Rotork remains fully committed to the principles laid down for inclusion in theFTSE4Good Index. The Group Environmental Policy has been published on thecompany web site since early 2002 and is reviewed annually. As in previousyears, the Group Environmental Report, to be published on the web site in lateSpring 2005, will include global reporting of environmental data for the 2004trading year. Further details of the Group's environmental performance during the year underreview are contained in the Corporate Responsibility Statement. Employees I would like to make special mention of the dedication and enthusiasm of ourentire worldwide workforce. There were many challenging issues which had to beaddressed on a daily basis in order to achieve these results and I very muchadmire the level of commitment that everyone showed in serving our customerswhich is the basis of our financial success. Bill Whiteley Chief Executive 1 March 2005 Board of Directors Executive WH Whiteley (Chief Executive) Bill (56) joined Rotork in 1974 and was President of Rotork's North Americanoperations from 1979 until he became Managing Director of Rotork Actuation in1988. He has been a member of the Rotork p.l.c. Board since 1984 and wasappointed Group Chief Executive in 1996. He is a member of the NominationCommittee. Bill is a non-executive director of Roxboro Group plc andSpirax-Sarco Engineering plc. RE Slater Bob (53) joined Rotork in 1989 as Finance Director of the Actuation Division,and was appointed to the Board of Rotork p.l.c. as Group Finance Director in1998. He has previously held finance positions in mining, building controls andthe engineering industry. GE Malcolm Since joining Rotork in 1984, George (59) had been Engineering Director of theActuation Division prior to becoming a member of the Rotork p.l.c. Board in1997. He is currently Operations Director of the Actuation Division. Hisprevious appointments were in industrial controls, aerospace and shipbuildingcompanies. RH Arnold Bob (53), who became a member of the Rotork p.l.c. Board in 2001, is a graduateengineer. Previously with Westinghouse in the USA, he joined Rotork ControlsInc. as Engineering Manager subsequently becoming Vice President, Engineeringand since 1988 President of Rotork Controls Inc. Bob has responsibility for allRotork's interests in the Americas. GM Ogden Graham (48), holds a Phd and 1st class honours degree in electronic engineeringfrom Bristol University and has been with Rotork since 1985. Since joiningGraham has been closely involved in product development including our awardwinning IQ series. He was appointed to the Actuation division operating board in1997 as Research and Development Director and joined the Board of Rotork p.l.c.in January 2005. Non-Executive RC Lockwood (Chairman) Roger (59) has been a non-executive director of Rotork since joining the Boardin 1988 and became non-executive Chairman in November 1998. He is Chairman ofthe Nomination Committee. He is Chairman of Colston Manufacturing (Engineering)Co Ltd and Hydro International plc and has previously held CEO roles inautomotive and engineering businesses. JW Matthews John (60) has been a non-executive director of Rotork since joining the Board inNovember 1998. He is Chairman of Crest Nicholson plc and Regus plc. He haspreviously held senior positions in banking and industrial companies. He isChairman of the Audit and Remuneration Committees and a member of the NominationCommittee, and is the senior independent non-executive director. A Walker Alex (58), who joined the Board as a non-executive director in January 2001, hasbeen Chief Executive of Yule Catto & Co. plc since 1986. He is a member of theAudit, Remuneration and Nomination Committees. IG King Ian (48) joined the Board in February 2005 as a non-executive director. He iscurrently Group Managing Director, Customer Solutions and Support, BAe Systemsplc and is a member of that Company's Executive Committee. Ian has previouslyheld senior financial and general management positions at Marconi. He is amember of the Audit, Remuneration and Nomination Committees. Report of the Directors The directors submit their report and the audited accounts for the year ended 31December 2004 as set out on pages 24 to 48. Principal Activities Rotork p.l.c. is a holding Company. The principal activities of the RotorkGroup are the design, manufacture and support of actuators, systems and relatedproducts worldwide. Rotork Actuation provides a range of products, systems and services for themotorisation and manual operation of and adaption to industrial valves anddampers for isolation duty and process control applications. It does thisthrough its Electric Actuator, Gears and Fluid System operations. Actuatedvalves are major control elements in refineries, pipelines, power stations,water distribution systems and effluent treatment plants and in all industriesin which liquids or gases are transported through pipes. Reviews of the Group's activities and business development including futuredevelopment of the business and research and development are set out in theOperating and Financial Review on pages 4 to 8. Dividends The directors recommend a final dividend of £8,303,000 for the year, payable on27 May 2005 to shareholders on the register on 6 May 2005. This represents9.70p per share (2003: 9.50p) which, with the interim dividend of 5.35p pershare (2003: 5.25p) and the additional interim dividend of 5.85p per share willproduce a total dividend per ordinary share of 20.90p (2003: 14.75p). Shares issued or purchased Details of the ordinary shares issued and the preference shares purchased during2004 are given in note 19 and 20. Substantial shareholdings As at 1 February 2005 the Company had been formally notified that the followinghave material interests in 3% or more of the issued ordinary share capital ofthe Company: Figures given below are for the total material and non-materialinterests of these shareholders. No. % Aviva plc 6,336,659 7.39% Legal & General plc 3,541,090 4.13% Prudential plc 3,033,373 3.53% Scottish Widows Investment Partnership Ltd. 3,030,351 3.53% Research and development Total Group expenditure on research and development in the year was £2,424,000(2003: £2,071,000) further details of which are contained in the Operating andFinancial Review on pages 4 to 8. Charitable donations During the year the Group made charitable donations of £35,000 (2003: £30,000). There were no political donations made in the year or the prior year. Directors The names of the directors in office throughout the year and their biographicaland other details including the other significant commitments of the Chairmanare as shown on page 9. Post year end, on 1st January 2005, GM Ogden wasappointed an executive director and on 17th February 2005, IG King was appointeda non-executive director. The Company has consented to GE Malcolm's earlyretirement on 8th April 2005. The interests of the directors in office at theend of the financial year in the shares of the Company are as shown in note 9 tothe financial statements. WH Whiteley, GE Malcolm, RE Slater, RH Arnold and GM Ogden have serviceagreements and details of these are contained in the Remuneration Report onpages 17 to 22. At the Annual General Meeting ("AGM"), in accordance with the Articles ofAssociation, RH Arnold, RC Lockwood and RE Slater will retire by rotation and,being eligible, will offer themselves for re-election. GM Ogden and IG Kingwill both offer themselves for election it being their first opportunity sinceappointment. The Senior Independent Director, JW Matthews has, following a formal performanceevaluation of the Chairman, confirmed to the Board that RC Lockwood continues tobe effective in and committed to his role as Chairman. A letter to similareffect has been circulated to shareholders ahead of the AGM. Statement of directors' responsibility for preparing the financial statements The following statement, which should be read in conjunction with the auditors'Statement of Auditors' Responsibilities, included in the audit report, is madewith a view to distinguishing for shareholders the respective responsibilitiesof the directors and of the auditors in relation to the financial statements. Company law requires the directors to prepare financial statements for eachfinancial year which give a true and fair view of the state of affairs of theCompany and the Group as at the end of the financial year and of the profit orloss for that period. The directors consider that in preparing the financial statements on pages 24 to48, the Company has selected suitable accounting policies which have beenconsistently applied and supported by reasonable and prudent judgements andestimates, and that all accounting standards which they consider to beapplicable have been followed subject to any explanations and any materialdepartures disclosed in the notes to the financial statements. The directorsare required to use a going concern basis in preparing the financial statementsunless this is inappropriate. After making enquiries, the directors have areasonable expectation that the Company and the Group have adequate resources tocontinue in operational existence for the foreseeable future. For this reasonthey continue to adopt the going concern basis in preparing the financialstatements. The directors have responsibility for ensuring that the Company keeps accountingrecords which disclose with reasonable accuracy the financial position of theCompany and which enable them to ensure that the financial statements complywith the Companies Act 1985. The directors have general responsibility for taking such steps as arereasonably open to them to safeguard the assets of the Group and to prevent anddetect fraud and other irregularities. Creditor payment policy While there is no formal code or standard, it is Company and Group policy tosettle terms of payment with creditors when agreeing the terms of eachtransaction and to abide by creditors' terms of payment provided that thesupplier is also complying with all relevant terms and conditions. There are nocreditors subject to special arrangements outside suppliers' terms andconditions. The Company does not have any trade suppliers so that a creditorday payment period is not appropriate. Auditors Resolutions to re-appoint KPMG Audit Plc as auditors and to authorise thedirectors to determine their remuneration are to be proposed at the forthcomingAnnual General Meeting. Annual General Meeting The Annual General Meeting of the Company will be held at the Company's officesat Rotork House, Brassmill Lane, Bath BA1 3JQ on Friday, 22 April 2005 at 12noon. A separate circular containing the Notice of the Meeting is sent toshareholders with this Annual Report. On behalf of the Board Stephen Rhys Jones, Secretary 1 March 2005 Bath Corporate Governance Set out within this section is a commentary on how the Company applies the mainand supporting principles of the Combined Code on Corporate Governance July 2003("the Code"). Specific disclosures required within the provisions of the Codeare also made within this section. Code Compliance Statement GE Malcolm who retires on 8th April 2005 has a two year notice period from theCompany contained in his service contract. All other serving executivedirectors have one year notice service contracts. Following the appointment ofIG King, currently there are three independent non-executives on the Board.However, during the year under review given that under the Code it is impliedthat a Chairman cannot be considered independent then the composition of theAudit and Remuneration Committees was non-compliant in that one of its memberswas the Chairman of the Board and the Nomination Committee was non-compliant asa majority of its members were not independent. As Rotork p.l.c. is considereda large Company by the Code it is recognised that for full compliance, afurther independent non-executive would need to be appointed so that half theBoard excluding the Chairman comprised non-executive directors. Theappointment of IG King is considered by the Board to be a significant steptowards full compliance in respect of the relevant Code provision, concerningBoard composition, in addition to facilitating full compliance for Committeemembership. As explained later in this report the Board has developed a formalprocess for performance evaluation which will be fully implemented during 2005. Subject to the matters referred to in this paragraph the Company considersthat it has throughout the year complied with the provisions of the Code. Internal Control The Company has during the year operated procedures necessary to comply with theguidance issued in the "Turnbull Report", and by reporting in accordance withthat guidance. The Board has ultimate responsibility for the Company's system of internalcontrol and is required to set appropriate policies and to review itseffectiveness. The role of management is to implement Board policies. The system of internal control is designed to reduce but cannot eliminate therisks of failure to meet business objectives. Internal control therefore canonly provide reasonable but not absolute assurance in meeting such businessobjectives or against material misstatement or loss. A continuous process for identifying, evaluating and managing the significantrisks faced by the Company continued to be applied and developed during the yearunder review and operated up to the date of approval of the annual report andaccounts. Senior managers with responsibility across all functions participatein the risk management process that identifies and evaluates the key risks(including social and environmental) facing the Company's businesses. Theirdeliberations are reported regularly to the Audit Committee and Board. Thisprocess is based on senior managers' detailed knowledge and understanding of keyrisks within and external to the business based on formal management informationand reports and their interaction and daily dealings with those reportingdirectly to them, their colleagues and external parties. Internal financialaudits are undertaken on a regular basis by a selected group of accountantsdrawn from head office across the divisional businesses and geographic centres.All these accountants have received relevant and specific training in internalaudit, best practice and control procedures. Work will continue to furtherembed internal control and risk management in the operations of the business andto further enhance and add to the relevant processes including consideration ofsocial and environmental risks. The processes that are used by the Board to review the effectiveness of thissystem of internal control include the following: During the year the Audit Committee: • Monitors and reviews the effectiveness of internal audit activities; • Reviews and monitors external auditor independence and objectivity and the effectiveness of the audit process; • Considers reports from management, internal and external audit on the system of internal financial control and any material control weaknesses; • Receives reports on Health and Safety and environmental issues; • Discusses with management the range of actions taken on problem areas for the business identified by Board members or in the internal and external audit reports. Additionally: • The Board receives copies of the minutes of all Audit Committee meetings; • The Board reviews the role of insurances in managing risk across the Group; • The Board regularly receives written and oral reports from management on all aspects of production, operations, financial and risk management matters. Prior to the year end the full Board following discussion at the Audit Committeeformally reviews the effectiveness of the Group's system of internal control. The Board The Board currently has nine members comprising the Chairman, who isnon-executive and whom the Board considers to be independent, the threeindependent non-executive directors as defined by the Code, and five executivedirectors, (one of whom as referred to above retires on 8th April 2005). Onappointment directors receive a suitable and tailored induction. There is aclear division of responsibility approved by the Board in writing between theChairman, RC Lockwood, and the Chief Executive, WH Whiteley, that ensures thatthere is a balance of power and authority between the running of the Board andthe executive responsibility for the running of the Company's business. JWMatthews is the Senior Independent non-executive Director. The full Board had nine meetings spread appropriately over the course of theyear under review. During the year RC Lockwood, JW Matthews, A Walker, WHWhiteley, RE Slater and GE Malcolm attended every Board meeting. RH Arnoldattended six Board meetings in person and two by video-link for part of themeeting. During the year Board meetings are scheduled at manufacturing sitesother than the Company's headquarters in Bath. This allows in particularnon-executive directors to meet management at these sites and receivepresentations from them. During the year under review the full Board visitedand held Board meetings at the Rotork Controls Inc. manufacturing plant inRochester, New York State and the Exeeco Limited facility in Leeds, England. The Chairman ensures through the Company Secretary that the Board Agenda and allrelevant information is provided to the Board sufficiently in advance ofmeetings. The Chairman and Company Secretary discuss the Agenda ahead of everymeeting. At meetings the Chairman ensures that all directors are able to makean effective contribution throughout meetings and every director is encouragedto participate and provide opinions for each Agenda item. The Chairman alwaysseeks to achieve unanimous decisions of the Board following due discussion ofAgenda items. The Schedule of Reserved Matters details those mattersspecifically reserved for Board decision. The types of decision which arereserved for Board decision relate to matters which cannot or the Boardconsiders should not be delegated to the Chief Executive and executivemanagement. They include approval of Group commercial strategy and successionplanning, approval of Group annual operating and capital expenditure budgets andrecommendations for payment of final dividend and decisions for interimdividends and dividend policy, approval of the Annual Report and financialstatements and announcements of final and interim results, ensuring soundinternal control and risk management, executive director remuneration, corporategovernance matters including Board and Committee performance appraisals, Boardand Committee membership. The Board regularly considers and discusses futurestrategy, following submissions by management, at Board meetings and separatestrategy meetings. The non-executive directors constructively challenge andhelp develop proposals on strategy at those meetings. The decisions which areleft to management are all those related to the successful operation andmanagement of the Company's business and in implementing the commercial strategywithin the limits set by the Board annually for overall operational budgets andcapital expenditure. The Chairman ensures that meetings of non-executives without the executivespresent are held. The Company maintains appropriate directors' and officers'insurance cover. Performance Evaluation The Board has during the year under review developed a formal process forperformance evaluation of the Board, its Committees and individual directorswhich will be fully implemented during 2005. The Chairman will during theevaluation consult individually with all directors addressing a consistent setof pre notified matters covering Board, Board Committees and individualdirector's effectiveness. The collective results of these structured dialogueswill be reviewed by the Chairman, consulting with others as appropriate. Anoverall summary of the evaluation results will be tabled at an appropriate Boardmeeting. The effectiveness of the evaluation process will then be assessed andform the basis for subsequent development action. The Senior IndependentDirector has led the performance evaluation of the Chairman through consultationwith all the directors followed by a meeting he chaired with the othernon-executive directors to consider all responses received and at which theperformance of the Chairman was formally evaluated. Appointments to the Board The Nomination Committee's four members during the year under review were RCLockwood (who chairs the committee), JW Matthews, A Walker and WH Whiteley. TheCommittee meets regularly to undertake its duties in relation to successionplanning and in recommending specific appointments to the Board. During theyear the Committee undertook a search for an additional independentnon-executive director with recent and relevant financial experience culminatingin the appointment to the Board of IG King who was introduced through anexternal consultant. Prior to the appointment of IG King the NominationCommittee considered a range of suitable candidates making use of externalsearch consultants and other contacts. A short list of those availablecandidates considered most suitable when compared with the criteria drawn up bythe Committee, which included recent and relevant financial experience, werethen interviewed by the Committee. Following further consideration by theCommittee, and meetings with all the executive directors, IG King wasrecommended to the Board by the Committee. IG King has undertaken to theCompany that he will have sufficient time to meet what is expected of him as setout in his letter of appointment. The Committee also recommended to the Board GM Ogden's appointment as anexecutive director. In making the appointment the Board considered the balanceof skills, knowledge and experience on the Board. GM Ogden's appointmentensures that following the retirement of GE Malcolm, an executive director withnot only senior management experience but also engineering and productdevelopment expertise, particularly in relation to electric and other types ofactuator, is a member of the Board. The Nomination Committee met formally twice during the year. RC Lockwood, JWMatthews and WH Whiteley attended both meetings of the Committee. A Walkerattended one meeting. Following the appointment of the third independent non-executive director, IGKing, the Nomination Committee now comprises three independent directors, theChief Executive and Chairman. A majority of the members of the NominationCommittee are therefore independent non-executive directors. The Terms ofReference of the Nomination Committee can be accessed on the Company's websitein the Investors' section. Audit Committee The Audit Committee is now comprised of the three independent non-executivedirectors, JW Matthews (Chairman), A Walker and IG King. It usually meets threetimes a year to review published financial information, the effectiveness ofboth external and internal audit and internal financial and other controls. TheFinance Director, Chief Executive and the external auditors normally attendmeetings and there is a meeting at least once a year between the Committee andthe external auditors at which management is not present. During the year underreview and prior to the appointment of IG King, RC Lockwood was a member of theCommittee. He stood down following IG King's appointment. The matter of auditor independence is considered by the Committee. The Auditordoes provide non-audit services. Auditor objectivity and independence issafeguarded by ensuring all non-audit services are managed and directed by theCompany executive management and by ensuring disclosure of non-audit fees to theAudit Committee. For significant general consulting projects more than oneservice delivery provider is considered. Categories of non-audit work providedby the auditor with fees are set out in note 5. Within the Audit Committee'sTerms of Reference is a requirement for the Committee to assess the independenceof the external auditor ensuring key partners are rotated at appropriateintervals and to ensure that the provision of non-audit services does not impairthe external auditors' independence or objectivity. This assessment wasundertaken by the Committee during the year. The Terms of Reference of theAudit Committee is available to view on the Company's website in the Investors'section. All of the members of the Audit Committee, during the year under review being,RC Lockwood, JW Matthews and A Walker attended all three meetings of theCommittee. RE Slater and WH Whiteley attended all three meetings of theCommittee by invitation. The internal audit function is undertaken by membersof the Company's finance department who all have other distinct posts. TheGroup Finance Director is also Head of Internal Audit. Remuneration Committee The work of the Remuneration Committee is described in the Remuneration Reporton pages 17 to 22. RC Lockwood, JW Matthews and A Walker attended the fourformal meetings of the Remuneration Committee during the year under review.The Chief Executive was invited to attend the four formal meetings for parts ofthose meetings. Relations with Shareholders Communication with shareholders is given high priority. All members of theBoard receive copies of all analysts' reports of which the Company is madeaware. The Chief Executive reports at each Board meeting upon his meetings withanalysts, fund managers and shareholders. The Company Secretary has recentlywritten on behalf of the Board to the Company's major shareholders offeringmeetings with the non-executive directors and requesting shareholders to confirmthey are content with current Board level contact with the Company andcommunication to non-executives. Individual shareholders have an opportunity to put questions to the Chairman atthe AGM and individual shareholder enquiries are dealt with throughout the yearby the Company Secretary's department. For the AGM all proxy votes are countedand (except in the event of a poll being called) at the AGM the balance for andagainst the resolution and the number of abstentions is displayed forshareholders after it has been dealt with on a show of hands. Prior to the AGMthe Company Secretary reports to the Board on the results of the proxy returnsand on the comments and analysis undertaken by voting agencies. Corporate Social Responsibility The Company has considered the guidelines on Social Responsibility published bythe Association of British Insurers and takes full account of the significanceof environmental and ethical matters in the conduct of its business and in itsrisk assessment processes. Rotork remains fully committed to the principleslaid down for its inclusion in the FTSE4Good Index and the 10 Principles of theUN Global Compact of which it is a signatory. Environment The Group Environmental policy, which is reviewed annually, includes commitmentsto the prevention of pollution, compliance with all relevant legal and otherregulatory requirements and to the continuous improvement of environmentalperformance. The Environmental policy applies to all manufacturing sites in theGroup worldwide. The complete policy may be found at www.rotork.com under 'Environment'. In its 2004 Environmental Report the Group reported that it had maintained itscommitment to managing and improving its environmental performance and tocommunicating this performance to its stakeholders through the publication ofits Environmental Report for 2004 which can be accessed in full atwww.rotork.com under 'Environment'. The 2005 Environmental Report will beavailable on the Company's website in late Spring 2005. The Group has identified its key environmental impacts to include the use ofenergy, water, and disposal of waste. The Group is continually developingpolicies and procedures on these issues to minimise its impact on theenvironment. Rotork considers it contributes to sustainable development and environmentalimprovement through the products and services it sells. The Company's productsare used around the world in all environments, including those which arehazardous and in many types of industries, including water purification, sewage,food processing, marine, irrigation, power generation and oil and gas. Rotorkproducts help reduce human error and thus potential environmental disasters,whilst saving energy and resource. With the launch in late 2003 of the newIntelligent Quarter Turn (IQT) range of actuators, which consume a tenth of theenergy of their predecessors, Rotork is continuing to develop and produce energyefficient products with improved performance. Environmental Management System Rotork will, through its Environmental Management System: • Allocate formal environmental responsibilities to ensure compliance with legislation. • Support a culture of consultation with employees, key stakeholders and other interested parties. • Provide environmental information, guidance and, where necessary provide training that meets best practice. • Monitor, measure, audit and seek continuous improvement in its environmental performance. • Work with external agencies and bodies to ensure continued adoption of best practice solutions in environmental management. • Communicate best practice and publish internal and external information detailing is aims and achievements. • Foster open communication with employees, customers, suppliers and other stakeholders via both electronic publishing and face-to-face discussion. The project to fully implement an Environmental Management System at the Bathmanufacturing site has continued to progress. Waste to landfill has beenidentified as the biggest environmental site impact and challenge. To turn thisimpact into an environmental 'win' required the redevelopment of the sitefacilities to accommodate the recycling systems necessary to reduce the impact.Recycling processes were established for wood, cardboard and IT equipment.