REG - Rotork PLC - 2022 Preliminary Results
28/02/2023 07:00
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RNS Number : 2165R Rotork PLC 28 February 2023
Tuesday 28(th) February 2023
Rotork plc
2022 Preliminary Results
Strong growth, expecting a year of further progress
Adjusted highlights 2022 2021 % change OCC(3) % change
Order intake(1) £681.6m £614.1m +11.0% +6.8%
Revenue £641.8m £569.2m +12.8% +8.4%
Adjusted(2) operating profit £143.2m £128.1m +11.8% +6.2%
Adjusted(2) operating margin 22.3% 22.5% -20bps -40bps
Adjusted(2) basic earnings per share 12.7p 11.3p +13.2% +7.5%
Cash conversion(4) 76% 108% - -
Reported highlights 2022 2021 % change
Revenue £641.8m £569.2m +12.8%
Operating profit £123.6m £105.7m +16.9%
Operating margin 19.3% 18.6% +70bps
Profit before tax £124.1m £105.9m +17.2%
Basic earnings per share 10.9p 9.2p +17.6%
Full year dividend 6.70p 6.40p +4.7%
Summary
· Group order intake increased 11.0% year-on-year with selling prices
and volumes higher. Fourth quarter orders rose high single-digits year-on-year
on an OCC basis
· Successful supply chain improvement measures reduced disruption
through the year
· Revenue increased 12.8%, benefiting from the second half's strong
recovery in deliveries
· Adjusted operating margins recovered strongly in the second half and
full year margins were 20bps lower at 22.3%. The reported operating margin was
19.3%
· Price and volume successfully offset cost inflation and partially
funded investments
· We launched our Growth+ strategy which is designed to deliver our
ambition of mid to high single-digit revenue growth and mid 20s adjusted
operating profit margins over time
· Closing net cash £105.9m (December 2021: £114.1m). ROCE(4) 31.3%
(up 120bps)
Kiet Huynh, Chief Executive, commenting on the results, said:
"I am pleased to report a resumption of organic sales growth and a strong
second half performance as expected. This was particularly encouraging given
2022's highly challenging backdrop which included significant supply chain
disruption and a resurgence in inflation.
The outlook for our end markets is positive and we entered the year with a
record opening order book. Our new Growth+ strategy has momentum and we are
already seeing early benefits from our focus on our strategy pillars of Target
Segments, Customer Value and Innovative Products & Services. Whilst
mindful of the uncertain economic outlook, we expect a year of further
progress in 2023."
(1) Order intake represents the value of orders received during the period.
(2) Adjusted(4) figures exclude the amortisation of acquired intangible assets
and other adjustments (see note 4).
(3) OCC(4) is organic constant currency results restated at 2021 exchange
rates.
(4) Adjusted figures, organic constant currency ('OCC') figures, cash
conversion and ROCE are alternative performance measures and are used
consistently throughout these results. They are defined in full and reconciled
to the statutory measures in note 2.
Rotork plc Tel: +44 (0)1225 733 200
Kiet Huynh, Chief Executive
Jonathan Davis, Finance Director
Andrew Carter, Investor Relations Director
FTI Consulting Tel: + 44 (0)20 3727 1340
Nick Hasell / Susanne Yule
There will be a meeting for analysts and institutional investors at 8.30am GMT
today in the Library at the offices of JPMorgan Cazenove, 60 Victoria
Embankment, London EC4Y 0JP. The presentation will also be webcast, with
access via https://www.investis-live.com/rotork/63cec7fd4aa86d1500117bdd/kwge
(https://www.investis-live.com/rotork/63cec7fd4aa86d1500117bdd/kwge) . Please
join the webcast a few minutes before 8.30am to complete registration.
Summary
Purpose
Our Purpose and sustainability vision are one and the same: keeping the world
flowing for future generations. We want to help drive the transition to a
clean future where environmental resources are used responsibly. We have a
major role to play in new energies and technologies that will support the
transition to a low carbon economy, as well as helping preserve natural
resources such as fresh water and eliminating energy sector methane emissions.
Business performance
Group order intake increased 11.0% year-on-year (6.8% on an organic constant
currency or OCC basis) to £681.6m. OCC order growth resumed in the fourth
quarter with orders having fallen modestly in the third quarter reflecting the
strength of the prior year period. All three divisions booked higher orders
for the full year, with Chemical, Process & Industrial ('CPI') and Oil
& Gas strongly ahead. Our customers continue to spend on automation and
environmental projects as well as maintenance and upgrade activities.
In response to the component cost inflation experienced during the year we
raised prices twice in 2022. We are all too aware of the challenge of
out-of-cycle price rises to customers and the increases implemented were
carefully designed to cover the higher costs we experienced.
Our operational teams performed well in what continued to be a difficult
period, especially in the first half. As we reported on 29 April 2022, our
important Shanghai facility was closed in mid-April in accordance with local
COVID-19 lockdown rules. The facility resumed full production in June and made
excellent progress delivering delayed shipments to customers. Towards the end
of the first half we started to see the benefit of the supply chain
improvement measures we had implemented over the prior twelve months. These
initiatives included direct purchasing and forward buying of semiconductors,
re-certification and re-engineering of products, securing of contracted
logistics routes and tactical inventory build.
Group revenue was 12.8% higher year-on-year (8.4% higher OCC), benefiting from
higher price realisation and as expected a strong recovery in deliveries in
the second half. Oil & Gas sales rose 8.9% (4.9% OCC), driven by a strong
recovery in the Americas and the upstream and increased methane emissions
reduction activity. CPI sales were 23.6% ahead (19.6% OCC), with Asia Pacific
strong but all major geographic regions growing. Water & Power sales were
up 7.8% (2.4% OCC), with good growth in the water segment offset by a decline
in power.
By geography, Asia Pacific revenues by destination grew mid-single digits
year-on-year on an OCC basis driven by a strong CPI performance. Europe,
Middle East & Africa ('EMEA') sales grew mid-single digits (OCC), despite
our exit from Russia, a high single-digits headwind for the region. Americas
revenues were high teens ahead (OCC) driven by Oil & Gas but with all
divisions contributing to growth in the region.
Rotork Site Services, our global service network and a key differentiator in
our industry, performed well with revenues growing faster than the group
overall. Our Lifetime Management and Reliability Services programmes have good
momentum, as does our Intelligent Asset Management predictive analytics
system. Rotork Site Services is managed as a separate unit within our
divisions and contributed 21% of Group sales (2021: 21%).
Adjusted operating profit was 11.8% higher year-on-year (6.2% higher OCC) at
£143.2m, reflecting higher volumes, price increases and higher component
costs, particularly in respect of chipsets. Adjusted operating margins
recovered strongly in the second half although not sufficiently to fully
offset the first half margin decline and initial Growth+ related investment.
The latter included headcount, travel and marketing. Full year margins were
20bps lower at 22.3% and statutory profit before tax was £124.1m.
Our Eco-transition portfolio of products and services that have particular
environmental or sustainability benefits, or which enable the energy
transition and decarbonisation, consists of three sub-portfolios: 'water &
waste water'; 'methane emissions reduction' and 'new energies &
technologies'. Water & waste water and methane emissions reduction sales
grew faster than the group year-on-year in 2022, however new energies &
technologies sales fell due to the non-repeat of waste-to-energy projects
completed in 2021. Overall, Eco-transition sales grew 10.0% year-on-year in
2022.
Return on capital employed was 31.3% (2021: 30.1%), benefiting from a greater
increase in adjusted operating profit than the increase in capital employed.
Cash conversion was 76% (2021: 108%) with the reduction expected and in large
part due to the delivery acceleration in the final months of the period. Our
balance sheet remains strong, with a net cash position of £105.9m at the
period end.
Market update
The events in Ukraine have necessitated a reconsideration of energy security
risks globally. A major change in approach is underway, with countries looking
to reduce their dependence on energy imported from unpredictable countries
(such as, but not only, Russia). The events may have caused the shift to
renewable energies to accelerate but they have also strengthened the activity
in traditional energy as additional investment is required to facilitate a
secure energy transition. One area expected to see significant investment is
liquified natural gas (LNG) which was already seen as an essential transition
fuel but now also as a means of helping provide energy security.
An important example of an initiative to drive investment into the energy
sector is the United States' Inflation Reduction Act. This promotes amongst
other things investments targeting the reduction of methane emissions in the
energy sector as well as investment in hydrogen production and carbon capture,
utilisation and storage ('CCUS'). Rotork is well placed to benefit from
investment in these areas.
The outlook for the water and waste water sector remains positive with
increasing investment in new and existing infrastructure. The sector is
focused on delivering water availability, improving water quality and reducing
leakage.
Automation and digitalisation in this sector are important mega trends
benefiting Rotork. The Inflation Reduction Act includes significant funding
for water quality.
The lifting of China's COVID-19 restrictions and the reopening of the
country's economy has the potential to boost activity in this important region
and is expected to be positive for global economic growth.
Growth+ strategy launch
In November we presented our new Growth+ strategy at our Capital Markets Event
held in London. The starting point of Growth+ is our Purpose, 'keeping the
world flowing for future generations'. Our Purpose is unchanged. It remains a
powerful motivator, and it drives everything we do. It recognises the
important part that we play in making our world a great place in which to
live, but also the role we can play helping improve the safety, environmental
and social performances of not just ourselves, but also of our end users,
customers, suppliers and communities.
Our vision is for Rotork to be the leader in intelligent flow control. This
recognises the ever-increasing importance of connectivity to our end users.
Today's intelligent flow control systems not only ensure safety, they are also
reliable, efficient and easy to use and play a vital role in ensuring the
uptime of our end users' operations (including through predictive and
preventative maintenance).
Growth+ is designed to deliver our ambition of mid to high single-digit
revenue growth and mid 20s adjusted operating profits over time. The levers
are its three pillars of Target Segments, Customer Value and Innovative
Products & Services, each underpinned by our 'Enabling a Sustainable
Future' initiative. It builds on the great work completed under the Growth
Acceleration Programme which has embedded strong foundations into the business
and moves us on to the next leg of our journey.
To facilitate the delivery of Growth+ we have revisited certain aspects of our
organisational structure. Our revised structure aims to foster increased
collaboration, whilst eliminating complexity and driving efficiencies.
Operational responsibility for our manufacturing facilities is now managed by
the divisional teams whilst a centralised operations excellence team manages
quality, supply chain and health and safety. We have also created a new senior
role, Business Transformation Director. This Director is responsible for
executing the change programmes within the Growth+ strategy and further
developing our end-to-end business processes. Additionally, we have recruited
a Chief Technology Officer to deliver our new product development and manage
and co-ordinate our approach to innovation.
We have already seen early benefits from our focus on target segments. In
methane emissions reduction we have made encouraging early progress with our
solutions positively received by the market. We are also making good progress
in carbon capture, usage & storage with Rotork products selected for the
world's first open-source CO2 transport and storage infrastructure in Norway.
In wastewater treatment, another target segment, we have had success winning
plant modernisation and improvement projects across the world.
We are also making good progress on our Customer Value initiative, which is
about putting the customer at the forefront of everything we do. One example
is our 'Achieving Customer Excellence' ('ACE') pilot. Through ACE we have
reduced product lead times to two weeks (from 16 weeks previously) at two
European plants. We plan to roll-out ACE to other plants over the next several
years.
During 2022 significant engineering resource was allocated to re-engineering
and re-certifying product ranges impacted by reduced semi-conductor activity.
Alongside this essential work we continued to innovate and develop new
products and solutions aligned with our chosen target segments and key drivers
automation, electrification and digitalisation. During the period we launched
five new products as well as important enhancements to Intelligent Asset
Management ('iAM'), our condition monitoring and analytics software.
Environmental performance
Sustainability is a major focus for everyone at Rotork. Whilst the impact we
have enabling our customers to improve their environmental performance likely
far exceeds our own environmental footprint, the latter is no less important.
We emitted 11.3 tCO2e per £1m of revenue based on location-based calculations
which is a reduction compared to 2021 of 21%.
Following the announcement of our Net Zero targets a year ago, we were pleased
to receive approval from the Science Based Targets initiative for our
near-term greenhouse gas ('GHG') emission targets. Rotork was one of the first
UK-based companies in our sector to receive approval for near-term 1.5(o)C
aligned targets. Underlining the importance that we attach to achieving our
Net Zero targets, we are proposing the inclusion of scopes 1 and 2 greenhouse
gas reduction targets into our senior team's long-term remuneration
opportunity starting 2023.
Our validated near-term targets are:
· to reduce our absolute scope 1 and 2 GHG emissions 42% by 2030
from a 2020 base year
· to reduce our absolute scope 3 GHG emissions from use of sold
products 25% by 2030 from a 2020 base year
· that 25% of our suppliers by emissions covering purchased goods
and services will have science-based targets by 2027
We are targeting Net Zero by 2035 for scopes 1 and 2 and by 2045 for scope 3.
We made further progress in implementing the recommendations of the Task Force
on Climate-related Financial Disclosures ('TCFD'), including our work to
quantify the potential impacts of climate risks and opportunities.
Whilst the Rotork team derives great motivation through its Purpose of
'keeping the world flowing for future generations', it is also pleasing to be
recognised by external agencies. We were particularly proud to be ranked by
S&P Global in the top 5% globally in the Machinery & Electrical
Equipment industry in its highly-regarded Corporate Sustainability Assessment
and included in the 2023 Sustainability Yearbook.
Health & safety
The safety of our people, partners and visitors is our number one priority and
our vision for health and safety is zero harm. In 2022 we recorded a lost-time
injury rate of 0.13, an encouraging improvement on 2021's 0.20, in part
reflecting the roll-out of the 'Rotork Life Saving Rules'. Our Total
Recordable Injury Rate was 0.53 (2021: 0.56).
Wellbeing and engagement
A knock-on effect of the invasion of Ukraine and of economies emerging from
the pandemic has been significant consumer price inflation, particularly of
essentials such as energy and food. We responded to the 'cost of living
crisis' by announcing an employee benefits review, the result of which
included additional support for colleagues in more junior roles and bringing
forward salary increases.
We launched our first employee discount scheme (in the UK) and based upon its
success we are looking to launch similar schemes in other countries. We also
introduced electric-vehicle salary sacrifice schemes in several countries,
helping colleagues to benefit from local financial incentives intending to
accelerate the take-up of pure electric and hybrid vehicles.
Rotork also provided short-term financial help to employees and ex-employees
facing hardship through Rotork Benevolent Support. The scheme made more grants
in 2022 than it did in 2021.
We completed two employee engagement pulse surveys during the year, one in
June and one in December. Participation was good in both, at 75%. The
engagement survey asks employees to rate Rotork as a place to work between
1-10, where 10 is good. Engagement continues to improve, with the score
increasing to 7.2 in December 2022, from 6.7 in June and 6.4 the year before.
We believe that the effective communication of our Growth+ strategy and cost
of living actions have helped to improve our scores.
We have a committed workforce who are proud to be Rotork employees and
determined to deliver on our ambitious goals. We offer our warmest thanks and
appreciation for all their efforts throughout 2022.
Capital allocation
We retain a strong balance sheet, with a net cash position of £105.9m at the
period end (31 December 2021: £114.1m). This provides us with optionality in
uncertain times and the financial flexibility to pursue our organic investment
plans, pay a progressive dividend and execute our targeted M&A strategy.
We regularly review our capital needs in line with our capital allocation
strategy, and have demonstrated discipline and flexibility in our use of
buybacks and dividends to deliver returns for shareholders. In the event that
in the future we determine we have surplus cash, we will continue to look to
return it to shareholders.
Board update
On behalf of everyone at Rotork I would like to offer our thanks to Martin
Lamb who will be stepping down as Chairman and from the Board at the AGM in
April 2023 after nine years of service. Martin has provided excellent
stewardship and overseen significant development of the Group. We all very
much look forward to working with his successor as Chair, Dorothy Thompson
CBE.
Outlook
The outlook for our end markets is positive and we entered the year with a
record opening order book. Our new Growth+ strategy has momentum and we are
already seeing early benefits from our focus on our strategy pillars of Target
Segments, Customer Value and Innovative Products & Services. Whilst
mindful of the uncertain economic outlook, we expect a year of further
progress in 2023.
Divisional review
Oil & Gas
£m 2022 2021 Change OCC(3) Change
Revenue 283.3 260.2 8.9% 4.9%
Adjusted operating profit 64.0 56.3 13.5% 8.3%
Adjusted operating margin 22.6% 21.7% +90bps +70bps
The increase in oil & gas sector activity first experienced in the second
half of 2021 continued through the year. Industry capital expenditure grew,
with the strongest recovery in the upstream segment and in North America.
Natural gas production rose, responding to the restrictions placed on Russian
gas exports. Productivity and emissions reduction related spending grew.
Looking forward, China's reopening is forecast to be positive for global oil
& gas demand.
Following a challenging first half where deliveries were restricted by supply
chain challenges the second half saw a strong recovery and full year
divisional sales were ahead 4.9% year-on-year (OCC). All segments grew and
downstream sales represented 50% of the total (51% in 2021); the upstream 25%
(24%) and the midstream 25% (25%).
EMEA sales were broadly unchanged year-on-year, largely reflecting the exit
from Russia. Downstream sales were higher, benefiting from refinery work in
the Middle East and North Africa, whilst upstream and midstream revenues were
lower. APAC revenues declined overall despite strong growth in the small
upstream segment which benefited from offshore projects in China and gas field
developments in Australia. Americas benefited from recovering markets as well
as methane emissions reduction initiatives and was the division's fastest
growing geographic region in 2022. All three Americas segments grew, with the
midstream reporting the fastest growth benefiting from increased MRO activity.
The division's adjusted operating profit was £64.0m, 13.5% up year-on-year.
Positive pricing plus volume growth contained the impact of higher material
costs, with product mix in the division less weighted to those ranges where
price increases were most significant (due to higher electronic component
content). With improved labour productivity and other costs broadly flat,
adjusted operating margins rose 90 basis points to 22.6%.
Oil & Gas' focus on target segments delivered notable order wins in
emissions reduction, CCUS and LNG during the period. Demand from choke valve
manufacturers for the Rotork IQTF electric actuator grew strongly year-on-year
as North American upstream operators sought to eliminate methane emissions
from new and existing wellheads. The division also supplied electric
actuators, which will replace methane emitting traditional 'gas over oil'
fluid power actuators, to pipeline operators in France, Italy and Spain. The
division is supplying over a hundred intelligent actuators to China's first
offshore carbon capture and storage project. Once commissioned this will store
each year the carbon dioxide equivalent to the annual emissions of one million
cars. In the LNG segment we won several important actuation package orders
including a major Gulf of Mexico stage 3 expansion project.
Chemical, Process & Industrial ("CPI")
£m 2022 2021 Change OCC(3) Change
Revenue 198.4 160.5 23.6% 19.6%
Adjusted operating profit 51.2 42.8 19.7% 15.2%
Adjusted operating margin 25.8% 26.7% -90bps -100bps
CPI is a supplier of specialist actuators and instruments for niche
applications in the broad chemical, process industry and industrial sectors.
The division serves a broader range of end markets than Rotork's other
divisions.
The division delivered a strong full year sales performance with revenues
19.6% higher year-on-year on an OCC basis after a slow start caused by supply
chain disruption.
Asia Pacific was the CPI division's fastest growing geography overall, despite
COVID-19 related supply chain disruption, benefiting from our coverage
expansion initiative and growth in target segments including HVAC, chemicals
and mining. In EMEA, sales growth accelerated in the second half after a slow
start to the year, resulting in full year revenue growth in the low teens
despite the loss of Russian business. Americas sales grew mid-teens. Sales
benefited from customer value improvements and business wins in the mining,
HVAC and marine end markets.
The division's adjusted operating profit was £51.2m, 19.7% higher than the
prior year. The combination of very strong volume growth plus pricing meant
CPI was the fastest growing division but this increases its share of common
costs. As a result of this, and despite gross margins being held close to
prior year levels, adjusted operating margin fell 90 basis points to 25.8%.
CPI is clearly benefiting from the pursuit of its chosen Growth+ target
segments such as decarbonisation (hydrogen and carbon capture, usage and
storage), chemicals, HVAC (semi-conductor, lithium-ion battery and data
centre) and mining. Electric actuators were selected for the first-of-its-kind
Northern Lights carbon capture and storage project in Norway. The customer
chose Rotork's robust, safe and reliable actuators due to their prior
experience of them in the oil & gas offshore environment. Rotork's
pneumatic actuators were chosen by innovative European and Asian automotive
battery manufacturers for use on their battery production lines and as part of
water and heating systems. Rotork's IQ electric actuators have also been
selected by the largest manufacturer of high performance resin films in China.
These resin films (POE and EVA) are used in photovoltaic solar panels and the
customer has ambitious growth plans.
Water & Power
£m 2022 2021 Change OCC(3) Change
Revenue 160.2 148.6 7.8% 2.4%
Adjusted operating profit 40.3 40.4 -0.3% -6.2%
Adjusted operating margin 25.2% 27.2% -200bps -220bps
Water & Power is a supplier of premium actuators, predominantly electric,
and gearboxes for applications in the water, wastewater and treatment and
power generation sectors. The water segment contributed 67% of divisional
sales in the year.
Following a challenging first half where deliveries were restricted by supply
chain disruption the second half saw a strong recovery and full year
divisional sales were ahead 7.8% year-on-year.
Despite a strong second half recovery, Asia Pacific sales were lower
year-on-year as a result of supply chain issues and reduced power sector
activity. Americas sales grew year-on-year driven by higher water sector
activity. EMEA was Water & Power's fastest growing geographic region in
2022. The region benefited from a strong second half and higher power station
refurbishment revenues year-on-year.
The division's adjusted operating profit was £40.3m, 0.3% lower year on year.
The impact of cost increases on electronics and the availability of these
components had a disproportionate impact on the division as a result of its
higher proportion of electric actuator sales. Second half revenue grew sharply
but with the slower first half, and despite other costs only growing modestly,
adjusted operating margins fell 200 basis points to 25.2%.
The division made good progress in its target segments of water
infrastructure, waste and wastewater treatment, desalination and alternative
energy during the year. Rotork supplied electric and fluid power actuators to
numbers of wastewater treatment modernisation and improvement projects around
the world which will provide better quality water more efficiently, including
ones in Singapore and Texas (US). In Malaysia, Rotork's IQ electric actuators
were selected to replace existing ageing, and increasingly unreliable,
actuators that provide flood defence across the country. The solution includes
Rotork iAM (intelligent asset management) for diagnostics and predictive
analytics. Rotork colleagues worked with the innovation team at a major UK
water utility exploring ways to automate the 'flushing' of the utility's water
sample-taking equipment. The solution is currently being trialled at multiple
sites.
By order of the Board
Kiet Huynh
Chief Executive
27 February 2023
Financial review
Order intake for the year was £681.6m (2021: £614.1m), up 11.0% from the
prior year or 6.8% on an organic constant currency (OCC) basis. Order intake
was split evenly between the first and second half of the year.
Group revenue was £641.8m for the year, 12.8% higher (+8.4% OCC) than 2021.
Revenue for the second half of the year was £361.8m, which was 29.2% higher
than the first half of the year, as expected. The first half of 2022 was
impacted by supply chain constraints, in particular the sourcing of components
such as chipsets and electronics and disrupted freight services, which had
started in the second half of 2021. Revenue grew in all three divisions with
CPI once again reporting the strongest year-on-year growth. CPI finished the
year 23.6% ahead (+19.6% OCC), Oil & Gas (O&G) grew 8.9% (+4.9% OCC)
and Water & Power (W&P) grew 7.8% (+2.4% OCC) but having been most
impacted by the supply chain challenges in the first half, reported the
strongest sequential growth, up 46.8% in the second half of the year. Within
O&G, upstream sales increased the most, up low-double digits OCC, sales to
midstream were up mid-single digits OCC and downstream, still the largest
segment, increased low-single digits OCC.
Rotork Site Services, our global service network and a key differentiator in
our industry, again made good progress in the year growing 13.3% compared with
2021. Performance in the second half of the year was considerably stronger
than the first as both COVID-19 restrictions eased and the improved supply
chain situation allowed more retrofit projects to proceed. Revenue was 9.5%
ahead of 2021 on an OCC basis and our lifetime management and reliability
services programmes performed well. Rotork Site Services is managed as a
separate unit within Rotork's divisions and contributed 21% (2021: 21%) of
Group revenue.
Gross margin reduced 70 basis points to 45.5% (-60bps OCC). Cost increases
relating to components, most acute for chipsets and electronics but
experienced in many components, were successfully mitigated by price
increases. Sales prices were increased twice in the year. Elevated logistics
costs continued to be offset by the surcharge introduced in 2021.
Overheads increased by £10.4m (+7.8%) on an OCC basis compared with 2021,
driven by wage inflation (which continues into 2023), an increase in global
travel as restrictions ease, and investment in commercial activities.
Overheads as a percentage of revenue decreased from 23.7% in 2021 to 23.1% in
2022.
Reported operating profit was £123.6m, 16.9% higher year on year. Adjusted
operating profit was £143.2m, an 11.8% increase with adjusted operating
margin decreasing 20 basis points to 22.3% (2021: 22.5%). On an OCC basis,
adjusted operating margin decreased 40 basis points to 22.1%.
Net finance income was £0.5m (2021: income of £0.2m) benefiting from more
favourable interest rates.
Statutory profit before tax was £124.1m, up from £105.9m in 2021.
Adjusted basic earnings per share was 12.7p (2021: 11.3p), an increase of
13.2%. Statutory basic earnings per share was 10.9p (2021: 9.2p), an increase
of 17.6%.
Growth Acceleration Programme
2022 marked the final year of the Growth Acceleration Programme (GAP) which
delivered a fundamentally leaner and stronger Group aligned with its end
markets and well placed to deliver profitable growth.
Within the Operational Excellence pillar of GAP, the focus was on managing our
factories through the continued impact of COVID-19 and the geo-political
situation, and this meant efforts that might otherwise have been spent on
driving GAP initiatives needed to be redirected. The procurement team had to
prioritise managing our existing supply chain to ensure we maintained the
supply of components required to meet customer deliveries. This impacted the
time available to drive improvements and cost saving initiatives. Continuous
improvement and lean initiatives continued, delivering around £2.2m of
savings in the year. The footprint optimisation programme continued with the
completion of the initiatives at the Houston, San Sebastian and Cusago sites.
The in-year benefit of these transfers, and those completed part-way through
2021, was £1.9m of incremental savings. New product development continued to
contribute positively to the Group, with £2.4m of benefits recognised in
2022.
Reflecting on the five years of GAP there are areas of notable success and
some where our initial objectives have not been fully achieved. Revenue growth
has been hard to achieve in recent years, as a result of business exits
(including in response to geopolitical events), COVID-19 and supply chain
challenges, and revenue is now very similar to the level it was in 2017.
Despite that, adjusted operating margin has improved 200 basis points through
a combination of footprint optimisation, lean and productivity improvements
and despite a supply chain which, rather than reflecting the improvements of
the early years of GAP, ended up as a net headwind. Cumulatively GAP has
driven £30m of profit improvement. Return on capital employed has increased
640 basis points to 31.3% over the course of GAP, reflecting both the
profitability improvements and footprint optimisation impact on net assets.
Cash was the other focus area of GAP as we sought to make it a self-funding
programme. In the first four years the programme generated a £40m working
capital reduction but the much higher weighting of revenue in the last quarter
of 2022 and the tactical inventory build has reduced this benefit to £4m
(further explanation below). Combined with the cash resulting from higher
profitability and disposal of surplus assets this has broadly funded the
investment in the ERP system to date.
Finally, GAP led a fundamental change of our divisional structure and the
focus on end market rather than product divisions. In November we launched the
Group's new strategy, Growth+, which builds upon the progress made under GAP.
Growth+ is specifically designed to deliver profitable growth by targeting the
right end market segments, being close to our customers and delivering
innovation.
Adjusted items
Adjusted profit measures are presented alongside statutory results as we
believe they provide a useful comparison of underlying business trends and
performance from one period to the next. The Group believes alternative
performance measures, which are not considered to be a substitute for, or
superior to, IFRS measures, provide stakeholders with additional helpful
information on the performance of the business.
The statutory profit measures are adjusted to exclude amortisation of acquired
intangibles, the net restructuring costs resulting from GAP, IT transformation
costs associated with the new ERP development, Russia market exit costs and
other adjustments that are considered to be significant and where treatment as
an adjusted item provides stakeholders with additional useful information to
assess the trading performance of the Group on a consistent basis.
Adjusted earnings reconciliation
£m Statutory results Amortisation IT transformation costs Redundancy and other restructuring costs Russia market exit Adjusted results
Gain on property disposal
Operating profit 123.6 7.0 (1.2) 8.9 1.4 3.5 143.2
Profit before tax 124.1 7.0 (1.2) 8.9 1.4 3.5 143.7
Tax (30.9) (1.1) 0.4 (2.2) (0.5) - (34.3)
Profit after tax 93.2 5.9 (0.8) 6.7 0.9 3.5 109.4
The table above adjusts the statutory results for the significant non-cash and
other adjustments to give adjusted results. Note 2 sets out the alternative
performance measures used by the Group and how these reconcile to the
statutory results. Further details of the restructuring costs are provided in
note 4.
Organic constant currency results
We also present OCC figures to exclude the impacts of currency, acquisitions,
business closures and disposals.
£m 2022 as reported Constant currency adjustment 2022 at 2021 exchange rates 2021
Revenue 641.8 (25.0) 616.8 569.2
Cost of sales (350.1) 14.4 (335.7) (306.4)
Gross profit 45.5% 291.7 (10.6) 45.6% 281.1 46.2% 262.8
Overheads 23.1% (148.5) 3.4 23.5% (145.1) 23.7% (134.7)
Adjusted operating profit(1) 22.3% 143.2 (7.2) 22.1% 136.0 22.5% 128.1
(1)Adjusted operating profit is before the amortisation of acquired intangible
assets and other adjustments (see note 4).
Currency
In 2022 we experienced a more pronounced currency impact than for several
years. The major currencies affecting the income statement are the US dollar
and the euro. The US dollar/sterling average rate of $1.24 (2021: $1.38) was a
14-cent tailwind, whilst the euro/sterling average rate was €1.17 (2021:
€1.16), a 1 cent headwind. With the average sterling rate across the basket
of other currencies, particularly China and India, strengthening in 2022 it
resulted in a £25.0m or 3.9% tailwind reported to revenue.
The impact of currency on the Group is both translational and transactional.
Given the locations in which we operate and the international nature of our
supply chain and sales currencies, the impact of transaction settlement
differences can be very different from the translation impact. We are able
partially to mitigate the transaction impact through matching supply currency
with sales currency, but ultimately we are net sellers of both US dollars and
euros. It is the net sale of these currencies which we principally address
through our hedging policy, covering up to 75% of net trading transactions in
the next 12 months and up to 50% between 12 and 24 months.
In order to estimate the impact of currency, at the current exchange rates we
consider the effect of a one cent movement versus sterling. A one euro cent
movement now results in approximately a £150,000 (2021: £200,000) adjustment
to profit and for the US dollar, and dollar-related currencies, a one cent
movement equates to approximately a £550,000 (2021: £600,000) adjustment.
Return on capital employed (ROCE)
Our capital-efficient business model and strong profit margins mean Rotork
generates a high ROCE. Our definition of ROCE is based on adjusted operating
profit as a return on the average net assets excluding net cash and the
pension scheme liability, net of the related deferred tax. The average capital
employed increased 7.8% over the year to £458.0m, driven largely by the
profit for the year and foreign exchange translation gains. Due to the
increase in adjusted operating profit, ROCE rose to 31.3% (2021: 30.1%).
Taxation
The Group's headline effective tax rate increased from 24.2% to 24.9%.
Removing the impact of the adjusted items provides a more reliable measure
and, on this basis, the adjusted effective tax rate is 23.9% (2021: 23.8%).
The Group expects its adjusted effective tax rate to remain higher than the
standard UK rate due to higher rates of tax in China, Germany, Australia and
the US.
The Group's approach to tax continues to be to operate on the basis of full
disclosure and co-operation with all tax authorities and, where possible, to
mitigate the burden of tax within the local legislation.
Cash generation
We finished the year with a net cash position of £105.9m (2021: £114.1m)
which leads to a cash conversion KPI of 75.9% of adjusted operating profit
into cash, down from 108.0% reported in 2021. The lower cash conversion is
explained by the tactical decision to build inventory levels to protect
against further supply chain disruption and the high relative weighting of
revenue in the final months of the year where the cash will be collected in
2023. Capital expenditure was £8.3m (2021: £13.2m), plus £2.1m in
capitalised software (2021: £5.2m) and £8.9m in IT software transformation
costs which were expensed in the period (2021: £8.5m). Our Research and
Development (R&D) cash spend increased 6.4% to £13.4m which represents
2.1% of revenue (2021: £12.6m and 2.2%). Dividends of £55.4m, tax payments
of £30.2m and pension contributions (above the charge recognised in the
income statement) of £7.0m were the other major outflows excluding working
capital.
Control of working capital as defined in the cash-flow statement, using
average exchange rates, is key to achieving our cash generation KPI. Inventory
increased by £23.9m, as we sought to mitigate supply chain disruption. Trade
receivables increased to £134.3m reflecting the relative high weighting of
sales in the final months of the year, this led to an effective cash outflow
of £32.6m. Trade receivables measured as days' sales outstanding(1), only
increased slightly from 57 to 58 days. Net working capital in the balance
sheet increased to 28.7% of revenue compared with 21.8% the year before and
generated a £60.4m outflow in the cash flow statement.
COVID-19 disruption and geopolitical risk
We have previously reported COVID-19 and geopolitical uncertainty as two areas
of risk that we were monitoring, and which could impact Rotork. These mirror
some of the scenarios we include in our annual viability statement which will
be published in our 2022 annual report. Our COVID-19 Committee continued to
monitor the external influences of COVID-19 on the business through the year,
and also coordinate the internal response.
Our teams in certain countries, especially China, were impacted by COVID-19
during the year. Whilst we made every effort to keep our production facilities
open, we did not hesitate to shut them if we believed there was any undue risk
to our colleagues, and our Shanghai facilities were closed or operating at
limited capacity at times during the year. Similar issues were also faced by
some of our component suppliers, causing supply chain delays and disruption.
Supply chain delays and disruption were further compounded by the impact from
the war in Ukraine. We have responded by utilising our global network to
mitigate supply chain disruption and have continued to grow some tactical
inventories where appropriate. During the second half of the year, we started
to see evidence of the supply chain stabilising and upward pressure on
component costs easing.
Deliveries to Russia ceased at the end of February 2022. Rotork had no
manufacturing presence in Russia and has suspended the activities of its sales
and service operations in the country in an orderly manner. A small number of
employees are currently retained to manage the process of exiting the
business. The Russia, Ukraine and Belarus region contributed around 3% to
group sales in 2021. The costs associated with exiting the Russian market and
impairing the assets have been recognised in other adjustments in the year.
As a global business we continue to monitor the trade position between all
locations where we are based or have customers or suppliers, and have
considered the potential impact of additional trade barriers between these
countries. We will take steps where necessary to mitigate any such changes but
continue to believe they will not materially impact the Group's results. We
have included scenarios in the viability assessment which model the impact of
all of these current uncertainties. The viability statement will be published
in our 2022 annual report.
Non-controlling interest
The Group invested £4.1m for 75% of the share capital in a newly-established
entity in Saudi Arabia during April 2022, with the remaining 25% owned by a
third party. Owing to this third-party shareholding, a "Non-controlling
interests" position is now reported in the financial statements.
Credit management
The Group's credit risk is primarily attributable to trade receivables, with
the risk spread over a large number of countries and customers, and no
significant concentration of risk. Creditworthiness checks are undertaken
before entering into contracts or commencing trade with new customers, and in
companies where insurance cover operates, the authorisation process works in
conjunction with the insurer, taking advantage of their market intelligence.
We maintained coverage of the credit insurance policy during the year and have
cover in place for virtually all of our companies at an aggregate of 90% of
receivables. Where appropriate, we use trade finance instruments such as
letters of credit to mitigate any identified risk.
Treasury
The Group operates a centralised treasury function managed by a Treasury
Committee, chaired by me and also comprising the Group Financial Controller
and Group Treasurer. The Committee meets regularly to consider foreign
currency exposure, control over deposits, funding requirements and cash
management. The Group Treasurer monitors compliance with the treasury policies
and is responsible for overseeing all of the Group's banking relationships. A
Subsidiary Treasury Policy restricts the actions subsidiaries can take and the
Group Treasury Policy and Terms of Reference define the responsibilities of
the Group Treasurer and Treasury Committee.
The Group uses financial instruments where appropriate to hedge significant
currency transactions, principally forward exchange contracts and swaps. These
financial instruments are used to reduce volatility which might affect the
Group's cash or income statement. In assessing the level of cash flows to
hedge with forward exchange contracts, the maximum cover taken is 75% of net
forecast flows. The Board receives treasury reports which summarise the
Group's foreign currency hedging position, distribution of cash balances and
any significant changes to banking relationships.
The £60m committed loan facility in place on 31 December 2021 expired on 25
June 2022 and the Group decided not to renew the facility past this date given
the strong cash position. Of the £60m loan facility £nil was drawn down at
31 December 2021.
Retirement benefits
The Group accounts for post-retirement benefits in accordance with IAS 19,
Employee Benefits. The balance sheet reflects the net assets of these schemes
at 31 December 2022 based on the market value of the assets at that date, and
the valuation of liabilities using year-end AA corporate bond yields. We
closed both the main defined benefit pension schemes to new entrants; the UK
scheme in 2003 and the US scheme in 2009, in order to reduce the risk of
volatility of the Group's liabilities. In 2018 we further reduced the risk of
volatility when we completed the closure to future accrual of both the UK and
US schemes. Members of the defined benefit schemes were transferred onto the
relevant defined contribution plan operating in their country.
The most recent triennial valuation of the UK scheme took place at 31 March
2019 and showed an actuarial deficit of £28.7m and a funding level of 86%. A
recovery plan was agreed with the Trustees as part of the 2019 valuation,
resulting in required annual contributions from the Company of £6.8m with
effect from 1 April 2020. The 31 March 2022 valuation is ongoing.
On an accounting basis the deficit in the schemes remained broadly flat at
£8.0m compared to £7.6m in 2021 and the funding level decreased from 97% to
94%. The Company paid total contributions of £6.8m over the year. The
schemes' assets decreased in value by £89.1m (2021: increase of £11.1m) and
the schemes' liabilities reduced by £88.7m (2021: decrease of £13.9m),
mainly due to the 285 bps increase in discount rate at the year-end to 4.8%,
which reflected the increase in yields on AA corporate bonds during 2022.
The accounting deficit is different to the actuarial deficit as on an
accounting basis we are required to use AA-rated corporate bond yields to
value the liabilities. The UK scheme's actuarial valuation uses gilt yields
since this most closely matches the investment strategy which is designed in
part to hedge the interest rate and inflation risks borne by the scheme. Cash
contributions are driven by the actuarial valuation.
Dividends
The Board is proposing a final dividend of 4.30p per share. When taken
together with the 2.40p interim dividend paid in September 2022, the 6.70p
(2021: 6.40p per share) represents a 4.7% increase in dividends over the prior
year. This gives dividend cover of 1.9 times (2021: 1.8 times) based on
adjusted earnings per share.
Jonathan Davis
Group Finance Director
27 February 2023
(1) Days' sales outstanding is calculated on a countback method. The sales
value including local sales taxes is deducted from the year end trade
receivables to calculate the number of days' sales outstanding.
Consolidated income statement
For the year ended 31 December 2022
Notes 2022 2021
£000 £000
Revenue 3 641,812 569,160
Cost of sales (350,079) (306,394)
Gross profit 291,733 262,766
Other income 1,620 587
Distribution costs (6,197) (5,397)
Administrative expenses (163,177) (152,064)
Other expenses (372) (182)
Operating profit 2,3 123,607 105,710
Finance income 5 3,049 2,442
Finance expense 5 (2,554) (2,221)
Profit before tax 124,102 105,931
Income tax expense 6 (30,901) (25,686)
Profit for the year 93,201 80,245
Attributable to:
Owners of the parent 93,243 80,245
Non-controlling interest (42) -
93,201 80,245
Basic earnings per share 8 10.9p 9.2p
Diluted earnings per share 8 10.8p 9.2p
Operating profit 2,3 123,607 105,710
Adjustments 3 7,051 9,001
- Amortisation of acquired intangible assets
- Other adjustments 4 12,587 13,369
Adjusted Operating profit 143,245 128,080
Adjusted basic earnings per share 2,8 12.7p 11.3p
Adjusted diluted earnings per share 2,8 12.7p 11.2p
Consolidated statement of comprehensive income
For the year ended 31 December 2022
2022 2021
£000 £000
Profit for the year 93,201 80,245
Other comprehensive income
Items that may be subsequently reclassified to the income statement:
Foreign exchange translation differences 21,928 (8,899)
Effective portion of changes in fair value of cash flow hedges net of tax (1,627) (88)
20,301 (8,987)
Items that are not subsequently reclassified to the income statement:
Remeasurement (loss)/gain in pension scheme net of tax (4,932) 19,469
Income and expenses recognised in other comprehensive income 15,369 10,482
Total comprehensive income for the year 108,570 90,727
Attributable to:
Owners of the parent 108,561 90,727
Non-controlling interest 9 -
108,570 90,727
Consolidated balance sheet
At 31 December 2022
Notes 2022 2021
£000 £000
Non-current assets
Goodwill 228,005 216,778
Intangible assets 20,579 25,722
Property, plant and equipment 78,726 77,798
Derivative financial instruments 74 -
Deferred tax assets 15,965 10,183
Total non-current assets 343,349 330,481
Current assets
Inventories 92,306 68,447
Trade receivables 134,279 94,189
Current tax 7,877 9,558
Derivative financial instruments 62 1,896
Other receivables 39,112 35,824
Assets classified as held for sale 211 2,884
Cash and cash equivalents 114,770 123,474
Total current assets 388,617 336,272
Total assets 731,966 666,753
Equity
Issued equity capital 7 4,304 4,302
Share premium 19,959 18,828
Other reserves 32,269 12,019
Retained earnings 531,951 498,931
Equity attributable to owners of the parent 588,483 534,080
Non-controlling interests 1,424 -
Total equity 589,907 534,080
Non-current liabilities
Interest bearing loans and borrowings 5,405 5,464
Employee benefits 9 11,955 11,336
Deferred tax liabilities 4,028 1,580
Derivative financial instruments 215 106
Provisions 1,439 1,559
Total non-current liabilities 23,042 20,045
Current liabilities
Interest bearing loans and borrowings 3,431 3,872
Trade payables 42,314 38,800
Employee benefits 9 15,200 14,440
Current tax 11,893 12,226
Derivative financial instruments 2,729 -
Other payables 39,084 37,986
Provisions 4,366 5,304
Total current liabilities 119,017 112,628
Total liabilities 142,059 132,673
Total equity and liabilities 731,996 666,753
These financial statements were approved by the Board of Directors and
authorised for issue on 27 February 2023 and were signed on its behalf by:
K Huynh and JM Davis
Directors.
Consolidated statement of changes in equity
Issued Share Translation Capital Hedging Retained Attributable to owners of the parent Non-controlling interest Total
equity Premium Reserve redemption Reserve Earnings £000 £000 £000
capital £000 £000 reserve £000 £000
£000 £000
Balance at 31 December 2020 4,370 16,826 18,374 1,644 916 528,624 570,754 - 570,754
Profit for the year - - - - - 80,245 80,245 - 80,245
Other comprehensive income
Foreign exchange translation differences - - (8,899) - - - (8,899) - (8,899)
Effective portion of changes in fair value of cash - - - - (109) - (109) (109)
flow hedges
Actuarial gain on defined benefit pension plans - - - - - 24,040 24,040 - 24,040
Tax on other comprehensive income - - - - 21 (4,571) (4,550) - (4,550)
Total other comprehensive income - - (8,899) - (88) 19,469 10,482 - 10,482
Total comprehensive income - - (8,899) - (88) 99,714 90,727 - 90,727
Transactions with owners, recorded directly in equity
Equity settled share-based payment transactions - - - - - (1,982) (1,982) - (1,982)
Tax on equity settled share-based payment transactions - - - - - 633 633 - 633
Share options exercised by employees 4 2,002 - - - - 2,006 - 2,006
Own ordinary shares acquired - - - - - (7,809) (7,809) - (7,809)
Own ordinary shares awarded under share schemes - - - - - 5,455 5,455 - 5,455
Share buyback programme (72) - - 72 - (50,324) (50,324) - (50,324)
Dividends - - - - - (75,380) (75,380) - (75,380)
Balance at 31 December 2021 4,302 18,828 9,475 1,716 828 498,931 534,080 - 534,080
Profit for the year - - - - - 93,243 93,243 (42) 93,201
Other comprehensive income
Foreign exchange translation differences - - 21,877 - - - 21,877 51) 21,928
Effective portion of changes in fair value of cash - - - - (2,067) - - (2,067)
flow hedges
(2,067)
Actuarial loss on defined benefit pension plans - - - - - (6,727) (6,727) - (6,727)
Tax on other comprehensive income - - - - 440) 1,795 2,235 - 2,235
Total other comprehensive income - - 21,877 - (1,627) (4,932) 15,318 51 15,369
Total comprehensive income - - 21,877 - (1,627) 88,311 108,561 9 108,570
Non-controlling interest on newly established subsidiary - - - - - - - 1,415 1,415
Transactions with owners, recorded directly in equity
Equity settled share-based payment transactions - - - - - 1,790 1,790 - 1,790
Tax on equity settled share-based payment transactions - - - - - (987) (987)
(987) -
Share options exercised by employees 2 1,131 - - - - 1,133 - 1,133
Own ordinary shares acquired - - - - - (3,475) (3,475) - (3,475)
Own ordinary shares awarded under share schemes - - - - - 2,765) 2,765 - 2,765
Dividends - - - - - (55,384) (55,384) - (55,384)
Balance at 31 December 2022 4,304 19,959 31,352 1,716 (799) 531,951 588,483 1,424 589,907
Detailed explanations for equity capital, the translation reserve, capital
redemption reserve and hedging reserve can be seen in note 7.
Consolidated statement of cash flows
For the year ended 31 December 2022
Notes 2022 2021 2021
2022 £000 £000 £000
£000
Cash flows from operating activities
Profit for the year 93,201 80,245
Adjustments for:
Amortisation of acquired intangibles 7,051 9,001
Other adjustments 4 12,587 13,369
Amortisation of development costs 1,436 1,657
Depreciation 14,933 15,673
Equity settled share-based payment expense 4,601 3,333
Profit on sale of property, plant and equipment (159) -
Finance income (3,049) (2,442)
Finance expense 2,554 2,221
Income tax expense 30,901 25,686
164,056 148,743
Increase in inventories (19,479) (8,330)
(Increase)/decrease in trade and other receivables (32,591) 5,944
(Decrease)/increase in trade and other payables (2,902) 2,583
Operating cash flow impact of other adjustments 4 (12,056) (13,346)
Difference between pension charge and cash contribution (6,979) (7,562)
Decrease in provisions (383) (937)
Increase/(decrease) in employee benefits 67 (9,632)
89,733 117,463
Income taxes paid (30,221) (32,021)
Net cash flows from operating activities 59,512 85,442
Investing activities
Purchase of property, plant and equipment (8,291) (13,170)
Purchase of intangible assets (2,066) (5,174)
Development costs capitalised (2,541) (1,806)
Sale of property, plant and equipment 4,629 3,808
Settlement of hedging derivatives 9 4,102
Interest received 751 857
Net cash flows from investing activities (7,509) (11,383)
Financing activities
Issue of ordinary share capital 1,133 2,006
Own ordinary shares acquired (3,475) (7,809)
Share buyback programme - (50,324)
Interest paid (817) (881)
Repayment of bank loans (694) (67)
Repayment of lease liabilities (3,966) (4,904)
Dividends paid on ordinary shares (55,384) (75,515)
Receipt from non-controlling interest in newly established subsidiary 1,415 -
Net cash flows from financing activities (61,788) (137,494)
Net decrease in cash and cash equivalents (9,785) (63,435)
Cash and cash equivalents at 1 January 123,474 187,204
Effect of exchange rate fluctuations on cash held 1,081 (295)
Cash and cash equivalents at 31 December 114,770 123,474
Notes to the Group Financial Statements
For the year ended 31 December 2022
Except where indicated, values in these notes are in £000.
Rotork plc is a public company limited by shares, registered and domiciled in
England. The consolidated financial statements of the Company for the year
ended 31 December 2022 comprise the Company and its subsidiaries (together
referred to as the Group).
1. Accounting policies
The accounting policies applied in the preparation of these consolidated
financial statements are set out below. These policies have been consistently
applied to the years presented, unless otherwise stated.
Basis of preparation
The consolidated financial statements of Rotork plc have been prepared in
accordance with UK-adopted international accounting standards and in
conformity with the requirements of the Companies Act 2006.
New accounting standards and interpretations
A number of amended standards became applicable for the current reporting
period. The application of these amendments has not had any material impact on
the disclosures, net assets or results of the Group.
New standards and interpretations not yet adopted
Further narrow scope amendments have been issued which are mandatory for
periods commencing on or after 1 January 2023. The application of these
amendments will not have any material impact on the disclosures, net assets or
results of the Group.
Adjustments to profit
Adjustments to profit are items of income and expense which, because of the
nature, size and/or infrequency of the events giving rise to them, merit
separate presentation. These specific items are presented as a footnote to the
income statement to provide greater clarity and an enhanced understanding of
the impact of these items on the Group's financial performance. In doing so,
it also facilitates greater comparison of the Group's underlying results with
prior periods and assessment of trends in financial performance. This split is
consistent with how underlying business performance is measured internally.
Adjustments to profit items may include but are not restricted to: costs of
significant business restructuring including any associated significant
impairments of intangible or tangible assets, adjustments to the fair value of
acquisition related items such as contingent consideration, acquired
intangible asset amortisation and other items considered to be significant due
to their nature or the expected infrequency of the events giving rise to them.
Going concern
The directors are satisfied that the Group has sufficient resources to
continue in operation for the foreseeable future, a period of not less than 12
months from the date of this report. Accordingly, we continue to adopt the
going concern basis in preparing the financial statements.
In forming this view, the on-going impact of COVID-19, supply chain disruption
and geo-political instability on the Group has been considered. The directors
have reviewed: the current financial position of the Group, which has net cash
of £106m and unused uncommitted overdraft facilities of £32m as at the year
end; the significant order book, which contains customers spread across
different geographic areas and industries; and the trading and cash flow
forecasts for the Group. The directors are satisfied that the Group has
adequate resources to continue operating as a going concern for the
foreseeable future, and that no material uncertainties exist with respect to
this assessment. The Group also has a number of mitigating actions that it can
take at short notice to preserve cash, for example reduction in capital
programmes, dividend deferral and other reductions in discretionary spend.
Consolidation
The consolidated financial statements incorporate the financial statements of
the Company and its subsidiaries for the year to 31 December 2022. The
financial statements of subsidiaries are included in the consolidated
financial statements from the date that control commences until the date
control ceases. Intra-Group balances and any unrealised gains or losses or
income and expenses arising from intra-Group transactions are eliminated in
preparing the consolidated financial statements.
Status of this preliminary announcement
The financial information contained in this preliminary announcement does not
constitute the Company's statutory accounts for the years ended 31 December
2022 or 2021. Statutory accounts for 2021, which have been prepared in
accordance with UK-adopted international accounting standards and in
conformity with the requirements of the Companies Act 2006 have been delivered
to the registrar of companies. Those for 2022, will be delivered in due
course. The auditors have reported on those accounts; their reports were (i)
unqualified, (ii) did not include a reference to any matters to which the
auditors drew attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under section 498 (2) or (3) of the
Companies Act 2006. Full financial statements for the year ended 31 December
2022 will shortly be available to shareholders, and after adoption at the
Annual General Meeting on 28 April 2023 will be delivered to the
registrar.
2. Alternative performance measures
The Group uses adjusted figures as key performance measures in addition to
those reported under adopted IFRS, as management believe these measures
provide stakeholders with additional useful information to facilitate greater
comparison of the Group's underlying results with prior periods and assessment
of trends in financial performance.
The Group believes alternative performance measures, which are not considered
to be a substitute for, or superior to, IFRS measures, provide stakeholders
with additional helpful information on the performance of the business. These
alternative performance measures are consistent with how the business
performance is planned and reported within the internal management reporting
to the Board. Some of these measures are also used for the purpose of setting
remuneration targets.
The key alternative performance measures that the Group use include adjusted
profit measures and organic constant currency (OCC).
Explanations of how they are calculated and how they are reconciled to IFRS
statutory results are set out below.
a. Adjusted operating profit
Adjusted operating profit is the Group's operating profit excluding the
amortisation of acquired intangible assets and other adjustments as defined in
note 1. Further details on these adjustments are given in note 4
b. Adjusted profit before tax
The adjustments in calculating adjusted profit before tax are consistent with
those in calculating adjusted operating profit above.
2022 2021
Profit before tax 124,102 105,931
Adjustments:
Amortisation of acquired intangible assets 7,051 9,001
Gain on disposal of property (1,208) (1,569)
IT transformation costs 8,868 8,493
Redundancy and other restructuring costs 1,372 6,445
Russia market exit 3,555 -
Adjusted profit before tax 143,740 128,301
c. Adjusted basic and diluted earnings per share
Adjusted basic earnings per share is calculated using the adjusted net profit
attributable to the ordinary shareholders and dividing it by the weighted
average ordinary shares in issue (see note 8). Adjusted net profit
attributable to ordinary shareholders is calculated as follows:
2022 2021
Net profit attributable to ordinary shareholders 93,201 80,245
Adjustments:
Amortisation of acquired intangible assets 7,051 9,001
Gain on disposal of property (1,208) (1,569)
IT transformation costs 8,868 8,493
Redundancy and other restructuring costs 1,372 6,445
Russia market exit 3,555 -
Tax effect on adjusted items (3,440) (4,785)
Adjusted net profit attributable to ordinary shareholders 109,399 97,830
Adjusted diluted earnings per share is calculated by using the adjusted net
profit attributable to ordinary shareholders and dividing it by the weighted
average ordinary shares in issue adjusted to assume conversion of all
potentially dilutive ordinary shares (see note 8).
d. Adjusted dividend cover
Dividend cover is calculated as earnings per share divided by dividends per
share. Adjusted dividend cover is calculated as adjusted earnings per share as
defined in note 2c above divided by dividends per share.
e. Total shareholder return
Total shareholder return is the movement in the price of an ordinary share
plus dividends during the year, divided by the opening share price.
f. Return on capital employed
The return on capital employed ratio is used by management to help ensure that
capital is used efficiently.
2022 2021
Adjusted operating profit 143,245 128,080
Capital employed
Shareholders' funds 589,907 534,080
Cash and cash equivalents (114,770) (123,474)
Interest bearing loans and borrowings 8,836 9,336
Pension deficit net of deferred tax 6,065 6,023
Capital employed 490,038 425,965
Average capital employed 458,002 424,815
Return on capital employed 31.3% 30.1%
Average capital employed is defined as the average of the capital employed at
the start and end of the relevant year.
g. Working capital as a percentage of revenue
Working capital as a percentage of revenue is monitored as control of working
capital is key to achieving our cash generation targets. It is calculated as
inventory plus trade receivables, less trade payables, divided by revenue.
h. Organic constant currency (OCC)
OCC results remove the results of businesses acquired or disposed of during
the period that are not consistently presented in both periods' results. The
2022 results are restated at 2021 exchange rates. There are no disposals or
acquisitions in 2022.
Key headings in the income statement are reconciled to OCC as follows:
31 December Currency adjustment OCC
2022 31 December
2022
Revenue 641,812 (24,999) 616,813
Cost of sales (350,079) 14,421 (335,658)
Gross margin 291,733 (10,578) 281,155
Overheads (148,488) 3,356 (145,132)
Adjusted operating profit 143,245 (7,222) 136,023
Interest 495 (63) 432
Adjusted profit before tax 143,740 (7,285) 136,455
Adjusted taxation (34,341) 1,740 (32,601)
Adjusted profit after tax 109,399 (5,545) 103,854
i. Cash conversion
Cash conversion is calculated as adjusted operating cash flow as a percentage
of adjusted operating profit. It is monitored to illustrate how efficiently
adjusted operating profits are converted into cash. Adjusted operating cash
flow is calculated as follows:
2022 2021
Adjusted operating cash flow
Operating cash flow 89,733 117,463
Operating cash flow impact of other adjustments 12,056 13,346
Difference between pension charge and cash contribution 6,979 7,562
Adjusted operating cash flow 108,768 138,371
Adjusted operating profit 143,245 128,080
Cash conversion 76% 108%
3. Operating segments
The three identifiable operating segments where the financial and operating
performance is reviewed monthly by the chief operating decision maker are as
follows:
Oil & Gas
Chemical, Process & Industrial
Water & Power
Each of our customers is allocated to a division. Sales to that customer,
along with all directly associated costs of that sale, are reported under the
division to which that customer is allocated. Where some of our customers sell
into multiple end markets, a lead end market is identified. Sales to these
customers will generally be allocated to the lead end market unless the sale
is of significance and an alternative end market has been identified, in which
case it will be reported under the alternative end market.
For all costs not directly attributed to a sale, these are allocated across
the three divisions within each of our businesses. There are some costs that
are directly attributable to a division, but most support costs and facility
costs are not directly attributable to a division and are generally allocated
based on split of revenue. Amortisation of acquired intangible assets is
allocated based on the split of revenue of the entity to which the asset
relates.
Unallocated expenses comprise corporate expenses.
Geographic analysis
Rotork has a worldwide presence in all three operating segments through its
subsidiary selling offices and through an agency network. A full list of
locations can be found at www.rotork.com.
Analysis by operating segment:
Oil & Gas Chemical, Process & Industrial Water & Power Unallocated Group
2022 2022 2022 2022 2022
Revenue from external customers 283,266 198,355 160,191 - 641,812
Adjusted operating profit* 63,960 51,206 40,293 (12,214) 143,245
Amortisation of acquired intangible assets (5,063) (1,410) (578) - (7,051)
Segment result 58,897 49,796 39,715 (12,214) 136,194
Other adjustments (12,587)
Operating profit 123,607
Net finance income 495
Income tax expense (30,901)
Profit for the year 93,201
Oil & Gas Chemical, Process & Industrial Water & Power Unallocated Group
2021 2021 2021 2021 2021
Revenue from external customers 260,153 160,454 148,553 - 569,160
Adjusted operating profit* 56,342 42,775 40,430 (11,467) 128,080
Amortisation of acquired intangible assets (6,381) (1,782) (838) - (9,001)
Segment result 49,961 40,993 39,592 (11,467) 119,079
Other adjustments (13,369)
Operating profit 105,710
Net finance income 221
Income tax expense (25,686)
Profit for the year 80,245
*Adjusted operating profit is operating profit before the amortisation of
acquired intangible assets and other adjustments (see note 4)
Oil & Gas Chemical, Process & Industrial Water & Power Unallocated Group
2022 2022 2022 2022 2022
Depreciation 6,591 4,615 3,727 - 14,933
Amortisation:
- Acquired intangible assets 5,063 1,410 578 - 7,051
- Development costs 1,239 701 868 - 2,808
Oil & Gas Chemical, Process & Industrial Water & Power Unallocated Group
2021 2021 2021 2021 2021
Depreciation 7,161 4,420 4,092 - 15,673
Amortisation:
- Acquired intangible assets 6,381 1,782 838 - 9,001
- Development costs 817 457 383 - 1,657
Balance sheets are reviewed by subsidiary and operating segment balance sheets
are not prepared; therefore no further analysis of operating segments assets
and liabilities is presented.
Geographical analysis:
Revenue by location of subsidiary 2022 2021
UK 55,146 55,971
Italy 52,997 49,150
Rest of Europe 96,627 102,501
USA 129,499 96,565
Other Americas 44,161 40,152
China 120,188 98,011
Rest of World 143,194 126,810
641,812 569,160
4. OTHER ADJUSTMENTS
Refer to note 1 for details on the adjustments to profit, including an
explanation of 'other adjustments'.
The other adjustments to profit included in statutory profit are as follows:
2022 2021
Gain on disposal of property 1,208 1,569
Redundancy and other restructuring costs (1,372) (6,445)
IT transformation costs (8,868) (8,493)
Russia market exit (3,555) -
Other adjustments (12,587) (13,369)
Gain on disposal of property
The £1,208,000 (2021: £1,569,000) gain on disposal of property relates to
the sale of the property in Melle, Germany.
Redundancy and Other restructuring costs
A further £1,372,000 (2021: £6,445,000) of redundancy and other
restructuring costs have been incurred, largely as a result of the progress
made under the Growth Acceleration Programme.
IT transformation costs
During the year £8,868,000 (2021: £8,493,000) of configuration costs were
incurred on the development of cloud-based software as part of the multi-year
IT transformation programme, this brings the total expensed as part of this
programme to £31,823,000. These costs were expensed as they do not meet the
capitalisation criteria under IAS 38. The new ERP system went live in January
2023 at our Bath, UK factory. The next phase of the programme is the roll out
of the ERP system across the other Group entities.
Russia market exit
The Russia market exit costs are in relation to the ceasing of operations in
Russia and the impairment of the gross assets of the Russian entity.
Income statement disclosure
All adjustments are included in administrative expenses. The adjustments are
taxable or tax deductible in the country in which the expense is incurred.
Cash flow statement disclosure
Other adjustments have a net operating cash outflow of £12,056,000 (2021:
£13,346,000) and a net investing cash inflow of £4,049,000 (2021:
£2,783,000).
5. finance Income and EXPENSE
2022 2021
Interest income 1,235 1,123
Foreign exchange gains 1,814 1,319
Finance income 3,049 2,442
2022 2021
Interest expense (744) (818)
Interest expense on lease liabilities (406) (404)
Interest charge on pension scheme liabilities (110) (522)
Foreign exchange losses (1,294) (477)
Finance expense (2,554) (2,221)
6. Income tax expense
2022 2022 2021 2021
Current tax:
UK corporation tax on profits for the year 3,173 2,029
Adjustment in respect of prior years (942) (615)
2,231 1,414
Overseas tax on profits for the year 30,242 26,277
Adjustment in respect of prior years (287) (295)
29,955 25,982
Total current tax 32,186 27,396
Deferred tax:
Origination and reversal of other temporary differences (1,935) (1,170)
Impact of rate change 252 (592)
Adjustment in respect of prior years 398 52
Total deferred tax (1,285) (1,710)
Total tax charge for year 30,901 25,686
Profit before tax 124,102 105,931
Profit before tax multiplied by the blended standard rate of 23,579 20,127
corporation tax in the UK of 19.0% (2021: 19.0%)
Effects of:
Different tax rates on overseas earnings 9,339 7,381
Permanent differences 404 1,591
Losses not recognised 93 (128)
Tax incentives (1,935) (1,835)
Impact of rate change 252 (592)
Adjustments to tax charge in respect of prior years (831) (858)
Total tax charge for year 30,901 25,686
Effective tax rate 24.9% 24.2%
Adjusted profit before tax (note 2b) 143,740 128,301
Total tax charge for the year 30,901 25,686
Amortisation of acquired intangible assets 1,109 1,784
IT transformation costs 2,217 2,400
Other adjustments (note 4) 114 601
Adjusted total tax charge for the year 34,341 30,471
Adjusted effective tax rate 23.9% 23.8%
A tax charge of £987,000 (2021: credit of £631,000) in respect of
share-based payments has been recognised directly in equity.
The effective tax rate for the year is 24.9% (2021: 24.2%). The adjusted
effective tax rate is 23.9% (2021: 23.8%) and is lower than the effective tax
rate for the year principally because of the tax treatment of expenses
included in other adjustments.
The adjusted effective tax rate has increased from 23.8% in 2021 to 23.9% in
2022, principally because of an increase in the proportion of the Group
profits arising in higher tax jurisdictions internationally. The Group expects
its adjusted effective tax rate to continue to move in line with the trends in
corporate tax rates in the jurisdictions where Rotork operates. The UK
corporation tax rate will increase to 25% from 1 April 2023. However, the
adjusted effective tax rate will still be higher than the standard UK rate due
to higher rates of tax in China, Germany, Australia and the US.
There is an unrecognised deferred tax liability for temporary differences
associated with investments in subsidiaries. Rotork plc controls the dividend
policies of its subsidiaries and the timing of the reversal of the temporary
differences. The value of temporary differences associated with unremitted
earnings of subsidiaries for which deferred tax has not been recognised is
£272,249,000 (2021: £258,167,000).
7. Capital and reserves
0.5p Ordinary £1 Non- 0.5p Ordinary £1 Non-
shares redeemable shares redeemable
issued preference issued preference
and fully shares and fully shares
paid up 2022 paid up 2021
2022 2021
At 1 January 4,302 40 4,370 40
Issued under employee share schemes 2 - 4 -
Share buyback programme - - (72) -
At 31 December 4,304 40 4,302 40
Number of shares (000) 860,771 860,276
The ordinary shareholders are entitled to receive dividends as declared and
are entitled to vote at meetings of the Company.
Share issue
The Group received proceeds of £1,133,000 (2021: £1,528,000) in respect of
the 494,972 (2021: 816,422) ordinary shares issued during the year: £2,000
(2021: £4,000) was credited to share capital and £1,131,000 (2021:
£1,524,000) to share premium.
Share buyback programme
In the year ending 31 December 2021, the group bought back a total of
14,403,732 Ordinary shares of 0.5p each for a total value of £50,324,000
including costs of £324,000. The average price paid for these repurchased
shares was 348.1p. These repurchased shares were then cancelled in the same
period.
Share forfeiture
During 2021 the Group had a share forfeiture programme following the
completion of a tracing and notification exercise to any shareholders who have
not had contact with the Company over the past 12 years, in accordance with
the provisions set out in the Company's Articles of Association. Under the
share forfeiture programme, the shares and dividends associated with shares of
untraced members are forfeited and resold in the market, with the resulting
proceeds transferred to the Group. During 2021, the Group received £478,000
proceeds from sale of untraced shares and £135,000 write-back of unclaimed
dividends on those shares, which are reflected in share premium and retained
earnings respectively.
Own shares held
Within the retained earnings reserve are own shares held. The Group acquired
1,124,000 of its own shares during the year (2021:
2,154,000). The total amount paid to acquire the shares was £3,475,000 (2021:
£7,809,000), and this has been deducted from
shareholders' equity. During the year, 793,000 (2021: 1,582,000) ordinary
shares were released to satisfy share plan awards. The
investment in own shares held is £6,000,000 (2021: £5,291,000) and
represents 1,831,000 (2021: 1,500,000) ordinary shares of the Company held in
trust for the benefit of directors and employees for future payments under the
Share Incentive Plan and Long Term Incentive Plan. The dividends on these
shares have been waived.
Preference shares
The preference shareholders take priority over the ordinary shareholders when
there is a distribution upon winding up the Company or on a reduction of
equity involving a return of capital. The holders of preference shares are
entitled to vote at a general meeting of the Company if a preference dividend
is in arrears for six months or the business of the meeting includes the
consideration of a resolution for winding up the Company or the alteration of
the preference shareholders' rights.
Translation reserve
The translation reserve comprises all foreign exchange differences arising
from the translation of the financial statements of foreign operations.
Capital redemption reserve
The capital redemption reserve arises when the Company redeems shares wholly
out of distributable profits.
Hedging reserve
The hedging reserve comprises the effective portion of the cumulative net
change in the fair value of cash flow hedging instruments that are determined
to be an effective hedge.
Dividends
The following dividends were paid in the year per qualifying ordinary share:
2022 2022 2021
Payment date
4.05p final dividend for 2021 (final dividend for 2020: 6.30p) 20 May 34,787 54,996
2.40p interim dividend for 2022 (interim dividend for 2021: 2.35p) 23 September 20,597 20,519
55,384 75,515
During 2021, the Company exercised its authority in accordance with the
provisions set out in the Company's Articles of Association that the balance
of unclaimed dividends over the past 12 years be forfeited. During 2021,
£135,000 of unclaimed dividends have been adjusted for in retained earnings,
resulting in a dividends movement in the statement of changes in equity of
£75,380,000.
After the balance sheet date the following dividends per qualifying ordinary
share were proposed by the directors. The dividends have not been provided
for.
2022 2021
Final proposed dividend per qualifying ordinary share
4.30p 37,013 -
4.05p - 34,780
8. Earnings per share
Basic earnings per share
Earnings per share is calculated for both the current and previous years using
the profit attributable to the ordinary shareholders for the year. The
earnings per share calculation is based on 858.9m shares (2021: 869.5m shares)
being the weighted average number of ordinary shares in issue (net of own
ordinary shares held) for the year.
2022 2021
Net profit attributable to ordinary shareholders 93,201 80,245
Weighted average number of ordinary shares
Issued ordinary shares at 1 January 858,776 872,958
Effect of own shares held 6 (28)
Effect of Share Buyback Programme - (3,694)
Effect of shares issued under Sharesave plans 167 220
Weighted average number of ordinary shares during the year 858,949 869,456
Basic earnings per share 10.9p 9.2p
Adjusted basic earnings per share
Adjusted basic earnings per share is calculated for both the current and
previous years using the profit attributable to the ordinary shareholders for
the year after adding back the after tax impact of the adjustments. The
reconciliation showing how adjusted net profit attributable to ordinary
shareholders is derived is shown in note 2.
2022 2021
Adjusted net profit attributable to ordinary shareholders 109,399 97,830
Weighted average number of ordinary shares during the year 858,949 869,456
Adjusted basic earnings per share 12.7p 11.3p
Diluted earnings per share
Diluted earnings per share is based on the profit for the year attributable to
the ordinary shareholders and 860.6m shares (2021: 870.5m shares). The number
of shares is equal to the weighted average number of ordinary shares in issue
(net of own ordinary shares held) adjusted to assume conversion of all
potentially dilutive ordinary shares. The Company has two categories of
potentially dilutive ordinary shares: those share options granted to employees
under the Sharesave plan where the exercise price is less than the average
market price of the Company's ordinary shares during the year and contingently
issuable shares awarded under the Long Term Incentive Plan (LTIP).
2022 2021
Net profit attributable to ordinary shareholders 93,201 80,245
Weighted average number of ordinary shares (diluted)
Weighted average number of ordinary shares for the year 858,949 869,456
Effect of Sharesave options 562 711
Effect of LTIP share awards 1,119 372
Weighted average number of ordinary shares (diluted) during the year 860,630 870,539
Diluted earnings per share 10.8p 9.2p
Adjusted diluted earnings per share
2022 2021
Adjusted net profit attributable to ordinary shareholders 109,399 97,830
Weighted average number of ordinary shares (diluted) during the year 860,630 870,539
Adjusted diluted earnings per share 12.7p 11.2p
9. Employee benefits
2022 2021
Recognised liability for defined benefit obligations:
- Present value of funded obligations 144,381 233,135
- Fair value of plan assets (136,375) (225,510)
8,006 7,625
Other pension scheme liabilities 158 261
Employee bonuses 11,524 10,717
Employee indemnity provision 1,925 2,033
Other employee benefits 5,542 5,140
27,155 25,776
Non-current 11,955 11,336
Current 15,200 14,440
27,155 25,776
10. Related parties
The Group has a related party relationship with its subsidiaries and with its
directors and key management. Transactions between two subsidiaries for the
sale and purchase of products or the subsidiary and parent Company for
management charges are priced on an arm's length basis.
Financial calendar
28 February 2023 Preliminary announcement of annual results for 2022
13 April 2023 Ex-dividend date for final proposed 2022 dividend
14 April 2023 Record date for final proposed 2022 dividend
28 April 2023 Announcement of trading update
28 April 2023 Annual General Meeting held at Bailbrook House Hotel, Bath, Somerset, BA1 7JD
8 August 2023 Announcement of interim financial results for 2023
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